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Daily Newsletter, Monday, 08/06/2007

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Table of Contents

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

Market Wrap

Majors Stabilize as Financials Get a Bounce (Part II)

Stocks recouped the bulk of Friday's losses to start the week, where after Friday's late-afternoon conference call from Bear Stearns (NYSE:BSC) $113.81 +5.03%, which sent markets reeling back lower to their close, it would appear that mortgage finance company Fannie Mae (NYSE:FNM) $62.50 +10.36% asking regulators to raise the maximum amount of home mortgages and related securities it can hold in it investment portfolio, helped calm investors nerves.

Fannie Mae (FNM), which finances roughly 20% of all home loans in the United States, was ordered last year to keep its mortgage holdings at or below a fixed level, now under $727 billion, after a multibillion-dollar accounting scandal in September 2004.

And while today's Market Wrap title and first paragraph may read very SIMILAR to that from last Monday, it has become rather apparent that market participants are focused on the "same story," with a varying "cast of characters" sending the financials and major market averages higher and lower faster than a mortgage lender can quote you a rate on a 30-year fixed-rate mortgage!

Even as I review today's NYSE and NASDAQ new high and new low ratios in the above table, they look strikingly similar to last Monday's NYSE 5-day NH/NL ratio of 9.1% and NASDAQ's 5-day NH/NL ratio of 19.3%.

In essence, over the past 5-days, bullish leadership remains very anemic, but appears to be trying to "firm" from a very oversold measure.

Intermediate-term leadership (20-day NH/NL ratio) continues to deteriorate as investors/traders sell their losers, or those stocks that have become disappointments versus price levels found more than a year-ago.

Closing U.S. Market Watch -

I haven't checked all of the indexes in my U.S. Market Watch, but for the most part, the S&P Banks Index (BIX.X) 361.90 +6.29% grabbed today's top spot among sector winners. I do know that money-center, or more super-regional KBW Bank Index (BKX.X) 107.30 finished up 5.46 points, or +5.36% from Friday's close of 101.84.

On Friday, both the BIX.X and BKX.X were the only two equity-based indexes in my U.S. Market Watch to CLOSE at new 52-week lows.

Both rallied strong today, and the major indexes responded.

Yes, even the NASDAQ-100 Index (NDX.X) 1,954.37 +1.86% and its tracker QQQQ $47.97 +1.15%, neither containing as single bank, broker, or insurer.

Oil, unleaded and heating oil futures were notably weak today. Last week I was alerting traders in the OptionInvestor.com Market Monitor that the U.S. Oil Fund (USO) $54.20 -2.24% was nearing, then achieving its point and figure chart bullish vertical count of $59.00 on Wednesday, right as the EIA released its weekly crude oil inventory data that showed a "surprising" draw of 6.49 million barrels. A draw that was much greater than some of the higher estimates of 2 million barrels.

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Today's weakness in oil gives some reversing LOWER point and figure sell signals for this energy commodity and is near-term bearish in my opinion. The September contract traded as if it was VERY SHORT the last couple of weeks, and it would not surprise me to see it settle around $75 going into its expiration.

However, the October, November and December contracts, which do begin to "look beyond" the summer driving season, and hurricane season (usually end of September) would suggest to me that oil prices either stabilize, or trade lower to the end of the year.

On Friday, Colorado State University "cut" its 2007 hurricane forecast. On April 3rd, CSU's initial forecast was for 17 named storms, 9 hurricanes and 5 intense. On Friday, CSU's revised forecast was for 15 named storms (-2), 8 hurricanes (-1) and 4 intense (-1). CSU did say that the hurricane season will likely be "much more active" than the 50-year average.

While many traders and investors will be focused on tomorrow's FOMC statement on interest rates, and language from the Fed, I would have to think that there may be just as many traders and investors focused on what regulators have to say to Fannie Mae's (FNM) request to increase their purchases of existing mortgages.

While it would be my opinion that the Fed could ease some concerns regarding the current illiquidity in the credit markets with words that it is seeing less of an inflationary threat, which would further signal that it remains on "hold" with its fed funds rate at 5.25%, the response from regulators, specifically the Office of Federal Housing Enterprise Oversight to Fannie Mae's request may become equally as important.

Having followed Fed commentary rather closely the past several years, any RATE CUT message could send the "wrong message" to market participants. In recent weeks, Fed commentary has been that the current weakness in the housing market, and credit market, has NOT shown up as WEAKENING the U.S. economy.

Should the FOMC actually CUT RATES tomorrow, or give "too strong" a statement regarding a potential near-term rate cut, that could further spook investors that developments in the housing sector are MUCH GREATER, or WORRISOME than initially thought.

If we think Friday's comments out of the Bear Stearns (BSC) conference call that the "housing bubble" is looking similar to the "internet bubble" helped stocks reverse gains, then I'd have to argue that a rate cut, or overly worrisome comments from the FOMC could be viewed similarly.

That is not to say that market participants don't want the TRUTH from the Fed, which I feel we've gotten over the many years, but a sudden, or DRASTIC change in "Fed speak," or monetary policy would do little to calm investor jitters.

Pacholder High Yield (PHF) - Daily Intervals

At this time, the "best I can do" to display a market's view of the HIGHER RISK bond market, is to continue to follow the Pacholder High Yield (PHF) $8.97 -1.84% that is in my U.S. Market Watch.

On Thursday, August 2nd, PHF updated its net asset value for that day as $9.50.

One reason I do believe that today's TOP STORY may well have been Fannie Mae (FNM) news would also go back several months to Treasury Secretary Paulson's words of caution to U.S. regulators regarding the potential "over regulation" of mortgage lending markets.

While the Federal Reserve can create some "liquidity" to the credit markets by cutting rates, we may now begin to see how regulators "capping" Fannie Mae's ability to buy, or generate loans has also added to the illiquidity of the mortgage markets.

That's not to say that regulator oversight, or closely monitoring what Fannie Mae is doing is WRONG, but sometimes, trying to "help" things, only makes things worse.

What I'm saying, or thinking here is that while the Office of Federal Housing Enterprise Oversight may indeed be trying to "help" oversee what Fannie Mae (FNM) is doing, that oversight may well be "hurting" some liquidity to the mortgage lending market that is currently needed.

In today's Market Monitor at OptionInvestor.com, Jane Fox noted something rather interesting, and informative.

Just prior to the cash market open at 09:30 AM EDT, she noted an announcement from Interactive Brokers regarding margin requirements for S&P futures (ES).

Note: Effective Monday 6 August, 2007, and until further notice, there will be a significant change in the intraday margins for most stock and index futures and futures options. Specifically, the intraday margin will be set to cover a price move of 4% in the instrument, but will not exceed the regular maintenance margin. By example, a 4% move in the ES futures would require intraday margin of 4% * 1450 price * 50 multiplier = $2900 USD. The regular intraday margin is $1400 USD and the regular overnight maintenance margin is $2800 USD so for ES the intraday margin would be the same as the overnight. PLEASE NOTE THAT THE ONLY MARGINS AFFECTED BY THIS POLICY CHANGE ARE INTRADAY (REDUCED) MARGINS ON EQUITY-LINKED FUTURES AND FUTURES OPTIONS.(End Note)

The main takeaway from what Interactive Brokers is doing, or "adjusting to" until further notice, is that they are trying to accommodate EXTREME market fluctuations on an intra-day basis.

For those that have been trading some of my Dow futures (YM) signals in the Market Monitor, you KNOW how quickly they've moved in just the span of 15-minutes!

Today, was really no exception!

Global Equity Benchmarks / Currencies

In last Monday's Market Wrap, I showed the same table above. All I'm doing here is "testing" my U.S. index analysis that BIG and NARROW is stronger than SMALL and BROAD.

Like a point and figure chart, the week-to-week comparison may remove some of the hour-to-hour and day-to-day volatility.

Yes, today's 286-point gain for the Dow Industrials (INDU) does have the NARROWEST and BIG caps relatively stronger than the other major U.S. indexes that we might trade.

We still see the SMALL caps, which is also rather BROAD (2,000 stocks) under performing.

While the S&P 500 (SPX) components are considered LARGE, it is rather BROAD (500 stocks) and its narrower brethren S&P 100 (OEX) 683.66 +2.43%, though down -0.21% since last Monday's close, should be viewed as "stronger" than a -0.42% decline in the SPX.

Very small difference week-to-week I agree.

Look at the Asian markets.

On Monday, the Hang Seng fell 601.71 points, or 2.67% to close at 21,936.73. Hardly a China "melt down" at this point.

Japan's Nikkei-225 fell just 65 points, or -0.39% on Monday, but remains a laggard for Asian equity index benchmarks.

European equity benchmarks still seem to "lead" weakness, or "lag" gains/bounces found here in the U.S.

What the above table suggests to me is that traders are rather focused on the "credit crunch" found here in the U.S. right now.

Russell 2000 ($RUT.X) - Daily Intervals

In last Monday's Market Wrap, we looked at the WEAKEST $RUT.X with only the "dark purple" retracement on the chart. Some of last week's Market Monitor commentary had me placing a "blue" retracement from the recent 03/05/07 low close to 7/13/07 high close on the RUT.X chart.

The ability of the RUT.X to muster a close back above 760.06 and 763.86 certainly suggests to me that short-covering, if not some bottom fishing bulls were doing some buying in an "oversold" index.

From a BEAR's perspective, I would place MINIMUM risk to
778.34-785.55 at this point and would strongly suggest bearish profits be protected.

Keep an eye on your "junk bond" indicator(s). Just observe a couple of days stability. Weakness tends to get SOLD first, and this is the weakest index in my opinion.

S&P 500 Bullish % (BPSPX) - 2% box chart

And here we, or "they" are. The S&P 500 Bullish % (BPSPX) from Dorsey/Wright and Associates is at the SAME LEVELS of RISK and internal weakness/strength as it has been several times before.

My "period of similarity" has been May (5), June (6) and July (7) of 2006.

Will history repeat? Will BUYERS (demand X) once again be able to outstrip SELLERS (supply O) and we begin to see point and figure charts of the stocks comprising the S&P 500 start to see reversing higher point and figure buy signals?

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

In last Monday's Market Wrap I began outlining a period of SIMILARITY in the SPX to that found in May, June and July of last year.

So far, I'd have to say INTERNALS (BPSPX) and the SPX itself look rather SIMILAR.

Today's trade at 1,427.37 did have the SPX chart falling to 1,430.

That's SIMILAR to last summer when the SPX fell to 1,220.

We can't chart today's trade at 1,460 at this point (blue ?), but that might be envisioned as the SPX at about 1,250 in late June of last year (prior to 7).

This can be one of those "when in doubt get out" moments for bears, and bulls are now looking for SIMILARITY to the past, in order to get long.

Easy does it, and you don't need to do it all at once!
 


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

Allegheny Tech - ATI - cls: 101.91 change: -0.49 stop: 98.49

Our bullish buy-the-dip play in ATI is now open. Shares slipped to $99.79 before rebounding. The $100 level and its rising 200-dma should be support and if you missed the early entry point we would still consider new call positions here. Our only concern is that ATI displayed relative weakness with another close in the red today. More conservative traders could raise their stops toward today's low (99.79). Our target is the $104.85-105.00 range. The next hurdle is short-term technical resistance at the 10-dma.

Picked on August 6 at $100.50
Change since picked: + 1.41
Earnings Date 10/25/07 (unconfirmed)
Average Daily Volume = 2.0 million

---

Lam Research - LRCX - cls: 57.47 chg: +2.65 stop: 53.90

The market's big rebound on Monday certainly helped LRCX perform a big bounce of its own. The stock rallied higher right from the start, which was unexpected after Friday's weakness. Shares closed up 4.8% on above average volume, which is bullish. We would not chase the bounce at this time. More conservative traders may want to tighten their stops. Our target is the $59.75-60.00 range.

Picked on August 3 at $ 55.10
Change since picked: + 2.37
Earnings Date 08/24/07 (confirmed)
Average Daily Volume = 2.9 million

---

PACCAR - PCAR - cls: 83.80 change: +3.14 stop: 79.70

Technically this is another bullish entry point on PCAR. The stock bounced from support near $80.00 again, which definitely looks like an entry point to buy calls. However, the stock is still trading under short-term technical resistance at its 10-dma and 100-dma and what is quickly becoming the top of its trading range near $85.00. We would hesitate to buy this bounce. Our target is the $89.50-90.00 range.

Picked on July 26 at $ 82.87
Change since picked: + 0.93
Earnings Date 07/24/07 (confirmed)
Average Daily Volume = 1.8 million

---

Penn National Gaming - PENN - cls: 57.28 chg: +0.09 stop: n/a

There is nothing new to report on for PENN. We have two weeks left before August options expire. Right now the situation looks grim. The stock should be trading near its buyout price around $67. The fact that it's not would suggest that the market doesn't believe this deal will get done - at least not in its current form or price. PENN's 45-day window to solicit a higher bid has expired. We're not suggesting new positions at this time.

Picked on June 17 at $ 62.12
Change since picked: - 4.84
Earnings Date 07/26/07 (unconfirmed)
Average Daily Volume = 1.0 million

---

Sears Holding - SHLD - cls: 134.09 chg: +2.51 stop: 127.49

Entry point alert. Over the weekend we suggested to readers to wait for a dip and bounce near $130 as another entry point. SHLD slipped to $129.55 before rebounding back. This remains an aggressive, higher-risk play but today's move looks like a buying opportunity. More conservative traders could put their stop under today's low. Our target is the $139.50-140.00 range.

Picked on August 3 at $133.00
Change since picked: + 1.09
Earnings Date 08/16/07 (unconfirmed)
Average Daily Volume = 1.7 million
 

Put Updates

Avalonbay - AVB - cls: 109.77 change: -4.62 stop: 115.26

Warning! Our new play in AVB is in jeopardy. The market's big bounce fueled a 1.7% rebound in AVB and the stock looks poised to continue higher tomorrow. Helping fuel the rebound was news that AVB was increasing its stock buyback program. We would wait and watch for a new failed rally under $115 before considering new put positions.

Picked on August 05 at $109.77
Change since picked: + 0.00
Earnings Date 07/31/07 (confirmed)
Average Daily Volume = 1.0 million

---

Bank of Amer. - BAC - cls: 48.16 chg: +1.16 stop: 48.51

Bullish reversal alert! We have to issue a reversal warning on BAC. Investors stepped in to buy the dip in financials. There was a lot of positive press from Wall Street today as they tried to reassure the markets that things were not as bad as they sounded last week. This definitely looks like short covering. BAC rallied 2.4% on huge volume today. Odds are good that if there is any follow through higher tomorrow we'll be stopped out at $48.51. The sad news is that the early morning low today was enough to hit our trigger and open the play at $46.75. We're not suggesting new positions at this time.

Picked on August 06 at $ 46.75
Change since picked: + 0.00
Earnings Date 07/19/07 (confirmed)
Average Daily Volume = 22.7 million

---

ITT Educ. - ESI - cls: 104.47 change: +2.25 stop: 107.51

Be careful here. Traders bought the dip in ESI at the $100 mark. We warned readers that the $100 level could be short-term support. At this point we would wait and watch for a failed rally under $105 or the 10-dma near $107 before considering new bearish put positions. Our target is the $92.00-90.00 range. The P&F chart is bearish with an $86 target.

Picked on August 05 at $102.22
Change since picked: + 2.25
Earnings Date 07/26/07 (confirmed)
Average Daily Volume = 491 thousand

---

MSCI Brazil iShares - EWZ - close: 61.10 chg: +0.20 stop: 64.15

We have to urge some caution with EWZ as well. The intraday breakdown under $60.00 hit our trigger point to buy puts at $59.90. However, the big afternoon bounce could have more room to run. We're not suggesting new positions at this time. Wait for a failed rally under the 10-dma around $63.35 before considering new put positions. Our target is the $55.25-55.00 range.

Picked on August 06 at $ 59.90
Change since picked: + 1.20
Earnings Date 07/27/07 (unconfirmed)
Average Daily Volume = 9.7 million

---

FMC Tech. - FTI - cls: 89.82 change: +1.60 stop: 92.51

FTI rebounded from its lows today but the overall pattern continues to look bearish. Watch for a failed rally near $90.00 or the 10-dma near $91.00 as a new bearish entry point to buy puts. Our target is the $82.00-80.00 range. We may have to adjust our target to account for the rising 50-dma. Currently the P&F chart points to an $83 target. FYI: FTI is due to split 2-for-1 on September 4th.

Picked on August 05 at $ 88.22
Change since picked: + 1.60
Earnings Date 07/30/07 (confirmed)
Average Daily Volume = 677 thousand

---

Harley Davidson - HOG - cls: 56.72 change: +1.52 stop: 60.26

We have to issue another bullish reversal alert for HOG. The stock dipped to $54.24 and rebounded back to close with a 2.7% gain. Currently the stock should find short-term resistance near the $58.00 level. We're not suggesting new positions at this time. Our target is the $52.50-50.00 range. The P&F chart already points to $42.00.

Picked on July 23 at $ 57.75
Change since picked: - 1.03
Earnings Date 07/27/07 (unconfirmed)
Average Daily Volume = million

---

Lubrizol - LZ - cls: 61.37 change: +1.43 stop: 64.15

LZ's rebound today erased Friday's decline. The pattern continues to look bearish but we'd wait for a failed rally under the 10-dma around $62.80 before considering new put positions. Our target is the $57.00-55.00 range. $57.00 is near the top of the April gap and $55.00 is near technical support at its 200-dma. If you want to aim for the $55 region then this looks like a new entry point for puts.

Picked on July 29 at $ 61.62
Change since picked: - 0.25
Earnings Date 07/27/07 (confirmed)
Average Daily Volume = 563 thousand
 

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.)

---

DaimlerChrysler - DCX - cls: 90.05 chg: +0.93 stop: n/a

We are facing a worst-case scenario with DCX continuing to bounce around sideways. Shares remain inside the $88-92 trading range. We are not suggesting new strangles on DCX at this time. The options in our suggested strangle were the August $95 calls (DCX-HS) and the August $85 puts (DCX-TQ). Our estimated cost was $3.70. We want to sell if either option rises to $6.45.

Picked on July 22 at $ 89.75
Change since picked: + 0.30
Earnings Date 07/25/07 (unconfirmed)
Average Daily Volume = 1.3 million
 

Dropped Calls

Terex - TEX - cls: 83.41 change: +1.01 stop: 79.74

TEX spiked lower this morning and tested $78.55 before rebounding. Over the weekend we raised our stop loss to $79.74 so the play is now closed. However, nimble traders might want to keep an eye on TEX since today's big intraday rebound might be used as a new entry point for bullish positions. The intraday low today was relatively close to the late June low. The stock had previously hit our conservative target in the $89.50-90.00 range several days ago.

Picked on July 26 at $ 83.87
Change since picked: - 0.46
Earnings Date 07/25/07 (confirmed)
Average Daily Volume = 1.1 million
 

Dropped Puts

Baker Hughes - BHI - cls: 76.40 change: +0.56 stop: 80.05

Target achieved and exceeded. Oil service stocks continued to look weak this morning. Shares of BHI dipped to an intraday low of $73.65. Our target was the $75.25-74.00 range. If you didn't exit be careful. The big intraday bounce looks like a short-term bullish reversal and buying opportunity.

Picked on July 29 at $ 79.43
Change since picked: - 3.03
Earnings Date 07/27/07 (unconfirmed)
Average Daily Volume = 4.6 million
 

Dropped Strangles

None
 

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

DISCLAIMER

Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

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