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Daily Newsletter, Monday, 12/05/2005

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Table of Contents

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

Market Wrap

Distribution Done

Last week's Nasdaq rally extended to this morning, as the futures held at and slightly above Friday's closing highs. The Dow and SPX were weaker but also held Friday's closing levels until the opening bell. The music stopped at the open, however, and a grind to the low end of the premarket range quick dissolved into a flush below Friday's lows. Thursday's range was partially retraced on the Nasdaq and SPX, and entirely reversed on the Dow prior to a closing bounce.

Volume was strong on the indices while weaker on the ETFs, and volume breadth was solidly negative on the Nasdaq, less so on the NYSE. Volume breadth finished with 1.4 declining shares for each advancing on the NYSE, 2 declining shares for each advancing on the Nasdaq. Today's print constituted a key reversal and bearish engulfing print for the day.

At 10AM, the Institute for Supply Management released its ISM Services index. The ISM index showed an increase in activity from purchasing managers in November that was less than expected at 58.5%, down from 60% in October. Economists had been expecting a reading of 59.2%. Readings above 50% indicate growth in this diffusion index. The Price-paid component fell from 78% to 74.2%, a persistently high level. Marketwatch quoted the ISM as saying that "There is still significant concern about the relatively high level of energy prices and its impact on freight costs and on the prices of other materials and services."

Daily Dow Chart

The Dow was looking a lot more bearish at 2PM than it did at the close, with a sideways bounce retracing part of the previous drop. What would have been a complete reversal of Thursday's gains was corrected by that bounce, but below 10855-875, 10800 looms large as next support. The Dow was the weakest link last week, with Friday's action clearly negative where the Nasdaq was positive. Bulls need to see a violation of the bearish triangle, on a break above 10875, while bears will look for a break of 10800 to target 10700-710 confluence. For the day, the Dow closed lower by 42.5 at 10835.01.

Daily S&P 500 Chart

The SPX lost 2.99 to close at 1262.09, breaking Friday's range but failing to retrace even half of Thursday's tall candle. The descending trendline connecting the rally highs has resulted in a slow roll in the 10-day stochastic, technically a downphase but more of a trending move that remains overbought. Descending resistance is at today's 1265 high. It's very early to consider this as a descending triangle, though it might be. A break below 1257 will target potential triangle support at 1249-50.

Daily Nasdaq Chart

The Nasdaq lost 15.73 to close at 2257.64, declining from an opening high of 2269.48. Steeply rising trendline support was tested but not broken. The daily cycle oscillators continue their slow roll, printing what still appears to be a bearish divergence against the higher price highs. Note that there's no possibility of a declining triangle interpretation here at the highs, because the highs have been rising. Rising trendline support is at 2250.

Daily TNX Chart

The Treasury announced the size of the upcoming 4-week bill, 5- and 10-year note auctions this morning, giving us some indication of the liquidity picture for the remainder of the month. The next 4-week bill auction will be in the amount of $16 billion, refunding $22 billion in maturing bills for a net paydown of $6 billion- adding to liquidity available to the market. However, the 5- and 10-year note auctions in the amount of $13 billion and $8 billion respectively will raise new cash of $21 billion, for a net drain of $15 billion. However, with the cash management bills auctioned on December 1st and 2nd maturing December 15th, $38 billion will be paid down, resulting in a net paydown of $23 billion. Overall, the Treasury should become a net contributor to the market, which would support a positive seasonal bias for mid-December. Of course, the Treasury isn't the only player affecting liquidity flows, but we should see it exert a supportive influence on the market.

Also, note that the paydown/adds will be from short-dated cash management and 4-week bills, while the new cash/drains will be from longer-dated 5- and 10-year notes. This combination exploits the flattened yield curve, by adding liquidity via paydowns of short-dated debt and raising cash via longer dated notes. It should encourage short rates to decline and longer rates to rise, all things being equal.

Today, 13- and 26 week T-bills were auctioned, $34 billion in total to refund $31.9 billion maturing for a net paydown of $2.09 billion. Indirect bidders purchased $8.4 billion of the total for a respectable 25% participation. The 13-week bills sold for 3.93% yielding 4.025% and generating 2.34 bids for each awarded. The 26-week bills sold for 4.185% yielding 4.335%, setting a 2.5 bid to cover ratio.

Bonds were weak throughout the session, with ten year note yields gapping up at the open and finishing strong, +4.8 bps at 4.567%. The daily cycle indicators are showing preliminary buy signals on the bounce from 4.4% support, and a break back above 4.6% would suggest a move to the top of the rising linear channel at 4.7%.

Daily Chart of Crude oil

Crude oil gapped higher overnight and held above the descending linear regression channel off the Katrina high at the end of August. The intraday high was 60.825, but even the end of session pullback held above gap. Oil bulls need to see the 59 area hold if retested, and a break above 61.30 to confirm a new uptrend off the 56 lows. For the day, February crude oil closed higher by .625 at 59.95.

Traders returned to their screens this morning to find an early morning report from Ford (F) to the effect that the automaker intends to close 8 North American assembly and parts plants. Like GM, which is eliminating 30,000 jobs and closing 12 North American facilities, F cited "soaring" raw material and health-care costs as well declining North American market share. Reuters reported that F has lost more than $1.4 billion from its North American unit. It's worth noting that the Fed has been iterating and reiterating its view that inflation is "well-contained," and, along with government, has been a supporter of the elimination of global barriers to employment. It is my own view that reality can be seen in announcements such as this: every consumer sees the price of pretty much everything other than consumer electronics rising, and increased competition from international, particularly Asian labour is pressuring wages. With North American wages not growing as quickly as the price of commodities, consumers here have relatively less money to spend, and it's pressuring North American manufacturers who must pay more for inputs and cannot charge correspondingly more for their finished products. F closed lower by 1.1% at 8.06, while GM gained .14% to close at 22.13.

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JPM announced that it intends increase its staff in India by 4,500 during the next two years. Marketwatch reported that these new graduates will be hired instead of "replacing staff somewhere else." INTC announced that it will invest more than $1 billion over the next 5 years in India and, more particularly, Indian tech companies. Craig Barrett said that this includes a $250 million venture capital fund to exploit the rapid growth in Indian information technology. Currently, INTC employs 3,000 engineers and professionals in its Bangalore-based design center.

In other news, NTL (NTLI) announced that it would offer $1.4 billion to purchase Virgin Mobile. NTLI gained 1.16% to close at 60.80. Later in the morning, Boston Scientific (BSX) announced its $25 billion bid for Guidant (GDT). The bid equates to $72 per share in cash and BSX stock for all of the outstanding GDT stock, and exceeded JNJ's previous $22 billion or $63.43 per share bid by roughly 14%. Both Fitch and S&P placed BSX on credit watch negative, citing their expectation that the unsolicited offer would result in BSX's incurring excessive debt leverage to finance the deal. BSX lost 3.59% to close at 26.35, while GDT gained 9.96% to close at 67.98.

Calpine traded huge volume today as the NYSE announced its intention to suspend trading in and seeking delisiting of CPN shares tomorrow due to its "abnormally low selling price" and the possibility that the company could be pushed into bankruptcy. This follows a Delaware court ruling requiring CPN to repay $313 million in mis-spent proceeds from the sale of its natural gas supplies. The company characterized the sum as "ruinous" and requested a suspension of the order, which motion was dismissed on Friday. The company now has until January 22 to comply with the ruling. CPN lost 14.29% to close at .24.

Britain's Chancellor of the Exchequer, Gordon Brown, lowered his forecast for UK GDP growth from 3%-3.5% to 1.75% in 2005. Brown expects 2006's GDP to grow 2% - 2.25%. He cited "tough" economic conditions exacerbated by the oil rally and the downturn in the housing market. British pound futures were trading higher by .5% at 1.7423 as of this writing.

The President addressed what the Associated Press characterized as a "friendly" crowd at the Deere-Hitachi Construction Machinery Corp. in North Carolina, calling on companies to fund their pension obligations and on Congress to clarify applicable rules to ensure that US workers get paid their pensions as promised by their companies, and not by taxpayers via federal pension insurance. Bush, whose approval rating on the economy was at a low of 37% in the latest AP-Ipsos poll, cited last week's job numbers and reiterated that the economy is strong, with brighter days ahead. That poll and others have shown that a majority of Americans are pessimistic about the economy, however. The President also called upon Congress to extend the tax cuts due to expire, and to implement the Administration's pending health and energy plans.

This is scheduled to be a lighter week for economic data. Tomorrow will see the releases of Q3 Productivity and Factory Orders, followed by Wednesday's weekly mortgage and petroleum data, as well as Consumer Credit in the afternoon. On Thursday, it's the weekly Initial Claims report and on Friday, Michigan Sentiment and Wholesale Inventories.

For tomorrow, traders will be watching this morning's highs carefully. With the daily cycle indicators in various stages of their slow-motion rollovers, a failure to regain yesterday's high will put today's lows in peril, opening the door to daily cycle downphases lasting potentially for weeks. On the other hand, positive seasonality, a friendlier Treasury, and a so-far unbroken rising price trend suggests that it's still early for bulls to be worrying. Barring a break of today's lows, the rising trend remains intact. We'll be following and analyzing the action tick-by-tick in the Market and Futures Monitors- see you there!
 

New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
None None

New Long Plays

None today.
 

New Short Plays

None today.
 

Play Updates

Updates On Latest Picks

Long Play Updates

ANSYS Inc. - ANSS - close: 43.03 change: -0.03 stop: 40.89

We'd probably call today a victory for the bulls in ANSS. The NASDAQ lost 0.69% and the GSO software index lost 0.75% but ANSS held its ground, traded sideways all day, and closed with a minor 0.06% decline. The stock has some resistance at $44.00 and we are suggesting a trigger at $44.05 to open the play. If triggered we'll target a move into the $49-50 range by the end of January. The Point & Figure chart currently points to a $60 target.

Picked on December xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 02/02/06 (unconfirmed)
Average Daily Volume: 153 thousand

---

Burlington Coat - BCF - close: 41.20 chg: -0.22 stop: 38.90

We don't see any change from our weekend update on BCF. The stock dipped to $40.60 but rebounded to close with a minor loss. We are not suggesting new plays at this time. Our year-end target is the $43.50 level.

Picked on October 24 at $38.90
Change since picked: + 2.34
Earnings Date 10/06/05 (confirmed)
Average Daily Volume: 165 thousand

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CE Frankline Ltd - CFK - cls: 13.25 chg: +1.00 stop: 11.44*new*

Now that's more like it! A rise in crude oil prices fueled a rally in the oil sector and CFK helped lead the way with an 8% gain on big volume. Volume was almost three times the average, which suggests more strength ahead. The stock closed at highs not seen since the fourth quarter of 1997. Our target is the $14.75-15.00 range over the next several weeks. We are raising our stop loss to $11.44.

Picked on November 16 at $11.98
Change since picked: + 1.27
Earnings Date 10/27/05 (confirmed)
Average Daily Volume: 150 thousand

---

Cree Inc. - CREE - close: 27.18 change: -0.59 stop: 25.49

Semiconductors hit some profit taking today and the SOX lost 1.56% making it the worst performer among the tech-related indices. CREE followed suit with a 2.12% decline. However, it's interesting to note that the selling stalled near the $27.00 level and CREE continued to consolidate there for the rest of the session. Our six-week target is the $30.00-31.00 range.

Picked on November 20 at $26.89
Change since picked: + 0.29
Earnings Date 01/19/06 (unconfirmed)
Average Daily Volume: 1.2 million

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CenturyTel Inc. - CTL - close: 33.15 change: -0.13 stop: 32.39

We remain on the sidelines and don't see any change from our previous update on CTL. Our strategy is to go long on a breakout over resistance at the 200-dma and the $33.50 level. Our trigger to buy the stock is at $33.55. If triggered we'll target a run to $36.00 before its January earnings report. The Point & Figure chart points to a $49 target.

Picked on December xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 01/26/06 (unconfirmed)
Average Daily Volume: 855 thousand

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D.R.Horton - DHI - close: 36.32 chg: -0.20 stop: 33.75

The rally in the homebuilders paused today as interest rates started moving higher again. The good news with DHI is the stock rebounded off its lows for the session and began trading higher into the close. This looks like a new bullish entry point to go long the stock. Our target for DHI is the $39.75-40.00 range.

Picked on November 21 at $35.85
Change since picked: + 0.47
Earnings Date 11/16/05 (confirmed)
Average Daily Volume: 3.2 million

---

eBay Inc. - EBAY - close: 45.20 change: +0.01 stop: 42.45

EBAY tried and failed again to breakout over the $46.00 level. Weakness in the tech sectors didn't help matters. More conservative traders may want to wait for a move over $46 before considering new longs. Our six-week target is the $49.90-50.00 range.

Picked on November 21 at $45.10
Change since picked: + 0.10
Earnings Date 01/18/06 (unconfirmed)
Average Daily Volume: 17.2 million

---

Forest Oil - FST - close: 46.20 change: +0.05 stop: 42.75

FST's failure to follow through on Thursday's and Friday's strength may suggest the stock still has more consolidating to go. It is true that Friday's intraday move over $47 was a breakout over the bullish/inverted head-and-shoulders pattern but the lack of follow through is a problem! Don't be surprised to see a dip back to $45 or even $44. Aggressive traders may want to buy a bounce. We are suggesting traders wait for another move over $47 before going long. Our target is the $52.50-53.00 range. We do not want to hold over FST's February earnings report.

Picked on December 02 at $47.01
Change since picked: - 0.81
Earnings Date 02/09/06 (unconfirmed)
Average Daily Volume: 1.1 million

---

Corning Inc. - GLW - close: 21.27 chg: +0.42 stop: 19.99

Good news! GLW displayed some relative strength today with a 2% rally through resistance at the $21.00 level. The stock looks poised to make a run toward our target in the $21.90-22.00 range.

Picked on November 13 at $20.11
Change since picked: + 1.16
Earnings Date 01/25/06 (unconfirmed)
Average Daily Volume: 11.8 million

---

Grant Prideco - GRP - close: 42.60 chg: +0.68 stop: 38.49

Strength in oil prices fueled another gain for GRP, which added 1.6% on above average volume. We see no changes from our previous update. Our target is the $46-47 range. We do not want to hold over GRP's earnings report in January.

Picked on December 02 at $41.80
Change since picked: + 0.80
Earnings Date 01/25/06 (unconfirmed)
Average Daily Volume: 1.5 million

---

JAMDAT Mobile - JMDT - close: 22.98 chg: -0.53 stop: 22.49

We are still in a watch-and-wait mode with JMDT. The stock is still consolidating above its simple 200-dma near the $22.50 level. Our strategy is to catch the next leg higher with a trigger at $24.01. If triggered we'll target the $26.95-27.00 range. FYI: the latest data put short interest at 22.8% of the 24.8 million share float.

Picked on December xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 02/07/06 (unconfirmed)
Average Daily Volume: 368 thousand

---

K-Swiss - KSWS - close: 31.74 chg: -0.72 stop: 30.89

Traders may want to go to yellow-alert here with KSWS and keep an eye on the exit door. The stock failed to see any follow through from Friday's rally and instead the stock produced a bearish engulfing candlestick pattern. These patterns are normally one-day reversal patterns but they need to see some follow through to really validate them. We have a relatively tight stop at $30.89, which is just under the seven-week trend of higher lows (a.k.a. support). More conservative traders could probably tighten their stops toward $31.25. A bounce back over $32.60 could be used as a new entry point.

Picked on November 29 at $32.09
Change since picked: - 0.35
Earnings Date 01/26/06 (unconfirmed)
Average Daily Volume: 256 thousand

---

Levitt - LEV - close: 22.70 chg: +0.26 stop: 20.95

LEV displayed some relative strength today by posting another gain in spite of a market pull back. We don't see any changes from our previous update. We would suggest long positions with LEV above $21.80 and target a run up into the $24.90-25.00 range. We do not want to hold over the February earnings report.

Picked on December 01 at $22.27
Change since picked: + 0.43
Earnings Date 02/02/06 (unconfirmed)
Average Daily Volume: 161 thousand

---

VCA Antech - WOOF - close: 27.92 chg: -0.08 stop: 25.90

There are no surprises here. We've been telling readers for days now that the momentum in WOOF has stalled and the stock looks poised for a pull back. We're surprised that the profit taking has been so mild. The $27 level and $26 level are the next two areas of support. We would not suggest new positions at this time. Our target is the $29.90-30.00 range.

Picked on November 09 at $26.74
Change since picked: + 1.16
Earnings Date 01/24/06 (unconfirmed)
Average Daily Volume: 436 thousand
 

Short Play Updates

None
 

Closed Long Plays

None
 

Closed Short Plays

None
 

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

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