The markets treaded water today as they digested earnings from a few early reporters and waited for the majors to confess. Intel was the cloud over the market with techs trading lower on several warnings ahead of the Intel report. The AMD warning should have been good for Intel but investors were taking no chances and some were taking profits into the close.
Dow Chart - 180 min
Nasdaq Chart - Daily
The morning started off weaker after the New York Manufacturing Survey fell to its lowest level since May 2005. The headline number fell to 9.1 and well below the consensus estimates of 20 and last months reading of 22.2. All the components positive for the economy declined while those negative for the economy rose. Shipments fell to 16.1 from 27.6, employment fell to 6.9, New Orders dropped to 10.3 from 22.5. Back orders rose slightly but remained negative at -8.5 while inventories plunged to -19.1 from -7.9. The components negative to the economy are prices paid and prices received. Prices paid jumped to 35.1 from 28.1 and prices received jumped to 19.1 from 13.5. This suggests inflation pressures remain despite the sudden weakness in manufacturing. The average workweek fell to -1.1 from 7.9. I view this report as a long term market positive since it still portrays a slow growth rebound for the Fed and the fall in oil prices will eventually filter through the system in the form of lower prices paid. The NY report has been stronger than the rest of the surveys for over a year and it was time for a pause that would bring it back into the same growth ranges as the rest of the country.
Tomorrow's reports include Mortgage Applications, Producer Price Index, Industrial Production, NAHB Housing Market Index and the Fed Beige Book. The PPI and the Beige Book will be the key reports.
After the bell Intel reported earnings that beat the street by a penny and raised guidance for Q1 very slightly. The 26 cents in earnings was a drop of -39% from the same quarter in 2005. The drop was due to the price war currently underway with AMD and continued expenses from their current restructuring effort. The weak spot in their report was a drop in gross margins to 49.6% compared to estimates in the 51% range. Revenue of $9.7B was slightly over estimates of $9.46B. Intel raised guidance for Q1 to a range of $8.7B to $9.3B compared to analyst expectations for $8.7B to $8.9B. In classic sell the news fashion Intel was hammered after the announcement with a drop to $21.40 from its post close high at $22.99. Intel had seen a strong bounce in January from $20 and was due for a post earnings decline on profit taking. There was nothing earthshakingly positive in the report that would justify a strong move higher.
Wells Fargo was the posture child for a positive earnings report after jumping +2% after reporting earnings that rose +13%. This was the first major bank to report and was seen as a proxy for the major banks reporting just ahead. WFC said mortgage applications hit $90 billion for the quarter and refinance applications accounted for 40% of that number. The CEO was very positive in his outlook and said regardless of the weakness in the building sector consumers were still buying homes at a strong pace. US Bank also reported earnings that rose +4% and posted a minor gain.
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In the homebuilder sector we saw Centex and KB Homes announce massive losses from cancellation of options on land contracts. Centex reported option cancellations on 37,000 lots worth $150 million. KB Homes reported losses of $88 million for cancelled land deals. Across the entire sector the money lost on cancelled options is thought to be over $1 billion. Centex said this was the most challenging housing environment in the last 25 years. Most had thought we had put in a bottom in this sector but the new revelations suggest there is continued weakness ahead. Foreclosures are starting to rise in areas that were previously exempt from this problem.
Forest Labs posted what some called a blowout quarter with earnings of 78 cents and well over analyst's estimates of 66 cents. They also raised guidance to $2.79 to $2.84 per share. Analysts were expecting $2.70. Forest lost -71 cents on the news in another classic post earnings dip.
Symantec lost -13% after warning that earnings for the quarter and year would be under prior estimates. The company said weakness in its data center management business was to blame. Cisco lost nearly a buck after Prudential and Bank of America both cut the company to a neutral rating.
The earnings cycle is young but the statisticians are already busy computing the results. According to Thomson Financial 53% of those S&P companies already reported beat analyst's estimates. 25% reported inline and 22% missed. These averages are right inline with historical norms. Although Thomson Financial is only predicting earnings growth of +9.1% they openly admit there is the potential for another double-digit quarter with just a few earnings surprises. If this does not happen then the string of double-digit quarters will end at 13. Materials and financials are the leading sectors and energy and utilities have been the losers.
Oil prices continued to decline hitting $50.53 intraday with a rebound into the close at $51.21. The drop was attributed to comments out of Saudi Arabia that there was no need for an emergency meeting to discuss further cuts. Other countries including Venezuela, Nigeria and Iran are begging for another meeting and production cuts despite their complete lack of any cuts by themselves over the last 3 months. Do as I say not as I do appears to be the message of the day. With Saudi not agreeing to another meeting the outlook could be turning negative. The conspiracy theorists are alive and well and are suggesting the US may have inked a side deal with Saudi Arabia to keep pushing prices lower by not supporting further cuts. Saudi produces something in the range of 9 mbpd. The US could have agreed to contribute $1 billion per month in some form other than outright cash as compensation for their losses in the price of oil. The list of countries who would be hurt the worst by falling oil prices is led by Iran. A continued sharp drop in prices could pressure the Iranian support for insurgents in countries like Iraq, Syria and Lebanon. It could also increase unrest and pressure the government of Mahmoud Ahmadinejad. $1B a month is far cheaper than fighting a war with Iran and solidifies the relationship between Saudi and the US. If you remember Saudi was vocal about the first cut and a strong force behind the coming February cut. For them to make their statement today it would appear something has changed. That something could be a deal with the US. The US economy would also benefit substantially from falling oil prices making the cost of a deal negligible in real money terms. Stranger things have happened in the past so this "theory" may have its roots in some real events.
February Crude Oil Chart - 30 min
Hugo Chavez said on Monday that Venezuela was halting conversations with foreign companies about their operations in the Orinco Belt. Chavez had said they would be forced to agree to Venezuela taking a majority ownership in their operations. Now, after months of unproductive talks, Chavez said he would just nationalize them and take full control. This sent shivers through the oil majors because most of them have production facilities in the belt. The Venezuela markets plunged another -12% on the news. Chavez played host to Iran's Mahmoud Ahmadinejad over the weekend and to no ones surprise they both took the opportunity to verbally abuse the US.
The markets failed to capitalize on the positive earnings and the drop in oil prices. It appears investors are suffering from a lack of conviction even as the Dow set a new record high. Fund managers are becoming more vocal in their feelings about a correction ahead. The current S&P bull run has extended to 187 days without a -2% correction and the 4th longest streak since 1928. That is only a minor -2% dip. The streak is even longer at 532 days since we have seen a real correction of -10% or more. By any metric the markets are very overbought but that does not mean they can't go higher. It only means there is a growing percentage of managers who will be holding back until a correction appears.
Days since a 2% correction on the S&P
If you only looked at the Dow it would seem there is no shortage of buyers at the top. The Dow shook off its early weakness today and gained +26 points to close at another new record high. 18 of 30 Dow stocks posted gains led by IBM at +$1.48. That is a new 5-year high for IBM, which reports earnings on Thursday. Dow components Citigroup, JPM and GE also report later this week.
The Nasdaq trended lower most of the day on fears of Intel but the eventual loss of -5 points was minor. After the Intel report the Nasdaq futures have been down over -5 points indicating a potentially lower open tomorrow. Initial support is 2480 followed by a strong congestion band just over 2420.
The S&P ran in place most of the day with the initial gap open lasting only a couple minutes before retreating to support at 1430. Readers will recognize that as our long/short decision point from Sunday. That has become our line in the sand and the S&P walked it like a tightrope all day long. The S&P futures are down only fractionally tonight and that would appear to indicate the broader market sentiment is better than that for techs. I would continue to honor that 1430 level and remain long above it and short below it.
SPX Chart - Daily
Russell-2000 Chart - Daily
The real weakness today came from the small caps and that is troubling to market bulls. The Russell lost -2.78 or -0.35% and was the largest percentage loser among the major indexes. Russell futures are continuing to weaken overnight and this could be our leading indicator for tomorrow. We saw small cap strength on Thr/Fri that confirmed the move to new highs by the major averages ahead of the weekend but today's weakness may be signaling that support is about to fail. The Russell has strong resistance at 800 and it came within .70 of that resistance this morning before sinking to close just over 791. For that Russell that is a big move and it was not reflected in the big cap indexes. It could have been just profit taking from the +30 point move late last week and if so then Wednesday should see a rebound. Based on the overnight futures I am not counting on it but anything can change before morning. Like the fund managers fearing a correction ahead I would advise everyone to be only cautiously long over SPX 1430 and not risk all your speculative funds.
New Long Plays
New Short Plays
Long Play Updates
Arrow Elec. - ARW - close: 34.74 chg: -0.01 stop: 33.74
The trading in ARW was a bit disappointing. Shares gapped open at $35.30 and then gave it all back to close virtually unchanged. We did not see any specific news behind this morning's gap higher. Readers may want to wait and watch for a dip (or better yet a bounce) closer to the $34.00 level. If Intel sells-off on its earnings news tonight it could easily weigh on the whole tech sector. Our target remains the $36.50 level near the May highs. We do not want to hold over the February earnings report.
Picked on January 14 at $34.75
Cascade - CAE - close: 52.70 chg: -2.84 stop: 52.45
CAE fails again! Shares of CAE have struggled to breakout over the $55.50 level for several weeks. We keep waiting for a breakout. We don't see any specific news to account for today's weakness (-5%) so it might be plain and simple profit taking as investors exit near the highs. Volume on today's decline was pretty strong, which is a bearish signal. If CAE doesn't bounce tomorrow we'll drop it as a candidate. Currently we're sitting on the sidelines waiting for a rally past $55.75 before suggesting any bullish positions. If triggered at $55.76 our target is the $59.75-60.00 range.
Picked on January xx at $xx.xx <-- see TRIGGER
China Mobile - CHL - cls: 43.90 chg: +1.30 stop: 39.99
Shares of CHL gapped open higher on Tuesday as the stock rushed to catch up with big gains in the Chinese stock market. Readers can choose to buy this rally or wait for a potential pull back toward the $42.50-43.00 region. More conservative traders may want to put their stop under $40.86. Our target is the $46.50-47.00 range. More aggressive traders may want to aim for $50.
Picked on January 14 at $42.60
Comcast Corp. - CMCSK - cls: 43.63 chg: +0.31 stop: 41.45
CMCSK continues to rally on strong volume. Shares almost hit the $44.00 level before consolidating back toward the $43.50 region. The MACD indicator on the daily chart has produced a new buy signal. We do not see any changes from our weekend comments. Our target is the 2000-2001 highs. We'll plan an exit in the $46.00-46.50 range. We do not want to hold over the early February earnings report.
Picked on January 14 at $43.32
Hewlett Packard - HPQ - close: 43.20 change: -0.33 stop: 39.95
HPQ endured some profit taking on Tuesday (-0.75%) after last week's late run up. If tech stocks see any selling on Intel's earnings news tomorrow we would watch for HPQ to dip toward what should be short-term support near $42.00 and its 10-dma. Readers can choose to buy the dip (or a bounce) near $42.00 as a new entry point. More conservative traders may want to tighten their stops toward $41.00. Our short-term target is the $46.00 level. We do not want to hold over the late February earnings report.
Picked on January 07 at $42.20
MedImmune - MEDI - close: 35.20 change: -0.17 stop: 32.95
MEDI under performed its peers in the biotech and drug sectors on Tuesday. Volume is fading and it looks like upward momentum is waning. We're not suggesting new bullish positions at this time. More conservative traders may want to tighten their stops further. We do not want to hold over the early February earnings report. Our target is the $36.50-37.00 range.
Picked on January 05
at $33.98 *gap open entry*
Piper Jaffray - PJC - close: 71.51 chg: -1.50 stop: 67.45
Warning! PJC produced a bearish failed rally today. The stock rallied to $74.30 early this morning before giving back all of Friday's gains. We noticed that the XBD broker-dealer index also produced a small failed rally so the sector could be poised for more profit taking. PJC's under performance today is not a good sign and more conservative traders may want to exit early! Broken resistance in the $69-70 region should act as short-term support. Our target is the $74.75-75.00 range. The P&F chart points to a $90 target (was $78 a few days ago). Please note that we do not want to hold over the January 24th earnings report.
Picked on January 10 at $69.45
Bankrate Inc. - RATE - close: 38.24 chg: +0.12 stop: 34.90
We remain cautious on RATE. It looks like shares want to move higher but volume has evaporated and shares are struggling to make it past $38.75. We remain short-term bullish but more conservative traders may want to use a tighter stop loss or wait for a rally past $38.75 before initiating positions. Our target is the $41.90-42.00 range. More aggressive traders may want to aim higher. FYI: The most recent (December) data put short interest at more than 35% of RATE's 11.2 million-share float.
Picked on January 11 at $38.25
Short Play Updates
The Andersons Inc. - ANDE - cls: 37.80 chg: -0.20 stop: 40.25
ANDE continues to under perform. The stock produced a failed rally under its simple 10-dma and 50-dma on Tuesday. ANDE looks poised to breakdown so we're going to keep it on the newsletter as a short candidate. We are waiting for a breakdown under support at the $37.00 mark. Our suggested trigger to short ANDE is at $36.99. If triggered at $36.99 our target is the $33.00-30.00 range. More conservative traders may want to widen their trigger to something like $36.95, 36.90, 36.85 just to raise the odds that we are catching a real breakdown. FYI: Traders should note that ANDE can be a volatile stock at times and the latest (December) data put short interest at 7.2% of ANDE's 14.7 million-share float. That's not a very big float and the relatively high short interest raises the risk of a short squeeze. We do not want to hold over the early February earnings report.
Picked on January xx at $xx.xx <-- see TRIGGER
Safety Ins. Group - SAFT - cls: 49.14 chg: -0.86 stop: 51.05
Tuesday's trading may have produced a new entry point for shorts in SAFT. The stock produced another failed rally/lower high under its six-week trendline of resistance. Today's session also produced a bearish engulfing candlestick pattern, which is usually seen as a bearish reversal. SAFT also closed back under the $50.00 level and its simple 200-dma. Traders may want to short the stock now. We are going to stick to our previous comments and suggest waiting for a drop under $48.50 before opening new plays. By waiting SAFT will need to trade lower under its exponential 200-dma before you initiate a position. We have two targets. Our conservative target is $45.10. Our aggressive target will be the $42.50 level. FYI: The latest (December) data put short interest at 7% of SAFT's 13.1 million-share float. That does raise the risk of a short squeeze.
Picked on January 08 at $ 48.49
Closed Long Plays
Continental Air. - CAL - close: 51.63 chg: +1.97 stop: 44.89
Target achieved. Crude oil suffered another very strong sell-off today. This helped fuel the rally in the airline sector. The XAL index rose 2.4%. Shares of CAL rose 3.9% and closed at another new multi-year high. The intraday high was $51.76 and our suggested target was the $51.75-52.00 range.
Picked on January 10 at $47.45
Sina Corp. - SINA - close: 34.02 change: +0.67 stop: 29.99
Target achieved. While the U.S. markets were closed on Monday the Chinese market continued to rally. When SINA opened for trading the stock shot higher and closed with a 2% gain. The high today was $34.23. Our target was the $34.00-35.00 range.
Picked on January 04 at $31.06
Closed Short Plays
Guitar Center - GTRC - close: 45.07 change: +1.18 stop: 44.55
We have been stopped out of GTRC at $44.55. Our last few updates have been more and more defensive due to GTRC's sharp rebound. It seems investors are ignoring the negative earnings news announced last week or the stock is experiencing some sort of short squeeze. Today's rally (+2.6%) is a breakout over its 50-dma and 200-dma and four-week trendline of lower highs.
Picked on January 08 at $42.45
Today's Newsletter Notes: Market Wrap by Jim Brown and all other plays and content by the Option Investor staff.
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