There is a war underway between economists over the conflicting economic numbers. Some say a recovery underway and others are warning of an impending recession. Unfortunately we will not know who is correct until some point in the distant future. The recession bears are pointing to reports like today's Durable Goods and inverted yield curve while growth proponents point to a continued surge in corporate profits, low unemployment and a firming housing sector. The equity markets are being pulled by both sides like a rope in a tug of war. With only 21 trading days left in 2006 the year is rapidly drawing to a close and there is little or no chance of resolving the recovery or recession question in that period. This could mean the rest of 2006 may be a rocky road for equities.
Dow Chart - Weekly
Nasdaq Chart - Weekly
The markets were rocked at the open by the -8.3% drop in the Durable Goods report for October and the sharpest drop since July-2000. The market reaction was a knee jerk prompted by the headline but it was entirely unjustified. If you recall the Durable Goods for September spiked +8.7% in another completely unexpected event. When that report broke most analysts expected the numbers to reverse in the current report. Analysts felt it was a statistical glitch caused by a +28% spike in aircraft orders that would be corrected the following month. Okay, it corrected as expected and the net for the two months is still a +0.4% gain and right inline with normal expectations. The internals were right inline with normal growth patterns with shipments rising +0.6% compared to a drop of -2.7% in the prior month. Back orders rose +1.2% although less than the +4.1% rise from the prior month it was the 9th consecutive month of gains. The majority of order losses came from the airline sector with a drop of -44% after that +28% gain in the prior month. Aircraft orders are typically very volatile given their high dollar value and random timing. The second largest decline came in computer orders with a -25.6% drop. This was the primary focus for traders as they felt this was a more telling indicator of economic activity. Personally I still believe the drop in computer sales is related to the delay in Microsoft's Vista operating system. Almost nobody wants to buy new equipment and be forced to pay for Windows XP only to have a new operating system arrive 60 days later. Those planning to buy computers are simply holding off on that purchase until Vista is released and probably for several weeks after that release just to make sure there are no problems.
On the positive side Existing Home Sales rose slightly in October from 6.21 million to 6.24 million on an annualized basis. While one month does not make a trend it is encouraging and could be further signs of a bottom forming. The price of existing homes fell again for the third consecutive month to an average of $221,000. This represents a -3.5% drop in existing home prices over the last 12 months. Inventory of unsold homes rose to a 7.4 months supply and the most since 1993. The +0.5% rise in sales was also bolstered by an upward revision of +0.3% in the September number. Despite the small gains sales are still -12% below year ago levels. Helping the housing market is the sharp drop in interest rates. Yields on the ten-year note fell to 4.485% this morning and the lowest level since January. This is a positive signal for those waiting for a sign before buying a new home. The Mortgage Bankers purchase applications index has begun moving back up again on this drop in rates.
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Despite the small rise in home sales we saw Consumer Confidence fall unexpectedly to 102.9 in today's report. This was a drop from the last reading of 105.1 and well below the consensus for a further rise to 106. The decline was led by a -2.7 drop in the expectations component and a lesser -1.5 drop in the present conditions component. These changes are not material but underlying consumer buying trends also weakened. The number of consumers planning on buying a car fell to the second lowest level on record while those considering purchasing a home also slipped. Those planning on buying a major appliance rose due to expectations of holiday electronics purchases. Those flat screen TVs are flying off dealer shelves. The strong jobs market is a growing challenge with a rise in those perceiving jobs are hard to get.
The last economic report for the day was the November Richmond Fed Survey, which jumped to +7 from -2 in October. This +9 point gain put the index back in positive territory after the first dip below zero since the Dec/Jan pause, which dipped to -4. Shipments and New Orders both rebounded to +6 from -7 and -1 respectively. Order backlogs improved only slightly to -11 from -13. The Jobs component rose from +6 to +10 indicating employers are hiring in expectations for business conditions to improve. The Richmond Survey joined the Philly Fed and New York surveys, both of which also improved in November.
On Wednesday we will see the first GDP revision for Q3 with an expected rise to +1.8% from the initial reading of +1.6%. New Home sales for October will also be released with expectations for a slight drop to 1,050,000 from 1,075,000 homes on an annualized basis. The Fed Beige book, an indicator of economic conditions on a national basis will also be released at 2:PM.
Ben Bernanke took center stage with a noon speech where he provided a balanced look for the economy. He said economic growth would continue to be under trend for the rest of 2006 but would return to trend in 2007. Trend is normally seen as 3.0-3.5% growth. He did note that there was some weakening in economic conditions but emphasized that this was expected and needed to push inflation lower. He said the core inflation rate was still uncomfortably high but moderating. The Fed continues to watch the job market for signs of wage inflation. He also said the economy could rebound faster than currently thought driven by strong jobs growth, the decline in unemployment and increasing capital investment. If that should happen Bernanke warned that it could supply additional inflationary pressures requiring further action by the Fed. Overall Bernanke's speech was balanced with a nod towards slower growth but a reminder that the Fed was ready to raise rates again if a quick rebound in growth rekindled inflation pressures. Ten-year yields spiked significantly from the morning lows once Bernanke took to the stage and made his cautious comments. The equity markets also rebounded from a morning loss once the speech was aired. Expectations for a rate cut prior to March were diminished but chances were already slim to begin with. Overall this was a market neutral to slightly positive speech that should remove the Fed as a factor for the rest of the year although we are likely to see further caution around the December Fed meeting on Dec-12th.
Former Fed Chairman Alan Greenspan also spoke saying the worst of the housing adjustment is over and reiterated his prior stance. He also said he was not concerned about the falling dollar as long as the economy remained flexible. These comments also helped provide support for the afternoon session.
Also moving the markets today was a profit warning from Nokia and Palm. Nokia cut its profit estimates for the next two years based on falling profit margins and slowing industry growth in global phone sales to +10% and slightly less than prior forecasts. Nokia said the more mature European, North American and Latin American markets were expected to grow by less than 10%. Margins were expected to drop to 15% from 17%. NOK only lost -22 cents but remains nearly -$1 below last Thursday's high after two days of sharp drops.
PALM also warned on earnings for the current quarter. PALM said earnings would be more in the range of 10-11 cents rather than previous guidance of 15-18 cents. They blamed a delay in the Treo 750 smart phone for the drop. Analysts were quick to downgrade PALM saying the shipping delay came at the worst time just ahead of the holiday season. Palm lost -1.18 or -8% on the news. RIMM also lost ground after the PALM warning and a downgrade from BMO Capital to neutral on valuation. RIMM had risen from $63 to $142 since August.
Apple rose +2.27 after UBS noted that iPod sales were strong for the holiday season and outpacing the new Zune player offered by Microsoft. Google, at $489, also recovered +4.75 of its loss from Monday but that is even more spectacular given its drop to $477 this morning. That is a +$12 rebound for the day. Strong rebounds from Monday's drop were also seen in CME, GS and BSC.
Harrah's Entertainment (HET) spiked +1.91 after news broke that Penn National Gaming (PENN) may consider making a higher offer for HET than the $15.5 billion offered by Apollo Management and Texas Pacific Group. For my money Harrah's is the premier casino company and the bidding could go even higher. Apollo and TPG said they had been taking their time doing the due diligence because they knew the PENN group was considering a bid.
January Crude Chart - 120 min
Oil prices rose to $61 for the second day of strong gains and came to rest right at strong resistance. Pushing oil and natural gas higher was a warning of colder weather over the next two weeks, terrorist attacks in Iraq and a Dec-14th meeting for OPEC. OPEC is already making noises about a further cut but analysts feel it is just an effort to talk prices up rather than a material chance of a cut. In Iraq a mortar attack on an oil facility started a major fire that shut off the supply of crude to a major refinery. Officials said it could be offline for weeks. Oil inventories are due out tomorrow and expectations are mixed. TFS Energy is expecting a build in all categories while JP Morgan is expecting a draw in all categories. Fimat is only expecting a draw in gasoline supplies. Gasoline should show a decline as dealers replenish supplies from the Thanksgiving travel holiday. With a new forecast of colder weather across most of the US the demand for heating oil and natural gas should increase. The December natural gas contract expired today and closed at its high for the month at $8.29. The energy complex dipped intraday after oil made its high at $61.20 after news appeared suggesting the sanctions on Iran would be weaker than expected. Once that news faded oil resumed its upward path to close right at $61. Assuming we don't have an unexpected rise in crude inventories tomorrow we could be on the verge of a breakout in crude prices. A continued fall in the dollar would almost guarantee a further rise in oil prices since it would take more dollars to buy the same barrel of oil. That is good for those of us who have been long oil in anticipation of the historical winter bounce.
I just returned from a three-week road trip with a stop in New Orleans where the Blanchard Investor Conference was held. I was greeted with Monday's -158 point decline in the Dow and better than -54 point drop in the Nasdaq. That is a heck of a day to return to the markets. I had felt the markets were stretching their luck after weeks of slowly creeping higher and this dip took most of the extreme bullishness away. The drop took the Dow back to strong support at 12100 and the S&P to 1380. Despite the large short interest that support held. Unfortunately Tuesday's rebound was lackluster but at least there was no follow through to Monday's selling. We appeared to be poised on the edge of the proverbial cliff and everyone is holding their breath to avoid tipping the scales to the sell side. I was asked today if investors should be buying calls or puts. I said yes. The market direction for the next week could be perilous but there are pockets of strength. It will be a stock pickers market with gains to be made with both calls and puts. Energy stocks continue to be strong and I would be a call buyer in that sector. Brokerage and exchange stocks would be another place to dip buy. I would avoid retailers and any high profile stocks in other sectors with strong gains over the last quarter. We are approaching the period where we could see an increase in tax selling towards year-end. Most estimates for the year-end S&P were in the 1385-1400 range with some as high as 1425. Having November close near 1400 could be a sell signal for many fund managers. With little more to gain and a lot of profits to lose the trigger fingers are going to be itchy. Bonuses are paid on profits taken and not profits lost. By any metric the +185 point S&P gain since June (+15%) is very strong and until the economy actually starts posting some stronger results we could be very close to a short-term top.
S&P-500 Chart - Daily
Using the S&P as our market guide we have decent support at 1380 followed by stronger support at 1360. I would not be concerned about any further drops as long as 1360 holds. A dip to that level would be a short term buy signal for me. I am neutral with a slightly bullish bias at 1380 and I would be bearish at 1400 and above. We could be looking at a volatile range between now and year-end. Longer term I would be looking to go short on any weakness after Dec-31st. We are due for a major correction and early January would be my target for that event.
As I stated earlier I was on the road for
the last three weeks and I appreciate
and want to thank Linda and Keene for filling in for me on the market
commentary. Because many of our readers are highly mobile I have a couple
recommendations for your future travels. I have stayed in a lot of hotels in my
life and two of my best stays were during this trip. If you venture to Branson
Missouri I would highly recommend the Chateau on the Lake for your stay. A truly
great hotel! In New Orleans I stayed at Harrah's new hotel across
from their downtown casino. This was also a major upgrade in casino lodging and
definitely a five star stay. Their goal is to exceed expectations and they did
it in every way. Lastly I strongly recommend the Garmin Nuvi 660 navigator if
you are in the market for a GPS companion. I have had other makes and this one
puts them all to shame. Because of my disappointment with prior devices I
researched literally dozens of models before making my selection. I can honestly
it was one of the best $800 purchases I ever made. With a larger screen for
those of us with aging eyesight and six million points of interest including
restaurants, hotels, etc, it proved to be worth its weight in gold. It has more
features than I could ever remember and it is so user friendly a caveman could
use it. It charted the way for more than 4000 miles of driving without a single
error. Pardon me for my shameless plugs for these products but I felt those
planning future trips
would appreciate a heartfelt unpaid testimonial. If I can
slam Overstock.com as a stock in these pages or recommend Marathon Oil for your
retirement account a couple of personal recommendations should not be out of
Play Editor's Note: The market's sell-off on Monday failed to break the rising bullish channel for the S&P 500 and the NASDAQ. Lack of follow through lower today suggests that we can buy this dip inside its bullish trend. We chose to add some new plays to the newsletter but we continue to suggest caution about adding new bullish positions. We would also like to point out that most of our new plays are in the oil sector. We would suggest that you only play a couple of stocks in the same sector to limit your risk.
New Long Plays
Carrizo Oil & Gas - CRZO - close: 31.76 change: +1.13 stop: 29.75
Why We Like It:
Picked on November
xx at $xx.xx <-- see TRIGGER
GulfMark - GMRK - close: 38.70 change: +0.62 stop: 36.99
Why We Like It:
Picked on November 28 at $38.70
ONEOK Inc. - OKE - close: 42.25 change: +0.76 stop: 41.35
Why We Like It:
Picked on November xx at $xx.xx <-- see TRIGGER
New Short Plays
WebMD - WBMD - close: 34.47 change: -2.28 stop: 35.26
Why We Like It:
Picked on November xx at $xx.xx <-- see
Long Play Updates
A.G.Edwards - AGE - close: 57.95 change: +0.08 stop: 55.95
The broker-dealer stocks managed a bounce today but the rebound appeared timid compared to yesterday's painful losses. AGE managed a dip toward the $57.50 region before traders stepped in a bought the dip. This can be seen as a new bullish entry point to go long the stock but we're a little bit gun shy and would suggest waiting for a new rise over $58.30 before initiating new positions. Our target is the $62.50 level. The P&F chart has a quadruple-top breakout buy signal with a $70 target.
Picked on November 15 at $58.15
ALON USA Ener. - ALJ - close: 29.55 chg: +0.48 stop: 27.75
ALJ did bounce from broken resistance at what should be new support at the $29.00 level. The stock closed with a 1.6% gain. The rise in the oil sectors is another positive here driven by gains in crude oil futures. Traders can choose to buy this bounce from $29 or wait for another breakout over $30.00 or a new relative high (above $30.40) before opening new long positions. Our target is the $33.50-34.00 range. Be aware that the 100-dma near $32 might offer some resistance. FYI: The P&F chart is still bearish after the August-September sell-off.
Picked on November 21 at $30.15
Heinz - HNZ - close: 43.55 change: -0.11 stop: 42.99*new*
We are almost out of time with HNZ. Our plan is to exit tomorrow (Wednesday) at the closing bell to avoid the company's earnings report on Thursday. Given our time frame we're raising the stop loss to $42.99.
Picked on November 08 at $43.20
Ladish Co - LDSH - close: 33.05 change: -0.06 stop: 32.99
There is no change from our previous update on LDSH. We are still sitting on the sidelines. It has been our plan to catch a breakout over $35.00 with a trigger to go long at $35.55. Unfortunately, the stock has struggled the last few days. If we don't see a bounce from $33 soon we'll drop LDSH as a bullish candidate.
Picked on November xx at $xx.xx <-- see TRIGGER
Pride Intl. - PDE - close: 31.16 change: +1.06 stop: 28.45
The rise in oil stocks and crude oil futures helped propel PDE to a 3.5% gain today. Traders used the dip toward $30 as a new entry point. Volume on today's rally was strong, which is definitely a bullish sign. Our target has been the $33.00-34.00 range. The P&F chart has reversed into a new buy signal that has seen its target grow from $41 to $44.
Picked on November 21 at $30.10
Raytheon - RTN - close: 50.80 change: +0.44 stop: 49.85
RTN bounced from round-number support at the $50.00 level and on above average volume, which is a good sign. We're waiting for a breakout over the $51.00 mark with a suggested trigger to go long at $51.05. If triggered our target is the $54.50-55.00 range.
Picked on November xx at $xx.xx <-- see TRIGGER
VeriSign - VRSN - close: 23.15 change: +0.12 stop: 21.90
VRSN's rebound today looks anemic and volume began to climb late in the day as shares turned lower again. We are concerned with the bearish turnaround in the technicals. More conservative traders may want to exit early. Right now we're expecting a dip back toward $22.50 and potentially the $22 level.
Picked on November 13 at $22.51
Worthington Ind. - WOR - close: 18.18 chg: +0.19 stop: 17.39
WOR's bounce today was definitely welcome. Today's 1% gain helps alleviate some of the bearishness of yesterday's reversal. Studying the intraday chart it looks like today's bounce could be used as a new bullish entry point to go long. Be aware that we do expect some resistance near the 100-dma (around 18.70) and near its 200-dma (around $19). Our target is the 19.85-20.00 range. This will not be a very quick play and we may end up holding it up to its late December earnings report.
Picked on November 19 at $17.96
Short Play Updates
Fannie Mae - FNM - close: 56.40 chg: +0.47 stop: 58.55
FNM produced a bit of an oversold bounce today but nothing too alarming. We remain bearish although this is probably not the best entry point for new positions. Our short-term target is the $54.00 level.
Picked on November 26 at $57.39
Closed Long Plays
Closed Short Plays
McKesson - MCK - close: 48.50 change: +0.18 stop: 50.01
We are pulling the plug early on the MCK short play. There has been no follow through on Friday's bearish reversal. Furthermore the bounce this week has been on rising volume. Today's volume was about double the average. We're exiting now to limit our losses.
Picked on November 26 at $48.18
Today's Newsletter Notes: Market Wrap by Jim Brown and all other plays and content by the Option Investor staff.
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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