Option Investor

Daily Newsletter, Saturday, 01/05/2008

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Table of Contents

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

Market Wrap

No Surprise Here

If you expected me to be shocked that the markets sold off for the first three days of 2008 then you did not read my commentary last Sunday. I warned for the last two weeks that the first few days would be rough and for me the first real market day for 2008 would be Tuesday the 8th. I warned that funds would be free to take profits now that we are in a new tax year and that is exactly what they did. 75% of the entire Nasdaq gain in 2007 was on the back of GOOG, AAPL and RIMM. Those profits were at risk for selling and so far GOOG has lost -8%, AAPL -10%, RIMM -10% and AMZN -10%. I was not surprised that the winners were sold hard but I would be surprised if it lasted past next Tuesday.

AAPL Chart - Daily

Network analysts were blaming the market meltdown on the Jobs numbers on Friday and while that did help accelerate the selling it was not the cause. The Jobs report was a shocker to some but I warned you last weekend that the whisper numbers were under 50K with many nearing zero. Jobs for December came in with a gain of only 18,000 and well under the "official" consensus for a gain of 70,000. Fortunately gains reappeared in November with an upward revision from 94,000 to 115,000. The total for Oct-Nov rose to +274,000 and offsets the meager 18,000 gain for December bringing the 3-month average to 97,300 new jobs. This was actually higher than the 3-month average for Q3 at 76,600 jobs. It is the way these numbers appear on a monthly basis that creates the consternation in the markets. Having only an 18,000 job gain in December sounds significantly worse than averaging 97.3K for Q4. December was not expected to be a strong month for jobs so this should have been even less of a surprise. We are still on a downward slope regardless of how you view it. I charted the monthly jobs in the first graphic and then the trailing 3-month moving average in the second graphic. Both paint a picture of slowing job gains but the pace appears manageable in the 3-month chart. Average monthly job gains for all of 2007 were 111,000 per month but that is well below the 2006 average of 189,000.

Nonfarm Payrolls Chart - Monthly

Nonfarm Payrolls Chart - 3-month trailing average

There were sharp drops in construction jobs (-49,000), manufacturing (-31,000) and retail (-25,000). The job diffusion index fell to 48.4 and the lowest level since 2003 suggesting the tide has turned and more companies were cutting back jobs than adding jobs. The unemployment rate spiked by 30 basis points to 5.0% and the highest rate since Nov-2005. This is a major red flag for the economy if it is true. The rate bottomed at 4.4% back in Oct-2006. The jobs report will increase the chances of the Fed cutting rates at or before the Jan-29th meeting.

The jobs data is not what it appears on the surface and that could have caused some additional background selling. The Non Farm Payroll (NFP) report contains an estimate called the birth-death ratio. In December 66,000 jobs were added as a result of this estimate. Basically the Bureau of Labor Statistics (BLS) does two surveys per month. One is the NFP and the other is called the Household Survey. For the NFP the BLS calls 160,000 businesses at random out of their database of 9 million. They ask a few employment questions to get the base for the NFP numbers. The BLS knows the method is flawed since larger corporations tend to stay around and get called repeatedly while small companies tend to disappear, move around or simply get passed over in the census. New companies are normally small and don't show up on the radar for years. The BLS has found that by averaging prior years of data they can compensate for this by adding in the birth-death ratio of new jobs as an average of prior periods. The BDR added 66,000 jobs in December of which 17,000 were supposed to be in the financial sector. Do you really think the financial sector added 17,000 jobs in December? Of course not, this was about the number from 2006 and 2005. When the economy is expanding this BDR will underestimate jobs and when the economy is shrinking it will over estimate jobs for about 12 months in both directions. That means while the economy is sinking into recession it will appear we are doing better in employment that we really are. Since February the BDR added over 1,239,000 jobs to the NFP. Since January the NFP has only shown a gain of 1,208,000 jobs. Does it seem right that the BDR added more jobs than we actually counted? I don't think so but the household survey goes even further into fuzzy logic.

In the Household Survey the BLS calls 60,000 homes at random and asks them employment questions. In the December household survey they showed a loss of -436,000 jobs for the month. This is where the unemployment percentage is derived and that sharp drop in jobs is why the unemployment rate spiked +30 points in one month while the NFP was still showing a job gain. The Household Survey is rarely discussed since the numbers vacillate so widely. In just the last month we went from a gain of +631,000 jobs in November to a drop of 436,000 in December. The variations come from large changes in the population numbers. For instance the civilian population rose from 232,939,000 to 233,156,000 in December. They assume 66% of the population were employed based on the responses received from their 60,000 phone calls. That equates to employment of 146,211,000 in December. It is hardly a precise method but it is the one used to calculate the unemployment rate. They calculated that the number of unemployed rose to 7,655,000 (+474,000) or 5.0% of the 153,866,000 currently employed. You can see why this data is not reported. It would cause the general public's eyes to glaze over. Instead we get the sanitized version of the non-farm payrolls as our beacon of sanity in the job market.

HHousehold Survey Chart

Also helping to increase those chances of a rate cut was the drop in the ISM Index on Wednesday into contraction territory at 47.7 for December. This was a drop of -3 points from the barely positive 50.8 in November. This was the sixth consecutive month of declines in the index. The last time that happened was in 2001. The headline number of 47.7 was the lowest since 2003. This is as close to a real time number as we get on the state of the manufacturing economy.

The ISM Services was released on Friday at 53.9 and it was nearly unchanged from the November reading of 54.1. The services sector is not healthy but it is holding just over contraction level and roughly where it has been since July. Employment rose a point to 52.1 but that could have been related to holiday jobs like catering parties and handling holiday events. January's ISM employment number will be more critical.

The ISM Manufacturing did break under 50 but the 4th quarter is not historically a strong quarter. In 2006 the low for the year was Q4 and we could be seeing the same cycle trend in Q4 2007.

ISM Chart

The Fed got a strong dose of exposure to recession flu last week but it remains to be seen if they caught a fever. The Fed funds futures are projecting a 160% chance of a 25-point rate cut when they meet again in a little more than 3-weeks. Goldman Sachs and JP Morgan already jumped into the fray on Friday with their forecast for a 50-point cut to 3.75%. Goldman also suggested we could see an intermeeting move before the regularly scheduled Jan-29th meeting. They believe the Fed will want to fight the recession fears rather than focus on inflation during Q1. Recessions are more damaging than inflation and should be at the top of the Fed's priority list. Once the economy begins to show growth again they can shift their focus back to inflation. The Fed announced late Friday they would offer another $60 billion in TAF loans (Term Auction Facility) similar to their first offering of this type. They will increase the amount offered to $30 billion on each of the next two auctions. Those auctions will be on Jan-14th and another on Jan-28th, the day before the FOMC meeting. The Fed saw its last auction of $20 billion oversubscribed by 300%. The Fed announcement said they were planning on continuing the auctions every two weeks for as long as it takes to address the pressures in the short-term funding markets. The prior two auctions brought in bids of 4.67% and 4.65%. That is more than the current Fed target of 4.25%.

On the economic calendar for next week there are not any events that I deem as critical or as market movers. Those that are material are lagging indicators and already factored into the equation. The most important event may be Treasury Secretary Henry Paulson's speech on Monday on how the markets are recovering from the credit crunch.

Economic Calendar

I believe the most important quasi-economic events for next week will be any further earnings warnings for Q4. Dow component Alcoa officially kicks off the earnings cycle when they report on Wednesday but the real earnings calendar does not fill up until the week of Jan-21st. That gives everybody planning on reporting after Jan-21st another full week to warn if earnings are going to be less than expected. This should happen next week if we are going to get an earnings dump. So far warnings have been very light except for financials.

Earnings estimates for the S&P for Q4 have declined to an expected loss of -9.5% and ending decisively our long string of earnings growth quarters. The earnings damage is almost entirely due to losses in financials. If you remove the financials from the S&P equation the earnings would still be expectations for +12.5% growth. By themselves earnings estimates for financials are expected to drop -66%. Earnings for energy and techs are still rising. The economy can't be too bad if tech stocks are still raising estimates but now the fears are starting to appear that even those bulletproof sectors may be in trouble. Consumer discretionary and Industrials are the only other sectors to show material estimate declines. Financials and Materials are the only sectors with negative expectations.

Earnings Expectations Table

The problem remains the subprime induced gridlock. In the FOMC minutes released last week for the Dec-11th meeting the Fed noted the risk of an "unfavorable" feedback loop in which credit market conditions restrained economic growth further, leading to additional tightening of credit. The Fed said such a compounding cycle of ever tightening conditions could require "substantial" further easing of Fed policy. Currently banks do not want to lend to other banks because they are not comfortable with the credit quality of those banks. There is simply too much subprime damage still unknown and other banks need to restrain lending to maintain adequate capital. This is keeping the pressure on financial earnings estimates on fears that there will be even more write-downs to come. This fear on the part of the Fed along with the sudden weakening in the ISM and Jobs should cause the Fed to react strongly to the changing events.

The financial stocks are still declining with analysts expecting the mother of all write-down cycles ahead of Q4 earnings. Citi (C), Bank America (BAC), Countrywide (CFC), Bear Stearns (BSC), Wachovia (WB) and Wells Fargo (WFC) among others all hit new 52-week lows on Friday. Fear is rampant in financials and that is rubbing off on the rest of the market. That also suggests we are nearing a bottom in the financial sector but it could take several more weeks for it to appear. S&P expects financial earnings to fall -66% in Q4, -11% in Q1 and then be up +25% by Q4-2008.

John Mauldin brought a company to my attention this week named ACA Capital Holdings. (ACA) ACA wrote credit default insurance on CDOs, $70 billion worth. After losing over $1 billion in Q3 and having their debt-rating cut to nothing they are in default and have to come up with nearly $2 billion in cash by Jan-18th or be deemed insolvent. On Dec-27th the company entered a consent order with the Maryland Insurance Commission giving control of the company to the commission. The New York Times reported last week that Merrill, Bear Stearns or possibly another large firm could take them over. The reason is simple. If they go under the $70 billion in CDO default insurance becomes worthless and those CDOs become worthless. It might make sense for somebody big with lots of ACA exposure to step into the gap just to save their own positions. The problem is that they would take on the risk of the other $70 billion in positions that was not theirs. This same ACA scenario could be happening to the other dozen or so firms that dabbled in this market. Odds are good there is more pain to come for the financial sector in January.

The chip sector was knocked for a 10% drop after both JP Morgan and Bank America cut Intel to neutral. Intel itself fell -15%. The JPM analyst cut Intel on concerns over slowing orders and rising inventory levels. He said processor growth had been rising at an annualized rate of 16-20% for the last two quarters and the highest level since the Y2K surge in 1999 and double the historic average of only 8% growth. He said order weakness was appearing in Europe and could be spreading. AMD hit a new 5-year low at $6.25 after a Wachovia analyst warned that Intel was well ahead of AMD on quad-core processors. Intel has been shipping the fastest quad-core processors for well over a year while AMD is still struggling with design problems. AMD hopes to have the design problems with its quad-core chip code named Barcelona fixed by March. That is nearly a 2-year head start for Intel and Intel is ready to announce faster versions in the coming months. Any day the market is open is a good day to sell AMD.


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Next week the Computer Electronics Show (CES) opens in Vegas with 140,000 attendees and over 3,000 exhibiting companies across 1.8 million feet of floor space. This is the largest electronics show in the world and all the new toys will be exhibited. Home theaters, gaming, cameras, phones, home networking, vehicle electronics and dozens of other categories will be on display. This should give tech stocks a boost simply from the hype surrounding the new devices and their components. The Macworld convention comes the following week from the 14th to 18th and Apple is expected to make even more announcements that could spur buying in tech stocks.

One jump-start to the CES show was an announcement late Friday that Warner Brothers was going to support the Blu-ray format for high definition DVD technology. That major win in the studio wars will be touted by Sony (SNE) at CES next week. There are some thoughts that Apple Computer will also pick a favorite the following week at MacWorld. Sony is the major developer behind Blu-ray. The battle lines appear drawn since Microsoft is expected to announce in its high profile keynote address at CES that it will support the competing HD-DVD in its Xbox 360 product. This brings back visions of VHS vs BetaMax and the videotape format wars. Many analysts are claiming it will not make any difference since the future appears to be a downloadable HD product rather than a flat disk. Apple is rumored to be announcing a new DVD component (HD or Blu-ray) to its Apple TV product at MacWorld but that may just be speculation. Warner Brothers said consumers had spoken in choosing the format rather than an internal WB decision and WB would cancel plans to distribute videos on both formats. Sony already has exclusive deals with Disney, 20th Century Fox and Lions Gate. HD-DVD has exclusive deals with Universal and Paramount/Dreamworks. The WB switch may be just enough weight to end the battle but the two main proponents of HD-DVD remain Microsoft and Toshiba and they have deep pockets. Just how much money they will want to spend to remain on the outside of the mainstream remains to be seen. Had WB made the announcement a month ago there would have been a lot more Blu-ray DVD components sold ahead of the holidays and a lot of HD-DVD players heading back to distributors today.

BoBond rating agency Fitch cut YRC Worldwide (YRCW) investment grade debt rating to junk status on Friday citing a weakening credit profile and tough market conditions. YRC (Yellow Roadway) fell -9% and hit a new 2-year low at $12 on the news. Fitch said the less-than-truckload market in the U.S. had weakened significantly in the past 18 months. According to Fitch poor pricing and over capacity was a result of slumping demand. Fitch expects earnings to come in under expectations for the near future. FedEX (FDX) also slumped to a new 2-year low at $84 due to the guilty by association rule. UPS was impacted less but still fell to its 2-year lows. The Transports are just a handful of points away from a major breakdown under 4100 and the bottom set in August 2006. High fuel prices have been dragging on the transports and specifically airlines for months.

YRCW Chart - Daily

Dow Transports Chart - Weekly

The markets roared off to the worst start since 1932 with a -565 point drop in the Dow and -170 point on the Nasdaq. I warned you last weekend to expect selling in AMZN, AAPL, RIMM and that even Intel and Microsoft were at risk. Those first three I mentioned were down -10% for the week. That should have been no surprise. I believe the majority of this decline was due simply to tax selling by funds now that 2007 is over. They can take profits now on 2007 positions and not have to pay taxes for a year. Secondly we are seeing billions in funds leaving the U.S. market and heading overseas through funds and ETFs. With the U.S. market apparently heading into a recession many investors want to shift money to an economy still growing. Russia funds were seeing strong inflows of cash as were Taiwan, Brazil and even China. The combination of tax selling and money movement was too much for the markets to bear.

Going into next week I am setting up to be bullish. I believe the tax selling is basically over given the severity of the drop. I only projected three days when I warned you last week. Monday will be a cleanup day where remaining positions are dumped and margin calls covered. Traders coming back from an extended holiday will do a gut check and hit the flush lever. I told you last week that I considered next Tuesday the first day of 2008 and I have not changed my mind. There are qualifications to my bullish stance but I am looking for an entry point for at least a trade.

Here is my qualification. The S&P started 2008 with the worst performance since 2000. The S&P-500 has to hold 1400 on any further drop. That is the 100-week average and right at the closing lows from August and November. We are setting up for EITHER a triple bottom low/rebound OR a major breakdown from that level. A break of 1400 could find support at 1375-1380 but a break there would be a game changer.

S&P-500 Chart - Weekly

S&P-500 Chart - Daily

The Nasdaq lost -170 points for the week and plunged to 2500 at Friday's close. This is major support from August and the majority of the drop was in the major names. It was clear tax selling ahead of CES and MacWorld. Now those waiting for an entry point in those same names should be jumping into the gap early in the week to establish positions. The Nasdaq has risk to 2350 if current support and Friday's close at 2500 does fail. RIMM is expected to be a big winner at CES with a number of new devices to feed off the popularity of the BlackBerry. As long as RIMM holds $98-$100 I would still be a buyer. I am not that positive on AAPL and feel it could have further to fall. An ideal entry on AAPL would be somewhere in the $165 range but there may be too many people ready to jump the gun to see a continued dip to that level. Apple will get a boost from MacWorld before Jan-18th. That means we should see a bottom sometime next week.

Nasdaq Chart - Weekly

The biggest worry for me is the Dow and the potential for a confirmed head and shoulders failure with a break of 12800. The Dow closed at a nine-month low on Friday and right at critical support. On a closing basis the Dow has broken a 6-month head and shoulders. On an intraday basis it is right at the neckline. Either way 12800 is critical support and a break here almost guarantees a retest of the February lows at 12000. Let's hope this does not happen.

Dow Chart - Weekly

Nothing says ugly better than the Russell-2000 chart. I warned you last week that the Russell would telegraph fund manager sentiment and judging by this telegram it is extremely bearish. Friday's close was a 16-month low and there was no attempt to buy the dip. This is purely recession related rather than tax selling. Small caps do terrible in a recession and Friday's Jobs numbers scared the dickens out of any fund holding small caps. This could be the failure point for any SPX 1400 rebound. The bulls may show up to buy 1400 only to be devoured by the small cap bears.

Russell 2000 Chart - Weekly

Wild cards for next week will include the JP Morgan Healthcare conference, a major event that could generate interest in any number of health related stocks. The New Hampshire primary on Tuesday will be another lightning rod for healthcare with half the candidates against nationalized healthcare and the others for it. Whoever comes out of NH with a vote lead could influence investor votes on those same stocks.

Something else I expect to see would be the influx of year-end retirement contributions. All those billions in contributions hitting funds last week will be cleared and ready to put to work next week. This is tens of billions of dollars and they have the perfect dip to buy. Since a lot of that money goes into index funds this is a market-lifting event in normal years. The problem here is the recession worries generated by the ISM and Jobs reports. Fund managers don't really have a lot of discretion on those index funds and they will have to put the money to work very soon even if the market continues to fall.

I wrote about the earnings and that only two sectors are in the negative category for estimates. That suggests to me the health of most sectors other than financial and maybe transportation are fine. The vast majority of analysts at Friday's close were screaming sell but that can also be a contrarian indicator. If we are not yet in a recession, earnings are still decent and the Fed is expected to ride to the rescue at the end of January or sooner then this becomes a buying opportunity. Tax selling was anticipated and the bears got help from the jobs report. End of story. At least I hope it is the end of the story. With CES, the JPM Healthcare Conference and MacWorld over the next ten days we should see buyers reappear.

Here is my best guess at a scenario for next week. Monday becomes washout day as traders on extended holiday come back to work and barf all over their charts. Margin calls are covered and the flush ends. On Tuesday buyers appear and the bulls get a running start heading into mid-week. A battle forms when the bears try to short the rally. If support holds the bulls charge ahead and into mid January, MacWorld and the meat of the earnings cycle. If support fails after Monday we go back to bed and set the alarm for the following week and try again.

You should be short from 1490 if you followed my suggestions. I would look to exit that short around 1400 and look to buy any bounce from that level. Should 1400 fail I would look to buy 1380 as a fall back position. If 1380 breaks the market has imploded and we load up on shorts and look for something in the 1235 range for a bottom. If we do go into implosion mode then Russell 675 would be a potential bottom for fund managers to buy in the small caps. I would look to pickup some IWM calls at that level should disaster strike. Initial Nasdaq support is 2400 if Friday's close at 2500 fails. If the Dow fails at 12800 it has risk to 12000. At face value the market appears headed deeper into the red. If that face value is wrong, as it has been so many times in the past, we will be ready for it next week.

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New Plays

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Play Editor's Note: Here's the plan. Monday could still see some follow through lower as retail investors read the weekend headlines and decide to sell. This could provide a short-term wash-out and a temporary bottom. Note that I said "could" provide. However, after such a sharp sell-off all the major indices look oversold and due for a bounce. We think it will be a bounce we can trade for a few days. We're listing some bullish candidates below but most have triggers to try and catch a dip on Monday.

New Long Plays

ArthroCare - ARTC - close: 52.04 change: +1.56 stop: 48.49

Company Description:
Founded in 1993, ArthroCare Corp. is a highly innovative, multi-business medical device company that develops, manufactures and markets minimally invasive surgical products. (source: company press release or website)

Why We Like It:
It looks like ARTC has turned the corner. Shares spent two months in a bearish channel that bottomed at $45.00 in December. Now the stock has broken through resistance near $50 and its 200-dma (and the top of its channel). The stock displayed relative strength on Friday and readers may want to consider buying the stock right here at $52.00. We are suggesting that traders wait for a dip. Our suggested entry point to buy ARTC is the $50.50-49.50 zone. We will place our stop loss at $48.49 to start. Our short-term target is the $54.50-55.00 range, which looks like resistance with the 50-dma and 100-dma hovering nearby.

Picked on January xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 02/14/08 (unconfirmed)
Average Daily Volume: 1.1 million


Intel Corp. - INTC - cls: 22.67 change: -2.00 stop: 21.85

Company Description:
Intel, the world leader in silicon innovation, develops technologies, products and initiatives to continually advance how people work and live. (source: company press release or website)

Why We Like It:
Intel has just been crushed in the past few days. The stock has lost most than 17% since the late December high. We think the selling is a little overdone. We are suggesting that readers buy a dip into the $22.25-22.00 range. We'll try and limit our risk with a stop loss at $21.85. You could try and put yours closer to $22.00 if you need to. The $22.00 level looks like potential support. The August low was $22.09. Essentially this is a dead-cat bounce play and we're trying to pick the bottom. Now how many times have you heard us tell you "don't try and pick the bottom"? Hopefully you've heard that a lot. Since we are breaking the rules here this is a speculative, higher-risk play. You could always wait for signs of a bounce before initiating positions. When you look at INTC's chart you should think "that's a falling knife!" We'll try and capture a bounce back toward $24.00 and its 200-dma. Our target will be the $23.90-24.00 zone. We do not want to hold over the January 15th earnings report (still unconfirmed) and that only gives us seven trading days. If INTC does not hit our trigger on Monday we might remove the play.

Picked on January xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 01/15/08 (unconfirmed)
Average Daily Volume: 57 million


Invest.Tech.Group - ITG - cls: 47.99 chg: +1.43 stop: 45.90

Company Description:
Investment Technology Group, Inc., is a specialized agency brokerage and technology firm that partners with clients globally to provide innovative solutions spanning the entire investment process. (source: company press release or website)

Why We Like It:
Shares of ITG out performed the market on Friday partially due to an upgrade on Friday morning. However the stock was already out performing as it consolidated sideways near six-month highs. We are suggesting readers buy Friday's bounce. However, if there is a dip on Monday our preferred entry point would be a pull back toward $47.00. We're starting with a stop loss under last week's low and short-term support near $46.00. The $50 level might offer some overhead resistance but our target is the $52.00-52.50 range. We do not want to hold over the late January earnings report. FYI: The P&F chart is bullish with a $65 target.

Picked on January 06 at $47.99
Change since picked: + 0.00
Earnings Date 01/31/08 (unconfirmed)
Average Daily Volume: 606 thousand


Move Inc. - MOVE - cls: 2.26 change: +0.04 stop: 2.14

Company Description:
Move, Inc. is the leader in online real estate with more than 6.9 million (1) monthly visitors to its online network of websites. (source: company press release or website)

Why We Like It:
Has MOVE finally hit bottom? The stock has been trading sideways for months with a floor under the stock near $2.20. Shares dipped to $2.15 on Friday morning before bouncing higher and actually closing positive. I'd like to say this is an all-time low for MOVE but shares were trading under $200 in 2005 and close to 50 cents back in 2003. Aggressive traders may want to buy the stock now following Friday's bounce. We're suggesting a trigger to buy MOVE at $2.32. If triggered our target is the $2.65-2.75 range. Just because this is a low-dollar stock

Picked on January xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 02/21/08 (unconfirmed)
Average Daily Volume: 1.0 million


Ryland Group - RYL - cls: 22.16 chg: -2.12 stop: 19.49

Company Description:
With headquarters in Southern California, Ryland is one of the nations largest homebuilders and a leading mortgage-finance company. The company currently operates in 28 markets across the country and has built more than 270,000 homes and financed more than 230,000 mortgages since its founding in 1967. (source: company press release or website)

Why We Like It:
Many of you probably think we're crazy trying to go long a homebuilder. The industry still has hard times ahead of it. However, RYL is trying to form a bottom with its sideways trading between $20 and $29. Odds are good that the stock will bounce again near support at $20.00. We're suggesting readers buy the dip in the $20.25-20.00 zone. We'll try and reduce our risk with a stop loss under the November low at $19.49. If we are triggered at $20.25 our short-term target is the $23.90-24.00 range. We won't have a lot of time since we plan to exit ahead of the late January earnings report.

Picked on January xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 01/23/08 (unconfirmed)
Average Daily Volume: 1.9 million

New Short Plays

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Play Updates

Updates On Latest Picks

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Long Play Updates

Cypress Semi - CY - close: 34.64 change: -1.38 stop: 33.99

The nascent bounce in shares of CY was cut short on Friday. The stock retreated back toward support. Friday's close under the 50-dma is bearish but CY should still have support near $34.00. More aggressive traders might want to give CY more room and place their stop loss under the mid December lows near $33.50. We do expect shares to trend lower on Monday but if $34.00 holds then we can buy the rebound. We do want to make a note that the late December-early January sell-off has turned most of the technical indicators bearish. It's important to look for signs of a bounce before considering new positions. Our target is the $39.75-40.00 range. More conservative traders may want to exit near the December highs at $38.75. FYI: It doesn't say it in the company description but CY is getting a lot of interest because of its exposure to the solar energy industry.

Picked on January 03 at $36.02
Change since picked: - 1.38
Earnings Date 01/24/08 (unconfirmed)
Average Daily Volume: 5.6 million


XTO Energy - XTO - close: 53.19 chg: -0.88 stop: 51.79

Shares of XTO weathered the storm on Friday relatively well. The stock lost 1.6% albeit on above average volume. If the market continues lower on Monday we would expect a dip in XTO toward $52.50 maybe $52.00. A bounce anywhere above $52 can be used as a new entry point. More conservative traders or those who want to see more momentum can wait for another rally past $54.00. Our target is the $59.00-60.00 range.

Picked on January 03 at $54.15 *triggered
Change since picked: - 0.96
Earnings Date 02/23/08 (unconfirmed)
Average Daily Volume: 4.1 million

Short Play Updates

Fist Community Bancorp - FCBP - cls: 37.50 chg: -1.70 stop: 41.26*new*

Financial stocks continue to be under performers. Shares of FCBP sank to new three and a half year lows with Friday's 4.3% decline. The stock might see an oversold bounce and an attempt to fill the gap from Friday morning. However, readers can use a failed rally in the $39-40 zone as a new entry point for shorts. We are adjusting our stop loss to $41.26. With a $3.30 decline readers might want to consider doing some profit taking. Our first target is the $35.25-35.00 range. Our second target is the $32.00-30.00 zone. The P&F chart is bearish with a $30 target. FYI: We do not want to hold over the late January earnings report.

Picked on December 30 at $40.80
Change since picked: - 3.30
Earnings Date 01/28/08 (unconfirmed)
Average Daily Volume: 416 thousand


Corning Inc. - GLW - cls: 22.44 change: -0.69 stop: 24.21

Before the bell on Friday GLW received new analyst coverage with a "buy" rating but that did not save the stock from plunging lower. Shares actually gapped open lower at $22.91. One of our suggested entry points to short GLW was at $22.95 so we would have been triggered at the opening trade. Our target is the $21.25-21.00 range. We do not want to hold over the late January earnings report. FYI: The P&F chart is bearish with a $15.00 target. There was virtually zero short interest listed for GLW.

Picked on January 04 at $21.91 *triggered/gap down entry
Change since picked: - 0.47
Earnings Date 01/24/08 (unconfirmed)
Average Daily Volume: 11.7 million


Granite Constr. - GVA - close: 34.48 change: -1.34 stop: 38.26*new*

GVA lost another 3.7% on Friday. The stock is nearing our target in the $34.00-33.00 range. However, with a $4.25 decline readers will want to consider taking some profits off the table right here. We are adjusting our stop loss to $38.26. We are not suggesting new positions at this time. FYI: The most recent date puts short interest at 7.8% of the 34.4 million-share float.

Picked on December 16 at $38.73
Change since picked: - 4.25
Earnings Date 02/11/08 (unconfirmed)
Average Daily Volume: 1.1 million


IAC Interactive - IACI - cls: 25.29 chg: -0.64 stop: 27.26*new*

Target achieved. Continued weakness in IACI pulled shares to $25.19 before bouncing a bit. Our initial target was the $25.50-25.00 range. The stock is nearing its 2007 low at $25.00, which is where readers can expect another oversold bounce. Please note we are adjusting our stop loss to $27.26. We are not suggesting new positions at this time. The H&S pattern, if it follows through, is forecasting a target in the $22 region. Our second, more aggressive target will be the $22.50 level. The P&F chart is still bullish for now but is on the verge of a breakdown. FYI: The latest data puts short interest at about 4% of the 120 million-share float.

Picked on December 11 at $27.60
Change since picked: - 2.31
Earnings Date 02/06/08 (unconfirmed)
Average Daily Volume: 2.8 million


Medicis Pharma - MRX - close: 25.91 change: +0.15 stop: 26.81 *new*

Be careful here! MRX bucked the market trend on Friday and produced a gain. Odds are it was short covering as the stock tested support near $25.50. Readers have a big decision to make here. Friday would have been the perfect day to see a breakdown through support but it did not happen. That's one reason to consider an early exit. Next there is a huge healthcare/drug/biotech conference next week. MRX is due to present at it on Tuesday. This conference could produce enough good news to launch a rebound in the sector. That's another reason to consider an early exit. The only reason to stay short is the very long-term, very consistent bearish trend of lower highs. Investors have been consistently selling the rallies. We're going to stick with MRX for another day may be two just to see what happens but you might just want to exit now. We are adjusting our stop loss to $26.81, above the late December high. 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: - 0.17
Earnings Date 02/05/08 (unconfirmed)
Average Daily Volume: 1.2 million


Zoll Medical - ZOLL - close: 25.17 chg: -0.69 stop: 27.01

ZOLL is off to an okay start. Shares continued lower and broke the 10-dma. We're playing ZOLL as a short with the stock's failed rally at the top of its wide $22.00-27.00 trading range. We are a little concerned that next week's healthcare conference might lift anything healthcare related but for now the trend is bearish. We're suggesting shorts here. We'll suggest taking profits at $24.10 and then again at $22.25. FYI: The P&F chart is bearish with a $17 target. The most recent short interest is at 8% of the stock's small 20 million-share float. That does raise the risk of a short squeeze, especially if ZOLL trades over $27.00.

Picked on January 03 at $25.86
Change since picked: - 0.69
Earnings Date 01/24/08 (unconfirmed)
Average Daily Volume: 257 thousand

Closed Long Plays

Advent Software - ADVS - close: 51.55 change: -2.18 stop: 51.90

ADVS tried to resist but in the last two hours of trading on Friday the stock plunged lower and past the $52.00 level. Shares hit our stop loss at $51.90. The breakdown under $52 and a number of moving averages is bearish. The next level of support looks like $50.00.

Picked on December 21 at $53.83 *gap open entry
Change since picked: - 2.28
Earnings Date 01/31/08 (unconfirmed)
Average Daily Volume: 245 thousand


Fiserv - FISV - close: 53.42 change: -1.48 stop: 53.99

The market-wide sell-off hit FISV pretty hard. Shares broke down under the $54.00 level and hit our stop loss. The MACD on the daily chart just produced a new sell signal. The breakout over resistance near $56.00 proved to be a bull trap.

Picked on December 28 at $56.11 *triggered
Change since picked: - 2.69
Earnings Date 01/31/08 (unconfirmed)
Average Daily Volume: 1.5 million


Ingles Markets - IMKTA - close: 23.68 chg: -0.80 stop: 23.95

IMKTA was no exception on Friday. Shares turned lower during the bloodletting. The stock lost 3.2% and closed under its 50-dma. Shares broke the $24.00 level and hit our stop loss at $23.95. The MACD on the daily chart has produced a new sell signal.

Picked on December 23 at $25.66
Change since picked: - 1.98
Earnings Date 12/03/07 (confirmed)
Average Daily Volume: 81 thousand


Sonoco Products - SON - cls: 30.78 chg: -1.39 stop: 31.95

It's the same story, different stock. SON lost 4.3% with Friday's market meltdown. Shares blew through technical support at its 100-dma and 50-dma. The move was worse than expected with SON gapping lower at $31.80. Our suggested stop loss was at $31.95.

Picked on December 20 at $33.36
Change since picked: - 2.58
Earnings Date 02/07/08 (unconfirmed)
Average Daily Volume: 587 thousand

Closed Short Plays

Bob Evans Farms - BOBE - cls: 25.37 chg: -0.22 stop: 27.55

Target exceeded. BOBE spiked lower on Friday morning following Thursday's bearish breakdown. Our target was the $25.25-25.00 zone. We mentioned the $24.60 level as a potential target but we stuck with the $25 region. Friday's intraday low was $24.62. If the stock continues lower we would expect an oversold, multi-day bounce at the November lows.

Picked on December 16 at $29.01
Change since picked: - 3.64
Earnings Date 02/14/08 (unconfirmed)
Average Daily Volume: 467 thousand

Today's Newsletter Notes: Market Wrap by Jim Brown 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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