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Daily Newsletter, Wednesday, 11/09/2005

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Table of Contents

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

Market Wrap

How the Cookie Crumbles

The ultimate chocoholic disaster happened. Kraft foods raised the price of Oreos, blaming higher energy costs. The company sent retailers a memo last week detailing the cookies, crackers, lunch meats and other products that will see higher prices.

As that Oreo cookie crumbles, so crumble other products in an economy that some still don't believe to be inflationary. In a climate in which consumers are being hit below the belt, literally, by the rising price of Oreos and other foodstuffs, the Oil Pricing and Profits hearing began today in Washington. Senators raucously claimed that energy companies were hitting beneath the belt, too, gouging consumers. Last night, Jim Brown discussed the importance of the hearing, so the implications don't need to be repeated.

The windfall profits by energy companies and the resultant hearing have prompted a debate as to whether market forces in a cyclical and low-profit-margin market should be allowed to govern energy companies' profits or whether government policies have a part. CNBC televised much of the hearing, with the energy companies' representatives led off by Lee R. Raymond, chairman and chief executive officer of Exxon Mobil Corp.

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The questions posed by that Senate hearing were unlikely to be resolved by one hearing, and might legitimately occupy many a lecture period in an economics class. Markets spent another morning with their next near-term direction unresolved, too.

Traders bored into near catatonia were stunned midday, however, by a spike that appeared out of nowhere. Market watchers attributed it variously to a SOX move above a key level, a statement by Raymond that suggested that crude prices had peaked and, conversely, a jump in crude prices that brought energy majors higher. With crude climbing over $60.00 just prior to the spike in the equities, the "crude" explanation wins my vote. A study of charts shows that XOM and other energy companies being responsible for much of the gain during that spike.

Ultimately, many indices could not hold those gains and fell back into the formations in which they'd traded before the spike. A series of explosions in Jordan may have contributed to the failure to hold those highs, but the crazy zigzagging action, zooming past carefully drawn trendlines and Fib levels and any other known technical analysis tool rattled traders and scrambled the charts.

Annotated Daily Chart of the SPX:

Annotated Daily Chart of the Dow:

Annotated Daily Chart of the Nasdaq:

Annotated Daily Chart of the SOX:

The opening of the Senate hearing and the release of wholesale inventories roughly coincided. September's build in inventories was much higher than expected, at 0.6 percent against the expected 0.3 percent. However, markets bounced after it was apparent that the build was pegged on increases in drugs and petroleum, with the important inventory-to-sales figure revealing a tightening in inventories. The nondurable inventory-to-sales figure was a record low. Economists, usually the only people paying attention to this number, suggest that the numbers hint at the need to ramp up production, perhaps even of those more expensive Oreos.

Against that backdrop, the Department of Energy released crude inventories numbers, with an upside surprise in the inventories number spiking equities higher. The build in crude and gasoline inventories proved more than twice what was expected. Distillates fell against an expected build, however. If the inventories number drove crude prices, it was difficult to discern which direction. After the release, crude prices dropped, soared above $60.00 and then dropped again.

Other market developments produced no predictable results in market action. Perhaps it was no surprise that insurance Company American International Group (AIG) will restate financial results again, delaying its 10-Q filing. The company had previously restated earnings and was investigated by regulators earlier in the year. The company noted that the errors resulted in third-quarter results being understated by $500 million. AIG was to zigzag its way 0.78 percent higher by the close.

Some retailers had good news. Retailer Federated (FD) beat expectations, climbing 7.72 percent by the end of the day, and Limited (LTD) was upgraded, posting a 3.39 percent gain by the close.

After yesterday's unwelcome surprise to the housing industry, delivered by Toll Brothers (TOL), some might have been relieved that the headline of the Mortgage Bankers Association's Weekly Mortgage Applications Survey for the week ending November 4 noted an increase in applications over the previous week. However, four-week moving averages continued their decline, and home purchase applications fell 3.6 percent below their year-ago level. The DJUSHB, the Dow Jones U.S. Home Construction Index, closed lower by 0.87 percent.

TOL's announcement yesterday hit other homebuilders and also other companies in their food chain. That included companies such as Home Deport (HD). This morning, Piper Jaffray lent its help by raising HD's rating to an outperform one. The firm sees margin improvement for the company. Linens 'N Things (LIN) also received an upgrade. HD gained 0.24 percent, and LIN, 0.15 percent.

After the close, CSCO reported earnings of $0.25 a share, beating by a penny. In his prepared statement, Chambers noted "increasing momentum in both the U.S. and Asia Pacific." The company planned capital expenditures in India, hiring as many as 4,000. Some looked to its higher gross margins, at 68.5 percent, against expectations for something in the realm of 67 percent, for CSCO's rise in after-hours trading. At the time of this report, CSCO was trading at $18.15, up from the close at $17.75. The conference call had not yet begun.

That conference call could help determine the direction for tomorrow. As of the close, charts had been scrambled, with short-term charts even more so than the longer-term ones. If Chambers says nothing to spook markets and CSCO opens above and maintains values above the 72-ema at $17.86, the company's stock may make a rush toward its 200-sma at $18.26, dragging other indices with it. Note, however, that call open interest and volume were stronger than put OI and volume for CSCO in both the $17.50 and $20.00, perhaps limiting upside gains for that company, and perhaps also limiting its contribution to broader market gains. If CSCO opens below those key levels and rolls down, it could help bring markets lower.

Markets so far remain choppy and difficult to trade, with old relationships broken apart. Midday, a rise in crude saw energy majors soar, too, bringing the SPX, OEX and Dow higher, and when crude costs dropped back, so did the energy majors and those indices. The old "crude higher/equities lower" paradigm clearly did not work, and the TRAN ignored it all, doing its own thing. Movements to the upside are often reversed in the SPX, OEX and Dow, while stellar setups on bearish plays produce no follow-through, either. As soon as a formation sets up on a chart and traders are enticed into the trade, the whole setup crumbles, trapping both bulls and bears and cheating as many as possible out of as many funds as possible.

I see no strong evidence of next direction, and would advise caution to all traders. Play the upside breakouts if bullishly inclined, but maintain close stops, keeping the SPX's reversal this afternoon in mind. This afternoon, selling rollovers from the SPX's and Dow's spikes, to 1226.59 and 10,601.92, respectively, would have been the more profitable plays. That kind of action warns of sellers lurking overhead, and those bearishly inclined might take that sell-the-bounce tactic, but be prepared to take quick profits, if any are offered. The TRAN is taking no bearish survivors, zooming ever higher in a climb that still looks unsustainable and begs for a pullback. Volume in TRAN components is dropping in many cases as the stocks rise, a dangerous sign but not a good market-timing one. The TRAN often helps lead the Dow and to some degree, the SPX and OEX, and so the TRAN's direction should be watched, too.

The best bet appears to be to wait for more clarity, and that's this writer's advice. While we used to see volatility and unpredictable behavior on opex week, we're often now seeing it the Thursday and Friday before opex week, so tomorrow could be even more difficult to manage.

Dell reports tomorrow after the close, but has already warned. Many might have already positioned themselves ahead of that report. Tomorrow morning's releases include the September trade gap, October import/export price indices and weekly jobless claims, all at 8:30, and November's preliminary Michigan consumer sentiment, at 9:47. Natural gas inventories will be released shortly afterward, and the last release of the day will be October's treasury budget, released at 2:00.
 

New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
WOOF TECUA

New Long Plays

VCA Antech - WOOF - close: 26.74 chg: -0.75 stop: 25.90

Company Description:
We own, operate and manage the largest networks of freestanding veterinary hospitals and veterinary-exclusive clinical laboratories in the country, and we supply ultrasound and digital radiography equipment to the veterinary industry. (source: company press release or website)

Why We Like It:
The recent earnings report in October helped fuel a rally that pushed shares of WOOF through significant resistance at the $26.00 level. Today's pull back was sparked by an analyst downgrade to a "hold" on valuation. We see the intraday bounce from broken resistance now new support at the $26.00 level as a new bullish entry point. While we are willing to go long here more conservative traders may want to wait for some confirmation of today's afternoon bounce by looking for a move over the $27.00 level. Currently the Point & Figure chart points to a $44 target. We are going to target a rise into the $29.90-30.00 range. Our time frame is eight weeks.

Picked on November 09 at $26.74
Change since picked: + 0.00
Earnings Date 10/26/05 (confirmed)
Average Daily Volume: 436 thousand
 

New Short Plays

Tecumseh Prod. - TECUA - close 18.96 chg: -0.71 stop: 20.55

Company Description:
Tecumseh Products Company is a full line, independent global manufacturer of hermetic compressors for air conditioning and refrigeration products, gasoline engines and power train components for lawn and garden applications, submersible pumps, and small electric motors. In addition, Tecumseh Products Company has many other subsidiaries that not only sell products inside the world of Tecumseh, but to the outside world as well. Our products are sold in over 120 countries around the world. (source: company press release or website)

Why We Like It:
It looks like shares of TECUA are imploding. Shares are very oversold on a long-term basis and today's decline marks a new all-time low for the stock. TECUA had been churning sideways near the $20.00 level for the last few weeks as investors waited for its Q3 earnings report. The company reported a couple of days ago and issued a bearish forecast blaming rising commodity costs and unfavorable currency exchange rates. Today's decline was fueled by volume about 150% above its daily average. The biggest risk here is probably a short squeeze. The latest data puts short interest at 7% of the 18.4 million shares outstanding. That's not an excessive amount of short interest but with such a small float it could be enough to provoke a short squeeze. If you choose to short the stock maintain a constant vigilance with your stop losses. We are going to suggest shorts with the stock under $19.00 but a failed rally under $20.00 could work too. We'll set the stop loss at $20.55. Our target is the $16.00 mark.

Picked on November 09 at $18.96
Change since picked: + 0.00
Earnings Date 11/07/05 (confirmed)
Average Daily Volume: 96 thousand
 

Play Updates

Updates On Latest Picks

Long Play Updates

Burlington Coat - BCF - close: 38.35 chg: -0.36 stop: 36.45

Well we mentioned a pull back to $38 and that's what we got today. Now the question is will the $38 level hold up as support or will BCF dip to its simple 50-dma at 37.60. More conservative traders might want to think about tightening their stops to just under the 50-dma. We are not suggesting new bullish positions with BCF under the $39.00 mark. Our target is the $43.50-44.00 range.

Picked on October 24 at $38.90
Change since picked: - 0.55
Earnings Date 10/06/05 (confirmed)
Average Daily Volume: 165 thousand

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Csk Auto - CAO - close: 15.32 change: -0.03 stop: 14.75

CAO tried to bounce this morning but the bounce failed at $15.55. We suspect that shares will continue lower and test the 50-dma near $15.15 or fall lower and hit the $15.00 level. We would not suggest new bullish positions until we see a significant bounce. Our target is the $17.50 mark.

Picked on November 02 at $15.58
Change since picked: - 0.26
Earnings Date 12/02/05 (unconfirmed)
Average Daily Volume: 388 thousand

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Intel Corp. - INTC - close: 24.80 chg: +0.25 stop: 22.75

INTC continues to rally and shares are nearing overhead resistance at the $25.00 level and the simple 200-dma near $24.90. We do expect the stock to pull back once it touches resistance. Traders looking for a new entry point can watch for a pull back toward the $24.00 region. Our year-end target is the $26.00-26.50 range.

Picked on November 06 at $ 23.99
Change since picked: + 0.81
Earnings Date 10/18/05 (confirmed)
Average Daily Volume = 51.6 million

---

IPC Holdings - IPCR - close: 28.74 chg: -0.35 stop: 26.99

IPCR's rally is fading and we could see the stock retest the $28.00 level near its simple 10-dma before it continues higher. A bounce from the 10-dma could be used as a new short-term entry point. Our short-term target is the $29.95-30.00 range but more aggressive traders may want to aim higher.

Picked on November 02 at $28.15
Change since picked: + 0.59
Earnings Date 10/25/05 (confirmed)
Average Daily Volume: 408 thousand

---

Martek Biosciences - MATK - cls: 30.73 chg: -0.07 stop: 29.85

There is no change from our weekend update on MATK. The stock remains under resistance at the $32.00 level. Our suggested entry point is a trigger at $32.05. Until MATK trades at or above this level we'll sit on the sidelines. If we are triggered our target is the $35.00 mark.

Picked on November xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 12/09/05 (unconfirmed)
Average Daily Volume: 864 thousand

---

Patterson Companies - PDCO - close: 41.67 chg: +0.27 stop: 38.99

PDCO bounced higher today but we're not sure the consolidation is over just yet. A move over $42.00 would be bullish but we wouldn't be surprise by another dip to the $41 level, which should be short-term support. Either move could be used as a new entry point just remember that our time is growing short. Our target is the $44-45 range. We plan to exit before the company announces earnings in late November.

Picked on October 30 at $40.85
Change since picked: + 0.82
Earnings Date 11/23/05 (unconfirmed)
Average Daily Volume: 1.2 million
 

Short Play Updates

Phazar - ANTP - close: 12.60 change: -0.27 stop: 15.01

Today's decline was good news. The lack of follow through on Tuesday's rally suggest that ANTP will continue lower. More conservative traders may want to think about tightening their stop. We're not suggesting new positions at this time. Our seven-week target is the $10.20-10.00 range. Remember, this is an aggressive, high-risk short.

Picked on November 03 at $13.32
Change since picked: - 0.72
Earnings Date 10/10/05 (confirmed)
Average Daily Volume: 182 thousand

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Mentor Graphics - MENT - close: 8.69 chg: +0.15 stop: 8.36

We see no changes from our previous updates on MENT. Our plan is to short the stock on a breakdown below the bottom of its trading range. Our trigger is at $7.80. If MENT breaks out over its 100-dma at 9.05 we may switch sides and open longs.

Picked on October xx at $xx.xx <-- see Trigger
Change since picked: + 0.00
Earnings Date 10/20/05 (confirmed)
Average Daily Volume: 713 thousand

---

Packaging Corp. - PKG - close: 20.06 chg: +0.18 stop: 20.55

PKG is experiencing a tug-of-war across the $20.00 mark. We would not suggest new positions until PKG traded back under $20 and now we'd probably look for a new low under $19.75. Our target is the $18.50 mark.

Picked on November 06 at $19.89
Change since picked: + 0.17
Earnings Date 10/17/05 (confirmed)
Average Daily Volume: 470 thousand

---

Sanderson Farms - SAFM - close: 33.57 chg: +0.08 stop: 35.55

SAFM's rally failed this afternoon at $34.25. The move back under the $34 level could be used as a new bearish entry point but we're not suggesting new plays at this time. Our target is the $32.00-31.00 range.

Picked on October 23 at $35.17
Change since picked: - 1.60
Earnings Date 12/07/05 (unconfirmed)
Average Daily Volume: 257 thousand

---

Sysco - SYY - close: 30.48 chg: -0.19 stop: 32.01

SYY is acting out its part of the script pretty much on cue. We expected a bounce from $30 and for the $31 level to act as overhead resistance. The failed rally under $31 was a new entry point and hopefully today's decline under the $30.50 mark confirms the move. Our target is the $28.50-28.00 range.

Picked on November 01 at $30.60
Change since picked: - 0.12
Earnings Date 10/31/05 (confirmed)
Average Daily Volume: 2.4 million
 

Closed Long Plays

Crown Castle - CCI - close: 28.25 change: +0.73 stop: 24.99

Target achieved. CCI continued to rally this morning and the stock hit a high of $29.20 before pulling back. Volume was extremely heavy at almost six times the daily average. Our target was the $29.00 mark.

Picked on November 01 at $25.81
Change since picked: + 2.44
Earnings Date 10/26/05 (confirmed)
Average Daily Volume: 1.2 million
 

Closed Short Plays

None
 

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

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