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Daily Newsletter, Wednesday, 09/21/2005

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Table of Contents

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

Market Wrap

Natural disaster waiting to happen? SPX turns "bear alert!"

Stocks sold off for a second-straight session as investors braced the arrival of Hurricane Rita, which the National Hurricane Center raised to a Category 4 storm (Category 5 is highest on Saffir Simpson scale) earlier this morning.

Volumes at both the NYSE and NASDAQ were heavy and at today's closing values, both the NYSE's and NASDAQ's more intermediate 10-day NH/NL ratios fell into a column of "O" as both shorter-
term (5-day NH/NL ratio) and intermediate-term bullish leadership turns defensive. In essence, market participants are much less willing to push a stock to new highs with buying, instead more willing to sell their losers, as well as their resent winners.

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Traders appeared more watchful of higher energy prices and Rita's track as it moved across the Gulf of Mexico, than a positive earnings release from Federal Express (FDX) $83.15 +7.98%, where despite a 51% increase in fuel prices versus a year ago, the air/ground shipper said demand remained strong, even after Hurricane Katrina's recent carnage to portions of Louisiana and Mississippi. The company reported Q1 profits of $339 million, or $1.10 per share, which was up from $330 million, or $1.08 per share in the year-ago quarter. Excluding a one-time charge from changing its lease accounting, earnings would have been $1.25, which was comparable to consensus estimates of $1.17 per share. Q1 revenue (ending Aug. 31) came in at $7.71 billion, up 10% from the $6.98 billion last year. Consensus was for $7.58 billion. The company noted that operating expenses jumped 11% to $7.12 billion, with fuel costs surging 51% to $728 million from $428 million a year ago.

A day after the FOMC raised its target on fed funds by 25 basis points to 3.75%, a defensive trade in Treasuries was found. Despite the FOMC's actions yesterday, a strong bid had the shorter-dated 5-year yield ($FVX.X) dropping 4.3 basis points to close at 3.993%, just 25 basis points above the current fed funds rate!

The S&P Banks Index (BIX.X) 339.13 -1.63% traded a 52-week low as a tightening fed combined with a bid for the longer-dated 30-year bond had its yield ($TYX.X) down 4.9 basis points to 4.458%. If looking to "pick a low" in the banks, today was not the day to try and do it.

Did the market "expect" the Fed to not raise rates on Wednesday, as reported by the Wall Street Journal? Fed fund futures contracts, as well as the banking sectors certainly didn't show any type of "expectation" for the FOMC to not raise 25 basis points.

Did Mr. Greenspan raise rates to avoid any type of "future blame?" Or was Mr. Greenspan and company (excluding Mr. Olson who voted against the 25 bp rate hike) trying to show some fiscal responsibility?

In Saturday's Market Monitor at OptionInvestor.com, I made some comments regarding fiscal policy where last week, President Bush outlined his plan for taxpayer's dollars to help fund some rebuilding of areas stricken by Hurricane Katrina.

My commentary wasn't to be considered "politician bashing," but perhaps lay some groundwork to what now faces President Bush, U.S. taxpayers, and yes.... the FOMC.

In brief, though President Bush draws on the entrepreneurial spirit of this great nation, to let the world know that New Orleans will rebuild, it will be the taxpayer that helps provide incentive to entrepreneurs. My point of contention with President Bush was that entrepreneurs usually don't need any type of incentive, if future risk/reward is favorable.

I will try and support my thoughts of how the MARKET might have taken President Bush's comments as a "negative."

For those that don't have access to my little "tirade" on Saturday, I disclosed that I have donated money to causes that should help human/animal relief efforts in Louisiana/Mississippi. I also voted for President Bush in the last two elections.

But from a "free market" perspective, should an incentive to business (tax breaks, outright funding) be given to rebuild business. If so, then precedence has been set.

Now market participants await the approach of Hurricane Rita as it tracks toward Houston, TX, where experts currently predict the storm to reach landfall Saturday morning.

U.S. Market Watch - 09/21/05 Close

Last week I profiled a bullish "option expiration manipulation" trade for Bank of America (BAC) $42.26 -1.72%, which was profitable and exceeded even my bullish expectations for the trade. The stock closes at a new 52-week low today, giving me some confirmation that Friday's gains were highly expiration manipulated, and not necessarily a market run with thought that the Fed would leave rates unchanged on Wednesday.

We haven't seen Friday's highs since early Monday morning. My analysis would be that the market wasn't front-running a pausing Fed yesterday, but was simply manipulated by the quarterly expiration.

I point to the 5 and 30-year yields. You can see from the % change that the curve has narrowed. On a pure net change basis the 5-year yield is up 4.9 basis points in the last 5-days, while the 30-year yield has risen a more modest 1.7 basis points. This is curve flattening and finds the S&P Banks Index (BIX.X) down another 2.23% in 5-days.

If there were ANY sign that the Fed is nearing the end of its rate hikes, it may well be the continued weakness in the Eaton Vance Ltd. Duration (AMEX:EVV) $17.56 -0.67%. Yes, its current SEC yield ($0.1261/share/month = $1.5132/share/year) looks attractive (SEC Yield based on $17.56 close = 8.617%), but this shorter-date maturity closed-end bond fund continues to decline (capital depreciation) as investors look to be discounting an end to the Fed's tightening policy versus the appearance of a nice dividend. What is happening here is what I warned traders/investors about this summer. A flattening yield curve, at what "should be" nearing the latter stages of Fed tightening brings greater risk to an investment vehicle like the EVV that offers a "high dividend yield" that is not in par with shorter-dated maturities. Either the dividend from EVV gets cut (we've seen some of that), or the price has to fall to equate to something equivalent to the 5-year Treasury yield.

As we look at the 5-day Net % changes, I'm going to draw your attention to the Defense Index (DFX.X) 271.00 -2.05% as action here may well be a market response to future budget cuts, if the government is to help fund the rebuilding of Katrina-stricken areas. Since President Bush's speech last week, this sector is down 3.17%. That's a decent decline for a sector whose components are somewhat reliant on federal dollars.

With speculation rising that some Federal budgets will come under the knife, in order to fund a projected $200 billion federal aid package toward Katrina, traders and investors might want to review investments that might be subject to some budget cuts.

Defense Index (DFX.X) / Lockheed Martin (LMT) montage

The DFX.X doesn't get a lot of attention from traders/investors, should budgets get cut at the federal level to fund the rebuilding of businesses that are adversely impacted by natural disasters, the DFX.X action may hint that some market participants are also factoring in some of the government's recently stated policy to give financial incentives to business. What the government gives to one area, it may have to cut in another.

Yes! National defense would most likely be one of the last places the government would look to cut budgets, but market psychology can become "when in doubt, get out!"

Lockheed Martin (LMT) was just a "top of mind" defense contractor, and it was only tonight that I note its violation of a rising 200-day SMA.

Friday's volume spike and downward price action does come at quarterly expiration. Could it be that some other market participants view federal funding for rebuilding a negative policy move from the White House? It may be a negative coincidence, but the President's actions are more "socialist" than that of "entrepreneurial."

Perhaps Mr. Greenspan and company were sending a message to Washington on Wednesday. You can borrow to fund what should be a market driven rebuilding, but it is going to cost you (and U.S. taxpayers) to fund it.

The Dollar Index (dx00y) was weak today, while gold, as depicted by the StreetTracks Gold Trust (GLD) $47.06 +1.79% ($47.06 roughly $470.60/ounce) rose sharply. It is notable that the night before Katrina hit, the GLD closed at $43.01. The GLD closed at a new 52-week high today.

My analysis here is that it might not be "FOMC policy" being critiqued by the markets, but policy out of Washington.

Let's take a quick look at some PnF charts. Let's start with a BIX.X chart on its conventional 5-point box scale. Just remember that Xs are up (demand outstripping supply) and Os are down (supply outstripping demand). For a column of O to be reversed into X, a meaningful 3-box reversal (in this case, 15-points) would be needed.

S&P Banks Index (BIX.X) - 5-point box size

Today's trade at 340 generates a second-consecutive "sell signal" as a column of O falls below a prior column of O. In my opinion, it isn't so much what the FOMC is doing, but what longer-dated maturities are doing (yields still relatively low) and the flattening of the yield curve. Banker's margins continue to get squeezed.

When the FOMC says it still doesn't see great risks to inflation, that keeps a bid in the longer-dated 30-year. Meanwhile, the tightening of the Fed has shorter-dated maturities "inching higher." Not good for banks.

The above chart is from www.dorseywright.com. Stockcharts.com's $BIX.X chart is funky as it doesn't reflect the adjustments made to this index back in June of 2002.

Here's the S&P 500 Index point and figure chart on its conventional 10-point box.

S&P 500 Index (SPX.X) - 10-point box

Today's action combined with recent selling from 1,240 does have the SPX seeing enough meaningful selling to reverse 3 boxes lower. It would take a trade at 1,200 for this index to generate a "sell signal." In early July, the SPX also gave a double bottom sell signal at 1,160, fell 1.7%, then reversed sharply higher. Trader's and investors might be able to use a 1.7% decline from 1,200 as a minimum assessment of downside risk.

I'm just seeing that tonight's S&P 500 Bullish % ($BPSPX) from wwww.stockcharts.com has fallen an additional 1.8% to 67.20% and has now reversed BACK DOWN to "bear alert status!" This is a DEFENSIVE signal from this broader market breadth indicator.

This should have BULLS taking a more defensive posture, and these internals do suggest the SPX will generate a "sell signal" at 1,200 as supply looks to be outstripping demand.
 

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

Burlington N. Santa F. - BNI - cls: 57.49 chg: +0.74 stop: 53.95

BNI continues to show amazing relative strength in spite of the market's weakness. The stock added 1.3$ on rising volume almost twice its daily average. If BNI does see any profit taking we'd look for the $56 level to act as support and readers could use a bounce from $56 as a new entry point. Our target is the $59.75-60.00 range.

Picked on September 20 at $56.75
Change since picked: + 0.74
Earnings Date 10/25/05 (unconfirmed)
Average Daily Volume: 2.0 million

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Quicksilver - KWK - close: 44.43 change: +0.75 stop: 39.99

Wall Street is growing more and more worried that hurricane Rita, which was just upgraded to a category five storm, will produce more shutdowns and more damage to the oil industry when it hits the Texas coastline. This gave the energy sector a lift and shares of KWK gapped higher before pulling back to almost fill the gap. We would still consider new bullish positions here. Our target is the $49.00-50.00 range.

Picked on September 20 at $43.68
Change since picked: + 0.75
Earnings Date 11/08/05 (unconfirmed)
Average Daily Volume: 844 thousand

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Mckesson - MCK - close: 45.61 chg: -0.08 stop: 44.85

MCK is holding up relatively well considering the weakness in the markets. However, the very short-term trend does look down and we expect the stock to retest support at the $45.00 level soon. At this time we would not suggest new bullish positions.

Picked on September 18 at $46.47
Change since picked: - 0.86
Earnings Date 10/20/05 (unconfirmed)
Average Daily Volume: 1.5 million

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Rowan Cos - RDC - close: 37.41 chg: +0.13 stop: 35.25

We see no changes from our previous update on RDC. The 36.50-37.00 range should offer new support. Our target is the $39.50-40.00 range.

Picked on September 14 at $36.31
Change since picked: + 1.10
Earnings Date 11/01/05 (unconfirmed)
Average Daily Volume: 2.1 million

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Ryerson Tull - RT - close: 21.13 change: +0.32 stop: 19.75

We see no change from our previous update. The $20.50-20.00 levels should act as support. Our target is the $23.50 level.

Picked on August 31 at $20.54
Change since picked: + 0.69
Earnings Date 07/28/05 (confirmed)
Average Daily Volume: 486 thousand

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Steel Dynamics - STLD - close: 32.56 chg: +0.24 stop: 31.49

STLD did manage to buck the trend on Wednesday and close in the green but we remain very cautious here. Shares are trading between the 50-dma and its 200-dma. We're not suggesting new plays. More conservative traders may want to tighten their stops.

Picked on September 18 at $33.91
Change since picked: - 1.35
Earnings Date 10/18/05 (unconfirmed)
Average Daily Volume: 1.2 million
 

Short Play Updates

Arctic Cat - ACAT - close: 20.17 chg: +0.09 stop: 21.11

ACAT did breakdown under the $20.00 mark intraday but the stock did not hit our trigger to short it at $19.79. We remain on the sidelines. If triggered our target is the $18.25-18.00 range.

Picked on September xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/20/05 (unconfirmed)
Average Daily Volume: 107 thousand

---

Anheuser Busch - BUD - cls: 44.19 chg: -0.73 stop: 46.25

BUD is finally starting to see some weakness with the stock falling under its simple 50-dma on heavy volume. The move helped produce a new MACD sell signal. The next level of support is the $44.00 mark. Our target is the $40.00 region before its October earnings report. We will not hold over BUD's earnings.

Picked on July 28 at $44.77
Change since picked: - 0.58
Earnings Date 10/26/05 (confirmed)
Average Daily Volume: 2.3 million

---

Cost Plus - CPWM - close: 18.89 change: -0.89 stop: 21.31

Retailers continue to lead the way lower. Shares of CPWM lost another 4.49% following Tuesday's breakdown under the $20.00 mark. Our target is the $16.50-16.00 range.

Picked on September 20 at $19.78
Change since picked: - 0.89
Earnings Date 11/17/05 (unconfirmed)
Average Daily Volume: 390 thousand

---

Nautilus Inc. - NLS - close: 22.41 chg: -0.88 stop: 25.11

NLS is also showing a lot of weakness. The stock lost 3.77% on relatively heavy volume. The next test is the $22.00 region, where it bounced last week. Our target is the $20.50-20.00 range.

Picked on September 14 at $23.80
Change since picked: - 1.39
Earnings Date 10/25/05 (unconfirmed)
Average Daily Volume: 363 thousand
 

Closed Long Plays

Idex Corp - IEX - close: 42.44 change: -1.28 stop: 41.99

Ouch! Today's follow through on yesterday's breakdown was painful. The stock lost almost three percent and cut through technical support at its 50-dma like soft butter. IEX should find additional support at the $42.00 level but we're not going to stick around to find out.

Picked on September 11 at $44.43
Change since picked: - 1.99
Earnings Date 10/20/05 (unconfirmed)
Average Daily Volume: 232 thousand

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Radian Group - RDN - close: 51.28 chg: -0.80 stop: 49.99

We are choosing to exit early here in RDN. The stock's weakness is not a surprise considering the sell-off in the markets. However, the breakdown under its simple 50-dma is a clue that shares are probably due for more weakness. We'll watch it for a bounce from the $50.00 level again.

Picked on September 07 at $51.10
Change since picked: + 0.18
Earnings Date 10/19/05 (unconfirmed)
Average Daily Volume: 518 thousand
 

Closed Short Plays

Wal-Mart - WMT - close: 42.49 change: -0.72 stop: 46.05

Target achieved. Wall Street continues to worry what hurricanes Katrina and Rita will do to consumer sentiment in addition to the impact that higher gas prices will have on consumer spending. This is pushing WMT to new three-year lows. Today's decline was enough to hit our target at $42.50. Aggressive traders might want to consider tightening their stops and letting WMT run but keep in mind the stock is getting very oversold and due for an oversold bounce (which could happen any day now).

Picked on August 24 at $45.95
Change since picked: - 3.46
Earnings Date 08/16/05 (confirmed)
Average Daily Volume: 10.2 million

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YUM Brands - YUM - close: 48.31 change: -1.19 stop: 51.01

Target achieved. The market's sell-off hit the hardest in retailers and restaurants. Shares of YUM dipped to $47.91 and filled the gap from early September. Our target was the $48.00 level. More aggressive traders may want to let the stock run as the MACD is nearing a new sell signal.

Picked on September 13 at $49.98
Change since picked: - 1.67
Earnings Date 10/12/05 (unconfirmed)
Average Daily Volume: 1.2 million
 

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

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