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Daily Newsletter, Thursday, 08/28/2008

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Table of Contents

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

Market Wrap

"The check is in the mail"

Market Wrap

This morning's pre-market release of a rather important and closely watched July durables good report found a mixed reaction at the open, but once traders and investors looked inside the numbers and started placing some of the pieces of the puzzle together, stocks began recouping some of this week's earlier losses in a still rather light volume trade.

Landlords that may have one, two, or maybe a few tenants that are habitually late with the rent payment each month will probably relate to my market wrap title.

Sometimes the rent never shows. Other times we're supposed to think the postal carrier delivered the rent check by Pony Express.

For a second-straight month, durable goods orders came in well above economists' forecast, suggesting some type of strong underlying fundamental economic trend exists that traders, investors and ECONOMISTS just aren't willing to embrace fully.

I can't quite figure out just how these types of numbers keep getting printed. Not only July's figures, but June's upside surprise was revised higher still.

Meanwhile, stocks just seem "stuck."

OK, OK, the small caps of the Russell 2000 Index (RUT.X) 732.95 +1.30% or its tracker the iShares Russell 2000 (IWM) $73.03 +1.19% have shown the ability to challenge their 12/31/07 closes a couple of times this year, but buyers (bulls, or short-covering bears) just don't seem to have the conviction to actually "deliver the mail" for a significant and sustainable move.

Large-cap NASDAQ, depicted by the NASDAQ-100 Index (NDX.X) 1,900.30 +0.74%, or its tracker the QQQQ $46.73 +0.64% have had their moments, but a prolonged move higher has been hard to come by.

I might also add, that despite the pummeling the financials and housing sector has witnessed the past couple of years, there's got to be some head-scratching going on in a few bear dens too.

If you're like me, you were probably scratching your head this morning and some early indications like the NASDAQ Short Term Trade (TRINQ) had it looking like four and five-lettered stock symbols at the NASDAQ were going to get crammed significantly lower, as the TRINQ's opening tick jumped to 3.06!

For those not familiar with TRINQ, or TRIN (see intra-day internal measures above), each day, a measure of 1.00 is considered to be "equilibrium" or a measure where buy-side and sell-side volume are equally matched. The higher the reading, the greater mount of sell-side volume, while the lower the reading (0.00 is lowest) would suggest greater amount of buy-side volume than sell-side.

A reading of 3.0 at any point during a session is equivalent to driving a car over a cliff, where the driver is gripping the steering wheel for all their worth, but expecting a very hard landing at the bottom of the ravine.

Prior to the open, the Commerce Department said U.S. durable goods orders in July rose well above expectations due to strength in aircraft, machinery and autos.

New orders for durable goods rose 1.3% in July, the same gain recorded in June and the largest gain since December. Excluding transportation, orders were up 0.7%.

Economists had expected a much smaller 0.1% increase for total orders and a 0.3% increase for orders excluding transportation.

The Commerce Department upwardly revised June's total durable goods orders to 1.3% and durable goods excluding transportation to 2.4%.

Non-defense aircraft and parts orders increased 28% following a 21.3% decline in the previous month. Boeing's (NYSE:BA) $64.52 +1.67% orders in July had increased to 70 from 62. Also contributing to total durable goods orders were gains in transportation equipment and motor vehicles and parts. The machinery sector saw a 4.6% increase in July.

The only order declines were seen for computers, electrical equipment and defense capital goods. The latter category declined by 25.7% following a 15.0% gain in the previous month.

The decline in orders for computers and electrical equipment could well have been a number traders were keying on this morning (see TRINQ).

Excluding defense, durable goods rose 2.8%, the largest gain since July of last year.

Durable orders excluding defense and aircraft, a category used as a proxy for overall manufacturing conditions, rose 2.6% in July.

It is THIS measure, which takes out the more "volatile" month-to-month and VERY LARGE TICKET ITEMS (defense and aircraft) that had selling "drying up,"

Another "grabber" of attention was that shipments for July rose 2.5%, the largest monthly gain since July of last year while unfilled orders and inventories both rose 0.8% in the month.

We'll remember, that on 07/24/08, just before the June durable good report was to be released, economists were looking for durable goods orders to either be unchanged, or to have fallen 0.3%.

Global Economic Calendar - Wednesday

An additional piece of economic data that I feel traders and investors were monitoring today (released at 10:20 AM EDT), even though from overseas, was Germany's preliminary Consumer Price Index (CPI), which did ease as we would have expected as depicted by the CRB Index (CRY in U.S. Market Watch) 401.02 +0.72% on the day, but off its early July highs of 473.97.

I think traders/investors that are short/put, or long/call any US-based company, that derives a meaningful (say 40% or more) of their revenue/earnings from overseas, needs to be monitoring economic trends and markets if they can.

Germany's DAX ($DAX) 6,321.03 -0.31% fell 19.49 points.

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Again, the dollar has shown some marked strength versus the euro the last couple of weeks and SHARP moves UP/DOWN even from very HIGH, or LOW levels tends to create trader/investor jitters.

A very NEGATIVE reaction in European, or UK markets as their currencies "ease" against the dollar, would be to see INFLATION pressures persist in those regions.

Let's take another weekly look at our major global equity indexes, currencies, oil and gold as well as a couple equity-based sectors we might be tracking.

Major Global Indexes, Currencies, Oil, Gold, HUI, OIX and XLF

Sit back for a minute, and take in some of the "bigger picture." These aren't charts, but their are some percentage changes that might begin to noted.

I look for things that "stick out" as somewhat unusual, or don't look like we might thing they should look.

For example, the British pound (FXB/pound) is not NOTABLY weaker than a "closer" counterpart the euro (FXE/euro) versus the US$.

Now look up at the "equity" side of things. In YELLOW, I note the FTSE-100 down 14.37% on the year, but "closer" counterparts perhaps have Germany's DAX -20.90% and France's CAC-40 down 22.11% since 12/31/07.

Could it be that the WEAKER pound versus the dollar is telling us the Bank of England will soon be cutting rates to stimulate the economy there? On a quarter-to-date (2008 Q3) a 7.9% decline in the pound vs. the US$ a bit weaker than the euro's 6.5% decline, yet back above to the equity indexes, FTSE-100 (not part of the EU) seems to "track" during that time comparison with EU members DAX and CAC-40.

Then we start looking at the US equity indexes.

It is somewhat of a "the check is in the mail" type of observation isn't it?

Will "the dollar's strength/weakness will be an accurate depiction of the world's view of the U.S. economy" actually come to fruition as Treasury Secretary Paulson and Fed Chairman Ben Bernanke said?

I hear you! I'll believe when I see it!

If I fully believed it, I'd be pounding my fist on the desktop telling you to "go all in."

"The check is in the mail."

Again, the US$, or the US Dollar Index (DXY) is very complex, and how the dollar trades (strong/weak) really can have different effects on things, or tell us different things about a domestic economy, or foreign economy, or impact on commodity prices (depending on where the commodities are being produced).

Some have "blamed" the dollar's weakness against the euro (or the euro's strength against the dollar) as exacerbating the RISE in commodity prices the last couple of years.

You're preaching to the choir if you're shouting "but many of Chinese consumers are just now migrating from bicycles to motor scooter, or even cars!" Thus some strong overseas demand that many believe is equivalent to when the U.S. consumer first migrated from the horse and buggy to a Model-T.

Yet some have "attributed" a weak dollar versus other currencies as helping BOOST sales/earnings of US-based exporters as the weaker dollar has US-manufactured goods and services being more price competitive (FXE $155, or e1.55 bought more US goods and services than it does today at $147.64, or e1.476).

Now look again at the above table we're tracking. Year-to-date, quarter-to-quarter.

DXY +0.42% on year, let's call it "unchanged," and FXE/euro a near-match, as it might be as the euro is the most heavily weighted currency in the DXY basket. Yet the U.S. Oil Fund (USO) $95.55 +1.87% today, still up 26.27% during same time observation. Q3-to-date, a much different story.

This is where I, and I think others, are having such a hard time getting our arms around things.

Speaking of oil, we got the EIA inventory data at 10:35 AM EDT, and there wasn't too much of a surprise, or at least, what few market participants are around this week, sure didn't show that great of a reaction.

The EIA reported a 177,000 barrel draw in crude oil stockpiles to 305.76 million barrels, while total gasoline stockpiles fell by 1.18 million barrels to 195.44 million barrels. Total distillate stockpiles rose by 57,000 barrels to 132.12 million barrels.

Versus a year ago, crude oil stockpiles are down 8.35%, total gasoline stockpiles are up 1.49% and total distillate stockpiles are up 1.70%.

On the demand side of things, US refineries increased their daily crude oil inputs by 300,000 barrels per day to 15.37 million barrels/day, and brought into production some idle capacity by utilizing 87.28% of their 17.6 million barrel/day operable capacity. In the prior week, refineries were utilizing 85.7% of total operable capacity.

As hurricane season looks to be getting into full swing, the number of days of crude oil supply remained unchanged at 20.5.

The more things change, the more they seem to stay the same. In late August of 2005, just before the Gulf of Mexico was slammed by Rita and Katrina, the number of days of crude oil supply stood at 20.3.

I would encourage subscribers to go back and look at the ARCHIVE pages (last August to mid-September'05) and read/observe all that was going on.

It was an exciting and historic event for me, as I hadn't experienced such an event. What worked? What didn't?

You might be VERY surprised what oil, unleaded, natural gas prices did.

Understand EXACTLY what the effects of the hurricanes were. Where they hit the coast at. Then if the Gulf of Mexico is once again hit by a hurricane, and refiners are flooded, with no power, and tankers pile up off the tip of Florida, why things traded as they did.

Bottom line here is traders had better EXPECT volatility in the energy pits, and if you have NO CLUE, or some type of historical reference (that's what the archives are for) as to how things traded and why the outcome was as it was, then hold on for the ride of your life, cause here comes Gustav.

Tropical Storm Gustav

Just recently you saw "Fickle Fay" wander around Florida. We'll see if Gustav can chart a steady course.

Yes, yes. "Female drivers." Hey, it's us guys that never stop to ask for direction when were lost.

"The mail's supposed to arrive" late Monday. Yes, Gustav was supposed to hit landfall late Sunday.

Yes, yes, yes! "The check is in the mail."

You got it.

U.S. Market Watch - 08/27/08 Close

As you could already see from the "Major Global Equity Index" table earlier, there's not a lot to write about this week.

Volume at the big board and the NASDAQ picked up a bit, but gosh they're light.

For example, the average volume on the big board the last 21-sessions has been 4.49 billion shares, and we've been running about 3.6 billion the last 5-days. NASDAQ was running just over 2.0 billion shares per day over the last 21-days, but that's been drawn lower with average daily volume of just 1.72 billion since our last visit.

I point out today's TRINQ high. Pretty good range you can see the intra-morning reversal.

I also point to the 5-year, 10-year and 30-year Treasury YIELDS. They too had a rather "wild" session.

YIELDS (they move INVERSE of PRICE) JUMPED higher on the durable goods data. That would be something that "makes sense" when you get a STRONGER than expected economic report, that might then think "Fed bias towards tightening."

However, by the close, PRICE LOSSES, turned into PRICE GAINS and YIELDS finished lower.

I will note, that juuuust about the time the major STOCK averages were hitting their HIGHS of the session, that about the time YIELDS turned red.

I could certainly argue some "defensive" buying of Treasuries into a long weekend, where Gustav might be knocking on some doors.

Fannie Mae (NYSE:FNM) $6.48 +15.30%, now off its 8/21/08 low of $3.53 may have once again had something to do with the bond market's gyration after it auctioned another $2 billion in short-term debt. The company sold $1 billion of 3-month bills 99.348 with a yield of 2.597% and $1 billion of 6-month bills at 98.549 to yield 2.912%.

Only note here is that today's auction found modestly HIGHER yield, which tells me that bond traders want a little more for the "modestly" HIGHER RISK they think they have over the next 3-to-6 months.

Fannie also shook up it management team, which some EQUITY traders viewed as a positive.

The Biotechnology Index (BTK.X) 823.40 -1.79% is red.

Shares of Amylin Pharmaceuticals (NASDAQ:AMLN) $20.46 -24.88% plunged after it and Eli Lilly (NYSE:LLY) $46.87 -0.31% said that four (4) more patients taking their Byetta diabetes medication have died.

Cell Genesys (NASDAQ:CEGE) $0.79 -71.78% fell sharply after the company halted an advanced prostate cancer drug trial.

I didn't highlight the Dow Jones Home Construction Index (DJUSHB) 297.50 +5.30%, but perhaps I should have. The 300.00 level has been some horizontal resistance since 06/06/08.

Today's Mortgage Banker's Association (MBA) weekly application survey showed what I would consider to be "stability."

That in itself could create some jitters among bears.

The MBA said its seasonally adjusted purchases index inched up 0.6% to 315.9, which is the sub-index I tend to tie with the DJUSHB. My 4-week SMA of the purchases index did rise to 315.1 from last week's 4-week SMA measure of 313.5, while my 12-week SMA (about 1 quarter time period) fell to 330.7 from last week's 12-week SMA measure of 335.10.

Undoubtedly the DJUSHB will "make the move higher" before the data from the MBA does, but some "stability" from the data may have some bears still on their toes.

Not much change in the average contracted interest rate for a 30-year fixed-rate mortgage, which edged down to 6.44% from the prior week's national average of 6.47%. A one-year ARM rose to 7.17% from the prior week's 7.07%, where some of Freddie's recent auctions sure isn't going to help things for those with ARMs.

Tonight, I'm going to leave you with one chart, and one chart only. We looked at this chart a couple of weeks ago and if the "check is in the mail," then with the Democratic National Convention drawing to and end, Tropical Storm Gustav moving into the Gulf of Mexico, and the Republican National Convention starting next week, this isn't just the chart of the week, but if the majors are going to begin to make a sustainable move higher to the end of the year, then this will likely be THE index to tell us.

The postman delivered two consecutive upside "surprised" in the form of durable goods orders for June and July.

S&P 500 Index (SPX) - 5-point box

There's been little change for the SPX in weeks, but by adding some "noise" with a less-conventional 5-point box, we can see some type of action.

Internals a/d lines over the past 5, 10, 21, and 50 days are what I would depict as "neutral" with many measures at 50%.

The larger picture, or the more institutionally followed BULLISH % indicators have "slipped" a bit for the BPSPX (take all 500 point and figure charts of the S&P 500 components and place "buy signal" in one stack, and "sell signal" in the other) and there's still 47.09%, or 235 in the "buy signal" stack and 265 in the "sell signal" stack.

It sure looks like there's been selling into the recent bounced, but buyers have been stubborn at the "apex" of the bullish triangle.

Something's got to give pretty soon.

My bias, based on various observations is the resolution will come to the upside. I'm leaning probably 60% bullish and 40% bearish on these observations.

Tomorrow (Thursday) is historically a BEARISH day for equities where August's next to last day has had the S&P 500 up only once the last 11 years.
 

New Plays

Most Recent Plays

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New Plays
Long Plays
Short Plays
KSU None

New Long Plays

Kansas City South - KSU - close: 51.41 change: +1.14 stop: 49.45

Company Description:
Headquartered in Kansas City, Mo., Kansas City Southern is a transportation holding company that has railroad investments in the U.S., Mexico and Panama. Its primary U.S. holding is The Kansas City Southern Railway Company. (source: company press release or website)

Why We Like It:
I hesitate to add new plays with the market moving so sharply on extremely low volume. Moves like this are not to be trusted. Keep that in mind as you contemplate this candidate. The railroad stocks have been showing strength and the DJUSRR index is not that far away from a new high. Shares of KSU could try and catch up to its peers. Traders bought the dip a few days ago near its rising 40-dma and its 50% retracement of the July rally. Today's gain is a bullish breakout over the four-week trend of lower highs. We are suggesting bullish positions now or on a dip back towards $50.00. We're listing this play with a stop loss at $49.45. More conservative traders could place their stop closer to $50.00 while aggressive traders could place theirs under $49.00. Our target is the $54.90-56.00 range. FYI: The P&F chart is still bearish from the August correction. Calendar note: KSU is due to present at an investor conference on September 4th.

Picked on August 28 at $51.41
Change since picked: + 0.00
Earnings Date 10/23/08 (unconfirmed)
Average Daily Volume: 1.4 million
 

New Short Plays

None today.
 

Play Updates

Updates On Latest Picks

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Long Play Updates

AMR Corp. - AMR - close: 10.16 change: +0.81 stop: *see details*

Airline stocks rallied sharply on the reversal in oil but AMR failed to breakout over its 10-dma. We don't see any changes from our previous comments. Our suggested entry point to buy AMR is the $8.00-7.85 zone. If triggered our stop loss is $7.45. We're setting two targets. Our first target will be $9.90. Our second target will be $11.90. We have also listed an alternative strategy for risk-averse traders. You can lower your risk with a collar on AMR. When you buy the stock sell an out of the money call option (per 100 shares of AMR that you own) and use this money from the call option to help pay for a put option to protect you should AMR suddenly plunge lower. It's not a perfect strategy. You limit your upside but you also limit your downside, which may help some readers sleep better at night.

Picked on August xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/15/2008 (unconfirmed)
Average Daily Volume: 24.6 million

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Basic Energy Services - BAS - cls: 29.50 chg: +0.01 stop: 26.45

Most of the energy sector suffered some profit taking on oil's reversal lower today. BAS managed to rebound from the $28.70 region and actually closed flat on the session. It was a decent show of relative strength. More conservative traders may want to use a tighter stop loss. Our target on BAS is $31.50. FYI: The most recent data listed short interest at 7% of the small 21.7 million-share float.

Picked on August 26 at $28.34
Change since picked: + 1.16
Earnings Date 11/06/08 (unconfirmed)
Average Daily Volume: 437 thousand

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CNX Gas - CXG - cls: 31.05 chg: +0.46 stop: 29.90 *new*

CXG is another energy stock that showed some relative strength today. Shares dipped to $30.13 and then bounced back into the green to post a 1.5% gain. We are raising our stop loss to $29.90. Our target is the $34.00-35.00 zone.

Picked on August 21 at $31.05 *triggered
Change since picked: - 0.00
Earnings Date 10/23/08 (unconfirmed)
Average Daily Volume: 373 thousand

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Petrohawk Energy - HK - close: 35.06 chg: -1.17 stop: 31.89

We warned readers yesterday that HK was ripe for some profit taking after the rally to resistance near its 50-dma. We're repeating our previous comments that investors will want to consider taking some money off the table. We're not suggesting new positions at this time. HK has already exceeded our first target and we're aiming for $38.50. If HK closes under $35.00 we're going to close the play.

Picked on August 20 at $30.55 */1st target exceeded (37.45 hi)
Change since picked: + 4.51
Earnings Date 11/06/08 (unconfirmed)
Average Daily Volume: 10.3 million

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Hornbeck Offshore - HOS - cls: 44.31 change: +0.37 stop: 40.95

HOS continues to march higher as hurricane Gustav approaches the Gulf of Mexico. Traders bought the dip near $43.00 midday. There is plenty of overhead resistance so this could be a tough ride higher. Our target is the $48.00 mark.

Picked on August 26 at $43.10
Change since picked: + 1.21
Earnings Date 10/30/08 (unconfirmed)
Average Daily Volume: 815 thousand

---

Monster Worldwide - MNST - cls: 19.85 chg: +0.45 stop: 18.94

The situation with MNST is improving. The stock continues to rebound and shares just broke out over its 10-dma. The next hurdle is round-number resistance at $20.00. We're not suggesting new positions at this time. Please note that we are altering our exit strategy. We are setting our first target at $20.80, just under the August resistance. We'll keep the $21.75 mark as our secondary target. Be sure to take some money off the table at $20.80.

Picked on August 20 at $19.11
Change since picked: + 0.74
Earnings Date 10/23/08 (unconfirmed)
Average Daily Volume: 3.1 million
 

Short Play Updates

NYSE Euronext - NYX - cls: 40.72 chg: +1.15 stop: 41.51

The volatility in the market and the financial-related stocks puts us in jeopardy. NYX added 2.9% and is poised to rally past last Friday's high. More conservative traders might want to inch their stops down to $41.15. We're leaving our stop at $41.51 for now. If the financials continue higher tomorrow we would expect to be stopped out. We are not suggesting new positions at this time.

Picked on August 25 at $39.41
Change since picked: + 1.31
Earnings Date 11/03/08 (unconfirmed)
Average Daily Volume: 5.0 million
 

Closed Long Plays

Exterran Holdings - EXH - close: 47.45 change: -1.04 stop: 48.75

We have been waiting for EXH to breakout over resistance near $50.00. Right now it doesn't look like the stock will breakout any time soon. Our suggested trigger to buy it was at $50.25. We're going to drop EXH as a bullish candidate and the play unopened.

Picked on August xx at $xx.xx never opened
Change since picked: + 0.00
Earnings Date 10/27/08 (unconfirmed)
Average Daily Volume: 1.2 million

---

UltraShort Midcap - MZZ - close: 54.50 chg: -1.87 stop: 55.65

It was just a few days ago we were expecting the market to crash lower and the MZZ to breakout over resistance and into a new leg higher. Neither has occurred yet. Our suggested trigger to buy MZZ remains untouched at $58.75. Given the latest turn of events we're dropping the MZZ as a bullish candidate with the play unopened.

Picked on August xx at $xx.xx never opened
Change since picked: + 0.00
Earnings Date 00/00/00
Average Daily Volume: 704 thousand

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Titanium Metals - TIE - cls: 14.66 change: +0.91 stop: 11.90

The high-volume rally in TIE continues. Shares hit $14.86 intraday. Our target was the $14.35-14.50 range. This rally is very bullish, especially considering the volume, but TIE now looks short-term overbought. The $15.00 level should offer some resistance. Watch this stock for a correction and it might provide another entry point to jump on again.

Picked on August 21 at $12.47 /target exceeded
Change since picked: + 2.19
Earnings Date 10/30/08 (unconfirmed)
Average Daily Volume: 3.4 million
 

Closed Short Plays

Bank of America - BAC - cls: 31.43 change: +1.78 stop: 31.05

We cautioned readers yesterday that financials were starting to look stronger. Yesterday's bounce turned into a route today as bears rushed to cover shorts. BAC added 6% and hit our stop loss at $31.05 closing the play.

Picked on August 18 at $29.30 /stopped out 31.05
Change since picked: + 2.13
Earnings Date 10/16/08 (unconfirmed)
Average Daily Volume: 90.8 million

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Cinci. Fincl. Corp. - CINF - cls: 29.51 change: +0.63 stop: 28.05

The rally in financials has powered a bullish breakout in CINF through the top of its trading range. Technically this looks like a bullish entry point to buy the stock. Our only concern with bullish positions is potential resistance at $30.00 and its 100-dma near $31. It was our plan to short CINF on a breakdown but the stock never hit our entry point. We're dropping this play unopened.

Picked on August xx at $xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 10/29/08 (unconfirmed)
Average Daily Volume: 2.2 million

---

Capital Trust - CT - close: 12.12 change: +0.51 stop: 13.55

It's time to go in CT. The stock dipped to $11.03 and bounced sharply ending the day up more than 4%. While volume was very low and doesn't communicate a lot of confidence behind this move we want to exit now. This stock has exceeded our first target at $12.55 and almost made it to our second target at $10.75. Currently CT is very short-term oversold and due for a bounce.

Picked on August 04 at $14.38 /1st target exceeded (11.03 low)
Change since picked: - 2.26
Earnings Date 07/29/08 (confirmed)
Average Daily Volume: 278 thousand

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Merrill Lynch - MER - close: 27.52 change: +2.25 stop: 26.10

Financial stocks rallied sharply today as bears rushed to cover shorts. The XBD broker-dealer index rose 4%. MER out performed its peers with an 8.9% gain. The stock hit our stop loss at $26.10 early this morning closing the play at breakeven.

Picked on August 07 at $26.10 /stopped out breakeven
Change since picked: + 1.42
Earnings Date 10/23/08 (unconfirmed)
Average Daily Volume: 42.2 million

---

Financial Sector SPDR - XLF - cls: 21.39 chg: +0.83 stop: 20.75

A few days ago it looked like financials were poised to crash lower. The crash has failed to materialize and now the XLF is bouncing and today's move saw a breakout over some significant moving averages. We are dropping the XLF as a bearish candidate. This ETF never hit our trigger to short it so the play was never opened.

Picked on August xx at $xx.xx never opened
Change since picked: + 0.00
Earnings Date 00/00/00
Average Daily Volume: 201 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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