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Newsletter

Daily Newsletter, Tuesday, 12/13/2005

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Table of Contents

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

Market Wrap

Fed Takes First Step

The Fed Open Market Committee took the first step today to end its 18-month, rate hike cycle. They raised rates another quarter point as expected but the big news was a substantial toning down of the position statement. On the surface the markets reacted positively but the gains were mostly on the back of one major buy program. Nonetheless it was a positive day as we expected it to be. So far the game plan from Sunday is right on track.

Dow Chart - 30 min

Nasdaq Chart - 60 min

SPX Chart - 30 min

The Fed meeting was the big news of the day although there were other market moving events. The Fed completely reworded their statement even more so than most analysts had expected. Gone was the language referencing the Fed's accommodative stance. Translation, if they are no longer accommodative then they are already in neutral territory. Gone was the measured pace phrase although they did keep the word measured to keep the bond groupies from panicking. This is the key phrase of the new statement:

"The Committee judges that some further measured policy firming is likely to be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance. In any event, the Committee will respond to changes in economic prospects as needed to foster these objectives."

The measured pace language was replaced by "furthered measured policy firming is likely" but they added this key phrase, "as needed." As needed means the Fed does not have to raise in the future as the measured pace language implied. The Fed also kept the market friendly portion of the past statements regarding the health of the economy. They said the expansion appears solid and core inflation has remained low with expectations contained. They did acknowledge that elevated energy prices could have the potential to add to inflation pressures.

Before the announcement the Fed Funds Futures were predicting a 70% chance of hikes through the March meeting with a 5% top by June. After the announcement there was a new shift in that outlook to as little as one and done to 4.50% in January or two and through to 4.75% in March. The idea that Bernanke would have to push the rate to 5% after Greenspan leaves to achieve credibility as an inflation fighter has faded. The market should take this new posture and celebrate as the year draws to a close. Since there was no pre meeting rally the news was not priced into the market ahead of time.

The positive comments about the economy should be encouraging to the market although it is just boilerplate for the announcement. What are they going to say? The economy stinks and rising energy prices are going to push it off a cliff? No, they want to remain a cheerleader for the economy and equities to justify their hikes. Still, the herd sees the statement and assumes it is gospel.

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Other economic news included the Retail Sales for November, which posted a +0.3% gain. This was lower than expected and was bolstered substantially by a +2.6% jump in auto sales. Without autos the number came in for a loss of -0.3%. The next biggest contributor was building materials dealers with a gain of +1.9% pushed higher by hurricane rebuilding from Texas to Florida. Gasoline sales posted their biggest drop since April 2003 as gasoline prices dropped back to around the $2 level. As a component gasoline stations fell to +16.8% over last November compared to +27.6% in October. Overall Retail Sales in November were lackluster and it is thought the culprit is the constant warning about rising energy prices.

Business Inventories rose only +0.3% in October and slower than analysts had expected. Business sales rose +0.8% in October and only slightly more than the +0.7% rise in September. The inventory to sales ratio remains at the record all time low of 1.25. Most analysts feel the economy is growing steadily and CapEx spending is rising but it is not being shown in the Business Inventory numbers. This suggests continued caution is warranted. On the flip side the low inventory to sales ratio could result in a strong build cycle if sales suddenly rose when the Fed does halt its rate hike cycle.

The Job Openings Labor Turnover Survey (JOLTS) released today showed a drop in those leaving their jobs for any reason across all industries and governments. The separations rate fell to 3.1% from 3.6% in September. The higher September rate was driven by the hurricane job losses. Job openings rose +2.9% and the highest since 2001. 3.57 million positions were listed as available. The largest gain in positions came from the professional/business sector at 886,000, up from 725,000 in September. Ironically hiring in the sector fell to 770,000 down from 925,000 in September. The jobs are there but employers are either being more selective or there is a shortage of qualified workers.

There was plenty of stock news today as we waited for the Fed announcement. Best Buy (BBY) was knocked for a -12% loss from $50 to $44 after posting earnings that missed street estimates. Volume was huge for BBY at 38 million shares and analysts wasted no time in downgrading the retailer. BBY said the main reason for the earnings miss was due to added expenses for new services. The CEO, Brad Anderson, said BBY has been adding personal shoppers, business experts and home theater installers so it could focus on its most profitable customers. He said the current spending for this conversion was unsustainable and would decline as the effort matured. BBY reported 28 cents compared to analyst's estimates of 30 cents. Sales were up +10% to $7.3 billion. Offsetting this sales gain was a +22% jump in sales and administrative expenses as the stores were upgraded to the current sales model. BBY opened 154 of these new "segmented" stores in Q3.

Hewlett Packard (HPQ) told analysts on Tuesday that earnings would be higher than current analyst estimates but revenue could disappoint. HPQ has been the best performing Dow stock in 2005 with a nearly +40% gain. It lost -3% on the revenue news. HP told analysts again that they were not planning on spinning off any segments. They have been pressured to spin off the PC division due to low margins and stiff competition. HP expects revenue to be in the $89.5-$91 billion range for the year. Analyst's estimates were $90.85 billion. The drop in HPQ carried over into another Dow component, IBM, which lost -2.25 and is down nearly -$7 in the last four days.

Lehman beat the street with a +41% jump in profit to lead off the parade of broker earnings due out this week. Lehman saw a +28% jump in revenue and profits of $823 million for the quarter or +$2.76 per share. Analysts had expected earnings of +$2.64. Despite the news LEH opened lower after they said investment underwriting was less active and capital markets revenue was down -6% in the quarter. The dip was short lived and LEH finished positive for the day.

Overstock.com fell -$1.72 or -4.48% to $36.64 after Crammer mentioned another downgrade on CNBC. The shorts smell blood again and the pop to $42 last week is quickly eroding as the holiday retail bounce for everyone begins to unravel on low sales numbers.

Oil took center stage once again as weather forecasters began predicting a 100-year winter. Yes, some forecasters are now saying this could be the coldest winter since the 1800s. A new front is headed south from Canada into the Midwest and is expected to cover two thirds of the U.S. by the weekend. Heating levels from last week's cold front rose to more than 30% above normal. Oil rose to $61.95 and a five-week high on expectations that heating oil demand would rocket higher. Natural gas rose to $15.78 intraday and a new historic high. Nobody is backing off their positions and the rallies are being sold with far less conviction.

Crude Oil Chart - Daily

Natural Gas Futures Chart - Daily

The bullish sentiment in energy was bolstered from several different sources. Goldman Sachs reiterated their $105 price target for crude and then expanded their outlook even more. Goldman Sachs said this was the beginning of a "super-spike" phase that could last 4-5 years. The Global Investment Research division said they disagree with the growing consensus that prices peaked in 2005. They said demand remained resilient and supply growth lackluster and that prompted them to leave their average price target for 2006 unchanged at $68. In 2005 the price of crude has risen to an average of $56.59. They said prices could spike above their average target of $68 to as high as $105. Goldman has taken a lot of heat over the last several months over this call and they refuse to back off after a review of the data. They claim OPEC is not showing any real success in raising production other than just enough to meet current demand. While OPEC claims it is set to raise capacity by +3.1 mbpd by the end of 2006 according to Goldman there are no real details to back up this claim.

Adding to the bullish price picture was an upgrade to the demand growth picture by the International Energy Association. The IEA, an energy policy advisor for 26 nations, revised their demand growth outlook beginning in 2006 to an average of 1.8-2.0 mbpd PER YEAR over the next five years. They said rising demand in China and India would cause much of the increases. This is stronger than the +1.18 mbpd demand increase they are projecting for all of 2005. Think about this for a minute. Using the round number of +2.0 mbpd growth for the next five years that suggests daily demand by the end of 2010 will grow to 93.5 mbpd compared to current production of 83.5 mbpd. That +10 mbpd increase is like adding another Saudi Arabia into OPEC. It is literally impossible for Saudi to double production in five years from its current 10.2 mbpd to 20 mbpd. They are currently in the middle of a $50 billion project to drill new wells and upgrade older ones in hopes of growing production from declining fields to 12.5 mbpd by 2009. Even if successful 12.5 mbpd is woefully short of the 20 mbpd that will be required if the IEA is correct in their outlook. There are other sources of new oil coming on stream over the next five years but nearly all analysts agree that they will only offset declines in older existing fields. Over the next five years nearly 150 million new cars and trucks will take to the global highways and over 25 million new energy consuming households will be formed.

While I agree with everything Goldman says I do not believe oil prices are going to make new highs in December unless a new ice comes to the northeast. Energy demand is cyclical with a seasonal pattern. The winter demand cycle runs from November to February. Once it appears the storage tanks will not run dry before milder weather arrives the price of oil and gas will drop. The next demand cycle is summer driving and that starts in June although price anticipation will begin much earlier. Oil prices tend to precede demand by two months. This produces a lull in March/April and our next real long term buying opportunity for oil stocks.

The battle for existing and future reserves is getting costlier as we saw in the Conoco/Burlington Resources acquisition this week. Conoco is paying over $30 billion for Burlington in a move that will make the merged company the largest gas producer in North America. Conoco shares have been trashed since the announcement losing over $6 billion in market cap but that cap has been transferred to Burlington with its +$10 jump in price. Conoco has been criticized in the press for buying Burlington on a week when gas prices hit an all time high. Conoco claims the deal will be profitable even if gas prices return to the $5 range. Conoco claimed it was the best time to buy Burlington and said they doubted gas prices would decline below $8. Conoco said they would completely pay off any debt related to the deal out of cash flow over the next 2-3 years.

Focus on this paragraph! Talk is cheap. Anybody can claim oil and gas prices are too high and will return to much lower levels. Conoco is the third largest energy company in the U.S. and they are not stupid. Do you honestly think they would subject themselves to ridicule and abuse by making a $30 billion acquisition at the top of the gas market if they did not think prices would eventually go higher? I think not! I have long said that Conoco was the only energy company that was acting like the end of cheap oil was really coming. Among the majors they are the most aggressive in exploration and in acquiring reserves. They have found it is cheaper to buy reserves than find them and they have proven they know those reserves in the ground are going to be more valuable in the future than they are today. Listen to all the analysts and quasi energy experts claiming world production will rise 50% over the next 20 years but weigh them all against the $30 billion purchase by Conoco. Are you going to bet your future on somebody that gets paid to push numbers to please some governmental agencies outlook or on a $30 billion commitment to higher gas and oil prices? COP has fallen from $64 to $58 on the news. This is initial support but I would NOT buy it yet. I made that mistake with Chevron/Unocal. There is always fear of another bidder and this could knock COP back to stronger support at $50. Since Conoco does not have $30B in the bank they are going to issue stock to make the acquisition. This will further dilute the current price. While I believe COP made the right move this is not the time to buy the stock. Be patient. The deal is expected to close early in 2006. This is shaping up to be a major play in our March/April window.

I would like to report that the markets are racing into the year end on the horns of a strong bullish rally. Unfortunately I can't and for the reasons I outlined in the weekend commentary I do not think any year end rally will appear until next Monday. I am not going to repeat the entire scenario here but the general idea is for a move higher at tomorrow's open and then a decline into Friday's close. Obviously it is impossible to predict market direction with ay certainty but I think the index rebalancing and quadruple expiration will combine to send us lower before the weekend.

The Dow has found support at 10740 and the post Fed buy program sent it soaring back to break resistance at 10850 but it could not hold that level. We still have a strong sell the rally cycle in place and it is likely to remain in place until after Friday. The Nasdaq continues to trade in the middle of its 2240-2275 range and the post Fed spike sent it back to the upper end of that range. The Nasdaq is likely to see the worst of the index selling due to the inclusion of Google into the NDX. Google is so large it will require funds to sell some of the other top Nasdaq stocks to make room. This should pressure the NDX and the Nasdaq by default.

The SPX managed to rebound to its four-year highs near 1272 and a level it has been unable to penetrate on its last three attempts. The S&P has been the least volatile of the big three indexes but you could not tell from the spike today. The +10 point post Fed spike was due mostly to a monster buy program that was launched on the announcement but it did manage to hold near the highs. A breakout over 1275 would be very bullish ahead of the expected volatility later this week.

NYSE Composite Chart - Daily

The NYSE Composite ($NYA.x) has been the clearest indicator of underlying market strength and the NYA broke out to a new all time high at 7851 today. The reverse of this bullishness was seen in the transports, which have been falling since their November 25th high at 4190. They hit a new four-week low at 4050 today. Clearly rising oil prices have had an impact but it is not the entire story. Oil prices did not begin to rise until after the $56 low on Nov-30th and then moved sideways for two weeks after the 5th. To put it simply the transports are no longer confirming the Dow advance and have given up more ground than the Dow over the same period. This could be simple profit taking given the sharp +640 point rally from the October lows to all time highs. I am seeing a lot of profit taking in some of the high flyers not related to the transports so it could be just a seasonal adjustment as we near year-end.

For the rest of the week Thursday is the only day with economic reports that could move the market but I think all the good news has already been factored into prices. The Fed news should be the mover tomorrow and the index changes the potential drag into Friday's close. Oil is rising overnight as I type this and currently $61.50 ahead of the Oil and Gas Inventories on Wednesday morning. Expectations are for declines across the board. The big energy mover will be the Natural Gas Storage Levels on Thursday morning. After the cold front last week we should see a significant drop. More than 75% of the nation saw temperatures lower than normal for this time of year. That big sucking sound you heard was gas being draw out of reserves to heat homes and generate electricity. Gas is currently $15.48 overnight and odds are very good we will see another new high this week. Personally I am looking for another sell the news event but will remain long energy until it appears. I would look to short/put the NDX/QQQQ on any weakness on Wednesday and maintain that short until Friday's close as long as weakness prevails. I didn't expect the Fed to change its statement so dramatically and it is entirely possible that could offset any potential NDX weakness. Only time will tell.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
GRMN None None
RYL    
STR    

New Calls

Garmin ltd - GRMN - close: 63.54 change: +2.70 stop: 57.90

Company Description:
Garmin International Inc. is a member of the Garmin Ltd. group of companies, which designs and manufactures navigation, communication and information devices -- most of which are enabled by GPS technology. Garmin is a leader in the general aviation and consumer GPS markets and its products serve aviation, marine, outdoor recreation, automotive, wireless and OEM applications. Garmin Ltd. is incorporated in the Cayman Islands, and its principal subsidiaries are located in the United States, Taiwan and the United Kingdom. (source: company press release or website)

Why We Like It:
GRMN appears to be one of the new growth/momentum stocks that trades like to follow. After a very strong summer and early fall the stock retreated back to the $55 level. Now after consolidating sideways for the last several weeks shares of GRMN are breaking out. Today's rally was fueled by volume almost double the daily average, which is a bullish development. Today's rally is also a breakout above its two-month trendline resistance consisting of its lower highs. Today's move also confirms yesterday's breakout over the simple 50-dma. The Point & Figure chart has turned positive and points to a $82 target. We are willing to buy calls here but more patient trades might want to wait for a better entry point on a dip back toward the $62.00 or even $61.00 level before initiating positions. Our mid-January target is the $69.00-70.00 range. We do not want to hold over the January earnings report.

Suggested Options:
We are suggesting the January calls. April calls would work too but we don't want to hold over the January earnings report.

BUY CALL JAN 60 GQR-AL open interest=2653 current ask $5.30
BUY CALL JAN 65 GQR-AM open interest=2229 current ask $2.15

Picked on December 13 at $ 63.54
Change since picked: + 0.00
Earnings Date 01/25/06 (unconfirmed)
Average Daily Volume = 1.1 million

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Ryland Group - RYL - close: 73.96 change: +1.94 stop: 69.90

Company Description:
With headquarters in Southern California, Ryland is one of the nation's largest homebuilders and a leading mortgage-finance company. The company currently operates in 27 markets across the country and has built more than 245,000 homes and financed more than 205,000 mortgages since its founding in 1967. (source: company press release or website)

Why We Like It:
Homebuilders are on the rebound despite some negative forecasts and concerns over a slow down in 2006. Today's FOMC decision on interest rates and expectations that the Fed is nearing the end of its rate hike cycle is considered good news for the industry. The DJUSHB home construction index was one of the best performers today and the sector index looks poised to breakout from its current consolidation pattern. The same holds true for RYL. The stock added 2.6% on decent volume and technical indicators are turning positive. The P&F chart for RYL suggests an $89 target. We are suggesting calls here with the stock over $72.50. There is some resistance near $77 but we suspect the stock can trade into the $79.50-80.00 range (our target) before its earnings report in January.

Suggested Options:
We are suggesting the January calls since we plan to exit ahead of the January earnings report.

BUY CALL JAN 70 RYL-AN open interest=1262 current ask $6.20
BUY CALL JAN 75 RYL-AO open interest=1715 current ask $3.10

Picked on December 13 at $ 73.96
Change since picked: + 0.00
Earnings Date 01/17/06 (unconfirmed)
Average Daily Volume = 1.3 million

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Questar Corp - STR - close: 80.85 chg: +1.38 stop: 77.45

Company Description:
Questar Corp. is a natural gas-focused energy company with an enterprise value of approximately $8 billion. Questar finds, develops, produces, gathers, processes, transports, stores and distributes natural gas, primarily in the Rocky Mountain region of the United States. (source: company press release or website)

Why We Like It:
We are adding another natural gas play to the call list. Natural gas futures hit new all-time highs above $15.00 today as investors worry that a cold winter will increase demand too much and produce gas shortages. This would send natural gas prices even higher with some predicting highs in the $20 range. STR is in an advantageous position because most of its natural gas production is in the Rocky Mountain region so the company doesn't have any exposure to the troubles located in the Gulf of Mexico. Technically we like the breakout over the $80.00 level. The move has helped the P&F chart produce a new buy signal that points to a $96 target. We are suggesting calls here with the stock over $80.00. More conservative traders may want to wait for STR to clear the November high at $81.35 first before initiating positions. Our target is the October highs in the $89.00-90.00 range. FYI: STR is also a current strangle play on the newsletter's play list.

Suggested Options:
We are suggesting January calls because we do not plan to hold over the January earnings report.

BUY CALL JAN 75 STR-AO open interest=2792 current ask $7.50
BUY CALL JAN 80 STR-AP open interest= 759 current ask $4.10
BUY CALL JAN 85 STR-AQ open interest=1063 current ask $1.50

Picked on December 13 at $ 80.85
Change since picked: + 0.00
Earnings Date 01/26/06 (unconfirmed)
Average Daily Volume = 752 thousand
 

New Puts

None
 

New Strangles

None
 


Play Updates

In Play Updates and Reviews

Call Updates

Alcon - ACL - close: 145.67 change: +0.67 stop: 139.90

ACL reversed some early morning weakness and closed at new December highs above the $145.00 level. This could be used as another bullish entry point. We plan to ride ACL up to its early February earnings report. Our target is the $154-155 range.

Picked on December 11 at $144.60
Change since picked: + 1.07
Earnings Date 02/08/06 (unconfirmed)
Average Daily Volume = 524 thousand

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Apache - APA - close: 72.16 change: +1.03 stop: 65.95

Oil stocks turned in another strong day after COP confirmed its bid for BR. Crude oil was also higher intraday but pared its gains by the closing bell. The action in APA looks like a short-term top so readers can watch for a dip back toward the $71.00-70.00 range before it moves higher again. Such a dip could be used as a new bullish entry point. Our end of January target is the $76.00-77.00 range. The Point & Figure chart points to an $83 target.

Picked on December 08 at $ 70.98
Change since picked: + 1.18
Earnings Date 01/26/06 (unconfirmed)
Average Daily Volume = 3.6 million

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Constellation Energy - CEG - cls: 56.27 chg: +0.86 stop: 53.39

CEG is showing renewed strength with a rebound off the simple 200-dma and a new six-week closing high. The stock looks poised to breakout over its 100-dma at 56.64. Our target is a run into the $60-62 range. FYI: the UTY utility index rebounded off its 10-dma and 100-dma to close at a new eight-week high.

Picked on December 11 at $ 55.60
Change since picked: + 0.67
Earnings Date 01/27/06 (unconfirmed)
Average Daily Volume = 947 thousand

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Dominion Res. - D - close: 80.00 chg: +1.05 stop: 74.75

Shares of D are also showing lots of relative strength. A good day in the utilities and a new all-time high in natural gas have pushed D to the $80.00 level. Our target is the $84.50-85.00 range compared to the P&F chart, which points to a $92 target.

Picked on November 27 at $ 78.24
Change since picked: + 1.76
Earnings Date 02/02/06 (unconfirmed)
Average Daily Volume = 1.8 million

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FMC Corp. - FMC - close: 54.35 chg: +0.55 stop: 51.95

FMC is actually showing more strength than we expected. The stock bounced higher again but it still stuck under resistance at the 200-dma (54.72), the $55.00 level, and its 100-dma (55.26). Short-term technical oscillators like the RSI and stochastics are starting to look positive again. Depending on your trading style you can look for a new bullish entry point on a move over $54.50, which would be a minor breakout over its one-week consolidation; a move over the 200-dma, or a move over its 100-dma and the December high ($55.41). The Point & Figure chart points to a $62 target. We are targeting a run into the $59.85-60.00 range.

Picked on December 01 at $ 55.04
Change since picked: - 0.69
Earnings Date 02/02/06 (unconfirmed)
Average Daily Volume = 270 thousand

---

Femsa Fomento - FMX - close: 68.18 chg: -0.55 stop: 67.75

FMX is still churning sideways inside its trading range. If we don't see a breakout higher by the end of the week we'll probably drop FMX as a candidate. Our strategy suggests going long calls if FMX trades at or above our trigger at $70.65. If we are triggered we'll target a run into the $74.75-75.00 range. The P&F chart points to an $81 target.

Picked on December xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 02/23/06 (unconfirmed)
Average Daily Volume = 308 thousand

---

Hydril - HYDL - close: 69.70 change: -0.63 stop: 65.95

We don't see any change from our previous update. The play is open after yesterday's spike higher. A potential problem is the short-term tick lower in the technical oscillators, which would tend to suggest the stock is due for a consolidation lower. If that occurs we'd look for the $67.50-68.00 range to offer immediate support. More conservative traders may want to wait for another move over $71.00 or 71.50 before initiating positions. Our target is the $78.00-80.00 range before HYDL's January earnings report, which we do not want to hold over.

Picked on December 12 at $ 71.01
Change since picked: - 1.31
Earnings Date 01/23/06 (unconfirmed)
Average Daily Volume = 263 thousand

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Kerr Mcgee - KMG - close: 94.60 chg: +0.87 stop: 88.99 *new*

KMG benefited from another positive day for energy stocks. However, today's action looks like a short-term top. Watch for a dip back toward $93.25 or even the 10-dma at 91.40. A bounce from either level could be used as a new bullish entry point. We're going to raise our stop loss to $88.99. Our mid January target is the $98.50-100 range.

Picked on December 02 at $ 90.26
Change since picked: + 4.34
Earnings Date 01/25/06 (unconfirmed)
Average Daily Volume = 1.8 million

---

Kinder Morgan - KMI - close: 93.88 chg: +1.15 stop: 87.45

Natural gas provider KMI issued its 2006 forecast today and its guidance was above Wall Street's expectations. The company also suggested it might raise its cash dividend. The stock did not react as well as we might have expected, especially with natural gas futures soaring to a new all-time high over $15.00. Today's move could be used as a new bullish entry point but conservative traders may not want to initiate plays with KMI under resistance at the $95.00 level. The P&F chart for KMI points to a $104 target. Our target is the $98.50-100 range. We do not want to hold over the mid January earnings report.

Picked on December 02 at $ 92.75
Change since picked: + 1.13
Earnings Date 01/18/06 (unconfirmed)
Average Daily Volume = 749 thousand

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Polaris Ind. - PII - close: 49.78 change: -0.23 stop: 48.49

PII is still struggling to recover from last week's downgrade-induced gap down. Technicals for the stock have turned bearish. We are not suggesting new positions. More conservative traders may want to exit here or try to exit near $51.00, which is short-term resistance at the bottom of the gap down. We're going to keep our target in the $54.00-55.00 range.

Picked on November 21 at $ 48.47
Change since picked: + 1.31
Earnings Date 01/12/06 (unconfirmed)
Average Daily Volume = 467 thousand

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Rockwell Autom. - ROK - cls: 59.93 chg: -0.01 stop: 55.75

ROK is trying very hard to breakout over the $60.00 level but it just doesn't seem to have the momentum. Our target is the $61.00-62.00 range and today's high at $60.43 may be as close as we get. More conservative traders may want to seriously consider exiting right here. We are not suggesting new positions at this time. Our target is the $61-62 range. FYI: the P&F chart points to a $69 target.

Picked on November 03 at $ 55.90
Change since picked: + 4.03
Earnings Date 11/03/05 (confirmed)
Average Daily Volume = 804 thousand

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Sunoco Inc. - SUN - close: 83.18 chg: -0.27 stop: 76.45

SUN didn't make much progress today and traded sideways in a $1.50 range. A bounce from the 10-dma (82.28) or the $80.00-81.00 region could be used as a new bullish entry point. The P&F chart for SUN points to a $93 target. Our target is the $89.90-90.00 range.

Picked on December 02 at $ 81.75
Change since picked: + 1.43
Earnings Date 02/02/06 (unconfirmed)
Average Daily Volume = 2.8 million

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Total S.A. - TOT - close: 129.70 change: +1.25 stop: 126.49

News that ConocoPhillips (COP) confirmed its bid for Burlington Resources (BR) gave the oil/energy sector some early strength today. Shares of TOT gapped higher to open at $130.15 and traded to $130.60 before paring its gains. Our trigger to buy calls was at $130.25 so the play is now open. We would probably expect a dip back to $128.50-128.75 to fill this morning's gap before seeing TOT really take off. Aggressive traders can use the dip as a new entry point. More conservative types may want to wait for a move over today's high at $130.60. Our target is the $136.00-137.00 range. Our time frame is before the mid-February earnings report. The P&F chart for TOT points to a $152 target.

Picked on December 13 at $130.25
Change since picked: - 0.55
Earnings Date 02/15/06 (unconfirmed)
Average Daily Volume = 936 thousand

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Tractor Supply - TSCO - cls: 55.03 chg: +1.32 stop: 51.95

TSCO is on the rebound. The stock dipped toward the $53.50 twice today. The second bounce finally got some wind behind it and a surge of volume lent strength to the rally. If TSCO wasn't so close to our $57.00-58.00 target range we'd say this was a new bullish entry point.

Picked on November 30 at $ 52.75
Change since picked: + 2.28
Earnings Date 01/18/06 (unconfirmed)
Average Daily Volume = 428 thousand

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Valero Energy - VLO - close: 109.00 chg: +0.55 stop: 99.49

VLO is another energy stock that surged higher through most of the session before pulling back in the last hour of trading. The rally seemed to stall under its November highs near $111.35. This looks like a short-term top and we'd expect a dip (probably toward $107) before VLO attempts to move higher again. The dip can be used as a new bullish entry point. Our target is the September highs at $117.00. Please note that VLO is due to split 2-for-1 on December 16th. That means your option positions will double in number while halving in value. Our post-split target will be $58.50. Our post-split stop loss will be $49.74. FYI: VLO is also a current strangle play in the strangle section.

Picked on December 08 at $106.56
Change since picked: + 2.44
Earnings Date 01/30/06 (unconfirmed)
Average Daily Volume = 9.8 million

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Zimmer Holdings - ZMH - close: 68.80 chg: -0.45 stop: 65.75

ZMH tried to rally higher today but the gains just ran out of steam near $69.85. Hopefully it's just a coincidence that the stock turned lower after announcing a new management structure and organizational changes. Watch for the 10-dma near 67.55 to act as short-term support. Our target is the $74.00-75.00 range under its simple 200-dma.

Picked on December 11 at $ 68.62
Change since picked: + 0.18
Earnings Date 01/25/06 (unconfirmed)
Average Daily Volume = 2.6 million
 

Put Updates

Magna Int. - MGA - close: 68.01 chg: +0.34 stop: 70.31

Shares of GM lost today, down 3.25%, following yesterday's credit downgrade from S&P. The downgrade seemed to spark new fears over potential bankruptcy for the car maker. Yet this news in GM did nothing to stop the oversold bounce in shares of MGA. We would keep a close eye on MGA's overhead resistance at the simple 50-dma near $68.66. A failed rally under the 50-dma could be used as a new bearish entry point in MGA. Our target is the $63-62 range.

Picked on December 04 at $ 68.14
Change since picked: - 0.13
Earnings Date 02/07/06 (unconfirmed)
Average Daily Volume = 318 thousand

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Netflix - NFLX - close: 24.05 chg: -1.05 stop: 28.15

Good news. The afternoon bounce from yesterday failed to follow through today. The stock turned lower at the $25.00 level and its 100-dma. This relative weakness really increases the odds that NFLX will hit our target at $22.50. We are not suggesting new positions at this time. We do not want to hold over the mid January earnings report.

Picked on December 09 at $ 25.99
Change since picked: - 1.94
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: 81.50 chg: +0.07 stop: n/a

There was virtually no change in ABC on Tuesday. We don't see any change from our weekend update. We have three days left before December options expire. We are not suggesting new positions. Our estimated cost for our strangle is $2.80. For the last couple of months we have been targeting a rise to $5.00 for the strangle but traders may want to adjust their target to something lower. We're going to adjust our target to $4.25. Currently the December $80 calls (ABC-LP) are trading at $1.60bid/$1.75ask.

Picked on October 16 at $ 74.81
Change since picked: + 6.62
Earnings Date 11/03/05 (confirmed)
Average Daily Volume = 900 thousand

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Amer. Eagle Out. - AEOS - cls: 21.75 chg: +0.47 stop: n/a

Negative comments from electronics retailer Best Buy (BBY) had no affect on apparel retailer AEOS. Shares of AEOS continued to bounce and added 2.2%. The stock is now challenging short-term overhead resistance near $22.00. We're not suggesting new plays. 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 $1.55bid/$1.65ask.

Picked on November 13 at $ 25.47
Change since picked: - 3.72
Earnings Date 11/15/05 (confirmed)
Average Daily Volume = 3.6 million

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Abercrombie&Fitch - ANF - close: 62.72 chg: +0.02 stop: n/a

ANF reversed early weakness this morning but after recovering from the morning downdraft the stock spent the rest of the session trading sideways. We have about six weeks to go before January options expire. 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. Right now our target may be out of reach. It really depends on how ANF performs during any Santa Claus rally should one appear.

Picked on November 13 at $ 59.67
Change since picked: + 3.05
Earnings Date 11/15/05 (confirmed)
Average Daily Volume = 2.7 million

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Blue Coat Sys. - BCSI - cls: 45.03 chg: +0.21 stop: n/a

The sideways consolidation is continuing to narrow. That could be good news. Imagine the stock price like a spring. The more tightly the market winds it the bigger the move when it finally breaks out. We're suggesting that readers consider launching new strangles in the $44.50-45.50 entry window. We're suggesting the January $50 call and the January $40 put. Our estimated cost is $3.25. We're aiming for a rise to $5.50. Remember we have about six weeks left before January options expire.

Picked on December 04 at $ 45.43
Change since picked: - 0.40
Earnings Date 02/14/06 (unconfirmed)
Average Daily Volume = 416 thousand

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Chicago Merc. Exchg. - CME - cls: 369.25 chg: +1.85 stop: n/a

We don't see any changes from our previous update. 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: - 6.65
Earnings Date 01/24/06 (unconfirmed)
Average Daily Volume = 879 thousand

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D.R.Horton - DHI - close: 36.81 chg: +0.72 stop: n/a

DHI looks bullish. The stock added another 1.99% to breakout through the top of what looks like a bull flag pattern. This actually looks like a tempting entry point to buy January or February calls. We are not suggesting new strangles in DHI 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. FYI: the DHI-AG calls are currently trading at $2.85bid/$3.00ask.

Picked on November 13 at $ 32.56
Change since picked: + 4.25
Earnings Date 02/15/06 (unconfirmed)
Average Daily Volume = 3.2 million

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Four Seasons - FS - close: 48.48 chg: -0.85 stop: n/a

FS continues to show relative weakness and the recent failed rally at the $50 level is good news. 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. FYI: the FS-MJ puts are trading at $2.60bid/$2.75ask.

Picked on November 08 at $ 55.37
Change since picked: - 6.89
Earnings Date 11/10/05 (confirmed)
Average Daily Volume = 319 thousand

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Lear Corp - LEA - close: 28.61 chg: +0.23 stop: n/a

LEA is still trying to bounce in spite of renewed fears for GM. 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). Our estimated cost was $1.60. We are targeting a rise to $3.20 or more.

Picked on November 06 at $ 30.24
Change since picked: - 1.63
Earnings Date 01/25/06 (confirmed)
Average Daily Volume = 1.8 million

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Loews - LTR - close: 96.38 change: +0.08 close: n/a

We only have three days left before December options expire. Our Dec. $95 calls are in the money but we need to see LTR make a run for the $100 level if we're going to be profitable. More conservative traders may want to exit early to protect/salvage their capital. 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. Currently the LTR-LS calls are trading at $1.65bid/$1.85ask. The high today was $2.40.

Picked on October 23 at $ 89.94
Change since picked: + 6.44
Earnings Date 10/27/05 (confirmed)
Average Daily Volume = 602 thousand

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Verifone Holdings - PAY - cls: 23.70 chg: +0.08 stop: n/a

We don't see any change from our weekend update on PAY. 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. Currently the PAY-AX calls are trading at $1.95bid/$2.35ask.

Picked on October 12 at $ 19.98
Change since picked: + 3.72
Earnings Date 12/01/05 (confirmed)
Average Daily Volume = 259 thousand

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Protein Design Labs - PDLI - cls: 28.35 chg: +0.45 stop: n/a

We do not see any change from our weekend update. We have four days left before December options expire. 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 have adjusted our target to breakeven at $1.80.

Picked on October 30 at $ 27.70
Change since picked: + 0.65
Earnings Date 11/01/05 (confirmed)
Average Daily Volume = 1.8 million

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Spectrum Brands - SPC - close: 18.73 change: -0.07 stop: n/a

We don't see any change from our weekend update on SPC. We have three days left before December options expire. More conservative traders may want to plan an exit near breakeven assuming SPC provides another move lower. We're going to follow our own suggestion and adjust our target to $1.25. 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).

Picked on November 08 at $ 20.63
Change since picked: - 1.90
Earnings Date 11/10/05 (confirmed)
Average Daily Volume = 576 thousand

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Questar Corp. - STR - close: 80.85 chg: +1.38 stop: n/a

Natural gas futures spiked and closed at new all-time highs today. This helped fuel a bullish breakout in STR over resistance at the $80.00 mark. There are about six weeks left before January options expire. 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: + 4.60
Earnings Date 01/26/05 (unconfirmed)
Average Daily Volume = 716 thousand

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Texas Ind. - TXI - close: 51.69 chg: -0.06 stop: n/a

We don't see any change from our previous updates. 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.

Picked on November 27 at $ 49.57
Change since picked: + 2.12
Earnings Date 12/15/05 (unconfirmed)
Average Daily Volume = 354 thousand

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Valero Energy - VLO - close: 109.00 chg: +0.55 stop: n/a

VLO hit a new four-week high but stalled under its October peak. We are not suggesting new strangle plays. 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: + 8.00
Earnings Date 01/30/06 (unconfirmed)
Average Daily Volume = 10.7 million
 

Dropped Calls

None
 

Dropped Puts

None
 

Dropped Strangles

None
 

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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