Option Investor
Newsletter

Daily Newsletter, Wednesday, 7/1/2009

Table of Contents

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

Market Wrap

With Manufacturing Stabilizing, it Was Not a Bad Day

by Judy Alster

Click here to email Judy Alster
The day and the third quarter opened on a positive note, no doubt spurred by the news that the S&P had posted its biggest quarterly gain in a decade. Some of the bounce could have been a reaction to Tuesday's selloff after the disturbing Consumer Confidence survey, but let's try to be optimistic. Giving an assist today was the fourth straight monthly rise in pending home sales. Also helping, despite one disappointing component, was the monthly report from the Institute for Supply Management, which showed some stabilization in manufacturing activity.

Today's Market Statistics:

The ISM's manufacturing index rose to 42.8 in May, much as expected, to its highest level since September 2008 and up more than two points over April's 40.1, although still in just-negative territory. A reading of 50 or higher means growth in the manufacturing sector, a level above 43 or so but below 50 tells us the U.S. economy is still growing even though the manufacturing sector is contracting and below 43, your economy is in recession

The index was expected to climb by roughly two points a month until it hit 50 sometime in the third quarter. But the index's new order level may cause revision to that view, given its nearly two-point decline to 49.2, a sub-50 reading indicating that more survey respondents reported a month-to-month decline than a gain. (The report gathers information on manufacturing production, new orders, supplier deliveries, inventories and employment.)

The big plus was production, up 6-1/2 points to 52.5 and the biggest factor in the index's improvement. At the same time customer inventories were down 2-1/2 points to 43.5, another bright spot. Another important factor was a big jump to a solid 50 reading for prices paid, which should help cool concern over deflation. Markets paid no lasting attention to the report, probably focusing on the weakness in new orders.

ISM Manufacturing Index:

In other reports, the best that can be said for pending home sales, a leading indicator of sales of existing homes, is that the monthly gain was nothing much but that year-over year it showed a nice gain of 3.2%. So no big improvement, but no big drop either.

Bleaker were the week's mortgage applications. That index fell a surprising 4.5% in the week ending June 26, to 267.7. The refinancing index is back at an 18-month low of 1,482.2, down 30% on the week, despite a slight decline in mortgage rates. The residential and commercial building sector, though, seems to have been holding its own for the last two months and is well off March lows:

In keeping with that, construction outlays in May slid into negative mode after April's big boost, slipping 0.9%, worse than the market expected, after rising 0.6% in April. The reversal in outlays in May was led by a 3.4 percent drop in residential outlays, while nonresidential outlays gained 0.5%. Still, residential and commercial building stocks are decidedly off their lows, as this chart of the sector shows:

Residential and Commercial Building:

Overall, construction is still is in the doldrums as homebuilders wait for unsold supply to dwindle and commercial builders remain stymied by lower corporate profits. More promising and maybe a little surprising is the building products sector, which has left its troughs behind and gone straight up for the last week or so. We'll have to wait for the next housing reports to see what, if anything, this recent spike signifies:

Building Products:

Crude oil supplies fell 3.7 million barrels in the June 26 week to 350.2 million, according to the Energy Information Agency's latest report. Petroleum products, however, saw a big jump in weekly inventory data with gasoline up 2.3 million barrels and distillates up 2.9 million: firm output, only fair demand. Demand for gasoline is up only 0.9% year-over-year while demand for jet fuel is down 9.4%. Could it be that Americans are actually using less gasoline and liking it? Could this last? Oil fell 75 cents to $71 in immediate reaction to the results, and closed lower at day's end.

Crude Oil Inventories:

Giving us a sneak preview of tomorrow's much-awaited jobless claims and employment situation reports, the ADP national employment report today called for private payrolls to shrink by 473,000 in June, after an estimate of 485,000 in May. Again, not great, but improving.

ADP Payroll Expectations:

Even the beat-up and bloodied auto sector showed signs of life last month compared to June 2008 after a year of sickening slides. Declines slowed last month for four of the six major carmakers, with Ford reporting the smallest monthly drop in a year, 10.7%. (The bad news was that every major automaker except Honda reported lower sales than in May.) Even Chrysler, which emerged from bankruptcy protection last month, saw its year-over-year sales decline shrink, leading to the surmise that the industry slump that began with $4 per gallon gasoline last summer could be leveling off.

Ford is the sole U.S. automaker to avoid bankruptcy protection and the only one not receiving government loans to keep from running out of money. Anticipating increased traffic at dealers and higher sales later this year, Ford announced earlier this week that it would boost its third-quarter production by 25,000 vehicles: a bold move. The market sold on the news but the rumor, so to speak, has bumped Ford's stock price up over 240% since early March:

Ford Motor Co.:

And in end-of-an-era news, GM plans to sell or close Pontiac, Saturn, Hummer and Saab to focus on Chevrolet, Cadillac, GMC and Buick, its four core brands.

All in all, the economic news, while nothing to jump up and down about, does suggest that the recession probably won't get much worse and may even be sliding to a halt, although it was still tentative enough to put the kibosh on the market's morning rally. Four of today's most important reports came out at 10 a.m. and the major indexes took an almost immediate tumble, as this mid-afternoon illustration of the Dow shows us. The intraday charts of the S&P500 and the Nasdaq looked similar:

Dow Jones Intraday:

The Dow traded as high as 8580.47, up over 130 points from Tuesday's close, but thought better of it and settled at 8504.06, barely scraping above its 200-day moving average and still hiding below its 20-day average. The trend seems to be flattening.

Dow Jones Industrial Average:

Ditto the S&P500, who also managed just a fractional gain after a big start today and whose trend looks similar:

S&P500:

The Nasdaq composite eked out a gain, while still managing to keep its distinct uptrend:

The Nasdaq Composite:

For a little more reassurance, I found a chart of the NYSE Advance-Decline line. As every child of six knows, never rely a single technical indicator, and the advance-decline certainly needs other technicals to back it up. Still, this weekly chart of the last year's advance-decline shows a marked uptrend for almost three months, with higher highs and higher lows, until just recently. Are we out of the woods?

NYSE Advance-Decline Line(Weekly):

Oil was in the news today, as big pension funds that model their portfolios on popular indexes have vastly increased their purchases of crude in recent months, more than 30% since the end of last year. This has probably contributed to the doubling in oil prices this year, making our ever-reactive policy makers wonder whether some investments in commodities should be watched, if not actively curbed. Last week a Senate investigations panel released a 247-page report saying index traders have made large purchases on the Chicago wheat-futures market and have pushed up futures prices over the past few years. Really?

This week a bill was introduced that would authorize the prohibition of "excessive speculation." We'll see where it goes. The move to rein in financial investment in commodities became frantic last year as energy and food costs spiked. Naturally, as prices fell in the second half, the momentum faded fast. This kind of behavior could be why alternative energy probably won't be the holy grail so many people thought it would be, at least not in our lifetimes: Whenever oil prices get out of hand, they're likely to plummet just as quickly, taking with them any sense of urgency about energy supplies.

Even so, oil prices fell despite the decline in crude supply, on doubts about whether people and businesses will be using much more energy any time soon. Benchmark crude for August delivery fell 58 cents to settle at $69.31 a barrel with one trading day, probably a short one, left in the week.

Crude Oil:

In specific stocks, auto parts supplier Lear Corp. (LEA) tumbled after the company said it planned to restructure its U.S. operations in bankruptcy court. Genetic-instrumentation maker Illumina (ILMN) had a breathtaking skid of $7.56 or almost 20%. A decline in its genetic testing equipment business lowered its quarterly estimate to $161 million, down from its previous forecast of $168 million to $173 million. The punishment seemed awfully excessive for the crime, but we should be used to that on Wall Street.

Lear Corp.:

Announcing earnings today, wine and spirits giant Constellation Brands (STZ) gapped up and stayed up despite a big earnings skid, from 20 cents a share in last year's quarter to three cents this year; it still beat expectations even though the strong dollar took about 15% off sales. Constellation, the world's biggest wine company by volume, said it's actually benefiting as consumers switch from higher-priced beverages to bargains in every price range (my wine snob friends will faint when they read this). Shares jumped 93 cents, or 7.3%, to close at $13.61.

Constellation Brands:

Also gapping up and really on a tear is General Mills (GIS), up $2.23 or almost 4% on higher than expected earnings in the fourth quarter, on top of which it boosted its 2010 earnings estimates. Food stocks rarely let you down for very long.

General Mills Corp.:

Another winner was specialty vehicle maker Oshkosh Corp. (OSK), who gained 26%. The military said this company was the "clear winner" in a multibillion-dollar competition to build new blast resistant, off-road vehicles for ground forces in Afghanistan.

Oshkosh Corp.:

In more bad earnings news, Myriad Genetics (MYGN), who makes diagnostic and therapeutic products, missed on earnings and forecast worse than expected full year revenue. As people lose their jobs they lose their insurance, and that hurts many such equipment makers. The stock lost a stunning $9.35 or 26%.

Myriad Genetics:

Tomorrow's a big day, with reports on jobless claims, the employment situation, the European Central Bank's monetary policy and the EIA's natural gas report, as well as a number of Treasury auctions.

Tomorrow's earnings reports include Methode Electronics, MSCI, Inc., Acuity Brands and MSC Industrial Direct, among others.

And finally, last week's Federal Reserve meeting obviouly had a mild effect on the market. But it's important to keep in mind that owing to a combination of several resignations and upcoming re-appointments, a few expired terms, the ordinary appointments and the fact that Mercury is in retrograde, as a reader kindly pointed out, Barack Obama has an extraordinary, some might say alarming, chance to reshape the FOMC.

Late last year the Washington Post said, "In January 2010, Obama can either reappoint or replace Chairman Ben S. Bernanke when his term expires and make the same decision about Vice Chairman Donald L. Kohn when his term ends in June of that year. Fed governors serve a 14-year term, though in practice most leave after a few years. Thus within 18 months of taking office, Obama is likely to have appointed five of the seven Fed governors."

The central bank is supposed to be independent from politics (uh huh), so a president's best chance of influencing how the Fed will regulate banks or respond to economic changes is through these appointments. With Republicans in Congress grilling Bernanke over his possible role in strong-arming Bank of America into buying Merrill Lynch, it would seem that he's ripe for replacing. On the other hand, it might be hard for the President to find another Fed chairman so exquisitely attuned to his wishes. Ladies and gentlemen, place your bets.

Because Friday is a market holiday there will be no newsletter on Thursday night. The activity for Thursday and Friday will be covered in the weekend newsletter.

Judy Alster


New Option Plays

Dividends and Tops

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Lorillard Inc. - LO - close: 69.34 change: +1.57 stop: 67.30

Why We Like It:
The market has been churning sideways the last several weeks and volatility has been contracting. It appears that investors are turning more cautious and looking for stocks with high dividend yields. LO fits that description. Shares have a bullish up trend and the stock currently yields more than 5%. Technically LO has built a bullish (inverse) head-and-shoulders pattern with the neckline at $70.00 resistance.

I'm suggesting readers buy calls at $70.10. Our first target is $74.00. Our second target is $76.75. FYI: The Point & Figure chart is very bullish and currently forecasts a $92 target.

Suggested Options:
I am suggesting the August calls but we plan to exit ahead of the late July earnings report.

BUY CALL AUG 70.00 LO-HN open interest=1126 current ask $2.80
BUY CALL AUG 75.00 LO-HO open interest= 309 current ask $1.10

Annotated Chart:

Picked on     July xx at $ xx.xx <-- see TRIGGER
Change since picked:      + 0.00
Earnings Date           07/27/09 (unconfirmed)
Average Daily Volume =       1.8 million  
Listed on  July 01, 2009         


NEW DIRECTIONAL PUT PLAYS

Core Labs - CLB - close: 84.53 change: -2.62 stop: 88.30

Why We Like It:
The oversold bounce in the oil service stocks is rolling over. Now with crude oil futures acting like they want to move lower as well the energy sector could be poised for another leg down. CLB under performed its peers with a 3% decline and another failed rally under $88.00. I'm suggesting new put positions now although if we're lucky we'll see a bounce towards $86.00 and we can launch positions there. Our first target is $80.25. Our second target is $76.00. FYI: The P&F chart is bearish and forecasts a $71 target.

Suggested Options:
Earnings are expected on July 22nd. Yet July puts expire after July 17th. Since stocks tend to fall faster than they climb I am listing July puts but readers may want to play August instead. We'll plan to exit ahead of earnings.

BUY PUT JUL 85.00 CLB-SQ open interest= 37  current ask $3.00
BUY PUT JUL 80.00 CLB-SP open interest=432  current ask $1.15

BUY PUT AUG 85.00 CLB-TQ open interest= 25  current ask $5.80
BUY PUT AUG 80.00 CLB-TP open interest= 26  current ask $3.60

Annotated Chart:

Picked on     July 01 at $ 84.53
Change since picked:      + 0.00
Earnings Date           07/22/09 (unconfirmed)
Average Daily Volume =       232 thousand 
Listed on  July 01, 2009         



In Play Updates and Reviews

TEVA exceeds our target

by James Brown

Click here to email James Brown


CALL Play Updates

Alcon Inc. - ACL - close: 117.89 change: +1.77 stop: 111.90

ACL was looking pretty good midday. The stock did erase yesterday's losses but it failed to breakout past yesterday's high. In effect we have ACL with an "inside day" today, which represents indecision by traders. Volume was naturally low ahead of the holiday. I remain bullish with ACL above $115 but more conservative traders may want to raise their stops toward $114-115. Our first target is $119.90. Our second target is $124.50.

Picked on     June 25 at $115.25 *triggered    
Change since picked:      + 2.64
Earnings Date           07/23/09 (unconfirmed)
Average Daily Volume =       688 thousand 
Listed on  June 24, 2009         


Becton Dickinson - BDX - close: 70.70 change: -0.61 stop: 67.75

BDX under performed the market on Wednesday. I expect shares will retest the $70.00 level soon and potentially the $69-68 zone. Wait and watch for a bounce. A rebound from $70.00 would be the most bullish scenario. A close under $70.00 would be bearish.

Our first target to take profits is $74.90. Our second target is $79.00. Currently the Point & Figure chart is bullish and forecasts an $86 target. We don't want to hold over the late July earnings report. Note: I'll admit that our second target at $79 is a little aggressive considering our time frame. Be sure to take some money off the table at $74.90.

Picked on     June 25 at $ 70.51 *triggered     
Change since picked:      + 0.19
Earnings Date           07/23/09 (unconfirmed)
Average Daily Volume =       1.8 million  
Listed on  June 18, 2009         


Bunge Limited - BG - close: 61.59 change: +1.34 stop: 58.49

BG managed to erase most of yesterday's gains but remains under resistance in the $62.00-62.50 region.. We're waiting for a breakout higher with a trigger to buy calls at $62.55. If triggered at $62.55 our first target is $67.45. Our second target is $69.95. More aggressive traders may want to aim for the $74-75 zone but we plan to exit ahead of the late July earnings report.

Picked on     June xx at $ xx.xx <-- see TRIGGER
Change since picked:      + 0.00
Earnings Date           07/23/09 (unconfirmed)
Average Daily Volume =       1.7 million  
Listed on  June 27, 2009         


Covance Inc. - CVD - close: 48.78 change: -0.42 stop: 45.90 *new*

The rally in CVD appears to be stalling a bit. If you're looking for a new entry point consider waiting for a dip near $48.00, near its 10-dma, or even a dip near $46.00. I'm bumping up our stop loss to $45.90. Our first target is $52.40. Our second target is $57.00 but we may run out of time.

Picked on     June 25 at $ 48.22
Change since picked:      + 0.56
Earnings Date           07/29/09 (unconfirmed)
Average Daily Volume =       654 thousand
Listed on  June 25, 2009         


Deckers Outdoor - DECK - close: 71.59 change: +1.32 stop: 67.75

After churning sideways for about two days DECK finally saw a push higher late this afternoon. The bounce looks like a new bullish entry point to buy calls. More conservative traders might want to consider a stop under yesterday's low near $69.40.

Our first target is $78.50. Our second target is $82.50 but traders need to take some profits at our first target! $82.50 is more aggressive.

Picked on     June 25 at $ 71.90
Change since picked:      - 0.31
Earnings Date           08/06/09 (unconfirmed)
Average Daily Volume =       630 thousand 
Listed on  June 25, 2009         


Quest Diagnostic - DGX - close: 56.73 chg: +0.40 stop: 53.40 *new*

DGX is still marching higher and hit a new multi-month high today. I'm not suggesting new positions at this time. We are raising the stop loss to $53.40. Our first target to take profits is $58.25. Our second target is $59.90. More aggressive traders may want to aim higher. The Point & Figure chart has a new triple-top breakout buy signal with a $75 target. We do not want to hold over the late July earnings report.

Picked on     June 24 at $ 54.28
Change since picked:      + 2.55
Earnings Date           07/22/09 (unconfirmed)
Average Daily Volume =       1.1 million  
Listed on  June 24, 2009         


Express Scripts - ESRX - close: 68.07 change: -0.68 stop: 63.75

The bounce in ESRX looks like it's losing some steam. Shares have struggled with resistance near $69.25 the last few days. I would expect a dip back toward $66.00-65.00. Our first target is $69.90. Our second target is $74.75.

Picked on     June 22 at $ 65.25
Change since picked:      + 2.82
Earnings Date           07/29/09 (unconfirmed)
Average Daily Volume =       3.7 million  
Listed on  June 18, 2009         


Edwards Lifesciences - EW - close: 67.04 change: -0.99 stop: 64.85

EW ran into a little bit of profit taking now that the second quarter has ended. Shares are testing their 10-dma. I am still bullish here but patient traders might want to wait for a dip near $66.00 or $65.00 and open positions there.

The Point & Figure chart is bullish with an $84.00 target. The $70.00 level could be round-number, psychological resistance but shares are in blue-sky territory. I'm setting our target at $74.00. We will plan to exit ahead of the July 20th earnings report.

Picked on     June 30 at $ 68.03
Change since picked:      - 0.99
Earnings Date           07/20/09 (confirmed)
Average Daily Volume =       369 thousand 
Listed on  June 30, 2009         


Euro Currency ETF - FXE - close: 141.44 chg: +1.11 stop: 137.90

A breakdown in the U.S. dollar produced a breakout for the euro. Shares of the FXE gapped open higher and hit $142.04 intraday. I don't see any changes from my previous comments. The trend in the dollar is down and the trend is up for the euro. Our first target is $144.50. Our second target is $148.50. The P&F chart is bullish with a $168 target.

Picked on     June 23 at $140.76
Change since picked:      + 0.68
Earnings Date           00/00/00
Average Daily Volume =       461 thousand    
Listed on  June 23, 2009         


Millicom Intl. - MICC - close: 57.29 change: +1.03 stop: 53.45

MICC gapped higher this morning likely due to strong gains in European markets today. Wait for a dip near $56 or $55 as a bullish entry point. Our first target is $59.95. Our second target is $64.50. We only have about three weeks before MICC's earnings so we may not reach the second target.

Picked on     June 25 at $ 56.37
Change since picked:      + 0.92
Earnings Date           07/21/09 (unconfirmed)
Average Daily Volume =       1.0 million  
Listed on  June 25, 2009         


Murphy Oil - MUR - close: 54.64 change: +0.32 stop: 49.90

Crude oil futures spiked higher and then reversed as investors first reacted to the API inventory numbers and then the Department of Energy numbers. Shares of MUR rallied to $55.75 before giving back most of its gains. This looks like a failed rally under $56.00 and some of its key moving averages. I'm not suggesting new positions at this time. The stock hit our first target on Friday. We have a second target at $58.00.

Picked on     June 23 at $ 51.51
Change since picked:      + 3.13
                               /1st target hit @ 54.50 (+5.8%)
Earnings Date           07/29/09 (unconfirmed)
Average Daily Volume =       1.9 million  
Listed on  June 23, 2009         


PUT Play Updates

Agrium Inc. - AGU - close: 39.41 change: -0.48 stop: 41.65

AGU continues to under perform. More aggressive traders may want to buy puts now. I'm suggesting readers use a trigger to buy puts at $38.75. If triggered our target is $31.00.

FYI: Readers should note that AGU is trying a hostile takeover for CF Industries, which is itself trying a hostile takeover of Terra Industries.

Picked on     June xx at $ xx.xx <-- see TRIGGER
Change since picked:      + 0.00
Earnings Date           07/27/09 (unconfirmed)
Average Daily Volume =       4.2 million  
Listed on  June 30, 2009         


Compass Minerals Intl. - CMP - cls: 55.20 change: +0.29 stop: 56.26

CMP is trying to breakout over resistance near $56.50. It failed today. We're still waiting for a breakdown under support. I'm suggesting readers use a trigger to buy puts at $52.25, which would be a breakdown under support at $52.50 and its 50-dma. If triggered at $52.25 our first target is $47.50. Our second target is $43.00.

Picked on     June xx at $ xx.xx <-- see TRIGGER
Change since picked:      + 0.00
Earnings Date           07/27/09 (unconfirmed)
Average Daily Volume =       792 thousand 
Listed on  June 29, 2009         


L-3 Comm. - LLL - close: 68.63 change: -0.75 stop: 73.55

LLL continues to show relative weakness. The stock produced another failed rally this time under $70.00. Our first target is $66.00. Our second target is $61.00.

Picked on     June 16 at $ 71.75
Change since picked:      - 3.12
Earnings Date           07/23/09 (unconfirmed)
Average Daily Volume =       976 thousand  
Listed on  June 16, 2009         


Symantec - SYMC - close: 15.63 change: +0.05 stop: 16.10

During the thin volume today SYMC made a run for it. The stock garnered some analyst exposure with a "market out perform" rating and shares rallied toward resistance at $16.00 and its 50-dma. The intraday high was $16.04. That's twice in the last few days that SYMC managed to pierce the $16.00 level before rolling over. I remain bearish but I hesitate to open new positions at this time. Our first exit target is $14.10.

Picked on     June 16 at $ 15.73
Change since picked:      - 0.10
Earnings Date           07/29/09 (unconfirmed)
Average Daily Volume =      16.8 million  
Listed on  June 16, 2009         


United Parcel Serv. - UPS - close: 50.85 change: +0.86 stop: 52.05

The Transportation index displayed some strength this morning with a rally over the 3300 level and its simple 200-dma. Unfortunately for the bulls the rally could not hold those gains and closed under both 3300 and its 200-dma. The short-term trend is up but longer-term the trend is bearish with a double top and a potential new lower high today.

Meanwhile shares of UPS continued to bounce. I've been suggesting that readers watch for a failed rally near technical resistance at its 200-dma and we may have got that today. If you're feeling cautious then wait for a new move under $49.90 to open positions.

Our first target to take profits is $45.50. We do not want to hold over the late July earnings report.

Picked on     June 26 at $ 49.50 *triggered     
Change since picked:      + 1.35
Earnings Date           07/23/09 (unconfirmed)
Average Daily Volume =       5.2 million  
Listed on  June 17, 2009         


Wynn Resorts - WYNN - close: 35.39 change: +0.09 stop: 37.65

Nothing has changed. The meager attempt at a bounce this morning failed at $36.23. I would consider new bearish positions now or wait for a move under $35.00. Our first target is $30.25. Our second target is $26.00.

Picked on     June 22 at $ 34.28
Change since picked:      + 0.93
Earnings Date           07/30/09 (unconfirmed)
Average Daily Volume =       3.4 million  
Listed on  June 22, 2009         


CLOSED BULLISH PLAYS

Teva Pharma. - TEVA - close: 50.19 change: +0.85 stop: 45.95

Target exceeded. TEVA has stretched its gains to six days in a row. The stock has broken out past significant resistance at the $50.00 level and managed to close at new all-time highs. Our target to take profits was $49.85. Considering TEVA's relative strength we may want to move it to our watch list and look for a new entry point.

Chart:

Picked on     June 03 at $ 46.49
Change since picked:      + 3.36<-- target hit @ 49.85 (+7.2%)
Earnings Date           07/29/09 (unconfirmed)
Average Daily Volume =       5.0 million  
Listed on  June 03, 2009