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Daily Newsletter, Wednesday, 10/15/2008

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Table of Contents

  1. Market Wrap
  2. New Plays
  3. In Play Updates and Reviews

Market Wrap

Stocks Retreat, Oil Prices Continue To Fall

Market Wrap

Buyers showed little interest in equities Wednesday and some arms had to be twisted to buy a commodity as continued credit woes had investors and traders cautious ahead of Friday's option expiration.

Volumes at both exchanges were light with the big board churning just shy of 6.5 billion shares compared to its 5-day average run rate of 8.3 billion and 10-day average of 8.0 billion shares.

Market breadth was weak from the opening bell, and while Treasuries did find some selling at the open (resulting in higher yields), a more defensive posture developed into the mid-point of the session.

After a spat of short covering on Monday, the benchmark S&P 500 Index (SPX.X) 907.84 -9.03% holds just more than a 7-point gain from Friday's close, while Nymex October Crude Oil futures (cl08x) settled down $4.09, or -5.20% at $74.54 on demand fears.

Due to Monday's holiday, the EIA delayed their weekly inventory report until tomorrow (Thursday) at 11:00 AM EDT. Current forecasts among industry analysts are for crude oil inventories to show a build of 1.9M barrels.

Number two (2) and three (3) Dow Industrial component heavyweights saw shares of ExxonMobil (NYSE:XOM) $62.35 -13.95% and Chevron (NYSE:CVX) $59.98 -12.48% pacing declines as "peak oil" takes on a new meaning in recent months. ExxonMobil and Chevron are, or were, respective #1 and #8 most heavily weighted S&P 500 components at this morning's cash open.

Brazil-based Petroleo Brasileiro (NYSE:PBR) $25.07 -23.07% was also slammed lower to close at its lowest level since May 10, 2007. No, PBR hasn't split its shares 3:1 since closing at $75.19 on May 21, 2008 either.

Earnings season gets into full swing and it was shares of Dow component and S&P500 heavyweight Coca-Cola (NYSE:KO) $44.21 +1.09% bucking negative breadth of 29:1 in the blue chip index. Coca-Cola executives said strength in international markets helped the soft drink maker report better-than-expected Q3 profits of $0.81/share.

Pepsico (NYSE:PEP) $51.25 -5.79% remained weak after its recent quarterly report, closing at a new multi-year low.

Banking giant JP Morgan (NYSE:JPM) $38.49 -5.45% said its Q3 net fell to $527 million, or $0.11 a share, amid $3.6 billion in write-downs plus losses from its Washington Mutual buy, but profits tripled at the investment banking unit.

Super regional Wells Fargo (NYSE:WFC) $33.35 -0.50% posted net income of $1.6 billion, or $0.49 a share, down 23% from the prior year. The bottom-line figure beat analysts' forecasts of $0.41/share. The banker said earnings were hurt by troubled investments in Fannie Mae, Freddie Mac and Lehman Brothers.

After the closing bell, eBay (NASDAQ:EBAY) $15.33 -13.58% said swing back to a net profit of $492.2 million, or $0.38/share, but warned it expects 4Q earnings excluding items of $0.39 to $0.41/share on revenue of $2.02 billion-$2.17 billion. Analysts were expecting earnings of $0.47/share on revenue of $2.44 billion. The online retailer said it sees full-year EPS excluding items of $1.69 to $1.71. Shares were marked lower at $14.58 in this evenings extended session.

Wednesday's Global Economic Calendar

Economic reports released prior to this morning's opening tick did little to improve sentiment.

U.S. retail sales saw the sharpest drop in three years, falling by 1.2% last month, as consumers sharply cut spending on economic fears. Core sales (excludes autos) fell 0.6%

The Labor Department says the producer price index fell 0.4% in September, helped in part by lower energy prices. Core prices at the manufacturing level (excludes food and energy) rose 0.4%.

Regional data had the Federal Reserve Bank of New York saying that New York manufacturers saw conditions worsening markedly in October. Business conditions dropped 17 points to a record low -24.6.

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A quick browse of October's survey had 22% of respondents indicating that their borrowing needs had increased over the past year, but an even larger proportion - 31% - indicated that their needs had decreased. When asked about changes since July, roughly 20% reported higher borrowing needs and almost the same percentage reported lower needs. The most widely cited reasons for declines in borrowing needs since July were management of existing debt, an increase in revenue, and a reduced need to replace or expand capital equipment.

At 10:00 AM EDT the Census Bureau released its manufacturing and trade inventories and sales figures for August. Inventories rose 0.3% to $1.5 trillion. Sales were estimated to have fallen 1.8% to $1.2 trillion. That had August's inventory/sales ratio at 1.27.

U.S. Market Watch -

My U.S. Market Watch was red across all equity-based indices and sectors for the entire session.

I take that back.

The S&P Banks Index (BIX.X) 154.34 -2.52% was actually in the green for the better part of the day and the Airline Index (XAL.X) 17.88 -3.35% had its moments.

In the last hour of trade however, even the well-nourished lady seemed to have had enough and quit singing "You Are The Wind Beneath My Wings."

The Semiconductor HOLDRs (SMH) $19.10 -6.82%, AMEX Gold Bugs ($HUI.X) 231.32 -10.40% and DowJones Home Construction (DJUSHB) 219.90 -9.10% CLOSED at new 52-week lows today.

American Airlines (NYSE:AMR) $8.78 -0.11% held above its 150-day SMA ($8.57) after the carrier said it earned a profit of $45 million in the recent quarter, helped largely from a $432 million gain from the sale of its investment business, American Beacon Advisors. Without the sale and other one-time items, AMR said it would have lost $360 million, or $1.39/share, which was close to analysts' forecast for a loss of $1.40/share.

American Airlines said it spent $2.72 billion on jet fuel in the recently completed third-quarter, 56.1% more than the $1.74 billion spent a year earlier.

Delta Airlines (NYSE:DAL) $7.44 +1.22% edged up $0.09, but still battles its 150-day SMA ($7.55). For the July-September quarter, the carrier said it lost $50 million, or $0.13/share. Excluding special items, Delta said it would have lost $26 million, or $0.07/share.

Delta said it spent $1.95 billion on jet fuel and related taxes in Q3, which was 54% more than the $1.27 billion it spent a year earlier.

US Oil Fund (USO) - Daily Intervals

Crude oil futures and the U.S. Oil Fund (USO) $60.73 -6.61% settled/closed below a very important near-term level of support today and continues to look vulnerable, especially into Tuesday's November futures contract termination. Open interest in the November contract isn't particularly heavy at 106,920 contracts, but today's 210,193 was and would suggest hesitancy to take delivery.

No price/earnings, no debt/equity ratios here and if the USO's WKLY S2 $57.17 doesn't find buyers, $45-ish looks in play.

Major Global Indexes, Currencies, USO, GLD, HUI, OIX and XLF

Asian markets were showing some sign of "stability" until tonight, and I wanted to monitor Japan's Nikkei-225 at its Thursday open. We weren't expecting a very positive open as the iShares Japan (EWJ) $8.35 -10.40% closed at another multi-year low today, which suggested the $NIKK was going to get hit.

As I type, the $NIKK trades down 921 points, or -9.65% at 8,626.

If we're to see any type of bounce in the U.S. tomorrow, Japan's $NIKK would need to see a MINIMUM decline of 4% at this point.

Then yen as depicted by the CurrencyShares Yen (FXY) $99.47 +1.80% has the yen trading near par ($/y $100 would be par) with the dollar, and the strong yen is NOT positive for Japanese exports, thus their economic outlook.

Japan is the world's 2nd largest economy (ranged by GDP).

S&P 500 Index (SPX.X) - Daily Intervals

Last Wednesday, I "drug it down" and this Wednesday, I'm "dragging it down" again!

Today's intra-day action seemed rather "orderly" and no real sign of panic, but the last 30-minutes sure had the look at buyers (bulls or short-covering bears) simply gave up.

Even as I "drag it down" there's still the "tie" way up at 1,208 and the July lows. That is NOT bullish considering the decline from last Wednesday's wrap.

If I were to "drag down" the now 839.80 low to 770, we'd still see a "tie" at what is now the 61.8% retracement at 1,295.

Today's last 30-minutes suggest buyers willing to "give up" and another break to a new low leaves vulnerability to 770 and 700.

Should NEW LOWS at the big board (NYSE) build back above 650 or so, that would also be some sign that the bottom is once again about to give way.

NASDAQ new lows greater than 450 also a negative sign.
 

New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
INTC None
WMT  

Play Editor's Note: Time and time again we have heard the old Wall Street maxim "don't try to catch a falling knife", which essentially states don't try to pick the bottom in a stock or a market. You'll end up getting cut. Unfortunately, that's all the market is offering us these days - a rain of knives!

Long-term investors can just hold their nose and close their eyes and wait for the selling to stop. Or if you're brave you can dollar-cost average as your market gets "cheaper" for you. This newsletter isn't about long-term investors. It's about trading.

I don't think traders have many options right now. If you can't watch your positions and the market during the day then you absolutely need to be sitting out. The volatility swings are horrific. If we don't sit out then we can either go with the trend, which is down, or we can try to buy dips near support. Lately, stocks have been slicing through support with barely a tap on the brakes.

Personally, as bad as the charts look, I do not want to short this market. That may be my emotion getting in the way but it would be too easy to see another +800 point day if something spooks the shorts into covering. That sort of violent rebound is what bear markets typically provide. Granted bear market rallies aren't normally as big as last Monday's move but you get the idea.

If we're not going to buy puts or short equities then we need to be looking for entry points to buy the dip and in this market that means trying to catch the knife! (Or you can sell puts, the strategy I mentioned yesterday and again in today's plays) All of the new plays I am publishing below should be considered very high-risk. It would be all too easy for the market to keep falling. I'm trying to play with a stop wide enough that stocks have room to move but not too wide. Stop loss placement is probably the greatest challenge in this market if you're not day trading.

In addition to tonight's plays I wanted to list a few stocks and where they might find support if the markets keep falling.

LLTC: A dip into the $20-19 zone for this semiconductor stock might be an entry point for bullish positions. Stop under $19.00.

MOT: The long-term chart for MOT is horrendous but investors defended the stock pretty hard when it dipped to $4.00 last week. I would be tempted to buy dips in the $4.20-4.00 zone with a tight stop under $4.00 (maybe $3.95-3.80).

CTXS: If this software stock breaks the $20-19 region of support then it's headed for the $15.00 level. A dip near $15.00 might be a tempting, albeit somewhat scary, entry point. Use a tight stop.

JNPR: This networking stock might be a buy in the $12.50-12.25 region.

YHOO: There is still speculation that someone will acquire YHOO. I would be tempted to speculate on some long-term options on a dip near $10.00. Of course I'd be a lot more bullish on a plunge toward stronger support around $5.00.

TRLG: This apparel stock appears to have very serious support in the $15.00-14.00 zone. I'd be tempted to buy a dip with a stop around $13.75ish.


New Long Plays

Intel Corp. - INTC - close: 14.99 change: +0.94 stop: 11.95

Why We Like It:
INTC recently reported earnings. The company beat by a penny and investors were unhappy with the company's outlook. If the globe is facing a widespread recession then naturally INTC's sales could be affected. Thus the longer-term trend may be down for INTC but that doesn't mean the stock won't see some oversold bounces. I suspect that INTC can bounce if it nears the 2002 low around $13.00. We're suggesting readers buy INTC in the $13.25-13.00 zone with a stop loss at $11.95. More conservative traders may want to use a tighter stop (say 12.50ish). If triggered at $13.25 our first target is $15.75.

Picked on October xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/14/08 (confirmed)
Average Daily Volume: 74 million

---

Wal-Mart - WMT - close: 50.05 change: -4.39 stop: 41.95

Why We Like It:
The sell-off in WMT is crazy. The company's business didn't get 8% worse today. We're moving into a recession. Consumers might cut back on their spending but WMT will be picking up more customers. The plan here is to buy fear and sell the rebound. If shares of WMT are getting sold this hard then where will it stop? I think shares will find support in the $44-42 zone. We're suggesting readers buy WMT in that $44-42 area with a stop loss at $41.95. This is one stock where we will be tempted to hold over the company's earnings report in mid November. If triggered at $44.00. That's right, $44, another 12% lower from here, then we will have two targets. Our first target is $49.50. Our second target is $54.00. Nimble and aggressive traders could try and catch the drop but there is no guarantee WMT will hit $44.00 and the bounces are going to be sharp!

Picked on October xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 11/13/08 (unconfirmed)
Average Daily Volume: 25 million
 

New Short Plays

None today.
 

Play Updates

Updates On Latest Picks

Long Play Updates

None
 

Short Play Updates

None
 

Closed Long Plays

Diamonds - DIA - close: 84.87 change: - 8.80 stop: 88.90

It was another one of those "worst days in stock market history" kind of sessions. The DJIA plunged more than 7.8%. The DIAMONDS lost more than 9%. Shares of the DIA quickly hit our stop loss at $88.90 closing the play.

Picked on October 14 at $91.00 *triggered 10/14
Change since picked: - 6.13 /stopped out @ 88.90
Earnings Date 00/00/00
Average Daily Volume: 27 million

---

Ultra Dow30 Proshares - DDM - close: 32.68 chg: -6.21 stop: 33.45

If the DJIA was hammered for a 7.8% loss then you can bet the DDM was crushed. Shares of this ultra-long ETF lost almost 16%. We would have been stopped out at $33.45. In hindsight a much tighter stop loss sure looks good right now but that's a tough call to make. We're in incredibly volatile markets and the DDM is twice as volatile.

Picked on October 14 at $37.15 *triggered
Change since picked: - 4.47 /stopped out 33.45
Earnings Date 10/30/08 (unconfirmed)
Average Daily Volume: 4.7 million

---

S&P SPDRS - SPY - close: 90.02 change: - 9.83 stop: 92.90

Wednesday was the worst percentage sell-off in the S&P 500 since the 1987 crash. The index lost almost 10%. The SPY hit our trigger to buy it on the way down at $96.00 and then hit our stop loss to exit at $92.90.

Picked on October 15 at $96.00 *triggered/stopped same day
Change since picked: - 5.98
Earnings Date 00/00/00
Average Daily Volume: 316 million

---

Ultra S&P500 ProShares - SSO - close: 29.02 chg: -5.99 stop: 29.40

Our plan with the SSO was to buy this ultra-long ETF when the S&P 500 index hit 965. The SPX hit 965 around 10:06 a.m. this morning placing our entry point in the SSO at $32.67. A 10% stop loss would have been $29.40. The selling in the S&P 500 picked up speed heading into the closing bell and the SSO hit our stop loss at $29.40 in the last five minutes of trading.

Picked on October 15 at $32.67 *triggered/stopped same day
Change since picked: - 3.65
Earnings Date 00/00/00
Average Daily Volume: 20 million

---

Terra Inds. - TRA - close: 19.25 change: -4.93 stop: 19.95

Ouch! The widespread market sell-off hit extraordinarily hard for the fertilizer-chemical names. TRA gave up more than 20% to close under the $20.00 level again. Our stop loss was at $19.95. The next stop looks like a rest of the lows in the 17.50-17.00 zone.

Picked on October 13 at $22.65 *triggered
Change since picked: - 3.40 /stopped out 19.95
Earnings Date 10/23/08 (unconfirmed)
Average Daily Volume: 5.7 million
 

Closed Short Plays

None
 

Today's Newsletter Notes: Market Wrap by Jeff Bailey and all other plays and content by the Option Investor staff.

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