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Daily Newsletter, Thursday, 12/15/2005

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Table of Contents

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

Market Wrap

DOW Futures Hit 11,000

The Dow futures actually hit 11,007 at this morning's early pop on the Altria news (more later) but that was the high of the day. The DOW popped up to 10938 so it has some work to do before it too can claim 11K. The media didn't seem to get all that excited about the futures hitting 11K so I guess we'll have to wait for the cash index to do it also. We may not be far from seeing it happen.

There were several economic reports released this morning but none of them seemed to have much of an effect. But when word was released about Altria (MO) and the Illinois Supreme Court's decision to reverse a lower court ruling in Price v. Philip Morris USA, more commonly known as the "lights" case. The decision overturned an award of more than $10B in damages and fees to plaintiffs, who had charged Altria with fraud for marketing light cigarettes as being less harmful than regular cigarettes. Shares of Altria shot higher on the news, up more than 5% before settling back the rest of the day, closing up +2.89 at $76.62 (+3.9%). Merck (MRK) was up about 2% today and between those two stocks the DOW had a relatively strong day as compared to the others.

Inflation numbers were released this morning and the overall number was surprisingly low. U.S. consumer prices fell -0.6% in November (vs. -0.4% expected) which is the fastest rate decline since July 1949. Energy prices dropped -8% over the past month (after increasing +12% in September) and this is credited with the decline in the CPI. Still, energy prices are up 18.3% in the past 12 months. Excluding food and energy prices, the core consumer price index rose +0.2% in November, for an annual rate of +2.4%. This +2.4% increase has been the same for the past 3 months, up from +1.4% previous to the hurricanes. This jump in core inflation is what the Fed watches carefully and they're not going to like the increase. We can expect the Fed to stay on its rate-tightening course.

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While oil and gasoline prices took a precipitous drop during November, natural gas dropped only 0.5% after seasonal adjustments. With winter heating months upon us, this is the cost that will have a real impact on consumer's psyche, more than the cost of gasoline. In other commodities, food prices rose +0.3% on a jump in pork and dairy prices.
Housing prices, which represent 42% of the CPI, rose +0.5% as hotel and motel prices rose +1.3% and owners' equivalent rent and rent of primary residence both increased +0.2%. Rising hotel and motel prices accounted for more than half of the increase in the core rate.

Medical care prices increased +0.6% in November, the largest increase since February. Hospital services prices increased +1.1%, the most in three years while drug prices increased +0.7%. Transportation prices dropped -4.8%, largely because of falling fuel prices. New car prices fell -0.1% and airfares fell -1.5%. Apparel prices were up +0.2% after seasonal adjustment. Education and communication prices rose +0.4%. Recreation prices were flat. So, depending on how and where you spend your money, the news for November was either good or bad. Remember those medical cost increases above--it will relate to a discussion below on under funded health care plans.

Natural gas prices have tumbled this week from a record front-month contract high of $15.78 on Tuesday to a closing price of $13.80 today. Today the EIA released their report on inventories and reported working gas in storage was 2,964 Bcf (billion cubic feet) as of Friday, December 9th for a net decline of 202 Bcf from the previous week. That is 195 Bcf less than last year at this time and 107 Bcf above the 5-year average of 2,857 Bcf. In the East Region, stocks were 43 Bcf above the 5-year average following net withdrawals of 118 Bcf. Stocks in the Producing Region were 26 Bcf above the 5-year average of 797 Bcf after a net withdrawal of 55 Bcf. Stocks in the West Region were 38 Bcf above the 5-year average after a net drawdown of 29 Bcf. At 2,964 Bcf, total working gas is within the 5-year historical range. A year ago did you ever think you'd give a hoot about how many Bcf's of natural gas we have where, or even what a Bcf was?

The Labor Department released the weekly earnings report which showed earnings increased +0.6% in November. The average workweek fell. Real earnings are down -0.4% in the past year. The unemployment picture was little changed from the week before with new claims rising 1,000 to 329K. The weekly continuing claims were up 21K to 2.6M.

The Empire State Index came out at 28.7 vs. 22.8 in November, which was above consensus of 19.0. This is the highest level reached in 2005. The new orders index was 30.2 vs. 25.9 in November while prices paid was 47.2 vs. 61.0. Industrial production numbers for November showed an increase of +0.7% vs. a forecast of +0.5% and industrial output for October was up a revised +1.3% vs. +0.9% in the previous estimate. November capacity utilization was 80.2% vs. a revised 79.8% in October. The Fed just stated two days ago that "possible increases in resource utilization...have the potential to add to inflation pressures." So the larger than expected rise in November capacity utilization to 80.2%, higher than the key 80% number over which inflationary pressures are generated, causes concerns that the Fed will continue to raise rates into mid-2006.

The December Philly Fed came in at 12.6 vs. 11.5 in November but below consensus of 13.6 (to as high as 15.0). The lower than expected number here may indicate that there may be some slippage in the more closely watched national ISM index. The Philly Fed price paid index was 49.0 vs. 56.8 in November which bodes well from an inflationary standpoint.

So after the initial excitement at the market open, it basically settled back the rest of the day. It wasn't so much due to a selling effort but instead looked more like a lack of buying. The advance/decline numbers showed a negative day while the new 52-week highs vs. lows showed there may have been some accumulation of stocks. If that's true, there are probably many funds looking to position for the Santa Claus rally. Whether we'll get one, or instead get an early one that sells off into the end of the month is too hard a call right now. Let's see what the charts are telling us.

DOW chart, Daily

The DOW has been cycling around the long term downtrend line from January 2000 through the March 2005 high. The fact that price is consolidating around this resistance line can be considered bullish. The turn up in the daily stochastics suggests we're going to get another push higher. If the final leg up (a 5th wave) is equal to the 1st leg up (wave-1) in the move up from the October low, I get a Fib target of 11,006. Some other things I look at suggest a higher target of 11,100-11,200 but it would be appropriate to see the DOW sneak over 11K, suck in a bunch of new longs, and then reverse hard down. Keep an eye on that 11,006 number. It also coincides with SPX 1285--see below.

SPX chart, Daily

The trend line along the highs since January 2004 is very close--just above 1280. Like the DOW, if I project the final leg up (5th wave) based on equality with the 1st wave, I get an upside target of 1285. Ideally the price pattern would give us a relatively minor pullback before proceeding higher so hitting 1285 could also give us a minor throw-over of the trend line if it gets there in the next week or so. I also have potential targets up around 1306 but 1285 would be the first level I would watch very carefully if you like picking tops.

Nasdaq chart, Daily

Unlike the DOW and SPX, the COMP has already climbed above its longer term trend line and is now using it as support. This is NOT true though for the NDX--the NDX has this trend line just above at about 1720, so about 19 points above. That would equate to about 2218 for the COMP. I show potential upside Fib targets for the COMP at 2303, 2338 and then 2356.

SOX index, Weekly chart

This weekly chart of the SOX is to give some perspective for what it's done over the past 2 years. It looks like one big bear flag and price is finding resistance at the top of the flag. It could press a little higher with a broader market rally but I wouldn't expect much more from this index. If you're long the semi's, go into profit protection mode and suck up your stops. Be studying some charts and see which stocks you may want to short, or get ready to buy some longer term puts on SMH.

Before looking at some more charts I wanted to pick up my discussion of under funded obligations, namely pension plans and now health care plans. I've been referring to the fact that many corporations are in trouble trying to fund their pension plans. Much of their problem has to do with higher expectations for returns on assets than has been, or likely will be, reality. Without higher returns, their under funding problem has only been exacerbated. Even with the bull market of the past 3 years most corporations have barely made a dent in their under-funded plans. Unfortunately there will come a day when the companies either belly up to the bar and fund their plans thereby incurring huge costs and decreasing their earnings (and stock price) or they will begin to cut benefits (or cancel their plans all together which many major corporations have already done, and saddle the Pension Benefit Guarantee Corp with a huge liability).

Now we hear about public institutions joining the crowd and their main problem is health care. A recent story in the NY Times discussed the problem that cities are having with their under-funded plans (the problem is not just cities of course--it will be states, cities, towns, school districts, water authorities, etc). My purpose here is not to sound dour and put us all into a bad mood. This pension and health care burden is not being discussed enough publicly and it's the elephant in the living room right now. My purpose is to inform you so that you can be prepared as an individual who may face future squeezes in retirement benefits, and to provide you with a heads up as to what will very likely affect future stock market returns (and bond returns since downgraded bonds are not a good thing if you're the holder of those bonds). States, cities and agencies that do not move quickly enough may see their credit ratings fall. We are on the verge of some very powerful changes that will have significant economic and social ramifications.

The usual practice for public institutions has been to budget for health care a year at a time, and to leave the rest for the future. It's now becoming apparent what the future liability will be like and in order to make up for their under funding we will likely see huge tax increases, severe cut backs in other services, a reduction in retirement benefits, or probably a combination of the above. Many governments have already been struggling with big deficits in their employee pension funds and now they're recognizing the huge burden of an under funded health care plan on top of that.

The NY Times article referred to the city of Duluth, MN as an example. Since 1983, Duluth has been promising free lifetime health care to all of its retired workers, their spouses and their children up to age 26. This was done in an effort to compensate for lower salaries in the public sector and seemed "cheap" at the time. No one really knew how much it would cost. For years, governments have been promising generous medical benefits to millions of public employees when they retire, but virtually none of these governments have kept track of the mounting price tag.

Three years ago, Duluth decided to find out and hired an actuary to do some calculations--the total came to about $178M, or more than double the city's operating budget. And the bill was growing. Hoping to see some improvement over the past 3 years, because economic conditions had changed and the new accounting rule had been announced, the city's leaders asked the actuary to update her numbers--it's now up to $280M, a 57% increase. As a side note, actuaries will likely be in short supply in the coming years as many public and private institutions grapple with this problem. Could be a lucrative job market for the actuarially gifted.

This is only the tip of the iceberg as many public institutions go through the same exercise. In fact they'll have to. The Governmental Accounting Standards Board (GASB) is going to be issuing a new ruling (GASB Statement No. 45) that will require this analysis of future costs that they will incur over the next 30 years. This needs to be done so that they can report their obligation to their taxpayers and bond holders. They are finding that under the new method, the benefit costs for a particular year can be anywhere from 2 to 20 times the pay-as-you-go costs they have been showing on their books. The new accounting rule will be phased in over 3 years, with all 50 states and hundreds of large cities and counties required to comply first. If they fail to put money behind their promises to retirees, they may feel the wrath of the financial markets as their credit ratings get lowered, making it harder and more expensive to sell bonds or otherwise borrow money.

Stephen T. McElhaney, an actuary and principal at Mercer Human Resources, a benefits consulting firm that advises states and local governments, estimated that the national total [obligation] could be $1 trillion. "This is a huge liability," said Jan Lazar, an independent benefits consultant in Lansing, Mich. "If anybody understands it, they'll freak out." When we think about the massive debt our country has, whether it's individuals, corporations or governments, and then throw this debt and the pension debts on top of all that, one has to wonder how long foreigners will continue to enjoy funding our profligacy. Hence the worry about "freaking out".

Alaska went through a similar exercise and after saying that Alaska's future combined obligations for pensions and retiree health care were under funded by $5.7B, Gov. Frank H. Murkowski called a special session of the Legislature and pushed through changes in pension and retirement health care benefits for new state employees. (The state Constitution forbids changing the benefits of current employees.) His actions caused a major ruckus with unions, advocates for the elderly (you know AARP will fight any changes here big time) and the Juneau schools superintendent. This battle will be heard loud and clear around the country soon. Michigan, with its possible $30B in largely unfunded health care promises, is already considering legislation that would shift "a considerable amount of the cost for health insurance to the retiree." Maryland now spends about $311M annually on retiree health premiums and the yearly cost will jump to $1.9B under the new GASB rule. But when that state calculated the value of the retirement benefits it has promised to current employees, the total was $20.4B.

OK, feeling all depressed now? Sorry, sometimes reality sucks. But tis better to be prepared than shocked with no game plan. On a lighter note, before continuing to look at a couple more charts, and for you technology buffs, I came across some research about a new element that has been discovered. Apparently it's a side benefit of some research based around the recent hurricanes. A major research institution (one that probably has its pension and health care plans already fully funded) has been able to prove the existence of a new element that they've named "Governmentium." This is from their press release:

"Governmentium (Gv) has one neutron, 25 assistant neutrons, 88 deputy neutrons, and 198 assistant deputy neutrons, giving it an atomic mass of 312. These 312 particles are held together by forces called 'morons' which are surrounded by vast quantities of lepton-like particles called 'peons.' Since Gv has no electrons, it is inert. However, it can be detected, because it impedes every reaction with which it comes into contact. A minute amount of Gv causes one reaction to take over four days to complete, when it would normally take less than a second!

Gv has a normal half-life of 4 years; it does not decay; but instead undergoes a reorganization in which a portion of the assistant neutrons and deputy neutrons exchange places. In fact, Governmentium's mass will actually increase over time, since each reorganization will cause more morons to become neutrons, forming 'isodopes.' This characteristic of moron promotion leads most scientists to believe that Gv is formed whenever morons reach a certain quantity in concentration. This hypothetical quantity is referred to as 'Critical Morass.'

When catalyzed with money, Gv becomes "Administratium' (Am) - an element which radiates just as much energy as Gv, since it has half as many peons but twice as many morons.

Onto some more charts. Next up are the banks.

BKX banking index, Weekly chart

This weekly chart of the banks is to again give a longer term perspective of what they've been doing. In its rally from the October 2002 low, the long coiling consolidation that it went through since January 2004 predicted the sharp rally out of it. One thing about these coils in this position of the pattern (wave-4 leading to wave-5) is that it sets up the last leg up. Based on that interpretation, the current rally leg is the last one for the whole rally from October 2002. This is clear as a bell on this index. The only question in my mind is where exactly it will end. If it manages to rally up to a Fib target of 111.83 I'd be looking for signals to put on some long term short positions.

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

Lennar Corp's (LEN 62.59 +2.03) reported a strong 4th quarter and their stock had a nice rally (but left a bearish looking hanging man doji on its daily chart). The daily chart of the housing index shows a long tail above a small body--a shooting start doji which again is bearish. A red candle tomorrow would be a confirmed reversal signal. But if it can manage a little more rally, there should be resistance up near the top of its bear flag pattern and a 62% retracement at 1001.

Oil chart, December contract, Daily

After breaking its downtrend, oil retraced 38% of it decline and now looks ready to roll back over. If that's all the bounce oil will be able to muster, it will be bearish for oil. It closed back below its 50-dma but has potential support at its 200-dma and previously broken downtrend line. It could drop back down for a retest of the low which might coincide with a test of its longer term uptrend line. Bullish divergence with another test of that low would suggest a higher bounce is coming. Otherwise, look out below. And again, a drop in oil price here would be a warning siren about a slowing economy dead ahead.

Oil Index chart, Daily

The oil index did a slight over-throw of the top of its ascending triangle pattern and closed back inside it today. That's a sell signal, confirmed with negative divergence on the oscillators. I'm expecting another leg down in the decline of this index.

Transportation Index chart, TRAN, Weekly

The weekly chart of the Trannies shows another sideways coil that formed in 2005 and a spike to the upside out of it. This should be the last leg up in its rally from 2003 and again it's just a matter of figuring an upside target. A potential Fib target is at 4275.

U.S. Dollar chart, Daily

The U.S. dollar broke support this week and sold off with a bunch of commodities, including gold and oil. A further pullback should find support at its uptrend line near $89.

Gold chart, August contract, Daily

If you were long gold I hope you pulled your stops up tight and took as much out of that rally as you could. The pullback should be swift although we could see some volatility surrounding the pullback. I'm looking for a pullback to the $460-470 area.

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

Sector action was mixed today, reflective of today's relatively flat market. Leaders to the upside were the airlines, disk drive index, gold and silver (a little dead cat bounce?), Transports and biotechs. Those in the red today were led by the energy indexes, the SOX and financials. Biotechs got a boost early today when Amgen (AMGN $80.43 +3.66)) announced its decision to acquire Abgenix (ABGX $21.68 +7.03) for $2.2B and an additional $1.0B in savings from restructuring efforts. Merck (MRK 29.77 +0.57) reaffirmed FY05 and FY06 guidance and was the DOW's 2nd leading component today, right behind Altria (MO 76.62 +2.89). Consumer staples were hurt today by Proctor & Gamble (PG 58.99 -0.63) which saw some profit taking today after hitting a new 52-week high yesterday, which followed upside Q2 guidance.

Oracle (ORCL 12.81 +0.02) reported after the bell that profits fell 2.1% while total revenue rose 19.4% (meaning their gross margins decreased). Their Q2 net earnings were $798M, or 15 cents a share, compared with $815M, or 16 cents a share, last year. Total revenue was $3.29B vs. $2.76B last year. Expectations had been for ORCL to report earnings of 19 cents a share on $3.41B in revenue, so a miss on both revenue and earnings. Their price dropped after hours to a low of $12.20 and closed at $12.48 which is back to the pullback low on Dec 9th.

Adobe (ADBE $34.85 + 0.41) on the other hand rose after hours after reporting its Q$ profit rose to $156.3M, or 31 cents a share, vs. $113.5M, or 23 cents a share, a year ago. Total revenue for the quarter rose 19% to $510.4M from $429.5M and they obviously were able to keep their costs under control. Price popped up to $36.44 and closed at $36.25 after hours. Interestingly enough, like ORCL, this brings price back to where it was on Dec 9th; they're just moving in opposite directions.

For tomorrow, remember it's a quadruple witching options expiration day, which can cause increased volatility which in the end doesnt necessarily mean anything in the larger price pattern. I get a different impression based on different indices. The DOW tells me to expect a rally tomorrow, SPX and the others tell me to expect a deeper pullback first. Opex Friday's are many times quiet and directionless, interspersed with fits of volatility. Be careful. Waiting until Monday to try a "normal" trade might not be a bad idea. Hopefully we'll see some good setups tomorrow on the Monitor. See you there and good luck tomorrow.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
None None None

New Calls

None today.
 

New Puts

None today.
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Apache - APA - close: 71.22 change: -2.12 stop: 67.99 *new*

Thursday proved to be a rough session for energy stocks, especially oil stocks. Crude oil slipped more than 80 cents to close at $59.99 a barrel while natural gas futures turned in a very volatile day but closed significantly lower this afternoon. The OIX oil index lost 1.4% and shares of APA lost 2.8%. APA looks ready to test the 10-dma near 70.40 and probably the $70.00 level, which should be round-number support. Readers can watch for a bounce from $70.00 as a new bullish entry point. We would not suggest new positions here. We are going to raise our stop loss to $67.99. More conservative traders may want to tighten their stops even further.

Picked on December 08 at $ 70.98
Change since picked: + 0.24
Earnings Date 01/26/06 (unconfirmed)
Average Daily Volume = 3.6 million

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Dominion Res. - D - close: 81.09 chg: +0.18 stop: 74.75

Utility stocks out performed the rest of the energy sector and shares of D managed to bounce from their intraday low near $80.29. We would not suggest new positions at this time. Our target for D 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: + 2.85
Earnings Date 02/02/06 (unconfirmed)
Average Daily Volume = 1.8 million

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FMC Corp. - FMC - close: 53.23 chg: -0.53 stop: 51.95

Traders have a decision to make with FMC. Either choose to exit here, protect your capital, and look for a new entry point later. Or speculate on a bounce from the $52.75 region or maybe a dip all the way toward late November support near $52.00, which is underpinned by the 50-dma. The P&F chart may be bullish but short-term technicals are bearish. We do expect the stock to dip lower. We are not suggesting new positions at this time.

Picked on December 01 at $ 55.04
Change since picked: - 1.81
Earnings Date 02/02/06 (unconfirmed)
Average Daily Volume = 270 thousand

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Femsa Fomento - FMX - close: 69.45 chg: +0.09 stop: 67.75

FMX is still creeping higher but remains under the $70.00 mark. 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

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Garmin ltd - GRMN - close: 62.20 change: -1.29 stop: 57.90

There should be no surprises here. We mentioned that GRMN would probably give us another dip toward the $62 level. A bounce from here could be used as a new bullish entry point. The problem lies with the markets. If the major indices turn lower tomorrow then GRMN may dip toward the $60.00 level and its 50-dma. Our mid-January target is the $69.00-70.00 range. We do not want to hold over the January earnings report.

Picked on December 13 at $ 63.54
Change since picked: - 1.34
Earnings Date 01/25/06 (unconfirmed)
Average Daily Volume = 1.1 million

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Hydril - HYDL - close: 69.63 change: -1.05 stop: 65.95

HYDL was unable to escape the profit taking in the oil sector today. We don't see any changes from our previous update on the stock. More conservative traders may want to wait for another move over $71.00 or $71.50 before considering call 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: - 1.38
Earnings Date 01/23/06 (unconfirmed)
Average Daily Volume = 263 thousand

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Kerr Mcgee - KMG - close: 94.41 chg: -0.64 stop: 88.99

Shares of KMG managed to resist most of the profit taking in the oil sector today. The stock continues to climb inside its narrow, rising channel. Watch for a dip back toward $93.25 or even the 10-dma at 91.68. A bounce from either level could be used as a new bullish entry point. Our mid January target is the $98.50-100 range. In the news today KMG announced plans to cut its budget by $600 million in 2006 and shift its focus to less risky ventures in the Rocky Mountains.

Picked on December 02 at $ 90.26
Change since picked: + 4.15
Earnings Date 01/25/06 (unconfirmed)
Average Daily Volume = 1.8 million

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Kinder Morgan - KMI - close: 94.09 chg: +0.35 stop: 87.45

A very volatile day for natural gas futures did not translate into a volatile day for KMI. The stock continues to consolidate under resistance at the $95 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: + 1.34
Earnings Date 01/18/06 (unconfirmed)
Average Daily Volume = 749 thousand

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Polaris Ind. - PII - close: 50.19 change: -0.39 stop: 48.49

We do not see any change from our previous update on PII. The very late afternoon bounce looks encouraging since volume was rising on the rally attempt. If it can breakout over $51 then there's a good chance it will fill the gap near $53.00-53.50. We're going to keep our target in the $54.00-55.00 range. We're not suggesting new positions.

Picked on November 21 at $ 48.47
Change since picked: + 1.72
Earnings Date 01/12/06 (unconfirmed)
Average Daily Volume = 467 thousand

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Rockwell Autom. - ROK - cls: 59.94 chg: -0.33 stop: 57.95

We see no change from our previous update on ROK. We are not suggesting new positions. More conservative traders may want to strongly consider exiting right here. Our target is the $61.00-62.00 range.

Picked on November 03 at $ 55.90
Change since picked: + 4.04
Earnings Date 11/03/05 (confirmed)
Average Daily Volume = 804 thousand

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Ryland Group - RYL - close: 75.12 change: -0.71 stop: 69.90

RYL spiked higher this morning but could not breakout past its November highs. The stock spent the rest of the session drifting lower with traders doing some profit taking and the stock coming to rest near the $75.00 strike price ahead of December options expiration tomorrow. We would not be surprised to see a dip back toward the $74 level. A bounce from $74 could be used as a new bullish entry point. Our target is the $79.50-80.00 range.

Picked on December 13 at $ 73.96
Change since picked: + 1.16
Earnings Date 01/17/06 (unconfirmed)
Average Daily Volume = 1.3 million

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Questar Corp - STR - close: 83.89 chg: -0.30 stop: 77.45

We see STR's 30-cent decline as relative strength. A volatile and eventually negative session for natural gas prices did not affect shares of STR. A bounce from $81 could be used as a new bullish entry point. 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.

Picked on December 13 at $ 80.85
Change since picked: + 3.04
Earnings Date 01/26/06 (unconfirmed)
Average Daily Volume = 752 thousand

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Sunoco Inc. - SUN - close: 83.82 chg: +0.64 stop: 76.45

It was a relatively quiet day for shares of SUN. The stock traded mostly sideways. We don't see any changes from our previous updates. 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: + 2.07
Earnings Date 02/02/06 (unconfirmed)
Average Daily Volume = 2.8 million

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Total S.A. - TOT - close: 129.19 change: -2.43 stop: 126.49

TOT did not escape the energy sector profit taking. The stock lost 1.8%. However, it may be worth noting that TOT tested support near $128.50 three times today. A move back over $130 could be used as a new bullish entry point. 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: - 1.06
Earnings Date 02/15/06 (unconfirmed)
Average Daily Volume = 936 thousand

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Tractor Supply - TSCO - cls: 54.73 chg: -0.11 stop: 51.95

TSCO traded in a very narrow range for most of the session. We don't see any change from our previous update on TSCO. We're not suggesting new positions at this time. Our target is the $57-58 range.

Picked on November 30 at $ 52.75
Change since picked: + 1.97
Earnings Date 01/18/06 (unconfirmed)
Average Daily Volume = 428 thousand

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Valero Energy - VLO - close: 106.88 chg: -2.82 stop: 99.49

VLO experienced some profit taking today after a strong performance in December thus far. A pull back in crude oil prices, combined with an analyst initiating coverage with a "neutral" rating, in addition to news that VLO has decided against a joint venture with Encana all may have influenced today's selling pressure. We see the late afternoon bounce from the 10-dma and the $105 level as a potential entry point for new long positions. However, we wait to see some follow through on this afternoon's bounce before initiating new call positions. 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: + 0.32
Earnings Date 01/30/06 (unconfirmed)
Average Daily Volume = 9.8 million

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Zimmer Holdings - ZMH - close: 69.99 chg: +0.48 stop: 65.75

ZMH displayed some strength today after announcing a $1 billion stock buy back program. The stock spiked toward the $71 level but could not hold its gains. The afternoon weakness suggests a dip back toward the 10-dma (68.25) is likely tomorrow. Our target is the $74.00-75.00 range under its simple 200-dma.

Picked on December 11 at $ 68.62
Change since picked: + 1.37
Earnings Date 01/25/06 (unconfirmed)
Average Daily Volume = 2.6 million
 

Put Updates

Magna Int. - MGA - close: 68.94 chg: -0.12 stop: 70.31

We do not see any change from yesterday's update on MGA. We believe that traders should remain on yellow alert considering yesterday's breakout over the 50-dma. We are not suggesting new positions at this time but we will be looking for a failed rally under $70 as a potential entry point. Our target is the $63-62 range.

Picked on December 04 at $ 68.14
Change since picked: + 0.80
Earnings Date 02/07/06 (unconfirmed)
Average Daily Volume = 318 thousand

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Netflix - NFLX - close: 25.94 chg: +1.51 stop: 27.45

This should not be a surprise. Yesterday we told readers to expect a rebound and expect the rebound to be sharp since NFLX is so heavily shorted. It didn't help matters (for the bears) that one analyst firm came out today and suggested the sell-off was a new buying opportunity. We are looking for the $26.50-27.00 range to offer overhead resistance. We are not suggesting new positions. Our target is $22.55.

Picked on December 09 at $ 25.99
Change since picked: - 0.05
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: 81.25 chg: -0.17 stop: n/a

Time is almost up! The stock traded in a 43-cent range today. December options expire this Friday. More conservative traders may want to exit right here to salvage some of their capital. 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 breakeven at $2.80. If the calls don't reach our new target we still have to exit before the close on Friday for whatever market value is. Currently the December $80 calls (ABC-LP) are trading at $1.25bid/$1.35ask.

Picked on October 16 at $ 74.81
Change since picked: + 6.37
Earnings Date 11/03/05 (confirmed)
Average Daily Volume = 900 thousand

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Amer. Eagle Out. - AEOS - cls: 21.49 chg: -0.25 stop: n/a

We don't see any change from our previous updates on AEOS. 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 $1.60bid/$1.75ask.

Picked on November 13 at $ 25.47
Change since picked: - 3.98
Earnings Date 11/15/05 (confirmed)
Average Daily Volume = 3.6 million

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Abercrombie&Fitch - ANF - close: 63.84 chg: -0.08 stop: n/a

We do not see any change from our previous updates on ANF. 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: + 4.17
Earnings Date 11/15/05 (confirmed)
Average Daily Volume = 2.7 million

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Blue Coat Sys. - BCSI - cls: 45.45 chg: -0.09 stop: n/a

We don't see any change from yesterday's update. If you have not opened a position yet in BCSI you might want to wait until next week to see if February strikes will become available. We would certainly prefer Februarys over January strikes. 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: + 0.02
Earnings Date 02/14/06 (unconfirmed)
Average Daily Volume = 416 thousand

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Chicago Merc. Exchg. - CME - cls: 368.12 chg: -1.23 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: - 7.78
Earnings Date 01/24/06 (unconfirmed)
Average Daily Volume = 879 thousand

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D.R.Horton - DHI - close: 37.54 chg: -0.40 stop: n/a

DHI hit some profit taking today after what has so far been a very bullish week. 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 $3.30bid/$3.60ask.

Picked on November 13 at $ 32.56
Change since picked: + 4.98
Earnings Date 02/15/06 (unconfirmed)
Average Daily Volume = 3.2 million

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Four Seasons - FS - close: 48.55 chg: +0.15 stop: n/a

We don't see any change from our previous update on FS. The stock continues to show relative weakness. 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 $2.30bid/$2.65ask.

Picked on November 08 at $ 55.37
Change since picked: - 6.82
Earnings Date 11/10/05 (confirmed)
Average Daily Volume = 319 thousand

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Lear Corp - LEA - close: 28.37 chg: -0.16 stop: n/a

We don't see any change from yesterday's update on LEA. LEA is currently struggling under the 50-dma and the $29.00 level. If we don't see more follow through to the downside over the next few days it may be prudent to try and exit early. 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: - 1.87
Earnings Date 01/25/06 (confirmed)
Average Daily Volume = 1.8 million

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Loews - LTR - close: 96.90 change: +0.00 close: n/a

Tomorrow is our last day. More conservative traders may want to exit right now and try to salvage some of their capital. The December options expire after Friday's close. 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. 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. Please note the new target - we plan to exit if our strangle rises to $3.90 or if shares of LTR hit 99.90. If LTR does not hit our target we still have to exit before Friday's close for whatever the current bid is. Currently the LTR-LS calls are trading at $1.75bid/$2.05ask. The high today was $2.40.

Picked on October 23 at $ 89.94
Change since picked: + 6.96
Earnings Date 10/27/05 (confirmed)
Average Daily Volume = 602 thousand

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Verifone Holdings - PAY - cls: 24.65 chg: +0.43 stop: n/a

PAY made another rally attempt at the $25.00 resistance level. Shares closed with a 1.77% gain on above average volume. 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 $2.40bid/$3.20ask.

Picked on October 12 at $ 19.98
Change since picked: + 4.67
Earnings Date 12/01/05 (confirmed)
Average Daily Volume = 259 thousand

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Protein Design Labs - PDLI - cls: 29.02 chg: +1.10 stop: n/a

Tomorrow is our last day for the PDLI strangle. Right now the stock's bias appears bullish. Yet unless the stock can trade significantly above the $30 level tomorrow we'll be closing it at a loss.

Picked on October 30 at $ 27.70
Change since picked: + 1.32
Earnings Date 11/01/05 (confirmed)
Average Daily Volume = 1.8 million

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Spectrum Brands - SPC - close: 20.06 change: -0.57 stop: n/a

Yesterday's unexpected gap up was the worst thing that could happen to us for this strangle play. Tomorrow's our last day for December options. Unless there is another big move tomorrow we'll be closing this play with a loss.

Picked on November 08 at $ 20.63
Change since picked: - 0.57
Earnings Date 11/10/05 (confirmed)
Average Daily Volume = 576 thousand

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Questar Corp. - STR - close: 83.89 chg: -0.30 stop: n/a

STR managed to hold on to most of its recent gains despite selling in the natural gas commodity. There are less than 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. FYI: the STR-AP calls are trading at $5.30bid/$5.70ask.

Picked on November 20 at $ 76.25
Change since picked: + 7.64
Earnings Date 01/26/05 (unconfirmed)
Average Daily Volume = 716 thousand

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Texas Ind. - TXI - close: 51.90 chg: -0.30 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: + 2.33
Earnings Date 12/15/05 (unconfirmed)
Average Daily Volume = 354 thousand

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Valero Energy - VLO - close: 106.88 chg: -2.82 stop: n/a

VLO experienced some profit taking after a very strong December performance so far. The intraday bounce from the 10-dma near $105 is a positive sign. 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 in the strangle's value.

Picked on November 21 at $101.00
Change since picked: + 5.88
Earnings Date 01/30/06 (unconfirmed)
Average Daily Volume = 10.7 million
 

Dropped Calls

Alcon - ACL - close: 139.75 change: -1.70 stop: 139.90

Yesterday's unexplained sell-off in ACL produced some follow through selling on Thursday. The stock dipped to $139.10 intraday and the oversold bounce midday failed to hold and ACL closed under the $140.00 level. Our stop loss was at $139.90 so we've been stopped out. Keep an eye on the simple 50-dma near 137.00. A bounce from there could be a new entry point or a breakdown below it could be a new bearish entry point.

Picked on December 11 at $144.60
Change since picked: - 4.85
Earnings Date 02/08/06 (unconfirmed)
Average Daily Volume = 524 thousand
 

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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