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Daily Newsletter, Saturday, 06/07/2008

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Table of Contents

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

Market Wrap

Oil Greases the Skids

At 8:30 on Friday morning the big news was the 49,000 job losses for the month of May. That headline lasted about an hour before oil grabbed the headlines in a steel grip that lasted all day. I will get to the reasons later but the key metric was the +$10.75 rise for the day to close at $138.50. This was the biggest price move in the history of the Nymex and the biggest percentage move since Iraq invaded Kuwait. The rest as they say is history as the explosion in oil greased the general market decline.

Wilshire Total Market Index Chart - Daily

Before I get to the oil story I need to touch on the economics. The biggest economic report on Friday was the Non-Farm Payrolls for May. The report showed the economy lost 49,000 jobs, which was actually less than the -60,000 loss analysts expected. The component that grabbed the headline was the spike in unemployment to 5.5%. The +0.5% spike in unemployment was the biggest single month jump in 22 years. The loss of jobs has now stretched for five consecutive months. However, the losses are minor compared to prior recessions. At the same point in prior cycles we were seeing 150,000 to 250,000 job losses per month. The current average decline for this cycle has only been -65,000 jobs. This has been a very tame economic slowdown.

The Jobs report captured the headlines with the 22-year spike in unemployment but that was an accounting anomaly rather than a real number to worry about. There was a shift into May by a large number of teenagers and college students looking for summer jobs. The youth employment market is being the hardest hit by the rise in prices and cost cutting by employers trying to trim expenses. The majority of teenage jobs are in fast food and restaurants and those are exactly the retail outlets suffering the most by high gasoline prices. An obscure factoid I heard was teenage unemployment at a 60 year high. There was a one-week shift in the accounting period and that also skewed the numbers.

May Non-Farm Payrolls

The economics for next week will be highlighted by the Fed's Beige Book on Wednesday and the Consumer Price Index on Friday. The Beige book will tell us how the various Fed regions are doing in this economic slowdown. Do they see the economic activity in their region slowing or rebounding? This is always a volatile event.

The biggest report for the week will be the Consumer Price Index. How much of the higher oil price has filtered through into consumer products? I can't conceive that oil prices have not influenced consumer prices. The Fed takes out direct food and energy prices as too volatile to track monthly but the indirect costs for transportation and raw materials has got to be pushing inflation higher. The Fed is facing the worst of all scenarios. Oil prices are out of control. The tax rebate stimulus has been consumed by the increase in the price of gasoline. Unemployment is rising at least on the surface and the economy is bordering on a recession. This is the return of stagflation in its purest form. No growth and soaring inflation. The Fed has to raise rates if the CPI shows an inflation spike but raising rates will slow the economy even further. They can't move in either direction on rates without escalating either inflation or recession. Their best move would probably be to cover their eyes and ears and do nothing in hopes the economic situation recovers on its own. James Bullard, President of the St. Louis Fed, basically agreed with that plan saying the Fed could remain neutral for the rest of the year. However, he also said the dominant policy concern was rapidly changing from the credit crisis to pressing inflationary concerns. The next Fed meeting is June 24th.

Economic Calendar

Now to the real market story. Oil prices declined to $121.61 on Wednesday night and then rebounded to $128 on Thursday. The net gain was a record $5.50 on Thursday. That was the largest single day dollar gain on record. It was nothing compared to Friday. On Friday crude prices added to that Thursday spike with another gain of $10.75 to close at $138.50 and another record high and the largest single day price gain in the history of the Nymex. It was the second largest percentage gain since Iraq invaded Kuwait in 1991.

The reasons for the spike were numerous. You hear people, including me, using the perfect storm analogy all the time but this was the perfect example. For purposes of clarity I will try to list all the reasons.

First there was a serious drop in open interest of roughly 50% as the lawmakers and the CFTC were discussing futures trading and energy market manipulation. Short interest rose significantly in anticipation of some sweeping change that could crater the energy market. When both parties made some calming comments on Wed/Thr that suggested it would be a couple months before any changes were made the bulls jumped back into the market and a monster short squeeze began on Thursday with the $5.50 gain. Volume was still low as though traders were still not convinced.

On Friday the market opened with the shorts worst nightmare. Morgan Stanley said the stage was set for $150 oil before July 4th because of supply constraints and increased global demand. July 4th is only 27 days away and $28 from the Wednesday lows. That gave new urgency for longs to reenter the market and for shorts to cover.

At the same time Shaul Mofaz, former chief of staff and defense minister in Israel said an Israeli attack on Iran would be unavoidable if they did not immediately halt their nuclear program. "If Iran continues its nuclear arms program we will attack it." Iran's President Mahmoud Ahmadinejad has more than once called for the elimination of Israel. Mofaz said Ahmadinejad would disappear before Israel does. Iran is the 4th or 5th largest oil exporter depending on whose numbers you believe. If Israel did attack their nuclear facilities it should have no impact on oil production but you never know. They could cripple their oil capability at the same time just for spite. There is precedent for an Israeli attack. In 1981 Israel planes destroyed an unfinished reactor in Iraq to prevent Iraq from gaining nuclear weapons. They struck another reactor under construction in Syria several months ago. Reportedly the U.S. has already approved an Israeli attack but I strongly doubt it. Regardless this was a comment that oil traders could not ignore. 25% of the world's oil goes through the Straits of Hormuz and Iran could block that passage to cripple the west for supporting Israel in an attack. Venezuela has also threatened to halt oil shipments to the U.S. if Iran is attacked.

At the same time Obama vowed to eliminate the threat posed by Iran to world security. "The danger from Iran is grave and real and my goal will be to eliminate this threat." He also said he would do everything possible to prevent Iran from obtaining a nuclear weapon. It appears the potential next president of the U.S. is already positioning himself to attack Iran. That gave oil traders one more excuse to buy oil.

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Also pushing oil higher was a limit up move on heating oil. Heating oil is seen as a proxy for diesel since both are products of the distillate process. A barrel of crude produces an average of 9.21 gallons of diesel, 1.75 gal of heating oil and 1.76 gal of fuel oil from the distillate process. There are also 19.15 gallons of gasoline and 3.82 gal of jet fuel. Depending on demand for a particular product additional refining steps can be taken to increase the percentage of a specific product. Demand on diesel is growing sharply and that puts pressure on the other distillates like heating oil. Trading heating oil therefore is a proxy for diesel. A limit up in heating oil puts pressure on all the crude products.

Also fueling the spike was the third consecutive weekly drop in crude inventories. This week's drop was -4.8 million barrels and that brings the total three week decline to -19 million barrels. If there is so much oil in the world then where is it? Current U.S. crude inventories are 11% below 2007 levels.

The weekly EIA report showed that over the last four weeks total crude consumption had fallen only 1.1% compared to the 3%-4% numbers being reported in the retail surveys. Gasoline demand had only declined -1.4% nationwide compared to the MasterCard Spending Pulse report showing a -4.7% drop for the week. This EIA demand picture was much more bullish since it was significantly less of a drop and suggested consumers were getting over the high prices and continuing life as normal.

The better than expected jobs report also boosted demand estimates since a stable job market contributes to stable consumption of crude products. Since many economists believe the economy has passed the bottom and is beginning to recover that jobs report was bullish for demand estimates.

Finally the war of words over rates between the ECB and the Fed effectively killed the rally in the dollar over the last two weeks. The last two days were extremely ugly after ECB President Jean-Claude Trichet said the ECB was considering raising rates as early as next month to fight inflation. Since the Fed is going to be challenged by recent economic events to raise rates that meant the dollar lost ground against the Euro. The two-day plunge on the chart below was just an added factor for the rise in crude.

USD Index Chart

Those events above contributed to the perfect storm for crude prices. Shorts were squeezed even harder by the lack of volume and the bulls kept buying everything in sight. There was a school of thought that shorting Thursday's close at $128 was the right thing to do technically. When that did not work they were forced to cover and that made the prior high at $135 the next obvious short. For four hours that $135 short resistance held on Friday but as the close approached with a volatile weekend ahead the bears were forced to cover and the last hour of trading saw another $4.50 gain. This spike should translate into another 10-15 cents per gallon at the pump by Wednesday of next week. It could be even more for diesel. AAA said the national average for gasoline was $3.99 on Wednesday making a jump over $4 next week almost certain.

The $150 price target by Morgan Stanley and several other firms is looking like a self-fulfilling prophecy today. With the close at $138.50 that is only $11.50 away. According to NOAA there is a tropical wave building in the Atlantic that has the potential to turn into a storm as it moves into the southeastern Caribbean. If this turns into a storm by Monday we will be looking at additional pressure for prices to move higher. Goldman's short-term target of $141 was ridiculed when they made it two months ago. Friday's high of $139.12 was close enough for them to claim a win. Boone Pickens said $150 by November. Stepping out a little farther there are predictions of $200-$225 in 12-18 months and $250-$500 in 36 months.

Remember my crude oil chart from last Sunday? I have reprinted it here for review. Note the comment on the chart. Wednesday's close was $122.30. I did not expect the move we got but those who followed my suggestion did well.

Last Week's Crude Chart

This Week's Crude Chart

The two-day $15 spike in oil prices crushed the transports, which closed at a new historic high on Thursday at 5493. For the life of me I can't understand why the transports were doing so well when the airline sector is tanking so hard. Continental joined the diet club and said it would ground 67 planes, cut jobs and reduce capacity due to oil prices. So far in the last 90 days the U.S. airline sector has seen over 500 planes either taken out of service or plans announced to ground them. Over 14,000 jobs have been cut and existing capacity has been reduced by 15%. They will save a lot of money with those changes but with oil prices rising so fast they are still losing ground. One analyst said the gains in oil prices over the last two days alone have increased the fuel bill for U.S. airlines by $4 billion. They were already projected to have moved from year-end 2007 expectations of a $4 billion profit in 2008 to a $2.3 billion loss if fuel stayed around $110 for the rest of the year. At $130 that loss was expected to grow to $6.1 billion and at Friday's close at $138.50 that loss was expected to grow to $10 billion for the year. You can't continue to lose that kind of money and stay in business. Analysts claim the airlines will have to raise prices by 25% to 35% just to break even. With the airlines in the tank and UPS and FDX bleeding profits from higher fuel costs, where is the strength in transports? Railroads of course. They are the winners in any continued high oil scenario but even they crumbled on Friday.

Ironically even the oil stocks lost ground on Friday. Refiners were sold hard as crack spreads disappeared at $138. Valero lost -3.31. Exxon with the largest reserves of any public company lost -$2.52. Even the drillers, the companies expected to benefit most by increased exploration, were knocked off their rigs. Transocean lost $4 to cap a $20 drop over the last three weeks.

There is an important event happening in September. The Association for the Study of Peak Oil (ASPO) is holding their annual conference in Sacramento on Sept 21-23rd. This is a full 2.5 days of intensive, as in 8:AM to 9:PM information overload from dozens of experts from around the world on the status of Peak Oil. The cost is minimal at $375 because they are a non-profit and make no money on the event. Feeding people three meals a day at the Hyatt in Sacramento would consume most of that fee. I would not miss this conference for the world. It is the most important event of the year for those invested in energy or users of energy so that means everybody. Follow the link below to register and meet me there. We can discuss each presentation and plan trades for the coming year. Put my name in the "how did you hear" box so they can group us together for the meetings. Go here to register:
http://www.aspo-usa.org/aspousa4/

Can anybody say tough market? Nothing is working more than a day or two and the markets are becoming increasingly volatile. When energy companies can't even rally on a $15 spike in oil then no company is safe. The indexes remain strongly diverged with the Russell and Nasdaq still holding the high ground while the Dow and S&P have both broken strong support. To illustrate the divergence the Russell only lost -8 points for the week while the Dow lost -428.

The Dow and S&P are falling on the continued decline in financials. The brokers are expected to report in two weeks but rumors of an earlier release by Lehman are circulating. Their official release date is June 16th but they are currently trying to attract additional capital. To do this they may need to release earnings earlier in order to put investors at ease. The shorts are punishing Lehman and volume has been huge. There are worries that Lehman could turn into another Bear Stearns because they can't deleverage fast enough. An early earnings release that was better than expected could do wonders for investor confidence.

The Dow lost -394 points on Friday to close at 12209. This is below several levels of recent support and appears to be targeting the March lows of 11750. Granted this is due mostly to the implosion in the financial sector with AIG under pressure again on Friday. Boeing was also a major decliner as traders flee the stock on worries airlines are going to cancel orders. Once the brokers report earnings in two weeks the Dow could recover. However, I believe sentiment may have been damaged significantly by this week's results. The +209 gain on Thursday was attributed to an asset allocation program where treasuries were sold and market indexes were bought. Many retail investors jumped on for the ride and were rewarded with Friday's -400 point loss. Frustration is setting in as traders start contemplating summer vacations, barbecues and yard work rather than fight the markets. I had more than one trader email me in the last couple of weeks expressing their frustration with the market. It is called summer and the opposite of our current extreme volatility is the approaching summer doldrums where nothing happens. It makes you appreciate the "sell in May" strategy.

Dow Chart - Daily

S&P-500 Chart

The S&P mirrors the Dow for the reasons I listed above and Friday's close at 1360 was a loss of -43 points. Critical support at 1370 was broken and critical resistance at 1405 has now held twice in the last two weeks. Both the Dow and S&P have clear chart failures and are projecting drops to lower levels. These are not charts I would buy.

The Nasdaq is struggling to hold on to its recent gains and Friday's -75 point beating knocked it back to 2475. Over 2440 the trend is still intact but the Nasdaq is not going to survive a continued swoon by the Dow and S&P. The chip sector is still strong with support on the SOX at 400. Intel was a drag on Friday after South Korea fined them $25 million for antitrust claims. I am neutral on the Nasdaq over 2440, bearish below that level. I would be bullish over Thursday's high at 2550. Cisco hit a five-month high on Thursday so tech is still alive but having a tough time carrying the Dow on its back.

Nasdaq Composite Chart - Daily

Russell-2000 Chart

The strongest chart is still the Russell 2000 and I am confused as to why. The Russell should not be leading the pack given the weakness in the Dow and S&P. I have been bullish over 730 and it closed at 740 on Friday. I thought we were good to go after the 762 breakout and close on Thursday. Obviously I was very depressed to see the decline on Friday despite it being better than the other indexes. You can still lose money on a falling leader. I am turning neutral on the market in general but I will continue to have a slightly bullish bias over 730 on the Russell. Under 730 I would be short or flat.

Crude prices should remain volatile and that is actually a negative. Many traders are walking away from trading crude because of the volatility. This reduces liquidity and actually makes it even more volatile. Expect some more big moves but they should all be news related.

The biggest stock even for next week is the Apple announcement on Monday. Steve Jobs is expected to announce the 3G iPhone at 10:00 and the market for Apple stock should be extremely volatile around the announcement. Many think the news is already priced into the stock while others think Jobs will pull another rabbit out of his hat with some astounding features. Some feel the iPhone novelty is wearing off and there are no big features other than the 3G capability. One analyst pointed out that adding the 3G feature added nearly 700 million potential customers in Europe and Asia. Those customers were prevented from buying a regular iPhone because no network in their area supported it. This should give Apple a significant new audience.

I would be cautious about entering new positions next week. This is a traders market and not a scenario for buy and hold investors. There is no need for an investor to be in the market at all times. Wait for a key inflection point and use smaller positions until a trend develops again. Lost opportunity is better than lost capital.

Jim Brown
 

New Plays

Most Recent Plays

Click here to email James
New Plays
Long Plays
Short Plays
None ACAS
  DOV
  DRI

Play Editor's Note: After Friday's big sell-off I'm expecting an oversold bounce but would use it as an opportunity to open new bearish positions.


New Long Plays

None today.
 

New Short Plays

Amer.Capital Strat. - ACAS - close: 30.95 change: -0.93 stop: 32.51

Company Description:
American Capital is the largest U.S. publicly traded private equity fund and one of the largest U.S. publicly traded alternative asset managers that is a member of the S&P 500. (source: company press release or website)

Why We Like It:
The sell-off in ACAS has been a little bit slower than the rest of the financials but the trend is still down. This is a stock that readers could short right away. Or if you prefer wait for another failed rally under $32.00 since the financial sectors are so oversold and due for a bounce! We want to aim for the January 2008 lows so our target is the $26.50-26.00 zone. We're suggesting a stop loss at $32.51 but you might be able to get away with a tighter stop closer to $32.00. The P&F chart is bearish with a $22 target. FYI: It is important for readers to note that ACAS has above average short interest. A lot of investors have seen the trend and they're piling on. The most recent data listed short interest at 15.5% of the 199-million share float. That is more than a week's worth of short interest and raises the risk of a short squeeze.

Picked on June xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/31/08 (unconfirmed)
Average Daily Volume: 2.4 million

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Dover Corp. - DOV - close: 51.93 change: -2.05 stop: 54.51

Company Description:
Dover Corporation, with over $7 billion in annualized revenues, is a global portfolio of manufacturing companies providing innovative components and equipment, specialty systems and support services for a variety of applications in the industrial products, engineered systems, fluid management and electronic technologies markets. (source: company press release or website)

Why We Like It:
This is a much more aggressive bearish play. DOV has been a huge relative strength winner over the past couple of months. Yet the bulls ran into trouble around $54.00-54.50. Now DOV's chart has a potential double-top pattern with the July 2007 peak and the May 2008 peak, which is bearish. Traders could short it now but we think the markets might see a bounce on Monday. Our suggested entry point for shorts on DOV is the $52.75-53.00 zone. If triggered our target is the $48.00-47.50 range. The stock does not have a lot of short interest that we know of.

Picked on June xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/23/08 (unconfirmed)
Average Daily Volume: 1.8 million

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Darden Rest. - DRI - close: 32.16 change: -1.68 stop: 34.81

Company Description:
Darden Restaurants, Inc., headquartered in Orlando, Fla., is the world's largest full-service restaurant company with almost $6.7 billion in annual sales and approximately 180,000 employees. The company owns and operates more than 1,700 restaurants including Red Lobster, Olive Garden, LongHorn Steakhouse, The Capital Grille, Bahama Breeze and Seasons 52. (source: company press release or website)

Why We Like It:
The U.S. is in an economic slowdown. The U.S. consumer is probably eating out less as they pay more for gas at the pump. That's not good news for DRI. Technically things look very bearish. The stock has broken down from a five-month bearish wedge pattern. The oversold bounce in late May failed under $35 and its 50-dma. Honestly, we're tempted to just short it right here. However, the selling on Friday stalled at its 100-dma. We think DRI might bounce. Instead we're suggesting readers short DRI on a bounce back into the $32.90-33.50 zone. We're setting the stop loss at $34.81 but you might be able to get away with a stop closer to Thursday's high near $34.50. We have two targets. Our first target is $30.10. Our second target is $27.75.

Picked on June xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 06/24/08 (unconfirmed)
Average Daily Volume: 2.0 million
 

Play Updates

Updates On Latest Picks

Click here to email James

Long Play Updates

Adaptec - ADPT - close: 3.20 change: -0.12 stop: 3.09

It proved to be a volatile day for ADPT. The stock spiked to $3.40 Friday morning and then reversed the remainder of the day closing with a 3.6% loss, which is a 5.8% decline from its intraday high. Shares are back to its short-term trendline of support. We are not suggesting new positions and more conservative traders might want to consider a stop loss around $3.13-3.14 instead of ours at $3.09. Our target is 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: - 0.05
Earnings Date 05/08/08 (confirmed)
Average Daily Volume: 559 thousand

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Axsys Tech. - AXYS - close: 62.01 change: -0.59 stop: 57.39

AXYS continues to show relative strength. The stock only lost 0.9% versus the S&P 500's 3% sell-off. Shares are holding above broken resistance near $60.00. While we are encouraged by AXYS' strength we're not suggesting new bullish positions. 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: + 2.85
Earnings Date 07/24/08 (unconfirmed)
Average Daily Volume: 124 thousand

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BJ Services - BJS - close: 31.63 change: -0.18 stop: 29.89 *new*

Oil service stock BJS initially spiked to a new six-week high at $32.59 but then reversed course. The oil sector stocks eventually succumbed to the painful selling in the market. This does look like a short-term top and we would expect a dip back toward $31.00 in BJS. Look for a bounce near $31.00 as a potential entry point. We are raising our stop loss to $29.89. 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: + 1.18
Earnings Date 07/24/08 (unconfirmed)
Average Daily Volume: 6.9 million

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AM Castle & Co - CAS - close: 31.64 change: -1.29 stop: 30.95

CAS, like most of the market, reversed most of yesterday's gains. The stock looks poised to retest the $31.00 level soon. Given the market's new posture of weakness, at least for the S&P 500, more conservative traders might want to exit early. We're going to stick with CAS for now since the bullish trend has not been broken. Wait for a bounce from $31.00 before considering new positions. An alternative would be to wait for a breakout over resistance near $33.00. Our target is the $36.50-37.00 zone, which is just under its all-time highs.

Picked on June 01 at $32.83
Change since picked: - 1.19
Earnings Date 07/31/08 (unconfirmed)
Average Daily Volume: 138 thousand

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Mercury General - MCY - close: 51.30 change: -1.34 stop: 49.99

After MCY's rally to new five-month highs we are surprised that the stock did not see more profit taking on Friday. Shares gave back 2.5% and failed to hit its average daily volume, which is a good sign for the bulls. We remain positive on the stock but you may want to wait for a dip or bounce near $51.00 or the $50.50 area as a new entry point. 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: + 0.38
Earnings Date 05/05/08 (confirmed)
Average Daily Volume: 264 thousand

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United States Cellular - USM - cls: 62.87 chg: -1.63 stop: 59.95

USM gapped down on Friday morning around $62.70 and tagged $62.60 before paring its losses. USM endured the market's sell-off better than most. Readers can choose to buy this dip or wait for a potential pull back toward $62.00 and buy it there. 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. Bear in mind that while USM is showing some relative strength this is not a great market to be opening bullish positions. You may just want to pass.

Picked on June 01 at $62.63
Change since picked: + 0.24
Earnings Date 08/07/08 (unconfirmed)
Average Daily Volume: 129 thousand

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Williams Cos. - WMB - close: 39.18 change: -0.19 stop: 37.75 *new*

Another new high in natural gas was overshadowed by the massive surge in crude oil. Shares of WMB was boosted by both strength in gas and a positive article by Barron's online suggesting that WMB is undervalued. Yet even these factors couldn't keep WMB's gains afloat. The stock reversed after hitting $40.58. This looks like a short-term top and we do expect a dip toward $38.50-38.00. We are raising our stop loss to $37.75. 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: + 0.78
Earnings Date 07/31/08 (unconfirmed)
Average Daily Volume: 6.7 million


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Wal-Mart - WMT - close: 58.37 change: -1.43 stop: 56.49

A day after surging to new multi-year highs WMT suffered a 2.39% loss. This really shouldn't be a surprise and we warned readers on Thursday to wait for a dip back toward $58.00 as a potential entry point. Near $58.00 WMT should fill the gap from Thursday morning. This past month WMT has produced what appears to be a big bull flag pattern (see chart) so we remain longer-term bullish. Yet even WMT, with its relative strength, may not be able to withstand a full fledged rout in the stock market. Wait for a bounce in the $58.00-57.50 region before considering new positions. WMT has already surpassed our early target at $59.00. The Point & Figure chart points to a $68 target. We have a second, more aggressive target at $62.00.

Annotated chart:

Picked on May 22 at $56.05 /1st target exceeded
Change since picked: + 2.32
Earnings Date 08/14/08 (unconfirmed)
Average Daily Volume: 19.1 million
 

Short Play Updates

McDonald's - MCD - close: 56.95 change: -1.10 stop: 59.32 *new*

Dow-component MCD lost another 1.89% on Friday, which wasn't bad considering the 394-point sell-off in the DJIA. Shares of MCD did trade to a new relative low and the stock looks poised to dip toward its 200-dma around 56.45. We are targeting the 200-dma so we're adjusting our exit range to $56.55-56.40. More aggressive traders may want to aim lower. We are adjusting our stop loss to $59.32 (breakeven). We're not suggesting new shorts at this time.

Picked on June 01 at $59.32
Change since picked: - 2.37
Earnings Date 07/30/08 (unconfirmed)
Average Daily Volume: 6.6 million

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Paychex Inc. - PAYX - close: 33.17 change: -0.83 stop: 35.25*new*

PAYX continues to slip lower with a bearish trend of lower highs and lower lows. We're inching our stop loss down to $35.25. More conservative traders may want to use a tighter stop loss. We're not suggesting new positions in PAYX at this time. 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: - 1.70
Earnings Date 06/25/08 (unconfirmed)
Average Daily Volume: 2.4 million

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Patterson Cos. - PDCO - close: 33.27 change: -0.84 stop: 34.51

PDCO rolled over under the top of its trading range with a 2.4% decline on Friday. This looks like a new entry point for shorts. However, PDCO does have potential support in the $33.20 zone, where it bounced on Friday. More conservative traders may want to see a new relative low under $33.00 before initiating positions. We are adjusting our stop loss down to $34.21, just above resistance near $34.20. Our target is the $30.50-30.00 zone. The P&F chart is bearish with a $28 target. FYI: The most recent data listed short interest at about 11% of the 98 million-share float. That is a relatively high degree of short interest for this stock.

Picked on June 03 at $33.42
Change since picked: - 0.15
Earnings Date 08/21/08 (unconfirmed)
Average Daily Volume: 1.6 million
 

Closed Long Plays

Holly Corp. - HOC - close: 43.72 change: -2.00 stop: 43.99

Ouch! On Thursday night I went out on a limb to buy the oil refiners. That limb splintered under the weight of $138 oil. Thursday's $5.00 rise in oil was a record-setting surge. I did not expect a $10.00+ rally again on Friday. Higher oil puts pressure on margins for the refiners and HOC's bounce from support on Thursday was quickly squashed. The stock hit our stop loss at $43.99.

Picked on June 05 at $45.72 /stopped out 43.99
Change since picked: - 2.00
Earnings Date 08/07/08 (unconfirmed)
Average Daily Volume: 1.2 million

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Sonoco Products - SON - close: 33.16 change: -1.44 stop: 32.99

We are giving up on SON. The stock has produced its second failed rally in a week. Friday's loss was 4.1% and the stock looks poised to retest support near $32.00 and its 50-dma. We would rather cut our losses now.

Picked on June 01 at $34.62 /exiting early
Change since picked: - 1.46
Earnings Date 07/30/08 (unconfirmed)
Average Daily Volume: 430 thousand

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WMS Industries - WMS - close: 37.04 change: -0.99 stop: 34.25

We are suggesting an early exit in WMS. The stock has struggled with resistance near $38.00 for a week and Friday's session has produced a bearish engulfing (reversal) candlestick pattern. Shares could retrace back toward technical support at its rising 200-dma near $34.90. We might want to try again on a bounce near $35.00.

Picked on May 28 at $36.05 /exiting early
Change since picked: + 0.99
Earnings Date 08/07/08 (unconfirmed)
Average Daily Volume: 1.1 million
 

Closed Short Plays

None
 

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

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