Despite some negative economics, continued worries about financial write-downs and oil at $127.82 the markets pulled back from a steep morning drop to close unchanged. Several of the major indexes are in breakout mode with the others coming very close. Overall it was a relatively tame expiration Friday and we were left with a bullish setup for next week.
On Friday the first reading on Consumer Sentiment for May fell to a new 28 year low at 59.5. This was the lowest reading since June 1980. It suggests there is a much more severe recession headed our way than the other economic indicators are showing. Sentiment is already 4.5 points below the lowest level reached in the 1990 recession. I believe the two major reasons for the current reading are $3.75 gasoline and falling home prices. The majority of most American's wealth is tied up in their homes. With the falling prices and the inability to borrow against that falling equity most consumers are really down in the dumps. Add in gasoline at nearly $4 and it is putting in a serious crimp in household budgets that live paycheck to paycheck. The present conditions component fell -5.3 points to 71.7 and the expectations component fell -1.6 points to 51.7. Inflation expectations rose to 5.2% and the highest level since 1982.
The New Residential Construction report showed that housing starts jumped +8.2% in April to 1.032 million units. Before you start thinking, "bottom in homebuilding" there is a catch. Single-family starts fell -1.7% to 692,000 units but multifamily units like apartment houses spiked +36% to 326,000 units. The 1.032 million starts was still -31% below the rate in April 2007. Excessively high inventory levels still need to be reduced before the homebuilders can begin to return to business as usual.
Next week the economic calendar is relatively bare with only the Chicago Fed National Activity Index (CFNAI) and Producer Prices (PPI) on Tuesday as the only major reports. The April PPI is expected to show a decline from the +1.1% spike in March. Given the continued high prices for energy it should not be a large drop. The CFNAI rebounded slightly from -1.28 to -0.78 in March and analysts hope for a continued improvement. The CFNAI bottomed out at -1.4 in the 2001 recession. A continued improvement in the April numbers would suggest February's -1.28 was a similar bottom.
The equity markets dropped sharply at the open on Friday as a rumor about a coming jobs revision made the rounds. The rumor said the April jobs number would be revised down by 150,000 jobs when non-farm payrolls for May are reported on June 6th. The rumor started when the individual state non-farm payrolls came in showing a -151,000 drop in April. The Bureau of Labor Statistics (BLS) only showed a loss of 20,000 jobs. BLS economist John Mullins said there was always a discrepancy between the numbers because they are done on a small sampling of data and not a complete census. A JP Morgan economist said, "Since 1990 the average absolute divergence between the two numbers has been 93,000." The rumor was so strong that the US Labor Dept flatly denied it by midday. The markets quickly rebounded with the Dow recovering nearly 100 points. The dip gave traders another entry point for new longs.
Retailer sentiment fell Friday after Goldman Sachs downgraded the department store sector to neutral from attractive. Goldman said higher gasoline prices should further depress consumer discretionary spending. Goldman cut JCP and JWN to neutral from buy saying expansion efforts and product launches have placed them at a near term disadvantage. Goldman said they carried more near-term earnings risk than Kohl's (KSS) and Macys (M). Goldman still deleted KSS from their conviction list and added Wal-Mart (WMT) in its place. Goldman feels Wal-Mart will benefit more from the consumer budget squeeze with consumers trying to stretch dollars farther at the discount store. They also upgraded TJX to a buy saying its value proposition gave it an advantage.
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Yahoo (YHOO) is waging a media war with shareholder lawsuits and the Carl Icahn's board seat play. A City of Detroit retirement fund filed suit against Yahoo for trying to cover up negative points in the Microsoft discussions. In current shareholder suits Yahoo redacted broad swaths of the lawsuit proceedings in an effort to hide events that were not flattering. They redacted references to the size and disclosure of a costly employee poison pill severance plan implemented by Yahoo to deter Microsoft from going hostile. They also redacted portions of conversations between Jerry Yang and Microsoft CEO Steve Ballmer. The details are eventually going to come out and Yahoo's attempt to conceal these and dozens of other points only emphasizes Yahoo is guilty of trying to ignore shareholder interests. Jerry Yang also sent a letter to Carl Icahn claiming Icahn either did not know the real details behind the takeover offer or was misinformed. Icahn has submitted a slate of directors to replace the entire Yahoo board. Institutional shareholders are lining up on the side of Icahn and it appears Jerry Yang's days are numbered. YHOO stock has risen to $28 on the growing idea that Icahn will be successful.
Next Tuesday Hewlett Packard (HPQ) will formerly release earnings although they
gave us a pre-release look last week at 87 cents. That beat the street by 2
cents if it holds up through the Tuesday report.
Crude oil spiked to another new high at $127.82 after Goldman again raised its estimates for oil prices. Goldman now expects oil prices to average a whopping $141 a barrel in the second half of 2008. Their previous forecast was an average of $107. The analysts believe that the oil market is undergoing a structural repricing that will continue to play out for some time to come. Goldman said, "We would view any pullback in oil, regardless of the size or duration - although a correction could be as large as 15% - as an opportunity to re-establish long positions in oil before the summer." This was a license to buy for traders and they sent the futures to a new high on the news. Other news from Saudi Arabia, that they increased production by 300,000 bpd to compensate for falling production elsewhere in OPEC, went ignored. Saudi raised production to 9.45 mbpd and that increase went into effect last Saturday. The announcement came during the visit by President Bush. Traders also ignored and rightfully so, news that the Dept of Energy would not contract for SPR oil deliveries for six months starting on July 1st. The 70,000 bpd trickle no longer going into the SPR will have zero impact on oil prices.
Another reason for the spike in crude was the impending expiration of the June futures contract on Monday. We could see another spike on short covering on Monday and then selling into the holiday weekend.
June Crude Futures Chart - Daily
Friday was the 8th time in 10 sessions that the crude futures contract set new record highs. The national average for gasoline rose to $3.787 on Friday with diesel rising to $4.482 per gallon. Those prices are likely to rise further because gasoline futures jumped another 6-cents on Friday. Historically gasoline prices are the highest around Memorial Day weekend and then decline through the summer. Another factor to consider for oil prices is the rapidly approaching hurricane season, which begins on June 1st. It won't be long before the hurricane forecasts begin and that will exert additional upward pressure on oil prices. The last two years have been very tame and the law of averages is working against us for another year with no storms in the Gulf.
Despite the record prices in oil the Dow transports continue to hold the high ground with resistance at 5400. The strength is not because airlines are gaining traction. Airlines are still losing the fuel battle. British Airways said on Thursday that for every $1 rise in crude oil it costs them $31 million extra in fuel. The strength in the transports is coming from the railroads, which are seen to be beneficiaries of the spike in fuel prices.
Pink slips are flying at the major brokers. Morgan Stanley (MS) cut 1500 jobs last week across its investment banking, trading and asset management businesses. That brings the total for this round of cuts to more than 4,400 workers. Morgan Stanley had 47,050 employees at the end of February. Lehman Brothers (LEH) is reportedly going to cut 5% of its 28,000 workers next week. The cuts are expected to be across all divisions and regions.
Take-Two Interactive (TTWO) closed at $27.10 on Friday with Electronic Arts (ERTS) $2 billion acquisition offer set to expire at midnight on Friday. The ERTS offer was $25.74 per share. The market appears to be expecting a higher bid and one analyst said they would not be surprised if it was over $30 per share. TTWO rebuffed a friendly offer by ERTS and forced ERTS to go directly to the shareholders with their offer. As of April 15th only 8% of TTWO shares had been tendered. ERTS shares lost -$1.92 on worries they would announce a higher offer.
Research in Motion (RIMM) just announced a new BlackBerry two weeks ago and on Friday they announced another touch screen model due out in Q3. The new BlackBerry "Thunder" will not have a keyboard but be completely touch screen. Nobody expects Thunder to replace the iPhone but it is just another weapon for RIMM in the war with Apple. The announcement last week of the 3G BlackBerry Bold gave RIMM quite a boost even though it had been expected for quite a while. The announcement of Thunder did not give RIMM a boost with the stock losing ground both Thursday and Friday.
The indexes all closed higher for the week with the Dow gaining +1.89% but well behind the Nasdaq at +3.41%. Several of the indexes are in clear breakout mode but the Dow has not managed that feat just yet. The Dow is stuck below resistance at 13000 and the 200-day average at 13014. Every pullback to uptrend support is met with buying but the resistance battle is still being fought. The Dow has been lagging the other indexes because of its narrow component base and the ability for a single stock to produce a really bad day. As a comparison the Wilshire-5000 closed at a new 5-month high on Friday although still fighting the same 200-day average.
Dow Chart - Daily
Wilshire-5000 Chart - Daily
The Nasdaq is the clear leader of the major indexes with a close over strong resistance at 2500 and the 200-day at 2516. The Nasdaq is on a run that looks very bullish. Tech stocks bullish heading into summer? Who would have ever thought it could happen? The next material resistance for the Nasdaq is 2725 but there will probably be plenty of opportunities from profit taking along the way.
Nasdaq Chart - Daily
The S&P-500 is giving us the same view as the Dow and Wilshire but it still has not conquered that 200-day curse. I believe we should remain long over 1400 and future dips to support should find plenty of buyers at that 1400 level. Once over the 200-day the S&P should find more funds in the buying mood. Crossing the 200-day is an old fund signal that has worked well for decades. I doubt it has changed.
Last Sunday and again on Tuesday I pointed out that the Russell had suddenly turned bullish and suggested that was the indicator we had been looking for to signal a coming rally. The Russell did finally break over resistance at 732 and then used that resistance as support on intraday dips the following two days. I view this as very bullish and a move over that 200-day at 748 would be icing on the cake. This sudden spurt by the Russell suggests fund managers are no longer afraid to buy risky stocks. This is a bullish signal for the markets!
Russell-2000 Chart - Daily
For next week the major calendar items are the June crude expiration on Monday, PPI and CFNAI and earnings from HD and HPQ on Tuesday. After Tuesday's reports it should be holiday time for the markets and volume is going to dry up like two-week-old Mothers Day flowers. Assuming a lack of market moving news we are likely to wander the rest of the week but the bias is definitely bullish. This is the last week for the sell in May crowd to make a decision. Options have expired and their open plays are now uncovered. They either have to bite the bullet and commit to the bullish trend or bail using the "sell in May" scenario. If the markets can hold in their current ranges past Memorial Day then the bull is back.
Play Editor's Note: I wanted to list a few more stocks that made my watch list. The fertilizer stocks look poised to rally and TNH looks like a bullish candidate. SFI, a real estate stock, might be a bullish candidate on a pull back. Third is HOGS a Chinese pork producer. HOGS made a big move on Friday but rally through resistance near $11.50 might make it a speculative bullish candidate.
New Long Plays
Avis Budget Group - CAR - close: 15.00 chg: +0.25 stop: 13.45
Why We Like It:
Picked on May xx at $xx.xx <-- see TRIGGER
Lululemon Athletica - LULU - cls: 36.55 chg: -0.08 stop: 33.49
Why We Like It:
Picked on May xx at $xx.xx <-- see TRIGGER
Sterlite Ind. - SLT - close: 21.82 chg: +0.90 stop: 19.74
Why We Like It:
Picked on May xx at $xx.xx <-- see TRIGGER
New Short Plays
Long Play Updates
Celanese Corp. - CE - close: 48.40 change: +1.23 stop: 45.49*new*
Traders bought the dip in CE on Friday and the stock added 2.6% by the closing bell. Friday also marked yet another price increase by CE for some of its products, this time in the Asia region. The stock looks poised to hit our target in the $49.90-50.00 zone soon. We're raising our stop loss to $45.49 since the $46.00 level should be support. More conservative traders could probably use a tighter stop.
Picked on May 11 at $46.35
iShares DJ US Oil & Gas - IEO - cls: 82.84 chg: +2.29 stop: 77.99
Oil and energy stocks continued to show relative strength on Friday. The IEO rallied 2.8% to a new all-time high. Our only concern was the lack of volume. We're also a little bit concerned that crude oil might see a sell-off following expiration on Monday. We'd be tempted to exit early on Monday afternoon with a minor gain and step back for a couple of days to see what happens. At this time we're going to keep the play open but conservative traders may want to give it some thought. Our short-term target is $85.00. Our secondary, more aggressive target is $87.50. This should be considered a high-risk play.
Picked on May 13 at $81.06
iShares DJ Oil Serv. - IEZ - cls: 75.92 chg: +1.81 stop: 71.90*new*
Oil service stocks really out performed the market on Friday and the IEZ rallied 2.4% to a new high. We have the same concerns here as we do with the IEO. This sector is in rally mode but it could see some profit taking if crude oil sells off due to expiration after Monday's close. More conservative traders might want to exit early on Monday afternoon. We're going to keep the play open but we will raise our stop loss to $71.90. Our target is the $79.50-80.00 range. This should be considered a high-risk play.
Picked on May 13 at $73.74
Agribusiness ETF - MOO - close: 63.42 chg: +1.52 stop: 59.90 *new*
The MOO appears to be breaking out from its recent consolidation. This ETF rallied 2.4% on Friday and its MACD is nearing a new buy signal. We remain bullish here but readers might want to wait for a dip near $62.00 as a potential entry point. We have two targets. Our first target is the $65.50 level near its old highs. Our second target is the $68.00-70.00 range. Please note that we're inching up our stop loss to $59.90.
Picked on May 08 at $61.79
Oshkosh Corp. - OSK - close: 39.56 change: -0.11 stop: 38.75
OSK has under performed the last three or four days. In the larger scheme of things the stock is probably just digesting its previous gains. However, some of the short-term technicals are naturally decaying. We are going to keep the play open for now but if OSK doesn't deliver a close over $40.00 soon we'll probably exit early. More conservative traders might want to exit early now or raise their stop toward $39.00 or Friday's low near $39.19. Conservative traders could also wait for a rise past the 100-dma near $40.53 before initiating positions. Our eight-week target is the $44.50-45.00 range. We would expect some resistance near $42.00. The Point & Figure chart is bullish with a $57 target.
Picked on May 13 at $39.90
Perdigao - PDA - close: 61.75 change: +2.20 stop: 54.95 *new*
Volume improved on Friday but it was still below average. The rally continued in both PDA and the Brazilian markets. Shares of PDA soared almost 3.7% to a new multi-year high past potential resistance near $60.00. We would seriously consider taking some profits right here and then just jump in again on a dip near $59-58. We are raising the stop loss to $54.95. If you want a tighter stop consider something near $56 (or whatever suits your trading style). Please note we are adjusting the target to $64.00, down from $64.50. The P&F chart is bullish with a $69 target.
Picked on May 13 at $57.74
Short Play Updates
Closed Long Plays
IAC/Interactive Corp. - IACI - cls: 23.84 chg: +0.13 stop: 21.49
Target achieved. We recently adjusted our target to $24.00 and IACI complied by tagging the $24.00 level on Friday. The stock's rally looked a little overdone so we wanted to lock in a profit. Last week's breakout in IACI is very bullish and we'd keep an eye on it for another potential entry point on a dip near $22.00 or its 10-dma.
Picked on May 12 at $21.90 */target achieved 24.00
Terra Ind. - TRA - close: 45.97 change: -0.18 stop: 41.99
Target achieved. TRA spiked higher on Friday and traded to $47.21 before paring its gains. Our second target was the $47.00 level. We remain bullish on the fertilizer/agriculture stocks but this play is closed. We'll look elsewhere and keep TRA on our watch list.
Picked on May 04 at $40.03 /2nd target hit 47.00
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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