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Daily Newsletter, Thursday, 08/14/2008

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Table of Contents

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

Market Wrap

Stocks Mixed as Op-Ex Nears

Market Wrap

The major averages put in a mixed-to-lower trade as traders fine-tune positions into this week's option expiration.

The big guns in the Dow Industrials ($INDU) provide the bulk of the activity and gyrations. Earlier this week it looked as if the Dow Diamonds (DIA) $115.40 -1.00% were going to pull free of their August "Max Pain" theory tabulation of $115.00, which is a culmination of all option open interest (calls and puts), but with two sessions left, the diamonds appear pinned.

Such may also be true for the S&P 500 SPDRs (SPY) $128.57 -0.60%, where after some decent short-covering action on Friday that saw this tracker's parent S&P 500 Index (SPX.X) 1,285.83 -0.29% lurch to as high as 1,313 on Monday, a seemingly gravitational pull with the SPY's August "Max Pain" theory of $128.00 keeps traders on their toes.

The small caps of the Russell 2000 (RUT.X) 747.69 +0.36% and its tracker the iShares Russell 2000 (IWM) $74.58 +0.36% continue to hold steady, with the IWM holding well above its August "Max Pain" theory value of $71.00.

A resurgence of bullish optimism in shares of Apple Computer (NASDAQ:AAPL) $179.30 +1.45% in recent days has this most heavily weighted NASDAQ-100 Index (NDX.X) 1,942.02 +0.04% and its tracker the QQQQ $47.70 -0.20% back above its August "Max Pain" theory tabulation of $46.00.

It wouldn't be a volatile session that saw stocks dart lower at the open, then reverse losses by mid-afternoon, to then finish mixed-to-lower unless there were economic reports, some weekly energy inventory data, weekly housing data, Fed speak, limit up conditions in the grain markets and chatter surrounding the financials.

Oh, don't be disappointed, as there was plenty of that.

Economic data released prior to the opening bell here in the U.S. had July total retail sales falling for the first time in five (5) months, as shoppers avoided buying cars as they paid more for gasoline. Total retail sales fell 0.1% month-over-month, which was slightly below consensus of 0.00%, while core retail sales (excluded automobiles, which can be volatile) rose 0.4%, but was below economists' forecast of +0.5%.

While traders, investors and economists were chewing on the retail data, US import prices (m/m) were also being released. After rising 2.9% in June, import prices rose 1.7% in July, which was above economists' forecast for a 1.0% rise.

The benchmark 10-year Treasury Yield ($TNX.X) darted lower on the retail data, with its yield falling to as low as 3.869%, but then began reversing course, hitting a high intra-day yield of 3.966% just before the 02:00 PM EDT tick.

Then at 10:00 AM it was time to see what U.S. business was doing with inventories. The Census Bureau said inventories rose 0.7% from May, which was above economists' forecast for a 0.5% The closely watched inventories/sales ratio at the end of June was 1.23, as June sales rose 1.7% from May.

Then, roughly 35-minutes later, at 10:35 AM EDT, it was time to see just what the Energy Information Agency (EIA) had to report on weekly crude oil-related inventories, and see just what the heck those refiners had been doing.

Some benchmark prices I noted in the OptionInvestor.com market monitor just seconds before the EIA release had the DIA at $115.33 -1.06%, the USO $91.96 +0.51%, Petroleo Brasiliero (NYSE:PBR) $49.09 -0.70%, which I had profiled deep out-the-money August $45 puts (07/17/08 as the stock was trading $57.62), Exxon/Mobil (NYSE:XOM) $77.50 +0.81%, Chevron (NYSE:CVX) $84.15 +0.70% (DIA and SPY heavyweights).

Then the numbers hit.

The EIA said U.S. crude oil stockpiles fell by 400,000 barrels, but it was the U.S. total gasoline stockpile decline of 6.4 million barrels that seemed to garner trader's attention.

Refiners weren't taking holiday, but it looked like it, as total distillates fell by 1.76 million barrels. The decline here looks to have come from ULS Diesel (less than 15ppm sulfur), which fell by 1.13 million barrels. Heating oil (greater than 500 ppm sulfur) inventories rose for 10th-straight week, up 1.0 million barrels to 34,777. It's remarkable, but heating oil stockpiles now down just 3.77 million barrels from a year ago, or -9.88%. This spring, heating oil stockpiles were down roughly 30% from year-ago levels.

Still, I think the two-weeks of consecutive draws in the gasoline complex certainly had to have some oil bears coming in and covering shorts at the institutionally monitored Quarterly S1 and Monthly S1.

My "chart of the week!"

U.S. Oil Fund (USO) - Daily Intervals

Airline bulls and oil bears probably stepping up some profit taking today. PBR traders could feel the pressure each day as we neared Friday's expiration, but I don't think today's data and technicals were going to give it to us.

Using the USO as a guide, I think a close above $94.60 could see bears further locking in gains, or stepping up their short covering. If bull's nerves aren't frazzled enough with the sudden reversal in the euro/$, then a move below Quarterly S1 ($90.45) will bring trader flash-backs to hedge fund Amaranth, which went belly up as natural gas prices plummeted before JP Morgan came in an picked up the pieces for penny's on the dollar.

Global Equities, Currencies, USO, GLD, HUI.X, OIX.X and XLF

Fascinating, fascinating indeed.

Asia struggles for a second Wednesday-to-Wednesday benchmarking. I can't say for certain, but while the Olympic Games are taking place, some of the "shut down" to control pollution on the mainland may be taking its toll.

European bourses give back the bulk of prior week's gains. Note the sharp 3.10% decline in the euro (FXE/euro) as depicted by the Euro CurrencyShares (FXE) $149.50 +0.05% on the session. Certainly some jitters here. MARKETS do NOT like that type of move in a currency.

Remember when the greenback had some sharp down days?

This week, I added the CBOE Oil Index (OIX.X) 810.69 +3.01% on the session, and the Financial SPDRs (XLF) $20.57 -2.88% on the session.

While the S&P 500 (SPX.X) 1,285.83 -0.29% is a broad-based index, financials and "energy" are heavy-weights.

Now, one thing I think I do need to follow up on is what we are observing in the Russell 2000 Index ($RUT.X) and how it is really starting to show signs of "outperformance" relative to some of its peers (INDU, OEX and SPX).

I've been warning some commentators of being "general" with their market calls in recent weeks and the RUT.X has been anything BUT a good short with a stop just above the day's high.

One reason I think this is not only because of the "stable" underlying economic trends here in the U.S., but market participants may have been factoring in a recovery in the U.S. Dollar, or the weighted basket of foreign securities against the dollar and the U.S. Dollar Index (DXY).

Please believe me when I tell you that I have probably looked at three (3) "small cap" earnings reports, and I can't say for certain, but smaller companies probably don't have the exposure to exchange rates that some of the LARGER cap companies do.

What's rather FASCINATING about the RUT.X performance is that its HEAVIEST WEIGHTED GROUP is FINANCIALS!

That then begs the question ... "what the heck are the BIG caps of the NASDAQ doing then?" Why aren't they "mirroring" the INDU, OEX, SPX?

Aha! the NASDAQ-100 Non-Financial Index (NDX.X) 1,942.02 +0.04% and its tracker QQQQ. Or maybe we should call it the NASDAQ-99 and one energy stock index.

The NDX/QQQQ has just one (1) "energy" stock in it. Patterson UTI Energy (NASDAQ:PTEN) $27.01 +2.81%.

On June 30, 2008, which would have been the END of Q2, PTEN was trading $36.13! Right near its all-time high for several days of $36-ish. If I slapped PTEN in the above table as an "oil" type of stock, its Q3 2008 would be about -25%. On Wednesday of last week, PTEN closed $26.41, so up about 2.25% from last Wednesday.

Please note that PTEN is what many would consider to be an OIL SERVICE company, and while I'd love to have the Oil Service HOLDRs (OIH) $185.57 +4.14% in the above table too, there's only so much I can update, and still meet, or be late for editors deadline.

Note the DXY +5.1% so far Q3.

But hold on a minute!

On Monday evening, I was looking at Dorsey/Wright and Associates table of New Highs and New Lows on a sector-by-sector observation.

What SECTORS do you think showed the GREATEST number of stocks hitting new highs?

Here's what I saw and I just about fell out of my chair.

52-week High/Low Summary - 08/11/08 Conclusion

"Banks" showing 16 new highs and right up there with healthcare and retailing?

I reviewed the 16 names in the "banks" and they were NOT stock symbols many of us would recognize. There were likely SMALL CAP.
(CHCO, FFIN, FFKT, HBHC, HOMB, IBKC, IBOC, MSFG, NBD, NBTB, PGC, RBCAA, SCB, THFF, UMBF, WIBC).

What this would suggest to me is that the "financial problems" can't be so wide spread. Isn't the MARKET smart enough to not have ANY bank trading a 52-week high?

In the above sector breakdown, I quickly point to other "financial" and "energy" related New Highs and New Lows.

Yes, just as I'll do the same on some very BEARISH days, or inflection points, I do the same on some BULLISH days.

I like to see what was LEADING (new highs), or strong; and what was LEADING (new lows), or weak.

U.S. Market Watch - 08/13/08 Close

What do you think? Some short-covering in oil/energy and gold/silver miners?

Could be a more sustainable rebound, but U.S. Dollar Index (DXY) was steady today.

If playing any type of oversold bounce, I'd stay ENERGY-related, not GOLD/SILVER/Miner related.

This week's Mortgage Bankers Assoc. weekly survey didn't show much again. Purchases index up 0.3%. The government purchase index (largely FHA) was a more notable +7.2%.

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The Dow Jones U.S. Home Construction Index (DJUSHB) 281.71 -1.34% on the session. They're "hanging tough," but 300 resistance holding. Not that far below their 12/31/07 close of 324. Stability is "good," but broader market bulls would like to see this group wake up again as they did this spring.

No MAJOR observations since last week's wrap.

However, here is something I noted today as it relates to STRONGEST iShares Russell 2000 (IWM) and a back test of another downward trend being broken to the UPSIDE.

Similar action as to what we saw in early July.

IWM - Daily Interval Chart

Small caps may not have as much option open-interest surrounding them as the LARGE cap names.

Most technicians see an UPSIDE break of DOWNWARD trend as a sign of strength, and we'll monitor the broken trend. If BEARS are giving up, they'll turn to cover at the trend.

Now the also-broad but still WEAK S&P Depository Receipts (SPY).

SPY - Daily Intervals

About the ONLY thing the IWM and SPY have in common would be HEAVIER financial sector(s) weightings, broadness of stocks. SPY/SPX components may be about 50/50 domestic economy/foreign economies as it relates to revenue/earnings.

I did have Market Monitor traders SELL the UNDERLYING ProShares Ultra S&P 500 (SSO) $61.52 -1.17% last Thursday at $60.40 for a decent gain.

Staying BULLISH, but REDUCING capital exposure, I thought bulls should get back on board Friday morning with a SUC-IJ at $3.10 as the SSO was $61.41.

At Tuesday evening's close, INTERNAL measures were still suggesting BULLISH bias.

To be HONEST, IWM and QQQQ are technical LEADERS.

SPY and OEX are "weak"

INDU/DIA are "weakest."
 

New Plays

Most Recent Plays

Click here to email James
New Plays
Long Plays
Short Plays
None None

Play Editor's Note: Today the VIX declined to test a rising trendline off the 5/19 low, also testing historical support/resistance in the 20.00 zone as well as the 6/17 low of 20.02, the 6/25 low of 20.34, the 8/05 low of 20.06, and the 8/11 low of 19.66. With some charts suggesting that it could dip toward 19.70 and then rebound, the VIX looks ready to either rebound or fall through what may be significant support. In this environment, we're holding off adding new trades.

New Long Plays

None today.
 

New Short Plays

None today.
 

Play Updates

Updates On Latest Picks

Click here to email James

Long Play Updates

Axsys Tech. - AXYS - cls: 74.58 change: -2.09 stop: 71.95

AXYS gapped lower this morning. That gap, coupled with yesterday's potential reversal signal, added to the scare factor today. The early morning dip brought AXYS within four cents of our stop. Fortunately for this trade, AXYS rebounded within the first few moments and closed well off the $71.99 low of the day. Other than some positive coverage on Motley Fool, no news surfaced on AXYS today. Conservative traders may have been stopped if they heeded our suggested conservative stop loss of $72.50, close to Tuesday's low. Because of the gap lower this morning, yesterday's potential reversal signal, and the slight drop the high today, we're not suggesting further new entries. MACD has flat lined near zero. Through the first half of 2008, AXYS tended to bounce off its 30-sma, and today's action presents the possibility that it might either trade sideways while the 30-sma plays catch up or even retreat to that moving average. Today's close back above the 10-sma was, however, encouraging. Our first target is $79.95. Our second target is $84.00. As a review, yesterday's move over $76.00 has produced a new triple-top breakout buy signal on the Point & Figure chart. FYI: The most recent data available listed short interest at 8.8% of the small 9.1 million-share float.

Picked on August 12 at $75.82
Change since picked: - 1.24
Earnings Date 10/23/08 (unconfirmed)
Average Daily Volume: 207 thousand

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Cal-Maine Foods - CALM - close: 44.82 change: +0.93 stop: 39.75

With a high of $45.35 today, CALM hit our first profit target. We're keeping our official stop at $39.75, but conservative traders might want to consider taking some money off the table if they haven't already done so as CALM hit this first profit target and raising their stops to their entry levels. The trend is still bullish, but CALM pulled back off its high of the day the last two days and may need a period of sideways consolidation or a pullback in order to digest gains. We're not suggesting new positions at this time. As noted earlier, our first target of $44.90 was hit today. Our second target is $49.00. The P&F chart is bullish with a $56 target. CALM has HUGE short interest. The most recent data listed short interest at almost 92% of the 14.2 million-share float. A new high could spark another short squeeze.

Picked on August 04 at $40.75
Change since picked: + 4.07
Earnings Date 07/28/08 (confirmed)
Average Daily Volume: 1.0 million

---

Esterline Tech. - ESL - close: 53.20 chg: +0.58 stop: 49.90

After dipping to its simple 200-dma yesterday and providing a new entry, ESL posted further gains today. With the former resistance at that 200-sma and historical resistance near $52 behind us, ESL's next hurdle will be the top of its consolidation zone from June, at $53.84. ESL traded with $0.30 of that high today before retreating. As noted last night, it will probably be a bumpy ride but we are aiming for the $57.00-60.00 zone. This is a short-term, two-week play. Other comments from last night also remain appropriate. We do not want to hold over the August 28th earnings report. We know that our target is aggressive given our time frame but the latest data put short interest at more than 9% of the small 29 million-share float. The stock could see a short squeeze ahead of earnings. We would like to raise the stop to just under the 7/24 high but that doesn't give the trade enough room to work yet.

Picked on August 12 at $52.30
Change since picked: + 0.32
Earnings Date 08/28/08 (confirmed)
Average Daily Volume: 352 thousand

---

Graham Corp. - GHM - cls: 106.97 chg: + 1.92 stop: 99.95

Although we've warned that this was an aggressive, higher-risk trade, we understand that even aggressive traders have relative degrees of aggressiveness. We would suggest to the less aggressive that they consider raising their stops, but that $99.95 level still appears to be the most appropriate level for a stop. We're a little worried by the tightening wedge shape in which GHM climbs and the dropping volume as it does, but summertime trading is sometimes accompanied by lower volume. As noted last night, GHM remains a strong candidate for a short squeeze. This stock has an extremely small float of just 4.5 million shares. The short interest is over 10% of the float. Our target is $114.50.

Picked on August 12 at $106.52
Change since picked: + 0.45
Earnings Date 10/27/08 (unconfirmed)
Average Daily Volume: 239 thousand

---

Harley-Davidson - HOG - close: 41.35 chg: +0.43 stop: 39.45

HOG came precariously close to our stop today, but by the end of the day had bounced from its converging simple 200-day and 10-day moving averages and up to a test of the exponential 200-day moving average. It ended the day between the two versions of its 200-sma moving averages, with upper and lower candle shadows piercing both versions. So far, this looks like consolidation prior to another bounce attempt, especially since today's bounce also came from the ascending trendline off its 7/15 low. Previously we outlined our concerns about the struggles HOG is facing with a slowing consumer and tighter lending. We are leaving our stop at $39.45 for now, and it certainly worked for us today. Our target is the $47.50-50.00 zone. The latest data lists short interest at 12% of HOG's 232 million-share float. The P&F chart is bullish with a new buy signal.

Picked on August 11 at $42.55
Change since picked: - 1.20
Earnings Date 10/16/08 (unconfirmed)
Average Daily Volume: 2.8 million

---

Juniper Networks - JNPR - close: 27.02 chg: +0.90 stop: 25.99

Today, JNPR bounded up to the top of its recent consolidation zone and to just under its simple 200-day moving average. We do not see any changes from our prior comments on JNPR. As noted yesterday, we are sticking to our prior suggested entry of $27.55. We are listing two targets. Our first target is $29.45, just below the 5/02 swing high of $29.49. Our second target is $32.50. As always, we suggest you take some money off the table at the first target and maybe even as it's closely approached, in case selling comes in just ahead of that 5/02 swing high. If triggered at $27.55 we'll start with a stop loss at $25.99. That is not the best risk-reward ratio for a stop loss but JNPR can be somewhat volatile. You may want to use a tighter stop loss.

Picked on August xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/23/08 (unconfirmed)
Average Daily Volume: 15.8 million

---

Monster Worldwide - MNST - cls: 20.41 chg: +0.51 stop: 17.85

Yesterday, we suggested that aggressive trades might want to buy MNST's bounce, and a further opportunity was offered today with a drop to $19.61 and then a rebound. We suggested a tighter stop if you did buy the dip, with one possibility being a stop under yesterday's low. A stop under the simple 10-day moving average, currently at $19.25, might be appropriate also, since MNST was pressured down by this average for months and may now bounce from it on the way up. For the official trade, the current entry zone to buy MNST is the $18.60-18.25 range. Our risk here by not buying MNST now for the official trade is that we could miss the move but we'd rather be patient with our entry point. If we are triggered at $18.60 our target is the $21.75 mark.

Picked on August xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/23/08 (unconfirmed)
Average Daily Volume: 3.1 million
 

Short Play Updates

Cincinnati Fincl. - CINF - cls: 28.26 chg: +0.80 stop: 28.35

CINF decided to torture us today. After this trade was triggered yesterday, CINF dipped this morning, then climbed to within a cent of our stop before retreating and rushing higher again into the close. Some sources list the high of the day as that $28.34 morning high and some, the just-after-the-close trades of $28.38. We're going with the Yahoo Finance listing that the official high was $28.34, keeping the trade open. That open status may change within a few minutes of trading tomorrow morning. Volume today was lower than the 30-day average and CINF barely closed above the 10-day simple moving average, an important average for CINF. The possibility exists that this was still just part of CINF's choppy consolidation pattern. If not stopped tomorrow morning, we have two targets. Our first target is $25.05. Our second target is $24.00.

Picked on August 13 at $26.99
Change since picked: + 0.47
Earnings Date 10/29/08 (unconfirmed)
Average Daily Volume: 2.2 million

---

Capital Trust - CT - close: 13.90 change: -1.00 stop: 16.35

UBS downgraded Capital Trust today to a sell rating from its former neutral raging. The UBS analyst cited CT's heavy exposure to subordinated and short-term loans. CT gapped lower this morning and closed lower, too. That's the good news for our bearish trade. However, volume perked up a bit from recent days with a doji produced, and that volume might have come from bulls and bears battling it out as CT dropped near its July low. We mentioned last night when adjusting our stop that CT is prone to quick rebounds and that might be particularly true if CT caps up tomorrow morning and leaves that doji isolated, a typical trick to trap bears. The stop remains wide and aggressive, but appropriately placed just above a descending trendline that has been pressuring CT lower over recent weeks. More risk-averse traders might consider the fact that CT has been finding resistance on daily closes at a resistance level now at $15.55 and might adjust their stop to just above that, waiting for an end-of-day value, if possible. As noted last night, the most recent data listed short interest at almost 28% of the small 19 million-share float. That definitely raises our risk for a short squeeze, so watch out for that possible gap tomorrow morning that could leave today's doji isolated. We have two targets. Target one is $12.55. Our second target is $10.25, last seen in May, 2005.

Picked on August 04 at $14.38
Change since picked: - 0.48
Earnings Date 07/29/08 (confirmed)
Average Daily Volume: 278 thousand

---

Merrill Lynch - MER - close: 25.98 change: +0.38 stop: 28.01

With news that New York Attorney General Andrew Cuomo has reached auction-rate settlements with two more banks, JPM and MS, some financials either stopped their declines or rebounded. MER gained, but its climb could not be called a rebound and they occurred on tepid volume. Its gains were topped by the simple 10-sma at $25.59 and a short-term descending trendline off the 8/06 high. We noted yesterday that a failed rally under $26.00 or $26.50 could be used as a new entry point for bearish positions. We have two targets. Our first target is $22.50. Our second target is $20.25. The Point & Figure chart is bearish with a $7.00 target.

Picked on August 07 at $26.10
Change since picked: - 0.12
Earnings Date 10/23/08 (unconfirmed)
Average Daily Volume: 42.2 million
 

Closed Long Plays

None
 

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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