The major averages began the week on a sour note as brokers, banks and insurers retraced roughly half of their gains from the recent July 15 lows, while militant attacks on Nigerian pipelines had oil prices firming after a sharp two-week sell off.
Early morning rumors that Merrill Lynch (NYSE:MER) $24.33 -11.59% was looking to sell a significant portion of its collateralized debt obligations (CDOs) weighed on brokers and large money center banks from the opening tick, and did little to help broader market sentiment as Monday's session wore on.
While volume levels were light, declining issues outnumbered advancing issues the entire session, deteriorating slowly with each 120-minute benchmark.
While the Merrill rumors found little traction among popular media outlets, it wasn't until after today's closing bell that the company said it had sold $11.1 billion in the securities and will record a $5.7 billion third-quarter write-down on the sales.
Today's CDO sale will cut the firm's exposure on June 27, to roughly $8.8 billion.
In addition to selling $11.1 billion in CDOs at a substantial loss, the broker said it plans to sell 200 million new common shares worth roughly $8.5 billion in an attempt to cut risk and bolster its capital reserves. The company said it senior management team plans to buy 750,000 shares of the offering, while Singapore sovereign wealth fund Temasek Holdings agreed to boost its take by acquiring another $3.4 billion.
Last tick in this evening's extended session has Merrill Lynch (MER) relatively unchanged at $24.35 after a post-market low of $22.57.
After two weeks of sharp declines, September crude oil futures (cl08u) at the Nymex looked to stabilize by gaining $1.47, or +1.19% to settle at $124.73 after Royal Dutch Shell PLC (RDS.A) $72.62 +0.16% confirmed Monday that some of its production had been disrupted in Nigeria after an attack on its 130,000 barrel-a-day Nembe Creek pipeline. The African nation's main militant group said it bombed two oil pipelines early Monday. Whether a second pipeline had in fact been damaged is still unconfirmed at this time (05:12 PM EDT).
Shell has yet to clarify the extent of the damage, but many oil traders see Nigerian production problems as the key element keeping prices buoyant.
The Energy Information Agency (EIA) said its data showed that U.S. oil demand in May was down 902,000 barrel per day, or -4.4% versus a year ago, at 19.729M barrels per day, the lowest level for any month since May 2003. The EIA said preliminary data had shown a more modest drop of 242,000 barrels a day, or -1.8%.
There was a multitude of earnings reports again today.
Before the bell, Dow component Verizon (NYSE:VZ) $33.60 -2.46% said it earned $0.66/diluted share on revenue of $24.1 billion in the second quarter. The figures were inline with Wall Street's estimate of $0.65/share and $24.18 billion.
At Friday's close, VZ was the seventeenth (17) most heavily weighted Dow component at 2.47% and the twenty-fourth (24) most heavily weighted S&P 500 components at 0.89%.
Only three (3) of the S&P 500's "heavyweights" managed to post a gain in today's session. ConocoPhillips (NYSE:COP) $82.25 rose $0.27, or +0.32%, Occidental Petroleum (NYSE:OXY) $76.08 +0.48% gained $0.27, while Amgen (NASDAQ:AMGN) $60.48 +12.16% jumped $6.56 after Friday evening's favorable results from a Phase III study for its Denosamub drug, which demonstrated significant reduction in the incidence new non-vertebral and hip fracture in women with osteoporosis.
After today's closing bell, Amgen's (AMGN) shares rose to $62.30 in the extended session when the company reported earnings of $0.87/share on revenue of $3.76 billion. Amgen raised it 2008 adjusted EPS guidance range from $4.00-$4.30 per share to $4.25-$4.45 per share. Revenue guidance was upped from a range of $14.2B-$14.6B to $14.6B-$14.9 billion. Amgen attributed the upward revisions to continuing efficiencies and sales momentum.
Other notables had Kraft Foods (NYSE:KFT) $30.83 +4.93% gaining $1.45/share after the company said this morning that it earned $0.48/dilute share on revenue of $11.2 billion. Kraft attributed top and bottom line results to price hikes aimed at offsetting the recent surge in costs of ingredients. At Friday's close, KFT was the forty-second (42) most heavily weighted SPX component at 0.41% of total.
Tyson Foods (NYSE:TSN) $15.09 -7.02% fell $1.14/share by the close after reporting pre-market earnings of $0.03/diluted share on sales of $231 million. Tyson said pork operating margins were +5.8% and 7.5% for the quarter and YTD, but chicken losses reflected higher input costs as fiscal 2008 increases in grain costs expected to approximate $550 million.
U.S. Market Watch - 07/28/08 Close
"Red" was the predominant color for anything equity today, but Treasury's saw strong PRICE gains, with lower YIELDS a result.
I think a strong demand figure for Freddie Mac's (NYSE:FRE) $7.72 -6.65% $2 billion short-term debt auction helped the strong bid for Treasuries. Freddie said it sold $1 billion of three-month notes at a 2.40% rate, compared to 2.54% at a 7/21/08 sale. Today's bid-to-cover, a measure of demand was 3.85 versus 3.30 on 07/21/08. Freddie also sold $1 billion in six-month notes at a 2.654% rate, compared to 2.54% at a similar sized 7/21/08 sale. Bid-to-cover at today's sale was 2.83 versus 2.27 on 07/21/08.
Economic reports released today were few.
At 02:00 AM EDT, German consumer confidence declined to a five-year low of 2.1 in August, due mainly to record high energy prices. Economists were looking for a more confident reading of 3.5 after a 3.6 reading in July.
Germany's DAX ($DAX) fell 85 points, or -1.33% on Monday to close at 6,351.15, while France's CAC-40 ($CAC) shed 52 points, or -1.20% to 4,324.45. London's FTSE-100 ($FTSE) was lower by 40 points, or -0.75% at 5,312.60.
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Here at home, the regional Chicago Fed Midwest Manufacturing Index rose last month, due largely to a rebound in auto production. The Chicago Fed Manufacturing Index rose 1.1% for June to a seasonally adjusted level of 106.0.
General Motors (NYSE:GM) $11.00 -7.56% and Ford Motor (NYSE:F) $7.75 -5.94% struggled throughout. Daimler AG (NYSE:DAI) $59.64 -1.98% and Toyota Motor (NYSE:TM) $88.54 -3.57% traded lower.
As I type (07:50 PM EDT) Japan has released its June year-over-year retail sales, which rose 0.3% to 10.99 trillion yen, or $102.3 billion. Japan's Minstry of Economy, Trade and Industry attributed the gain to increased spending on fuel due to higher gasoline prices combined with higher spending on food purchases.
On Monday, Japan's Nikkei-225 ($NIKK) edged up 19 points, or +0.14% to finish at 13,353, while the Yen CurrencyShares (FXY) $92.28 rose 0.43%.
As I type, the Nikkei-225 is lower by 151 points, or -1.13% at 13,202.
Global Equity Indexes, Currencies, Oil, Gold & $HUI.X
On a Monday-to-Monday closing basis (07/21 to 07/28) Asian markets have faired better than European and U.S. counterparts, but each day, gains or losses appear to have traders commenting on the U.S. banks/financials, and/or U.S. economic reports.
In last Wednesday's evening Market Wrap I alerted traders and investors that Dorsey/Wright & Associates broadest of broad Bullish & All (BPALL) had reversed back up to "bull confirmed" status at 32.00% (32.83% actual) and tonight's close remains in column of "X" at 32.31% actual.
In fact, since Wednesday evening's Market Wrap, all major market bullish % have now reversed back up into a column of "X."
As such, I thought today's decline just before the clock struck 02:00 PM EDT with the S&P 500 (SPX.X) 1,243 and the SPY at $124.29, trader and investors should be looking to buy this broad market index for partial positions.
I liked to ProShares Ultra S&P 500 (SSO) for 1/8 positions at $57.82 with a stop at $53.00 and longer-term target of $75.00.
The SSO is a 200% leveraged security on the S&P 500. That is, its moves up and down double the S&P 500.
A 1/8 position in the SSO in my opinion is equivalent to 1/4 position in the SPX, or SPY itself.
To be truthful, today's SPY close $123.59 -1.50% is about $0.42 weaker than this SPX/SPY/SSO bull would have like to see on a Monday, as it is that amount below a WEEKLY Support 1 level of $124.01.
Here's how the SPY traded in mid-March as the various bullish % reversed back higher and internals began suggesting demand was starting to outstrip supply.
SPY (March 6 to April 23 time periods) - 60-min intervals
This is how a 60-minute interval chart of the SPY looked back in mid-March as the major market bullish % and BPSPX reversed back up. Once the BPSPX itself reversed back up in mid-March, the SPY itself found enough buyers to keep closes ABOVE the WKLY S1s at a minimum.
Even on a Monday.
Now here is an SPY 60-minute interval chart, where the SPY closed below this WEEK's WKLY S1 (support level 1).
SPY (June 24 to July 28 close) - 60-minute intervals
Tonight's close below this WEEK's WKLY S1 of $124.01 somewhat concerning to a BULL and I thought SPX/SPY trader and investors should be looking to "buy the pullback" at a WKLY S1 ($124.10) after last week's traded ABOVE the WKLY R1 of $128.20 as internals show demand starting to outstrip supply.
On the above chart, I point to the $125.79 area, and after the SPY cash session close at 04:15 PM EDT, there were a couple of rather LARGE traded posted, that likely were put together during today's session.
One very large block of 7.5 million shares was crossed at a price of $125.79, and not long after, another block of 1.02 million shares was crossed at $123.59.
It is impossible to know if the order was a large BUYER, or large SELLER, but from tonight's close on, BULLS want to see the SPY whip back higher and by WEDNESDAY'S close, get back ABOVE $126.58 and this WEEK'S pivot (mid-point of last week's High/Low/Close pivot tabulation).
We will get NEW MONTHLY Pivot levels (shown in PINK) at Thursday's close, but it
would be viewed as PRICE BEARISH if the SPY were to see a SESSION close below
Play Editor's Note: The VIX volatility index is rebounding. Traders willing to speculate on another market meltdown might want to consider buying calls on the VIX. I would suggest September calls. Meanwhile if you think there is more hurt ahead for the financials consider buying calls on the extremely volatile SKF or puts on the UYG. The UYG is not quite so stomach churning. Both of these ETFs are in the financial sector and will move twice as far as the sector itself. Note: the SKF goes up in value as the financials go down.
Burlington Northern - BNI - cls: 96.74 chg: -1.31 stop: 93.90
The stock market soured on Monday and the weakness across the board with the exception of oil does not inspire us to open new bullish positions. The railroad stocks held up better than the broader market but that doesn't mean they won't sink if the S&P continues to slide lower. Today's pull back in BNI to its 10-dma would normally be a new bullish entry point. At this time we would wait for a bounce before considering new call positions. I would expect a dip back toward $96.00 at a minimum. More conservative traders may want to play with a tighter stop loss. It is possible that BNI could fill the gap from July 22nd, which would mean a dip back toward $94.00. There is potential technical resistance at the 50-dma. Our target is the $104.75 mark. FYI: The Point & Figure chart is bullish with a $119 target but there is resistance near $102.
Picked on July 27 at $ 98.05
Fording Cand. - FDG - close: 82.49 change: +2.14 stop: 78.49
FDG out performed the broader market and most of its peers in the coal sector with a 2.6% gain on Monday. The stock broke through technical resistance at its 50-dma and hit our trigger to buy calls at $81.75. The play is now open. Our target is the $89.50 mark. I would expect some additional resistance near $85.00 on the way up.
Picked on July 28 at $ 81.75 *triggered
SPDR Gold Shares - GLD - cls: 91.73 chg: +0.04 stop: 89.95
We are surprised that gold didn't perform better today. Stocks were down and the U.S. dollar was down. Yet the GLD only managed a fractional gain. It looks like this gold ETF is still trying to bounce from support near $90 and its rising 50-dma. There appears to be potential resistance near $94.00 but we're aiming for a bounce back to $94.90. More aggressive traders may want to aim higher.
Picked on July 24 at $ 91.33
Intl. Bus. Mach. - IBM - cls: 126.25 chg: -2.28 stop: 124.95
IBM was not immune to the selling on Monday. The stock lost more than 1.7% and broke down under its 10-dma. This is short-term bearish and we would expect a dip toward what should be better support around $125.00 and its 50-dma. Wait for signs of a bounce before considering new positions. You could argue that our stop loss at $124.95 is a bit too tight, especially if we're expecting a dip and bounce near $125. More aggressive traders may want to widen their stop. We have two targets. Our first target is $134.75. Our second target is $139.00. We are now suggesting the August or September calls.
Picked on July 23 at $130.25 *triggered
United States Oil - USO - cls: 100.54 chg: +1.27 stop: 97.45
Oil is finally starting to see an oversold bounce from support. The USO is bouncing from round-number support near $100 and its rising 100-dma. We see today's rebound as another entry point to buy calls. Our target is the $106.75 mark. The 50-dma near $108 looks like overhead resistance. More aggressive traders may want to aim higher. Ultimately our ultra-long term bias for oil is much, much higher but that doesn't mean the commodity won't see corrections, seasonal swings, and some sector rotation.
Picked on July 24 at $101.46
Alliant Tech.- ATK - close: 98.60 chg: -0.73 stop: 101.75
ATK produced another mini failed rally today and still looks poised to drop toward the bottom of its channel. This looks like another entry point for puts. We are aiming for $95.25. More aggressive traders could aim lower. The Point & Figure chart is bearish with a $78 target. We do not want to hold over the August 8th earnings report. This could be considered a higher-risk more aggressive play because the spreads on the options are a little too wide!
Picked on July 27 at $ 99.33
Freddie Mac - FRE - close: 7.72 change: -0.55 stop: n/a
Concerns over financials continue to spook the markets. FRE lost another 6.6%. We don't see any changes from our weekend comments. Our time frame is several weeks although at this rate FRE could hit our target pretty soon. You will want to consider the September or October puts. We consider this a lottery-ticket style of play. The put option is our ticket. If we win, we should win big. If we lose, we lose it all. Thus we're not playing with a stop loss. More conservative traders may want to play with a stop anyway. Our short-term target would be a move back to $5.00. More aggressive traders may want to aim lower. FYI: FRE will be presenting at a conference on July 28th.
Picked on July 20 at $ 9.18
(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.)
Apple Inc. - AAPL - close: 154.40 chg: -7.72 stop: n/a
I was determined to add AAPL as another put play over the weekend but the volatility made picking a decent stop loss too risky. Now I'm wishing we added AAPL anyway. This strangle play isn't using a stop loss and we're happy to see AAPL moving again. The stock lost 4.7% and closed on its lows for the session. We are not suggesting new strangle positions. The options we suggested were the August $180 calls (APV-HP) and the August $150 puts (APV-TJ). Our estimated cost is $8.90. We want to sell if either option hits $14.50 or more.
Picked on July 20 at $165.15
Popular Inc. - BPOP - close: 6.34 change: -0.33 stop: n/a
BPOP, a banking stock, followed financials lower. Shares gave up almost 5% albeit on low volume. We are not suggesting new strangle plays on BPOP. The options we listed were the August $7.50 calls (BQW-HU) and the August $5.00 puts (BQW-TA). Our estimated cost was $0.65. We want to sell if either option hits $1.45 or more.
Picked on July 16 at $ 5.82
DIAMONDS - DIA - close: 111.34 chg: -1.83 stop: n/a
The DIA sank another 1.5% on Monday. We don't see any changes from our previous comments. We still need to see some big moves before the play is profitable. More conservative traders may want to exit early now. We are not suggesting new strangles on the DIA. The options we suggested were the August $115 calls (DIA-HK) and the August $109 puts (DIA-TE). Our estimated cost is $4.35. We want to sell if either option hits $6.90 or more.
Picked on July 07 at $112.21
iShares Brazil - EWZ - cls: 77.14 chg: -0.26 stop: n/a
The bounce in the EWZ this morning failed, which should set up for another leg lower soon. We're not suggesting new positions at this time. The options we suggested back in early July were the August $90 calls (EWZ-HR) and the August $75 puts (EWQ-TO). Our estimated cost is $3.95. We want to sell if either option hits $5.90.
Picked on July 03 at $ 83.06
FosterWheeler - FWLT - close: 55.17 chg: -0.55 stop: n/a
FWLT bounced up to its simple 10-dma and rolled over. Today's failed rally suggests a continuation of the bearish trend. We are not suggesting new strangle positions in FWLT at this time. The options we suggested were the August $70 calls (UFB-HN) and the August $50 puts (UFB-TJ). Our estimated cost was $2.60. We want to sell if either option hits $4.00.
Picked on July 15 at $ 61.24
Corning Inc. - GLW - close: 20.80 chg: +0.30 stop: n/a
Thanks to some positive analyst comments over the weekend GLW gapped higher this morning but pared its gains after trading near $21.00. If you want to open positions ahead of earnings tomorrow is your last day. You may want to pick a different set of options unless GLW pulls back toward $20 tomorrow. The options we suggested were the August $22.50 calls (GLW-HX) and the August $17.50 puts (GLW-TW). Our estimated cost is $0.75. We want to sell if either option hits $1.50. Try and keep your investment balanced on both sides of the trade.
Picked on July 10 at $ 20.16
Google Inc. - GOOG - close: 477.12 chg: -14.86 stop: n/a
The longer GOOG struggles with resistance near $500 the stronger odds become that the next move is going to be lower. We're going to repeat our previous comments about the lack of follow through on the post-earnings sell-off. More conservative traders may want to consider an early exit now to salvage capital since August options expire in three weeks. We're not suggesting new strangle positions in GOOG at this time. The options we listed were the August $590 calls (GOO-HR) and the August $480 puts (GOP-TI). Our estimated cost was $19.10. We want to sell if either option hits $30.00 or more.
Picked on July 16 at $535.60
Internet Holders - HHH - cls: 48.69 change: -1.53 stop: n/a
The HHH lost 3% today thanks to weakness in AMZN, YHOO and especially ETFC. Only aggressive traders should consider new positions at this time since we have less than three weeks left. The options we suggested were the August $55 calls (HHH-HK) and the August $45 puts (HHH-TI). Our estimated cost is $1.65. We want to sell if either option hits $2.45.
Picked on July 03 at $ 50.50
Lehman Brothers - LEH - close: 15.27 chg: -1.78 stop: n/a
I am probably going to wish we had just added LEH ad a directional put play but we should still do well with this strangle strategy. The stock moved more than 10% on Monday so we're not suggesting new positions at this time. The options we suggested were the September $24.00 calls (LYH-IR) and the September $10.00 puts (LYH-UB). Our estimated cost is $2.15. We want to sell if either option hits $3.50 or higher.
Picked on July 27 at $ 17.05
Legg Mason - LM - close: 35.55 chg: -3.96 stop: n/a
LM also gave up more than 10% today. Today's move looks like another failed rally near $40.00. We're not suggesting new strangle positions at this time. The options we listed were the August $45 calls (LM-HW) and the August $35 puts (LM-TG). Our estimated cost was $3.15. We want to sell if either option hits $4.85 or more.
Picked on July 23 at $ 40.20
MarketVectors Agribusiness- MOO - close: 55.00 chg: -0.26 stop: n/a
The early morning bounce in MOO faded and the intermediate trend remains bearish. We're not suggesting new positions at this time. The options we suggested were the August $62 calls (MYV-HJ) and the August $50 puts (MOO-TX). Our estimated cost is $2.10. We want to sell if either option hits $3.15.
Picked on July 03 at $ 57.25
Netflix - NFLX - close: 28.63 change: +0.78 stop: n/a
Positive analyst comments helped push NLFX to a 2.8% gain on Monday. The stock came close to breaking out over its simple 200-dma. We're not suggesting new strangles at this time. The options we suggested were the August $32.50 calls (QNQ-HT) and the August $22.50 puts (QNQ-TX). Our estimated cost is $1.20. We want to sell if either option hits $2.20 or more.
Picked on July 23 at $ 27.98
PowerShares QQQ - QQQQ - cls: 44.42 chg: -0.85 stop: n/a
The Qs continue to churn sideways. We do not see any changes from our weekend comments. We're definitely not suggesting new positions and traders will want to consider an early exit now to cut their losses. We only have three weeks left before August options expire. The options we suggested were the August $47 calls (QQQ-HU) and the August $43 puts (QQQ-TQ). Our estimated cost is $1.80. We want to sell if either option hits $2.75 or more.
Picked on July 07 at $ 44.90
Starbucks - SBUX - close: 14.23 change: -0.19 stop: n/a
We would not expect shares of SBUX to move much ahead of its July 30th earnings report. SBUX has many options at $1.00 increments in the teens, readers could open new strangles at any time but we would wait until Wednesday, just before the earnings report, to do so. The options we suggested for the strangle were the August $14.00 calls (SQX-HK) and the August $13.00 puts (SQX-TJ). Our estimated cost was $1.38. We want to sell if either option hits $3.50 or more.
Picked on July 15 at $ 13.58
UBS Ag - UBS - close: 19.15 change: -1.61 stop: n/a
UBS got hammered on Monday as investors fled the financials again. Shares of UBS lost 7% and closed under round-number support at $20.00. We're not suggesting new positions at this time. We listed two different strangles.
UBS Strangle #1) This uses the August $22.50 calls (UBS-HX) and $17.50 puts (UBS-TW). Our estimated cost was $1.90. We want to sell if either option hits $3.00.
UBS Strangle #2) This uses the August $25.00 calls (UBS-HE) and $15.00 puts (UBS-TC). Our estimated cost was $0.90. We want to sell if either option hits $1.90.
Picked on July 13 at $19.49
Washington Mutual - WM - close: 3.95 chg: +0.11 stop: n/a
WM delivered an oversold bounce on Monday amidst a widespread and very strong sell-off in the financial sector. We suspect that WM will find support again, at least temporarily near its $3.00 low. A lot of investors would be tempted to buy WM at $3.00 as a speculative "it can't get much worse" kind of trade. At $3.00 a lot of traders see this as a long-term call option that doesn't expire with unlimited upside. That doesn't mean that WM can't go to $2.00 or $1.00 but expect some sort of bounce at $3.00. We are not suggesting new positions at this time. The options we suggested were the August $8.00 calls (WM-HV) and the August $4.00 puts (WM-TH). Our estimated cost is $0.72. We want to sell if either option hits $1.95 or more.
Picked on July 20 at $ 5.92
Valero Energy - VLO - close: 31.81 chg: -0.07 stop: n/a
It was not surprising to see VLO trade sideways ahead of its earnings report tomorrow. We are no longer suggesting new strangle positions. The options we suggested were the August $37.50 calls (VLO-HU) and the August $27.50 puts (VLO-TS). Our estimated cost is $1.38. We want to sell if either option hits $2.25 or higher.
Picked on July 27 at $ 31.88
Today's Newsletter Notes: Market Wrap by Jeff Bailey and all other plays and content by the Option Investor staff.
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