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Daily Newsletter, Friday, 07/06/2007

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Table of Contents

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

Market Wrap

Holiday Hoopla

The bulls celebrated their independence last week with a very broad based rally that returned the major indexes to near their recent highs. The rally came on low volume and without any associated hoopla. It was as stealthy as any we have seen in recent months with gains coming slowly on that low volume. It appeared the bears took the holiday and the bulls celebrated by grazing calmly on a few tech stocks.

Dow Chart - Daily

Nasdaq Chart - Daily

The big economic report on Friday was the Non-Farm Payrolls for June. The headline number of +132,000 new jobs came in almost exactly as expected compared to estimates for a gain of +130,000. The surprise came from a revision to May from 157,000 to 190,000 and April was revised up to 122,000 from 80,000. This +75,000 two-month revision brought the three-month average to 148,000 new jobs per month. This is exactly where it needs to be to accommodate the 150,000 new workers moving into the market each month. This was slightly higher than the +142,000 monthly average for the first quarter. The unemployment rate remained unchanged at 4.5%. Job gains were grouped mostly in the health and hospitality sectors. Manufacturing lost -18K, Retail -24K, Construction gained +12K, Hospitality +39K and Education and Health +59K. Government jobs accounted for an additional +40K gain. Year over year average earnings were up +3.9%.

Some analysts expect jobs gains to slow as the year progresses do mostly to a further slowdown in housing construction. As the new mortgage underwriting rules begin to be enforced the homebuilding sector, a prime employer nationwide, is expected to see another round of layoffs as summer ends.

The stronger than expected payroll report, when you take into account the +75,000 in upward revisions to prior months, sent the equity market into an opening tail spin. That dive was quickly erased once analysts hit the wires saying there was nothing in the report that would cause the Fed to change its current stance on rates. The next big economic events will be the GDP for Q2 on July 27th and the Bernanke testimony to the House and Senate on the 18th and 19th. Since this is an election cycle year you can bet Bernanke will be seriously grilled on all matters economic in an effort to make election points for the questioner. This is Bernanke's state of the economy testimony and traders are hoping for a little insight into the Fed mindset other than the canned FOMC statements. The first reading on Q2-GDP on the 27th is producing street estimates from the high 1% growth range (+1.8-1.9%) to the low 4% range for Q2. Expectations are all over the map with the official numbers in the mid 3% range. There is a serious opportunity for expectations to be crushed if the housing implosion caused a bigger drain on GDP than expected. Any GDP number under 2% would be nearly disastrous given the rising whisper numbers over 4%.

Economic Calendar

Next week there are plenty of economic reports but none are material enough to be market movers without an extreme deviation from expectations. The economic calendar gets busy towards the end of the week but nobody will be watching. The highlight for next week will be the beginning of the Q2 earnings cycle. That reporting cycle kicks off on Monday with Alcoa (AA) as the first Dow component to report. The earnings calendar for the week has only a few names you would recognize but it does signal the official start of the Q2 cycle.

Earnings Table

Oil prices have clearly broken out over resistance at $70 with Friday's close at $72.81 an 11-month high. The same old reasons are still there and consist of violence in Nigeria, Iran's defiance, US and China demand increases and less production from OPEC. Brent crude is also rising to $75 on fears of a -300,000 bpd drop in output from the North Sea due to a variety of factors including a steep increase in depletion rates and some individual platform outages. Locally things are looking up with the 85 Kbpd Sunoco refinery in Tulsa restarting after a 30-day outage. Conoco's 150 kbpd refinery in Borger restarted after a 6-week outage. Exxon also is restarting its big Beaumont refinery. There is no target date yet for the restart of the Kansas refinery that was flooded out last week. These refineries will be running flat out trying to catch up with lagging product production in various areas. Crude inventories may be at decade highs but refined products are well below normal levels. Gasoline is -4.7% below 2006 levels but heating oil is -42% below 2006. The reason for the big discrepancy is a shift by all operating refineries to gasoline to avoid summer shortages and capture the high crack spread on gasoline. Some of that refinery capacity will have to be diverted back to heating oil soon or there will be shortages this winter. Because of the refineries coming back online the price of gasoline has resisted moves higher but with the spike in oil prices over $70 this week we did see August gasoline futures move to a new 11-month high at $2.31 on Friday. According to AAA the average retail price of gasoline last week was $2.95 but you can bet it will be higher soon. Demand in the U.S. actually dropped about -85,000 bpd in the prior week compared to 2006 but odds are good the July 4th week made up for it. Those numbers will be out next Wednesday.

August Crude Oil Chart - Daily

Gasoline Futures Chart - Daily

Microsoft is going to take a $1.15 billion pre tax charge in this quarterly cycle due to extending warranties on its Xbox-360 game consoles. Many of the Xbox game consoles have shown a general hardware failure error on the console lights and Microsoft said they were extending the warranty on those consoles to 3-years from the date of purchase. Customers who previously paid for those repairs will be reimbursed. Even though Xbox sales have failed to reach Microsoft targets the company reiterated on Friday that they expect the division to be profitable in 2008. Microsoft also reported that regulators had failed to request any additional information in the allotted 30-day time period for their announced $6 billion acquisition of aQuantive. By failing to request further documents in the 30-day period the deal is automatically cleared by regulatory rules. Google's $3 billion acquisition of DoubleClick was not so lucky. Regulators responded to calls by Microsoft and many others about the GOOG/DCLK acquisition and they have requested documents for further review. Many industry watchers feared a GOOG/DCLK combination would put too much advertising power in one firm and be non-competitive.

Macy's Chart - 30 min

The takeover speculation we saw in Macys (M) back on Friday June 22nd had fallen silent in the two weeks that followed with the stock returning to its previous levels. Just like clockwork that speculation returned on Friday and the stock shot up nearly +$4 intraday to touch $43 once again. Options volume reached hysterical levels with 75,700 call contracts traded compared to 42,161 puts. Normal volume for all their options is around 45K. Only weeks after changing its name from Federated to Macys and securing the coveted single character NYSE listing of (M) it appears the LBO vultures are circling.

Takeover speculation hit Monster Worldwide again with the stock spiking +3% on Friday. This speculation is almost a monthly event so little attention is paid to the rumors.

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Boeing (BA) will formerly present the first 787 Dreamliners in ceremonies on Sunday. More than 640 787s have been ordered but until now nobody has actually seen a real one. In Seattle, Qwest Field will host the 787 activities with about 50,000 current and former Boeing employees expected to attend. In Everett Washington Tom Brokaw will emcee the activities with 15,000 expected to attend. The six test aircraft are expected to begin flying in late August or early September. Various major customers will each receive one of the six aircraft. All Nippon Airways will receive one of the six because of its large order for 50 planes. On Friday Quantas increased its order by another 20 planes. Boeing sees no delays in its production schedule and although it took months to produce the first six planes Boeing expects to be cut that down to six days each once full production begins and then to three days each once those production lines gain experience. Boeing expects to produce 100 planes per year with a target eventually exceeding 2000 total planes. The first aircraft to be presented on July 8th will still have over 1000 temporary fastener bolts due to a shortage of titanium parts that Boeing said could take up to nine months to resolve. Here is your test plane. We ran out of bolts but we used plenty of duck tape.

Only two days after the National Association of Realtors said its index of pending home sales fell to 97.7 in May from 101.2 in April, the homebuilders were rebounding strongly. The reading was the weakest on record since the 9/11 low. Friday's gains included TOL +3%, CTX +3%, HOV +4%, LEN +3%, NVR +3.7% and even BZH +4%.

RIMM fell -84 cents despite having its price target raised to $350 from $205 by Crown Capital. I believe profit taking was offset by the upgrade and the announcement RIM has received approval to sell the BlackBerry in China. RIM said it was finalizing delivery availability to corporate customers in mainland China.

RIMM Chart - Daily

The major indexes returned to near their highs last week with the exception of one. The Nasdaq exceeded its recent high and surged another +30 points to 2666 in only three days of trading. Why did the Nasdaq suddenly take flight on July 2nd? A little research provided the answer. The Nasdaq is a modified form of a capitalization-weighted index. The bigger the company the more of the index it controls. One company is responsible for 9% of the Nasdaq 100 index. It is not Intel, Cisco, Oracle or even Microsoft. Those giants are in the top ten but not at the top. The largest weighted company in the Nasdaq index is Apple at 8.98% of the index value. Apple spiked +12 from Monday night to Friday morning. RIMM at 2.27% spiked +16 in the same period. Google at 4.49% rose +$20. Add in strong gains by Cisco with a 3.68% weighting, Intel at 2.95%, Oracle at 2.58% and Ebay at 2.0% and you have a seven stock rally. Remember when one stock or a handful of stocks in the Nasdaq catch fire it causes the value of the QQQQ to rise. Traders don't see the individual components moving only the price of the QQQQ. They jump on the bandwagon and buy more Qs and that causes Q shorts to cover. Buying in the Qs causes QQQQ managers to buy the entire index to cover the new demand. The rise in the Qs causes the entire index to rise even when the rally may have only been in a handful of stocks. The top ten Nasdaq stocks account for nearly 39% of the total index.

Nasdaq Index Weightings

I said last Sunday that should the Nasdaq rally continue it could spread to the other indexes. The seven stock rally in the Nasdaq did carry over to the other indexes to some extent but none of the others with the exception of the NYSE Composite tested their prior highs. The NYSE Composite did exceed its prior high by +7 points. For an index at 10,074 that 7 points is infinitesimal.

I think the major indexes did an outstanding job of following the Nasdaq higher. The Dow gained +203 points for the week and the Wilshire 5000 nearly +300. It was one of the better weeks we have seen this year. Unfortunately it came on low volume with most institutional traders off on an extended holiday. Next week will be the real test to see if this rally has legs. If the major indexes can reach their old highs and then breakout over that resistance then everyone will jump on the wagon with the tech bulls and go along for the ride.

What do you think would happen if we suddenly saw some profit taking in those highflying techs I mentioned above? AAPL +12, RIMM +16 and GOOG +20. Those are pretty strong gains for low volume trading. Those same index percentages work on the downside as well.

Apple Inc Chart - 15 min

Google Chart - 120 min

I believe we are poised for some consolidation. With earnings just ahead and expectations fading over the last couple weeks we could see some positive surprises. I am not sure fund managers will want to take profits ahead of the earnings cycle. They may want to hold on to see what surprises lay ahead. At the same time I doubt they will be adding to positions at these levels with the normal summer doldrums just ahead. The Q2 earnings cycle is normally peppered with guidance warnings for Q3. The summer quarter is not normally a strong quarter and guidance will reflect this. Eventually we are going to see a real correction between now and the 4th quarter. Normally that correction comes or ends in October. It can last several weeks or drag on for months but it normally ends in October. That means the timing for any potential dip is getting shorter as each day passes. The ideal time for a summer dip is after the Q2 earnings. Not all of them but enough that we know how the story ends. That would be 2-3 weeks from now.

S&P-500 Chart - Daily

That sets up several possible scenarios. If the rally continues next week and the other indexes breakout to new highs then we party on until the punchbowl goes dry. If we fail to make those breakouts and consolidate at these levels then I believe it is a warning that confidence is slipping or that the number of stocks bulls are willing to buy is dwindling. Apple and RIMM can't continue to power the rally by themselves. It has to broaden out to have any chance for success. The third scenario would be a failure at these levels and the beginning of another decline into August. That is the scenario I see least possibility of occurring so it may be the one most likely to happen. I think the one with the most chance of occurring is a consolidation at this level while we wait for earnings. If by some miracle earnings are a blowout across the board then we could move higher. Eventually there will be a correction but that scenario could put it off for another month or so. Picking a market direction ahead of Q2 earnings is the mission of fools. I can't say I am the head fool today because another website has already got dibs on that title. Let's just say that without any material economics or material earnings events the market will be left to find its own direction and in its overbought state it may take a few days for that direction to be determined. I would gladly go long over S&P 1540 or short a failure under 1535. I don't care which direction the market goes just as long as it maintains that direction for more than a few hours. It is the indecision that chews up trading accounts.
 

New Plays

Most Recent Plays

New Plays
Long Plays
Short Plays
AHG EOC
GMRK  
RGLD  

New Long Plays

Apria Healthcare - AHG - cls: 31.12 chg: +0.60 stop: 28.99

Company Description:
Apria provides home respiratory therapy, home infusion therapy and home medical equipment through approximately 500 branches serving patients in all 50 states. With approximately $1.5 billion in annual revenues, it is the nation's leading homecare company. (source: company press release or website)

Why We Like It:
AHG spent more than six weeks consolidating sideways and building a bottom in the $28.00 to $29.50 range. The stock broke out higher last week and pushed through resistance near $29.50, the 50-dma and the $30.00 level. Traders bought the dip again at $30.00 and shares now look poised to make a run at its highs. We're suggesting positions with AHG above $30.00. You can jump in now or wait for another dip in the $30.00-30.50 zone. Our target is the $33.95-34.00 range. We do not want to hold over the late July earnings report in about three weeks. We're placing our stop loss at $28.99. More conservative traders may want to place theirs closer to $29.50 or even near $30.00.

Picked on July 08 at $31.12
Change since picked: + 0.00
Earnings Date 07/26/07 (unconfirmed)
Average Daily Volume: 700 thousand

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GulfMark - GMRK - cls: 54.05 change: +1.33 stop: 49.99

Company Description:
GulfMark Offshore, Inc. provides marine transportation services to the energy industry through a fleet of sixty-one (61) offshore support vessels, primarily in the North Sea, offshore Southeast Asia, and the Americas. (source: company press release or website)

Why We Like It:
Crude oil futures broke out over resistance to new multi-month highs last week. This helped fuel new all-time highs for the oil and oil service stocks. Shares of GMRK, an oil service company, looks poised to breakout from its nine-week consolidation pattern. Aggressive traders may want to jump in now. We are suggesting a trigger to buy the stock at $54.55, which is just above Friday's high. More conservative traders may want to wait for bullish breakout over the $55.00 level. We are using a wide (somewhat aggressive) stop loss under $50.00. You might want to use a tighter stop. Our target is the $59.00-60.00 range. We do not want to hold over the late July earnings report. FYI: The MACD on the weekly chart is near a new sell signal but the P&F chart has a bullish (bear trap) pattern and a $65 target.

Picked on July xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/26/07 (unconfirmed)
Average Daily Volume: 284 thousand

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Royal Gold - RGLD - cls: 25.75 change: +0.54 stop: 23.99

Company Description:
Royal Gold is a precious metals royalty company engaging in the acquisition and management of precious metal royalty interests. (source: company press release or website)

Why We Like It:
Gold and mining stocks were big winners last week. The strength was almost sector wide and shares of RGLD managed to breakout past its bearish trendline of lower highs. The stock does have plenty of overhead resistance but it looks like RGLD has turned the corner. We're suggesting long positions now but odds are good we'll see a more attractive entry point on a dip back towards the $25.00 level, which should be short-term support. Watch the 50-dma to be overhead resistance. Our target is the $27.90-28.00 range. More aggressive traders may want to aim higher. FYI: The P&F chart is still very bearish.

Picked on July 08 at $25.75
Change since picked: + 0.00
Earnings Date 08/16/07 (unconfirmed)
Average Daily Volume: 462 thousand
 

New Short Plays

Empresa Natl. Elec. - EOC - cls: 47.50 chg: -1.05 stop: 50.05

Company Description:
Endesa Chile is an electricity generating company subsidiary of Enersis which has a presence in five countries in Latin America: Argentina, Brazil, Colombia, Chile and Peru. It has 46 electricity plants and an installed capacity of 12,332.8 MW. (source: company press release or website)

Why We Like It:
This new short play is based on the technicals. Virtually all of EOC's daily and weekly technical indicators have turned bearish. The stock has produced what appears to be a bearish double top with the April and June peaks. The last two weeks have seen multiple failed rallies under the $50.00 level. Now shares are breaking down under the 50-dma. We're suggesting shorts with a target in the $43.00-42.50 range. We do see potential support at the rising 100-dma around $45.00 so don't be surprised by a bounce. We do not want to hold over the late July earnings report.

Picked on July 08 at $47.50
Change since picked: + 0.00
Earnings Date 07/25/07 (unconfirmed)
Average Daily Volume: 141 thousand
 

Play Updates

Updates On Latest Picks

Long Play Updates

Columbia Sportswear - COLM - cls: 69.68 chg: +0.22 stop: 65.95

COLM tried to breakout over round-number resistance at $70.00 on Friday. The best it could do was an intraday spike to $70.06. The stock has a bullish trend of higher lows and most of the technical indicators are bullish. Readers can choose to buy another dip near $68.00 or wait for a new relative high over $70.06 as their entry point. Our target is the $73.50-75.00 range. The P&F chart is very bullish with an $89 target.

Picked on June 17 at $68.54
Change since picked: + 1.14
Earnings Date 07/26/07 (unconfirmed)
Average Daily Volume: 219 thousand

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Verasun Energy - VSE - cls: 15.31 chg: +0.06 stop: 12.89

After Thursday's pop higher and failed rally pattern VSE looked poised to fall lower. Yet the stock displayed relative strength on Friday. Traders bought the dip at $15.20 multiple times. We remain bullish on VSE but we're not suggesting new positions at this time. Shares have overhead resistance near $16 and its 50-dma. More conservative traders may want to tighten their stops toward $14.00 or breakeven. Our target is the $17.75-18.00 range, just under the simple 200-dma. We'll be watching the 50-dma and 100-dma as potential resistance. FYI: The P&F chart is still bearish.

Picked on June 29 at $14.21
Change since picked: + 1.10
Earnings Date 08/07/07 (unconfirmed)
Average Daily Volume: 878 thousand
 

Short Play Updates

Broadcom - BRCM - cls: 30.63 change: +0.54 stop: 31.05

Bullish breakout alert! A new relative high for the semiconductor sector helped lift BRCM to a 1.79% gain. This follows Thursday's rebound back above what should have been round-number resistance at the $30.00 mark. Friday's rally also produced a bullish breakout over its trendline of lower highs. We would strongly suggest that readers consider an early exit right here to cut their losses. Our market bias isn't very positive right here so we're going to stick with the play and see if BRCM rolls over. We are not suggesting new positions.

Picked on June 25 at $29.75
Change since picked: + 0.88
Earnings Date 07/19/07 (unconfirmed)
Average Daily Volume: 11.1 million

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Staples Inc. - SPLS - cls: 24.75 chg: +0.13 stop: 25.15

SPLS has bounced back toward technical resistance at the 50-dma and its trendline of lower highs. This is a critical test for SPLS. A failed rally from here could be used as a new entry point for shorts. A breakout higher would be a potential bullish entry point. More conservative traders may want to tighten their stops toward $25.00. We're not suggesting new positions at this time. Our target is the $22.00 mark.

Picked on May 27 at $24.40
Change since picked: + 0.35
Earnings Date 07/27/07 (unconfirmed)
Average Daily Volume: 7.0 million
 

Closed Long Plays

None
 

Closed Short Plays

None
 

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

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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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