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Daily Newsletter, Monday, 06/16/2008

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Table of Contents

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

Market Wrap

Stocks Post Modest Gains As Rocco and Tiger Go Extra Round

Stocks posted modest gains to start the week as traders were either more occupied with this year's sudden death round of the U.S. Open golf championship between sentimental favorite Rocco Mediate and the world's #1 ranked golfer Tiger Woods, or traders expended all their energy last week ahead of this Friday's Triple Witch expiration as volumes were notably less than last week's 4.49 billion share average daily volume at the big board and 2.14 billion share average churn the NASDAQ.

For those of you that taped today's sudden death round of the U.S. Open, don't worry, I will not reveal today's winner in tonight's Market Wrap.

Oil prices jolted higher ahead of this morning's cash open and helped set a broader negative tone for stocks in early session trade as July crude oil futures (cl08n) jumped to a session high $139.89 just prior to 09:00 AM EDT, but then retreated as traders and investors mulled the effects of an overnight fire at a StatoilHydro (NYSE:STO) $38.46 +3.08% drilling rig in the North Sea, which could affect as much as 150,000 barrels of daily oil production, and this weekend's announcement out of Saudi Arabia that it would boost oil output by 200,000 barrels a day from June to July.

By session's end, July crude oil futures at the Nymex settled down $0.25, or -0.19% at $134.61, with this contract expiring on Friday.

After breaking below what I have been viewing as a key level of support (1.5392) on Friday, the euro did strengthen back some today, settling at 1.5476 +0.64% versus the dollar.

It has been my thoughts that the weakness in the dollar versus the euro has been partially responsible for the remarkable gains in oil prices. With some "softening" in the euro, I don't see how market participants can continue to blame any further strength in oil on monetary policy, should weakness in the euro versus the dollar continue.

U.S. Market Watch -

Financials were once again in focus with Lehman Brothers (NYSE:LEH) $27.20 +5.38% reporting a previously forecasted loss. The broker reported its first-ever quarterly loss of $2.8 billion, or $-5.14 per share. Revenue (total revenue less interest expense) for the recently completed Q2 was negative at $-700 million. Some analysts took solace in the firm's 20% reduced exposure to residential mortgages, commercial mortgages and real estate investments during the quarter.

The Financial SPDRs (XLF) $23.60 +0.94% edged higher by $0.22 and were the third-most heavily traded security, turning just more than 124 million shares.

U.S. homebuilder's confidence was about as robust as Lehman's in June.

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The National Association of Home Builders said its index for sales of new, single-family homes fell to just 18 in June, matching a record low set in December 2007. The index, which was 19 in May, gauges builder's perceptions of current home sales as well as sales expectations for the next six months. Readings above 50.00 indicate that more builders view sales conditions as good, while measures below 50 suggest builders see poor sales conditions persisting.

While the NAHB's survey of home builders was very negative, last week's rebound in the seasonally adjusted purchases index from the Mortgage Banker's Association (MBA) will be in the spotlight Wednesday morning.

MBA's Weekly Survey of Purchases - Week Ended 06/06/08

While sentiment among new homebuilders is negative, I would at least want to note that last Wednesday's release of the Mortgage Bankers Association (MBA) purchases index rebounded, with the MBA saying there were some signs that depressed prices may have started to find some speculators re-entering the market.

Having plunged to 333.6 for the week ended 05/30/08, the seasonally adjusted purchase index edged up 8.4% last week.

In the above table, and over to the far right, I've been calculating the 4-week SMA (simple moving average) and 12-week SMA (roughly 1 quarter).

Economic data released today showed manufacturing activity in New York State remained weak. The Empire State Manufacturing Survey fell 5 points to a negative 8.7 in June, which was weaker than economists' forecast of -2.0 and May's -3.2 measure. Readings above 0.00 suggest growth, while measurements below 0.00 suggest slowing.

Of the 200 manufacturing executives polled, roughly 30% of responding businesses reported conditions had deteriorated since May, while 21% said conditions had improved.

This weekend I had been asked by subscribers to post some of the major index/tracker "Max Pain Theory" levels. At tonight's close, the current tabulations when all June call and put open interest is combined would equate to the following.

June "Max Pain Theory" Tabulations - at 06/16/08 Close

The Dow Diamonds (DIA) $122.66 -0.35% and the Financial SPDRs (XLF) $23.60 +0.94% currently reside BELOW their June'08 Max Pain theory levels. The SPY $136.23 +0.05%, IWM $73.78 +0.62% and USO $108.99 -0.19% currently reside ABOVE their June'08 Max Pain theory levels. Give or take several cents, the QQQQ $48.80 +0.88% and SMH $32.00 +0.72% currently trade near, or at their June Max Pain theory levels.

While traders should NOT rely on securities "gravitating," or "elevating" towards the Max Pain theory levels, this is a QUARTERLY expiration and levels can me more influential and create greater gyrations as institutional traders, especially options market makers attempt to push things around and keep as much of the premiums they've sold as possible.

While today's U.S. Open sudden death round was exciting, last week's heavy volume certainly suggests institutions were active in their pre option expiration activity and if you thought Tiger's birdie on the 18th hole Sunday was unbelievable, which forced today's playoff, traders should always be aware that similar excitement and turning of events can take place into Friday's expiration.

U.S. Oil Fund (USO) - $0.50 box chart

Oil prices as depicted by the U.S. Oil Fund (USO) could be a major driver into Friday's expiration. Not only do USO options expire this week, but July crude oil futures (cl08n) also expire at Friday's close.

A break ABOVE $113.00 in the USO could bring another HUGE wave of buying into oil and weigh on the major indices, while a break below $116.00 in the USO, which happens to be this month's "Max Pain" theory could trigger a substantial decline.

Open interest in the July crude oil futures (cl08n) is heavy at 172,409 contracts and today's volume was brisk at 273,792 contracts!

If there's going to be a pivotal technical event to drive markets this week, I have to think its oil's price.

Like a 4-foot put to win the U.S. Open, great pressure continues to build around oil's price.

Euro CurrencyShares (FXE) - Daily Intervals

On Friday (06/13/08) the euro looked set to break down against the dollar, but the euro rebounded today.

I have NO clue as to "why" oil shorts didn't get their heads handed to them today, other than the euro looking a bit suspect to softening.

It is a tough call here as support looks horizontal at $154.00, but the lower highs despite oil's strength has a near-term bearish look to it.

If sellers come in strong below Friday's low (FXE= $153.40), then some hedge funds that have been long oil and long the euro could relinquish their hold.

The reason I feel pressure here is that I had profiled NAKED calls against the FXE, but on June 5th, I feared the FXE could surge above trend (as it did on June 6th), and should it break much above $158, traders could get caught in another short squeeze similar to that in late February (see 02/26/08 move).

Despite some very hawkish comments out of ECB officials, the euro's strength has been "kept in check."

In my opinion, the yen has weakened enough against the dollar at this point to alleviate fears among Japanese investors that their economy would crater under dollar weakness.

I think greater focus will be placed on the eur/$ and its impact, if any, on oil for the next couple of weeks.

DIA and SPY Montage - Daily Intervals

Little change in the DIA, or SPY from last Monday's market wrap at tonight's close, but buyers defended where they had to in the DIA on Wednesday (06/11/08).

On Tuesday morning as the DIA was trading $123.36, I did think conservative bulls should be looking to trade long the DIA Aug $123 Calls (DAW-HS) at $4.50/contract. As stated in last Monday's market wrap, I'm looking to hold this call option as long as the DIA can hold a CLOSE above $120.75.

IWM and QQQQ Montage - Daily Intervals

Both the very broad small caps of the iShares Russell 2000 (IWM) $73.78 +0.62% and the narrower, but larger cap names at the NASDAQ as depicted by the NASDAQ-100 Tracker (QQQQ) $48.80 +0.88% remain steady.

Shares of QQQQ/NDX component Adobe Systems (ADBE) $42.85 +0.32% slipped to $41.85 in this evening extended session after the software-maker said net income rose to $214.9 million, or $0.40 a share, amid strong sales overseas. Excluding stock-based compensation and acquisition charges, the company said EPS were $0.50. Revenue rose 19% year-over-year to $886.9 million. Analysts were looking for the company to earn $0.46/share on revenue of $880.01 million.
 

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: 3.30 change: +0.04 stop: 3.17

ADPT out performed the market with a 1.2% gain. We remain very cautious on the stock. Our first target is $3.50. Our secondary, more aggressive target is $3.70. 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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BJ Services - BJS - close: 32.05 change: +0.36 stop: 30.45

BJS added another 1% and did marginally better than most of its oil service peers. Shares of BJS did not see a sharp sell-off from its highs like crude oil did. Yet shares of BJS did produce what is called a "doji" candlestick, which indicates indecision and possible turning point. This could be a volatile week in the energy stocks as crude oil endures both an options expiration and a futures expiration. 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: + 1.65
Earnings Date 07/24/08 (unconfirmed)
Average Daily Volume: 6.9 million

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BPZ Resources - BZP - close: 27.23 change: +1.13 stop: 22.99

Wow! The action in BZP was a surprise. Friday's session looked like a short-term top. There was no follow through and BZP out performed the markets with a 4.3% gain. We would wait for a pull back before considering new positions. Broken resistance near $25.00 should be new support. Wait for a dip near $25.00 or even $24.50 before jumping in. We're upping our stop loss to $22.99. The latest data put short interest at about 10% of the float so BZP could see more of a short squeeze here. We have two targets. They are $27.50 and $29.90. The Point & Figure chart is bullish with a $40 target.

Picked on June 12 at $25.53 / 1st target hit $27.50
Change since picked: + 1.70
Earnings Date 08/02/08 (unconfirmed)
Average Daily Volume: 883 thousand

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Cognizant Tech. - CTSH - close: 35.81 change: +0.06 stop 33.65

We do not see any changes from our weekend comments on CTSH. More conservative traders might want to inch up their stops a bit. The stock looks ready to fill the gap from last November. Our target is the $38.00 mark. The P&F chart is much more bullish with a $49 target. We do not want to hold over the late July earnings report.

Picked on June 12 at $34.57
Change since picked: + 1.24
Earnings Date 07/31/08 (unconfirmed)
Average Daily Volume: 4.8 million

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McDonald's - MCD - close: 59.94 chg: -0.01 stop: 58.49

MCD did not make any progress today but shares have maintained their bullish trend of higher lows. We would still consider new positions here near $60.00 or on a dip near $59.50. MCD has produced a bullish breakout from a wedge pattern (see chart). There is obvious resistance near $61.50 but we're going to aim closer to the December 2007 highs. Our target is $63.00.

Picked on June 12 at $59.34
Change since picked: + 0.01
Earnings Date 07/24/08 (unconfirmed)
Average Daily Volume: 6.6 million

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SLM Corp. - SLM - close: 24.70 change: +0.85 stop: 21.75*new*

We did not have to wait very long for SLM to hit one of our triggers. The stock broke through resistance near $24.00 and hit our upside trigger to buy the stock at $24.25. Our target is the $28.00-29.00 range or the 200-dma, whichever one SLM hits first. We are adjusting the stop loss to $21.75.

Picked on June 16 at $24.25 *triggered
Change since picked: + 0.45
Earnings Date 07/17/08 (unconfirmed)
Average Daily Volume: 9.1 million

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Steel Dynamics - STLD - close: 39.35 change: -0.12 stop: 36.49

A lackluster market may have held STLD back on Monday. The stock failed to breakout over resistance at $40.00. Nor did shares pull back enough to hit our buy the dip trigger. We are suggesting two different entry points. If STLD breaks out over resistance at $40.00 then we want to buy it at $40.10. If STLD pulls back then we're suggesting readers buy it in the $38.25-38.00 zone. Our target is the $44.00-45.00 range. We do not want to hold over the July earnings report. The P&F chart is bullish with a $50 target.

Picked on June xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 07/21/08 (confirmed)
Average Daily Volume: 4.6 million

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Wal-Mart - WMT - close: 59.31 change: +0.13 stop: 57.75

Once again investors bought the dip in WMT. We're not suggesting new positions at this time and don't see any changes from our weekend comments. WMT has exceeded our first target at $59.00. The Point & Figure chart points to a $68 target. We have a second, more aggressive target at $62.00.

Picked on May 22 at $56.05 /1st target exceeded
Change since picked: + 3.26
Earnings Date 08/14/08 (unconfirmed)
Average Daily Volume: 19.1 million
 

Short Play Updates

Amer.Capital Strat. - ACAS - cls: 29.21 chg: +0.06 stop: 31.55

ACAS under performed the financials and the broker-dealers today. We remain bearish but the oversold bounce may not be over yet. Wait for a failed rally before considering new shorts. We are aiming for the January 2008 lows so our target is the $26.50-26.00 zone. 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 08 at $30.95
Change since picked: - 1.74
Earnings Date 07/31/08 (unconfirmed)
Average Daily Volume: 2.4 million

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Allstate - ALL - close: 49.85 change: -0.04 stop: 51.51

ALL continues to slide lower inside its narrow, short-term, bearish channel. We don't see any changes from our weekend comments. If the stock reaches $50.40-50.50 readers can use it as a new entry point for shorts. We're suggesting a stop loss at $51.51 but more conservative traders might want to put theirs near $51.00 instead. Our target is the $45.25-45.00 zone. FYI: In the news today ALL announced it was buying Partnership Marketing Group, which is a roadside assistance company and part of General Electric (GE).

Picked on June 11 at $49.31
Change since picked: + 0.54
Earnings Date 07/23/08 (unconfirmed)
Average Daily Volume: 3.9 million

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Darden Rest. - DRI - close: 33.13 change: +0.66 stop: 34.55

As we expected DRI bounced again. The stock added about 2% by the close. We are suggesting new positions but more conservative traders may want to wait for this bounce to roll over before jumping into new shorts. We have two targets. Our first target is $30.10. Our second target is $27.75.

Picked on June 13 at $32.50 *triggered
Change since picked: + 0.63
Earnings Date 06/24/08 (unconfirmed)
Average Daily Volume: 2.0 million

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Kraft Inc. - KFT - close: 30.27 change: -0.73 stop: 31.85

KFT plunged more than 2% and hit $30.05 before bouncing. Volume was above average on the decline, which is bearish. The $30.00 level could be round-number support so don't be surprised to see an oversold bounce. Our target is $29.00. FYI: After the bell tonight KFT announced plans to spin-off its Post cereal business. This might be the reason KFT was trading up around $30.50 in after hours.

Picked on June 11 at $30.78
Change since picked: - 0.51
Earnings Date 07/30/08 (unconfirmed)
Average Daily Volume: 7.8 million

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Paychex Inc. - PAYX - close: 33.67 change: +0.02 stop: 34.87

PAYX posted a minor gain. We don't see any changes from our weekend comments. At this point odds are good that PAYX will reach the $34.00-34.50 region. Wait for the bounce to roll over before considering new shorts. 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: - 1.20
Earnings Date 06/25/08 (unconfirmed)
Average Daily Volume: 2.4 million

---

Patterson Cos. - PDCO - close: 32.34 change: -0.45 stop: 34.05

Healthcare stocks were generally lower today. PDCO spiked lower at the open but managed to pare its losses. 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: - 1.07
Earnings Date 08/21/08 (unconfirmed)
Average Daily Volume: 1.6 million
 

Closed Long Plays

Williams Cos. - WMB - close: 38.67 change: -0.11 stop: 37.95

Natural gas rallied to another high and yet shares of WMB closed in the red. We have been growing increasingly more worried about the fading momentum and bearish divergences seen in WMB's technical picture. Today's lack of strength is our cue to exit. We're suggesting readers abandon ship. More aggressive traders may want to hold on since the trend is still "up". We'd rather not wait around to get stopped out.

Picked on May 22 at $38.40
Change since picked: + 0.27
Earnings Date 07/31/08 (unconfirmed)
Average Daily Volume: 6.7 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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