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Daily Newsletter, Tuesday, 01/24/2006

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Table of Contents

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

Market Wrap

The Return of Op-Ex

Traders doubled-checked their calendars to be sure that January's third Friday had passed as the equity indices traced a tight, flat range. The range felt ready to break at any time, but each attempt was reversed quickly.

Volume was moderate, and volume breadth held in positive throughout the session, finishing with 1.8 advancing shares for each declining on the NYSE and 1.5:1 on the Nasdaq. Despite that, however, bulls weren't able to break upward out of what bears saw as flags at the bottom of last week's steep decline.

Daily Dow Chart

The Dow gained 23 points to close at 10712. The afternoon high was 10750. Unlike that of the Nasdaq, the Dow's high failed to exceed yesterday's high, resulting in a higher low and lower high for the day. This price compression suggests a potentially explosive move out of the narrowing range. The current range is just below the November-December range that broke on last week's drop below 10730-750, and the overhang will be a major obstacle for bulls seeking another shot at the highs. If the current bounce is a bear flag/dead-cat bounce, then a violation of 10630-650 could be enough to kick off the next leg of the decline.

Daily S&P 500 Chart

The SPX eked out a 3.04 gain close at 1266.86. As with the Dow, these prints have managed to retrace only a small part of last week's decline. On the other hand, the November-December confluence has not yet failed, and while the oscillators point down, the broader bullish trend has yet to be seriously violated. 1260 is first support below, 1272 immediate resistance just above the 1271.47 high of the day.

Daily Nasdaq Chart

The Nasdaq gained 16.78 to close at 2265.25, bouncing from rising linear support at a low of 2256. 2270 is first resistance a point above today's high, followed by 2290-2300. As noted in the Market Monitor, this week's flaggy bounce has yet to impact the oscillators on the daily or weekly charts, which remain in downphases. Only the intraday cycles are bouncing, and that bounce appears to be corrective. A strong move back above 2300 could change that, however.

Daily TNX Chart

The Treasury auctioned $12 billion of 4-week bills today to refund $10 billion maturing and raising $2 billion of new cash. Foreign central banks purchased $900.2 million of $12 billion total, a weak showing, and the bid to cover ratio was 2.02. The bills sold for a high-rate of 4.145% yielding 4.216%.

The Treasury also auctioned $10 billion of 20-year Treasury Inflation-Protected Securities (TIPS), raising all new cash. Foreign central banks took a big $5.56 billion of the total, but the bid to cover ratio was just 1.48. The high-yield was 2.039%, the median yield 1.955% (at which rate half of the bonds were auctioned) and the interest rate 2%.

In addition to this effective $12 billion in drains on the market, the Fed loaned its dealers $7 billion via overnight repo, refunding the $10 billion expiring today for a net drain of $3 billion. That drain was mitigated by the outright coupon purchase announced yesterday and delivered today, in the amount of $947 million. Given that nearly $15 billion in liquidity was drained today by the Treasury and the Fed, it wasn't surprising that the treasury markets were weaker, but equities nevertheless held their slim gains.

Ten year note yields (see chart above) closed higher by 3.3 bps at 4.39%, back within the rising linear channel. The daily cycle continues its difficult downphase, and a break back above the 4.44% level could be enough to generate the first upturn in this timeframe.

There were no major economic data released today, but the earnings were fast and furious. 3N (MMM) reported Q4 earnings that rose from $720 million or 91 cents per share to $761 million or 99 cents in the current quarter, 4 pennies short of consensus estimates. Sales rose from $5.09 billion to $5.33 billion, a 4.5 gain but missing expectations of $5.4 billion. Net of one-time accounting charges, the company said it earned $1.04 per share. For Q1, MMM expects EPS of $1.1-$1.14, compared with First Call estimates of $1.15. The company will restate 2005 earnings to include a 14-cent per share charge related to expensing of stock options. MMM closed lower by 1.98% at 74.20.

McDonald's Q4 earnings rose from 31 cents or $397.9 million in the year-ago quarter to $.48 or $608.5 million on revenue that rose 19% to $3.55 billion, meeting consensus estimates of 48 cents. MCD gained .14 to close at 35.85. JNJ's earnings Q4 earnings rose from $1.2 billion or 41 cents to $2.2 billion or 73 cents, but sales fell 1.1% to $12.6 billion on a 4.2% drop in domestic sales. Estimates were for EPS of 73 cents on $13.2 billion revenue. JNJ got hit for a 2.99% loss to close at 59.36.

Dupont (DD) reported Q4 earnings that fell from $278 million or 28 cents to $153 million or 16 cents per share, 3 cents of which was a one-time benefit in the form of lower than expected tax costs resulting from its repatriation of foreign earnings. Sales dropped 3% to $5.83 billion. Estimates were for EPS of 10 cents on revenue of $5.92 billion. The company also warned that Q1 earnings are expected at 70 cents per share, 29 cents lower than the current consensus view. The company cited declines in its agriculture and nutrition businesses on lower demand for crop protection chemicals and other factors. As well, last year's hurricanes were blamed for an expected decrease in performance materials, coatings and color technologies. Full year earnings for 2006 are expected around $2.60 per share, compared with a $2.83 consensus. DD lost .73% to close at 39.26.

Upside earnings surprises included LXK and SMG, though Lexmark's earnings nevertheless fell 47% and the company announced a planned job cuts of 825 positions and outsourcing of another 525 positions. LXK rose 11.29% to close at 51.08. EMC reported a record quarter and full-year, with Q4 net income rising 27% from $321 million or 13 cents per share to $409 million or 17 cents on revenue that rose 15% to $2.71 billion. Estimates were for EPS of 17 cents on $2.693 billion revenue. EMC gained 2.94% to close at 13.65.

After the bell, SUNW reported Q2 earnings that fell from a $4 million profit in the year-ago quarter to a loss of $233 million or 7 cents per share. Revenues rose, however, to $3.38 billion from $2.84 billion. Excluding one-time entries, EPS was a loss of 3 cents, missing expectations by 2 pennies. Sun got hit for a 2.29% loss afterhours to 4.27 as of this writing.

Disney (DIS) confirmed its agreement to purchase Pixar (PIXR) for $7.4 billion, comprised of $6.3 billion in stock and $1.1 billion in cash, pursuant to which PIXR CEO Steve Jobs will join Disney's board and become its largest shareholder. DIS closed the day +1.84% at 25.99, and PIXR closed lower by 1.2% at 57.57, up .03 to 57.60 as of this writing.

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In other news, Canadians elected a new Tory minority federal government yesterday. The Conservative party won 124 seats in Canada's House of Commons, the Liberals 103, the Bloq Quebecois 51 and the NDP 29. Quebeckers gave the BQ 51 out of 75 ridings, while the Conservatives gained 10 new ridings, 8 of which were former BQ ridings. This is a smaller minority than the Liberals won in the 2004 election, suggesting that the Conservatives will have their work cut out for them in Parliament. Canadian dollar futures traded both sides of .87 on Globex, and then dropped hard to the mid-.86s as the Bank of Canada announced another 25 bp overnight rate hike to 3.5%.

The Bank of Canada's rate decision was inline with expectations, and its policy decision maintained that "some modest further increase in the policy interest rate would be required to keep aggregate supply and demand in balance and inflation on target over the medium term..."

This is a relatively light week for economic data, with the greater emphasis to remain on corporate earnings. There were no major economic reports released today, and tomorrow we'll get the weekly EIA Petroleum report, the weekly Mortgage Bankers Association data, and Existing Home Sales. On Thursday, it's Durable Orders, Initial Claims and the Help Wanted Index, as well as the EIA Natural Gas inventory report. On Friday, we'll get the GDP and New Home Sales.

For tomorrow, the big question will be whether the bulls can break out of this bear flag off the lows. A sideways drift would only add another day to the "accumulation/distribution" dilemma. While the pattern and the cycles in the daily and weekly timeframes support more downside from here, the market has had a habit of blasting strongly higher from such consolidations. Best is to watch the support and resistance levels posted above and keep an open mind- a break on heavy volume should be the real deal. We'll be following all the action as it happens in the Market Monitor and Futures Monitor. See you there!
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
FCX JCI None

New Calls

Freeport Mcmoran - FCX - cls: 60.22 chg: +1.92 stop: 55.79

Company Description:
FCX explores for, develops, mines and processes ore containing copper, gold and silver in Indonesia, and smelts and refines copper concentrates in Spain and Indonesia. (source: company press release or website)

Why We Like It:
Metal and mining related stocks continue to be the leaders in the rally this week. Copper-related mining companies have seen the shares rebound strongly after testing supporting trendlines. FCX is one such stock that has rebounded from support. A quick look at the daily chart and you'll notice that the rallies have been garnering the most volume over the last few weeks. The current bounce back over the $60.00 level looks like a new bullish entry point to buy calls. More patient traders might consider waiting for a pull back into the $58.00-59.00 region and buy a bounce there instead. We're going to stick our stop loss under Monday's low. Our target is the $64.75-65.00 range. Please note that there is some headline risk involving rival Phelp Dodge's (PD) earnings report coming up on January 31st.

Suggested Options:
We are suggesting the March calls.

BUY CALL MAR 55 FCX-CK open interest= 63 current ask $7.00
BUY CALL MAR 60 FCX-CL open interest=286 current ask $3.80
BUY CALL MAR 65 FCX-CM open interest= 35 current ask $1.85

Picked on January 24 at $ 60.22
Change since picked: + 0.00
Earnings Date 01/17/06 (confirmed)
Average Daily Volume = 2.6 million
 

New Puts

Johnson Controls - JCI - close: 70.35 chg: -0.54 stop: 72.51

Company Description:
Johnson Controls is a global leader in interior experience, building efficiency and power solutions. The company provides innovative automotive interiors that help make driving more comfortable, safe and enjoyable. For buildings, it offers products and services that optimize energy use and improve comfort and security. Johnson Controls also provides batteries for automobiles and hybrid electric vehicles, along with systems engineering and service expertise. Johnson Controls, founded in 1885, is headquartered in Milwaukee, Wisconsin. (source: company press release or website)

Why We Like It:
Investors were not very happy with the recent earnings report. The stock responded by breakdown down from its multi-month up trend and breaking support at its simple 50-dma. The oversold bounce has failed at the 50-dma for two days in a row and JCI looks poised to turn lower again. We are going to suggest a trigger to buy puts at $69.90. There is some support near the 100-dma but we believe that JCI could consolidate down toward the 65.50-65.00 range. The P&F chart has turned bearish and points to a $57 target.

Suggested Options:
We are suggesting the April puts because the March puts don't have much open interest.

BUY PUT APR 75 JCI-PO open interest=159 current ask $7.00
BUY PUT APR 70 JCI-PN open interest=189 current ask $3.70
BUY PUT APR 65 JCI-PM open interest=403 current ask $1.70

Picked on January xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 01/20/06 (confirmed)
Average Daily Volume = 955 thousand
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Caterpillar - CAT - close: 61.35 change: +0.31 stop: 59.90

Tomorrow is our last day before we exit. The plan is to jump out on Wednesday afternoon near the closing bell. We do not want to hold over the earnings report even though we think CAT will turn in better than expected results. There are too many variables that could send shares lower. Wall Street expects CAT to report earnings of $1.11 a share. We are not suggesting new plays at this time. Our target is the $64.75-65.00 range. The Point & Figure chart points to a $72 target.

Picked on January 08 at $ 60.45
Change since picked: + 0.90
Earnings Date 01/26/06 (confirmed)
Average Daily Volume = 4.0 million

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Fortune Brands - FO - close: 78.11 change: +0.41 stop: 76.45

The lack of movement in shares of FO is not very inspiring. More conservative traders may just want to hop out right here and wait for the stock to pick a new direction. We would not suggest new bullish positions until FO trades over $79.10 or $79.31 or its 100-dma near $79.50. Nimble traders may want to have already considered bearish put positions if FO trades under $76.50. Earnings are expected in early February and we do not want to hold over the report.

Picked on January 18 at $ 78.65
Change since picked: - 0.54
Earnings Date 02/03/06 (unconfirmed)
Average Daily Volume = 803 thousand

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Holly Corp. - HOC - close: 69.26 chg: +0.53 stop: 63.95 *new*

HOC almost hit our target today. The stock hit a high of $69.69 this afternoon in spite of a general pull back in the oil sector today. Odds are decent that HOC might be able to spike higher tomorrow into our target range of $69.75-70.00. If not then we'd expect a consolidation back down toward its 10-dma now at 66.25. We would not hold over the February earnings report. Please note that we are changing the stop loss to $63.95.

Picked on January 17 at $ 65.65
Change since picked: + 3.61
Earnings Date 02/06/06 (unconfirmed)
Average Daily Volume = 303 thousand

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Lehman Brothers - LEH - close: 135.82 chg: -0.73 stop: 131.05

The XBD broker-dealer index managed to see a new high today but shares of LEH failed to participate. The stock consolidated sideways for most of the session with a bearish tilt to the whole day. We would not be surprised to see LEH continue lower tomorrow and aim for the $134.00 region. Our target is the $138.50-140.00 range.

Picked on January 09 at $131.05
Change since picked: + 4.77
Earnings Date 03/14/06 (unconfirmed)
Average Daily Volume = 2.3 million

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Selective Ins. - SIGI - close: 57.48 chg: +0.33 stop: 54.65 *new*

The IUX insurance index closed lower today but SIGI bucked the trend in the sector with a 0.5% rally. The stock tried to breakout over the $58 level again but failed. Yesterday we warned readers to watch for a dip into the $56.00-56.50 range and that's what occurred this morning. We remain bullish and continue to target the $59.50-60.00 range. We are going to raise the stop loss to $54.65. We do not want to hold over the late January earnings report. FYI: SIGI might announce a stock split with its earnings report. The company last split its stock in December 1997 in the $50-52 region.

Picked on January 19 at $ 56.05
Change since picked: + 1.41
Earnings Date 01/31/06 (confirmed)
Average Daily Volume = 163 thousand

---

Wynn Resorts - WYNN - close: 57.70 change: +0.19 stop: 54.99

If you're feeling optimistic you could say the good news here is that there was no follow through on yesterday's failed rally. The overall pattern remains bullish for WYNN but we're surprised that the stock is under performing with the market positive both Monday and Tuesday this week. More conservative traders may want to wait for a move over $60.00 or the November high at 61.50 before initiating positions. We're going to target a rally into the 64.75-65.00 range. We do not want to hold over the February earnings report.

Picked on January 22 at $ 58.78
Change since picked: - 1.08
Earnings Date 02/09/06 (unconfirmed)
Average Daily Volume = 1.1 million
 

Put Updates

Biotech HOLDRs - BBH - close: 194.57 chg: +1.57 stop: 201.55

Given yesterday's bounce from its lows we're not surprised by the gain today in the BBH. We are not expecting a lot of movement tomorrow. BBH will likely pace the action in Amgen (AMGN) and we don't expect AMGN to move much ahead of its earnings report due out on Thursday morning. Remember, that AMGN's earnings report is our biggest risk here in the BBH since AMGN is such a large component. This is risky and more conservative traders may not want to hold a position over AMGN's earnings report. Our target is the $187.00-185.00 range above the 200-dma on the BBH.

Picked on January 20 at $195.78
Change since picked: - 1.21
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 539 thousand

---

DRS Tech. - DRS - close: 49.23 change: +0.48 stop: 51.01

DRS rallied this morning with a gap higher to open at $49.45 but the upward momentum failed to breakout over the $50.00 level and shares failed to close over technical resistance at the simple 200-dma (49.67). This could be the sort of failed rally at resistance that traders can use as a new bearish entry point just be sure to put your stop losses in place! Our target is currently the $45.00-44.00 range.

Picked on January 17 at $ 47.95
Change since picked: + 1.28
Earnings Date 02/09/06 (unconfirmed)
Average Daily Volume = 275 thousand

---

Express Scripts - ESRX - close: 88.16 chg: +2.00 stop: 90.01

It looks like bulls are buying the bounce from the 50-dma, which occurred yesterday. ESRX added 2.3% and could be headed for a retest of resistance in the $90.00 region. We remain on the sidelines. Our trigger to buy puts is under the 50-dma at $84.95. If triggered we'll target a decline to the rising 100-dma (currently 74.87). We will be adjusting our target to account for the rising 100-dma. At the moment we'll use an exit zone of $77.00-75.00.

Picked on January xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 02/22/06 (confirmed)
Average Daily Volume = 2.1 million

---

Omnicare - OCR - close: 55.69 change: +0.67 stop: 57.51

OCR is still bouncing. We would watch for a failed rally near $56.00 and its 100-dma as a new bearish entry point. If the stock trades over the $56.30-56.50 zone then our play could be in trouble and conservative types might want to jump out quickly. We're going to leave our stop loss at $57.51. Our target is the $51.00-50.00 range before its February earnings report.

Picked on January 20 at $ 54.99
Change since picked: + 0.70
Earnings Date 02/23/06 (unconfirmed)
Average Daily Volume = 1.3 million

---

Sears Holding - SHLD - close: 121.70 chg: +0.44 stop: 124.05

We feel fortunate that the bounce in SHLD today was not bigger. Our put play is still alive but we wouldn't suggest new positions until SHLD trades back under the $120.00 level. Our target is the $116.00-115.00 range.

Picked on January 23 at $119.95
Change since picked: + 1.75
Earnings Date 03/07/06 (unconfirmed)
Average Daily Volume = 2.5 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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Building Materials - BMHC - cls: 74.99 chg: +0.50 stop: n/a

BMHC is still churning sideways near $75 and its 200-dma. We are not suggesting new strangle positions at this time. The options in our strangle play are the March $90 calls (BGU-CR) and the March $70 puts (BGU-ON). Our estimated cost is $8.20. Our target is $12.50 by March expiration.

Picked on December 18 at $ 80.95
Change since picked: - 6.06
Earnings Date 02/07/06 (unconfirmed)
Average Daily Volume = 527 thousand

---

Encana Corp. - ECA - close: 47.05 chg: -1.04 stop: n/a

Oil stocks felt some profit taking on Tuesday with a decline in both the OIX and OSX indices. Shares of ECA lost just over 2%. Watch for a bounce above the $46.00 level. We're not suggesting new positions. Our strategy involves the April $50 calls (ECA-DJ) and the April $40 puts (ECA-PH). Our estimated cost is $3.45. We are aiming for a rise to $5.95.

Picked on January 10 at $ 45.56
Change since picked: + 1.19
Earnings Date 02/15/06 (confirmed)
Average Daily Volume = 4.4 million

---

Ryland Group - RYL - close: 75.17 change: +0.05 stop: n/a

As we expected shares of RYL continued to trade sideways on Tuesday as investors waited to hear the company's earnings report that was due out after the closing bell. Unfortunately, at the time we wrote this update the company had not yet released its earnings numbers. Analyst estimates are for profits of $3.12 a share. Investor reaction to the report should spark some volatility tomorrow. We are no longer suggesting new strangle positions. Our play involves the April $80 calls (RYL-DP) and the April $70 puts (RYL-PN). Our estimated cost is $7.00. Our target is $12.00.

Picked on January 22 at $ 75.19
Change since picked: - 0.02
Earnings Date 01/24/06 (confirmed)
Average Daily Volume = 1.1 million
 

Dropped Calls

Giant Ind. - GI - close: 67.13 change: +5.01 stop: 55.45

Target achieved. Actually our target has been surpassed. Oil stocks actually took a break today and consolidated lower but shares of GI bucked the trend. The stock got a big boost (+8%) after an analyst firm started coverage on GI with a new "buy" rating this morning. The stock rallied strongly on very big volume. Our target was the $66.00-67.00 range.

Picked on January 20 at $ 60.85
Change since picked: + 6.28
Earnings Date 02/20/06 (unconfirmed)
Average Daily Volume = 279 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.

Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.

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