Option Investor

Daily Newsletter, Monday, 07/10/2006

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Table of Contents

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

Market Wrap

EMC's warning is latest drag for technology

Stocks opened higher as merger news provided optimism, but gains faded toward the close with semiconductors once again pacing declines after data storage giant EMC Corp. (NYSE:EMC) $10.41 -6.88% warned that it now expects to earn $0.13 share on revenue of $2.58 billion, down from the company's prior quarterly guidance of $0.13 a share on revenue of $2.66 billion.

If EMC's warning had a silver lining, it seemed to have been cannibalized in a somewhat mixed statement from management regarding its new Symmetrix systems offering. While the company said it had strong new orders for its Symmetrix DMX-3 systems, the orders came late in the quarter, and couldn't balance fewer-than-expected orders placed for its Symmetrix DMX-2 systems.

Shares of Heritage Property Investment Trust (NYSE:HTG) $35.94 +2.74% gained 96 cents, but trade well off their March highs of $40.00 after the company said it has agreed to be acquired by the Australian-American joint venture of Centro Watts for $1.83 billion, or $36.15.


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Further merger news had shopping center REIT Kimco Realty Corp. (NYSE:KIM) $37.41 +1.46% buying smaller operator Pan Pacific Retail (NYSE:PNP) $69.35 -0.92% for $70.00 a share. Kimco said it will assume approximately $1.1 million in PNP's debt.

Kraft Food (NYSE:KFT) $30.21 +0.03% edged up a penny by the close. Kraft said it will buy the Spanish and Portuguese operations of United Biscuits, a U.K. cookie maker, for $1.07 billion. The deal satisfies Kraft's appetite to buy back all Nabisco trademarks in the E.U., Eastern Europe, the Middle East and Africa.

Two economic reports were released during Monday's trade.

Wholesale inventories for May (10:00 AM EDT) showed a 0.8% increase to a seasonally adjusted $375.81 billion, even though sales rose at a rate twice as high as stockpiles. Economists expected inventories to rise by 0.5%.

Consumers continued to take on debt, but at a slower pace than in April, as a sharp rise in credit card financing and other revolving debt offset the first drop in non-revolving debt in six months. May consumer credit (03:00 PM EDT) expanded by $4.4 billion to $2.174 trillion according to the Federal Reserve. April's previously reported $10.6 billion surge was revised lower to $9.3 billion.

U.S. Market Watch - 07/10/06 Close

For whatever reason, several indexes I was tracking in my U.S. Market Watch have either been "discontinued" as of June 30, or multiple data sources are no longer paying fees to exchanges for feeds. As such, I've simply tried to "substitute" like indexes with some ETF (electronic traded funds) for various sector representations. PINK **.

The NASDAQ-100 Tracker (QQQQ) $37.36 -0.87% did trade a fresh 52-week low intra-day, with the Semiconductor HOLDRs (AMEX:SMH) $31.09 -2.23% closing at a new 52-week low.

Earnings season kicked off with Dow component Alcoa (NYSE:AA) $33.41 -0.41% falling to $31.94 in tonight's extended session. The aluminum giant reported Q2 net income of $744 million, or $0.85 a share, up 62% from $460 million, or $0.52 a share, a year ago. Alcoa said income from continuing operations came in at $0.86 a share, which matched Wall Street expectations. Investors appeared disappointed as revenue increased 19% to $7.96 billion, which missed analysts' estimate of $8.01 billion.

Telecom equipment maker Lucent (LU) $2.34 -1.26% looks set to challenge recent 52-week lows tomorrow morning after the company warned it will miss its quarterly revenue target by $300 million, with earnings per share also falling short of estimates, as its telecom equipment gear was hurt by weak sales in the U.S. and China.

Lucent, which has agreed to be acquired by French equipment maker Alcatel (NYSE:ALA) $12.30 -1.04% for $13.45 billion, said in a statement that sales for its fiscal third quarter totaled $2.04 billion, roughly 13% lower than its sales in the same period a year ago.

Energy prices softened from recent highs. I did note a Dow Jones headline this morning that Saudi Arabia has started testing some of its heavy-oil reserves, looking to unlock its huge, hard-to-tap and largely unexploited reservoirs of heavy crude.

As earnings season begins, I find a headline from Dow Jones that Wall Street forecasts for the S&P 500 are now calling for aggregate Q2 operating earnings growth of 11%-12%, up from single digits forecasted earlier in the quarter that threatened to snap a winning streak of 11 straight quarters of double-digit profit growth.

When I went to bed Sunday evening, Japan's Nikkei-225 ($NIKK) was down more than 100-points. When I woke up this morning, the Nikkei-225 finished up an impressive 245-points, or 1.60%.

Japan's Nikkei-225 ($NIKK) - 50-point box

In this morning's Market Monitor I posted the above chart, where the Monday's early session dip to 15,100 would have a supply (O)/demand (X) chartist continuing to chart lower to 15,000. However, I do show "blue ?" to depict the intra-day turnaround.

What looks to have triggered the intra-day reversal was that machine orders fell 2.1%, which was less than the -4.6% forecast.

We've been hearing about a "liquidity crunch" out of Japan, and I do think an earlier release of the country's M2+CD Money Supply year-over-year reading of +1.2% versus forecast of +1.5% and previously reported +1.4% gain spooked buyers earlier in the session.

I'd have to say that after having some N. Korean-launched missiles falling the in the Sea of Japan, the Nikkei-225 has been hesitant to relinquish some bottom-fishing gains. I'll continue to monitor things, but a break back below 14,800 would be an alert to weakness.

I like to extend "old trends" on a chart and monitor them. If they begin serving up resistance or support, that will often-times depict market participants showing a growing bias. With the $NIKK still somewhat either side of its recently broken bullish support trend, but now below downward trend, at best I'd be cautiously optimistic/bullish.

Hong Kong's Hang Seng ($HSI.X) - 50-point box

As quickly as China's Hang Seng fell 2,050 points (-11.8%) from its May highs, buyers have been aggressive after recent triple top buy signal at 15,900.

Earlier this morning China said it country's trade surplus hit a record as it exported $14.5 billion more in goods than it takes in during June. Economists had forecasted a surplus of $13.6 billion.

Currency traders saw the data as further adding the U.S. pressuring China to let the yuan appreciate faster.

I wanted to updated traders and investors on these two major Asian/Pacific Rim indexes, as they appeared to be providing the bulk of the drag for other major stock market indices around the world.

Things look to have stabilized here, but I'll continue to monitor.

Internals improving at NYSE, still weak at NASDAQ.

Over the past week, some of the major market bullish % indications have reversed higher.

In fact, all have reversed back up except the very broad NASDAQ Composite Bullish % ($BPCOMPQ) from StockCharts.com

NASDAQ Composite Bullish % ($BPCOMPQ) - 2% box chart

I don't mean to "focus on the negative," in fact; some have said, "Jeff's too bullish!"

No, what I think traders and investors need to do is at least take note of an indicator that is "different" than some others. For any number of reasons, where one primary reason may be favorable stock option grant prices to company executives, the greater number of stocks listed on the NASDAQ (4 and 5 lettered stock symbols) are still depicting that supply is in control.

It would be painting with a broad brush to say the NASDAQ is "all tech," but it is broadly known that many technology firms tend to compensate their executives to a greater extend with stock options.

Each week I get an e-mail from Scott & Scott regarding their investigation into a company possibly having granted stock options to a company executive at a "favorable price" prior to the stock's price moving higher.

NASDAQ Composite ($COMPQ) - 10-point Box

I'm running late to my editor's deadline, but I would continue to caution "NASDAQ Bulls" of getting too aggressive with bullish plays. It should be suspicious to some that the NASDAQ's first test of bearish resistance trend comes on July 3, just as the Stock Trader's Almanac notes that historically, the NASDAQ "Worst 4 Months" begin in July.

Be careful out there, and DO NOT OVERLEVERAGE! Trade your stops and targets.

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

Amer.Eagle Outfitters - AEOS - cls: 35.33 chg: -0.32 stop: 32.99

AEOS experienced a little bit of profit taking on Monday but traders bought the initial dip at the $35.00 level this afternoon. If the markets continue lower tomorrow we would not be surprised by an drop toward $34.50 or $34.00 (somewhere around the 10-dma). Watch for the dip and bounce as a new entry point. Our target is the $38.25-38.50 range. The P&F chart is more optimistic with a $63.00 target. We do not want to hold over the August earnings report.

Picked on July 06 at $34.77
Change since picked: + 0.56
Earnings Date 08/15/06 (unconfirmed)
Average Daily Volume: 2.2 million


Celgene Corp. - CELG - close: 47.85 chg: -0.40 stop: 44.95

The biotech sector felt some profit taking today with the BTK index losing just over 1%. Shares of CELG followed suit with a 0.8% decline but for the most part CELG consolidated sideways. Our market bias is still flat to down so we're not suggesting new long positions at this time but a bounce from the $46.00 level might be a tempting entry point. We do expect some resistance at $50.00 but our target is the $52.40-52.60 range. The Point & Figure chart shows a triple-top breakout buy signal with a $57 target. We do not want to hold over the late July earnings report.

Picked on June 29 at $47.24
Change since picked: + 0.61
Earnings Date 07/27/06 (unconfirmed)
Average Daily Volume: 3.9 million


Energy Transfer - ETP - close: 45.00 chg: +0.11 stop: 43.45

We no longer have to wonder about when ETP will report earnings. The company reported after the closing bell today, which would explain why the stock has been consolidating sideways in such a narrow range the past several days. We warned readers that we did not have a confirmed date but suspected it might be anywhere between July 10th and the end of the month. Fortunately, the company reported earnings significantly above the analysts' estimates but we have no way to know how the markets will react to the news. We did not see any after hours movement in the stock price. At this time we're not suggesting new plays. Our target is the $47.50-48.00 range.

Picked on June 18 at $44.25
Change since picked: + 0.75
Earnings Date 07/10/06 (confirmed)
Average Daily Volume: 149 thousand


Norfolk Southern - NSC - close: 51.90 chg: +0.35 stop: 49.99

NSC managed a minor bounce today and out performed its peers in the transportation sector but we're not out of the woods yet. The technicals are still looking weak and NSC remains under its 50-dma and 100-dma. We would either wait for a move over $52.50 or the 100-dma at $52.70 before considering new bullish positions. More conservative traders may want to hold off altogether on new bullish plays since our market bias is still flat to down.

Picked on June 29 at $52.57
Change since picked: - 0.67
Earnings Date 07/26/06 (unconfirmed)
Average Daily Volume: 2.2 million

Short Play Updates

Broadcom - BRCM - close: 27.40 change: -0.35 stop: 30.25

The semiconductor stocks continue to lead the tech sectors lower. BRCM lost another 1.26% on decent volume. The MACD's new sell signal is easier to see now. We don't see any changes from our new play description from the weekend. We are using a wide, aggressive stop above $30.00 for now. In reality, broken support near $29.00 should be new resistance. We are suggesting two targets - a conservative target at $25.05 and a more aggressive target at $22.75. Please note that BRCM is due to report earnings on Thursday, July 20th and we do not want to hold over the report.

Picked on July 09 at $27.75
Change since picked: - 0.35
Earnings Date 07/20/06 (confirmed)
Average Daily Volume: 15.5 million


IAC/Interactive Corp. - IACI - cls: 25.22 chg: -0.27 stop: 26.55

An upgrade for Yahoo (YHOO) failed to inspire any strength in the Internet sector. Shares of IACI lost another 1%. At this time we don't see any changes from our new play description from the weekend. We'd consider shorts anywhere under $26.00. Our target is the $24.00-23.75 range. We do not want to hold over the early August earnings report. Readers should note that IACI has relatively high short interest at 4.8% of its 195 million-share float.

Picked on July 09 at $25.49
Change since picked: - 0.27
Earnings Date 08/01/06 (unconfirmed)
Average Daily Volume: 2.3 thousand


Juniper Networks - JNPR - cls: 15.42 chg: -0.30 stop: 16.26

Networking stocks saw a lot of weakness today. The NWX index lost 2.4%. Shares of JNPR dropped 1.9% but again volume was pretty low, which makes us cautious. Another warning flag readers should be aware of is that the NWX index closed just above its 200-week moving average so it could see a bounce soon. Everything else continues to look pretty bearish for JNPR. Our target is unchanged in the $14.10-14.00 range. The P&F chart points to an $8.50 target.

Picked on June 19 at $15.89
Change since picked: - 0.47
Earnings Date 07/19/06 (unconfirmed)
Average Daily Volume: 13.8 million


Medtronic - MDT - close: 47.70 change: +0.11 stop: 48.75

MDT was downgraded today and that provided the fuel for the stock's initial spike lower. Counteracting the analyst downgrade was news that the FDA had approved a new spinal treatment study by MDT. At the end of the day MDT tested and failed to breakout over resistance at the $48.00 level. We are not suggesting new plays at this time. More conservative traders might want to do some profit taking. 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: - 1.79
Earnings Date 08/22/06 (unconfirmed)
Average Daily Volume: 10.8 million


Maxim Integrated - MXIM - close: 29.05 chg: -0.70 stop: 31.25

MXIM lost another 2.3% to close at a new three-year low. The semiconductor stocks continue to drag on the market. We don't see any changes from our new play description from this weekend. We are suggesting shorts with MXIM under $30.00. Our target is the $27.00-26.75 range. The Point & Figure chart points to a $17 target. We do not want to hold over the early August earnings report. FYI: more aggressive traders may want to play with a wider stop (above the 50-dma) and aim for the $25.00 region.

Picked on July 09 at $29.75
Change since picked: - 0.70
Earnings Date 08/02/06 (unconfirmed)
Average Daily Volume: 5.5 million


NitroMed - NTMD - close: 4.25 change: -0.17 stop: 5.01

NTMD is now down more than 16% from our picked price and shares are nearing their late June lows (4.22). Traders might want to seriously consider doing some profit taking here. We're not suggesting new plays at this time. Our target is the $4.10-4.00 range.

Picked on June 18 at $ 5.07
Change since picked: - 0.82
Earnings Date 07/31/06 (unconfirmed)
Average Daily Volume: 710 thousand

Closed Long Plays

A.S.V.Inc. - ASVI - close: 22.09 change: -0.01 stop: 21.85

Some early morning weakness pushed ASVI to our stop and beyond. Shares of ASVI dipped to $21.62, just under its 50-dma, before bouncing. We did not see any specific news to account for the spike lower. Our stop loss was $21.85 so the play is now closed.

Picked on June 18 at $21.20
Change since picked: + 0.89
Earnings Date 07/27/06 (unconfirmed)
Average Daily Volume: 463 thousand


Starbucks - SBUX - close: 35.63 chg: -0.41 stop: 34.98

We are suggesting an early exit in SBUX. There should have been more of a bounce today and there wasn't. Thus it's time to abandon ship. SBUX looks poised to retest the $35.00 level soon.

Picked on June 29 at $37.05
Change since picked: - 1.42
Earnings Date 08/02/06 (unconfirmed)
Average Daily Volume: 6.0 million


USA Truck - USAK - close: 18.95 chg: -0.15 stop: 18.99

USAK displayed some relative weakness today with a 0.7% decline. Plus, the stock produced a new short-term lower high with the failed rally this morning. Our plan was to suggest longs at $20.05 but the stock never broke out over the $20.00 level. The play is dropped unopened. We are going to keep an eye on the stock for a future breakout over $20.00.

Picked on July xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/20/06 (unconfirmed)
Average Daily Volume: 140 thousand

Closed Short Plays


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


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