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Daily Newsletter, Monday, 09/25/2006

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Table of Contents

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

Market Wrap

Majors indexes creep higher as third quarter draws to an end

The major indexes shrugged off early morning weakness to finish higher with the narrow S&P 100 Index (OEX.X) 614.56 +0.85% closing at 5-year highs as homebuilders and semiconductor lead Monday's gains.

Tobacco stocks were weak with Dow component Altria (NYSE:MO) $77.06 -6.36% falling $5.25/share after a federal judge ruled earlier this morning that a jury should decide whether tobacco companies must pay tens of millions of smokers up to $200 billion for allegedly duping them into buying light cigarettes over the past three decades.

Altria, the parent of the nation's largest cigarette maker, Philip Morris USA Inc., said the ruling will delay its long-awaited restructuring plan, which includes a divestiture of its controlling stake in Kraft Foods Inc.

As the smoke cleared from ongoing "light cigarette" litigation, the National Association of Realtors (NAR) said sales of existing single-family homes and condominiums fell 0.5% in August to a seasonally adjusted annual rate of 6.30 million units. That was a fifth straight monthly decline and left sales 12.6% below the pace of a year ago.

August's 0.5% decline was less than the -1.6% forecast among economists.

The continued slowdown for existing home sales had the inventory of unsold homes rising to a record 3.92 million units, or 7.5 months backlog.

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The NAR said the median price of a home sold in August fell to $225,000, which was down 2.2% from July and down 1.7% from August 2005. The year-over-year decline in home prices was the first drop in home prices since a 0.1% decline in April 1995.

Sales of condominiums fell 3.5% to an annual rate of 793,000 units, which represented a 14.5% drop from the condo sales pace in August 2005.

By region of the country, sales of single-family homes and condominiums in the South fell by 0.8% in August compared with July and were off 2.3% in the West. Sales actually rose by 1.9% in the Northeast and 0.7% in the Midwest.

Median prices were down in all regions of the country except the West, where the median price rose by 0.3% from a year ago.

The existing home sales figures brought another wave of buying into Treasuries with the 10-year Yield ($TNX.X) plunging as low as 4.530% intra-day. The benchmark bond finished down 4.2 basis points at 4.555%.

Here again I think the bond market is responding to housing data in combination with past Fed commentary and the FOMC's concern that housing prices had become "inflationary."

I (Jeff Bailey) am not in the "bear's camp" that a modest decline in housing prices, from above historic average price gains witnessed the past couple of years, spells doom and gloom for the U.S. economy. I do think the builds in inventory levels and easing of housing prices on a national level should calm some fears on the inflation front.

Since we visited last Monday, the 10-year yield ($TNX.X) has fallen 25.5 basis points and Wednesday's FOMC decision on Fed Funds was unchanged, with the FOMC's target still 5.25%.

U.S. Market Watch - 09/25/06 Close

November crude oil futures (cl06x) rose 90 cents, or +1.49% to settle $61.45 after breaking below the $60.00 level earlier this morning. The November contract moved off its NYMEX floor trade low of $59.65 just when an obscure headline crossed my newswire feed from Dow Jones that "OPEC doesn't plan an emergency meeting."

An "emergency meeting?" I thought to myself. Regarding what? Falling prices?

Not minutes later a relief bid was found with the November contract trading as high as $62.15 intra-day.

OPEC's president did speak to oil ministers from the 11-nation producer group about the recent decline in oil prices but said there were no plans yet for OPEC to hold a formal meeting.

Good news and bad news

In Tuesday afternoon's Market Monitor at OptionInvestor.com I was talking out loud that after writing Monday's rather bullish market wrap and pointing out that the major bullish % charts from StockCharts.com and Dorsey/Wright & Associates had reversed up and were signaling the resumption of internal repair, that it would only be fitting that some type of geopolitical event take place to sour a bull's appetite for stocks on a broader scale.

As Linda Piazza pointed out in Tuesday evening's Market Wrap, a coup attempt on Thailand's government was found on Tuesday and quickly tested a bull's resolve.

My first thought was "semiconductor's are vulnerable" as many fabricators are found in the region.

Throw in a rather "anemic" August 2006 book-to-bill ratio of 1.00 after June's 1.14 and July's 1.06 readings and there hasn't been a lot of good news for the chips since last Monday. Yet they hold tough with Microsoft's pending release of its Vista operating system and new Office products.

Traders and investors should remember that the book-to-bill ratio is really a 3-month average of worldwide bookings. A book-to-bill of 1.00 means that for every $100 in new orders received, $100 worth of orders was shipped.

I still remember chip bull's saying that the upcoming release of new Microsoft products would eventually turn the chip stocks around during their torrid decline from May to July.

Microsoft (NASDAQ:MSFT) $26.95 +1.08% has been trading strong, as has fellow software giant Oracle (NASDAQ:ORCL) $17.97 +2.45% in recent months.

The DEMAND for faster chips/processors are driven in part by new SOFTWARE upgrades, and it has been "software" as depicted by the GSTI Software Index (GSO.X) 180.67 +1.53%, which closes at multi-year highs that may still keep bulls building positions among chip names into year's end.

GSTI Software Index (GSO.X) - Monthly Intervals

While the Semiconductor HOLDRs (SMH) have rebounded from their summer lows, it has been software stocks and the likes of heavyweights Microsoft and Oracle that have been a major driver of technology gains in recent weeks.

Do NOT forget that Standard & Poors has "Information Technology" as being the #2 weighted industry behind "Financials" for the broad S&P 500 Index (SPX.X), which not unlike the narrower S&P 100 Index (OEX.X) is making 5-year highs.

I would always encourage short-term traders to "step back" and look at the big picture from time to time. Whether it be DAILY, WEEKLY, MONTHLY time intervals on a bar chart, or the Point and Figure charts, which tend to filter out some of the intra-day, or day-to-day "noise."

If I could throw on one additional piece of "bad news," with the broader S&P 500 Index (SPX.X) trading at 5-year highs, it would be the latest regional Philadelphia Fed data.

Why is the SPX trading multi-year highs when there's so much "bad news" in the market?

Maybe there's some "good news" just around the corner?

According to The Stock Trader's Almanac, October begins a rather bullish period of seasonality into year's end.

Money Center Banks (BKX.X), Brokers (XBD.X), Computer Technology (XCI.X), Cyclicals (CYC.X), High Tech (MSH.X) and Interactive Internet (IIX.X) along with Transports ($TRAN) are sectors that the Almanac notes as being sectors that tend to "outperform."

If it is "true" that SOFTWARE drives future demand for chips and the computers that use those chips, then SOFTWARE becomes a "key sector" for Q4.
 


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

Cymer Inc. - CYMI - close: 44.37 chg: +1.95 stop: 41.95

The semiconductor stocks were the second best performing sector on Monday. The SOX index rose about 2.5% but it failed to keep up with the 3.4% gain in homebuilders. Shares of CYMI definitely out performed the market and its peers. The stock added 4.59% and managed to close above technical resistance at the 100-dma and 200-dma but failed to breakout over resistance at the $45.00 mark. We are a little surprised by the show of strength and wonder how much of today's gain was fueled by short covering. We're still not suggesting new positions at this time. Our target is the $47.00-48.00 range.

Picked on September 06 at $ 42.55
Change since picked: + 1.82
Earnings Date 10/24/06 (unconfirmed)
Average Daily Volume = 1.0 million

---

General Dynamics - GD - close: 71.12 change: +0.51 stop: 69.94*new*

The DFI defense index added 1.3% and closed near new four-month highs. Unfortunately, shares of GD under performed its peers. The stock added 0.7% but the trading today almost looks bearish. Shares of GD gapped open and spiked to $71.95 before reversing course. We did see GD bounce midday after filling the gap from this morning and chart readers will notice that volume spiked on today's session. We were counting on some end of quarter window dressing to help push GD higher. We remain bullish with GD over $70.00 but today's action did not inspire a lot of confidence. We're inching up our stop loss to $69.94. The P&F chart has a triple-top breakout buy signal and a $75 target. We agree with the target and will aim for the $74.50-75.00 range. We do not want to hold over the mid October earnings report.

Picked on September 24 at $ 70.61
Change since picked: + 0.51
Earnings Date 10/18/06 (unconfirmed)
Average Daily Volume = 1.3 million

---

Mettler Toledo - MTD - close: 65.07 chg: +0.92 stop: 61.99

MTD's intraday bounce from Friday continued into Monday's session and the stock added 1.4%. Volume came in below average, which is normally not a good sign but shares did close near their best levels of the day and that tends to be bullish for the next day. We hesitate to suggest new positions but this could be used as a new entry point. If you do open new plays we'd suggest a tighter stop loss. Currently our target is the $68-69 range. We do not want to hold over the late October earnings report.

Picked on September 13 at $ 63.66
Change since picked: + 1.41
Earnings Date 10/26/06 (unconfirmed)
Average Daily Volume = 169 thousand

---

Omnicom - OMC - close: 91.80 chg: +1.61 stop: 89.89

Against our expectations shares of OMC did rebound on Monday. This bounce is consistent with support in the $90 region. Aggressive traders might want to consider new positions here but we are not suggesting new positions at this time. Our target is the $96-97 range.

Picked on September 10 at $ 90.97
Change since picked: + 0.83
Earnings Date 10/24/06 (unconfirmed)
Average Daily Volume = 1.1 million
 

Put Updates

Burlington Nor.SantaFe - BNI - cls: 69.20 chg: +0.48 stop: 71.01

Transports and railroad stocks managed to rally on Monday but it wasn't very convincing. Shares of BNI dipped to a new relative low this morning before bouncing back. If you look at the daily chart this is starting to look a potential entry point for calls wit today days of bounces relatively close to its 50-dma. We want to remind readers that BNI is still trading under its five-month trendline of resistance near last week's highs. A failed rally under $70 could be used as a new entry point however, we'd wait for another decline under $68 or today's low of $67.24 before opening positions. We do expect some support near $64.00. Therefore we're going to list two targets. Our conservative target is $64.25 and our aggressive target is at $61.00. We do not want to hold over the late October earnings report.

Picked on September 22 at $ 67.75
Change since picked: + 1.45
Earnings Date 10/24/06 (unconfirmed)
Average Daily Volume = 2.8 million

---

Caterpillar - CAT - close: 64.33 chg: +1.56 stop: 67.36

A strong day for big caps and the DJIA helped shares of CAT produce a 2.4% oversold bounce. However, you'll notice that the rally stalled near broken support and what should be new resistance near $65.00. This may end up being a new entry point to buy puts. Traders could open positions now or wait for a new decline under $64.00. Our target is the $60.25-60.00 range but more aggressive traders may want to aim lower. The P&F chart does point to a $48 target.

Picked on September 21 at $ 64.59
Change since picked: - 0.26
Earnings Date 10/20/06 (unconfirmed)
Average Daily Volume = 5.2 million

---

Express Scripts - ESRX - close: 76.99 chg: -2.63 stop: 82.51

Talk on the street today was that drug stores and pharmacy benefit mangers like ESRX were trading lower as investors continue to react to last week's news about Wal-Mart offering 300 generic drugs at $4.00. Shares of ESRX lost another 3.3% on strong volume on Monday following Friday's bearish breakdown and sell signal. The drop has increased the P&F chart's bearish target from $73 to $69. We're aiming for a decline into the $75.50-75.00 range. We do not want to hold over the late October earnings report.

Picked on September 21 at $ 79.85
Change since picked: - 2.86
Earnings Date 10/25/06 (unconfirmed)
Average Daily Volume = 1.6 million

---

Joy Global - JOYG - close: 32.80 change: -0.37 stop: 36.55

JOYG lost another 1.1%, potentially due to end of quarter window dressing, but it's worth noting that shares rebounded from their lows of the session (31.32). We do not see any changes from our weekend update. Our target is the $30.50-30.00 range. Keep an eye on CAT, which is also breaking down. Weakness in CAT should also drag on JOYG.

Picked on September 20 at $ 34.95
Change since picked: - 2.15
Earnings Date 11/30/06 (unconfirmed)
Average Daily Volume = 2.6 million

---

Las Vegas Sands - LVS - close: 65.71 change: +0.44 stop: 70.05

LVS also bounced from its lows of the session. We can probably expect another rebound toward the 10-dma, currently near $67.25. Wait and watch for a failed rally under the 10-dma or $68 before considering new bearish put plays. We suspect that the 200-dma will offer some technical support so we're targeting the $60.50-60.00 range. We do not want to hold over the early November earnings report.

Picked on September 19 at $ 65.99
Change since picked: - 0.28
Earnings Date 11/01/06 (unconfirmed)
Average Daily Volume = 2.2 million

---

Maxim Integrated - MXIM - close: 28.69 chg: +0.40 stop: 30.05

Red alert! The SOX semiconductor index and MXIM both dipped lower this morning before rebounding strongly. The SOX was actually the second best performing index behind the homebuilders. The move in MXIM looks like a perfect bear trap! The stock dipped under support at $28.00, hit our trigger to buy puts at $27.90, and then bounced from $27.76 back above the $28 level. This is bad news and more conservative traders, if you did open positions this morning, might want to exit immediately to cut your losses. There is still a chance that MXIM will fail to trade over resistance at $30.00 so we're going to keep the play open. Traders can choose to wait and watch for another failed rally under $30.00 or a new low under $27.75 as a new entry point to buy puts. Currently our target is the $24.00 level although we would expect a bounce near $26 and traders may want to do some profit taking at $26 to take some money off the table. We do not want to hold over the early November earnings report.

Picked on September 25 at $ 27.90
Change since picked: + 0.79
Earnings Date 11/03/06 (unconfirmed)
Average Daily Volume = 5.4 million

---

Nucor - NUE - close: 47.17 change: +0.20 stop: 50.01

Monday morning shares of NUE were downgraded. This news propelled the stock through support at $46.00 and hit our trigger to buy puts at $45.90. Unfortunately, the market's strength helped NUE rebound from the $45.00 level (already potential round-number support) and the stock closed back in the green. The play is now open but we would not suggest new positions at this time. Wait and watch for a new failed rally under the $49.00-49.50 region or a new low under $46.00 (or 45.00) again. Our target is the $40.50-40.00 range. We do not want to hold over the mid October earnings report. FYI: The P&F chart has a triple-bottom breakdown sell signal with a $41 target.

Picked on September 25 at $ 45.95
Change since picked: + 1.22
Earnings Date 10/19/06 (unconfirmed)
Average Daily Volume = 4.2 million

---

Southern (Peru) Copper - PCU - cls: 87.25 chg: +0.33 stop: 92.51

We saw a similar pattern in PCU. The stock dipped lower this morning only to reverse higher and close in the green. A failed rally under $88.00 would be preferred but odds are we expect PCU to bounce back toward the $90 region. Watch for a failed rally under $90.00 as a new entry point to buy puts. Our target is the $81.00-80.00 range. Traders should also note that PCU is due to split 2-for-1 on October 3rd. This shouldn't have any big impact on our play but our post-split target would be the $40.50-40.00 range. More aggressive traders may want to aim lower.

Picked on September 22 at $ 86.50
Change since picked: + 0.75
Earnings Date 10/16/06 (unconfirmed)
Average Daily Volume = 1.3 million

---

FreightCar Amer. - RAIL - close: 54.11 chg: +0.27 stop: 56.32

Railroad-related stocks under performed the market today and RAIL under performed its peers. We remain bearish and traders can choose to open positions here or watch for a failed rally under $55.00 or $56 as a new entry point to buy puts. We're going to list two targets. We suggest selling half or more of your position at our first target in the $50.25-50.00 range. Sell the rest at our second target in the $46.00-45.00 range.

Picked on September 21 at $ 54.50
Change since picked: - 0.39
Earnings Date 10/26/06 (unconfirmed)
Average Daily Volume = 353 thousand

---

SanDisk - SNDK - close: 54.84 chg: -0.54 stop: 60.05

An analyst downgrade before the opening bell sparked a gap down in SNDK. Shares opened at $54.00 and dipped to $53.15 before bouncing back with the market's rally. It's probably not a coincidence that the low today was near the converging 40-dma, 100-dma and exponential 200-dma. At this time we would expect SNDK to rebound back toward the $56.00-57.50 region. A failed rally under $57.50 could be used as a new entry point to buy puts. Our target is the $51.50-50.00 range. We do not want to hold over the mid October earnings report so that only gives us about four weeks.

Picked on September 22 at $ 56.69
Change since picked: - 1.85
Earnings Date 10/19/06 (unconfirmed)
Average Daily Volume = 9.9 million

---

Textron - TXT - close: 81.61 change: -1.98 stop: 84.01

There is no change from our weekend play description on TXT. We're still waiting for a breakdown under very significant support at the $80.00 level. Our trigger to buy puts is at $79.85. More conservative traders may want to use a trigger around $79.50 to reduce the risk of being triggered on an intraday under $80.00. If triggered we're suggesting two targets. Our first target is the $75.50-75.00 range. Our second target is the $71.00-70.00 region. Plan on selling half or more at the first target to lock in a gain. We do not want to hold over the mid October earnings report.

Picked on September xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/19/06 (confirmed)
Average Daily Volume = 829 thousand

---

U.S.Steel - X - close: 54.99 chg: -0.77 stop: 60.05

This morning before the opening bell one analyst firm downgraded shares of X and NUE and raised concerns over rising inventories in the steel industry. Shares of X gapped open lower at $54.80 and traded to $53.63 before bouncing back. Volume was pretty heavy on the session. We remain bearish but there is a good chance that X will see a rebound back toward broke support and what should be new resistance near $56.00-57.00. We'd wait for a failed rally in that range as a new entry point to buy puts.

Picked on September 22 at $ 55.95
Change since picked: - 0.96
Earnings Date 10/24/06 (unconfirmed)
Average Daily Volume = 4.4 million
 

Strangle Updates

None
 

Dropped Calls

None
 

Dropped Puts

EOG Resources - EOG - close: 63.30 chg: +1.11 stop: 64.15

Crude oil saw a steep intraday dip but managed to rebound strongly as word spread that OPEC might call an "emergency" meeting to discuss production cuts. This lifted the oil stocks out of the read and shares of EOG bounced for a 1.78% gain, which out performed its peers. The stock has not yet broke out above resistance at the $64.00 level but we're going to exit early and avoid or limit our losses.

Picked on September 06 at $ 63.85
Change since picked: - 0.55
Earnings Date 10/31/06 (unconfirmed)
Average Daily Volume = 3.3 million

---

Steel Dynamics - STLD - close: 47.22 chg: -0.62 stop: 52.05

Target achieved. This morning the steel industry was under pressure after some negative analyst comments about rising inventories and two downgrades (for X and NUE). Shares of STLD traded down in sympathy with a gap lower and an intraday low of $45.15. STLD bounced back with the rest of the market and the move today, with the rebound from round-number support near $45.00, looks like a short-term bullish reversal. We would expect the bounce to try for the $50 region again, where we would look for the bounce to fail and traders may want to try new put positions again. Our target was the $45.15-45.00 range.

Picked on September 22 at $ 49.40
Change since picked: - 2.18
Earnings Date 10/19/06 (unconfirmed)
Average Daily Volume = 1.5 million
 

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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