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Daily Newsletter, Saturday, 09/15/2007

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Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews
  4. Trader's Corner

Market Wrap

Tiptoe To Tuesday

As the week came to a close the volume slowed significantly with many traders away from the markets. Volatility was subdued and the markets held their early week gains to finish up about +2% for the week. As traders left early for the Jewish holiday those remaining just wanted to tiptoe quietly into the close in hopes of preserving those gains ahead of next weeks heavy economic calendar, FOMC meeting and key subprime earnings.

Dow Chart - Daily

Nasdaq Chart - Daily

Friday saw a flurry of economic reports but none were spectacular. Import prices declined -0.3% in August compared to a +1.3% rise in July. The drop was due mostly to a fall in oil prices in August. Guess where that index is going to be next month? With oil at record levels the import price report for September is likely to show an even stronger rise.

August Retail Sales rose +0.3% and half of the consensus estimates for a +0.6% gain. Ex-autos the headline number would have fallen by -0.4%. End of summer bargains prompted a +2.8% jump in auto sales. Gas station sales fell -2.4% but as we know that will reverse in September. Furniture sales rose +0.5% and electronics continued to show strength with a +0.4% gain. On the surface it appears consumers are still healthy and hoarding of cash has not yet hit the retail sector seriously. Back to school buying was credited with keeping sales in positive territory.

Industrial Production rose +0.2% in August and only slightly below expectations. Output was weak, falling -0.3% with mining output falling -0.6%. Were it not for a monster +5.3% surge in utility output the headline number would have been much worse. Warm temperatures contributed to the rise in electricity output for summer cooling. Capacity utilization at 82.2% was unchanged from the prior month. Auto production fell -2.6% and the largest drop since January.

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Business Inventories rose +0.5% and slightly above consensus with retailers up +1%. This was a July report so it did not have any impact on the markets. Business sales were up a cautious +1.1% with manufacturer sales up +2.6%. The inventory to sales ratio fell to a new cycle low at 1.26% suggesting there is a manufacturing upswing somewhere in our future.

Consumer Sentiment was inline with analyst's estimates with a slight +0.4 rise to 83.8. That surprised me given the negativity in the marketplace over oil and loans. It is still holding at lows not seen since last August. With mortgage resets growing, jobs falling and gasoline prices likely to rise sharply over the next couple weeks it is not likely that sentiment will rise soon.

Next week is a monster week for economics with the FOMC meeting the largest market mover. Earnings from the brokers will also highlight the extent of the subprime damage. The Producer Price Index on Tuesday is expected to show a decline but the Fed will be looking at the inflation rate at the core level to see if producers are going to be passing costs on to consumers. On Wednesday the Consumer Price Index will show the impact of that pass through of producer prices from prior months. The Philly Fed Survey closes the economic calendar for the week on Thursday and is still expected to show an improvement over July. I am not holding my breath on that one. It could very easily surprise to the downside.

Economic Calendar

After two weeks of concentrated Fed analysis in the press and on stock TV the consensus is for a -25 basis point cut in the Fed rate and a -50% point cut in the discount rate. There are some that believe Bernanke could lower reserve requirements for banks to improve liquidity in the system. I am not in that camp and I believe lowering the reserve requirements at a time when banks are under stress and holding bad paper is probably not a good plan. Those requirements are put there to cushion against the impact of bad loans and it sounds like we need a larger cushion today not a smaller one.

The current Fed scenario suggests we will see four 25-point rate cuts by June but analysts are up in arms against that plan. They feel a drawn out rate cut cycle will only prolong the pain and further damage the economy. Most favor a sharper 50-point cut next week followed by another 50 points in October and then a pause. Analysts feel the economics will deteriorate so badly in Sept/Oct that the Fed will be forced to cut 50 points at the Halloween meeting and be another 60 days behind the curve if they wait to make that large cut. By taking decisive action next week they can provide a calming influence into Q4 and help offset the damage of the continuing mortgage reset scenario.

I am not going to beat a dead horse here because I am sure everyone already knows how big a news event the FOMC meeting will be. In reality it is more of a sentiment band-aid than a real economic event. Any cut will help but it normally takes 12-18 months for it to be fully felt in the economy. Mortgages would be the only immediate benefit and the housing sector needs all the help they can get. If by chance the Fed did not cut the market would behave badly and we could easily see a several hundred point contraction. A 25-point cut is already priced in so that may not produce a material move higher. There are signs of inflation coming back to haunt the Fed so their decision is not a slam-dunk. The language is of course the key and the Fed should consider carefully what they say.

The real key to the long-term health of the markets may not be the Fed but the earnings from BSC, LEH, MS and GS next week. The dates appear to have finally been nailed down and I posted them again in the economic calendar above. With Lehman first on the list any positive surprise should translate into a substantial bounce on the rest. Goldman remains my best pick in that sector and I would not hesitate to buy them on positive Lehman news. Bear Stearns is the most feared report but as I said last week I think all the bad news is already priced into the stock.

Merrill Lynch (MER) warned on Friday that the subprime problem and the credit crunch in corporate paper was forcing it to reduce the value of securities on their books. This would force them to post a lower profit in Q3. The earnings warning was made in a SEC filing in regard to a $1.3 billion buyout of subprime lender First Franklin Financial in late December. That deal is expected to close on Sept-21st. Merrill also packaged and sold mortgage backed securities on subprime loans acquired elsewhere. Merrill did not state how much the write down would be and on what assets leaving analysts to wonder if this was the first shoe to drop leaving a larger one for later. If you let the market down in stages it is better on your stock price. If Merrill has to warn on subprime issues you know the other brokers are also going to face the music, possibly in a much harsher fashion.

Goldman announced last week that another of their hedge funds had a significant loss over the last month. I don't think that will impact Goldman Sachs stock next week since the daily hedge fund implosions are hardly making the news any more. I continue to hear that of the 9000 hedge funds as many as 2000 may not be around at year-end. Reportedly many are hanging on to that last thread of hope for a miraculous recovery in the credit markets. The problem here is the lack of a market in debt. Once the major brokers identify debt valuations this week those funds will have to mark to market and many will be underwater.

Bear Stearns (BSC) rebounded about $12 from their lows on Monday at $105. The major mover ahead of next Thursday's earnings was news billionaire Joseph Lewis bought 8.1 million shares in late August and early September bringing his total stake to 7% and making him the largest shareholder. Lewis said he had no activist interest in BSC and just bought the shares for an investment. Lewis currently controls more than 170 companies. Having a knowledgeable multi billionaire invest nearly $1 billion in BSC stock did wonders for investor confidence.

Best Buy (BBY) reports on Tuesday and that could be our window on the current state of the consumer. The retail sales for August showed electronics as one of the few sectors still positive. We should get a better understanding of current conditions and future guidance when BBY reports.

Tech stocks could get a boost when Adobe reports on Monday. The tech sector was stunned into only a +1 point gain on Friday after Intel was downgraded on valuation. The semiconductor sector was also dragging on tech stocks all week after profit warnings in that group. The SOX was the only index to post a loss (-1.16%) for the week. The August semiconductor book-to-bill report is due out Tuesday after the close and it had fallen to .84 in July and a two-year low. That equates to $84 in bookings for every $100 in product shipped. Monthly bookings fell -10.4% in July and YTD bookings have fallen to -17% below the prior year. An increase in production capability has increased the supply of chips in 2007 resulting in excess inventories and a drop in prices. Manufacturers are struggling to overcome this inventory overhang but DRAM and NAND products are beginning to firm. To top it off SanDisk and 23 other companies are being sued in a class action case for allegedly conspiring to fix the price of flash memory. The case is seeking restitution, and triple damages.

FedEx (FDX), the poster stock for dead money in 2007, reports earnings on Thursday. It will not be the earnings that are so important but the guidance about the state of the shipping business. After Bill Zollars from YRC Worldwide (YRCW) came out last week and begged for a rate cut to head off a recession and claimed there was no build up in progress for holiday orders the trucking sector has been under pressure. It will be up to FedEx to come to the rescue. The transports are struggling to hold support at 4700 and positive guidance by FDX would help. Other stocks in the sector are UPS, JBHT and EXPD.

Hovnanian (HOV) is having a fire sale this weekend in all of its communities from coast to coast. They announced they were cutting prices on homes for 3-days only by $75,000 to $100,000 and the goal was to sell 1000 homes. They picked the price cut to specifically put as many homes as possible under the $417,000 jumbo loan limits and allow more buyers to qualify. HOV stock had fallen to $10 and found a solid bottom there over the last week. The news of the sale caused a +10% spike. Reportedly business was brisk in their sales offices with CNBC showing lots of buyer traffic and interviewing people signing contracts as fast as they could to lock in the price and the model they wanted. Hovnanian said they wanted to cut prices sharply enough to push people off the fence and make a buying decision. He said too many buyers were just waiting on the sidelines for a sign the decline in prices was over. This forced them to act quickly or be left out.

Carl Icahn filed a notice on Friday that he had acquired an 8.5% stake in BEA Systems (BEAS). He said Icahn Capital Management had acquired 33.4 million shares and call options representing another 16.1 million shares. That would be the vast majority of the open interest in BEAS calls and a slick move. You buy a pile of calls at for the $12.50 strike for pocket change with BEAS languishing at $11.50-$12. That does not directly influence the stock price. After your announcement sends BEAS to $13.50 and probably higher next week since the announcement was late in the day, you can either exercise the calls locking in the stock at a cheaper price or simply sell the calls for a nice profit on news you generated. A very nice trick if you have the bucks and name to pull it off. Icahn said an acquirer could make better use of BEAS technology and he would lobby for the company to be sold using his own slate of directors. BEAS issued no comment on the news. BEAS is currently in danger of being delisted from the Nasdaq for failure to file reports for several quarters while doing a stock options probe. BEAS did confirm it received another delisting notice from the Nasdaq on Friday.

British bank Northern Rock, the 4th largest mortgage issuer in England, had to be bailed out on Friday by the Bank of England. Stock in the bank fell 31% when the news broke. Depositors stood in line for hours to withdraw their money. The bank said it had been unable to raise funds since last month when the global credit markets froze up. The amount of the bailout was not disclosed and the BOE said Northern Rock was in no danger of collapse. The bank said there was no sign of easing in the credit markets and conditions could continue to be grid locked through year-end. Just last week a Bank of England big wig derided the American banking crisis saying the Fed should not bail banks out and should let U.S. banks fail for making bad decisions. It is funny how high profile statements have a way of coming back to haunt you. British analysts warned about comparing Northern Rock to Countrywide saying NR was more diligent in its lending practices, no longer has a subprime book and has a repossession rate of less than 1%.

Countrywide (CFC) can't say that but it is trading more than $3 off its lows for the week after saying it lined up another $12 billion in borrowing capacity from new or existing credit facilities. They also reported that loan fundings for August were $34 billion, down 17% from August 2006, but still a respectable number in a tough environment. There were $52 billion in the pipeline at the end of August, down from $64 billion at the same time last year. That should put a lot of skeptics to rest with news that business as usual is not as bad as everyone thought.

Alan Greenspan will be interviewed on 60 minutes this Sunday and the interviewer has a definite edge in her voice. Gone is the fear and awe that reporters expressed when they interviewed him as Fed Chairman. It is scoop time and the sharks smell blood. In an excerpt making the rounds on Friday Greenspan denies any knowledge or control over the subprime problem. He said he "didn't really get it until late 2005 or early 2006." Sure Alan, and I guess you want us to believe in the tooth fairy as well. In the interview he stumbles all around the subject before admitting he didn't get it. That is a heck of an admission by the guy everyone thought was infallible. One analyst called it "an incredibly disingenuous, if not cowardly, attempt to weasel out of responsibility for the current economic mess." Catch the interview on Sunday night.

Merger and acquisitions hit the low for the year this week with only 135 deals announced totaling $5.9 billion according to Thomson Financial. This was the lightest volume and the lowest dollars for the year. The next lightest weeks were August 19th with 154 deals and $12.1 billion and January 6th with 235 deals for only $6.9 billion. When you can't be assured of funding it makes it a lot tougher to sign those contracts including a breakup fee if the deal does not close.

EExpiring October Crude Oil Chart - 30 min

Oil prices hit yet another new high on Friday at $80.35 before succumbing to selling that knocked the price back to $79 at the close. The quick appearance of Humberto caught traders leaning the wrong way and shorts were again massacred. Fortunately the three refineries knocked offline by storm related power outages will all be back online by Saturday. There was no material disruption and no refinery damage. Tropical storm Ingrid is now wandering around east of Puerto Rico and tracking northward toward Bermuda. It is very slow moving and it could be Wednesday before we know for sure it is not going to take a left turn into the Gulf. That is cutting it very close for holders of the October futures contracts. The October contracts, the ones that hit $80.35 on Friday, cease trading on Wednesday and anyone not wanting to take delivery will need to exit before then. Add in the normal weekly inventory numbers on Wednesday morning and the stage is set for a massive sell off next week. I suppose that was part of the crash in the last 30 min of trading on Friday. With open interest so high in this contract there are going to be a lot of exits next week. How many will wait until the last minute on hopes of another inventory drop or a left turn by Ingrid is anybody's guess. I loaded up on shorts at $80 so I hope there is a stampede for the exits and no weekend bombing of Iran. Analysts claim Iran could be part of the high prices. The UN Security Council group dealing with Iran over the nuclear issue is scheduled to meet again next Friday to discuss a third round of sanctions. I doubt further sanctions will be approved until 2008 because Russia and China are against further actions. With the U.S. stonewalled in causing Iran further grief and Bush running out of time in office many think the U.S. or Israel will take action to destroy the nuclear sites. That would of course send oil prices through $100 within seconds.

Were it not for the Fed meeting clouding the horizon I would again be on the verge of switching to a bullish bias in the broader markets. The shorts have been unable to capitalize on numerous events and even the approach of the earnings warning cycle and some high profile warnings already announced has had little impact on the markets. The Dow is slowly creeping up on resistance at 13500 and a break over that level could trigger a rush of buying. I have begun to believe that the August crash has cancelled the potential for a further drop in September and the bottom is behind us. What the Fed does, while maybe not material for the economy in the short term, is critical for short-term market sentiment. Any kind of cut at the Tuesday meeting should result in further bullishness even if there is a sell the news reaction.

The markets will still be hostage to the financial earnings next week but if Lehman does not disclose disastrous results on Tuesday the rest of the club will be expected to do the same. That could be the first step on the wall of worry the bulls will use to reach higher ground. The S&P has strong resistance at 1490 and that was evident again on Thursday when 1489.58 was the intraday high. However, with the financials the largest component of the S&P and the reason it has been held back for weeks, a rebound in financials after this week's earnings will definitely aid in any breakout.

The Nasdaq has strong resistance between 2610-2635 and it is knocking on the door. With Adobe and Oracle announcing earnings next week we could have the software sector lead the techs over the roadblock. The problem for techs will be the semi book-to-bill on Tuesday and any new tech warnings. Summer is not normally a bullish quarter and earnings estimates have been moving progressively lower. That could be a bad sign or the potential for some positive surprises.

SS&P-500 Chart - Daily

Russell 2000 Chart - Daily

Russell 2000 Chart - 15 min

The flaw in the bullish argument is still the Russell-2000. While big cap stocks are making new highs on decent volume the small and mid caps are just doing good to tread water. The Russell posted the smallest gain (+0.9%) of any major index for the week. While it appears 775 has emerged as decent short-term support the Russell has not been able to move more than a few points over that level all week. This is way below the even stronger resistance at 800. Fund managers are still avoiding risk and more importantly avoiding liquidity issues. They are favoring the big caps where a quick exit is always possible. For instance GE traded over 35 million shares on a lazy Friday and well over their average volume. The QQQQs traded 100 million and Intel nearly 70 million. With total volume across all exchanges only 4.6 million, the lowest since 8/27, those individual volumes are huge.

I have been recommending a neutral or bearish position under 790 on the Russell and we have been pinned just above support at 775 for a week. Some may see it as a glass half full and support at 775 ready to act as a springboard for the next attack on 800. Others may see it as glass half empty and support about to break. I am with the half full crowd today and think we are about to see an end to this consolidation. I am changing my market bias to a long over 775 and short under 770. There are a great number of events next week that could scuttle any rally attempt but they could also provide fuel for a takeoff. Those events are the Fed, financial earnings, tech earnings, PPI, CPI, BBY/FDX earnings, etc. They can paint a positive picture contrary to that portrayed by the Jobs report or they can confirm the economic decline. I believe we are either going to rally hard or crash hard next week but the risks to the upside is greater. All the bad news should be priced in or at lease very close to it. Of course as soon as I make that statement some new revelation will appear to take us down another notch. I saw the Northern Rock bailout on Friday as market negative and after an opening dip it was quickly ignored. The bears have run out of ammo and may be ready to hibernate for the winter. It will all depend on the events for the week and the severity of any that turn negative. Otherwise I am going to maintain a long bias over Russell 775 and a short bias for energy unless Ingrid turns west. It should be a full week! Good luck!
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
AAPL XLE AZO
C   DJX
SYK   LEH
TMA   XLF

Play Editor's Note: Historically September is the worst month for stocks, especially the second half of September. This should make you ask why would we be adding new bullish positions at this time? Good question! We suspect that the markets experienced their September-October sell-off a bit early with the big market decline in August. Second, the Federal Reserve appears poised to launch a new series of rate cuts. While this will be offset by the fear that the U.S. is in or rapidly heading into a recession, the market usually looks past the present to the future. It's a well-known market maxim that you "don't fight the fed." We expect that the markets will remain volatile but if we can get past this week with the Fed meeting and a number of financial and broker earnings reports then the path of least resistance is likely to be up. More conservative traders might feel safer to just step aside and wait until Wednesday before considering any new positions.


New Calls

Apple Inc. - AAPL - cls: 138.81 change: +1.61 stop: 133.69

Company Description:
Apple ignited the personal computer revolution in the 1970s with the Apple II and reinvented the personal computer in the 1980s with the Macintosh. Today, Apple continues to lead the industry in innovation with its award-winning computers, OS X operating system and iLife and professional applications. Apple is also spearheading the digital media revolution with its iPod portable music and video players and iTunes online store, and has entered the mobile phone market this year with its revolutionary iPhone. (source: company press release or website)

Why We Like It:
It looks like the price-cut news that took shares of AAPL from $145 to $130 has been fully digested. Shares are rebounding with a very bullish trend of higher lows. There was something in the news recently on how the price cut has temporarily tripled the sales pace of the iphone. Speaking of the iphone the company just announced on September 10th it had sold its one-millionth iphone. The stock has short-term resistance at $140.00. We're suggesting a trigger to buy calls at $140.25. If triggered we have two targets. Our first, more conservative target is the $144.75-145.00 range. Our second, more aggressive target is the $149.00-150.00 range. We do have a very wide (aggressive) stop loss because the markets and AAPL have been so volatile. Readers are strongly encouraged to find their own stop loss placement that best suits their risk level. We will note that the technicals are somewhat mixed but the P&F chart is still bullish with a $180 target. We do not want to hold over the mid October earnings report.

Suggested Options:
We are suggesting the October calls. Our suggested trigger to open positions is at $140.25.

BUY CALL OCT 135 APV-JG open interest=30892 current ask $9.80
BUY CALL OCT 140 APV-JH open interest=46347 current ask $7.00
BUY CALL OCT 145 APV-JI open interest=34835 current ask $4.90

Picked on September xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/18/07 (unconfirmed)
Average Daily Volume = 39.9 million

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Citigroup - C - clos: 46.64 change: +0.28 stop: 44.49

Company Description:
Citi is todays pre-eminent financial services company, with some 200 million customer accounts in more than 100 countries. Our history dates back to the founding of Citibank in 1812, Bank Handlowy in 1870, Smith Barney in 1873, Banamex in 1884, and Salomon Brothers in 1910. (source: company press release or website)

Why We Like It:
Market pundits are expecting the financial sector to turn higher this week once we pass the Fed meeting and the brokerage earnings releases. If that's true then C is definitely poised to benefit as one of the largest and most liquid stocks for funds to move into. Looking at the chart it appears that C has found a short-term bottom in the $44.50-45.00 range. The stock does still have overhead resistance at its 50-dma and trendline of lower highs. Plus, the P&F chart is still bearish. We're suggesting call positions now. You might want to wait until after the Fed meeting or until after C can clear the $47.50 mark. Our initial target is the $49.85-50.00 range but we might decide later to add a more aggressive target at the 200-dma.

Suggested Options:
We are suggesting the October calls. Please note that we do not want to hold over the mid October earnings report.

BUY CALL OCT 45.00 C-JI open interest=12022 current ask $3.40
BUY CALL OCT 47.50 C-JW open interest=16561 current ask $1.90
BUY CALL OCT 50.00 C-JJ open interest=14670 current ask $0.85

Picked on September 16 at $ 46.64 <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/19/07 (confirmed)
Average Daily Volume = 40.7 million

---

Stryker - SYK - cls: 70.09 change: +0.64 stop: 65.90

Company Description:
Stryker Corporation is one of the world's leading medical technology companies with the most broadly based range of products in orthopaedics and a significant presence in other medical specialties. (source: company press release or website)

Why We Like It:
Shares of SYK have spent the last few months digesting its previous 12-month rally. This sideways consolidation looks like it's finally about to end. SYK is testing resistance at the $70.00 mark and hit a new all-time high on Friday. We want to see more confirmation of the breakout. We're suggesting a trigger to buy calls at $70.65. If triggered our target is the $74.90-75.00 range. Given the length of SYK's consolidation we would actually aim higher, maybe the $77.50-80.00 range, but we don't have much time and plan to exit ahead of the mid October earnings report. More conservative traders might be able to get away with a tighter stop loss near $67.50 or $68.00. The P&F chart is bullish with an $83 target.

Suggested Options:
We are suggesting the October calls. Our trigger to open positions is at $70.65.

BUY CALL OCT 70.00 SYK-JN open interest= 900 current ask $2.55
BUY CALL OCT 75.00 SYK-JO open interest= 563 current ask $0.70

Picked on September xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/17/07 (confirmed)
Average Daily Volume = 1.4 million

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Thornburg Mtg - TMA - cls: 13.63 chg: +0.05 stop: 10.90

Company Description:
Founded in 1993, based in Santa Fe, New Mexico, and built on a foundation of quality, innovation, and discipline, Thornburg Mortgage has rapidly grown to become a nationwide mortgage lender backed by a balance sheet of high quality assets. We have developed into a fully integrated mortgage originator and portfolio lender with a niche focus on jumbo adjustable rate mortgages for clients with complex financial profiles. (source: company press release or website)

Why We Like It:
This is a case of throwing the baby out with the bathwater. TMA has virtually zero exposure to the subprime mess but the stock got hammered anyway. Thus the pull back can be seen as a buying opportunity. Shares are developing a bullish trend of higher lows and we're suggesting call positions anywhere in the $12.50-14.00 range. We have two targets. Our first target is the $16.25-16.50 zone. Our second target is the $17.50-19.00 range. The P&F chart has reversed into a new buy signal with a $19.50 target. We do not want to hold over the mid October earnings report.

Suggested Options:
We are suggesting the October calls.

BUY CALL OCT 12.50 TMA-JV open interest=5499 current ask $1.65
BUY CALL OCT 15.00 TMA-JC open interest=9952 current ask $0.55

Picked on September 16 at $ 13.63
Change since picked: + 0.00
Earnings Date 10/15/07 (unconfirmed)
Average Daily Volume = 5.4 million
 

New Puts

Energy Sector SPDR - XLE - cls: 72.50 chg: +0.20 stop: 73.65

Company Description:
The XLE is the Energy Select Sector SPDR and is an Exchanged Traded Fund (ETF) designed to track the oil, gas, and services industries.

Why We Like It:
Crude oil futures have produced a huge rally over the last couple of weeks but it looks like it has run into significant resistance at $80.00 a barrel. The oil sector has followed it higher and the XLE has broken out to new six-weeks highs. If you look at the P&F chart on the XLE it looks pretty bullish. However, if you read the wrap this weekend then you know that Jim is expecting a sharp correction in crude oil that is assuming no one starts shooting at Iran over the weekend. We are suggesting that readers buy puts on the XLE to capture any correction in oil. However, we're going to list a trigger to open positions at $71.15, which is just under the 10-dma. More conservative traders could put their trigger under the $70.00 mark and the 50-dma. If the play is triggered at $71.15 our target is the $65.50-65.00 range. An alternative target could be the rising 200-dma (currently near $63.80).

Suggested Options:
We are suggesting the October puts. Our trigger to open positions is at $71.15. Feel free to choose your own strike price! The ones listed below are suggestions.

BUY PUT OCT 73.00 XBT-VU open interest= 309 current ask $2.75
BUY PUT OCT 72.00 XBT-VT open interest= 700 current ask $2.25
BUY PUT OCT 71.00 XBT-VS open interest= 412 current ask $1.90
BUY PUT OCT 70.00 XBT-VR open interest=12895 current ask $1.55
BUY PUT OCT 68.00 XBT-VP open interest=37200 current ask $1.05
BUY PUT OCT 66.00 XBT-VN open interest= 5912 current ask $0.75

Picked on September 16 at $ 72.50
Change since picked: + 0.00
Earnings Date 00/00/00
Average Daily Volume = 25.9 million
 

New Strangles

AutoZone - AZO - cls: 109.90 change: +0.78 stop: n/a

Company Description:
As of May 5, 2007, AutoZone sells auto and light truck parts, chemicals and accessories through 3,881 AutoZone stores in the United States and 110 AutoZone stores in Mexico, and also sells the ALLDATA brand automotive diagnostic and repair software. (source: company press release or website)

Why We Like It:
AZO has sold off sharply in September but shares spent the last few days churning sideways near $110 as investors wait for the company's earnings report. AZO is expected to report earnings on Tuesday morning (September 18th) ahead of the opening bell. That gives us Monday to open positions. We'd use the $109.00-111.00 range to open strangle positions. We're going to list the play with September options but doing so probably makes it an aggressive play since September strikes expire in five days.

Suggested Options:
A strangle requires buying an out of the money call and an out of the money put. We're suggesting the September strikes below. Our estimated cost is $2.50. We want to sell if either option hits $3.85 or higher.

BUY CALL SEP 115 AZO-IC open interest=920 current ask $1.25
-and-
BUY PUT SEP 105 AZO-UA open interest=1091 current ask $1.25

Or try this combo...with an estimated cost of $0.95. We would sell if either option hits $1.85.

BUY CALL SEP 120 AZO-ID open interest=838 current ask $0.50
-and-
BUY PUT SEP 100 AZO-UT open interest=845 current ask $0.45

FYI: You could do the $115/$105 strangle with October options but it would cost about $6.40.

Picked on September 16 at $109.90
Change since picked: + 0.00
Earnings Date 09/18/07 (confirmed)
Average Daily Volume = 812 thousand

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Dow Jones Industrial Avg. - DJX - cls: 134.43 chg: +0.18 stop: n/a

Company Description:
The DJX index is a 1/100 representation of the Dow Jones Industrial Average.

Why We Like It:
We're expecting a big move this week, one way or the other, in the DJIA. To capture that move we have a strangle on the Diamonds (DIA) and this new strangle on the DJX. We would suggest opening the play on Monday or at the latest on Tuesday ahead of the Fed decision on interest rates.

Suggested Options:
A strangle requires buying an out of the money call and an out of the money put. We're suggesting two strangles. One is with September options for the adventurous reader. One is with October strikes. Strikes are available at $1.00 increments so it's very easy to create your own strangle if you're so inclined.

Our estimated cost on the September strangle is $1.25. We want to sell if either option hits $2.00.

BUY CALL SEP 137 DJY-IG open interest=1465 current ask $0.50
-and-
BUY PUT SEP 132 DJW-UB open interest=9876 current ask $0.75

Our estimated cost on the October strangle is $4.75. We want to sell if either option hits $6.75.

BUY CALL OCT 137 DJY-JG open interest= 660 current ask $2.25
-and-
BUY PUT OCT 132 DJW-VB open interest=1754 current ask $2.50

Picked on September 16 at $134.43
Change since picked: + 0.00
Earnings Date 00/00/00
Average Daily Volume = million

---

Lehman Brothers - LEH - cls: 59.50 chg: -0.18 stop: n/a

Company Description:
Lehman Brothers, an innovator in global finance, serves the financial needs of corporations, governments and municipalities, institutional clients, and high net worth individuals worldwide. Founded in 1850, Lehman Brothers maintains leadership positions in equity and fixed income sales, trading and research, investment banking, private investment management, asset management and private equity. (source: company press release or website)

Why We Like It:
LEH kicks off the broker earnings this week on Tuesday morning before the opening bell. They could set the tone for the financials although we'd still have to endure the FOMC meeting on Tuesday afternoon. The stock could see some huge volatility if LEH drops an earnings bomb or as investors breathe a huge sigh of relief should the company offer good news. We're going to be aggressive and use September options, which expire in five days. You might want to reconsider and check out October options instead. Monday is our only day to open positions. We're suggesting the $58.50-61.00 entry range.

Suggested Options:
A strangle requires buying an out of the money call and an out of the money put. We're suggesting the September strikes below. Our estimated cost is $1.55. We want to sell if either option hits $2.50 or higher. FYI: For some reason the puts seem too expensive. Traders might want to be patient and see if you get a better entry point later in the day. You will want to try and keep your investment relatively equal on both sides of the trade to keep the strategy neutral.

BUY CALL SEP 65.00 LES-IM open interest=16437 current ask $0.55
-and-
BUY PUT SEP 55.00 LES-UK open interest=21804 current ask $1.00

Picked on September 16 at $ 59.50
Change since picked: + 0.00
Earnings Date 09/18/07 (confirmed)
Average Daily Volume = 15.4 million

---

Financial SPDR - XLF - cls: 33.98 chg: +0.12 stop: n/a

Company Description:
The XLF is the Financial Select Sector SPDR. This is an Exchanged Traded Fund (ETF) that is designed to follow the banks, financials, and insurance stocks.

Why We Like It:
Financial stocks could see a lot of movement this week with the Fed meeting and a number of brokerage company earnings releases. By playing the XLF we don't have to pick a specific company but can try and capture the move for the whole sector. We're going to be aggressive and suggest the September options, which expire in five days. You might want to reconsider and check out the October strikes. We are suggesting that you open your strangle position ahead of the Fed's decision on interest rates Tuesday afternoon.

Suggested Options:
A strangle requires buying an out of the money call and an out of the money put. We're suggesting the September strikes below. Our estimated cost is $0.65. We want to sell if either option hits $0.95 or higher. FYI: The puts are more expensive than the calls so you'll want to try and keep your investment relatively even on both sides of the trade to keep the strategy neutral.

BUY CALL SEP 35.00 XLF-II open interest=115061 current ask $0.15
-and-
BUY PUT SEP 33.00 XLF-UG open interest=170819 current ask $0.40

Picked on September 16 at $ 33.98
Change since picked: + 0.00
Earnings Date 00/00/00
Average Daily Volume = 69.1 million
 


Play Updates

In Play Updates and Reviews

Call Updates

Broadcom - BRCM - cls: 35.50 change: -0.37 stop: 33.95

We're starting to see a lot of mixed signals on BRCM. Some of the short-term technical indicators are suggesting the next move will be lower. Meanwhile the actual price still has a bullish pattern of higher lows. Furthermore the stock didn't react very negatively to the legal reversal over the import ban against rival QCOM's phones. Overall the picture looks like BRCM is coiling for a major breakout over resistance near $37.00. More conservative traders may still want to wait for a rise over $37.00 before considering call positions. At this point more nimble traders can watch for a bounce near its 10-dma in the $35.00-35.25 zone or a move back over $36.00 as a potential entry point. Our target is the $39.85-40.00 range. The Point & Figure chart is bullish with a $49 target.

Suggested Options:
If BRCM provides a new entry point we would suggest the October calls. Please note that we do not want to hold over the mid October earnings report.

Picked on September 12 at $ 35.85
Change since picked: - 0.35
Earnings Date 10/17/07 (unconfirmed)
Average Daily Volume = 11.0 million

---

Intl. Bus. Mach.- IBM - cls: 115.13 chg: -0.82 stop: 113.24

We have to reiterate our warning on IBM. The stock has been under performing the last few days and the technical indicators are starting to turn bearish. The MACD on the daily chart is very close to a new sell signal. The RSI looks weak. Weekly indicators are also worrisome. Plus, the chart pattern is starting to look like a bearish double top. IBM does have some short-term support near $114.00 and then potential support at the 50-dma but the 50-dma is near $113.15 so dipping to the 50-dma would hit our stop loss. More conservative traders may want to bail out early and wait for a breakout to new highs before considering new positions. We're not suggesting new positions at this time. The stock has already hit our $118-120 target range. Our second, more-aggressive target is the $124.00-125.00 zone. FYI: The Point & Figure is very bullish with a $177 target.

Suggested Options:
We're not suggesting new positions in IBM at this time. Please note that we do not want to hold over the mid October earnings report.

Picked on August 26 at $113.24
Change since picked: + 1.89
Earnings Date 10/17/07 (unconfirmed)
Average Daily Volume = 9.5 million

---

Manitowoc - MTW - cls: 39.72 change: +0.58 stop: 37.48

Technical signals on MTW are mixed with both bullish and bearish indicators. There was no follow through on Wednesday's bearish reversal and MTW still has a bullish pattern of higher lows. If you look closely Friday's session was actually a bullish engulfing reversal pattern. This looks like a new entry point to buy calls. However, readers might feel more comfortable waiting for a rise past Friday's high at $40.06. Or you could wait for a rise past the September highs near $41.00. Our post-split target is the $44.00-45.00 range. Our post-split stop loss is $37.48. The Point & Figure chart is forecasting a $56 target.

Suggested Options:
We are suggesting the October calls.

BUY CALL OCT 37.50 MTW-JU open interest= 607 current ask $3.50
BUY CALL OCT 40.00 MTW-JH open interest=1067 current ask $2.05
BUY CALL OCT 42.50 MTW-JV open interest= 667 current ask $1.15

Picked on September 05 at $ 40.13 *split adjusted
Change since picked: - 0.41
Earnings Date 10/31/07 (unconfirmed)
Average Daily Volume = 1.0 million

---

Triumph Group - TGI - cls: 81.00 change: +4.54 stop: 75.85*new*

Target achieved! TGI soared to a 5.9% gain on Friday. Volume on the move was pretty heavy. Driving the rally was some positive analyst comments. The stock was upgraded to a "buy" after one analyst firm raised their earnings estimates on TGI and raised their price target from $78 to $88. We had two targets on TGI. Our first target was the $79.75-80.00 range. Our second target is the $82.50-84.00 range, which could be hit on Monday if there is any follow through higher. We are adjusting our stop loss to $75.85. We would not suggest new positions at this time. FYI: The latest data puts short interest at more than 13% of the 16-million share float. That's a high degree of short interest and raises the risk of a short squeeze.

Suggested Options:
We are not suggesting new positions on TGI at this time.

Picked on September 13 at $ 75.85
Change since picked: + 5.15
Earnings Date 10/25/07 (unconfirmed)
Average Daily Volume = 275 thousand
 

Put Updates

Ashland Inc. - ASH - cls: 59.98 change: +0.54 stop: 61.01

If you're holding puts on ASH then last week was pretty uncomfortable. Monday's sell-off did not see any follow through lower. Wednesday was technically a bullish signal higher following Tuesday's inside day. Friday's session produced a bullish engulfing (reversal) candlestick pattern. Yet in spite of everything ASH is still struggling with resistance near $60.00 and continues to have overhead resistance at the $60.50 level and potential resistance at the 50-dma near $60.30. If you're a more conservative trader it may still make sense to exit early and cut your losses now. We seriously considered doing just that. However, we don't know yet what direction the market will move after the FOMC meeting and ASH still has some hurdles above it. We would probably not start any new put positions at this time. We have two targets. Our first target is the $55.15-55.00 range. Our second target is the $52.65-52.50 range.

Suggested Options:
We're not suggesting new put plays on ASH at this time.

Picked on September 09 at $ 58.84
Change since picked: + 1.14
Earnings Date 10/30/07 (unconfirmed)
Average Daily Volume = 796 thousand

---

Acuity Brands - AYI - cls: 49.91 change: +1.05 stop: 52.80

Some of our readers might want to consider an early exit in AYI right here. Friday's move looks like a bullish engulfing (reversal) candlestick pattern. Plus, Friday also produced what could be interpreted as a bullish double-bottom near $48.00. Now normally a bullish engulfing candlestick needs to see some confirmation. If we see AYI breakout or close over its 10-dma we might abandon the play early. At this time we're not suggesting new bearish positions. We have two targets. Our first target is the $47.75-47.50 range. Our second target is the $45.25-45.00 zone.

Suggested Options:
We are not suggesting new positions in AYI at this time.

Picked on August 26 at $ 52.80
Change since picked: - 2.89
Earnings Date 10/04/07 (unconfirmed)
Average Daily Volume = 536 thousand

---

Whirlpool - WHR - cls: 91.22 change: -0.37 stop: 95.15

WHR continues to under perform the market. Shares appear ready to breakdown under support at the $90.00 level. However, we honestly expect the stock to merely trade sideways for the next day and a half as investors wait for the FOMC meeting to finish on Tuesday. Technically a failed rally under $92.50 or a new decline under $90.00 could be used as a new entry point for puts. We have two targets. Our first target is the 87.75-87.50 range. Our second target is the $85.00-84.00 range. The P&F chart is bearish with an $87 target.

Suggested Options:
If WHR provides a new entry point we'd suggest the October puts. However, at this point we'd wait until after the FOMC meeting before considering new positions on this stock.

Picked on September 09 at $ 92.77
Change since picked: - 1.57
Earnings Date 10/24/07 (unconfirmed)
Average Daily Volume = 1.1 million

---

U.S.Steel - X - close: 91.64 change: +1.35 stop: 96.71 *new*

This looks like a pivotal spot for shares of X. A week ago the oversold bounce was rolling over and the stock look poised to begin a new leg down. Yet twice this past week traders have bought the dip at the $89.00 level. Will the stock rebound higher and breakout past resistance near $93.00, its 200-dma near $96.70, or the early September highs near $96.60? That may very well depend on how the market reacts to the FOMC meeting and what the fed heads have to say about the state of the economy. At this point we would not suggest new put positions with X above $89.00. We do have a wide stop loss because the market (and the stock) has been somewhat volatile. More conservative traders may want to adjust their stop loss to something tighter. Please note that we are adjusting our stop loss to $96.71.

Suggested Options:
We are not suggesting new put positions on X at this time.

Picked on September 12 at $ 89.26
Change since picked: + 2.38
Earnings Date 10/31/07 (unconfirmed)
Average Daily Volume = 3.8 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.)

---

Bear Stearns - BSC - cls: 117.19 chg: +2.36 stop: n/a

This week could be the moment of truth for the brokers. Several of the largest broker dealers report earnings. LEH reports on Tuesday, MS on Wednesday, and BSC and GS report on Thursday. Many expect LEH to set the tone on Tuesday. Given the big rebound in BSC (almost 12 points) it looks like investors are betting on a positive report. Plus, there has been renewed speculation that BSC is a takeover target. It doesn't hurt that a billionaire investor just upped his stake in BSC this past week. We're not suggesting new positions at this time. Currently our strangle involves the October $115 call (BSC-JC) and the October $95 put (BVD-VS). Our estimated cost was $9.50 and we want to sell if either option hits $14.00 or more. The company is expected to report earnings on September 20th. This should be considered a more aggressive play.

FYI: Last week we switched our strangle from September strikes to October strikes due to a move in BSC's earnings report date. If you're holding the September strikes it might work out. They were the Sep. $115 calls and Sep. $95 puts. Our estimated cost was $4.40. We wanted to sell if either option hit $7.85. Currently the Sep. $115 call is trading at $5.70bid/$5.80ask.

Suggested Options:
We are not suggesting new positions in BSC at this time.

Picked on September 09 at $105.37
Change since picked: +11.82
Earnings Date 09/20/07 (confirmed)
Average Daily Volume = 8.7 million

---

Diamonds - DIA - cls: 134.46 chg: +0.16 stop: n/a

This week could be the turning point in the markets for fall. While we are not suggesting new strangle positions on the DIA you could certainly create a new one on Monday or Tuesday morning ahead of the FOMC meeting. Options are available at $1.00 strikes so you're free to pick and choose how much risk you want to take. Please note we are adding another (virtually identical) strangle on the DJX tonight. Our DIA strangle play suggested using the September $137 call (DAZ-IG) and the September $127 put (DAW-UW) with an estimated cost of $2.05. We want to sell if either option rises to $3.10 or more. We have one week (five trading days) left before September options expire.

Suggested Options:
We're not suggesting new plays on the DIA at this time.

Picked on August 30 at $132.57
Change since picked: + 1.89
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 20.8 million

---

S&P 100 Index - OEX - cls: 694.38 chg: -0.62 stop: n/a

The OEX looks poised to breakout over resistance near $700 but it all depends on how the market reacts to the Fed decision on Tuesday. We're not suggesting new positions in the OEX at this time. Our strangle strategy suggested using the September 700 call (OEZ-IT) and the September 660 put (OEY-UL) with an estimated cost of $14.30. We want to sell if either option rises to $21.45 or more. Considering these prices we probably need to see a move into the $705-710 range or the $655-650 zone to be profitable.

Suggested Options:
We're not suggesting new plays on the OEX at this time.

Picked on August 30 at $680.46
Change since picked: +13.92
Earnings Date 00/00/00
Average Daily Volume = 1306 thousand
 

Dropped Calls

Transocean - RIG - cls: 106.16 change: -1.42 stop: 104.85

We are going to suggest an early exit in RIG. If you read this weekend's market wrap then you know that Jim is bearish on oil and expects another sharp correction. Technically, RIG still has support at the $105 level so more aggressive traders might want to consider sticking it out.

Picked on August 31 at $105.75
Change since picked: + 0.41
Earnings Date 10/31/07 (unconfirmed)
Average Daily Volume = 7.3 million
 

Dropped Puts

L-3 Comm. - LLL - cls: 98.44 change: +0.17 stop: 98.55

We have been watching and waiting on LLL for a week and the stock hasn't moved much. We've been waiting for a breakdown under support near $96.00 with a suggested trigger to buy puts at $95.90 but it just hasn't happened. At this point it seems like the odds are about equal that shares could breakout either direction. If you really wanted to play LLL then a strangle might work but earnings aren't expected until the end of October. We're dropping the play unopened.

Picked on September xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/24/07 (unconfirmed)
Average Daily Volume = 936 thousand
 

Dropped Strangles

None
 


Trader's Corner

Going Global

Correction: Original version had an incorrect byline

In February, U.S. equity traders went global, like it or not. Traders woke one February morning to learn that Chinese stock prices had collapsed and the yen carry trade was being unwound. U.S. futures were spiraling lower.

Few had even known the meaning of the phrase "yen carry trade" before that day, but many learned its meaning afterward. Across the globe, big money had been borrowing yen. Due to the cheap carrying costs, they were able to use borrowed funds to invest in other securities that yielded more than the carrying costs. Sometimes those other securities had been equities. Wish I'd thought of it. It was great. . . . except not on that day.

Even before that day, some traders had noticed something peculiar about a chart of the U.S. dollar's value against the yen (USDJPY). The movements on that chart seemed to lead or corroborate new developments on the equity charts.

At some point in the future, perhaps in the near future, inter-market relationships could change. If equities aren't escalating, why invest borrowed yen in equities? Consider that this week's dollar gain against the yen might be due at least in part to the political instability in Japan that makes it nearly impossible for the Bank of Japan to raise rates. Is big money going to take the risk that a new political regime will be welcomed with a firming yen? Will big money look at Goldman's experience, with one of the firm's global hedge funds burned in an unwinding yen carry trade, and take the same risk? That previous relationship might be unbuckled.

Either way, traders need to watch. As long as the USDJPY tends to lead or corroborate equity moves, traders can use the currency pair to determine where equities might go or whether a move might be sustained. When such judgments no longer appear to play out, traders will be forewarned that the inter-market relationship has unbuckled.

How, exactly, does one watch the currency pairs? Those who read my articles know that I prefer nested Keltner charts, but many find them confusing or their charting services don't afford them the opportunity to employ them.

That turns out not to be a big problem. Many forex traders believe the forex markets to be the cleanest or purest to trade on a technical basis. What does that mean? According to James Chen, writing "Support & Resistance Precision in Forex" for the August issue of STOCKS & COMMODITIES, that means that simple support and resistance studies may be all traders need when watching currencies. Rising and declining trendlines, horizontal support and resistance and formations such as channels can be important tools on forex charts.

Annotated Weekly Chart of the USDJPY:

Annotated Daily Chart of the USDJPY:

Annotated Daily Chart of the USDCAD:

So, if the forex markets trade nicely in relationship to trendlines, gaps, and other simple formations, how would one use that information as a prediction or corroboration of how equity markets might behave?

One example might be found on September 6 and 7, as seen on intraday charts.

Annotated 15-Minute Chart of the SPX:

Annotated 15-Minute Chart of the USDJPY:

The warnings or predictions offered by the USDJPY don't always work that cleanly. Especially lately, equities have sometimes appeared to lead currencies, rather than the other way around. That happened on September 11, for example, when the currency pair did not confirm early equity strength, but equities went on to post strong gains that finally seemed to pull the USDJPY higher, too. However, this hasn't happened often enough that traders can afford to ignore the actions of the currency pair. If they're breaking through resistance or support, traders should consider the possibility that equities might do so, too. If equities are breaking through and the currency pair is not, traders should prepare for the possibility that the equity move might not be sustained.

Which indices show the most correspondence to behavior in the USDJPY? My information is purely anecdotal, but watching has become particularly interesting. It used to seem that the Russell 2000 showed the most correspondence. Lately, however, the RUT hasn't seemed as responsive to gains in the USDJPY. This is just anecdotal evidence, but is that a sign that any yen being borrowed aren't as likely to be spent buying the less liquid small caps? The OEX, Dow and SPX have been more responsive to UDSJPY moves, particularly to any climb in the currency pair, so are any yen being borrowed being put to work buying more liquid large caps? If this is what's happening, it certainly would seem to be a sign of growing caution even among the big money crowd. Given what's happened to some big money players, I can't say I blame them for that caution.

I receive my currency feed through DTNIQ. I use either BUSDJPY or TUSDJPY for that feed. Other charting services may or may not include currency quotes and might use different symbols if they do include it.

Free currency charts and quotes can be found at http://finance.yahoo.com with the quotes available on the sidebar on the left of the home page. Clicking through calls up charts. Printing the charts allows one to draw trend-lines and determine support and resistance.

Drawing trend-lines by hand? That is going back to the beginnings of technical analysis, isn't it? While I wouldn't suggest trading the forex markets with hand-drawn trendlines as one's only technical study, that might be all the technical analysis you need if you're using the forex markets in the manner I do, as a sort of indicator index.
 

Today's Newsletter Notes: Market Wrap by Jim Brown, Trader's Corner by Leigh Stevens, and all other plays and content by the Option Investor staff.

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