Option Investor

Daily Newsletter, Saturday, 8/15/2009

Table of Contents

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

Market Wrap

No Harm Done, Yet

by Jim Brown

Click here to email Jim Brown

The markets may have posted their first weekly loss in five weeks but there was no damage. The decline on Friday was minimal and exactly to uptrend support.

Market Statistics

There were three economic reports on Friday and investors had several different views of the recovery. Catching the most headlines was the first Consumer Sentiment Survey reading for August. The first reading on August sentiment came in at 63.2 and a significant drop from the July reading of 66.0 and consensus estimates for a rise to 68.5. The sharp decline was a serious surprise for analysts. At 63.2 the index is at five month lows. The big drop came from a sharp decline in the current conditions component from 70.5 to 64.9. The expectations component was relatively unchanged with only a -1.1 point drop to 62.1.

The drop in the current conditions component was blamed on rising gasoline prices, high unemployment and falling home prices. I disagree with these claims. Gasoline has barely moved in the last four weeks. The jobs report the prior Friday showed that jobs losses and unemployment had actually improved. Home prices actually ticked higher in some regions while others declined only slightly. New home sales were up as were pending home sales. This data conflicts with the "official" assumptions made by analysts.

What has really changed in the country in the last four weeks? Lawmakers recessed for the summer and began holding their normal August town hall meetings around the country. While the meetings were held like normal the attendance and emotion was far from normal. Instead of having 20-30 concerned senior citizens showing up for the normal lecture and glad handing with the politicians we saw hundreds of voters, sometimes thousands, show up in full attack mode. Signs and banners were in abundance as attendees fought to get to a microphone to complain about the proposed health care plan. Those that could not get to a microphone simply yelled their opposition. News cameras captured the events and the videos were run repeatedly on the various local news programs. Most lawmakers have now cancelled remaining meetings in fear of the growing resistance while others changed the format to a group conference call where the politician answered prepared questions rather than be accosted by the voters. I hope voters remember this in the next election.

The only thing that has changed for consumers over the last four weeks has been the sudden exposure on their local news to the rising hostility over the proposed health care plan. Most consumers turn a deaf ear to events transpiring in Washington but pay close attention to a near riot at the local fire station or VFW where a town hall meeting is held. That news lingers for days while a harsh speech by a critic on the House floor in Washington is never heard by 99.99% of consumers.

Consumers have heard, right or wrong, that they will lose their current insurance, their taxes will go up, the government will decide if they can get life prolonging treatments and like other countries with government health care they may have to wait 6-9 months for a doctors appointment. President Obama's approval rating has fallen to only 47% and a new low as the health care fight becomes mainstream. A Rasmussen poll on Thursday showed 52% of voters now disapprove of President Obama's performance with 38% of those strongly disapproving while 47% somewhat approve. That approval rating has fallen from its high of 65% after he took office. If appears that the "change we can believe in" has turned into "change consumers don't want" and that change in sentiment showed up in the current survey for August.

The talking heads on TV kept saying all day long on Friday that the drop in consumer sentiment caused the drop in the markets. I think that was the easy answer but not the accurate answer. More on my reasoning later.

Consumer Sentiment Chart

The second report making news was the Consumer Price Index or CPI. The CPI was unchanged in July after a +0.7% monthly increase in June. The stabilization was credited to the slight decline in gasoline prices after their sharp rise in June. Obviously those analysts are not talking to the analysts on the sentiment survey. The core CPI rose only +0.1%. The year over year decline in the headline number was -2.1% and that is the lowest in 59 years.

There is obviously no inflation present and with the declining core CPI numbers there is actually a small worry about deflation. The Fed was right to keep their rates flat and should be able to do so for months to come. The lack of demand in the economy is pressuring prices and making it practically impossible for anyone to raise prices. The only real price increase in 2009 has come from the energy sector where crude prices have rallied from under $40 to over $70.

Actually the cash for clunkers program, effectively a government subsidy on new cars, will push the CPI lower in the coming months as the actual price paid for a new car declines. With official unemployment over 9% many economists fear prices could continue falling on all items. However, it is not the 9% of the workforce that controls prices but the 91% still employed and bringing home a paycheck.

CPI Chart

The last report was the Industrial Production for July, which came in with a gain of +0.5%. This is the first reading in positive territory and was led by a +1% jump in manufacturing. Compared to the -22% drop in Q1 that is a monster improvement. This was led by a 20.1% jump in automobile manufacturing as plants were restarted. As autos begin to consume the backlog of parts we will see further gains as parts manufacturers begin to restart their facilities. However, the capacity utilization rate rose to only 68.5% from 68.1% and remains at multi decade lows.

Historically recessions end three months before any gains in industrial production. The positive gains in July confirm the conventional wisdom that the recession ended in late Q1, early Q2.

Industrial Production Chart

Next week has a full economic calendar but only a couple of reports that will have any impact on the market. The Producer Price Index (PPI) is expected to show the same lackluster gains as the CPI last week. The Philly Fed Manufacturing Survey will be the most watched report. As the first regional manufacturing report in the August/September cycle analysts will start forming opinions on the continued rebound. It is expected to show a decline of only -3.5% compared to the cycle low of -41.3% in February. A positive number here would be very market friendly.

Economic Calendar

If it is Friday it means another bank was closed. Colonial BancGroup (Nyse:CNB) with 346 branches in Florida, Alabama, Georgia, Nevada and Texas was closed by regulators. The government said $22 billion of the banks assets and branches would be bought by BB&T Bank (Nyse:BBT). The balance of the assets will be controlled by the FDIC. BB&T has 1,500 branches across the Southeast. The failure of Colonial is the largest bank to be closed this year and the sixth largest in U.S. history. The FDIC has closed 77 banks so far in 2009. Dwelling House Savings and Loan of Pittsburg was also closed on Friday and will be assumed by PNC Bank (Nyse:PNC). The FDIC also closed Community Bank of AZ, Community Bank of NV and Union Bank of AZ.

The FDIC said the closing of Colonial will cost the FDIC $2.8 billion. The 300+ banks still on the problem bank list have combined assets of $220 billion and far more than the $13 billion left in the FDIC fund. The FDIC does have a $30 billion line of credit in case another major bank or banks fail. The FDIC charges banks a percentage of deposits to produce revenue and rebuild the fund. Because of the dramatic increase in closures the FDIC issued a special assessment to member banks earlier this summer that is expected to raise $5.6 billion when paid in September. That will reduce the amount of money banks have to lend to customers. Colonial had applied for TARP funds but was told by regulators they had to raise $300 million in private capital first and they could not raise the money.

Colonial had been hit with a restraining order on Thursday that prevented them from liquidating or transferring assets worth $1 billion. The suit was filed by Bank America against Colonial to recover assets. Colonial acted as a mortgage broker and had 6,000 mortgages belonging to Bank America and held in trust by Colonial.

While on the subject of banks there is a story making the rounds on the Internet about a pending Roosevelt-style "bank holiday" in August or September. Harry Schultz started the rumor and it has been getting a lot of news coverage. The theory is the government needs to close the banks temporarily in order to sort out the various asset problems that still exist. The closing could result in "wide spread nationalization" and new banking rules according to Schultz. He claims it could also lead to a formal U.S. dollar devaluation.

Schultz claims U.S. embassies are being told to purchase massive amounts of local currencies, enough to last them a year, and they are being sent large amounts of U.S. currency to make these purchases. There are some anecdotal reports from others that this part of the story could be true. I have had several readers email me asking if this bank holiday rumor was a real threat. After researching it in depth I believe this is just a newsletter writer spreading a rumor to self promote his newsletter. I have seen nothing that leads me to believe that this is a real threat or has any shred of credibility except maybe to Schultz. Why embassies are being told to purchase currencies is unknown. However, I am not sure the embassies would actually be sent pallets of U.S. currency to do this even if the administration wanted it done. I think there are easier ways to accomplish the task. That leads me to believe that this part of the story is also untrue even though it is being reported from multiple sources.

The administration has problems. The FDIC has problems. However, none of those problems appear severe enough to warrant the massive disruption of the banking system, the civilian population and the world economy by closing the U.S. banks for several weeks. In Roosevelt's time it could be done. Today, with our massive global interdependencies I think it would be a disaster. What kind of confidence would other countries have in buying our debt if our banks were closed? There is $1.5 trillion in debt coming up for sale over the next 12 months. Without that sale the U.S. could not function. I believe any administration would do anything necessary to avoid a show of weakness with a forced bank holiday. If someone mentions this rumor to you, do yourself a favor and kill it.

Oil prices posted the biggest declines on Friday with a -4.8% loss for the week to close at $67.43, down -3.09 on Friday alone. The reason given was again the falling consumer sentiment. I don't believe the sentiment had that much to do with it and a quick check shows that the dollar rallied again, which is negative for oil prices. Oil had been on a four week rally to just over $72 after trading under $60 in mid July. I believe this was just profit taking aggravated by the rebound in the dollar. The current crude futures contract expires next Thursday and surely that had nothing to do with the volatility in prices (grin). We also learned on Friday that China may be considering removing some of the stimulus because the economy is heating up. Any slowing of the rebound would delay demand.

Next week should see a bounce in oil prices because there is not one but two tropical storms headed for the gulf. Tropical storm Two was officially named Ana and is being followed by a newly formed tropical storm Three. Ana has sustained winds of 40 mph and increasing. Tropical storm three has already reached that level and is expected to become a named storm soon. Ana is on track to go north of Cuba and impact the tip of Florida while storm Three is tracking south of Ana's path for a more direct hit on Puerto Rico and Cuba and possibly into the gulf. These two storms should provide a lift for oil prices next week.


Storm Track for Ana

Also impacting the oil sector late Friday was earnings from oil giant Petrobras (Nyse:PBR). Earnings fell -20% due to the lower price of oil compared to the same period in 2008. No surprise there. Production was up +6%. The surprise came from the monster spending program to extract oil from the Tupi field. Investments for the first six months were $32 billion. That will increase to $174 billion through 2013 as the exploration of the Santos Basin continues and the infrastructure is built. The first oil was pumped from the Tupi field in May in a scheduled 15-month test to produce between 15,000-30,000 bpd. However the test was suspended in July due to equipment failure.

The Tupi oil is going to be very hard to produce because it lies deep under water and under a deep layer of unstable salt. Well depths are 20,000 to 25,000 feet to the oil in 7,000 to 9,000 feet of water. The oil temperature in the reservoir is thought to be 100 degrees celsius (210 F) and the water temperature on the ocean bottom is only 4 degrees C (39 F). This causes significant problems when the hot oil hits the cold pipes. Petrobras is experimenting with new technology necessary to extract oil from these depths. Methods being tested include using titanium pipes with heaters to slowly decrease the oil's temperature on its trip to the surface. Imagine the cost of this development for the initial 150-180 wells being planned. Eventually they will figure out how to do it but this oil will not be cheap. Initial wells cost $240 million each but that price has fallen to $60 million on the 15 exploration wells already drilled. Only 8 of those found oil. The massive expenditures Petrobras is making to find and produce this oil is very beneficial to the entire oil services sector. Billions in contracts to every offshore operator will keep producing profits for the service sector.

Tupi well depth (1 meter = 3.3 feet)

Pimco's CEO, Mohamed El-Erian, in an interview on Friday said that the market was on the equivalent of a sugar high. El-Erian said investors are overly optimistic and current market valuations are not warranted by the economic outlook for 2010. He is a very respected money manager with $756 billion under management and I am sure many people listened to him. He said people were not confident enough to start spending again either nationally or globally. Until that occurs the economy is not going to produce decent growth.

Meanwhile JP Morgan believes we are going to see a normal "V" bottom recovery. JPM economist James Glassman, former Fed Governor Laurence Meyer and Stephen Stanley from RBS all believe that the worst recession since the 1930s has created a reservoir of demand that will quickly boost the economy and avoid the slow growth many are predicting. Meyer is expecting a +3.6% GDP in 2010 and +3.9% in 2011.

The key to the economic recovery is a rebound in spending by both businesses and consumers. You may have noticed on Thursday the retail sales for July declined by -0.1% when analysts were expecting a gain of +0.7%. Core sales (ex-auto, ex-gas) fell for the fifth straight month and at -0.4% was the biggest decline since March. General merchandise stores fell -0.8% and have been averaging a -0.7% drop for the last five months.

JC Penny (Nyse:JCP) reported earnings on Friday that were a breakeven and raised its guidance for the year to 75-90 cents per share. However, it lowered guidance for Q3 saying it could lose up to a nickel a share citing a tough environment today. Kohls (Nyse:KSS) also said on Thursday that the second half of 2009 would be worse than previously expected. Guidance was below Wall Street estimates. Kohls CEO warned that the coming holiday season could be ugly.

Wal-Mart (Nyse:WMT) reported on Wednesday that same store sales fell -1.5% in Q2. They had previously forecast flat to +3%. The quarterly decline was the first ever for Wal-Mart. Wal-Mart said consumers were buying less expensive store brand products and buying smaller sizes. They were also paying cash instead of credit. Neither Wal-Mart or Kohl's sees a consumer rebound in our immediate future.

So, it seems there is some confusion among analysts and retailers on how the recovery is going to be powered. The consumer has no credit. Thanks to the new credit card laws the lenders have cancelled billions in open credit lines rather than risk lending to consumers who may not pay on time now that they can't bump their rates or charge late fees like they did before. Millions of others have had their interest rates jacked higher from the 7% to 8% intro, good customer rates to across the board 22% to 24% because the banks only have ten months under the law to make changes before they can no longer change rates and fees on classes of borrowers. Now everyone is paying higher rates rather than just those who abuse their credit. This is your government at work. I am sure some of the rules needed to be changed to protect the downtrodden but now those of us who pay our bills have to help pay the bills of everyone else through higher rates.

I got sidetracked in that last paragraph but you get the point. Home equities are no longer available like ATMs for spending money and handling family expenses. The average family has lost more than 25% of their credit card limits, some more than 50%. We may not be losing jobs at the record rates but we are still not creating jobs. The housing sector is improving but rates are rising and that will slow down purchases. 500,000 families with clunker cars have taken advantage of the cash for clunker program to put themselves into debt for a $40,000 auto on average. That means they have roughly $600 a month less to spend after factoring in payments and insurance. You don't need expensive insurance on a clunker but lenders demand full coverage on new cars. That is $600 less for Wal-Mart, Kohl's and JC Penny.

Based on all the above I am having a hard time visualizing a robust "V" bottom recovery. However, I am still a believer that a recovery will occur. I actually believe it will begin in earnest this year when the holiday season begins. As each day passes and John Consumer hears more of the "recession over" conversation in the news he will start to breathe easier and relax his hold on his wallet. Remember, only 9% of the workforce is unemployed. 15% if you count those unfortunates who the government ignores because they have been unemployed for more than 27 weeks. That leaves 85% of American workers continuing to earn a paycheck and pay their bills like normal. Everything they need to buy is going down in price nearly every day. I believe they will come out of their bunker mentality and start to open the wallet by year-end as long as we don't have any new surprises in the financial system.

I guess I am just not a V bottom visionary today. I was telling a reader on Friday that I thought the recovery would be long and steady and so would the market rebound. There are enough people who still think we are going back to the lows to keep others with cash on the sidelines. Comments like we got from El-Erian on Friday help keep quite a few people in cash or bonds.

The continued tightness in the financial system will keep corporations from expanding too quickly. Getting loans is still a challenge for most companies. Without loans for expansion the job market will be hindered by plans that are delayed until conditions improve. This is a long-term trend and it could take 2-3 years before the smoke clears and business is back to normal. During that period we will see corporations post ever increasing profits because expenses have been cut to the bone. Since they will be limited expansion capability they won't be able to add those expenses back on in a rush to build capacity.

This should lead to a period of long, steady, relatively slow growth. This is the perfect situation for the stock market. Increasing profits without increasing expenses. Profit comparisons starting in Q4 will be easy. With comps of a breakeven or even a loss the majority of companies will be able to beat the street with ease once we get into Q4 and beyond.

For buy and hold investors this is Nirvana. The downside should be minimal and the market path should be steadily higher but at a restrained pace. Volatility should ease and the phrase "long term hold" should be longer than the expiration on your milk carton.

The flaw in this scenario is the global recovery. Most other nations do not have the strength of the U.S. or China. They may rebound slower than hoped for and drag out the recovery. Offsetting those slow growers will be the BRIC nations. China is ramping up so quickly that there is a fear they will cancel or withdraw some of their stimulus. The Chinese markets fell -5% on Friday on this worry. All of this will work out eventually and the world will expand once again.

The next crisis for U.S. investors is probably going to be created by the government. We saw the markets rally when it appeared the healthcare juggernaut had run off the rails. The same fears of government intervention still hold true in the financial sector as well as others. Gordon Gekko (Michael Douglas) said for lack of a better term, "greed is good." Think you know what he said? You may be surprised with the last sentence.

Without monetary reward for expanding and taking risks there will be no economic rebound.

The current administration has embarked on class warfare and is trying to make profits illegal. The administration has said they are going to raise taxes on corporations and high-income individuals to pay for all the social programs. If it happens those same taxpayers are going to scale back and not take on the risky projects or burn the midnight oil working 60-80 hours a week. This is a historical lesson that we have learned many times over the last 80 years. It always happens this way and it will slow the recovery if it comes to pass.

The big news on Friday was the "Pay Czar" and his review of the top 100 employees at the seven largest companies still stuck in the TARP trap. The top 25 at each company will be reviewed individually and the next 75 will be put through a pay formula to see if their pay is excessive. Nobody knows how this will turn out but the government intervention in the pay process is just another example of the growing control problem. I am not saying there does not need to be something done about executive pay because I have a hard time understanding what a person does that makes a million dollars a week. I just believe it should be up to the shareholders to force that review.

While I am on the czar topic that is another pet peeve of mine this week. In the past various presidents have named a czar for special projects or to oversee a commission or process. These czars are not an official post and are not vetted or approved by Congress. These are personal appointments that operate outside regular government channels. They have the power of the presidency but none of the oversight and control of a cabinet level position. For instance there is currently a car czar, TARP czar, drug czar, border czar, urban czar, regulatory czar, stimulus accountability czar, health czar, Iran czar, Middle East czar, Af-Pak czar (Afganistan-Pakistan), Sudan czar, climate czar, technology czar, copyright czar, green jobs czar, science czar, security czar, cyber czar, Guantanamo closure czar, etc. All of these are personal presidential appointments.

Normally presidents are way out on the edge if they have 2 or 3 czars. Some had none. So far president Obama has named 44 czars. This is more czars than Russia had during its entire imperial history. Basically he has his own shadow government running outside the formal government. Actually this has its advantages. Each person is given their direct orders for their area and that is the only thing they deal with. Unlike a government position which may have dozens of areas of responsibility. It also allows the administration to be insulated from the problem area yet retain operational control. If there is good news you are able to take credit but if bad news you can dodge the bullet. But, come on, 44 czars? Of course appointing a czar does make voters think you are serious about handling the problem.

Did you know that the czar position was first formally recommended in 1982 by a senator who said the war on drugs would not succeed without the appointment of a cabinet level drug czar? Still that czar was not officially appointed until 1988 when William Bennett took the position. That 1982 senator making the czar comment was Joe Biden. He did not realize that Nixon had appointed Jerome Jaffe as drug czar back in 1971.

I would say we are on the verge of a recovery. How fast or how far that recovery goes is up to many factors and none of which we control as individuals. Determining where the stock market will go as we progress through this recovery is a difficult task.

I believe it will continue to go up but only after we shake off the 50% rebound since March. For small caps that rebound was 67% from the 343 close on the Russell-2000 on March 9th to the 575 close on Thursday. That was a gain of +232 points or 67.6%. All of that came without a 10% correction along the way. CNBC was running a list of stocks on Friday that were up over 1000% since the market lows. Not 100% but 1000%. If the recovery was on fire and we expected +3% GDP in Q3 then maybe that would be justified. Unfortunately we are going to be lucky to get 1% GDP in Q3.

If you go back in history and chart recoveries out of recessions you will not find a +50% rebound off a recession low in only five months except for the bear market rally in 1930, which was eventually erased with an further 82% drop in 1932. Since 1950 the average length of time to achieve a 50% rebound is 18 months. Over that period we normally get real GDP growth of +4.5% from the bottom, not just a dead cat bounce. On average 850,000 jobs have been added to the economy. The national ISM is 56.2 or higher and expanding. Corporate profits have increased by more than 12% and bank lending has increased by more than 5%. None of those events has occurred in this rebound.

Unlike El-Erian I am not bearish on stocks. As a reader reminded me on Friday, "It is not our duty as speculators to be on the bull side or the bear side, but upon the winning side." (Quote by Jesse Livermore) Determining that winning side today is a tough job.

We saw the "sharp pullback" as reported by the talking heads and the "first weekly decline in five weeks" as though we were staring into an abyss ready to gobble up our profits. This is absurd and or course it was a slow news Friday. The decline was simply typical of recent down days and was bought just like every decline before it.

I believe the decline was caused mostly by option expiration and the Wed/Thr failure to move over 1012 on the S&P. You may remember the last Friday before expiration. That was July 10th and the head and shoulders pattern on the major indexes was one tick away from breaking down at the close. Most market analysts predicted massive selling once that neckline broke. Instead there was a massive short squeeze on Monday and the July rally was born.

The prior Friday before expiration was June 12th. The S&P closed at a six-month high of 946. Over the next two days the index lost 43 points. On the prior Friday before expiration, May 8th, the S&P closed at a new five-month high of 929. Over the next four days the index lost -48 points. I could go on but you get the picture. In recent months the Friday before expiration and the days immediately following have seen increased volatility. The talking heads on TV were blaming the Consumer Sentiment report but I believe it was more likely option expiration pressures.

There was no sell off despite the Dow being off -161 at its lowest point of 9232. Volume was horrible at only 8.5 billion shares. (Somebody asked me this week where I get these numbers. It is the total number of shares traded on the NYSE, Nasdaq, AMEX and electronic exchanges. It is reported daily in the Momentum section of Investertech.com. You can check the volume by market for any day since 2001. Subscription required) Friday was the lightest day of the week for volume and the average for the week was just under 9 billion shares. That is decent volume for a summer Friday but not a representative market. As I stated last week this was still a buyer boycott not a sell off.

We would have probably seen this boycott on Thursday as well except that banks rallied after news broke that John Paulson's hedge fund had made some massive buys of bank stocks. Paulson bought 168 million shares of Bank America and 35 million shares of Regions Financial among others. Paulson's funds have been doing extremely well since a 600% gain in 2007 betting against subprime. In 2008 his flagship fund was up +37% compared to an average loss of 19% for the hedge fund community. If Paulson thinks banks are a buy then the rest of the fund community tags along. The report was credited with rescuing the indexes from an opening drop on Thursday with the major banks jumping +4% to +6% on the news. Basically the historical "day after the FOMC" market decline was postponed for a day due to the bank rally.

The volume was light despite the fact the S&P failed again over 1010. You would think a repeated failure on a Friday after a 50% rebound would have attracted more sellers. It appears the shorts are losing conviction. If you look at a chart of the S&P or Dow you will see a textbook test of uptrend support. For nearly a month now this support has played a pivotal part in the market movement. Not only do you have horizontal support at 995 but uptrend support from July.

SPX Chart - 15 min

On the resistance side of the equation there is an even more ominous set of converging resistance levels. The 200-month moving average is 1016. The 38% Fib retracement is 1014 and the 50% rebound level from the March 667 low is 1000. All of these factors make it a real challenge to move higher from here. It does not make it impossible but it does make it difficult.

SPX Chart - Monthly

The Dow was handicapped on Friday by news that Boeing had told its supplier in Italy to stop making the bodies for the 787 because Boeing had found flaws in 29 they had already received. Boeing lost -1.75. MMM gave up -1.28, CAT -1.17 and IBM -1.01. These were responsible for about 50 of the Dow points loss.

Buyers hit the tape again at the close to cut the losses in half and push the Dow back over 9300. Like the S&P the Dow is facing serious overhead resistance. Unlike the S&P the Dow is already over the 200-month average and the 50% rebound level is 9705. That leaves the Fib retracement at 9422 as the defining factor. Since the Dow only has 30 stocks it is at the mercy of one or two losers whereas the S&P is a real index that fund managers follow and a single stock can't move the index. That makes the converging resistance levels on the S&P more critical than the single resistance on the Dow.

Dow Chart - Monthly

Dow Chart - 60 min

The Nasdaq has its own set of converging resistance levels at 2000-2010. For the last two weeks this has been a solid top for tech stocks. Support is 1950-1970 and then 1750. We don't want to see support at 1950 break or the picture could get ugly very quickly.

The major tech stocks appear to be weakening. With the exception of Apple the tech leaders are turning into laggards. For instance Intel is struggling to hold over support at $18.60 and the SOX lost -2.5% on Friday. RIMM closed with a gain of a buck but was hammered for a -10% loss earlier in the week. Microsoft has been stuck at $23.50 for a month. Qualcomm collapsed with the chip sector and is clinging to support at $45.50. Ebay has declined for over a week and closed on support of $21.50 on Friday. Amazon closed near a six week low on Friday at $83.50. This is not a picture of tech strength. It is the most normal picture of typical summertime tech weakness I have seen this year.

Nasdaq Chart - Weekly

Nasdaq Chart - 120 Min

I believe the market will continue higher but eventually there will be a 10% correction before the end of October. Next week or next month I don't know. I bet I heard 20 traders last week saying the markets were overbought and needed to rest but nobody said they were shorting the market. That has been suicide lately. In the charts above there is a clear picture of support and resistance. Resistance is stronger today but the indexes keep moving higher despite the negative sentiment from professional traders. Don't bet against China and their current rebound. Also Hong Kong reported a 3.3% GDP on Friday. These markets can help pull the U.S. markets higher because individual investors don't want to miss out on another BRIC move.

I keep going back to Steve Grasso's comments that he is seeing fund buy orders cross his desk on every dip. They are not chasing price but they are keeping a steady stream of buy orders on the dips. Equity funds are still receiving money with $5.2 billion in inflows over the last week. However, bond funds saw $12.3 billion in new deposits according to TrimTabs.com. Vanguard confirmed the pattern for July saying $3.9 billion came into stock funds and $7.6 billion into their bond funds. Fund flows into stock funds are still way below the ten-year average of $7.8 billion a month.

If the majority of money is still going to bond funds then that suggests the majority of cash is still uninvested and this rally is running on a trickle of cash compared to a river. There is still enough chatter about a correction that many investors are still content to sit and wait for a better entry point. Once that point comes, probably a 10% correction, you can bet those flows will immediately go to stocks.

However, insider trading is not telling us it is time to buy. Last week there was 29 times more insider sales by dollar volume than buys by insiders. These are the people who should know when a company is doing good and when there is trouble ahead. Until that sales trend reverses we are still facing some future volatility.

For next week I would look to buy a dip to S&P 990 and short a break below that level with another dip buy at 970. Under 970 would be a clear short. Same with the Dow at 9200 and 9000. The same levels on the Nasdaq are 1970 and 1950. If by chance the Nasdaq broke over 2020 on volume I would have to hold my nose and buy something. That would be 1015 on the S&P but be careful of false breakouts that are knocked back by days end. The next six weeks could be rocky. This is a time to wait for an entry point rather than chase the markets. Plan your trades then enter passively and exit aggressively!

Jim Brown

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New Plays

Corn, Diesel Engines, and Specialty Retail

by James Brown

Click here to email James Brown


Corn Products - CPO - close: 31.49 change: -0.77 stop: 27.49

Why We Like It:
Shares of CPO broke out to new highs for the year on big volume last Thursday. More aggressive traders may want to buy the dip on Friday. I would prefer to wait for a some sort of dip with the market this overbought. The plan is to buy CPO at $29.50. Our first target is $32.30. Our second target is $34.85. The Point & Figure chart is bullish with a $45.00 target.

FYI: You may have seen headlines that sugar is seeing shortages around the world and sugar prices are on the rise. Many expect sugar to appreciate significantly throughout the rest of this year. That's going to drive demand for alternatives like corn syrup.

Annotated chart:

Entry on    August xx at $xx.xx <-- TRIGGER @ 29.50
Change since picked:     + 0.00   			
Earnings Date          10/22/09 (unconfirmed)    
Average Daily Volume:       687 thousand
Listed on  August 15, 2009    

China Yuchai Intl. - CYD - close: 10.00 chg: -0.46 stop: 8.90

Why We Like It:
Share of this Chinese diesel engine maker are breaking out to new 11-month highs. The rallies are being fueled by strong volume. That's what we want to see in a bullish candidate. The $9.00 level was support for most of August. I'm suggesting we buy CYD on a dip at $9.50 with a stop loss at $8.90. Keep in mind that volume is normally light and this is a Chinese company that will be prone to volatility thanks to the Chinese market. I am suggesting very small position sizes to limit our risk. If triggered at $9.50 our first target is $11.50. FYI: The Point & Figure chart is bullish with an $18.50 target.

Annotated chart:

Entry on    August xx at $xx.xx <-- TRIGGER @ 9.50
Change since picked:     + 0.00   			
Earnings Date          08/12/09 (confirmed)    
Average Daily Volume:       155 thousand
Listed on  August 15, 2009    

Titan Machinery - TITN - close: 13.12 change: -0.06 stop: 11.30

Why We Like It:
The company runs agriculture and construction equipment stores. It looks like shares have formed a bottom over the last six weeks and are poised to run higher from here. I'm suggesting bullish positions now but we can really use the $12.00-13.00 zone as a place to open positions. One strategy might be to buy half now and half on a dip near $12.50 or $12.00. I'm suggesting a stop loss under the August low and 200-dma. We should have about a month before TITN reports earnings. Our upside target is $14.75 and $15.85.

Annotated chart:

Entry on    August 15 at $13.12 
Change since picked:     + 0.00   			
Earnings Date          09/15/09 (unconfirmed)    
Average Daily Volume:       248 thousand
Listed on  August 15, 2009    

In Play Updates and Reviews

Adapting Strategies

by James Brown

Click here to email James Brown

BULLISH Play Updates

America Movil - AMX - close: 45.67 change: +0.51 stop: varies

AMX has spent the last six days trading inside the one-day range created by its bearish reversal candle on August 6th. Thus far there has been no follow through on the signal and bulls could argue that the lack of profit taking is a sign of strength. The high on August 6th was 46.46. I'm suggesting we try two different approaches. We'll keep our buy the dip strategy but raise the entry point to $42.25 and up our stop loss to $39.95. We'll also add a breakout trigger at $46.51. If AMX hits the breakout trigger we only want to use very small positions probably 1/4 our normal size. We'll try and limit our risk with a stop loss at $45.15, just under today's low. Here's a summary:

Breakout trigger @ 46.51, stop loss 45.15, 1st target 49.75. Use small position size.

Buy the dip trigger @ 42.25, stop loss 39.95, 1st target 45.95, 2nd target 49.75.

Annotated chart:

*Breakout Trade*
Entry on    August xx at $xx.xx <-- TRIGGER @ 46.51, stop 45.15
Change since picked:     + 0.00   			

*Buy the dip Trade*
Entry on    August xx at $xx.xx <-- TRIGGER @ 42.25, stop 39.95
Change since picked:     + 0.00   		
Earnings Date          07/21/09 (confirmed)    
Average Daily Volume:       4.3 million 
Listed on  August 01, 2009    

Bank of America - BAC - close: 17.39 change: +0.39 stop: 13.95

BAC continues to show relative strength and help lead the financial sector higher. The stock closed at new highs for the year. I still don't want to chase this move but I will up our trigger to buy the dip to $15.55. If we do get triggered I would only trade 1/2 your normal position size. Only on a significant correction would I trade any larger.

Our first target is $17.75 and our second target is $18.45. The Point & Figure chart is bullish with a long-term target at $31.00.

Annotated chart:

Entry on    August xx at $xx.xx <-- TRIGGER @ 15.55
Change since picked:     + 0.00   			
Earnings Date          07/17/09 (confirmed)    
Average Daily Volume:       310 million 
Listed on  August 01, 2009    

BJ Services Co. - BJS - close: 14.73 change: -0.33 stop: 13.90

A bounce in the U.S. dollar helped push crude oil lower and the oil service stocks corrected on Friday. Shares of BJS dipped to short-term support near $14.50. I would use this pull back as a new entry point to buy the stock. Our first target is $16.65. My time frame is about four weeks or less.

Annotated chart:

Entry on    August 13 at $15.06 
Change since picked:     - 0.33   			
Earnings Date          10/29/09 (unconfirmed)    
Average Daily Volume:       8.0 million 
Listed on  August 13, 2009    

Hormel Foods - HRL - close: 37.39 change: +0.09 stop: 35.95

We have three days left for the HRL play. The company reports earnings on August 20th before the opening bell. We will exit on Wednesday at the closing bell. I suspect that HRL will continue to fill the gap so more conservative traders may want to go ahead and exit early now. I am not suggesting new bullish positions. HRL has exceeded our first target but we still have a second and final target at $39.90.

Annotated chart:

Entry on      July 20 at $35.40 /gap higher entry
                              /originally listed at $35.25
Change since picked:     + 1.99
                            /1st target exceeded @ 38.74 gap (+9.4%)
Earnings Date          08/20/09 (confirmed)    
Average Daily Volume:       486 thousand
Listed on  July 20, 2009    

IDEX Corp. - IEX - close: 26.73 change: -0.50 stop: 24.75

As expected IEX has started to correct. The short-term trend is now down but broken resistance at $26.00 should offer new support. We want to buy the stock on a pull back into the $26.10-25.00 zone. If we are triggered our first target is $29.85. My time frame is six to eight weeks.

Annotated chart:

Entry on      July xx at $xx.xx <-- TRIGGER @ 26.10
Change since picked:     + 0.00   			
Earnings Date          07/20/09 (confirmed)    
Average Daily Volume:       570 thousand
Listed on  July 25, 2009    

J.P.Morgan Chase - JPM - close: 42.45 change: -0.45 stop: 35.90 *new*

The mighty JPM continues to inch higher and the string of higher lows is virtually unbroken for the last five weeks. This pace is unsustainable. We want to be ready to buy the dip. However, I'm altering our strategy a bit. The May high was $38.94. A 38.2% Fib retracement of the current run would be near $38.65. I'm suggesting we buy JPM at $38.75. More patient traders can hold out hope for a dip closer to $36.00. However, our new stop loss is now $35.90. If triggered our first target is $42.50. Our longer-term target is $44.75. Our time frame is eight to ten weeks.

Annotated chart:

Entry on      July xx at $xx.xx <-- TRIGGER @ 38.75 & 37.50
Change since picked:     + 0.00   			
Earnings Date          07/16/09 (confirmed)    
Average Daily Volume:        55 million 
Listed on  July 18, 2009    

Morgan Stanley - MS - close: 29.79 change: -0.09 stop: 27.75

The Thursday and Friday low was pretty close to a 50% retracement of the late July and early August rally. Readers looking for an entry point may want to start scaling into MS now. A dip near $28.00 would be better but we may not get it. MS has exceeded our first target at $31.50. We're currently aiming for our second target at $34.90.

Annotated chart:

Entry on    August 04 at $29.50 *triggered (1/2 position)  
Change since picked:     + 0.29
                              /1st target hit @ 31.50 (+6.7%)
Earnings Date          07/22/09 (confirmed)    
Average Daily Volume:        24 million 
Listed on  July 23, 2009    

Microsoft - MSFT - close: 23.69 change: +0.07 stop: 21.80

MSFT has been going sideways for three weeks now following its earnings report. Currently the plan is to open new positions or add to positions on a dip near $22.00. However, if MSFT does not correct readers may want to consider buying a breakout over $24.50.

More aggressive traders may want to go ahead and widen their stop loss to under $21.00 or under $20.00 depending on your risk tolerance. Currently our target is at $27.75 but that might be too optimistic. We may have to stretch out our time frame from several weeks to a few months.

FYI: MSFT doesn't move very fast and eventually the market will correct. An alternative would be to just exit early now and re-enter on a dip near $22.00 or $21.00. This way your capital isn't tied up and you can use it for other trades while we wait for MSFT to retest support.

Annotated chart:

Entry on      July 27 at $23.00
Change since picked:     + 0.69   			
Earnings Date          07/23/09 (confirmed)    
Average Daily Volume:        58 million 
Listed on  July 23, 2009    

Oil States Intl. - OIS - close: 29.16 change: -0.35 stop: 27.95

OIS pulled back to the middle of its $28-30 trading range, churned sideways and then ticked higher late in the day on Friday. More aggressive traders could launch positions now. We're waiting for a breakout over resistance. I'm suggesting readers use a trigger at $30.20 (up from 30.10 on Thursday) to open bullish positions. If triggered our first target is $34.00. Our second target is $38.00. My time frame is six to eight weeks.

Annotated chart:

Entry on    August xx at $xx.xx <--  TRIGGER @ 30.20
Change since picked:     + 0.00   			
Earnings Date          10/29/09 (unconfirmed)    
Average Daily Volume:       738 thousand
Listed on  August 13, 2009    

TEVA Pharmaceuticals - TEVA - close: 51.39 change: -0.50 stop: 47.95

New Trigger! Once again TEVA dipped toward $51.00 and its 30-dma and yet again the stock managed a bounce. More aggressive traders may want to consider new bullish positions here. I am suggesting readers wait to buy TEVA on a pull back into the $50.50-48.00 zone. If triggered at $50.50 our first target is $54.75. Our second target is $59.50. Our time frame is eight to ten weeks.

Annotated chart:

Entry on    August xx at $xx.xx <-- TRIGGER @ 50.50 *NEW*
Change since picked:     + 0.00   			
Earnings Date          11/05/09 (unconfirmed)    
Average Daily Volume:       5.3 million 
Listed on  August 05, 2009    

BEARISH Play Updates

Akamai Tech. - AKAM - close: 18.01 chg: -0.19 stop: 20.05

AKAM continues to slide and shares lost 1% on Friday. Volume was very light on the session. I would still consider new bearish positions in the $18.00-19.00 zone. Our first target is $16.25.

FYI: There have been rumors that AKAM is a takeover target. Readers may want to choose put options, which limit your risk to what you paid, versus shorting the stock, which has unlimited risk. A stop loss at $20.05 isn't going to work if AKAM gets an offer for a lot higher. Shares will gap open.

Annotated chart:

Entry on    August 11 at $18.44 
Change since picked:     - 0.43   			
Earnings Date          10/29/09 (unconfirmed)    
Average Daily Volume:      10.4 million 
Listed on  August 11, 2009    

Expedia Inc. - EXPE - close: 22.12 change: -0.65 stop: 23.55

EXPE is finally starting to show some chinks in its bullish armor. The stock broke down under its 10-dma and broke down under the $22.00 level on an intraday basis. Shares hit our trigger for bearish positions at $21.85. The play is now open. I want to remind readers that this is an aggressive trade since most of the run appears to have been fueled by short covering. Our first target is $19.75. Our second target is $18.00. I suggest traders use smaller than normal position sizes.

Annotated chart:

Entry on    August 14 at $21.85 
Change since picked:     + 0.00   			
Earnings Date          10/29/09 (unconfirmed)    
Average Daily Volume:       5.0 million 
Listed on  August 10, 2009    

St. Jude Medical - STJ - close: 38.09 change: +0.12 stop: 40.20

STJ continues to trade with a bearish trend of lower highs. Unfortunately some of the technical indicators are mixed. More conservative traders may want to use a stop loss closer to $39.00 to lower their risk. The stock is still bouncing from its 100-dma and exponential 200-dma near $37.50. Readers may want to wait for a new drop under $37.50 or 37.00 to open positions. Our first target is $35.50 near the simple 200-dma. Our second target is $33.00. The Point & Figure chart is bearish with a $30.00 target.

Annotated chart:

Entry on    August 04 at $38.32 
Change since picked:     - 0.23   			
Earnings Date          10/15/09 (unconfirmed)    
Average Daily Volume:       4.4 million 
Listed on  August 04, 2009    

TJX Cos. Inc. - TJX - close: 35.09 change: -0.27 stop: 36.30 *new*

Last week wasn't very good for the retailers. Most of the earnings beats were due to cost cutting and layoffs while same store sales have been falling. The official retail sales numbers were worse than expected and Friday's miss on the consumer sentiment data is also bearish for the group. Unfortunately we're almost out of time for TJX. Monday is our last day. We have to exit at the close on Monday to avoid holding over earnings on Tuesday morning. It's time to start looking for new candidates in this sector. Given our time left I am lowering the stop loss to $36.30.

I am setting our first target to take profits at $32.25

Annotated chart:

Entry on    August 08 at $35.48 
Change since picked:     - 0.39   			
Earnings Date          08/18/09 (confirmed)    
Average Daily Volume:       5.4 million 
Listed on  August 08, 2009    

Williams Cos. - WMB - close: 16.83 change: -0.35 stop: 17.55

It looks like WMB's rally is about to roll over. I would use Friday's drop as a new entry point for bearish positions. Our first target is $15.10. Our second target is $14.10.

Annotated chart:

Entry on    August 11 at $16.78 
Change since picked:     + 0.05   			
Earnings Date          11/05/09 (unconfirmed)    
Average Daily Volume:       5.6 million 
Listed on  August 11, 2009