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Daily Newsletter, Monday, 08/21/2006

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Table of Contents

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

Market Wrap

Make it a "light"

The major indexes gave back some of last week's impressive gains on Monday in what could best be described as a "light" session of trade.

There were no major economic reports released for the U.S. today, and a light economic calendar this week begins Wednesday morning at 10:00 AM EDT with July existing home sales (consensus 6.6 million annual rate vs. previous 6.6 million annual rate).

Volumes at both major exchanges were anemic with many traders opting for the lounge chair at the vacation home after last week's active trade, where many of the major equity indexes broke above, or free of their August "Max Pain" Theory tabulations earlier in the week, then trended higher into Friday's close.

While the Semiconductor HOLDRs (AMEX:SMH) $32.54 -1.65% traded weak today, the battering this sector has taken since the beginning of the year had the most optimistic bull looking to guard some profits after last week's 8.2% gain.

Semiconductor HOLDRs (AMEX:SMH) - Daily Intervals

In recent Market Wraps that I've written, I've been showing the conventional use of fibonacci retracement from a relative high close to relative low close for various indexes.

In Tuesday's wrap, it looked like shorts, and ESPECIALLY call sellers got caught on the "wrong side" of the near-term trade and with arms and legs wrapped tight, gave themselves a big bear hug.

I think bulls will, or should, use that to their advantage near-term. Look for the SMH to pull in, show some stability from $31.28-$31.51, then look for 1/2 positions there, and add further on a move ABOVE the recent highs.

According to Dorsey/Wright and Associates, their Semiconductor Sector Bullish % (BPSEMI) has reversed up to "bull alert" status at 33% bullish after a recent low 24% measure. It would currently take a reversing lower measure of 26% to revert back to "bear confirmed" status, and a 68% reading to achieve "bull confirmed" status.

A complete list of various HOLDRs and their components/weightings can be found at http://www.holdrs.com

Patterson-UTI Energy (NASDAQ:PTEN) $27.64 +2.18%, Microsoft (NASDAQ:MSFT) $26.12 +1.27% and Expedia (NASDAQ:EXPE) $15.34 +1.05% were percentage gainers for the QQQQ, but couldn't offset negative breadth of 17:83 and losses of 3% or more for Akamai Technologies (NASDAQ:AKAM) $38.73 -3.12%, Urban Outfitters (NASDAQ:URBN) $16.54 -3.33%, Amazon.com (NASDAQ:AMZN) $28.13 -3.39%, Monster Worldwide (NASDAQ:MNST) $41.48 -3.51%, PETsMART (NASDAQ:PETM) $23.92 -3.47%, NVIDIA (NASDAQ:NVDA) $23.92 -3.47% and Broadcom (NASDAQ:BRCM) $28.89 -3.70%.

Earnings reports were also light on Monday.

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Shares of building products retailer Lowe's (NYSE:LOW) $28.35 -3.96% gapped back below both their 50-day SMA ($29.26) and curling higher 21-day SMA ($28.58) after the company missed Q2 estimates and cut its year forecast.

The number 2 home improvement retailer after Dow component Home Depot (NYSE:HD) $34.30 -1.35% reported earnings per share of $0.60 for the quarter, up from $0.52 a year earlier.

Analysts had forecast a profit of $0.61 a share.

Lowe's said sales rose 12.2% to $13.4 billion from $11.9 billion a year earlier. Analysts were expecting it to post revenue of $13.3 billion for the period.

Lowe's pared its full-year profit forecast to a range of $2 to $2.07 a share from May's projection of $2.07 to $2.11 a share and said they now see same-store sales for the year rising 2% to 3%, compared with May's forecast for a gain of 4% to 5%.

Company executives cited higher gasoline prices, as well as the slowing housing market as reasons for their more cautious outlook.

Despite strong gains in longer-dated Treasuries, which had the benchmark 10-year YIELD ($TNX.X) falling 1.6 basis points to 4.819% and the 30-year YIELD ($TYX.X) edging down 0.9 basis points to 4.964%, home builders as depicted by the DJUSHB closed down 18 points, or -2.90% on their curling higher 21-day SMA .

Today's economic calendar was void of any

The September Crude Oil futures (cl06u) will expire at Tuesday's close, where Middle East tensions helped provided a bounce from last week's decline. September Crude settled up $1.31, or +1.84% at $72.45, while October Crude Oil futures (cl06v) settled higher by $1.20, or +1.66% at $73.30.

Iran's supreme leader said Tehran will continue to pursue nuclear technology while refusing access to U.N inspectors wanting to examine its underground nuclear facility, accusing the U.S. of pressure despite assertions it isn't seeking nuclear weapons.

Just after today's close, the EIA said the average retail price for gasoline across the U.S. fell by 7.6 cents last week to $2.924 cents per gallon. September Unleaded futures (hu06u) settled down $0.0303, or -1.54% at $1.9366.

Miners got a nice bounce with the AMEX Gold Bugs Index ($HUI.X) 344.71 +5.37% jumping higher not only on the dollar's weakness, but the rebound in oil prices.

One item traders and investors will want to be alert to with the $HUI.X's strong bounce today is something I began alerting gold (commodity) traders to in Thursday's Market Monitor. I think longer-dated Treasury maturities are about to reverse course, and I'll discuss these thoughts, and possible dynamics below.

S&P Depository Receipts (AMEX:SPY) - Daily Intervals

Not unlike the SMH, or the QQQQ, or many equity-based indexes, we saw a notable rise into Friday's August expiration.

A "trap" a trader can fall into when they see a more "oversold" SMH/QQQQ rise quicker than what got the bull party started, is to try and turn more BEARISH the major index that sounded the trumpet for the bull's charge to begin.

"Financials" comprise the GREATEST weighting not only for the S&P 500, but also the SMALL CAPS and the Russell 2000 Index ($RUT.X).

Now, a low beta sector like the BIX.X and BKX.X, where many stocks there have a beta of about 0.30 to 0.50, a 5-dayNet% gain of 1.60% and 1.50% is nothing to sneeze at for a bull.

Beta is a measure of volatility, or systematic RISK, of a security or a portfolio in comparison to the market as a whole.

Let's say the SPX/SPY is representative of "the market" here in the U.S..

It would appear that the greater weighting of the banks starts to act like a damp cloth on the SPY and even the RUT.X, and with fed funds currently at 5.25% and the discount rate at 6.25%, it can be tough for banks (that make loans) to see much margin when the 5-year, 10-year and 30-year Treasury YIELDS are ALL below the above-mentioned fed funds and discount rate.

So why are the banks hanging in there with some nice gains considering there low beta relative to "the market?"

I think it is anticipation that we should start to see some "bond bulls" in the Treasury market start locking in gains, bring selling to the longer-dated maturities, and have their YIELDS start to rise and the benchmark bond 10-year YIELD ($TNX.X) has achieved, and now begins to exceed its bearish vertical count.

10-year YIELD ($TNX) Chart - 0.25 box size

I've always thought the "bond market" is much smarter, or educated about the "stock market" when it comes to the economy, and what the Fed is thinking, or may be doing in the future.

When the bond market "overdose" things, is usually when shorts get on the wrong side of things, and a momentum trade really unwinds.

The above chart is that of the 10-year YIELD, but I have, and would also alert traders/investors that the longest-dated 30-year YIELD ($TYX.X), which was down a more fractional 0.9 basis points at 4.965% today, would have its Point and Figure chart showing a bearish vertical count of 49.00, or 4.90%.

The bond market is SO MUCH MORE a RISK/REWARD trade than probably any other market we would encounter. Not just because of its size, which dwarfs equity markets, but because there is such a small window for error.

Think about it.

Trillions of dollars in a YIELD of, say 5%. Heck, the SPX/SPY has risen 6.25% in just the past month.

In Thursday's Market Monitor, it was my "gut feel" based on observations that gold was about to get a bounce, as TREASURY YIELDS were "overdone" to the downside, relative to where fed funds rates were at, combined with the 10-year YIELD ($TNX.X) achieving its bearish vertical count.

Yes! Perhaps I was a day early, but today's jump in the Amex Gold Bugs Index ($HUI.X) has the "equity" portion of the gold commodity getting a bounce, and I think this may lead to some SELLING in longer-dated Treasuries (that's where the risk in the bond market is at right now; LONGER-dated MATURITIES) where the RISK comes from the amount of TIME to MATURITY.

The Dollar's weakness gives us a signal too, that the Fed is closer to a "hold," or ease cycle than it is for raising rates.

But the "dynamic" I want to get across is the potential RISE in longer-dated Treasury YIELDS, that then adds some MARGIN, or spread back to banks that LEND MONEY.

How does an SPY/SPX pullback take place?

For the most part, stocks began their rebound not long after the recent FOMC meeting, and decision to hold the fed funds target at 5.25%.

YIELDS fall and Dollar weakens, and gold gives somewhat of a "mixed signal" and has been rather volatile on a session-to-session basis.

What I see taking place the next week is YIELDS start to rise, this builds some "fear" back onto the inflation side of things, and stocks ease back from their current rally.

However, the recent lackadaisical gains for banks, and perhaps "financials" in general, then ignite on the loan spread increasing from the rise in longer-dated maturities.

And that is where I think a BEAR that thinks "oh, short/put the SPY/SPX" as its rise from the June lows has played out, and now it has further to fall than the NDX/QQQQ" might be the BIG mistake.
 

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

eBay Inc. - EBAY - close: 26.74 chg: -0.51 stop: 24.49

There are no changes from our weekend new play description on EBAY. We're still looking for a pull back into the $26.25-25.25 range. We're suggesting a trigger to buy the stock at $26.25. If triggered our short-term target is the $29.85-30.00 range. More aggressive traders may want to aim higher.

Picked on August xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/18/06 (unconfirmed)
Average Daily Volume: 19.6 million

---

JDS Uniphase - JDSU - close: 2.47 change: -0.04 stop: 2.24

JDSU is still churning sideways near the $2.50 level. If the broader market indices continue to pull back we might look for a dip in JDSU toward its rising 10-dma, currently around 2.30. A bounce from the 10 or 50-dma could be used as a new entry point to go long the stock. Our target is the $2.85-2.90 range. We do consider this an aggressive, higher-risk play due to JDSU's volatility. Please note that we do not want to hold over the August 30th earnings report.

Picked on August 16 at $ 2.50
Change since picked: - 0.03
Earnings Date 08/30/06 (confirmed)
Average Daily Volume: 42.3 million

---

Lucent Tech. - LU - close: 2.26 change: -0.05 stop: 2.14

Over the weekend we suggested that traders look for a dip into the $2.25-2.20 region and LU delivered one today. The intraday low was $2.24. If you're still concerned that the markets, and LU, might have further to fall then look for a dip closer to $2.20 before entering long positions. Don't forget that Alcatel (ALA) members are set to vote on the LU-ALA merger on September 7th. Traders should definitely keep an eye on shares of ALA since weakness in ALA will affect LU. Our target for LU is the $2.50-2.60 range.

Picked on August 20 at $ 2.31
Change since picked: - 0.05
Earnings Date 10/25/06 (unconfirmed)
Average Daily Volume: 42 million

---

Maxim Integrated - MXIM - close: 28.61 chg: -0.78 stop: 27.95

The semiconductor sector, which saw such big gains last week, was a leader to the downside today as traders did some profit taking. MXIM did not escape the pull back and shares lost 2.6%. This looks like a failed rally at resistance and a potential entry point for shorts however we suspect that last week produced a trend change for the semis. Thus we're looking for a breakout in MXIM's bearish pattern. Our plan is to use a trigger at $30.15 to go long the stock. If triggered our target is the $33.00-34.00 range, which is under the falling 200-dma.

Picked on August xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 11/03/06 (unconfirmed)
Average Daily Volume: 6.0 million

---

Novellus - NVLS - close: 26.99 change: -0.61 stop: 24.99

NVLS is another semiconductor stock that gave into some profit taking on Monday after last week's big gains. We would wait for a bounce from the $26.00 region before considering new bullish plays. Our target is the $29.50-30.00 range. Our time frame is four to six weeks. Please note that NVLS has announced its mid-quarter update for August 30th, 2006. FYI: The P&F chart points to a $49 target.

Picked on August 16 at $26.65
Change since picked: + 0.34
Earnings Date 10/18/06 (unconfirmed)
Average Daily Volume: 2.8 million

---

St. Mary Land Expl. - SM - close: 41.48 chg: +0.51 stop: 39.95

More fiery rhetoric out of Iran contributed to market weakness and oil strength. Crude oil was already bouncing from round-number support near $70 a barrel. Monday saw crude rebound higher as Iran stated it would refuse the U.N.'s demands that Iran stop enriching uranium. Naturally the rise in crude oil helped the oil stocks trend higher. Shares of SM added 1.2% and the stock is now challenging its simple 10-dma. Our target is the $43.85-44.00 range.

Picked on August 20 at $40.97
Change since picked: + 0.51
Earnings Date 11/02/06 (unconfirmed)
Average Daily Volume: 642 thousand

---

Stereotaxis - STXS - cls: 10.51 change: +0.40 stop: 9.24

Our new bullish play in STXS has been opened. The stock bucked the market's trend today and continued to move higher. STXS broke through resistance at its simple 200-dma and traded at our trigger to go long the stock at $10.31. Volume came in above average in spite of today marking the lowest market volume day for the year. Readers can choose to go long here with the breakout over its 200-dma or look for a potential dip back towards what should be round-number, psychological support at the $10.00 mark. Our target is the $11.85-12.00 range.

Picked on August 21 at $10.31
Change since picked: + 0.20
Earnings Date 08/09/06 (unconfirmed)
Average Daily Volume: 272 thousand

---

Teradyne - TER - close: 13.58 change: -0.23 stop: 12.69

Semiconductor stocks experienced some profit taking on Monday following last week's big rally. TER was no exception and shares lost 1.6% but volume came in pretty low suggesting a lack of conviction on the move. Readers can choose to buy a bounce from the $13.50 level (here) or the 50-dma (near 13.35) or even a dip near $13.00. Our target is the $14.75-15.00 range, which is under the simple 200-dma.

Picked on August 16 at $13.53
Change since picked: + 0.05
Earnings Date 10/18/06 (unconfirmed)
Average Daily Volume: 2.4 million
 

Short Play Updates

Brookefield Homes- BHS - close: 24.00 chg: -0.86 stop: 24.55

Homebuilders were also hit with plenty of profit taking on Monday. The DJUSHB home construction index lost 2.9%. Shares of BHS under performed its peers with a 3.4% decline. The stock continues to look vulnerable to more selling and we are waiting for a breakdown under support near $23.00. We're suggesting a trigger at $22.99 to short the stock. Our target is the $20.10-20.00 range. Please note that the latest (July) data puts short interest at 20% of BHS' 26.2 million-share float. That is a high degree of short interest and increases the risk of a short-squeeze!

Picked on August xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/20/06 (confirmed)
Average Daily Volume: 497 thousand

---

Portfol.Recov.Assoc. - PRAA - cls: 40.52 chg: -0.97 stop: 42.05

The oversold bounce in PRAA is fading and the stock is quickly nearing round-number, psychological support near the $40.00 level. We want to capture the next leg lower on a breakdown under support. Therefore we're suggesting a trigger at $39.49 to short the stock. If triggered our target is the $36.00-35.00 range.

Picked on August xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 08/02/06 (confirmed)
Average Daily Volume: 166 thousand

---

Steel Dynamics - STLD - close: 52.76 chg: -0.86 stop: 54.66

Wow! It doesn't get much closer than today's narrow escape in STLD. The stock spiked higher this morning to $54.65 before deflating and eventually closing with a 1.6% loss. Over the weekend we had adjusted our stop loss to $54.66. The overall bearish trend of lower highs is still in place but the stock does look oversold. We're not suggesting new positions and due to the rising 200-dma we're going to adjust our target to $50.25-50.00.

Picked on August 09 at $53.95
Change since picked: - 0.33
Earnings Date 10/19/06 (unconfirmed)
Average Daily Volume: 1.6 million
 

Closed Long Plays

None
 

Closed Short Plays

None
 

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

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