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Daily Newsletter, Tuesday, 09/26/2006

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Table of Contents

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

Market Wrap

Following the Script

The tape painters did a magnificent job of pushing stocks higher as the quarter heads for a close on Friday. The S&P hit a new five year high and the Dow closed at its second highest close ever and a six year high at 11669.39. It was a big cap day as fund managers put money in the safety of blue chips and shunned small caps and many techs. The Russell 2000 gained only a paltry +2.52 points and the Nasdaq hit a resistance wall at 2260 where it stalled once again. On the surface it definitely appeared the bulls were in control but their reign may be nearing an end.

Dow Chart - Daily

S&P-500 Chart - Daily

On the economic front the Richmond Fed Manufacturing Survey for September jumped unexpectedly to a +9 compared to +3 in August. The internal components showed sharp increases with the six-month outlook jumping from +5 to +31. Shipments jumped from -8 to +9 and new orders rose to +10 from +5. This was exactly opposite the sharp drop we saw in the Philly Fed survey last week. It was the difference between night and day and it could not have come at a better point on the calendar with only three days left in the quarter. It was exactly what the bulls had ordered and it provided hope that the economy really was headed for a soft landing.

Consumer Confidence for September also rose +4.3 points to 104.5 and well over the 101 consensus. Both the present conditions and future expectations components showed nice gains. If you recall the August reading showed a headline number that fell sharply from 107 to 100.2. The September reading recovered half of that drop. The gains came on falling energy prices for both gasoline and natural gas, falling real interest rates, rising stock market and the perception that jobs were plentiful. These points offset the continuing drop in home prices probably because the drop in interest rates suggests a bottom for the housing implosion in the months ahead. Expectations for inflation fell while expectations for the stock market rose.

The S&P Case/Shiller composite index on housing showed home prices were falling in five of the top ten areas surveyed. This was done over the July period so the data just released today is somewhat dated. Overall the index was clinging to an annual growth rate in prices of +6.7% compared to +15.8% in July 2005. Home prices fell in Boston, New York, San Diego, San Francisco and Washington. Of the ten cities surveyed Denver showed the most relative strength with prices rising in July. S&P said the drop in those high profile areas was even worse when you take into account this was the most active period of the year when prices should be strong. I believe this was seen as old news and the market has already been factoring it in for quite a while.

The rising confidence and surprising jump in the Richmond Fed survey combined on a day when fund managers were already trying to put every spare dollar to work ahead of quarter end. It was a match made in heaven and the big cap indexes celebrated. All the news was not positive with warnings from several high profile companies.

Lennar (LEN) reported earnings that fell -38% and warned that conditions were still deteriorating. CEO Stuart Miller said, "The U.S. housing market has continued to deteriorate, trailing down further and faster than anticipated." Land sales for the quarter went negative at -$300,000 compared to +$46.4 million gain for Q3-2005. Lennar incurred a -$15.8 million write-off for deposits and options on land it does not now intend to purchase. Despite the drop in earnings Lennar delivered 12,337 new homes, a +17% rise from 2005 and has back orders for 11,056 homes, down only slightly from 11,614 in the same quarter in 2005. The gloom and doom from Lennar did nothing to depress the sector and most builders posted nice gains despite the news. We recently added DHI as a play in the LEAPS Trader because their outlook is different from the rest of the builders. They remain cautious but still positive. Check out a recent presentation from DHI here: http://tinyurl.com/oyggu

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Another warning related to the housing sector came from Lowes (LOW). Lowes said profits for the full year would be at the low end of its prior estimates. They said the slowing housing market was hurting sales and the lack of any hurricanes would make Q3 a difficult comparison. Hurricane sales of things like plywood ahead of a storm and then building materials for repairs after the storm create a strong surge in sales. The major storms in 2005 created a strong extended surge that is only now subsiding. The lack of any storms this year will make Q4 sales comparisons to that 2005 period very difficult. Overall this warning had little to do with Lowes normal business but more to do with weather cycles. Lowes traded positive and negative during the day but ended fractionally positive.

Eagle Materials (EXP) a maker of cement and sheetrock cut its outlook for 2007 earnings due to weaker demand in the housing market. Eagle lowered its forecast to $3.80-$4.20 from the prior range of $4.40-$4.70. Analysts were expecting an average of $4.55. This was a warning directly related to the slowdown in housing and the drop in demand for sheetrock although I am sure they also have a comparison problem from post storm demand in 2005. EXP fell -4.08 in regular trading.

PMCS lost ground after warning that sales of communication chips were slowing. PMCS lowered expectations for the quarter to about $115 million and well below current analysts expectations for $123.2 million. While some analysts issued downgrades for PMCS, Merrill Lynch analyst Srini Pajjuri reiterated a buy rating and a $10 target price. He felt that over the next 4-6 quarters PMCS would benefit from demand for broadband products.

Jabil Circuit (JBL) posted earnings that saw revenue rise +50% but it will not be able to file its full financials until a probe into stock option grants is completed. Revenue jumped to $3 billion from $2 billion in the same quarter in 2005. This was slightly better than the $2.84 billion expected by analysts. Jabil expects revenue to rise about +20% for the full year to about $12.36 billion. JBL lost a buck on the news.

After the bell Red Hat said it now expects to report a profit of 12-13 cents on revenue of $105 million. This was about a -34% drop due to acquisition costs and a sharp increase in operating expenses. RHAT fell -8% in after hours.

Intel CEO Paul Otellini took the stage on Tuesday to announce a new chip breakthrough for Intel processors. The new Quad Core chip has four processors on one chip and significantly more processing power over the current Dual Core models. The new chips will be called Core2 Extreme Quad-core and offer +70% more power than the current speed leader the Core2 Duo chips. Intel said it had already shipped more than 5 million Core2 Duo processors since the late July release and over one million Xeon 5100 chips using the same technology. According to Intel it was the fastest 60-day ramp in history. The new quad-core chips for desktops will be available in Q1-2007 with versions for gamers and servers due out later this year.

Oil prices were all over the map once again but support at $60-$61 appears to be holding. That may only be a temporary event but new support noises are starting to be heard from within OPEC. The president of OPEC Edmund Daukoru told Reuters on Tuesday that "the current low in oil prices was harming investments and something needs to be done." And, "We are already talking among ourselves in the OPEC fold. The price is very low and it is not good for investors." Saudi Oil Minister Ali Al-Naimi last week called prices at $62 reasonable. Given the comments coming from OPEC officials it definitely appears they are going to support prices and $60 could be the unofficial trigger point. The sharp increase in prices over the last few months was successful in creating some demand destruction on a global basis and we are positively swimming in oil at present. The current drop in oil prices will revive that demand but it is a long process that could take several months. At the current price levels various countries will be adding to their strategic petroleum reserves and that will help absorb the slack. The oil inventory report tomorrow is expected to show a drop in crude around -1.6 mb, a rise in gasoline of +1.1 mb and a gain in distillates of +2.0 mb.

November Crude Futures Chart - Daily

October Natural Gas Futures Chart - Daily

The October natural gas futures contract expires tomorrow and prices set a new low at $4.38 ahead of the event. The November contract is still trading at $5.97 in hopes of some cold weather over the next month. Energy analysts were out in force today recommending gas stocks with the consensus picks being DVN and XTO but don't forget UPL, ECA and CHK as candidates. With the October gas contract expiring along with the quarter I would expect a temporary pause in the decline of gas prices once the November contract becomes current. The gas inventory levels on Thursday could be another week of very large insertions pushing us that much closer to the 3.5-3.6 TCF maximum. The cold front over the weekend was very mild and probably required very little in extra gas for heating.

The Dow closed at its second highest level ever at 11669 and equaling the intraday high set back on May 10th. This is only -51 points below its highest intraday level ever at 11750 set on Jan-14th 2000. The S&P sprinted for a nice gain to close at 1336 and a new five-year high driven by the same blue chip stocks powering the Dow. The S&P performed a perfect swoon to our 1315 trigger point last Friday and then blasted off once again for that +20 point romp. Those following my S&P recommendations should be happy campers. Unfortunately not all indexes are breaking out to new highs.

The Nasdaq came to a dead stop at 2260 and exactly the resistance level that held us back on the last bounce. Chip stocks are turning in mixed results and tech earnings fears are starting to creep into the collective investor consciousness. This is creating a drag on techs after their +12% rebound from the July lows. The small caps as evidenced by the Russell 2000 are positively lethargic. Resistance at 732 for the last month held once again this week and it is well away from the 785 high set last May.

Nasdaq Chart - Daily

Russell-2000 Chart - Daily

The divergence between large caps and small caps and the relative weakness in techs only three days before the end of the quarter is a very real cause for concern. If funds are not buying small caps it means they have no confidence about the future and don't want to get caught holding low volume high volatility positions ahead of October. The October lows are typically where funds take positions in small caps. Those funds holding cash and waiting for an October dip are probably getting very nervous. They likely gave in to temptation and bought helping to fuel the big cap romp today in an effort to avoid showing large cash levels on their Q3 statements with markets at new highs. It is a tough call for fund managers with large bonuses at risk.

The Q3 window dressing scenario is in full bloom as I described in Sunday's commentary. I suggested we could see gains on Mon/Tue and then range bound for the rest of the week as managers try to hold the indexes at these levels. The party is off to a good start but there is a strong possibility of a hangover next week. Fund managers will begin trimming those positions entered to produce attractive statements and raising cash for the next dip. Despite the Richmond Fed Survey today we will get the Kansas survey on Thursday, NAPM-NY and Chicago PMI on Friday and the all-important national ISM survey on Monday. I would be very cautious about any gains you are currently holding. Continue to follow the herd higher but keep those stops tight and try to avoid immediately jumping back if you are stopped out. Next week will be the key but it is possible even a market friendly ISM may not stave off an October dip. The market is very overbought but that doesn't mean it can't get more overbought. It just means there is an even stronger reason to be cautious.
 


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: 44.79 chg: +0.39 stop: 41.95

Semiconductor stocks under performed the market today. The SOX index lost ground due to an earnings warning from PMCS. Yet a number of stocks in the group ignored the news and continued to rally higher. INTC was a big leader with a 2.8% rally, but if you look at INTC you'll notice that shares stalled right at significant resistance at the $20.00 level and its 200-dma. Shares of CYMI surged higher this morning and hit $45.77 but pared its gains and closed back under round-number resistance at the $45.00 level. This sort of move looks like a failed rally. We are not suggesting new positions. Our target is the $47.00-48.00 range.

Picked on September 06 at $ 42.55
Change since picked: + 2.24
Earnings Date 10/24/06 (unconfirmed)
Average Daily Volume = 1.0 million

---

General Dynamics - GD - close: 72.06 change: +0.94 stop: 69.94

Defense stocks enjoyed another day of strength with the DFI index rising 0.75% and closing at another four-month high. Shares of GD out performed its peers with a 1.3% gain. The bounce from $70.00 in GD looks bullish but we are a little bit cautious with GD's inability to breakout over the September highs in the $72.30-72.50 region. Our target is the $74.00-75.00 range. We do not want to hold over the mid October earnings report.

Picked on September 24 at $ 70.61
Change since picked: + 1.45
Earnings Date 10/18/06 (unconfirmed)
Average Daily Volume = 1.3 million

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Mettler Toledo - MTD - close: 64.94 chg: -0.13 stop: 61.99

If you look at just the closing numbers then MTD under performed the market with a loss today. However, if you look at the intraday action in MTD, the session looks more bullish. The stock bounced from the $64.00 level and appears poised to move higher. This actually looks like an entry point to buy calls - or you could wait for a move over today's high at $65.06. If you do open new bullish positions here then you may want to tighten your stop to Friday's low (63.52). 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: + 1.28
Earnings Date 10/26/06 (unconfirmed)
Average Daily Volume = 169 thousand

---

Omnicom - OMC - close: 92.83 chg: +1.03 stop: 89.89

The two-day bounce in OMC is doing a lot to improve the technical picture for the stock. Volume came in a little above average on today's gain, which is bullish. The breakout over $92 and its 10-dma is also bullish. Given the market's strength readers may want to buy the bounce in OMC but we'd be extra careful with our stops and be prepared to exit early. We're concerned that this rally may fade heading into the weekend and next week. Our target is the $96-97 range.

Picked on September 10 at $ 90.97
Change since picked: + 1.86
Earnings Date 10/24/06 (unconfirmed)
Average Daily Volume = 1.1 million
 

Put Updates

Caterpillar - CAT - close: 65.90 chg: +1.57 stop: 67.36

We can blame the better than expected consumer confidence numbers if we want to but the bounce in economically sensitive stocks like CAT seems a bit overdone. Actually the rebound is looking rather dangerous! Broken support near $65.00 was supposed to act as new overhead resistance. Tuesday's 2.4% gain and breakout over this level on above average volume is bad news if you're holding puts. We don't see this move as any sort of window dressing. CAT was down about 13% for the quarter at the end of last week so we don't see funds buying the stock to paint their portfolios. If anything they should have been selling. Wait for a new decline under $64.50 before considering new put plays. Aggressive traders could jump in early under $65.00. 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: + 1.31
Earnings Date 10/20/06 (unconfirmed)
Average Daily Volume = 5.2 million

---

Express Scripts - ESRX - close: 77.71 chg: +0.72 stop: 82.51

ESRX continues to under perform the market but it's hard for the stock to make any headway lower if the DJIA and S&P 500 are making new relative highs. A failed rally under $80.00 could be used as a new entry point to buy puts. 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: - 2.14
Earnings Date 10/25/06 (unconfirmed)
Average Daily Volume = 1.6 million

---

Joy Global - JOYG - close: 35.38 change: +2.58 stop: 36.55

Ouch! JOYG just erased all of our unrealized gains in one day. JOY, like CAT, is another one of the "economically sensitive" stocks that enjoyed such a strong rally today. The stock's rally did stall near $36.00 and its 10-dma, both levels were expected to offer some resistance. We would hesitate to open new plays at this time but a new decline under $35.00 could be used as an entry point. Our target is the $30.50-30.00 range.

Picked on September 20 at $ 34.95
Change since picked: + 0.43
Earnings Date 11/30/06 (unconfirmed)
Average Daily Volume = 2.6 million

---

Las Vegas Sands - LVS - close: 67.90 change: +2.19 stop: 70.05

LVS also enjoyed a strong session with the stock adding 3.3%. The two-day bounce is improving the technical picture for LVS. We are not suggesting new positions at this time and traders may want to think about an early exit since the stock is not cooperating. We do not want to hold over the early November earnings report.

Picked on September 19 at $ 65.99
Change since picked: + 1.91
Earnings Date 11/01/06 (unconfirmed)
Average Daily Volume = 2.2 million

---

Maxim Integrated - MXIM - close: 27.97 chg: -0.72 stop: 30.05

Good news! MXIM failed to see any upward follow through on yesterday's bullish reversal. Instead the stock lost 2.5% and closed back under support at the $28.00 level. The weakness was probably sympathy pains for fellow semiconductor company PMCS who issued a profit warning today. While this may look like a new entry point to buy puts in this market we would be hesitant to open new bearish plays until the market rally runs out of steam. 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: + 0.07
Earnings Date 11/03/06 (unconfirmed)
Average Daily Volume = 5.4 million

---

Nucor - NUE - close: 49.47 change: +2.30 stop: 50.01

After yesterday's bullish reversal from support near $45.00 we kind of expected a bounce in NUE today. Unfortunately, we didn't expect such a big bounce with a 4.8% gain on above average volume. It was only yesterday morning that the stock was downgraded and one analyst was voicing their concern over high inventory levels. It seems that NUE and most of the steel-industry stocks are surging higher today after Reliance Steel (RS) issued a positive earnings warning by raising their earnings forecast. If there is any good news here it is that the rally stalled under round-number resistance at $50.00 and technical resistance at the 50-dma. The bad news is that shorts might get scared and NUE could see more short covering. We would wait for a new decline under $48.00 before considering new bearish positions. Our target is the $40.50-40.00 range. We do not want to hold over the mid October earnings report.

Picked on September 25 at $ 45.95
Change since picked: + 3.52
Earnings Date 10/19/06 (unconfirmed)
Average Daily Volume = 4.2 million

---

Southern (Peru) Copper - PCU - cls: 90.89 chg: +3.64 stop: 92.51

Same story, different stock. Shares of PCU rallied sharply following yesterday's intraday bullish reversal. Volume came in above the daily average, which is bad news for the bears. We expected a bounce towards $90.00 not a breakout over $90.00. The rally did stall under resistance near $92.00 but we're in a dangerous position here. More conservative traders may want to cut their losses now. We are not suggesting new positions. 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.

Picked on September 22 at $ 86.50
Change since picked: + 4.39
Earnings Date 10/16/06 (unconfirmed)
Average Daily Volume = 1.3 million

---

FreightCar Amer. - RAIL - close: 55.26 chg: +1.15 stop: 56.32

Shares of RAIL were caught up in the transports/railroad stock rally on Tuesday. The stock added 2.1% but remains under resistance near $56 and its 100-dma. We are not suggesting new positions at this time. 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: + 0.76
Earnings Date 10/26/06 (unconfirmed)
Average Daily Volume = 353 thousand

---

SanDisk - SNDK - close: 54.05 chg: -0.79 stop: 60.05

SNDK failed to rally with the rest of the market on Tuesday and this show of relative weakness is good news for the bears. Unfortunately, if the market continues to rally we would expect SNDK to eventually join it. 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: - 2.64
Earnings Date 10/19/06 (unconfirmed)
Average Daily Volume = 9.9 million

---

Textron - TXT - close: 84.26 change: +1.92 stop: 84.01

We are still sitting on the sidelines waiting for a breakdown under the $80.00 level. More aggressive traders might want to consider plays on a failed rally under $85.00. If triggered at $79.85 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: 57.57 chg: +2.58 stop: 60.05

Reversal alert! Two days ago (Friday) shares of X were looking pretty bearish with a breakdown under support near $56.00. Monday came and the stock gapped lower after an analyst downgrade yet shares bounced back sharply due to a strong market rally. Now the rally in the markets and shares of X continues with volume coming in above average for X. This isn't window dressing since X would qualify as a loser for the third quarter. It seems that X and most of the steel-industry stocks are surging higher today after Reliance Steel (RS) issued a positive earnings warning by raising their earnings forecast. We have to warn readers that the three-day candlestick pattern is another bullish reversal and given the volume on the bounce it would suggest more upside to come. Conservative traders may want to cut their losses. We still see overhead resistance near $60 with its 50-dma and 200-dma so we're going to keep the play open for now.

Picked on September 22 at $ 55.95
Change since picked: + 1.62
Earnings Date 10/24/06 (unconfirmed)
Average Daily Volume = 4.4 million
 

Strangle Updates

None
 

Dropped Calls

None
 

Dropped Puts

Burlington Nor.SantaFe - BNI - cls: 71.23 chg: +2.03 stop: 71.01

We have been stopped out of BNI at $71.01. Railroad stocks rallied strongly on Tuesday with a 2.8% gain in the Dow Jones railroad index and this contributed a lot to the Dow Transports 2.5% gain. Shares of BNI added 2.9% on strong volume to breakout over potential resistance at the 10-dma, the $70.00 level, the exponential 200-dma and its five-month trendline of lower highs. If shares trade over $72.50 readers may want to consider bullish positions just be careful with potential resistance at $75.00 and its simple 200-dma.

Picked on September 22 at $ 67.75
Change since picked: + 3.48
Earnings Date 10/24/06 (unconfirmed)
Average Daily Volume = 2.8 million
 

Dropped Strangles

None
 

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