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Daily Newsletter, Wednesday, 06/22/2005

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Table of Contents

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

Market Wrap

A hunger for yield!

A hunger for yield!

Treasury bond prices surged on Wednesday, extending Tuesday's hefty price gains, which came on the heels of Sweden's central bank cutting rates by a half point to 1.5%. 

A hunger for yield was further fueled today after the latest minutes of the Bank of England's Monetary Policy Committee revealed that 2 of the 7 panel members voted to cut that benchmark rate 25 basis points from 4.75% on concern that euro-zone growth was slowing. Earlier this month, England's Monetary Policy Committee held rates at 4.75%.

The benchmark 10-year yield ($TNX.X) plunged 10.4 basis points to finish the session back below the 4.0% level at 3.945%. A strong round of buying was also found in the shorter-dated 5-year note with its yield ($FVX.X) down 11.9 basis points to 3.721%, while the longer-dated 30-year yield ($TYX.X) fell 8.2 basis points to 4.251%.


As market participants from around the world scrambled toward U.S. Treasuries, the U.S. Dollar Index (dx00y) 88.56 +0.43% had the greenback finding buyers.

Notwithstanding lower interest rates, which raise the current value of future earnings and thus should increase the current value of stocks, the major equity indices failed to retrace early-morning highs as investors contemplate euro-zone interest rates, which many feel have been too high given the regions more sluggish economic growth (compared to the U.S.), and the potential negative impact slowing may have on demand for U.S. exports.

All-told, market internals finished modestly positive at the a/d line, while bullish leadership persists among new high and new low ratios at both major exchanges.

Despite a weekly draw in U.S. crude oil inventories, pit traders cited "profit taking" for weakness in energy prices. August Crude Oil futures (cl05q) fell $0.95, or -1.61% to settle at $58.09. Meanwhile, August Unleaded Gas (hu05q) was down $0.167, or -1.02% to $1.6182, while August Heating Oil (ho05q) edged down less than a penny, or -0.46% to $1.6357. The EIA said crude oil stocks were down 1.6 million barrels, which was slightly less than updated consensus for a 2.0 million decline. Gasoline stockpiles rose by 200K barrels, which was a stronger build than the +50K consensus. While distillate inventories (i.e. heating oil, diesel fuel) rose by 1.3 million barrels, but shy of consensus for a 2.0 million barrel increase. 

Online broker Ameritrade (NASDAQ:AMTD) $17.87 +20.58% surged after being halted for trade mid-session, where gains gave a strong boost to the Securities Broker/Dealer Index (XBD.X) 154.85 +2.95%, which finished as today's bullish sector winner. Earlier this morning, CNBC reported that it had learned the company was set to make an offer for rival TD Waterhouse. At roughly 01:48 PM EDT, Ameritrade's stock was halted at $14.83, when the company then confirmed its intent to buy TD Waterhouse, with the overall value of the deal thought to be $2.85 billion in cash. At the same time, Ameritrade said it was not interested in a semi-hostile takeover attempt by E*Trade (NYSE:ET) $13.75 +6.50%. 

TD Waterhouse's parent, Toronto Dominion (NYSE:TD) $44.15 +1.23% will initially own 32% of the newly created company, which will be called TD Ameritrade. 

It would be my analysis that Wall Street liked the deal as Toronto Dominion (TD) will receive approximately 190 million newly issued shares of AMTD, where market participants see little effect of the all-stock deal actually hitting the market.

Ameritrade (AMTD) was today's most actively trade stock with just over 86.9 million shares changing hands. Average daily volume had been running at roughly 6 million shares per day the past three months.

Ford Motor (NYSE:F) $10.68 -4.38% was today's second-most actively traded stock on the big board, behind Lucent (NYSE:LU) $3.06 (unch), with 29 million shares traded. Late yesterday the automaker warned 2005 earnings would be lower than expected. 

Dow component General Motors (NYSE:GM) $34.82 -3.03% gave back $1.09 after a recent challenge of its 200-day SMA ($35.85). United Auto Workers President Ron Gettelfinger said the union is not yet persuaded by GM's argument that it must cut union members' health-care benefits to be competitive, and says the union wants time for a team of experts to study the automaker's costs.

U.S. Market Watch - 06/22/05


A spattering of green and red is found once again in the U.S. Market Watch. As hard as I stare at the QQQQ $37.81 -0.10% in recent weeks, this sometimes volatile index tracker has seen closes of $37.90, $37.87, $37.87, $37.85 and now $37.81 in the past 5 sessions.

I thought we would get some type of "resolution" break to the current sideways trade today, with some type of response after the weekly energy data. No go! And after yesterday's "doji" day, today's session saw an intra-day swing being equidistant and outside of yesterday's tight trade. 

The S&P Banks Index (BIX.X) 368.67 +0.01% looked as if it might be "the sector" to lead a meaningful break higher earlier this morning. But as the session wore on, and the hunger for bonds built, buyers faded in the banks. 

S&P Banks Index (BIX.X) - Daily Intervals


"Financials" comprise roughly 28% of the broader S&P 500 Index (SPX.X) 1,213.88 +0.02%, and just as the SPX has shown the ability to start to creep above the "right shoulder" of a head/shoulder top pattern, so have the more regional banks. Yes! Banks love a low interest rate environment (the FOMC sets interest rates), but with Treasury yields falling and the yield curve flattening, that will put some pressure on banks. I feel the banks really want to go higher, but buyers seem to lack the conviction for the push.

Now, I will stress the term BUYERS. I'm not just talking BULLS, but undoubtedly some BEARS that are short this group.

The above chart is shown with both MONTHLY (red) and WEEKLY (blue) pivot analysis retracement, where we would expect some formidable near-term institutional selling at the overlapping MONTHLY R1 and WEEKLY R1. Today's action wasn't a "test and smash of selling" either, as the BIX.X held above that correlative 370 area for about an hour. Usually, if sellers are just waiting for the chance to dump a sector on strength, the test of these institutional levels will find sellers rather quickly, when the computer programs that manage this basket of stocks gets turned on for selling. Note Monday morning's low found buyers immediately.

Here's a 30-minute interval chart of the BIX.X. Buggers have been strong, but just when it looks like buyers are really going to get aggressive....

S&P Banks Index (BIX.X) - 30-minute intervals


The WEEKLY Pivot analysis levels were derived from last week's high/low and close. I show a "bullish swing trade" in shares of Well Fargo (NYSE:WFC) $61.72 +0.35% as a like-stock, where after not seeing much follow through at a likely institutional level of resistance, I want to take a profit. True, its not a big profit, but it is what the market's gave me, or what I thought traders should take.

I also show some thoughts as to a range of emotions that market participants may be having. I have these emotions. I understand them. Sure looks like the banks are under accumulation, but buyers not overly aggressive. 

If we were to think that the lower YIELD in Treasuries is a signal of economic contractions, then banks will likely show weakness, even if the Fed does cut rates. Banks derive their income/earnings not only from the "spread" between rates and bond yields, which many loan originations will be tied, but they still need economic growth for loan DEMAND!

Today, the Mortgage Bankers Association released its Weekly Mortgage Applications Survey for the week ended June 17. The Market Composite Index, a measure of mortgage loan application volume was 786.8, a decrease of 11.3% from one week earlier (887.00). The Purchases Index fell by 9.4% to 479.4 from 529.3 the previous week, whereas the seasonally-adjusted Refinance Index decreased by 13.2% to 2575.0 from 2967.4 one week earlier.

Accordion to the association, the average contract rate for a 30-year fixed rate mortgage increased to 5.63% from 5.62% one week earlier, with points decreasing to 1.17 from 1.25.

So what's missing for another bullish leg higher in equities? How about cash? 

S&P 500 Index (SPX.X) - Daily Intervals


On a week-to-week basis, the SPX has seen gains, but they really came in two sessions. I won't chuckle out of bullish complacency, something "perma-bears" keep reminding bulls of.

What I do think trader/investors need to understand is this simplistic equation.

Treasury YIELD + Dollar + Oil = Equity prices/economy

What has taken place the past week to have the SPX looking "stalled out," but holding support of 1,211 despite a bears word of caution at his/her head and shoulder top they've so readily conceded?

Cash! The U.S. Dollar Index (dx00y) is relatively unchanged, but fractionally lower on a week-to-week basis. OK. In very simplistic supply/demand terms, some money has left the country.

However, it BONDS that have really seen the attraction of cash! 

If my simplistic equation is to show further bullishness for stocks, I think equity bulls NEED to see some money COME BACK OUT OF BONDS! It is NOT a negative sign than "junk bonds" as depicted by the Pacholder High Yield (PHF) $9.65 +0.52% is up 4.43% the past 5-days. Remember, this is the HIGHEST RISK asset class for fixed income. The trade in PHF tells us there is an APPETITE not only for YIELD, but RISK!!!!! 

Where there's an APPETITE for RISK, what comes next, when the appetite for YIELD is exhausted, is the APPETITE for GROWTH!

I make note that the Federal Open Market Committee will meet next week. Bond bulls are eating up Treasuries like there is no tomorrow. They may continue to do so into the FOMC meeting. 

Dow Transports (TRAN) - Daily Intervals


The TRAN and the SPX don't look "identical", but we can see where two-days of gains did find some participation from the TRAN. As an economically sensitive group, SPX bulls do like to see some "strength come from weakness." Bears hate it.

Let's look quickly at the NASDAQ Composite Index (COMPX) 2,092.03 +0.04% and a chart I put together in TUESDAY evening's Market Monitor. This chart doesn't have today's trade (h= 2,103 / l= 2083) but may well speak to the markets willingness to get aggressive at this point. 

NASDAQ Composite Index (COMPX) - Daily Intervals


Is the bullish move in the COMPX "way overdone" as some bear bloggers are saying? Not if we're looking at the NASDAQ Composite Bullish % ($BPCOMPQ) from www.stockcharts.com, which just started to show some meaningful addition of new point and figure buy signals.

I'll give the 2,100 level of horizontal resistance to the bear bloggers, just as they have conceded that level from 2,000. And while there's more banks/financial listed on the big board, as well as energy stocks, I find it very hard to believe that bears are resting comfortably at this point.

There may be some "freed up cash" from the bond market come Wednesday afternoon, Thursday morning of next week. I view a close above 2,100 as BULLISH!

For those traders that do follow moving averages, it is thought by many market technicians that when both the 21-day and 50-day SMA are ABOVE the longer-term 200-day SMA, it is a sign that near-term, intermediate-term and longer-term price action is in unison.

NASDAQ Composite Bullish % ($BPCOMPQ) - 2% box scale


The very broad NASDAQ Composite Bullish % ($BPCOMPQ) continues to show strengthening internals as more and more 4 and 5-lettered stocks generate reversing higher point and figure buy signals. I've benchmarked some inflection price levels. 

If bears (sellers) flinch above 2,100 and bulls (buyers) start showing some conviction, we should really start to witness a quick and rapid building of buy signals.

 
 



New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
DECK None

New Long Plays

Deckers Outdoor - DECK - cls: 25.88 chg: +1.42 stop: 23.75

Company Description:
Deckers Outdoor Corporation builds niche products into global lifestyle brands by designing and marketing innovative, functional and fashion-oriented footwear, developed for both high performance outdoor activities and everyday casual lifestyle use. The Company's products are offered under the Teva, Simple and UGG brand names. (source: company press release)

Why We Like It:
We like DECK for its bullish technical breakout over resistance at the $25.00 level and its simple 50-dma on volume way above average. It is true that DECK has been subject to a number of takeover rumors and word was that another rumor resurfaced today but we're not buying the rumor. What we do care about is that today's high volume breakout over resistance could spark a short squeeze. DECK only has a 10.4 million share float and the latest data put short interest at 34.9 percent of the float. We're willing to go long here at $25.88 but would prefer to buy a dip back toward $25.00. Of course if a short squeeze does occur DECK may not see a dip any time soon. We think it's also worth noting that today's gain pushed DECK's P&F chart into a new buy signal that now points to a $35.00 target. We do not plan on holding over DECK's earnings report. Our target is the $29.50-30.00 range.

Picked on June 22 at $25.88
Change since picked: + 0.00
Earnings Date 07/21/05 (unconfirmed)
Average Daily Volume: 753 thousand

New Short Plays

None today.

Play Updates

Updates On Latest Picks

Long Play Updates

Amer. Home Mtg Invest. - AHM - cls: 36.22 chg: -0.23 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: - 0.12
Earnings Date 07/25/05 (unconfirmed)
Average Daily Volume: 445 thousand

---

Canon - CAJ - close: 54.60 change: -0.26 stop: 53.45 

Remember, we're not suggesting bullish positions until CAJ can trade over $55.00 again. If we don't see some action soon we'll close this play. Currently we are planning on closing CAJ on Friday afternoon. 

Picked on May 29 at $55.24
Change since picked: - 0.64
Earnings Date 04/27/05 (confirmed)
Average Daily Volume: 157 thousand

---

CB Rich. Ellis Grp - CBG - close: 41.00 chg: +0.19 stop: 38.49

Wonderful! CBG dipped toward the $40.00 level as we had hoped for and traders were quick to buy the dip. We see this as a new bullish entry point. 

Picked on June 20 at $41.40
Change since picked: - 0.40
Earnings Date 08/01/05 (unconfirmed)
Average Daily Volume: 466 thousand

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Caremark - CMX - close: 44.17 chg: +0.15 stop: 42.45 

No change from our previous update. We are not suggesting new plays at this time.

Picked on May 09 at $43.30
Change since picked: + 0.92
Earnings Date 05/03/05 (confirmed)
Average Daily Volume: 2.6 million 

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Greenbrier Co - GBX - close: 29.66 change: +0.36 stop: 27.99 

It would appear that traders are buying this recent dip in GBX. The stock added 1.22 percent today out performing the Transportation sector. We would consider new bullish positions here. 

Picked on June 01 at $28.67
Change since picked: + 0.99
Earnings Date 06/29/05 (unconfirmed)
Average Daily Volume: 227 thousand

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General Electric - GE - close: 35.72 chg: -0.43 stop: 34.95

Whoa! After weeks of churning today's decline suddenly looks more significant. The drop under the $36.00 level has finally triggered our play. We have been suggesting that readers consider bullish positions once GE dips into the $36.00-35.50 range. The only news we can find that might contribute to GE's relative weakness today appears to be a blurb about its short cycle orders in May. GE stated that short cycle orders grew between 0% and 5% in May that was below the previous April growth of 5% to 10%. Our only concern regarding today's decline in GE was the volume. Volume came in above average and that suggests more weakness ahead. We've said it before and we'll state it again here. As our reader you might be better off waiting for both the dip into our suggested entry range and waiting for GE to bounce back out (above $36.00) before considering bullish positions. Right now we are watching the simple 200-dma at 35.58 and the exponential 200-dma at 35.30 as the next levels of support. We want to remind readers that we do not plan on holding over GE's earnings report. Unfortunately, there is some confusion over GE's report date. Some sources list July 15th or 16th while other sources list GE's report date as July 8th. None of them really give this play a lot of time and it's a serious factor to consider when choosing to step aside or go long. We will probably adjust our target to somewhere in the 37.00-37.50 range if GE does produce a rebound. 

Picked on June 22 at $36.00
Change since picked: - 0.28
Earnings Date 07/16/05 (unconfirmed)
Average Daily Volume: 18.7 million 

---

Georgia Gulf - GGC - close: 34.85 change: +0.13 stop: 33.95 

No change from our previous update.

Picked on June 05 at $34.33
Change since picked: + 0.52
Earnings Date 07/28/05 (unconfirmed)
Average Daily Volume: 598 thousand

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ExxonMobil - XOM - close: 59.67 change: +0.16 stop: 56.99 

Oil stocks rebound somewhat following yesterday's pull back. We see no changes from our previous update on 06/21/05.

Picked on June 09 at $58.44
Change since picked: + 1.23
Earnings Date 07/28/05 (unconfirmed)
Average Daily Volume: 20.9 million 

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M/I Homes Inc - MHO - close: 54.28 chg: +0.03 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: + 3.30
Earnings Date 07/25/05 (unconfirmed)
Average Daily Volume: 143 thousand

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Smurfit-Stone Cont. - SSCC - close: 11.29 chg: -0.12 stop: 10.99

No change from our previous update.

Picked on June 19 at $11.68
Change since picked: - 0.39
Earnings Date 07/22/05 (unconfirmed)
Average Daily Volume: 2.4 million 

---

Sirius Satellite Radio - SIRI - cls: 5.92 chg: -0.04 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: + 0.27
Earnings Date 04/28/05 (confirmed)
Average Daily Volume: 40.0 million 

---

Sohu.com - SOHU - close: 23.01 change: +0.09 stop: 20.99 

SOHU continues to show strength and on above average volume. Our target is the $24 level. Yet SOHU is looking overbought and extended here. More conservative traders may want to exit early for a profit. 

Picked on June 13 at $21.25
Change since picked: + 1.75
Earnings Date 07/28/05 (unconfirmed)
Average Daily Volume: 924 thousand

Short Play Updates

Rogers Corp - ROG - close: 42.45 change: +0.05 stop: 45.01

Hmm... still no action in ROG. We'd watch for a bounce to fill the gap. Please see our previous update on 06/20/05 for more details. 

Picked on June 20 at $42.40
Change since picked: - 0.05
Earnings Date 07/18/05 (unconfirmed)
Average Daily Volume: 94 thousand

Closed Long Plays

None

Closed Short Plays

None

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

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