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Daily Newsletter, Thursday, 09/13/2007

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Table of Contents

  1. Market Wrap
  2. New Plays
  3. In Play Updates and Reviews

Market Wrap

Hurricane Humberto Surprises Southeast Texas

Introduction

Hurricane Humberto surprised Southeast Texas and those hoping for a reprieve from high crude costs.

When I was a child, my parents once woke us in the middle of the night to evacuate our home. Before evacuating, my volunteer fire fighter father woke neighbors who were sleeping unaware. He had been warned by the radio kept in our home to summon the fire fighters that a massive hurricane had changed course in the middle of the night. To get to safety, we drove through the leading edge of that massive hurricane, dodging branches and other debris blowing across the road.

It's surprising that even today, a community can be caught unaware by a hurricane, but Gulf Coast communities were surprised Wednesday to learn that a tropical storm was building off their shores, a tropical storm that strengthened into Category 1 Hurricane Humberto overnight. Newspapers report that the storm swirled into being only Wednesday afternoon, but that unexpected meteorological conditions allowed it to strengthen into a hurricane before hitting ground just before dawn this morning.

A relative in Port Arthur told us last night that the first she knew of a storm threatening the coast was late in the school day, when the principal at the school where she teaches made an announcement. According to other reports, emergency staff and Entergy employees were caught unaware by the storm's quick development, too. The hurricane's winds missed qualifying it as a Category 2 storm by only 11 mph when it hit. Although Humberto was only a Category 1, the storm did impact refineries in the area.

Headlines in the BEAUMONT ENTERPRISE this morning warned of school closings, widespread power outages and flooding. Those power outages caused problems at a Valero (VLO) refinery in Port Arthur, a company spokesperson announced early this morning. The company's 325,000 barrel per day refinery shut down production at that plant. Later in the morning, the BEAUMONT ENTERPRISE reported that Total Petrochemicals USA, Inc.'s Port Arthur refinery was also shut down by the power loss. Neither company was reporting damage by flooding, so they should be up running again as soon as the power is returned and they can power up again, a process that is not as simple as flipping a switch in the best-case scenario, and this wasn't the best-case scenario.

The newspaper also reported early in the day that company staff at Royal Dutch Shell's and Saudi Refining's Motiva Enterprise LLC's Port Arthur refinery was checking out the plant, with a report later noting that the refinery would be shut for at least five days. The Motiva plant sustained a little damage, too, amounting to some lost insulation.

One facility did appear to sustain more damage, although the extent of that damage was uncertain. The newspaper featured a picture of the Golden Pass LNG terminal on Texas 87 in Sabine Pass, showing visible damage from the storm.

At least one of these refineries, Motiva, and perhaps others were unable to complete shut-down processes before power went out, shutting them down. That will complicate getting them up and running.

Jim Brown recently detailed refineries that were struggling to maintain production for various reasons, including Port Arthur's Total. It's perhaps not surprising that while area residents might have been caught unaware by this storm, crude traders might not have been yesterday afternoon as the storm began developing, driving crude to its record high this week. Trackers also watch a new potential storm center brewing in the Atlantic. Crude clung to prices near $80.00 most of the day. As this report was filed, they were at $80.09, but with crude futures having printed a doji at the top of a steep climb, a potential reversal signal.

Boone Pickens wasn't surprised by $80 crude. He was invited to speak on CNBC this morning because he had predicted that crude would reach $80 a barrel before his 80th birthday. He will not be 80 for several months, so his prediction was handily met. Pickens said he had long predicted some unusual happenings in the fourth quarter, and he mentioned possible supply problems due to developments in Mexico.

Financials provided their own storm systems lately, but today the breezes were balmy. Many financials basked in those breezes, driving the SPX and indices such as the broker/dealers (XBD) sharply higher. Countrywide Financial (CFC) announced before the open that August's mortgage loan fundings were 17 percent lower than in the year-ago level. The investment crowd was more focused on the company's securing of an additional $12 billion in borrowing capacity. Meanwhile Deutsche Bank upgraded troubled lender Thornburg Mortgage Asset Corp. (TMA) to hold from its previous sell signal. DB thought although financing risks and margin calls had not been eliminated, liquidity had improved and the group had stabilized its operations.

The balmy breezes might not have told the entire story. The Fed released figures today that show that Wednesday, U.S. banks came to its discount window to borrow the largest amounts since the 9/11, $7.2 billion. A MarketWatch.com article said the average for the week was $2.7 billion.

Another storm was brewing across the pond, complete with signs that liquidity might not have improved at all. In the U.K., a Royal Institution of Chartered Surveyors' poll and another index of housing prices each showed declines in housing prices. Industry analysts noted the tightening of credit to prospective homebuyers. Problems were extending into the commercial property sector, Morgan Stanley noted when it downgraded British Land. Arguing against these liquidity concerns was the lowering of the LIBOR rate, the benchmark that the globe's central banks use.

How did all this impact trading? It was an odd day, one in which financials and some big caps led some indices sharply higher, while small caps, mid caps and semis showed much less enthusiastic participation in gains. I read in one article that the Dow Jones Transportation index was rallying and that was a sign of underlying market strength, but my conclusion was different. It wasn't until early afternoon that the TRAN surpassed yesterday's high, a feat the TRAN's sister index, the Dow achieved in the first 15-minute candle. The TRAN might have gained, but it appeared to be following rather than leading, and this is an index that often leads the SPX, OEX and Dow.

So, I have a quandary. For days now on the live portion of the site I've been warning that bulls need to protect their gains, being constantly vigilant. Meanwhile, the SPX and some other indices keep soaring. I've learned to look askance at any rally that isn't led by or doesn't see strong participation by the small caps, semis and TRAN. So, do I keep warning bulls about employing profit-protecting measures and risk looking silly?

You bet I do. Those hurricane winds blew a whiff of something a little fishy inshore today, and I don't quite know what to make of it. Was this just a relief rally in some former down-and-outs, with those financials propelling the SPX and other indices higher or is it a sign that the credit crunch and subprime problems are finished, dissipated like the winds and rains of Hurricane Humberto will soon be? The energy-related stocks such as those comprising the XOI and OIX helped propel prices higher, but what happens to those as the expiration of energy futures approaches, especially with that doji sitting right at the top of a steep climb on the crude futures? Does former leadership in indices such as the RUT, SOX and TRAN not matter any longer? Maybe, but I always get worried by "it's different this time" statements.

There's nothing wrong with advising that profits be protected, with saying that I just don't quite understand what's going on here. That's quite different than saying the sky is falling and advising readers to pile into bearish plays. So, I'll risk looking and sounding silly.

Charts

Annotated Daily Chart of the SPX:

One concern for bulls lies in a comparison with what happened after the last test the 50-sma. The SPX pulled back September 4, after testing the 50-sma, closing slightly above it. The next day began a steep decline. RSI tests the same trendline it tested that day, too. To dispel any fears if the SPX should begin to repeat that performance, bulls want to see the SPX climb immediately tomorrow, with that climb accompanied by an RSI breakout.

All bulls should decide tonight how they'll treat a test of the upper triangle resistance if it should be tested again or how they'll react if an immediate downturn should begin tomorrow morning, always keeping in mind the possibility of a fake-out move. Overnight developments that could impact the USDJPY and, therefore, possibly our trading climate, will be discussed later.

Annotated Daily Chart of the Dow:

The last Dow test of the 50-sma on September 4 resulted in a significant pullback that began the next day, echoing what was seen on the SPX chart. Bulls don't want to see a repeat, but instead to see a strong push higher tomorrow.

The Nasdaq did not perform as well as the SPX and Dow.

AAnnotated Daily Chart of the Nasdaq:

The semiconductors also underperformed the SPX and Dow. Lots of analysts addressed the sector today. Lehman brothers upgraded Europe's semiconductor and equipment sector today to a positive rating, up from its former neutral rating. Infineon Technologies (IFX), a SOX component, received an upgrade to overweight from its former equal weight. However, STMicroelectronics (STM), also a SOX component, was downgraded to underweight from its former overweight rating.

UBS increased INTC's price target to $32.00, up from the former $30.00, and made statements considered bullish about the company. Banc of America initiated coverage of Broadcom (BRCM) and Atheros (ATHR) with buy ratings, but said that Marvell (MRVL) was a company in transition, with a harder time ahead than the other two companies. BRCM, INTC, and MRVL are SOX components, but ATHR is not.

After hours, Lattice Semiconductor (LSCC) said its sales would be down. The company said it hadn't seen the typical seasonal buildup. LSCC is not a SOX component.

Annotated Daily Chart of the SOX:

The SOX needs to bounce early tomorrow to avoid selling. Any drop would be a violation of a rising trendline that can be drawn from the 8/16 low to the 8/28 low and extended to today's close. The SOX appeared to close right on that trendline (not shown).

The Russell 2000 also did not participate in today's SPX and Dow gains, instead printing a doji right in the middle of its chop zone. Talk about not committing to a direction!

Annotated Daily Chart of the RUT:

Since early this year, I have been noting that the actions of the USDJPY (U.S. dollar against the Japanese yen) tended to lead or at least corroborate U.S. equities. In recent weeks, however, I've been cautioning traders that this inter-market relationship could change. While the USDJPY has so far continued to be a good barometer of what might happen to equities, we should begin building scenarios for times when that inter-market relationship could change.

I don't have a strong background in economics, so I'm puzzling out the various scenarios right along with you. It's my belief that the relationship could change when the reasons that movements in the USDJPY change. The inter-market relationship could also change if big money decides either that yen carry trades are too risky or that they will put any funds they borrow into something other than equities, particularly U.S. equities.

Hints of both possibilities surfaced this week. The USDJPY gained this week, charging back up to the top of last Friday's gap down, but why was that happening? Japan's prime minister resigned when lack of public trust made that decision necessary. A new election has been scheduled, coincidentally for the same date as the next Bank of Japan meeting, on September 19. It's widely believed that amid such political turmoil the BOJ cannot raise rates. Therefore, the yen has weakened. But does such political uncertainty, added to a surprising downgrade in Japan's GDP, encourage big money to pile into yen carry trades? I'm not so sure.

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In addition, Goldman's Global Alpha hedge fund announced today that its yen carry trades (borrowing yen and using the funds borrowed to buy Australian dollars and stocks in the U.S., Norway and Finland) resulted in a sharp decrease in the fund's value when those trades had to be unwound. The yen carry trades were down 22.5 percent and the fund was down by a third, a Dow Jones report noted.

The inter-market relationship doesn't appear to have unraveled just yet. Last Thursday's lagging behavior in the USDJPY signaled that something wasn't right with the equity gains, and that something not right showed up immediately last Friday. Today's equity gains were accompanied by strong gains in the USDJPY, with strong overnight gains in the currency pair predicting equity gains today.

However, we shouldn't be caught flat-footed. Keep these issues in mind. Understand that the USDJPY has, over the last two years, either led or corroborated U.S. equity moves, but don't count on it to work that well ad infinitum.

Annotated Daily Chart of the USD/yen:

Today's Developments

A calendar in this weekend's newsletter listed today's most important events as earnings from Bear Stearns (BSC) and Lehman (LEH). However, Yahoo's events calendars for each list BSC's for September 20 and LEH's for September 18, and I didn't find earnings reports for either company today.

Government releases included the weekly initial and continuing jobless claims released at 8:30 EST, numbers that would be watched closely because of last week's disastrous jobs number. In fact, some credited the early stock-market gains with the relatively good news from initial claims. Those of us who watch the USDJPY know better, as strong overnight gains in that currency had already set up the possibility of equity gains.

First-time claims rose 4,000 to 319,000 last week. The previous week's claims were revised to a decline of 22,000 to 315,000. The four-week moving average dropped 1,000 to 324,000, which was encouraging to those who want to see any improvement in the jobs outlook after last week's disastrous jobs (non-farm payrolls) report. The four-week moving average of continuing claims, however, rose 9,000 to 2.58 million, prolonging a trend of rising continuing claims. To paraphrase a CNBC guest commentator this morning, employers are not laying off workers, but they're not hiring new ones, either.

Weekly natural gas storage numbers followed at 10:30 EST, these for the week ending September 7. Natural gas supplies built 64 billion cubic feet, a number that inched just above expectations. Most attention in the energy sector focused on crude, however, with Hurricane Humberto having temporarily shut down at least three refineries in Port Arthur, and Ingrid, given her name only today, still to be watched.

The August treasury budget was released at 2:00 EST. Forecasts were for a deficit of $75.0-85.00 billion. I went back and checked that, afraid I had read wrong, because the actual deficit proved to be $117 billion. A year ago, it was $64.7 billion.

Briefing.com had forecast $115.00 billion, a forecast that was perhaps derived from the Congressional Budget Office's identical projection. That was more in line with the actual number, but still far away from many expectations and from the year-ago deficit. The government reported that a calendar quirk had been responsible for a record $283.5 billion outlay. The Labor Day holiday was responsible for the quirk, as it pushed Social Security and some other payments typically made in September into August. Receipts gained 8 percent to $166.5 billion. For the fiscal year to date, the budget deficit is about $30 billion less than at the same time last year.

Company-related news included announcements by McDonald's (MCD) and Microsoft (MSFT) that they would raise dividend payments. Target (TGT) said it was mulling over selling its credit-card receivables, totaling $7 billion. Citigroup upgraded GM to a buy rating and gave it a $41 price target. The upgrade appeared to be prompted, at least in part, by improvement in UAW discussions. Alcatel-Lucent (ALU) lowered revenue guidance. A judge removed the import ban imposed on Qualcomm (QCOM) phones that was imposed as QCOM and Broadcom (BRCM) engage in a legal battle.

Another development that might prove interesting related to Former Fed head Alan Greenspan. He was interviewed for "60 Minutes," with the interview to be aired this Sunday. Snippets of the interview were released today. The statements were characterized as Greenspan's defense of his policies and his insistence that neither he nor the FOMC was responsible for the subprime mess, but we'll have to wait and see whether that was just a come-on to get people to watch the program. Whether you're a fan or foe of Greenspan's policies, the program should prove watch worthy.

Tomorrow's Economic and Earnings Releases

Tomorrow's economic slate is full and not just for the U.S. Although the emphasis should remain on our economic releases and events, these days no trader can be complacent about what might be going on in the rest of the globe's economies and bourses.

About 12:30 am, Japan releases two numbers related to its industrial production. Perhaps more importantly, tomorrow, Germany, one of the world's biggest economies, releases August CPI numbers at 2:00 EST. August HICP (Harmonized Index of Consumer Prices) will also be released for the EU, and this is a key inflation measure for the ECB. The ECB's Jean-Claude Trichet affirmed as late as this week that the ECB remains on inflation watch and has not abdicated the possibility of raising rates again.

Any of these could impact trading tomorrow and they all occur before any of our scheduled releases. Those include three releases during the 8:30 time slot: August Retail Sales, expected to rise 0.6 percent; August Import and Export Prices, with the headline increase expected to be 0.3 percent; and the second-quarter's current account. August's Industrial Production follows at 9:15.

September's Consumer Sentiment, once a closely watched economic release and one that might become more important to us in the future, will be released at 10:00. As we try to determine how hard the subprime mess is hitting consumers, this number may assume more importance than it's had recently. Expectations are for this number to sink to 83.0 from its previous 83.4.

July's Business Inventories will also be released at 10:00, followed by the ECRI Weekly Leading Index at 10:30.

What about Tomorrow?

Several intraday charts show that indices need to consistently print gains over key levels tomorrow to continue the bullish momentum.

Annotated 30-Minute Chart of the SPX:

The SPX had slipped just below that 30-minute 9-ema at the close. The 15-minute chart pointed out more information about resistance.

Annotated 15-Minute Chart of the SPX:

Nothing in this chart precludes a retest of upper channel resistance, but nothing promises it, either. The SPX hit the 45-ema in the last few minutes of trading, then bounced back, but resistance looks as if it's firming up above the SPX. This chart suggests that it will need a concerted push higher to get through that resistance if it does retest it.

Annotated 30-Minute Chart of the Nasdaq:

Black-channel resistance doesn't look as strong here as it did on the SPX's 15-minute chart. A retest of that black-channel resistance can't be ruled out, but neither can a retest of the 120-ema (aqua). Since Tuesday, the Nasdaq has bounced from the 45-ema (pink), so bulls want to see that moving-average support maintained on 30-minute closes to maintain the current bounce.

Annotated 30-Minute Chart of the RUT:

The picture these charts and the daily ones present is that prices need to gain quickly and maintain gains tomorrow to avert the fear of repeating the early September downturn when similar moving averages or resistance levels (either on price or RSI) were last being tested.
 

New Plays

Most Recent Plays

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New Plays
Long Plays
Short Plays
None None

New Long Plays

None today.
 

New Short Plays

None today.
 

Play Updates

Updates On Latest Picks

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Long Play Updates

Boyd Gaming - BYD - cls: 41.45 chg: -0.18 stop: 39.49

BYD ignored the market's strength today. The stock is still struggling with resistance at the $42.00 level. If the major averages see any sort of consolidation then odds are good that BYD will retest the bottom of its trading range near $40.00. We would not suggest new positions at this time. Our target is the $44.90-46.00 range. Keep a wary eye on the simple 50-dma for potential overhead resistance. The Point & Figure chart is still very bearish following the late summer sell-off.

Picked on September 04 at $41.55
Change since picked: - 0.10
Earnings Date 10/25/07 (unconfirmed)
Average Daily Volume: 1.0 million

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Global Ind. - GLBL - cls: 24.64 chg: -0.51 stop: 22.89

The OSX oil services index has been stuck under resistance near the 285 level for the last two weeks. Seeing crude oil rise to new all-time highs over $80 a barrel has not been enough of a catalyst to spark a breakout in the services sector. While GLBL has been out performing some of its peers the stock hit some profit taking today with a 2% decline. Our target is the $28.00-29.00 range.

Picked on September 06 at $24.65
Change since picked: - 0.01
Earnings Date 10/30/07 (unconfirmed)
Average Daily Volume: 2.5 million

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Starbucks - SBUX - cls: 27.48 chg: +0.15 stop: 26.74 *new*

SBUX continues to bounce around its trading range but it did come within 20 cents of our target. Speaking of our target we need to adjust it. The 100-dma looks like technical resistance and it has fallen to $27.85. We are adjusting our target to $27.75-28.00. We're also inching up our stop loss to $26.74.

Picked on August 16 at $26.61
Change since picked: + 0.87
Earnings Date 11/15/07 (unconfirmed)
Average Daily Volume: 17.0 million

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Wyndham Worldwide - WYN - cls: 30.05 change: +0.14 stop: 29.90

There is no change from our previous comments on WYN. If shares of WYN don't start to perk up soon we might drop it as a bullish candidate. It has been our plan to buy a breakout over $32.00 with a trigger at $32.15. So far that hasn't happened yet. Aggressive traders might want to consider buying a bounce from $30.00. We would keep an eye on the $29.70. A breakdown under $29.70 could be used as an entry point for bearish positions.

Picked on September xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 11/01/07 (unconfirmed)
Average Daily Volume: 1.5 million
 

Short Play Updates

Cintas - CTAS - cls: 36.05 change: -0.09 stop: 37.01

CTAS tried to rally again but it failed near $36.50. By the closing bell CTAS had produced a bearish engulfing (reversal) candlestick pattern. The low today was $35.90. Yesterday we suggested that readers wait for a new decline under $35.90 or lower as a potential entry point for new shorts. More conservative traders still in the play might want to tighten their stops toward the $36.50 region. Our target is the $33.50-33.00 range.

Picked on September 09 at $35.65
Change since picked: + 0.40
Earnings Date 09/20/07 (unconfirmed)
Average Daily Volume: 1.1 million

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Fastenal Co. - FAST - cls: 42.97 change: -0.09 stop: 46.01

FAST was immune to the market's strength today. The stock continues to trade sideways and under short-term resistance near $44.00 and its 100-dma. More conservative traders may want to think about tightening their stops. We are targeting a decline into the $40.25-40.00 range. The $40.00 level and its rising 200-dma near $40 should be support. FYI: The P&F chart is still bullish, for now. FYI: The latest (August) data puts short interest at 9% of the 105.8 million-share float. That is an above average amount of short interest, which raises the risk level on this play.

Picked on September 09 at $43.48
Change since picked: - 0.42
Earnings Date 10/11/07 (unconfirmed)
Average Daily Volume: 1.6 million

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Jackson Hewitt - JTX - cls: 26.15 chg: +0.05 stop: 28.05

Be careful. This could be a bear trap! JTX broke down under very significant support at the $26.00 level and traded under this level for the first half of the day. Surprisingly the stock managed to bounce back late this afternoon. The move looks like a short-term bullish reversal pattern called a "hammer" candlestick. At the same time the move under $26.00 produced a new quadruple (actually a quintuple) bottom breakdown sell signal with a $21 target on its Point & Figure chart. We would look for a new decline under $26.00 or a failed rally under $26.50 as a new entry point for shorts. More conservative traders may want to use a tighter stop loss. Our target is the $22.50-22.00 range. FYI: The latest data puts short interest at more than 12% of the 30 million share float. That's a relatively high degree of short interest and does raise the risk of a short squeeze.

Picked on September 13 at $25.85 <-- see TRIGGER
Change since picked: + 0.30
Earnings Date 09/06/07 (confirmed)
Average Daily Volume: 391 thousand

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Monster Worldwide - MNST - cls: 33.04 chg: +0.07 stop: 35.05

There is no change from our previous comments on MNST. MNST is still meandering sideways. If the stock bounces watch for resistance in the $34-35 region. A new decline under $32.50 could be used as another entry point. Our first target is the $30.25-30.00 range.

Picked on September 09 at $33.50
Change since picked: - 0.47
Earnings Date 12/26/07 (unconfirmed)
Average Daily Volume: 2.6 million

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Network Appl. - NTAP - cls: 27.29 change: +0.25 stop: 28.85

The NASDAQ composite and many of the tech sectors represented in that index under performed the market today. Shares of NTAP managed to out do its peers in the networking sector but the stock remains under resistance near $28.00 and its 50-dma. This could be a new entry point for shorts or readers can wait for a new decline under $26.75. We have two targets. Our first target is the $25.15-25.00 range. Our second target is the $24.00-23.50 zone.

Picked on September 09 at $27.12
Change since picked: + 0.17
Earnings Date 11/15/07 (unconfirmed)
Average Daily Volume: 11.1 million
 

Closed Long Plays

Cameco Corp. - CCJ - cls: 44.00 chg: +1.21 stop: 37.95

Target achieved. CCJ continued to rally and pushed through technical resistance at its 200-dma to close up 2.8%. Shares hit an intraday high of $44.69. Our target was the $44.50-45.00 range. The $45 level looks like resistance so look for some consolidation here. We remain bullish on CCJ and would keep an eye on it for another entry point down the road.

Picked on August 27 at $40.26
Change since picked: + 3.74
Earnings Date 10/30/07 (unconfirmed)
Average Daily Volume: 3.6 million
 

Closed Short Plays

None
 

Today's Newsletter Notes: Market Wrap by Linda Piazza and all other plays and content by the Option Investor staff.

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