Option Investor

Daily Newsletter, Saturday, 02/03/2007

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Table of Contents

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

Market Wrap

Bulls Show No Fed Fear

The Wednesday FOMC announcement suggested further rate hikes in our distant future but bulls ignored the news and charged higher. It was a Goldilocks week for economics with a mixture of slow growth indications and weakening inflation numbers. What is a bear to do when all the signs point to an early spring rally? Evidently they cover their shorts and move to the sidelines to avoid being trampled. New highs are becoming commonplace once again and still no correction in sight.

Dow Chart - Daily

Nasdaq Chart - Daily

The biggest economic report on Friday was the non-farm payrolls with a headline number showing a gain of +111,000 jobs in January while the unemployment rate rose to 4.6%. This was well below the consensus estimates for a gain of +150,000 but just right for Goldilocks. Adding to the positive spin was an upward revision of December by +30,000 to 206,000 jobs and November by +42,000 to 196,000 jobs. Warmer than expected weather was credited with some of the employment gains in the construction sector. The January employment report also contained the annual revision for all of 2006 and that showed another gain of +752,000. This pushed the average monthly average for 2006 from 153,000 to 187,000 jobs. This was a very nice report and suggests that the economy is stronger than previously expected but is not growing at an inflationary pace. This was the perfect Goldilocks scenario except for the continued drop in manufacturing employment of -16,000 jobs in January stretching the loss to -129,000 manufacturing jobs since June. This is consistent with a six-month decline in the ISM manufacturing index. The weakness in manufacturing and the continued tame increase in monthly job creation support the Fed's decision to remain on the sidelines. Once jobs begin to spike that decision will be much tougher.

The final reading of January Consumer Sentiment came in at 96.9, down from the initial reading of 98.0 but still well above Decembers reading of 91.7. The slight downtick late in the month could have been due to the arrival of the holiday bills. Gasoline prices are holding at their lows and the markets remain at their highs. Job creation is strong and wages are rising. There was nothing in the headlines to depress sentiment leaving analysts to suspect the arrival of holiday bills as the culprit. Even at the slightly lower level this was still the biggest one-month jump since Dec-2004. The expectations component posted the biggest gain of +6.4 points.

The final economic report on Friday showed that Factory Orders rose +2.4% in December following an upwardly revised gain of +1.2% in November. The headline number was well above the consensus estimates for a rise if +1.9%. Durable goods orders rose +2.9%. Nondurable goods orders rose +1.8% and the largest increase since May-2006. This bounce in orders shows the economy picked up slightly late in Q4 and is consistent with the Goldilocks slow growth scenario. Even with this unexpected rise in December the orders for the entire fourth quarter were the lowest since Q3-2001 when we were well into the recession. Inventory levels have begun to moderate and manufacturers will continue to manage them as we move further into 2007. In the ISM we saw a sharp drop in the inventory component that was the largest drop since the early 1980s and the lowest level since 2001.

Last week was a very busy week economically and the outcome basically confirmed the Goldilocks scenario and the Fed's decision to remain on hold. To recap the week's events puts this into perspective.

New Home Sales 1,120,000 versus estimates of 1,055,000
Mortgage Applications rose to 631.1 vs 611.3 the prior week.
Employment Cost Index moderated to +0.8% from +1.0%.
GDP at +3.5% rose over estimates of 3.1% and Q3 at +2.0%.
Chicago PMI fell to 48.8 from 51.6 showing contraction.
Construction Spending fell -0.4% vs prior gain of +0.1%.
Challenger Layoff Report rose slightly to 62,975 from 54,643.
Personal Income rose +0.5% from 0.3%.
NAPM-NY rose again to 445.9 to keep its streak alive.
ISM Index fell to 49.3 (4yr low) from 51.4 showing contraction.
Jobs gained only +111,000 vs est of 150K and December's 206K.
Factory Orders spiked +2.4% vs est +1.9% and prior of +1.2%.

The majority of the reports were slow growth positive with only the PMI and ISM showing slight declines into contraction territory. Those declines were driven by the decline in the manufacturing sector and that is actually positive for inflation watchers. More weakness in manufacturing reduces the chances of inflationary prices. For the bulls it was the perfect economic storm. The overall cloudy conditions remain but faint rays sunshine are peaking through in many places suggesting better weather ahead.

The Fed added to the expectations for sunshine with their surprising comments on the economy. The statement was almost bullish in tone considering it came from a bunch of career bankers and economists.

"Recent indicators have suggested somewhat firmer economic growth, and some tentative signs of stabilization have appeared in the housing market. Overall, the economy seems likely to expand at a moderate pace over coming quarters. Readings on core inflation have improved modestly in recent months, and inflation pressures seem likely to moderate over time."

What is not to like about that statement. There is no sign of a more hawkish Fed and one that wants to talk up interest rates. They did maintain their tightening bias but it remains bland and data dependent. All that Fed worry and it turns out they were on our side. The bears were definitely blindsided by that one.

Punxsutawney Phil came out of his burrow on Friday and did not see his shadow. That is supposed to mean spring is just ahead and we have been spared six more weeks of winter. Ben Bernanke and company came out of their burrows this week and saw a stronger economy and falling inflation. They quickly proclaimed the possibility of stable growth and retired to their burrows for six more weeks until March 20th when they will emerge again looking for sunlight to pierce the economic gloom.

For next week it will be a holiday if sorts from the heavy schedule we saw last week. There are very few reports and only one of any consequence. That would be the ISM non-Manufacturing on Monday. Analysts are expecting a small gain but the number is really not material unless there is a major move in either direction. The US economy has become a services economy but the markets tend to ignore the ISM services number. It would have to fall near or under 50 into contraction mode before traders would become concerned. There is a much better chance for an upside surprise rather than a material dip. As investors we just want it to remain relatively flat to avoid any major changes in economic visibility. The rest of the reports are filler and should be ignored unless there is a major change.

Economic Calendar

The earnings parade will begin to wind down next week with 62% of the S&P already reported. It will take six more weeks for the remaining 38% to confess as the smaller company reports trickle in. Of the 62% already reported 64% beat estimates, 20% missed and 16% reported inline. Earnings projections for Q4 have risen back into double digits at +10.4% with the help of several outstanding reports late last week. If this trend holds it would be the 14th consecutive quarter of double-digit earnings. It would require a major miracle for that streak to continue next quarter. As of Jan-1st the projection for Q1 was S&P earnings of +8.7%. According to Thomson Financial that number has dropped to earnings growth of only +5.1%. There was a very bad series of lowered guidance reports early in the week that spiked the ratio of negative to positive guidance to 1.8 to 1 and nearly double the historical average. The earnings late in the week reversed that trend with numerous positive results that knocked that ratio back down to only .8 to 1 and back into normal territory. Still, without some additional strong positive guidance the earnings for Q1 will fail to impress at +5.1% and end that streak at 14 months.

Earnings late in the week included Amazon, which reported profits that fell -50% on a +34% rise in sales. That sounds terrible but there were charges of $91 million in taxes for the quarter compared to a tax benefit of $38 million in the comparable 2005 period. Analysts were only expecting 21 cents and Amazon reported profits of 23 cents so even with the tax problem they beat the street. The stock was beaten to a -$1.31 loss on the news.


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In another headline shocker Wendy's earnings fell -90% due to losses from its recently sold Baja Fresh Mexican Grill chain. Net income was 3 cents compared to 25 cents in the comparable quarter of 2006. Excluding charges Wendy's earned 6 cents compared to Wall Street estimates of 21 cents. You would have thought WEN stock would have been grilled on the news but it only fell -73 cents or -2%. Investors read between the headlines to see that same store sales rose +3.1% and future profits were expected to rise now that Wendy's is free of the Baja Fresh and Tim Horton brands.

Homebuilders soared again after builder Standard Pacific (SPF) gave guidance for Q1 that exceeded analyst expectations. SPF gained +1.95 even after posting a net loss for Q4 of -1.53 and a $290.7 million write off for inventory impairments and land deposit write-offs during the quarter. It appears if you write everything off then you will eventually make a profit. Other builders riding the Pacific wave were KBH +1.09, TOL +1.22, CTX +1.34, LEN +1.09, DHI +0.96 and NVR +20.50.

Nabors (NBR) spiked nearly $3 intraday on talk of a leveraged buyout deal in the works. We get one of these rumors nearly every quarter. Nabors has more than 1500 drilling rigs including both land and offshore. With a market cap of only $9 billion they have been rumored as a target by GE, DO and several European companies. Nabors spokesman, Dennis Smith, said, "it is our policy not to comment on rumors." Over 60,000 calls and 11,125 puts traded on Friday on more than eight times normal volume. Nabors will report earnings Tuesday after the close. Nabors has already warned that earnings will fall short of estimates due to lower demand for gas drilling rigs in the U.S. Nabors lowered its earnings forecast to 95 cents to a dollar. Analysts are now expecting $1.01. Major analysts downplayed the buyout rumor saying the cyclical nature of drilling produced too large a swing in revenue to tempt LBO firms. They need strong guaranteed income to payoff their acquisition debt.

March Crude Oil Chart - 90 min

Energy traders were in a buying mood again on Friday with oil spiking +1.72 to close at $59.02. That equates to an 18% rebound since February crude hit a low of $49.90 back on Jan-18th. Even as bullish as I am about oil long term I was very surprised to see this strong of a bounce. All the normal factors were blamed again and this time there were no expiring futures contracts to create an artificial move. The Nigerian oil workers union is threatening to strike on Monday due to a lack of security and the increased number of attacks on oil facilities. If they strike this could further crimp output of light crude from Nigeria. OPEC is thought to have actually begun cutting production again on Thursday despite the rise in prices. We will not know that for sure for several more weeks. Russia and Iran are said to be considering formation of an OPEC like group for gas producers. How this would impact world markets remains to be seen. Russia has 26.6% of the global supply of gas followed by Iran at 14.9% and Qatar at 14.3%. Considering we are going to be importing significantly larger amounts of LNG from these three countries in the very near future it is not likely to be at favorable prices. Venezuela was also quoted as a problem for oil with Chavez rewriting laws by presidential decree. Chevron said it lost 90,000 bpd in production in Venezuela when Chavez cancelled their prior agreements and nationalized the facilities. Analysts believe this will slow production wherever nationalism is practiced. Russia is also quietly kicking international companies out of Russian oil fields and turning operations over to their national oil companies. The potential for a military conflict with Iran appears to be growing daily with the announcement they are installing 3,000 enrichment centrifuges at the underground complex at Natanz. The eventual goal is to have 54,000 active centrifuges in order to accelerate the program. The U.S. said the announcement proved Iran was not moving to comply with the UN mandate for a halt in the process. Whatever the real reason for the spike in oil prices those of us invested in energy are not complaining.

Dell and Intel were back in the news and the news was not good. A class action lawsuit on behalf of investors was filed against Dell saying Dell had hidden $1 billion a year in rebates from Intel. Dell evidently received huge amounts of money from Intel to keep it an Intel only computer maker. These payments have been known for sometime as they were mentioned in an AMD suit a year ago. AMD claimed they were secret illegal rebates used to protect market share. Intel insists the payments were legal and were part of a discount pricing arrangement. The current suit does not claim they were illegal rebates but were simply not disclosed properly by Dell and gave investors the wrong impression about Dell's profitability. Dell claims the payments of $250 million per quarter were marketing fees paid to Dell to feature the Intel logo on Dell computers and advertising. Payments for advertising are not broken out on Dell's financial statements and according to the suit they inflated profitability assumptions on PC sales. Another suit claims Dell insiders propped up the stock price from 2003-2005 with improper accounting and disclosures enabling insiders to sell $3.5 billion in stock. Since 2005 Dell stock has fallen -44%. Dell also announced that CEO Kevin Rollins had resigned, Michael Dell was returning as his replacement and that Dell profits would be less than expected for Q4. It was not a good week for Dell. There are also some benchmark tests making the rounds on the web showing that in tests of identical class PCs between Dell and HP the HP computers are sometimes up to 50% faster than the Dell model. This could be another reason why HP is taking back market share by leaps and bounds against the former PC leader.

Global chip sales are expected to rise about 10% in 2007 to $273.8 billion after a similar +8.9% rise in 2006. The Semiconductor Industry Association said sales of chips were benefiting from the inclusion of chips in almost every electrical product made including the explosion of music devices, cell phones and large screen TVs. The semiconductor index has not benefited from this explosion in chips and fell -13% over the past year. Recent performance has been volatile with many chip companies warning about future profits. For an industry with 10% growth you would think the chip stocks could find a bid. The SOX has been trending sideways for the last five months.

Dow Transport Chart - Daily

Dow Transport Chart - Weekly

The Dow Transports (+6%) had no problem finding a bid last week after dropping back to test initial support at 4700 on Friday Jan-26th. The rebound off that support was dramatic with a vertical sprint to close at a new historic high at 5006. Twice before in 2006 that 5000 level had been tested followed by sudden declines. Is the third time the charm? The rebound was prompted by monster moves in FedEx (FDX) from $108.50 to $115 in three days and UPS +4 in four days. The railroads like BNI, UNP and CSX were also strong gainers while the airlines were stuck on the taxiway. Transports up to a new historic high while oil rebounded +18% from its lows? What's up with that? It is the Goldilocks stealth growth economy starting to gain speed. It is a rebound to 3.5% GDP in Q4 and the potential for an even higher number in Q1 that has sparked the sector.

140-Year Temperature Chart

Coal also found a bid with colder weather upon us. Arch Coal reported earnings on Friday of $79.5 million compared to a loss of $1 million in the comparable quarter. For all 2006 Arch profits soared +1,058% to $260.6 million compared to $22.5 million in 2005. Arch and Peabody (BTU) have said they are going to reduce production targets for 2007 given the current surplus of coal. Winter consumption trends have been shattered by warm weather over the last decade. The top seven warmest years on record in the U.S. since 1850 from the top down are 2006, 2005, 1998, 2002, 2003, 2004. In the Netherlands January was the warmest January in the last 300 years. It was the 5th warmest in England in 350 years. According to a UN organized group of scientists the top 11 hottest years globally occurred in the last 12 years. Think about this. These are huge statistics! There is no doubt that global warming has accelerated but that is a topic for a different time. The Arch Coal CEO said there were plans to build 96 gigawatts of coal fired electric plants in the U.S. over the next decade, 156 GW by 2030. Each 15 GW requires 16 million tons of coal per year. Once all 96 GW are built that will require an additional 102 million tons of coal per year or nearly 900,000 rail cars or 9,000 trainloads, 25 per day, of coal. To put that into perspective Arch only sold 127 MT (million tons) in all of 2006. The new plants currently scheduled would nearly double the current output of Arch Coal. Obviously they are not the only coal company with Peabody (247 MT worldwide), Massey (39.1 MT) and Consol Energy (68.9 MT) the other majors. Using the 2006 numbers listed here those new plants will increase coal demand in the U.S. by more than 10% not taking into account the coal used for other than power generation. The EIA said that U.S. coal demand in 2007 would increase by 20 MT but production would decrease by 30 MT. With the huge increase in demand in our future you would expect coal stocks to be rising. However, they were hit by the warm weather and are trading significantly off their highs. I would consider coal a buy here with Peabody my favorite. They have increased exposure to Asian markets through their recent acquisition or Excel Energy in Australia. Prices are rising to Asia as is demand. The sector is ripe for further consolidation with Peabody the eventual survivor. However, with coal the energy of the future there has been speculation that a larger energy company like Exxon could start acquiring coal assets for the eventual coal to liquid (CTL) shift as oil prices eventually move over $100. CTL needs oil to be over $50 to be commercially practical in any real quantity.

Wilshire-5000 Chart - Weekly

Wilshire-5000 Chart - Daily

What do we do now? With the S&P-500, NYSE Composite, Russell-2000, Wilshire-5000 and Dow Transports all at new historic highs do we continue to go long? That is a tough question but nothing attracts money faster than new highs. Eventually this streak will end badly but there is nothing on the horizon to suggest it will be soon. We spent weeks wandering sideways in 2007 as we consolidated the gains from the last half of 2006. The markets had plenty of chances to roll over and crash back to earth in an expected correction. Despite six individual days of sharp declines in 2007 none have stuck and the bulls bought every dip. Until that pattern changes we should continue to buy the dips. Eventually we will be wrong and it will be painful. Historically when the correction eventually appears investors will buy the first dip and lose money. They will buy it again lower and again lose money. We are creatures of habit and it normally takes several consecutive days of losses before we get the message. I don't see a dip on the horizon but the real ones are rarely expected. According to Ned Davis Research the Dow has gone 138 trading days as of Friday without a -2% retracement. The Dow has also gone 981 trading days without a -10% correction. We came close in May 2006 but close does not count in statistics. This is the longest streak for the Dow without a correction since 1958. Kind of makes you question the wisdom of going long doesn't it? This is probably what is keeping everyone else out of the market and costing the shorts lots of money. Everyone is betting on what they think will happen rather than what is happening. The trend is your friend and right now the trend is up.

Russell-2000 Chart - Weekly

The Dow closed at 12656 and just shy of Thursday's new high. Based on the recent series of new highs and higher lows it appears 12700 is the next target and that could easily happen soon. 12500 is current support and the 30-day moving average. It would take a dip to 12400 to qualify as a -2% retracement and 11400 for a -10% correction. I could easily see 12400 but I can't imagine 12000 much less anything below that without a significant change in market sentiment.

The Nasdaq closed at 2475 on Friday and a very slight breakout over the 2400-2475 range it has been stuck in since Nov-13th. We had that three-day buy program spike back on Jan-11th that took the Nasdaq to 2508 before dropping nearly 90 points and back into the range in the three days that followed. Without that spike it would have been three months of pure boredom.

The S&P finally broke out of its 1430 resistance ceiling with a monster spike after the Fed announcement. That spike triggered significant short covering and added nearly 10 points for the day. On Thursday the bears tried to sell the opening bounce but were rewarded with another new high close. Friday the index closed within a point of 1450 but could not make the connection despite nearly a full day of trying. Friday's close was a 6.5-year high and I am sure there are plenty of shorts that still need to cover. Once over the psychological 1450 barrier the next material resistance is 1530. I know that sounds unreal at this point but we are in breakout mode with very few plot points above us.

The Wilshire 5000, the broadest of all U.S. indexes is also in breakout mode with a new historic high on Friday at 14642. This shows a broad participation of all sectors in the rally. Even more bullish is the breakout on the Russell-2000 past the very strong resistance at 800 to close at a new historic high of 809 on Friday. This shows that fund managers have committed to the rally and are buying small caps. This is a critical sentiment indicator and suggests the bullish sentiment is rising. The NYSE Composite closed right at Thursday's historic high and continues to be a broad based sentiment indicator covering everything from small caps to the largest blue chips listed on the NYSE.

There are simply no bearish indications to be found and that in itself is scary. When there are no bears to be found it usually means their trap is about to be sprung. It is worry about the potential downside that keeps most traders from participating in the upside. It is easy to buy a corrective dip like the $50 bottom in oil. The risk is minimal and there is plenty of proven upside potential. Buying a breakout is much tougher on the brain since there is nothing to measure it against. Every hiccup appears to be the start of the next correction and sends traders scurrying to the sidelines only to watch a sudden rebound occur without them. We have to realize that there are hundreds of thousands of investors with cash in hand waiting for a pullback to buy. Some may be waiting a long time for a significant dip while others may bite the bullet and jump in on any future pause. I admit I am very skeptical about buying breakouts after finding out I bought the peak more times than I care to admit. I was talking to the person in charge of the option plays about what to pick this weekend. Do we buy the breakout with option premiums on the edge of extreme or do we buy puts on the chance of a failure at this level. If we bought calls then what sector? Those that have a good story are already up strongly. Same with puts. Do we buy puts on the winners or on those few bouncing along the bottom? This is a tough weekend for stock pickers.

SPX Chart - Daily

Officially we need to remain long as long as the market continues higher. I know that is easy to say and tough to do. The S&P is far enough over 1430 that we need to choose a new pivot point for our market direction indicator. I use the term loosely this weekend since all indicators appear to be pointing higher. I am going to be buying the dips to 1440. Under 1440 I plan on reversing to a short bias with a target of 1420. Over 1450 I am just going to close my eyes and hang on. I know if I watch it closely I will see an impending sell off in every hiccup. We are in a precarious period on the calendar. Q4 earnings are winding down and Q1 guidance has been less than exciting. 5.1% earnings growth for the quarter could begin to sour investors on the whole rally concept. When is the question? We also have the refunding in the bond market next week with $28 billion up for auction. That could extract a few bucks out of the market with yields around 4.8% on the ten-year note. Those institutions with profits in equities may need to rebalance their portfolio to spread the risk. We also have the typical post Fed slump to deal with only based on the Fed's bullish statement there should not be any reason to slump. There are no material economics ahead and nothing on the news calendar. It is the perfect scenario for Goldilocks and the three markets. The rally appears to be just right, not too fast and not too slow with bears in sight. Just to be safe keep those stops keyed to SPX 1440 in case lightning does strike out of a blue sky.

New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays

Play Editor's note: We hope everyone read the market wrap this Sunday. This is a challenging time to pick stocks. Why? Because the market is so overbought and veteran traders know that nothing goes up forever. Eventually this market will see a correction and the selling will likely be sharp and painful. It is essential that traders, no matter what direction you play, use a stop loss to try and limit your risk. The market's trend is up so we are sticking with the trend and adding more bullish than bearish candidates. However, we suggest readers consider new positions very cautiously and keep one foot pointed toward the exit door.

New Long Plays

EchoStar - DISH - close: 40.38 chg: +0.65 stop: 38.95

Company Description:
EchoStar Communications Corporation serves more than 13 million satellite TV customers through its DISH Network(TM), the fastest-growing pay-TV provider in the country since 2000. DISH Network's services include hundreds of video and audio channels, Interactive TV, HDTV, sports and international programming, together with professional installation and 24-hour customer service. (source: company press release or website)

Why We Like It:
DISH looks like an attractive bullish candidate with the recent bounce from the bottom of its rising channel. The recent consolidation looks like a bull flag inside the larger upward trend. We are suggesting longs with the stock over $40.00. Our target is the $43.50-44.00 range. More conservative traders might want to try and trigger above $40.65 before initiating new positions.

Picked on February 04 at $40.38
Change since picked: + 0.00
Earnings Date 03/14/07 (unconfirmed)
Average Daily Volume: 1.5 million


Florida EastCo. - FLA - cls: 62.31 chg: +0.72 stop: 59.85

Company Description:
Florida East Coast Industries, Inc., (FECI) headquartered in St. Augustine, FL, conducts operations through Flagler Development Group (Flagler) and Florida East Coast Railway, L.L.C. (FECR). FECI conducts its real estate operations through Flagler which owns, develops, leases and holds in joint ventures approximately 8.8 million square feet of Class-A office and industrial space, as well as an additional 1,056,700 square feet under construction. In addition, Flagler provides construction, consulting, third party brokerage and property management (includes Flagler's wholly owned portfolio in addition to 11.1 million square feet for third parties) services and owns 828 acres of entitled land in Florida, which is available for development of up to an additional 16 million square feet. Flagler also owns approximately 3,158 acres of other Florida properties. Florida East Coast Railway, L.L.C. (FECR), a subsidiary of FECI, is a regional freight railroad that operates 351 miles of mainline track from Jacksonville to Miami and provides intermodal drayage services at terminals located in Atlanta, Jacksonville, Ft. Pierce and Miami. (source: company press release or website)

Why We Like It:
The rally in the railroads paused on Friday but we believe there is more upside to come. Meanwhile shares of FLA did not see a slow down in its rally following Thursday's bullish breakout over resistance at the $61.00 level. Volume on the current rally in FLA has been consistently above average. We are suggesting new positions now but our preferred entry point would be on a dip towards the $61 level, which should act as new support. There is potential resistance at the December high but we're going to aim for the $65.00-66.00 range. The Point & Figure chart points to a $94 target. FLA is due to report earnings on the morning of Thursday, February 15th. Therefore we plan to exit the day before at the closing bell.

Picked on February 04 at $62.31
Change since picked: + 0.00
Earnings Date 02/15/07 (confirmed)
Average Daily Volume: 113 thousand


Accr. Home Lenders - LEND - cls: 28.60 chg: +1.19 stop: 25.75

Company Description:
Accredited Home Lenders Holding Co. is a nationwide mortgage banking company that originates, finances, securitizes, services and sells non-prime mortgage loans secured by single-family residences. (source: company press release or website)

Why We Like It:
Financials are on the run again and a few stocks in the mortgage industry are seeing some strength on potential buyout rumors. We have not heard anything specific on LEND but the stock has seen a nice bounce from the recent bottom. LEND's breakout over the $27.00 level looks like an entry point to buy the stock. The recent rally has broken through multiple levels of resistance and it would not surprise us to see a short-squeeze. The most recent (January) data put short interest at 26% of LEND's small 21.1 million-share float. We are suggesting longs with the stock over $27.00. Expect a little resistance near $30.00 and its 100-dma but we're aiming for the $32.00-33.00 range. Please note that we only have seven trading days before we plan to exit ahead of earnings.

Picked on February 04 at $28.60
Change since picked: + 0.00
Earnings Date 02/14/07 (confirmed)
Average Daily Volume: 668 thousand

New Short Plays

Avid Tech. - AVID - close: 34.99 chg: -2.10 stop: 37.41

Company Description:
Avid Technology, Inc. is the world leader in digital nonlinear media creation, management, and distribution solutions, enabling film, video, audio, animation, games, and broadcast professionals to work more efficiently, productively, and creatively. (source: company press release or website)

Why We Like It:
AVID failed to deliver on its recent earnings report and investors are leaving! The company missed estimates and revenues and said the first quarter was going to be tough. The stock was already in a longer-term bearish trend and Friday's sell-off puts it on the verge of breaking down under another level of significant support near $35.00. We want to see some follow through on the move before initiating any shorts. Therefore we're suggesting a trigger to short the stock at $34.65. If triggered our target is the $30.50-30.00 range. We do expect a bounce near $32.00, around the July lows. The P&F chart points to a $29.00 target. FYI: Readers should note that the most recent (January) data puts short interest at 12.2% of AVID's 40.9 million-share float, which is relatively high and raises the risk of a short squeeze.

Picked on February xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 02/01/07 (confirmed)
Average Daily Volume: 677 thousand

Play Updates

Updates On Latest Picks

Long Play Updates

Anadarko Petrol. - APC - cls: 43.83 chg: -0.09 stop: 41.99

Time is running short for our APC play. The company is due to report earnings on Monday after the closing bell. We plan to exit on Monday at the close. Oil stocks experienced some profit taking on Friday after a strong week. Shares of APC hit a new relative high of $44.87 before slipping back under resistance near $44.00. We remain bullish on oil and oil stocks and will continue to keep an eye on APC for another potential play post-earnings.

Picked on January 31 at $44.05
Change since picked: - 0.22
Earnings Date 02/05/07 (confirmed)
Average Daily Volume: 4.9 million


Cascade - CAE - close: 54.28 chg: +0.34 stop: 52.45

The sideways consolidation in CAE is narrowing and that usually means that a breakout is imminent. Given last week's trend of higher lows we suspect the breakout will be upward. More aggressive traders might want to consider long positions on a move past $54.50. We are still waiting for a breakout over $55.50. Our suggested trigger to buy the stock is at $55.75. If triggered our target is the $59.76-60.00 range. FYI: We do not want to hold over the early March earnings report. FYI: A move past $56.00 would create a new quintuple top breakout buy signal on the P&F chart.

Picked on January xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 03/08/07 (unconfirmed)
Average Daily Volume: 71 thousand


Commscope - CTV - close: 32.56 change: +0.10 stop: 29.99

The trend in CTV remains bullish. The stock has a positive trend of higher lows as traders buy the dips near its rising 10-dma. We would still consider new positions here with CTV above $32.00. More conservative traders might want to adjust their stops toward $31.00. Our target is the $34.85-36.00 range. We do not want to hold over the late February earnings report. FYI: The P&F chart is bearish.

Picked on January 24 at $32.05
Change since picked: + 0.51
Earnings Date 02/22/07 (unconfirmed)
Average Daily Volume: 862 thousand


Foundation Coal - FCL - cls: 34.10 change: -0.17 stop: 31.49*new*

Coal-producer ACI reported earnings on Friday that were better than expected but the company guided lower. This weighed on the coal industry and shares of FCL gapped down but managed to rebound into the closing bell. The short-term trend in FCL continues to look bullish and readers might want to consider buying a dip near $32.00-33.00. We are raising our stop loss to $31.49. More conservative traders might want to put their stop closer to $32.00. The company recently came out and set their earnings announcement date for February 15th so we have extra time for this play to run. We'll plan to exit on Wednesday, February 14th at the closing bell. Our target is the $34.75-35.00 range. FYI: There appeared to be some confusion on where FCL closed on Friday. One source said FCL closed at $33.28 (+$0.25). Most sources put FCL's close at $34.10 (-$0.17).

Picked on January 29 at $32.11
Change since picked: + 1.99
Earnings Date 02/15/07 (confirmed)
Average Daily Volume: 771 thousand


Granite Constr. - GVA - close: 55.23 chg: +0.55 stop: 51.99*new*

GVA produced a very strong week with a 5.4% gain and a breakout past potential resistance at $54.00 and $55.00. Friday's breakout over $55.00 was fueled by improving volume, which tends to be a bullish sign. We are not suggesting new positions at this time but if GVA sees any consolidation we'd look for support in the $53.00-54.00 region. Please note that we're adjusting the stop loss to $51.99. More conservative traders might be able to get away with a stop near $52.50 or $53.00. Our target is the $57.50 mark. We do not want to hold over the February 14th earnings report.

Picked on January 21 at $52.41
Change since picked: + 2.82
Earnings Date 02/14/07 (confirmed)
Average Daily Volume: 509 thousand


Genesee - GWR - close: 27.83 change: -0.12 stop: 26.49

Shares of railroad-related GWR experienced a minor bout of profit taking on Thursday and Friday. We would use the dip on Friday as a new entry point since broken resistance near $27.50 should be new support. GWR should also have technical support at its simple 200-dma near $27.60. We only have six trading days left before we have to exit ahead of the company's earnings report due out on February 13th. Our target is $32.00-32.50.

Picked on January 31 at $28.19
Change since picked: - 0.36
Earnings Date 02/13/07 (confirmed)
Average Daily Volume: 221 thousand


Hansen Natural - HANS - cls: 39.60 chg: +0.61 stop: 37.49

HANS continues to rally and the stock rose 1.5% on Friday following Thursday's breakout from its trading range. We suggested that more aggressive traders might want to buy the breakout over $39.00. We see potential resistance at $40.00 so we're suggesting a trigger to go long at $40.05. If triggered at $40.05 our target will be the $44.00-45.00 range. More conservative traders might want to consider a higher trigger, maybe $40.25 or $40.50, to lower the risk of being triggered on an intraday spike above $40.00. Investors should know that HANS received a delisting notice from the NASDAQ a couple of weeks ago. The company was expecting it as says it is working with the NASDQ to remedy any problems. Obviously the risk here is that NASDAQ may choose to delist the stock, which would prompt plenty of larger investors to dump their shares.

Picked on January xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 03/05/07 (unconfirmed)
Average Daily Volume: 3.1 million


PeopleSupport - PSPT - close: 23.65 chg: -0.36 stop: 21.89 *new*

PSPT is still consolidating near its all-time highs and short-term resistance around the $24.00 level. The trend remains bullish and we would watch for a dip near its 10-dma (23.30) or in the $22.75-23.00 region as a new bullish entry point to buy the stock. Please note that we are raising the stop loss to $21.89. Our target is the $26.00 level. We do not want to hold over the early March earnings report.

Picked on January 28 at $23.24
Change since picked: + 0.77
Earnings Date 03/07/07 (unconfirmed)
Average Daily Volume: 295 thousand


Bankrate Inc. - RATE - close: 40.33 chg: +0.21 stop: 38.25*new*

We are almost out of time with the bullish play on RATE. The company is due to report earnings on February 6th. We plan to exit on Monday, February 5th at the closing bell. Our target is the $41.90-42.00 range. Please note that we are adjusting the stop loss to breakeven at $38.25. FYI: The most recent (January) data put short interest at 30% of RATE's 11.2 million-share float, which definitely raises the risk of a short squeeze.

Picked on January 11 at $38.25
Change since picked: + 2.08
Earnings Date 02/06/07 (confirmed)
Average Daily Volume: 334 thousand

Short Play Updates

Comverse Tech. - CMVT - cls: 19.60 change: +0.03 stop: 20.05

It was a bearish weak for CMVT. The stock broke down to new relative lows and shares were delisted from the NASDAQ. CMVT continues to trade under its old symbol on the "pink sheets". We are not suggesting new positions. The stock has been consolidating sideways the last couple of days and remains under its bearish trend of lower highs. Our target is the $18.00-17.50 range. If you're looking for a quote on CMVT try going to pinksheets.com or stockcharts.com.

Picked on January 22 at $19.85
Change since picked: - 0.28
Earnings Date 03/14/07 (unconfirmed)
Average Daily Volume: 4.4 million


Safety Ins. Group - SAFT - cls: 48.49 chg: -0.89 stop: 50.05

Friday was a good day for the bears. SAFT produced a failed rally and bearish engulfing candlestick (bearish reversal) under the $50.00 level and its 200-dma. This looks like a new entry point to short the stock. We have two targets. Our conservative target is $45.10. Our aggressive target is the $42.50 level. FYI: The latest (January) data put short interest at 6.4% of SAFT's 13.1 million-share float. That does raise the risk of a short squeeze.

Picked on January 08 at $ 48.49
Change since picked: + 0.00
Earnings Date 04/30/07 (unconfirmed)
Average Daily Volume = 83 thousand


Teledyne Tech - TDY - close: 39.31 change: +0.47 stop: 40.35

Last week was a rough one for bears in TDY. There was no follow through lower on the bearish breakdown from late January. A generally positive market environment helped TDY rebound about 6% from its lows. The stock is now in position to challenge overhead resistance near $40.00 and its two-month trendline of lower highs. More conservative traders may want to exit early or tighten their stops. We are not suggesting new plays until we see a convincing reversal lower. Currently our target is the $34.25-34.00 range. The P&F chart has a triple-bottom breakdown sell signal with a $33 target. FYI: The latest (January) data has short interest at 3.7% of the company's 31.3 million-share float.

Picked on January 28 at $37.80
Change since picked: + 1.51
Earnings Date 01/25/07 (confirmed)
Average Daily Volume: 197 thousand

Closed Long Plays

Toll Bros. - TOL - close: 35.35 change: +1.22 stop: 31.89

Target achieved and exceeded. The homebuilders continued to rally on Friday. The DJUSHB home construction index surged 3.1%. Shares of TOL out performed its peers with a 3.5% gain. The stock broke through the $35.00 level, which was potential round-number, psychological resistance. Due to TOL's relative strength more aggressive traders may want to hold the stock and see how far it can run. We are closing the play at our target ($34.75-35.00 range) but we'll keep an eye on it for a dip and a possible entry point for new long positions.

Picked on January 21 at $32.42
Change since picked: + 2.93
Earnings Date 03/06/07 (unconfirmed)
Average Daily Volume: 3.3 million

Closed Short Plays


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


Option Investor Inc is neither a registered Investment Advisor nor a Broker/Dealer. Readers are advised that all information is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor is it to be construed as a recommendation to buy, hold or sell (short or otherwise) any security. All opinions, analyses and information included herein are based on sources believed to be reliable and written in good faith, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. In addition, we do not necessarily update such opinions, analysis or information. Owners, employees and writers may have long or short positions in the securities that are discussed.

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