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Daily Newsletter, Wednesday, 08/03/2005

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Table of Contents

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

Market Wrap

Bear Season Remains Open Until Population Under Control

The major indices shrugged off early morning weakness to finish mixed, but the downtrodden AMEX Gold Bugs Index ($HUI.X) 210.32 +5.42% surged as rosier European economic data lifted the euro to a two-month high against the greenback.

Eurozone data showed after a measure of the services economy showed expansion, edging up to 53.5 in July from 53.1 in June and had some economists in the region sensing a turn for the better as the euro-zone economy sputters along. Also fueling euro gains were rumors of Saudi Arabian and Kuwaiti buying of euros.

Now take note of this all you technicians (currency, commodity, stock, bond, any tradable security) out there. Some euro technicians say today's action in the euro also found a key break above technical resistance at the $1.2250 level, where several times this past week, the euro kept hammering away at this level, only to be knocked back. That is, before today's successful charge took the euro as high as $1.2343 intra-day.

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I'm using today's "commentary" of euro technicians to solidify a key technical measure that can sway one side of a trade to another. It is thought by many that the more times a HORIZONTAL level is tested as resistance, or support, once broken, that level can become a MASSIVE reaction point for a strong directional move in the direction of the break!

I'll touch on this in one of my "key sectors for the month," and traders that have been following my commentary over the years, will know this equity sectors as a pretty good indicator of BULLISH aggression, or lack thereof.

Economic data released here in the U.S. had the Institute of Supply Management nonmanufacturing index slipping to 60.5% in July from 62.2% in June. Economists were expecting some slippage, but to a reading of 61.4%. As a reminder, this is a diffusion index, where readings above 50% signal expansion, while levels below 50% signal contraction. This services index has been above 50% for 28 months. While the overall ISM reading slipped to 60.5%, July new orders rose to 61.9% from June's 59.5%. The employment component fell to 56.2% in July, after a 57.4 reading in June. The prices-paid component jumped to 70.3% from 59.8%, its highest level since December. Ralph Kaufman, chairman of the ISM's nonmanufacturing survey committee, said survey participants blamed the increase entirely on higher oil prices.

Speaking of oil, September Crude Oil futures (cl05u) settled down $1.03, or -1.66% at $60.86 after spiking to $62.50 in the first minutes of this morning's floor trade. The morning highs came just shy of the contract high of $62.90 set on July 8, 2005.

Weekly inventory data showed crude oil inventories rose by a very modest 196,000 barrels, the first build after four weeks of decline! Gasoline inventories fell by a sharp 4.02 million barrels, while distillate inventories rose by 1.49 million barrels.

September Heating Oil futures (ho05u), a distillate, settled down $0.0362, or -2.10% to $1.6889. Meanwhile, September Unleaded Gas futures (hu05u) settled down $0.0107, or -0.60% at $1.7709.

The longer-dated 30-year Treasury yield ($TYX.X) fell 3.5 basis points to 4.505% with the Treasury Department confirming it will reintroduce the 30-year bond with semiannual auctions beginning early next. Buying was evenly spread among the major maturities with the shorter-dated 5-year yield ($FVX.X) falling 3.6 bp to 4.127%, while the benchmark 10-year yield ($TNX.X) was down 3.6 bp to 4.300%

U.S. Market Watch - 08/03/05

What a difference a day makes with the AMEX Gold Bugs ($HUI.X) 210.32 +5.42% now up 6.81% since last Wednesday's close (see 5DyNet% column).

How about them HMOs!? Shares of Cigna (NYSE:CI) $115.57 +6.61% surged to an all-time high after the employee benefits provider joined recent other health insurers such as Aetna (NYSE:AET) $76.89 +0.01% and Wellpoint (NYSE:WLP) $73.96 +0.80% in posting forecast-beating results.

In last Wednesday's Market Wrap I noted that the "healthcare" sectors had been a drag on the broader S&P 500, and I do think the week-to-week gains helped broader-market bulls.

Tonight I'm going to focus in on the FINANCIALS, with some focus on the S&P Banks Index (BIX.X), which is at a near-term levels of rising support.

But first, let's talk a little about "bear season."

S&P Depository Receipts - Daily Intervals

In last Wednesday's Market Wrap, we did some "fine tuning" on the S&P Depository Receipts (AMEX:SPY) $124.72 +0.26%, which would have close juuuust above the 50% retracement of $12.66.

For several weeks I've been reading about "bullish complacency" as depicted by the various volatility measures (VIX.X, VXO.X, VXN.X). However, I could never find anyone that could show me, or prove to me, that it was BULLS doing all the call buying and put selling to have these various volatility measures falling to multi-year lows.

Last night I was snooping around for any confirmation to my thoughts that it might be BEARS (often times their own worst enemy) that might be doing the call buying and put selling. After all, options were "created" as an instrument to help hedge RISK. Recent short interest data on the S&P Depository Receipts (AMEX:SPY) $124.72 +0.26% shows that SHORT INTEREST on the SPY has built to a 12-month high! Meanwhile the SPY is at a 4-year high!

In orange, I've tried to benchmark the 06/16 and recent 07/15 dates with short interest readings.

In my opinion, "bear season" is in full swing and the Division of Wildlife hasn't published any definitive dates as to when it will close.

Now, I know what a bear that is short below $123.65 is probably saying. "Those bulls haven't shown me anything. Yeah... you got your healthcare boost last week, but I'm not sweating things at all. I'm as cool as a cucumber."

But whether YOU or I am bullish/bearish this broader market measure, don't forget that there's roughly 113.1 million shares on the wrong side of the trade at tonight's close.

On a hot summer's night, when the humidity is high, even a cucumber will sweat.

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

"Financial" represent roughly a 25% weighting in the SPY/SPX and while the more regional S&P Bank Index (BIX.X) is not a full representation of "financials," it is a sector/index I like to use (in addition to the BKX.X, XBD.X and IUX.X, which I group together in our U.S. Market Watch).

Do you see how the BIX.X on a technical basis has been of NO HELP to the SPY/SPX bulls in the last couple of weeks? But note some of the same SIMILARITIES of a reverse head/shoulder pattern, as well as a bullish resistance trend (thick red line).

Trading and technical analysis is so much of a "what if" type of question.

"What if" the BIX.X breaks down below its near-term bullish trend and breaks below what looks to be the formation of a "right shoulder." Aha! That is perhaps a BEAR'S case for still shorting/putting the SPY/SPX.

But.... "What if" the BIX.X rebounds sharply and tries to reclaim its bullish resistance (thick red trend)?

In essence, the BIX.X can perhaps become our "key" index/sector of the week/month. It could well be the indicator of just how long bear season is going to last.

Why do I show a BLUE retracement and a PINK retracement?

The BLUE retracement may be thought of as a LONGER-TERM bull's retracement. Say for example the "smartest bull" bought the May 2004 relative lows of 322.50 and that bull also sold the tippy-top high of 382.78. It's not uncommon for those bulls to come back for seconds on a 61.8% retracement of that range.

The PINK retracement may be thought of as an INTERMEDIATE-TERM bear's retracement. Say for example the "smartest bear" sold the December all-time highs. Hey... you've got to be very smart, or very lucky to have done that. But let's assume "smart money" sold that high and THEN bought the recent 04/21/05 low of 340.63.

Hmmm... maybe a little bit STRONGER than a bear would have wanted above this PINK 61.8% retracement, and maybe, just maybe, the BIX.X firms a bit at 50% of PINK retracement.

All I want traders and investors to do is get the feel/observation of how this index/sector could be pivotal in comings sessions.

Over the past 20 sessions, I see that the BIX.X is up just 0.81%, the BKX.X is up 2.15%, the XBD.X is up 5.94% and the IUX.X is up 3.5%.

What I'm doing here tonight is focusing on the BIX.X, which is the WEAKEST of the financial sectors/indices in our U.S. Market Watch.

I like to monitor any "weakness" for further weakness, or renewed STRENGTH.

Also remember... "healtchare" represents roughly a 25% weighting in the SPY/SPX.

OK... now let's revisit some talk among traders regarding the euro, and how it hammered against a key technical level of $1.225 and finally broke through.

I'm not a currency trader, and I'd be lying to you if I told you I could "feel the power" of today's break higher. However, maybe today's $HUI.X surge was triggered by such a break higher in the euro vs. dollar.

Hmmmm.... I could perhaps envision a bunch of angry villagers pounding and pounding and pounding at the castle gates with their battering ram. For the BIX.X it may well be the 360 level that seller are trying to break.

One of my "key sectors" for buyers showing some aggressiveness is the CBOE Internet Index (INX.X) 203.19 -0.31%. Where in recent Market Monitor notes, I've been focusing on INX.X 204.50, let's round up to 205.00 to keep a round number.

My thoughts of the INX.X being a sector/index to represent how aggressive buyers are getting probably lingers from the "Internet Bubble." Yes... "no earnings and a pipe dream." In March of 2000, this index topped out at 944.

CBOE Internet Index (INX.X) - Daily Intervals

Here's an index I like to associate with buyers being "aggressive" or "not aggressive." No, I don't have "reverse head/shoulder pattern on the brain," but these patterns continue to show up, and from what I've seen, necklines keep getting broken to the upside, and the "right shoulders" held when the pullbacks took place.

See how the BIX.X becomes a "test for strength, or weakness on the current pullback.

See how the INX.X can become a test for strength, or weakness on the current bounce?

When things (indices/sectors) get in unison (up/down) that's when the powerful moves can come for the major indices. To the upside, it is when all the buyers, including short-covering bears, and suddenly convinced bulls all start getting on the same side of the trade. To the downside is when all the sellers get in unison, which includes convinced bears and doubtful bulls.

Recent short interest data in the SPY would suggest to this analyst that bears should not be overly confident, and bulls might start getting aggressive.
 

New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
ERICY AIRT

New Long Plays

LM Ericsson - ERICY - close: 35.19 chg: +0.38 stop: 32.99

Company Description:
Ericsson is shaping the future of Mobile and Broadband Internet communications through its continuous technology leadership. Providing innovative solutions in more than 140 countries, Ericsson is helping to create the most powerful communication companies in the world. (source: company press release or website)

Why We Like It:
This is both a momentum play and a technical breakout play. Shares of ERICY have been consistently climbing higher over the past few months in what looks like a rising channel. Today's breakout over the $35.00 level marks a new three-year high for the stock. Plus, it confirms the recent breakout through resistance at the top of ERICY's massive gap down back in 2002. ERICY's Point & Figure chart also points higher with a $49.00 target. We are suggesting bullish positions over the $35.00 level with an eight-week target in the $39.50-40.00 range. More patient traders might want to wait for another dip before considering new positions. We're going to start the play with our stop loss near the simple 50-dma.

Picked on August 03 at $35.19
Change since picked: + 0.00
Earnings Date 07/21/05 (confirmed)
Average Daily Volume: 1.9 million
 

New Short Plays

Air T, Inc. - AIRT - close: 13.84 change: -0.34 stop: 15.01

Company Description:
AirT, through its subsidiaries, provides overnight air-freight service to the express delivery industry and manufactures and services aviation and other specialized equipment. AirT is one of the largest small aircraft air cargo operators in the United States and currently operates a fleet of single and twin-engine turbo-prop aircraft nightly in the eastern half of the United States and Canada, South America, Puerto Rico and the Virgin Islands. (source: company press release or website)

Why We Like It:
As an air courier the high-cost of oil and thus jet fuel has got to be putting pressure on AIRT's margins. We also like AIRT as a bearish candidate because shares have been under performing their peers in the airline sector. The stock's six-week sideways consolidation has broken down to new relative lows. Its Point & Figure chart looks very bearish and points to a $10.00 target. Our initial target is the January 2005 lows near $12.00 (actually 12.10-12.00) but we wouldn't be surprised to see AIRT trade lower. Traders can choose to short the stock here or look for another bounce and failed rally under the $14.50 level. It is worth knowing that AIRT has a very small float of just 2.51 million shares but we do not see very much short interest.

Picked on August 03 at $13.84
Change since picked: + 0.00
Earnings Date 06/17/05 (confirmed)
Average Daily Volume: 289 thousand
 

Play Updates

Updates On Latest Picks

Long Play Updates

Kerzner Intl - KZL - close: 60.98 chg: -0.28 stop: 58.99

We have three trading days left. That is if we want to exit on Monday afternoon to avoid holding over KZL's earnings report on Tuesday. Depending on how KZL performs we may choose to exit on Friday. We would not suggest new positions here.

Picked on July 22 at $61.01
Change since picked: - 0.03
Earnings Date 08/09/05 (confirmed)
Average Daily Volume: 154 thousand
 

Short Play Updates

Adobe Systems - ADBE - close: 28.10 change: -0.52 stop: 30.41

Due to the gap down on Tuesday we pulled out suggested entry point to short the stock and are currently monitoring ADBE for another potential entry. We like today's show of weakness as it helped produce the new MACD sell signal today. Traders watching this with us may want to choose an entry under $28.00 or watch for another rebound back toward the $29.00 level. We're also watching the GSO software index for a breakdown under short-term support at the 164 level. Currently we are not suggesting an entry just yet.

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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A.S.V.Inc - ASVI - close: 48.56 chg: -0.39 stop: 49.01

Only by the skin of our teeth is this play still alive. ASVI traded to $49.00 again but failed to push through it. Our stop loss is at $49.01. That marks three days in a row that ASVI has failed to breakout over the $49.00 level. We are not suggesting new plays but more aggressive traders may want to consider shorts on a drop below the $47.00 mark.

Picked on July 28 at $45.87
Change since picked: + 2.69
Earnings Date 07/28/05 (confirmed)
Average Daily Volume: 120 thousand

---

ATI Tech. - ATYT - close: 12.76 change: -0.29 stop: 13.41

We have good news to report on for ATYT. The stock produced a failed rally at its declining 50-dma and erased yesterday's gains. This looks like a new bearish entry point. Our target is the $11.50-11.20 range.

Picked on July 17 at $12.83
Change since picked: - 0.07
Earnings Date 09/22/05 (unconfirmed)
Average Daily Volume: 5.9 million

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Biogen Idec - BIIB - close: 40.67 chg: -0.17 stop: 40.01

We are still on the sidelines watching BIIB for a reversal. The stock did break through resistance a couple of days ago but there has been very little follow through. Currently we are suggesting shorts if BIIB trades under $37.99. We will probably close this as a candidate if BIIB doesn't trade under $40.00 in the next two sessions.

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

---

Anheuser Busch - BUD - cls: 44.32 chg: +0.11 stop: 46.25

No change from our previous update. Our ten-to-twelve week target is the $40.25-40.00 range.

Picked on July 28 at $44.77
Change since picked: - 0.45
Earnings Date 07/27/05 (confirmed)
Average Daily Volume: 2.3 million

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Intl Game Tech. - IGT - cls: 27.54 chg: +0.00 stop: 29.01

Unfortunately, there is no change in IGT today. We see no change from our weekend update. IGT continues to look weak. We would still consider new short positions here. Our target is the $24.50-24.00 range.

Picked on July 21 at $27.21
Change since picked: + 0.33
Earnings Date 07/21/05 (confirmed)
Average Daily Volume: 2.3 million

---

Juniper Networks - JNPR - cls: 24.48 chg: +0.23 stop: 25.61

Uh-oh! JNPR is moving the wrong direction. The stock finally broke through the exponential 200-dma, which it has been flirting with the last several sessions. The next level of resistance is the $24.50 mark, which was support back in early July. After that there is additional resistance at its simple 200-dma near $24.70. More aggressive traders can used failed rallies at any of these levels as new entry points. We would not suggest new positions until JNPR traded back under the $23.90 mark.

Picked on July 21 at $23.90
Change since picked: + 0.54
Earnings Date 07/19/05 (confirmed)
Average Daily Volume: 7.5 million

---

Royal Caribbean - RCL - cls: 45.20 chg: +0.15 stop: 48.01

RCL got an early morning pop higher but its strength quickly failed. We see no change from our previous updates. Our target is the $41.25-41.00 range.

Picked on July 27 at $45.50
Change since picked: - 0.30
Earnings Date 07/27/05 (confirmed)
Average Daily Volume: 1.3 million

---

Triad Hosp. - TRI - close: 49.82 chg: -0.33 stop: 52.01

The good news here is that shares of TRI are once again trade under the $50.00 level but we would still hesitate to open new bearish positions until TRI trades under $49.50 again. If that occurs we would target the $45.50-45.00 range.

Picked on July 25 at $49.20
Change since picked: + 0.62
Earnings Date 07/25/05 (confirmed)
Average Daily Volume: 967 thousand
 

Closed Long Plays

None
 

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.

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