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Daily Newsletter, Tuesday, 02/06/2007

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Table of Contents

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

Market Wrap

Consolidation Or Distribution

For four days the markets have moved sideways with neither the bulls nor the bears able to find traction. Some say this is consolidation after sprinting to new highs and some say this is a sign of distribution at those highs. Distribution occurs when institutions slowly unload positions after a strong market gain and transfer those holdings into the weaker hands of speculators who buy at the highs hoping for a continued rally. Both of those events could be occurring but most likely it was caution ahead of Cisco earnings due to the National Semi warning this morning.

Dow Chart - Daily

Nasdaq Chart - Daily

There were no major economic reports today with the Job Openings and Labor Turnover Survey (JOLTS) the only report to dissect. Gross hirings fell slightly to 4.9 million fro 5.0 million and those leaving their jobs declined to 4.5 million from 4.7 million. That was good news but the even better news came from the number of new job openings, which rose to 4.4 million from 4.3 million. More jobs opening and fewer people changing jobs should be good for the consumer since it implies employers will have to pay a more competitive salary to keep workers. The +3.5% increase rate in job openings was the highest rate since the economic recovery began back in 2002. This should be a bullish report since it underscores the recovery in the job market but it is also slightly inflationary.

Wednesday reports include the Mortgage Application Survey, Productivity and Costs, Consumer Credit and the Oil and Gas inventories. None of these reports are market movers.

We also had several Fed heads speaking today including Ben Bernanke. Bernanke made some bullish comments but did not really address the economy or Fed policy so his speech was ignored. Treasury Secretary Paulson testified before the House Ways and Means Committee and said the U.S. economy was declining from previously hot levels to a more sustainable pace. Sounds like he is about a year behind the times.

Most of the talk today was concern ahead of Cisco's earnings after the warning by National Semi. After the bell Cisco reported earnings of 33 cents compared to estimates of 31 cents and year ago earnings of 26 cents. Revenues were also slightly higher at $8.44B versus estimates of $8.28B. Cisco shares fell sharply after the release as investors were disappointed about the Scientific Atlanta numbers within the Cisco structure. That division posted revenue that was below what many analysts had hoped. Once the conference call began CSCO spiked nearly +$2 from the after hours lows to close just over $28.55. The spike was due to guidance John Chambers gave on the conference call. Chambers said sales for the current quarter would rise 19-20% compared to prior expectations of 17% growth. Cisco had rebounded nearly +60% since the August lows and there was plenty of optimism already priced in. It will be interesting to see if CSCO can pierce the strong resistance at $29 in trading on Wednesday.

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Business Objects (BOBJ) announced earnings of 60 cents compared to estimates of 56 cents. This was only a small +2% rise in profits. Their guidance for the current quarter was for higher sales than current estimates but earnings were projected to be 35-39 cents and the street was already looking for 39 cents. BOBJ rose about 50 cents in after hours. BOBJ has been rumored to be an acquisition target by Oracle.

National Semi declined -3% after warning that sales in the current quarter would decline more than previously anticipated. This put a cloud over the entire chip sector but the selling was muted. Rambus fell -1.20 the day after a sharp +4.50 gain Monday on a favorable royalty ruling by the FTC. The FTC issued an order capping royalties Rambus can charge on its older chip technology. While that sounds bad there was a chance they could have eliminated the royalties completely. Half a loaf is better than no loaf at all. The order allows Rambus to charge .25% to .50% for four of its older chip products for the next three years. After three years the royalties will stop. Rambus had been charging 1% to 2% for those same royalties. It was a mixed 3-2 decision and brought a lot of hostility from the panel. The FTC wanted to penalize Rambus even further for deceiving the Joint Electron Device Engineering Council (JEDEC) regarding its technology in the past. The JEDEC is responsible for standards in the chip industry. Rambus was lucky to get out with anything and one commissioner wrote in her dissenting opinion that without "zero royalty rates" Rambus "will continue to reap the fruits of its ongoing violation of antitrust laws." Two of the commissioners wanted to cap royalties on its more popular DDR2 memory.

About the only market finding a bid today was bonds. Even with the $18 billion refunding in three-year notes there were plenty of buyers in bonds. Tomorrow will see $10B in ten-year notes go to auction. Treasuries were bought so strongly that yields on the ten-year notes fell to 4.76% and a new two-week low. 4.75% should be a level where the enthusiasm ends.

Microsoft lost ground for the 4th consecutive day and a streak not seen since October. The slowing adoption of Vista and numerous reported problems is dragging on the profit prospects for the software giant. MSFT closed at $29.51 with strong support at $28.85.

AMD slid to $15.31 and a 21-month low on fears that it will be forced to cut prices even further to hold off the technology wave coming from Intel today. Intel may have been caught napping a couple years ago when AMD beat them to the punch on a couple key releases but Intel has come back with a roar and they are gaining speed. It could be years before AMD catches up, if ever. AMD was once regulated to be the second source for processors and maintained market share by selling so cheaply they enticed a few low dollar buyers away from Intel. They are rapidly falling back into that slot but the Intel lead today would require AMD to nearly give processors away to stay in business. This price crunch is what analysts fear and why they are downgrading AMD. At $15 AMD is a long way from its $42 high in January of 2006. That is a -63% loss in value in just 12 months and it could get a lot worse.

March Crude Oil Chart - 60 min

Oil prices continued their climb and tagged $60 at 9:AM this morning but that was the high of the day and we saw a steady decline into the close. The cold front gripping the northeast is continuing although the short term forecast for the next 11-15 days was for slightly warmer weather. We are rapidly coming to the end of winter and the impact of cold weather on prices is only temporary. The EIA also announced what we already knew that OPEC production cuts had fallen far short of their 1.2 mbpd target as of November 1st with shipments down only 600,000 bpd over the fourth quarter. Shipments in January fell another 110,000 bpd but Angola, a new OPEC member as of Jan-1st with no official quota, raised production +200,000 bpd. Iraqi production fell -250,000 on bad weather offsetting the Angola increase. The new round of cuts of 500,000 bpd slated to begin on Feb-1st are only expected to be 60% effective with a net reduction of -300,000 bpd coming mostly from Saudi Arabia. With winter winding down it will be up to OPEC to control their own fate. The oil inventories announced tomorrow are expected to see an increase in crude by +2.2 mb, gasoline +2.0 mb and a decline in distillates, which includes heating oil by -3.4 mb. This should already be priced into the market.

Interest in earnings is really slowing with Cisco about the only company in focus on Tuesday. There are plenty of companies still to report but few big names. 321 of the 500 S&P companies have reported. 65% beat estimates, 20% reported inline and 15% missed estimates. Earnings growth is still hovering in the +10.4% range and will qualify as another double-digit quarter if the numbers hold as the remaining 179 S&P-500 companies report. Earnings estimates for the rest of the year are 5% for Q1, 5% Q2, 5% Q3 and roughly 4% for Q4. Some analysts feel those numbers are too low by as much as 100% based on the recent economic signs. Let's hope they are right in their claims.

The Dow sprinted +125 points after the Fed announcement last Wednesday to hit 12665 and has done absolutely nothing since that sprint. Today's close was 12664. The Dow has been locked in a very tight 50-point range for the last four days between 12630-12680. Is it consolidation or distribution? It appears to be consolidation given the lopsided internals. New 52-week highs were 659 compared to only 83 new lows. However, volume was less decisive with 2.7B advancing and 2.4B declining. That is nearly a dead heat and suggests there is also some distribution under way as we hold at the highs. It is a tough call given the mixed messages but the bulls continue to buy every dip no matter how small.

The Nasdaq was the surprise of the day. After a sharp decline to 2454 at the open on the NSM warning the Nasdaq rebounded to end the day slightly positive at 2471 nearly +20 points higher. With Cisco reporting after the close you might have expected tech traders to be a little more cautious before buying the dip. This shows the underlying bullish sentiment and the problem the bulls are going to have if we ever do see a real correction.

SPX Chart - Daily

NYSE Composite Chart - Daily

The S&P tagged 1450 today and promptly sold off but recovered into the close. The SPX is not as bullish as the Wilshire-5000 and the Russell-2000. Both of those broad indexes finished right at their record highs from last week. The strength in those broader indexes is what is giving me a bullish bias for the market. The Russell appears poised to breakout over 810 to a new historic high from its 809.86 close today. The Wilshire is also pressing its historic high of 14659 with its close at 14644. Meanwhile the NYSE Composite did close at a new historic high at 9343.96. 9400 should be strong resistance for the NYSE Comp. The broader market looks very bullish but unfortunately the market is simply a bull that is led around by the Dow ring in its nose. Where the Dow goes the broader market goes except in very rare occasions.

Russell-2000 Chart - Daily

Wilshire-5000 Chart - Daily

For the rest of the week I would continue to remain long and buy the dips above SPX 1440. Below 1440 I would maintain a short bias with a dip buy target again at 1420. There is nothing material on the economic calendar and the markets will be looking for an excuse to move. The Cisco guidance may be that excuse but the futures are not showing any excitement in overnight trading. The various contracts are positive but only fractionally. Be careful and follow the recommendation above.
 

New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
TCHC CPSI

Play Editor's note: We are cautiously adding new bullish positions to the newsletter. Our opinion of the market has not changed from this weekend and we remain defensive.


New Long Plays

21st Century - TCHC - close: 22.37 change: +1.08 stop: 20.95

Company Description:
The Company, through its subsidiaries, underwrites general liability insurance homeowners' property and casualty insurance, flood insurance and personal automobile insurance in the State of Florida. The Company underwrites general liability coverage as an admitted carrier in the States of Louisiana, Texas and Alabama for more than 300 classes of business, including special events. The Company also operates as an approved (non-admitted) carrier in the States of Georgia, Kentucky, Virginia, South Carolina, Missouri and Arkansas offering the same general liability products. (source: company press release or website)

Why We Like It:
TCHC spent three months consolidating lower but that changed on January 31st when the company raised its earnings guidance for 2007. The initial rally has stalled under the 50-dma and 100-dma but now we're seeing a rebound on above average volume. Now that TCHC has broken its trendline of resistance we see the bounce as a new entry point to go long the stock. More conservative traders may want to wait for a rise past $23.35 and its 50-dma. Traders should also note that we can't find an earnings date for the company even though they recently raised their earnings guidance. We have two targets. Our conservative target is the $24.85-25.00 range. Our more aggressive target is the $27.00-27.50 range.

Picked on February 06 at $22.37
Change since picked: + 0.00
Earnings Date 00/00/07 (unconfirmed)
Average Daily Volume: 115 thousand
 

New Short Plays

Comptr.Prog.&Sys - CPSI - cls: 29.52 chg: +0.53 stop: 32.01

Company Description:
CPSI is a leading provider of healthcare information solutions for community hospitals with over 600 client hospitals in 46 states. Founded in 1979, the Company is a single-source vendor providing comprehensive software and hardware products, complemented by complete installation services and extensive support. (source: company press release or website)

Why We Like It:
The bearish pattern in CPSI has taken a turn for the worse. Shares had been slowly consolidating lower since its peak in December. The stock suddenly gapped down under support near $30.00 after its recent earnings report in early February. The company reported inline with estimates but guided lower. Today's oversold bounce to try and fill the gap failed at $30.75. We would use today's bearish reversal as a new entry point for shorts. Please note we're keeping the stop at $32.01 in case CPSI tries to fill the gap again. Any failed rally under $31.00 can be used as a new entry point for shorts. Our target is the $25.50-25.00 range. The P&F chart points to an $18 target. The most recent (January) data puts short interest at 10.3% of the company's 9.3 million-share float. That is a high amount of short interest and with such a small float it really increases the risk of a short squeeze so trade cautiously!!

Picked on February 06 at $29.52
Change since picked: + 0.00
Earnings Date 01/27/07 (unconfirmed)
Average Daily Volume: 97 thousand
 

Play Updates

Updates On Latest Picks

Long Play Updates

Cascade - CAE - close: 54.69 chg: +0.54 stop: 52.45

The situation in CAE seems to be improving. The stock bounced from its lows today and actually looks like it might breakout over resistance in the $55.00-55.50 region. 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

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Commscope - CTV - close: 32.96 change: +0.29 stop: 29.99

CTV out performed the major averages with a 0.88% gain and a new relative high. We do not see any changes from our weekend update on CTV. The stock continues to creep higher with short-term technical support at its 10-dma. 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: + 0.91
Earnings Date 02/22/07 (unconfirmed)
Average Daily Volume: 862 thousand

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EchoStar - DISH - close: 41.29 chg: +0.29 stop: 38.95

Traders bought the dip in DISH again and shares rallied toward last month's highs. Volume on the move was above average, which tends to be a bullish sign. Tomorrow could produce some volatility in the stock. Rival DirectTV (DTV) reports earnings tomorrow morning. A Reuters article out today suggested that DISH and DTV should report "steady" subscriber growth but guide for slower growth in 2007. If DTV does issue any bearish comments we would look for DISH to dip back toward support near $39.00-40.00. We are suggesting longs with the stock over $40.00. Our target is the $43.50-44.00 range.

Picked on February 04 at $40.38
Change since picked: + 0.91
Earnings Date 03/14/07 (unconfirmed)
Average Daily Volume: 1.5 million

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Foundation Coal - FCL - cls: 33.67 change: -0.14 stop: 31.49

FCL is still digesting last week's gains. A dip toward $33.00 or the 10-dma would not be out of the ordinary. Readers might want to consider buying a dip near $32.00-33.00. More conservative traders might want to put their stop closer to $32.00. We plan to exit on Wednesday, February 14th at the closing bell to avoid earnings the next day. Our target is the $34.75-35.00 range.

Picked on January 29 at $32.11
Change since picked: + 1.56
Earnings Date 02/15/07 (confirmed)
Average Daily Volume: 771 thousand

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Florida EastCo. - FLA - cls: 62.55 chg: +0.80 stop: 59.85

FLA ignored any weakness in the railroad sector and posted a 1.2% gain and another new relative high. Volume on today's rally was above average. Today's relative strength is good news as most of the railroads trended lower after two stocks in the group were downgraded this morning. 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: + 0.24
Earnings Date 02/15/07 (confirmed)
Average Daily Volume: 113 thousand

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Granite Constr. - GVA - close: 55.17 chg: +0.81 stop: 51.99

GVA turned in a decent rebound with a 1.49% gain. Volume came in pretty low on the move and that remains a concern for the bulls. Overall the trend remains bullish. 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: + 2.76
Earnings Date 02/14/07 (confirmed)
Average Daily Volume: 509 thousand

---

Genesee - GWR - close: 27.12 change: -0.37 stop: 26.49

GWR continues to show relative weakness and more conservative traders may want to exit early right here. The railroad sector was lower today thanks to a couple of downgrades in the group. GWR wasn't downgraded but shares still lost 1.3%. The $27.00 level held up as short-term support for now. We would wait for a new rise past $27.75 or $28.00 before considering new bullish positions. We only have four 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: - 1.07
Earnings Date 02/13/07 (confirmed)
Average Daily Volume: 221 thousand

---

Hansen Natural - HANS - cls: 38.96 chg: +0.15 stop: 37.49

If there is any good news in our HANS play is that there was no follow through lower on yesterday's bearish reversal. Unfortunately, the stock is still poised to decline. We would wait and watch for a bounce near $38.00 or back over $40.00 before considering new bullish positions. More conservative traders may want to exit early or tighten their stops.

Picked on February 5 at $40.05
Change since picked: - 1.09
Earnings Date 03/05/07 (unconfirmed)
Average Daily Volume: 3.1 million

---

Accr. Home Lenders - LEND - cls: 28.17 chg: -0.84 stop: 25.75

LEND experienced some profit taking today. The stock lost 2.8% and looks poised to move lower. Yesterday we suggested that readers looking for an entry point should watch for a pull back into the $27.00-28.00 region, which looks like could happen tomorrow. Our target is the $32.00-33.00 range but that requires LEND to breakout past $30 and its 100-dma. We only have five trading days left before we plan to exit ahead of earnings.

Picked on February 04 at $28.60
Change since picked: - 0.43
Earnings Date 02/14/07 (confirmed)
Average Daily Volume: 668 thousand

---

PeopleSupport - PSPT - close: 22.78 chg: -0.02 stop: 21.89

PSPT's lack of follow through on yesterday's short-term bearish breakdown is a good sign but we would still expect a consolidation towards the $22.00 region or at least $22.50. A bounce from either could be used as a new entry point. 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: - 0.46
Earnings Date 03/07/07 (unconfirmed)
Average Daily Volume: 295 thousand
 

Short Play Updates

Avid Tech. - AVID - close: 33.13 chg: +0.23 stop: 37.41

AVID produced a minor oversold bounce after its two-day decline. Should the stock continue to bounce watch for a failed rally under $35.00 as a new entry point for shorts. 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 05 at $34.65
Change since picked: - 1.52
Earnings Date 02/01/07 (confirmed)
Average Daily Volume: 677 thousand

---

Safety Ins. Group - SAFT - cls: 48.39 chg: +0.21 stop: 50.05

SAFT seems to be struggling to produce any sort of follow through lower on Friday's bearish reversal. Today's intraday bounce looks like it will continue tomorrow. More conservative traders may want to adjust their stops toward last week's high. We're going to keep our stop at $50.05 since the $50.00 level should be round-number resistance and the 200-dma near $49.71 should be resistance. 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: - 0.10
Earnings Date 04/30/07 (unconfirmed)
Average Daily Volume = 83 thousand

---

Teledyne Tech - TDY - close: 37.79 change: +0.12 stop: 40.01

The markets did not move much today and neither did shares of TDY. We do not see any changes from our previous updates. Monday's decline looks like a new entry point and the stock remains under its 200-dma. 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: - 0.01
Earnings Date 01/25/07 (confirmed)
Average Daily Volume: 197 thousand
 

Closed Long Plays

None
 

Closed Short Plays

Comverse Tech. - CMVT - cls: 20.12 change: +0.45 stop: 20.05

We have been stopped out of CMVT at $20.05. The stock produced a relatively strong rebound and broke out over the $20 level and its simple 10-dma. 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: + 0.27
Earnings Date 03/14/07 (unconfirmed)
Average Daily Volume: 4.4 million
 

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

DISCLAIMER

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.

Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.

To ensure you continue to receive email from Option Investor please add "support@optioninvestor.com"

Option Investor Inc
PO Box 630350
Littleton, CO 80163
Copyright Option Investor Inc, 2005
All rights reserved

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

DISCLAIMER

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.

Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report and website should be independently verified.

To ensure you continue to receive email from Option Investor please add "support@optioninvestor.com"

Option Investor Inc
PO Box 630350
Littleton, CO 80163

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