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Daily Newsletter, Monday, 06/02/2008

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Table of Contents

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

Market Wrap

ISM's PMI Leaves Bulls Wanting Less and More

Stocks began today's session on a sour note with banks grabbing negative headlines and setting a negative tone early, while key economic data released at 10:00 AM EDT showed the manufacturing sector continued to exhibit some sign of slowing in May.

Shares of Wachovia (NYSE:WB) $23.40 -1.68% finished down $0.40 having traded a new multi-year low ($22.72) at this morning's open after the company said its Chief Executive Officer Ken Thompson was forced out by the company's board of directors.

Market participants drew little comfort from the continued shakeup with Mr. Thompson becoming the third CEO of a major U.S. financial institution to lose the top job as a result of the credit crisis.

Washington Mutual (NYSE:WM) $9.00 -0.22% also slid to a new multi-year low ($8.75) at the open of today's trade. Hit hard since the middle of 2007 due to deterioration in the mortgage and credit markets, the company announced today that it was splitting CEO and chairman roles in an effort to focus on the problems at hand.

Then banking concern said Stephen Frank will assume the title of chairman of the board, while Kerry Killinger will remain as chief executive.

At 10:00 AM EDT, as stocks were pushing their worst levels of early trade, U.S. construction spending figures were released by the Commerce Department.

The department said spending on U.S. construction projects fell by 0.4% in May to an annual rate of $1.21 trillion. The figures were roughly inline with economists' forecast for a 0.5% decline. I (Jeff Bailey) saw little sign of a market response to an upwardly revised March figure, where March's previously reported 1.1% decline was revised to a still negative 0.6% decline.

That "lack of response" may well have been due to the more closely monitored Institute for Supply Management's (ISM) manufacturing report (national), also released at 10:00 AM EDT.

While the ISM Manufacturing Index came in at a "better-than-forecasted" measure of 49.6 (consensus was 48.5), a look inside the numbers, or sub-index readings deserve closer scrutiny.

ISM's May'08 PMI -

As noted in tonight's market wrap tile, May's ISM data left many bulls more than likely wanting "less" from the Prices component, which jumped to a very expansionary measure of 87.0.

Levels above 50.0 for the PMI and sub-index measures signal growth, while levels below 50.0 signal contraction.

One bright spot, or sign of renewed expansion in the above data series had production improving to a 51.2 measure in May, its highest measure since January.

That increase in production may have been attributed to some of contraction-like measures we've see from the backlog of orders, where in May we would now see a notable decline to 46.0 from 51.5.

Here's a quick look at the ISM Mfg. Index measures since Oct'07 and how each of the sub-index components have been measured.

ISM Mfg. Index & Sub-Index Measures Since Oct'07

In my opinion, May's "elevated" measure of 87.0 for prices will be tied to the sharp rise in raw materials costs.

The CRB Index in my U.S. Market Watch (CEC:CRY) 425.77 +0.85%, while largely weighted with oil prices, has risen 92 points, or 27.6% since the end of Sep'07, and is up just more than 67 points, or 18.7% since the end of Dec'07.

Also a concerning focal point to economists was the still anemic employment index measure of 45.5. While a modest improvement from April's 45.4 measure, April's lackluster construction spending data doesn't appear to hold thought of any sharp rebounds for June.

The weaker U.S. dollar looks to even out some of the trade deficit with exports looking "even keel" at 49.5, while the exports index shows some bullish expansion at 59.5.

Still, at these "weaker" levels of the dollar versus major global currencies (euro, yen and pound), dollar strength and weakness continues to impact market sentiment.

Closing U.S. Market Watch - 06/02/08 @ 05:00 PM EDT

One major item I drew attention to last week was the notable "lag" in the Dow Industrials (INDU) $125.04 -1.06%.

One of the PRIMARY themes that remained was the weakness in financials. While not heavily weighted components, at Friday's close shares of American Express (NYSE:AXP) $45.25 -2.37% today, had fallen 5.33% on a 20DyNet% basis. JP Morgan (NYSE:JPM) $42.15 -1.97% today, had fallen 7.66%; American Intl. Group (NYSE:AIG) $35.87 -0.36% today had fallen 10.62%; Bank of America (NYSE:BAC) $33.58 -1.26% today had fallen 7.20% and Citigroup (NYSE:C) $21.46 -1.96% today had declined 7.36%.

General Electric (NYSE:GE) $30.41 -1.00% shed $0.31 today, and his past quarter's earnings report and troubles with its financing arm still look to weigh on the shares.

General Motor's (NYSE:GM) $17.44 +1.98% did gain $0.34/share today, but now the smallest-weighted component was down a eye-popping 15.72% 20DyNet at Friday's close.

I'd have to think that some of the sharp declines in the above "financial" names partially reflect today's news out of Standard & Poors.

At roughly the mid-point of today's session, Standard & Poors credit ratings opened the proverbial floodgate with some various CreditWatch "negative" alerts for Lehman Brothers (NYSE:LEH) $33.90 -7.90%, Merrill Lynch (NYSE:MER) $42.62 -2.95% and Morgan Stanley (NYSE:MS) $43.10 -2.55%.

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S&P cited the outlooks on the large financial institutions sector as being predominantly "negative" due to the weaker U.S. economy and its impact on consumer lending.

Shares of Citigroup (NYSE:C) $21.46 -1.96% did ease from their session lows of $21.00 when Standard & Poors removed the company from its CreditWatch, where they had placed the company's debt on April 15, 2008, with negative implications. The ratings firm said, "Despite the challenges facing Citigroup over the next two years because of deteriorating consumer credit, its fundamental earnings power is unimpaired."

With that being about the most "positive" thing S&P said today, market participants will monitor this banking giant near-term.

Citigroup (NYSE:C) - $0.50 and $1 box chart

The supply (O) / demand (X) chart of Citigroup (C) remains longer-term bearish. After generating a reversing higher Point and Figure "buy signal" at $25.00 in early April, sellers (O) have driven the stock back down to near-term support above the $20.00 level. A trade at $20.00 is viewed further negative. Excellent RISK/REWARD profile for BULLS as they RISK $1.00 downside to a trade at $20.00, while longer-term REWARD, utilizing the bullish vertical count to $40 is roughly $17.00.

Should the stock trade $20.00, it would be deemed BEARISH for the stock.

Trade and account management would dictate BULLISH CAUTION and SMALL BULLISH positions currently as the BANK sector is "bear confirmed."

Traders and investors would be well advised to monitor the Financial Select SPDR (XLF) $24.39 -1.49% at these levels of critical support.

Financial Select SPDR (XLF) - $0.50 box

With Standard & Poors growing further negative the LARGER financials, the XLF's Point and Figure chart provides and excellent view of what is at stake.

On 05/20/08 the XLF generated a reversing lower point and figure sell signal at $25.50, and now trades just above important support at $24.00.

I think we as traders and investors can begin to make the tie between Citigroup (C) at $20.00 and the XLF at $24.00.

Trades at either, or both respective levels will likely weigh heavily on the sector, if not the broader market as well.

S&P 500 Index (SPX.X) - 10-point box

An old point and figure chartist saying is that the "first sell signal in the new upward trend is often a buying opportunity." That's what we find here in the S&P 500 Index (SPX.X).

Having turned "bull confirmed" in early April (4), the recent selling has generated a double bottom sell signal at 1,380.

I've placed this month's (June's) newly calculated MONTHLY Pivot Levels on our point and figure chart.

AGGRESSIVE bulls can play here with a stop just below MONTHLY S1 of 1,369. More CONSERVATIVE bulls can play on a trade at 1,350, with a stop below MONTHLY S2 of 1,377.

A couple of weeks ago I adjusted my economic forecast from "modest recession" to "modest growth" for 2008.

I would be VERY surprised if the SPX traded 1,472 and MONTHLY R2 this month, let alone by July expiration, so pick options accordingly.

S&P 500 Bullish % ($BPSPX) - 2% box chart

At tonight's close, StockCharts.com's S&P 500 Bullish % ($BPSPX) saw a net gain of 2 stocks to reversing higher PnF "buy signals" and status for this broader-market indicator is "bull correction."

In early April (4) at 44.00%, this major market bullish % achieved "bull confirmed" status, rose to 52.00% on the above chart, then reversed to "bull correction" status at 45%, then reversed back up again to "bull confirmed" status at 52% to rise as high as 62.00%.

Look for buyers (old bears and new bulls) to be buying this pullback.

It would currently take a measure on the above chart to 44.00% for this indicator to achieve "bear confirmed" status.

IWM and QQQQ Montage - Daily Intervals

Both the IWM and QQQQ have been the "bullish leadership" major averages in recent months, but some of the near-term softening in the INDU and SPX.X look to be keeping buyers cautious.

Look for these two averages to BREAK TO NEW RELATIVE highs as a CONFIRMATION of any rebound in the INDU and SPX.X.

Need the FINANCIALS to find a footing to provide a LIFT for the SPX.X.
 

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

Adaptec - ADPT - close: 3.16 change: -0.07 stop: 2.99

We talked about buying a dip near $3.15 and we got one today. Shares of ADPT pulled back to their rising 10-dma. This does look like an entry point but readers may want to wait for signs of a bounce first, especially with the major averages looking vulnerable. More conservative traders may want to consider a stop loss closer to $3.05. More conservative traders might also want to wait for a rally over $3.30 as an entry point. Our target is the December 2007 highs. We'll try to exit in the $3.65-3.70 zone. The stock can be somewhat volatile so we do consider this a higher-risk play. Our time frame is several weeks. FYI: The most recent data listed short interest at more than 7% of the 118 million-share float. Based on ADPT's average daily volume that is a lot of short interest and the stock could see a short squeeze.

Picked on May 28 at $ 3.25
Change since picked: - 0.09
Earnings Date 05/08/08 (confirmed)
Average Daily Volume: 559 thousand

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Axsys Tech. - AXYS - close: 61.54 change: +2.38 stop: 55.99*new*

There is no slow down in the rally for AXYS. The stock added another 3.8% and broke through potential round-number resistance at $60.00. Volume was slightly above average on the day, which is positive. If you don't want to chase it then consider waiting for a pull back into the $59-58 zone. We are upping our stop loss to $55.99. Our target is the top of the channel in the 64.00-65.00 range.

Picked on June 01 at $59.16
Change since picked: + 2.38
Earnings Date 07/24/08 (unconfirmed)
Average Daily Volume: 124 thousand

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BJ Services - BJS - close: 30.15 change: -0.05 stop: 28.95

BJS displayed some strength this morning but gave it all back and closed fractionally lower. The trend is still positive and we would still consider new positions on a bounce from here or a bounce in the $29.50 zone. Our initial target is the $33.00-34.00 range. The P&F chart is bullish with a $52 target.

Picked on May 28 at $30.45
Change since picked: - 0.30
Earnings Date 07/24/08 (unconfirmed)
Average Daily Volume: 6.9 million

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AM Castle & Co - CAS - close: 32.03 change: -0.80 stop: 30.69

CAS was not immune to the almost market-wide profit taking. The intraday bounce from the $31.50 zone looks like a new bullish entry point to buy the stock. Our target is the $36.50-37.00 zone, which is just under its all-time highs. We're suggesting a stop loss under last week's low but more conservative traders might be able to get away with a slightly tighter stop.

Picked on June 01 at $32.83
Change since picked: - 0.80
Earnings Date 07/31/08 (unconfirmed)
Average Daily Volume: 138 thousand

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Celanese Corp. - CE - close: 48.33 change: -0.37 stop: 46.85

CE continues to trade sideways but it has a very clear bullish pattern of higher lows. We remain optimistic but we're not suggesting new positions at this time until we see a breakout over $49.30 (aim for the second target). Our first target is $49.90-50.00. Our secondary, more aggressive target is the $52.50 mark. The P&F chart is forecasting a long-term target of $74.

Picked on May 11 at $46.35
Change since picked: + 1.98
Earnings Date 04/21/08 (confirmed)
Average Daily Volume: 1.3 million

---

Copa Holdings - CPA - close: 33.03 change: -0.44 stop: 31.40

The airline sector ran into some turbulence. The XAL index plunged 3.1%. Shares of CPA out performed its peers with a 1.3% decline. The intraday bounce from $32.00 looks like a potential entry point but you might want to consider a tighter stop loss under today's low. Our target is the $34.50-35.00 zone. FYI: More aggressive traders may want to aim for $36.00 or its 200-dma near 38.45.

Picked on May 27 at $31.40
Change since picked: + 1.63
Earnings Date 05/08/08 (confirmed)
Average Daily Volume: 589 thousand

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Corning Inc. - GLW - close: 26.87 chg: -0.47 stop: 26.45

GLW is about to test its rising trendline of support. The stock lost 1.7% today, which can probably be blamed on the general market weakness. A bounce from here or the $26.50 mark could be used as a new entry point. Our target is the 2006 high at $29.60. FYI: The P&F chart is bullish with a $45 target.

Picked on May 27 at $27.27
Change since picked: - 0.40
Earnings Date 07/24/08 (unconfirmed)
Average Daily Volume: 13.3 million

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General Motors - GM - close: 17.44 chg: +0.34 stop: 16.84

GM garnered a lot of attention today after a positive Barron's article over the weekend. The stock rallied almost 2% by the closing bell. The bounce looks like a new entry point to buy the stock. However, we are going to try and reduce our risk by raising the stop loss to $16.95. I suspect that if the market drops again tomorrow GM will retest the $17.00 level. Actually tomorrow could be volatile as GM holds its annual shareholder meeting and business update. The meeting begins around 10:15 a.m. Eastern. Our target is the $19.50 mark. The most recent data listed short interest at more than 17% of the 530 million-share float.

Picked on May 27 at $17.42
Change since picked: + 0.02
Earnings Date 07/31/08 (unconfirmed)
Average Daily Volume: 18.7 million

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Mercury General - MCY - close: 51.01 change: +0.15 stop: 49.65

Traders continue to buy the dips in MCY. Today's rebound looks like another entry point to go long the stock. Our short-term target is the $54.00-55.00 zone. The P&F chart is a lot more bullish with a $68 target.

Picked on May 28 at $50.92 *triggered/gap higher entry
Change since picked: + 0.09
Earnings Date 05/05/08 (confirmed)
Average Daily Volume: 264 thousand

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Sonoco Products - SON - close: 34.25 change: -0.37 stop: 32.89

SON provided a minor pull back on Monday. We see it as another entry point for bullish positions. Our target is the $38.00 level. The P&F chart points to a $51 target. FYI: SON is due to present at a basics and industrials conference on June 4th.

Picked on June 01 at $34.62
Change since picked: - 0.37
Earnings Date 07/30/08 (unconfirmed)
Average Daily Volume: 430 thousand


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United States Cellular - USM - cls: 62.25 chg: -0.38 stop: 59.95

Investors bought the dip near $60.00 again. The intraday bounce looks like another entry point to go long USM. Our target is the recent highs in the $67.00-67.50 zone. More aggressive traders could aim for $70 or its 200-ema. The P&F chart is bullish with an $85 target.

Picked on June 01 at $62.63
Change since picked: - 0.38
Earnings Date 08/07/08 (unconfirmed)
Average Daily Volume: 129 thousand

---

Williams Cos. - WMB - close: 37.88 change: -0.16 stop: 37.25

WMB is consolidating sideways and we would expect a big move soon. The stock is either going to rally from its trendline of support or break it. More conservative traders could try and tighten their stops a little bit more. Thursday's high was $38.60. We'd wait for a rise over $38.60 before considering new positions. Our target is the $42.00-42.50 zone. More aggressive traders may want to aim higher. The Point & Figure chart points to $56.

Picked on May 22 at $38.40
Change since picked: - 0.52
Earnings Date 07/31/08 (unconfirmed)
Average Daily Volume: 6.7 million

---

WMS Industries - WMS - close: 37.35 change: +0.31 stop: 34.25

WMS continues to show relative strength. The stock posted another gain although it was off its highs of the session. We remain bullish but if you're looking for a new entry point wait for a dip. A pull back around $36 might work. Our target is the $39.50-40.00 zone. Note that we are adjusting our stop loss to $34.25.

Picked on May 28 at $36.05
Change since picked: + 1.30
Earnings Date 08/07/08 (unconfirmed)
Average Daily Volume: 1.1 million

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Wal-Mart - WMT - close: 57.20 change: -0.54 stop: 55.85

WMT is acting normally here. We expected a dip back toward $57.00 and shares hit $56.52 instead. Our short-term target is the $59.00 level near its recent highs. More aggressive traders may want to aim higher. The Point & Figure chart points to a $68 target. We are going to tentatively set a secondary, aggressive target at $62.00 but we suggest readers take some money off the table at $59.00.

Picked on May 22 at $56.05
Change since picked: + 1.01
Earnings Date 08/14/08 (unconfirmed)
Average Daily Volume: 19.1 million
 

Short Play Updates

Expeditor's Intl. - EXPD - close: 46.29 chg: -0.79 stop: 47.51

Today's pull back is a tempting entry point to begin new shorts but consider waiting for another drop below today's low (45.95). We have two targets. Our first, short-term target is $42.50. Our secondary target is the $40.25 mark. The P&F chart is bearish with a $38 target. FYI: The most recent data listed short interest at 6% of the 209 million-share float.

Picked on May 28 at $45.65 *triggered
Change since picked: + 0.64
Earnings Date 05/08/08 (confirmed)
Average Daily Volume: 1.7 million

---

McDonald's - MCD - close: 58.55 change: -0.77 stop: 60.01

Right on cue shares of MCD pulled back following Friday's failed rally. The stock did bounce near $58 and its rising 50-dma, which is right where we said to look for a bounce. We might get another chance at shorts near $59.50 soon. Our first target is the $56.30-56.00 zone. We are contemplating a secondary, more aggressive target. Currently the P&F chart is still bullish.

Picked on June 01 at $59.32
Change since picked: - 0.77
Earnings Date 07/30/08 (unconfirmed)
Average Daily Volume: 6.6 million

---

Paychex Inc. - PAYX - close: 33.79 change: -0.76 stop: 36.16

PAYX under performed the market on Monday. The stock spiked lowered and broke down under short-term support near $34.00 and its 100-dma. This is good news for the bears. Our target is the $31.00-30.00 zone. FYI: The most recent data listed short interest at 5% of the 320 million-share float. That's several days worth of short interest.

Picked on May 22 at $34.87
Change since picked: - 1.08
Earnings Date 06/25/08 (unconfirmed)
Average Daily Volume: 2.4 million
 

Closed Long Plays

Avis Budget Group - CAR - close: 13.25 chg: -0.67 stop: 13.35

Ouch! The car rental stocks were hit hard today. We didn't see any specific news to account for the relative weakness. HTZ lost 3.9% and shares of CAR fell 4.8%. The stock hit our stop loss at $13.35 closing the play.

Picked on May 27 at $13.55 *triggered
Change since picked: - 0.30
Earnings Date 08/07/08 (unconfirmed)
Average Daily Volume: 1.0 million
 

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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