Option Investor

Daily Newsletter, Tuesday, 12/18/2007

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Table of Contents

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

Market Wrap

Visions of Santa

Are traders finally catching the holiday spirit with visions of a Santa Claus rally dancing in their head? The bulls have been beaten senseless over the six days since the Fed decision with the Dow losing about 700 points. Today's midday rebound may have been less about Santa and more about covering shorts but there is plenty of historical precedence to justify a switch to a bullish stance.

Dow Chart - 120 min

Nasdaq Chart - Daily

The only material economic report today was the New Residential Construction starts for November. Those came in at 1.187 million units on an annualized basis. This was a drop of -3.87% from October levels but was much better than the 1.170 million analysts had expected. In fact the bottom in starts for this cycle was back in September at 1.182 million units. Could this be a bottom forming in the housing sector? It may be too early to start calling a bottom since there have been numerous lows in this cycle with temporary rebounds that have all failed. 1.2 million units would be a good place for a bottom since analysts believe this is the minimum level required to cover the new home requirements from new households being formed and from new immigration. The strength in the November numbers came from multifamily units or apartments, which increased by 332,000 units while single family homes fell another -2.3%. If builders want to have homes ready for the spring selling season then December and January are the months they need to start construction. That gives them five months to complete in time for spring sales and summer moves. This makes the next two reports critical for determining builder health.

Housing Starts Chart

Wednesday is another light day for economics with only the weekly Mortgage Applications and Oil inventories. The real key will be the continued earnings from the major brokers. Today Goldman Sachs (GS) was the focal point as they reported their Q4 earnings. Goldman's profit came in at $7.01 per share compared to $6.59 in Q4-2006 and the $6.61 expected by analysts. This equated to $3.17 billion in profits. Revenue rose to $10.74 billion from $9.41 billion in the comparison quarter.

By all metrics it was a good quarter for Goldman when compared to the losses being predicted for the other major brokers. Although some analysts suggested the gains were not that clean. There was a $734 million gain from real estate investments and $800 million from the sale of some power plant interests. There was also a 75-cent per share gain on some miscellaneous investments that had not been expected. Goldman also saw withdrawals from its quantitative hedge funds because those funds were performing badly. Goldman's CFO did not inspire investors when he gave a cautious outlook for the future. He said the dislocation in the capital markets was continuing and declined to say the worst was over. Instead he said we are just getting closer to the bottom. Goldman was knocked for a $7 loss but that was better than the -$12 intraday levels. There are worries that the current quarter will be a disaster. Goldman books its incentive fees from its hedge funds in December and those funds have been hammered by market conditions and investor withdrawals. A CNBC reporter said after the close a VP of Goldman told him the last two weeks had been horrible and among the worst in the companies history. It sounds like they zigged when they should have zagged. It is tough to always be on the right side of billion dollar trades as Goldman has done so well in the past. Goldman did say they have reduced their risk to subprime mortgages and CDOs to about $1 billion and leveraged loans to $27 billion.

Next up will be Morgan Stanley on Wednesday and they are expected to show additional losses due to subprime problems. Bear Stearns on Thursday is also expected to report more losses but there are signs the damage at Bear may be nearly over. The losses in the financial sector are largely the cause of the reduced estimates for the entire S&P. According to Thomson the financial are expected to show a -38% drop in earnings for Q4 and another -19% drop in Q1. They are expected to recover with +17% gains for all of 2008. The consensus is for financials to take the maximum write-downs possible in 2007 to avoid having the 2008 results tainted. They all want to get the bad news behind them and move on with their business. This would provide some easy comps to beat in Q3/Q4 2008. Merrill Lynch is expected to add another $6 billion to their previously announced $8 billion write-down.

Adobe helped rally techs after posting better than expected earnings on Monday night. Adobe beat the street by a penny at 38 cents per share and that compared to 30 cents in the year-ago quarter. That +28% jump in profits came on the back of strong sales in its premium products. Adobe also raised its forecast for Q1 to revenue of as much as $885 million and well over analyst's estimates for $837 million. Adobe also said new products in the pipeline would enable it to close 2008 very strong.

Palm (PALM) reported earnings or lack thereof after the close with a $9.63 million loss or -9 cents per share. In the year-ago period Palm earnings were +12 cents per share. The loss was worse a penny worse than analyst's expected. The bleeding is expected to worsen with Palm saying it could lose up to $33 million in Q4 or 33-cents per share. Palm's problems have led to a cancellation of products and churn in the executive positions. There are rumors that Elevation Partners, who closed a deal to acquire a 27% stake in October, could take the company private given the drop in share price to $5.50 from the $19 high in October. There have also been rumors that Palm could go under given the strong competition in the smart phone space by RIMM and Nokia. Palm's Treo smart phone sales only rose to 686,000 units for the quarter and well below the 745,000 units analysts were expecting. PALM sank to $5.25 in after hours from its $5.92 close.


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Greenspan is still rocking the market with a speech over the weekend where he brought up the possible return of stagflation. That is when prices rise and growth slows at the same time. This was a problem he faced in his term as Fed head. He also reiterated that recession potential today was 50:50 in his opinion.

The Fed is trying to take action to prevent another mortgage crisis. Now that the horse is out of the barn they are going to close the doors. Some of the rules they are considering would prohibit "no doc" loans and require 12 months of escrow for taxes and insurance. They are also proposing a ban on higher broker fees for higher yield products, a ban on misleading mortgage ads and a ban on most prepayment penalties. They would discourage loan procedures that would encourage inflated appraisals and track default patterns to identify lenders that made a habit of loaning to people who could not repay the loan. Borrowers would have to qualify at the highest potential rate over the life of the loan and would have to re-qualify for any re-finance or any future loan modification. Their proposed guidelines were put on the table Tuesday for a 90-day public review. After the 90-days the Fed can decide which rules they want to enact and which rules they will change.

The ECB offered to loan euro-zone commercial banks extra money through year-end to handle critical end of year transactions. Analysts had expected about $160 billion in borrowings but the ECB reported this morning that more than $500 billion was borrowed. The ECB said it would accept all bids with an interest rate offered of at least 4.2%. The ECB had been worried that banks were going to hoard cash and stay out of the market until 2008. Evidently there was vast understated demand from the current credit crisis. The Bank of England also injected $20 billion in three-month loans. The results of the U.S. Federal Reserve auction for $20 billion in funds that was held on Monday will be announced on Wednesday. Analysts say it was at least five-times over subscribed. Given the ECB move of $500 billion there are some who think the Fed could expand its $20 billion cap and lend money to anyone who bid over a minimum rate. This will be an interesting story to follow tomorrow.

The January crude contract expired at $90.49 today after a very volatile 7-days. The contract spiked overnight on the last day of trading to $92.64 on news Turkish troops had invaded Iraq. The news was confirmed but it was also reported that the incursion was already over and troops were returning to Turkey. Oil prices immediately fell back to $90 on the news. The February contract closed the day at $90 to move back in parity with the expiring January futures. The 20 analysts surveyed by Platts call for oil to average $74 for all of 2008. Meanwhile Goldman Sachs raised their estimate yesterday for oil in 2008 to average $95. There is definitely a wide range of opinions on future prices. Mastercard publishes a weekly SpendingPulse report covering things like charges at service stations. According to MasterCard gasoline purchases surged +3.4% in the week ended on Dec-14th. That amounts to 9.331 million barrels of gasoline per day. The winter storm apparently prompted drivers to stock up in advance of the actual storm similar to buying patterns ahead of a hurricane. The four-week average was still -0.2% lower than the same period in 2006 indicating consumers are driving less due to higher gasoline prices. Estimates for the oil inventories tomorrow are for a drop of -1.8 million barrels in crude levels and a gain of +1.2 mb in gasoline supplies.

January Crude Futures Chart - Daily

What prompted the rebound today? Is it Santa coming to Wall Street or just another oversold bounce? Don't we wish we knew the answer to that question? The better than expected Goldman earnings and news of the $500 billion in liquidity injected by the ECB caused a gap higher open but it was quickly sold once again. By noon the Dow had plunged -150 points from the opening highs. The Dow then traded sideways for an hour just above 13100 before exploding back into positive territory on no news. If you look at the intraday chart on 3-5 minute scale there were at least six major program trades launched. There was a sell program at 10:00 and another at 11:00 that lasted nearly an hour. The final plunge accelerated on heavy volume between 11:45 and noon. I believe this was funds cleaning up their positions ahead of the holidays and possibly some lingering option expiration moves. There were two major buy programs at 1:PM and again at 2:PM that produced a +150 point rebound to 13265. The rest of the day was lackluster after the last program ended at 2:30. The pre-close spike was probably short covering by those who were scared out of their positions by the two buy programs. Unfortunately 13250 was resistance at the open and again resistance in the afternoon. There was another sell the close attempt that knocked 50 points off the Dow in the last 20 min but the damage was minimal.

Volume was actually pretty decent at 6.4 billion shares and the highest level in the last 3-days. It was about 2:1 in favor of advancing volume suggesting there was more buying of the dip than selling of the bounce. As we get closer to the holidays the bears are going to become scarcer. The holidays are typically bullish as workers eager to invest their holiday bonus start shopping for stocks instead of presents as year-end approaches.

The Nasdaq rebounded about 50 points from its intraday low to retest 2600 twice in the afternoon. Both attempts failed but the index managed to hold off the end of day sellers and remain pretty close those highs. With PALM earnings today, ORCL tomorrow and RIMM on Thursday there is plenty of risk remaining for tech traders. Palm is not a market mover and the Nasdaq futures are actually up +5 overnight despite the worse than expected Palm earnings. Oracle could be a mover on Wednesday after Larry Ellison unloaded $1 billion in stock over the last month or so. Ironically ORCL was one of the strongest rebounders late this afternoon. Clearly there was some short covering in progress there. The Nasdaq has support in the 2550 range and right at the low for the day.

S&P-500 Chart - Daily

The S&P-500 hit support at 1460 on Monday and managed to hold at that level until 1:PM. The afternoon sell cycle ended those hopes and the rebound on Tuesday's open was lackluster at best and could only manage 1455. The intraday low was 1435 at noon. The afternoon buy programs managed to retest the 1460 level but it held firm and would be my trading indicator for Wednesday. If you are following my recommendations from Sunday I thought we might get a trading bounce on the first test of 1460 and although the bulls tried to pull it off they just could not get any traction. A break of 1460 was a signal to double up on shorts. For the rest of the expiration week I would look to remain short under 1460 and only small trading longs over 1460. Should a miracle happen and we somehow manage to move bock over 1490 I would double up on longs again. We are very oversold and that could produce a major short squeeze on any unexpected news. Between 1460-1490 could be a trading zone for the next couple days IF something happens on Wednesday to get us back over 1460. Right now it looks like another failure at 1460 could be another shorting opportunity. I hate to be negative going into the holidays but sentiment is definitely on the side of the bears despite the afternoon rebound.

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New Plays

New Option Plays

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

Play Editor's Note: One stock we wanted to add tonight but just didn't have time was AVT. AVT looks like a bearish candidate and we would consider puts under the November low. The P&F chart points to a $23 target but is suggesting potential support near $31.

New Calls

Cameron - CAM - close: 91.85 chg: -1.57 stop: 89.90

Company Description:
Cameron is a leading provider of flow equipment products, systems and services to worldwide oil, gas and process industries. (source: company press release or website)

Why We Like It:
No I haven't lost my mind - at least not yet. Anyone who does any sort of technical study on CAM will wonder why we're listing it as a bullish candidate here. Almost all of the technical signals and oscillators are bearish. The MACD is bearish. RSI is bearish. The P&F chart looks very bearish. However, at the same time CAM still has a long-term bullish up trend and bulls have been relatively consistent at buying dips near the rising 100-dma. This time the 100-dma is also bolstered by support at the $90.00 level. We're suggesting readers buy this dip today or maybe look for a bounce back above $93.00 as an entry point. Our target is the $99.00-100.00 range. More aggressive traders could aim for $105 but the stock does have pretty clear resistance near $100. Since we're fighting the "trend" in the technical picture we're going to list this as an aggressive, higher-risk play. FYI: CAM is due to split 2-for-1 on December 31st, 2007.

Suggested Options:
We are suggesting the January calls.

BUY CALL JAN 90.00 CAM-AR open interest=404 current ask $5.60
BUY CALL JAN 95.00 CAM-AS open interest=609 current ask $3.10

Picked on December 18 at $ 91.85
Change since picked: + 0.00
Earnings Date 01/31/08 (unconfirmed)
Average Daily Volume = 2.1 million


Energen - EGN - close: 65.32 change: +2.05 stop: 62.75

Company Description:
Energen Corporation is a diversified energy holding company with headquarters in Birmingham, AL. Its two lines of business are the acquisition, development and exploration of domestic, onshore natural gas, oil and NGL reserves and natural gas distribution in central and north Alabama. (source: company press release or website)

Why We Like It:
This is another stock with some mixed signals but this time some of the short-term oscillators are showing EGN bouncing from an oversold condition. EGN dipped toward technical support at its 50-dma and the bottom of its rising, bullish channel. Traders bought the dip today and this looks like a chance to ride it back toward resistance near $70.00. Our target is the $69.50-70.00 range. We're suggesting a stop under the 50-dma. The P&F chart is bullish with a $74 target.

Suggested Options:
We are suggesting the January calls.

BUY CALL JAN 65.00 EGN-AM open interest=158 current ask $3.00
BUY CALL JAN 70.00 EGN-AN open interest=124 current ask $0.95

Picked on December 18 at $ 65.32
Change since picked: + 0.00
Earnings Date 01/24/08 (unconfirmed)
Average Daily Volume = 700 thousand


Hologic - HOLX - close: 66.22 chg: +1.14 stop: 63.75

Company Description:
Hologic, Inc. is a diversified medical technologies company specializing in diagnostic imaging products and interventional devices dedicated to serving the healthcare needs of women. (source: company press release or website)

Why We Like It:
HOLX got some good news recently. The stock is being added to the NASDAQ-100 index. The addition is expected to occur on December 24th. All the funds and money managers who track the NDX will have to buy shares. We're surprised that HOLX hasn't moved further on the news. The stock appears to be breaking out from a sideways consolidation of higher lows and lower highs (in this case it's just an ugly shaped pennant formation). We see today's close over $66.00 as a new bullish entry point to buy calls. We're listing two targets. Our conservative target is the $69.50-70.00 range. Our more aggressive target is the $74.00-75.00 range.

Suggested Options:
We are suggesting the January calls.

BUY CALL JAN 65.00 QHX-AM open interest=4233 current ask $3.60
BUY CALL JAN 70.00 QHX-AN open interest=5155 current ask $1.40

Picked on December 18 at $ 66.22
Change since picked: + 0.00
Earnings Date 01/30/08 (unconfirmed)
Average Daily Volume = 2.8 million


Noble Energy - NBL - close: 77.30 chg: +1.58 stop: 74.75

Company Description:
Noble Energy is one of the nation's leading independent energy companies and operates throughout major basins in the United States. (source: company press release or website)

Why We Like It:
NBL has been one of the leaders in the oil sector. The stock has rallied back to its all-time highs and is on the verge of a breakout. We're suggesting readers buy a breakout over resistance at $78.00. We're listing a trigger to buy calls at $78.25. If triggered our target is the $84.50-85.00 range. The P&F chart is bullish with an $86 target.

Suggested Options:
We're suggesting the January or February calls.

BUY CALL JAN 75.00 NBL-AO open interest=212 current ask $4.30
BUY CALL JAN 80.00 NBL-AP open interest=170 current ask $1.70

BUY CALL FEB 80.00 NBL-BP open interest=808 current ask $2.90
BUY CALL FEB 85.00 NBL-BQ open interest=126 current ask $1.35

Picked on December xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 02/26/08 (unconfirmed)
Average Daily Volume = 1.5 million

New Puts

None today.

New Strangles

None today.

Play Updates

In Play Updates and Reviews

Call Updates

China Security - CSR - close: 22.12 change: -0.13 stop: 19.99

Once again traders bought the intraday dip in CSR. This bounce looks like another entry point to buy calls. 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: - 1.13
Earnings Date 01/24/08 (unconfirmed)
Average Daily Volume = 525 thousand


Energizer - ENR - close: 114.57 chg: +1.36 stop: 109.95

Traders continued to buy the dip in ENR and today's afternoon rebound looks like a new bullish entry point. More conservative traders may want to raise their stop toward $112.50. 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: + 1.82
Earnings Date 01/28/08 (unconfirmed)
Average Daily Volume = 511 thousand


Holly Corp. - HOC - close: 51.13 change: +0.93 stop: 44.95

HOC continues to show relative strength. Today's intraday bounce and close above $50.00 looks like another bullish entry point to buy calls. More conservative traders could raise their stop losses toward $48.00. 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: + 0.55
Earnings Date 02/12/08 (unconfirmed)
Average Daily Volume = 859 thousand

Put Updates

Amazon.com - AMZN - cls: 86.99 chg: +1.90 stop: 95.05

AMZN dipped to $83.86 before bouncing back. The oversold bounce could reach as high as the $90 level and its 10-dma. Another failed rally under $90 could be used as a new entry point for puts. We're adjusting our stop loss to $92.55. AMZN has already hit our initial target in the $85.25-85.00 range. Currently we're aiming for the $81.50-80.00 zone. The P&F chart is bearish with a $74 target.

Picked on December 16 at $ 89.08
Change since picked: - 2.09
Earnings Date 01/31/08 (unconfirmed)
Average Daily Volume = 8.8 million


Boeing - BA - close: 87.17 change: -0.23 stop: 93.26

BA continues to look weak but we noted that very short-term technicals might be suggesting a bounce soon. We're not suggesting new positions at this time. 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: - 4.26
Earnings Date 01/31/08 (unconfirmed)
Average Daily Volume = 7.0 million


Genentech - DNA - close: 67.29 chg: -0.28 stop: 70.85

Shares of biotech giant DNA continue to show relative weakness. However, we noted that very short-term technicals might be suggesting a bounce soon. A failed rally in the $68.50-70.00 zone can be used as a new entry point for puts. 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: - 1.14
Earnings Date 01/10/08 (unconfirmed)
Average Daily Volume = 4.3 million


Garmin - GRMN - close: 94.41 chg: -7.41 stop: 107.25 *new*

Target exceeded! GRMN crashed through support near $100 and traded past our first target in the $96.00-95.00 range and almost hit our second, more aggressive target at $91.00-90.00. The news behind the move was a report out that showed GRMN had lost market share in November. One news article quoted an industry analyst who downplayed the news suggesting that GRMN always loses market shares in November because the company offers fewer incentives for Black Friday and that market share would return in December. We're not suggesting new positions at this time. Please note our new stop loss at $107.25.

Picked on December 11 at $104.78
Change since picked: -10.37
Earnings Date 02/14/08 (unconfirmed)
Average Daily Volume = 6.2 million


Sears Holding - SHLD - cls: 105.69 chg: +1.70 stop: 115.05*new*

SHLD produced an oversold bounce today and we don't think it's over yet. Look for a failed rally in the $109-110 range as a new bearish entry point for puts. We are adjusting our stop loss to $115.05. 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: - 4.59
Earnings Date 10/27/07 (unconfirmed)
Average Daily Volume = 3.3 million


Shire Plc - SHPGY - close: 67.61 change: +0.14 stop: 73.51

SHPGY continues to struggle under short-term resistance near $68.00. The lack of a bigger bounce is a good sign for the bears. 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: - 0.46
Earnings Date 02/00/08 (unconfirmed)
Average Daily Volume = 956 thousand

Strangle Updates


Dropped Calls


Dropped Puts

Agrium - AGU - close: 56.35 change: -2.07 stop: 65.01

Target exceeded! Right on cue AGU traded lower. The stock performed another failed rally near $60.00 this morning. Early morning weakness pulled AGU to an intraday low of $54.40. Our target was the $55.10-55.00 range. Shares closed with a 3.5% loss and produced a bearish engulfing candlestick pattern. Volume was pretty strong on the sell-off. More aggressive traders may want to aim for the 100-dma near $52.50.

Picked on December 11 at $ 59.66
Change since picked: - 3.31
Earnings Date 01/31/08 (unconfirmed)
Average Daily Volume = 1.6 million

Dropped Strangles


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


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