Option Investor
Newsletter

Daily Newsletter, Tuesday, 7/14/2009

Table of Contents

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

Market Wrap

Goldman Earnings Overcome Dell Warning

by Jim Brown

Click here to email Jim Brown

Goldman Sachs posted strong earnings before the open and probably set a high water mark that no other financial company will reach.

Market Stats Table

Goldman Sachs (Nyse:GS) reported earnings of $2.7 billion for Q2. This compared to a loss of $3.29 billion in the worst four months of the financial crisis. Goldman managed to earn that $2.7 billion with stock and debt underwriting and high risk trading. Trading is their core strength and they are actually closer to a hedge fund than a commercial bank. The wild market swings and billions in TARP funds allowed them to take advantage of the opportunities presented. Goldman has now paid back the TARP and is free and clear of Treasury restrictions. Meanwhile many of their competitors are still limping along and trying to find traction in the weak economy.

Goldman was forced to take $10 billion in TARP funds even when they claimed they did not need it. They used the money well to add to profits but the payback during the quarter forced them to take a 78-cent per share charge. Even with the charge Goldman earned $4.93 per share and well over the $3.54 analysts expected.

Despite the blowout earnings Goldman shares gained only 22-cents for the day. Analysts already expected Goldman to beat the street and Meredith Whitney already caused a +8 spike on Monday with her bullish comments on Goldman. Goldman had gained +$16 from last Wednesday's low of $135 to the opening spike to $151 this morning. That was too much of a rebound on expectations to have a continued rebound on the actual news. Goldman shares also ran into strong resistance at $150 and well below Whitney's price target of $186.

Goldman Sachs Chart

The Goldman news succeeded in overcoming numerous earnings warnings to keep the markets slightly positive for the day. Dell (Nasdaq:Dell) held their analyst meeting today and they used that opportunity to warn that enterprise sales were "very weak" and gross margins would fall. Dell said it had to cut prices to retain market share. Dell shares fell -8% for the day. Dell did say they expected 10% unit growth in 2010-2012. That was obviously a calculated comment designed to prevent a complete collapse in the stock price. They threw out a growth forecast 2 years in the future to cloud the current impact of sales falling and margins imploding.

Dell Chart

Other warnings today came from Sun Microsystems (Nasdaq:JAVA). Sun warned that quarterly results will sharply miss Wall Street projections. Oracle, which is buying Sun for $7 billion, was quick to say it had reviewed Sun's projections and was still confident it would add to Oracle's profit in the first full year after the deal closes. Sun has been traveling a tough road with Intel's chips getting progressively faster and cheaper and IBM's and Hewlett Packard's server business both taking market share from Sun. Sun projected revenue of $2.63 billion for the quarter and short of analyst estimates for $3.06 billion. Sun also projected a loss of 24-34 cents per share compared to analyst expectations for a loss of 8 cents. Sun stock did not react to the news because of the Oracle comment.

Sun Microsystems Chart

Take-Two Interactive (Nasdaq:TTWO) fell -10% after cutting its guidance. The company said slow orders from retailers and a delayed game release would cause it to lose 65-75 cents for Q2. Analysts were expecting a 54-cent loss.

Martin Marietta Materials (Nyse:MLM) lowered its full year outlook again claiming the recession was ongoing. Martin said state and local governments were not spending money on construction projects, roads, bridges, etc. Martin supplies sand and gravel for those projects. No roads being built means no concrete and asphalt being purchased. Martin said profits are not expected to be in the $2.70-$3.30 range and down from previously lowered estimates of 3.70-4.15 per share. Analysts were already expecting $3.55 per share.

After the bell Intel (Nasdaq:INTC) blew away earnings estimates of 8-cents with earnings of 18-cents for Q2. This excluded a $1.45 billion anti trust fine from the European Union. Sales of $8.02 billion were higher than the $7.28 billion analysts expected. Intel also gave guidance for Q3 revenue of $8.5 billion that was $700 million higher than analysts expected. Even gross margins surprised at 51% compared to estimates of 45%. Intel even projects that Q3 margins would be over 53%. Everyone was worried that the low price notebooks and netbooks would hurt Intel's margins but evidently the increased volume has helped lower costs.

Intel called the bottom in the PC sector last quarter and it appears they were right on target. Even with their raised guidance they will not be back to their pre crisis level of $9.47 billion but they are recovering strongly in a slow economy. When the real economic rebound arrives it is Intel that will benefit strongly. Intel's share price spiked from the $16.82 close to $18.11 in afterhours and helped push S&P futures up +10 points.

Intel Chart

The chip sector appears to be in rebound mode. Texas Instruments (Nyse:TXN) raised guidance for Q2 a couple weeks ago. Micron (Nyse:MU) and National Semi (Nyse:NSM) beat expectations. Novellus (Nasdaq:NVLS) said on Monday it was seeing a rebound in orders. This could be the real green shoots investors were hoping for to come back into the market.

Johnson & Johnson (Nyse:JNJ) posted profits that fell -3.5% after the strong dollar and generic competition took a toll on their prescription drug sales. JNJ still beat estimates mostly on a -13% reduction in research and administration costs and production costs by -6%. Earnings were $1.15 per share compared to analyst estimates of $1.11. JNJ reiterated its full year forecast.

Not all the earnings reports were good. Yum Brands (Nyse:YUM) beat the street with earnings of 50-cents per share and 7-cents above estimates. However, Yum lowered estimates for same store sales for the rest of 2009. YUM shares fell -4% in after hours.

The earnings due out for the rest of the week include (Nyse:IBM), (Nasdaq:GOOG), (Nyse:HOG), (Nyse:JPM) and Bank America (Nyse:BAC). Bank America Merrill Lynch released a report this week claiming the recession was over. It will be very interesting to see if their earnings reflect this newfound optimism.

Earnings Calendar

Exxon (Nyse:XOM) made the news today with a $600 million investment partnership with Synthetic Genomics. The plan is to develop transportation fuel from algae. This could be just a prime example of green washing with Exxon trying to improve its image but there has been a lot of research into the algae area. Algae can be grown on land unsuitable for normal crop production. Algae consumes green house gases and produces oil that is suitable for refining into gasoline and diesel. The problem is scale and developing a highly productive strain of algae. How many acres of hydroponics will it take to produce any measurable quantity of oil? Of the $600 million, $300 million will go to SG and $300 mil used internally by Exxon. This is a multiyear project with those funds spread out over five years. This is a drop in the proverbial bucket for Exxon when their research and exploration budget is $29 billion for 2009.

In the earnings today the Intel report was far more important than the Goldman Sachs report. We already know that Goldman has a very good trading department and they are responsible for a large percentage of the program trades on any given day. That may produce profits for Goldman but it is not an indication of economic activity.

The Intel earnings and raised guidance is a very strong indication that the recession is over and the economy is improving. We can only speculate about how much better it will be in the fourth quarter when Windows 7 begins delivering and the upgrade wave shifts into high gear. I have reported several times that IT managers are already planning their upgrades to new hardware complete with Windows 7. Microsoft always offers upgrade licenses to provide users with an incentive to buy the hardware early with Windows XP or Vista installed and to upgrade free to Windows 7 later.

If you have every gone through the hassle of an operating system upgrade that lost your files and erased your setting then you realize how few users actually take Microsoft up on this offer. The vast and I do mean vast majority would rather suffer through their existing PC problems for a couple more months than go through the conversion process of upgrading operating systems. They will wait until systems with 7 preinstalled hit dealer shelves in October. I believe the buying will be brisk and continue for several quarters.

This means Intel will not see a big lift in Q3 but their Q4 could be explosive and that should carry over into Q1/Q2 of 2010. The fact that Intel is seeing increased chip sales today is extremely positive for the economic outlook. Novellus said the same thing as did Texas Instruments. We could have a real recovery brewing and these are the very early signs.

The Intel news sent the S&P futures up +10 points in afterhours and the Nasdaq futures up +29. Even the Dow futures are up strong at +59 at 7:PM. Obviously a lot can change overnight but this should be a positive for Asian markets as well. Those Asian markets are already pumped after Singapore upgraded its economic outlook and said GDP rose by 20.4% in June.

The Meredith Whitney banking upgrade on Monday morning created an enormous short squeeze off what was critical support at the close on Friday. That upgrade was a blessing since she was very bearish only 2-3 weeks ago. She was seen as late to the upgrade party but she does have an influential voice. Her upgrade to the banks and a new price target of $186 for Goldman was bad news for shorts that had loaded the boat last week in anticipation of a support failure. Monday's rally was clearly short covering led by the financial sector.

If the futures gains after today's close carry over into Wednesday we could see the tech shorts follow the same pattern as the financials. Techs did not really make any forward progress on Tuesday as traders waited for Intel to report. Tomorrow they will be chasing the markets either trying to open positions or close those that have gone against them. This is an option expiration week and all those July options have very little life left.

The Nasdaq Composite closed at 1800 today and a +30 point futures bounce could push the index very close to the highs from July 1st. From a technical perspective a +30 point bounce would put the Nasdaq right at the downtrend resistance from the June highs. That resistance is 1835-1850.

Remember, July, August, September are normally known as Death Valley Days for tech stocks. This means a lot of investors were either shorting techs in anticipation or simply not invested and hoping to pick some up cheap later this summer. Did Intel change the game enough to make those investors race into the market or will they be comfortable waiting until later this summer? Time will tell but you can bet a breakout over the June highs at 1875 would trigger a gold rush panic to get long techs.

Nasdaq Chart - Daily

Nasdaq Chart - 180 Min

On the Dow we have been watching a head and shoulders top form and the neckline support at 8300 was broken last week. The rebound this week to 8359 on the financial short covering does not negate the H&S. It may have just postponed the breakdown. However, a move back over resistance at 8500 would be seen as bullish and with Intel a Dow component that may be a possibility.

The Dow futures are up +59 points in afterhours trading and that roughly equates to Dow 5400 at the open on Wednesday. Should a real rally break out that takes the Dow over 8500 it could be a game changer.

Dow Chart

The S&P-500 closed at 905 and still well under the right shoulder at 930. S&P futures are up about 9 points as I type this giving the cash S&P a 915 print. That is still well below resistance with support still at 880. The S&P futures are not as strong now as when Intel announced earnings. They have lost about 5 points from the highs and that could be just some minor profit taking. Any further weakness would suggest to traders that the 930 resistance is still safe.

S&P-500 Chart

The TMI chart shows the index is still using the down trending 200-day average as support and faces overhead resistance on any Intel rally. The Russell-2000 has the identical down trend pattern as the TMI.

Dow Total Market Index Chart

Russell 2000 Chart - Daily

On Wednesday we need to watch for a sell the news event on Intel. Not because the news was not good but because Intel is up significantly on the expectations. It is the shorts getting squeezed tonight that powered the $2 gain. It is not buyers suddenly wanting to own Intel.

Volume was very light today at only 7.4 billion shares and Monday's big rally only managed to hit 8.3 billion. This is far from a confirmation of any major rally. Monday was a short squeeze and today was treading water ahead of the Intel news. You can't determine market direction on less than 10 billion shares. 7.4 billion shares is not even a decent churn rate.

This is also an option expiration week and any trades done with July options will lose value faster than yesterday's newspaper if those positions are not closed ASAP. There are no real earnings that will shake the tech trees again on Wednesday with the big news coming on Thursday with IBM and GOOG. With expiration on Friday I would be surprised to see any major trend develop until next week. Once the earnings news from this week and OpEx is history then the real market trend should emerge.

Hopefully tonight will be the last text emails you receive. We have undergone a significant conversion process and HTML emails should return on Wednesday.

Jim Brown


New Option Plays

Driving Higher

by James Brown

Click here to email James Brown

Editor's Note:

FYI: I had written a bullish play for NEU but the option spreads are so wide I decided to erase it. More aggressive traders may want to check it out. I would set my first target at $74.00 and my second target at $79.00.


NEW DIRECTIONAL CALL PLAYS

AutoZone Inc. - AZO - close: 158.77 change: +2.88 stop: 151.49

Why We Like It:
After two months of sliding lower AZO is now breaking out over multiple levels of resistance. I would prefer to buy calls on a dip back to the $157-156 zone but I'm suggesting bullish positions right now. This bullish breakout should portend a rally back toward the $170 level. I see short-term support near $152.00 so we'll set the stop at $151.49. Our target is $169.00.

Suggested Options:
I'm suggesting the August calls.

BUY CALL AUG 160 AZO-HL open interest=1791 current ask $5.10
BUY CALL AUG 165 AZO-HM open interest= 627 current ask $3.00
BUY CALL AUG 170 AZO-HY open interest=1084 current ask $1.60

Annotated Chart:

Picked on     July 14 at $158.77
Change since picked:      + 0.00
Earnings Date           09/22/09 (unconfirmed)
Average Daily Volume =       1.0 million  
Listed on  July 14, 2009         



In Play Updates and Reviews

Stocks Cautiously Higher

by James Brown

Click here to email James Brown


CALL Play Updates

Euro Currency ETF - FXE - close: 139.38 chg: +0.57 stop: 137.90

The dollar managed a minor gain but the euro under performed and the FXE lost 0.4%. The 50-dma is rising up fast and should offer some additional support soon. I would still consider new bullish positions in the $139.00-141.00 zone.

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:      - 1.38
Earnings Date           00/00/00
Average Daily Volume =       461 thousand    
Listed on  June 23, 2009         


Gold Miner ETF - GDX - close: 36.76 change: +0.83 stop: 33.99

Gold and gold miners were up today. Unfortunately, the GDX gapped open higher probably due to the strength miners were showing in Europe. The GDX opened at $36.49 and essentially traded sideways. I would expect a dip back toward $36.00 before moving higher. Our first target is $39.00. This should be a quick play that only lasts a few days.

Picked on     July 13 at $ 36.49 /gap higher entry
                               /originally listed at $35.93
Change since picked:      + 0.27
Earnings Date           00/00/00
Average Daily Volume =       6.8 million  
Listed on  July 13, 2009         


O'Reilly Automotive - ORLY - close: 40.14 change: +0.14 stop: 38.49

Traders are still buying the dip in ORLY but the stock didn't make much progress in spite of a generally bullish day for stocks. I would still consider new bullish positions here. Our first target is $44.00.

Picked on     July 13 at $ 40.00
Change since picked:      + 0.14
Earnings Date           07/29/09 (confirmed)
Average Daily Volume =       1.9 million  
Listed on  July 13, 2009         


UltraShort SP& 500 - SDS - cls: 56.57 chg: -0.73 stop: 55.90

The bounce in the S&P 500 wasn't very inspiring. We had the big market rally on Monday, gains across the globe on Tuesday, and a strong earnings report from Goldman Sachs but the S&P gains less than five points. I would still buy calls on the SDS with the ETF above $56.00.

Due to this inverse ETF's volatility readers may want to trade half or less than their normal position size. Our first target to take profits is the $64.00 level. Our second target is the $67.00 level. My time frame is several weeks (toward August option expiration) but traders might want to buy September calls instead.

Picked on     July 08 at $ 60.50 *triggered     
Change since picked:      - 3.93
Earnings Date           00/00/00
Average Daily Volume =        40 million  
Listed on  July 07, 2009         


Ultra-Short REIT - SRS - close: 20.48 change: -0.44 stop: 19.45

Commercial real estate drift higher thanks to the widespread market rally but the overall trend is still down. This dip in the SRS toward $20.00 is a new entry point to buy calls.

This ETF can be somewhat volatile so I'm using a wide stop loss at $19.45. I suggest readers only trade half or less than their normal position size. Our first target is $26.00. Our second target is $29.50.

Picked on     July 09 at $ 22.67
Change since picked:      - 2.19
Earnings Date           00/00/00
Average Daily Volume =      27.8 million  
Listed on  July 09, 2009         


PUT Play Updates

Agrium Inc. - AGU - close: 37.14 change: +0.14 stop: 40.05

AGU trying to bounce but not making it very far with the 200-dma directly overhead. I would watch for a failed rally in the $39.00-40.00 zone as a new entry point for puts. Our first target is $35.10. Our second 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     July 06 at $ 38.75 *triggered     
Change since picked:      - 1.61
Earnings Date           07/27/09 (unconfirmed)
Average Daily Volume =       4.2 million  
Listed on  June 30, 2009         


Core Labs - CLB - close: 83.28 change: +1.46 stop: 85.25

CLB has a six-week bearish trend of lower highs but today's gain is confirmation of yesterday's bullish reversal pattern. Yet today's gain was also fueled by light volume. I'm not suggesting new bearish positions but readers may want to consider an early exit right here.

CLB has already hit our first target at $80.25. Our second target is $76.00.

Picked on     July 01 at $ 83.16 /gap down entry
                              /originally listed at 84.53
Change since picked:      + 0.12
                              /1st target hit @ 80.25 (-3.5%)
Earnings Date           07/22/09 (unconfirmed)
Average Daily Volume =       232 thousand 
Listed on  July 01, 2009         


Compass Minerals Intl. - CMP - cls: 49.01 change: +0.48 stop: 53.05 *new*

We were expecting an oversold bounce following yesterday's big declines. CMP struggled with the $49.50 level. I am lowering the stop again, this time to $53.05. I'm not suggesting new positions at this time. CMP has exceeded our first target at $47.50. Our second target is $43.00.

Picked on     July 06 at $ 52.25 *triggered     
Change since picked:      - 3.24
                               /1st target hit @ 47.50 (-9.0%)
Earnings Date           07/27/09 (unconfirmed)
Average Daily Volume =       792 thousand 
Listed on  June 29, 2009         


Costco - COST - close: 45.03 change: +0.06 stop: 46.10

COST just isn't moving. The stock failed to participate with the rally yesterday and today, which is bearish. Yet short-term support near $44.00-44.50 holds. We are still waiting for a breakdown under support at $44.00. Our plan is to buy puts at $43.90. If triggered our target is $40.25.

Picked on     July xx at $ xx.xx <-- see TRIGGER
Change since picked:      + 0.00
Earnings Date           10/08/09 (unconfirmed)
Average Daily Volume =      4.75 million  
Listed on  July 04, 2009         


Freeport McMoran - FCX - close: 48.18 change: +0.27 stop: 50.51

It looks like we have our new entry point. FCX spiked up to $50.10 and failed, which is exactly what we've been waiting for to launch new positions. FCX has already hit our first target at $45.25. Our second target is $41.00.

Picked on     July 04 at $ 47.92 /gap down entry
                               /originally listed at $49.72
Change since picked:      + 0.26
                               /1st target hit @ 45.25 (-5.5%)
Earnings Date           07/22/09 (unconfirmed)
Average Daily Volume =        18 million  
Listed on  July 04, 2009         


MetLife Inc. - MET - close: 29.28 change: -0.11 stop: 30.35

MET did not participate in the market's rally today. Instead shares spent the session digesting yesterday's impressive move. We're waiting for the bounce to roll over as a new entry point to buy puts again. Our first target is $25.25. Our second target is $21.75.

Picked on     July 04 at $ 28.04
Change since picked:      + 1.24
Earnings Date           07/30/09 (unconfirmed)
Average Daily Volume =       7.4 million  
Listed on  July 04, 2009         


Mosaic - MOS - close: 43.22 change: +0.76 stop: 45.05

Widespread strength in the market helped MOS produce a 1.7% gain but the rally was not enough to break the bearish trend of lower highs. I would launch new positions on a move under $42.00. More conservative trades may want to wait for a new decline under Friday's low of $39.64 to open position. This is an aggressive trade because MOS and the sector can be so volatile. Our first target is $35.50. We do not want to hold over the July 22nd (unconfirmed) earnings report.

Picked on     July 11 at $ 41.13
Change since picked:      + 2.09
Earnings Date           07/22/09 (unconfirmed)
Average Daily Volume =       6.8 million  
Listed on  July 11, 2009         


NII Holdings - NIHD - close: 19.26 change: -0.07 stop: 20.10

Yesterday NIHD rallied through resistance. Today there wasn't much follow through. I'm repeating myself from yesterday but more conservative traders may want to abandon ship right now or lower your stop toward the $19.50 area like I suggested over the weekend. Tuesday's high was $19.51. I'm not suggesting new positions at this time. Our first target is $16.15.

Picked on     July 04 at $ 18.61
Change since picked:      + 0.65
Earnings Date           07/23/09 (unconfirmed)
Average Daily Volume =       2.9 million  
Listed on  July 04, 2009         


Sears Holdings - SHLD - close: 59.69 change: +2.10 stop: 64.25

We were expecting an oversold bounce in SHLD and we got it. Shares tried to rally to $60.00 but couldn't do it and spent most of the day drifting sideways under resistance. Wait for the bounce to roll over under resistance near $60.00 or the $62.00 level. Our first target is $55.10. Our second target is $50.50.

Picked on     July 07 at $ 59.75
Change since picked:      - 0.06
Earnings Date           08/27/09 (unconfirmed)
Average Daily Volume =       1.2 million  
Listed on  July 07, 2009         


United Parcel Serv. - UPS - close: 49.58 change: +0.16 stop: 51.55

Both UPS and the transports are inching higher toward resistance. Wait for this rebound to fail before considering new positions.

Our first target to take profits is $45.50. I am setting a secondary target at $43.00. We do not want to hold over the late July earnings report.

Picked on     June 26 at $ 49.50 *triggered     
Change since picked:      + 0.08
Earnings Date           07/23/09 (confirmed)
Average Daily Volume =       5.2 million  
Listed on  June 17, 2009         


Weyerhaeuser - WY - close: 29.04 change: -0.05 stop: 31.51

We are still waiting for the bounce to roll over near resistance at the $30.00 level and its 100-dma. Our first target is $26.00. Our second target is $23.00. The P&F chart points to a $24 target.

Picked on     July 04 at $ 29.51
Change since picked:      - 0.47
Earnings Date           07/31/09 (unconfirmed)
Average Daily Volume =       2.1 million  
Listed on  July 04, 2009         


Wynn Resorts - WYNN - close: 33.80 change: +1.49 stop: 35.25

The oversold bounce and probably some short covering in WYNN continues. The stock added 4.6% and is challenging short-term resistance near $34.00. More conservative traders might want to consider adjusting their stops to $34.28 (our entry point). I'm not suggesting new positions at this moment. WYNN has already exceeded our first target at $30.25. Our second target is $26.00.

Picked on     June 22 at $ 34.28
Change since picked:      - 0.48
                               /1st target hit @ 30.25 (-11.7%)
Earnings Date           07/30/09 (unconfirmed)
Average Daily Volume =       3.4 million  
Listed on  June 22, 2009         


CLOSED BEARISH PLAYS

ITT Educational - ESI - close: 92.07 change: +2.13 stop: 92.65

Some of the education stocks were up sharply today. ESI managed to rally to $92.72 late this afternoon. That was enough to close the play with our stop at $92.65. We could argue that our stop was too tight since today's bounce was almost enough to tag the 10-dma. I would keep ESI on your watch list for a new drop under $89.00 as a bearish entry point.

Chart:

Picked on     July 09 at $ 88.99 *triggered     
Change since picked:      + 3.66<-- stopped out @ 92.65 (+4.1%)
Earnings Date           07/23/09 (unconfirmed)
Average Daily Volume =       902 thousand 
Listed on  July 08, 2009         


L-3 Comm. - LLL - close: 68.46 change: +2.18 stop: 68.15

LLL was upgraded by J.P.Morgan this morning and the stock gapped open higher at $67.85 and then rallied to $68.66 intraday. Our stop loss was hit at $68.15. Readers might want to keep LLL on their watch list for a failed rally near $70.00, which may be a new entry point for bearish plays. LLL had already hit our first target at $66.00. Our second target was $61.00.

Chart:

Picked on     June 16 at $ 71.75
Change since picked:      - 3.60<-- stopped @ 68.15 (-5.0%)
                               /1st target hit @ 66.00 (-8.0%)
Earnings Date           07/23/09 (unconfirmed)
Average Daily Volume =       976 thousand  
Listed on  June 16, 2009