Option Investor

Daily Newsletter, Monday, 11/19/2007

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Table of Contents

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

Market Wrap

Location, Location, Location

Stocks gave back the bulk of last week's gains as banking behemoth Citigroup (NYSE:C) $32.00 -5.88% fell $2.00 a share and close at its lowest level since March of 2003 after Goldman Sachs told investors they should sell their stock, saying the bank faces more write-downs of mortgage-related exposures and may have to cut its dividend to firm up its eroded capital ratios.

Goldman Sachs told investors that it believes the banking giant will have to book $15 billion in collateralized debt obligation (CDO) write-downs over the next two quarters.

If Goldman Sach's comments regarding Citigroup were not enough to have investors moving more of their capital out of mortgage-related issues, then Credit Suisse's comments regarding Freddie Mac's (NYSE:FRE) $37.50 -7.90% subprime mortgage portfolio probably helped investors make a decision to abandon ship.

Credit Suisse said it believes the nation's second-larges U.S. mortgage finance company may be set to report a loss of between $1 billion to $5 billion on its subprime AAA portfolio.

In a note to clients, Credit Suisse said "While Freddie's AAA subprime securities likely have substantial subordination, if the recent credit spread widening does not reverse over the coming quarters, we believe that Freddie could recognize an other-than-temporary impairment of between $1-5 billion."

Not to be left out, broker Friedman, Billings, Ramsey & Co. said it was downgrading Fannie Mae to "market perform" from "outperform" and cut its price target on the stock to $35 from $60.

Shares of Countrywide (NYSE:CFC) $10.57 -12.42% traded another multi-year low today, falling to as low as $10.25.

As I type this evening's wrap, credit rating agency Moody's is updating its ratings on the company.

Moody's said it is holding its Baa3 senior debt rating, and its C- bank financial strength rating and Baa1 deposit rating of Countrywide. Moody's update is a result from a ratings review that started in August.

I'm currently seeing shares of Countrywide (CFC) ticking up fractionally from today's close at $10.80 in tonight's extended session.

Armed with a point and figure chart bearish vertical count (currently under construction) of $6.00, I'd continue to suggest investors avoid the name.

We could see the stock bounce tomorrow. Just last week (see Monday's Market Wrap) I noted the mortgage lender warn that further cuts in its credit ratings to junk levels could severely limit its ability to raise money in public debt markets and cause it to lose bank deposits.

Homebuilders as depicted by the Dow Jones Home Construction Index (DJUSHB) 307.00 -6.39% were atop today's list of sector losers, partly due to the plethora of broker comments regarding mortgage-related issues.

Additional information on the housing front had the National Association of Home Builders (NAHB) saying its index for sales of new, single-family homes was unchanged at 19 in November, after October's initial 18 reading was revised up to 19.

November's (and October's) 19 measure remains the lowest number since the inception of the index in 1985.

David Seider, the NAHB's chief economist said "The message from today's report is that builders do not see any significant change in housing market conditions as compared to last month," and added that "while they continue to work down inventories of unsold homes and reposition themselves for the market's eventual recovery, they realize it will be some time before market conditions support an upswing in building activity - most likely by the second half of 2008."

The NAHB also reported that its expectations index for sales in the next six months fell to 25 from 26, while a sub-index in the report did turn up modestly with the traffic of prospective buyers rising to 17 in November from October's 15.

The overall housing market index in October was based on a survey of 335 home builders, who answer questions about sales prospects now and in the near term. When the Housing Market Index exceeds 50, it means the number of builders who see "good" sales outnumber the number who see "poor" sales. The numbers used in compiling the index are adjusted for seasonal variations.

Retailers were also weak with building products retailer Lowes Co. (NYSE:LOW) $23.12 -7.55% leading the declines. The company said it earned $643 million, or $0.43/share. The company's blamed Q3 results on a continuing housing correction, drought conditions in several markets and slower sales in the Gulf Coast.

In today's Market Monitor at OptionInvestor.com I did issue a "refinance your mortgage alert" for those that may be looking to get out of an adjustable rate mortgage (ARM) and lock in a fixed rate mortgage.

The benchmark 10-year Yield ($TNX.X) fell 7.1 basis points to 4.079%, its lowest yield close since September 2005.

While the strong bid for this maturity continues to suggest a "defensive posture" among market participants (flight to safety), many 15-year and 30-year mortgage loan rates tend to follow the benchmark bond's yield.

On Wednesday of last week, I noted that the Mortgage Bankers Association (MBA) had just released its weekly mortgage applications survey. The MBA said the average contract interest rate for a 30-year fixed-rate mortgage stood at 6.19%. The average contract interest rate for a 15-year fixed-rate mortgage was 5.77%. The average contract interest rate for one-year ARMs was 5.98%.

Perhaps you can agree that FIXING a rate for 30-years at 6.19% vs. the "unknown" 1-year adjustable of 5.98% makes some sense as it relates to RISK management.

Additionally, I mentioned that "first time home buyers" that were in part considering a home purchase (new or existing) that they consult with the tax advisor as to the timing of a home purchase this close to the end of the year.

The question I think a consumer should ask their tax professional is if the POSITIVE tax implications of purchasing now, might not be more FULLY experienced after the December 31, 2007.

Have your tax professional run a "this is your tax estimate now" if you stay the current course (example: rent vs. own); and this is what you might stand to gain should you go ahead with a new mortgage and purchase a home today, or after the new year.

In brief, I was a bit disappointed in late 2006 when I had hoped to reduce my tax liability by purchasing a home in September of 2006.

My disappointment came from not being able to FULLY realize tax-deductibility of mortgage-related fees that I would have been able to more fully realize had I delayed purchase until after the New Year.

In essence, had somebody ADVISED me that by waiting until AFTER the first of the year (based on my tax bracket) that I would have garnered GREATER tax relief by waiting until the new year to purchase a home mortgage, I would have been able to better utilize some of the tax-deductibility associated with mortgage fees.

As I have mentioned, TAX implications should NOT be the primary decision point of ANY INVESTMENT, but may be considered when deciding to either purchase, or sell and investment.

NYSE and NASDAQ Internals -

Today's finishing advance/decline line at both the NYSE and NASDAQ were negative, and for the most part, were bearish from the opening bell.

Today's 544 new lows at the big board exceed the more recent 490 from 11/8/07 and at a MINIMUM continue to show BEARISH leadership prevailing, even at some very quantitatively "oversold" readings.

My NYSE NH/NL 5-day ratio is currently at 10.8%, while the 10-day NH/NL ratio is at 14.4%. It was on 08/07/07 that the NYSE 10-day NH/NL ratio fell as low as 9.0% before its most recent high of 72.4% was witnessed on 10/11/07.


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NASDAQ's NH/NL indications aren't anything for a bull to be cheering about, but there too, are at some very quantitatively "oversold" measures.

My NASDAQ NH/NL 5-day ratio is currently at 22.0%, while the 10-day NH/NL ratio is at 20.4%. It was on 08/07/07 that the NASDAQ 10-day NH/NL ratio fell as low as 19.1% before its most recent high of 73.6% was witnessed on 10/11/07.

In the point and figure charting world, measures ABOVE 70% are deemed "overbought," while measures BELOW 30% are deemed "oversold."

There's an old saying that "a picture is worth a thousand words," so let's look at my hand charted NYSE 5-day and 10-day NH/NL ratio chart.

NYSE 5-day and 10-day NH/NL Ratio Chart - 2% box

For me, it is of little use to be given a new high, or new low reading, without some type of concept of what these important internal indications are doing over time.

Similar to the institutionally followed BULLISH % indicators, that tell a trader/investor meaningful shifts in supply (O) and demand (X), I developed a new high and new low chart in ratio format for both the NYSE and NASDAQ. Then began charting the "faster moving" 5-day NH/NL ratio, and the 10-day NH/NL ratio.

The PRIMARY point addressed in the above chart is that I'm seeing both the "f"ive-day NH/NL ratio and the 10-day NH/NL ratio approaching some similar levels found in early to mid-August in the NYSE.

Make no mistake, that the above chart depicts BEARISH leadership, but at levels where we've seen some big rebounds.

For instance, let's follow just the 10-day NH/NL ratio. It is logical that it would be a little "slower moving" that the 5-day NH/NL ratio, and would filter out some noise that the shorter-term 5-day might introduce.

On August 7th, we witnessed the 10-day NH/NL ratio fall to a low measure on the chart of 10%. When you're at 10%, how much further can you fall? To 0%!

Well, as you can see, the 10-day NH/NL ratio did reverse back up at 16% as it followed the eventual "buy signal" of the five-day at a similar 16%.

As time progressed, the 10-day NH/NL ratio rose steadily to a recent high measure of 72% on the chart by 10/11/07, before reversing back lower on 10/17/07.

Due to time constraint, I won't show the NASDAQ's NH/NL ratio chart, but it looks rather similar to that of the NYSE's NH/NL ratio chart.

I would have to expect at least 1, perhaps 2 additional weeks of WEAKNESS, but I would want subscribers to have plans in place for a potentially powerful "oversold bounce."

There's little "good news" in the markets, and that's the time to be alert for a bounce.

After the closing bell, shares of Hewlett Packard (NYSE:HPQ) $49.56 -2.34% saw some modest upside after-hours action at $50.27 when the computer maker said its Q4 net rose 28%, boosted by strength in laptops and strong sales in the Asia-Pacific region. HP said it reported a profit of $2.2 billion, or $0.81/share on revenue of $28.29 billion. Analysts were looking for EPS of $0.82 on revenue of $27.39 billion.

Global Equity Benchmarks/ Dollar Index/ Oil / Gold

European bourses have been the "weakest" since last Monday's update, and I can only surmise that some of last week's news regarding "subprime" issues related to holdings of CDOs finally caught up with some foreign banks.

U.S.-based institutions aren't the only holders of the once hungered-for subprime debt.

This weekend, it was reported that OPEC was interested in a non-dollar currency, with some members blaming higher oil prices on the weak U.S. dollar.

From what I read, it was largely Iran and Venezuela commenting negatively with regard to the U.S. dollar.

Due to time constraints, I will not be able to break out individual currencies like I had been doing in prior wraps, but one thought I might be able to see support of is a "currency basket" that not unlike the U.S. Dollar Index (DXY) itself (which is a weighted basket of foreign currencies), we eventually see oil denominated not just in US dollars, but perhaps a basket of currencies.

One idea, is perhaps derive a weighted currency called the Oil Dollar Index, where oil would be denominated by a basket of currencies, where the basket would be weighted by consumption.

Recent statistics I've seen (www.nationmaster.com) had the top five consumers of oil (roughly 30 million barrels per day) showing the US consuming roughly 54.5% (20.7 million bbl/day), China (yuan) about 17.1% (6.5 m bbl/day), Japan (yen) about 14.7% (5.5 m bbl/day), Germany (euro) about 7.2% (2.65 m bbl/day) and Russia (ruble) about 6.5% (2.5 m bbl/day) of crude.

It wouldn't make sense to me to simply say, "oh, the euro is strong, so let's switch to it for now" as a currency benchmark for oil. Five year's from now, that could change dramatically.

Instead, a "weighted basket" of currencies (weighted by consumption) might be warranted.

S&P 500 At Important Support Level

You've probably seen more bar/candle charts of the S&P 500 Index (SPX.X) the past couple of months than you can shake a stick at.

From a pure supply (O) and demand (X) perspective, the SPX now rests at a VERY important technical level of longer-term and even intermediate-term support as a VERY long-term institutional upward trend is tested.

S&P 500 Index (SPX) - 10-point box

Today's trade at 1,440 is the FIRST TEST of the bullish support trend on the SPX! This is the FIRST TEST of this institutionally followed trend since the U.S. recession ended in 2003!

It has been pondered if the U.S. is in a recession, or if it will go into a recession.

All I know, based on the above observation, is that a trend of long-term support and even intermediate-term support dating back to late-August, early September (blue 9) is currently being challenged at the 1,440 level.

A trade at 1,430 would be a "spread triple bottom sell signal," and would be further BEARISH.

On 11/07/07 the SPX's trade at 1,480 (marked above) generated a "triple bottom sell signal" and last Wednesday's bounce back up to 1,492.14 intra-day found some notable selling.

I think this will be the MOST CLOSELY MONITORED technical chart in the day's, weeks to come.

As close as today's low of 1,430.71 is to 1,430.00, the SPX did NOT trade that level (1430.00).

If it does, we should be prepared for a meaningful amount of selling.

Should buyers be formidable above 1,430, I would want to monitor market internals, like that of the new high and new low indications.

My bullish thoughts would be that a BULL needs to see new lows STOP BUILDING almost immediately, with new highs building back to the upside, which would have the 10-day NH/NL ratios reversing back UP.

Traders and investors alike should be OFF "long margin," and if short underlying stocks (requires margin), those positions should be MANAGED carefully.

I suggest where applicable, traders ease IN and OUT of positions.

Bottom line is that the SPX, a benchmark of U.S. equities, and perhaps the economy (if you believe as I do that the SPX is a reflection of the U.S. economy) is at an important level of technical support. We're nearing some "oversold" levels on various internal indicators like the NH/NL ratios and your ACCOUNT/TRADE management will be important.

Don't second-guess PROFITS where you have them, and be willing to CUT LOSSES where applicable.

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

Cicso Systems - CSCO - cls: 29.43 chg: -0.51 stop: 27.89

CSCO lost about 1.7%, which was inline with the losses in the NASDAQ composite. Readers might want to take a more patient approach and wait for a dip toward $29.00 or the 200-dma near $28.80. Better yet consider waiting for the dip and then signs of a bounce before initiating new positions. We remain bullish and tonight's positive earnings news from Hewlett-Packard (HPQ) could actually lift the tech sector tomorrow. Both shares of CSCO and HPQ were trading higher after hours tonight, which means it would really require some patience if you wanted to wait for more of a dip. If CSCO can breakout over $30.00-30.10 or its 10-dma near $30.25 we wouldn't wait. Currently we have two targets. Our first target is the $31.85-32.00 range. Our second, more-aggressive target is the $33.50-34.00 zone. Our time frame is six to eight weeks.

Picked on November 18 at $29.94
Change since picked: - 0.51
Earnings Date 02/06/08 (unconfirmed)
Average Daily Volume: 50.7 million


CVS Caremark - CVS - cls: 41.88 change: -0.33 stop: 39.85

CVS is actually holding up pretty well in spite of the market's weakness. However, momentum is definitely fading and suggests that the stock could be poised for a dip near $41.50 or the $41.00 levels soon. Wait for a bounce before considering new positions. More conservative traders might want to consider a higher stop loss in case the stock does reverse. Our target is the $45.85-46.00 range. Our time frame is year-end.

Picked on November 07 at $42.15
Change since picked: - 0.27
Earnings Date 11/01/07 (confirmed)
Average Daily Volume: 10.5 million


Coca-Cola - KO - close: 62.25 change: -0.37 stop: 59.59

The rally in KO hit a speed bump on Monday. Shares spent the session trading sideways in the $62.00-62.50 range. Broken resistance near $62.00 should now be support but we would not be surprised to see KO test the $61 region again. We're suggesting long positions now although readers certainly have a choice. You could wait for a new relative high to confirm the breakout from its $59.70-62.00 trading range or you could try and jump in on a dip into the $61.00-60.00 zone. Our end of year target is the $66.00-67.00 range. The bullish P&F chart suggests a $69 target.

Picked on November 15 at $61.95
Change since picked: + 0.30
Earnings Date 01/15/08 (unconfirmed)
Average Daily Volume: 8.3 million


UST Inc. - UST - close: 54.19 change: +0.13 stop: 51.99

The bull-bear fight in UST continues and the bulls won another round. Traders bought the dip near its rising 10-dma and the stock actually closed over technical resistance at the 200-dma. Readers can buy this bounce or wait for a new relative high over $54.55. Our target is the $58.00-60.00 range. We would expect some short-term resistance near $56.00. The P&F chart is bullish with a $67 target.

Picked on November 14 at $54.41
Change since picked: - 0.22
Earnings Date 01/24/08 (unconfirmed)
Average Daily Volume: 1.0 million


Xilinx - XLNX - close: 22.97 change: -0.07 stop: 22.59

The semiconductor sector continues to plummet and XNLX is inching closer to a breakdown under support near $22.60. The stock hit $22.64 this afternoon. Odds are growing sharply that any market weakness tomorrow morning will see XLNX hit our stop loss at $22.59 and close the play. If XNLX does not breakdown then look for a rally past $23.25 or $23.50 as a new bullish entry point. We would consider this an aggressive, higher-risk play since XNLX is still in a short-term down trend. We would expect some resistance near $24.00. Our short-term target is the $24.90-25.00 range. More aggressive traders may want to aim higher. FYI: If you look at the weekly chart it almost looks like a bearish head-and-shoulders pattern, which is just another reason why we'd consider this higher-risk.

Picked on November 13 at $23.48
Change since picked: - 0.44
Earnings Date 01/17/08 (unconfirmed)
Average Daily Volume: 5.6 million

Short Play Updates

Amgen - AMGN - close: 54.69 change: -0.80 stop: 57.76

The oversold bounce in AMGN appears to be rolling over. This could be used as a new bearish entry point. More conservative traders will want to consider a tighter stop loss just above the 50-dma (near $56.30). Our target is the $50.15-50.00 mark. More aggressive traders could aim for the August lows. Our stop is a little bit wide, which makes this higher risk. Furthermore any time you play a biotech company there is a higher level of risk. You never know when there will be a positive or negative press release about some drug, some clinical trial or some news from the FDA or a rival that could send shares of a biotech stock gapping either direction.

Picked on November 11 at $54.28
Change since picked: + 0.41
Earnings Date 01/24/08 (unconfirmed)
Average Daily Volume: 10.4 million


W.R. Berkley - BER - close: 28.27 chg: -0.40 stop: 30.55

BER continued to breakdown. The stock slipped through support and hit our suggested trigger to short it at $28.40. The play is now open and our target is the $26.00-25.50 zone. Volume continues to come in high on the declines, which is bearish. The P&F chart points to a $14 target.

Picked on November 19 at $28.40
Change since picked: - 0.13
Earnings Date 02/07/08 (unconfirmed)
Average Daily Volume: 1.0 million


Cousins Properties - CUZ - close: 23.67 change: -0.48 stop: 26.31

CUZ continued to fall and shares slipped to a new multi-year low. The stock hit our suggested entry point for shorts at $23.65 so the play is now open. Our target is the $20.25-20.00 range. Readers should note that this is a more aggressive play because of our relatively wide stop loss. Plus, the latest data puts short interest at over 10% of the 36.8 million-share float, which raises the risk of a short squeeze, especially with the stock near support.

Picked on November 19 at $23.65
Change since picked: + 0.02
Earnings Date 02/05/08 (unconfirmed)
Average Daily Volume: 506 thousand


Microchip Tech. - MCHP - cls: 30.28 change: -0.48 stop: 32.11

The semiconductor sector is helping lead the market lower. This is putting pressure on MCHP and the stock looks poised to retest support near $30.00 again. We're not suggesting new positions at this time but remain bearish on the stock. Our target is the $28.50-28.00 level. The P&F chart is bearish with a $19 target.

Picked on November 11 at $31.51
Change since picked: - 1.23
Earnings Date 01/31/08 (unconfirmed)
Average Daily Volume: 3.1 million


Medicis Pharma - MRX - close: 26.15 change: +0.07 stop: 28.05

MRX managed a minor bounce today but the overall trend remains bearish. We do not see any changes from our weekend comments. Technicals are bearish and the P&F chart points to a $19 target. We are suggesting shorts now although more patient traders might want to consider trying to wait and short a failed rally under $27.00. Our target is the $23.00-22.50 zone. FYI: Any time we play a biotech stock we're dealing with a high-risk situation. MRX seems to be more of a drug company but we're still at risk that some FDA decision or some clinical trial news could send the stock gapping one direction or the other. Furthermore the most recent data puts short interest at more than 23% of MRX's 49.2 million-share float. That is a high-degree of short interest and raises the risk for a short squeeze.

Picked on November 18 at $26.08
Change since picked: + 0.07
Earnings Date 02/05/08 (unconfirmed)
Average Daily Volume: 1.2 million


NVIDIA - NVDA - cls: 30.26 change: -2.19 stop: 34.05 *new*

NVDA remains a volatile stock and shares lost almost 6.75% on Monday. The stock is now testing support near $30.00 again. More conservative traders may want to take a little money off the table real fast. We are seriously tempted to lower our stop loss to the 10-dma near $33.05. Instead we're adjusting the stop loss to $34.05. Our target remains the 200-dma (currently near $27.60).

Picked on November 12 at $32.45
Change since picked: - 2.19
Earnings Date 11/08/07 (confirmed)
Average Daily Volume: thousand


Trimble Navigation - TRMB - cls: 36.14 chg: -1.51 stop: 40.01

Another round of market-wide weakness was too much for TRMB. The stock broke down under technical support at the 100-dma. We were suggesting a trigger to short TRMB at $37.25 so the play is now open. Our target is the 200-dma and we're suggesting an exit in the $33.00-32.90 zone for now. The P&F chart is bearish with a $30.00 target. FYI: Short interest looks pretty low, which is surprising and may be out of date.

Picked on November 19 at $37.25
Change since picked: - 1.11
Earnings Date 01/24/08 (unconfirmed)
Average Daily Volume: 970 thousand

Closed Long Plays

Allstate Corp. - ALL - close: 51.20 chg: -1.44 stop: 51.75

Our patience with ALL failed to payoff. The stock continued lower thanks to widespread market weakness. Shares of ALL did not even pause as it traded through short-term support near $52.00. The stock hit our stop loss at $51.75 early this morning closing the play. We would keep an eye on ALL to see how shares react near stronger support in the $50.25-50.00 zone.

Picked on November 16 at $52.50
Change since picked: - 1.30
Earnings Date 01/30/08 (unconfirmed)
Average Daily Volume: 4.1 million

Closed Short Plays


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


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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