Volatility everywhere, buy programs, sell programs, competing economic analysis, nerve gas and fading earnings gave investors another case of indigestion. The markets reacted to these sound bites as though as though hearing them second hand and not sure of their importance. Competing buy/sell programs provided the majority of the week's activity and with the exception of the Dow the indexes close very close to flat for the week. Blue chips were up, techs flat and Russell hit a new two week low. The NYSE composite swapped sides with resistance and support twice on either side. Volatility, although lethargic, was the name of the game with the S&P finishing only +3 points from where it started the week.
Dow Chart - 180 min
Nasdaq Chart - 60 min
Chart - 60 min
A stronger move came from the Treasury Budget released at 2:PM. This report showed a budget surplus in January of $21 billion but that was not the key. The portion that provided some market lift was the details showing rising individual income and rising taxes despite the lower tax rates. This was seen as a positive for the economy along with a jump in corporate tax payments of a whopping +27% through January. Revenues from personal income taxes were up +11% for the first four months of the 2006 fiscal year. The fiscal year for budget accounting runs from Oct through September. Friday's numbers represented the first four months of the 2006 fiscal year. The Treasury Budget was released at 2:PM and a strong buy program kicked off several minutes later adding +2000 issues to the A/D line over the next hour. While the market gains were attributed to the budget release I believe it was simply end of week short covering sparked by the buy program rather than some misplaced euphoria over a dull report on budget accounting.
A continued drop in energy prices has not provided a bounce in equities and has actually removed some support with implosions in numerous energy stocks. Sunoco was the poster child for the end of momentum in energy stocks. SUN has fallen from $96.50 on Feb 1st to close at $72.50 on Friday. This -24 points, -25% drop is purely a result of sector rotation out of the energy group. Those momentum leaders over the last few months have switched directions and are now the leaders on the loser board. I have been predicting this pre-March dip in oil for weeks but the magnitude of the selling in some individual issues has been very surprising. Valero (VLO) is another example of traders bailing with their profits with a drop from $64 on Jan-31st to $50 on Friday. That $50 level represents a strong buy level for me and I did act on it.
Sunoco Chart - Daily
Crude Oil Chart - 90 min
Oil fell to close at $62 and -$7 off its Feb highs and Natural Gas fell to a new 52-week low at $7.33. Oil at Friday's $61.20 lows was under the 200-day average at $61.69 and only the third time this year that oil has touched that 200-day level. Despite this intraday break I still believe oil is going lower. $58-$60 is strong support and I believe this correction will eventually see those levels. We are close enough to that expected bottom I did see some bargain hunting in some energy stocks just before the close.
The northeast is facing their first real winter storm of the season this weekend but there is no shortage of gas or heating oil. The mild winter has allowed natural gas supplies to grow to near record levels and +36% over the five-year average for this time of year. Heating oil supplies are also well stocked and refiners are already shifting to gasoline for the summer season. The storm should not cause any material jump in energy prices unless the cold is so bad and lengthy that the water around Manhattan freezes over and commuters walk across the ice to work. In short, it is not going to happen this year!
Oil service companies and drillers were not completely immune to the selling but stocks like HAL, SLB, DO and RIG finished positive for the day. They are not tied dollar to dollar to oil prices with service and drilling contracts now going for record prices with commitments for several years into the future. The Oil Service Index (OSX.x) has only declined just over -9% in February compared to monster drops in a few individual stocks.
Energy commodities were not the only futures taken behind the woodshed for a beating. Gold has fallen -$26 for the week to close at $549.50 on Friday. There are many reasons being given for the drop including the suggestion that a recession is less likely today than last week. I think whoever floated that excuse is delusional but they are welcome to their opinion. Personally I think the Iran factor has cooled and oil prices have fallen. That takes the fear factor out of gold as a safe haven and cuts down on the petrodollars available for investment into gold as an oil hedge. The Middle East producers export about 30 mbpd. At an average drop of $7 a bbl that is a loss in revenue of $210 million per day or $1.47 billion per week. That excess cash buys a lot of gold even if only a minor portion is allocated to that hedge. Like the dip in oil prices the dip in gold should only be temporary. Iran will come back to the headlines and OPEC will prevent oil prices from falling much further.
Another commodity on the ropes is copper. Friday's -5% intraday drop was the largest single day drop in copper futures in several years. The drop was blamed on downgrades to the copper stocks rather than a drop in demand unless of course you listen to Prudential. Phelps Dodge was downgraded by Prudential on Friday but it was already in free fall before that late hit. Prudential should get a 15-yard penalty for that personal foul. Prudential cut its investment rating on the copper industry in general to "Neutral" from "Favorable" on what they called "weaker-than-expected demand" in the U.S., South Korea, Taiwan and Japan. PD closed at $142 and well off the high for the week at $166. (-$24) With Market Vane still showing a 90% bullish rating for copper it was only natural that copper stocks were hammered by the current commodity correction. Pigs get fat, hogs get slaughtered being the current theme.
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Prudential's downgrade was not unanimous in the analyst community. On Thursday, Goldman Sachs analyst J. Alberto Arias said he sees more evidence of an extended copper cycle ahead -- not less. On Thursday he wrote, "Over the past two weeks, three major copper producers have cut their 2006 production guidance by 145,000 tonnes, which supports our view of a market deficit this year." The analyst forecast a "bull-case scenario" for copper prices at $2.12 per pound, with the price floor at $1.60. He noted that Phelps Dodge Corp. and Freeport McMoRan Copper & Gold Inc., in particular, are poised to benefit from copper prices anywhere in that range. Freeport McMoran (FCX) was hammered for a -$10 loss after the government of Indonesia said they wanted to raise their cut in the current profit sharing arrangement with FCX.
I should comment here about stock ownership. What commodities have been the momentum favorites over the last year? Oil, gold and copper. I listed the two biggest losers above, SUN and PD both losing -$24 each since February began. My point? These are two of the highest institutionally owned stocks in the market. PD is 95% institutionally owned and SUN is 79% owned by institutions. SUN traded more than three times its average volume on Friday and PD more than twice its average. Profits are being taken by funds and sell stops are being hit daily. It does not mean there is a bear market forming in commodities, just that profits are being taken in prior momentum leaders. The question for us today is where are they putting that money?
It appears much of it is going into international funds, overseas Ishares and Holders. TrimTabs reported that $3.9 billion came into the market last week but U.S. funds only received $1.3 billion of that total. I think we can assume that money received from selling those momentum stocks above may be allocated in the same ratios for current investments. With a battle brewing in the U.S. between the Fed rate hikes and a possible recession U.S. equities may not be seen as a safe haven based on current money flows. For money going into U.S. stocks it appears the favorite sectors are healthcare, defense, a few biotechs, oil drillers and oil service stocks and selected transports. Railroads, BNI, CNI, UNP, CSX are seeing inflows as well as a couple airlines AMR, CAL and UPS. You would think with oil imploding it would have greased the transports for a strong gain. However, transports have already run their race as we saw in Q4 and are fighting for traction today. Financials have stopped falling but have yet to rally. I believe the uncertainty about the Fed is holding them back.
Hopefully the Humphrey Hawkins testimony next week by Ben Bernanke will give us some insight into the Fed's future. This will be his first report to lawmakers on Tuesday and Wednesday and they are likely to take it easy on him since they don't have a lot of Bernanke history to pick apart. This will be his opportunity to layout his plan and tell them how he expects to run the Fed. He no longer has to answer to Greenspan and helicopter Ben is in charge of his own fate. With rate expectations currently at 5% and growing and GDP expectations for 2006 at 3% and shrinking there are some dangers ahead. The markets should pause ahead of Tuesday's testimony until some of those questions are answered.
Google took it on the chin this week that ended with a -$60 drop from its $432 pre-earnings close. Google seems to have found support in the $360 range but Barron's is going to do a hatchet job on them this weekend. The Barron's premise is that Google is overvalued even at the current level. Since GOOG is the REAL poster child for a momentum stock there may still be some sellers lurking just overhead. There is a gap still waiting to be filled at $303 but that is a long way from $360. Expect volatility in GOOG on Monday.
Google Chart - Daily
Pfizer (PFE) punished investors who capitalized on the strong early week rebound to near $27 by warning about future profits. 57 million shares traded on Friday knocking the stock back to $25.50 intraday. Pfizer said patent expirations would hurt earnings and revenue growth would be flat. Pfizer said the company was moving from the old Pfizer to a new Pfizer with old patents expiring but a new wave of new medicines approaching. Zacks Investment Research took exception to the news claiming the $4 billion cut in expenses last year was supposed to improve results in 2006 and beyond but those improvements seem to have disappeared. With the recent rebound to resistance at $26.50 investors should be cautioned about future gains until more guidance is made available.
Quality Systems (QSII) found out it is not nice to miss earnings targets with a drop from $92 to $70 after missing estimates by a dime. Piper Jaffray upgraded QSII after correctly sifting through the earnings and realizing that $4 million in net income had to be deferred to the next quarter cutting their recognizable income nearly in half to only $4.6 million. The nearly -50% cut in net income was responsible for the dime miss and had they been able to recognize the income as planned they would have beaten street estimates. The company did not say why the income was deferred but they did say the NextGen licenses were sold and paid in full during the quarter. On the surface it looks like a buying opportunity but we still need clarification as to why the income was deferred.
The market was bipolar for the week with a downdraft on Tuesday, rally on Wednesday, failed rally on Thursday and an end of day buy program on Friday. It is hard to determine a market direction when the last three market moves in alternating directions were a direct result of large buy/sell programs. Market direction simply depends on which program executed last. The Dow was the strongest index for the week and tested resistance at 10950 twice with no success. This level has resisted all but one breakout since November 23rd. We did see one spike out of the range the second week of January all the way to 11045 but the Dow could not hold its gains and it slipped beneath the 10950 level once again. This remains the level to be watched as February progresses.
The Nasdaq is slowly building a bearish formation with 2240 as support and a series of lower highs dating back to January 12th. The programs last week produced a spike to 2285 but it was short lived with a Friday close at 2262. The negative setup on the Nasdaq is nearly identical to the setup on the SPX. Lower lows and lower highs since mid-January. The SPX performed almost perfectly for those following the SPX as our long/short indicator. On Tuesday with the SPX at 1255 I told everyone that the market was oversold and a trading bounce was likely. I suggested shorting weakness on any oversold bounce given the negative fundamentals. The SPX rallied out of the 1253 intraday low on Wednesday to 1274.50 on Thursday morning before weakness appeared. You should note that is appeared right at 1275 where we expected resistance to appear. Once the roll over began our 1270 short indicator was crossed almost immediately giving everyone a perfect setup for an exit from their Wednesday long and right back into a short at 1270. The SPX crashed right back to 1254 at Friday's open before the afternoon buy program returned it right back to 1270 once again. You could not script this better for traders. If you followed my suggestions you should have made a couple very good trades.
NYSE Composite Chart - 60 min
Next week the same rules apply. We need to remain short under SPX 1270 and cautiously long over 1275. That recommendation has not changed in several weeks. Until this trading range changes there is no need to do anything different. I know it sounds simplistic but it takes the emotion out of the decision and we trade in the direction of the trend. Next week the economic calendar has some more meat in it with the PPI, Industrial Production and a couple of Fed surveys. The semi book-to-bill comes out Thursday night and it will be interesting to see if bookings can go positive for the first time since Sept-2004. The last reading was .96 meaning only $96 dollars in orders were received for every $100 shipped. The SOX needs some good news to provide support for the Nasdaq. It has been holding above 530 but is starting to look heavy.
If I had to
take one trade next week it would be Valero. The monster drop on
Friday took it back to strong support at $50 and there is a much greater chance
of a rebound than a continued drop. But, oil prices could continue to decline
with strong support at $58 and -$4 below Friday's close. Whatever you decide to
trade next week just don't get married to your position. The markets are not
giving us any directional help and volatility is the only factor we can count
on. Until a trend appears I
would be continue to be cautious especially on longs
New Long Plays
Curtiss Wright - CW - close: 59.78 chg: +0.77 stop: 57.99
Why We Like It:
Picked on February xx at $ xx.xx <-- see TRIGGER
LM Ericsson - ERICY - close: 34.26 chg: -0.02 stop: 33.93
Why We Like It:
Picked on February xx at $xx.xx <-- see TRIGGER
Palm Inc. - PALM - close: 37.49 change: +0.54 stop: 35.99
Why We Like It:
Picked on February 12 at $37.49
TASER Intl. - TASR - close: 9.75 change: +0.26 close: 9.24
Why We Like It:
on February xx at $xx.xx <-- see TRIGGER
New Short Plays
Long Play Updates
CEC Entertainment - CEC - cls: 37.35 chg: -0.08 stop: 35.99
On Thursday we warned readers to expect a dip in shares of CEC. That's what the stock delivered. Shares fell to $36.59 before rebounding almost back into the green. This looks like a potential entry point for new bullish positions but we're not that confident in the major indices so consider new positions carefully. We will leave our stop loss at $35.99 for now. The 200-dma near $36.42 should act as short-term support. Our target is the $39.85-40.00 range.
Picked on February 1 at $37.61
Dominos Pizza - DPZ - close: 25.76 change: -0.09 stop: 24.45
We are starting to run out of time for this play with DPZ. The company is due to report earnings on the morning of Tuesday, February 21st. Since the market is closed on February 20th that means we need to exit near the closing bell on Friday the 17th. Yet the play has not even opened yet. Our plan is to catch a bullish breakout over resistance at the $26.00 level. We're suggesting that readers use a trigger at $26.16. to open positions. If DPZ does not hit our trigger by the close on Tuesday we'll drop DPZ as a candidate. If triggered we'll target a rally into the $27.85-28.00 range.
Picked on February xx at $xx.xx <-- see TRIGGER
Helen of Troy - HELE - close: 19.50 chg: +0.25 stop: 18.95
HELE is bouncing back toward the top of its three-week trading range near $19.60. The stock has been consolidating sideways between $19.00 and $19.60 since we began this play. The technical indicators are giving mixed signals and we are not suggesting new bullish positions at this time. The P&F chart, which tends to weed out the noise we might see on a daily chart is bullish and points to a $27 target but that could take a while to be reached. Our target is the 200-dma (21.07) but we're using the $21.00 level as our exit for now.
Picked on January 25 at $19.04
Knightsbridge Tankers - VLCCF - cls: 27.78 chg: +0.05 stop: 25.95*new*
Red alert! Our risk just changed drastically with VLCCF. We were under the impression that the company would not report earnings until February 28th. Unfortunately, another information source is now stating that VLCCF will report earnings on Monday morning, February 13th. We will be unable to avoid holding over the earnings report. In order to reduce our risk we're raising the stop loss to $25.95. Hopefully, VLCCF will mimic its peer NAT and rally on its earnings news. Analysts' estimates are for profits of $0.56 a share. The $27.00 level and the 50-dma near $26.50 should offer short-term support. Our target is the $29.95-30.00 range.
Picked on February 07 at $27.64
Short Play Updates
Amer. Home Mtg - AHM - close: 27.81 chg: -0.61 stop: 28.85*new*
AHM continues to consolidate with a bearish trend of lower highs and lower lows. The stock hit a new two-month low on Friday but failed to hold it. The weakness on Friday looks like a new entry point for shorts but we are suggesting caution. A look at the chart below and you'll see why. AHM is still holding on to short-term support. Plus, the technical indicators are throwing off mixed signals. We are going to inch our stop loss down to $28.85. Our target is the $25.25-25.00 range.
Picked on February 08 at $27.89
Ebay Inc. - EBAY - close: 39.53 change: -0.00 stop: 42.01
EBAY is a new play from the Thursday night newsletter. The stock did continue lower on Friday but the intraday rebound suggests the stock might continue to bounce higher. Watch for the simple 10-dma (now at 41.15) to act as overhead resistance. We are going to reprint our original play description from Thursday here:
Most of the major Internet companies have not been doing very well. EBAY ranks right up there with its compatriots. The stock reversed course after a failed rally at $48 after its earnings report in January. It is arguable that EBAY is looking a bit oversold and due for a bounce. However, we like today's failed rally and see it as a new entry point to short the stock. It looks more attractive if you consider that EBAY has broken down below nine-month old support (see chart). We are going to put our stop loss at $42.01 since $42.00 used to be old support. More conservative traders may want to put their stop loss above today's high (41.18) or above the 10-dma. Our initial target will be the $35.75-36.00 range. The P&F chart is bearish and points to a $32 target.
Picked on February 09 at $39.53
Flextronics - FLEX - close: 10.08 change: -0.08 stop: 10.55
The SOX semiconductor index was the weakest tech-related index on Friday with a 1.17% decline. Yet even with the decline the SOX bounced significantly from its lows of the session. Shares of FLEX followed suit with a decline early on that broke below the $10.00 mark but the stock rebounded to close unchanged on the day. The overall pattern remains bearish but we hesitate to open new positions here. FLEX could easily bounce back to the $10.35 or even $10.50 region and still keep its bearish trend in place. Look for the simple 10-dma near $10.27 to act as short-term resistance. Our target is the $9.05-9.00 range.
Picked on February 05 at $10.02
Liz Claiborne - LIZ - close: 34.16 change: +0.03 stop: 34.75
The good news here is that there has been no follow through on Wednesday's intraday rebound. LIZ continues to trade under a short-term trend of lower highs. We are not suggesting new short positions until LIZ trades back under $33.50. More conservative traders might try reducing their risk with a stop loss closer to $34.50. In the news on Friday it was reported that LIZ is one of multiple companies considered as candidate to buy out fashion designer Vera Wang, which is valued around $300 million.
Picked on February 07 at $33.45
Nat.Res.Ptnrs - NRP - cls: 51.60 chg: +0.34 stop: 53.01*new*
Uh-oh! Our time frame just changed with NRP. We have been working under the impression that NRP would not report earnings until February 20th or later. New data suggests that NRP will announce earnings on February 14th before the opening bell. That means we will need to exit on Monday afternoon near the closing bell to avoid holding over the report. We are adjusting our target to $50.25 and our stop loss to $53.01.
Picked on February 02 at $53.01
Oregon Steel - OS - close: 37.73 change: +0.74 stop: 40.01
Our new play in OS is not off to the best start but Friday's bounce may just prove to be the sort of failed rally entry point traders like to short. We would consider new shorts if OS trades under $37.50 again. More conservative traders might want to consider a tighter stop loss. We don't see any change from our original play description from Thursday night so we're reposting it here:
The upward momentum in the steel industry has stalled and many of the major players are reversing after a very solid run up in January. OS is one of them. The MACD, RSI and stochastics on the daily chart are all bearish and now some of the weekly indicators are turning south. We see today's failed rally as a new entry point to short the stock. Our target is going to be the simple 50-dma, currently at 32.76. However since the 50-dma is rising we'll use an exit range or target in the 33.50-32.75 zone. More conservative traders may want to consider putting their stop loss just above today's high (39.24). Please note that this is a slightly more aggressive play. The most recent data put short interest at 14.5% of the 35.5 million shares in the float. If you're not interested in trading OS then check out ATI, which is another steel stock offering a similar pattern and potential entry point for shorts.
Picked on February 09 at $36.99
Closed Long Plays
Closed Short Plays
Family Dollar Store - FDO - cls: 24.02 change: +0.41 stop: 24.51
We are not comfortable with the bounce in FDO on Friday. The stock began to take off late on Friday afternoon after clearing the $23.80 level. Volume really began to pick up late on Friday towards the close. We are choosing to exit early and keep our losses at a minimum.
Picked on February 06 at $23.45
Today's Newsletter Notes: Market Wrap by Jim Brown and all other plays and content by the Option Investor staff.
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