There was no big decline after last week's strong gains. The bears are disappointed and we could see shorts leaving the market at today's close. After nearly three full days of trading we have seen almost no movement since Friday's opening spike. The indexes are consolidating in place as opposed to a typical post excitement dip that bulls like to buy. This suggests breakout pressure is building and the bulls may be preparing to stampede once again.
Dow Chart - Daily
Nasdaq Chart - Daily
The economics reports today failed to move the markets with the weekly Chain Store Sales snapshot flat at -0.1% after the strong +1.0% gain in the prior week. The New Residential Construction report for May came in at an annualized rate of 1.474 million homes and right inline with consensus estimates. This was a drop from the 1.506 million number we saw in April. While starts fell -2.1% there was a +3.0% in new permits indicating a slight pickup in planned building activities. This is a better picture for the housing sector than we saw on Monday when the NAHB Housing market Index fell two points to 28. Every component of the NAHB Index was at historic lows for the 20+ years records have been kept. The normally bullish spring housing cycle is shaping up to be the worst in decades but this should not be a surprise to anyone. What is surprising is the lack of buying in the builders. After a year of buying false bottoms only to see new lows a week later the bulls appear to have completely lost interest in the sector. Maybe it is finally time to buy?
There is only one economic report left in the week that will have any potential impact on the markets. That is the Philly Fed Survey on Thursday. The conversations are starting to turn to the two-day Fed meeting, which begins next Tuesday. Nobody expects any change in rate or bias but there is always the fear the Fed may want to shake up the market by changing the statement. This may serve to keep a lid on equities as the week progresses. Treasuries are finding buyers after five weeks of concentrated selling and the three-day rebound has seen the yield fall to 5.086% at today's close. This is well below the 5.33% high yield we saw on the 13th when the selling reached its peak. Yields run opposite of treasury prices. The lower the price the higher the resulting yield. With the rally in treasuries we should be seeing a rally in equities but that has yet to appear. It is possible that the 5% yield is attracting money from the equity side ahead of the normal summer doldrums in equities. A safe 5% for the next 90 days may be an attractive option to wait for a potential October correction.
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We are in that quarterly period between the end of earnings and the beginning of the warnings for the next earnings cycle. Stock news is extremely light as activity slows around the vacation season. If it were not for mergers and acquisitions making the news there would be little new information to create headlines. Those merger headlines have also slowed but rumors continue to make the rounds. Blackstone Group LP, the manager of the second largest buyout firm, moved its expected IPO date to this week as scrutiny from lawmakers began to cloud the future for partnerships. Rather than see their valuations fall any further from headline risk they moved the date forward to capitalize on their efforts. The stock will begin trading on Friday in what will be a $4.75 billion IPO. This will be the fourth largest IPO in U.S. history. With the buzz around the Blackstone IPO this could be another source of funds drain on the equity markets as traders raise cash for their expected IPO allotment. Blackstone is only selling a 12.3% stake in its management company and shareholders will have little say in the management of its $88 billion investment portfolio. The pricing of the IPO shares in the $29-$31 range values the entire company at roughly $32 billion. If lawmakers proceed with changing the tax structure for public partnerships now at 15% to that of a corporation at 35% the value of these mega partnerships will drop significantly. Removing an additional 20% of the profits by changing the tax rate could put investor's net returns from these funds back into the range of normal returns that well managed mutual funds produce. That prospect is what accelerated the Blackstone IPO so current partners could cash the reputation valuation check before the rules change.
Best Buy (BBY) made the news as one of the late cycle earnings reporters with earnings that fell -18%. BBY warned that FY 2008 profits would be lower due to a softening economy and a move by consumers to lower margin items and away from high profit large screen TVs. CEO Brad Anderson said higher gas prices impacted consumer discretionary income "pretty directly and pretty immediately." They expect the low margin item trend to continue through the back to school season but pickup again when football season returns along with high margin shopping. Brad said big screen TV sales were driven strongly by football. They also said profits were hurt by the inclusion of their low margin business in China. BBY lost -2.83 (-6%) on the news.
Expedia (EXPE) spiked +3.64 (+14%) on news it would buy back $3.5 billion of its shares in a massive buyback. This represents 42% of its outstanding shares. The buyback will be conducted as a modified Dutch auction with prices between $27.50 and $30. EXPE conducted a similar offering in December where it bought back 9% of its shares. The terms of the auction will be filed next week with the closing date on August 5th. If Expedia is successful in buying back all the shares they expect that will mean a 51% reduction in outstanding shares in the last six months. That leaves the two majority shareholders IAC Interactive (IACI) and Liberty Media (LINTA) in the drivers seat with private equity money already sniffing around the online travel industry. They have said they will not tender any of their shares and that will result in their stake rising from 26% to 41% without having to spend a dime of their own money. They already have 100% of the voting rights. For those individual shareholders who retain their shares the outlook is bright with those two giants owning such a big stake. Expedia's business is booming again and odds are good buyout companies are already taking aim.
General Electric (GE) broke out to a new five-year high on Tuesday on what was called a technical breakout. There was nothing material in the news to power the move but when resistance at 38.25 broke it took off like a rocket to end with a +1.22 (+3.2%) gain on volume of 73 million shares. For GE this is a monster move on monster volume. GE also announced it was buying 91% of HM Capital Partners ownership of 8 million shares in Regency Energy Partners LP. Regency (RGNC) is a pipeline company that operates over 4000 miles of gas pipeline in the Southwest. The price was $603 million. GE Energy Services already owns or has interests in over 20,000 miles of gas pipelines in North America. GE has been active in picking up minority interests in multiple energy services companies over the last couple years. They have been rumored as a potential acquirer of a major driller like RIG or DO, which would be pocket change for GE and give them a strong position to build on in the energy sector. For a company sitting on mountains of cash owning pipelines is a smart move. It is steady repeatable income and our gas consumption is only going to grow along with gas prices.
Home Depot announced the mother of all stock buybacks after the close today. They had announced the sale of their Home Depot Supply unit for about $10.3 billion to a group of private equity firms. This had been expected for quite a while and is expected to close in Q3. What was not expected was the announcement of what they are going to do with the money. They announced a $22.5 billion increase in their current buyback program using that $10.3B and other available funds. There are no dates on the buyback other than "as soon as practicable." HD stock spiked +2.40 in after hours but that is probably just the start of the gains. This represents nearly 30% of Home Depot's outstanding shares.
The Apple iPhone buzz continues ahead of the launch date late next week. It is not the iPhone that is contributing to the chatter this week but competitors showing up at the various electronics shows around the world. Four major handset manufacturers are debuting more than 20 new models of phones with iPhone like features. The initial target market is Europe and the more than 700 million European phone users. All phones in Europe are already high-speed 3G models with more capabilities than most networks in America. These phones models are partnering with MusicStation and the more than four million songs currently available. In Europe more than 12% of phone users listen to music on their phones compared to 4% in America. This is a giant land grab by the four major handset manufacturers in an attempt to protect themselves from the growth of iTunes due to iPhone usage. These competing handsets are expected to sell more than 100 million units in 2008 compared to the optimistic 10 million target by Apple's iPhone. The best thing about MusicStation is its broad platform capability. It is not limited to any one brand, model or carrier unlike the iPhone. This is not expected to blunt the iPhone sales in the U.S. but Apple is going to have a tough battle if it decides to move its marketing effort overseas. Rumors out today claim Apple is negotiating with Germany based T-Mobile to become their iPhone carrier in Europe. IDC surveyed people who were planning to buy a new mobile phone and had expressed interest in the iPhone. More than 40% said they would probably not buy it due to price and the hassle of changing carriers. AT&T is the only iPhone carrier in North America.
Miner, driller and uranium producer BHP Billiton (BHP) continued to rise despite news it may be ready to make an offer for Alcan (AL). Alcoa (AA) is currently involved in a hostile bid for Alcan and BHP could be seen as a white knight riding in to the rescue. Reportedly BHP has hired Merrill Lynch to advise it on the move. BHP would be forced to sell some of Alcan's assets in areas it has no interest such as the downstream manufacturing and extrusion businesses. BHP is a miner not a manufacturer. On Monday the Times of London said BHP was targeting Alcoa not Alcan. Analysts feel this is unlikely given the regulatory issues they would have to hurdle. I believe BHP is rising for another reason not related to Alcoa or Alcan. There is a persistent rumor circulating that China is going to make a bid for BHP. This could be consistent with their plan to lockup resources for future use. BHP has extensive metals deposits, mining operations on multiple continents, oil drilling and production and most importantly to China, uranium assets to fuel the large increase in nuclear plants China is building. BHP has a market cap of $17 billion and would be pocket change for the new China investment fund. BHP is currently a long-term position in our LEAPS Newsletter.
BHP Chart - Weekly
August Crude Oil Futures Chart - Daily
Oil prices continue to rise with today's close at $69 just one notch higher as we wait for the next hurricane to appear. With July crude futures expiring tomorrow this could also have been the result of some short covering. Wednesday's inventory report is expected to show some gains in crude and gasoline inventories and anything less than a decent gain will be seen as yet another reason to push prices higher. Nigeria came back to the news front today with a new worker strike scheduled to begin tomorrow. The situation there is very tense on numerous fronts and it will probably get worse before it gets better and it could take years before better conditions are seen. Tensions are also increasing over Iran's nuclear goals and would-be presidential candidate Fred Thompson suggested further tightening of sanctions on Iran, possibly even a blockade, to force a regime change. A new video circulating on the Internet and run by ABC News reportedly shows a graduation ceremony at an al Qaeda training camp for suicide bombers. A Pakistani journalist was invited to take pictures are the graduates were sent off on their missions to America, Canada, Great Britain and Germany. This may not directly relate to oil but it does increase global tensions with oil producing Middle East countries suspected of funding those operations.
The sideways motion on the indexes for the last three days is thought to be a consolidation phase following last week's +400 point rebound. Market breadth has been weak with advancers and decliners about even on low volume. Monday only saw 4.6 billion shares traded compared to Friday's 6.49 billion. There is really nothing to point to a direction for the rest of the week other than a lack of sellers at this level. Contrary to the prior rebound attempts each brief bounce was sold. Now the pattern appears to be buy the dips and those dips have been very shallow. There is an underlying bid and although not strong it has been enough to keep the bears at bay.
The Dow has found support at 13600 but as yet been unable to post any material gains. Today's +22 point gain was helped by GE's roughly +10 point contribution to the Dow. IBM also contributed roughly 10 Dow points with the rest of the components roughly even. Dow resistance is 13685 and easily in range to be broken on any positive news event. That even could be the strong bounce seen overnight by Dow component Home Depot. If HD powers forward for $3-$4 tomorrow it could be the spark needed to trigger additional buying. Most traders forget that all the Dow components are traded in various forms of ETFs. A major gain by a single Dow stock can trigger a major move in an ETF and that triggers additional buying of that ETF and a corresponding buy from ETF managers in the other Dow components. A sharp breakout to a new Dow high could trigger another round of short covering across all the indexes.
TThe Nasdaq gapped open on Friday to about 2625 and that is almost exactly where it closed today. After three days of trading on both sides of that level it just can't seem to make any headway. The Semiconductor Book-to-Bill report tonight was flat at 1.00, $100 in orders for every $100 in billings. It has been nearly flat for the last six months despite a large number of chip plants coming online and a large increase of installed chip equipment. This is seen by chip analysts as a bottoming process with expectations for a sharp rebound later this year. Chips will be needed for new 3G phones, Vista computers and the seasonal demand of consumer electronics for fall. The B-T-B report will be neutral for techs on Wednesday so motive power will have to be found somewhere else. Support is 2620 and resistance 2630 trapping the Nasdaq in a very narrow range. Like the Dow a new driven spike to new highs over 2630 could stimulate additional short covering.
S&P-500 Chart - Daily
The S&P-500 is holding in an even tighter range just below 1535 with overhead resistance highs at 1540. The S&P survived option expiration and the Monday option cleanup and rebounded sharply from Tuesday's opening dip. The Russell-2000 is behaving remarkably well ahead of its annual rebalance on Friday. It has rebounded back nearly +30 points from its post rebalance announcement lows. When you consider 240 current Russell stocks will be leaving the indexes that is a strong performance and suggests mutual funds are not afraid of small caps and are buying the dips ahead of the summer doldrums. That is a bullish sentiment indicator for the broader market. Market breadth improved slightly on Tuesday and I credit the small caps for the change.
With the Home Depot news I would have expected the Dow futures to be positive overnight but they are trading down slightly along with the S&P and Russell futures as I write this commentary. I believe this is temporary and the futures are waiting to see what Asia does overnight. Lately we have been a slave to their performance and them to ours. If today's lackluster U.S. performance rubs off on their markets it could produce a negative bias for the U.S. on Wednesday. I am slightly bullish on the markets for Wednesday but also slightly cautious on any Dow move below 13600. We are approaching the summer doldrums and earnings-warning season for Q2. These factors along with the Fed meeting next Tuesday suggest we should not let a bullish bias overcome our need for caution.
New Long Plays
New Short Plays
Long Play Updates
Amphenol - APH - cls: 35.82 change: -0.42 stop: 34.69
APH lost another 42 cents on Tuesday. The close under $36.00 is starting to make us nervous although APH should have support near its trendline of higher lows and its rising 50-dma. We'd wait for a bounce back over $36.00 or $36.50 before considering new bullish positions. Our target is the $39.75-40.00 range.
Picked on June 10 at $35.74
Aracruz Celulose - ARA - cls: 65.82 chg: -0.23 stop: 59.90
ARA tried to rally past $67.00 this morning but failed. Shares are short-term overbought and due for a correction so more conservative traders may want to think about taking some profits here. We're not suggesting new positions at this time. Our target is the $68.00-70.00 range.
Picked on June 03 at $62.00
Cal-Maine Foods - CALM - cls: 15.72 chg: +0.09 stop: 13.49
CALM spent almost the entire day between $15.40 and $15.60 until a late afternoon rally pushed it higher. We're not suggesting new positions at current levels. Our target is the $17.40-17.50 range. FYI: More conservative traders may want to exit near $16.50.
Picked on June 17 at $14.80
CB Richard Ellis - CBG - cls: 38.65 chg: -0.64 stop: 37.49
This is the second day in a row that CBG tried to rally past $40.00 and failed. We are suggesting a trigger at $40.15, which is above potential round-number resistance at $40.00. If triggered at $40.15 our target is the $44.00-45.00 range. The P&F chart points to a $52 target.
Picked on June xx at $xx.xx <-- see TRIGGER
China Netcom - CN - cls: 55.12 chg: -0.16 stop: 51.90
The rally in the Chinese markets slowed down today. Meanwhile shares of CN continue to churn sideways near the $55.00 level. We would still consider new long positions here but patient traders may want to wait for a possible pull back near $54.00. The P&F chart points to a $73 target. We're aiming for the $59.50-60.00 range. More aggressive traders could aim for the highs near $62.50.
Picked on June 17 at $55.600
Columbia Sportswear - COLM - cls: 68.91 chg: +0.28 stop: 65.95
COLM spiked lower this morning but bulls quickly bought the dip near its 10-dma. The rebound looks like another entry point to go long the stock. Our target is the $73.50-75.00 range. The P&F chart is very bullish with an $89 target.
Picked on June 17 at $68.544
EMC Corp. - EMC - close: 17.99 change: +0.20 stop: 16.46 *new*
EMC continued to rally marking its fifth gain in a row. The stock is nearing potential resistance at the top of its 3 1/2 month rising channel. More conservative traders may want to exit now to lock in a gain. We remain bullish and the above average volume during this five-day winning streak is very positive. However, we're not suggesting new positions at this time. Our target is the $18.50-20.00 range. Please note that we're adjusting the stop loss to breakeven at $16.46. If you choose not to lock in a profit now consider raising your stop to protect a 5% gain.
Picked on May 27 at $16.46
Group 1 Auto - GPI - cls: 41.66 chg: -0.04 stop: 39.95
This morning's bounce from the $41.00 level looks like another bullish entry point in GPI. This is somewhat aggressive since GPI has clear resistance in the $43.00-43.50 zone. However, if the markets continue to rally then we believe GPI will breakout. More conservative traders may want to wait for a new relative high over $43.00 or $43.50 first. Our target is the $47.00-48.00 range just under the descending 200-dma. FYI: The P&F chart is still bearish.
Picked on June 17 at $41.96
Raytheon - RTN - close: 56.10 chg: +0.36 stop: 55.19
RTN is still consolidating sideways. We remain defensive given the recent sell signal in the MACD on its daily chart. We're not suggesting new positions at this time. More aggressive traders may want to leave their stop under $55.00, which is additional support. Our target is the $59.75-60.00 range.
Picked on June 03 at $56.17
St. Mary Land - SM - cls: 39.87 chg: +0.20 stop: 36.95
SM continues to rally and traded above round-number, psychological resistance at the $40.00 level on an intraday basis. We're not suggesting new positions at this time but a dip near broken resistance and what should be new support around $39.00 could be an entry point. Our target is the $43.50-44.00 range. The P&F chart is bullish with a $48 target.
Picked on June 04 at $38.51
Encore Wire Corp. - WIRE - cls: 30.14 chg: +0.34 stop: 28.49
Today's rally in WIRE looks pretty encouraging. The close over $30.00 is a positive sign. More aggressive traders may want to go long right here. More conservative traders may want to tighten their stop loss closer to the $29.00 level. We'd wait for a move past $30.45 before considering new positions. 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
AMB Properties - AMB - cls: 55.22 change: +0.31 stop: 58.26
AMB produced an oversold bounce after testing (and breaking) the late May low. We would expect the bounce to continue tomorrow. Watch for the 10-dma above $56 to act as overhead resistance. More conservative traders might want to think about lowering their stop loss toward Friday's high near $57.00. Our target for AMB is the $52.00-50.00 range.
Picked on June 11 at $ 56.21
Broadcom - BRCM - cls: 30.26 change: -0.37 stop: 31.65
BRCM continued lower following yesterday's failed rally. The stock is testing support near $30.00 again. We're going to stick to our plan and wait for a breakdown under support at $30.00. Our suggested trigger is at $29.75. If triggered our target is the $27.00-26.00 range. We do not want to hold over the mid July earnings report. FYI: One of the larger risks with shorting BRCM will be any sort of headline-making news events in the legal battle between BRCM and QCOM.
Picked on June xx at $xx.xx <-- see TRIGGER
Continental Airlines - CAL - cls: 33.80 chg: +0.90 stop: 36.26
Some positive analyst comments for US Airways and a dip in oil prices fueled a bounce in airline stocks. CAL spiked to $34.66 this morning but the rally failed at its simple 10-dma. Our target is the $30.50-30.00 range. We do not want to hold over the mid July earnings report.
Picked on June 12 at $34.10
CIT Group - CIT - cls: 57.65 chg: +0.04 stop: 60.05
It was a quiet day for CIT. We don't see any changes from our previous comments. Our target is the $55.25-55.00 range. We are suggesting a stop loss at $60.05 but more conservative traders might want to use $59.65.
Picked on June 12 at $58.17
Healthcare REIT - HCN - cls: 41.04 chg: +0.25 stop: 43.01
We need to be careful in HCN. The stock spiked to $39.78 this morning but rallied back for a 0.6% gain. The move today looks like a short-term bullish reversal. We would expect the bounce to continue. The question is whether or not HCN will fail at resistance near its 10-dma (around $41.50) or near the $42.00 level. More conservative traders may want to tighten their stops toward $42.00. Our target is the $38.50-38.00 range.
Picked on June 11 at $ 41.73
Monster Worldwide - MNST - cls: 43.22 chg: -0.28 stop: 46.26
MNST continues to sink following yesterday's breakdown. More conservative traders might be tempted to lower their stops toward the $45 level. Our target is the $40.50-40.00 range.
Picked on June 12 at $44.41
Staples Inc. - SPLS - cls: 25.08 chg: +0.09 stop: 25.55
SPLS bounced from its lows near $24.75 this morning. That's significant because the $24.75 level was resistance for most of last week. Today's move is bullish and SPLS could be preparing for a rally attempt past the 50-dma and the $25.50 level. We're not prepared to exit yet because SPLS is still under its trendline of lower highs.
Picked on May 27 at $24.40
U S T Inc. - UST - close: 51.86 chg: -0.24 stop: 55.01
UST is still showing weakness and today's close under $52.00 is bearish. We're not suggesting new positions. UST has already hit our target in the $52.60-52.50 range. Now we're aiming for the $50.50-50.00 zone.
Picked on May 23 at $54.96
Closed Long Playss
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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