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Daily Newsletter, Monday, 06/26/2006

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Table of Contents

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

Market Wrap

New home sales up 4.6% in May

The major indices posted gains to start the week with recent new home sales figures for May, along with a robust merger and acquisition environment providing a lift to bullish sentiment.

The Commerce Department said new-home sales rose in May at their fastest pace since December, as sales climbed notably in the South and West.

Sales of single-family homes increased 4.6% last month at a seasonally adjusted rate of 1.234 million, which was much stronger than the 4.0% decline forecasted from April's 1.15 million annual rate.

However, regional data showed mixed results, with softer pricing spurring demand. While new-home sales jumped 6.0% in the South and 5.3% in the West, sales fell 7.9% in the Northeast, hitting the lowest regional level since July 2004.

The average price of a home dropped to $249,300 in May, which was down from an upwardly revised $302,000 in April. The median price dropped to $235,000 from an upwardly revised $245,900. Compared with a year earlier, the average price in May was 2.4% higher, while the median price of a new home rose 2.9% year-over-year.

The Commerce Department said an estimated 114,000 homes were actually sold last month, up from 105,000 in April, based on figures not seasonally adjusted.

There were an estimated 556,000 homes for sale at the end of May, own from April's record 560,000. May's inventory of new homes slipped to a 5.5 month's supply at the current rate of sales, compared to April's 5.8 month's supply.

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While the direction of housing market indicators has not been uniform, so far this year's data generally have shown a slowdown. Last week the National Association of Home Builders reported its index for new home sales fell to its lowest level in more than 11 years.

Today's data had little impact on July Fed Fund futures (ff06n) 94.72, which still predict a 100% chance of a 25-basis point rate hike when the FOMC meets later this week.

It was another "Merger Monday" with Phelps Dodge (NYSE:PD) $76.23 -8.10 saying it had reached an agreement to acquire Canadian mining companies Inco (NYSE:N) $64.21 +10.21% and Falconbridge (NYSE:FAL) $51.80 +5.07% in a deal valued at roughly $40 billion. If consummated, the deal would create the largest mining company based in North America.

Industry analysts see annual output from the combined company totaling 3.4 billion pounds of copper, making it the world's largest publicly-traded copper producer, and 738 million pounds of nickel, which would put it at the top list of global nickel producers.

News of the deal raised eyebrows in Canada, as well as anger from union leaders and lawmakers that will undoubtedly mount an effort to keep Inco and Falconbridge under Canadian control. Phelps Dodge said that while copper operations would shift to the company's headquarters in Pheonix, AZ, nickel operations would continue to be based in Toronto, home to both Inco and Falconbridge.

Citigroup and HSBC advised Phelps Dodge, Inco was advised by Morgan Stanley, RBC Capital and Goldman Sachs, while Falconbridge was advised by CIBC World Markets.

Additional M&A activity was found with Johnson & Johnson (NYSE:JNJ) $60.21 -1.81% saying it would buy Pfizer Inc's (NYSE:PFE) $23.01 +1.63% consumer health-care business (Listerine mouthwash, Sudafed decongestant and Nicorette smoking cessation products) for $16.6 billion in cash.

Sources close to the deal told Reuters that J&J's offer topped bids from British groups GlaxoSmithKline (NYSE:GSK) $53.98 -0.27% and Reckitt Benckiser PLC.

Shares of Sirius Satellite Radio (NASDAQ:SIRI) $4.70 +5.14% also benefited from some merger talk and were atop today's list of most actively traded in what would be characterized as a light volume session at the NASDAQ. Sirius saw just over 930 million shares change hands after the company's CEO, Mel Karmazin said he would be "interested" in buying rival XM Satellite (NASDAQ:XMSR) $14.37 +6.76%, but thought regulatory issues "would be a question mark."

Mr. Karmazin didn't give my (Jeff Bailey's) thoughts to a possible pairing of a DirecTV/SIRI or XMSR, or EchoStar/SIRI or XMSR marriage much time, saying he thought it would make more sense for DirecTV and EchoStar to continue to try and merge with each other.

In 2002, regulators nipped a proposed merger between DirecTV (NYSE:DTV) $16.24 +0.06% and EchoStar (NASDAQ:DISH) $30.25 +0.29% amid competitive concerns.

Investment banks, you might want to approach Garmin (NASDA:GRMN) $98.88 +0.54% with the idea of a possible acquisition of SIRI, or XMSR. SIRIUSLY!

U.S. Market Watch - 06/26/06 Close

One area of my U.S. Market Watch that should not go unnoticed is the impressive gains found among the Securities Broker Dealer Index (XBD.X) 209.42 +0.75%. Yes, M&A news of late may have traders focusing on energy and miners, but the large investment banks/brokers that are putting some of these "blockbuster" deals together should be seeing some heft investment banking fees.

With NASDAQ and NYSE volumes beginning to show summer-like volumes where the retail trader spends more time at the beach than at their trading terminals, corporations seem more than willing to "make a deal" in recent weeks.

Securities Broker Dealer Index (XBD.X) - Daily Intervals

M&A activity can mean "big bucks" for the investment bankers. While light volumes can hamper gains from some of the online brokers, gains for the XBD.X oftentimes fuels a broader advance for the financial industry as a whole.

In today's Market Monitor at OptionInvestor.com I updated a Sector Bullish % Bell Curve (12:56:51 PM EDT) comparison from 06/16/06 to Friday's close. I associate the WALL Street sector bullish % with the brokers. As of this writing and tonight's close, the BPWALL from Dorsey/Wright & Associates remains in "bear confirmed" status at 34.15% (up 2.44% today) and would currently need a reading of 48% to achieve the strongest of market conditions reading of "bull confirmed."

S&P 500 (SPX.X) - Daily Intervals

All I'm doing here with the SPX chart is using similar retracement as used with the XBD.X. I would not say that the XBD.X is strong enough to pull the SPX out of its "bearish funk," but I don't like to be surprised either! I've lost track over the years of how many times the financials lead the majors out of, or into a decline. With all the talk of "merger mania," but not a lot of discussion of how much revenue/earnings can be generated by the big investment banking firms, I want to have a close eye on the XBD.X.

Since I'm discussing the BIG investment banks, let's take a look at the small caps as June's "reconstitution" runs its course for the Russell indexes!

Russell 2000 Index (RUT.X) - Daily Intervals

Just as financials represent the largest weighting in the SPX, so is true with the RUT.X. Very similar technicals relative to 21-day, 50-day and 200-day SMA's, but the RUT.X does appear to be "lagging" within a similar May high to recent June relative low. This gives hint that "size does matter" and perhaps some credence that the BIG brokers are a place to be looking long.
 


New Plays

New Option Plays

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

New Calls

None today.
 

New Puts

None today.
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Bear Stearns - BSC - cls: 136.50 chg: +1.55 stop: 129.99

The XBD broker-dealer index crept higher on Monday but remains under resistance near the 210 level. The sector index does look poised for an upside breakout. We think BSC will lead the way. Shares closed near their high for the session and managed to breakout and close over its simple 50-dma. Aggressive traders may want to go long call options right here. We're going to stick to our plan with a trigger at $137.51. We don't see any changes from our weekend play description. Our target is the $144.50-147.50 range.

Picked on June xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 09/14/06 (unconfirmed)
Average Daily Volume = 1.5 million

---

Chipolte Mex Grill - CMG - cls: 62.75 chg: +0.85 stop: 57.45

Shares of CMG, like most of the market today, churned sideways in a narrow range before some late afternoon buying pressure pushed the stock (and the market) higher. We don't see any changes from our weekend update. Our target is the $67.50-70.00 range. We do not want to hold over the late July earnings report.

Picked on June 18 at $ 61.76
Change since picked: + 0.99
Earnings Date 07/20/06 (unconfirmed)
Average Daily Volume = 384 thousand

---

Cognizant Tech. - CTSH - close: 66.34 chg: -0.22 stop: 62.49

After Friday's big gain shares of CTSH spent Monday consolidating. Traders bought the dip near $65.40 so readers could use this as a new entry point. We don't see any changes from our weekend update. Our target is the May highs in the $69.50-70.00 range. The P&F chart has a triple-top breakout buy signal with an $80 target.

Picked on June 24 at $ 65.05
Change since picked: + 1.29
Earnings Date 07/26/06 (unconfirmed)
Average Daily Volume = 1.4 million

---

General Dynamics - GD - cls: 64.58 chg: -0.82 stop: 63.99

Lately we had grown cautious on GD and today's relative weakness just proves our point. Most of the market closed higher today. It wasn't much but the bias was bullish toward the market's close. Yet GD displayed relative weakness with a 1.25% decline on average volume. Most of the market saw below average volume. GD did bounce off its lows for the session but we're concerned. More conservative traders may want to exit early. We're keeping the play open because GD could still bounce from support near $64.00 and its 100-dma.

Picked on June 18 at $ 66.12
Change since picked: - 1.54
Earnings Date 07/19/06 (unconfirmed)
Average Daily Volume = 1.5 million

---

Google - GOOG - close: 404.22 chg: - 0.64 stop: 384.50

A sideways market left GOOG to trade sideways in a $5.00 range. The stock closed with a fractional loss on very low volume. We don't see any changes from our weekend update. The stock remains near the top of its five-week channel and could easily consolidate back toward the 50-dma around $395. We would hesitate to open new bullish positions at this time but a bounce from the 50-dma near $395 (or even the $400 level) could be used as an entry point. The Point & Figure chart remains bullish and points to a $444 target. Our target is the $440-445 range.

Picked on June 21 at $401.00
Change since picked: + 3.22
Earnings Date 07/20/06 (unconfirmed)
Average Daily Volume = 9.8 million

---

Legg Mason - LM - close: 101.45 chg: +0.55 stop: 96.99

We are growing more positive on the brokers right now but the XBD index remains under resistance near the 210 level. Traders might want to wait for a breakout in the XBD before considering new call positions in the sector. Meanwhile LM inched higher today but remains below our new suggested entry at $102.00 or $102.50. We remain concerned about resistance at its descending 50-dma. Right now our target is the $107.50-108.00 range.

Picked on June 18 at $102.45
Change since picked: - 1.00
Earnings Date 07/25/06 (unconfirmed)
Average Daily Volume = 1.8 million

---

Manpower - MAN - close: 65.04 change: +0.13 stop: 63.99

Shares of MAN have spent the last two and a half sessions consolidating sideways on either side of the $65.00 level. We hesitate to suggest new call plays with more sideways action expected. Wait for another move over $66.00 as a potential entry point. Our target is the $69.85-70.00 range. The P&F chart now points to an $80.00 target so more aggressive traders may want to aim higher. We do not want to hold over the mid-July earnings report.

Picked on June 21 at $ 66.05
Change since picked: - 1.01
Earnings Date 07/18/06 (unconfirmed)
Average Daily Volume = 959 thousand

---

Marathon Oil - MRO - close: 76.88 chg: +0.16 stop: 73.95

Oil stocks continued their rally on Monday following a strong rise in crude oil futures toward $72 a barrel. The action in MRO was muted with shares failing to breakout past their simple 50-dma. We remain on the sidelines. Our suggested entry point to buy calls is at $77.55. If triggered then we'll target a run into the $84.00-85.00 range. We do not want to hold over the late July earnings report. The P&F chart looks pretty bullish with a bounce from support and an $85 target.

Picked on June xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/27/06 (unconfirmed)
Average Daily Volume = 3.2 million

---

Reynolds American - RAI - cls: 112.50 chg: +1.84 stop: 107.75

RAI produced some relative strength today. Shares added 1.66% out performing most of the market. This is a welcome improvement but shares remain under short-term resistance near $112.75. We are suggesting two targets. Our conservative target is $115.00. Our aggressive target is $119.00. The P&F chart is still bullish and points to a $148 target.

Picked on June 15 at $111.15
Change since picked: + 1.35
Earnings Date 07/26/06 (unconfirmed)
Average Daily Volume = 632 thousand

---

United Tech. - UTX - close: 62.24 chg: -0.04 stop: 59.95

The DJIA may have closed up today but shares of UTX, a component, failed to make much progress. The stock remains under technical resistance at its 50-dma. We don't see any changes from our weekend update. Our target remains the $64.00-65.00 range.

Picked on June 08 at $ 60.13
Change since picked: + 2.11
Earnings Date 07/19/06 (unconfirmed)
Average Daily Volume = 3.7 million
 

Put Updates

Apple Computer - AAPL - close: 58.86 chg: +0.03 stop: 60.05

Citigroup added AAPL to their recommended list today but it failed to produce any new buying interest. The stock traded in a very narrow range until a last minute spike higher pushed shares into the green. We remain on the sidelines. We're keeping our strategy to buy puts if AAPL trades at $56.85 or lower. If triggered our target will be the $50.50-50.00 range. We do not want to hold over AAPL's mid July earnings report. FYI: The Point & Figure chart points to a $44 target.

Picked on June xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/19/06 (unconfirmed)
Average Daily Volume = 33.1 million

---

Amgen Inc. - AMGN - close: 64.85 chg: -0.08 stop: 67.55

We are not suggesting new plays on AMGN at this time. Shares did produce some relative weakness today but we're expecting a short-term bounce toward the 65.50 level, maybe higher. Currently our target is the $62.65-62.25 range although the P&F chart points to a $60 target. AMGN is due to present at another conference on Tuesday this week. That always increases the risk of some sort of news event moving the stock.

Picked on June 05 at $ 67.48
Change since picked: - 2.63
Earnings Date 07/18/06 (unconfirmed)
Average Daily Volume = 8.9 million

---

Digital River - DRIV - cls: 41.39 change: +0.83 stop: 42.05

Uh-oh! DRIV has reversed course on us (again). Shares spiked higher this morning and while they failed to trade over resistance at the $42.00 level we're still in danger of being stopped out. More conservative traders may want to consider an early exit right now. We are not suggesting new plays.

Picked on June 19 at $ 39.45
Change since picked: + 1.94
Earnings Date 07/19/06 (unconfirmed)
Average Daily Volume = 1.0 million

---

Express Scripts - ESRX - cls: 67.71 chg: +0.44 stop: 70.10

ESRX traded in a very narrow 25-cent range for almost the entire session on Monday. The short-term bias seems to be bullish but the stock remains under resistance at the $70.00 level. We're not suggesting new plays at this time. Our conservative target at $65.25 was hit days ago and now we're aiming for the $60.50 mark. The Point & Figure chart points to a $52 target.

Picked on June 08 at $ 69.59
Change since picked: - 1.88
Earnings Date 07/26/06 (unconfirmed)
Average Daily Volume = 1.8 million

---

Group 1 Auto - GPI - close: 54.25 chg: -0.01 stop: 58.46

There is no change from our weekend update with GPI. We are still suggesting that traders strongly consider exiting early right here for a profit. We're not suggesting new plays. Our target is the $51.50-50.00 range.

Picked on June 11 at $ 58.46
Change since picked: - 4.21
Earnings Date 08/01/06 (unconfirmed)
Average Daily Volume = 498 thousand

---

Intl. Bus. Mach. - IBM - cls: 77.15 chg: +0.05 stop: 80.05

A sideways market left IBM to consolidate sideways as well. We see no changes from our weekend update on IBM. As long as the stock continues to trade under its current six-week trendline of lower highs we're going to remain bearish. Our target is the $73.50-73.00 range. Please note that we will be running into a time crunch soon. We don't want to hold over the mid-July earnings report expected in about three weeks.

Picked on June 06 at $ 78.75
Change since picked: - 1.60
Earnings Date 07/18/06 (unconfirmed)
Average Daily Volume = 5.2 million

---

IDEXX Labs - IDXX - close: 75.40 chg: +0.28 stop: 78.05

If you look closely at some of the intraday chart it looks like IDXX's next move might be lower but we're not suggesting new plays at this time. Our conservative target at $75.25 has already been hit. Now we're aiming for the $72.00 level.

Picked on June 12 at $ 77.95
Change since picked: - 2.55
Earnings Date 07/28/06 (unconfirmed)
Average Daily Volume = 144 thousand

---

Oshkosh Truck - OSK - close: 48.61 chg: -0.54 stop: 51.51

OSK is still showing relative weakness. The next challenge for the bears is going to be a breakdown under the $48.00 level. We remain bearish but traders looking for new positions might want to wait for a drop under $48.00 before initiating plays. Our target is the $45.50-45.00 range. The P&F chart points to a $34 target.

Picked on June 13 at $ 49.49
Change since picked: - 0.88
Earnings Date 08/01/06 (unconfirmed)
Average Daily Volume = 737 thousand
 

Strangle Updates

None
 

Dropped Calls

None
 

Dropped Puts

Carpenter Tech. - CRS - close: 105.39 chg: +0.60 stop: 105.01

CRS continued to bounce today and shares closed over the $105 level. We were trying to catch a breakdown under the $100 level with a trigger to buy puts at $99.25 but the stock never hit our trigger. The technicals have turned somewhat bullish given the rebound out of its recent trading range. Aggressive traders may want to buy calls here or wait for a move past $107.50 (or $110).

Picked on June xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/24/06 (unconfirmed)
Average Daily Volume = 651 thousand
 

Dropped Strangles

None
 

DISCLAIMER

Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

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

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