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Daily Newsletter, Monday, 05/08/2006

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Table of Contents

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

Market Wrap

Letters of engagement.....

It truly was a mixed session for the major indices with the Dow Industrials (INDU) as well as the S&P 500 (SPX.X) both edged up to multi-year highs at one point in the session.

Modest gains and losses were found by the close considering Friday's display of bullish optimism.

In the OptionInvestor.com Market Monitor, I like to "keep a pulse" of market internals and key index benchmarks during the day, as well as other "trading" measures such as the TRIN, TRINQ and VIX.X.

Energy sectors as well as June Crude Oil futures (cl06m) were under pressure early in the session after comments from Iran hinted at a moderating posture over its nuclear program.

An Iranian government spokesman told reporters that President Ahmadinejad wrote a letter to President Bush proposing "new solutions" to their differences.

June Crude (cl06m) fell as low as $68.20 in the first minutes of its floor trade at the NYMEX, only to settle down a modest 17 cents, or -0.24% at $69.77.

Later in the session, U.S. Secretary of State Condoleezza Rice dismissed the surprise letter, saying it didn't seriously address the standoff over Tehran's disputed nuclear program.

In an interview with the Associated Press, Ms. Rice said the letter from the Iranian leader was about 18 pages long and covered history, philosophy and religion. "This isn't it. This letter is not the place that one would find an opening to engage on the nuclear issue or anything of the sort," Rice said. "It isn't addressing the issue that we're dealing with in a concrete way."

U.S. Market Watch - 05/08/06 Close

Shares of chip-giant Intel (INTC) $20.11 +3.07% jumped higher at the open and built gains to the close after American Technology's analyst Dough Freedman sent a "letter" to clients saying the company could be gearing up to sell or take its flash-memory business public. Mr. Freedman raised his investment rating on Intel to "buy" from "hold."

But the gains for Intel weren't enough to bridge the recently widening gap (see 20-dayNet%) among many 4 and 5-lettered NASDAQ stock symbols and the 1, 2 and 3-lettered variety at the NYSE.

There will be times when there isn't just "one equity market," but two, perhaps three markets depict various measures of strength and weakness.

The U.S. Dollar Index (dx00y) edged fractionally higher. A note of interest here may be that the U.S. Treasury Department said it plans to release a semi-annual report on currency policies of major trading partners at 04:00 PM EDT on Wednesday. The report will be watched closely for assessments of foreign exchange policy in China.

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With the Dow Industrials (INDU) up an impressive 4.6% the past four weeks, it might behoove traders/investors to consider foreign exchange and "foreign trade" as it relates to the 4.8% decline in the Dollar Index (dx00y) during the same period.

It has been discussed that the tumbling dollar could mean "doom and gloom" for U.S-based assets. It has also been discussed that the weaker dollar could benefit large multi-nationals that derive revenue earnings from overseas/border trading partners.

We're at multi-year highs for some of the major equity indices. Dollar Index has retraced about 61.8% of its January 05 low to October 2005 relative high.

Dollar Index (dx00y) - Weekly Intervals

Ask anyone (bull/bear) their opinion on what the dollar is telling you, and you'll get a minimum of at least two, if not three different answers.

In October of last year it was "bearish" that the dollar was showing strength. My "bear notes" had it that the dollar's rise from January 2005 was a clear market signal that hyperinflation was at hand.

It is not uncommon for any security to retrace 38.2%, 50%, or 61.8% of "its move." However, when a security does retrace more than 61.8% of "its move" as the U.S. Dollar Index (dx00y) has done (from Dec05/Jan06 to Oct05/Dec05 relative high) there's another "four letters" that could drive dollar action this week.

The Federal Open Market Committee (FOMC) meets on Wednesday and many market participants see another 25 basis point tightening.

I want to quickly discuss "one item" that still sticks in my mind regarding ex-Fed Chairman Alan Greenspan's comments regarding Fed policy. And I think we should tie some of his comments to the dollar.

Mr. Greenspan had mentioned that the rapid rise in housing prices was JUST ONE (emphasis on just one) indicator of inflation that was on his radar screen and having some influence on future Fed policy.

Dow Jones Home Construction Index (DJUSHB) - Weekly Intervals

At different times, I do believe "markets are telling a story." I received a question just more than a week ago from a trader/investor that had set some downside alerts on the Dollar Index (dx00y) and DJUSHB and was wanting some follow up as to "why" both indices triggered his downside alerts (per 04/24 and 04/27 Market Wraps).

My historical "research" (looking at charts of the dx00y and DJUSHB) was inconclusive that there has been much of a "lasting tie" between dollar (up/down) and DJUSHB (up/down).

But that does NOT mean that some near-term relationships aren't being developed that might need to be monitored, or understood.

Scenario stated: The dollar's recent weakness is a sign from currency traders that the Fed may be reaching a near-term end to its tightening policy as one of the Fed's inflation concerns (housing prices) abates to more realistic growth measures.

We've heard the term "one and done" for Fed raising its target for Fed Funds so many times, I truly have lost track.

However, the dollar does/has tended to move higher/lower the past year based on FOREIGN market participant's views of Fed policy regarding rates. Where the dollar tends to "bid" or rise in anticipation of Fed tightening. Where Fed tightening has been construed with "economic growth" that could accompany, or lead to inflation.

As I look at the dollar's recent decline, one could draw a conclusion (which should be continually tested over time) that FORIEGN (substitute GLOBAL) market participants see a "key" indication of housing prices (falling if DJUSHB is a measure) as reasoning that the Fed may begin to pause.

S&P 100 Index (OEX.X) - Daily Intervals

In last week's Market Monitor at OptionInvestor.com, I got a little "excited" (my convictions get me excited) I feverishly started explaining how important I thought SECTOR analysis was as it relates to DAY trading, SWING trading, or INVESTING. And how important I (and most institutions) feel (based on historic observation) how important it is to know what stocks and sectors have "more importance" or weighting on an index that other stocks, or sectors.

As a trader or investor observes tonight's U.S. Market Watch, it might be worthy to observe that the "financials" (BIX.X, BKX.X, XBD.X and IUX.X) have had a relatively IMPORTANT role in the S&P 100's (OEX.X) recent advance the last couple of weeks.

"Financials" as an industry make up the GREATEST WEIGHTING of the SPX, OEX and RUT.X. Yes! Even the "small caps" are heavily weighted on the financial side. When we see these small, relatively obscure, yet publicly traded banks jumping 25% in a day due to their being acquired, the small cap RUT.X reflects some of that weighting too.

In a recent "Trader's Corner" article (5/03/06), fellow analyst Leigh Stevens discussed the potential reverse head/shoulder pattern in the OEX.

Which looks to be "in play" after Friday's action.

With the dollar showing weakness (market once again thinking Fed pause?), and financials strong the several weeks, combined with some "cooling" in the homebuilders (Fed/FOMC point of interest), it would have to be a CONSIDERATION that different portions of the market may have put some of this together.

It should be "clear" that the equity index fluctuations aren't ENTIRELY DRIVEN by dollar action (up/down), but a tie with past Fed commentary, dollar action, and DJUSHB price decline certainly get the letter A for "Attention!"
 

New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
None None

New Long Plays

None today.
 

New Short Plays

None today.
 

Play Updates

Updates On Latest Picks

Long Play Updates

Phillips Van-Heusen - PVH - cls: 39.30 chg: -0.63 stop: 37.49

We have been cautious on PVH for a week now given the lack of upward momentum and shares finally broke down under short-term support in the $39.70 region. A bounce from $39.00 would be good enough to fill the gap and we'd used it as a new entry point but we would not be surprised by a dip toward the $38 level. Be sure and wait for the bounce before considering new positions. You might want to consider tightening your stop loss. Our target is the $42.00-42.50 range. The Point & Figure chart currently points to a $56 target.

Picked on April 19 at $38.59
Change since picked: + 0.71
Earnings Date 06/19/06 (unconfirmed)
Average Daily Volume: 332 thousand

---

Stone Energy - SGY - close: 47.58 chg: +0.17 stop: 45.95

News that the President of Iran sent a letter to President Bush about possible "solutions" helped deflate some of the oil premium, at least a small amount, with crude oil's decline under $70 a barrel today. Fortunately, SGY continued to show relative strength and the stock out performed its peers in the oil sector. We see no changes from our weekend update. More conservative traders may want to wait for a new rise past the simple 200-dma at 47.95 before initiating plays. Our short-term target will be resistance in the $51.25-51.50 range. More aggressive traders may want to aim higher.

Picked on May 07 at $47.41
Change since picked: + 0.17
Earnings Date 05/03/06 (confirmed)
Average Daily Volume: 560 thousand

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Universal Health - UHS - close: 51.86 chg: +0.17 stop: 49.95

We were almost triggered today. Shares of USH broke out over resistance at the $52.00 level but failed to hit our trigger to go long at $52.15. The high today was $52.09. We feel it is fortunate that we were not triggered today since volume was below the daily average suggesting a lack of confidence or conviction behind the move. Our strategy still stands. If triggered we will target the $56.00-57.00 range, which has been significant resistance in the past. We do anticipate some resistance near $54.

Picked on May xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/27/06 (confirmed)
Average Daily Volume: 571 thousand
 

Short Play Updates

Blyth Inc. - BTH - close: 20.84 chg: +0.28 stop: 20.55

We are still sitting on the sidelines with BTH. The stock's oversold bounce from the $20.00 level just marked its third gain in a row. However, technical traders will note that volume is drying up and has never been very strong on this rebound. We suspect that the stock will roll over under the $21.00 level or its 50-dma near 21.26. Aggressive traders might want to consider a position if a failed rally does occur. We're still going to suggest a trigger to short the stock at $19.79 under the March low. If triggered we will target a decline into the $18.25-18.00 range since the $18.00 level has been support in the past.

Picked on April xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 05/24/06 (unconfirmed)
Average Daily Volume: 185 thousand

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Coach Inc. - COH - close: 31.92 chg +0.06 stop: 33.51

The major market averages drifted sideways on Monday and shares of COH followed suit to churn in a narrow range all day. We do not see any changes from our weekend play description. We are suggesting a trigger at $31.45 to short the stock. If triggered our target will be the $28.25-27.50 range although more aggressive traders may want to aim lower.

Picked on May xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/25/06 (confirmed)
Average Daily Volume: 2.3 million

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Healthcare Rlty Trust - HR - cls: 35.20 chg: +0.06 stop: 37.01

We are suggesting that readers wait and watch for HR's bounce to fail under the $36.00 level (near its 100-dma) before considering new bearish positions. Our target is the $32.50-32.00 range. The Point & Figure chart points to a $22 target.

Picked on May 04 at $35.32
Change since picked: - 0.12
Earnings Date 05/03/06 (confirmed)
Average Daily Volume: 212 thousand

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Red Robin - RRGB - close: 45.00 chg: -0.22 stop: 46.51

Today wasn't the big breakout we thought it might be but shares of RRGB are moving and the direction appears to be lower. The stock looks poised to breakdown under $45.00 and its 50-dma (44.69) soon. We are suggesting that readers look for a decline under $44.75 or $44.50 as the next entry point to short the stock. Our target is the $40.25-40.00 range. More aggressive traders may want to aim lower. We'll plan to exit ahead of the mid-May earnings report.

Picked on April 26 at $43.99
Change since picked: + 1.01
Earnings Date 05/17/06 (unconfirmed)
Average Daily Volume: 355 thousand

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Tiffany & Co. - TIF - close: 34.37 chg: +0.31 stop: 36.01

TIF is still trying to bounce from the $34.00 level but the bulls are struggling to push TIF past short-term resistance at its 10-dma. We do not see any changes from our weekend play update. Our target is the $32.25-31.75 range.

Picked on April 25 at $35.11
Change since picked: - 0 74
Earnings Date 03/28/06 (confirmed)
Average Daily Volume: 1.3 million
 

Closed Long Plays

None
 

Closed Short Plays

None
 

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

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