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Daily Newsletter, Thursday, 09/27/2007

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Table of Contents

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

Market Wrap

Winding Up the Quarter

Introduction

Does end-of-quarter window dressing have anything to do with stock-market performance this week? Some have speculated that it might and that much of the window-dressing money was going to big caps and techs. Certainly the NDX benefited from buying in both categories today, with the NDX opening a few cents above 2100. That pushed the NDX to a level not seen since February 2001, if I'm reading my charts correctly. The NDX closed just off that high of the day, however, trading in a tight range but never again reaching the early high.

After the credit-crunch scares of recent weeks, some attributed this week's stock performance to relief that the U.S. hasn't produced our version of the U.K.'s Northern Rock and to other signs that the credit crunch may be easing. Many of that U.K. bank's customers stood in lines outside the bank's branches a couple of weeks ago, withdrawing their life savings. Today's announcement that Tracinda might take a position in Mastercard (MA) helped create the feeling that the credit problem was easing.

The underperformance of the financials by some parameters today seemed to refute that second argument. Some individual financials such as C and some indices such as the BIX closed minimally higher, but C closed below its opening level and the BIX produced a small-bodied candle in a congestion zone. The BKX produced a slightly stronger candle but didn't even top yesterday's high and stopped near its 50-sma. Those doing the window dressing didn't seem to want too many financials on their books at quarter's end.

Some market watchers might have wondered if crude's strength might have propped up crude-related indices and stocks. Crude closed the regular trading session at $82.88, up $2.58 on Nymex. We can all remember periods when the crude-related stocks prompted big gains in the SPX, OEX and Dow, for example. However, rally participation was mixed in crude-related stocks and indices. For example, the OIX gained, although it didn't break out to a new high, but the XOI moved sideways. Some of crude's gains can surely be attributed to the dollar's weakness.

Volume patterns didn't exactly sound an enthusiastic affirmation of the bounce, either. Volume was again okay today but not particularly big. For example, with the NDX pushing above 2100 at one point, volume on the Nasdaq exchange was far less than 2 billion.

Let's see what charts have to say.

Charts

Annotated Daily Chart of the SPX:

Of course there has been some follow-through, so perhaps my comment that there hadn't been any was misleading. I meant that the SPX hadn't clearly broken higher out of the recent sideways trend with a tall green candle. Today's candle was instead indicative of indecision.

If bulls can't garner enough strength to push the SPX prices above 1540 and keep them there, another trip down to midline and 10-sma support, at least, may be needed to recharge. A bottom-of-the-channel test can't be ruled out, either.

The narrow-based, blue-chip-predominant Dow did a better job repeating that old pattern. Now it's approaching top-of-the-channel resistance. If in bullish Dow-related plays, keep following the Dow higher with your stops. Consider carefully tonight whether you would want to hold onto those positions over the weekend with the Dow approaching that resistance as well as its July 17 intraday high of 14,021.95. Remember, as you're making your decisions, that you may be seeing some window-dressing here. Wise older traders on CNBC admitted today that there's still some concern about market stability and that they'd be wary of too much equity exposure right now, preferring to spend any equity dollars on big caps. We're still seeing some defensiveness in the markets, and that's showing up in the way that the Dow and NDX are perhaps outperforming broader but similar indices.

Annotated Daily Chart of the Dow:

Again, my chart annotations might be misleading. The Dow of course did break higher, and more convincingly than the SPX has done. I meant that it hadn't broken out of the channel, and that, until it does, channel resistance might be presumed to hold.

The Nasdaq's daily candle was not a bullish one, but the last time I wrote the Wrap, a potential reversal signal on the Nasdaq was produced that day, too. It resulted in only a one-day pullback before prices climbed again.

Annotated Daily Chart of the Nasdaq:

If a pullback should occur, look for potential support near those rising red trendlines. However, it may soon be time for a deeper pullback if the Nasdaq can't thrust cleanly above the midline level. If enough interest doesn't exist to push it into the upper, bullish half of its rising channel, then a dip toward the 10-sma and bottom-of-the-channel support may be needed.

Annotated Daily Chart of the SOX:

Annotated Daily Chart of the RUT:

Annotated Daily Chart of the TRAN:

Today's Developments

Today's economic releases included the final look at the second quarter's GDP. Economists predicted that the GDP would ease slightly to 3.90 percent, down from the previous 3.95 percent. Economists got it wrong, however, with the growth revised to 3.80 percent. Articles still termed this the fastest growth pace in more than a year.

Although consumer spending, business investments and residential investment were all revised lower, those revisions had minimal impact to the GDP. An upward revision in imports was blamed for the downward revision in GDP. Consumer price inflation was also revised higher by a tenth of a point, a troubling trend for those on inflation watch.

Since this final revision was not earth-shattering enough to garner much attention or impact trading, this article won't detail all nitty-gritty details but will move on to the other reports of the day. During the same 8:30 time slot as the GDP, weekly initial and continuing claims were released. Economists suggested that initial claims would climb slightly to 315,000.

Again, those making the predictions were wrong. Initial jobless claims dropped 15,000 to 298,000. While this is of course an encouraging sign for the economy, this is not all good news, or wouldn't be if initial claims and non-farm payrolls from last month weren't so at odds. Jobless claims under 300,000 indicate a job market that might be tight enough to be adding wage pressures to other potential inflation pressures. With the divergence in this report and last month's non-farm payrolls, it's somewhat difficult to ascertain what's going on in the job market, and that makes it difficult to guess what the FOMC might do next with regard to rate cuts.

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Most experts deem the four-week moving average more accurate. That four-week moving average fell, too. It declined 9,750 to 311,500. Continuing claims declined 11,000 to 2.55 million with the four-week moving average falling 5,500 to 2.57 million. The seasonally adjusted insured rate unemployment rate was again at 1.9 percent, with this number alternating between 1.9 and 2.0 percent in recent months.

Some market watchers were left scratching their heads when trying to determine what to believe about jobs and how they might impact Fed decisions. On the whole, market participants today appeared to take the news as good news about the economy and a relief after the non-farm payrolls disaster, potential wage inflation or not.

August New Home Sales were released at 10:00. Industry watchers predicted that new home sales would drop to 830,000, but sales dropped much more than anticipated, to 795,000. That decline was an 8.3 percent drop month over month and a 21.2 percent drop over the last year. The median sales price dropped, too, by 7.5 percent to $225,700. A Marketwatch.com article termed that the largest year-over-year drop in 37 years.

The inventories of unsold homes did decline, but that was due to builders making efforts to lower their inventories rather than to increasing sales. At the current sales rate, that's an 8.2-month supply of homes. Obviously, the credit crunch has hit home, or rather, it's hit new-home sales.

Although articles about this number were replete with cautions about sampling and other statistical errors, KB Homes' (KBH) earnings report certainly did nothing to reassure markets that the new-home sales figures were just out of whack. The builder took a hit with a $690.1 million land-related charge and a $107.9 million goodwill impairment charge, prompting a third-quarter loss. The company's Chief Executive Jeffrey Mezger's statement mentioned worsening conditions, including tighter lending standards and an inventory glut of homes that was prompted, in part, by rising foreclosures. Those conditions likely contributed to the company's delivery of 28 percent fewer homes than in the prior year and reduction in selling price of 7 percent over the last quarter's prices. Mezger doesn't anticipate improvement any time soon, at least not through the end of this year and perhaps into 2008.

Despite Mezger's assertion that the bottom was not yet in, some homebuilders and the Dow Jones U.S. Home Construction Index (DJUSHB) inched higher today. The DJUSHB had approached the bottom of a steeply descending price channel, however, and the minimal gains seen today might have been based on a technical move, a bounce from descending-channel support. The bottom of that price channel now appears to cross near 332. So far, there's no change in tenor on that index's chart. A move above 420 would currently be required to break out of that descending channel. The index closed at 350.58.

The Department of Energy released natural gas inventories for the week ending September 21 at 10:30. Natural gas inventories rose 74 billion cubic feet that week, with that number in line with expectations. Natural gas prices had been falling into the report, but bounced afterwards, leaving a doji with its lower shadow descending to potential support near 6.775. Natural gas futures were at 6.92 at the close.

The Federal Reserve Bank of Kansas released the Kansas district's September Manufacturing Survey at 11:00. This district's report is not as predictive of the ISM or GDP changes as are some of the other reports, so it seldom proves market moving. For September, the bank termed the manufacturing activity "modest" and noted that many companies were trimming inventories.

September's Agricultural Prices rounded up the day's reports, coming in at 3:00. The September Farm Prices Received Index climbed 2 points month over month, the USDA reported. That's good news for producers but perhaps not such good news for those of us paying at the grocery store. Producers of wheat, lettuce, eggs and cattle received higher prices, while producers of hogs, corn, strawberries and onions received lower prices. The Prices Paid Index rose 1 point, with producers paying more for nitrogen fertilizers, diesel fuel and feeder cattle.

Weekly commercial-paper data was also released today, with this data collected through September 26. As defined by the Federal Reserve, "[c]ommercial paper consists of short-term, promissary [sic] notes issued primarily by corporations." Companies use this commercial paper to raise the cash they need since it might cost them less than bank loans. Bloomberg.com reported that the drop in commercial paper slowed after the Fed cut. While the total outstanding still declined, the slowing of the decline was interpreted to mean that commercial paper is not deteriorating as quickly as it had been. Still, FTN Financial's chief economist was quoted as saying that the commercial paper market was not yet on sound footing and wouldn't be as long as it was declining.

Why does this matter to us and to mom and pop trader? Perhaps you remember the name BNP Paribas SA, the bank that froze withdrawals from some of its mortgage-asset-backed investment funds on August 9. Yields on commercial paper soared that day because those issuing the paper couldn't entice others to take the paper on anything less than stellar yields. No one wanted to touch commercial paper, and that meant that companies couldn't easily get the money they needed.

If you don't remember all of this, take a look at the SPX or any other index's chart for August 9, and your memory will be jogged. For those who would like to study the actual government release with charts, it can be found at the following site. You'll find a chart there that shows the steep drop in commercial paper, but I just didn't have room for any other charts in this article.

For now, this report does show some encouraging signs or at least signs that allow us to breathe a little. Yields on overnight commercial paper are now at their lowest since August 30, 2006, all courtesy of the Fed's action at its last meeting.

Despite the encouraging Mastercard news mentioned earlier, today offered more confirmation that potential suitors or buyers are being impacted by the credit crunch. Sallie Mae's potential buyers balked at paying the previously agreed-upon $25.3 billion to take over the student loan giant, blaming higher borrowing costs as well as federal legislation that will adversely impact the company. This morning, Sallie Mae claimed it was entitled to a $900 million breakup fee if the consortium of buyers balks.

Company-specific news included continued speculation that Bear Stearns would sell a minority position in itself. Freddie Mac (FRE) settled with the SEC on its accounting fraud charges, with FRE to pay $50 million. Chevron Corp. announced a share buyback that will total 7.5 percent of its market capitalization. Other company-specific news was that Microsoft's (MSFT) release of its "Halo 3" videogame was the most successful U.S. release in entertainment history.

Tomorrow's Economic and Earnings Releases

Tomorrow's reports include the important September Chicago PMI. This report, due at 9:45 EST, is expected to remain steady at 53.8. Previous to that report, August's Personal Income will appear at 8:30 and New York's September NAPM will be released at 9:00.

Releases at 10:00 EST include August's Construction Spending, expected to drop 0.3 percent, and September's Consumer Sentiment, forecast to inch higher to 84.0 from the previous 83.8. The ECRI Weekly Leading Index will follow at 10:30.

What about Tomorrow?

Annotated 30-Minute Chart of the SPX:

Annotated 30-Minute Chart of the Nasdaq:

Annotated 30-Minute Chart of the RUT:

The USDJPY didn't put on a convincing confirmation of equity gains. It did break above the trendline of a possible bull flag (not shown on the chart below), but then it slipped back to and slightly below the trendline by the close. Is this a retest of former resistance or a sign that momentum waned here, too? This could be important to equity performance, so watch the USDJPY levels (listed as "yen" on CNBC's crawl above the screen if you don't have the feed on your charting program) tomorrow morning. Equity bulls want to see it higher but should be aware of that looming resistance near 116.40.

Annotated 30-Minute Chart of the USDJPY:

So, what do I think? On balance, I'm a little concerned about the sustainability of the current move and wonder if some signs aren't showing that pullbacks toward stronger support, mostly in the 10-sma areas, are needed. The SPX didn't follow through on its old patterns, which probably should have prompted a stronger move by today. That stronger move kind of fizzled. The TRAN certainly isn't confirming strength. Some financials gained today, but the gains weren't huge. Volume wasn't huge, either, exuberantly greeting the recoveries off the summer's low.

My conclusion then has to be that this could indeed be some window dressing. I think the SPX needs to post a stronger gain, the TRAN needs to rise along with her sister index, the Dow, and the USDJPY needs to break out of its congestion zone, and all that needs to be accomplished as soon as possible for the bulls' sakes. Otherwise, I think pullbacks to recharge and retest support may be needed.

For tomorrow, I would have to look at internals and the indicators I watch, such as the USDJPY action, before it's possible to gauge whether window-dressing will be powerful enough to recharge indices or whether they'll need to pull back soon toward those 10-sma's. Join us on the Market Monitor tomorrow morning and I'll tell you what I'm seeing there.
 


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

Broadcom - BRCM - cls: 36.60 change: +0.02 stop: 33.95

A relatively quiet day on Wall Street left shares of BRCM to churn sideways. Shares remain under resistance at the $37.00 level. Readers can wait for a bounce near $36.00 or wait for a new rally over $37.00 as a potential entry point. Our BRCM target is the $39.85-40.00 range. The Point & Figure chart is bullish with a $49 target. 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: + 0.75
Earnings Date 10/10/07 (unconfirmed)
Average Daily Volume = 11.0 million

---

Citigroup - C - clos: 46.88 change: +0.33 stop: 45.65

Shares of Citigroup continue to rebound albeit very slowly. This bounce from the $46.00 level looks like a new bullish entry point to buy calls. However, more conservative readers might want to wait for a rise past the $47.00 level or its 50-dma near $47.30 before initiating new positions. Readers might want to tighten their stops toward $46.00. 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. Please note that we do not want to hold over the October 19th earnings report.

Picked on September 16 at $ 46.64
Change since picked: + 0.24
Earnings Date 10/19/07 (confirmed)
Average Daily Volume = 40.7 million

---

Ceradyne - CRDN - cls: 75.73 change: -0.28 stop: 71.74

CRDN experienced a little bit of profit taking today but traders bought the dip at $74.40 midday. Our short-term target is the $79.50-80.00 range. The P&F chart is bullish with a $92 target.

Picked on September 25 at $ 74.61
Change since picked: + 1.22
Earnings Date 11/01/07 (unconfirmed)
Average Daily Volume = 653 thousand

---

Intl. Bus. Mach.- IBM - cls: 117.71 chg: +0.41 stop: 113.90

The consolidation in IBM is coiling more tightly and the trend of rising lows is suggesting a bullish breakout soon. Readers might want to consider new bullish positions on a rise past $119 or $120. 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. We do not want to hold over the mid October earnings report.

Picked on August 26 at $113.24
Change since picked: + 4.47
Earnings Date 10/17/07 (unconfirmed)
Average Daily Volume = 9.5 million

---

L-3 Comm. - LLL - cls: 102.68 chg: +0.21 stop: 95.99

The rally in LLL took a day to rest and shares spent the session trading sideways. Readers can choose to buy a dip in the $100-101 region or wait for a new relative high over $103. Our target is the $107.50-110.00 range. More aggressive traders may want to aim higher.

Picked on September 25 at $100.96
Change since picked: + 1.72
Earnings Date 10/25/07 (confirmed)
Average Daily Volume = 904 thousand

---

Lockheed - LMT - cls: 106.79 change: +1.07 stop: 98.99

Thursday turned out to be another bullish session for LMT. The stock dipped toward $104 (actually 103.81) but traders quickly bought the pull back and shares rebounded back to a new closing higher. Volume on the session was pretty strong. Fueling the rally was an early afternoon press release from LMT stating that the company was raising its dividend by 20% to 42 cents per share. The company also announced they were adding another 20 million shares to their stock buy back program. Our target is the $109.50-110.00 range. We are seriously considering adding a second, more aggressive target given the strength in the defensive sector and LMT. More aggressive traders may want to aim higher. The P&F chart points to a $117 target. We do not want to hold over the late October earnings.

Picked on September 24 at $103.81 *gapped higher
Change since picked: + 2.98
Earnings Date 10/24/07 (unconfirmed)
Average Daily Volume = 2.7 million

---

Stryker - SYK - cls: 68.88 change: +0.98 stop: 65.90

SYK is starting to look tempting again. The stock rose past its simple 10-dma and posted a 1.4% gain on a rather lackluster day in the markets. This afternoon SYK issued a press release stating, "...announced today that it has reached a resolution with the United States Attorney's office in Newark, New Jersey in connection with its investigation of consulting practices in the orthopaedic industry.... The resolution requires the Company's Orthopaedics subsidiary to comply with certain standards and procedures in connection with the retention and payment of orthopaedic surgeon consultants related to reconstructive products and the provision of certain benefits to such surgeons." We're sticking to our plan, which calls for a trigger at $70.65 to open positions. If triggered at $70.65 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. The P&F chart is bullish with an $83 target.

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

---

Terex - TEX - cls: 89.89 change: +2.16 stop: 81.99 *new*

TEX just posted its fifth gain in a row. The stock rose 2.4% and managed to trade intraday over resistance at the $90 level. We remain bullish on the stock but the rally might be a little tired so don't be surprised to see a one or two day pull back. The $85-86 level should now be short-term support. We are raising our stop loss to $81.99. More conservative traders might want to use a higher stop loss. The P&F chart is very bullish with a $100 target. There will likely be some resistance near $90 but our target is the $94-95 range.

Picked on September 25 at $ 86.50
Change since picked: + 3.39
Earnings Date 10/25/07 (unconfirmed)
Average Daily Volume = 1.8 million

---

Whole Foods - WFMI - cls: 48.14 change: +0.17 stop: 42.49

WFMI hit some profit taking after yesterday's big gain but bulls bought the dip and pushed WFMI back into the green. Our first target is the $49.75-50.00 range. Our second target is the $52.50-55.00 zone. We do not want to hold over the early November earnings report. We're suggesting a stop loss at $42.49 but it looks like readers might be able to get away with a stop much closer around $44.00.

Picked on September 26 at $ 46.26
Change since picked: + 1.88
Earnings Date 11/01/07 (unconfirmed)
Average Daily Volume = 3.2 million
 

Put Updates

Alexander & Baldwin - ALEX - cls: 49.39 chg: +0.33 stop: 52.01

The tone of the market seems to be cautiously bullish and given this generally positive undercurrent we would hesitate to open new bearish plays. ALEX continues to look bearish with shares under support near $50.00 but it looks like the bears are having a hard time. A failed rally under $50 can still be used as a new entry point but readers might want to consider a tighter stop loss. The P&F chart is already bearish with a $36 target. There is some support near $47.50 but we're aiming for a decline into the $45.50-45.00 range. We do not want to hold over the late October earnings.

Picked on September 23 at $ 49.50
Change since picked: - 0.11
Earnings Date 10/25/07 (unconfirmed)
Average Daily Volume = 337 thousand

---

Cephalon - CEPH - cls: 72.85 chg: +0.40 stop: 74.25

Given the reaction in shares of CEPH the last two days it seems evident that investors are not worried about the FDA's recent public health warning on CEPH's Fentora drug. The general trend in CEPH is still bearish but short-term the bulls are really defending it near $72.00. We would only consider new positions with CEPH under $72 and it might be better off to wait for a new relative low (under $71.00). Our target is the $68.00-67.00 range. More aggressive traders could aim for the $65 region. The P&F chart is very bearish with a $50 target.

Picked on September 26 at $ 71.70
Change since picked: + 1.15
Earnings Date 11/01/07 (unconfirmed)
Average Daily Volume = 1.5 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.)

---

Dow Jones Industrial Avg. - DJX - cls: 139.13 chg: +0.35 stop: n/a

The DJIA and DJX are still inching higher. At this point we probably need to see the DJIA breakout over resistance at the 14,000 level before the DJX October $137 call option will even come close to hitting our target at $6.75. We are not suggesting new positions on the October version of our strangle. The options listed for our October strangle were the October $137 calls (DJY-JG) and the October $132 puts (DJW-VB) with an estimated cost of $4.75. We want to sell if either option hits $6.75.

Picked on September 16 at $134.43
Change since picked: + 4.70
Earnings Date 00/00/00
Average Daily Volume = million
 

Dropped Calls

None
 

Dropped Puts

None
 

Dropped Strangles

None
 

Today's Newsletter Notes: Market Wrap by Linda Piazza 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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