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Daily Newsletter, Monday, 10/16/2006

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Table of Contents

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

Market Wrap

Regional Manufacturing Readings Ignite Small Caps

A stronger than expected reading from the regional New York Fed manufacturing index had the small caps of Russell 2000 Index (RUT.X) 769.48 +0.89% jumping higher on Monday, while energy stocks also found gains with November Crude Oil futures (cl06x) touching $60 a barrel ahead of this week's special meeting among OPEC members in Qatar.

Natural Gas was today's hot commodity with the November futures contract (ng06x) settling up $0.785, or 13.87% at $6.444/mmBtu.

Traders cited several reasons for today's natural gas price action. Among the reasons were the stronger than expected New York Fed's data (see below), cooler temperatures as well as comments from the head of the North American Electric Reliability Council, or NERC, for today's rise in natural gas prices.

NERC President and CEO Rick Sergel said that Texas and New England are the two U.S. regions most likely to face severe power grid problems and possible blackouts in the next few years.

The NERC's concerns about those two areas painted a dismal picture of the ability of electricity resources to keep pace with demand throughout many regions of the U.S. where I (Jeff Bailey) think traders turned to the natural gas complex as the "alternative fuel" to electricity.

Stocks opened mixed-to-higher with the New York Fed saying its October Manufacturing Index jumped to 22.9 from 13.8 in September. The 22.9 reading was well above economists' forecast, which was looking for a decline to 11.2. Readings above zero signal most manufacturers reported business is getting better.

The New York Fed's manufacturing gauge of new orders declined to 11.8 from 14 in September, while the shipments index rose to 22.5 from 20.6. Inventories rose to 2.5 from September's -4 reading.

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Additional measures showed manufacturing costs declined as the index of prices paid for raw materials decreased to 30.8 from 41 in September, while the measure of prices received by factories rose to 19.4 from 12.5.

Employment data at the manufacturing level in the region also showed a rebound with the index of manufacturing employment rising to 19.4 from September's 12.5.

Volumes were light at both the NYSE and NASDAQ with a plethora of economic reports being released tomorrow.

Prior to tomorrow's opening bell (08:30 AM EDT), traders and investors will get a look at the producer price index for September. Economists are forecasting prices to fall 0.7% month-over-month after a 0.1% rise in August, while the core rate (excluding food and energy) is expected to rise 0.2% after a 0.4 decline.

At 09:00 AM EDT the Treasury International Capital (TIC) Report, which measures foreign demand for U.S. debt and assets will be released. The U.S. Dollar Index (dx00y) 86.97 has been on the rise since late August, depicting some renewed demand for the greenback, if not U.S. assets. Economists are looking for inflows to have risen by $56 billion after $32.9 billion in July.

Then at 09:15 AM EDT September industrial production is forecasted at unchanged versus a 0.1% decline in August, while capacity utilization (a key measure the Fed keeps an eye on for inflation) is forecasted to have eased to 82.2% vs. 82.4% in August.

Later in the afternoon, at 01:00 PM EDT, the National Association of Homebuilders (NAHB) will release its Housing Market Index figures for October. Economist are forecasting the index to remain unchanged from September's reading of 30.00.

U.S. Market Watch - 10/16/06 Close

While there was a lot of green on the screen again today, there was some pockets of weakness among financials.

Wachovia Corp. (NYSE:WB) $55.25 -2.16% closed off its session lows of $54.63, but traded weak after the bank reported net income of $1.88 billion, or $1.17 a share, which included a $0.02/share charge in merger-related costs. The bank said revenues increased 5% to $7.04 billion. The results were shy of analysts' estimates for earnings of $1.19/share on revenue of $7.28 billion. Wachovia officials cited the current interest rate environment pressuring results.

I think traders and investors understand that Fed funds are currently 5.25%, while the benchmark 10-year Treasury note is yielding 4.788% after having recently fallen to just below 4.6% in late September. While I believe the recent RISE in Treasury YIELDs have been a relief for margins between what a bank borrows at and can lend at, margins are narrow.

Wachovia is the first of the nations major banks to report earnings. Wells Fargo (NYSE:WFC) $36.20 -0.25% is scheduled to release earnings tomorrow (consensus $0.63/share), while JPMorgan Chase (NYSE:JPM) $47.73 -0.89%, Bank of America (NYSE:BAC) $53.71 -1.25% and Citigroup (NYSE:C) $50.15 -0.45% are scheduled to report quarterly earnings on Thursday.

JPMorgan (JPM) and Citigroup (C) are Dow Industrials components as we near Dow 12,000 and once again, I think "bulls will be betting on the banks," if not monitoring them closely in coming sessions. "Financials" also carry the heaviest industry weighting for the broader S&P 500 Index (SPX.X).

KBW Bank Sector Index (BKX.X) - Daily Intervals

There is NOTHING at this point that I see as BEARISH for the BKX.X, but those that have followed my commentary over the years know how I tend to keep a very close eye on the banks and various financial sectors/indexes.

Wachovia's earnings were not terrible, but the company's executives state the obvious as it relates to lending margins.

Both the Dow Industrials and S&P 500 Index (SPX.X) achieved prior multi-year highs on, or very close to May 8th, and with several large banks reporting earnings this week, both the BKX.X and BIX.X may be "key sectors" that determine near-term market direction.

Today's S&P Banks Index (BIX.X) 397.44 -0.56% doesn't look overly concerning on the surface, but I will note that this group of super regional banks and regional banks did trade their WEEKLY S1 (396.36) briefly, and show some DIVERGENCE to the S&P 500 Index (SPX.X) as it nears its MONTHLY R2 (1,371.70) and did not trade its WEEKLY Pivot, which this week moves HIGHER to 1,363.50 from last week's 1,343.49 (see last Monday's Market Wrap).

Here is the SAME chart shown in Monday's Market Wrap of the SPX.X, but with WEEKLY Pivot Retracement (blue) updated.

S&P 500 Index (SPX.X) - Daily Intervals

There are SIMILARITIES between the BKX.X/BIX.X charts and the S&P 500 Index (SPX.X). Just as the BKX.X fell quickly from a May 8th relative high to June 14th low, the SPX did the same. But the last few sessions, both the BKX.X and BIX.X have not really "confirmed" the SPX.X strength.

I wouldn't say, or believe that they HAVE to, but this is where the Pivot levels can come in useful.

Various sectors, or industries have different beta, and a 1% gain/loss in the banks is a much bigger move than a 1% gain/loss in the SPX, which would be a MARKET that the banks would be measured against.

A sign of CAUTION is that the S&P Banks Index (BIX.X) does see lower trade at its WEEKLY S1 (buyers held firm at that level of 396.36), while the SPX continued to move higher, not even touching its WEEKLY Pivot of 1,363.50.

Bottom line is that we have some earnings coming from some BIG banks this week, where a DECLINE in Treasury YIELDS vs. current Fed Funds has lending margins being squeezed. Add to that some data tomorrow that addresses INFLATION, or perhaps lack thereof on the producer level, which could influence FOMC policy.

If there is a group of stocks that may be "priced to perfection" at this point in time, I think it may well be the banks, and their price action based on upcoming PAST earnings and FORWARD outlooks from the likes of WFC, JPM and C will be KEY.
 


New Plays

Play Updates

Updates On Latest Picks

Long Play Updates

Arch Coal - ACI - close: 32.86 change: +1.80 stop: 29.99

ACI produced a strong rally today adding 5.7% and breaking out past its 50-dma. Shares also cleared minor resistance at the $32.00 level. Our target is the $34.00-35.00 range. We would not consider new positions at this time. ACI is due to report earnings on Friday morning. Thus we plan to exit on Thursday at the closing bell to avoid holding over the report.

Picked on October 10 at $30.32
Change since picked: + 2.54
Earnings Date 10/20/06 (confirmed)
Average Daily Volume: 3.5 million

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BJ Servies - BJS - close: 30.34 change: +0.83 stop: 28.99

News that OPEC has called an emergency meeting to discuss how they can stop the decline in oil helped prop up oil prices today. A big jump (+14%) in natural gas also spurred more strength in energy stocks. Shares of BJS spiked lower at the open but quickly reversed and closed with a 2.8% gain. More aggressive traders might want to open positions now with the close over $30.00. We're suggesting traders use a trigger at $30.55 to open positions. If triggered our target is the $33.50-34.00 range. We do not want to hold over the October 31st earnings report. FYI: The P&F chart is still bearish. Be advised that BJS is an oil services company and the oil services sector tends to be more volatile than the rest of the oil sector.

Picked on October xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/31/06 (confirmed)
Average Daily Volume: 5.5 million

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Anheuser-Busch - BUD - close: 48.59 change: +0.58 stop: 46.85

There was renewed talk of a leveraged buyout for BUD on Monday and the stock rose 1.2% on the session with volume coming in above average. The move over $48.00 (and our old trigger at $48.21) could be used as a new entry point to go long but we'd suggest a tighter stop loss. Our target is the $49.90-51.00 range.

Picked on October 10 at $48.21
Change since picked: + 0.38
Earnings Date 10/25/06 (unconfirmed)
Average Daily Volume: 2.6 million

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D.R.Horton - DHI - close: 24.02 change: +0.13 stop: 22.99

Homebuilding stocks just sort of flopped around on Monday in spite of positive talk that the sector may have bottomed and a couple of upgrades in the industry. We don't see any changes from our previous update. Our strategy will still work so we're suggesting a trigger to buy the stock at $25.51. If triggered at $25.51 our target is the $29.00-30.00 range although more conservative traders may want to exit at the 200-dma currently near 28.38.

Picked on October xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 11/14/06 (confirmed)
Average Daily Volume: 4.1 million

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Denbury Resources - DNR - cls: 30.32 chg: +1.05 stop: 27.99

DNR turned in a very positive session on Monday with a 3.5% gain. DNR is another oil company and the stock rose thanks to the jump in crude oil, natural gas and the OPEC news. We wanted to see a breakout over resistance at $30.00 and its 50-dma and 200-dma and we got it. Our suggested trigger to go long was at $30.26 so the play is now open. Our target is the $33.00-34.00 range. We do not want to hold over the early November earnings report.

Picked on October 16 at $30.26
Change since picked: + 0.06
Earnings Date 11/01/06 (unconfirmed)
Average Daily Volume: 826 thousand

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IAC/InterActive - IACI - close: 29.60 change: +0.10 stop: 28.69

IACI is still creeping higher but we remain skeptical. We're not suggesting new positions at this time. Our target is the $31.40-31.50 range. We do not want to hold over the late October earnings report.

Picked on October 04 at $29.73
Change since picked: - 0.13
Earnings Date 10/31/06 (unconfirmed)
Average Daily Volume: 2.2 million

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Intl. Game Tech. - IGT - cls: 41.79 chg: -0.21 stop: 40.95

Caution! Over the weekend we warned readers that IGT look poised to turn lower. The stock did under perform on Monday and shares lost about 0.5%. The move produced a new MACD sell signal on the daily chart. We're expecting a dip toward $41.00. If you don't want to endure the pull back then consider exiting early right now. Our target is the $44.00-45.00 range. We do not want to hold over the early November earnings report.

Picked on September 17 at $40.26
Change since picked: + 1.53
Earnings Date 11/02/06 (unconfirmed)
Average Daily Volume: 2.2 million

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Ingersoll-Rand - IR - close: 41.21 chg: +0.94 stop: 38.75

IR turned in a strong session. The stock spiked higher to breakout over technical resistance at its 200-dma early this morning. After the initial surge shares just consolidated sideways. IR closed with a 2.3% gain. The move over the 200-dma looks like a new entry point. Bear in mind that we do not want to hold over the October 27th earnings report. Our short-term target is the $43.00-43.50 range. Please note that we're adjusting our stop loss to $38.75.

Picked on October 08 at $40.20
Change since picked: + 1.01
Earnings Date 10/27/06 (confirmed)
Average Daily Volume: 2.8 million

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Kinetic Concepts - KCI - cls: 33.00 chg: +0.42 stop: 31.49

KCI continued to bounce on Monday adding 1.28% but volume came in pretty low. Tomorrow the stock looks poised to move higher. After the closing bell today KCI announced that the FDA had issued a favorable report on KCI's V.A.C. technology. The stock was trading higher after hours. We can probably expect a gap higher tomorrow morning. Our target is the $37.50-38.00 range. We do not want to hold over the late October earnings report.

Picked on October 08 at $33.35
Change since picked: - 0.35
Earnings Date 10/30/06 (unconfirmed)
Average Daily Volume: 1.4 million

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Newfield Expl. - NFX - close: 40.87 chg: +1.57 stop: 37.99

Our new play in NFX is now open. NFX is another oil stocks that benefited from the rise in oil and natural gas and the OPEC news. The stock shot higher past resistance at $40.00 and its 50-dma. We were suggesting a trigger to go long at $40.26. Our target is the $44.00-45.00 range. We do not want to hold over the October 26th earnings report.

Picked on October 16 at $40.26
Change since picked: + 0.61
Earnings Date 10/26/06 (unconfirmed)
Average Daily Volume: 1.6 million

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Palm Inc. - PALM - close: 16.39 chg: +0.13 stop: 14.99

We are still suggesting caution with PALM. The stock's bullish breakout last week is struggling to produce any follow through higher. A bounce near $16 could be used as a new entry point to go long. Our target is the $17.90-18.00 range near its 200-dma. More conservative traders might also want to use a stop loss closer to Thursday's low (15.51). We would consider this a higher-risk play. FYI: The P&F chart points to a $20 target.

Picked on October 12 at $16.22
Change since picked: + 0.17
Earnings Date 12/20/06 (unconfirmed)
Average Daily Volume: 4.0 million

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PDL BioPharma - PDLI - close: 20.45 chg: +0.07 stop: 18.69

There is no change from our previous updates on PDLI. The stock is still consolidating sideways but looks like it wants to breakout higher. We remain bullish and could continue to suggest new positions with the stock above $20.00. More conservative traders may want to consider tightening their stops toward last weeks low (19.95). Our target is the $22.25-22.50 range. We do not want to hold over the early November earnings report.

Picked on October 05 at $20.11
Change since picked: + 0.34
Earnings Date 11/02/06 (unconfirmed)
Average Daily Volume: 1.3 million

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Titanium Metals - TIE - close: 29.08 chg: +0.91 stop: 25.99

The rally in metal stocks continued on Monday. TIE added another 3.2%. Shares are very quickly nearing our target in the $29.90-30.00 range. More conservative traders may want to consider locking in a gain right now. We're not suggesting new positions. We don't want to hold over the October 23rd earnings report (still an unconfirmed date).

Picked on October 11 at $27.01
Change since picked: + 2.07
Earnings Date 10/23/06 (unconfirmed)
Average Daily Volume: 4.3 million

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W&T Offshore - WTI - close: 32.24 chg: +1.25 stop: 29.75 *new*

WTI is another oil stock that surged higher on Monday. The stock added another 4% on top of last week's gains. Shares are quickly approaching potential resistance near its 100-dma and exponential 200-dma around the $33.00 level. More conservative traders may want to exit early as WTI near $33.00 to lock in a gain. We're raising the stop loss to $29.75. Our target is the $34.00-35.00 range.

Picked on October 13 at $30.21
Change since picked: + 2.03
Earnings Date 11/09/06 (unconfirmed)
Average Daily Volume: 534 thousand

---

Olympic Steel - ZEUS - close: 27.92 change: +0.58 stop: 25.95

We do not see any changes from our weekend play description on ZEUS. The rally in metal stocks continued on Monday and ZEUS added 2.12%. The stock is quickly approaching its exponential 200-dma at 28.19. We're suggesting long positions with ZEUS above $27.00. Our target is the $29.90-30.00 range, which is where we expect the stock to encounter resistance with its 200-dma and 100-dma. We do not want to hold over the October 26th (unconfirmed) earnings report.

Picked on October 15 at $27.34
Change since picked: + 0.58
Earnings Date 10/26/06 (unconfirmed)
Average Daily Volume: 205 thousand
 

Short Play Updates

None
 

Closed Long Plays

Acc. Home Lenders - LEND - cls: 33.70 chg: -1.38 stop: 34.95

A downgrade for LEND this morning sparked a spike lower and LEND broke down from its trading range. We're dropping the stock as a bullish candidate. Shares never hit our trigger to open positions.

Picked on October xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/31/06 (unconfirmed)
Average Daily Volume: 759 thousand
 

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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