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Daily Newsletter, Monday, 07/17/2006

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Table of Contents

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

Market Wrap

Major Indexes Finish Mixed on Profit Taking....

The major U.S. equity indexes finished mixed as market participants seemed eager to protect bullish gains in mining and energy shares after last week's run up on heightened Middle East tensions.

While traders and perhaps investors alike were eager to sell gold, with the StreetTracks Gold (NYSE:GLD) $63.95 -2.89%, another type of gold in the form of arches had Dow component McDonald's (NYSE:MCD) $34.72 +5.08% jumping $1.68/share after the restaurant giant said Q2 same-store sales rose 5.5% and forecasted a quarterly net profit of $0.67 a share, including $0.10/share in income related to the sale of shares of Chipotle Mexican Grill (NYSE:CMG) $55.50 +2.56%. Analysts were expecting McDonald's to earn $0.56 a share.

Meanwhile, fellow Dow component Citigroup (NYSE:C) $46.40 -2.48% fell sharply after the largest bank by assets in the U.S. said it earned $5.27 billion, or $1.05 a share in the recently completed second quarter, which was a penny below the $1.06/share consensus. Citigroup said revenues climbed 10% to $22.18 billion, despite continued struggles with its U.S. consumer business.

Economic data took a backseat to updates out of the Middle East, as violence in Lebanon continued to escalate.

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The government said U.S. June industrial production jumped a healthy 0.8%, following a revised 0.1% gain in May, with auto and machinery output bolstering June's increase. Capacity utilization was also on the rise, increased 0.6% to a post-recession high of 82.4%.

The jump in capacity utilization will grab some attention toward inflationary pressures.

The U.S. Dollar Index (dx00y) 86.96 +1.01% surged, and just like that, the mighty greenback trades at levels not seen since June 23.

The question on every trader's mind is weather the dollar's renewed strength and gains today are "flight to safety" related, or a reaction from currency traders that the further rate hikes are needed?

Regional economic data had the New York Federal Reserve district's manufacturing-activity index dropping to 15.64 from 29.01 in June. The 15.64 reading was well below economists' forecast of 20.00.

U.S. Market Watch - 07/17/06 Close

It has been tough for bulls in nearly any sector to hold onto gains, but when it comes right down to it, as losses mount elsewhere, protecting gains where you've got them becomes paramount.

In PINK I've highlighted the 5-day Net% changes of sectors that up to, or including today's trade would have shown a week-to-week gain.

I would urge traders and investors alike to NOT MAKE BIG DIRECTIONAL BETS when geopolitical events are grabbing headlines and swaying sentiment.

While the Middle East news now moves "in front" of N. Korea's recent missile launches, I would note that Japan's Defense Chief called for a permanent law to allow overseas troop deployments today.

According to Kyodo News, Fukushiro Nukaga, who was in Kuwait to greet soldiers withdrawing from southern Iraq, told reporters the country needed a new, permanent law to enable Japan to more promptly participate in peacekeeping activity.

Traders and investors may want to review this news item as it relates to Japan's Constitutions (Chapter II, Article 9), which I (Jeff Bailey) believe was drafted just after World War II by General Douglas MacArthur.

Japan's Nikkei-225 ($NIKK) finished Friday's trade at 14,845.24 and sits right on what I feel is important support (see last Monday's Market Wrap). The Nikkei-225 was closed Monday for holiday as the dollar closes in on a 3-year high against the yen.

Bulls may not have been the only ones protecting recent gains after the NASDAQ-100 Tracker's (QQQQ) $36.04 +0.27% Monday-to-Monday 3.53% decline.

Apple Computer (NASDAQ:AAPL) $52.37 +3.35% rose $1.70/share after American Technology Research analyst Shaw Wu said the company could report June results at the high end of its target and could end up exceeding its target for revenue of $4.2 billion to $4.4 billion and earnings of $0.39-$0.42 a share.

U.S. Dollar Index (dx00y) - Daily Intervals

Oh my! Currency traders and market mavens will have trouble figuring out just what the dollar is "saying" about the economy and/or geopolitical unreast. Just after the FOMC announced its decision on interest rates on June 29, the dx00y "plunged."

In the June 30 Market Monitor (05:23:06 PM EDT) I noted a comment from Craig Russell, Senior Foreign Exchange Strategist with ODS Securities and his comments regarding being long the dollar going into the 06/29/06 FOMC meeting as he thought it a possibility the FOMC might just raise 50bp. Mr. Russell admitted that the dovish commentary saw his long bet getting "crushed."

I paraphrase now, but further comments given by Mr. Russell seemed "certain" that traders/investors should just sell the dollar and look for new lows.

If we were to IGNORE what is taking place on the geopolitical front, I'd have to say the dollar's strength is that of further hikes, which would only come from a tightening Fed.

NASDAQ Composite ($COMPQ) - 10-point box

Internals as depicted by both the narrow NASDAQ-100 Bullish % ($BPNDX), which would depict the BIG caps of the NASDAQ as well as the much broader (+3000 stocks) depict internals that remain weak. I would monitor the Nikkei-225 ($NIKK) as well as the Hang Seng ($HSI) as weakness in those markets would likely serves as a wet blanket on NASDAQ rallies.

I would note that it wasn't until Thursday, when violence between Israel and Hezbollah escalated that the COMPX traded 2,090.

S&P 500 Index ($SPX.X) - 10-point box

Last Monday I thought we should monitor the "weaker" NASDAQ Composite as many times, weakness begets further weakness and drags other indexes lower. That certainly looks to be the case with the often-quoted S&P 500 Index (SPX.X).

I would say that today's "energy" trade was the drag on the SPX and may confirm my thoughts that market participants are eager to protect gains when they get them, especially when major market averages are under distribution.

Here's a quick look at the top weighted "industries," (think sectors) that comprise the S&P 500 as of Friday's close. The S&P 500 is a MARKET CAP weighted index.

I've "grouped" my U.S. Market Watch by various "industries" so that during the day, or week (5-dayNet%) I can see what sectors, if any are pulling the SPX various directions.

S&P500 Index Industry Weightings - By Market Cap

Financials (BIX.X, BKX.X, XBD.X, IUX.X) were relatively "strong" today considering the drubbing Citigroup (C) $46.40 -1.18% took.

Information Technology (GSO.X, SMH, INX.X, DDX.X, NWX.X) have really been getting hammered and have provided the bulk of SPX weakness, on many timeframes.

Healthcare (DRG.X, RXH.X, HMO.X)

One area I've been noting in the Market Monitor that has been notably weak of late has been the consumer discretionary sector, perhaps depicted by the Consumer Discretionary SPDRs (AMEX:XLY) $31.61 +0.70%. I (Jeff Bailey) tend to think of this group as a group of stocks whose services products find demand based more on "wants" than "needs." If there is an economic story to be told here, it would be that the consumer is becoming "more discretionary" with spending and not as indiscriminant.
 

New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
None ANTP
  MTSC

New Long Plays

None today.
 

New Short Plays

Phazar Corp. - ANTP - close: 8.68 change: -0.24 stop: 9.27

Company Description:
PHAZAR CORP is a publicly owned company that operates as a holding company with Antenna Products Corporation and Phazar Antenna Corp. as wholly owned subsidiaries. Antenna Products Corporation is an operating subsidiary that designs, manufactures, and markets antenna systems, towers, and communication accessories worldwide. (source: company press release or website)

Why We Like It:
It has been a while since we have played ANTP on the Premier Investor newsletter. We've been keeping an eye on the stock. Shares have produced a very bearish pattern of lower highs and it looks like ANTP might be ready to breakdown under significant support in the $8.55-8.65 range. Before we continue we have to warn readers that this is an aggressive play. ANTP can be volatile and the most recent data puts short interest at over 10% of the 2.1 million-share float. That's a relatively high degree of shorts and a very, very small float. To make this play even higher risk we cannot find the company's next earnings report. Last year they reported in August so it stands to reason that they might report again in early August. We are going to suggest a trigger at $8.49 to short the stock. If triggered our target will be the $7.00-6.75 range.

Picked on July xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 08/04/06 (unconfirmed)
Average Daily Volume: 89 thousand

---

MTS Systems - MTSC - close: 34.19 change: -1.23 stop: 37.05

Company Description:
MTS Systems Corporation is a leading global supplier of test systems and industrial position sensors. The Company's testing hardware and software solutions help customers accelerate and improve their design, development, and manufacturing processes and are used for determining the mechanical behavior of materials, products, and structures. MTS' high-performance position sensors provide controls for a variety of industrial and vehicular applications. (source: company press release or website)

Why We Like It:
A number of the scientific and technical instrument companies have been breaking down recently. One of them is MTSC, which just broke support at the $35.00 level today on strong volume. The technical picture is bearish with the MACD producing a new sell signal two days ago. As a matter of fact the technical picture almost looks too bearish and MTSC does look short-term oversold with its drop from the $40 region. We are going to suggest shorts with MTSC under $35.00 but more patient traders may want to wait and see if MTSC produces any sort of oversold bounce first. Both the $35.00 level and the $36.00 level should offer some overhead resistance so a failed rally near either could work as a new entry point. We would definitely be cautious about opening new plays if the major averages are positive tomorrow. The weekly chart shows MTSC breaking down under long-term support and the Point & Figure chart shows MTSC breaking support as well with a $21 target. We're going to aim for a decline into the $31.00-30.00 range. We do not want to hold over the July 26th earnings report. FYI: the latest data puts short interest at 4% of the stock's 18 million-share float.

Picked on July 17 at $34.19
Change since picked: + 0.00
Earnings Date 07/26/06 (confirmed)
Average Daily Volume: 105 thousand
 

Play Updates

Updates On Latest Picks

Long Play Updates

Amer.Eagle Outfitters - AEOS - cls: 34.77 chg: +0.61 stop: 32.99

The consolidation in AEOS may be ending. The stock out performed on Monday with a 1.7% bounce. While we are not excited about opening new bullish plays in this market environment we have to say that this looks like a new entry point to go long shares of AEOS. 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: + 0.00
Earnings Date 08/15/06 (unconfirmed)
Average Daily Volume: 2.2 million
 

Short Play Updates

Broadcom - BRCM - close: 27.37 change: -0.76 stop: 30.01*new*

It looks like the bounce in BRCM is failing at its 10-dma. This actually looks like a new bearish entry point to short BRCM but conservative traders might want to tighten their stop toward the $29 region. We're going to inch our stop loss down to $30.01. Please remember that BRCM is due to report earnings on July 20th after the market's close and we do not want to hold over the report. Our target is the $25.05-22.75 range.

Picked on July 09 at $27.75
Change since picked: - 0.38
Earnings Date 07/20/06 (confirmed)
Average Daily Volume: 15.5 million

---

Coach Inc. - COH - close: 26.21 change: -0.22 stop: 28.55

We do not see any changes from our new play description this past weekend. COH still looks like a short but patient traders may want to wait for a bounce back toward the $27.00 or $27.50 regions before considering an entry. We do want to offer one word of caution. The RLX retail index looks oversold and could be ready to bounce from significant support near the 420 level. Our target for COH is the $22.75-22.25 range. We do not want to hold over the early August earnings report.

Picked on July 16 at $26.43
Change since picked: - 0.22
Earnings Date 08/01/06 (confirmed)
Average Daily Volume: 4.1 million

---

Centex Corp. - CTX - close: 45.21 chg: -0.59 stop: 50.05

The homebuilders continued to sink on Monday. CTX lost 1.28% on above average volume and is testing round-number support at the $45.00 level. We are still somewhat concerned about a potential oversold bounce to "fill the gap" from Friday morning. Readers can wait for a rally into the $47.50-48.00 region before considering new bearish positions. We do expect some sort of bounce near the early June low (44.13) but our target is the $42.60-42.40 range. We do not want to hold over the July 24th earnings report.

Picked on July 13 at $47.37
Change since picked: - 2.16
Earnings Date 07/24/06 (confirmed)
Average Daily Volume: 2.5 million

---

Medtronic - MDT - close: 47.50 change: +0.45 stop: 48.75

MDT reversed Friday's loss with today's 0.9% gain. The move was fueled by news that the FDA had okayed MDT's Guardian Real-Time (glucose) monitoring system. We are not suggesting new bearish positions. More conservative traders might want to tighten their stops toward $48.25 or $48.20 or consider doing some profit taking. We continue to target a drop into the $45.50-45.00 range and we don't want to hold over the August earnings report.

Picked on June 21 at $49.49
Change since picked: - 1.99
Earnings Date 08/22/06 (unconfirmed)
Average Daily Volume: 10.8 million

---

Maxim Integrated - MXIM - close: 28.38 chg: -0.12 stop: 30.75

MXIM sank to new multi-year lows after an analyst firm downgraded the stock. Shares closed near their lows for the session, which is typically bearish for the next day's open. Our target is the $27.00-26.75 range. We do not want to hold over the early August earnings report. 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: - 1.37
Earnings Date 08/04/06 (confirmed)
Average Daily Volume: 5.5 million

----

Patterson-UTI Ener. - PTEN - close: 23.38 chg: -1.49 stop: 26.41

PTEN experienced some heavy selling today with a 5.99% loss following Friday's technical breakdown. PTEN got a push lower after an analyst firm downgraded the stock. Our target is the $22.65-22.45 range. We do not want to hold over the late July earnings report.

Picked on July 14 at $24.90
Change since picked: - 1.52
Earnings Date 07/27/06 (unconfirmed)
Average Daily Volume: 3.2 million

---

Volt Info Sci. - VOL - close: 45.00 chg: -0.75 stop: 46.51

Danger! Shares of VOL are even more volatile than we thought. The stock gapped down this morning to open at $45.01 and then sank to $42.10 before bouncing back. Volume was very strong on the move. We cannot find any specific news to account for the gap down this morning. At this time we would expect VOL to try and "fill the gap" with a rise into the $45.60-45.75 region. A failed rally under $46.00 could be used as a new entry point but remember this is an aggressive, high-risk play. Our target is the $40.10-40.00 range. FYI: Traders should be aware that MAN, a rival in this sector, is due to report earnings on July 19th. A big up or down surprise in MAN could have a big influence on VOL.

Picked on July 17 at $44.45
Change since picked: + 0.55
Earnings Date 06/08/06 (confirmed)
Average Daily Volume: 256 thousand

---

Watson Wyatt Wld - WW - close: 32.99 chg: -0.20 stop: 34.55

We do not see any changes from our weekend new play description on WW. The stock continues to sink and Monday's session saw above average volume on the decline. Our target is the $31.10-31.00 range, which is above potential support at its rising 200-dma. We do not want to hold over the early August earnings report. FYI: the most recent data put short interest at 6.9% of WW's 41 million-share float.

Picked on July 16 at $33.19
Change since picked: - 0.20
Earnings Date 08/08/06 (unconfirmed)
Average Daily Volume: 216 thousand

---

XM Sat.Radio - XMSR - close: 13.00 change: +0.11 stop: 14.25

We do not see any real changes from our weekend update on XMSR. The stock is still looking bearish but shares are clinging to old support at the $13.00 level. We'd probably look for a drop under Monday's low (12.80) as a new entry point for shorts. Aggressive traders might try catching a failed rally under $13.50 as a new entry point. Our target is the $10.25-10.00 range. We do not want to hold over the July 27th earnings report. FYI: the latest data puts short interest at 15% of XMSR's 222 million-share float. That's relatively high and increases the risk of a short squeeze.

Picked on July 14 at $12.95
Change since picked: + 0.05
Earnings Date 07/27/06 (confirmed)
Average Daily Volume: 7.7 million
 

Closed Long Plays

None
 

Closed Short Plays

IAC/Interactive Corp. - IACI - cls: 24.21 chg: -0.17 stop: 26.01

Target achieved. IACI under performed its peers in the Internet sector today. The INX Internet index closed in the green but IACI lost another 0.69%. The stock traded to an intraday low of $24.00 and our target was the $24.00-23.75 range.

Picked on July 09 at $25.49
Change since picked: - 1.28
Earnings Date 08/01/06 (unconfirmed)
Average Daily Volume: 2.3 thousand
 

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

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