Weak housing data was credited with pushing the market lower today but I doubt weak housing numbers actually surprised anyone. The pause today was more likely profit taking from Monday's short squeeze ahead of Friday's employment report. The major indexes may have been mixed with only fractional gains or losses but as I will explain later the real key to market sentiment was extremely bullish.
Dow Chart - Daily
Nasdaq Chart - 30 min
Pending home sales fell -6.5% in September as shown by the drop in the Pending Home Sales Index (PHSI) to 85.5. This was the lowest level since the index was created. The index fell -21.5% over September 2006, also the largest decline ever. The index is now -33.3% off its August 2005 peak. Existing home sales fell -23.7% from their Sept-2005 peak and -12.8% below Sept-2006. Since the September numbers are just the leading edge of the fallout in closings related to the August mortgage crash we are sure to see even lower sales numbers in the months ahead. The National Association of Realtors reported that more than 10% of closings were cancelled due to rescinded loan commitments and even more sales never got to that stage because buyers could not get an initial approval so they could move forward in the contract process. Estimates of existing home sales in September are for a -7% decline to 5.1 million units on an annualized basis. This decline is expected to bottom in Q4 at something under the 5 million rate for home sales.
Tomorrow's reports include the ISM Non-Mfg and the Challenger Employment report. Neither is expected to be market movers. The big report for the week is the Non-Farm Payrolls on Friday. Estimates are still holding for a gain of +115,000 as though last months -4000 loss never happened. Nearly everybody will be surprised with Friday's number since the unofficial whisper numbers are all over the map from -10,000 to +135,000 jobs. The potential today is for a positive surprise from an August revision. If they do revise sharply higher it would relieve a lot of recession talk in the markets. Assuming the September number is positive it would signal an all clear for the bulls to rally into year-end. It would also remove a lot of incentive for the Fed to cut rates again. I think the market would be fine with that if it thought the economy was not about to fall into a recession.
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The buyout of Sallie Mae (SLM) by private equity firm J.C. Flowers appears to be on life support. Flowers had agreed to pay $60 per share ($25 billion) back in April. Flowers sent SLM a revised offer saying a "material adverse change" or MAC had occurred due to changes in the credit markets and some legislation cutting subsidies to student lenders. The new offer is for $50 a share and some warrants that Flowers said could be worth $10. Analysts claim the warrants are more likely to be worth $1 instead. Sallie Mae said no thanks and told Flower to either follow through with the $60 offer or pay the $900 million breakup fee. SLM was up slightly to $50 on thoughts that either this deal or another deal would get done somewhere over the $50 price range. SLM had fallen off from the $58 high after the original announcement due to the credit crunch and expectations that the deal would not get done.
Garmin (GRMN) shareholders are in shock with the -$23 drop over the last two days. The challenge to the leader in navigation equipment came from Nokia's $8.1 billion ($78 per share) cash bid for Navteq (NVT). Nokia plans to integrate the GPS mapping technology into its phones and that suggests to the market for standalone GPS devices will shrink. Nokia paid more than 50 times earnings for NVT. Nokia actually acted in self-defense because an acquisition of NVT by Google, Microsoft or even Garmin could have taken Nokia out of the map market. Nokia currently uses NVT technology to power its GPS aware phones. Had someone else acquired NVT they could have decided not to renew Nokia's current license and kick them out of the mapping business. Nokia currently provides the mapping service, called Smart2Go, on its GPS phones for $13 a month. That is a strong and growing revenue stream and they did not want to give that up. Only 11% of the more than one billion cell phones sold last year had GPS capability. That number is expected to climb to 33% by 2011. The revenue stream can be expanded by selling advertising to local firms for consumer searches. If you are in an unfamiliar area and want Chinese food you check the list on your phone map. Restaurants that pay a fee to Nokia will appear on your list. Since GPS aware phones are always online Nokia can start implementing better real time traffic updates and weather services including alerts. Competitor TomTom is also on the move and will likely begin to insert cellular chips into other devices making them Internet capable. Analysts say this puts TomTom on a faster growth path that Garmin according to an analyst at Sanford Bernstein. Another problem Garmin faces is it's current license of NVT data to power its maps. Garmin is either going to have to make a higher bid for NVT, develop the database itself or worst case become a Nokia customer at a much higher cost. None of these are pleasant possibilities for Garmin. That suggests Garmin's days of high flying stock prices may be numbered without some news of a solution from Garmin. The play here would be to short Garmin and go long Navteq on thoughts that somebody will make a higher bid for NVT and it could be Garmin. Nokia's market cap is $146B and Garmin's only $21B. Hardly a fair fight but it could be a fight for survival for Garmin. Never bet against a smaller opponent who has been backed into a corner. Common sense tends to evaporate when a fight is the only alternative.
Navteq Chart - 30 min
Garmin Chart - Daily
Baidu.com Chart - 60 min
On the opposite side of the ledger Chinese search firm Baidu.com (BIDU) spiked +$36 to $320 after a JP Morgan analyst said BIDU was on the right track and could add another 100 million users over the next few years. He said BIDU could hit $400 by the end of 2008. From the +36 gain today it appears it could reach it by the end of 2007. I almost bought options on BIDU on Monday after 4 days of declines to just above $280. Unfortunately I never made any money with ALMOST trades. It only counts when you actually pull the trigger.
Gold dropped $17 on positive economics and a sharp rebound in the US dollar. That $755 level was too good to last for the gold bugs and today's close at 738 is recent support but a strong employment report on Friday could push it back to $715 on easing recession fears.
Morgan Stanley (MS) said it was cutting 600 jobs and shrinking its mortgage unit as the impact of the subprime crisis continues to be felt. MS missed estimates when it reported earnings and was forced to take nearly a $1 billion write down or corporate loans on its books.
Homebuilders are trading like the subprime problem is over thanks to the Citigroup attempt to again pick a bottom in the sector on Monday. Citigroup analyst Stephen Kim said the worst might be over and he saw little risk from here in the big cap builders. He cited the tendency for the builders to rally well before the fear subsided in past housing cycles. He upgraded Centex (CTX), D.R. Horton (DHI) and Ryland (RYL) to buy from hold. He raised his price target on Lennar (LEN) but cut his targets on Beazer (BZH), DHI, KBH, TOL and others. RYL, KBH, TOL and LEN all gained around a $1.50 on the continued bullishness today. Home supply stores did not benefit due to weakening consumer buying. In Florida for instance consumer sales fell -3.2% for the month as the drop in home prices, the inability to get loans and high gas prices kept shoppers at home.
Homebuilder SPDR Chart - Daily
Greenspan, speaking in London, said the long period of low prices and stable growth was coming to an end and central banks today will have to pay more attention to inflation pressures. He also said, "We are beginning to see this extraordinary period of disinflation and economic growth come to a halt and we have to be very sensitive to the fact inflationary pressures could well get out of hand." He also said Bernanke had a tougher task ahead than Greenspan had when he was Fed chairman. It is amazing what a book tour has done for Greenspan. You can actually understand what he is saying and he is in front of a microphone every day. In the CNBC interview two weeks ago he admitted he intentionally made up Greenspeak to confound the members of the house and senate committees whenever he gave testimony. He said he knew he was going to be asked questions he did not want to answer and so he made up the complicated and hard to understand Greenspeak so they would not understand his answers and continue to question him on the same subject. They did not want to look like fools for not understanding and would move on to other topics. Sounds to me like lying to congress and I thought that was illegal. However, I guess it is not a lie if you don't really answer the question with a false answer. I am sure Bernanke and probably quite a few other government officials wish Greenspan would simply ride off into the sunset never to be heard from again. But, fame is a funny thing even for a self confessed introvert. You get used to the spotlight and now that he is selling books he wants to grab all the attention he can before the current crisis fades.
Oil prices fell to $78.90 today on falling crude demand and a revised hurricane forecast. Hurricane forecasters revised their estimates to only 4 major storms this year now that the season is past its peak. All the recent storms have failed to venture towards the Gulf and are dissipating before nearing land. The season has been a flop in terms of a having a dangerous storm make landfall in the U.S. or blow through the oil patch. September 10th is the historic peak in the season although storms can still appear through November. The short covering bounce into the close was caused by a weather forecast suggesting a low-pressure area was forming 100-miles off the coast of Florida and cyclonic activity was possible. Traders short for the last three days were also covering before the inventory report tomorrow morning.
November Crude Chart - Daily
Russell 2000 Chart
The Dow closed down -40, Nasdaq +6 and the S&P flat but it was a bullish day for me. I say this because the Russell 2000 was up strong for the second straight day with nearly a +1% gain. You know I believe the Russell is the best indicator of fund manager sentiment and it appears they are buying again. The Russell is up +27 points for the week or +3.3% compared to only a 1.5%-1.9% gain for the other indexes. It appears the influx of quarter end retirement cash is being put to work in the small caps and that suggests fund managers are no longer afraid of another dip in October. This is a bullish signal and the bounce has put the Russell within 25 points of its July high at 856. If the Russell continues to outpace the rest of the indexes and we get good news on Friday we could see a breakout over that high and that would trigger a serious upward move in the broader market. The keyword in that sentence was of course "if."
The Dow rallied +190 on Monday and gave back -40 today. I would love to repeat that trend every two days for the rest of the year. The 14000 level was never in danger of being broken today and while the volume was light the buyers were waiting for every dip. Even Greenspan's inflation warning failed to cause any damage. It is possible we may still see some weakness ahead of the jobs report but it appears the tide has turned and the expectations for a better than expected report are providing support.
The Nasdaq rallied quickly from its intraday dip and managed to post a +6 point gain to a new high. Today it was the broader Nasdaq composite leading the way with the NDX or Nasdaq-100 closing down fractionally lower. The big cap techs rested with only Apple moving higher. RIMM, EBAY, DELL and MSFT all closed slightly lower. RIMM was weak on the PALM earnings and profit taking before it's own earnings on Thursday. The Nasdaq should find uptrend support at 2720 and we are in breakout mode as long as nothing appears in the form of a news event to trip the bulls.
Earnings officially begin next week but the calendar does not get really crowded
until the week after that. Earnings warnings are running 2.8 to 1 over positive
guidance and that is the worst quarterly ratio we have seen in several years.
The subprime quarter as they are calling it saw broad dislocations of trends in
almost every sector except tech. Banking, insurance, brokers, builders, retail,
etc, all saw events that impacted earnings. According to Thomson Financial
S&P 500 earnings have fallen to only +2% growth and the lowest
quarterly growth in years but still growth. Citigroup said today that they felt
the earnings markdown was over done and we should expect upside surprises. Their
number for the S&P was +3.2% growth with upside potential. This is very bullish
news for stocks and a series of positive surprises early in the earnings cycle
could have a very positive impact on the markets. All the bad new is apparently
priced in and the
news is improving. Usually when things are looking up so
favorably we will stumble over an event that nobody saw coming. The only thing I
could imagine today would be a major sell off in the Chinese market when it
reopens next week. If there is serious profit taking ahead of the National
Congress convening in mid October that could ripple around the globe but it
should only be temporary unless the Congress takes drastic action to cool the
market. The Non-Farm payrolls should not be
a problem unless we lost jobs in
September and there is no upward revision to August. Get ready for earnings and
start targeting those cheap October options ahead of their reports.
New Long Plays
New Short Plays
Long Play Updates
Boyd Gaming - BYD - cls: 44.08 chg: +0.58 stop: 41.55
BYD continues to rebound and is nearing resistance in the $44.50-44.60 zone. More conservative traders may want to do some profit taking right here. Our target is the $44.90-46.00 range.
Picked on September 04 at $41.55
Coach Inc. - COH - cls: 47.20 change: +0.13 stop: 45.99
We remain defensive on COH. Many of the technical indicators have turned or are turning bearish. Wait for a new rise past $48.00 or $48.25 before considering new positions. Considering COH's under performance more conservative traders may want to go ahead and abandon COH right here. 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: 33.01 change: +0.02 stop: 30.90
CSCO is still trading sideways. We would watch for a dip back toward the $32.50-32.00 range as a potential entry point to jump in. FYI: CSCO is due to present at two different investor/analyst conferences this week on October 1st and the 2nd. Our target on CSCO is the $34.75-35.00 range.
Picked on September 26 at $32.65
Global Ind. - GLBL - cls: 26.01 chg: +0.49 stop: 24.65
GLBL probably gave the bulls a scare this morning. Shares dipped intraday under its trendline of higher lows. Fortunately, traders bought the dip at $24.85 and the stock rebounded to close over short-term resistance near $26.00. We're not suggesting new positions at this time. Our target is the $28.00-29.00 range.
Picked on September 06 at $24.65
Intel - INTC - cls: 26.38 change: +0.01 stop: 25.39
We did not have to wait very long for INTC to hit our trigger. The stock traded to $26.58 intraday and our trigger to buy the stock was at $26.55. There was an initial pull back from its highs but traders bought the dip and INTC was rebounding higher into the closing bell. We would consider new positions right here. Our target is the $28.40-28.50 range. We don't have much time and plan to exit ahead of the mid October earnings report.
Picked on October 02 at $26.55
NETC has been very strong the last couple of weeks and the stock found some profit taking today. Shares slipped 3%. We're not suggesting new positions at this time. 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
NVIDIA - NVDA - close: 37.41 change: -0.36 stop: 33.75
Investors bought the morning dip in NVDA and given enough time it looked like shares might have turned positive today. Another positive for NVDA was an upgrade from S&P who raised their outlook on the company from "stable" to "positive". Our target for NVDA is the $39.00-40.00 range. We do not want to hold over the early November earnings report. FYI: The Point & Figure chart is bullish with a $55 target.
Picked on September 26 at $36.15
Sirius Satellite Radio - SIRI- cls: 3.48 change: -0.01 stop: 3.19
Shares of SIRI are just not moving this week. Readers can choose to try and buy a dip near $3.40 or wait for a new rise past $3.55 or $3.60 as a new entry point. This is a high-risk, speculative play. There has been a lot of new talk about the proposed merger between SIRI and XMSR never getting completed. Thus far the recent comments on the merger have not derailed the rally in SIRI but future headlines could send the stock moving sharply lower and thus remains a risk. We are using a wide (aggressive) stop loss and SIRI is facing some resistance near $3.60. Our target is the $3.95-4.00 range.
Picked on September 30 at $ 3.49
TASER Intl. - TASR - cls: 16.97 change: +0.77 stop: 14.99
TASR turned in a strong session, rising 4.75% on above average volume. The catalyst for the move was a press release from TASR this morning. The company said a number of new medical studies "affirmed the general safety of the TASER(r) electronic control device." Our target is the $17.75-18.00 range. The P&F chart is pretty bullish with a $24 target.
Picked on October 01 at $16.20
Westwood One - WON - cls: 2.80 chg: +0.04 stop: 2.24
WON is trying to bounce. More aggressive traders might want to jump in now and just adjust your stop loss. We're going to stick to our plan for now. Our plan is to buy a dip into the $2.60-2.50 range. However, what we want to do is actually buy a rebound back out of this zone. So wait for WON to dip toward $2.50 and then we're suggesting readers buy it on a rebound back above $2.60. We're suggesting a stop under the recent lows but conservative traders might consider a stop under $2.50. 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: 32.10 change: -0.68 stop: 30.89
Hmmm... is the rally in WYN already over? The stock just broke out over resistance two days ago. Shares slipped 2% and traded back toward what should be support near the $32.00 level. A bounce from here could be used as a new entry point. Our target is the $33.90-35.70 range. One concern is potential resistance at the 100-dma and 20-dma that are near the $34.00 level.
Picked on September 19 at $32.15
Zoltek - ZOLT - cls: 44.33 change: -0.76 stop: 39.95
Late this morning ZOLT experienced some sharp profit taking with a plunge to the $43.50 level but traders bought the dip and pared the stock's losses. The afternoon rebound could be used as a new entry point for bullish positions. More conservative traders may want to consider a tighter stop loss. 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: 51.90 change: +0.00 stop: 54.26
The good news is that there was no follow through on CTV's bullish reversal yesterday. The stock closed unchanged on Tuesday. The overall trend still looks bearish but we hesitate to open new positions here. More conservative traders may want to tighten their stops toward $53.50 or $53.00. Our target is the $47.00-45.00 range but we'll be watching for potential support at the rising 200-dma. The P&F chart points to a $43 target.
Picked on September 24 at $51.75
Microchip - MCHP - cls: 36.84 change: -0.08 stop: 37.36
There is no change from our previous comments on MCHP. A rally in the SOX could lift MCHP to breakout over resistance near $37.50. We're going to stick to our plan for now and wait for a breakdown under support near $36.00. At the moment we're suggesting a trigger for shorts in MCHP at $35.79. If triggered at $35.79 our target is the $33.00-32.50 range. We did note that the P&F chart is still bullish and it will take a new decline under $35.00 to reverse that pattern.
Picked on September xx at $xx.xx <-- see TRIGGER
Supervalu - SVU - cls: 36.35 change: -0.27 stop: 40.01
SVU continues to sink following yesterday's breakdown. We would not suggest new positions at this time. More conservative traders may want to place their stop closer to $39.50. We're aiming for $35.25-35.00.
Picked on September 30 at $38.05 *gap down
Closed Long Plays
Closed Short Plays
Insteel Industries - IIIN - cls: 15.53 chg: -0.31 stop: 16.35
We didn't see any news but something caused an intraday spike past resistance at $16.00 around 10:00 a.m. this morning. Shares topped out at $16.36 - just enough to hit our stop loss and close the play. The sharp reversal lower looks like a new entry point for shorts!
Picked on September 30 at $15.35
Today's Newsletter Notes: Market Wrap by Jim Brown and all other plays and content by the Option Investor staff.
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