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Daily Newsletter, Monday, 03/03/2008

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Table of Contents

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

Market Wrap

Stocks Mixed After Weak Economic Data

Stocks started the week out mixed to lower on Monday after January construction spending and February manufacturing figures showed the U.S. economy sputtered in the latter part of 2007 and early in the first quarter of this year.

Investors braced themselves for steep declines at the open as Asian markets exhibited weakness with Japan's Nikkei-225 ($NIKK) falling 4.49% and Hong Kong's Hang Seng ($HSI.X) shedding 3.07% on the heels of Friday's declines here at home.

Economic data released at 10:00 AM EST had the Commerce Department reporting that construction spending fell by 1.7% in January, which was below economists forecast for a 0.60% decline. December's previously reported 1.10% decline was revised lower to -1.3%.

But buyers stood their ground when at the same time, the Institute for Supply Management's index of U.S. manufacturing activity came in at 48.3 for February (January was 50.7). While the figure showed contraction (levels above 50.0 signal expansion), the 48.3 measure was slightly above the 48.0 forecast.

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A breakdown of the ISM Manufacturing Index showed the prices index eased modestly to 75.5 from 76.0 a month earlier, but the expansionary 75.5 measure was enough to keep a firm bid in commodities with the CRB Index (CRY) carrying gains to close at another 52-week and multi-year high.

Other sub-index measures showed the employment index falling to 46.0 from January's 47.1, new orders edging lower to 49.1 from 49.5, production falling to 50.7 from 55.2 and inventories falling to a 45.4 measure from 49.1.

Closing U.S. Market Watch -

After last week's plunge to multi-year lows, the U.S. Dollar Index (DXY) showed some stability, more than likely due to short-covering.

Gold and silver as depicted by the StreetTracks Gold (GLD) $97.41 +1.27% (approximately $974.10 spot) and iShares Silver (SLV) $201.65 (approximately $20.16 spot) continued to shine.

The AMEX Gold Bugs Index ($HUI.X) 501.65 +3.20% was today's sector winner and psychological resistance of 500.00 found little traction among sellers.

First sign of any weakness in my opinion on the HUI.X would be a close back below its 01/14/08 close of 481.00.

AMEX Gold Bugs Index ($HUI.X) - Daily Intervals

The HUI.X looked like it might be showing signs of a reversal on Friday as the major averages saw selling. As soon as the broader markets see some abatement of selling, the HUI.X powers higher still. I've been showing both gold and silver commodity's charts with similar "bull fit 38.2%" retracement and an Andrews Pitchfork (modified schiff) that some "wave traders" will use.

iShares Silver Trust (SLV) - Daily Intervals

Silver as depicted by the iShares Silver Trust (SLV) $201.63 +2.51% has been playing "catch up" to gold over the longer-term. So much so that last week I had to stack, or copy the Andrews Pitchfork (modified schiff) to give wave traders further upside targets. As tough as it is for me to suggest new long positions, it is outlandish to even suggest short positions. It has been for months as overhead supply is nonexistent.

Homebuilders and financials were among today's sector losers after mortgage lender Thornburg Mortgage (NYSE:TMA) $4.32 -51.46% said it hasn't yet been able to meet a new wave of margin calls worth at least $270 million and that it is facing a shortage of cash, which could hurt its ability to meet any future margin calls.

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

On Tuesday and Wednesday of last week, the S&P 500 Index (SPX.X) tested its bearish resistance trend, but quickly fell back below heavy 1,350 March put/call open interest, which would be a "Max Pain" theory level for quarterly expiration (03/20/08 is Triple Witching expiration).

A break at 1,310 would be quite bearish and set the stage for a test of the January lows.

Dow Industrials ($INDU) - 50-point box

Not unlike the SPX, the Dow Industrials ($INDU) found sellers at its bearish resistance trend and sellers stood their ground below 12,800 resistance.

Boeing (NYSE:BA) $80.67 -2.56% gapped lower at the open to trade as low as $79.25 on news that it had lost a $35 billion Air Force contract.

United Technologies (NYSE:UTX) $69.40 -1.57% made an unsolicited offer to buy Diebold (NYSE:DBD) $38.84 +61.02% for $2.63 billion in cash. Diebold, which is a big player in the automatic teller machine, security system arena said later in the day that it was "not the right time" for the UTX offer. That suggested UTX might have to sweeten its bid.

DIA and SPY Montage - Daily Intervals

Neither the DIA, or SPY have seen a CLOSE below their conventional 19.1% retracement since the January lows, but strength is needed as both the QQQQ and iShares Russell 2000 (IWM) $68.20 -0.66% remain a drag.

IWM and QQQQ Montage - Daily Intervals

A late session "rally" in the small caps had the IWM recapturing the $68.14 level by the close, but growing concern for QQQQ/NDX heavyweight Apple's (AAPL) iPhone sales had the most-heavily weighted component falling back below its 1/23/08 low of $126.14.
 


 


New Plays

New Option Plays

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

Play Editor's Note: I haven't read tonight's wrap yet so hopefully I'm not contradicting anyone. Short-term it looks like stocks want to bounce but it's probably just another opportunity to set up shorts. I'm looking at potential put plays in the homebuilders, maybe the XHB, IYR or ITB. Plus, I'm also looking at potential put plays on the MDY midcap spdr and the IWM smallcap ishares. I'm also watching energy stocks for potential bullish plays. Aggressive traders might want to consider calls in PBR right here. We'll re-evaluate if it looks like PBR can breakout over $120 again, which could be soon. Meanwhile GOOG is probably a put candidate on a failed rally near $490-500. We'll have to keep an eye on that one.


New Calls

None today.
 

New Puts

None today.
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

CF Industries - CF - close: 120.48 change: -1.60 stop: 117.45

I would like reader comments on this one! Most quote services are going to list the low of the day at $117.38. If that is true then we would have gotten stopped out at $117.45. HOWEVER, I checked a 1-minute intraday chart and did not see CF trade under $1117.50. Then I checked the tick by tick chart and did not see CF trade under $117.50. Still not believing either chart, after all the quote said the intraday low was $117.38, I went through the time and sales data at the end of the day, at each low for the day and at the open for the day and did not see any trades under $117.50. The low trade was at 09:48:44 for $117.51. Thus, CF never hit our stop loss at $117.45. Unless someone can show me the trade under $117.50 I'm going to keep CF as not being stopped out. Now whether or not we should keep CF on the play list may be a different story. The stock did break support near $120 on an intraday basis and we are seeing some short-term sell signals. Plus, the daily chart's MACD indicator just produced a new sell signal. More conservative traders may want to consider an early exit anyway. At this point we would wait for a rally over today's high (124.46) before considering new bullish call positions. 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 *gap entry / stopped 117.45
Change since picked: - 0.55
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 2.8 million

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iShares China 25 - FXI - cls: 146.45 chg: +1.22 stop: 149.45

We don't see any changes from our weekend comments. Asian markets were rocky over the weekend as they reacted to the Friday sell-off here at home. The FXI actually showed relative strength. There was a dip this morning and then another dip when the S&P 500 turned lower this afternoon. However by the closing bell the FXI was back in the green. Nimble aggressive traders might want to consider positions here with a tight stop (or if the markets continue lower then look for an entry point in the 140-137 zone). We are officially waiting for a breakout over $160 with our suggested trigger at $161.01. If we are triggered our target is the $178.00-180.00 zone although we'll have to keep a wary eye on potential resistance at the 100-dma.

Picked on February xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 00/00/00
Average Daily Volume = 7.8 million

---

Monsanto - MON - cls: 118.63 change: +2.95 stop: 113.99

Bulls were rushing in to buy the dip in MON this morning. They did it again with the afternoon swoon. The relative strength in MON today is very encouraging and we would suggest new call positions here. 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: + 0.54
Earnings Date 04/03/08 (unconfirmed)
Average Daily Volume = 7.1 million

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Potash - POT - close: 157.36 change: -1.54 stop: 147.75

POT under performed its rival MON but did manage to pare its losses before the closing bell. Shares hit an intraday low of $153.95. We remain bullish on the stock but readers might want to see a deeper pull back or a better bounce before considering new call positions. POT has already surpassed our early target in the $158-160 zone so readers should have already booked some profits. 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: + 9.86
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 5.9 million

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Shaw Group - SGR - close: 62.91 change: -1.47 stop: 59.85

SGR continued to see profit taking but traders bought the dip twice near $62.00. A bounce from here could be a new bullish entry point. We have two targets. Our first target is the $69.50-70.00 zone. Our second, more aggressive target is the $74.00-75.00 zone. The Point & Figure chart is very bullish with an $81 target.

Picked on February 24 at $ 64.53
Change since picked: - 1.62
Earnings Date 04/08/08 (unconfirmed)
Average Daily Volume = 1.8 million

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Smith Intl - SII - close: 62.81 change: -0.22 stop: 59.90

SII survived the morning volatility but then dipped to its exponential 200-dma when the market turned lower this afternoon. Shares bounced back quickly. Yet the rebound wasn't convincing enough for us to suggest new positions here. The stock has already hit our first target in the $64 zone. Our second target is the $68.00-70.00 zone. 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: + 2.29
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 3.5 million

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Yahoo! Inc. - YHOO - close: 27.77 change: -0.01 stop: n/a

There was nothing new on the MSFT-YHOO news front today and we don't see any changes from our weekend comments. We have three weeks before March options expire. Right now we're speculating that MSFT will raise its bid before expiration. This remains a very risky, aggressive bet. Our suggested calls were the March $30 or March $32.50 strikes.

Picked on February 17 at $ 29.66
Change since picked: - 1.89
Earnings Date 04/17/08 (unconfirmed)
Average Daily Volume = 54 million
 

Put Updates

Ambac Fincl. - ABK - cls: 9.94 change: -1.20 stop: n/a

ABK plunged more than 10% today. There is still a lot of fear and uncertainty and looks like investors are getting more jittery. According to a CNBC commentator ABK and the consortium of banks and regulators working on a deal with the ratings agencies are presenting another format for the bailout this afternoon/this evening. CNBC went on to speculate that the next 24 to 48 hours could see some big news one way or the other. This remains a very speculative play. We will definitely hold over the April earnings if we get the chance. If you are considering new positions here then think about an out of the money April call as a potential hedge against a deal getting done. 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: - 1.60
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 10.9 million

---

MBIA Inc. - MBI - close: 12.62 change: -0.35 stop: n/a

MBI continues to drift lower but we don't see any changes from our weekend comments. If you're thinking about opening new plays then consider an out of the money April call as a hedge against a bailout coming to pass. 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. We will definitely hold over the April earnings if we get the chance.

Picked on January 27 at $ 14.20
Change since picked: - 1.58
Earnings Date 01/31/08 (confirmed)
Average Daily Volume = 15.2 million

---

NII Holdings - NIHD - close: 40.24 change: +0.51 stop: 41.26

NIHD managed a 1.2% bounce but remains in jeopardy of a breakdown. We are suggesting readers use a trigger at $38.95 to buy puts. If triggered our target is the $35.50-35.00 zone. More aggressive traders could aim for the trendline of lower lows. The Point & Figure chart is bearish with a $19 target. FYI: The latest data lists short interest at 3.8% of the 171.7 million-share float, which is only about 1.5 days worth of short interest.

Picked on March xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 02/27/08 (confirmed)
Average Daily Volume = 3.3 million

---

Precision Castparts - PCP - cls: 109.18 chg: -1.21 stop: 112.65

PCP continued to sell-off on Monday. Shares hit our suggested trigger to buy puts at $109.49 this morning and continued to drift lower into the session. If the stock bounces readers can watch for a failed rally in the $111-112 zone as a new entry point for puts. Our target is the $101.00-100.00 zone. The most challenging part of this trade is our stop loss placement. After Friday's 4.4% decline knowing where to put the stop is tough. The $112 area looks like a good spot but just to give PCP a little room to move we're suggesting a stop at $112.65.

Picked on March 03 at $109.49 *triggered
Change since picked: - 0.31
Earnings Date 05/08/08 (unconfirmed)
Average Daily Volume = 1.9 million

---

Everest Re Group - RE - close: 95.24 change: -1.64 stop: 102.01

RE continues to sink. The stock lost almost 1.7% and failed to bounce with the market later this afternoon. We have two short-term targets. Our first, conservative target is $93.50. Our second, more aggressive target is the $91.00-90.00 zone. We're suggesting a stop loss at $102.01 but more conservative traders might be able to get away with a stop around $100.51. FYI: The P&F chart is bearish with a $74 target.

Picked on February 28 at $ 97.93
Change since picked: - 2.69
Earnings Date 04/23/08 (unconfirmed)
Average Daily Volume = 487 thousand

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Sears Holding - SHLD - close: 96.47 change: +0.85 stop: 100.51

Traders bought the dip in SHLD near $95.00 twice today. This could be setting up for another run towards $100. Fortunately, we're waiting for a breakdown under support. We are suggesting a trigger to buy puts at $94.00. More aggressive traders may want to jump in early under $95.00. If we are triggered at $94.00 our target is the $85.50-85.00 zone near its January lows. Looking at the weekly chart and its bearish channel more aggressive traders may want to aim for $80 but we would expect a bounce near $85.00. FYI: A breakdown under $94 would produce a new triple-bottom breakdown sell signal on the Point & Figure chart. There are a lot of investors who believe SHLD is going lower. The most recent data puts short interest at more than 19% of the 65 million-share float. That is almost 7 days worth of short interest. Naturally that raises our risk of a short squeeze.

Picked on February xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 02/28/08 (confirmed)
Average Daily Volume = 2.8 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: 23.00 chg: -1.32 stop: n/a

CROX continues to sink and the put side of our strangle is looking pretty good. Shares of CROX lost 5.4% and closed at its lows for the session. Meanwhile the March $25 puts soared 48% to $2.50bid/$2.65ask. We are currently not suggesting new positions. The options we had suggested were the March $40 calls (CQJ-CH) and the March $25 puts (CZL-OE). Our estimated cost was $2.50. We were previously suggesting an exit if either option hit $4.25. We're adjusting our target to $3.75. We have just less than three weeks left before March options expire. More aggressive traders may want to keep the $4.25 target. Editor's note: It looks like the root symbol for the March $25 put changed from CQJ to CZL a few days ago.

Picked on February 17 at $ 33.43
Change since picked: -10.43
Earnings Date 02/19/08 (confirmed)
Average Daily Volume = 5.2 million
 

Dropped Calls

CNOOC - CEO - cls: 162.50 chg: -3.27 stop: 159.49

When you see a play get stopped out by two cents and then suddenly rebound it's easy to wonder about market manipulation and if the market makers are playing games. It doesn't do us any good to whine about it but it makes you wonder sometimes. We knew CEO would see some volatility today. We warned readers that Asian markets would probably see losses as they reacted to the Friday sell-off in U.S. equities. The Hang Seng index lost 3% in reaction to our own declines. CEO is based in Hong Kong so a 3% drop in the market was bound to weigh on the stock. However, the initial decline in CEO this morning found support near $162.75. It was not until the U.S. markets sank again later this afternoon that shares of CEO actually spiked lower and traded under support near $160 and its 50-dma. The stock hit an intraday low of $159.47. We have been stopped out but we would keep an eye on CEO for a rebound as a potential entry point for new positions.

Picked on February 26 at $170.73 *stopped 159.49
Change since picked: - 8.23
Earnings Date 03/19/08 (unconfirmed)
Average Daily Volume = 509 thousand

---

Humana Inc. - HUM - close: 68.35 change: +0.02 stop: 67.75

HUM ended the session essentially unchanged for the day. Unfortunately, the early morning weakness was enough to hit our suggested stop loss at $67.75 closing the play. Honestly, the bounce back this afternoon looks like a tempting entry point to consider buying calls again and use a stop under today's low near $66.82.

Picked on February 28 at $ 71.00 *triggered / *stopped 67.75
Change since picked: - 2.65
Earnings Date 04/28/08 (unconfirmed)
Average Daily Volume = 1.9 million
 

Dropped Puts

None
 

Dropped Strangles

Genentech - DNA - close: 79.18 change: +3.43 stop: n/a

Target achieved. DNA had us worried last week with all the profit taking but shares rebounded sharply on Monday. The stock soared 4.5% and hit a new five-month high at $79.59. This lifted the March $75 calls to an intraday high of $5.00. There "could" be some follow through higher tomorrow so more aggressive traders might want to let this play run another day or two and see what happens. The play is officially closed. 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: + 6.81
Earnings Date 04/10/08 (unconfirmed)
Average Daily Volume = 3.5 million
 

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

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