Table of Contents
The emphasis on Friday was purely on shopping and not trading. The markets closed the week with another gain but it was touch and go on the Nasdaq. An afternoon sell program in a very thin market knocked the Nasdaq back to zero but buyers bought the dip once again to close the day with a gain.
Dow Chart - Daily
Nasdaq Chart - Daily
There was very little for traders to focus on during the day. There were no economic reports and the energy markets were closed for a long four-day weekend. Volume was seriously lacking with less than 1.5B shares across all markets. The NYSE only managed to trade 720,000 shares and the Nasdaq only 650,000. It was a day we could have skipped and nobody would have missed it.
The biggest news for the day was news that there were several different problems with the Xbox and Microsoft said they would replace or repair them as necessary. Buyers who had waited more than 24 hrs in the cold in some areas were highly frustrated to see the problems appear. MSFT fell -75 cents from Wednesday's level but regained it into the close to end down only -16 cents. Microsoft also announced it had hired the chief scientist from Cray computer, Burton Smith. Microsoft declined to release information on what his job would be at Microsoft. Could the software giant be heading into the hardware market? I seriously doubt it. Smith did hint that he had enjoyed his years in high performance computing and was eager to pursue a new and very different opportunity at Microsoft. It will be interesting to see what his new job will be.
Intel and AMD both managed gains on Friday after Caris and Company analyst Risk Whittington told investors that both could beat earnings estimates for Q4. He has a buy rating on AMD and an above average rating on Intel.
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There was no weakness in Google as it tacked on another +5.81 to close at a new historic high at $428.67. Analysts were talking up changes to its Froogle offering where shoppers can check inventory levels of specific items at stores in their area. Is there anything Google has not considered to make our life easier?
The biggest point gainer for the day was the Chicago Mercantile Exchange with a +$10.23 jump to $396.90. This came after the CME announced on Wednesday that option volume on their CME E-Mini equity index options exceeded 4,006,366 contracts year to date. This is a +727% increase over the 487,727 for 2004. This embarrassment of riches has kept the CME moving higher all year and Friday's close was a new historic high.
Another stock that is simply an embarrassment is Taser. TASR now TASRE has been notified it will be delisted from the Nasdaq due to a failure to file its Q3 report. Taser has said that it will have to restate earnings for Q1/Q2 due to errors in how it accounted for legal and professional fees. Remember Taser had been criticized in the past for payments to individual in positions of authority to obtain orders for guns. How do you account for payments like that? Recently Taser has fallen from grace as concerns mount over the safety of its products. Taser has appealed the Nasdaq delisting and has requested a hearing on the matter. Normally the attachment of the "E" to a Nasdaq symbol is the kiss of death but a few do return to favor. TASRE closed at $6.50, -90 cents, but well off the $33 level it saw in December 2004.
Conoco Phillips announced on Friday it was buying a refinery in Wihelmshaven Germany from Louis Dreyfus Energy Holdings. The amount paid was not disclosed but COP said it was paying cash. The refinery processes 275,000 bbls per day and increases Conoco's European capacity by +74%. Conoco also said it was adding 25 new wells in Norway's Ekofisk field in partnership with Total SA. They expect to add +100,000 bbls per day of oil equivalent. COP has a 35.1% interest in the field and TOT 39.9%. When completed in 2006 the +100K bbls per day will equate to 0.0011764% of our daily global oil consumption.
I posted the illustration below two weeks ago showing an average historical depletion rate of current global production at 5%. I illustrated that the world would be short 16 mbpd by 2010 at that 5% average. Last week the Schlumberger CEO gave a talk using an even more ominous 8% depletion rate. Why would he use that rate unless there was a danger of that becoming reality? SLB is the largest womb-to-tomb well servicing company on the planet. They are in the best position to know how quickly wells are drying up. Needless to say the outcome is not pretty at -8%. I have also discussed previously how new technology has allowed companies to extract oil from fields quicker and that could lead to faster depletion in the 8% range. Seems the Schlumberger CEO may be giving us a peak into the future.
Thursday was Peak Oil day according to Kenneth Deffeyes. Deffeyes is a geologist and a professor at Princeton and has been predicting for several years that 11/24/05 would be the peak in global production. He spent a lot of time and effort extrapolating the same facts M. King Hubbert used to correctly predict the peak in U.S. production in 1970 over 14 years in advance. Using the same methodology Deffeyes had projected a top in global oil production on Thanksgiving this year. It could be sometime before he will be proven right or wrong but even if he is wrong he probably did not miss it by much. It took until 1972 for Hubbert's 1970 U.S. production peak to become obvious since the ebb and flow of thousands of wells tends to make day-by-day tracking difficult. Only after time has passed and actual production figures have become history are we able to say the peak passed.
Schedule of Global Production Depletion at 5%
Also leading us to the same conclusion was a news article last week that Kuwait has announced that Burgan, its largest field and also the second largest field in the world has begun an irreversible decline. They said that peak output fell short of their previous estimates of 2 mbpd and 1.7 mbpd was now the optimum rate. They also said that despite additional investment in Burgan and other fields there would be a decline in overall production. Kuwait had predicted until just recently that Burgan would produce at 2mbpd for the rest of the fields 30-40 years of life. To admit now that not only could they not reach the 2mbpd target and production would now decline instead of remain flat should be a very sobering event for global oil watchers. This is exactly what we are expecting from Saudi and the other OPEC producers in the area as the spotlight of world concern focuses on their futures. Numerous analysts have already claimed the same thing has happened with the largest field in the world, Ghwar in Saudi Arabia, only Saudi is able to disguise it by not reporting production numbers by field. The Energy Analyst at the Bank of Montreal claims numbers obtained from various sources prove Ghwar is already in irreversible decline. Matthew Simmons showed slides at the ASPO conference last week that suggested the top seven Saudi fields are already in decline. However, until Saudi confesses the global charade will continue. There is an ongoing dispute on whether the Greater Burgan field in Kuwait or the Cantarell field in Mexico is the second largest field. Until the final production numbers are tallied several decades from now the question will continue to be argued. Either way, Pemex has already told the world that the Cantarell field was heading into decline as of May. The mainstream media is still not listening.
Retailers were reporting a mixed picture on Friday based on numerous onsite reports. Stampedes at several Wal-Marts produced minor injuries but shopping continued. Roughly 20% of holiday sales are rung up this weekend and many retailers hired scores of temporary workers to handle the load. One Best Buy store said they hired an extra 125 workers just for this weekend. The iPod remains the most sought after gift with lines for the Xbox attracting the most attention.
While it may be called Black Friday because that is when most retailers shift into the black for the year the coming Monday is called Cyber Monday. This is a new trend brought on by the vast array of websites selling thousands of items at highly discounted prices. The trend began several years ago as shoppers toured the malls of the Thanksgiving weekend comparing models and features of items they want to buy. On Monday when buyers went back to work where most offices have broadband connections they surfed the web for the models they had determined they wanted while mall surfing over the weekend. Cyber stores post huge sales numbers on Monday as those purchases are made online from the office. I have been bombarded with dozens of email ads this week from online stores I frequent to remind me they are waiting patiently for my business. My favorite store is NewEgg.com and the worst in my opinion is Overstock.com but I know everyone has their own preferences.
Despite the markets lackluster performance on Black Friday they finished the week with very strong gains. The Dow gained +165 and the Nasdaq +112. The Dow and S&P completed their fifth straight week of gains and the Nasdaq extended its string to six weeks. Those statistics should be worrisome to anyone long this market. Now that the pre-Thanksgiving rally is history we could be entering a period of weakness ahead of the Christmas holidays. Typically the Santa Claus rally covers the last five days of the year and the first two days of the New Year. Between now and then we have the January Effect (JE) to provide support but given the six weeks of rally the JE may have already run its course. Fund managers typically have bought small caps in January to refresh their portfolios after rotating out of winners late in the year and to put year-end contributions to work. Traders caught on to the January bounce and started buying ahead of the bounce to get in front of this surge of January fund buying. Over the last few years this front running buying has moved farther ahead of January to actually add to the pre-Thanksgiving buying. This can produce a lull in December with traders already long and funds short on cash until January. I discussed the low cash positions over the last couple weeks as a coming problem for December buying.
Next week could be a critical week with the markets at new highs and a new flood of economic reports ahead. The markets may have over reacted to the supposedly good news in the FOMC minutes and economic news could either feed that reaction or kill it. This is a very full week for economics with the PMI, GDP, ISM and Jobs leading the list.
Table of Economic Reports
Crude Oil Chart - Daily
Natural Gas Chart - Daily
While I would like to maintain a bullish stance I believe a more cautionary view
is required. The cold front in the North East and the new cold front due to
arrive in the Midwest on Sunday suggests a very strong possibility that gas
prices will rally strongly and take oil with it. Since energy stocks
ignored for months now there is a good chance traders will rotate out of techs
and the broader market in hopes of a new rebound in energy. Should any of those
economic reports above surprise negatively it could hasten year-end profit
taking. The Dow sprinted to 10955 on Friday before giving up -40 of those points
to close at 10915. This was very close to the 10984 resistance high from March
and the psychological 11000 level. This would be a good spot for profit taking
begin. The Nasdaq struggled to stay in positive territory at 2260 and the
weight of its +235 point sprint is weighing on the techs. For these reasons I
would be cautious about adding any new positions and tighten my stops again to
avoid a nasty surprise. We are pressing our luck that the rally will continue
and it is time to take profits and hit the malls.
New Long Plays
We encourage everyone to read this weekend's market wrap. If you have then feel free to skip ahead to the play updates. If not we want to caution you about initiating any new bullish positions. The Dow Jones Industrial Average is up 700 points in just the last four weeks and looks very overdue for some profit taking. To make matters worse the rally in the DJIA stopped right at major resistance (see chart) at its five-year trendline. Granted the DJIA is an index of just 30 stocks but the S&P 500 and the NASDAQ composite, while both have broken out to new highs, both also look just as overbought and due for a correction. Given these conditions we're going to hold off on adding new positions to the newsletter tonight. More aggressive traders may want to look over these speculative candidates: Gateway (GTW) looks poised to make a run towards its 200-dma but watch out for resistance near $3.25. IMS Health (RX) has recently broken out from its three-month descending channel and news of the canceled merger may continue to fuel the rebound.
Chart of the DJIA:
New Short Plays
Long Play Updates
Burlington Coat - BCF - close: 41.54 chg: +0.30 stop: 38.45 *new*
BCF continued to rally on Friday after bulls bought the early dip near $40.65. We believe that BCF will continue to rally into the holiday season (a.k.a. cold weather). Traders looking for a new entry point can watch for a dip back to its 10-dma near 40.45 or the $40 level. Odds are growing for another dip with the major averages so overbought. We're raising our stop loss to $38.45. Our target is the $43.50-44.00 range.
Picked on October 24 at $38.90
Csk Auto - CAO - close: 15.82 change: +0.10 stop: 14.95
Time is running low for our CAO play. The company is expected to report earnings on Monday, December 5th and we do not want to hold over the report. Currently the stock is poised under resistance near $16.00 and its exponential 200-dma. The question is whether or not the stock will breakout before the earnings report. Given the trend of higher lows it looks like CAO might breakout but we're worried that the major averages are overbought and due for a pull back, which would normally stall any bullish action in CAO. We are not suggesting new plays and we plan to exit on Friday, December 2nd near the closing bell. More conservative traders may want to raise their stops toward $15.19 or $15.39 to reduce your risk. We're going to adjust our target to $16.40 near its simple 200-dma.
Picked on November 02 at $15.58
CE Frankline Ltd - CFK - close: 12.10 chg: +0.09 stop: 9.99
CFK is giving us some mixed signals. Short-term some of its oscillators are starting to look a bit bearish. Meanwhile its weekly indicators and its P&F chart are bullish. It would be great to see CFK rally from its 10-dma (11.87) or the $12.00 level. However, we would not be surprised to see a dip back to $11.50 or even $11.00, especially now with the major indices looking so overbought and due for a pull back. Given the circumstances we would hesitate to launch new bullish positions right here. Our target is going to be the $14.75-15.00 range over the next seven weeks. We are suggesting a stop loss at $9.99 but more conservative traders might want to consider something tighter (the 50-dma is near 10.98).
Picked on November 16 at $11.98
Cree Inc. - CREE - close: 27.45 change: +0.16 stop: 24.89
The SOX semiconductor sector index continued to creep higher on Friday and CREE followed suit. The bad news is that the SOX is still struggling with resistance in the 485 region. Meanwhile CREE, which broke through significant resistance at $26 several days ago, hit a new three-month high on Friday. Currently the major averages look overbought and due for a pull back and when that occurs we'd look for CREE to retest the $26 level as support. A bounce from $26 could be used as a new bullish entry point. Our target will be the $30.00-31.00 range.
Picked on November 20 at $26.89
D.R.Horton - DHI - close: 36.62 chg: -0.05 stop: 32.45
Homebuilding stocks took a post-Thanksgiving nap on Friday. Shares of DHI spent almost the entire session bouncing along the $36.50 level. If the major averages pull back we would watch for DHI to dip toward the $35 level. A bounce from $35.00 could be used as a new bullish entry point. Actually a bounce from $36 could be used as an entry point but we expect more profit taking in DHI if the DJIA/SPX consolidate some of their gains. Our target for DHI is the $39.75-40.00 range.
Picked on November 21 at $35.85
eBay Inc. - EBAY - close: 46.71 change: +0.07 stop: 42.45
Friday was a quiet session for EBAY. We suspect that shares will pull back and retest the $45 level and/or its simple 10-dma currently at 44.77 as support before moving higher again. We would wait for a bounce from this support before initiating new longs in EBAY. EBAY's P&F chart points to a $66 target. Our target is the $49.90-50.00 range.
Picked on November 21 at $45.10
Corning Inc. - GLW - close: 20.93 chg: -0.09 stop: 18.99
GLW's rally continues to struggle with the $21.00 level. We suspect that with the major averages overbought and due for a dip that GLW will dip too back toward the $20.00-20.25 region. We would wait for a bounce above the $20.00 mark before considering new bullish positions. GLW's P&F chart currently points to a $29 target. Our target is the $21.90-22.00 range. We're going to raise our stop loss to $19.89 to reduce our risk.
Picked on November 13 at $20.11
Kraft Foods - KFT - close: 30.11 chg: +0.05 stop: 28.89
If you missed Wednesday's newsletter KFT is a new bullish candidate based on its technical breakout about long-term resistance. The stock powered through resistance on Wednesday and there was some initial follow through buying on Friday morning. Unfortunately, the rally on Friday stalled at $30.50 and KFT gave up most of its gains. The action on Friday looks like a short-term top. Watch for a dip back toward the $29.50 level, which as broken resistance should now act as new support. A bounce from the $29.50 level could be used as a new bullish entry point. We plan on riding KFT into January up to its mid-month earnings report. The P&F chart for KFT points to a $48 target. Our target is the $32.50 mark.
Picked on November 23 at $30.06
Mentor Graphics - MENT - close: 9.11 chg: -0.13 stop: 8.64
Last Wednesday was a big day for MENT. The stock broke out over the top of its four-month trading range at the $9.00 level. Our trigger to go long was at $9.05 opening the play. Friday's session saw the stock pull back but broken resistance at $9.00 acted as new support and shares of MENT were rebounding higher into the afternoon. This looks like another bullish entry point to go long the stock. Our target is currently the $9.95-10.00 range near its 200-dma.
Picked on November 23 at $ 9.05
VCA Antech - WOOF - close: 28.42 chg: +0.29 stop: 25.90
The rally continued for shares of WOOF on Friday with the stock adding just over one percent to close at a new all-time high. We are not suggesting new bullish positions at this time. If the major market averages pull back then WOOF could dip back to the $27.50 or $27.00 levels pretty easily. If this occurs we'd watch for a bounce as a new entry point. In the meantime more conservative traders may want to tighten their stops. We're going to leave ours at $25.90 for now. Our target is the $29.90-30.00 range.
Picked on November 09 at $26.74
Short Play Updates
Closed Long Plays
Closed Short Plays
Today's Newsletter Notes: Market Wrap by Jim Brown and all other plays and content by the Option Investor staff.
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