Option Investor

Daily Newsletter, Wednesday, 11/16/2005

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Table of Contents

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

Market Wrap

Driving in Circles

Equities started on a northward path this morning, but that path played out soon. Equities reversed and headed south, only to turn around again and end up only slightly south of where they started.

Indices dropped into the release of the crude inventories number and drove north with grinding gears afterward. Recent market leader, the Dow Jones Transports, drove both directions with the others, navigating across oil slicks, buffeted by winds from the airlines heading lower.

That inventories release revealed an unanticipated drop in crude and gasoline supplies. Coupled with a monthly update by OPEC that raised its forecast for oil demand for 2005 and 2006, the worse-than-expected inventories release sent crude higher, creating a slick place on the path that had been leading indices northward.

Annotated Daily Chart of the TRAN:

Annotated Daily Chart of the Dow:

Annotated Daily Chart of the Nasdaq:

Annotated Daily Chart of the SOX:

The EIA reported that crude inventories declined by 2.2 million barrels, still remaining well above the average range for this time of year. Gasoline inventories fell 0.9 million barrels, with those inventories now in the middle of the average range for this time of year. Distillate fuel inventories increased 2.6 million barrels, with distillates in the lower half of the average range for this time of the year. After the release, many indices dropped toward or below yesterday's low and then commenced a coiling action. Even before the release, crude prices had been rising toward the 200-sma on the contract for December delivery, with that 200-sma at $58.34.

Equities didn't react to pre-market releases. October's CPI rose 0.2 percent, with higher food, medical care and shelter prices prompting a rise that was deemed higher than expected by some sources and in line with expectations by others. Core CPI, excluding food and energy prices, also rose 0.2 percent, higher than the typical 0.1 percent increases seen in recent months. The S&P 500 e-mini traded at 1232.50 immediately before the release, but then rose in what was termed a muted reaction, visually depicting the lack of reaction.


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Another release verified information garnered from last week's results. Inventories at U.S. businesses are dropping to record low numbers when compared to sales. September's inventories rose 0.5 percent, but sales climbed 0.6 percent, with the resultant inventory-to-sales ratio of 1.25 months showing a tightening. However, that 0.5 percent increase in inventories was more than the expected 0.3 percent, so even this positive number was muffled by some under-the-hood components. Part of that inventories increase was driven by a 2.1 percent increase in retail auto inventories. The retail inventory-to-sales ratio rose to 1.46 months from 1.45 months rather than dropping as did the overall number. Despite the troubling rise in the retail ratio, economists speculate that the overall number will result in a revised-higher GDP for the quarter that ended in September.

Other data in a separate release indicated strong foreign demand for U.S. bonds. That information won't be new to readers of OptionInvestor's pages, however, as Jonathan Levinson has been reporting on those treasury auctions. The TYX, the yield for 30-year bonds, dropped through the daily 21-ema, with that average having supported the TYX since September 8. Some monies were clearly being allocated to bonds today, with bonds trading in inverse relationship to yields.

If pre-market economics releases didn't seem to impact the markets, an earnings release, a warning and other developments might have done so, pressuring techs and non-techs both. Blue Coat Systems (BCSI), a Nasdaq component, dropped heavily after its disappointing earnings and guidance Tuesday after the bell. Oracle's (ORCL) acquisition of Thor Technologies and OctetString pressured that stock, too, not helping the Nasdaq.

American Express (AXP) pressured the financials, with the company saying that economists' expectations for the company were far too optimistic. Some commented that the downturn was partly due to the one-time effect of the new bankruptcy law. General Motors (GM) also dragged down the Dow, OEX and SPX, with GM being a component stock of all three. Headlines noted that the stock hit a 14-year low this afternoon.

The HMO, the Morgan Stanley Healthcare Index, and the UTY, the Utility Sector Index gained, but metals and oil majors were among the biggest gainers. The CRX, the Morgan Stanley Commodity Index, climbed 1.55 percent, and the XOI, the AMEX Oil Index, rose 1.55 percent. Components of the DJUSHB, the Dow Jones Home Construction Index, attempted to support markets, rising 1.44 percent. The housing industry was again in the news with D.R. Horton (DHI) reporting earnings and raising its forecast for the fiscal year ending next September. The company reported $1.77 a share on revenue of $5.1 billion, beating expectations for $1.63 a share and revenue of $4.7 billion. Although DHI could not hold onto all its gains, and printed a candle under its converging 200-sma and 72-ema, it posted a gain for the day.

About the same time as DHI's earnings release, the Mortgage Bankers Association released mortgage applications for the week ending November 11, with that release characterizing sales as steady during a week shortened by a holiday. Looking under the headline number showed a mixture of components increasing and decreasing from the previous week, but the four-week moving average for the seasonally-adjusted Market Index fell 2.9 percent; the Purchase Index, 1.4 percent; and the Refinance Index, 5.1 percent. The average contract interest rate for a 30-year fixed-rate mortgage climbed to 6.33 percent from the previous week's 6.31 percent, but points decreased.

Other companies reporting before the open included Tyco International (TYC) and retailers Big Lots Inc. (BLI) and Talbots (TLB). TYC doubled its profit in the fourth quarter and maintained its outlook for 2006, but missed expectations for $0.46 a share by four cents. It was light on revenue, too. The company reported further restructuring plans, and some articles characterized the company's report in glowing terms, an impression apparently shared by investors, who sent the stock higher, although it closed well off its $29.15 high. That early pop higher contributed to the early positive market sentiment.

TLB's report was characterized as an upside one. BLI's loss was not as deep as expected. The company said that softer sales and gross margins still challenge the company. Positive sentiment in the retailers helped hold the S&P Retail Index, like the DJUSHB, in positive territory even when other indices were showing losses.

In other pre-market reactions, Gilead Sciences (GILD) rose in pre-market trading after reports that it had settled a dispute with Roche Holdings (RHHBY). GILD had licensed Tamiflu to Roche in 1996, and the dispute involved that drug. RHHBY had dropped Monday after reports that two Japanese teens had died after taking Tamiflu, exhibiting strange behavior before their deaths. Roche denied that the drug had anything to do with their deaths, and the stock printed an inside-day candle yesterday.

By midday, the Senate Banking Committee had approved Ben Bernanke's nomination to be the next chairman of the Federal Reserve, with only one senator, Jim Bunning R-KY, voting against the nomination on grounds that Bernanke could be a Greenspan clone. Bernanke's own words raised that concern as he assured the senators yesterday that he would not swerve too much from Greenspan's policies. Bernanke wants to move slowly, base his decisions on economic and not political realities, and build a consensus. Many believe that he will have a difficult job, facing a need for budget constraints, for a trimming of the trade deficit and to engineer a soft landing for the housing market. The committee recommended his confirmation to the full Senate, where his nomination is widely expected to be greeted with a positive vote.

Earnings reported after the close included AMAT's, NTAPS and MDT's. As this report was prepared, AMAT was trading at $17.45, down from its $17.77 close. The report was characterized as beating expectations, although profit fell to $0.15 a share and sales dropped 22 percent. NTAP was trading at $29.40, down from its $27.88 close after reporting earnings of $0.21 a share on revenue of $483 million against expectations of $0.18 a share on revenue of $476 million. MDT was down to $56.00, from the close of $56.99 after reporting earnings characterized as in line with expectations.

Earnings are slowing, but tomorrow's include retailers such as GPS, FL and WMS. BEAS, DIS and SBUX also report tomorrow.

Tomorrow is a busy day for economic releases but not all will prove market moving. Initial claims and October's building permits and housing starts will be released before the market open, at 8:30. October's capacity utilization and industrial production will be released at 9:15, with those numbers of some importance to the market, especially as sales-to-inventories figures show a need to ramp up production. Natural gas inventories will be released at 10:30. The November Philly Fed, probably the most closely watched of all tomorrow's numbers, will be reported at noon.

The doji printed on many equity charts demonstrated the indecision in the markets, indecision that might be complicated by the usual pin-them-to-the-number action typical of an option-expiration Thursday. Several indices ended the day perched just above their 10-sma's, including the TRAN. As is shown below, the crude contract for December delivery ended the day just below its 10-sma.

Annotated Daily Chart for Crude, December Delivery

Bulls and bears are unsure what will happen next with crude and how that might impact equities. Will a rise in oil majors help indices or will the fear of inflation due to higher crude drive equities lower? Is crude just rising to retest former resistance and will prices roll lower temporarily again, dropping the oil majors that have helped support markets? For tomorrow, that indecision might result in choppy market action. If inclined to trade, the crude contract and TRAN might be watched, with market sentiment toward equities perhaps worsening if the TRAN sustains a move below its 10-sma and crude sustains a movement above that average on its chart. A move to retest recent index highs cannot be precluded, but if there's a bounce, bullish profits should be protected as recent highs are approached. On rollovers below the 10-sma's, or to the 10-sma in the case of the Dow, likely bounce points have been marked on the charts. For tomorrow, the best benchmark on the SPX and Nasdaq might be bullish above the 10-sma and bearish below it, with the knowledge that ranges might be tight and choppy. Be particularly careful of drawing too-quick impressions in the early morning period, as professionals have been particularly active in driving the market one direction or the other, only to see a reversal after the first thirty minutes or so.

New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
CFK None

New Long Plays

CE Frankline Ltd - CFK - close: 11.98 chg: +0.64 stop: 9.99

Company Description:
CE Franklin distributes pipe, valves, flanges, fittings, production equipment and other general oilfield supplies to producers of oil and gas in Canada through its 41 branches, which are situated in towns and cities that serve particular oil and gas fields of the western Canadian sedimentary basin. In addition, the Company distributes general oilfield supplies to the oilsands, refining, heavy oil and petrochemical and non-oilfield related industries such as the forestry and mining industries. (source: company press release or website)

Why We Like It:
If you consider the rising demand for energy across the globe then CFK looks like they're in the right business by supplying infrastructure and components to the energy sector. Technically we like the stock because shares just broke out from a six-week consolidation. Oscillators are bullish, its MACD has produced a new buy signal, and its P&F chart has also produced a new buy signal that now points to a $16.50 target. Traders have a choice. You can look for a pull back into the $11.20-11.60 range and buy a dip or you can buy the next surge higher over today's high. We would prefer to buy the dip but that would not stop us from entering new positions right here. Our target is going to be the $14.75-15.00 range over the next eight weeks. We are suggesting a stop loss at $9.99 but more conservative traders might want to consider something tighter.

Picked on November 16 at $11.98
Change since picked: + 0.00
Earnings Date 10/27/05 (confirmed)
Average Daily Volume: 150 thousand

New Short Plays

None today.

Play Updates

Updates On Latest Picks

Long Play Updates

Burlington Coat - BCF - close: 40.11 chg: +0.15 stop: 37.45

BCF didn't see a lot of action today but the narrow trading range did have a bullish tilt to it. We see no changes from our previous updates. Our target is the $43.50-44.00 range.

Picked on October 24 at $38.90
Change since picked: + 1.21
Earnings Date 10/06/05 (confirmed)
Average Daily Volume: 165 thousand


Csk Auto - CAO - close: 15.26 change: -0.01 stop: 14.95

This could be a short-term turning point for CAO. The stock dipped toward support at the $15.00 level and managed to bounce all the way back to almost unchanged. The candlestick pattern looks like a hammer-type of bullish reversal. A move back over $15.50 might be consider a new bullish entry point. If you are considering a bullish position don't forget that we plan to exit ahead of CAO's early December earnings report.

Picked on November 02 at $15.58
Change since picked: - 0.32
Earnings Date 12/02/05 (unconfirmed)
Average Daily Volume: 388 thousand


Corning Inc. - GLW - close: 20.39 chg: +0.33 stop: 18.99

GLW displayed some relative strength today with shares closing near their highs for the session with volume rising into the close. This looks like a new bullish entry point. Our target is the $21.90-22.00 range. Our time frame is seven weeks.

Picked on November 13 at $20.11
Change since picked: + 0.28
Earnings Date 01/25/06 (unconfirmed)
Average Daily Volume: 11.8 million


Intel Corp. - INTC - close: 24.87 chg: -0.21 stop: 23.45

This looks like a new bullish entry point in INTC. We've been expecting a pull back toward the 10-dma near $24.60 and the stock bounced twice from that level during Wednesday's session. Our year-end target is the $26.00-26.50 range.

Picked on November 06 at $ 23.99
Change since picked: + 0.88
Earnings Date 10/18/05 (confirmed)
Average Daily Volume = 51.6 million


Komag - KOMG - close: 28.68 change: +0.86 stop: 26.99

Once again KOMG has rallied back toward short-term resistance at the $29.00 level and the stock looks poised to move higher. Our strategy involves a trigger to go long at $29.21. More conservative traders may want to use a trigger over the 50-dma or the $30.00 mark instead. If we are triggered we'll target a rise to the $34.00-35.00 range. Our time frame is seven weeks.

Picked on November xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 01/25/06 (unconfirmed)
Average Daily Volume: 1.3 million


Mentor Graphics - MENT - close: 8.60 chg: +0.03 stop: 8.49

Nimble traders may want to give up on waiting for a breakout in MENT and just trade the ups and downs inside the trading range. Currently our strategy is to buy a breakout over resistance at the $9.00 level. Our trigger to go long is at $9.05. If triggered we'll target a run into the $9.95-10.00 range.

Picked on October xx at $xx.xx <-- see Trigger
Change since picked: + 0.00
Earnings Date 01/19/06 (unconfirmed)
Average Daily Volume: 713 thousand


Patterson Companies - PDCO - cls: 41.87 chg: -0.23 stop: 39.99

Today's close under its 10-dma and the $42.00 level do not bode well for PDCO. Its MACD indicator is nearing a new sell signal. We do expect the stock to have some support near its 100-dma currently at 41.32 but more conservative traders may want to adjust their stop loss to just under the $41.00 mark - we're certainly thinking about doing the same thing. We're not suggesting new bullish positions here. Remember we plan to exit ahead of earnings near Thanksgiving. Our target is the $44.00 level.

Picked on October 30 at $40.85
Change since picked: + 1.02
Earnings Date 11/23/05 (confirmed)
Average Daily Volume: 1.2 million


VCA Antech - WOOF - close: 27.06 chg: +0.13 stop: 25.90

We still don't like the bearish action in WOOF's MACD indicator but so far the stock remains above support at the $26.00 level. We may still exit early if WOOF trades under $26.50.

Picked on November 09 at $26.74
Change since picked: + 0.32
Earnings Date 10/26/05 (confirmed)
Average Daily Volume: 436 thousand

Short Play Updates

Sanderson Farms - SAFM - close: 33.15 chg: +0.36 stop: 35.01

We see no changes from our previous updates on SAFM. The stock is still trending lower and nearing our target at the $32.00 mark. More aggressive traders may want to aim lower. We are not suggesting new positions.

Picked on October 23 at $35.17
Change since picked: - 2.02
Earnings Date 12/07/05 (unconfirmed)
Average Daily Volume: 257 thousand


Tecumseh Prod. - TECUA - close 19.58 chg: +0.08 stop: 20.55

We see no change from our previous update on TECUA. A failed rally under $20.00 could be used as a new bearish entry point but enter new positions carefully! Our target is the $16.00 mark.

Picked on November 09 at $18.96
Change since picked: + 0.62
Earnings Date 11/07/05 (confirmed)
Average Daily Volume: 96 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.


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