Option Investor

Daily Newsletter, Thursday, 04/21/2005

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Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews

Market Wrap

Market Wrap


+ 206.24



+ 48.65


S&P 500

+ 22.45


Just a few trading days ago we were talking about fears of a "Black Monday".  We'll that has quickly faded from our memory and now its time to jump on the "Yeah Baby Thursday" bandwagon. 

We got a bona-fide, everybody stop selling and start buying no matter what country you live in, type of rally today.  After the Chinese water torture sell-offs and fake-outs we've been having for the last few months, this was a nice refresher.

Even better, there's a good reason to believe that this wasn't another one of those one day wonders.  In fact, I'm going on record and calling out the bottom.  Yup, you heard it here first, it is officially time to cut loose your shorting mentality and get ready for another leg up on the market.

While after such a big day today, we might soon be due for a breather in the next trading day or two, but a real trend change is at hand.  I'm recommending a buy here on the INDU, SPX and NDX indices with a stop out on a close below today's low.   Looking for short term retracements back up to the 200 DMA as short term targets, but really, this has the making of a decent rally that could actually last a few months.  Given the past divergence between the S&P 500 and the Nasdaq, we'd also favor the technology weighted QQQQ as the ETF to focus on as the scared money starts to rotate back into sectors that are going to be able to juice their returns. 

Now, let me show you some different sets of data that make this such a compelling case for my long call, including a close look at the current market sentiment by a few different measures.

Let's start with the average investor out there.  This last weekend, after Friday's horrific close to an awful week, the 20 something financial journalists got their panties in a bunch and started screaming louder then a teenage girl meeting her favorite rock star.

Just look at some of the headlines we took in on the weekend:

"Stocks plunge on IBM fears"
"Stock market in freefall as markets close"
"Wall St. suffers worst day in two years"
"Stock Broker Quits, Gets Job Pumping Gas."

Ok, maybe the stock brokers aren't reduced to flipping burgers at McDonalds, but last Friday it sure felt close.

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And this is the culmination of an overwhelming bearish sentiment that had been increasing in volume for several weeks.   The AAII (American Association of Individual Investors) has a weekly poll that gauges bullish and bearish opinion and has reached the lowest level of bullish opinion in 13 years.  This is after only a 5% correction in the S&P 500.  Now if every Tom, Dick and Harry is so convinced that the market has such a bad outlook, who is left to sell?  Secondly, historical data shows that this group has never been right when the sentiment is at such extremes.   No doubt, they will mark yet another low point in the market this time. 

Even so, I like to get some "back up" data to support my thesis, so I'll point you to a few more facts.  First, odd-lot short sales, (these are typically small retail traders who are selling short and are also wrong when they all are behaving the same), recorded an all time high last Friday.

Second, the put/call ratio has made 3 extreme highs, including an intra-day record as far as we know, with major bets being made on the put side, both on individual equities and on the OEX index. 

Third, looking at assets in the Rydex funds (these are leveraged funds that are used by market timers) shows major bets having been made on the short side and an overall withdrawal of assets on 30 out of 33 of their long funds.

The overall conclusion I arrive at is that we've reached an extreme point of view from most all market sentiment measures and combined with a great price action reversal, today is the day to change our intermediate bias from short to long. 

I leave you with the chart of the QQQQ.  Please print it out and come back and look at it 3 months from now.


New Plays

New Option Plays

Call Options Plays
Put Options Plays
NUE None

New Calls

Nucor - NUE - close: 53.60 chg: +1.83 stop: 49.95

Company Description:
Nucor and affiliates are manufacturers of steel products, with operating facilities in fifteen states. Products produced are: carbon and alloy steel - in bars, beams, sheet and plate; steel joists and joist girders; steel deck; cold finished steel; steel fasteners; metal building systems; and light gauge steel framing. Nucor is the nation's largest recycler. (source: company press release)

Why We Like It:
The broad market bounce is likely to give shares of NUE a boost as investors respond to its positive earnings report. The company reported earnings today that were well above analyst estimates. Profits actually tripled from the same period a year ago. The company also reaffirmed its Q2 guidance and raised its dividend. We believe that bargain hunters will also be drawn to the technical picture. Not only is NUE oversold from five weeks of declines but the stock is bouncing from support. NUE has price support and technical support in the $49-50 range and this looks like a good spot to speculate on a stronger rebound. Short-term technical oscillators have turned positive. However, it's worth noting that the P&F chart is currently bearish. We want to see confirmation that NUE has indeed reversed course. Our suggestion is to use a TRIGGER at $55.05. There could be round-number resistance at the $55 level in addition to its 100-dma. We can wait for NUE to trade at $55.05 and then target a move toward $60.00 or higher. We are using a very wide stop loss and traders may need to adjust it for their own comfort level.

Suggested Options:
We are suggesting the June calls.

BUY CALL JUN 50.00 NUE-FJ OI=194 current ask $5.60
BUY CALL JUN 55.00 NUE-FK OI=405 current ask $2.70
BUY CALL JUN 60.00 NUE-FL OI=163 current ask $1.10

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/21/05 (confirmed)
Average Daily Volume = 3.3 million

New Puts

None today.

Play Updates

In Play Updates and Reviews

Call Updates

Eaton Corp - ETN - close: 60.66 chg: +1.57 stop: 56.99

A big rebound in the markets helped ETN add 2.65 percent on Thursday. The stock broke through round-number, psychological resistance at the $60.00 mark. Shares are nearing our profit/exit target in the $62.00-63.00 range.

Picked on April 18 at $ 58.51
Change since picked: + 2.15
Earnings Date 04/14/05 (confirmed)
Average Daily Volume = 1.1 million


Ishares Dow Jones Energy - IYE - cls: 72.89 chg: +2.12 stop: 68.84

Oil-related stocks were not left out of today's market rally. The OIX added 2.2 percent and the OSX climbed more than 3 percent. The IYE ishares were strong throughout the session and closed with a 2.99 percent gain. Our target is the $74.00-75.00 range.

Picked on April 18 at $ 70.78
Change since picked: + 2.11
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 170 thousand


Patterson Cos. - PDCO - close: 50.80 chg: +0.74 stop: 49.45

PDCO continues to cause us concern. The lack of participation in today's market rally is discouraging. Let us rephrase that. PDCO added 1.47 percent today but given the bounce from support near $50.00 and its 50-dma we would have expected a bigger move. Technically this is still a bullish entry point but we would enter cautiously.

Picked on April 18 at $ 50.75
Change since picked: + 0.05
Earnings Date 05/19/05 (unconfirmed)
Average Daily Volume = 789 million

Put Updates

KB Home - KBH - close: 111.25 change: +2.27 stop: 115.01

Traders should be very careful here. The 200-point rally in the Dow Industrials was unexpected and caught many shorts off guard. We're encouraged to see that KBH didn't rebound too sharply but bears are still in danger here. We would not suggest new bearish plays at this time. We'll wait for another drop below the $109 level. Anybody with current open bearish positions should carefully monitor their stops. A more conservative trader may want to exit early if KBH trades over $112.50.

Picked on April 20 at $108.98
Change since picked: + 2.27
Earnings Date 06/16/05 (unconfirmed)
Average Daily Volume = 1.5 million


MGM Mirage - MGG - close: 68.69 change: +1.59 stop: 72.51

The market bounce on Thursday was a surprise but we can use it to our advantage in MGG. Shares rallied toward the $70.00 level and failed (as we suggested it might). This sort of failed rally could be used as a new bearish entry point. However, we would not initiate new bearish positions if the broader indices continue to rally tomorrow. We would be patient. There is no rush to open plays here.

Picked on April 20 at $ 67.10
Change since picked: + 1.59
Earnings Date 04/19/05 (confirmed)
Average Daily Volume = 1.1 million

Dropped Calls


Dropped Puts

Expeditors Intl Was. - EXPD - cls: 51.00 chg: +2.58 stop: 52.51

The big rally in the markets was lead by a huge rebound of 3.46 percent in the Dow Transports. The Transportation index rallied back above technical resistance at its simple and exponential 200-dma's. EXPD followed suit by rallying back above the $50.00 level. We are going to exit early to avoid further losses.

Picked on April 14 at $ 49.31
Change since picked: + 1.69
Earnings Date 05/04/05 (unconfirmed)
Average Daily Volume = 748 thousand


Ishares Russ 2000 Val - IWN - cls: 180.00 chg: +4.00 stop: 183.51

The IWN ishares are still under what should be resistance in the 180-182 region but we don't want to risk it. The rebound today was too strong and likely to spook the bears into covering positions again tomorrow. We will close this play early to avoid further losses.

Picked on April 14 at $178.04
Change since picked: + 1.96
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 324 thousand


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