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Daily Newsletter, Monday, 05/05/2008

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Table of Contents

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

Market Wrap

Yahoo! Tumbles, While Crude Oil Rumbles

Investors locked in some gains after last week's FOMC decision to cut its fed funds target 25 basis points to 2.00%, while shares of Yahoo! Inc. (NASDAQ:YHOO) $24.37 -14.99% tumbling more than $4.00/share after Microsoft (NASDAQ:MSFT) $29.06 -0.61% withdrew its $47.5 billion offer.

According to news reports, Yahoo! shareholders said they would support a move by activist shareholders to replace the company's board of directors after playing hardball with the world's largest software company.

While Yahoo! shareholders sound "hot under the collar," energy prices spike higher for a second-straight session as supply concerns and unseasonably cooler weather forecast helped set the bullish tone.

June Nat Gas futures (ng08m) jumped $0.4010, or 3.72% to settle at $11.178, which is just shy of last Monday's June contract record settlement of $11.329.

June Crude Oil (cl08m) surged to a record intra-day high of $120.36 before settling up $3.65, or 3.14% at $119.97 on a trifecta of technical buying, renewed supply concerns out of Nigeria, Iran and Iraq as well as tight US stockpiles into the summer driving season.

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

Despite a 2-day surge in crude oil prices, which tend to come on euro strength against the dollar, the euro rose a more tepid 0.47% to tick 1.5496 at today's 05:00 PM EDT close.

Meanwhile, equity weakness mirrored that of dollar weakness vs. the yen, with the dollar slipping 0.51% to 104.85.

At 10:00 AM EDT, stocks tried to recover from their opening tick lows after the Institute for Supply Management (ISM) said its services index rose to an expansionary 52.0 reading in April versus April's contracting measure of 49.6.

Readings above 50 in the ISM indicate growth. Economists expected a 49.1 reading for April after three consecutive months of declines.

Wells Fargo's head of foreign exchange strategy Nick Bennenbroek said "the report is consistent with the trend we have been seeing that the U.S. economy is not as disappointing as many initially thought."

In the above U.S. Market Watch, I've highlighted in blue some of the indices we might view as more "service" related, where the services sector represents roughly 80% of U.S. economic activity (banks, airlines, hotels, restaurants and retailing).

I think we also saw some further sign that market participants see a Fed that may start to "stand pat" on further rate cuts.

Today's results from the Treasury's 13-week auction showed less-than-bullish demand for this very short-term maturity and its yield ($IRX.X) backed up 8.5 basis points to 1.550%. Just days after the Bear Stearns (NYSE:BSC) $10.70 -1.83% bailout by JP Morgan (NYSE:JPM) $48.00 -1.35%, the 13-week yield plunged to 0.20% on Thursday 03/20/08.

Instead, buyers showed a greater appetite for the 5-year Treasury Yield ($FVX.X) as it's yield fell 2.4 basis points to 3.135%.

5-year Yield ($FVX.X) Chart - Daily Intervals

Today is a great day to quickly review the 5-year Yield ($FVX.X) chart and review what it may be "saying."

As noted in prior wraps and teachings over the years, I've suggested that traders and investors try to keep some type of "consistent range" on various indices.

For the 5-year Treasury Yield ($FVX.X), a SHORTER-TERM Treasury yield, I'm still keeping a 10/15/07 relative high to 01/23/08 relative low RANGE with a conventional retracement bracket.

During times of "distress," it is not unusual to see market participants plough cash into shorter-dated Treasuries, perhaps like they did just days before, and the day of the "Bear Stearns failure."

But despite the "sky is falling" mantra, and a Fed targeting fed funds at 2.00%, sellers in this bond now have its yield having risen roughly 93 basis points from it 3/17/08 closing yield of 2.202%.

Current levels are certainly going to be finding both some TECHNICAL yield buying at the conventional 38.2% and 150-day SMA (32.15; 3.215%).

Associating YIELD and PRICES is difficult, so let's take a look at the iShares Lehman 3-7 Year (NYSE:IEI) $107.15 +0.15%, which would be a security that would approximate the 5-year's price action.

iShares Lehman 3-7 Year (IEI) - Daily Intervals

Just as the 5-year YIELD is at a near-term YIELD resistance, the IEF is at its near-term PRICE support.

Now, we must think not only about what market participants might that are LONG the 5-year, or IEI from $111, or $108.36, but what about those that are/were SHORT this bond when the "sky was falling?"

Think about this. If short at $110.02, that trade would be PROFITABLE by 2.6% and I (Jeff Bailey) would have to be looking for some near-term SHORT COVERING at these PRICE levels.

Why you ask? Because at that time, this security would have been YIELDING roughly 2.5%/year. In such a short amount of time passing, a SHORT can lock in a very HANDSOME bond-related gain, without owing much dividend (per IEF), or interest (per a 5-year T-bond).

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Furthering my thoughts that we could see some TECHNICAL buying in the 5-year Yield, which could have some cash taking PROFITS from equity is this.

I (Jeff Bailey) do NOT see the FOMC raising its target on the fed funds rate anytime soon.

Today, shares of mortgage lender Countrywide Financial (NYSE:CFC) $5.38 -10.03% were among the most active on broker comments that S&P 100 heavyweight Bank of America (NYSE:BAC) $38.97 -2.06% may lower its buyout offer to $2.00/share due to further write downs should it complete its buyout of CFC.

The various parts of the BOND market are SO IMPORTANT to monitor.

Then tie with a MAJOR index like the S&P 500 (SPX.X), or its tracker and the S&P Depository Receipts (SPY).

SPY and DIA Montage - Daily Intervals

At tonight's close, I'm seeing a MAJOR correlation with the shorter-dated 5-year Treasury and the S&P Depository Receipts (SPY) $140.83 -0.48%. Not only at TREND, but the 150-day SMA.

IWM and QQQQ - Daily Intervals

While the VERY BROAD iShares Russell 2000 (IWM) has worked itself above trend, here we would want to note a TIE as it relates to the Oct-January RANGE.

Encouraging this May expiration to see the IWM's "Max Pain" theory value actually RISE to $71.00 from $70.00, suggesting option traders starting to get more bullish.
 


New Plays

New Option Plays

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

New Calls

None today.
 

New Puts

None today.
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Aracruz Celulose - ARA - cls: 81.51 chg: +2.08 stop: 75.49

ARA is bouncing nicely as the Brazilian market continues to set new highs. We remain positive here but more conservative traders may want to tighten their stops (maybe somewhere in the $77.50 zone). We have two targets. Our first target is the $84.50-85.00 range. Our second target is the $88.50-90.00 zone. As expected the rally over $80.00 did produce a new P&F chart buy signal, which currently points to a $94 target.

Picked on April 28 at $ 80.25 *triggered
Change since picked: + 2.48
Earnings Date 04/07/08 (confirmed)
Average Daily Volume = 481 thousand

---

CF Ind. - CF - close: 134.75 chg: -0.01 stop: 126.45

The fertilizer stocks were showing strength early in the day but the rally faded into the afternoon. Shares of CF seemed to reverse under its 10-dma and the $140 level. We remain bullish but readers might want to wait and watch for a dip or bounce near $130 before considering new positions. This morning's move over $137.50 was our suggested entry point to buy calls so the play is open. More conservative traders could wait for a rally over $140 as their entry point. We are using a wide (aggressive, high-risk) stop loss under Thursday's low. You may want to use a much tighter stop loss but remember this can be a very volatile group. Our target is the $155.00-160.00 range. FYI: CF is due to present at two different investor/analyst conferences this week on May 6th and May 7th.

Picked on May 05 at $137.50 *triggered
Change since picked: - 2.75
Earnings Date 04/27/08 (unconfirmed)
Average Daily Volume = 3.1 million

---

Cytec Ind. - CYT - close: 59.08 change: +0.29 stop: 57.95

We have been cautious on CYT the last few days. Today's session was encouraging. While the gains weren't very impressive the stock was inching higher. If you look at an intraday chart (like a 10-minute chart) you can see how CYT just barely edged past its short-term trendline of lower highs. We would still wait for a rally over $60.00 or $61.00 before considering new bullish positions. We have to label this a more aggressive play because the spreads on the options are pretty wide. There isn't much we as traders can do about that except try to minimize its impact with good entry and exit strategy. We're listing two targets. Our first target is the $64.75-65.00 range. Our second target is the $68.00-70.00 zone.

Picked on April 27 at $ 60.64
Change since picked: - 1.27
Earnings Date 04/17/08 (confirmed)
Average Daily Volume = 556 thousand

---

Gilead Sciences - GILD - close: 53.67 chg: +0.04 stop: 49.99

GILD continued to inch higher but failed to make much headway due to the lackluster market performance. We don't see any changes from our weekend comments. We're suggesting readers buy calls now although a dip in the $52.50-52.00 zone would work well too. Our target is the $57.50-60.00 range. Don't forget that any time we play a biotech company it should be considered an aggressive, higher-risk trade. There is always risk of some FDA decision or clinical trial result surprising the market and sending the stock gapping one direction or the other.

Picked on May 04 at $ 53.63
Change since picked: + 0.04
Earnings Date 04/16/08 (confirmed)
Average Daily Volume = 8.9 million

---

HSBC - HBC - close: 87.15 change: -0.52 stop: 84.90

HBC delivered some solid gains last week and shares hit some profit taking today. We would look for a dip in the $86.50-86.00 zone as a new bullish entry point. We have two targets. Our short-term target is the $89.75-90.00 range. Our more aggressive, longer-term target is the $94.00-95.00 zone. The P&F chart is bullish with a $113 target.

Picked on April 28 at $ 86.19 *triggered/gap higher
Change since picked: + 0.96
Earnings Date 03/08/08 (confirmed)
Average Daily Volume = 1.7 million

---

Home Depot - HD - close: 29.37 chg: -0.75 stop: 28.99

Shares of HD followed the retailers lower instead of the homebuilders higher. The RLX retail index lost 2.3% presumably on negative comments from Sears (SHLD) and a new record high in oil prices. We would seriously consider buying a dip or bounce near $29.00 with a very tight stop but for the moment our "official" entry point to buy calls is at $30.55. If triggered our target is the $34.00-35.00 range. We do not want to hold over the May 20th earnings report.

Picked on May xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 05/20/08 (confirmed)
Average Daily Volume = 17.0 million

---

Hovnanian - HOV - close: 11.85 chg: +0.18 stop: 10.74

HOV rallied higher this morning after announcing its preliminary second quarter results. The company doesn't truly report until late May. According to HOV the company delivered 2,494 homes in the Q2, which is a 21% decline from a year ago. Net contracts were down 29%. Cancellations were at 29% compared to 38% in the first quarter. The backlog was at 3,577 homes, which is a 54% drop from a year ago. What moved the stock higher was its cash flow. HOV said it hit positive cash flow in the second quarter, which is a quarter earlier than expected. The company raised its positive cash flow projections for the rest of 2008. The stock rallied to $12.43 but failed at resistance near $12.50 yet again. Right now our stop loss at $10.74 is just under the 50-dma but we're tempted to raise it closer to the $11.00 level. Another bounce near $11.30 can be used as a bullish entry point. We have two targets. Our first target is the $13.50-14.00 zone. Our second, more aggressive target is the $14.75-15.00 zone. FYI: The P&F chart is bullish with a $25 target. HOV still has a high amount of short interest. The most recent data listed short interest at almost 65% of the 37.2 million-share float. That really raises the odds of a short squeeze, which would be great for us. Don't forget that we do not want to hold over the late May earnings report.

Picked on April 16 at $ 11.86
Change since picked: - 0.01
Earnings Date 05/29/08 (unconfirmed)
Average Daily Volume = 4.1 million

---

Harsco - HSC - close: 61.60 change: +1.05 stop: 57.99

Steel and iron stocks were out performing the markets today. HSC was no exception and shares rallied 1.7%. We don't see any changes from our weekend comments. The $60.00 level should be short-term support. Our four-week target is the $64.50-65.00 range.

Picked on May 01 at $ 60.38
Change since picked: + 1.22
Earnings Date 04/22/08 (confirmed)
Average Daily Volume = 613 thousand

---

Intl.Bus.Mach. - IBM - cls: 122.03 chg: -1.15 stop: 118.49

IBM is still consolidating sideways to down. As shares drift lower patient traders might get another chance to buy a dip near $120.00. We would consider new positions anywhere in the $121.00-120.00 zone. More conservative traders might want to cinch up their stops toward $120, which should be new support. We have two targets. Our first target is the $124.90-125.00 range. Our second target is the $128.00-130.00 zone.

Picked on April 30 at $120.75 *triggered
Change since picked: + 1.28
Earnings Date 04/16/08 (confirmed)
Average Daily Volume = 8.8 million

---

ImClone Sys. - IMCL - close: 46.22 change: -0.84 stop: 45.85

The sharp weakness in shares of IMCL today remains a mystery. We didn't see any news that would account for the decline and none of its major competitors seemed to have any significant headlines. The stock found support near $46.00 and a bounce from here would be an attractive entry point given our tight stop loss. We have two targets. Our first target is the $54.00 level. Our second target is the $58.00 level. Please note that any time we play a biotech company it is considered an aggressive, higher-risk play. You never know when an FDA decision or some clinical trial result might come out for this company or one of its rivals and send the stock gapping one direction or the other at which point our stop loss might become worthless.

Picked on May 01 at $ 48.07
Change since picked: - 1.85
Earnings Date 04/24/08 (confirmed)
Average Daily Volume = 1.6 million

---

iShares Russ.2000 - IWM - cls: 72.27 chg: -0.25 stop: 69.49

The small cap stocks were flat to down all day and actually out performed the S&P 500, the DJIA and the NASDAQ composite. We would use a dip near $71.50 as a new bullish entry point. Our four to six-week target is the $77.50-80.00 zone. The P&F chart is bullish with an $87 target.

Picked on April 28 at $ 72.55 *triggered
Change since picked: - 0.28
Earnings Date 00/00/00
Average Daily Volume = 84.6 million

---

iShares DJ Transports - IYT - cls: 94.56 chg: -0.31 stop: 89.95

The transports struggled with new record high oil prices but overall the group held up pretty well. The airlines were naturally under performers but the transport sector as a whole was surprisingly resilient. We are not suggesting new positions at this time. This group does look a little overbought and due for a dip. Our eight-week target is the $98.00-100.00 zone. IYT has already surpassed our first target in the $94.85-95.00 zone.

Picked on April 27 at $ 91.48 /1st target exceeded
Change since picked: + 3.08
Earnings Date 00/00/00
Average Daily Volume = 1.4 million

---

Joy Global - JOYG - close: 78.64 chg: +1.67 stop: 72.45 *new*

Lehman Brothers (LEH) raised their price target on both JOYG and BUCY. JOYG had its target raised from $80 to $88. The stock responded with a spike above $78 this morning and a new all-time high at $79.05. While we remain bullish here readers may want to consider taking profits right now. Please note our new stop loss is at $72.45. Our target is the $79.50-80.00 range. We are going to add a secondary target in the $84.00-85.00 zone. However, we will plan to exit ahead of the late May earnings report. The P&F chart is already bullish with an $88 target.

Picked on April 16 at $ 72.55 *triggered
Change since picked: + 6.09
Earnings Date 05/29/08 (confirmed)
Average Daily Volume = 2.3 million

---

Mosaic - MOS - close: 124.79 change: +0.16 stop: 115.49

Fertilizer stocks were higher as a group this morning. MOS actually gapped open higher at $126.75 before pulling back. Our suggested entry point to buy calls was at $126.50 so we've adjusted it for the opening price today. While the stock struggled to maintain its gains today we remain bullish. Readers can choose to open positions here or on a dip near $121-120. If you're patient a dip would be more attractive. Our first target is the $138.00-140.00 range. We are playing with a very wide, aggressive stop loss at $115.49, just under Thursday's low. You may want to use a tighter stop closer to $120.

Picked on May 05 at $126.75 *triggered/gap higher entry
Change since picked: + 0.00
Earnings Date 07/30/08 (unconfirmed)
Average Daily Volume = 7.4 million

---

Arcelor Mittal - MT - close: 90.90 change: +1.75 stop: 85.99

MT also gapped open higher as shares adjusted to strength in Europe. MT opened at $89.73 and rallied throughout the session. Our suggested entry point to buy calls was $90.25 so the play is open. The company is due to report earnings in the next week or two so this should be a short-term play. We don't want to hold over the announcement. Our target is the $99.00-100.00 zone. The P&F chart is very bullish with a $116 target. FYI: MT garnered some headlines today as the media reported that the company was trying to buy a stake in Angang Steel, China's second-largest steel maker. MT wants to buy a 25% stake but Angang is only offering a 2% stake at this time. Right now estimates place a 25% stake around $5 billion.

Picked on May 05 at $ 90.25 *triggered
Change since picked: + 0.65
Earnings Date 05/14/08 (unconfirmed)
Average Daily Volume = 3.7 million

---

Nucor - NUE - close: 76.85 change: +2.55 stop: 69.75

NUE rallied more than 3.4% as the steel stocks displayed relative strength today. As a group the steel sector is hitting new highs. This looks like another bullish entry point to buy calls in NUE. We are raising our stop loss to $71.59 just under last week's low. Our initial target is the $79.50-80.00 range. Our second, more aggressive target is the $84.00-85.00 zone. The Point & Figure chart is bullish with a $93 target. FYI: We had a reader write in about the May $80 calls. Due to NUE's sideways consolidation over the last couple of weeks the May $80s are a risky bet. You may want to roll your position forward into June or July calls.

Picked on April 22 at $ 74.63
Change since picked: + 2.22
Earnings Date 04/17/08 (confirmed)
Average Daily Volume = 5.6 million

---

POSCO - PKX - close: 125.40 change: +0.76 stop: 119.75

Our new play on PKX is now open. The stock broke out over resistance at its long-term trendline of lower highs and over resistance near $125.00. Our suggested trigger to buy calls was at $125.55. Our target is the $139.00-140.00 range. We should expect to see some overhead resistance at the 100-dma and exponential 200-dma near $130-133. NOTE: We would consider this a slightly more aggressive play for two reasons. First, PKX is prone to gap openings as the U.S. traded shares adjust to trading overseas the night before. Second, the spreads on the options are pretty wide and that immediately puts us, as option traders, at a disadvantage.

Picked on May 05 at $125.55 *triggered
Change since picked: - 0.15
Earnings Date 07/16/08 (unconfirmed)
Average Daily Volume = 907 thousand

---

Textron - TXT - cls: 61.98 change: -0.02 stop: 59.85

We don't see any changes from our previous comments on TXT. The stock traded sideways on Monday but still looks poised to breakout higher. We are suggesting new positions right here but more conservative traders could wait for a new relative high over $62.50. Our short-term target is the $64.85-65.00 zone. Our secondary, more aggressive target is the $68.00-70.00 range. The Point & Figure chart is bullish with an $83 target. FYI: TXT is due to present at an investor conference on May 8th.

Picked on April 27 at $ 61.39
Change since picked: + 0.59
Earnings Date 04/17/08 (confirmed)
Average Daily Volume = 2.1 million
 

Put Updates

None
 

Strangle Updates

None
 

Dropped Calls

None
 

Dropped Puts

United States Oil - USO - cls: 96.74 chg: +3.34 stop: 94.65

We have been stopped out of USO. Before the opening bell news that violence had flared up again in Nigeria and that rebels were targeting oil platforms and pipelines sent crude oil higher. The USO actually gapped open higher at $95.23, which is above our stop loss at $94.65. As the day wore on crude oil continued to climb and hit a new high above $120.00 a barrel. The USO followed with a new high of its own at $96.92. We would have been stopped out at the opening bell.

Picked on April 21 at $ 94.38 /stopped out/gap higher 95.233
Change since picked: + 2.36
Earnings Date 00/00/00
Average Daily Volume = 5.9 million
 

Dropped Strangles

None
 

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

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