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Daily Newsletter, Tuesday, 05/16/2006

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Table of Contents

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

Market Wrap

Cat Lost Its Bounce?

After two days of strong losses last week most traders were poised for the proverbial dead cat bounce. Unfortunately this cat seems to have lost its bounce. The minor redound in the Dow barely lifted the index back over 11400. The Nasdaq found solid overhead resistance at 2240 and the midday attempt to break that resistance on both days failed miserably. The SPX, our indicator of choice also failed to move back over 1295 and our signal to buy the rebound. The lackluster rebound attempt may have soured investor sentiment and the odds of a meaningful rebound may have been diminished.

Dow Chart - Daily

Nasdaq Chart - Daily

Inflation watchers were rewarded with several economic reports this week and the week is still young. The headline number on Tuesday's PPI report rose +0.9% and much faster than the +0.6% analysts expected. The jump was a direct result of rising energy prices. Removing the food and energy components results in a PPI number of only +0.1%. Prices for finished goods rose +4.0% while prices for things like heating oil and gasoline rose +13.7% or more. Prices for jet fuel rose +18.1%. Metals prices rose +5.9%. For inflation watchers the PPI internals showed little signs of inflation if you disregard energy but the Fed has said they are concerned about the impact of energy prices on consumers. So far manufacturers have not been able to pass the higher prices on to consumers with high profit margins helping them to absorb the extra costs. Since consumers can't live without food and energy the headline number may color the Fed's actions in the future if the trend continues and manufacturers begin to raise prices. Until then the +0.1% core rate is Fed friendly.

Industrial production jumped +0.8% for April and double what analysts expected. The gains were broad-based with utilities rising +0.9%, mining +0.9% and manufacturing +0.7% all posting strong gains. The March number was also revised up by +0.4%. This growth in production is good news and indicates the economy is still on track and improving nicely. If this trend continues it would be Fed negative and contrary to the expectations for a softening later this year.

The bad news just keeps coming for the homebuilders. The NAHB Housing Market Index on Monday sank to 45 and the lowest level since June 1995. This index of optimism has been on a slide since the cycle high of 72 in June-2005 and the rate of decline is accelerating. The traffic component fell to 32 from April's reading of 39. This has also been sliding lower since the cycle high of 55 in June-2005. On Tuesday the New Residential Construction report was released for April at 1.849 million homes and well below consensus estimates for as much as 2.0 million. This -7.4% drop was in addition to a drop in new permits by -5.4% and starts fell by -5.6%. Starts are now at the lowest point since Nov-2004. The continued swoon in the housing market will eventually produce enough of a drop in available inventory to equalize supply and demand. Unfortunately for builders that bottom has not yet appeared. The housing backlog has been providing support to the permits/starts numbers but that backlog is rapidly shrinking. Once builders work through that order backlog the number of starts will slow again until new buyers begin to appear. The Fed appears to have killed the sector rather than slowed it and the continued weakness should keep the Fed on the sidelines. The Fed cannot afford to let the sector languish for long because of its support for the broader economy.

On Wednesday we will get the Consumer Price Index and a look at the actual impact of energy prices on the consumer. We will also see the Mortgage Application Survey, which has seen applications flat line over the last several months. Thursday has the Philly Fed Survey, Chicago Fed Index and the Semi book-to-bill for April.

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Two Dow components made the news on Tuesday with one of them preventing the Dow from closing with a gain. Home Depot posted a +19% jump in profits and reaffirmed guidance for the year. Unfortunately their revenue was below analyst's estimates and the stock was pummeled for a -$2 loss to a new seven-month low at $38.44. This accounted for -16 Dow points when the Dow closed down only -8. Also pressuring the price was news that HD said it was no longer going to report same store sales. That is a key metric for investors and they ran for the door when news broke that metric was going to be eliminated.

Wal-Mart beat the street with a +6.3% jump in profits and reaped the benefit of a modest jump in share price on a day when the averages were lukewarm at best. The jump in price was surprising after Wal-Mart warned that spikes in gasoline prices utility bills would leave consumers with less to spend and pressure earnings in the months ahead. Wal-Mart said lower income consumers were running out of money towards the end of the month and Wal-Mart was combating this problem by keeping prices on staple goods as low as possible. They also said shoppers were consolidating trips to avoid driving around town and burning extra gas. Wal-Mart becomes a real destination in this case since they offer everything from food and house wares to auto, electronics, lawn and garden and plenty in between. Wal-Mart reported progress on managing its enormous inventory with a -2% drop over the prior year. WMT gained +64 cents for the day.

After the close Hewlett Packard posted a +51% rise in earnings or +54 cents compared to analyst estimates of 49 cents. Revenue rose +5% to $22.6 billion from $21.6 billion in the same period in 2005. They projected earnings between 45-48 cents for the current quarter also over the current analyst estimate of +43 cents. HPQ rose +30 cents in moonlight trading. The HPQ earnings focused an even harsher spotlight on Dell with Dell's recent warning definitely a company specific problem. Since May-16th 2005 HPQ stock rose from $21.01 to $31.00 for a +48% gain while Dell sank from $39.35 to $23.78 for a -39% drop.

Neurocine Biosciences (NBIX) took the price for being the largest loser on Tuesday with a -$34 drop from yesterday's $54.51 close. This -62% drop was due to the FDA delaying approval of their insomnia drug Indiplon and the outright rejection of another version. NBIX is jointly developing the drug with Pfizer but PFE stock was unchanged. Analysts had been expecting Indiplon to be a billion dollar drug and the setback for investors was dramatic. The CEO said he was still bullish on his outlook and they would move quickly to answer any outstanding FDA questions. According to the FDA they approved the 5MG and 10MG doses but not the 15MG dose. The 15MG time-release dose was to be the leading dosage but the FDA said they were delaying the approval because they did not have time to review all the documentation. I didn't realize there was a time limit to the review process. I guess they did not want the process hanging over their heads while they took their extended summer vacations. Instead they handed NBIX a -$1.3 billion haircut to their $2 billion market cap. Imagine waking up to see your $51 stock trading at $25 without the benefit of a stock split. This is why I rarely buy stocks. I may lose 100% of my $5 option price but it is far less than suffering a major loss in a stock position. You never know when lightning will strike and it has been striking a lot lately. This drop could put NBIX in danger of a sudden takeover attempt given the sharp drop in value. Nearly everyone expects the 15MG version of Indiplon to eventually be approved and I am thinking some long-term call options at this level may be a deal.

NBIX Chart - Weekly

June Crude Futures Chart - Daily

High dollar investors recently went on an energy shopping spree with names like Gates, Icahn and Buffet making the news. Gates invested $84 million in Pacific Ethanol (PEIX). Buffet accumulated 9.6 million shares of Conoco Phillips (COP) or roughly $560 million as of Dec-31st. That stake nearly doubled to 17.9 million shares or $1.1 billion by March-31st. He also added to positions in GE and UPS. Carl Icahn disclosed that he had acquired 1.36 million shares of Consol Energy (CNX). He also bought Houston Exploration (THX), Transocean (RIG) and Williams Companies (WMB). Icahn also bought non-energy companies GY, GDT, LEXR, TYC, CD and LEA while selling shares in ABS, MEE, TIN and WLT.

I doubt those deep pocket investors would have taken positions in the energy sector if they thought oil prices were going down anytime soon. Crude prices have fallen -$2.50 for the week. However, we are not out of the option/futures contract expiration pressures yet. May 19th is termination day for the June crude futures and this volatility is likely related to that expiration event. We have seen some pretty severe price swings around contract expiration dates over the last year and with prices hovering around $70 it makes traders even more nervous as time expires. Wednesday is inventory day and expectations are all over the place. This should heighten the volatility in prices as traders currently in expiring June positions exit on the news. Some expect to see a slight build in crude while the general consensus is looking for a decline in crude of -1.3 million bbls and a build in gasoline inventories of 2.1 million bbls. With refinery utilization back over 90% they should be sucking up crude at nearly full speed. Gasoline levels should build as we approach the Memorial Day kickoff of driving season. How fast those gasoline supplies are dispersed will be the real key to how well oil prices are supported.

The U.S. announced it was no longer going to sell warplanes to Venezuela due to a lack of progress on terrorism. While that excuse may fly with the general public I doubt any of our readers will believe it. Chavez has gone off the deep end and is trying to rally nearly all of South America against the U.S. government. Chavez immediately said it was considering selling its current fleet of 21 F-16 fighter jets to Iran or Cuba. Chavez also said he would look into buying sophisticated fighters from China and Russia. Because of Chavez increasingly anti American tone the U.S. had already quit selling Venezuela sensitive upgrades to those F-16 jets. Chavez also played the oil card saying he "would not" halt oil shipments to the U.S. just because we cut off his F-16 support. Like Iran continually mentioning the Strait of Hormuz as a veiled threat the comment by Chavez about oil to the U.S. was also a veiled threat despite it being very hollow. He would be cutting off his own financial support since VZ is the fourth largest exporter to the US behind Mexico, Canada and Saudi Arabia. VZ exported 1.183 mbpd to the US in March. The VZ oil is heavy and cannot be used by everyone and is refined by Citgo (owned by PDVSA, the state owned Venezuelan oil company) and sold at 14,000 Citgo stations around the country. Halting exports to the US would hurt Chavez more than it would hurt us and cost Venezuela nearly $100 million per day. While I was researching the facts above I stumbled across a page recommending a "BUY-cott" at Citgo stations. The propaganda page said the money spent at Citgo would contribute to the democratic government of Venezuela and help Chavez provide food, health care, literacy and education for all citizens. What a crock of bull! I think we should put a $10 a bbl import on VZ oil. That would really tick Chavez off. He could not afford to halt shipments and would have to suffer the financial humiliation. I think those 21 F-16 fighter jets should suddenly catch on fire wherever they are parked but the power behind that move might be a little too obvious. http://www.commondreams.org/views05/0516-25.htm

Ecuador claimed it was not trying to nationalize its oil industry despite kicking Occidental out of the country. Using the Chavez/Morales verbs the president of Petroecuador said OXY must leave the country for having failed to meet its contract and violating the law. Occidental transferred 40% of its concession to Encana in 1999 to form a joint venture in the production efforts. The OXY expulsion is just another confirmation that oil prices are eventually going higher as exploration and production declines in South America. The current nationalism and confiscation of assets in South America is the largest expropriation in more than 30 years.

The markets failed to rebound from last weeks thrashing and that is disconcerting for the bulls. It appears the bulls were so traumatized from the sharp drop that they have not yet recovered. Nothing material has changed in the economic outlook with the exception that the few economic reports have been Fed friendly. The continued housing decline and the lack of inflation suggests the Fed will not need to hike again in June. This should be market positive but you could not tell it from the averages. Commodity prices as reflected in the metals and energy futures have continued to soften. Copper, gold, silver and stocks that deal in aluminum and titanium have been crushed. Phelps Dodge lost -15% of its value without any material change in worldwide copper demand. Titanium Metals (TIE) dropped -26% before buyers returned. Many energy companies imploded more than -10% with OXY as an example at -12%. Neither the energy stocks or the metals are rebounding like you would expect after a -10% drop.

Nasdaq-100 Chart - Daily

There were several surveys on CNBC on Tuesday showing that tech stocks were currently the favorite of fund investors but you can't tell that from the Nasdaq. The Nasdaq closed at 2227, -120 (-5.3%) off last week's highs and -148 (-6.2%) off the highs for the year. The drop would probably have been worse except for the intervention of the 200-day average at 2229, which has acted as intraday support both days this week. A break here could test the low for the year at 2189. That may not be a major move from today's close but it is a critical level for the markets. If we do decline from here on a break of the 200-day average then 2189 could be the last stop before another nearly -100 point decline to next support at 2100. Since a -10% correction would take us to 2137 I would expect that 2100-2137 level to hold. Personally I am surprised we have not rebounded already but that is an emotional feeling rather than technical analysis. We need to follow the trend and right now that trend is still down. The 200-day average is historically a decisive point for the Nasdaq so keep your eyes on that for direction. The Nasdaq-100 ($NDX) has already broken the 100 and 200 day averages and strong support at 1635. Currently at 1623 it has tested support at 1618 twice but a break here targets 1550.

The Nasdaq is getting no help from the traditional supporting indexes. The Russell-2000 is resting on the 100-day average at 734 but can't seem to break overhead resistance at 741 from April. The SOX has already broken the 100 and 200 day averages and at 484 has only minimal support at 475 before a potential plunge to 450. There is no love for semis ahead of Thursday's book-to-bill report.

Transportation Chart - Daily

The transportation sector was the leader in early May but Tuesday's close at 4797 was near the low of the day. Despite the -216 plunge from last weeks highs at 5013 that is only a -4% drop. Real support is still 100 points lower although the 30-day average, currently at 4755, has been strong rising support since the transports were back at 3600 in October. Every touch has produced a rebound. If this average holds again it could spark a rally in the Dow and then the S&P. The transports are an integral part of Dow theory and are seen as confirmation of economic activity. I have not heard anyone in the transportation sector commenting on a downtrend in shipments.

SPX Chart - Daily

However, this market drop has not been on any economic concerns. It is in the dumps strictly due to profit taking and until that is over nothing else matters. This is expiration week for options although that should be less of a factor than the end of week dump last week. The June crude futures also expire making the energy sector volatile and prone to a monster move depending on the oil inventory report on Wednesday. I am going to recommend sticking with my instructions from Sunday. Buy any rebound over SPX 1295 and keep your stops tight to protect against a reversal. As you can see by the chart above the SPX is exactly where we should expect a rebound from the 100-day average and uptrend support. Hopefully we will hit a level soon where a major buy program is triggered that squeezes the shorts and produces liftoff. Until then the trend is your friend and that trend is still down. The TRIN at 1.32, Nasdaq TRINQ at 1.87 and the put/call ratio at 1.01 are all signaling extreme oversold conditions and have reached levels where reversals tend to occur. Gold is surging overnight, currently over $700 again, so maybe the metals tide has turned and that could trigger some bargain hunting.
 

New Plays

Most Recent Plays

NEW PLAYS TABLE-->
New Plays
Long Plays
Short Plays
CR None
HNT  

New Long Plays

Crane Co - CR - close: 42.64 change: +0.59 stop: 40.99

Company Description:
Crane Co. is a diversified manufacturer of engineered industrial products. Founded in 1855, Crane provides products and solutions to customers in the aerospace, electronics, hydrocarbon processing, petrochemical, chemical, power generation, automated merchandising, transportation and other markets. The Company has five business segments: Aerospace & Electronics, Fluid Handling, Engineered Materials, Merchandising Systems, and Controls. Crane has approximately 10,500 employees in North America, Europe, Asia and Australia. (source: company press release or website)

Why We Like It:
Our market view leans toward the bearish side right now we still see some bullish candidates. CR looks like a tempting bullish candidate with a relatively consistent up trend and a low-risk entry. CR has pulled back toward technical support at its rising 50-dma and traders are buying the dip. Volume has been above average on the two-day rebound from support. We're going to suggest long positions with CR above $42.00. Our target will be the $45.40-45.75 range, near its recent highs. We'll put our stop loss under support at the 50-dma. Monitor your stops closely. While it looks like CR is bouncing from the support the weekly chart shows a bearish reversal pattern that has not yet been confirmed.

Picked on May 16 at $42.64
Change since picked: + 0.00
Earnings Date 07/24/06 (unconfirmed)
Average Daily Volume: 288 thousand

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Health Net. - HNT - close: 41.12 chg: +1.45 stop: 39.34

Company Description:
Health Net of California, a subsidiary of Health Net, Inc., is one of the largest health plans in California, serving nearly 2.3 million members statewide. It contracts with more than 51,000 physicians, 300 hospitals and 4,600 pharmacies, giving its members greater choice and more convenient access to care. Its commercial, POS and Medicare lines of business have received the "Excellent" accreditation status from the National Committee for Quality Assurance. (source: company press release or website)

Why We Like It:
HNT's recent earnings report in early May was mixed. The company beat estimates but issued a warning for Q2. The lack of weakness on the warning may be because the stock has already been hammered over the last several weeks. Now shares are starting to rebound and the stock has broken out from its bearish channel (see chart). Helping HNT is a rally in healthcare-related issues. Healthcare tends to be seen as a defensive play when the stock market gets volatile or bearish. We also noticed that volume on today's gain was more than double the daily average. We are going to suggest longs with HNT over $40.00. However, more conservative traders may want to see the stock push past last week's highs near $41.30 before initiating new positions. An alternate entry would be a bounce from the $40 level. We are concerned with potential resistance at the descending 50-dma (currently 45.32) so we're going to set our target in the $44.50-45.00 range.

Picked on May 16 at $41.12
Change since picked: + 0.00
Earnings Date 08/07/06 (unconfirmed)
Average Daily Volume: 1.1 million
 

New Short Plays

None today.
 

Play Updates

Updates On Latest Picks

Long Play Updates

Universal Health - UHS - close: 52.40 chg: -0.17 stop: 49.95

UHS is trying to creep higher but the stock is struggling to keep its upward momentum. Normally healthcare-related issues are seen as a defensive play but that didn't seem to help shares of UHS today. The trend remains positive but we'd look for a bounce from $52.00 or its 10-dma as the next potential entry point. Our target is the $56.00-57.00 range. The P&F chart points to a $64 target.

Picked on May 10 at $52.15
Change since picked: + 0.25
Earnings Date 04/27/06 (confirmed)
Average Daily Volume: 571 thousand
 

Short Play Updates

Blyth Inc. - BTH - close: 20.37 chg: -0.01 stop: 20.55

There is still no change for our BTH play. We're still on the sidelines waiting for a breakdown under support. However, chart readers will note that BTH has produced another "lower low" or failed rally today. Aggressive traders might want to consider short positions with a really tight stop. For the rest of us we're suggesting a trigger at $19.79. If triggered we will target a decline into the $18.25-18.00 range since the $18.00 level has been support in the past. The May 24th earnings date is still unconfirmed but assuming that's the date we only have one week for this play to open and drop for us. Keep that in mind.

Picked on April xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 05/24/06 (unconfirmed)
Average Daily Volume: 185 thousand

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Coach Inc. - COH - close: 30.33 chg -0.31 stop: 33.01

Shares of COH continue to feel the pain as the stock's early morning rally failed near $31.00. COH closed the session with a 1% loss on another day of very strong volume. More conservative traders may want to tighten their stop loss. Our target is the $28.25-27.50 range. More aggressive traders may want to aim lower since the P&F chart points to a $24 target.

Picked on May 11 at $31.45
Change since picked: - 1.12
Earnings Date 04/25/06 (confirmed)
Average Daily Volume: 2.3 million

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Juniper Networks - JNPR - cls: 16.57 chg: -0.33 stop: 18.01

It was a somewhat volatile session for JNPR today. The stock slipped most of the day to hit a new two-and-a-half year low at $16.17 before a sharp afternoon bounce erased some of the weakness. Volume on the session was above average. We suspect that JNPR will continue to bounce tomorrow. Watch for potential resistance at $17.00 or 17.50-17.75. Our target is the $15.10-15.00 range.

Picked on May 12 at $16.89
Change since picked: - 0.33
Earnings Date 07/19/06 (unconfirmed)
Average Daily Volume: 11.2 million

---

K-Swiss - KSWS - close: 27.81 chg: -0.18 stop: 29.01

We have nothing new to report on for KSWS except that we're encouraged by today's weakness. We'd probably wait for a new decline under $27.50 before considering new bearish positions. Our target is the $25.15-25.00 range. More aggressive traders may want to aim lower. The P&F chart points to a $21.00 target. Be advised that the most recent data puts short interest at 5.8% of KSWS' 27 million-share float. That raises the risk of a short squeeze.

Picked on May 12 at $27.45
Change since picked: + 0.36
Earnings Date 04/27/06 (confirmed)
Average Daily Volume: 300 thousand

---

Red Robin - RRGB - close: 43.60 chg: +0.45 stop: 44.05*new*

Tomorrow is our last day. We plan to exit near the closing bell to avoid holding over RRGB's earnings report on the 18th. In an effort to reduce our risk we're going to set the stop loss at $44.05.

Picked on April 26 at $43.99
Change since picked: - 0.39
Earnings Date 05/18/06 (confirmed)
Average Daily Volume: 355 thousand

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Tiffany & Co. - TIF - close: 32.49 chg: -0.17 stop: 34.65*new*

TIF continues to show relative weakness but we want to remind readers that the stock looks very short-term oversold and due for a bounce. This is the second day in a row that the stock found support in the $32.33-32.34 region. That could be indicating a new level of support. Our target is the $32.25 mark but traders may want to seriously think about exiting early right here. We are going to lower our stop loss to $34.65.

Picked on April 25 at $35.11
Change since picked: - 2.62
Earnings Date 03/28/06 (confirmed)
Average Daily Volume: 1.3 million

---

Yahoo! - YHOO - close: 30.97 chg: -0.06 stop: 32.55

YHOO is still oscillating sideways between $30.50 and $31.25. We suspect that the stock is just churning in place until money managers return from YHOO's analyst day tomorrow. Tomorrow's conference could easily be the spark the stock needs to move (either direction). More conservative traders may want to take a wait-and-see approach instead of opening positions ahead of the meeting. The $32.00 level and the 50-dma should be overhead resistance. Our target is the $27.00-26.00 range. Readers should note that short interest is about 6% of YHOO's 1.2 billion-share float.

Picked on May 14 at $30.81
Change since picked: + 0.16
Earnings Date 07/26/06 (unconfirmed)
Average Daily Volume: 20.2 million
 

Closed Long Plays

None
 

Closed Short Plays

Hi-Tech Pharma - HITK - close: 20.41 chg: -0.75 stop: 24.01

Target achieved. In spite of recent attempts at a bounce, shares of HITK hit new relative lows this morning at $20.13. Our target was the $20.25-20.00 range.

Picked on May 10 at $22.91
Change since picked: - 2.50
Earnings Date 03/09/06 (confirmed)
Average Daily Volume: 154 thousand

---

Psychiatric Sol. - PSYS - cls: 30.16 chg: +0.67 stop: 30.25

As we feared, the bounce from Monday continued into Tuesday's session and we've been stopped out at $30.25. If you look at the chart below you'll see that today's session pushed PSYS through two levels of what should have been significant resistance. The close over $30.00 and its simple 10-dma is not good news for the bears and could spark more covering.

Picked on May 15 at $27.75
Change since picked: + 2.41
Earnings Date 07/26/06 (unconfirmed)
Average Daily Volume: 645 thousand
 

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

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