The major averages finished lower to start the week as earlier session gains faded into the close as mortgage-related issues continued to weigh on investor and trader optimism.
Shares of E*Trade (NASDAQ:ETFC) $3.59 -58.20% were atop today's list of most actively traded at the NASDAQ after the company warned late Friday that deterioration in the value of its holdings of securities backed by home mortgages had fallen significantly and would lead to a Q4 write-down (see Saturday's Market Wrap).
E*Trade's online broker rival Ameritrade Holdings (NASDAQ:AMTD) $18.89 +5.35% may have been a benefactor on thoughts that it would be able to garner new stock trader accounts.
Still, E*Trade's plunge left the equally-weighted AMEX Broker/Dealer Index (XBD.X) 201.15 -3.46% lower at the close.
The cap-weighted Financial Select SPDRs (AMEX:XLF) $30.25 +0.36% finished fractionally positive, but well off its lunchtime high of $31.18.
Adding to an already jittery market regarding subprime issues was credit agency Fitch slashing credit ratings of roughly $37.2 billion of global collateralized debt obligations (CDOs), with more than $14 billion worth of transactions falling from the highest-rated AAA to speculative-grade, or junk, status.
I (Jeff Bailey) would have to think that Fitch's "revelation" may come from last week's investor update from Morgan Stanley (NYSE:MS) $53.77 -0.79% (Wednesday evening) regarding how difficult it has been since mid-summer to ascertain how CDOs can be valued.
In brief, my takeaway from Morgan Stanley's update was that the firm started 2007 with a net short position hedge to their CDO assets (or soon to be liabilities), and by late summer, the weakness and then illiquid CDO market found the firms hedge at "break even," but deteriorating to a net long position with the hedge still in place as the CDO market continued to deteriorate.
In essence, the credit crunch that found few buyers in the quickly deteriorating CDO market made it, and continues to make for VERY DIFFICULT for anyone to value what this portion of the market is "worth."
One blurb I did hear mentioned on CNBC today, that did make sense, is that the large institutional holders of CDO-related debt are actually initiated trades at some bids, checking those bids for how much liquidity is there, to try and ascertain what value the market is placing on the debt.
I thought Jim Brown's Market Wrap from Saturday and quick update as to Citigroup's (NYSE:C) $33.57 +1.41%, Merrill Lynch's (NYSE:MER) $53.19 -0.15%, Morgan Stanley's (NYSE:MS) $53.77 -0.79% and UBS Ag's (NYSE:UBS) $46.41 +1.57% tabulated announcements as to written down losses (estimates at best) can give some near-term benchmarks for us to monitor.
I have NOT listened to other updates outside of Morgan Stanley's, but would view their "worst/worst case" scenario and stock price benchmark of $53.70 at Thursday's close (at least one day for a market response to their update) and the firm stating it had hedged its CDO portfolio well in advance of what is now taking place, as a key benchmark.
With Morgan Stanley (MS) closing just 7-cents ABOVE last Thursday's close, I would have to currently think, based on observation, that market participants don't think "the worst is over," for credit-related issues.
If you would like to listen to Morgan Stanley's conference call from 11/07/07, you can do so at this http://biz.yahoo.com/cc/2/87542.html
Shares of Countrywide Financial (NYSE:CFC) $13.19 -4.62% were modestly weak, but continue to hold above their recent multi-year low of $12.07. In a filing with the Securities Exchange Commission (SEC), the company warned that further cuts in its credit ratings to junk levels could severely limit its ability to raise money in public debt markets and cause it to lose bank deposits.
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I should note that NASDAQ-100 Index (NDX.X) 1,982.16 -2.56% and its tracker QQQQ $48.78 -2.44% posted a fractional gain at the open, but lead today's weakness among the major indexes. If anything, this STRONGLY suggests to me that bulls holding gains the past few months are becoming more eager to protect those gains with a "sell now, ask questions later" type of mentality.
NASDAQ-100 heavyweight Apple Computer (NASDAQ:AAPL) $153.76
While the U.S. Dollar Index (DXY) inched higher by 0.915% from Friday's close of 75.40, mining shares as depicted by the AMEX Gold Bugs Index ($HUI.X) 408.12 -7.64% lead today's list of sector losers.
Gold as depicted by the StreetTracks Gold (NYSE:GLD) $78.30 -4.72% (~$783.00 spot) and silver as depicted by the iShares Silver Trust (AMEX:SLV) $143.15 -6.37% (~14.32 spot) were notably weak.
The US Oil Fund (AMEX:USO) $72.77 -2.67% finished down $2.00 on rumor that OPEC might agree to a production increase this weekend when the cartel meets this weekend in Riyadh, Saudi Arabia. However, Saudi Arabia's oil minister, Ali Naimi appeared to defuse the rumor saying "(Production will be discussed) when OPEC meets in Abu Dhabi, not here (in Riyadh)."
Mr. Naimi left open the possibility of a production increase at next month's meeting in Abu Dhabi, in the United Arab Emirates, next month.
December Crude Oil futures (cl07z) at the NYMEX settled down $1.70, or -1.76% at $94.62 on Monday.
The CBOE Oil Index (OIX.X) 792.63 -4.23% was notably weak, and it wasn't necessarily the decline in oil prices.
Shares of BP PLC (NYSE:BP) $72.11 -4.01% fell sharply for a fourth-straight session after a confidential document suggested a fairly high probability still exists for a "catastrophic" incident or a loss of the company's key U.S. licenses, underscoring a cautious approach recently adopted by the company's new chief executive Tony Hayward.
Late Sunday, Alaska's House passed an oil tax bill, backing Governor Sarah Palin's effort to rewrite a one-year old law she has called a failure and tainted by a federal corruption probe tied to the current law.
The final vote on the bill boosting the tax rate on oil companies from 22.5% to 25% was 27-13.
Based on a market price of $80 a barrel this rate, plus other fiscal changes, that could mean an additional $1.49 billion to the state's coffers for fiscal year 2009, said Revenue Commissioner Pat Galvin.
According to many analysts, North Slope producers BP PLC (BP) $72.11 -4.01%, ConocoPhillips (NYSE:COP) $78.97 -4.34% and Exxon/Mobil (NYSE:XOM) $84.54 -2.65% have the most immediately at stake among Alaska's oil industry players.
The U.S. government bond market was closed today for Veterans Day.
There were a couple of deals announced today.
International Business Machines (NYSE:IBM) $101.45 +1.19% said it will buy software developer Cognos (NASDAQ:COGN) $57.15 +7.87% for $5 billion, or $58/share.
And Constellation Brands (NYSE:STZ) $22.60 -1.69% said it would buy the U.S. wine business of Fortune Brands (NYSE:FO) $79.66 +0.61% for $885 million.
NYSE and NASDAQ Internals-
It has been just about one month since the NYSE and NASDAQ were able to record some inflection new highs of 347 and 242 respectively, but since that date, and sessions leading into October's option expiration (10/19/07), the number of new lows at both exchanges has been mounting.
Late Monday evening, after I had written the Market Wrap, Dorsey/Wright & Associates' Over-the-counter Bullish % (BPOTC) did reverse back lower to "bear confirmed" status at 42%, and at Friday's close, had further weakened to 35.92%, meaning that of roughly 3,000 stocks listed at the NASDAQ, just 1,077 four and five-lettered stock symbols had a point and figure "buy signal" associated with their chart.
That rather SLOW moving indication of supply/demand ties pretty close to my NSDQ A/D 5-day Ratio inflection low of 36% on 11/07/07 and suggests broad-based selling still underway.
Perhaps this confirms the notion that some of the BIG and NARROW NASDAQ-100 components are seeing the "take profits where you can," mentality.
Dorsey/Wright's NASDAQ-100 Bullish % (BPNDX) reversed back lower to "bear alert" status on October 19th at 66% from an inflection high of 74%, and have just recently achieved "bear confirmed" status at Thursday's closing measure of 42% when this narrower indicator needed to see a 48% measure to reach bear confirmed status.
Global Equity Index Benchmarks and Currencies
One can perhaps see the "take'em where you've got'em" mentality for profits that is sweeping the globe.
Having surged 11.32% from 10/22-10/29 benchmarks, the HangSeng in China has retreated 12.4%.
While the NASDAQ-100 Index (NDX.X) hadn't had nearly as "euphoric" of a run as the Hang Seng in recent weeks, or months, that's where the bulk of profits here in the U.S. have been, and the 9.92% decline since Monday's close is noticeable.
I would still have to say, based on observation, that the only real global equity/currency "link" that I see is the WEAKNESS in Japan's Nikkie-225 with the WEAKNESS in the US$ vs. the yen.
I do need to correct a calculation, or currency conversion commentary I made in Monday's Market Wrap.
The correct conversion for one (1) US$ is equivalent to 7.41 Chinese yuan.
I incorrectly stated that one (1) yuan was equivalent to $7.4535.
While there is NO EXCUSE for my error, it "didn't make sense" that PetroChina (NYSE:PTR) $184.54 -8.59% was trading at $222.10 last Monday, when the stock IPO in at 16.70 yuan, or $2.24/share.
Therefore, I can NOT make any tie with where a stock is trading in China, valued at XX.XX yuan with that same stock trading as an American Depository Receipt (ADR) here in the United States.
The ONLY tie, or conversion I can make is when a China-based company reports revenue and earnings in yuan, then converting those yuan to US$.
Russell 2000 Index ($RUT.X) - Daily Intervals
As we head into Friday's option expiration for November, the major indexes exhibit further weakness and the small caps of the Russell 2000 ($RUT.X) found selling into this morning's strength at the 782 level.
The weakness into Friday's option expiration for November is SIMILAR to what we witnessed going into October's option expiration, which was October 19th.
On the above chart of the RUT.X, I've now attached an UPWARD trend that has been firmly broken to the downside at the 10/22/07 relative low (the Monday after the 10/19/07 option expiration).
One PRIMARY reason I do this tonight is based on my thought, or observation from the 10/22/07 Market Wrap, was that this technically WEAKER index showed some RELATIVE STRENGTH and "surprised" me the day after the expiration.
That may have been a "heads up" to the more NOTABLE STRENGTH that ensued for the NASDAQ-100 (NDX.X), which was still making new multi-year highs!
NASDAQ-100 Tracker (QQQQ) - Daily Intervals
For many trader's it is probably hard to think that there are "profits at stake" in BIG tech names found in the NASDAQ-100 Tracker (QQQQ) $48.73 -2.54%, but SIMILAR to the mid-July to August 16th low, the QQQQ has fallen nearly the same percentage.
With the NASDAQ-100 Bullish % (BPNDX) in "bear confirmed" status, it is NOT a time to be buying FULL POSITIONS (if you normally invest/trade a full position as being equivalent to $1,000.00), but with a some RISK as defined by the various bullish % indicators quickly being reduced (the BPNDX was up at 74% and "overbought" above 70% on 10/15/07, I think a good place to be looking BULLISH the QQQQ for a nice bounce would be the $47.60 level and 200-day SMA.
One reason for buying PARTIAL positions, or SMALLER position size at this point is that many of the major indices look like a BULL would be trying to catch the proverbial "falling knife."
Buying a PARTIAL position allows a trader/investor that might NORMALLY buy $1,000.00 (or $5,000, or $10,000 as a full position) the ability to "take some heat" near-term.
Call options are an EVEN BETTER investment tool, as the MOST a trader/investor can LOSE is the AMOUNT of money invested in the CALL OPTION itself.
One trade I might seriously take a look at on the OPTION side of things is a QQQQ December $49 Call (QQQ-LW) which finished today's CLOSE with a $2.06 offer.
One (1) contract would cost a trader $206.00 (excluding commission) and would expose a trader to an equivalent 100 QQQQ shares.
A position could be established tomorrow morning, but to ADD to the BULLISH position, I'd want to see the LONGER-TERM WEAKER and BROADER Russell 2000 Index ($RUT.X) back above 782, where the QQQQ "should be" trading BACK ABOVE $50.00.
What I feel, based on observation, that the QQQQ still allows at this point is to SHY AWAY from the continued uncertainty weighing on the FINANCIALS, and perhaps the recent SURGE in oil prices, that should we see PROFIT TAKING there, would have QQQQ components rather VOID of both.
S&P Depository Receipts (SPY) - Daily Intervals
The SPY is just "full" of financials and have been of NO HELP to a bull in recent MONTHS. Today's weakness in the ENERGY sector was another negative.
The "reason" I think a QQQQ BULL can be patient at this point is that there may be further reason for BIG TECH bulls to protect gains, or at this point, keep losses to a minimum as the SPY looks near-term vulnerable to the $141 level.
Some November option expiration work I showed in today's Market Monitor on both the SPY and the S&P 500 ($SPX.X) 1,439.18 -0.99% has November option montages suggesting some formidable RESISTANCE into Friday's expiration at SPX 1,450, and SPY $147, which would be equivalent to SPX 1,470.
With the VIX.X 31.09 +9.08% having RISEN notably from the 19.00 measure earlier this MONTH, that says to me that there have been a greater number of call SELLERS/put BUYERS than there has been the number of call BUYERS/put SELLERS.
If we're to see any type of inflection point changes, or a shift into Friday's
expiration, the VIX.X level to monitor would be 33.88 at a "peak," and a measure
New Long Plays
New Short Plays
Long Play Updates
Allstate Corp. - ALL - close: 53.18 chg: +0.05 stop: 49.99
ALL continued to show relative strength on Monday by posting another gain. However, the rally was struggling into the closing bell and shares had essentially rolled over. The stock looks poised to pull back toward what should be support near $52.00. We are suggesting readers jump in on a dip. Our suggested entry point would be on a dip into the $52.50-52.00 range. Our official "trigger" will be $52.50. However, given this bearish market environment, we would suggest that readers wait for signs of a bounce first before initiating positions instead of just buying ALL as it trades down through $52.50. Looking at the daily chart we do see some resistance near $56.75-57.00. Our target will be the $57.50-58.00 range or its 200-dma, whichever comes first. Our stop is at $49.99 but more conservative traders may want to use a stop loss closer to $51.00.
Picked on November xx at $xx.xx <-- see TRIGGER
CVS Caremark - CVS - cls: 41.43 change: -0.13 stop: 39.85
Shares of CVS are still holding up pretty well. Friday's session produced a bearish reversal candlestick but today did not see a lot of follow through until right there at the very end near the closing bell. Look for a bounce near $41.25-41.00 or wait for a new relative high over $42.40 before initiating new positions. More conservative traders might want to consider a tighter stop loss near $40.50. Our target is the $45.85-46.00 range. Our time frame is year-end.
Picked on November 07 at $42.15
WMS Ind. - WMS - close: 34.44 chg: -0.59 stop: 32.39
WMS lost 1.69% but the selling seemed relatively mild. Readers can choose to buy a bounce here near $34.50 or wait for a new relative high over $36.00. Readers might want to tighten their stops! Our target is the $39.75-40.00 range. The P&F chart is very bullish with a $59 target.
Picked on November 08 at $36.11
Short Play Updates
Amgen - AMGN - close: 54.50 change: +0.22 stop: 57.76
If you just look at the closing numbers then AMGN's 22-cent gain looks like relative strength. However, if you look at the trading on the intraday chart the stock produced another failed rally pattern. this actually looks like a new entry for shorts although more conservative traders may want to wait for a new decline under $54.00 before starting positions. Our target is the $50.15-50.00 mark. More aggressive traders could aim for the August lows. Our stop is a little bit wide, which makes this higher risk. Furthermore any time you play a biotech company there is a higher level of risk. You never know when there will be a positive or negative press release about some drug, some clinical trial or some news from the FDA or a rival that could send shares of a biotech stock gapping either direction. FYI: In the news today it was revealed that AMGN had received two federal subpoenas over a couple of its products (source: AP). That's never good news and should reinforce the bearish trend.
Picked on November 11 at $54.28
Microchip Tech. - MCHP - cls: 30.65 change: -0.86 stop: 33.05
Technology stocks led the market lower on Monday. Or maybe the correct phrase is "bled" the market lower. Many of the recent high-flying tech stocks were crushed today. Meanwhile semiconductors continued to drift lower. MCHIP lost 2.7% and we remain bearish. More conservative traders might be tempted to tighten their stops. There is obvious support near $30 but our target is the $28.50-28.00 level. The P&F chart is bearish with a $19 target.
Picked on November 11 at $31.51
NVIDIA - NVDA - cls: 30.03 change: -3.33 stop: 35.05
Ouch! It was a rough day for NVDA shareholders. The stock quickly broke down under technical support at the 100-dma. We were suggesting a trigger to short NVDA at $32.45. The stock blew right past it as it lost almost 10% to close near round-number support at $30.00. If you did open positions this morning we would SERIOUSLY consider covering and locking in a gain. Normally, when a stock closes at its low for the session, like NVDA did today, it's a bearish sign for tomorrow. However, the major stock indices continue to look very oversold and due for a bounce. The $30.00 level would be the perfect spot to look for an oversold bounce in NVDA. Now having said that our target remains the 200-dma, currently near $27.50. As expected the stock has produced a brand new Point & Figure chart sell signal and the new target is $23.00.
Picked on November 12 at $32.45
Closed Long Plays
CSX Corp. - CSX - close: 42.71 change: -0.85 stop: 42.75
Transportation and railroad stocks continued lower in spite of a pull back in crude oil. Shares of CSX broke down under what should have been technical support at its rising 200-dma. We had been waiting for a breakout over resistance near $45.00 but that failed to occur. We're dropping CSX as a bullish candidate - the play unopened.
Picked on November xx at $xx.xx <-- see TRIGGER
Esterline Tech - ESL - cls: 52.55 change: -0.65 stop: 53.49
ESL has failed to rebound and today's session looks like a bearish failed rally pattern under its 50 and 10-dma. This looks more like a bearish entry point for shorts but the stock could have support near $51 and its 100-dma. We had been waiting for a breakout and suggested a trigger at $55.51 but that has failed to occur. We're dropping the play unopened.
Picked on November xx at $xx.xx <-- see TRIGGER
Gerdau Sa ADS - GGB - close: 27.31 change: -1.72 stop: 27.90
Metal, steel and mining stocks almost all turned lower today, some sharply lower. GGB lost almost 6% and broke down under what should have been support near $28.00. Shares hit our stop at $27.90 closing the play.
Picked on October 28 at $30.37
Companhia Vale Rio - RIO - cls: 32.85 change: -2.85 stop: 34.95
The once high-flying metal and mining stocks have been hit hard with profit taking. RIO broke down from its trading range and closed with an 8% loss today. Shares hit our stop loss at $34.95 relatively early this morning.
Picked on November 06 at $37.75
Closed Short Plays
NVE Corp. - NVEC - cls: 25.24 change: -0.97 stop: 28.76
Target achieved. The market's afternoon plunge gave NVEC the little extra oomph it needed to hit our target in the $25.50-25.00 range. If you did not exit we would suggest caution since NVEC is very oversold and $25.00 should be round-number, psychological support (and don't forget that NVEC has a relatively high amount of short interest).
Picked on October 22 at $29.30 *gap down entry
Today's Newsletter Notes: Market Wrap by Jeff Bailey and all other plays and content by the Option Investor staff.
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