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Daily Newsletter, Tuesday, 01/16/2007

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Table of Contents

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

Market Wrap

Waiting For Earnings

The markets treaded water today as they digested earnings from a few early reporters and waited for the majors to confess. Intel was the cloud over the market with techs trading lower on several warnings ahead of the Intel report. The AMD warning should have been good for Intel but investors were taking no chances and some were taking profits into the close.

Dow Chart - 180 min

Nasdaq Chart - Daily

The morning started off weaker after the New York Manufacturing Survey fell to its lowest level since May 2005. The headline number fell to 9.1 and well below the consensus estimates of 20 and last months reading of 22.2. All the components positive for the economy declined while those negative for the economy rose. Shipments fell to 16.1 from 27.6, employment fell to 6.9, New Orders dropped to 10.3 from 22.5. Back orders rose slightly but remained negative at -8.5 while inventories plunged to -19.1 from -7.9. The components negative to the economy are prices paid and prices received. Prices paid jumped to 35.1 from 28.1 and prices received jumped to 19.1 from 13.5. This suggests inflation pressures remain despite the sudden weakness in manufacturing. The average workweek fell to -1.1 from 7.9. I view this report as a long term market positive since it still portrays a slow growth rebound for the Fed and the fall in oil prices will eventually filter through the system in the form of lower prices paid. The NY report has been stronger than the rest of the surveys for over a year and it was time for a pause that would bring it back into the same growth ranges as the rest of the country.

Tomorrow's reports include Mortgage Applications, Producer Price Index, Industrial Production, NAHB Housing Market Index and the Fed Beige Book. The PPI and the Beige Book will be the key reports.

After the bell Intel reported earnings that beat the street by a penny and raised guidance for Q1 very slightly. The 26 cents in earnings was a drop of -39% from the same quarter in 2005. The drop was due to the price war currently underway with AMD and continued expenses from their current restructuring effort. The weak spot in their report was a drop in gross margins to 49.6% compared to estimates in the 51% range. Revenue of $9.7B was slightly over estimates of $9.46B. Intel raised guidance for Q1 to a range of $8.7B to $9.3B compared to analyst expectations for $8.7B to $8.9B. In classic sell the news fashion Intel was hammered after the announcement with a drop to $21.40 from its post close high at $22.99. Intel had seen a strong bounce in January from $20 and was due for a post earnings decline on profit taking. There was nothing earthshakingly positive in the report that would justify a strong move higher.

Wells Fargo was the posture child for a positive earnings report after jumping +2% after reporting earnings that rose +13%. This was the first major bank to report and was seen as a proxy for the major banks reporting just ahead. WFC said mortgage applications hit $90 billion for the quarter and refinance applications accounted for 40% of that number. The CEO was very positive in his outlook and said regardless of the weakness in the building sector consumers were still buying homes at a strong pace. US Bank also reported earnings that rose +4% and posted a minor gain.

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In the homebuilder sector we saw Centex and KB Homes announce massive losses from cancellation of options on land contracts. Centex reported option cancellations on 37,000 lots worth $150 million. KB Homes reported losses of $88 million for cancelled land deals. Across the entire sector the money lost on cancelled options is thought to be over $1 billion. Centex said this was the most challenging housing environment in the last 25 years. Most had thought we had put in a bottom in this sector but the new revelations suggest there is continued weakness ahead. Foreclosures are starting to rise in areas that were previously exempt from this problem.

Forest Labs posted what some called a blowout quarter with earnings of 78 cents and well over analyst's estimates of 66 cents. They also raised guidance to $2.79 to $2.84 per share. Analysts were expecting $2.70. Forest lost -71 cents on the news in another classic post earnings dip.

Symantec lost -13% after warning that earnings for the quarter and year would be under prior estimates. The company said weakness in its data center management business was to blame. Cisco lost nearly a buck after Prudential and Bank of America both cut the company to a neutral rating.

The earnings cycle is young but the statisticians are already busy computing the results. According to Thomson Financial 53% of those S&P companies already reported beat analyst's estimates. 25% reported inline and 22% missed. These averages are right inline with historical norms. Although Thomson Financial is only predicting earnings growth of +9.1% they openly admit there is the potential for another double-digit quarter with just a few earnings surprises. If this does not happen then the string of double-digit quarters will end at 13. Materials and financials are the leading sectors and energy and utilities have been the losers.

Oil prices continued to decline hitting $50.53 intraday with a rebound into the close at $51.21. The drop was attributed to comments out of Saudi Arabia that there was no need for an emergency meeting to discuss further cuts. Other countries including Venezuela, Nigeria and Iran are begging for another meeting and production cuts despite their complete lack of any cuts by themselves over the last 3 months. Do as I say not as I do appears to be the message of the day. With Saudi not agreeing to another meeting the outlook could be turning negative. The conspiracy theorists are alive and well and are suggesting the US may have inked a side deal with Saudi Arabia to keep pushing prices lower by not supporting further cuts. Saudi produces something in the range of 9 mbpd. The US could have agreed to contribute $1 billion per month in some form other than outright cash as compensation for their losses in the price of oil. The list of countries who would be hurt the worst by falling oil prices is led by Iran. A continued sharp drop in prices could pressure the Iranian support for insurgents in countries like Iraq, Syria and Lebanon. It could also increase unrest and pressure the government of Mahmoud Ahmadinejad. $1B a month is far cheaper than fighting a war with Iran and solidifies the relationship between Saudi and the US. If you remember Saudi was vocal about the first cut and a strong force behind the coming February cut. For them to make their statement today it would appear something has changed. That something could be a deal with the US. The US economy would also benefit substantially from falling oil prices making the cost of a deal negligible in real money terms. Stranger things have happened in the past so this "theory" may have its roots in some real events.

February Crude Oil Chart - 30 min

Hugo Chavez said on Monday that Venezuela was halting conversations with foreign companies about their operations in the Orinco Belt. Chavez had said they would be forced to agree to Venezuela taking a majority ownership in their operations. Now, after months of unproductive talks, Chavez said he would just nationalize them and take full control. This sent shivers through the oil majors because most of them have production facilities in the belt. The Venezuela markets plunged another -12% on the news. Chavez played host to Iran's Mahmoud Ahmadinejad over the weekend and to no ones surprise they both took the opportunity to verbally abuse the US.

The markets failed to capitalize on the positive earnings and the drop in oil prices. It appears investors are suffering from a lack of conviction even as the Dow set a new record high. Fund managers are becoming more vocal in their feelings about a correction ahead. The current S&P bull run has extended to 187 days without a -2% correction and the 4th longest streak since 1928. That is only a minor -2% dip. The streak is even longer at 532 days since we have seen a real correction of -10% or more. By any metric the markets are very overbought but that does not mean they can't go higher. It only means there is a growing percentage of managers who will be holding back until a correction appears.

Days since a 2% correction on the S&P

If you only looked at the Dow it would seem there is no shortage of buyers at the top. The Dow shook off its early weakness today and gained +26 points to close at another new record high. 18 of 30 Dow stocks posted gains led by IBM at +$1.48. That is a new 5-year high for IBM, which reports earnings on Thursday. Dow components Citigroup, JPM and GE also report later this week.

The Nasdaq trended lower most of the day on fears of Intel but the eventual loss of -5 points was minor. After the Intel report the Nasdaq futures have been down over -5 points indicating a potentially lower open tomorrow. Initial support is 2480 followed by a strong congestion band just over 2420.

The S&P ran in place most of the day with the initial gap open lasting only a couple minutes before retreating to support at 1430. Readers will recognize that as our long/short decision point from Sunday. That has become our line in the sand and the S&P walked it like a tightrope all day long. The S&P futures are down only fractionally tonight and that would appear to indicate the broader market sentiment is better than that for techs. I would continue to honor that 1430 level and remain long above it and short below it.

SPX Chart - Daily

Russell-2000 Chart - Daily

The real weakness today came from the small caps and that is troubling to market bulls. The Russell lost -2.78 or -0.35% and was the largest percentage loser among the major indexes. Russell futures are continuing to weaken overnight and this could be our leading indicator for tomorrow. We saw small cap strength on Thr/Fri that confirmed the move to new highs by the major averages ahead of the weekend but today's weakness may be signaling that support is about to fail. The Russell has strong resistance at 800 and it came within .70 of that resistance this morning before sinking to close just over 791. For that Russell that is a big move and it was not reflected in the big cap indexes. It could have been just profit taking from the +30 point move late last week and if so then Wednesday should see a rebound. Based on the overnight futures I am not counting on it but anything can change before morning. Like the fund managers fearing a correction ahead I would advise everyone to be only cautiously long over SPX 1430 and not risk all your speculative funds.
 


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

Chaparral Steel - CHAP - cls: 44.47 chg: -0.69 stop: 41.99

A weaker than expected manufacturing number during this morning's economic report may have prompted some profit taking in CHAP. The good news is that traders began to step in this afternoon and buy the dip near $44.00. We see the pull back as a new entry point to buy calls although more conservative traders might want to wait for a rally past $45.00 to confirm the bounce. Our target is the $49.00-50.00 range.

Picked on January 14 at $ 45.16
Change since picked: - 0.69
Earnings Date 03/20/07 (unconfirmed)
Average Daily Volume = 635 thousand

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iShares China Index - FXI - close: 107.39 chg: +1.99 stop: 99.49

We warned you that FXI was going to gap open every day. The Chinese-focused ETF opened at $107.45 following a strong couple of days in the Chinese markets. Readers can choose to look for a dip back near $105.00 or wait for a rally past the simple 10-dma (near $108.00). We do have a wide stop loss. More conservative traders may want to use a tighter stop. Our target is the $115.00-117.00 range.

Picked on January 14 at $105.40
Change since picked: + 1.99
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 1.3 million

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Lehman Brothers - LEH - cls: 82.53 change: -0.21 stop: 77.99

We need to issue a cautionary warning on the broker-dealers. This sector was a big leader last week. Today's (Tuesday) session saw the XBD index produce a failed rally under the 260 level. This looks like a short-term top and a prelude to some profit taking. Readers may want to step back and watch for a dip into the $80.00-81.00 region before considering new call positions on LEH. We have two targets. Our conservative target is the $84.85-85.00 range. Our aggressive target is the $89.00-90.00 range. LEH's Point & Figure chart shows a very bullish pattern called a bullish triangle breakout that points to a $111 target.

Picked on January 11 at $ 80.25
Change since picked: + 2.28
Earnings Date 03/15/07 (unconfirmed)
Average Daily Volume = 3.4 million


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China Life Ins. - LFC - close: 48.90 change: +2.04 stop: 43.95

The U.S. markets were closed on Monday but that didn't stop the Chinese stock market from surging higher. Shares of LFC gapped open higher on Tuesday in a reaction to stock strength back home. Readers can choose to buy the rally, wait for a dip back into the $46.00-47.00 region or watch for a breakout over its simple 10-dma near $50.00 as a new entry point. It really depends on your trading style. Remember, LFC is a more aggressive, higher-risk play and will tend to gap open every day. Our target is the $52.50-55.00 range.

Picked on January 14 at $ 46.86
Change since picked: + 2.04
Earnings Date 04/18/07 (unconfirmed)
Average Daily Volume = 1.7 million

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Lockheed Martin - LMT - cls: 97.00 change: +0.69 stop: 90.95

Shares of LMT continue to show relative strength by posting their fifth gain out of the last six sessions. LMT closed at another new high in spite of news out on Monday that the Navy has ordered the company to stop working on a $200 million ship project. LMT is nearing our target in the $99.00-100.00 range so we're not suggesting new positions. The stock has already hit our conservative target in the $94.85-95.00 range last week. More conservative traders may want to lock in a gain right now.

Picked on November 29 at $ 90.62
Change since picked: + 6.38
Earnings Date 01/23/07 (unconfirmed)
Average Daily Volume = 2.1 million

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Merrill Lynch - MER - close: 96.86 change: -0.16 stop: 93.99

MER suffered the same slow down that LEH did today. The XBD broker-dealer index appeared to produce a failed rally on Tuesday. We would caution traders to expect some profit taking. Normally, we'd suggest being ready to buy the dip but we have to exit soon. MER should find some support at $94.00, its 10-dma or the $95.00 level. Our target is the $99.50-100.00 range. We do not want to hold over the January 18th earnings report so we plan to exit on Wednesday the 17th at the closing bell if MER has not hit our target by then. We are not suggesting new positions in MER at this time. Please note that we're raising the stop loss to $93.99.

Picked on January 10 at $ 94.44
Change since picked: + 2.42
Earnings Date 01/18/07 (confirmed)
Average Daily Volume = 4.6 million

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Altria Group - MO - close: 89.29 change: +0.87 stop: 84.75

MO bounced for a 0.98% gain as traders stepped in to buy the dip near its rising 10-dma. We do not see any significant changes from our weekend comments. We're not suggesting new positions in MO at this time. More conservative traders might want to consider a tighter stop loss near $86. We are targeting a rally into the $92.50-95.00 range. The P&F chart currently points to a $114 target. We do not want to hold over the late January earnings report.

Picked on January 04 at $ 87.65
Change since picked: + 1.64
Earnings Date 01/31/07 (unconfirmed)
Average Daily Volume = 8.8 million

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Teleflex - TFX - close: 67.15 chg: +0.04 stop: 64.75

TFX did not make much progress on Tuesday. We expected more of a follow through after Friday's bullish breakout. We would still consider new call positions here but it might pay to wait and look for a dip back toward the $66.00 region. More aggressive traders may want to put their stop under the 50-dma. Normally we would expect the $70.00 level to act as resistance but looking at TFX's history the stock seems to encounter resistance in the $72.00 region. Our target will be the $71.00-72.00 range.

Picked on January 14 at $ 67.11
Change since picked: + 0.04
Earnings Date 02/14/07 (unconfirmed)
Average Daily Volume = 202 thousand
 

Put Updates

eBay Inc. - EBAY - close: 30.04 change: +0.04 stop: 31.26

Thankfully shares of EBAY continue to under perform. The stock barely moved today and remains under technical resistance at its 200-dma. Even with EBAY's relative weakness we hesitate to suggest new put positions given our time frame and the market's strength. The company is due to report earnings on January 24th and we do not want to hold over the announcement. Please note that we're adjusting our stop loss to $31.26. Our target is the $26.00 level.

Picked on January 08 at $ 29.70
Change since picked: + 0.34
Earnings Date 01/24/07 (confirmed)
Average Daily Volume = 14.5 million
 

Strangle Updates

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

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Blue Nile - NILE - cls: 38.65 chg: -0.26 stop: n/a

We do not see any changes from our weekend update on NILE. Time is quickly running out. We're not suggesting new positions. We have adjusted our target to $1.20, which is half of our estimated cost. The options in our suggested strangle are the January $45 call (JWU-AI) and the January $35 put (JWU-MG).

Picked on October 29 at $ 38.92
Change since picked: - 0.27
Earnings Date 10/30/06 (confirmed)
Average Daily Volume = 226 thousand
 

Dropped Calls

None
 

Dropped Puts

Cummins Inc. - CMI - close: 118.72 change: +1.97 stop: 118.15

We have been stopped out of CMI at $118.15. We suspect that the strong rally in the transports, thanks to another sharp drop in oil and some upgrades in the sector, rubbed off on CMI pushing the stock higher. Today's rally has broken CMI's five-week trendline of lower highs (resistance).

Picked on January 10 at $114.50
Change since picked: + 4.22
Earnings Date 01/29/07 (confirmed)
Average Daily Volume = 1.0 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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