Option Investor

Daily Newsletter, Monday, 03/24/2008

Printer friendly version

Table of Contents

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

Market Wrap

Majors Gain On Housing Data; Treasury Selling

Upbeat figures on existing home sales combined with an upwardly revised bid for Bear Stearns (NYSE:BSC) $9.93 +66.61% from JP Morgan (NYSE:JPM) $46.55 +1.26% brought buyers into equities for a second-straight session.

Meanwhile, investors that had been pouring cash into Treasuries at a feverish pace into Thursday's Triple Witch expiration locked in gains with the shorter-dated five year treasury yield ($FVX.X) jumping 26 basis points to finish just more than 25 bp above the current fed funds target of 2.25% at 2.600%.

Closing U.S. Market Watch - 04:15 PM EDT

The Dow Jones U.S. Home Construction Index (DJUSHB) 393.51 +5.27% matched its February high of 410 early in the session after the National Association of Realtors (NAR) said sales of previously owned homes rose 2.9% in February to a 5.03 million-unit annual rate.

February's gain was the first monthly gain since July and represented an upside surprise to economists forecast of 4.85 million units.

The pick-up in sales helped cut into a hefty inventory of unsold homes on the market. The NAR said the inventory fell 3% to 4.03 million units at the end of February. At February's sales pace that represented a 9.6 months' supply, the slimmest inventory since August, but still high by historical standards.

While the gain in sales broke a six-month streak of declining sales, prices continued to fall. The NAR said median prices fell 8.2% from their year-ago level to $195,900.

The NAR added that on a regional basis, sales decreased by 1.1% in the West, but were up 11.3% in the Northeast, 2.5% in the Midwest and 2.1% in the South.

CME's Regional Housing Futures (May'08, Aug'08, Nov'08)

Each Friday, I try to capture the "last trade" for the various CME Regional housing futures.

For the near-month May'08 contract, it was "gridded" back on 06/01/07 for initial trade and you can see that for the most part, housing prices have been falling since early Jun'07. The Boston market actually made a modest benchmark Friday high of 165.00 the week ended 02/08/08 (it may have traded higher Mon-Thurs prior), but then fell to a benchmark Friday low of 152.20 on 02/29/08, inched up a tad to 155.20 on a Friday benchmark for 3/07/07, didn't budge at its Friday 3/07/07 benchmark, and has inched up a bit at last week's benchmark close.

However, you can see some of the "West" regions like Las Vegas, Los Angeles and San Diego are still making new lows for the May'08 contract.


Get 50% of your trades wrong and still make big profits in the stock market!

We'll show you exactly when to buy and sell stocks with a proven method used by professional traders to manage risk, nail short-term gains, and pile up amazing profits. Master short-term trading with our expert analysis, detailed technical charts, and precise trade setups including specific entry, stop, and target prices. Now Completely FREE for 30 Days!

CLICK HERE: http://www.hotstix.com/public/default.asp?aid=10383

Anyhow, you and I can get a feel, based on observation that at most, regional housing prices are mostly lower, with "bright spots" of housing price INCREASES hard to find.

These various CME housing futures are relatively "new" and have not been around very long and trade VERY, VERY thin.

Yep, not many short-term traders in the housing market these days.

Maybe when the cable networks discontinue the "Flip This House" shows will housing prices start to recover in a more meaningful 20%/year rate (grin).

Dow Jones Home Construction (DJUSHB) - Daily Intervals

Ah, but the DJUSHB is actually UP so far this year (2008) and there aren't too many sub-indices we can say that about. Yes, the DJUSHB has been either side of its 12/31/07 close of 324.

I turned BULLISH shares of Toll Bros. (NYSE:TOL) $24.18 +4.67% on 1/31/08 when TOL was trading $23.66 with a TOL Jun $25 Call (TEP-FE) (equates to 1/4 bullish position), but after having seen these levels traded in late February and then observed a pullback to TOL $18.50 and DJUSHB 300.00, thought it best today to SELL an COVERED OUT-the-money TOL May $27.50 Call for $1.40/contract.

In essence, while today's NAR report a bullish surprise, one data point doesn't necessarily make a trend. If the CME regional housing futures weren't hovering near lows, I might have thought we could wait another week or two, see if the builders might get a breakout going above 410.

The iShares DJUSHB (NYSE:ITB) $21.03 +5.83% look very similar to the DJUSHB (as they should) and today's volume was very brisk at 3.45 million shares traded (3-month avg. volume is 841,811 shares/day), roughly 4-times the average daily volume. That's a sign of GREAT disagreement among buyers and sellers, but also shows interest in this group!

As noted, shares of Bear Stearns (NYSE:BSC) surged higher after JP Morgan (NYSE:JPM) boosted its offer to $10.00 per share from $2.00, hoping to stem some criticism that the banking giant was getting too sweet a deal for the battered investment bank. JP Morgan also said it will buy 95 million new shares of Bear Stearns, giving it a 39.5% stake in the company and a big leg up in getting shareholder approval for the takeover. The purchase is slated to close by April 8th.

Financials were strong at the open and held gains until about noon, but started to fade toward the close.

The more regional S&P Banks Index (BIX.X) finished in the red after trading as high as 274.95 earlier this morning.

Friedman, Billings, Ramsey & Co issued some cautious notes and cut their Q1 earnings estimates for 21 financial institutions because of continued uncertainty in the credit markets.

Wells Fargo (NYSE:WFC) $32.09 -1.41% stuck its head back above a still trending lower 200-day SMA ($32.93) for the second-time in as many months after a Robert W. Baird & Co. analyst downgraded the stock to "underperform" from "neutral," saying the valuation of the stock does not adequately reflect underlying earnings risk at the San Francisco-based bank.

Dow Transports (TRAN) - Daily Intervals

In the latter-half of 2007, the TRAN's weakness below its longer-term 150-day SMA (dark purple) and 200-day SMA (red) had technicians citing a more BEARISH Dow Theory technical event underway. But the Transports look to have found their BULLISH gear late last week.

Stochastics (technical analysis tool for RANGES) suggests to me the TRAN may have 5,000-5,100 in it near-term before we see some profit taking. Moving Average Convergence Divergence (MACD) has some bullish momentum building from what could well be a reverse head/shoulder pattern.

In tonight's U.S. Market Watch, I again point to the now current month Nymex May Crude Oil futures (cl08k) which settled down $0.98, or -0.96% at $100.86. The "matching" Nymex NY Harbor Unleaded (rb08k) settled up $0.0203, or 0.78% at $2.6326, which would have the "crack spread" much improved from last week's Market Wrap. (Note: 5DyNet% and 20DyNet% changes for cl08k and rb08k).

This certainly has a trader monitoring the refiners closely and either looking to snug down some stops on BEARISH trades in the group, while at the same time looking for a bullish trade.

And there may be no better test than shares of Valero (NYSE:VLO) $50.08 +1.15%, which darted to $47.85 in this evening's extended session after the refiner, which in January saw improving refining market conditions, warned that Q1 earnings per share will be well below analyst estimates amid tight margins (i.e. crack spread narrowing) and outages at several plants.

Valero said it "expects throughput margins on gasoline and certain other products such as petroleum coke, residual fuel oil, and petrochemicals to be significantly lower in the first quarter of 2008."

With earnings due on April 29, Valero warned that it now sees Q1 earnings of $0.10 to $0.35, compared with the mean per-share estimate of $0.91.

Energy Futures Table - Daily Settlement

I still think that April Unleaded (expires Monday, 3/31/08) may trade lower into its expiration, but unleaded prices have been rather steady-to-higher since last Monday. Meanwhile, the Crude Oil "roll" from Wednesday's expiration (03/19/08) has been modestly negative.

In the above table, I calculate a "crack spread" (Unleaded divided by Crude; then multiply by factor of 1000) to get a chartable value of 26.10 for the "May Crack."

Valero "speaks the truth" as to what it sees for Q1. Heck, on February 15, the "May Crack" at that time (column AB) was 27.53 and it recently dropped sharply to 24.25 on 3/17/08. But a slight decline in Crude Oil prices and a stead-to-higher trade in unleaded has the crack spread, or MARGIN for refiners like Valero improving.

I think there's a BULLISH opportunity in the making late this week, or early next week for a bullish trade in the refiners.

I think a trade would like to see Valero (VLO) "dilly-dally" around these extended session levels into next Monday, and have the "May Crack" come in to a 25.00 measure.

Then nip away at a VLO Jun $52.50 Call (VLO-FX) for $2.80 or buy more time (you can never buy too much time) with a VLO Sep $52.50 (VLO-IX) for roughly $3.80.

Valero Energy (VLO) - Daily Intervals

With the major averages having made a pretty strong move from the low-end of a developing range, it could be time for VLO to once again make a move from the low-end of its recent Feb highs to March lows. I've benchmarked the 2/15/08 "high crack spread" measure and the 03/17/07 "low crack spread" measure. Just as quickly as margins looked to improve in January, they deteriorated. Now VLO "speaks the truth" as margins have deteriorated since, but they are starting to firm a bit.

Dow Diamonds (DIA) - Daily Intervals

With the Dow Transports (TRAN) breaking above February resistance, I would have to think the Dow Industrials (INDU) and its tracker DIA follow that lead. I still expect some volatile trading as depicted by my alternating green and red arrows.

Look for a "new range" in the DIA to begin to develop from $120 to $129.

US Dollar Index / SPY Montage - Daily Intervals

I still see the US Dollar Index (DXY) as more of a "sentiment" driver for broader equities than anything, and the recent bounce in the dollar index (DXY) may still have some legs, but I'm certainly expecting some selling should the dollar index elevate towards 73.83 and especially the November relative low of 74.50.

Dorsey/Wright and Associates' S&P 500 Bullish % (BPSPX) reversed back UP to "bull alert" status on Wednesday at 31.12% (fell to 23.09% on 03/17/08) and has risen to 38.35% (38.00% on chart) at tonight's close. A measure of 42% is needed for "bull confirmed" status. On 02/28/08 Dorsey's BPSPX rose to 40.96% as the SPY itself tested its 50-day SMA at $139.14.

New Plays

New Option Plays

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

Play Editor's Note: Monday's market action was pretty encouraging. The Dow Industrials broke through their four-month trendline of resistance. The S&P 500 is close to doing the same. I am reiterating my weekend comments that I'm short-term bullish and would probably look to use dips in the next day or two as bullish entry points. Overall we remain in a bear market.

New Calls

None today.

New Puts

None today.

New Strangles

None today.

Play Updates

In Play Updates and Reviews

Call Updates

Apple Inc. - AAPL - close: 139.53 chg: +6.26 stop: 121.90

Technology stocks lead the way on Monday as a generally bullish mood swept over the market thanks to the stronger home sales data this morning. Shares of AAPL sprinted 4.7% and broke out above its simple 50-dma. Shares are now challenging potential resistance at the $140 level. This "should" be resistance so it may pay off to wait for a dip back toward $136-134 and use the pull back as a new entry point to buy calls. We are raising our stop loss to $124.85. Our target is the $148.00-150.00 zone. More aggressive traders could aim higher, maybe $160ish. The Point & Figure chart is bullish with a $166 target.

Picked on March 23 at $133.27
Change since picked: + 6.26
Earnings Date 04/23/08 (unconfirmed)
Average Daily Volume = 48.5 million


DIAMONDS - DIA - close: 125.34 change: +2.23 stop: 120.75

The better than expected home data and the revised bid for Bear Stearns helped fuel a market-wide rally. The DJIA rose 187 points (1.5%). Meanwhile the DIA posted a 1.8% gain. If you missed the move this morning we would still consider bullish positions on a dip near $124-123 although the breakout over $125 does look like a momentum trader's entry point. Our target is the $128.00-130.00 zone.

Picked on March 23 at $123.11
Change since picked: + 2.23
Earnings Date 00/00/00
Average Daily Volume = 19.1 million


Essex Prop. Trust - ESS - cls: 116.54 chg: +3.54 stop: 109.90

The better than expected home sales figures this morning fueled rallies in the REIT stocks in addition to the homebuilders. Shares of ESS rose 3% and broke through its long-term trendline of resistance. We were waiting for the breakout over $115 and this trendline with a suggested trigger to buy calls at $115.50. The play is now open. Our target is the $124.50-125.00 range. Traders should expect some resistance near $120 but it will probably be temporary. The Point & Figure chart is bullish with a triple-top breakout buy signal and a $132 target. FYI: Aggressive traders could also try buying calls on another dip near $111-110.

Picked on March 24 at $115.50 *triggered
Change since picked: + 1.04
Earnings Date 05/05/08 (unconfirmed)
Average Daily Volume = 408 thousand


Intuitive Surgical - ISRG - cls: 327.24 chg: +26.55 stop: 278.00

Did we mention that shares of ISRG were volatile? Sometimes that can work in our favor. Today shares of ISRG opened at $302.74 and soared to an 8.8% gain. ISRG did so on above average volume, which is normally a good sign. The stock has cleared potential resistance near $310-315. After such a big move we would not suggest new positions at this time. The intraday high was $335.00. Our target is the $339.00-340.00 zone. More aggressive traders may want to aim higher. The bullish target on the P&F chart just jumped from $360 to $456.

Picked on March 23 at $300.69
Change since picked: +26.55
Earnings Date 04/17/08 (confirmed)
Average Daily Volume = 1.1 million

Put Updates

Ambac Fincl. - ABK - cls: 6.41 change: -0.29 stop: n/a

In spite of the strength in financials today shares of ABK continue to under perform. We are not suggesting new bearish positions in ABK. This remains a very speculative play. We will definitely hold over the April earnings if we get the chance. Previously we had been suggesting the May out-of-the money puts ($5.00 and $2.50 strikes).

The bounce from $5.00 is struggling.
Picked on January 27 at $ 11.54
Change since picked: - 5.13
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 10.9 million


Cytec Ind. - CYT - close: 53.05 chg: +0.43 stop: 56.15

We remain wary of bearish positions in CYT only because of the market's newly bullish tone. Thus far the trading in CYT continues to look bearish. Shares failed near short-term resistance at its trendline of lower highs. The $50.00 level looks like nearest support so we are targeting a drop into the $50.25-50.00 zone. More aggressive traders might want to consider aiming lower.

Picked on March 09 at $ 54.72
Change since picked: - 1.67
Earnings Date 04/17/08 (unconfirmed)
Average Daily Volume = 601 million


MBIA Inc. - MBI - close: 14.17 change: +1.40 stop: n/a

MBI turned in a very big bounce today and broke through a few resistance levels including its 50-dma. Shares ended the session up 10%. Meanwhile the war of words between MBI and Fitch ratings continues. We're not suggesting new bearish positions at this time. We had been suggesting the out-of-the-money May puts (7.50, 5.00 and 2.50 strikes). We will definitely hold over the April earnings if we get the chance.

Picked on January 27 at $ 14.20
Change since picked: - 0.03
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 15.2 million

Strangle Updates


Dropped Calls

Research In Motion - RIMM - cls: 111.83 chg: +6.89 stop: 95.75

Target exceeded. Tech stocks were a big part of today's rally and RIMM led the charge. The stock closed with a 6.5% gain and hit an intraday high of $112.24. Our target was the $110-112 zone. We remain bullish on RIMM but would not want to hold over next week's earnings report on April 2nd. More aggressive traders may want to aim for $120. Right now a dip near $105-106 might be a short-term entry point to buy calls again.

Picked on March 11 at $100.74 /target exceeded $112.24 high
Change since picked: +11.09
Earnings Date 04/02/08 (confirmed)
Average Daily Volume = 25 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.

Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.

To ensure you continue to receive email from Option Investor please add "support@optioninvestor.com"

Option Investor Inc
PO Box 630350
Littleton, CO 80163

E-Mail Format Newsletter Archives