Option Investor

Daily Newsletter, Monday, 11/19/2007

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Table of Contents

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

Market Wrap

Location, Location, Location

Stocks gave back the bulk of last week's gains as banking behemoth Citigroup (NYSE:C) $32.00 -5.88% fell $2.00 a share and close at its lowest level since March of 2003 after Goldman Sachs told investors they should sell their stock, saying the bank faces more write-downs of mortgage-related exposures and may have to cut its dividend to firm up its eroded capital ratios.

Goldman Sachs told investors that it believes the banking giant will have to book $15 billion in collateralized debt obligation (CDO) write-downs over the next two quarters.

If Goldman Sach's comments regarding Citigroup were not enough to have investors moving more of their capital out of mortgage-related issues, then Credit Suisse's comments regarding Freddie Mac's (NYSE:FRE) $37.50 -7.90% subprime mortgage portfolio probably helped investors make a decision to abandon ship.

Credit Suisse said it believes the nation's second-larges U.S. mortgage finance company may be set to report a loss of between $1 billion to $5 billion on its subprime AAA portfolio.

In a note to clients, Credit Suisse said "While Freddie's AAA subprime securities likely have substantial subordination, if the recent credit spread widening does not reverse over the coming quarters, we believe that Freddie could recognize an other-than-temporary impairment of between $1-5 billion."

Not to be left out, broker Friedman, Billings, Ramsey & Co. said it was downgrading Fannie Mae to "market perform" from "outperform" and cut its price target on the stock to $35 from $60.

Shares of Countrywide (NYSE:CFC) $10.57 -12.42% traded another multi-year low today, falling to as low as $10.25.

As I type this evening's wrap, credit rating agency Moody's is updating its ratings on the company.

Moody's said it is holding its Baa3 senior debt rating, and its C- bank financial strength rating and Baa1 deposit rating of Countrywide. Moody's update is a result from a ratings review that started in August.

I'm currently seeing shares of Countrywide (CFC) ticking up fractionally from today's close at $10.80 in tonight's extended session.

Armed with a point and figure chart bearish vertical count (currently under construction) of $6.00, I'd continue to suggest investors avoid the name.

We could see the stock bounce tomorrow. Just last week (see Monday's Market Wrap) I noted the mortgage lender warn that further cuts in its credit ratings to junk levels could severely limit its ability to raise money in public debt markets and cause it to lose bank deposits.

Homebuilders as depicted by the Dow Jones Home Construction Index (DJUSHB) 307.00 -6.39% were atop today's list of sector losers, partly due to the plethora of broker comments regarding mortgage-related issues.

Additional information on the housing front had the National Association of Home Builders (NAHB) saying its index for sales of new, single-family homes was unchanged at 19 in November, after October's initial 18 reading was revised up to 19.

November's (and October's) 19 measure remains the lowest number since the inception of the index in 1985.

David Seider, the NAHB's chief economist said "The message from today's report is that builders do not see any significant change in housing market conditions as compared to last month," and added that "while they continue to work down inventories of unsold homes and reposition themselves for the market's eventual recovery, they realize it will be some time before market conditions support an upswing in building activity - most likely by the second half of 2008."

The NAHB also reported that its expectations index for sales in the next six months fell to 25 from 26, while a sub-index in the report did turn up modestly with the traffic of prospective buyers rising to 17 in November from October's 15.

The overall housing market index in October was based on a survey of 335 home builders, who answer questions about sales prospects now and in the near term. When the Housing Market Index exceeds 50, it means the number of builders who see "good" sales outnumber the number who see "poor" sales. The numbers used in compiling the index are adjusted for seasonal variations.

Retailers were also weak with building products retailer Lowes Co. (NYSE:LOW) $23.12 -7.55% leading the declines. The company said it earned $643 million, or $0.43/share. The company's blamed Q3 results on a continuing housing correction, drought conditions in several markets and slower sales in the Gulf Coast.

In today's Market Monitor at OptionInvestor.com I did issue a "refinance your mortgage alert" for those that may be looking to get out of an adjustable rate mortgage (ARM) and lock in a fixed rate mortgage.

The benchmark 10-year Yield ($TNX.X) fell 7.1 basis points to 4.079%, its lowest yield close since September 2005.

While the strong bid for this maturity continues to suggest a "defensive posture" among market participants (flight to safety), many 15-year and 30-year mortgage loan rates tend to follow the benchmark bond's yield.

On Wednesday of last week, I noted that the Mortgage Bankers Association (MBA) had just released its weekly mortgage applications survey. The MBA said the average contract interest rate for a 30-year fixed-rate mortgage stood at 6.19%. The average contract interest rate for a 15-year fixed-rate mortgage was 5.77%. The average contract interest rate for one-year ARMs was 5.98%.

Perhaps you can agree that FIXING a rate for 30-years at 6.19% vs. the "unknown" 1-year adjustable of 5.98% makes some sense as it relates to RISK management.

Additionally, I mentioned that "first time home buyers" that were in part considering a home purchase (new or existing) that they consult with the tax advisor as to the timing of a home purchase this close to the end of the year.

The question I think a consumer should ask their tax professional is if the POSITIVE tax implications of purchasing now, might not be more FULLY experienced after the December 31, 2007.

Have your tax professional run a "this is your tax estimate now" if you stay the current course (example: rent vs. own); and this is what you might stand to gain should you go ahead with a new mortgage and purchase a home today, or after the new year.

In brief, I was a bit disappointed in late 2006 when I had hoped to reduce my tax liability by purchasing a home in September of 2006.

My disappointment came from not being able to FULLY realize tax-deductibility of mortgage-related fees that I would have been able to more fully realize had I delayed purchase until after the New Year.

In essence, had somebody ADVISED me that by waiting until AFTER the first of the year (based on my tax bracket) that I would have garnered GREATER tax relief by waiting until the new year to purchase a home mortgage, I would have been able to better utilize some of the tax-deductibility associated with mortgage fees.

As I have mentioned, TAX implications should NOT be the primary decision point of ANY INVESTMENT, but may be considered when deciding to either purchase, or sell and investment.

NYSE and NASDAQ Internals -

Today's finishing advance/decline line at both the NYSE and NASDAQ were negative, and for the most part, were bearish from the opening bell.

Today's 544 new lows at the big board exceed the more recent 490 from 11/8/07 and at a MINIMUM continue to show BEARISH leadership prevailing, even at some very quantitatively "oversold" readings.

My NYSE NH/NL 5-day ratio is currently at 10.8%, while the 10-day NH/NL ratio is at 14.4%. It was on 08/07/07 that the NYSE 10-day NH/NL ratio fell as low as 9.0% before its most recent high of 72.4% was witnessed on 10/11/07.


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NASDAQ's NH/NL indications aren't anything for a bull to be cheering about, but there too, are at some very quantitatively "oversold" measures.

My NASDAQ NH/NL 5-day ratio is currently at 22.0%, while the 10-day NH/NL ratio is at 20.4%. It was on 08/07/07 that the NASDAQ 10-day NH/NL ratio fell as low as 19.1% before its most recent high of 73.6% was witnessed on 10/11/07.

In the point and figure charting world, measures ABOVE 70% are deemed "overbought," while measures BELOW 30% are deemed "oversold."

There's an old saying that "a picture is worth a thousand words," so let's look at my hand charted NYSE 5-day and 10-day NH/NL ratio chart.

NYSE 5-day and 10-day NH/NL Ratio Chart - 2% box

For me, it is of little use to be given a new high, or new low reading, without some type of concept of what these important internal indications are doing over time.

Similar to the institutionally followed BULLISH % indicators, that tell a trader/investor meaningful shifts in supply (O) and demand (X), I developed a new high and new low chart in ratio format for both the NYSE and NASDAQ. Then began charting the "faster moving" 5-day NH/NL ratio, and the 10-day NH/NL ratio.

The PRIMARY point addressed in the above chart is that I'm seeing both the "f"ive-day NH/NL ratio and the 10-day NH/NL ratio approaching some similar levels found in early to mid-August in the NYSE.

Make no mistake, that the above chart depicts BEARISH leadership, but at levels where we've seen some big rebounds.

For instance, let's follow just the 10-day NH/NL ratio. It is logical that it would be a little "slower moving" that the 5-day NH/NL ratio, and would filter out some noise that the shorter-term 5-day might introduce.

On August 7th, we witnessed the 10-day NH/NL ratio fall to a low measure on the chart of 10%. When you're at 10%, how much further can you fall? To 0%!

Well, as you can see, the 10-day NH/NL ratio did reverse back up at 16% as it followed the eventual "buy signal" of the five-day at a similar 16%.

As time progressed, the 10-day NH/NL ratio rose steadily to a recent high measure of 72% on the chart by 10/11/07, before reversing back lower on 10/17/07.

Due to time constraint, I won't show the NASDAQ's NH/NL ratio chart, but it looks rather similar to that of the NYSE's NH/NL ratio chart.

I would have to expect at least 1, perhaps 2 additional weeks of WEAKNESS, but I would want subscribers to have plans in place for a potentially powerful "oversold bounce."

There's little "good news" in the markets, and that's the time to be alert for a bounce.

After the closing bell, shares of Hewlett Packard (NYSE:HPQ) $49.56 -2.34% saw some modest upside after-hours action at $50.27 when the computer maker said its Q4 net rose 28%, boosted by strength in laptops and strong sales in the Asia-Pacific region. HP said it reported a profit of $2.2 billion, or $0.81/share on revenue of $28.29 billion. Analysts were looking for EPS of $0.82 on revenue of $27.39 billion.

Global Equity Benchmarks/ Dollar Index/ Oil / Gold

European bourses have been the "weakest" since last Monday's update, and I can only surmise that some of last week's news regarding "subprime" issues related to holdings of CDOs finally caught up with some foreign banks.

U.S.-based institutions aren't the only holders of the once hungered-for subprime debt.

This weekend, it was reported that OPEC was interested in a non-dollar currency, with some members blaming higher oil prices on the weak U.S. dollar.

From what I read, it was largely Iran and Venezuela commenting negatively with regard to the U.S. dollar.

Due to time constraints, I will not be able to break out individual currencies like I had been doing in prior wraps, but one thought I might be able to see support of is a "currency basket" that not unlike the U.S. Dollar Index (DXY) itself (which is a weighted basket of foreign currencies), we eventually see oil denominated not just in US dollars, but perhaps a basket of currencies.

One idea, is perhaps derive a weighted currency called the Oil Dollar Index, where oil would be denominated by a basket of currencies, where the basket would be weighted by consumption.

Recent statistics I've seen (www.nationmaster.com) had the top five consumers of oil (roughly 30 million barrels per day) showing the US consuming roughly 54.5% (20.7 million bbl/day), China (yuan) about 17.1% (6.5 m bbl/day), Japan (yen) about 14.7% (5.5 m bbl/day), Germany (euro) about 7.2% (2.65 m bbl/day) and Russia (ruble) about 6.5% (2.5 m bbl/day) of crude.

It wouldn't make sense to me to simply say, "oh, the euro is strong, so let's switch to it for now" as a currency benchmark for oil. Five year's from now, that could change dramatically.

Instead, a "weighted basket" of currencies (weighted by consumption) might be warranted.

S&P 500 At Important Support Level

You've probably seen more bar/candle charts of the S&P 500 Index (SPX.X) the past couple of months than you can shake a stick at.

From a pure supply (O) and demand (X) perspective, the SPX now rests at a VERY important technical level of longer-term and even intermediate-term support as a VERY long-term institutional upward trend is tested.

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

Today's trade at 1,440 is the FIRST TEST of the bullish support trend on the SPX! This is the FIRST TEST of this institutionally followed trend since the U.S. recession ended in 2003!

It has been pondered if the U.S. is in a recession, or if it will go into a recession.

All I know, based on the above observation, is that a trend of long-term support and even intermediate-term support dating back to late-August, early September (blue 9) is currently being challenged at the 1,440 level.

A trade at 1,430 would be a "spread triple bottom sell signal," and would be further BEARISH.

On 11/07/07 the SPX's trade at 1,480 (marked above) generated a "triple bottom sell signal" and last Wednesday's bounce back up to 1,492.14 intra-day found some notable selling.

I think this will be the MOST CLOSELY MONITORED technical chart in the day's, weeks to come.

As close as today's low of 1,430.71 is to 1,430.00, the SPX did NOT trade that level (1430.00).

If it does, we should be prepared for a meaningful amount of selling.

Should buyers be formidable above 1,430, I would want to monitor market internals, like that of the new high and new low indications.

My bullish thoughts would be that a BULL needs to see new lows STOP BUILDING almost immediately, with new highs building back to the upside, which would have the 10-day NH/NL ratios reversing back UP.

Traders and investors alike should be OFF "long margin," and if short underlying stocks (requires margin), those positions should be MANAGED carefully.

I suggest where applicable, traders ease IN and OUT of positions.

Bottom line is that the SPX, a benchmark of U.S. equities, and perhaps the economy (if you believe as I do that the SPX is a reflection of the U.S. economy) is at an important level of technical support. We're nearing some "oversold" levels on various internal indicators like the NH/NL ratios and your ACCOUNT/TRADE management will be important.

Don't second-guess PROFITS where you have them, and be willing to CUT LOSSES where applicable.

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

Express Scripts - ESRX - close: 65.91 chg: +0.53 stop: 61.14

Once again ESRX displayed relative strength. The stock rose to another new high, this time breaking out past resistance near $66.00 on an intraday basis. We remain bullish here but given the market's weakness we'd still hesitate to launch new positions. The P&F chart is bullish with a $97 target. Our short-term target is the $69.50-70.00 range.

Picked on November 13 at $ 64.67
Change since picked: + 1.24
Earnings Date 02/07/08 (unconfirmed)
Average Daily Volume = 2.4 million


Gilead Sciences - GILD - cls: 43.28 change: -1.36 stop: 41.74

Monday proved to be a day of broad-based selling. The biotech stocks turned lower as the BTK index lost 1.6%. Shares of GILD under performed its peers with a 3% sell-off. We continue to suggest caution here. Wait for a bounce near the rising 50-dma or the $42.00 level before considering new bullish positions. Our target is the $47.00-48.00 range. There might be some resistance its 10-dma near $45.00.

Picked on November 13 at $ 43.11
Change since picked: + 0.17
Earnings Date 01/31/08 (unconfirmed)
Average Daily Volume = 7.6 million


Goodrich Corp. - GR - close: 70.02 change: -1.91 stop: 67.90

GR finally succumbed to profit taking. The stock lost 2.6% and dipped to (and under) round-number support at the $70.00 level. The stock should find support here and at its rising 50-dma (near $68.80) but given the market weakness we would hesitate to bet on support these days. Wait for signs of a bounce before considering new bullish positions. More conservative traders might want to ratchet up their stop loss toward to 50-dma. We have two targets. Our conservative target is the $74.90-75.00 range. Our more aggressive target is the $78.00-80.00 range. The P&F chart is bullish and points to a $99 target. FYI: GR is due to present at the Aerospace and Defense conference on Thursday, November 29th, 2007 at 11:30 a.m. ET.

Picked on November 05 at $ 71.05
Change since picked: - 1.03
Earnings Date 10/25/07 (confirmed)
Average Daily Volume = 1.0 million


L-3 Comm. - LLL - cls: 108.58 chg: -2.92 stop: 107.99

Fear in the markets is finally starting to spread to stocks like LLL. Shares traded lower all day long and closed near its lows for the session, which is usually a bearish signal for tomorrow. The breakdown under $109 is another negative signal. Odds are good that if the markets show any weakness tomorrow morning that LLL will hit our stop loss at $107.99. LLL has already hit our first target in the $114-115 range. Our second, more aggressive target is the $118.00-120.00 range. FYI: The P&F chart's bullish target has risen from $133 to $139 and now to $145.

Picked on October 29 at $108.10
Change since picked: + 0.48
Earnings Date 10/25/07 (confirmed)
Average Daily Volume = 627 thousand


Las Vegas Sands - LVS - cls: 110.49 chg: -8.27 stop: 109.90

A negative story in Barron's over the weekend yanked the carpet out from under shares of LVS. The market's widespread weakness only exacerbated the sell-off. Shares of LVS lost almost 7% and will test support near $110 and its 100-dma soon. A bounce from here could be used as a new bullish entry point but odds are pretty good that any market weakness tomorrow morning will push LVS to our stop loss at $109.90 and close the play. LVS has already hit our initial target near $117. Our secondary, aggressive target is the $121.00-122.50 zone.

Picked on November 08 at $111.60
Change since picked: - 1.11
Earnings Date 11/02/07 (confirmed)
Average Daily Volume = 4.0 million


ExxonMobil - XOM - close: 84.11 chg: -0.99 stop: 82.99

Investors failed to find any safe haven in oil stocks on Monday during the market-wide sell-off. The OIX oil index lost 1.1% and XOM mirrored the move. Shares of XOM continue to trade in a bearish trend (as previously discussed) and the stock is nearing support at its rising 200-dma. Wait for signs of a bounce or a breakout over its 10-dma before considering new bullish positions. Our target is the $92.50-95.00 range. More conservative traders may want to lock in some gains near $90.00.

Picked on November 13 at $ 86.75
Change since picked: - 2.64
Earnings Date 01/31/08 (unconfirmed)
Average Daily Volume = 24.2 million

Put Updates

Canadian Pacific - CP - cls: 62.68 change: -1.61 stop: 66.26

Weakness in shares of CP continued on Monday. The stock hit a new relative low and shares hit our suggested trigger to buy puts at $62.85. The play is now open and our target is the $57.50-57.00 range. The Point & Figure chart is bearish and points to a $51 target

Picked on November 19 at $ 62.85
Change since picked: - 0.17
Earnings Date 01/30/08 (unconfirmed)
Average Daily Volume = 553 thousand


ESSEX Property - ESS - close: 103.56 change: -0.61 stop: 107.31

Bulls bought the initial dip in ESS near $105 but the midday bounce faded into the closing bell. We are still waiting for a breakdown under support at $102. We are suggesting a trigger to buy puts at $101.75. We'll suggest a stop above Friday's high at $107.31. If triggered our target is support in the $94.00-93.00 range. The P&F chart is much more bearish with a $78 target. FYI: Do not be surprised if ESS produces an initial bounce from the $100 mark.

Picked on November xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/31/07 (confirmed)
Average Daily Volume = 272 thousand


J.B.Hunt - JBHT - close: 25.34 change: -0.44 stop: 27.05

JBHT lost another 1.7% and shares hit a new relative low but the stock did not breakdown under round-number support at the $25.00 mark. We want to see a breakdown under $25.00. We are suggesting a trigger to buy puts at $24.95. More aggressive traders may want to jump in early at $25.25. If we are triggered at $24.95 our target is the $22.50-22.00 range. If JBHT trades under $25.00 it will produce a new triple-bottom breakdown sell signal on the P&F chart.

Picked on November xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 01/29/08 (unconfirmed)
Average Daily Volume = 1.8 million


PACCAR - PCAR - close: 46.74 change: -0.33 stop: 50.81

Monday's trading in PCAR should send up warning flags for the bears. The stock failed to truly participate in the market's weakness. Shares just traded sideways all day long. That's not a good sign for the bears. We would not be surprised to see a bounce back toward $48.00 or even the 10-dma just under $50.00. Double check your stop loss placement. Our target is the $42.50-42.00 range. The Point & Figure chart is forecasting at $38 target.

Picked on November 16 at $ 46.99 *triggered
Change since picked: - 0.25
Earnings Date 01/30/08 (unconfirmed)
Average Daily Volume = 2.7 million


Regency Centers - REG - cls: 66.73 chg: -0.83 stop: 72.01

REG tried to bounce this afternoon but struggled under the $68.00 level, which as broken support should be new resistance. We do not see any changes from our weekend comments. We are suggesting put positions now or on a failed rally under $70.00. More conservative traders may want to use a tighter stop near $70. Our suggested stop is above resistance near $72.00. Our target is the $62.50-62.00 range near the August 2007 lows.

Picked on November 18 at $ 67.56
Change since picked: - 0.83
Earnings Date 10/27/07 (unconfirmed)
Average Daily Volume = 570 thousand

Strangle Updates


Dropped Calls


Dropped Puts


Dropped Strangles


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


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