The rumors over the content of President Bush's State of the Union speech tonight produced a rebound across all markets. Traders anticipating various environmental topics in the speech sent energy, ethanol and agriculture stocks soaring. Reportedly Bush will recommend doubling the size of the strategic petroleum reserve from its current 700 million barrel size to 1.5 billion barrels. That would take 8,000 days to fill at the current rate of 100,000 bpd. Obviously filling it sooner rather than later would require a faster fill rate and add to current oil demand for a long time. Ethanol is also expected to be discussed and the stress it is putting on the agriculture system to produce more corn. Companies that are developing a non-corn method of producing ethanol are expected to be rewarded with additional subsidies in the billions of dollars. Traders attempt to game the speech may have produced a bounce today but tomorrow may bring a different result.
Dow Chart - Daily
Nasdaq Chart - Daily
The economic reports today failed to impress investors but may have helped on the Fed front. The Richmond Fed Manufacturing Survey fell to a headline reading of -11 for January compared to -6 for December. The survey showed a sharp decline in the conditions in the Richmond district. The two components showing the sharpest dip were Shipments, which fell from -4 to -13 and Orders with a -12 from last month's -8 reading. Order backlogs remained level at -16. You have to go back to April 2003 to find a lower headline number. The only component to rise was the six-month outlook, which rose to 45 from 30. The weakness in this report should help keep the Fed on the sidelines longer but that same weakness casts a shadow on the current rebound expectations.
Offsetting the decline in the Richmond Fed numbers, the Conference Board Leading Economic Indicators (LEI) rose +0.3% and the third monthly gain in four months. The index has risen to levels that suggest a continued firming in the economy. Typically the LEI leads the economy by 1-2 quarters and the current level is consistent with a 3% GDP. This should be Fed neutral given the long lead-time.
Homebuilders led the market today after DR Horton beat the street and made some cautious comments about an improving market. Goldman also helped with an upgrade on multiple builders and the sector in general. Goldman upgraded DHI, TOL, MDC and RYL but cut HOV to neutral and LEN to a sell saying they had the most exposure to the remaining risk. Goldman said the worst was over for the builders despite continued weak sales ahead.
Homebuilders SPDR Chart - Daily
After the bell there were several high profile earnings announcements. Sun Microsystems posted earnings of 3 cents compared to estimates for only a penny. SUNW also beat revenue estimates thanks to the growing popularity of its newest operating system for servers. After years of losses this could be a sign they are finally turning the corner back into favor with the corporate IT world. SUNW also announced a private equity placement of $700 million to Kohlberg Kravis Roberts (KKR). The capital injection of $700 million is seen to be a significant vote of confidence for the struggling computer maker by a very knowledgeable firm. Shares of SUNW spiked significantly in after hours trading.
AMD reported a loss of -$1.08 per share including charges. Net of charges that translates into a profit of only a penny a share and below the guidance AMD gave when it warned back on the 12th. Gross margins fell to 40% from 51.4% due to the price war with Intel. AMD also warned that future earnings and revenue would be below estimates. AMD fell more than $1 in after hours trading. I recently saw a speed test comparing the top line AMD and Intel quad core processors and Intel has beaten them very badly in just the last 12 months with multiple increases in processing power. A year ago I had a nearly state of the art dual Xeon 3.6ghz desktop computer. The new top line Cloverton quad core Xeon is nearly 10 times as fast as my current dual Xeon PC. Intel is also rumored to be preparing an octal-core processor announcement for later this year. With benchmark testers finding it hard to find any software to stress the quad-core models I can't imagine how much power a chip with 8 imbedded processors will contain. AMD has its work cut out for it to even catch up with Intel much less pass it again.
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Yahoo reported profits of 19 cents but was helped by a tax benefit that added +3 cents. Without the tax help Yahoo earned 16 cents and that beat analyst estimates of 13 cents. This was a drop of -61% compared to the 46 cents Yahoo earned in Q4-2005. YHOO dropped sharply in after hours until Yahoo said its new advertising system code named Panama would debut ahead of schedule on Feb-5th. That produced a rebound from $26 to $28.50 in after hours. Google is still seen taking market share and Yahoo is struggling to find new revenue. Yahoo also gave guidance that was seen as light by analysts.
DuPont (DD) reported earnings that beat the street but disappointed analysts with its outlook. The drop in the housing market and the bear market in autos is putting pressure on profits. Overseas sales were the saving grace in Q4 erasing the -3% drop in US revenue. DD sees that trend continuing in 2007. They also said they felt the auto business had hit bottom and a rebound could appear in 2007.
Texas Instruments said profits rose only 2% and were pressured by a trend in cell phones to lower priced models. TXN makes about $5 on a cheap phone and $25 on the more expensive models. TXN said consumers were trending towards the less expensive phones despite the huge feature list on the expensive models. Once the iPhone hits the market those current high priced models will likely take another hit as the consumer shifts to the iPhone model. Like nearly everyone else TXN guided lower for Q1 to a range of 28-34 cents compared to analyst's estimates of 35 cents. Ironically an upgrade led to a +4% jump in TXN as investors bet that TXN will turn the corner in 2007 to higher profitability. Noted Merrill Lynch analyst Joe Osha said "TXN will hit a bottom in Q1 and its shares are "too cheap considering the likely improving trajectory of the business in 2007." Shorts were stunned as TXN gapped open to near $30 on the upgrade.
Dow Transports Chart - Daily
The transports were flirting with the resistance highs at 4870 until oil spiked higher late in the day. The transport gains were on the back of the railroads and not the airlines. The rebound in oil prices and weak earnings from United Airlines sent the airline sector crashing back to earth. Losses included AMR -3.39, CAL -2.61 and UAUA -3.94. UAUA lost $61 million (-55 cents) for the quarter on revenue that rose +5%. Analysts were only expecting a loss of 35 cents. United is the second largest airline by traffic and said a series of crippling winter storms lowered revenue by $40 million. More than 4000 UAL flights were cancelled in December when the Denver airport was closed for two days. An earlier storm in Chicago caused the cancellation of 900 flights.
Oil prices rose +$2.46 to close at $55.04 after OPEC said there was no need to meet again because inventories were already declining thanks to their production cuts. There was also more violence in Nigeria where an American was kidnapped and held hostage. The Nigerian rebels pledged to step up their attacks in 2007. The president of OPEC also said he felt $55 was a fair price for the OPEC basket of crude. That equates to something in the $60 range for the benchmark contract of light sweet crude. AG Edwards also weighed in on oil prices saying last week's touch of $50 should be strong support.
March Crude Futures Chart - 30 min
Late in the day the Department of Energy (DOE) said it was going to begin adding to the Strategic Petroleum Reserve at the rate of 100,000 bpd. The DOE plans to add 11 million barrels over the coming months. Plans are underway to increase the size of the SPR to 1.5 billion barrels and Secretary Bodman said further additions would be made with fill rates determined by market conditions. Bodman said oil would be added in a way that would not increase gasoline prices or impact the market. Exactly how they would add 800 million bbls without impacting the market is still unclear. The current 691 million bbls in the reserve equates to a 55-day supply. In 1985 that same amount covered a 118-day supply. It was also reported that China had taken advantage of the drop in prices to add more than 25 million bbls to its SPR over the last 90 days. China is rapidly constructing three more SPR locations to contain 30 million bbls each. They are also in the planning stages for some monster SPR locations to be constructed over the next ten years to bring their SPR to as much as 800 million bbls. Since there is no reason to build them if you are not going to fill them the combination of China's build out and the new US decision equals something in the 1.5 billion bbl range for additions over the next few years. It would take 6000 days or 16.5 years to fill them at the rate of 250,000 bpd. Obviously neither country is going to wait 16 years to complete their fills. That suggests we could see some strong auxiliary demand over the next 6-7 years.
The Dow transports have been rising sharply since late December when it reached strong support at 4500. The rebound stalled at 4870 early last week and the outlook is not good if the price of oil continues to rise. The 4870 level is strong resistance and a failure here could weaken the Dow. The rise in the Transports had been a confirming influence on the recent Dow rally and a collapse in transports could have a negative impact on any further attempts for the Dow to rally.
The Dow fell more than -100 points intraday on Monday on multiple concerns including earnings. The Dow fell from last Wednesday's high just over 10600 to initial support at 12450 yesterday. Today's rebound failed at 12550, which was last week's support now turned into resistance. Today's rebound was primarily due to traders buying that dip and trying to game the president's speech. That suggests Wednesday's action could be negative. Buy the rumor, sell the news. A break of 12450 would be a confirmation of a negative outlook.
The Nasdaq managed to close positive for the day but only barely at +0.34. The intraday gains were sold hard and were it not for expiring time on the clock we could have returned to yesterday's lows. Techs have a lot against them today with multiple earnings disappointments and more than likely others to come. Initial support is 2420 with critical support only slightly lower at 2400.
The S&P-500 performed yet another rebound to 1430 and a dead stop at that resistance level. This range is getting plenty of airtime but little resolution. Monday saw a dip to 1420 and very little bounce into the close. Today's monster gains by energy stocks and stocks expected to benefit from tonight's speech produced the rebound. Again, we could easily see a sell the news event on Wednesday. The president has a tough road to travel tonight and the odds of him pulling a rabbit out of his hat that appeases everyone is nearly zero. If anything the potential exists for a negative response to the speech rather than the beginning of a new bull run. Listen intently for references to Iran because repeated linking of Iraq and Iran could be a clue that a military confrontation with Iran is in our future.
S&P-500 Chart - Daily
Nothing has changed with my recommendations. I still believe we should short failures at S&P 1430 and be prepared to go long over that level. The market risk in my opinion is to the downside and every touch of 1430 just gives us one more opportunity to get short again. The next material economic report is the Kansas Fed Survey on Thursday. Next week there is a two-day Fed meeting and there is little possibility for a positive result. The Fed is likely to say the economy is recovering but inflation is still a problem. Depending on how they say it we could see fear of the Fed come back into the market. They will want to talk tough to apply pressure rather than be forced to raise rates. That fear of what they may say could filter into the markets later this week. This emphasizes my downside risk assumptions. Trade cautiously until this indecision at 1430 is resolved.
New Long Plays
New Short Plays
Long Play Updates
Arch Coal - ACI - close: 29.86 change: +0.93 stop: 27.39
The market rally and strength in energy stocks helped ACI turned in a strong session. The stock rose 3.2% and on relatively strong volume. The technical indicators continue to look bullish and the stock is now challenging potential resistance at the $30.00 level. Our target is the $32.50 level. We do not want to hold over the early February earnings report so we only have a couple of weeks. FYI: The P&F chart is still bearish from the January sell-off.
Picked on January 21 at $29.08
Cascade - CAE - close: 53.86 chg: +0.67 stop: 52.45
CAE continues to consolidate sideways between $51 and $55.50. The stock's trading range has narrowed a bit over the last several days and that might suggest a breakout (either direction) soon. We are still waiting for a breakout over resistance at the $55.50 level. Our suggested trigger to buy the stock is at $55.75. If triggered our target is the $59.76-60.00 range. FYI: We do not want to hold over the early March earnings report.
Picked on January xx at $xx.xx <-- see TRIGGER
Comcast Corp. - CMCSK - cls: 43.77 chg: -0.26 stop: 41.45
CMCSK failed to participate in the market's bounce on Tuesday. Yet overall the trend remains very bullish. We would look for a dip near its 10-dma (around $43.35) or near the $43.00 level as a new entry point to go long - just remember that we plan to exit before the February 1st earnings report. More conservative traders may want to tighten their stops a bit. Our target is the 2000-2001 highs. We'll plan an exit in the $46.00-46.50 range.
on January 14 at $43.32
Commscope - CTV - close: 31.60 change: +0.67 stop: 29.99
CTV displayed some relative strength with a 2.1% bounce on Tuesday. More aggressive traders might want to consider bullish positions. We are still waiting for a breakout over resistance near $32.00. We are suggesting a trigger to go long the stock at $32.05. If triggered our stop loss will be $29.99 and our target is the $34.85-36.00 range. We do not want to hold over the late February earnings report. FYI: The P&F chart is bearish. Plus, more conservative traders may want to put their stop at $30.49 under the most recent low.
Picked on January xx at $xx.xx <-- see TRIGGER
Granite Constr. - GVA - close: 53.10 change: +1.26 stop: 50.79
Building-related stocks were generally higher on Tuesday. Shares of GVA soared to an intraday high of $54.07 before pulling back to close under its simple 100-dma. GVA still managed to post a +2.4% gain. The rally past $53.00 is a new entry point to go long and we'd also consider new long positions on a dip near $52.50-52.00. Our target is the $57.50 mark. We do not want to hold over the mid February earnings report.
Picked on January 21 at $52.41
Hewlett Packard - HPQ - close: 42.31 chg: +0.29 stop: 40.59*new*
Tuesday's bounce in shares of HPQ looks like a new entry point to go long the stock. However, more conservative traders may want to tighten their stop toward $41.00 or the recent lows. We are inching up our stop loss to $40.59, which is just under technical support at the rising 50-dma. We do not want to hold over the February 20th earnings report. Our target is the $46.00 level.
Picked on January 07 at $42.20
MedImmune - MEDI - close: 34.46 change: -0.08 stop: 33.45 *new*
We have been warning readers to expect a dip in MEDI towards the $34.00 level, which should be support. However, today's lack of participation in the market's bounce casts a more bearish shadow over MEDI. Please note that we're adjusting our stop loss to $33.45. Wait for a bounce (anywhere above $33.75) before considering new bullish positions. Our target is the $36.50-37.00 range. FYI: We've also suggested that readers keep an eye on the BTK biotech index. Today's weakness in the BTK is not a good sign and suggests that the sector is close to performing a bearish double-top pattern. More conservative traders may want to put their stop loss at breakeven to reduce their risk and worry factor.
Picked on January 05 at $33.98 *gap open entry*
Bankrate Inc. - RATE - close: 37.08 chg: +0.22 stop: 35.49*new*
The recent consolidation in RATE might be over. Traders bought the dip at $36.41 and volume really improved during the afternoon rally. Overall volume remains weak. Aggressive traders might want to consider new positions now and we would probably use a tighter stop loss. Speaking of stop losses we're going to adjust ours to $35.49, which is just under the simple 200-dma. 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. We do not want to hold over the early February earnings report!
Picked on January 11 at $38.25
Raytheon - RTN - close: 53.18 change: +1.23 stop: 50.95
Defensive stocks were a bright spot in the market today. The DFI index rose just over 2%. Shares of RTN out performed its peers with a 2.3% gain on above average volume. The breakout over the $52.50 level is also a positive sign. Chart readers will notice that the daily chart's MACD indicator is super close to a new buy signal. A dip back towards $52.50 could be used as a new entry point if you don't want to chase it here. Our target is the $55.00-56.00 range. The old highs near $54 might offer some resistance. More conservative traders may want to tighten their stop loss towards the $51.25-51.40 region. We do not want to hold over the February 1st earnings report so we have less than two whole weeks.
Picked on January 21 at $52.30
TJX Cos. - TJX - close: 29.84 change: -0.11 stop: 28.95
The retail sector appeared to be sleeping today. Retail stocks failed to rally with the market strength and they failed to sell-off on the big rebound in crude oil. We would keep a close watch on crude oil as rising oil is likely to put pressure on the retailers. Currently we're waiting for a stronger breakout in TJX. The stock remains under resistance in the $30.00-30.15 region. We are suggesting a trigger to buy the stock at $30.21. If triggered our target is the $32.50-33.00 range. We do not want to hold over the mid February earnings report.
Picked on January xx at $xx.xx <-- see TRIGGER
Toll Bros. - TOL - close: 33.64 change: +1.33 stop: 30.89
Housing stocks were strong today. Investors responded warmly to the DHI earnings report this morning. TOL got an extra boost after being upgraded by Goldman Sachs. Shares of TOL hit an intraday high of $34.36 before paring its gains and closing with a 4.1% gain. Volume on TOL's rally today was strong, which is a bullish sign. Our target is the $34.75-35.00 range.
Picked on January 21 at $32.42
Short Play Updates
Comverse Tech. - CMVT - cls: 20.03 change: +0.09 stop: 20.75
We are a little surprised by any strength in CMVT following some negative comments and earnings news in the communication sector (Alacatel-Lucent and Tellabs). We did notice that CMVT's strength failed early this morning and the session looks like a failed rally under technical resistance at its 50-dma. We would use the move as a new entry point for shorts but more conservative traders might want to tighten their stops or wait for a new decline under $19.85 before opening positions. Our target is the $17.75-17.50 range. Please note that this play might have an extra risk concerning the company's earnings report. The problem is we can't find one and we can't find when it is due to report next. History would suggest CMVT tends to report in March but we can't support that for 2007. Earnings reports are always a risk because there are too many variables and the stock could move sharply either direction on the news. We did find one source that said CMVT's subsidiaries VRNT and ULCM are due to report in March.
Picked on January 22 at $19.85
Safety Ins. Group - SAFT - cls: 48.53 chg: +0.72 stop: 50.05*new*
It looks like SAFT is still trying to bounce. Yet shares remain in a six-week bearish channel on top of breaking down below significant support a few days ago. Watch for a failed rally from current levels or under $49.40-49.50 as a new entry point. Please note that we are adjusting our stop loss to $50.05. We have two targets. Our conservative target is $45.10. Our aggressive target is 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
Piper Jaffray - PJC - close: 70.99 chg: +1.11 stop: 68.75
Time has run out. PJC is due to report earnings tomorrow morning. Wall Street is expecting the company to deliver earnings of 70 cents per share. We do not want to hold over the announcement and it was our plan to exit tonight at the closing bell.
Picked on January 10 at $69.45
Closed Short Plays
Today's Newsletter Notes: Market Wrap by Jim Brown and all other plays and content by the Option Investor staff.
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