Option Investor

Daily Newsletter, Wednesday, 05/04/2005

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Table of Contents

  1. Market Wrap
  2. New Plays
  3. In Play Updates and Reviews

Market Wrap

Dow Powered by 18-Wheeler

Dow Powered by 18-Wheeler

Stocks surged on Wednesday with the Dow Industrials (INDU) 10,384.64 +1.29% jumping triple-digits after billionaire Kirk Kerkorian wanted to "substantially" add to his General Motors (NYSE:GM) stake. Shares of General Motors (GM), which have fallen more than 30% the past year, surged $5.03 per share to close the regular session at $32.80. A spectacular 18% gain.

Mr. Kerkorian's Tracinda Corp. offered to pay about $870 million for an additional 5% stake in the world's No. 1 automaker. If consumated, Kerkorian would own nearly 9% of GM.

The news rocked Wall Street and helped inflate some tires as investors wondered just what this savvy value investor saw in the beleaguered company.

The dollar fell in Wednesday's trade, but the decline took place late Tuesday evening when Hong Kong's central bank followed the Federal Reserve's lead and raised rates 25 basis points to 4.5%.

When I first noted the dollar's weakness in Tuesday's evening's Market Monitor, I thought we might be seeing a "global reaction" to yesterday's FOMC decision to raise rates 25 basis points to 3.0%. I might have been partially correct, but only because Hong Kong followed with a 25 basis point hike of their own.

In essence, I think we witnessed some "fast money" rotating back to Hong Kong to play some interest-rate games.

Gold prices rose more than $1.00 with the StreetTracks Gold Trust (NYSE:GLD) $42.90 +0.32% gaining 14-cents, equivalent to $1.40 per ounce for the precious metal.

Today's economic calendar had the April ISM Services coming in at 61.7, which was above the consensus for 61.0. While expansionary, April's reading slipped from May's 63.1.

Retailers participated in today's broader-market gains with the S&P Retail Index (RLX.X) 410.82 +1.38%.

A dynamic session was found in the long end of the Treasury bond market. Investor's dumped the longer-dated 30-year sending its YIELD higher by 8.2 basis points to 4.585% on news that the Treasury is considering bringing back the 30-year, where auctions had been discontinued in 2001.

I view this possible move a good fiscal policy. In fact, two years ago I commented that the Treasury should switch from their funding of the deficit with longer-term debt at historically low rates, not short-term debt as had been the policy when the U.S. was at a surplus.

A decision from the Treasury is expected in August.

Take note of this and don't misconstrue that today's selling in the longer-dated 30-year was a "hyper inflation" market reaction to anything the Fed said, or didn't say, in yesterday's brief statement.

The knee-jerk reaction in the longer-dated bond comes as investors and very short-term traders contemplate a new form of supply coming to market.

Brokers were strong today with Legg Mason (NYSE:LM) $79.47 +12.64% striding higher after reporting quarterly earnings of $0.98 per share versus consensus estimates for $0.97. Mason's results helped alleviate fears that after a rough first-quarter for stock prices, investors hadn't thrown in the towel. The firm's assets under management rose by $12 billion in the quarter.

Insurers also got a boost with MetLife (NYSE:MET) $43.55 +12.12% saying first-quarter profits surged 65% over the same period last year, with all business lines coming in with a strong performance.

Internets lead today's tech rally. Online service provider United Online (NASDAQ:UNTD) $11.94 +34.76% reported upbeat quarterly results and was today's No. 3 percentage gainer on the NASDAQ. Google, Inc. (NASDAQ:GOOG) $228.50 +1.02% traded another all-time high and closed just above its point and figure chart's bullish vertical count of $228.

U.S. Market Watch - 05/04/05 Close

There was a long of green on the screen today. Please note the action in the shorter-dated 5-year Treasury YIELD ($FVX.X), the benchmark 10-year YIELD ($TNX.X), which was unchanged, and then the knee-jerk in the 30-year.

Despite weekly energy data showing continued builds, June Crude Oil futures (cl05m) settled up 63 cents at $50.13 in a choppy $48.80-$50.60 intra-day range.

Closing Internals - 05/04/05

Advancers clearly outnumbered decliners and there was never a question if the majors would finish higher, but how high. Bullish leadership at the NYSE is building both short and intermediate-term from very oversold ratios, and NASDAQ tags along for the ride, but struggles.

Dow Industrials Components - Sorted by price

One stock in a narrow index that jumps 18%, or falls 18% will drive that day's action as institutions have to get "re-weighted." We've seen the downside action in the Dow when Merck (MRK), Pfizer (PFE) and IBM (IBM) have had a sharp decline. GM jumps from the 25th slot in price-weighting to 22. If you're modeled to mirror the Dow, you've got to do a lot of buying to compensate for GM's gains. Add to that a 78.3 million share short position in GM, and there was some buying that "had to be done."

Dow Industrials (INDU) - 50-point box

Yesterday's double top buy signal at 10,300 and today's spark from GM had every bear and his/her brother/sister assessing risk to previously broken 10,400 support. I expect the INDU to work sideways through the summer, most likely between 9,800-10,600.

While deadlines prevent me from updating a pivot matrix, some historical analysis with the MONTHLY Pivot levels would show that after the major indices all test their MONTHLY S2 (like they did in April), we have not witnessed a test of MONTHLY R1 the following month, and usually flounder around in order for some base-building to resume.

Don't be short/put much above 10,600 as there is no wrath like a short squeeze.

What? A short squeeze in a major index?

S&P 500 Index (SPX) - 10-point chart

There's been some nice squeeze-like moves in the SPX the past couple of years. You can't believe the amount of e-mail I get when I mention a pending squeeze coming. Like that in early November when the bullish % charts were reversing up from midfield. While I don't expect a euphoric bull run from the 1,140 reversal, just understand that there are undoubtedly some "old bears" that saw 1,220 and have offered up some support on the SPX's recent pullback into that massive base created last year.

Add in a little "if there's value in GM, there's got to be value elsewhere," and we get a powerful rally today.

Now, let's take a look at RISK as depicted by the broader S&P 500 Bullish % ($BPSPX).

S&P 500 Bullish % ($BPSPX) - 2% box size

If this were a football field, then bears still have the ball and they're nearing the 50-yard line. Point here is that the SPX Bullish % ($BPSPX) is nearing a VERY SIMILAR level of RISK that it did in August (8) and September (9) of last year.

I've tried to circle some of the same "inflection" points on the above bullish % chart as that found in the SPX's point and figure chart where hopefully we recognize a SIMILAR LEVEL OF RISK and internal strength/weakness as the SPX pulls into a MASSIVE BASE OF SUPPORT.

I would be looking to short/put bounces, but don't put on trades as if it is all or nothing, get yourself over leveraged and crush the account.

I'm trying to get back into the swing of things and begin writing one Market Wrap per week, which will be found each Wednesday. I'd like to compliment some of the other writer's analysis, but from a purely supply/demand and pivot analysis point of view.

What I hope a Wednesday Market Wrap on a weekly basis will allow, is a week-to-week benchmarking, where we really try and get a "broader" perspective on what is happening on a week to week basis, when then gives even greater meaning to the Monday, Tuesday, Thursday and Friday wraps.

When I read Jim's comments on the SPX last night and remember his comments on how well those 100-exp and 130-exp moving averages had been shorted and shorted and shorted and shorted, now they're being bought and bought and bought at a similar level of RISK found in August as the SPX pulls into a massive base of support.

Even with the U.S Fed and Hong Kong raising interest rates.


New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
BHS None

New Long Plays

Brookfield Homes - BHS - close: 44.74 chg: +1.37 stop: 42.45

Company Description:
Brookfield Homes Corporation is a residential homebuilder and land developer, building homes and developing land in master-planned communities and infill locations. We design, construct and market single-family and multi-family homes primarily to move-up and luxury homebuyers. We also entitle and develop land for our own communities and sell lots to other homebuilders. Our portfolio includes 30,000 lots owned and controlled in the San Francisco Bay Area; Southland / Los Angeles; San Diego / Riverside; Sacramento; and Washington D.C. Area markets. (source: company press release)

Why We Like It:
We normally don't suggest plays on stocks with average daily volume under 200,000 shares but BHS looks like a decent candidate given its relative strength. This is one homebuilder who's stock has resisted the weakness in both the major market averages and the declines in the DJUSHB home construction index. Instead shares of BHS have spent the last couple of months consolidating sideways between $40-45 as it digests its November-March gains. The technical signals are bullish although its Point & Figure chart is currently in a sell signal. That's why we're suggesting that readers us a trigger to open the play. Our entry point will be $45.05 to catch the breakout over resistance at the $45.00 level. Our eight-week target is the $50.00 level, which is likely to be round-number, psychological resistance.

Picked on May xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 05/02/05 (confirmed)
Average Daily Volume: 100 thousand

New Short Plays

None today.

Play Updates

Updates On Latest Picks

Long Play Updates

Archstone-Smith - ASN - close: 35.98 chg: +0.19 stop: 34.85

Hmm... ASN did not participate much in today's broad market rally. That could be a cause for concern. We remain on the sidelines waiting for ASN to confirm the bullish breakout. Our trigger to go long is $36.26. No changes from our previous update on 05/01/05. In the news the company said it sold $300 million in 10-year notes.

Picked on May xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/26/05 (confirmed)
Average Daily Volume: 811 thousand

Short Play Updates

Biomet - BMET - close: 39.21 chg: +1.06 stop: 39.51

Uh-oh! BMET rallied strongly with the markets today. The stock is now challenging technical resistance near its 50-dma and the top of its descending channel. If BMET trades above the $40.00 level readers may actually want to reverse course and consider bullish positions. We remain on the sidelines waiting for BMET to trade at or below our trigger of $37.45.

Picked on May xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 03/22/05 (confirmed)
Average Daily Volume: 2.4 million


Boston Scientific - BSX - cls: 29.36 chg: -0.48 stop: 31.51

BSX was rebuked again at the $30.00 level and displayed relative weakness during today's market rally. No changes from our previous update on 05/01/05.

Picked on April 19 at $29.05
Change since picked: + 0.31
Earnings Date 04/19/05 (confirmed)
Average Daily Volume: 5.4 million


Novellus - NVLS - close: 24.19 change: +0.56 stop: 25.01

NVLS paced the advance in the SOX semiconductor index, which lead the stock to close over the $24.00 level. We're not convinced that this is a bullish reversal even though the MACD has produced a new buy signal. Bears should tread cautiously.

Picked on April 29 at $23.40
Change since picked: + 0.79
Earnings Date 04/18/05 (confirmed)
Average Daily Volume: 4.0 million


Catalina Mktg - POS - close: 24.79 chg: +0.36 stop: 25.25

Shares of POS continued to fight with overhead resistance near the $25.00 level and its exponential 200-dma coupled with its 21-dma. We're going to stick to our bearish bias for now but we're not suggesting new bearish plays.

Picked on April 22 at $23.80
Change since picked: + 0.99
Earnings Date 05/18/05 (unconfirmed)
Average Daily Volume: 468 thousand

Closed Long Plays


Closed Short Plays

Today's Newsletter Notes: Market Wrap by Jeff Bailey and all other plays and content by the Option Investor staff.


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