Option Investor

Daily Newsletter, Monday, 05/12/2008

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Table of Contents

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

Market Wrap

Oil Prices Ease; Record Receipts Has Budget Deficit Shrinking

Stocks rebounded strongly to start the week and built gains toward the close as a combination of easing oil prices and record tax receipts for the month of April bolstered investor sentiment.

The major averages opened modestly higher, then sunk into negative territory just after the 10:00 AM mark when June Crude Oil futures (cl08m) lurched to another record high of $126.40.

CNBC reported later in the afternoon that there were reports out of China that its oil imports declined 4.00% for the month. While I could find no news to confirm those reports, June Crude Oil did settle down $1.73, or -1.37% at $124.23. It was the first decline for June crude since May 2nd.

Other energy complexes tracked lower with June Heating Oil (ho08m) retreating $0.0762, or -2.10% to settle at $3.5598 after last week's 12.96% surge, spurred largely by Wednesday's EIA weekly inventory report.

June Unleaded (rb08m) settled down $0.037, or -1.16% at $3.1642.

Just after todays close, the EIA reported that the national average for gasoline prices rose nearly 11-cents per gallon last week to a record $3.722/gallon.

Natural gas prices also retreated with June Nat. Gas futures (ng08m) settling back $0.2360, or -2.05% at $11.301.

Today's "top story" in my opinion looks to have caught several traders off guard. Including me!

I had tried to get an early start on tonight's Market Wrap, but just as I try to plan anything, today's 02:00 PM EDT release of the Congressional Budget status for April sent stocks notably higher to the close, and had the dollar reversing some of its earlier-session losses.

Monthly Tax Receipts, Outlays & Deficit/Surplus

Perhaps one of the more shocking economic reports we've received so far this year had the Treasury reporting record revenue receipts of $403.75 billion for April'08, which for the first seven months of this budget year (begins October), revenues have totaled $1.55 trillion, up 3% from the same period a year ago.

While the April 15 tax deadline usually finds a notable increase in revenues, the year-over-year comparisons raised some eye browse from economists that had forecasted a severe recession for the U.S.

While revenues from tax receipts showed a gain, outlays were also high on a year-over-year basis.

Through the first seven months of this budget year, the federal deficit totals $152.2 billion, nearly double the $80.8 billion deficit during the same period in 2007.

With the dollar having shown some sign of stability in the recent month, traders, investors and economists continue to monitor the U.S. deficit closely as economic growth/slowing will significantly impact tax revenues.

While the deficit in 2007 dropped to a five-year low of $162.8 billion (see table above), many economists expected the deficit to rise significantly this year because of economic weakening and extra spending in such areas as the recently announced $168 billion economic stimulus package and the funding of the war in Iraq.

U.S. Market Watch - (05:00 PM EDT)

Financials were atop today's list of sector winners, recouping some of last week's gains. Several of the mortgage insurers reported earnings today, and while weak, may not have been "as weak" as some feared.

MBIA Inc. (NYSE:MBI) $9.85 +4.45% held gains to the after posting a $2.41 billion first quarter loss.

Shares of Research-in-Motion (NASDAQ:RIMM) $141.97 +6.92% closed at a record high as the handheld electronic maker introduces its first major new BlackBerry model in more than a year.

But today's most noteworthy gainer came late in the session when shares of Electronic Data Systems (NYSE:EDS) $24.00 +27.25 jumped more than $5.00 before being halted for trade.


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Just when I noticed that shares of Hewlett Packard (NYSE:HPQ) $46.83 -4.68% had reversed earlier session gains, it too was halted for trade.

Not long after both stocks were halted, Hewlett Packard said it is in talks with EDS about a possible acquisition.

Option-Expiration Gyrations

As we head into this week's option expiration for May, the major averages look choppy, but today's volatility action (see VIX.X, and VXN.X) lower and price action looks like buyers could be pressed into Friday's expiration.

SPY and DIA Montage - Daily Intervals

Last week's action may have brought some jitters to bulls as the major averages "gravitated" back lower to this month "Max Pain" theory values for the various tracker like the SPY and DIA.

"Max Pain" Theory values are simply a culmination of all put and call open interest for an index, or a stock that has option traded on them and price action into an expiration can be choppy and volatile.

The ability for both the SPY and DIA to hold steady at their respective "Max Pain" Theory values suggests that institutional traders aren't necessarily to relinquish their hold on these two indices.

The S&P Depository Receipts (SPY) remain the only major equity average to still trade below its downward trend.

IWM and QQQQ Montage - Daily Intervals

Just as the SPY and DIA hold above their May "Max Pain" Theory values, so does the small caps of the IWM and the large caps at the NASDAQ with the QQQQ.

Apple Computer (AAPL) $188.16 +2.56%, the most HEAVILY weighted stock in the QQQQ remains a big driver. Today, AAPL said its online inventory of the iPod is now "sold out" in both the U.S. and the U.K., which continues to draw speculation that the company is set to announce it next generation of the popular device.


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

Celanese Corp. - CE - close: 48.13 change: +1.78 stop: 44.45

Before the opening bell an analyst firm raised their price target on CE from $48 to $55. This poured gas on a hot new 52-week high and shares added 3.8%. We don't see any changes from our weekend comments. The Point & Figure chart is bullish with a $65.00 target. Our initial target is the $49.90-50.00 range. CE moves kind of slowly but we're tempted to add a second target above $50.

Picked on May 11 at $46.35
Change since picked: + 1.78
Earnings Date 04/21/08 (confirmed)
Average Daily Volume: 1.3 million


Citi Trends - CTRN - close: 20.02 change: -0.25 stop: 18.99

Uh-oh! Traders need to turn cautious on CTRN. The retailers were out performers today. The RLX retail index added 2.7% but most of that was due to monster gains in shares of ANN. CTRN under performed the market and failed to see any follow through on Friday's intraday bounce. More conservative traders may want to raise their stop toward Friday's low (19.33). We have two targets. Our first target is the $22.40-22.50 range. Our second target is the $24.00-25.00 range. We do not want to hold over the late May earnings report. The P&F chart is bullish with a $29.00 target.

Picked on May 08 at $20.05 *triggered
Change since picked: - 0.03
Earnings Date 05/21/08 (confirmed)
Average Daily Volume: 327 thousand


IAC/Interactive Corp. - IACI - cls: 22.38 chg: +0.84 stop: 20.79

Right on cue shares of IACI broke out higher through resistance and past the $22.00 level. Our suggested entry point to buy IACI was at $21.90 so the play is now open. Don't fret if you missed it. The stock is nearing potential resistance at its 100-dma and might pull back to retest the $21.70 region as support. Use the dip as a new entry point. Our target is the $24.50-25.00 range or the 200-dma, whichever is hit first. Please see our weekend comments regarding the IACI proposed split up and Liberty Media's lawsuit.

Picked on May 12 at $21.90 *triggered
Change since picked: + 0.48
Earnings Date 04/24/08 (unconfirmed)
Average Daily Volume: 3.0 million


Agribusiness ETF - MOO - close: 61.82 chg: +0.07 stop: 59.49

We don't see any changes from our prior comments on MOO. We'd still buy dips in the $61.00-60.00 zone. We have two targets. Our first target is the $65.50 level near its old highs. Our second target is the $68.00-70.00 range.

Picked on May 08 at $61.79
Change since picked: + 0.03
Earnings Date 00/00/00
Average Daily Volume: 1.2 million


SanDisk - SNDK - close: 29.27 change: +0.09 stop: 27.69

Tech stocks were out performers today but SNDK was ignored. Shares meandered sideways and slowly turned green later this afternoon. The general trend remains unchanged and we don't see any changes from our weekend comments. We'd still buy the stock at current levels. More conservative traders could use a stop closer to $28.00 or $28.25ish. Our target is the $34.00-35.00 range. The Point & Figure chart has a bullish triple-top breakout buy signal and points to a $51 target.

Picked on May 11 at $29.18
Change since picked: + 0.09
Earnings Date 07/17/08 (unconfirmed)
Average Daily Volume: 9.9 million


SolarFun Power - SOLF - close: 14.94 change: +0.09 stop: 13.79

Our new, aggressive play in SOLF is not off to a big start but we're not complaining. The stock is flirting with a breakout over its 200-dma. We are still suggesting bullish positions in the $14.00-15.00 zone but more conservative traders may want to wait for a rally over today's high (15.34) before initiating positions. We have two targets. Our first target is $17.00. Our second target is $19.00. This can be a volatile stock and we consider a high-risk play. Earnings are due on May 21st and we plan to exit ahead of the report. FYI: The P&F chart is bullish with a $24 target.

Picked on May 11 at $14.85
Change since picked: + 0.09
Earnings Date 05/21/08 (confirmed)
Average Daily Volume: 4.5 million


Terra Ind. - TRA - close: 44.04 change: +0.03 stop: 39.99

We don't see any changes from our weekend comments. TRA hit our target at $44.00 on Friday. Shares are arguably a little overbought and due for a pull back. A dip near $42 might be a new entry point. While we're still bullish on TRA we suggest readers take some money off the table. Our secondary, more aggressive target is the $47.00-48.00 range.

Picked on May 04 at $40.03 /1st target hit 44.00
Change since picked: + 4.01
Earnings Date 04/24/08 (confirmed)
Average Daily Volume: 4.6 million

Short Play Updates


Closed Long Plays

Excel Maritime - EXM - cls: 50.52 chg: +5.37 stop: 41.95

Target exceeded! The shipping stocks were higher today thanks to some positive analyst comments that demand would likely outstrip supply heading into the first quarter of 2009. EXM exploded higher with an 11.8% gain and an intraday high of $50.59. Our target was the $49.00-50.00 range. We would definitely keep an eye on this sector.

Picked on May 04 at $43.12 */target exceeded 49.00
Change since picked: + 7.40
Earnings Date 05/19/08 (confirmed)
Average Daily Volume: 1.1 million

Closed Short Plays


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


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