Option Investor

Daily Newsletter, Monday, 05/09/2005

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Table of Contents

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

Market Wrap



The markets traded a narrow range on very light volume in a quiet, listless session. For the first time in over a week, the previous day's low was broken, a lower low and lower high for the Dow. An end of session ramp job cleared the Friday highs for the S&P and Nasdaq, but the Dow failed to make it.

Volume breadth was positive for the session, with the NYSE leading the way, 3.39 advancing shares for each declining. On the Nasdaq, there were 1.73 advancing shares for each declining. Total volume was light, with combined Nasdaq and NYSE volume barely breaking 2.8 billion.

Daily Dow Chart

An end-of-session ramp closed the Dow less than a point off its 10384.86 high. The bounce from the 10320 low was sufficiently sharp to leave a bullish doji hammer. While there may well be followthrough tomorrow, the light volume and lack of drama don't fit the profile for a valid doji reversal, particularly because today's print reversed in the direction of the broader daily trend. The break of Friday's low was the first warning shot across the bow of the daily cycle upphase, and 10320 will be a key level to watch tomorrow. A break of that level could qualify as a bearish ascending wedge breakdown as well, projecting potentially to the low 10000's. To the upside, 10400 and 10440 are immediate resistance.

Daily S&P 500 Chart

The SPX added 7.49 to close at 1178.84, just off a session high of 1178.87. As with the Dow, the end of session ramp was the cherry on top, actually breaking Friday's high and qualifying today as a key outside reversal- the lower low was followed by a higher high. However, the light volume and the "reversal" in the direction of the broader trend are problematic to that interpretation. There's strong resistance to 1180, actually 1182, and while the daily upphase continues, it's approaching overbought territory. The 1186-90 zone should cap the current run if the bulls are able to clear immediate resistance from here. To the downside, a break of today's low on strong volume will set up the same wedge break noted on the Dow.

Daily Nasdaq Chart

The end of session ramp for the Nasdaq broke the Friday high, as it did on the SPX but failed to do on the Dow and QQQQ. The light volume made today a difficult session to read, and as with the SPX, the closing print at the 1979.67 is right on strong resistance of 1980. Above this level, the 1996-2000 and 2025 levels are next resistance, while the 1960 low is at trendline support. Below that level, the daily cycle upphase would be threatened.

Daily TNX Chart

Ten year treasury yields (TNX) melted up Friday following the release of the employment report, and while bonds did not fall apart today, the TNX did not give back any of its Friday gains. The daily cycle upphase, while slow in coming, is in full swing. The current TNX rally faces resistance at 4.3% followed by bollinger resistance at 4.37% and then the 4.4%-4.44% confluence. Support is at the 22 day EMA, followed by 4.22%-4.24%. For the day, the TNX added 1.2 bps to close at 4.278%.

The Treasury auctioned $28 billion in 13-week and 26-week bills, comprised of $15 billion in 13-week bills and $13 billion in 26-week bills. The 13-week auction generated a respectable 2.18 bids for each accepted, with a high-rate of 2.85%, while the 26-week bills fetched a bid-to-cover ratio of 2.32 and a high rate of 3.12%. Indirect bidders (foreign central banks) took $7.1 billion or 25% of the total.

Chart of Crude oil

Crude oil followed Friday's pattern today, trading an uneasy range bound chop only to rocket higher into the close, reversing an earlier loss to close 1.075 or 2.11% at 52.025 on the Nymex. On the daily chart, the bounce from 49 support has the oscillators turning up from their most recent downphase, and a close above 52 should be enough to generate preliminary buy signals in this timeframe.

The Bank of England's rate announcement was released at 7AM, with no change to the 4.75% rate for a 9th consecutive month. Analysts were expecting England's central bank to leave rates unchanged.

At 10AM, the Commerce Department released the lone economic report of the day, Wholesale Inventories for March. Wholesale Inventories grew 0.4% in the latest month, less than the 0.7% expected and February's 0.6% gain. Sales rose 0.2%, bringing the inventory-to-sales ratio to 1.19. The 0.4% reading was disappointing but still represents an 11% increase over March 2004's level. The inventory-to-sales level remains very low, slightly above the 1.14 low last year, suggesting a good balance between wholesale supply and demand currently.

In corporate news, Alcan (AL) announced earnings that rose from $106 million or 29 cents per share on revenue of $6.01 billion in Q1 2004 to $218 million or 58 cents on revenue of $5.17 billion in the current quarter. Based on current operations only, net EPS was 56 cents, meeting expectations, as did the $5.15 billion revenue figure. AL closed lower by 1.08% at 33.

Cellular distributor Brightpoint (CELL) reported earnings that rose from -$2.2 million or -11 cents per share on revenue of $440.2 million in Q1 2004 to $2.8 million or 16 cents per share on revenue of $485.6 million. The company cited growth in use of wireless devices, and estimates that the industry grew 20% during the quarter. CELL got smoked for a 6.62% loss at 18.77 on nearly 11 times its average daily volume.

On Friday night, Berkshire Hathaway (BRKA, BRKB) reported Q1 earnings that declined from $1.55 billion or $1,008 per share on revenue of $17.18 billion in Q1 2004 to $1.36 billion or $886 per share (basis BRKA shares) on revenue of $17.18 billion. The company's position in cash and cash equivalents from $40.9 billion in the year-ago quarter to $46.71 billion. The company also disclosed that an executive at General Re received a Wells Notice from the SEC, which is investigating some of the company's reinsurance activities and is considering filing civil lawsuits against that executive for alleged violations of securities laws. BRKA closed lower by $749 or 0.89% at $83,250.

Earnings season is winding down, but there was plenty of merger news today, with Duke Energy (DUK) announcing that will purchase Cinergy (CIN) in a $9 billion all-stock deal. Each share of CIN will be converted to 1.56 DUK shares, the equivalent of paying $45.80 for each CIN share, which places a 13.4% premium on DUK's closing price of $40.38 on Friday. The merger will resulted in the elimination of approximately 1500 jobs, roughly 5% of the companies' combined workforce. DUK's CEO will be chairman of the new company, and DUK announced that it intends to increase its dividend by 12.7%. Later in the session, Fitch blessed the deal, affirming DUK's and its subsidiaries' debt ratings, as well as those of CIN, at "stable." DUK closed lower by 1.84% at 28.82, while CIN gained 4.8% to close at 42.32.

Kirk Kerkorian's Tracinda made news again on the GM tape, filed a tender offer with the SEC for the acquisition of 28 million shares to add to its current 22 million shares of GM- a move that would bring its ownership to 8.84% of the company. The price per share is $31. Tracinda disclosed that it had begun acquiring shares in the open market in April. GM gained 1.85% to close at 31.33.

Tomorrow could be another quiet day, with no economic reports scheduled and only a 3-year note and 4-week bill auction from the Treasury. CSCO reports after the bell, with analysts looking for EPS of 22 cents and revenue of $6.16 billion. With volume so light during the past few sessions and no major scheduled data points until the CSCO release, we could be in for another snoozer. The cycle picture suggests that the daily cycle upphase in place for the past 2 weeks should begin running out of racetrack this week, and while the topping process is often a slow, choppy affair (as was the last daily cycle bottom), the low volume environment can encourage sudden spikes and gappy trading as we saw at today's close. Whatever happens, don't let boredom trick you into taking a position of which you're not confident. It's much easier to watch a sleepy range than to be grinding your teeth, obsessing about which way it might to break. With the market going on its 3rd consecutive light volume session and the indices walking up daily trendline support, chances are we'll get some direction (and volume) soon.


New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
CMX None

New Long Plays

Caremark - CMX - close: 43.30 chg: +1.51 stop: 40.95

Company Description:
Caremark Rx, Inc. is a leading pharmaceutical services company, providing, through its affiliates, comprehensive drug benefit services to over 2,000 health plan sponsors and their plan participants throughout the U.S. Caremark's clients include corporate health plans, managed care organizations, insurance companies, union, government agencies and other funded benefit plans. The Company operates a national retail pharmacy network with over 59,000 participating pharmacies, seven mail service pharmacies, the industry's only FDA-regulated repackaging plant and 21 licensed specialty pharmacies for delivery of advanced medications to individuals with chronic or genetic diseases and disorders. (source: company press release)

Why We Like It:
CMX has produced a strong bullish breakout through the top of its recent trading range. The company reported earnings last week that were inline with expectations but management guided higher for 2005. Today shares climbed 3.6 percent on volume almost three times the norm, which suggests more strength ahead. Plus, the stock broke through resistance near the $42.00 level, which dates back to the January highs. We also like the Point & Figure chart, which shows a new ascending triple-top breakout buy signal with a $47.00 target. We are willing to go long at current levels but it might be prudent for readers to consider waiting and watching for a dip back toward $42.00 as a new bullish entry point. Broken resistance near $42 should become new support. Our target is the $47.00-48.00 range.

Picked on May 09 at $43.30
Change since picked: + 0.00
Earnings Date 05/03/05 (confirmed)
Average Daily Volume: 2.6 million


Greenhill & Co - GHL - close: 34.11 chg: +1.85 stop: 31.49

Company Description:
Greenhill & Co., Inc. is an independent investment banking firm that (i) provides financial advice on significant mergers, acquisitions, restructurings and similar corporate finance matters and (ii) manages merchant banking funds and commits capital to those funds. Greenhill acts for clients located throughout the world from offices in New York, London and Frankfurt, and recently announced plans to open a Dallas office. (source: company press release)

Why We Like It:
The last several months have seen a ton of merger & acquisition activity, which sounds like a very healthy environment if you're an investment banker like GHL. The stock peaked in March but shares are bouncing from a recent test of support north of the $30.00 level. Today's gain was fueled by very strong volume and broke through its six-week descending channel and its 10 and 21-dma's. The technical oscillators are bullish and its MACD just produced a new buy signal today. Readers can choose to go long at current levels or wait for a dip back toward the $33.00-32.50 region and buy a bounce. Our short-term target is the $37.00-38.00 range.

Picked on May 09 at $34.11
Change since picked: + 0.00
Earnings Date 04/21/05 (confirmed)
Average Daily Volume: thousand


Humana - HUM - close: 36.33 chg: +1.25 stop: 32.95

Company Description:
Humana Inc., headquartered in Louisville, Kentucky, is one of the nation's largest publicly traded health benefits companies, with approximately 7 million medical members located primarily in 15 states and Puerto Rico. Humana offers a diversified portfolio of health insurance products and related services -- through traditional and consumer-choice plans -- to employer groups, government-sponsored plans, and individuals. (source: company press release)

Why We Like It:
Healthcare stocks appear to be the market leaders. The HMO.X index is at or near new highs. Meanwhile shares of HUM just broke out to a new all-time high above its previous peak dating back to April 1991. We also like HUM because shares just broke through the top of its three-month trading range - a range where the stock was consolidating its late 2004 gains. The P&F chart also shows a new breakout buy signal on top of the previous buy signal that points to a $70 target. Readers can choose to go long now or look for a possible dip back toward the $35.00 level. Our short-term target is the $40.00 region.

Picked on May 09 at $36.33
Change since picked: + 0.00
Earnings Date 05/02/05 (confirmed)
Average Daily Volume: 1.3 million

New Short Plays

None today.

Play Updates

Updates On Latest Picks


Long Play Updates

Archstone-Smith - ASN - close: 36.81 chg: +0.97 stop: 34.85

Good news! ASN erased Friday's losses and broke out to new relative highs on Monday. This looks like a new bullish entry point. Our target is the $38.50-39.00 range.

Picked on May 06 at $36.26
Change since picked: + 0.55
Earnings Date 04/26/05 (confirmed)
Average Daily Volume: 811 thousand


Brookfield Homes - BHS - close: 47.30 chg: +1.30 stop: 42.45

BHS produced another high-volume gain adding 2.8 percent on volume more than three times the average. We see no change from our previous update on 05/08/05.

Picked on May 05 at $45.05
Change since picked: + 2.25
Earnings Date 05/02/05 (confirmed)
Average Daily Volume: 100 thousand


First Bancorp - FBP - close: 40.25 chg: -0.43 stop: 37.00

FBP dipped to $39.50 this morning but that's where traders bought the dip. We continue to believe this is a bullish entry point. More conservative traders might want to consider a tighter stop loss near the $38 level. No change from our previous update.

Picked on May 05 at $40.37
Change since picked: - 0.12
Earnings Date 04/19/05 (confirmed)
Average Daily Volume: 280 thousand

Short Play Updates

Ball Corp - BLL - close: 39.40 chg: +0.22 stop: 41.01

The market-wide rally on Monday was enough to lift BLL off its lows of the session. We remain bearish but readers might want to wait and see if shares trade near and then roll over under the $40.00 level (a.k.a. a failed rally) before initiating new positions.

Picked on May 05 at $38.98
Change since picked: + 0.42
Earnings Date 04/28/05 (confirmed)
Average Daily Volume: 611 thousand


Biomet - BMET - close: 38.18 chg: -0.21 stop: 39.51

Almost! BMET dipped to $37.67 this morning before managing a meager bounce. We're encouraged by the stock's relative weakness today. We are still waiting for BMET to trade at or below our entry point of $37.45 to open the play.

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: 29.50 chg: -0.11 stop: 31.51

No change from our previous update on 05/08/05.

Picked on April 19 at $29.05
Change since picked: + 0.45
Earnings Date 04/19/05 (confirmed)
Average Daily Volume: 5.4 million


Novellus - NVLS - close: 23.78 change: +0.01 stop: 25.01

The SOX semiconductor index is inching higher toward resistance at the 400 level. Meanwhile NVLS continues to display relative weakness. A Forbes article today mentioned some Bear Stearns comments on NVLS who believe that longer-term NVLS could be attractive but shorter-term there are worries about the second quarter. We see no change from our previous update.

Picked on April 29 at $23.40
Change since picked: + 0.38
Earnings Date 04/18/05 (confirmed)
Average Daily Volume: 4.0 million


Catalina Mktg - POS - close: 24.59 chg: +0.34 stop: 25.25

No change from our previous update on 05/08/05. POS remains under resistance at the $25.00 mark.

Picked on April 22 at $23.80
Change since picked: + 0.79
Earnings Date 05/18/05 (unconfirmed)
Average Daily Volume: 468 thousand

Closed Long Plays


Closed Short Plays


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


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