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Daily Newsletter, Tuesday, 05/15/2007

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Table of Contents

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

Market Wrap

That Was Fun

A tame CPI report suggesting the inflation monster might have been tamed sent the indexes sharply higher at the open. As the day progressed that opening spike failed to hold its momentum and with the exception of the Dow the major averages slipped back into the red. The TV reporters continued to plug the new closing high on the Dow while the Nasdaq and the Russell closed at a two-week low. There are 30 stocks in the Dow and more than 2,000 in the Russell. Which index would you trust for true market direction?

Dow Chart - Daily

Nasdaq Chart - Daily

The morning started off with a bang with the Consumer Price Index (CPI) rising only +0.4% and below estimates of +0.6%. This small gain in the headline number is consistent with slowing inflation and right inline with the Fed's expectations. Unfortunately the core rate rose +0.2% and right inline with an annual inflation rate of +2.4% at the core level. Energy prices rose +2.4% in April but actually slowed from their +5.9% growth in March. With the core number inline with estimates and the headline number below consensus it appears on the surface the inflation monster may have been tamed. Personally I believe it is too early to draw any conclusions but analysts immediately proclaimed an end to inflation and future rate cuts closer than previously thought. This produced a sharp opening spike in the markets but analysts were quick to pour cold water on any idea of a near term rate cut. It is clear from everything the Fed has said that they will not cut rates until there is a more dramatic change in the outlook or inflation pressures have clearly established a firm trend lower. This suggested early in the day the spike would fail and that outlook definitely came to pass.

The outlook on the economy brightened slightly with the NY Empire State Manufacturing Survey, which jumped significantly to 8.0 for the May reading. This was more than double the 3.8 posted in April and four times the 1.9 low posted in March. The gains were inline with estimates suggesting the bottom in NY has passed. Shipments jumped sharply to 14.1 from 8.7 and employment rose to 9.7 from 5.4. Prices paid fell to 34.4 from 40.5 while prices received rose to 15.6 from 7.1. That also suggests demand is returning and manufacturing profits are on the rebound. New orders rose to 8.0 from 3.9 and unfilled orders rose to zero from -8.3. All these components point to a moderate rebound in NY state manufacturing but it is far too soon to say there are only blue skies ahead.

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Optimism in the home sector fell -3 points to 30 in May according to the NAHB Housing Market Index. This equals the low in builder sentiment set last September. The index had risen to 39 in February and has declined in the following months. The buyer traffic component fell to 23 from its high of 29 in February but it has fallen back towards the cycle low of 22 also set in September. The builder community clearly thought conditions were improving as the year began but those hopes have been dashed by a slowing of buyer traffic. The subprime problem has removed quite a few buyers from the market place and raised further financing hurdles for prime and alt-a customers those still trying to buy a home. Builders have recently been moving their projections for a rebound into 2008 and they are continuing to release optioned land rather than follow through on purchases. When the rebound does come the builder community will be frantically trying to reacquire that land and we could see a strong bump in prices due to competition, lack of home inventories and the lag time needed to fill the channel with new construction. The drop in builder sentiment and buyer traffic may have a much stronger impact on future Fed rate cuts than anything else. The housing sector contributes a full point to GDP and is responsible for 25% of jobs losses over the last year. One problem for the Fed is the impact of higher rates on the current loan problem. Many loan originators have to buy back defaulted loans and resell them at a much higher discount rate and they are impacted even more by the 5.25% Fed rate. This entire cycle is producing even more caution, tighter lending standards and applying even more pressure to the housing market.

Foreclosures fell -1% in April from March levels but there were still 147,708 foreclosure filings. This is an increase of +62% from April 2006. Household Finance, now known as HSBC Finance Corp (HBC) posted lower Q1 profits and said it doubled its loan loss reserves for the quarter to $1.7 billion because of mortgage problems. As of year end HSBC had set aside $10.6 billion for bad debts. HSBC said it had tightened its loan underwriting criteria. For loans already on the books it was prepared to modify loans where it believes customers are capable of making payments. This scenario is being repeated dozens of times every month by different lenders as mortgage holders try to deal with a surge in skips, foreclosures and bankruptcies brought about by loose lending standards and the housing market bust.

On the stock front it was an ugly day for retailers. Wal-Mart (WMT) posted earnings that grew by +8% but those profits came from strength in international operations and Sam's Club warehouse sales. Wal-Mart's core business in the U.S. continued to drag results lower and WMT warned that slumping sales could drag Q2 results below expectations. It was a cleverly disguised profit warning from the largest U.S. retailer. As it always does after a disappointing quarter Wal-Mart said it would focus on "everyday low prices" to boost traffic and sales. Eventually this quarterly "new" focus will wear thin for analysts and investors both. International sales surged +19% helping to push those overall earnings up by +8%. International sales account for 23% of all Wal-Mart sales. U.S. same store sales fell -3.5% for the quarter with April sales the worst drop in three decades. In the recorded call Wal-Mart said three things were weighing on consumer minds. Job income and impact of inflation on budgets were two of the concerns. Wal-Mart said prices at the pump were the biggest factor affecting the purchasing decision of its core customers.

Home Depot posted a -29% drop in Q1 profits and blamed the drop on April's bad weather. HD said April sales were hit hard by weather problems leading to 66% of the drop in profits. However, they also warned that the rest of the year would be challenging. Now my question is this, "If Q1 results were weather related are they projecting bad weather for the rest of the year?" Am I the only one who sees a contradiction here? HD earned 53 cents for the quarter and analysts were expecting 59 cents. Same store sales declined -7.6% for the quarter.

TJX also reported earnings that missed street estimates and blamed it on the weather and a charge relating to a security breach of its computer system. Data involving 45.7 million credit cards was stolen from TJX computers over an 18 month period and more than 300 banks are planning a class action suit against TJX seeking tens of millions of dollars in damages. TJX said this could impact future earnings by 2-3 cents. TJX also guided analysts to the lower end of its prior range for the rest of the year.

Limited Brands (LTD) announced it was slashing its profit forecast by 50% for Q1 to 12-14 cents from 25-28 cents. LTD also said Q2 prospects would continue to be challenging. They also said they would be dumping 67% of its Express stores division to Golden Gate Capital for $548 million. The Limited is still looking for other strategic options for its other namesake stores.

After the bell AMAT reported earnings that beat the street by a penny and saw stronger than expected sales but still fell sharply in after hours trading. AMAT cautioned that sales in several business segments would slow. They forecast a drop in orders and the stock took a beating to close at a five-week low in after hours. AMAT projected a drop in orders of between 10-15% from buyers like contract chip manufacturers to makers of flat-panel displays. Revenue was expected to be down -2% overall with memory still expected to account for 60% of AMAT's business. On a brighter side sales of equipment used in making solar panels has been stronger than expected and orders are expected to double to $400 million in 2007.

Monster Worldwide (MNST) cancelled their appearance at a Goldman Sachs conference and that fueled additional speculation that a takeout was in the wind. Monster has been a perennial rumor target for a buyout but they never seem to materialize. MNST jumped +8.6% on May-3rd due to takeover rumors. Call option volume spiked sharply today on the rumor with more than 35,000 calls being traded compared to 9,000 puts.

Oil prices rose slightly to 63.15 on news that Shell had to cut production of Nigerian light crude by another -170,000 bpd due to rebel activity. Apparently rebels have occupied a pipeline hub preventing further deliveries. Shell has declared Force Majeure on light crude from the Bonny field. This provided price support for gasoline in the U.S. ahead of tomorrows inventory report. Oil inventories are expected to rise +200,000 barrels, gasoline +900,000 barrels and distillates +1.4 million barrels. Refinery utilization is expected to rise to 89.7% and well below the level needed to fill our gasoline requirements for summer. Not only are we experiencing a streak of refinery outages in the U.S. but other countries are also seeing refinery production outages. The challenge is simply too few old refineries forced to run flat out to keep pace with demand. Without a serious maintenance program each year these old refineries would be crashing even more often than they do. In 1980 there were more than 300 refineries in the U.S. and today there are less than 150 but gasoline demand is significantly higher. Oil companies are meeting demand by adding capacity to existing refineries whenever possible. It takes 5-7 years to build a refinery today in a developed country and $5-$7 billion. None of the major oil companies want to make that kind of investment in time and money this close to Peak Oil. If oil supplies are going to be shrinking in the near future there is no reason to make the investment. Existing refineries will handle future volumes with no problems. There are some refineries being built in countries that export crude so they can capture the profits associated with selling refined products. Last week the crack spread was well over $30 per barrel. If you are Saudi Arabia or Kuwait the prospect of getting an extra $30 per barrel for your remaining oil is a very big reason to build refineries and export gasoline instead of oil. The U.S. imports more than 1 mbpd of gasoline and that need is growing.

Retail gasoline prices have risen nearly 40% since the end of February and AAA said prices are now at an all time high. As of today that is $3.10 on a national average. That is not quite an all time high if you adjust for inflation. That number is $3.22 from March 1981 for those keeping track. You would have paid $1.42 cash for that gallon of gas in March 1981. Today prices range from $3.62 in San Francisco to $3.12 in Washington DC and $2.90 in Houston. Those numbers may be budget breakers to Wal-Mart shoppers but if you lived in Europe they would produce mile long lines at any service station. Gasoline costs $6.71 per gallon in France, $7.09 in Germany, $6.68 in Italy, $7.77 in the Netherlands and $7.07 in the United Kingdom. Much of that price is taxes but the pain at the pump is still the same. These prices are the reason the average car in Europe is half the size of a car in the U.S. and distances traveled are also less but that does not diminish the pain at the pump. This is going to cause retailers further pain as retail consumer sales take a back seat to gasoline expenses.

If you turn on stock TV these days you hear phrases like Bull Market Coverage or Riding the Rally Train. These make good TV sound bites and attract viewers wanting to be long but those comments may be coming to an end very soon. All day today CNBC advertised the Dow at a new historic high in their lead in to various features. They rarely mentioned the Nasdaq and S&P and many other indexes were in negative territory. The Nasdaq and Russell were at two-week lows and falling. Where is the bull in that?

The Dow did rally to a new historic high of 13481.60 before declining nearly 100 points (-97.76) to close up only +37 for the day. Yes, that was also a new historic close but it was well off the highs and powered mostly by only five Dow stocks, GM, MMM, AA, VZ and BA. Five stocks don't make a market. In reality 30 stocks don't make a market either but the Dow is routinely seen as the main market barometer. The Dow has closed with gains 27 of the last 32 days now and gained +8.5% in that period. This is a prime example of an extremely overbought index but that is lost on most retail traders.

In Asia a similar problem exists only to even greater extremes with the Shanghai Index up +50% so far this year after a +100% gain in 2006. Other Asian indexes are up strongly but not quite to those levels. Does this deter retail traders from pouring money into the market? Definitely not and it has actually sucked more people into the market rather than scared them away. In 2006 there were 5.5 million retail brokerage accounts opened in China. In the first quarter of 2007 there has been over 8.5 million new accounts were opened. Bull markets, regardless of how extremely overbought they may be, will always attract new buyers willing to bet on even higher highs. This can be seen in everything not just stocks. Remember the housing bubble two years ago? People were borrowing every penny they could find to buy bigger houses, second homes and even speculative homes because prices were always going higher. Now those buyers are going into foreclosure at a rate 62% higher than April 2006. The iPhone has not even been released yet and people on Ebay are paying 2-3 times the expected retail prices to guarantee they get one when they first come available. All of these speculative rallies will eventually fail and prices will return to normal. Will there be a message across the ticker on CNBC's screen proclaiming the market top and time to exit? I seriously doubt it.

The only sign we will get is a narrowing of market breadth, deteriorating internals and weakness in the supporting indexes as the big caps forge ahead. Don't look now but this is exactly what is happening. Market breadth is shrinking rapidly with only the mega caps still climbing. Volume is increasing but declining volume was 2:1 over advancing today with the Dow at a new record. Volume was very high at nearly 6 billion shares traded. Decliners beat advancers by 2:1 for the second consecutive day. This does not sound like a bull market. It sounds more like a collapsing bull to me. I know the analysts are now predicting Dow 14,000 or even 15,000 as I heard one claim today. According to them the economy is rebounding but you can't tell it from retail sales. Inflation is falling but it costs more to buy everything because of the high price of gasoline and corn. The Dow normally gains 25% between Sept-06 and Sept-07 due to pre-election posturing in 3rd year of presidential election cycles. The Dow has averaged 25% gains since 1950 according to one interview I heard today. A +25% rally would be +2,919 points from September's 11679 close or 14,600 in round numbers by Sept-30 of this year. That is only +1200 points or so from today's close. Get long and hang on is the current market cry. I am afraid if you follow that theory you will end up crying instead.

Today's Dow candle to nearly 13500 could easily be the last one in a long string. Support at 13375, 13300 and 13200 may hold any initial declines but we need a long period of consolidation before making any new runs toward any predicted 14,600 target in September. The Dow has rebounded nearly straight up +13.7% from its 11979 low in March to the 13581 high today. Even if this is a presidential election cycle the Dow still needs to consolidate those gains before moving higher.

The Nasdaq hit a multiyear high of 2580.06 back on May 7th before losing -30 points the next day. On May 9th that 2580 level was tested once again and the following day's low was -47 points off the high. Today's close at 2525 was -55 points lower and a new two-week low. Declining volume on the Nasdaq was better than 4:1 over advancing volume on the second strongest volume day in two weeks. Tech stocks are usually the first to die led by the chips. The Semiconductor Index hit a high at 510 five days ago and a new two-week low today. With the AMAT warning after the close today I would not expect a semiconductor rally on Wednesday but when you are "riding the rally" stranger things have happened. The Nasdaq has pretty decent support in the 2500-2510 range and I believe odds are good we will get to see just how strong it is.

The S&P beat its six-year high today by one point to tag 1514.83. The selling was instantaneous as somebody's sell program triggered when that 1513.80 high from last week was surpassed. The S&P gave back -13 points as the afternoon progressed to close right on psychological support at 1500. A break there finds decent support at 1480 but a break there would be a serious train wreck for the rally train. For the last month the S&P has stubbornly refused to move higher in other than minor increments as if traders were scared to put that last buck on the line in case they needed taxi fare home if disaster struck.

SPX Chart - 90 min

Russell-2000 Chart - 90 min

The Russell is still the chart that tells the whole story. I have been preaching the Russell as our canary in the coalmine for weeks. Because the small caps are fairly illiquid fund managers can't blow out a position in one order like they can with IBM, GE or Oracle. It can take several days of partial orders to liquidate without driving the price down sharply. When fund managers feel an approaching correction they can begin selling the small caps days ahead of any material big cap collapse. They can even assist in painting the large cap tape by keeping a bid under the large caps while dumping small caps bit by bit. The Russell hit 830 back in February just before the late February drop. When the Russell returned to 830 back on April 16th it was met with serious selling. Six times the Russell tried to gain traction for a run over 830 and succeeded to touch 835 four times but each time it crossed that 830 barrier sellers began to appear. 835 was a brick wall that allowed nobody to cross. The resistance battle raged at 830-835 for an entire month and resistance won. Today's close at 814 was a two-week low and the second lowest close since April 15th. It is not a pretty sight. I suggested everyone short every failure at 835 and each touch resulted in sharp declines while the Dow rally train headed even higher into the clouds. I believe today that a continued Russell drop below the May 1st support at 810 will produce a train wreck for the Dow and one that could take some time to clear.

The rest of the week has 11 additional economic reports including Industrial Production, Residential Construction, Philly Fed Survey and Consumer Sentiment. There are plenty of chances for lousy economics to further grease the wheels for a Fed rate cut later in the year. There are also plenty of chances for investors to discover the weak retail sales are only the tip of the iceberg of slower growth pressured in part by higher gasoline prices. I heard another survey on Tuesday and I can't remember who did it but the result showed consumers were moving into conserve mode once again as discretionary funds were poured into the gas tank instead of retail registers. Those summer vacations are looking a lot more optional as gas prices head higher. All we need now is a hurricane headed for the Gulf and Q2 GDP cold easily turn negative along with our markets. Maintain a short bias under Russell 835 except for short-term dip buys.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
None VTAL None

New Calls

None today.
 

New Puts

Play Editor Notes: The NASDAQ Composite and the Russell 2000 both look very vulnerable to more profit taking and that would definitely weigh on the rest of the market. We would turn defensive on any bullish positions and more conservative traders may want to start ratcheting up their stops or plan some early exits.

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Vital Images - VTAL - cls: 28.42 chg: -1.76 stop: 30.05

Company Description:
Vital Images, Inc., headquartered in Minneapolis, is a leading provider of enterprise-wide advanced visualization and analysis software solutions. The company's technology gives radiologists, cardiologists, oncologists and other medical specialists, time-saving productivity and communications tools that can be accessed throughout the enterprise and via the Web for easy use in the day-to-day practice of medicine. (source: company press release or website)

Why We Like It:
Tech stocks are beginning to under perform the rest of the market. Shares of VTAL just broke down from what looks like a multi-month top and on big volume. Aggressive traders may want to buy puts now or on a failed rally under $30.00. We're suggesting a trigger to buy puts at $27.99. Our target is the $25.15-25.00 range.

Suggested Options:
We are suggesting the June puts. Our trigger is at $27.99.

BUY PUT JUN 30.00 HXQ-RF open interest= 65 current ask $2.35
BUY PUT JUN 25.00 HXQ-RE open interest= 0 current ask $0.35

Picked on May xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/26/07 (confirmed)
Average Daily Volume = 191 thousand
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Allegheny Tech - ATI - cls: 114.28 chg: +0.14 stop: 109.99

The markets struggled to make any headway on Tuesday. Most of the major sector indices were trending lower. Shares of ATI managed a meager gain after trading sideways all day. The overall trend in ATI remains bullish but we're concerned about the weakness in the NASDAQ and the Russell potentially dragging the market lower. More conservative traders may want to avoid starting new bullish positions at this time. Our target is the $119.00-120.00 range. FYI: The Point & Figure chart forecasts a $122 target.

Picked on May 08 at $113.45
Change since picked: + 0.83
Earnings Date 07/25/07 (unconfirmed)
Average Daily Volume = 2.4 million

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Baidu.com - BIDU - cls: 129.03 chg: -2.96 stop: 124.95

Uh-oh! There was no follow through on BIDU's bullish breakout from Monday. The stock produced what looked like an intraday failed rally near $133. The close under $130 is bearish. There is a chance that BIDU will bounce near the bottom of its gap around $128.00-128.25 or shares might find technical support at its rising 10-dma around 126.75. We are not suggesting new positions at this time. We'll wait and watch to see (if) where BIDU bounces. This is an aggressive, higher-risk play. More conservative traders, if you decided to pursue BIDU, may want to tighten their stops. Our target is the $139.50-140.00 range. The P&F chart is bullish with a $203 target.

Picked on May 14 at $130.51
Change since picked: - 1.48
Earnings Date 07/26/07 (unconfirmed)
Average Daily Volume = 2.2 million

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Peabody Energy - BTU - cls: 50.41 change: -0.29 stop: 47.99

Coal stocks are still getting some positive press in the media. Unfortunately, BTU is struggling to build on any momentum. Actually momentum seems to be stalling. A dip back toward $50.00 or maybe $49.50 seems like a good bet here. Our target is the $54.50-55.00 range. The P&F chart is very bullish with a $69 target. Our biggest concern with calls on BTU is M&A news. The risk is that BTU might announce it is acquiring one of its smaller rivals and normally shares of the acquirer go down on the announcement.

Picked on May 09 at $ 50.70
Change since picked: - 0.29
Earnings Date 07/19/07 (unconfirmed)
Average Daily Volume = 5.3 million

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Ctrip.com - CTRP - cls: 71.49 chg: -0.61 stop: 69.99

Tomorrow is our last day for this call play on CTRP. The company reports after the closing bell so we plan to exit at the close on Wednesday, May 16th. More conservative traders may want to exit at the open tomorrow since CTRP looks poised to dip toward $70.00. Wall Street is looking for a profit of 27 cents a share.

Picked on April 29 at $ 70.63
Change since picked: + 0.86
Earnings Date 05/16/07 (confirmed)
Average Daily Volume = 389 thousand

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General Dynamics - GD - cls: 80.95 chg: +0.59 stop: 78.85 *new*

GD displayed relative strength on Tuesday but the stock couldn't hold any gains past the early May highs. Looking at the daily chart today's action might be considered a failed rally, which is usually bearish. Watch for another bounce near $80 as a new entry point. We are adjusting our stop loss to $78.85. 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: + 0.68
Earnings Date 04/25/07 (confirmed)
Average Daily Volume = 1.4 million

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Goldman Sachs - GS - cls: 224.38 chg: -1.80 stop: 222.45

The broker-dealer stocks were big under performers today. The XBD index lost 1.4% and broke down under the 250 level. The daily chart for the XBD has produced a MACD sell signal. Shares of GS are still holding up pretty well but any further weakness in the XBD or the NASDAQ or the Russell could definitely weigh on investor confidence. It doesn't help that GS' daily chart also sports a new MACD sell signal. More conservative traders may want to abandon ship with GS right here to cut their losses. We're not suggesting new positions at this time!

Picked on May 13 at $227.50
Change since picked: - 3.12
Earnings Date 06/12/07 (unconfirmed)
Average Daily Volume = 7.4 million

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Precision Castparts - PCP - cls: 112.81 chg: +1.68 stop: 106.85 *new*

PCP continues to rally and on above average volume, which tends to be bullish. We are adjusting our stop loss to $106.85. More conservative traders may want to put their stop closer to the 10-dma. Our target is the $118.00-120.00 range.

Picked on May 13 at $110.91
Change since picked: + 1.90
Earnings Date 05/09/07 (confirmed)
Average Daily Volume = 1.0 million

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Marathon Oil - MRO - cls: 111.46 chg: +2.54 stop: 104.99 *new*

Target achieved. Another positive day for crude oil helped most oil stocks close higher. MRO out performed with a 2.3% rally. Boosting shares of MRO were an upgrade to a "buy" this morning. The stock has surpassed our conservative target in the $109.85-110.00 range. The breakout over $110 on big volume is bullish but we're not suggesting new positions at this time. Our aggressive target is the $114.00-115.00 range. If you failed to take some money off the table we would definitely reconsider as MRO is looking a little short-term overbought. FYI: The P&F chart points to $110 and MRO has a 2-for-1 split coming up on June 19th. Please note that we're raising the stop loss to $104.99.

Picked on May 08 at $105.55
Change since picked: + 5.91
Earnings Date 07/31/07 (unconfirmed)
Average Daily Volume = 3.8 million

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Sears Holding - SHLD - cls: 177.00 chg: +0.23 stop: 174.74

We are reiterating yesterday's warning! SHLD has not seen any follow through on its bounce from the multi-month trendline of support. The negative earnings news from HD today did not inspire any confidence in the retailers. The RLX retail index lost almost 1% and closed at a new relative low. Furthermore the RLX looks poised for more weakness. We are not suggesting new positions in SHLD at this time and more conservative traders may just want to exit early right here to avoid or limit any losses.

Picked on May 13 at $177.96
Change since picked: - 0.96
Earnings Date 05/31/07 (unconfirmed)
Average Daily Volume = 1.7 million

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Terex - TEX - cls: 81.66 change: -1.25 stop: 77.95

Market weakness on Tuesday prompted some profit taking in TEX. Shares lost 1.5% but remain near all-time highs. A bounce near $80.00 could be used as a new entry point but given the market's recent weakness we would hesitate to open new positions. Our target is the $87.00-90.00 range. The P&F chart points to a $105 target.

Picked on May 09 at $ 81.16
Change since picked: + 0.50
Earnings Date 07/25/07 (unconfirmed)
Average Daily Volume = 1.2 million

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Vangard Emergy Mkts ETF -VWO- cls: 85.30 chg: +0.04 stop: 83.45

The VWO actually tried to rally midday but failed at resistance near $86.00 for the fifth time in the last several days. We would be extra cautious about opening new bullish positions given the NASDAQ's and Russell's current weakness. Currently we're suggesting calls on a VWO breakout over $86.00. Our trigger is at $86.15. If triggered our target is the $89.85-90.00 range. More aggressive traders may want to aim higher since the P&F chart points to $113.

Picked on May xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 416 thousand

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WATSCO - WSO - cls: 55.70 change: -0.77 stop: 54.85 *new*

Trading in WSO took a bearish turn for the worse on Tuesday. Shares produced a failed rally under $57.50 and a breakdown under the rising 10-dma. More conservative traders may want to exit early even though WSO should have support near $55.00. We are raising our stop loss to $54.85.

Picked on May 06 at $ 55.73
Change since picked: - 0.03
Earnings Date 07/19/07 (unconfirmed)
Average Daily Volume = 382 thousand
 

Put Updates

Equinix - EQIX - cls: 78.21 chg: -3.30 stop: 83.55 *new*

EQIX displayed relative weakness on Tuesday with a reversal under its 10-dma and a breakdown under $80.00. Shares closed with a 4% loss. 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. Please note that we're adjusting the stop to $83.55.

Picked on May 06 at $ 82.83
Change since picked: - 4.62
Earnings Date 04/26/07 (confirmed)
Average Daily Volume = 515 thousand

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Essex Property - ESS - cls: 125.01 chg: -2.66 stop: 130.05

ESS turned in another very bearish session. Shares produced another failed rally under resistance near $129 and its 200-dma. The intraday high of $132.60 looks like a bad tick. Volume on today's sell-off was above average. Our suggested trigger to actually 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

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Itron - ITRI - cls: 66.41 change: -1.02 stop: 69.35 *new*

ITRI lost another 1.5% and the decline today looks like confirmation of Monday's failed rally. Traders can use today's weakness and close under the 50-dma as a new entry point or you can keep waiting for a drop under $66.00 before launching new put positions. We are adjusting the stop loss to $69.35. Our target is the $60.50-60.00 range.

Picked on May 08 at $ 65.85
Change since picked: + 0.56
Earnings Date 05/02/07 (confirmed)
Average Daily Volume = 547 thousand

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Russell 2000 Ishares - IWM - cls: 80.97 chg: -0.73 stop: 83.55

The Russell 2000 and its IWM ishares continue to look weak. We may have missed the entry point near $83.00. More nimble traders may want to think about chasing the IWM's current weakness. We're going to stick to our plan for now and wait for another failed rally near $83.00. We're suggesting a trigger to buy puts at $82.90. We'll try and limit our risk with a tight stop at $83.55. More aggressive traders may want to put their stop just above $84.00. If we are triggered at $82.90 then we will have two targets. Our conservative target is $80.25-80.00. Our aggressive target is the $78.25-78.00 range.

Picked on May xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 58.4 million

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Las Vegas - LVS - cls: 77.97 change: -0.29 stop: 85.01

LVS was upgraded to an "out perform" this morning. The news accounted for LVS' gap open at $79.45 but the rally ran out of steam near $80.00 again. The trend remains bearish. We would still consider new put positions here. 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: - 1.88
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.)

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Lockheed Martin - LMT - cls: 99.51 change: +0.31 stop: n/a

LMT continued to rally and shares are challenging resistance near $100. Unfortunately, the current market weakness could not come at a worse time for this strangle play. If the major averages (minus the DJIA) keep sliding then LMT is going to have a hard time breaking out higher. There are only three trading days left for our strangle play on LMT. May options expire after the 18th. At this point we need to see LMT trade to $101.50 or 88.50 just to breakeven. 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 $2.00 or more (note the change in target price).

Picked on April 22 at $ 95.40
Change since picked: + 4.11
Earnings Date 04/24/07 (confirmed)
Average Daily Volume = 1.7 million
 

Dropped Calls

Bear Stearns - BSC - cls: 150.55 chg: -3.30 stop: 154.75

BSC displayed relative weakness on Tuesday. Shares lost 2.1% and broke down under what should have been technical support at its 50-dma and 200-dma. The selling stalled near round-number support at $150.00. It was our plan to buy calls on a breakout over $160 but it hasn't happened. We're dropping the stock as a bullish candidate (unopened). More nimble traders will want to consider buying puts on a breakdown under $150.00.

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
 

Dropped Puts

AvalonBay - AVB - cls: 122.24 chg: -2.07 stop: 125.26

We would have been stopped out of AVB at $125.26. Sometimes the market can be cruel. Before the open AVB was upgraded to a "buy". The stock spiked higher this morning on the upgrade news but the rally stalled at $127 and shares gave back all of its gains and more. The move today looks like a failed rally/bearish reversal and traders can use it as a new entry point for puts. We have to list it as a closed play. If AVB continues lower tomorrow we may re-add it as a put play again.

Picked on April 30 at $124.45
Change since picked: - 2.21
Earnings Date 04/26/07 (confirmed)
Average Daily Volume = 770 thousand
 

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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