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Daily Newsletter, Saturday, 03/25/2006

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Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews
  4. Trader's Corner

Market Wrap

Google Bounce, Housing Dip

Friday's opening bounce was due in part from news that Google was finally going to be added to the S&P. The opening bounce on Google sprinted to $370 and a +28 point gain. This powered the Nasdaq and NDX to about a +8 point gain at the opening bell. The news that Alcatel could be in a deal to buy Lucent powered additional buying as talks of consolidation in the telecom and networking sectors added fuel to the Nasdaq bounce. The NDX sprinted +17 points higher and the Nasdaq Compx +15 before the first hour of trading was over. Shorts were forced to cover once again and the downtrend that formed on Thursday was temporarily reversed.

Dow Chart - 15 min

Nasdaq Chart - 240 min

S&P Chart - 240 min

The Google news may have been instrumental in the Nasdaq jump but that is only a temporary blip. Economic news out Friday has the potential to produce longer-term market pressures. We saw on Thursday that existing home sales spiked +5.5% and traders cheered. Market analysts were speculating that the housing bubble was not going to burst after all. Yes, a rebound in the housing market may push the Fed to an additional hike but the economy was ok. Are they right or wrong? On Friday the new home sales numbers were released and new home sales fell -10% in February and -13% year over year. This was the fourth consecutive month of declines and inventory for sale rose to 548,000 units or 6.3 months at the current sales rate. The drop in new home sales was the largest drop since 1997 while the inventory of new homes for sale reached levels not seen since Jan-1996.

Now there are probably a few readers thinking what the heck? Existing home sales are up +5.5% while new home sales are down -10.5%. How can that be? Isn't that a contradiction of facts? The answer is simple. The housing bubble has been a hot topic for months. The average homeowner has been reading the news and thinking it was time to bail to escape from the mountain of debt they have accumulated in their home equity ATM. Consumers have folded their credit card debt, new cars and loan consolidation programs into their tax deductible home mortgage for several years. The 125% loan to value programs even seduced many homeowners to borrow money against their homes to raise investment cash. After all homes were going up at record rates. Many homeowners had borrowed against their equity to buy second homes or homes to fix and flip. You can't turn on cable TV without seeing dozens of shows that are based on the escalation in home prices over the last five years. Design to Sell, Fix and Flip, Sell That House, etc. Fear that this bubble was going to burst and leave homeowners holding the bag sent consumers to their closest realtor. Buyers watching house prices rise for years were waiting to buy the dip.

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The answer to the new home/existing home headline diversion comes from the timing of the transactions. Existing home sales are counted when they close. The +5.5% increase in existing home sales in February were the result of decisions made at least 90-120 days ago or approximately October/November. Homeowners made the decision to sell, slapped on a new coat of paint and cleaned out the garage prior to listing the property. Once the spruce up was over the homes were listed for sale and the process began. The traditional December sales lull due to holiday preparations put home shopping off until January. Competition for available buyers caused a downtick in asking prices as sellers maneuvered into a favorable position in the market. Buyers hoping for a dip saw these "bargains" appear and took the plunge. Contracts were signed in the Jan timeframe and the brain numbing appraisal, inspection, loan, title search, closing process began. Finally in February those Q4 sales decisions began to close and the sales numbers soared.

For new home sales the numbers are counted when contracts are signed. Delivery and closing of those homes can take up to a year depending on options chosen and inventory available. The headline number for new home sales is the very beginning of the sales process and represents a longer-term decision for buyers. New homes are typically more expensive and require many more buying decisions than purchasing a preowned home. It is less impulsive and represents more of a longer-term plan rather than a sudden urge to move. New homes are also seldom bought for speculation. Homeowners looking to speculate in the real estate market will normally buy an additional preowned home to fix and flip or as a rental property and seldom buy a new one for that purpose.

I described the process behind the sharp jump in existing home sales for February and that the process likely began in October. If we dig a little deeper we see that October was also the second highest month of new home sales ever at 1.345 million units on an annual basis. July was the highest at 1.371 million. The decline began in August as inventory levels began to climb. The October spike was the result of a quick reaction by builders to step up marketing, price reductions and move in specials to try and flush inventory before winter arrived. Since the 1.345 million headline number in October sales have fallen to only 1.08 million in February. This represents a -20% drop in new home sales in only four months. In some areas of the country such as the west coast sales have declined more than -30%. That is the sharpest decline in nearly a quarter century. The average price of a new home has dropped to $230,400 and a four-month low. Obviously that is not a west coast price. Builders are also reporting a surge in cancellations, which began in the November/December timeframe.

To recap this analysis the key point should be clear. The media has been talking about the bursting housing bubble in some form for about six months. That stretches out a little longer if you take into account the talk about the bubble while it was still rising but little action was taken by consumers during that period. They adopted a wait and see attitude with their finger on the proverbial trigger. Once the signs of weakness began to confirm the talk, consumers sprang into action. That pivot point for consumers appears to have been October in both existing home sales and new home sales. Only the reporting was different due to the different time frames and methods for counting sales. In October consumers began to react to the bubble warnings and the process is continuing as prices fall and interest rates rise.

Is this the end of the world for housing? Definitely not! The rate of sales just prior to the decline was an all time high and simply not sustainable. Interest rates were at decade lows and the consumers were coming out of their 9/11 cocoons. It was simply a buying cycle where all the factors converged for strong gains. Nobody expects a housing disaster, just a return to normal conditions. I was talking about this with an office manager for Countrywide Financial this week. He had just been in a meeting where Countrywide had told them they expected the weakness to firm soon and resume its normal course. According to Countrywide the average age of baby boomer children is now 32. This is also the average age where families purchase the house where they will raise their family. Their 20 something years are behind them and early children are reaching school age. They spend more time actually planning for the future and taking into account things like extra bedrooms, home offices, larger garages, distance from good schools, etc. The home they buy at 32 is one they are likely to be in for many years. According to Countrywide the weakness is only temporary because there has been no reduction in the number of new households created each year. That number is currently 1.2 million and corresponds quite nicely with the recent historical average of new home sales at just over 1.2 million units per year. There will always be peaks and valleys and we are simply shaking off the excess from the 2005 peak.

Chart of Personal Bankruptcy filings. Source = economy.com

The wild card here is the over committed consumer. I discussed last Sunday the expected 2006 economic slowdown due to a rising consumer debt load. This rising debt and slowing economy scenario could keep the pressure on homebuilders and home sales for the rest of 2006. This is not a bad thing just a necessary workout period. All of these factors will be taken into account at next weeks FOMC meeting. They are fully aware of the factors depressing the housing sector and they welcome the pause as a needed cooling off period. However, they also don't want the cooling to become a new ice age in home buying with sales frozen to a standstill. The economy needs the housing sector to prosper in order for the economy to prosper. For the Fed it is all about stable growth rather than a constant boom/bust cycle.

The Fed will have to balance their desire to increase rates with the slowdown in housing. Determining what rate will push housing and the economy into a dive is a prime focus for the Fed. Also pressing their decision next week is the drop in Durable Goods announced on Friday. The headline number was actually a gain of +2.6% but nearly all the growth came from transportation equipment. However, core capital goods ex-aircraft actually fell -2.3%. Boeing said sales of civilian aircraft doubled in February over January levels. A drop in sales of aircraft in January was responsible for the -19.8% drop in the January durable goods number. There has been an underlying weakness in capital goods for the last two months and this could be signaling a lengthening slowdown in the economy that most had thought was already behind us. The durable goods report is always confusing but the Fed will doubtlessly take these numbers into account for their decision next week.

The markets seem to be undecided about the Fed direction despite several speeches and much analyst coverage of Fed expectations. The official outlook is still for a quarter point hike in March and again in May. However, the likelihood of another hike in June is slipping. In fact there is an increasing amount of rumors suggesting a potential Fed cut in Q1 of 2007. According to Fed watchers the slowing in housing, slight rise in jobless claims, rising gasoline prices and mixed economic signals suggests the Fed should stop soon and may have already gone too far.

The weak housing numbers gave the market an added boost at Friday's open because it puts that additional pressure on the Fed not to overshoot. The Fed language next week is going to be even more important than normal. I know we say that a lot but it always seems to be true. Over the last two weeks the market has stalled at the current highs and we can't seem to make any headway. We are seeing a lack of conviction by the bulls ahead of the Fed meeting and that should continue until the language is dissected. They will look for any clues that the Fed will quit in May or any clues that they will continue past May. The future of the market in the short term will depend on that language.

You should also note that the FOMC meeting next week has been increased to a two-day meeting from the originally scheduled one-day event. Bernanke must have decided he would need to add the additional time for his first meeting in order to get everyone on the same page and reevaluate all the prior data. I applaud his decision to take this step. Unfortunately it makes our Option Investor mouse pad calendars incorrect since this was scheduled to be only a one-day meeting when they were printed.

Offsetting the market's Fed fears is the approaching end of the quarter. Typically we see the indexes move higher as the quarter ends as retirement contributions begin to appear. We also see tape painting by the funds in order to show the greatest possible spin for those quarterly statements. This may not be readily apparent ahead of the Fed but I believe the dip buying over the last week could have been funds supplying support going into quarter end. Tape painting works best when the markets are near their recent resistance highs. If they were tanking the fund efforts would have less of an impact. With the month/quarter end on Friday and the Fed decision on Wednesday afternoon that leaves two days for a strong tape painting rally on some favorable language. I am not sure how funds will react if the language is not favorable. They still have money to put to work and statements to print. It should be interesting.

Since energy has been holding above support for the last month and many energy stocks are beginning to break out again it would make sense to me that funds will want to show how smart they are by owning energy stocks. Oil prices closed at $64.30 on Friday and moving very close to resistance at $65.50. You may remember that resistance on the expired April contract was just under $64. If you compare apples to apples that equates to the $65.50 level on the May contract. I could easily see that $65.50 level broken before next Friday as funds paint the tape. It is simpler to buy oil futures, which float all boats than buy a couple dozen individual stocks if you want your energy portfolio to shine. You can get in quickly and out quickly compared to stocks. With 7,000 hedge funds and more than 17,000 mutual funds it takes very little imagination to imagine this scenario playing out. If it does then we can also expect some undressing in the futures around April 4th.

Chart of May Crude Oil - Daily

Oil prices continue to be artificially inflated by geopolitical concerns but there is widespread agreement that $60 should remain the bottom on any correction. Italy's Eni SpA declared force majeure last week on a Nigerian oil pipeline that was attacked my militants. The 75,000 bpd pipeline is expected to be back in service sometime next week but it is just one more increment of production taken offline by the group. They claim they will stop the flow of one mbpd and the market is afraid they can do it. Nigeria produces the light sweet crude needed to make low emission gasoline. Nigeria is the 6th largest OPEC producer and the 4th largest supplier of oil to America.

Meanwhile Boliva is expected to nationalize its energy resources the first week of April. This move is being made by the socialist president Evo Morales. Three former presidents have been charged with violating the constitution after privatizing the energy sector more than a decade ago and entering into contracts with foreign oil companies. Those companies invested more than $3 billion into Boliva as a result of the contracts in an effort to modernize its energy production. I guess Bolivia feels there are no further investments coming and it is time to take back those modernized fields. Why is it that companies never learn that dealing with rapidly changing socialists governments tends to be detrimental to their financial health. Companies impacted include Spain's Repsol YPF, Petrobras, Total and Exxon among others. Venezuela just took back half of the exploration blocks foreign companies bid on and paid for in the 1990s. The oil minister said they had plenty of opportunities in the remaining half and basically if they didn't like it they could leave. Is it any wonder that exploration companies are gravitating towards Canada and the Gulf of Mexico where the rule of law applies and the only surprises are whether or not you hit oil or gas.

The next OPEC meeting is June 1st in Venezuela and the VZ oil minister has already said they will be pressing for a cut in production again. Heck, I would be afraid Chavez would take them all hostage and nominate himself as the new OPEC president.

Outside of Google and housing there was little news moving the markets on Friday. The next most popular topic was a potential takeover of Lucent by Alcatel to create a $33 billion telecom firm. The rumors of a Lucent takeover have been making the rounds for a couple years and many times Alcatel was the suggested suitor. Friday's news that it was nearly a done deal was so anticlimactic that both companies only gained about 25 cents each. Of course that was a +8.5% gain for Lucent. If the deal goes through the NYSE will have to find another stock to take the spot as the daily volume leader that Lucent normally fills. For instance, Lucent traded 531 million shares on Friday or 22.5% of the total volume on the NYSE. I am sure the market makers in Lucent will be sorry to see that cash cow leave for greener pastures.

Chart of Russell 2000 - Weekly

As the quarter draws to a close we have a chance for a record quarter on some indexes. The S&P close today represents a +4.3% gain for the quarter with several strong days likely ahead. The S&P has not posted a quarterly gain of more than 4.3% since late 2004. If Friday's close was the quarter end the Dow would have posted a +5.2% gain, Nasdaq +4.89% and NYSE Composite +6.4%. Those were blown away by the Russell-2000 small caps posting a +12% gain for the year and the Dow transports adding +9.5%. The last index on the list is the NDX, which posted a gain of only +2% mostly due to the addition of Google to the index in late December. Google was trading around $440 when it was added and it closed at $365 on Friday. This was +$24 more than Thursday's close due to the S&P addition. Without that S&P news the NDX would have barely edged over a +1.5% gain for the year. The NDX closed at 1688 the day before Google was added in December and closed at 1679 on Friday. The lackluster performance was not entirely Google's fault with INTC, EBAY, AMZN, YHOO and SNDK leading the miserable NDX performance.

Chart of Google - Weekly

Other than the NDX the remainder of the indexes are still pegged at or near their highs. The Russell closed at a new historic high on Friday at 753 while the Dow, SPX, Nasdaq and NYSE Composite are still struggling just a few points below their respective highs. I have to admit I thought this week would turn out a lot worse when I wrote about it on Tuesday night. Whatever produced that monster dip on Tuesday was forgotten after several Dow components announced positive news before the bell on Wednesday. Microsoft's announcement about the delay of the new Windows software knocked the Nasdaq for a loop but it was quickly forgotten and Friday's close brought us right back to Tuesday's levels before that event. Yes, the bulls are alive and buying every dip.

This suggests to me that the Fed decision language will be viewed through rose-colored glasses as long as the shock of a very negative report does not break the glass. Anything even remotely market friendly will be met with a strong finish for March. You only need to look at the homebuilder stocks on Friday for a sign. New home sales were down -10.5% and Centex gained +1.16, Lennar +.47, NVR +2.98. Only Beazer and Hovnanian could not quite make it back to positive territory and finished with fractional losses. The bad news bulls are alive and leading the charge. There are some high profile economic reports next Thursday and Friday but after the Fed meeting they may just be additional stepping-stones for the end of quarter buying.

The qualification for all of this is the same gains that I listed above. While I would not expect the funds to take profits before quarter end it is always possible. It also sets up the potential for some relatively strong undressing the following week. Funds may not want to hold over what could be seen as questionable earnings. If the end of quarter scenario does play out as expected I would plan on either exiting at month end or tightening stops on April 3rd. Yes, it is time to sell too soon!
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
APC None None
CLF    
NBR    
PTRY    
RTP    
TS    

New Calls

Anadarko Petrol. - APC - close: 100.55 chg: +1.20 stop: 96.95

Company Description:
Anadarko Petroleum Corporation's mission is to deliver a competitive and sustainable rate of return to shareholders by exploring for, acquiring and developing oil and natural gas resources vital to the world's health and welfare. As of year-end 2005, the company had 2.45 billion barrels-equivalent of proved reserves, making it one of the world's largest independent exploration and production companies. Anadarko's operational focus in North America extends from the deepwater Gulf of Mexico, up through the western U.S. and Canadian regions and onto the North Slope of Alaska. Anadarko's international activities are focused on its major positions in North Africa, the Middle East, Indonesia and exploration or production operations in several other countries. (source: company press release or website)

Why We Like It:
We are bullish on the oil sector. The price of crude will probably have a floor under it given the ongoing violence in Nigeria and geopolitical tension in Iran and Iraq. Meanwhile APC looks like another bullish candidate. The stock is bouncing from an early March test of support near its 200-dma. On Friday the stock tried to breakout over technical resistance at its simple 50-dma and resistance at its trendline of lower highs. If the oil indices continue to move higher then we expect APC will follow and we want to catch the breakout. We are going to suggest a trigger to buy calls at $102.10. If triggered then we will aim for a rally into the $109.50-110.00 range.

Suggested Options:
We are suggesting the May calls but note that we do not want to hold over the late April earnings report.

BUY CALL MAY 100 APC-ET open interest=3971 current ask $5.30
BUY CALL MAY 105 APC-EA open interest=1451 current ask $3.10
BUY CALL MAY 110 APC-EB open interest=2267 current ask $1.65

Picked on March xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/28/06 (unconfirmed)
Average Daily Volume = 2.5 million

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Cleveland Cliffs - CLF - close: 94.14 chg: +3.85 stop: 89.45

Company Description:
Cleveland-Cliffs Inc, headquartered in Cleveland, Ohio, is the largest producer of iron ore pellets in North America and sells the majority of its pellets to integrated steel companies in the United States and Canada. Cleveland-Cliffs Inc operates a total of six iron ore mines located in Michigan, Minnesota and Eastern Canada. The Company is majority owner of Portman Limited, the third-largest iron ore mining company in Australia, serving the Asian iron ore markets with direct-shipping fines and lump ore. (source: company press release or website)

Why We Like It:
Metal and mining-related stocks were big winners on Friday. One such winner was CLF. The stock rebounded from the $90.00 level to breakout over resistance at its 100-dma, 50-dma and resistance at the $92.75 region. Volume came in above average on the rally, which is bullish. We also note that the P&F chart shows a breakout through resistance and points to a $114 target. We are going to suggest bullish positions here with CLF above $93.00. We are going to be aggressive with our target and aim for the $107-110 range. However, we do expect some resistance near $100 and more conservative traders may just want to play it safe and exit in the $99.50-100.00 range, especially since our time frame is only thirty days. Going forward we'll discuss the $100 level as our conservative target.

Suggested Options:
We are suggesting the May calls but we do not want to hold over the late April earnings report.

BUY CALL MAY 90 CLF-ER open interest= 36 current ask $8.60
BUY CALL MAY 95 CLF-ES open interest= 48 current ask $5.90
BUY CALL MAY100 CLF-ET open interest= 14 current ask $3.80

Picked on March 26 at $ 94.14
Change since picked: + 0.00
Earnings Date 04/26/06 (unconfirmed)
Average Daily Volume = 545 thousand

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Nabors Inds. - NBR - close: 67.62 chg: +1.06 stop: 64.99

Company Description:
The Nabors companies own and operate almost 600 land drilling and approximately 875 land workover and well-servicing rigs worldwide. Offshore, Nabors operates 43 platform rigs, 19 jack-up units and three barge rigs in the United States and multiple international markets. Nabors markets 28 marine transportation and supply vessels, primarily in the U.S. Gulf of Mexico. In addition, Nabors manufactures top drives and drilling instrumentation systems and provides comprehensive oilfield hauling, engineering, civil construction, logistics and facilities maintenance, and project management services. Nabors participates in most of the significant oil, gas and geothermal markets in the world. (source: company press release or website)

Why We Like It:
The OSX oil services index looks poised for a breakout and if it does rally higher then NBR will likely follow suit. Shares of NBR have already spent the last four weeks building on a new base or bottom after a painful decline in February. Friday's rally in NBR produced a new P&F chart buy signal that points to a $77 target. We want to see some confirmation so we are suggesting a trigger to buy calls at $68.75. If triggered we will target a move into the $74.00-75.00 range. Please note that NBR is set to split 2-for-1 on April 18th. Our post-split target will be $37.00. We do not want to hold over the late April earnings report.

Suggested Options:
If triggered then we are suggesting the May calls.

BUY CALL MAY 65.00 NBR-EM open interest= 750 current ask $5.50
BUY CALL MAY 67.50 NBR-EU open interest= 309 current ask $4.10
BUY CALL MAY 70.00 NBR-EN open interest=2648 current ask $2.85
BUY CALL MAY 72.50 NBR-EV open interest= 348 current ask $1.95

Picked on March xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/27/06 (unconfirmed)
Average Daily Volume = 3.7 million

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Pantry Inc. - PTRY - close: 61.85 chg: +0.83 stop: 58.85

Company Description:
Headquartered in Sanford, North Carolina, The Pantry, Inc. is the leading independently operated convenience store chain in the southeastern United States and one of the largest independently operated convenience store chains in the country, with net sales for fiscal 2005 of approximately $4.4 billion. As of December 29, 2005, the Company operated 1,401 stores in eleven states under select banners including Kangaroo Express(SM), our primary operating banner, Golden Gallon, and Cowboys(SM). The Pantry's stores offer a broad selection of merchandise, as well as gasoline and other ancillary services designed to appeal to the convenience needs of its customers. (source: company press release or website)

Why We Like It:
PTRY is somewhat of a momentum play. We believe the stock is offering traders a new bullish entry point with the bounce from the bottom of its rising channel. This will allow for a relatively tight stop loss. One of our concerns is that volume has been very light the last few days and that's bearish. We are going to suggest call positions here above $60.00 but more conservative traders may want to wait for a new high above $62.70. Our target is the $67.00-68.00 range. We do not want to hold over the late April earnings report.

Suggested Options:
We are suggesting May calls.

BUY CALL MAY 60 PQR-EL open interest= 26 current ask $4.70
BUY CALL MAY 65 PQR-EM open interest= 65 current ask $2.15

Picked on March 26 at $ 61.85
Change since picked: + 0.00
Earnings Date 04/27/06 (unconfirmed)
Average Daily Volume = 364 thousand

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Rio Tinto - RTP - close: 198.60 chg: +4.55 stop: 189.90

Company Description:
Rio Tinto is a mining company supplying aluminum, copper, gold, minerals, and iron ore. (source: company press release or website)

Why We Like It:
RTP is another bullish candidate from the rebounding metal, gold and mining sector. Friday saw the stock breakout over resistance at $195.00, its simple 50-dma and its two-month trendline of lower highs. Short-term technical oscillators are turning bullish again and its P&F chart has reversed into a new buy signal that currently points to a $220 target. Our concern is that volume on the rally was below average and that RTP is still trading under the $200 mark, which might act as round-number resistance. We are going to suggest call positions here above $195 but more conservative traders may want to wait for a breakout over $200 before initiating plays. Our target is the $210-212 range.

Suggested Options:
We are suggesting the May calls. Individual traders should pick which strike works best for their own personal strategy. At this time the CBOE does not list any strikes above $200 for May.

BUY CALL MAY 190 RTP-ER open interest= 6 current ask $16.70
BUY CALL MAY 195 RTP-ES open interest= 4 current ask $11.60
BUY CALL MAY 200 RTP-ET open interest= 5 current ask $ 8.90

Picked on March 26 at $198.60
Change since picked: + 0.00
Earnings Date 02/06/06 (confirmed)
Average Daily Volume = 326 thousand

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Tenaris - TS - close: 184.55 chg: +5.45 stop: 177.79

Company Description:
Tenaris is a leading global manufacturer and supplier of seamless steel pipe products and provider of pipe handling, stocking and distribution services to the oil and gas, energy and mechanical industries. It is also a leading regional supplier of welded steel pipes for gas pipelines in South America. With manufacturing facilities in Argentina, Brazil, Canada, Italy, Japan, Mexico, Romania and Venezuela and a network of customer service centers in over 20 countries, Tenaris has an annual production capacity of 3.3 million tons of seamless, and 930 thousand tons of welded pipes, annual consolidated net sales in excess of US$ 6.5 billion and 17,500 employees worldwide. (source: company press release or website)

Why We Like It:
Business is probably pretty good for TS right now. The high price of oil has oil-related companies flush with cash and they're probably spending some of it with TS. The stock has a bullish trend of higher lows as it consolidates under resistance near $186. We think shares are poised to breakout higher. We're going to suggest a trigger to buy calls at $186.75. If triggered we will target a rally into the $198-200.00 range, which is consistent with the bullish P&F chart target.

Suggested Options:
We are suggesting the May calls.

BUY CALL MAY 180 TSW-EP open interest=120 current ask $15.80
BUY CALL MAY 185 TSW-EQ open interest= 80 current ask $13.20
BUY CALL MAY 190 TSW-ER open interest=108 current ask $10.90
BUY CALL MAY 195 TSW-ES open interest= 0 current ask $ 8.90
BUY CALL MAY 200 TSW-ET open interest= 0 current ask $ 7.30

Picked on March xx at $xxx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 05/01/06 (unconfirmed)
Average Daily Volume = 553 thousand
 

New Puts

None today.
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Burlington NrthSanta Fe - BNI - cls: 80.35 chg: +0.32 stop: 78.99

The major indices managed to close in the green on Friday but the Dow Transportation index only posted a marginal gain. The overall upward pattern in the Transports is still there but recent weakness could be suggesting the sector is due for a stronger consolidation, potentially toward the 4400 level. Meanwhile shares of BNI are still trying to bounce from Thursday's low but shares remain under resistance at the $82.00. We are going to keep the stock active as a candidate with a suggestion to use a trigger at $82.51 to open call positions. If triggered we'll target a rally into the $87.50-90.00 range. We do not want to hold over BNI's late April earnings report.

Suggested Options:
We are suggesting the April and May options but our preference is for May strikes so we can hold the position right up to the April earnings date. Our trigger to buy calls is at $82.51.

BUY CALL MAY 80 BNI-EP open interest= 64 current ask $3.70
BUY CALL MAY 85 BNI-EQ open interest=198 current ask $1.50

Picked on March xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/25/06 (unconfirmed)
Average Daily Volume = 2.1 million

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Bear Stearns - BSC - close: 138.14 change: +1.12 stop: 131.99

The rally continues in shares of BSC and the play is now open. The stock has broken out to new highs and traded at our trigger to buy calls at $137.65. The move on Friday also helped the daily chart's MACD indicator produce a new buy signal. Now that the play is open we are targeting a move into the $144.00-145.00 range. However, we would not be surprised to see BSC's first test of potential round-number resistance at $140 to fail and shares would likely dip back toward the $138.00-137.50 level again, which should act as new support. Readers have a choice to initiate new bullish positions here or hope for a pull back.

Suggested Options:
We are suggesting the May calls.

BUY CALL MAY 135 BSC-EG open interest=334 current ask $6.50
BUY CALL MAY 140 BSC-EH open interest=358 current ask $3.70
BUY CALL MAY 145 BSC-EI open interest=455 current ask $1.80

Picked on March 24 at $137.65
Change since picked: + 0.49
Earnings Date 06/15/06 (unconfirmed)
Average Daily Volume = 1.1 million

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Deere Co - DE - close: 78.25 change: +0.25 stop: 74.95

Rival CAT failed to turn in a positive day but the bounce in shares of DE continued on Friday. The overall pattern remains very bullish for DE but this is an aggressive entry point with DE still trading under resistance in the $79.00-79.40 region. We are suggesting new bullish positions here but more conservative traders may want to wait for a move over $79.50 or better yet a move over $80.00, which might act as round-number, psychological resistance. Our target is the $84.00-85.00 range. The P&F chart is bullish and points to a $112 target.

Suggested Options:
We are suggesting the May calls.

BUY CALL MAY 75 DE-EO open interest= 47 current ask $4.80
BUY CALL MAY 80 DE-EP open interest=400 current ask $1.95

Picked on March 22 at $ 77.29
Change since picked: + 0.96
Earnings Date 05/16/06 (unconfirmed)
Average Daily Volume = 1.6 million

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Grainger W.W.Inc. - GWW - close: 75.25 change: -0.00 stop: 73.95

We are still in a wait and see mode with GWW. The stock is flirting with a breakout but shares just can't find any follow through. The last six weeks of 2005 saw GWW trading sideways in a narrow range (about 69.00-72.50). That range grew to $69.00-75.50 in 2006. We thought the stock had broken out through the top of the range a few days ago but there has been no conviction. Volume has dried up too as if traders are waiting to see what direction GWW will move next. Short-term the stock is trading in a new $74.00-76.00 trading range. We are suggesting a trigger to buy calls at $76.51. If triggered we'll target a rally into the $79.90-80.00 range. The P&F chart is bullish with a triple-top breakout buy signal pointing to a $90 target.

Suggested Options:
We do not want to hold over the mid April earnings report so we're suggesting April calls.

BUY CALL APR 75 GWW-DO open interest=805 current ask $2.20
BUY CALL APR 80 GWW-DP open interest=577 current ask $0.60

Picked on March xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/15/06 (unconfirmed)
Average Daily Volume = 449 thousand

---

Hartford Fin. Srv. - HIG - cls: 80.98 chg: -1.17 stop: 79.95

We have been warning readers for weeks that HIG looks ready to pull back and test support near $80 and its 200-dma. Well now it's finally happening. The bad news is that volume is rising on the pull back, which is bearish. Conservative traders may want to abandon positions now. We are not suggesting new bullish positions until HIG trades over its 50-dma. Nimble traders may want to switch directions and buy puts if HIG breaks down under $80.00 although we'd probably wait for a drop under the February low near $79.50.

Suggested Options:
We are not suggesting new bullish plays in HIG at this time.

Picked on February 14 at $ 82.12
Change since picked: - 1.15
Earnings Date 04/27/06 (unconfirmed)
Average Daily Volume = 1.1 million

---

Lehman Brothers - LEH - close: 144.91 change: +1.11 stop: 140.79

LEH continues to look like an attractive bullish candidate given its Wednesday bounce from support near the 50-dma and the $141 region. We would suggest new call positions here but more conservative traders may want to wait for a move over $146.00 to confirm that LEH has broken the short-term trendline of lower highs. On the daily chart you can see that the MACD indicator is nearing a new buy signal. We do expect some resistance in the $149-150 region but LEH looks like it has the momentum to breakout higher. Conservative traders may want to exit near $149. We're going to aim for the $153.00-155.00 range.

Suggested Options:
We are suggesting the May calls.

BUY CALL MAY 140 LES-EH open interest=147 current ask $8.10
BUY CALL MAY 145 LES-EI open interest=158 current ask $4.90
BUY CALL MAY 150 LES-EJ open interest=137 current ask $2.60

Picked on March 22 at $144.61
Change since picked: + 0.30
Earnings Date 06/14/06 (unconfirmed)
Average Daily Volume = 2.0 million

---

ITT Industries - ITT - close: 56.56 change: +0.11 stop: 53.84*new*

Shares of ITT are still stuck in a short-term trading range. The upper boundary of this range shows clear resistance at the $56.70 level. The good news here is that ITT appears to be showing a bullish trend of higher lows inside this short-term consolidation. Our target is the $57.00-58.00 range. This close to our target we're not suggesting new positions. It might be wise for more conservative traders to just exit early here. We are going to raise our stop loss to breakeven at $53.84.

Suggested Options:
We are not suggesting new bullish positions at this time.

Picked on March 15 at $ 53.84
Change since picked: + 2.72
Earnings Date 04/28/06 (unconfirmed)
Average Daily Volume = 1.4 million

---

MedcoHealth - MHS - close: 60.18 change: +1.53 stop: 57.95

Breakout! Friday morning Citigroup started coverage on MHS with a "buy" rating. The news helped push shares of MHS up and out of their trading range and through resistance at the $60.00 level. Volume came in well above the daily average, which is bullish. Our trigger to buy calls was at $60.05 so the play is now open. Our target is the $64.50-65.00 range. The P&F chart already points to a $68 target.

Suggested Options:
We are going to suggest the May options but we plan to exit ahead of MHS' April earnings report. Our trigger is $60.05.

BUY CALL MAY 55 MHS-EK open interest=10 current ask $6.40
BUY CALL MAY 60 MHS-EL open interest=82 current ask $2.85
BUY CALL MAY 65 MHS-EM open interest=96 current ask $0.90

Picked on March 24 at $ 60.05
Change since picked: + 0.13
Earnings Date 04/25/06 (unconfirmed)
Average Daily Volume = 1.6 million

---

Altria Group - MO - close: 72.94 chg: +0.19 stop: 71.99*new*

We are surprised at MO's relative strength on Friday. As of Thursday's close the stock looked ready to hit our stop loss at $71.85. It is noteworthy that Friday's bounce failed to breakout over MO's short-term trendline of lower highs so the current trend looks bearish. We are not suggesting new bullish positions and we honestly considered exiting early right here to limit our losses. More conservative traders may want to give an early exit more thought. We are going to inch up our stop loss to $71.99. On Monday the Illinois Supreme Court will decide if they want to hear the appeal of a class action suit against Phillip Morris and its "light" cigarettes.

Suggested Options:
We are not suggesting new bullish positions in MO at this time.

Picked on March 14 at $ 74.11
Change since picked: - 1.17
Earnings Date 04/19/06 (unconfirmed)
Average Daily Volume = 8.1 million

---

Silicon Labs - SLAB - close: 52.24 change: +0.19 stop: 46.95

Traders tried to do some profit taking in SLAB on Friday but bulls bought the dip Friday morning and the stock closed in the green again. This helped confirm the new MACD buy signal on its daily chart. Meanwhile bulls will note that the action in the SOX semiconductor index is improving. Short-term technicals on the SOX are starting to turn positive and the MACD is near a new buy signal. The SOX isn't out of the woods yet but it's improvement. Meanwhile SLAB is challenging its highs from January in the $52-53 range. Our target is only the $54.90-55.00 range but more aggressive traders may want to aim higher toward the $58-60 region. We are certainly tempted to aim past the $55 level but the decision on where to exit lies with each individual trader.

Suggested Options:
Our time frame is short so we're suggesting the April calls.

BUY CALL APR 50 QFJ-DJ open interest=2259 current ask $3.70
BUY CALL APR 55 QFJ-DK open interest=1578 current ask $1.15

Picked on March 23 at $ 51.05
Change since picked: + 1.19
Earnings Date 04/26/06 (unconfirmed)
Average Daily Volume = 1.2 million

---

Schlumberger - SLB - close: 122.18 chg: -0.84 stop: 118.99

The oil sectors are on the rebound and the OSX oil services index looks ready to breakout above resistance near its 50-dma and the 205 level. Such a move in the OSX would herald a new leg higher and probably launch a run at the January highs. We think SLB will be leading the charge. Friday the stock paused a bit but we don't see any change from our Thursday night play description so we're reposting it here:

We are going to increase our exposure to the oil sector. The OSX oil services sector looks ready to breakout over resistance after forming what looks like an inverse or bullish head-and-shoulders pattern over the last few weeks. SLB looks to be part of the vanguard leading the services industry higher. We like the bounce from $119 and its 50-dma as a new bullish entry point. However, more conservative traders may want to wait for a move over $125.00 or $125.50 before initiating positions. We are targeting a rally into the $129.75-130.00 range. The P&F chart is bullish and points to a $144 target. Please note that SLB is due to split 2-for-1 on April 10th. Our post-split target will be the $64.87-65.00 range. We do not want to hold over the April 21st earnings report.

Suggested Options:
We are suggesting the May calls although more aggressive traders might want to try April strikes.

BUY CALL MAY 120 SLB-ED open interest=5533 current ask $7.60
BUY CALL MAY 125 SLB-EU open interest=5462 current ask $5.00
BUY CALL MAY 130 SLB-EZ open interest=5826 current ask $3.10

Picked on March 23 at $123.02
Change since picked: - 0.84
Earnings Date 04/21/06 (unconfirmed)
Average Daily Volume = 6.2 million

---

Toyota Motor Corp. - TM - close: 108.18 chg: +0.98 stop: 104.99

If you were looking for a new bullish entry point in TM this is probably it. However, we remain somewhat cautious given the bearish MACD on the daily chart and the short-term four-day trend of lower highs. Plus, the lack of volume continues to be a weakness in TM's up trend. More conservative types may want to think about tightening their stop loss. The $110 level remains short-term resistance. Our target is the $112.50-115.00 range. Traders with a longer-term horizon may want to aim higher.

Suggested Options:
We are not suggesting new bullish positions in TM at this time.

Picked on March 12 at $106.68
Change since picked: + 1.50
Earnings Date 02/07/06 (confirmed)
Average Daily Volume = 438 thousand

---

Valero Energy - VLO - close: 59.19 change: +0.39 stop: 54.49*new*

Another positive day for oil stocks helped lift VLO toward round-number resistance at the $60.00 level. The stock failed to breakout but shares did hit a new one-month high. We would expect a dip back toward the 10-dma near 57.50 and use a pull back as a new bullish entry point. Our target is the $62.50-63.00 range. Please note that we're raising our stop loss to $54.49.

Suggested Options:
We are not suggesting new bullish positions in VLO at this time. Wait for a pull back toward the 10-dma. We would choose the April or May calls.

Picked on March 15 at $ 57.55
Change since picked: + 1.64
Earnings Date 05/02/06 (unconfirmed)
Average Daily Volume = 10.7 million
 

Put Updates

Biosite Inc. - BSTE - close: 51.33 chg: +0.08 stop: 52.55

We are starting to wonder if BSTE is going to cooperate with us or not. The stock has bounced twice from the $50.00 level in the last week and tried to breakout over the $52.00 level three times. Short-term technical oscillators are actually starting to look bullish. We are going to keep BSTE as a bearish candidate for now but we're definitely sticking to our plan to use a trigger at $49.75 and more conservative traders may want to wait for a breakdown under $49.00 before initiating positions. Our target will be the $45.25-45.00 range. If BSTE closes over $52.50 we'll drop the stock as a bearish candidate.

Suggested Options:
We are not suggesting new plays at this time. Watch for a move to $49.75. If triggered we'd choose the May puts.

Picked on March xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 03/25/06 (unconfirmed)
Average Daily Volume = 261 thousand

---

Gannett Co Inc. - GCI - close: 58.91 chg: -0.49 stop: 61.76

Good news. GCI may be weaker than we expected. We have been warnings readers to watch for a bounce and a failed rally near $60.00 as the next entry point to consider buying puts. Now it looks like the 59.50 level is acting as new resistance. Shares of GCI displayed relative weakness on Friday following some disappointing revenue numbers from fellow newspaper company Knight Ridder (KRI) on Thursday night. Friday's decline might be a new entry point. Our target is the $55.25-55.00 range. Don't forget that we plan to exit ahead of the April 12th earnings report.

Suggested Options:
We are suggesting the April puts.

BUY PUT APR 60 GCI-PL open interest=1263 current ask $1.90
BUY PUT APR 55 GCI-PK open interest= 628 current ask $0.25

Picked on March 19 at $ 59.04
Change since picked: - 0.13
Earnings Date 04/12/06 (confirmed)
Average Daily Volume = 1.1 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.)

---

Encana Corp. - ECA - close: 47.91 chg: +1.13 stop: n/a

We have four weeks left before April options expire. If this play is going to be successful we need to see ECA trade over $53.50 or under $36.50. We are not suggesting new strangle positions. Our strangle 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.

Suggested Options:
We are not suggesting new strangle positions at this time.

Picked on January 10 at $ 45.56
Change since picked: + 2.35
Earnings Date 02/15/06 (confirmed)
Average Daily Volume = 4.4 million

---

Ryland Group - RYL - close: 70.86 change: +0.30 stop: n/a

The worse than expected new home sales figures on Friday morning temporarily sucked the wind out of the homebuilders rebound but shares of RYL managed to bounce back into the green by the closing bell. This play is not in good shape. We only have four weeks left before April options expire. Right now RYL appears to have reversed course and is rebounding higher. In order for this play to be successful we would need to see RYL trade over $87 or under $63. At this point in the game traders might want to be thinking about an early exit right now to salvage some capital. We are adjusting our target to breakeven at $7.00. We are not suggesting new strangle positions at this time. Our play involves the April $80 calls (RYL-DP) and the April $70 puts (RYL-PN).

Suggested Options:
We are not suggesting new strangle positions at this time.

Picked on January 22 at $ 75.19
Change since picked: - 4.33
Earnings Date 01/24/06 (confirmed)
Average Daily Volume = 1.1 million
 

Dropped Calls

Cummins Inc. - CMI - cls: 105.13 change: +0.36 stop: 103.85

More aggressive traders may want to keep CMI on their watch list as a potential candidate should the stock bounce higher from here. Unfortunately, we have been stopped out. The market makers must have seen a bunch of stops under the $104 level and tried to take them out because CMI traded under $103.90 for about 60 seconds on Friday morning before rebounding. The stock probably spent about two minutes trading under $104.00. Our stop loss was $103.85. The low was $103.82.

Picked on March 13 at $105.25*gap higher*
Change since picked: - 0.12
Earnings Date 04/20/06 (unconfirmed)
Average Daily Volume = 867 thousand

---

Hydril - HYDL - close: 76.22 change: -0.77 stop: 71.95

Target achieved. HYDL turned in a strong morning on Friday and rose to $77.91 before succumbing to some profit taking after a decent bounce from $72. Our target was the $77.50-80.00 range.

chart:

Picked on March 12 at $ 70.23
Change since picked: + 5.99
Earnings Date 04/26/06 (unconfirmed)
Average Daily Volume = 289 thousand

---

Macerich Co. - MAC - close: 72.44 change: -0.70 stop: 69.95

REIT stock MAC is not cooperating. The stock's bullish break out has failed to see any follow through. Short-term technicals are turning bearish. We would rather exit early right here and then watch from a distance to see if MAC turns around again. More aggressive traders may want to consider keeping bullish positions open but expect a consolidation to the 50-dma under $72.00 if not the $70 level. The P&F chart remains bullish and points to an $87 target.

Picked on March 16 at $ 74.05
Change since picked: - 1.61
Earnings Date 05/16/06 (unconfirmed)
Average Daily Volume = 371 thousand
 

Dropped Puts

None
 

Dropped Strangles

None
 


Trader's Corner

'Tis the Season

'Tis the season when bears sometimes frolic and become jolly. Tax season, that is.

Steve Northwood, treasury and Fed analyst with an online market-related service, recently mentioned an anomaly that tends to occur as in the days leading up to April 15-17. Individual tax payers could be shelling out up to $180 billion in taxes as the April 15 deadline looms, he says. Some may liquidate treasury or equity positions to raise that cash, resulting in downward pressure on the markets.

Market guru Martin J. Pring's research might show a slightly different timing for that downward pressure. In TECHNICAL ANALYSIS EXPLAINED, he posts research that shows market performance for each day of the year during the period of May 1952-April 1971. April's chart does show a dip, but a dip that occurs near or after April 15 rather than before that date. So should we traders count on any seasonal but fleeting weakness this April?

The SPX chart for April 2005 certain displays weakness into the April 15-17 period.

Annotated Daily Chart for the SPX:

A similar pattern occurred in 2004.

Annotated Daily Chart of the SPX:

The pattern did not play out the same way in 2003, however.

Annotated Daily Chart of the SPX:

Was it possible that another seasonal pattern interfered with the usual down period leading into April 15-17? With Easter on April 20 in 2003, but outside that April 12-20 period on the other two years, that possibility exists. One study, with results published in Pring's book, shows that the Thursday before Good Friday sees average returns in excess of 0.25 percent. That holiday-shortened week leading into April 15-17 was also an option-expiration week, and reports at the time credited option expiration with providing a lift to the equities.

The previous year, 2002, produced a steep decline into April 12, a bounce instead of a decline during the April 12-April 17 period, and then a resumption of the decline. If the tax season produced a seasonal effect, the timing was skewed. Easter had been early that year, March 31, but April 15-19 were the days of that option expiration week. Trading patterns proved volatile, perhaps due to opex.

Easter occurred April 15 in 2001, and again the bullishness preceding a holiday seemed to have a stronger effect that any expected downturn due to tax payments to be made.

Annotated Daily Chart of the SPX, 2001

Perhaps those taking big stock market losses in 2000-2002 had no need to sell stocks or bonds to pay taxes in the April's of 2001, 2002 and 2003. The multitude of seasonal influences--holidays, opex weeks and tax season--that might work with or against each other makes it difficult to sort out which will be strongest at any one time. What is clear is that sometimes there is selling into the April 15-17 period, but sometimes there is not. Be aware of the possibility. However, the pattern does not appear trustworthy enough that I would advise traders to bank on it this year with automatic bearish entries at the close on April 12 this year.
 

Today's Newsletter Notes: Market Wrap by Jim Brown, Trader's Corner by Linda Piazza, 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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