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Daily Newsletter, Monday, 07/14/2008

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Table of Contents

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

Market Wrap

Run on IndyMac Trumps European Gains

U.S. stocks jumped at the open after inflation data released at the manufacturing level in the United Kingdom came in below expectations, but IndyMac Bancorp's (NYSE:IMB) $0.12 -57.14% failure late Friday, which the FDCI took over, trumped early morning buying, with the major indices finishing at, or near their lows of the session.

The collapse of IndyMac is expected to cost the FDIC $4 billion to $8 billion, potentially wiping out more than 10% of its $53 billion deposit-insurance fund, and with industry analysts still warning that there may be more carnage yet to come among subprime mortgages, investors remained cautious.

Volumes at the NASDAQ were what I would consider to be "light" with just less than 2 billion shares changing hands.

Volumes at the big board remained "brisk" in a very active trade among financials.

Federal Home Loan Mortgage (NYSE:FRE) $7.11 -8.25%, affectionately called "Freddie Mac," churned 263 million shares and was atop today's list of most actives, while Fannie Mae (NYSE:FNM) $9.73 -5.07%, Washington Mutual (NYSE:WM) $3.23 -34.73%, Wachovia Bank (NYSE:WB) $9.84 -14.73% and Citigroup (NYSE:C) $15.22 -5.99% rounded out today's most actives at the NYSE.

Still up roughly 82% from Friday's intra-day low of $3.89, Freddie Mac's auction of $3 billion in short-term debt sold at better than expected prices after the Fed said Sunday that it granted the Federal Reserve Bank of New York authority to lend Freddie and Fannie (should such lending prove necessary) capital at 2.25%, the same rate given to commercial banks and large Wall Street Firms.

Washington Mutual (NYSE:WM) $3.23 -34.74% was sharply lower after Lehman Brothers said the bank could see $26 billion in losses from items on its balance sheet.

Ohio-based National City Corp. (NYSE:NCC) $3.20 -27.60% also came under pressure and were halted for trade just prior to 12:00 PM EDT at $3.21 with news pending. The banks spokeswoman said in a statement that it was still credit-worthy. When trading was resumed in the shares, buyers marked an intra-day low of $2.99.

In an attempt to protect some homebuyers from themselves and lenders, the Fed approved a final mortgage-lending rule by requiring creditors to verify borrowers' income and assets and to establish escrow accounts for all first-lien mortgages.

In essence, if a prospective borrower tells a lender that he/she/they have $100,000.00 in income, but in reality make $50,000.00, it'll probably be difficult to qualify for a $300,000.00 loan with no-money-down, let alone 125% loan-to-value!

Somehow, someway, somebody will figure out a way to circumvent the system. Not unlike death and taxes, this to is something you can count on.

With taxpayers on the hook for IndyMac's bailout, the U.S. Dollar Index (DXY) 72.01 -0.12% (from Friday's close) was off fractions, with the yen and pound as depicted by the Yen CurrencyShares (FXY) 95.08 +0.36% and British Pound CurrencyShares (FXB) $199.77 +0.36% showing gains, while the most heavily weighted euro depicted by the Euro CurrencyShares (FXY) $159.39 -0.03% edged lower.

Silver and gold as represented, viewed by some as a hedge against a weakening dollar, had the iShares Silver Trust (AMEX:SLV) $189.40 +1.61% (~$18.94 spot) and StreetTracks Gold (NYSE:GLD) $95.91 +0.78% (~$959.10 spot) posting gains.

Major Global Markets, Currencies, Oil and Gold

Asian markets finished Monday's session mixed-to-lower with Japan's Nikkei-225 ($NIKK) shedding 29 points, or 0.20% to finish at 13,010.

Later this evening, the Bank of Japan is slated to announce its overnight call rate, with many expecting no change at 0.50%.

In last Monday's market wrap, I quickly updated you on the $NIKK point and figure chart, where since Monday, we have seen further selling (-2.62%) take the $NIKK below its bullish support trend. First sign of strength now would be a double top buy signal with trade at 13,200. A trade there could bring in some meaningful near-term short-covering after a pattern of lower highs at 13,400, then 13,250 and now 13,150.

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Mainland China's Shanghai Composite ($SSEC) gained 21 points, or +0.76% and continues to rise from a very "oversold" 0-14% bullish percent (4% on chart), having now reached a more "overbought" 68-72% at this evening's update (See Monday's Wrap and Global Bullish %) of 68%.

Let's call the Hang Seng's ($HSI) trade since last Monday's update as "unchanged" even though it is up 0.46% from last Monday's close.

As China's Shanghai bullish % has quickly reversed course, let's quickly review today's economic data out of the UK, the FTSE-100's point and figure chart, as well as the London Bullish % from Dorsey/Wright, as we observe some "similarity" of internal strength presenting itself.

FTSE-100 ($FTSE) - 50-point box

On a 2008-YTD basis, I'd have to say, based on observation, that the FTSE-100 is perhaps the "stronger" of the major European bourses covered in my Monday market wraps.

Today's economic data out of the UK showed the country's Producer Price Index (PPI) Inputs rising a hefty 2.1% (M/M) in June as sharp increases in prices of oil, gas and electricity, as well as imported food kept inflation hawks at the ready. While the 2.1% rise offered some cushion to economists' forecast for a larger 2.5% increase after a 3.9% (M/M) surge in May, producers were able to pass along some of their costs with PPI Outputs rising 0.9% (M/M) after a 1.9% increase in May (M/M). While greater focus is given to the INPUTS side of the equation, the output increase was also below economists' forecast for a 1.2% increase.

With the FTSE-100 ($FTSE) challenging its Jan'08 lows, there are few bullish profits at this point, but a recent reversal back up in Dorsey/Wright's Bullish % for London (BPLN) to "bull alert" suggests at a minimum that not unlike Shanghai, we may be seeing some short-covering start to take hold on a more meaningful basis.

London Bullish % (BPLN) - 2% box chart

Bears will likely want to make the tie with "bull alert" status signaling just that. Being on the alert for strength as the BPLN reverses up from BELOW 30%.

Off the various "Europe" based bullish % covered by the institutionally followed Dorsey/Wright & Associates, the London Bullish % is the only bullish % to currently show a reversal higher.

That's enough for this technician to have subscribers on early alert for strength in Europe.

As I type, another closely watched economic report is being released out of the UK, with its Royal Institution of Chartered Surveyors (RICS) House Price Balance coming in at a weak, but stronger-than-forecasted reading of -88.00% in June. Economists were looking for a reading of -93.8% after May's -92.2%. The RICS suggests that 88% of surveyors reporting housing prices fell in June, a modest improvement from 92.2% having reported falling housing prices in May.

Analysts mentioned a "glimmer of optimism" in that demand may be starting to pick up with a balance of -35 reporting a rise in new-buyer enquiries, compared to -51 in May.

With many of the "same problems" found in Europe and the UK as found here in the U.S. I think it worthy of tracking some of the foreign markets economic data, and market participant reactions to the data.

Closing U.S. Market Watch -

Again, financials as grouped with the BIX.X, BKX.X, XBD.X were notably weak again today.

My only comment here is to trade OPTIONS and do NOT over leverage.

I have not been PROFILING any bullish, or LONG CALL option trades among the banks, but traders have been having success with "small" OUT-THE-MONEY put option positions in Lehman Bros. (NYSE:LEH) $12.40 -14.06% and Bank of America (NYSE:BAC) $20.15 -7.01%.

If/when a trader gets a double, or 100% gain, which can be a day or two, don't shun those types of gains.

Oil prices were rather "steady" today, but supply concerns in Iran, Nigeria and now Brazil keep bulls steady and short on edge.

Brazil's Petroleo Brasileiro (NYSE:PBR) $62.36 +1.05% said earlier this morning that a strike by 2,500 workers in the Campos Basin (80% of Brazil's oil output) might have cut production by 300,000 barrels/day, but later in the afternoon said it looked as if 136,000 barrels per day of production was negatively impacted. Brazil produces roughly 1.8 million barrels per day of oil and gas equivalents.

Short interest data on the US Oil Fund (USO) $117.48 +0.07% has been released. As of 06/30/08, short interest has grown to a record 20.02 million shares. On June 30th, the USO closed at $113.77.

While it is "never too late" for the U.S. to try and ease its dependency on foreign oil, President Bush lifted an executive ban on U.S. offshore oil drilling today, but until Congress lifts its own ban, the moratorium will continue.

Into next Tuesday's expiration, Nymex August Crude Oil futures (cl08q) settled up $0.10, or +0.07% at $145.18, while the September futures contract (cl08u) settled up $0.12 at $145.78.

One internal indicator I like to have traders and investors keep an eye on in the major U.S. benchmarks is the narrow NASDAQ-100 Bullish % (BPNDX) from Dorsey/Wright, and StockCharts.com's ($BPNDX).

On Tuesday, July 8th, this narrower bullish % did reverse back up to "bear correction" status at 40%, but on Thursday, reversed right back down to "bear confirmed" status at 33.00%.

It would now take a reversing higher measure of 40.00% on the below chart to once again achieve "bear correction" status, and a stronger demand measure of 42.00% to reach "bull confirmed" status, the STRONGEST of market conditions.

NASDAQ-100 Bullish % (BPNDX) - 2% box chart

My analysis would have to suggest that the recent spat of buying in among NDX components was largely short-covering related. Maybe some "bargain hunting" bulls, but a quick look at the NDX itself gives us a good observation that a trade at 1,880 is needed to signal demand returning on a more meaningful basis, and a re-test of the March lows still in play.

NASDAQ-100 Index (NDX) - 20-point box

Traders and investors can probably make the tie between the recent UPWARD reversal in the BPNDX to 40.00% and the recent reversal up to 1,860 in the NDX itself, then the 3-box reversals back lower.

For me, it would currently take a trade at 1,880 to signal strength here.

One sector that looks compelling from the BULLISH side would be BIOMed, where its sector bullish % has been gaining buy signals and remains in "bull alert" status at 30.50% (has been 32.00% on sector bullish %) having fallen to as low as 14% in early March.

The U.S. Market Watch would show the Biotechnology Index (BTK.X) 759.70 -0.46% up 2.87% since June 24th, and representing some RELATIVE STRENGTH.

Hmmmm... the Pharmaceutical Index (DRG.X) 300.15 -0.34% also showing some strength since then.

One earnings report this evening had shares of Genentech (NYSE:DNA) $75.39 -3.03% edging higher at $76.45 after the world's second-largest biotechnology company posted net income of $782 million, or $0.73/share (including one-time charges of $0.09/share) on revenue of $3.24 billion. Wall Street was looking for the company to earn $0.86/share on revenue of $3.23 billion.

Late this afternoon, after the market closed, the Semiconductor Equipment and Materials International, known as SEMI, echoed last week's cautious forecast from research firm Gartner Inc., saying it has revised LOWER its 2008 forecast for chip equipment sales.

SEMI said sales are likely to fall 20% this year, which is much more pessimistic than the group's previously projected 1.4% decline seen in January. Last week, Gartner said it saw semiconductor capital spending dropping by 22% as chipmakers are expected to delay spending due to migration to the advanced 12-inch, or 300-millimeter, wafer-fabrication lines, which industry analysts see as boosting output at lower manufacturing costs.

Chipmaker behemoth Intel (NASDAQ:INTC) $20.47 -0.82% may shed some light on its cap-ex spending when it reports earnings tomorrow after the closing bell.

Bullish caution advised for Applied Materials (NASDAQ:AMAT) $17.77 -0.78%, KLA-Tencor (NASDAQ:KLAC) $37.33 -1.21%. Novellus (NASDAQ:NVLS) $19.49 +1.72% found some buyers today, but has been spending some time under its late-April lows of $20.00.

Not unlike the Biotech's, which show some relative strength near-term, the small caps of the Russell 2000 Index ($RUT.X) manage to hold a 0.95% gain since Monday, and a fractional gain since Wednesday.

A "traingle" or pennant pattern looks like it is forming and there's probably some pressure building here.

Russell 2000 Index (RUT) - 4-point box

The RUT.X jumped higher this morning, traded a HIGH of 680.72, and in "BLUE ?" I've envisioned how the RUT finished the session.

This would be my "index chart of the WEEK" as we've at least got some UP (X) and DOWN (O) action that gives us the sense of pressure building between supply/sellers (O) and demand (X) buyers.

Bears steady as long as the RUT.X does NOT trade 688. Bulls can play, but I STRONGLY suggest small CALL OPTION positions, where DOWNSIDE risk is LIMITED to the price of the CALL option.
 

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

FLIR Sys. - FLIR - close: 42.00 change: -0.55 stop: 39.95 *new*

It was a real debate tonight on whether or not to keep FLIR. The stock's trend is bullish and it has a consistent trendline of support. Yet the short-term action today looks bearish and we could see a dip back toward the $40.00 region. The MACD on the daily chart is turning negative and has produced a bearish divergence. I strongly suggest that more conservative traders just exit early right now instead of seeing this turn into a potential loss. We're also adjusting our stop loss to $39.95. We're not suggesting new positions. Our target is the $44.95 mark. The P&F chart points to a $73 target. We do not want to hold over the July 24th earnings report.

Picked on June 29 at $41.38
Change since picked: + 0.62
Earnings Date 07/24/08 (confirmed)
Average Daily Volume: 2.2 million

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Garmin - GRMN - close: 42.05 chg: -0.61 stop: 41.49

There is no change from our previous comments. GRMN is still stuck in a trading range. We would continue to buy dips in the $42.00-41.75 zone. However, more conservative traders may want to wait for a new relative high over $45.00 again. Our target is the $49.50 mark. We do not want to hold over the July 30th earnings report.

Picked on July 08 at $44.10
Change since picked: - 1.04
Earnings Date 07/30/08 (confirmed)
Average Daily Volume: 3.0 million

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Helmerich-Payne - HP - cls: 68.34 chg: +0.84 stop: 62.39

HP continues to out perform the market but the stock failed to breakout over $70.00 today. We have two targets. Our first target is $69.90. Our second target is $74.00. We do not want to hold over the late July earnings report.

Picked on July 10 at $66.40
Change since picked: + 1.94
Earnings Date 07/31/08 (unconfirmed)
Average Daily Volume: 1.6 million

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Masimo Corp. - MASI - close: 35.56 chg: -1.16 stop: 34.45

Some of the quote services out there are going to tell you that the low in MASI today was $34.40. Not true! We checked the time and sales and the low for the day was $34.56. MASI never traded under $34.50. We're going to keep this stock on the newsletter. Now whether or not traders should hold on to it is another issue. We didn't see any news to account for the sudden sell-off. Buyers did step in to buy the dip and this afternoon bounce may prove to be a new entry point. However, the market environment remains very bearish and readers might just want to exit early anyway. The P&F chart is positive with a $56 target. Our target is the $39.95 mark. More aggressive traders could aim for the highs near $42.00 but we do not want to hold over the late July earnings report.

Picked on July 09 at $35.65 *triggered
Change since picked: - 0.09
Earnings Date 07/28/08 (unconfirmed)
Average Daily Volume: 461 thousand

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Terra Inds. - TRA - close: 48.56 chg: +1.61 stop: 44.45 *new*

The fertilizer stocks were out performing today. TRA added more than 3%. We are raising our stop loss to $44.45. We have two targets. Our first target is $49.75. Our second target is $54.00. We do not want to hold over the late July earnings report.

Picked on July 08 at $45.44
Change since picked: + 3.12
Earnings Date 07/24/08 (confirmed)
Average Daily Volume: 4.6 million

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Wyeth - WYE - close: 48.01 change: -0.29 stop: 46.39

WYE received some positive legal news today. A New Jersey judge dismissed two hormone therapy lawsuits against WYE. The stock failed to move on the news and looks set to trade lower. Readers may want to tighten their stops. Today's session came close to producing a bearish engulfing candlestick pattern. This week WYE may have some news as the company presents at a conference on July 17th. Our target is the $52.50 mark. We do not want to hold over the late July earnings report. FYI: The P&F chart has a $61 target.

Picked on July 08 at $48.31 *triggered
Change since picked: - 0.30
Earnings Date 07/23/08 (unconfirmed)
Average Daily Volume: 8.7 million
 

Short Play Updates

ICICI Bank - IBN - close: 26.29 chg: -0.32 stop: 30.15

Shares of IBN did not see a big reaction to stress in the U.S. financial sector on Monday. However, the trend for both is lower. We are suggesting shorts under $27.00. More conservative traders may want to wait for a new relative low under $25.66 to open positions. Our target is the $21.50 mark. Our original play description suggested an alternative strategy of buying an out-of-the-money call as a little bit of insurance just in case the financial sector explodes higher on some unexpected news. We had suggested the August $30 call, which was $1.20 as of last Friday night. FYI: You might want to adjust your stop loss on the stock to $29.25 instead. It is up to you when you sell the call if IBN rallies. You could sell it when the value covers our loss on the stock or let it run and potentially make a profit if IBN breaks out over $30.00.

Picked on July 13 at $26.61
Change since picked: - 0.32
Earnings Date 07/20/08 (unconfirmed)
Average Daily Volume: 3.6 million

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UBS Ag - UBS - close: 18.64 change: -0.85 stop: 20.75

The U.S. financial sector posted its biggest one-day launch in eight years following news that IndyMac bank closed its doors as a private institution over the weekend. The fact that the bounce in shares of FRE and FNM failed to hold today is also very bearish. Shares of UBS tried to rally but failed under the $20.00 mark. This is also another failed rally under its 10-dma. Our target is the $16.50 mark. Readers may already want to consider lowering their stop loss. Our original play description suggested that readers might want to buy a little insurance with an out-of-the-money call on UBS. It's not guaranteed to work but if the financial sector unexpectedly rebounds higher it could help protect us from serious losses. We had listed the July $22.50 call or the August $22.50 call with our suggestion to use the August $22.50 call. Our estimated cost was $0.80 ($80 per contract). You may have pay more or less for it depending on when you opened the trade.

Picked on July 13 at $19.49
Change since picked: - 0.85
Earnings Date 08/12/08 (unconfirmed)
Average Daily Volume: 7.3 million
 

Closed Long Plays

DIAMONDS - DIA - close: 110.50 chg: -0.50 stop: 111.69

We are dropping the DIA as a bullish candidate. We did not see a panic sell-off this morning and yet the bounce failed to hold. The trend looks lower and more aggressive traders may want to consider bearish positions instead. The stock (actually an ETF) did not hit either of our suggested entry points to buy it.

Picked on July xx at $xx.xx /never opened
Change since picked: + 0.00
Earnings Date 00/00/00
Average Daily Volume: 15.7 million

---

Olympic Steel - ZEUS - cls: 58.26 chg: -1.20 stop: 55.95

We are suggesting an early exit in ZEUS. The stock has produced another failed rally near $60.00. We'd rather exit now and wait for another entry point then see this turn into a loss.

Picked on July 08 at $56.56 /exiting early 58.26
Change since picked: + 1.70
Earnings Date 07/31/08 (unconfirmed)
Average Daily Volume: 319 thousand
 

Closed Short Plays

Big Lots - BIG - close: 27.13 change: -2.95 stop: 32.15

Wow! We thought BIG was poised to move but we didn't think it would drop to our target in one day. BIG actually traded higher this morning and hit $30.99 before reversing course. The stock then plunged toward our target at the 38.2% Fibonacci retracement level. Our target was $26.35 and BIG hit $26.39. That's close enough for us and while not a "win" we're suggesting readers exit now. Keep an eye on BIG for a failed rally under $30.00 as another potential entry point for shorts. If you did buy a call option as insurance it's up to you if you want to hang on to it or write it off. If BIG bounces sharply the option could recover some and you might be able to recoup some capital on your insurance expense.

Picked on July 13 at $30.08 / exiting early
Change since picked: - 2.95
Earnings Date 08/28/08 (unconfirmed)
Average Daily Volume: 2.6 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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