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Daily Newsletter, Wednesday, 07/13/2005

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Table of Contents

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

Market Wrap

Trade gap narrows to $55.3 billion in May

The total U.S. trade deficit narrowed to $55.3 billion in May as strengthening demand from foreign trading partners and lower oil prices helped to stabilize the deficit after setting a record $60.1 billion in February.

U.S. exports rose to their highest level in history, up 0.2% to $106.9 billion, however, analysts noted that a recent jump in oil prices could have the narrowing trade gap being short lived.

Breaking down the report would reveal the deficit with China rose to $15.8 billion, the highest since last November, due to a 12.8% surge in imports of Chinese clothing and textiles. In the first five months of this year, Chinese clothing and textile shipments are up 53.6% from the same period in 2004. Even with the narrowing of the overall deficit in May, the trade imbalance through this year's first five months is running at an annual rate of $681.6 billion, 10% above last year's all-time record of $617.6 billion. Analysts believe the underlying trends are so strong that the deficits this year and in 2006 will set new record highs. Of course, the backdrop analysis revolves around China and their currency, the yuan, meaning that China's currency and that of other Asian currencies will likely remain undervalued against the dollar. If there is no change, Asian products will remain cheaper in America and American products will be more expensive in China. For that reason, analysts are forecasting that the trade deficit will remain at record levels, raising concerns about the U.S. ability to continue depending on foreigners to hold ever-larger amounts of American dollars and dollar-denominated assets.

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Weekly energy inventory data was released this morning and seemed to draw little broader equity market response. The EIA said crude oil inventories (excluding the SPR) fell by 3.8 million barrels, due in part to some Gulf of Mexico platform shutdowns as Hurricane Dennis approached. Some analysts also pointed to higher prices in recent weeks having refiners delaying purchase of the "black gold." We (you and I) might believe this after two consecutive weeks of 3.8 million barrel draw-downs and oil hovering around the $60/barrel mark. Refiners continued to focus their efforts on distillates. For an eighth week in a row, distillate inventories saw gains. The latest week's tally saw distillates rise by 3.1 million barrels. Unleaded gasoline inventories fell by 2.5 million barrels, after falling by 974,000 in the week prior.

Some of my own tabulations show crude oil inventories still up 0.6%, or 2.04 million barrels compared to 3-months ago. Unleaded stockpiles are up 0.5%, or 1.0 million barrels for the most recent quarter. Meanwhile, distillate inventories are up 15.7%, or 16.3 million barrels as the "chipmunk-refiners" get ready for winter.

On a year-over year basis, I tabulate (from EIA statistics) that crude oil inventories are up 6%, or 18.1 million barrels versus this time last year. Unleaded gasoline stockpiles are up 3.3%, while distillate inventories are up 3.2%.

This is all fine and dandy, but we can perhaps sense some of the "risk premium" that is in the energy markets, where risk comes from any supply disruptions due to weather, or geopolitical events.

Shares of healthcare service provider HCA Inc. (NYSE:HCA) $50.05 -8.85% traded sharply lower and triggered selling in broader healthcare sectors. The company forecasted second-quarter earnings of $0.88-$0.92 a share. From tax settlements to deferred gains to reduction in liability insurance, profits really ranged from around $0.72-$0.76. Analysts were looking for 77 cents per share. What appeared to spook sector bulls the most was the company saying it sees a decrease of 0.3% in same-facility admissions for the second quarter although revenue on this basis is projected at $6 billion for the period. In addition, HCA reaffirmed its 2005 outlook for earnings of $3.05 to $3.20 per share, excluding gains on sales of assets, impairments and tax settlements.

The Morgan Stanley Health Provider Index (RXH.X) 476.22 -2.99% was today's sector loser.

After today's closing bell, stock specific news had shares of chipmaker Advanced Micro Devices Inc. (NYSE:AMD) $19.25 -0.61% trading up 35 cents to $19.60 in the extended session after reporting second-quarter net income of $11 million, or $0.03 a share, down from $32 million, or $0.09 a share in the year-ago period. The results beat Wall Street's expectations as most analysts figured AMD would lose $0.06 cents a share. In the quarter, sales were largely unchanged at $1.26 billion.

Apple Computer (NASDAQ:AAPL) $38.35 +0.28% was also in the news, reporting a third-quarter profit of $320 million, or $0.37 a share, on revenue of $3.52 billion. During the same period a year ago, Apple earned $61 million, or $0.09 a share, on revenue of $2.01 billion. Apple beat the estimates of analysts who forecast a profit of $0.31 cents a share on $3.34 billion in revenue. After a choppy extended session, shares of Apple (AAPL) are ticking $39.35. Note: IPod sales climbed to 6.15 million units from 860,000 a year ago.

U.S. Market Watch - 07/13/05 Close

The PRICE-weighted Dow Industrials (INDU) 10,557.39 +0.41% outperformed the major indices to the upside today, boosted largely by another upgrade of IBM (NYSE:IBM) $81.45 +1.76%, this time by Bernstein, citing compelling valuations.

In today's Market Monitor (07/13/05) I made a quick little timetable of recent broker calls on Big Blue. CSFB might have gotten the capitulation bottom on 04/29/05 with their downgrade (opened $76.98). On 06/13/05, Banc of America, who probably bought CSFB's downgrade, upgraded IBM (opened $74.50). Not to play second-fiddle, Caris and Company also upgraded IBM that day.

Don't forget! The INDU/DIA is a PRICE-weighted index, and IBM has now moved up to the second-most heavily weighted price component. CAT is still #1, IBM #2.... ah heck. Here's the INDU/DIA components sorted by price.

Dow Indu. Components - Sorted by Price (07/13/05)

It can be helpful to at least look at some of the components of a WEIGHTED index if you can from time to time. Try and understand, or get a feel for how things have been working.

An string of upgrades on IBM may not seem like a deal, but it would appear the MARKET is listening to some of the bullish calls. With IBM now the second-most heavily weighted component, what IBM does (up/down) is a big deal for an INDU/DIA/DJX trader.

What kind of stock is IBM? Chemical? Drug? No, no, no... it is probably a "computer" or "technology stock." Any other computer/tech stocks in the INDU? Yes! INTC, MSFT, HPQ. Some associations can be made here over the past 5 and 20-days, as well as past 52-weeks, but IBM is the "bigger deal" as it carries more PRICE WEIGHT.

Now... for you S&P 100 Index (OEX.X) traders, which is a MARKET CAP WEIGHTED index, you'll want to know that IBM is roughly the 13th-most heavily weighted component. XOM and GE keep trading places at #1/#2, while MSFT is #3, C is #4 and WMT is #5.

Let's take a quick look at IBM's point and figure chart from www.stockcharts.com. In yesterday's Market Monitor I made some quick comments on IBM's point and figure (PnF) chart.

If YOU are a INDU/DIA/DJX trader, you should think this chart/stock important.

IBM (IBM) - $1 box scale

We've heard fundamental analysts talk about "bottoms up approach to analysis." Same can be done for market technicians. But you've got to look at quite a few charts. While IBM is just one of the 30 INDU/DIA/DJX components, it is currently one of the more heavily weighted components.

A couple of things we might want to note, and what I really like about PnF charting. While we still don't have past wrap archives restored, you might think you're reading an October 2004 wrap, where IBM was a focal stock in that wrap. IBM had just given a triple top buy signal (10/19/04) at $88. Just last week, IBM gives a triple top buy signal at $78.

Now, does IBM look "cheap" to you? Not on a fundamental basis, we'll be arguing that for the rest of our lives. For some fundamentalists, IBM has NEVER been "cheap."

Check this out. Last week we looked at the INDU's PnF chart. Are you seeing what I'm seeing?

I placed little "blue dots" on IBM's chart, as I'm trying to get the feel/observation of a possibly emerging bullish support trend. This type of trend is only put in place, once the bearish resistance trend (red +) are broken to the upside.

Dow Industrials (INDU) - 50-point box

Last Wednesday (PINK circle) the INDU was trading 10,300 on the above chart, and despite the "London bombing", market participants remained bullish at the bullish support trend. There are some similarities (I think) in how the INDU looks, and IBM. Both continue to look bullish!

I benchmarked the IBM (10/19/04) and (12/07/04) dates and relative price points of IBM.

Now... something else happened since our last visit. The trading session after July 8th, the very broad NASDAQ Composite ($COMPX) traded a triple top buy signal at 2,120 on its 20-point box chart. Bugger triggered a triple top buy signal on its 10-point box scale on July 8th too! Just like IBM!

NASDAQ Composite (COMPX) - 20-point box

I didn't catch the name of an analyst on CNBC, but he said something that grabbed my ear. I've kind of been thinking the same thing. He thought the major indices were just starting to see a similar "fall rally" as we witnessed in Sept.-Dec. of last year. With some of these triple top breakouts taking place (IBM, INDU, COMPX) I would have to agree that we're starting to see some similarities.

NASDAQ Comp. (COMPX) - Daily Intervals

Boom! Yes, bears would have tried to leverage off the 2,100 level, but on 07/08/05, all heck broke loose. MACD oscillator kicked back above its signal too! Look at my 10/27/04 note when MACD kicked above its Signal when trending into the zero level. Most technicians view a MACD above Signal more powerful when trending into, but still above zero.

See the horizontal PINK dashed line? What I've done here is benchmarked the 12/02/04 close of 2,143.57, with some internal readings. We can see that "bullish leadership" as depicted by the 10-day NH/NL ratio isn't quite as bullish/high as that found in a sharp upward rise, but current readings are still building higher. Same goes for the very broad NASDAQ Composite Bullish % ($BPCOMPQ) from www.stockcharts.com. Not as many 4 and 5-lettered stock symbols showing PnF buy signals with their charts.

These internal readings, combined with the outward appearance (bar chart, PnF chart) should have traders/investors BULLISH, but you're NOT backing up the truck and giving the "c'mone back" as James Cramer likes to use when he's an aggressive buyer of a stock, even when it's getting crushed into the dirt.

Check out that rising 21-day SMA (NOW) and about a week AFTER 12/02/04. The COMPX is turning over (from sellers to buyers in control) and just as 2,100 was formidable resistance, the level becomes support.

Yes... every bear and his/her brother "knew" the top was near late last year. That's why the COMPX bounced like a rubber ball when it re-tested the rising 21-day SMA and 2,100 level!

Keep an eye on the Dow Transports (TRAN) 3,609.62 +0.35%. They've crept above the "Bear Stearns" downward trend and since closing above their 200-day SMA (3,585) on... yes, 07/08, they've just been sitting there.

Oil/energy prices still appear to be a drag here. We may hear that energy traders see a possible sharp decline coming for oil. If so, I would have to think the TRAN has got to get further bid, and really wipe out that 3,650 level, like the move witness in the COMPX at 2,100.
 

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

Black Hills - BKH - close: 39.51 change: +0.24 stop: 36.85

BKH continues to show strength and came within 15 cents of our target range (39.85-40.00) today.

Picked on July 11 at $38.20
Change since picked: + 1.31
Earnings Date 08/05/05 (unconfirmed)
Average Daily Volume: 232 thousand

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Berry Petrol. - BRY - close: 56.77 change: -1.17 stop: 53.49

BRY has pulled back to its simple 10-dma, which is the frontline of defense for the bulls. If the stock continues to pull back watch for the $55.25-55.50 region to act as the next level of support.

Picked on July 03 at $55.23
Change since picked: + 1.54
Earnings Date 08/02/05 (unconfirmed)
Average Daily Volume: 192 thousand

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Dynamic Materials - BOOM - close: 40.74 chg: +0.10 stop: 37.95

The tug of war betweens buyers and shorts has intensified. Shares of BOOM churned between $40.26 and 41.88 all day. This is a higher-risk play but it's worth noting that the risk may be growing. The major averages look a bit short-term overbought and due for a dip. If the major averages do pull back a bit then BOOM could easily slip under the $40.00 level and probably dip under support at the $38.00 mark stopping us out. Then again the markets could march higher tomorrow following some of the better than expected earnings news after the bell.

Picked on July 11 at $ 42.01
Change since picked: - 1.27
Earnings Date 05/05/05 (confirmed)
Average Daily Volume = 2.0 million

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Cameco - CCJ - close: 47.24 chg: +0.19 stop: 42.49

No change from our previous update. Our target is the $49.50-50.00 range. More conservative traders may want to do some profit taking of their own here.

Picked on June 27 at $44.14
Change since picked: + 3.10
Earnings Date 07/28/05 (unconfirmed)
Average Daily Volume: 989 thousand

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Deckers Outdoor - DECK - cls: 25.86 chg: -0.15 stop: 24.49

No changes from our previous update.

Picked on June 22 at $25.88
Change since picked: - 0.02
Earnings Date 07/21/05 (unconfirmed)
Average Daily Volume: 753 thousand

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Diodes Inc. - DIOD - close: 34.97 change: +0.00 stop: 30.95

No change from our previous update. The SOX, the NASDAQ, and DIOD all look a bit extended here. Don't be surprised to see DIOD dip back toward the $34.00 level. Our target remains the $36.50 mark.

Picked on July 05 at $32.48
Change since picked: + 2.49
Earnings Date 07/27/05 (unconfirmed)
Average Daily Volume: 249 thousand

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Forest Oil - FST - close: 44.66 change: -0.16 stop: 41.25

FST continues to coil more tightly under resistance at the $45.00 mark. Our target is the $47.50-48.00 range.

Picked on July 05 at $44.15
Change since picked: + 0.51
Earnings Date 08/01/05 (unconfirmed)
Average Daily Volume: 790 thousand

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GulfMark Offshore - GMRK - close: 28.45 chg: -0.21 stop: 26.49

No change from our previous update. We are targeting a move into the $31.50-32.00 range.

Picked on July 07 at $28.65
Change since picked: - 0.20
Earnings Date 08/01/05 (unconfirmed)
Average Daily Volume: 92 thousand

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Home Depot - HD - close: 40.98 chg: -0.32 stop: 38.75

No change from our previous update. We are suggesting that readers go long HD on a dip into the $40.85-40.50 range. You, the reader, may want to consider waiting until after HD begins to bounce before initiating new long positions.

Picked on July xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 08/16/05 (unconfirmed)
Average Daily Volume: 7.4 million

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Hologic - HOLX - close: 40.18 change: -0.78 stop: 38.69.

Volume was pretty low on today's decline. Tomorrow might be a new entry point. Wait for signs of a bounce before considering new bullish positions here. Our target is the $47-49 range.

Picked on July 10 at $42.46
Change since picked: - 2.28
Earnings Date 07/27/05 (unconfirmed)
Average Daily Volume: 220 thousand

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Nextel Comm. - NXTL - close: 32.96 change: +0.16 stop: 31.49

We have been triggered. News that NXTL shareholders approved the merger with Sprint (FON) pushed shares of both companies higher today. We were suggesting a trigger to go long NXTL at $33.10 and the stock hit a high of $33.11. We also notice that technically NXTL's MACD indicator has just produced a new buy signal. Likewise shares of FON are showing a new MACD buy signal. Shares of NXTL are going to track inline with FON since FON is acquiring the company. Readers may want to switch and buy shares of FON on a move over $25.60. FON does have some resistance near the $26.00 level (actually 25.80-25.87) so more conservative traders may want to see this level broken first. Don't forget that we plan to exit this play ahead of NXTL's earnings report. Fortunately, FON reports after NXTL does although these dates are currently unconfirmed.

Picked on July 13 at $33.10
Change since picked: - 0.14
Earnings Date 07/21/05 (unconfirmed)
Average Daily Volume: 9.9 million
 

Short Play Updates

Sina.com - SINA - close: 27.19 change: -0.69 stop: 29.01*new*

Internet stocks were the worst performing group in the tech sector today with the INX index closing in the red. SINA really under-performed with a 2.47% decline. This looks like the sort of failed rally readers can use as a new bearish entry point. Our target is the $25.75-25.50 range. We are lowering our stop loss to $29.01.

Picked on June 30 at $27.90
Change since picked: - 0.72
Earnings Date 07/26/05 (unconfirmed)
Average Daily Volume: 1.4 million
 

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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