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Daily Newsletter, Saturday, 09/29/2007

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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

Third Quarter Ends With A Whimper

The third quarter ended with a whimper instead of a roar as conflicting Fedspeak tormented the markets. Various Fed speakers discussed their views of the economy and the chance for another rate cut in October and the market did not like what it heard. Funds tried valiantly all week to keep the indexes near record territory but selling pressure increased as the week drew to a close.

Dow Chart - Daily

Nasdaq Chart - Daily

The economic reports for Friday were mixed and offered conflicting views on the economy. Personal Income rose at a +0.3% rate in the August report and while that was less than the +0.5% in the prior month it was still a gain. This suggests employment is still tight and there has not been a weakening of the positive trend despite the August employment data. Even better for the economy spending rose at a stronger than expected +0.6% rate. Inflation as measured by the PCE deflator or Core PCE rose only +0.1% causing the year-over-year inflation rate to fall to +1.8% from +1.9%. This +1.8% core rate was identical to top line inflation for the same period and good news for the Fed.

The consumer spending report is at odds with same store sales reports from various retailers, which showed falling sales trends and less demand for high dollar electronics. The consumer spending report showed a surge in durable goods spending while retailers selling things like washing machines, dishwashers, stoves, etc were complaining about weak sales. Something is amiss in the data heading into what has been described as the worst holiday shopping season in over five years.

The NAPM-NY report of business conditions in New York City fell in September for the third consecutive month with a -7.4 point drop in the headline number to 437.6. The peak back in June was at 451.5 and the index has moved down in all but one report since that high. The headline number on this report was the lowest level since Oct-2006. There has been persistent weakness in the service sector and the current conditions component fell to 35.1 from 47.3 in the prior month. That is the third month below 50 and readings below 50 indicate contraction not expansion. Meanwhile the six-month outlook component rose +15 points to 75.0 and the highest level since August 2006. The spike in the outlook is directly related to the Fed rate cut and expectations for future cuts.

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The Chicago Purchasing Managers Index (PMI) was flat in September at 54.2 and a level it has been holding since the monster dip from May's high at 61.7. The internal components were mostly flat with the exception of a sudden increase in production from 55.7 to 58.3 and a sharp increase in order backlog to 50.5 from 38.8. Prices paid fell more than 10 points to 59.0 from 71.8. Overall this was a bullish report suggesting we are starting to see signs of a rebound from the early Q3 dip. This survey appears to be contradicting weakness in other regional surveys and should have been bullish for the markets.

The PMI report correlates well with the national ISM so this upswing in the PMI suggests we will see a positive gain in the ISM on Monday.

The Construction Spending report for August saw an increase of +0.2% despite a -1.5% drop in residential spending. This gain was well over the -0.3% estimate and the -0.5% drop we saw in July. The majority of the gain came in private non-residential construction, which rose +2.3%. This suggests we could see some blowout numbers once housing begins to recover.

Lastly the final reading for Consumer Sentiment came in unchanged at 83.4 and we could be seeing a bottom form after nearly a year of declines. The Fed rate cuts, the approaching holiday season and the post Fed market rally seems to have halted the slide.

Consumer Sentiment Chart

Economic Calendar

The key reports for next week are the ISM on Monday and the September Non-Farm Payrolls on Friday. As you read above the ISM should be positive but the big wall of worry the bulls have to climb comes with the jobs report on Friday. The consensus estimate is for a gain of 115,000 jobs and a sharp revision higher for the August report that showed a loss of -4,000 jobs. Friday's report has the ability to rock the markets and move the Fed.

If the report comes in as expected and August jobs are revised sharply higher the implications for the economy are very strong. It would indicate that the -4,000 jobs last month was a bookkeeping error and the economy is much stronger than everybody thought. The Fed would be instantly knocked back to the sidelines and there would be no further rate cuts.

This would be the proverbial good news, bad news joke for the markets. Good news, the economy is stronger than we thought. Bad news the two to three additional Fed rate cuts already priced into the market need to be removed. A sharp revision higher in jobs could mean a -300 point haircut for the Dow. Over the last two weeks the market has been in hover mode after the post Fed bounce. The sudden and forceful action added about 500 points to the Dow since Sept-17th when the Dow closed right at 13400. The Dow has basically moved sideways since the Fed meeting with every dip bought but every rally sold. It is hovering just under 14000 while waiting on some confirmation that the good news is true. For the first week the market acted like it was too good to be true and actually gave up a little ground. As more news came out the bulls slowly began to accept the fact the Fed was on their side and late last week we started to see some additional gains.

Late Friday afternoon that story changed. St. Louis Fed President William Poole said fairly forcefully the market should not assume there would be any further rate cuts. Poole joined three other Fed presidents who also echoed that party line earlier in the week but his voice seemed to carry more force since he is a voting member. The Dow dropped nearly 70 points late Friday when the comments were made.

Poole also said, The U.S. economy's underlying resilience, along with future Fed actions, "should they be desirable," will most likely keep the economy "on a track of moderate average growth and gradually declining inflation over the next few years." He also cautioned "It would be a mistake for markets to bake into the cake the assumption of ongoing rate cuts." And, "The disruption seems to be declining a bit, and that's the direction we wanted to go." He said the 50-point cut was necessary to send a message to the markets that the Fed was ready to act to solve any financial crisis. Poole feels that crisis has passed and credit markets not functioning at the time have reopened for business. For instance the corporate bond market was not functioning prior to the Fed meeting. That market has rebounded and September closed with more than $110 billion in corporate issuance, a record amount! Clearly the corporate bond market has returned. The Fed's direct loans to banks hit a high of $7.2 billion on Sept-12th and dwindled to zero by Sept-26th showing that inter-bank lending had resumed. Clearly the conditions that pushed the Fed into that 50-point cut have been reversed. All four Fed presidents echoed that future rate "moves" would be data dependent.

Should the payroll report show that the August loss of jobs was a accounting blip and the ISM show a positive gain then the Fed will be back on the sidelines and the next move expected will be another rate hike if inflation continues to climb. I know that is a contradictory statement to the one I made earlier about the Core PCE deflator showing falling inflation. The core PCE deflator may be falling but prices for commodities, food and energy are exploding. That is real inflation that is not shown in the core rate. Commodity prices posted their strongest September gains in 32 years. Gold hit a new 27-year high on Friday at $753.

Food prices are rising at the fastest rate in over 17 years. Consumers spend 9.9% of their income on food. In the last year corn has risen 40%, soybeans 75%, wheat 70% and a loaf of bread +24%. Milk, meat and produce have also risen due to the higher cost of feed, fertilizer and transportation expenses. The price of oil hit a new high on the Brent Crude contract on Friday and the U.S. November WTI contract came within 34 cents of another new high on Friday. This is real inflation and the Fed will need to react to it very soon if prices don't decline quickly.

The Fed reacted to credit markets that were grid locked over the subprime crisis. As I said at the time it was only a sentiment cut not a cut that would actually benefit the economy any time soon. It was a monetary statement not economic fertilizer.

If the ISM and NonFarm payrolls show the economy is growing moderately as the Fed has been saying prior to the credit freeze then future Fed rate cut expectations will quickly be erased from the market.

Another problem the Fed needs to address is the falling dollar. The U.S. dollar index hit a record low on Friday of 77.67, the lowest price since the index was created over 40 years ago. The freefall of the dollar creates further inflation pressures since everything we purchase requires more dollars than it did before. Cutting rates and a slowing economy combine to push the dollar lower. Raising rates in a growing economy raises the value of the dollar and slows the implied inflation rate. The Fed does not want to be cutting rates in this environment. They may be forced to cut if the jobs report shows another job loss but they definitely do not want to be forced into that position.

US Dollar Index Chart

The stage is set for a monster move on the nonfarm payroll news. While nobody knows the answer in advance it definitely appears the market has already factored in a weaker job market and another rate cut on Halloween. Therefore the market is at extreme risk if that scenario falls apart with the jobs announcement.

There is still a bias by economists towards the possibility of a recession. Greenspan reiterated on Friday that the possibility of a recession was around 43%. The CEO of Freddie Mac said there is a 40-45% chance. Former Treasury Secretary Robert Rubin said there was a 50/50 chance of either a soft landing or a serious problem. The market has factored in this increasing potential for a recession by factoring in another 75 points of Fed rate cuts before year-end. Again, if the ISM and Jobs reports reduce the chance of a recession it will also reduce the chance for another rate cut.

Since all the factors are weighted towards further rate cuts there is an extreme chance of a disappointment if the ISM/Jobs data comes in positive. When the market finds itself with the majority of participants leaning in the same direction it tends to correct to balance the outlook. That possibility of a correction, the removal of a potential rate cut from the outlook, could happen before the jobs report. Quite a few traders will not want to wait around only to get blindsided by potentially unfavorable data.

Another problem the markets will face next week is the Asian markets. All the major Asian indexes either closed at record highs or very near them on Friday as the quarter came to an end. The Chinese exchanges will be closed all week for National Day celebrations and the Australian and Hong Kong markets will be closed on Monday for other holidays. Without the Asian markets for inspiration and guidance the U.S. markets could be listless. There is an even bigger problem ahead since the Asian markets are expected to correct when they reopen on October 8th. Investors are expected to take profits before China's National Congress meets in mid October on fears that the congress will take new measures to reign in the exploding markets. If they raise rates, raise transfer or trading taxes, etc, then it would be better to be out of the market before that happens. With the indexes at record highs the potential for profit taking ahead of the meeting is very strong. The various global indexes have exploded since the July lows with the Hang Seng up +40%, India +25% and the Shanghai SSE Composite +49%. By comparison the Dow only rebounded +11% from the August lows. That is plenty of profits at risk if the rules were to change.

On our side of the pond the U.S. markets are very close to new highs with the Dow's Friday close only 127 points from a record high. The Nasdaq is only 23 points below its July high and the S&P 25 points. The quarter ended on Friday and there was no end of quarter surge. There was no obvious window dressing although every dip was quickly bought in order to keep the markets only 25 points off their highs. All the recent winners like Apple, Google, Garmin, RIMM, etc flat lined all week as funds did manage to keep them pinned at their post Fed highs. They were content to hold their gains rather than battle to push them higher. This is a perfect setup for window undressing next week. Now that those Q3 statements are in the bag the funds can dump those stocks and run to the safety of cash until the jobs report is released.

Google Chart - 15 min

Apple Chart - 15 min

In my humble opinion I think the potential for profit taking next week is very strong. There are just too many factors lining up against us and funds would rather take profits on their own schedule than be blown out of the market on unexpected data. They can always get back in when the smoke clears and the market picks a direction. If you look at the chart of the Nasdaq a failure here at 2700 would be a convincing double top. If the Fed did reverse course back to a tightening bias that would not necessarily mean the markets would crash since it would also mean the economy was doing better than previously thought. It just means there would be market volatility until a balance was achieved.

Another problem the market faces is the constantly falling earnings expectations. The current expectations for S&P-500 earnings have fallen to only +2% growth for Q3. This compares to +9% in Q2 and +22% in Q3-2006. That is a significant decline in earnings from 22% to only 2% in only 12 months. This is a five-year low. This sharp decline in earnings raises the PE ratio for stocks from fairly valued to over valued in some cases. Is it the end of the world? Obviously not. If you are a fund it simply represents an opportunity to adjust your portfolio to better represent those companies that can do well in bad years as well as good years.

If we look at the charts the Nasdaq has the potential for a textbook double top. However, every new high retest always has that potential. In trading you have to trade the momentum in hopes of a breakout but always be wary of a failed retest that produces a double top.

Nasdaq Chart - Daily

For an important quarter end the volume was extremely weak. Volume on Friday was only 5.3 billion shares across all exchanges. This should have been a 7 billion share day. Volume is a weapon of the bulls and the bulls have been suspiciously absent for the last week. On Friday volume only appeared when sellers appeared. The selling was nipped in the bud every time but there was no follow through. The indexes were pushed back to the flat line and volume shrank again. This is a perfect example of stealth window dressing. They showed up with just enough volume to prevent sellers from piling on and the status quo was maintained. The sellers evidently realized the end of quarter game was in progress and stepped aside to wait until Monday. The odds are good the tide will turn on Monday and funds will be heading to the sidelines to wait for the jobs report.

This is typically a rocky time for the markets. Even Carl Icahn warned on Thursday that the next couple weeks could be volatile. Of course September is usually a rough month for the markets and the Nasdaq gained +3.7% and had the best September since 1998. You can't count on market cycles repeating exactly but it is wise to be wary of them.

The Russell 2000 had very anemic volume all week averaging only 675 million shares daily. Back during the August rebound the Russell managed 1.2B to as high as 1.88B shares per day. The Russell is showing absolutely no buying by funds. The Russell has put in two lower highs and lower lows since the post Fed bounce and has drifted back to close just over prior resistance at 800. The Russell appears poised to break that resistance, now support, and head sharply lower next week. I am just not seeing any support from fund managers. This is prompting me to be ultra cautious for next week. The recommendation for the week is to be short under 800 and buy a dip to 780. If by chance we do move higher I would not go long until the Russell moves over 815. Russell 820 is also resistance but moving over 815 could generate some short covering and push over that 820 level. I would be cautious of any longs ahead of the Jobs report on Friday and look to follow any market move after that report. It could be extremely bullish or extremely bearish so consider an index straddle on Thursday in cheap October options to capture any move on the news. I will revise this setup again on Tuesday night from a vantage point two days closer to the jobs event. Hopefully things will be a little clearer by then.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
None IDXX None
  LAMR  
  PKX  
  SHLD  

Play Editor's Note: I discussed our market outlook with Jim, tonight's market wrap author, and agree with him that there isn't a lot of compelling reasons for investors to buy stocks this week. The markets are facing a lot of uncertainty. Plus, the global markets could see some serious profit taking, which will likely influence trading here in the U.S. The month of October is likely to be very choppy but will hopefully set up for an entry point into a year-end rally.


New Calls

None today.
 

New Puts

IDEXX Labs - IDXX - cls: 109.59 change: -1.31 stop: 113.85

Company Description:
IDEXX Laboratories, Inc. is a leader in companion animal health, serving practicing veterinarians around the world with innovative, technology-based offerings, including a broad range of diagnostic products and services, practice management systems and pharmaceuticals. (source: company press release or website)

Why We Like It:
The bullish up trend in IDXX is in serious jeopardy. The stock produced a top on September 20th and the slow roll over into a bearish pattern is now picking up momentum - lots of momentum. Volume has soared to more than twice the daily average for the last two sessions. The close under $110 is another bearish signal. Given the huge volume spikes we do not expect IDXX to find any support at its rising 50-dma near $108.60. We are suggesting a stop loss just above the 10-dma. Our target is the $101.00-100.00 range. We do not want to hold over the late October earnings report.

Suggested Options:
We are suggesting the November puts. At this time We only see November $120, 115s, and 110s. New strikes should be available soon. Nimble traders might consider October strikes but October options expire in three weeks.

BUY PUT NOV 110 UID-WB open interest= 10 current ask $6.50

November $105 puts would also be a potential play.

Picked on September 30 at $109.59
Change since picked: + 0.00
Earnings Date 10/27/07 (unconfirmed)
Average Daily Volume = 210 thousand

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Lamar Advertising - LAMR - cls: 48.97 change: -0.34 stop: 51.55

Company Description:
Founded in 1902, Lamar currently operates more than 150 outdoor advertising companies in more than 40 states and Puerto Rico. Lamar operates more than 149,000 billboards and has more than 75 transit franchises that reach driving audiences in 18 states and two provinces through displays on bus shelters, benches and buses. (source: company press release or website)

Why We Like It:
It was a bearish week for LAMR. The stock continued to under perform the markets and shares produced a new triple-bottom breakdown sell signal on its P&F chart. This looks like a bearish momentum play. However, we want to warn readers that last Wednesday's bounce was near the August 2006 lows around $47. Short-term we see Friday's failed rally under $50.00 as a new entry point to buy puts. Yet if we look at the weekly we have to wonder if the bounce is over already. To protect yourself consider using a tight stop loss just above the $50.00 mark. We're going to suggest a stop loss at $51.55 to give LAMR a little bit of room to maneuver. Our target is the $45.25-45.00 range.

Suggested Options:
We are suggesting the November puts.

BUY PUT NOV 50.00 LJQ-WJ open interest=420 current ask $2.70
BUY PUT NOV 45.00 LJQ-WI open interest=275 current ask $0.75

Picked on September 30 at $ 48.97
Change since picked: + 0.00
Earnings Date 11/08/07 (unconfirmed)
Average Daily Volume = 1.2 million

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POSCO - PKX - cls: 178.77 change: -2.36 stop: 185.05

Company Description:
POSCO is a South Korean steel producer.

Why We Like It:
Calling tops or bottoms can be extremely hazardous to your trading account but that's what this play is attempting to do. The massive rally in PKX appears to have run out of gas. Friday's move was both a bearish close under $180 and a bearish engulfing candlestick (reversal) pattern. However, is this just a pause for PKX to catch its breath and continue higher or is it the beginning of a correction? The stock is very overbought but momentum plays always seem to get more overbought then we think they should. We suspect that with Friday being the end of the quarter, and with Asian markets at or near significant highs, that this stock could see some profit taking or at least some mutual fund "undressing" now that the quarter is over. We have to warn you again that this is a very aggressive position. The P&F chart is super bullish with a $268 target. We have two targets. Our first target is the $171.50-170.00 range. Our second target is the $165.00-160.00 zone. This should be a very quick play. While we do not have a confirmed earnings date the information we have found suggests that PKX will report earnings around October 8th and we don't want to hold over the report.

Suggested Options:
This is a high-risk, aggressive play so we're going to go with some high-risk, aggressive options with the October puts. Remember - October strikes expire in three weeks. We expect to be out of this play in just a few days.

BUY PUT OCT 185 PKX-VW open interest= 59 current ask $11.80
BUY PUT OCT 180 PKX-VV open interest=148 current ask $ 8.90
BUY PUT OCT 175 PKX-VU open interest= 39 current ask $ 6.30
BUY PUT OCT 170 PKX-VN open interest=691 current ask $ 4.40

Picked on September 30 at $178.77
Change since picked: + 0.00
Earnings Date 10/08/07 (unconfirmed)
Average Daily Volume = 812 thousand

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Sears Holding - SHLD - cls: 127.20 chg: +0.23 stop: 132.65

Company Description:
Sears Holdings Corporation, the publicly traded parent of Kmart and Sears, Roebuck and Co., is the nation's fourth largest broadline retailer with over $50 billion in annual revenues and approximately 3,800 full-line and specialty retail stores in the United States and Canada. (source: company press release or website)

Why We Like It:
The markets have been worried about what many are forecasting to be the worst holiday shopping season in five years. Last week's sales warning from Target (TGT) pushed the entire retail sector lower. SHLD reacted to the TGT news with a spike to new 52-week lows. The oversold bounce that followed in SHLD has stalled under what looks like resistance near $130.00. We're suggesting puts with SHLD under $130. Our first target is the $120.50-120.00 range. Our second target is the $115.50-115.00 range. The P&F chart is a bit more bearish with a $108 target. We're suggesting a stop loss at $132.65 but it looks like readers might be able to get away with a stop a little bit closer to the $130 level if you wanted to try. We do not want to hold over the November earnings report. FYI: The retailers could see some volatility when many of them announce same store sales numbers late this week or early next week (somewhere in the October 4th-9th time frame).

Suggested Options:
We are suggesting the November puts.

BUY PUT NOV 130 KTQ-WY open interest=177 current ask $8.20
BUY PUT NOV 125 KTQ-WE open interest=273 current ask $5.80
BUY PUT NOV 120 KTQ-WD open interest=334 current ask $4.00

Picked on September 30 at $127.20
Change since picked: + 0.00
Earnings Date 11/15/07 (unconfirmed)
Average Daily Volume = 2.3 million
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Broadcom - BRCM - cls: 36.44 change: -0.16 stop: 34.45 *new*

We are leaning towards an early exit in BRCM. We have had the stock on our play list for two and a half weeks and shares haven't made much progress. The stock is challenging resistance near $37.00 but the momentum is definitely stalling. The technical indicators are hinting at a correction or pull back lower soon. Volume has definitely dried up the last few days. We are raising our stop loss to $34.45 but we suggest that readers consider exiting early instead. Odds are good that BRCM will test $36.00 or last week's low near $35.70 before moving higher. 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.

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

Picked on September 12 at $ 35.85
Change since picked: + 0.59
Earnings Date 10/10/07 (unconfirmed)
Average Daily Volume = 11.0 million

---

Citigroup - C - clos: 46.67 change: -0.21 stop: 45.79 *new*

The technical indicators on Citigroup are a mixed bag. Meanwhile looking at the action in the price has it's own conflicting signals. The bounce from the $46.00 level is a higher low and looks like an entry point for bullish positions. Yet volume on the rebound has been very low, which is bearish. Furthermore C has struggled with technical resistance at its 50-dma the last several days. We're not very optimistic here. After reading the market wrap for this weekend it might make more sense to just exit early right now. We're going to inch up our stop loss to $45.79 and we're not suggesting new positions at this time. Our initial target is the $49.85-50.00 range. Please note that we do not want to hold over the October 19th earnings report.

Suggested Options:
We're not suggesting new positions in C at this time.

Picked on September 16 at $ 46.64
Change since picked: + 0.03
Earnings Date 10/19/07 (confirmed)
Average Daily Volume = 40.7 million

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Ceradyne - CRDN - cls: 75.74 change: +0.01 stop: 71.74

The defense sector was one of the market's best performing sectors in the third quarter. That's going to make them a potential target for profit taking this week if the fund managers do any window "undressing". Shares of CRDN continue to look strong but don't be surprised if shares dip back toward their 10-dma around $73.20. We would watch for a dip, or preferably a bounce, as a new entry point to buy calls. Our short-term target is the $79.50-80.00 range. The P&F chart is bullish with a $92 target.

Suggested Options:
If CRDN provides a new entry point we would suggest using the November calls.

Picked on September 25 at $ 74.61
Change since picked: + 1.13
Earnings Date 11/01/07 (unconfirmed)
Average Daily Volume = 653 thousand

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Intl. Bus. Mach.- IBM - cls: 117.80 chg: +0.09 stop: 113.90

Shares of IBM closed near multiyear highs and look poised to breakout higher. We don't see any changes from our previous comments. Readers might want to consider new bullish positions on a rise past $119 or $120. The stock has already hit our first target in the $118-120 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.

Suggested Options:
If IBM provides an entry point with a new relative high then we would suggest the November calls. However, we would not hold over the mid October earnings report.

Picked on August 26 at $113.24
Change since picked: + 4.56
Earnings Date 10/17/07 (unconfirmed)
Average Daily Volume = 9.5 million

---

L-3 Comm. - LLL - cls: 102.14 chg: -0.54 stop: 95.99

Defense stock LLL closed near its all-time highs but remains stuck near resistance in the $102.50 region. We believe that LLL will be able to breakout higher. However, odds are pretty good that the markets could see some profit taking this week. We would watch for LLL to dip back toward the $100 level as a new bullish entry point to buy calls. An alternative entry would be to wait for a new high over $103. Our target is the $107.50-110.00 range. More aggressive traders may want to aim higher. The P&F chart points to a $115 target.

Suggested Options:
If LLL provides a new entry point (see above) we would suggest the November calls.

Picked on September 25 at $100.96
Change since picked: + 1.18
Earnings Date 10/25/07 (confirmed)
Average Daily Volume = 904 thousand

---

Lockheed - LMT - cls: 108.49 change: +1.70 stop: 102.45*new*

LMT was an exception to the languid market on Friday. Shares rallied past their late July highs to score a new all-time high. We are adjusting our stop loss to $102.45. We remain bullish on LMT but we're not suggesting new positions at this time. Don't be surprised if LMT sees some profit taking next week as fund managers might be tempted to do some window "undressing". 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.

Suggested Options:
We're not suggesting new positions in LMT at this time.

Picked on September 24 at $103.81 *gapped higher
Change since picked: + 4.68
Earnings Date 10/24/07 (unconfirmed)
Average Daily Volume = 2.7 million

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Stryker - SYK - cls: 68.76 change: -0.12 stop: 66.49 *new*

We are not willing to give up yet on SYK as a bullish candidate. The stock has spent the last couple of weeks consolidating between $67 and $69 and shares look like they're poised to breakout higher. We are waiting for a breakout to a new high and we're suggesting a trigger to buy calls at $70.65. Our biggest challenge right now is our time frame. SYK is due to report earnings on October 17th and we do not want to hold over the earnings report. 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. The P&F chart is bullish with an $83 target. FYI: We're adjusting the stop loss to $66.49.

Suggested Options:
If SYK hits our trigger to open positions at $70.65 we would suggest using the November calls.

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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Terex - TEX - cls: 89.02 change: -0.87 stop: 81.99

TEX has been very strong the last couple of weeks and shares were able to hold on to their gains into the end of the third quarter. The pattern remains bullish but we would not be surprised to see some profit taking and a dip back toward $85 or its 10-dma around $84.60. We would wait for a pull back before considering new bullish positions. 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.

Suggested Options:
We are not suggesting new positions at this time. If TEX provides a new entry point we'd suggest using the November calls.

Picked on September 25 at $ 86.50
Change since picked: + 2.52
Earnings Date 10/25/07 (unconfirmed)
Average Daily Volume = 1.8 million

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Whole Foods - WFMI - cls: 48.96 change: +0.82 stop: 44.85*new*

All we needed was another 26 cents. WFMI hit an intraday high of $49.49 on Friday and eventually closed up 1.7%. After such a strong performance last week WFMI looks like a target for some profit taking this week. We would not be surprised to see a dip back toward $46 or least the $47 region. We are adjusting our stop loss to $44.85. The trend continues to look bullish but we're not suggesting new positions at this time. 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. FYI: There was some news out late Friday that WFMI's president was moving to Safeway. We're not sure if this is going to have an impact on WFMI or not. Sometimes companies will try to hide significant news at late or odds hours, like a Friday night, hoping that investors won't notice when the market reopens.

Suggested Options:
We're not suggesting new positions in WFMI at this time.

Picked on September 26 at $ 46.26
Change since picked: + 2.70
Earnings Date 11/01/07 (unconfirmed)
Average Daily Volume = 3.2 million
 

Put Updates

Alexander & Baldwin - ALEX - cls: 50.13 chg: +0.74 stop: 52.01

We remain cautious on ALEX. The close over $50.00, which should have been resistance, is not a good sign for the bears. If we thought the market was going to rise this week we'd probably drop ALEX right here. However, our expectation is for the major indices to be flat to down and thus we're expecting ALEX to roll over under its 200-dma near $51.00. At this time we'd watch for a new decline under $49.70 or $49.50 as a new entry point to buy puts. 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.

Suggested Options:
If ALEX provides a new entry point we would use the November puts.

Picked on September 23 at $ 49.50
Change since picked: + 0.63
Earnings Date 10/25/07 (unconfirmed)
Average Daily Volume = 337 thousand

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Cephalon - CEPH - cls: 73.06 chg: +0.21 stop: 74.25

Unfortunately, CEPH didn't move much this week. There was an intraday breakdown under support near $72.00 on the FDA warning but there wasn't any follow through on it. At the same time CEPH can't seem to build on any of its bounce attempts and the stock has a bearish pattern of lower highs. While the play is currently "open" we're not suggesting new positions at this time. Wait for a new decline under $72.00 or even a new relative low under $71.00 before considering new put positions. 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. Remember that any time we play a biotech stock it should be considered higher-risk. There is always the chance that an unexpected headline about a successful or failed clinical trial or FDA decision could send the stock violently one direction or the other.

Suggested Options:
If CEPH provides a new entry point we would suggest the November puts.

Picked on September 26 at $ 71.70
Change since picked: + 1.36
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.)

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Dow Jones Industrial Avg. - DJX - cls: 138.96 chg: -0.17 stop: n/a

The DJIA is struggling to maintain its upward momentum and most market pundits are expecting volatility in October, which suggests some corrections ahead. We only have three weeks left before October options expire. Given these conditions more conservative traders may want to strongly consider an early exit right here and cut their losses. The October $137 calls are still trading in the $3.40-3.50 range and the $132 puts are in the $0.35-0.40 range. 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.

Suggested Options:
We're not suggesting new positions in the DJX at this time.

Picked on September 16 at $134.43
Change since picked: + 4.53
Earnings Date 00/00/00
Average Daily Volume = million
 

Dropped Calls

None
 

Dropped Puts

None
 

Dropped Strangles

None
 


Trader's Corner

Does Your Broker Sweep Up After You?

A few weeks ago, I noticed something important missing from the message section of my online broker: dividend statements. It turns out that when I had opened a new account, I had neglected to indicate that I wanted any unused funds in the trading account to be swept into a money market account at the end of each day.

It's been more than two years since I last wrote an article on sweeps. This occurs when unused money from your brokerage accounts is swept into money market funds, putting that unused money to work earning dividends. I thought it might be time to address the topic again.

It's important to understand how your brokerage addresses these issues, preferably before you choose the brokerage. First, not all brokerages offer this option, although an Internet search using the terms "brokerage" and "sweep" turned up tons that do. In addition, those that do sweep funds may not offer clients the choice of opting in or out. In addition, a brokerage might change the third-party bank to which funds are swept, with the subsequent new interest rate significantly different than that previously received on swept funds.

As early as 2005, the NYSE argued with the determination of some member organizations that the original customer agreements allowed them to implement or change a cash sweep plan without requiring additional consent forms. In addition, the NYSE wanted member organizations to inform clients if they were paid for sweeping funds into a particular third-party bank. They wanted customers to be advised if there was a significant difference in the interest rate they might receive on the swept funds and that they might receive in a money-market account.

The NYSE wanted customers to know about another potential conflict. Those customers who had accounts large enough that funds in excess of $100,000 needed to be aware that if the brokerage planned to sweep funds in excess of that amount into a single bank, FDIC coverage would be affected on those funds above the $100,000 level. In addition, if the third-party bank accepts customers other than the brokerage's sweep account, prior accounts at that bank may impact FDIC insurance coverage, too.

Back in 2005, the NYSE asked that member organizations prominently post information about sweep plans on their websites, update that information frequently, and also mail information if they had no websites. The NYSE wanted representatives at each brokerage that offered sweep plans trained to discuss the impact of those plans or choices within the plans with customers.

At that time, a quick check of several online brokerages showed me that no such information was prominently displayed or readily found on searches of major online brokerages. Has anything changed in the more than two years since that initial article was written? My brokerage did email me a few months ago when a change was made, informing me of the potential change. Check your brokerage's website to find out.

This is particularly important for those traders who might need tax-free income or those who are particularly concerned about having FDIC coverage. For example, those concerned with that FDIC coverage and who typically have more than $100,000 in excess cash in their brokerage accounts would want to ensure that their brokerages sweeps cash into more than one third-party bank or into the same bank in separate capacities.

If you have any questions about these issues, call your brokerage's customer support and ask for someone to explain the implications of the various choices the brokerage might offer for sweeping those unused funds. Then call your financial advisor to ensure that the cash sweep plan you're considering is right for you.
 

Today's Newsletter Notes: Market Wrap by Jim Brown, Trader's Corner 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.

Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.

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