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Daily Newsletter, Monday, 10/29/2007

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Table of Contents

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

Market Wrap

Stocks Gain Despite Bubbling Crude

The major equity averages posted modest-gains to start the week despite the continued rise in oil prices, where December Crude Oil (cl07z) at the NYMEX traded as high as $93.70 before settling up $1.67, or +1.82% at $93.53.

Miners as depicted by the AMEX Gold Bugs Index ($HUI.X) 428.68 +1.92% were also strong on dollar weakness, as gold nears the $800.00 level.

Financials finished mixed after a modest gain late last week as traders position themselves ahead of the two day Fed meeting, which starts tomorrow.

NYSE and NASDAQ Composite Internals - Since 09/24/2007

Market internals at the big board had gainers outnumbering advancers by a 3-to-2 margin. Investors pushed 286 1, 2, and 3-lettered stock symbols to new 52-week highs, while 82 stocks fell to a new 52-week low.

NASDAQ internals were what I'd consider to be fractionally positive with advancing issues roughly equal to declining issues. While there are some energy stocks that trade on the NASDAQ, the number of new highs aren't as impressive among the 4 and 5-lettered stocks symbols the past couple of days.

Global Equity Index Benchmarks and Currencies

The U.S. Dollar Index (DXY) 76.83 has fallen an additional 1.58% since last Monday, and that decline finds the AMEX Gold Bugs Index ($HUI.X) and Gold itself recouping their 10/15 to 10/22 losses. Traders and investors continue their bantering as to the relationship between the greenback and oil prices, where uncertainty surrounds if oil's rise is causing the dollar to weaken, or the weakening of the dollar in anticipation of further Fed rate cuts simply exacerbates the rise in oil prices, where oil is prices in US$.

Odd-man out is gold, which certainly looks to be tied with the euro's strength vs. the US$.

Japan's Nikkei-225 ($NIKK) has seen a modest 1.58% bounce after its 10/15-10/22 as the US$ steadies against the yen.

Outside of that relationship, I still find it difficult to make too many ties between how currencies trade relative to key global equity benchmarks.

S&P 100 Index (OEX.X) (40 Heavyweights) - Cap Weighted Index

Other than some profit taking in Microsoft (NASDAQ:MSFT) $34.57 -1.31% after last week's bullish response to the software giants quarterly earnings report, buying among the top 40-weighted S&P 100 ($OEX) components helped to offset any MSFT weakness.

Look for institutional capital to be aggressive buyers of MSFT on any dips near $33.00 to $33.50, as they'll all want to show "Mr. Softy" on their books by year's-end.

One theme of weakness over the last 20-days sticks out as "banks," be it regional, or money center.

In this evening's wrap, we'll take a look at the S&P Bank Index (BIX.X) and Broker/Dealer Index (XBD.X).

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Zurich-based UBS AG (NYSE:UBS) $53.25 -1.07% said today that it expects to report a loss of 600 million Swiss francs ($515 million) to 800 million francs, but warned it could take further charges in the fourth quarter from its exposure to U.S. housing and mortgage markets. The Swiss banking group, which will report third-quarter earnings tomorrow, said the fourth quarter has started with good results from all units, but further deterioration in U.S. housing markets or rating downgrades for mortgage-related securities could lead to further write-downs.

While UBS is not a component of an major U.S. equity benchmarks, its exposure and comments regarding the housing and mortgage-related areas of the U.S. economy are closely followed.

Verizon (NYSE:VZ) $45.99 +0.85% did close at a new 52-week high. The telecom service provider, which is the 19th-most heavily weighted component in the price-weighted Dow Industrials ($INDU) 13,870 +0.46%, said Q3 net income fell 34% to $1.27 billion, or $0.44 a share, hurt by international taxes and costs of a spin-off of access lines. Adjusted earnings were $0.63 cents a share, which was a penny better than a survey of analysts by Thomson Financial, which produced an average estimate of $0.62 cents a share.

Positive guidance from the communications company regarding its strong wireless business and high-speed Internet customers, helped put a bid into the newtorkers with the Networking Index ($NWX.X) 306.70 +2.14% atop today's list of sector winners.

S&P Banking Index (BIX.X) - Daily Intervals

Some comments late last week out of Countrywide Financial (NYSE:CFC) $16.83 -2.71% and Merrill Lynch (NYSE:MER) $67.42 +2.01% took some pressure off the "super regional" and regional banks at the end of last week, but there was little follow-through today.

I would have to remain rather cautious the banks at this points, and today's high was notable relative to the BIX's 08/03/2007 low of 340.50. The inability to hold a move above that level would have to suggest "bank bulls" that may have thought they got the low in early August, aren't so certain.

Broker/Dealer Index (XBD.X) - Daily Intervals

Brokers are showing some sign of repair taking place among the financials. Goldman Sachs (NYSE:GS) $243.81 +3.34% closed at an all-time high again today after trading as low as $157.38 on August 16th!

Dow Transports (TRAN) - Daily Intervals

I wanted to quickly update traders on the Dow Transportation Average (TRAN) 4,844.51 -0.46%, and comments that I made in recent market wraps.

I should note that the TRAN components are NOT "heavyweights" in any major U.S. equity index (INDU, OEX, SPX, NDX/QQQQ), but what they say in the form of technicals is what "Dow Theory" monitors.

I'm not seeing any sign of bullishness at this point, but I am somewhat impressed that they've held together considering the following chart.

US Oil Fund (AMEX:USO) - Daily Intervals

Another short squeeze is underway in the energy complex, and after last week's "surprising" draw in crude oil inventories, bears are scrambling once again to cover positions when overhead supply in both the USO and futures are nonexistent.

The MOST dangerous short I continue to see is either oil the commodity, or gold the commodity, and for those that love to difficult trade of trying to pick a top at highs, where there is no overhead supply to keep things in check, the most dangerous place to try and short is in the FUTURES markets, especially when holding over the weekend, when RISK of a gap higher on Sunday evening's re-open could leave traders facing a HUGE GAP UP, in a highly LEVERAGED instrument.

I've pointed to two bars on the daily interval bar chart of the USO, where it has "spiked" higher intra-day, but CLOSES notably lower at a day's close.

Oil EQUITIES should LEAD a DECLINE in oil prices. If set on trying to "pick a top," do it with an OIL STOCK/EQUITY, but utilize a PUT OPTION, where the MOST YOU CAN LOSE is the amount of the OPTION!

Should oil prices ever abate, and energy equities decline, it would have to be my analysis that another GROUP of stocks pick up the slack.

S&P 500 Index ($SPX) - Daily Intervals

As you can see from my U.S. Market Watch and 20DyNet% changes, technology and energy stocks have been the primary drivers that have the S&P 500 Index ($SPX) closing above its trying-to-round lower 21-day SMA.

The rather broad Russell 2000 Index ($RUT) 821.72 +0.04% did test its 21-day SMA (826.39) in today's session, but traded more inline with what we saw in the S&P Banks Index (BIX.X), which was strength at the open, but a giveback of those gains towards the mid-point of today's session.
 


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

Boeing - BA - close: 96.99 change: +0.97 stop: 94.85

BA actually spent most of the day trading sideways. That changed late this afternoon when the company announced a new $7 billion stock buy back program and a 35-cent quarter cash dividend. The stock shot higher and hit $97.60 intraday before paring its gains. Our suggested trigger to buy calls was at $97.25 so the play is now active. There is potential resistance at its 50-dma and the $100 level but if the markets make a fourth quarter run then BA could rally back toward the $105 region. Our target is the $104-105 zone. FYI: The P&F chart is still bearish from the October sell-off.

Picked on October 29 at $ 97.25
Change since picked: - 0.26
Earnings Date 10/24/07 (confirmed)
Average Daily Volume = 6.3 million

---

Haynes Intl. - HAYN - cls: 87.37 change: +0.88 stop: 82.45

HAYN continued to rally but most of the gains came early this morning. The stock spent the rest of Monday's session consolidating sideways although we did note that the stock was rising higher into the closing bell. We remain bullish and would still consider new positions here. Tomorrow could see some volatility in steel and metal stocks. U.S. Steel (NYSE:X) is due to report earnings tomorrow morning and investor reaction to the news may influence trading in HAYN. If HAYN sees any profit taking we would watch for the $85 level to act as short-term support. A dip or a bounce near $85 could be used as a new bullish entry point for calls. Our conservative target is the $89.90-90.00 range. Our more aggressive target is the $94.50-95.00 range. The Point & Figure chart has broken through resistance and points to a $100 target.

Picked on October 28 at $ 86.49
Change since picked: + 0.88
Earnings Date 12/10/07 (unconfirmed)
Average Daily Volume = 166 thousand

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L-3 Comm. - LLL - cls: 107.97 chg: +0.99 stop: 103.90

LLL continued to rally on Monday and charged to new all-time highs before pulling back around 2:00 p.m. this afternoon. The stock hit $108.80 midday. Our suggested trigger to buy calls was at $108.10. The play is now open. Our target is the $114.00-115.00 range. The P&F chart is bullish with a $133 target. FYI: If the stock sees any profit taking watch for a bounce near $106 as an alternative entry point for calls.

Picked on October 29 at $108.10
Change since picked: - 0.13
Earnings Date 10/25/07 (confirmed)
Average Daily Volume = 627 thousand

---

Siemens - SI - close: 135.95 change: +3.45 stop: 127.40

SI continued to rally. Unfortunately the stock gapped open higher. The opening trade was $135.54. We were suggesting a trigger to buy calls at $133.55. We'll have to take this morning's open. SI's relative strength today (+2.6%) is encouraging but more patient traders may want to consider waiting for a possible dip. The $133-132 zone should now be short-term support. Our primary target is the $139.85-140.00 range. More aggressive traders can aim higher. FYI: SI trades as an ADR here in the U.S. and will most likely gap open one way or the other every session as the ADR adjusts to trading in Europe.

Picked on October 29 at $135.54 *gap higher entry
Change since picked: + 0.41
Earnings Date 10/27/07 (unconfirmed)
Average Daily Volume = 582 thousand

---

Sina Corp. - SINA - cls: 56.95 change: +0.39 stop: 49.99

SINA hit a new high on Monday at $58.19. The fact that shares closed in the green is a show of relative strength. After Friday's big move some profit taking would have been normal. Traders bought the dip near $56.00 this morning, which is another positive sign. Our target is the $59.50-60.00 range. SINA is due to report earnings somewhere in the October 29th-November 8th range. Hopefully the closer we get to the end of October we'll find a confirmed date since we do not want to hold over SINA's earnings report. (Still no update on a confirmed earnings date)

Picked on October 23 at $ 53.40
Change since picked: + 3.55
Earnings Date 11/08/07 (unconfirmed)
Average Daily Volume = 1.0 million

---

W-H Energy Services - WHQ - cls: 59.82 chg: -0.14 stop: 56.95

WHQ spiked higher this morning and hit $60.21. Our suggested trigger to buy calls was at $60.05 so the play is now open. If you missed this morning's move the afternoon rebound from $59.00 looks like another bullish entry point although you could wait again for another rally past $60.00. Normally we avoid holding over an earnings report. WHQ is an exception. All the bad news should be priced into the stock already. That gives WHQ a decent change to beat Wall Street's lowered expectations. WHQ is due to report earnings on Tuesday morning. Our target is the $66.50-67.50 zone. WHQ may have resistance at $65.00 and then again at the 100-dma and 50-dma overhead.

Picked on October 29 at $ 60.05
Change since picked: - 0.23
Earnings Date 10/30/07 (confirmed)
Average Daily Volume = 542 thousand
 

Put Updates

BEA Systems - BEAS - cls: 16.50 change: -0.00 stop: 18.05

BEAS let ORCL's $17/share bid for the company expire on Sunday. We are very surprised that the stock did not show more weakness today. Shares of BEAS tried to rally midday but failed near Friday's high. The stock closed unchanged on the session. We remain bearish but more conservative traders will want to seriously consider taking some early profits right here. We're not suggesting new positions at this time. Our target is the $15.25-14.75 range.

Picked on October 23 at $ 17.87
Change since picked: - 1.37
Earnings Date 10/27/07 (unconfirmed)
Average Daily Volume = 19.6 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.)

---

Borg Warner - BWA - cls: 102.92 change: +4.96 stop: n/a

Positive analyst comments on Monday helped lift BWA to another new relative high and a 5% gain. Shares of BWA hit an intraday high of $104.37 while the November $100 calls (BWA-KT) hit an intraday high of $5.50. The company's earnings report is behind it and we're not suggesting new strangles. We have three weeks left for our November options. The options we suggested for a strangle were the November $100 calls (BWA-KT) and the November $90 puts (BWA-WR). Our estimated cost was $4.50. We want to sell if either option hits $7.25 or more.

Picked on October 23 at $ 95.67
Change since picked: + 7.25
Earnings Date 10/25/07 (confirmed)
Average Daily Volume = 392 thousand

---

Express Scripts - ESRX - cls: 61.87 chg: +0.50 stop: n/a

ESRX continues to inch higher. The stock added another 0.8% today. We do not see any changes from our previous comments. We are no longer suggesting new strangle positions on ESRX. The options we suggested for a strangle were the November $65 calls (XTQ-KM) and the November $55 puts (XTQ-WK). Our estimated cost was $1.95. We want to sell if either option hits $3.50 or higher.

Picked on October 21 at $ 59.65
Change since picked: + 2.22
Earnings Date 10/24/07 (confirmed)
Average Daily Volume = 2.1 million

---

Intl. Bus. Mach. - IBM - cls: 114.80 chg: +1.07 stop: n/a

It looks like IBM is poised to make a bullish breakout attempt through resistance near $115 and its 50-dma soon. We've mentioned it before but the lack of directional movement in IBM is bad news for our strangle and readers may want to abandon ship. We have three weeks left on our November options. We are not suggesting new strangle positions at this time. Our November strangle suggested the November $125 call (IBM-KE) and the November $110 put (IBM-WB). Our estimated cost was $3.00. We wanted to sell if either option hits $6.00.

Picked on October 15 at $118.03
Change since picked: - 3.23
Earnings Date 10/16/07 (confirmed)
Average Daily Volume = 7.5 million

---

Monster Worldwide - MNST - cls: 39.32 chg: -0.28 stop: n/a

MNST is still struggling with resistance near $40.00. Readers may want to abandon ship since the post-earnings volatility was not enough to push our strangle into a profit. There are three weeks left for the November strikes. We are no longer suggesting new positions. The options we suggested for our strangle were the November $40 calls (BSQ-KH) and the November $35 puts (BSQ-WG). Our estimated cost is $1.75. We want to sell if either option hits $2.95 or higher.

Picked on October 23 at $ 37.22
Change since picked: + 2.10
Earnings Date 10/24/07 (confirmed)
Average Daily Volume = 2.0 million
 

Dropped Calls

None
 

Dropped Puts

Tsakos Energy - TNP - cls: 70.20 change: +0.29 stop: 71.01

We are suggesting an early exit in TNP. The stock sold off this morning but recovered and managed to crawl back above technical resistance at its 50-dma, 100-dma and the $70.00 mark. That's an impressive move. Plus, the sector leaders like EXM and DRYS look poised to breakout higher. We'd rather cut our losses now.

Picked on October 22 at $ 67.67 *gap down
Change since picked: + 2.53
Earnings Date 11/05/07 (confirmed)
Average Daily Volume = 114 thousand

---

Sepracor Inc. - SEPR - cls: 23.02 change: -0.07 stop: 24.01

We have run out of time with SEPR as a put play. It was our plan to exit on Monday at the close to avoid holding over Tuesday's earnings report. We were unfortunate to have a bad entry with the October 22nd gap down below our suggested entry point.

Picked on October 21 at $ 22.91 *gap down
Change since picked: + 0.11
Earnings Date 10/30/07 (confirmed)
Average Daily Volume = 1.5 million
 

Dropped Strangles

None
 

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

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