Option Investor

Daily Newsletter, Thursday, 11/01/2007

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Table of Contents

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

Market Wrap

The Headlines Said It All


This morning's early Marketwatch.com headline, "And now, sell-the-news time," said it all. What were the reasons for the sell-the-news reaction, other than those Jim Brown detailed in last night's Wrap, including the un-window-dressing by mutual funds?

Those other early morning headlines focused on the overnight climb in crude to a new record, above $96 a barrel. Crude was to close well below that overnight high at $93.45 a barrel, but other troubles in the energy sector surfaced. Exxon Mobil (XOM) reported, with the company missing estimates by four cents according to some headlines. The company's quarterly profit dropped more than it had in four years. Some energy-related companies were not going to have a good day. Maybe Jim's Leaps subscribers are finally going to get the entries they've been wanting.

Still other headlines noted Credit Suisse's revelation that almost all its investment banking profit in the third quarter was wiped out by its $1.9 billion write-down in collateralized debt obligations (CDO's), residential mortgages and leveraged loan commitments. It didn't appear that financials were going to have a good day, either.

In addition, CIBC World Markets downgraded Citigroup (C), citing capital concerns. CIBC analyst Meredith Whitney warned that C's tangible capital ratio of 2.8 percent was below the 5.0 industry level. C would need to raise more than $30 billion in capital over the near term, Whitney warned. That's not going to be easy, a later report from the Fed on commercial paper hinted. Whitney says the company will need to cut dividends, sell assets, raise capital, or employ a combination of those methods.

The financials were going to be hit from other sides, too. Bear Stearns cut MasterCard on valuation concerns. Later in the day, several financial news sources reported on ACA Capital (ACA) with headlines such as BusinessWeek's "The Next Worry: Bond Insurers."

BusinessWeek speculated that credit default swaps, an entity that a Dow Jones article defined as "an exotic form of bond insurance," could cause further credit crunch woes. The article's author, Matthew Goldstein, pointed at ACA as the company that might spark another blowup in the minefield that currently makes up the global credit field.

Remember that acronym "CDO" from the paragraph on Credit Suisse's woes? Bond insurers such as ACA sell insurance for bonds backed by CDO's and mortgages. AIG, MBI and ABK are three of the firms in addition to ACA that Goldstein identified as participating in a trillion-dollar business selling such insurance to banks and other major investors. ACA rebutted recent concerns by pointing to a Standard & Poor's confirmation of the company's debt rating and Stable Outlook.

Goldstein's article resurrects a question many have asked. Is the worst over, the damage horrible but fully known? Furthermore, some ask whether those ratings by companies such as S&P can be maintained. Those are uncomfortable questions for big money holding some of these companies' stocks in an atmosphere that remains jittery. Today's steep stock-market losses demonstrated just how jittery the climate remains.

A further bit of news worsened fears among those in the know. In its weekly report on the outstanding level of asset-backed commercial paper, the Federal Reserve reported that those levels fell for the twelfth straight week. That paper dropped 1 percent to $9 billion. Previously, companies could issue commercial paper to fund their operations or other functions, but this continued drop shows that companies are finding it increasingly difficult to use this method to raise funds. In many cases, they've instead gone to banks, pulling from their existing credit lines. The larger market for commercial paper was characterized as recovering, rising 0.5 percent or $9.9 billion.

Paper issued by non-financials decreased 5.2 percent or $11.7 billion. Other news from the Fed's report showed increases. Paper issued by financial firms rose 3.6 percent or $28.6 billion.

Other headlines worried about the strength of the consumer, based on some of today's regularly scheduled reports. Consumer discretionary stocks weren't likely to have a good day, either.

In the end, it wasn't going to be a good day at all for those holding most equities, with exceptions including MSFT, which gained, and GOOG, which held its own. That early Marketwatch.com article said it all.


Annotated Daily Chart of the SPX:

To obtain a possible downside target, I took at look at the SPX's daily Keltner chart. That suggests a possible target and potential support on daily closes at about 1496.50-1499.10. Look how close that is to the already drawn horizontal red trendline, so we have corroboration from two sources of potential support in that area. The Keltners establish it as both potential support and a possible target. If you have bearish plays, I would spend some time thinking tonight about how you would treat a test of that support tomorrow, if it should occur. I've thought for a while that we were in a sell-the-bounce atmosphere, but some bulls have certainly profited. I'm just not going to be recommending looking for opportunities to buy dips, however, but I will counsel bears to watch potential support levels for bounce attempts and be particularly protective of profits. Rallies can be sharp in such a volatile atmosphere.

If the SPX should continue toward that target mentioned in the previous paragraph, the dynamic Keltner lines will slip a little lower with the price action. A bounce and daily close above about 1520 and especially above about 1529 erases that downside target.

Annotated Daily Chart of the Dow:

The Dow's daily Keltner chart suggests a downside target near 13,475 until and unless the Dow begins producing daily closes above 13,727. However, a bounce will likely find resistance on daily closes at about 13,727-13,766, the Keltner chart suggests.

Annotated Daily Chart of the Nasdaq:

The Nasdaq looks much stronger than the other indices based on its performance near the 10-sma, so it's the index to watch tomorrow for either a bounce or a cascade through that support.

The Nasdaq's daily Keltner chart shows a close beneath its 9-ema, but only slightly. It suggests a possible drop to 2,726-2,737, where it shows next potentially strong support to be, but that close was such a tentative confirmation of the target that I'm not sure how much credence it should be given. A daily close back above about 2810 questions that target.

Annotated Daily Chart of the SOX:

Annotated Daily Chart of the RUT:

The RUT's daily Keltner chart shows potential support on daily closes, also a potential target, near 791.50. The RUT can and does often overrun presumed targets, however those targets are established, but this would fit with the idea of a punch lower and then stabilization. A move below October's 788.66 low that isn't quickly reversed would set up a potential target near 772, however.

Annotated Daily Chart of the TRAN:

The TRAN, like the RUT, often overruns support or resistance by a bit, so this supposed breakdown would need to be confirmed by a push through October's previous low and continued closes beneath the triangle's support.

Today's Developments

Today began with Monster releasing its October Employment Index. This month, Monster expanded the index so that it now includes data from the top 28 U.S. metropolitan markets, so it's possible that the index won't be comparing apples to apples for a few months. Monster says it has revised and rescaled the current and historical data for the local Index, using the same methodology as the national one. Monster believes this will result in consistency and accuracy.

If it is comparing apples to apples, it's indicating a heating-up job market. The index rose two points, to 188, its highest value since May's 189. The under-the-headline news appeared more mixed, however.

Twelve out of 20 industries and 10 out of 23 occupational categories registered increased online job availability. Those included management and business and financial operations. Monster characterized this result as suggesting "a reassuring corporate hiring outlook." The construction and real estate industries continued to decline, and Monster thought that suggested "continued hardship in the building and housing sectors." Remember that yesterday the FOMC said that the intensification of the housing correction might impact the rate of economic expansion.

Year over year growth was nine percent. The largest regional rise was found in New England. The largest rate of increase was found in Cincinnati, Kansas City and Cleveland.

That report on employment was followed an hour and a half later, at 7:30, by the October Challenger, Gray and Christmas Report on layoffs. John Challenger appeared on CNBC this morning, noting several bullet points from the report. Job cuts fell 12 percent in the current report. Job cuts in the financial sector fell 61 percent from the August report. Speaking on CNBC, Challenger termed this "a very positive report."

Bankrate Inc. reported that the average fixed-rate 30-year mortgages interest rates fell to 6.29 percent from the previous week's 6.31 percent. Bankrate expects tomorrow's jobs report to influence the rates more than yesterday's FOMC decision, pointing out another reason why that report should be closely watched.


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At 8:30, the Labor Department released weekly initial and continuing jobless claims. Initial claims fell 6,000 to 327,000. The four-week moving average, deemed more reliable, rose 1,750 to 327,000. Continuing claims rose 65,000 to 2.58 million, with the four-week average of those claims increasing 13,000 to 2.53 million.

September's Personal Income, with all its components, appeared during the same 8:30 EST time slot as the jobless claims. The Commerce Department reported figures that were deemed the weakest growth since the spring. The numbers were roughly in line with expectations.

The Personal Consumption Expenditure (PCE) price index rose 0.2 percent, which brings it higher by 2.4 percent in the past year, a bit hotter than might be desired. Core inflation also rose 0.2 percent, producing a more moderate 1.8 percent for the year. Inflation-adjusted real consumer spending increased by 0.1 percent, but real disposable income rose a slightly higher 0.2 percent. The same disparity was seen in current dollars, with spending increasing 0.3 percent and incomes rising 0.4 percent. As might be extrapolated from that, savings rates increased. They rose 0.9 percent.

While most of us agree that in the long run, the increased savings rate might be a good thing, it might not be so good for companies depending on those consumer dollars. As a CNBC guest noted while discussing a different economic number, this week's GDP was partly propped up by presumed healthy consumer spending. If consumers, perhaps worried about the decline in their homes' values, rein in spending and start saving, consumer spending no longer props up GDP. The decline in the consumer discretionary sector corroborated that worry.

Consumers have reason to be worried about home value. RealtyTrac reported foreclosure filings up 30 percent in the third quarter when compared to the previous quarter, and up 100 percent when compared to the third quarter of 2006. The number of filings was termed a spike, and the foreclosure rate was one out of 196 mortgages. Nevada, California and Florida saw the highest foreclosure rates, but 45 out of 50 states saw increases.

The most important release of the day was September's ISM or Institute for Supply Management index, released at 10:00. To determine their headline and component indices, the ISM surveys corporate purchasing managers. The report details the percentage of those responding managers who feel that a questioned component of their businesses is expanding, and their answers are compiled and reported in percentages.

After the prior 52.0 percent in the headline number, economists predicted a slight drop to 51.8 percent, but the headline number dropped more sharply than expected, to 50.9 percent. As most know, the 50 percent level is the benchmark contraction/expansion level, and this obviously approaches contraction. This is the fourth straight month of declines.

Another bit of bad news came in the prices-paid component of this release. That portion rose from 59 percent to 63 percent. The new orders component fell to 52.5 percent from the previous 53.4 percent, and production dropped below the 50 percent level, to 49.6 percent. That component had previously been 54.6 percent.

The Energy Department was responsible for the next release, the weekly natural gas inventories. Those inventories climbed 66 billion cubic feet, a build that some termed larger than expected. Inventories remain above both year-ago levels and five-year averages.

October's Vehicle Sales were released. Industry sales slipped to 16.1 million from the previous 16.2 million. Chrysler's sales fell 9 percent, more than anticipated. Its CEO said that industry sales for this year and into 2008 would be "significantly lower." The company will cut four models and as many as 10,000 hourly jobs.

Toyota barely beat out Ford in sales. Ford's (F) sales declined, but its 9.5-percent drop was not as much as anticipated. Analysts had predicted a 14.6 percent drop in sales. General Motors' (GM) sales rose.

Companies reporting earnings included CVS Caremark. The company beat expectations, but saw profit taking. Crocs (CROX) beat EPS expectations but the company's stock was soundly trounced when the company offered in-line full-year guidance and missed on revenue expectations. CROX closed at $74.75 yesterday and closed at $48.10 today. Ouch!

Companies that reported after hours included CBS, beating expectations. Electronic Arts beat estimates and raised its forecast. Marathon Oil Corp. (MRO) beat expectations on EPS, but missed on revenue. The company's net income and EPS fell from the year-ago levels.

Tomorrow's Economic and Earnings Releases

Tomorrow's reports include the important October Employment or Non-Farm Payrolls Report at 8:30. Expectations before the ADP report were that 85,000 jobs would be added, down from the previous month's 110,000. I'm now seeing the estimate at 80,000 jobs.

September's Factory Orders follows at 10:00. After the prior 3.3-percent drop, economists expect orders to slip 0.4 percent. The ECRI Weekly Leading Index follows at 10:30.

Companies report earnings tomorrow include AIV, BA, CVX, CI, RDEN, MGLN, and VIA. AIV is the symbol for Apartment Investment and Management. With home sales troubled, some might be interested in seeing how the apartment sector fares.

What about Tomorrow?

After today's big-range day, the normal expectation for most indices (not necessarily the more volatile RUT) is for a small-range day. Is that likely to happen tomorrow? Let's look at some parameters that will help traders watch for a change in short-term tenor, with the short-term tenor obviously being down today.

30-Minute Chart of the SPX:

Here's something that often happens about lunchtime. Prices tend to flatten. Selling or buying pressure tends to ease during the lunchtime lull, and prices trade sideways into either a rising or fall (depending on whether the day is trending up or down) 9-ema. Those who have capitalized on an early move have to be particularly careful of their stops, decided whether they want to weather that consolidation into the 9-ema during the lunchtime lull (particularly when viewing a 15-minute chart) or get out after the first push. Obviously, sometimes the 9-ema holds as S/R and sometimes it doesn't. That's the whole point of the test: to see if it does. If you've been in a bearish position all through most of today, decide tonight what you want to do about your stops and/or profit-taking levels if there's an early push lower toward some of the targets mentioned.

30-Minute Chart of the Dow:

30-Minute Chart of the Nasdaq:

30-Minute Chart of the RUT:


New Plays

Most Recent Plays

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New Plays
Long Plays
Short Plays
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New Long Plays

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New Short Plays

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Play Updates

Updates On Latest Picks

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Long Play Updates

Alcoa - AA - cls: 37.90 change: -1.69 stop: 36.95

As a Dow component AA felt the brunt of the DJIA's sell-off. The stock broke down under what should have been short-term support near $39.00 and again near $38.50. Watch for a rebound before considering new bullish positions. Our target is the $44.50-45.00 range. Our time frame is six to eight weeks.

Picked on October 29 at $40.10
Change since picked: - 2.20
Earnings Date 10/09/07 (confirmed)
Average Daily Volume: 11.5 million


Adobe - ADBE - close: 46.92 change: -0.98 stop: 44.85

ADBE's bullish trend (and channel) is in danger again. The stock lost 2% and closed under its rising 10-dma. Shares look poised to dip toward $46.00 soon. More conservative traders may want to take a little money off the table. Our target is the $49.50-50.00 range. The P&F chart is already bullish with a $51 target. Our time frame is about four weeks.

Picked on October 09 at $45.05
Change since picked: + 1.77
Earnings Date 12/17/07 (unconfirmed)
Average Daily Volume: 7.0 million


AZZ Inc. - AZZ - close: 31.67 change: -2.43 stop: 30.95

Ouch! AZZ under performed the markets. The stock hit some heavy profit taking with most of it occurring in the last two hours of trading today. AZZ closed with a 7.1% decline on rising volume. There is a chance that AZZ will bounce near $31.00 and its 50-dma. We're not suggesting new positions at this time. Our initial target is the $37.90-38.00 range but more aggressive traders could aim for $40.00. FYI: The latest data puts short interest at a relatively high 7.7% of AZZ's very small 11-million share float.

Picked on October 31 at $34.10
Change since picked: - 2.43
Earnings Date 01/03/08 (unconfirmed)
Average Daily Volume: 200 thousand


Bristow Group - BRS - cls: 48.17 chg: -1.72 stop: 47.90

It has been a very volatile few days in BRS. The stock's been seeing some relatively big intraday swings. Today was just another whipsaw with a failed rally under $50.00 and a drop toward short-term support near $48.00. We're not suggesting new positions at this time. BRS is due to report earnings on Monday, November 5th after the market's close. We do not want to hold over the report.

Picked on October 29 at $50.71
Change since picked: - 2.54
Earnings Date 11/05/07 (confirmed)
Average Daily Volume: 210 thousand


C S X Corp. - CSX - close: 43.34 change: -1.43 stop: 42.99

Warning! The bullish trend in CSX is in trouble. The stock has broken down below the bottom of its rising channel and the MACD on the daily chart has produced a new sell signal. More conservative traders will want to consider cutting their losses right here and exiting early. We're not suggesting new positions at this time. Our target is the $49.50-50.00 range. Our time frame is six to eight weeks. FYI: The P&F chart points to a $61 target.

Picked on October 30 at $45.21 *gap higher entry
Change since picked: - 1.87
Earnings Date 10/16/07 (confirmed)
Average Daily Volume: 6.1 million


Gerdau Sa ADS - GGB - close: 30.31 change: -0.79 stop: 27.90

Shares of GGB were upgraded to a "buy" rating this morning. Unfortunately, the positive news could not compete with the market's sell-off. GGB gapped open lower at $30.56 and closed with a 2.5% loss on above average volume. The $30.00 level is holding as support for now but don't be surprised to see a dip toward the 10-dma near $29.70. Our target is the $33.50-35.00 range.

Picked on October 28 at $30.37
Change since picked: - 0.06
Earnings Date 11/07/07 (unconfirmed)
Average Daily Volume: 2.3 million


MIVA Inc. - MIVA - close: 3.04 change: -0.14 stop: 2.99

MIVA posted another decline. Shares under performed the market with a 4.4% sell-off and a drop back toward support near $3.00. A bounce from here could be used as a new bullish entry point. However, given the stock's recent relative weakness we would probably avoid new positions at this time. We want to remind readers that this is a high-risk, speculative play. We suspect that the bad news is already out so we're going to make an exception to our rule about holding over earnings. This time we plan to hold over the report in early to mid November. Our target is the $3.95-40.00 range.

Picked on October 28 at $ 3.34
Change since picked: - 0.30
Earnings Date 11/08/07 (unconfirmed)
Average Daily Volume: 252 thousand


Systemax - SYX - close: 22.48 change: -0.92 stop: 21.59

SYX lost 3.9% but traders bought the dip at $22.18 this afternoon. We would wait for a new rally past the 10-dma (22.80) or past today's high at $23.42 before considering new bullish positions. Our target is the $27.00-27.50 range. Our time frame is six to eight weeks. FYI: the P&F chart is very bullish with a $40 target.

Picked on October 28 at $23.39
Change since picked: - 0.91
Earnings Date 12/17/07 (unconfirmed)
Average Daily Volume: 348 thousand


XTO Energy - XTO - cls: 65.68 change: -0.70 stop: 63.95

Murphy's law is working against us here. XTO rallied to $67.49 midday as crude oil rose to $96 a barrel. Then crude oil reversed and XTO gave back its gains. Our suggested trigger to buy the stock was at $67.25. The play is now open but the move today looks like a bull trap and bearish failed rally pattern. We would wait and watch for a bounce near $65.00 or near $64.00 as an alternative entry but it would need to be a very convincing rebound. Our target is the $72.50-75.00 range. The P&F chart is bullish with an $89 target.

Picked on November 01 at $67.25
Change since picked: - 1.57
Earnings Date 01/21/08 (unconfirmed)
Average Daily Volume: 3.3 million

Short Play Updates

Basic Energy - BAS - cls: 19.41 change: -0.38 stop: 20.85

BAS has produced another bearish failed rally under resistance at $20.00 again. This is another entry point for shorts. Our target is the $18.50-18.00 range. More conservative types could exit near the August lows around $18.60. The P&F chart is very bearish with a $9.00 target. We do not want to hold over the November 8th earnings report.

Picked on October 29 at $19.75
Change since picked: - 0.34
Earnings Date 11/08/07 (confirmed)
Average Daily Volume: 406 thousand


Gap Inc. - GPS - cls: 18.05 change: -0.85 stop: 19.05

The bears were in control on Thursday and GPS plunged through a cloud of moving averages, any of which could have been short-term support. This is a bearish move and readers could use it as a new entry point for shorts. Our target is the $16.00-15.50 range.

Picked on October 21 at $17.49 *gap down
Change since picked: + 0.56
Earnings Date 11/21/07 (unconfirmed)
Average Daily Volume: 8.7 million


NVE Corp. - NVEC - cls: 28.11 change: -0.76 stop: 31.05

Market weakness helped push NVEC to a new relative low. The stock lost 2.6% and did so on above average volume, which is bearish. More conservative traders might want to tighten their stops closer to the $30 level. Our target is the $25.50-25.00 range. The bearish head-and-shoulders pattern in the charts is forecasting a $20-18 target. FYI: We would consider this an aggressive play simply for the fact that NVEC's average daily volume is very low! However, the real risk is a short squeeze. The latest data puts short interest at more than 30% of NVEC's very, very small 4.2-million share float. That represents a big risk for a short squeeze.

Picked on October 22 at $29.30 *gap down entry
Change since picked: - 1.19
Earnings Date 10/17/07 (confirmed)
Average Daily Volume: 76 thousand

Closed Long Plays


Closed Short Plays


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


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