Option Investor

Daily Newsletter, Monday, 07/31/2006

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Table of Contents

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

Market Wrap

Natural Gas Explosion Leaves Majors Unchanged

September Natural Gas futures (ng06u) surged higher on Monday to settle up $1.027 per 1,000 cubic feet, or 14.3%, as temperatures across much of the Midwest and Northeast, combined with last week's surprising draw (7 billion cubic feet) in inventories brought strong buying into the complex.

The summer heat wave had temperatures reaching well into the 90's, with much of the nation's power grid seeing peak levels of demand.

Continued violence and little confirmation of a cease-fire in the Middle East also helped lift September Crude Oil futures (cl06u) back near last week's highs, with the September contract settling up $1.16, or 1.58% at $74.40.

Volume at the big board came in about average with July's average daily volume of 2.34 billion shares, while NASDAQ volume was notably weak and below July's average daily volume of 1.93 billion shares.

Merger activity was modest, but shares of Disk Drive Index (DDX.X) component M-Systems (NASDAQ:FLSH) $36.00 +13.24% jumped after the Israel-based maker of removable flash storage devices said it had agreed to be bought by SanDisk Corp. (NASDAQ:SNDK) $46.66 -1.01% for $1.35 billion.

SanDisk said it was offering M-Systems shareholders 0.76368 shares of SanDisk stock for each M-Systems share, which at Friday's close valued M-Systems at $36.00 per share.


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Copper miner Phelps Dodge (NYSE:PD) $87.34 +7.16% rose sharply after the company said it would no longer pursue an acquisition of Falconbridge (NYSE:FAL) $55.06 +0.07% after that company's shareholder-base rejected Phelps' offer. Phelps Dodge said it remained committed to its Inco (NYSE:N) $77.77 +1.79% acquisition strategy.

Prudential analyst John Tumazos upgraded Phelps Dodge's shares to "overweight" and lifted his price target to $110 from $60.

Meanwhile, Teck Cominco (NYSE:TCK) $66.12 +1.92% said it was raising its cash portion of a hostile cash-and-stock offer to buy Inco. The bid now stands at $14.5 billion, including up to $8.04 billion in cash payouts.

Today's earnings calendar was busy once again.

Shares of health service provider Humana (NYSE:HUM) $55.93 +8.51% surged $4.39 per share after the company said its Medicare Advantage plan pushed net income higher to $89.5 million, or $0.53 a share. Analysts were expecting EPS of $0.35 a share. The company said revenue climbed 52% to $5.41 billion and that full-year earnings may top estimates.

Shares of Scottish Re Group (NYSE:SCT) $3.99 -75.06% were the second-most actively traded at the big board and plunged after the life reinsurer said its CEO Scott Willkomm resigned, and that the company now expects to report an operating loss of approximately $130 million for the second quarter. The company said it has hired investment bankers Bear Stearns & Co. and Goldman Sachs to evaluate "strategic alternatives and potential sources of capital."

Drug giant and Dow component Pfizer (NYSE:PFE) $25.99 -0.45% edged down 12 cents and were atop today's list of most actively traded stocks. The company said today that Jeffrey Kindler will take over for embattled Chief Executive Hank McKinnel. Mr. Kindler is a former CEO of two McDonald's (NYSE:MCD) $35.39 +0.28% subsidiaries.

U.S. Market Watch - 07/31/06 Close

Airline stocks remain fairly volatile and just when they looked to be "taking off" the past couple of week, they were grounded today with Continental Airlines (NYSE:CAL) $26.34 -7.44% pacing declines on no company specific news that I could uncover.

UAL Corp. (NASDAQ:UAUA) $26.14 -5.01% reported its first profit since coming out of bankruptcy. Shareholders were rewarded with a post-bankruptcy new low of $25.80 intra-day.

The Oil Service HOLDRs (AMEX:OIH) $145.77 +2.94% took today's top spot among narrow list of sector winners in the U.S. Market Watch with top-weighted holdings Halliburton (NYSE:HAL) $33.36 +2.29%, Baker Hughes (NYSE:BHI) $79.95 +2.63%, Schlumberger (NYSE:SLB) $66.85 +2.45% and Transocean (NYSE:RIG) $77.23 +1.21% trading higher.

Retailers as depicted by the S&P Retail Index (RLX.X) 436.01 +0.31% finished flat. The group found a bid at the open when Wal-Mart (NYSE:WMT) $44.50 +0.08% said U.S. July same-store sales rose 2.4%, which was at the high end of the company's prior forecast.

Thomson Financial said it expects July same-store sales to rise an average of 3.6% overall, and increase 4.7% excluding Wal-Mart's sales.

Though same-store sales are an important metric of monthly performance, analysts cautioned not to read too much into results for July, the smallest month in the second quarter in terms of sales, according to Lehman Brothers.

Economic data released today had the National Association of Purchasing Management Chicago saying its index of area business activity rose to 57.9 in July on a seasonally adjusted basis from 56.5 in June. Economists were expecting a reading of 56.0.

Regional central bankers made some comments with little more than a week to go before the Fed's rate-setting committee next Tuesday (08/07/06). Two central bankers underscored their uncertainty surrounding the key question of whether another interest rate hike was in store.

Federal Reserve Bank of San Francisco President Janet Yellen said she thought monetary policy appears where it needs to be given a moderation in economic growth and the impact of rate hikes, but added that central bankers need to watch incoming data closely.

"It appears to me that the federal funds rate currently lies in a vicinity that is roughly appropriate for the Fed to attain its key objectives over the medium run," Yellen said. But she added "since all such approaches are inherently imprecise, policy must be responsive to the data that actually emerges."

Ms. Yellen said the data the Fed must watch is not limited to statistics on "inflation, output and employment" but should include "energy prices, the dollar, the stock market, long-term interest rates, housing prices and inflation expectations."

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

I've yet to find "the chart" where technicals give any decisive sign of market direction. Friday's "weaker-than-expected" GDP data (+2.5% vs. +3.2% consensus) has me contemplating the proverbial double-edged sword, as we would likely expect numbers to come down on earnings growth rates.

I would have to say that the "market got it right" as Q1 GDP was a very robust +5.6%.

One internal measure I've drawn trader's and investor's attention to is the S&P 500 Bullish % ($BPSPX) measures, where for a third-time since August 2005 this measure of market RISK and internal strength/weakness is at 48%.

I focus a bit more on the SPX this evening as The Stock Trader's Almanac notes that August is the worst S&P month the last 15-years.

S&P 500 Bullish % ($BPSPX) - 2% box chart

The institutionally followed S&P 500 Bullish % ($BPSPX) from StockCharts.com shows a reversal back lower to "bear confirmed" status at what has been important levels of "support" since August (8=August in PnF charting).

Quantitatively, we're at midfield on a scale of 0% to 100% and the above internals would suggest sellers have a slight upper hand.

Dorsey/Wright and Associates' S&P 500 Bullish % (BPSPX) looks very similar to the StockCharts.com $BPSPX, but shows 4 different times since August 2004 that this major indicator of market RISK and internal strength/weakness has measured 48%, but NEVER 46%. At tonight's close, Dorsey's BPSPX comes in unchanged at 48.39%.

Dorsey/Wright does NOT adjust a stock's supply (O) / demand (X) for the payment of stock dividends and thus the slight discrepancy between these two charting services Point and Figure charts and bullish % measures.

The point here is that the SPX looks range-bound between 1,220 and 1,290, but internals are at what could be a VERY IMPORTANT level.

As we begin the month of August and trader's seemingly sitting on pins and needles with each economic report, a 46% reading could become a hole in the damn that triggers a waterfall of bearish enthusiasm.

At this evening's close, all of StockCharts.com's major market bullish % are in a "column of O" except for the NYSE Bullish % ($BPNYA). This is also true for Dorsey/Wright and Associates' major market bullish % charts.

StockCharts.com provides FREE PnF charts. If you would like to view some of the major market bullish % charts, which give insight to supply/demand internals of the major indexes, their symbols are as follows.

The very narrow Dow Industrials Bullish % (30 stocks) $BPINDU
The narrow NASDAQ-100 Bullish % $BPNDX
The narrow S&P 100 Bullish % $BPOEX
The broader S&P 500 Bullish % $BPSPX (see above)
The very broad NASDAQ Comp. Bullish % $BPCOMPQ
The very broad NYSE Comp. Bullish % $BPNYA

New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays

New Long Plays

None today.

New Short Plays

UAL Corp. - UAUA - close: 26.14 chg: -1.38 stop: 28.01

Company Description:
United Airlines is the world's second largest airline operating more than 3,700 flights a day on United, United Express and Ted to more than 210 U.S. domestic and international destinations from its hubs in Los Angeles, San Francisco, Denver, Chicago and Washington, D.C. With key global air rights in the Asia-Pacific region, Europe and Latin America, United is one of the largest international carriers based in the United States. United is also a founding member of Star Alliance, which provides connections for our customers to 842 destinations in 152 countries worldwide. United's 57,000 employees reside in every U.S. state and in many countries around the world. (source: company press release or website)

Why We Like It:
We considered adding another bullish long candidate to the play list tonight but the major indices are still trading under resistance. Instead we're going to add this airline stock as a bearish, short candidate. The stock has been trading in a bearish pattern of lower highs for months. Currently shares are poised to breakdown under support near $25.80-25.85. The company reported earnings this morning and the news was mixed but management issued downside guidance going forward. A quick look at the chart does show that UAUA can be volatile so be ready for a lot of ups and downs. Readers should know that as an airline the stock will probably see added volatility as the airline industry reacts to moves in the price of oil. We also want to point out that the $25.00 level might be round-number support but we can't tell at this point. We are suggesting a trigger to short the stock at $25.70. Our target is the $22.00-20.00 range. FYI: The latest (July) data puts short interest at 3.8% of its 85.6 million-share float.

Picked on August xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/31/06 (confirmed)
Average Daily Volume: 1.8 million

Play Updates

Updates On Latest Picks

Long Play Updates

E*Trade - ET - close: 23.31 change: +0.06 stop: 21.90

The rally in the broker-dealers stalled a bit on Monday. ET displayed some relative strength with a close in the green but shares failed to breakout past the $23.50 level. We don't see any changes from our new play description this past weekend. We're suggesting a trigger to go long at $23.55. More conservative traders may want to see more confirmation and wait for a move over $23.75. There is potential resistance at its 100-dma near $24 but our target is the $25.90-26.00 range. Technical traders will note that ET's P&F chart is still bearish and will remain bearish for a while.

Picked on July xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/19/06 (confirmed)
Average Daily Volume: 5.3 million


China Petro & Chem. - SNP - cls: 57.52 chg: +0.57 stop: 54.75

Uh-oh! Be careful here. SNP spiked higher this morning and traded to $58.90 before reversing course. Yes, the stock did close with a 1% gain but the move today looks like a bearish, failed rally under its 100-dma. We would not be surprised to see a dip towards the $56.50 region. However, patient traders can use a dip or bounce near $56.50 as a new entry point to go long the stock. Our target is the $62.00-63.00 range. We don't want to hold over the late August earnings report.

Picked on July 30 at $56.95
Change since picked: + 0.57
Earnings Date 08/23/06 (unconfirmed)
Average Daily Volume: 295 thousand


St. Jude Medical - STJ - cls: 36.90 chg: -0.51 stop: 33.99

The rally in STJ took a breather today. Shares traded in a relatively narrow range almost the entire session. Meanwhile in the news STJ and Boston Scientific settled their patent dispute. If STJ does pull back more watch for a bounce from the $36 region as a new entry point. Our target is the $39.00-40.00 range. Our time frame is about four to six weeks. FYI: The P&F chart points to a $48 target.

Picked on July 25 at $35.94
Change since picked: + 0.96
Earnings Date 07/19/06 (confirmed)
Average Daily Volume: 3.8 million


USA Truck - USAK - close: 19.15 change: -0.83 stop: 18.99

Transportation stocks were weak on Monday as crude oil futures added 1%. The action in USAK was bearish. The stock completely erased Friday's gains and shares are testing the $19.00 level and its rising 10-dma. We're going to keep USAK as a bullish candidate for now but if shares close under $19 we'll drop it. Currently we're suggesting that traders wait for the stock to trade at or above $20.35 before going long. If triggered our target is the $22.50-23.00 range. Our time frame is about six weeks.

Picked on July xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/20/06 (confirmed)
Average Daily Volume: 124 thousand

Short Play Updates

Juniper Networks - JNPR - cls: 13.45 chg: -0.22 stop: 14.61

The NWX networking index posted a minor gain today but shares of JNPR displayed relative weakness with a 1.6% loss. Traders might want to consider new positions given today's decline but consider using a tighter stop. Our target for JNPR is the $12.00-10.00 range. Conservative traders can exit near $12 with us and more aggressive traders can aim lower. The P&F chart is still very bearish with an $8.50 target.

Picked on July 21 at $13.75
Change since picked: - 0.30
Earnings Date 07/19/06 (confirmed)
Average Daily Volume: 13.1 million


NCI Bldg - NCS - close: 46.74 chg: -1.13 stop: 50.15

The attempted bounce in NCS has already failed. Shares displayed relative weakness today with a 2.3% loss and a new six-month low. We suspect that NCS may be able to trade towards $40. There does appear to be some support near $45.00 but we're going to target a decline into the $42.50-40.00 range. Be ready for a bounce when shares near $45. We do not want to hold over the late August earnings report.

Picked on July 27 at $47.65
Change since picked: - 0.91
Earnings Date 08/31/06 (unconfirmed)
Average Daily Volume: 383 thousand


Meridian Biosci. - VIVO - cls: 21.00 chg: +0.05 stop: 22.05

We do not see any changes from our weekend update on VIVO. Traders can wait for a failed rally under the 10-dma or a new decline under $20.40 or $20.00 before opening short positions.
Our target is the $18.15-18.00 range since the $18.00 level was support last year. FYI: the P&F chart shows a triple-bottom breakdown sell signal with a $16 target.

Picked on July 23 at $20.94
Change since picked: + 0.06
Earnings Date 07/20/06 (confirmed)
Average Daily Volume: 175 thousand


Watson Wyatt Wld - WW - close: 32.96 chg: -0.13 stop: 34.01

We don't see any big changes from our weekend update. WW is consolidating sideways inside its two-month bearish trend. Unfortunately this is turning some of the technical indicators bullish. For example, the MACD on the daily chart is nearing a new buy signal. More conservative traders may want to tighten their stops toward $33.50 or even $33.25. We are not suggesting new plays at this time. 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: - 0.23
Earnings Date 08/10/06 (confirmed)
Average Daily Volume: 216 thousand

Closed Long Plays


Closed Short Plays


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


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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