Option Investor

Daily Newsletter, Saturday, 01/26/2008

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Table of Contents

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

Market Wrap

Cliff Dwellers

The markets raced back to resistance on Wednesday and then stalled once the buy programs and short covering ran its course. Traders turned back into cliff dwellers on Friday as the markets edged closer to the edge of the abyss. With a Grand Canyon sized cliff potential looming traders quickly took their rebound profits off the table fearing a repeat of last weekend's global implosion.

Dow Chart - Daily

Nasdaq Chart - Daily

There were no economic reports of note on Friday and we were left to trade based on the earnings news for the week. This was a very light week on the economic calendar but next week will be exactly the opposite. The week starts out with the State of the Union where President Bush will use the pulpit to lobby for a new round of tax cuts and economic stimulus. The markets will be paying close attention to see what the last year of the Bush presidency may hold. On Tuesday we get the latest Durable Goods report and expectations are for an increase of 1.6% and that would be a sharp departure from four months of flat to significantly lower orders. Why analysts think orders picked up in December is unclear. All other indicators suggest the economy was slowing significantly in December.

On Wednesday we will get the first look at Q4-GDP and current estimates are something in the 1% range. That compares to the 4.9% reading we saw in Q3. This report will be one of the key reports for the week. Also on Wednesday the Fed will conclude their 2-day FOMC meeting and odds are still very strong they will cut rates again. Currently the Fed Funds Futures are showing a 305% chance of a 25-point cut and an 86% chance of a 50-point cut. Either would be an amazing development given their 75-point cut early last week. I believe the market is setting up for a disappointment from the Fed for reasons most people don't understand.

You may have heard of the massive $7.15 billion trading loss at French bank Societe Generale last week. A 31-year-old futures trader made massive unapproved bets on Eurostox equity futures heading into 2008. When the positions went against him he compounded the bets by increasing the positions in a "huge scheme of elaborate fictitious transactions" according to Societe Generale. As the markets continued to decline his positions were increased until the fraud was initially uncovered around Tuesday the 15th but the full scope was not known until Friday the 18th. After dissecting the positions over the weekend the bank frantically unloaded the futures on Monday and Tuesday of last week (21/22nd).

Eurostoxx 50 ETF

The actual value of the positions is still unknown but it is believed to have been in the tens of billions and according to AFX News was in excess of the $70 billion market cap of SocGen. Reportedly the trader had amassed a long position of more than 1.5 million Eurostoxx 50 futures contracts and an undisclosed number of DAX Futures. Another news source claimed the total position was worth more than $103 billion. If you are long futures you are long the market. If you sell those long futures you are putting pressure on the market and that is exactly what happened last week. Selling $100 billion in the global futures market would be a monster crush of equities. The U.S. markets were closed on Monday and that put additional pressure on the more thinly traded futures markets. Traders could not look at the U.S. markets for reassurance that the bottom was not falling out. With Societe Generale in panic mode after realizing they were massively positioned on the wrong side of the market they were dumping positions on a massive scale. They probably decided not to follow in the footsteps of Barings and try to negotiate their way out of trouble. When Barings did it in 1995 the news leaked and the market went against them nearly doubling the loss.


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The trader, Jerome Kerviel, helped them unwind the positions because the complexity astounded the bank. He then disappeared along with many of his bosses. Reportedly the trader did not profit from the scheme and was trading for the benefit of the bank. The trader vanished on Tuesday and is only speaking through his lawyer. The bosses were fired for letting it happen. SocGen has filed charges against the trader. The $7.15 billion loss ranks as the largest ever to be suffered by a bank in a fraudulent trading scheme. The next largest was the $1.38 billion loss that bankrupted Barings in 1995. Amazingly SocGen still expects to post a profit for the quarter despite the $7.15 billion loss and another $2.5 billion loss in subprime mortgages. They are going to raise $8 billion in emergency capital in an offering underwritten by JP Morgan and Morgan Stanley.

Eurostoxx 50 Index

The Fed reacted in part to the massive sell off in global equities last Mon/Tue when they cut rates by 75-points at the open of the U.S. markets on Tuesday. Since a major factor in that sell off was Societe General dumping tens of billions in equity futures and not recession fears as previously thought this suggests the Fed may not want to follow that ill-timed rate cut with another cut that may not be needed. The Fed released a statement on Friday saying they were unaware of the SocGen trades when they cut rates on Tuesday but were comfortable with their decision. What are they going to say? Oops, we screwed up and will fix it next week by raising rates. Most people are completely unaware of the impact of the Societe Generale disaster on the global equity markets and are still expecting the Fed to pull another rabbit out of their hat on Wednesday. To say the announcement will be extremely important would be an understatement.

On Thursday there are ten economic reports with the headliner the Chicago PMI with expectations for a drop from 56.4 to 52.0 and possible under 50 and into contraction territory. On Friday the two biggest reports for the week could be the Non-farm Payrolls and the ISM Index. The payroll report is expected to show a gain of 57,000 jobs in January compared to only 18,000 in December. There are whisper numbers suggesting we could even see a negative number. If this jobs number is going to be negative it could push the Fed to act again on Wednesday. They will have an advance look and will be taking the payrolls into account when making their decision.

The ISM Index for January is expected to decline to 47.0 from 47.7 in December. That drop to 47.7 was the sixth consecutive month of decline and the first time that has happened since the decline into the 2001 recession. The 47.7 level is also the lowest reading since the 2001 recession. The ISM is probably our best indicator of the U.S. economy on a current basis and the Fed will also have this data before their Wednesday decision. If the economy is as bad as people claim we could see a number as low as 45 and clear recession territory.

Economic Calendar

Last week was a big week for earnings but next week will be even bigger. We can't match the star power of Intel, Microsoft or Apple but there are some big names led by YHOO, AMZN and Google from the Internet sector and OXY, CVX and XOM from the energy sector. Of particular note are the MBI earnings on Thursday. There are considerable fears of another rating downgrade and a cut to less than AAA could put them out of business. If their credit rating falls the rates on tens of billions in bonds they insured will rocket higher and force many firms to take additional write downs. This is a key earnings event for the week.

Amazon estimates are weakening on fears that they could warn for Q2 due to slowing consumer sales. Yahoo has already disclosed they are feeling the pain and will be cutting employees to reduce costs. Google has been sinking on fears they will spend billions on the discarded broadcast spectrums that the government is putting up for sale. If they win the bids for billions they will have to spend billions more putting a product on those airwaves. Eventually earnings will rise but fears of over aggressive goals have been depressing the stock price.

So far with one-third of the S&P already reported the earnings for Q4 have fallen -19% over the same period in 2006. It is primarily due to the carnage in the banking industry and the sudden explosion of subprime problems. Many of the tech companies that reported last week beat estimates and guided higher. That has not helped their stock prices. Microsoft reported sales that soared +81% over the comparison quarter and after opening 5% higher at $35 declined to close with a loss at $32.94. Apple reported strong earnings and was promptly knocked for a $30 loss on weak guidance. The good and the bad still lost ground. More than 633 companies will report next week and by far the busiest week of the quarter.

Earnings Calendar - Selected Companies

Gold prices hit a new record high at $924.20 after news broke that power outages in South Africa had shutdown some of the countries mines. Rolling power outages have been hitting various parts of the country over the past few weeks with power going out for up to five hours at a time as demand exceeds supply. AngloGold Ashanti (AU), Harmony Gold (HMY) and Gold Fields (GV) have all announced shutdowns or curtailment of underground mining and some above ground processing. Mining and smelting requires a lot of continuous power and they can't afford for the power to keep dropping unexpectedly. For those miners underground it is a major hazard knocking out lights and ventilation. The problem is not expected to be solved for up to 3-years when new plants come online. It is worse this month because of recent heavy rains. The coal used for power is low quality and when wet it produces even less heat and therefore less electricity.

February Gold Chart - Daily

Elsewhere on the energy front crude rebounded +1.30 to $91 and well off the panic lows of $85.42 we saw last Monday. Crude prices were depressed by the implosion in the European equity markets and the unwinding of the SocGen trades. When the liquidity lake is drained all the boats settle to the bottom. Next Friday OPEC meets again to discuss production levels. Short of somebody pointing a nuke at Saudi Arabia and blackmailing them to produce more oil there will not be a production increase. The drop to $85 last week sealed that fate and two weeks of inventory gains in the U.S. for 6.6 million barrels was another nail in the coffin. There will be a lot of conciliatory sound bites from the meeting but OPEC will not likely raise production rates.

I believe the markets rallied this week mainly on the possibility for a bailout of the monoline bond insurers Ambac (ABK), MBIA (MBI) and ACA Capital (ACA). Ambac rallied +67% for the week to close Friday at $11.31. That is impressive but it was well off the $16.45 high for the week. That was a +143% rebound off the prior Thursday's low of $6.76. The rebound was on news that Wilbur Ross a billionaire investor might take a run at buying them. He specializes in distressed companies but before the week was out the rumor was quashed by the Financial Times saying he would rather start a new company than take over the many problems of Ambac. Ambac's problems increased on Friday with the filing of multiple suits against them with one being a class action suit. Furthermore Ambac said it will no longer disclose any future filings of additional suits. That is not a good sign.

Ambac Chart - 45 min

I reported on this last Sunday and despite the +100% bounce on these stocks the situation has not changed. Ambac has insured $556 billion in debt from 137,000 customers. MBIA insured $31 billion including $8.14 billion in CDOs that were made up of other CDOs. These have nearly a zero chance of paying off or being able to claim on the insurance. ACA Capital has insured $69 billion and after taking monster losses only has about $425 million in capital left and has already been placed into receivership by the State of Maryland. That is a total of $656 billion in insured bonds that will eventually be revalued with monster write-downs. Banks and brokers have already written off nearly $100 billion and most analysts are now talking about another $200 million to go over the next few quarters. If you expand the scope to the bonds, CDOs and credit default swaps (a $45 trillion market) held by funds, hedge funds, banks, institutions and sovereign funds that could add up to another $2 trillion at risk.

Since they will all end with some value the risk is only in the short-term mark-to-market losses but many will require significant recapitalization. New York's Insurance Superintendent is trying to arrange a bank led bailout of those three firms rather than suffer the trillion dollar consequences of all three going under. He is having trouble since the main banks are all having capital problems of their own. Should the bond insurers fail, which is extremely likely, it would cast a pall over the entire sector and cause untold damage to the financial system in the process. Barclays said this week the stink is spreading to formerly pristine firms and even Financial Guaranty Insurance Company is likely to be downgraded. They insured $315 billion in bonds. Barclays also said banks will have to raise another $143 billion in capital to offset further write-downs as bond insurers begin to fail.

The key here is the downgrades and their impact on the banking system. John Mauldin said banks will suffer $22 billion in write-downs for every notch of credit downgrade on the insurers. ACA is already at junk (CCC) and Ambac and MBIA are just starting to crack below the investment grade rating of AAA on their way to junk status. Everyone in the business agrees that the three firms are going to fail. It is just a matter of time. Regulators, banking officials and some elected officials are pleading with the rating agencies to delay any downgrade on the group to give them time to sculpt a bailout plan rather than have the sector crumble to dust. So far the agencies have appeared willing to wait but time is growing short. A failure to downgrade when justified would subject the rating agencies to legal attack. Another domino fell on Thursday when Security Capital (SCA) was cut from AAA to A by Fitch. Traders immediately reported that they were unable to sell debt insured by Security Capital.

Citigroup said last week that it reserved another $900 million to cover exposure to bond insurers. The Louisville Arena Authority said it was going to drop Ambac as an insurer for their $340 million in bonds now that Ambac has lost its AAA rating. They had previously committed to pay $11.4 million to Ambac for insurance for those bonds. As more companies flee the insurer the company will have less money to pay claims and continue operations. Any rating below AAA effectively prevents the company from writing new business. ACA is already CCC, SCA was just cut to A, Ambac was cut to AA by Fitch. Ambac premiums written fell by 78% in Q4 as customers fled to more stable alternatives.

Bond Rating Scale

The problem for the markets was the news on Friday that no bailout is coming. Hopes were high for a Wilbur Ross takeover or a bank consortium bailout. Those options died on the vine and we can expect those stocks to return to $5 very quickly. The major financial stocks that rallied on hope last week will decline with them as that hope fades. This is going to be a major problem long-term and with financials the largest sector in the market they will cause a lot of damage.

The Dow fell to 11634 on Wednesday and repeated that decline with a touch of 11645 on Wednesday. The rebound was triggered by a monster buy program and some serious short covering on the potential bail out of the bond insurers. Once that completed the Dow was at 12325 and holding. It held for nearly two days at that 12325 level before the bailout hopes began to fade. Friday closed with a -171 point loss. We have already had more triple digit days in 2008 than we had in the first 3-months of 2007. The volatility is huge with the VIX closing just below 30 on Friday. Unfortunately I believe the volatility is going to continue.

I believe we have risk due to the continuing financial problem, economic numbers due out next week and a possible disappointment by the Fed. I already discussed the problem with the banks/insurers. The economics could be ugly with challenges in the Durable Goods, GDP, PMI, Jobs and the ISM Index. The potential for recessionary news is very high. The Fed, whether they admit it or not, was fooled by the SocGen futures dumping into a history making 75-point inter-meeting rate cut. Now they are faced with either admitting it (zero chance) or trying to bluff their way through with only a 25-point cut on Wednesday. If they don't cut at all with the market expecting 50-points it would be a disaster. They can't take a pass because that would be admitting they were fooled and caved in to market pressures. That means they have to cut and 25-points is the minimum they can get by with. The market will not be happy with 25-points.

There is another scenario that should be mentioned. If the Fed does cut 50-points even after realizing they were fooled by the SocGen trades then there is an even bigger problem ahead. It will suggest the Fed knows something we don't and whatever it is could be dangerous. It would be completely ignoring the inflation monster that they were so careful to guard against just a short time ago. It could mean the economy was even worse off than we thought.

OR, it could mean the Fed is aware of the mounting problems in the bond sector and is trying to head off a calamity in advance. The best thing the Fed could do for the economy today is to bring back housing inflation. By cutting the rates in half they could rekindle real estate demand within a couple months. No big bailout, no billions in support for mortgage companies, just quickly cut rates to the bone. Once the bottom appears to be behind us in the housing sector and with Fed rates around 2.0% those wanting to make a purchase would be racing to make a deal. Home inventories would shrink substantially by summer. This is also an ideal way to head off the 1.2 million foreclosures expected in 2008. Rekindle the housing bubble and suddenly those underwater could escape economic ruin with the help of a rush of buyers. Mortgage backed CDOs would no longer be plunging in value. Mortgage companies would be recovering and new loans being written. Add in the proposed economic stimulus package and we could be back to 5% GDP by year-end. The Fed could then pull back on the reins a little slower and let the inflation heat bleed off the economy over time instead of the implode track we are on today. The Fed wanted to deflate the housing bubble but they did not expect the entire global financial system to crash in the process. The Fed should see the beauty of a quick re-injection of liquidity into the housing sector but then again they are the Fed. They are always behind the curve and this crisis is no different.

For next week I think the odds are good we are going to see the indexes return to some lower levels. I know some analysts are expecting a retest of the lows at 11640 but my crystal ball does not see that clearly. Based strictly on the charts we still have risk to 10700 but that won't happen next week. I do believe we are going to see a couple down days with high volatility but there are far too events impacting sentiment to just roll over and drop back to 11640 without another SocGen futures program. That was a once in a decade type of event and I think it did flush out a lot of weak holders. Unfortunately the Fed made the surprise rate announcement on Tuesday morning before the U.S. markets really had a chance to duplicate the overseas losses. Many traders ready to pull the exit trigger heard the Fed news and decided to hold on. That limited the damage even though we had another margin call plunge on Wednesday morning.

S&P-500 Chart - Daily

The index I am going to use this weekend is the S&P-500. The S&P closed at 1330 on Friday after plunging to 1271 on Wednesday and rebounding to 1368 on Friday. That 100-point range is probably going to be the range for next week as well. 1350 is currently initial resistance and 1330 initial support. That gives us our trigger points. I would short a failure at 1330 and go long on a breakout over 1350. If we do get a dip back to the 1270 range I would reverse to a long around 1275. I used a 5-point cushion there to avoid the rush of traders wanting to buy a purely technical dip to 1271 and jumping the gun. I spent a long time trying to analyze the known events on the calendar and the combination of events and decipher their potential impact on the markets. The only one that fit the scenario for a serious market drop was the Fed. The rest are just additional chapters to a book where we already know the ending. The Fed is the wild card that could really sour the markets. That makes Wednesday D-day or drop-day if it is really going to happen. If this is really a bear market and last week's bounce just a bear market rally then the reasons for a continued drop are meaningless. It will happen regardless of the news. There will be several short squeezes along the way and every one will be assigned an excuse in the press. The key for me is to simply trade what the market gives us. I know the impulse is to buy Google or short Amazon ahead of their earnings but the key is to always trade in the direction of the market if a direction is present. If we are in a consolidation phase then trade anything you want. Otherwise turn (trade) in the direction of the skid. You always have three choices. Stay on the sidelines, trade what you want or trade what is right. The decision you make determines your long-term profitability. For me that means enter shorts of your choice on a failure of SPX 1330, enter longs over 1350 and buy a dip to 1275. All the rest is just noise.

New Plays

Most Recent Plays

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New Plays
Long Plays
Short Plays

Play Editor's Note: The market's oversold bounce failed right at resistance and most of the indices and stocks I examined this weekend have already produced a short-term bearish reversal. I was honestly expecting the rally to last a little longer before rolling over but we can only play what the market gives us. There is a growing chorus of analysts suggesting that we will see the market retest and potentially break last week's low. However, with so many people still bearish if the market can breakout over Friday's resistance levels then we could see a huge short squeeze. Monitor your stop losses carefully. We are adding a number of new bearish candidates. Don't try to play them all. Just pick the ones you like.

FYI: Additional stocks that look like bearish candidates are...OMX, PWR, WYE, FDO, LANC, and LPNT.

New Long Plays

Schering-Plough - SGP - cls: 19.02 change: -1.15 stop: 17.39

Company Description:
Schering-Plough is an innovation-driven, science-centered global health care company. Through its own biopharmaceutical research and collaborations with partners, Schering-Plough creates therapies that help save and improve lives around the world. (source: company press release or website)

Why We Like It:
Shares of SGP are just getting killed over concerns that their cholesterol drug Vytorin may not be as effective as previously thought. The stock has fallen about 37% in just the last two weeks. Many analysts believe the selling has been overdone. Friday's move looks like a selling climax and we want to capture a chunk of any oversold bounce. We're suggesting long positions here at current levels. Our target is the $22.00-22.50 range.

Picked on January 27 at $19.02
Change since picked: + 0.00
Earnings Date 02/12/08 (confirmed)
Average Daily Volume: 19.2 million

New Short Plays

CBRL Group - CBRL - cls: 29.26 change: -0.21 stop: 30.35

Company Description:
Headquartered in Lebanon, Tennessee, CBRL Group, Inc. presently operates 570 Cracker Barrel Old Country Store restaurants and gift shops located in 41 states. (source: company press release or website)

Why We Like It:
Consumer-related stocks have been killed on concerns that the economy is slowing down and the consumer is overburdened and will spend less. This has definitely weighed on the restaurant stocks. When the market finally bounced CBRL shot higher and the bounce looks overdone. CBRL stalled right at resistance near $30.00. We are suggesting shorts here at current levels although more conservative traders could wait for a move under $28.50 first. There is potential support near $26.00 but our target is the 25.25-25.00 range. Warning: the latest data put short interest at 20% of the stock's small 22.2 million-share float. That raises the risk of a short squeeze.

Picked on January 27 at $29.26
Change since picked: + 0.00
Earnings Date 02/20/08 (unconfirmed)
Average Daily Volume: 674 thousand


Chico's FAS - CHS - close: 8.40 change: -0.56 stop: 9.21

Company Description:
The Company is a specialty retailer of private branded, sophisticated, casual-to-dressy clothing, intimates, complementary accessories, and other non-clothing gift items. The Company operates 1,037 women's specialty stores. (source: company press release or website)

Why We Like It:
It's been a long, slow, painful death for CHS shareholders. The trend of lower highs as investors sell the rallies stretches for months. While the big volume on last week's bounce does suggest that CHS may have found a bottom we suspect that the stock will retest the lows again. Thursday-Friday last week saw CHS fail near $9.10 so we're putting our stop loss at $9.21. There appears to be some minor support near $7.80 but we're aiming for a pull back into the $7.10-7.00 zone at which point it might be time to switch sides and go long. We'll have to wait and see. FYI: The latest data put short interest at 7.7% of the stock's 175 million-share float.

Picked on January 27 at $ 8.40
Change since picked: + 0.00
Earnings Date 03/03/08 (unconfirmed)
Average Daily Volume: 3.3 million


Fastenal Co. - FAST - close: 39.07 chg: -1.13 stop: 41.31

Company Description:
Fastenal sells different types of industrial and construction supplies. As of November 30, 2007, Fastenal operated 2,154 stores in the United States (all 50 states), Canada (all provinces), Puerto Rico (multiple), Mexico (14 states), Singapore (one location), Netherlands (one location), and China (one location) selling to the general public. (source: company press release or website)

Why We Like It:
FAST delivered a good earnings report last week, which helped power the rebound. Now the rally has run out of steam right at resistance and shares just produced a bearish reversal pattern. The stock could easily revisit or surpass its lows so we're setting two targets. Our first target is the $35.50-35.00 zone. Our second, more aggressive target is the $33.00-32.50 range. FYI: Traders should note that the most recent data lists short interest at 7.2% of FAST's 124 million-share float.

Picked on January 27 at $39.07
Change since picked: + 0.00
Earnings Date 01/22/08 (confirmed)
Average Daily Volume: 1.7 million


Hasbro Inc. - HAS - close: 23.95 change: -0.76 stop: 25.11

Company Description:
Hasbro (NYSE: HAS) is a worldwide leader in childrens and family leisure time entertainment products and services, including the design, manufacture and marketing of games and toys ranging from traditional to high-tech. (source: company press release or website)

Why We Like It:
HAS is another stock suffering from fears of a slowdown in the economy and the consumer. The recent bounce stalled right at resistance and appears to be rolling over again. We are suggesting shorts at current levels. The recent low was $21.57 but we see the $22.00 level as support. Our target is $22.10-22.00. FYI: Short interest is at 5.3% of the stock's 131.1 million-share float.

Picked on January 27 at $23.95
Change since picked: + 0.00
Earnings Date 02/11/08 (confirmed)
Average Daily Volume: 1.9 million


Starwood Hotels - HOT - close: 42.53 change: -1.66 stop: 45.05

Company Description:
Starwood Hotels & Resorts Worldwide, Inc. is one of the leading hotel and leisure companies in the world with approximately 890 properties in more than 100 countries and 145,000 employees at its owned and managed properties. (source: company press release or website)

Why We Like It:
HOT has done a better job than most at building a bottom over the past couple of weeks and we suspect that shares will retest it soon. This is going to be a very short-term play. HOT is due to report earnings on Thursday morning, January 31st, before the opening bell. We do not want to hold over the event so we will plan to exit on Wednesday at the closing bell unless shares hit our stop or target first. We are aiming for a pull back into the $39.00-38.50 zone at which point it may be time to switch to bullish positions. FYI: Short interest is listed at just 1.9% of the stock's 197.8 million-share float.

Picked on January 27 at $42.53
Change since picked: + 0.00
Earnings Date 01/31/08 (confirmed)
Average Daily Volume: 3.1 million


Korn/Ferry Intl. - KFY - close: 15.13 change: -0.38 stop: 16.05

Company Description:
Korn/Ferry International, with more than 80 offices in 39 countries, is a premier global provider of talent management solutions. Based in Los Angeles, the firm delivers an array of solutions that help clients to identify, deploy, develop, retain and reward their talent. (source: company press release or website)

Why We Like It:
January's market weakness pushed KFY through significant support near $16.00. Now the rebound has stalled as support becomes new resistance. We think KFY could retest its lows and potential hit new lows. We're suggesting shorts here at current levels. Our first target is the $13.25-13.00 range. Our second, more aggressive target is the $12.25-12.00 zone. The Point & Figure chart points to a $6.50 target. FYI: It is important to note that KFY has above average short interest at 11.2% of the stock's 46 million-share float.

Picked on January 27 at $15.13
Change since picked: + 0.00
Earnings Date 03/06/08 (unconfirmed)
Average Daily Volume: 701 thousand


Limited Brands - LTD - close: 17.07 chg: -0.44 stop: 18.05

Company Description:
Victoria's Secret is the leading specialty retailer of lingerie and beauty products, dominating its world with modern, fashion-inspired collections, prestige fragrances and cosmetics, celebrated supermodels and world-famous runway shows. (source: company press release or website)

Why We Like It:
The markets are still worried about a slowdown in the consumer so retailers like LTD will struggle. The stock's oversold bounce has stalled right at resistance near $18.00 and its 50-dma. We are looking for a retest of the recent lows. Our target is the $15.25-15.00 zone. FYI: The latest data puts short interest at 7.7% of the stock's 302 million-share float.

Picked on January 27 at $17.07
Change since picked: + 0.00
Earnings Date 02/27/08 (unconfirmed)
Average Daily Volume: 5.9 million


Macy's - M - close: 24.95 chg: -0.43 stop: 26.05

Company Description:
Macy's, the largest retail brand of Macys, Inc., delivers fashion and affordable luxury to customers at more than 800 locations in 45 states, the District of Columbia, Puerto Rico and Guam. (source: company press release or website)

Why We Like It:
Macy's is another retailer that has seen a sharp recovery from its lows. The rally has stalled under resistance near $26.00. We want to capture a drop back toward the $22.00 region. Aggressive traders could aim for the January lows near $21.00. FYI: The most recent data puts short interest at 3% of the 431 million-share float.

Picked on January 27 at $24.95
Change since picked: + 0.00
Earnings Date 02/26/08 (unconfirmed)
Average Daily Volume: 7.8 million


NII Holdings - NIHD - close: 39.46 chg: -2.45 stop: 43.01

Company Description:
NII Holdings, Inc., a publicly held company based in Reston, Va., is a leading provider of mobile communications for business customers in Latin America. NII Holdings, Inc. has operations in Argentina, Brazil, Mexico, Peru and Chile. (source: company press release or website)

Why We Like It:
There doesn't appear to be any end in sight for the selling in NIHD. The oversold bounce failed right at resistance and shares have already slipped under round-number support at $40.00. We are listing two targets. Our first target is $35.50-35.00. Our second, more aggressive target is the $32.00-30.00 zone. The Point & figure chart suggests a $19 target. FYI: The most recent data lists short interest at 4.1% of the 171 million-share float.

Picked on January 27 at $39.46
Change since picked: + 0.00
Earnings Date 02/28/08 (unconfirmed)
Average Daily Volume: 3.6 million

Play Updates

Updates On Latest Picks

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Long Play Updates

Cepheid - CPHD - close: 30.80 change: -1.43 stop: 27.45

CPHD continues to be a relative strength leader but shares did hit some profit taking on Friday with a 4.4% decline. The action over the last two sessions is starting to look like a top but so far the bullish trend remains intact. The market's rebound appears to have ended abruptly so we would hesitate to open new bullish plays in this environment. However, we would still consider buying a dip in CPHD. Currently our plan is to buy a pull back into the $29.50-28.50 zone. More conservative trades may want to tighten their stops toward $28.00. We're leaving our stop loss at $27.45. Just be sure to wait for signs of a bounce before opening positions. We're going to list two targets. Our first target is the $32.00 mark. Our second target is the $34.00-35.00 range.

Picked on January xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 02/21/08 (unconfirmed)
Average Daily Volume: 1.2 million


Excel Maritime - EXM - cls: 31.84 change: -0.48 stop: 29.39

Our enthusiasm to open bullish positions in EXM has cooled somewhat following the market turnaround on Friday. Given our expectation for the market to retest the recent lows we would strongly hesitate to open new positions here. We are going to keep the play on the newsletter but we're adjusting our suggested entry point and stop loss. Our new entry point to buy the dip in EXM is the $30.25-30.00 zone. Our stop loss will move down a few cents to $29.39. We're reducing our risk and hopefully we can slip in on a bounce near round-number support. Wait for that bounce! Our short-term target will be the $34.75-35.00 range. More aggressive traders could aim for the $37-40 region.

Picked on January xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 03/13/08 (unconfirmed)
Average Daily Volume: 1.3 million

Short Play Updates

Avery Dennison - AVY - close: 46.14 change: +0.22 stop: 48.55*new*

Shares of AVY spent Friday's session churning sideways. The stock remains oversold and due for a bigger bounce so we're not suggesting new short positions. Please note that we are adjusting our stop loss to $48.55. The stock has already hit our early target in the $45.15-45.00 zone. Readers should also note that we are adjusting our aggressive target to $44.15-44.00 instead of the $42.50 mark. The P&F chart is bearish with a triple-bottom breakdown sell signal and a $40 target. FYI: The most recent short interest was listed at 3.7% of the 97.3 million-share float.

Picked on January 13 at $48.50
Change since picked: - 2.36
Earnings Date 01/29/08 (confirmed)
Average Daily Volume: 1.0 million

Closed Long Plays

Intel Corp. - INTC - cls: 20.00 change: -0.69 stop: 17.95

It's time to go. The Microsoft earnings gave tech stocks a pop on Friday morning but it quickly faded. Shares of INTC rose to $21.28 and then crashed back toward round-number support at $20.00. The move has painted a bearish reversal in the form of a bearish engulfing candlestick pattern. We are suggesting an early exit immediately. INTC has already surpassed our early target of $20.00 and gave us a decent shot at our more aggressive target in the $21.75-22.00 zone.

Picked on January 22 at $18.20 *triggered /exit 20.00
Change since picked: + 1.80
Earnings Date 01/15/08 (confirmed)
Average Daily Volume: 70 million


Merrill Lynch - MER - cls: 54.96 change: -2.49 stop: 53.75

This was a tough decision. It really does look like MER has built a decent bottom over the last couple of weeks. Unfortunately, the broader market is showing too much weakness and we're expecting a retest of the lows. We're suggesting an early exit in MER now. Look for another bounce near $50.00 or a new breakout over $60.00 as potential bullish entry points.

Picked on January 23 at $58.05
Change since picked: - 3.09
Earnings Date 04/17/08 (unconfirmed)
Average Daily Volume: 22.2 million


Semiconductor SPDR - XSD - cls: 39.30 change: -1.27 stop: 38.45

As traders we strive to be nimble and respond to what the market tells us. Friday's action in XSD says run! We are hitting the emergency exit button. XSD spiked higher on Friday morning and hit $41.29 but the ETF quickly reversed. The equity produced a big bearish engulfing candlestick pattern. We were suggesting an entry point to buy it at $39.50 so the play is open but we want to close the play and cut our losses early. Look for another bounce in the $37.50 region before considering new bullish positions.

Picked on January 25 at $39.50 *triggered /exit 39.30
Change since picked: - 0.20
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume: 97 thousand

Closed Short Plays


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


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