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Daily Newsletter, Monday, 02/25/2008

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Table of Contents

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

Market Wrap

Blip, Dip, Then Rip As Financials Finish Higher

It is getting tougher and tougher to describe some of the intra-day action and just when it looks like the major averages are going to break lower from a choppy 2-week range and provide an attractive bullish entry point, or cover some short/put positions on a climactic dip, buyers show up in force on news that pending deals may save some mortgage insurers from losing their "AAA" debt ratings.

Negative comments out of Oppenheimer regarding banking giant Citigroup (NYSE:C) $24.74 -1.51% took some wind out of Friday's late-afternoon rally early this morning.

Citigroup's shares darted lower at the open and provided a somber tone as stock futures gave back the bulk of their overnight (Sunday) gains at the cash open after Oppenheimer's Merideth Whitney said further write-downs tied to subprime mortgages, risky corporate debt and consumer loans could have the banker posting another quarterly loss, and possibly forcing the company to sell up to $100 billion in assets.

Citigroup (NYSE:C) - Daily Intervals

Ms. Whitney, who in October correctly predicted that Citigroup would cut its dividend and raise some $30 billion in capital, said the largest U.S. bank might lose $0.28/share, or roughly $1.4 billion in the first quarter. Ms. Whitney's revised estimates are well below Wall Street's current estimate for a profit of $0.62/share.

While somewhat encouraging to bulls that Citigroup isn't trading below its 1/22/08 inflection low, a close much below $24.41 would be viewed as further negative.

Dow Diamonds (DIA) - Daily Intervals

While Citigroup (C) is no longer a heavily weighted PRICE component (#27 of 30) in the Dow, the banking giant's price action tends to carry some weight as it relates to market psychology. As well it should.

The Dow Diamonds (DIA) $125.54 +1.40% posted a strong gain on breadth of 29:1. Late Thursday afternoon, the DIA was trading $121.56 (INDU 12,155) when sellers vanished on news that mortgage insurer Ambak (ABK) $12.41 +15.87% might keep its "AAA" rating.

For several days now, I've been looking for a DIA decline back near the 1/22/08 close on heavy volume approaching 43 million shares, and look for a BULLISH entry on a "sling shot" type of move back above my 19.1% conventional retracement of $120.87.

So far, buyers have been stubborn above the $120.87 level and sellers don't appear to be overly aggressive.

Stocks slid to their morning lows at 10:00 AM EST, but then turned back higher after the National Association of Realtors said January's existing home sales came in slightly above expectations.

The National Association of Realtors said sales of single-family homes and condominiums dropped by 0.4% in January to a seasonally adjusted annual rate of 4.89 million units, which was slightly above economists' forecast of 4.80 million units. Still, January's decline marked the sixth-straight monthly decline for existing home sales. The NAR added that the median price of a home sold in January slid to $201,000, a drop of 4.6% from a year ago. Alarming to some industry watchers was that the inventory of unsold homes jumped to a 10.3 month's supply, meaning that at the current pace of sales, it would take that long to sell the 4.19 million homes on the market.

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January's 10.3 month's supply was up from December's 9.7 months and just below a 20-year high of 10.5 months.

Buyers really stepped in later in the session when rating agency Fitch said was putting the credit ratings of various insurers on watch for further downgrades because of continued weakness in the U.S. mortgage markets. Fitch said MGIC Investments (MTG) $15.98 +7.97%, Radian Group (NYSE:RDN) $8.06 +5.63% and PMI Group (NYSE:PMI) $7.78 +4.85% were the firms they were monitoring closest.

Ambak (NYSE:ABK) $21.41 +15.87% and MBIA Inc. (NYSE:MBI) $14.58 +19.70% surged when their names were not on Fitch's list.

Moments after Fitch's comments, rating agency Standard & Poors took MBIA's "AAA" rating off its credit watch. While some industry watchers say ratings are subject to change any given day, it has been thought that ABK and MBI were likely candidates for downgrades.

Having held two (2) of the MBI April $7.50 Puts (MBI-QU) since 1/22/08 and 2/12/08 based on the thought that a downgrade on their debt was coming, I thought bears should move to the sidelines today.

There is potential for some powerful short covering in MBI should the stock break much above $16.20.

After the close, MBIA (MBI) did say that it was eliminating its quarterly dividend to save the company approximately $174 million in cash. Shares of MBI eased to $14.33 in extended session trade.

Closing U.S. Market Watch -

Both the AMEX Natural Gas Index (XNG.X) 609.65 +3.25% and CRB Index (CRY) 401.26 +0.64% closed at new multi-year highs today.

Oil prices held steady near the $100/barrels mark on reports that OPEC is expected to pump around 250,000 barrels a day less in February versus January as some members start to pull in output ahead of the end of winter in main consuming nations in the northern hemisphere.

Chevron (NYSE:CVX) $87.18 +2.06%, which was added to the Dow Industrials on 2/19/08 (replacing Altria (NYSE:MO)) closed above its 200-day SMA ($87.00) for the first time since falling below on 1/16/08 ($86.42). Exxon/Mobil (NYSE:XOM) $89.13 +2.24% and CVX are now the #2 and #3 weighted components in the Dow Industrials.

International Business Machines (NYSE:IBM) $110.08 +1.85%, the most heavily weighted Dow Component also closed above its 200-day SMA ($109.29)!

IBM - Daily Intervals

It isn't just "energy" that is giving the Dow Industrials a lift, and it may not be just energy stocks that are building gains from the January lows. "Big Blue" has retraced more than 50% of its October highs to January lows and depicts BULLISH leadership among the Dow 30.

NASDAQ-100 Tracker (QQQQ) - Daily Intervals

While "Big Blue" gets a technology trader's bullish attention, two of the QQQQ/NDX heavyweights has Apple Computer (NASDAQ:AAPL) $119.74 +0.23% and Google (NASDAQ:GOOG) $486.44 -4.20% still below their 1/23/08 intraday lows of $126.15 and $519 respectively.

The QQQQ may well be the most manageable bull trade and offer very good risk/reward for a small position, where a rather tight stop could be placed just under the $41.63 level.

With IBM (not a QQQQ component, but a bellwether for tech) showing some signs of favor, the QQQQ could launch with bounces that catch some momentum in AAPL and GOOG.

At tonight's close, Dorsey Wright & Associates' NASDAQ-100 Bullish % (BPNDX) is still in "bear confirmed" status at 25.00%, and would need a higher measure reading of 28% to achieve "bull alert" status. A measure of 30% would be needed for "bull confirmed."

If a trader/investor would normally consider $10,000.00 as a "full position" in the QQQQ, then under current conditions, I would think a 1/4 position, or $2,5000 appropriate (2,500 / $43.90 = 57 shares).
 


 


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

Atwood Oceanics - ATW - cls: 96.24 change: +3.13 stop: 89.19*new*

Oil service stocks soared on Monday. The OSX index rose 2.3%. Shares of ATW out performed its peers with a 3.3% gain. If we had to pick on something to complain about it would the lack of volume behind today's move. If the sector can follow through with more gains then ATW has a good chance of hitting our target in the next day or two. We are adjusting our stop loss to $89.19, just under Friday's low. Our target is the $99.00-100.00 zone. FYI: ATW has a moderate amount of short interest, about 7.4% of the 27.6 million-share float. That is about 4 days worth of short interest.

Picked on February 17 at $ 90.37
Change since picked: + 5.87
Earnings Date 05/08/08 (unconfirmed)
Average Daily Volume = 654 thousand

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CF Industries - CF - close: 130.99 change: +5.13 stop: 117.45*new*

Monday was another strong day for stocks in the fertilizer, herbicide, agriculture industry. CF added more than 4% and shot to a new all-time high breaking out over the $130 level. More conservative traders will want to seriously consider doing some profit taking right here. We are adjusting our stop loss to $117.45. Our target is the $138.00-140.00 zone. The Point & Figure chart is bullish with an updated $143 target. FYI: The most recent data puts short interest at 6.8% of the 53.4 million-share float.

Picked on February 19 at $121.03 *triggered/gap higher
Change since picked: + 9.96
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 2.8 million

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Monsanto - MON - cls: 121.92 change: +5.25 stop: 113.99 *new*

MON, another ag-play, turned in a strong session with a 4.49% gain and a breakout over resistance near $120. Today's rally pushed the P&F chart bullish target from $157 to $163. We have two targets. Our first target is the $127.00 level. Our second target is the $137.00-140.00 range. We are adjusting our stop loss to $113.99. The fertilizer and agriculture stocks have been very volatile so readers should consider them aggressive, higher-risk plays.

Picked on February 12 at $118.09 *gap higher entry
Change since picked: + 3.83
Earnings Date 04/03/08 (unconfirmed)
Average Daily Volume = 7.1 million

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Mosaic - MOS - close: 117.06 change: +8.10 stop: 104.45*new*

Shares of MOS were leading the charge higher. The stock rallied more than 7.4% and did so on above average volume, which is a good sign. The stock broke out to another all-time high. MOS will probably hit our second target tomorrow. MOS has already hit our initial target near $110. Our second target is the $118.00-120.00 zone. Again, these are very volatile stocks with a lot of intraday spikes. We would consider this a more aggressive, higher-risk play. Please note that we are adjusting our stop loss to $104.45. FYI: The Point & Figure chart suggests a $131 target. More aggressive traders may want to aim past the $120 zone. Then again keep in mind that MOS is up six weeks in a row.

Picked on February 12 at $101.83 *gap higher entry
Change since picked: +15.23
Earnings Date 04/09/08 (unconfirmed)
Average Daily Volume = 5.8 million

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Nucor - NUE - close: 66.78 change: +0.93 stop: 59.95

NUE continues to rally with shares hitting another new relative high. Our target is the $68.00-70.00 zone since the $70.00 level is likely to be significant resistance. The P&F chart is bullish with a $76 target.

Picked on February 17 at $ 62.01
Change since picked: + 4.77
Earnings Date 04/17/08 (unconfirmed)
Average Daily Volume = 5.0 million

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Petroleo Brasileiro - PBR - cls: 119.90 chg: +1.35 stop: 111.90

PBR lagged behind the rest of the oil sector today but the trend is still bullish. If you prefer buying on momentum then look for a new relative high over $120 as your entry point. Currently, our target is the $128.00-130.00 range. The move over $116 has produced a new Point & Figure chart buy signal. Actually it is a quadruple-top bullish breakout buy signal with a $150 target (it was a $138 target two weeks ago). FYI: Another risk is PBR's earnings report. We can't find an earnings date and they normally report in mid February. That is a risk because we do not like to hold over an earnings report.

Picked on February 12 at $116.00 *triggered
Change since picked: + 3.90
Earnings Date 02/12/08 (unconfirmed)
Average Daily Volume = 7.6 million

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Potash - POT - close: 164.28 change: +7.28 stop: 147.75 *new*

POT is another fertilizer play that turned in a big day. The stock rallied 4.6% and broke through potential resistance at the $160 mark. We are adjusting our stop loss to $147.75. More conservative traders may want to take some profits here. The stock has already hit our first target in the $158-160 zone. Our second, more aggressive target is the $168.00-170.00 zone. More aggressive traders may want to aim significantly higher. The Point & Figure chart is forecasting a $222 target. Again, this is a very volatile stock. Readers should consider it an aggressive, higher-risk trade.

Picked on February 12 at $147.50 *triggered
Change since picked: +16.78
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 5.9 million

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Shaw Group - SGR - close: 66.14 change: +1.61 stop: 58.45

SGR is off to a good start with a 2.49% gain and a new six-week high. We don't see any changes from our weekend comments. Shares have cleared their 100-dma and look poised to rally toward $70. We are listing two targets. Our first target is the $69.50-70.00 zone. We suggest closing most of your position there. Our second, more aggressive target is the $74.00-75.00 range. The Point & Figure chart is very bullish with an $81 target. FYI: More conservative traders may want to use a stop loss closer to $60.00.

Picked on February 24 at $ 64.53
Change since picked: + 1.61
Earnings Date 04/08/08 (unconfirmed)
Average Daily Volume = 1.8 million

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Smith Intl - SII - close: 63.50 change: +1.17 stop: 58.45

Target achieved. Oil service stocks performed very well today. While SII may have under performed its peers the stock managed to breakout over the $64.00 level and hit our first target in the $64.25-65.00 zone. The intraday high this afternoon was $64.46. Bulls now have to power through resistance near $65.00 and its 50 and 100-dma. Our second target is the $68.00-70.00 zone. We would expect SII to pull back initially when it hits $65.00. The P&F chart for SII is very bullish with an $80 target (it was a $77 target last week).

Picked on February 17 at $ 60.52
Change since picked: + 2.98
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 3.5 million

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MEMC Electr. - WFR - cls: 81.41 chg: -0.14 stop: 77.45

It was a rocky, up and down day for WFR. The stock started lower after being downgraded before the opening bell. At the end of the day WFR closed down with a fractional loss. However, that may change tomorrow. Rival LDK Solar (LDK) reported earnings after the closing bell tonight and the stock was trading higher after hours markets. If investors are buying the news then WFR might be able to breakout tomorrow as well. Our suggested entry point to buy WFR calls is $82.55, which would be a breakout higher. We have two targets. Our first target is the $89.00-90.00 range and we suggest readers close out the majority of their position here. Our second, more aggressive target is the $94.00-95.00 range near its December highs.

Picked on February xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 5.9 million

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Yahoo! Inc. - YHOO - close: 28.13 change: -0.29 stop: n/a

YHOO continues to languish. The ongoing drama over MSFT's hostile bid is casting a pall over both stocks. The current consensus on the street, if there is a consensus, is that YHOO will eventually accept MSFT's bid. The real question is will they accept the $31/share bid or will they negotiate MSFT higher, say in the $33-34-35 zone. Some have speculated that MSFT is pursuing a proxy fight with YHOO's board because it is cheaper than raising their bid for the company. Our directional call play is a very speculative gamble that MSFT will raise its bid and that this news will come out in the next four weeks. There is plenty of risk and MSFT could decide to walk away or YHOO could do something stupid and poison any deal that kills the share price.

Picked on February 17 at $ 29.66
Change since picked: - 1.53
Earnings Date 04/17/08 (unconfirmed)
Average Daily Volume = 54 million
 

Put Updates

Ambac Fincl. - ABK - cls: 12.41 change: +1.70 stop: n/a

No deal yet but word on the street is that the banks, the agencies and ABK are definitely getting close. What boosted the market late this afternoon was S&P reaffirming their triple A rating on both ABK and MBI. Yet at the same time we saw multiple, contradictory stories about whether or not S&P did or did not keep ABK and MBI on their negative creditwatch, which means they were at risk for a downgrade. Volume in ABK is definitely picking up as traders place bets on whether not a bailout will get done. We are not suggesting new positions at this time. Previously we had been suggesting the May out-of-the money puts and a speculative out-of-the money March ($20) call as a hedge should a bailout plan come to pass.

Picked on January 27 at $ 11.54
Change since picked: + 0.87
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 10.9 million

---

W.W.Grainger - GWW - close: 75.93 chg: +1.16 stop: 78.26

GWW rallied right to short-term resistance near $76.00. If you're bullish then today's close over the 10-dma is a positive sign. More conservative traders might be tempted to tighten their stops toward the $77.00 level. If the market breaks out higher from its current consolidation we would expect to be stopped out at $78.26. We are not suggesting new puts at this time. Our target is the $70.75-70.00 zone.

Picked on February 10 at $ 76.65
Change since picked: - 0.72
Earnings Date 04/16/08 (unconfirmed)
Average Daily Volume = 1.0 million

---

iShares DJ Financial - IYF - cls: 88.96 chg: +1.04 stop: 90.65*new*

The bond insurer news is lifting the financials. The IYF is bouncing to the top of its recent trading range. Short-term technical oscillators are edging higher and suggesting a bullish breakout over $90.00 soon. We're actually going to tighten our stop loss down to $90.65, which is still above the 50-dma. Our risk is that we get stopped out on an intraday spike but that's better than seeing the sector explode on some truly good news (a.k.a. acceptable bond-insurer bailout). We are not suggesting new puts at this time. Our official target is the $81.00-80.00 zone.

Picked on February 06 at $ 88.62
Change since picked: + 0.34
Earnings Date 00/00/00
Average Daily Volume = 1.1 million

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MBIA Inc. - MBI - close: 14.58 change: +2.40 stop: n/a

MBI popped almost 20% on the progress bond insurers are making. The news from S&P about the ratings agency reaffirming the triple-A rating for MBI is "good" news but again we saw multiple, conflicting stories about whether or not MBI was on negative creditwatch (for a potential downgrade). It would seem contradictory to affirm the AAA rating and keep them on creditwatch. Meanwhile, after the closing bell, MBI announced it was canceling its dividend and that the Board of Directors had made the decision to split its company into two divisions, separating the municipal bond business, within five years. In a letter to shareholders MBI also said that they had "ceased ensuring new derivative credit contracts from our insurance companies"... and "have suspended the writing of all new structured finance business for approximately six months." There is still no deal yet but we're not suggesting new positions at this time. We had been suggesting the out-of-the-money May puts and a March $22.50 (or $20.00) call as a hedge in case a bailout plan for the bond insurers does get done.

Picked on January 27 at $ 14.20
Change since picked: + 0.38
Earnings Date 01/31/08 (confirmed)
Average Daily Volume = 15.2 million

---

Mohawk Ind. - MHK - cls: 74.66 chg: -0.02 stop: 78.05

MHK continues to under perform the market. The stock struggled with resistance near $75.00 today. We remain bearish but would hesitate to open new put plays if the broader market rallies tomorrow. Wait and watch for a failed rally before considering new put plays. There is potential support at $70.00 but we're aiming for the $66.50-65.00 zone near its January 2008 bottom.

Picked on February 14 at $ 73.70
Change since picked: + 0.96
Earnings Date 02/13/08 (confirmed)
Average Daily Volume = 907 thousand

---

Sears Holding - SHLD - cls: 99.08 chg: +2.54 stop: 100.76 *new*

It was a bullish day for SHLD, which bounced right back toward resistance near $100 and its 50-dma around $100.70. If the broader market averages can breakout higher tomorrow then short covering will likely push SHLD through its bearish trend of lower highs and end this play. However, just to make sure we don't get taken out on an intraday spike (or at least reduce our chances) we are adjusting the stop loss to $100.76, which is just north of the 50-dma. We would only consider new puts if SHLD produced a clear failed rally from here. Otherwise wait for a new relative low. Bear in mind that we plan to exit on Wednesday at the closing bell to avoid holding over earnings on Thursday.

Picked on February 22 at $ 94.75 *triggered
Change since picked: + 4.33
Earnings Date 02/28/08 (confirmed)
Average Daily Volume = 3.0 million

---

Legacy Vulcan - VMC - cls: 69.86 chg: +1.60 stop: 70.86

We don't like the way things are shaping up in VMC. The stock's bounce has short-term oscillators starting to look bullish. If the market can breakout higher then VMC will likely breakthrough resistance near $70.00 and hit our stop loss. More conservative traders may want to consider exiting early right here to cut your losses. The stop loss is a little bit wider than we would like but VMC can see some big $3-$4 swings intraday so readers should consider this an aggressive, higher-risk play.

Picked on February 17 at $ 66.64
Change since picked: + 3.22
Earnings Date 04/30/08 (unconfirmed)
Average Daily Volume = 2.1 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.)

---

CROCS Inc. - CROX - close: 25.04 chg: -0.39 stop: n/a

CROX continues to be shunned by traders. The stock lost another 1.6% and completely ignored the market's rally today. We are not suggesting new strangles at this time. The options we had suggested were the March $40 calls (CQJ-CH) and the March $25 puts (CQJ-OE). Our estimated cost was $2.50 and we wanted to sell if either option hits $4.25 or higher.

Picked on February 17 at $ 33.43
Change since picked: - 8.39
Earnings Date 02/19/08 (confirmed)
Average Daily Volume = 5.2 million

---

Genentech - DNA - close: 77.96 change: +6.36 stop: n/a

DNA shot higher following the late Friday FDA news and approval for Avastin to treat breast cancer. The stock added 8.8% and hit an intraday high of $79.40. Unfortunately, the March $75 calls (DWN-CO) only hit a high of $4.80. We were looking for a $5.00 exit. More conservative traders may want to exit now with the March $75 calls trading at $3.60bid/$3.80ask. We are not suggesting new positions. The options we had suggested were the March $75 calls (DWN-CO) and the March $70 puts (DWN-ON). Our estimated cost was $2.80. We want to sell if either option hits $5.00 or higher.

Picked on February 20 at $ 72.37
Change since picked: + 5.59
Earnings Date 04/10/08 (unconfirmed)
Average Daily Volume = 3.5 million
 

Dropped Calls

None
 

Dropped Puts

None
 

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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