Wall Street started the week out on a positive note with the major indexes posting fractional gains.
Based on this morning's readings, and volume observations of individual stocks listed on the NYSE, total volume on the NYSE as posted in the above table is probably inaccurate.
U.S. economic data continued to show modest, yet stable signs economic growth at the factory level.
After a surge in March factory orders (+4.3%), The Commerce Department said factory orders increased a more tepid 0.3% in April, which was below the 0.8% increase economists had expected.
The Commerce Department noted a sharp 23.4% decline in demand for ships and boats, which reversed a 13.3% increase in March.
A 10.7% decline in commercial aircraft orders also reversed huge gains the past two months.
China's Shanghai Composite ($SSEC) fell 330 points, or -8.26% to 3,670 on Monday, as retail investors there continued to lock in gains and fret about a hike in stock-trading tax, the latest move from China's central bank (People's Bank of China) to cool a market that had nearly tripled in value the past year. It was the index's biggest one-day decline since February 27, which set off a brief global market.
"The Chinese market does not have much liquidity and when it moves, it moves in one direction. Any big swings should fuel concerns about global money investing in emerging markets and other risky assets," said Norihiro Fujito, general manager at Mitsubishi UFJ Securities Co. Ltd.'s investment research and information division.
Shanghai Composite ($SSEC) - 50-point box
Having gained roughly 56% since January to its recent highs of 4,300, or 43% from a triple top buy signal at 3,000 in mid-February, the rather illiquid stocks of the $SSEC broke support at 3,850 on Monday.
While I do not put great weight into INDEX bullish and bearish vertical counts derived from the institutionally followed point and figure charting methodology, these bullish and bearish vertical counts serve as an initial too for RISK/REWARD assessment.
Having exceeded it BULLISH vertical count of 3,950, Monday's trade at 3,850 and currently building to the downside column of "O" has a bearish vertical count to 3,200.
Investor psychology may have also taken a hit.
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On Friday, Bloomberg quoted one Chinese investor, Ge Hong, a 30-year-old Shanghai post office worker as saying, "I'm very worried and I don't know what to do." Ge said she lost 2,000 yuan ($262) in the May 30th decline, more than half a month's salary for the average postal worker in the city.
Mark Mobius, who oversees about $30 billion as managing director of Templeton Asset Management, said in an interview last week that a 30% decline would be "healthy" for the Chinese market.
As I look at the $SSEC, a 30% decline from the recent highs of 4,300 would equate to a pullback to roughly 3,010.
Hong Kong's Hang Seng ($HSI) - 50-point box
The more institutionally held Hang Seng ($HSI) bucked the mainland weakness by rising 126 points, or 0.62% on Monday and closed at 20,729.
On May 9th, I captured Dorsey/Wright's World Bullish Percent Bell Curve. Similar to the various MARKET and SECTOR bullish % measures I follow, and update trader on in the OptionInvestor.com Market Monitor, we can perhaps take get a feel for how STRONG, yet OVERBOUGHT (levels above 70% are deemed overbought on a quantitative basis).
World Bullish % Bell Curve - 05/09/07
Money/cash tends to rotate within a country, and around the world. The MARKET (in this case, a GLOBAL market) is great at SELLING HIGH RISK, and BUYING LOWER RISK. On May 9, the Shanghai Composite ($SSEC) closed at 3,875, which was prior to its recent highs of 4,300.
Here's Dorsey/Wright's World Bullish % Bell Curve as of Friday evening's closing measures.
World Bullish % Bell Curve - 6/01/07
Again, Shainghai's Composite is full of rather illiquid shares, and perhaps Ge Hong's comments give us a feel for investor sentiment.
Do you see some of the "rotation" taking place that I mentioned might be set to take place in my May 21st market wrap? Even China said it had agreed to place $3 billion of its foreign exchange reserves with US-based private equity group Blackstone that day.
From last Tuesday's Market Wrap, and continuing coverage of my May 21 wrap "Another Piece of the Puzzle Falls Into Place" I'm following, and making some minor adjustments.
US Large Cap, Small Cap, China and Japan
While data feeds on China's Shanghia Composite don't allow for me to track that index in my benchmark table, I think the point and figure chart of the $SSEC, if not the Global Bullish % suggest investors are exiting the quantitatively HIGHER RISK situation there, and opting for other regions of the world.
It had been thought by some that the small caps of the Russell 2000 Index ($RUT.X) were a "high risk" asset class here in the U.S. several weeks ago.
Last week, I had actually profiled a SHORT position in the iShares Japan (EWJ) $14.73 +0.34% on May 24 at $14.34, which was BEFORE the People's Bank of China tripled a share-trading tax on the May 30th.
I noted early that morning that the EWJ's morning's low was right at our short entry of $14.34. It was as if market participants were saying "It's not Japan," that then had us getting stopped out of that 1/2 position short on Friday at $14.62 or a -1.95% loss.
As I continue to follow the "China Revelation" and put the pieces of the puzzle together, I have to think, based on observation that market participants are jitter over the changes that the People's Bank of China are now having to deal with, in regards to past yuan manipulation, and market participants are indeed opting of "safer havens" or "less risky" regions of the globe.
Closing U.S. Market Watch - 06/04/07
Monday did find some M&A news.
The most notable M&A activity in my opinion was that subprime lender Accredited Home Lenders (NASDAQ:LEND) $15.12 +9.88% said it had agreed to be acquired by private equity firm Lone Star for $400 million, or $15.10/share.
The sale comes just two months after the San Diego-based company obtained a $230 million term loan from hedge fund Farallon Capital.
I followed shares of LEND closely from late February, and noted the $230 million cash infusion from hedge fund Farallon Capital.
Should we see any other "stressed" subprime lenders also find future cash infusions from hedge funds, be alert to the company being a prime take-over candidate.
Contract electronic manufacturer Solectron (NYSE:SLR) $3.88 +15.13% was atop today's list of most actives at the big board, turning 123.9 million shares after the company said it had agreed to be purchased by larger rival Flextronics (NASDAQ:FLEX) $11.54 -1.36% for $3.6 billion in cash and stock.
The AMEX Airline Index (XAL.X) 50.95 -2.74% was today's sector loser after Continental Airlines (NYSE:CAL) $37.45 -6.09% said late Friday its overall passenger unit revenue fell between 0.5% and 1.5% from May 2006 levels.
J.P. Morgan Securities analyst Jamie Baker wrote in a research report he believes that Wall Street overall expected about 1% growth.
Goldman Sachs' Robert Barry said CAL's weak figures are partly due to the difficult year-ago comparisons. "But we also see the result as further evidence of an increasingly unfavorable domestic supply/demand dynamic, engendered by slowing demand growth, rising supply, and aggressive low cost carrier pricing."
Energy equities depicted by the OIX.X, OIH and XNG.X were broadly higher, in part on news that Cyclone Gonu is expected to hit the Persian Gulf in the next 18 hours (from time of this writing).
"There is concern the storm could disrupt shipping," said Phil Flynn, an analyst at Alaron Trading Corp. "Any type of disruption or in crude supply right now would be critical to a world thirsty for oil."
July Crude Oil (cl07n) at the NYMEX settled up $1.13, or +1.74% at $66.21 in Monday's trade.
S&P 500 Index ($SPX) - 10-point box
Ask any trader/investor about "valuation," or "risk" and you'll get at least 4 different answers.
Is China's Shanghai ($SSEC) a bit "overvalued?" Some may say Yes! It achieved its bullish vertical count of 3,950 and until just recently, was up anywhere from 43% to 56% since January.
Is the widely followed S&P 500 Index ($SPX) "overvalued?" Still some room to its longer-term bullish vertical count of 1,890, with downside RISK being assessed to 1,470 at a MINIMUM, and 1,360, which would be a double bottom sell signal, which would negate the bullish vertical count currently being constructed.
In last Tuesday's Market Wrap I showed a weekly interval bar chart of the tracking S&P Depository Receipts (AMEX:SPY) $154.10 +0.01%, where I thought it would at least take a CLOSE below $150.86 (another assessment of downside risk) before I thought supply would be getting an upper-hand on demand.
The lowest the SPY has traded since Tuesday, May 29th was the next morning and buyers gobbled up the People's Bank of China "bad news" from a session low of $151.34 to a close of $153.48.
New Long Plays
New Short Plays
Long Play Updates
Aracruz Celulose - ARA - cls: 60.00 chg: -2.00 stop: 57.99
The Brazilian markets suffered a 180-point loss on Monday but that's only a 0.3% decline and probably just normal profit taking with the local markets near record highs. Meanwhile the NYSE-traded ADR shares of ARA suffered a 3.2% sell-off. We could not find any specific news or catalyst to explain the weakness in ARA. The pull back to $60.00 looks like a new entry point but given the sharp dip on Monday we'd wait for signs of a bounce before jumping in. A rebound over $60.50 might work as an alternative entry point. Our target is the $68.00-70.00 range. More conservative traders may want to exit near $66.00.
Picked on June 03 at $62.00
Business Objects - BOBJ - cls: 40.45 chg: +0.35 stop: 38.95
Traders are buying the dip in BOBJ near the $40 level. The good news is that Monday did not see any follow through on Friday's bearish reversal candlestick. This looks like a new entry point to go long the stock but if you're launching new positions consider adjusting your stop toward $40. Our target is the $44.00-45.00 range. The P&F chart is bullish with a $53 target. FYI: BOBJ remains a takeover target.
Picked on May 21 at $40.15
CIT Group - CIT - close: 61.16 change: +0.05 stop: 58.49
We do not see any changes from our weekend comments for CIT. Traders bought the dip at $60.45 this morning. More aggressive traders may want to go long the stock right here. We want to wait for a rally past the February 2007 high so we're suggesting a trigger to go long the stock at $61.75. If triggered we are aiming for the $67.00-70.00 range. Currently the Point & Figure chart forecasts an $84 target. More conservative traders may want to exit near $65.00, which could be round-number resistance.
Picked on June xx at $xx.xx <-- see TRIGGER
EMC Corp. - EMC - close: 17.05 change: +0.22 stop: 15.85
EMC managed to tag a new relative high today. Shares closed up 1.3% after announcing it had bought Verid, a privately held IT security firm. We're not suggesting new positions at this time but a dip (or bounce) near the rising 10-dma could be an entry point. The P&F chart has seen its bullish price target rise from $24.00 to $25.50 over the last week. Our target is the $18.50-20.00 range.
Picked on May 27 at $16.46
Fomento Economico - FMX - cls: 40.34 chg: -0.10 stop: 37.99
There is no change from our weekend comments on FMX. The stock continues to trade sideways above the $40.00 level. We are suggesting long positions now with FMX above $40.00 but a dip near $39.00 could also be used as a new entry point. Our target is the $44.00-45.00 range.
Picked on June 03 at $40.44
Gerdau Ameristeel - GNA - cls: 15.95 chg: -0.06 stop: 14.95
There is nothing new to report on for GNA. Metal and steel stocks tended to under perform the markets on Monday. Shares of GNA continue to look overbought and due for a correction but until the trend changes the bulls are in control. Traders might want to tighten their stops toward the rising 10-dma near $15.60. Our target is the $17.50-18.00 range. This remains a higher-risk, speculative play. Some of the technical indicators are suggesting the next move "should" be down.
Picked on May 20 at $15.23
Kansas City Southern - KSU - cls: 42.40 chg: -0.10 stop: 39.61 *new*
KSU experienced some mild profit taking after Friday's big rally. Shares spent most of Monday trading sideways in a very small range. A dip back to the $41.00 area would not be unusual here. We're adjusting our stop loss to breakeven at $39.61. Our target is the $43.50-44.00 range. Currently the P&F chart points to a $45 target. We are not suggesting new positions at this time.
Picked on May 17 at $39.61
Pinnacle Enter. - PNK - cls: 31.09 chg: +0.15 stop: 29.95
Breakout alert! This looks like a new bullish entry point in PNK. The stock has broken out past its 100-dma and past the $31.00 level. The stock also closed at its high for the session, which is usually bullish for the following day. We're going to stick to our plan and use a trigger to open positions at $31.35. More conservative traders may want to use a trigger above $31.50. If triggered our target is the $34.50-35.00 range. Currently the P&F chart for PNK is still bearish and points to a $19 target.
Picked on June xx at $xx.xx <-- see TRIGGER
Raytheon - RTN - close: 56.60 chg: +0.43 stop: 53.95
Shares of RTN were marching higher after the company announced it had won another U.S. military contract. This time RTN won the Navy Multiband Terminal contract with $1 billion over the life of the contract. Volume came in just above average on the session and the new high. We don't see any changes from our weekend comments and would still consider new positions here. Our target is the $59.75-60.00 range.
Picked on June 03 at $56.17
St. Mary Land - SM - cls: 38.47 chg: +0.38 stop: 35.99
SM posted its fourth gain in a row and broke out to new five-month highs with today's rally. A 1.7% rally in crude oil supported a sector-wide rally in the energy stocks. SM hit an intraday high of $38.60 and our suggested trigger to buy the stock was at $38.51. Now that the play is open our target is the $43.50-45.00 range. We would expect some resistance near $40.00 and again near $40.65 but overall the breaking from its trading range and above its 200-dma is very bullish.
Picked on June 04 at $38.51
Superior Energy - SPN - cls: 40.33 chg: +0.43 stop: 37.99
Strength in crude and the oil sector helped pull SPN back above the $40.00 level. The general trend is still positive but we remain wary. We're not suggesting new positions at this time. More conservative traders may want to tighten their stops. Our target is the $42.50 mark. The P&F chart is very bullish with a $65 target.
Picked on May 13 at $38.42
Trico Marine - TRMA - cls: 42.43 chg: -0.35 stop: 40.45
We are a little surprised by the relative weakness in TRMA today. Oil stocks, especially oil service stocks, were trading higher today. On a technical basis the dip back toward $42.00 in TRMA looks like a new entry point to buy it. Our target is the $46.50-47.50 range. The P&F chart points to a $58 target.
Picked on June 03 at $42.78
Encore Wire Corp. - WIRE - cls: 29.42 chg: -0.40 stop: 27.95
WIRE under performed the markets on Monday. Volume was low so it's tough to put a lot of emphasis behind today's move. However, we do suspect that WIRE is poised to dip toward the $29.00 level soon. Wait and watch for a bounce near $29.00 as a new entry point. An alternative entry would be to look for a new relative high over $30.45. More conservative traders may want to tighten their stops toward $28.50. The Point & Figure chart suggests a $46 price target. We are targeting the $32.50-33.00 range.
Picked on May 27 at $29.26
Short Play Updates
Archer Daniels - ADM - cls: 34.48 chg: -0.11 stop: 36.11
ADM continued to under perform the markets on Monday. Yet the bounce from the $34.00 level is something of a warning for the bears. Today's move has produced a "hammer" style candlestick, which is usually seen as a bullish reversal. We wouldn't start to worry until we saw ADM trade over $35.00, which should be overhead resistance. A failed rally near $35.00 would actually be an attractive entry point for shorts. Our target is the $30.50-30.00 range but we do expect some support and a bounce near $32.75-33.00.
Picked on June 03 at $34.59
MarineMax - HZO - cls: 21.19 chg: +0.14 stop: 21.51
We have to wave the warning flag again. HZO is still creeping higher and today's gain is technically a bullish breakout over its 50-dma. Yet shares appear to be struggling to rise past the May 22nd high. More conservative traders may just want to exit early right here to cut their losses. We're going to stick it out and see what happens but we're not suggesting new positions. It is VERY important that traders realize HZO has a high amount of short interest. The latest data put short interest at $28% of the 16.8 million-share float. That's a lot of short interest and a small float. Unfortunately, that can be a recipe for a big short squeeze.
Picked on May 29 at $19.95
Staples Inc. - SPLS - cls: 25.15 chg: -0.22 stop: 25.76
SPLS under performed the market with a 0.8% decline but we're not completely convinced that readers should be shorting what almost looks like a failed rally. We're not suggesting new positions at this time but if SPLS turns south a drop under $24.50 would look like a new entry point.
Picked on May 27 at $24.40
U S T Inc. - UST - close: 53.60 chg: -0.71 stop: 55.65
UST reversed course and lost 1.3% and on above average volume. The big volume behind the decline is positive unfortunately if you look at the intraday chart it looks like most of the volume showed up on the late afternoon bounce, which is worrisome. More conservative traders may want to tighten their stops closer to the $55.00 level. The P&F chart has a bearish signal with a $47 target. We have two targets. Our conservative target is $52.60-52.50. Our more aggressive target is the $50.50-50.00 range. FYI: More aggressive traders might want to give UST more room to maneuver and leave their stop above $56 or its 200-dma.
Picked on May 23 at $54.96
Closed Long Plays
Closed Short Plays
Today's Newsletter Notes: Market Wrap by Jeff Bailey and all other plays and content by the Option Investor staff.
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