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Daily Newsletter, Wednesday, 12/14/2005

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Table of Contents

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

Market Wrap

Timber!

The mighty fell last night. In the overnight markets, gold and the Nikkei 225 both tumbled from lofty levels, gold continuing a slide that had begun earlier in the week.

Some attributed gold's plunge at least in part to a change in margin requirements on the Tokyo exchange this week, leading to a liquidation of some positions. A disappointing Tankan quarterly survey supposedly led to the Nikkei's more-than-400-point tumble off its day's high.

Whatever the causes, by the dawn here in the U.S., the lumberjacks were roaming through our markets, looking for other mighty trees to fell. What they found were the trees that had been hiding the bears, forcing bears to take cover and send the SPX to a fresh 52-week high.

The Nasdaq was a reluctant participant in gains for a time in the afternoon, spending much of the day in negative territory and closing there, too. The Bank of America and Bear Stearns downgraded Apple (AAPL) to neutral and peer perform ratings, respectively, contributing to the Nasdaq's relative weakness. Jim Brown has mentioned the possible pressure on the Nasdaq this week due to the reweighting. So far, that pressure has worked only to dampen gains, not to send the Nasdaq below support.

Annotated Daily Chart of the Nasdaq:


That tactic of buying support may no longer work because of the Nasdaq's reweighting. Longs may not be a good idea at all this week on the Nasdaq.

Annotated Daily Chart of the SOX:


Annotated Daily Chart of the Russell 2000:


While the tech-heavy Nasdaq, SOX and Russell 2000 languished, blue chips helped the SPX and Dow to display much more strength. The SPX achieved new 52-week intraday and closing highs despite the retreat off its 1275.80 high of the day.

Annotated Daily Chart of the SPX:


Annotated Daily Chart of the Dow:


The day saw a number of economic releases. The Mortgage Bankers Association released mortgage applications for the week ending December 9 at 7:00 EST. The headline noted the continuing decrease of refinance applications, but mortgage loan application volume was also down 5.7 percent on an adjusted basis and 8.1 percent on an unadjusted basis. The purchase index, refinance index, conventional index and government index all fell. The four-week moving averages for the market and refinance indices fell while that for the purchase index remained unchanged. The average contract interest rate for a 30-year fixed-rate mortgage fell to 6.28 percent from the previous week's 6.32 percent, and points decreased. Despite the fall in some figures from the MBAA, the DJUSHB, the Dow Jones U.S. Home Construction Index, produced strong gains ahead of tomorrow's earnings announcements from a couple of homebuilders.

An AP article hit the wires this morning, speculating that the Pentagon will ask for $80-100 billion more for the effort in Afghanistan and Iraq. This number is in addition to the $50 billion that Congress may approve before adjourning, pushing the war costs up to a possible half-trillion dollars. No final proposal has been written and the ultimate request could differ from the figure now being bandied about, the article concedes, but critics have long accused President Bush of delaying requests as long as possible to keep budget deficit projections less dire than they would otherwise be, and a request anywhere near that amount will plead their case for them.

That press release and its implications for the trade deficit were to lend special significance to the 8:30 release showing that the trade deficit unexpectedly widened by 4.4 percent in October, to a new record $68.9 billion. For the year-to-date, the trade gap now stands at $598.3 billion, with the year now set to break last year's record $617.6 billion annual deficit. The deficit had been expected to narrow to $62.9 billion according to one report. Trade deficits with China, Canada, Mexico, the EU, and OPEC-member nations all reached new records. Exports rose during October by the largest amount in seven months, but that export number was driven by aircraft sales and not enough to overcome rise in import prices.

Bonds reacted, with the ten-year yield gapping lower and dropping, but the immediate reaction in equities was muted. That was to come later, when the markets pulled back from the early highs after the crude inventories release. Even that pullback was not to last, however.

Perhaps a separate release by the Labor Department showing that November's import prices dropped 1.7 percent, far more than the expected 0.7 percent, helped reassure investors, with the drop in crude prices mostly responsible for that decline. During the period covered, petroleum prices declined the most they had in almost a year.

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Treasury Secretary John Snow spoke reassuringly of the trade deficit in an interview on CNBC this morning, claiming that the way to undo that deficit was to continue efforts to grow the economy. He asserted that continuing tax cuts in the face of a record deficit would be a good idea because of the stimulus on the economy. He also noted that energy costs were not filtering through to core costs.

The impact of crude costs on trade deficit and the deficit's impact on the economy put special emphasis on the crude inventories on this day of many economic releases. Crude inventories rose 0.9 million barrels; motor gasoline, 1.8 million barrels; and distillates remained flat. Expectations had been that crude inventories would drop 1.5 million barrels; gasoline, climb 1.0 million barrels; and distillates, rise 800,000 barrels. While crude and gasoline builds proved better than expected, the distillate number was a disappointment, with distillates the most important component this time of year.

Considering the average range for this time of year, crude was above the upper end of the range, gasoline in the lower half, and distillates in the middle. A couple of minutes before the release, crude had traded at $61.45 a barrel, but quickly dropped to a low of $60.80 before beginning a rebound that took it to a new high for the day. When crude again reversed from that new high, at about 11:00, equities began a climb that was at first labored, but then gained steam as crude dropped to a new low for the day.

Sectors that performed well from early in the day included retailers, utilities and industrials, with blue chips in general performing well. An afternoon push carried financials higher, too.

Many specific-stock related developments probably contributed to the trading pattern today, too, but in the interest of keeping this already-too-long Wrap as short as possible, they will be covered briefly. If these impact your positions, check your preferred news source for more information. AAPL's two downgrades, already mentioned, were due to valuation concerns after recent gains. Electronic Arts (ERTS), ConocoPhillips (COP), PPG Industries (PPG) and Best Buy (BBY) also received downgrades. Safeway (SWY) provided disappointing guidance.

Big caps General Electric (GE), Boeing (BA), Honeywell (HON), Pfizer (PFE) and Wal-Mart (WMT) offered good news, helping to stabilize the big-cap heavy OEX. GE CEO Immelt gave an encouraging state-of-the-company speech to investors. Australia's Quantas Airways chose BA over Airbus for new orders. BA has reached a record number of new orders for the year. HON reaffirmed guidance for fiscal 2005 and 2006, with its fiscal 2006 EPS growth now expected to be 20-30 percent. Yesterday, PFE announced a dividend boost, and today the CEO said that the lifting of the dividend was only the first of a series of developments the company planned to increase shareholder return. WMT bought Sonae, a Brazilian retailer. In other news, General Dynamics (GD) will buy Anteon International (ANT), with the price tag at about $2.2 billion. Citigroup upgraded Nike (NKE).

Near the close, Amgen (AMGN) announced that it would acquire Abgenix (ABGX) for a significant premium to the $14.65 closing price, at $22.50. ABGX understandably shot up during after hours trading. JNJ also announced that its Paliperidone drug had been shown effective in schizophrenia studies. Symantec (SYMC) was granted a new antivirus technology patent.

The failure of the usual market leaders to lead today questions the sustainability of the rallies on other indices, but none of those usual leaders led to the downside, either. There was an obvious preference for the safety of blue chips, so those blue chips better continue to lead the way if the rally is to be sustained. GE has been in a possible bearish right triangle on its daily chart, with a flat supporting line at about $35.25, so bulls want to see GE stay above that level. BA was a market leader today, but saw a close well off its high of the day on strong volume, a sign that big-money people were selling into the rally. Some were expressing concern that BA could not keep up its record orders into next year. BA was approaching the top of a rising regression channel in place since January 2003, a long time for a climb within such a channel, and it was testing the previous swing high at $70.93 back in December 2000. It traded above that today after testing it yesterday. It has the possibility of rising a little further before it hits the top of the rising regression channel, but no guarantee that it will.

Tomorrow is a busy day for economic releases again. At 8:30 are the usual initial claims, but also CPI for November and the NY Empire State Index for December. CPI and employment figures will prove important for market direction. A strong labor number (fewer claims than expected) might worry markets, as the Fed is known to be watching for upward pressure from wages. A core CPI that shows that inflationary tendencies are being passed on to the consumer might, too. At 9:15, capacity utilization and industrial production for November will be released. At 10:30 come the natural gas inventories, with those currently probably more important than the crude inventories. Noon sees the Philly Fed number for December.

Earnings include those from ADBE, APOL, BSC, FCEL, GS, KBH, LEN, ORCL, PIR, and RAD, among others, with a number of financials and homebuilders among that group. That could prove important given the importance of the homebuilders and financials in today's rally

LLumberjacks weren't able to fell many stocks or indices on our markets today, as was obvious by the new 52-week high on the SPX, but the bifurcation in the tech-related indices and the others cautions bulls to keep close stops. The Nikkei's steep decline last night shows what happens when weak bulls are shaken out, but a number of recent sharp 300+ point gains on the Nikkei have shown what can happen when you try to catch a top, too. Watch the levels indicated on the charts above, but remember the tendency for technical analysis to become less useful beginning mid-morning on opex Thursdays.
 

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: 41.71 change: -0.05 stop: 40.89

There is no change from our previous update on ANSS. We remain on the sidelines. 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.

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

---

Anglogold - AU - close: 45.87 change: -1.03 stop: 41.95

As we suspected the pull back in gold stocks was not over yet. Shares of AU lost 2.19% but volume was below average, which doesn't suggest a lot of conviction. A bounce from the 10-dma could be used as a new entry point. Our target is the $49.50-50.00 range.

Picked on December 06 at $44.81
Change since picked: + 1.06
Earnings Date 01/27/06 (unconfirmed)
Average Daily Volume: 904 thousand

---

Burlington Coat - BCF - close: 41.27 chg: +0.20 stop: 39.90

There is no change from our previous updates on BCF. We are not suggesting new plays at this time. More conservative traders may want to exit right here! Our year-end target is the $43.50 level.

Picked on October 24 at $38.90
Change since picked: + 2.51
Earnings Date 01/04/06 (unconfirmed)
Average Daily Volume: 165 thousand

---

CenturyTel Inc. - CTL - close: 34.25 change: +0.39 stop: 32.39

The breakout continues in CTL. The stock added another 1.15% and pushed through technical resistance at its 100-dma. Our target is the $36.00 level. The P&F chart for CTL points to a $49 target.

Picked on December 12 at $33.55
Change since picked: + 0.70
Earnings Date 01/26/06 (unconfirmed)
Average Daily Volume: 855 thousand

---

D.R.Horton - DHI - close: 37.94 chg: +1.13 stop: 33.75

The homebuilding stocks were some of the best performers today. The DJUSHB index added 2.65% and broke through resistance at its 100-dma. DHI was helping lead the pack with a 3% gain and a new two-month high. Technicals have turned positive again and its daily chart shows a new MACD buy signal. Our target for DHI is the $39.75-40.00 range.

Picked on November 21 at $35.85
Change since picked: + 2.09
Earnings Date 11/16/05 (confirmed)
Average Daily Volume: 3.2 million

---

Duke Energy - DUK - close: 27.42 change: +0.53 stop: 25.99

Our new bullish play in DUK is off to a strong start. The stock added almost 2% today and volume came in well above its average, which is a bullish development. The daily chart also shows a new MACD buy signal. Strength in the utilities and news of some M&A activity between FPL and CEG helped lift the sector. DUK is testing resistance near $27.50 so we wouldn't be surprised by a dip from here before seeing new relative highs. Our target is the top of the channel, which should intersect with the 200-dma near $28.00. We'll use a target of $27.95-28.00. Our stop will be under last week's low at $25.99.

Picked on December 13 at $26.89
Change since picked: + 0.53
Earnings Date 02/01/06 (unconfirmed)
Average Daily Volume: 3.9 million

---

Forest Oil - FST - close: 48.82 change: +0.26 stop: 44.49

A strong rebound from its lows of the session helped push FST into the green. We're not sure the pull back is over so we'd still keep an eye on the 10-dma. 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: + 1.81
Earnings Date 02/09/06 (unconfirmed)
Average Daily Volume: 1.1 million

---

Corning Inc. - GLW - close: 21.27 chg: +0.04 stop: 20.45 *new*

We don't see any change from our previous update. Last night's after hours strength failed to show up today but volume came in pretty strong. We're raising our stop loss to $20.45. Our target is the $21.90-22.00 range.

Picked on November 13 at $20.11
Change since picked: + 1.18
Earnings Date 01/25/06 (unconfirmed)
Average Daily Volume: 11.8 million

---

K-Swiss - KSWS - close: 33.06 chg: +0.01 stop: 31.45

We see no change from our previous updates on KSWS. The stock appears to be consistently inching higher in a narrow channel. As long as you monitor your stops the play should work out well. Our target is the $34.85-35.00 range.

Picked on November 29 at $32.09
Change since picked: + 0.97
Earnings Date 01/26/06 (unconfirmed)
Average Daily Volume: 256 thousand

---

Levitt - LEV - close: 23.10 chg: +0.15 stop: 20.95

Wednesday was a relatively volatile day for shares of LEV. The stock did breakout over resistance near $23.00 but failed to hold its gains over the descending 100-dma (23.40). We are not suggesting new positions at this time. More conservative traders may want to tighten their stops. Our target is 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: + 0.83
Earnings Date 02/02/06 (unconfirmed)
Average Daily Volume: 161 thousand

---

Nautilus - NLS - close: 20.28 change: +1.43 stop: 17.89

Breakout! NLS produced a big bullish breakout today with a 7.58% gain on big volume more than twice the daily average. The stock cleared both resistance at the 50-dma and its early December highs. Actually what we could be seeing is a short-squeeze. The latest data puts short interest at 21% of its 33 million shares outstanding. Our target is the $21.50 level. We will not hold over the February earnings report.

Picked on December 11 at $18.81
Change since picked: + 1.47
Earnings Date 02/01/06 (unconfirmed)
Average Daily Volume: 598 thousand

---

VCA Antech - WOOF - close: 27.86 chg: -0.17 stop: 26.74 *new*

Heads up! We're adjusting our stop loss. While the $26.00 level should be substantial support we don't want to see WOOF give back all of its gains. We're moving our stop to breakeven at $26.74. We would not suggest new positions here. Our target is the $29.90-30.00 range.

Picked on November 09 at $26.74
Change since picked: + 1.12
Earnings Date 01/24/06 (unconfirmed)
Average Daily Volume: 436 thousand
 

Short Play Updates

New River Pharma. - NRPH - close: 49.66 chg: +3.67 stop: 50.01

Today is a good example of why we like to use triggers. Yesterday did look like a bearish entry point but we wanted to see some confirmation. This morning before the opening bell an analyst firm started coverage on NRPH with an "out perform" rating. The stock responded by gapping higher and soaring back toward the $50 level for a 7.9% gain on huge volume. A big chunk of today's move was probably a short squeeze with everyone trying to cover at once. Since we are still on the sidelines we're going to keep NRPH on the play list for another day or two and see where it goes from here. Our strategy involves a trigger at $45.45 to open the play. If triggered we'll target a drop to the $40.00 level. Currently the P&F chart points to a $39 target, which more closely coincides with the H&S pattern target.

Picked on December xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 11/14/05 (confirmed)
Average Daily Volume: 86 thousand

---

NeuroMetrix - NURO - close: 31.10 chg: +0.23 stop: 34.01

We're not giving up yet but we're not suggesting new positions here either. There is still a chance that NURO will produce an oversold bounce back toward the 50-dma near $33.30. A failed rally there could be used as a new bearish entry point for more aggressive traders. However, more conservative traders may want to protect their capital and exit early right here. You can always re-enter on a failed rally or a new relative low. Our target is a decline into the $22.75-22.00 range above its simple 200-dma. We do not want to hold over the late January earnings report.

Picked on December 06 at $29.59
Change since picked: + 1.51
Earnings Date 01/27/06 (unconfirmed)
Average Daily Volume: 210 thousand
 

Closed Long Plays

CE Frankline Ltd - CFK - cls: 14.89 chg: +0.29 stop: 11.98

Target achieved. CFK turned in another strong session with most of its gains today coming in late this afternoon. Our target was the $14.75-15.00 range and shares hit a high of $15.10. Volume came in well above the average again. CFK has risen more than 24% from our picked price.

Picked on November 16 at $11.98
Change since picked: + 2.91
Earnings Date 10/27/05 (confirmed)
Average Daily Volume: 150 thousand
 

Closed Short Plays

None
 

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

DISCLAIMER

Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.

To ensure you continue to receive email from Option Investor please add "support@optioninvestor.com"

Option Investor Inc
PO Box 630350
Littleton, CO 80163
Copyright Option Investor Inc, 2005
All rights reserved

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

DISCLAIMER

Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.

To ensure you continue to receive email from Option Investor please add "support@optioninvestor.com"

Option Investor Inc
PO Box 630350
Littleton, CO 80163

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