Crude Oil at the NYMEX broke above the $86/barrel mark today as supply concerns and tensions in the Middle East had NYMEX Crude Oil futures (cl07x) settling up $2.44, or 2.92% at $86.13.
The latest surge in oil prices was fueled with a one-two-punch after the Organization of Petroleum Countries (OPEC) said crude oil production by countries that are not OPEC members is probably falling despite rising demand.
Exacerbating oil's rise for a fifth-straight session was the Turkish government threatening to invade northern Iraq in an attempt to chase rebel fighters from the Kurdistan Workers' Party. The military tensions on the Turkish border are a potential flash point as a major pipeline that links Iraq's northern fields to Turkey is vulnerable to disruptions from bombings.
In a recent report, energy analysts at Lehman Brothers listed an unexpected growth in supplies from Iraq as one potential reason oil prices might fall.
Outside of energy and mining sectors, the Biotechnology Index (BTK.X) 849.83 +0.55% held onto a modest gain.
SShares of Biogen IDEC (NASDAQ:BIIB) $82.51 +18.83% surged as high as $84.75 in early morning trade after the company's board said it had authorized management to explore the sale of the company after drawing interest from potential buyers. Shares of Biogen IDEC churned a hefty 30.7 million shares, roughly 7-times its average daily volume.
Shares of Medtronic (NYSE:MDT) $50.00 -11.23% led the list of decliners for the S&P 500, after it suspended sales of four models of defibrillation leads because of a risk they could break.
Dow component and S&P 100 heavyweight Citigroup (NYSE:C) $46.24 -3.40% traded down $1.63 after the banking behemoth said third-quarter earnings declined to $2.38 billion from $5.51 billion a year earlier. While bottom line results were slightly better than analysts had forecast, the company warned that its third-quarter earnings would decline by 60%.
Citigroup's CFO Gary Crittenden cautioned investors that mortgage delinquencies have accelerated and said consumer credit market conditions "will continue to deteriorate."
I would appear that many market participants were looking for an "all clear, it's over," from Citigroup.
While I (Jeff Bailey) wouldn't read Citigroup's message as anything close to an "it is over," I did note today that the Pacholder High Yield (PHF) $9.20 +0.54% continues to show some sign of firming in my U.S. Market Watch (above). A recent Net Asset Value (NAV) computation from this closed-end "junk bond" fund on 10/11/2007 was $9.89/share, its highest NAV benchmark since 07/19/2007 when the fund reported a $10.01 NAV.
It should be noted that closed-end funds can trade above, or below their actual NAV. A closed-end funds NAV is derived from their actual holdings, which may not necessarily be reflected in the securities market price. On Thursday, 10/11/2007, Pacholder High Yield (PHF) closed at $9.15, a 7.48% discount to its NAV.
On August 16, when PHF's shares fell to a session low of $7.54 and closed $7.73, the fund reported a NAV of $9.33.
I do think we should listen to the world's largest banker's comments, but if PHF is any indication of the higher risk junk bond credit markets, we are seeing some firming and renewed liquidity.
Homebuilders as depicted by the Dow Jones U.S. Home Construction Index (DJUSHB) 365.93 -3.69% paced today's sector weakness and broke back under a trying-to-round-higher shorter-term 21-day SMA at 378.14.
Ex-Fed Chairman Alan Greenspan may not have helped sentiment towards the homebuilders after he reiterated his thoughts that housing prices had yet to bottom.
As I type this evening's wrap, current Fed Chairman Ben Bernanke has wrapped up his speech to the Economic Club of New York.
Some of the headlines are the Dr. Bernanke is keeping his options open by standing ready to "act as needed" if recent credit-market and housing turmoil affects the economy, but is also being prepared to "reverse" last month's rate cut should inflation return.
Dr. Bernanke did say the rate cut in September has helped to reduce financial strains, it is still too early to tell whether the housing slump and credit crunch will translate into consumer and business spending, though Fed officials reported that their business contacts were growing more cautious.
A quick look at the December Thirty-day Fed Funds futures (CBOT:ff07z) 95.40, suggest that market participants now see a 60% probability of an additional 25 basis point rate cut by year's end. I establish this analysis by taking the base 100, then subtracting current trade of 95.40, or (100 - 95.40) = 4.60%. The current target for the Fed Funds rate is 4.75%.
As recently as September 25th, the December Fed Funds futures contract rose as high as 95.64, suggesting a Fed Funds target of (100 - 95.64) = 4.36%. That would have equated to a 55% probability of an additional 50-basis point rate cut.
December Fed Funds Futures (ff07z) - Daily Intervals
Just after Dr. Bernanke's speech, I see the ff07z down tick to 95.40. Not much of a reaction, but the above chart gives some observation of the "uncertainty" that market participants are dealing with.
Why would the ff07z rise all the way to 95.625 just over a week ago? I would have to think "worrisome economic slowing."
I like to simply "divide the ranges" of what would be 25 basis point moves with a retracement bracket, where each level is simply a "10% probability" level.
Again, the above chart suggests market participants see a 60% chance of an additional 25 basis point rate cut by year's end.
We did get some regional economic data today, which was stronger than forecasted. The NY Empire State Business Conditions Index came in at 28.8 for October, which was well above the 13.0 forecast and September's 14.7 reading.
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The diffusion index measures sentiment at manufacturing firms, with readings over zero indicating that more firms say conditions are better. The index is seen as an inconsistent predictor of national manufacturing activity.
A quick look inside the numbers showed the new orders index rose to 25.0 from 13.6, while the shipments index rebounded to 28.6 from 5.1.
The prices-paid index was roughly unchanged at 36.1, while the prices-received index rose to 15.1 from 11.7, the highest since January.
The employment index rose, and the average workweek index reached its highest level in more than a year.
Manufacturers expect business conditions to remain favorable; the future index increased to 50.6.
Market Internals (NYSE & NASDAQ) - Since 09/04/07
Market internals at both the NYSE and NASDAQ were weak today, and from the opening bell, decliners easily outnumbered advancers by roughly 3:1.
In Thursday's Market Monitor at OptionInvestor.com, I did suggest traders holding some of my bullish plays take some profits off the table, and cut one loss. With some profits booked, I think bulls will want to be set to reload and target new highs in the not-to-distant future.
By the end of the month for those that read last Monday's Market Wrap. I'm still sticking with an SPX target of 1,600 by Halloween.
Global Equity Benchmarks and Currencies -
While oil's rise may get some "bearish" broader market headlines here in the U.S. and perhaps European bourses, it wasn't the case on Monday in China.
Since last Monday, China's Hang Seng ($HSI) has surged an additional 6.37%.
Alan Greenspan also said today that the rising China stock markets are not sustainable for very long.
Stock's I like to follow, and trade from time-to-time with a "China flavor" had Baidu.com (NASDAQ:BIDU) $314.71 -2.56%, Sohu.com (NASDAQ:SOHU) $43.66 -1.66%, PetroChina (PTR) $236.44 +9.39% (currently PUT in Market Monitor from $181.42 on 10/08/07) and CNOOC Ltd. (NYSE:CEO) $188.26 +5.73% showing some very mixed results.
While I might tend to agree with Alan Greenspan's view on China, I've yet to see the market confirm those thoughts.
One "reason," I did encourage traders to book some profits on Thursday of last week, may also present itself in the above table.
On Thursday, Bundesbank president Axel Weber said if risks to price stability materialize it may no longer be possible for the European Central Bank (ECB) monetary policy to remain accommodative to help support the EU member states' economic growth.
In essence, I think Mr. Weber was saying "rate cut less likely."
The euro rebounded against the dollar (Euro/US$) and the euro was also strong against the Japanese yen (Euro/Yen).
London's FTSE-100 was up 1.59% week-over-week, and we'll remember that the UK is NOT on the euro currency. However, Germany's DAX and France's CAC-40 may reflect euro-currency economies.
In essence, monitor the DAX and CAC-40. It has been my analysis in recent weeks that market participants want to see the ECB take a less hawkish stance on rates.
Should the ECB continue to RAISE rates, that would likely STRENGTHEN their currency further and pressure the European block's exports to other countries.
Japan remains "most vulnerable" in my opinion should the US$ weaken vs. the yen (US$/Yen) and the euro weaken vs. the yen (Euro/Yen).
One of today's "best" technical comments and thought processes came from Ms. Louise Yamada. Perhaps some of you caught her comments regarding past history and the 10-year anniversary of "Black Monday" and October 2007.
In brief, Ms. Yamada made a case (for which she will continue to test) that the recent PRO-ACTIVE, instead of REACTIVE Fed policy may have averted another crash like that found 10-years ago to the day.
Dow Industrials (INDU) - Daily Intervals
There are some "spooky" similarities that may indeed have presented themselves just a couple of weeks ago when the Dow Industrials (INDU) fell sharply below its 200-day SMA on August 16th. The next day, the Fed cut the Discount Rate by 50 basis points to 5.75%.
Just recently, as the INDU hovered at its 50-day SMA, the Fed cut the Fed Funds target by 50 basis points, and once again lowered the Discount Rate 50 basis points to 5.25%.
Dow Industrials (INDU) "Black Monday" - Daily Intervals
It was 10-years ago today that the Dow Industrials plunged more than 500 points. Just one day after it had closed below its 200-day SMA.
Ms. Yamada sees some striking technical similarities, with one difference. A more PRO-ACTIVE Fed instead of a Fed that was more REACTIVE.
Here's what I see taking place in the S&P 500 Index (SPX.X) into October's option expiration, and into the end of the month. At Friday's close there was a pretty good BULLISH setup. Bulls NEEDED some type of pullback in order to set the trade up, they got some of it today.
S&P 500 Index (SPX) - 60-minute interval chart
In last Monday's Market Wrap I showed the SPX with the MONTHLY (dark purple) MONTHLY Pivot retracement. We're going to "zoom in" with a 60-minute interval chart here tonight.
The SPX closed a little stronger than I thought it might (ABOVE WEEKLY S1) so a Tuesday decline to WKLY S2 is questionable.
But that's the "lower risk" bull entry as it comes right near the previously broken to the upside downward trend, and some VERY heavy option open interest.
What a Pivot trader bull likes to see is a PULLBACK early in the week like we did get today, and then a "sling shot" move back higher with a Wednesday CLOSE at or near all that overlapping MONTHLY R1 and WEEKLY Pivot of 1,561.54.
The Dow Transports (TRAN) couldn't quite close the deal above their 150-day SMA last week and that could well have limited gains for the SPX.
Oil prices have weighed on the Transports, and once again, this Wednesday's EIA inventory figures could set the tone for the rest of the week, and perhaps the month.
The ability of the SPX to see strength ABOVE the MONTHLY R1 suggests institutional computers have limited supply of stock and a move back above WEEKLY Pivot and that MONTHLY R1 should get a catapult move to my Halloween target of 1,600.
With volatility having spiked today, I'd trade IN-THE-MONEY , or AT-THE-MONEY call options. I'm going to be looking to buy the SPY November $153, or $154 calls.
If the Transports (TRAN) are NOT above 4,980 should the SPX/SPY trade MONTHLY R1 (1,563.90/$156.52) bulls can tighten up some stops.
Watch the Market Volatility Index (VIX.X) 19.25 +8.57%. It's WEEKLY R1 is 19.35 (see SPX at WEEKLY S1) and its WEEKLY R2 is at 20.96. Should the VIX.X hit 20.96 and reverse back lower quickly, that suggest that institutional computers, and traders that LOVE to SELL PREMIUM have found a level they have confidence in.
Remember, VIX declines when call BUYERS/put SELLERS are more aggressive than
call SELLERS/put BUYERS.
New Long Plays
New Short Plays
Long Play Updates
Adobe - ADBE - close: 45.71 change: -0.41 stop: 42.85
ADBE held up pretty well during Monday's market weakness. Traders were buying the dip this afternoon. It wasn't low enough to hit the rising 10-dma but readers may want to use the pull back as a new bullish entry point. Our target is the $49.50-50.00 range. The P&F chart is already bullish with a $51 target. Our time frame is about seven weeks.
Picked on October 09 at $45.05
Computer Sciences - CSC - cls: 58.95 chg: -0.23 stop: 55.95
CSC tested short-term resistance at $60.00 this morning before turning lower. Fortunately for the bulls traders were buying the dip late this afternoon. We remain bullish on CSC and would still consider positions here. However, more conservative traders may want to wait for a breakout over $60.00. There is potential resistance near $62.00-62.50 but we're aiming for the $64.00-65.00 range. The P&F chart shows a new triple-top breakout buy signal and a breakout through resistance with a $70 target. We can't find an earnings report date yet but CSC has a history of reporting in early November.
Picked on October 14 at $59.18
Cisco Systems - CSCO - cls: 32.79 change: -0.13 stop: 31.45
We do not see any changes from our weekend comments on CSCO. Traders were buying the dip near $32.50 this afternoon. If you're feeling conservative think about raising your stop toward the October low around $31.88. Currently our stop is just under the rising 50-dma. Our target on CSCO is the $34.75-35.00 range.
Picked on September 26 at $32.65
Heidrick & Struggles - HSII - cls: 40.32 chg: +0.12 stop: 37.99
HSII displayed relative strength by holding support at the $40.00 level. We remain bullish and would continue to open new positions here. There is potential resistance at the 50-dma around $42.50. Our target is the $44.00-45.00 range. We do not want to hold over the end of October earnings report.
Picked on October 14 at $40.20
Marinemax Inc. - HZO - cls: 15.50 chg: -0.35 stop: 15.24
We do not see any changes from our weekend comments. Our suggested trigger to go long the stock is at $16.26, which would be a new relative high. If triggered at $16.26 or target is the $17.90-18.00 range. Watch for potential resistance at the 50-dma. FYI: The latest data puts short interest at more than 33% of the small 17 million-share float. That's a very high amount of short interest and it wouldn't take much for the shorts to get squeezed! Remember, this is an aggressive play since we're fighting the bearish trend of lower highs.
Picked on October xx at $xx.xx <-- see TRIGGER
Juniper Networks - JNPR - cls: 36.67 change: -0.45 stop: 34.69
We do not see any changes from our weekend comments. We are suggesting new positions now but readers might want to wait for a new rise over $37.50 before initiating new positions. Conservative types might also want to consider raising their stop loss toward $36.00 to really reduce their exposure. Our target is the $39.85-40.00 range. The Point & Figure chart is very bullish with a $67 target. We do not want to hold over the October 23rd earnings report.
Picked on October 07 at $37.04
Lexmark - LXK - close: 42.27 change: -0.68 stop: 39.95
LXK encountered some profit taking this morning but this is the third day in a row that the stock has found support near $42.00. If you think LXK can breakout past resistance near $45.00 then this would be a new entry point. Our target is the $44.85-45.00 range so we're not suggesting new positions at this time. More conservative traders might want to raise their stops toward $42.00 (actually around $41.90).
Picked on October 09 at $41.06
Knight Capital - NITE - cls: 13.25 change: -0.33 stop: 12.99 *new*
There is still no resolution yet on an earnings report date. One source says October 17th another says the 18th. We plan to close this play tomorrow (Tuesday) at the closing bell to avoid holding over earnings. With just one day left we're inching up the stop loss to $12.99. Our target is the $14.65-15.00 range.
Picked on October 10 at $13.25
NVIDIA - NVDA - close: 36.39 change: +0.26 stop: 34.49
NVDA is trying to bounce and shares are challenging the 10-dma. This looks like a new bullish entry point but readers may want to wait until after Intel (INTC) reports earnings on Tuesday night. Reaction to INTC's news could set the direction for the whole sector. Our target is the $39.00-40.00 range. FYI: AMD reports on Thursday.
Picked on September 26 at $36.15
Plexus - PLXS - close: 28.27 change: -0.36 stop: 27.49
There is no change from our weekend comments on PLXS. We are suggesting a trigger to buy the stock at $29.05. If triggered our target is the $32.00-32.50 range. We do not want to hold over the October 31st earnings report. FYI: The P&F chart points to a $49 target.
Picked on October xx at $xx.xx <-- see TRIGGER
Rowan Companies - RDC - cls: 40.38 change: +0.20 stop: 37.99
Oil stocks continued to rally as crude oil futures rose past $86 a barrel. RDC hit $41.30 this morning before paring its gains. We remain bullish on the stock here. Our biggest concern would be a correction sell-off in crude oil, which is long overdue. Our target in RDC is the $44.00-44.50 range.
Picked on October 14 at $40.18
Sirius Satellite Radio - SIRI- cls: 3.63 change: +0.09 stop: 3.29
SIRI displayed relative strength with a 2.5% gain and a new rally past resistance near $3.60. This looks like a new bullish entry point to go long the stock although readers opening new positions now may want to tighten their stops! This remains a very speculative, higher-risk play. Our target is the $3.95-4.00 range.
Picked on September 30 at $ 3.49
Synalloy Corp. - SYNL - cls: 21.05 change: -0.13 stop: 19.99
SYNL continues to trade sideways and we don't see any changes from our weekend comments. We also want to reiterate our earlier warning that we can't find an earnings report date for SYNL. That means everyday is a potential landmine if SYNL reports earnings unexpectedly and the results are negative. At this point we'd probably wait for a rally past $21.75 or $22.00 before considering new bullish positions. Our target is the $27.00-28.00 range.
Picked on October 09 at $22.39
World Acceptance Corp. - WRLD - cls: 34.30 chg: -0.52 stop: 31.99
We are somewhat surprised that the weakness in financial stocks did not have a bigger impact on shares of WRLD. The stock lost 1.49% but was on the rebound heading into the closing bell. This may prove to be a new bullish entry point. Readers should note that this week will bring a number of earnings reports from the financial sector. This flood of earnings news could produce some volatility in the sector and in shares of WRLD. Readers may want to adjust their stops closer to the $33 level. The P&F chart points to a $46 target. We're aiming for the $37.25-38.00 range. We only have one week and plan to exit ahead of the October 23rd earnings report.
Picked on October 09 at $33.93
Zoltek - ZOLT - cls: 45.15 change: -1.76 stop: 42.90
Ouch! ZOLT lost 3.7% and closed back near round-number support at the $45.00 level. We did not see anything specific to account for the relative weakness. We're not suggesting new positions at this time. You may want to tighten your stop closer to the $44 level. Our target is the $49.00-50.00 range.
Picked on September 24 at $43.06
Short Play Updates
Apria Healthcare - AHG - cls: 24.82 change: -0.49 stop: 26.75
AHG continued to sell-off on Monday. Shares slipped 1.9% on above average volume. Contributing to the move may have been news that AHG just announced a deal to buy Coram Inc. for $350 million in cash. Our AHG target is the $22.50-22.00 range. We do not want to hold over the October 30th earnings report. FYI: AHG has relatively high short interest. The latest data puts short interest at more than 15% of the 43.3 million-share float. This raises the risk of a short squeeze.
Picked on October 14 at $25.31
Pacific Ethanol - PEIX - cls: 8.99 change: -0.04 stop: 9.75
We do not see any changes from our weekend comments on PEIX. The stock is in a long-term downtrend. The current consolidation looks like it's about to roll over into a new leg lower. Shares have resistance near $9.70 and short-term support near $8.50. We are suggesting shorts now although some readers may want to wait for a new decline under $9.00. Our target is the $7.75-7.50 range. Readers should note that the most recent data puts short interest at more than 16% of PEIX's 34.2 million-share float, which would raise the risk of a short squeeze.
Picked on October 14 at $ 9.03
Closed Long Plays
CompuCredit - CCRT - close: 23.51 change: -1.47 stop: 23.45
Our bullish play on CCRT did not last long. Citigroup's negative comments about the consumer credit markets yanked the carpet out from under CCRT. Shares of CCRT slid 5.88% and broke down under short-term support at its 10-dma and the $24.00 level. Our stop loss was hit at $23.45. We were aggressive with our suggested entry point and should have stuck to a trigger over $25.50 to open positions.
Picked on October 14 at $24.98
Closed Short Plays
Today's Newsletter Notes: Market Wrap by Jeff Bailey and all other plays and content by the Option Investor staff.
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