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Daily Newsletter, Monday, 07/24/2006

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Table of Contents

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

Market Wrap

Mergers help fuel rebound

Over $60 billion worth of merger announcements helped fuel a strong rebound for the major indices on Monday, while upbeat earnings from Schering-Plough (NYSE:SGP) $20.55 +5.65% and Dow component Merck (NYSE:MRK) $38.95 +4.25% gave lift to broader healthcare and drugs.

Volumes were brisk at both the NYSE and NASDAQ, but come in as average with July average daily volume of 2.31 billion and 1.90 billion respectively.

Merger announcements were plentiful.

Shares of ATI Technologies (NASDAQ:ATYT) $19.67 +18.78% surged and were today's most actively traded (151.6 million) after the manufacturer of graphics and multimedia processing products said chipmaker Advanced Micro Devices (NYSE:AMD) $17.39 -4.76% offered to buy the company in a deal valued at $5.4 billion.

Under the terms approved unanimously by both companies' boards of directors, AMD will pay $4.2 billion in cash, and 57 million of its shares (based on Friday's AMD close of $18.21), which valued ATI's shares at $20.47.

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Shares of NVIDIA (NASDAQ:NVDA) $19.56 +10.07%, ATI's chief rival, jumped after the company's CEO said ATI's coupling with AMD will strengthen his company's hand, because Intel, which sells about 80% of the world's microprocessors, will be resistant to buying graphics chips from a competitor (AMD).

The nation's largest for-profit hospital operator, HCA (NYSE:HCA) $49.48 +3.36% rose $1.61 after the company said it would urge shareholders to accept a $21.3 billion, or $51 per share offer from a private investment group made up of Bain Capital, Kohlberg Kravis Roberts & Co., and Merrill Lynch Global Private Equity.

The Pharmaceutical Index (DRG.X) 342.22 +2.27% closed at a new multi-year high.

Shering-Plough (NYSE:SGP) $20.55 +5.65% said Q2 net income was $237 million, or $0.16 a share, as sales rose 11% to $2.8 billion. Shering's $0.16/share beat analysts forecast by an impressive $0.08/share.

Dow component Merck (NYSE:MRK) $38.95 +4.25% surged to a multi-year high, but not on a favorable jury ruling for its painkiller Vioxx! The drug giant reported net income of $1.5 billion, or $0.69 a share. That was up from $720.6 million, or $0.33 a share, a year ago. Revenue came in at $5.77 billion for the quarter, up 5.6% from the $5.47 billion in the year-ago quarter. Excluding a net charge of $161 million for its ongoing global restructuring, Merck said net income would have been $0.73 per share, $0.08 better than the consensus estimate.

U.S. Market Watch - 07/24/06 Close

Homebuilders as depicted by the Dow Jones Home Construction Index (DJUSHB) 587.77 +4.10% were atop the percentage gainer's list of my U.S. Market Watch.

Tomorrow at 10:00 AM EDT, existing home sales are expecting to come in at a 6.6 million annual rate (June), compared to 6.7 million.

The S&P Retail Index (RLX.X) 428.26 +2.49% paced itself higher to the close. Tomorrow at 10:00 AM EDT we'll get a look at July consumer confidence. Current consensus is for a reading of 104.0 vs. a prior reading of 105.7.

Dow component Wal-Mart (NYSE:WMT) $44.43 +1.62% gained $0.71 after the company said it hired Leslie Dach, vice chair of Edelman public relations and architect of its stepped-up strategy to combat critics, to a new post as executive vice president of government relations and corporate relations.

September Natural Gas Futures (ng06u) were today's "hot commodity" as traders in that complex monitored Tropical Storm EMILIA.

In this morning's Market Monitor at OptionInvestor.com, I thought traders short gold should be looking to take some profits off the table with the StreetTracks Gold (GLD) $61.14 ($611.40/oz equivalent) nearing the psychological $600.00 level. We're still holding 1/4 position (short basis $62.71) with a stop at $62.00 ($620.00/oz equivalent).

Semiconductors as depicted by the Semiconductor HOLDRs (AMEX:SMH) $29.76 +1.98% got a bounce after last week's continued drubbing.

Shares of Texas Instruments (NYSE:TXN) $27.84 +3.11% build on Monday's regular session gains to $28.96 in tonight's extended session. The chip maker reported Q2 earnings of $2.39 billion, or $1.50 a share, on strengthening demand for wireless semiconductors. Earnings from continuing operations of $0.47 a share topped Wall Street estimates by a penny. Texas Instruments said revenues rose 24% to $3.7 billion. The company said it expects Q3 earnings from continuing operations of $0.42-$0.48 a share on revenue of $3.63 billion to $3.95 billion. (Q3 consensus was $0.45 on revenue of $3.83 billion).

On a Monday-to-Monday measure, the Securities Broker Dealer Index (XBD.X) 207.00 +2.36%, which recouped Thursday and Friday's losses would hold the top spot in the U.S. Market Watch for 5-day Net% gains.

Merger activity along with some still rather brisk summer-time volumes has this group of stocks adding some stability to the S&P 500 Index (SPX.X), but faces another formidable challenge at its still ascending longer-term 200-day SMA.

It is my "top sector" to monitor this week!

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

I touched on just a couple of today's merger announcements, but the brokers may not be a bad place for bulls to hang out with a portion of their bullish capital in the latter part of this year.

I like to "challenge" what appears to be a stronger sector/index and there's no better challenge presenting itself in the XBD.X than a sharply trending lower 50-day SMA (intermediate-term) and ascending 200-day SMA (long-term), and trying to round-out 21-day SMA (short-term).

Take note of the upward trend, where I've anchored that trend to the October 2005 lows, and attached to the recent June relative lows. For many bulls, in just about every sector, July 3, which was a trade-shortened session ahead of the July 4th holiday has been anything but celebratory fireworks.

In last Monday's Market Wrap, we looked at "financials" comprising the greatest weight for the S&P 500 Index (SPX.X) 1,260.91 +1.66% and S&P Depository Receipts (AMEX:SPY) $126.21 +1.82%.

Here's a quick look at the stocks that comprise the EQUAL-weighted XBD.X.

AMEX Broker/Dealer Components - 07/24/06 Close

My "top pick" among brokers at this point is Goldman Sachs (NYSE:GS) $146.90 +3.42%, and I profiled a bullish position in the GS Oct $140 Calls (GS-JH) on Thursday. You name it (stock, bond, commodity), Goldman Sachs probably has some trading exposure or advisory exposure from which it derives trading revenues.

Aha! Financials! Last week's "big bull move" was in the S&P Banks Index (BIX.X) 381.93 +0.44%. And that move in the banks might have caught some overly critical Fed watchers off guard after Fed Chairman Ben Bernanke's testimony.

Surely they are, or were do for a rest after Wednesday's move. That is one reason I also profile some S&P Depository Receipt (SPY) $126.21 +1.82% puts again on Friday.

S&P Banks Index (BIX.X) - Daily Interval

Surely the BIX.X would retrace some of last week's gains, but Friday's lows seemingly peg the 50% retracement, or mid-point of the May to June decline. That hints to me there may be some "Fed bashers" as I like to call them, overly short the banks and concerned with getting some short positions covered. Just in case Dr. Bernanke and the rest of the FOMC have things under control.

For the BIX.X, I also marked the July 3rd intra-day high, and we can see this group of stocks has extended gains above that date of benchmarking.

If the FOMC, or the Fed is doing such a terrible job, I can't for the life of me figure out why the banks are performing so well.

While technology stocks have been a "major drag" on the broader S&P 500, anchoring trends from the October lows to recent relative lows for both the XBD.X and BIX.X should give us some observation of strength, and helping support the S&P 500 after last week's test of the June relative lows.

S&P Depository Receipts (SPY) - Daily Intervals

The SPY looks very, very, very similar to the Securities Broker Dealer Index (XBD.X) as it would relate to trend from the October 2005 relative low to June lows. The "difference" I would note is that the XBD.X hasn't come anywhere close to re-testing its June lows (0% blue retracement).

Friday's close below July's $125 "Max Pain Theory" had an ominous look to it, as if market participants were saying "I don't want to take possession/assignment of SPY $125.

With financials such a "heavyweight" in the S&P 500, and S&P 100 (OEX.X) for that matter, the XBD.X is my "sector of the week" for S&P traders to be monitoring closely.

That takes care of some "strength," now let's check out the "weakness" and the Semiconductor HOLDRs (SMH)

Semiconductor HOLDRs (SMH) - Daily Intervals

I tend to remember my "terrible trades" more than I do the good ones. Only a Market Monitor reader will understand the $31.51 level. On July 13, I profiled a "go long 1/2 bullish position" in mid-session trade at $31.51, and I picked the afternoon high as that trade was stopped for a loss at $30.75 before that session's close. To be safe, and having just had a bullish trade crammed down my throat, I set an alert at $31.51, so if that level were traded again, I might be alert to selling.

On Wednesday (07/19/06), just ahead of Intel's (INTC) $17.48 +1.92% quarterly earnings report, the SMH traded $31.51 and once gain got smacked.... to another 52-week low!

"Fool me once, shame on you!"

"Fool me twice, shame on me!"

Find a close above $31.51 and I (Jeff Bailey) might just start to look bullish this group, but that's a starting point. Yeah, yeah, yeah. Wait until $31.51 and I'll have missed the bullish move? My trade blotter doesn't suggest so.

I like to also monitor weakness, and the semiconductors would be the group for that.
 

New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
None None

New Long Plays

Play Editor's note: The U.S. markets produced a strong bounce on Monday but in spite of all the strength today we did not find any new bullish candidates that were attractive enough to add to the newsletter. Out of the several hundred stocks we did look at today there were a few we considered but earnings were in a couple of days so we would not have had enough time to trade them properly. Maybe the picture will change if the markets produce any sort of follow through on today's rebound.

New Short Plays

None today.
 

Play Updates

Updates On Latest Picks

Long Play Updates

None
 

Short Play Updates

Phazar Corp. - ANTP - close: 8.86 change: +0.18 stop: 9.27

There is no change from our previous updates on ANTP. We remain on the sidelines. Our trigger to short the stock is at $8.49. If triggered our target will be the $7.00-6.75 range. We want to remind 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.

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

---

Cascade - CAE - close: 37.04 change: +1.35 stop: 36.76

The market bounce on Monday fueled a big rebound in CAE (+3.7%) but volume came in pretty low suggesting little or no confidence behind today's move. We are still on the sidelines. Our plan is to use a trigger at $34.90 to catch any breakdown under support in the $35 region. If triggered our target is the $31.50-31.00 range. The Point & Figure chart is more bearish with a $22.00 target. We do not want to hold over its earnings report in September.

Picked on July xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 09/07/06 (unconfirmed)
Average Daily Volume: 87 thousand

---

Coach Inc. - COH - close: 27.23 change: +0.92 stop: 28.01

The retailers have been pretty weak lately and today's rally sparked quite a bit of short covering and probably some bargain shopping. The rebound in COH today was stronger than we would have expected. The close over $27.00 is not a good sign. More conservative traders may want to consider tightening their stops or exiting early to limit losses. The overall pattern for COH is bearish but short-term the stock could bounce toward its 50-dma (near 28.75). Our target for COH is the $22.75-22.25 range. We do not want to hold over the early August earnings report so that gives us six trading days left.

Picked on July 16 at $26.43
Change since picked: + 0.80
Earnings Date 08/01/06 (confirmed)
Average Daily Volume: 4.1 million

---

Juniper Networks - JNPR - cls: 13.77 change: +0.14 stop: 15.01

If you're feeling optimistic then the good news today is that JNPR only added 1%. The stock under performed the wider market and remains under broken support and what should be overhead resistance at the $14.00 level. Normally we would suggest that readers consider short positions with JNPR under $14.00 but right now we'd wait to see if the market builds on today's rally first before initiating new plays. Our target is the $12.00-10.00 range. Conservative traders can exit near $12 with us and more aggressive traders can aim lower. Speaking of conservative traders you might want to put your stop just above Thursday's high (14.76). The P&F chart is still very bearish with an $8.50 target.

Picked on July 21 at $13.75
Change since picked: + 0.02
Earnings Date 07/19/06 (confirmed)
Average Daily Volume: 13.1 million

---

MTS Systems - MTSC - close: 34.46 change: +1.42 stop: 35.26*new*

The oversold bounce in MTSC today was pretty sharp with the stock adding 4.29%. Volume was low and that suggest a lack of confidence behind the move but it's still a big bounce. Currently it is our plan to exit on Wednesday afternoon near the close to avoid holding over the company's earnings report. That's still the plan but we're going to tighten our stop loss to reduce our risk. The 10-dma near $35.00-35.05 should be short-term overhead resistance. We're going to lower our stop loss to $35.26.

Picked on July 17 at $34.19
Change since picked: - 1.15
Earnings Date 07/26/06 (confirmed)
Average Daily Volume: 105 thousand

---

Maxim Integrated - MXIM - close: 28.10 chg: +0.71 stop: 30.01

The NASDAQ composite produced a pretty strong bounce today and the semiconductor sector followed with a 1.8% gain. Shares of MXIM out performed the SOX and the NASDAQ with a 2.59% gain. More conservative traders may want to exit now to try and lock in a profit - or consider tightening their stops toward $29.25 to reduce their risk. The long-term trend for MXIM remains bearish but short-term the stock could bounce toward the $30 region.

Picked on July 09 at $29.75
Change since picked: - 1.65
Earnings Date 08/04/06 (confirmed)
Average Daily Volume: 5.5 million

----

Teva Pharma. - TEVA - close: 30.49 change: +0.73 stop: 31.65

Danger! TEVA added 2.4% on above average volume and produced an intraday bullish reversal today. The big bounce in the markets helped fuel the move but news that Condoleeza Rice is in Lebanon may also spur some buying for Israel-based companies in hopes the fighting may end sooner than expected. The move over $30.00 is bad news for us and more conservative traders may want to strongly consider exiting now to minimize any losses. We're not suggesting new plays.

Picked on July 21 at $29.79
Change since picked: + 0.70
Earnings Date 08/01/06 (unconfirmed)
Average Daily Volume: 7.4 million

---

Meridian Biosci. - VIVO - close: 21.12 chg: +0.18 stop: 23.05

VIVO tried to bounce this morning but it failed under the $22.00 level. This sort of failed rally looks like a new entry point for shorts but right now we'd hesitate to open new bearish plays until we see if the markets produce any sort of follow through on Monday's rally. Our target is the $18.15-18.00 range since the $18.00 level was support last year.

Picked on July 23 at $20.94
Change since picked: + 0.18
Earnings Date 07/20/06 (confirmed)
Average Daily Volume: 175 thousand

---

Watson Wyatt Wld - WW - close: 32.90 chg: +0.64 stop: 34.01

Monday's market rally inspired WW to a 1.98% gain. If the rally continues we'd look for WW to encounter some resistance at its descending 10-dma near $33.30. We're not suggesting new plays at the moment. Our target is the $31.10-31.00 range. 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: - 0.29
Earnings Date 08/10/06 (confirmed)
Average Daily Volume: 216 thousand

---

XM Sat.Radio - XMSR - close: 11.20 change: -0.00 stop: 13.51

XMSR displayed relative weakness today. The stock's failure to participate in the market's rally on Monday is definitely bearish and good news for our short play. Our target is the $10.50-10.00 range. We do not want to hold over the July 27th earnings report. More conservative traders may want to consider tightening their stops toward the $13.00 level. 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: - 1.75
Earnings Date 07/27/06 (confirmed)
Average Daily Volume: 7.7 million
 

Closed Long Plays

None
 

Closed Short Plays

Alex. & Baldwin - ALEX - cls: 41.14 chg: +0.99 stop: 41.75

We are cutting our losses in ALEX. We warned readers over the weekend that Friday's session looked like an intraday bullish reversal. Today's 2.4% rally, while fueled on low volume, still seems to confirm the rebound. Actually the three-day candlestick pattern also looks like a bullish reversal pattern. The overall, larger trend in ALEX is still bearish but unless you're willing to endure a bounce back toward the $42.50 (that means putting your stop above $42.50) we're suggesting traders exit now.

Picked on July 21 at $39.95
Change since picked: + 1.19
Earnings Date 07/28/06 (unconfirmed)
Average Daily Volume: 354 thousand

---

Centex Corp. - CTX - close: 47.06 chg: -2.45 stop: 46.25

The market rally today sparked a big bounce in the homebuilders. It was probably shorts rushing to lock in profits that helped push the DJUSHB index to a 4.1% gain. Shares of CTX added 5.49% and erased a lot of our potential gains with today's move. It was our plan to exit at the closing bell today to avoid holding over the company's earnings report but we were stopped out at $46.25 on the rebound this morning. The company's earnings report was positive but management guided lower for the next quarter. CTX was trading near $46 in after hours.

Picked on July 13 at $47.37
Change since picked: - 0.31
Earnings Date 07/24/06 (confirmed)
Average Daily Volume: 2.5 million

---

USEC - USU - close: 11.26 change: +0.42 stop: 11.26

We've been stopped out of USU. We tried to limit our risk with a relatively tight stop loss and it looks like the rally in the markets today was just too strong. Our stop was at $11.26.

Picked on July 23 at $10.84
Change since picked: + 0.42
Earnings Date 08/01/06 (unconfirmed)
Average Daily Volume: 1.0 million
 

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

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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.

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