What a difference a week makes! Last Tuesday the Fed announced a 50-point rate cut and the Dow surged +335 points. Today, a week later the Dow is 80 points below the high set on that post Fed surge. Volatility has died with the VIX 10 points below last week's high and volume is shrinking again. In a post rate cut world the markets are supposed to rally, right? Somebody needs to tell the bulls to start putting more money to work or all this negative economic news is going to bring the bears back from hibernation.
Dow Chart - Daily
The economic reports made headlines but the bad news was not as bad as expected. The weekly chain store sales snapshot showed another 1% drop in sales after a 1.1% drop the prior week. This was the largest two-week decline since 2004 and pushed the index to its lowest level for the year. Analysts said warmer than normal weather and higher gasoline prices were the primary cause of the slowing sales. Gasoline prices averaged $2.86 nationwide last week and that was 43 cents higher than the same period in 2006. The failure of oil to follow the normal seasonal cycle this fall is putting additional pressure on budgets.
Consumer confidence fell to 99.8 in September from 105.6 in August. This drop put the index at its lowest level since November 2005. The present conditions component fell sharply to 121.7 from 130.1 and the expectations component fell to 85.2 from 89.2. The jobs component fell -2 points to 25.7 due to the disaster in the August jobs report.
Existing home sales fell to 5.50 million from 5.75M. This was slightly better than an expected drop to 5.45M. For comparison sales hit 7.35 million units in June 2005 or nearly 2 million units more than today. Sales were down -4.3% in August and September is expected to be even worse. Condo sales were falling even faster at -8%. Home sales in the South fell -13% and Midwest -11%. The time on market for an average home grew to 10 months. Overall the median home price was flat although in many sectors prices were down from 5% to as much as 9%. The stable areas of the country are offsetting the drastically negative regions. With tougher loan requirements hindering those actually trying to buy a home this sales pattern is going to get worse before it gets better.
On the bright side the Richmond Fed Manufacturing Survey doubled its August reading of +7 with a spike to +14. This was an acceleration of the rebound, which started back in June. Shipments spiked +12 points to 22 and new orders jumped from 5 to 14. Hopefully this good news will translate into an improved ISM when it is announced on Monday. The only negatives were a -3 point drop in backorders and a -8 point drop in the six-month outlook from 25 to 17.
There are no material economic reports remaining for the week. The only items of interest are Durable Goods on Wednesday, the last look at Q2 GDP, Kansas Fed Survey and more disappointing New Home Sales on Thursday. The Chicago PMI on Friday will be the only key report for the rest of the week.
In stock news Vonage (VG) was given what some analysts were calling a death sentence. A court found Vonage guilty of violating six patents held by Sprint and fined them $69.5 million. The court also said they must pay Sprint 5% of future sales. Vonage said they would appeal. This was the second ruling against Vonage. The first was a ruling they had violated three patents belonging to Verizon. The jury in that case awarded $58 million in damages and a 5.5% royalty on future sales. Vonage says they will develop a workaround to avoid using the infringed patents but that could take a long time and seriously degrade their ability to sell their products with this cloud over their head. At today's close Vonage had a market cap of just over $100 million. Sprint should just agree to take them over in lieu of the fine and end their misery. Vonage went public at $14 in May-2006 and has never traded over its opening day spike.
Vonage Chart - Daily
Lowe's Companies (LOW), a major home building materials supplier, warned that same store sales could be well below the prior forecast and flat in 2008. They cut their full year profit forecast due to the prolonged decline in the housing sector. This should not have been a surprise but traders knocked the stock for a -6% loss on the news. Lowe's said it was scaling back on the number of new stores it would open to between 135-145 compared to the 155 pace for last year. Lowe's said consumers were putting off purchases of big-ticket projects such as kitchen renovations. Lowe's said sales would be off -3% or so compared to the projections by Home Depot for a -8% drop this year. LOW, HD and the entire sector closed sharply lower for the day.
Target did not help the retail outlook when it issued a warning of its own today. Target (TGT) said same store sales would slump to only a minor gain of +1.5% to 2.5% from their prior forecast of 4% to 6% growth. Target cited slowing shopper traffic as the cause for slowing sales. With Wal-Mart already vowing to cut prices even further than it did for the last holiday season the rest of the retailers are going to find it tough to make a profit in Q4. The various trucking companies have already said there is no buildup of traffic from retailers ordering holiday inventory. Analysts are expecting this to be the worst holiday shopping season in over five years. Target lost -2.50 on the news.
The American Trucking Association seasonally adjusted tonnage index fell -0.8% in August pushing the index to 2.2% lower over the same period in 2006. This is evidence that the actual volume of packages being shipped ahead of the holiday season is not just flat but is dropping as a result of lower volume in holiday orders.
Lennar Homes (LEN) posted its worst quarter ever with a loss of $513.9 million. Lennar said it had cut its workforce by 35% and expects to make further cuts soon. That was the worst quarterly performance in Lennar's 53-year history. The actual loss was $3.25 per share with a charge of $3.33 per share for write-downs on land and inventory markdowns. With competing builders slashing prices 15% to 25% all the major builders are going to end up marking down their unsold inventory. Lennar's construction starts were down -62% year-over-year. The average sales price of a Lennar home fell to $296,000 from $316,000. New home deliveries fell to 7,266 in Q3 from 12,337 in Q3-2006. Cancellation rates were 32% due mostly to mortgage problems either with the new home or problems selling the buyer's existing home. None of this should be news to traders but the sector tanked again as the news broke. Deutsche Bank issued a buy on Toll Brothers (TOL) and Centex Homes (CTX) saying they were well positioned to ride out the storm. The same analyst maintained a sell rating on the other builders in the sector.
Whirlpool (WHR) dropped -4.47 on the warnings from Lowe's, Target and Lennar earnings. News that consumers were backing away from big-ticket items sent traders fleeing from the appliance maker. Sears Holding (SHLD) finally broke support at $130 with a -4.56 drop as the bloom finally shriveled on the Eddie Lampert turnaround story.
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Europe's second largest oil company, BP, was knocked for a -$2 loss today after the CEO warned of a "dreadful quarter." The CEO said he was going to shake-up the company structure after its worst performance in 15 years. Reportedly there will be some serious cost cutting including layoffs. Later in the day BP tried to correct the statements in the press saying the CEO was talking about "operating performance" not earnings. BP has been hit with a large number of refinery outages and delayed projects. The oil pipeline spill in Alaska also contributed to the rising expenses and lower profits and the ouster of John Browne as CEO on May 1st.
The news from BP and the lack of storms in the Gulf led the price of oil lower to close back under $80 at $79.45 for a loss of -1.50. I checked the hurricane spotter page as I was typing this and Tropical Storm Karen is still tracking northward and well away from Florida. Tropical depression 13 formed into a recognizable disturbance off the coast of Mexico this afternoon and could be upgraded to a storm and given a name by morning. The current storm track is north to the Texas coast. Current wind speeds are only 30-45 mph but that could change if it moves further away from land during its formation stage. Several of these localized storms have failed to develop this year but we did see one hit refinery row high on the Texas coast a couple weeks ago. You can't count them out just because they formed overnight close to shore. Oil traders don't appear to be worried as oil futures are trading flat overnight.
NRG Energy (NRG) announced plans to apply for permits to build two nuclear power plants in Bay City Texas, about 90 miles from Houston. The $6 billion plants would not begin construction until 2010 and would not be online until after 2015. This is the first application for a nuclear plant in the U.S. since the Three Mile Island accident in 1979 soured the public on nuclear power. This is the first of 29 applications expected over the next 18 months as regional power companies move away from fossil fuel to generate electricity. While coal remains cheap the long-term forecast is for stricter emissions control and that could be very expensive over the life of the plant. The cost to generate a KWH of electricity is 1.72 cents for nuclear plants, 2.37 cents for coal, 6.75 cents for gas and 9.63 cents for oil. The problem facing nuclear plants is the availability of uranium. Currently demand is greater than supply and expected to remain that way until new mines come online in 2012-2015. The shortage today is being made up by down blending plutonium from decommissioned Russian nuclear weapons. Those supplies are expected to be exhausted two years from now. The future is bright for uranium producers and companies in the plant construction and maintenance cycle. Some symbols include CCJ, ABB, MDR, GE, TOSBF and BHP.
The U.S. dollar sank to another 15 year low today at 78.21 and came within 3 cents of an all time low. The current low was set in 1992 at $78.19 and it is a pretty good bet that low will be broken this week. With the threat of another Fed rate cut and the potential for a slowing economy the dollar could get a lot cheaper before 2008. This is pushing up the price of commodities, metals, oil, gold, etc, and will add to the risk of inflation.
Chart of U.S. Dollar Index
S&P announced several additions to the S&P-500 effective at the close today. The Intercontinental Exchange (ICE) will replace First Data (FDC). Tesoro (TSO) will replace Maxim Integrated Products (MXIM). Maxim is scheduled to be delisted from the Nasdaq this week. Teradata will be added to the S&P on Friday after its spin off from NCR is complete. NCR will replace Beazer Homes (BZH) on the S&P Midcap 400. Expedia (EXPE) will replace Solectron (SLR) in the S&P-500 on Oct-1st. SLR is being acquired by Flextronics (FLEX). OptionsXpress (OXPS) will be added to the S&P Smallcap 600 after the close on Friday replacing RARE Hospitality (RARE), which is being acquired by Darden (DRI). I hoped you paid attention; there will be a test on these changes later this week.
Microsoft added another 50 cents on a choppy trading session as sales of Halo 3 continue to be strong. However, it was reported this afternoon that the packaging on the extra cost "special edition" version had scratched the disks. Evidently the disks came lose during transport and were scratched by their hard metal surroundings. Microsoft was quick to put in place a disk swap program where users could send in any damaged disks and get new ones in return. Microsoft expects for the Xbox division to eventually turn a profit and the broad acceptance of the Halo 3 game is a vital part of that effort.
GM is making no progress on its strike and there was news of further plant closings outside the U.S. as parts ran out. Roughly 80,000 workers are on strike and there are fears that a prolonged strike could make the economy even worse. GM is already losing more than $100 million per day in lost production but they do have an 87-day backlog of inventory. Letting the strike run and selling down their inventory would not be that bad for GM as long as it was resolved in two weeks or so. After two weeks the costs and restart problems will begin to mount. GM has $32 billion in cash and investments on hand so burning off a few bucks to get a batter contract and reduce inventory is not a bad deal. The acquisition of auto parts maker Dana Corp (DCNAQ) could be in jeopardy because of the strike according to a letter delivered to the CEO on Friday. Apparently there was a clause in the contract saying a strike by any major carmaker could invalidate the deal.
It was a choppy market today with all the retail news but tech leaders were still leading. Apple (AAPL), Research in Motion (RIMM), Garmin (GRMN), Expedia (EXPE) and BIDU all made new highs and helped power the Nasdaq to a +15 point gain. Tech stocks are still in favor with investors eager to add risk to their portfolios in a rate cut environment. No subprime worries there and tech innovations are still flowing. Nvidia (NVDA) appears about to breakout of a resistance top at $36 after announcing a new GPU chip for Intel motherboards to produce high quality graphics beyond what they currently deliver. I am an avid Nvidia fan, I bought a new 4-monitor Nvidia card this week, and a stanch opponent of their competitor ATI. I am recommending a buy on Nvidia over $36.
The Nasdaq has held the high ground from last week's post Fed short covering bounce. It appears the Nasdaq is about to break out of its weeklong consolidation just under 2690 and rocket higher to test the five-year high at 2722. The QQQQs already made the break to a new high today and that appears to be a sign of another move higher on the Nasdaq composite index about to begin. QQQQ support at $50 should provide a launch pad on any interim pullback.
The Dow continues to lag techs but is still holding in its post Fed consolidation range. We need to see the Dow move over 13875 to trigger additional short covering and give us a chance of a retest of the highs at 14022. WMT, MCD, CAT, HD and GM were the drags on the Dow today.
The S&P mirrors the Dow with a series of slightly lower lows over the last week but still holding within 20 points of its post Fed spike high. The S&P was hampered by the retail, homebuilding and energy components today and still managed to close only fractionally down by -0.52 points. Uptrend support is around 1500 and overhead resistance at 1540. That gives the S&P a 40-point range and the close today at 1518 was right in the middle of that range.
The Russell 2000 remains the weaker index with another -3 point decline today to
804. This is below the 200-day average at 807 and only marginally above what
should now be support at 800. As I have said before a breakdown below 800 would
be very bearish and signify a move by funds away from small caps. That would be
a bearish turn of events ahead of October. There is one qualification on that
decline. With Friday the quarter end we could be seeing fund adjustments ahead
of those quarterly
statements. That is also a good reason we are seeing the tech
leaders spring higher. Everybody wants to show those leaders in their portfolios
in their October statements. Once the quarter ends I would look for volatility
to increase and a swap out of those leaders to capture profits and potentially a
move into the small caps for a longer-term position. "That is my outlook for
today and I am sticking to it at least until the market opens tomorrow," he said
New Long Plays
NVIDIA - NVDA - close: 35.82 change: +0.45 stop: 33.75
Why We Like It:
Picked on September xx at $xx.xx <-- see TRIGGER
New Short Plays
Long Play Updates
Boyd Gaming - BYD - cls: 43.93 chg: +0.36 stop: 41.55 *new*
All we needed was another ten cents. Shares of BYD rallied intraday but topped out at $44.80. Our target is the $44.90-46.00 range. The trend is still bullish but we're not suggesting new positions. Please note that we're adjusting the stop loss to breakeven at $41.55.
Picked on September 04 at $41.55
Coach Inc. - COH - cls: 46.96 change: -0.71 stop: 45.99*new*
Tuesday was a bearish day for retailers. The RLX index lost 2.6%. Evidently the Target news we mentioned about them cutting their September sales forecast came out last night after the closing bell. Today's retailer weakness was the reaction to TGT's news. Shares of COH gapped open lower under what should have been support near $47.00 and its 10 and 200-dma. Traders did buy the dip near $46.00 and its 50-dma but this looks pretty ugly. We are raising our stop loss to $45.99. At this point we would wait for a new rally past $47.50 before considering new bullish positions. FYI: On CNBC today COH garnered some positive analyst comments who thought the company would do very well this holiday season in spite of some of the general doom and gloom for a lousy holiday retail season. Our target is the $51.85-52.00 range. More aggressive traders could aim for the April highs near $54.00. The P&F chart points to a $63 target. We do not want to hold over the late October earnings report.
Picked on September 19 at $48.70 *gap higher
Cisco Systems - CSCO - cls: 32.44 change: +0.56 stop: 30.90
CSCO displayed relative strength with a 1.7% gain and a bullish engulfing candlestick. CSCO's leadership is encouraging. We're waiting for a breakout to a new relative high. We want to capture that breakout and we're suggesting a trigger to buy the stock at $32.65. If triggered our target is the $34.75-35.00 range.
Picked on September xx at $xx.xx <-- see TRIGGER
Global Ind. - GLBL - cls: 25.82 chg: +0.60 stop: 23.99
GLBL displayed some relative strength with a 2.3% rally. Shares continue to slowly march higher. We're not suggesting new positions at this time. More conservative traders might be tempted to raise their stops toward the 50-dma near $24.50. Our target is the $28.00-29.00 range.
Picked on September 06 at $24.65
Liberty Global - LBTYA - cls: 42.18 change: -0.02 stop: 39.99
Shares of LBTYA still aren't moving. The stock is consolidating sideways in the $42-43 range. A rally from here, near $42, could be used as a new bullish entry point but if the market and LBTYA see any weakness we would watch for a bounce near its 10-dma (41.78) or the $41.50 area as a new entry point as well. Our short-term target is the $44.85-45.00 range. More aggressive traders may want to aim higher.
Picked on September 23 at $42.33
NET Services - NETC - cls: 15.76 change: +0.43 stop: 13.90
Traders bought the dip and NETC rose 2.8% while producing a bullish engulfing candlestick pattern. We do have to note that the rally stalled at NETC's 100-dma but given today's strength we would expect a breakout soon. Our target is the $17.75-18.00 range. The P&F chart is bullish with a $21 target. FYI: We can't find a third quarter earnings date yet but the company has a history of reporting in late October or early November. We don't want to hold over the earnings report.
Picked on September 24 at $15.60
Westwood One - WON - cls: 3.07 chg: +0.09 stop: 2.24
Did we miss the play with WON? The stock hit our target this morning with a spike to $3.30 yet we're still sitting on the sidelines waiting for an entry point. Fueling the move today was an analyst upgrade and talk that the company might be a takeover candidate with their stock at these levels. While we are encouraged by the stock's strength we don't want to chase it. Currently our plan suggests that readers wait for a pull back into the $2.60-2.50 zone to buy the stock. At this time we would change that. Wait for WON to dip into that zone and then rally back out of it again as our signal to go long the stock. If triggered we're going to target a rebound into the $3.25-3.50 range.
Picked on September xx at $xx.xx <-- see TRIGGER
Wyndham Worldwide - WYN - cls: 30.63 change: -0.69 stop: 29.90
We have been warning readers to expect a dip toward the $31.00-30.50 zone and we got that pull back today. Shares spiked lower at the open before bouncing at $30.36. The bad news is that the intraday bounce failed near $31.00. This sort of bearish action is bad news! We are not suggesting new positions at this time and honestly, after seeing today's intraday moves, more conservative traders might want to exit early to cut their losses. Our target is the $33.90-35.70 range. FYI: The P&F chart is still bearish from the summer sell-off.
Picked on September 19 at $32.15
Zoltek - ZOLT - cls: 41.74 change: -1.32 stop: 39.95
A little bit of profit taking after Monday's big move in ZOLT would be expected but today's 3% decline was a bit steeper than would be expected. Shares did seem to find some support intraday but we would probably wait for a new rise past $42.00 before considering new positions. More conservative traders might want to wait for a rally past $44.00 since that might be short-term overhead resistance. Our target is the $$49.00-50.00 range. The P&F chart is bullish with a $51 target.
Picked on September 24 at $43.06
Short Play Updates
Commscope - CTV - cls: 52.97 change: +1.10 stop: 56.21
An oversold bounce in CTV would be expected but we're concerned over today's action. The move today produced a bullish engulfing candlestick pattern, and given its position on the chart, this looks like a bullish reversal. Readers should be cautious here and may want to tighten their stops to reduce their risk. Broken support near $52.00 should have been resistance. Now we will watch the 50-dma near $54.60 to act as overhead resistance. We are not suggesting new short positions at this time. Our target is the $47.00-45.00 range but we'll be watching for potential support at the rising 200-dma.
Picked on September 24 at $51.75
Media General - MEG - cls: 26.83 change: -0.00 stop: 28.55
There is no change from our previous comments on MEG. The stock traded sideways all day and closed unchanged on the session. MEG looks poised to breakdown to new lows and we want to capture the sell-off. We're suggesting a trigger to short MEG at $26.45. If triggered our target is the $22.50-22.00 range. The Point & Figure chart is very bearish with a $10 target. We do not want to hold over the mid October earnings report. Due to the stock's trend the bears have been piling on top of this stock. Short interest is pretty high at more than 17% of the stock's 20.8 million share float. The combination of high short interest and a small float is a dangerous combination and raises the risk of a short squeeze. A stop loss will not always save us. More conservative traders may want to pass on this play.
Picked on September xx at $xx.xx <-- see TRIGGER
Varian Medical - VAR - cls: 39.09 chg: +0.22 stop: 40.21
VAR is catching a bit of a bounce today. Readers can watch for a new failed rally under $40.00 as another entry point for shorts. Our target is the $35.50-35.00 range. The P&F chart is bearish and points to a $31 target. We do not want to hold over the late October earnings report.
Picked on September 23 at $39.28
Closed Long Plays
Gamestop - GME - close: 57.03 chg: +0.86 stop: 49.95
Target achieved. GME suffered some profit taking this morning but investors bought the dip. Shares just posted their sixth gain and sixth new high in a row. Eventually this momentum is going to run out of steam. At this point we'd be looking for the $60 level to offer some round-number, psychological resistance. The intraday high was $57.17. Our target was the $57.00-60.00 range.
Picked on September 17 at $52.10
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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