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Daily Newsletter, Monday, 12/03/2007

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Table of Contents

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

Market Wrap

Looking For a "Dip," Then a "Rip"

After an impressive round of buying last week, the major averages gave back some of those gains to start the week, but some observations dating back to Tuesday at 11:00 AM EST up to tonight's close has me looking for a dip, then a rip higher as witnessed in August as a year-end rally looks to be in the making.

One of "today's top stories" in my opinion was released late Friday and had homebuilder Lennar Corp. (NYSE:LEN) $16.74 +5.68% saying it sold a total of 11,000 residential sites in eight states (California, Colorado, Florida, Illinois, Maryland, Massachusetts, Nevada and New Jersey) to a venture mostly owned by the real-estate arm of Morgan Stanley (NYSE:MS) $52.28 -0.83% for $525 million.

Lennar said late Friday it formed a land investment deal with Morgan Stanley Real Estate to acquire, develop, manage and sell residential real estate, with Lennar selling properties valued at $1.3 billion to the venture for $525 million.

If my math is correct, that has Lennar selling land assets at about $0.40 on the dollar!

What the deal does is give Lennar some much needed cash as it tries to weather the storm of a bloated inventory and also suggests to me that the homebuilder is changing its business model to a leaner "just in time inventory" model.

That is, instead of sitting on inventory, during times of contraction or expansion, the homebuilder is shifting its business model toward a higher inventory turnover and return of capital invested model.

And what about Morgan Stanley? Well, at $0.40 on the dollar, they're getting some real estate at what would appear to be a discounted price should the residential real estate market(s) in some of the above mentioned markets reverse their lows, or continue to see a bullish bounce as witnessed in the regional CME housing futures in Denver, CO.

In Thursday evening's Market Monitor at OptionInvestor.com, I updated investors on the various CME Residential Housing futures (Composite; Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York Metro, San Diego, San Francisco and Washington D.C.).

CME Residential Housing Futures - Feb'08 and May'08

I had to "shrink" the above table to horizontally fit within the market wrap limits, but if you squint, you can probably see that Boston and Denver have been the only "bright spots" among some of the major metropolitan areas traded.

I don't follow these regional housing data on a day-to-day basis.

Other than a "fix and flip" where you're actually investing capital to improve a property with the hopes of selling at a higher price than capital invested (price of home + improvement expenses) that a home price purchased today will advance 10% by next month.

Still, as it relates to the near-term Feb'08 contracts, my latest benchmark data of 11/29/07 had the Composite just off a recent benchmark low of 207.20 from 11/14/07.

On a benchmark date of 9/04/07 Boston at 164.40 would have risen above its 03/02/07 benchmarking of 163.60 and risen higher to 167.00 on the 11/29/07 benchmarking.

Denver, which at one time was leading the nation in foreclosures just recently traded 136.60, slightly above its early March benchmark highs of 133.40.

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Conversely, Las Vegas, Los Angeles and San Diego are still showing new benchmarking lows for the February'08 contract.

Anyhow, this isn't a "Housing Newsletter," but with housing and mortgage-related issues grabbing headlines anytime we see a declining stock market, I think the CME residential housing futures give us some insights as to why Lennar is doing what it is doing, and perhaps why Morgan Stanley's real estate venture might see some decent risk/reward profile in $0.40 on the dollar transaction.

The Dow Jones Home Construction Index (DJUSHB) 306.22 +1.58% was atop today's list of sector winners. It's 5DyNet% is up a whopping 13.98% and would suggest to me some formidable amounts of short-covering during that time. Perhaps even a little bit of bullish buying trying to catch "the bottom."

Plenty of time to accumulate bullish positions with the DJUSHB down 58.23% the last 52-weeks.

Certainly Morgan Stanley is looking at the venture LONG-term. Lennar (LEN) looking for some cash and adjusting their business model.

Daily Internals - 12/03/07

On an intra-day basis, we did see a mixed open, but advancing issues at both exchanges were modestly negative throughout.

Today's economic news released at 10:00 AM EST had the Institute for Supply Management (ISM) saying its November Manufacturing Index edged lower to an expansionary 50.8 versus October's 50.9.

A quick look inside the numbers had the prices paid rising to 67.5 from 63.0 in October, while the employment index fell to a contraction level of 47.8 from October's 52.0.

The new orders index rose to 52.6 from October's 52.5, while production rose to 51.9 after October's contraction of 49.6. Inventories continued to fall at 46.9 from October's 47.2.

Readings above 50.00 are considered "expansion," while readings below 50.00 are viewed as "contraction."

Just after 01:00 PM EST, we saw some selling come in when General Motors (NYSE:GM) $28.61 -4.08% announced that November US sales fell 11%, reversing a 3-month streak of higher sales.

Despite a holiday clearance sale to spur demand, GM said sales of light trucks fell 15% (compared to Nov'06) to 156,196, while car sales fell 4.5% to 105,077. Analysts citied the decline in truck and SUV sales as being partially attributed to higher fuel prices and the housing downturn.

Ford Motor (NYSE:F) $7.25 -3.46% said later in the afternoon that that sales rose 0.7% in November (compared to Nov'06), which ended a year-long losing streak of declining monthly-comparison sales trends.

Ford said a 25% jump in sales to commercial fleet and government customers drove the increase.

Toyota (NYSE:TM) $110.92 -1.36% said sales were flat for the month compared with last November. Toyota did see a 4% increase in car sales with its hybrid Prius jumping 109%. Truck and SUV sales fell 5%.

Chrysler said it saw car sales surge 41%, led by the new Sebring convertible as well as the Dodge Charger and Avenger. Those sedans helped lift Dodge's car sales by 75% for the month. Chrysler added that truck sales were down 13.

Oil prices reversed early morning losses and I'd have to think that also attributed to some of this afternoon's broader market losses.

January Crude Oil (cl08f) traded as low as $87.15 just prior to the 11:00 hour, but reversed those losses to settle higher by $0.60, or 0.68% at $89.31.

Comments out of OPEC members the past week have kept traders on their toes into Wednesday's meeting.

When January crude threatened $100/barrel, a 750,000 barrel/day increase seemed like a "sure thing," but the recent drop below $90.00 has some speculating that the cartel could easily leave current production targets unchanged.

Since last Monday's Market Wrap, we've seen some notable changes on what I consider to be "slower moving" internals. Changes that certainly suggest a more bullish shift like that found in late August.

For example; at today's close, the NYSE's 10-day NH/NL ratio reversed back up into a column of X. (see table above)

Crazy as it may seem, it was exactly 10-days ago that I reviewed the NYSE NH/NL ratio chart in the 11/19/07 Market Wrap.

We've seen this before. As recent as August 24th when the NYSE 10-day NH/NL ratio reversed up from a low chart measure of 10.0% on 8/07/07 to 16% on 8/24/07.

NYSE NH/NL Ratio Chart - 12/03/2007

Here's an updated chart of the NYSE NH/NL ratio that I showed in the Monday 11/19/07 Market Wrap.

VERY SIMILAR to August 7, the NYSE's 10-day (Os and Xs) has fallen to 10%, and SIMILAR to August 24th, has reversed back up to 16%. This suggests to me that BEARISH leadership (number of new lows relative to new highs) is abating.

It would be open to great debate as to whom is doing the buying, but all I think we should be alert to is that SOMEBODY is buying.

For example, late Tuesday evening (11/27/07) as I was updating some of my own very short-term PRICE indicators (daily pivot levels), I saw a notable volume spike in the Dow Diamonds (DIA) $133.31 -0.63% that took place between 10:55 AM EST and 11:00 AM EST.

For an "old" trader like myself that has heard the term, and seen what can happen regarding the phrase "volume proceeds price action," I alerted traders in the OptionInvestor.com Market Monitor of the trade.

Further investigation uncovered some unusual option activity in the CBOE Dow Jones Industrial Index Average ($DJX.X) $133.15
-0.42% at the $130 strike.

Dow Diamonds (DIA) - 15-minute intervals

I'm showing a 15-minute interval chart to try and capture some time proceeding and the eventual outcome of a notable intra-day volume spike in the Dow Diamonds (AMEX:DIA) from last Tuesday.

If my math is correct, 2 million shares multiplied by $129 equates to $258 million transaction.

As a trader/investor it would be "nice to know" if it were a BULL buying or a BULL selling. It would be "nice to know" if it were a BEAR shorting, or a BEAR covering.

We don't know, nor perhaps, will we ever.

However, what we DO KNOW is that the RESOLUTION of that trade at $129.00 DIA was to the UPSIDE and would have to be deemed bullish price action.

Bottom line! $129.00 becomes a VERY INFLUENCIAL PRICE LEVEL going forward.

On the above chart, I've also take a retracement from the 11/26/07 low to Friday morning's opening high.

Now note the 61.8% retracement of that range.

DIA $130.09 would be darned close to the suspicious $DJX option action I also noted that evening.

What I hope to do here is provide a LEVEL that you and I can view as a MAJOR level of price support to TRADE against in the coming sessions.

I'm looking to get BULLISH the CLOSER the DIA comes to $130, because as it does (if it does) then that REMOVES DOWNSIDE RISK from a BULLISH trade, say with a DIA stop loss on a trade BELOW $129, or $128.66.

Even better for an options trader is utilizing a CALL option where they could view a session CLOSE below $129.00, or $128.66 as bearish.

For fibonacci retracement like that shown above, whenever a security retraces MORE THAN 61.8% of a move, that tends to SUGGEST a concerning REVERSAL of PRICE action.

Now that we've perhaps uncovered "the trade" that may have sparked the recent rally (big bets like this usually have some premise behind them) are there other signs of a reversal we should be alert to?

Yes!

While the Dow Industrials are just 30 stocks, the S&P 500 Index ($SPX) contains 500 stocks.

While we're seeing some signs of a reversal in the NH/NL ratios, Wednesday's action also saw the broad S&P 500 Bullish % (BPSPX) from Dorsey/Wright reverse back up to "bull confirmed" status at 42%.

At tonight's close, Dorsey/Wright's BPSPX was unchanged at 46.79%.

What this tells us is than since the inflection low of 35.74% on 11/27/07, we've seen a net gain of roughly 55 stocks give reversing HIGHER point and figure "buy signals."

What I would IMMEDIATELY suggest bullish and bearish traders/investors do is KNOW where the INDEX you like to trade CLOSED at on 11/27/07.

S&P Dep. Receipts (SPY) - 15-minute interval chart

The SPY allows us to "turn on the volume" for an observation that the SPX itself doesn't allow.

What we see in the DIA doesn't show up in the SPY, but SOMEBODY is/was BUYING the big guns and mega-caps.

With the BPSPX reversing back up to "bull confirmed" status, it is TIME for bears to be playing DEFENSE and looking for a pullback after the VERY strong move that began on 11/28/07.

For the QQQQ $50.88 -0.83%, a 61.8% retracement of the recent range would be a trade at $50.18. I had profiled a BULLISH trade for the QLD $103.53 -1.83% on Tuesday at $99.96, but "sold too soon" on Wednesday as it rose to $104.85.

I'd like a 2nd chance to nip away at another 1/4 position if given the chance. Perhaps round up to 1/2 position should the QLD then take out Friday's high of $109.01, or QQQQ $52.24 for the "rip" higher.
 

New Plays

Most Recent Plays

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New Plays
Long Plays
Short Plays
None None

New Long Plays

None today.
 

New Short Plays

None today.
 

Play Updates

Updates On Latest Picks

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Long Play Updates

Arch Coal - ACI - close: 37.35 change: -0.51 stop: 34.95

We do not see any changes from our weekend comments on ACI. The stock did pull back on Monday but not enough. We are looking for a dip toward $36.00. Our suggested entry point to buy ACI is the $36.50-36.00 range. We'll use a stop loss at $34.95. Conservative traders could adjust their stops closer to $36. Our target is the $41.50-42.00 range. The Point & Figure chart is bullish with a $68 target.

Picked on November xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 01/31/08 (unconfirmed)
Average Daily Volume: 2.6 million

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Canadian Natl.Railway - CNI - cls: 48.13 chg: -0.91 stop: 45.99

We were suggesting an entry point in the $48.00-47.00 zone and CNI hit $47.70 this morning so the play is now open. The stock lost 1.8% in spite of news that the company has negotiated a deal to buy back 5 million shares through private agreements as part of its 33 million-share buyback program. CNI currently has about 494.5 million shares outstanding. Now that the play is open our target is the $51.85-52.00 range. However, we suspect that CNI will dip again tomorrow. Readers can eye a pull back near $47.50-47.00 as another entry point but wait for signs of a bounce first. Readers might want to watch the DJUSRR railroad index to see if the sector can breakout over its trend of lower highs. FYI: The P&F chart is still bearish following the November sell-off.

Picked on December 03 at $48.00 *triggered
Change since picked: + 0.13
Earnings Date 01/23/08 (unconfirmed)
Average Daily Volume: 1.2 million

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Fresh Del Monte - FDP - close: 31.16 chg: +0.24 stop: 28.39

FDG continued to show relative strength on Monday and rallied to $32.19 before reversing. The action today looks like a short-term top and we would expect a pull back toward support. Currently we're suggesting a trigger to buy FDP in the $30.15-29.00 range. We would seriously consider adjusting that entry zone to $29.50-29.00 but we'll keep our original plan for now. Look for signs of a bounce before opening positions. Aggressive traders will want to put their stop loss under $27.50. We're suggesting a stop at $28.39. We have two targets. Our first target is the $32.50 mark, which was resistance back in October. Our second target is the $34.00-35.00 range. FYI: The P&F chart is still bearish from the early November sell-off.

Picked on December xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 02/27/08 (unconfirmed)
Average Daily Volume: 685 thousand

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Coca-Cola - KO - close: 62.20 change: +0.10 stop: 59.59

There is no change from our previous comments on KO. The stock consolidated sideways in the $62-63 range. Right now we would be looking for a dip near $61 as a potential entry point. It is worth noting that short-term technicals like the RSI are looking bearish and suggesting further short-term weakness. 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: + 0.25
Earnings Date 01/15/08 (unconfirmed)
Average Daily Volume: 8.3 million

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PC Mall - MALL - close: 10.87 change: -0.00 stop: 9.49

MALL experienced some profit taking this morning but eventually closed unchanged on the session. We do not see any changes from our weekend comments so we're reposting them here: We would consider MALL an aggressive bullish play due to volatility in the stock price. Shares were cut in half from the peak near $20.00 to the recent lows under $10.00. The current bounce is a bounce from significant support (see chart). We suspect that shares will dip again before any further gains. Our suggested entry point to buy the stock is the $10.25-10.00 zone. We would strongly suggest you wait for signs of a bounce first once MALL enters this region. We're putting the stop loss under the recent low. We have two targets. Our first target is the $12.25-12.50 zone near its 200-dma. Our second, more aggressive target is the $13.75-14.00 region. FYI: The P&F chart is still bearish following the sharp sell-off.

Picked on November xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 02/04/08 (unconfirmed)
Average Daily Volume: 356 thousand

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Children's Place - PLCE - cls: 28.89 chg: +0.43 stop: 24.90

PLCE displayed some early morning strength with a breakout over its 100-dma but after the initial pop the stock traded sideways in a very narrow range. We do not see any changes from our weekend comments so we're reposting them here: PLCE appears to have built a significant bottom over the last two months. The recent rally follows some positive earnings guidance from the company. The breakout over resistance in the $27.00-27.50 zone is encouraging but the stock is currently stalled near its 100d-ma. We suspect PLCE is overdue for a little profit taking. We are suggesting that readers buy a dip in the $26.50-26.00 zone. If triggered our target is the $29.85-30.00 range. We might consider a more aggressive target near $32.50 but the $30 level looks like it could be tough resistance. The P&F chart is actually bullish with a $36 target. FYI: PLCE will announce its November sales numbers on December 6th ahead of the opening bell.

Picked on November xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/25/07 (unconfirmed)
Average Daily Volume: 1.3 million
 

Short Play Updates

Amgen - AMGN - close: 55.09 change: -0.16 stop: 56.26

Shares of AMGN spiked lower at the open this morning on the negative Aranesp news we mentioned over the weekend. AMGN managed to recover most of its losses and spent the majority of the day trading sideways in a narrow range. The overall trend continues to look bearish. Our target is the $50.15-50.00 mark. More aggressive traders could aim for the August lows. We want to point out again that the weekly chart shows the potential for an inverse head-and-shoulders pattern. The Point & Figure chart is bearish with a $39 target. 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: + 0.81
Earnings Date 01/24/08 (unconfirmed)
Average Daily Volume: 10.4 million

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Cousins Properties - CUZ - close: 23.77 change: -0.00 stop: 25.05

CUZ closed unchanged on the session after trading sideways all day. We would suggest waiting for a new decline under $23.50 or $23.40 before initiating new shorts. More conservative traders might want to tighten their stops toward Friday's highs. Our target is the $20.25-20.00 range. 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: + 0.12
Earnings Date 02/05/08 (unconfirmed)
Average Daily Volume: 506 thousand

---

Monster Worldwide - MNST - cls: 32.13 change: -1.64 stop: 35.05

MNST under performed the markets on Monday with a sharp spike lower. The stock closed at its lows for the day with a 4.8% decline. This looks like a new entry point for shorts. More conservative traders might want to consider a tighter stop loss near $34.00. We have two targets. Our first target is the $30.15-30.00 range. Our second target is the $28.50-27.50 zone. The bearish P&F chart points to a $26 target.

Picked on November 26 at $32.35 *triggered
Change since picked: - 0.22
Earnings Date 01/31/08 (unconfirmed)
Average Daily Volume: 2.3 million

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Medicis Pharma - MRX - close: 26.92 change: +0.02 stop: 28.05

We remain wary of the trading in MRX. The stock is still trying to bounce. The stock is quickly approaching its trendline of lower highs and if the stock continues higher it should hit the trendline (of resistance) in the $27.25-27.50 zone. We are not suggesting new positions at this time. Our target is the $23.00-22.50 zone. The P&F chart is bearish with a $19 target. 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: + 0.74
Earnings Date 02/05/08 (unconfirmed)
Average Daily Volume: 1.2 million

---

Patterson-UTI Energy - PTEN - cls: 18.89 chg: +0.04 stop: 20.05

Monday provided traders an interesting test of resistance in PTEN. The stock traded at resistance near $19.00 and its descending 10-dma before rolling over this afternoon. Further weakness from here can be used as a new entry point for shorts. Our target is the $17.50-17.00 zone. FYI: The most recent data puts short interest at 10% of the stock's 152 million-share float. That is a relatively high amount of short interest and raises the risk of a short squeeze.

Picked on November 26 at $18.95 *triggered
Change since picked: - 0.08
Earnings Date 02/14/08 (unconfirmed)
Average Daily Volume: 3.8 million

---

Trimble Navigation - TRMB - cls: 37.35 chg: +0.28 stop: 38.26

TRMB displayed some relative strength on Monday but the stock remains under resistance near $38.00. We are repeating this weekend's suggestion that readers may want to wait for a new decline under $36.75 before initiating new positions. More conservative traders might want to inch their stop loss down toward $38.00. Our target is the 200-dma and we're suggesting an exit in the $33.50-33.00 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: + 0.10
Earnings Date 01/24/08 (unconfirmed)
Average Daily Volume: 970 thousand
 

Closed Long Plays

None
 

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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