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Daily Newsletter, Wednesday, 03/22/2006

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Table of Contents

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

Market Wrap

Fits and Starts

Dictionary.com defines "fits and starts" as "repeated bursts of activity." That's what the markets saw Wednesday. Those bursts had produced both declines and bounces. Although the surprise drawdown in inventories predictably produced one move, others seemed less predictable. Jim Brown mentioned in Tuesday's Wrap that this might be a throwaway week, and today was certainly a throwaway day.

With little economic news scheduled Wednesday, Bernanke's Monday night speech already picked apart and the FOMC meeting still ahead next week, market participants had little to guide them. Company-related news dominated pre-market commentary, although many also kept a wary eye on bond yields and metals after yields inverted again Tuesday and silver reached a 22-year high. Futures were mixed, but indicated a flattish opening. Some worried about Microsoft's impact on the markets, with Jim Brown having reported Microsoft's delay of the introduction of its Vista Window's operating system program in Tuesday's Wrap. Some were cheered by earnings reports from various companies. Dow futures were higher, and Nasdaq futures lower.

In fits and starts, indices dropped but then retraced varying percentages of the collapse from yesterday's afternoon highs into today's lows. Relative out-performance in this regard by the big-cap OEX index would look suspiciously like flight to safety, but the RUT almost matched its performance. The mighty TRAN's performance beat the OEX's, with the TRAN driving past yesterday's new high. Two out of the three indicator indices--the RUT, TRAN and SOX--matched or even exceeded the OEX's performance, so bears can't claim a suspicious flight into big caps or blue chips.

By the end of the day, bears were left feeling as if a normal oversold bounce had gotten away from them once again. No resistance level, bearish divergence or technical development has proven trustworthy. Bears were exhausted by running today's sprints in fits and starts, only to be told to go back and start all over again. The day left participants questioning what had happened and which influence was the most important. Many indices ended right back where they'd started Tuesday morning.

Annotated Weekly Chart of the SPX:

Annotated Daily Chart of the Dow:

Annotated Daily Chart of the Nasdaq:

Annotated Daily Chart of the SOX:

The day's economic releases began when the Mortgage Bankers Association released mortgage applications for the week ending March 17 at 7:00 EST. With the existing home sales due tomorrow and new home sales on Friday, the focus tightens on the residential housing sector. The MBAA's figures showed that mortgage application volume fell 1.6 percent on a seasonally adjusted basis from the previous week. Four-week moving averages for Market, Purchase, and Refinance Indices all eased, while the average interest rate for a 15-year fixed-rate mortgage dropped to 5.99 percent from the previous week's 6.06 percent. Some credited the drop in applications with early weakness in the markets, but then some indices bounced from early lows into the release of crude inventories.

The second release of the day was that crude inventories number. That number showed that supply declined for the first time in six weeks. The Department of Energy reported a surprising decline of 1.3 million barrels in crude inventories for the week ending March 17. Motor gasoline inventories declined 2.3 million barrels, and distillates fell 800,000 barrels, with the decline in gasoline inventories particularly worrisome heading into the driving season. The release noted, however, that gasoline inventories are more than one percent higher than their year-ago level, despite last week's drop.

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Today, the Saudi oil minister assured the world that the current prices weren't hurting the global economy. The minister announced an IPO for the Petrorabigh petrochemical complex, to begin trading by the end of the year, and affirmed the desire for a stable oil market.

Other figures released today showed that OPEC's March production of crude dropped 300,000 barrels below March's due to the known problems in Nigeria. In other developments obliquely related, France and the U.K. stopped consultations with Russia and China in the bid to break a deadlock over what to do about Iran's nuclear program as the U.N. Security Council tries to break that deadlock.

Crude for May delivery bounced after the inventories release, but found resistance at $62.85 and dropped back again to end the day at $61.77, down $0.57. This was a close below the 200-sma at $62.16. As this report was prepared, crude traded at $62.03 in after-hours trading.

Also released today were a couple of economic numbers that may not have attracted much attention. One was the Chicago Fed National Activity Index for February. This index rose to 0.32 from January's 0.28. The component measuring production rose, those measuring consumption and housing fell and that measuring employment was unchanged. The U.S. mass layoffs was also released, showing that February's total of firms reporting mass layoffs dropped when compared to January's as well as to the year-ago level. However, the total number of workers impacted was up from January's number and the number of firms announcing (rather than reporting) layoffs also climbed. The number of factory workers impacted by mass layoffs rose significantly, from January's 29,541 to February's 45,073.

MSFT dropped 2.12 percent today, impacting many indices. In addition to the Microsoft news covered last night, stock-related news that caught attention today included the announcement that GM, auto-part supplier Delphi and the UAW had reached agreements that would hopefully result in the buyouts of 30,000 employees. If approved in bankruptcy court, the deal would be offered to 13,000 hourly Delphi employees and as many as 100,000 GM hourly workers. Up to 5,000 of Delphi's employees would be allowed to return to GM, and GM would also take over some post-retirement benefits for the Delphi employees who return to work for GM. An analyst on CNBC this morning mentioned that up to 36,000 of these workers were nearing retirement, and many believed that it would be likely the company would find 30,000 to accept the buyouts. GM bounced, but couldn't maintain all gains, and closed higher by only 0.04 percent.

Bristol-Myers Squibb Co. (BMY) and Sanofi-Aventis (SNY) benefited from their agreement with Apotex Inc., a Canadian drugmaker. Apotex had been suing to invalidate Plavix's patents so that it could introduce a generic competition, one that has already gained approval by the FDA. Under the terms of the agreement, BMY and SNY will grant Apotex a license and royalty, and Apotex agrees not to market their generic version of Plavix in the U.S. until September 2011 unless another drug-maker invalidates Plavix's patents first. Another company, India-based Dr. Reddy's Laboratories (RDY), already seeks to do just that. RDY has been approached about a possible settlement, too. The agreement reached with Apotex prompted UBS, Citigroup and Merrill Lynch to upgrade Bristol-Myers. BMY gained 10.55 percent, SNY jumped 9.61 percent, and RDY climbed 7.02 percent.

While BMY and SNY were benefiting from their news, Biogen Idec (BIIB) was suffering from news related to its Tysabri drug. The FDA will extend its review of the drug. The company's stock dropped 0.43 percent.

Morgan Stanley's (MS) net income rose 17 percent in its first fiscal quarter, the company reported today. Like some of its peers, the firm reported that investment banking and fixed-income trading helped it achieve record revenues. The stock climbed 2.53 percent. FedEx Corp. also reporting rising profits, by 35 percent in the third quarter, but the company disappointed on its full-year profit forecast. Still, the stock gained 1.07 percent.

ADBE was due to report after the bell this evening, but the report was not yet out as this report was prepared. It's capable of moving the markets, however. Tomorrow's economic releases may have more impact on the markets. They include Initial Claims for the week ending March 18 at 8:30 EST and February's Existing Home Sales, due at 10:00. Many will be watching tomorrow's home sales numbers, as well as Friday's new home sales numbers. Forecasts for existing homes are for 6.40-6.5 million existing home sales, down slightly from the previous month's 6.56 million. Near 10:30, natural gas inventories will be released.

Companies reporting earnings include COMS, BGO, CAG, FDO, GIS, PALM, SCHL, and SLR.

I began this report much more cautiously bullish, but as I conclude it, I find that evidence has remained more on the caution than the bullishness. The TRAN inched just above yesterday's high, but not significantly so, verifying the resistance at that level. The OEX and SPX could not even match yesterday's high, nor could the RUT. The SOX's performance indicates weakness more than strength, and the Nasdaq just coils within a narrowing triangle. Although the TRAN's continuing strength argues that buying dips remains the wisest choice, that dip occurred today and it's too late for new bullish positions with the TRAN currently challenging resistance again. The SOX's behavior argues against buying dips for now, with that opportunity also having been presented already today. I would not be surprised to see some indices push a little higher but could not yet bet that they break out and hold a breakout.

The charts I study tell me that it's almost, but perhaps not quite, as likely that the SPX could drop to 1291-1293 as it is that it might climb to 1312, and that's the problem for all of us trying to interpret charts ahead of the FOMC meeting. Those charts indicate the possibility, if not yet the probability, of a choppy and perhaps doji-type day tomorrow. If you're long, keep moving your stops higher. If you're not long, it's probably too late since the dip you needed for a new entry occurred today. If you're short or decide to enter shorts based on evidence if resistance is tested tomorrow, keep your stops tight and don't let a bounce get away from you. Don't even consider a new short position if the SOX and TRAN drive higher, particularly if the SOX maintains values above its 72-3ma. For now, the strange underpinning of the markets continued, and bears can't do much more than sprint before the bulls take over again.
 

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. Campus Comm. - ACC - cls: 26.35 chg: -0.15 stop: 25.74*new*

Has ACC finally bottomed again? We thought yesterday's intraday rebound looked like a bullish reversal but shares were weak early this morning again. Traders did buy the bounce but it doesn't look very convincing. The daily chart's MACD indicator is nearing a new sell signal. Short-term technical oscillators certainly look bearish too. Watch for a bounce over the 10-dma, near $26.75, or $27.00 before considering new bullish positions. We are raising our stop loss to $25.74.

Picked on March 15 at $27.11
Change since picked: - 0.76
Earnings Date 03/01/06 (confirmed)
Average Daily Volume: 70 thousand

---

Aeropostale - ARO - close: 30.59 change: -0.17 stop: 29.99

We warned readers to look for a dip toward the 10-dma/$30.00 region. Shares hit the 10-dma this morning before bouncing. Unfortunately, the bounce was not very convincing. We'd probably wait for a move over $31.00 again before considering new bullish plays. Our target is the $33.95-34.50 range.

Picked on March 17 at $31.21
Change since picked: - 0.62
Earnings Date 03/09/06 (confirmed)
Average Daily Volume: 1.1 million

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BE Aerospace - BEAV - close: 24.50 change: -0.31 stop: 23.95*new*

We are losing patience with the sideways consolidation in shares of BEAV. The stock remains under resistance at the $25.00 level. We are not suggesting new bullish positions at this time. Please note that we're adjusting our stop loss to $23.95, under what should be short-term support at $24.00. More aggressive traders may want to put their stop under the 50-dma.

Picked on March 12 at $24.25
Change since picked: + 0.25
Earnings Date 05/05/06 (unconfirmed)
Average Daily Volume: 800 thousand

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Hewlett Packard - HPQ - cls: 33.36 chg: -0.18 stop: 32.45

Computer makers like HPQ were weak this morning after Microsoft (MSFT) announced that its new Vista operating system would be delayed until 2007. Shares of HPQ gapped lower to open at $32.64 before traders bought the dip. The news today is definitely bad news for the sector and more conservative traders may want to consider an early exit. We are not suggesting new bullish positions. Our target is the $35.00 level.

Picked on February 22 at $32.94
Change since picked: + 0.42
Earnings Date 02/15/06 (confirmed)
Average Daily Volume: 13.5 million

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IAC/InterActive - IACI - close: 30.38 chg: +0.03 stop: 29.95

The technical picture for IACI continues to worsen. The daily chart's MACD indicator has produced a new sell signal. More conservative traders may want to exit early right here. We are going to wait and see if the stock will bounce from round-number support at the $30.00 level. We're not suggesting new longs at this time.

Picked on March 03 at $30.31
Change since picked: + 0.07
Earnings Date 02/08/06 (confirmed)
Average Daily Volume: 2.1 million

---

Smurfit-Stone - SSCC - close: 13.37 chg: +0.20 stop: 12.99

We suggested that readers watch for a bounce near $13.00 as a new bullish entry point. SSCC delivered with a rebound from today's low near $13.08. While we see this as a new entry point volume continues to be very low and that's a danger sign for the bulls. More conservative traders may want to wait for a move over $13.60 before considering longs. We're going to target a rally into the $14.95-15.50 range.

Picked on March 19 at $13.58
Change since picked: - 0.21
Earnings Date 04/26/06 (unconfirmed)
Average Daily Volume: 3.1 million
 

Short Play Updates

Baidu.com - BIDU - close: 51.00 change: +1.60 stop: 52.11

Uh-oh! Be careful here. BIDU almost hit our stop loss today with a rally to $52.00. The overall pattern remains bearish but if the major market averages continue to rally the shorts might get spooked and start to run. We are not suggesting new positions. Traders should double-check their stop loss placement.

Picked on March 09 at $ 48.32
Change since picked: + 2.68
Earnings Date 05/23/06 (unconfirmed)
Average Daily Volume = 788 thousand

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Crown Castle Intl. - CCI - close: 29.12 chg: -0.13 stop: 31.01

CCI continues to show relative weakness and looks poised to move lower tomorrow. The failure to participate in today's market rally is a good sign for the bears. Our target is the $26.25-26.00 range.

Picked on March 15 at $29.36
Change since picked: - 0.24
Earnings Date 05/02/06 (unconfirmed)
Average Daily Volume: 1.1 million

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N.Y.Times - NYT - close: 25.30 change: -0.49 stop: 26.76

We have been triggered in this short play. NYT issued an earnings warning for its first quarter today. The company warned that earnings could come in up to 70 percent less than a year ago. The stock gapped open lower at $25.55, which is below our trigger to short the stock at $25.64. We have adjusted our entry price accordingly. Volume was very strong on today's sell-off. Don't be surprised to see an oversold bounce back toward $26.00. A failed rally near $26.00 could be used as a new entry point. Our target is the $24.00 level.

Picked on March 22 at $25.55
Change since picked: - 0.25
Earnings Date 04/13/06 (confirmed)
Average Daily Volume: 1.1 million

---

Tribune Co. - TRB - close: 28.29 change: -0.27 stop: 31.01

News that NYT issued an earnings warning helped push shares of TRB to a new low under its February dip. Our target is the $26.50-26.00 range. We do not want to hold over the April earnings report.

Picked on March 19 at $29.36
Change since picked: - 1.07
Earnings Date 04/13/06 (confirmed)
Average Daily Volume: 1.6 million
 

Closed Long Plays

Synopsys - SNPS - close: 21.91 change: -0.12 stop: 21.89

SNPS continued to show relative weakness and the stock broke down under technical support at its simple 50-dma today. We would have been stopped out at $21.89.

Picked on March 02 at $22.49
Change since picked: - 0.58
Earnings Date 02/15/06 (confirmed)
Average Daily Volume: 1.4 million
 

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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