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Daily Newsletter, Saturday, 07/30/2005

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Table of Contents

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

Market Wrap

Oil Creeps Higher, Stocks Wilt

Oil Creeps Higher, Stocks Wilt

Oil prices have almost completely recovered from their July swoon and broke the $61 level once again on Friday. Stocks, tired from a breakout to new highs took the day off for a well-deserved rest. The major indexes gave the appearance of a rally but closed flat for the week. The earnings parade is drawing to a close and the high volume on Wed/Thr faded as traders eager for a weekend break closed their books early.

Dow Chart - Daily


Nasdaq Chart - Daily


SPX Chart - Daily


The economic news on Friday was good across the board and there was plenty of it. The headline news item was Q2 GDP at +3.4%. This was slightly below the consensus of +3.5 and below the +3.8% level for Q1 but still well within a satisfactory range. A drop in inventory investment by -$6.4 billion was responsible for the slower growth. Consumer spending rose +3.3% and business cap-ex spending rose by +9%. The bad news was a jump in inflation with the personal consumption expenditures (PCE) up +3.3%, one point higher than Q1. The core PCE was up only +1.8% and rising at a slightly slower rate than in Q1. Higher energy prices were the main reason for the jump in the PCE. The Fed watches the PCE closely for signs of inflation and this release suggests there will be a continued series of rate hikes into 2006. Greenspan's testimony last week also confirmed this assumption. There is no end in sight for hikes at this time although a Fed rate of 4.50% is now the target number by analysts.


The Employment Cost Index showed employer costs rose +0.7% in Q2, which is no surprise to any employer. Health care costs continue to rise and the higher cost of employee expenses is being passed on to employees in the form of lower wages. Wage growth over the last couple years has been exceptionally weak and that is helping to keep a lid on inflationary pressures. Benefit costs rose +0.8% in Q2 but to a level that is +5.1% over Q2-2004. A +5% gain in only one year is very strong. This will continue to pressure jobs as employers try to contain costs. Employees can expect to work more and get paid less as the ranks are continually pared to the minimum number of employees possible to get the job done.

Consumer Sentiment showed no decline in the final numbers for July as the closing update showed the same 96.5% as the initial reading. The softening of gasoline prices over the summer vacation period acted to ease sticker shock with each fill-up. The expectations component rose slightly as consumers looked ahead to fall.

The NY-NAPM rose to 339.6 ending two months of decline. The July reading almost erased those two declines and came close to the 341.2 high set in April. July's number was the second higher reading for 2005. Business conditions in New York appeared to have weathered the spring soft spot and a rebound is underway. However the outlook component fell to neutral meaning there is little visibility for future conditions.

The July Chicago PMI surged to 63.5 from its 53.6 reading in June and well over consensus estimates of only 55. This reading erased the prior two months of declines and returned it to near its cycle highs. A +10 point jump in this is indicator is very strong. Internal components surged with New Orders jumping from 56.5 to 69.6, Order Backlogs from 45.3 from 56.1 and production from 57.8 to 70.5. The jump in orders and order backlogs suggests an acceleration in business conditions that should carry over into future months. Again, the spring soft patch across the country appears to have passed.

This flurry of strong economic news produced a mixed open on Friday with the good news mixing with some weak earnings and guidance. The early morning spike eroded into a session of profit taking as the day progressed. Given the week behind us that profit taking was completely justified. The weekend headlines will carry only good news with the Dow up +4.1% for the month making it the best showing since December 2004. When you reflect on how range bound the Dow has been for most of the month you realize the majority of the gains came in only two days starting on July 7th followed by a huge gap open on the 14th. Those three days accounted for nearly +450 points of Dow gains leaving the rest of the month as a range bound consolidation period. The constant bumping against the top of the range finally managed to produce a break over 10700 on end of month buying and that prompted at least a few bulls to throw in the towel. The Dow declined -64 points on Friday to close at 10643.

The Nasdaq headline will be even more impressive with a +6.3% gain for the month and the best month since December 2003. The Nasdaq road map looks a lot like the Dow with big gains on the same three days but adds another one on the 19th that broke it out of the prior consolidation and into another range. End of month buying pushed the Nasdaq out of that higher range to tag 2200 on Friday and ringing the exit bell. The Nasdaq closed at 2185 for a loss of -12.

The SPX also broke out of its boring upward bias to tag the next level of uptrend resistance at 1245 the same time the Dow and Nasdaq were touching 10700/2200. Amazing how those round numbers coincide. When Friday's smoke cleared the SPX had returned to the 1233 range where it had spent most of the week. While I was beginning to think the breakout had legs I want to see what happens after the month end buying before switching to a bullish bias. The drop to close at 1233 could be just profit taking and next week will be key for eventual market direction.

SPX Chart - 30 min


The SOX failed to move higher for the week but it also failed to give up any ground on Friday. The SOX has clung to 475 like a drowning man to a life raft. The conflicting chip earnings and guidance has come and gone but for eight straight days the SOX has failed to stray far from that 475 level. It still faces very strong resistance at 485-490 and this could be consolidation ahead of a breakout attempt or an indication that traders do not have enough conviction to overcome the summer doldrums ahead.

The Russell is still possessed by a bullish spirit and refuses to roll over. The constant series of new highs was blunted only slightly by a -3 point dip on Friday. The uptrend appears poised to continue with this weeks 685 high only a stepping-stone higher. At least this is what the chart appears to be saying. A contrary viewpoint would be an oversold index due for a rest. The closest support is 675 followed by 667 and 660. The breakout by the Russell is the most bullish confirmation a market could ask for. However, the Russell has help with the transports also confirming.

Russell Chart - Daily


SOX Chart - Weekly


SOX Chart - 60 min


Dow Transports Chart - Weekly


The transports have rallied from a quadruple bottom low at 3400 to just over 3800 for a +9% gain in only a month and in the face of $60 oil. They fell slightly on Friday as oil hit $61 intraday but only slightly. The transport rally has been confirming the move in the broader markets and a breakout over 3800, the prior all time resistance high in 1999, and a break over the current all time high at 3889 set back in March, would be very bullish. This makes the initial resistance at 3800 especially critical to hold for the next week.

With more than 65% of the S&P reported we are seeing Q2 earnings at the high end of estimates, thanks to the outstanding energy profits, and Q3 guidance has improved to inline with estimates at +16% growth. Without the energy stocks the performance and outlook would have been substantially different. Energy earnings have been from outstanding in the +30% to +50% range to over +100% in some cases. This went a long way on improving the S&P earnings and outlook. Energy stocks should continue to rise with oil futures hitting $61 intraday on the current contract and $63 on the December contract. However, oil stocks fell on profit taking as earnings traders took profits and moved on to other trades. Oil demand estimates are beginning to creep upward again and the stage is set for a Q3 rally into the heating oil season. Continue to buy the dip until we see a change in outlook.

December Crude Oil Chart - Daily


In oil news there were three fires at different installations that helped trigger the move higher on production concerns. Unocal posted a +40% jump in earnings and that fueled increased speculation that CNOOC would make another bid to buy the company. A Chinese newspaper claimed CNOOC was preparing to make another bid that could come as early as next week. However, an unnamed CNOOC official said Unocal was no longer a takeover target due to potential U.S. government intervention. Meanwhile the Financial Times reported late Friday that CNOOC was considering a $20 billion "knock-out" bid to be made public just prior to the August 10th Unocal shareholder vote. Chevron is not sitting idly by and said the Unocal earnings made the company even more valuable to Chevron. You think they are saying that just to make CNOOC think they will rebut any higher bid? I would bet on it and the fact remains Chevron NEEDS to acquire Unocal. Chevron recently reported that their proven reserves fell -11% in 2004 as oil becomes harder and more expensive to find. Chevron said financial projections of the merged company were much stronger than originally stated due to positive events at Unocal. Chevron has offered $17B for Unocal and CNOOC bid $18.5B. CNOOC has almost no chance of getting its deal approved by the administration and may want to save face by withdrawing instead of being blocked. Friday the Senate voted to approve the $14.5 billion energy bill which has a provision attached to block the CNOOC/UCL deal pending a four-month review. It was widely expected that CNOOC would not make any further moves until lawmakers recessed for the summer to avoid any further knee jerk reactions by lawmakers prior to the August 10th shareholder vote.

On a day where stock news was overshadowed by the urge to leave early for the weekend those investors in Whole Foods were rewarded with a weekend treat. WFMI announced earnings that increased +31%, beat the street by +3 cents and raised guidance. This was a pure case of weakened expectations and a high short interest being hit with the glaring light of a contrary reality. WFMI shares jumped +14 to 136.50 as shorts were not just squeezed but battered badly. Analysts had been downgrading WFMI and the stock had been listless in a tight trading range for the last quarter. Investors who kept the faith were well rewarded. After a +14 point jump +10 points over their prior all time high I would think puts would be in order.

With the weekend headlines set to show a bullish July it would appear to retail investors that they are missing the train. They might not be the only ones with commitment issues. There are a group of traders including me that question this non-stop rally ahead of the historical August dip. There is another group holding off on longs in fear of the decade low on the VIX, another historical danger sign. There are other traders, including a large number of institutions, who typically wait for the Sept/Oct dip to enter positions. They are probably watching the new highs with a great deal of worry that they too are missing the train. The bears, fully aware of all those points have been continually shorting each progressive high only to be forced to cover time and time again. One reader email this week questioned the contrary trend and wondered if it could continue. Yes, is the short answer. As long as nearly everybody expects the markets to pause in August there is always the chance we will move higher. The more traders who believe a drop is coming the more traders will be short. With each dip being bought by those thinking the train is leaving the station and buy programs far outnumbering sell programs the shorts will continue to be squeezed. The problem comes when everyone decides we are going higher and the shorts give up the game. Without the shorts to provide the motive power the market sentiment could change. I know it sounds crazy that once everyone turns bullish we could get a market drop but it does happen. It takes both sides to make a market.

The earnings parade is coming to a close but we will continue to get a slowing trickle of earnings headlined by Dell (8/11) and Cisco (8/9). Earnings over the last two weeks has provided lift to the market on the surface. If you look at the market stats header above you may be surprised. Last week the Dow lost -10, SPX -1. The Nasdaq only gained +5, Russell +2 and the broadest index of all the Wilshire 5000 only added +23. BUT the perception by retail traders, the talking heads on TV and the newspaper headlines this weekend will be that the markets are in rally mode. Does the knowledge that the indexes basically finished flat for the week change your perception of the market?

I believe we should continue to be cautious over SPX 1225 until the market provides confirmation in the form of volume and points. Yes, we touched new highs but promptly gave them up along with all the gains for the week. Not much confirmation there. Volume on Friday was the second lowest in the last two weeks. BUT, that was the good news. Weak volume on a down day is a market positive and it was a summer Friday. The damage could have been a lot worse. The internals were also bullish despite the headline numbers on the indexes. The 52-week highs for the last two days have been very strong averaging over 700 per day. This is well over the numbers posted since the July 11th spike at 868. We have seen numbers well under 500 and as low as 217 over the last three weeks. I view this as bullish confirmation of an underlying bid. HOWEVER, it could also have been due to month end buying by institutions and funds.

While I am leaning more bullish as each day passes I am still watching for lightning to strike. Like playing golf on a cloudy day you could be having an awesome round but are constantly watching for signs of lightning to cancel the game. The markets struggled higher during the week with improving internals but we don't know how much of that was artificial due to month end buying. On Monday we begin the back nine, using the golf analogy, and the storm clouds are still gathering on the horizon. Just like a very hot summer day tends to produce monster storms a very hot market next week could do the same. I know the minute I turn completely bullish the market will turn on me in a heartbeat. So I will continue to recommend cautious longs over SPX 1225 and shorts only below that level. The bottom of the Dow range is just under 10600 so a move below that level would be a danger signal. The Nasdaq is much stronger with support at 2165 and 2145 before falling out of its range.

Storm clouds looming next week include the ISM on Monday, Factory Orders on Tuesday and Nonfarm Payrolls on Friday. The ISM is expected to rise based on the improving regional reports we have seen over the last few weeks. This should be market positive unless it is a blowout over the estimate of 55, which would be Fed negative. The Jobs report is expected to show a gain of +175,000 jobs and a stronger than expected gain there would also be Fed negative. There is a growing whisper suggesting the Fed will remove the measured pace language at the August 9th meeting in preparation for a 50 point move in September. All signs point to an accelerating economy and the Fed will want to be ready to step up its pace of rate hikes. This makes the ISM and Jobs reports this week all the more important. Critical inflection points while the market struggles at its highs only add to the danger of a change in market sentiment. With the current Fed Funds rate at 3.25% it is very tolerable to stocks. Should the Fed escalate the rate hike process we could be over 4% very quickly and numbers over 4% typically begins to pressure stocks. There were several economic analysts interviewed on Friday regarding the GDP and two mentioned the potential for a 5.+ number for Q3. If they are thinking the economy is picking up speed that fast then the Fed is also thinking it and planning ahead to slow it down. This makes these two reports and the Fed meeting only a week away a potential roadblock for the markets. Either report could be that lightning bolt that ends the game. As long as you are expecting the worst it is easy to plan for future. Keep those stops tight, enter passively and exit aggressively if lightning does strike.
 

 
 



New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
None ADBE
  BIIB

New Long Plays

None today.
 

New Short Plays

Adobe Systems - ADBE - close: 29.64 change: -0.47 stop: 30.41

Company Description:
Adobe is the world's leading provider of software solutions to create, manage and deliver high-impact, reliable digital content. (source: company press release or website)

Why We Like It:
The GSO software sector looks vulnerable to more profit taking and that doesn't bode well for shares of ADBE. ADBE has rallied sharply from its July lows but the rally has stalled under resistance near the $30.00 level where its 50-dma and 200-dma have converged. It would appear that the 50-dma is very close to crossing under the 200-dma and this is normally seen as a very bad omen. Because ADBE has not yet broken its short-term up trend we are going to suggest a trigger to open the play. Our entry point to short the stock will be $28.99. Our initial target is the $26.25-26.00 range near its July lows but it's worth noting that the bearish P&F chart points to a $19.00 target.

Picked on July xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 09/15/05 (unconfirmed)
Average Daily Volume: 6.8 million

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Biogen Idec - BIIB - close: 39.29 chg: -0.61 stop: 40.01

Company Description:
Biogen Idec creates new standards of care in oncology, neurology and immunology. As a global leader in the development, manufacturing, and commercialization of novel therapies, Biogen Idec transforms scientific discoveries into advances in human healthcare. (source: company press release or website)

Why We Like It:
This is a simple play. BIIB has been trading sideways in a wide range between $34.00 and $40.00 for the past few months. The stock just tested resistance again at the $40.00 level and failed to breakout. We want to short the stock near resistance and ride it back toward the bottom of its range. However, to confirm that BIIB has indeed turned again we are going to suggest a trigger to short the stock under the $38.00 level. More aggressive traders may want to consider positions now or under $39.00. Our entry point will be $37.99. Our target is the $35.00-34.50 range.

Picked on July xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/26/05 (confirmed)
Average Daily Volume: 4.6 million
 

Play Updates

Updates On Latest Picks

Long Play Updates

Kerzner Intl - KZL - close: 59.75 chg: -1.25 stop: 57.99

Friday was not a great day for KZL. The stock completely erased Thursday's gains and closed back under the $60.00 level. There is still hope the 100-dma will act as support but we've been saying to watch the $59.00 level for the last week. The biggest risk here is the unknown earnings date. The best data suggests a report between August 1st and August 8th. We suspect it will be August 3rd. If we don't hear something soon we may exit early on Tuesday just to be safe. Thus, we're not suggesting new plays at this time.

Picked on July 22 at $61.01
Change since picked: - 1.26
Earnings Date 08/01/05 (unconfirmed)
Average Daily Volume: 154 thousand
 

Short Play Updates

A.S.V.Inc - ASVI - close: 47.95 chg: +2.08 stop: 49.01

Wow! That was certainly unexpected. ASVI out performed the markets on Friday with a 4.5 percent rebound. We need to immediately turn defensive and we are not suggesting new plays at this time. Only if ASVI turns lower and trades under the $46.00 level would we consider new short positions. A reprint of our Thursday night play description follows:

ASVI managed to beat Wall Street's earnings estimates by a penny today but that failed to inspire investors who "sold the news". After the stock's impressive three-month rally we believe that today's earnings report has sparked the beginning of a consolidation as traders lock in profits. The initial dip this morning was bought but buyers could not power the stock higher than the $47.00 level, which had been recent support. This is typical as broken support tends to become resistance. We view this as a failed rally and combined with the new MACD sell signal it looks like an entry point for shorts. We are going to target the 200-dma but we'll set a target range of $40.50-40.00 to begin with. We are suggesting shorts here under $46.00 but more conservative traders may want to see some confirmation and wait for a decline under the $45.00 level.

Picked on July 28 at $45.87
Change since picked: + 2.08
Earnings Date 07/28/05 (confirmed)
Average Daily Volume: 120 thousand

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ATI Tech. - ATYT - close: 12.58 change: +0.02 stop: 13.41

We do not have much new to report on for ATYT. The stock continues to under perform the market and its peers in the semiconductor sector. Thursday's decline looked like another entry point for bears and Friday hasn't changed that. The technical indicators are bearish as is the P&F chart, which points to an $11.50 target. We agree. Our target is the $11.50-11.20 range.

Picked on July 17 at $12.83
Change since picked: - 0.25
Earnings Date 09/22/05 (unconfirmed)
Average Daily Volume: 5.9 million

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Anheuser Busch - BUD - cls: 44.35 chg: -0.42 stop: 46.25

BUD is a new bearish candidate from the Thursday night newsletter. We see no changes from our original play description so we're reposting it here:

Investors did not respond well to BUD's earnings report on July 27th and the stock broke down to new 2 1/2 year lows. Shares had already been in a downtrend for months and this just seemed to confirm its direction. Today's oversold bounce failed near its previous lows in what looks like a perfect failed rally entry point for new shorts. Now BUD does not move very fast but we're going to aim for the $40.25-40.00 range with a ten to twelve week time frame. If the major indices begin to consolidate between now and then we might get lucky and see BUD decline more quickly. The Point & Figure chart is bearish and points to a $35 price target.

Picked on July 28 at $44.77
Change since picked: - 0.42
Earnings Date 07/27/05 (confirmed)
Average Daily Volume: 2.3 million

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Intl Game Tech. - IGT - cls: 27.36 chg: -0.43 stop: 29.01

After a couple of false starts it looks like IGT is finally ready to begin its next leg lower. The stock broke down through multiple levels of support on July 21st and we believe the stock could hit its April lows. The P&F chart points to a $13.00 target. We're aiming for the $24.50-24.00 range. Friday's decline back under the simple 100-dma looks like another bearish entry point.

Picked on July 21 at $27.21
Change since picked: + 0.15
Earnings Date 07/21/05 (confirmed)
Average Daily Volume: 2.3 million

---

Juniper Networks - JNPR - cls: 23.99 chg: +0.02 stop: 25.61

Networking stock JNPR still looks poised to set new relative lows. The stock broke down under multiple levels of support after producing a bearish Head & Shoulders pattern. The fact that the NASDAQ is overbought and testing resistance near 2200 only makes this play in JNPR that much more attractive. If the NASDAQ turns lower than JNPR could accelerate to the downside. We would consider new shorts here under $24.00 but it might be a good idea to wait for another decline under $23.90 before initiating positions. Our target is the $21.50-21.00 range. One of the biggest risk for this play is larger rival CSCO's earnings report on August 9th. A surprisingly positive earnings report from CSCO could scare the shorts and inspire the buyers here in JNPR.

Picked on July 21 at $23.90
Change since picked: + 0.09
Earnings Date 07/19/05 (confirmed)
Average Daily Volume: 7.5 million

---

Royal Caribbean - RCL - cls: 45.45 chg: +0.05 stop: 48.01

RCL managed a minor oversold bounce on Friday morning but it failed under the $46.00 level. The continued weakness bodes well for our short play. If you missed our early updates investors "sold the news" after RCL's earnings report and the stock broke down through multiple levels of support (50-dma, 200-dma, exponential 200-dma, the 100-dma and its three-month trend line of higher lows. We are targeting the $41.25-41.00 range.

Picked on July 27 at $45.50
Change since picked: - 0.05
Earnings Date 07/27/05 (confirmed)
Average Daily Volume: 1.3 million

---

Sina.com - SINA - close: 27.81 change: +0.06 stop: 28.51

Time is almost up for our SINA play. The company is due to report earnings on Wednesday, August 3rd so we plan to exit on Tuesday after the close to avoid any surprises. We are not suggesting new plays at this time.

Picked on June 30 at $27.90
Change since picked: - 0.09
Earnings Date 08/03/05 (confirmed)
Average Daily Volume: 1.4 million

---

Triad Hosp. - TRI - close: 49.67 chg: +0.19 stop: 52.01

We do not have much new to report on for TRI. Investors reacted negatively to TRI's earnings report on Monday and shares produced a big bearish engulfing candlestick while also breaking support. Since then the stock has been stuck under round-number support/resistance at the $50.00 mark. We would open new shorts with TRI under $50.00 but more conservative traders may want to see more confirmation with a decline under $49.00 before going short. Our target is the $45.50-45.00 range.

Picked on July 25 at $49.20
Change since picked: + 0.47
Earnings Date 07/25/05 (confirmed)
Average Daily Volume: 967 thousand
 

Closed Long Plays

Steel Dynamics - STLD - cls: 32.16 chg: -0.31 stop: 28.99

We are choosing to close STLD as a potential candidate. Readers can still keep an eye on the stock for a dip back toward support near $30.00. Since the stock never hit our entry point it has been closed as unopened.

Picked on July xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/19/05 (confirmed)
Average Daily Volume: 1.4 million

---

Vital Images - VTAL - close: 19.56 change: +0.06 stop: 17.99

VTAL showed a little bit of volatility on Friday with a dip toward the $19.00 level but bulls bought the dip. We are closing the play per our previous suggestions to avoid the company's earnings report next week expected on August 2nd.

Picked on July 19 at $18.93
Change since picked: + 0.63
Earnings Date 08/02/05 (confirmed)
Average Daily Volume: 107 thousand
 

Closed Short Plays

NS Group - NSS - close: 42.45 change: +0.45 stop: 40.01

NSS continues to display incredible relative strength. While our strategy to wait for a decline under Tuesday's low may still work we're choosing to close this as a potential play and look elsewhere. The play is closed as unopened.

Picked on July xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/25/05 (confirmed)
Average Daily Volume: 353 thousand
 

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

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