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Daily Newsletter, Tuesday, 06/21/2005

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Table of Contents

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

Market Wrap

Inchworm Losing Its Grip?

Lackluster trading, minimal volume, rising oil prices and weak economics have failed to stop the markets from moving steadily higher over the last week. The ten steps forward, nine steps backward I mentioned last week is still in play with every strong spurt of buying followed with an almost identical spurt of selling. Despite the advances the markets are having trouble creeping higher as we approach major resistance levels just overhead. Social Security news late in the day helped grease the skids and the inchworm began to lose traction. 

Dow Chart - Daily

Nasdaq Chart - Daily

The morning started off with a negligible +0.1% gain in the weekly retail sales but it was the third straight week of gains. Warmer weather has helped boost sales of seasonal goods but rising gas prices could slow future consumption. On Monday the Conference Board Leading Indicators fell again by -0.5% with nine of the ten components leading the index lower. April was revised up +0.2% to unchanged technically breaking the five-month string of losses. The index is showing a rising risk of recession due mostly to the rising energy prices. The indicators are being adjusted beginning in June to "bring the index more inline with growth in the economy." A simple case of "if you don't like the answer just change the question" by those that manipulate these things. 

The markets were inching slowly higher as the day progressed until news broke at 3:PM that Republican Senator Bob Bennett was prepared to introduce a Social Security plan that does NOT include private accounts. This would be a reversal to the Bush plan and the markets did not take the news well. When the news broke the Dow lost -30, Nasdaq -10 and both fell into negative territory. Traders bought the dip and rescued the indexes from a potentially stronger bout of profit taking. There has been no real profit taking since early May and the closer we get to Q2 earnings the more likely traders will want to lock in some profits. 

SPX Chart - Daily

The SPX gained +7% since April and is trading only about 1% below its highs for the year at 1229. There is a clear triple top retest in progress and there have been no signs of failure despite the lackluster gains. The VXO fell to a lows not seen since 1994 at 10.08 and is VERY close to single digit levels. This puts the VXO at extremely risky levels for the bulls. The low volume advances and constant dip buying have removed nearly all the volatility from the market despite numerous challenges ahead. Traders have decided to buy bad news and good news alike and there is little fear of the future. 

Considering the falling Q2 guidance this constant dip buying is even more amazing. Q2 guidance began as strongly positive with one negative announcement for every positive one. Historically the average is 2:1, two negative for every positive. 2-3 weeks ago that 1:1 ratio changed with an acceleration of negative releases to a 2:1 ratio. This week we saw negative guidance from MWD, ITW, AET, NUE, NYT, KRI and others that pushed the ratio to 2.7:1 negative to positive. This is not a good sign but traders continue to buy the dips ahead of the normal late summer weakness. After the close today Ford slashed its earnings outlook by -20% for the rest of the year and announced they were going to cut -5% of salaried positions. Contributions to 401K and bonuses for remaining workers were also eliminated. 

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This Friday we will see the Russell indexes rebalanced at the close and next week is quarter end. This has got to be hell week for fund managers as they try to adjust portfolios to match the new Russell weightings as well as window dress for the end of quarter close. This should increase volatility as the week draws to a close, especially with a Fed meeting approaching. 

The interest rate discussions are accelerating with the June FOMC meeting only a week away. Record oil prices are being overshadowed by the almost daily Fedspeak and the coming two-day meeting. Fed funds futures are showing nearly a 100% chance of a quarter point hike at both the June and August meetings and better than a 50% chance of another hike in September. Just when the bond groupies were nearing agreement on the future of rates, Pimco's Bill Gross suggested today that the Fed could be cutting rates by year end. Confused? So are the markets and we are likely to trade sideways until we hear what the Fed says next Wednesday when their meeting closes. We do have another Greenspan speech this Thursday but I doubt he will say anything contrary to his prior appearances with that Fed meeting just ahead. 

December Crude Oil Chart 

Oil prices cooled slightly from their record levels but only slightly. Inventory levels are expected to drop substantially when announced on Wednesday and only a few traders took profits ahead of the news. The current month contract closed at $58.90 with the December contract at $60.23, slightly below its $61.15 high from yesterday. The August contract becomes the current contract on Wednesday. (CL05Q) I won't repeat all the news moving oil higher but there is one elephant in the room. China Oil (CNOOC) has been rumored to be preparing a rival bid for Unocal. Today the price of that bid was rumored to be $71.50 a share, all cash. Chevron issued a statement saying they were committed to the acquisition as though warning CNOOC that they were ready to raise their bid to complete the deal. In other words, don't waste your time, we already have FTC approval and we are not going to withdraw peacefully. If CNOOC, a government sponsored entity, does bid higher then that revalues oil properties on a global scale. China is currently importing 3.2mbpd of oil over and above their current production and that demand is rising quickly according to BP. With construction accelerating on infrastructure ahead of the coming 2008 Olympics this demand could consume all excess global production by year-end. 

It was also announced today that China's Q1 GDP was +9.4% and the same record rate of 2004. If China's economy paused it was only briefly and several analysts expressed concern that is was actually accelerating from that Q1 rate. China did make a bid for Maytag today as the dominoes continue to fall in their direction. In 2002 China bought 18 U.S. companies, 15 in 2003 and a whopping 26 in 2004. They are rapidly buying or attempting to buy assets that will allow them to broaden their global reach and market share in many areas. With 1.3B people moving rapidly into a consumer economy China will eventually be a global force and a powerful economic force. This should be sending chills through the current administration. 

Those chills probably turned into real fear on Monday when the Washington Times reported yet another intelligence failure on China. Reportedly U.S. spy agencies failed to recognize several key military developments over the past decade. Among the biggest were the development of a new long-range cruise missile and deployment of a new warship using stolen U.S. Aegis battle management technology. They also missed the deployment of a new class of attack submarine known as the Yuan class until photos appeared on the Internet. They also developed new precision guided munitions, air to ground missiles and more accurate warheads. They also developed new surface-to-surface missiles for targeting U.S. aircraft carrier battle groups. Last but not least were imports of advanced weaponry including Russian submarines, warships and fighter-bombers. China is not going to be the sleeping bear much longer and is rapidly growing teeth and claws to backup its acquisition goals. I have said numerous times that we will be in a shooting war with China over oil within the next ten years and it is not one that will be easy to win. If we do go to war with China over oil how will that impact our imports of Chinese goods and those made by the 60+ U.S. companies China has bought in the last three years?

Over the last week the Dow has climbed slightly above 10600 to three month highs and has raised the high side of our recent range. 10635 has turned into current resistance and has held solid for three days. Despite that overhead resistance there has been very little pullback and 10575 is acting like support. Traders continue to maintain a bid under the Dow stocks and that bid has finally translated into a bid under the Nasdaq. 

The Nasdaq finally pulled out of its slump to 2060 and has returned to overhead resistance at 2095. Real resistance is 2100 but the 2095 level appears to be where the overly eager sellers have taken a stand. Despite the social security news dip the Nasdaq rebounded to close with another gain at 2091 and just under those resistance levels. Now that techs stocks have found buyers all we need is a strong catalyst to catapult us over 2100 to produce a real short squeeze. 

I still believe we have a strong bout of profit taking before the summer is over but my bias on the short term is still slightly to the upside. I say slightly because the gains are minimal, volume is very low and internals are barely breakeven. The VXO is screaming a warning and every bear in the market is camped at Nasda1 2100. It appears we have the makings of an explosion and all we need is a spark. Investors Business Daily is comparing the current market with the 1994-1995 beginning of the Y2K bull market. The Fed is 2-3 moves away from being done and it could come as soon as the August meeting. When the Fed stopped raising rates in Feb-1995 the market exploded with the S&P jumping +50% by Q2-1996. Talk like this is energizing retail traders and creating the underlying bid. Any apparent flinch by the Fed next Wednesday could create a monster move higher. Should that move appear it will run headfirst into Q2 earnings and with warnings accelerating it could be a spectacular impact. 

The S&P appears to have triple topped at 1220 and this could be the stalling point ahead of next Wednesday's Fed announcement. A breakout over 1220 could be very powerful with a sprint to 1250 very quickly. I just have a problem seeing a summer rally that is not followed by a strong retracement in the August-October period. That retracement could erase the gains all the way back to 1160. This keeps me from being too bullish on anything but energy stocks until fall. The imploding VXO confirms my hesitancy to be long the market. Conversely I don't want to be short it either until we get past the end of the quarter and into July. This is summer trading at its finest with low volume and minimal direction. I believe it will change over the next three weeks and I suggest everyone be ready. Definitely enter longs passively and be ready to exit aggressively. Above all do not leave positions open without stops if you go on vacation! 

New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
None None

New Long Plays

None today.

New Short Plays

None today.

Play Updates

Updates On Latest Picks

Long Play Updates

Amer. Home Mtg Invest. - AHM - cls: 36.45 chg: -0.11 stop: 34.95

There is still no change from our weekend update. AHM is bouncing around its $35.50-37.00 trading range. Readers can choose to buy a bounce from the bottom of the range or wait for a breakout.

Picked on June 19 at $36.34
Change since picked: + 0.11
Earnings Date 07/25/05 (unconfirmed)
Average Daily Volume: 445 thousand

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Canon - CAJ - close: 54.86 change: +0.56 stop: 53.45 

CAJ is starting to show a little life again. Today's one-percent gain is encouraging but we're still not suggesting new bullish positions until CAJ trades over the $55.00 level. 

Picked on May 29 at $55.24
Change since picked: - 0.38
Earnings Date 04/27/05 (confirmed)
Average Daily Volume: 157 thousand

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CB Rich. Ellis Grp - CBG - close: 40.81 chg: -0.59 stop: 38.49

So far so good. We wanted a dip back toward the $40.00 level and that's where CBG appears to be heading. No change from our previous update on 06/20/05.

Picked on June 20 at $41.40
Change since picked: - 0.59
Earnings Date 08/01/05 (unconfirmed)
Average Daily Volume: 466 thousand

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Caremark - CMX - close: 44.07 chg: -0.66 stop: 42.45 

Hmm... news that CSFB started coverage on CMX with an "out perform" rating today didn't help the stock any. CMX also announced that it is promoting its CFO to its COO spot. 

Picked on May 09 at $43.30
Change since picked: + 0.77
Earnings Date 05/03/05 (confirmed)
Average Daily Volume: 2.6 million 

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Greenbrier Co - GBX - close: 29.30 change: +0.25 stop: 27.99 

We remain somewhat cautious on GBX here. The stock did bounce back over the $29.50 level intraday but couldn't hold it. We do not like how the MACD indicator is beginning to curl towards a new sell signal. Other technical oscillators are mixed. As long as GBX stays above the $28 level or its 200-dma bulls should be okay but we hesitate to suggest new positions here. 

Picked on June 01 at $28.67
Change since picked: + 0.63
Earnings Date 06/29/05 (unconfirmed)
Average Daily Volume: 227 thousand

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General Electric - GE - close: 36.15 chg: -0.13 stop: 34.95

Please see our weekend update for strategy details on GE. We are currently suggesting a bullish entry on a dip into the $36.00-35.50 range.

Picked on May xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/16/05 (unconfirmed)
Average Daily Volume: 18.7 million 

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Georgia Gulf - GGC - close: 34.72 change: -1.13 stop: 33.95*new* 

More conservative traders may want to start eyeing the exits here. GGC has been unable to breakout over its simple 50-dma and now shares are breaking down under its 10-dma and the $35.00 level. Tuesday's 3.15 percent decline definitely under performed the wider market. We are not suggesting new bullish positions at this time. Instead we are raising our stop loss to $33.95 to reduce our risk. The action over the last couple of days has not been good to the technical indicators. 

Picked on June 05 at $34.33
Change since picked: + 0.39
Earnings Date 07/28/05 (unconfirmed)
Average Daily Volume: 598 thousand

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ExxonMobil - XOM - close: 59.51 change: -1.34 stop: 56.99 *new*

XOM hit some profit taking today pulling the stock back below the $60.00 level. A dip in crude oil may be the cause but then again both oil and oil stocks look a overbought and extended. We suspect that XOM's decline may also be partially fueled by comments from the company's CEO Lee Raymond today. Lee said that conditions for investing across the globe's more energy-rich countries are declining (source: Reuters). We would watch for a bounce in the $58.00-58.50 region in XOM's stock price. We are also raising our stop loss to $56.99. 

Picked on June 09 at $58.44
Change since picked: + 1.07
Earnings Date 07/28/05 (unconfirmed)
Average Daily Volume: 20.9 million 

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M/I Homes Inc - MHO - close: 54.25 chg: +0.17 stop: 50.98 

No change from our weekend update. More conservative traders may want to consider taking some profits here. Our target is the $54.90-55.20 range.

Picked on June 14 at $50.98
Change since picked: + 3.27
Earnings Date 07/25/05 (unconfirmed)
Average Daily Volume: 143 thousand

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Smurfit-Stone Cont. - SSCC - close: 11.41 chg: -0.17 stop: 10.99

If you were one of the traders looking for our suggested alternative entry point in the $11.20-11.40 range you got it today. The low was $11.25 and SSCC obviously bounced back toward $11.40. The rest of us might want to wait for SSCC to breakout over the $12.00 level or even its 50-dma before considering new bullish positions. 

Picked on June 19 at $11.68
Change since picked: - 0.28
Earnings Date 07/22/05 (unconfirmed)
Average Daily Volume: 2.4 million 

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Sirius Satellite Radio - SIRI - cls: 5.96 chg: -0.05 stop: 5.59 

No change from our weekend update. SIRI continues to coil under resistance in the $6.10 region. 

Picked on May 22 at $ 5.65
Change since picked: + 0.31
Earnings Date 04/28/05 (confirmed)
Average Daily Volume: 40.0 million 

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Sohu.com - SOHU - close: 22.92 change: +0.62 stop: 20.99 *new*

It was a strong day for the Chinese Internet-related stocks and SOHU added another 2.78 percent on decent volume. Don't be surprised to see SOHU dip back toward the $22.00 level before continuing higher. Our target is the $24.00 level or above. We are raising our stop loss to $20.99. 

Picked on June 13 at $21.25
Change since picked: + 1.66
Earnings Date 07/28/05 (unconfirmed)
Average Daily Volume: 924 thousand

Short Play Updates

Rogers Corp - ROG - close: 42.40 change: -0.00 stop: 45.01

The lack of a bounce today in ROG might be considered good news for the bears. We would still prefer to short a failed rally up near the $44.00 level but we're not afraid to open new bearish positions here. It's up to you if you want to wait for a possible bounce fill-the-gap type of move before initiating positions. Please see our previous update on 06/20/05 for more details. 

Picked on June 20 at $42.40
Change since picked: - 0.00
Earnings Date 07/18/05 (unconfirmed)
Average Daily Volume: 94 thousand

Closed Long Plays

Nova Chemicals - NCX - cls: 31.09 chg: -1.00 stop: 31.95 

NCX continues to show a lot of volatility. This morning the stock was downgraded by Lehman Brothers to an "under weight". The broker lowered their price target to $21.00. This had shares of NCX gapping lower to open at $31.50, which is below our stop loss at $31.95 so we would have been immediately stopped out. Readers may want to consider bearish positions in NCX if the stock breaks down under the $30.00 level. 

Picked on June 01 at $33.03
Change since picked: - 1.94
Earnings Date 07/20/05 (unconfirmed)
Average Daily Volume: 660 thousand

Closed Short Plays

None

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

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