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Daily Newsletter, Monday, 04/23/2007

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Table of Contents

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

Market Wrap

Bullish Surprises as Big as Texas

Stocks edged lower on Monday after last week's bullish option expiration, as a mixed morning session turned modestly weaker just after 01:00 PM EDT on news out of Nigeria that gunmen battled security forces in the country's southern oil region.

After settling lower into Friday's May crude oil expiration, the unrest in Nigeria found June Crude Oil futures on the Nymex (cl07m), now the front month contract, settling up $1.78, or 2.78% at $65.89.

One of tonight's after-hours winners comes from an earnings report out of chip maker Texas Instruments (NYSE:TXN). The stock finished today's regular session down 9 cents at $32.41, but surged to $35.47 in tonight's extended session after reporting quarterly earnings of $0.35/share, which was above consensus estimates for $0.31/share. The company said Q4 revenues were $3.19 billion, which was slightly above consensus estimates for $3.15 billion.

Texas Instruments is the largest weighted stock in the Semiconductor HOLDRs (AMEX:SMH) $35.97 -0.71%, which jumped to $36.81 in Monday's extended session.

On Friday (04/20/07) the SMH closed above the $36.00 level, something it hasn't been able to do since May'06. There was great debate on Friday (04/13/07) in the OptionInvestor.com Market Monitor regarding "valuations" and the SMH's range between $33.00 and $36.00. If tonight's extended session trade is any indication of the future, then market participants seems to side with the "undervalued" camp, and a major technical breakout to the upside is at hand.

Last week's 4.6% gain in the S&P Banks Index (BIX.X) 397.34 -0.85% was paramount to last week's new highs for the S&P 500 (SPX.X) 1,480.93 -0.23% in my opinion. As I get caught up on last week's action, the gains for the financials, where regional bank weakness was providing bullish caution, was last week's biggest bullish surprise in my opinion.

Monday tends to be a day where merger and acquisition deals are announced. Today's biggest deal had London-based banker Barclays PLC (NYSE:BCS) $58.27 -2.88% saying it was buying Amsterdam-based ABN Amro (NYSE:ABN) $48.16 -2.29% in a $91 billion stock deal. ABN said it had also agreed to sell its LaSalle unit, which operates more than 400 branches across Illinois, Michigan and Indiana to US-based banking giant Bank of America (NYSE:BAC) $50.51 -1.03% for $21 billion.

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Other M&A deals had NASDAQ-100 component MedImmune (NASDAQ:MEDI) $56.57 +17.82% finishing atop today's most actively traded after the biotech-concern said it agreed to be bought by London-based AstraZeneca PLC (NYSE:AZN) $55.91 -5.30% for $15.6 billion (11.5 billion euro). Two weeks ago, shares of MedImmune surged from the $38 level after the company said it would no longer resist disappointed shareholder's calls for the sale of the company.

Activist investor and billionaire Carl Icahn recently revealed that he owned just over 1% of MedImmune's stock, and called the company's management "lackluster."

AstraZeneca hopes to close the deal in June. If consummated, AstraZeneca said the acquisition would increase the company's proportion of biotechnology drugs in its pipeline from 7% to 27%, and enlarge its total pipeline by 45 projects to 163 projects.

While MedImmune was trading another multi-year high, shares of fellow NASDAQ-100 component Sirius Satellite Radio (NASDAQ:SIRI) $2.80 -6.04% fell to its lowest since September 2004 as pessimism grows for how much value a combination between it and fellow NASDAQ-100 component XM Satellite Radio (NASDQ:XMSR) $11.13 -3.13% will generate.

Bank of America's Jonathan Jacoby said implied stock prices of SIRI and XMSR suggest the odds of an SIRI/XMSR merger coming to fruition have dropped to 35%. Mr. Jacoby cut his price target on SIRI to $2.75 from $3.50 and XMSR's to $12.50 from $17.00.

U.S. Market Watch - 04/23/07 Close

While the AMEX Biotechnology Index (BTK.X) was today's sector winner, closing at another all-time high, homebuilders as depicted by the Dow Jones US Home Construction Index (DJUSHB) 634.99 -2.03% and the AMEX Airline Index (XAL.X) 52.68 -1.93% were today's sector losers.

After reviewing last Wednesday's Mortgage Bankers Association's weekly application survey and the CME's various regional housing futures contracts (Aug'07, Nov'07 and Feb'08) I'd have to surmise that last week's +8.82% rise was largely short-covering.

On Friday, the CME's Aug'07 Composite Housing Futures (composite of Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York Metro, San Diego, San Francisco and Washington DC) settled 214.80, just off a benchmarking low of 213.20 observed on 03/30/07. The CME's Nov'07 Composite Housing Futures settled 211.60 on Friday, also just off a 03/30/2007 benchmarking low of 211.40.

Housing sector watchers might perk up should we see Nov'07 futures exceed the Aug'07 contract prices.

Dow Jones US Home Cons. ($DJUSHB) - 5-point box chart

The supply (O) and demand (X) chart of the DJUSHB has been giving some conflicting buy signals of late. In late February, the traded at 715 on 2/22/07 was quite bearish as a spread triple bottom sell signal was given just below bullish trend. The double top buy signal at 640 didn't was "false", or weakness was found once again on 3/27/07 when a double bottom sell signal was generated at 615. On Tuesday of last week (4/17/07) a reversing back higher buy signal was generated at 610.

The pattern the DJUSHB has NOT been able to produce is two consecutive "buy" signals.

When looking at the above chart of the DJUSHB, a BULL and/or BEAR is probably observing some confusion as market participants feel things out.

I'd be more DEFENSIVE, or bearish below the recent relative high of 655. My bar chart shows the 200-day SMA trying to round flat from downward trend 660.00.

This is probably the TOUGHEST sector to trade bullish/bearish right now, but continues to be a MAJOR focus of traders and investors. I would avoid the group if at all possible.

Today, Dow Jones News Wire noted that a paper co-authored by Mr. Greenspan said home equity served as a growing source of funds for U.S. consumer spending from 2001-2005, financing close to 3% of total personal consumption expenditures.

Semiconductor HOLDRs (SMH) - Weekly Intervals

Tonight's news and after-hours action in Texas Instruments (TXN) should bring renewed interest to the sector, which has been lacking for more than 6-months. While TXN is not a component of the NDX/QQQQ, three of the 5 top-weighted stocks in the SMH are NASDAQ-100 components. Tonight's bullish-looking surprise of TXN should have bears running for cover in the group as earnings season is just beginning.

With the major indexes either at all-time highs, or new multi-year highs, overhead supply is limited, and bulls on a broader scale may hold back their willingness to sell, instead, looking for further gains.

The SMH is perhaps an "ideal" sector to be buying the technical breakout that has been doing nothing for 6-months, where the break higher really brings in the momentum bulls, and short-covering from bears that questioned valuations, but can no longer question the price action.

I'd like to thank Linda Piazza for filling in for me last Monday.
 

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

Archer Daniels Midland - ADM - cls: 38.96 chg: +0.41 stop: 36.95

ADM continued to rally on Monday. Shares rose just over 1% to close at a new six-month high. We don't see any changes from our weekend comments. We are suggesting long positions following Friday's rally. There is some resistance near $40 but our target is the $42.00-42.50 range. We don't have much time. Our plan is to exit on Monday, April 30th to avoid holding over earnings on May 1st. FYI: Our target is a little optimistic given the time frame and more conservative traders may want to exit near $40.00.

Picked on April 22 at $38.55
Change since picked: + 0.41
Earnings Date 05/01/07 (unconfirmed)
Average Daily Volume: 8.7 million

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Apria Healthcare - AHG - cls: 33.92 chg: +0.03 stop: 32.45

AHG spent the session trading sideways. Things look a bit more optimistic if you look at the intraday chart and see the bullish trend higher for the session. We're not suggesting new positions at this time even though AHG looks poised to move higher. Aggressive traders may want to leave their stop under the rising 50-dma. Conservative traders might want to tighten their stop towards $33.00. Our target is the $35.75-36.00 range. We do not want to hold over the May 1st earnings report.

Picked on March 27 at $32.37
Change since picked: + 1.55
Earnings Date 05/01/07 (confirmed)
Average Daily Volume: 910 thousand

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Brookfield Asset Mgmt - BAM - cls: 57.19 chg: -0.36 stop: 53.89

We're seeing some mixed signals with BAM. The XBD index rose 0.5% today but BAM slipped 0.6% and produced what appears to be a bearish reversal with its bearish engulfing candlestick today. If you look at some of the intraday chart BAM has pulled back toward the bottom of its narrow, rising channel and should be poised to move higher from here. We are not suggesting new positions. More conservative traders may want to lock in a gain here. Our target is the $58.75-59.00 range.

Picked on April 08 at $54.76
Change since picked: + 2.43
Earnings Date 05/02/07 (confirmed)
Average Daily Volume: 675 thousand

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Basic Energy - BAS - cls: 25.95 chg: +0.32 stop: 23.19

BAS turned in a bullish session. Traders bought the dip near $25 and its 10-dma this morning. Fueling the move was a big day for oil futures, which have risen past $65 a barrel. The stock now looks poised to breakout over $26. More conservative traders may want to tighten their stops toward $24.00 or maybe the 10-dma near $24.50. Our target is the $29.00-30.00 range. We do not want to hold over the early May earnings report.

Picked on April 12 at $25.39
Change since picked: + 0.56
Earnings Date 05/09/07 (unconfirmed)
Average Daily Volume: 160 thousand

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Bristow Group - BRS - close: 37.82 chg: +0.03 stop: 36.45

BRS had trouble building on any strength in oil today. We are not suggesting new bullish positions in BRS at this time. Our target is the $38.40-38.50 range. FYI: The P&F chart is bullish and points to a $47 target. We do not want to hold over the early May earnings report.

Picked on March 11 at $35.88
Change since picked: + 1.94
Earnings Date 05/07/07 (unconfirmed)
Average Daily Volume: 243 thousand

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C.H.Robinson Worldwide - CHRW - cls: 51.76 chg: -0.09 stop: 50.25

Rising oil prices means rising fuel costs and that weighed on the transports today. We don't have much time left so we're not suggesting new positions. CHRW is expected to report earnings after the market's close on Tuesday so we're planning to exit at the closing bell on April 24th.

Picked on April 16 at $50.25
Change since picked: + 1.51
Earnings Date 04/24/07 (confirmed)
Average Daily Volume: 2.0 million

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Cabot Oil - COG - close: 36.00 change: +0.52 stop: 33.45

Entry point alert. Nigeria is a major exporter of crude oil. Concerns over the country's recent presidential elections pushed oil toward $66 a barrel today. Many oil stocks got a boost out of the news and COG rose 1.4%. Shares hit an intraday high of $36.16, which was enough to hit our suggested trigger to buy the stock at $36.15. Now that the play is open our target is the $39.75-40.00 range. We do not want to hold over the April 30th earnings report.

Picked on April 23 at $36.15
Change since picked: - 0.15
Earnings Date 04/30/07 (confirmed)
Average Daily Volume: 1.0 million

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Citrix Sys. - CTXS - cls: 34.61 chg: +0.37 stop: 33.45

Monday turned out to be pretty bullish for CTXS. Traders bought the dip near the bottom of its trading range and near the rising 10-dma this morning. The stock rose over 1% and broke out through the top of its trading range. Unfortunately, we do not have much time. CTXS is due to report after the bell on April 25th. We plan to exit at the closing bell on Wednesday to avoid holding over the announcement.

Picked on April 16 at $34.10
Change since picked: + 0.51
Earnings Date 04/25/07 (confirmed)
Average Daily Volume: 2.5 million

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GulMark Offshore - GMRK - cls: 48.50 chg: +1.25 stop: 45.45

We didn't see any specific news to account for GMRK's sudden spike higher on Monday morning. We're not complaining. Overall the sector was trending higher thanks to strength in crude. Volume came in above average on the gain, which tends to be bullish. Our short-term target is the $49.90-50.00 range. More aggressive traders may want to aim higher.

Picked on April 22 at $47.25
Change since picked: + 1.25
Earnings Date 05/03/07 (unconfirmed)
Average Daily Volume: 211 thousand

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James River Coal - JRCC - cls: 9.33 chg: +0.34 stop: 8.49

The M&A activity on Monday may have reminded investors that the coal-producers are ripe for more consolidation. JRCC spiked at the open and then rebounded again when the stock dipped toward $9.00 this afternoon. This looks like a new entry point for long positions if you aim for the 200-dma and put your stop closer to $8.75. Our target is $9.90-10.00 and we're not suggesting new plays.

Picked on April 08 at $ 8.15
Change since picked: + 1.18
Earnings Date 05/08/07 (confirmed)
Average Daily Volume: 647 thousand

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Microsoft - MSFT - cls: 28.78 chg: -0.24 stop: 28.24

We are almost out of time with MSFT. Our target is the $29.90-30.00 range. We plan to exit at the close on Thursday, April 26 to avoid earnings.

Picked on April 17 at $28.85
Change since picked: - 0.08
Earnings Date 04/26/07 (unconfirmed)
Average Daily Volume: 61.0 million

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NVIDIA Corp. - NVDA - cls: 31.37 chg: -0.52 stop: 28.74

The earnings warning news from AMCC also weighed on shares of NVDA, another chip company. Shares of NVDA slipped 1.6% and look poised to test technical support near its 10-dma and 50-dma around $30.75. We'd use a dip or a bounce in the $30.25-30.75 region as a new entry point - just remember that we plan to exit ahead of earnings on April 30th. Our target is the $34.50-35.00 range.

Picked on April 15 at $30.58
Change since picked: + 0.79
Earnings Date 04/30/07 (unconfirmed)
Average Daily Volume: 11.9 million

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Starbucks Corp. - SBUX - cls: 31.57 chg: -0.09 stop: 30.39

Hmm... SBUX broke out over significant resistance on Friday. Yet today's rally couldn't make it past the $32.00 level. More conservative traders may want to wait for a rally past the $32.00 level before initiating positions. We're suggesting positions now in the $31.00-32.00 range. We'll put our stop under Thursday's low at 30.39. More aggressive traders might want to use a stop under $30.00. Our target is the $35.00-36.00 range but we need to exit ahead of the May 3rd earnings report.

Picked on April 22 at $31.66
Change since picked: - 0.09
Earnings Date 05/03/07 (confirmed)
Average Daily Volume: 10.5 million

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Target - TGT - cls: 61.43 chg: -0.69 stop: 59.89

TGT actually held up pretty well, slipping 1.1%, after announcing that April same-store sales will come in weaker than expected. Normally with news like that we would expect a bigger drop. Watch for a bounce near $61.00 or its 50-dma as a new bullish entry point. We'll list a conservative target at $64.75 and an aggressive target at $67.50. The $65.00 level looks like short-term resistance.

Picked on April 22 at $62.12
Change since picked: - 0.69
Earnings Date 05/29/07 (unconfirmed)
Average Daily Volume: 4.2 million

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UNIT Crp. - UNT - cls: 55.59 chg: +0.92 stop: 51.75

The surge in crude oil today helped UNT post a 1.6% gain and the move came in on above average volume. Traders have been buying dips toward the rising 10-dma lately. More conservative traders may want to exit early to lock in a gain. We do not want to hold over the early May earnings report. Our target is the $58-60 range.

Picked on April 08 at $51.95
Change since picked: + 3.64
Earnings Date 05/03/07 (unconfirmed)
Average Daily Volume: 407 thousand
 

Short Play Updates

None
 

Closed Long Plays

KLA-Tencor - KLAC - cls: 54.05 chg: -0.16 stop: 53.45

Semiconductors were under performing today after AMCC issued an earnings warning and the stock dropped 22%. Shares of KLAC held up reasonably well but we're going to call it quits and cut our losses. There is still a chance for a bounce if traders want to buy positions ahead of the earnings report this Thursday. We don't want to wait so we're suggesting an early exit now.

Picked on April 04 at $55.15
Change since picked: - 1.10
Earnings Date 04/26/07 (confirmed)
Average Daily Volume: 4.9 million
 

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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