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Daily Newsletter, Wednesday, 03/01/2006

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Table of Contents

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

Market Wrap

You Can Bank on a Rally

Or can you? Through much of February, financials lent strength to the indices. The BKX, the KBW Bank Index, and the BIX, the S&P Banks Index, charged higher over the last three weeks and showed particular strength last week. Some market watchers questioned that leadership, given the recent uncertainty about the current rate-hike cycle and the continued yield-curve inversion. Some of those uncertainties played out in yesterday's strong profit taking among the financials. Today, the BIX and BKX appeared to lag other indices' gains, but the SOX and TRAN ran forward, assuming leadership roles. Most tech-related indices gained.

Annotated Weekly Chart of the BKX:

Despite today's SPX gains and hopes that by this time this week, we'd see more conclusive evidence of next direction on the SPX, this Wednesday sees that index just about where it was last Wednesday, both in price and in relationship to its rising wedge.

Annotated Weekly Chart of the SPX:

Despite today's strong gain, the Dow could not press above the 10-sma. Unlike the SPX, it remains below last Wednesday's 11,137.17 close. Like the SPX, it also has not clearly revealed next direction, despite hopes that it might have done so by today.

Annotated Weekly Chart of the Dow:

Those already long the Dow or Dow stocks should protect longs with hopes that the Dow will move back to the top of that broadening formation or even break through the top, but this in-between spot, in a broadening formation, does not appear a good spot for new positions.

During the pre-market period today, some market watchers pointed to former favorite CSCO's behavior as indicating renewed Nasdaq strength. Ahead of a Merrill Lynch conference this afternoon, this former tech darling closed yesterday at $20.24, its highest close since September, 2004. By mid-afternoon, the stock's price had shot above $21.00 and article titles gave CSCO credit as leading tech shares higher. Market watchers want to hear good news out of CSCO at that conference, and especially want to hear that the company is increasing its spending. Watch your stops if you're long this stock as some volume patterns indicate that some are selling into the rallies. If that supply dries up or is absorbed, CSCO could shoot higher, but if CSCO or Merrill Lynch says something disappointing and supply overwhelms demand, it could go down as fast as it rose. CSCO closed at $21.06, up $0.82 or 4.05 percent.

Annotated Daily Chart of the Nasdaq:

If the SOX has managed to break out of its bull flag and back above its last gap, then Nasdaq dips to and bounces from the 10-sma might be considered tentative buying opportunities, but with smaller positions than usual and with full awareness of the resistance soon to be faced. Many reasons exist to peg the recent climbs as suspicious, and the SOX's gappy climb remains one of those reasons.

CSCO wasn't alone in creating enthusiasm for tech-related stocks. Many SOX components played their part. ALTR gapped higher this morning and then ran up above $21.00, after closing yesterday at $20.04, but it wasn't the only SOX component to bounce. NSM also gapped higher, NVLS shoved past a gap on its daily chart, TXN saw an early and strong gain, and many other components bounced from their recent drubbings. INTC was more of a follower than a leader among the chip stocks, however, showing tepid gains as it also touched $21.00, but not able to hold onto its highs into the close. INTC closed at $20.80, up $0.20 or 0.97 percent. During the pre-market period, J.P. Morgan downgraded the company's 2006 earnings estimates and Stifel Nicolaus cut its price target for the company.

Annotated Daily Chart of the SOX:

The day's economic release calendar was full. The Mortgage Bankers Association released mortgage applications for the week ending February 24 at 7:00 EST. That report might have gained more interest after this week's disappointing numbers for new and existing home sales if market watchers hadn't been so focused on later data. The MBAA figures showed that the Market Composite Index decreased 1.2 percent from the previous week's figure on a seasonally adjusted basis and was 18.9 percent lower than the year-ago level. The Purchase Index decreased 1.9 percent, the Refinance Index climbed 0.1 percent, the Conventional Index decreased 1.4 percent, and the Government Index increased 1.5 percent. Four-week moving averages were down more than two percent for the Market, Purchase and Refinance Indices. Refinancings decreased as a percentage of total applications. The average interest rate for a 30-year fixed-rate mortgage fell to 6.18 percent and points decreased, too. A spot on CNBC later in the afternoon used the narrowing of the gap between rates for one-year ARMS and 30-year fixed-rate mortgages as an example of how real-life decision-making processes are affected by the inversion we're seeing lately.

Other early morning reports included January's Personal Income figures. Personal incomes rose 0.7 percent, but headlines warned that inflation cut into those gains in incomes. With consumer inflation increasing 0.5 percent and core inflation gaining 0.2 percent, real disposable incomes gained only 0.1 percent. Real consumer spending gained only 0.4 percent. Both gains proved the weakest in many months, although the headline number for consumer spending, a 0.9 percent gain, was the strongest since last summer. That resulted in a decline in savings.

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Print and television commentators were soon pondering the quandary facing the FOMC with this divergence in headline and core numbers and personal incomes and consumer spending. The FOMC typically relies on core numbers as representing the true state of inflationary pressures, but committee members can not forever ignore the probable eventual effect of continued high non-core trends. Those of us in the real world know that higher energy costs already factor into our day-to-day experiences. Jim touched on this subject in his Wrap last night, so I won't belabor the subject.

These reports and concerns about the performance of individual stocks such as Google (GOOG) and Pfizer Inc. (PFE) merely provided the background against which the ISM was to appear at 10:00. A study claiming that PFE's Celebrex painkiller almost doubles the risk of heart attacks pressured that stock in pre-market trading. It dropped in early trading, but bounced from the day's low and managed a close near the flat-line level, up $0.07 or 0.27 percent. GOOG printed a small-bodied candle, with a close only a few points above yesterday's, up $2.18 or 0.60 percent.

The ISM number came in higher than expected. The number had been forecast to rise to 55.6-55.8 percent from January's 54.8 percent. However, ISM was reported at 56.7 percent for February. New orders jumped to 61.9 percent, up from 58.0 percent the previous month, and employment climbed to 55.0 percent, up from 51.3 percent. The price index fell to 62.5 percent, down from 65 percent.

Construction spending was also reported at 10:00, and that number disappointed. Spending had been expected to increase 1.0-1.3 percent gain but instead showed an increase of only 0.2 percent. That was the smallest increase since June, the Commerce Department reported.

Equities had risen into the ISM and construction spending numbers, but dropped afterwards, climbing again into and beyond the release of crude inventories. American Petroleum Institute (API) figures showed crude inventories rising 2.5 million barrels while the Energy Department reported a rise of 1.6 million. The API claimed gasoline inventories rose 213,000 barrels, while the government announced a build of 300,000 barrels. The API's figure for distillates was a drop of 1.4 million barrels while the energy department reported a drop of 1.5 barrels. A drop in distillates had been expected after last week's chilly weather, and as refineries begin gearing up to produce motor gasoline in anticipation of increased demand in the summer months.

Crude costs proved somewhat volatile before and after the announcement. Although the drawdown in distillates was expected and the increase in crude inventories was higher than expected, some focused on demand and geopolitical developments ahead of next week's OPEC meeting. For a number of fifteen-minute periods before and after the announcements, candles showed long tails either direction with small candle bodies forming near $62.00, but crude eventually dipped to a low of $61.48 before bouncing to a new day's high and then retreating off that high again. At the Nymex close, the front-month crude contract was trading at $61.97, up from yesterday's close at $61.41. As this report was prepared, it was last at $62.20.

Car manufacturers released reports on last month's sales from late morning until early afternoon. Ford (F) announced that February's U.S. car and truck sales were down when compared to last year's sales, by 1.4 and 5.4 percent, respectively. Total U.S. sales declined 4 percent versus the year-ago levels. Land Rover sales increased 27.8 percent, but sales of other models fell.

DaimlerChrysler (DCX) sales increased 4 percent. Mercedes-Benz sales pulled the group higher, but Chrysler sales also increased. General Motors (GM) reported that sales declined 2.5 percent in February, a disappointment when market watchers had expected a 1.3 percent increase. DCX climbed, but both F and GM inched lower.

Tomorrow's economic reports include the 6:00 EST Monster Employment Index, the 7:30 EST Challenger Report, the 8:30 Jobless Claims and the 10:30 Natural Gas Storage numbers. During the day, we'll be seeing chain store sales and the semiconductor billings number will also be released, usually after the market close.

Companies reporting earnings include CATS, CAV, CIEN, CWEI, COST, CMOS, DLM, DT, MDS, NXST, NOVL, PBY, TLB, UVN, and RMIX, among others.

I can only repeat the mantra that I've been repeating for a while. The SPX, OEX and Dow are not going to fall too far as long as the TRAN is moving higher. The TRAN should have reached strong resistance week before last, but it continues to move higher, having broken out of a weekly envelope that had previously always held it since mid-1997. With an inverted yield curve, crude prices that should be causing problems and increasing geopolitical tensions, I remain skeptical of that breakout, but not skeptical enough to bet against it myself or advise others to do so. With the SOX having produced numerous gaps on the way to its January high, I'm suspicious of that index's climb, too, especially ahead of this week's book-to-bill number, but the SOX recently completed a successful test of its 50-sma, and it's attempting an upside breakout of a possible bull flag. The SOX was stopped at the top of its last big gap. Gap resistance held, a suspicious event, but the SOX still climbs.

Remain skeptical enough that you keep raising stops as appropriate if long, but don't assume that bearish positions are right until the markets give you proof. First steps toward that proof would consist of sharp pullbacks in the TRAN and the SOX. Instead, both attempt upside breakouts. Add the BKX and BIX to your radar screen, as it's possible that their strength is flagging, but there's been a phenomenon that Keene Little likens to bathtub sloshing in the markets lately. One index leads until it breaks through some significant level or formation. Then its strength flags, and then all the momentum seems to flow to another index or sector, and the same occurs. When each has broken above levels that some would consider significant, it is left alone to fend for itself for a while, while efforts are made to support another. It seems a juggling act of sorts, and perhaps it can continue perpetually, but be careful if the master juggler drops too many indices at once.
 

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

Amer.Phys.Cap. - ACAP - close: 50.15 change: +0.86 stop: 46.75

Look alive! ACAP turned in a strong performance today adding 1.7% and closing over round-number resistance at the $50.00 mark. This is a new closing high for the stock. We are still on the sidelines. Aggressive traders may want to consider long positions here but 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

---

Arrow Elect. - ARW - close: 35.59 change: +0.80 stop: 33.90

A big rebound in the tech stocks, lead by semiconductors, helped ARW reverse yesterday's losses. Volume was pretty strong today for ARW at about three times the daily average volume. This looks like a new bullish entry point but be aware there appears to be short-term resistance near $36.00. Our target is the $39.00-40.00 range.

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: 32.66 change: +0.62 stop: 30.89

CLE broke out over resistance today to reach new highs. Volume is improving but remains low. CLE will probably report same-store sales data for February soon and the news could spark a big move either direction. 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: + 0.66
Earnings Date 03/09/06 (confirmed)
Average Daily Volume: 697 thousand

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LM Ericsson - ERICY - close: 34.70 chg: +0.60 stop: 33.93

Good news! Our ERICY play has bounced back into the green. Today's bounce has broken the stock's short-term trendline of resistance and this looks like a new bullish entry point. More conservative types might want to wait for a move over the 50-dma near $35.00. Our target is the $36.75-37.00 range.

Picked on February 14 at $34.61
Change since picked: + 0.09
Earnings Date 01/31/06 (confirmed)
Average Daily Volume: 2.2 million

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Hewlett Packard - HPQ - cls: 34.05 chg: +1.24 stop: 31.75

HPQ helped lead the markets higher with a big gain today. Shares added 3.77% and closed near its recent highs. The move might have been fueled by news that HPQ and Gateway (GTW) have settled their patent dispute but then again maybe not. The press release from HPQ didn't hit until 4:04 PM, after the market had closed. News of this settlement might drive HPQ higher tomorrow. Our target is the $35.00-35.50 range.

Picked on February 22 at $32.94
Change since picked: + 1.11
Earnings Date 02/15/06 (confirmed)
Average Daily Volume: 13.5 million

---

Network Appl. - NTAP - close: 34.19 chg: +1.03 stop: 31.90

The rebound in the NASDAQ and technology sectors helped push NTAP to a 3.1% gain and the stock closed over short-term resistance at the $34.00 level. Our ten-week target is the $39.00-40.00 range.

Picked on February 27 at $33.50
Change since picked: + 0.69
Earnings Date 02/15/06 (confirmed)
Average Daily Volume: 4.5 million

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OptionsXpress - OXPS - close: 30.58 change: +0.20 stop: 29.95

Be careful here. OXPS did not participate in the market's rebound today and the relative weakness is a worry. More adventurous traders might want to consider new positions if OXPS trades over $31.00 again but due to the market's weakness today we'd probably wait for a move over $31.50 before considering new positions.

Picked on February 26 at $31.95
Change since picked: - 0.97
Earnings Date 04/27/06 (unconfirmed)
Average Daily Volume: 1.0 million

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SCS Transportation - SCST - cls: 28.00 chg: +0.97 stop: 25.99

Our bullish play in SCST has been opened. Our trigger to go long was at $27.55, above resistance at $27.50. The stock rallied sharply and added 3.5% on above average volume today. The MACD on the daily chart is nearing a new buy signal. Now that we're triggered our target is the $29.90-30.00 range. SCST's P&F chart points to a $36.50 target.

Picked on March 01 at $27.55
Change since picked: + 0.45
Earnings Date 04/25/06 (unconfirmed)
Average Daily Volume: 139 thousand

---

Unisys - UIS - close: 6.82 change: +0.14 stop: 6.34

UIS produced a decent bounce today fueled by strength in techs and news that Air Canada has renewed their contracts with UIS. Unfortunately, the stock ran into heavy resistance at $6.83 today. It was a virtual wall that kept a lid on UIS' rally. This is somewhat worrisome. We are not suggesting new bullish positions. More conservative traders may want to tighten their stops. Our short-term target is a move into the $7.40-7.50 range.

Picked on February 16 at $ 6.81
Change since picked: + 0.01
Earnings Date 01/26/06 (confirmed)
Average Daily Volume: 2.1 million
 

Short Play Updates

Bed Bath & Beyond - BBBY - cls: 36.66 chg: +0.62 stop: 37.01

We are still untriggered with BBBY. If shares close over the 50-dma soon, currently at 36.78, we'll probably drop BBBY as a bearish candidate. We're suggesting a trigger to short the stock at $34.80.

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

---

Hilton Hotels - HLT - close: 24.15 change: -0.05 stop: 25.01

HLT's relative weakness today might be significant. 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
 

Closed Long Plays

None
 

Closed Short Plays

Juniper Networks - JNPR - close: 19.65 chg: +1.26 stop: 19.25

We have been stopped out of JNPR. Networking stocks were some of the best performers today. Cisco Systems (CSCO) broke out over significant resistance and this may have helped fuel a potential short squeeze in JNPR. Then again maybe it was JNPR that helped fuel the rally in CSCO since JNPR vaulted over the $19.00 level early this morning. Both stocks benefited from some discussion on CNBC about the growth in wireless chips. Our stop for JNPR was $19.25.

Picked on February 19 at $17.97
Change since picked: + 1.68
Earnings Date 01/25/06 (confirmed)
Average Daily Volume: 11.8 million
 

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

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