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Daily Newsletter, Monday, 10/29/2012

Table of Contents

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

Market Wrap

Markets Closed Ahead of Sandy's Landfall

by Linda Piazza

Click here to email Linda Piazza
Introduction

Here's what you need to know in a nutshell about today. Due the approach of Hurricane Sandy, equity and options markets were closed today and will be tomorrow, too. By early this morning, equity index futures and interest rate futures were also closed, while futures markets on energy and metals remained open.

Currently, exchanges are scrambling to get something into place by Wednesday, but whether that's electronic trading only or something more or even something less depends on Sandy.

Although markets were closed, some companies did report earnings, some numbers were released and some developments occurred across the pond, too. I will cover those developments as well as a few daily charts for those who are interested.

I want to begin, however, or end, if you're not reading any further, by letting all subscribers in Sandy's path know that we hope for your safety and that of your homes and businesses. Growing up on Texas' Gulf Coast, I've been through or evacuated from many a hurricane in my lifetime, and I and all here at Options Investor hope you remain safe. I'm certain those in the hurricane's path are already tracking the storm's approach, if they still have a computer connection or a hand-cranked emergency radio, but others who might want to track Sandy can do so at the National Hurricane Center's page.

Here we go with the news of the day. By the time markets would normally have opened this morning, market participants had learned that markets would not open for equity and equity options trades, and futures trading in equity options had already ceased. The bond market was opened for a shortened day, and trading in energy and metal futures opened. While they were still trading, equity futures had climbed off their overnight low, likely created when futures were the only tools traders could use to hedge their positions. Some knee-jerk selling of equity futures likely occurred as market participants sought that hedging.

Some sellers were likely hedging against declines in our markets, but also trouble in Europe was resulting in a climb of the dollar futures. Although the relationship sometimes shifts depending on what else happens in the economy, lately climbs in the dollar have not been good for either equities or commodities. With Sandy approaching our shores and the dollar climbing, futures traders had two reasons to hedge.

By the time this article is uploaded and you read it, developments and predictions regarding Sandy will have changed, so I won't attempt to cover them in depth. However, we must question how Sandy might impact the markets. We learned today through various news reports that 6.5 percent of the national's refining capacity lay along the path of the holiday. Ports were closing by midmorning, shutting down supply to those refiners, with bay areas in New York, New Jersey and Delaware closed to new vessels. Many pundits comment that this will keep supply tight, but many of those refineries where shutting down or cutting back their own capacity. For example, the Phillips 66 Bayway refinery in Linden, NJ was shut down. Hess Corp. (HES) had announced on Sunday that it would cut back production at its Port Reading, N.J. refinery, and I haven't seen an update. While supplies will be tightened due to the inability to transport those supplies, demand is likely also to decrease due to the shuttered production and the fact that people may not be able to drive. The impact of Sandy could be felt across the pond, too, as refineries and fuel transport is stalled, disrupting deliveries to Europe's fuel depots.

Monday's Developments

Early in their sessions, many Asian markets tried for or achieved gains, but then they sank lower. The Nikkei 225 lost 0.04 percent; the Hang Seng, 0.16 percent; and the Straits Times, 0.91 percent. China's Shanghai Composite dropped a heavier 2.1350 percent. Some commentators blamed Sandy, and global market participants may also be hesitant ahead of our elections. It would be egocentric of us to tie all developments on Asian markets to our developments, however, as some news sources sometimes do. In Hong Kong, the government said it will tack a 15-percent tax on non-resident buyers of Hong Kong properties in an effort to keep prices under control. The tax would also be imposed on companies to thwart companies who might buy properties and then transfer them to non-residents. That development hit equities there.

Developments in Europe also impacted trading. Uncertainty about Sandy's and the upcoming election's impact added concerns, but traders in Europe certainly had enough to ponder already. This weekend, Germany's Finance Minister Wolfgang Schaeuble proposed an expansion of the powers of the European Union's monetary affairs commissioner, a suggestion with which the ECB's Bank Chief Mario Draghi concurred. The expansion includes the power to veto budgets that failed to meet deficit guidelines. That would result in more control over the budgets of member states. Such an expansion would not be an easy sell to member states, particularly to the U.K., and would require changes in EU treaties. Moreover, while Germany's finance minister and ECB head Draghi may be in agreement, Germany's Bundesbank chief Jens Weidmann has not been.

On the lead-up to Italy's 10-year auction sometime this week, perhaps tomorrow, tension rose in Italy. In Sicily, an anti-government party garnered 25 percent of the vote. Italy's Prime Minister Mario Monti and Spain's Prime Minister Mariano Rajoy were meeting, while Italy's former prime minister, caught up in a possible tax fraud case, said that the government was threatened by a possible withdrawal of support from the center right.

Today, the FTSE 100 dropped only 0.20 percent, having climbed well off its midday low all the way into positive territory but then dipping at the end of the day. The DAX dropped 0.40 percent, but also climbed well off its low and dipped at the end of the day. It never reached positive territory, however. The CAC 40 dropped a heavier 0.76 percent, and Spain's IBEX 35 dropped 0.60 percent. Yields on Spanish 10-year bonds climbed 0.06400 percent, to 5.656, the highest close in a week. Yields on Italy's 10-year rose, too.

Of particular note, however, was the performance of Greece's Athens Stock Exchange. That index lost 6.3 percent.

Here in the U.S., the Bureau of Economic Analysis released reports as scheduled during what should have been the pre-market session. Those reports included Personal Spending, Personal Income, and Core PCE Price Index. Personal spending came in ahead of expectations, rising 0.8 percent as opposed to the expected 0.6 percent. Personal income also increased, up 0.4 percent as opposed to the prior 0.1 percent, but that increase was less than the anticipated 0.5-percent increase. The Core PCE Price Index was in line with expectations, up 0.1 percent.

Story stocks today need to be expanded to include story sectors: those likely to be impacted by Sandy. Those included anything related to the storage and delivery of heating oil in the northeast. Gasoline demand could be expected to rise in the immediate lead-up to landfall and then fall off after landfall. Some refineries have been shuttered, as had been noted, with the startups after shutdowns not an easy or quick process. Tanker companies could be impacted.

In addition, airlines resorted to parking their planes across the globe. Up to 9,000 flights have been cancelled, with airlines waiving fees. Cruise companies serving the Northeast saw some of their ships impacted. Norwegian Cruise Line's Gem was scheduled to return to New York today and is now waiting out at sea, unable to find an alternative port because of the size of the storm.

Companies scheduled to report earnings today included utility company PG&E (PCG), Burger King (BKW), Herbalife Ltd. (HLF), Hertz Global Holdings (HTZ), and Anadarko Petroleum Corp. (APC). Some companies postponed earnings while others went forward. PCG went forward. The adjusted net income was $0.93/share, with expectations pegged at $0.88/share. As we know, earnings/share hasn't been the biggest problem in this reporting season. It's been revenue. Revenue exceeded expectations, climbing 3 percent from the year-ago level to $3.98 billion. That's above the expected $3.83 billion. The company's CEO affirmed that the company had continued efforts to "improve PG&E's operations across the business" and also the company's commitment to "resolving our gas pipeline issues."

Burger King (BKW) also reported. As anticipated, Q3 earnings plummeted, but not as much as expected. The company beat on EPS. Excluding one-time items, the company reported $0.17/share, with expectations pegged at $0.14-$0.15/share, depending on the analysts surveyed. The company also reported that the board of directors had agreed to a cash dividend of $0.04/share, paid on November 29 to shareholders of record on the close of business November 9. In its first full quarter since returning to trading as a public company, the company reported same-store sales growth of 1.4 percent, and system-wide sales growth of 3.9 percent. Revenue declined 25.8 percent to $451.1 million, but the consensus had been $442.96 million.

Armstrong World Industries (AWI) beat expectations, too, reporting $0.97/share against expectations of $0.90. However, this company was one repeating the often-seen pattern from this reporting season. Revenue fell short, at $694.7 million versus the $738.87 million, and the company lowered guidance for the 2012 fiscal year. The company mentioned divestitures of non-core businesses and softness in remodeling and repair activities as the reasons behind the lowered guidance.

Hertz Global Holdings (HTZ) wasn't scheduled to release earnings until the afternoon, but by early Monday morning, it had announced that the CEO of acquired company Dolan, Gary Rappeport, would retire at the end of the year. Tom Callahan, currently president and COO of the company, will step into his shoes. In early afternoon, the company announced that it would delay its results, releasing them after the market close on Wednesday.

Anadarko Petroleum Company (APC) was scheduled to report in the afternoon. The company followed that Q3 pattern, beating by $0.08 on earnings/share but missing on revenue. Earnings were $0.84 per share. Revenues rose to 3.33 billion, but the company had been expected to earn $3.39 billion. Weather-related downtime in the Gulf of Mexico had resulted in about 1 million BOE of production being shut in. The company announced that liquids sales hit record volumes during the quarter. The company increased the FY 2012 sales-volume guidance, raising the midpoint of their projected range by about 3 million BOE.

Other companies announcing delayed earnings for this week included Pfizer (PFE) moving its announcement from Tuesday to Thursday; Thomson Reuters Corp. (TRI.T), moving its announcement from Tuesday to Friday; and NRG Energy (NRG), moving its announcement from Wednesday to Friday. Others may be postponing earnings, so check schedules of companies that interest you or in which you have a position, options or otherwise.

Our equity markets of course could not react to any of these developments. Energy markets were reacting, with natural gas prices hitting an 11-month high this morning. Today was the expiration of November futures, however, which could have been a factor, especially when combined with market participants making post-Sandy bets. The CME Group's report also pointed to reports "that showed an elevated level of offline US nuclear capacity."

The CME Group's report characterized the crude complex's trade as "choppy to lower." On the /CL contract, the "choppy" part occurred in early trading, with the "lower" portion produced after the early morning intraday high.

Volume in silver futures proved light, with silver futures moving down. Gold futures were well off Friday's early morning high but zigged and zagged a lot today, staying with the trading range from the last couple of days of trading. CME reports on all these futures mention both risk aversion ahead of Sandy's landing and the pressure due to the dollar's rise.

Let's look at daily charts for some of the equity indices, with the caveat that what's happening with Sandy will trump anything that we see on these charts. I typically also include intraday charts in my Monday Wraps, but we of course did not have any intraday trading today, and Friday's setups will likely be rendered moot by developments before markets open again.

Charts

Those new to my Monday Wraps might find the following two paragraphs useful when interpreting my charts. Those who have read the Wraps can skip straight to the charts. I set up nested Keltner channels on my charts. It's a run-of-the-mill channeling system like the more familiar Bollinger Bands. As with those more familiar BB's, channel boundaries are often targets for upside or downside moves. They also mark levels where prices might find support or resistance on closes. When several channel lines converge, that potential resistance or support might appear stronger, just as it would if 20-, 50- and 100-sma's all converge in one spot.

For the benefit of subscribers, I mark potential upside and downside target/support/resistance levels with ovals, usually green for upside and red for downside. Orange ovals are sometimes used when the darker-colored ones would not allow for a clear examination of the next target. From now on, I will mention the nearest potential support or resistance level in the discussion on the chart, but not the further-out ones. They can be located on the charts if price breaks through the nearest levels on consistent daily closes. If an interpretation such as "support levels appear stronger than resistance, so up looks more likely than down" is possible, I'll tell you. Often we traders must be able to defend our trade against a move in either direction.

As with any type of potential support or resistance, those with profits should be protective of those profits as support or resistance is tested. If prices find support and climb, look to the next higher oval, even one just broken through, as potential resistance. Do the reverse when resistance is breached. Hopefully, this format provides you with the information you need without requiring all night to read as happens when I list each potential support or resistance level individually.

Annotated Daily Chart of the SPX:

This chart of course provides the setup as of last Friday, as do all the other equity charts. Last week, the SPX broke lower and set a tentative downside target. As of Friday, the SPX maintained a potential downside target in the 1390-1402 range, almost touched by the SPX on Friday. Friday's candle had been one of indecision, a doji with both upper and lower shadows or candle wicks. While such a candle at the bottom of a decline can alert traders to watch for a bounce, this one's meaning is less clear. It comes after days of sideways movement produced by candles all indicating indecision and looks to be part of that sideways indecision. It makes no trustworthy prediction.

For now, traders should consider the possibility that the SPX will drop down to test that deeper target level. This is what I would have said Friday, and it's obviously what we need to consider now. If the SPX does drop deeper into that potential support zone, there's the risk of a much deeper potential target being set, the one at the lower red rectangle. That potential downside target would be set by consistent or sustained daily closes beneath the lower level of the SPX's closed marked support zone.

I have a caution to offer. If the SPX should drop into that 1390-1402 level and bounce from there, but then hold steady at or beneath the 1425-1432 zone for a few days, be aware of the possibility that it could roll down again. Be aware of the same possibility if the SPX doesn't drop first but just climbs into that resistance zone and holds there for a few days. Doesn't mean a rollover can happen, but it does mean that it could.

I'm as alert to upside surprises as I am to downside ones. Because we have seen several days of indecision on the SPX and because the SPX did closely approach known historical, Keltner, and round-number support, traders must be alert to the possibility that the SPX could climb immediately. Several types of potential resistance converge near the red 9-ema and up to about 1432, so that's the first place to watch for potential resistance on daily closes. If the SPX can sustain daily closes above that resistance zone, the next potential resistance area is marked, too.

Annotated Daily Chart of the Dow:

The Dow's chart is similar except that the Dow has been sitting on top of the target zone, where potential support might be supposed to exist on daily closes. A further drop down to 13000-13040 looks possible. A sustained break of 13000 on daily closes sets a new, much lower potential downside target marked on the chart.

A further drop deeper into the zone being tested is possible, but is it probable? That's not possible to predict from this evidence. I wouldn't be surprised, based on the NDX's behavior that we'll see later, but all we know now is that buyers and sellers have been pretty evenly matched for the last few trading days.

The same caution should be offered concerning a Dow bounce, either immediately or after a drop to test 13000. If the Dow powers up to the 13237-13317 zone and stalls there on several daily closes, the possibility exists that it could roll down and test this support again.

If the Dow can sustain daily closes back inside the marked next resistance zone, a next potential target is marked on the chart.

Annotated Daily Chart of the NDX:

The NDX dropped to the support zone by last Monday, signaling what could (and did) happen rather quickly on other indices. The NDX's drop pushed the potential target and potential support lower. The NDX has been sliding lower along those potential support lines, now at about 2637-2650.

The NDX's small-bodied, relatively long-legged Friday candle did come at the bottom of a decline and does look like a more classic sign of a potential bounce. However, the NDX doesn't always follow through on such signs, so we have to discount that promise a little and downgrade it to a slightly bullish/mostly neutral status. If prices instead fall through the support that the NDX has been pushing lower, a next potential downside target is marked on the chart.

If the NDX climbs, it's going to almost immediately hit its head on converging resistance of many types near 2690-2700. Watch for rollover potential from that level. If the NDX can sustain closes above that converging potential resistance, the next potential upside target is marked.

Annotated Daily Chart of the RUT:

Ah, the RUT, often the one to lead the pack, the one that I anthropomorphize in my own thoughts as the renegade of the indices. For a renegade, the RUT has been behaving quite nicely, pausing right where you'd expect it to pause. Prices appear trapped between converging potential support, from the current level down to just below 800, and resistance, at the red 9-ema near 821 and up to about 827.

Prices can stall here for a few more days, but they're eventually going to break one direction or another. If the RUT breaks out to the upside and maintains daily closes above that next resistance zone marked by the top orange rectangle, then the next Keltner target is near 835-840. The chart was too crowded to mark that 835-840 zone with a rectangle, but I'm noting it here.

If the RUT rolls down again, either after a bounce attempt or immediately, a deeper downside target is marked in the event of sustained daily closes beneath about 798-800.

Annotated Daily Chart of the Dollar:

After stalling on a few attempts to maintain values above a 23.6 percent retracement of its decline off its July high, the dollar finally has begun to find support above $80.00. Whether it continues to do so depends on many geopolitical developments.

Equity weakness has lately been caused by, impacted by or accompanied by--depending on your opinion--on dollar strength. The two have been moving in opposition to each other. While our equities did not trade, dollar futures did. Geopolitical developments across the globe and here in the U.S. could impact the dollar. Traders might like to keep it on their radar screens for that reason.

Tomorrow's Economic and Earnings Releases

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Although government offices in the impacted areas were closed today and will be tomorrow, scheduled national economic releases were released. It's difficult to pinpoint which of these other U.S. releases will appear on time or be delayed. Federal Reserve Bank of New York President William Dudley had been scheduled to speak in New York tomorrow, at the Fairfield County Business Council, but the latest information is that this event has been cancelled.

Some of these U.S. releases could still be rescheduled.

Minneapolis Federal Reserve Bank President Naryana Kocherlakota will speak at the University of Minnesota-Duluth. President Kocherlakota will be accepting questions from the audience.

By midmorning on Monday, the Yahoo! Earnings schedule appeared to have been updated, removing companies that had previously been scheduled to report tomorrow and had since delayed their reports. As this report was prepared, reports were still expected tomorrow from AGN (BMO), ADM (BMO), AMTD (BMO), CAR (AMC), CAH (BMO), DLPH (BMO), DNDN, DENN (AMC), Deutsche Bank AG (DBK.DE), EA (AMC), F(BMO), GNW (AMC), JDSU (AMC), ODP (BMO), ONXX (AMC), PZZA (AMC), PNR (BMO), PBI (AMC), STX (AMC), SFLY (AMC), X (No Time Supplied), VLO (BMO), WM (BMO), and WMB (AMC), among others.

Of course, the true big event for tomorrow remains Sandy.

As of this time, the exchanges have confirmed that markets will again be closed tomorrow, but check in with your favorite source for market-related news tomorrow morning for more updates, particularly as to whether the metals and energy futures will be open as they were today. My latest information was that equity futures would open at 5:00 pm CST this afternoon and be open until 8:15 am CST tomorrow morning. Interest rate and treasury markets were also expected to open at 5:00 pm CST but they were projected to remain open until their normal closing time of 4:00 pm CST tomorrow. Exchanges were still planning for a Wednesday open. Any and all of these projections could change.


New Plays

Markets Closed Due to Weather

by James Brown

Click here to email James Brown

Editor's Note:

The major U.S. stock exchanges, the NYSE and the NASDAQ, have both closed trading today (Monday) and Tuesday due to safety concerns. According to CNBC this is the first two-day shutdown for the stock market due to weather since the year 1888.

Hurricane Sandy about to hit the U.S.


In Play Updates and Reviews

First 2-day Weather Closure since 1888

by James Brown

Click here to email James Brown

Editor's Note:

Just in time for Halloween the east coast of the U.S. is facing a monster of a storm with Hurricane Sandy. This storm could be one of the worst to hit the U.S. Many will recall that Hurricane Katrina, which hit the U.S. back in 2005, was a category five storm. Hurricane Sandy is currently only a category one storm but what it lacks in power it will make up for in sheer size. Sandy is more than 700 miles across and will drench the eastern seaboard and put 50 million people at risk.

Hurricane Sandy is a HUGE storm!

Determined to avoid the criticism that plagued President Bush and the government's response to Katrina, President Obama has already declared emergencies in several states including, Connecticut, Massachusetts, New Jersey, New York, Pennsylvania, and Rhode Island. One of the biggest worries is the potential for the storm surge to push 8 feet to 10 feet of water past the beaches and into these heavily populated regions.

The major U.S. stock exchanges, the NYSE and the NASDAQ, have both closed trading today (Monday) and Tuesday due to safety concerns. According to CNBC this is the first two-day shutdown for the stock market due to weather since the year 1888.

You can keep up to date on Hurricane Sandy on this page at Weather.com.

For all of our friends and readers on the east coast, please stay safe!

The newsletter should get back to normal on Wednesday when the markets re-open. We will still be posting a brief market commentary, mostly news related, each night to keep you up to date.

-James