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Daily Newsletter, Monday, 02/27/2006

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Table of Contents

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

Market Wrap

Nasdaq Gaps & Goes

The Nasdaq gapped higher at the open and led the way up this morning in what proved to be a "flagpole" rally. Stocks launched their way up a steep "flagpole" only to stall at the highs in a narrow, sideways range. That range broke to the downside in the final minutes of the cash session, but the pullback was too shallow to make much of a dent in the Nasdaq's gain for the day.

Although the Nasdaq led, the SPX was a lot closer to the year's high, and ran to new highs not seen since 2001. Bearish housing data and big issuances of new debt from the Treasury were ignored by equities, and while bonds got hit, resistance on the ten year note yield held at 4.6% (see below). Volume breadth on the indices was strong throughout the session, holding positive into the close despite the final pullback.

Daily Dow Chart

The Dow held above Friday's range, but failed to clear this month's resistance to 11200. Below that level, the current gains above 11000 remain vulnerable to a possible bear wedge, while bulls see the break above 11000 as a bullish triangle break currently retesting (and holding above) horizontal support. For the day, the Dow closed higher by 36 at 11098.

Daily S&P 500 Chart

The SPX gained 4.7 to close at 1294.13, failing from its afternoon high at 1297.57. The break to new highs was short-lived, but so was the pullback that followed. The chart is certainly more bullish than bearish at the highs at the highs, a pattern of higher lows and higher highs on the daily chart. Today's break didn't run far enough to rule out a double-top interpretation, but until we see a break of 1280 support, 1288 at minimum, the benefit of the doubt will have to go to the bulls.

Daily Nasdaq Chart

The Nasdaq blew through last week's high, adding 20.14 to close at 2307.18. The move returned to but failed to break above rising resistance at the broken trendline from the beginning of this month. Resistance to 2315 from late January is in play at current levels, today's high 2313, above which the year high should come quickly into view. If today's breakaway gap up open was a bull flag break on the daily chart, then the bulls could be treated to a new leg up to new highs.

On the liquidity front, the Fed's open market desk had no repos maturing this morning, but added a $2 billion overnight repo for a net add in that amount. This was followed up by another coupon purchase in the amount of $1.2 billion, which is effectively a permanent repo that never gets paid back from the dealers to the Fed, bringing the day's total to a $3.2 billion net add.

At 11AM, the Treasury announced the size of tomorrow's 4-week bill auction, which will be in the amount of $20 billion to refund $18 billion maturing. The net effect is to raise new cash in the amount of $2 billion, which drains available liquidity.

Today's auction was for 13- and 26-week bills, the Treasury offering $40 billion of new debt to refund $32.231 billion in maturing notes, raising new cash and effectively draining $7.769 billion. Foreign central banks purchased $10 billion of the $40 billion auctioned, the 13-week bills setting a high-rate of 4.51% with a 4.625% yield and generating 2.02 bids for each accepted. The 26 week bills set a high-rate of 4.58%, the yield 4.754% and a bid-to-cover ratio of 2.13.

Daily TNX Chart

The wave of treasury issuance has caused the ten year note yield (TNX) to rally from a higher low above 4.285%. On the daily chart, 4.6% resistance has been in play for a week, above which the previous 4.65%-4.7% confluence is in play. For the day, TNX closed higher by 2.3 bps at 4.590%.

There was no shortage of bad news from the Middle East over the weekend. However, Traders opened their screens to a drop in crude oil prices as Saudi spokesman Major-General Mansour al-Turki announced that two raids were carried out last night, resulting in the death of five suspects and a single arrest. All six were believed to be involved in last week's al-Quaeda attack. As well, AP reported that Iran and Russia had reached an agreement in principle to set up a joint uranium enrichment venture. The talks that led to the agreement had US support, and helped to ease concerns about Tehran's possible agenda to manufacture nuclear weapons. As well, this weekend's agreement reduces the likelihood that the UN Security Counsel will be forced to initial sanctions or take other actions against Iran. Those concerns remain, however, as many details remain unsettled, including the West's demand that Iran cease domestic uranium enrichment activities.

Crude oil closed the day lower by 1.975 at 60.925, 10 cents off its session low. Natural gas closed -.53 at 6.785, 8.5 cents off its low.

At 10AM, the day's lone economic report was released. The Commerce Department reported that sales of new homes declined 5% to an annual rate of 1.233 million homes in January (seasonally adjusted). That reading marks a two year low. Inventory rose 2.5% to a new record of 528,000 units, and at the lower annual rate, the record number of homes for sale represents a 5.2 month supply, the largest in 9 years. The median sale price of a new home rose 6.7% from the year-ago reading to $238,100. December's new home sales figure was revised from 1.269 million to a 1.298 annualized rate.

This will be a busy week for economic data. Tomorrow, we will be treated to the Preliminary Q4 GDP and Chain Deflator, Chicago PMI, Consumer Confidence and Existing Home Sales. On Wednesday, in addition to the weekly Mortgage Bankers and EIA Petroleum reports, we'll get Auto & Truck Sales, Personal Income and Personal Spending, Construction Spending and the ISM Index. On Thursday, it's the weekly Initial Claims and EIA Natural Gas Storage Reports, followed by ISM Services and Michigan Sentiment on Friday.

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In corporate news, there was good news from Lowe's (LOW), who reported Q4 earnings that rose from $508 million or 64 cents per share on sales of $8.55 billion to $695 million or 87 cents on sales of $10.81 billion. Consensus estimates were for EPS of 80 cents on $10.44 billion sales. LOW forecasts Q1 EPS of 92-94 cents and $4.03-$4.13 for the full year ending January 2007, compared with current consensus of 88 cents for Q1 and $3.95 for the year. LOWE closed higher by 5.63% at 69.22.

GE reported that it will divest itself of its remaining 71 million Class A and 15 million Class B shares in Genworth Financial (GNW). GE added .18 to close at 33.33, GNW losing .23 to close at 32.41.

The world's largest gold producer, Newmont Mining (NEM) reported Q4 earnings that fell from $190 million or 42 cents per share in the year-ago quarter to $62 million or 14 cents. The company cited legal settlements and asset write-downs for the decline. Earnings from continuing operations fell from 34 cents to 16 cents per share, while revenues rose from $1.2 billion to $1.31 billion. Estimates were for earnings from continuing operations of 36 cents on $1.4 billion revenue. Tne company sold 2.4 million ounces of gold during the quarter at an average realized price of $472 per ounce. NEM got smoked for a 5.88% loss at 54.69.

Barrons released an article this weekend speculating that AAPL could bid for DIS, noting that AAPL CEO Steve Jobs is also PIXR's CEO, and is on Disney's board as its largest individual shareholder. Neither DIS nor AAPL released any news to confirm or deny the rumor, but AAPL traded lower today against the broader market, while DIS was up. AAPL lost .66% to close at 70.99, while DIS gained 1.47% to close at 28.39. PIXR closed higher by 1.96% at 65.06.

For tomorrow, traders will be watching for a continuation of today's equity festivities. So far, the Treasury's heavy supply of debt has been sparing equities, with bonds getting hit as stocks rally. Liquidity analysis would suggest that a reduction in the supply of money should ultimately hurt all markets, while today's action felt more like asset allocation from bonds into stocks. As always, the chart you're trading is the only one that counts, and so while the weakness in bonds is ominous, equity bulls continue to benefit from a rising tape.

Tomorrow will also be my last day posting in the Market Monitor. It was not an easy decision to take, and I'm going to miss you as well as my colleagues enormously. You're in the best of hands here, with a team comprised of analysts who really care and give it their best, every day. May all of your longs rally, your shorts tank, and your option writes expire worthless. A friend and trading mentor wrote something a few years ago that I've had stuck to my second monitor ever since, and I can think of no better a parting quote:

"I'd just like to remind you, that no matter how important trading the market may be in your life, NEVER let it interfere with that which is most important, your loved ones. Now, go give your spouses and kids a hug, and if your Mom and Dad are still around, give them a call to let them know you are thinking of them. Then go see them this weekend and give them a hug too."
 

New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
NTAP None
SCST  

New Long Plays

Network Appl. - NTAP - close: 33.50 chg: +0.93 stop: 31.90

Company Description:
Network Appliance is a world leader in unified storage solutions for today's data-intensive enterprise. Since its inception in 1992, Network Appliance has delivered technology, product, and partner firsts that simplify data management. (source: company press release or website)

Why We Like It:
NTAP's latest earnings report was a winner and sent shares gapping higher. Since then the stock has spent time consolidating those gains. Now that NTAP has filled the gap and bounced from support near $32.00 we see the rebound as a bullish entry point to get long the stock. Today's move in NTAP looks even more appealing now that the NASDAQ has broken out from its short-term trend of lower highs. We are going to be very aggressive with NTAP and target a rally into the $39.00-40.00 range over the next ten weeks. We would also label this an aggressive play because NTAP still has resistance at $34.50 and again at $35.00. Yet if NTAP can trade over $35.00 it would be a big buy signal. The P&F chart is already bullish and points to a $49 target.

Picked on February 27 at $33.50
Change since picked: + 0.00
Earnings Date 02/15/06 (confirmed)
Average Daily Volume: 4.5 million

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SCS Transportation - SCST - cls: 26.98 chg: +0.15 stop: 25.99

Company Description:
SCS Transportation, Inc. provides trucking transportation and supply chain solutions to a broad base of customers across the United States. With annual revenue of $1.1 billion, the Company focuses on regional and interregional less-than-truckload (LTL), and selected truckload (TL) and time-definite services. Operating subsidiaries are Saia, a multi-region LTL carrier based in Duluth, Ga., and Jevic, a hybrid LTL and truckload carrier based in Delanco, N.J. Headquartered in Kansas City, Mo., SCST has approximately 9,600 employees nationwide. (source: company press release or website)

Why We Like It:
Today's pull back in crude oil prices helped fuel a strong gain in the Dow Transportation sector index. The TRAN index is hitting new all-time highs on the strength in railroads, trucking, and the rebound in airlines today. SCST is a trucking stock and shares have been climbing for the past few months but have been stuck in a sideways consolidation for the past four weeks. We suspect that SCST is about ready to breakout and produce its next leg higher. We want to catch that move with a trigger to go long at $27.55. If triggered we will target a rally into the $29.90-30.00 range. SCST's P&F chart points to a $36.50 target.

Picked on February xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/25/06 (unconfirmed)
Average Daily Volume: 139 thousand
 

New Short Plays

None today.
 

Play Updates

Updates On Latest Picks

Long Play Updates

Amer.Phys.Cap. - ACAP - close: 48.99 change: +0.13 stop: 46.75

There is no change from our weekend update for ACAP. We remain on the sidelines. Our plan is to catch a breakout over resistance in the $50.00-50.50 region. We are suggesting a trigger to go long the stock at $50.61. If triggered we'll target a rally into the $54.85-55.00 range. The Point & Figure chart is bullish with an ascending triple-top breakout buy signal and a $91 target.

Picked on February xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 02/16/06 (unconfirmed)
Average Daily Volume: 53 thousand

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Arrow Elect. - ARW - close: 35.59 change: -0.30 stop: 33.90

Our new play in ARW is not off to the strongest start. What we do see is that traders bought the dip midday near $35.22 and the stock was on the rebound Monday afternoon. Volume came in well above the daily average. If you're looking for a new entry point this looks like a possibility or wait for a new move over $36.00. Our target is the $39.00-40.00 range over the next eight to ten weeks. We'll start our stop loss at $33.90 but more conservative traders may want to use a tighter stop near $34.80.

Picked on February 26 at $35.89
Change since picked: - 0.30
Earnings Date 02/22/06 (confirmed)
Average Daily Volume: 587 thousand

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Claires Store - CLE - close: 32.32 change: +0.51 stop: 30.89

Strength in the retailers today helped push CLE to a 1.6% gain and our play back into positive territory. Retailers will start to announce their same-store sales data for February in a few days and that could spark a new rally (or sell-off) in the group. Don't forget that we plan to exit ahead of the earnings around March 9th. Our target is the $33.90-34.00 range. The P&F chart points to a $42 target.

Picked on February 14 at $32.00
Change since picked: + 0.32
Earnings Date 03/09/06 (confirmed)
Average Daily Volume: 697 thousand

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LM Ericsson - ERICY - close: 34.53 chg: -0.02 stop: 33.93

We see no change from our weekend update on ERICY. The stock has been slowly consolidating lower over the past several days on below average volume. We suspect that ERICY will dip toward $34.00 and its simple 200-dma before moving higher again. Wait for the bounce from the 200-dma before considering new positions. Our target is the $36.75-37.00 range.

Picked on February 14 at $34.61
Change since picked: - 0.08
Earnings Date 01/31/06 (confirmed)
Average Daily Volume: 2.2 million

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Hewlett Packard - HPQ - cls: 33.41 chg: +1.39 stop: 31.75

Wow! Monday proved to be a reversal of fortunes for HPQ. The stock started the day off strong and closed with a 4.3% gain. The move over $33.00 looks like a new bullish entry point for longs. Our target is the $35.00-35.50 range.

Picked on February 22 at $32.94
Change since picked: + 0.47
Earnings Date 02/15/06 (confirmed)
Average Daily Volume: 13.5 million

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Novell Inc. - NOVL - close: 9.64 change: -0.03 stop: 9.10

We do not see any change from our weekend update for NOVL. We are not suggesting new positions in NOVL at this time. We only have three days left before NOVL reports earnings and honestly this looks like a good spot to exit with a minor gain. The stock tested resistance at the $9.80 level again and failed to breakout. We plan to exit on Thursday afternoon to avoid holding over the report due out Thursday night.

Picked on February 14 at $ 9.30
Change since picked: + 0.34
Earnings Date 03/02/06 (confirmed)
Average Daily Volume: 5.6 million

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OptionsXpress - OXPS - close: 31.95 change: +1.15 stop: 29.95

Uh-oh! Our new play in OXPS is starting off on the wrong foot. If you're a candlestick reader then today's trading has painted what looks like "dark cloud cover", which can signal a bearish reversal. The big spike in volume on today's failed rally near $32.00 is another big warning sign. We are not suggesting new bullish plays at this time and we expect that shares will pull back toward the $30.00 level. Watch for a bounce from $30.00 before considering new longs.

Picked on February 26 at $31.95
Change since picked: + 0.00
Earnings Date 04/27/06 (unconfirmed)
Average Daily Volume: 1.0 million

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Unisys - UIS - close: 6.90 change: +0.09 stop: 6.34

UIS was inching higher today but remains under resistance at the $7.00 mark. More conservative traders may want to tighten their stop losses even higher. Our short-term target is a move into the $7.40-7.50 range.

Picked on February 16 at $ 6.81
Change since picked: + 0.09
Earnings Date 01/26/06 (confirmed)
Average Daily Volume: 2.1 million
 

Short Play Updates

Bed Bath & Beyond - BBBY - cls: 35.99 chg: +0.27 stop: 37.01

There is no change from our weekend update for BBBY. We are still on the sidelines with BBBY. Our plan is to catch the next leg down in the stock price. The stock has been consolidating sideways for the last few weeks with a new trend of lower highs. We're suggesting a trigger to short the stock at $34.80. If triggered we'll target a decline into the $30.50-30.00 range. The Point & Figure chart is bearish and points to a $25.00 target.

Picked on February xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 03/29/06 (unconfirmed)
Average Daily Volume: 3.5 million

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Hilton Hotels - HLT - close: 24.35 change: +0.04 stop: 25.01

There is no change from our weekend update on HLT. We want to catch any breakdown under $24.00 and we're suggesting a trigger to short the stock at $23.98. If triggered our target is the $22.25-22.00 range.

Picked on February xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 05/02/06 (unconfirmed)
Average Daily Volume: 2.9 million

---

Juniper Networks - JNPR - close: 17.89 chg: +0.22 stop: 19.25

A solid day of gains for the technology group helped fuel another bounce in JNPR. So far short-term resistance at the $18.00 level is holding. However, now that the NASDAQ looks ready to post further gains we'd be careful with this short in JNPR. Double check your stop loss and make sure you're comfortable with the amount of risk you're taking. We remain bearish and continue to target the $15.25-15.00 range. The P&F chart is very bearish and points to a $9.00 target.

Picked on February 19 at $17.97
Change since picked: - 0.08
Earnings Date 01/25/06 (confirmed)
Average Daily Volume: 11.8 million
 

Closed Long Plays

Curtiss Wright - CW - close: 63.58 chg: +0.86 stop: 59.90

Target achieved. CW traded consistently higher throughout the session on Monday and finally hit our target in the $63.95-64.00 range late this afternoon.

Picked on February 16 at $ 60.35
Change since picked: + 3.23
Earnings Date 02/09/06 (confirmed)
Average Daily Volume = 76 thousand
 

Closed Short Plays

None
 

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

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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.

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