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Daily Newsletter, Monday, 03/24/2008

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Table of Contents

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

Market Wrap

Majors Gain On Housing Data; Treasury Selling

Upbeat figures on existing home sales combined with an upwardly revised bid for Bear Stearns (NYSE:BSC) $9.93 +66.61% from JP Morgan (NYSE:JPM) $46.55 +1.26% brought buyers into equities for a second-straight session.

Meanwhile, investors that had been pouring cash into Treasuries at a feverish pace into Thursday's Triple Witch expiration locked in gains with the shorter-dated five year treasury yield ($FVX.X) jumping 26 basis points to finish just more than 25 bp above the current fed funds target of 2.25% at 2.600%.

Closing U.S. Market Watch - 04:15 PM EDT

The Dow Jones U.S. Home Construction Index (DJUSHB) 393.51 +5.27% matched its February high of 410 early in the session after the National Association of Realtors (NAR) said sales of previously owned homes rose 2.9% in February to a 5.03 million-unit annual rate.

February's gain was the first monthly gain since July and represented an upside surprise to economists forecast of 4.85 million units.

The pick-up in sales helped cut into a hefty inventory of unsold homes on the market. The NAR said the inventory fell 3% to 4.03 million units at the end of February. At February's sales pace that represented a 9.6 months' supply, the slimmest inventory since August, but still high by historical standards.

While the gain in sales broke a six-month streak of declining sales, prices continued to fall. The NAR said median prices fell 8.2% from their year-ago level to $195,900.

The NAR added that on a regional basis, sales decreased by 1.1% in the West, but were up 11.3% in the Northeast, 2.5% in the Midwest and 2.1% in the South.

CME's Regional Housing Futures (May'08, Aug'08, Nov'08)

Each Friday, I try to capture the "last trade" for the various CME Regional housing futures.

For the near-month May'08 contract, it was "gridded" back on 06/01/07 for initial trade and you can see that for the most part, housing prices have been falling since early Jun'07. The Boston market actually made a modest benchmark Friday high of 165.00 the week ended 02/08/08 (it may have traded higher Mon-Thurs prior), but then fell to a benchmark Friday low of 152.20 on 02/29/08, inched up a tad to 155.20 on a Friday benchmark for 3/07/07, didn't budge at its Friday 3/07/07 benchmark, and has inched up a bit at last week's benchmark close.

However, you can see some of the "West" regions like Las Vegas, Los Angeles and San Diego are still making new lows for the May'08 contract.

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Anyhow, you and I can get a feel, based on observation that at most, regional housing prices are mostly lower, with "bright spots" of housing price INCREASES hard to find.

These various CME housing futures are relatively "new" and have not been around very long and trade VERY, VERY thin.

Yep, not many short-term traders in the housing market these days.

Maybe when the cable networks discontinue the "Flip This House" shows will housing prices start to recover in a more meaningful 20%/year rate (grin).

Dow Jones Home Construction (DJUSHB) - Daily Intervals

Ah, but the DJUSHB is actually UP so far this year (2008) and there aren't too many sub-indices we can say that about. Yes, the DJUSHB has been either side of its 12/31/07 close of 324.

I turned BULLISH shares of Toll Bros. (NYSE:TOL) $24.18 +4.67% on 1/31/08 when TOL was trading $23.66 with a TOL Jun $25 Call (TEP-FE) (equates to 1/4 bullish position), but after having seen these levels traded in late February and then observed a pullback to TOL $18.50 and DJUSHB 300.00, thought it best today to SELL an COVERED OUT-the-money TOL May $27.50 Call for $1.40/contract.

In essence, while today's NAR report a bullish surprise, one data point doesn't necessarily make a trend. If the CME regional housing futures weren't hovering near lows, I might have thought we could wait another week or two, see if the builders might get a breakout going above 410.

The iShares DJUSHB (NYSE:ITB) $21.03 +5.83% look very similar to the DJUSHB (as they should) and today's volume was very brisk at 3.45 million shares traded (3-month avg. volume is 841,811 shares/day), roughly 4-times the average daily volume. That's a sign of GREAT disagreement among buyers and sellers, but also shows interest in this group!

As noted, shares of Bear Stearns (NYSE:BSC) surged higher after JP Morgan (NYSE:JPM) boosted its offer to $10.00 per share from $2.00, hoping to stem some criticism that the banking giant was getting too sweet a deal for the battered investment bank. JP Morgan also said it will buy 95 million new shares of Bear Stearns, giving it a 39.5% stake in the company and a big leg up in getting shareholder approval for the takeover. The purchase is slated to close by April 8th.

Financials were strong at the open and held gains until about noon, but started to fade toward the close.

The more regional S&P Banks Index (BIX.X) finished in the red after trading as high as 274.95 earlier this morning.

Friedman, Billings, Ramsey & Co issued some cautious notes and cut their Q1 earnings estimates for 21 financial institutions because of continued uncertainty in the credit markets.

Wells Fargo (NYSE:WFC) $32.09 -1.41% stuck its head back above a still trending lower 200-day SMA ($32.93) for the second-time in as many months after a Robert W. Baird & Co. analyst downgraded the stock to "underperform" from "neutral," saying the valuation of the stock does not adequately reflect underlying earnings risk at the San Francisco-based bank.

Dow Transports (TRAN) - Daily Intervals

In the latter-half of 2007, the TRAN's weakness below its longer-term 150-day SMA (dark purple) and 200-day SMA (red) had technicians citing a more BEARISH Dow Theory technical event underway. But the Transports look to have found their BULLISH gear late last week.

Stochastics (technical analysis tool for RANGES) suggests to me the TRAN may have 5,000-5,100 in it near-term before we see some profit taking. Moving Average Convergence Divergence (MACD) has some bullish momentum building from what could well be a reverse head/shoulder pattern.

In tonight's U.S. Market Watch, I again point to the now current month Nymex May Crude Oil futures (cl08k) which settled down $0.98, or -0.96% at $100.86. The "matching" Nymex NY Harbor Unleaded (rb08k) settled up $0.0203, or 0.78% at $2.6326, which would have the "crack spread" much improved from last week's Market Wrap. (Note: 5DyNet% and 20DyNet% changes for cl08k and rb08k).

This certainly has a trader monitoring the refiners closely and either looking to snug down some stops on BEARISH trades in the group, while at the same time looking for a bullish trade.

And there may be no better test than shares of Valero (NYSE:VLO) $50.08 +1.15%, which darted to $47.85 in this evening's extended session after the refiner, which in January saw improving refining market conditions, warned that Q1 earnings per share will be well below analyst estimates amid tight margins (i.e. crack spread narrowing) and outages at several plants.

Valero said it "expects throughput margins on gasoline and certain other products such as petroleum coke, residual fuel oil, and petrochemicals to be significantly lower in the first quarter of 2008."

With earnings due on April 29, Valero warned that it now sees Q1 earnings of $0.10 to $0.35, compared with the mean per-share estimate of $0.91.

Energy Futures Table - Daily Settlement

I still think that April Unleaded (expires Monday, 3/31/08) may trade lower into its expiration, but unleaded prices have been rather steady-to-higher since last Monday. Meanwhile, the Crude Oil "roll" from Wednesday's expiration (03/19/08) has been modestly negative.

In the above table, I calculate a "crack spread" (Unleaded divided by Crude; then multiply by factor of 1000) to get a chartable value of 26.10 for the "May Crack."

Valero "speaks the truth" as to what it sees for Q1. Heck, on February 15, the "May Crack" at that time (column AB) was 27.53 and it recently dropped sharply to 24.25 on 3/17/08. But a slight decline in Crude Oil prices and a stead-to-higher trade in unleaded has the crack spread, or MARGIN for refiners like Valero improving.

I think there's a BULLISH opportunity in the making late this week, or early next week for a bullish trade in the refiners.

I think a trade would like to see Valero (VLO) "dilly-dally" around these extended session levels into next Monday, and have the "May Crack" come in to a 25.00 measure.

Then nip away at a VLO Jun $52.50 Call (VLO-FX) for $2.80 or buy more time (you can never buy too much time) with a VLO Sep $52.50 (VLO-IX) for roughly $3.80.

Valero Energy (VLO) - Daily Intervals

With the major averages having made a pretty strong move from the low-end of a developing range, it could be time for VLO to once again make a move from the low-end of its recent Feb highs to March lows. I've benchmarked the 2/15/08 "high crack spread" measure and the 03/17/07 "low crack spread" measure. Just as quickly as margins looked to improve in January, they deteriorated. Now VLO "speaks the truth" as margins have deteriorated since, but they are starting to firm a bit.

Dow Diamonds (DIA) - Daily Intervals

With the Dow Transports (TRAN) breaking above February resistance, I would have to think the Dow Industrials (INDU) and its tracker DIA follow that lead. I still expect some volatile trading as depicted by my alternating green and red arrows.

Look for a "new range" in the DIA to begin to develop from $120 to $129.

US Dollar Index / SPY Montage - Daily Intervals

I still see the US Dollar Index (DXY) as more of a "sentiment" driver for broader equities than anything, and the recent bounce in the dollar index (DXY) may still have some legs, but I'm certainly expecting some selling should the dollar index elevate towards 73.83 and especially the November relative low of 74.50.

Dorsey/Wright and Associates' S&P 500 Bullish % (BPSPX) reversed back UP to "bull alert" status on Wednesday at 31.12% (fell to 23.09% on 03/17/08) and has risen to 38.35% (38.00% on chart) at tonight's close. A measure of 42% is needed for "bull confirmed" status. On 02/28/08 Dorsey's BPSPX rose to 40.96% as the SPY itself tested its 50-day SMA at $139.14.
 

New Plays

Most Recent Plays

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New Plays
Long Plays
Short Plays
IYZ None

Play Editor's Note: Monday's market action was pretty encouraging. The Dow Industrials broke through their four-month trendline of resistance. The S&P 500 is close to doing the same. I am reiterating my weekend comments that I'm short-term bullish and would probably look to use dips in the next day or two as bullish entry points. Overall we remain in a bear market.


New Long Plays

iShares Dow Jones Telecom - IYZ - close: 23.79 chg: +0.75 stop: 22.24

Company Description:
The IYZ is the iShares Dow Jones US Telecom exchange traded fund. This ETF seeks to represent the Dow Jones U.S. select telecommunications index.

Why We Like It:
The IYZ has broken out past a significant trendline of resistance. The group has produced a bullish reversal and is deeply oversold. This could be the beginning of a new leg higher. Aggressive traders may want to jump in right now. We are suggesting that readers buy a dip in the $23.50-23.00 zone. We're listing a stop loss at $22.24. Our 1st target is the $25.85-26.00 range. Our second target is the $27.85-28.00 zone.

Picked on March xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 00/00/00
Average Daily Volume: 429 thousand
 

New Short Plays

None today.
 

Play Updates

Updates On Latest Picks

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Long Play Updates

Coca-Cola - KO - close: 61.18 chg: +0.14 stop: 57.99

KO did see a dip today but bulls bought KO at $60.54. We would still expect a stronger dip near $60.00 and do not see any changes from our weekend comments. Traders could probably buy KO right here. However, after a five-day rally, we would rather buy a dip. We're suggesting readers buy KO in the $60.05-59.50 range. We'll suggest a stop loss at $57.99. Our target is the $64.50-65.00 range. The Point & Figure chart is bullish with a $90 target.

Picked on March xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/17/08 (unconfirmed)
Average Daily Volume: 10.9 million

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Microsoft - MSFT - close: 29.17 chg: -0.01 stop: 27.19

If you're a tech bull you're probably scratching your head in wonder at why shares of MSFT didn't move today. The NASDAQ soared 3% and yet MSFT lost a penny. We could not find anything specific to account for the relative weakness but we did notice that volume was very low today. Overall we remain bullish on MSFT but given today's performance you may want to try and buy a dip near $28.50 or its 10-dma near 28.75. Our suggested stop loss is at $27.19. If you want to be more aggressive put your stop under $27.00 and more conservative traders could try putting your stop around $28.25 but that maybe too close. There is potential resistance with some significant moving averages overhead. However, we are aiming for the $32.00-33.00 zone.

Picked on March 23 at $29.18
Change since picked: - 0.01
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume: 114 million

---

Meritage Homes - MTH - close: 18.90 chg: +0.86 stop: 15.90

This morning's better than expected housing data gave the markets a jolt higher and squeezed the shorts in the homebuilders. Shares of MTH spiked toward resistance near $20.00 before setting with a 4.7% gain. Today's move confirms the bullish breakout over the 200-dma, which is a good thing, but if you're patient you may want to try and buy a dip near $18.00 or $17.50 if we get the chance. We expect that the short squeeze will continue so MTH may not offer many dips. This remains an aggressive play. Our target is the $25.00-27.00 zone. The P&F chart is bullish with a $28 target. FYI: MTH is due to present at an analyst conference on March 26th.

Picked on March 24 at $18.60 *triggered
Change since picked: + 0.30
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume: 893 thousand

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99 Cents Only Stores - NDN - cls: 10.90 chg: +0.14 stop: 9.49

Retail stocks continued to run on Monday. While we are short-term bullish for the group and NDN we don't want to chase them right here. We are suggesting readers wait for a dip into the $10.30-10.00 zone. We'll set the stop at $9.49 (more conservative traders could try one closer to $10.00 but that might be too tight). Our target is the $11.95-12.00 range.

Picked on March xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 05/12/08 (unconfirmed)
Average Daily Volume: 2.0 million
 

Short Play Updates

Starbucks - SBUX - close: 17.89 chg: +0.36 stop: 18.55

SBUX looks like it wants to rebound higher but the trend is still bearish. Given the market's recent bullishness we would hesitate to open new shorts at this time. Our target on SBUX is the $15.05-15.00 zone. FYI: The most recent data puts short interest at 3.4% of the 703 million-share float, which is about 2 days worth of short interest.

Picked on March 07 at $17.49 *triggered
Change since picked: + 0.40
Earnings Date 04/30/08 (unconfirmed)
Average Daily Volume: 16.5 million

---

Safeway Inc. - SWY - close: 28.97 change: -0.01 stop: 30.26

SWY continues to under perform. The stock traded sideways and actually closed in the red today in spite of the market-wide rally. The trend is still bearish but wait for another failed rally before considering new shorts. There appears to be some support near $26.00 so we are suggesting a target in the $26.50-26.00 zone. The P&F chart is bearish with a $22.00 target. FYI: The latest data puts short interest at 3.9% of the 437 million-share float, which is about 4 days worth of short interest.

Picked on February 29 at $28.74
Change since picked: + 0.23
Earnings Date 02/21/08 (confirmed)
Average Daily Volume: 4.9 million
 

Closed Long Plays

None
 

Closed Short Plays

Akamai Tech - AKAM - close: 32.87 chg: +2.28 stop: 32.55

One analyst firm reiterated their out perform on AKAM and the news probably exacerbated today's short covering in tech stocks. The NASDAQ soared 3% and AKAM vaulted higher to a 7.4% gain. The stock has broken past its 05-dma and resistance near $32.00. Our stop loss was at $32.55. The long-term trend is still bearish but we would wait and watch to see if AKAM fails near its descending 200-dma before considering new shorts.

Picked on March 16 at $31.19 /stopped 32.55
Change since picked: + 1.68
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume: 5.8 million
 

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

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