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Daily Newsletter, Monday, 08/07/2006

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Table of Contents

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

Market Wrap

Oil spikes; Fed decision looms

U.S. stocks finished broadly lower ahead of tomorrow's closely watched FOMC decision on interest rates, while September Crude Oil futures (cl06u) surged 2.97%, or $2.22/barrel to settle at $76.98 after BP (NYSE:BP) $70.45 -2.88% said it began shutting down 22 miles of transit pipelines late Sunday after a leak was discovered near the massive Prudhoe Bay field in Northern Alaska.

The West Coast was expected to be squeezed particularly hard and the government was considering releasing oil from emergency stockpiles to ease an expected crunch.

California gets about 20% of its oil from Alaska, with the remainder coming from in state and foreign sources.

According to the U.S. Energy Information Administration (EIA), the shutdown will reportedly deprive markets of 400,000 barrels of oil per day, about 2.6% of U.S. supply including imports.

The aging pipeline system on the North Slope, which was designed to last 25 years, but has now lasted 29 years, has been fraught with corrosion problems.

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BP, which is the operator of the Prudhoe Bay field traded weak as company officials were uncertain as to how long transit lines would be shut down. The company did say it was spending $72 million this year to inhibit corrosion, up from $60 million last year.

Dow component Exxon Mobil (NYSE:XOM) $69.23 +0.78% and Conoco Phillips (NYSE:COP) $67.61 -1.32%, both major producers at Prudhoe Bay, traded mixed.

Shares of Prudhoe Bay Trust (NYSE:BPT) $76.85 -12.56%, which derives royalties from the Prudhoe Bay field fell $11.04/share, but finished well off their morning lows of $69.00.

Volumes at both the NYSE and NASDAQ were what I would consider to be "light" today. The NASDAQ's 1.46 billion shares was the lowest full-day volume since June 26.

For the month of July, NYSE volume (excluding the 1/2 day on 07/03/06) averaged a brisk 2.39 billion shares per day, while NASDAQ average daily volume came in at a more modest 1.93 billion shares per day.

U.S. Market Watch - 08/07/06 Close

Treasuries gave back some of last week's gains with yields backing up a bit. I'm thinking bond bulls took some handsome profits ahead of tomorrow's FOMC decision on rates.

August Fed Funds futures (ff06q) 94.71 were unchanged and currently have traders forecasting just more than a 15% probability that the Federal Open Market Committee will raise its target for Fed Funds by 25 basis points at tomorrow's meeting.

We did get once piece of economic data today in the form of June consumer credit. The government said consumer credit rose by $10.3 billion to $2.186 trillion, led by gains in revolving credit. The $10.3 billion increase was much larger that the $4.0 billion forecast, and May's upwardly revised $5.9 billion increase (from $4.4 billion).

The June consumer credit figures were released at 03:00 PM EDT, just as the bond markets closed. A quick check of the U.S. Dollar Index (dx00y) 84.81 as I type (05:45 PM EDT) is little changed from its 03:00 PM EDT session close.

It would have to be my analysis that the rather flat trade in the dollar has market participants little moved as to Fed action from the consumer credit data.

In my opinion, the June consumer credit figures have an "inflationary" look to them.

I would expect FOMC members and traders to be monitoring tomorrow morning's 08:30 AM EDT release of Q2 Nonfarm Productivity, where current consensus is for a 0.9% increase.

Increases in productivity are a KEY measure that FOMC members will monitor, and INCREASES in productivity are believed by many to be dovish for inflation and allow a pause to further Fed rate hikes.

Also slated for release at 08:30 AM EDT will be Q2 labor costs, which are forecasted to rise by 3.6%.

Should labor costs rise 3.6%, it becomes imperative that productivity also increase for those that have been "banking" on the Fed to pause.

September Crude Oil futures (cl06u) - $0.50 box size

At Friday's settlement, it looked as if Crude Oil prices for September delivery might be headed lower, but this weekend's news out of Alaska certainly gives traders something to reconsider. Perhaps some information they didn't have at Friday's settlement.

Today's trade at $77.00 now has the Point and Figure chart (supply/demand) back on a "buy signal" (column of X exceeding prior column of X) and hinting at an initial bullish price objective of $82.50.

I've given a quick tutorial on how a BULLISH vertical count is tabulated (in blue text).

Exacerbating today's rise in oil was news out of Denver, CO that at some Colorado truck stops, diesel fuel was being rationed to 50 to 75 gallons per truck as the conversion of diesel to meet the new EPA requirements has regional refiners still "scrubbing" storage tanks that will eventually store the ultra-low-sulfur diesel (15 parts per million from 500 parts per million).

Sunoco's (NYSE:SUN) $77.79 +4.92%, shares surged $3.65/share on heavy volume of 5.03 million shares in Monday's trade. Sunoco operates Denver's only regional refinery.

The company said it has been trying to maximize diesel production and had recently completed a $445 million project to produce ultra-low-sulfur diesel.

According to AAA, the average price of diesel in Colorado was $3.20/gallon, compared with a national average of $3.06.

September Heating Oil futures (ho06u), which trader will tie to distillates, moved sharply higher to settle up $0.0539, or +2.58% at $2.1435 and just off its all-time contract high of $2.18 set in early July.

I had profiled a 1/2 position short in shares of Sunoco (SUN) headed into Friday's close at $74.87 in the OptionInvestor.com Market Monitor, without the knowledge that there was a diesel shortage here in Denver, CO, and a pending crude oil supply disruption at Prudhoe Bay. That trade was stopped out not long after this morning's open at $75.50.

Oil and water

It has been on rare occasion that daily internals would have NASDAQ showing any strength relative to the NYSE (NH/NL, or A/D), and today was no exception.

But just because the NASDAQ trades weak, that doesn't necessarily mean "the market" is weak, or is overly bearish.

CNBC's James Cramer likes to say "there's always a bull market going on somewhere." For the NASDAQ Composite, or NASDAQ-100, that's not been the case.

If anything, other major indexes have been PULLED LOWER by the very broad NASDAQ Composite (COMPX) 2,072.50 -0.60%, and even the narrower NASDAQ large caps and NASDAQ-100 Index (NDX.X) 1,494.13 -0.64%.

Key earnings after tomorrow's closing bell will come from technology/networking giant Cisco Systems (NASDAQ:CSCO) $17.41 +0.98%, which range-traded within Friday's session today.

Current consensus (21 analysts) is for Cisco to earn $0.28 per share on revenue of $7.92 billion.

NASDAQ-100 Index (NDX.X) - Daily Intervals

Friday's "pop" above 1,515 early in the morning was pushed back below this key level of resistance by 12:00 PM EDT. According to StockCharts.com's NASDAQ-100 Bullish % ($BPNDX), just 29 of the 100 stocks' comprising this index currently show a Point and Figure "buy signal" associated with the chart. Since closing below 1,515, the NDX has NOT been able to close above that level. That's a good test from strength (a close above 1,515).

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

Since Monday's wrap, the SPX is little changed. However, we did see some sign that demand was starting to outstrip supply as the SPX did trade 1,290 and generate a double top buy signal.

Tonight's S&P 500 Bullish % ($BPSPX) reading from StockCharts.com has 53% of the stocks in this index (265 of 500) showing point and figure buy signals. A BULL that might be looking to buy the break higher at 1,290 would want to see MORE than 54% to show some BULLISH CONFIRMATION.

A LOW RISK and potentially HIGH RETURN trade is to look for the SPX to pull back, say 3 or 4 boxes to 1,260/1,250, to then buy a 1,300 strike call.

A "safer" trade for a bull is to see if the NDX can hold a close above 1,515, as any STRENGTH at the bottom (the NDX is WEAKEST) most likely brings a tidal wave of bullish enthusiasm to the STRONGER SPX.

If the S&P 500 Bullish % ($BPSPX) were giving BULLISH CONFIRMATION, I'd say "go long young bulls," but the slight bearish divergence still depicts that of bullish caution.
 

New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
None None

Editor's note: We're not adding any new plays to the newsletter until the FOMC meeting is over on Tuesday, August 8th. Our market bias remains bearish.


New Long Plays

None today.
 

New Short Plays

None today.
 

Play Updates

Updates On Latest Picks

Long Play Updates

E*Trade - ET - close: 23.42 change: -0.16 stop: 21.90

There is no change from our weekend update on ET. The stock traded in a 38-cent range on Monday as investors waited for Tuesday's FOMC meeting. We're not suggesting new bullish positions in ET at this time although we may change our minds if ET can breakout past $24.00 and its simple 100-dma. Our target is the $25.90-26.00 range.

Picked on August 04 at $23.61 *gap higher*
Change since picked: - 0.19
Earnings Date 07/19/06 (confirmed)
Average Daily Volume: 5.3 million

---

Highland Hospitality - HIH - cls: 13.74 chg: -0.15 stop: 13.25

As expected HIH delivered a dip on Monday. We don't see any changes from our weekend update on the stock. Our market bias is growing bearish but a move over $13.80 or $13.85 might be used as a bullish entry point in HIH. Our target is the $14.90-15.00 range.

Picked on August 04 at $13.85
Change since picked: - 0.11
Earnings Date 07/27/06 (confirmed)
Average Daily Volume: 388 thousand
 

Short Play Updates

Juniper Networks - JNPR - cls: 13.00 chg: -0.13 stop: 14.01

JNPR lost another 1% today and we don't see any changes from our weekend update. Don't be surprised if JNPR produces some volatility following the FOMC meeting tomorrow afternoon. We're not suggesting new shorts at this time. 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: - 0.75
Earnings Date 07/19/06 (confirmed)
Average Daily Volume: 13.1 million

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UAL Corp. - UAUA - close: 24.95 chg: +0.34 stop: 27.01

Most of the airline stocks were negative on Monday since fuel is such a huge expense for the industry and crude oil surged to 3% near $77 a barrel. Yet UAUA bucked the trend and added 1.3% after a positive review in Barron's over the weekend. We would watch for a bounce towards the $26.00 level, which as broken support should act as near-term overhead resistance. Our target is the $22.00-20.00 range.

Picked on August 01 at $25.70
Change since picked: - 0.75
Earnings Date 07/31/06 (confirmed)
Average Daily Volume: 1.8 million

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Meridian Biosci. - VIVO - cls: 20.30 chg: -0.20 stop: 22.05

We do not see any changes from our weekend update on VIVO. The stock is holding above support near $20.00 as investors wait for the FOMC meeting tomorrow. Look for a decline under $20.00 or last week's low at $19.78 before considering new bearish 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: - 0.64
Earnings Date 07/20/06 (confirmed)
Average Daily Volume: 175 thousand

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Watson Wyatt Wld - WW - close: 32.46 chg: +0.04 stop: 33.51

There are no changes from our weekend update on WW. The stock looks like it wants to bounce and it could rally toward the $33.50 region before hitting the top of its descending channel. We're not suggesting new plays and more conservative traders may want to tighten their stops toward $33.00. Our target is the $31.50-31.00 range. Please note that we plan to exit on Wednesday, August 9th at the closing bell to avoid holding over the company's earnings report due out August 10th.

Picked on July 16 at $33.19
Change since picked: - 0.73
Earnings Date 08/10/06 (confirmed)
Average Daily Volume: 216 thousand
 

Closed Long Plays

None
 

Closed Short Plays

NCI Bldg - NCS - close: 50.34 chg: +0.44 stop: 50.15

We have been stopped out of NCS at $50.15. Shares dipped to $49.00 before traders bought the dip and pushed the stock back through round-number resistance at the $50.00 mark. Volume on today's gain was above average. This is a breakout over its five-week trendline of resistance but NCS still has technical resistance at its 50-dma and 200-dma overhead.

Picked on July 27 at $47.65
Change since picked: + 2.69
Earnings Date 08/31/06 (unconfirmed)
Average Daily Volume: 383 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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