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Daily Newsletter, Thursday, 12/01/2005

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Table of Contents

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

Market Wrap

Ra-Ra Rally Resumes

The market started off on a very bullish note after the futures climbed right from yesterday's close and gave us a strong gap up at the open. Equities continued their climb, albeit more slowly, right through lunch and then pretty much flattened out for the afternoon. The strong rally today that was followed by a choppy pullback is indicative of further rally ahead. However, it's looking to me like the rally off the October low is close to being finished, but not before the DOW likely gets over 11K. That bell needs to get rung before the Boyz will let the Bears sit at the table.

The week-long pullback looks like it might have been some house cleaning in preparation for a December rally. Looking at the NYSE, while it pulled back from its high on Nov. 23, the new 52-week highs continued to outnumber the new lows. It looked like there was some accumulation going on in preparation for a rally. Looking at the performance of the small caps relative to the large caps the past few days, you can see where the buying was going during the pullback. Today was the beginning of the best month for blue chips as December has historically seen an average of a +1.7% gain in the S&P over the last 55 years. Adding this to the index's +3.1% year-to-date gain bodes well for a year-end forecast of a +5.0% gain for the S&P that many have been looking for. Anticipation of new fund inflows was also a likely factor in the jump out of the gates today. Today's rally was strong by most measures. Up volume blew away down volume better than 4:1 and advancing issues were almost 3:1 better than declining issues. Overall volume was strong. Until proven otherwise, today's rally should be viewed as the start of a new advance and not as a correction to the recent pullback.

But there was an interesting observation made by Linda on today's Market Monitor and I think her observation is exactly right. Here's what she said, "I've noticed something during the rally off the October lows that I don't remember noticing at other times. In this run up, one index always seems to be the leader. It was the TRAN for a while. As soon as the TRAN moved above 4000, pulled back, and then rose through it however, I started noticing other indices picking up, as if the baton were being passed to another sector. If I remember correctly, the financials were next. Now they're appearing to be flagging, and here comes the SOX. It seems to be as if one sector after another is being pumped up, and as soon as it gets to some level that might sustain it in bulls' eyes, so that they'll buy on pullbacks, attention is turned to another."

This is what I call "tub sloshing" as it reminds me of water sloshing from one end of the tub to the other. I've reported before how mutual funds currently have record low cash on hand as a percent of total assets. The last time cash was this low was when we were heading into 2000 and we know what happened shortly after that. Basically when everyone casts their vote and puts money to it, in this case an expectation for a year-end rally, we soon find out that there's no one left to put more money to it. Hence the reason for using this as a contrarian indicator. Without a lot of new money that can enter the market (other than foreign capital which I believe is plenty right now) money tends to flow from sector to sector. Somebody is in the tub and just pushing the water back and forth--money leaves one sector and heads for another, out of that one, into another. The challenge for stock pickers is to figure out where the money will rotate to next. As for the major indices, they've been basically stuck in neutral while all this is going on (the market has essentially been flat for almost 2 years). Conspiracy theorists could be forgiven for thinking it's all a carefully choreographed show just to hold the major indices up. Sooner or later market forces will prevail and some of the excesses in the system will need to be purged, which is healthy, but for now the maestro plays on.

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Today was an active one as far as economic reports although the market didn't seem to pay much attention to any of it. It seemed to have an agenda and that was to rally. After the pullback into the end of the month of November, which appeared to be an overlapping sideways/down correction, we had a nice setup for a rally to start off the month of December. Not much got in the way of that today. Kicking off reports was actually an overnight report from London as the European Central Bank (ECB) announced its first interest-rate hike in more than five years, lifting its key rate by a quarter-point to 2.25%. This was supposedly done in an effort to fight the threat of inflation caused by high oil prices. The rate hike was unanimously approved and widely expected after recent comments from President Jean-Claude Trichet, who had indicated over the past few weeks that the ECB was ready to move against the threat of inflation. The previous rate of 2% had been in force since June 2003.

October personal income from wages and salaries was reported before the bell and it rose +0.6%, near expectations and the biggest gain in 3 months. Disposable incomes (after taxes) increased +0.3% in October. After adjusting for inflation, disposable incomes rose +0.2%. In the past year, real disposable incomes are up +0.9%. Proprietors' income fell -0.2%, after rising +4.8% in September, and income from assets rose +0.6%, including a +1.0% rise in income from dividends. The increase in personal incomes follows a +1.7% gain in September which was skewed by the impact of Hurricane Katrina.

Personal spending rose +0.2%, also matching forecasts. Real consumer spending was up +0.1%, the first increase in 3 months, and it follows a decline of -0.4% in September. But real spending on durable goods was down -2.5%, the 3rd straight monthly decline. Spending on nondurable goods increased 1.1%, while spending on services increased 0.1%.

With incomes rising faster than spending, the personal savings rate improved to -0.7% from -0.8%. The record low was in August at negative 2.2%. The savings rate has been negative for six of the past seven months. The October savings rate was -0.7% versus -0.8% in September, an improvement but obviously still not healthy. And now we head into the Christmas season where credit cards will likely be maxed out.

The core personal consumption expenditure (PCE) price index came in at +0.1% versus +0.2% expected, which left a +1.8% year-over-year rate, down from +2.0% in September. It's the smallest year-over-year gain since February 2004. Fed officials have said they want core inflation to remain between 1% and 2%. Consumer prices rose +0.1% in October, after rising +0.9% in September, giving us an annual rise of +3.3% in the past year compared with a +3.7% rate in September.

While the above numbers are all Fed-friendly, as it suggests inflation remains under control, it is still widely believed that the Fed is likely to raise rates at least a couple more times in the next few months as insurance against a breakout of inflation. The Fed's policy committee will meet on Dec. 13 to consider a 13th consecutive quarter-percentage point increase in the federal funds target rate to 4.25%.
And then Bernanke will have to have at least one rate increase just to show he's in control and will not let inflation enter the picture. Recession maybe, inflation no.

Jobless claims were also released at 8:30 and showed initial claims fell 17K to 320K (consensus 325K). The continuing jobless claims were down 24K to 2.77M.

Spending on U.S. construction projects increased +0.7% in October as public-sector outlays jumped. Total outlays rose +0.7%, versus +0.5% expected, to a record seasonally adjusted annual rate of $1.13 trillion. September's increase was revised down to +0.2% from +0.5% previously. Spending is up +7.9% in the past year. Public-sector spending climbed +1.9%, the biggest increase since February, while private-sector spending rose +0.3%. Within the private sector, spending on residential projects increased +0.6% and spending on nonresidential projects fell -0.3%. Again, some of these improvements in residential projects may be hurricane related. And speaking of residential construction, home prices are up +12% in the past year but that's down from +13.4% in Q2.

Next out were the ISM numbers. The Institute for Supply Management reported that the index fell to 58.1% in November from 59.1% in October, not as large of a decline as expected. The consensus forecast of estimates was for the index to drop to 57.8%. Any reading above 50 indicates expansion. New orders fell to 59.8% in November from 61.7% in October. The employment index rose to 56.6% from 55%. The price index fell to 74% from 84%. All in all, these were pretty neutral numbers.

Very quickly, retail numbers are pouring in and notable names beating expectations include LTD, GPS, JCP, ANN, TLB, CHS, FDO and GYMB while disappointments include TGT, COST, FD, KSS, JWN, SKS, DG, and TJX. Walmart is getting a lot of attention because of their poor performance out of the gates last year (they didn't discount enough or early enough). They're reporting same-store sales rose +4.3% with estimates for December same-store sales at +2% to 4%. WMT was down on the news today.

Onto the charts to see where all this leaves us.

DOW chart, Weekly

This weekly perspective shows the significance of the rally above the downtrend line from January 2000. Weekly stochastics has now reached up into overbought and while it can stay there it is a heads up to be careful now after the strong rally off the October low. The shorter term chart shows more rally potential but it must continue its rally from here.

DOW chart, 120-min

This 120-min chart shows a parallel up-channel to keep your eye on. If price were to drop below 10800 it would be a signal that a high is probably in. Currently the DOW is fighting a previous uptrend line at its most recent high. A break back above this line, with a rally above 10960, should easily send it over 11K which should be attained before this rally is finished. The top of the current up-channel is near 11,100.

SPX chart, Daily

The trend line along the highs since January 2004 shows upside potential for the current rally to get up near 1280. Some internal Fib projections point to 1272 and there's a Gann number at 1275. But the under-throw below the uptrend line from August 2004 could mean an over-throw of the upper trend line is coming (a common occurrence). That would suggest we might even see as high as 1300. If the SPX is to have an average +1.7% gain in December (as discussed above), that takes us to 1271. That doesn't mean we'll top out there because we could rally above it and pull back to it by the end of the month. But the confluence of numbers in the 1270-1275 means it could end up being tough resistance there.

Nasdaq chart, Daily

The COMP looks bullish by holding above resistance by the trend line across the highs since January 2004. But the internal wave count suggests this one could be topping soon and Fib projections of 1277 (only 10 points higher) and then 2306 are not far away. On a weekly chart a failure to rally above those levels and then a drop back below the line would look like an over-throw and would be longer term bearish. For now, stick with the bulls.

SOX index, Weekly chart

Lots of excitement about the SOX today--a new 1-1/2-yr high! They of course fail to mention that it is still below the high of January 2004 and is still around 75% below its 2000 peak. But SOX is one that gives me a more immediate bearish feeling as compared to the major indices. As shown on this weekly chart, price action over the past 1-1/2 years looks suspiciously like a bear flag to me. The internal choppy price action supports that view. By this chart, resistance is right here and any failure to continue its rally could start to look a lot more bearish. Be careful about being long the semi's.

Time constraints prevent me from continuing last week's discussion on the pension benefit fiasco that's building. I'll provide some more information in next week's report.

There were a lot of sales numbers coming out of the auto industry today and I'll just reprint what Jonathan posted during the day on the Market Monitor. In a nutshell, Nissan, Volvo and GM sales were down while Toyota, Mazda, Honda, Suzuki and Hyundai sales were up. GM's sales were almost universally reported lower but I guess that made investors feel better about the stock--it was up +3.4% today and one of the leading DOW components. This follows a -4.8% drubbing it took yesterday to finish the month of November down -19%. A little house cleaning on that one and I guess it was a steal today, especially after it reported a less than expected -11% decline in November sales (-13% expected). Ford said they expect things to improve from its -14.8% decline in November sales. That could be like saying the savings rate, as reported above, improved this month (from -0.8% to -0.7%). I could report that little improvement, which of course is still negative and a bad number, as a +12.5% improvement in the savings rate. That's how numbers can be so easily distorted to obfuscate the truth. At any rate, here are the raw numbers reported:

NISSAN NOV. U.S. CAR SALES DOWN 5.2% AT 37,994
NISSAN NOV. U.S. TRUCK SALES DOWN 10.2% AT 39,218
NISSAN NOV. U.S. ALTIMA SALES DOWN 11% AT 15,154
NISSAN NOV. U.S. PATHFINDER SALES DOWN 7.5% AT 5,958
VOLVO NOV. U.S. SALES 8,076 UNITS VS 10,889 UNITS
FORD EXPECTS DEC. SALES TO 'SHOW FURTHER IMPROVEMENT'
FORD TO BUILD 885K VEHICLES IN N.A. PLANTS IN Q1 2006
FORD TO BUILD 790K VEHICLES IN N.A. PLANTS IN Q4 2005
TOYOTA NOV. U.S. SALES RISE 5.6% FROM A YEAR AGO
MAZDA NOV. N.A. TOTAL SALES UP 1%
GM NOV. U.S. TRUCK SALES DOWN 16% VS YR AGO
GM NOV. U.S. CAR SALES DOWN 3% VS YR AGO
GM NOV. U.S. SALES DOWN 11% VS YR AGO
GM NOV. U.S. CADILLAC BRAND SALES DOWN 24.8% VS YR AGO
GM NOV. U.S. BUICK BRAND SALES DOWN 5.8% VS YR AGO
GM NOV. U.S. CHEVROLET BRAND SALES DOWN 13.4% VS YR AGO
GM NOV. U.S. OLDSMOBILE BRAND SALES DOWN 90.8% VS YR AGO
GM NOV. U.S. HUMMER BRAND SALES UP 113.6% VS YR AGO
GM NOV. U.S. PONTIAC BRAND SALES UP 10.7% VS YR AGO
GM NOV. U.S. GMC BRAND SALES DOWN 27.4% VS YR AGO
GM NOV. U.S. SATURN BRAND SALES UP 12% VS YR AGO
GM NOV. U.S. SAAB BRAND SALES DOWN 18.1% VS YR AGO
AMERICAN HONDA NOV. U.S. TOTAL SALES 105,860 VS 98,075
AMERICAN HONDA NOV. U.S. TOTAL SALES UP 6.4% VS YR AGO
AMERICAN HONDA NOV. U.S. TOTAL CAR SALES UP 3.9%
AMERICAN HONDA NOV. U.S. TOTAL TRUCK SALES UP 9.6%
AMERICAN HONDA NOV. U.S. ACCORD SALES DOWN 3.4%
AMERICAN HONDA NOV. U.S. CIVIC SALES UP 18%
SUZUKI NOV. U.S. TOTAL VEHICLE SALES 5,707 VS 4,827
SUZUKI NOV. U.S. CAR SALES 3,724 VS 3,107
SUZUKI NOV. U.S. CAR SALES UP 15% VS YR AGO
SUZUKI NOV. U.S. TRUCK SALES UP 11% VS YR AGO
HYUNDAI NOV. U.S. TOTAL SALES UP 12.5% VS YR AGO
HYUNDAI NOV. U.S. SONATA SALES UP 116.8% VS YR AGO
HYUNDAI NOV. U.S. SONATA SALES 14,216 VS 6,557

BKX banking index, Daily chart

The short term charts support a further bounce in the banks but the daily chart says a top is in. This was a rally that went too far too fast and as compared to the broader indices, this one looks bearish to me. If the DOW and SPX are able to rally to a new high but the banks do not, I would consider that a major intermarket bearish divergence. So watch for that.

U.S. Home Construction Index chart, DJUSHB, Daily

The bounce from the October low in the housing index looks bearish. The 200-dma is currently providing support and then the 50-dma is just below at 897. The weekly chart looks like it's rolling over which supports my bearish view on this index. In addition to the 50% retracement offering resistance, the upward correction came close to achieving two equal legs up in its bounce (976.30 and the high was 970.28). If it does press a little higher, watch that 976 level for potential resistance.

Oil chart, December contract, Daily

Oil continues to stay trapped in a relatively tight parallel down-channel and until it can break out (needs to get above $60 here) the trend is down. It's currently stalling at its 200-dma. The 50-dma is coming down hard now so any rally to that level will likely offer up resistance. In the energy arena, natural gas stocks were reported today as down 49 bcf and price closed up $0.45 at $13.00. It's currently stalled under its 50-dma so it will be interesting to see how price reacts from here. Down please!

Oil Index chart, Daily

The oil index is essentially chopping sideways between its 50 and 100-dma's. If it continues to chop sideways into a coil, it will look bearish. With a sharp drop followed by this consolidation we can expect another drop with the 2nd leg down equal to or greater than the first leg. That would be a clear break of its longer term uptrend line. That's the way I'm currently leaning on this index.

Transportation Index chart, TRAN, Weekly

The Trannies had a heck of a rally from the October low--to an all-time high. It's one of the reasons why it's important that the DOW at least rally to a new annual high (forget about an all-time high). The Dow theorists are having a field day with the bearish divergence created between the TRAN and the DOW. The TRAN looks like it should rally a little higher though and the DOW might follow it this time.

U.S. Dollar chart, Daily

After hitting a previously broken uptrend line the dollar has been consolidating on top of previous resistance just under $91. The consolidation continues to look bullish and we should see a rally up to $93 soon. We could then get a deeper pullback that sets up another strong rally. I see no change to the forecast for the U.S. dollar to reach up into the upper 90's by spring 2006. Then things could start to get ugly for the dollar again.

Gold chart, August contract, Daily

Just another symbol and just another buying spike. Too much too fast again. Longer term gold bulls don't want to see this kind of rally. This is more indicative of a blow-off parabolic move and they tend to correct hard the other way once everyone has piled in (and shorts bailed out). Once the music stops the new bulls get trapped in the southbound cattle cars wailing all the way. Will gold crash and burn? Who knows but at this point I consider it risky to be long gold. At a minimum I wouldn't be surprised to see a correction kick off that takes gold down to $460.

Results of today's economic reports and tomorrow's reports include the following:

In today's sector action, no surprise, all were green today. Leaders to the upside were the SOX, gold and silver, energy, airlines and most technology sectors. Laggards today included the utilities, retail, financials, pharmaceuticals and biotechs.

It's rare that we have complete agreement between sectors and indices and today is no different. The broader indices look like a rally dead ahead but the SOX looks like it could be topping here. The banks look like they've topped. The COMP looks like it's very close to a possible high. SPX could be within 10 points of major resistance which puts the DOW just over 11K. Will the fund managers hit the sell button at 11K and lock in their +5% year (and lock in their huge bonuses)? What would you do if you were a fund manager with those kinds of gains and potentially little upside potential? I think I'd lock in gains, especially in the big caps. The small caps might continue to benefit but the risk there is that they're harder to get out of if the selling begins.

I'd stick with the bulls for now but only if the rally can continue right away. I see the potential for a little more pullback tomorrow morning but it will then need to get turned around and rally to a new high above today's. For futures traders I would not want to see today's gaps filled--that would be too great a retracement and would indicate to me that a larger pullback is still in progress and a December rally will have to wait (or more bearishly, that a high is in for the year). If a rally does not materialize, all the new money that has made it into the market recently could be looking for the exit in a hurry. That's how no-bid situations develop and it likely would not be pretty. Those expecting Santa to show up this month may be positioning themselves for it, placing some yummy cookies on the table for him. If he starts threatening a no-show people might be quick to grab their cookies and run for the door. Be careful with your positions and don't let them go against you. Good luck and I'll call 'em as I see 'em on the Futures Monitor. See you there.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
CMI None None
FMC    
KMG    
KMI    
RIO    
SUN    

New Calls

Cummins Inc. - CMI - close: 91.32 chg: +2.32 stop: 87.75

Company Description:
Cummins Inc., a global power leader, is a corporation of complementary business units that design, manufacture, distribute and service engines and related technologies, including fuel systems, controls, air handling, filtration, emission solutions and electrical power generation systems. Headquartered in Columbus, Indiana, (USA) Cummins serves customers in more than 160 countries through its network of 550 Company-owned and independent distributor facilities and more than 5,000 dealer locations. With more than 28,000 employees worldwide, Cummins reported sales of $8.4 billion in 2004. (source: company press release or website)

Why We Like It:
Cyclical stocks have been pretty strong this fall and CMI looks like a tempting bullish candidate given today's breakout over resistance at $90.00. Looking at CMI's daily chart you can quickly see that shares rebounded from its exponential 200-dma in October. The rally stalled under the $90 level in November and shares consolidated sideways for the entire month. Now CMI is rested and poised to hit new highs. The Point & Figure chart has produced a new buy signal that now points to a $102 target. We would suggest new call plays with CMI above the $90 level. Our six-week target is the $97-100 range. Readers can choose to go long calls here or look for a dip back to the $90 level. We'll put our stop under the bottom of its recent trading range. One of the biggest risk here is the CYC cyclical index is very overbought with a near non-stop rally from its October lows and is nearing resistance at its late 2004 highs near 790. The second risk here is a downgrade as the median analyst target is currently at $90.

Suggested Options:
We are going to suggest the January calls. We do not plan on holding past CMI's late January earnings report. For our new readers, please note, we are not suggesting you buy all of the calls listed below. This is a quick reference for the calls we would consider buying.

BUY CALL JAN 85 CMI-AQ open interest= 227 current ask $8.30
BUY CALL JAN 90 CMI-AR open interest= 296 current ask $4.70
BUY CALL JAN 95 CMI-AS open interest=1274 current ask $2.40

Picked on December 01 at $ 91.32
Change since picked: + 0.00
Earnings Date 01/30/06 (unconfirmed)
Average Daily Volume = 611 thousand

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FMC Corp. - FMC - close: 55.04 chg: +1.87 stop: 51.95

Company Description:
FMC Corporation is a diversified chemical company serving agricultural, industrial and consumer markets globally for more than a century with innovative solutions, applications and quality products. The company employs approximately 5,000 people throughout the world and operates its businesses in three segments: Agricultural Products, Specialty Chemicals and Industrial Chemicals. (source: company press release or website)

Why We Like It:
FMC is a bullish candidate based on its technical breakout. The stock has been declining for the last four months in a descending channel. On November 23rd the stock broke out to the upside on an intraday basis but failed to push past the simple 200-dma. The breakout was fueled by an analyst upgrade who said the stock was undervalued and its weakness was a buying opportunity. The analysts might be right. As a chemical company oil prices are a significant expense for them. While oil remains near historic highs crude has been coming down from its peak the last several weeks. Therefore investor expectations for the company's earnings may be set too low. Today's rally in FMC was fueled by stronger than average volume and the stock pushed past resistance at the 200-dma and the $55.00 mark. The Point & Figure chart has reversed its sell signal into a new buy signal that points to a $68 target. We would suggest bullish positions with the stock above $54. More conservative traders may want to wait for more confirmation and look for a move over its 100-dma before initiating positions. We'll stick our stop loss at $51.95, since the top of the gap (near 52.00) should act as support. Our six-week target is the $59.85-60.00 range.

Suggested Options:
We are suggesting the January calls.

BUY CALL JAN 50 FMC-AJ open interest= 6 current ask $6.00
BUY CALL JAN 55 FMC-AK open interest=530 current ask $2.55
BUY CALL JAN 60 FMC-AL open interest= 73 current ask $0.75


Picked on December 01 at $ 55.04
Change since picked: + 0.00
Earnings Date 02/02/06 (unconfirmed)
Average Daily Volume = 270 thousand

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Kerr Mcgee - KMG - close: 89.59 chg: +3.14 stop: 84.99

Company Description:
Kerr-McGee is an Oklahoma City-based oil and natural gas exploration and production company focused in the U.S. onshore, deepwater Gulf of Mexico and select proven world-class hydrocarbon basins. (source: company press release or website)

Why We Like It:
We're going to try again with the energy stocks. The OIX oil index and XNG natural gas index both look poised for a breakout from their two-month consolidation. Meanwhile the OSX oil services index is trading near new all-time highs. KMG is a natural gas play and natural gas futures have bounced strongly the last couple of days suggesting the commodity have put in its bottom for the fourth quarter. Shares of KMG have been consolidating between $80 and $90 for the last two months but the last three weeks have seen a steady trend of higher lows. It's daily chart has the stock under resistance at the $90.00 mark and poised for a bullish breakout. Meanwhile the P&F chart has already broken out above resistance and points to a $106 price target. We are going to suggest a trigger at $90.26 to open positions. If triggered we'll target a rise into the $98.50-100.00 range by mid January.

Suggested Options:
We do not want to hold over KMG's late January earnings report so we're suggesting the January calls.

BUY CALL JAN 85 KMG-AQ open interest=1109 current ask $7.20
BUY CALL JAN 90 KMG-AR open interest=1337 current ask $4.10
BUY CALL JAN 95 KMG-AS open interest=1743 current ask $2.00

Picked on December xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 01/25/06 (unconfirmed)
Average Daily Volume = 1.8 million

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Kinder Morgan - KMI - close: 92.24 chg: +1.64 stop: 87.45

Company Description:
Kinder Morgan, Inc. is a leading North American energy transportation and distribution company with approximately 40,000 miles of natural gas and petroleum transportation pipelines, 1.1 million natural gas distribution customers and 150 terminals. Kinder Morgan, Inc. owns the general partner interest of Kinder Morgan Energy Partners, L.P., one of the largest publicly traded pipeline limited partnerships in the United States. Combined, the two companies have an enterprise value of more than $35 billion. (source: company press release or website)

Why We Like It:
We are going to double up on the natural gas stocks. If you didn't like the KMG play then consider KMI as an alternative candidate. KMI's two-month consolidation looks a bit more bullish than KMG's and the stock has already broken out above technical resistance at its 50-dma and 100-dma. The P&F chart for KMI points to a $104 price target. Aggressive traders could open positions right here. We want to see some confirmation. Our strategy is to use a trigger at $92.75 to open call positions. If triggered we'll target a rally into the $98.50-100.00 range before KMI's mid January earnings report.

Suggested Options:
We are suggesting the January calls.

BUY CALL JAN 90 KMI-AR open interest=1811 current ask $4.60
BUY CALL JAN 95 KMI-AS open interest=1625 current ask $1.95

Picked on December xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 01/18/06 (unconfirmed)
Average Daily Volume = 749 thousand

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Companhia Vale de Rio - RIO - close: 44.94 chg: +1.58 stop: 41.85

Company Description:
Companhia Vale do Rio Doce (CVRD) is the largest metals & mining company in the Americas and one of the largest in the global metals & mining industry, with a market capitalization of approximately US$ 45 billion. CVRD shares are traded on the New York Stock Exchange - NYSE (RIO and RIOPR), on the BOVESPA (Vale3 and Vale5) and on Latibex (XVALP and XVALO). The ADR depositary agent is JP Morgan Chase. CVRD is the world's largest producer and exporter of iron ore and pellets and one of the leading producers of manganese and ferro- alloys. It also produces copper, bauxite, kaolin, potash, alumina and aluminum. CVRD is the largest logistics service provider in Brazil, where it owns and operates a series of railroads and ports. It also holds stakes in steel companies in Brazil and abroad. (source: company press release or website)

Why We Like It:
Metal and mining stocks have been one of the bright spots in the market. Following some positive analyst comments for the sector we think the group still has more gains ahead of it. Shares of RIO have rallied up to resistance at the $45.00 level and look poised to break out. We are going to suggest a trigger at $45.45, above last week's high (45.30). If triggered our six-week target will be the $49.50-50.00 range.

Suggested Options:
We are suggesting the January calls but traders might want to consider March calls and exit ahead of RIO's March earnings report.

BUY CALL JAN 40 RIO-AH open interest=4106 current ask $5.80
BUY CALL JAN 45 RIO-AI open interest=2763 current ask $2.35
BUY CALL JAN 50 RIO-AJ open interest= 872 current ask $0.65

Picked on December xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 03/14/06 (unconfirmed)
Average Daily Volume = 2.7 million

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Sunoco Inc. - SUN - close: 80.69 chg: +3.49 stop: 76.45

Company Description:
Sunoco, Inc., headquartered in Philadelphia, PA, is a leading manufacturer and marketer of petroleum and petrochemical products. With 900,000 barrels per day of refining capacity, approximately 4,800 retail sites selling gasoline and convenience items, over 4,300 miles of crude oil and refined product owned and operated pipelines and 38 product terminals, Sunoco is one of the largest independent refiner-marketers in the United States. Sunoco is a significant manufacturer of petrochemicals with annual sales of approximately five billion pounds, largely chemical intermediates used in the fibers, resins and specialties markets. Utilizing a unique, patented technology, Sunoco also currently has the capacity to manufacture over 2.5 million tons annually of high-quality metallurgical-grade coke for use in the steel industry. (source: company press release or website)

Why We Like It:
If we're going to consider some energy stocks as bullish candidates we can't forget the refiners. SUN has rebounded strongly from its October lows off the 100-dma. Currently shares are challenging resistance near its all-time highs. The P&F chart for SUN points to a $93 target. We are going to suggest a trigger at $81.75, above its September high of $81.49. If triggered we'll target a run into the $89.90-90.00 range over the next six weeks.

Suggested Options:
We're going to suggest the January options. Be sure to double-check your option symbol. There are some odd symbols out there due to SUN's 2-for-1 split back in August.

BUY CALL JAN 80 SUN-AP open interest=2469 current ask $5.10
BUY CALL JAN 85 SUN-AQ open interest=2248 current ask $2.80
BUY CALL JAN 90 SUN-AA open interest= 972 current ask $1.45

Picked on December xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 02/02/06 (unconfirmed)
Average Daily Volume = 2.8 million
 

New Puts

None today.
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Dominion Res. - D - close: 76.31 chg: +0.36 stop: 74.75

D managed a bounce from its intraday low above the simple 200-dma but the stock seemed to lag behind the major indices and some of its peers. Readers looking for an entry point might want to wait for a move over $77.50 or the $78 level before considering new calls. The 50-dma near $78.40 is the next significant level of resistance so more conservative traders might feel better waiting for a breakout over the $50-dma before considering new longs.

Picked on November 27 at $ 78.24
Change since picked: - 1.93
Earnings Date 02/02/06 (unconfirmed)
Average Daily Volume = 1.8 million

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Hovnanian - HOV - close: 50.09 change: +0.25 stop: 47.45

Homebuilders rebounded today but shares of HOV spent the session consolidating sideways. A rise from here over 50.50 could be used as a new bullish entry point now that the major indices are showing strength again. The $48 level remains short-term support. Our target is the $54.50-55.00 range.

Picked on November 21 at $ 49.25
Change since picked: + 0.84
Earnings Date 12/07/05 (unconfirmed)
Average Daily Volume = 1.5 million

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NovAtel Inc. - NGPS - close: 29.86 chg: -0.30 stop: 27.75

Uh-oh. NGPS did not participate in the market's rally today. Instead shares closed under round-number, psychological support at the $30 level today. That's bad news for the bulls. More conservative traders may want to exit early right here. You can always re-enter the play later. We might consider exiting early if NGPS doesn't rebound soon. Our target is the $35.00-36.00 range by year-end.

Picked on November 21 at $ 30.45
Change since picked: - 0.54
Earnings Date 01/26/06 (unconfirmed)
Average Daily Volume = 292 thousand

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Polaris Ind. - PII - close: 52.90 change: +3.46 stop: 47.99 *new*

Positive news for retail sales and consumer spending today helped lift the markets and propel shares of PII through resistance at the $50 level and its 100-dma. Volume came in almost twice the average on today's breakout for PII. Our target is the $54.00-55.00 range. We are raising our stop loss to $47.99.

Picked on November 21 at $ 48.47
Change since picked: + 4.43
Earnings Date 01/12/06 (unconfirmed)
Average Daily Volume = 467 thousand

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Rockwell Autom. - ROK - cls: 59.42 chg: +2.99 stop: 55.75 *new*

Wow! The tables have turned for shares of ROK. The stock has rebounded very sharply today with volume coming in more than twice the average today. This is a new seven-month high and ROK is nearing what could be resistance at the $60.00 level. More conservative traders may want to plan on an exit near the $60 mark. Currently our target is the $61.00-62.00 range under its 52-week highs. We're going to raise the stop loss to $55.75 just under Tuesday's lows.

Picked on November 03 at $ 55.90
Change since picked: + 3.52
Earnings Date 11/03/05 (confirmed)
Average Daily Volume = 804 thousand

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Tractor Supply - TSCO - cls: 54.28 chg: +0.42 stop: 49.95

TSCO continues to climb and cracked over the $54 level today. Volume was again very strong. Our six-week target is the $57-58 range.

Picked on November 30 at $ 52.75
Change since picked: + 1.53
Earnings Date 01/18/06 (unconfirmed)
Average Daily Volume = 428 thousand

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Walter Inds. - WLT - close: 51.33 change: +0.98 stop: 45.95

The market strength has helped fuel the rebound in WLT from the $50 region. This looks like a new bullish entry point. The P&F chart looks very bullish with a $67 target. We believe shares can run into the $57-58 range before year's end.

Picked on November 20 at $ 51.50
Change since picked: - 0.17
Earnings Date 10/26/05 (confirmed)
Average Daily Volume = 927 thousand
 

Put Updates

Netflix - NFLX - close: 27.11 chg: -0.43 stop: 28.55

The action in NFLX was very interesting today. The market's rally failed to cause much fear in the high amount of shorts in the stock. NFLX's lack of participation in the rally certainly suggest more weakness ahead. Currently our strategy is to catch any breakdown with a trigger to buy puts at $25.99. If triggered we'll target a drop to the $22.50 mark. Alternatively, traders might want to consider buying calls if NFLX continues to bounce from its channel and passes the $29.50 or $30.00 levels.

Picked on November xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 01/18/06 (unconfirmed)
Average Daily Volume = 1.4 million
 

Strangle Updates

(What is a strangle? It's when a trader buys an out-of-the-money (OTM) call and an OTM put on the same stock. The strategy is neutral. You do not care what direction the stock moves as long as the move is big enough to make your investment profitable.)

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AmerisourceBergen - ABC - cls: 79.41 chg: -0.94 stop: n/a

ABC reaffirmed its earnings guidance today. The company outlook wasn't quite as rosy as investors would like or traders just used the news to do some profit taking. Whatever the case ABC was moving the wrong direction today. The $78 level should be short-term support. We are not suggesting new strangle positions at this time. Our current strangle involves the December $80 calls (ABC-LP) and the December $70 puts (ABC-XN). Our estimated cost was $2.80. Our current target is for a rise to $5.00 in the strangle.

Picked on October 16 at $ 74.81
Change since picked: + 4.65
Earnings Date 11/03/05 (confirmed)
Average Daily Volume = 900 thousand

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Amer. Eagle Out. - AEOS - cls: 20.82 chg: -1.94 stop: n/a

We reported last night that AEOS issued an earnings warning and the stock was trading lower and poised to gap down. Gap down it did and the stock lost 8.5% on very big volume. The stock is nearing its September lows. Watch for an oversold bounce. We are not suggesting new strangle positions at this time. The current strangle has an estimated cost of $2.35 with the January $27.50 calls (AQU-AY) and the January $22.50 puts (AQU-MX). We are targeting a rise to $4.70. FYI: currently the January $22.50 puts are trading at $2.40bid/$2.50ask.

Picked on November 13 at $ 25.47
Change since picked: - 4.65
Earnings Date 11/15/05 (confirmed)
Average Daily Volume = 3.6 million

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Abercrombie&Fitch - ANF - close: 61.74 chg: +0.42 stop: n/a

ANF produced some volatility today after reporting same-store sales growth of +23%, which was above analyst estimates. The stock dipped intraday to its simple 200-dma before rebounding sharply. We are not suggesting new strangle positions at this time. The options in our strangle are the January $65 calls (ANF-AM) and the January $55 puts (ANF-MK). Our estimated cost was $5.15. We're looking for a rise to $8.50.

Picked on November 13 at $ 59.67
Change since picked: + 2.94
Earnings Date 11/15/05 (confirmed)
Average Daily Volume = 2.7 million

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Chicago Merc. Exchg. - CME - cls: 368.50 chg: +14.35 stop: n/a

CME continues to trade in very volatile fashion. Today the stock produced a 4.05% rebound. CME reported its version of same-store sales with a press release stating that November's trading volume for its daily derivatives rose 27 percent from a year ago. We are not suggesting new strangle positions at this time. Our current play involves the January $400 calls (CMJ-AK) and the January $350 puts (CMJ-MA). Our estimated cost was $26.70. We're aiming for a rise to $40.00 in the strangle before January options expire.

Picked on November 20 at $375.90
Change since picked: - 7.40
Earnings Date 01/24/06 (unconfirmed)
Average Daily Volume = 879 thousand

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D.R.Horton - DHI - close: 36.01 chg: +0.57 stop: n/a

DHI bounced higher along with the rest of the homebuilders but the stock remains inside its short-term consolidation pattern. We are not suggesting new strangles at this time. Our current play involves the January $35 calls (DHI-AG) and the January $30 puts (DHI-MF). Our estimated cost was $3.15. We're aiming for a rise to $6.00.

Picked on November 13 at $ 32.56
Change since picked: + 3.45
Earnings Date 11/16/05 (confirmed)
Average Daily Volume = 3.2 million

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Four Seasons - FS - close: 50.22 chg: +0.32 stop: n/a

FS continues to trade sideways in its trading range near the $50.00 level. The 32-cent bounce doesn't look like much of a rally compared to the rest of the market. If we don't see a breakout move one way or the other pretty soon (a few days) we'll exit early to avoid further losses. We are not suggesting new strangles at this time. The options in our strangle were the January $60 calls (FS-AL) and the January $50 puts (FS-MJ). Our estimated cost was about $2.60. We're aiming for a rise to $5.00 or more.

Picked on November 08 at $ 55.37
Change since picked: - 4.43
Earnings Date 11/10/05 (confirmed)
Average Daily Volume = 319 thousand

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Lear Corp - LEA - close: 27.85 chg: +0.01 stop: n/a

Shares of GM managed a 3% bounce today despite declining car sales figures for November. Meanwhile LEA failed to move at all, which is bearish considering the market-wide rally. We are no longer suggesting new strangle positions. The options in our strangle are the January $35 calls (LEA-AG) and the January $25 puts (LEA-ME). We are targeting a rise to $3.20 or more.

Picked on November 06 at $ 30.24
Change since picked: - 2.39
Earnings Date 10/26/05 (confirmed)
Average Daily Volume = 1.8 million

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Loews - LTR - close: 97.40 change: +0.82 close: n/a

LTR managed a rebound given the market strength today. We don't see any changes from our previous update. We're not suggesting new plays. The options in our strategy are the December $95 calls (LTR-LS) and the December $85 puts (LTR-XQ). Our estimated cost is about $3.05. We plan to exit if our strangle rises to $5.00 or if shares of LTR hit 99.90.

Picked on October 23 at $ 89.94
Change since picked: + 7.61
Earnings Date 10/27/05 (confirmed)
Average Daily Volume = 602 thousand

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Verifone Holdings - PAY - cls: 23.25 chg: +0.35 stop: n/a

PAY continued to bounce today and appeared to breakout above its three-week trend of lower highs. However, the real move should be happening tomorrow. After the closing bell today PAY reported earnings and bested estimates by 3 cents a share. The stock was trading near $24 in after hours markets. We're not suggesting new positions. Our current strangle involves the January $22.50 calls (PAY-AX) and the January $17.50 puts (PAY-MW). Our estimated cost was $2.60 and we're aiming for a rise to $4.50 or more.

Picked on October 12 at $ 19.98
Change since picked: + 3.27
Earnings Date 12/01/05 (confirmed)
Average Daily Volume = 259 thousand

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Protein Design Labs - PDLI - cls: 27.75 chg: -0.10 stop: n/a

The lack of movement in PDLI is troubling. The stock needs to breakout out of this short-term trading range pretty quickly. We are not suggesting new strangle positions. The options in our strangle are the December $30 calls (PQI-LF) and the December $25 puts (PQI-XE). Our estimated cost was at $1.80. We'll plan to sell if either side rises to $3.25.

Picked on October 30 at $ 27.70
Change since picked: + 0.05
Earnings Date 11/01/05 (confirmed)
Average Daily Volume = 1.8 million

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Spectrum Brands - SPC - close: 18.25 change: +0.25 stop: n/a

The market's strength fueled a minor bounce in SPC today. We don't see any changes from our previous updates. We are not suggesting new strangle positions at this time. Our estimated cost for this strangle was $1.25. The options in our suggested strangle are the December $22.50 calls (SPC-LX) and the December $17.50 puts (SPC-XW). We are aiming for a rise to $2.50 or more.

Picked on November 08 at $ 20.63
Change since picked: - 2.19
Earnings Date 11/10/05 (confirmed)
Average Daily Volume = 576 thousand

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Questar Corp. - STR - close: 75.99 chg: +1.43 stop: n/a

Natural gas futures turned in a pretty strong session rising more than 3%. This in turn fueled a bounce in STR, which added 1.9%. STR may very well reverse course and breakout higher. What's important is that STR needs to pick a direction and move. If shares continue to churn sideways for another couple of weeks it will kill our strangle position. We are no longer suggesting strangle positions in the stock. Our strangle involves the January $80 calls (STR-AP) and the January $70 puts (STR-MN). Our estimated cost was $5.10 and we're aiming for a rise to $9.50 or more.

Picked on November 20 at $ 76.25
Change since picked: - 0.26
Earnings Date 01/26/05 (unconfirmed)
Average Daily Volume = 716 thousand

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Texas Ind. - TXI - close: 52.47 chg: +2.59 stop: n/a

The market rally propelled TXI up and out from its two-month sideways consolidation. The breakout also pushed TXI above its simple 50-dma. We are not suggesting new strangle positions. The options in our strangle are the January $55 calls (TXI-AK) and the January $45 puts (TXI-MI). Our estimated cost is $2.70. We're looking for a rise to $5.00 or more. TXI is due to report earnings around December 15th.

Picked on November 27 at $ 49.57
Change since picked: + 2.90
Earnings Date 12/15/05 (unconfirmed)
Average Daily Volume = 354 thousand

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Valero Energy - VLO - close: 101.10 chg: +4.90 stop: n/a

Oil stocks turned in a solid performance and shares of VLO out performed its peers with a 5% rebound back above the $100 level. VLO needs to breakout of this $95-102.50 trading range for our strangle to grow. We are not suggesting new strangle plays any longer. Our current play involves the January $110 calls (VLO-AB) and the January $90 puts (VLO-MR). Our estimated cost was $5.85 and we're aiming for a rise to $9.50. VLO is due to split 2-for-1 on December 16th so our post-split target will be a rise to $4.75.

Picked on November 21 at $101.00
Change since picked: + 0.10
Earnings Date 01/30/06 (unconfirmed)
Average Daily Volume = 10.7 million
 

Dropped Calls

Phelps Dodge - PD - cls: 142.53 chg: +6.86 stop: 124.99

Target achieved. Actually our target has been surpassed. PD was upgraded before the opening bell and the stock spiked higher over the $140 level very quickly. Our target was the $139.90-140.00 range.

Picked on November 18 at $131.25
Change since picked: +11.28
Earnings Date 01/26/06 (unconfirmed)
Average Daily Volume = 2.7 million
 

Dropped Puts

None
 

Dropped Strangles

Hutchinson Tech. - HTCH - cls: 28.80 chg: +0.21 stop: n/a

Today's market rally helped push HTCH toward resistance near the $30.00 level. While the stock did not hold all of its gains the intraday strength was enough to push the January $30 calls (UTQ-AF) to our adjusted target at $1.65. A couple of weeks ago when HTCH failed to produce much of a post-earnings move we adjusted our target for the strangle from $3.00 to breakeven at $1.65. More aggressive players may want to think about leaving the play open since there are several weeks left before January options expire. Keep in mind that HTCH looks short-term overbought and just produced a failed rally at resistance so the stock will probably pull back to its 10-dma before continuing higher.

Picked on October 26 at $ 24.89
Change since picked: + 3.92
Earnings Date 11/01/05 (confirmed)
Average Daily Volume = 666 thousand
 

DISCLAIMER

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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