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Daily Newsletter, Saturday, 04/19/2008

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Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews
  4. Trader's Corner

Market Wrap

What A Difference A Week Makes!

Last week the market imploded on a negative earning surprise from GE. All the analysts were projecting gloom and doom for the rest of the earnings cycle since the bluest of the blue chips had surprised so negatively. Surprise, surprise, this week's earnings have been nearly the exact opposite of GE. We had upside surprises and strong guidance from a diverse group including Intel, IBM, Merrill Lynch, Caterpillar and even Google. Did we dodge the recession bullet?

Dow Chart - Daily

The only economic report on Friday was the regional and state employment report. It was less than exciting. Employment increased in 22 states and declined in 27 states. The states with the best hiring were Texas, Minnesota, Colorado and Utah. The biggest decline in employment came in Michigan, Florida, Missouri and Nevada. South Dakota had the lowest unemployment rate of 2.5% and Michigan the highest at 7.2%. There was little change in the trends from the prior month suggesting the recession worries are not translating into real employment cuts.

The monthly surge of key economic reports is over for April. Next week is one of the lightest calendars we have seen in recent months. The two regional reports are the only items of interest and light interest at that. The event creating the biggest volatility will probably be the May crude futures expiration on Tuesday. The CFTC said open interest in crude futures increased by 40% over the last two weeks and the only way to create open interest is for somebody to sell a contract short. May open interest is well over 10 times the actual volume of oil available and that suggests a lot of those contracts will have to be bought back by Tuesday. It should be very interesting to see those shorts squirm and see what happens to the June contract as some of those shorts roll forward.

Weekly Economic Calendar

The earnings parade started with the 800lb gorilla (GE) doing a face plant in front of the viewing stand. After GE hobbled away the parade picked up speed and the crowd cheered each passing report. It was a dramatic change from the negativity of the prior week. Intel, IBM, Google, Merrill, Citigroup, Caterpillar, Honeywell, etc, all beat the street and some by a wide margin or in the case of Merrill was not as negative as some expected. Not all the earnings have been positive. 20% of the S&P have reported and headline earnings are down -22%. That is not the entire story. If you take out the financials the S&P earnings to date would be 8%. Financial earnings are down -68% for the quarter and that is dragging down the entire S&P. At today's close the S&P is valued at a PE of 13.8 and that is traditionally low.

Unfortunately this positive earnings news may not continue. As the earnings process moves forward the quality of the companies reporting will deteriorate. The large multinational blue chips report early in the cycle and the smaller less diverse companies report later. The companies already reported generally made their money overseas instead of inside the U.S. Intel gets 80% of its earnings from outside the United States, IBM 65% and CAT 60%. Even Google got 51% of its earning for the quarter from overseas sources. These companies are relatively insulated from the U.S. recession as long as it does not contaminate the rest of the world. Once we get into earnings from those companies who deal primarily in the U.S. we could see more damage from the slowing economy.

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Next week there are nearly 1000 companies reporting. The column numbers in the calendar below are the number of companies reporting on that day. The rough total is about 973 but that number changes daily. The most important ones for me are in orange headed by Bank America on Monday. There are some worries that BAC could produce a negative surprise. Yahoo is next up on Tuesday and we should get some more news about the Microsoft offer. Apple, Amazon and UPS are Wednesday. Amazon exploded higher by $6 on Friday after the bullish Google report. Will the Google Internet earnings trend carry over into Amazon? Apple is expected to post very strong earnings but there are some worries that iPhone sales have slowed as consumers wait for the 3G version rumored to be out in June. UPS will give us another update on how the recession is impacting package volume inside in North America. Thursday has Microsoft and they are expected to post strong numbers even though there are cracks appearing in the corporate acceptance of Vista. American Express could tell us if the higher dollar corporate customer is still charging ahead. MMM will be a key to watch for the manufacturing sector. MOT will be another update on the chip sector and YRCW could be confirmation of any trend UPS discusses. There is nothing material on Friday.

The expectations continue to be relatively low so there is the potential for more upside surprises than downside disasters. There is no guarantee but as long as last week's trend continues the market should be positive.

EEarnings Calendar

Citigroup reported on Friday they lost -$5.1 billion on additional write-downs of more than $12 billion. The street was just happy they did not do worse. iti reported a $10 billion loss in Q4 so this was a decent improvement. There were some signs they may need to go out for additional capital but that was perceived positively. Citi gained 1.08 on the day.

E*Trade (ETFC) posted disappointing results but reported they added 60,000 new customers in the quarter. This was the largest increase since Q4-2005. They now have 4.8 million accounts. ETFC had been losing customers after they warned they lost billions in the subprime mortgage problem. Traders were afraid they would go under but that fear has subsided. ETFC gained 10% for the day.

The biggest winner for the day was Google with a $90 gain to $540. OI had recommended a strangle play to hold over earnings and buyers were well rewarded! Expectations were very low for Google with signs of falling click through rates around the world. Those signs were very wrong with Google getting 51% of their earnings from overseas. Google also updated their online ad system to enhance earnings from existing business. Analysts were quick to reiterate their price targets in the $750 range. After dropping 40% from its highs analysts are now calling it a must own stock once again.

A byproduct of the positive earnings has been a complete removal of the next Fed rate cut from the markets. Just over a week ago there was a 79% chance of a 50-point cut at the April 29th meeting. That has fallen to slightly less than a 50% chance of a 25-point rate cut. Nobody is whining now about the loss of the rate cut with the Dow up 523 for the week. That may change as we get closer to the FOMC meeting.

Oil prices continued to soar with crude settling at $117 late Friday. There are no words to describe this move and shorts are getting crushed. The move on Friday was "reportedly" due to renewed violence in Nigeria. Nigeria is the 3rd largest exporter of oil to the U.S. and this is light crude not the heavy Saudi grade. Nigeria already had about one million barrels of daily production shut in for most of 2007 and a loss of more supply from there would impact the world market and the U.S. in particular. Personally I think the noise from Nigeria helped the spike but most of the move is more likely due to the May crude futures expiration next Tuesday. Anyone short this contract and hoping for a correction to escape the pain is suffering from new highs every day. Once this contract expires I do expect to see some profit taking. The two days after expiration in March saw crude fall from $109 on expiration day to $98.64 two days later. That was a 10% drop.

May Crude Futures Chart - Daily

Next week is energy week in the earnings cycle with more than twenty energy companies reporting. The exceptions are Exxon and Chevron, which don't report until the following week. Schlumberger (LB) reported earnings on Friday that rose 18% to $1.06 but that was less than the $1.12 analysts expected. The CEO blamed the loss on bad weather with quite a few winter storms restraining field activity. SLB gained $6 on the news plus an announcement they were going to buy back $8 billion in stock over the next three years.

Cisco does not report earnings until May 6th. With their growing overseas business model they should do well. On Friday Lazard initiated coverage on CSCO with a buy. CSCO has strong resistance at $26 but with the good tech results we could see CSCO ease up to that level ahead of earnings. They would be primed to make a break if they say anything positive. CEO John Chambers said last week overseas business was good and they were moving to sell even more into those markets.

Friday's strong gains were greatly appreciated but volume was still weak. Friday was an option expiration day, which should have generated a significant volume spike but it did not happen. Volume across all markets was only 7.3 billion shares compared to the 10.4 billion on expiration day in March. The internals were very good with advancing volume 6:1 over declining. New 52-week highs at 215 was the largest number since Dec-26th. That is bullish but after a week of strong gains you would expect new highs to be strong. We really need to see more volume before we can really claim the rally has legs.

The Dow gained 228 on Friday and 523 for the week. On Friday 56 of those Dow points or 25% of the Dow's gain came from the $6.69 gain in CAT. Other big gainers were MMM 2.25, AIG 2.06, BA 1.75 and UTX 1.72. Dow components KO, T, WMT and PG finished down for the day. The Dow spiked 100 points past strong resistance at 12750 and is right on the verge of a breakout. Friday's close was a two-month high. A move over 12900 would be very bullish.

Dow Chart - Daily

Dow Transport Chart - Daily

Even more amazing was the breakout for the Dow Transports (TRAN) to 5100. The 5000 level had been strong resistance dating back to last August. Transports breaking out with oil at $117 and diesel at $4.15 is a major change in sentiment. We are close to a Dow theory confirmation if the Dow can move over 12900 and the transports continue higher. This would be very bullish for the broader markets. If oil does correct after expiration next Tuesday it could give the transports another boost. Potential problems would be the UPS earnings on Wednesday and RCW on Thursday.

The Nasdaq broke above its resistance for the last two months but came to a dead stop at even stronger resistance at 2400. I view this as the biggest problem in the markets. There are no material Nasdaq earnings on Monday with BRCM and YHOO the leaders on Tuesday. Yahoo is not expected to be especially positive and BRCM will probably not beat by much. Apple and Amazon on Wednesday is the first real chance for another earnings pop. Those will be followed by Microsoft earnings on Thursday. I suspect we will see some profit taking on the Nasdaq on Monday and any weakness that takes us back below 2400 is only going to make that resistance level even stronger. The Russell confirmed this same resistance level with a move to 720 and a dead stop. It is possible we will see some funds picking up some bargains on the Russell but not if the Nasdaq goes into decline.

Nasdaq Chart - Daily

S&P-500 Chart - Daily

S&P-500 Chart - Expanded View - Daily

The S&P-500 rallied to exactly where it failed back on Feb-4th at 1395. This is a very strong resistance level and getting over 1395-1400 could be a major challenge. We have a nice series of higher highs and higher lows out of the March bottom but we still have not broken that key resistance.

Russell 2000 Chart - Daily

Everybody should realize that Friday's rally was just one more short squeeze out of the Tuesday lows. Wednesday saw a textbook short squeeze on an earnings surprise. Thursday saw no follow through and it is likely some of those shorts that were blown out on Wednesday loaded up again on Thursday. Others who thought Wednesday's spike was an anomaly probably just held their shorts. Friday was option expiration and the 200 point gap open on the Google news was a crushing blow to those still nursing their wounds from Wednesday and those waiting until the last minute to close April options. Funds do NOT rush into the market on Google earnings news. The only people rushing into the market on Friday morning were people covering their shorts. You can't convince me that any retail investor rushed to pay a $90 premium to Thursday's close just so they could invest in Google. It was a short squeeze NOT a new bull market.

Let me switch sides here a minute. Many bull markets began as short squeezes. Shorts load up on the way down and then get crushed when conditions change. Real investors don't buy squeezes because they are skeptical the rally will hold. However, they will buy subsequent dips if they think conditions have changed. Have conditions really changed? We can't be sure yet because everyone who beat the street did so on international earnings. We need to see some U.S. earnings to confirm things are not as bad as they seemed a week ago. This squeeze could be the start or the continuation of the March rebound but until we get confirmation with a move over S&P 1400, Nasdaq 2400 and Dow 12900 it is just a trade.

Another problem for the market is $117 oil. For that matter if we actually got a $10 correction next week it would still be a problem. Remember the table I showed on Tuesday of changes consumers were making to offset the price of gasoline? I am reprinting it here.

BigResearch Gasoline Impact Survey

There is nothing in that table that suggests we will avoid a recession. Consumers are being crushed by the price of gasoline and increase in food prices. Do you think the market is going to continue to rise on $117 oil or even $110 oil? Gasoline prices are expected to be $3.75 to $4.00 per gallon in May. See my commentary from Thursday night for the reason for that move and why May gasoline is so expensive. I would love to be wildly bullish on the markets but we need to see some confirmation first. For several weeks I have been in dip buy mode to SPX 1320. For next week I would continue to buy the dips unless we have a downturn in earnings. We should see buyers appear on any dip back to 1350. A move under 1350 would mean the negative sentiment is returning. Remember the "sell in May and go away" cycle that starts in about 2 weeks. That will be a decision point for the markets. Earnings will be over for all practical purposes and investors will have to really decide if they want to stand aside or chance riding gains through the normally rough summer markets. Since we had a significant sell off from Oct to mid March I am betting that sell in May and go away cycle will not occur this year but we need to remain cautious. A second reason that cycle may not occur is the recession trade. Historically long term investors like to buy the market at the bottom of a recession because the market is normally much higher six months later. Rallying out of a recession is a time tested trading strategy. All of those points suggest the next couple weeks will be crucial to market direction. I would continue to buy dips to 1350 and hope for a breakout over 1400 but under 1350 I would be negative.

Jim Brown
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
ATK None None
BGC    
ESRX    
IBM    

New Calls

Alliant Tech - ATK - close: 106.78 chg: 0.83 stop: 104.85

Company Description:
ATK is a premiere aerospace and defense company with more than 17,000 employees in 21 states and over $4.1 billion in revenue. (source: company press release or website)

Why We Like It:
The recent market strength has allowed the DFI defense sector index breakout past technical resistance at its 200-dma and 100-dma. The group looks like it may have put in a bottom over the last three months. In a similar fashion ATK may have built a bottom of sorts over the last few months. Shares are now marching higher and look poised to rally past their own 100-dma and 200-dma soon. If you look at the intraday chart Friday's trading looks like a new entry point to buy calls. However, we do expect a dip in the major averages this week so we'd rather buy a dip in ATK. We are suggesting readers buy calls on a pull back into the $106.00-105.50 zone. We'll use a tight stop at $104.85 to reduce our risk. If triggered we have two targets. Our short-term, immediate target is $109.90. Our second, more aggressive target is the $114.00-115.00 zone. Keep in mind that Lockheed Martin (LMT) another defense company reports earnings on April 22nd and their results could strongly influence ATK's share price. FYI: A move over $110 would reverse the Point & Figure chart into a new buy signal. We do not want to hold over the May 8th earnings report.

Suggested Options:
Our suggested trigger is $106.00. We are suggesting the May calls. FYI: It is up to the individual trader to decide which month and which strike price best suits your trading style and risk on all of our suggested plays.

BUY CALL MAY 105 ATK-EA open interest=203 current ask $4.50
BUY CALL MAY 110 ATK-EB open interest=576 current ask $1.85

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: 0.00
Earnings Date 05/08/08 (confirmed)
Average Daily Volume = 246 thousand

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General Cable - BGC - close: 71.37 chg: 4.16 stop: 64.99

Company Description:
General Cable, headquartered in Highland Heights, Kentucky, is a global leader in the development, design, manufacture, marketing and distribution of copper, aluminum and fiber optic wire and cable products for the energy, industrial, and communications markets. (source: company press release or website)

Why We Like It:
Shares of BGC soared more than 6% on Friday following a bullish breakout over resistance on Wednesday and Thursday. Volume came in strong on the rally, which is a good sign for the bulls. We want to buy a dip. We're suggesting readers buy calls on a pull back into the $68.50-67.50 zone. If triggered our target is the $74.00-75.00 range. We do not want to hold over the April 29th earnings report so that's not a lot of time. The Point & Figure chart is bullish with an $83 target.

Suggested Options:
Our suggested trigger to buy calls is $68.50. We're suggesting the May calls but plan to exit ahead of the April 29th earnings report. Option prices are probably a little inflated on the big rally so a dip should see them deflate quickly.

BUY CALL MAY 65.00 BGC-EM open interest=1669 current ask $8.70
BUY CALL MAY 70.00 BGC-EN open interest=1391 current ask $5.40
BUY CALL MAY 75.00 BGC-EO open interest= 972 current ask $3.00

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: 0.00
Earnings Date 04/29/08 (confirmed)
Average Daily Volume = 841 thousand

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Express Scripts - ESRX - close: 68.76 chg: 1.73 stop: 64.95

Company Description:
Express Scripts, Inc. is one of the largest pharmacy benefit management (PBM) companies in North America, providing PBM services to 55 million patients through facilities in 13 states and Canada. Express Scripts serves thousands of client groups, including managed-care organizations, insurance carriers, third-party administrators, employers and union-sponsored benefit plans. (source: company press release or website)

Why We Like It:
Friday's rally over $68.00 looks like a new bullish entry point to buy calls in ESRX. However, we're expecting a dip in the major market averages so we'd rather buy a dip in ESRX too. We're suggesting readers buy calls when ESRX falls into the $67.50-66.50 range. The company is due to report earnings on April 29th and we don't want to hold over the announcement so that's not a lot of time. Our target is the $72.50 mark. The P&F chart is bullish with an $81 target.

Suggested Options:
Our suggested entry point is a dip into the $67.50-66.50 range. We're suggesting the May calls but plan to exit ahead of the April earnings.

BUY CALL MAY 65.00 XTQ-EM open interest=6360 current ask $5.40
BUY CALL MAY 70.00 XTQ-EN open interest=2367 current ask $2.45

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: 0.00
Earnings Date 04/29/08 (confirmed)
Average Daily Volume = 3.1 million

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Intl.Bus.Mach. - IBM - cls: 124.40 chg: 1.32 stop: 118.49

Company Description:
International Business Machines Corporation is one of the largest technology and IT services company in the world with revenues approaching $100 billion a year.

Why We Like It:
IBM helped kick off the strength in tech stocks with a better than expected earnings report on April 16th. Shares broke through resistance at the $120 level and are currently trading near multi-year highs. The high-volume breakout is a buy signal but we don't want to chase it. Instead we're suggesting readers buy a dip in the $120.75-120.00 zone. If triggered we'll have two targets. Our first target is the $124.90-125.00 range. Our second target is the $128.00-130.00 zone.

Suggested Options:
We are suggesting the May calls or July calls. Our trigger to buy calls is at $120.75.

BUY CALL MAY 120 IBM-ED open interest=8109 current ask $6.00
BUY CALL MAY 125 IBM-EE open interest=7139 current ask $2.80

BUY CALL JUL 120 IBM-GD open interest=6467 current ask $8.60
BUY CALL JUL 125 IBM-GE open interest=6130 current ask $5.60

Picked on April xx at $ xx.xx <-- see TRIGGER
Change since picked: 0.00
Earnings Date 04/16/08 (confirmed)
Average Daily Volume = 8.8 million
 

New Puts

None today.
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Ashland Inc. - ASH - close: 53.64 change: 0.77 stop: 49.85

ASH continues to claw its way higher and the stock actually broke out and closed over technical resistance at its 200-dma on Friday. At this time we only have six trading days left before ASH reports earnings on April 29th. We do not want to hold over the report. Due to our declining time we are adjusting the target to $56.00-58.00. More conservative traders might want to start taking profits when ASH hits $55.00. If the market dips next week watch for ASH to find short-term support near its 10-dma or the $52.00 level.

Suggested Options:
We are not suggesting new positions at this time.

Picked on April 06 at $ 51.25
Change since picked: 2.39
Earnings Date 04/29/08 (confirmed)
Average Daily Volume = 774 thousand

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CH Robinson Worldwide- CHRW - cls: 60.21 chg: 1.65 stop: 57.74*new*

The fact that transports continue to rally in the face of record high oil prices is pretty impressive. We don't have much time left. CHRW is due to report earnings on April 22nd after the closing bell. We will plan to exit on Tuesday at the close to avoid holding over earnings if CHRW doesn't hit our target first. We are raising our stop loss to $57.74. Our target is the $62.00-62.50 zone.

Suggested Options:
We are not suggesting new positions at this time.

Picked on April 15 at $ 58.25
Change since picked: 1.96
Earnings Date 04/22/08 (confirmed)
Average Daily Volume = 1.9 million

---

CONSOL Energy - CNX - cls: 86.25 chg: 3.19 stop: 79.95 *new*

Friday was another strong day for coal stocks. CNX rallied 3.8% to another new all-time high. Traders bought the dip near $85.00 on Friday afternoon, which is bullish for Monday. Monday could see some volatility. Before the opening bell rival coal producer ACI is going to report earnings. Wall Street expects ACI to deliver a profit of $0.46 a share. If ACI misses or offers any sort of negative comments it could spark a very sharp sell-off in this group. On the other hand if they offer positive comments then there is a pretty good chance that CNX will hit our target at $88.00 on Monday. We are raising our stop loss in CNX to $79.95. We still don't see a confirmed earnings date for CNX but it's coming up soon (estimates are for CNX to report between April 24 and May 5th).

Suggested Options:
We are not suggesting new positions at this time.

Picked on April 15 at $ 80.55
Change since picked: 5.70
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 3.7 million

---

DryShips Inc. - DRYS - close: 75.52 chg: 1.83 stop: 69.75 *new*

DRYS delivered another gain. The stock rallied to an intraday high of $77.67 and briefly traded over its 200-dma. The stock is nearing our target in the $79.00-80.00 zone. We are raising our stop loss to $69.75 but more conservative traders might want to use a tighter stop. We are not suggesting new positions at this time. If the market sees any profit taking look for DRYS to pull back toward $73.00-72.00.

Suggested Options:
We are not suggesting new positions at this time.

Picked on April 15 at $ 70.32
Change since picked: 5.20
Earnings Date 05/29/08 (unconfirmed)
Average Daily Volume = 4.2 million

---

Fluor - FLR - close: 160.10 chg: 3.70 stop: 149.85 *new*

FLR hammered out a 2.3% gain on Friday but shares are still struggling with resistance near $160. We remain bullish on FLR but we're not suggesting new positions at this time. A dip into the $156-154 zone might qualify as a new entry point to buy calls. We are raising our stop loss to $149.85. The stock has already hit our target at the $159.00 level. 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.

Suggested Options:
We are not suggesting new positions at this time.

Picked on April 01 at $146.50 *triggered /1st target hit $159
Change since picked: 13.60
Earnings Date 05/12/08 (confirmed)
Average Daily Volume = 2.3 million

---

CurrencyShares Euro - FXE - cls: 159.11 chg: -0.75 stop: 156.90*new*

The U.S. dollar actually managed to put together back to back gains. Friday's strength in the dollar pulled the FXE lower. The FXE actually gapped open at $157.88 but managed a rebound at $157.50. We are adjusting our stop loss higher to $156.90 but more conservative traders may want to consider a stop closer to $157.50. We want to use a tight stop. This is a momentum play and some of the momentum indicators are starting to falter. A rebound back over $159 would look like a new entry point to buy calls. Our target is the $164.00-165.00 range. Our time frame is three to five weeks.

Suggested Options:
If the FXE provides a new entry point we'd use the May calls.

Picked on April 13 at $158.57
Change since picked: 0.54
Earnings Date 00/00/00
Average Daily Volume = 307 thousand

---

Hovnanian - HOV - close: 11.81 chg: -0.04 stop: 10.45

HOV spiked to $12.39 near its exponential 200-dma before rolling over on Friday. Short-term momentum indicators are suggesting a dip soon. Look for a bounce near $11.00 as a new entry point to buy calls. Our target is the $13.50-14.00 zone. Our second, more aggressive target is the $14.75-15.00 zone.

Suggested Options:
If HOV provides a new entry point we would suggest the May or August calls but keep in mind we do not want to hold over the May earnings report.

Picked on April 16 at $ 11.86
Change since picked: - 0.05
Earnings Date 05/29/08 (unconfirmed)
Average Daily Volume = 4.1 million

---

Joy Global - JOYG - close: 76.71 chg: 3.71 stop: 69.95*new*

The widespread market rally helped push JOYG to new all-time highs. The stock posted a 2.3% gain on above average volume. More conservative traders may want to pull a little money off the table now. We're adjusting our stop loss to $69.95. We are not suggesting new calls at current levels. Our target is the $79.50-80.00 range. The P&F chart is already bullish with an $88 target.

Suggested Options:
We're not suggesting new positions at this time.

Picked on April 16 at $ 72.55 *triggered
Change since picked: 4.16
Earnings Date 05/29/08 (unconfirmed)
Average Daily Volume = 2.3 million

---

Lincoln Elec. - LECO - cls: 73.13 chg: 1.20 stop: 70.90 *new*

We are announcing a change of plans on LECO. The company is due to report earnings on April 23rd. We don't want to hold over the report. Odds are good that the U.S. stock market will see some profit taking soon and if it does LECO should follow it lower. We are planning to exit on Monday (April 21st) at the closing bell to try and cut our losses short. Our new stop loss is $70.90.

Suggested Options:
We are not suggesting new positions.

Picked on April 07 at $ 73.73 *triggered/gap higher
Change since picked: - 0.60
Earnings Date 04/23/08 (confirmed)
Average Daily Volume = 233 thousand

---

Ultra Petrol. - UPL - close: 85.01 chg: 1.03 stop: 79.45

Oil and energy stocks continue to march higher with crude hitting new records daily. Shares of UPL look poised to rally into next week. Something to keep in mind is the crude oil futures expiration after this Tuesday. We might want to consider an early exit on Tuesday at the closing bell just to avoid any profit taking if crude futures spike lower on Wednesday morning. We are adjusting our target to the $88.50-90.00 zone. The P&F chart has broken through resistance and points to a $95 target.

Suggested Options:
We are not suggesting new positions at this time.

Picked on April 10 at $ 81.50
Change since picked: 3.52
Earnings Date 05/01/08 (unconfirmed)
Average Daily Volume = 1.4 million

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United States Oil - USO - close: 93.79 chg: 1.42 stop: 89.95*new*

Strategy alert! Did you read the market wrap for this weekend? Jim has discussed how crude oil futures are due to expire after Tuesday and last month there was a big sell-off after expiration. Now crude oil could very easily see a continuation of its rally, essentially a short squeeze at this point, up through the end of Tuesday's session. Don't be surprised to see crude oil hit $120 a barrel by Tuesday but we would expect some profit taking by week's end. Here is our strategy change with the USO, which has already hit our initial target at $92.50. We are suggesting that everyone exit on Monday. If you want to exit Monday morning or Monday afternoon that's up to you. We do think that oil will be higher on Monday so the newsletter will close this play at Monday's closing bell. More aggressive and nimble traders might want to hold this position through Tuesday and just exit at Tuesday's closing bell. We are also listing an alternative exit strategy to just exiting at Monday's close. Our new target is the $94.85 mark. In summary we are closing this play on Monday afternoon or we could get taken out earlier on Monday if the USO hits $94.85. Our new stop loss is $89.95.

Suggested Options:
We are not suggesting new positions.

Picked on April 07 at $ 86.49 *gap higher /1st target hit
Change since picked: 7.30
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 5.4 million

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ExxonMobil - XOM - cls: 94.00 chg: 0.62 stop: 89.99 *new*

Crude oil is hitting new records and XOM continues to rally on oil's coattails. Shares of XOM hit an intraday high of $94.45 on Friday. Our target is the $94.85-95.00 range, which we think XOM will hit on Monday. We're adjusting the stop loss to $89.99. We would not hold over the May 1st earnings report.

Suggested Options:
We are not suggesting new positions at this time.

Picked on April 15 at $ 90.80
Change since picked: 3.20
Earnings Date 05/01/08 (confirmed)
Average Daily Volume = 26.2 million
 

Put Updates

Ambac Fincl. - ABK - cls: 5.98 change: 0.22 stop: n/a

It was a big week for the financials with investors buying bad news hoping the worst is behind them. Shares of ABK rallied about 20% from its lows. Considering the strength in financials this past week we would seriously consider closing this play now and just cutting your losses early. However, ABK is due to report earnings on Wednesday morning (April 23rd). The company's results and their guidance could be a lot worse than expected so we're going to stick it out for at least three more days to hold over earnings. Readers should keep in mind that ABK will be desperate to put a positive spin on its results and guidance to halt the bleeding in its stock price. We are not suggesting new bearish positions in ABK. This remains a very speculative play. Previously we had been suggesting the May out-of-the money puts ($5.00 and $2.50 strikes).

Suggested Options:
We are not suggesting new positions in ABK.

Picked on January 27 at $ 11.54
Change since picked: - 5.56
Earnings Date 04/23/08 (confirmed)
Average Daily Volume = 10.9 million

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Capital One - COF - close: 47.21 chg: -1.53 stop: 51.05

We previously reported on COF's earnings, which came out on Thursday. The results were actually 2 cents better than expected. Yet the early morning Friday rally hit $51.00 and reversed. This looks like another entry point for put positions. Investors remain worried about the status of the consumer and weakness in consumer credit. Our target is the $41.50-40.00 zone. The Point & Figure chart is bearish with a $38 target.

Suggested Options:
We are suggesting the May puts.

Picked on April 13 at $ 48.30
Change since picked: - 1.09
Earnings Date 04/17/08 (confirmed)
Average Daily Volume = 9.0 million

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Fannie Mae - FNM - close: 28.55 chg: 0.30 stop: 30.26

A positive reaction to Citigroup's (C) earnings news fueled another day of strength in the financials. Shares of FNM rallied to $29.99 and reversed. Look for a new decline under $27.50 before considering new put positions. FNM has already exceeded our target at the $25.25 mark. Our second target is the $21.00-20.00 zone.

Suggested Options:
If FNM provides a new entry point we would use the May or June puts.

Picked on April 08 at $ 29.00 /1st target exceeded 25.25
Change since picked: - 0.45
Earnings Date 05/27/08 (unconfirmed)
Average Daily Volume = 26.5 million

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Humana Inc - HUM - cls: 43.50 chg: 1.23 stop: 45.20

Option expiration short covering on Friday may have accounted for the 2.9% bounce in HUM. The rally stalled under $44.00 but shares did breakout over its 10-dma. We are not suggesting new positions at this time. If the stock closes over $44.00 we'll want to consider an early exit. 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).

Suggested Options:
We are not suggesting new positions at this time.

Picked on March 30 at $ 45.20
Change since picked: - 1.70
Earnings Date 04/28/08 (confirmed)
Average Daily Volume = 4.4 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.)

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Goldman Sachs - GS - cls: 179.93 chg: 7.83 stop: n/a

The strength in financials was very apparent in the broker-dealers. The XBD broker-dealer index rose 2.8%. Shares of GS out performed its peers with a 4.5% gain. The stock is back to challenging resistance near $180 again. We are not suggesting new strangles at this time. 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.

Suggested Options:
We are not suggesting new positions at this time.

Picked on April 06 at $175.40
Change since picked: 4.53
Earnings Date 06/12/08 (unconfirmed)
Average Daily Volume = 14.5 million

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Merrill Lynch - MER - cls: 47.35 chg: 0.64 stop: n/a

The rally in financials lifted MER past technical resistance at its 50-dma. The long-term trend in MER is still bearish but investors are now faced with the possibility of a true bullish breakout soon. Our extremely speculative strangle using April options is now dead but the May strangle still looks good. We're not suggesting new positions at this time. The options we listed in the May strangle were the May $50 calls (MER-EJ) and the May $32.50 puts (MER-QA). Our estimated cost was $1.76 and we want to sell if either option hits $3.00 or more.

Suggested Options:
We are not suggesting new positions in MER at this time.

Picked on April 15 at $ 43.34
Change since picked: 4.01
Earnings Date 04/17/08 (confirmed)
Average Daily Volume = 30.6 million
 

Dropped Calls

Baker Hughes - BHI - close: 80.80 chg: 3.42 stop: 71.45

Target exceeded. Oil service stocks soared again. Rival Schlumberger (SLB) reported earnings on Friday that were worse than expected but investors bought the news anyway with crude hitting new highs near $117 a barrel. This positive attitude lifted BHI to a 4.4% gain and shares rallied past resistance at the 200-dma and the $80.00 mark. The intraday high was $81.09. Our target was the $78.50-80.00 zone.

Picked on April 10 at $ 72.76 *target exceeded (81.09high)
Change since picked: 8.04
Earnings Date 04/22/08 (confirmed)
Average Daily Volume = 4.7 million

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Essex Prop. - ESS - close: 117.11 chg: -1.31 stop: 109.45

Target achieved. Your quote feed probably says that ESS opened at $118.80 but if you look at an intraday chart is looks like ESS actually opened at $119.80. Our target was the $119.50-120.00 zone. Shares reversed under round-number resistance at $120 and looks like they could dip toward $115 again.

Picked on April 15 at $112.07 /target hit $119.50
Change since picked: 5.04
Earnings Date 04/30/08 (confirmed)
Average Daily Volume = 411 thousand
 

Dropped Puts

iShares Financial - IYF - close: 86.44 chg: 1.43 stop: 85.55

Trading in the financials this week certainly didn't play out the way we expected. The group bounced on Tuesday and didn't look back. The IYF gapped open higher at $87.62 on Friday morning as investors reacted to the Citigroup earnings news. Our suggested stop loss on the IYF was $85.55. Unfortunately, we would have been stopped out at the opening bell.

Picked on April 13 at $ 82.51 /gap open exit 87.62
Change since picked: 3.93
Earnings Date 00/00/00
Average Daily Volume = 3.6 million

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iShares Fincl.Servcs. - IYG - cls: 91.69 chg: 1.79 stop: 92.26

We had the same problem with the IYG. A positive reaction to Citigroup's earnings had the IYG gapping higher and opening at $93.02. Our suggested stop was $92.26 so we would have been stopped out at the open.

Picked on April 13 at $ 87.26 /gap open exit 93.02
Change since picked: 4.43
Earnings Date 00/00/00
Average Daily Volume = 344 thousand

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Juniper Networks - JNPR - cls: 24.48 chg: 1.12 stop: 24.55

The GOOG earnings news was too much for the bears. Tech stocks soared at the open and JNPR was no exception. JNPR gapped open at $24.06 and rallied to $24.67 intraday. Our suggested stop loss was $24.55. The longer-term trend in JNPR is still bearish but our play is closed.

Picked on April 09 at $ 22.95 triggered/stopped 24.55
Change since picked: 1.53
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume = 11.5 million

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MBIA Inc. - MBI - close: 13.04 change: 0.33 stop: n/a

It's time to cut our losses in MBI. We were expecting bigger losses in the financial sector this week. There are a number of analysts that believe financials will still see another wave of write downs. However, current investor sentiment is to buy the dip and the bad news with hopes this sector has finally hit bottom. Shares of MBI have essentially been bouncing around sideways and we suspect they will continue to bounce sideways until its earnings report in mid May. We don't want to wait around as option premiums decay. Several days ago we suggested that if financial stocks did not sell-off this past week we would cut MBI as a bearish play.

Picked on January 27 at $ 14.20
Change since picked: - 1.16
Earnings Date 05/13/08 (confirmed)
Average Daily Volume = 15.2 million
 

Dropped Strangles

Google Inc. - GOOG - cls: 539.41 chg: 89.87 stop: n/a

Target exceeded. If you haven't heard yet GOOG reported earnings that were better than expected. The company said business continues to look good. Short covering had GOOG gapping open higher at $535.21 and soaring to $547.70 intraday. The call side of our strangle was the May $500 (GOP-EO). These May $500 calls gapped open at $41.50 and traded to an intraday high of $54.00 before settling at $46.50. Our estimated cost for the entire strangle was $14.10 and we had adjusted our exit target to sell to $34.50 but this morning's gap open at $41.50 would have closed the play for us.

Picked on April 16 at $455.03
Change since picked: 84.38
Earnings Date 04/17/08 (confirmed)
Average Daily Volume = 2.9 million
 


Trader's Corner

Sure, the Markets Always Come Back . . . Some Decade or Other

A few weeks ago, Karen Datko of MSN's SMART SPENDING picked up an entry from the blog. The blog was written by a woman in her late 50's, a woman striving to save for her retirement. The entry lamented the impact that this year's decline had on several funds the woman held, all stock index funds. Her investments had dropped 17 percent over the last six months despite her diligent deposits each month.

She was operating under the impression that she had begun saving so late that she needed the greater returns sometimes offered by stocks relative to bonds. She offered the rationale that she didn't believe bonds to be appropriate for her age or her particular circumstances.

Some respondents questioned her rationale. They suggested that she diversify her portfolio and consider approaching a professional money manager for advice. However, a hefty proportion of respondents offered comments such as those by Fredie. Fredie, while also suggesting she see a money manager, added, "I have looked at the market since the 87 crash and have been able to remain sane even through the early 90's . . . don't sweat the market but play long and keep playing . . . look at the Dow over the last 10 years and you would see that the Dot Com bust appear [sic] as a blip."

Perhaps Fredie and some of the other respondents should have looked a little further back than 1987 before offering too many comments about what markets do.

Courtesy of Stockcharts.com, here's a portion of the S&P 500 chart from the mid 60's to the mid 80's.

SPX Chart:

Yes, the SPX was generally climbing during this two-decade period, but I want you to note something different. Note the horizontal line marked at 103.71? For perspective, follow that line from the 1969 high over to the year 1980. Although the SPX scrambled above that line for up to a couple of years at a time for a while, note that consistent values above 103.71 were not maintained from 1969's high until after 1980.

Imagine the case of an investor who jumped into S&P 500 stocks with both feet when the S&P 500 was at about 103.71 during some period in 1969. If that investor had taken the "it always comes back" route and held on, that investor would certainly have finally been rewarded with consistent prices above 103.71: in 1979-1980.

Is this a wise choice for a woman in her late 50's, to blindly hold onto a stock-only and undiversified (away from stocks) portfolio through all those ups and downs? At some periods, a woman who held on during the decline in the late 1960's could have taken money out of the market and benefited or at least broken even. However, imagine that she had reached a time when she needed to cash out some of those funds when the markets reached 103.71 again in 1978. Those who remember the stagflation times know that those 1969 dollars weren't going to buy as much if she happened to need to take her money out then.

In addition, that scenario presumes that she lived through and kept her money in the funds through the heart-stopping drop in 1974. The problem with the buy-and-hold scenario is that many investors who espouse a buy-and-hold strategy eventually panic: they hit a point of maximum pain, such as many must have hit in 1974, and cave. Or they have no choice as the money is needed.

Perhaps you think this period was unique. Not so much. Some of have probably seen the portion of Dow's chart depicted below, also courtesy of Stockcharts.com.

Chart of the Dow:

Anyone jumping in feet-first to Dow-related investments in 1928 and holding on through the pre-crash period and then into the 1932-1933 period would have had to have waited until 1951-1952 until their investments came back with any lasting power. Obviously, some wise investors could have cherry picked Dow-related stocks, buying and selling, and making bigger profits, but the point is not negated.

Would a woman in her late 50's in 1928 have been able to hang on until 1951-1952, or, might she have faced financial needs that forced her to sell some of those stocks at a loss during her retirement years? Would a man in his 30's in 1928 have been able to wait that long before pulling money out to help pay for a home or a child's college expenses?

One more chart. Remember Fredie's comment about the last recession having been a "blip" in the markets? In early 2000, when the stock market began rolling over, CNBC reporters took to the street, asking people walking down Wall Street if they intended to sell their stocks. Almost without exception, those investors being interviewed answered something the equivalent of "No, I'm a buy-and-hold person," or "I'm in the market for the long run." Many of my trading friends expressed similar opinions, and many of them were heavily invested in the big momentum stocks of the day, such as JDSU.

Monthly Chart of JDSU:

Was the decline a mere blip? I don't think so.

Will traders who bought JDSU and similar stocks and held ever get their investments back? Perhaps, but perhaps those of you who lived through the 2000 decline don't realize that it's already been the better part of a decade since JDSU began its long slide lower.

Am I saying that blogger will see further devaluation of her stock-only retirement fund or that she'll have to wait one or more decades before it climbs back to its late 2007 level? I don't know what will happen with her fund, but I wish that people, even in the financial community, didn't keep reassuring others that "they always come back."

Mostly stock prices do come back, but does your time window allow you to wait, or will you be forced to sell after even steeper declines, if they come? Back last fall, I read a report from a market advisor who told investors they should cash out then if they didn't think they'd have the nerve to endure a 30-percent drop. A friend who works for a fund manager told me of panicked phone calls her office was receiving when markets were hitting recent lows, calls from people who pulled their accounts at the very bottom.

I'm not saying that they shouldn't have pulled their accounts, but I am advising against a buy-and-hold strategy in an undiversified account if you don't have the time frame, the financial means or the stomach for such a strategy. I went to cash myself in most of our accounts, but I did it last fall, near the market highs, not at the recent lows.

I'm not trying to scare anyone, only urging people not to believe the hype that's bandied about so readily. I want people to question and not listen blithely to dogma, do some investigating of their own and make wise decisions about diversification and recession-era investing. I'm trying to do the same thing. Don't be scared, just be prepared, and seek the help of a professional if you need it.
 

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

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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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