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Stock Market News Update
Wednesday, November 17, 2010

wednesday update



Wednesday saw U.S. stocks mixed a day after suffering their steepest selloff since August, as the Nasdaq Composite advanced, but the Dow struggled to join the rebound.

Stocks ended mixed Wednesday after trading in a narrow range for most of the day as investors weighed inflation and housing reports.

Wall Street struggled to benefit from relative calm in Europe after days of tumultuous trading due to fears that Ireland and maybe other countries will need to be rescued from their debt crises.

The choppy day gave Wall Street a chance to put a stop to the S&P 500’s four-day slide and a slump that has erased more than 300 points from the Dow.

Stocks flirted with modest gains today, as traders considered some mildly soothing economic data. First up, the Labor Department revealed that core consumer prices rose just 0.6% in October on a year-over-year basis, marking the smallest increase on record. This tame report effectively calmed some of the inflationary fears sparked by the Fed's latest round of quantitative easing -- and, in fact, the data seemed to lend support to the central bank's argument that deflation is a more pressing concern.

“The market hasn’t really bounced at all from yesterday’s selloff. But it’s just as much of a positive that the market hasn’t followed through by being down more today,” said Michael James, managing director of equity trading at Wedbush Securities.

However, other parties have a different slant on the market direction. "I think the market is in a deterioration trend. It's worrisome at this point, considering that we had a selloff yesterday with pretty big volume and poor advance-decline numbers," said Frank Gretz, market analyst and technician at the Shields & Co brokerage in New York.

"The market is certainly vulnerable, and I think it is in fact headed for a correction."

Results for Major Market Indexes

The Dow Jones Industrial Average (DJIA – 11,007.88) finished with a loss of 15.62 points, or 0.14%.

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The S&P 500 Index (SPX – 1,178.59) finished the day with a very small gain of 0.25 points, or 0.02%.

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However, the Nasdaq Composite (COMP – 2,476.01) ended the day, with a gain of 6.17 points, or 0.25%.

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The Russell 2000 Index of smaller companies had a gain of 2.19 points, or 0.31%, to settle at 707.53.

After seeing triple-digit swings in several recent trading sessions, the blue chips moved in a very tight range of just over 50 points on Wednesday. About half of the Dow's 30 stocks advanced, led by Merck (MRK) and Travelers (TRV). The index's worst performers were BofA and Home Depot (HD).

However, the Nasdaq Composite posted minor gains, led by technology stocks like Amazon.com (AMZN) and Qualcomm (QCOM).

Wall Street hit session lows after NetApp (NTAP) spooked the markets ahead of the close by releasing quarterly results and guidance that trailed estimates.

Meanwhile, the financial sector slid nearly 1%. The Federal Reserve said it will require all 19 original “stress test” banks to submit capital plans by early next year so they can prove they can absorb losses before raising dividends or buying back stock. These plans will impact big banks like Citigroup (C) and Wells Fargo (WFC).

Trading Volume

Volume was light and some of the day's quietness was due to investors awaiting the pricing of General Motors' GM.UL initial public offering after the market's close, said Nick Kalivas, senior equity index analyst at MF Global in Chicago.

The automaker set the terms for a landmark IPO that could be the largest in U.S. history, raising up to $22.7 billion.

"There's a feeling a lot of money has been sucked out of the market to go pay for that. Once that gets out of the way, that theory's going to be put to the test," said Kalivas.

About 7.19 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, below last year's estimated daily average of 9.65 billion.

Advancing stocks outnumbered declining ones on the NYSE by 1,807 to 1,182, while on the Nasdaq, advancers beat decliners 1,374 to 1,245.

Notes of Interest….

The Dow Jones Industrial Average (DJIA) was the only one of the three major market indexes to close lower today.

After spending time on both sides of breakeven, the Dow settled for a modest loss of 15.6 points, or 0.1%.

Despite today's dip, the Dow remains above both the 11,000 level and its rising 50-day moving average.

The S&P 500 Index’s (SPX) barely budged today, adding just 0.3 point by the close.

The SPX is trading directly above reliable support at its rising 10-week moving average.

The Nasdaq Composite’s (COMP) turned in the day's best performance by adding 6.2 points, or 0.3%.

The looming 2,500 level could become a short-term point of contention for the COMP, as this round-number region marked the site of its bearish gap on Tuesday.

Crude futures extended their losing streak to a fourth straight session, as traders continued to fret over the prospect of a rate hike from China. The threat of slower economic growth from the key oil-consuming nation seems to be the primary catalyst for commodity traders right now -- today's decline came even as the U.S. dollar weakened, and the government reported that crude supplies unexpectedly plunged last week by a whopping 7.29 million barrels. By the close, crude oil for December delivery shed $1.90, or 2.3%, to finish at a new four-week low of $80.44 per barrel.

Gold futures also backpedaled, as traders found little motivation to buy the popular inflationary hedge in the wake of today's shockingly tame consumer price data. As a result, gold for December delivery ended the day on a modest decline of $1.50, or 0.1%, at $1,336.90 per ounce.

Bonds: The price on the benchmark 10-year U.S. Treasury eased, pushing the yield up to 2.86% from 2.85% late Tuesday.

The CBOE Volatility index .VIX, Wall Street's so-called fear gauge, declined 3.6 percent but remained above 20. On Tuesday, it closed at its highest point in more than a month.

Economic Concerns

Consumer Prices

U.S. consumer prices rose less than expected in October and the increase in the year-on-year core rate was the smallest on record, data showed on Wednesday, further supporting the Federal Reserve's decision to ease monetary policy.

The Labor Department said its Consumer Price Index increased 0.2% last month, as energy costs rose, after edging up 0.1% in September. October's increase was below economists' expectations for a 0.3% gain.

Excluding volatile food and energy prices, core CPI was flat for a third straight month in October and the annual increase of 0.6% was the smallest since records started in 1957, the department said.

Economists polled by Reuters had expected core CPI to edge up 0.1% in October and the year-on-year rate to rise 0.7% after a 0.8% increase in September.

The data came on the heels of a report on Tuesday that showed core producer prices recorded their biggest decline in more than four years in October as vehicle prices tumbled.

The report could help to ease criticism of the Fed's Nov. 3 decision to inject additional money into the economy through purchases of $600 billion worth of government debt.

The U.S. central bank's unpopular decision was driven by policymakers' desire to prevent the current disinflation environment from translating into a crippling phase of deflation and to boost a sluggish labor market.

Some traders said the inflation data mean the Federal Reserve has additional leeway to support the economy and asset prices. But others worry that inflation is too low, and that the central bank's actions could drive prices higher as money flows into commodities markets.

"The CPI is to close to zero for comfort, it's not what we'd like to see at this point," said Paul Zemksy, head of asset allocation at ING Investment Management.

Housing Starts

Starts on new homes slumped to the lowest in 1-1/2 years in October, mainly due to sharply reduced building of multiunit homes, according to a government report on Wednesday that underlined the strains facing the sector.

The Commerce Department said overall construction starts plummeted 11.7% to a 519,000 annual rate from a downwardly revised 588,000 in September.

It was the weakest starts rate since 477,000 in April 2009 when the economy was still struggling with the impact of the 2007-2008 financial crisis.

Economists surveyed by Reuters had anticipated a starts rate in October of 600,000 -- far higher than the actual outcome.

Permit applications for new building edged up to 550,000 last month from an upwardly revised 547,000 in September, potentially a sign that builders hope for better times ahead.

Overseas Concerns

Worries about the European sovereign debt crisis have resurfaced this week, taking many market participants by surprise. European Union leaders and officials from the International Monetary Fund gathered in Dublin on Wednesday to discuss ways to support the troubled Irish economy.

"Over the last few months the markets had hoped that sovereign debt issue had gone away," said Bruce McCain, chief investment strategist with Key Private Bank. "Ireland is making it more than apparent that it hasn't."

Meanwhile, investors also learned that representatives from the European Commission, the European Central Bank, and the International Monetary Fund will pay a visit to Ireland on Thursday. Ollie Rehn, the European Union's commissioner for economic affairs, said the group will collaborate with Ireland "to determine the best way to provide any necessary support to address market risks, especially as regards the banking sector." With the storm cloud of uncertainty hanging over the market starting to clear up, bears took a bit of a break from their recent selling spree.

In currencies : Wall Street breathed a sigh of relief as the euro rallied off of near-two month lows against the dollar. The turbulent currency has been rocked by Ireland's debt mess. European officials are reportedly readying a financial support package for Ireland as large as $135 billion and the U.K. said it is ready to help its neighbor as well. The cost to insure the debt of Ireland and other troubled countries like Portugal have spiked in recent days amid concerns about their soaring deficits.

The markets have worried problems in Ireland could spread to other nations like Spain and rattle the euro. A weaker euro versus the dollar tends to hurt U.S. exports and is seen as a bearish catalyst. The euro was up 0.43% to $1.3545 on Wednesday

Overseas Markets

European Markets closed higher. Britain's FTSE 100 added 0.2%, the DAX in Germany gained 0.5% and France's CAC 40 rose 0.8%.

Asian Markets ended mixed. The Shanghai Composite lost 1.9% and the Hang Seng in Hong Kong dropped 2%, while Japan's Nikkei gained 0.2%.

Company Earnings Reports



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Target (TGT) posted a 23% jump in third-quarter profits and non-GAAP EPS of 68 cents that matched estimates. Revenue increased by 2.2% to $15.61 billion, also mirroring the Street’s view. Target predicted it will post its best same-store sales of any quarter in the last three years.

BJ’s Wholesale (BJ) beat the Street on Wednesday with a 32% rise in third-quarter profits and EPS of 43 cents. Analysts had called for EPS of 36 cents. Revenue increased 4.9% to $2.63 billion, nearly meeting the Street’s view of $2.64 billion. BJ’s also upped its full-year EPS view, projecting $2.48 to $2.52, which would top estimates for $2.45.

Suntech Power (STP) slumped 10% to 10-week lows after missing estimates with a profit of 18 cents a share. Analysts had called for EPS of 23 cents. Credit Suisse also downgraded the solar sector from “neutral” to “underperform,” dragging down stocks like First Solar (FSLR) and LDK Solar (LDK).

Company News and Movements:



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• The markets also received more positive news on the General Motors front as the auto maker boosted the size of its initial public offering by 31% to 478 million shares due to heavy demand, giving it a chance to be one of the largest IPOs ever. The move comes after GM already upped the price range to $32 to $33. The bailed-out auto maker is scheduled to price its highly-anticipated IPO Wednesday evening and begin trading on Thursday.

Dynergy (DYN) signed off on a sweetened takeover bid from private equity giant Blackstone (BX) worth $5.00 a share. The new bid reflects an 80% premium to Dynergy’s closing price on August 12, the day before the initial offer. Dynergy shareholders will still have a chance to vote on the deal later on Wednesday.

Booz Allen (BAH) soared 9% in the government consulting firm’s debut on the New York Stock Exchange.

Apple (AAPL) named former Northrop Grumman (NOC) CEO Ronald Sugar to the company’s board of directors. Sugar replaces Jerome York, a former IBM (IBM) CEO who died in March.

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Options Movement

Chico's FAS Inc. (CHS)

Trendy retailer Chico's FAS Inc. (CHS) announced earnings that beat analyst expectations this morning, and the stock gapped more than 7% higher on the open.

In fact, the operator of Chico's stores (as well as the Soma Intimates and White House/Black Market chains) survived the recent downturn better than many of its peers, and saw earnings jump in recent quarters. The recession hit in the midst of CHS' plan to reverse a long sales decline, but the changes have gained traction, helping drive recent strength.

CHS reported before the open that its fiscal third-quarter profit rose 27%. Earnings rolled in at $28.8 million, or 16 cents a share, up from $22.7 million, or 13 cents a share, a year earlier. Net sales rose 8.1% to $483 million as same-store sales increased 3.1%. Net sales at the direct-to-consumer business, which includes catalog and Internet sales and isn't included in same-store sales, jumped 41%. Analysts most recently forecast earnings of 15 cents a share on $477 million in revenue.

Options players favored calls on the stock heading into the company's earnings report. The International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE) have reported 36.8 calls purchased to open for every one put purchased to open during the past 50 trading sessions. This ratio of calls to puts is higher than 76% of all those taken during the past year, pointing to a growing optimism.

Meanwhile, the put/call open interest ratio (SOIR) for CHS comes in at 0.16, as call open interest outnumbers put open interest by more than five to one. This ratio of puts to calls is lower than 92% of all those taken during the past 52 weeks. In other words, short-term options players have been more optimistically aligned toward the shares only 8% of the time during the past 12 months.

Short sellers have started to unload their pessimistic positions. During the past month, the number of CHS shares sold short dropped by 39% to 10.6 million. This accumulation of bearish bets still accounts for nearly 6% of the company's total float, and a continued unwinding of these bearish bets could fuel a nice rally.

Elsewhere, the stock could also benefit from upgrades. According to Zacks, the stock has earned eight "buy" ratings, nine "holds," and one "strong sell."

The average 12-month price target for CHS comes in at $12, according to Thomson Reuters. This estimate implies that analysts expect the shares to rally more than 19% during the next 12 months from Tuesday's closing price of $10.07. Any price-target increases could also attract some buyers to the shares.

Technically speaking, the security is up nearly 8% in early thanks to the company's positive news. The shares of CHS are down more than 28% since the beginning of 2010, although they recently bounced off the 9 level. Unfortunately, the stock remains trapped in a trading range between support at the 9.50 level and resistance in the 11-11.50 area.

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Traders should keep a close watch on resistance at the 11.50 area. A break above this region could successfully shake loose the last of the bears, resulting in a fresh wave of buying pressure.

Children's Place Retail Stores, Inc. (PLCE) is slated to step into the earnings limelight bright and early tomorrow morning. According to Thomson Reuters, analysts, on average, are anticipating a per-share profit of $1.12, down from the company's year-ago earnings of $1.38 per share. Historically speaking, the children's retailer has matched or exceeded the Street's per-share profit projections in each of the past four quarters. However, judging by the latest options trends, it seems speculators are betting the firm will snap that winning streak.

During the past 10 sessions on the International Securities Exchange (ISE), PLCE has racked up a put/call volume ratio of 0.89, which ranks in the 78th annual percentile. In other words, during the past couple of weeks, options players on the ISE have bought to open PLCE puts over calls at a much faster clip than usual.

Meanwhile, a handful of skeptical speculators are employing calls to bet bearishly on the security. By Tuesday's closing bell, PLCE had seen roughly 2,300 calls cross the tape – more than double its expected daily call volume. Nearly all of the action centered on the deep-in-the-money December 40 call, which saw 2,005 contracts change hands. However, almost all of the calls traded at the bid price, and call open interest at the soon-to-be front-month strike skyrocketed overnight, pointing to sell-to-open activity.

By writing the December 40 calls to open, the sellers are expecting the shares of PLCE to retreat beneath the $40 level by December options expiration. In this best-case scenario, the calls will expire worthless, allowing the traders to retain the entire premium received from the sale – which represents the maximum potential reward on the play.

At last check, PLCE has quite a ways to fall before those round-number calls are rendered worthless, with the stock up 2% to explore the $47.15 region.

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The following companies had some impressive options movement :-

Costco Wholesale Corporation (COST) on Tuesday hit a fresh annual high of $66.40. The bulk retailer has been hovering just below the $66 level for the past several days. In fact, after enjoying a nice rally in September, the stock had entered into a period of consolidation in the $64 to $66 neighborhood. In the meantime, COST's 10-week trendline has moved up to meet the shares, and could now provide a springboard for the stock going forward.

Option players responded to COST's technical feat on Tuesday, with call volume ramping up to four times the norm. The November 67.50 call was most popular, with 2,624 contracts traded -- the bulk of which changed hands at the ask price, indicating they were likely purchased. In fact, the November 67.50 call seems to have struck a chord with traders lately, with over 5,000 contracts added at this strike over the past two weeks.

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Calls have been the options of choice for traders on the International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE) lately. During the past two weeks, speculators on these exchanges have bought to open 9.3 COST calls for every put, a ratio which ranks above 100% of all other readings taken during the past year. In other words, call buying has reached climactic levels on the ISE and CBOE.

Yet not everyone is so optimistic about COST, with Zacks reporting that 12 out of 25 analysts deem the retailer worthy of a "hold" or worse rating. However, we could begin to see some of these skeptics abandon their positions, as COST has vaulted ahead again today to tag a new high of $66.99. Going forward, a round of upgrades and/or price-target boosts in the face of continued technical strength by COST could help the bulk behemoth extend its quest for new highs.

Dick's Sporting Goods, Inc. (DKS) soared to a fresh annual high of $34.18 on Tuesday following a particularly promising earnings report. The stock jumped some three points higher on Tuesday, and is now perched above the $33 level for the first time since February 2008. In fact, DKS is now approaching record-high territory, as the stock has never closed a month above $36.

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DKS' technical feat may catch bearish traders off-guard, as speculators on the ISE have bought to open 1.2 puts for every call during the past two weeks. In the same skeptical vein, short interest increased by 2% during the past month, and now accounts for 10.4% of the stock's total available float. At DKS' average daily trading volume, it would take nearly 12 days to unwind all of these bearish bets.

This pessimism is further illustrated by DKS' November open interest configuration, with the 30 strike housing peak put open interest of over 1,000 contracts, and another 676 contracts at the 31 strike. With DKS hovering above $33, both of these puts are out of the money. As Friday's expiration nears, an unwinding of these out-of-the-money puts could provide a tailwind for DKS, helping the sporting goods stock continue its sprint higher on the charts.

Mattel, Inc. (MAT) soared to a new 52-week peak of $25.24 on Tuesday. This technical feat snapped the stock out of its recent trading range between the $21 and $24 levels. In fact, MAT has not closed a week above $24 -- not to mention $25 -- since mid-2007.

Interestingly enough, option traders have actually been betting against MAT lately, as evidenced by the stock's put/call open interest ratio (SOIR) of 1.12, which ranks above all but 6% of other readings taken during the past year. In other words, short-term traders have seldom been more put-heavy toward the toymaker.

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In fact, a quick look at MAT's November open interest configuration reveals that peak put open interest of nearly 1,800 contracts can be found at the 23 strike, with significant accumulations of puts at the 22 and 24 strikes, as well. These out-of-the-money contracts could provide an extra boost for MAT as front-month expiration nears.

In the same bearish vein, short interest jumped by a whopping 55.7% during the past month -- 27.4% in the most recent reporting period -- and now accounts for 4.4% of the stock's total available float.

With MAT flying high on the charts, a reversal of pessimism from option players and the shorts could help the toy titan extend its upward journey.

Other Options News

• Bearish activity detected in Northern Oil and Gas (NOG) , with 2496 puts trading, or 12x the recent average daily put volume in the name.

• Bearish activity detected in Regions Financial (RF) , with 33422 puts trading, or 10x the recent average daily put volume in the name.

• Bullish flow detected in Activision Blizzard (ATVI) , with 10879 calls trading, or 2x the recent average daily call volume in the name.

• Increasing volume is also being seen in Children’s Place (PLCE), Savient (SVNT) , and Human Genome Sciences (HGSI) .

Conclusion

After a strong rally in September and October, investors said a pause in the market was not surprising, given the lack of a positive catalysts and renewed jitters.

"We've run up quite a bit off the June low, people are feeling a bit exposed with all these problems that have sprung up," said Bruce McCain, chief investment strategist with Key Private Bank.

Stocks fell sharply Tuesday on concerns about economic developments in Europe and China. All three major indexes fell nearly 2%, and the day's losses put stocks on track to post their first down month since August.


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