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Daily Newsletter, Thursday, 06/23/2005

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Table of Contents

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

Market Wrap

The Little Market That Couldn't

The Little Market That Couldn't

After weeks of consolidation, the market struggled higher out of the consolidation over the past week, chugging up the hill ever so slowly, only to come crashing back down today into the same range we've been in since the end of May. Today's big red candle looks bearish, no two ways about it. Now the question is what it means in the larger pattern. No surprise, we get different answers when we look at different indices. The mere fact that the DOW lost 166 points today while the SOX ended in the green causes a bit of head scratching. When people want out of stocks they usually sell the high-beta stocks, i.e., the techs and semiconductor stocks are usually the first to go. So the fact that the SOX was green today causes one to wonder whether the sell off today was real or just an over reaction to something, or worse a manipulation of the market.

By manipulation I mean there may be very large players who cause the market to swing one way while they position for another. We see this intraday when for example we get a buying spike that is immediately reversed. This is usually someone creating a buy program or two to get some buying/short-covering started, goose the liquidity so that they can then sell into it. This liquidity push enables them to sell without causing a down spike and they can get better prices in the process. The opposite happens in a selling spike where someone does their buying during the sudden selling. This maneuver can be done on a daily basis as well. That's why today's sudden selling spike may not be trustworthy yet. When the whole market participates, then consider it real selling. Or strong moves down followed by sloppy corrective bounces likely means the selling will continue. One day down does not a trend make and that's what we need to be careful about after today's hard sell off.


Other manipulation can be done by the Fed but their manipulation tends to be longer term where they're more interested in the amount of money floating through the system. We constantly hear about the Fed's concern about inflation, economic growth, etc. and how they're going to change interest rates to affect the economy. What we don't hear much about is what they're doing behind the scenes with money supply which can have a far greater impact on the market than what they're doing or saying about interest rates. In fact they're often doing just the opposite of what they're saying. They might be saying they're worried about inflation and that they're going to maintain a "measured pace" in interest rate increases, but with the other hand they're pumping huge amounts of money into the system so as to prime the economic pump. How do they do that? They print money and buy stuff from anyone not part of the Federal Reserve System. The stuff they buy may be bonds from Merrill Lynch or a basket of S&P500 stock from Morgan Stanley. If they want to pull money out of the system they buy stuff. They can also introduce money into the Federal Reserve System through foreign banks. We know after the 1987 crash that the Fed implemented a control system to thwart future crashes. That system seems to have evolved into a daily control system instead of just an emergency system. The all-knowing Fed has become a dangerous player in the market.

Money supply, as measured by M-3, can expand exponentially as banks lend out their money, and account for it as an asset. The consumer or business who borrowed the money then spend the borrowed money and it lands in another bank who then lends it out. Keep doing this and you can see how quickly it multiplies from the initial dollar the Fed may have inserted into the system. With the banks' historical low reserve requirements we have a banking system more vulnerable to a crash than we had prior to the banking collapse from the 1929 stock market crash. But back to M-3, we've had a huge increase in money supply in the past 12 weeks and it is accelerating. The Fed is stuffing the money channel at a furious rate at the moment, up almost $153B over the past 3 months and up $79B in just the last week alone, a 42.5% annualized growth rate. This is being done while the Fed is talking about inflation and the need for measured increases in interest rates. Printing money and inserting into the system is highly inflationary. The Fed knows something and doesn't want to scare the market. Perhaps they're worried about the housing market and want free money to be available longer, hoping to stave off any housing collapse. The problem is when they stop stuffing the channel--any "normal" correction that was coming, and held off, is only made worse. Look what happened in 2000 after the Fed did the same thing out of Y2K worry. So the longer term picture by the Fed's actions is actually quite worrisome. They usually make matters worse rather than better.

But that's in the future. We care more about what's going to happen tomorrow and next week. I mention it because I don't want anyone caught like a deer in the headlights in the next leg down of the bear market which could be even more violent, and hit the blue chips harder, than the first leg down. Let's take a look at today's price action and see how it fits in the larger patterns.

DOW chart, Daily


Today's big red candle looks very bearish and the DOW's red candle looks worse than the others. After struggling to rally up underneath the broken uptrend line from March 2003, it finally collapsed. It dropped below its 200-dma at 10445 and stopped exactly on its 200-ema at 10421. Also, not shown on this chart, there is a trend line that runs down from January 2000 through the January 2004 currently at about 10420. The 50-dma and price level support lies in the 10375-10490 area so we could see a little more downside work tomorrow.

SPX chart, Daily


SPX broke down from its bearish ascending wedge also looks very bearish. As shown on the 120-min chart below, there may be trend line support at 1197 and then below that is price level support at 1191 which is the high in April and low in June. A parallel line to the one along the highs from April, snapped to the low in May, shows potential support at the same 1191 area. If price does drop down to that level, the bounce from there (or here for that matter) will be telling--an overlapping corrective rise will signal more downside coming whereas a strong reversal back up will signal that the move down was a false move.

SPX chart, 120-min


This closer view shows the ascending wedge that decisively broke today. These typically see a quick retracement back to the beginning of the pattern, which in this case would first be the 1191 low on June 9th. But watch to see if price finds support on the trend line along the lows from the end of May.

Nasdaq chart, Daily


As mentioned above, the SOX ended in the green today and that certainly helped the Nasdaq as compared to the DOW. It's pullback, again from 2100 resistance, looks more like it's part of the consolidation underneath firm resistance. The uptrend line from October 2002 currently sits near 2056 so we'll get to see if this acts as support. If it does, we may simply be consolidating and getting ready to bust a move above 2100. If that were to happen, it's a straight shot back up to previous highs just under 2200.

SOX index, daily chart


While the SOX gave up most of its gains today, and created a shooting star candlestick pattern (bearish), this candlestick is normally more effective at the top of a strong rally. This one is happening more as part of a potential consolidation under resistance. Like the Nasdaq, the SOX looks more bullish than the blue chips at the moment which is a change in character. It may get a further pullback with the broader market but so far I don't see anything especially bearish here yet. 

BKX banking index, daily chart


The banks got a sharp pullback and certainly contributed to the DOW's demise today. Whether this turns into something more bearish or is simply part of its consolidation, it's too early to tell. Right now the banks are bouncing between its 200-dma's. The recent break to the upside from its very corrective pullback over the past month looks bullish and I'm not ready to count this pullback as anything more bearish than just a pullback.

Before the bell we got some news from FedEx when they announced they would miss Q4 forecasts by $0.02 and lowered guidance for Q1 FY06. This kind of news only made it worse for the Transports today which was a leading sector to the downside today, beat only by the Airlines. This morning's economic numbers included unemployment claims and then Existing Home Sales and the Weekly Mortgage Application Survey for the week ending June 17. Later in the morning we got some more news from Greenspan's testimony before the Senate Finance Committee. The unemployment data showed Initial claims fell 20K to 314K, below expectations of 330K, and the lowest level since the 299K reported in mid April. This further validates a strong labor market, which should result in a good nonfarm payroll gain for the month of June. 

May existing home sales fell 0.7% to an annual rate of 7.13M (consensus 7.15M), down from April's record high 7.18M in April. The data roughly matched forecasts, and still reinforced the understanding that low mortgage rates and strong price gains continue to fuel the housing market. The median national sales price was $207,000 in May, up 12.5% from the previous year. Inventories of unsold homes rose 4.9% to 2.55 million units, representing a supply of 4.3 months. On a year-on-year basis, existing home sales were up 3.5%. "The housing market remains red hot with mortgage rates low, the economy growing and the labor market improving," said David Lereah, NAR chief economist.

But the oracle of Omaha, Warren Buffett, the billionaire chairman of Berkshire Hathaway has a different opinion. He told CNBC on Thursday that he thinks there's probably a real estate bubble in the U.S. He said lending practices, low interest rates and herd mentality are "coming together in the real estate market in a way that would lead me to believe that, certainly at the high end, people who buy houses today may have some periods when they regret it." The investing legend also said the U.S. current account deficit is a big problem and will lead to a weaker U.S. dollar, possibly in five years. He has been very public about his short position in the US dollar.

The Mortgage Bankers Association (MBA) today released its Weekly Mortgage Applications Survey for the week ending June 17. The Market Composite Index--a measure of mortgage loan application volume--was 786.8, a decrease of 11.3 percent on a seasonally adjusted basis from 887.0 one week earlier. On an unadjusted basis, the Index decreased 11.7 percent compared with last week but was up 29.6 percent compared with the same week one year earlier.

Greenspan's testimony included discussion on China and he warned lawmakers against a "step back into protectionism," saying that imposing punitive tariffs on Chinese imports would harm U.S. consumers, protect "few if any American jobs" and put the U.S. economy "at risk." While the Treasury market shrugged off the text, as much of what has been said is nothing new (e.g. yuan revaluation would not narrow trade deficit and protectionist efforts are "misguided"), arguments that proposals for anti-China tariffs would do little to protect U.S. jobs and may undercut U.S. living standards amplified an already broad-based sense of nervousness in stocks. His remarks citing "no credible evidence" that U.S. manufacturing activity or jobs would be helped by China revamping its currency system did not help alleviate the concerns of many who are hoping that such revaluation would provide support to the U.S. economy.

As already mentioned, the Transports took a beating today. The Industrial sector was weak across the board, with huge losses coming from Construction & Farming to Transportation, as the Dow Jones Transportation Average closed at its worst level since mid May. Of the nine economic sectors that lost ground, Materials paced the way lower, led by a drubbing in Steel--the worst performing S&P group--as well as Diversified Materials & Mining and Diversified Chemicals. Steel was under pressure after Steel Technologies (STTX 17.31 -3.39) issued downside Q3 earnings and revenue guidance, citing increased margin pressure amid continued price declines. This may be only the start of such warnings.

Other leading sector losers included the retail index, computer hardware and internet and financials. Green sectors today included the energy indexes, gold and silver index, the SOX and brokers. It's interesting that the brokers were green when the financials took a big hit. Usually the brokers selling off is a clue behind real selling and this is just another piece of the puzzle that makes me wonder about what today's selling was all about. With oil's price rising, it was no surprise the oil indices did well. Their charts continue to look very bullish.

Oil chart, August contract, Daily


After a very brief consolidation, oil continues to drive higher, making a new high above April's. It might consolidate at current levels for a couple of days, which would be natural at this level, but it looks like it will head higher--the top of the parallel up-channel near $63.50, and rising, makes for a good target.

Oil Index chart, Daily


The oil index and oil continue to track closely. After breaking to a new high above the March high, price is pulling back a little to that high. Like oil this index may consolidate a little around the current level. But after the beating the rest of the market took today, this one only gave us a doji day. Like oil, this index looks to be headed to the top of its parallel up-channel. If this index begins to roll over to any significant degree, it could be forecasting a topping in oil. For now there's no such signal.

Transportation Index chart, TRAN, Daily


The Trannies, hurt by the Airlines today, which were hurt by the news of record oil prices, continues to look like one of the more bearish indexes. The blow this index took today contributed to the DOW's hard decline. But watch to see if support is found at the uptrend line from May 2004. It's likely to at least give the index a bounce which will help the DOW bounce and for that reason this index is a good one to watch.

U.S. Home Construction Index chart, DJUSHB, Daily


This index gave us a throw-over above the top of its parallel up-channel and has now fallen back inside the channel. This is a bearish heads up for something more significant that may happen here. The larger pattern looks like it needs a consolidation here that will be followed by one more push back up. If we get that, watch for negative divergence at any new/equal high since it would be a signal to take profits in this sector and prepare for a more significant pullback. Right now it's firing off warning flares (including the latest negative divergence at the new high), but it may only be a small pullback here. The other warning, as discussed at the beginning, is what the Fed is doing with money supply. It makes me wonder what they see coming down the pike in the housing market and by their actions they don't like what they see and it should have you on guard if you're invested in this market.

U.S. Dollar chart, Daily


The US dollar looks like it's consolidating which could be bullish. The dollar may consolidate further with an additional pullback or it may start to drop hard from here after a corrective looking bounce so far. At the present time I do not see the dollar rallying to new highs, yet.

Gold chart, June contract, Daily


After practically no hesitation in getting back above its broken uptrend line, there was only a minor consolidation at its downtrend line before breaking above it. The yellow metal is on fire and I don't see any evidence yet of it slowing down. If the dollar pulls back again it will probably ignite some more buying.

Tomorrow's economic reports include Durable Goods Orders at 8:30 for May with a forecast of +3.0%, while the market expects +1.5% and the prior number was +1.9%. At 10:00 we get New Home Sales for May and the forecast, expectations and prior numbers are 1325K, 1320K and 1216K, respectively, so it doesnt look like there should be any surprises there. The big question for tomorrow is how it will react to today's big sell off, at least in the blue chips. As discussed above, don't take this one-day sell off as meaning anything more bearish than a heads up that something worse might happen because it may not. This market has been struggling to climb and has/had a lot of nervous longs. If there is some manipulation going on, they will want to shake out the weak longs to prepare the market for a strong thrust higher. By creating a large sell off over a day or two, they also accomplish the task of loading the rocket with fuel, otherwise known as weak shorts. These are the traders who will give a shrill scream as they run for cover on the next rally and provide the short covering fuel needed to propel the market over resistance. I have no idea if this will happen or we instead start a sell off through the summer. I just think it's too early to make any big bets. Trade carefully, take profits (or losses) quickly and watch for the next setup. This market has not been kind to buy/sell and hold. It has been more kind to fast traders so be one and good trading. 

 
 



New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
None None

Editor's note:

Thursday proved to be a rough day in the markets if you are bullish. Yet despite the sell-off the DJIA, S&P 500 and the NASDAQ Composite are all still above support. We are considering a number of new bearish candidates but hesitate to jump in without more confirmation that the markets are reversing. Look for new plays in the weekend newsletter. 

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: 36.06 chg: -0.16 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: - 0.28
Earnings Date 07/25/05 (unconfirmed)
Average Daily Volume: 445 thousand

---

CB Rich. Ellis Grp - CBG - close: 41.16 chg: +0.16 stop: 38.49

CBG is showing some relative strength today. No change from our previous update.

Picked on June 20 at $41.40
Change since picked: - 0.24
Earnings Date 08/01/05 (unconfirmed)
Average Daily Volume: 466 thousand

---

Caremark - CMX - close: 43.46 chg: -0.71 stop: 42.45 

No change from our previous update. We are not suggesting new plays at this time. More conservative traders may want to exit early to avoid any losses, especially if the major averages continue declining.

Picked on May 09 at $43.30
Change since picked: + 0.16
Earnings Date 05/03/05 (confirmed)
Average Daily Volume: 2.6 million 

---

Deckers Outdoor - DECK - cls: 25.18 chg: -0.70 stop: 23.75

We suggested buying a dip back toward the $25.00 level and DECK supplied one today. Shares dipped to $25.20 for a while and then mid afternoon dipped again toward $24.50 before traders bought the dip and pushed it back above the $25.00 level. This looks like a new bullish entry point but with the market's sell-off today we might hesitate to open new bullish positions. Our target is the $29.50-30.00 range. Please see our 06/22/05 update for more details.

Picked on June 22 at $25.88
Change since picked: - 0.70
Earnings Date 07/21/05 (unconfirmed)
Average Daily Volume: 753 thousand

---

ExxonMobil - XOM - close: 59.02 change: -0.65 stop: 56.99 

Surprisingly the oil stocks didn't do much today in spite of the new high in crude oil. Shares of XOM actually faded lower. We continue to watch for a dip toward the $58.50-58.00 region. 

Picked on June 09 at $58.44
Change since picked: + 0.58
Earnings Date 07/28/05 (unconfirmed)
Average Daily Volume: 20.9 million 

---

M/I Homes Inc - MHO - close: 52.80 chg: -1.48 stop: 50.98 

After four days of churning sideways under resistance at the $55.00 level traders were not afraid to do some profit taking during today's market decline. MHO lost 2.7 percent but the selling began to loose momentum after the stock filled the gap from the 17th and neared its simple 10-dma. 

Picked on June 14 at $50.98
Change since picked: + 1.82
Earnings Date 07/25/05 (unconfirmed)
Average Daily Volume: 143 thousand

---

Sirius Satellite Radio - SIRI - cls: 5.88 chg: -0.04 stop: 5.59 

No change from our weekend update. 

Picked on May 22 at $ 5.65
Change since picked: + 0.23
Earnings Date 04/28/05 (confirmed)
Average Daily Volume: 40.0 million 

---

Sohu.com - SOHU - close: 22.77 change: -0.24 stop: 21.25 *new*

SOHU held up better than most of the Internet stocks today. The stock is overbought. We would expect a pull back toward the 10-dma near $22.00 before it continues higher. We are raising our stop loss to breakeven at $21.25.

Picked on June 13 at $21.25
Change since picked: + 1.51
Earnings Date 07/28/05 (unconfirmed)
Average Daily Volume: 924 thousand

Short Play Updates

Rogers Corp - ROG - close: 41.15 change: -1.30 stop: 45.01

This is more like it. ROG is declining with the market and lost more than three percent today on volume slightly above average. This marks a new two week low. Watch for potential support near the 100-dma above the 40.00 level. 

Picked on June 20 at $42.40
Change since picked: - 1.35
Earnings Date 07/18/05 (unconfirmed)
Average Daily Volume: 94 thousand

Closed Long Plays

Canon - CAJ - close: 54.56 change: -0.04 stop: 53.45 

CAJ did indeed trade over the $55.00 level on Thursday but the stock was unable to maintain its gains. We've been cautious on the stock for days now and we're choosing to exit early. 

Picked on May 29 at $55.24
Change since picked: - 0.68
Earnings Date 04/27/05 (confirmed)
Average Daily Volume: 157 thousand

---

Greenbrier Co - GBX - close: 28.10 change: -1.56 stop: 27.99 

The Transportation sector was one of the worst performing sectors today. Investors drove the group to a 3.1 percent decline on fears of rising oil and fuel costs. Shares of GBX were hammered late in the session and dipped to $27.90 before the closing bell. We have been stopped out at $27.99. 

Picked on June 01 at $28.67
Change since picked: - 0.57
Earnings Date 06/29/05 (unconfirmed)
Average Daily Volume: 227 thousand

---

General Electric - GE - close: 34.66 chg: -0.84 stop: 34.95

Wow! It looks like investors were not happy with the news out of GE today. The company reaffirmed its earnings guidance and announced plans to streamline the company's eleven businesses into six divisions. The re-organization is projected to save the company $200-to-$300 million. The market reaction was negative then again maybe it was just an overreaction to what $60 a barrel oil might cost to a company like GE. Shares gapped lower to open at $35.50 below the simple 200-dma and then sank through its 200-ema and then through support at the $35.00 level on big volume. We have been stopped out at $34.95. 

Picked on June 22 at $36.00
Change since picked: - 1.34
Earnings Date 07/16/05 (unconfirmed)
Average Daily Volume: 18.7 million 

---

Georgia Gulf - GGC - close: 33.44 change: -1.41 stop: 33.95 

The market sell-off today hit hard in shares of GGC and the stock broke down below the $34.00 level. We have been stopped out at $33.95. 

Picked on June 05 at $34.33
Change since picked: - 0.89
Earnings Date 07/28/05 (unconfirmed)
Average Daily Volume: 598 thousand

---

Smurfit-Stone Cont. - SSCC - close: 10.99 chg: -0.30 stop: 10.99

SSCC is another casualty from today's market decline. The stock dipped below the $11.00 level right near the end of the day. We have been stopped out at $10.99.

Picked on June 19 at $11.68
Change since picked: - 0.69
Earnings Date 07/22/05 (unconfirmed)
Average Daily Volume: 2.4 million 

Closed Short Plays

None

Today's Newsletter Notes: Market Wrap by Keene H. Little and all other plays and content by the Option Investor staff.

DISCLAIMER

Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.

To ensure you continue to receive email from Option Investor please add "support@optioninvestor.com"

Option Investor Inc
PO Box 630350
Littleton, CO 80163
Copyright Option Investor Inc, 2005
All rights reserved

Today's Newsletter Notes: Market Wrap by Keene H. Little and all other plays and content by the Option Investor staff.

DISCLAIMER

Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.

To ensure you continue to receive email from Option Investor please add "support@optioninvestor.com"

Option Investor Inc
PO Box 630350
Littleton, CO 80163

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