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Daily Newsletter, Monday, 06/02/2008

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Table of Contents

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

Market Wrap

ISM's PMI Leaves Bulls Wanting Less and More

Stocks began today's session on a sour note with banks grabbing negative headlines and setting a negative tone early, while key economic data released at 10:00 AM EDT showed the manufacturing sector continued to exhibit some sign of slowing in May.

Shares of Wachovia (NYSE:WB) $23.40 -1.68% finished down $0.40 having traded a new multi-year low ($22.72) at this morning's open after the company said its Chief Executive Officer Ken Thompson was forced out by the company's board of directors.

Market participants drew little comfort from the continued shakeup with Mr. Thompson becoming the third CEO of a major U.S. financial institution to lose the top job as a result of the credit crisis.

Washington Mutual (NYSE:WM) $9.00 -0.22% also slid to a new multi-year low ($8.75) at the open of today's trade. Hit hard since the middle of 2007 due to deterioration in the mortgage and credit markets, the company announced today that it was splitting CEO and chairman roles in an effort to focus on the problems at hand.

Then banking concern said Stephen Frank will assume the title of chairman of the board, while Kerry Killinger will remain as chief executive.

At 10:00 AM EDT, as stocks were pushing their worst levels of early trade, U.S. construction spending figures were released by the Commerce Department.

The department said spending on U.S. construction projects fell by 0.4% in May to an annual rate of $1.21 trillion. The figures were roughly inline with economists' forecast for a 0.5% decline. I (Jeff Bailey) saw little sign of a market response to an upwardly revised March figure, where March's previously reported 1.1% decline was revised to a still negative 0.6% decline.

That "lack of response" may well have been due to the more closely monitored Institute for Supply Management's (ISM) manufacturing report (national), also released at 10:00 AM EDT.

While the ISM Manufacturing Index came in at a "better-than-forecasted" measure of 49.6 (consensus was 48.5), a look inside the numbers, or sub-index readings deserve closer scrutiny.

ISM's May'08 PMI -

As noted in tonight's market wrap tile, May's ISM data left many bulls more than likely wanting "less" from the Prices component, which jumped to a very expansionary measure of 87.0.

Levels above 50.0 for the PMI and sub-index measures signal growth, while levels below 50.0 signal contraction.

One bright spot, or sign of renewed expansion in the above data series had production improving to a 51.2 measure in May, its highest measure since January.

That increase in production may have been attributed to some of contraction-like measures we've see from the backlog of orders, where in May we would now see a notable decline to 46.0 from 51.5.

Here's a quick look at the ISM Mfg. Index measures since Oct'07 and how each of the sub-index components have been measured.

ISM Mfg. Index & Sub-Index Measures Since Oct'07

In my opinion, May's "elevated" measure of 87.0 for prices will be tied to the sharp rise in raw materials costs.

The CRB Index in my U.S. Market Watch (CEC:CRY) 425.77 +0.85%, while largely weighted with oil prices, has risen 92 points, or 27.6% since the end of Sep'07, and is up just more than 67 points, or 18.7% since the end of Dec'07.

Also a concerning focal point to economists was the still anemic employment index measure of 45.5. While a modest improvement from April's 45.4 measure, April's lackluster construction spending data doesn't appear to hold thought of any sharp rebounds for June.

The weaker U.S. dollar looks to even out some of the trade deficit with exports looking "even keel" at 49.5, while the exports index shows some bullish expansion at 59.5.

Still, at these "weaker" levels of the dollar versus major global currencies (euro, yen and pound), dollar strength and weakness continues to impact market sentiment.

Closing U.S. Market Watch - 06/02/08 @ 05:00 PM EDT

One major item I drew attention to last week was the notable "lag" in the Dow Industrials (INDU) $125.04 -1.06%.

One of the PRIMARY themes that remained was the weakness in financials. While not heavily weighted components, at Friday's close shares of American Express (NYSE:AXP) $45.25 -2.37% today, had fallen 5.33% on a 20DyNet% basis. JP Morgan (NYSE:JPM) $42.15 -1.97% today, had fallen 7.66%; American Intl. Group (NYSE:AIG) $35.87 -0.36% today had fallen 10.62%; Bank of America (NYSE:BAC) $33.58 -1.26% today had fallen 7.20% and Citigroup (NYSE:C) $21.46 -1.96% today had declined 7.36%.

General Electric (NYSE:GE) $30.41 -1.00% shed $0.31 today, and his past quarter's earnings report and troubles with its financing arm still look to weigh on the shares.

General Motor's (NYSE:GM) $17.44 +1.98% did gain $0.34/share today, but now the smallest-weighted component was down a eye-popping 15.72% 20DyNet at Friday's close.

I'd have to think that some of the sharp declines in the above "financial" names partially reflect today's news out of Standard & Poors.

At roughly the mid-point of today's session, Standard & Poors credit ratings opened the proverbial floodgate with some various CreditWatch "negative" alerts for Lehman Brothers (NYSE:LEH) $33.90 -7.90%, Merrill Lynch (NYSE:MER) $42.62 -2.95% and Morgan Stanley (NYSE:MS) $43.10 -2.55%.

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S&P cited the outlooks on the large financial institutions sector as being predominantly "negative" due to the weaker U.S. economy and its impact on consumer lending.

Shares of Citigroup (NYSE:C) $21.46 -1.96% did ease from their session lows of $21.00 when Standard & Poors removed the company from its CreditWatch, where they had placed the company's debt on April 15, 2008, with negative implications. The ratings firm said, "Despite the challenges facing Citigroup over the next two years because of deteriorating consumer credit, its fundamental earnings power is unimpaired."

With that being about the most "positive" thing S&P said today, market participants will monitor this banking giant near-term.

Citigroup (NYSE:C) - $0.50 and $1 box chart

The supply (O) / demand (X) chart of Citigroup (C) remains longer-term bearish. After generating a reversing higher Point and Figure "buy signal" at $25.00 in early April, sellers (O) have driven the stock back down to near-term support above the $20.00 level. A trade at $20.00 is viewed further negative. Excellent RISK/REWARD profile for BULLS as they RISK $1.00 downside to a trade at $20.00, while longer-term REWARD, utilizing the bullish vertical count to $40 is roughly $17.00.

Should the stock trade $20.00, it would be deemed BEARISH for the stock.

Trade and account management would dictate BULLISH CAUTION and SMALL BULLISH positions currently as the BANK sector is "bear confirmed."

Traders and investors would be well advised to monitor the Financial Select SPDR (XLF) $24.39 -1.49% at these levels of critical support.

Financial Select SPDR (XLF) - $0.50 box

With Standard & Poors growing further negative the LARGER financials, the XLF's Point and Figure chart provides and excellent view of what is at stake.

On 05/20/08 the XLF generated a reversing lower point and figure sell signal at $25.50, and now trades just above important support at $24.00.

I think we as traders and investors can begin to make the tie between Citigroup (C) at $20.00 and the XLF at $24.00.

Trades at either, or both respective levels will likely weigh heavily on the sector, if not the broader market as well.

S&P 500 Index (SPX.X) - 10-point box

An old point and figure chartist saying is that the "first sell signal in the new upward trend is often a buying opportunity." That's what we find here in the S&P 500 Index (SPX.X).

Having turned "bull confirmed" in early April (4), the recent selling has generated a double bottom sell signal at 1,380.

I've placed this month's (June's) newly calculated MONTHLY Pivot Levels on our point and figure chart.

AGGRESSIVE bulls can play here with a stop just below MONTHLY S1 of 1,369. More CONSERVATIVE bulls can play on a trade at 1,350, with a stop below MONTHLY S2 of 1,377.

A couple of weeks ago I adjusted my economic forecast from "modest recession" to "modest growth" for 2008.

I would be VERY surprised if the SPX traded 1,472 and MONTHLY R2 this month, let alone by July expiration, so pick options accordingly.

S&P 500 Bullish % ($BPSPX) - 2% box chart

At tonight's close, StockCharts.com's S&P 500 Bullish % ($BPSPX) saw a net gain of 2 stocks to reversing higher PnF "buy signals" and status for this broader-market indicator is "bull correction."

In early April (4) at 44.00%, this major market bullish % achieved "bull confirmed" status, rose to 52.00% on the above chart, then reversed to "bull correction" status at 45%, then reversed back up again to "bull confirmed" status at 52% to rise as high as 62.00%.

Look for buyers (old bears and new bulls) to be buying this pullback.

It would currently take a measure on the above chart to 44.00% for this indicator to achieve "bear confirmed" status.

IWM and QQQQ Montage - Daily Intervals

Both the IWM and QQQQ have been the "bullish leadership" major averages in recent months, but some of the near-term softening in the INDU and SPX.X look to be keeping buyers cautious.

Look for these two averages to BREAK TO NEW RELATIVE highs as a CONFIRMATION of any rebound in the INDU and SPX.X.

Need the FINANCIALS to find a footing to provide a LIFT for the SPX.X.
 


New Plays

New Option Plays

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

Play Editor's Note: Readers may want to keep an eye on the biotech stocks. The BTK biotech index looks poised to rebound. I was tempted to buy calls on the biotech ishares (IBB) but the IBB still has significant resistance near $80.00. None of the other biotech ETFs look good enough to play. I was also sorely tempted to add ISRG as a put play tonight but two things stopped me. First were the option prices. They are incredibly expensive. Second, ISRG was just added to the S&P 500 on Friday so there "should" be an underlying bid for the stock as funds that track the S&P 500 add it to their portfolio.


New Calls

None today.
 

New Puts

None today.
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Peabody Energy - BTU - close: 77.52 change: +3.60 stop: 70.85

Coal stocks were on fire today after some positive analyst comments this morning about the rising price of coal. One analyst raised their forecast on metallurgical coal by 90% to $130 per ton in 2009 and to $250 per ton in 2010. He also raised his price forecast on steam coal, burned to create electricity, by another 25%. All the major coal stocks took off. Shares of BTU opened at $73.75 and rallied to $79.00 intraday. Our first target is the $79.75-80.00 zone. We're adding a second target in the $84.00-85.00 range but strongly suggest that readers take some profits near $80.

Picked on June 01 at $ 73.92
Change since picked: + 3.60
Earnings Date 07/24/08 (unconfirmed)
Average Daily Volume = 5.8 million

---

Garmin Ltd. - GRMN - close: 50.57 chg: +1.92 stop: 45.95 *new*

GRMN really out performed the market today. The stock rallied 3.9% following Friday's breakout over the 50-dma. The stock actually closed above the mid May high. We are raising our stop loss to $45.95. Our target is the $54.00-55.00 zone or the 100-dma, whichever is hit first. FYI: The most recent data, which may be out of date, listed short interest at more than 15% of GRMN's 114 million-share float. GRMN could still see a short squeeze. GRMN's P&F chart is bullish with a $71 target.

Picked on June 01 at $ 48.65
Change since picked: + 1.92
Earnings Date 07/31/08 (unconfirmed)
Average Daily Volume = 4.6 million

---

Harsco - HSC - close: 62.87 change: -0.45 stop: 60.45

We don't see any changes from our weekend comments. HSC current challenge is to breakout past the May highs. We're not suggesting new bullish positions in HSC at this time. Our target is the $64.50-65.00 range but more aggressive traders may want to aim higher.

Picked on May 01 at $ 60.38
Change since picked: + 2.49
Earnings Date 04/22/08 (confirmed)
Average Daily Volume = 613 thousand

---

iShares Russ.2000 - IWM - cls: 73.99 chg: -0.68 stop: 71.70

The Russell 2000 small cap index followed the rest of the market lower. We don't see any changes from our weekend comments. We had been suggesting that more conservative traders may want to exit or take profits in the $74.50-75.00 zone. Right now our target is the $77.50-80.00 zone. We're not suggesting new positions at this time. FYI: The Point & Figure chart's bullish price target has moved from $87 to $96.

Picked on April 28 at $ 72.55 *triggered
Change since picked: + 1.44
Earnings Date 00/00/00
Average Daily Volume = 84.6 million

---

Natl. Oilwell Varco - NOV - cls: 83.80 chg: +0.48 stop: 78.69

It was another bumpy day for oil prices but by the closing bell both oil and the oil sector were higher. If we get the chance another dip in the $82-81 zone could be used as a new entry point. NOV did provide a dip to $82.00 this morning. More conservative traders might want to tighten their stops closer to $80.00. Our target is the $88.50-90.00 zone. The P&F chart is bullish with a $105 target.

Picked on May 28 at $ 83.15
Change since picked: + 0.65
Earnings Date 07/30/08 (unconfirmed)
Average Daily Volume = 6.4 million

---

Priceline.com - PCLN - close: 132.76 chg: -1.77 stop: 127.99

This looks like a new bullish entry point in PCLN. The stock fell toward support near $130 and traded there for most of the morning before finally beginning to recover. The afternoon bounce looks like an entry point to buy calls. More conservative traders may want to tighten their stops. The intraday low was $129.80. Our target is the $139.50-140.00 zone.

Picked on May 27 at $132.75 *triggered
Change since picked: + 0.01
Earnings Date 05/08/08 (confirmed)
Average Daily Volume = 1.5 million

---

POSCO - PKX - close: 139.00 change: +2.35 stop: 133.95 *new*

PKX displayed some relative strength with a spike to $140.61 before settling with a 1.7% gain. Shares are nearing our target in the $143.00-145.00 zone. We are raising our stop loss to $133.95. This is an aggressive higher-risk play. PKX tends to gap open every morning as it adjusts to trade in Korea. Plus, the option spreads tend to be a little wide. FYI: The Point & Figure chart is bullish with a $212 target.

Picked on May 27 at $133.26
Change since picked: + 5.74
Earnings Date 07/14/08 (unconfirmed)
Average Daily Volume = 733 thousand

---

Molson-Coors Brewing - TAP - cls: 57.72 chg: -0.28 stop: 55.95

TAP failed to make any progress but neither was it subjected to any serious intraday sell-offs. We would consider buying dips to the $57.00-56.75 zone. If you prefer to buy on momentum then wait for a new relative high (above 59.51). Our target is the $64.00-65.00 range. FYI: The P&F chart is bullish with a $69 target.

Picked on May 23 at $ 58.51 *triggered
Change since picked: - 0.79
Earnings Date 08/07/08 (unconfirmed)
Average Daily Volume = 1.1 million
 

Put Updates

Avalonbay - AVB - close: 98.83 change: -2.37 stop: 102.85

Investor concerns for the financial sector also influenced the REITs. Shares of AVB lost 2.3% and the stock tested short-term support near $98.00. A failed rally in the $100-102 zone could be used as another entry point. We have two targets. Our short-term target is the 100-dma near $97.13. We'll use the $97.25-97.00 zone as our first target to take some profits. Our second target is the $92.50 zone. The Point & Figure chart is bearish with a $90 target. FYI: We do qualify this as a slightly more aggressive play because the REIT stocks like AVB can be volatile and the option spreads are a little wider than normal. Plus, the most recent data listed short interest at 16% of the 70 million-share float.

Picked on June 01 at $101.20
Change since picked: - 2.37
Earnings Date 07/30/08 (unconfirmed)
Average Daily Volume = 1.0 million

---

Kohls - KSS - close: 44.31 change: -0.49 stop: 45.65

Right on cue shares of KSS rolled over but the 1% decline could be chalked up to the market's weakness today. We remain bearish on the stock. We're suggesting a tight stop loss. If we're wrong we should be taken out quickly. Our target is the $40.50-40.00 zone. The P&F chart is bearish with a $35 target.

Picked on June 01 at $ 44.80
Change since picked: - 0.49
Earnings Date 08/14/08 (unconfirmed)
Average Daily Volume = 6.1 million

---

3M Co. - MMM - close: 76.25 chg: -1.31 stop: 77.01

MMM displayed some relative weakness with a 1.6% decline but shares are still above support. We are still waiting for MMM to breakdown under support near $75.00. Our suggested trigger to buy puts is at $74.95. If triggered our first target is the $70.25-70.00 zone. Our secondary target is the $66.00-65.00 range. The P&F chart is bearish with a $69 target."

Picked on May xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/24/08 (unconfirmed)
Average Daily Volume = 4.0 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.)

---

Amgen Inc. - AMGN - close: 44.22 chg: +0.19 stop: n/a

AMGN managed to shrug off any market weakness but the stock's post-ASCO reaction isn't very inspiring. The short-term trend is up and AMGN is trying to breakout over its 100-dma. We are not suggesting new strangle positions at this time. We have suggested a July strangle and a slightly more aggressive June strangle. The options in the July strangle are the July $45 calls (AMQ-GI) and the July $40 puts (AMQ-SH). Our estimated cost for the July strangle was $1.65. We want to sell if either option hits $3.50. The options in the June strangle are the June $45.00 calls (AMQ-FI) and the June $40.00 puts (AMQ-RH). Our estimated cost on the June strangle was $0.56. We want to sell if either option hits $1.10 or more. June options expire in less than three weeks.

Picked on May 22 at $ 42.77
Change since picked: + 1.45
Earnings Date 07/24/08 (unconfirmed)
Average Daily Volume = 6.7 million

---

McDonald's - MCD - close: 58.55 chg: -0.77 stop: n/a

MCD fell quickly this morning but found support near $58 and its 50-dma. We are not suggesting new positions. We did not see any real headlines out of the Goldman Sachs conference that MCD was supposed to present at today. The options we suggested were the June $62.50 calls (MCD-FZ) and the June $57.50 puts (MCD-RY). Our estimated cost was $1.10. We want to sell if either option hits $1.65 or higher. More aggressive traders may want to raise their target. Keep in mind that June options expire in less than three weeks and will see their premium erode more quickly.

Picked on May 18 at $ 60.53
Change since picked: - 1.98
Earnings Date 07/24/08 (unconfirmed)
Average Daily Volume = 7.5 million
 

Dropped Calls

Martin Marietta - MLM - cls: 115.97 chg: -0.72 stop: 114.95

We are giving up on MLM. The last few days MLM has managed to hold above support at $115.00 and because of this more aggressive traders may want to hang on and keep their stop under support. We're exiting early now to cut our losses. Almost all of the short-term indicators are suggesting a breakdown and the stock produced yet another failed rally under its 10-dma today.

Picked on May 27 at $118.15 / exiting early
Change since picked: - 2.18
Earnings Date 05/06/08 (confirmed)
Average Daily Volume = 561 thousand

---

Oceaneering Intl. - OII - cls: 70.54 chg: -0.82 stop: 69.95

The rebound in OII continues to struggle and shares fell under support at $70.00 today. The intraday low was $69.75 hitting our stop at $69.95 on the way. We would keep an eye on OII. Watch to see if it bounces near technical support at the converging 50 and 200-dma near $67.50-68.00.

Picked on May 28 at $ 73.36 / stopped out 69.95
Change since picked: - 2.82
Earnings Date 07/31/08 (unconfirmed)
Average Daily Volume = 1.0 million
 

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.

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