Option Investor

Daily Newsletter, Monday, 01/30/2006

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Table of Contents

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

Market Wrap


"Sideways" was the direction today as the pre-FOMC lull commenced a day early. Exchange volume was respectable and breadth held positive for most of the session in what was a very quiet session.

Daily Dow Chart

Volume breadth favored the Nasdaq, with the NYSE finishing with 1.08 advancing shares for each declining. Pricewise, the Dow finished lower by 7 at 10899.92, near the lower end of its very narrow range for the day- less than 45 points from stem to stern. The doji rejection at the highs and lows showed indecision at the top of Friday's range, and while the daily cycle indicators are starting to turn up, Friday's high was never touched or tested. Below today's 10887 low, next confluence support is at 10800.

Daily S&P 500 Chart

The SPX gained 1.48 to close at 1285.20, trading less than a four point range in what was effectively a footnote to Friday's session. As with the Dow, the daily cycle indicators are turning up but direction remains up for grabs, with the January high still 10 points north of current levels. Bulls need to see price holds above the 1282 confluence/trendline support level, with the year high at 1295 key resistance. Should 1282 fail, next support is at the rising trendline off the October low.

Daily Nasdaq Chart

The Nasdaq added 2.55 to close at 2306.78, trading within the upper doji shadow atop Friday's range. The high came at 2314, and previous confluence at 2300 was not tested. There remains an unfilled gap to 2280, below which is rising support off the October lows to 2250. But price is doing its best to pull the daily cycle up from a higher low. I'm suspicious of bullish action here because of the weekly cycle, due for a downphase that should cap any daily cycle strength. But the price trend has been steadily up since last May, and for the time being, price continues to coil within its rising apex.

Daily TNX Chart

Liquiditywise, the Fed's open market desk had a $5.75 billion weekend repo expiring this morning, and replaced it with a $5 billion overnight repo. That drained net $750 million, a small amount, but demand for the money on the part of the dealers rose, with the highest rate submitted with treasury collateral up to 4.45% and a stopout rate of 4.4%. This shows the Fed allowing rates to climb toward an anticipated overnight rate of 4.5%, presumably to be announced tomorrow.


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The Treasury announced the size of the upcoming 4-week bill auction today, and auctioned 13-week and 26-week bills. There were $8 billion of the 4-week paper maturing, and $18 billion of new 4-week bills will replace them, raising new cash in the amount of $10 billion.

The 13- and 26-week bill auction was for $37 billion to refund $34.7 billion maturing, again raising new cash in the amount of $2.28 billion. The indirect bid, representative of demand for foreign central banks, was lighter than the usual 25% participation rate, $8.33 billion of the $37 billion total or 22.5% of the total. The high rate on the 13-week bills was 4.375%, the yield 4.485% and the bid-to-cover ratio light at 1.87. The high-rate on the 26-week bills was 4.435%, the yield 4.6%, with 1.94 bids tendered for each accepted.

Later in the session, Assistant Treasury Secretary Mark Warshawsky announced that the Treasury expects to borrow $188 billion in Q2 of this year, a new record $17 billion above the anticipated Q1 level of borrowing. Warshawsky stated that the Treasury expects to pay down $30 billion of federal debt in Q3, and went on to say that the economy is "right on track," "on firm footing," and that the negative savings rate is no reason to be pessimistic. Presumably, he meant to exclude from the latter statement those consumers being drawn deeper into debt as they try to make ends meet.

Ten year treasuries were weak from the get-go and held their losses throughout the session. Ten year note yields (TNX) (see chart above) finished higher by 3.2 bps at 4.535%. On the daily chart, we see the first signs of the anticipated upturn in the oscillators following last week's sharp break above descending linear resistance. 4.6% is next confluence and Fibonacci resistance, 4.45% now support.

The sole economic report for the day was the Commerce Department's Personal Income and Personal Spending, reported at 8:30AM. The report showed a 0.9% rise in consumer spending in December, while personal income rose 0.4% and real disposable income rose 0.4%. Expectations were for a rise of 0.4% in personal income and 0.8% in personal spending. The previous month saw both figures rise 0.3%. The Personal Consumption Expenditure price index was unchanged from December, while the Core PCE rose 0.1%, following 4 consecutive months of 0.2% gains. The Core PCE is up 1.9% during the past year. Associated Press reported that the savings rate was negative for all of 2005 at -0.5%, the lowest rate since 1933, when the annual savings rate fell to -1.5%.

There's a heavy week ahead for economic data, with the Employment Cost Index, Chicago PMI, Consumer Confidence and FOMC announcement tomorrow, then Auto & Truck Sales, Construction Spending, the ISM Manufacturing Index and the weekly Mortgage and Petroleum data on Wednesday. On Thursday, we get the weekly Initial Claims and Natural Gas data, and preliminary Productivity for Q4. On Friday, it's the monthly employment report, with Nonfarm Payrolls, Average Workweek, Hourly Earnings, and the Unemployment Rate as well as Michigan Sentiment, Factory Orders and ISM Services.

Also tomorrow will be OPEC's meeting in Vienna. Iran's oil minister Kazem Vaziri Hamaneh said that any supply decisions will be taken collectively by the cartel. Both Iran and Venezuela have both expressed support for supply cuts to defend current price levels, but other members, such as Saudi Arabia and Algeria, have indicated that they see no reason to tighten supplies. OPEC is currently pumping at capacity, with a 28 million bpd daily quota. Crude oil futures closed the day +.625 at 68.375, off a low of 67.275.

Last but not least, Fed Chairman Greenspan will step down tomorrow and past the torch to Ben Bernanke. The International Herald Tribune reported that Greenspan has plans to start a consulting firm, Greenspan Associates, and to write a book. His wife, Andrea Mitchell, added that he has recently begun to learn "how to do his own research on the Internet; he is still in the process of getting a personal e-mail address."

Marketwatch cited the Investment Company Institute to the effect that US stock funds saw net outflows of $2.18 billion in December compared with inflows of $9.23 billion in November. Foreign-content equity funds saw inflows of $12.28 billion, slightly up from November's $11.79 billion figure. Bond funds saw net outflows of $2.71 billion compared with outflows of $324 million in November. Overall, mutual fund assets grew $138.9 billion or 1.6% to $8.906 trillion.

In corporate news, Eastman Kodak (EK) reported a Q4 loss that shrunk from $59 million or 20 cents per share in the year-ago quarter to $52 million or 18 cents per share. Based on its continuing operations, EK lost 50 cents per share. Sales rose 12% to $4.2 billion, however, based on strong demand for its digital products. The company announced that CFO Robert Brust will retire at the end of the month, and the company is currently searching for a successor. Although the stock has been pummeled over the past year, it has risen roughly 25% during the past quarter. EK lost 2.35% to close at 25.75 for the day.

Drugmaker Schering-Plough (SGP) reported Q4 earnings that rose from a loss of 58 cents or $856 million in the year-ago quarter to a profit of 7 cents or $104 million, citing growth of its flagship drugs. Revenues rose 6% to $2.3 billion (or +13% to $2.7 billion including sales from its joint venture with MRK). Estimates were for EPS of 8 cents on revenue of $2.3 billion. Later in the morning, SGP reported that its oral hepatitis C protease inhibitor SCH 503034 has been granted Fast track status by the FDA. SGP lost 2.54% to close at 19.57.

Mattel (MAT) reported Q4 earnings that fell to 69 cents per share or $279.2 million fro $284.3 million or 68 cents in the year-ago quarter. This quarter's result was boosted by an 11 cent tax benefit. Net sales fell from $1.85 billion to $1.84 billion. The company cited an 11% in Hot Wheels and Barbie brands, while Fisher-Price rose 1% and its American Girl brand rose 12%. MAT gained 6.9% to close at 15.80.

Exxon-Mobil (XOM) reported a record profit, not for itself but all US companies, at $10.71 billion for Q4 and $36.13 billion for the full year. The company earned $1.71 per share for quarter, compared with $1.3 per share or $8.42 billion in the year-ago quarter. Revenues rose from $83.37 billion to $99.66 billion in the current quarter, less than Q3 2005's $100.72 billion however. XOM's previous record was posted in Q3 2005 at $9.92 billion, and the previous US record had been XOM's in 2004, at $25.3 billion. XOM rose 2.97% to close at 63.11.

After the bell, Kraft (KFT) reported earnings that rose from 37 cents or $677 million to 46 cents or $773 million in the current quarter on sales that rose 10% to $9.7 billion. Estimates were for sales of $9.4 billion. The EPS figure included a restructuring charge of 10 cents, net of which EPS would have been 56 cents, beating consensus estimates by 3 cents. KFT rose 2.42% to close at 30.

For tomorrow, there's a good chance that we'll have to continue watching the grass grow as the markets await the FOMC announcement and, in particular, the policy statement. Prices are poised just below recent multiyear highs, the bears clamoring for a correction or worse, the bulls eyeing the rising trend and nearby highs. With lots of economic data, the OPEC meeting, the transfer of the Fed chairmanship from Greenspan to Bernanke and the FOMC meeting, the pre-FOMC drift could be livelier than usual. We'll be following it all for you in the Market and Futures Monitors- see you there!

New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays

New Long Plays

None Today.

New Short Plays

None Today.

Play Updates

Updates On Latest Picks

Long Play Updates

Argonaut Group - AGII - close: 35.28 chg: +0.08 stop: 33.80

We don't see any change from our weekend new play description on AGII. The stock didn't move much today and volume was pretty low and that suggests that traders are waiting to hear from the FOMC meeting tomorrow before making any moves. You might want to do the same. We are suggesting longs here over $35.00. Our stop loss will be $33.80. Our short-term target is 38.00-38.50.

Picked on January 29 at $35.20
Change since picked: + 0.08
Earnings Date 02/07/06 (confirmed)
Average Daily Volume: 189 thousand


Global Power Equip. - GEG - close: 4.73 chg: +0.08 stop: 4.09

Our aggressive, speculative play in GEG is doing okay. The stock dipped to $4.51 this morning but bulls were ready to buy the dip and push GEG back into the green. This looks like a new bullish entry point. However, a glance at the intraday chart looks somewhat worrisome. GEG looks like it could slip lower tomorrow plus we have pretty good odds that the market will see some volatility tomorrow with the Fed decision on interest rates due out tomorrow afternoon. We don't see any changes to our strategy although more conservative traders may want to tighten their stops (4.19, 4.38 or even 4.48 look like potential spots for a stop loss). We will target the simple 100-dma currently at 5.54 so we'll use a target zone of $5.40-5.60.

Picked on January 29 at $ 4.65
Change since picked: + 0.08
Earnings Date 03/13/06 (unconfirmed)
Average Daily Volume: 334 thousand


Helen of Troy - HELE - close: 19.35 chg: +0.31 stop: 17.74

We do not see any change from our weekend update on HELE. We do expect some resistance near the top of the gap in the 19.50-20.00 range but will continue to target the $22.00-22.50 range. Our time frame is ten weeks.

Picked on January 25 at $19.04
Change since picked: + 0.31
Earnings Date 01/09/06 (confirmed)
Average Daily Volume: 285 thousand


Mens Wearhouse - MW - close: 34.38 change: -0.26 stop: 31.85

We do not see any change from our weekend update on MW. Watch for a dip, maybe down to the $33 region, before considering new longs. Our target is the $36.00-37.00 range. We do not want to hold over the (unconfirmed) February 15th earnings report. We are raising our stop loss to $31.85.

Picked on January 25 at $32.62
Change since picked: + 1.76
Earnings Date 02/15/06 (unconfirmed)
Average Daily Volume: 625 thousand


Nordic Am. Tankers - NAT - close: 32.05 chg: +0.30 stop: 29.95

The move over $32.00 today looks like a new bullish entry point to go long NAT. We still expect some resistance from the 100-dma (now at 33.15) but we suspect that NAT will eventually power through it. Do not forget that we only have a few days before we need to exit ahead of the February 7th earnings report and readers may not want to initiate new longs right here.

Picked on January 25 at $31.56
Change since picked: + 0.49
Earnings Date 02/07/06 (confirmed)
Average Daily Volume: 191 thousand


Patterson-UTI - PTEN - close: 37.85 chg: +0.74 stop: 34.85

Oil service stocks continue to out perform. The OSX index added 2.9% and shares of PTEN followed with a 1.99% gain. Our target is the $39.85-40.00 range.

Picked on January 17 at $36.85
Change since picked: + 1.00
Earnings Date 03/16/06 (unconfirmed)
Average Daily Volume: 3.2 million

Short Play Updates

Continental Air. - CAL - close: 19.44 change: +0.95 stop: 19.55

Uh-oh! Our new short play in CAL is in big trouble. Shares of AMR (American Airlines) soared to a 10% gain on Monday on no news. Meanwhile shares of CAL added more than 5% after reporting that its flight attendants had signed a new labor contract. Both moves were probably fueled, at least somewhat, by short covering. It certainly does not make any sense to see airline stocks moving higher with crude oil moving higher since fuel is such a big expense for the sector. We are not suggesting new plays in CAL and honestly from the looks of CAL's chart today we expect to be stopped out tomorrow at $19.55.

Picked on January 29 at $18.49
Change since picked: + 0.95
Earnings Date 04/18/06 (unconfirmed)
Average Daily Volume: 3.3 million


Health Net - HNT - close: 48.74 chg: -0.15 stop: 50.05

We do not see any change from our weekend update on HNT. The stock did not move much today and traders could just be waiting to hear from the FOMC meeting tomorrow. We would not suggest new positions here. We are adjusting our target to the $45.50-45.00 range.

Picked on January 23 at $48.95
Change since picked: - 0.21
Earnings Date 02/01/06 (confirmed)
Average Daily Volume: 958 thousand


MedImmune - MEDI - close: 33.26 change: -0.72 stop: 34.51

MEDI's 2.1% decline on Monday was a welcome sight. The stock has produced a failed rally under resistance and this looks like a new bearish entry point for shorts. Our target is the 200-dma but we're using an exit range of $31.50-31.00.

Picked on January 18 at $33.45
Change since picked: - 0.19
Earnings Date 02/02/06 (unconfirmed)
Average Daily Volume: 2.1 million


Travelzoo - TZOO - close: 20.95 change: +0.16 stop: 22.05

We do not see any change from our weekend update on TZOO. We plan to exit ahead of the February 2nd earnings report. That means we plan to exit on Wednesday afternoon near the closing bell.

Picked on January 22 at $21.02
Change since picked: - 0.07
Earnings Date 02/02/06 (confirmed)
Average Daily Volume: 309 thousand

Closed Long Plays

Bluelinx - BXC - close: 14.83 change: +0.94 stop: 12.47

We are choosing to exit early in BXC. The trend in the stock has been bullish recently and remains so but we did not expect today's gain nor can we find any catalyst to account for the 6.7% surge on Monday's session. Volume came in well above average and that's bullish as well. However, the FOMC meeting tomorrow and the market's reaction to it is a big unknown variable. We'd rather exit now with BXC so close to our target than risk having the stock reverse on us if traders don't like what they hear from the Fed tomorrow afternoon. We can always watch for a new entry point for new bullish positions later. Our target was a move into the $15.00-15.50 range.

Picked on January 10 at $12.47
Change since picked: + 2.36
Earnings Date 02/15/06 (confirmed)
Average Daily Volume: 142 thousand


Nexen Inc. - NXY - close: 57.16 change: +1.45 stop: 51.95

Target achieved. Oil stocks continued to rally on Monday and shares of NXY hit a high of $57.73. Our target was the $57.50-58.00 range.

Picked on January 11 at $52.11
Change since picked: + 5.05
Earnings Date 02/17/06 (unconfirmed)
Average Daily Volume: 424 thousand

Closed Short Plays

None Today.

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


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