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Daily Newsletter, Tuesday, 05/08/2007

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Table of Contents

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

Market Wrap

Valiant Effort

The Dow rebounded +77 points off the opening low but still fell 3.9 points short of extending its record run. Monday's close tied a streak of positive days, 24 of the last 27, not seen since 1927. Tuesday's loss of -3.90 may have broken the streak but with the Dow rebounding to close only 4 points under a new high the rally is still intact. That rally has posted an average gain of only +30 points per day but it has been enough to stretch overbought to extreme levels. Today the Dow is +760 points over its 50-day average and +1200 points above its 200-day average. These are extreme levels but they don't necessarily mean a crash is near.

Dow Chart - 30 min

Nasdaq Chart - Daily

There were no material economic reports to rile the markets and the two we did have are seldom market movers. The Job Openings Labor Turnover Survey (JOLTS) showed that hiring and firing rates were unchanged from February levels at 3.4%. Construction lost a few more jobs but business and professional services offset that decline. The number of available jobs has increased by 4.4% over the last four quarters while the number of hires has declined by 1.9%. It appears there is a mismatch of skills needed and workers available. I mentioned a loss of jobs in construction and those jobs are normally blue-collar hourly workers. They are not likely to apply for professional office jobs where there are plenty of openings. The health services and education sectors both reported increased openings of 3.6% or better. The quit rate across all sectors continued to hold at 2.0% where it has been for the last year. This all points to a tight labor market and a stable economy.

March Wholesale Trade rose slightly by 0.3% but was less than the 0.4% expected. The most important component is sales and that rose from 1.0% to 1.8%. It had fallen to a -0.9% back in January. This suggests some firming but the inventory to sales ratio remains high at 1.14. The slight decline in wholesale inventories will cut -0.2% off the Q1 GDP taking it down to only 1.1% growth assuming there are no offsets from other GDP components.

The National Association of Realtors revised their estimates for existing home sales in 2007 to 6.3 million units, a drop of -2.9% from 2006. This is a reduction of 350,000 homes from their prior forecast.

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Texas Instruments is hosting a 2-day analyst event this week in New York and the SOX reacted by losing 2.7 points to close just over 501. Broadcom finished in the green after UBS issued bullish comments about the stock. According to the UBS analyst checks with both Cisco and Motorola indicated Broadcom was still the vendor of choice for their VOIP products. A Credit Suisse analyst called TXN one of the best long-term choices because of strong product cycles and high barriers to entry for competitors. TXN beat the street when they reported earnings for Q1.

Energy services company McDermott International (MDR) spiked +6.56 or +11% after reporting earnings of $1.38 that beat the street estimate of $1.27. Also powering the spike was news that they won a $250 million contract from American Electric Power to design and build a 600-megawatt coal-fired boiler and associated environmental control equipment.

Elsewhere in the energy sector ethanol maker VeraSun Energy (VSE) plunged -15% after reporting a loss of a penny when analysts were expecting a profit of 11 cents. The company blamed the loss on higher corn prices. Revenue was $144.5 million. Investors should get used to this kind of story. If it were not for Federal subsidies none of the ethanol makers would be posting much of a profit and most a sizeable loss. Corn ethanol is not the answer because it takes more energy to produce it than it produces when burned. It sounds like a good idea but instead it has caused prices to rise on nearly every food product from meat, bread and anything made with high fructose corn syrup, which is nearly everything but produce. There are 34 ethanol plants under construction in the US and the demand for corn is only going higher pushing food prices higher as well.

The transportation sector spiked +53 points after strong gains in Ryder (R) and CSX. Ryder Systems rose +2.5% after announcing a planned buyback of $200 million or about 6% of its outstanding shares. Railroader CSX gained after it announced a 25% increase in its dividend and an additional $1 billion buyback. This raises the current repurchase program to $3 billion by the end of 2008. This represents about 15% of outstanding CSX stock.

Dow Transports Chart - Daily

Tech stocks finished fractionally in the green after Hewlett-Packard (HPQ) raised its guidance for Q2 to 64-65 cents from 57-58 cents. HPQ was forced to rush the guidance update to the market after an "inadvertent disclosure" of financial information in an email to a "single outside party." That was a significant change in guidance and resulted in a +3% jump in the stock to $45. That is a six-year closing high.

Gateway (GTW) also reported earnings after the close and posted a loss of -2 cents and missed analyst estimates for a 2-cent profit. Revenue of $1.01B topped analyst estimates of $983M but investors were not excited. GTW fell slightly in after hours from its $2.08 close. Yawn.

After the close Cisco (CSCO) reported earnings of 34 cents that were +34% over the comparison quarter. Analysts had expected 33 cents. CEO John Chambers said demand showed no signs of slowing. That is different than saying demand is strong or demand is increasing. They guided analysts to revenue of $9.2-$9.3B for Q2 and analysts were already expecting $9.3B. Cisco fell over 5% in after hours on what many felt was weak guidance and the +50% rally in Cisco shares since last August.

Electronic Arts posted a larger then expected loss after the close and warned on 2008. ERTS posted a loss of -8 cents a share for Q1 but after items that rose to a profit of +6 cents. Analysts were expecting a profit of +2 cents. ERTS said full year results would now be in the range of .90 to $1.20 cents. Analysts were expecting $1.31. ERTS fell -$1.60 in after hours.

Disney (DIS) also reported earnings of 44 cents that beat the street estimates of 36 cents but revenue was weaker than expected. Shares fell -2% in after hours.

Oil prices recovered to close at $62.19 after Nigeria reported that production output would drop by -25% due to violence in the oil patch. The EIA also raised demand estimates for Q2 and Q3 by +20,000 bpd in the US and +100,000 bpd worldwide. These people are normally behind the curve and only embarrass themselves with their updates. For instance they also said gas prices would rise +18 cents this summer to $2.96 per gallon. This was on the same day that AAA said national prices were now $3.07 and expected to move higher. Prices on the West Coast are now in the $3.75 range with only the Midwest and Southeast still fractionally under $3.00.

As the markets set new records nearly every day it reminds us of the last time this happened back in March of 2000. There were forecasts of Nasdaq 10,000 and Dow 20,000. Instead a recession and a nasty bear market lay just over the horizon. With the major indexes hitting new highs and bullish runs like the Dow's 80 year positive day streak it is hard to convince anyone that the market could potentially crash.

If you factor in the record prices for gasoline and the economic impact of the subprime mortgage problem it becomes even more implausible that the market will just continue moving higher. Maybe that is exactly why it is moving higher. Bears continue to short it for all the obvious reasons but fund managers continue to reluctantly buy it to avoid missing out if it suddenly takes flight to loftier levels. One writer called the current small daily market gains in the indexes as "rational exuberance." Earnings are still decent despite the 13-quarter string of double-digit results. The economy refuses to sink and continues to grow. Commodity prices are rising pushing inflation into our daily lives but not at a pace that is fast enough to force Fed action. Market gains in the face of impending problems are not unknown. In six of the ten recessions since the 1940s the Dow continued to post gains even after the economy was clearly imploding.

S&P earnings for Q1 are now at 8.1% growth and more than double most estimates in the 3-4% range six weeks ago. Earnings for Q2 are now forecast at 11.5% with even higher levels for the remainder of 2007. Earnings are expected to grow by +11.5% or better for all of 2008. With earnings not expected to slow and global growth led by China, India and their neighbors literally exploding there is no reason to cry wolf and shift investments into bonds. Unfortunately the market rarely needs a reason to behave irrationally. The indexes may not be soaring like they did in 2000 but they have captured some serious gains. I showed a statistic earlier than the Dow is +720 points over its 50-day average and +1200 points over the 200-day average. This is an extreme swing in market terms. The last time the Dow had hit these extremes was January 2004 and while there was no crash we did wander lower for the next nine months as those gains were digested.

The Dow closed at the high for the day at 13314. This was -4 points below Monday's historic closing high. The dip was bought once again and a -77 point deficit was erased. We have only seen 5 dips since April 1st and all were bought very quickly. This is not necessarily a market to short but I am not sure it is one where I want to be 100% long.

The Nasdaq did manage to post a positive close but less than a point. This may have been a result of the HPQ earnings, the TXN analyst meeting and the impending Cisco/Gateway/Electronic Arts earnings after the close. Why enter new long positions ahead of those potential disasters? This makes Wednesday a challenge with all the after hours reporters trading lower overnight. Is this going to be another dip to buy or will the bulls finally decide to move to the sidelines to count their profits?

SS&P-500 Chart - Daily

The S&P-500 has established a strong line of resistance at 1510 that it has not been able to cross for three consecutive days. This is a temporary line in the sand with 1527 even stronger resistance if the S&P does manage to move higher. I would buy a breakout over 1510 but only for a short-term trade. I would look to short a touch of 1527 or a failure back under 1500.

To determine our direction I am still going to point you to the Russell-2000. 830 has been the decision point for several weeks and it closed at 830.62 today. That price magnet has seen action in 12 of the last 17 days and we are still stuck to 830 like glue. If you want to expand that range slightly to give yourself an easier go/no go signal I would look to be long over 835 and short under 827. That eliminates the constant indecision of multiple crosses of 830.

Russell-2000 Chart - Daily

Wednesday's trading will be held hostage to the FOMC meeting despite the lack of any material change in Fed posture. The economy continues to wander along the narrow path between growth and recession with only a +1.1% GDP but that has been enough to reduce inflation concerns as the Fed had hoped. At this point they are on cruise control and just waiting for a bend in the road to force them to make a change. According to the Fed Funds Futures there is no change in rates expected until late in Q4 if at all. Wednesday's meeting will be all smoke and no fire but at least it will give the TV commentators something to talk about. Remain focused on Russell 830 and don't get distracted by the sound bites.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
ATI None None

New Calls

Allegheny Tech - ATI - cls: 113.45 chg: +1.68 stop: 108.45

Company Description:
Allegheny Technologies Incorporated is one of the largest and most diversified specialty metals producers in the world with revenues of $5.3 billion during the most recent four quarters ending March 31, 2007. ATI has approximately 9,500 full-time employees world-wide who use innovative technologies to offer growing global markets a wide range of specialty metals solutions. (source: company press release or website)

Why We Like It:
Believe it or not but we almost added ATI as a call candidate last night. News or rumors of more consolidation in the metals sector lifted the whole group today. ATI is rebounding from a recent test of the $105 level and today's rally is a breakout over some moving averages. This looks like an entry point to buy calls and aim for the April highs. We're suggesting call positions with ATI above $110. It's up to you if you want to buy calls now or wait for a potential dip back towards the $111-110 zone. Our target will be the $119.00-120.00 range. FYI: The Point & Figure chart forecasts a $122 target.

Suggested Options:
We are suggesting the June calls. Please note that normally a June $110 call would have a -FB suffix and a June $120 call would have a -FD suffix. The CBOE is listing -FX and -FY respectively. Double-check your symbols with your broker.

BUY CALL JUN 110 ATI-FX open interest=1194 current ask $7.90
BUY CALL JUN 115 ATI-FC open interest=2110 current ask $5.20
BUY CALL JUN 120 ATI-FY open interest= 746 current ask $3.20

Picked on May 08 at $113.45
Change since picked: + 0.00
Earnings Date 07/25/07 (unconfirmed)
Average Daily Volume = 2.4 million
 

New Puts

None today.
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Apple Inc. - AAPL - cls: 105.06 chg: +1.14 stop: 99.85

AAPL continues to rally. The company got some positive analyst' comments and a new higher price target this morning. Volume came in above average on the gain, which is normally bullish. Plus, the close over potential round-number resistance at $105 is positive. Our target is the $108.00-110.00 range. FYI: The Point & Figure chart forecasts a $123 target.

Picked on May 07 at $102.55
Change since picked: + 2.51
Earnings Date 07/25/07 (unconfirmed)
Average Daily Volume = 23.9 million

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Abbott Labs - ABT - cls: 58.84 chg: -0.11 stop: 55.69

Drug stocks hit some profit taking this morning and both the DRG drug index and shares of ABT spiked lower at the opening bell. Fortunately, traders bought the dip in ABT near $58.25. We were suggesting that readers watch for a dip near $58.00 and that may be a close as it gets. The next hurdle is resistance is potential resistance in the $59.15-59.50 range (or just round-number resistance at $60.00). Our target is the $62.00-62.50 range. FYI: The P&F chart points to a $65 target.

Picked on May 06 at $ 58.30
Change since picked: + 0.54
Earnings Date 07/18/07 (unconfirmed)
Average Daily Volume = 7.1 million

---

Bear Stearns - BSC - cls: 153.39 chg: -2.46 stop: 154.75

BSC is taking a turn for the worse. Shares spiked lower at the open and the afternoon bounce looked pretty meager. The daily chart's MACD indicator has produced a new sell signal. We're currently on the sidelines waiting for a breakout over $160.00. Our suggested entry point to buy calls is at $160.25. More nimble traders may want to watch for a bounce near $152 and its 50-dma or 200-dma (in the $151.50 region) as a potential, and aggressive, entry point. A breakdown under $150 would be very bearish for BSC.

Picked on May xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/27/07 (unconfirmed)
Average Daily Volume = 2.7 million

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Ctrip.com - CTRP - cls: 72.35 chg: +1.25 stop: 67.45

Online travel site Expedia (EXPE) reported earnings this morning. The company missed estimates but revenues came in better than expected. The EXPE earnings news did garner one upgrade. While shares of EXPE traded lower shares of CTRP traded higher. CTRP actually produced a small spike at the open and closed with a 1.75% gain. More conservative traders may want to tighten their stops toward $69.50. Our short-term target is the stock's highs in the $74.50-75.00 range. The Point & Figure chart forecasts a $93 target. We do not want to hold over the May 16th earnings report.

Picked on April 29 at $ 70.63
Change since picked: + 1.72
Earnings Date 05/16/07 (confirmed)
Average Daily Volume = 389 thousand

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General Dynamics - GD - cls: 80.32 chg: -1.09 stop: 77.75

News that GD had won another $100 million order from the U.S. Army failed to fuel any buying momentum. The stock actually spiked lower at the open and then began to bounce after dipping under the 10-dma. Traders can choose to buy the bounce but we'd wait for a new rally past $81.00. We have two targets. Our conservative target will be the $84.75-85.00 range. Our aggressive target will be the $89.00-90.00 range. The P&F chart has produced a triple-top breakout buy signal with a $96 target.

Picked on April 29 at $ 80.27
Change since picked: + 0.05
Earnings Date 04/25/07 (confirmed)
Average Daily Volume = 1.4 million

---

Lehman Brothers - LEH - cls: 75.99 chg: -0.86 stop: 74.85

Broker-dealer stocks were weak this morning and LEH was no exception. Bulls did buy the dip twice near $75.15 and the afternoon rebound looks like a new entry point to buy calls. However, it's worth noting that the short-term momentum indicators are looking more bearish. More cautious traders may want to wait for a new rally past $77.50 or $78.00 before considering new positions. The P&F chart is bullish with a $100 target. We see potential resistance near $80 on the daily chart. Our target is the $84.00-85.00 range.

Picked on May 06 at $ 77.30
Change since picked: - 1.31
Earnings Date 07/18/07 (unconfirmed)
Average Daily Volume = 5.9 million

---

Marathon Oil - MRO - cls: 105.42 chg: +1.02 stop: 99.75

Our new play in MRO is now open. Crude oil finally bounced. This may just be an oversold bounce in crude oil futures but the move lifted energy stocks. Shares of MRO hit an intraday high of $105.61. Our suggested trigger to buy calls was at $105.55 so the play is open. We have two targets. Our conservative target is the $109.85-110.00 range. Our aggressive target will be the $114.00-115.00 range. FYI: The P&F chart points to $110 and MRO has a 2-for-1 split coming up on June 19th.

Picked on May 08 at $105.55
Change since picked: - 0.13
Earnings Date 07/31/07 (unconfirmed)
Average Daily Volume = 3.8 million

---

Research In Motion - RIMM - cls: 146.76 chg: +6.93 stop: 138.99*new*

RIMM was off to the races on Tuesday. Positive analysts' comments following yesterday's analyst day sent shares of RIMM to a 4.9% gain on big volume. Today's rally even made it past potential resistance at $145.70 near the top of its April gap. This is very bullish and we're raising the stop loss to $138.99. More conservative traders may want to consider taking a little money off the table right here. Our target is the $149.00-150.00 range.

Picked on May 07 at $140.25
Change since picked: + 6.51
Earnings Date 04/27/07 (unconfirmed)
Average Daily Volume = 6.1 million

---

WATSCO - WSO - cls: 56.24 change: +0.49 stop: 53.95

WSO continues to show relative strength. Shares posted another 0.8% gain. We would still consider new positions here. The P&F chart looks very positive with a bullish triangle breakout pattern and a $68 target. We're suggesting calls with WSO above $55. Our target is the $59.50-60.00 range.

Picked on May 06 at $ 55.73
Change since picked: + 0.51
Earnings Date 07/19/07 (unconfirmed)
Average Daily Volume = 382 thousand
 

Put Updates

AvalonBay - AVB - cls: 119.03 chg: -0.99 stop: 125.26

The bounce in AVB is already running out of gas. Shares lost 0.8% and closed back under the $120 level. We're not suggesting new positions at this time. Our target is the $112.50-110.00 range. The P&F chart points to a $110 target. More conservative traders might want to think about taking some money off the table here.

Picked on April 30 at $124.45
Change since picked: - 5.42
Earnings Date 04/26/07 (confirmed)
Average Daily Volume = 770 thousand

---

Equinix - EQIX - cls: 81.37 chg: -0.24 stop: 86.05

EQIX is still slipping. Shares are nearing potential support near $80.00. If the market's rally tomorrow on something the FOMC says then EQIX will likely bounce but we can watch for resistance at the simple 10-dma overhead. More conservative traders may want to wait for a breakdown under $80.00 before initiating positions. Our target is the $75.25-75.00 range. Aggressive traders may want to aim closer to $70 but be aware that the 200-dma might offer new technical support. FYI: The P&F chart points to a $70 target.

Picked on May 06 at $ 82.83
Change since picked: - 1.46
Earnings Date 04/26/07 (confirmed)
Average Daily Volume = 515 thousand

---

Essex Property - ESS - cls: 125.84 chg: -1.30 stop: 130.05

ESS displayed relative weakness on Tuesday. The stock lost over 1% and looks poised to breakdown under support near $125.00. We're almost tempted to buy puts now but we'll stick to the plan. Our hypothetical trigger to buy puts is at $124.65, which is under the March 2007 low. There is potential support near $120 but if triggered our target is the $115.50-115.00 range. FYI: The P&F chart points to a $100 target.

Picked on May xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 05/02/07 (confirmed)
Average Daily Volume = 281 million

---

Itron - ITRI - cls: 66.33 change: -0.12 stop: 70.01

Caution! ITRI displayed weakness today but the big bounce back is dangerous. ITRI broke down under support at the 50-dma and the $66 level and $65 level before suddenly seeing a big bounce back from its intraday low of $64.57. The candlestick pattern today actually looks like a bullish reversal so we would expect more of a bounce tomorrow. Watch for resistance near $68.00 or its 10-dma near $68.75. A failed rally under either level could be used as a new entry point for puts. Our target is the $60.50-60.00 range. More conservative traders may want to aim for the rising 100-dma (currently near 61.00) since the 100-dma could be support.

Picked on May 08 at $ 65.85
Change since picked: + 0.07
Earnings Date 05/02/07 (confirmed)
Average Daily Volume = 547 thousand

---

Las Vegas - LVS - cls: 79.13 change: -1.11 stop: 85.01

This looks like another entry point to buy puts on LVS. Rival WYNN reported earnings yesterday and investors sold the WYNN news today. Shares of LVS slipped 1.3% and broke down under round-number support at $80.00. Furthermore LVS' decline was fueled by strong volume, which is normally bearish. Our target is the $71.50-70.00 range. Currently the P&F chart sports a triple-bottom breakdown sell signal with a $75 target.

Picked on May 07 at $ 79.85
Change since picked: - 0.72
Earnings Date 05/02/07 (confirmed)
Average Daily Volume = 2.1 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.)

---

Lockheed Martin - LMT - cls: 98.22 change: +0.15 stop: n/a

The new trend in LMT looks bullish with Monday's breakout over the 50-dma but we're running out of time. May options expire after the 18th. We only have eight trading days left. We're not suggesting new strangle plays at this time. The suggested options we had listed were the May $100 calls (LMT-ET) and the May $90 puts (LMT-QR). Our estimated cost was $1.50. We want to sell if either option rises to $2.25 or more.

Picked on April 22 at $ 95.40
Change since picked: + 2.82
Earnings Date 04/24/07 (confirmed)
Average Daily Volume = 1.7 million
 

Dropped Calls

None
 

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.

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