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Daily Newsletter, Tuesday, 12/27/2005

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Table of Contents

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

Market Wrap

Santa's Claus Rally Dead?

Santa failed to make his Wall Street appearance this morning and traders panicked as news of his demise hit the wires. It appears Santa's sleigh was shot down by the Canadian border patrol when he was mistaken for a terrorist during what Canadian officials are calling an "unscheduled border crossing." His sleigh full of goodies destined for Wall Street investors was confiscated by officials and will be held pending an investigation into the matter. Several reindeer managed to escape but three were caught in the hail of bullets. Their names are being withheld pending identification. However, none of the three had a red nose. Young children are advised to skip the news photo below due to the graphic violence depicted.

Santa and the unidentified reindeer fatalities

The markets opened with a bang on a sharp drop in energy prices but a brief inversion of the yield curve tempered those gains. It has been five years since the curve last inverted followed by a recession. The last four recessions were preceded by an inverted curve. Since 1954 a severely flattened or inverted yield curve preceded every recession and several severe economic slowdowns. This recession worry was given as a reason for the sharp sell off of the morning gains. In reality it was not selling by retail investors that caused the drop. There was a strong sell program triggered when the Dow rebounded to the December highs at the open and then failed to hold. The sell programs knocked the A/D line from +1258 to -2850 in a very short period of time for a net change of -4100 issues. The S&P rallied to 1271.83 and within four points of a new four-year high before imploding to suffer a significant loss back to near the bottom of the December range. It was not a pretty picture for the bulls and the severity of the selling could easily have ruined sentiment for the rest of the year.

Dow Chart - Daily

Nasdaq Chart - Daily

The falling oil prices caused funds to dump energy stocks they had been trying to hold until January. Many funds probably wanted to hold those energy winners until after the calendar expired in order to present the best possible shine to their year-end portfolios. The sharp drop in oil and gas prices sent funds running to the exits despite a minor rebound in oil prices towards days end. Previous big winners suffered huge losses as stop losses were hit as funds dumped positions. A sample of the big losers would be AHC -5.31, IMO -3.59, ATW -3.51, EOG -3.33, SLB -3.05, BTU -3.01, KMG -3.00 and STR -2.90. Many of those stocks were up +50% to +100% for the year and huge profits were at risk. Gas stocks were hit the hardest as warmer than expected weather was predicted for the next seven days. Natural gas prices fell from Friday's close at $12.28 to rest on $11 at the bell. This is a substantial drop from the $14.42 high last Wednesday (-23%) and the $15.78 high (-30%) just over ten days ago. This is a massive loss for natural gas prices and this time of year they are the driving force in the energy sector. Oil prices trade on a btu basis to natural gas during the winter and it is remarkable that oil closed down only -27 cents at $57.85 after trading as low as $57.30 intraday.

Crude Chart - Daily

Natural Gas Chart - daily

If you looked at a list of the top 100 losers today better than 80 of them were energy stocks but the other big drops came from other prior winners. Google (GOOG), Whole Foods (WFMI), Nutri Systems (NTRI), Hansen Natural (HANS), Garmin (GRMN), ITT Industries (ITT), PW Eagle (PWEI), Marchex (MCHX), Hurco (HURC), Franklin Resources (BEN), Terex (TEX), Freeport McMoran (FCX), Education Services (ESI) and Deere (DE) to name a few. The main reason these companies are on the list is profit taking into year-end. Some funds with big gains obviously got nervous and started taking profits early.

After the close the S&P announced changes to the S&P-500. CBX Corp (CBSwi) and the new Viacom Inc (VIA.Bwi) will replace Visteon (VC) and the old Viacom (VIA.B) at the close of trading on Friday. The "wi" means "when issued" on the new stocks above. S&P also announced that Whole Foods Market (WFMI) will replace MBNA Corp (KRB) which is being acquired by Bank America.

Although the fund selling was strong and the internals terrible it was on very light volume. If you recall I mentioned on Sunday that we expected very low volume this week due to the back-to-back three-day weekends. Volume today barely broke three billion shares across all markets and much of that volume was due to stops being hit rather than a sudden burst of activity from investors getting cold feet. The real selling pressure came from two sell programs, one at 11:20 and the other at 1:20. This was not an all day event or a massive change in investor sentiment. It was two large sell programs on a very light volume day and there were no traders around to buy the dip. The result was a -105 point Dow loss and the worst day after Christmas ever according to market historians.

Where we go from here is a different matter. After having the stuffing knocked out of the holiday turkey we may have suffered a sentiment blow that could be terminal. The odds of an offsetting day of buy programs this late in the year are very slim. The tape painters will probably be content with holding the averages in the current range rather than trying to repair the damage. Dow 10725 is an area likely to be defended as long as selling volume does not increase substantially. I believe retail traders may be scared enough to stay on the sidelines until they see what January will bring. Given todays sell programs I think we just got a preview of what is to come.

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The airwaves were full of news about pockets of weak holiday sales although several stores including Wal-Mart and Federated were still on track to meet estimates. Retail analysts were cool to the idea that buyers were strong enough to push profits higher. Retailers appeared to have discounted earlier and deeper in hopes of selling to buyers strapped by higher energy/gasoline bills. This is likely to be a prevailing story as we move into January and more retail info becomes available.

There were some news standouts today headed by a warning from Overstock.com. OSTK issued a press release warning that they were no longer expecting to make a profit in Q4 due to higher expenses and slower than expected growth. The CEO, Jack Byrne, said Overstock decided to build the brand instead of focus on profits. During the period Overstock would have negative cash flows and rising inventory levels. Byrne said the excessive ad spending was necessary to get above the noise. The noise he was referring to was his fight with the mythical "Sith lord" he claims is responsible for the decline in his stock price. Bryne appeared in an interview on Bloomberg on Friday and today he lashed out at Bloomberg for editing out comments they deemed unnecessary. It is going to be progressively difficult to get good press if every interviewer ends up getting ripped by the Overstock CEO. Byrne said Overstock would announce its Q4 results "sometime in late January or early February." That vagueness in earnings dates is less than comforting to investors accustomed to having companies announce a firm date months in advance. OSTK closed at a new 52-week low at $31 with an -8% loss. We bought puts on Overstock in the LEAPS Trader at $38.50 in early December. For comparison Amazon said it had its best holiday season ever with a record number of items shipped.

OSTK Chart - Daily

WFMI Chart - Daily

Whole Foods Markets (WFMI) closed at $150.81 today and split 2:1 after the close. Whole Foods would be a good candidate for some of those year-end investment dollars at its new price of $75 sometime after Wednesday. Since there is likely to be some January profit taking on WFMI I would hesitate to enter until a new uptrend begins. Waiting for any January dip would be a good idea but let the trend tell you when it is time to enter.

Guidant dropped -2.29 to $64.69 after saying it received a warning letter from the FDA about its manufacturing center in Minnesota. On Friday Guidant said earnings would fall below expectations. This is bad news for Boston Scientific and its $25 billion bid for the company. BSX made the bid after Johnson and Johnson lowered its prior offer to $21.5B after a rash of negative news hit Guidant. Will BSX lower its bid as well? Traders appeared ready to take profits now rather than wait to see if another round of bidding or bid cuts would come first.

The potential inverted yield curve had been cussed and discussed for months and its arrival today was blamed for the drop. However, this indicator of future economic weakness is far from perfect. While all prior recessions on record were preceded by a flat or inverted yield curve there have been inversions without a recession. There is a Wall Street adage applied to many indicators as the situation warrants. In this case the adage would be applied like this. "An inverted yield has correctly predicted 10 of the last five recessions." This would mean the indicator appeared much more often than recessions actually occurred. For us it is not as much a worry about a potential recession as it is about how funds will react to the news. If today's selling was the nervous Nellie's bailing on the news then we could see some more tomorrow as the curve is debated ad nauseum on stock TV and in print. The key for us is to trade what the markets give us rather than try to guess in advance.

I warned on Sunday that the markets had serious resistance at Dow 10900-10950, SPX 1275-1280 and Nasdaq 2270-2280. The Dow spiked right into the middle of that Dow 10900-10950 range with today's 10932 high. The SPX could not make the grade to 1275 but came close right at 1272. The morning gap down on the entire energy sector kicked the props from under the SPX preventing it from hitting that 1275 resistance level. The Nasdaq also failed to reach its resistance highs and topped out at 2260 due mostly to the implosion on the Russell-2000. The Russell dropped nearly -10 points or -1.43% compared to only -0.9% on the Dow, S&P and Wilshire-5000. This Russell drag on the market is what concerns me the most. The Russell is a favorite proxy for mutual fund buying and selling. Funds like to buy the smaller companies when markets are expecting a multi month rise in hopes they will become larger. In times where the markets are expected to be choppy or down those same funds exit the small caps and rotate into the highly liquid blue chips. A larger drop in the Russell than the rest of the indexes suggests to me that funds are not planning on rising markets in early 2006. The January effect helped the Russell to a long bounce from the 615 low in October to the +690 levels we saw as resistance for the entire first two weeks in December. That boost to small caps from January expectations is now behind us and funds are starting to worry if the yield curve is right or wrong this time around. If there is a recession ahead the place you do not want to be as a fund is small caps. They are too illiquid and they tend to react sharply to bad economic news. Meanwhile multinational blue chips are safe havens for large amounts of cash.

The rest of the week is likely to remain volatile with buying volume declining as the week comes to a close. However, selling volume could rise if more funds start getting nervous. As a trader I plan on shorting weakness on any bounces in anticipation of a January dip. The Dow Transports dropped -50 points today after setting a new all time high on Friday. This was -50 points when oil was down sharply and a reason for them to be celebrating. If you read my weekend commentary you know I am expecting a sharp drop in the Transports once the calendar expires. A drop in Transports typically drags on the Dow and the manufacturing stocks. From where I sit tonight I see more negative potential on the horizon than I see positives and visibility is decreasing. In cases like this it is best to be overly cautious and go with the trend for short trades. Just remember to enter passively and exit aggressively and definitely don't get married to your positions.

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: 44.21 change: -0.88 stop: 40.89

Danger! Will Robinson! If we had a robot friend to monitor our trading it might shout out a warning after today's market weakness, especially if it saw the action in ANSS today. The stock tried to rally but failed under the $46 level and then proceeded to fall toward broken resistance now new support near $44.00. The drop to support near $44 is not a problem. We suggested that traders look for a dip toward $44 as a new entry point. The danger lies in today's bearish engulfing candlestick pattern, which is usually seen as a one-day (bearish) reversal pattern. We would not suggest new positions at this time. More conservative traders may want to tighten their stops toward the $42 or $43 levels. We're going to leave ours under the simple 50-dma for now. Our target is the $49.00-50.00 range by the end of January. We do not want to hold over the early February earnings report.

Picked on December 22 at $44.05
Change since picked: + 0.16
Earnings Date 02/02/06 (unconfirmed)
Average Daily Volume: 153 thousand

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Anglogold - AU - close: 47.59 change: -0.42 stop: 44.95

Gold stocks were not immune to today's sell-off. Shares of AU posted a 0.8% loss and also produced a bearish engulfing candlestick pattern. We are not suggesting new positions. More conservative traders may want to exit right here for a gain. Our target is the $49.50-50.00 range.

Picked on December 06 at $44.81
Change since picked: + 2.78
Earnings Date 01/27/06 (unconfirmed)
Average Daily Volume: 904 thousand

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BMC Software - BMC - close: 21.11 change: +0.16 stop: 20.74

BMC displayed some relative strength today. The stock added 0.76% and broke out over resistance at the $21.00 level. Our trigger to go long the stock was at $21.11. Our target now is the $21.85-22.00 range.

Picked on December 27 at $21.11
Change since picked: + 0.00
Earnings Date 02/01/06 (unconfirmed)
Average Daily Volume: 1.5 million

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CenturyTel - CTL - close: 33.33 change: -0.12 stop: 32.75 *new*

CTL continues to oscillate sideways near the $33.50 level. The failed rally under the 100-dma today looks bearish so we're going to raise our stop loss to $32.75 just under the simple 50-dma. We are not suggesting new bullish positions here.

Picked on December 12 at $33.55
Change since picked: - 0.24
Earnings Date 01/26/06 (unconfirmed)
Average Daily Volume: 855 thousand

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D.R.Horton - DHI - close: 36.26 chg: +0.05 stop: 34.75

Homebuilders were one of the few sectors to close in the green today. Unfortunately, the strength was not very impressive. DHI tried to rally higher but closed off its best levels of the session. So far DHI is still trading above short-term support near $36 and the stock is also testing support at its multi-week trendline of higher lows. We are not suggesting new positions. Our target for DHI is the $39.75-40.00 range.

Picked on November 21 at $35.85
Change since picked: + 0.41
Earnings Date 11/16/05 (confirmed)
Average Daily Volume: 3.2 million

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Duke Energy - DUK - close: 27.69 change: -0.14 stop: 26.89

Bulls bought the afternoon dip to $27.50 but they did not have enough momentum to push DUK into the green. The stock is close to our $27.95-28.00 target. We are not suggesting new positions here.

Picked on December 13 at $26.89
Change since picked: + 0.80
Earnings Date 02/01/06 (unconfirmed)
Average Daily Volume: 3.9 million

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JDS Uniphase - JDSU - close: 2.49 change: -0.02 stop 2.39

There is no change from our weekend update on JDSU. We remain on the sidelines. Our trigger to go long/buy the stock is at $2.65. If triggered we'll target a rally to $2.98. We would qualify this as an aggressive play.

Picked on December xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 01/25/06 (unconfirmed)
Average Daily Volume: 50.0 million

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Levitt - LEV - close: 22.92 chg: +0.38 stop: 21.95

LEV displayed some impressive relative strength on Tuesday. The stock added 1.6% and looks poised to breakout over the $23.00 level again. Our target is the $24.90-25.00 range.

Picked on December 01 at $22.27
Change since picked: + 0.65
Earnings Date 02/02/06 (unconfirmed)
Average Daily Volume: 161 thousand

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LifeCell Corp. - LIFC - close: 19.56 change: -0.21 stop: 19.24

We do not see any change from our weekend update on LIFC. Currently we are on the sidelines. Our trigger to go long the stock is at $20.65. If triggered we'll target a rally into the $24-25 range.

Picked on December xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 01/25/06 (unconfirmed)
Average Daily Volume: 598 thousand

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Norfolk So. Corp. - NSC - close: 44.81 chg: -0.39 stop: 42.34

The Dow Transportation sector hit some profit taking on Tuesday and the railroads were not immune. Shares of NSC hit a new high this morning but failed to hold its gains. We would not suggest new positions right here. Watch for a dip back toward the $44.00 level. Actually we'd watch for a bounce from the $44 level. The stock remains a candidate to benefit from any end-of-quarter window dressing. Our end of January target is the $48.50-49.00 range. The Point & Figure chart for NSC currently points to a $64 target. We do not want to hold over the late January earnings report.

Picked on December 22 at $44.35
Change since picked: + 0.46
Earnings Date 01/25/06 (unconfirmed)
Average Daily Volume: 2.2 million

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Outback Steakhouse - OSI - close: 41.00 chg: -0.28 stop: 40.49

OSI tried to rally this morning but couldn't make it past Friday's high. The ensuing sell-off stalled above $40.50 and OSI was bouncing higher into the closing bell. Watch for a move over $41.70 before considering new longs. More conservative traders may want to wait for a move over the 200-dma before considering new long positions.

Picked on December 23 at $41.55
Change since picked: - 0.55
Earnings Date 02/09/06 (unconfirmed)
Average Daily Volume: 789 thousand

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VCA Antech - WOOF - close: 27.85 chg: -0.13 stop: 26.74

We do not see any change from our weekend update on WOOF. We will plan to exit ahead of the late January earnings report. Our target is the $29.90-30.00 range.

Picked on November 09 at $26.74
Change since picked: + 1.11
Earnings Date 01/24/06 (unconfirmed)
Average Daily Volume: 436 thousand

Short Play Updates

Danaher - DHR - close: 55.30 change: -0.41 stop: 57.35

Tuesday's action in DHR may prove to be a new entry point for more aggressive traders. The stock tried to rally this morning but failed near short-term resistance in the $56 region and its descending 10-dma. More conservative traders may want to wait for DHR to trade under short-term support near $55.00 before considering new short positions. Our target for DHR is the $51.25-51.00 range.

Picked on December 18 at $55.79
Change since picked: - 0.49
Earnings Date 02/16/05 (unconfirmed)
Average Daily Volume: 1.5 million

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NeuroMetrix - NURO - close: 26.91 chg: -0.17 stop: 31.05

We don't see any change from our weekend update on NURO. Our target is $25.25. We are not suggesting new plays at this time.

Picked on December 06 at $29.59
Change since picked: - 2.68
Earnings Date 01/27/06 (unconfirmed)
Average Daily Volume: 210 thousand

---

Waters Corp. - WAT - close: 37.90 chg: -0.18 stop: 39.25

Today might be a new bearish entry point in WAT. The stock rallied higher this morning but failed under $39.00 and its multi-month trendline of resistance. More conservative traders may want to wait for a new decline under the December 20th low near $37.55 before initiating positions. Our target is the $35.25-35.00 range. We do not want to hold over the late January earnings report.

Picked on December 18 at $38.60
Change since picked: - 0.70
Earnings Date 01/24/06 (unconfirmed)
Average Daily Volume: 901 thousand

Closed Long Plays

Forest Oil - FST - close: 45.07 change: -1.17 stop: 44.89

FST is another casualty of the energy sector sell-off on Tuesday. The stock broke down, on an intraday basis, below support at the $45.00 level and its 50-dma. Our stop loss was hit at $44.89 closing the play.

Picked on December 02 at $47.01
Change since picked: - 1.94
Earnings Date 02/09/06 (unconfirmed)
Average Daily Volume: 1.1 million

---

Nautilus - NLS - close: 18.70 change: -0.52 stop: 18.75

Tuesday proved to be a bearish day for NLS. The stock failed to join the markets in their morning rally higher. Instead the stock was weak from the start and lost 2.7% to close under its 21-dma and breakdown through the bottom of its rising channel. We've been stopped out at $18.75.

Picked on December 11 at $18.81
Change since picked: - 0.11
Earnings Date 02/01/06 (unconfirmed)
Average Daily Volume: 598 thousand

Closed Short Plays

None
 

Today's Newsletter Notes: Market Wrap by Jim Brown 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 Jim Brown 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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