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Daily Newsletter, Thursday, 10/25/2007

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Table of Contents

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

Market Wrap

Dropping the Ball

Introduction

Ball Corp. (BLL) allegedly dropped the ball today with revenue that disappointed. This provider of metal and plastic packaging to companies that supply beverages, food and household products beat EPS expectations, but its mixed report was indicative of a number of earnings reports today.

A bigger disappointment was in store than the one delivered by BLL or the other mixed earnings reports today, however. Durable goods orders dropped rather than rose as expected. Although the volatility of the notoriously unreliable durable goods orders is recognized, the number dampened the bullish fervor that had been building. When the cash market opened, the morning's early gains were quickly reversed. Then September's New Home Sales appeared on the scene. A 4.8 percent gain in the headline number was all many bulls needed to hear.

Traders who neglected to read past the headline number dropped the ball and weren't prepared for the early afternoon weakness in equities. The unexpected gain in new home sales was produced only when compared to an August figure that had been revised sharply lower. The number of new home sales dropped when compared to the original August number. Sales for all the summer months had been revised sharply lower, and home sales were characterized as being worse than even the grim expectations.

Those on the ball had to keep up with geopolitical developments, too, with new sanctions against Iran being announced. The latest sanctions will be imposed on the finances of Iran's Islamic Revolution Guards Corp and three state-owned banks. In addition, OPEC's secretary general announced that OPEC hasn't made any plans to discuss further production increases beyond the 500,000 extra barrels a day that are expected beginning in November. Jim Brown covers these developments in much depth and can better evaluate various claims, but the U.K. tanker tracker said that nothing like 500,000 extra barrels will be seen into November 10. This tracker said shipments will rise only 20,000 barrels a day leading into November 10.

If all that wasn't enough, news wires reported that Lebanon had fired on Israeli warplanes flying in Lebanese airspace. Those various announcements combined to help send crude to new record intraday and closing highs.

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The day wasn't finished yet. Time still allowed for a bounce. Bears who grew too complacent also found out they'd dropped the ball. Flying rumors and speculations about AIG, PMI and MBI as well as anticipation of MSFT earnings after the bell contributed to the choppy nature of the trading. A rumor surfaced in the afternoon that the insurer might have troubling exposure to subprime mortgages, pressuring financials. By mid-afternoon, AIG had refuted the rumors, sending equities higher again. AIG, PMI and MBI all bounced off their lows to varying degrees, but all closed well off their highs of the day.

Were markets really moved by all these developments? They were set up for choppy price movement from the get-go this morning. My study of the charts and volume patterns tells me that bulls and bears are still fighting it out for supremacy. Today, volume was big, but what happened with markets? Many indices produced doji or near doji. Almost all had both upper and lower shadows where prices were pushed one direction or the other. A monstrous tug-of-war was going on today, it seems to me, yet indices couldn't make any progress. I've been taught not to like big volume moves at the top of a climb that end up going nowhere, because big volume is produced only when big money is involved. If big money was involved, what was it doing? It was certainly doing at least some selling. That showed up in closes that were off the highs of the day and in up/down volume patterns.

Does that mean that the battle is over? Nope. It does, however, make me suspicious, but I'm always suspicious and cautious where the markets are concerned, saving all my optimism and gullibility for my real life outside the markets. Until one group or the others wins out, we've got chop. My first equity-related post on the Market Monitor, the live portion of the site, posted fifteen minutes before the cash open, related my opinion that indices were trapped in choppy zones and that trading itself might be choppy. It was. No surprise.

Charts

Annotated Daily Chart of the SPX:

You can use these traditional chart settings or the ones I prefer, drawn from daily Keltner charts. The daily Keltner chart suggests that a daily close beneath the 120-ema (about 1493.60 currently) would set up a potential downside target of about 1455. A daily close above the 9-ema (about 1523 currently) would set up a potential upside target just above 1554. Between the two, it's just chop according to the Keltner setup. Trade chop at your own risk.

Annotated Daily Chart of the Dow:

The Dow's daily Keltner chart suggests that a daily close beneath the 120-ema, now at about 13,470, targets about 13,187. A daily close above the 9-ema, now at about 13,745, targets a level just above 14,000. Between the two, it's just chop according to the Keltner setup.

Annotated Daily Chart of the Nasdaq:

What does the daily Keltner chart predict for the Nasdaq? It shows that a daily close beneath the 45-ema now at just over 2,700 sets up a potential downside target of about 2,625.50. A daily close above a Keltner trendline now at just over 2,782 sets up a potential upside target at 2,839.

Annotated Daily Chart of the SOX:

Annotated Daily Chart of the RUT:

It's actually the daily 9-ema that more closely bounds the upper portion of the RUT's triangle, with that moving average currently at about 816.50. The RUT's daily Keltner chart suggests that it's already set a potential downside target and support of 768.90 and that the potential target and support will remain in place as long as it continues producing daily closes beneath the 9-ema and, as importantly, below the 120-ema now at 811.55. A daily close above the 9-ema would erase that downside target and reset an upside one for a line that's now at about 839.40 but is still descending.

Annotated Daily Chart of the TRAN:

Today's Developments

Today's economic events began with the weekly initial and continuing claims at 8:30. Initial claims were expected to number 320,000, down from the prior 337,000. They were a little higher than that, at 331,000. The four-week average rose by 7,750 to 324,750, to its highest level in almost two months.

Continuing claims rose, too, by 7,000. The four-week average of continuing claims declined 3,750 to 2.53 million. The insured unemployment rate stayed at 1.9 percent.

September's Durable Goods Orders appeared during the same 8:30 EST time slot. Economists originally had predicted a gain of 1.5-2.0 percent in durable orders, rebounding from the previous 4.9-percent decline. In recent days, those expectations had lowered to a 1.1 percent gain, but even that was too optimistic. Instead, economists were surprised when the Commerce Department reported a 1.7 percent drop in the headline number.

However, delving beneath the headline number turned up some more cheerful news. Much of the decline was due to a sharp decrease in orders for defense goods. That component tends to be volatile. Since those goods are expensive, the volatility of this component can swing the headline number one direction or the other, too. Excluding those orders, durable goods orders rose a more encouraging if somewhat tepid 0.7 percent.

If transportation orders were stripped out, orders for durable goods climbed 0.3 percent. Orders for core capital equipment goods increased 0.4 percent. Orders for machinery climbed 4.3 percent. Orders for primary metals also climbed, by 1.6 percent.

Unfilled orders also rose 1.1 percent, a hint that maybe production will ramp up a bit, at least in the civilian aircraft sector. That sector prompted the big gain.

Those results might have ended the good news to be found in the durable goods orders, however. Orders for computers and electronics, electrical equipment, fabricated metals and transportation goods all declined, by 1.4, 0.4, 2.8 and a whopping 6.3 percent, respectively. Shipments fell in those categories, too, with the headline shipments dropping 2.0 percent. This was the largest decrease in shipments in a year.

For the year, orders rose an annualized 0.4 percent compared with the year-ago period. Shipments climbed only an annualized 0.1 percent.

This release knocked a little of the wind out of the sailing futures, but only a little. Most market participants understand that this volatile release isn't one that is likely to change the Fed's decision one direction or another.

September's New Home Sales appeared at 10:00, and traders got good news. New home sales rose to 770,000 when the expectations had pegged the number at 758,000. The percentage gain was 4.8 percent. Inventories dropped to 8.3 months at the current selling rate against the previous 9 months. Median sales prices rose an annualized 5 percent.

Sounds great, doesn't it? The trouble is that the 4.8 percent gain over August's number was a gain against a revised-lower number. Previously August sales had been reported at 795,000 but have now been revised lower to 735,000. It wasn't just August, either: the last three months, the whole summer, were revised sharply lower. If you compare apples to apples, then, September's 4.8 percent gain to 770,000 was actually a loss from the previously reported August number of 795,000.

The next report was the natural gas inventories report. The Department of Energy reported a build of 68 billion cubic feet. Natural gas futures climbed, but it was also perhaps being dragged higher by another component of the energy complex: crude. Crude futures hit a new high today, scrambling above $88.00 and then $89.00 and finally $90.00 a barrel. It hit a new all-time high of $90.55 and settled at a record $90.46.

The last report of the day was the Kansas City Fed Manufacturing Index. Although this tenth district's report isn't as predictive of the ISM as are the indices from some of the other districts and rarely garners much interest, it did at least show an increase of 7 in October, up from 4 in September. Prices paid and received indices both climbed. On this district's website (www.kc.frb.org), the district summarized the report as showing modest expansion. Producers were mostly positive about future activity, the district noted, but some troubling trends were noted. Orders and employment indices were characterized as "sluggish," and the district noted that firms continued cutting inventories.

Companies reporting earnings today included Aetna (AET), Dow Chemicals (DOW), EMC (EMC), Motorola (MOT), and Symantec (SYMC). AET, EMC and MOT beat on expectations and guidance. DOW and SYMC disappointed, SYMC because it lowered its Q3 earnings and not because of the current quarter's earnings. It reportedly beat Q2 expectations for this quarter.

SYMC and fellow tech Comcast (CMCSA) pressured the Nasdaq. CMCSA's earnings were in line with expectations but some investors reportedly feared that it wouldn't meet future guidance.

Other important companies reporting earnings included Amgen (AMGN), Bristol-Myers Squibb (BMY), and Travelers (TRV). All supposedly beat expectations, but not all gained.

MSFT reported after the bell along with a host of other companies. Before reporting earnings, MSFT announced that it had taken a $250 million position in Facebook.com, a development that investors appeared to like.

They also liked MSFT's after-hours earnings report. Bullet points were an EPS of $0.45 versus an anticipated $0.35 a share, revenue of $13.76 billion versus an anticipated $12.57 billion, EPS guidance for next quarter of $0.44-0.46 versus an expected $0.44, revenue guidance of $15.6 billion-16.1 billion versus an anticipated $15.6 billion, and 2008 EPS of $1.78-1.81 versus an expected $1.73. Web services, business services, client revenue and, most importantly according to some analysts, the entertainment devices units all were ahead of expectations. Vitsa sales were robust, according to the company. As I type, MSFT had zoomed up to $34.85, up from its $32.00 close.

Remember that not all after-hours stock movements in reporting companies are repeated in trading once the cash markets open. Many a short is being forced to cover this afternoon. However, if these gains continue through to tomorrow, it looks as if resistance will be tested before support on some indices.

Other companies reporting after hours include MFE, climbing after its earnings report revealed preliminary Q3 profit that beat expectations. The company termed the results "preliminary" since several financial statements will need to be restated. WEN reported flat revenue and slipping profits, but said that full-year earnings would be at the high end of its previously announced range. Baidu Com (BIDU) was higher in after-hours trading, but I don't believe its earnings report had been released by the time this report was written. It wasn't on the news services I watch.

Applied Micro Circuits Corp. (AMCC) traded slightly lower on low volume in after-hours trading, with a first quarter loss that widened. CLS also dropped as it reported a profit after a previous loss, but saw revenue falling 13 percent.

Many more companies reported, but this article would be too long to read and presented to late to publish if all were awaited or covered.

Tomorrow's Economic and Earnings Releases

Tomorrow's single economic report is the revised October Michigan Sentiment. Unless the revision is a big one, this should not be a market-moving event. The prior number was 82.0, and economists predict 82.0-82.3 for the revision.

Earnings from Countrywide Financial (CFC) will probably have much more impact. Speculation has been rampant about CFC since it announced earlier in the week its plan to approach troubled mortgage holders. Today's reaction to the rumors about AIG, PMI and MBI prove that the markets have not priced in all risk to due to the subprime mess and might still be vulnerable to bad news. It was a sell-now, find-out-the-truth-later reaction.

OOther than CFC, companies reporting earnings tomorrow include ATE, BHI, EXC, FO, MTH (Meritage Homes), OPY, and WMI.

AAnother potential impact on our markets could come during the overnight session when Japan's September CPI and Industrial Production are released. Japan's CPI is an important number, as the central bank at one time was watching CPI for guidance as to when they could safely raise rates. As you may know by now, raising rates would likely impact the yen's value, likely sending it higher against other currencies, which can cause havoc in the globe's equity markets as yen carry trades are unwound. It could be an important night. A diving USDJPY (U.S. dollar versus the Japanese yen) would not be good for equity markets.

What about Tomorrow?

I'm not going to post my usual intraday eltner charts this evening. Why? The daily charts show me that most indices are in chop zones. While inside those zones, new trades are likely to be chopped up, and I don't want to encourage new trades within those chop zones. You have two choices. You can look at the charts and determine that you want to buy support and/or sell resistance or you can wait for the breakout and play the breakout. Evaluate the breakout or breakdown levels you want to see, determine what stop is appropriate for you, and enter if your parameters are met. Be prepared to be whipsawed out of the trade if markets quickly reverse, as they sometimes do.

Consider before you enter an options play on a Friday what's happening next week. Before an FOMC meeting, we tend to see two kinds of reactions: markets that are clamped down into tight ranges or wild moves that come out of nowhere. It's important in those circumstances to know a stop that's appropriate based on the movement of the underlying and also one that's based on deterioration in your option's price when markets get clamped down and implied volatility subsides. Your brokerage may not allow you to set OCO (one cancels other) orders based on two separate parameters, but if not, maybe set the stop contingent on the movement of the underlying and write down the maximum deterioration you'll accept in your option's price, regardless of where the underlying goes.

My other reason for not posting those intraday charts is that CFC's earnings report tomorrow and Japan's CPI and Industrial Production have the capacity to completely undo anything seen on these charts. They might be something like a map of the new world that purports to lead to the interior of India. Useless because one is not where one expected to be.
 

New Plays

Most Recent Plays

Click here to email James
New Plays
Long Plays
Short Plays
None None

Play Editor's Note: It has been a very rocky week, more so than usual for an earnings week. The bullish camp will point out the very impressive afternoon rebounds. The bearish camp will note that the bulls can't build on their gains and the bullish trend remains broken with the NDX index as an exception. Investor reaction to Microsoft's (MSFT) earnings report could single handedly drive the market higher tomorrow. We would suggest readers sit back and watch to see how the tug-o-war plays out tomorrow.


New Long Plays

None today.
 

New Short Plays

None today.
 

Play Updates

Updates On Latest Picks

Click here to email James

Long Play Updates

Adobe - ADBE - close: 47.20 change: -0.80 stop: 44.45

ADBE hit another new high at $48.47 this morning before succumbing to some profit taking. The 10-dma near $46.70 and the $46.00 level should both offer some support for the stock. We're not suggesting new positions at this time. 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 four weeks.

Picked on October 09 at $45.05
Change since picked: + 2.15
Earnings Date 12/17/07 (unconfirmed)
Average Daily Volume: 7.0 million

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Heidrick & Struggles - HSII - cls: 39.65 chg: -0.07 stop: 38.95

We remain defensive on HSII. The stock bounced sideways and traders stepped in to buy the dip near $39.10 for the second day in a row. Technical indicators continue to deteriorate. Readers may want to cut their losses now and exit early. We're not suggesting new positions at this time. 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
Change since picked: - 0.55
Earnings Date 10/30/07 (confirmed)
Average Daily Volume: 353 thousand

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Sirius Satellite Radio - SIRI- cls: 3.59 change: -0.04 stop: 3.39*new*

SIRI's merger partner XMSR reported earnings today. XMSR announced earnings that missed Wall Street estimates by 2 cents a share in spite of its subscriber growth. Neither stock moved much on the news. We would keep an eye on XMSR's stock price and its support near $14.90 a share. Please note that we're adjusting our stop loss on SIRI from $3.34 to $3.39. We are not suggesting new positions in SIRI at this time. This remains a very speculative, higher-risk play. Our target is the $3.95-4.00 range. Note: SIRI is expected to report earnings on October 30th. We plan to exit ahead of the report.

Picked on September 30 at $ 3.49
Change since picked: + 0.12
Earnings Date 10/30/07 (confirmed)
Average Daily Volume: 35.2 million
 

Short Play Updates

Gap Inc. - GPS - cls: 18.30 change: +0.23 stop: 19.05

GPS bounced sideways between $18.00 and overhead resistance near $18.50. The failure at $18.50 is a good sign but we're suggesting readers wait for a new decline under $18.00 before considering new shorts. More conservative traders may want to tighten their stops toward $18.50-18.60. Our target is the $16.00-15.50 range.

Picked on October 21 at $17.49 *gap down
Change since picked: + 0.81
Earnings Date 11/21/07 (unconfirmed)
Average Daily Volume: 8.7 million

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Interpublic Group - IPG - cls: 9.96 change: -0.09 stop: 10.31

We only have a few days left for this play to open, progress and close prior to IPG's earnings report. Odds are rising that the stock may just churn sideways near $10.00 as investors wait for the earnings announcement. If IPG doesn't hit our trigger soon we'll probably drop it as a candidate. We are suggesting a trigger to short IPG at $9.80. If triggered our target is the $8.10-8.00 range but that is probably too aggressive given our time frame. We do not want to hold over the November 1st earnings report. FYI: The latest data puts short interest for IPG at 8.4% of its 438 million-share float.

Picked on October xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 11/01/07 (confirmed)
Average Daily Volume: 3.5 million

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JDS Uniphase - JDSU - cls: 14.60 change: -0.39 stop: 15.55*new*

JDSU lost another 2.6% and closed under its 200-dma and 50-dma, which is another bearish move. We are adjusting our stop loss to $15.55. Our target is the $13.75-13.50 zone. We do not want to hold over the October 31st earnings report.

Picked on October 21 at $15.23
Change since picked: - 0.63
Earnings Date 10/31/07 (confirmed)
Average Daily Volume: 3.8 million

---

NVE Corp. - NVEC - cls: 28.90 change: -0.53 stop: 31.51

NVEC under performed the market with a 1.8% decline and a close under the $29.00 level. Our only concern is the very light volume on the move. We remain bearish on the stock and would consider new positions here. Our target is the $25.50-25.00 range. FYI: We would consider this an aggressive play simply for the fact that NVEC's average daily volume is very low! However, the real risk is a short squeeze. The latest data puts short interest at more than 30% of NVEC's very, very small 4.2-million share float. That represents a big risk for a short squeeze.

Picked on October 22 at $29.30 *gap down entry
Change since picked: - 0.40
Earnings Date 10/17/07 (confirmed)
Average Daily Volume: 76 thousand
 

Closed Long Plays

None
 

Closed Short Plays

Avon Products - AVP - cls: 38.03 chg: +0.63 stop: 38.01

Wachovia slapped an "out perform" rating on AVP and the shorts panicked. Shares of AVP spiked to $38.45 this morning hitting our stop loss at $38.01. The rally did not have enough steam to push past resistance in the $38.50 region. If AVP could breakout over $38.50 it would be a bullish buy signal.

Picked on October 21 at $36.19
Change since picked: + 1.84
Earnings Date 10/30/07 (confirmed)
Average Daily Volume: 2.6 million
 

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

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Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

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