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Daily Newsletter, Monday, 07/24/2006

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Table of Contents

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

Market Wrap

Mergers help fuel rebound

Over $60 billion worth of merger announcements helped fuel a strong rebound for the major indices on Monday, while upbeat earnings from Schering-Plough (NYSE:SGP) $20.55 +5.65% and Dow component Merck (NYSE:MRK) $38.95 +4.25% gave lift to broader healthcare and drugs.

Volumes were brisk at both the NYSE and NASDAQ, but come in as average with July average daily volume of 2.31 billion and 1.90 billion respectively.

Merger announcements were plentiful.

Shares of ATI Technologies (NASDAQ:ATYT) $19.67 +18.78% surged and were today's most actively traded (151.6 million) after the manufacturer of graphics and multimedia processing products said chipmaker Advanced Micro Devices (NYSE:AMD) $17.39 -4.76% offered to buy the company in a deal valued at $5.4 billion.

Under the terms approved unanimously by both companies' boards of directors, AMD will pay $4.2 billion in cash, and 57 million of its shares (based on Friday's AMD close of $18.21), which valued ATI's shares at $20.47.

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Shares of NVIDIA (NASDAQ:NVDA) $19.56 +10.07%, ATI's chief rival, jumped after the company's CEO said ATI's coupling with AMD will strengthen his company's hand, because Intel, which sells about 80% of the world's microprocessors, will be resistant to buying graphics chips from a competitor (AMD).

The nation's largest for-profit hospital operator, HCA (NYSE:HCA) $49.48 +3.36% rose $1.61 after the company said it would urge shareholders to accept a $21.3 billion, or $51 per share offer from a private investment group made up of Bain Capital, Kohlberg Kravis Roberts & Co., and Merrill Lynch Global Private Equity.

The Pharmaceutical Index (DRG.X) 342.22 +2.27% closed at a new multi-year high.

Shering-Plough (NYSE:SGP) $20.55 +5.65% said Q2 net income was $237 million, or $0.16 a share, as sales rose 11% to $2.8 billion. Shering's $0.16/share beat analysts forecast by an impressive $0.08/share.

Dow component Merck (NYSE:MRK) $38.95 +4.25% surged to a multi-year high, but not on a favorable jury ruling for its painkiller Vioxx! The drug giant reported net income of $1.5 billion, or $0.69 a share. That was up from $720.6 million, or $0.33 a share, a year ago. Revenue came in at $5.77 billion for the quarter, up 5.6% from the $5.47 billion in the year-ago quarter. Excluding a net charge of $161 million for its ongoing global restructuring, Merck said net income would have been $0.73 per share, $0.08 better than the consensus estimate.

U.S. Market Watch - 07/24/06 Close

Homebuilders as depicted by the Dow Jones Home Construction Index (DJUSHB) 587.77 +4.10% were atop the percentage gainer's list of my U.S. Market Watch.

Tomorrow at 10:00 AM EDT, existing home sales are expecting to come in at a 6.6 million annual rate (June), compared to 6.7 million.

The S&P Retail Index (RLX.X) 428.26 +2.49% paced itself higher to the close. Tomorrow at 10:00 AM EDT we'll get a look at July consumer confidence. Current consensus is for a reading of 104.0 vs. a prior reading of 105.7.

Dow component Wal-Mart (NYSE:WMT) $44.43 +1.62% gained $0.71 after the company said it hired Leslie Dach, vice chair of Edelman public relations and architect of its stepped-up strategy to combat critics, to a new post as executive vice president of government relations and corporate relations.

September Natural Gas Futures (ng06u) were today's "hot commodity" as traders in that complex monitored Tropical Storm EMILIA.

In this morning's Market Monitor at OptionInvestor.com, I thought traders short gold should be looking to take some profits off the table with the StreetTracks Gold (GLD) $61.14 ($611.40/oz equivalent) nearing the psychological $600.00 level. We're still holding 1/4 position (short basis $62.71) with a stop at $62.00 ($620.00/oz equivalent).

Semiconductors as depicted by the Semiconductor HOLDRs (AMEX:SMH) $29.76 +1.98% got a bounce after last week's continued drubbing.

Shares of Texas Instruments (NYSE:TXN) $27.84 +3.11% build on Monday's regular session gains to $28.96 in tonight's extended session. The chip maker reported Q2 earnings of $2.39 billion, or $1.50 a share, on strengthening demand for wireless semiconductors. Earnings from continuing operations of $0.47 a share topped Wall Street estimates by a penny. Texas Instruments said revenues rose 24% to $3.7 billion. The company said it expects Q3 earnings from continuing operations of $0.42-$0.48 a share on revenue of $3.63 billion to $3.95 billion. (Q3 consensus was $0.45 on revenue of $3.83 billion).

On a Monday-to-Monday measure, the Securities Broker Dealer Index (XBD.X) 207.00 +2.36%, which recouped Thursday and Friday's losses would hold the top spot in the U.S. Market Watch for 5-day Net% gains.

Merger activity along with some still rather brisk summer-time volumes has this group of stocks adding some stability to the S&P 500 Index (SPX.X), but faces another formidable challenge at its still ascending longer-term 200-day SMA.

It is my "top sector" to monitor this week!

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

I touched on just a couple of today's merger announcements, but the brokers may not be a bad place for bulls to hang out with a portion of their bullish capital in the latter part of this year.

I like to "challenge" what appears to be a stronger sector/index and there's no better challenge presenting itself in the XBD.X than a sharply trending lower 50-day SMA (intermediate-term) and ascending 200-day SMA (long-term), and trying to round-out 21-day SMA (short-term).

Take note of the upward trend, where I've anchored that trend to the October 2005 lows, and attached to the recent June relative lows. For many bulls, in just about every sector, July 3, which was a trade-shortened session ahead of the July 4th holiday has been anything but celebratory fireworks.

In last Monday's Market Wrap, we looked at "financials" comprising the greatest weight for the S&P 500 Index (SPX.X) 1,260.91 +1.66% and S&P Depository Receipts (AMEX:SPY) $126.21 +1.82%.

Here's a quick look at the stocks that comprise the EQUAL-weighted XBD.X.

AMEX Broker/Dealer Components - 07/24/06 Close

My "top pick" among brokers at this point is Goldman Sachs (NYSE:GS) $146.90 +3.42%, and I profiled a bullish position in the GS Oct $140 Calls (GS-JH) on Thursday. You name it (stock, bond, commodity), Goldman Sachs probably has some trading exposure or advisory exposure from which it derives trading revenues.

Aha! Financials! Last week's "big bull move" was in the S&P Banks Index (BIX.X) 381.93 +0.44%. And that move in the banks might have caught some overly critical Fed watchers off guard after Fed Chairman Ben Bernanke's testimony.

Surely they are, or were do for a rest after Wednesday's move. That is one reason I also profile some S&P Depository Receipt (SPY) $126.21 +1.82% puts again on Friday.

S&P Banks Index (BIX.X) - Daily Interval

Surely the BIX.X would retrace some of last week's gains, but Friday's lows seemingly peg the 50% retracement, or mid-point of the May to June decline. That hints to me there may be some "Fed bashers" as I like to call them, overly short the banks and concerned with getting some short positions covered. Just in case Dr. Bernanke and the rest of the FOMC have things under control.

For the BIX.X, I also marked the July 3rd intra-day high, and we can see this group of stocks has extended gains above that date of benchmarking.

If the FOMC, or the Fed is doing such a terrible job, I can't for the life of me figure out why the banks are performing so well.

While technology stocks have been a "major drag" on the broader S&P 500, anchoring trends from the October lows to recent relative lows for both the XBD.X and BIX.X should give us some observation of strength, and helping support the S&P 500 after last week's test of the June relative lows.

S&P Depository Receipts (SPY) - Daily Intervals

The SPY looks very, very, very similar to the Securities Broker Dealer Index (XBD.X) as it would relate to trend from the October 2005 relative low to June lows. The "difference" I would note is that the XBD.X hasn't come anywhere close to re-testing its June lows (0% blue retracement).

Friday's close below July's $125 "Max Pain Theory" had an ominous look to it, as if market participants were saying "I don't want to take possession/assignment of SPY $125.

With financials such a "heavyweight" in the S&P 500, and S&P 100 (OEX.X) for that matter, the XBD.X is my "sector of the week" for S&P traders to be monitoring closely.

That takes care of some "strength," now let's check out the "weakness" and the Semiconductor HOLDRs (SMH)

Semiconductor HOLDRs (SMH) - Daily Intervals

I tend to remember my "terrible trades" more than I do the good ones. Only a Market Monitor reader will understand the $31.51 level. On July 13, I profiled a "go long 1/2 bullish position" in mid-session trade at $31.51, and I picked the afternoon high as that trade was stopped for a loss at $30.75 before that session's close. To be safe, and having just had a bullish trade crammed down my throat, I set an alert at $31.51, so if that level were traded again, I might be alert to selling.

On Wednesday (07/19/06), just ahead of Intel's (INTC) $17.48 +1.92% quarterly earnings report, the SMH traded $31.51 and once gain got smacked.... to another 52-week low!

"Fool me once, shame on you!"

"Fool me twice, shame on me!"

Find a close above $31.51 and I (Jeff Bailey) might just start to look bullish this group, but that's a starting point. Yeah, yeah, yeah. Wait until $31.51 and I'll have missed the bullish move? My trade blotter doesn't suggest so.

I like to also monitor weakness, and the semiconductors would be the group for that.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
GS None None
THX    

New Calls

Goldman Sachs - GS - close: 146.90 chg: +4.86 stop: 141.79

Company Description:
Goldman Sachs is a leading global investment banking, securities and investment management firm that provides a wide range of services worldwide to a substantial and diversified client base that includes corporations, financial institutions, governments and high net worth individuals. Founded in 1869, it is one of the oldest and largest investment banking firms. The firm is headquartered in New York and maintains offices in London, Frankfurt, Tokyo, Hong Kong and other major financial centers around the world. (source: company press release or website)

Why We Like It:
If the markets can build on Monday's rally then the XBD broker-dealer index could breakout past significant resistance at both its 50-dma and 200-dma near the 208 level. A breakout for the XBD could help push GS past resistance at its own 50-dma and the $148 mark. We are going to suggest a trigger to buy calls at $148.05, which is above resistance at the 50-dma (147.65) and today's high (147.50). More conservative traders may want to wait for a move past the $150 mark before considering call positions. If triggered our target will be the $154.00-155.00 range. If you look at the chart below GS has broken out past its bearish channel and just recently bounced from a test of the old channel in addition to its 200-dma. This could be a change in trend for the stock but the Point & Figure chart is still bearish and points lower.

Suggested Options:
We are suggesting the August or September calls. You choose which month and strike best suits your trading style.

BUY CALL AUG 145 GS -HI open interest=2656 current ask $5.40
BUY CALL AUG 150 GPY-HJ open interest=7405 current ask $2.65
BUY CALL AUG 155 GPY-HK open interest=3862 current ask $1.05

BUY CALL SEP 145 GS -II open interest= 0 current ask $7.40
BUY CALL SEP 150 GPY-IJ open interest= 0 current ask $4.60
BUY CALL SEP 155 GPY-IK open interest= 0 current ask $2.65

Picked on July xx at $xxx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 09/21/06 (unconfirmed)
Average Daily Volume = 5.2 million

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The Houston Exp. - THX - cls: 61.87 chg: +1.52 stop: 59.99

Company Description:
The Houston Exploration Company is an independent natural gas and crude oil producer engaged in the development, exploitation, exploration and acquisition of natural gas and crude oil properties. The company's operations are focused in South Texas, the Arkoma Basin, East Texas, and the Rocky Mountains. (source: company press release or website)

Why We Like It:
The oil stocks are finally seeing some buying interest again and this has fueled a strong bounce in THX from the bottom of its trading range near $60.00. If the markets see any follow through on Monday's rally then we expect the oil stocks to participate. That could lead to a bullish breakout in THX above significant resistance at the $62.50 mark. We're suggesting a trigger to buy calls at $62.60. If triggered our target is the $67.50-70.00 range. We do not want to hold over the early August earnings report. FYI: The Point & Figure chart is bullish and points to a $76 target.

Suggested Options:
We are suggesting the August calls.

BUY CALL AUG 60.00 THX-HL open interest=2233 current ask $3.50
BUY CALL AUG 65.00 THX-HM open interest=2010 current ask $2.00

Picked on July xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 08/03/06 (unconfirmed)
Average Daily Volume = 667 thousand
 

New Puts

None today.
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Dominion - D - close: 77.47 change: -0.25 stop: 74.99

The rally in shares of D paused on Monday with the stock erasing about half of Friday's gain. We do not see any big changes from our previous update. We would probably wait and watch for a pull back toward the $77.00-76.50 region before considering new call option plays. 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, which gives us about eight trading days.

Picked on July 17 at $ 76.05
Change since picked: + 1.42
Earnings Date 08/03/06 (confirmed)
Average Daily Volume = 1.5 million
 

Put Updates

Air Products Chem. - APD - cls: 61.63 chg: +0.22 stop: 64.01

APD tried to bounce today but the rally stalled at APD's 200-dma near $62.00. We do not want to hold over the company's earnings report so we're planning to exit on Tuesday afternoon at the close. Our target is the $59.00-58.00 range although right now we'd probably be happy exiting near $60.

Picked on July 09 at $ 62.95
Change since picked: - 1.32
Earnings Date 07/26/06 (confirmed)
Average Daily Volume = 1.2 million

---

Apollo Group - APOL - close: 47.74 chg: +0.83 stop: 50.05

APOL participated in the market's rebound today with the stock adding 1.7%. Shares remain under its bearish trend of lower highs but we're not suggesting new plays at this time. Our target is the $45.50-45.00 range.

Picked on July 09 at $ 49.92
Change since picked: - 2.18
Earnings Date 09/19/06 (unconfirmed)
Average Daily Volume = 1.4 million

---

Chicago Merc. - CME - close: 465.00 change: +13.00 stop: n/a

Our high-risk, speculation play in CME just got riskier with today's 2.8% bounce in the stock price! The company is due to report earnings tomorrow morning before the opening bell. Wall Street's estimates are for CME to report profits of $3.09 a share. Today, Monday, was our only day to consider opening speculative put positions to capture any post-earnings sell-off. Please see Sunday's play description for more details. FYI: The P&F chart points to a $408 target.

Picked on July 23 at $452.00
Change since picked: +13.00
Earnings Date 07/25/06 (confirmed)
Average Daily Volume = 680 thousand

---

IDEXX Labs - IDXX - close: 74.31 chg: +0.07 stop: 76.05

There is no change from our weekend update on IDXX. We are not suggesting new plays. Our conservative target at $75.25 has already been hit and we're currently aiming for $72.50. We do not want to hold over the earnings report on Friday, July 28th.

Picked on June 12 at $ 77.95
Change since picked: - 3.64
Earnings Date 07/28/06 (confirmed)
Average Daily Volume = 144 thousand

---

Manpower Inc. - MAN - close: 60.26 chg: +1.88 stop: 62.25

The rebound in MAN was a little stronger than expected. We warned readers to watch for a bounce toward $60 as a new entry point but the stock continued to rally and closed above round-number resistance and broken support at the $60 mark. We are not suggesting new plays at this time. We'd wait for a decline back under $59.50 before considering new puts. Our target is the $55.50-55.00 range. The Point & Figure chart currently points to a $52 target.

Picked on July 20 at $ 59.42
Change since picked: + 0.84
Earnings Date 07/19/06 (confirmed)
Average Daily Volume = 1.0 million

---

Oil Serv. Holders - OIH - cls: 134.10 chg: +4.10 stop: 134.26

There is no change from our new play description from this past weekend on the OIH. The oil service HOLDRs bounced from the $130 level as crude oil rallied and the oil stocks joined the market rebound. The OIX oil index added 2.8% and the OSX oil service index rose 3% today. We don't know if this bounce has any legs or not so we're keeping OIH on the play list as a bearish candidate with a trigger to buy puts at $129.00. If triggered our short-term target is the $120.00 level. The Point & Figure chart points to a $106 target and the H&S pattern projects a $90 target so more aggressive traders may want to aim lower.

Picked on July xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 11.6 million

---

Union Pacific - UNP - close: 85.42 chg: +2.38 stop: 87.01

Be careful! The bounce in UNP today was a lot stronger than we expected. Our weekend update said watch for a bounce towards $84-85 to buy puts. Well, UNP added 2.8% and broke out higher back above technical resistance at its 200-dma and the $85.00 level. We are not suggesting new plays at this time. We would wait for a new decline back under the $84.00 level before considering new put positions. Tomorrow morning could see some volatility as investors react to earnings news from BNI, another railroad stock. More conservative traders may want to tighten their stops toward $86.00 or just exit early given the bullish move today!

Picked on July 21 at $ 83.75
Change since picked: + 1.67
Earnings Date 07/20/06 (confirmed)
Average Daily Volume = 1.7 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.)

---

Bausch Lomb - BOL - close: 47.47 change: +0.07 stop: n/a

There is no change from our new play description on BOL this past weekend. The stock is still consolidating sideways as investors wait for the company's earnings report on July 27th. We are suggesting that readers open strangle plays in the $47.00-48.00 range, the closer to $47.50 the better. The goal is to open positions before the report on Thursday. At current prices our estimated cost is $2.15. Our goal will be to sell if either option rises to $3.25 or more. More aggressive traders may want to aim higher. The options in our suggested strangle are the August $50 call (BOL-HJ) and the August $45 put (BOL-TI).

Picked on July 23 at $ 47.40
Change since picked: + 0.07
Earnings Date 07/25/06 (unconfirmed)
Average Daily Volume = 2.2 million

---

L-3 Comm. - LLL - close: 76.24 chg: +0.98 stop: n/a

LLL bounced around today but eventually closed higher with a 1.3% gain and a breakout over its simple 50-dma. The stock is currently outside our suggested entry range to open strangle positions ($74.00-76.00), with our suggestion to try and open positions as close to $75 as possible. Our estimated cost was $1.35. We will plan to sell if either option rises to $2.25 or more. The options in our LLL strangle are the August $80 call (LLL-HP) and the August $70 put (LLL-TN).

Picked on July 23 at $ 75.26
Change since picked: + 0.98
Earnings Date 07/27/06 (confirmed)
Average Daily Volume = 1.2 million

---

3M Co. - MMM - close: 71.69 change: +0.97 stop: n/a

MMM is trying to bounce after Friday's test of support near the $70 level. The stock did trade inside our suggested entry range in the $69.00-71.50 range. Currently MMM is outside that window so we're not suggesting new plays. Of course the window of opportunity has probably passed since MMM is due to report earnings tomorrow morning. Wall Street is looking for earnings of $1.07 a share. Our estimated cost was $0.75. We are planning to exit if either options rises to $1.50 or more.

Picked on July 23 at $ 70.72
Change since picked: + 0.97
Earnings Date 07/25/06 (confirmed)
Average Daily Volume = 3.7 million

---

Phelps Dodge - PD - close: 76.68 change: -0.52 stop: n/a

Shares of PD dipped to $75.00 and its simple 200-dma this morning before bouncing. The company is due to report earnings on Wednesday morning so tomorrow is our last day to try and open positions before the report. We're suggesting an entry range in the $76-78 window. Our estimated cost is at $2.15. We're planning to sell if either option rises to $3.15 or more. The options in our strangle are the August $85 call (DPB-HQ) and the August $70 put (PT-TN).

Picked on July 23 at $ 77.20
Change since picked: - 0.52
Earnings Date 07/26/06 (confirmed)
Average Daily Volume = 7.8 million
 

Dropped Calls

Alcon Inc. - ACL - close: 93.93 chg: +0.68 stop: 96.51

Time has run out. It was our plan to exit on Monday at the closing bell to avoid holding over the company's earnings report. We cannot find any specific news to account for the spike down intraday but shares almost hit our target at $90.50. The low for the session was $90.85. Today's rebound has produced what looks like a short-term bullish reversal candlestick. If you're interested Wall Street's estimates for ACL's earnings were $1.15 a share. FYI: It looks like ACL was trading near $95 in after hours tonight.

Picked on July 13 at $ 95.61
Change since picked: - 1.68
Earnings Date 07/24/06 (confirmed)
Average Daily Volume = 805 thousand
 

Dropped Puts

Jacobs Engineering - JEC - cls: 71.70 chg: +1.80 stop: 74.01

Ouch! Today's rebound was pretty sharp and shares of JEC added 2.5%, which almost erased Friday's sell-off. It was our plan to exit Monday at the closing bell to avoid holding over the company's earnings report tomorrow morning. Analysts estimates are for JEC to report earnings of 75 cents a share.

Picked on July 16 at $ 73.75
Change since picked: - 2.05
Earnings Date 07/25/06 (confirmed)
Average Daily Volume = 583 thousand

---

Panera Bread - PNRA - close: 59.52 chg: +1.83 stop: 60.35

We have been stopped out of PNRA at $60.35. Before the opening bell Merrill Lynch upgraded the stock from a "sell" to a "neutral". This prompted some buying and/or short covering. Shares of PNRA gapped open at $59.71 and then spiked to $61.35 before reversing course. This move looks like an over-reaction to the news since PNRA was already looking oversold and due for a bounce.

Picked on July 18 at $ 59.49
Change since picked: + 0.03
Earnings Date 07/25/06 (confirmed)
Average Daily Volume = 494 thousand
 

Dropped Strangles

None
 

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