Worries over the financial sector came back to haunt the markets today. The Wall Street Journal ran an article saying Lehman was still in trouble and would need to raise an additional $4 billion in capital. Fears of another Bear Stearns disaster caused investors to dump not only Lehman but all financial issues. S&P cut its ratings on Lehman saying their risk was higher than their peers and their earnings would be lower in future quarters. Investors worried that another ratings cut would be very detrimental to any hunt for additional capital. The cost of that capital would be high and the availability of capital could be a challenge. The Lehman news coupled with a Bernanke speech and George Soros testimony was more than the market could bear.
Wilshire 5000 Chart - Daily
The economic reports for Tuesday were no help. The Factory Orders for April showed a large spike in orders of +1.1% compared to estimates for a -0.1% drop. Nondurable goods orders rose a whopping +2.8% and overshadowed a minor -0.5% drop in durable goods orders. The biggest factor for the jump in the headline number was a sharp rise in the value of petroleum and crude products. With prices soaring even a flat order rate is showing a drastic jump in dollar volume. Consumer durable orders declined for the third consecutive month and the fifth time in the past six months. This suggests consumer budget problems are continuing to put a drag on the economy.
That drag is also appearing in the weekly chain store sales data. Sales fell -0.8% to stretch the decline to five weeks. Year over year sales growth slipped to 1.2%. The EIA said the cost of gasoline rose to a new record level of $3.98 on Monday and this is crushing the blue-collar household. The tax rebates are providing minor support for consumer sales but the price of gasoline is proving to be a bigger problem.
Another sign of consumer shock was the monster decline in auto sales. GM said it was closing four North American truck plants employing 10,000 workers and could sell its Hummer brand. GM now sees higher gasoline prices as a permanent threat to its business. GM said it would add shifts at two U.S. plants making more popular and higher mileage cars in order to realign output with changing demand due to gasoline prices. GM CEO Rick Wagoner said, "High gasoline prices are changing consumer behavior rapidly. We at GM don't think this is a spike or temporary shift. We believe that it is by and large permanent." SUV and truck sales accounted for 60% of GM's U.S. sales in 2007. GM has lost $51 billion over the last three years and Wagoner said GM was not ready to project a timeline for returning to profitability. GM said May sales fell -32% with truck and SUV sales down -39%. When the GM sales news broke after lunch the Dow went from down -15 to -120 almost instantly.
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Cars outsold the top selling Ford F-series truck in May for the first time since 1992. This is a clear sign that the consumer mindset is changing. Honda's sales rose +18% led by a 36% increase in car sales. Nissan said sales rose +8% with a 19% increase in car sales. Chrysler said sales fell -25% and Toyota dropped -4%. The Ford F-series truck has been the best selling truck in the U.S. for 31 years. Ford's Jim Farley said small and mid-size cars made up 47% of sales in May, up from 34% in February. Ford said it was slashing North American production of trucks and SUVs for the rest of the year. Total U.S. sales from all manufacturers fell to 14.27 million units. This was the lowest pace in 10 years and down -13% from a year ago.
George Soros told lawmakers on Tuesday that the current rise in oil prices was not specifically due to manipulation by index funds. He said that while fund investment was partly responsible for the gains, oil prices still have a strong foundation in reality. Soros did say that with billions in investments by commodity funds there was a danger that the markets could become imbalanced simply because of the size of the positions. The index funds are long only and once positions are entered they are never sold but rolled forward on a quarterly basis into the next expiration cycle. Soros did suggest some changes to the way energy futures are traded in order to make it more difficult for investors to trade crude futures. The CFTC is already considering some changes that will reclassify some large investors and impose position limits. Soros agreed with those proposed changes and suggested raising the margin requirements as well. He also said the bubble in oil prices aggravates the prospects for a recession. When billionaires testify before lawmakers some actually listen. The price of crude collapsed during his testimony and then sank even lower as the cash market closed at 2:30. Crude dropped -$3.22 to close at $124.77 and below critical support at $125. Boone Pickens said the U.S. probe into market manipulation is a waste of time. "What you are trying to do is find a scapegoat and place the blame for it when what you have is demand that is greater than supply. We are using 400,000 bpd less than we did a year ago but China is using 500,000 bpd more than they did last year." When the current U.S. economic crisis is over our demand will rebound even stronger.
July Crude Oil Futures Chart - Daily
A London think tank, Global Insight, said there are 887 million vehicles in the world. That is up from 553 million just 15 years ago. It is estimated that the number will top one billion before 2012. Of that 113 million increase only about 10 million will be hybrids. Over 100 million new vehicles will still be normal gasoline/diesel versions. Even if they were all the economical versions and got 25 mpg the amount of new oil needed is astounding. Assuming each vehicle drove only 100 miles per week, less than half the U.S. average, and got 25 mpg it would require an additional 15 million barrels of oil per day in 2012.
That is an impossible number. Current global production is just over 85 million bpd with another 2-3 mbpd gained from the refinery process and from natural gas liquids. We lose just over 4 mbpd per year from depletion and demand has been increasing about 1.5 mbpd per year. In order to add 15 mbpd of production by 2012 we would need to find and produce nearly 30 mbpd of new oil just to offset depletion and this new demand. There is absolutely no way on earth for this to happen.
The CEO of Michelin Tires was on TV today hawking some new tire technology. As part of the background data it was disclosed that there are three million trucks in the U.S. and they burn 38 billion gallons of fuel each year. Every penny increase in diesel costs truckers $391 million dollars. For every 10 cent rise the industry loses 1000 truckers because the smaller companies and owner operators can't pass on the higher fuel costs.
Ben Bernanke spoke today and said economic conditions will remain "strained" for the rest of the year. However, he appeared to target the falling dollar and that raised eyebrows among analysts. The Fed normally leaves comments and action on the dollar to the Treasury Dept. His comments on the inflation damage done by a weak dollar suggests somebody is about to take action to correct that problem. The Fed funds futures actually spike to show about a 15% chance of a rate hike at the June 24th meeting. That shocked the markets because traders are not yet ready to face a hiking cycle. If the economy was improving it could swallow the Fed's medicine a little easier but with the financials still under stress and the markets weakening, it was an ill wind blowing rate hike chances down Wall Street.
On the political front it appears Obama has clinched the democratic nomination according to an AP tally of delegates. That seemed to roil the markets as well. Having the democratic contest end will shift the battle to McCain versus Obama and that is going to produce an entirely new set of political footballs for the media to abuse every day. Everyone new it would eventually happen but the AP announcement seemed to surprise the markets. Obama's new tax promise is not favored by Wall Street and he definitely has momentum over McCain.
I touched on the Lehman downgrade and capital raise in the opening paragraph. Lehman denied rumors they needed extra capital and denied they had gone to the Fed for help. Of course Bear Stearns denied they needed capital or help the week before they imploded. The continued unknowns in the financial sector are weighing on the market. With financials the largest sector on the S&P it is going to be nearly impossible for the markets to rally until the financials find a bottom.
Boeing (BA) was the biggest loser on the Dow with a -$3 loss. Investors are worried that the troubles in the airline industry will force cancellation of orders for planes. With airlines failing weekly that is going to put hundreds of used planes in the market at fire sale prices. Analysts are also worried that Boeing will not resume construction of smaller planes like the 737 until as late as 2020 because of the construction efforts on the Dreamliner. Both Boeing and Airbus shifted to a big plane strategy several years ago when the industry was booming. With the industry being crushed by the price of oil it could be a decade before either of these manufacturers can return to making small planes in volume. This is similar to the GM/Ford problem. They have been making progressively larger trucks and SUVs for the last five years and suddenly nobody wants to buy them. Plants will be closed and billions lost as they try to turn themselves into compact car companies. Fortunately for GM/Ford they currently have production lines for those types of vehicles. Boeing and Airbus have limited capacity for making smaller planes today with the majority of their capacity geared to the big planes. Boeing was also hit with a $508 million judgment for damages to 13,000 homeowners around the Rocky Flats nuclear weapons plant. Boeing bought parts of Rockwell in the 1990s and inherited Rockwell's liability for the damage.
Other big losers on the Dow were XOM -2.10, CVX -1.51 and AA -1.03. The oil companies were down hard on the -$3 drop in oil prices. The Dow chart could only be described with one word, ugly. The initial support from 12450-12500 broke and the double top at the 200-day average is looking really solid today. The lower high on the 29th and again this morning is setting a bad precedent for the rest of June. The financial drag on the Dow and S&P shows no signs of a letup. If oil prices are going to continue lower on new regulation fears then that is a double whammy for the Dow and S&P. If today's close at 12400 fails to hold tomorrow than the eventual target becomes 11750. I know that is a major change in bias but the Dow trend has changed. Today's close was a six-week low.
Dow Chart - Daily
The S&P is testing support at 1375 and a break there targets 1325 and ultimately 1275. I read one commentary today that suggested we could hit 1080 by the end of summer. The analyst was comparing the 2001 chart and recession with the 2008 chart and recession. There are quite a few similarities but comparing charts years apart is more an educational exercise than a trading guide. The key for us would be a break of support at 1325/1275.
S&P-500 Chart - 2008
S&P-500 Chart - 2001
The Nasdaq is not screaming higher but the chart is still much easier on the eyes than the Dow's. The uptrend is still intact as long as support at 2440 holds. The three leaders of the Nasdaq, GOOG, RIMM and AAPL, lost some points but are still holding the high ground. On Oct-23rd those three stocks were responsible for 50% of the +400 points of Nasdaq gains. From November to February those three stocks were crushed and the Nasdaq declined -25% before it bottomed on March 17th. Since March those same three stocks rallied hard and were responsible for half of the 400 points gained by the Nasdaq. My question is this. If those three stocks account for 50% of the Nasdaq gains then we are not really seeing a tech rally but an AAPL, RIMM, GOOG rally. How much farther can those three stocks take us? RIMM has already had two major announcements of new BlackBerry models in the last three months. Apple is widely believed to be setting on millions of 3G iPhones with the announcement expected next Monday. That suggests AAPL has farther to run but what happens after the announcement? Since the announcement has been rumored for weeks there could be a post announce decline. What will the 3G iPhone and any new features do to BlackBerry sales? That could depress RIMM as well. It simply looks to me like the Nasdag foundation is built on three support legs and two of them could be ready for a fall. I am not speculating that the Nasdaq is about to crash but I would be concerned if support at 2440 broke.
Nasdaq Chart - Daily
Russell-2000 Chart - Daily
The Russell 2000 remains the strongest index and the biggest question for the market. The Russell lost only -2 points today and finished well off its lows. The strength in the Russell despite the negative sentiment being given off by the financial sector is puzzling. If fund managers really thought the financial sector was going to implode with another Bear Stearns type of disaster they would not be buying illiquid small caps. This suggests the fund community is split on market direction. I still favor being long stocks with high relative strength over Russell 730 and adding to those longs over 750. You could extend that dip buy to as low as 720 if you are an aggressive trader. I would look to be short under 720. We will maintain this bias until proven wrong.
The next big event this week will be the Non-Farm Payrolls on Friday. The consensus is still for a loss of 60,000 jobs. This report could quickly change the Fed bias on rates and the next FOMC meeting will only be 12 trading days after the report. A much larger drop than expected could put the Fed back in rate cut mode but it would have to be a really large drop. A much better than expected number well into positive territory could escalate the potential for a rate hike as early as June 25th. For the rest of the week it will be financials, energy and Non-Farm Payrolls in the spotlight. Plan your trading around those events.
New Long Plays
New Short Plays
Patterson Cos. - PDCO - close: 33.42 change: -0.19 stop: 34.51
Why We Like It:
Picked on June 03 at $33.42
Porfolio Recov.Assoc. - PRAA - cls: 39.66 chg: -0.41 stop: 41.01
Why We Like It:
Picked on June xx at $xx.xx <-- see TRIGGER
Long Play Updates
Adaptec - ADPT - close: 3.17 change: +0.01 stop: 2.99
It wasn't much but ADPT did show some relative strength today. Traders bought the dip at $3.11. We remain bullish but would hesitate to open new positions at this time. More conservative traders might want to wait for a rally over $3.30 as an entry point. Our target is the December 2007 highs. We'll try to exit in the $3.65-3.70 zone. The stock can be somewhat volatile so we do consider this a higher-risk play. Our time frame is several weeks. FYI: The most recent data listed short interest at more than 7% of the 118 million-share float. Based on ADPT's average daily volume that is a lot of short interest and the stock could see a short squeeze.
Picked on May 28 at $ 3.25
Axsys Tech. - AXYS - close: 62.28 change: +0.74 stop: 55.99
AXYS continues to show relative strength. The stock added another 1.2% and hit another new high albeit on very low volume. We're not suggesting new positions at this time. Our target is the top of the channel in the 64.00-65.00 range.
Picked on June 01 at $59.16
BJ Services - BJS - close: 30.27 change: +0.12 stop: 28.95
Oil services stock BJS ignored weakness in crude oil and the oil sector to post a minor gain. Traders bought the dip at $29.61. Readers may want to wait for a rise past $31.00 before initiating new positions. Yesterday we suggested buying a bounce from $29.50 and BJS delivered that opportunity today. Our initial target is the $33.00-34.00 range. The P&F chart is bullish with a $52 target.
Picked on May 28 at $30.45
AM Castle & Co - CAS - close: 31.54 change: -0.49 stop: 30.69
We are urging caution on CAS. The short-term technical indicators are growing worse. Shares are effectively bouncing inside the $31-33 trading range but inside that range it's inching lower. A rebound from current levels would look like a new entry point but readers may feel more comfortable waiting for a rise past $32.50 or over $33.00. Our target is the $36.50-37.00 zone, which is just under its all-time highs. We're suggesting a stop loss under last week's low but more conservative traders might be able to get away with a slightly tighter stop.
Picked on June 01 at $32.83
Copa Holdings - CPA - close: 32.93 change: -0.10 stop: 31.40
Another down day for crude oil powered the airline index (XAL) to a 2.8% gain. Yet shares of CPA failed to rally with its peers. We are not suggesting new positions at this time. Our target is the $34.50-35.00 zone. FYI: More aggressive traders may want to aim for $36.00 or its 200-dma near 38.45.
Picked on May 27 at $31.40
General Motors - GM - close: 17.58 chg: +0.14 stop: 16.95
GM was one of the big headline stocks today. The company held its annual shareholder meeting. Prior to the meeting the company announced it was closing four truck plants in an effort to focus on smaller, more fuel-efficient cars. By shutting the plants GM will save $1 billion a year. During the meeting GM's CEO said they believe that the rise in gasoline and the changes in consumer's buying patterns and desires to smaller, fuel-efficient cars is a permanent one. The stock rallied to $18.18 midday before curtailing its gains. We would still be tempted to buy a bounce but keep a tight stop loss. Our target is the $19.50 mark. The most recent data listed short interest at more than 17% of the 530 million-share float.
Picked on May 27 at $17.42
Mercury General - MCY - close: 51.04 change: +0.03 stop: 49.65
MCY did not participate in the market weakness but neither did it rally. The general pattern is still a bullish one but the market's tone doesn't inspire us to suggest new positions here. Our short-term target is the $54.00-55.00 zone. The P&F chart is a lot more bullish with a $68 target.
Picked on May 28 at $50.92 *triggered/gap higher entry
Sonoco Products - SON - close: 33.46 change: -0.79 stop: 32.99*new*
Ouch! Today's 2.3% decline in SON looks like bad news for the bulls. The move actually looks like a reversal of last week's breakout making the rally above $34.00 look like a bull trap. More conservative traders may want to abandon ship right here. We are going to give SON one more day to rebound but we're inching up our stop loss to $32.99. Our target is the $38.00 level. The P&F chart points to a $51 target. FYI: SON is due to present at a basics and industrials conference on June 4th.
Picked on June 01 at $34.62
United States Cellular - USM - cls: 61.35 chg: -0.90 stop: 59.95
The general weakness in the market is throwing a wet blanket over USM's bounce from support. The stock lost 1.4% and appears headed back toward support near $60.00. A bounce from $60.00 would be an entry point but you may not want to initiate positions if the major averages are falling. Our target is the recent highs in the $67.00-67.50 zone. More aggressive traders could aim for $70 or its 200-ema. The P&F chart is bullish with an $85 target.
Picked on June 01 at $62.63
Williams Cos. - WMB - close: 38.26 change: +0.38 stop: 37.25
A new relative high in natural gas gave WMB some relative strength. The stock added 1% and looks poised to keep climbing. More conservative traders could try and tighten their stops a little bit more. Our target is the $42.00-42.50 zone. More aggressive traders may want to aim higher. The Point & Figure chart points to $56.
Picked on May 22 at $38.40
WMS Industries - WMS - close: 37.40 change: +0.05 stop: 34.25
We might be seeing a short-term top in WMS. This is the second day in a row that the stock stalled out near $38.00. More conservative traders may want to exit now. Any downturn could pull WMS back toward support at its 200-dma. We're not suggesting new positions at this time. Our target is the $39.50-40.00 zone.
Picked on May 28 at $36.05
Wal-Mart - WMT - close: 57.77 change: +0.57 stop: 55.95 *new*
A pre-opening upgrade for WMT sparked a gap higher in the stock price today. Yet the rally ran out of steam near $58.00. We're starting to see a potential trend of lower highs. We're not suggesting new bullish positions and we're inching up our stop loss to $55.95. Our short-term target is the $59.00 level near its recent highs. More aggressive traders may want to aim higher. The Point & Figure chart points to a $68 target. We are going to tentatively set a secondary, aggressive target at $62.00 but we suggest readers take some money off the table at $59.00.
Picked on May 22 at $56.05
Short Play Updates
Expeditor's Intl. - EXPD - close: 46.32 chg: +0.03 stop: 47.51
A sell-off in oil was not enough to fuel another rally in EXPD but we did notice a bounce from its 10-dma. Look for another drop under $46.00 as a potential entry point for shorts. We have two targets. Our first, short-term target is $42.50. Our secondary target is the $40.25 mark. The P&F chart is bearish with a $38 target. FYI: The most recent data listed short interest at 6% of the 209 million-share float.
Picked on May 28 at $45.65 *triggered
McDonald's - MCD - close: 57.56 change: -0.99 stop: 60.01
MCD is looking a little stale. The stock broke down under its 50-dma and under its four-month trendline of support. This is good news for the bears. Please note we are adjusting our target to $56.40-56.00. The 200-dma near $56.30 might act as technical support. We are contemplating a secondary, more aggressive target but at this time we would exit completely near the 200-dma. Currently the P&F chart is still bullish.
Picked on June 01 at $59.32
Paychex Inc. - PAYX - close: 33.63 change: -0.16 stop: 35.55 *new*
PAYX is trending lower and hit a new relative low today. We are adjusting our stop loss to $35.55. Our target is the $31.00-30.00 zone. FYI: The most recent data listed short interest at 5% of the 320 million-share float. That's several days worth of short interest.
Picked on May 22 at $34.87
Closed Long Plays
Celanese Corp. - CE - close: 47.49 change: -0.84 stop: 46.85
We are suggesting an early exit in CE. The stock has been struggling to maintain its upward momentum the last few weeks. While last Friday it looked like shares might breakout higher CE has stumbled instead. There is still potential support at $47 and $46 but we're calling it quits and suggest traders exit before this turns into a loss.
Picked on May 11 at $46.35 /exiting early
Corning Inc. - GLW - close: 26.77 chg: -0.10 stop: 26.45
Shares of GLW dipped toward the bottom edge of its rising channel and tagged our stop loss at $26.45. GLW did rebound from its lows but not by much and the very short-term trend is definitely negative.
Picked on May 27 at $27.27 /stopped out 26.45
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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