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Daily Newsletter, Monday, 04/07/2008

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Table of Contents

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

Market Wrap

Wamu and Consumer Credit Drive Action; Alcoa Reports Q1 Earnings

The major averages got off to a bullish start Monday with banking shares leading gains on talk that Washington Mutual (NYSE:WM) $13.15 +29.30% may be close to getting a $5 billion private equity investment from buyout firm TPG, Inc.

As gains built towards the mid-point of the session, today's loan economic report brought in some selling after the Federal Reserve said Americans increased their outstanding credit in February but at nearly half the rate as in the previous month.

The Fed said consumer borrowing in February rose at an annual rate of 2.4%, or by $5.2 billion, to bring total consumer credit up to $2.5 trillion.

Economists polled by Thomson's IFR Markets had expected total consumer borrowing to rise by $5.3 billion in February.

Consumer borrowing in January was upwardly revised to a $10.3 billion from the previously reported $6.9 billion.

The majority of the increase in total consumer debt was for credit card debt, or revolving credit, which rose to annualized 5.9% rate in February, or by $4.7 billion.

Consumer borrowing for auto loans and other types of so-called non-revolving credit, rose at an annual rate of 0.4% in February, an increase of $497 million.

The Fed's measurement of consumer credit does not include mortgages and other loans secured by real estate.

Closing U.S. Market Watch - (05:00 PM EDT)

In this weekend's Market Wrap, I had mentioned the NYSE reporting that short interest as of March 31 had risen 4.2% to 16.1 billion shares.

This afternoon, NYSE regulators said they and the Financial Industry Regulatory Authority were investigating a large increase in short interest data released Friday for Lehman Brothers' 7.9% preferred stock.

Late this afternoon, the NYSE said their initial investigation revealed an error and that the previously measured short interest on the preferred stock was incorrect.

After tonight's close, the NYSE now reports that it has amended NYSE short interest as of March 31 to 15.6 billion shares.

Despite some fractional dollar firming against the euro, May Crude Oil futures (cl08k) settled up $2.86, or +2.69% at $109.09 on technical buying. May Unleaded (rb08k) tracked crude oil higher, but at a less aggressive pace, settling up $0.0268, or +0.97% at $2.7835.

With some notable deterioration in the unleaded/oil crack spread, I thought it best if Valero Energy (NYSE:VLO) $49.63 -1.93% move to the sidelines as the stock was trading $50.54.

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As I type (with Tuesday's energy futures session underway), May crude oil's 5DyNet% is up 7.08% vs. unleaded's 5.70%, while crude oil's 20DyNet% is up 1.91% vs. unleaded's 1.83%.

May Nat. Gas futures (ng08k) reclaimed the bulk of Thursday and Friday's losses with a 5.03% gain to settle up $0.469 at $9.7910.

The Amex Nat. Gas Index (XNG.X) 630.68 +0.91% closed at a new 52-week high.

In today's OptionInvestor.com Market Monitor I notes some of global energy advisor Tristone Capital's coverage/updates to past call, that looked like a "take profit" on these, and buy these as they look to be breaking out. The old "rotate your capital and play follow the leader" that's a long-held strategy of institutional traders.

As one example, with Apache Corp. (NYSE:APA) $128.60 +1.73% surging to yet another all-time high in today's session ($131.45), Tristone cut its rating on the shares to "outperform" from "Top Pick," yet raised its target on energy producer (largely natural gas) to $148 from $122.

The firm then raised it rating on Newfield Exploration (NYSE: NFX) $56.09 +2.52% to "Top Pick," also raising the firm's prior target to $78 from $68.

APA and NFX Montage - Daily Intervals

While Tristone made several "downgrade" calls and rotated them to "top picks" today, their call is a classic example of how institutional firms can look to take profit from one trade and rotate to another, perhaps a very SIMILAR stock (sector) that may well play some catch up.

Fascinating action in APA from the $90.00, a level many Market Monitor subscribers will remember from several months ago as I warned of shorting the break to a new high. Notable how the stock found buyers on a date becoming more familiar to major market index traders and 1/23/08.

Newfield (NFX) looks like it is set to test its recent all-time high of $57.75 having also found an inflection low on 1/23/08.

Tristone also raised Devon Energy (NYSE:DVN) $108.44 +1.02% to "top pick" status and raised it price target to $140 from $85.

Shares of semiconductor equipment maker Applied Materials (NASDAQ:AMAT) $20.19 -3.35% were weak after Credit Suisse analyst Satya Kumar downgraded the shares to "neutral" from "outperform." Mr. Kumar said his research showed the company is having difficulty manufacturing its large solar panels, and noted the panels are expensive because of their size. Mr. Kumar added that the company's efficiency goals are too low. By 2010, AMAT plans to make solar panels that cost $1/watt of power generated, but more efficient panels are already on the market.

Citigroup's Timothy Arcuri may have agreed and suggested investors swap out of AMAT and into fellow equipment maker KLA-Tencor (NASDAQ:KLAC) $42.81 +6.57%. While Mr. Arcuri maintained his "buy" rating on AMAT, he thought KLAC could surprise to the upside in the March and June quarters with his research suggesting the company is seeing some increased adoption rates at Samsung and a resurgence or orders from Taiwan Semiconductor (NYSE:TSM) $10.49 +0.57%.

The Semiconductor HOLDRs (SMH) $30.29 -0.49% were little changed.
(See this weekend's Market Wrap)

Chip maker Intel (NASDAQ:INTC) $21.75 fell $0.12.

Earnings season kicks off today and fundamentalists as well as technicians will be taking notice as to calendar Q1 earnings.

Shares of Dow component Alcoa (NYSE:AA) $37.44 -4.00% traded weak into this evenings release of its quarterly (Q1 for the aluminum giant).

Alcoa (NYSE:AA) - Daily Interval Chart

Aluminum producer Alcoa said its Q1 earnings plunged 54% as higher raw material and energy costs and a weaker dollar cut into results.

Net income fell to $303 million, or $0.37/share compared with $662 million, or $0.75/share during the same period last year. Excluding items, AA said earnings per share were $0.44 vs. a comparable $0.79 in the year-ago quarter. Revenue fell 7% from a year ago to $7.38 billion from $7.91 billion.

While the top line results beat Wall Streets average estimate of $7.18 billion, bottom line figures came in shy of the $0.48/share estimate.

Alcoa executives said the weaker dollar impacted results negatively by $68 million, or $0.08/share, on a quarter-by-quarter basis.

However, and this confuses me (Jeff Bailey) a bit, AA also noted that the weaker dollar positively impacted MANY commodity prices in the recent quarter and that the price of aluminum climbed 24.5% in the last three months.

I have not fully read AA's earnings press release at this point, but would like to investigate further just why/how the weaker dollar has had NEGATIVE impact.

I would hate to think that at some point, AA "blame" a stronger dollar for weakening aluminum prices, thus having a negative impact on earnings.

In February, Alcoa and Aluminum Corporation of China Ltd. (NYSE:ACH) $44.90 +2.16% announced they were jointly buying 12% of Rio Tinto PLC's (NYSE:RTP) $456.30 +0.39% shares in a deal reportedly valued at $14.05 billion. Alcoa said it contributed $1.2 billion to the total investment.

In this weekend's Market Wrap, I made multiple broader market notes as to a major bottom having been found in the major U.S. equity benchmarks.

There are a couple POTENTIAL head/should BOTTOM patterns developing in AA. One near-term pattern (blue) has already developed, where a break much above $40.70 and the 10/29/07 high would be a neckline.

A more severe pullback into last August's lows near $30.25 also a possible pattern.

Rather "shocking" that a deep cyclical like AA showing some muster above its 12/31/07 close.

Shares of AA were rather quiet in this evening's after-hours session, ticking lower at $37.23.

Morgan Stanley Cyclical Index (CYC.X) - Daily Intervals

In today's OptionInvestor.com MM, I did note that the CYC.X had retraced 50% of its "TRAN-like" decline. (See Dow Transports in this weekend's wrap).

As one component of the CYC.X (AA, C, CAT, CSX, DD, DE, DOW, ETN, F, FCX, FDX, GCI, GT, HON, HPQ, IP, IR, JCI, MAS, MGA, MMM, MOT, PPG, PTV, R, SHLD, TIN, UTX, WHR and X), AA would be showing some strength relative to its 150-day SMA (dark purple) and its 12/31/07.

With AA being the first to issue some fundamental data as to both domestic and global trends, we'll want to follow the MARKET's response over the next several sessions.

Dow Industrials (INDU) - Daily Intervals

This weekend's Market Wrap was a lot of charts and tables to digest.

You can see a lot of "stock component overlap" with the CYC.X and the Dow Industrials Components, a PRICE weighted index.

Dow Industials' 30 components - Sorted by PRICE

BOTTOM line earnings can be VERY difficult to "compare" vs. a year ago, as company's take special one-time charges, or gains on various parts of their business, or shifts in their business strategy.

Revenues are revenues. On a 52-week basis, the PRICE of AA was still up 8.23% versus this day last year.

General Electric (NYSE:GE) $37.26 -0.79% is the next component to report (4/11/08 before market open) and it has its finger in just about every piece of the U.S. and global economy.

Wall Street is looking for the company to earn $0.51/share (year ago $0.44/share) on revenue of $43.66 billion (+15.9% vs. year ago).

IWM and QQQQ Montage - Daily Intervals

Other than the strong start to the new quarter (04/01/08) there's not a lot to say about the iShares Russell 2000 (IWM) and the NASDAQ-100 Tracker (QQQQ). Volumes are rather light and since the recent lows, we haven't seen volume near the 50-day average.

In this weekend's market wrap I had mentioned that I had profiled a 1/2 position short in the IWM, which we were holding INTO the end of Q1, but a LOWERED stop from $69.82 entry was hit at $68.82 on 03/31/08.

I wouldn't be bashful with the picking up a bullish position back in there if given a second chance.
 


New Plays

New Option Plays

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

Play Editor's Note: I want to remind readers that a lot of major indices and sector indices are still trading just under significant resistance levels. A breakout higher would obviously be very bullish but after last week's gains odds are probably stronger that we see a pull back or some sort of correction first so the market can build up a good head of steam for the next breakout. FYI: Shares of ESRX just produced a failed rally at $68.00. Nimble traders might be able to scalp three or four points with a put play. Look for support in the $61-60 zone.


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: 44.90 chg: +0.95 stop: 39.85

Aluminum-related stocks were mostly higher ahead of Alcoa's (AA) earnings report due out after the closing bell tonight. Shares of ACH rose another 2.1% as it inched closer to resistance at its 100-dma and exponential 200-dma. ACH has already hit our early target at $44.85 and today's intraday high was $46.38. Shares of ACH will probably see some profit taking tomorrow. AA missed its earnings estimate by 4 cents and that will be an excuse by traders to sell these stocks. We're not suggesting new positions in ACH at this time. You may want to raise your stop loss. Our second, more aggressive target is the $47.75-50.00 zone.

Picked on March 30 at $ 40.80
Change since picked: + 4.10
Earnings Date 03/18/08 (unconfirmed)
Average Daily Volume = 1.8 million

---

Ashland Inc. - ASH - close: 51.59 change: +0.34 stop: 46.99

We do not see any changes from our weekend comments on ASH. Readers can choose to buy calls now or better yet wait for a dip back towards $50.00. We're suggesting a stop loss at $46.99 but you may want to use a stop closer to $48. There is potential resistance at its 200-dma in the $54-55 zone. Our target is the $57.00-58.00 range. We do not want to hold over the late April earnings report.

Picked on April 06 at $ 51.25
Change since picked: + 0.34
Earnings Date 04/23/08 (unconfirmed)
Average Daily Volume = 774 thousand

---

Core Labs - CLB - close: 130.20 chg: +0.85 stop: 118.99

CLB continues to run away from us. We've been waiting for a pull back and CLB keeps posting gains instead. Shares traded to $134.16 before giving back most of its intraday gains today. This looks like it could be a short-term top even as it forms a technical breakout over resistance near $130 and its inverse H&S pattern. Currently our suggested entry point to buy calls is the $123.50-120.00 zone. We're sticking with that entry zone for now but we might raise it toward the $125 region. If triggered at $123.50 our short-term target will remain $130 (actually 129.75) but we'll add a second target of $139-140. We still do not want to hold over earnings in late April.

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/23/08 (unconfirmed)
Average Daily Volume = 240 thousand

---

CONSOL Energy - CNX - cls: 74.56 chg: -1.55 stop: 69.49

Coal stocks made headlines today as ACI reaffirmed its earnings guidance. The problem was that the street was expecting ACI to be more optimistic with its earnings guidance. Just reaffirming its previous numbers was used as an excuse to lock in gains in this high-flying group. Shares of CNX had spiked to $80.44 this morning and gave back all of its gains and more. We are suggesting readers buy a dip in the $73.50-72.00 zone. The closer to $72.50 the better but our official entry point for the newsletter is going to be $73.50. The Point & Figure chart is very bullish with a $95 target. We are listing two targets. Our first target is the $79.75-80.00 range. Our second target is the $84.00-85.00 zone. More aggressive traders might want to aim for $90. Remember, we do not want to hold over the late April earnings report.

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 3.7 million

---

Essex Prop. Trust - ESS - cls: 116.97 chg: +0.50 stop: 112.95

Monday was a quiet day for ESS. Shares continued to meander sideways. We don't see any changes from our weekend comments. The stock has pulled back to the bottom edge of its four-week rising channel so this looks like a bullish entry point. Truly conservative traders might want to adjust their stop closer to the $115 region. 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.

Picked on March 24 at $115.50 *triggered
Change since picked: + 1.47
Earnings Date 05/05/08 (unconfirmed)
Average Daily Volume = 408 thousand

---

Fluor - FLR - close: 150.93 chg: -1.96 stop: 139.90

Caution! FLR just produced a short-term bearish reversal with today's bearish engulfing candlestick pattern. The stock traded in a $5.00 range with a failure near $155. We would expect a dip back toward the $146-145 zone and readers can use it as a new bullish entry point. More conservative traders may want to consider a stop loss in the $142-144 region. We have 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. FYI: The P&F chart is bullish with a $184 target.

Picked on April 01 at $146.50 *triggered
Change since picked: + 4.43
Earnings Date 05/07/08 (unconfirmed)
Average Daily Volume = 2.3 million

---

Hovnanian - HOV - close: 12.22 chg: -0.11 stop: *varies*

HOV spent the session bouncing around a $1.00 range. There are no changes from our weekend comments. HOV remains poised for another short squeeze. We are listing two potential entry points and stops for each entry. If HOV rallies from here we're suggesting readers buy calls at $13.25 with a wide stop loss at $10.99. If HOV pulls back from here then we suggest readers buy calls in the $10.50-10.00 zone with a stop loss at $9.49. If triggered at $13.25 our first target is the $16.90-17.00 range. Our second target is $19.85-20.00. If triggered near $10 our first target is $14.50-15.00 and our second target would be near $20. Remember, this is an aggressive play. The stocks have seen a lot of whipsaws over the last several weeks.

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 05/29/08 (unconfirmed)
Average Daily Volume = 4.1 million

---

Lincoln Elec. - LECO - cls: 70.58 chg: +1.33 stop: 66.99

Ouch! It doesn't happen that often but sometimes we get hit with a really bad fill on an entry point. We added LECO over the weekend with a suggestion to buy calls on a breakout over resistance with a trigger at $70.75. Unfortunately, the stock gapped open higher at $73.73 after being upgraded this morning before the bell. LECO quickly gave back most of its early morning gains but we would have been filled at the open. If you are looking for an entry point watch for a bounce near $70.00 or a potential dip to $69.50 as LECO "fills the gap" from this morning. Our play is open. We have two targets. Our first target is the $74.85-75.00 range. Our second target is the $78.00-80.00 zone. The Point & Figure chart is bullish with a $91 target. We do not want to hold over the late April earnings report.

Picked on April 07 at $ 73.73 *triggered/gap higher
Change since picked: - 3.15
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 233 thousand

---

3M Co. - MMM - close: 80.19 chg: -0.33 stop: 78.45

MMM is still struggling with resistance in the $81.50-81.75 zone. Shares hit $81.62 this morning and failed again. It still looks like MMM will breakout higher but we're going to stick to our plan. Our official entry point to buy calls is still at $81.75. There is potential resistance near $85.00 and its 200-dma but our target is the $87.00-87.50 zone. We do not want to hold over the late April earnings report.

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 3.9 million

---

Arcelor Mittal - MT - close: 84.44 chg: -0.73 stop: 78.24

The dip in MT was minor and if you're looking for a new entry point wait for a dip near $83.00-82.50 (maybe 82.00). Our target is the $89.00-90.00 zone. The P&F chart is very bullish and just saw its price target jump from $101 to $113 this past week.

Picked on March 31 at $ 82.03 *triggered/gap open
Change since picked: + 2.41
Earnings Date 05/15/08 (unconfirmed)
Average Daily Volume = 4.1 million

---

Potash Corp. - POT - close: 173.28 chg: +2.39 stop: 149.75

POT is still being uncooperative with our plan to buy a dip near $167-165. Shares gapped open higher and traded to $178 this morning as investors reacted to news that a Goldman Sachs analyst had raised his price target on POT from $180 to $225. We agree. POT looks like it can go a long way and $225 is probably not an unreasonable multi-month, maybe year-end, target. The P&F chart is already bullish with a $218 target. Our challenge is an entry point for a more short-term trade. The stock found support this afternoon near $170. We're starting to wonder if POT is not going to dip under the $170 level. However, we aren't giving up yet and sticking to our $167.50-165.00 entry point zone. We are playing with a wide stop loss because the stock can be so volatile. More conservative traders might want to try and play with a stop closer to $160 instead. Our first target is the $179.50-180.00 zone. Our second target is the $188.00-190.00 zone. More aggressive traders could aim for the $200 region. FYI: The P&F chart is bullish with a $218 target.

Picked on April 03 at $ xx.xx <--see TRIGGER
Change since picked: + 0.00
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 7.7 million

---

United States Oil - USO - close: 86.93 chg: +2.05 stop: 82.45

Commodities were hot today and crude oil surged more than 2% toward $109 a barrel. Unfortunately, oil was so hot that the USO actually gapped open higher at $86.49. One of our suggested entry points to buy calls on the USO was at $86.05. We would have been triggered at the opening trade. We remain bullish on oil and the USO but if you're looking for a new entry point we'd rather wait for a dip. A pull back into the $86.50-85.00 zone would not be unexpected. Our first target is the $92.50 mark. Our second, more aggressive target is the $97.50-100.00 zone.

Picked on April 07 at $ 86.49 *triggered/gap higher
Change since picked: + 0.44
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 5.4 million
 

Put Updates

Ambac Fincl. - ABK - cls: 6.21 change: +0.22 stop: n/a

It looks like ABK has found a new short-term trading range in the $6.00-6.40 region. We don't see any changes from our previous comments. 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).

Picked on January 27 at $ 11.54
Change since picked: - 5.33
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 10.9 million

---

Humana Inc - HUM - cls: 43.16 chg: -0.96 stop: 47.05

Shares of HUM slipped again and continue to under perform the market. The stock lost another 2.1%. There was some interesting news out after the closing bell. A Reuters article announced that the U.S. government was raising its payments made to private healthcare insurance firms, like HUM, for their Medicare plans by 3.6% in 2009. This sounds like good news right? Actually the market will probably see it as bad news since just a couple of months ago it was expected that the government might raise their payouts by 4.8%. The news came out after the closing bell and we're not seeing any real after hours move on the report. Our target is the $40.50-40.00 zone. More aggressive traders may want to aim lower. Currently the P&F chart is so bearish it points to a target of zero ($0.00).

Picked on March 30 at $ 45.20
Change since picked: - 2.04
Earnings Date 04/28/08 (unconfirmed)
Average Daily Volume = 4.4 million

---

MBIA Inc. - MBI - close: 13.59 change: -0.02 stop: n/a

MBI closed relatively unchanged on Monday. We do not see any changes from our previous comments. Honestly, we are surprised that last Friday's credit downgrade by Fitch hasn't had a bigger impact on shares of MBI. We have not been suggesting new bearish positions but if you wanted to speculate with puts here it might work if you place a stop loss above $14.50 or $15.00. We had been suggesting the out-of-the-money May puts (7.50, 5.00 and 2.50 strikes).

Picked on January 27 at $ 14.20
Change since picked: - 0.61
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 15.2 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.)

---

Goldman Sachs - GS - cls: 178.73 chg: +3.33 stop: n/a

GS is still flirting with a bullish breakout over its trendline of resistance and the $180 level. We would still consider strangle positions in the $173.50-178.50 zone (more aggressive traders could widen that entry zone to $170-180). The options we suggested for this strangle were the May $190 calls (GPY-ER) and the May $160 puts (GPY-QL). Our estimated cost was $8.70. We want to sell if either option trades at $14.50 or higher.

Picked on April 06 at $175.40
Change since picked: + 3.33
Earnings Date 06/12/08 (unconfirmed)
Average Daily Volume = 14.5 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.

DISCLAIMER

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.

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