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Daily Newsletter, Monday, 06/30/2008

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Table of Contents

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

Market Wrap

Majors Finish First Half Mixed

Stocks finished mixed-to-lower as the second quarter came to and end Monday in another brisk volume trade at the big board.

While well off Thursday and Friday's rising daily volumes of 5.23 billion and 6.09 billion shares, traders remained active among the one, two, and three-lettered stock symbols at the big board.

Economic figures released here in the U.S. were regional and continued to suggest that while the economy is not slipping into a full-blown recession, it's limping along at best.

Just after the cash market open the Chicago Purchasing Manager's Index, a barometer for business activity in the Midwest (Illinois, Michigan and Indiana) was released. The group said its overall index rose to 49.6 for June, from 49.1 in May and was above economists' forecast for a decline to 48.0. While not as weak as many had feared, the sub-50 reading still showed sign of business activity contracting for a fifth-straight month.

Other important readings due out this week are the Labor Department's June employment report and ISM's Non-Manufacturing Composite. Both reports are slated for release on Thursday.

Just before the clock struck 12:00 PM EDT, oil prices eased from their morning highs with August Crude Oil futures (cl08q) having traded another record high of $143.67 before the 07:00 AM EDT hour when the EIA revised April U.S. oil usage to -3.9% versus the same period last year. But a dip to $139.20 was gobbled up as the EIA said U.S. oil use rose by 36,000 barrels per day versus March.

By day's end, Nymex August Crude Oil futures (cl08q) settled down $0.21, or -0.15% at a fitting $140.00 round-number close. August Nat. Gas futures (ng08q) settled up a hefty $0.1550, or 1.17% at $13.353.

On a more global scale, Japan's Nikkei-225 ($NIKK), which finished Monday's session down 63 points, or -0.46% managed to finish up 7.6% for the second-quarter as the yen fell 6.3% against the greenback during the same period.

While the land of the rising sun recouped a portion of it 18.2% decline from the first quarter, financial reforms and a devastating earthquake in Mainland China had the Shanghai Composite ($SSEC) glowing red by an additional 21.2% in the second quarter.

European bourses put in a mixed-to-higher trade to start the week. A 96-point gain had London's FTSE-100 ($FTSE) rising 1.74% as oil and mining shares bolstered gains. Despite the bounce, buyers were unable to push the FTSE-100 into positive territory at the end of the quarter with the pound relatively unchanged versus the dollar on a year-to-date basis.

Germany's DAX ($DAX) finished lower by just more than 3-points, or -0.06% at 6,418, while France's CAC-40 ($CAC) rose 37 points, or +0.85% to 4,434, while pacing euro-zone weakness with a 5.8% decline for the second quarter.

Major Global Markets, Currencies, Oil and Gold

Since our visit last Monday, oil prices as depicted by the U.S. Oil Fund (USO) $113.77 +0.01% have risen an additional 2.57%, as bullish momentum accelerated thru the second quarter with the USO surging 39.8%.

While "black gold" rose 39.8% in the second quarter, its shiny counterpart in the StreetTracks Gold (GLD) $91.40 -0.07% (~$914.00 spot) finished up 1.1% for the quarter, while the U.S. Dollar Index (DXY) finished at 72.50 for the quarter, up roughly 1.0% versus a weighted basket of global currencies.

Since I'm on the topic of commodities, Corn futures, or "granular gold" as it is being called these days traded limit down at 724'6 from Friday's 754'6 for the July contract after the latest U.S. Department of Agriculture (USDA) figures showed farmers had planted more than a million more acres of corn than had been expected back in March.

The USDA said farmers expect to harvest 78.9 million acres of corn, down 8.7% from the 86.5 million harvested last year. The 8.7% decline includes the damage to corn crops caused by flooding in the Midwest.

Wall Street ended the second quarter of 2008 rather mixed.

An additional 7.4% decline for the narrowly comprised Dow Industrials ($INDU) in the second quarter caps off the worst first half for the Dow Industrials since 1970.

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Shares of Chevron (NYSE:CVX) $99.13 +1.35% capped off a component-best 16.13% gain for the quarter, while discount retailer Wal-Mart (NYSE:WMT) $56.20 -0.17% rose 6.68% on the quarter and now leads a rather narrow list of YTD gainers by a wide margin, with an 18.24% gain thru the first half of the year. International Business Machines (NYSE:IBM) $118.53 -1.26% fell $1.52 today, but still holds a 9.65% gain since its 12/31/07 close of $108.10.

Only CVX (16.13%), WMT (6.68%), XOM (+4.20%), IBM (+3.52%), INTC (+1.42%) and MCD (+0.81%) showed price gains for the quarter.

While rising energy prices, and commodity price in general garnered much of the second-quarter's headlines, concerns about the financial sector, even if they aren't as pronounced as at the start of the quarter continued to provide major headwinds for the Dow Industrials, the broader S&P 500 Index ($SPX) 1,280.00 +0.12% at the end of the second-quarter.

General Motors (NYSE:GM) $11.50 -0.43% traded at its lowest level since 1954 earlier in the session and plunged 39.63% during the second-quarter as slowing auto-sales combined with the credit crunch hurt results at its GMAC unit.

Insurer American Intl. Group (NYSE:AIG) $26.46 -4.64% closed at another multi-year low today, and darned near outpaced GM for biggest percentage decliner in the second-quarter.

Bank of America (NYSE:BAC) $23.87 -2.92% also closed at a multi-year low having dropped 37.04% in the just completed second quarter.

Dow Components - Sorted by Q2 % Gain/Loss

Simply sorting the Dow-30 components by their Q2 gain/loss and placing the $NDX, which gained 3.1% on the quarter probably speaks "volumes" as to the importance of International Business Machines (NYSE:IBM) and larger-cap technology. Mind-you, there's more than technology comprising the NDX/QQQQ, but there isn't a "financial" in the bunch.

The Russell 2000 Index ($RUT) has been relinquishing gains as I thought they might into the end of the second quarter, and a "follow the weakness" trade on 06/18/08 in the ProShares UltraShort Russell 2000 (TWM) $78.80 +2.41% as the Dow Diamonds (DIA) $113.55 +0.07% closed below $120.75 that very day has paid off handsomely to this point.

This "follow the weakness" we're seeing in the RUT is what tends to occur as some very handsome BULLISH gains start getting SOLD by bulls as they see other gains diminish, or losses build in other parts of the market.

Still, the more domestic and economically sensitive small caps have shown some relative strength compared to their BIG CAP brethren and still suggests that while the U.S. economy sputters, it remains a question as to how severe a slowdown is.

The Financial Select SPDRs (XLF) $20.20 -1.79%, which is comprised of bank, brokers, insurers fell 19% for the quarter, and it remains apparent that JPM, C, BAC and AIG remained under selling pressure during the quarter, some of the "financial" portions of GE's (GE Capital) and GM's business units are still being closely scrutinized.

Closing U.S. Market Watch -

Since last summer, roughly 1-year ago (see YrNet%), banks and brokerages have written down more than $300 billion of mortgage-backed securities and other "risky" investments. Later this month even more losses are expected when companies like Citigroup (NYSE:C) $16.76 -2.84%, Merrill Lynch (NYSE:MER) $31.71 -3.02% report their second-quarter results.

For the second-quarter, Merrill's stock price has fallen 20.6%, roughly inline with the XLF itself.

Late this evening, a rather "bold" and bullish call came from Morgan Stanley with the firm saying investor's should buy Lehman Brothers (NYSE:LEH) $19.81 -10.96%. This despite rumors that the beleaguered investment bank could be bought out well below its current price.

"We think near-term risk of incremental write-downs is balanced by solid liquidity and capital footing," wrote analysts Patrick Pinschmidt and Avi Ghosh. "The firm's ability to weather near-term market headwinds and return to respectable return on equity generation should help the shares trade closer to book value."

Morgan Stanley's duo thinks Lehman's return on equity (ROE) will rise from 3% in the second half of this year to 12% in 2009 and 14% in 2010, even as the firm's debt trading declines 28% from its peak.

Pinschmidt and Gosh think LEH should trade nearer to book value, which currently stands at roughly $39/share.

S&P Depository Receipts (SPY) - Daily Intervals

After closing BELOW $132.02 and 19.1% conventional retracement, buyers have been unable to muster any type of gain and the SPX once again rests at/near its lowest close of 2008 and the 03/10/08 close of $127.57.

While the closely monitored S&P 500 Bullish % (BPSPX) from Dorsey/Wright and Associates shows 30.80% of the SPX/SPY components (154 out of 500) still having a "buy signal" associated with their chart, and this 30.8% well above the 03/17/08 relative low measure of 23.09%, which would be deemed "bullish divergence," I think bears should be protecting gains here, and bulls have some time to monitor things, and see if some of the New High and New Low indications, as well as the various major market bullish % indicators reverse back up.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
VIX None CVX

New Calls

CBOE Volatility Index - VIX - close: 23.95 chg: +0.51 stop:

Company Description:
The CBOE Volatility index or VIX measures implied volatility for the broader market and is commonly referred to as a "fear gauge" for the market.

Why We Like It:
If you really think the market is going to bounce for the next week or two (or three) then don't buy calls in the VIX - at least not yet. If the market does bounce then the VIX will trend lower. On the other hand if you do think the market is going to bounce but want some sort of hedge in case the market crashes then consider buying some calls on the VIX. When the market sells off sharply the VIX tends to spike. At significant market bottoms, when investors are throwing in the towel, the VIX tends to spike to 30 or more. Right now the trend in the VIX is higher. Even though the DJIA is at new relative lows and the SPX is nearing its lows for the year the VIX is saying we aren't anywhere close to a bottom yet. We are suggesting call positions but consider this a highly speculative position, especially if you choose to buy the July calls. We would prefer the August 30s, which gives us more time.

We have two targets. First target is $29.50. Second target is $34.00.

FYI: We're not listing a stop loss. This is a lottery ticket style of play. Either we "win" if the market sells-off or we don't win.

Suggested Options:
We are suggesting the July or August calls. Keep in mind that Julys expire in less than three weeks.

BUY CALL JUL 25.00 VIX-GE open interest=76158 current ask $1.60
BUY CALL JUL 27.50 VIX-GY open interest=72946 current ask $0.95
BUY CALL JUL 30.00 VIX-GF open interest=98137 current ask $0.55

-or-

BUY CALL AUG 27.50 VIX-HY open interest=36402 current ask $1.45
BUY CALL AUG 30.00 VIX-HF open interest=43463 current ask $0.95
BUY CALL AUG 32.50 VIX-HZ open interest=14488 current ask $0.65

Picked on June 30 at $ 23.95
Change since picked: + 0.00
Earnings Date 00/00/00
Average Daily Volume = n/a million
 

New Puts

None today.
 

New Strangles

Chevron - CVX - close: 99.13 chg: +1.33 stop: n/a

Company Description:
Chevron Corporation is one of the largest integrated oil and gas companies on the planet.

Why We Like It:
I still think that oil is going to see some significant swings this summer and that's going to move the oil stocks. CVX has been under performing oil lately but shares have been consolidating sideways for more than a month. The range is narrowing and that suggests a breakout sooner rather than later. We're suggesting a strangle to capture any big moves in CVX over the next two months. The puts cost more than the calls so you will have an uneven number of contracts as you try to keep your investment balanced on either side of the trade. We would try and open positions in the $99.00-101.00 zone.

Suggested Options:
A strangle involves buying both an out of the money call and an out of the money put. We don't care what direction the stock goes as long as it moves one direction. If it moves far enough one side of our trade will rise enough to pay for the entire trade and make a profit.

We are suggesting the August options below. Our estimated cost is $2.20 (based on these prices we need 2 calls per 1 put). We want to sell if the puts $3.85 or if the calls hit $1.90. More aggressive traders may want to aim higher.

BUY CALL AUG 110.00 CVX-HB open interest=1771 current ask $0.55
-and-
BUY PUT AUG 90.00 CVX-TR open interest= 384 current ask $1.10

Picked on June 30 at $ 99.13
Change since picked: + 0.00
Earnings Date 08/01/08 (confirmed)
Average Daily Volume = 13.3 million
 


Play Updates

In Play Updates and Reviews

Call Updates

iShares Russ. 2000 - IWM - cls: 69.05 chg: -0.65 stop: 68.90

The lack of a real bounce in the markets on Monday afternoon is a big warning sign for investors. The IWM tried to rally this morning but rolled over and was trading near its lows for the day at the closing bell. This weakness does not bode well for tomorrow and shares hit $68.92 intraday. If there is any weakness tomorrow morning we would expect to be stopped out at $68.90. We still think the smallcap index is short-term oversold and there will be a bounce play here sooner rather than later. This should be a very short-term play and be over in three or four days, maybe sooner. Our target is the $71.60-72.00 zone. Depending on which options you choose you might be able to capture 30 cents to a $1.00 if you're deeper in the money.

Picked on June 29 at $ 69.70
Change since picked: - 0.65
Earnings Date 00/00/00
Average Daily Volume = 74 million

---

Murphy Oil - MUR - close: 98.05 chg: +1.76 stop: 89.99

MUR continued to show relative strength on Monday and added another 1.8%. Our preference would be to wait for a dip before opening new bullish plays but we knew that a follow through to Friday's breakout was a big possibility. If you have patience wait for a dip back toward the $96.00-94.00 range. We have two targets. Our first target is $99.95. Our second target is $104.85. The P&F chart is bullish with a $109 target but that could grow. Our stop loss is a little wider than we would prefer so we are labeling this a more aggressive trade.

Picked on June 29 at $ 96.26
Change since picked: + 1.76
Earnings Date 07/23/08 (unconfirmed)
Average Daily Volume = 1.9 million

---

Wynn Resorts - WYNN - close: 81.35 chg: +1.54 stop: 77.45

This morning WYNN had its price target cut from $118 to $93 and shares responded with a dip to $77.66 this morning. We were suggesting a trigger to buy calls at $80.75. After the initial downdraft WYNN did bounce as expected and triggered our bullish play. More conservative traders may want to tighten their stop toward today's low. We don't see any other changes from our weekend comments. We have two targets. Our first target is $84.90. Our second target is $89.00.

Picked on June 30 at $ 80.75 *triggered
Change since picked: + 0.60
Earnings Date 08/04/08 (unconfirmed)
Average Daily Volume = 2.0 million
 

Put Updates

None
 

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: 47.16 chg: +0.79 stop: n/a

AMGN is back to hitting new relative highs. We do not see any changes from our weekend comments but we will note that the July $45 calls hit $2.66 today. We have less than three weeks left with the July options. We are not suggesting new positions at this time. 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 $3.00.

FYI: If AMGN rallies to $48.00 and for some reason the July $45 calls do not hit $3.00 we would exit anyway.

Picked on May 22 at $ 42.77
Change since picked: + 4.39
Earnings Date 07/24/08 (unconfirmed)
Average Daily Volume = 6.7 million

---

Alpha Nat. Res. - ANR - close: 104.29 chg: +1.46 stop: n/a

You can blame it on window dressing but ANR soared to another new all-time high. The stock gapped open at $104.98 and traded to $108.73 before paring its gains. We still need to see some big moves in ANR if this strangle play is going to become profitable. We're not suggesting new positions at this time. This is a higher-risk strangle play with the options so expensive. The options we suggested were the July $105 calls (ANR-GA) and the July $85 puts (ANR-SQ). Our estimated cost was $9.40. We want to sell if either option hits $14.50.

Picked on June 15 at $ 94.25
Change since picked: +10.04
Earnings Date 08/05/08 (unconfirmed)
Average Daily Volume = 3.7 million

---

Garmin Ltd. - GRMN - close: 42.84 chg: -1.28 stop: n/a

This back and forth sideways action is a killer for strangle plays. It's time that more conservative traders need to make a decision about exiting early and just cutting your losses now. We have less than three weeks left for July options. We're going to stick with the play for now. We're not suggesting new positions at this time. The options we listed were the July $50 calls (GQR-GJ) and the July $40 puts (GQR-SH). Our estimated cost was $2.55. We want to sell if either option hits $ 4.75 or higher.

Picked on June 15 at $ 44.91
Change since picked: - 2.07
Earnings Date 07/30/08 (unconfirmed)
Average Daily Volume = 4.1 million

---

Holly Corp. - HOC - close: 36.92 chg: -0.20 stop: n/a

HOC managed to bounce near Friday's lows. The stock could be setting up for a larger oversold bounce soon. We're not suggesting new positions at this time. The options we listed were the July $45 calls (HOC-GI) and the July $35 puts (HOC-SG). Our estimated cost was $2.00. We want to sell if either option hits $ 3.00 or higher.

Picked on June 15 at $ 41.25
Change since picked: - 4.33
Earnings Date 08/07/08 (unconfirmed)
Average Daily Volume = 1.1 million

---

KLA-Tencor - KLAC - close: 40.71 chg: +1.00 stop: n/a

KLAC rallied more than 2.6% after its Board of Directors approved a 15 million-share buyback program. The company has 150.8 million shares in float. I'm surprised the stock did not move higher than 2.6%. We are not suggesting new positions at this time. We have less than three weeks left, which raises the risk for this play. We listed two different strangles on KLAC.

Suggested Options:
KLAC Strangle #1) The options we listed were the July $42.50 calls (KCQ-GV) and the July $37.50 puts (KCQ-SU). Our estimated cost is $1.65 We want to sell if either option hits $3.00.

KLAC Strangle #2) The options we listed were the July $45.00 calls (KCQ-GI) and the July $35.00 puts (KCQ-SG). Our estimated cost is $0.70. We want to sell if either option hits $1.50.

Picked on June 22 at $ 40.07
Change since picked: + 0.64
Earnings Date 07/24/08 (unconfirmed)
Average Daily Volume = 3.7 million

---

Nucor - NUE - close: 74.67 change: -0.21 stop: n/a

Positive analyst comments about the future price of steel gave the group a rally this morning. Unfortunately for NUE the rally failed and NUE remains poised for a move lower. We are not suggesting new positions at this time. The options we listed were the July $85 calls (NUE-GQ) and the July $70 puts (NUE-SN). Our estimated cost is $2.50. We want to sell if either option hits $3.50.

Picked on June 25 at $ 77.18
Change since picked: - 2.51
Earnings Date 07/17/08 (unconfirmed)
Average Daily Volume = 6.6 million

---

United States Oil - USO - cls: 113.66 chg: -0.09 stop: n/a

Crude oil rallied to another new record this morning and yet the USO did not follow suit. Suddenly there is a disconnect between crude futures and this oil etf. We are not suggesting new positions at this time. We suggested two different strangles. The strangle with the wider strikes costs less but has higher risk.

USO Strangle #1) The options we listed were the July $115 calls (IYS-GK) and the July $105 puts (IYS-SA). Our estimated cost is $7.10 We want to sell if either option hits $9.75.

USO Strangle #2) The options we listed were the July $120 calls (QSO-GP) and the July $100 puts (IYS-SV). Our estimated cost is $4.10. We want to sell if either option hits $6.50.

Picked on June 22 at $109.14
Change since picked: + 4.52
Earnings Date 00/00/00
Average Daily Volume = 12.5 million

---

Valero - VLO - close: 41.18 change: +1.22 stop: n/a

The pull back in crude oil powered a rebound in VLO. The stock added 3% today after hitting multi-year lows on Friday. We're not suggesting new positions. The options we suggested were the July $50 calls (VLO-GJ) and the July $40 puts (VLO-SH). Our estimated cost is $1.89. We want to sell if either option hits $2.75 or higher.

Picked on June 15 at $ 44.84
Change since picked: - 3.66
Earnings Date 07/29/08 (unconfirmed)
Average Daily Volume = 10.8 million
 

Dropped Calls

None
 

Dropped Puts

None
 

Dropped Strangles

Fording Cand. Coal - FDG - close: 95.61 chg: +1.86 stop: n/a

Target achieved! Another day, another gain for FDG. Again, it could be window dressing by fund managers, but FDG broke through its recent trading range to hit another record high. The July $90 calls (FDG-GR) hit an intraday high of $8.02. Our target to exit was $8.00. The play is closed for us but more aggressive traders may want to keep their position open. There is just under three weeks left for July options. However, keep in mind that if this was window dressing then tomorrow there could be some undressing. The options we suggested were the July $90 calls (FDG-GR) and the July $75 puts (FDG-SO). Our estimated cost was $5.45. We want to sell if either option hits $ 8.00 or higher. More aggressive traders may want to aim higher.

Picked on June 15 at $ 82.91
Change since picked: +12.70
Earnings Date 07/23/08 (confirmed - amc)
Average Daily Volume = 1.7 million
 

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

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