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Daily Newsletter, Monday, 03/19/2007

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Table of Contents

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

Market Wrap

Merger Monday. Oil Looks Ready For An Advance.

The major indexes recouped most of last week's losses in a bullish post quadruple witching expiration, where strength in the dollar against the yen and an abundance of merger activity buoyed investor optimism.

Monday's session here in the U.S. found buyers at the open, as foreign bourses saw strong gains on the heels of the Peoples Bank of China saying it was raising rates by 0.27 basis points, bringing the one-year deposit rate to 2.79% and its lending rate to 6.39%. It was the third time in 11 months that the BOC has raised rates in an attempt to cool the country's rapid growth. The bank's policy appeared to be working as growth in spending on factories and real estate slowed to 23% in the first two months of the year from a peak of 31% in the first half of 2006.

Hong Kong's benchmark Hang Seng Index ($HSI.X) jumped 313 points, or 1.65% to 19,266, while Japan's Nikkei-225 ($NIKK) gained 265 points, or +1.59% to close just above the psychological 17,000 level at 17,009.

The dollar found gains against the yen, where of late, equities both here in the U.S. and abroad have seeming mirrored strength in the dollar versus yen, and weakness when the yen strengthens against the dollar.

Monday's dollar/yen cross rate saw the USD/JPY gain 0.69%, or 0.81 points to 117.51 from Friday's final tick of 116.70. Still, the USD/JPY remained range-bound from 115.50-118.50 against the yen, and closed today's session just below last Monday's close of 177.72.

Currency traders will be keeping an eye on things later this evening as the Bank of Japan is tentatively scheduled (no firm date/time) to address interest rates. According a poll by Forex Factory, market participants see the Bank of Japan holding rates steady at 0.50%.

In my opinion, a surprise move out of the BOJ would be for them to RAISE rates. That could have the yen strengthening further against the dollar.

European bourses saw Britain's FSTE 100 gaining 0.96%, German's DAX adding 1.39% and France's CAC-40 jumping 1.43% on Monday.

U.S. Market Watch - 03/19/07 Close

My QCharts' percentage changes for 5-dayNet% longer may be incorrect. I have validated, or edited some of the 5-dayNet% changes for accuracy (blue squares).

Crude Oil futures for April (cl07j) are being rolled ahead of Tuesday's expiration, where April delivery settled down $0.52, or -0.91% at $56.59. May Crude Oil (cl07k) on the NYMEX settled up $0.12, or +0.20% at $59.70.

Meanwhile, April Unleaded (rb07j) settled higher by $0.051, or +2.67% at $1.9481. May Unleaded (rb07k) gained a more modest $0.029, or +1.55% to settle $1.8991.

Look for the crude oil commodity to be firm-to-higher as the summer driving season is just months ahead. I'm looking for refiners that have temporarily "shut down" some of their operations for maintenance ahead of this summer's unleaded switchover to start seeing some steadier draws on crude oil supplies.

U.S. Oil fund (AMEX:USO) - $0.50-box chart

As depicted by the U.S. Oil Fund (AMEX:USO) $48.70 +0.57%, oil the commodity is giving some "mixed signals" and remains longer-term bearish. But I think oil traders are going to be getting BULLISH in comings sessions, perhaps this Wednesday's EIA inventory data will spark the longer-term advance and refiners gear up for this summer's driving season.

Some BULLISH observations dating back to mid-January is the notable advance/demand (column of X) from January 19th to February 5th, where during that time we saw some interest from market participants with a nice heavy VOLUME build. That advance from $43.50 to $49.50 was a "low pole warning" and a pattern that point and figure chartists will look for as a potential sign of a bottom.

I like the STRATEGY of picking up an initial position, say 1/4, or 1/2 position to try and mitigate some bullish RISK, where a stop could be placed at $47.00, or $46.50. In my opinion, the USO should NOT trade $46.50 AFTER Wednesday's EIA inventory report.

Another Merger Monday ...

If you had a stock that benefited from today's merger activity, you probably know it by now, but just because the major indexes aren't trading at multi-year highs, that doesn't mean M&A activity has taken a rest.

Confirmed M&A of U.S.-based companies exceeded $15 billion. While foreign deals of U.S.-traded ADR's also found some action on M&A news.

Herbicide and pesticide service provider Servicemaster (NYSE:SVM) $15.15 +12.47% said it had agreed to be acquired by a private investment group in a deal valued at $5.5 billion, which included the assumption of $1.02 billion in debt.

Health service provider Triad Hospitals (NYSE:TRI) $51.72 +4.78% confirmed it has agreed to be acquired by Community Health (NYSE:CYH) $34.78 -5.48% for $5.1 billion.

Drilling contractor Todco (NYSE:THE) $39.24 +19.70 saw its shares gain more than $6.00 after the company said it had agreed to be acquired by Hercules Offshore (NASDAQ:HERO) $25.32 -4.70% for $2.3 billion in cash and stock.

American Depository Receipts (ADRs) of energy producers Braskem (NYSE:BAK) $15.01 +16.53%, Ultapar Participaceos (NYSE:UGP) $24.92 +5.99% and Petrobras (NYSE:PBR) $87.84 +1.92% gained after companies agreed to purchase petrochemical concern Ipirange for $4 billion. The news ignited some speculation among traders and investors that a merger between two, if not three of the consortium (BAK, UGP, PDR) might be in the works.

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Shares of Netherland's largest bank ABN Amro (NYSE:ABN) $41.36 +14.12% finished well above their gap-higher open of $39.47. The stock jumped on speculation that it was in talks to be acquired by United Kingdom's Barclays PLC (NYSE:BCS) $53.35 -0.28%. After the close, ABN confirmed it was in "exclusive preliminary discussions with Barclays PLC concerning a potential combination of the two organizations." At tonight's close, ABN's market capitalization is roughly $78 billion, while Barclays market cap is approximately $87 billion.

Subprime "shift"....

In this weekend's Market Wrap, Jim Brown mentioned that subprime lender Accredited Home Lenders (NASDAQ:LEND) $8.95 -17.88% was going to sell $2.7 billion in subprime loans at a discount in order to free up capital so it could cover margin calls.

While Accredited Home Lenders did not give specifics as to whom they might sell some of the $2.7 billion in loans to, a MarketWatch report on Friday said that chief financial officers of Bear Stearns (NYSE:BSC) $147.12 +1.1%, Goldman Sachs (NYSE:GS) $202.44 +1.7% and Lehman Bros. (NYSE:LEH) $72.30 +1.60% all said they expected these assets to come on market and that they would be buyers at the right prices.

To me, this "sounds" very similar to what took place months ago in the natural gas arena, when hedge fund Amaranth disclosed it had lost anywhere from $6 to $9 billion as natural gas prices plummeted and moved against the firm's bullish strategy. Banker JP Morgan (NYSE:JPM) $47.58 +1.16% reportedly picked up the assets for $2 billion by late September, and within days, the firm had sold enough of the natural gas futures portfolio to shift more than 50% of its risk to others.

Late Friday evening, in the OptionInvestor.com Market Monitor, I quickly reviewed the AMEX Securities Broker/Dealer Index (XBD.X) 230.88 +1.64%, as BSC, GS and LEH comprise this index.

It may well be that some of the subprime lenders are taking some appropriate action, and "shifting" some of there now realized RISK to the major brokers. And these BROKERS know how to manage risk!

As such, the XBD.X becomes a focal point for me, perhaps you, and I want to show what I think are some meaningful PRICE observations as it relates to some of the "warnings" bears reiterated in mid-September as to why the brokers were headed lower.

AMEX Broker/Dealer Index ($XBD.X) - Weekly Intervals

Last week's decline in the XBD.X came right at its mid-September breakout, where the brokers were getting ready to launch to an all-time high.

On Friday, we learned that one strategy the subprime lenders will look to take for liquidity is to sell some of their loans to the big brokerages, which have demonstrated over the decades, an ability to assess and then manage risk.

Technically, it "makes sense" that the XBD.X found support last week where it did. That was a level (221) where some long-time "broker bears" were shorting/putting the XBD.X in mid-September.

Two questions we all have is "how much further downside risk is there?" and "how long will this last?"

The XBD.X may give some guidance.

The most recent "correction" we have to draw on is the decline from mid-April 2006 to mid-June 2006, when the XBD.X fell 21%.

That was about 2 months!

The current "correction" looks to have begun in earnest in mid-to-late February, and to last week's inflection low, would equate to a 14% decline.

We might then get an idea that based PURELY on PRICE, and given recent history, the XBD.X may be roughly two-thirds of the way through a correction, if we are to use mid-April 2006 to mid-June 2006 as the most recent example.

In Friday evening's Market Monitor, I also reviewed Dorsey/Wright & Associates' Wall Street Bullish % (BPWALL), which measures the percentage of "Wall" Street-like stocks showing point and figure buy signals still associated with their charts, looking VERY SIMILAR to sector internals found in late May 2006.

As of tonight's closing measure, Dorsey/Wright's BPWALL was unchanged at 45.24%.

Bullish % For Wall Street (BPWALL) - 2% box chart

Imagine if you will that you are keeping track of 100 stocks' point and figure charts. In one stack, you place only those that show a "buy signal" still intact on the PnF chart. As of tonight's count, you'd have roughly 45 stocks in the "buy signal" stack (thus 45.24% bullish) and another 55 stocks in the "sell signal" stack.

Do you see some of the INTERNAL similarities of the BPWALL today, that would have presented themselves in early June (blue 6) of last year?

What we can say on a QUANTITATIVE basis is that the BPWALL is as WEAK as it was in late May, but there has also been a lot of RISK REMOVED when this bullish % was up at 82%.

S&P Depository Receipts (AMEX:SPY) - Weekly Intervals

With some subprime "risk" being shifted to the brokers, and the brokers an excellent "tell" (as are banks, if not financials in general) a group of stocks that tends to LEAD advances and declines for the S&P 500, there are also some SIMILARITIES taking place today (this week) that took place last spring and early summer.

I'd currently be assessing downside RISK over the next couple of MONTHLY (about 8 more weeks) to SPY $134.00. That would equate to about an 8% decline from the recent highs of $146.00.

That type of decline may well come IF the XBD.X were to see a similar 21% decline from recent highs.

As of tonight's closing measure, Dorsey/Wright's bullish % for the S&P 500 (BPSPX) rose 0.81% (net gain of 4 stocks to point and figure buy signals) to 66.80%, just up from a recent low measure at Friday's close of 66.00%.

Since August of 2004, Dorsey/Wright's bullish % for the S&P 500 has not fallen to 46.00% and has been a LEVEL OF RISK that seems to find BUYERS really holding firm over SELLERS.
 

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

In Play Updates and Reviews

Long Play Updates

Bristow Group - BRS - close: 36.14 chg: +0.33 stop: 34.59

Strength in the energy stocks helped BRS breakout over the $36.00 level. The technical indicators continue to improve. If we wanted to complain about something it would be the failure to close over the simple 50-dma and the lack of volume behind today's move. This looks like another bullish entry point. Our target is the February highs in the $38.40-38.50 range. This is an oil services company so keep an eye on the OSX index and the price of crude. FYI: The P&F chart is bullish and points to a $47 target.

Picked on March 11 at $35.88
Change since picked: + 0.26
Earnings Date 05/07/07 (unconfirmed)
Average Daily Volume: 243 thousand

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Boardwalk Pipeline - BWP - cls: 37.57 chg: -0.93 stop: 35.85

Warning! The trading in BWP today looks like a bearish reversal. Technically the stock painted a bearish engulfing candlestick pattern, which is typically seen as a bearish reversal, especially at the top of a bullish trend. The weakness is putting a crimp in the MACD and the stock appears to be creating a bearish divergence between price and the MACD. If you look at an intraday chart you can see how BWP just fell off a cliff in the last 30 minutes of trading. The move is a reaction to new that BWP has announced a public offering of 7.5 million units "representing limited partner interest". If these "units" represent shares of stock then we would expect a bigger sell-off tomorrow since BWP only has 18.7 million shares of stock in its float. Investors don't like having their interest diluted.

Picked on March 08 at $37.10
Change since picked: - 0.47
Earnings Date 05/14/07 (unconfirmed)
Average Daily Volume: 182 thousand

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Canadan Nat.Res. - CNQ - cls: 51.70 chg: +1.07 stop: 48.95

We do not see any changes from our weekend update. Aggressive traders might want consider buying the bounce. We're going to stick to our plan. Our trigger to go long is at $53.05. If triggered our target is the $58.00-60.00 range. We do expect some resistance near $56.50. FYI: A rally past $53.00 would created a new P&F buy signal. This is another oil-related play so keep an eye on the price of crude. Our time frame is seven to eight weeks.

Picked on March xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 03/07/07 (confirmed)
Average Daily Volume: 2.0 million

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eBay Inc. - EBAY - close: 31.71 chg: -0.03 stop: 29.85

Positive analyst comments and a recommendation to buy EBAY ahead of its next earnings report were not enough to lift the stock for more than a few minutes. Shares spiked higher at the open and hit $32.48 but quickly gave back all of its gains and actually closed in the red. We remain bullish but today's action is worrisome. We're not suggesting new positions at this time. We have two targets. Our first, more conservative target, will be the $33.85-34.00 range. Our second, more aggressive target, will be the $37.00-38.00 zone.

Picked on March 05 at $30.49
Change since picked: + 1.22
Earnings Date 04/25/07 (unconfirmed)
Average Daily Volume: 18 million

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Helmerich Payne - HP - cls: 29.35 chg: +0.99 stop: 27.49

It was a strong day for HP. The stock gapped open higher at $28.77 and then soared to a 3.49% gain. Our suggested entry point was at $28.76 so we would have been triggered at the open. Fueling the rally in HP was some M&A activity between a couple of oil drillers with HERO making a bid for THE. Now that our play in HP is open our target is the $32.50 mark. We do expect some resistance near $30.00.

Picked on March 19 at $28.77 *gap higher*
Change since picked: + 0.59
Earnings Date 05/03/07 (unconfirmed)
Average Daily Volume: 1.4 million

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Imergenet Inc - IIG - cls: 19.65 chg: -0.60 stop: 18.95

IIG struggled on Monday and eventually closed down almost 3%. This relative weakness on a day when most tech stocks were marching higher is a cause for concern. We would watch for a bounce near its 10-dma around $19.20 or a new rally past $2.20-2.25 as a new entry point. Readers should be aware that IIG does have additional overhead resistance at its 50-dma and 100-dma near $21.65. However, we're aiming for the $23.25-23.50 range. The P&F chart for the stock looks pretty bullish with a $25.50 target.

Picked on March 15 at $20.35
Change since picked: - 0.70
Earnings Date 05/08/07 (unconfirmed)
Average Daily Volume: 709 thousand

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Rentech - RTK - close: 2.54 chg: -0.10 stop: 2.23

After last week's big bounce a little bit of profit taking in RTK is to be expected. We just didn't expect it on a day where most of the market was trading higher. Fortunately, RTK held on to short-term support near $2.50 at least for now. We would use a bounce from here as a new entry point. We are going to use a relatively wide stop loss because shares have been so volatile lately and this makes the play a little more high-risk. We'll set the stop at $2.23. Our target will be the $3.40-3.50 range.

Picked on March 18 at $ 2.64
Change since picked: - 0.10
Earnings Date 05/11/07 (unconfirmed)
Average Daily Volume: 915 thousand

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TEPPCO Part. - TPP - close: 43.90 chg: -0.07 stop: 41.95

We do not see any changes from our weekend comments on TPP. The stock didn't move much and remains under the $44.00 level. A dip toward $43.50 or $43.00 could be used as a new entry point. Our target is the $44.90-45.00 range.

Picked on March 06 at $42.88
Change since picked: + 1.02
Earnings Date 02/07/07 (confirmed)
Average Daily Volume: 142 thousand
 

Short Play Updates

Avid Tech. - AVID - close: 32.90 chg: +0.02 stop: 34.05

We do not see any changes from our weekend comments on AVID. More conservative traders may want to try and exit on a dip near $32.00. We are not suggesting new positions at this time. Our target is the $30.50-30.00 range. FYI: Readers should note that the most recent (February) data puts short interest at 12.6% 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: - 1.75
Earnings Date 02/01/07 (confirmed)
Average Daily Volume: 677 thousand

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Flextronics - FLEX - cls: 11.04 chg: +0.03 stop: 11.51

FLEX managed a 3-cent bounce on Monday and considering the strength in tech stocks today the action in FLEX looks like relative weakness. Watch for a failed rally near $11.20 or a new relative low under $10.90 as a new entry point. More conservative traders may want to see a decline under $10.65 first before initiating positions. If you choose the lower entry point then tighten your stop loss. We'll set our stop at $11.51 for now. If you want to reduce your risk try a stop above $11.31 or above $11.20 but that raises the risk you may get stopped out on an intraday spike. Our target is the $10.10-10.00 range. We do not want to hold over the early May earnings report. FYI: The most recent data put short interest at a minor 1.7% of the float.

Picked on March 18 at $11.01
Change since picked: + 0.03
Earnings Date 05/01/07 (unconfirmed)
Average Daily Volume: 6.0 million

---

Tellabs - TLAB - close: 10.08 chg: +0.12 stop: 10.26

Uh-oh! TLAB is not cooperating. Shares rose 1.2% and produced a bullish breakout over the simple 10-dma. Our weekend comments said we were suggesting positions with TLAB under $10.00 and shares never traded under $10.00 today. Wait for a new decline under $10.00 or $9.90 before initiating positions. Our target is the $9.10-9.00 range. We do not want to hold over the late April earnings report. FYI: The P&F chart points to a $2.00 target. The most recent data put short interest at a minor 2.2% of the float.

Picked on March 18 at $ 9.96
Change since picked: + 0.12
Earnings Date 04/24/07 (unconfirmed)
Average Daily Volume: 7.5 million
 

Closed Long Plays

Short QQQ Proshares - PSQ - close: 63.70 chg: -0.67 stop: 63.49

It doesn't look good for the PSQ. Strength in tech stocks lifted the NASDAQ 100 index and the NDX looks poised to breakout higher. The PSQ is an inverse ETF so as the NDX goes up the PSQ goes down. We're suggesting an early exit in the PSQ to cut our losses before we get stopped out at $63.49.

Picked on March 13 at $64.98
Change since picked: - 1.28
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume: 138 thousand
 

Closed Short Plays

None
 

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

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