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Daily Newsletter, Saturday, 10/07/2006

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Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews
  4. Trader's Corner

Market Wrap

Jobs Shock Bulls

The September non-farm payroll report shocked everyone not just the bulls. The economy created only 51,000 jobs in September but the revisions for August and for the rest of the year caused the bulls to cough up some of their hard fought gains in a reflex reaction. It was still a bullish week and the outlook has not yet dimmed.

Dow Chart - Daily

Nasdaq Chart - Daily

The Jobs report was the major news on Friday with the +51,000 gain and the slowest job growth in 12 months. However, when coupled with the +60,000 revision for August it continued to produce an average of +120,000 jobs in a slowing economy. The August revision was a shock but not nearly as shocking as the +810,000 revision for the 12 months ended in March 2006. Each year the BLS revises the prior years numbers based on actual data compiled from the unemployment records filed by the states. The average revision is in the 0.1% to 0.2% range and this year's revision was +0.6% and the largest revision in a decade. The BLS said they were researching the very unusual change to determine why it was so large. According to analysts that revision means the economy is now slowing from a faster pace or higher level than previously thought. You may think that it is not relative since the data is 12-18 months old but it means the momentum was stronger and that underlying strength both in the economy and in inflation could quickly reappear.

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The equity market did a double take and the Dow promptly plunged -50 points on the news. The bond market recoiled in shock with the yield on the ten-year note spiking from a post announcement dip to 4.574% to an intraday high of 4.702%. In bond terms this is gigantic and roughly equivalent to a +200 point Dow day in equities. Bonds had been pricing in the next Fed move as a rate cut before March with a slim chance of December increasing with the January meeting to nearly 85% my March. Now those chances have fallen to less than 50% and worries are rising that the Fed may not be done. If the economy is stronger than analysts had previously expected it could rebound sharply now that energy prices have fallen significantly and the summer doldrums are past. We have already seen a sharp uptick in retail sales and that wave is getting stronger as gasoline prices head closer to $2. After hawkish comments from multiple Fed heads last week the jobs report put the Fed right back in the picture with a meeting only two weeks away. In reality the Jobs report was simply an excuse for the market to rest after a week of breaking records.

Ten-Year Note Yield Chart

The calendar last week was busy with several critical reports including the ISM and the Jobs report. Next week's calendar is also busy but without any really critical reports. Vying for attention will be the FOMC minutes on Wednesday and the Fed's Beige Book on Thursday. The bond market will be closed on Monday for Columbus Day but equities will still trade. The key for next week will be the beginning of Q3 earnings with Alcoa the leadoff batter for the Dow on Tuesday. Other earnings of note are DNA, INFY, LPL and SVU on Tuesday, LRCX, MON, YUM on Wednesday, GENZ, PEP, PII and COST on Thursday. This is just the beginning of the earnings wave, which begins in earnest the following week. Traders will only get a preview this week as the early reporters set the stage for what is shaping up to be a strong earnings cycle. Currently the estimates for Q3 earnings growth for the S&P-500 are +14% and only slightly less than the +15% estimate only a month ago. The Q4 earnings estimates are for +12.3% growth and only slightly less than the +13% estimate a month ago. These are remarkable given the removal of the energy sector from the leadership position of +30% to +50% growth over the prior quarters. Other sectors have jumped into the lead with financials and materials now expected to produce better than +30% earnings growth. The warnings for this cycle started off worse than normal but failed to maintain the pace. Overall the cycle is looking pretty good and that has helped push the indexes to their new highs. If the S&P can produce a minimum of +10% earnings growth in Q3 it will tie at 13 quarters the longest string of consecutive quarters of double-digit growth we saw between 1992-1995.

Economic Calendar

There are still some negative earnings surprises hitting the tape with Micron (MU) on Friday. Micron missed the street estimate of 14 cents with earnings of +8 cents after charges. Investors raced to dump the stock despite positive comments from numerous analysts. MU lost -14% or -$2.40 and closed at the low of the day. Micron said they only invested $1.8 million in capex in 2006 but planned to bump that to $4 billion in 2007. I know that difference sounds amazing but I looked it up in three different places. Micron is partnering with Intel to develop NAND memory and move out of DRAM chips. Analysts said DRAM memory should remain strong through 2007 due mostly to the memory requirements of the new Microsoft Vista operating system. Reports claim that it is a huge memory hog both in PC memory and video card memory. Pretty soon a 4GB PC will be standard and that is great for companies like Micron. S&P analysts Thomas Smith said, "PC memory needs are going to rise up to +500% to run Vista." I bought about 40GB of memory over the last six months and the going rate for DDR2-666hmz SDRAM is about $100 per GB. I view that as amazingly cheap already but with demand spiking it is only going to get cheaper. Bear Stearns felt this decline in DRAM prices made SanDisk a better investment than Micron for Q4 and they expect SNDK could have additional upside despite its weeklong rebound. The SOX was hit hard on Tuesday on the Marvel warning and had almost shaken off the losses but Micron stole the show again. The SOX is struggling to hold over initial support at 445 after three weeks of progressively lower highs.

SOX Chart - 90 min

There were lots of new highs on individual stocks led by Berkshire Hathaway (BRK.a) hitting $100,000 a share on Thursday. The internals on Wed/Thr were very strong with 563 stocks hitting new highs on Thursday alone. As you can see in the table below the enthusiasm appears to have peaked on Wednesday with better than 4:1 up volume over down. There were more new highs on Thursday but that was mostly due to a spike in the Russell. Yes, the Russell-2000 finally found a bid and it appears fund managers are finally putting some cash in the small caps. This is a bullish event since it means they are more confident in the rally having legs and less fearful the economy is going to implode. Compare the bottom table of the Russell-2000 internals to the ratios in the top table representing all the combined markets. You can easily see the strength building in the broader Russell and that represents a shift in fund manager bias. The Russell rally deteriorated slightly on Friday, as decliners were far worse than the health portrayed by the -3 point finish.

Market Internals - All Markets

Market Internals - Russell 2000

Google is reportedly in talks to buy YouTube.com for something in the range of $1.6 billion. YouTube currently boasts three times the number of video viewers than Google currently has on Google Video. YouTube users watch more than 100 million videos daily. That number simply boggles my mind when you think of all the time involved not to mention the Internet bandwidth consumed. To gain that kind of viewership I would think $1.6 billion would be cheap for Google and they could recover their investment very quickly through their advertising engine. However, YouTube is currently under the gun for copyright infringement from users posting copyrighted materials online for viewing. YouTube will remove them immediately if the copyright holder complains but they simply cannot police the volume of videos posted each month. Google is a much larger entity with deep pockets and could make a deal with copyright holders rather than fight. Google is also under the gun for its book-scanning project. Google issued subpoenas last week to the other major Internet search engines requesting information on number of books scanned, deals with authors and future plans for scanning. Google is trying to produce the largest online library of content on the planet and 8,000 writers through the Authors Guild and the Association of American Publishers is suing to stop them.

GM took a turn for the worse on Friday as Kirk Kerkorian associate Jerome York resigned from the board citing "grave reservations" about GM's ability to compete and recover from its current problems. KK also said he was abandoning plans to raise his stake in GM from 9.9% to 12% as he had recently indicated. GM shares fell -2.08 on the news. GM has been the best Dow performer recently rising from $19 in April to $34 earlier this week. Friday's close was $31. An analyst at Bank America warned that York's departure could lead to other board departures as remaining members might want to distance themselves from any potential fight with Kerkorian and the impact on GM. GM recently decided not to pursue an alliance with Renault and Nissan as suggested by Kerkorian. GM was readying for a fight earlier this week when they changed the bylaws making it more difficult for aggressive shareholders to try and force changes in the company.

The jump in interest rates on Friday did not produce a material decline in homebuilders because a former Fed head came to their rescue. Alan Greenspan spoke at a conference in Calgary on Friday and said the worst may be over for the U.S. housing industry. Citing the worst downturn in a decade Greenspan said weekly mortgage applications were flattening out after a very dramatic slump. Bernanke said the slump would probably knock off only a point of GDP this year with less impact in 2007. Vice Chairman Donald Kohn said on Wednesday he did not know how long the slump would last but doubted it would push the economy into a recession. Mortgage applications spiked +12% last week with the most apps since June as low rates prompted a +17.5% jump in refinancing as consumers bailed out of ARM loans.

It was a tough week for the energy sector despite a growing call for production cuts from OPEC. Oil tried to rebound from $60 last week to peak at $64 before inventory and weather data combined to send it plummeting again this week to a low of $57.70. That level was quickly bought but the rally ran out of steam as OPEC members voiced their disagreements on a proposed production cut. Oil closed on Friday at $59.76. OPEC has been arguing all week about making public cuts now or waiting until the December meeting. Several members have already promised voluntary cuts and several more are said to be quietly slowing production. Saudi has raised the asking price of its oil as a way to limit supplies. On Friday the Nigerian Oil Minister and OPEC President Edmund Daukoru said he was optimistic that a consensus could be formed before Monday but that no formal action had been taken. OPEC is rumored to be planning price supports at OPEC $55 which is the basket price for the 12 grades of crude they supply. The WTI or light sweet crude that is considered the benchmark of oil pricing normally trades about $5 over the OPEC basket, which would put support around $60 and it closed at $59.76 on Friday. The Financial Times had already reported that OPEC had informally agreed to a one million bbl cut on Thursday but that agreement was never officially announced. Saudi was reportedly unhappy with the unofficial cuts and wanted an official policy to be announced. Saudi had already decreased its output by -200,000 to - 1mbpd over the last month depending on whom you believe. By raising their asking price to European consumers of their heavy oil they were implementing their own brand of supply disruption. It appears the delay in OPEC announcing a cut could stem from how they allocate that cut to all members. Several are already unable to produce their full quota while others are overproducing. Deciding how to divide the quotas is the type of decision it may take a Solomon to make. Reportedly President Bush and Energy Secretary Sam Bodman do not want OPEC to cut production until prices are much lower. Bloomberg reported this week that a survey of 29 analysts predicted an average cost of crude to be $64 for 2007. That is +$2 higher than the prior estimate despite the current drop in prices. Barclay's Capital is predicting $74.60 and the highest forecast in the survey. They said, "the current decline is due to short term factors but global growth should remain strong and capacity is not expanding by much.

Natural gas rallied nearly $1 for the week to $6.42 and a +19% bounce off its lows for the week. This came despite another +73 Bcf injection into storage. That brings the gas in storage to 3,327 Bcf and matched the high set in Nov-2004, which was also a 13-year high. There was only four weeks left in the injection cycle before draws begin to appear with winter weather around November 1st. The gains in gas this week were said to be technical buying by the talking heads on CNBC. However, there were two specific reasons for the bounce. The first came from the news that the scheduled autumn refueling of several nuclear plants would be longer and larger than usual and the highest level in the last six years. Refueling normally occurs in October when the weather is mild and peaks around mid month. This year the refueling is expected to take an additional 7,000 megawatts above the five-year average offline for 2-3 weeks. That could add an additional 1BCF per day to gas consumption as long as the weather stays mild but an early cold front could spike gas demand significantly. The second reason gas spiked was an announcement by Questar that they had shut in some production from the Rocky mountain region. As of October 1st they were shutting down 70 million CF per day. We saw Chesapeake announce a shut in of production for 100 million CF per day in the prior week. Questar is a major processor, transporter and distributor of gas with storage in multiple locations. I warned everyone over the last several months this would happen as storage locations reached maximum capacity and we are right at that national capacity limit this week. By shutting in production this reduces some competition for storage and the associated drop in prices. If gas companies can hold out for three more weeks until winter begins this oversupply crisis will evaporate. Ironically, despite the production shutdown Questar raised its 2006 production guidance for the entire year to +10% to +12% over 2005. Questar also announced it had added about 40BCF of hedges through 2009 at an average price of just under $8 per Mcf and 2008 oil production at $64.30. Gas futures are trading just under $10 for Jan-2008. Gas traded at less than 40% of the price of crude on a BTU basis last week and that is only the second time since 1993 that has happened. The last was July-7th, 1995.

The website Energikrise.blogspot.com recently posted a chart of global energy production by OPEC for the last five years and despite a slight uptick in the last several months global production is still below the levels seen in 2005. The spike in prices did produce a slight rise in production and decrease in demand but analysts claim that may not be sustainable. The second chart is the global production from all sources showing the same production plateau. All data is from official IEA production reports. As long as the world economy continues to grow the -8% depletion rate on existing fields will always be a serious drag on sustaining any future production increases.

OPEC Production chart from 2001

Global Oil Production 2001-2006

Despite the drop in oil prices the Transportation index plunged -60 points on Friday after UPS announced it was making some unspecified job cuts in its logistics and freight forwarding unit. UPS said there were 2000 employees in that unit and they were going to restructure it to eliminate redundancies. This should not have been a major announcement but the transports had been on a roll over the last several days tacking on more than +200 points. It was just an excuse for profit taking on a Friday before a long weekend.

Dow Transport Chart - Daily

For next week we have a unique setup with numerous factors suggesting this rally could continue. The Dow has extended its gains from the July lows to nearly +1200 points. That three-month rebound is over extended and overbought by nearly any metric you care to use. However, it is showing no signs of fading despite the stall at 11860 since Wednesday afternoon. There are simply no sellers and every dip is bought instantly. The consolidation we saw on Thr/Fri was minimal and therapeutic. The only challenge for the Dow is approaching resistance at 11900 and the approaching earnings cycle. The Dow has climbed every wall of worry since the rebound began and it appears to be getting stronger the more extended the rally becomes. The strong potential of a positive outcome for earnings has already been priced into the tape. You have heard the term before, "priced to perfection," but this is a prime example. The lack of any material earnings warnings and the total disregard for what bad earnings we have seen seem to suggest the Dow is bullet proof. That is a term that should never be applied to the market. Whenever the outlook is too good to be true it normally is. However, the jobs report even with its shocks was still market positive when viewed long term. It suggests the economy is not collapsing and the soft landing is proceeding according to schedule. The challenge remains inflation, also not a problem according to recent reports. The Fed will not be a problem as long as inflation continues to moderate. Energy is not a problem at these levels and is actually disinflationary at these prices. Earnings don't appear to be a problem either with +14% earnings growth in an economic slowdown very market positive. Various officials are calling an end to the housing slump and there were no hurricanes to disrupt business as usual on the coasts. There is simply no bad news in the U.S. and that is scary.

However, there is a rising threat overseas. North Korea has said they could test a nuclear bomb as early as this weekend. The UN warned NK on Friday of severe unspecified consequences it if carries out its test. The UN has options under Chapter 7 of the UN Charter, which allows the UN to take immediate action to deal with threats to world peace. We obviously know who would spearhead any reprisal action the UN decided to inflict. US officials said Friday that a test would immediately evoke full-scale sanctions with the only debate being what "full-scale" means. The US is prepared to blockade shipping in and out of NK with searches of any vessels allowed through. The UN passed a resolution after the missile tests in July to allow inspection and interdiction of shipping to prevent export/import of missile technology and weapons of mass destruction. There are fears that NK would sell its nukes on the black market to terrorists for use elsewhere, preferably in the US. If a bomb goes off in NK this weekend all bets are off for market stability in the world markets.

Secondly, the Iran problem is heating up again with the six world powers negotiating with Iran agreeing on Friday to pursue sanctions against Iran for failing to halt nuclear activities. The top diplomats issued a statement saying they were "deeply disappointed" by Tehran's refusal to suspend enrichment. US Undersecretary of State Nicholas Burns said, "The decision has been made to go for sanctions because we need to raise the stakes for Iran in this confrontation. The UN will discuss sanctions under Chapter 7 next week to include non-military actions such has severing diplomatic relations, economic relations, transportation and communications with Iran. The committee also did not rule out additional measures but said it would be counter productive to discuss those measures in public. Secretary of State Rice said the committee had decided it was time to take the next step because the credibility of the Security Council was at stake. Iranian President Mahmoud Ahmadinejad was defiant on Thursday that his country would never be intimidated into giving up its nuclear program. Under Iran's system of clerical rule, Supreme Leader Ayatollah Ali Khamenei has the last word and he said last weekend Iran would never give up its nuclear right. It appears fairly certain that this event will come to a head and it is moving at a snails pace but picking up speed.

With the major problems for the market being too much good news inside the US and some fairly harsh problems developing overseas the bad news bulls may be running on a short leash. It seems almost inconceivable to the bulls that any October surprise will occur and that is the most dangerous period. Most analysts feel that the +1167 points of Dow gains were borrowed from Q4 and that while the markets may move higher from here the rate of climb may slow. The head bull Abby Joseph Cohen raised her targets for the S&P last week to 1450 over the next 12 months. With Friday's close at 1350 that does not leave us a lot of room to run and she is normally overly optimistic.

The S&P has resistance at 1365, which corresponds to roughly 12000 on the Dow. That may be the unofficial target that will cause bulls to start taking profits assuming some overseas event does not sink us first. Until then the focus will be on tech stocks and the Russell as funds broaden their horizons and retail investors jump in to surf the wave. The Nasdaq had a good week after playing the anchor for the prior month. That along with the Russell was the proof that the rally was growing legs. Hopefully not so many legs that it trips and falls. If the SPX does break 1365 the new target becomes 1425.

SPX Chart - Daily

In a nutshell I would continue to remain long over SPX 1340 but be very observant if signs of aging begin to appear. The Dow and S&P are very extended and it may not take much of an excuse to produce some profit taking. A Dow reversal under 11650 would suggest a bull trap springing shut. The fourth quarter after mid October is normally a bullish period and even if the rate of climb slows it does not mean the rally will stop. I believe any sudden decline not prompted by an overseas event will be bought as many investors come back to the market they have avoided for years. Nothing promotes retail investing like new highs and after a week of successes they should be flocking to their PC next week. If the fist few earnings reports are positive it could turn into a rout for the bears. There are still plenty of bears around but they are being trampled on a daily basis as they continue to jump in front of the bulls at every resistance point. There is nothing like continued short covering to produce a strong bull market. Managers previously waiting for an October surprise to the downside are being forced to chase stocks after the surprise breakout. Remain long over SPX 1340 but consider going flat or short on any sudden drop below that level.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
SEPR None None
UBB    

New Calls

Sepracor - SEPR - close: 50.20 chg: +0.65 stop: 47.95

Company Description:
Sepracor Inc. is a research-based pharmaceutical company dedicated to treating and preventing human disease by discovering, developing and commercializing innovative pharmaceutical products that are directed toward serving unmet medical needs. Sepracor's drug development program has yielded a portfolio of pharmaceutical products and candidates with a focus on respiratory and central nervous system disorders. (source: company press release or website)

Why We Like It:
SEPR caught our attention on Friday with its move over technical resistance at its simple 200-dma. The move was only an intraday spike but shares still managed to close over round-number resistance at the $50.00 level. Volume on the session came in pretty strong too, which is normally bullish. Currently the Point & Figure chart is still bearish but if you study the daily chart it looks like SEPR has built a base or bottoming pattern over the last couple of months. The rally on Friday reversed at the $51.00 level, which was where the rally failed in early August. We're going to suggest a trigger to buy calls at $51.25 in an effort to catch any breakout above this resistance level. If triggered we'll target a run into the $55.50-56.00 range but we plan to exit ahead of SEPR's late October earnings report. That only gives us about 12 to 13 trading days. We'll re-evaluate our stop loss placement once we see a close over the 200-dma. FYI: The latest (September) data put short interest at more than 13% of SEPR's 108 million-share float. That's a relatively high amount of short interest and a move over $51.00 might spark some short covering.

Suggested Options:
We are suggesting the November calls but we plan to exit ahead of the October earnings report. Our trigger is at $51.25.

BUY CALL NOV 47.50 ERU-KW open interest=4782 current ask $5.80
BUY CALL NOV 50.00 ERU-KJ open interest=6898 current ask $4.30
BUY CALL NOV 52.50 ERU-KX open interest=4388 current ask $3.20
BUY CALL NOV 55.00 ERU-KK open interest=1031 current ask $2.20

Picked on October xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/24/06 (unconfirmed)
Average Daily Volume = 2.3 million

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Unibanco - UBB - close: 79.12 change: +0.83 stop: 74.95

Company Description:
Unibanco is the third-largest Brazilian private bank, with more than 80 years of history and activity in the market. The Bank is present in every segment of the financial market, offering a broad and complete range of services to a diversified customer base. (source: company press release or website)

Why We Like It:
Financial stocks have been a big part of the market's strength so we've decided to add a banking stock to the list. UBB looks like an attractive call candidate given the recent breakout through resistance near $77.00 and its seven-month trendline of resistance (see chart). The daily and weekly chart technicals are bullish and the P&F chart points to a $100 target. We are suggesting call positions right here but traders have a choice. You could wait for a dip back toward what should now be support near $77.00 (77.00-77.50) or wait for a breakout past the $80.00 mark. Our target is the $85.00-86.00 range. We do not want to hold over the early November earnings report.

Suggested Options:
We are suggesting the November calls but we plan to exit ahead of the October earnings report. At this time we do not see a November $85 strike price available.

BUY CALL NOV 75.00 UBB-KO open interest= 80 current ask $6.50
BUY CALL NOV 80.00 UBB-LP open interest=162 current ask $3.60
or
BUY CALL JAN 85.00 UBB-AQ open interest=135 current ask $4.30

Picked on October 08 at $ 79.12
Change since picked: + 0.00
Earnings Date 11/09/06 (unconfirmed)
Average Daily Volume = 796 thousand
 

New Puts

None today.
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Ambac Fincl. - ABK - close: 84.61 chg: -0.25 stop: 81.99

ABK did not escape the minor market pull back on Friday and shares closed with a 0.29% decline but volume was light and traders bought the dip at $84.22 on Friday morning. We remain bullish following ABK's breakout over resistance at $84.00 and its 50-dma. The technical picture is positive and its Point & Figure chart points to a $102 target. We don't see any changes from yesterday's play description. Our target is the $88.00-90.00 range. We do not want to hold over the October 25th earnings report.

Suggested Options
We are suggesting the November calls but we do not want to hold over the October earnings.

BUY CALL NOV 80.00 ABK-KP open interest=164 current ask $5.70
BUY CALL NOV 85.00 ABK-KQ open interest=708 current ask $2.10

Picked on October 04 at $ 84.40
Change since picked: + 0.21
Earnings Date 10/25/06 (confirmed)
Average Daily Volume = 819 thousand

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Amgen Inc. - AMGN - close: 74.01 change: -0.72 stop: 69.99

Biotechs turned in a strong week with the BTK index breaking out over resistance at its 200-dma and resistance near the 680 level. Strength in AMGN during the middle of the week really kept the momentum strong. Friday saw shares of AMGN experience a little overdue profit taking. The stock lost close to 1% but we see relative strength in the intraday chart where traders bought the dip twice near $73.50. This could be used as a new entry point to buy calls. Our target is the $79.00-80.00 range. We do not want to hold over the October 23rd earnings. FYI: More conservative traders might want to adjust their stop loss closer to the $72 level.

Suggested Options
We are suggesting the November calls but we do not want to hold over the October earnings.

BUY CALL NOV 70.00 YAA-KN open interest=1743 current ask $5.30
BUY CALL NOV 72.50 YAA-KV open interest=4013 current ask $3.50
BUY CALL NOV 75.00 YAA-KO open interest=7658 current ask $2.00

Picked on October 04 at $ 72.97
Change since picked: + 1.04
Earnings Date 10/23/06 (confirmed)
Average Daily Volume = 7.8 million

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Deere & Co. - DE - close: 85.29 change: -2.26 stop: 82.99

The rally in shares of DE suffered a setback on Friday. Shares gapped open lower and closed with a 2.58% loss on strong volume. The weakness in DE was due to an earnings warning from Agco Corp. (AG). AG is a rival in the agriculture machinery industry and the company issued an earnings warning due to lower than expected sales. Shares of AG closed down 5.9% at $24.70 but that was an improvement from its lows of the session of $22.47 (-14.4%). The overall pattern in DE still looks bullish but the sharp decline on Friday has produced a kink in the technical indicators. The weekly chart's latest candle now looks like a short-term top. We would suggest waiting for a new move over $85.50 or a bounce near $83.50-84.00 as the next entry point to buy calls. Our target is the $89.50-90.00 range. We do not want to hold over the November earnings report. FYI: The P&F chart points to a $108 target.

Suggested Options
We are suggesting the November calls.

BUY CALL NOV 80.00 DE-KP open interest=298 current ask $7.30
BUY CALL NOV 85.00 DE-KQ open interest=521 current ask $4.00
BUY CALL NOV 90.00 DE-KR open interest=438 current ask $1.75

Picked on October 04 at $ 85.39
Change since picked: - 0.10
Earnings Date 11/14/06 (unconfirmed)
Average Daily Volume = 2.7 million

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Emerson Electric - EMR - close: 84.77 chg: -0.06 stop: 82.99

EMR spent another session consolidating sideways. The stock spiked back over the $85 level on Friday morning but failed at the same spot as Thursday. The lack of movement, under average volume and mild pull back in the markets left Friday's trading as a neutral session. Thus the overall bullish pattern is still in play. However, we would now wait for a move over $85.25 before initiating new call positions on EMR. The weekly chart and the P&F chart both look pretty bullish. Our target is the $89.00-90.00 range. We do not want to hold over the late October earnings report.

Suggested Options
We are suggesting the November calls but we do not want to hold over the October earnings.

BUY CALL NOV 80.00 EMR-KP open interest=588 current ask $5.90
BUY CALL NOV 85.00 EMR-KQ open interest=951 current ask $2.25
BUY CALL NOV 90.00 EMR-KR open interest=209 current ask $0.50

Picked on October 05 at $ 85.15
Change since picked: - 0.38
Earnings Date 10/31/06 (unconfirmed)
Average Daily Volume = 1.5 million

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Entergy - ETR - close: 80.63 change: +0.27 stop: 77.99

Electric utility stock ETR turned in a strong week with new all-time highs. The breakout over round-number resistance at $80.00 is also a positive sign. We also noticed that traders were buying the dips near $80, which is definitely bullish. Everything appears to be pointing higher for ETR. We would continue to open new plays at current levels. Our short-term target is the $84.00 level. We do not want to hold over the late October earnings report.

Suggested Options
We are suggesting the November calls.

BUY CALL NOV 75.00 ETR-KO open interest= 48 current ask $6.30
BUY CALL NOV 80.00 ETR-KP open interest=587 current ask $2.15
BUY CALL NOV 85.00 ETR-KQ open interest= 53 current ask $0.30

Picked on October 03 at $ 80.33
Change since picked: + 0.30
Earnings Date 10/31/06 (unconfirmed)
Average Daily Volume = 1.1 million

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Greenbrier - GBX - close: 30.00 change: -0.77 stop: 27.99

Transportation stocks hit a pothole on Friday. The Dow Jones Transportation index slipped 1.3% and the Dow Jones Railroad index fell 1.25%. Some were saying the sell-off was a reaction to UPS who came out with news on Thursday night that it would make some job cuts. We suspect that Friday's session was just profit taking after a strong week. We would use the pull back in GBX as a buying opportunity. The stock bounced near the top of its previous trading range, which is a good sign. Our target is the $33.00-34.00 range. We do not want to hold over the early November earnings report. FYI: The P&F chart is still bearish but it's seeing a strong bounce near support. More conservative traders could always tighten their stops - we'd consider moving ours toward the $29 level.

Suggested Options
We are suggesting the November calls.

BUY CALL NOV 25.00 GBX-KE open interest= 1 current ask $5.90
BUY CALL NOV 30.00 GBX-KF open interest=98 current ask $2.20

Picked on October 05 at $ 30.05
Change since picked: - 0.05
Earnings Date 11/01/06 (unconfirmed)
Average Daily Volume = 310 thousand

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Mettler Toledo - MTD - close: 66.19 chg: -0.36 stop: 64.95 *new*

We are not suggesting new call positions in MTD. The stock does still have a bullish pattern of higher highs and higher lows but the technical indicators are suggesting that MTD is running out of momentum. The trading on Thursday and Friday this past week looks like a short-term top and the MACD indicator is near a new sell signal. More conservative traders might want to consider exiting early to lock in a gain. We're going to adjust our stop loss to $64.95. Our target is the $68-69 range. We do not want to hold over the late October earnings report.

Suggested Options
We are not suggesting new plays on MTD at this time.

Picked on September 13 at $ 63.66
Change since picked: + 2.53
Earnings Date 10/26/06 (unconfirmed)
Average Daily Volume = 169 thousand

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Omnicom - OMC - close: 94.65 chg: +0.97 stop: 92.95 *new*

After a week of consolidating sideways shares of OMC displayed some relative strength on Friday. The stock broke out over the $94 level again and closed with a 1% gain. The rise lent new strength to the short-term technical indicators and OMC looks poised to breakout past its September highs and make a run toward its June 2006 highs. We are not suggesting new call positions at this time. We are going to try and reduce our risk by raising the stop loss to $92.95, which is under the recent consolidation. More conservative traders may want to think about locking in a profit right here or at least taking some money off the table. Our target is the $96.00-97.00 range. We do not want to hold over the late October earnings. FYI: The P&F chart points to a $131 target.

Suggested Options
We are not suggesting new plays on OMC at this time.

Picked on September 10 at $ 90.97
Change since picked: + 3.68
Earnings Date 10/24/06 (unconfirmed)
Average Daily Volume = 1.1 million

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Vulcan Materials - VMC - close: 80.18 chg: +0.26 stop: 76.95

On your mark. Get set. VMC displayed relative strength on Friday and crept across the $80.00 level leaving the stock poised to hit our trigger at $80.26 and launch this play. More aggressive traders may want to open positions now. The Point & Figure chart is already bullish with a $93 target. If we are triggered at $80.26 our target will be the $84.50-85.00 range. We do not want to hold over the late October earnings report.

Suggested Options
We are suggesting the November calls but we do not want to hold over the October earnings.

BUY CALL NOV 75.00 VMC-KO open interest= 257 current ask $7.10
BUY CALL NOV 80.00 VMC-KP open interest= 563 current ask $3.90
BUY CALL NOV 85.00 VMC-KQ open interest=1173 current ask $1.75

Picked on October xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/31/06 (unconfirmed)
Average Daily Volume = 843 thousand
 

Put Updates

Maxim Integrated - MXIM - cls: 28.28 chg: -0.08 stop: 29.05*new*

Semiconductor stocks are still under performing the market. Earlier this week the group struggled due to an earnings warning from MRVL. Friday the sector was hit again after Micron (MU) missed Wall Street's earnings estimates when it reported results on Thursday night. Currently shares of MXIM are stuck in a trading range between $29.00 and $27.50. At the moment the technical picture is pretty muddy. We would wait for a new decline under $27.50 before considering new put positions. Please note we're adjusting our stop loss to $29.05. Our target is the $24.00 level.

Suggested Options
Wait for a new decline under $27.50 before considering positions. We'd suggest the November puts.

Picked on September 25 at $ 27.90
Change since picked: + 0.38
Earnings Date 11/03/06 (unconfirmed)
Average Daily Volume = 5.4 million

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FreightCar Amer. - RAIL - cls: 51.58 chg: -0.52 stop: 54.55*new*

Shares of RAIL continue to sink and the stock lost another 0.99% on Friday. RAIL is quickly approaching our first target in the $50.25-50.00 range. We're not suggesting new positions at this time. We're suggesting two targets because RAIL appears to have some support near $50.00. 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. The P&F chart points to a $42 target. FYI: Please note we're adjusting the stop loss to $54.55.

Suggested Options
We're not suggesting new plays in RAIL at this time.

Picked on September 21 at $ 54.50
Change since picked: - 2.92
Earnings Date 10/26/06 (confirmed)
Average Daily Volume = 353 thousand
 

Strangle Updates

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

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Boston Properties - BXP - close: 104.23 chg: -1.23 stop: n/a

After a positive week with a bullish bounce from support near $102 and the bottom of its rising channel traders decided to take some profits on Friday. The stock lost 1.1% on above average volume. The overall bullish trend is still intact but momentum could be struggling here. We're not suggesting new strangle positions at this time. The play was labeled as aggressive and higher risk due to our short three-week time frame. We need to exit before October options expire on October 21st. Our suggested options were the October $105 call (BXP-JA) and the October $100 put (BXP-VT). Our estimated cost is about $1.90. We're suggesting an exit if either option rises to $3.80 or higher.

Suggested Options
We're not suggesting new strangle positions in BXP at this time.

Picked on October 01 at $103.34
Change since picked: + 0.89
Earnings Date 10/24/06 (confirmed)
Average Daily Volume = 694 thousand

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Google - GOOG - close: 420.50 chg: + 8.69 stop: n/a

The rally in GOOG continued into Friday. Bulls bought the dip near $410 and shares hit a new two-month high close to $422 on Friday afternoon. There has been plenty of talk and speculation lately that GOOG is in talks to buy YouTube.com. It would appear from the rise in GOOG's shares that investors are not concerned with the estimated $1.6 billion price tag that GOOG may end up paying. We're not suggesting new strangle plays at this time. The options in our strangle strategy are the November $440 call (GOP-KH) and the November $360 put (GGD-WL). Our estimated cost for this position is about $13.00. Our suggested exit is at $24.00 or higher.

Suggested Options
We're not suggesting new strangle positions in GOOG at this time.

Picked on October 01 at $401.90
Change since picked: +18.60
Earnings Date 10/19/06 (unconfirmed)
Average Daily Volume = 5.6 million

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Legg Mason - LM - close: 101.25 change: -2.50 stop: n/a

Ouch! LM suffered some sharp profit taking on Friday. The stock under performed the broader market and its peers with a 2.4% decline that erased Thursday's gains. LM looks poised to trade back towards the $100 level. We would use a dip into the $100.50-99.50 region as a new entry point to open strangle positions. The options in our strangle strategy are the November $105 calls (LM-KA) and the November $95.00 put (LM-WS). Our estimated cost is $5.15. We're suggesting an exit if either options rises to $7.25.

Suggested Options
If LM dips back toward $100 we would consider new strangle positions.

Picked on October 03 at $ 99.72
Change since picked: + 1.53
Earnings Date 10/24/06 (unconfirmed)
Average Daily Volume = 1.4 million
 

Dropped Calls

None
 

Dropped Puts

Chipotle - CMG - close: 51.59 change: +1.47 stop: 52.61

We are giving up on CMG as a put candidate. The stock saw a lot of shares traded on Friday with volume coming in almost 15 times the daily average. Most of the volume flooded in during the morning dip in CMG but shares turned around and produced a strong afternoon rally to close up almost 3%. The big churn in shares was due to the McDonalds (MCD) exchange offer that expired on Thursday night. There is still a chance that CMG will reverse under resistance near $52 and its exponential 200-dma but given the market's bullish environment we're suggesting an early exit to cut our losses now.

Picked on September 28 at $ 49.45
Change since picked: + 2.14
Earnings Date 10/30/06 (unconfirmed)
Average Daily Volume = 459 thousand
 

Dropped Strangles

None
 


Trader's Corner

Heisenberg's Uncertainty Principle for Market Commentators

"He doesn't really trade, you know," someone writes, referring to another writer on the site. I can almost hear the hushed voice behind the written words, the slightly gleeful edge to that voice. I've received similar comments before, with only the subject of those speculations changing from time to time.

I don't engage in such speculation, and there's a reason that goes beyond my loyalty to coworkers and the site. I don't care if a commentator is trading or not as long as that commentator's advice gives me a new perspective on the markets or helps me be a better trader.

For the record, as I'm roughing out this article late in September, I, as the trading spouse in my marriage, have open in the portfolio I share with my husband more than 130 contracts of bear call spreads and more than 40 contracts of bull put spreads, as well about 450 shares of stock. The end-of-quarter rally allowed me to close out some of my October bull put spreads well ahead of October's option expiration for a minimal amount and I have yet, as of late September, to enter any bull put spreads for November, accounting for the discrepancy in the numbers of the bull put and bear call spreads. There aren't a lot of full condors there. Still, that number of trades and contracts qualifies me as a trading writer. It should allow me to speak with some validity about this issue to those subscribers who believe a financial writer must trade.

That concern about who actively trades and who doesn't isn't limited to subscribers to this website. Blogs caution that traders need to know who is trading and who is not "putting his money where his mouth is." The implication, of course, is that the financial writer suspected of not trading is somehow less skilled than other writers, his or her comments less useful, and that the commentator is perhaps not quite honest or straightforward. But is that true?

I don't think it's always necessary for a financial writer to be trading, or, to reword that statement a bit, for a writer to be always trading. In fact, I propose that, particularly for those writers who deal with directional trades, there ought to be some periods when they're not trading and advising readers not to do so, either. As I'm writing, markets have been driven up during quarter-end window-dressing activities and, for several days, have been sitting near their highs, with breadth and technical indicators looking wacky. That's not a good environment for trading, and many of the writers on the live portion of the site have been commenting on that environment and perhaps restraining themselves from trading too heavily in their personal accounts, too. That's a sound practice, in my opinion.

Those who have emailed me about some other non-trading financial writer aren't talking about a few days of not trading, however, but about a more prolonged period. Let's consider whether an extended period of not trading makes a writer less reliable a market guide. My take on the situation might be a little different than those you've heard up until now.

I understand the arguments. Our readers tend to like their commentators right in the trenches with them, trying to get that same fill they're trying to get. When Mike Parnos of Couch Potato fame suggests a condor or a spread and a potential price target for those plays, readers know that he's likely trying it himself and has a good idea what credit readers can get for those credit spreads. There's certainly something to be said for that kind of in-the-trenches-with-you advice. He and other writers like him know what works in the real trading world and what doesn't. I value his in-the-trenches-with-you advice, although I sometimes am not in exactly the same trades he is. I don't have to be to benefit from his advice and from a study of his reasoned approach.

Sometimes, too, it works well to see a writer's disappointment or anger or joy when markets move and a trade either doesn't work or works. We benefit from learning how that writer controls that emotion, decides to refrain from trading if conditions aren't right, or even musters the courage to try again after a failed play.

However, I want to pose another viewpoint. There's also something to be said for the objectivity that arises when a financial writer refrains from trading. Some websites prohibit their financial writers from trading anything they're mentioning in their commentary for this reason.

We all try not to get too invested in our trades, but especially for those trading directional trades, whom are we kidding? Of course emotions are involved. Some writers just control them better than others, but all want the markets to move in the direction that will result in winning trades. When we're in such a play, we pray, literally sometimes, that markets won't move in such a way as to produce losses.

So, a problem sometimes arises. We can, no matter how much we strive not to do so, hope--that dirty four-letter word in trading--so hard that we make ourselves believe that markets are due to turn around and go the direction we want any moment. Most financial writers who are also trading control those emotions enough that they can study the markets with relative objectivity. They wouldn't have survived in this business if they couldn't do so. However, hope is hard to completely eliminate, particularly when every technical and breadth indicator tells us that the markets should go one way and they're stubbornly refusing to head that direction.

Did you catch the anthropomorphism in that last paragraph, the investing of market behavior with a mind, a willfulness, an ability to be stubborn? That's the kind of thinking that sometimes catches all of us when we're actively trading, even financial writers who are practiced at turning a supposedly objective gaze on those charts. I deliberately employed that anthropomorphism to make a point, but that kind of thinking creeps up on every trader, no matter how trained in objectivity.

Several conditions converged a couple of years ago that kept me from trading for many months. A granddaughter's health limited my time and my composure. It forced me to choose my personal trading or my work because I had neither the time nor the emotional energy to do both. About the same time, an outside event made that choice easier. A new disclaimer was temporarily added to the site. My interpretation of the disclaimer was stricter than the intention behind it, certainly, but I felt prohibited from trading. I decided to honor my stricter interpretation rather than the one most others felt more reasonable. I stopped trading until the disclaimer changed again, by which time my family situation had changed, too.

Consider my reasons for not trading during that period: personal and ethical. Do you really want advice from a commentator who does not know when to back off from trading, and keeps trying no matter what the conditions that might impact concentration, or one who does not honor her ethical convictions? Was recognizing my time constraints and ethical concerns a sign that I was less skilled a commentator than I had been earlier or would be again, whatever level of skill you consider that I have? I don't think so, and I don't believe it of other commentators who might refrain from trading for other, outside reasons.

During my several-month hiatus from trading, I continued commenting on what I saw developing each day, and I made some valuable discoveries. At that time, I was still writing for the live Market Monitor in addition to writing articles. Soon, I discovered something I had suspected but never until then tested. When my own emotions were removed and I had nothing at stake other than my desire to provide as sound a commentary as I was capable of providing, my observations were based purely on what I saw developing on the charts. I didn't hope the markets went any direction at all, and I could calmly assess what I saw developing. I didn't care where the markets went, other than that I knew shorts would be hurt if markets went one direction and bulls, if they went another, and I do care about our readers.

If markets weren't behaving according to the predictions of technical analysis, I wasn't tempted to keep suggesting that they should soon do so. I more quickly recognized that something wasn't working right and advised subscribers accordingly. If prices were bouncing up or down from some key moving average, I could see that action with clear eyes. I wasn't focused on my hope that the move was so extended that it would end soon, something I perhaps needed to happen since I had jumped in too soon with a new position. My view wasn't clouded by my own emotions or my own trades.

Of course, eventually I lost some of that well-honed feel for how much traders could shave off the bid/ask spread on an OEX option when they were entering a play. I didn't have as good a sense of how inflated the options would be at what time during amateur hour and when exactly they might calm down again. Those and similar concerns comprise the admitted problems with a non-trading financial writer.

Back when I was studying physics in high school and college, we learned about Heisenberg's Uncertainty Principle. In simple words for those who don't remember it, scientists can study the position or the mass of a subatomic particle, but not both at the same time. The act of measuring the mass impacts the positioning of that particle, for example.

I think of the trading or non-trading status of financial writers in a similar way. Those writers can have current and up-to-date experience with the nitty-gritty details of trading or complete objectivity, but perhaps not both at the same time. Mike Parnos comes the closest I've seen to having both, since his style of trading allows more objectivity and less emotion. Jane Fox does a good job of unemotional commentary, too. I'm impressed by both in particular when considering objectivity, and by all the writers as a group when considering their skills and the care they devote to their commentary.

Here's something to consider. When a site has many writers, with some actively trading and some perhaps not at any one time, you might get both perspectives. Heisenberg's Uncertainty Principle applies only when you're trying to measure the position and mass of the same particle at the same time: you could accurately measure the position of one and the mass of another. You, as readers can benefit from the objectivity of one commentator and the currently-in-the-trenches experience of another.

I have no data on who is actively trading or who is not on our site. I haven't asked. I don't care. If I'm reading commentary that helps me align my own trades or points me to research to consider, which I am reading, why should I care?

The next time you're mulling over what you value in a financial writer's commentary, consider that there might be room for both types of commentators: those who trade and those who don't. Do you want in-the-trenches experience or objective commentary, or can you perhaps benefit from both on a site that features a number of writers? Think about it.
 

Today's Newsletter Notes: Market Wrap by Jim Brown, Trader's Corner by Linda Piazza, and all other plays and content by the Option Investor staff.

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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