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Daily Newsletter, Wednesday, 09/28/2005

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Table of Contents

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

Market Wrap

Capacity Constraint DeLayed End of Quarter Bounce

The major indices finished mixed to higher where an early morning bid on the heels of last night's last-minute tentative agreement between the Canadian Auto Workers (CAW) and General Motors (GM) $30.84 +0.22% had the union agreeing to modest wage increases of roughly 1.5% in the first year, followed by 1% gains in each of the next two years. The CAW also agreed to a pension increase of just $6.80 per month over the life of the contract for retired workers.

The news was viewed as a positive by investors because of GM's need to cut their plant capacity by as much as 20% due to declining market share.

General Motors (GM) popped higher at the open and traded a morning high of $31.54, but those gains didn't last long as parts supplier to the "Big 3" (GM, Ford (F) $9.95 +1.01% and DaimlerChrysler (DCX) $54.83 +3.78%) had Delphi's (DPH) $2.65 -3.63% CEO once again warning that unless GM and the United Auto Workers (UAW), which represents Delphi's workers, helps the company to drastically cut costs, then Delphi is prepared to file bankruptcy at any time.

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Delphi, which was spun-off from GM, refused comment on rumors that it has asked GM for a bailout package worth $6 billion to help it avoid bankruptcy.

DaimlerChrysler's (DCX) shares outperformed on the session on news that the automaker is planning to cut more than 8,000 jobs at its Mercedes division in Germany. This would be 3,000 more than the 5,000 previously expected.

Stock futures did trade higher overnight on the GM/CAW news and early morning economic data had orders for durable goods showing a sharp 3.3% rise to $210.82 billion in August, a resumption in growth after July's revised plunge of 5.3%. August's increase was much stronger than the 0.5% rise expected by economists. The rise in orders was broad and showed higher capital spending. Orders for non-defense capital goods excluding aircraft increased 3.6% during August after falling 3.3% in July.

Then at 10:30 AM EDT, the EIA reported its weekly inventory figures. The agency said crude oil inventories fell for a fifth-straight week and were down 2.4 million barrels for the week ended September 23. Unleaded gasoline stockpiles rose for a third-straight week by 4.4 million barrels, while distillate inventories fell by 573,000 barrels.

While the inventory figures found an immediate mixed trade from the energy futures markets, it was the decline in operable capacity among the nation's refiners that drew a bullish bid in the various energy contracts.

As I was anxiously awaiting last night's news out of the Canadian Auto Workers talks with GM, there was a continuing roll of press releases being issued by energy producers and refiners as they assessed damage from Hurricane Katrina and Rita.

The EIA also tracks changes in operable refiner capacity. While operable capacity fell 10.22% for the week ended September 2 (Katrina), this week's data showed a 4.06% decline in operable capacity from Rita.

All energy futures settled sharply higher with November Unleaded Gasoline futures (hu05x) surging as high as $2.34 intra-day, to settle up $0.08, or 4.03%. Helping exacerbate the move was today's October contract settlement, where traders seemed pressed to cover any obligations instead of risking delivery. November Heating Oil (ho05x) settled up $0.074, or 3.56% at $2.168, while November Crude Oil (cl05x) settled higher by $1.28, or 1.97% at $66.35.

November Natural Gas futures (ng05x) continued to surge and settled up $0.98, or 7.47% at $14.10.

U.S. Market Watch - 09/28/05 Close

On a week-to-week basis, November Crude Oil is relatively unchanged, but the refined products such as unleaded gas and heating oil suggest market participants remain concerned about refiner's ability to get back online as hurricane damage continues to be assessed.

Gulf of Mexico production concerns also show up in the natural gas complex as winter approaches.

Kerr McGee (KMG) $96.89 +1.35% is perhaps a good example of just how "forgiving" market participants are for energy-related stocks. Today, KMG warned that it was lowering its Q3 and Q4 production estimates due to recent hurricane activity. The producer/explorer said it now anticipates a reduction in production of 1.2 million barrels of oil equivalent in the third quarter, and Q4 production was seen down by 1.7 million barrels of oil equivalent a day. Kerr-McGee expected a reduction of 3% in its annual Gulf of Mexico production volumes, but "with two category five hurricanes in one month we expect to exceed this allowance," said Buterbaugh.

The company did say it expects to restore 60,000 barrels of oil equivalent a day, or close to 50% of its net pre-Katrina production, by the end of the week.

The S&P Banks Index (BIX.X) 333.02 -1.46% was notably weak today and has sported a 1.8% decline on a Wednesday-to-Wednesday close. While a 10.4 basis point rise in the shorter-dated 5-year yield ($FVX.X) versus a more modest 3.1 basis point rise in the longer-dated 30-year yield ($TYX.X) over the past week would represent yield curve flattening, that's wasn't the only "bad news," this sector had to deal with.

Mortgage lender Fannie Mae (FNM) $41.71 -10.68% plunged $4.99 per share by the close, with the bulk of today's decline coming in the final 90-minutes of trade, on unconfirmed reports that investigators found new accounting violations.

A spokeswoman for the Office of Federal Housing Enterprise Oversight, which overseas Fannie Mae's financial soundness, would not confirm or deny reports that extensive additional problems had been found.

For many mortgage companies, commercial banks, savings and loans as well as credit unions, news of further accounting problems at Fannie Mae creates a potential "capacity constraint." Many mortgage loan originators count on Fannie Mae to facilitate the flow of mortgage capital.

Freddie Mac (FRE) $54.60 -1.97% also traded weak and closed at a 52-week low.

Equity markets were roiled late in the session on news that a Texas grand jury charged Rep. Tom DeLay and two political associates with conspiracy in a campaign finance scheme, forcing the House majority leader to temporarily relinquish his post. DeLay says that charges leveled against him are an act of "blatant political partisanship" and that he is innocent of all charges. Republicans selected Rep. Roy Blunt (R., Mo.), the current Republican whip to fill DeLay's role.

Today's "DeLay news" becomes a bit unnerving to investors as the nation tries to deal with the aftermath of two powerful hurricanes. While Democrats may be guilty of political partisanship, politicians know how to "strike while the iron is hot."

Yes, President Bush's poll numbers are at their lows, and with congressional Republican leaders saying they will try and reduce funding to other federal programs to help cover the cost (estimated at $250 billion) of Hurricanes Katrina and Rita, the opportunity for Democrats to unseat some Republicans in the upcoming elections is prime for the taking. Make no mistake about it. If the proverbial shoe was on the other foot, I believe Republicans would be trying to do the same thing to Democrats.

It is said that the market hates uncertainty and the "DeLay disruption" looms as a negative as the nation's politicians try and sort out what is to be done in hurricane-ravaged portions of the south are to receive federal tax dollars to rebuild.

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

Anytime I see a chart where the analyst starts rolling out to weekly, or monthly intervals to find support, or resistance, it is usually a sign that building trend is taking hold. The above chart of the BIX.X is just that. A weekly interval chart as the BIX.X breaks to a new 52-week low. Next support for the BIX.X looks to be the 322.50-327.00 level, and this week's highs were capped quickly at the 343 level.

Networking Index (NWX.X) - Weekly Intervals

Today's durable goods report revealed a 5.5% rise in orders for computers and other electronic products. I do think some of the networker's gains have come on the anticipated spending brought on by repairing infrastructure from hurricane damage in the south.

The Semiconductor Index (SOX.X) has been "on fire" since April, but has cooled off with a 1.99% decline the past four weeks and we could well be seeing some rotation to the networking side of things. I'm a bit skeptical of the networkers' relative strength and 4.97% gain over the past 5-days, as it is some of the smaller-priced names doing the bulk of the work. I can't say for certain that institutions would be marking things up into the quarter by targeting the smaller-priced names, but the "big gun" in the group, Cisco Systems (CSCO) $17.92 +1.12% is battling both its 50-day SMA and 200-day SMA at $18.25 and $18.40 respectively and shows a more modest 0.39% gain for the past 5-days and 2.34% gain for the past 20-days.

Networking Index (NWX.X) Components - Sorted by 5-day % gains

Traders talk about "end of quarter marking up," and a quick look at the NWX.X components shows some of the "smaller cap" and lower priced names providing the bulk of the lift.
 

New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
None ENZ

New Long Plays

None today.
 

New Short Plays

Enzo Biochem - ENZ - close: 14.80 chg: -0.20 stop: 15.51

Company Description:
Enzo Biochem is a leading life sciences and biotechnology company focused on harnessing genetic processes to develop research tools, diagnostics and therapeutics and provides reference laboratory services to the medical community. Founded in 1976, we have concentrated on the development of enabling technologies in the areas of gene regulation and gene modification. (source: company press release or website)

Why We Like It:
This is both a play on relative weakness and a bearish technical pattern. ENZ has been sliding under a series of lower highs for weeks now and the recent slide has been powered by above average volume. ENZ is also producing what looks like a bearish head-and-shoulders pattern with a slanting neckline. Today's decline would suggest that ENZ has broken that neckline but we want to see some confirmation. The weekly chart shows a very big pennant shape, which is normally neutral, but we want to confirm that ENZ is breaking down under that longer-term trendline of support (on the bottom part of that pennant pattern. We are suggesting that readers use a trigger at $14.49 to open bearish positions. Such a move should confirm the breakdown in addition to falling below potential support near its late August lows. The two biggest risks are earnings and a short squeeze. We cannot confirm the earnings date but it looks like October 14th. That doesn't give us much time and we do not want to hold over the report. Secondly, the latest data puts short interest at 10.2% of its 24.4 million share float. The potential for a short squeeze is definitely there! If we are triggered we'll start with a stop loss at $15.51. The P&F chart currently points to an $11.50 target. We are going to target the $12.25-12.00 range.

Picked on September xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/14/05 (unconfirmed)
Average Daily Volume: 90 thousand
 

Play Updates

Updates On Latest Picks

Long Play Updates

Burlington N. Santa F. - BNI - cls: 58.35 chg: +1.29 stop: 54.90

The transportation sector managed to bounce higher today in spite of rising energy costs. Of course rising oil just makes the rail roads look more appetizing compared to trucks and air. This helped push BNI to a 2.2% gain today. Our target is the $59.75-60.00 range.

Picked on September 20 at $56.75
Change since picked: + 1.60
Earnings Date 10/25/05 (unconfirmed)
Average Daily Volume: 2.0 million

---

Quicksilver - KWK - close: 45.33 change: +0.70 stop: 39.99

The huge rally in natural gas futures was one of the major headlines today. Wall Street is worried that a cold winter will push this commodity even higher. We expected natural gas prices to rise, which is why we added KWK to the list. Shares of KWK climbed 1.56% while challenging the $46.00 level. Our target is the $49-50 range.

Picked on September 20 at $43.68
Change since picked: + 1.65
Earnings Date 11/08/05 (unconfirmed)
Average Daily Volume: 844 thousand

---

Mckesson - MCK - close: 47.18 chg: +1.17 stop: 44.85

Bam! We expected MCK's recent consolidation to produce a breakout move and today was it. The stock spiked higher at the open and closed near its highs for the day with volume coming in well above its average. If shares pull back at all we would look for the $46.50 level to act as support. Our target is the $49.75-50.00 range.

Picked on September 18 at $46.47
Change since picked: + 0.71
Earnings Date 11/08/05 (unconfirmed)
Average Daily Volume: 1.5 million

---

Motorola - MOT - close: 22.15 change: -0.22 stop: 21.78

This is it. MOT is down three days in a row and nearing what should be support at the $22.00 level. If we don't see a bounce soon readers better be prepared to exit! Traders may want to adjust their stops to be under the simple 50-dma, which is currently at $2.75.

Picked on September 25 at $22.79
Change since picked: - 0.66
Earnings Date 10/10/05 (unconfirmed)
Average Daily Volume: 19.2 million
 

Short Play Updates

Arctic Cat - ACAT - close: 20.29 chg: +0.13 stop: 21.11

There seems to be quite a tug-of-war in shares of ACAT in the $19.80-20.50 range. Volume has been above average for the last several sessions. Right now we would expect shares to turn lower under the $20.50 level but we would not suggest new bearish positions until ACAT traded under $19.75 again. If we don't see some downward momentum soon we will exit early. Our target is the $18.25-18.00 range.

Picked on September 23 at $19.79
Change since picked: + 0.50
Earnings Date 10/20/05 (unconfirmed)
Average Daily Volume: 107 thousand

---

Anheuser Busch - BUD - cls: 43.19 chg: -0.45 stop: 45.65*new*

BUD continues to produce some downward momentum following the recent breakdown under support near the $44 level. Our target is the $40 region before its October earnings report but our readers may want to take some early profits off the table around $42.50. We are lowering the stop loss to $45.65 near the 100-dma.

Picked on July 28 at $44.77
Change since picked: - 1.58
Earnings Date 10/26/05 (confirmed)
Average Daily Volume: 2.3 million

---

Cogent Inc. - COGT - close: 24.20 chg: +0.49 stop: 26.51*new*

COGT produced a bit of an oversold bounce today. There may be some more follow through tomorrow. We're not suggesting new plays but readers can watch for a failed rally under $26.00 as a new entry point. We are lowering the stop loss to $26.51. Our target is the $22.50-22.00 range.

Picked on September 22 at $25.21
Change since picked: - 1.01
Earnings Date 10/25/05 (unconfirmed)
Average Daily Volume: 874 thousand

---

Cost Plus - CPWM - close: 18.43 change: -0.68 stop: 20.31 *new*

Wednesday was another tough day for retail stocks. The RLX index lost 1.3% but shares of CPWM fell more than 3.5% on rising volume that came in well above its daily average. The stock also hit a new four-year low. We are going to lower the stop loss to $20.31. Our target is the $16.50-16.00 range.

Picked on September 20 at $19.78
Change since picked: - 1.35
Earnings Date 11/17/05 (unconfirmed)
Average Daily Volume: 390 thousand

---

99c Only Stores - NDN - close: 9.02 chg: -0.38 stop: 10.01*new*

NDN is off to a good start. A rough day for retailers was no match for NDN, who lead the way lower with a 4% decline on above average volume. NDN has closed at new seven-year lows and under the 1999 low near $9.37. We are lowering the stop loss to $10.01. More conservative traders might be able to get away with a stop near $9.75. Our target is the $8.60-8.50 range.

Picked on September 27 at $ 9.40
Change since picked: - 0.38
Earnings Date 10/20/05 (unconfirmed)
Average Daily Volume: 581 thousand

---

Nautilus Inc. - NLS - close: 22.20 chg: -0.00 stop: 24.11 *new*

Hmm... shares of NLS closed unchanged today. This "relative" strength on a day the retail sector fell could be a warning sign. NLS has been battling with support near $22.00. Given today's action we would not be surprised to see a bounce back to its simple 10-dma near $22.85. More conservative traders may want to tighten their stops or take some money off the table right here. We are going to lower our stop loss to $24.11. Our target is the $20.50-20.00 range.

Picked on September 14 at $23.80
Change since picked: - 1.60
Earnings Date 10/25/05 (unconfirmed)
Average Daily Volume: 363 thousand
 

Closed Long Plays

Southern Peru Copper - PCU - cls: 54.83 chg: +1.88 stop: 49.25

Target achieved. Copper producing companies like PD, FCX and PCU all saw their stocks surge higher today as copper prices neared multi-year highs around $1.75 a pound. Our target was the $54.85-55.00 range and PCU hit the bottom edge of that range today. Readers should be aware that the $55 level looks like resistance but there is no way to know if it will stall the rally in this stock. We will keep an eye on PCU and FCX for future entry points.

Picked on September 25 at $50.92
Change since picked: + 3.91
Earnings Date 10/17/05 (unconfirmed)
Average Daily Volume: 765 thousand
 

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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