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Daily Newsletter, Wednesday, 08/25/2004

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The Option Investor Newsletter                Wednesday 08-25-2004
Copyright 2004, All rights reserved.                        1 of 2
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Little Reaction  
Futures Wrap: See Note
Index Trader Wrap: Bear trap in the retailers! 


Posted online for subscribers at http://www.OptionInvestor.com
******************************************************************
MARKET WRAP  (view in courier font for table alignment)
******************************************************************
      08-25-2004           High     Low     Volume   Adv/Dcl
DJIA    10181.74 + 83.11 10199.21 10068.11 1.46 bln 1969/ 867
NASDAQ   1860.72 + 23.83  1861.79  1830.30 1.28 bln 2020/ 966
S&P 100   539.57 +  4.59   540.35   533.75   Totals 3989/1863
S&P 500  1104.96 +  8.77  1106.29  1093.24
SOX       384.28 +  4.01   386.62   374.67
RUS 2000  550.14 +  5.13   550.16   542.13
DJ TRANS 3114.00 + 11.83  3117.56  3082.06
VIX        14.98 -  0.35    15.76    14.81
VXO (VIX-O)14.63 -  0.58    15.73    14.42
VXN        21.41 -  0.56    22.57    21.27
Total Volume 2,768M
Total UpVol  2,174M
Total DnVol    544M
Total Adv  3989
Total Dcl  1863
52wk Highs  138
52wk Lows    65
TRIN       0.50
PUT/CALL   0.78
******************************************************************

Little Reaction
Linda Piazza

Last night, two planes taking off from the same airport in Moscow
crashed within minutes of each other, killing all of the almost
90 people on board the two aircraft.  One pilot pressed a hidden
hijack alert before the plane disappeared from radar, but as
Wednesday dawned, investigators still withheld opinions about the
likelihood that the crashes were a result of an act of terrorism. 
Some feel terrorists acting ahead of this weekend's presidential
elections in Chechnya could be responsible.  Perhaps because the
terrorism might have been due to those elections, U.S. futures,
as well as Asian and European markets, showed little reaction.

Crude prices crept up, too, with many expecting the morning's
inventory numbers to show a decline.  Crude prices had dropped
for several days as Iraq increased oil flow from the southern
fields and drew closer to exporting oil from the northern fields,
too.  A strike against a pipeline in southern Iraq reduced
supplies again and heightened concerns that terrorism could
disrupt oil production and delivery.  ECB President Trichet
reassured market watchers that although he's remaining vigilant,
rising oil prices won't cause the ECB to change its forecast for
economic recovery.  This came after announcements over the last
week from French and Japanese economic ministers that quantified
how much of an effect gains in crude prices might have on their
countries' GDP growth if crude prices continued to increase. 
Still, although European markets eased off their highs, our
futures appeared to have little reaction.

Nor did our futures react to Wednesday's earliest economic
release.  This morning's economic releases started with the MBA
Refinancing Index at 7:00, with the previous number showing a
20.9 percent increase.  The Refinance Index fell 8.0 percent for
the week ending August 20, with refinancing activity falling to a
40.4 percent share of total mortgage activity from the previous
40.7 percent share.  The Market Composite Index of mortgage loan
applications fell 6.3 percent if seasonal adjustments were
considered and 7.3 percent if those adjustments were not
considered.  According to the Mortgage Bankers Association, the
average interest rate for a 30-year fixed-rate mortgage increased
to 5.78 percent from the previous week's 5.75 percent.  

Homebuilders have so far shown little reaction to the Fed's
beginning tightening cycle.  This morning, Toll Brothers (TOL)
reported better-than-expected Q3 earnings, with sales of luxury
homes reportedly responsible for the good showing.  The company
expected deliveries and average home price to rise in fiscal
2005, with net income growth of 30 percent or more during that
year.  Though many spoke of a bubble in the housing market late
last year, the behavior of stocks in the sector has continued to
confound those who expected a steeper drop.  TOL did show a
little reaction Wednesday, however, climbing to a high not seen
since April 1 before tumbling lower after the 10:00 release of
further economic numbers related to the housing industry. 

At 10:00, July's New Homes Sales showed those sales dropping to
1.134 million from June's 1.326 million new homes. Expectations
had been for 1.300-1.320 million sales, so the decline was
greater than expected.  Sales of single-family homes dropped 6.4
percent, also a disappointing number.  By the end of the day, the
DJUSHB, the Dow Jones U.S. Home Construction Index, had dropped
1.01 percent, one of the few declining sectors.  The index's
rejection of its H&S formation on its weekly chart may be in
question unless the index can push higher this week, building on
recent gains.

Annotated Daily Chart of the DJUSHB:

 

The 8:30 release of the Durable Goods number for July also
provoked a little reaction.  June's Durable Goods orders had
risen 0.9 percent, and with predictions for July's for a 1.0-1.5
percent increase, depending on the source.  The 1.7 percent
increase was termed better than expected, but some also called
the increase unsustainable since most gains were related to
orders for new civilian aircraft.  Boeing (BA) was one of the
companies reporting those higher orders, with the company
delivering 75 commercial airplanes in the second quarter and
recently reaching tentative deals with two dozen customers.  

Orders for computers, defense goods and autos dipped, however. 
Ex-transportation, durable orders rose only 0.1 percent.  Still,
June's number for durables less transportation had been down 0.4
percent, and the 0.1 percent rise was the first monthly increase
since March.  Shipments of durable goods rose 0.1 percent, with
this figure providing a look at current production.  Unfilled
orders rose 1.2 percent, with this number providing a measure of
future production.  Inventories rose 0.8 percent.  After the
release of the durable goods numbers, S&P futures dropped from a
7:20 high of 1,100 down to a 10:10 low of 1092.75. 

After that little reaction, markets coiled into tight ranges, and
not even the usually market-moving releases on crude, distillate
and gasoline inventories broke them out of those coils.  Crude
inventories had been forecast to fall, and they did.  The API,
the American Petroleum Institute, said that crude inventories
fell by 3.4 million barrels, with the earlier release by the
Department of Energy noting a smaller 1.7 million-barrel decline. 
Although the API and Energy Department figures displayed their
usual disparity, both were greater than the maximum drop
expected, pegged at around 1 million barrels according to one
article.  The API noted that distillate inventories fell 633
thousand barrels, but gasoline stocks rose by 1.5 million
barrels.  The Department of Energy had tagged those numbers at a
500 thousand barrel climb for distillate inventories and a flat
number for gasoline inventories.  Some market watchers commented
on the higher gasoline inventories noted by API, saying that at
least was a relief.  

Still markets coiled, showing little reaction to the news. The
advancing:declining ratios showed the lack of direction.  Except
for a short period near the release of the crude, distillate and
gasoline inventories, advancing and declining issues remained
equally matched.  At about noon, however, as crude dropped below
Tuesday's low, markets did show a little reaction, breaking out
of those coiling formations to the upside and shooting higher. 
Crude futures had spiked above $45.50 early Wednesday, but had
been drifting down from that level as the morning progressed. 
The buying appeared to be broad-based as all main industry groups
moved into positive territory.  Advancers pulled ahead of
decliners on both exchanges.  

A dip in crude costs shouldn't be given all the credit for that
little reaction.  A study of intraday charts points out that the
SOX had been gaining since its gap-lower opening and first five-
minute dip, preparing the way for a breakout.  At five minutes
after noon, just a few minutes after crude prices dipped below
Tuesday's high, the SOX broke above Tuesday's high, signaling an
upside breakout.  

Annotated Five-minute Chart of the SOX:

 

Other indices participated in that little reaction in the 
afternoon, as did most sectors of the markets.  The XAU, the gold
and silver index, and the XBD, the Securities Broker Dealer
Index, appeared to the sectors showing the biggest gains. Volume
remained suspect, however.  In last night's Wrap, Jane Fox
pointed out the importance of volume corroborating gains.  That's
not happening now.  While that little reaction this afternoon
produced breakouts on the indices, some charts display reasons
for caution other than volume considerations.

Annotated Daily Chart of the SPX:

 

The SPX nears the level from which it should turn back if it's to 
form another shoulder for a possible inverse H&S formation.  It's
also approaching the converging 100- and 200-sma's.  Many
oscillators show potential price/oscillator bearish divergence,
but that can be undone if price moves higher than the August 2
high of 1108.60.  A rollover beneath those converging 100- and
200-sma's would present a good opportunity for a bearish position
while a breakout above them would suggest a bullish one.  If
entering bearish plays on a rollover, make plans to protect
profits in the right-shoulder area, in case the index rolls up
again toward the neckline.

The Russell 2000 has also approached the appropriate spot for a
horizontal neckline for a potential inverse H&S.  

Annotated Daily Chart of the Russell 2000:

 

This chart displays the same tentative bearish price/oscillator
divergence, but bearish divergence that can be erased if the
Russell 2000 moves above the 7/30 high of 552.14 before
oscillators turn lower.  With the importance of the 50-dma to the
Russell 2000's trading pattern, a breakout above that horizontal
resistance would not be confirmed until a breakout above the 50-
dma, too.  Any participating in a long Russell play on any such
breakout should have profit-protecting plans in mind for an
approach to the 100- and 200-sma's at 562.15 and 564.67,
respectively.  As mentioned in this weekend's Wrap, the breakout
above the rectangular pattern formed in the middle of August
appeared to be the best bet for long positions for the Russell
2000, as new entries since then have always faced resistance that
looked important and might turn it lower.  Rollovers from below
the 50-dma would be appropriate for bearish entries, with plans
made to protect profit in the right-shoulder area. 

Although the Nasdaq also faces horizontal resistance, it has not
yet approached either the 50-dma or the appropriate spot for a
horizontal neckline for a possible inverse H&S.

Annotated Daily Chart of the Nasdaq:

 

A breakout above May's swing low at 1865.40 might make an 
appropriate long entry, but SOX and Russell 2000 strength should
be confirmed first before such an entry is considered.  Light
volume days already make these breakouts suspect, so all other
ducks should be in a row before such entries.  Entries at
rollovers from beneath the 50-dma and 1900 resistance, if
offered, might make appropriate bearish entries, but profit-
protecting plans should be made as the right-shoulder level is
approached again.  

The Dow also approaches horizontal resistance, as well as
resistance from several important moving averages, an appropriate
level for a horizontal neckline for a potential inverse H&S.

Annotated Daily Chart of the Dow (Using DJX as Proxy):

 

The Dow, Russell 2000, and Dow all approach horizontal and other 
forms of resistance.  Daily charts show possible bearish 
divergence developing, but divergence that can be erased by the
simple act of price climbing higher before oscillators roll down.
Yet the form the indices have been producing appears to be
possible inverse H&S's, which would require the formation of
another shoulder before completion, warning that there might be
another dip to come even if indices are to breakout eventually. 
On weekly charts, these indices appear to be following through on
the morning-star reversal signals produced last week, but this
week isn't over yet, and one indicator index we watch hasn't yet
achieved a breakout.

Annotated Daily Chart of the SOX:

 

A careful look at a SOX 60-minute chart shows an inverse H&S-ish
formation on that chart, too, apparently nearer to confirmation
than that of other indices, but the formation appears so ragged
that a neckline is difficult to define.  A breakout above
Monday's high of 394.58 might mark the neckline while others
might prefer to wait for a breakout above 400 to consider the
formation confirmed.  That 50 percent retracement of the SOX's
rally off the October 2002 low appears to be a sticky place that
the SOX has difficulty moving past, however.  After hours, 
semiconductor company Credence Systems (CMOS) reported earnings
that sent the stock lower on disappointment in the revenue figure
and the outlook for Q4 sales and earnings.  That report won't
help the SOX get past that sticking point.

In other after-hours stock developments, Cyberonics (CYBX) was
falling after the medical device maker commented on its plans
after receiving a not-approvable letter from the FDA over an
anti-depression drug.  The company raised guidance for the Q2,
saying that it expected a narrower loss than previously
announced.

In last weekend's Wrap, I speculated that some of crude's recent
abrupt ascent could have been tied to short-covering as last
Friday's expiration of the futures for September delivery
approached. Shorts who had hoped for a resolution to the
situation in Iraq were trapped when a resolution dragged on past
Friday's expiration. I had reasoned that if that had been a
factor, crude futures might ease this week, allowing equities to
rise.  Whether that speculation turned out to be true or all the
other reasons attributed to crude's descent this week, such as
the renewed flow in Iraq, are responsible, the dip in crude
prices eased some pressure.  Wednesday, crude futures for October
delivery dropped from Tuesday's closing level of $45.21
(according to QCharts) to Wednesday's close at $43.47, a
significant drop on top of three previous days of drops.  Crude
could continue dropping, down to the $41.25-42.00 support or even
lower, to the 30-dma, currently at $37.34 but still rising
steeply toward the $39-41 region.  

In the meantime, how much damage has crude's rise done to our
GDP?  Fear of that GDP number may begin to assert itself
tomorrow, with the number to be released Friday morning.  Japan's
and the eurozone's GDP disappointed.  Our markets react as if
they expect an upside surprise, moving up in preparation for
breakouts above horizontal resistance and important moving
averages, but those light-volume climbs remain suspect ahead of
the GDP.  If you want to bet along with those who expect an
upside surprise or at least not a disastrous number, be aware of
the risks.  Sitting out the day ahead of the GDP number might not
be a bad idea.

Thursday morning's economic releases will include the usual 8:30
release of initial jobless claims, with those jobless claims at
331 thousand last week and with expectations for 335 thousand for
the current week.  July's Help-Wanted Index comes next, at 10:00,
with that index at 38 for June. Expectations are for a flat to
slightly higher number for July, at 38-39.  Natural gas
inventories will be released at 10:30.  Other events for Thursday
include mid-quarter updates from GDT and NVLS, but it will be 
developments in crude and anticipation over the GDP that control
markets tomorrow.  


***************
FUTURES MARKETS
***************

Futures wrap is not emailed due to the excessive number of charts.
It may be read on the website at this address.
http://www.OptionInvestor.com/indexes/futureswrap.asp


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*****************
INDEX TRADER WRAP
*****************

Bear trap in the retailers!

The S&P Retail Index (RLX.X) 391.61 +0.91% found strength above 
both its 50-day and 200-day SMA's as bullish sentiment improved 
with October Crude Oil futures (cl04v) falling below $44, as all 
sectors except the Dow Jones Home Construction Index (DJUSHB) 
610.07 -1.01% found gains.

U.S. Market Watch - 08/25/04 Close

 

Up until 12:00 PM EDT, it was looking like it was going to be 
another tightly contested session of fractional gains and losses 
like we witnessed on Monday and Tuesday, but when October Crude 
Oil futures (cl04v) cracked below yesterday's low between 12:00 
and 12:05 PM EDT, buyers turned on the computers in impressive 
fashion.

S&P Retail Index (RLX.X) - Daily Intervals

 

While not a percentage gainer, I think the S&P Retail Index 
(RLX.X) made one of the more important moves in today's session 
as it found some follow through buying after yesterday's close 
above both its 50-day SMA and 200-day SMA.  Support should be 
firming at the 21-day SMA where both bulls and bears will most 
likely be eager to buy pullbacks.  

The RLX.X has come a long way since its August 6 relative low, 
and some charts I'll show for the NYSE Composite ($NYA.X) 
6,431.79 +0.77% and Morgan Stanley Cyclical Index (CYC.X) 680.29 
+0.87% with similar conventional retracement shown above provide 
an additional measure for technical strength. 

S&P Retail Index (RLX.X) - 5-point box size

 

The conventional 5-point box scale that most institutions will 
view has the S&P Retail Index (RLX.X) showing the "bear trap" 
pattern with Tuesday's trade at $390.  The "trap" looks to be 
classic as it came right as the RLX.X was about to test its 
bullish support trend.  Buyers seemed eager as the RLX.X traded a 
session low of 360.04 on August 6, not 360.00.

Its notable that the RLX.X hit it recent all-time highs in late 
June (red 6 is June, red 7 July), when the October Crude Oil 
futures (cl04v) had just undercut the $36 level before the most 
recent surge to $48.

NYSE Composite ($NYA.X) - Daily Intervals

 

As the RLX.X moves above its correlative 50-day SMA and 200-day 
SMA, the very broad NYSE Composite ($NYA.X) 6,431.79 +0.77% shows 
similar technicals, where it challenges its 38.2% conventional 
retracement from the March highs and May lows.

Similar MACD setup to that found on May 26, when the NYSE was 
challenging the 38.2% retracement.  Bulls may have the upper-hand 
as bullish leadership is actually stronger today than that found 
at the May 26 close.

My tabulations would have shown the NYSE 5-day NH/NL ratio at 
53.2% and 10-day NH/NL ratio at 35.8% at the close of May 26 
trade, where that day's NH/NL breadth was 68:25.

Market Snapshot / Internals - 08/25/04 Close

 

At the 12:00 snapshot the major indices were mixed and TRIN/VIX 
indications were not in synchronization for what looked to be a 
third-straight session.  Suddenly, crude oil broke below 
yesterday's low, TRIN moved below 1.00 as well as today's DAILY 
Pivot and bulls took control.

Volumes picked up a bit, which bulls will find comforting as it 
expresses some interest, but the still rather anemic volume 
levels will traders questioning the recent rise in stocks.

Morgan Stanley Cyclical Index (CYC.X) - Daily Intervals

 

The deep cyclical found in the Morgan Stanley Cyclical Index 
(CYC.X) don't get a lot of coverage as they are "boring," but can 
reflect the underlying strength/weakness of an economy.  I'm just 
noticing tonight that the CYC.X shows a "nasty-looking" potential 
reverse head and shoulders pattern developing, where the downward 
trend from the all-time highs to the late-April rally high would 
represent a descending neckline.  

Shoot, I meant to type in the WEEKLY Pivot levels as I did for 
the RLX.X.  QCharts'-derived weekly pivot levels starting at 
WEEKLY S2 are as follows.  640, 659, P=669, 688, 698.

Pivot Analysis Matrix - 08/25/04 

 

Some pretty wide ranges for correlative support, but the major 
indices look destined for a trade at WEEKLY R1s.  If we were 
looking for volume to pick up, that would be a level where I'd 
expect some interest.

The S&P Banks Index (BIX.X) 359.11 +0.31% is first to trade its 
MONTHLY R2, which in my opinion is no small feat.

Jeff Bailey


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The Option Investor Newsletter                Wednesday 08-25-2004
Copyright 2004, All rights reserved.                        2 of 2
Redistribution in any form strictly prohibited.


In Section Two:

Watch List: Plenty of bullish candidates!
Stop Loss Updates: MHK, ZBRA
Dropped Calls: TXT
Dropped Puts: HIG
New Calls: None
New Puts: None

**********
Watch List
**********

Plenty of bullish candidates!

___________________________________________________________________

How to use this watch list:
  Readers can use the candidates below as a springboard for their
  own research.  Many are in the process of breaking support or
  resistance or in the process of starting new trends or
  extending old ones.  With your own due diligence these could be
  strong potential plays.
___________________________________________________________________


Research In Motion - RIMM - close: 63.37 change: +1.12

WHAT TO WATCH: RIMM has been a big winner the past couple of 
weeks with a $10 climb.  The last three sessions have seen RIMM 
consolidate above its simple 40 and 50-dma's.  It may be 
noteworthy that traders bought the dip to $61.00 today.  If 
you're feeling aggressive this could be an entry point to catch 
RIMM as it runs toward the $70.00 region.  Be sure to manage your 
risk carefully.  We would suggest a stop under $60 or $61.  The 
bullish P&F chart points to $84.00.
 
Chart=


---

American Intl Group - AIG - close: 71.10 change: +0.69

WHAT TO WATCH: This Dow-component has also turned in a very sharp 
reversal in the last couple of weeks.  AIG appears to have 
produced a double-bottom near the $66 level.  Bulls can be 
encouraged by the breakout over its simple 200-dma and the $70.00 
mark in the last several days.  We would watch for a little more 
confirmation and a move over the $71.50-71.75 level.  If this 
occurs traders can target a run toward the $75-77 region.   The 
P&F chart shows a nice rebound from rising support but it needs a 
move over $72.00 to produce a new "buy" signal.
 
Chart=


---

Goldman Sachs - GS - close: 90.03 change: +2.50

WHAT TO WATCH: The XBD broker-dealer index turned in a big 2% 
rally today that broke through technical resistance at its simple 
100-dma and its exponential 200-dma.  At the same time shares of 
GS outpaced the move with a 2.85% rally to breakout over its 40 
and 50-dma's and the $90.00 mark.  This looks like a bullish 
entry point for GS but the stock has been very volatile the last 
few months and whipsawed traders very quickly after numerous 
bullish or bearish signals.  We'd keep an eye on it and overhead 
resistance near $92.50 with its 100-dma and the exponential 200-
dma.
 
Chart=


---

Boeing - BA - close: 52.50 change: +1.59

WHAT TO WATCH: Ask and you shall receive!  Yesterday we listed BA 
as a bullish candidate for a breakout over resistance at $51.50.  
Today shares rally more than 3% to do just that.  Volume was way 
above average on the breakout too and that's good news for 
momentum traders.  Singapore Airlines announced it will order 18 
new 777 model jets from BA worth billions of dollars.  The P&F 
chart for BA is bullish with a $62 target.  Traders can choose to 
open positions at current levels or watch for a dip back toward 
$51.00.  We would target the $60 region.
 
Chart=



-----------------------------------
RADAR SCREEN - more stocks to watch
-----------------------------------

ALL $48.61 +0.67 - Strength in the insurance stocks has helped 
ALL breakout to new multi-year highs.  This looks like a bullish 
entry point.

CB $68.48 +1.03 - CB is another insurance stock that's pushing 
higher.  CB has rallied through technical resistance at the 100 
and 200-dma's.  Look for a new relative high as a potential entry 
point.

MTB $98.40 +1.74 - MTB's stock is somewhat volatile but we like 
the bullish trend towards resistance at $100.  We're watching for 
a breakout. 

CI $65.65 +1.10 - CI is yet another insurance stock, this time in 
the healthcare industry.  CI has broken through resistance at its 
simple 50-dma and the $65.00 level.  This might be an entry point 
for a run toward $70 but look for confirmation over $66.


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*****************
STOP-LOSS UPDATES
*****************

MHK - call play -
  Traders bought the dip to $75.00 and MHK has bounced
  another 1.3 percent to $77.00.  We're raising the stop loss
  to $73.00.
 
 
ZBRA - call play -
  Shares of ZBRA surged nearly 2 percent and broke through
  overhead resistance at $83.50 and $84.00.  We have been
  triggered at $84.35.  Don't forget that ZBRA will begin trading
  on a post 3:2 split basis on Thursday morning.  Double check
  your option symbols with your broker!


*************
DROPPED CALLS
*************

Textron - TXT - close: 65.32 change: +1.07 stop: 61.99      

In one fell swoop TXT surges higher on big volume to tag both the 
$65.00 mark and our target at $66.00 in the same day.  
Considering TXT's business in small aircraft it looks like 
investors cheered the durable goods report, which showed a strong 
climb in civilian aircraft sales (a 100 percent increase).  We 
are going to follow our plan to exit at $66.00.  However, while 
we are suggesting that readers take profits more aggressive 
traders might want to consider leaving a speculative position 
open.  TXT may continue to run.  

Picked on July 26th at $60.72
Change since picked:   + 4.60
Earnings Date        07/22/04 (confirmed)
Average Daily Volume =    622 thousand
Chart =



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************
DROPPED PUTS
************

Hartford - HIG - close: 61.07 change: +1.23 stop: 61.26     

Wednesday's widespread market rally was not lost on the IUX 
insurance index, which rose nearly 1 percent to breakout above 
the 315 level and its simple 50-dma.  HIG also participated in 
the rally and tagged our stop loss at $61.26 before closing with 
a 2 percent gain.  While we're not convinced this is a rally that 
will last in HIG we're going to obey the stop loss and close it.

Picked on August 12 at $59.17
Change since picked:   + 1.90
Earnings Date        07/21/04 (confirmed)
Average Daily Volume =    1.4 million 
Chart =


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Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

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