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Daily Newsletter, Monday, 07/17/2006

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Table of Contents

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

Market Wrap

Major Indexes Finish Mixed on Profit Taking....

The major U.S. equity indexes finished mixed as market participants seemed eager to protect bullish gains in mining and energy shares after last week's run up on heightened Middle East tensions.

While traders and perhaps investors alike were eager to sell gold, with the StreetTracks Gold (NYSE:GLD) $63.95 -2.89%, another type of gold in the form of arches had Dow component McDonald's (NYSE:MCD) $34.72 +5.08% jumping $1.68/share after the restaurant giant said Q2 same-store sales rose 5.5% and forecasted a quarterly net profit of $0.67 a share, including $0.10/share in income related to the sale of shares of Chipotle Mexican Grill (NYSE:CMG) $55.50 +2.56%. Analysts were expecting McDonald's to earn $0.56 a share.

Meanwhile, fellow Dow component Citigroup (NYSE:C) $46.40 -2.48% fell sharply after the largest bank by assets in the U.S. said it earned $5.27 billion, or $1.05 a share in the recently completed second quarter, which was a penny below the $1.06/share consensus. Citigroup said revenues climbed 10% to $22.18 billion, despite continued struggles with its U.S. consumer business.

Economic data took a backseat to updates out of the Middle East, as violence in Lebanon continued to escalate.

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The government said U.S. June industrial production jumped a healthy 0.8%, following a revised 0.1% gain in May, with auto and machinery output bolstering June's increase. Capacity utilization was also on the rise, increased 0.6% to a post-recession high of 82.4%.

The jump in capacity utilization will grab some attention toward inflationary pressures.

The U.S. Dollar Index (dx00y) 86.96 +1.01% surged, and just like that, the mighty greenback trades at levels not seen since June 23.

The question on every trader's mind is weather the dollar's renewed strength and gains today are "flight to safety" related, or a reaction from currency traders that the further rate hikes are needed?

Regional economic data had the New York Federal Reserve district's manufacturing-activity index dropping to 15.64 from 29.01 in June. The 15.64 reading was well below economists' forecast of 20.00.

U.S. Market Watch - 07/17/06 Close

It has been tough for bulls in nearly any sector to hold onto gains, but when it comes right down to it, as losses mount elsewhere, protecting gains where you've got them becomes paramount.

In PINK I've highlighted the 5-day Net% changes of sectors that up to, or including today's trade would have shown a week-to-week gain.

I would urge traders and investors alike to NOT MAKE BIG DIRECTIONAL BETS when geopolitical events are grabbing headlines and swaying sentiment.

While the Middle East news now moves "in front" of N. Korea's recent missile launches, I would note that Japan's Defense Chief called for a permanent law to allow overseas troop deployments today.

According to Kyodo News, Fukushiro Nukaga, who was in Kuwait to greet soldiers withdrawing from southern Iraq, told reporters the country needed a new, permanent law to enable Japan to more promptly participate in peacekeeping activity.

Traders and investors may want to review this news item as it relates to Japan's Constitutions (Chapter II, Article 9), which I (Jeff Bailey) believe was drafted just after World War II by General Douglas MacArthur.

Japan's Nikkei-225 ($NIKK) finished Friday's trade at 14,845.24 and sits right on what I feel is important support (see last Monday's Market Wrap). The Nikkei-225 was closed Monday for holiday as the dollar closes in on a 3-year high against the yen.

Bulls may not have been the only ones protecting recent gains after the NASDAQ-100 Tracker's (QQQQ) $36.04 +0.27% Monday-to-Monday 3.53% decline.

Apple Computer (NASDAQ:AAPL) $52.37 +3.35% rose $1.70/share after American Technology Research analyst Shaw Wu said the company could report June results at the high end of its target and could end up exceeding its target for revenue of $4.2 billion to $4.4 billion and earnings of $0.39-$0.42 a share.

U.S. Dollar Index (dx00y) - Daily Intervals

Oh my! Currency traders and market mavens will have trouble figuring out just what the dollar is "saying" about the economy and/or geopolitical unreast. Just after the FOMC announced its decision on interest rates on June 29, the dx00y "plunged."

In the June 30 Market Monitor (05:23:06 PM EDT) I noted a comment from Craig Russell, Senior Foreign Exchange Strategist with ODS Securities and his comments regarding being long the dollar going into the 06/29/06 FOMC meeting as he thought it a possibility the FOMC might just raise 50bp. Mr. Russell admitted that the dovish commentary saw his long bet getting "crushed."

I paraphrase now, but further comments given by Mr. Russell seemed "certain" that traders/investors should just sell the dollar and look for new lows.

If we were to IGNORE what is taking place on the geopolitical front, I'd have to say the dollar's strength is that of further hikes, which would only come from a tightening Fed.

NASDAQ Composite ($COMPQ) - 10-point box

Internals as depicted by both the narrow NASDAQ-100 Bullish % ($BPNDX), which would depict the BIG caps of the NASDAQ as well as the much broader (+3000 stocks) depict internals that remain weak. I would monitor the Nikkei-225 ($NIKK) as well as the Hang Seng ($HSI) as weakness in those markets would likely serves as a wet blanket on NASDAQ rallies.

I would note that it wasn't until Thursday, when violence between Israel and Hezbollah escalated that the COMPX traded 2,090.

S&P 500 Index ($SPX.X) - 10-point box

Last Monday I thought we should monitor the "weaker" NASDAQ Composite as many times, weakness begets further weakness and drags other indexes lower. That certainly looks to be the case with the often-quoted S&P 500 Index (SPX.X).

I would say that today's "energy" trade was the drag on the SPX and may confirm my thoughts that market participants are eager to protect gains when they get them, especially when major market averages are under distribution.

Here's a quick look at the top weighted "industries," (think sectors) that comprise the S&P 500 as of Friday's close. The S&P 500 is a MARKET CAP weighted index.

I've "grouped" my U.S. Market Watch by various "industries" so that during the day, or week (5-dayNet%) I can see what sectors, if any are pulling the SPX various directions.

S&P500 Index Industry Weightings - By Market Cap

Financials (BIX.X, BKX.X, XBD.X, IUX.X) were relatively "strong" today considering the drubbing Citigroup (C) $46.40 -1.18% took.

Information Technology (GSO.X, SMH, INX.X, DDX.X, NWX.X) have really been getting hammered and have provided the bulk of SPX weakness, on many timeframes.

Healthcare (DRG.X, RXH.X, HMO.X)

One area I've been noting in the Market Monitor that has been notably weak of late has been the consumer discretionary sector, perhaps depicted by the Consumer Discretionary SPDRs (AMEX:XLY) $31.61 +0.70%. I (Jeff Bailey) tend to think of this group as a group of stocks whose services products find demand based more on "wants" than "needs." If there is an economic story to be told here, it would be that the consumer is becoming "more discretionary" with spending and not as indiscriminant.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
None LAZ None
  PNRA  

New Calls

None today.
 

New Puts

Lazard Ltd. - LAZ - close: 35.00 chg: -1.30 stop: 36.75

Company Description:
Lazard, one of the world's preeminent financial advisory and asset management firms, operates from 29 cities across 16 countries in North America, Europe, Asia, Australia and South America. With origins dating back to 1848, the firm provides services including mergers and acquisitions advice, asset management, and restructuring advice to corporations, partnerships, institutions, governments, and individuals. (source: company press release or website)

Why We Like It:
The broker-dealer and investment-related stocks have been a popular target for profit taking lately. Shares of LAZ have definitely been showing relative weakness and the stock just broke technical support at its 200-dma on big volume. Technically the picture is bearish with a two-day old MACD sell signal and a triple-bottom-breakdown sell signal on the P&F chart with a $28 target. We are suggesting that readers use a trigger to open put positions because LAZ is looking somewhat oversold after two weeks of declines and if the markets are positive tomorrow then bulls might try to buy this dip near $35.00. Our suggested trigger to buy puts is at $34.49. If the stock bounces from here more nimble traders might want to try and enter on a failed rally near the top of its channel. If we are triggered at $34.49 our target will be the $31.00-30.00 range. We do not want to hold over the early August earnings report.

Suggested Options:
We're suggesting the August puts. You choose which strike works best for you.

BUY PUT AUG 35.00 LAZ-TG open interest=310 current ask $2.10
BUY PUT AUG 30.00 LAZ-TF open interest= 0 current ask $0.55

Picked on July xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 08/08/06 (unconfirmed)
Average Daily Volume = 504 thousand

---

Panera Bread - PNRA - close: 60.71 chg: -1.39 stop: 62.01

Company Description:
Panera Bread Company owns and franchises bakery-cafes under the Panera Bread and Saint Louis Bread Co. names. The Company is a leader in the specialty bread/cafe category due to its unique bread combined with a quick, casual dining experience. (source: company press release or website)

Why We Like It:
A negative article in Barron's over the weekend is raising more doubts about PNRA. The stock has already been weak with a decline from $69 to support near $60. Today's session did see traders buy the dip but the bounce was fading into the closing bell. The technical picture on both the daily and weekly chart is bearish. Plus, the P&F chart is bearish with a $50 target. Considering the market environment and concerns over consumer spending we're going to list PNRA as a bearish candidate to buy puts. However, we're suggesting a trigger to open positions at $59.49. If triggered our target will be the $55.50-55.00 range. We do not want to hold over the July 25th earnings report.

Suggested Options:
We are suggesting the August puts.

BUY PUT AUG 60.00 UPA-TL open interest= 798 current ask $2.50
BUY PUT AUG 55.00 UPA-TK open interest= 592 current ask $0.90

Picked on July xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/25/06 (confirmed)
Average Daily Volume = 494 thousand
 

New Strangles

None
 


Play Updates

In Play Updates and Reviews

Call Updates

Dominion - D - close: 75.78 change: +0.17 stop: 74.49

Our new bullish call play in D has been opened. The stock traded above resistance at $76.00 on an intraday basis and hit our trigger to buy calls at $76.05 opening the play. The move over $76.00 has produced a new double-top breakout buy signal on the Point & Figure chart that now points to an $87 target. Please note that we are NOT suggesting new plays with shares of D under $76.00. Wait for a new rise above this level before considering new call positions. Our target is the $81.00-82.00 range although more conservative types may want to exit near $80.00. Please note that we do not want to hold over D's early August earnings report.

Picked on July 17 at $ 76.05
Change since picked: - 0.27
Earnings Date 08/03/06 (confirmed)
Average Daily Volume = 1.5 million

---

EOG Resources - EOG - close: 67.45 change: -2.70 stop: 69.90

We are still on the sidelines with EOG. Our plan is to buy calls if shares trade at $72.55 or higher. More aggressive traders might want to consider an early entry on a move over $71.00 and/or its 200-dma. If this sell-off in oil stocks continues then traders may want to consider switching directions and buying puts if EOG trades under potential support near $65.00 and its simple 50-dma. For more details see our weekend play description on EOG.

Picked on July xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 08/01/06 (confirmed)
Average Daily Volume = 3.5 million

---

Fortune Brands - FO - close: 70.55 change: -0.28 stop: 69.74

Lack of a real oversold bounce in the markets today is bad news. More conservative traders may want to exit early with this bullish play on FO before we're stopped out at $69.74. We're going to stock it out since the stock has not yet violated support at the $70.00 level yet. We are not suggesting new positions.

Picked on July 06 at $ 71.30
Change since picked: - 0.75
Earnings Date 07/21/06 (unconfirmed)
Average Daily Volume = 674 thousand

---

Reynolds American - RAI - close: 119.82 chg: +0.38 stop: 117.45

Our new call play in RAI is now open. Investors may be moving money into RAI since the stock can be seen as a "safe haven" play. The stock provides a strong dividend and its product is seen as recession proof. The early July legal victory for the tobacco industry also removes an overhang above shares of RAI. The move over $120.00 and our trigger to buy calls at $120.20 has opened the play. Unfortunately, RAI failed to hold most of its gains. We are NOT suggesting new bullish positions with RAI under the $120.00 mark. Now that the play is open our target is the $124.50-125.00 range. We have a limited amount of time for this play to work since we plan to exit ahead of the late July earnings report.

Picked on July 17 at $120.20
Change since picked: - 0.38
Earnings Date 07/26/06 (unconfirmed)
Average Daily Volume = 636 thousand
 

Put Updates

Alcon Inc. - ACL - close: 94.68 chg: -1.05 stop: 100.05

It looks like Friday's session may have just been a pause for the bears to catch their breath. ACL lost more than 1% on Monday and is nearing the April low near $94.44. We are suggesting that traders open put plays with ACL under $98.00. More conservative traders might want to wait for a decline under $95.00 or the late April low near $94.44 before initiating positions. We're suggesting two targets. Our conservative target is the $90.50 mark. Our aggressive target is the $87.00-85.00 range. We do not want to hold over the July 24th earnings report so we don't have a lot of time.

Picked on July 13 at $ 95.61
Change since picked: - 0.93
Earnings Date 07/24/06 (confirmed)
Average Daily Volume = 805 thousand

---

Air Products Chem. - APD - close: 61.51 chg: -0.44 stop: 65.01

Shares of APD have now closed under potential technical support at its simple 200-dma. We don't see any other changes from our weekend update. We don't want to hold over the late July earnings report. Our target is the $59.00-58.00 range.

Picked on July 09 at $ 62.95
Change since picked: - 1.44
Earnings Date 07/26/06 (confirmed)
Average Daily Volume = 1.2 million

---

Apollo Group - APOL - close: 48.84 chg: +0.54 stop: 52.01

APOL produced a bit of an oversold bounce today but as long as APOL remains under $50.00 we're going to stay short-term bearish. A failed rally under $50 and its 10-dma could be used as a new entry point for puts. Our target is the $45.50-45.00 range. The P&F chart points to a $40.00 target. FYI: More conservative traders might want to consider tightening their stop loss (maybe around $51).

Picked on July 09 at $ 49.92
Change since picked: - 1.08
Earnings Date 09/19/06 (unconfirmed)
Average Daily Volume = 1.4 million

---

Cardinal Health - CAH - cls: 63.20 chg: +0.40 stop: 65.25

There is no change from our weekend new play description on CAH. Our trigger to buy puts is at $62.25, under the recent support. If triggered then we'll target a decline into the $57.75-57.00 range. More aggressive traders might want to aim for the $55 region. The P&F chart points toward $40. We do not want to hold over the early August earnings report.

Picked on July xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 08/03/06 (confirmed)
Average Daily Volume = 1.6 million

--

Caterpillar - CAT - close: 69.19 chg: -0.00 stop: 74.01

Shares of CAT tried to bounce today but the rally stalled near $70.00. The stock closed unchanged. We're down to the last three days for this play. The company is due to report earnings on the morning of Friday, July 21st. We do not want to hold over the report. Our target is the $67.50-66.50 range, which is just above the rising, simple 200-dma. Readers should be prepared for a bounce in CAT if the DJIA bounces from its June low.

Picked on July 12 at $ 71.31
Change since picked: - 1.61
Earnings Date 07/21/06 (confirmed)
Average Daily Volume = 5.1 million

---

Express Scripts - ESRX - cls: 70.67 chg: +0.82 stop: 71.51

Be extra careful here. ESRX spiked lower this morning and hit our trigger to buy puts at $69.30. Unfortunately, the stock quickly bounced after hitting our trigger and closed back above the $70.00 level. The play is now open but we are not suggesting new put plays with the stock above $70.00. Look for a new decline under $69.75 or $69.25 before initiating new positions. Our target is the $64.50-64.00 range. We do not want to hold over the July 26th earnings report.

Picked on July 17 at $ 69.30
Change since picked: + 1.37
Earnings Date 07/26/06 (confirmed)
Average Daily Volume = 2.0 million

---

IDEXX Labs - IDXX - close: 73.06 chg: +0.24 stop: 76.51

We want to repeat our previous suggestion that traders consider locking in a profit now. The BTK biotech index lost 0.8% today but IDXX out performed its peers with a minor, oversold bounce on Monday. We're not suggesting new positions. Our conservative target at $75.25 has already been hit and we're aiming for the $72.00 level.

Picked on June 12 at $ 77.95
Change since picked: - 4.91
Earnings Date 07/28/06 (unconfirmed)
Average Daily Volume = 144 thousand

---

Jacobs Engineering - JEC - cls: 71.88 chg: -1.87 stop: 77.55

JEC continues to show weakness and the stock lost 2.5% on Monday closing near its lows for the session, which is typically bearish for the following open. The P&F chart now points to a $63 target. Our target is the $69.00 level near the June lows. More conservative traders may want to exit at $70 while aggressive traders may want to aim lower. Bear in mind that we do not want to hold over the July 25th earnings report so we only have five trading days.

Picked on July 16 at $ 73.75
Change since picked: - 1.87
Earnings Date 07/25/06 (confirmed)
Average Daily Volume = 583 thousand

---

Whole Foods - WFMI - close: 58.92 chg: +0.53 stop: 63.01

Over the weekend we told readers to watch for a bounce and failed rally under $60 or $61. It looks like WFMI may be providing that failed rally under $60. Shares hit $59.75 before paring its gains this afternoon. Readers can open new put positions here but we would be careful and probably hesitate about opening new plays if the major averages turn positive again tomorrow. Our target is the $56.00-55.00 range. The P&F chart points to a $43 target. We do not want to hold over the late July earnings report.

Picked on July 12 at $ 61.20
Change since picked: - 2.28
Earnings Date 07/31/06 (confirmed)
Average Daily Volume = 1.4 million
 

Strangle Updates

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

---

D.R.Horton - DHI - close: 20.72 change: -0.48 stop: n/a

The homebuilders continued to sink on Monday. The DJUSHB index fell 0.99% while DHI lost another 2.2% on strong volume. We are aiming for an exit at $2.55. The high for the put side of our strangle was $2.30 on Monday. Our estimated cost was about $1.70. We're still planning to exit if either options rises to $2.55 or more. We're not suggesting new strangle plays. The options in our strangle are the August $25 call (DHI-HE) and the August $22.50 put (DHI-TX). Don't forget that DHI is expected to report earnings on Thursday, July 20th and we do plan on holding over the report.

Picked on July 09 at $ 23.90
Change since picked: - 3.18
Earnings Date 07/20/06 (confirmed)
Average Daily Volume = 3.7 million
 

Dropped Calls

Baker Hughes - BHI - close: 79.27 change: +4.38 stop: 79.75

Oil stocks, and specifically oil-service stocks, were clobbered today following a 2.3% pull back in crude oil futures toward $75 a barrel. Honestly, we don't see why oil stocks sold off today. This conflict with Israel is not going to end soon and neither is the ongoing drama with Iran and N. Korea. However, the "market" is always right and traders decided to sell oil stocks today. Next time we'll use a trigger. More conservative traders, if they took our suggestion to wait for a move over $84.00, would still be on the sidelines. If you opened new plays this morning then we would have been stopped out at $79.75.

Picked on July 16 at $ 83.65
Change since picked: - 4.38
Earnings Date 07/28/06 (confirmed)
Average Daily Volume = 4.3 million
 

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.

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