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Daily Newsletter, Wednesday, 02/01/2006

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Table of Contents

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

Market Wrap

Market Wrap

Google-Eyed

Google's spectacular after-hours decline yesterday captured more attention among some market participants than the week's earlier GDP disappointment, the removal of the "measured" language in the FOMC's statement, their assertion that further rate hikes may be necessary or President Bush's speech. Numbered among the google-eyed must have been those gasping at the prospect of what could happen to unrealized gains on their own investments as well as those gasping at the buying opportunity they thought was being dropped into their laps. Investors of all stripes wondered how the disappointment might impact investor sentiment.

Overnight, an example had been provided. Hit by a negative reaction to NTT DoCoMo's and Mizuho Financial Group's earnings reports, the Nikkei had tumbled almost 200 points off its high of the day to close at its low. While that sounds staggering, 200-point intraday moves on the Nikkei qualify as a typical ho-hum day for that index over the last few weeks, when gains or losses of much bigger magnitude have become almost commonplace. As U.S. traders awoke, European bourses were reporting solid gains in the 0.24-0.67 percent ranges, so global reactions proved mixed, as would U.S. reactions during the first part of the trading day.

If GOOG disappointed, Boeing (BA) provided the counterbalance, with support also lent by old-guard companies such as CAT and HON. The two forces created the mixed trading pattern that predominated early in the day. Reactions to a slightly disappointing ISM number and mixed crude inventories report also proved muted at first, although the latter was to change by the end of the day. By midday, indices had settled into the tight-range sideways movements that drive traders crazy or put them to sleep, but the DOW, SPX, Nasdaq and SOX were all to see gains by the end of the day.

Annotated Weekly Chart of the SPX:

Annotated Daily Chart of the Dow:

Annotated Daily Chart of the Nasdaq:

Annotated Daily Chart of the SOX:

As google-eyed as some might have been, the implication of the ISM release might have escaped notice, at least temporarily. A similar measure in Europe had eased in January, while the U.K.'s measure rose. Expectations for the U.S.'s Institute for Supply Management's manufacturing sentiment index were for an easing to 55.4 percent from December's 55.6 reading. Instead, the ISM fell to 54.8, with 50 marking the boom/bust line for this indicator. This proved to be the third drop in the ISM, although one economist with the ISM cautioned that the index had peaked after the hurricanes and was only now coming back to a typical level. He cautioned that it would be a mistake to pay too much attention to that three-month downtrend, but some might wonder. New orders, production and employment components fell, but one bright spot proved to be the backlog of orders. That component rose above the 50 benchmark, to 53.5 percent from the previous 49.5 percent. Exports also rose.

Even more problematic than the drop in the headline number was the performance of a component of the ISM number, the prices index. This inflation measure jumped to 65 percent from the previous 63 percent. Given the FOMC's hint that future rate hikes might occur, this inflation measure should have grabbed attention, as modest as the gain might have been.

If any were watching economic releases, December's construction spending might have cheered them, as spending rose 1.0 percent above November's revised-higher number. Economists had expected Katrina-related rebuilding to produce a gain, but this number beat expectations for a 0.2 percent gain. For the full year, spending increased 8.9 percent, with private-sector spending rising 9.3 percent and spending on housing climbing 11.1 percent.

The National Association of Realtors didn't have good things to say about housing, however, with the association's index of pending home sales falling 3 percent in December. Year over year, the index has fallen 5.5 percent. The Mortgage Bankers Association's figures for the week ending January 27 also revealed that those applications fell for the first time in a month. Over the last few days, CNBC reports have been focusing on the incentives new home builders have been offering in order to entice buyers, much as car manufacturers have done over the last years. The new home sales figure had been surprisingly robust after a drop in sales of existing homes. However, the MBAA survey showed that total mortgage loan application volume fell 5.1 percent on a seasonally adjusted basis from the previous week. If not adjusted for seasonal patterns, it rose 9.1 percent, but was down 12.1 percent from the year-ago level.



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Other components fell, too. The purchase, refinance and conventional indices fell 8.0, 1.5 and 5.9 percent, respectively. The government index rose 5.3 percent. Four-week moving averages for the market, purchase and refinance indices all rose, still building after the last month of gains. Thirty-year fixed-rate mortgage rates increased to 5.79 percent from the previous week's 5.66 percent and points increased, too. The DJUSHB, the Dow Jones Home Construction Index, was to fall 2.39 percent today, plunging beneath its 200-sma and closing just above its 200-ema.

Despite the troubling implications of the ISM and NAR reports and the GOOG disappointment, a short-lived rebound in many indices followed these releases. GOOG wasn't alone in disappointing investors. It was joined by such diverse companies as Allstate (ALL), MicroStrategy (MSTR), JetBlue (JBLU), Symantec (SYMC) and Legg Mason (LM). GOOG was to close the regular session at $401.78, well off its $387.52 regular-session low, but further off its $432.66 close yesterday. Most other disappointing companies saw their stocks lower, too, although some must have disagreed with the interpretation of LM's earnings, because it bounced.

JBLU did not bounce. It barely managed a close off its low of the day, closing at $11.18, down from Tuesday's 13.04 close. JBLU is a component of the TRAN, the Dow Jones Transportation Index. In early trading, JBLU headed lower, along with 15 other of the 19 TRAN components, leaving only ALEX, CHRW and GMT in the green. After President Bush's "America is addicted to oil" statement and his reminder that we import oil from often-unstable parts of the world, some worry might have preceded the release of the crude inventories number, but even after that number and the drop in crude prices that was ultimately to result, the TRAN stair-stepped lower.

Annotated Weekly Chart of the TRAN:

Some characterized that crude inventory number as mixed, but the eventual reaction was to send crude futures into a loss after they rose to a high of $69.00, testing the 1/20 high of $69.15. A build had been expected and was delivered in most components. Distillate inventories did not build as expected, however. The EIA announced that crude inventories rose by 1.9 million barrels, and gasoline rose by 4.2 million barrels, but distillates fell by 200,000 barrels. Crude remains above the upper end of the average range for this time of year; gasoline, in the upper end; and distillates, above the upper end of the average range.

Later in the day auto sales data began appearing, with some companies beating expectations. Ford Motor (F) was one, with the company's January U.S. sales increasing 2 percent. Underneath the headline number, Ford Excursion sales dove, driving down truck sales, but mid-size sedans performed well, bringing the headline number into positive territory. Other companies reporting better-than-anticipated results included Daimler Chrysler (DCX) and General Motors (GM). GM's January sales rose 6 percent, but this manufacturer also saw truck sales below that of other classifications. Truck sales were flat.

Some had credited the auto sales numbers with a stronger performance on the markets in the afternoon, but crude's drop from its test of January's high also occurred at about the same time equity indices began trying to break out of their consolidation patterns. The drop in crude cratered the OIX, too, though, perhaps capping any gains. Refiners were hit. Sunoco (SUN) was one of those, dropping ahead of this afternoon's earnings report.

Some auto manufacturers were beating sales expectations and Boeing (BA) also beat expectations, reporting a doubling of its fourth-quarter profit. The company also raised both EPS and delivery guidance. Some have worried whether BA can keep up the pace after last year's record number of aircraft orders, but investors weren't worrying today, sending the stock into a 4.84 percent gain. Boeing (BA) also beat expectations, reporting a doubling of its fourth-quarter profit. The company also raised both EPS and delivery guidance.

Other positive developments saw Amgen (AMGN) benefiting from speculation that the FDA might hold up peer Roche's competing anemia drug. AMGN gained 4.52 percent. Healthcare and biotechs provided bright spots early in trading while other recent leaders to the upside took a breather. The HMO, the Morgan Stanley Healthcare Index, was to close higher by 2.06 percent, and the BTK, the Biotechnology Index, posted a 0.76 percent gain.

AT&T (T) also benefited from a report in the FINANCIAL TIMES. T gained 2.31 percent, and the XTC, the North American Telecoms Index, climbed 0.73 percent. In other news, United Airlines (UAL) emerged from bankruptcy today, with the revamping of the company having taken three years.

Earnings for tomorrow include ALA, AMZN, APA, AZN, CERN, CLX, CMCSA, CVS, DB, ERTS, EFX, GTW, ITWO, IMGN, IP, KSU, MEDI, NTIQ, NSANY, ONNN, OSK, RTN, RCL, SFNT, SLE, SOFO, STA, SPF, HOT, ROW, TXU, WSTC, WHR and a number of financials. This includes just some of the reporting companies.

This afternoon and evening, retailers will begin reporting January same-store sales data. Some were beginning to trickle in as this report was completed, with Hot Topic (HOTT) reporting a slowing of sales and Aeropostale raising its forecast for the quarter after strong January sales. American Eagle (AEOS) reported that January sales rose 17.5 percent, while Limited Brands (LTD) saw its sales rise 3 percent. The RLX, retail index, trended down into the mid-afternoon, when it hit its daily 100-ema and bounced from that, although some individual retailer showed small gains. Some, such as TGT, WMT, FDO and DLTR have been chopping around for a month or more, looking for next direction. The day produced a loss for the RLX.

Other after-hours developments include a mixed report from JDSU. Revenue increased 73 percent, but the company reported a net loss of $0.03 a share. As this report was prepared, the stock traded at $3.07, down from the $3.16 close. RIMM had climbed to $73.77 in after hours, up from its $73.61 close after a favorable patent ruling by the U.S. Patent and Trademark Office.

Tomorrow's economic reports, in order of their releases, include the Monster Employment Index at 6:00, the Challenger Employment Report at 7:30, initial claims and preliminary Q4 productivity at 8:30,and natural-gas inventories at 10:30.

It should not go without notice that the Russell 2000 rose to a high of 736.45 today, testing its January 27 high of 736.25, but like many other indices, it did not remain above the top of this week's consolidation, with the Dow being one of the few indices that did, but the DOW remains within a difficult trading pattern, a broadening formation. The Wilshire 5000, like many other indices, bounced today, but did not move above the top of its recent consolidation pattern, either.

Next action proves difficult to gauge as indices have moved up to proven resistance and stopped there. The TRAN tests long-term resistance, as it seems to have been doing interminably, the RUT stopped at its recent high and the SOX just below the top of the last huge gap. These leading indices showed a mixed performance today. Frequent mention of Friday's employment numbers show that some market participants may be on hold again ahead of those numbers. Trade carefully in this choppy environment. If long, continue to move stops higher as indices move higher, but keep a watch on those three indices that tend to lead different sectors of the market.
 

New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
ARLP None
CEC  
NAFC  
RCRC  

New Long Plays

Alliance Res. - ARLP - close: 39.20 chg: +1.20 stop: 37.49

Company Description:
Alliance Resource Partners is the nation's only publicly traded master limited partnership involved in the production and marketing of coal. Alliance Resource Partners currently operates eight mining complexes in Illinois, Indiana, Kentucky, Maryland and West Virginia. (source: company press release or website)

Why We Like It:
We are long-term bullish on coal stocks given our country's energy needs. However, the industry's stocks have been in a slow decline for months now. We suspect that ARLP's consolidation is about over. Today's gain in ARLP is a breakout over its simple 50-dma and the stock is challenging resistance at its multi-week trendline. We are going to suggest a trigger above round-number resistance at $40.00 and technical resistance at the 200-dma (39.66). Our trigger to go long will be $40.05. If triggered we will target a rally into the $44.00-45.00 range. Our time frame is eight to tend weeks.

Picked on February x at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 01/30/06 (confirmed)
Average Daily Volume: 112 thousand

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CEC Entertainment - CEC - cls: 37.61 chg: +1.59 stop: 35.18

Company Description:
Where a Kid can be a Kid, Chuck E. Cheese's Pizza is also a special place for families. The menu features homemade pizza with fresh, high quality ingredients, sandwiches, bread sticks and a salad bar. In addition, Chuck E. Cheese's offers games and rides for kids of all ages and an animated stage show starring Chuck E. and his musical friends. The restaurants are also a popular location for birthday parties and special events for groups and organizations. The Chuck E. Cheese's Pizza concept has been in operation since May of 1977 when the first restaurant opened in San Jose, California. (source: company press release or website)

Why We Like It:
This is a technical breakout play. CEC has been consolidating sideways under its simple 200-dma for the last several weeks. Today's rally is a bullish breakout over the November-December highs and the 200-dma. The move was fueled by volume more than double the daily average. Bulls are fighting against a bearish P&F chart but CEC can probably rally toward round-number resistance near $40.00. We would consider longs right here or watch for a dip back to the $36.50 region. Our target is the $39.85-40.00 range.

Picked on February 1 at $37.61
Change since picked: + 0.00
Earnings Date 03/01/06 (unconfirmed)
Average Daily Volume: 226 thousand

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Nash-Finch Co. - NAFC - close: 30.37 chg: +0.77 stop: 29.29

Company Description:
Nash Finch Company is a Fortune 500 company and one of the leading food distribution companies in the United States. Nash Finch's core business, food distribution, serves independent retailers and military commissaries in 28 states, the District of Columbia, Europe, Cuba, Puerto Rico, Iceland, the Azores and Honduras. The Company also owns and operates a base of retail stores, primarily supermarkets under the Econofoods, Family Thrift Center and Sun Mart trade names. (source: company press release or website)

Why We Like It:
This is a simple buy the bounce from the bottom of its rising channel play. NAFC bottomed back in early January and shares have been rising in a steady channel since. Today's rebound is a bounce from rising support. Plus, today's gain also happened to produce a bullish engulfing candlestick pattern. We're going to put our stop loss under today's low. Our target is the $32.45-32.50 range. More conservative traders may want to exit near $32.00 since the 100-dma might act as overhead resistance. Hopefully a follow through on today's bounce will spark some more short covering. The latest data puts short interest at 11.8% of its 13.2 million-share float. Please note the biggest risk we see here with NAFC is earnings. We cannot find any upcoming earnings date and we certainly don't want to hold over any future report.

Picked on February 1 at $30.37
Change since picked: + 0.00
Earnings Date 00/00/06 (unconfirmed)
Average Daily Volume: 240 thousand

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RC2 Corp. - RCRC - close: 35.62 chg: +0.75 stop: 34.49

Company Description:
RC2 Corporation (www.rc2corp.com) is a leading designer, producer and marketer of innovative, high-quality toys, collectibles, hobby and infant care products that are targeted to consumers of all ages. RC2's infant and preschool products are marketed under its Learning Curve family of brands which includes The First Years by Learning Curve and Lamaze brands as well as popular and classic licensed properties such as Thomas & Friends, Bob the Builder, Winnie the Pooh, John Deere and Sesame Street. RC2 markets its collectible and hobby products under a portfolio of brands including Johnny Lightning, Racing Champions, Ertl, Ertl Collectibles, AMT, Press Pass, JoyRide and JoyRide Studios. RC2 reaches its target consumers through multiple channels of distribution supporting more than 25,000 retail outlets throughout North America, Europe, Australia, and Asia Pacific. (source: company press release or website)

Why We Like It:
Shares of RCRC appear to be on the verge of a significant bullish breakout. The stock is bouncing from support near the $34.00 level and today's gain is a bullish breakout over the simple 50-dma. Volume came in above average. RCRC is also challenging resistance at its six-month overhead trendline and the 200-dma. We are suggesting a trigger to go long at $36.05. If triggered we'll target a rally into the $39.00-40.00 range but we will plan to exit ahead of its February earnings report.

Picked on February x at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 02/14/06 (unconfirmed)
Average Daily Volume: 114 thousand
 

New Short Plays

None today.
 

Play Updates

Updates On Latest Picks

Long Play Updates

Argonaut Group - AGII - close: 35.50 chg: -0.05 stop: 33.90

We don't see any change from our previous updates on AGII. Our short-term target is 38.00-38.50. We plan to exit ahead of its February earnings report.

Picked on January 29 at $35.20
Change since picked: + 0.30
Earnings Date 02/07/06 (confirmed)
Average Daily Volume: 189 thousand

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Global Power Equip. - GEG - cls: 5.15 chg: +0.41 stop: 4.59*new*

The bulls are running in shares of GEG or at least they've got the bears on the run and they are covering shorts. GEG has broken out from its trading range and now it has broken out above round-number resistance at the $5.00 mark. Our target is the simple 100-dma, currently near $5.50, but we've been using a target zone to exit in the $5.40-5.60 range. We won't hesitate to jump out at $5.40. More conservative traders might want to take some profits right here with GEG up more than 10% from our picked price. We are raising the stop loss to $4.59.

Picked on January 29 at $ 4.65
Change since picked: + 0.50
Earnings Date 03/13/06 (unconfirmed)
Average Daily Volume: 334 thousand

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Helen of Troy - HELE - close: 19.45 chg: +0.29 stop: 17.99

HELE is still bouncing along the $19.00 level but it's struggling to breakout over $19.50. More conservative traders might want to consider tightening their stops toward the 10-dma. Our target is the $22.00-22.50 range.

Picked on January 25 at $19.04
Change since picked: + 0.41
Earnings Date 01/09/06 (confirmed)
Average Daily Volume: 285 thousand

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Mens Wearhouse - MW - close: 33.93 change: -0.24 stop: 31.85

Wednesday's session saw MW continue to consolidate some of its recent gains. Tomorrow could be different. After the closing bell MW reported that January same-store sales rose 3%, which was better than expected. That should but a bullish bias under the stock tomorrow. Our target is the $36.00-37.00 range. We do not want to hold over the (unconfirmed) February 15th earnings report.

Picked on January 25 at $32.62
Change since picked: + 1.31
Earnings Date 02/15/06 (unconfirmed)
Average Daily Volume: 625 thousand

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Nordic Am. Tankers - NAT - cls: 32.00 chg: -0.06 stop: 30.75*new*

Time is running low with our play in NAT. We're choosing to raise the stop loss to $30.75, which is under short-term support at $31.00 and the 10-dma near $31.20. The 100-dma near $33.00 still looks like short-term resistance. We only have a few days before we need to exit ahead of the February 7th earnings report and readers may not want to initiate new longs right here.

Picked on January 25 at $31.56
Change since picked: + 0.44
Earnings Date 02/07/06 (confirmed)
Average Daily Volume: 191 thousand

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Patterson-UTI - PTEN - close: 36.60 chg: -1.02 stop: 34.85

Be careful here. Short-term technicals are turning bearish on PTEN. Today's profit taking in the oil and oil services stocks hit PTEN for a 2.7% loss. Now the MACD on PTEN's daily chart has produced a new sell signal. We are not suggesting new longs and conservative traders may want to exit early right here to prevent further losses. We're watching the $35.50-36.00 level for short-term support.

Picked on January 17 at $36.85
Change since picked: - 0.25
Earnings Date 03/16/06 (unconfirmed)
Average Daily Volume: 3.2 million
 

Short Play Updates

None
 

Closed Long Plays

None
 

Closed Short Plays

Travelzoo - TZOO - close: 21.66 change: +1.04 stop: 22.05

The GOOG sell-off did not have the negative impact on the Internet sector that we expected. The INX Internet index actually closed in the green. Shares of TZOO displayed some unusual relative strength with a 5% bounce. It was our plan to exit today near the closing bell to avoid holding over the company's earnings report due out tomorrow.

Picked on January 22 at $21.02
Change since picked: + 0.64
Earnings Date 02/02/06 (confirmed)
Average Daily Volume: 309 thousand
 

Today's Newsletter Notes: Market Wrap by Linda Piazza 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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