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Email Version, Section 1, Wednesday 12-22-2004
PremierInvestor.net Newsletter Wednesday 12-22-2004
section 1 of 2
Copyright (c) 2004, All rights reserved.
Redistribution in any form is strictly prohibited.
The entire newsletter is best viewed in COURIER 10 for alignment
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In section one:
Market Wrap: Higher Highs
Watch List: Electronics to Financials and more
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MARKET WRAP (view in courier font for table alignment)
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12-22-2004 High Low Volume Adv/Dcl
DJIA 10815.89 + 56.46 10822.68 10739.19 1.75 bln 1694/1129
NASDAQ 2157.03 + 6.12 2163.48 2145.18 1.80 bln 1676/1376
S&P 100 575.34 + 1.98 576.04 571.85 Totals 3370/2505
S&P 500 1209.57 + 4.12 1211.42 1203.81
SOX 424.05 - 0.35 427.13 422.39
RUS 2000 648.46 + 2.26 649.75 645.68
DJ TRANS 3790.62 - 1.47 3803.75 3786.24
VIX 11.45 - 0.10 11.71 11.37
VXO (VIX-O)11.81 + 0.29 12.18 11.58
VXN 17.15 + 0.21 17.38 16.44
Total Volume 3,556M
Total UpVol 2,191M
Total DnVol 1,306M
Total Adv 3370
Total Dcl 2505
52wk Highs 390
52wk Lows 19
TRIN 0.82
PUT/CALL 0.91
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Market Wrap
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Higher Highs
Jonathan Levinson
The Dow and SPX hit new highs for the year as the Nasdaq trailed
behind. An unexpected rise in oil inventories saw crude oil drop
sharply, a move that was credited by some reporters for the
higher high in the Dow and SPX.
Breadth was positive, with advancing volume nearly doubling
declining volume on the NYSE and the Nasdaq. Volatility remains
very low, with the VXO going out at 11.81 and the QQV dropping
another 1.46% to close at 15.48
Daily Dow Chart
The Dow blasted higher in a move that kicked off at 10AM,
reaching a 42 month high at 10822.68 before 11AM and held for a
minor correction to 10786 before resuming its upward march to
close the day at 10815.89. Support below is at 10780, 10740,
10640 and 10575. While the daily oscillators are vulnerable to a
bearish divergent downphase, that will only occur if the Dow
reverses hard from here. The more likely scenario would see a
minor pullback to one of the supports I've drawn as the bull flag
breakout in the Dow continues to play out. A move below 10430-
10440 support would invalidate that bullish scenario.
Daily S&P 500 Chart
The SPX reached a new year high at 1211.42 on the 10AM runup, and
the pullback bounced from a double intraday bottom at 1207 to
stall out at 1210, closing the day at 1209.57. Support from
1205-07 is followed by 1189-92 and 1172. As with the Dow, the
daily cycle oscillators suggest caution, but only the bears can
drill the price below the 1172 level from here.
Daily Nasdaq Chart
The Nasdaq missed the party, touching a high of 2163.48 on the
morning pop, below its Dec. 15th high of 2171.27. The afternoon
bounce was weaker as well, failing below 2158 to close at 2157.
The bearish divergence is steeper for the Nasdaq as well, but the
question remains as to whether it's a bearish divergence or a
corrective bullish consolidation. Provided that 2070 doesn't get
violated on a closing basis, it should prove to be the latter.
Weekly TNX Chart
The Mortgage Bankers Association reported that the Mortgage Index
was flat at 689.3 for the week ended December 17, following the
previous week's 1% decline. The Refinancing Index rose 5.7% to
1958.2 following the previous week's 2% decline, while the
Purchase Index declined 3.6% to 471.1 following the prior week's
0.4% decline.
The sideways drift of the ten year note yield (TNX) in recent
weeks has the weekly cycle upphase faltering. Provided that the
4.0%-4.02% rising wedge support line doesn't fail, the upphase
should begin to get traction on a break above 4.26% resistance,
above which 4.4% is the next significant confluence. For the
day, TNX rose 3.3 bps to close at 4.201%. Interested readers can
follow the daily action of the TNX in my nightly Futures Wraps.
Weekly chart of Crude oil
The Energy Department reported today that crude oil inventories
rose by 2.1M barrels, catching analysts off guard on their
expectation of an 800K barrel decline. Gasoline inventories rose
1.8M barrels against expectations for inventories to remain
unchanged. Distillate supplies rose 600K barrels vs.
expectations for a 1.13M barrel decline. The American Petroleum
Institute confirmed the increases in supply, reporting increases
of 2.9M, 4.2M and 315K barrels for crude oil, gasoline and
distillate supplies respectively.
Crude oil futures got slammed on the news, dropping from an
intraday high of 45.95 to a low of 43.65 before bouncing to a
range in the low 44's. On the one-year daily chart, the move
kicked off what might prove to be the right shoulder of a head
and shoulders top with a horizontal neckline at 40 or a hunchback
neckline at 41. Using the 40 neckline, the implied target would
be as low as 25. While I would be personally surprised to see
levels even approaching 25, that's the implied target of the
formation. A move above 50 would invalidate the pattern, but 46
is a confluence that has acted as support and resistance this
year, and the failure 5 cents below it fit well with a
relatively symmetrical h&s pattern. For the day, crude oil
closed lower by 3.17% at 44.30.
The big news of the day landed overnight as FNM announced the
resignation of CEO Franklin Raines and CFO J.T. Howard, as well
as a number of smaller management changes, following last week's
announcement that the SEC would require to amend prior accounting
"errors". Those errors allegedly resulted in the overstatement
of $9B worth of past profit. FNM owns 25% of current US
mortgages and is the countries largest GSE. It's currently
defendant to a number of class action suits and under criminal
investigation by the Justice Department, investigation by the SEC
and an ongoing probe by its regulator, the Office of Federal
Housing Enterprise Oversight (OFHEO). The company also announced
the dismissal of FPMG as its auditors.
Raines was replaced by interim CEO Daniel Mudd and Howard was
replaced by Robert Levin.
The Washington Post reported that the OFHEO alleges that FNM
"systematically manipulated accounting estimates, ignored
accounting requirements it had lobbied unsuccessfully against and
operated with weak internal controls that helped obscure the
other problems." The OFHEO has been aggressive in its call for
Raines' removal, blaming him for promoting a corporate culture
that prioritized "stable" earnings rather than accurate
disclosure. The OFHEO stated last night that FNM is
"significantly undercapitalized". To get an idea of the potential
enormity of that statement, consider that FNM has outstanding
debts to bondholders totally 957B and guarantees the principal
and interest on 1.9T of mortgage-backed securities. These are
significant percentages of the total amount of US debt in
circulation, a particularly worrisome situation as the media
began to utter names like "Enron" and "Worldcom" in the same
breath as "Fannie Mae". Others however, note that FNM aptly
qualifies for the phrase "too big to fail".
To make up for the 9B shortfall, FNM would likely have to sell
part of its portfolio, issue new stock or reduce its dividend.
Traders following this story will recall that FNM had previously
been ordered by the OFHEO to increase its capital reserves by 5B
no later than mid-2005.
What's important for traders to note is that while the situation
continues to unfold, it is not a new one. Bears have been
discussing FNM and FRE for years, and for years the sky has not
fallen. Given the size and breadth of FNM's commitments, the
issue is, if anything, as political as it is financial.
Regardless of the financial outcome, the departure of Raines, a
self-made man, a Rhodes scholar and former director of the Office
of Management and Budget, raises all the old issues of corporate
governance and ethics that continue to plague our markets.
FNM gapped higher at the open and traded a high of 73.81, bounced
from a low of 71.61 and settled into a range around 72 to close
+2.32% at 71.98.
On a lighter note, at 8:30, the Commerce Department announced the
final Q3 GDP results, which came in at 4% vs. the 3.9% previously
reported. The 4% expansion of the economy for Q3 exceeded
estimates for an unrevised 3.9% and Q2's 3.3% growth rate. The
core personal consumption expenditure index (PCE), which nets out
food and energy costs and is the Fed's preferred measure of
inflation, rose at a .9% annual rate vs. the .7% expected, the
smallest rise since last year's .9% increase, which was a 32 year
low. Corporate profits were low as well, however, with domestic
profits decreasing by 59.3B in Q3 compared with an increase of
28.3B in Q2. That 59.3B decline was comprised of a 68.7B drop in
profits of domestic financial corporations (which dropped 7.9B in
Q2) and a 9.4B rise in profits of non-financial corporations
(which had increased by 36.2B in Q2). The personal savings rate
declined to a low of .5% in Q3, down from 1.3% in Q2 and 1.0% in
Q1.
In other news, Marketwatch reported that SNE has won injunctions
against 2 Hong Kong companies allegedly engaged in producing
counterfeit PlayStation products. However, SNE declined to
comment on a report in the Financial Times to the effect that
investigations have revealed significant networks such
counterfeiters- one story covered a container that left one such
sub-contracting factory, entered a prison in Shenzen, China
loaded with parts and remained for several days, long enough for
the inmates to assemble them. The issue of intellectual property
between the West and East remains critical and unresolved. SNE
lost .66% to close at 37.80.
MSFT lost an appeal in the European Union to delay an order
requiring it to immediately release a stripped-down version of
Windows and amend its business practices. The EU's Court of
First Instance had upheld the European Commission's sanctions
imposed on MSFT in March, and today's failed appeal leaves the
original decision intact, along with the finding that MSFT had
abused its monopoly. MSFT's General Counsel Brad Smith said that
the company would comply with the decision. Consumer groups
applauded the decision, and the fact that MSFT will now be
required to share its protocols and offer a version of Windows
that contains no multimedia apps, deemed to prejudice competitors
such as RealNetworks. The fine upheld totals 497M euro. For the
day. MSFT closed lower by .37% at 26.97.
For tomorrow, there's a full slate of economic reports as the
markets prepare for the long weekend. At 8:30AM, we get
November Durable Orders, Personal Income and Personal Spending,
as well as initial claims for the week ended 12/18. At 9:45 it's
Michigan Sentiment for December and at 10AM, November New Home
Sales. Volume should continue to thin out ahead of the weekend,
and with the headlines reporting the bullish new highs, we can
expect retail traders to adopt that as the theme. After today's
dismal intraday downphases following Tuesday's strong rise, the
environment should remain decidedly unfriendly for bears even in
the shortest timeframes, at least above today's lows.
As I watch the hail outside my window, I'd like to take the
opportunity to wish everyone a warm and happy, healthy and
prosperous holiday season.
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WATCH LIST
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The PremierInvestor.net watch list is not designed to be read
as full fledged stock picks. Rather we would prefer to offer
it as an extra tool in today's investor toolbox. Think of it
as a radar screen with your own radar operator pointing out
interesting developments, technical patterns or potential plays
that you may or may not have seen on your own. Due to time
constraints we do glance at the news but rarely do we have
time to fully read pertinent news stories, due background
research and other necessary screens that investors should do
before making a decision. A common exercise is to read the
entry, glance at the sector and other stocks in that industry
and then compare what's happening in the stock to what's
happening in the broader market indices. We hope you enjoy
the Watch List and that it proves to be a useful tool for your
own trading success.
STOCKS WORTH WATCHING
---------------------------------
Electronics Boutique - ELBO - close: 40.76 change: +0.93
WHAT TO WATCH: We strongly considered adding ELBO to the play
list tonight as a bullish play. Shares have been consolidating
sideways the last few weeks with support near $37 and resistance
at $40.00. ELBO broke through the $40 level today as its MACD
indicator nears a new buy signal. The P&F chart is bullish with
a $58 target but we would probably pick the $44-45 region as a
short-term target.
---
Providian Financial - PVN - close: 16.32 change: +0.35
WHAT TO WATCH: PVN looks like an attractive candidate with its
consistent long-term up trend and bullish technicals including a
new MACD buy signal . Today's move over four-week old resistance
at $16.25 could be a new bullish entry point. We hesitate to
play it because it would need to be a three or four-month
investment given its current rate of climb to make it worthwhile.
Short-term traders could use the 100-dma as support. Long-term
traders could put their stop under the 200-dma.
---
Citigroup Inc - C - close: 48.31 change: +1.12
WHAT TO WATCH: C is no stranger to the watch list. We've been
highlighting the stock for a breakout over major resistance at
$48.00 and that's exactly what happened today. The new all-time
highs in the BKX and BIX banking indices bodes well for the
entire financial sector and the markets in general. We also like
C's P&F chart with its bounce from support and new buy signal
with a $59 (long-term) target. Traders can use today's rally as
a new entry point. Our eight-week target would be $52
---
Concord Communications - CCRD - close: 10.58 change: +1.10
WHAT TO WATCH: We cannot find any news to account for CCRD's 11.6
percent rally today. Volume was very strong up about 150 percent
more than normal. More importantly CCRD has bust through major
resistance at the $10.00 mark and its simple and exponential 200-
dma's. The P&F chart shows a new buy signal with a $16 target.
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RADAR SCREEN - more stocks to watch
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CLE $21.05 +0.90 - CLE surged more than 4.4 percent and it looks
like this could be the beginning of a decent rebound attempt.
AM $27.91 +0.56 - After seven weeks of consolidating sideways
under resistance at $28.00 shares of AM look ready to break out.
PLCE $35.99 +1.41 - PLCE has been rallying higher with rising
volume. The recent strength has pushed through resistance at $34
and produced a new MACD buy signal.
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DISCLAIMER
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