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Daily Newsletter, Wednesday, 08/24/2005

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Table of Contents

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

Market Wrap

Durables down, while new homes sales and energy prices soar

It was a volatile day on Wall Street where stocks started the session off weak and brought further defensive into Treasuries after the Commerce Department said orders for durable goods fell a sharper than expected -4.9% in July to $204.71 billion, dragged lower by a 16.6% decrease in defense orders and a 20.2% drop in civilian aircraft. Economists were looking for a 1.5% decline in durable goods orders after three straight months of strong gains.

Durable orders in June were revised lower to a 1.9% increase from the previously reported 2.8% increase. Durable-goods orders jumped 7.3% in May.

Economists were generally unfazed by July's decline, citing the expected month-to-month volatility patterns of the data.

"We do not see this decline as anything more than statistical noise at this point. Despite the 4.9% decline in July, over the last three months, durable goods orders have risen at a 17.0% annualized rate," said the economic team at Bear Stearns in a note to clients.

But the tide then turned at the 10:00 hour as the "housing bubble" refused to pop when the Commerce Department said sales of new homes surged 6.5% in July to a new record seasonally adjusted annual rate of 1.41 million. Economists were expecting sales to have slipped to a pace of 1.33 million units annually.

Builders look to be putting up homes ahead of the fall/winter season as the supply of new homes increased 1.8% to a record 460,000.

Reversing a trend of higher prices, the median price of a new home fell to $203,800, which is down 4% in the past year, as builders shift their focus to building homes costing less that $250,000.

Yesterday, the National Association of Realtors said sales of previously owned homes fell 2.6% to a seasonally adjusted annual rate of 7.16 million in July, the third highest sales pace ever.

We did see a fractional "flight from safety" as the benchmark 10-year YIELD ($TNX.X) rose from the 4.164% yield level to 4.20%, with stocks lifting from their lows.

But the action was just getting started and we hadn't reached the 10:30 AM mark when the Energy Department releases its weekly inventory data.

With October Crude Oil futures (cl05v) hovering at the $66.00 level, the contract fell quickly to its WEEKLY Pivot of $65.45 after the EIA said crude oil inventories rose by 1.85 million barrels. But oil stabilized as another huge 3.24 million barrel draw was found in gasoline. Refiners continued to crank out the heating oil with a 1.42 billion barrel increase.

By 11:05 AM EDT, the October Crude (cl05v) contract had jerked back higher to $66.70, briefly piercing Tuesday's high, but equity traders seemed to pull their bids just after 01:00 PM EDT when crude lurched further above the 11:00 AM high, then settle at a new contract high of $67.32 +2.45% on the session.

October Heating Oil (ho05v) settled up $0.528, or 2.85% at $1.9034, while October Unleaded Gasoline (hu05u) settled up $0.6666, or 3.71% at $1.8603.

On a month-to-month basis, crude oil inventories are up 1.6%, or 5.086 million barrels, while distillates are up 5.33%, or 6.7 million barrels. However, its the continued draw on gasoline stockpiles that grows more worrisome, down 6.84%, or 14.3 million barrels the past four weeks.

Also striking bullishness into the energy complex was the National Hurricane Center saying that Tropical Storm Katrina would likely move into the central Gulf of Mexico by Monday, and with the storm intensifying, the NHC would most likely upgrade Katrina to hurricane status.

Shareholders of Houston-based midstream energy concern, Enterprise Group Holdings (EPE) $32.55 +16.25, celebrated their IPO debut with a hefty $4.55 gain. The company priced 12.6 million shares at $28 per share. Underwriters were led by Citigroup (C) $43.05 -1.17% and Lehman Brothers (LEH) $103.76 -2.20%.

While not quoted in my U.S. Market Watch, October Natural Gas futures (ng05v) surged $0.30, or 3.11% to easily settle at a new record high of $10.019.

Volume at the big board was brisk at 1.93 billion shares, but as the month of August draws to a close, average volume has dropped off 2% from July, with average daily volume running 1.83 billion shares. Still, this would be "heavy" considering August of last year, when average daily volume on the big board was running a lackluster 1.21 billion per day.

NASDAQ volume was also brisk at 1.72 billion shares, but so far this month, average daily volume is down a sharp 7% from July's 1.65 million average daily volume.

I must admit though, I am surprised at the end of today that the NASDAQ was able to achieve 90 news highs (best in last 7 sessions), while new lows among 4 and 5-lettered stocks holds around the 30-mark for the 10-straight session. These reading are NOT bullish, they're just not as bearish as I would have expected.

Ah yes... tomorrow's a new day, as is the next. However, when the major indices are trading weak, we should expect the number of new lows to be growing if the inchworm is losing traction. The only buyers of stocks trading new 52-week lows are more than likely shorts locking in gains, and a short usually locks in gains when they sense the bulk of damage has been done.

One notable new 52-week low on the NASDAQ was IAC/InterActive (IACID) $24.35 -2.36%, which recently spun off it popular Expedia (EXPE) $21.60 -0.69% travel business. Since the spinoff, shares of IACID, which according to the CBOE holds an 8.02% weighting in its CBOE Internet Index (INX.X) 189.70 -1.12%, has lost 12% of its value.

U.S. Market Watch - 08/24/05 Close

Miners as depicted by the AMEX Gold Bugs Index ($HUI.X) 200.16 -2.49% were hardest hit in today's session and after a spurt of bullishness in recent weeks, are once again nestled back at the psychological 200 level.

The S&P Retail Index (RLX.X) 451.49 -1.07%, which set an all-time high in late July (489.34), continued its retreat on thought that higher gasoline prices will weigh on the consumer. Applebee's International (APPB) $22.37 -6.98% served up an intra-day new 52-week low after the casual-dining restaurant operator cut its earnings estimates for the third quarter and all of 2005, based on weak same-store sales.

Meanwhile, fashion accessories retailer Coach (COH) $33.99 +4.13% reversed a string of daily losses after the company said its fiscal first quarter is tracking ahead of plan.

The S&P Banks Index (BIX.X) 350.92 -0.96% broke to new monthly lows and now looks to challenge its May, 13 inflection low of 350.28

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

The BIX.X showed some life Monday with the 10-year YIELD ($TNX.X) rising to 4.25%. Yes... rising. However, the declines in YIELD will continue to pressure margins for the bankers. It WAS A COINCIDENCE that the 10-year yield rose above 4.25% when the major indices achieved their recent relative highs. It is NO COINCIDENCE that a tightening Fed, and LOWER YIELDS for the 10-year and 30-year YIELDS (from buying in those maturities) has pressured the banks.

10-year yield ($TNX.X) - Daily Intervals

An tomorrow is a "new day," and an important one at that. Yes, on May 13th, when the 10-year YIELD ($TNX.X) closed at 4.121%, the Fed had just raised rates to 3.0%. Today, August 24, current Fed Funds stand at 3.5%.

I profiled a bullish trade in shares of PACCAR (PCAR) $69.19 -0.31% at the $70.12 level after the stock had popped to as high as $70.93 earlier in the morning. I "knew" that I needed selling in the longer-dated maturities to not only widen some margins for banks, but also to free up cash that could then flow toward equities. I didn't get it, the market didn't get it, and I got stopped out at $60.50.


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

One CAN NOT say that BIX.X May 13th is equal to SPX May 13th. That would be as foolish as picking an arbitrary 10-year yield and equating it with what the stock market is doing. However, I will say... "as long as BIX.X below 359, bulls with have a tough time getting SPX above 1,230.

A note to "frustrated bears" that have been hearing for months that a decline was coming, don't get caught up in the "horse and carrot" routine and start lowering your targets! At least not on ALL OF YOUR POSITIONS. If you've got a couple of options contracts and have seen time eating away, still trade your initial target and take some off the table.

NASDAQ-100 Tracker (QQQQ) - Daily Intervals

When writing last week's wrap, it wasn't until later that evening that I noticed www.stockcharts.com's NASDAQ-100 Bullish % ($BPNDX) had reversed back lower to "bull correction" status at 56%.

Now, since Wednesday, we have seen a net gain of 3 stocks to point and figure buy signals (NDX/QQQQ components) and these would be SNPS $18.62 +0.75%, when it traded $19.00. RIMM $75.95 -1.05% generated a reversing higher buy signal at $74, QLGC $34.69 -0.34% generated a reversing higher buy signal at $35 and APOL $76.50 +1.08% generated a reversing buy signal today.

IACID generated a reversing lower point and figure sell signal at $25 on 08/22.

The much broader S&P 500 Bullish % ($BPSPX) remains in "bull confirmed" mode at 70.80%, and slipped 0.2% today. So, a net loss of 1 stock to a reversing lower PnF sell signal here. It would currently take a reversing lower reading of 68% for this major market barometer to reverse back lower to "bull correction" status.

Keep a very close eye on those NH/NL ratios for a reversal back higher. They'll lead up/down before these slower moving bullish % do.


 

New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
None COST
  SONC

New Long Plays

None Today.

New Short Plays

Costco Wholesale - COST - close: 43.33 chg: -0.32 stop: 44.60

Company Description:
Costco currently operates 458 warehouses, including 337 in the United States and Puerto Rico, 65 in Canada, 16 in the United Kingdom, five in Korea, four in Taiwan, five in Japan and 26 in Mexico. The Company also operates Costco Online, an electronic commerce web site, at www.costco.com and at www.costco.ca in Canada. The Company plans to open two additional new warehouses prior to the end of its fiscal year 2005, on August 28, 2005. (source: company press release or website)

Why We Like It:
COST may be one of our favorite places to shop but its stock is looking a but unhealthy here. The whole retail sector looks vulnerable after Wal-Mart issued concerns that rising gas prices was affecting its customers. Even COST had one analyst downgrade the company's estimates due to worries over fuel costs. Looking at the chart one can see that its oversold bounce has failed near $44.50 and under its 100-dma and exponential 200-dma. Technicals are bearish and its P&F chart points to a $33 target. We're going to suggest shorts here with a relatively tight stop and a target in the $40.50-40.00 range. Please note that we're going to try and maintain a tight stop because bears are facing what looks like support on its weekly chart (see below).


Picked on August 24 at $43.33
Change since picked: + 0.00
Earnings Date 10/06/05 (unconfirmed)
Average Daily Volume: 2.8 million

---

Sonic Corp - SONC - close: 30.39 chg: -1.27 stop: 32.01

Company Description:
Sonic, America's Drive-In, originally started as a hamburger and root beer stand in 1953 in Shawnee, Okla., called Top Hat Drive-In, and then changed its name to Sonic in 1959. The first drive-in to adopt the Sonic name is still serving customers in Stillwater, Okla. Sonic has approximately 3,000 drive-ins coast to coast and in Mexico. More than a million customers eat at Sonic every day. (source: company press release or website)

Why We Like It:
This is a simple trade the channel play. SONC has been slowly descending in a channel since its peak back in March. The action over the past couple of weeks has been SONC trying to breakout over the stop of its channel. Now shares are turning lower and its technical oscillators are bearish. Its MACD has produced a new sell signal and its P&F chart points to a $25 target. Looking at the chart you can see that today's decline through technical support at its exponential 200-dma was fueled by stronger than average volume. We're going to suggest shorts here but more conservative traders may want to wait for a decline under the $30.00 mark. Our target is the $28.00 level.

Picked on August 24 at $30.39
Change since picked: + 0.00
Earnings Date 09/26/05 (unconfirmed)
Average Daily Volume: 537 thousand
 

Play Updates

Updates On Latest Picks

Long Play Updates

LM Ericsson - ERICY - close: 34.21 chg: -0.55 stop: 33.75

ERICY dipped toward support at the $34.00 level, bolstered by its simple 50-dma. This may prove to be a new bullish entry point for the stock but we would wait for signs of a bounce before initiating positions. Look for a move back over the $35.00 mark if you're feeling cautious.

Picked on August 03 at $35.19
Change since picked: - 0.98
Earnings Date 07/21/05 (confirmed)
Average Daily Volume: 1.9 million
 

Short Play Updates

Assured Guaranty - AGO - close: 21.87 chg: -0.28 stop: 23.26

AGO has slipped back down toward the bottom of its short-term trading range. The dip under $21.80 looked like a new bearish entry point but bulls bought the dip again near the closing bell. Enter cautiously. Our target is the $20.50-20.00 range.

Picked on August 10 at $22.39
Change since picked: - 0.24
Earnings Date 08/04/05 (confirmed)
Average Daily Volume: 229 thousand

---

Anheuser Busch - BUD - cls: 44.20 chg: -0.25 stop: 46.25

There is no change from our weekend update for BUD. Our target is the $40.25-40.00 range before its October earnings report.

Picked on July 28 at $44.77
Change since picked: - 0.57
Earnings Date 07/27/05 (confirmed)
Average Daily Volume: 2.3 million

---

Hansen Natural - HANS - close: 43.18 chg: -1.57 stop: 47.51

Shares of HANS lost 3.5% today. The continuation of yesterday's failed rally looks like a new bearish entry point but more conservative traders may want to wait for the stock to trade back under $42 before initiating positions. Our target is the $38.00-37.50 range.

Picked on August 10 at $43.37
Change since picked: - 0.19
Earnings Date 08/09/05 (confirmed)
Average Daily Volume: 1.1 million

---

Intl Game Tech. - IGT - cls: 26.74 chg: -0.20 stop: 28.51

There is nothing new to report for IGT. The multi-week trend of lower highs remains intact. Our target is the $24.50-24.00 range.

Picked on July 21 at $27.21
Change since picked: - 0.47
Earnings Date 07/21/05 (confirmed)
Average Daily Volume: 2.3 million

---

Juniper Networks - JNPR - cls: 23.56 chg: -0.10 stop: 24.70

JNPR is still churning sideways in its three-week trading range. We're not suggesting new plays at this time. More conservative traders may want to adjust their stops toward the $24.00 level. Looking at JNPR's peers today we see that CSCO is breaking down to new relative lows but FFIV is rebounding higher.

Picked on July 21 at $23.90
Change since picked: - 0.34
Earnings Date 07/19/05 (confirmed)
Average Daily Volume: 7.5 million

---

Jos. A. Bank - JOSB - close: 37.78 change: +0.66 stop: 40.01

JOSB has produced yet another failed rally in its current down trend but the stock was able to maintain some of its gains. Readers looking for a new entry might want to take a closer look here. Our target is the $35.50-35.00 range.

Picked on August 16 at $39.95
Change since picked: - 2.17
Earnings Date 09/08/05 (unconfirmed)
Average Daily Volume: 297 thousand

---

O M I Corp - OMM - close: 17.42 change: +0.77 stop: 18.01

Red alert! OMM surged higher today and hit $17.81 near its exponential 200-dma before paring its gains. OMM added 4.6% but it appears that almost the whole oil tanking industry saw their stocks move higher today. One can only assume it's a reaction to crude oil's new high. Oddly enough the group seemed disconnected to the rise in oil over the past few months so to see a one-day spike like this without any specific news is unexpected. We are not suggesting new plays. Conservative players may want to actually consider exiting right here to preserve their capital. The stock is still trading under resistance at the $18.00 mark so we're going to leave the play open.

Picked on August 14 at $17.20
Change since picked: + 0.22
Earnings Date 07/25/05 (confirmed)
Average Daily Volume: 1.4 million

---

Royal Caribbean - RCL - cls: 44.48 chg: -0.55 stop: 47.01

Good news. The bounce in RCL appears to have reversed. This looks like a new bearish entry point. Our target is the $41.25-41.00 range.

Picked on July 27 at $45.50
Change since picked: - 1.02
Earnings Date 07/27/05 (confirmed)
Average Daily Volume: 1.3 million

---

Wal-Mart - WMT - close: 45.55 change: -0.79 stop: 48.01

Heads up! Dow-component and retail titan Wal-Mart has broken down through support at the $46.00 level. Our suggested entry point to short the stock was $45.95 so the play is now open. Volume was pretty heavy today at 50% above the norm and that should suggest more weakness ahead. Daily technicals are bearish and its weekly chart's MACD has just produced a new sell signal. The Point & Figure chart is bearish with a $37 target. While the play is open and we would short the stock here some traders may want to be patient and look for an oversold bounce back toward the $46.00-46.50 region before initiating positions. Our target is the $42.25-42.00 range.

Picked on August 24 at $45.95
Change since picked: - 0.40
Earnings Date 08/16/05 (confirmed)
Average Daily Volume: 10.2 million

---

Xilinx - XLNX - close: 27.19 chg: -0.23 stop: 28.01

Semiconductor stock XLNX almost stopped us out today with a rally to $27.90 but the rally just couldn't push any farther despite multiple attempts to run higher. XLNX reversed course midday and gave it all back. This looks like a new bearish entry point but we're really not suggesting new positions at this time. Our target is the $26.10-26.00 range.

Picked on August 04 at $27.91
Change since picked: - 0.72
Earnings Date 07/21/05 (confirmed)
Average Daily Volume: 6.1 million
 

Closed Long Plays

None Today.

Closed Short Plays

LifePoint Hosp. - LPNT - cls: 46.04 chg: +0.54 stop: 46.51

We are choosing to exit early in LPNT. Yesterday we lowered the stop loss to $46.51 to reduce our risk. The stock came close to hitting our stop today with today's bounce. We don't like this show of strength on a day that most of the market is turning lower.

Picked on August 16 at $ 44.95
Change since picked: + 1.09
Earnings Date 07/27/05 (confirmed)
Average Daily Volume = 686 thousand
 

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

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