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Daily Newsletter, Saturday, 07/01/2006

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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

Okay, Now What?

The Fed met, the markets moved and the analysts have argued over the future outlook. Investors appeared to cheer the decision but overhead resistance held. The market's narrow range for the last two weeks was broken but only barely. Inflation is rising, the economy is slowing and earnings are shrinking. Historically this is a negative for the equity markets but a halt in a Fed rate cycle is generally seen as a positive. Confusion over the market's future reigns as we enter the low volume summer doldrums period.

Chicago PMI Table

Economics on Friday were mixed but the lead report, the Chicago PMI, showed a sharp drop in the headline number. The number for June came in at 56.5 and well below the May reading at 61.5 and the consensus estimates at 60.0. This report showed a stronger drop in economic conditions than other recent indicators. As you can see in the table above new orders fell sharply by -12.4 along with a drop in production and employment. The only major gain was the +12.1 jump in prices paid. At 89.0 this is the highest level in 18 years. It is a solid indication of rising inflation working its way through the system. 74% of survey responders reported rising prices. The PMI knocked the morning markets back to negative territory after a strong GM inspired open.

The NAPM-NY rose to 394.5 for June compared to 388.6 in May. Business conditions in New York continued their steady post 9/11 rise. The headline number has been on a steady climb with the last minor blip back in Sept 2005. The six-month outlook at 75.0 is at the highest level since April 2005. Inventory used in production fell by -19 days but this is a volatile component that averages between 45-60 days so this drop just brings it back into line with the averages. The capital expenditure days fell for the second month but the 360 we saw in April was abnormal. The average is around 175 days. The internal production components are all well over 50 indicating economic expansion. Note the purchase quantity at 72.2 has taken a sharp turn higher from April's 37.5. Not shown here is the continuing job losses in manufacturing and financial services. Many businesses are reporting moves out of Manhattan to reduce expenses.

NAPM-NY Table

Consumer Sentiment

The University of Michigan Consumer Sentiment for June rose to 84.9 from the preliminary 82.4 reading. The present conditions component rose from 96.1 to 105 and expectations rose to 71 from 68.2. May was a low point for sentiment after a decline from 91.5 in December. The combination of high gas prices, falling stock market, weakening housing market, rising rates and constant talk of a slowing economy was more than consumers could bear. June's rebound shows the resiliency of consumers and their adaptability to higher gasoline prices. After two months of $3 gas it has become factored into daily life with cutbacks in driving or expenditures cuts in other areas. The next shock to sentiment could come when gas hits $3.50 later this summer as some analysts expect.

Personal income for May was released with a +0.4% headline number. This beat expectations of only +0.2% and represented a +5.4% rise since May 2005 but was still below the +0.7% seen in April. As you might expect that +5.4% increase over 2005 was still below the +6.7% increase in spending over the same period. Not surprisingly the savings rate fell by -1.7% to its lowest level since August and the second lowest level on record if you count the hurricane dip last year. The PCE Deflator, an indicator of inflation at the consumer level also rose +0.4% pushing the 12-month number to +3.3%. The core PCE, minus food and energy rose only +0.2% or +2.1% year over year.

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The economic calendar for next week contains two major reports. The ISM Index on Monday is the major economic indicator for June. This will show on a national level where we stand in terms of an economic slowdown. The index is expected to be relatively flat at 54.9 compared to 54.4 in May. Given the potential for a surprise we could see some added volatility. The markets close at 1:PM and morning volume is going to be extremely light once the opening Russell settlements fade. Any material surprise in the headline number could produce a significant market move given the expected low volume. With expectations flat a surprise could come from either direction. The ISM needs to remain over 50 to indicate a continued economic expansion.

The Jobs report on Friday will be the next milestone on the economic highway. Expectations are for a gain of +175,000 jobs but you may recall the May report with the same expectations only managed to produce +75,000 jobs. Whisper numbers are running around 135-150K but it is entirely possible we will see something under 100K once again. At some point a falling labor market is going to impact the equity markets negatively. Housing accounts for 25% of the jobs in America and many builders are suffering heavy layoffs. Two builders here in Denver, a relatively strong market, just cut their workforce substantially. With condo construction going dormant and home inventories at a 6.5-month level there is no need to maintain the fast pace of construction seen over the last several years or maintain that level of workforce. Add in the job cuts in the automotive sector and the attrition from the $1.7 trillion in mergers and acquisitions so far in 2006 and I see weaker job numbers not inline with estimates. Note in the table below how badly analysts have missed the estimates over the last year.

Jobs Table June-2005 to June-2006

Economic Calendar

The news moving the markets on Friday morning was a Kirk Kerkorian move to form an alliance between GM, Nissan and Renault. Apparently KK had discussed an alliance with Renault CEO Carlos Ghosn and Ghosn expressed an interest in acquiring up to a 20% stake in GM. Renault owns a 44% stake in Nissan. KK owns about 10% of GM at prices averaging around $29. KK had bought into the company 12-18 months ago when he thought a bottom was forming and then suffered substantial losses on the continued drop. He exited some positions on the way down and then added to positions around $20. Using his activist clout he has been able to push GM stock higher and Friday's gain of +2.35 pushed him much closer to breakeven. If he can get the automakers to do a deal it would represent a $3 billion buy in by Renault/Nissan. That would push the stock price higher and give KK more clout against the GM board. The alliance would be a joint working arrangement not a merger. The companies could share production and design facilities and reduce costs and redundant product lines. Those at Burnham Securities familiar with GM management said the deal had a "snowball's chance in hell" of ever occurring. GM is right on the verge of completing its turnaround and announced last week it is two years ahead of schedule on job cuts. Ghosn is nicknamed "Le Cost killer" after he took Nissan from being in debt for billions of dollars in 1999 back to profitability in 2001. It appeared to some analysts that KK may be trying to undermine GM CEO Risk Wagoner and setup Ghosn to take control of GM. Wagoner is already on shaky ground and offered to resign in April unless the board gave him a vote of confidence which they did. The KK proposal may not have a chance in its present configuration but odds are good he will keep pushing until some arrangement beneficial to his share price is concluded. The +2.35 gain in GM represents roughly +20 Dow points and kept the Dow from closing any more negative than its -40 point loss. The next largest gainer was Merck at +54 cents.

Apple Computer lost -1.70 after admitting that they had an option grant problem and had hired outside counsel to do a review. This adds Apple's name to a growing list of companies who apparently played with the dates to give preferential treatment to officers in their stock option grants. This list currently involves more than 60 companies but there are still some roaches in the woodpile. Computer Associates (CA) announced on Thursday it may have to take a charge of as much as $300 million in additional expenses for option grant misdeeds.

Computer Sciences (CSC) was crushed for -$7.32 after it revealed the SEC had requested information about its stock option grants. In an effort to blunt the news CSC said it was going to buy back up to $2 billion in stock. Also hurting them was news that they were no longer exploring merger possibilities. Those hoping for a long awaited takeover rushed for the exits.

Palm reported earnings that beat the street but was knocked for a -2.56 loss on weaker than expected guidance. I believe this is going to be the market killer as the earnings begin in earnest on July 10th. The number of warnings we have seen plus the weak guidance from many late reporters could accelerate once the regular earnings cycle begins. Now that the quarter is over there could be an increase in warnings.

August Crude Oil Chart - Daily

July Unleaded Gasoline Chart - 30 min

Oil prices posted gains for the 8th consecutive day as increased gasoline demand pushed prices higher. The expiring June contract in unleaded gas hit a high of $2.32 on Thursday but was hammered back to $2.11 at the close as traders exited ahead of Friday's expiration. Oil closed at 73.93 for a gain of +41 cents after a strong break of initial resistance at $73 on Thursday. The $74 closing level is also strong resistance from June 5th and a break there could easily see a new high before the late summer slump. Analysts are expecting gasoline prices to hit $3.50 as demand outstrips refinery output over the next couple of weeks. There is plenty of gasoline in inventory so there will not be any shortages. Current refinery problems on the gulf coast and in the rain-swollen northeast are expected to be resolved by next weekend.

Also pushing prices higher was a new deadline imposed on Iran. Initially Iran was asked to respond by June-29th but Iran said it would not respond until August 22nd. That gives them more time to refine uranium before saying take this proposal and shred it. US Under Secretary for Political Affairs, Nicholas Burns, said the committee had given Iran until Wednesday July-5th to respond and comply with the terms to stop any enrichment currently in progress. The committee spokesman is scheduled to meet with Iran on Wednesday. The US said the committee was unified around the offer and the timetable. Diplomats from the world's eight major industrial nations said at a Moscow meeting on Thursday they expected to receive a "clear and substantive" response by next Wednesday. Iran has had the proposal since June 6th and the committee feels any further delays are just stalling tactics. I seriously doubt Iran will agree and will stonewall again. Iran's foreign minister reaffirmed on Thursday President Mahmoud Ahmadinejad's position that Iran would NOT reply until Aug-22nd. A senior Iranian cleric, Ahmad Khatarmi, vowed on Friday that his country would never talk with the US over Tehran's nuclear program. On Tuesday Iran's supreme leader, Ayatollah Ali Khamenei, said he saw no use in talking with the US. He further said, "with regards to our nuclear case, we have nothing to do with the U.S. and principally, our officials will have no talks with the U.S." He said Iran was only willing to talk with European leaders on the committee "if they recognized Iran's right to pursue nuclear power." The UN committee said it was going to meet on July-12th to either consider Iran's response or make decisions on the next step in the sanction process if Iran did not reply. The leaders of the entire G8 +1 countries, Canada, Italy, Japan, Russia, Britain, France, Germany and the US, plus China, are scheduled to meet on July 15th in St Petersburg, Russia. The committee is nearly powerless unless Russia relents and signs on to some further action. On Tuesday Putin said, "I repeat once again that we have no intention of joining in any kinds of ultimatums that only drive the situation into a dead end and deal a blow to the U.N. Security Council's authority." On Thursday the text of that speech was presented to the committee to emphasize that point.

With or without Russia I expect this problem to escalate over the coming weeks and that could keep oil prices at the current levels despite inventories at the highest level in eight years. Oil inventories have risen +39 mb over the last 90 days despite another drop of 400,000 bpd in Saudi production and 500,000 bpd offline in Nigeria. Iraq is finally producing 2.5mbpd and security appears to be holding around the oil infrastructure. Inventories in the US have been increasing at an average of 496,000 bpd despite a drop in imports of -448,000 bpd. Current crude inventories are +10.7% OVER the five-year average and refinery utilization rose to 93.8% last week. This is the highest level since Katrina. Without a meltdown in Iraq and a string of hurricanes headed toward the gulf oil fields there is going to be a price correction soon. Depending on Iran and the weather I expect that August, if not earlier, will see some strong volatility in the price of oil. Gasoline demand increased ahead of the holiday weekend but inventory levels are right at the five-year average and driving is expected to slow after the holiday due to higher prices. The crack spread jumped from 20 cents on June-20th to 42 cents without any specific reason. This sets the gasoline market up for a fall once demand slows.

Gasoline Demand Table

I was shocked by the market rally around the Fed meeting this week. Program trades were prevalent the morning before the meeting announcement and then again after the announcement. Shorts were squeezed again and the trading range for the last two weeks was shattered. When you look at the Fed statement there is only a VERY slight modification that could be seen as a softening in their stance but the market seems to have interpreted it as a guarantee. Sorry folks, but it is not a guarantee. The Fed has clearly said they will continue hiking rates based on the data. Friday's data clearly showed an increase in the inflation rate with the prices paid component of the PMI hitting an 18-year high. Wake up and smell the inflation! I am not going to beat a dead horse here and the next meeting is August 8th. We will see how long the current attitude remains in the market. With the ISM and Jobs next week it could be severely tested.

The Dow ran for +335 points between the Wednesday low and Friday high. Friday's action was lethargic at best after the PMI knocked the props out at the open. Volume was very low until the 3:PM bell marked the beginning of the Russell rebalance. As of 3:PM only 3.4 billion shares had traded across all markets. Between 3:PM and the close of after hours trading nearly 4 billion shares traded hands. That is more than we traded all day on Monday. Friday marked only the second 7 billion-share day in market history.

Market Internals

The reason for the extreme jump in volume was the Russell rebalance at the close. According to an interview with Russell officials on Friday over $3 trillion is now indexed to the Russell-1000/2000 indexes. Nearly every position had to be modified in some respect with the index weighting for each stock being adjusted due to the additions/deletions. The index peg is tied to the closing prices on Friday so the majority of funds submitted market on close orders to change these positions.

I have to admit this Russell rebalance did not go as I planned. I had shorted Russell futures at the close just before the announcement and got a good ride down on Mon/Tue the next week but that was the end of the free money. The market rebounds on the 21st and 26th gave us new entry points but there was never any real momentum to the downside. I shorted it again on Friday afternoon and finally thought we were going to see a collapse into the close but a monster buy program hit at 15 min before the close and took out my trailing stops. After that buy program there was a ton of volume on the buy side with some orders holding 200 or more contracts. This pushed the futures back to 728 after the close when the cash market closed at 720. One trader I heard was speculating that funds took short positions before the June 15th announcement knowing there would be a decline into the close when the had to adjust their Russell positions on June 30th. Once their adjustments were done they closed their insurance in the futures. In theory I understand it but 693 was the futures close before the announcement with a high of the week at 702 the day before. Even if they had anticipated the rebalance and shorted at the absolute high the Thursday before the announcement they would still have suffered a major loss at Friday's close. After the buy program blew through at 3:45 the futures were resting at 723. That is a -20 point loss if they actually sold that level. ($2000 per contract) There were 100-200 contract orders flying by. There were 37,900 contracts traded between 3:45 and the futures close at 4:15. That was nearly 25% of the volume for the entire day in a 30 min period. The majority of that volume was buy orders. The futures spiked +8 points into the close while there were massive order imbalances on the sell side on the Russell changes. Many stocks had imbalances of more than a million shares to sell at the close. Some over 3 million to sell and Exxon (XOM) had nearly 10 million shares sold at the close. Why the Russell futures would be so oppositely imbalanced with 30,000 contracts to buy is a puzzle we may never unravel. I doubt I broke even on the Russell scenario over the last two weeks. Remember what I said last Tuesday about no guaranteed trades? There are no guaranteed trades and this proved that point. It had worked so well in the past but as they say, "past performance is no guarantee of future results." Once it becomes a trend there are always those who will bet against it.

Russell futures chart - 5 min

Dow Chart - 120 min

The Dow rallied out of Wednesday's low at 10900 to trade at resistance of 11200 for much of the afternoon on Friday. That +300 point sprint stopped right at that resistance level, which begins at 11200 and tops at 11275. The combination of end of quarter window dressing and Thursday's short squeeze did a number on the bears. A failure to break that 11275 level next week could result in another lower high and a possible continuation of the correction started in May. The bears will probably try to reload on any attempt to break 11275. However, there are few events next week to stimulate any strong buying ahead of earnings. The ISM on Monday could cause a market move on low volume. Which way it might move is another question. If the ISM drops sharply will traders buy the dip thinking it is an end to future rate hikes? OR, will the sell it on worries that a sharp drop means the economy is headed for a recession? If the ISM turned sharply higher would they buy that news of a stronger than expected economy or sell it fearing more rate hikes ahead? Over the last 45 years covering 10 rate hike cycles the Fed pushed the economy into recession five times. For the other five times the markets sprinted higher by an average of +15% over the following year once the final rate hike was in place. Obviously a 50/50 chance of betting wrong is not good odds in the investing arena. Another study claims 8 of the last ten rate hike cycles produced recessions over the next six months after hikes ended. You can twist survey results any number of ways if you have an answer you are trying to fit. It depends on your definition of recession and the time frame you are using. I believe this cycle should produce the rally when hikes end.

Bond buyers have appeared around every corner. After a two week pounding and the worst 9-day selling streak in years the Friday buying pushed that yield back to a two week low at 5.138%. The yields on the 2, 5 and 10 year are all below the current Fed Funds rate. The bond market appears to be telling us that inflation/recession fears are growing. Several analysts speculated that the lack of a 50-point hike meant the Fed was not ready to really take that final stand and knock inflation backwards. Instead they were willing to wait and see how much further it would climb before stronger action needed to be taken. Indecision by the Fed is never a confidence builder for the markets. The dollar was also pounded on the Fed action and analysts are betting it will continue to fall next week. Gold jumped +27 on Friday to $617.50, +$35 since Wednesday nights close. A cheaper dollar means higher priced gold and oil. The commodity does not change, only the currency used to price it.

Ten-year Yield Chart - 60 min

Dollar Index Chart - 90 min

The Nasdaq rallied very strongly on Thursday as those normally short tech stocks into the summer were forced to cover once again. The Nasdaq posted a +64 point gain and that was on top of a strong bounce on Wednesday afternoon. Resistance at 2180 held and the index closed fractionally lower on Friday. All in all I think that was very bullish. A +90 point rebound in two days and it only gave back two points. You may have noticed in the market stats table at the beginning of this commentary that only one index lost ground for the week. That was the SOX. The SOX never fully recovered from the Tuesday beating to an eight month low at 423. Tech stocks and especially chip stocks are not out of the woods yet. Microsoft has already joined the losers list with its notice about Office 2007 being delayed in addition to Vista. Apple has its own set of problems along with Dell, QCOM, CSCO, EBAY and others. Intel found some buyers last week but almost everyone expects them to warn or miss earnings. It is going to be tough for the Nasdaq to find any traction when the majority of the big cap techs are stuck in quicksand and slowly sinking. About the only techs with a pulse are the Internets, YHOO and GOOG. Even a +3.75 bounce by RIMM and positive showings by several biotechs could not rescue the index on Friday. I think resistance at 2180 is going to be tough to break and tech warnings could be out in force next week.

Nasdaq Chart - 60 min

SPX Chart - 90 min

The S&P made it all the way to 1275 before gravity slowed its advance. That was a +37 point rebound and like the Nasdaq it only gave back a couple points at the close. The resistance at 1260, which had held for two weeks was broken on the Thursday afternoon short squeeze. SPX 1275 has been resistance in the past but not the recent past. The index split the 1260-1290 resistance levels and may have established the upper end of a new range. If not the resistance band between 1290-1295 is much stronger and should slow any pre earnings creep.

I think the rebalance confused the issue on Friday and investors fresh off either wins or losses on Thursday afternoon did not want to take a new position ahead of the potentially chaotic close. The indexes traded in a very narrow range intraday and on very light volume. There was zero conviction but there was an underlying bid. For next week I would be cautious until the Russell cloud disperses. Monday, normally an extremely light day, was blessed with the ISM and cleanup of the Russell positions. That suggests volume will be heavy at the open and then take a direction from the ISM. If the numbers are even close to the expectations volume will die and everybody will leave for the weekend before the 10:00 coffee cools. I would not suggest any new positions on Monday unless you are very brave or a glutton for punishment. Once investors have a chance to really think about the Fed statement and the ISM we could see a directional move begin on Wednesday. My bias just looking at the charts would be short term bearish. Even if we are going higher we should pause to regroup somewhere below Friday's close. However, there was that underlying bid on Friday and a failure to give back any gains. I don't want to count out the bad news bulls. This is their time to shine if they are so inclined. The bears will be shorting the open expecting a pullback and a couple buy programs could send them back to the sidelines in a hurry. That makes Wednesday our day for directional decisions. We could see some companies try to hide their earnings warnings by releasing them on Monday afternoon when nobody is watching. Others facing an early cycle earnings date will be forced to confess quickly now that the quarter is over. The wishing and hoping for a late quarter revenue miracle has passed and final numbers are in the can. This possibility for warnings next week could be our market driver beginning on Wednesday. I am not going to formally pick a direction but my bias is bearish given all the factors. The ISM is Monday's wild card and it could produce an early fireworks display or go out a dud. Plan your market holiday accordingly.

Market Holiday - No Monday newsletter!

Remember, Monday is only a half-day with the equity markets closing at 1:PM. Volume will be extremely light with most traders absent and institutions closed. Because of the expectations for an extremely slow day after 10:15 we are not going to publish a newsletter on Monday. Happy 4th and eat a hotdog for me.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
AH None None
MSTR    

New Calls

Armor Holdings - AH - close: 54.83 chg: +1.10 stop: 51.99

Company Description:
Armor Holdings, Inc. is a diversified manufacturer of branded products for the military, law enforcement, and personnel safety markets. (source: company press release or website)

Why We Like It:
AH looks like a bullish call candidate now that its breaking out higher above its two-month bearish trend and from its recent sideways consolidation. The bounce has not yet reversed the bearish signal on its P&F chart but the move over $54.00 looks like a new entry point to buy calls. We are suggesting positions here. Readers can choose to wait for a move past $55.00, which might be short-term resistance or wait for a dip back toward $54.00 again. Our biggest concern is going to be technical resistance at its 50-dma and 100-dma still overhead. Our target is the $59.50-60.00 range. We do not want to hold over the July earnings report.

Suggested Options:
July options expire after Friday, July 21st. Aggressive traders could play the Julys. We're going to suggest the August strikes.

BUY CALL AUG 50.00 AH-HJ open interest=1483 current ask $6.10
BUY CALL AUG 55.00 AH-HK open interest= 528 current ask $2.80
BUY CALL AUG 60.00 AH-HL open interest=1299 current ask $1.00

Picked on July 02 at $ 54.83
Change since picked: + 0.00
Earnings Date 07/20/06 (unconfirmed)
Average Daily Volume = 656 thousand

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MicroStrategy - MSTR - cls: 97.52 change: +2.64 stop: 91.74

Company Description:
Founded in 1989, MicroStrategy is a global leader in business intelligence (BI) technology. MicroStrategy provides integrated reporting, analysis, and monitoring software that helps leading organizations worldwide make better business decisions every day. Companies choose MicroStrategy for its advanced technical capabilities, sophisticated analytics, and superior data and user scalability. (source: company press release or website)

Why We Like It:
MSTR looks ready to run toward the March-April-May highs. Shares displayed relative strength on Friday with a 2.78% gain. The rally on Friday was also a breakout over resistance near $95.00 and its 50-dma near $97. Volume was very strong on the move, which is bullish. Friday's rally also produced a quadruple-top breakout buy signal on its P&F chart, that now points to a $112 target. We are suggesting call positions here near $97.50 but traders have a choice. If you think the market (or MSTR) is going to pull back then look for a dip or bounce near $95.00, which as broken resistance should be new support. If you're worried about potential resistance at its 100-dma (98.75) or the $100 mark then wait for a move past $100 before buying calls. Our target is the $108.50-110.00 range. We do not want to hold over the late July earnings report. The stock can be volatile sow we're using a wide (aggressive) stop loss.

Suggested Options:
Aggressive traders might want to consider the July calls. We are suggesting the August strikes.

BUY CALL AUG 95.00 EOU-HS open interest= 591 current ask $8.40
BUY CALL AUG100.00 EOU-HT open interest= 428 current ask $5.80
BUY CALL AUG105.00 EOU-HA open interest= 356 current ask $3.80

Picked on July 02 at $ 97.52
Change since picked: + 0.00
Earnings Date 07/27/06 (unconfirmed)
Average Daily Volume = 333 thousand
 

New Puts

None today.
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Allegheny Tech. - ATI - cls: 69.24 chg: -0.77 stop: 64.95

A little bit of profit taking after Thursday's big move is to be expected. Watch for a dip to (or bounce from) $68.00 or its 50-dma near $67.90 as a potential entry point. We don't see any other changes from our new play description on Thursday night so we're reposting it here:

All of the steel-related stocks we looked at on Thursday did very well. We like ATI as a call option candidate due to the bullish breakout. Granted bullish breakouts were a dime a dozen with Thursday's market rally but ATI pushed through significant resistance near $68.00, its 50-dma and the $70.00 level. This was in addition to trading past the gap down from mid May. We are suggesting calls with ATI above $68.00. You, the reader, can choose to open positions here or wait for a potential pull back. Considering the size of the rally today, and in ATI, it would be natural to expect some profit taking tomorrow but the shorts are probably scared and Friday is the last day for end of quarter window dressing so the rally could continue. Our target is the $75.00-76.00 range. The P&F chart currently points to an $83 target. We do not want to hold over the July earnings date.

Suggested Options:
We are suggesting the August calls.

BUY CALL AUG 65.00 ATI-HM open interest= 356 current ask $ 8.60
BUY CALL AUG 70.00 ATI-HN open interest=1070 current ask $ 5.80
BUY CALL AUG 75.00 ATI-HO open interest= 456 current ask $ 3.80

Picked on June 29 at $ 70.01
Change since picked: - 0.77
Earnings Date 07/26/06 (unconfirmed)
Average Daily Volume = 3.8 million

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Burlington N.Santa Fe - BNI - cls: 79.25 chg: +0.16 stop: 74.90

We would still consider new call positions here or traders can wait for a breakout above $80.00 or look for a dip toward short-term support near $78.00. At this time we don't see any changes from our new play description from Thursday so we're reposting it here:

The transport stocks were a big part of Thursday's rally. The Dow Jones Transportation average added 3.3% to break through resistance at the 4800 level. Shares of BNI did their part with a breakout from its two-week trading range and its 50-dma. We are suggesting calls here with BNI above $79.00. More conservative traders might want to wait for a move past the $80.00 mark since that level might be psychological resistance. Our target is going to be the $84.90-85.00 range although more aggressive traders might want to aim for the April highs near $87.50. The P&F chart currently points to a $93 target. We do not want to hold over the July earnings report.

Suggested Options:
We are suggesting the August calls.

BUY CALL AUG 75.00 BNI-HO open interest= 142 current ask $6.70
BUY CALL AUG 80.00 BNI-HP open interest=4123 current ask $3.60
BUY CALL AUG 85.00 BNI-HQ open interest= 179 current ask $1.65

Picked on June 29 at $ 79.09
Change since picked: + 0.16
Earnings Date 07/25/06 (unconfirmed)
Average Daily Volume = 2.3 million

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Bear Stearns - BSC - cls: 140.08 chg: +0.57 stop: 132.49

BSC is currently looking pretty strong with a three-day rally from $132.50 to $140.00. The bullish breakout over resistance at its 50-dma and the $137.00-137.50 region was our buy signal. Speaking of buy signals Friday's trade over the $140.00 mark has produced a brand new triple-top breakout buy signal on its Point & Figure chart with a $178 target. We suspect that BSC looks ready for some profit taking. We'd look for a dip back toward $138.00-137.00 as a new entry point. Our target is the $144.50-147.50 range.

Suggested Options:
We are not suggesting new positions right here. Look for a dip. We prefer the August calls.

Picked on June 29 at $137.51
Change since picked: + 2.57
Earnings Date 09/14/06 (unconfirmed)
Average Daily Volume = 1.5 million

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Chipolte Mex Grill - CMG - cls: 60.95 chg: +0.10 stop: 57.45

The technical picture for CMG has definitely taken a turn for the worse in the last several days. CMG's sideways consolidation is drifting lower. This isn't a surprise. We've been warning readers to expect a dip toward the 50-dma and/or the bottom of its rising channel. Right now with CMG near the support at the bottom of its rising channel this looks like a bullish entry point but we'd probably wait for some signs of strength before initiating new positions. At this time, since we're a little concerned over CMG's momentum, we'd wait for a move over Friday's high (62.50) before buying calls again. More conservative traders might want to raise their stop toward the 50-dma. Our target is the $67.50-70.00 range. The P&F chart points to a $78 target. We do not want to hold over the late July earnings report.

Suggested Options:
We are not suggesting new calls at this time. Wait for a new rise over $62.50. If CMG does turn higher readers can choose from the July or August calls.

Picked on June 18 at $ 61.76
Change since picked: - 0.81
Earnings Date 07/20/06 (unconfirmed)
Average Daily Volume = 384 thousand

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Google - GOOG - close: 419.33 chg: + 1.52 stop: 394.99 *new*

GOOG continues to show relative strength. After Thursday's big move the stock suffered some profit taking on Friday morning with a dip toward $412. Fortunately, traders bought the dip and the stock was inching higher most of the session. We remain bullish but it would not surprise us to see some additional profit taking next week since the $420 level looks like the next region of resistance. We are not suggesting new positions at this time. We are going to adjust our stop loss to $394.99. More conservative types may want to put theirs closer to $400. Our target is the $440-445 range. We do not want to hold over the late July earnings report. FYI: Readers should note that GOOG may encounter significant resistance in the $425-430 region due to the trendline of lower highs (see chart). You might want to think about locking in some gains as GOOG nears this area.

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

Picked on June 21 at $401.00
Change since picked: +18.33
Earnings Date 07/20/06 (unconfirmed)
Average Daily Volume = 9.8 million

---

Goldman Sachs - GS - close: 150.43 chg: -1.77 stop: 146.45

On Friday GS tried and failed to breakout past the 50-dma and the $153 level. A little profit taking is not surprising after Thursday's big gain. We do not see any changes from our new play description from Thursday so we're reposting it here:

We seriously considered adding GS to the play list as a call candidate right here (at $152). Thursday's 3.8% gain is a bullish breakout through the top of its six-day trading range and resistance near $150 and its 100-dma. However, the stock still has technical resistance directly overhead at its 50-dma. Therefore we're going to suggest a trigger to buy calls at $153.05. Aggressive traders may want to jump in early. We're suggesting two targets. Our conservative target is the $157.50 level. Our aggressive target is going to be the $164.00 level. If shares of GS can trade over $154 it will produce a new buy signal on the P&F chart.

Suggested Options:
We're suggesting the August calls.

BUY CALL AUG 150.00 GPY-HJ open interest=1679 current ask $5.90
BUY CALL AUG 155.00 GPY-HK open interest=1712 current ask $3.40
BUY CALL AUG 160.00 GPY-HL open interest=3421 current ask $1.70

Picked on June xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 09/12/06 (unconfirmed)
Average Daily Volume = 5.0 million

---

Reynolds American - RAI - cls: 115.30 chg: +0.12 stop: 109.69

Shares of RAI continue to show relative strength. The stock dipped to $114 on Friday before traders stepped in to buy the dip. Volume continues to rise. The bounce from $114 looks like a new entry point but only for aggressive traders. We're not suggesting new plays at this time. A bounce from the 10-dma would look like a better entry. RAI has already hit our conservative target at $115.00. Right now we're aiming for our aggressive target at the $119.00 level.

Suggested Options:
We are not suggesting new call plays at this time.

Picked on June 15 at $111.15
Change since picked: + 4.15
Earnings Date 07/26/06 (unconfirmed)
Average Daily Volume = 632 thousand

---

Union Pacific - UNP - close: 92.96 chg: +1.42 stop: 87.45

Our new call play UNP is off to a good start. Shares added 1.55% on Friday and broke out over its 50-dma. The P&F chart's bullish target has risen from $104 to $110. We do not see any changes from our new play description on Thursday night so we're reposting it here:

UNP is another railroad stock that enjoyed a strong session Thursday. Shares added 2.3% and broke out from a two-week trading range. Volume was strong as UNP cleared resistance at the 100-dma. We are suggesting calls here with UNP above the $90.00 level. More conservative traders may want to wait for UNP to clear the 50-dma directly overhead. Our target is the $96.00-97.00 range. The P&F chart is bullish with a bounce from support and a $104 target. We do not want to hold over the July earnings report.

Suggested Options:
We are suggesting the August calls.

BUY CALL AUG 90.00 UNP-HR open interest= 703 current ask $5.50
BUY CALL AUG 95.00 UNP-HS open interest=1823 current ask $2.70

Picked on June 29 at $ 91.54
Change since picked: + 1.42
Earnings Date 07/20/06 (unconfirmed)
Average Daily Volume = 1.6 million

---

United Tech. - UTX - close: 63.42 chg: +0.13 stop: 59.95

The good news here is that UTX was able to hold on to its gains from Thursday. On Friday traders bought the dip near the stock's rising 50-dma. UTX is relatively close to our target in the $64.00-65.00 range so we're not suggesting new bullish positions at this time. More aggressive traders might want to aim for the May highs above $66.00.

Suggested Options:
We're not suggesting new plays in UTX at this time.

Picked on June 08 at $ 60.13
Change since picked: + 3.29
Earnings Date 07/19/06 (unconfirmed)
Average Daily Volume = 3.7 million

---

Wynn Resorts - WYNN - close: 73.30 chg: -0.34 stop: 69.75

The trading action in WYNN on Friday looks like a short-term bearish reversal. We would look for a dip to the 50-dma (near 72.40) as a new entry point. If shares trade under $72.00 we'd wait for a bounce back before initiating new plays. Our target is the $79.50-80.00 range. The P&F chart has a spread triple-top breakout buy signal with an $86 target. We do not want to hold over the early August earnings report.

Suggested Options:
We are suggesting the August calls.

BUY CALL AUG 70.00 UWY-HN open interest=260 current ask $6.30
BUY CALL AUG 75.00 UWY-HO open interest= 67 current ask $3.50
BUY CALL AUG 80.00 UWY-HP open interest=103 current ask $1.70

Picked on June 29 at $ 73.64
Change since picked: - 0.34
Earnings Date 08/02/06 (unconfirmed)
Average Daily Volume = 1.0 million
 

Put Updates

Apple Computer - AAPL - close: 57.27 chg: -1.70 stop: 60.05

AAPL definitely under performed on Friday. Shares lost 2.88%. The news headlines would have you believe the drop was on the back-dating options story but that news came out the day before. One analyst firm came forth and said the pull back should be used as a buying opportunity. We are a little hesitant to suggest new positions here. The stock spiked lower and hit our trigger to buy puts the day before the Fed announcement and market rally. At this time we're going to suggest that readers wait for a decline under $56.50 or even $56.00 before considering new put plays. Our target is the $50.50-50.00 range. The P&F chart points to a $44 target. We do not want to hold over the July earnings report.

Suggested Options:
We are not suggesting new plays at this time. If AAPL continues to sink we'd suggest the August puts.

Picked on June 28 at $ 56.85
Change since picked: + 0.42
Earnings Date 07/19/06 (unconfirmed)
Average Daily Volume = 33.1 million

---

Amgen Inc. - AMGN - close: 65.23 chg: +0.13 stop: 67.25

The BTK biotech index has been showing a lot of strength in the last couple of days. Fortunately for us the rally in AMGN on Friday failed. We're going to leave our stop loss where it is at $67.25 above the 50-dma. However, more conservative traders might want to put their stop above Friday's high or just exit now to lock in a small gain. We're not suggesting new plays. Our target is the $62.65-62.25 range.

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

Picked on June 05 at $ 67.48
Change since picked: - 2.25
Earnings Date 07/18/06 (unconfirmed)
Average Daily Volume = 8.9 million

---

Digital River - DRIV - cls: 40.39 change: +0.29 stop: 42.05

We still don't see any news to account for DRIV's weakness on Thursday morning. We remain cautious with shares above $40.00 and we're not suggesting new positions at this time. Our stop remains just above short-term resistance at the $42.00 level. Currently our target is the $35.25-35.00 range. The P&F chart is bearish and points to a $26 target.

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

Picked on June 19 at $ 39.45
Change since picked: + 0.94
Earnings Date 07/19/06 (unconfirmed)
Average Daily Volume = 1.0 million

---

Group 1 Auto - GPI - close: 56.34 chg: +0.05 stop: 58.01 *new*

We are still in a wait and see mode with GPI. We're waiting to see if and when the oversold bounce will fail. So far the bounce has brought the MACD indicator all the way to the brink of a new buy signal. We are not suggesting new bearish plays at this time. Instead we're going to lower our stop loss to $58.01. More conservative traders may want to adjust their stops toward Thursday's high near $56.75. Our target is the $51.00 level. The P&F chart points to a $50 target.

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

Picked on June 11 at $ 58.46
Change since picked: - 2.12
Earnings Date 08/01/06 (unconfirmed)
Average Daily Volume = 498 thousand

---

Intl. Bus. Mach. - IBM - cls: 76.82 chg: -0.77 stop: 78.75*new*

The action in IBM on Friday was interesting. The stock produced a (bearish) failed rally under the $78.00 level. Furthermore volume was above average on the reversal and the stock appears to have produced a bearish engulfing candlestick pattern. We are not suggesting new put positions in IBM at this time but if you were looking for an entry point this could be it - just consider using a tighter stop near $78.00. We're adjusting our stop loss to $78.75. Our target is the $73.50 level. We do not want to hold over the mid July earnings report.

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

Picked on June 06 at $ 78.75
Change since picked: - 1.93
Earnings Date 07/18/06 (unconfirmed)
Average Daily Volume = 5.2 million

---

IDEXX Labs - IDXX - close: 75.13 chg: -0.09 stop: 78.05

Strength in the BTK biotech index is probably fueling the bounce in IDXX. The pattern remains bearish but IDXX is on the verge of pushing past short-term technical resistance at its 10-dma. Volume came in above average on Friday's session. We are not suggesting new positions at this time. The MACD indicator on the daily chart is starting to look bullish so more conservative traders might want to do some profit taking here. Our conservative target at $75.25 has already been hit and we're now aiming for the $72.00 level.

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

Picked on June 12 at $ 77.95
Change since picked: - 2.82
Earnings Date 07/28/06 (unconfirmed)
Average Daily Volume = 144 thousand

---

Oshkosh Truck - OSK - close: 47.52 chg: -0.17 stop: 50.51

OSK continues to look relatively weak. The stock failed to really participate during the big market rally on Thursday. Shares seem to be trending in a lower high, lower low pattern. If OSK does try and bounce we would expect to see some resistance at $49.00 and again at $50.00. Any failed rally under $50 and its 200-dma could be used as a new entry point but we're not suggesting new plays at the moment. Our target is the $45.50-45.00 range. The P&F chart points to a $34 target.

Suggested Options:
We're not suggesting new put plays in OSK at the moment. Watch for a new failed rally attempt.

Picked on June 13 at $ 49.49
Change since picked: - 1.97
Earnings Date 08/01/06 (confirmed)
Average Daily Volume = 737 thousand
 

Strangle Updates

None
 

Dropped Calls

Marathon Oil - MRO - close: 83.30 chg: -0.25 stop: 77.55

Close enough? MRO hit $83.99 on Friday. Our target was the $84.00-85.00 range. We're going to suggest that readers exit early for a potential profit right here. MRO looks short-term overbought and any consolidation could bring it right back to the $80 level again. We'll definitely keep an eye on the stock for another entry point to buy calls. More aggressive traders willing to suffer the ups and downs may want to keep the play open and aim for the April highs.

Picked on June 27 at $ 77.55
Change since picked: + 5.75
Earnings Date 07/27/06 (unconfirmed)
Average Daily Volume = 3.2 million
 

Dropped Puts

None
 

Dropped Strangles

None
 


Trader's Corner

The Value in Being a Doubting Thomas or Thomasina

At times, I read four or five investment-related articles each and every night. I have sometimes poured over experts' predictions. I often filtered those predictions through what technical analysis told me about the charts and tried to remain enough of a doubting Thomasina to demand proof that each prediction was justified.

Still, the more letters behind the names of the authors and the more obscure the economic research they threw at readers, the more credence I gave their predictions. That's human nature. Sometimes their predictions influenced me more than they should, and that's human nature, too. All the writers on our staff want to educate readers, but we perhaps want to educate you most to question what you read, even if it's our own words, and to remain a Doubting Thomas or Thomasina. It's your money and your responsibility to determine how and when to trade.

Recently, when thinning files, I came across articles from July 2002 and May 2003. The article published in the summer of 2002 was the text of an interview with a man who was the vice president of a brokerage firm and editor of an investment newsletter. The interview concerned the then imminently expected Kondratieff Winter.

As the newsletter editor explained, Kondratieff was a Russian economist who studied capitalism from the Industrial Revolution through to the 1920's. He proposed that the economy cycled through a long period of expansion and contraction that lasted about 50 to 60 years. Later economists divided these cycles into four seasons, with the Kondratieff Winter being a time of deflation when debt would be washed out of the system. Unemployment would hit highs, currency crises could be expected, and stocks would lose ground. The best investments would be cash and gold according to this expert.

The person being interviewed expected that a Kondratieff Winter was upon us, and he expected gold to appreciate while stocks would likely plunge. He advised that traders be wary of staying in the stock market and thought it possible that the Dow might slip to 1200 if the markets were to parallel what happened between 1929 and 1932. While perhaps stopping short of predicting that the Dow was actually going to reach that level, he did not see any reason to believe that the stock markets might react any differently to that expected Kondratieff Winter than to the one that had hit in the 1920s. He advised staying out of bonds because of an expected rise in yields. He thought the economic downturn would impact that demand for crude, so that the U.S. might become self-sufficient in providing its own need for crude, and that commodities would not inflate.

Obviously, and fortunately, not all of those possible outcomes have been realized, although gold certainly has appreciated as the interviewee suggested it would. In mid-2003, yields did increase, but they then chopped around in a tight range until recently, much to the puzzlement of many. The Dow did not drop anywhere near 1200, crude zoomed higher, and commodities zoomed, too. Some have posed arguments that the dollar's decline has contributed to a somewhat false inflation of commodity prices, of course, but the fact remains that the scary possibilities suggested in that article have not, for the most part, yet been realized.

Neither have those in the May 2003 article that I found in my files. The author of the article published in May of that year is a professor of geophysics at UCLA, writing about intriguing research on a topic he called "cooperative herding and imitation." The professor and another researcher believed that the S&P 500 showed herding as it lost value from 2000 into early 2003. At the time I read the article, I was finishing writing a young-adult novel whose premise involved the mathematical basis behind human behavior, so the coincidence of themes caught my attention. The professor updated the graphs showing the predicted future of the stock market each month. In recent months, the professor's updates have included as many as 20 "equiprobable" outcomes and have cautioned that the forecasts are not deterministic. However, at the time I first read his material, the two researchers suggested the possibility that the S&P 500 could be headed into sub-700 levels in the summer of 2004 and graphs included only two possible scenarios, both rather dire.

His current predictions include a possible continued upward to sideway-upward (3 out of 20) movement of the SPX, as well as another drop to 2002 lows. Rereading the research, I still find myself intrigued by the mathematics behind the studies, but I also wonder how much the dire predictions in both of those articles, coming during and after the slump of markets into their 2002 lows, impacted my thinking about the markets during that period. I tend to be a bit of a Doubting Thomasina, but the fact that I copied and filed those articles among my other research must mean they impacted me, and I clearly remember being uncertain about the sustainability of the bounce when it began in the spring of 2003.

So, what's the point? We're hearing a lot of similar-sounding prognoses about the markets now. It's possible, of course, that manipulation of the markets just postponed that Kondratieff Winter and that it will be upon us soon. Lots of things are possible, but "possible" doesn't equate to "definitely." So, listen to those prognosticators who have earned your respect. Read some of the dire predictions and some of the more optimistic ones, then evaluate what you're hearing and reading. Study charts on your own. Use the information to protect positions or perhaps even evaluate whether you want to change your trading style into one that will be more protective of your assets.

While you're doing all this, however, keep the Doubting Thomas or Thomasina in you alive and active. No matter how educated the guess about market direction, no matter how experienced or educated the person giving the forecast, we all get surprised at times. Don't believe everything you hear or read.
 

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