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Daily Newsletter, Monday, 12/10/2007

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Table of Contents

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

Market Wrap

Reset Reprieve

Stocks continued their rally that began on Wednesday as traders and investors contemplate a reprieve for adjustable rate mortgage lenders and borrowers alike.

Having rebounded 13.2% last week on the heels of a mortgage relief packaged that could help more than one million homeowners avert foreclosure in the next two years, the Dow Jones Home Construction Index (DJUSHB) was atop today's list of sector winners.

Monthly Mortgage Rate Resets -

Thursday's outlining of what some are calling the "5-year Freeze" on adjustable rate mortgages (ARMs) sent shockwaves through the financial markets. Suddenly, the onslaught of ARMs that are about to reset may be delayed, allowing homeowners with ARMs that are about to be ratcheted higher, additional time to improve credit ratings (if need be), but also allowing some additional time for housing prices to stabilize, if not rebound.

Lenders, also faced with millions of refinancing applications, could benefit from an additional five-years time to process applications.

I would encourage everyone to read the U.S. Treasury's press release from Thursday at this link.

At a MINIMUM, I (Jeff Bailey) would think that Thursday's news brought in a strong wave of short-covering by those that may have been counting on millions of ARMs forcing borrowers into foreclosure.

Also helping improve sentiment toward homebuilders was the National Association of Realtors (NAR) saying the battered housing market is on the verge of stabilizing and inched-up its outlook for 2007 and 2008 home sales.

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The NAR said it now sees existing home sales falling 12.5% this year to 5.67 million, which is up slightly from last month's prediction of 5.66 million existing home sales this year. The NAR also forecast sales will rise slightly in 2008 to 5.7 million, up from last month's prediction of 5.69 million.

While the NAR's revisions hardly suggested a sharp rebound in sales, after nine straight months of downward revisions, the report was viewed as a sign of stabilization.

On the mortgage front, after being halted prior to today's open with news pending, shares of mortgage insurer MBIA, Inc. (NYSE:MBI) $33.95 +13.16% reversed last week's losses and traded as high as $38.19 intra-day after the company said it had secured a $1 billion funding commitment from Warburg Pincus, the US private equity group, in a sign that buy-out investors are finding some value in the troubled mortgage arena.

Terms of the deal have Warburg initially investing $500 million into MBIA by purchasing 16.1 million of the company's shares at $31 each, a small premium to Friday's closing price of $30.00/share.

Warburg will then back a $500 million rights issue which MBIA expects to complete early next year. Warburg will have the right to nominate two board members, and will receive warrants to purchase additional MBIA shares at $40.00, allowing it to bolser its profit if the share price rises.

Daily Internals - 12/10/07

The major averages jumped at the open on early CNBC reports of MBIA's cash infusion.

But just as MBIA was released for trade at 11:00 AM EST, shares of banking giant Bank of America (NYSE:BAC) $46.64 +2.79% gave back gains at 11:15 AM EST from the $46.71 level, slipping to as low as $45.74 on CNBC's report that it had frozen one of its SIV-related money market funds.

The stock rebounded to close back near its high of the session after the company said it was closing a privately placed money-market fund (Columbia Strategic Cash Portfolio fund) for institutional investors.

BAC's spokesman Jon Goldstein denied CNBC's report that the fund had been frozen, saying that clients were being offered the option of cash redemptions or of switching their assets into other Columbia-managed funds.

Who said CNBC was a cheerleading network for the bulls?

Despite today's turmoil, advancers held the upper hand over decliners at both exchanges and for the first time since October 31, new highs outnumber new lows at both exchanges, suggesting to me that we're just starting to see some sign that bullish leadership (new highs) is starting to overcome bearish leadership (new lows).

I should also alert traders and investors that Dorsey/Wright and Associates' VERY BROAD NYSE Bullish % (BPNYSE) reversed back up into a column of X at 40.20% on Wednesday of last week and at tonight's close has risen to 46.00% bullish. This indicates that the demand (X) is really starting to outstrip supply (O) and the offensive (bullish) team is on the field. On 11/27/07, this major market bullish % reached an inflection low of 32.82%.

In essence, on 11/27/07, 32.82% of roughly 3,000 point and figure charts (985) were showing "buy signal" associated with their charts. At tonight's measure of 46%, we would now envision roughly 1,380 NYSE-listed stocks showing PnF buy signals.

Standard & Poors also chimed in today by cutting its ratings and outlook on 14 SIVs. S&P said it was cutting its ratings on some SIVs to deepest junk from investment grade, and assigned a negative outlook to most other SIVs. S&P didn't provide a dollar amount affected by the downgrades.

As if that wasn't enough, as I type, shares of Washington Mutual (NYSE:WM) $18.65 -1.99%, which diverged from today's bullish bid in banks, saw its shares fall to $18.12 in tonight's extended session after the mortgage lender said it would slash its dividend by 73% to $0.15/share and eliminate 2,600 mortgage and 550 corporate support jobs as it looks to close 190 of its 336 mortgage offices as it stops making loans to borrowers with subprime, or poor credit.

Also after today's close, handset chipmaker Texas Instruments (NYSE:TXN) $32.67 +0.58% ticks higher at $34.25 after the company said a stronger-than-expected end to the year for mobile handsets had it raising the lower end of its revenue estimates for the fourth quarter.

Texas Instruments said it now expects revenues to come in between $3.5 billion and $3.66 billion in the fourth quarter, compared to previous guidance of $3.4 to $3.6 billion.

Nokia (NYSE:NOK) $39.98 +1.24% is TI's biggest customer. Its shares were quiet at $40.00 in the extended session.

While WaMu was getting ready to cut its dividend, fast-food giant McDonalds (NYSE:MCD) $61.90 +2.89% closed at another all-time high after it said global same-store sales rose 8.2% in November, while U.S. sales were up 4.4%, boosted in part by it premium roast coffee and breakfast menu sales.

Shares of Starbucks (NYSE:SBUX) $22.73 +0.48% edged up 11-cents.

Energy prices were mixed with fractional losses across the complex.

Energy secretary Bodman called on OPEC to increase oil supplies as low global oil inventories kept prices high. Mr. Bodman added that he thought speculators were adding to oil's volatility, but not higher prices.

January Crude (cl08f) settled down $0.42, or -0.48% at $87.86, while January Unleaded (rb07f) finished down $0.0189, or -0.82% at $2.2501.

Gold as depicted by the StreetTracks Gold (NYSE:GLD) $80.00 +1.78% (~$800.00 spot) traded strong. Ahead of tomorrow's FOMC decision on interest rates, the U.S. Dollar Index (DXY) 76.06 was marginally soft.

A quick look at Jan Fed Fund futures (ff08f) 95.82 has market participants forecasting a 100% probability of a 25 basis point cut for the federal funds rate, and just over 25% probability of a 50 basis point cut.

The FOMC's current target is 4.5%.

Not much of a "dip," but a little bit of "rip"

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

In last Monday's market wrap I was looking for a "dip" and then a "rip" higher.

Needless to say, we didn't see much of a dip, or a 3-box reversal back lower to 1,450, and Thursday's trade at 1,500 has the SPX back on a "buy signal."

I'm seeing GREAT SIMILARITY from the OUTWARD appearance of the SPX as to late August PRICE action, but INTERNAL indicators are also VERY SIMILAR.

On the above chart, I've drawn in PINK our institutional mathematically derived MONTHLY Pivot levels, where I would look to have a BULLISH stance above 1,475.

On 11/28/2007, Dorsey/Wright's broad S&P 500 Bullish % (BPSPX) did reversed back up to "bull confirmed" status at 42% (47% actual) as the SPX itself closed 1,469.

At tonight's close, it has risen to 54.82% bullish (54% on chart) as 274 of the 500 stocks comprising the SPX now show a point and figure buy signal associated with their chart.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
None None None

Play Editor's Note: Traders seem optimistic ahead of the Fed meeting tomorrow. Unfortunately that only raises the risk of a disappointment or some sort of "sell the news" reaction. Hopefully the damage won't be too bad. I have a large number of stocks on my watch list where I would welcome a significant dip as a potential bullish entry point.


New Calls

None today.
 

New Puts

None today.
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Aluminum Corp. of China - ACH - cls: 60.38 chg: +0.26 stop: 54.45

Shares of ACH spent Monday trading sideways as investors wait to hear the FOMC decision on rates tomorrow. Odds are good that the markets will see a sell the news move, which should pull ACH lower toward our suggested entry point. We're suggesting readers buy a dip in ACH in the $56.50-55.00 zone. This way traders could aim for the 10-dma or short-term support near $55.00. Our official entry will be $56.50 for now. If triggered our target is the $64.50-65.00 range but we might adjust that as the 50-dma ($66.20) continues to slide lower. FYI: The Point & Figure chart has a $75 target.

Picked on December xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 03/08/08 (unconfirmed)
Average Daily Volume = 1.8 million

---

Constellation Energy - CEG - cls: 103.16 chg: -0.27 stop: 97.45

CEG is a prime example of what happened for a lot of the market today - absolutely nothing. The stock traded in a relatively narrow range as investors wait for the Fed meeting on Tuesday. If there is any profit taking the $100 level should be short-term support. A dip back toward the $100 zone could be used as a new bullish entry point. More conservative traders might be able to inch up their stop a bit. The Point & Figure chart has produced a triple-top breakout buy signal. Our target is the $107.50-110.00 range. FYI: CEG is due to present at an analyst conference on December 13th.

Picked on November 20 at $100.56
Change since picked: + 3.03
Earnings Date 01/31/08 (unconfirmed)
Average Daily Volume = 1.3 million

---

Energizer - ENR - close: 115.03 chg: -1.77 stop: 109.95

ENR hit some profit taking today but traders bought the dip midday near $114 and its rising 10-dma. The stock was due for a little bit of a rest so we're not surprised. Our target is the $119.00-120.00 range. FYI: The P&F chart has a very bullish pattern called a bullish triangle breakout and it is forecasting a $157 target.

Picked on November 26 at $112.75 *triggered
Change since picked: + 2.28
Earnings Date 01/28/08 (unconfirmed)
Average Daily Volume = 511 thousand

---

Excel Maritime - EXM - close: 54.37 change: +4.21 stop: 46.45

The water-transport/shipping stocks continued to rally on Monday. Shares of EXM added almost 8.4% and did so on improving volume. We remain bullish but we probably would not chase new positions at current levels. Stocks in this group can be volatile and we would consider this a higher-risk, more aggressive play. Our target is the $57.50-60.00 range but we might have to adjust it for the 50-dma (currently at $59.29). The Point & Figure chart is bullish with a $98 target. FYI: Another stock in this group that looks like a potential play is DRYS but it is even more volatile than EXM.

Picked on December 09 at $ 50.16
Change since picked: + 4.21
Earnings Date 03/13/08 (unconfirmed)
Average Daily Volume = 1.5 million

---

Holly Corp. - HOC - close: 48.34 change: +0.13 stop: 44.95

There wasn't much change in HOC today. The stock, like many in the market, traded sideways in a narrow range as investors waited on tomorrow's FOMC meeting. We're not suggesting new positions. If the markets see any profit taking next week then HOC will likely fall back toward support near $45.00. At this point we'd rather buy a bounce near $45.00 or wait for a real breakout over $50.00. Readers might be more excited to just find another stock in the energy sector that has been showing more strength. Our target on HOC is the $54.75-55.00 range.

Picked on December 03 at $ 50.58 *bad tick/gap open
Change since picked: - 2.24
Earnings Date 02/12/08 (unconfirmed)
Average Daily Volume = 859 thousand

---

Itron Inc. - ITRI - close: 82.56 change: -1.78 stop: 77.85

ITRI also ran into some profit taking. After a sharp two-day move higher the stock rallied to $85.00 (actually 84.98) and then pulled back. Any further profit taking should find support near broken resistance at $80.00. We're not suggesting new positions at this time but a bounce near $80 would be a new entry point. Our target is the $86.00-87.00 range near its 100-dma. Last week's rally has pushed the target on the P&F chart from $92 to $107.

Picked on December 06 at $ 80.26 *triggered
Change since picked: + 2.30
Earnings Date 02/13/08 (unconfirmed)
Average Daily Volume = 824 thousand

---

JA Solar - JASO - close: 66.34 change: +2.76 stop: 56.25 *new*

Target achieved! Solar stocks continued to rise following a 28% rally in shares of LDK. Shares of JASO added another 4.3% on top of Friday's big gain. JASO has hit our conservative target in the $64.50-65.00 range. Our next, more aggressive target is the $69.00-70.00 zone. This remains an aggressive play. We are adjusting the stop loss to $56.25.

Picked on December 03 at $ 56.25 *triggered
Change since picked: +10.09
Earnings Date 03/31/08 (unconfirmed)
Average Daily Volume = 3.0 million

---

Nat.Oilwell - NOV - close: 73.92 change: +0.40 stop: 66.90

We don't see any changes from our weekend comments. NOV continues to climb but shares look a little bit overbought and due for a dip. Readers could use a dip back into the $71.00-70.00 zone as a new bullish entry point. Broken resistance at the 50-dma and then again near $70.00 should be new support. Our target is the $79.00-80.00 range. The Point & Figure chart is bullish with an $84 target.

Picked on December 03 at $ 70.73
Change since picked: + 3.19
Earnings Date 02/06/08 (unconfirmed)
Average Daily Volume = 5.5 million

---

Nucor - NUE - close: 61.72 change: -0.26 stop: 56.75

Traders bought the dip midday near $60.70 and the stock was on the rebound heading into the closing bell. The intraday low did look like another entry point. We're going to keep our stop loss under last week's low. Our target is the $64.90-65.00 range. The bullish breakout in just the last couple of days has produced a new P&F chart buy signal with a $73 target.

Picked on December 06 at $ 60.15 *triggered
Change since picked: + 1.57
Earnings Date 01/24/08 (unconfirmed)
Average Daily Volume = 4.6 million

---

Research In Motion - RIMM - cls: 102.38 chg: -1.27 stop: 96.75

We do not see any changes from our weekend comments on RIMM. Right now we're suggesting a dip into the $100.00-97.00 zone. We'll try and limit our risk with a stop loss at $96.75, just under the rising 100-dma, which should be technical support. If triggered our target is the $109.50-110.00 range. More aggressive traders could aim for the 50-dma, currently near $113.40.

Picked on December xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 12/20/07 (confirmed)
Average Daily Volume = 32.2 million

---

Union Pacific - UNP - close: 135.26 chg: +0.42 stop: 126.95

Railroad stock UNP continues to hold on to its gains. The stock traded sideways as the market waits for the Fed decision tomorrow. More conservative traders may want to take a little money off the table right here. After last week's gains it would be only natural to see a little profit taking. Our initial target is the $139.00-140.00 range. The P&F chart is bullish with a $138 target. Please note that we're adjusting the stop loss to $126.95. More conservative traders may want to put their stop closer to $129-130.

Picked on December 06 at $130.50 *triggered
Change since picked: + 4.76
Earnings Date 01/24/08 (unconfirmed)
Average Daily Volume = 2.3 million
 

Put Updates

Boeing - BA - close: 92.64 change: -0.52 stop: 95.01

BA continues to under perform the market but the stock looked like it was trying to bounce in the last few minutes of trading today. Just after the closing bell BA announced a 14% increase in its quarterly dividend and shares were trading closer to $93.00 in after hours markets. We're not suggesting new positions at this time. Wait until after the Fed meeting and then look for a new decline under $91.50. Our target is the $85.50-85.00 region just under the November lows. FYI: BA has an important conference call scheduled for Tuesday, December 11th at 10:00 a.m. Eastern to update investors on its 787 Dreamliner production schedule.

Picked on December 04 at $ 91.43 *triggered/gap down
Change since picked: + 1.21
Earnings Date 01/31/08 (unconfirmed)
Average Daily Volume = 7.0 million
 

Strangle Updates

None
 

Dropped Calls

ExxonMobil - XOM - close: 92.03 chg: +0.53 stop: 86.75

Target achieved. XOM finally hit our target in the $92.50-95.00 range. Shares continue to look strong and we've been suggesting that readers might want to hold on and aim for the $94.50-95.00 zone instead.

Picked on November 13 at $ 86.75
Change since picked: + 5.28
Earnings Date 01/31/08 (unconfirmed)
Average Daily Volume = 24.2 million
 

Dropped Puts

Celgene - CELG - close: 49.18 change: -8.18 stop: 61.75

Targets exceeded! Negative analysts comments about CELG's latest results for its Revlimid trials sent the stock crashing. The stock gapped open lower at $55.22 and then plunged to an intraday low of $47.21 before bouncing around $48-50 the remainder of the session. Our initial target was the $55.50-55.00 range and then we had a more aggressive target in the $51.00-50.00 range.

Picked on December 04 at $ 59.49 *triggered
Change since picked: -10.24
Earnings Date 01/31/08 (unconfirmed)
Average Daily Volume = 4.2 million
 

Dropped Strangles

None
 

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

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