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Daily Newsletter, Monday, 06/04/2007

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Table of Contents

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

Market Wrap

Market Wrap

Wall Street started the week out on a positive note with the major indexes posting fractional gains.

Based on this morning's readings, and volume observations of individual stocks listed on the NYSE, total volume on the NYSE as posted in the above table is probably inaccurate.

U.S. economic data continued to show modest, yet stable signs economic growth at the factory level.

After a surge in March factory orders (+4.3%), The Commerce Department said factory orders increased a more tepid 0.3% in April, which was below the 0.8% increase economists had expected.

The Commerce Department noted a sharp 23.4% decline in demand for ships and boats, which reversed a 13.3% increase in March.

A 10.7% decline in commercial aircraft orders also reversed huge gains the past two months.

China's Shanghai Composite ($SSEC) fell 330 points, or -8.26% to 3,670 on Monday, as retail investors there continued to lock in gains and fret about a hike in stock-trading tax, the latest move from China's central bank (People's Bank of China) to cool a market that had nearly tripled in value the past year. It was the index's biggest one-day decline since February 27, which set off a brief global market.

"The Chinese market does not have much liquidity and when it moves, it moves in one direction. Any big swings should fuel concerns about global money investing in emerging markets and other risky assets," said Norihiro Fujito, general manager at Mitsubishi UFJ Securities Co. Ltd.'s investment research and information division.

Shanghai Composite ($SSEC) - 50-point box

Having gained roughly 56% since January to its recent highs of 4,300, or 43% from a triple top buy signal at 3,000 in mid-February, the rather illiquid stocks of the $SSEC broke support at 3,850 on Monday.

While I do not put great weight into INDEX bullish and bearish vertical counts derived from the institutionally followed point and figure charting methodology, these bullish and bearish vertical counts serve as an initial too for RISK/REWARD assessment.

Having exceeded it BULLISH vertical count of 3,950, Monday's trade at 3,850 and currently building to the downside column of "O" has a bearish vertical count to 3,200.

Investor psychology may have also taken a hit.

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On Friday, Bloomberg quoted one Chinese investor, Ge Hong, a 30-year-old Shanghai post office worker as saying, "I'm very worried and I don't know what to do." Ge said she lost 2,000 yuan ($262) in the May 30th decline, more than half a month's salary for the average postal worker in the city.

Mark Mobius, who oversees about $30 billion as managing director of Templeton Asset Management, said in an interview last week that a 30% decline would be "healthy" for the Chinese market.

As I look at the $SSEC, a 30% decline from the recent highs of 4,300 would equate to a pullback to roughly 3,010.

Hong Kong's Hang Seng ($HSI) - 50-point box

The more institutionally held Hang Seng ($HSI) bucked the mainland weakness by rising 126 points, or 0.62% on Monday and closed at 20,729.

On May 9th, I captured Dorsey/Wright's World Bullish Percent Bell Curve. Similar to the various MARKET and SECTOR bullish % measures I follow, and update trader on in the OptionInvestor.com Market Monitor, we can perhaps take get a feel for how STRONG, yet OVERBOUGHT (levels above 70% are deemed overbought on a quantitative basis).

World Bullish % Bell Curve - 05/09/07

Money/cash tends to rotate within a country, and around the world. The MARKET (in this case, a GLOBAL market) is great at SELLING HIGH RISK, and BUYING LOWER RISK. On May 9, the Shanghai Composite ($SSEC) closed at 3,875, which was prior to its recent highs of 4,300.

Here's Dorsey/Wright's World Bullish % Bell Curve as of Friday evening's closing measures.

World Bullish % Bell Curve - 6/01/07

Again, Shainghai's Composite is full of rather illiquid shares, and perhaps Ge Hong's comments give us a feel for investor sentiment.

Do you see some of the "rotation" taking place that I mentioned might be set to take place in my May 21st market wrap? Even China said it had agreed to place $3 billion of its foreign exchange reserves with US-based private equity group Blackstone that day.

From last Tuesday's Market Wrap, and continuing coverage of my May 21 wrap "Another Piece of the Puzzle Falls Into Place" I'm following, and making some minor adjustments.

US Large Cap, Small Cap, China and Japan

While data feeds on China's Shanghia Composite don't allow for me to track that index in my benchmark table, I think the point and figure chart of the $SSEC, if not the Global Bullish % suggest investors are exiting the quantitatively HIGHER RISK situation there, and opting for other regions of the world.

It had been thought by some that the small caps of the Russell 2000 Index ($RUT.X) were a "high risk" asset class here in the U.S. several weeks ago.

Last week, I had actually profiled a SHORT position in the iShares Japan (EWJ) $14.73 +0.34% on May 24 at $14.34, which was BEFORE the People's Bank of China tripled a share-trading tax on the May 30th.

I noted early that morning that the EWJ's morning's low was right at our short entry of $14.34. It was as if market participants were saying "It's not Japan," that then had us getting stopped out of that 1/2 position short on Friday at $14.62 or a -1.95% loss.

As I continue to follow the "China Revelation" and put the pieces of the puzzle together, I have to think, based on observation that market participants are jitter over the changes that the People's Bank of China are now having to deal with, in regards to past yuan manipulation, and market participants are indeed opting of "safer havens" or "less risky" regions of the globe.

Closing U.S. Market Watch - 06/04/07

Monday did find some M&A news.

The most notable M&A activity in my opinion was that subprime lender Accredited Home Lenders (NASDAQ:LEND) $15.12 +9.88% said it had agreed to be acquired by private equity firm Lone Star for $400 million, or $15.10/share.

The sale comes just two months after the San Diego-based company obtained a $230 million term loan from hedge fund Farallon Capital.

I followed shares of LEND closely from late February, and noted the $230 million cash infusion from hedge fund Farallon Capital.

Should we see any other "stressed" subprime lenders also find future cash infusions from hedge funds, be alert to the company being a prime take-over candidate.

Contract electronic manufacturer Solectron (NYSE:SLR) $3.88 +15.13% was atop today's list of most actives at the big board, turning 123.9 million shares after the company said it had agreed to be purchased by larger rival Flextronics (NASDAQ:FLEX) $11.54 -1.36% for $3.6 billion in cash and stock.

The AMEX Airline Index (XAL.X) 50.95 -2.74% was today's sector loser after Continental Airlines (NYSE:CAL) $37.45 -6.09% said late Friday its overall passenger unit revenue fell between 0.5% and 1.5% from May 2006 levels.

J.P. Morgan Securities analyst Jamie Baker wrote in a research report he believes that Wall Street overall expected about 1% growth.

Goldman Sachs' Robert Barry said CAL's weak figures are partly due to the difficult year-ago comparisons. "But we also see the result as further evidence of an increasingly unfavorable domestic supply/demand dynamic, engendered by slowing demand growth, rising supply, and aggressive low cost carrier pricing."

Energy equities depicted by the OIX.X, OIH and XNG.X were broadly higher, in part on news that Cyclone Gonu is expected to hit the Persian Gulf in the next 18 hours (from time of this writing).

"There is concern the storm could disrupt shipping," said Phil Flynn, an analyst at Alaron Trading Corp. "Any type of disruption or in crude supply right now would be critical to a world thirsty for oil."

July Crude Oil (cl07n) at the NYMEX settled up $1.13, or +1.74% at $66.21 in Monday's trade.

S&P 500 Index ($SPX) - 10-point box

Ask any trader/investor about "valuation," or "risk" and you'll get at least 4 different answers.

Is China's Shanghai ($SSEC) a bit "overvalued?" Some may say Yes! It achieved its bullish vertical count of 3,950 and until just recently, was up anywhere from 43% to 56% since January.

Is the widely followed S&P 500 Index ($SPX) "overvalued?" Still some room to its longer-term bullish vertical count of 1,890, with downside RISK being assessed to 1,470 at a MINIMUM, and 1,360, which would be a double bottom sell signal, which would negate the bullish vertical count currently being constructed.

In last Tuesday's Market Wrap I showed a weekly interval bar chart of the tracking S&P Depository Receipts (AMEX:SPY) $154.10 +0.01%, where I thought it would at least take a CLOSE below $150.86 (another assessment of downside risk) before I thought supply would be getting an upper-hand on demand.

The lowest the SPY has traded since Tuesday, May 29th was the next morning and buyers gobbled up the People's Bank of China "bad news" from a session low of $151.34 to a close of $153.48.
 


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

Baker Hughes - BHI - cls: 85.55 change: +2.38 stop: 79.95

Our new call play in BHI is now open. The stock broke out over resistance at the $84.00 level early today. Boosting the sector were positive analyst comments out of Morgan Stanley. Another strong rally in crude oil today certainly didn't hurt the bulls. We suggested that readers use a trigger at $84.26 to buy calls. Now that the play is open our target is the $89.00-90.00 range. The P&F chart has reversed from a sell signal to a new buy signal with a $94 target. Also in the news it was announced that BHI had reached a settlement with the U.S. relating to a bribery probe into the company's divisions in Angola, Kazakhstan, and Nigeria.

Picked on June 04 at $ 84.26
Change since picked: + 1.29
Earnings Date 07/25/07 (unconfirmed)
Average Daily Volume = 4.3 million

---

Chaparral Steel - CHAP - cls: 73.74 chg: -0.45 stop: 69.95

Steel and metals stocks lagged the market on Monday. Investors might have been disappointed that there weren't any mergers announced but honestly we can't say why the group under performed today. Volume came in very low for CHAP so it's hard to reach much into today's performance. Overall the trend is unchanged and CHAP still has a bullish trend of higher lows. The afternoon bounce might be considered a new entry point. More conservative traders will want to strongly consider waiting for a breakout over $75.00 or the $75.50-75.60 zone before buying calls. We're going to set two targets. Our first target is the $79.50-80.00 range. Our aggressive target is the $84.00-85.00 range. The P&F chart currently points to a $99 target.

Picked on May 30 at $ 73.69
Change since picked: + 0.05
Earnings Date 07/10/07 (unconfirmed)
Average Daily Volume = 801 thousand

---

Carpenter Tech - CRS - cls: 135.15 chg: -0.52 stop: 129.90

CRS is another metals stock that under performed the market on Monday. We're not too alarmed. A little bit of profit taking after Friday's rally is not a surprise. Given today's trading we would suggest patience and watch for a dip into the $132.00-133.00 zone as a potential entry point. An alternative entry point would be to wait for a new relative high over $138. The P&F chart shows a triple-top breakout buy signal that points to a $170 target. Our target is the $147.50-150.00 range although we would expect some resistance near its all-time high around $142. FYI: We are surprised that CRS did not show more strength today following last Friday's news about the stock being added to the S&P midcap 400 index.

Picked on June 03 at $135.67
Change since picked: - 0.52
Earnings Date 07/27/07 (unconfirmed)
Average Daily Volume = 429 thousand

---

F5 Networks - FFIV - close: 81.89 chg: +0.35 stop: 74.95

The networking sector continued to rally and turned in one of today's best performances. FFIV under performed its peers but managed a 0.4% gain. Volume came in very low for FFIV today, which might be a cautionary sign. We would still consider new positions here but strongly suspect that shares will dip toward the $80.00 level soon. Buying a dip or bounce near $80 would be an attractive entry point. More conservative traders might want to use a tighter stop loss in the $78.00 or $77.50 zone. Our target is the $89.00-90.00 range.

Picked on June 03 at $ 81.54
Change since picked: + 0.35
Earnings Date 07/25/07 (unconfirmed)
Average Daily Volume = 1.3 million

---

Global SantaFe - GSF - cls: 70.25 chg: +1.39 stop: 65.90

A strong session for oil prices and some positive analyst comments for oil service stocks helped GSF rally to a new closing higher. The stock closed up over 2% and the close over round-number resistance at $70.00 is a positive sign. If the stock sees any profit taking look for the $68 level to act as short-term support. Our target is the $74.50-75.00 range. The P&F chart displays a triple-top breakout buy signal with an $87 target.

Picked on June 03 at $ 68.86
Change since picked: + 1.39
Earnings Date 08/01/07 (unconfirmed)
Average Daily Volume = 4.8 million

---

Altria Group - MO - cls: 71.80 change: -0.02 stop: 69.90

We don't see any changes from our weekend comments on MO. The stock has regained its bullish pattern of higher lows and we suspect shares are about to hit new highs again. We are aiming for the $76.00-77.00 range, which would coincide with the $77.00 target on the P&F chart. More conservative traders may want to wait for a new high first before opening positions.

Picked on June 03 at $ 71.82
Change since picked: - 0.02
Earnings Date 07/19/07 (unconfirmed)
Average Daily Volume = 11.7 million

---

OM Group - OMG - cls: 62.56 chg: -0.17 stop: 59.85

We are starting to worry about OMG. Shares have been stuck under the $64 level for days now and the upward momentum is dying. More than one of its technical indicators are starting to turn bearish. The sideways consolidation is still narrowing so we're not ready to abandon the play yet and broken resistance at $60.00 is the clearest level of potential support. We are suggesting that readers wait for a breakout over $64.00 before considering new positions. 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: + 0.12
Earnings Date 08/02/07 (unconfirmed)
Average Daily Volume = 801 thousand

---

Sunoco - SUN - cls: 84.17 chg: +3.06 stop: 79.45 *new*

Target achieved. A hefty 1.7% rally in crude oil fueled a big move in the oil stocks. Shares of SUN surged 3.77% on strong volume to hit new one-year highs. Our first target was the $84.00-85.00 range. We now expect the $85 level to act as short-term resistance so be ready for some profit taking. We are going to raise the stop loss to $79.45. Our second, more aggressive, target is the $88.00-90.00 range. The updated P&F chart has seen its buy signal rise from $94 to $109 over the last several days.

Picked on June 01 at $ 80.26
Change since picked: + 3.91
Earnings Date 08/01/07 (unconfirmed)
Average Daily Volume = 3.3 million

---

Tesoro - TSO - close: 63.95 change: +0.21 stop: 57.99

Hmmm... we are surprised that TSO under performed the oil sector today. Shares have been a real leader in the group but they struggled to participate during Monday's energy rally. Volume continued to slide. We suspect TSO will see a dip toward $62.00 soon, which would be an attractive entry point. Our target is the $69.00-70.00 range.

Picked on June 03 at $ 63.74
Change since picked: + 0.21
Earnings Date 07/27/07 (unconfirmed)
Average Daily Volume = 6.2 million

---

Vangard Emergy Mkts ETF -VWO- cls: 89.02 chg: -0.27 stop: 84.99

We don't see any changes from our weekend comments for the VWO. The ETF failed to make any headway but neither did it see any serious profit taking. More conservative traders may want to tighten their stops. The ETF is nearing our target in the $89.85-90.00 range. More aggressive traders may want to aim higher.

Picked on May 16 at $ 86.15
Change since picked: + 2.87
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 416 thousand

---

XTO Energy - XTO - cls: 61.61 chg: +3.24 stop: 56.74 *new*

Monday proved to be a big day for XTO. The stock gapped open higher at $60.51 and traded to an intraday high of $62.25 before paring its gains and close up 5.5%. The move was powered by news that XTO was buying some natural gas and oil properties from Dominion Resources for $2.5 billion. Unfortunately, the company decided to take advantage of this positive development and announced a 15 million-share secondary offering at the closing bell tonight. Investors tend to get unhappy when a company dilutes their position but 15 million shares might not be too much compared to XTO's 368 million shares outstanding. We wouldn't be surprised to see any profit taking tomorrow. More conservative traders may want to do some profit taking of their own. Please note that we're adjusting the stop loss to $56.74. Our target is the $62.50-65.00 range. Aggressive traders may want to aim higher.

Picked on May 27 at $ 57.63
Change since picked: + 3.98
Earnings Date 07/25/07 (unconfirmed)
Average Daily Volume = 3.2 million
 

Put Updates

Anixter Intl. - AXE - cls: 72.61 chg: -0.22 stop: 72.05

We don't see any changes from our weekend comments for AXE. We are currently sitting on the sidelines so it doesn't hurt to leave AXE on the newsletter as a bearish candidate but the bears are definitely having a hard time here and AXE looks closer to breaking out over resistance near $75.00 than breaking down under $70.00. Currently it is our suggested strategy to buy puts on a breakdown under $68.50. We are considering a higher trigger point at $69.00 or just under $70.00 but for now we'll stick with a $68.49. More nimble traders might actually want to scope out potential bullish positions if AXE can trade over resistance at the $75.00 mark.

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: 83.78 chg: +0.78 stop: 82.55

GILD is starting to look more and more bullish. Shares rose 0.9% and the technical indicators are improving. The stock is nearing resistance at the top of it trading range near $84.50. Nimble traders might want to consider buying calls on a breakout over $84.50 or over $85.00. We might switch directions on a move over $85.00. Currently we've been waiting for a breakdown under $80 and the bottom of its trading range. Our suggested trigger is at $79.90. Readers should note that 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 07/18/07 (unconfirmed)
Average Daily Volume = 4.1 million

---

Vital Images - VTAL - cls: 27.55 chg: -0.70 stop: 29.05

VTAL continues to under perform. The stock produced a bearish failed rally under last week's highs near $28.35. This could be considered a new entry point for puts. Our target is the $25.15-25.00 range.

Picked on May 16 at $ 27.99
Change since picked: + 0.44
Earnings Date 04/26/07 (confirmed)
Average Daily Volume = 191 thousand
 

Strangle Updates

None
 

Dropped Calls

None
 

Dropped Puts

None
 

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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