Option Investor
Newsletter

Daily Newsletter, Monday, 06/26/2006

HAVING TROUBLE PRINTING?
Printer friendly version

Table of Contents

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

Market Wrap

New home sales up 4.6% in May

The major indices posted gains to start the week with recent new home sales figures for May, along with a robust merger and acquisition environment providing a lift to bullish sentiment.

The Commerce Department said new-home sales rose in May at their fastest pace since December, as sales climbed notably in the South and West.

Sales of single-family homes increased 4.6% last month at a seasonally adjusted rate of 1.234 million, which was much stronger than the 4.0% decline forecasted from April's 1.15 million annual rate.

However, regional data showed mixed results, with softer pricing spurring demand. While new-home sales jumped 6.0% in the South and 5.3% in the West, sales fell 7.9% in the Northeast, hitting the lowest regional level since July 2004.

The average price of a home dropped to $249,300 in May, which was down from an upwardly revised $302,000 in April. The median price dropped to $235,000 from an upwardly revised $245,900. Compared with a year earlier, the average price in May was 2.4% higher, while the median price of a new home rose 2.9% year-over-year.

The Commerce Department said an estimated 114,000 homes were actually sold last month, up from 105,000 in April, based on figures not seasonally adjusted.

There were an estimated 556,000 homes for sale at the end of May, own from April's record 560,000. May's inventory of new homes slipped to a 5.5 month's supply at the current rate of sales, compared to April's 5.8 month's supply.

Advertisement

TradeKing offers $4.95 trades to everyone. Same price - market or limit - no price tiers. Add just $.65 per option contract. Get a great value in a Web-based brokerage with free option tools, scanners, charts and the "must-have" probability calculator. TradeKing features power tools for the wired investor - free blog publishing editor and RSS newsreader integrated right into your trading platform. Click here to check out TradeKing.

www.tradeking.com/AdTrack/optinvemail1Q106/HOME

While the direction of housing market indicators has not been uniform, so far this year's data generally have shown a slowdown. Last week the National Association of Home Builders reported its index for new home sales fell to its lowest level in more than 11 years.

Today's data had little impact on July Fed Fund futures (ff06n) 94.72, which still predict a 100% chance of a 25-basis point rate hike when the FOMC meets later this week.

It was another "Merger Monday" with Phelps Dodge (NYSE:PD) $76.23 -8.10 saying it had reached an agreement to acquire Canadian mining companies Inco (NYSE:N) $64.21 +10.21% and Falconbridge (NYSE:FAL) $51.80 +5.07% in a deal valued at roughly $40 billion. If consummated, the deal would create the largest mining company based in North America.

Industry analysts see annual output from the combined company totaling 3.4 billion pounds of copper, making it the world's largest publicly-traded copper producer, and 738 million pounds of nickel, which would put it at the top list of global nickel producers.

News of the deal raised eyebrows in Canada, as well as anger from union leaders and lawmakers that will undoubtedly mount an effort to keep Inco and Falconbridge under Canadian control. Phelps Dodge said that while copper operations would shift to the company's headquarters in Pheonix, AZ, nickel operations would continue to be based in Toronto, home to both Inco and Falconbridge.

Citigroup and HSBC advised Phelps Dodge, Inco was advised by Morgan Stanley, RBC Capital and Goldman Sachs, while Falconbridge was advised by CIBC World Markets.

Additional M&A activity was found with Johnson & Johnson (NYSE:JNJ) $60.21 -1.81% saying it would buy Pfizer Inc's (NYSE:PFE) $23.01 +1.63% consumer health-care business (Listerine mouthwash, Sudafed decongestant and Nicorette smoking cessation products) for $16.6 billion in cash.

Sources close to the deal told Reuters that J&J's offer topped bids from British groups GlaxoSmithKline (NYSE:GSK) $53.98 -0.27% and Reckitt Benckiser PLC.

Shares of Sirius Satellite Radio (NASDAQ:SIRI) $4.70 +5.14% also benefited from some merger talk and were atop today's list of most actively traded in what would be characterized as a light volume session at the NASDAQ. Sirius saw just over 930 million shares change hands after the company's CEO, Mel Karmazin said he would be "interested" in buying rival XM Satellite (NASDAQ:XMSR) $14.37 +6.76%, but thought regulatory issues "would be a question mark."

Mr. Karmazin didn't give my (Jeff Bailey's) thoughts to a possible pairing of a DirecTV/SIRI or XMSR, or EchoStar/SIRI or XMSR marriage much time, saying he thought it would make more sense for DirecTV and EchoStar to continue to try and merge with each other.

In 2002, regulators nipped a proposed merger between DirecTV (NYSE:DTV) $16.24 +0.06% and EchoStar (NASDAQ:DISH) $30.25 +0.29% amid competitive concerns.

Investment banks, you might want to approach Garmin (NASDA:GRMN) $98.88 +0.54% with the idea of a possible acquisition of SIRI, or XMSR. SIRIUSLY!

U.S. Market Watch - 06/26/06 Close

One area of my U.S. Market Watch that should not go unnoticed is the impressive gains found among the Securities Broker Dealer Index (XBD.X) 209.42 +0.75%. Yes, M&A news of late may have traders focusing on energy and miners, but the large investment banks/brokers that are putting some of these "blockbuster" deals together should be seeing some heft investment banking fees.

With NASDAQ and NYSE volumes beginning to show summer-like volumes where the retail trader spends more time at the beach than at their trading terminals, corporations seem more than willing to "make a deal" in recent weeks.

Securities Broker Dealer Index (XBD.X) - Daily Intervals

M&A activity can mean "big bucks" for the investment bankers. While light volumes can hamper gains from some of the online brokers, gains for the XBD.X oftentimes fuels a broader advance for the financial industry as a whole.

In today's Market Monitor at OptionInvestor.com I updated a Sector Bullish % Bell Curve (12:56:51 PM EDT) comparison from 06/16/06 to Friday's close. I associate the WALL Street sector bullish % with the brokers. As of this writing and tonight's close, the BPWALL from Dorsey/Wright & Associates remains in "bear confirmed" status at 34.15% (up 2.44% today) and would currently need a reading of 48% to achieve the strongest of market conditions reading of "bull confirmed."

S&P 500 (SPX.X) - Daily Intervals

All I'm doing here with the SPX chart is using similar retracement as used with the XBD.X. I would not say that the XBD.X is strong enough to pull the SPX out of its "bearish funk," but I don't like to be surprised either! I've lost track over the years of how many times the financials lead the majors out of, or into a decline. With all the talk of "merger mania," but not a lot of discussion of how much revenue/earnings can be generated by the big investment banking firms, I want to have a close eye on the XBD.X.

Since I'm discussing the BIG investment banks, let's take a look at the small caps as June's "reconstitution" runs its course for the Russell indexes!

Russell 2000 Index (RUT.X) - Daily Intervals

Just as financials represent the largest weighting in the SPX, so is true with the RUT.X. Very similar technicals relative to 21-day, 50-day and 200-day SMA's, but the RUT.X does appear to be "lagging" within a similar May high to recent June relative low. This gives hint that "size does matter" and perhaps some credence that the BIG brokers are a place to be looking long.
 

New Plays

Most Recent Plays

NEW PLAYS TABLE-->
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

Asta Funding - ASFI - close: 35.71 change: +0.28 stop: 33.95

This might just be a new bullish entry point for ASFI. The stock traded lower this morning but then consolidated sideways between $35.00 and $35.20 for most of the day. The late day buying spree in the markets helped fuel a mini-breakout for ASFI. Volume was rising with the stock's strength. We're still suggesting that readers wait for a move over $36.00 or its 50-dma before going long but more aggressive traders might want to consider today's bounce as a new entry. Our target is the $39.95-40.00 range.

Picked on June 23 at $36.01
Change since picked: - 0.29
Earnings Date 08/08/06 (unconfirmed)
Average Daily Volume: 165 thousand

---

A.S.V.Inc. - ASVI - close: 21.75 change: -0.04 stop: 19.99

We do not see any changes from our weekend update on ASVI. More conservative traders may want to exit early near the 50-dma (currently near $23.04). We are not suggesting new plays at this time. Our target is the $23.50-24.00 range (for now).

Picked on June 18 at $21.20
Change since picked: + 0.55
Earnings Date 07/27/06 (unconfirmed)
Average Daily Volume: 463 thousand

---

Syneron Med. - ELOS - close: 21.00 change: -0.42 stop: 19.99

As expected the markets were mostly flat today as investors wait for the FOMC's next interest rate decision. This left ELOS to churn sideways in a narrow 30-cent range. We're starting to worry that the MACD may be rolling over soon suggesting that ELOS still has farther to fall. We would not suggest new bullish positions at this time. Our target is the $23.85-24.00 range but we are concerned that the simple 50-dma near $23 might be the next level of overhead resistance.

Picked on June 21 at $21.51
Change since picked: - 0.51
Earnings Date 08/03/06 (unconfirmed)
Average Daily Volume: 615 thousand

---

Energy Transfer - ETP - close: 45.40 chg: +0.43 stop: 42.49

ETP is still marching higher. The stock added 0.95% and its MACD has produced a new buy signal. The stock is nearing potential resistance in the $45.80-46.00 region and we do expect a pull back once this area is hit. A dip to $44.50 could be used as a new entry point for longs. Our target is the $47.50-48.00 range.

Picked on June 18 at $44.25
Change since picked: + 1.15
Earnings Date 07/10/06 (unconfirmed)
Average Daily Volume: 149 thousand

---

Ryder Systems - R - close: 56.32 chg: -0.03 stop: 53.49

We do not see any changes from our new play description on R this past weekend. Shares spiked over $57 this morning and traders bought the dip near $56 this afternoon. We are going to suggest longs with R above $56.00. Our short-term target is the $59.85-60.00 range. More aggressive traders might want to keep their eyes open for a potential entry point on a dip near $55.00. We do not want to hold over the late July earnings report. Please note that R is due to present at a transportation conference on Tuesday, June 27. This event is an unknown variable that could produce stock-moving headlines.

Picked on June 25 at $56.35
Change since picked: - 0.03
Earnings Date 07/27/06 (unconfirmed)
Average Daily Volume: 644 thousand

---

Ryland Group - RYL - close: 45.37 chg: +0.59 stop: 43.99

Homebuilding stocks were strong today after an unexpected rise in the new home sales numbers released this morning. Shares of RYL quickly rose to $46.55 before losing steam. Our trigger to buy the stock was at $45.31 so the play is now open. Looking at how today's strength failed did not inspire a lot of confidence. We're going to remain bullish with RYL above $45.00 but more conservative traders may want to tighten their stops! Our target is the $49.50-50.00 range. We do not want to hold over the company's earnings report on July 19th.

Picked on June 26 at $45.31
Change since picked: + 0.06
Earnings Date 07/19/06 (confirmed)
Average Daily Volume: 1.5 million

---

Starbucks - SBUX - close: 36.49 chg: -0.01 stop: 34.98

We see no changes from our weekend update on SBUX. Our trigger to go long the stock is at $37.05 so we remain on the sidelines for now. More conservative traders may want to raise their trigger to $37.15 or $37.25 just to make sure that we're catching a real breakout past resistance. If triggered we'll target a rally into the $39.95-40.00 range.

Picked on June xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 08/02/06 (unconfirmed)
Average Daily Volume: 6.0 million

---

Verizon Comm. - VZ - close: 32.78 change: -0.05 stop: 31.90

There are no changes from our weekend update on VZ. We're still expecting a dip toward the 10-dma, maybe toward the 200-dma. We would still wait for a dip and bounce before considering new long positions. Our target is the $34.75-35.00 range.

Picked on June 18 at $32.54
Change since picked: + 0.24
Earnings Date 07/25/06 (unconfirmed)
Average Daily Volume: 9.8 million
 

Short Play Updates

The Geo Group Inc. - GGI - cls: 33.40 chg: -0.20 stop: 35.05

We do not see any changes from our weekend update on GGI. The market's sideways consolidation led GGI to trade in a 63-cent range. We're not suggesting new bearish plays at this time and want to remind readers that this is an aggressive play due to the stock's volatility. Our conservative target at $32.25 has already been hit. We're going to adjust our aggressive target from $30.25 to $31.00 due to the rising 100-dma, currently at $30.78.

Picked on June 11 at $34.14
Change since picked: - 0.74
Earnings Date 05/04/06 (confirmed)
Average Daily Volume: 135 thousand

---

Juniper Networks - JNPR - close: 15.83 chg: +0.01 stop: 17.05

Some negative analyst comments on JNPR failed to spark any new selling pressure. Investors are waiting for the FOMC meeting and shares of JNPR churned sideways just like everything else. We're suggesting shorts with JNPR under $16.00. More conservative traders may want to see a new relative low under $15.65 first. Our target is the $14.10-14.00 range. We do not want to hold over the mid July earnings report. The P&F chart looks very bearish with an $8.50 target.

Picked on June 19 at $15.89
Change since picked: - 0.06
Earnings Date 07/19/06 (unconfirmed)
Average Daily Volume: 13.8 million

---

4 Kids Enter. - KDE - close: 15.40 change: +0.02 stop: 16.05

There is no change from our weekend update on KDE. We are going to remain bearish as long as KDE remains under broken support at $15.50. Our target is the $12.60-12.50 range. The P&F chart sports a triple-bottom breakdown sell signal with an $11.50 target.

Picked on June 19 at $15.45
Change since picked: - 0.05
Earnings Date 08/09/06 (unconfirmed)
Average Daily Volume: 113 thousand

---

Medtronic - MDT - close: 48.28 change: -0.20 stop: 51.01

MDT is still slipping toward the next level of support around $48.00. We are expecting a bounce near the $48.00 level. Therefore we're not suggesting new shorts at this time. Wait for the bounce to fail, probably under the $50 level as a new entry point for shorts. Our target is the $45.50-45.00 range. We do not want to hold over the August earnings report.

Picked on June 21 at $49.49
Change since picked: - 1.21
Earnings Date 08/22/06 (unconfirmed)
Average Daily Volume: 10.8 million

---

Middlesex Water - MSEX - close: 17.14 change: -0.07 stop: 17.75

We see no changes from our weekend update on MSEX. We are not suggesting new short positions until MSEX trades back under $17.00 or $16.90 again. Our target is the $15.15-15.00 range. The P&F chart points to a $12.00 target.

Picked on June 20 at $16.90
Change since picked: + 0.36
Earnings Date 05/08/06 (confirmed)
Average Daily Volume: 28 thousand

---

NitroMed - NTMD - close: 4.68 change: -0.31 stop: 5.51

Monday was another rough day for NTMD investors. The stock churned sideways for the first half and then suddenly began to slide lower. Shares closed with a 6.2% loss although it's worth noting that volume came in very low. Our target is the $3.70-3.60 range.

Picked on June 18 at $ 5.07
Change since picked: - 0.39
Earnings Date 07/31/06 (unconfirmed)
Average Daily Volume: 710 thousand

---

Sun Hydraulics - SNHY - cls: 18.48 chg: +0.36 stop: 18.51

We have bad news. SNHY displayed some relative strength today and added close to 2%. Shares look poised to hit our stop loss at $18.51 tomorrow. We expected to be stopped out.

Picked on June 21 at $17.45
Change since picked: + 1.03
Earnings Date 08/08/06 (unconfirmed)
Average Daily Volume: 89 thousand

---

Tellabs - TLAB - close: 13.50 change: -0.21 stop: 14.81

TLAB continues to show relative weakness. The stock lost 1.5% on above average volume. This seems especially noteworthy since volume was so low across the market today. Our target is the $13.00-12.75 range. We do not want to hold over the company's July earnings report.

Picked on June 18 at $14.32
Change since picked: - 0.82
Earnings Date 07/25/06 (unconfirmed)
Average Daily Volume: 5.9 million
 

Closed Long Plays

None
 

Closed Short Plays

Avid Tech. - AVID - close: 33.96 change: +0.15 stop: 37.35

Lately we've been suggesting that readers consider an early exit to lock in any potential gains in AVID. After today's bounce we're going to do just that. More aggressive traders may want to leave the short open since AVID is still under potential resistance at its 10-dma and the $35.00 level. We had been aiming for a decline to the $32.50 mark.

Picked on June 11 at $37.35
Change since picked: - 3.39
Earnings Date 08/03/06 (unconfirmed)
Average Daily Volume: 763 thousand
 

Today's Newsletter Notes: Market Wrap by Jeff Bailey 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.

To ensure you continue to receive email from Option Investor please add "support@optioninvestor.com"

Option Investor Inc
PO Box 630350
Littleton, CO 80163
Copyright Option Investor Inc, 2005
All rights reserved

Today's Newsletter Notes: Market Wrap by Jeff Bailey 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.

To ensure you continue to receive email from Option Investor please add "support@optioninvestor.com"

Option Investor Inc
PO Box 630350
Littleton, CO 80163

E-Mail Format Newsletter Archives