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Daily Newsletter, Monday, 01/30/2006

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Table of Contents

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

Market Wrap

Flatline

"Sideways" was the direction today as the pre-FOMC lull commenced a day early. Exchange volume was respectable and breadth held positive for most of the session in what was a very quiet session.


Daily Dow Chart

Volume breadth favored the Nasdaq, with the NYSE finishing with 1.08 advancing shares for each declining. Pricewise, the Dow finished lower by 7 at 10899.92, near the lower end of its very narrow range for the day- less than 45 points from stem to stern. The doji rejection at the highs and lows showed indecision at the top of Friday's range, and while the daily cycle indicators are starting to turn up, Friday's high was never touched or tested. Below today's 10887 low, next confluence support is at 10800.


Daily S&P 500 Chart

The SPX gained 1.48 to close at 1285.20, trading less than a four point range in what was effectively a footnote to Friday's session. As with the Dow, the daily cycle indicators are turning up but direction remains up for grabs, with the January high still 10 points north of current levels. Bulls need to see price holds above the 1282 confluence/trendline support level, with the year high at 1295 key resistance. Should 1282 fail, next support is at the rising trendline off the October low.


Daily Nasdaq Chart

The Nasdaq added 2.55 to close at 2306.78, trading within the upper doji shadow atop Friday's range. The high came at 2314, and previous confluence at 2300 was not tested. There remains an unfilled gap to 2280, below which is rising support off the October lows to 2250. But price is doing its best to pull the daily cycle up from a higher low. I'm suspicious of bullish action here because of the weekly cycle, due for a downphase that should cap any daily cycle strength. But the price trend has been steadily up since last May, and for the time being, price continues to coil within its rising apex.


Daily TNX Chart

Liquiditywise, the Fed's open market desk had a $5.75 billion weekend repo expiring this morning, and replaced it with a $5 billion overnight repo. That drained net $750 million, a small amount, but demand for the money on the part of the dealers rose, with the highest rate submitted with treasury collateral up to 4.45% and a stopout rate of 4.4%. This shows the Fed allowing rates to climb toward an anticipated overnight rate of 4.5%, presumably to be announced tomorrow.

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The Treasury announced the size of the upcoming 4-week bill auction today, and auctioned 13-week and 26-week bills. There were $8 billion of the 4-week paper maturing, and $18 billion of new 4-week bills will replace them, raising new cash in the amount of $10 billion.

The 13- and 26-week bill auction was for $37 billion to refund $34.7 billion maturing, again raising new cash in the amount of $2.28 billion. The indirect bid, representative of demand for foreign central banks, was lighter than the usual 25% participation rate, $8.33 billion of the $37 billion total or 22.5% of the total. The high rate on the 13-week bills was 4.375%, the yield 4.485% and the bid-to-cover ratio light at 1.87. The high-rate on the 26-week bills was 4.435%, the yield 4.6%, with 1.94 bids tendered for each accepted.

Later in the session, Assistant Treasury Secretary Mark Warshawsky announced that the Treasury expects to borrow $188 billion in Q2 of this year, a new record $17 billion above the anticipated Q1 level of borrowing. Warshawsky stated that the Treasury expects to pay down $30 billion of federal debt in Q3, and went on to say that the economy is "right on track," "on firm footing," and that the negative savings rate is no reason to be pessimistic. Presumably, he meant to exclude from the latter statement those consumers being drawn deeper into debt as they try to make ends meet.

Ten year treasuries were weak from the get-go and held their losses throughout the session. Ten year note yields (TNX) (see chart above) finished higher by 3.2 bps at 4.535%. On the daily chart, we see the first signs of the anticipated upturn in the oscillators following last week's sharp break above descending linear resistance. 4.6% is next confluence and Fibonacci resistance, 4.45% now support.

The sole economic report for the day was the Commerce Department's Personal Income and Personal Spending, reported at 8:30AM. The report showed a 0.9% rise in consumer spending in December, while personal income rose 0.4% and real disposable income rose 0.4%. Expectations were for a rise of 0.4% in personal income and 0.8% in personal spending. The previous month saw both figures rise 0.3%. The Personal Consumption Expenditure price index was unchanged from December, while the Core PCE rose 0.1%, following 4 consecutive months of 0.2% gains. The Core PCE is up 1.9% during the past year. Associated Press reported that the savings rate was negative for all of 2005 at -0.5%, the lowest rate since 1933, when the annual savings rate fell to -1.5%.

There's a heavy week ahead for economic data, with the Employment Cost Index, Chicago PMI, Consumer Confidence and FOMC announcement tomorrow, then Auto & Truck Sales, Construction Spending, the ISM Manufacturing Index and the weekly Mortgage and Petroleum data on Wednesday. On Thursday, we get the weekly Initial Claims and Natural Gas data, and preliminary Productivity for Q4. On Friday, it's the monthly employment report, with Nonfarm Payrolls, Average Workweek, Hourly Earnings, and the Unemployment Rate as well as Michigan Sentiment, Factory Orders and ISM Services.

Also tomorrow will be OPEC's meeting in Vienna. Iran's oil minister Kazem Vaziri Hamaneh said that any supply decisions will be taken collectively by the cartel. Both Iran and Venezuela have both expressed support for supply cuts to defend current price levels, but other members, such as Saudi Arabia and Algeria, have indicated that they see no reason to tighten supplies. OPEC is currently pumping at capacity, with a 28 million bpd daily quota. Crude oil futures closed the day +.625 at 68.375, off a low of 67.275.

Last but not least, Fed Chairman Greenspan will step down tomorrow and past the torch to Ben Bernanke. The International Herald Tribune reported that Greenspan has plans to start a consulting firm, Greenspan Associates, and to write a book. His wife, Andrea Mitchell, added that he has recently begun to learn "how to do his own research on the Internet; he is still in the process of getting a personal e-mail address."

Marketwatch cited the Investment Company Institute to the effect that US stock funds saw net outflows of $2.18 billion in December compared with inflows of $9.23 billion in November. Foreign-content equity funds saw inflows of $12.28 billion, slightly up from November's $11.79 billion figure. Bond funds saw net outflows of $2.71 billion compared with outflows of $324 million in November. Overall, mutual fund assets grew $138.9 billion or 1.6% to $8.906 trillion.

In corporate news, Eastman Kodak (EK) reported a Q4 loss that shrunk from $59 million or 20 cents per share in the year-ago quarter to $52 million or 18 cents per share. Based on its continuing operations, EK lost 50 cents per share. Sales rose 12% to $4.2 billion, however, based on strong demand for its digital products. The company announced that CFO Robert Brust will retire at the end of the month, and the company is currently searching for a successor. Although the stock has been pummeled over the past year, it has risen roughly 25% during the past quarter. EK lost 2.35% to close at 25.75 for the day.

Drugmaker Schering-Plough (SGP) reported Q4 earnings that rose from a loss of 58 cents or $856 million in the year-ago quarter to a profit of 7 cents or $104 million, citing growth of its flagship drugs. Revenues rose 6% to $2.3 billion (or +13% to $2.7 billion including sales from its joint venture with MRK). Estimates were for EPS of 8 cents on revenue of $2.3 billion. Later in the morning, SGP reported that its oral hepatitis C protease inhibitor SCH 503034 has been granted Fast track status by the FDA. SGP lost 2.54% to close at 19.57.

Mattel (MAT) reported Q4 earnings that fell to 69 cents per share or $279.2 million fro $284.3 million or 68 cents in the year-ago quarter. This quarter's result was boosted by an 11 cent tax benefit. Net sales fell from $1.85 billion to $1.84 billion. The company cited an 11% in Hot Wheels and Barbie brands, while Fisher-Price rose 1% and its American Girl brand rose 12%. MAT gained 6.9% to close at 15.80.

Exxon-Mobil (XOM) reported a record profit, not for itself but all US companies, at $10.71 billion for Q4 and $36.13 billion for the full year. The company earned $1.71 per share for quarter, compared with $1.3 per share or $8.42 billion in the year-ago quarter. Revenues rose from $83.37 billion to $99.66 billion in the current quarter, less than Q3 2005's $100.72 billion however. XOM's previous record was posted in Q3 2005 at $9.92 billion, and the previous US record had been XOM's in 2004, at $25.3 billion. XOM rose 2.97% to close at 63.11.

After the bell, Kraft (KFT) reported earnings that rose from 37 cents or $677 million to 46 cents or $773 million in the current quarter on sales that rose 10% to $9.7 billion. Estimates were for sales of $9.4 billion. The EPS figure included a restructuring charge of 10 cents, net of which EPS would have been 56 cents, beating consensus estimates by 3 cents. KFT rose 2.42% to close at 30.

For tomorrow, there's a good chance that we'll have to continue watching the grass grow as the markets await the FOMC announcement and, in particular, the policy statement. Prices are poised just below recent multiyear highs, the bears clamoring for a correction or worse, the bulls eyeing the rising trend and nearby highs. With lots of economic data, the OPEC meeting, the transfer of the Fed chairmanship from Greenspan to Bernanke and the FOMC meeting, the pre-FOMC drift could be livelier than usual. We'll be following it all for you in the Market and Futures Monitors- see you there!
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
AAPL XMSR NONE

New Calls

Apple - AAPL - close: 75.00 change: +2.97 stop: 69.99

Company Description:
Apple ignited the personal computer revolution in the 1970s with the Apple II and reinvented the personal computer in the 1980s with the Macintosh. Today, Apple continues to lead the industry in innovation with its award-winning desktop and notebook computers, OS X operating system, and iLife and professional applications. Apple is also spearheading the digital music revolution with its iPod portable music players and iTunes online music store. (source: company press release or website)

Why We Like It:
We have been watching AAPL ever since its earnings report. The company pre-announced strong earnings in early January and the news sent shares soaring higher. The actual earnings report was a bit anticlimactic especially with a lackluster earnings guidance for the second quarter. We've been watching to see if and where investors would step in to buy the dip. It looks like bulls are defending support near the $70.00 level. Today's rebound produced a bullish engulfing candlestick pattern (interpreted as a bullish reversal) on volume way above the daily average. We see this as a short-term, very aggressive and speculative entry point, especially given the bearish P&F chart and bearish technicals on the weekly chart. We're suggesting bullish positions here with a target in the $84.00-85.00 range. More conservative traders might want to wait for more confirmation and look for a move over today's high (76.60) or the 10-dma (76.95) before buying calls. We'll put our stop loss under support near $70.00. Our time frame is six-to-eight weeks.

Suggested Options:
We are suggesting the March calls. As with all of our new call or put plays the options listed are for reference. You the individual trader should decide which month and which strike best suits your trading style and risk.

BUY CALL MAR 70 QAA-CN open interest=1628 current ask $7.90
BUY CALL MAR 75 QAA-CO open interest=4051 current ask $5.00
BUY CALL MAR 80 QAA-CP open interest=12900 current ask $2.90

Picked on January 30 at $ 75.00
Change since picked: + 0.00
Earnings Date 01/18/06 (confirmed)
Average Daily Volume = 27.1 million

New Puts

XM Sat.Radio - XMSR - close: 26.43 chg: -1.04 stop: 28.51

Company Description:
XM is America's number one satellite radio service with more than 6 million subscribers. Broadcasting live daily from studios in Washington, DC, New York City, the Country Music Hall of Fame in Nashville, Toronto and Montreal, XM's 2006 lineup includes 160 digital channels of choice from coast to coast: the most commercial-free music channels, plus premier sports, talk, comedy, children's and entertainment programming; and 21 channels of the most advanced traffic and weather information. (source: company press release or website)

Why We Like It:
After months of consolidating sideways with a bearish trend of lower highs it looks like XMSR is finally breaking down. The stock has seen a sharp rise in volume lately and today's 3.7% decline was fueled by extremely strong volume, which is of course very bearish. The stock gapped down this morning and then rallied just enough to fill the morning gap before heading lower again. More conservative traders may want to wait for XMSR to breakdown below its April 2005 lows near $26.00 before initiating positions. We're going to target a decline into the $21.00-20.00 range and we'll start with a stop loss at $28.51. We do not want to hold over the (unconfirmed) February 9th earnings report making this a short-term play. FYI: the P&F chart points to a $19.00 target.

Suggested Options:
We only have a few days so we're suggesting the February puts.

BUY PUT FEB 30.00 QSY-NF open interest=1310 current ask $3.80
BUY PUT FEB 27.50 QSY-NY open interest=3645 current ask $1.70
BUY PUT FEB 25.00 QSY-NE open interest=5841 current ask $0.60
BUY PUT FEB 22.50 QSY-NX open interest= 687 current ask $0.25

Picked on January 30 at $ 26.43
Change since picked: + 0.00
Earnings Date 02/09/06 (unconfirmed)
Average Daily Volume = 5.0 million

New Strangles

None Today.


Play Updates

In Play Updates and Reviews

Call Updates

Aetna - AET - close: 93.32 change: +0.63 stop: 89.99

Monday proved to be a positive day for AET. The stock gapped higher at the opening bell and traded briefly above resistance at its simple 50-dma and the $94.00 level. Our trigger to buy calls was hit at $94.05 so the play is now open. We are suggesting caution because AET failed to close over the $94 level and this could turn into a failed rally near resistance. Aggressive traders might want to look for a bounce from $92 as a new entry point. The rest of us are probably better off waiting for a new relative high above $94.20 before buying calls. We do not want to hold over AET's February earnings report. Our target is the $99.00-100.00 range.

Picked on January 30 at $ 94.05
Change since picked: - 0.73
Earnings Date 02/09/06 (confirmed)
Average Daily Volume = 1.7 million

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Carter's Inc. - CRI - close: 68.06 chg: +0.06 stop: 64.75

We do not see any change from our weekend update on CRI. Any bounce above $65 could be used as a new bullish entry point. The P&F chart is bullish and points to an $85 target. Our target is the $72.50-75.00 range. We do not want to hold over the late February earnings report.

Picked on January 25 at $ 66.62
Change since picked: + 1.44
Earnings Date 02/20/06 (unconfirmed)
Average Daily Volume = 313 thousand

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Express Scripts - ESRX - close: 91.65 chg: -0.77 stop: 87.45

We do not see much change from our new play description on ESRX published over the weekend. Readers can use today's pull back as a new entry point to buy calls or hope for a dip back toward the $90.00-90.75 region and buy calls on a bounce there. Broken resistance near $90 should now act as new support. Our target is the $99.50-100.00 range. We do not want to hold over the February 22nd (unconfirmed) earnings report.

Picked on January 29 at $ 92.42
Change since picked: - 0.77
Earnings Date 02/22/06 (unconfirmed)
Average Daily Volume = 2.1 million

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Freeport Mcmoran - FCX - cls: 63.30 chg: +0.33 stop: 56.85

FCX is still creeping higher. We don't see any change from our weekend update. Don't forget that rival Phelps Dodge (PD) is expected to report earnings on January 31st. The stock has been soaring and traders might use PD's report as an excuse to lock in profits. If that occurs then FCX could see some selling by association. Our target in FCX is the $64.75-65.00 range.

Picked on January 24 at $ 60.22
Change since picked: + 3.08
Earnings Date 01/17/06 (confirmed)
Average Daily Volume = 2.6 million

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KB Home - KBH - close: 77.51 chg: +1.21 stop: 73.30

KBH is off to a good start with today's 1.5% gain. We would still consider new bullish positions here and we don't see much change from our new play description from this weekend. Our target is the $84.00-85.00 range. Short-term traders can target the January highs near $82.00. The P&F chart is bullish and points to a $93.00 target.

Picked on January 29 at $ 76.30
Change since picked: + 1.21
Earnings Date 03/16/06 (unconfirmed)
Average Daily Volume = 2.0 million

---

SFBC Intl. - SFCC - close: 21.51 chg: -0.40 stop: 18.95

The trading action in SFCC this Monday looks like a new bullish entry point. Over the weekend we warned readers to watch out for a pull back into the $20.00-20.75 region as a new entry zone. Shares dipped to $20.42 this morning and quickly rebounded higher. A strong bounce from here could set off another short squeeze. The stock has incredibly high short interest. Our target is the $24.90-25.00 range. More conservative traders may want to exit in the $24.50-24.65 zone since the 38.2% Fibonacci retracement of its October-December sell-off is about $24.65. In the news today SFCC announced that it is being sued by the owner of some land it leases property from. SFCC issued a press release to defend itself.

Picked on January 25 at $ 20.92
Change since picked: + 0.59
Earnings Date 02/22/06 (unconfirmed)
Average Daily Volume = 2.5 million
 

Put Updates

Biotech HOLDRs - BBH - close: 193.12 chg: -1.63 stop: 200.11

Biotech stocks were the worst performing sector today. The BTK index fell 1.34%. Shares of the BBH Holdrs fell 0.8% and look poised to breakdown under the $192 level again. Keep an eye on AMGN, which appeared to have produced a failed rally under its 200-dma today. Our target for the BBH is the $187.00-185.00 range.

Picked on January 20 at $195.78
Change since picked: - 2.66
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 539 thousand

---

Johnson Controls - JCI - close: 70.52 chg: +0.53 stop: 72.51

We do not see much change from our weekend update on JCI except that we would not open new put positions with the stock above the $70.00 level. Watch to see if the stock fails to rally over its simple 10-dma, which is quickly sliding lower to meet the stock price. Our target is the $65.50-65.00 range but watch for a bounce from the 100-dma near 68.00.

Picked on January 25 at $ 69.90
Change since picked: + 0.62
Earnings Date 01/20/06 (confirmed)
Average Daily Volume = 955 thousand
 

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.)

---

Building Materials - BMHC - cls: 80.64 chg: +0.64 stop: n/a

We do not see any change from our weekend update on BMHC. Earnings are coming up around February 7th and will probably produce more volatility. 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: - 0.31
Earnings Date 02/07/06 (unconfirmed)
Average Daily Volume = 527 thousand

---

Encana Corp. - ECA - close: 49.23 chg: +2.12 stop: n/a

Oil stocks were some of the best performers today and ECA added 4.5% to out perform many of its peers. 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: + 3.67
Earnings Date 02/15/06 (confirmed)
Average Daily Volume = 4.4 million

---

Google Inc. - GOOG - close: 426.82 chg: -6.67 stop: n/a

Tomorrow is your last day to consider opening strangle positions in GOOG before its earnings report after the closing bell on Tuesday. Wall Street expects GOOG to report profits of $1.77 a share. We are suggesting the February $450 calls and February $420 puts. Our estimated cost was about $40.10. Our target is for a rise to $60.00 for either side of the strangle. Given today's decline you might want to consider the $440 calls and the $420 puts or even the $410 puts. Remember, this is an aggressive, high-risk play and we expect shares to gap open (up or down) on Wednesday morning after the report.

Picked on January 29 at $433.49
Change since picked: - 6.67
Earnings Date 01/31/06 (confirmed)
Average Daily Volume = 11.1 million

---

Ryland Group - RYL - close: 73.81 change: +0.51 stop: n/a

We do not see any change from our weekend update on RYL. We are not suggesting new 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: - 1.38
Earnings Date 01/24/06 (confirmed)
Average Daily Volume = 1.1 million
 

Dropped Calls

Wynn Resorts - WYNN - close: 64.72 change: +1.78 stop: 58.45

Target achieved. Citigroup started coverage on WYNN with a "buy" rating this morning and the stock responded with an early rally up and over the $65.00 mark. Our target was the $64.75-65.00 range.

Picked on January 22 at $ 58.78
Change since picked: + 5.94
Earnings Date 02/09/06 (unconfirmed)
Average Daily Volume = 1.1 million
 

Dropped Puts

Omnicare - OCR - close: 48.96 change: +6.09 stop: 56.25

Target achieved. Actually OCR has surpassed our target in the $51.00-50.00 range. The stock closed with an 11% loss on huge volume after news surfaced of a raid by law enforcement officials. An Associated Press article reported that the Cincinnati Enquirer stated over the weekend that the Michigan attorney general's office had raided OCR's offices last week. At least one stock analyst downgraded shares to a "hold" on the news.

Picked on January 20 at $ 54.99
Change since picked: - 6.03
Earnings Date 02/23/06 (unconfirmed)
Average Daily Volume = 1.3 million
 

Dropped Strangles

None Today.

Today's Newsletter Notes: Market Wrap by Jonathan Levinson and all other plays and content by the Option Investor staff.

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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