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"Code Orange" has stocks in the red

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The major indexes were just off their highs of the session with the Dow Industrials (INDU) 7,902 -0.33% having traded a session high of 8,001 when the office of Homeland Security raised it threat level to Orange from Yellow. "Orange" alert means the Homeland Security office senses a high risk of terrorist attacks.

While details of just why the Homeland Security office raised its code to "orange" has yet to be disclosed, MSNBC cited extreme amount of terrorist chatter for the possible raising of the threat level.

Early morning trade has seen the major indexes "wobble" above and now below yesterday's trading range. In this morning's market monitor, we did make note that the major indexes found selling just above their DAILY R1 levels of resistance. This action to me hints that some traders "discovered" the news just minutes before it hit the news wires, and the selling we've seen has probably been due to the heightened alert than today's economic news.

I say this morning's renewed weakness in stocks is most likely due to the heightened alert for terrorism, as the major indexes were of their highs of 09:40 AM EST, when further economic data on December wholesale inventories were released at 10:00 AM EST. Wholesale inventories in December rose 0.8%, which was higher than the 0.2% consensus. While the number got a negative reaction with the S&P 500 Index (SPX.X) 835.01 -0.37% falling from 840 to 835 in the span of 14-minutes, the 840 level was well below the morning high of 845.73.

Sector action which was broadly positive at the open, has taken on a more mixed to bearish look.

Sector weakness has the CBOE Internet Index (INX.X) 90.98 -2.03%, Disk Drive Index (DDX.X) 68.54 -1.95% and Airline Index (XAL.X) 32.50 -2.22% leading sector declines, while Biotechnology (BTK.X) 330 +1.13% and Healthcare (HMO.X) 490 +1.36% show gains.

A notable new 52-week low in Duke Energy (NYSE:DUK) $16.30 -1.21% has been traded. This was a stock discussed as "bearish" dating back to September of last year on thoughts that the company might experience a "cash crunch" and have its higher dividend yield susceptible to being lowered. Since discounting below a secondary offering from September 25th at $18.34 per share, the stock has been under selling pressure since breaking back below that level this January and looks to be seeing continued weakness, perhaps by those having taken the secondary now becoming sellers. If short/put from past commentary, good stopping point would be just above the $18.34 level on Duke (DUK).

Also mentioned and profiled as a short/put candidate from $26 in our intra-day commentary has fellow utility American Electric Power (NYSE:AEP) $21.37 -2.86% under continued selling pressure. Same thoughts here as mentioned previously regarding potential "cash crunch" and potential lowering of dividend as noted from a Business Week article and technical confirmation that market participants become wary of some higher dividend yielding utilities that continue to suffer from past aggressive merger activity, where economic slowing has reduced demand for industrial utilities, and lower revenues/earnings has higher dividends put to risk. I currently hold August puts on AEP and had profiled this expiration in the past to allow time for quarterly earnings announcement to potentially have the company lowering its dividend. While the company recently maintained its quarterly dividend of $0.60 per share, putting the annual dividend yield at 10.9%, price action and further technical breakdown have the stock looking to discount a dividend cut. For those holding short/put from previous profile, could follow with a trailing stop just above $24. Per correlative point and figure work and a bearish vertical count that now grows to $13, I'd look for some type of "firming" near the $20 level, potential 3-box reversal back to $23 and then continuation lower to mid-teens. This type of action would then perhaps correlate with the Business Week article mentioned before, where some professional shorts felt the stock's "fair value" was near $14.

Jeff Bailey

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