Option Investor
Newsletter

Daily Newsletter, Monday, 7/20/2009

Table of Contents

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

Market Wrap

Simply En Fuego

by Todd Shriber

Click here to email Todd Shriber
Stocks continued their torrid run on Monday with all three major US indexes inching above critical psychological levels to close at, or close to, their intraday highs. The S&P 500, which rose 1.1% to close close at 951.13, above the oft-mentioned 950 level, now rests at its highest level since November. The Dow Jones Industrial Average turned in a triple-digit performance (the good kind), buoyed by strong runs by Caterpillar (CAT) and Alcoa (AA), both of which rose nearly 4%. The Nasdaq gained 1.2% to close above 1900 at 1909.29.

Market Stats Table

News that embattled financial services firm CIT Group (CIT) may avoid bankruptcy sparked the bulls, as did a couple of solid earnings reports from the likes of Hasbro (HAS) and Eaton (ETN). All 10 S&P 500 industry groups finished the day higher, with commodity and industrial stocks leading the way. Speaking of commodities, crude oil inched closer to $64 a barrel, closing at $63.98. Although crude oil closed up 42 cents on the day, that was not enough to cover up a pair of glum earnings reports from oil services firms Haliburton (HAL) and Weatherford International (WFT).

Speaking of crude, it appears to have established support in the $60 area. Whether or not that signals another run to $70 a barrel and beyond is another story. The national average for gas prices is around $2.47 a gallon currently, compared to close to $4 just a year ago. Inventories remain high and folks are still driving less, but it appears that stocks are responding to some stabilization in oil prices. Or maybe it is the other way around.

Crude Chart

And speaking of oil services stocks, as I mentioned above Haliburton and Weatherford did not set the world on fire with their earnings reports on Monday. Haliburton said second-quarter profits tumbled 48%, but that was not as bad as expected. Weatherford missed analysts' estimates by reporting an 89% drop in second-quarter earnings. Combine that with some bearish options trade today in offshore driller Diamond Offshore (DO), which I highlighted in the Market Monitor, and one might expect that entire oil services was down today. That was not the case. Sure, Weatherford closed down almost 5%, but Haliburton and Diamond Offshore were both up.

The Oil Services HOLDRS ETF (OIH), which counts the three aforementioned stocks among its top 10 holdings, also finished up on the day, popping $1.46 to $102.44. The close above $100 is important, as I have lamented before, not to mention the 50-day average of $100.50 looks to be acting as support for OIH, at least in the near-term.

OIH Chart

Another commodity that is experiencing a resurgence of sorts is copper. The bronze metal has been surging throughout July as the chart below shows and copper futures are up over 50% this year. Emerging market demand, particularly from China, has buoyed copper's fortunes this year. Copper for September delivery finished Monday at $2.47 a pound, good for a nine-month high.

Copper Chart

That may spell good news for Freeport McMoRan (FCX), the world's largest copper producer. The company reports second-quarter results before the bell on Tuesday and analysts are expecting a profit of 69 cents a share on sales of $3.4 billion. The shares went for $16.80 on December 5th. On Monday, they closed at $57. That is an impressive run to be sure, but consider that Freeport's stock performed that well in the face of an exceptionally weak US housing market and that market is a prime destination for copper.

The market is all about earnings right now, for the most part anyway, and Freeport's results will be closely scrutinized. Sure, bulls would love to see Freeport beat estimates, but higher guidance is really what the bulls want to see here and that could send Freeport shares above $60 as soon as tomorrow and perhaps on their way to the June high of $61.55. The shares are well above the 50-day moving average at $51.25, and support probably rests in the low $55 area.

FCX Chart

One interesting element to the market's recent surge is the performance of cyclical stocks. You know, commodities shares like Freeport and Alcoa and construction equipment stocks like Caterpillar. Alcoa, the smallest member of the Dow yet one of the largest aluminum firms in the world, rose 38 cents or, 3.7%, on Monday to close at $10.60.

Caterpillar, perhaps the epitome of a cyclical stock given its exposure to construction and infrastructure demand, received one of the more interesting upgrades you will hear about, which I highlighted in the Monitor. On Monday, Bank of America/Merrill Lynch upgraded Caterpillar to ''buy'' from ''hold.'' By itself, the upgrade is not all that noteworthy, but Caterpillar reports earnings on Tuesday and not many on the Street are expecting anything stellar in the way of upside surprises. That did not deter Bank of America/Merrill Lynch, which said that construction machine sales reached a cyclical bottom in the second quarter and that earnings do not matter as they apply to Caterpillar.

That is a bold assessment, but the market apparently agrees, at least it did on Monday as buyers sent Caterpillar shares up $2.66, or 7.8%, to $36.65. The dividend yield is tidy at 4.9%.

So it is safe to assume that Mr. Market will be picking over Caterpillar and Freeport's earnings before the bell tomorrow, but there was another important after-market profit announcement out of the semiconductor sector. Last week, Intel's (INTC) bullish after-hours report helped fuel the market for the rest of the week. After the close Monday, Texas Instruments (TXN), the biggest maker of chips used in mobile phones, said second-quarter profits fell by more than 50%, but guess what? That was not as bad as expected.

Ah, the wonders of significantly reduced earnings estimates. Sarcasm aside, Texas Instruments earned 20 cents a share on sales of $2.46 billion. Analysts had been expecting a profit of 19 cents a share on sales of $2.41 billion. Certainly not an Intel-esque beat of analyst estimates, but Texas Instruments likely shifted the Street's focus from the previous quarter's results to the current quarter by forecasting third-quarter profits of 29 cents to 39 cents a share on sales of $2.5 billion to $2.8 billion. Analysts are estimating 28 cents a share on sales of $2.53 billion.

The chart shows Texas Instruments is in the midst of undoubtedly bullish run and it will be interesting to see if investors send the stock above $25 tomorrow in the wake of this afternoon's earnings report. It is worth noting that Texas Instruments traded down in the after-hours session. Intel traded up in after-hours trade when it announced its sterling results last week.

TXN Chart

With a light economic calendar tomorrow and 25% of the S&P 500 reporting earnings this week, I am going to keep the focus on those earnings reports. Staying in the tech sector, Apple (AAPL) reports fiscal third-quarter results after the close tomorrow. Analysts are expecting a record quarter out of the maker of iPods and iPhones with a profit of $1.16 a share. Everyone knows the superlatives that Wall Street loves to tack on Apple, juggernaut, stalwart, etc. I will just leave it to the charts below to show that iPhone and iPod sales are not likely to show any negative surprises.

iPhone Chart

iPod Chart

In addition to Caterpillar, four other Dow components report earnings before the bell tomorrow, so it is fair to say there will be no shortage of catalysts. Chemical giant DuPont is expected to earn 53 cents a share for the second quarter. I am not in the business of making predictions, but it is worth noting that Goldman Sachs added DuPont rival Dow Chemical (DOW) to its conviction buy list on Monday. Perhaps that is a sign that the specialty chemicals sector is looking up after a brutal 2008. Either way, DuPont yields a robust 5.9%.

Drugmaker Merck (MRK) is another Dow name reporting second-quarter results tomorrow and analysts are forecasting 77 cents a share in profits. Coca-Cola (KO) also reports before the bell and analysts are calling for the world's largest soft drink maker to earn 89 cents a share. Rounding out the cavalcade of Dow earnings tomorrow, United Technologies (UTX) is expected to report profits of $1.04 a share. So yeah, the Dow is probably in for an action-packed day on Tuesday.

Not to be ignored is the financial sector. Even though bellwethers such as Goldman Sachs (GS) and Bank of America (BAC) have already delivered results, there are a few more financials slated to step into the earnings confessional this week. State Street (STT) is one to watch tomorrow. State Street is the largest US manager of assets for other institutions and one of the ''Group of 10'' banks that promptly repaid TARP loans from Uncle Sam.

While it is tough to compare State Street to Goldman Sachs, it is hard to ignore that State Street's shares have nearly tripled since March, outperforming King Goldman in the process. State Street fits in a space between money center and investment banks and fills that space quite nicely. Put another, way there are few superior major financial institutions in the U.S. at this point. Analysts are calling for 97 cents a share for the second quarter.

STT Chart

For those looking to extend the Goldman trade, I present you with Jefferies (JEF). Again, this is a name that is hard to draw direct comparisons to Goldman Sachs with, but Jefferies is a boutique investment bank that has done quite well for itself lately, even in a tough operating environment for companies of this nature. I guess pilfering talent from the likes of Bear Stearns and Lehman Brothers will do that. Two interesting tidbits about Jefferies that could make it worth watching: The company increased has increased its share of the global M&A advisory market this year and it did not take one red cent of money from Uncle Sam during the financial crisis.

Looking at market technicals, I talked about the importance of Dow 8800 last week and the index shot through that resistance level today with ease. While 8800 was believed to be a higher hurdle than it proved to be, significant resistance does lie ahead at 9000. That is not all that far off and with five Dow stocks reporting earnings on Tuesday, 9000 could come into play within the next couple of days. That of course depends on the news from those companies.

Dow Chart

The S&P 500 cleared the 950 level and that is important as resistance was pegged around 940 and the close above the psychological 950 area could mean 1000 is on the horizon. You can bet that is another area of strong resistance, but if a close above that level is seen in the next week or so, you can bet bulls will run the index higher from there.

S&P 500 Chart

As if Friday's close at a nine-month high was not enough for the Nasdaq, the tech-laden index marched higher again on Monday, blasting through resistance at 1895 to close above 1900. I get the feeling that 2000 this week might be asking a bit much of the Nasdaq, but then again the catalysts exist beyond Apple's earnings. Yahoo (YHOO), eBay (EBAY), Microsoft (MSFT) and Amazon (AMZN) all report earnings this week. A close in the 1950-1960 area on strong volume could signal 2000 is near by.

Nasdaq Chart

It cannot be argued that 81% of the major companies that have reported earnings thus far have beaten estimates by an average of 15%. I would not want to be on the wrong end of that trend, but any downbeat surprises from some of the names mentioned here could bring the bears out of hibernation.


New Option Plays

Is This Time To Launch?

by James Brown

Click here to email James Brown

Editor's Note:

The S&P 500 has rallied to 951 and marked a new closing high for the year. Is this the breakout over 950 many are looking for? I doubt it. The S&P 500 index struggled with 950 for several days in a row. This could be a bull trap after a massive 8% rally in six days time. If you're looking for a breakout I'd wait for the S&P 500 to close over 960. Unfortunately, we're in a predicament when it comes to new plays. Do we launch bearish positions now with the S&P 500 testing resistance? We could but there really hasn't been any sign that the rally is slowing down. At the same time do we launch new bullish positions with the S&P 500 testing resistance and looking very extended and due for a correction? That doesn't sound like a smart play either. The only play that might work with the S&P 500 at such a pivotal level would be some sort of neutral straddle or strangle but if you look at a daily chart of the S&P 500 it's been going sideways for three months. Straddles or strangles might not be the best trade either.

Thus I'm not suggesting new positions on OptionInvestor at this time. However, two stocks I'm watching are AAPL and PKX. Apple Inc. (AAPL) is due to report earnings after the closing bell Tuesday night. There is always a chance for profit taking on the earnings results. I would wait and hope for a decline following its announcement. We can use a dip in the $143.00-140.00 zone as a new bullish entry point and consider a stop loss under the 40 or 50-dma. PKX is a south Korean steel maker and shares have broken out from a multi-week consolidation. Look for a correction toward the $88.00-87.00 zone as a potential entry point to buy calls.


In Play Updates and Reviews

Commodities Still Rising

by James Brown

Click here to email James Brown


CALL Play Updates

AutoZone Inc. - AZO - close: 156.65 change: -0.33 stop: 151.49

AZO continues to under perform the market but if we were going to reconsider a new entry point then this is it. The stock dipped toward very short-term support near $154.00, while breaking support at the 50-dma and the $155.00 level in the process, only to bounce back. This is a new higher low in its short-term trend of lows. I'm raising our stop loss to $154.25. Our target is $169.00. FYI: The P&F chart is bullish with a $186 target.

Chart:

Picked on     July 14 at $158.77
Change since picked:      - 2.12
Earnings Date           09/22/09 (unconfirmed)
Average Daily Volume =       1.0 million  
Listed on  July 14, 2009         


Euro Currency ETF - FXE - close: 142.25 chg: +1.24 stop: 138.75

Weakness in the U.S. dollar has lifted FXE above short-term resistance at $142.00. The MACD on the daily chart has just produced a new buy signal. 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:      + 1.49
Earnings Date           00/00/00
Average Daily Volume =       461 thousand    
Listed on  June 23, 2009         


Gold Miner ETF - GDX - close: 40.23 change: +1.59 stop: 35.90 *new*

Target achieved. Weakness in the dollar fueled a rally in gold and the gold-miner ETF surged 4.1%. The GDX gapped open higher at $39.95. Our first target to take profits was at $39.50. I am raising our stop loss to $35.90. Our second target is $42.40.

Chart:

Picked on     July 13 at $ 36.49 /gap higher entry
                               /originally listed at $35.93
Change since picked:      + 3.74
            gap higher exit   /1st target hit @ 39.95 (+9.4%)
Earnings Date           00/00/00
Average Daily Volume =       6.8 million  
Listed on  July 13, 2009         


Lorillard - LO - close: 69.11 change: -0.87 stop: 67.90

Shares of LO were rebuffed again at the $70.00 level. The stock sank 1.2% under performing the rest of the market. We're not going to have much time if this stock can breakout over resistance. If triggered at $70.50 I'm raising our stop loss to $68.49. Our first target is $74.50. Our second target is $77.00. We have to exit by Friday to avoid earnings.

Picked on     July xx at $ xx.xx <-- see TRIGGER
Change since picked:      + 0.00
Earnings Date           07/27/09 (confirmed)
Average Daily Volume =       1.5 million  
Listed on  July 18, 2009         


O'Reilly Automotive - ORLY - close: 41.07 change: +0.34 stop: 38.49

Traders bought the dip near $40.00 and its rising 10-dma. I don't see any changes from my previous comments. Our first target is $44.00. We do not want to hold positions over the July 29th earnings report.

Picked on     July 13 at $ 40.00
Change since picked:      + 1.07
Earnings Date           07/29/09 (confirmed)
Average Daily Volume =       1.9 million  
Listed on  July 13, 2009         


Polaris - PII - close: 35.50 change: +1.10 stop: 31.45

PII has continued to rally and shares broke through resistance near $35.00. If the S&P 500 can keep the rally alive above 950 then I don't see any reason why PII can't keep its own rally going. Yet I don't want to chase this move but PII could be seeing a short squeeze.

I am suggesting that readers wait and buy calls on a dip in the $33.00-32.00 zone. We'll try and limit our risk with a stop loss at $31.45, which is just under Friday's low. Our first target is $37.25. Our second target is $39.50. Currently the Point & Figure chart is bullish with a $49.00 target.

Picked on     July xx at $ xx.xx <-- see TRIGGER
Change since picked:      + 0.00
Earnings Date           07/16/09 (confirmed)
Average Daily Volume =       436 thousand 
Listed on  July 18, 2009         


SPX Corp. - SPW - close: 54.02 change: +1.75 stop: 47.95

Wow! SPW has broken out over resistance at the $54.00 level but it produced this move on pretty light volume. The stock is overbought. We don't want to chase it.

The plan is to buy calls on SPW with a dip in the $50.25-48.00 zone. I'm raising the stop loss to $47.95. If we don't see SPW contract soon (Monday or Tuesday) I'll probably drop it as a bullish candidate. We don't want to hold positions over the July 29th earnings report. Our first target is $53.75. Our second target is $57.00.

Picked on     July xx at $ xx.xx <-- see TRIGGER
Change since picked:      + 0.00
Earnings Date           07/29/09 (confirmed)
Average Daily Volume =       777 thousand 
Listed on  July 15, 2009         


PUT Play Updates

Compass Minerals Intl. - CMP - cls: 50.50 change: +0.48 stop: 52.01 *new*

CMP is still in a down trend but if the S&P 500 confirms this breakout over 950 I would expect this stock to rebound. I'm lowering the stop loss to $52.01. More conservative traders may want to exit early. I'm not suggesting new positions at this time. CMP has exceeded our first target at $47.50. Our second target is $43.00. FYI: The P&F chart is bearish with a $35 target.

Picked on     July 06 at $ 52.25 *triggered     
Change since picked:      - 1.75
                               /1st target hit @ 47.50 (-9.0%)
Earnings Date           07/28/09 (confirmed)
Average Daily Volume =       792 thousand 
Listed on  June 29, 2009         


LEAP Wireless - LEAP - close: 26.73 change: +0.49 stop: 29.45

LEAP produced a little oversold bounce. The trend is still down. Readers may want to wait for another failed rally type of move in the $28-29 zone before opening positions. More conservative traders may want to avoid opening new bearish positions with the S&P 500 in rally mode.

Our first target is $22.65. Our second target is $20.25. The $22.50 level could be strong support so I suggest readers take off most of their position there. FYI: The P&F chart is bearish with a $19.00 target.

Picked on     July 17 at $ 26.80 *triggered    
Change since picked:      - 0.07
Earnings Date           08/06/09 (confirmed)
Average Daily Volume =       2.2 million  
Listed on  July 16, 2009         


Sears Holdings - SHLD - close: 64.66 change: +1.94 stop: 65.05

The RLX retail index is soaring and is very close to resistance in the 345 region. The sector looks very short-term overbought with a non-stop rally from the 305 region. The question we have to ask is will SHLD break higher above the $65.00 level as the RLX retail index grinds higher those last few inches toward overhead resistance. Right now, with today's 3% gain in SHLD and its close over $64.00 and its 30-dma, I believe the odds are against us and suspect that SHLD will hit our stop loss at $65.05 tomorrow. It's also worth noting that the MACD on the daily chart is about to turn bullish. I'm not suggesting new positions at this time.

Picked on     July 07 at $ 59.75
Change since picked:      + 4.91
Earnings Date           08/27/09 (unconfirmed)
Average Daily Volume =       1.2 million  
Listed on  July 07, 2009         


WestAmerica - WABC - close: 47.34 change: +0.27 stop: 50.05

WABC gapped higher on us this morning but the rally stalled under the 48.00 level. I would consider new bearish put positions in the $47.00-49.00 zone. Our first target is $41.50. Our second target is $38.00. The Point & Figure chart is bearish with a $37.00 target. Readers may want to trade October puts because WABC doesn't move that fast.

Picked on     July 18 at $ 47.61 /gap higher entry
                               /originally listed at $47.07
Change since picked:      - 0.27
Earnings Date           07/14/09 (confirmed)
Average Daily Volume =       331 thousand 
Listed on  July 18, 2009         


Strangle & Spread Play Updates

(What is a strangle? It's when a trader buys an out-of-the-money (OTM) call and an OTM put on the same stock. The strategy is neutral. You do not care what direction the stock moves as long as the move is big enough to make your investment profitable.)

McDonald's - MCD - close: 58.28 change: +0.44 stop: n/a

MCD gapped higher on us but shares are still in our desired entry zone. The plan is to launch a strangle position ahead of the July 23rd earnings report that come out before the market opens. That means we need to launch positions before Wednesday's closing bell. We want to open positions in the 58.50-56.50 zone. The closer to $57.50 the better.

I suggested the August $60 calls (MCD-HL) and the August $55 puts (MCD-TK). Our estimated cost is $1.25 (0.70 + 0.55). We want to sell if either option hits $2.75 or higher. This may take several weeks to succeed.

Picked on     July 18 at $ 57.84
Change since picked:      + 0.44
Earnings Date           07/23/09 (unconfirmed)
Average Daily Volume =       7.8 million  
Listed on  July 18, 2009         


CLOSED BULLISH PLAYS

Bunge Ltd. - BG - close: 65.86 change: +0.91 stop: 59.35

We are running out of time on BG. The company is due to report earnings on July 23rd. While today's action looks like a short-term top we're not going to have time to wait for a correction and then buy calls on a bounce. I'm suggesting we kick BG off the play list tonight and wait to see how the market reacts to the company's earnings results on Thursday morning. Maybe then we'll see a new entry point. Truly aggressive and nimble traders may want to consider very brief bearish positions with a stop above today's high. BG looks overbought here after an eight-day run up. I would not hold over earnings. Our plan was to buy calls on a dip in the $61-60 zone.

Chart:

Picked on     July xx at $ xx.xx <-- see TRIGGER
Change since picked:      + 0.00             *never opened*
Earnings Date           07/23/09 (unconfirmed)
Average Daily Volume =       1.5 million  
Listed on  July 15, 2009         


CLOSED BEARISH PLAYS

Weyerhaeuser - WY - close: 31.77 change: +1.13 stop: 31.51

Commodity and building-material-related stocks continued to climb. Shares of WY gained 3.6% and broke through multiple layers of resistance. The stock hit our stop loss at $31.51 closing the play.

Chart:

Picked on     July 04 at $ 29.51
Change since picked:      + 2.00<-- stopped out @ 31.51 (+6.7%)
Earnings Date           07/31/09 (confirmed)
Average Daily Volume =       2.1 million  
Listed on  July 04, 2009