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Daily Newsletter, Saturday, 04/08/2006

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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

Jobs Porridge Too Hot

Jobs for March increased by +211,000, which is great for the economy but bad for the Fed. Investors reacted like a diner seeing a sumptuous plate of food placed before them but then recoiling in pain when the first bite sears their tongue. It appears to be a good meal but the eater must wait before consuming it. This is how investors reacted to the strong jobs news. The futures raced higher on expectations but the reaction jump at the open was quickly reversed as the searing pain of 5% bond yields brought reality back into focus.

Dow Chart - Daily

Nasdaq Chart - Daily

SPX Chart - Daily

I mentioned on Tuesday the need for a Goldilocks type of jobs number for the markets to move higher. Analysts were officially expecting +195,000 for the headline number but hoping for something in the +150,000 range as "just right" for a continued rally. In reality the jobs number was better than it appeared on the surface. It was +16,000 over the consensus but the numbers for January and February were revised down substantially. January dropped from 170K to 154K for a loss of -16K and February dropped from 243K to 225K for a loss of -18K. Add the revisions together for a drop of -34K over the prior two months and that knocks the headline number for March back to a net gain of only +177,000. Of course most people don't look at it that way.

Other employment numbers released on Friday showed the unemployment rate dropping to 4.7% and average hourly earnings rising +0.2% but slower than each of the prior three months. Wages rose +0.4% in Feb, +0.3% in Jan and +0.4% in December. The average wage for an hourly worker is now $16.49 and is up +3.4% over the prior year. Job gains came primarily in the service sector with a gain of +202,000 jobs while manufacturing payrolls fell -5,000 after a drop of -10,000 in the prior month. While the administration always beats their drum about the jobs gains the amount of new workers entering the workforce continues to grow. 166,000 new workers entered the workforce in March. Over the last eight months the economy has created an average of 168,625 jobs per month. As you can see we are barely staying ahead of the curve and far from strong jobs growth.

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Still, the jobs report did provide an insight into the rest of 2006. The hours worked index rose an annualized +2.7%. This is a proxy for GDP growth and when combined with stronger productivity gains suggests annualized GDP growth of around 5.0% for 2006. A +5% GDP is too strong for the Fed and they will likely act to prevent this rate. It was the realization and anticipation of this action that produced the sell off excuse.

The July Fed funds futures are now pricing in a 48% chance of a 5.25% rate after the June meeting. There is a meeting in May and another in June and we are very close to expecting a hike at both. The May meeting was already a lock after the last Fed meeting left the hike language in the statement. After Friday's jobs report the yield on the ten-year note shot up to close at 4.963% and the highest level since June-2002. The 30-year bond soared to 5.038% and the first time over 5% since 2004. By Friday's close analysts were spewing forecasts for much higher rates based not only on our Fed but the corresponding actions by other global banks. It appears higher rates are hear to stay and analysts are starting to ratchet up their predictions.

Those 5% bond yields sent shivers through the equity market for more than one reason. A 5% bond yield is typically seen as the point where a safe return in bonds is better than a risky return in stocks. However, if equities were coming out of a dip with plenty of room to run investors would take on the extra risk in hopes of a strong rally ahead. Instead this bull is already 37 months old, 41 months if you count the start at the bottom in October 2002. This bull is ready for slaughter and the warning about a slowing economy in the second half of 2006 is putting fear in bullish hearts.

We have two separate reasons why the economy may slow. The first is simply its age for the current cycle. The rebound out of the hurricane dip added several months to its life but almost everyone agrees it is going to slow later this year. The second reason is the Fed. I reported above that the Jobs report implied a +5.0% annualized GDP and the Fed does not want that much growth. They will force the economy to slow if it does not appear headed for a vacation on its own. The bottom line is a slowing economy either from its own weight or forced sabbatical from continued Fed rate hikes.

I mentioned on Tuesday the Risk of Recession numbers due out on Wednesday could be a problem. That headline number for March came in at 20.7% compared to the previously reported 15.2% in February. February was revised higher to 20.8%. These are risk levels not seen since last summer just before the hurricanes struck and impacted the data. Individual states are surging higher with Massachusetts, Wisconsin, Idaho and Kansas are all over 35% for March. Obviously those are not key states with major economic impacts on the nation but they are indicative of rising risk.

Another reason given for the sell off in equities was the failure by congress to extend the tax cuts before going home for the Easter break. Investors are hoping to see the cuts extended another two years and the political process is slower than molasses in January. Congress failed to act on the measure to extend before they left for the break. If they do not act soon more than 15 million households will face a tax increase of $31 billion on dividends, capital gains and the AMT. The Senate version would spare an additional 3.5 million households from AMT than the House proposal. While some analysts were blaming this postponement for the market collapse I doubt it was responsible for the drop. The selling was too broad, too sharp and covered multiple global markets including Germany, London, Paris and Brazil. It appeared program related and possibly an asset allocation program by a major fund. The selling was over in the US markets by 11:45 with the markets trading flat the rest of the day.

The market sell off was no respecter of persons and nearly all stocks were hit with losses. Those hit hardest were those with the largest gains over the last week. Oil pulled back from seven-week highs at just over $68 and energy stocks took a needed rest. Tech stocks retreated from a weeklong rally to new five-year highs and the Nasdaq ended with a loss for the week. Financials fell, metals collapsed and even the small caps finally gave up ground. Transports had been rallying despite rising oil prices but traders took profits in those issues as well. All the major indexes rallied to new highs on the open but were immediately hit with major selling. Few stocks were able to brave the storm.

The Chicago Mercantile Exchange headed the list of those companies able to overpower the sellers. The CME has been under competitive fire by the Intercontinental Exchange and they quenched that fire on Friday. They announced a deal with the NYMEX to trade its energy and metals derivatives. The CME soared +$25 while ICE dropped -$6.80. Illumina Inc came in number two on the leader board after raising guidance for Q1. ILMN gained +$3.87.

Leaders on the downside included SafeNet (SFNT), which fell -$5 after warning that results would be lower than expected. RIMM, fresh off its patent battle, reported earnings that disappointed and warned that Q1 would also be below expectations. RIMM dropped -$4.60 on the news. Finishing out the losers list were steel stocks TS, IPS, VMC and miners RTP and PD. Oil stocks AHC, SLB, PTR, FTO and DO led the list of losers in the energy sector. SLB had gained +$8 for the week through Thursday morning ahead of its 2:1 split after the close on Friday. Atwood Oceanics (ATW) also split 2:1 after the close.

May Crude Futures Chart - Daily

May Natural Gas Futures - Daily

Oil prices hit $68.29 on Thursday and fell to $66.25 intraday on Friday. That dip was quickly bought to return oil to $67.35 at the close. Helping to push oil higher was news from Nigeria that facilities knocked offline by militants should be back online by month end. This good news had barely hit the wire before the militants vowed again to cause even more damage to reach their target of 1-mbpd offline. Currently there is slightly more than 500K bpd offline. Also pushing prices lower early Friday was news from the OPEC president that OPEC expects no cut in production quotas this year if prices remained at the current levels. No kidding? Why would any OPEC member voluntarily cut production when they are receiving record prices for their crude? When asked what OPEC would do to keep prices from moving over $70 he said the best strategy would be to build new production capacity. If you read between the lines it means they are powerless to prevent further price rises with their current capacity. He claimed there was a surplus of about 1.9 mbpd currently. That should be consumed once refiners begin producing gasoline again. There has been a bill introduced in the Senate that seeks to ban oil cartels (OPEC) and strip foreign nations of "sovereign immunity" to prosecution under U.S. price fixing laws. The section referring to OPEC is titled "No Oil Producing and Exporting Cartels." (NOPEC) I am not kidding. The bill sponsors are Arlen Specter and Herb Kohl. In what universe are they living? Is Iran or Venezuela actually going to care if we ban their cartel? Are Specter and Kohl so nave that they think they can make countries sell us their oil at the price we want to pay by suing them? This is so stupid it boggles my mind.

The Weatherford CEO was on CNBC on Thursday. He said the inflation adjusted cost of finding and producing new oil was up +80% since 2000. The number of oilrigs in operation was at a 20 year high. In 1999 only 1200 rigs were operational and that number is over 3000 today. He said that despite this increase in drilling efforts global production had only increased +1% since 2003. This is due to the rising decline rate at many aging fields offsetting new production. He said Weatherford had new technology that allowed older fields to be probed deeper, up to six miles, in order to squeeze out every drop available. Weatherford is the fourth largest oil well service firm behind SLB, HAL and BHI.

Helping to push the price of oil higher was news from the Congressional Budget Office that demand from China would likely add $14 to the price of oil over the next five years and +38 cents to a gallon of gas by 2010. The Asian continent is exploding with projected GDP for 2006 now between 7.2-7.4%. China is the leading force but just like Mexico supplies cheap labor and cheaply made goods to the US the countries surrounding China are benefiting from making cheap goods for them. This broadens the economic boom and the demand for petroleum to not only China but the surrounding countries as well.

After the close of oil trading today the AMEX announced that it had received the last approval necessary to begin trading the oil ETF on Monday. The ETF will trade under the symbol USO for United States Oil and will begin trading at the current futures price at the open. Since they waited until after the close of trading for oil to announce the last approval we could see a substantial boost on Monday. I am sure the managers already own a base position but depending on how well it is received by the public they may have to buy a lot more. Add in the speculators that will begin buying futures at the open on Sunday night and volatility is sure to erupt.

Next week is the start of earnings season with the official kickoff being handled by Dow component Alcoa on Monday. The calendar for the first week is light but the pace picks up considerably the week of the 17th. S&P earnings estimates for Q1 according to Thomson Financial are currently for 10.4% earnings growth. This estimate has fallen from 12.6% on Jan-1st, 14.4% on Oct 1st and 16% on July 1st. Despite the decline in estimates Thomson is still predicting another quarter of double-digit earnings growth. This would be the 15th consecutive quarter according to Thomson's calculations but it may also be the last.

According to Thomson that double digit streak will depend on the top three sectors hitting their estimates. Those sectors are energy +43%, healthcare +19% and industrials +14%. If any of those falter then the streak is over. Energy has been broad support for this S&P streak for several quarters but even that is falling. Earnings growth in energy for Q4 was over 56% but stronger comparisons are just ahead. The beginning of the big energy ramp of 2005 was in February but a sharp decline from April 1st to May 23rd should give us one more quarter of easy numbers but Q3 is going to be tough to beat. Oil rose from $51 in late May to over $70 in late August. That provided windfall profits for energy stocks and will be tough for them to match in 2006 even with oil flirting with $70 once again.

Earnings pre announcements have been very light for Q1 but it is tough to say if it has been due to fewer companies giving quarterly guidance or things are going as planned. So far in this cycle we have seen 63% of the tech pre announcements giving negative guidance, 10% inline and 27% positive guidance. This equates to better than 2:1 negative to positive guidance. However, we have also seen many more companies drop out of the guidance cycle. Companies giving quarterly guidance have dropped to less than 50% from 61% only a year ago. Companies are shifting to annual guidance to avoid having a bunch of short-term targets that they must hit or be penalized. According to those making the shift this will allow them more time to focus on running the company instead of managing earnings expectations.

This is the first quarter where all companies must deduct options expenses. It has been several years coming and we have seen many try to beat the deadline with various forms of comparative accounting over the last year. Well the time is up. All the funny numbers will vanish and the dirty cloud of hidden options expenses will be behind us, or so the accountants say. According to S&P options expenses for the S&P should knock about -3.5% off the average earnings expectations. Unfortunately most tech stocks depend on options as a method of attracting and retaining valued employees. It is entirely conceivable that some tech companies could see double to triple the impact. Many companies have moved away from options and towards other forms of enticement in order to avoid this options reporting.

Possibly more important to tech stocks next week is the delay by Microsoft in releasing the new Windows operating system until 2007. The new operating system always generates a wave of tech buying that many tech companies depend on for a needed injection of profitability. By delaying the release until 2007 those companies who had been predicting revenue in 2006 based on the prior dates will be left holding the earnings bag when guidance is revealed.

Business Week has an article this weekend called "Blue Chip Blues" showing that earnings for blue chip companies have increased +200% over the last five years but the average blue chip stock has increased very little. Returns of the S&P-100 stocks, the bluest of the blue chips, has been less than 1% over that same period. The S&P-500 may be at 5-year highs but it returned only +4.3% annually during that period. According to BW the biggest blue chip stocks, S&P-100, returned an average of 16% per year between 1982-2000 but less than 1% thereafter. Small caps are dominating in the US but that is not the whole story. According to BW investors are finding such good returns overseas that the blue chips are floundering. They point to South Korea up +54% last year, Latin America +55%, Saudi Arabia +108%, Russia +87% and Japan +42%. Small caps are so popular now that they support an average PE of 25 compared to 15 for the S&P-100. The blue chip blues are so bad the Fidelity Blue Chip Growth Fund is about to ask investors to approve a switch to the Russell-1000 as its benchmark rather than the current S&P-500. They claim this will give them a wider range of stocks with better growth opportunities. Fidelity Magellan, a $50 billion fund, dumped PFE, INTC and PG among others and boosted its foreign holdings to 25%, up from 4% just a few months ago. Anyone doubting why our markets are having trouble moving higher should look no further. Fidelity Magellan sold $11 billion in US blue chips to move that money overseas but remember they are a conservative fund. Multiply that by hundreds if not thousands of the 14000 mutual funds available and we see why the fund flows report each week continues to show the majority of the cash going into overseas equities.

The Dow spent all week knocking on the resistance door at 11250 and could not break through. Some traders said they were actually relieved to see the breakdown on Friday as evidence something is about to change in the status quo. Traders have feared an impending correction despite the more than three-week levitation at multiyear highs. The Dow was the first to breakout of prior resistance back in mid March but the Nasdaq was lagging. The roles were reversed over the last two weeks with the Dow lagging and the Nasdaq pushing out to new highs. Meanwhile the S&P-500 has remained nearly perfectly flat since March 15th. Among the major indexes there are no winners. Only volatility while time passes and we wait for something to happen.

The lesser known or maybe I should say lesser hyped indexes have been doing great. I have repeatedly mentioned that the NYSE Composite and Russell 2000 have been making new highs. These are doing well because they are not blue chip reactive and represent the true strength of the broader market. Everyone knows the Dow and Nasdaq are each held captive by the movements of a handful of mega cap issues. For instance the Dow was prevented from a major dip on Thursday single handedly by a +$4 gain in MMM. 3M is the second largest weighted Dow stock behind only IBM. The +4 gain by MMM on Thursday, representing approximately +30 Dow points helped hold the Dow to only a -23 point loss.

Dow Chart - 60 min

Nasdaq Chart - 30 min

NYSE Composite Chart - 60 min

For next week we could see some more selling in the big caps especially after the Business Week article. This means the Dow could show further weakness with support at 11100 and just slightly below Friday's close. The Nasdaq big caps could be under pressure as well given the impending earnings cycle and the 2:1 negative to positive earnings warning ratio. The Nasdaq has support at 2330 followed by a vacuum between there and 2300.

SPX Chart - 90 min

The S&P-500 closed right at support at 1295 and a level we have seen a lot of over the last three months. We spent the first two months of the year trying to get over 1295 and the last month trying to stay above it. That level is still the key for me. I would remain long over 1295 but shift to shorts under that level. We have gone too long without a real correction and it would not take more than a couple high profile earnings misses to make that 5% yield in the bond market a lot more attractive. I warned readers two Sunday's ago to tighten up stops on April 3rd just in case the first week of April saw fund managers begin to take profits. If you had done that the morning of April 3rd you would have gotten out very close to the highs for the week.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
None AMGN None
  ESRX  
  GENZ  
  RAI  

New Calls

None today.
 

New Puts

Amgen Inc. - AMGN - close: 71.03 chg: -0.82 stop: 72.55

Company Description:
Amgen discovers, develops and delivers innovative human therapeutics. A biotechnology pioneer since 1980, Amgen was one of the first companies to realize the new science's promise by bringing safe and effective medicines from lab, to manufacturing plant, to patient. Amgen therapeutics have changed the practice of medicine, helping millions of people around the world in the fight against cancer, kidney disease, rheumatoid arthritis, and other serious illnesses. With a broad and deep pipeline of potential new medicines, Amgen remains committed to advancing science to dramatically improve people's lives. (source: company press release or website)

Why We Like It:
The biotech stocks have helped lead the market decline recently. The BTK index peaked in late February and consolidated lower through the month of March. The last couple of weeks the BTK index has been consolidating above support near the 700 level and its simple 100-dma. Yet on Thursday the index broke down and Friday only seemed to confirm the breakdown. AMGN has been sliding lower for weeks too but the stock has not yet broken significant resistance at the $70.00 level. Should the major indices, and the BTK index, continue lower next week then we suspect that AMGN will breakdown. Thus we are suggesting a trigger at $69.90 to open bearish positions. If triggered we'll target a decline into the $65.50-65.00 range. AMGN's P&F chart is already bearish and points to a $60 target but a drop under $70 would produce a new triple-bottom breakdown sell signal. This is going to be a short-term play. We do not want to hold over the April 18th earnings report, which will be announced after the closing bell. FYI: any time you trade a biotech company there is always increased risk of some sort of unexpected headline news like a new drug success or failure that could send shares surging either direction.

Suggested Options:
We are suggesting the May puts but plan to exit on or before April 18th.

BUY PUT MAY 72.50 YAA-QV open interest= 998 current ask $2.85
BUY PUT MAY 70.00 YAA-QN open interest=1518 current ask $1.65
BUY PUT MAY 67.50 YAA-QU open interest= 951 current ask $0.90

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/18/06 (confirmed)
Average Daily Volume = 10.7 million

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Express Scripts - ESRX - close: 85.39 chg: -0.06 stop: 90.01

Company Description:
Express Scripts, Inc. is one of the largest PBM companies in North America, providing PBM services to over 50 million members. Express Scripts serves thousands of client groups, including managed-care organizations, insurance carriers, employers, third-party administrators, public sector, and union-sponsored benefit plans. (source: company press release or website)

Why We Like It:
The rally has definitely stalled in ESRX. The stock was on fire from the end of 2004 through most of 2005 but the stock has been building a bearish head-and-shoulders pattern for the last four months. ESRX now looks on the verge of breaking support at the neckline of this pattern. The stock has already broken support at its 50-dma and 100-dma. The P&F chart is already bearish and points to an $80 target but that target could get worse. We are suggesting put positions here with an $80.25-80.00 target. However, more aggressive traders may want to aim lower. The H&S pattern points to a target in the $73-74 range, which, coincidentally is where you'll find the simple 200-dma. We do not want to hold over the April 26th earnings report.

Suggested Options:
We are suggesting the May puts.

BUY PUT MAY 85.00 XTQ-QQ open interest=1984 current ask $3.40
BUY PUT MAY 80.00 XTQ-QP open interest=4707 current ask $1.55

Picked on April 09 at $ 85.39
Change since picked: + 0.00
Earnings Date 04/26/06 (confirmed)
Average Daily Volume = 1.6 million

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Genzyme Corp. - GENZ - close: 65.50 chg: -0.81 stop: 68.01

Company Description:
One of the world's leading biotechnology companies, Genzyme is dedicated to making a major positive impact on the lives of people with serious diseases. This year marks the 25th anniversary of Genzyme's founding. Since 1981, the company has grown from a small start-up to a diversified enterprise with more than 8,000 employees in locations spanning the globe and 2005 revenues of $2.7 billion. (source: company press release or website)

Why We Like It:
GENZ is another bearish play in the struggling biotech sector. GENZ has been consolidating lower under a trend of sinking highs for months but the stock has been finding support near the $65.00 level. Given the breakdown in the BTK index and the weakness in the major averages there is a rising chance that GENZ will finally break support at $65.00. We are suggesting a trigger to buy puts at $64.90. If triggered then we will target a decline into the $61.00-60.00 range. This is going to be a short-term play because we do not want to hold over the April 19th earnings report. Currently the P&F chart points to a $56 target but a move under $65.00 would produce a new triple-bottom breakdown sell signal. FYI: any time you trade a biotech company there is always increased risk of some sort of unexpected headline news like a new drug success or failure that could send shares surging either direction.

Suggested Options:
We are suggesting the May puts but more aggressive traders could trade the April puts.

BUY PUT MAY 67.50 GZQ-QU open interest=130 current ask $3.50
BUY PUT MAY 65.00 GZQ-QM open interest=190 current ask $2.20
BUY PUT MAY 62.50 GZQ-QZ open interest=302 current ask $1.25

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/19/06 (confirmed)
Average Daily Volume = 2.1 million

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Reynolds American - RAI - close: 104.97 chg: -1.07 stop: 108.01

Company Description:
R.J. Reynolds Tobacco Company (R.J. Reynolds) is the second-largest tobacco company in the United States, manufacturing about one of every three cigarettes sold in the country. (source: company press release or website)

Why We Like It:
At first we planned to suggest put positions on MO the stock is weak and has broken down through multiple levels of support. Unfortunately, MO is due to report earnings in just over a week and given the market holiday on Friday the 14th we chose to pass. Instead we're suggesting puts on another tobacco stock: RAI. The stock peaked at $110 a few weeks ago and have now broken down below technical support at the 50-dma and price support near $105. It could be that traders have finally decided to do some profit taking after an impressive run up since the October lows. It's also important to note that while RAI still offers an impressive dividend yield in the 4.7-5.0% range this dividend is growing less attractive as bond yields rise. Our target is the 100-dma near the $100.00 mark. We'll use an exit range of $100.50-100.00. We do not want to hold over the late April earnings report.

Suggested Options:
We are suggesting May puts.

BUY PUT MAY 105 RAI-QA open interest= 653 current ask $3.50
BUY PUT MAY 100 RAI-QT open interest=4083 current ask $1.95

Picked on April 09 at $104.97
Change since picked: + 0.00
Earnings Date 04/27/06 (unconfirmed)
Average Daily Volume = 637 thousand
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Arch Cap. Grp. - ACGL - cls: 57.99 chg: -0.03 stop: 55.95

The action in the markets today looks pretty bearish. A lot of the major indices are showing bearish reversal signals. While ACGL weathered the storm pretty well today we would expect the stock to continue lower next week. If you're concerned that the markets are really headed lower then you might want to exit early and look for a new entry point on a bounce. We are expecting ACGL to slip towards the $57.00 level, which should be support. If the $57 level fails then the $55 level, bolstered by the 100-dma, is the next level of support but we would be stopped out at $55.95. We're not suggesting new bullish positions. Our target is currently the $62.50-63.00 range. We do not want to hold over the late April earnings report.

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

Picked on April 03 at $ 58.15
Change since picked: - 0.16
Earnings Date 04/27/06 (unconfirmed)
Average Daily Volume = 195 thousand

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Amerada Hess - AHC - close: 145.84 chg: -3.57 stop: 139.95

After a bullish week the oil sector was not immune to the market-wide profit taking on Friday. Shares of AHC lost 2.38% but volume was not as strong as the recent bullish breakout. The $144 and $146 levels were overhead resistance and they should now act as support. At this point in the game we would watch for a dip into the $144-145 region. A bounce above $144 could be used as a new bullish entry point. Actually, since we have a wide stop under $140, a bounce above $140 could be used as a new bullish entry point. A noteworthy development this past week was AHC's bullish breakout produced a new triple-top breakout buy signal on its P&F chart, which now points to a $170 target. Currently our target is the $154.00-155.00 range. We do not want to hold over the April 26th earnings report.

Suggested Options:
We are not suggesting new bullish positions at this time. Watch for a bounce above $144.00.

Picked on April 05 at $146.51
Change since picked: - 0.67
Earnings Date 04/26/06 (confirmed)
Average Daily Volume = 1.5 million

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Anadarko Petrol. - APC - cls: 102.15 chg: -1.96 stop: 98.90*new*

APC lost ground on Friday. Shares fell 1.88% and the move has given short-term technicals a bearish tilt. However, the stock should find some support at the 50-dma (100.82), the $100.00 mark, which is round-number, psychological support, and APC's four-week trendline of higher lows. We would watch for a dip toward the $100 level and watch for a bounce there as the next entry point. We're going to inch up our stop loss to $98.90. Our target remains the $109.50-110 range. The P&F chart remains bullish with a breakout buy signal that points to a $127 target. We do not want to hold over the late April earnings report.

Suggested Options:
We are not suggesting new bullish positions at this time. Watch for a bounce above the $100 level.

Picked on March 28 at $102.10
Change since picked: + 0.05
Earnings Date 04/28/06 (unconfirmed)
Average Daily Volume = 2.5 million

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Burlington NrthSanta Fe - BNI - cls: 83.45 chg: -1.48 stop: 79.95

The Dow Transportation index spiked higher on Friday morning to hit its fifth new all-time high in a row. Unfortunately, the index reversed course and now looks poised for more profit taking. Shares of BNI are already seeing traders do some profit taking after Wednesday's peak. The technical picture is growing more bearish but we believe this is a short-term pull back in the stock's longer-term up trend. Given the action in the markets today and in BNI over the last couple of days we would expect the stock to slip lower toward the $82.00-82.50 range and probably toward stronger support near $80.00 and its simple 50-dma, which has been consistent technical support in the past (see chart). We would watch for a bounce above the $80 level as the next bullish entry point. Conservative traders may want to play it safer. The latest candlestick on the weekly chart looks like a top so you may want to re-evaluate how much risk you're willing to take. Our target is the $87.50-90.00 range. We do not want to hold over BNI's late April earnings report.

Suggested Options:
We are not suggesting new bullish positions in BNI at this time. Watch for a dip to and a bounce above the $80 level.

Picked on March 27 at $ 82.51
Change since picked: + 0.94
Earnings Date 04/25/06 (unconfirmed)
Average Daily Volume = 2.1 million

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Beazer Homes - BZH - close: 67.87 chg: -0.91 stop: 64.74

We find the Friday trading action in BZH and the rest of the homebuilders pretty interesting. The stock market sank on rising interest rates fears yet the homebuilders failed to truly sell-off like you might expect. Both BZH and the DJUSHB home construction index were on the rebound Friday afternoon. We are cautious given the market's weakness but we don't see any change from our new play description from Thursday although waiting for a breakout over $70 may look more attractive now. What follows is a reprint of Thursday's original play description:

It might seem a bit odd to consider bullish call positions in a homebuilder in a rising interest rate environment. The yield on the 10-year bond has risen sharply lately and that's putting pressure on mortgage rates, which have risen to levels not seen since 2003. Yet historically speaking mortgage rates remain relatively low. Plus, there have been renewed comments that the Fed might be nearing the end of its tightening cycle. We also recently entered the spring/summer building and selling season for homes so maybe investors are counting on a few strong quarters from the builders. Several stocks in the group appear to have built an inverse or bullish head-and-shoulders pattern and they're all on the verge of breaking out above resistance at the neckline of this pattern. BZH is one such stock and today's gain looks like a breakout. We are going to suggest calls here but the 100-dma (near $69.00) and the $70.00 mark could still offer resistance so more conservative traders may want to wait for a move over $70.00 before initiating positions. Currently the P&F chart points to an $87 target but if BZH can trade over $69.00 it will produce a new triple-top breakout buy signal. We are going to target the $74.50-75.00 range. However, please keep in mind that this will be a short-term play. We do not want to hold over the April 27th earnings report.

Suggested Options:
We are suggesting the May calls but we plan to exit on April 26th to avoid holding over earnings.

BUY CALL MAY 65.00 BAD-EM open interest= 483 current ask $6.10
BUY CALL MAY 70.00 BAD-EN open interest=1539 current ask $3.20

Picked on April 06 at $ 68.78
Change since picked: - 0.91
Earnings Date 04/27/06 (confirmed)
Average Daily Volume = 1.2 million

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ConocoPhillips - COP - close: 65.95 chg: -1.29 stop: 62.45 *new*

COP was not exempt from the profit taking on Friday. After a strong week traders decided to take some money off the table. Overall the pattern remains unchanged and bullish. The P&F chart shows a bullish triangle breakout pattern with an $82 target. Statistics suggest that this is one of the most successful patterns to trade in an up market. However, short-term the market looks poised for more weakness. We would watch COP for a dip back toward the $65.00 level and probably the $64.00 level. A bounce in that general area could be used as a new bullish entry point. We are going to raise the stop loss to $62.45, which is under the simple 200-dma. Our target for COP is the $69.00-70.00 range.

Suggested Options:
We are not suggesting new bullish positions at this time. Wait and watch for the bounce. We do not want to hold over the late April earnings report.

Picked on March 29 at $ 64.80
Change since picked: + 1.15
Earnings Date 04/26/06 (unconfirmed)
Average Daily Volume = 10.5 million

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Deere Co - DE - close: 79.63 change: -0.37 stop: 75.95

Shares of DE held up relatively well during Friday's weakness. The stock has been short-term overbought and Friday would have been a good excuse for investors to lock in some profits but they did not. Even so the short-term technicals are turning lower. We need to be prepared for a potential dip back to technical support at its rising 50-dma (near 76.70). More conservative traders may want to adjust their stops closer to the 50-dma. 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 not suggesting new bullish positions at this time.

Picked on March 22 at $ 77.29
Change since picked: + 2.34
Earnings Date 05/16/06 (unconfirmed)
Average Daily Volume = 1.6 million

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Grainger W.W.Inc. - GWW - close: 75.40 change: -1.41 stop: 73.95

GWW's recent breakout is reversing course. The stock lost 1.8% on Friday and while volume was low the move is lending new weakness to a technical picture that was already suffering. We are expecting shares to dip back toward the bottom of its previous trading range near $74.00, which should be support. More conservative traders may want to consider an early exit if GWW trades under $75.00 or $74.50. We are not suggesting new plays at this time. Our target is the $79.90-80.00 range. Please remember that we plan to exit ahead of the April 17th earnings report.

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

Picked on March 30 at $ 76.51
Change since picked: - 1.11
Earnings Date 04/17/06 (confirmed)
Average Daily Volume = 449 thousand

---

Halliburton - HAL - close: 77.27 chg: -1.25 stop: 71.45

Same story, different stock. After some strong mid-week gains shares of HAL pulled back on Friday. A dip to the 10-dma (near 74.75) or the $74.00 region would not be out of line here but it would turn the short-term technicals bearish. We would watch for a bounce in the $74.00-75.00 region as a new bullish entry point. Our target is the $79.85-80.00 range. More aggressive traders may want to aim for the January highs near $82. The P&F chart looks very bullish with a $90 target. We do not want to hold over the April 21st earnings report.

Suggested Options:
We are not suggesting new bullish positions at this time. Watch for the bounce near $75.

Picked on April 04 at $ 75.20
Change since picked: + 2.07
Earnings Date 04/21/06 (confirmed)
Average Daily Volume = 8.0 million

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Lehman Brothers - LEH - close: 148.65 change: -2.35 stop: 143.49

Uh-oh! We need to issue a reversal alert for LEH. The stock almost completely erased Thursday's breakout and Friday's candlestick is a bearish engulfing pattern. Overall the long-term pattern is still bullish but short-term the stock could be headed back toward support near the 50-dma. The best case scenario is that LEH bounces from the $148 level. Odds are probably better that LEH dips toward $145. We would look for a bounce near $145 as a new bullish entry point. We are suggesting that readers consider selling half their positions at $153.00 and then sell the second half of their position at $159.00. More conservative traders may want to exit completely near $152.50-153.00.

Suggested Options:
We are not suggesting new bullish positions at this time. Look for a bounce north of $145 and/or its 50-dma.

Picked on March 22 at $144.61
Change since picked: + 4.04
Earnings Date 06/14/06 (unconfirmed)
Average Daily Volume = 2.0 million

---

Marvell Tech. - MRVL - close: 59.74 change: -0.44 stop: 54.99

The semiconductor sector index lost 1.8% as the group suffered through a sharp day of profit taking in the tech sector. Yet shares of MRVL held up pretty well due to an analyst upgrade before the opening bell. We would watch for a dip to the $58.00 level, which should be support. We are reposting the original play description from Thursday here:

The SOX semiconductor index has reversed course. After a five-week consolidation pattern the semis have rebounded and now the SOX index is breaking out over the 520 level and technical resistance at the 50-dma. Strength in the sector is helping fuel as rebound and a breakout in MRVL. The stock spent about three weeks consolidating between $54.00 and $58.00 and now shares are breaking out on rising volume. The technical picture is positive and today's high-volume move is a breakout over the $60.00 mark and its 100-dma. We also like the Point & Figure chart, which looks very bullish for MRVL and currently points to a $73 target. We are suggesting bullish positions above $58.00 and our target is going to be the $65.50-66.00 range. The next level of resistance appears to be $66.50-67.00.

Suggested Options:
We are suggesting the May calls.

BUY CALL MAY 55.00 UVM-EK open interest=4675 current ask $7.00
BUY CALL MAY 57.50 UVM-EY open interest=2553 current ask $5.50
BUY CALL MAY 60.00 UVM-EL open interest=7241 current ask $4.10
BUY CALL MAY 62.50 UVM-ES open interest=5807 current ask $3.10

Picked on April 06 at $ 60.18
Change since picked: - 0.44
Earnings Date 05/25/06 (unconfirmed)
Average Daily Volume = 5.9 million

---

Pantry Inc. - PTRY - close: 65.00 chg: -0.91 stop: 59.99*new*

PTRY suffered a midday sell-off but the stock rebounded when traders stepped in near the simple 10-dma. Coincidentally PTRY bounce also occurred near the bottom of its rising channel. Normally we would see this sort of bounce as a new bullish entry point but we are suggesting caution given the market's weakness on Friday. Our target remains unchanged in the $67.00-68.00 range although if you look at the rising channel you might want to consider aiming for the $70 region. We are raising our stop loss to $59.99. More conservative traders may want to tighten their stops closer to our breakeven point near $61.85. The P&F chart points to a $78 target. We do not want to hold over the late April earnings report.

Suggested Options:
We are not suggesting new call positions in PTRY at this time.

Picked on March 26 at $ 61.85
Change since picked: + 3.15
Earnings Date 04/27/06 (unconfirmed)
Average Daily Volume = 364 thousand
 

Put Updates

Apollo Group - APOL - close: 52.50 chg: -0.38 stop: 53.31

We are still in a wait and see mode with APOL. The stock gapped higher on Thursday after an analyst upgrade. While it looks like APOL is breaking out through the top of its channel the stock is still stuck under resistance at its 50-dma and the $54.00 level. We'll keep the stock as a bearish candidate for now. We're suggesting a trigger to buy puts at $49.85, which is under support at the $50.00 level. If triggered we will have two targets. Our first target is the $45.50-45.00 range. Conservative traders can exit here, the rest of us we're suggesting sell half their position. We'll keep the other half open and target a decline into the $41.00-40.00 range, which is closer to the bottom of its channel.

Suggested Options:
We are suggesting the May puts. Our trigger to buy puts is at $49.85.

BUY PUT MAY 50.00 OAQ-QJ open interest=2824 current ask $0.95
BUY PUT MAY 45.00 OAQ-QI open interest= 728 current ask $0.25

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 06/22/06 (unconfirmed)
Average Daily Volume = 2.4 million
 

Strangle Updates

(What is a strangle? It's when a trader buys an out-of-the-money (OTM) call and an OTM put on the same stock. The strategy is neutral. You do not care what direction the stock moves as long as the move is big enough to make your investment profitable.)

---

Encana Corp. - ECA - close: 46.84 chg: -1.18 stop: n/a

Time is running short for our strangle in ECA. April options expire in two weeks. To have any chance of success ECA needs to trade over $50 or under $40 pretty soon. We are not suggesting new positions. Our strangle strategy involves the April $50 calls (ECA-DJ) and the April $40 puts (ECA-PH). Our estimated cost is $3.45.

Suggested Options:
We are not suggesting new strangle positions.

Picked on January 10 at $ 45.56
Change since picked: + 1.28
Earnings Date 02/15/06 (confirmed)
Average Daily Volume = 4.4 million

---

Ryland Group - RYL - close: 71.97 change: -1.05 stop: n/a

Time is also running out for our RYL strangle. We have two weeks left before the April options expire. Currently we do not have any expectations that the stock will move enough to make this play profitable after last week's big reversal higher. We are not suggesting new plays. 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.

Picked on January 22 at $ 75.19
Change since picked: - 3.22
Earnings Date 01/24/06 (confirmed)
Average Daily Volume = 1.1 million
 

Dropped Calls

None
 

Dropped Puts

None
 

Dropped Strangles

None
 


Trader's Corner

Let's Settle This

Last December, a trader submitted a question to the CBOE's educational "Ask the Institute." The question concerned SPX settlement values. I knew without looking at the remainder of the question which opex cycle had prompted the question: the November 2005 SPX settlement. I had felt the pain of that particular option-expiration settlement value along with a lot of other sufferers, and I remembered it well.

The SPX had closed Thursday, November 17 at 1242.80. Those who had written or sold the November 1250 call probably felt fairly confident, if perhaps slightly nervous, that their sold calls would expire worthless the next morning.

They were to be proved wrong. Although the next day saw an SPX open at 1242.80 and a day's high of 1249.58, the settlement value was 1254.85. That weekend, those who had written the 1250 call got messages from their brokers that their sold calls had expired in the money, and that their accounts were being docked the appropriate $485 per contract, plus any commission for closing the position.

How did that happen, the trader questioned in the email to CBOE's "Ask the Institute." Such questions get asked all the time. When I was writing for the Market Monitor, I knew to prepare for a spate of last-minute questions about when certain options expired, with those questions often arriving mid- to late-afternoon on Thursday of option-expiration week. Those questions probably should have been asked before a trade was initiated, but even experienced options traders and commentators sometimes get mixed up. Let's settle some misconceptions about options expiration.

First, while many current-month index options--the DJX, NDX, SPX, RUT and SOX, for example--stop trading on Thursday at the close and have settlement values determined when their component stocks open Friday morning, not all do. OEX options trade through Friday and have settlement values determined by component closing values Friday afternoon. This is true of both the American-style OEX options and the European-style XEO options.

If you're trading index options, know when they stop trading and when they settle. Calendars provide option, equity and currency expiration dates, and those can be found one at least two sources. Those who signed up for a year's subscription to OptionInvestor received a mouse pad with that information. It's also available at the following Yahoo.com site:
http://biz.yahoo.com/opt/calendar.html

You need more specific information, however, to determine stop-trading and settlement times. Go to the exchange that handles the options for that information. For example, copying and pasting the following link provides detailed information on the SPX's expiration, for example:
http://www.cboe.com/Products/indexopts/spx_spec.aspx

That CBOE page contains a sentence that explains why so many were dismayed by the SPX's settlement value on November 18: "The exercise-settlement value, SET, is calculated using the opening (first) reported sales price in the primary market of each component stock on the last business day (usually a Friday) before the expiration date."

While it's possible that the settlement value and the opening value of the index are close, that's not necessarily true. If markets are buoyant near the opening, as happened November 18, each SPX component may be opening higher in domino fashion, even if the original sales price is soon knocked back, even by the time other components have opened. The compilation of all the first sales prices on each of the 500 components may reach a high that the index itself never sees, as happened that November day. Included in the answer, the "Ask the Institute" commentator noted that this unusual settlement value scenario tended to occur a few times one year, but then would not occur for another year or so.

In other words, it was a fluke, but totally legit. I'm certain that commentator would warn that while a settlement value twelve points above the previous day's close might be unusual, it's always possible for a settlement value to be off-kilter by several points and that possibility must be factored into the decision about whether to close out an expiring options position on Thursday night or hold it overnight and wait out the settlement value.

The fact that OEX options continue trading Friday and don't settle until the close on Friday erases some of the danger, but not all. If prices are cascading lower into the close, for example, the settlement price might be several or even many points lower than the OEX's closing price. Still, the overnight risk is removed, and that tempts some options traders to focus on the OEX rather than the SPX. The tradeoff for erasing that risk is seeing extrinsic value pour out of your option while equities and indices are pinned beginning about mid-morning Thursday, with the loss of extrinsic value accelerating Friday.

You won't find settlement information for all indices on the CBOE. If you want to find stop-trading and settlement information for the SOX, for example, you'll have to go to the Philadelphia Stock Exchange. Copying and pasting the following link will supply you with the information on the SOX:
http://www.phlx.com/products/sox.html

If you're trading XAU options, you'll find information on them at the Philadelphia Stock Exchange's site, too. There, you'll find that they expire on a three-month cycle rather than a one-month cycle. The OSX, another commodity-related index with options listed on the PHLX, also expires on a three-month schedule, but the two have different stop-trading and settlement times. The XAU options stop trading the last Friday prior to expiration and settle based on the close of the component stocks that Friday, while the OSX options stop trading on the last business day before the third Friday of the expiration month and settles based on the open of the component stocks the next morning. Don't assume that because both indices are commodity-related and have three-month cycles that their settlements are the same.

In fact, don't assume much of anything about stop-trading or settlement when you're dealing with index options. Do your research, and do it before you initiate the trade.
 

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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