Option Investor

Daily Newsletter, Monday, 12/17/2007

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Table of Contents

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

Market Wrap

Regional Economic Figures Send Stocks Lower

Stocks were broadly lower to start the week after a closely monitored regional barometer on business activity showed that economic growth decelerated faster than economists expected in December.

Decliners easily outpaced advancers by nearly 4:1 on both major exchanges after the New York Fed said its Empire State index of overall manufacturing activity conditions slid to a reading of 10.31 from 27.40 in November, which was well below economists forecast of 20.0.

While readings above 0.0 depict expansion, the figures drew investor's scrutiny in light of the current credit crunch, which Fed officials say will likely dampen economic growth over the next couple of quarters.

A look inside the regional index had the new orders index falling to 14.26 from 24.49 in November, while the shipments index fell to 21.08 from 32.19.

Unfilled orders remained in negative territory at -10 after registering a -1.20 in November. Inventories fell to -10, compared to -1.19 in November.

There was a "silver lining" of sorts as the prices paid index fell to a reading of 35 from November's 42.86, while the prices received index rose fractionally to 12.5 from 11.9. This set of data suggests that manufacturers saw some abatement in the costs of inputs, but have been able to pass on some of the costs.

Employment indexes were mixed as the number of employees rose to 12.83 from November's 10.63, while the average employee work week fell to a -7.50 reading from 4.76 in November.

The six-month expectations index rose to 32.4 from 30.52.

Supplementary survey questions; identical to those included in the December 2006 survey; asked manufacturers to quantify the change in the prices they paid for a number of major inputs, or budget categories, in 2007 as well as the expected change in those prices in 2008. On average, respondents indicated that prices paid for goods and services overall rose by 6.5% in 2007; they anticipated a virtually identical increase in 2008. Manufacturers expected a hike of 4% for wages and 7.5% for employee benefits in 2008increases that slightly exceeded those reported for 2007. Energy costs were expected to jump nearly 8%, while the costs of other commodities were seen rising by a little more than 5%; these increases were somewhat smaller than those reported for 2007.

The NY Empire Index is seen as a preview to the Philadelphia Fed Index slated for release on Thursday (consensus +6.2).

The Philadelphia Fed Index will get greater attention as many economists see it as having closer ties with the Institute for Supply Management's (ISM's) broader manufacturing index.

Closing U.S. Market Watch - 05:00 PM EST

After a notable rebound last week, the dollar traded mixed against a basket of major foreign currencies to start the week.

The U.S. government said the current account deficit, the broadest measure of international trade, narrowed in the third quarter compared to the second quarter. The Commerce Department said the trade deficit fell by 5.5% to $-178.5 billion from $-189 billion.

The Commerce Department noted that the deficit in goods shrank by 2.2% to $199.7 billion in the third quarter as record levels of export sales helped offset a rising bill for foreign oil.

The surplus in services, items such as airline tickets and consulting fees, increased by 3% to $26.5 billion. The surplus in investment income rosy sharply by 61.5% to $20.5 billion. The only decline occurred in the category that includes foreign aid, which rose to $25.8 billion, up 11.2% from 23.2 billion in the prior quarter.

In a separate report, the U.S. government said revenues increased 7.6% in 2007 to $2.6 trillion, while net operating costs fell by $175 billion, but entitlement spending growth remained a looming problem.

The 13-week Treasury Yield ($IRX.X) rose 13.5 basis points, in part due to the Treasury saying it plans to sell $20.0 billion in 4-week bills tomorrow, which is down from its last auction of $23.0 billion.


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We did see fractional losses for January Crude Oil futures (cl08f) which settled down $0.64, or -0.70% at $90.63.

Some of today's weakness in oil prices may have been attributed rumors that OPEC may boost output. Data released by oil tanker-tracker Petrologistics suggested OPEC oil exports have already risen by about 400,000 barrels a day.

The Oil Service HOLDRs (AMEX:OIH) $176.85 -2.53% did fall back below its rising 150-day SMA after National Oilwell Varco (NYSE NOV) $70.69 -8.63% said it had agreed to buy oil-equipment company Grant Prideco (NYSE:GRP) $53.91 +13.59% in a cash-and-stock deal worth about $7.5 billion. At Friday's close, the deal valued GRP at $58.00/share.

Sector traders may have viewed the deal modestly negative considering Grant Prideco (GRP) traded as high as $59.99 in June.

Additional M&A news had Ingersoll-Rand (NYSE:IR) $43.60 -11.34% falling sharply after the industrialized conglomerate said it was buying Trane Inc. (NYSE:TT) $45.24 +21.81% in a cash-and-stock deal valued at $10 billion. Ingersoll-Rand's CFO Herbert Henkel said the combined company expects to earn $4 per share in 2008 and will have more than $300 million in annual pretax synergies by 2010. The combination will create one of the world's largest makers of commercial and residential climate control companies.

Banks traded lower, but did show some "unusual stability" in an otherwise weak trade as investors and traders mull last Tuesday's 25 basis point rate cut and Wednesday morning's central banker's "Fab 5" (Federal Reserve, Bank of England, European Central Bank, Bank of Canada and Swiss National Bank) news.

It had been my (Jeff Bailey's) stance (based on Fed and Treasury statements) that there was NOT going to be a government-led BAIL OUT for subprime.

As I lay my head down Tuesday evening, I wondered just what the Fed had up its sleeve.

On Wednesday morning we found out. Or I think we did.

It has NOT been market participants that were necessarily "counting on a bail out," but it was more-than-likely some BANKERS!

And I think the Fed and other Central Banks also saw that as the case. Despite their continued statement to the contrary!

It has to be my observation that central bankers are NOT going to let banks sit around and DO NOTHING.

By "do nothing," I mean, WAIT FOR A BAIL OUT that isn't coming, and NOT LEND MONEY to WORTHY customers!

I think the Fed's 25 basis point cut has now given lenders ample room to generate new loans (refinances, business), which they have shied away from, waiting perhaps for a BAIL OUT.

I called the Fab 5 strategy "genius" as it gives signal that central banks are going to provide LIQUIDITY if needed, but bankers NOT ORIGINATING LOANS to worthy customers as nonsense.

On Friday, I thought Citigroup's (NYSE:C) $30.77 +0.22% plan to bail out seven affiliated investment entities and bring roughly $49 billion in assets onto its balance sheet as some sign that bankers are dealing with the credit crunch at hand on their own, and no longer able to "sit around" waiting for somebody else to take care of them.

Treasury Secretary Paulson commented today that he applauded Citigroup's SIV decision from Friday, but reiterated that there was no "silver bullet" for the current credit market problems.

My main point here regarding Fed policy and government policy (U.S., European) is that for a FREE MARKET ECONOMY to function properly, there MUST NOT BE A BAIL OUT.

Certainly we saw a "negative reaction" to Tuesday's FOMC decision on interest rates, and a reversal of early morning gains Wednesday, but I think the longer-term NEGATIVES, if not near-term negatives to any type of bail out would, or would have been MORE SEVERE than letting financial markets work through the problems themselves.


Because a bail out would be an OPEN DOOR policy to NEVER have to think about downside risk of any investment decision going forward.

We've seen great carnage for MANY mortgage lenders that turned their heads and looked the other way when originating, or purchasing loans of HIGH RISK borrowers, and when needed, HEDGING that risk. Especially those originators and lenders that CONCENTRATED their efforts on subprime borrowers.

Any type of BAIL OUT in my opinion would draw a VERY BEARISH reaction from market participants, as it would be a realization from all that we were now facing a market environment going forward where ALL RISK could be ignored.

Let any buyer, or seller of anything be it a commodity, an equity, or a debt instrument, never have to deal with RISK and I'd argue that you WOULD NOT HAVE A FREE MARKET.

Instead, you would only have a market with PRICE floors and ceilings.

Institute a market with floors and ceilings and you end up with a market, or an economy, that that would only thrive from INNEFICIENCY.

Market Internals Show Weakness

Tonight I need to update traders and investors on two of my major market indicators recent reversals back lower.

While advance/decline ratios and NH/NL ratios near some "oversold" levels once again, where we would look for a bounce, Thursday's action did have the narrow NASDAQ-100 Bullish % (BPNDX) from Dorsey/Wright & Associates reversing back lower to "bear confirmed" status.

Today's action had the broader S&P 500 Bullish % (BPSPX) also reversing back lower to "bull correction" status.

The very broad and more institutionally followed NYSE Bullish % (BPNYSE) finished today's trade at 40.26% bullish, and is very close to a reversing lower measure of 40%.

NASDAQ-100 Bullish % (BPNDX) - 2% box chart

While today's action did see a net gain of 1 stock to a reversing higher point and figure buy signal (37% to 38%), Thursday's action and reversal back lower mandates bullish caution as supply (O) begins to outstrip supply (X).

If we're to observe a "year-end rally," it would have to be my opinion that we would see the BPNDX see a 3-box reversal back up to 44%, and a 46% measure to achieve "bull confirmed" status.

We can tie in some PRICE levels with the QQQQ's point and figure chart.

QQQQ - $1 and $0.50 box

In early September (blue 9) the QQQQ generated a double top buy signal at $49.50, and has NOT given a "sell signal" at this point. However, a trade at $48.50 on the above chart would be viewed BEARISH and a triple bottom sell signal.

From current levels of trade ($49.73), I would assess BULL RISK to $48.50, or $1.23/share.

Just prior to today's close, I thought it WORTH the RISK for traders following my portfolio (bullish and bearish trades) to dip their BULLISH toe back in the water and purchase a partial position in the QQQQ Jan $50 Calls (QQQ-AX) for $1.69 as the QQQQ was trading $49.95.

Here an option traders ASSESSES BULL RISK as $169.00 (1 contract = 100 shares).

Traders may have been stopped out of these calls on Tuesday of last week at $3.40/contract as the QQQQ traded $52.20 just after the FOMC announcement.

Today, QQQQ/NDX heavyweight Apple Computer (AAPL) $184.40 -3.14% traded lower despite some upbeat comments out of UBS. The firm said it retail channel checks showed strong demand for the company's computers and thought new product to be revealed at the MacWorld show on January 15 would benefit the shares. UBS raised its target on AAPL's shares to $235 from $200.

S&P 500 Bullish % (BPSPX) - 2% box chart

Today's action did see the broader S&P 500 Bullish (BPSPX) reversed back down to "bull correction" status from "bull confirmed."

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

The ability for sellers/supply (O) to get the SPX back below the MONTHLY Pivot (1,475) is rather bearish in my opinion, and traders following my profiled trade in an SPY put were whipped out just above the SPX 1,475 level a couple of weeks ago.

It would still have to be my analysis that the SPX/SPY provides a better BEARISH trade, where the NDX/QQQQ would provide a better bull opportunity.

At this point, I'd only be looking long the SPX on a 3-box reversal back higher, where a stop could be placed at a "sell signal."

For example, should the SPX reverse back up tomorrow and see trade at 1,480 without having traded 1,440, then a bull could play long at 1,480, stop 1,440.

Bears can play the downside here, but I would STRONGLY suggest NOT being short SPX above 1,530 as that would be a spread triple top buy signal. Should the BPSPX also reverse back up to "bull confirmed" at such PRICE level, that could make for a powerful squeeze higher.

One of the MAIN levels I feel needs to hold on each day's CLOSE going forward will be Dow Industrials (INDU) 13,000. I think that LEVEL is important not only for market PSYCHOLOGY, but as it relates to my observation of 2,000,000 shares trade $129.00 on 11/27/07 (see my 12/03/07 Market Wrap).

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

China Security - CSR - close: 22.25 change: -1.00 stop: 19.99

Bulls started buying Monday's dip in CSR near the $22 level. This looks like another bullish entry point to buy calls. However, Asian markets might decline again in reaction to Monday's drop in the U.S. markets, which might put more pressure on shares of CSR Tuesday morning. Wait for signs of a bounce tomorrow before jumping in. This is an aggressive play due to the stock's volatility. We're using a very wide stop loss at $19.99. More conservative traders may want to use a stop closer to $21.00. We have two targets. Our first target is the $26.00 level. Our second target is the $29.00 level. The P&F chart is bullish with a $34 target.

Picked on December 16 at $ 23.25
Change since picked: - 1.00
Earnings Date 01/24/08 (unconfirmed)
Average Daily Volume = 525 thousand


Energizer - ENR - close: 113.21 chg: -1.79 stop: 109.95

ENR lost 1.55% today and the short-term technical picture continues to deteriorate. We reiterate our suggestion that readers may want to exit early. ENR looks like it's headed lower and will retest support near $112.50 and then the $110 level again. We are not suggesting new positions. Our target has been the $119.00-120.00 range and shares hit $118.88 on Wednesday last week. 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: + 0.46
Earnings Date 01/28/08 (unconfirmed)
Average Daily Volume = 511 thousand


Holly Corp. - HOC - close: 50.20 change: +1.25 stop: 44.95

HOC out performed the broader markets today. Shares added 2.5% and broke through round-number resistance at the $50.00 mark. Volume came in above average on the rally, which is a bullish sign. This looks like a new entry point to buy calls. 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: - 0.38
Earnings Date 02/12/08 (unconfirmed)
Average Daily Volume = 859 thousand

Put Updates

Agrium - AGU - close: 58.42 change: +0.46 stop: 65.01

The intraday strength in AGU was a little surprising but the rally stalled at the $60.00 level. This now looks like a failed rally entry point for new put positions. More conservative traders may want to use a tighter stop loss. Our target is the $55.10-55.00 zone but more aggressive traders may want to aim for the rising 100-dma closer to $52.00.

Picked on December 11 at $ 59.66
Change since picked: - 1.24
Earnings Date 01/31/08 (unconfirmed)
Average Daily Volume = 1.6 million


Amazon.com - AMZN - cls: 85.09 chg: -3.99 stop: 95.05

Target achieved! The profit taking in AMZN continued today and shares broke down under a number of moving averages including the 50 and 100-dma. Our short-term target was the $85.25-85.00 range. Today's 4.4% sell-off shrugged off positive analyst comments and a raised price target for AMZN this morning. The MACD on the daily chart has just produced a new sell signal. Our second target is the $81.50-80.00 zone. The P&F chart is bearish and today's decline has pushed the P&F target from $84 to $76.

Picked on December 16 at $ 89.08
Change since picked: - 3.99
Earnings Date 01/31/08 (unconfirmed)
Average Daily Volume = 8.8 million


Boeing - BA - close: 87.40 change: -1.02 stop: 93.26

BA continues to look bearish following Friday's failed rally at $90.00. We do not see any changes from our previous comments. We have two targets. Our first target is the $85.55-85.00 range. Our second target is the $81.50-80.00 zone. The P&F chart is bearish with a $75 target.

Picked on December 04 at $ 91.43 *triggered/gap down
Change since picked: - 4.03
Earnings Date 01/31/08 (unconfirmed)
Average Daily Volume = 7.0 million


Genentech - DNA - close: 67.57 chg: -0.86 stop: 70.85

DNA lost 1.25% and continues to slip following last week's bearish reversal. We do not see any changes from our weekend comments. The P&F chart points to a $54 target. We're suggesting puts now with DNA under $70.00. Our target is the $62.50-60.00 range. The main hurdle for the bears is support near $65.50. More conservative traders could do some profit taking near $65.00.

Picked on December 16 at $ 68.43
Change since picked: - 0.86
Earnings Date 01/10/08 (unconfirmed)
Average Daily Volume = 4.3 million


Garmin - GRMN - close: 101.82 chg: -2.22 stop: 112.55

We do not see any changes from our weekend comments. GRMN continues to look bearish following Friday's failed rally pattern. Remember, this is an aggressive, higher-risk play because the stock can be so volatile and there is still a lot of bullish expectations out there for GRMN's Christmas season. We have two targets. Our first target is the $96.00-95.00 zone. Our second target is the $91.00-90.00 zone.

Picked on December 11 at $104.78
Change since picked: - 2.96
Earnings Date 02/14/08 (unconfirmed)
Average Daily Volume = 6.2 million


Sears Holding - SHLD - cls: 103.99 chg: -1.25 stop: 117.55

SHLD lost 1.18% and volume appears to be rising on the sell-off. We don't see any changes from our weekend comments. A failed rally under $110 could be used as a new entry point for puts. We have two targets. Our first target is the $100.50-100.00 range. Our second more-aggressive target is the $92.50-90.00 zone. The P&F chart is bearish with a $78 target.

Picked on December 11 at $110.28
Change since picked: - 6.29
Earnings Date 10/27/07 (unconfirmed)
Average Daily Volume = 3.3 million


Shire Plc - SHPGY - close: 67.47 change: -0.51 stop: 73.51

SHPGY gapped down this morning at $66.87 but then staged a recovery. The bounce struggled under the $68 level all day. We remain bearish but the stock could try and "fill the gap" from last Thursday. A failed rally near $70.00 would be our preferred entry point to buy puts again. Our initial target is the $65.25-65.00 range although we're considering a more aggressive target in the $62-60 region. FYI: Any time we play a biotech or even a drug stock we're dealing with a higher-risk situation. We are at risk that some FDA decision or some clinical trial news could send the stock gapping one direction or the other.

Picked on December 13 at $ 68.07 *triggered/gap down entry
Change since picked: - 0.60
Earnings Date 02/00/08 (unconfirmed)
Average Daily Volume = 956 thousand

Strangle Updates


Dropped Calls

Constellation Energy - CEG - cls: 98.95 chg: -1.98 stop: 97.45

CEG is starting to cave in to market pressure. Shares of CEG lost almost 2% and broke down under round-number support at the $100 level. Technically CEG is still inside its bullish channel but we would rather exit early now and cut our losses than wait and see if shares bounce near its rising 50-dma around $96.00.

Picked on November 20 at $100.56
Change since picked: - 1.61
Earnings Date 01/31/08 (unconfirmed)
Average Daily Volume = 1.3 million


Itron Inc. - ITRI - close: 77.87 change: -0.82 stop: 77.85

ITRI continues to see profit taking. The stock lost another 1% and hit our stop loss at $77.85. After six down days in a row the stock is looking short-term oversold and due for a bounce.

Picked on December 06 at $ 80.26 *triggered
Change since picked: - 2.39
Earnings Date 02/13/08 (unconfirmed)
Average Daily Volume = 824 thousand


Mobile Telsys - MBT - cls: 89.95 change: -5.27 stop: 91.75

Ouch! Weakness overseas compounded with weakness here in the U.S. and suddenly MBT's relative strength just vanished as traders rushed in to lock in gains. The stock lost more than 5.5% and broke down under round-number support at the $90.00 level. The stock is on the verge of breaking down under its bullish channel. Aggressive traders may want to buy puts on further weakness with a stop above $95.00. We would have been stopped out today at $91.75.

Picked on December 16 at $ 95.22
Change since picked: - 5.27
Earnings Date 03/08/08 (unconfirmed)
Average Daily Volume = 1.6 million


Nat.Oilwell - NOV - close: 70.69 change: -6.68 stop: 69.99

Our unrealized $6.64 gain in NOV just vanished in a puff of smoke this morning. NOV announced it was buying rival Grant Prideco (GRP) for $58 a share (7.37 billion). As is normally the case shares of the buyer went down while shares of the company being bought went up. NOV was within 66 cents of our target at Friday's high. Monday's intraday weakness hit our stop at $69.99.

Picked on December 03 at $ 70.73
Change since picked: - 0.04
Earnings Date 02/06/08 (unconfirmed)
Average Daily Volume = 5.5 million


Union Pacific - UNP - close: 128.96 chg: -1.60 stop: 129.45

Another day of steep market losses was too much for UNP and the stock broke down under support near $130.00. We recently raised our stop loss so we would have been stopped out at $129.45. We would keep an eye on UNP down the road for future opportunities!

Picked on December 06 at $130.50 *triggered
Change since picked: - 1.54
Earnings Date 01/24/08 (unconfirmed)
Average Daily Volume = 2.3 million

Dropped Puts


Dropped Strangles


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


Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

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