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Daily Newsletter, Tuesday, 04/01/2008

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Table of Contents

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

Market Wrap

April Fools

Is today's rally real or just a cruel April fool's joke? It will of course take a week or so to know for sure but real or not today was a real bear-b-que. It appears the majority of those hedge funds who went into the quarter end heavily shorted have decided to cover their shorts and go long. It may not have been by choice given the early morning gap open but the results were the same.

Dow Chart - Daily

Nasdaq Chart - Daily

The morning economics offered a ray of hope for the markets. The Institute for Supply Management (ISM) actually gained slightly to 48.6 in March from 48.3 in February. Throwing out the anomalous reading in January this has been a four-month hold just over 48 and could be signaling that the economy is starting to improve or at least not getting any worse. Anything under 50 is still in contraction territory but the drop appears to have slowed and there are no indications we are going lower. New orders declined slightly to 46.5 from 49.1 but back orders rose to 47.5 from 45.4. Supplier deliveries improved to 53.6 and employment jumped over 3 points to 49.2. Employers would not be adding workers if they thought there was more weakness ahead. Despite the glimmer of hope that maybe the economy is stabilizing there were a couple of negative factors. The prices paid index spiked 8 points to 83.5 indicating inflation is increasing sharply. This is the highest level we have seen since Katrina. This is a negative for the Fed. The combination of no decline in the headline economic conditions and a sharp increase in inflation pressures could push the Fed back into rate hike mode very quickly.

ISM Chart

The latest Case Shiller home price index was released today and nationally prices fell -8.9% in Q4. This was on top of a -4.5% drop in Q3. This is a different survey than the one reported two weeks ago but the numbers are just as dismal with a national drop in home prices of 10% over the last 12 months but currently dropping at an 18% annualized rate. That is the sharpest drop in the 32-years of the indexes history. The good news came from places like Atlanta, San Francisco and the East and West South Central states where conditions actually improved. The mortgage reset boom is scheduled to peak in May/June and then begin to decline slowly into 2009. That will slow the foreclosure rate and the pressure on home prices.

For the rest of the week the major reports remaining are the Factory Orders on Wednesday, ISM Services on Thursday and the Jobs report on Friday. The Jobs report is the most important. With the strong improvement in the ISM employment component the analyst estimate revisions are flying fast. We had several estimates for a loss of 75,000-jobs as late as Monday. Now we have estimates appearing with gains of 44,000 to 50,000 jobs. If we did actually have some decent job gains you can kiss any future rate cuts goodbye and that might actually be negative for the market in the very short term. Traders would love to have strong growth return and ignore rising rates but they have to mentally make that directional change first. Now they are focused on lower rates but that could be changing this week. Bernanke will testify again on Wednesday and anything is possible from his appearance but hopefully he won't try to send a message to the markets that the rate game is changing.

The big news for the day was the Lehman capital raise. The Lehman CFO was on CNBC again and there were some very interesting comments. Callan said they really did not need the money but they felt they needed to take the step to halt the speculation in Lehman stock. Volume in the stock had gone from an average of 15-16 million per day to days over 200 million. There are rumors that the Lehman CEO has turned over to the SEC information about how a conspiracy of short sellers caused the crash of Bear Stearns. He took the step of selling the stock not only to get additional capital while they could but also to show that major players were still investing in Lehman. They sold $4 billion in stock and the offering was over subscribed with $14 billion in offers. Callan said they specifically placed the stock in hands that would not short it and would not buy put insurance. This was to make a statement but also to prevent the stock from being used against Lehman. The move was 5% to 10% dilutive depending on how you look at it but as a confidence builder it was worth every penny. LEH had a $20 billion market cap on Monday and closed today with a cap of $24.4B. It may have been dilutive but that $4 billion in dilution has already been erased. This brings Lehman's leverage down to 13:1 and well within a reasonable range. Bear Stearns was levered around 30:1. Lehman fell in late trading on Monday evening after the announcement hit the wires but that weakness has been forgotten. Lehman added +6.70 today or 17.8% to close at $44.32 after trading as low as $36.80 Monday night.

The rally actually started overseas after UBS and Deutsche Bank reported more write-downs. UBS reported a Q1 loss of $12.1 billion, write-downs of $19 billion and said it would seek $15.1 billion in new capital. Sounds like a very ugly quarter and a bank you would not touch with the proverbial 10-foot pole. UBS gained +4.21 or 14.6% on the news. UBS write-downs for the last nine months total $37.4 billion. S&P cut their rating one notch to AA- citing risk management problems and the need for additional liquidity. UBS Chairman Marcel Ospel resigned saying he was ultimately responsible for the banks health. UBS said it would create a new unit to "hold currently illiquid U.S. real estate assets." I wish I could bury my mistakes that easy. Alt-A loans were cut from $26.6 billion to $16 billion. JP Morgan said UBS was drawing a line under its risk exposure and future losses. Investors must have liked the idea given the strong gain.

Deutsche Bank announced it expects a Q1 write-down of $4 billion due to significantly more challenging market conditions. Despite the write-downs the bank said it expected to stay on course and investors bought the story. DB gained +4.70 on the news.

This "positive?" banking news created a rally in Europe and that positive news carried over to the U.S. markets. The Financial SPDR (XLF) gained +7% and erased the losses from the past week. This carried over into the homebuilders with a +8.5% rally in the XBD.

Apple Inc Chart - Daily

Tech stocks were also exploding with the Nasdaq adding 83 points. Leading the charge was Apple Inc (AAPL) with a $6 gain to just below $150. Powering this move was news from Piper Jaffray that the 3G iPhone may be out sooner than expected. The Piper analyst said calls to 20 Apple retail stores nationwide found none of them had iPhones in stock. The analyst said this suggests the 3G model will be delivering before the expected late May date. The price tag is expected to be $399 and nobody expects a radical change in the form factor. Merrill reinstated the stock with a buy and a $180 price target. There are quite a few people expecting the 3G announcement with earnings on Apr-23rd. Others think Apple will stage a monster press release with plenty of advance warning in order to make the biggest splash. April Fools day is also Apple's birthday. Steve Jobs started it in a garage 32-years ago today. He was later pushed out of the company he started only to return 11 years ago to rescue it in epic style. I doubt there is any chance for another coup attempt any time soon.

Research in Motion (RIMM) tacked on $5.25 to $117.50 on expectations they will blowout earnings on Wednesday. Quite a few analysts have been expecting some subscriber flight as the iPhone seduces BlackBerry users with the bigger screen. RIMM has announced the 9000 which some are calling the iPhone killer. Others are less flattering saying it is like an iPhone only crappier. Henry Blodget released some pictures of the BB 9000 and said it looks a lot like an iPhone with a keyboard. Blodget said it looks like the RIMM CEO threw an iPhone on his designer's desk and said, "Copy it." Earnings are expected to be 33-cents on revenue of $1.85 billion. Analysts expect RIMM to announce the addition of 2.15 million new subscribers for the quarter.

BlackBerry 9000 Pictures

Microsoft made the news not only with a nice gain right to resistance at $29.50 but with news they will not pay more than $31 for Yahoo. This sets up a win-win for Microsoft stock. They win if they get Yahoo at that price and they also win if the deal falls apart because the deal risk will be gone. Microsoft has been a big laggard of the broader market since the Yahoo bid began but it may be about to post a breakout. Yahoo declined to $28.50 on the news and you can bet there are more declines ahead as long as the management keeps trying to discourage the takeover.

If it is Tuesday it must be triple digits. On March-11th the Dow gained +417 followed by +420 on March-18th. Tuesday March-25th was a give back day after the +393 gain on good Thursday. Today's +391 romp had more conviction than any of those prior gains and it launched from a higher level. Volume was better than 8:1 advancers over decliners and at more than 8 billion shares it was +1.5 billion over the daily average for last week. All the indexes posted a new 4-week high and some are nearing critical resistance. Is a new bull market about to begin? I would not go that far just yet but I still believe the bottom is behind us. Tuesday was just another monster short squeeze day but there was also an added flavor of some new money coming off the sidelines.

On a normal short squeeze you get a morning pop, a midday decline and then an end of day ramp as shorts hoping for a sell the rally afternoon finally capitulate and buy the close to cover. Today there was no decline. It was straight up all day with volume increasing into the close as several buy programs kicked off late in the day. It appeared to me from the market action last week that the hedge funds protected their shorts into Friday's close and then bailed as a group once the quarter was over. They were of course helped in their decision by the financial rally that started in Europe and followed the sun west. The rally was also helped by new retirement money hitting the market with the quarter end contribution inflows being put to work. According to Bloomberg this was the biggest first day of Q2 since 1938. There were only 13 S&P-500 stocks trading lower. It was not a fun day to be short and if you remember my commentary from last week we were nearing record short interest levels again.

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The Dow squeezed past its Monday high from last week at 12600 and edged even closer to the much stronger resistance at 12750 and the top of its recent range. A move over 12750 would be very bullish. The 100-day average at 12728 is the first test but the twin peaks in February are going to be the key. All 30 Dow stocks were higher with JPM +4, AIG +3.75, AXP +3.37, BAC +2.95, XOM +2.44, UTX +2.42, C +2.42 and MMM +2.17 as the leaders.

The Nasdaq closed at a 6-week high at 2362 and was even more vertical than the Dow. Once the tech short covering started it was aggressive. Initial resistance was 2337 and that was easily broken. From here until about 2410 there is a lot of congestion but 2410 is the next critical level to watch. The Nasdaq looks a lot like a rally launch but we need that first stage to complete with a break over 2410 for confirmation.

The S&P tacked on +47 points to close at 1369 and a new 4-week high. With the financials gaining +7 points the S&P was dragged higher with few stragglers left behind. Only 13 S&P stocks were lower. That is an excellent confirmation that shorts on index ETFs were being covered in high volume. There is a strong resistance band from 1375-1395 and a move over 1400 would be very bullish. It is the same story on the Russell from 720-730. Over 730 would trigger a buying frenzy.

S&P-500 Chart

Dow Transports Chart - Daily

Watch the Dow transports for a clue to the rally strength. If the transports move over 5000 this could produce an explosive change in market sentiment. That has been resistance for eight months and a move higher would be confirmation that investors think the worst is behind us.

For the rest of the week we need to watch for an explosive event around the Bernanke testimony at 9:30 tomorrow morning. That will be followed by the RIMM earnings after the close. Let's hope there is no talk of slowing sales due to the economy. On Thursday traders will start jockeying for position ahead of Friday's employment report. The range of estimates is now -75K to +50K so it would be hard to please everybody but also hard to really disappoint completely. Those with bearish estimates would love to be proven wrong. Short of a real implosion in jobs any "normal" report should be met with relief more than excitement. I still believe the bottom is behind us and today's rally, regardless of reason, gave us a new support point on the S&P at 1320. Continue to buy dips unless that level fails. Should we get lucky enough to move over 1400 you better have your seatbelt fastened.

Jim Brown
 


New Plays

New Option Plays

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

Play Editor's Note: The tone of the market has changed dramatically in just one session. While it seems a clich to state that one day does not make a trend we are (naturally) seeing a lot more bullish candidates. We just don't feel like chasing them right here. You've probably heard it said more than once this year that traders are "buying the dips and selling the rips". Today definitely qualifies as a "rip". I'm noticing some technicals are nearing a potential short-term top signal. A few stocks that do look like potential bullish candidates and ones that I would be watching for a dip are: CLB, LLL, HSIC, CHL, DD over $48.00-48.10, maybe MSFT over $29.75 and NTDOY over its 100-dma. We'd also keep an eye on the transports. They are starting to look tempting.


New Calls

None today.
 

New Puts

None today.
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Aluminum Corp. of China - ACH - cls: 43.90 chg: +3.47 stop: 39.85*new*

The U.S. traded shares of ACH turned in a very big day. The stock rallied more than 8.5% and did so on above average volume. The move has lifted ACH past its 50-dma again. Plus, the MACD on the daily chart has produced a new buy signal. The intraday high was $43.96. We are raising our stop loss to $39.85. We have two targets. Our conservative target is the $44.85-45.00 range. Our more aggressive target is the $48.50-50.00 zone.

Picked on March 30 at $ 40.80
Change since picked: + 3.10
Earnings Date 03/18/08 (unconfirmed)
Average Daily Volume = 1.8 million

---

Essex Prop. Trust - ESS - cls: 121.48 chg: +7.50 stop: 109.90

REIT stocks were big winners today. Shares of ESS soared more than 6.5% to new five-month highs. The close over $117.50 and over $120 is very bullish. We are not suggesting new positions at this time. Given the big move today more conservative traders might want to take some early profits now. Our target is the $124.50-125.00 range. The Point & Figure chart is bullish with a triple-top breakout buy signal and a $142 target (it was a $132 target).

Picked on March 24 at $115.50 *triggered
Change since picked: + 5.98
Earnings Date 05/05/08 (unconfirmed)
Average Daily Volume = 408 thousand

---

FPL Group - FPL - close: 64.89 chg: +2.15 stop: 59.49

Alternative energy plays seem to be drawing more attention lately. Shares of FPL added 3.4% and broke through its 50-dma and 200-dma (again). Volume was only ho-hum but the short-term trend looks good. A dip back to $64.00 might be a new entry point. We would expect some overhead resistance at its 100-dma near $66. Our target is the $67.00-67.50 zone.

Picked on March 27 at $ 63.55 *triggered
Change since picked: + 1.34
Earnings Date 04/30/08 (unconfirmed)
Average Daily Volume = 2.6 million

---

Fluor - FLR - close: 148.78 chg: +7.62 stop: 136.45 *new*

Entry point alert on FLR. The market's strength helped power FLR to a 5.3% gain. Today's move is a breakout over resistance in the $145-146 zone plus it is a breakout over FLR's five-month trendline of lower highs. Our suggested entry point to buy calls was at $146.50 so the play is now open. If you don't want to chase it here then consider waiting for a dip back toward $146-145. Please note we're adjusting the stop loss to $136.45. We're setting two targets. Our first target is the $159.00-160.00 zone. Our second target is the $168.00-170.00 zone. We do not want to hold over earnings in early May.

Picked on April 01 at $146.50 *triggered
Change since picked: + 2.28
Earnings Date 05/07/08 (unconfirmed)
Average Daily Volume = 2.3 million

---

Arcelor Mittal - MT - close: 82.41 chg: +0.61 stop: 76.95

MT actually under performed the market today. Shares gapped open lower but traders bought the dip near support around $80.00 and the stock eventually posted another gain. We remain bullish on MT in spite of this morning's mysterious weakness. Our target is the $89.00-90.00 zone. We're suggesting a stop at $76.95 but more conservative traders could try and play with a tighter stop near $78.30 instead. FYI: MT is holding an investor day on Wednesday this week.

Picked on March 31 at $ 82.03 *triggered/gap open
Change since picked: + 0.38
Earnings Date 05/15/08 (unconfirmed)
Average Daily Volume = 4.1 million
 

Put Updates

Ambac Fincl. - ABK - cls: 6.11 change: +0.36 stop: n/a

The financials were the market's best performing sector with an 8.5% jump in the broker-dealers and an 8.1% jump in the BIX banking index. Shares of ABK rose 6.2% in what was probably just another day or short covering. 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). We may want to start thinking about taking profits as ABK nears the January lows (near $4.50).

The bounce from $5.00 is struggling.
Picked on January 27 at $ 11.54
Change since picked: - 5.43
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 10.9 million

---

Garmin Ltd - GRMN - close: 54.85 chg: +0.84 stop: 60.05

One of the biggest rally day of the year was not enough to lift GRMN more than 1.5%. That should tell you that there isn't a lot of buying interest in the stock right now. That doesn't necessarily mean the bounce is over but buyers are not very enthusiastic to buy the "dip". The stock has already hit our initial target in the $54.50-54.00 zone. We would expect a bounce back toward $56 or $58. More conservative traders may want to put their stop closer to $58.00. Our second more aggressive target is the $50.50-50.00 zone. We do not want to hold over the early May earnings report.

Picked on March 27 at $ 58.97 /1st target exceeded
Change since picked: - 4.12
Earnings Date 05/01/08 (unconfirmed)
Average Daily Volume = 4.9 million

---

Humana Inc - HUM - cls: 47.00 chg: +2.14 stop: 48.01

HUM produced a pretty good bounce today with a 4.7% gain albeit on below average volume. We've seen a couple of news items, one on Monday and another today, mentioning that HUM's Chairman bought 10,000 shares of HUM at $45.76 recently. While that's normally a bullish sign, one of inside management buying shares with their own money, it doesn't automatically make the stock a buy. We would be careful here. It wouldn't take much to push HUM to our stop loss at $48.01. Currently the P&F chart is so bearish it points to a target of zero ($0.00). We are suggesting puts at current levels or on a failed rally near $46.00. Our first target is $40.50-40.00. We'll consider an aggressive target as the play progresses.

Picked on March 30 at $ 45.20
Change since picked: + 1.80
Earnings Date 04/28/08 (unconfirmed)
Average Daily Volume = 4.4 million

---

MBIA Inc. - MBI - close: 13.48 change: +1.26 stop: n/a

The market's short-squeeze fueled rally on Tuesday had a big impact on MBI. The stock gapped open at $12.67 and closed with a 10.3% gain. Volume rose to 8.5 million shares. 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: - 0.72
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 15.2 million
 

Strangle Updates

None
 

Dropped Calls

Apple Inc. - AAPL - close: 149.53 chg: +6.03 stop: 134.45

Target achieved. The market-wide rally fueled a 4.2% gain in shares of AAPL. The stock surged toward resistance near $150 and its 200-dma. The intraday high was $149.66. Our target was the $148.00-150.00 zone. News that there was a shortage of iPhones could have been fueling the move too. AAPL is selling out even as the 3G iphone approaches.

Picked on March 23 at $133.27 /target achieved $148.00
Change since picked: +16.26
Earnings Date 04/23/08 (unconfirmed)
Average Daily Volume = 48.5 million

---

Intuitive Surgical - ISRG - cls: 346.94 chg: +22.59 stop: 316.49

Target exceeded! One of today's biggest winners was ISRG. The stock rallied more than 22 points for a 6.9% gain on above average volume. The intraday high was $347.93. Our target was only in the $339.00-340.00 zone. Shares of ISRG are challenging round-number psychological resistance near $350 and are now within striking distance of its December highs near $359. We would keep ISRG on your personal watch list for another entry point. The P&F chart is very bullish with a $456 target.

Picked on March 23 at $300.69 *target $339 exceeded (347.93)
Change since picked: +46.25
Earnings Date 04/17/08 (confirmed)
Average Daily Volume = 1.1 million
 

Dropped Puts

Amer.Intl.Group - AIG - cls: 47.00 chg: +3.75 stop: 45.11

The massive rally and short covering in the financials today was not lost on shares of AIG. The stock added more than 8.6% by the day's end. Shares opened at $44.51 and quickly rallied through our stop loss at $45.11 closing the play. The overall trend is still bearish and AIG still has resistance at its 50-dma but the bears could be in trouble here.

Picked on March 30 at $ 42.80 /stopped 45.11
Change since picked: + 4.20
Earnings Date 05/08/08 (unconfirmed)
Average Daily Volume = 26.2 million

---

Capital One - COF - close: 53.48 chg: +4.26 stop: 52.55

Bears ran for cover in shares of COF as well. The stock surged 8.6% and quickly hit our stop loss at $52.55 closing the play. If the rally continues COF will likely encounter resistance near $57.50.

Picked on March 30 at $ 48.99 /stopped 52.55
Change since picked: + 4.49
Earnings Date 04/17/08 (unconfirmed)
Average Daily Volume = 10.2 million

---

Cytec Ind. - CYT - close: 55.97 chg: +2.12 stop: 54.75

The market's sudden strength this morning pushed CYT to gap open at $54.82. Our stop loss was at $54.75 so we should have been taken out at the open. CYT dipped to $53.73 before rebounding again. This upward move might actually have some legs given CYT's sideways consolidation over the last several days.

Picked on March 09 at $ 54.72 /stopped out 54.82 gap open
Change since picked: + 1.25
Earnings Date 04/17/08 (confirmed)
Average Daily Volume = 601 million

---

Everest Re Group - RE - cls: 93.71 chg: +4.18 stop: 91.75

RE is another insurance stock that soared on strength (a.k.a. short covering) in the financial sector today. RE gapped open at $90.53 and closed with a 4.6% gain. The stock traded through our stop loss at $91.75 closing the play. The longer-term trend is still bearish but the bounce could carry RE to the $95-96 zone or even the $100 region before running out of steam.

Picked on March 30 at $ 88.61 /stopped out 91.75
Change since picked: + 5.10
Earnings Date 04/23/08 (unconfirmed)
Average Daily Volume = 601 thousand
 

Dropped Strangles

None
 

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

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