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Daily Newsletter, Tuesday, 02/06/2007

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Table of Contents

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

Market Wrap

Consolidation Or Distribution

For four days the markets have moved sideways with neither the bulls nor the bears able to find traction. Some say this is consolidation after sprinting to new highs and some say this is a sign of distribution at those highs. Distribution occurs when institutions slowly unload positions after a strong market gain and transfer those holdings into the weaker hands of speculators who buy at the highs hoping for a continued rally. Both of those events could be occurring but most likely it was caution ahead of Cisco earnings due to the National Semi warning this morning.

Dow Chart - Daily

Nasdaq Chart - Daily

There were no major economic reports today with the Job Openings and Labor Turnover Survey (JOLTS) the only report to dissect. Gross hirings fell slightly to 4.9 million fro 5.0 million and those leaving their jobs declined to 4.5 million from 4.7 million. That was good news but the even better news came from the number of new job openings, which rose to 4.4 million from 4.3 million. More jobs opening and fewer people changing jobs should be good for the consumer since it implies employers will have to pay a more competitive salary to keep workers. The +3.5% increase rate in job openings was the highest rate since the economic recovery began back in 2002. This should be a bullish report since it underscores the recovery in the job market but it is also slightly inflationary.

Wednesday reports include the Mortgage Application Survey, Productivity and Costs, Consumer Credit and the Oil and Gas inventories. None of these reports are market movers.

We also had several Fed heads speaking today including Ben Bernanke. Bernanke made some bullish comments but did not really address the economy or Fed policy so his speech was ignored. Treasury Secretary Paulson testified before the House Ways and Means Committee and said the U.S. economy was declining from previously hot levels to a more sustainable pace. Sounds like he is about a year behind the times.

Most of the talk today was concern ahead of Cisco's earnings after the warning by National Semi. After the bell Cisco reported earnings of 33 cents compared to estimates of 31 cents and year ago earnings of 26 cents. Revenues were also slightly higher at $8.44B versus estimates of $8.28B. Cisco shares fell sharply after the release as investors were disappointed about the Scientific Atlanta numbers within the Cisco structure. That division posted revenue that was below what many analysts had hoped. Once the conference call began CSCO spiked nearly +$2 from the after hours lows to close just over $28.55. The spike was due to guidance John Chambers gave on the conference call. Chambers said sales for the current quarter would rise 19-20% compared to prior expectations of 17% growth. Cisco had rebounded nearly +60% since the August lows and there was plenty of optimism already priced in. It will be interesting to see if CSCO can pierce the strong resistance at $29 in trading on Wednesday.

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Business Objects (BOBJ) announced earnings of 60 cents compared to estimates of 56 cents. This was only a small +2% rise in profits. Their guidance for the current quarter was for higher sales than current estimates but earnings were projected to be 35-39 cents and the street was already looking for 39 cents. BOBJ rose about 50 cents in after hours. BOBJ has been rumored to be an acquisition target by Oracle.

National Semi declined -3% after warning that sales in the current quarter would decline more than previously anticipated. This put a cloud over the entire chip sector but the selling was muted. Rambus fell -1.20 the day after a sharp +4.50 gain Monday on a favorable royalty ruling by the FTC. The FTC issued an order capping royalties Rambus can charge on its older chip technology. While that sounds bad there was a chance they could have eliminated the royalties completely. Half a loaf is better than no loaf at all. The order allows Rambus to charge .25% to .50% for four of its older chip products for the next three years. After three years the royalties will stop. Rambus had been charging 1% to 2% for those same royalties. It was a mixed 3-2 decision and brought a lot of hostility from the panel. The FTC wanted to penalize Rambus even further for deceiving the Joint Electron Device Engineering Council (JEDEC) regarding its technology in the past. The JEDEC is responsible for standards in the chip industry. Rambus was lucky to get out with anything and one commissioner wrote in her dissenting opinion that without "zero royalty rates" Rambus "will continue to reap the fruits of its ongoing violation of antitrust laws." Two of the commissioners wanted to cap royalties on its more popular DDR2 memory.

About the only market finding a bid today was bonds. Even with the $18 billion refunding in three-year notes there were plenty of buyers in bonds. Tomorrow will see $10B in ten-year notes go to auction. Treasuries were bought so strongly that yields on the ten-year notes fell to 4.76% and a new two-week low. 4.75% should be a level where the enthusiasm ends.

Microsoft lost ground for the 4th consecutive day and a streak not seen since October. The slowing adoption of Vista and numerous reported problems is dragging on the profit prospects for the software giant. MSFT closed at $29.51 with strong support at $28.85.

AMD slid to $15.31 and a 21-month low on fears that it will be forced to cut prices even further to hold off the technology wave coming from Intel today. Intel may have been caught napping a couple years ago when AMD beat them to the punch on a couple key releases but Intel has come back with a roar and they are gaining speed. It could be years before AMD catches up, if ever. AMD was once regulated to be the second source for processors and maintained market share by selling so cheaply they enticed a few low dollar buyers away from Intel. They are rapidly falling back into that slot but the Intel lead today would require AMD to nearly give processors away to stay in business. This price crunch is what analysts fear and why they are downgrading AMD. At $15 AMD is a long way from its $42 high in January of 2006. That is a -63% loss in value in just 12 months and it could get a lot worse.

March Crude Oil Chart - 60 min

Oil prices continued their climb and tagged $60 at 9:AM this morning but that was the high of the day and we saw a steady decline into the close. The cold front gripping the northeast is continuing although the short term forecast for the next 11-15 days was for slightly warmer weather. We are rapidly coming to the end of winter and the impact of cold weather on prices is only temporary. The EIA also announced what we already knew that OPEC production cuts had fallen far short of their 1.2 mbpd target as of November 1st with shipments down only 600,000 bpd over the fourth quarter. Shipments in January fell another 110,000 bpd but Angola, a new OPEC member as of Jan-1st with no official quota, raised production +200,000 bpd. Iraqi production fell -250,000 on bad weather offsetting the Angola increase. The new round of cuts of 500,000 bpd slated to begin on Feb-1st are only expected to be 60% effective with a net reduction of -300,000 bpd coming mostly from Saudi Arabia. With winter winding down it will be up to OPEC to control their own fate. The oil inventories announced tomorrow are expected to see an increase in crude by +2.2 mb, gasoline +2.0 mb and a decline in distillates, which includes heating oil by -3.4 mb. This should already be priced into the market.

Interest in earnings is really slowing with Cisco about the only company in focus on Tuesday. There are plenty of companies still to report but few big names. 321 of the 500 S&P companies have reported. 65% beat estimates, 20% reported inline and 15% missed estimates. Earnings growth is still hovering in the +10.4% range and will qualify as another double-digit quarter if the numbers hold as the remaining 179 S&P-500 companies report. Earnings estimates for the rest of the year are 5% for Q1, 5% Q2, 5% Q3 and roughly 4% for Q4. Some analysts feel those numbers are too low by as much as 100% based on the recent economic signs. Let's hope they are right in their claims.

The Dow sprinted +125 points after the Fed announcement last Wednesday to hit 12665 and has done absolutely nothing since that sprint. Today's close was 12664. The Dow has been locked in a very tight 50-point range for the last four days between 12630-12680. Is it consolidation or distribution? It appears to be consolidation given the lopsided internals. New 52-week highs were 659 compared to only 83 new lows. However, volume was less decisive with 2.7B advancing and 2.4B declining. That is nearly a dead heat and suggests there is also some distribution under way as we hold at the highs. It is a tough call given the mixed messages but the bulls continue to buy every dip no matter how small.

The Nasdaq was the surprise of the day. After a sharp decline to 2454 at the open on the NSM warning the Nasdaq rebounded to end the day slightly positive at 2471 nearly +20 points higher. With Cisco reporting after the close you might have expected tech traders to be a little more cautious before buying the dip. This shows the underlying bullish sentiment and the problem the bulls are going to have if we ever do see a real correction.

SPX Chart - Daily

NYSE Composite Chart - Daily

The S&P tagged 1450 today and promptly sold off but recovered into the close. The SPX is not as bullish as the Wilshire-5000 and the Russell-2000. Both of those broad indexes finished right at their record highs from last week. The strength in those broader indexes is what is giving me a bullish bias for the market. The Russell appears poised to breakout over 810 to a new historic high from its 809.86 close today. The Wilshire is also pressing its historic high of 14659 with its close at 14644. Meanwhile the NYSE Composite did close at a new historic high at 9343.96. 9400 should be strong resistance for the NYSE Comp. The broader market looks very bullish but unfortunately the market is simply a bull that is led around by the Dow ring in its nose. Where the Dow goes the broader market goes except in very rare occasions.

Russell-2000 Chart - Daily

Wilshire-5000 Chart - Daily

For the rest of the week I would continue to remain long and buy the dips above SPX 1440. Below 1440 I would maintain a short bias with a dip buy target again at 1420. There is nothing material on the economic calendar and the markets will be looking for an excuse to move. The Cisco guidance may be that excuse but the futures are not showing any excitement in overnight trading. The various contracts are positive but only fractionally. Be careful and follow the recommendation above.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
JCP None None
NKE    

Play Editor's note: We are cautiously adding new bullish positions to the newsletter. Our opinion of the market has not changed from this weekend and we remain defensive.


New Calls

Play Editor's note: We are cautiously adding new bullish positions to the newsletter. Our opinion of the market has not changed from this weekend and we remain defensive.

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J.C.Penney - JCP - close: 84.70 chg: +1.29 stop: 81.99

Company Description:
J. C. Penney Corporation, Inc., the wholly owned operating subsidiary of J. C. Penney Company, Inc., is one of America's largest department store, catalog, and e-commerce retailers, employing approximately 151,000 associates. (source: company press release or website)

Why We Like It:
Retail stocks have continued to rally in spite of rising oil prices. The RLX retail index just closed at another new all-time high. Some of the retailers have been rising on positive expectations for strong January same-store sales figures. JCP has helped lead the charge and is also trading near all-time highs. If you study the chart you'll see the big rally in January fueled by some upgrades. The recent rally on February 1st was supposedly driven by news that JCP had signed a deal with Polo Ralph Lauren to market a new brand of clothing. Overall the trend is bullish given the breakout over its November and December highs. The P&F chart points to a $108 target. We are suggesting a trigger to buy calls at $85.51, which would be above the intraday high. If triggered our target is the $89.50-90.00 range. We do not want to hold over the February 22nd earnings.

Suggested Options:
We are suggesting the March calls. Our trigger is at $85.51. Double-check the March $90 call symbol with your broker. It should be -CR but the CBOE has it listed as -CB.

BUY CALL MAR 85.00 JCP-CQ open interest=1130 current ask $2.95
BUY CALL MAR 90.00 JCP-CB open interest= 552 current ask $1.05

Picked on February 06 at $ 84.70
Change since picked: + 0.00
Earnings Date 02/22/07 (confirmed)
Average Daily Volume = 2.3 million

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Nike - NKE - close: 101.17 change: +1.75 stop: 97.99

Company Description:
NIKE, Inc. based near Beaverton, Oregon, is the world's leading designer, marketer and distributor of authentic athletic footwear, apparel, equipment and accessories for a wide variety of sports and fitness activities. (source: company press release or website)

Why We Like It:
NKE produced a big run from its August lows but when the stock broke down in late January it didn't fall very far. Traders bought the dip near $95.00 and the rebound makes the previous breakdown look like a bear trap. Traders bought the dip (this week) again and now shares are trading near all-time highs. Fueling the strength in NKE has been some positive comments from management. NKE believes they will see +50% sales growth and hit sales of $23 billion in five years. We see the rebound back above $101 as a new entry point to buy calls. More aggressive traders may want to wait for a trade past $101.51 before initiating new positions just to make sure NKE can breakout past last week's high. Our target is the $107.50-110.00 range.

Suggested Options:
We are suggesting the March calls.

BUY CALL MAR 100 NKE-CT open interest=618 current ask $3.30
BUY CALL MAR 105 NKE-CA open interest=400 current ask $1.00

Picked on February 06 at $101.17
Change since picked: + 0.00
Earnings Date 03/21/07 (unconfirmed)
Average Daily Volume = 1.4 million
 

New Puts

None today.
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Burlington Nor.SantaFe - BNI - cls: 80.31 chg: -0.48 stop: 77.99

The railroads continued to slip lower on Tuesday thanks to a couple of downgrades in the group. BNI was not downgraded but shares dipped toward short-term technical support at its rising 10-dma. We would use a bounce from here as a new bullish entry point to buy calls. Our target is the $87.00-87.50 range. The Point & Figure chart points to $100 and BNI's inverse H&S pattern also suggests a $100 target.

Picked on February 1 at $ 82.01
Change since picked: - 1.70
Earnings Date 01/23/07 (confirmed)
Average Daily Volume = 2.4 million

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Bear Stearns - BSC - cls: 166.15 chg: +1.09 stop: 161.49

The broker-dealers didn't make much progress today but that didn't stop shares of BSC from bouncing higher. We are suggesting new call positions now but if a dip occurs then look for a bounce in the $162.50-163.00 region. More conservative traders may want to wait for a rally past $167.50 before initiating positions. We have two targets. Our first target is the $172.00 level. Our second target is the $174.75-175.00 range. We do not want to hold over the mid-March earnings report.

Picked on February 04 at $166.35
Change since picked: - 0.20
Earnings Date 03/15/07 (unconfirmed)
Average Daily Volume = 1.3 million

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Garmin - GRMN - close: 50.95 change: +0.04 stop: 48.79

The major market averages traded sideways on Tuesday and GRMN followed suit. The stock bounced between short-term support near $50.00 and overhead resistance near the 50-dma. We are suggesting new positions with the stock above $50.00. The company is expected to report earnings on the morning of Wednesday, February 14th. That means we need to exit the night before. More conservative traders may want to use a tighter stop loss (maybe 49.49). Our target is the $54.75-55.00 range. We have five trading days.

Picked on February 04 at $ 51.15
Change since picked: - 0.20
Earnings Date 02/14/07 (confirmed)
Average Daily Volume = 2.3 million

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OM Group - OMG - close: 50.41 change: +2.32 stop: 45.75

Today's bounce in OMG looks like a new bullish entry point. The stock has broken out above last week's highs and the $50.00 level. Driving the move appears to be news out today that the E.U. has approved a deal for Russian miner OAO Norilsk Nickel to buy OMG's nickel assets for $408 million (source: AP). We are aiming for the $54.00-55.00 range. We do not want to hold over the early March earnings.

Picked on January 25 at $ 48.05
Change since picked: + 2.36
Earnings Date 03/02/07 (unconfirmed)
Average Daily Volume = 770 thousand

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Research In Motion - RIMM - cls: 137.60 chg: +0.79 stop: 127.75*new*

Tech stocks were hardest hit today but traders eventually bought the dip and the NASDAQ managed to (barely) close in the green. Shares of RIMM dipped to $133.74 before traders bought the dip and pushed it back into the green. The positive earnings report from CSCO tonight could renew enthusiasm for tech stocks in general tomorrow. We are raising our stop loss to $127.75. Our target is the $140.00-142.50 range. FYI: The P&F chart is still bearish due to the January sell-off.

Picked on February 04 at $132.82
Change since picked: + 4.78
Earnings Date 03/22/07 (unconfirmed)
Average Daily Volume = 9.2 million

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RTI Int. - RTI - close: 83.97 change: +0.97 stop: 77.75 *new*

RTI is creeping higher. The stock rose 1.1% and closed at a new all-time high. Our only concern with the rally is the fading volume, which is a cautionary flag for the bulls. We're going to inch up our stop loss to $77.75. Broken resistance near $80 should be support. The P&F chart points to a $105 target. Our target is the $88.00-90.00 range.

Picked on January 31 at $ 81.75
Change since picked: + 2.22
Earnings Date 03/12/07 (unconfirmed)
Average Daily Volume = 737 thousand

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Ryland Group - RYL - close: 58.45 chg: +0.22 stop: 54.99

RYL is trying to bounce. We suggested that readers try and buy the dip near $57.50. Today's low was $57.62, which is close enough. The Point & Figure chart for RYL has produced a double-top breakout buy signal with a $70 target. We are aiming for the $64.00-65.00 range.

Picked on February 04 at $ 59.29
Change since picked: - 0.84
Earnings Date 04/25/07 (unconfirmed)
Average Daily Volume = 1.2 million

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Teleflex - TFX - close: 66.84 chg: -0.13 stop: 64.75

We still don't see any changes from our weekend comments on TFX.
Recently our concerns have been the lack of volume and today's volume came in pretty low. We suggested buying a bounce or a dip near $66.00 and today's intraday low was $66.34, which is probably close enough. Our target is the $71.00-72.00 range. The P&F chart points to an $81 target. We plan to exit ahead of the mid February earnings report. FYI: We cannot find a confirmed earnings date and it looks like TFX is due to report in the February 14th-27th range. More conservative traders may not want to open plays with a potential earnings announcement just seven trading days away.

Picked on January 14 at $ 67.11
Change since picked: - 0.27
Earnings Date 02/14/07 (unconfirmed)
Average Daily Volume = 202 thousand
 

Put Updates

F5 Networks - FFIV - close: 72.19 change: +0.21 stop: 76.25

Double-check your stop loss and make sure you're comfortable with how much risk you are taking. Tonight's earnings report from CSCO could have a big impact on FFIV. CSCO reported after the bell and beat estimates for both profits and revenues. CSCO was up strongly after hours and the bullish news is lifting shares of FFIV as well. Shares of FFIV were trading near $73.00 in after hours. FFIV should have short-term resistance near $75.00 and its simple 50-dma. More conservative traders may want to adjust their stop toward $75.00. We're not suggesting new positions at this time until we see how FFIV reacts tomorrow. Our target is the $66.00-65.00 range. Traders should be aware that the rising 100-dma near $67 might offer some support. FYI: The Point & Figure chart has produced a triple-bottom breakdown sell signal with a $63 target. Plus, the company recently announced an analyst meeting for February 7th in New York.

Picked on January 28 at $ 72.70
Change since picked: - 0.51
Earnings Date 01/24/07 (confirmed)
Average Daily Volume = 1.0 million

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Ventana Medical - VMSI - cls: 41.05 chg: +0.37 stop: 42.05

VMSI is still trying to bounce and the stock rose 0.9% on Tuesday. We are waiting for a breakdown under $40.0.00. Our suggested trigger to buy puts is at $39.75. More conservative traders may want to set their trigger lower to try and confirm the breakdown under $40.00. If we are triggered at $39.75 our target is the $35.50-36.00 range.

Picked on February xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 02/02/07 (confirmed)
Average Daily Volume = 351 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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Google - GOOG - cls: 471.48 change: +4.32 stop: n/a

Traders have a choice to make. It's been four days sine GOOG's earnings report. Normally GOOG tends to make its biggest post-earnings move in the three to four days after the announcement. Do we exit now or do we hang on? February options expire in less than two weeks so that's not much time. Any option not yet in the money will see the premiums diminish very rapidly. If GOOG tries to bounce then the put side of our strangle will wither away even faster. You can see the dilemma. GOOG has produced a bearish double top, a bearish breakdown, failed rally and sell signal. Yet we're running out of time and our options are still out of the money. We are choosing to stick it out and see if GOOG will continue to fall. However, after tonight's bullish earnings report from CSCO the tech sector is likely to bounce tomorrow. More conservative traders may want to cut their losses and exit early! We are not suggesting new positions. In our original play description we suggested two different potential strangle strategies. One involved the February $530 call (GOP-BW) and the February $470 put (GOP-NG). This strategy had an estimated cost of $17.40 and we want to exit if either option rises to $29.00 or more. The second strangle strategy involved the February $550 call (GOP-BY) and the February $450 put (GOP-NJ). This second strategy had an estimated cost of $8.70 and we want to sell if either option rises to $16.00 or more.

Picked on January 28 at $495.84
Change since picked: -24.36
Earnings Date 01/31/07 (confirmed)
Average Daily Volume = 5.2 million

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United Parcel Srv. - UPS - cls: 73.93 chg: +0.25 stop: n/a

UPS is still not moving and that is the worst thing that can happen for us and this strangle play. We are not suggesting new strangle positions at this time. February options expire in less than two weeks and considering UPS' failure to move on its earnings report more conservative traders may want to adjust their targets to break even. Our estimated cost was $1.65. We suggested the February $75 call (UPS-BO) and the February $70 put (UPS-NN).

Picked on January 28 at $ 72.49
Change since picked: + 1.44
Earnings Date 01/30/07 (confirmed)
Average Daily Volume = 2.9 million
 

Dropped Calls

Macerich - MAC - close: 100.96 change: +3.66 stop: 93.46

Target achieved and exceeded. REITs were strong today thanks in part to the Blackstone Group raising their all-cash offer to buy Equity Office Properties (EOP). The M&A news fanned the flames underneath MAC and the stock soared 3.7% and broke out past the $100 mark. Our target was the $98.00-100.00 range.

Picked on January 28 at $ 93.46
Change since picked: + 7.50
Earnings Date 02/13/07 (confirmed)
Average Daily Volume = 436 thousand
 

Dropped Puts

None
 

Dropped Strangles

None
 

Today's Newsletter Notes: Market Wrap by Jim Brown 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.

Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.

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