Option Investor

Daily Newsletter, Wednesday, 10/26/2005

Printer friendly version

Table of Contents

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

Market Wrap

Bizarre Badminton

For a couple of weeks, traders have been engaged in a game of bizarre badminton, fielding a barrage of earnings results, some wrapped up in colorful shuttlecocks and some coming in the form of bullets or spitballs. Traders have also been batting away disturbing rumors about indictments of White House parties and a possible hedge fund failure. Those hedge fund rumors are being lobbed toward traders all the way from European forex markets, and although nearly invisible to U.S. traders and still unproven, they may still be contributing to that need to charge back and forth across the court. The missiles come at traders in a fast-and-furious pace, as traders race from one side of the court to the other, trying to dodge the most unpleasant of the missiles and keep the good ones afloat.


Profit from the Q's

The once a week candlestick chart of the Nasdaq 100 (QQQQ) reveals simple yet powerful strategies for profiting from the stock market - whether down or up!

Click here for your complimentary report:


The missiles related to what is now being termed Leakgate by some reporters flew thickly pre-market. Rumors included speculation that indictments would be handed down in the two-year criminal investigation in the leak of a CIA officer's identity as early as today, but the grand jury adjourned for the day without those indictments being handed down or at least made public, if they were. Some speculated that the indictments would be levied against I. "Scooter" Libby, Vice President's Cheney's chief of staff, and Karl Rove, President Bush's political adviser, among others. Wilder rumors, swirling for the last week, speculated that the indictments could reach higher. By yesterday, some articles were noting reports that Libby first learned the identity of the CIA officer from Cheney, with those speculations conflicting with other descriptions of the flow of information.

Traders tire of charging back and forth. For the past two days, some indices have stalled at resistance.

Annotated Daily Chart of the SPX:

Annotated Daily Chart of the Dow:

Annotated Daily Chart of the Nasdaq:

Annotated Weekly Chart of the SOX:

The indecision about the next direction intraday was apparent on many of those charts, but the overall view remains a bearish one until proven otherwise. The charts show indices retesting broken support to see if it's holding as resistance. Until it stops holding, the assumption is that there will be more downturns through the consolidation formations or, in the SOX, more churning between important averages.

The missiles, both pleasant and otherwise, continued being hurled by other entities. Before-the-open broker action included Deutsche Bank and Citigroup downgrades of Amazon (AMZN, down 13.92 percent), to a hold at Deutsche Bank and a sell at Citigroup. Other broker action included a Prudential trimming of Temple-Inland's (TIN, down 0.33 percent) rating to a neutral and a Merrill Lynch downgrade of ITT (down 3.46 percent) on valuation concerns. Citigroup upgraded International Paper (IP, up 2.42 percent) to buy from a hold rating.

In addition, Piper Jaffray cut its estimates and price target on Research in Motion (RIMM, up 0.92 percent). The firm thought Nokia would gain market share and was worried about the possibility of BlackBerry sales being interrupted. RIMM's attempt to dodge unpleasant missiles failed, with later news stating that the Supreme Court would not block the decision to shut down BlackBerry sales, but that RIMM could file a second request with the court.

Other news included Guidant's (GDT, down 2.25 percent) announcement that the U.S. Attorney's offices in Boston and Minneapolis had subpoenaed documents related to pacemakers, ICDs, leads and other similar products. GDT wasn't alone. St. Jude Medical (STJ, down 0.75 percent) and Medtronic (MDT, down 0.23 percent) also received subpoenas, and all were to decline after the open. Johnson & Johnson (JNJ, down 0.73 percent) suffered along with them because of its pending acquisition of GDT.

Wal-Mart Stores (WMT, up 0.19 percent) was to hold an analyst meeting later in the day, so was already in focus, but The New York Times also unveiled purported suggestions from an executive vice president for trimming spending on healthcare and other benefits, including dissuading unhealthy people from working for the company and other similarly disturbing proposals.

Lockheed Martin (LMT, down 1.16 percent) was also the subject of a newspaper report, this one speculating that the company was considering a buyout bid of Computer Sciences Corp. (CSC, up 1.29 percent).

Before-the-bell earnings bombarded traders with missiles to be dodged or batted back. They included third-quarter earnings results from Boeing (BA, down 1.87 percent) that were deemed disappointing by some but were confusing to decipher since the reported number included several one-time items. Profit more than doubled in the third quarter. The company earned $1.01 billion or $1.26 a share against expectations of $0.80 a share, but the earnings included a $0.62 a share tax benefit and a hit of $0.25-0.30 a share from the machinists' strike. The year-ago earnings had been $0.56 a share on earnings of $456 million. Revenue was lower, dropping to $12.63 billion from the previous quarter's $13.15 billion. The company raised full-year earnings estimates for 2005 and 2006 but warned that full-year sales for those years would not meet estimates.

A Taser (TASR, down 0.44 percent) representative fielded questions, as hard as bullets, about its earnings report when interviewed on CNBC this afternoon. The former momentum darling saw declining sales after questions about the safety of its stun guns. Although the TASR representative said that global opportunities existed, including in the U.K., where every police officer was to be equipped with a stun gun, but that didn't impress investors who dropped the stock. The gross margin widened, the company declared, and one wrongful-death suit has been dropped. However, quarterly income was less than $0.01 a share, down from last quarter's $0.11 a share. Net sales dropped 38 percent from the previous quarter. CNBC commentators also questioned the company representative about insider sales of the stock near the top, but the executive countered with the information that insiders had been selling the stock all the way up, too.

Utility company Exelon (EXC, down 1.25 percent) disappointed, pressuring the entire sector. Like BA's, the comparisons with expectations proved difficult. The disappointment stemmed at least in part from the company's full-year EPS estimate of $3.00-3.15 against expectations for an EPS of $3.13. The midpoint of that range proved lower than the expected number.

Another much-watched release came from ConocoPhillips (COP, up 0.36 percent), with the company saying that third-quarter profit jumped 89 percent. Earnings were $2.68 a share, beating expectations of $2.57 a share and also topping the year-ago earnings of $1.43 a share. Revenue rose 43 percent. The strong commodity price environment helped offset the impact from Katrina, Rita and Dennis, the company's chairman and chief executive stated. The company's Lake Charles, LA refinery should return to normal operations by next week, the company added.

In a climate when this company and two others in the sector report this week and the inflationary impact of higher gasoline and other energy costs are hotly debated, the weekly crude inventories release assumed some importance. At about 10:30, the Energy Department announced that crude inventories rose 4.4 million barrels and gasoline inventories climbed 200,000 barrels, but that distillates fell 1.6 million barrels. Gasoline and distillate inventories were reportedly in the lower end of the average range for this season while crude was in the upper range for the season. This could perhaps be reflecting the impact of reduced refining capacity.

Crude reacted by reaching down to test $61.50 support and then climbing, but eventually dropping all the way to neckline support on a potential head-and-shoulder formation.

Annotated Daily Chart of Crude for December Delivery:

Traders must bat various ideas back and forth concerning a possible decline in crude prices. Is the decline due to softening demand as economies slow or due to ramped-up production as refineries come on line again? Is the decline a seasonal effect? At any rate, that potential H&S remains a potential one only and the potential violation of the 30-week sma on a weekly closing basis also remains only a possibility. Crude costs are as close to a bounce point as they are to a failure.

The barrage of information showed that traders occasionally batted some nice shuttlecocks to the ground and kept afloat some spitballs, although sometimes they fielded those missiles as expected. Commentators liked the pre-market earnings reports from Monster Worldwide (MNST, up 0.26 percent), Sprint Nextel (S, down 0.65 percent) and Wellpoint (WLP, down 4.37 percent), but WLP and sector peer Cardinal Health (CAH, down 0.58 percent) were to be punished because of their in-line guidance. Other pre-market releases included Lucent's (LU, down 0.18 percent) report of $0.08 earnings versus last year's $0.23. LU had been expected to earn only $0.05 according to some sources. Net income fell 69 percent from the year-earlier period. Other upside reports included L-3 Communications' (LLL, down 2.28 percent) report of $1.11 a share against expectations of $1.09. Later, investors were to focus on its in-line guidance, however, sending it lower.

Flextronics (FLEX, down 2.9 percent) reported a second-quarter loss or breakeven per-share earnings, compared to a profit of $0.16 a share and higher revenue in the year-ago period. If one-time charges were excluded, FLEX earned $0.17 a share against expectations of $0.19 and against higher revenue than the company reported. Starwood Hotels & Resorts Worldwide (HOT, down 1.26 percent) reported falling net profit for the third quarter and earnings of $0.17 a share. Excluding some tax expenses related to repatriating earnings and its 1998 sale of ITT World Directories, the company would have beat analysts' expectations of $0.52 a share, the company claimed, and would have reported $0.58 a share. Together with IP's upgrade, Air Products' (ADP, up 2.44 percent) earnings results, beating expectations, were to help the materials sector post gains in early trading.

What should be apparent from those releases and the subsequent drops or bounces is that some releases deemed encouraging in the pre-market session were dropped to the court by the close. The same was true of some releases deemed disappointing. The perverse badminton game continued.

The day was light on economic releases, at least giving traders a little relief on that front. Economic numbers included the Mortgage Bankers Association's mortgage applications figures for the week ending October 21, with that group of numbers released at 7:00 EST. The Market Composite Index fell 7.9 percent from the previous week's number, with that figure measuring mortgage loan application volume. The seasonally-adjusted Purchase Index dropped 7.4 percent; the Refinance Index, 8.5 percent; the Conventional Index, 8.1 percent and the Government Index, 4.9 percent. The four-week moving average of the Purchase Index dropped 0.9 percent; the seasonally adjusted Market Index, 1.5 percent and Refinance Index, 2.3 percent. The refi share of mortgage activity also dropped. The average contract interest rate for the 30-year fixed-rate mortgage fell to 6.06 from the previous 6.09 percent and points decreased, too.

President Bush was playing his own game of bizarre badminton, reputed by some to be making a number of gambits to deflect attention from the possibility of pending indictments, as yet just rumored. Some suspected that his naming of Greenspan's successor was one of those gambits, coming earlier than some had anticipated. Today, as survey results revealed that 55 percent of Americans disapprove of his policies, some expressed disappointment in the lack of concrete steps to decrease the deficit in today's address to The Economic Club. While reassuring listeners that the U.S. economy was strong and resilient, President Bush did call for Congress to "push the envelope" on spending cuts but also asked that his tax cuts be made permanent. He expressed disappointment that more Democrats have opposed free-trade measures he wants. This reporting of various theories in no way implies a political viewpoint, but was only part of the trading environment, and so a necessary part of this report. The speculations, some believe, contributed to unease in the markets, although there appeared to be no discernable direct correlation between anything said today and a particular market turning point.

Speaking before the Center for National policy, U.S. Treasury Secretary Snow also called on Congress today to continue the tax cuts about to expire and to control spending. He called for a simpler tax code that was more pro-growth.

After-hours earnings reports continued to hurl missiles into the air. Applied Micro Circuits Corp. (AMCC) eased lower in after hours, and Pulte Homes (PHM) dropped more than a dollar as of this reporting, but no earnings reports were showing up in news at the time of this report, so it was unclear whether they were reacting to earnings reports or just in advance of those reports. Applebee's International (APPB) eased after its report showed that quarterly profit dropped. Biogen (BIIB) reported lower earnings but higher revenue and sales for the third quarter, and was dropping in after-hours trading. As reported by Jeff Bailey on OptionInvestor's Market Monitor, after-hours reporting companies included LSI Logic (LSI), dropping after its report; Sallie Mae (SLM), steady; Digital River (DRIV), dropping after its report; Callaway Golf (ELY), higher in after-hours; WellChoice (WC), steady; Raymond James (RJF), higher after its report and Wright Express (WXS), higher.

Many more were due, and Thursday's schedule shows no letup in the barrage of missiles hurled at traders. Thursday's reporting companies include AET, ALA, AEP, APA, ARLOY.PK, AZN, ABX, BEBE, BDK, BR, BOBJ, COG, CAJ, CRA, CRDN, CCE, CGI, CAM, CFC, DENN, EMN, ELN, EMCI, XOM, GTW, GP, GSK, HMC, IMCL, IDC, KLAC, LTR, MSO, MFE, MSFT, NCR, NWL, NXTP, PHS, PXR, PD, RTN, RSAS, SBP, SAPE, SMI, SWIR, SKYW, SNE, SWN, STA, SPF, SU, TRA, TCC, UNP, UHS, VZ, VMC, WASH, WMI, WEN, XMSR and YELL, just to name a small percentage of reporting companies.

Thursday's economic releases begin with the usual 8:30 release of jobless claims, with September Durable Goods Orders, Help-Wanted Index and New Home Sales following at 10:00 am.

Eventually traders will be able to see through that barrage of missiles, better able to decide whether to keep playing or leave the court until a better season, but that may not happen until Friday. For now, despite the alternating bullish and bearish days, what we're seeing is volatile consolidation after support was broken. Until key levels are broken to the upside, pointed out on the charts above, but including the daily 72-ema's on some charts, the best plan may continue to be selling tests of resistance and taking at least partial profits as the bottoms of the consolidation zones. An opportunity to sell a rollover beneath the SPX's 200-sma was offered several times this week. I'm not sure it will be tomorrow, but if there's an early bounce, watch for rollovers beneath 1999-1203 for new bearish entries. Decide first if you want to enter any new trades ahead of Friday's important release, however, as that could change the court rules in this bizarre badminton game.

New Plays

Most Recent Plays

New Long Plays

None today.

New Short Plays

Educ. Mgmt. Corp. - EDMC - close: 29.73 chg: -0.72 stop: 31.05

Company Description:
Education Management Corporation is among the largest providers of private post-secondary education in North America, based on student enrollment and revenue. EDMC has 71 primary campus locations in 24 states and two Canadian provinces. EDMC's education institutions offer a broad range of academic programs concentrated in the media arts, design, fashion, culinary arts, behavioral sciences, health sciences, education, information technology, legal studies and business fields, culminating in the award of associate's through doctoral degrees. EDMC has provided career-oriented education for over 40 years. (source: company press release or website)

Why We Like It:
EDMC peaked under long-term resistance at the $36.00 level back in the July-August period. Since then the stock has slowly melted lower under a trend of lower highs and lower lows. The P&F chart is bearish and points to a $23.00 price target. We believe that EDMC might be on the verge of breaking down from its two-week trading range between $29.80-31.00. We'll suggest shorts in the stock under the $30.00 level and target a decline to the $27.75 mark. Our time frame is pretty short. We do not want to hold over the company's earnings report on November 8th. If we do not see some downward momentum in the next couple of days we'll exit this play early. The biggest risk to shorting EDMC now would be a bullish earnings surprise from one of its peers. Dates to watch out for are October 28th (COCO reports earnings), November 2nd (CECO reports earnings), and October 27th (STRA reports earnings). STRA reports earnings tomorrow morning before the opening bell. If they surprise to the upside we would step back and just watch how EDMC reacts to the news for the first 60-90 minutes before considering any positions. Remember, we only want to initiate a short position in EDMC is the stock is trading under $30.00. Alternatively, if STRA bombs its earnings report you may not want to chase any big moves (more than 3%) in shares of EDMC. As another alternative conservative traders may actually want to use a trigger at $29.49 to open the play.

Picked on October 26 at $29.73
Change since picked: + 0.00
Earnings Date 11/08/05 (confirmed)
Average Daily Volume: 493 thousand


Netflix - NFLX - close: 24.98 change: -2.43 stop: 25.01

Company Description:
Netflix is the world's largest online movie rental service, providing more than three million subscribers access to over 50,000 DVD titles. Under the company's most popular program, for $17.99 a month, Netflix subscribers rent as many DVDs as they want and keep them as long as they want, with three movies out at a time. There are no due dates, no late fees and no shipping fees. DVDs are delivered for free by the USPS from regional shipping centers located throughout the United States. Netflix can reach more than 90 percent of its subscribers with generally one business-day delivery. Netflix offers personalized movie recommendations to its members and has more than 1 billion movie ratings. (source: company press release or website)

Why We Like It:
NFLX is a high-risk, speculative play. The stock has just left a trail of dead and injured bears in its wake since shares bottomed back in March of 2005. That's why we suggest major caution considering a short on the stock. The stock peaked several days ago just before the company reported earnings. NFLX beat estimates by 5 cents but revenues came a bit under analysts' expectations. NFLX offered more good news by raising its subscriber estimates for the fourth quarter. That was a few days ago. Oddly enough shares of NFLX lost almost 9% today on very strong volume with no news. Shares dipped intraday to just under its simple 50-dma, which has been support and the bottom of its rising channel for the past several months. We want to speculate that a drop may be coming. Weekly technical indicators have turned or are turning bearish. Some of the daily indicators have turned bearish. We'll suggest a trigger at $23.74 to open the play. Only if NFLX trades at $23.74 or lower would be short the stock. If we are triggered we'll target a decline toward the 100-dma (21.00-20.85 is our target range). One of the biggest risk here is a short squeeze. The latest data puts short interest at about 30 percent of NFLX's 53.6 million shares. Plus, there is another risk. Rival Blockbuster (BBI) is due to report earnings on November 1st. What BBI has to say about the past quarter and its future guidance will very likely push shares of NFLX either higher or lower depending on BBI's outlook. There is a definite risk here but we're going to try and limit our risk to a stop loss at $25.01.

Picked on October xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 02/16/05 (unconfirmed)
Average Daily Volume: 1.6 million

Play Updates

Updates On Latest Picks


Long Play Updates

Burlington Coat - BCF - close: 38.00 chg: -0.33 stop: 36.45

The action in the major market averages today is starting to worry us. The market looks poised to turn lower again (at least short-term) and in that environment we would not be starting new bullish plays. BCF dipped to technical support at its 50-dma today. The bad news is that the bounce wasn't very strong. We are not suggesting new plays at the moment and more conservative traders will want to keep a close eye on their stops! Our eight week target is the $43.50-44.00 range.

Picked on October 24 at $38.90
Change since picked: - 0.90
Earnings Date 10/06/05 (confirmed)
Average Daily Volume: 165 thousand


HR Block - HRB - close: 24.24 change: +0.22 stop: 22.99

The move over $24.25 today looks like a new bullish entry point. However, we are growing more concerned over the major averages. We would not initiate new bullish positions in HRB unless the major averages were positive. Our target for HRB is the simple 200-dma near $25.80. Our time frame is just less than four weeks. We plan to exit ahead of the company's earnings report.

Picked on October 23 at $24.09
Change since picked: + 0.15
Earnings Date 11/17/05 (confirmed)
Average Daily Volume: 2.1 million


Network Appl. - NTAP - close: 25.74 chg: -0.35 stop: 24.49

Heads up! The short-term bullish rally in NTAP has failed. The stock lost 1.3% and broken down under its 10-dma and 100-dma. We would expect shares of NTAP to retest support at the $25.00 level. We are not suggesting new plays at this time. Readers can watch for a bounce from $25 as a new bullish entry point but enter cautiously.

Picked on October 16 at $25.12
Change since picked: + 0.62
Earnings Date 11/16/05 (unconfirmed)
Average Daily Volume: 5.9 million


Outback Stkhse - OSI - close: 36.75 chg: -0.50 stop: 34.99

Yesterday we said that if the major averages turned lower we'd expect OSI to test the $36.75 region. That is exactly what has happened. It didn't help the restaurants today that PFCB missed its earnings estimates and guided lower. The bad news is that the major averages don't look healthy. If the DJIA and S&P 500 continue lower we'd expect OSI to dip back toward the $36 region. Readers can watch for a bounce from $36.00 as a new bullish entry point.

Picked on October 23 at $37.21
Change since picked: - 0.46
Earnings Date 10/20/05 (confirmed)
Average Daily Volume: 819 thousand

Short Play Updates

Elkcorp - ELK - close: 31.25 chg: -0.58 stop: 32.75

ELK continues to consolidate sideways between $31 and $33 but the short-term trend looks bearish. We are suggesting a trigger to short the stock at $30.49. More conservative traders may want to wait for a decline under $30.00 before initiating positions. Our target will be the $27.00 level.

Picked on October xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/21/05 (confirmed)
Average Daily Volume: 205 thousand


Sanderson Farms - SAFM - close: 33.97 chg: -0.34 stop: 37.51

Worries over avian flu continue to haunt shares of SAFM and the stock lost another percent today. Our target is the $32.00-31.00 range.

Picked on October 23 at $35.17
Change since picked: - 1.20
Earnings Date 12/07/05 (unconfirmed)
Average Daily Volume: 257 thousand

Closed Long Plays


Closed Short Plays


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


Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.

To ensure you continue to receive email from Option Investor please add "support@optioninvestor.com"

Option Investor Inc
PO Box 630350
Littleton, CO 80163

E-Mail Format Newsletter Archives