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Daily Newsletter, Monday, 02/11/2008

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Table of Contents

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

Market Wrap

AIG Plunges; Dow Industrials To Get New Look

Shares of Dow component and insurance giant American Intl. Group (NYSE:AIG) $44.74 -11.72% plunged to a new multi-year low Monday after the company's auditor PricewaterhouseCoopers LLC said AIG had a material weakness in its internal control over financial reporting and oversight related to the valuation of a derivatives portfolio owned by AIG Financial Products Corp., a unit of AIG.

While AIG disagreed with its auditor's assessment of oversight, the company acknowledged that its credit derivatives portfolio lost $4.88 billion in gross market value in October and November, more than four times the $1.15 billion executives had estimated in December.

The problems are centered on collateralized debt obligations (CDOs), complex securities that are partly backed by mortgage securities. As house prices have fallen and delinquencies and foreclosures risen, the market value on these securities have dropped sharply in recent months.

The news rocked AIG shareholders' confidence and had Fitch Ratings saying it may cut AIG's AA ratings in light of the disclosure.

AIG's sharp decline had the S&P Insurance Index (IUX.X) 303.95 -5.32% breaking below its January 22nd relative low of 311.43; also closing at a new multi-year low today.

Today's gains for the majors, especially the Dow Industrials, S&P 100, S&P 500 and even the Russell 2000 (RUT.X) which all have enough "financial" weighting is rather impressive considering today's news out of AIG.

The NASDAQ-100 (NDX.X) 1,793.09 +1.09% and its tracker QQQQ $44.07 +1.07% where neither have a bank or any financial exposure lead today's major market averages, but face some near-term resistance that traders and investors will want to monitor closely.

I will discuss these technicals when compared to the DIA, SPY and iShares Russell 2000 (IWM) $69.70 +0.04% which tracks the Russell 2000 Index (RUT.X) 699.75 +0.12%.

The Dow Industrials (INDU) darted lower at the open, but it wasn't all due to today's revelations out of AIG.

Dow Jones said it was going to "shake up" the Dow components for the first time in four years and would add Bank of America (NYSE:BAC) $42.14 -0.04% and Chevron (NYSE:CVX) $80.43 +1.47% on February 19. Dow Jones said Altria (NYSE:MO) $72.42 -0.91% and Honeywell (NYSE:HON) $57.64 -0.32% will be removed.

Dow Industrials Components - Price Weighted Index

Chevron's (CVX) addition will certainly give much greater "energy" weighting to the Dow Industrials, which up to this point had representation only from Exxon Mobil (XOM) $82.22 +1.84%.

Altria's (MO) being removed may not be a total shock as there remains speculation that the company will spinoff several units this year to try and unlock shareholder value. As such, it might make sense for that the company be taken out of the Dow Industrials.

Some questioned the addition of Bank of America (BAC) as AIG, JPM and C already had three "financial" related components.

Honeywell (HON) may indeed have had some overlap with fellow conglomerates United Tech (NYSE:UTX) $71.57 +0.30% and General Electric (NYSE:GE) $34.01 +0.50%.

One point that would be more specific to shorter-term traders after Feb 19 in my opinion is that on any given day, the strength, or weakness in the energy sector will likely see greater impact on the INDU/DIA and Dow futures than has been seen in the past as XOM and CVX will represent the #2 and #4 most-heavily weighted components in the PRICE-weighted index.

Closing U.S. Market Watch - 02/11/08 Close

Energy prices continued their torrid rebound from Thursday's close, driven in large part I think after Thursday evenings news that Exxon Mobil (NYSE:XOM) secured a court order to freeze more than $12 billion in worldwide assets of Venezuela's state-owned oil company, as XOM prepares to dispute the nationalization of a multi-billion dollar oil project in Venezuela.

Oil prices found buyers on that news and strength holds as traders fear that Hugo Chavez may cut off production supply to the U.S.

While there was some speculation that Chavez may not make such a bold move as to cut off exports to the U.S., in tonight's extended session I noted that Standard & Poors said the recent freezing of Venezuelan assets had the ratings firm saying its ratings of the state-owned oil company PDVSA and Venezuela were unaffected by the US Court ruling.

This inaction by S&P could have Chavez gaining some confidence to indeed cut off supplies to the U.S. and have oil prices firm-to-higher.

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March Crude Oil (cl08h) settled up $1.82, or 1.98% at $93.59 after Friday's 4.15% gain. March Unleaded (rb08h) settled higher by $0.390, or 1.65% at $2.3962 after Friday's 3.94% advance.

Last week's 200 Bcf draw and robust winter demand finds March Nat.Gas (ng08h) up $0.23, or +2.77%. Nat. Gas now sports a six session winning streak and settled at its highest level since 11/01/07 $8.804. It is also the first settlement above a still trending lower 200-day SMA ($8.363) since this commodity closed below this longer-term SMA on 6/21/2007.

There were no major US economic announcement scheduled for today, but a stronger-than-expected January PPI out of Great Britain had the pound firming (+0.26% at 1.9509) while precious metals found gains. Great Britain's PPI m/m rose 2.6%, which was much higher than the 1.0% forecast and showed acceleration from December's m/m gain of +1.4%.

January's PPI gave pause to some currency trader's that the Bank of England would cut rates rapidly.

London's FTSE ($FTSE) - 50-point box

Not unlike some of the major U.S. equity indexes, the FTSE-100 staged a nice bounce after plunging from the 6,250 level, but unlike the major U.S. equity indices, the FTSE slid 1.13% today and a trade at 5,650 would be a break of near-term support.

PnF chartists have noted many stocks and indexes that gave a reversing higher PnF buy signal, but in the downward trend, it isn't unusual to see. What's important to monitor is a quick reversal and NO support (break at 5,650). If the break comes we must question a "bottom" and immediately assess downside risk to the recent lows.

Global Equity Benchmarks; Currencies; Oil and Gold

It has been awhile since I showed my major global equity index table with Monday-to-Monday closes as well as the U.S. Dollar Index (DXY) which is most heavily weighted with the euro, the Japanese yen and British pound.

While recent economic data does suggest slowing of the U.S. economy, Asian and European bourses have been hardest hit. China's economic data still shows more robust growth, but the uncertainty surrounding the U.S. economy certainly has taken its toll.

European bourses are going to be closely monitored here as Germany's DAX ($DAX) taps 6,700 support for a fourth time and now probes its longer-term bullish support trend.

Germany's DAX ($DAX) - 50-point box

Buyers continue to stand their ground above 6,650 and this is deemed VERY important support. It's like the Karate Kid smashing
his hand on a cinder block repeatedly. Either buyers give in and the DAX crumbles further lower, or the Karate Kid breaks his hand and gives up.

It would have to be my opinion that U.S. equity market participants don't want to see these support levels violated to the downside, otherwise we could see U.S. equity market participants canceling some bids at key support levels.

You can view other FREE PnF chart, or bar charts if you like of Japan's Nikkei-225 ($NIKK), Hong Kong's Hang Seng ($HSI), Shanghai's ($SSEC), and France's CAC-40 ($CAC) at StockCharts.com.

S&P 500 Index (SPX.X) - 20-point box

After giving to consecutive double top buy signals at 1,370 and another at 1,390, Friday's trade at 1,330 generated a reversing lower "sell signal" at 1,330.

While PnF chartists do NOT utilize Professor Davis' pattern and probabilities study for the "bullish signal reversed," pattern like the SPX gave with the trade at 1,330, this supply (O) and demand (X) dynamic must be understood.

What this pattern depicts by the series of higher highs and higher lows and then the "sell signal" is representative of buying once again being exhausted or very tentative at best.

S&P Depository Receipts (SPY) - Daily Intervals

While the PnF chart of the SPX suggests weakness coming, the bar chart shown in last Monday's wrap had the SPY slipping back under its 38.2% conventional retracement. Tuesday's action saw a gap below the MONTHLY Pivot of $136.79 and the decline to 19.1% conventional at $132.02 and Quarterly S2 (support level 2) of $131.27 still holds buyers. A break much below there would have to be viewed further bearish.

I would also make a quick note that both the DIA and RUT.X/IWM reside above their conventional 19.1% retracement. This is SIMILARITY to the SPY.

However, the QQQQ gives us the "divergence" we look for and want to monitor. The Qs tried their darndest to recapture their conventional 19.1% and for now, this is the "tail" of the snake, or the "tail" of the inchworm. If it can gain strength and "dig in" above $44.20, that shouldn't hurt the INDU/DIA, SPX/SPY, RUT.X/IWM.

NASDAQ-100 Trust (QQQQ) - Daily Intervals

Whether its the Quarterly Pivot levels, the MONTHLY Pivot levels, or conventional use of retracement, the QQQQ lead weakness. The QQQQ is often seen as an index that mounts gains when buyers get more aggressive with their buying, and when weakness comes, it tends to be a drag on bullish enthusiasm.

Heavyweight Apple Computer (NASDAQ:AAPL) $129.45 +3.16% did reclaim its 1/23/08 and 1/28/08 lows of $126.14 today. That would be equivalent to the QQQQ's 0% retracement of $41.61 above.

Citigroup's Richard Gardner added the stock to his "Top Picks Live" list saying the 37% decline since the beginning of the year through Friday now fully reflects reductions in Q1 build plans for the iPod and the iPhone.

Just after the close, Research in Motion (NASDAQ:RIMM) $94.47 +5.30% shed $1.00 to $93.37 in the extended session after saying its US Blackberry users experienced "critical outages," which cut of wireless e-mail for everyone.

AT&T (NYSE:T) $36.87 +1.37% said the problems were not network related, but RIMM specific.

Shares of RIMM did close above their conventional 19.1% retracement of $91.07.

Additional news out of NASDAQ-100 heavyweights had Microsoft (NASDAQ:MSFT) $28.21 -1.22% saying it felt its recent bid for Yahoo! Inc. (NASDAQ:YHOO) $29.87 +2.29% "fair." Over the weekend, Yahoo said MSFT's unsolicited bid of $41.6 billion was too low.
 

New Plays

Most Recent Plays

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New Plays
Long Plays
Short Plays
None None

New Long Plays

None today.
 

New Short Plays

None today.
 

Play Updates

Updates On Latest Picks

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Long Play Updates

Acuity Brands - AYI - cls: 45.38 chg: +0.66 stop: 43.49

AYI bounced from support near its 100-dma for the third day in a row. This looks like a new bullish entry point if the market can continue to rebound. Our target is the $49.50-50.00 zone. The Point & Figure chart looks very bullish with a $62 target and a breakout over resistance.


Picked on February 5 at $45.50 *triggered
Change since picked: - 0.12
Earnings Date 04/03/08 (unconfirmed)
Average Daily Volume: 857 thousand

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Expedia - EXPE - close: 24.74 chg: -0.37 stop; 23.39

After three days of gains EXPE looked ripe for some profit taking and shares dipped to 24.23 before bouncing back this afternoon. We were able to catch the low with a suggested entry point in the $24.25-24.00 zone. Broken resistance near $24.00 should be new support. Our target will be the $27.00-27.50 zone.

Picked on February 11 at $24.25 *triggered
Change since picked: + 0.49
Earnings Date 02/07/08 (confirmed)
Average Daily Volume: 3.7 million

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General Moly - GMO - close: 9.97 change: -0.11 stop: 9.18

We don't see any changes from our weekend comments for GMO. More aggressive traders may want to buy the stock over $10.25. We see potential resistance at $10.50 and its 50-dma so we are suggesting a trigger to buy GMO at $10.55. If triggered we have two targets. Our first target is the $12.40-12.50 zone near its December highs. Our second, more aggressive target is the $13.90-14.00 range. We are starting with an aggressive (wide) stop. You may want to adjust yours.

Picked on February xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 03/31/08 (unconfirmed)
Average Daily Volume: 665 thousand

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Microsoft - MSFT - close: 28.21 change: -0.35 stop: 27.39

MSFT dipped back to the $28.00 level on fears that they might overpay for Yahoo (YHOO) following news that YHOO had rejected MSFT's bid for the company. Investors bought the dip at $27.91. This looks like another bullish entry point to buy the stock. We don't see any changes from our weekend comments. We are suggesting bullish positions now in the $27.50-29.00 (maybe $30) zone. We have two targets. Our four to six week target is the $31.85-32.00 range. We are considering a longer-term target in the $34 region.

Picked on February 10 at $28.56
Change since picked: - 0.35
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume: 90.7 million
 

Short Play Updates

Sovran Self Storage - SSS - cls: 38.40 chg: -0.66 stop: 40.05*new*

Shares of SSS continue to look bearish, especially following today's failed rally near $40 and its 50-dma. We are adjusting our stop loss to $40.05. We are planning on exiting at the closing bell on Wednesday to avoid holding over the company's earnings report. Considering our time frame we're adjusting our target to $35.50-35.00. FYI: The P&F chart is bearish with a $32 target. The most recent data puts short interest at 7.2% of the 20.99 million-share float.

Picked on February 06 at $37.90 *triggered
Change since picked: + 0.50
Earnings Date 02/13/08 (unconfirmed)
Average Daily Volume: 170 thousand

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Terra Nitrogen - TNH - cls: 127.60 chg: +1.40 stop: 137.26

Shares of TNH dipped to $122.20 before bouncing back into the green today. The trend still looks bearish and the intraday chart shows how the bulls failed to push shares past the $130 level. We remain short-term bearish on TNH but we're turning more bullish again on the fertilizer industry as a whole. Stocks like MON, MOS and POT all look bullish and poised for breakouts. TNH is definitely under performing its peers. Part of the risk in the short side of this play is that if those stocks do breakout then TNH might reverse higher. The 200-dma continues to rise and is now at $113.33. We are going to adjust our bearish target from $115 to $117.50-115.00. We are suggesting readers cover their shorts and then buy the dip at the 200-dma. We'll use a buy entry point in the $116.00-114.00 zone. If TNH hits our entry point to buy it we'll use a stop loss at $109.45. We are also adjusting our short-term bullish targets (if triggered at $116) from just one target at $124 to two targets. One at $124 and one at $134. Meanwhile the latest data puts short interest at 3% of the very (VERY) small float of 4.8 million share. A 3% short interest is not normally that worrisome but that is a very small float and raises the risk of a short squeeze.

Picked on February 07 at $129.40
Change since picked: - 1.80
Earnings Date 02/070/08 (confirmed)
Average Daily Volume = 455 thousand

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United Parcel Ser. - UPS - cls: 71.41 chg: +0.83 stop: 74.05

UPS bounced from the $70 level in spite of another sharp rise in crude oil today. This looks like another entry point for shorts, especially if shares start to roll over under its 10-dma and the $72.00 level. More conservative traders may want to consider a tighter stop loss near $72.00 to reduce their risk. Our target is the $66.00-65.00 zone.

Picked on February 10 at $70.58
Change since picked: + 0.83
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume: 5.4 million

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Xerox Corp. - XRX - cls: 15.28 chg: -0.05 stop: 16.01

XRX failed to see any follow through on Friday's bounce higher. We remain bearish. Readers can choose to short it here or on a new decline below $14.90. More conservative traders might want to consider a stop loss near $15.50. Our short-term target is the $13.55 mark. XRX's Point & Figure chart is bearish with a $10.50 target. The most recent data listed short interest at just 0.6% of the float.

Picked on February 07 at $14.95 *triggered
Change since picked: + 0.33
Earnings Date 01/24/08 (confirmed)
Average Daily Volume: 5.9 million
 

Closed Long Plays

None
 

Closed Short Plays

None
 

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

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