Option Investor

Daily Newsletter, Monday, 06/25/2007

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Table of Contents

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

Market Wrap

Market Wrap

The major indexes finished lower after a volatile session, but negative sentiment regarding subprime mortgages kept buyers at bay with broker Bear Stearns (NYSE:BSC) $139.10 -3.23% closing at a 9-month low on heavy volume of 10.5 million shares.

Last week, Bear Stearns said that two of its hedge funds, Bear Stearns High-Grade Structured Credit Fund and The Bear Stearns High Grade Structured Credit Enhanced Leveraged Fund, nearly collapsed after betting on complex securities backed by subprime mortgages.

Late Friday, the broker said it would bail out one of its hedge funds with $3.2 billion in secured loans that were backed by assets the firm sees as "beaten down dramatically," with the collateral worth more than the amount of the loan.

Bear Stearns said the two hedge funds had assets of more than $10 billion as of a week ago, and that the firm's commitment was less than $35 million.

The firm's CFO, Sam Malinaro said the company's mortgage business, recognized by Wall Street as one of the most experienced, would not be affected by the funds' performance. However, Mr. Malinaro did say that while mortgage-backed bonds in the subprime arena looks to be contained, the two funds' high-profile struggles seem to be increasing risk premiums (read decline on prices, higher yields), or increasing the additional cost of borrowing money for risky investments.

But Bear's move didn't seem to calm Wall Street's jitters.

While the major indexes did reverse opening session losses after the National Association of Realtors said that existing home sales declined in May by only 0.3% to an annual rate of 5.99 million units, versus consensus of 5.96 million, a mid-session downgrade by Standard and Poor's on a large number of bonds backed by risky home loans made in 2005 and 2006 zapped buyer's enthusiasm.

Tomorrow's release of existing home sales (consensus 922K) after last month's much stronger-than-expected 981K is going to be closely monitored by all market participants.

I would have to surmise that the weakness in the DJUSHB over the last month has market participants viewing last month's report as not being the "v-bottom" in housing.

The S&P 500 Index (SPX.X) 1,497.74 -0.32% looked as if it was set to make a move above an important level of weekly resistance at its WEEKLY Pivot of 1,513.54 (derived from last week's H/L and Close) and MONTHLY Pivot of 1,514.32 (derived from May's H/L and Close) as S&P's word of caution was delivered.

If looking for an end of month rally, which could have mutual funds and hedge funds putting "sideline cash" to work, check out today's SPX highs, note the overlap of SPX WEEKLY and MONTHLY Pivot, and that is likely the near-term line in the sand for technical strength.

If institutional computers are set to sell, the SPX should NOT get much above today's highs, or the correlative WEEKLY/MONTHLY Pivots.

Closing U.S. Market Watch - 06/25/07

The homebuilders as depicted by the Dow Jones Home Construction Index ($DJUSHB) 556.23 -1.85% certainly don't like the recent revelations out of Bear Stearns and closed at their lowest level since 07/18/06 (557.76), so a new 52-week close here tonight. Since last Monday, the DJUSHB is down 5.37%.

This despite the benchmark 10-year Treasury Yield ($TNX.X) falling 6.0 basis points to 5.078% today. Since last Monday, the 10-year Treasury YIELD ($TNX.X) is down 6.4 basis points. Since writing my 6/11/07 wrap "Banks Key as Yields Move Higher," the 10-year Treasury YIELD ($TNX.X) is down 5.9 basis points.

Now you know me. I tend to review my commentary, notes that I take, and I hope you're doing the same!

Since that very same wrap from 6/11/07, the S&P Banks Index (BIX.X) is down 2.3%, having declined 3.36% since last Monday, June 18th and have closed just below the 390 level of support I felt was important. While the BIX.X did trade strong into early last week near 405, sellers certainly seemed to outnumber buyers at that important level of resistance.

In my 6/11/07 I reviewed how regional banks can benefit fundamentally, or be hurt fundamentally by Treasury YIELD movement, where "loan demand" becomes the more difficult variable to observe.

You see, we can view, observe or see which way YIELDS are moving, and can view, observe, or see how the MARKET is treating the banks.


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Bear Stearns' recent news creates the uncertainty, and has evidently increased the "risk premium" of mortgage loans. Both "old," or previously originated, and "new" loans that lenders contemplate making. Oh, they'll still make new loans, but they'll likely be adding in points, or higher lending rates.

I currently observe WEAKNESS in the BIX.X.

And here's where I want to "build" a little on the 05/11/07 wrap, and discussion of Treasury YIELDS, as it would relate to the MARKET's perception of inflation, or lack of it, and this Thursday's upcoming FOMC decision on interest rates.

There may be some equity traders that are wondering "why" we seem to have lost the "lower yield = higher equity prices" in recent sessions.

Here's my analysis, based on recent observation, and some years of observations.

In Friday's OptionInvestor.com Market Monitor I "alerted" traders that the December Fed Funds futures (ff07z) 94.83 +0.02% began hinting that the likelihood of a Fed RATE CUT had just started to increase, with a 10% probability of a 25 basis point cut before the end of the year.

At tonight's close, the "odds" increase to just over 30% on the longer-dated December contract.

December 30-day Fed Fund Futures (ff07z) - Daily Intervals

Trying to "read" the bond market isn't as easy as some might think. There are different variables, observations that I like to follow over time.

But to start, you have to know where you've been in order to hopefully know where you're headed, and "why you're headed that direction."

The reason I do comment on Fed Fund futures at this point in time is that compared to Treasury Bond's trading in recent weeks (remember the sharp move higher in Treasury YIELDS) that may have had some, including PIMCO'S Bill Gross making a very bearish call on Treasury bonds, it might appear that the Fed Funds futures "have it right!"

That is, even in early June, when the benchmark 10-year YIELD ($TNX.X) was trading with a 4.95% yield, and had yet to "jump" to as high as 5.316% by June 13th, the above December Fed Funds futures contract was hovering at 94.77, or just above 94.75, which would be viewed as a Fed Funds target of 5.25%.

On my various Fed Funds futures charts, like that shown above, I like to place a retracement bracket on the contract(s), but use a "10%" increments.

You and I know that the Fed moves in increments of 25 basis points, so each "end" of the retracement bracket can be placed at each 25bp increment.

That is, a Fed Funds Target of 5.00% would be equivalent to Fed Funds futures 95.00. A Fed Funds Target of 5.25%, which is the CURRENT target set by the FOMC would be 94.75 Fed Funds futures.

My analysis here is that "Fed Funds have it right/correct" and that the recent Treasury bond market action has indeed had bond traders making the adjustment, and should now be more "in tune" with Fed policy.

If anything, the Fed Fund futures now begin to suggest at a MINIMUM that the FOMC will take NO ACTION on Monday.

Now, I want to STRESS, that I am interpreting what the MARKET is saying. It is IMPORTANT to understand this.

I would also say that the MARKET is now thinking that the FOMC's brief commentary in Thursday's statement will likely be less hawkish in regards to inflation.

Now, on Thursday, if ANY OF THIS MARKET ANALYSIS is WRONG, be ready for a NEGATIVE reaction, or LOWER equity prices.

Why does the Fed RAISE rates? Yes! To cool economic expansion and apply pressure, or try and ease inflation!

Housing prices look to be trending lower, not "plunging" at this point, but this was an inflation fear of the fed several months ago. ENERGY prices were another major concern.

Why does the Fed LOWER rates? Yes! To stimulate economic expansion as long as inflation remains under control.

For those monitoring higher GRAIN prices, and wondering what the Fed can do about that, I've yet to come up with a good answer. I'm not familiar what type of Fed policy, other than raising margin requirement on futures accounts to remove some speculator from the market, that could bring grain prices down.

If my analysis of the MARKET (or MARKET PARTICIPANTS) is CORRECT, then SPX 1,515 should be BROKEN TO THE UPSIDE!

10-year Treasury Yield - Weekly Intervals

Where've we been? How about from about 4.675% at the 5/11/07 close to above 5.245%. Now a "doji" weekly bar/candle close on Friday, and a sliiiight undercut of last week's low as December Fed Fund futures tick "up," and begin to hint at NO fed action Thursday, with a slight bias toward LOOSENDING.

Where's it headed?

I say a 5 handle, or 5.00% at Friday's close with the December Fed Funds futures (ff07z) going out at 94.875.

That darned doji.

Where've we been, where are we headed?

Well, with the BIX.X right at 390 and 50% of its 06/23/06 to 02/20/07 range, I'm going to have to mandate that the BIX.X gets some bullish traction now.

If not, we're going lower on the SPY. Here too we've got overlapping WEEKLY Pivot ($151.33) and MONTHLY Pivot ($151.63) less last week's ex-dividend of $0.6556/share.

S&P Depository Receipts (SPY) - WEEKLY Intervals

Even as the 10-year Treasury Yield ($TNX.X) edged lower last week, the SPY did see a Friday close below its 5/11/07 "doji" weekly interval bar.

I tend to use MACD as an indication of bull caution, and if over leveraged on the long/bullish side, late February's sharp weekly decline on the break below its 10-week (50-day SMA) provides the caution.


December Fed Fund futures (ff07z), if not the other nearer-term Fed Fund futures contracts all suggest NO FOMC action at Thursday's meeting.

Yes, the higher 10-year Yield ($TNX.X) may have weighed on the SPX/SPY, or broader market, but now it eases a bit, and begins to mirror Fed Funds.

With equities flat-to-lower last week, I would even suggest the LOWER yields (bond buying) a bit defensive.

And the CBOE Volatility Index (VIX.X) 16.65 +5.71% challenging its June 7th relative highs of 17.09 again today, that hints market participants are jittery about something.

And it shouldn't be the Fed.

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

Ashland - ASH - cls: 61.80 change: -0.47 stop: 59.95

Lack of follow through on the recent bounce is not looking good for the bulls. The technical indicators for ASH are starting to look more bearish. At this time we're expecting a dip toward $61.00. More conservative traders may want to tighten their stops. Our target is the 200-dma (currently at $64.48). More aggressive traders may want to aim higher but we would not hold over the late July earnings report.

Picked on June 10 at $ 61.49
Change since picked: + 0.31
Earnings Date 07/23/07 (unconfirmed)
Average Daily Volume = 657 thousand


Avery Dennison - AVY - cls: 66.06 chg: -0.36 stop: 64.90

The market weakness today pulled AVY under short-term support at $66.00 on an intraday basis. The dip looks like a potential entry point but traders might feel more comfortable waiting for a bounce before launching new positions. Our target is the $69.75-70.00 range. We do not want to hold over the late July earnings report.

Picked on June 11 at $ 66.05
Change since picked: + 0.01
Earnings Date 07/24/07 (unconfirmed)
Average Daily Volume = 728 thousand


BP Plc. - BP - close: 70.11 change: +0.35 stop: 67.85

News that the Nigerian labor strike had ended pulled crude oil to a hefty loss yet shares of BP bucked the negative trend in oil stocks. The stock actually hit a new relative high midday. We remain bullish on the stock with shares over $70.00 but there's a good chance BP could see another correction toward its rising 10-dma. The P&F chart points to a $90 target. Our target is the $74.85-75.00 range. More aggressive traders may want to aim higher. FYI: We do see some resistance near $73.50.

Picked on June 22 at $ 70.25
Change since picked: - 0.14
Earnings Date 07/24/07 (unconfirmed)
Average Daily Volume = 3.5 million


Cleveland Cliffs - CLF - cls: 78.05 chg: -1.41 stop: 74.99

It was a rough day for the bulls. CLF tried to rally over the $80 level but failed multiple times. If support wasn't so close near $75 and its 50-dma then today's session would look like a bearish entry point. We're going to stick to our plan and wait for a breakout over resistance at $80.00. Our suggested trigger to buy calls is at $80.55. If triggered our target is the $89.00-90.00 range. We plan to exit ahead of the late July earnings report. FYI: Readers might want to consider buying puts if CLF trades under $75.00.

Picked on June xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/25/07 (unconfirmed)
Average Daily Volume = 1.6 million


Chevron Corp. - CVX - close: 82.95 chg: +1.40 stop: 79.90

Tension between the world's major oil companies and the Venezuelan government over plans to nationalize the oil industry there did not stop any rally in CVX. Instead an analyst upgrade to a "buy" helped push CVX to a 1.7% gain. The intraday move over $83.00 looked like another entry point. More conservative traders can wait for a new relative high over $84.00 before considering new positions. Our target is the $89.00-90.00 range.

Picked on June 18 at $ 83.75
Change since picked: - 0.80
Earnings Date 07/27/07 (unconfirmed)
Average Daily Volume = 9.1 million


Deere Co - DE - close: 122.79 change: -0.56 stop: 117.45

For the moment we remain bullish on DE even though today's session looks like another failed rally near $125. A bounce from here or somewhere above the $120 level can be used as a new entry point. Conservative traders might want to consider a tighter stop loss closer to $120. We have two targets. Our first target is the $129.50-130.00 range. Our second, more aggressive target is the $134.00-135.00 range. The P&F chart is bullish with a $152 target.

Picked on June 20 at $123.55
Change since picked: - 0.76
Earnings Date 08/15/07 (unconfirmed)
Average Daily Volume = 2.6 million


Global SantaFe - GSF - cls: 72.42 chg: -1.28 stop: 66.65

We do not see any changes from our weekend comments. We're not suggesting new positions. More conservative traders will want to strongly consider exiting now to lock in a gain. Our target is the $74.50-75.00 range.

Picked on June 03 at $ 68.86
Change since picked: + 3.56
Earnings Date 08/01/07 (unconfirmed)
Average Daily Volume = 4.8 million


Russell 2000 iShares - IWM - cls: 82.49 chg: -0.43 stop: 81.35

More aggressive traders may want to buy this dip toward $82.00. We're a little concerned with the big volume on the session. More conservative traders may want to wait for a new move over $83.50 and use a tighter stop loss just under $82.00. We're going to set our stop under the June low. There is some resistance in the $84.50-85.00 zone but the Point & Figure chart forecasts a $95 target. We are aiming for the $86.50-87.50 range. The RUT doesn't move very quickly so September calls might work better.

Picked on June 24 at $ 82.85
Change since picked: - 0.43
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 71.6 million


Mastercard - MA - close: 161.95 chg: -6.48 stop: 157.99

Ouch! It was a nasty day for MA. The stock lost 3.8% and produced what looks like a bearish (reversal) engulfing candlestick pattern. We would definitely wait for signs of a bounce before considering new positions. MA should find some short-term support near $160 and its rising 10-dma near $159. There is still a chance that funds will buy this dip to do some window dressing. This is an aggressive, higher-risk play. Our target is the $179.50-185.00 range.

Picked on June 24 at $168.43
Change since picked: - 6.48
Earnings Date 08/01/07 (unconfirmed)
Average Daily Volume = 3.7 million


Manpower - MAN - cls: 92.60 change: -0.60 stop: 89.90

MAN has produced another bearish failed rally pattern. This is the third failed rally in the last five days. Thus far MAN has a bullish trend of higher lows but it wouldn't take much to break that pattern. A bounce near $92.00 could be used as a new entry point but readers might want to tighten their stop losses. Our target is the $99.50-100.00 range. The P&F chart has a triple-top breakout buy signal with a $110 target.

Picked on June 20 at $ 94.15
Change since picked: - 1.55
Earnings Date 07/20/07 (unconfirmed)
Average Daily Volume = 829 thousand


Pacific Ethanol - PEIX - cls: 12.71 chg: -0.12 stop: 11.90

If you look at the intraday chart it appears that traders were buying the dip near $12.50 late this afternoon. We remain bullish and don't see any changes from our weekend comments. We're playing the story on this stock because the technicals are still pretty bearish and the P&F chart points to a $9.50 target. We are suggesting call positions now or on a dip back toward $12.00. This does feel like an aggressive, higher-risk entry point given Friday's failure to close over $13.00. More conservative traders may want to wait for a rise past $13.35 or $13.50 before initiating new positions. There is potential resistance near $14.00, the 100-dma and the 200-dma. We're going to aim for the 200-dma, which means we'll use a $15.50-15.75 exit range for now. FYI: We cannot find a future earnings date for PEIX but suspect it will be in August or September.

Picked on June 24 at $ 12.83
Change since picked: - 0.12
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 892 thousand


Penn National Gaming - PENN - cls: 61.00 chg: -0.60 stop: n/a

PENN continues to slide, which is something of a surprise since the current deal values PENN near $67 a share. This is a speculative play gambling on more suitors showing up to drive the buyout price higher.

Picked on June 17 at $ 62.12
Change since picked: - 1.12
Earnings Date 07/26/07 (unconfirmed)
Average Daily Volume = 1.0 million


SanDisk - SNDK - cls: 47.13 change: -0.77 stop: 43.45

SNDK lost 1.6% during today's profit taking. Watch for the 10-dma near $46.50 or the $46.00 level to offer short-term support. We have two targets. Our conservative target is the $49.50-50.00 range. Our aggressive target is the $52.50-55.00 range, which might be too optimistic given our time frame. We don't want to hold over the mid July earnings report.

Picked on June 17 at $ 46.40
Change since picked: + 0.73
Earnings Date 07/19/07 (unconfirmed)
Average Daily Volume = 7.6 million


Valero Energy - VLO - cls: 75.94 chg: -0.51 stop: 72.45

VLO continues to churn sideways. We are suggesting new positions here but it would be perfectly fine to wait for a new relative high over $78.00 before initiating positions. More conservative traders might want to think about raising their stop loss toward last week's low. We're going to keep our stop under $72.50 and its 50-dma for now. Our target is the $84.50-85.00 range.

Picked on June 18 at $ 77.55
Change since picked: - 1.61
Earnings Date 07/26/07 (unconfirmed)
Average Daily Volume = 13.2 million


XTO Energy - XTO - cls: 60.49 chg: -0.96 stop: 58.95

Uh-oh! XTO is giving back a lot of our unrealized gains. The selling stalled near round-number support at $60.00. Technically a bounce from here could be a new entry point but we'd be cautious. We're not suggesting new positions. We are repeating our suggestion that readers consider taking some money off the table and lock in a potential profit. Our target is the $64.75-67.50 range.

Picked on May 27 at $ 57.63
Change since picked: + 2.86
Earnings Date 07/25/07 (unconfirmed)
Average Daily Volume = 3.2 million

Put Updates

Allegheny Tech - ATI - cls: 105.70 chg: -1.07 stop: 112.15

Today's weakness in ATI and its relative "closing" low looks like a new entry point to buy puts. However, over the weekend we suggested that more conservative traders may want to wait for a new relative low under $105.50 before initiating positions. Currently we have two targets. The first target is the $100.50-100.00 range since the $100 level would normally be round-number support. Our second, more aggressive target is the $95.50-95.00 range although we may need to adjust this to the 200-dma, which is rising and currently near $94.00. The P&F chart currently points to a $94 target.

Picked on June 12 at $106.70
Change since picked: - 1.00
Earnings Date 07/25/07 (unconfirmed)
Average Daily Volume = 2.1 million


Gilead Sciences - GILD - cls: 38.72 chg: -0.52 stop: 41.27

GILD sank to a new two-month low and eventually closed right at technical support near the 100-dma. We're not suggesting new positions at this time. Our post-split target is $37.62-36.25.

Picked on June 07 at $ 39.95 *split adjusted
Change since picked: - 1.23
Earnings Date 07/18/07 (unconfirmed)
Average Daily Volume = 4.1 million


Las Vegas Sands - LVS - cls: 74.72 chg: -0.13 stop: 80.26

LVS sank to a new multi-month low but the sharp rebound doesn't inspire the bears. We don't see any big changes from our weekend comments. Readers may want to lower their stops. Our target is the $70.50-70.00 range. More aggressive traders may want to aim lower.

Picked on June 17 at $ 76.78
Change since picked: - 2.06
Earnings Date 08/01/07 (unconfirmed)
Average Daily Volume = 3.0 million


Mettler Toledo - MTD - cls: 94.41 chg: +0.08 stop: 99.11

Today's action in MTD looks like a new bearish entry point. The stock produced a bearish failed rally near the $96.00 level. Our target is the $90.50-90.00 range. FYI: The P&F chart has reversed into a new triple-bottom breakdown sell signal with an $87 target (was $91).

Picked on June 19 at $ 96.75
Change since picked: - 2.34
Earnings Date 07/26/07 (unconfirmed)
Average Daily Volume = 215 thousand


QUALCOMM - QCOM - cls: 42.53 change: -0.46 stop: 44.05

We are still surprised that QCOM is not showing more weakness given the recent turn of events. On Friday the ITC denied QCOM's request for a stay on the importation ban. We would still consider put positions here but readers might want to wait for a new decline under $42.00 or $41.00 before opening positions. Our target is the $37.00-36.00 range. We do not want to hold over the mid July earnings report.

Picked on June 10 at $ 41.87
Change since picked: + 0.66
Earnings Date 07/18/07 (unconfirmed)
Average Daily Volume = 18.0 million


Weyerhauser - WY - cls: 79.98 chg: -0.59 stop: 82.05

Our bearish play in WY is now open. The stock dipped to $79.49 this afternoon and closed under what should have been support at $80.00 and its 50 and 100-dma. Our trigger to buy puts was at $79.49. Now that the play is open our target is the $75.00-74.00 range. The P&F chart is very bearish with a $61 target.

Picked on June 25 at $ 79.49
Change since picked: + 0.49
Earnings Date 07/20/07 (unconfirmed)
Average Daily Volume = 2.1 million

Strangle Updates


Dropped Calls

Central Euro. Media - CETV - cls: 98.39 chg: +2.19 stop: 89.75

Target achieved. CETV continued to rally on Monday. The stock hit an intraday high of $99.58. Our target was the $99.00-100.00 range. CETV has been showing a lot of relative strength so we'd keep an eye on it for another entry point in the future. Right now shares look overbought with the run from $90 toward $100.

Picked on June 17 at $ 92.75
Change since picked: + 5.64
Earnings Date 08/02/07 (unconfirmed)
Average Daily Volume = 124 thousand

Dropped Puts


Dropped Strangles


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


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