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Daily Newsletter, Tuesday, 12/30/2008

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Table of Contents

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

Market Wrap

Markets All Dressed Up and Nowhere To Go

Mutual funds dressed up stocks one more time as the managers headed for their big New Years Eve celebrations. Many stocks hit multi-week highs as managers threw money at the winners in hopes of making their year-end statements as attractive as possible. Unfortunately we all know those party dresses and tuxedos end up in a pile on the floor once New Years Eve passes and the hangover begins.

Market Stats Table
[Image 1]

Economic news was about the only thing on tap on Tuesday and it was not pretty. The Consumer Confidence number for December fell to an all time historic low at 38.0 after rebounding slightly in November to 44.7. December's reading was the lowest since the records were started in 1967. Analysts had expected a bounce to 45. Falling jobs were credited with the drop after unemployment hit a 15-year high in November at 6.7%. 42% of people surveyed for the confidence report said jobs were hard to get and those who felt business conditions were bad increased to 46%.

Consumer Confidence
[Image 2]

The latest Case Shiller 20-city housing index fell by 18% from October 2007 and the largest drop since inception. The 10-city index fell by 19.1% and its biggest decline in its 21-year history. The numbers are expected to decline even more over the next couple months because housing demand has fallen significantly since the equity markets went into free fall in November. Phoenix AZ had the largest decline of -34% year over year.

MasterCard's Spending Pulse report showed consumers spent between 5.5% and 8% less during the holiday season compared to 2007. Retail sales for December will be reported on Jan 8th and analysts are competing with each other to have the lowest estimates on the street. Analysts are now predicting we could see another 25% of retailers to file bankruptcy or close in 2009.

The Chicago Purchasing Manager's report or PMI rose fractionally to 34.1% from 33.8% in December and contrary to analyst estimates for a continued drop. Anything under 50 represents a contraction in economic conditions. There were some positive signs with the employment component rising to 39.6 from 33.4. New orders rose from 27.2 to 29.4 and prices paid fell to 30.5 from 50.7.

Oil prices gave up some ground despite the continued fighting in Israel. The problem is not with production from Israel since there is no production in that country. The fear is that countries surrounding Israel could come to the aid of Hamas and prompt an attack by Israel on oil production in those countries. There are also worries that shipments from the region could slow due to the close proximity of the fighting. Israel and Hamas have been fighting for decades and nobody seriously expects the conflict to grow beyond the current borders. The small bounce in oil prices this week is just a knee jerk reaction and has nothing to do with supply and demand. Mastercard's spending pulse for last week showed that gasoline demand in the U.S. fell by 3.8% from the same week in 2007. Petrologistics also surprised analysts when they said OPEC crude production could fall -400,000 bpd in December. This is more than previously expected and suggests there could be some teeth in the recent OPEC announcement to cut another 2.2 mbpd in January. Time will tell.

Reporters were blaming Tuesday's rally on the $5 billion in financing GMAC received from the Treasury Dept and an additional $1 billion to GM. This is total crap but they have to blame market moves on something. Both loans were expected and GM rose a whopping 21 cents. GMAC immediately rolled out some new financing plans including an increase in zero percent financing and lower credit standards in an attempt to clear out some inventory. The stage is being set for rapidly rising car prices. With automakers shutting down for a month and removing nearly 800,000 cars from the production lines the supply of vehicles is going to shrink quickly. GM has found from recent price cuts and high incentives that they can't make money with that program and they will have to raise prices on lower volumes to get back in the black. If you are looking for a new/used car the low priced window may be closing soon.

With the Fed/Treasury bailout of GMAC it should be noted that the Fed currently has $2.3 trillion of assets on their balance sheet and only $40 billion in capital. That is better than 50:1 leverage and it is expected to grow to 75:1 in 2009. Bear Stearns had less leverage than the Fed but they couldn't print their own money. I guess you can take on all the debt you want if you own the printing press for money. There is a rising feeling in the economic community that this monster Fed debt load could end badly.

Apple Computer is still reeling from the rumors over Steve Jobs health. Apple had rallied to just over $88 intraday when the Gizmodo Tech Blog printed a story saying Jobs health was declining fast. This was given as the reason why Jobs canceled his traditional keynote speech at MacWorld Expo in January. The stock rebounded from its $4 drop after CNBC disputed the rumor. An unnamed Apple executive said something to the effect of "If there was something wrong with Steve they would let us know." That is not exactly true and investors have a long memory when it comes to bad news. Apple and Jobs concealed his original cancer diagnosis for over 9 months before disclosing it to shareholders. Fool me once shame on you, fool me twice shame on me. Investors don't want to be on the receiving end of a surprise announcement. Since Steve Jobs and the board are NOT saying anything about his condition and the stock has fallen -$20 since the new rumor began I am betting on the rumor rather than on Apple's truthfulness. If there is truly nothing wrong with him then the board should be fired for letting the rumor kill the stock price.

With the trading year nearly over the carnage by country is dramatic. Russia is leading the loss column with a -73% drop in its market. Mexico is actually a relative winner with only a -24% decline. US markets are near the bottom of the list with only a 40% decline.

Market Losers
[Image 3]

Even with the year-end window dressing there were only two Dow components that will finish the year in the green. Those two companies are Wal-Mart and McDonalds. Both cater to the blue-collar crowd. Of course that crowd has grown significantly in 2008. Worst hit were the financials and commodities plus GM.

Dow Losers
[Image 4]

Small cap stocks are normally the sector that outperforms when a recession ends. There are quite a few more small cap stocks today than there were just a few months ago. There were only 300 small cap stocks with a market cap under $200 million back in June. That has grown to nearly 700 today. Small caps are normally seen as having market caps between $300 million and $2.5 billion. There were 54 small cap stocks with more than $2 billion in market cap in June. Today there are only 15. The number of small caps with a market cap over $1 billion were cut in half from 377 to 197 over the last six months. This gives fund managers plenty of options when the buying actually begins. To put this in perspective XOM, MSFT, GOOG and WMT have a combined market cap greater than the entire Russell-2000 index. S&P announced it had changed its requirement for a $5 billion market cap to be considered for the S&P-500. The new threshold is now $3 billion. It has been a tough year.

Today the Dow closed up +184 and the Nasdaq +40. The Russell 2000 rose +3.56% to 482 but is still under resistance at 490-500, which has held for the last month. It is still the strongest index but struggling to hold its gains until year-end. Tuesday's move across all indexes was purely year-end window dressing on low volume. This is setting up a strong potential for an early January decline. I wish it were not so and I will be the biggest cheerleader if I am wrong. I believe there will be some dumping of stocks the first week in January once we are out of the 2008 tax year.

The Dow rally took it to 8669 and almost exactly in the middle of its current range. There is no trend other than sideways and we have seen three tests of support at 8400 over the last three weeks. That should be the key Dow level to watch for next week for signs of a real breakdown. A breakout over 9000 would be huge and could attract vast amounts of cash from the sidelines. If fund managers felt there was a real rally in progress I believe most would chase it.

Dow Chart
[Image 5]

The Nasdaq continues to honor support at 1500 and closed exactly in the middle of its 1500-1600 range over the last three weeks. Like the Dow there is no trend other than sideways while it consolidates gains from the November bottom and we wait for the 2008 tax year to pass.

Nasdaq Chart
[Image 6]

S&P-500 Chart
[Image 7]

Without boring you I will briefly claim again that the Russell is still the most bullish index BUT I am still of the belief that the window dressing rug could be pulled out abruptly next week. Small caps may lead the indexes out of a recession but they also fall the fastest when market disasters strike. A break of support at 460 would be a clear sign of fund selling.

Russell 2000 Chart
[Image 8]

If the markets actually tank next week it could signal a bad trend. There is a 91% correlation rate between the first five trading days of the year and the market direction for the rest of the year. Personally I think any decline will be short lived and the bottom is behind us. However, there are a lot of analysts who believe the rebound into December is just another bear market rally. They believe economic conditions are going to get worse before they get better and Q4 earnings, which will begin to hit in another ten days are going to be horrible. They expect dozens if not hundreds of retailer bankruptcy filings and store closings. They expect home prices to continue lower. I believe home prices will begin to rise in Feb/Mar as we enter the normal spring buying season. Mortgage rates hit 5.14% this week and applications are rising. Economics may get worse but anybody with a newspaper, email and TV already know that. The breakfast of champions lately has not been Wheaties but bad economic news. Will that be sunny side up or over easy on that Confidence report Mr. Jones? It is time for investors to shake off the winter financial gloom and start expecting spring sunshine and flowers. It may not begin for several more weeks but I do believe it is coming. The ice age in the credit markets is beginning to thaw and new loan programs are springing up everywhere. Lets hope the markets follow suit and January closes higher than it starts.

Only ONE DAY LEFT!! If you have not taken advantage of our year-end renewal special yet I suggest you do so quickly. Wednesday at midnight the special will end. This is the cheapest rate for the entire year and includes $250 in free gifts.

You get not ONE but FOUR DVDs worth over $200!

[Image 9]

Everybody gets TWO mouse pad calendars. These are very worthwhile even if you don't trade options. For an entire year you never have to look for a calendar because it is always under your mouse. Market holidays, FOMC meetings, Crude expirations and of course option expiration dates.

[Image 10]

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New Option Plays

Education Stocks Showing Strength

Play Editor's Note: I am adding some bullish positions tonight but I do so with a lot of hesitation. I'm worried that this might be a sucker's rally given the extremely low volume. Currently I think the best trade is probably just sitting out and waiting until next week to see what direction the market moves. If you can't wait then consider some aggressive, speculative plays like the ones listed tonight.

FYI: One stock I considered but did not add is Goldman Sachs (GS). The late day spike in GS looks unsustainable but the rally is a bullish breakout over $80.00 and its 50-dma. GS would definitely be a very aggressive, high-risk bullish candidate but there is no denying the bullish triangle pattern. My first target would be $89.90.


NEW DIRECTIONAL CALL PLAYS

Apollo Group - APOL - close: 77.46 change: +1.06 stop: 74.90

Why We Like It:
APOL is one of the most bullish stocks I can find. The stock is trading near multi-month highs and looks poised to breakout. Shares have been consolidating sideways but the consolidation recently narrowed as APOL built on the bullish trend of higher lows. I am suggesting bullish positions now. More conservative traders may want to wait for a rally over $78.00 again.

There is some resistance near $81.50 so we're setting our first target to exit at $81.00. We will tentatively set a secondary target at $84.90 but I'm not very optimistic. The P&F chart is bullish with an $87 target.

Suggested Options:
We are suggesting January calls because this should be a short-term play. APOL has earnings on January 8th and we do not want to hold over the announcement.

Remember, this is an aggressive play and we're using options that expire in less than four weeks.

BUY CALL JAN 75.00 OAQ-AO open interest=5868 current ask $6.70
BUY CALL JAN 80.00 OAQ-AP open interest=6839 current ask $3.90

Annotated Chart:
APOL

Picked on December 30 at $ 77.46
Change since picked:      + 0.00
Earnings Date           01/08/09 (confirmed)
Average Daily Volume =       2.3 million  


Bidu.com - BIDU - close: 126.93 change: +5.08 stop: 119.95

Why We Like It:
This is an aggressive play. BIDU can be a very volatile stock and the market is trading with very light volume. Essentially we are betting that today's bounce from support near $120 (where BIDU filled the gap) will continue. Our short-term target is $139.95. FYI: the P&F chart is bullish with a $212 target.

Suggested Options:
We're suggesting the January calls.

Remember, this is an aggressive play and we're using options that expire in less than four weeks.

BUY CALL JAN 125.0 BDQ-AE open interest= 796 current ask $9.50
BUY CALL JAN 130.0 BDQ-AF open interest=1271 current ask $7.00
BUY CALL JAN 135.0 BDQ-AG open interest= 741 current ask $5.10

Annotated Chart:
BIDU

Picked on December 30 at $126.93
Change since picked:      + 0.00
Earnings Date           02/12/09 (unconfirmed)
Average Daily Volume =       4.2 million  


ITT Educational Serv. - ESI - close: 93.80 chg: +2.35 stop: 89.90

Why We Like It:
I have been watching ESI for days. The stock was slowly marching higher and nearing resistance near $92.00 and its trendline of lower highs. Today's rally is a bullish breakout over both. While I am skeptical of the move due to the market's lack of volume it remains a bullish entry point. Our short-term target is $99.90. I'm considering a secondary target near $105. The P&F chart is bullish with a $111.00 target.

Suggested Options:
We are suggesting the January calls.

Remember, this is an aggressive play and we're using options that expire in less than four weeks.

BUY CALL JAN 90.00 ESI-AR open interest=1854 current ask $6.50
BUY CALL JAN 95.00 ESI-AS open interest= 927 current ask $3.50
BUY CALL JAN 100.0 ESI-AT open interest=2388 current ask $1.65

Annotated Chart:
ESI

Picked on December 30 at $ 93.80
Change since picked:      + 0.00
Earnings Date           01/22/09 (unconfirmed)
Average Daily Volume =       831 thousand 



In Play Updates and Reviews

Time To Raise Stops Again.


CALL Play Updates

Alcon Inc - ACL - close: 86.45 change: +0.35 stop: 84.45 *new*

ACL's performance on Tuesday paled to the late session gains in the major indices. Shares of ACL only managed a 0.4% gain but on the positive side the stock does appear to be building support near the $85.00 level. We are raising our stop loss to $84.45. Thus if ACL does breakdown we'll be closed out pretty quickly. Currently the bulls are facing potential technical resistance at ACL's falling 50-dma near $87.82. Lately I've suggested waiting for a rise over $87.00 before initiating positions. More conservative traders may want to wait for a breakout past the 50-dma instead. We need to trade defensively and that means smaller positions, tighter stops, and be even more patient for the right set up.

If ACL can push past the $89-90 zone it would be a bullish breakout past the neckline of an inverse head-and-shoulders pattern with a potential bullish target of $110 or more. This coincides with the Point & Figure chart's bullish target of $110. Our upside target is $99.00.

Picked on December 22 at $ 85.25 *triggered     
Change since picked:      + 1.20
Earnings Date           02/04/09 (unconfirmed)
Average Daily Volume =       840 thousand 


Caterpillar - CAT - close: 43.66 change: +1.32 stop: 41.40 *new*

The current bounce in CAT is about four days old and it's starting to look a lot more convincing. I'm going to try and reduce our risk by raising the stop loss to $41.40. If you're going to play with a tight stop you could entertain new positions here. Otherwise I would stick to my previous comments and wait. Let's just say I don't trust the rally on this light holiday volume. Our target is $49.50. The Point & Figure chart is bullish with a $58 target.

Picked on December 16 at $ 43.80
Change since picked:      - 0.14
Earnings Date           01/29/09 (unconfirmed)
Average Daily Volume =      13.4 million  


Energizer Holdings - ENR - close: 52.95 change: +2.79 stop: 48.25 *new*

ENR delivered a strong session with a 5.5% gain and closing near its highs for the day. Taking a closer look at ENR's chart I see potential resistance at the October 30th high at $54.38. Therefore I'm adjusting our first target down from $54.50 to $54.25. Be sure to take some money off the table when ENR hits our first target. I'm also adjusting the stop loss to $48.25.

We have two targets. Our first target is $54.25. Our second target is $59.00. The Point & Figure chart is already bullish with a $68.00 target.

Picked on December 29 at $ 50.05 *triggered     
Change since picked:      + 2.90
Earnings Date           01/29/09 (unconfirmed)
Average Daily Volume =       798 thousand 


Lockheed Martin - LMT - close: 84.29 change: +3.75 stop: 79.95 *new*

Be ready to exit! LMT surged more than 4.6% to close at new six-week highs. There is no resistance between current levels and our target at $84.90 and I expect the stock to hit our target tomorrow. We're adjusting the stop loss to $79.95. More conservative traders may even want to use a tighter stop. More aggressive traders may want to aim higher. FYI: The P&F chart is bullish with a $90 target.

Picked on December 29 at $ 80.00 *triggered     
Change since picked:      + 4.29
Earnings Date           01/22/09 (unconfirmed)
Average Daily Volume =       2.8 million  


Sunoco Inc - SUN - close: 43.05 change: +0.56 stop: 39.85

Right on cue SUN dipped toward technical support at its 200-dma and bounced. The intraday low was $40.71. Yesterday I said use a dip to $40.75 or lower as a new entry point to buy calls. After two weeks of consolidating sideways SUN looks ready to rally higher. More conservative traders may want to use a stop loss under today's low.

The P&F chart is very bullish with a $54 target. Our target is $47.00.

Picked on December 20 at $ 42.30
Change since picked:      + 0.75
Earnings Date           02/04/09 (unconfirmed)
Average Daily Volume =       4.2 million  


PUT Play Updates

AvalonBay - AVB - close: 58.43 change: +3.28 stop: 61.65

A lot of the REITs exploded higher today with 4%-to-5% gains. I think it's all short covering from short-term oversold conditions. The trend on most of these stocks is definitely down especially after breaking down from the six-week bounce from the November lows. The plan today is to wait for this bounce to roll over and then use it as a new entry point to buy puts.

AVB has already hit our first target at $55.10. We're currently aiming for $50.55. The P&F chart has seen its bearish target drop from $50 to $41.

Q&A
One of our readers, Michael, asked me if there were any other REIT stocks that might be additional bearish candidates for a put play. I do think there is a very good chance that the market will retest the November lows. Several of the REIT stocks are setting up for possible put plays and aggressive traders could target their November lows. I would make sure to take profits along the way to avoid losing them in any oversold, bear-market rallies on the way down.

ESS is another REIT that looks bearish. A failed rally at $77 or maybe $80 could be an entry point to buy puts. Otherwise wait for a breakdown under $70.00.

VNO is a REIT that looks like a bearish candidate. A failed rally at $60.00 or a new relative low under $54 can be used as entry points.

Two more REITs that I would consider and have similar patterns are BXP and SPG. Caution - There are a lot of traders that think these REITs are heading lower and some of them have very high short interest. This means they are at risk for a short squeeze should the market suddenly shoot higher.

Picked on December 24 at $ 57.98 *gap down entry
Change since picked:      + 0.45
Earnings Date           02/04/09 (unconfirmed)
Average Daily Volume =       3.5 million  


Avon Products - AVP - close: 23.43 change: +0.93 stop: 24.05

A little bit of an oversold bounce is to be expected but today's gain in AVP (+4.1%) is worrisome because it pushed the stock above technical resistance at the 50-dma. Now given the light holiday volume I suspect this is just a bull trap but I would not bet on it being a trap. AVP still has resistance at $24.00. Wait for a failed rally at $24.00 before considering new positions.

We have two targets. Our first target is $20.25. Our second target is $18.60. FYI: The Point & Figure chart is bearish with an $11 target.

Picked on December 23 at $ 22.46
Change since picked:      + 0.97
Earnings Date           02/05/09 (unconfirmed)
Average Daily Volume =       4.6 million  


Equinix Inc. - EQIX - close: 52.48 change: +1.45 stop: 52.75

EQIX is still bouncing from the $50.00 level. The general trend is still bearish and we're going to stick to our plan.

Our suggested entry point to buy puts is $49.75. If triggered we have two targets. Our first target is $45.05. Our second target is $40.50. More aggressive traders may want to aim lower.

Picked on December xx at $ xx.xx <-- see TRIGGER
Change since picked:      + 0.00
Earnings Date           02/11/09 (unconfirmed)
Average Daily Volume =       990 thousand 


Capital One Financial - COF - close: 30.86 chg: +1.55 stop: 31.51

Be careful here! Bears need to start looking for the exit signs. Today's short-covering rally in COF powered a 5.2% gain and a breakout over the $30.00 mark and its multi-week trendline of lower highs. I suspect that this is just a head fake to suck in the bulls before COF reverses but we have to act as if this is the real thing. If COF breaks out over the 50-dma it may be time to switch to bullish positions. I would wait for a new decline under $29.50 or $28.75 before considering new bearish positions.

Our first target is $25.50. Our second target will be a new relative low at $21.00. FYI: The P&F chart is bearish with a $17 target.

Picked on December 23 at $ 29.38 /gap higher entry
Change since picked:      + 1.48
Earnings Date           01/22/09 (unconfirmed)
Average Daily Volume =       8.5 million  


Google Inc. - GOOG - close: 303.11 change: +5.69 stop: 311.00

GOOG served up a 1.9% gain but this actually under performed the NASDAQ and the S&P 500. Short-term resistance near $307 held firm today. I would look for a new move under $295 or $290 as an entry point to start new bearish positions. Or you could use a failed rally under the 50-dma as a potential entry point.

Our first target is $281.00. Our second target is $265. More aggressive traders could aim for $250. The Point & Figure chart points to $252.

Picked on December 27 at $300.36
Change since picked:      - 2.94
Earnings Date           01/29/09 (unconfirmed)
Average Daily Volume =       5.4 million  


Strangle & Spread Play Updates

*Currently we do not have any Strangle or Spread play updates*


CLOSED BEARISH PLAYS

Franklin Resources - BEN - close: 63.41 change: +3.92 stop: 63.11

It was the financial sector that really lead the market higher in the last 60 minutes of trading. This put the bears on the defense and BEN saw some short covering into the closing bell. The stock rallied more than 6.5% and broke the two-week trend of lower highs. Shares of BEN hit our stop loss at $63.11 closing the play.

I would keep BEN on your watch list. The stock has resistance near $66.00. A breakout or reversal there might be an opportunity.

Chart:
BEN, Franklin Resources

Picked on December 27 at $ 59.64
Change since picked:      + 3.77
Earnings Date           01/22/09 (unconfirmed)
Average Daily Volume =       1.4 million  


DISCLAIMER

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