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Daily Newsletter, Wednesday, 09/10/2008

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Table of Contents

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

Market Wrap

What happened\? Let's get caught up!

Market Wrap

It's been awhile since you and I visited and having been away from the markets last week, I've had to do some catching up to find out just what happened while I was away, and share with you the REAL story, that may not have been covered by the drive by media.

Something happened on Thursday, and after trying to find out "what" from the popular press, and having little success, I've been hard at work and have tried to put some pieces of the puzzle together.

What happened last Thursday to have the major indices all down roughly 3.00%?

Inquiring minds want to know. So here we go.

It is only until today that I actually start to get "caught up" on some of the things that took place and something certainly triggered investor/trader sentiment on Thursday.

The global economic backdrop is our starting point as highly anticipated overseas rate decisions were made early Thursday morning.

Perhaps CNBC provided some coverage of these decisions, announcements, but I was in no condition to watch a TV, nor listen to it last week.

And while some subscribers may have been crunching numbers from the recent quarter and getting ready for this quarter's earnings reports, they probably had the TV off, and were locked in a quiet room too.

As I type, some guest on CNBC is saying his "fundamental" tabulations have stocks "cheap" right now!

We'll see, but there were some stocks that were VERY cheap 6-months ago, (low price/earnings) that don't trade today, or are nearing the $0.00 level in quick fashion. There are some that were "expensive" (high price/earnings) that trade much higher than they did 3, or 6-months ago, and they're even more expensive today as the stock's price moves higher still.

Some observations made with various U.S. equity futures early Thursday morning show little indication of any "negative" reaction to both the London Central Bank and European Central Bank standing pat on interest rates in those parts of the world.

I've thought for a few months now that the ECB has been too hawkish on near-term inflation, perhaps too focused on just one parameter that they might not be taking in the BIG picture of the global economy and the easing of pressures.

As you will see later, today's close for the CRB Index (CRY) 358.27 -0.72% in the U.S. Market Watch is now at the 12/31/07 close. While oil is the BIGGEST weighting in this index, we should have a general observation of where things stand in time (nearly three quarters ago).

What looks somewhat "suspicious" Thursday morning, is what I would consider to be somewhat of a pre-determined bearish move in some of our volatility measures, where despite a relatively flat open for U.S equities, the VIX.X had moved above an important third-quarter level of volatility resistance at 21.44 on September 2nd, stayed there on September 3rd, and jolted higher on Thursday (09/04/08).

Was something "bad" about to happen that had put buyers/call sellers outnumbering put seller/call buyers?

CBOE Market Volatility Index (VIX) - Daily intervals

On Wednesday 09/03/08 (cursor box in chart) the VIX.X closed with a 21.43 measure, almost exactly at its current QUARTERLY Pivot (21.44). OK, not all that "alarming" but put buyers/call sellers just about even with put sellers/call buyers relative to the second quarter. Remember, a PIVOT is the mid-point of a recent period's range.

But while equities were relatively "flat" Thursday morning, you can see the VIX's next day bar opened at 22.00 and rose notably from the open.

Maybe some "smart money" new of bad things to come regarding FRE and FNM.

Or was it the EIA inventory reports about to be released on Thursday at 10:35 AM EDT (natural gas) and 11:00 AM EDT (crude oil and refined products).

Oh boy ... I won't tell you I'm caught up on all that may, or may not have taken place from that week's hurricane. But last Thursday's EIA report and today's data certainly suggests refiners "learned" from their experiences a few years back and a time line with last Thursday intra-day DOES look to have drawn a negative reaction in the equity markets that day, especially for the Dow Industrials (CVX and XOM) are heavyweights, and S&P 100 and 500 (energy and financials both heavily weighted).

As I said several weeks ago, there's a lot of number crunching going on for those "fundamental" investors. BEST to play the piano with both hands. One on the fundamentals and the other on the technicals.

Later we'll note that FedEx (NYSE:FDX) $87.86 +3.66% was updating analysts and investors as fuel prices have fallen. Gosh, so many fundamental valuations one should cover. FDX looks to be trading at a p/e ratio of 24.36. That's on BACKWARD looking 12-months earnings though. Markets tend to be FORWARD looking.

Now, last Thursday, I can't say as if I see anything "unusual" with the EIA inventory, or refinery run data. As I had said on 08/27/08, the HURRICANE implications (if any) were going to be key, but the news of damage to refineries (if any) would be the likely driver.

That's where we did see some OUT OF WHACK data today, and it sure looks as if refiners did some studying and RISK management from the 2005 hurricanes.

What I'm talking about here is today's CRUDE OIL INPUTS into refineries, which fell SHARPLY by 1,775,000 barrels per day.

Remember, while this was reported TODAY, it was as of last Friday's close.

When hurricane season arrives, you'd better have as many eyes and as many hands as you can get if you're going to trade oil, or any of its derivatives.

EIA Gross Inputs, Crude Oil Inputs, Utilization and Days Supply

See the "unusual" or "out of whack" observation in the INPUTS for the week ended 09/05/08. There's analysts out there that do NOTHING but talk to their refiner sources for up-to-the day goings on.

There was certainly some "shutting down" by refiners, or not taking on any more CRUDE OIL last week.

See "column I" and percent utilization of operable capacity? It FELL to 78.27%, an OUT OF WHACK decline of 10.41 and "column J."

The # of days supply of crude oil, based on a 4-week average of crude oil inputs and the current stockpile of crude oil (298.03 million barrels), excluding the Strategic Oil Reserve, remained rather steady at 20.3 days.

This is a quick and dirty "demand" side of US refinery.

The supply side had the EIA saying US crude oil stockpiles fell by 5.8 million barrels to 298.03 million barrels. Total gasoline stockpiles fell by 6.4 million barrels (see refinery data above to tie with lack of refining of these products), while total distillate stockpiles fell by 1.25 million barrels to 130.5 million barrels.

Subcategories of the total gasoline figures had conventional gasoline stockpiles down 3.7 million barrels to 90 million barrels and reformulated, or summer blend (almost over) falling by 117,000 barrels to 1.86 million barrels.

There are many distillate subcategories. A couple I track had ULS diesel stockpiles (<15 PPM Sulfur) falling by 1.1 million barrels to 74 million barrels. Kerosene-type jet fuel down 2.3 million barrels to 39.8 million barrels, and heating oil stockpiles (>500 PPM Sulfur) rising by 636,000 barrels to 35,972.

Heating oil stockpiles still down 15.7% from year ago levels, but refiners can crank this stuff out faster than, than, than, taxpayers can back mortgages from FRE and FNM.

But not as fast as, as, as, ECB, or LCB can cut rates due to still rather hawkish thoughts about input inflation figures.

Let's hit two, make it three birds with a stone shall we.

One is for number crunchers as they try to estimate what input costs are going to be for the upcoming quarter. The second bird is any observation of commodity price inflation, or easing. The third is why aren't stocks rallying with the dollar's renewed strength against the euro and the pound.

Beetles Balanced (from 06/30/08 Close)

Bird #1: With the iShares S&P GSCI commodity index (GSG) $54.39 +0.62% on the day, down 27.39% since the end of Q2, how's that going to impact some costs of inputs to manufacturers bottom line in Q3 and Q4?

There are many other commodities that are inputs and COSTS to a manufacturer, but you can see how busy the number crunchers are.

Bird #2: What adjustments to your inflation model has been made the past 10-weeks? Do central bankers extend this type of decline to next quarter? Get those calculators humming.

You should begin to understand the time needed for such analysis and forecasting.

Bird #3: This is perhaps "why" the dollar's strength has not yet, nor will it ever if it continues, resulted in broader major US market equities. See the P/L % column? That's since 06/30/08, or representing Q3 to date. Yes, the IWM is up 3.5% and some of the CASH holds itself firm in small caps. The DIA relatively "unchanged" so far this quarter, but QQQQ now "leads weakness" on this time interval observation, while the SPY -3.37% so far this quarter, is pulled and tugged by what has been happening with LOWER energy prices (has weighed NEGATIVE) on the "energy stocks." And of course, you know what's all taking place with financials and the credit crisis.

I mentioned FedEx (NYSE:FDX) $87.86 +3.66%, which rose today to once again probe its 200-day SMA ($88.13). The company said its about-to-be completed Q1 earnings should be $1.23/share, which is well above the company's prior guidance of $0.80-$1.00/share. Yep, fuel prices easing helps with revised higher guidance.

Well, I haven't NEARLY gotten all written that I feel I needed to, but I've just been told that I need to get the wrap in.

Bottom line.

With S&P 500 (SPX.X) 1,232.04 +0.61%, I would view a CLOSE below 1,221 as further bearish. A CLOSE above 1,315 as sign of strength.

Inflation pressures as depicted by the CRB Index, or GSG look to be easing.

Oil's weakness is a "double-edged sword." Oil, or energy stock's prices which helped bulls during some tough times, has been a anchor of late. Gasoline prices have fallen and should help consumer and manufacturer.

Hurricane season in full swing, but it looks like refiners are going to produce what they want, when they want, and not get caught with tanks full of oil and not be able to refine if they get flooded.

Some of the "getting caught up" I did today in the OptionInvestor.com Market Monitor was too much time, but I also tried to tabulate for traders and investors how much refining capacity was in the Houston, TX portion of the gulf.

Ike's on his way.
 


The Contrarian

The CBOE Equity Put/Call Ratio

I sent out a brief update on Monday to notify everyone that the 10 day moving average of the CBOE Equity Volume Put/Call ratio had closed back above the 20 day moving average as of Fridays close. As I mentioned in the last posting, before switching to a Negative bias, I would like to see the 20 day moving average begin to move up as well. By the close, the 10 day had continued to advance and the 20 day moving average began to curl upward as well. Therefore, the Equity Put/Call ratio has signaled that there has been a shift in option trader sentiment. Prior to the shift the trend was that option traders were buying more calls than puts. The point of inflection where traders shift from buying calls to puts the sentiment indicator identifies the peak in Bullish call buying. For future reference, I will most likely switch the signal upon the 10 day moving averages (DMA) initial tick upward to Negative bias followed by a Negative confirmed once the 10 DMA crossed above the 20 DMA.

Therefore, the signal is now a Negative confirmed because the 10 DMA is above the 20 DMA. The 10 DMA is at 0.758 while the 20 DMA is at 0.728. As the chart shows both moving averages are advancing quickly which indicates that they will probably reach Bullish territory soon and signal a Positive bias. The signal will become Positive once the 10 DMA curls downward and Neutral once the 10 DMA breaks above 0.80. SIGNAL: NEGATIVE BIAS

The CBOE Volatility Index ($VIX)

Have you ever heard the phrase when the VIX is high its time to buy; when the VIX is low its time to go? It refers to the historical inverse relationship between the CBOE Volatility Index (VIX) and the S&P 500 (SPX). The VIX is the constant implied volatility measure of the SPX while the VXO is the volatility index of the S&P 100 (OEX). Positive and Negative signals are generated from the 10 day moving average of the VIX reaching its peak and lows, respectively, followed by a reversal.

Last Thursday the $VIXs 10 day moving average crossed above the 20 day moving average. on Thursdays close. The initial cross signaled a Negative bias for the $VIX sentiment indicator. Basically, SPX option investors went from being somewhat complacent about their portfolios and the markets to feeling the increased need for portfolio protection. Therefore, those SPX option traders began to buy more puts at even after the market adjusted the volatilities up and thus the prices higher. The signal was moved to a Negative bias as of Thursdays close. As both moving averages move higher the current trend shows that volatility is advancing from a relative low range (near 20) up to its recent high of 26. Our signal will become Neutral once the moving average curls over or reaches up to the July high of 26. If the $VIX declines to the 10 day moving average, positive deltas may be done on market advances. However, the capitulation high is at the upper Bollinger band at 29.30 which would provide a higher probability short covering and/or long entry. SIGNAL: NEGATIVE BIAS

Investors Intelligence

Each week Investors Intelligence releases its polls of Investment Advisors/newsletter writers that determine the percentage that are either Bullish, Bearish and Corrective. Investors Intelligences staff actually reads the sampling of the newsletters and then determines their sentiment bias. Normally bullish signals occur when the percentage Bearish newsletter writers exceeds past 45% while Bearish signals occur when the percentage of Bullish advisors exceeds 55%.

The report that was released last Wednesday shows that the level of Bullish advisors increased 0.5% to 38.3%. The level of Bearish newsletter writers also increased a little to 41.6% from 40.0%. Therefore, the spread decreased a little more (1.1%) to minus 3.3%. As I mentioned on Monday, I probably should have moved the bias to Negative at the first downtick but the normal bearish levels usually occur above 25. Even the last reversal that happened in May occurred with the spread above 10. The slope in the curve is somewhat flat which indicates that the trend in sentiment of newsletter writers may soon be reversing back toward positive territory. This is now the third week that the Bearish newsletter writers have increased. The signal will become Positive on the next uptick in the spread. SIGNAL: SLIGHTLY NEGATIVE BIAS

Robert J. Ogilvie
 

New Plays

Most Recent Plays

Click here to email James
New Option Plays
Call Options Plays
Put Options Plays
Strangle Options Plays
None LAMR None
  VLO  

New Calls

None today.
 

New Puts

Lamar Advertising - LAMR - cls: 36.47 chg: -1.14 stop: 38.01

Company Description:
Founded in 1902, Lamar, one of the nations largest providers of out-of-home advertising, operates more than 150 outdoor advertising companies in more than 40 states and Puerto Rico. Lamar has more than 70 transit franchises reaching driving audiences across the U.S., Canada and Puerto Rico through billboards, digital billboards, bus shelters, benches and buses. (source: company press release or website)

Why We Like It:
LAMR's bearish long-term trend of lower highs has run into a new problem with technical resistance at the 200-dma. Shares just reversed again on Tuesday and now the stock is breaking down under its 50-dma. We're tempted to buy puts now. However, the $36.00 level looks like it might be short-term support. We're suggesting a trigger to buy puts at $35.90. If triggered our target is 31.50 mark. More aggressive traders could aim for a new relative low.

Suggested Options:
We are suggesting the October puts. It is up to the individual trader to decide which month and which strike price best suits your trading style and risk.

BUY PUT OCT 35.00 LJQ-VG open interest=5659 current ask $1.70
BUY PUT OCT 00.00 LJQ-VF open interest=2877 current ask $0.40

Picked on September xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 11/06/08 (unconfirmed)
Average Daily Volume = 1.4 million

---

Valero Energy - VLO - close: 30.90 chg: +0.39 stop: 32.01

Company Description:
Valero Energy Corporation is a Fortune 500 company based in San Antonio, Texas, and incorporated in Delaware. The company has approximately 22,000 employees and assets valued at $38 billion.
The largest refiner in North America, Valero has an extensive refining system with a throughput capacity of approximately 3.1 million barrels per day. (source: company press release or website)

Why We Like It:
We can easily see how the bulls might declare today a potential entry point to buy VLO after forming a bullish double-bottom pattern. Shares bounced from a test of the $30 level back in July and shares rebounded again today. However, the long-term trend remains bearish. VLO and the rest of the refiners could suffer as Americans continue to cut back on demand and the rest of the world won't help since it's heading into a global slow down. We suspect that VLO will actually breakdown and begin another leg lower. We're suggesting a trigger to buy puts at $28.99. If triggered we will have two targets. Our first target is $25.25. Our second target is $21.50.

Suggested Options:
We are suggesting the October puts. It is up to the individual trader to decide which month and which strike price best suits your trading style and risk.

BUY PUT OCT 30.00 VLO-VF open interest=1918 current ask $2.22
BUY PUT OCT 25.00 VLO-VE open interest=2103 current ask $0.60

Picked on September xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 11/04/08 (unconfirmed)
Average Daily Volume = 11.7 million
 

New Strangles

None today.
 

Play Updates

Updates On Latest Picks

Click here to email James

Call Updates

UltraShort Russell2000 - TWM - cls: 70.04 chg: -1.33 stop: 64.75

The markets got a bounce today but the bounce was fading lower into the closing bell. We see this dip in the TWM as another bullish entry point to buy calls. If you think the market bounce is not over yet then wait for the TWM to dip toward $68.00 before considering new positions. We have two targets. Our first target is $77.50. Our second target is $82.50.

Picked on September 09 at $ 71.37
Change since picked: - 1.33
Earnings Date 00/00/00
Average Daily Volume = 7.4 million

---

United States Oil - USO - cls: 82.97 chg: -0.62 stop: 77.45

News that OPEC was "trimming" their output lead to a morning pop in crude oil prices but the rebound eventually failed. Shares of USO gapped open and hit $84.68 before paring its gains. We are waiting for a pull back toward $80.00. We are suggesting that readers use a trigger to buy calls in the $80.50-80.00 zone. If you're feeling really nimble you could wait and try to jump in near $79.00. We're suggesting a stop loss at $77.45 but more conservative traders might want to inch theirs higher around $78.00. If we are triggered at $80.50 we have two targets. Our first target is $84.75. Our second target is $87.50.

Picked on September xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 00/00/00
Average Daily Volume = 13.8 million

---

CBOE Volatility Index - VIX - close: 24.52 chg: -0.95 stop: n/a

After a big down day yesterday the market bounced and that took a little air out of the rally in the VIX. The trend remains up for the volatility index. Our target is the $29.75 mark. Readers might want to consider scaling out of positions in the 28-29 region.

Picked on August 03 at $ 22.57
Change since picked: + 1.95
Earnings Date 00/00/00
Average Daily Volume = x million
 

Put Updates

Intuitive Surgical - ISRG - cls: 273.94 chg: +5.83 stop: 280.55

ISRG produced a bounce today but the rebound struggled again under $280 and its exponential 200-dma. The stock actually produced a new lower high on a short-term basis. This looks like another entry point to buy puts. Right now we're only listing one target at $251.00. More aggressive traders might want to consider aiming for the January 2008 lows near $225 but keep in mind the $250 level could be strong support. This should be considered a higher-risk play because the stock price can be so volatile and the options can have wide spreads.

Picked on September 09 at $268.11
Change since picked: + 5.83
Earnings Date 10/16/08 (unconfirmed)
Average Daily Volume = 655 thousand

---

Roper Industries - ROP - cls: 57.14 chg: -0.21 stop: 60.05

The bounce in ROP continues to struggle and shares are building a short-term pattern of lower highs, which compliments the intermediate pattern of lower highs. We would still consider new bearish entry points here. More conservative traders might consider stops above Tuesday's high. Our target is $54.25. FYI: The Point & Figure chart is bearish with a $45 target but the P&F chart also shows some support near $53.00.

Picked on September 03 at $ 58.19
Change since picked: - 1.05
Earnings Date 10/23/08 (unconfirmed)
Average Daily Volume = 664 thousand

---

Unibanco - UBB - close: 103.47 chg: +1.72 stop: 112.45 *new*

Target achieved. Weakness in financials contributed to UBB's fall to an intraday low of $99.06. Our first target was $100.50. The sharp rebound produced what might be considered a bullish hammer candlestick and a potential reversal signal. We're not suggesting new bearish positions and we're adjusting the stop loss to $112.55, which is just above the 10-dma. More conservative traders might want to tighten their stops toward $110 instead. Our second target is $92.50. The Point & Figure chart has produced a brand new triple-bottom breakdown sell signal and the bearish target has dropped from $92 to $84. The stock can be volatile so readers should consider this a higher-risk play.

Picked on September 04 at $108.82 /1st target hit 9/10/08
Change since picked: - 5.35
Earnings Date 11/06/08 (unconfirmed)
Average Daily Volume = 1.5 million
 

Strangle Updates

None
 

Dropped Calls

None
 

Dropped Puts

Air Products - APD - cls: 85.16 change: +0.61 stop: 88.05

Target achieved. Actually APD hit our second target today at $84.00 when shares dipped to $83.87. Shares had hit our first target at $87.00 back on September 4th. The play is closed for us but we would keep an eye on APD. Another failed rally under its 10-dma might be another bearish entry point.

Picked on August 31 at $ 91.85 *2nd target hit 84.00
Change since picked: - 6.69
Earnings Date 10/22/08 (unconfirmed)
Average Daily Volume = 1.8 million
 

Dropped Strangles

None
 

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

DISCLAIMER

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.

Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.

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