The pre Christmas holiday cheer lost its fizz like a week old open bottle of pop. The post holiday markets were still in celebration mode until news of the Pakistani assassination killed the enthusiasm and reminded traders what a fragile world we live in. Fears of an Al Qaeda takeover of a nuclear-armed country put the world on watch and the markets on hold. Volume fell sharply and traders went into hold mode until next week. Any year-end shuffling has already been completed and we are waiting for the New Years ball to drop over Time Square to trigger a new trading year.
Dow Chart - Daily
Nasdaq Chart - Daily
If you were looking for a reason to trade on Friday you had to look hard and I doubt you found good one. The economics were mixed but I doubt anyone was paying attention. The surprise came from the Chicago PMI with a headline number jumping nearly 4 points to 56.6 for December. That was the second month of strong gains from the October 8-month low at 49.7. The unexpected spike pushed the index to a 6-month high. Expectations were for a decline to 51.0 from last months 52.9. The spike was powered by a sudden jump in backorders from 45.9 to 60.7 and new orders from 53.9 to 58.4. Even more surprising was the drop in prices paid by more than 12 points. The strength in the PMI is in stark contrast to the rest of the regional manufacturing reports, which show activity slowing. This surprising strength suggests the national ISM on Wednesday could be stronger than the weak number previously expected. If these economic reports continue to show improvement the Fed will be hard pressed to make any further rate cuts.
Chicago PMI Table
The NAPM-NY report also showed an unexpected gain to 449.1 from 445.0. That was the third consecutive month of gains that pushed it to the highest point since June. Activity levels increased but both the current conditions component and the six-month outlook fell by 2 points. Business is improving but respondents are unsure it will continue. Hiring slowed but that is common in December. Unemployment is holding at 4.6% and inline with the national rate but initial unemployment claims are rising. Given the turbulence in the financial markets centered in New York hiring was expected to be even weaker. This was a positive report given the pessimism surrounding the impact of the current financial woes on the New York area.
The report that did not surprise anyone was the New Home Sales for November. Sales fell to 647,000 annualized units falling -9% from October and -34% from the prior November. This was the steepest year-over-year decline so far in this cycle. The biggest decline came from the Midwest with a month-to-month drop of 27.6%. Months of supply on the market increased to 9.3 months. Surprisingly the median price of a home sold rose +7.3% due mostly to a firming of sales on the west coast. The NAHB Housing Market Index is still holding at its record low of 19 where it has been for the last 3-months. The high for the year was 39 back in February. You could say two months without a decline in the index may be positive since we are only 3-months away from the start of the spring sales season. Builders may start showing signs of hope once the holiday doldrums have passed. December is the worst month for home sales because potential consumers have their attentions focused elsewhere.
New Home Sales Chart
Next week's economic calendar has some important events. The calendar will start out grim with the existing home sales on Monday and they should also show a sharp decline. The ISM Index for December will follow on Wednesday and analysts are not expecting any major change. However with the unexpected jump in the PMI (Purchasing Manager Index) we could see a positive surprise in the ISM. Also on Wednesday the FOMC minutes for the Dec-11th meeting will be released and we will get to see what the Fed was thinking when they cut rates by a quarter point. Future rate cut hopes for the Jan-29th meeting will ride on these FOMC minutes, the ISM and on Friday's employment report.
The Nonfarm Payroll report on Friday is officially expected to show a gain of 70,000 jobs but the unofficial whisper numbers are dropping fast. Most are in the 50K range but some are nearing zero. Unexpected strength here would turn the Fed off completely but unexpected weakness could pull the Fed back into the picture. It should be an interesting economic week.
It has been an interesting year in the markets. The Dow is on track to post a +7% gain, S&P +4% and Nasdaq +11%. The Russell is on track to lose 2% for the full year and that is significantly better than the -7% drop we were seeing back on Dec 18th. The Santa bounce tacked +65 points on the Russell before the assassination killed interest in small caps. The biggest Dow gainer was Honeywell (HON) at +35% and the biggest loser was Citigroup (C) at -48%. The leading sector was energy at +33% and financials at -21% were the losers.
We are only a week away from the start of the earnings season and surprisingly the number of warnings has been minimal once the initial flurry passed. Next week will be the last chance many will have to confess before the actual earnings cycle begins with the first Dow component, Alcoa (AA), reporting on Jan-8th.
This was a window dressing week and it was progressing pretty well until the assassination spoiled the party. Monday is going to be a full trading day but not likely a day full of trading. The real trading will begin on Wednesday and the start of tax selling. Anyone holding their gains to avoid taxes in 2007 will be free to dump away on Wednesday. This should be a short 2-3 day event and can be offset by the end of year retirement contributions hitting the market. Mutual funds who dressed up their portfolios heading into year-end will also be free to shuffle the books heading into a new trading year. Since funds wanting to buy had no reason to wait the bias could be to the downside for the first couple days of 2008. Expect those stocks with the biggest 2007 gains to see the sharpest selling.
The dog shoppers will be active and you can expect a temporary bounce in those stocks most out of favor in 2007. There is a long track record of winning trades from buying the dogs of the Dow early in the year. Historically the average gains on the dogs of the Dow are around 14% for the year. The Dow dogs analysts are pointing to this year are GM, PFE, DD, C and CAT. Conversely the Dow stocks going into January with the best ratings typically return the least for the full year. The stocks analysts following this strategy suggest avoiding are HPQ, T, MO, WMT and AIG.
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Warren Buffett was feeling the holiday spirit last week with multiple purchases. On Friday he agreed to buy the NRG reinsurance business from ING for $441 million. He also announced a move to setup a municipal bond insurer with a triple-A rating to compete with companies like MBIA and Ambac. The new company will initially operate in New York but is expected to apply for licenses in other states as well. This company is going to be a competitive threat given Berkshire's stronger financial position. MBIA (MBI) fell 14% and Ambac (ABK) lost 12% on the news. Buffett announced on Christmas Day that Berkshire was spending $4.5 billion to buy 60% of Marmon. This is the industrial conglomerate controlled by the Pritzker family. Berkshire currently has $50 billion in excess cash and has been rumored to be looking at positions in a major financial entity. However, Buffett told CNBC he has not seen anything yet that caused him to get excited. "Everybody knows our phone number but nobody has brought us anything we are willing to move on."
Citigroup and HSBC were in the news on Friday as the Wall Street Journal claimed they were preparing to sell off units to raise capital and prepare for rough times ahead. Citigroup is expected to sell or shutter several of its mid-sized units worth $12 billion or more. These are considered non-critical assets and could be sold to raise additional capital. Units possibly up for sale include Student Loan Corp, its North American auto lending business, Brazilian credit card company Redecard SA and its Japanese finance business. HSBC could exit all or part of its $13 billion auto finance business according to the Journal. Citi is expected to announce more job cuts above the already announced 17,000. Citi employs 300,000 workers in over 100 countries.
The NYSE won the bragging rights for new business in 2007. There were 425 new IPOs worth more than $78 billion. There is no news yet about the potential for a repeat in 2008. 25 of those IPOs were Chinese companies. With the Chinese market up +97% for the year the odds are good there will be some more IPOs to follow. Meanwhile the CME is about to break initial support on the news the 12 major banks are going to start their own futures exchange.
CME Chart - 60 min
Amazon moved close to a new high on Friday after it was announced they were selling 17 Nintendo Wii games per second when the games were in stock prior to Christmas. Amazon said this was the best holiday season in its 13 years as a web merchant. Dec-10th was the busiest day with customers buying 5.4 million items. They shipped 3.9 million items on their biggest shipping day. I cannot even conceive of the scale needed to process and ship 3.9 million orders in one day. Just exactly how many UPS trucks does that take to make the pickup? Amazon has definitely grown up into the dominant merchant on the web. Now the real trick will be if their stock can avoid the normal January decline. Shorting AMZN on Jan-2nd has been a consistent winning trade but recent strong earnings may have jinxed that trend.
Amazon Chart - Daily
Wal-Mart closed its movie download service that it launched less than a year ago. Wal-Mart accounts for 40% of all DVD sales but the download service was never a big hit. Wal-Mart tried a DVD rental business as well but gave up on that in 2005 and turned the service over to Netflix. Wal-Mart still operates a music download service. Wal-Mart blamed the decision on Hewlett-Packard, which provided the software running the site. Wal-Mart said Hewlett "made a business decision to discontinue its video download merchant store service." HPQ said it dropped the service because it was not performing as expected. Last month AOL scrapped its pay-for-download movie service. That leaves only Apple iTunes and Amazon's Unbox service as the remaining video download options. WMT stock failed to move on the announcement. The problem with the video download service is the time required for the download and they won't run on normal DVD players. Watching a movie on your PC just has not caught on yet when players like cable giant Comcast offer thousands of videos at a cheaper price that play on your TV. ITunes just announced an alliance with News Corp's Fox to rent digital movie downloads. With more and more entertainment center receivers offering iPod connections it appears companies like Blockbuster and Netflix have another wave of competitive pressure ahead. Netflix passed on a partnership with Tivo to allow movies to be downloaded directly so it may have shot itself in the foot with that decision.
The indexes are leaving 2007 right in the middle of their congestion ranges. The Dow found support the prior week at 13200 and resistance this week at 13550. Both levels are bracketed by even stronger resistance/support about 400 points further in each direction. If it were not for the window dressing the week would have been a bigger bust than it was. We still can't apply much weight to the market action since stock news was slim and volume slimmer. The last three days barely broke 4 billion in volume across all the exchanges. The NYSE managed to break 2 billion on Friday but only barely. It is year-end, everyone has already positioned their portfolios for the end of the tax year and now we just wait until Jan-2nd to execute the next plan. The Dow should test 13200 again next week and how it reacts to that support will give us an initial direction but we need to get past the lingering holiday volume and beginning of year trades before any real direction should appear. That means any volatility next week should be ignored with Tuesday Jan-8th the first real day of 2008.
The Nasdaq showed the most strength with a two-week rebound to retest resistance at 2725. Whether that was just window dressing or retail traders spending their holiday bonus is unclear. The Nasdaq held the high ground pretty well with only a -50 point decline on the Bhutto killing. Since the Nasdaq is being held up by gains in AAPL, RIMM and AMZN with help from INTC and MSFT the odds are good we could see a continued dip late next week. Those first three are up on expectations of a strong holiday season and now that it is over the tendency is to take profits rather than be disappointed by earnings. There is no guarantee but AAPL and AMZN have both had a good run.
The S&P-500 is again back below resistance at 1490. The two-day attempt to hold Monday's breakout was very lackluster but that could also be due to end of year window dressing and position squaring rather than real buying interest. I still think we should be long over 1490 and short below that level.
S&P-500 Chart - Daily
Russell-2000 Chart - Daily
The Russell was the surprise in the velocity it attained going into the holidays but it was no surprise to see it fail at 800 once again. That is very strong resistance that has been with us since August. We are at that point on the calendar where small caps should be our guide. After the first couple days of 2008 pass we need to be watching the Russell very carefully to see if fund managers are buying or selling small caps. That tells us if they are confident of market direction or afraid of further market weakness. Support on the Russell is 740 and resistance 800. We closed on Friday at 771 almost exactly in the middle.
I would not get too excited about trading on Monday even though it is a full day. Volume is going to be sparse and without some external event direction will be entirely chaotic. It is a day to spend getting ready to party the New Year in rather than donating spreads to the market makers.
Happy New Year!
Play Editor's Note: Volume has been extremely light this week, which is to be expected during the holidays. Unfortunately, it makes our job as traders tougher. Monday is not going to be any different. It will be a full day of trading but it will probably be a lackluster day at best. We're not loading up on a lot of new plays since we should really wait to see how the market reacts on Wednesday, when most market participants should be back to work. Jim's market outlook is flat to down next week so we're adding some shorts. FYI: Another stock we're watching as a potential short is SNDK.
New Long Plays
New Short Plays
First Community Bancorp - FCBP - cls: 40.80 chg: +0.38 stop: 43.26
Why We Like It:
Picked on December 30 at $40.80
NII Holdings - NIHD - close: 47.59 change: -0.04 stop: 50.05
Why We Like It:
Picked on December 30 at $47.59
Long Play Updates
Advent Software - ADVS - close: 54.30 change: +1.09 stop: 49.99
We still never found any news that might explain Thursday's sharp drop. Fortunately, ADVS recovered on Friday with a 2% gain. Traders bought the dip near its 10-dma. This could be used as a new bullish entry point however readers may want to use a tighter stop loss. Our target is the $57.50 level. More aggressive traders may want to aim for the $60 region. The late day bounce from the $55 region is a good sign. More conservative traders will want to use a tighter stop loss.
Picked on December 21 at $53.83 *gap open entry
Fiserv - FISV - close: 56.03 change: +1.10 stop: 53.99
FISV rallied to a new five-month high on Friday. Shares broke through resistance at the $56.00 level and hit our suggested trigger to buy the stock at $56.11. The play is now open. Our target is the $59.75-60.00 range. As expected the move over $56.00 has produced a new Point & Figure chart triple top breakout buy signal. The P&F chart now points to a $69 target.
Picked on December 28 at $56.11 *triggered
Ingles Markets - IMKTA - close: 25.63 chg: +0.21 stop: 23.95
IMKTA experienced some volatility on Friday morning with an intraday spike to $27.29. Shares briefly traded above technical resistance at the 100-dma before paring its gains. The overall trend with the breakout from its bearish channel is still bullish but IMKTA might drift back toward the $25.00 region and its 50-dma before moving higher again. Be patient if you're looking for a new entry point. Today's move does look like a failed rally. Our target is the $27.75-28.00 range. More aggressive traders could aim higher. FYI: Normally we do not play stocks with an average daily volume of less than 250,000 shares so we're tempted to label this play as aggressive.
Picked on December 23 at $25.66
Coca-Cola - KO - close: 62.30 change: -0.71 stop: 61.75
This is an important test for KO. We've been cautioning readers that KO looked like it was headed back toward support near $62.00. Now here it is testing $62 and soon its rising 50-dma. Normally a bounce from here would look like a bullish entry point. However, we mentioned on Thursday that KO has produced some short-term sell signals. It's also nearing some more intermediate-term sell signals. We are not suggesting new positions at this time. More conservative traders may want to exit early now to avoid potential losses. Our target is the $66.00-67.00 range. The bullish P&F chart suggests a $69 target.
Picked on November 15 at $61.95
Sonoco Products - SON - cls: 32.99 chg: +0.02 stop: 31.75
We do not have any changes to add to our previous comments on SON. The stock is still producing a lot of mixed signals. The trend this past week has been bearish and next week it would not surprise us to see a dip back toward $32.00 and the mid December low. Considering our market outlook for next week more conservative traders may want to just exit early now to limit any losses. You could always jump back in on a bounce near $32.00. We're not suggesting new positions at this time. There is potential resistance at the exponential 200-dma near $34.50 and then again near $35.00. We're setting our first target at $34.85-35.00. Our second, more aggressive target is the 200-dma (currently near $36.75).
Picked on December 20 at $33.36
XTO Energy - XTO - close: 52.74 chg: +0.39 stop: 51.79
More aggressive traders might want to buy this past week's dip in XTO. We are suggesting that readers wait for a breakout over resistance at $54.00. Our suggested entry point for bullish positions is at $54.15. If XTO can breakout over $54.00 it would produce a new buy signal on the Point & Figure chart. Speaking of the P&F chart XTO has a habit of producing a sell signal and then reversing higher. The P&F chart currently sports a sell signal and it looks poised to reverse higher again. If triggered our target is the $59.00-60.00 range.
Picked on December xx at $xx.xx <-- see TRIGGER
Short Play Updates
Bob Evans Farms - BOBE - cls: 26.87 chg: +0.50 stop: 30.11
BOBE's lack of follow through on Thursday's failed rally is disappointing but the trend is still bearish. Look for another failed rally near the 10-dma as a potential entry point for shorts. More conservative traders might want to tighten their stops toward $29.00 or near the 50-dma around $28.60. 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
Granite Constr. - GVA - close: 36.18 change: -0.25 stop: 40.26
Selling pressure in GVA is pushing the stock closer to a breakdown under short-term support near $36.00. More conservative traders might want to take a little money off the table right now with GVA off more than 6.5% from our picked price. However, odds look good that GVA will breakdown next week. 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: 26.99 chg: -0.10 stop: 28.81
Honestly we don't see any changes from our previous comments. IACI still looks bearish with a trend of lower highs and a bearish head-and-shoulders pattern. The challenge is breaking through support near $26.50-26.40. More conservative traders may want to tighten their stops closer to the $28.00 level. Conservative traders may also want to wait for a breakdown under support near $26 and target the $22.50 zone. 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: 26.31 change: +0.15 stop: 27.35*new*
We don't see any changes from our prior comments on MRX. Shares have a bearish trend of lower highs but bears are fighting against support near $25.50. Thursday's failed rally looked like a new entry point for shorts. More conservative traders may want to tighten their stops closer to $27. We are adjusting our stop to $27.35. 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
Tempur-Pedic Intl. - TPX - cls: 26.68 chg: -0.04 stop: 30.15
TPX is still drifting lower. Overall we don't see any changes from our previous comments. TPX has already exceeded our first target in the $27.25-27.00 range. Our second target is the $25.25-25.00 range. More aggressive traders could aim closer to $24.00. If you missed taking profits earlier this month now would be a good time to do so. 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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