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Daily Newsletter, Monday, 07/10/2006

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Table of Contents

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

Market Wrap

EMC's warning is latest drag for technology

Stocks opened higher as merger news provided optimism, but gains faded toward the close with semiconductors once again pacing declines after data storage giant EMC Corp. (NYSE:EMC) $10.41 -6.88% warned that it now expects to earn $0.13 share on revenue of $2.58 billion, down from the company's prior quarterly guidance of $0.13 a share on revenue of $2.66 billion.

If EMC's warning had a silver lining, it seemed to have been cannibalized in a somewhat mixed statement from management regarding its new Symmetrix systems offering. While the company said it had strong new orders for its Symmetrix DMX-3 systems, the orders came late in the quarter, and couldn't balance fewer-than-expected orders placed for its Symmetrix DMX-2 systems.

Shares of Heritage Property Investment Trust (NYSE:HTG) $35.94 +2.74% gained 96 cents, but trade well off their March highs of $40.00 after the company said it has agreed to be acquired by the Australian-American joint venture of Centro Watts for $1.83 billion, or $36.15.

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Further merger news had shopping center REIT Kimco Realty Corp. (NYSE:KIM) $37.41 +1.46% buying smaller operator Pan Pacific Retail (NYSE:PNP) $69.35 -0.92% for $70.00 a share. Kimco said it will assume approximately $1.1 million in PNP's debt.

Kraft Food (NYSE:KFT) $30.21 +0.03% edged up a penny by the close. Kraft said it will buy the Spanish and Portuguese operations of United Biscuits, a U.K. cookie maker, for $1.07 billion. The deal satisfies Kraft's appetite to buy back all Nabisco trademarks in the E.U., Eastern Europe, the Middle East and Africa.

Two economic reports were released during Monday's trade.

Wholesale inventories for May (10:00 AM EDT) showed a 0.8% increase to a seasonally adjusted $375.81 billion, even though sales rose at a rate twice as high as stockpiles. Economists expected inventories to rise by 0.5%.

Consumers continued to take on debt, but at a slower pace than in April, as a sharp rise in credit card financing and other revolving debt offset the first drop in non-revolving debt in six months. May consumer credit (03:00 PM EDT) expanded by $4.4 billion to $2.174 trillion according to the Federal Reserve. April's previously reported $10.6 billion surge was revised lower to $9.3 billion.

U.S. Market Watch - 07/10/06 Close

For whatever reason, several indexes I was tracking in my U.S. Market Watch have either been "discontinued" as of June 30, or multiple data sources are no longer paying fees to exchanges for feeds. As such, I've simply tried to "substitute" like indexes with some ETF (electronic traded funds) for various sector representations. PINK **.

The NASDAQ-100 Tracker (QQQQ) $37.36 -0.87% did trade a fresh 52-week low intra-day, with the Semiconductor HOLDRs (AMEX:SMH) $31.09 -2.23% closing at a new 52-week low.

Earnings season kicked off with Dow component Alcoa (NYSE:AA) $33.41 -0.41% falling to $31.94 in tonight's extended session. The aluminum giant reported Q2 net income of $744 million, or $0.85 a share, up 62% from $460 million, or $0.52 a share, a year ago. Alcoa said income from continuing operations came in at $0.86 a share, which matched Wall Street expectations. Investors appeared disappointed as revenue increased 19% to $7.96 billion, which missed analysts' estimate of $8.01 billion.

Telecom equipment maker Lucent (LU) $2.34 -1.26% looks set to challenge recent 52-week lows tomorrow morning after the company warned it will miss its quarterly revenue target by $300 million, with earnings per share also falling short of estimates, as its telecom equipment gear was hurt by weak sales in the U.S. and China.

Lucent, which has agreed to be acquired by French equipment maker Alcatel (NYSE:ALA) $12.30 -1.04% for $13.45 billion, said in a statement that sales for its fiscal third quarter totaled $2.04 billion, roughly 13% lower than its sales in the same period a year ago.

Energy prices softened from recent highs. I did note a Dow Jones headline this morning that Saudi Arabia has started testing some of its heavy-oil reserves, looking to unlock its huge, hard-to-tap and largely unexploited reservoirs of heavy crude.

As earnings season begins, I find a headline from Dow Jones that Wall Street forecasts for the S&P 500 are now calling for aggregate Q2 operating earnings growth of 11%-12%, up from single digits forecasted earlier in the quarter that threatened to snap a winning streak of 11 straight quarters of double-digit profit growth.

When I went to bed Sunday evening, Japan's Nikkei-225 ($NIKK) was down more than 100-points. When I woke up this morning, the Nikkei-225 finished up an impressive 245-points, or 1.60%.

Japan's Nikkei-225 ($NIKK) - 50-point box

In this morning's Market Monitor I posted the above chart, where the Monday's early session dip to 15,100 would have a supply (O)/demand (X) chartist continuing to chart lower to 15,000. However, I do show "blue ?" to depict the intra-day turnaround.

What looks to have triggered the intra-day reversal was that machine orders fell 2.1%, which was less than the -4.6% forecast.

We've been hearing about a "liquidity crunch" out of Japan, and I do think an earlier release of the country's M2+CD Money Supply year-over-year reading of +1.2% versus forecast of +1.5% and previously reported +1.4% gain spooked buyers earlier in the session.

I'd have to say that after having some N. Korean-launched missiles falling the in the Sea of Japan, the Nikkei-225 has been hesitant to relinquish some bottom-fishing gains. I'll continue to monitor things, but a break back below 14,800 would be an alert to weakness.

I like to extend "old trends" on a chart and monitor them. If they begin serving up resistance or support, that will often-times depict market participants showing a growing bias. With the $NIKK still somewhat either side of its recently broken bullish support trend, but now below downward trend, at best I'd be cautiously optimistic/bullish.

Hong Kong's Hang Seng ($HSI.X) - 50-point box

As quickly as China's Hang Seng fell 2,050 points (-11.8%) from its May highs, buyers have been aggressive after recent triple top buy signal at 15,900.

Earlier this morning China said it country's trade surplus hit a record as it exported $14.5 billion more in goods than it takes in during June. Economists had forecasted a surplus of $13.6 billion.

Currency traders saw the data as further adding the U.S. pressuring China to let the yuan appreciate faster.

I wanted to updated traders and investors on these two major Asian/Pacific Rim indexes, as they appeared to be providing the bulk of the drag for other major stock market indices around the world.

Things look to have stabilized here, but I'll continue to monitor.

Internals improving at NYSE, still weak at NASDAQ.

Over the past week, some of the major market bullish % indications have reversed higher.

In fact, all have reversed back up except the very broad NASDAQ Composite Bullish % ($BPCOMPQ) from StockCharts.com

NASDAQ Composite Bullish % ($BPCOMPQ) - 2% box chart

I don't mean to "focus on the negative," in fact; some have said, "Jeff's too bullish!"

No, what I think traders and investors need to do is at least take note of an indicator that is "different" than some others. For any number of reasons, where one primary reason may be favorable stock option grant prices to company executives, the greater number of stocks listed on the NASDAQ (4 and 5 lettered stock symbols) are still depicting that supply is in control.

It would be painting with a broad brush to say the NASDAQ is "all tech," but it is broadly known that many technology firms tend to compensate their executives to a greater extend with stock options.

Each week I get an e-mail from Scott & Scott regarding their investigation into a company possibly having granted stock options to a company executive at a "favorable price" prior to the stock's price moving higher.

NASDAQ Composite ($COMPQ) - 10-point Box

I'm running late to my editor's deadline, but I would continue to caution "NASDAQ Bulls" of getting too aggressive with bullish plays. It should be suspicious to some that the NASDAQ's first test of bearish resistance trend comes on July 3, just as the Stock Trader's Almanac notes that historically, the NASDAQ "Worst 4 Months" begin in July.

Be careful out there, and DO NOT OVERLEVERAGE! Trade your stops and targets.
 


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: 139.50 chg: +0.27 stop: 134.95

BSC held up pretty well during Monday's session. The stock managed a minor bounce from the simple 10-dma. We're still worried about the market's next move and would expect BSC to test the $136.50 or $135.00 level. If you don't want to endure that kind of pull back consider exiting early right now! Our target is the $144.50-147.50 range. The P&F chart is still bullish with a $184 target.

Picked on June 29 at $137.51
Change since picked: + 1.99
Earnings Date 09/14/06 (unconfirmed)
Average Daily Volume = 1.5 million

---

Fortune Brands - FO - close: 72.37 change: +0.74 stop: 69.74

FO continues to show relative strength. The stock added another 1% and closed over potential resistance at the $72.00 level. We're still aiming for the $74.00 mark but we might have to adjust it lower as the 50-dma falls. We're concerned the 50-dma may be overhead resistance. We do not want to hold over the July earnings report (21st - unconfirmed). FYI: more aggressive traders may want to use a wider stop like under Wednesday's low.

Picked on July 06 at $ 71.30
Change since picked: + 1.07
Earnings Date 07/21/06 (unconfirmed)
Average Daily Volume = 674 thousand

---

Google - GOOG - close: 418.00 chg: - 2.45 stop: 399.00

GOOG received some positive analyst comments about its earnings estimates but that failed to stop the stock from seeing some minor profit taking. The upward momentum is starting to struggle a bit and shares dipped to and closed near its rising 10-dma. More conservative traders might want to lock in some profits right here! There is potential resistance in the $425-430 region with its trendline of lower highs. We are aiming for the $440 level.

Picked on June 21 at $401.00
Change since picked: +17.00
Earnings Date 07/20/06 (confirmed)
Average Daily Volume = 9.8 million

---

Komag Inc. - KOMG - close: 45.33 change: -1.50 stop: 44.49

Technology stocks, specifically hardware stocks, were hammered today thanks to an earnings warning from EMC. The GHA hardware index lost 2.4%. Shares of KOMG lost 3.2% but on below average volume if it's any consolation. We warned readers over the weekend that we expected KOMG to dip the $45.00 level. A bounce from the 10-dma (45.21) or the $45.00 mark could be used as a new entry point. More conservative traders might want to tighten their stops toward $45.00.

Picked on July 06 at $ 47.54
Change since picked: - 2.21
Earnings Date 07/26/06 (unconfirmed)
Average Daily Volume = 1.1 million

---

Union Pacific - UNP - close: 90.36 chg: +0.24 stop: 88.49

Bulls bought the dip in UNP this afternoon. The stock closed higher and the rebound back above the $90.00 mark might look like a new bullish entry point to buy calls. However, we're still concerned about weakness in the major indices and the transportation index. Our readers might want to wait for a move over $91.00 before considering new plays. Currently our target is the $96.00-97.00 range.

Picked on June 29 at $ 91.54
Change since picked: - 1.18
Earnings Date 07/20/06 (unconfirmed)
Average Daily Volume = 1.6 million
 

Put Updates

Apple Computer - AAPL - close: 54.96 chg: -0.44 stop: 58.55*new*

AAPL lost 0.79% and closed under the $55.00 level for the first time since last October. The daily chart's MACD indicator has produced a new sell signal today. The P&F chart remains bearish with a $44 target. We are targeting a decline into the $50.50-50.00 range. Please note that we're lowering our stop loss to $58.55.

Picked on June 28 at $ 56.85
Change since picked: - 1.89
Earnings Date 07/19/06 (unconfirmed)
Average Daily Volume = 33.1 million

---

Air Products Chem. - APD - close: 63.29 chg: +0.34 stop: 65.01

APD produced a bit of an oversold bounce today in spite of news that one analyst firm lowered their earnings estimates for the company. Readers can use a failed rally under $64.00 or the 50-dma (64.44) as a new entry point to buy puts. Our short-term target is the $59.00-58.00 range. It's short-term because we do not want to hold over the late July earnings report.

Picked on July 09 at $ 62.95
Change since picked: + 0.34
Earnings Date 07/26/06 (unconfirmed)
Average Daily Volume = 1.2 million

---

Apollo Group - APOL - close: 50.12 chg: +0.20 stop: 52.51

We don't see any changes from our weekend play description for APOL. The stock did produce a minor bounce but the rally failed twice under the $50.60 level. More conservative traders might want to wait for a new relative low (49.79) before initiating new put positions. The P&F chart is bearish and points to a $44 target. We are suggesting put options with APOL under $50.00 although more aggressive traders might want to consider a failed rally under $51.00 as a new entry point. We do expect some support near the $47.50 region (around the March lows) but our target is the $45.50-45.00 range.

Picked on July 09 at $ 49.92
Change since picked: + 0.20
Earnings Date 09/19/06 (unconfirmed)
Average Daily Volume = 1.4 million

---

Digital River - DRIV - cls: 40.14 change: +0.02 stop: 42.05

DRIV dropped to a new one-week low but a late day bounce pushed it back into the green. The move under $39.50 midday looked like a new entry point but we remain cautious given the bounce and would not suggest new plays at this time. We're aiming for a drop into the $35.25-35.00 range, which is under the simple 200-dma. We do not want to hold over the late July earnings report.

Picked on June 19 at $ 39.45
Change since picked: + 0.69
Earnings Date 07/27/06 (confirmed)
Average Daily Volume = 1.0 million

---

Intl. Bus. Mach. - IBM - cls: 76.67 chg: +0.25 stop: 78.75

IBM spent most of the day trading sideways. There was an afternoon dip to a new relative low but someone decided to buy the dip and IBM closed in the green. We're surprised the stock was not weaker. UBS lowered their earnings estimates and price target on IBM this morning. We do not want to hold over the report and that doesn't give us a lot of time so we're not suggesting new plays right now. Currently our target is the $73.50 level. More aggressive traders might want to aim lower in the $72-70 region.

Picked on June 06 at $ 78.75
Change since picked: - 2.08
Earnings Date 07/18/06 (unconfirmed)
Average Daily Volume = 5.2 million

---

IDEXX Labs - IDXX - close: 73.85 chg: -0.85 stop: 77.51

IDXX is sinking again. Shares lost 1.1% and closed under what has been minor support at the $74.00 level. More conservative traders may want to think about locking in some profits here. Our conservative target at $75.25 has already been hit and we're now aiming for the $72.00 level. Currently the Point & Figure chart points to a $64 target.

Picked on June 12 at $ 77.95
Change since picked: - 4.10
Earnings Date 07/28/06 (unconfirmed)
Average Daily Volume = 144 thousand
 

Strangle Updates

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

---

D.R.Horton - DHI - close: 23.50 change: -0.40 stop: n/a

Shares of DHI bounced around our suggested entry range this morning (23.75-24.25) before finally sinking lower. We think it's worth noting that volume was pretty low on the session. We're also surprised that DHI did not see more weakness after KBH and Dominion homebuilders said that the market continues to soften with more cancellations and weaker orders. We don't care which way DHI moves as long as it moves far enough before August expiration. Our estimated cost was about $1.70. Right now we're planning to exit if either option rises to $2.55 or more. The options in our strangle are the August $25 call (DHI-HE) and the August $22.50 put (DHI-TX).

Picked on July 09 at $ 23.90
Change since picked: - 0.40
Earnings Date 07/20/06 (confirmed)
Average Daily Volume = 3.7 million

---

KB Home - KBH - close: 45.12 change: -0.64 stop: n/a

Is all the bad news already price into the homebuilders? KBH and Dominion released statements today saying that they continued to see weak trends with higher cancellations and a slow down in new orders. Yet shares of KBH only lost 1.39% and on very low volume. Normally a confession like that would see a much bigger reaction. The stock is still inside our suggested entry range ($44.00-46.00) to open strangle plays. Our estimated cost was about $1.45. The options we suggested were the August $50 call (KBH-HJ) and the August $40 put (KBH-TH). We would like to exit if either option rises to $2.45 or more.

Picked on July 09 at $ 45.76
Change since picked: - 0.64
Earnings Date 09/14/06 (unconfirmed)
Average Daily Volume = 2.4 million
 

Dropped Calls

None
 

Dropped Puts

None
 

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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