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Daily Newsletter, Monday, 09/25/2006

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Table of Contents

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

Market Wrap

Majors indexes creep higher as third quarter draws to an end

The major indexes shrugged off early morning weakness to finish higher with the narrow S&P 100 Index (OEX.X) 614.56 +0.85% closing at 5-year highs as homebuilders and semiconductor lead Monday's gains.

Tobacco stocks were weak with Dow component Altria (NYSE:MO) $77.06 -6.36% falling $5.25/share after a federal judge ruled earlier this morning that a jury should decide whether tobacco companies must pay tens of millions of smokers up to $200 billion for allegedly duping them into buying light cigarettes over the past three decades.

Altria, the parent of the nation's largest cigarette maker, Philip Morris USA Inc., said the ruling will delay its long-awaited restructuring plan, which includes a divestiture of its controlling stake in Kraft Foods Inc.

As the smoke cleared from ongoing "light cigarette" litigation, the National Association of Realtors (NAR) said sales of existing single-family homes and condominiums fell 0.5% in August to a seasonally adjusted annual rate of 6.30 million units. That was a fifth straight monthly decline and left sales 12.6% below the pace of a year ago.

August's 0.5% decline was less than the -1.6% forecast among economists.

The continued slowdown for existing home sales had the inventory of unsold homes rising to a record 3.92 million units, or 7.5 months backlog.

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The NAR said the median price of a home sold in August fell to $225,000, which was down 2.2% from July and down 1.7% from August 2005. The year-over-year decline in home prices was the first drop in home prices since a 0.1% decline in April 1995.

Sales of condominiums fell 3.5% to an annual rate of 793,000 units, which represented a 14.5% drop from the condo sales pace in August 2005.

By region of the country, sales of single-family homes and condominiums in the South fell by 0.8% in August compared with July and were off 2.3% in the West. Sales actually rose by 1.9% in the Northeast and 0.7% in the Midwest.

Median prices were down in all regions of the country except the West, where the median price rose by 0.3% from a year ago.

The existing home sales figures brought another wave of buying into Treasuries with the 10-year Yield ($TNX.X) plunging as low as 4.530% intra-day. The benchmark bond finished down 4.2 basis points at 4.555%.

Here again I think the bond market is responding to housing data in combination with past Fed commentary and the FOMC's concern that housing prices had become "inflationary."

I (Jeff Bailey) am not in the "bear's camp" that a modest decline in housing prices, from above historic average price gains witnessed the past couple of years, spells doom and gloom for the U.S. economy. I do think the builds in inventory levels and easing of housing prices on a national level should calm some fears on the inflation front.

Since we visited last Monday, the 10-year yield ($TNX.X) has fallen 25.5 basis points and Wednesday's FOMC decision on Fed Funds was unchanged, with the FOMC's target still 5.25%.

U.S. Market Watch - 09/25/06 Close

November crude oil futures (cl06x) rose 90 cents, or +1.49% to settle $61.45 after breaking below the $60.00 level earlier this morning. The November contract moved off its NYMEX floor trade low of $59.65 just when an obscure headline crossed my newswire feed from Dow Jones that "OPEC doesn't plan an emergency meeting."

An "emergency meeting?" I thought to myself. Regarding what? Falling prices?

Not minutes later a relief bid was found with the November contract trading as high as $62.15 intra-day.

OPEC's president did speak to oil ministers from the 11-nation producer group about the recent decline in oil prices but said there were no plans yet for OPEC to hold a formal meeting.

Good news and bad news

In Tuesday afternoon's Market Monitor at OptionInvestor.com I was talking out loud that after writing Monday's rather bullish market wrap and pointing out that the major bullish % charts from StockCharts.com and Dorsey/Wright & Associates had reversed up and were signaling the resumption of internal repair, that it would only be fitting that some type of geopolitical event take place to sour a bull's appetite for stocks on a broader scale.

As Linda Piazza pointed out in Tuesday evening's Market Wrap, a coup attempt on Thailand's government was found on Tuesday and quickly tested a bull's resolve.

My first thought was "semiconductor's are vulnerable" as many fabricators are found in the region.

Throw in a rather "anemic" August 2006 book-to-bill ratio of 1.00 after June's 1.14 and July's 1.06 readings and there hasn't been a lot of good news for the chips since last Monday. Yet they hold tough with Microsoft's pending release of its Vista operating system and new Office products.

Traders and investors should remember that the book-to-bill ratio is really a 3-month average of worldwide bookings. A book-to-bill of 1.00 means that for every $100 in new orders received, $100 worth of orders was shipped.

I still remember chip bull's saying that the upcoming release of new Microsoft products would eventually turn the chip stocks around during their torrid decline from May to July.

Microsoft (NASDAQ:MSFT) $26.95 +1.08% has been trading strong, as has fellow software giant Oracle (NASDAQ:ORCL) $17.97 +2.45% in recent months.

The DEMAND for faster chips/processors are driven in part by new SOFTWARE upgrades, and it has been "software" as depicted by the GSTI Software Index (GSO.X) 180.67 +1.53%, which closes at multi-year highs that may still keep bulls building positions among chip names into year's end.

GSTI Software Index (GSO.X) - Monthly Intervals

While the Semiconductor HOLDRs (SMH) have rebounded from their summer lows, it has been software stocks and the likes of heavyweights Microsoft and Oracle that have been a major driver of technology gains in recent weeks.

Do NOT forget that Standard & Poors has "Information Technology" as being the #2 weighted industry behind "Financials" for the broad S&P 500 Index (SPX.X), which not unlike the narrower S&P 100 Index (OEX.X) is making 5-year highs.

I would always encourage short-term traders to "step back" and look at the big picture from time to time. Whether it be DAILY, WEEKLY, MONTHLY time intervals on a bar chart, or the Point and Figure charts, which tend to filter out some of the intra-day, or day-to-day "noise."

If I could throw on one additional piece of "bad news," with the broader S&P 500 Index (SPX.X) trading at 5-year highs, it would be the latest regional Philadelphia Fed data.

Why is the SPX trading multi-year highs when there's so much "bad news" in the market?

Maybe there's some "good news" just around the corner?

According to The Stock Trader's Almanac, October begins a rather bullish period of seasonality into year's end.

Money Center Banks (BKX.X), Brokers (XBD.X), Computer Technology (XCI.X), Cyclicals (CYC.X), High Tech (MSH.X) and Interactive Internet (IIX.X) along with Transports ($TRAN) are sectors that the Almanac notes as being sectors that tend to "outperform."

If it is "true" that SOFTWARE drives future demand for chips and the computers that use those chips, then SOFTWARE becomes a "key sector" for Q4.
 

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

Advance Auto Parts - AAP - cls: 34.00 chg: +0.69 stop: 31.89

AAP continues to show relative strength. The stock rallied for a 2% gain and broke out over technical resistance at the 100-dma to close at a new three-month high. Our target remains the $35.80-36.00 range. We do not want to hold over the early November earnings report for AAP.

Picked on September 12 at $32.93
Change since picked: + 1.07
Earnings Date 11/02/06 (unconfirmed)
Average Daily Volume: 1.4 million

---

Hovnanian - HOV - close: 30.20 change: +0.92 stop: 27.74

Our bullish play in HOV is now open. Homebuilders shrugged off more bad news (again) and the DJUSHB home construction index was the best performing sector index up 3.4%. The news today was actually on existing home sales. Inventories rose to a 7-month supply and existing home prices fell in August (y/o/y) for the first time in 11 years. That didn't stop investors from buying the group and volume on HOV's rally came in pretty strong. We were waiting for a breakout over resistance at $30.00 with a trigger to go long at $30.11. The play is open and our target is the $34.00-35.00 range. Our time frame is about six to eight weeks.

Picked on September 25 at $30.11
Change since picked: + 0.09
Earnings Date 09/06/06 (confirmed)
Average Daily Volume: 1.6 million

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Intl. Game Tech. - IGT - close: 39.92 chg: +0.68 stop: 38.95

It might be window dressing or it could just be IGT riding the market strength but shares added 1.7%. Unfortunately the rally failed to close over round-number resistance at the $40.00 level. We're suggesting that readers wait for a new move over $40.32 before opening positions. Our target is the $44.00-45.00 range. We do not want to hold over the early November earnings report. FYI: The P&F chart points to a $57 target.

Picked on September 17 at $40.26
Change since picked: - 0.34
Earnings Date 11/02/06 (unconfirmed)
Average Daily Volume: 2.2 million

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United Tech. - UTX - close: 63.23 chg: +0.93 stop: 61.99

The bounce in UTX (+1.49%) after testing support near $62 on Friday would normally look like a bullish entry point to go long. If your bias is bullish then consider opening plays here. We are somewhat skeptical of the bounce today and remain unconvinced. Our target is $66.00.

Picked on September 10 at $63.34
Change since picked: - 0.11
Earnings Date 10/17/06 (unconfirmed)
Average Daily Volume: 3.5 million

---

WebEx Comm. - WEBX - close: 40.09 chg: +1.68 stop: 37.45*new*

Internet stocks performed pretty well on Monday with the INX Internet index adding 2%. Shares of WEBX out performed its peers and the NASDAQ with an impressive 4.3% gain on strong volume. Odds are good this is funds window dressing their portfolios with WEBX ahead of the quarter end this Friday. The move today is a bullish breakout over $40.00 and its recent trading range. By all accounts this strength and breakout looks like a new entry point to go long. WEBX is hitting new multi-year highs. However, we would be careful about opening new bullish positions at this time. Please note that we're raising our stop loss to $37.45. Our target remains the $42.50-44.00 range. The P&F chart is very positive with a bullish triangle breakout buy signal.

Picked on September 12 at $38.49
Change since picked: + 1.60
Earnings Date 10/25/06 (unconfirmed)
Average Daily Volume: 625 thousand
 

Short Play Updates

Charlotte Russe - CHIC - close: 26.32 chg: +0.55 stop: 27.05

Retail stocks performed well as funds loaded up with the end of quarter window dressing. Shares of CHIC managed a 2.1% bounce on strong volume. It is the volume that concerns us and the stock could see more window dressing buying pressure before the end of the week. Conservative traders may want to tighten their stops significantly or exit early to cut their losses now. We're not suggesting new positions. We do not want to hold over the mid October earnings report. FYI: The latest (August) data puts short interest at 6.9% of CHIC's 22.2 million-share float.

Picked on September 22 at $25.75
Change since picked: + 0.57
Earnings Date 10/19/06 (unconfirmed)
Average Daily Volume: 497 thousand

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Commercial Metals - CMC - close: 19.09 chg: -0.05 stop: 21.55

Bearish analyst comments and a couple of downgrades in the steel sector helped pull CMC lower this morning. The stock dipped to $18.40 before bouncing back. Volume was above average on the session. The move looks like a short-term bullish reversal and we would expect the bounce to continue toward the $20 level. Broken support at $20.00 should now act as new resistance. A failed rally under $20 could be used as a new entry point for shorts. Our target is the $17.50-17.00 range. We do not want to hold over the late October earnings report.

Picked on September 21 at $19.90
Change since picked: - 0.81
Earnings Date 10/24/06 (unconfirmed)
Average Daily Volume: 1.5 million

---

CSX Corp. - CSX - close: 30.64 change: +0.07 stop: 31.26

Transport stocks under performed the market on Monday but the pattern in most of them was wide spread. The group saw a dip this morning only to rebound higher into the afternoon. CSX broke support at $30.00 and its 200-dma on an intraday basis but reversed higher at $29.81. Thankfully that was not low enough to hit our trigger at $29.75 so we're still sitting on the sidelines. Today's move looks like a short-term bullish reversal and we'd expect a bounce - probably into the $31.00-31.50 region. If triggered at 29.75 our target is the $27.00-26.00 range. We do not want to hold over the mid October earnings report so that gives us about four weeks.

Picked on September xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/17/06 (confirmed)
Average Daily Volume: 4.5 million

---

Hormel Foods - HRL - close: 36.40 chg: +0.38 stop: 36.51

If you exit now you might be able to pay for the commissions. The market's rally helped fuel a 1% gain in HRL on Monday. The move actually looks like a bullish engulfing candlestick pattern, which is typically interpreted as a bullish reversal. Honestly we're a little surprised that the rebound in HRL stalled out at $36.50 and failed to hit our stop loss at $36.51. We suggest that readers strongly consider exiting early right here.

Picked on August 31 at $36.65
Change since picked: - 0.25
Earnings Date 11/23/06 (unconfirmed)
Average Daily Volume: 331 thousand

---

Ladish - LDSH - close: 29.68 change: -0.25 stop: 31.01

Correction! Over the weekend we added LDSH as a new short candidate with a trigger to open plays at $29.65. That was a typo. It was supposed to be a trigger at $28.65. If you go back and read Sunday's newsletter you'll see that we said, "We're suggesting a trigger to short the stock at $29.65, which is under last week's lows." Last week's low was $28.70. We're going to open the play anyway but we are NOT suggesting new positions until LDSH trades at or below $28.65. Our target is the $25.50-25.00 range. We do not want to hold over the late October earnings report. FYI: The latest (August) data puts short interest at 6.5% of LDSH's 14 million-share float. That's not a very big float and might be a reason for concern.

Picked on September 25 at $29.65
Change since picked: + 0.00
Earnings Date 10/24/06 (unconfirmed)
Average Daily Volume: 270 thousand

---

Linear Tech. - LLTC - close: 32.02 chg: +0.05 stop: 32.66

Warning! The action in LLTC today looks like a short-term bullish reversal. The stock dipped to an intraday low of $31.05. Our trigger to short the stock was at $31.79. The market rebound led by strength in the semiconductors helped pull LLTC back into the green. We are not suggesting new plays at this time and more conservative traders, if you opened positions this morning, may want to exit immediately to cut your losses. We do not want to hold over the mid October earnings report. FYI: The latest (August) data puts short interest at 4% of LLTC's 300 million-share float.

Picked on September 25 at $31.79
Change since picked: + 0.23
Earnings Date 10/17/06 (unconfirmed)
Average Daily Volume: 4.0 million

---

NTL Inc. - NTLI - close: 25.15 chg: +0.17 stop: 26.05

NTLI traded in a 60-cent range all day and the afternoon bounce had actually begun to fade lower into the close. This relative weakness is a good sign but we'd probably wait for a move under $24.80 or $24.75 before opening new short positions. Our target is the $21.00-20.00 range. More conservative traders may want to exit near $23.00. We do not want to hold over the early November earnings report.

Picked on September 21 at $25.01
Change since picked: + 0.14
Earnings Date 11/03/06 (unconfirmed)
Average Daily Volume: 2.5 million

---

Reliance Steel - RS - close: 29.22 change: -0.13 stop: 31.01

This morning before the opening bell an analyst firm downgraded NUE and X and issued concerns over rising inventories in the steel industry. Shares of RS gapped open lower in sympathy but the stock bounced back like much of the market today. Watch for a failed rally near $30.00 as a potential entry point to open shorts. Our short-term target is the $26.50-26.00 range.

Picked on September 24 at $29.35
Change since picked: - 0.13
Earnings Date 10/19/06 (unconfirmed)
Average Daily Volume: 1.1 million

---

Washington Group Intl. - WGII - cls: 57.27 chg: +0.76 stop: 57.25

There is no change from our weekend update. We are still waiting on the sidelines for WGII to breakdown under the 200-dma. We might drop WGII as a bearish candidate if shares close over $58.00. We're suggesting a trigger to short the stock at $55.45. You may want to wait for a decline under $55.00. Our target is the $51.00-50.00 range. We do not want to hold over the November earnings report.

Picked on September xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 11/06/06 (unconfirmed)
Average Daily Volume: 242 thousand
 

Closed Long Plays

None
 

Closed Short Plays

Tessera Tech. - TSRA - close: 33.60 chg: +1.70 stop: 32.81

We have been stopped out of TSRA at $32.81. Shares were strong from the start this morning with a gap higher to open at $32.61. The rally lifted TSRA 5.3% to breakout above its bearish pattern of lower highs. Today's strength probably had a lot of short covering behind it. The breakout from the bearish pattern is very positive but TSRA still has significant long-term resistance in the $35.00-36.00 range.

Picked on September 19 at $30.95
Change since picked: + 2.65
Earnings Date 10/31/06 (unconfirmed)
Average Daily Volume: 634 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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