Equity markets have been in need of a focus lately, with markets swinging first one direction and then another. The Wednesday-morning market open was going to provide that focus in the form of an early TRAN rise to test the March record intraday high.
Annotated Weekly Chart of the TRAN:
All gazes remained riveted on the TRAN, already approaching the March 8 intraday and record high of 3889.97 before the inventories release. After that inventories number, the TRAN drove past that March intraday high and eventually past 3900.
The EIA reported that crude inventories increased 2.73 million barrels, higher than the expected 2.5 million barrels, and gasoline rose 1.03 million barrels, higher than the expected 700,000 barrels. Distillates fell 159,000 barrels, but even in that number, the news was better than expected. Analysts had anticipated a 1.0 million barrel decline.
By midday the TRAN had posted an almost two percent gain, on its way to an eventual 2.29 percent gain, as it charged above its March high and 3900. The XAL, the Airline Index, was posting a strong gain, too, on its way to its eventual 3.42 percent gain. Bear Stearns upgraded that industry group, with shared components of the TRAN and the XAL including AMR, CAL, JBLU and LUV. AMR was one of the specific companies highlighted by Bear Stearns, and AMR was to rise by $0.87 or 6.53 percent.
Other indices charged up to test resistance, too.
Chart of the Dow:
Annotated Daily Chart of the SPX:
Annotated Daily Chart of the Nasdaq:
Daily chart of the SOX:
Pre-market focus on political issues seemed to wane as the markets opened and equities displayed such strength. Political issues earn comment on these pages only when they might impact market movements. Jim Brown commented last night on some of the proposed tax code changes that could affect markets, including the housing industry. This morning, two other reports, one an economic report and another an earnings report, refocused attention at least momentarily away from the TRAN and XAL and onto the industry that has been so important in sustaining our economy.
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For the second week in a row, the Mortgage Bankers Association reported a drop in home purchase applications, this for the week ending October 28. The report indicated that the anticipated fourth-quarter softening in the new home sales from their record levels is occurring. The Market Composite Index, the component that measures mortgage loan application volume, fell 4.8 percent from the previous week's number on a seasonally adjusted basis. The Purchase Index dropped 6.2 percent; the Refinance Index, 2.8 percent; the Conventional Index, 4.9 percent and the Government Index, 4.1 percent. The four-week moving average for the seasonally adjusted Market Index dropped 2.4 percent; the Purchase Index, 1.9 percent and the Refinance Index, 3.0 percent. The refinance share of mortgage activity did rise to 43.6 percent, however. The average contract interest rate for a 30-year fixed-rate mortgage rose to 6.21 percent from the previous week's 6.06 percent. Points increased.
If the Mortgage Bankers Association anticipated a softening in new home sales for the last quarter of the year, Beazer Homes' (BZH) earnings report attempted to refocus investors on the record year that some homebuilders had experienced. When reporting fiscal fourth-quarter earnings, the company beat expectations of $3.11 a share, reporting $3.61 a share, up from the $1.82 a share from the year-ago quarter. Revenue of $1.81 billion also beat forecasts of $1.56 billion. For the next fiscal year, BZH raised earnings expectations to $10.50 a share from the previous $10.44 a share.
Annotated Daily Chart of the DJUSHB:
Annotated Daily Chart of the TNX:
If consumers are going to have difficulty due to higher rates, that difficulty certainly didn't show up in the sector performance today. Much of the day, the consumer discretionary stocks led gains. Techs, telecoms, materials and financials numbered among other industry leaders.
Political developments other than proposed tax code changes gained attention in the early morning period. The early morning's political debates, including those on CNBC, centered on whether Democrats had pulled a "stunt," as some deemed their closed-door session yesterday, or a coup that refocused attention on reportedly faulty intelligence leading up to the war with Iraq. That refocusing threatened to create the kind of uncertain environment that makes market participants uneasy.
However, the political impact was upstaged by those previously mentioned market developments and perhaps by encouraging news from the Challenger report. Few market participants cared what Republicans or Democrats were doing as bulls celebrated and shorts trembled. That Challenger report said that layoffs had fallen 20.2 percent year over year in October, but were up 13.2 percent over September's announcements. Year-to-date, layoff announcements still run 4.7 percent higher than the previous year, lower than September's 8.2 percent year-to-date figure. Hiring announcements increased by 45 percent. Some articles and CNBC commentators deemed the report encouraging while others noted that the developments were expected after some recovery from hurricanes Katrina and Rita. From an anecdotal perspective only, I can note that here in the Dallas area, local news channels focus on the dilemma faced by evacuees relocated here, as many have been unable to find work, have not received FEMA reimbursements and may soon be kicked out of the apartment complexes that had offered them free rent for a short period of time. The Challenger report may indicate a recovery from Katrina and Rita, but evacuees might not have the same perspective.
Another sector battled for attention in the pre-market session: the media industry. Time Warner Inc. (TWX) announced that it was increasing its stock buyback plan by $7.5 billion, Deutsche Bank upgraded publisher Knight-Ridder (KRI) after KRI's largest shareholder, Private Capital Management, pressured the company to sell the group, and Cablevision Systems (CVS) approved a special $3 billion dividend.
Time Warner rates as the world's largest media company, according to one source. The company announced the stock buyback plan as part of its third-quarter earnings report, including $0.19 a share earnings, above the expected $0.17. Shareholders have been campaigning for the company to do something about the decline in the stock's price, and the stock buyback plan appeared to be the company's answer.
In addition, the Wall Street Journal reported that a consortium composed of large cable operators would announce a plan to sell cell phone service that would run over Spring Nextel's (S) wireless network. That announcement did come. In early trading, S, TWX and sector stock Comcast (CMCSA) all rose, with both TWX and CMCSA reportedly included in that consortium. At the end of the day, S had gained 3.68 percent; TWX, 1.87 and CMCSA, 2.49. Other members of the consortium are Cox Communications and Advance/Newhouse Communications.
Techs performed well, certainly garnering their share of the attention and perhaps surprising some who had focused on recent Dell and Symantec disappointments. Certainly during the pre-market session and the early trading period, some attention focused on Symantec's (SYMC) disappointment as well as other earnings reports. SYMC beat expectations but received seven downgrades this morning after its provided downside guidance for the full year. Pre-market reports from Sun Microsystems (SUNW), ATP Oil & Gas (ATPG) and Dean Foods (DF) were deemed disappointing, while Cigna (CI), EDS (EDS), Duke Energy (DUK) and Electronics Arts (ERTS) joined TWX in producing better-than-expected results. In early trading, ERTS' leap higher was to be balanced by SYMC's plummet. ERTS was to close higher by $4.44 or 7.95 percent, and SYMC, lower by $4.63 or 19.29 percent.
Utilities and the healthcare sectors, both sometimes seen as good defensive bets during times of equity weakness but sometimes abandoned on equity strength, were among early decliners, but the UTY, the Utility Sector Index, was to close higher by 0.62 percent. The HMO, the Morgan Stanley Healthcare Index, was to closer lower by 0.67 percent. The healthcare sector also suffered from developments that focused negative attention on the sector. A jury began another day of deliberation on the second Vioxx liability suit against Merck (MRK), and the stock slipped lower in early trading. MRK closed lower by $0.11 or 0.38 percent. In addition, the Federal Trade Commission cleared Johnson & Johnson's (JNJ) acquisition of Guidant (GDT), but the troubled medical device maker's stock dropped after news circulated that JNJ might not follow through with the acquisition. JNJ posted a $0.60 or 0.96 percent loss for the day, and GDT, a $1.99 or 3.15 percent loss. By the end of the day, Standard & Poors Ratings Services and Fitch Ratings said that GDT had been put on a "developing" and "evolving" rating watch, respectively, with the uncertainty over JNJ's acquisition leading to those changes.
After-hours reports included Qualcomm's (QCOM) earnings report, with the company earning $0.32 a share on profit that climbed 37 percent and revenue that rose 40 percent. The stock closed at $40.37 and was last at $41.28 as this report was prepared. Qwest Communications (Q) was unchanged in after hours after reporting that its loss had narrowed to $144 million and that the company had reached a tentative $400 million settlement in lawsuits sought by shareholders after the company was forced to restate revenue due to a reported accounting scandal. Federated (FD) reported that same-store sales dropped 0.7 percent in October, but climbed 0.6 percent in the third quarter when compared to the year-ago period. Priceline (PCLN) produced earnings of $0.47 a share, up from the year ago $0.28 a share. Expectations for the fourth quarter were set at $0.24-0.28 a share on a pro forma basis. PCLN closed the regular session at $19.50 and was last trading at $22.45. Prudential Financial (PRU) reported operating earnings of $1.46 a share against expectations of $1.16 a share, according to one source. PRU reported that third-quarter profit more than doubled. The chief executive affirmed that the company would meet full-year targets. PRU closed the regular session at $71.85, but last traded at $74.49 as this report was prepared. Symbol Technologies (SBL) beat expectations, and the stock of the manufacturer of mobile-computing and barcode-scanning technologies last traded at $8.75, after closing the regular session at $8.15. Univision (UVN) beat expectations on an adjusted-for-one-time-items basis by a cent and beat on revenue. The company also announced an additional $500 million stock buyback program. UVN closed the regular session at $27.46 and last traded at $28.00. Hewlett-Packard announced a change in the way it elects its board of directors.
With many earnings reports and economic and possible political developments, opportunity exists to refocus the markets again tomorrow, especially after strong climbs that ended at resistance. Earnings reports scheduled for tomorrow include those from TDSC, ACCL, ADPT, ABC, CPN, CELG, CLX, CMCSA, CSC, CVS, EE, RDEN, ENB, ENZN, EXPE, FLR, GMST, HIG, ICOS, IDA, IDCC, IPR, LSE.L, NTIQ, PDC, PWAV, GOLD, REV, SLE, SUN, SSYS, TRN, UN, WGRD and WMB, among others.
Thursday's economic releases won't be concluded with the usual 8:30 release of jobless claims. At that same time the third quarter's preliminary productivity number will be released, but that time period's releases will be followed at 10:00 by September's factory orders and October's ISM services. Productivity is expected to rise 2.3-2.7 percent, depending on the source, up from the prior 1.8 percent increase. Factory orders are expected to be flat to down 1.0 percent, also according to the source, with the previous month's orders up 2.5 percent. ISM services for October is widely expected to rise to 57.0 from the previous 53.3.
With indices jammed against important resistance, traders have close-by stops, whatever bias they might hold. The TRAN broke out strongly out of a chart formation that was distinctly bearish, and now appears to be trying to lead the indices upward. Breakouts above the trendlines and important moving-averages in this report would look bullish, rollovers beneath them, perhaps not bearish but at least indicating a possible pullback.
A Nasdaq downturn back below the descending trendline off the summer high, an SPX downturn below the 100-sma and the top of its descending regression channel off the summer high, and a Dow rollover now that it has been unable a second time in a week to close above its 200-sma, and the short-term bias looks negative. However, bears need to be prepared for support just below to produce some churning. Many indices have climbed back into long-term rising regression channels that they had broken below or tested, and bulls have had some encouragement, and will not give up easily if indices pull back to retest that support.
Other than the TRAN's chart, the SPX's chart perhaps looks most bullish, because that chart could be interpreted as an attempt to invalidate a head-and-shoulders formation. I don't think the formation has quite been invalidated, but the attempt to run the SPX up past the most appropriate right-shoulder level has certainly occurred. However, any rollover beneath the 100-sma, even after a piercing of that average if the piercing is brief enough, should urge bulls to exercise caution. The SPX may be beginning a pullback or rollover through the channel. If that happens, support converges at the 200-sm and the rising trendline that formed the support on its rising wedge shape. Another choppy period could begin, as warned in the previous paragraph.
Because so much focus appended to the TRAN today in its often-seen capacity as a market leader, it may be imperative to watch that index tomorrow for guidance. I leave you with a last chart.
Annotated Thirty-Minute Chart of the TRAN:
Watch the TRAN tomorrow to determine if it was the front-running to further
gains for other indices or a front-runner in trapping bulls.
New Long Plays
Csk Auto - CAO - close: 15.58 change: +0.39 stop: 14.24
Why We Like It:
Picked on November 02 at $15.58
New Short Plays
Long Play Updates
Burlington Coat - BCF - close: 38.80 chg: +0.55 stop: 36.45
The retailers rallied pretty nicely today and BCF added 1.4% but it remains under resistance at the $39.00 level. We remain bullish but more conservative traders may want to wait for a move over $39 before going long. Our target is the $43.50-44.00 range.
Picked on October 24 at $38.90
Crown Castle - CCI - close: 25.85 change: +0.04 stop: 24.24
CCI tried to rally higher today but by the end of the session it was lucky to hold its gains. If you're the optimistic type the fact that CCI held yesterday's unexplained but impressive gains could be seen as a good sign. However, we are leaning more toward the camp that CCI could pull back and we'd rather buy a bounce from $25.50 or even the $25.00 level. For more details please see Tuesday's play description. Our target is the $29.00 mark.
Picked on November 01 at $25.81
IPC Holdings - IPCR - close: 28.72 chg: +0.75 stop: 26.99
IPCR continued to rally today and broke out over short-term resistance at the $28.00 mark. Our trigger to go long the stock was $28.11 but IPCR gapped open at $28.15 so we are adjusting our entry price even though shares later dipped to $27.88. The 2.6% gain was fueled by volume still way above the norm. Readers can choose longs here over $28.00 or wait for a dip back to the $28 level. We feel that odds of a dip back to $28 are probably pretty good. Our target is the $29.95-30.00 range.
Picked on November 02 at $28.15
Outback Stkhse - OSI - close: 38.74 chg: +1.27 stop: 35.75
Wednesday proved to be a strong session for OSI. The stock added 3.3% on average volume to breakout over resistance at the $38.00 level and the 50-dma (38.49). Our target is the $39.90-40.00 range.
Picked on October 23 at $37.21
Patterson Companies - PDCO - close: 42.08 chg: +0.59 stop: 38.99
The market strength today also helped PDCO, which added 1.4% and broke out over resistance at the $42.00 mark and its simple 100-dma (41.70). Our target is the $44-45 range. We will plan to exit before the company announces earnings in late November.
Picked on October 30 at $40.85
Short Play Updates
Mentor Graphics - MENT - close: 8.63 chg: +0.31 stop: 8.36
Gosh! We may have to switch directions and go long if MENT can breakout over resistance at the $9.00 mark. At this time we remain on the sidelines. MENT has been stuck in a trading range between $7.85 and $9.00 for months. Our trigger to short the stock is at $7.80. If triggered we'll target a decline to the $6.55 mark.
Picked on October xx at $xx.xx <-- see Trigger
Sanderson Farms - SAFM - close: 33.91 chg: -0.32 stop: 36.11
Lack of participation in today's market rally is a good sign for the bears. SAFM even sank back under the $34.00 mark. Our target is the $32.00-31.00 range.
Picked on October 23 at $35.17
Sysco - SYY - close: 30.58 chg: -0.02 stop: 32.01
We are not surprised that SYY failed to confirm yesterday's breakdown with the broader market averages on the upswing. However, it is good news that SYY failed to truly participate in today's rally. It might be prudent to wait and watch for an oversold bounce back to the $31.00 level, which as broken support should become new resistance. A failed rally under $31 can be used as a new entry point. Our target is the $28.50-28.00 range.
Picked on November 01 at $30.60
Closed Long Plays
HR Block - HRB - close: 24.10 change: -0.64 stop: 23.49
It is usually a bad sign when the company's CEO says they may have to lower their earnings estimates. That's what happened today at an analyst conference. HRB's CEO said that rising interest rates could cut its profit margins on its mortgage lending business. The stock did bounce off its intraday lows near $23.66 but we're going to exit early right here!
Picked on October 23 at $24.09
Closed Short Plays
Elkcorp - ELK - close: 32.97 chg: +1.25 stop: 32.51
Shares of ELK struggled under resistance at the $32.20 level for most of the session until a late afternoon surge pushed the stock past our stop loss at 32.51. The move also pushed ELK above its simple 100-dma.
Picked on October 27 at $30.49
Today's Newsletter Notes: Market Wrap by Linda Piazza and all other plays and content by the Option Investor staff.
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