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Daily Newsletter, Wednesday, 12/27/2006

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Table of Contents

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

Market Wrap

Bulls Find More Treats in Toe of Holiday Stocking

Bulls found more treats in the bottom of their holiday stocking on Wednesday, where a stronger-than-expected rise in new home sales for the month of November had most market participants reaffirming their belief in Santa Claus and the "Santa Claus Rally."

After a 1.1% decline last week, it looked as if Santa Claus might be carrying lumps of coal in his sleigh, but the broader S&P 500 Index (SPX.X) has recouped all of last week's losses to come within fractions of its most recent multi-year high.

Small caps depicted by the Russell 2000 Index (RUT.X) 797.73 +1.21% grabbed today's bullish spotlight. With just two days left in the calendar year, the small caps battle 30 of the mega caps in the Dow Industrials (INDU) 12,510.57 +0.82% and the very broad list of 1, 2 and 3-lettered stock symbols for the NYSE Composite (NYA.X) 9,179.40 +0.84% and AMEX Composite (XAX.X) 2,056.31 +0.83% (+18.17% year-over-year) for this year's "U.S. Market Winner!"

Meanwhile the very broad NASDAQ Composite (COMPX) 2,431.22 +0.73% and its narrower brethren in the NASDAQ-100 Index (NDX.X) 1,763.41 and NASDAQ-100 Trust (QQQQ) $43.33 +0.51% bought up the rear as they have for much of 2006.

Closing U.S. Market Watch - 12/27/06

Homebuilders as depicted by the Dow Jones Home Construction Index (DJUSHB) 733.14 +1.86% found gains on mixed housing reports and with just 2-days left in the calendar year (see YrNet% above) are the only equity-based index in my U.S. Market Watch to show a negative return for 2006.

This morning's Mortgage Banker's Assoc. (MBA) report looked negative, but I do think a realization set in that buying a house the week of major holidays probably wasn't at the top of a "last minute shopper's list."

The MBA's seasonally adjusted mortgage applications composite index fell 14.2% from the prior week as the purchases index fell 10.6% to 390.2, but remained above the recent trough low measures of 375.5 from late September and late October. The refinance index fell 18.5% from the prior week as the average rate for a 30-year fixed-rate mortgage rose to 6.12% after dipping below the 6.0% level for the week ended 12/01/06. Other MBA indices, which comprise the composite, had the conventional index falling 14.3, while the government index fell 12.39%.

With a light holiday volume trade, it is difficult to tell if buyers showed up, or sellers vanished after the Commerce Department said sales of new homes in the U.S. rose by 3.4% to an annual sales pace of 1.047 million. The increase was well ahead of economists' prediction for a more modest 1.6% gain. The data also showed that homebuilders were working off some of their inventory as inventories fell 1.4%. While the median price of a new home is up 5.8% from a year earlier, the Commerce Department noted that sales are still down 15% from November 2005. November's year-on-year increase in the median house price was the most in five months.

Treasury yields rose notably from the time the housing figures were released with bond traders saying last week's jump in housing starts and today's Commerce Department report suggest the industry downturn that helped slow economic growth this year might not have the same impact in 2007.

Fed Chairman Ben Bernanke and other Fed officials have said that housing and energy prices are two primary areas of focus on the inflation front.

Economic reports scheduled for release tomorrow (in order of what traders/investors will focus on) is the 10:00 AM EST December Chicago PMI (forecast 50.0 vs. prior 49.9) where readings above, or below 50.0 signal expansion/contraction. Some economic data providers list this key report being released on Friday, but it will be a closely monitored figure. Today, the Fed Bank of Chicago said manufacturing activity in the Midwest rose 0.3% in November, compared to October, with machinery, resource and auto sectors all posting monthly gains.

Also due out at 10:00 AM EST is November Existing Home Sales (forecast 6.20M annual rate vs. 6.24M annual rate) and 10:00 AM EST December Consumer Confidence (forecast 101.0 vs. prior 102.9). Weekly jobless claims for the week ended 12/23 are slated to be released at 08:30 AM EST (forecast 315K vs. prior 315K).

Energy prices were weak again today, with February Crude Oil futures (cl07g) falling for a fourth-straight session. The February contract settled at its lowest level of the month, down 76 cents, or -1.24% at $60.34. Due to the Christmas holiday, the EIA delayed its weekly crude oil inventory report until tomorrow morning at 10:30 AM EST. Natural gas inventories will be reported on Friday at 10:30 AM EST.

Heading into settlement for January delivery, Natural Gas futures were weak as market participants have been reluctant to take physical delivery in the downward trend. February Nat. Gas futures (ng07g), which traded as high as $9.00 in late November, settled down 19.1 cents, or -3.02% at $6.142 per mmBtu.

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There a lot of company-specific news today.

One of today's top stories did have Apple Computer (AAPL) $81.52 +0.01% carving out a fractional gain after trading as low as $76.77 this morning! Shares of AAPL were atop today's list of most actives on a report that federal investigators are examining stock-option documents that were allegedly falsified by company officials to maximize potential executive gains. The report, citing anonymous "people with knowledge of Apple's situation," claims that criminal charges are being considered by prosecutors and that CEO Steve Jobs has decided to hire an attorney to defend against forthcoming Justice Department and SEC actions. Mr. Jobs previously relied upon the company's outside counsel. This Friday's delayed 10-k filing by Apple may contain further information on the options investigation, including the possibility of further earnings restatements.

Seeing the strength is easy, but what about weakness?

From a bull's perspective, it is GREAT to see the major indices pushing the envelope to new highs as we end the year, but let's remember that many traders won't return until after the New Year and volumes this week are running about 1/2 what they have been in recent weeks.

While holding one (1), or a partial put position on the Dow Diamonds (AMEX:DIA) $124.93 +0.77%, from a 12/01/06 entry point of DIA $121.93, I'm not about to pound my fist on the table and tell you there's major signs of weakness yet, or "still" to come.

However, some of the weakening signs I noted in last week's Market Wrap (Monday, 12/18/06) do look to be spilling over to other market internals.

In Friday evening's Market Monitor, I made the statement that I was turning more "neutral" from a mid-September "bullish" posture, and I'd like to review with you, some of the reasons why.

When you, or I review PRICE action in the above U.S. Market Watch, I want you to look at not just the 5-day Net% change for the major indices, but also the 20-day Net% and YrNet%.

Let's take the two major broad markets and the NYSE Composite ($NYA.X) and NASDAQ Composite (COMPX). Step back for a moment, take in a BIG picture and the YrNet%. The NYSE is up nearly double what the NASDAQ Composite has done year to date.

If just comparing these two markets, one can make several assumptions, or make statements as to "why" such a disparity exists (+18.17% vs. +9.17%).

But this is where I want to try and build on some of last Monday's commentary and "Have bears cried wolf one-too-many times?"

Again today, I see "valuation" as a bear's word of caution. That word of caution was used in September, October and November.

After this afternoon's close, I saw a Dow Jones news headline regarding S&P 500 earnings after 486 companies have now reported their Q3 earnings. Of the 486 companies that have reported, 208, or 43% have surprised on the upside. Twenty-eight percent, or 138 have issued positive reports. Ten percent, or 48 companies were on target with First Call estimates. Nine percent, or 46 companies issued negative reports, while 9%, or 46 companies revealed negative surprises.

**(Positive and negative surprises include companies that deviated from expectations by at least 5%, with adjustments when the numbers are near 0 and the percentage difference becomes meaningless. Positive and negative reports are from companies that deviated by less than 5%).

While some may view economists and fundamental analysts as "dart throwers" or those that have number-crunching models so complex that even they can't ascertain what the future holds, one should probably understand that a large portion of an analyst's estimate (reported and tabulated by First Call) is derived from the executives that actually run the companies!

What I want to focus on, and perhaps you may want to also stay focused, or aware of, is what you and I actually SEE.

It has been my experience that STRENGTH from one market can lead to STRENGTH in another. It has also been my observation that WEAKNESS in one market can lead to WEAKNESS in another.

As you review the BIG picture and the YrNet%, you can OBSERVE the PRICE differential. You and I might also make the observation that the "weakness" or the lag in the NASDAQ Composite has had NO effect on the NYSE Composite.

But there are signs that that this may be having an effect.

Last Monday (12/18/06) I reviewed the NASDAQ Summation Index ($NASI) on a 20-point box. While today's advance/decline line (see top table) was a very strong 2,175/900 and follows a very strong Tuesday a/d line of 1,878/1,156, I am OBSERVING a somewhat NEGATIVE, weakening NYSE Summation Index ($NYSI) begin to develop.

It's as if the NASDAQ is "pulling," or at least weighing on the NYSE.

Here's a quick update of the NASDAQ Summation Index ($NASI) where for vertical chart limitations, I'm going to once again show this chart on a point and figure 20-point box size. Then we'll look at the NYSE Summation Index ($NYSI).

NASDAQ Summation Index ($NASI) - 20-point box

The main observation is that since Monday, 12/18/06, the NASDAQ's a/d line has deteriorated from a +120 measure to +20. I tend to "think" of zero (0) as a point of equilibrium, but that "sell signal" at +200 still remains a warning sign of internal damage, where all the troops aren't advancing.

Now let's take a look at the NYSE Summation Index ($NYSI), which measures the a/d line of the NYSE. Here is where I start to see some of the "NASDAQ pulling/weighing on the NYSE" internals.

NYSE Summation Index ($NYSI) - 20-point box

Now, it may seem "crazy" that STRENGTH in one market can become STRENGTH for another, and that WEAKNESS in one becomes an alert for WEAKNESS in another. However, do you see the "buy signals" on the NYSE Summation ($NYSI) on 07/11 and 07/26? Those would have been well before the "buy signal" for the NASDAQ Summation at -580.

That was then, what about now? On the above 20-point box, the NYSE Summation ($NYSI) would have given its first "sell signal" on Tuesday at the +900 measure.

This is one sign of some internal weakening for the NYSE Composite ($NYA.X) 9,179.40 +0.84%, even as it closes at an all-time high this evening!

OK! That's two ways to VISUALLY look at some internals of two VERY BROAD indices. Roughly more than 6,000 stocks (3,000 NASDAQ and 3,000 NYSE).

What do you think about the NASDAQ-100 (NDX.X) YrNet% gain of roughly 5.6%? That's better than a kick in the mouth, but is it playing "catch up" to strength? Or is it a sign that WEAKNESS (relative to other major indices, say the 100 stocks in the S&P 100).

In today's Market Monitor, I provided a bit of a test for PRICE action with a day trade long for the QQQQ. Even a futures trader that may have traded the NQ on that signal may have been less than impressed with the NQ showing any attempt to play "catch up."

Now, let's take a look at another, yet different measure of internals strength/weakness, and the narrow (only 100 stocks) NASDAQ-100 Bullish % ($BPNDX). What we're doing here is simply looking at the percentage of stocks that comprise the NASDAQ-100 (the LARGE CAPS of the NASDAQ) that currently show a "buy signal" still intact with their point and figure chart. This indicator, or measure of internals gives us an observation of not only STRENGTH and WEAKNESS, but also RISK. I basic terms, HIGHER BULL RISK LEVELS are found at 70% and above, while LOWER BULL RISK LEVELS are found at 30% and lower.

NASDAQ-100 Bullish % ($BPNDX) - 2% box scale

While the NASDAQ Summation ($NASI) is exhibiting some signs of broader weakness in its advance/decline line, on Friday, 12/22/06 the narrower NASDAQ-100 Bullish % ($BPNDX) reversed to "bear alert" status at 66%. In early December (red C) 72% of the NASDAQ-100 stocks were showing a "buy signal" on their point and figure (supply/demand) charts, but now 66% show point and figure "buy signal" still intact, with 34% (or 34 of 100) now showing point and figure "sell signals" on their charts.

Now let's quickly review some PRICE action, and since it does appear that some WEAKNESS is leading WEAKNESS from the internals, I want to update a QQQQ chart shown previously in the 12/11/06 Market Wrap, where I had been "benchmarking" a Friday high close from 11/24/06 and various option expiration closes.

Since 11/24/06 (this would be just prior to early December) the QQQQ has NOT been able to see a Friday close above $44.65, and this past Friday (12/22/06) closed a penny (once cent) below $42.94. That's not a "big deal" on the surface, but it was a LEVEL, based on fibonacci retracement, I said I would use as an alert to PRICE weakness.

NASDAQ-100 Trust (QQQQ) - Daily Intervals

If I could describe yesterday's, and even today's PRICE action in the QQQQ, it would be "sympathy rally" with the other major indices. That is, their STRENGTH helped the QQQQ, but I wasn't that impressed and commented on it during today's session.

The table of today's internals should also warrant a quick discussion. I'm running very late on my editors deadline, and won't get a chance to show the NYSE, or NASDAQ New High/New Low ratio charts, but the NASDAQ NH/NL ratio chart has also given "sell signals" or "bullish leadership" as depicted by the number of New Highs compared to the number of New Lows as weakening.

In summary, several of the NASDAQ internals measures are signaling weakness, and flashing some warning signs to bulls. I have mentioned in prior Market Wraps that ACCOUNT MANAGEMENT should have traders/investors OFF of long MARGIN. That is, an investor that ONLY TRADES/INVESTS bullish, should NOT be on margin, and I would think 50% exposure on the LONG side for any major index (DIA/SPY/QQQQ) would be adequate.

A comparative Bullish % chart that I would have also liked to have shown in tonight wrap would be the S&P 100 Bullish % ($BPOEX), which like the NASDAQ-100, would be some of the LARGE Cap measures of the S&P. There are some stocks that comprise the S&P 100, that also comprise the NASDAQ-100, but there are differences too. Traders and investors can view that chart for FREE at www.stockcharts.com and its symbol is $BPOEX. StockCharts.com still shows it in a column of "X" to 84%, but as of tonight's reading is now 80%.

My thoughts as to WEAKNESS leading to WEAKNESS can be tested in the future too, should the $BPOEX begin to REVERSE lower.
 

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

AllState - ALL - close: 65.92 change: +0.23 stop: 63.49

ALL gapped up slightly on Wednesday and held its grounds all day (but didn't make much further progress). It was able to challenge last week's high of $66.06 but not get above it. ALL is short term overbought so we could see a pullback but hopefully the 10-dma, now at $65.33, will continue to provide support. We remain bullish on the stock above $65.00 although we could see an intraday move down to its 20-dma at $64.65. While our stop remains at $63.49 (now just below the rising 50-dma at $63.51) more aggressive traders may want to exit with a break of the uptrend line from August, currently at $64.40. Daily stochastics is now overbought and there is a bearish divergence on RSI. In the meantime our upside target is the $69.00-70.00 range.

Picked on December 15 at $65.25
Change since picked: + 0.67
Earnings Date 01/31/07 (unconfirmed)
Average Daily Volume: 2.4 million

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ONEOK Inc. - OKE - close: 43.76 change: +0.36 stop: 42.25

OKE continues to show relative strength vs. the natural gas index (XNG.X) and looks to be recovering nicely off its December dip. By holding above $43 this should turn more bullish over the next several days and by moving higher it should get its 10-dma ($43.33) back above it 20-dma ($43.46) and lend price support. Our stop is currently near the uptrend line from May which is right on top of the 50-dma at $42.22.

Picked on November 28 at $42.25
Change since picked: + 1.51
Earnings Date 07/26/06 (unconfirmed)
Average Daily Volume: 547 thousand

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Raytheon - RTN - close: 53.63 change: +0.18 stop: 51.99

RTN got a small lift on Wednesday with the market. We're watching how price will react if it RTN pulls back to its uptrend line from November which is right on top of its 10-dma, both at $53.25. We remain somewhat cautious given the overbought oscillators so we are not suggesting new positions. Considering how close Thursday's high ($54.17) came to our target in the $54.50-55.00 range and the steepness of the rally since November, we could see a larger pullback. We're leaving our stop below the 20-dma at $52.63 and the $52.06 low on 12/11/06 but more aggressive traders can consider raising the stop closer to the 20-dma.

Picked on November 29 at $51.05
Change since picked: + 2.58
Earnings Date 01/25/07 (unconfirmed)
Average Daily Volume: 1.5 million

---

St.Paul Travelers - STA - close: 54.23 change: +0.21 stop: 51.95

STA had a wild day on Wednesday with a gap up, a drop back down into negative territory and then an afternoon bounce back up into positive territory. It remained comfortably above its 10-dma and continues to look bullish here. But with the daily oscillators looking to be rolling over and the bearish divergence at the last high we do not recommend any new plays in this stock. The current stop at $51.95 keeps it below the 20-dma and uptrend line from August, both currently at $52.78. Our target is the $57.50 level. The P&F chart is bullish with a $76 target.

Picked on December 17 at $53.56
Change since picked: + 0.67
Earnings Date 02/01/07 (unconfirmed)
Average Daily Volume: 2.5 million
 

Short Play Updates

Cheesecake Factory - CAKE - close: 24.90 chg: +0.22 stop: 27.01

CAKE continues to be pressured lower by its downtrend line from the end of November (currently at $25.00) and its 10-dma (at $25.34). This bodes well for our short play and the stop at $27.01 is above the 20-dma at $26.02. Once the 20-dma drops below the neckline at $25.70 we'll be able to lower our stop to just above that and get it closer to our entry price. In the meantime use a bounce to the 10-dma or $25.70 to initiate a new play. Our downside target is the $22.25-22.00 range. We do expect some support near $24.00 but given the bearish technicals on the weekly chart we think any bounce at $24 would be temporary. The P&F chart currently points to a $4.00 target. FYI: The most recent (November) data puts short interest at 11.8% of CAKE's 73.7 million-share float. That is relatively high short interest and could raise the risk of a short-squeeze if CAKE manages to rally.

Picked on December 18 at $25.65
Change since picked: - 0.75
Earnings Date 11/30/06 (confirmed)
Average Daily Volume: 1.3 million

---

Colonial Prop. - CLP - close: 46.61 change: +0.39 stop: 48.26

CLP continued higher today and made it back up to its 10-dma at $46.62 and its downtrend line from the end of November located at the same level. This bounce is another opportunity for a short entry with the same stop level as noted above. If it continues higher on Thursday the next resistance level is prior support near $47.20. We're keeping our stop at $48.26 to keep it above the 200-dma. Our target is the May 2006 low at $42.68 but we will plan to exit at $42.75. We do not want to hold over the late January earnings. FYI: Traders should know that in the past few months CLP has been noted as a potential takeover/acquisition target in the real estate sector. If a deal is announced it could be very painful for shorts but we haven't heard anything further on the subject. Meanwhile short interest is about 3% of the 43.4 million-share float.

Picked on December 17 at $46.71
Change since picked: - 0.10
Earnings Date 01/30/07 (confirmed)
Average Daily Volume: 217 thousand

---

New Century - NEW - close: 32.21 change: -2.11 stop: lowered to 35.70

After yesterday morning's spike up and then drop for the rest of the day we thought the short term pattern looked bearish and indeed it was. Today saw a big gap down followed by price flatlining. Our stop is being lowered after today's drop to the declining trend line along the lows since June. The stop is now above the 20-dma and price support-turned-resistance at $35.54. More aggressive traders can lower their stop to just above the 20-dma and downtrend line from August, both near $35.00. We remain bearish on NEW and traders can choose a breakdown under $34 (although today's gap down didn't give you much of a chance) or a failed rally that closes today's gap at $34.32 as a new entry point. Our target is the $31.00-30.00 range. FYI: The most recent (November) data put short interest at 22% of the company's 50 million-share float. That is a very high degree of short interest and it does raise the risk of a short squeeze if NEW reverses sharply higher.

Picked on December 10 at $34.47
Change since picked: - 2.26
Earnings Date 02/01/07 (unconfirmed)
Average Daily Volume: 1.4 million

---

21st Century - TCHC - close: 23.42 change: +0.37 stop: 26.01

TCHC bounced a little further today but didn't quite make it up to its 10-dma at $23.81 which is also the location of its downtrend line from October. Volume was downright anemic today (even with the lower holiday volume we're seeing in general) which supports the idea that the bounce will fail. Our stop at $25.01 is above the 20-dma at $24.82 so that will hopefully allow this to whip around a bit underneath our stop. Our downside target is the $21.50-20.00 range. The most recent (November) data puts short interest at over 6% of TCHC's 6.4% float. That's a very small float so 6% might be enough short interest to really increase the risk of a short squeeze should TCHC reverse higher.

Picked on December 10 at $24.84
Change since picked: - 1.42
Earnings Date 11/01/06 (confirmed)
Average Daily Volume: 115 thousand

---

Cognos - COGN - close: 41.88 change: -0.21 stop: 42.31

The short play in this stock has not been triggered yet as we're still waiting for it to drop through its 50-dma, currently at $39.88, to trigger our entry at $39.60. Price action on the daily charts looks like it's just consolidating so we like our entry price and will patiently wait for it to get hit. We might raise our trigger price if this pushes a little higher in the coming week. Our downside target price is $35.00 which is just above its 200-dma and at previous price level resistance now potential support.

Picked on December 21 at $40.19 (waiting for trigger at $39.60)
Change since picked: + 1.69
Earnings Date 12/20/06 (confirmed)
Average Daily Volume: 2.0 million

---

Citrix Sys. - CTXS - close: 27.37 change: +0.55 stop: 51.95

After dropping below support at $27.60, which is a potential H&S neckline for price action since August, we are now hoping to see CTXS head for its H&S price objective of $18 which is the same as the current P&F price objective. Aggressive traders can aim for that target while a short term downside target is a little less aggressive at $24.60 which is based on the 200 weekly average and a gap fill from October 2005 ($24.47 closing price on 10/24/05). An additional entry opportunity can be found if CTXS bounces back up to resistance at $27.60, which it appears it might do this week.

Picked on December 22 at $27.45
Change since picked: - 0.08
Earnings Date 01/27/07 (unconfirmed)
Average Daily Volume: 3.8 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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