Monday, October 22, 2007

HOTS Weekly Options Commentary

HOTS Weekly Options CommentarySocialTwist Tell-a-Friend
Peter Stolcers

With the exception of financial stocks, most sectors have been beating expectations. Financials are not some small little part of the overall market; they comprise 20% of the S&P 500. Last week was laden with earnings releases from national/regional banks, mortgage lenders and brokerage firms. This week, we will see a much greater mix of earnings.

SLB posted nice earnings and it was down by more than $12. In fact, all of the oil stocks were hit hard Friday. Oil is near $90 and that might become an issue for the market. I still believe that energy is one of the best investments and once this pullback stabilizes it will present a great buying opportunity.


CAT posted a 21% increase in earnings; however, they lowered guidance for the next quarter. They painted a very weak picture for domestic construction. Last week housing starts fell to a new 14-year low and the Beige Book indicated weaker economic conditions across the nation.

The dollar continues to drift lower and it is making new 30-year lows against most major currencies. This will eventually translate into inflation and that will put upward pressure on interest rates.








After a day like Friday, it is easy to focus on the negative issues. I believe we could see continued weakness for the next week or two that tests some of the major support levels. The last few days of October mark the beginning of the strongest bullish seasonal pattern of the year. I believe we will work off the worries and rally into year-end.

The economic numbers are very light this week. Durable goods orders, new home sales and Michigan sentiment are the only scheduled releases. Obviously, durable goods orders are the most significant release since they reveal our appetite for big-ticket items.

This is a list of some of the upcoming releases: ECL, ZBRA, NFLX, TXN, AKS, AXE, ARW, COH, CBE, JCI, LMT, PCAR, PCP, POOL, SHW, SII, AMTD, UPS, WHR, AMZN, BRCM, HOKU, JNPR, NVLS, PNRA, TRMD, STM, XL, ATI, BA, CME, GLW, FCX, LM, MER, NOV, NSC, NOC, PFCB, R, SLAB, TASR, WLP, AKAM, ACL, CLB, FFIV, MNST, STR, SYMNC, TEX, TSCO, ZMH, AET, BDK, CELG, CMI, GO, DOW, HET, MOT, PENN, POT, ROK, SO, SU, AMGN, AVID, BIDU, CENX, CLF, CYTC, KLAC, MSFT, WFR, SWIR, ABFS, CFC, CVH, FO, IR, ITT, LZ, TDW, WMI

They are in chronological order so that you can follow along as the week progresses. The current estimates are for flat earnings growth. I believe that will be an easy hurdle to clear. Corporate guidance is the key as traders look to the future. By the end of next week we will have a much clearer picture.


Corporate earnings have been strong, the unemployment rate is low, interest rates are low, tax rates are low, inflation is in check and global expansion is helping us through this rough patch. All of these conditions might be on the brink of changing; however, I don't believe that they will deteriorate before year-end.

I am patiently going to wait for support to be established and then I will buy this dip. I do not want to try and short this market for fear that I will get caught in a whipsaw. I got caught short last March and I learned from my mistake. In August, I bought into the weakness and took profits during the snap back rally.


During the last 3 quarters, the first week of earnings season has started off poorly. I expect a better week ahead.


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Friday, October 19, 2007

Market Timing

Market TimingSocialTwist Tell-a-Friend
Fari Hamzei

I wrote a piece for FOX biz channel around 830 am PDT this morning, about my reasons why DOW should close about -350 to -500 today. Robert Gray, formerly of Bloomberg TV, quoted us near the close.

As a service to our loyal readers, here are my bullet points (part of these points were posted in our SuperPlatinum Virtual Trading Room in real time). Tomorrow in our Saturday Class we will explore these crucial issues in more detail.

1) expiration week is a counter trend -- we have been climbing a wall of worry since Aug 16th -- SPX hit massive resistance at MR1 Level (Monthly Resistance Level One) five times between October 8th and 15th and failed. We've had divergences between SPX and NDX at new highs with their respective cum advance decline lines -- see our Timer chart below.
2) Crude Oil is at ~85 to 90 USD per barrel.
3) Benazir Bhutto returning to Pakistan -- I wrote about this in early Aug on our Blog -- they have 40 confirmed nukes -- AQ is HQ'd there.
4) comrade Paulson putting his foot in his mouth on SIVs.
5) dollar trashing by Uncle Ben via pre-mature easing.
6) DJ Trans telegraphing massive slow down of the US Economy. See our Wyckoff Chart below.
7) 20th anniversary of Black Monday falling on October Expiration Day.











Have a great weekend......

Saturday, October 13, 2007

HOTS Weekly Options Commentary

HOTS Weekly Options CommentarySocialTwist Tell-a-Friend
Peter Stolcers

Last week a stable Employment Report was released and the market surged higher. Despite mixed earnings announcements and soft economic releases, the market was able to add to those gains throughout the week until Thursday afternoon. "Hawkish comments" from one of the Fed Officials spooked the market, creating an intraday reversal. Chinese stocks were hit hard along with other stocks that have recently posted big gains.

Friday morning, the “all clear” sign was given. Chinese stocks held firm overnight and the PPI and retail sales numbers came in better than expected. The market was able to bounce and it closed above the highs made a week ago.

The economic releases this week are: industrial production, CPI, housing starts, LEI and Philly Fed.

I believe the earnings guidance, not the economic news will drive prices during the next few weeks. They are forward looking as opposed to the hindsight provided by economic releases. If GE and MCD are any indication, the earnings should come in at or above expectations. Both posted solid results.

Next week we will get an onslaught of earnings releases. I expect most companies to meet estimates and the current projected growth rate year-over-year is flat (0%). I believe that threshold will be cleared easily. The wild card is the earnings guidance that corporations will provide. If future weakness becomes a theme, the market will decline. If the earnings and guidance are consistent with the market's expectations, the market will continue to push higher.
These are some of the companies that are announcing this week: C, ETN, DNA, JBHT, JNJ, USB, WFC, INTC, STX, YHOO, ABT, MO, CIT, KO, ITW, JPM, UTX, ALL, EBAY, ILMN, ME, SYK, BAC, BGG, NUE, PH, PFE, RS, STJ, UNH, AMD, CREE, GILD, GOOG, IBM, ISRG, SNDK, TPX, VFC, MMM, CAT, HOG, HON, SLB.




We are only two weeks away from a seasonally bullish period. The earnings releases have been decent, we have not had many earnings warnings and the economic releases have been positive. As long as Americans have jobs, they will continue to spend and pay their debts. Add the Fed's half point interest rate cut to that equation and you can see why I am bullish. As long as the SPY is above 150, we will trade from the long side.

Editor's Note: To take advantage of our high performance Options Trading Service (HOTS), click here.

Friday, October 12, 2007

Equity Index Update (Special Edition)

Equity Index Update (Special Edition)SocialTwist Tell-a-Friend
Brad Sullivan

The index markets suffered through a sharp decline in the afternoon trade after a JP Morgan analyst cut revenue estimates for the Chinese Internet company BIDU (Baidu.com). The stock plunged from 358 per share to 303. Other staples of the momentum side also slid as GOOG dropped from a new all-time high of 641 to 622 on the close…AAPL fell sharply as did DRYS. The NQ market participants were clearly caught off guard as the index cratered from 2210 to 2160 in 30 minutes of trading…the subsequent bounce proved short lived and another round of selling pushed the index to the session lows of 2146 a solid -2% drop for the afternoon from high to low.



The interesting aspect of the decline was the second wave of selling. It was during this wave that the broader market came along for the ride on the downside…GS gave back its entire session from Tuesday’s FOMC minutes rally and the stock settled at 229. The examples of this type of price action were found everywhere by the close and one has to wonder if a confluence of forces that have been the underpinning of this rally (global growth, commodity boom, no inflation…so on so on) is being rethought. Certainly, a one day reversal should not cause a top in this long running bull market…and for the bears hoping that we have finally turned the cards over to the “sell” side of the ledger I would advise caution. There needs to be more technical work done on the downside in order to generate a price ceiling of significance. In the short run, it would appear that a rally back to yesterday’s highs would be a stretch. So…where does that leave us?

From a day trading perspective, much of the move was accomplished (at least in terms of velocity and price discovery) in yesterday’s swoon. The SPZ went BELOW the September Employment Report session low (1558.25) and some mild sell stops pushed the index to session lows of 1556.25. However, this low was still HIGHER than the GAP left from that very Employment report (1552.25). The subsequent short covering bounce into the close pushed the index towards 1565 – that close is on slightly lower on the week and does not represent the low close of the week as that was accomplished on Monday at 1562.75. In fact, only the NQ and ER2 contracts closed at new weekly lows. Essentially, this boils down to patience and a little bit of reality. Yes the markets are overextended and the fact that a revenue downgrade of a Chinese Internet company could put so much pressure on the marketplace proves that point. However, to make the leap from the trade in BIDU to an overall slowing of the China Story may be a bit of a stretch. In my opinion, we witnessed a rare news event that led to a bit of a buyers strike. Whether or not that continues today will be fascinating, particularly as we head into earnings season. My advice is to lay low and look for a few opportunities, particularly early, for selling rallies. Psychologically the market took a hit and some of that should carry into today.

Random Comments

Random CommentsSocialTwist Tell-a-Friend
Fil Zucchi

I will refrain from too many comments on the nasty reversal we saw yesterday, since there are far smarter technical eyes in this community than me. Rather, a few thoughts on specific names and areas:

  • Keep a close eye on the Baltic Dry Index (BDI) and its proxies, companies like Paragon Shipping (PRGN), Quintana Marine (QMAR), and Dryships (DRYS). In my view they reflect better than anything else the true state of the world tangible economy; and in hindsight I believe they will be seen as the telltale sign of coming runaway inflation. Since July the Index has gone parabolic, with dry bulk shipping rates going through the roof, and there’s anecdotal evidence that the flipping game that spread from stocks, to homes, to commercial real estate, has now infected the “vessels” asset class. Yesterday’s break in these stocks arrived after several days of vertical moves on massive volume. If the BDI follows the stocks breaks, you can kick one more leg from under the broader market.

  • Chatting with folks very close to distressed-debt vulture funds, the consensus is that the weaker of the major homebuilders, Tousa Inc. (TOA), Standard Pacific (SPF), Beazer Homes (BZH), and perhaps even Hovnanian (HOV), would be better off filing for bankruptcy sooner than later; the theory being that there is no way out for them anyway, and at least right now they have enough assets left to effectively reorganize, and the economy is not in recession (yet). If they wait until things really turn ugly fresh capital will be much more expensive.

  • With respect to the last point however, one daunting question is how many multiples of the bonds’ face values are the outstanding CDS against such debts? And where is that time bomb hidden?

  • Corporate bond watchers and equity players are having a heated debate as to whether the recovery in the debt markets of the last couple weeks will set off another wave of M&A, LBO’s, and buybacks. We are already seeing the buybacks, and strategic M&A. In my humble opinion, and based on anecdotal conversations with folks at major PE groups, LBO’s are done and they are not coming back (corporates traders disagree). Debt fueled buybacks have been as consistently successful as flipping a coin: just look at Intel (INTC), Dean Foods (DF), Amgen (AMGN), St. Jude Medical (STJ), not to mention a bunch of the homebuilders. That leaves strategic M&A, where premiums are not likely to be nearly as fat as they were in LBO’s.

  • The last time the Dollar Index (DXY) touched current levels it reversed and shot higher within two weeks. This is week two since the break of the 79 level and any semblance of a bounce is still AWOL. I may end up eating my words (wouldn’t be the first . . . or tenth time), but in my opinion the greenback has at most two more weeks to mount a rally or the next move down will start getting tagged as a “currency crisis”. Of course with M3 ramping at 14% in September and gold and oil going relentlessly higher one could argue that the currency crisis is already here.

  • On a slightly more cheery note, if one has to be long something, I continue to think that small regional banks with little mortgage exposure should benefit from the steepening yield-curve. The RKH Holder is a lazy way to play this. Also, not a day goes by that I don’t find an article concerning the lack of bandwidth in the metro networks and at the switching nodes. Away from the ne’er do wells – Alcatel-Lucent (ALU), Nortel (NT), Tellabs (TLAB) – I think there are tremendous opportunities, especially in software rich companies. Favorites include Ciena (CIEN), Infinera (INFN), F5 Networks (FFIV), Akamai (AKAM), and Limelight Networks (LLNW); once the cable guys finally decide how to avoid getting run over by the Bells FTTP deployments, and they start formulating their capital spending (which is inevitably coming), other viable names will be Ceragon Networks (CRNT), Arris (ARRS), Harmonic (HLIT) and BigBand Networks (BBND).

    And always know where the “emergency exit” is!!

  • Friday, October 5, 2007

    Bull Run in the Silver and Gold Index (XAU)

    Bull Run in the Silver and Gold Index (XAU)SocialTwist Tell-a-Friend
    Tim Ord





    The $XAU chart above dates back to 1985. At the bottom of the chart is the Price Relative to gold Ratio (PRTG). PRTG ratio measures the premium or discount the $XAU is selling against gold. This ratio identifies when gold stocks are cheap or expensive compared to the yellow metal gold. When PRTG ratio is near .20 or below then gold stocks are out of favor and cheap and at a good buy. When PRTG is near .30 range or higher then gold stocks are in favor and expensive and near a high. The time to buy gold stocks is the transition from cheap heading to expensive. To identify this buying zone, we have drawn a red trend lines connecting the highs on PRTG and where PRTG has exceeded those downtrend lines and have triggered buy signals. These buy signal on the monthly PRTG ratio where triggered in early 1993, late 2001, early 2003 mid 2005 and in the last couple of months a bullish crossover has occurred and has triggered a buy signal and the buy signal is still on going. Even though a “Shakeout” did occur in August of this year the month PRTG buy signal remained intact. Therefore the bigger trend is up.





    Above is the Breadth statistics for the HUI as of the close yesterday. We keep tabs on this study because its giving good insight of what is going on the HUI index. The bottom window is the % of stocks above its 50 day moving average. When this percentage is near 0% the market is near a low and when near 100% the market is near a high. The next window up is the % of stocks above its 10 day moving average. Again the same percentages work the same way. When both the 10 DMA and 50 DMA are both at extremes (either near 100% or 0%) the market is near a turn and head in the opposite direction. We have circle in blue where the 10 DMA and 50 DMA where near 100% and helped to pick out the highs in the HUI. Recently both the 10 DMA and 50 DMA turned down near the 100% range and suggest the market was near a short term high. The HUI tested the previous high of 9/21 and the McClellan Oscillator was far below its previous high and a negative divergence similar to the negative divergence at the previous highs on the HUI. The negative divergence on the McClellan Oscillator helps to confirm the 10 DMA and 50 DMA for a short term top. We have support coming in near 160 on the XAU and the next support below that is the 147 range. We will be watching these areas for a bullish setup on the XAU. Also on the last COT (Commitment of Traders) report, the Commercials have back off its bullish stance and now are short term bearish. Also Seasonality for Gold in the month of October is bearish.


    Therefore they may be a pull back this month but the pull back should be bought. We have support coming in near 160 on the XAU and the next support below that is the 147 range. We plan to go long the XAU on the next buy signal.


    Editor's Note: watch for Tim Ord's upcoming book, "The Secret Science of Price and Volume", to be published by John Wiley & Sons, in February 2008.

    Sunday, September 30, 2007

    HOTS Weekly Options Commentary

    HOTS Weekly Options CommentarySocialTwist Tell-a-Friend
    Peter Stolcers

    This week the market fell into a very tight 30 point trading range on the S&P 500. In the absence of news, light directionless trading set in. The economic releases came in slightly better than expected, but everyone knows they are hindsight. It is the future the Fed is concerned about.

    This same scenario will unfold next week during the first four days. The economic releases are very light and they include the ISM numbers, building permits and auto sales. PEP, WAG and RIMM are the only earnings worth mention.





    The fireworks will let loose on Friday with the release of the Unemployment Report. The weak number last month paved the way for the Fed to lower interest rates. If there is an increase in unemployment, the market will have a negative reaction. On the other hand, solid employment could prove that last month’s decline was an aberration. If this unfolds, the market will make a run at the all-time high.

    I still suspect that the market is headed higher. Global growth is fueling our economy and housing only makes up 5% of our GDP. Earnings are right around the corner and we have not had an earnings warning outside of the home building sector. BSC and LEH were supposedly “exposed” to sub prime and both posted decent results. As companies release earnings, their guidance for next quarter will have a tremendous influence on the market.

    This market can swing either way. While we wait, we will stay balanced.

    Editor's Note: To take advantage of our high performance Options Trading Service (HOTS), click here.

    Friday, September 21, 2007

    HOTS Weekly Options Commentary

    HOTS Weekly Options CommentarySocialTwist Tell-a-Friend
    Peter Stolcers

    Last week, the Fed pulled a surprise move when it lowered interest rates and the discount window rate by .5%. The S&P 500 futures rallied 25 points instantly. It was able to add to those gains on Wednesday and prices are holding firm.

    I have been opposed to the Fed lowering interest rates because all of the economic data suggest "full employment" and moderate growth. The exception to this is housing, which only accounts for 5% of our GDP. If the economy continues on a moderate growth path, this ease will translate into a new record high for the market.

    Don’t be fooled, on a relative basis the market is not near an all-time high. Once the Fed’s actions were revealed, the dollar got hammered. The market is dollar denominated and a foreign investor buying the SPY would pay much less for those shares now than they did at the prior high two months ago. For anyone who has recently traveled abroad, the decrease in our purchasing power is blatantly obvious. A weak dollar is an inflationary event and it is one reason why dollar denominated commodities like oil and gold are increasing in price. For the first time in 31 years, the US and Canadian dollars are trading at parity.





    Enough about the dollar, I’m concerned that the Fed sees the big picture and that economic weakness lies ahead. They have been interviewing top CEOs and gathering unique data to gauge what lies ahead. Chairman Bernanke has been a steadfast inflation fighter and he had to be concerned to take such dramatic action. The market would have been satisfied with a .25% ease combined with help at the discount window. He had the option to wait for further evidence that the economy was slowing, but he didn't.

    There aren't any earnings announcements worth mention next week so the market will look to the economic releases for direction. Consumer confidence, durable goods, GDP, personal income, core PCE inflation and Chicago PMI are on deck. Those numbers are like looking in the rear view mirror and they may give the appearance that all is well. Consequently, the market is likely to rally and test of the all-time highs this week.

    The only way to trade this market is to stay long commodity stocks and equipment manufacturers that generate more than half of their revenues overseas. There are also select technology stocks that I like. I fear that the market could hit another "air pocket" once the first weak economic number hits.

    Editor's Note: To take advantage of our high performance Options Trading Service (HOTS), click here.

    Thursday, September 20, 2007

    Home Builders, CDs and Corp. Paper

    Home Builders, CDs and Corp. PaperSocialTwist Tell-a-Friend
    Fil Zucchi

    The following piece was written on August 27:

    “We all know the treatment housing stocks have received and at this point few seem to offer decent risk/reward on the downside. The thing to watch carefully now is the debt of these companies and the news-flow around them.

    I’ve gone over a bunch of fixed income research concerning this group and while the analysts continue to reassure readers that most companies are still cash flow positive and they will come out stronger when the market turns, one can’t help but get that funny feeling that the real message of those notes lies not in the “all is well” boilerplate, but int eh passing mention that technical violations of debt covenants are not a big deal because the lenders will undoubtedly wave those covenants.

    Perhaps they are correct. However, we are often told that bond investors are the “smart” money because they are closer to the financials of the companies than equity investors. After all, bond holders are not in the business of taking principal risk.

    Yet Standard Pacific (SPF) and Lennar (LEN) have had to renegotiate loan terms, Beazer Homes (BZH) won’t say where its debt stands until its internal investigation on accounting issues is concluded, Comstock Homes (CHCI) has already gone through one restructuring and its faith hangs on the future sales at a project in Alexandria, VA, and . . . .well, you get the picture. Furthermore, considering how frothy things used to be for homebuilders, one would think that the covenants were probably loose enough already.

    Are these covenant workouts a sign that bondholders want to avoid defaults at least as much as the debtors? Isn’t this the same movie we saw in the late 1980’s with respect to commercial loans, before everything hit the fan? Will the daily new lows in the stocks of these companies create their own set of technical defaults?

    Most eyes are fixated on mortgage debt, derivatives, and the likes, but few for now dare speak of actual defaults in plain vanilla corporate obligations, especially the kind still rated BB or better (how is that possible?). If that were to happen, that is what you can call the “other shoe”.

    Since then, and despite yesterday’s Fed cuts, very little has changed:

    The 7-year paper of most issuers has rallied 5-10% but still yields 12-15%.
    The CDS’ on these debts have also come in some, but still trade at spreads 3-5x what they were in May, and some spreads suggest a pretty high risk of default. Just a few minutes ago S&P warned that approximately $35b of B rated corporate paper (not just homebuilders) is at risk in 2008, and for our purposes we will ignore that there may be 5x-10x that amount of CDS written against it, for which someone is going to have to pony up some cold hard cash.

    No amount of shuffling of debts between GSE’s or other pan-handling bailouts address the key problem: there is way too much debt out there that folks and companies are beginning to struggle to pay. The homebuilders are at the forefront and they should be watched very closely.


    Editor Note: Fil Zucchi spent this summer on the long trip back to the Old Country -- Italy. We are glad to find him safe and sound at his HQ on the East Coast.

    Wednesday, September 19, 2007

    Pink slips at the FDA will equate to red ink for biotech investors

    Pink slips at the FDA will equate to red ink for biotech investorsSocialTwist Tell-a-Friend
    David Miller

    Andy von Eschenbach, FDA Commissioner, says he’ll have to issue 2,000 60-day pink slips at the FDA if Congress and the President don’t get the PDUFA IV bill passed by Friday. We think the chance that they will is good, but the early Presidential election season could very well create some unexpected events. There are more than a few folks who would like to hold this bill up for political gain.

    If the pink slips go out, we doubt staffers will start running for the exits right away. The growing trend of the FDA asking for delays will increase immediately, however, as managers start changing existing review and especially meeting schedules.

    One could argue some decisions might come early, but we think any such occurrences will be rare. The FDA already considers itself understaffed. Bureaucrats, in our experience, don’t work harder in the face of crises like this. They tend to want to punish those they regulate by delaying even more.

    We’ll more than likely see additional delays. The silent delays will be in meetings, time to obtain SPAs, etc. The more public delays will be similar to what ZymoGenetics (ZGEN) recently experienced – 90 days here, a 2-month Class One response turning into a 6-month Class Two response there, etc.






    As timelines slip, biotech valuations go down. Significant delays will start damaging biotech investor portfolios.

    If the PDUFA IV legislation is tied up for quite some time – say towards Halloween no end in sight – then things will get frightening. The pharma, biotech, and financial communities will pirate the pink-slipped FDA staffers. Once Congress finally gets around to passing the legislation, Dr. von Eschenbach won’t have anyone to hire back. He’s already said the FDA is understaffed.

    Even if he replaces people, the loss of institutional knowledge will be significant. Guidance to companies will shift as new people provide new opinions. Delays in regulatory decisions will abound as new review teams have to start from square one in reviewing the data.

    Again, I don’t think we’ll get that far as Congress and the President know what’s at stake here. But keep it on your radar just the same.

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