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Daily Newsletter, Wednesday, 01/18/2006

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Table of Contents

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

Market Wrap

Stampeding the (Live)door

Investors in Japanese stocks stampeded last night. Everyone had crowded into the same bullish building and the stampede was prodded by a broadening investigation of Livedoor, an Internet company. The volume threatened to swamp the capacity of the Tokyo Stock Exchange, forcing a close of trading twenty minutes earlier than normal and prompting a planned later starting time in tonight's afternoon session. Last night, the Nikkei 225 closed almost 1,150 points below Friday's intraday high.

Traders, print articles and television commentators talked about the Nikkei's action, with some traders worrying that such a stampede could hit our markets. The fear had certainly spilled over into Taiwan and South Korea, with the bourses of those countries down 3.16 and 2.64 percent, respectively. Although moderate in comparison to the Nikkei's drop, the FTSE 100, CAC 40 and DAX had down days well underway by the time most U.S. traders opened their eyes. At one point during the pre-market period, a CNBC commentator mentioned that each component of the CAC 40 and DAX was lower, most by more than one percent. Rising crude prices this week, disappointments from Yahoo (YHOO) and Intel (INTC)--coupled with Citigroup, UBS and Piper Jaffray downgrades of INTC--increased the fear.

J.P. Morgan stood in front of the stampeding crowd, holding them back at least momentarily while it announced forecasts deemed slightly better than anticipated, at least until investors decided that its revenues were disappointing. Mellon (MEL) added its weight, also beating expectations. Although reporting Q4 profit, gross margins and worldwide service bookings that beat expectations, IBM had also reported revenue that didn't quite meet expectations, but investors ignored those revenue numbers in favor of the other strengths the report showed.

The December CPI release also turned a few stampeding traders away from the door, with the headline figure falling 0.1 percent and the core number staying a tame 0.2 percent. By the end of the day, dip-buyers anticipating a Nikkei bounce tonight and reassured by the day's economic releases bought support levels on some indices, and tempered the losses. If after-hours action is any guide, they might not be glad they did so.

Annotated Daily Chart of the Wilshire 5000:

That bounce up to retest the 10-sma was a theme repeated on several indices, and the retests should prove important to watch. The SPX, however, found resistance below the 10-sma and below the 38.2 percent retracement of the drop over the last week, a level some other indices hit. A weekly chart shows an unhealthy looking potential for the SPX, depending on the action across the rest of the week.

Annotated Weekly Chart of the SPX:

The SPX closed between the potential support offered by December's high and potential resistance offered by the 10-sma and the top of the wedge, with the two coinciding. The Dow also closed between support and resistance, although in the Dow's case it was the 50-sma offering support.

Annotated Daily Chart of the Dow:

Similarly, the Nasdaq closed between support and resistance. On a 60-minute chart, the last bounce looked corrective, however, and likely to break to the downside. Tomorrow will tell.

Annotated Daily Chart of the Nasdaq:

The SOX found support at December's high and bounce up to the 10-sma, although it did not close above it.

Annotated Daily Chart of the SOX:

The Russell 2000 did manage a close just above its 10-sma, but just barely above a 38.2 percent retracement of the decline over the last week.

The CPI number combined with comments from Fed Governor Susan Bies and the release of the Beige Book helped to temper declines. Economists had expected the headline CPI number to rise 0.2 percent, so the 0.1 percent drop was a surprise. For the full year, CPI rose 3.4 percent, about the same as 2004's 3.3 percent increase, but the increase was still the largest since 2000. Core CPI for 2005 rose 2.2 percent, as it had in 2004. With an ongoing debate about whether the FOMC will stop raising rates in January or March, the figure cheered those who believe it will end in January, although most believe that the Fed would like to keep core inflation in the 1-2 percent range.

The news wasn't all benign, however. Energy prices rose 17.1 percent for the year. For the fourth quarter, core CPI rose an annualized 2.8 percent. Higher gasoline prices might drive January's CPI higher, too, warns an economist with High Frequency Economics. Here in Dallas, evening news programs address both higher heating and gasoline bills. Two nights ago, a local news station interviewed a woman who has switched to meals that require either no cooking or little cooking, to save on natural gas bills, and this is in a city that has been having record highs, forcing residents to break out their summer wardrobes.

Housing trends were on the mind of Susan Bies today, but at least some of the news was good over the short term. The Mortgage Bankers Association released mortgage applications for the week of January 13 at 7:00 EST. The Market Composite Index measuring the volume of mortgage loan applications rose 2.2 percent, the second week of increases after a several-week period of downturns. Compared to the year-ago level, however, this number was down by 10.9 percent. The seasonally adjusted Purchase, Refinance, Conventional and Government indices all increased, too, but the Refinance Index was 19.7 percent lower than the year-ago level. The four-week moving average for the Market Index and Refinance Index rose 0.8 and 4.1 percent, respectively, while that for the Purchase Index fell 0.5 percent. Refinances increases as a percentage of total applications.

Capital flow figures showed that China's and Japan's holdings of U.S. treasuries rose in November. Foreign official institutions bought $5.9 billion of securities. Foreigners purchased $103.2 billion of U.S. securities. November capital flows for November fell to $89.1 billion.

Federal Reserve Board Governor Susan Bies spoke about the time that economic release hit the markets. She said in a speech to a business group that the housing market might cool, but that a big drop wasn't anticipated. Other comments included a possible short-term risk to spending brought about by heating bills. Bies anticipates 2006's economic growth would slow to the mid-three percent range, a rate she considers more sustainable. She called decisions for the Fed this year "more data dependent" than previously and noted that the Fed would watch employment, capacity utilization and inflation carefully.

The Fed's Beige Book, a resource for the FOMC in the January 31 meeting, was released at 2:00. Notable trends included a lessening of input price pressures toward the end of the year, a tempering of the housing market and some tightening in labor markets although wage gains remained moderate.

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Other releases passed mostly unnoticed with much air time taken up with discussion about the Nikkei. For the week ending January 14, U.S. chain store sales fell 1.4 percent when compared to the prior week's figures. UBS Securities and the International Council of Shopping Centers release these figures. Warmer weather, higher gasoline costs and weaker consumer confidence were blamed for the decrease, but an ICSC economist still predicts a 3.0-3.5 percent rise in sales for the month. The RLX, the S&P Retail Index, gapped lower this morning, but then rose to test the gap, bouncing into a confluence of the 10-, 30- and 50-sma's. Those look like potentially strong resistance for the RLX, and it, too, looks vulnerable to it 72-ema. If you're trading the OEX, watch how the RLX reacts tomorrow and whether it can push through those moving averages or rolls down under them.

Earnings disappointments helped prompt the early decline. Although its earnings release was at first cheered, J.P. Morgan Chase disappointed on at least one measure. It reported earnings of $0.76 a share, with earnings excluding non-operating items at $0.73 a share. This was above the $0.72 a share some analysts expected. The year-ago level had been $0.46. The CEO did mention disappointing trading results, and some found revenue light. JPM gapped lower, ran higher, but ended the day with a long upper shadow, the body of its daily candle sitting on the 50-sma. Mellon Financial (MEL) beat forecasts, but produced a doji with the open and close below the 10-sma. Financials Northern Trust (NTRS) and Charles Schwab (SCHW) disappointed, and both declined.

In other news, Guidant (GDT) decided that Boston Scientific's (BSX) offer was superior to Johnson & Johnson's (JNJ). GDT closed lower by 0.40 percent; BSX, higher by 0.12 percent; and JNJ, high by 1.48 percent.

While today's initial sell off was attributed to the Nikkei's decline and the Nikkei's to the Livedoor investigation, the truth is that the markets were overbought, due for a pullback, and just waiting around for the impetus that would start the stampede. That's especially true of the Nikkei, but generally true of most bourses across the globe. This pullback was needed.

In the U.S., some had again been chanting "it's different this time" with reference to relatively high crude costs, inversions of the yield curve such as the one that occurred again today and other concerns. Some of those investors dropped equities and commodities on their way to the exits. They were suddenly wondering if perhaps it's not different this time, but a brave group stayed behind and bought the dip again ahead of important earnings after the close.

Companies reporting after the bell today included eBay (EBAY), Advanced Micro (AMD), QLogic (QLGC) and Apple Computer (AAPL). As this report was prepared, eBay traded at $41.66, down from its $44.44 close. Some blamed the drop on a disappointing outlook. The company reported earnings of $279.22 million or $0.20 a share, on revenue of $1.33 billion. Excluding certain items, earnings were $0.24 a share. The outlook in question was for net earnings of $0.14-0.15 a share and pro forma earnings of $0.22-0.23 a share on revenue of $1.365-$1.38 billion.

As this report was prepared, AAPL had last traded at $77.20 in after hours, down from its $82.49 close on disappointment with its forecast. The company reported profit that grew 95 percent due to iPod sales, with earnings of $565 million or $0.65 a share on $5.75 billion in sales. Excluding options cost, the company would have earned $0.68, and analysts had expected $0.61 on this basis. Expectations for the current quarter are for $0.38 or $0.42 excluding options costs on sales of $4.3 billion, below the $0.48 a share before costs that analysts had expected.

AMD last traded at $34.20, up $0.05 from its close, although one headline announced that the company's profit missed expectations. The company announced net profit of $95.6 million or $0.21 a share on revenue to $1.84 billion, but expectations were for earnings of $0.27 a share. Revenue had been expected to be only $1.65 billion, however, according to one article, and others noted that the after-hours price increase was pegged on AMD's topping of revenue estimates. The earnings were also being compared to last year's loss for the comparable quarter.

A week's decline into support doesn't prove much. Not yet. Weak hands needed to be shaken out, and they were to some degree this morning, but many have decided, perhaps prematurely and based in some part on an anticipated Nikkei bounce, that support has been found and it's time to move higher again. It was certainly time last week for indices and stocks to seek their true support so that more savvy investors would feel comfortable buying, but I'm not sure that's who was doing the buying today. Tomorrow might provide a part of that answer, but only a part.

Where support lies and what the markets do after rising from that support will give us more information about what will happen next with the markets. A theme appeared across many indices today. The 10-sma's did not hold as support, one component of the theme. Today, some indices bounced from or held at their 50-sma's, some from tests of their December highs, so the nailing of at least temporary support was another theme. Indices probed for support, and dip buyers found the right places to buy the dips.

That doesn't mean that the support will continue to hold, however. Many 10-sma's haven't yet been retested from the underside, for example, except for in a few cases. The SOX and the RUT are two indices that did retest their 10-sma's. The SOX closed just below its 10-sma and the RUT just above.

It's still possible that indices could roll over again. Rollover possibility exists at the 10-sma's and bounce potential exists at either the December highs in those indices in which those highs have not yet been breached or at a zone defined by the 50-sma and 72-ema in those indices in which those December highs have been breached. The SOX and RUT may give us clues tomorrow as to what to expect, as we see whether they continue their bounces up past the 10-sma.

The SPX, OEX, Dow and Nasdaq ended the day between the 10-sma's and what I deem to be strongest support near the 72-ema's, not a good entry point for either bullish or bearish positions. Watch the SOX and RUT for guidance tomorrow morning. The SOX stopped at a 38.2 percent retracement of the decline off last week's high and the RUT at a 50 percent retracement, so both might have been merely retracing part of a decline before continuing a downward path.

If they and other markets bounce tomorrow, watch for that rollover potential. Don't assume a rollover will occur and don't enter bearish trades if the SOX and RUT and then other indices blast through their 10-sma's on strong volume and head higher.

If markets do roll over, protect bearish profits at the 72-ema, although bears should prepare for a bounce that might begin sooner. Opex week, a focus on the ending of rate hikes by the FOMC and the months' long success rate of a buy-the-dip strategy may combine to limit any pullback, even if the setup appears stellar.

So far, this is just a to-be-expected shakeout, but if indices fall below December lows on anything other than a brief stop-running move, I'll be scrapping that scenario for a more bearish one.

Companies reporting tomorrow include homebuilders Beazer Homes (BZH) and D.R. Horton (DHI), both reporting before the open; Merrill Lynch (MER), along with a number of other financials; Pfizer (PFE), reporting before the open; Briggs & Stratton (BGG); United Health Group (UNH), reporting before the open, and former momentum darling and recent strong gainer Rambus (RMBS).

Tomorrow's economic reports include Initial Claims and December's Building Permits and Housing Starts, all released at 8:30. Those will be followed by crude inventories at 10:30, released a day late as is usual during a holiday-shortened week. The much-watched Philly Fed follows at noon.
 

New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
None BC

New Long Plays

None today.
 

New Short Plays

Brunswick - BC - close: 40.20 change: -0.44 stop: 41.01

Company Description:
Headquartered in Lake Forest, Ill., Brunswick Corporation endeavors to instill "Genuine Ingenuity"(TM) in all its leading consumer brands, including Mercury and Mariner outboard engines; Mercury MerCruiser sterndrives and inboard engines; MotorGuide trolling motors; Teignbridge propellers; MotoTron electronic controls; Northstar marine electronics; Navman marine and GPS-based products; IDS dealer management systems; Albemarle, Arvor, Baja, Bayliner, Bermuda, Boston Whaler, Crestliner, HarrisKayot, Hatteras, Lowe, Lund, Maxum, Meridian, Ornvik, Palmetto, Princecraft, Quicksilver, Savage, Sea Boss, Sea Pro, Sea Ray, Sealine, Triton, Trophy, Uttern and Valiant boats; Attwood marine parts and accessories; Land 'N' Sea and Kellogg Marine parts and accessories distributor; Life Fitness, Hammer Strength and ParaBody fitness equipment; Brunswick bowling centers, equipment and consumer products; Brunswick billiards tables; and Valley-Dynamo pool, Air Hockey and foosball tables. (source: company press release or website)

Why We Like It:
Shares of BC look poised to move lower. The stock has produced two failed rallies near its simple 200-dma in the last five weeks. Today's decline pushed the stock back under its simple 50-dma. The P&F chart is already in a sell signal that points to a $22 target. The trend changed in BC back in April 2005 after the stock failed to breakout over the $50 level. Since then the stock has produced several failed rallies, all lower highs from the April peak. The company issued an earnings warning back in September 2005 and that explains the gap down on the chart. We are going to suggest a trigger to short BC at $39.45, which is under December's support near 39.50. What makes this play somewhat risky is the time frame. BC is due to report earnings before the market open on January 26th. We do not want to hold over the report. That does not give us a lot of time for BC to trigger the play and then trade into our target in the $36.00-35.00 range.

Picked on January xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 01/26/06 (unconfirmed)
Average Daily Volume: 746 thousand
 

Play Updates

Updates On Latest Picks

Long Play Updates

Advance Auto Parts - AAP - close: 43.55 chg: +0.04 stop: 43.69

AAP managed to close in the green on Wednesday but we're not sure the bounce has any strength behind it. We are going to keep AAP as a bullish candidate on the list for now. Our trigger to go long the stock is at $45.05, above resistance at the $45.00 level. We'll abandon the play if AAP closes under the 50-dma. If triggered we'll target a rally into the $48.00-49.00 range. This play might be considered more aggressive than normal because of our time frame. We do not want to hold over the early February earnings report.

Picked on January xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 02/02/06 (unconfirmed)
Average Daily Volume: 891 thousand

---

Amer. Power Conv. - APCC - cls: 23.32 chg: +0.09 stop: 22.90

We see no change from our previous updates. APCC is still churning sideways in its trading range between $23.00 and its 100-dma. We're choosing to keep the play open. The stock has been somewhat resilient and thus far has not broken support at the $23.00 level. We would not suggest new long positions at this time. We do not want to hold over the early February earnings report.

Picked on January 08 at $23.57
Change since picked: - 0.25
Earnings Date 02/02/06 (unconfirmed)
Average Daily Volume: 1.5 million

---

Bluelinx - BXC - close: 12.66 change: +0.06 stop: 11.45

BXC is still trying to bounce from its rising 10-dma. Considering the current (bearish) market environment we hesitate to suggest new long positions here. Our target for BXC is the $15.00-15.50 range by late February through early March. FYI - the P&F chart points to a $25 target.

Picked on January 10 at $12.47
Change since picked: + 0.19
Earnings Date 03/09/06 (unconfirmed)
Average Daily Volume: 142 thousand

---

Evergreen Solar - ESLR - cls: 13.32 chg: +0.37 stop: 11.85*new*

ESLR is showing lots of relative strength with a 2.8% gain on big volume today. Volume was more than double the daily average and that's bullish given the rise in price. We are raising the stop loss to $11.85. Our target is the $13.90-14.00 range. It would be tempting to aim higher but we do not want to hold over the company's earnings February earnings report.

Picked on January 10 at $12.25
Change since picked: + 1.07
Earnings Date 02/03/06 (unconfirmed)
Average Daily Volume: 2.4 million

---

Nexen Inc. - NXY - close: 52.12 change: -1.77 stop: 47.95

NXY was unable to escape the profit taking in the energy sector today. Shares lost 3.2% and have filled the gap from Tuesday morning. A bounce back over $52.50 could be used as a new bullish entry point. Our target is the $57.50-58.00 range by mid February.

Picked on January 11 at $52.11
Change since picked: + 0.01
Earnings Date 02/17/06 (unconfirmed)
Average Daily Volume: 424 thousand

---

Patterson-UTI - PTEN - close: 36.33 change: -0.59 stop: 33.85

We believe the dip in PTEN looks like a new bullish entry point. Yet traders might want to wait. The dip may not be over yet and PTEN could decline toward its rising 10-dma (35.25) before moving higher again. A bounce from the 10-dma would be an attractive entry point. Our target is the $39.85-40.00 range. We do not want to hold over the earnings report. Unfortunately, we can't find a good date for PTEN's upcoming announcement. Some sources say January 26th other say the 31st, while other suggest PTEN will report earnings in February or even March.

Picked on January 17 at $36.85
Change since picked: - 0.52
Earnings Date 01/26/06 (unconfirmed)
Average Daily Volume: 3.2 million

---

Shanda Inter. - SNDA - close: 16.34 change: -0.66 stop: 16.75

Asian bourses turned lower after the Japanese stock exchanged posted its second big decline in two days. Today's decline was steep enough that the exchanged closed early. This weighed on the neighboring countries and Chinese SNDA fell almost 4% when its began trading here in the states. Since we are still on the sidelines and not at risk we're willing to give SNDA a couple of more days to try and bounce back before we remove it from the play list. Our trigger to go long is at $18.10. If triggered we will target a rally into the $19.90-20.00 range.

Picked on January xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 02/02/06 (unconfirmed)
Average Daily Volume: 1.6 million
 

Short Play Updates

Landstar System - LSTR - close: 39.62 change: -0.80 stop: 42.01

The action in LSTR is very interesting. Most of the transportation stocks rebounded today after a big bounce in the airline sector. Yet not so for LSTR. The stock continued to decline and has broken down below support at the $40.00 level and its 100-dma. Our trigger to short the stock was at $39.95 and the play is now open. Volume on today's breakdown was more than double the average, which is bearish! Our target is the $36.50-36.00 range above its simple 200-dma. We do not want to hold over the early February earnings report.

Picked on January 18 at $39.95
Change since picked: - 0.33
Earnings Date 02/02/06 (unconfirmed)
Average Daily Volume: 406 thousand

---

MedImmune - MEDI - close: 34.22 change: +0.53 stop: 35.41

Attention! More conservative traders may want to abort this play immediately. MEDI dipped low enough this morning to break support at the 100-dma and hit our trigger to short the stock at $33.45. The low today was $33.41. Unfortunately, shares immediately rebounded and closed with a 1.5% gain. The move today has produced a bullish engulfing candlestick pattern, which is normally seen as a bullish reversal pattern. The stock does still have multiple levels of overhead resistance and the major averages look vulnerable to more weakness so we're not going to abandon the play just yet but the risks for being short MEDI just jumped higher. Our target is currently the $30.50-30.00 range.

Picked on January 18 at $33.45
Change since picked: + 0.77
Earnings Date 02/02/06 (unconfirmed)
Average Daily Volume: 2.1 million
 

Closed Long Plays

LifeCell Corp. - LIFC - cls: 20.77 change: -2.15 stop: 19.99

The recent breakout in LIFC had looked very promising. The stock was up over 10% from our picked price as of Tuesday's close. Unfortunately, all of that has changed. The stock gapped lower to open at $22.19 and then plummeted to $19.70 before bouncing today. Volume was very big at 3.1 million compared to the daily average of 600K. The stock was moving lower after news surfaced that rival Tutogen Medical (TTG) maybe producing or preparing to produce some competing products. One news article quoted an analyst from Roth Capital saying the reaction in the stock price today is overdone since concerns about a competitive produce are premature. We have been stopped out at $19.99.

Picked on January 11 at $20.65
Change since picked: + 0.12
Earnings Date 01/24/06 (confirmed)
Average Daily Volume: 598 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.

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