Is today's rally real or just a cruel April fool's joke? It will of course take a week or so to know for sure but real or not today was a real bear-b-que. It appears the majority of those hedge funds who went into the quarter end heavily shorted have decided to cover their shorts and go long. It may not have been by choice given the early morning gap open but the results were the same.
Dow Chart - Daily
Nasdaq Chart - Daily
The morning economics offered a ray of hope for the markets. The Institute for Supply Management (ISM) actually gained slightly to 48.6 in March from 48.3 in February. Throwing out the anomalous reading in January this has been a four-month hold just over 48 and could be signaling that the economy is starting to improve or at least not getting any worse. Anything under 50 is still in contraction territory but the drop appears to have slowed and there are no indications we are going lower. New orders declined slightly to 46.5 from 49.1 but back orders rose to 47.5 from 45.4. Supplier deliveries improved to 53.6 and employment jumped over 3 points to 49.2. Employers would not be adding workers if they thought there was more weakness ahead. Despite the glimmer of hope that maybe the economy is stabilizing there were a couple of negative factors. The prices paid index spiked 8 points to 83.5 indicating inflation is increasing sharply. This is the highest level we have seen since Katrina. This is a negative for the Fed. The combination of no decline in the headline economic conditions and a sharp increase in inflation pressures could push the Fed back into rate hike mode very quickly.
The latest Case Shiller home price index was released today and nationally prices fell -8.9% in Q4. This was on top of a -4.5% drop in Q3. This is a different survey than the one reported two weeks ago but the numbers are just as dismal with a national drop in home prices of 10% over the last 12 months but currently dropping at an 18% annualized rate. That is the sharpest drop in the 32-years of the indexes history. The good news came from places like Atlanta, San Francisco and the East and West South Central states where conditions actually improved. The mortgage reset boom is scheduled to peak in May/June and then begin to decline slowly into 2009. That will slow the foreclosure rate and the pressure on home prices.
For the rest of the week the major reports remaining are the Factory Orders on Wednesday, ISM Services on Thursday and the Jobs report on Friday. The Jobs report is the most important. With the strong improvement in the ISM employment component the analyst estimate revisions are flying fast. We had several estimates for a loss of 75,000-jobs as late as Monday. Now we have estimates appearing with gains of 44,000 to 50,000 jobs. If we did actually have some decent job gains you can kiss any future rate cuts goodbye and that might actually be negative for the market in the very short term. Traders would love to have strong growth return and ignore rising rates but they have to mentally make that directional change first. Now they are focused on lower rates but that could be changing this week. Bernanke will testify again on Wednesday and anything is possible from his appearance but hopefully he won't try to send a message to the markets that the rate game is changing.
The big news for the day was the Lehman capital raise. The Lehman CFO was on CNBC again and there were some very interesting comments. Callan said they really did not need the money but they felt they needed to take the step to halt the speculation in Lehman stock. Volume in the stock had gone from an average of 15-16 million per day to days over 200 million. There are rumors that the Lehman CEO has turned over to the SEC information about how a conspiracy of short sellers caused the crash of Bear Stearns. He took the step of selling the stock not only to get additional capital while they could but also to show that major players were still investing in Lehman. They sold $4 billion in stock and the offering was over subscribed with $14 billion in offers. Callan said they specifically placed the stock in hands that would not short it and would not buy put insurance. This was to make a statement but also to prevent the stock from being used against Lehman. The move was 5% to 10% dilutive depending on how you look at it but as a confidence builder it was worth every penny. LEH had a $20 billion market cap on Monday and closed today with a cap of $24.4B. It may have been dilutive but that $4 billion in dilution has already been erased. This brings Lehman's leverage down to 13:1 and well within a reasonable range. Bear Stearns was levered around 30:1. Lehman fell in late trading on Monday evening after the announcement hit the wires but that weakness has been forgotten. Lehman added +6.70 today or 17.8% to close at $44.32 after trading as low as $36.80 Monday night.
The rally actually started overseas after UBS and Deutsche Bank reported more write-downs. UBS reported a Q1 loss of $12.1 billion, write-downs of $19 billion and said it would seek $15.1 billion in new capital. Sounds like a very ugly quarter and a bank you would not touch with the proverbial 10-foot pole. UBS gained +4.21 or 14.6% on the news. UBS write-downs for the last nine months total $37.4 billion. S&P cut their rating one notch to AA- citing risk management problems and the need for additional liquidity. UBS Chairman Marcel Ospel resigned saying he was ultimately responsible for the banks health. UBS said it would create a new unit to "hold currently illiquid U.S. real estate assets." I wish I could bury my mistakes that easy. Alt-A loans were cut from $26.6 billion to $16 billion. JP Morgan said UBS was drawing a line under its risk exposure and future losses. Investors must have liked the idea given the strong gain.
Deutsche Bank announced it expects a Q1 write-down of $4 billion due to significantly more challenging market conditions. Despite the write-downs the bank said it expected to stay on course and investors bought the story. DB gained +4.70 on the news.
This "positive?" banking news created a rally in Europe and that positive news carried over to the U.S. markets. The Financial SPDR (XLF) gained +7% and erased the losses from the past week. This carried over into the homebuilders with a +8.5% rally in the XBD.
Apple Inc Chart - Daily
Tech stocks were also exploding with the Nasdaq adding 83 points. Leading the charge was Apple Inc (AAPL) with a $6 gain to just below $150. Powering this move was news from Piper Jaffray that the 3G iPhone may be out sooner than expected. The Piper analyst said calls to 20 Apple retail stores nationwide found none of them had iPhones in stock. The analyst said this suggests the 3G model will be delivering before the expected late May date. The price tag is expected to be $399 and nobody expects a radical change in the form factor. Merrill reinstated the stock with a buy and a $180 price target. There are quite a few people expecting the 3G announcement with earnings on Apr-23rd. Others think Apple will stage a monster press release with plenty of advance warning in order to make the biggest splash. April Fools day is also Apple's birthday. Steve Jobs started it in a garage 32-years ago today. He was later pushed out of the company he started only to return 11 years ago to rescue it in epic style. I doubt there is any chance for another coup attempt any time soon.
Research in Motion (RIMM) tacked on $5.25 to $117.50 on expectations they will blowout earnings on Wednesday. Quite a few analysts have been expecting some subscriber flight as the iPhone seduces BlackBerry users with the bigger screen. RIMM has announced the 9000 which some are calling the iPhone killer. Others are less flattering saying it is like an iPhone only crappier. Henry Blodget released some pictures of the BB 9000 and said it looks a lot like an iPhone with a keyboard. Blodget said it looks like the RIMM CEO threw an iPhone on his designer's desk and said, "Copy it." Earnings are expected to be 33-cents on revenue of $1.85 billion. Analysts expect RIMM to announce the addition of 2.15 million new subscribers for the quarter.
BlackBerry 9000 Pictures
Microsoft made the news not only with a nice gain right to resistance at $29.50 but with news they will not pay more than $31 for Yahoo. This sets up a win-win for Microsoft stock. They win if they get Yahoo at that price and they also win if the deal falls apart because the deal risk will be gone. Microsoft has been a big laggard of the broader market since the Yahoo bid began but it may be about to post a breakout. Yahoo declined to $28.50 on the news and you can bet there are more declines ahead as long as the management keeps trying to discourage the takeover.
If it is Tuesday it must be triple digits. On March-11th the Dow gained +417 followed by +420 on March-18th. Tuesday March-25th was a give back day after the +393 gain on good Thursday. Today's +391 romp had more conviction than any of those prior gains and it launched from a higher level. Volume was better than 8:1 advancers over decliners and at more than 8 billion shares it was +1.5 billion over the daily average for last week. All the indexes posted a new 4-week high and some are nearing critical resistance. Is a new bull market about to begin? I would not go that far just yet but I still believe the bottom is behind us. Tuesday was just another monster short squeeze day but there was also an added flavor of some new money coming off the sidelines.
On a normal short squeeze you get a morning pop, a midday decline and then an end of day ramp as shorts hoping for a sell the rally afternoon finally capitulate and buy the close to cover. Today there was no decline. It was straight up all day with volume increasing into the close as several buy programs kicked off late in the day. It appeared to me from the market action last week that the hedge funds protected their shorts into Friday's close and then bailed as a group once the quarter was over. They were of course helped in their decision by the financial rally that started in Europe and followed the sun west. The rally was also helped by new retirement money hitting the market with the quarter end contribution inflows being put to work. According to Bloomberg this was the biggest first day of Q2 since 1938. There were only 13 S&P-500 stocks trading lower. It was not a fun day to be short and if you remember my commentary from last week we were nearing record short interest levels again.
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The Dow squeezed past its Monday high from last week at 12600 and edged even closer to the much stronger resistance at 12750 and the top of its recent range. A move over 12750 would be very bullish. The 100-day average at 12728 is the first test but the twin peaks in February are going to be the key. All 30 Dow stocks were higher with JPM +4, AIG +3.75, AXP +3.37, BAC +2.95, XOM +2.44, UTX +2.42, C +2.42 and MMM +2.17 as the leaders.
The Nasdaq closed at a 6-week high at 2362 and was even more vertical than the Dow. Once the tech short covering started it was aggressive. Initial resistance was 2337 and that was easily broken. From here until about 2410 there is a lot of congestion but 2410 is the next critical level to watch. The Nasdaq looks a lot like a rally launch but we need that first stage to complete with a break over 2410 for confirmation.
The S&P tacked on +47 points to close at 1369 and a new 4-week high. With the financials gaining +7 points the S&P was dragged higher with few stragglers left behind. Only 13 S&P stocks were lower. That is an excellent confirmation that shorts on index ETFs were being covered in high volume. There is a strong resistance band from 1375-1395 and a move over 1400 would be very bullish. It is the same story on the Russell from 720-730. Over 730 would trigger a buying frenzy.
Dow Transports Chart - Daily
Watch the Dow transports for a clue to the rally strength. If the transports move over 5000 this could produce an explosive change in market sentiment. That has been resistance for eight months and a move higher would be confirmation that investors think the worst is behind us.
For the rest of the week we need to watch for an explosive event around the Bernanke testimony at 9:30 tomorrow morning. That will be followed by the RIMM earnings after the close. Let's hope there is no talk of slowing sales due to the economy. On Thursday traders will start jockeying for position ahead of Friday's employment report. The range of estimates is now -75K to +50K so it would be hard to please everybody but also hard to really disappoint completely. Those with bearish estimates would love to be proven wrong. Short of a real implosion in jobs any "normal" report should be met with relief more than excitement. I still believe the bottom is behind us and today's rally, regardless of reason, gave us a new support point on the S&P at 1320. Continue to buy dips unless that level fails. Should we get lucky enough to move over 1400 you better have your seatbelt fastened.
Play Editor's Note: The tone of the market has changed dramatically in just one session. While it seems a clich to state that one day does not make a trend we are (naturally) seeing a lot more bullish candidates. We just don't feel like chasing them right here. You've probably heard it said more than once this year that traders are "buying the dips and selling the rips". Today definitely qualifies as a "rip". I'm noticing some technicals are nearing a potential short-term top signal. A few stocks that do look like potential bullish candidates and ones that I would be watching are: GW (oil services), SPF (homebuilder), the Financial SPDRs XLF and XLP, MSFT over $29.75 and DD over 48.00 or $48.10.
New Long Plays
New Short Plays
Long Play Updates
Excel Maritime - EXM - close: 30.00 change: +0.65 stop: 28.39*new*
Traders bought the dip in EXM near $29 again and the stock posted a 2.2% gain. Normally a gain like that would be a good day but on a day like today it looks like relative weakness. We would wait for a new rally over $30.25 or $30.30 before considering new bullish positions. We'll try and reduce our risk with a stop loss at $28.39. More conservative traders may want to consider a stop closer to $29.00 instead. Our target is the $35.00-37.00 zone. The Point & Figure chart is much more bullish with a $45 target. We do not want to hold over the late May earnings report.
Picked on March 31 at $30.30 *triggered
Corning Inc. - GLW - close: 24.95 chg: +0.91 stop: 23.45
Today's 3.8% gain in GLW has brought us almost back to breakeven. The move looks like a new entry point for bullish positions or consider buying a dip near $24.50. More conservative traders might want to consider a tighter stop near $23.65 instead of our suggested stop at $23.45. We're listing two targets. Our first target is the $27.00 level. Our second target is the $29.00 level. We do not want to hold over the late April earnings report.
Picked on March 25 at $25.14
Honeywell - HON - close: 57.79 chg: +1.37 stop: 54.49 *new*
HON continues to rally. Shares added another 2.4%. The MACD is now two days into a new buy signal. The share price has broken out past its simple 50-dma and is nearing potential resistance near $58.00 and its 200-dma. If you are looking for a new bullish entry point consider a dip near $56.75-56.50. We are raising our stop loss to $54.49. Our target is the $59.90-60.00 zone. More aggressive traders could aim for the top of the larger range near $62.00. Keep in mind that we do not want to hold over the earnings report in about three weeks.
Picked on March 25 at $56.00
Hormel Foods - HRL - close: 42.18 change: +0.52 stop: 39.85
HRL continues to march higher. The stock closed at its high for the day, which is normally a bullish sign for the next session. The stock might find some resistance in the $42.40-42.50 zone so don't be surprised to see a pull back. Any dips near $41.75-41.50 are probably entry points. More conservative traders might want to wait for a new high over $42.50 before initiating positions. We anticipate holding this stock on the newsletter for about six to eight weeks. The Point & Figure chart is bullish with a $64 target. FYI: HRL declared a quarterly cash dividend of 18.5 cents per share payable on May 15, 2008 to shareholders of record on April 19th. HRL has been paying quarterly dividends for almost 80 years.
Picked on March 31 at $41.83 *triggered/gap open
iShares Telecom - IYZ - close: 24.19 chg: +0.82 stop: 22.49
It was a very strong day for the IYZ, which posted a 3.5% gain and a new four-week high. Volume came in above average on the gain, which is bullish. The stock closed over potential resistance near $24.00 and will soon be challenging technical resistance at its 50-dma. We have two targets. Our 1st target is the $25.85-26.00 range. Our second target is the $27.85-28.00 zone.
Picked on March 25 at $23.50 *triggered
JA Solar - JASO - close: 18.87 change: +0.27 stop: 15.90
Traders were buying the dips in JASO near $18.00 but today's 1.4% gain looks like relative weakness compared to the rest of the market. We remain bullish but we're not suggesting new positions. More conservative traders might want to move their stop to breakeven at $17.13 or move their stop closer to $17.85 or $18.00 to reduce their risk. The stock is up about 10% from our picked price so readers may want to take some profits here. We have two targets. Our first target is $19.95. Our second, more aggressive target is the $22.25-22.50 zone.
Picked on March 25 at $17.13
Meritage Homes - MTH - close: 21.15 chg: +1.83 stop: 16.49
The homebuilders were some of the best performing stocks today. The DJUSHB index surged 7.7%. Shares of MTH out performed its peers with a 9.4% gain. The stock is up almost 14% from our picked price. Readers might want to consider taking some money off the table right here. We remain bullish but we're not suggesting new positions at this time. MTH is a huge candidate for a short squeeze. The most recent data put short interest at more than 40% of the very small 22 million-share float. This was almost two weeks of short interest. More conservative traders may want to put their stop closer to $17.00 since broken resistance near $17.50 should now be support. Our target is the $25.00-27.00 zone. The P&F chart is bullish with a $28 target.
Picked on March 24 at $18.60 *triggered
Short Play Updates
Cognizant Tech - CTSH - cls: 30.17 chg: +1.34 stop: 31.01
CTSH rallied with the broader market today but remains under technical resistance at its 100-dma. The close over $30.00 is a danger sign for the bears but watch for another failed rally as a new entry point for shorts. We're suggesting a stop loss above the 100-dma. Our first target is the 26.25-26.00 zone. Our second, more aggressive target is the $24.25-24.00 range. The P&F chart is bearish with an $18 target.
Picked on March 30 at $29.18
Longs Drug Stores - LDG - cls: 43.20 chg: +0.74 stop: 43.55
The bounce in LDG continues. The stock is nearing resistance around the $43.50-44.00 zone. A breakout over $44.00 could send it back to $48.00. We have our stop at $43.55 and if the market sees any follow through tomorrow on Tuesday's gain then LDG will probably stop us out. Wait for a new drop under $42.00 before considering new shorts. Our first target is the $38.25-38.00 zone. Our second target is the $35.25-35.00 zone. The P&F chart is bearish with a $29.00 target.
Picked on March 30 at $41.30
Closed Long Plays
Closed Short Plays
Starbucks - SBUX - close: 18.50 chg: +1.00 stop: 18.11
Bulls were desperately hoping for a bottom in the market and bears were fearing a short squeeze and the combination helped fuel a 5.7% gain in shares of SBUX. The stock broke through resistance near $18.00 and through technical resistance at its 50-dma. SBUX hit our stop loss at $18.11 closing the play. The long-term trend is still bearish but short-term this might just be a tradable bottom although we wouldn't chase it here.
Picked on March 07 at $17.01 /stopped out 18.11
Safeway Inc. - SWY - close: 29.89 change: +0.54 stop: 30.05
The short covering in SWY continued for a second day in a row. The stock gapped open higher at $29.75 and rallied to $30.14 before settling with a 1.8% gain. Our stop loss was hit at $30.05 closing the play. The overall pattern continues to look bearish but bulls look like they are going to try and push SWY past resistance near $30 and its 50-dma soon.
Picked on February 29 at $28.74 /stopped 30.05
Today's Newsletter Notes: Market Wrap by Jim Brown and all other plays and content by the Option Investor staff.
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