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Daily Newsletter, Wednesday, 10/29/2008

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Table of Contents

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

Market Wrap

Witches Brew

[Image 1]

Bull horn, bear snout, some butterflies too.
Stirred in a pot for a wild witches brew.
Be careful my pretty, don't eat it so quick.
Too much of this cooking, could make you sick.

Stocks found a mixed-to-higher trade for the bulk of Wednesday's session, but a Halloween-like "trick" in the final 15-minutes of trade left the major averages twisted, with the broader S&P 500 (SPX.X) falling 10 points, or -1.10% to close at 930.09.

S&P 500 Index (SPX.X) - 15-minute intervals
[Image 2]

Just as yesterday morning's "dip" looked like another new low was certain for the S&P500, today's move above 956 after the FOMC lowered its target for fed fund by 50-basis points to 1.00% had the look that last week's highs were going to be traded into the close.

Then, as if a witch's spell had been cast over buyers, the S&P500 shed roughly 40-points faster than General Electric's (NYSE:GE) $19.20 -1.48% CEO Jeffrey Immelt could say the company was aiming for the same 2009 profit (flat profits), even if revenues fall 10%-15%.

At least, that seemed to be a headline released by Dow Jones at 03:52 PM EDT, which coincided with today's late-session decline.

GE had already warned that profits will fall in 2008 as a result of troubles at its hefty finance arm and analysts, on average, look for profit of $1.95/share.

GE's shares were trading $20.00, then fell to as low as $18.70 during the final 15-minutes of trade.

Here this evening, I'm seeing further news that a GE spokesperson said the Dow Jones report quoting Mr. Immelt "was completely out of context and inaccurate."

I (Jeff Bailey) do think the headline created some uncertainty among market participants. However, shares of GE tick rather quietly in this evening's extended session at $19.38.

I did click through many of the indexes/sectors and many stocks, even commodities, and there wasn't much of anything that didn't see a notable decline in the final 15-minutes of trade.

Wednesday's Global Economic Calendar -
[Image 3]

Today's global economic calendar had the Bank of England (BOE) saying total net lending to individuals in September rose to 2.4 billion pounds from the anemic 400 million pounds in August. The BOE said the 12-month growth rate slowed further, to +5.4% from August's +6.1%, and the 3-month annualized growth rate fell by 0.4 percentage points to +1.9%.

More and more, we're hearing the "velocity of money" measure being mentioned by some economists as an important metric of how capital flows are doing, or not doing as has been the case since the credit crunch tightened.

One modest positive was that within the total increase, net lending secured on dwellings was 2.2 billion pounds compared to the 0.1 billion pound increase in August.

The BOE added that the number of loans approved for house purchases edged up to 33,000.

Not shown in the above economic calendar, we also got our weekly report from the Mortgage Banker's Association (MBA). The MBA said its seasonally adjusted purchases index rose 8.5% to 303.10 last week, which was a smidge above the 4-week average of 302.6.

After a 23.5 decline for the week ended 10/17, the MBA's refinance index rose 28.5% to 1,489.4.

The MBA added that the average contract interest rate for a 30-year fixed-rate mortgage fell to 6.26% from the prior week's 6.28%. Meanwhile, the average contract interest rate for a one-year ARM decreased to 6.90% from 6.97%.

MBA's Weekly Data (Table)
[Image 4]

I track and tabulate several of the data sets the MBA reports each weak, and there may be an opportunity for a bounce in the homebuilders as depicted by the DJUSHB.

What I'm looking at here is the seasonally adjusted purchases index, the "Friday after report DJUSHB" and then a 4-week and 12-week average of the purchases index itself.

The 4-week averages purchase is still below its 12-week average, but looks to be stabilizing, and with the DJUSHB and many of the builders well off some of their DJUSHB benchmarks of 290.31 and 277.01, I think the builders may still have some room for further gains.

Today, the DJUSHB 212.83 +7.40% was among the sector winners as you'll see later in the US Market Watch.

Pulte Home (PHM) - Daily Intervals
[Image 5]

You could probably take any of the homebuilding stocks and place some date benchmarks on them using the MBA's weekly data like I'm showing with Pulte Homes (NYSE:PHM) $9.88 +6.92%.

Now, as you've probably seen of late, a stock, is a stock, is a stock, and in some cases, stocks have really been getting squashed of late.

But some stocks have "held up" relatively better than others this year.

Today, PHM almost traded its 12/31/07 close of $10.54, and several homebuilders I looked at were trading near their 21-day SMA's.

Using the MBA's weekly data at least gives us an additional observation of PURCHASES, where I can derive some moving averages like the 4-week and 12-week.

A stock like PHM might just want to elevate itself back higher and the 150-day, 200-day and 50-day SMA's look like achievable targets.

Take the "witches advice," and don't stuff the account overly full.

I would also have to think that there are some "bears" that are short PHM. They're looking at the same chart, they see/hear what the Fed is trying to do (save the banks and housing market) and they've seen PHM at these levels twice, make it thrice, this year.

Additional economic data released today had the Commerce Department saying new orders for long-lasting manufactured goods rose unexpectedly in September by 0.8%, led by demand for defense goods (+19.1%) and transportation equipment.

Excluding transportation, September durable goods were down 1.1%. Slightly better than forecast, but relatively inline.

EIA Weekly Inventory / Refinery Data
[Image 6]

At 10:35 AM EDT we got our weekly inventory and refinery data from the EIA. The 493,000 bbl build was lighter less than the forecast for a build of 1.4M barrels.

Commodities in general had a strong day today and you can see from the above data that while gasoline inventories saw draws, refiners were producing distillates (diesel, heating oil).

Crude oil inputs rose by 289,000 bbls/day to 14.85 million bbl/day, which was slightly less than last year's 14.93 million bbl/day input.

Percent utilization of operable capacity begins to level off at 85.34% on a post Hurricane Ike basis and the number of days supply of crude oil falling to 21.7 days may have helped bring the bid to oil.

US Market Watch - 10/29/08 Close
[Image 7]

Today also "felt" a bit like an option expiration. Some market observers say there is a big REBALANCING taking place into the end of the month.

Perhaps some of last Wednesday's market wrap commentary would suggest that is a possibility.

The HUI.X +15.65% since Friday's close (5DayNet%) while GLD and SLV up a lesser 2.47% and 5.91%.

Same type of observation for OIX.X and USO.

Some have also said the Yen's strength as depicted by the FXY has been a "flight to safety" move in recent weeks. A -2.86% decline does have the major averages here in the U.S seeing some gains.

While the Bank of Japan has their rates at 0.50%, there was some speculation today that they could lower to 0.25%. This may be a reason why the yen eases from recent 52-week and multi-year highs against the dollar.

Breadth at the NYSE today was positive by the close at 1,875 to 1,135. NASDAQ breadth also finished positive at 1,707 to 1,186.

Major Global Indexes, Currencies, USO, GLD, HUI.X, OIX.X and XLF
[Image 8]

Asian markets continue to trade weak since our last visit, and that's a "global concern." Here at home, the small caps of the Russell 2000 ($RUT.X), which would perhaps reflect the state of the US economy and be sensitive to banks "not eager to lend" is notable.

S&P Depository Receipts (SPY) - $1 and $2 box
[Image 9]

At last Wednesday's close the SPY was trading at the $88.00 level (pink box), then tested the $84.00 "support" and whipped back higher.

GE's comments or not, today's late session decline sure could be technical in nature, where "those that bought the low, don't want to eat crow."

The red "?" would be about where the SPY closed after seeing $95, $96 and $97 today.

This remains a TOUGH market to trade due to the volatility.


New Plays

Failed Rally Entry Point

Play Editor's Note: The late-day sell-off in stocks only confirms that we're still stuck in a downtrend. I'd love for the market to find a bottom but it looks like stocks may have to retest their lows again. At the very least I would expect a 50% retracement of the bounce.

Check out these stocks: TYC's failed rally under resistance at $25.00 looks like a bearish entry point.
FCX also has a failed rally under resistance at $30.00, which looks like a bearish entry point.
JNPR has a failed rally under $19.50.
HIG's failed rally is worse with a strong trend of lower highs. If I had more time I would have added HIG as a short with a stop loss at $21.50 and a target of $16.50 (maybe a secondary target even lower).

---------------------- NEW BEARISH Plays ----------------------

Petrobras - PBR - close: 24.21 change: +1.71 stop: 25.65

Why We Like It:
I am very long-term bullish on PBR and the oil industry in general. If you want to buy and hold PBR for years then the mid 20s is probably great. Yet short-term the trend is still bearish. I know PBR out performed the market today but the sharp sell-off at the close looks like a potential entry point for aggressive traders to capitalize on a retest of the recent lows. We're suggesting bearish positions now with a stop loss above today's high. Our target to exit is $20.25 at which point we would strongly consider switching directions and buying the stock with a tight stop loss. I offer at least one caveat. If crude oil is trading above $67.00 tomorrow morning before the stock market opens I would not open bearish positions on PBR.

Annotated chart:
PBR

Picked on October 29 at $24.21
Change since picked: + 0.00
Earnings Date 11/10/08 (unconfirmed)
Average Daily Volume: 31 million

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Ultra(Long)Russell2000 - UWM - close: 21.33 chg: +0.25 stop: 23.01

Why We Like It:
It's probably not a very popular belief but I'm not totally convinced by the recent rally. There are a lot of folks who really want to believe the bottom is in. After such a painful year I don't blame them. However, the charts are telling me we could see another retest of the lows (again). We're going to suggest a tight stop on this so if we're wrong, we know we're wrong quickly. The plan here is to open bearish positions on the UWM, which is the double-long of the Russell 2000 (RUT) small cap index, which should move twice as fast as the RUT. We're suggesting a stop loss above today's high. Our target is $18.05. If you look at the numbers this isn't the greatest risk-reward ratio but a stop loss any tighter risks being stopped too early. I'm setting a secondary target of $16.25 but I would take most of the position off the table at $18.05.

Annotated chart:
UWM

Picked on October 29 at $21.33
Change since picked: + 0.00
Earnings Date 00/00/00
Average Daily Volume: 4.2 million

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In Play Updates and Reviews

One play triggered on the breakout. The rest still in wait mode.

Play Editor's Note: The late-day sell-off in stocks only confirms that we're still stuck in a downtrend. I'd love for the market to find a bottom but it looks like stocks may have to retest their lows again. At the very least I would expect a 50% retracement of the bounce.

Check out these stocks:
TYC's failed rally under resistance at $25.00 looks like a bearish entry point.
FCX also has a failed rally under resistance at $30.00, which looks like a bearish entry point.
JNPR has a failed rally under $19.50.
HIG's failed rally is worse with a strong trend of lower highs. If I had more time I would have added HIG as a short with a stop loss at $21.50 and a target of $16.50 (maybe a secondary target even lower).

____________ BULLISH Play Updates ____________

Broadcom - BRCM - close: 16.84 change: -0.91 stop: 14.90 *new*

After out performing the market earlier this week BRCM under performed the market all day today. Shares closed down about 5% and look poised to drop toward the $16.00-15.75 zone. We are upping our stop loss to $14.90. We're not suggesting new positions at this time. Our target is $19.50.

Picked on October 24 at $16.10 *triggered 10/24
Change since picked: + 0.74
Earnings Date 10/21/08 (confirmed)
Average Daily Volume: 14 million

---

Ingersoll-Rand - IR - close: 17.02 change: -0.93 stop: 14.45 IR under performed the market all day and struggled with resistance near $18.00 for the entire session. We are reiterating our plan to buy a dip in the $15.50-15.00 zone. If triggered we have two targets. Our first target is $19.50. Our second target is $22.50.

FYI: More nimble traders could try and short IR right here with a stop loss at $18.05 and a target near $15.00.

Picked on October xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/24/08 (confirmed)
Average Daily Volume: 4.8 million

---

Nucor - NUE - close: 36.64 change: +0.54 stop: 24.90

Bulls were probably encouraged to see NUE close with a gain on Wednesday but the stock failed to rally past resistance near $38.00. Aggressive traders might want to consider bearish short positions now with a stop loss at $38.10 and a $31.00 target. We are going to patiently wait for the bullish entry point on a dip in the $28.00-26.00 zone although if we see another bounce in the $31-30 range we might have to alter our strategy. If triggered at $28.00 we have two targets: $34.50 and $39.50.

Picked on October xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 01/22/09 (unconfirmed)
Average Daily Volume: 9.7 million

---

Wal-Mart - WMT - close: 55.02 change: -0.15 stop: 52.35*new*

Be careful here! WMT broke through resistance near $56.00 and its 200-dma and hit our alternative entry point to buy the stock at $56.25. Unfortunately, the rally topped out at $56.80 and WMT quickly retreated back under resistance. This looks like a failed rally pattern, which is bearish. The newsletter is officially long WMT but given the market volatility I don't have a lot of confidence in the move. I would not be the least bit surprised to get stopped out tomorrow. Trading in this market environment is tough! More conservative traders may want to limit their risk by raising their stops toward the $53.00 region. Our first target is $59.95. Our second target is $63.00.

chart:
WMT

Picked on October 29 at $56.25 *triggered
Change since picked: - 1.23
Earnings Date 11/13/08 (unconfirmed)
Average Daily Volume: 25 million

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____________ BEARISH Play Updates ____________

PetsMart - PETM - close: 19.14 change: +0.87 stop: 20.05

PETM turned in another strong move higher. Shares rallied to $19.91 and almost broke resistance at $20.00 but the market reversed late in the day and PETM followed. The general trend suggests the pattern remains bearish and today's move could be another entry point for bearish positions. Our target is $15.05.

Picked on October 26 at $18.53
Change since picked: + 0.61
Earnings Date 11/19/08 (confirmed)
Average Daily Volume: 3.3 million

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