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Daily Newsletter, Tuesday, 05/29/2007

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Table of Contents

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

Market Wrap

Small Caps Lead Modest Advance

Boosted by a decline in energy prices and a rebound in consumer confidence, the Russell 2000 Index ($RUT.X) 837.53 +0.92% outpaced the large cap benchmarks in a relatively quiet post-holiday trade.

Advancing issues outnumbered decliners throughout, and while the major indexes struggled to hold gains at the midpoint of Tuesday's trade, buyers held their ground toward the close.

Volumes at both the big board and the NASDAQ were light as the Memorial Day weekend marks the beginning of summer vacations. With just two days left in the month, volume levels have been brisk in May with the NYSE averaging just over 2.9 billion shares traded per day, up a hefty 11% from April's 2.63 billion share per day average. NASDAQ volume is up a healthy 13% at 2.09 billion shares per day after an anemic 1.85 billion per day average in April.

U.S. Market Watch - 05/29/07 Close

Oil prices fell sharply with July Crude Oil (cl07n) settling down $2.05, or -3.14% on hopes that the inauguration of a new president in OPEC member Nigeria would contribute to stable supply from the Niger Delta region.

Nigeria's President Umaru Yar'Adua used his inaugural address to call for an immediate cessation of hostilities. The main militant group, the Movement for the Emancipation of the Niger Delta, said they are considering the request.

"We're pulling the plug. It's certainly a big drop, a material drop in price," said Tim Evans, an energy analyst at Citigroup Global Markets. "Basically, the new president is calling for Nigerian unity. He's waving the olive branch and it makes us feel more secure regarding Nigerian oil supplies."

Both the Oil Service HOLDRs (AMEX:OIH) $166.62 -0.88% and CBOE Oil Index (OIX.X) 724.68 -0.73% traded weak.

Headed into Thursday's June unleaded futures settlement, July Unleaded (rb07n) plunged lower by $0.1171, or -5.07% to settle at $2.1934.

Exacerbating the decline in unleaded was Valero Energy (NYSE:VLO) $73.62 -1.49% saying it plans to restart the gasoline-producing catalytic cracking unit at its 170,000 barrel-per-day McKee refinery in Sunray, Texas tomorrow at 01:00 PM EDT.

The unit was shut on Thursday to fix catalyst circulation problems.

Crude oil intake at the McKee refinery has been at 50%, or 85,000 barrels-per-day, since the plant restarted on April 13 after being shut down for two months following a fire.

While the catalyst work was being done, the refinery's crude intake was down to 80,000 barrels-per-day. Roughly 30,000 barrels-per-day of gasoline output as well as 3,000 barrels-per-day of jet fuel production were lost.

The refining giant said it hopes crude oil throughput at the McKee facility will reach 150,000 barrel-per-day by the end of June, but the refinery won't return to 170,000 barrels-per-day before the end of the year.

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Economic data released today had the Conference Board saying its consumer confidence index rose in May as an upbeat business outlook and higher stock prices overshadowed record gasoline prices.

The Conference Board said its index of consumer sentiment rose to 108.0 in May versus an upwardly revised 106.3 reading in April. The median forecast among economists was for 105.0 after a previously reported 104.0 reading in April, which was the lowest reading since August 2006.

The Conference Board said the present situation index rose to 136.1 in May from an upwardly revised 133.5 in April, while its expectations index increased to 89.2 in May from an upwardly revised 88.2 reading in April.

The business research group said its recent survey of consumers' assessment of the job market didn't change much in May. Consumers surveyed who said jobs were "plentiful" held a revised 29.0% in May versus April's 29.0%.

Those who said jobs were "hard to get" slipped to 19.9% in May from a downward adjusted 20.3% in April.

Treasuries witnessed selling at the short-end of the curve with the 5-year Treasury Yield ($FVX.X) rising 3.1 basis points to 4.827%.

I think the selling there was based on Canada's central bank holding interest rates unchanged at 4.25% for the eighth-straight meeting, but saying "an increased risk" that inflation will persist above 2.0% still has Canadian monetary policy makers leaning more towards tightening than loosening rates.

I continue to follow 30-day Fed Fund futures here in the U.S., where market participants still see the Fed holding rates unchanged out to October (ff07v) 94.78 -0.01%. That is, if I take 100, then subtract 94.78, I get 5.22%. The Fed's current target on Fed funds is 5.25%.

Merger Tuesday!

With equity markets closed in the U.S. on Monday, there were still some CEO's making deals over 3-day weekend.

One of the nation's largest apartment REITs, Archstone-Smith (NYSE:ASN) $60.15 +8.90% followed through on Friday's gains. The Englewood, CO-based company said it had agreed to be acquired by a partnership sponsored by Tishman Speyer and Lehman Brothers (NYSE:LEH) $72.91 +0.20% for $22.2 billion (including $6.9 billion in debt), or $60.75 per share.

Local telephone service provider CT Communications (NASDAQ:CTCI) $31.39 +45.45% had shorts dialing 911 after the company said it had agreed to be acquired by Windstream (NYSE:WIN) $14.90 -0.13% for $585 million in cash, or $31.50 per share.

The Networking Index (NWX.X) 277.67 +3.11% closed at a new multi-year high with component Avaya (NYSE:AV) $15.76 +15.28% rocketing higher on speculation that Canada's Nortel Networks (NYSE:NT) $25.99 +0.77% could be set to make a bid for the company. Over the weekend, Avaya postponed an investor conference. The Wall Street Journal reported that Avaya was in talks with private equity firm Silver Lake about a leveraged buyout and had also held talks with Nortel about a possible deal. Avaya's shares were atop today's most active list with 52.8 million shares changing hands. Heavy considering the stock usually turns about 6.4 million shares per day on average.

Alcan (NYSE:AL) $86.00 +1.17% added $1.00 per share on rumors that the Canadian-based maker of aluminum products may be considering a sweetened bid from Norway's Norsk Hydro (NYSE:NHY) $35.03 -1.07%. Last week, Alcan turned down a hostile $27.4 billion bid from rival Alcoa (NYSE:AA) $40.37 -1.29%. Canada's Globe and Mail suggested Norsk Hydro could be planning a $30 billion bid for Alcan.

China Revelation

In last Monday's Market Wrap I discussed China's continuing to take steps towards revaluation of the yuan against the U.S. Dollar and wanted to quickly follow up on the changes, or lack of changes, since Monday's wrap.

US Large Cap, Small Cap, China and Japan

One of the more notable changes since last Monday (5/21/07) is that China's Hang Seng Index ($HSI.X) has fallen 2.19% as of their Tuesday (05/29/07) close as the dollar ($) weakens ever so slightly against the yuan by 0.19%.

I'd be hard pressed to say that "small caps" as depicted by the Russell 2000 (RUT.X) have seen some safe-haven rotation, but they have shown a gain relative to the large-cap indexes.

Meanwhile, the dollar has risen fractionally (+0.16%) against Japan's yen, and the Nikkei-225 ($NIKK) has also gained a more impressive 0.66%.

The main point, or observation I want to follow up on is how currency relationships, which can impact trade, may indeed be impacting market participants' decisions on where they place their capital.

S&P Depository Receipts (SPY) - WEEKLY Intervals

Last week, there was great chatter regarding the recently released short interest position that bears have built, even as the major indexes build some impressive gains.

Looking at an SPY WEEKLY bar chart gives us the opportunity to "turn on the volume."

A couple of weeks ago (see 5/14/07 Market Wrap) we were noting a "doji" on the weekly interval chart that may have been a warning sign for a reversal in trend.

So far, the SPY has been able to inch higher and volume has been building.

All volume tells us is that there is GREAT DISAGREEMENT among market participants at this point as to where the SPY is headed, but I would think a CLOSE above $152.62 could bring agreement among buyers.

If a technician like myself thought the "doji" was meaningful (and I do still at this point), then it would take a CLOSE below that $150.86 to begin to think that sellers were getting any type of a hand on things.
 


New Plays

New Option Plays

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

New Calls

None today.
 

New Puts

None today.
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Freeport McMoran - FCX - cls: 75.84 chg: +1.23 stop: 69.95

Copper producer FCX continued to rally on Tuesday. Shares shot higher at the open and closed over potential round-number resistance at the $75.00 level. We don't see any changes from our weekend comments and would still consider new positions here or on a dip back towards $75.00. More cautious types might also want to use a tighter stop loss. Our target is the $79.50-80.00 range.

Picked on May 27 at $ 74.61
Change since picked: + 1.23
Earnings Date 07/25/07 (unconfirmed)
Average Daily Volume = 12.3 million

---

OM Group - OMG - cls: 61.94 chg: -0.50 stop: 59.85

OMG failed to keep pace with the market on Tuesday and shares suffered some profit taking. We would still consider new positions here but it might pay off more to wait and watch for a dip and bounce near the $60.00 level or the 10-dma, which should be short-term support. Our target is the $68.50-70.00 range. The P&F chart is bullish with an $86 target.

Picked on May 27 at $ 62.44
Change since picked: - 0.50
Earnings Date 08/02/07 (unconfirmed)
Average Daily Volume = 801 thousand

---

Vangard Emergy Mkts ETF -VWO- cls: 86.15 chg: -0.27 stop: 83.95

Shares of the VWO ETF continued to trade sideways. We didn't see anything noteworthy except for the very light volume, which is a surprise. Traders were buying the dip this afternoon. A rally from here can be used as a new entry point. We remain cautious given the market and hesitate to suggest new positions. Our target is the $89.85-90.00 range.

Picked on May 16 at $ 86.15
Change since picked: + 0.00
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 416 thousand

---

XTO Energy - XTO - cls: 57.17 chg: -0.46 stop: 54.99

Oil stocks lagged the market on Tuesday. Crude oil futures plunged over 3% after Nigerian workers ended their strike and news surfaced that some U.S. refineries were coming back online. XTO dipped 0.79% but we did notice that traders bought the dip near last Thursday's lows. A bounce from here or over $58.00 (or over $58.50) could be used as a new entry point for calls. More conservative traders may want to step back and wait before initiating positions given today's relative weakness. The P&F chart is very bullish with a $76 target. We are aiming for the $62.50-65.00 range. More conservative traders may want to use a tighter stop loss under the 50-dma or under $56.00. FYI: Readers should note that XTO is due to present at a conference on May 31st. It's an opportunity for news to move the stock.

Picked on May 27 at $ 57.63
Change since picked: + 0.00
Earnings Date 07/25/07 (unconfirmed)
Average Daily Volume = 3.2 million
 

Put Updates

Anixter Intl. - AXE - cls: 70.64 chg: +0.64 stop: 72.05

AXE continued to bounce on Tuesday but the initial rebound struggled. The pattern still looks bearish but we're sticking to our plan. Shares look poised to breakdown under technical support at the 50-dma. Nimble traders may want to buy puts on a drop below $69.30 (near Friday's low). We want to see a new relative low so we're suggesting a trigger at $68.49. If triggered we have two targets. Our conservative target is the $65.15-65.00 range. Our more aggressive target is the $62.00-60.00 range.

Picked on May xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/24/07 (unconfirmed)
Average Daily Volume = 520 thousand

---

Gilead Sciences - GILD - cls: 81.96 chg: +0.22 stop: 82.55

The BTK biotech index turned in a decent bounce with a 0.78% gain today. Shares of GILD under performed its peers with a 0.26% bounce. GILD did have some news today. The company announced some positive Phase III clinical trial results for its cystic fibrosis treatment. We are still waiting for a breakdown under support. We are suggesting a trigger to buy puts at $79.90. If triggered we will have two targets. Our conservative target is $75.25-75.00. Our aggressive target is the $72.50-70.00 range. Readers should note that GILD is due to present at a conference on May 30th. Plus. the stock is set to split 2-for-1 on June 25th. FYI: The P&F chart is still bullish with a $97 target but a drop under $80 should reverse it into a new sell signal.

Picked on May xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/27/07 (unconfirmed)
Average Daily Volume = 4.1 million

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Las Vegas - LVS - cls: 76.63 change: +0.05 stop: 81.15

Casino-related stocks were generally higher but LVS under performed its peers and the market. We don't see any changes from our weekend comments. We remain bearish on LVS but would probably expect another bounce soon. Watch for the $80.00 level to act as short-term resistance. Our target is the $71.50-70.00 range.

Picked on May 07 at $ 79.85
Change since picked: - 3.22
Earnings Date 05/02/07 (confirmed)
Average Daily Volume = 2.1 million

---

Vital Images - VTAL - cls: 28.01 chg: +0.06 stop: 30.05

VTAL flirted with both sides of the $28.00 level on Tuesday. The overall trend continues to look bearish. Watch for the 10-dma and the $29.00 level to act as short-term overhead resistance. More conservative traders may want to adjust their stop closer to the $29.00 level. Our target is the $25.15-25.00 range. The Point & Figure chart displays a descending triple-bottom breakdown pattern with a $23 target.

Picked on May 16 at $ 27.99
Change since picked: + 0.02
Earnings Date 04/26/07 (confirmed)
Average Daily Volume = 191 thousand
 

Strangle Updates

None
 

Dropped Calls

None
 

Dropped Puts

Essex Property - ESS - cls: 126.55 chg: +4.15 stop: 124.26

We have been stopped out of ESS. News that Archstone (ASN) might be a takeover candidate last Friday fueled a big rally in the group ahead of the weekend. The news today, that Tishman Speyer and Lehman Brothers are making a $13.5 billion bid to acquire ASN, sent the REIT sector soaring again. ASN rallied 8.9%. Shares of ESS gapped open higher at $124.50 and closed up 3.3%. Our stop loss was at $124.26 so we would have been stopped out at the open.

Picked on May 16 at $124.65
Change since picked: + 1.90
Earnings Date 05/02/07 (confirmed)
Average Daily Volume = 281 million
 

Dropped Strangles

None
 

Today's Newsletter Notes: Market Wrap by Jeff Bailey and all other plays and content by the Option Investor staff.

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