If this market were a turkey I would kill it and bury it rather than risk food poisoning at the dinner table on Thursday. Ugly does not do justice in describing the various index charts and news releases making the rounds. Bearishness is rampant and by listening to analysts and reporters you would think we were heading into a world war rather than a slowdown in the economy. It must be time to buy because there is plenty of blood in the streets if you believe the news.
Dow Chart - Daily
Nasdaq Chart - Daily
There was a flurry of economic reports on Wednesday led by the second reading on the Consumer Sentiment for November. Sentiment actually rose to 76.1 from the initial November reading of 75.0. This was still down from the 80.9 posted in October and still the second lowest reading since the 1990s. You know the reasons so I don't have to spell them out here.
The Conference Board Leading Indicators, which should be named lagging indicators since it always runs a month behind, fell -0.5% in October. Seven of the ten components subtracted from the reading. The three-month annualized growth rate fell to -4.8% and the lowest level since January-2001. The six-month annualized rate fell to -1.0% clearly showing how quickly the growth has slowed in the last three months.
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Mass Layoffs rose to 1,320 events involving 50-employees or more and totaling 131,780 workers for October. This was the highest level of layoffs events since January. Layoffs are expected to continue rising over the next several months. Year-end changes are routine and getting a holiday check and a pink slip are not uncommon.
The most shocking report for the day was the Risk of Recession Probability, which came in at 47% for October. This was another monster jump from last months 32% probability. This is up from only 15.3% in July. This is the highest level since early 2002. The risks are growing primarily from the rising delinquencies in home mortgages, soaring foreclosures and rising defaults on consumer credit loans. The credit crunch is returning, gasoline prices crushing consumer budgets and retailers are expecting ugly holiday sales. This falling consumer confidence was the major drag on the recession numbers. It is not a pretty picture!
Recession Probability Chart
Traders were not really looking at the economic reports but the global indexes. The major indexes were getting hammered even worse than the U.S. markets. Japan's Nikkei index fell -2.5%. The Hong Kong Hang Seng Index swung more than 1400 points intraday on Tuesday before closing up +341. Then it was slammed for a -1153 point loss on Wednesday of -4.15%. The BSE-30 fell -2.3%, Jakarta -2.3% and the Shanghai was relatively composed with only a -1.5% loss. In Europe it was not any better. The CAC-40 fell -2.8%, DAX -1.5%, Swiss SSMI -2.56% and FTSE-100 -2.5%. They used to say when the U.S. caught a cold the world sneezed. Now we can't tell who is sneezing and who is really sick. The subprime slime has contaminated markets worldwide and the credit crunch is turning into a credit strangle. So many global banks had bought into the U.S. mortgage market using the various mortgage-backed securities that our mortgage virus has now contaminated the global financial system. Banks in Europe were already off from 6% to 10% for the week still falling. The backbone of the American mortgage system, Fannie Mae (FNM) and Freddie Mac (FRE) were still reeling from their multiyear lows hit on Tuesday. With those mortgage banks running at capacity and in financial trouble of their own it cast a new pall over the financial sector. Add in the growing U.S. recession worries and the markets had plenty to worry about ahead of the holiday.
Countrywide Financial (CFC) has to disclaim bankruptcy rumors on almost a daily basis now but nobody believes them. They are currently leveraged 17:1 and 40% of their loans are negative amortizing ARM loans. Treasury Secretary Hank Paulson helped sour the mood saying foreclosures in 2008 would be significantly bigger than the disaster we are already seeing in 2007. AIG dropped another -3 points on worries they have more subprime exposure than originally disclosed. Even GE was tanking on charges related to the subprime slime. Goldman Sachs lost -$8 after saying its Global Alpha hedge fund will end the year with only $4 billion in assets compared to the roughly $10 billion it started with in 2007. This is a quantitative fund that relies on computer models to make big bets. Those quant funds have been killed in 2007 because of the abnormal swings in the credit markets. Goldman also said many investors were asking for their money back.
That could be what is wrong with the broader market. You may remember that last Thursday was the last notice day for investors wanting to withdraw money at year-end from hedge funds. The markets have gone into a steep dive since the 15th and it could be due to a lot of hedge funds selling to meet redemption requests. Bond yields are falling with money pouring into the safety of treasuries. The yield on the ten-year note broke below 4% intraday for the first time since June-2005. The US Dollar Index fell below 75 intraday for the first time in years.
Ten-Year Yield Chart
US Dollar Index Chart
The only sector still treading water is energy with crude oil setting a new historic high at $99.29 on Wednesday. Crude inventories were mixed in today's report. The EIA report showed crude stocks fell -1.1 million barrels but the API report showed stocks rose by 1.4 million barrels. This confused traders and the much-awaited $100 tick never happened. The key factoid was a monster drop in distillates by -2.4MB in the EIA report and -3.6MB in the API report. Distillates are things like jet fuel and heating oil. Home heating oil hit a new record high on the news at $2.72. With the cold front blanketing the U.S. we could easily see $3 heating oil soon as demand increases.
January Crude Oil Chart - Daily
Heating Oil Chart - Daily
A new factor is entering into the oil trade. Since oil is a shrinking resource with a high daily demand, institutions are using it as an inflation play instead of the traditional bonds and gold. Buying oil as we approach the peak of global production is almost a guaranteed trade. It also compensates for the falling dollar and it is inflation proof. This movement into the futures contracts is skewing the normal supply demand volatility cycles. This is only going to get worse as demand, even our current weaker demand growth, continues to grow. Production has stagnated but not yet peaked but that event is rapidly approaching. Long-term oil investments are going to be worth more than gold.
Today's market action was no exception to the recent trend. Mid afternoon rallies were sold and we closed at new post August lows across the board. The Dow closed at 12799 and under the August closing low of 12,845.78. A close below this level as we had today is a Dow Theory sell signal. The general outline of a Dow Theory sell signal has these three conditions. 1. Both the Dow and the Dow Transports undergo a significant correction from joint new highs. This happened back in August. 2. In a rebound rally from that correction both averages fail to rise above their prior highs. 3. To trigger the sell signal both averages have to close below their respective correction lows, which happened today. Why is a Dow Theory sell signal important? According to Mark Hulbert, founder of the Hulbert Financial Digest, a 70-year study from 1930 to 1997 found that Dow Theory signals averaged 4.4% per year better than regular buy and hold investing. That is enough to make many institutional investors sit up and take notice.
Not everyone believes this will happen in 2007. Abby Joseph Cohen, Jason Trennert and David Bianco are still holding to their year-end forecasts of 1600 on the S&P by year-end. Abby is strategy head at Goldman Sachs, Joseph at Strategas Research partners and David at UBS. They expect the markets to rebound with the steepest year-end rally since 1971. Abby also does not believe the U.S. will see a recession. Looks like these strategists are going to be severely tested over the next five weeks.
The Dow declined to 12840 on Tuesday but rebounded out of danger before the close. With the global indexes down hard overnight the Dow opened lower to 12820 and under the signal point but rebounded by late afternoon on positive news from GM. That was not enough to scare away the bears and the closing sell cycle we have seen so often over the last three-weeks slammed the indexes pushing the Dow to close under 12,800 to trigger the sell signal. Regardless of the Dow Theory a close under the August lows is a definite sell signal on just a technical basis. This suggests the next Dow target will be 12500 and not 15000 as those analysts expect. At today's close the Dow has declined -1399 points or -9.9% from its intraday high of 14198. On a closing basis that is a drop of -1365 points or -9.6%. If today is any indication of what Friday is going to look like the Dow will meet the -10% correction criteria.
The Nasdaq finally cracked the support of the 200-day average to close at 2562 and while still off its August lows by 100 points or so the Nasdaq has fallen -297 points on a closing basis and a -10.4% drop. This puts the Nasdaq Composite in full correction mode with a potential target of 2500 as initial support. The Nasdaq 100 or NDX has actually performed rather well over the last two weeks. The NDX was the hardest hit when the correction began and fell -245 points in only four days. It found support at 2000 and has held over that support for seven trading days. Even though it has been holding at this level today's close gives it a -10.4% correction loss as well. Based on the NDX relative strength I would be a strong buyer of big cap techs when this correction is over.
The S&P-500 closed at 1416 or -9.5% from its closing highs but today's close was a new 3-month low. There is minor support at 1407 but the real backstop is down at 1375. The S&P is far more important to fund managers and that close under uptrend support at 1425 is likely to make it dinner table conversation on Thursday.
S&P-500 Chart - Daily
Russell-2000 Chart - Daily
Nasdaq-100 (NDX) Chart - Daily
The Russell-2000 has been the weakest link since the middle of October. Today's close at 740 is a new 52-WEEK LOW for the small caps. This is extremely bearish and represents an 11.4% correction from its October 11th high. I do not think the worst is over for the small caps even though 740 is support from April 2006. If fund managers obey the Dow Theory sell signal then small caps are going on sale when the market reopens.
The only bright spot besides the Nasdaq NDX is the NYSE composite at 9405. It is still declining but has yet to reach its August lows by 300 points. The NYSE has only fallen -8.7% but I am afraid its strength is about to be tested. At this point I would focus on the NDX as the major standout but with the NYSE and Russell picking up speed I think it is a mute point.
45 of the last 55 years the day before and after Thanksgiving combined produced a positive result. With the Dow off -211 and the sell signal triggered I think the odds of a repeat of those 45 years is nearly impossible. Black Friday is normally positive but it is going to have a tough task ahead to continue that trend. Friday is not normally a fund day in the markets due to low volume with most funds not coming back to the market until Monday. If we start out with a negative bias on Friday that could change quickly. If funds do jump into the market on a low volume holiday Friday it could get really ugly. We are reaching textbook oversold extremes but there is nothing on the horizon that we can expect to stop the slide. If you look at the internals on the market stats graphic at the beginning of this commentary you will see only 61 new 52-week highs and 901 new 52-week lows. That is actually a smaller number of new lows than Monday or Tuesday with Tuesday hitting 1035 new lows. The trend has been accelerating and there are no signs of change. As long as the global markets are still tanking on financial worries it will be hard for the U.S. markets to lead us higher. I have nothing positive to say except Friday is only a half-day of trading. At least the pain will be over quickly. Eat a lot of turkey and maybe you will be able to sleep through it.
Play Editor's Note: The major indices are in bearish trends dating back to their October peaks just a few weeks ago. While our short-term bias is bearish the indices are looking oversold and due for a bounce. Oversold bounces in a bearish trend are usually sharp but they also tend to be over quickly. While Friday is a shortened trading session we will be adding new plays to the newsletter this weekend.
New Long Plays
New Short Plays
Long Play Updates
Cicso Systems - CSCO - cls: 28.25 chg: -0.79 stop: 27.89
Ouch! It was a tough day for CSCO. The stock failed to see any sort of follow through on Tuesday's afternoon bounce. Shares have now closed under technical support at the 200-dma and are testing support near $28.00. The close under the 200-dma is definitely bearish as is the failure of the first oversold bounce from $28 several days ago. Normally we would not be suggesting bullish positions here. However, the major market indices are looking short-term oversold and due for a bounce. Today's dip toward support may prove to be an attractive entry point in CSCO. Yet we would wait for a rebound first. Look for a rally past $28.80 (at the 200-dma) or a rally past the 10-dma (29.30) before initiating positions. Currently we have two targets. Our first target is the $31.85-32.00 range. Our second, more-aggressive target is the $33.50-34.00 zone. Our time frame is six to eight weeks.
Picked on November 18 at $29.94
CVS Caremark - CVS - cls: 40.82 change: -0.68 stop: 39.85
Yesterday's dip and rebound looked like a new entry point for bullish positions. Today's weakness just looks like trouble. The stock has broken down under short-term support and technical indicators are turning bearish. Given Wednesday's performance we would expect a decline toward round-number support at $40.00, which is bolstered by its rising 50-dma. A bounce near $40 would look like another bullish entry point but do so cautiously. The markets are definitely struggling and the major indices are in bearish trends. This is not the best environment to be starting new bullish positions. Our target is the $45.85-46.00 range. Our time frame is year-end.
Picked on November 07 at $42.15
Coca-Cola - KO - close: 62.25 change: -0.54 stop: 59.59
Dow-component KO hit another new multi-year high this morning but eventually gave back its gains to close lower. Shares are testing short-term support near $62.00. A bounce from here could be used as a new bullish entry point. However, odds are growing that KO will test the $61.00 level. We would encourage readers to wait and look for a bounce near $61 as an alternative entry point. Our end of year target is the $66.00-67.00 range. The bullish P&F chart suggests a $69 target.
Picked on November 15 at $61.95
UST Inc. - UST - close: 54.70 change: -0.38 stop: 51.99
Shares of UST actually endured Wednesday's market weakness relatively well. The stock traded sideways and hit a new relative high Wednesday afternoon before turning lower into the closing bell. Given the market's performance we would not be surprised to see UST dip back toward $54.00 and its 10 and 200-dma. This area near $54.00 should be short-term support. A bounce near $54.00 can be used as a new bullish entry point. Our target is the $58.00-60.00 range. We would expect some short-term resistance near $56.00. The P&F chart is bullish with a $67 target.
Picked on November 14 at $54.41
Short Play Updates
Amgen - AMGN - close: 52.84 change: -1.29 stop: 56.26 *new*
Biotech stocks are turning lower. The BTK biotech index broke down under its 200-dma. Contributing to the sector's weakness is AMGN, one of its biggest components. AMGN lost 2.38% and closed at a new eight-week lows. We are adjusting our stop loss to $56.26. More aggressive traders may want to keep their stop above the 200-dma (around $57.11). Our target is the $50.15-50.00 mark. More aggressive traders could aim for the August lows. 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.
Picked on November 11 at $54.28
W.R. Berkley - BER - close: 28.81 chg: -0.08 stop: 30.55
BER is still trying to bounce but is running into resistance near $29.00. We told readers that BER would likely find resistance in the $29.00-30.00 region and that a failed rally under $30.00 could be used as a new bearish entry point. The bounce doesn't look like it's over yet so be patient. Our target is the $26.00-25.50 zone. The P&F chart points to a $14 target.
Picked on November 19 at $28.40
Cousins Properties - CUZ - close: 22.88 change: -0.11 stop: 26.31
It was a quiet session for CUZ. The stock traded sideways in a relatively narrow range. The trend is bearish but a bounce back toward $24.00 would not be unexpected. Our target is the $20.25-20.00 range. Readers should note that this is a more aggressive play because of our relatively wide stop loss. Plus, the latest data puts short interest at over 10% of the 36.8 million-share float, which raises the risk of a short squeeze, especially with the stock near support.
Picked on November 19 at $23.65
Medicis Pharma - MRX - close: 25.47 change: -0.46 stop: 28.05
MRX continues to inch lower. Today saw an intraday failed rally under $26.00. This looks like a new bearish entry point for shorts. Our target is the $23.00-22.50 zone. FYI: Any time we play a biotech stock we're dealing with a high-risk situation. MRX seems to be more of a drug company but we're still at risk that some FDA decision or some clinical trial news could send the stock gapping one direction or the other. Furthermore the most recent data puts short interest at more than 23% of MRX's 49.2 million-share float. That is a high-degree of short interest and raises the risk for a short squeeze.
Picked on November 18 at $26.08
NVIDIA - NVDA - cls: 29.71 change: -0.32 stop: 33.51 *new*
NVDA's bounce from its exponential 200-dma yesterday has already failed. The stock closed under round-number support at $30.00, which is a bearish sign. We're not suggesting new positions and readers might want to take some profits here. We are going to inch down our stop loss to $33.51. Our target remains the simple 200-dma (currently near $27.66). We will exit if NVDA trades in the $27.75-27.60 zone.
Picked on November 12 at $32.45
Trimble Navigation - TRMB - cls: 34.85 chg: -0.71 stop: 40.01
The profit taking in TRMB continues. The stock lost another 2% and closed under what could have been round-number, psychological support at the $35.00 mark. TRMB is still looking short-term oversold so we would expect a bounce near $35.00 or the $34.50 region. We would not suggest new positions at this time. Our target is the 200-dma and we're suggesting an exit in the $33.00-32.90 zone for now. The P&F chart is bearish with a $30.00 target. FYI: Short interest looks pretty low, which is surprising and may be out of date.
Picked on November 19 at $37.25
Closed Long Plays
Closed Short Plays
Microchip Tech. - MCHP - cls: 28.11 change: -1.16 stop: 32.11
Target achieved. Semiconductor stocks continue to trade lower. MCHP helped lead the way with a 3.9% sell-off on above average volume. The stock closed at its lows for the session, which is normally a bearish sign for the next trading day. Our target was the $28.50-28.00 range so the play is closed for us. More aggressive traders might want to aim for the $27.75-27.00 zone.
Picked on November 11 at $31.51
Today's Newsletter Notes: Market Wrap by Jim Brown and all other plays and content by the Option Investor staff.
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