Are traders finally catching the holiday spirit with visions of a Santa Claus rally dancing in their head? The bulls have been beaten senseless over the six days since the Fed decision with the Dow losing about 700 points. Today's midday rebound may have been less about Santa and more about covering shorts but there is plenty of historical precedence to justify a switch to a bullish stance.
Dow Chart - 120 min
Nasdaq Chart - Daily
The only material economic report today was the New Residential Construction starts for November. Those came in at 1.187 million units on an annualized basis. This was a drop of -3.87% from October levels but was much better than the 1.170 million analysts had expected. In fact the bottom in starts for this cycle was back in September at 1.182 million units. Could this be a bottom forming in the housing sector? It may be too early to start calling a bottom since there have been numerous lows in this cycle with temporary rebounds that have all failed. 1.2 million units would be a good place for a bottom since analysts believe this is the minimum level required to cover the new home requirements from new households being formed and from new immigration. The strength in the November numbers came from multifamily units or apartments, which increased by 332,000 units while single family homes fell another -2.3%. If builders want to have homes ready for the spring selling season then December and January are the months they need to start construction. That gives them five months to complete in time for spring sales and summer moves. This makes the next two reports critical for determining builder health.
Housing Starts Chart
Wednesday is another light day for economics with only the weekly Mortgage Applications and Oil inventories. The real key will be the continued earnings from the major brokers. Today Goldman Sachs (GS) was the focal point as they reported their Q4 earnings. Goldman's profit came in at $7.01 per share compared to $6.59 in Q4-2006 and the $6.61 expected by analysts. This equated to $3.17 billion in profits. Revenue rose to $10.74 billion from $9.41 billion in the comparison quarter.
By all metrics it was a good quarter for Goldman when compared to the losses being predicted for the other major brokers. Although some analysts suggested the gains were not that clean. There was a $734 million gain from real estate investments and $800 million from the sale of some power plant interests. There was also a 75-cent per share gain on some miscellaneous investments that had not been expected. Goldman also saw withdrawals from its quantitative hedge funds because those funds were performing badly. Goldman's CFO did not inspire investors when he gave a cautious outlook for the future. He said the dislocation in the capital markets was continuing and declined to say the worst was over. Instead he said we are just getting closer to the bottom. Goldman was knocked for a $7 loss but that was better than the -$12 intraday levels. There are worries that the current quarter will be a disaster. Goldman books its incentive fees from its hedge funds in December and those funds have been hammered by market conditions and investor withdrawals. A CNBC reporter said after the close a VP of Goldman told him the last two weeks had been horrible and among the worst in the companies history. It sounds like they zigged when they should have zagged. It is tough to always be on the right side of billion dollar trades as Goldman has done so well in the past. Goldman did say they have reduced their risk to subprime mortgages and CDOs to about $1 billion and leveraged loans to $27 billion.
Next up will be Morgan Stanley on Wednesday and they are expected to show additional losses due to subprime problems. Bear Stearns on Thursday is also expected to report more losses but there are signs the damage at Bear may be nearly over. The losses in the financial sector are largely the cause of the reduced estimates for the entire S&P. According to Thomson the financial are expected to show a -38% drop in earnings for Q4 and another -19% drop in Q1. They are expected to recover with +17% gains for all of 2008. The consensus is for financials to take the maximum write-downs possible in 2007 to avoid having the 2008 results tainted. They all want to get the bad news behind them and move on with their business. This would provide some easy comps to beat in Q3/Q4 2008. Merrill Lynch is expected to add another $6 billion to their previously announced $8 billion write-down.
Adobe helped rally techs after posting better than expected earnings on Monday night. Adobe beat the street by a penny at 38 cents per share and that compared to 30 cents in the year-ago quarter. That +28% jump in profits came on the back of strong sales in its premium products. Adobe also raised its forecast for Q1 to revenue of as much as $885 million and well over analyst's estimates for $837 million. Adobe also said new products in the pipeline would enable it to close 2008 very strong.
Palm (PALM) reported earnings or lack thereof after the close with a $9.63 million loss or -9 cents per share. In the year-ago period Palm earnings were +12 cents per share. The loss was worse a penny worse than analyst's expected. The bleeding is expected to worsen with Palm saying it could lose up to $33 million in Q4 or 33-cents per share. Palm's problems have led to a cancellation of products and churn in the executive positions. There are rumors that Elevation Partners, who closed a deal to acquire a 27% stake in October, could take the company private given the drop in share price to $5.50 from the $19 high in October. There have also been rumors that Palm could go under given the strong competition in the smart phone space by RIMM and Nokia. Palm's Treo smart phone sales only rose to 686,000 units for the quarter and well below the 745,000 units analysts were expecting. PALM sank to $5.25 in after hours from its $5.92 close.
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Greenspan is still rocking the market with a speech over the weekend where he brought up the possible return of stagflation. That is when prices rise and growth slows at the same time. This was a problem he faced in his term as Fed head. He also reiterated that recession potential today was 50:50 in his opinion.
The Fed is trying to take action to prevent another mortgage crisis. Now that the horse is out of the barn they are going to close the doors. Some of the rules they are considering would prohibit "no doc" loans and require 12 months of escrow for taxes and insurance. They are also proposing a ban on higher broker fees for higher yield products, a ban on misleading mortgage ads and a ban on most prepayment penalties. They would discourage loan procedures that would encourage inflated appraisals and track default patterns to identify lenders that made a habit of loaning to people who could not repay the loan. Borrowers would have to qualify at the highest potential rate over the life of the loan and would have to re-qualify for any re-finance or any future loan modification. Their proposed guidelines were put on the table Tuesday for a 90-day public review. After the 90-days the Fed can decide which rules they want to enact and which rules they will change.
The ECB offered to loan euro-zone commercial banks extra money through year-end to handle critical end of year transactions. Analysts had expected about $160 billion in borrowings but the ECB reported this morning that more than $500 billion was borrowed. The ECB said it would accept all bids with an interest rate offered of at least 4.2%. The ECB had been worried that banks were going to hoard cash and stay out of the market until 2008. Evidently there was vast understated demand from the current credit crisis. The Bank of England also injected $20 billion in three-month loans. The results of the U.S. Federal Reserve auction for $20 billion in funds that was held on Monday will be announced on Wednesday. Analysts say it was at least five-times over subscribed. Given the ECB move of $500 billion there are some who think the Fed could expand its $20 billion cap and lend money to anyone who bid over a minimum rate. This will be an interesting story to follow tomorrow.
The January crude contract expired at $90.49 today after a very volatile 7-days. The contract spiked overnight on the last day of trading to $92.64 on news Turkish troops had invaded Iraq. The news was confirmed but it was also reported that the incursion was already over and troops were returning to Turkey. Oil prices immediately fell back to $90 on the news. The February contract closed the day at $90 to move back in parity with the expiring January futures. The 20 analysts surveyed by Platts call for oil to average $74 for all of 2008. Meanwhile Goldman Sachs raised their estimate yesterday for oil in 2008 to average $95. There is definitely a wide range of opinions on future prices. Mastercard publishes a weekly SpendingPulse report covering things like charges at service stations. According to MasterCard gasoline purchases surged +3.4% in the week ended on Dec-14th. That amounts to 9.331 million barrels of gasoline per day. The winter storm apparently prompted drivers to stock up in advance of the actual storm similar to buying patterns ahead of a hurricane. The four-week average was still -0.2% lower than the same period in 2006 indicating consumers are driving less due to higher gasoline prices. Estimates for the oil inventories tomorrow are for a drop of -1.8 million barrels in crude levels and a gain of +1.2 mb in gasoline supplies.
January Crude Futures Chart - Daily
What prompted the rebound today? Is it Santa coming to Wall Street or just another oversold bounce? Don't we wish we knew the answer to that question? The better than expected Goldman earnings and news of the $500 billion in liquidity injected by the ECB caused a gap higher open but it was quickly sold once again. By noon the Dow had plunged -150 points from the opening highs. The Dow then traded sideways for an hour just above 13100 before exploding back into positive territory on no news. If you look at the intraday chart on 3-5 minute scale there were at least six major program trades launched. There was a sell program at 10:00 and another at 11:00 that lasted nearly an hour. The final plunge accelerated on heavy volume between 11:45 and noon. I believe this was funds cleaning up their positions ahead of the holidays and possibly some lingering option expiration moves. There were two major buy programs at 1:PM and again at 2:PM that produced a +150 point rebound to 13265. The rest of the day was lackluster after the last program ended at 2:30. The pre-close spike was probably short covering by those who were scared out of their positions by the two buy programs. Unfortunately 13250 was resistance at the open and again resistance in the afternoon. There was another sell the close attempt that knocked 50 points off the Dow in the last 20 min but the damage was minimal.
Volume was actually pretty decent at 6.4 billion shares and the highest level in the last 3-days. It was about 2:1 in favor of advancing volume suggesting there was more buying of the dip than selling of the bounce. As we get closer to the holidays the bears are going to become scarcer. The holidays are typically bullish as workers eager to invest their holiday bonus start shopping for stocks instead of presents as year-end approaches.
The Nasdaq rebounded about 50 points from its intraday low to retest 2600 twice in the afternoon. Both attempts failed but the index managed to hold off the end of day sellers and remain pretty close those highs. With PALM earnings today, ORCL tomorrow and RIMM on Thursday there is plenty of risk remaining for tech traders. Palm is not a market mover and the Nasdaq futures are actually up +5 overnight despite the worse than expected Palm earnings. Oracle could be a mover on Wednesday after Larry Ellison unloaded $1 billion in stock over the last month or so. Ironically ORCL was one of the strongest rebounders late this afternoon. Clearly there was some short covering in progress there. The Nasdaq has support in the 2550 range and right at the low for the day.
S&P-500 Chart - Daily
The S&P-500 hit support at 1460 on Monday and managed to hold at that level until 1:PM. The afternoon sell cycle ended those hopes and the rebound on Tuesday's open was lackluster at best and could only manage 1455. The intraday low was 1435 at noon. The afternoon buy programs managed to retest the 1460 level but it held firm and would be my trading indicator for Wednesday. If you are following my recommendations from Sunday I thought we might get a trading bounce on the first test of 1460 and although the bulls tried to pull it off they just could not get any traction. A break of 1460 was a signal to double up on shorts. For the rest of the expiration week I would look to remain short under 1460 and only small trading longs over 1460. Should a miracle happen and we somehow manage to move bock over 1490 I would double up on longs again. We are very oversold and that could produce a major short squeeze on any unexpected news. Between 1460-1490 could be a trading zone for the next couple days IF something happens on Wednesday to get us back over 1460. Right now it looks like another failure at 1460 could be another shorting opportunity. I hate to be negative going into the holidays but sentiment is definitely on the side of the bears despite the afternoon rebound.
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New Long Plays
Evergreen Solar - ESLR - cls: 15.70 chg: +0.68 stop: 14.65
Why We Like It:
Picked on December 18 at $15.70
New Short Plays
Long Play Updates
Salesforece.com - CRM - close: 58.50 change: -0.23 stop: 55.95
Aside from some early morning volatility shares of CRM continue to trade sideways. The intraday bounce from its rising 10-dma is a good sign but the stock isn't making much progress with round-number resistance at $60.00. We remain bullish on CRM above $58.00 but would hesitate to open new positions based on market conditions. The Point & Figure chart is bullish with a $74 target. Our target is the $64.00-65.00 range.
Picked on December 11 at $59.25 *triggered
Coca-Cola - KO - close: 62.28 change: -0.18 stop: 61.45
A bounce back above $62.40-62.50 could be used as a new bullish entry point but if you're launching new positions now you may want to use a stop loss just under today's low (61.88). We've been targeting the $66-67 range with a year-end time frame. With only two weeks left in the year that probably won't happen. KO might be able to do it by the middle of January. The bullish P&F chart suggests a $69 target.
Picked on November 15 at $61.95
PC Mall - MALL - close: 10.92 change: +0.67 stop: 9.90
Good news! MALL is displaying some impressive relative strength. Shares spent most of the day trading sideways in the $10.10-10.25 zone and then this afternoon they broke out higher. The stock closed with a 6.5% gain. This looks like a new (aggressive) entry point for bulls. MALL has already hit our initial target at $12.25. Our second, more aggressive target is the $13.75-14.00 region. FYI: The P&F chart is still bearish following the sharp sell-off. We would consider this an aggressive play given the stock's volatility.
Picked on December 04 at $10.25 *triggered
Short Play Updates
Bob Evans Farms - BOBE - cls: 28.45 chg: -0.06 stop: 31.75
We have to urge caution on BOBE. The stock traded to $27.57 this morning and then bounced back sharply. The move on the daily chart looks like a possible one-day reversal pattern. At this point we would wait and watch for a new failed rally in the $29.50-30.00 zone as a new entry point for shorts. We're aiming for the $25.25-25.00 zone. FYI: The most recent data puts short interest at 11.6% of the 32.74 million-share float. That is a relatively high amount of short interest and raises the risk of a short squeeze.
Picked on December 16 at $29.01
Mack-Cali Realty - CLI - cls: 31.38 chg: -0.61 stop: 35.15
Warning! We have to urge caution on CLI too. The stock continued to show weakness and shares hit $30.41 intraday. All we needed was another 16 cents and CLI would have hit our target in the $30.25-30.00 zone. We're suggesting readers be careful because the sharp bounce back and the big volume suggests a possible one-day reversal pattern. We would expect a bounce tomorrow. Broken support near $34.00 should now be overhead resistance. Our target is the $30.25-30.00 range. The P&F chart is bearish with a $27 target.
Picked on December 16 at $32.74
C.H.Robinson - CHRW - cls: 51.94 chg: +0.44 stop: 54.55
Lack of follow through on last week's bearish reversal in CHRW raises the risk for bears. Shares of CHRW have been trading sideways the last few sessions with support near its 200-dma and resistance near its 10-dma. More conservative traders may want to wait for a drop under $51 before starting new plays. Our target is the $46.00 level. More conservative traders may want to get out near $47.50 while aggressive traders could aim for real support near $45.00. The P&F chart points to a $34 target. FYI: The most recent data puts short interest at 5.2% of the stock's 166.8 million-share float. That is a relatively high amount and raises the risk of a short squeeze.
Picked on December 16 at $51.52
DELL Inc. - DELL - close: 24.02 change: +0.37 stop: 25.05
We don't see any major changes from our previous comments on DELL. The stock produced an oversold bounce today. The close over short-term resistance at $24.00 is bullish but the trend is still very bearish. Our target is the $22.10-22.00 zone above the March lows. The P&F chart is very bearish with a $17.00 target.
Picked on December 11 at $24.36
Emergency Med.Svs. - EMS - cls: 29.96 change: +0.66 stop: 32.05
EMS got a boost today after one analyst firm started coverage on it with a "buy" rating. We remain bearish following yesterday's technical breakdown. Look for a failed rally under $31.00 or a new decline under $29.75 as a new entry point for shorts. There is potential support near $27 and then again near $25, which is more easily seen on the P&F chart. We are listing two targets. Our first target is $27.25. Our second target is $25.25. FYI: The stock does have a relatively high amount of short interest and a very small 8.57 million-share float, which raises the risk of a short squeeze.
Picked on December 17 at $29.30
Granite Constr. - GVA - close: 37.51 change: -0.03 stop: 42.15
GVA looks like it wants to bounce tomorrow. We would watch for a failed rally in the $39.00-40.00 zone as a new bearish entry point for shorts. Our target is the $34-33 range near its lows for the year. FYI: The most recent date puts short interest at 7.8% of the 34.4 million-share float.
Picked on December 16 at $38.73
IAC Interactive - IACI - cls: 26.76 chg: +0.12 stop: 28.81
IACI is trying to rebound near support at the neckline to its bearish head-and-shoulders pattern. A bounce back toward $28 would not be out of line here. Wait for another failed rally or a new drop under $26.00 as an entry point (although if you're shorting it under $26 we suggest aiming for our second target). We have two targets. Our first target is the $25.50-25.00 range. The H&S pattern, if it follows through, is forecasting a target in the $22 region. Our second, more aggressive target will be the $22.50 level. The P&F chart is still bullish for now but is on the verge of a breakdown. FYI: The latest data puts short interest at about 4% of the 120 million-share float.
Picked on December 11 at $27.60
Medicis Pharma - MRX - close: 25.72 change: +0.18 stop: 28.05
MRX is also trying to find support near its November lows. We would not be surprised to see an oversold bounce here and a failed rally near $26.50 could be used as a new entry point for shorts (or a new relative low under $25.35). Our target is the $23.00-22.50 zone. The P&F chart is bearish with a $19 target. 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
Paychex - PAYX - close: 38.14 change: +0.37 stop: 40.01 *new*
Tomorrow is our last day for PAYX. The company is due to report earnings after the closing bell on Wednesday. We do not want to hold over the report so we'll plan to exit at the closing bell. Wall Street expects PAYX to report a profit of 39 cents a share. We're not suggesting new positions. Please note our new stop at $40.01. Our target is the $37.25-37.00 range. More aggressive traders could aim for the $36 level and its April lows.
Picked on December 11 at $39.62
Tempur-Pedic Intl. - TPX - cls: 27.32 chg: -0.09 stop: 30.67
Bullish reversal alert! Be careful with TPX. Yesterday the stock hit our first target at $27.25. Today the shares dipped to $26.11 before bouncing back. The move looks like a one-day bullish reversal pattern and we would expect more of a bounce tomorrow. We're not suggesting new positions at this time and more conservative traders may want to exit completely right here. Our second target is the $25.25-25.00 range. FYI: It's important to note that the most recent data puts short interest at almost 19% of the 68-million share float. That is a high degree of short interest and raises the risk of a short squeeze.
Picked on December 12 at $30.67
Closed Long Plays
Closed Short Plays
Today's Newsletter Notes: Market Wrap by Jim Brown and all other plays and content by the Option Investor staff.
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