Option Investor

Daily Newsletter, Monday, 01/29/2007

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Table of Contents

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

Market Wrap

"Bird" was the Word

Outside of the small cap Russell 2000 Index (RUT.X), which finished up 5 points, or 0.69%, gains and losses for the major market averages were "poultry" as traders and investors digested a plethora of earnings reports and contemplated this week's FOMC decision on interest rates.

New highs and new lows at both major exchanges appear to be steady with buyers somewhat hesitant to push stocks to notable new highs, while sellers are equally hesitant to dump too many losers to new lows.

At today's close, NASDAQ's 5-day NH/NL ratio reverses back up into a column of "X" and has both shorter-term (5-day) and intermediate-term (10-day) leadership swings to the bullish side.

In my opinion, Yahoo! Inc. (NASDAQ:YHOO) $27.87 -0.60% and eBay (NASDAQ:EBAY) $32.00 +1.10% earnings announcements seem to have coincided, or "hatched" some renewed bullish enthusiasm among 5 and 5-lettered stock symbols since last Monday's Market Wrap.

Equities were broadly higher at the mid-point of today's session, but some selling was witnessed as the longer-dated 30-year Treasury Yield ($TYX.X) stuck its head above the 5.00% yield mark for the first time in 5-months. August 17, 2006 to be exact.

With the Fed currently targeting 5.25% for Fed Funds, and broader consensus looking for the FOMC to hold its target at 5.25%, this afternoon's momentary trade above 5.00% (session high 5.004%) in the 30-year yield did bring some goose bumps to equity bulls, with the broader S&P 500 Index (SPX.X) shedding 8 points in just over an hour's time.

News of an outbreak of bird flu in southern Russia found little response here in the U.S. News reports said the virus, which killed birds at three farms, or households in the Krasnodar territory, involved the H5N1 strain that scientists are watching for fear it could mutate into a more deadly form.

Russia recorded its first cases of bird flu in Siberia in 2005, and outbreaks have since occurred further west. It was noted that no human cases of bird flu have been reported in Russia.

In late 2005, shares of BioCryst Pharmaceuticals (NASDAQ:BCRX) $10.14 +0.69% would jump on news of bird flu, but intra-day checks found the stock perched near the $10.00 level.

Meat producer Tyson Foods (NYSE:TSN) $17.28 +3.53% fluttered to a 52-week high just after the open, trading as high as $17.94. The company said its Q1 earnings rose 46%, boosted by higher profits in its chicken, pork and prepared foods units, and cost-cutting efforts that lowered expenses. The Springdale, Ark., meat processor reported first-quarter earnings of $57 million, or 16 cents a share, up from $39 million, or 11 cents a share, a year earlier. The company said sales for the quarter ended Dec. 30 rose 1.6% to $6.56 billion from $6.45 billion a year ago. Analysts expected, on average, earnings of 6 cents a share on revenue of $6.38 billion. In addition, Tyson affirmed its earlier earnings outlook for its 2007 fiscal year, saying it expects earnings of 50 cents to 80 cents a share. The company also said it expects its second quarter to be profitable, but higher grain/feed costs have weighed on results. Tyson executives did warn that the diversion of corn from animal feed into fuel production could result in consumers paying "significantly" more for food at supermarkets and restaurants.


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Mini-sized March Corn futures (yc07h) at the CBOT settled down 5.4 cents at $4.00/bushel. Earlier this month, the contract traded limit up after the U.S. Department of Agriculture's final 2006 corn production and stockpiles report came in tighter than forecast.

There are so many news items that cross the wires each day, it is difficult to mention them all, but several dynamics regarding energy prices and biofuels continue to play out in the grain-related markets.

Dow Jones Newswire noted that fertilizer stocks were on the rise again today, continuing strong gains amid renewed interest in biofuels, particularly corn-based ethanol.

Shares of Mosaic (NYSE:MOS) $20.81 +4.31% gained 86 cents by the close after surging to $21.98 at the open on heavy volume of 4.57 million shares. Other "fertilizer" names found CF Industry Holdings (NYSE:CFI) $31.38 +9.68%, Potash Corp. (NYSE:POT) $154.71 +4.67%, Terra Industries (NYSE:TRA) $14.47 +5.23% and Agrium (NYSE:AGU) $33.94 +2.07%. CF Industry's Charles Nekvasil said the company has been benefiting from the ethanol craze, as it has a 30% market share in the U.S. corn belt.

Shares of farming equipment maker Deere (NYSE:DE) $98.54 +0.25% hold near their recent 52-week high. Last fall it didn't "make sense" as to why the stock surged from the $70.00 level. After a profitable put position was closed out on 08/15/06 below $70.00, I thought Market Monitor traders should go back for seconds about one-week later as the stock rebounded to $72.00.

I think "the MARKET" figured things out sometime ago.

Additional "bird-related" news showed up in merger/acquisition headlines this Monday.

Dow component Citigroup (NYSE:C) $54.06 -1.11% slid 61 cents after the financial services giant said it was buying Prudential's Egg Online Bank for $1.3 billion in cash.

Egg was founded in 1998, and is reportedly the world's largest online bank with over 3 million customers. Its products and services including online bill paying, credit cards, personal loans, savings accounts, mortgages and insurance.

Prudential said the sale will enhance its earnings per share this year and the proceeds will be used to reduce net debt. Prudential's (NYSE:PRU) $88.16 +0.23% shares rose 21 cents.

Reducing "net debt." There's another theme I've been seeing in recent months.

In today's Market Monitor I made a note that Town Sports (NASDAQ:CLUB) $20.01 -0.34% announced a cash tender offer for its 9.58% senior notes due in 2011.

Each day it seems, many companies that don't have a wide following have been retiring debt.

While I do not know what rating CLUB's 9.58% notes carried from ratings services like Standard & Poors, or Moody's, I've been racking my brain as to why the "junk bond" Pacholder High Yield Fund (NYSE:PFH) $10.12 +0.49% (pays $0.075/share per month) has been trading so strong, despite the upward move in Treasury yields the past couple of weeks.

I have to at least think that balance sheets are really looking strong and companies continue to pay off "higher yielding debt" they have issued in year's past.

Perhaps this is just another "golden egg," now hatched from the recent economic expansion.

U.S. Market Watch - 01/29/07 Close

You see, as recently as late December, when the Pacholder High Yield (NYSE:PHF) $10.12 +0.49% was trading $9.75, I thought "junk bond" bulls should be looking for some higher YIELD and lower PRICE from PHF (its my "junk bond" security in the above U.S. Market Watch), as its then SEC Yield was just over 9% ($9.75 / $0.90 per year dividend; $0.075/month), but as noted, PHF's net asset value (price of basket of junk bonds fund manager held) was also rising.

A light bulb goes on tonight that even as Treasury bond YIELDS are on the rise, a "safer bond asset class" when compared to "junk bonds," is that higher yielding debt retirement headlines, like that of CLUB, has higher yielding debt probably becoming more scarce.

What happens to PRICES when DEMAND exceeds SUPPLY? Yes! PRICES must RISE.

My only "explanation" as to why "junk bond" prices as depicted by the PHF are rising, is that higher yielding debt, or riskier debt, is becoming somewhat scarce.

In the last 20 sessions, the benchmark 10-year Treasury Yield ($TNX.X) has RISEN 23.8 basis points to 4.892% at tonight's close. One would think that "junk bonds" PRICES should fall, in order for their YIELDs to RISE, but that has NOT been the case, as PHF's price has RISEN 3.79% the last 20 sessions.

When reviewing today's U.S. Market Watch, I should not that the AMEX Securities Broker/Dealer Index (XBD.X) 248.55 -1.16% traded weak.

Merrill Lynch (NYSE:MER) $92.39 -2.26% provided the drag after the broker said it agreed to buy private-banking and wealth-management firm First Republic (NYSE:FRC) $53.63 +40.02% for $1.8 billion. The $55 cash-and-stock deal is seen as a move by Merrill Lynch to bolster its retail-brokerage business.

Airlines as depicted by the AMEX Airline Index (XAL.X) 60.38 +2.13% were today's sector winner.

March Crude Oil futures (cl07h) settled down $1.41, or -2.54% at $54.01, and that may have helped stabilize the XAL.X in the form of near-term short covering. The AMEX Airline Index (XAL.X) has fallen roughly 9.8% from its recent multi-year high of 66.92 on 01/16/07.

One headline I caught in today's Market Monitor at OptionInvestor.com was that the International Air Transport Association (IATA) forecasted that revenue growth in worldwide airline industry may slow by almost half in 2007 from 2006's 8% growth rate. The IATA said it is forecasting worldwide airline revenue to increase 4.5% in 2007. The industry group estimates that 2006 earnings were between $2 billion and $3 billion and sees 2007 profits rising to about $4 billion. The IATA noted that continued cost reductions and stricter management of available seats is key to industry profitability.

There were no major economic data releases scheduled for today, but some regional data from the Dallas Federal Reserve showed growth in January. The bank said that its production index rose to 13.8 from -5.2 in December and that its general activity index stood at 4.7 in January, up from a -8.8 measure in December. Readings above zero indicate positive activity, and the higher the number, the more broad-based the gains. Manufacturing in the Dallas Fed district represents a notable portion of total U.S. output and is concentrated in energy production and electronic goods.

NASDAQ-100 Trust (QQQQ) - Daily Intervals

While YHOO and EBAY are not "heavyweights" in the NASDAQ-100, jumps in both of the securities gave a lift above January's option expiration benchmark of $44.17. A PRICE level I think the QQQQ has to at least close below is $43.45 to signal sellers getting any type of control over sellers.

At tonight's close, Dorsey/Wright and Associates' NASDAQ-100 Bullish % (BPNDX) is still "bull confirmed" at 65%, but a reading of 64% would have this narrower major market bullish % reversing back lower to "bull correction" status. A 62% reading would be bearish and "bear confirmed."

I've been "dragging up" the QQQQ's 0% fibonacci retracement level to a Friday high, challenging sellers to get a close below 19.1% by more than a penny or two, to signal some type of conviction.

For me (Jeff Bailey), I tend to view stocks like YHOO and EBAY as stocks that tend to trade bullish when market participants get aggressive with their buying. I do think that EBAY's recent quarter(s) earnings and supply/demand chart signal the stock has made a bottom and the tide is turning bullish for the name. I think the jury is still out on YHOO and have no opinion.

NASDAQ Composite (COMPX) - Daily Intervals

The very broad NASDAQ Composite (COMPX), which is comprised of just more than 3,000 stocks looks very similar to the narrower NASDAQ-100, which holds the NASDAQ's LARGE Cap names.

Using the SAME EXACT tie points as shown in the QQQQ, it is rather obvious how the narrow and broad NASDAQ market measures move with each other.

One "internal" measure of market breadth I've been following and commenting on here has been StockCharts.com's NASDAQ Summation Index ($NASI). Tonight's closing measure is -76.11, which is little changed from last Monday's -84.61 reading.

S&P 500 Index (SPX.X) - Daily Intervals

It has been my experience that "weakness" in a weaker market index tends to lead to "weakness" in another. That is why I've been keeping a rather close eye on the COMPX and QQQQ/NDX. On 12/22/06 I turned "neutral" from "bullish" on the SPX.X at 1,410.

The PRICE strength of both in recent weeks should keep traders and investors honest.

The "bearish divergence" from MACD on the SPX.X shouldn't be ignored, and if anything, should be used as a reason to be OFF LONG MARGIN and having raised some cash since 12/22/06.

For the SPX's Point and Figure chart (10-point box), it would currently take a trade at 1,410.00 for it to reverse 3-boxes.

Here's a link to StockCharts.com's $SPX
where since giving a "buy signal" at 1,290, the SPX has NOT given back 30-points.

I should say that it IS a coincidence that my "neutral" call on the SPX at 1,410 would mark a 3-box reversal on the SPX's Point and Figure (supply=0 / demand=X) chart, but that was also a read on several of the market internal measures I've been commenting on in recent weeks.

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.


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