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Daily Newsletter, Monday, 12/10/2007

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Table of Contents

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

Market Wrap

Reset Reprieve

Stocks continued their rally that began on Wednesday as traders and investors contemplate a reprieve for adjustable rate mortgage lenders and borrowers alike.

Having rebounded 13.2% last week on the heels of a mortgage relief packaged that could help more than one million homeowners avert foreclosure in the next two years, the Dow Jones Home Construction Index (DJUSHB) was atop today's list of sector winners.

Monthly Mortgage Rate Resets -

Thursday's outlining of what some are calling the "5-year Freeze" on adjustable rate mortgages (ARMs) sent shockwaves through the financial markets. Suddenly, the onslaught of ARMs that are about to reset may be delayed, allowing homeowners with ARMs that are about to be ratcheted higher, additional time to improve credit ratings (if need be), but also allowing some additional time for housing prices to stabilize, if not rebound.

Lenders, also faced with millions of refinancing applications, could benefit from an additional five-years time to process applications.

I would encourage everyone to read the U.S. Treasury's press release from Thursday at this link.

At a MINIMUM, I (Jeff Bailey) would think that Thursday's news brought in a strong wave of short-covering by those that may have been counting on millions of ARMs forcing borrowers into foreclosure.

Also helping improve sentiment toward homebuilders was the National Association of Realtors (NAR) saying the battered housing market is on the verge of stabilizing and inched-up its outlook for 2007 and 2008 home sales.

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The NAR said it now sees existing home sales falling 12.5% this year to 5.67 million, which is up slightly from last month's prediction of 5.66 million existing home sales this year. The NAR also forecast sales will rise slightly in 2008 to 5.7 million, up from last month's prediction of 5.69 million.

While the NAR's revisions hardly suggested a sharp rebound in sales, after nine straight months of downward revisions, the report was viewed as a sign of stabilization.

On the mortgage front, after being halted prior to today's open with news pending, shares of mortgage insurer MBIA, Inc. (NYSE:MBI) $33.95 +13.16% reversed last week's losses and traded as high as $38.19 intra-day after the company said it had secured a $1 billion funding commitment from Warburg Pincus, the US private equity group, in a sign that buy-out investors are finding some value in the troubled mortgage arena.

Terms of the deal have Warburg initially investing $500 million into MBIA by purchasing 16.1 million of the company's shares at $31 each, a small premium to Friday's closing price of $30.00/share.

Warburg will then back a $500 million rights issue which MBIA expects to complete early next year. Warburg will have the right to nominate two board members, and will receive warrants to purchase additional MBIA shares at $40.00, allowing it to bolser its profit if the share price rises.

Daily Internals - 12/10/07

The major averages jumped at the open on early CNBC reports of MBIA's cash infusion.

But just as MBIA was released for trade at 11:00 AM EST, shares of banking giant Bank of America (NYSE:BAC) $46.64 +2.79% gave back gains at 11:15 AM EST from the $46.71 level, slipping to as low as $45.74 on CNBC's report that it had frozen one of its SIV-related money market funds.

The stock rebounded to close back near its high of the session after the company said it was closing a privately placed money-market fund (Columbia Strategic Cash Portfolio fund) for institutional investors.

BAC's spokesman Jon Goldstein denied CNBC's report that the fund had been frozen, saying that clients were being offered the option of cash redemptions or of switching their assets into other Columbia-managed funds.

Who said CNBC was a cheerleading network for the bulls?

Despite today's turmoil, advancers held the upper hand over decliners at both exchanges and for the first time since October 31, new highs outnumber new lows at both exchanges, suggesting to me that we're just starting to see some sign that bullish leadership (new highs) is starting to overcome bearish leadership (new lows).

I should also alert traders and investors that Dorsey/Wright and Associates' VERY BROAD NYSE Bullish % (BPNYSE) reversed back up into a column of X at 40.20% on Wednesday of last week and at tonight's close has risen to 46.00% bullish. This indicates that the demand (X) is really starting to outstrip supply (O) and the offensive (bullish) team is on the field. On 11/27/07, this major market bullish % reached an inflection low of 32.82%.

In essence, on 11/27/07, 32.82% of roughly 3,000 point and figure charts (985) were showing "buy signal" associated with their charts. At tonight's measure of 46%, we would now envision roughly 1,380 NYSE-listed stocks showing PnF buy signals.

Standard & Poors also chimed in today by cutting its ratings and outlook on 14 SIVs. S&P said it was cutting its ratings on some SIVs to deepest junk from investment grade, and assigned a negative outlook to most other SIVs. S&P didn't provide a dollar amount affected by the downgrades.

As if that wasn't enough, as I type, shares of Washington Mutual (NYSE:WM) $18.65 -1.99%, which diverged from today's bullish bid in banks, saw its shares fall to $18.12 in tonight's extended session after the mortgage lender said it would slash its dividend by 73% to $0.15/share and eliminate 2,600 mortgage and 550 corporate support jobs as it looks to close 190 of its 336 mortgage offices as it stops making loans to borrowers with subprime, or poor credit.

Also after today's close, handset chipmaker Texas Instruments (NYSE:TXN) $32.67 +0.58% ticks higher at $34.25 after the company said a stronger-than-expected end to the year for mobile handsets had it raising the lower end of its revenue estimates for the fourth quarter.

Texas Instruments said it now expects revenues to come in between $3.5 billion and $3.66 billion in the fourth quarter, compared to previous guidance of $3.4 to $3.6 billion.

Nokia (NYSE:NOK) $39.98 +1.24% is TI's biggest customer. Its shares were quiet at $40.00 in the extended session.

While WaMu was getting ready to cut its dividend, fast-food giant McDonalds (NYSE:MCD) $61.90 +2.89% closed at another all-time high after it said global same-store sales rose 8.2% in November, while U.S. sales were up 4.4%, boosted in part by it premium roast coffee and breakfast menu sales.

Shares of Starbucks (NYSE:SBUX) $22.73 +0.48% edged up 11-cents.

Energy prices were mixed with fractional losses across the complex.

Energy secretary Bodman called on OPEC to increase oil supplies as low global oil inventories kept prices high. Mr. Bodman added that he thought speculators were adding to oil's volatility, but not higher prices.

January Crude (cl08f) settled down $0.42, or -0.48% at $87.86, while January Unleaded (rb07f) finished down $0.0189, or -0.82% at $2.2501.

Gold as depicted by the StreetTracks Gold (NYSE:GLD) $80.00 +1.78% (~$800.00 spot) traded strong. Ahead of tomorrow's FOMC decision on interest rates, the U.S. Dollar Index (DXY) 76.06 was marginally soft.

A quick look at Jan Fed Fund futures (ff08f) 95.82 has market participants forecasting a 100% probability of a 25 basis point cut for the federal funds rate, and just over 25% probability of a 50 basis point cut.

The FOMC's current target is 4.5%.

Not much of a "dip," but a little bit of "rip"

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

In last Monday's market wrap I was looking for a "dip" and then a "rip" higher.

Needless to say, we didn't see much of a dip, or a 3-box reversal back lower to 1,450, and Thursday's trade at 1,500 has the SPX back on a "buy signal."

I'm seeing GREAT SIMILARITY from the OUTWARD appearance of the SPX as to late August PRICE action, but INTERNAL indicators are also VERY SIMILAR.

On the above chart, I've drawn in PINK our institutional mathematically derived MONTHLY Pivot levels, where I would look to have a BULLISH stance above 1,475.

On 11/28/2007, Dorsey/Wright's broad S&P 500 Bullish % (BPSPX) did reversed back up to "bull confirmed" status at 42% (47% actual) as the SPX itself closed 1,469.

At tonight's close, it has risen to 54.82% bullish (54% on chart) as 274 of the 500 stocks comprising the SPX now show a point and figure buy signal associated with their chart.
 

New Plays

Most Recent Plays

Click here to email James
New Plays
Long Plays
Short Plays
None None

Play Editor's Note: Traders seem optimistic ahead of the Fed meeting tomorrow. Unfortunately that only raises the risk of a disappointment or some sort of "sell the news" reaction. Hopefully the damage won't be too bad. I have a large number of stocks on my watch list where I would welcome a significant dip as a potential bullish entry point.


New Long Plays

None today.
 

New Short Plays

None today.
 

Play Updates

Updates On Latest Picks

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Long Play Updates

Canadian Natl.Railway - CNI - cls: 51.10 chg: +1.06 stop: 46.90

CNI displayed some relative strength on Monday. The stock out performed the markets with a 2.1 gain. Traders bought the dip near $50.00 this morning and produced a bullish engulfing candlestick pattern. The stock is now back to challenging technical resistance near its 50-dma. More conservative traders might want to do a little profit taking ahead of the fed meeting. Our target is the $51.85-52.00 range.

Picked on December 03 at $48.00 *triggered
Change since picked: + 3.10
Earnings Date 01/23/08 (unconfirmed)
Average Daily Volume: 1.2 million

---

Salesforece.com - CRM - close: 57.70 change: -0.14 stop: 54.95

Shares of CRM failed to see any real follow through on Friday's bullish breakout. While that may be disappointing the trend still looks bullish. Traders bought the dip near $56.25, which is consistent with its pattern of higher lows. We're suggesting a trigger to buy CRM at $59.25. More conservative traders may want to wait for a rally over $60.00. Nimble traders could try buying a dip near $55.00 if the opportunity presents itself. The Point & Figure chart is bullish with a $74 target. Our target is the $64.00-65.00 range.

Picked on December xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 02/21/08 (unconfirmed)
Average Daily Volume: 1.7 million

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Diana Shipping - DSX - close: 34.01 change: -0.64 stop: 31.75

The rally in DSX seemed to stumble on Monday. Shares hit $35.67 and then reversed course. We would wait and watch for a dip (or better yet a bounce) near its rising 10-dma around $32.91 before considering new bullish entry points. Please note the sector can see some volatile swings and we would consider this an aggressive, higher-risk play. Our target is the $39.50-40.00 range. The P&F chart is still bearish but looks like it's building for a bullish breakout.

Picked on December 09 at $34.65
Change since picked: - 0.64
Earnings Date 02/21/08 (unconfirmed)
Average Daily Volume: 3.5 million

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Coca-Cola - KO - close: 63.27 change: +0.12 stop: 59.59

It was a quiet day for KO but investors bought the midday low near $62.90. We remain bullish on the stock and fail to see any changes from our weekend comments. A dip or a bounce near $62.00 could still be used as a new bullish entry point. 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: + 1.32
Earnings Date 01/15/08 (unconfirmed)
Average Daily Volume: 8.3 million

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PC Mall - MALL - close: 11.66 change: +0.15 stop: 9.90

We don't see any changes from our weekend comments on MALL. Currently MALL is up about 13.75% from our triggered price at $10.25. More conservative traders may want to do a little profit taking of their own right now. We're not suggesting new positions at this time. 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. We would consider this an aggressive play given the stock's volatility. FYI: MALL will present at an investor conference on Wednesday, December 12th.

Picked on December 04 at $10.25 *triggered
Change since picked: + 1.41
Earnings Date 02/04/08 (unconfirmed)
Average Daily Volume: 356 thousand
 

Short Play Updates

Monster Worldwide - MNST - cls: 33.90 change: +0.29 stop: 35.05

Some of the short-term technicals are still suggesting that MNST wants to move higher but the stock is struggling with resistance near $34.00. Right now we would wait for a new decline under $33.00 or $32.50 before considering new bearish positions. 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: + 1.55
Earnings Date 01/31/08 (unconfirmed)
Average Daily Volume: 2.3 million

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Medicis Pharma - MRX - close: 27.02 change: -0.61 stop: 28.05

The reversal in MRX today is encouraging and traders might want to consider new positions here. If you prefer to see a little more confirmation of the reversal then wait for a drop under the 10-dma or a drop under $26.60 before initiating new positions. 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: + 0.94
Earnings Date 02/05/08 (unconfirmed)
Average Daily Volume: 1.2 million
 

Closed Long Plays

NASDAQ Stock Market - NDAQ - cls: 47.68 chg: +1.88 stop: 42.45

Target achieved. Shares of NDAQ continued to rally and the stock hit an intraday high of $48.11 before closing with a 4.1% gain. Our target was the $48.00-50.00 zone. The overall trend still looks bullish so we'd keep an eye on NDAQ for another entry point down the road (like a sharp dip after the Fed meeting tomorrow). Broken resistance near $44 and $45 should offer some support.

Picked on December 06 at $44.15 *triggered
Change since picked: + 3.53
Earnings Date 02/13/08 (unconfirmed)
Average Daily Volume: 3.1 million
 

Closed Short Plays

Amgen - AMGN - close: 50.99 change: -1.11 stop: 56.26

Target exceeded. Multiple analyst firms downgraded shares of AMGN today and the stock gapped open lower at $50.80 and spiked to $49.62 before bouncing back. Our target was the $50.15-50.00 zone. The stock now looks short-term oversold and due for a bounce. We would expect it to fill the gap near $52 at the very least.

Picked on November 11 at $54.28
Change since picked: - 3.29
Earnings Date 01/24/08 (unconfirmed)
Average Daily Volume: 10.4 million
 

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

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