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Newsletter

Daily Newsletter, Saturday, 7/25/2009

Table of Contents

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

Market Wrap

Friday the 13th For Nasdaq

by Jim Brown

Click here to email Jim Brown

It may have been July 24th for traders but it was an unlucky Friday the 13th for the Nasdaq. The streak of consecutive daily gains was snapped at 12 after Microsoft and Amazon cursed the Nasdaq with a -7 point loss.

Market Statistics

Despite the -7 point decline in the Nasdaq the markets remained bullish after a week of conflicting earnings. Various resistance levels were broken and the major indexes were up over 4% for the week. For the second and busiest week of earnings season so far it was a resounding success.

On Friday there were little in the way of economic reports to subdue the bullish enthusiasm of traders. The only report of note was the Consumer Sentiment Survey for July with a headline number of 66.0. This was +2 points better than the first reading for July but still -5 points below the 70.8 reading in June. The biggest decline came in the expectations component, which fell to 63.2 from 69.2. The present conditions component fell to 70.5 from 73.2. The 66.0 headline number was the lowest reading since April.

Factors causing the decline included larger job losses in June, continued house price declines and foreclosures, the rise in interest rates cutting off refinancing efforts and worries over the change in Washington. The growing fight about the health care reform along with the rising expectations for cost and taxes needed to pay for it has soured the outlook for American taxpayers. For generations politicians have been claiming new programs would not raise taxes and eventually they always find a way to tax somebody for the new benefit.

The new health care plan has polarized the nation with 57% now strongly against it, 33% for it and 10% with no opinion. The numbers opposed are growing because of the taxes being discussed but more importantly the details of the plan. There is a rapidly rising backlash from the retiring boomer generation who are being told the government is no longer going to approve the expensive drugs or operations needed to keep them alive. The thought of being "counseled" every five years as called for in the plan on how to die early and gracefully is not being met with open arms. This sounds more like a science fiction plot than a new health care plan for America.

The worries over the plan details and how to pay for it have taken on a life of their own in the press. Consumers feeding on those rumors and then passing them on to others with their own embellishments are compounding the problems and weighing on consumer sentiment. Most analysts believe a lot of the market rally this week had more to do with the apparent slowing of the plan than with the earnings being released. On Friday the Dow shot up +25 point when the leader of the blue dog democrats, Mike Ross, said the plan was dead and there was no chance for a deal. Unfortunately Ross appeared again later and said talks would resume on Monday.

Consumer Sentiment Chart

The economic calendar for next week has a couple of high profile events in the Beige Book and the GDP report for Q2. The Fed Beige Book on Wednesday is an update on the economic conditions in all 12 Fed regions. We would hope to see another uptick in conditions heading into Q3. This is a preview of the two-day Fed meeting in two weeks.

The second quarter GDP report on Friday is the critical report for the week. The last reading on the Q1 GDP was a drop of -5.49%. The estimates for the Q2 GDP range from -1.6% to +1.8%. Any reading in positive territory would prompt a monster rally in the market. The consensus opinion is closer to a -1.5% decline, which would be a major improvement but still in a recession and inline with what the market is expecting.

GDP Chart

Next week will be a major debt auction by the government. $205 billion in various notes and short-term bills will be auctioned starting on Monday. This is a massive amount of supply but because it is mostly short term notes all the auctions are expected to succeed. The 2-5-7 year notes will be the largest ever auctions of these notes on record. However, as I have cautioned before, the more debt the government is forced to sell the better the chance for an auction to eventually fail. Even if there is no failure the sheer volume of supply is going to force interest rates higher. I added the various auctions to the calendar in green.

Economic Calendar

Until the GDP report on Friday the focus will be on earnings with over 500 companies reporting. This is the busiest week of earnings season but there are only a couple dozen companies you would know. Out of the 500+ reporting I had a hard time filling the graphic below with symbols I thought everyone would recognize.

There are five Dow components reporting (those in green) and by the end of the week 70% of the S&P will have reported. Currently the stats are 77% have beaten earnings per share estimates, 14% have missed and 9% reported inline. Those statistics are misleading.

Earnings Calendar

In the first graphic below are the 30 Dow stocks. Those with a colored background have already reported. The ones in green beat the earnings per share estimates, yellow reported inline and red missed the estimates. Based on this graphic and the +77% statistic above it looks like a blowout earnings season.

Dow Components By Estimate Result

However, the graphic below tells a much different story. Those stocks in green beat their revenue numbers and those in red missed estimates on revenue. Boeing was inline. This graphic is telling us the real story. The majority of companies are beating estimates per share because of dramatic cost cutting measures. Laying off tens of thousands of workers, forcing vacations, cutting salaries, closing plants and slashing advertising budgets allowed them to beat the earnings per share estimates. Unfortunately the gains are not repeatable unless you can make the same cuts this quarter.

For earnings to be investor worthy they must come from rising revenue in the form of increased sales. Obviously we are in the middle of a recession and sales for nearly everyone are down across the board. Those that did beat the lowered estimates did not do so without a lot of pain and their management should be commended. The key for investors at this point is the outlook. Quite a few companies have guided lower and a rare few have guided higher. Those that guided higher should be the leaders when the rebound really catches fire.

Dow Components By Revenue Result

There is a bright side to this story. As we have seen in prior recessions those companies that really cut the fat to trim down to a fighting weight will see earnings explode once the real recovery begins. They have cut millions if not billions in salaries, sold off non-core businesses, closed high cost facilities, etc. Now that expenses are dramatically lower they are poised to really dish out the profits when sales pick up again. A deep recession is good for business balance sheets because they can flush bad decisions and hide the losses in the negative recession earnings.

Government Motors is a prime example. They cut 1000 dealerships, laid off tens of thousands of workers, cancelled unfavorable contracts and eliminated debt through bankruptcy. They don't have to sell nearly as many cars in 2010 to break even as they did in 2008. Obviously this is an extreme example but you get the picture. Their problem in 2010 will be selling go-kart sized economy cars to a consumer that wants a SUV. The new government appointed board with many non-auto members will be hard pressed to force a profit if the "green cars" turn to rust brown on the dealer lots while buyers move to SUVs produced by non governmental companies. But, as they say, that is another story.

The bottom line to the earnings story is that corporate America has completed the normal recession downsizing and is ready to go forth and do battle again on the global stage and retake market share when the recovery really begins. This is a bullish event and something that many money managers were anticipating in their purchases last week.

In the Dow table above you probably noticed that Microsoft (Nasdaq:MSFT) missed their earnings estimates on Thursday night. Microsoft stock was crushed for an 8.25% loss to $23.44 on Friday. This equated to about 17 Dow points. Microsoft revenue fell -17% to $13.1 billion. This was $1 billion less than analyst estimates. Microsoft lost almost $20 billion in market cap on Friday alone. Microsoft said their revenue declined because of an overall shift toward cost-conscious purchasing. However, they said PC sales had flattened in recent months suggesting the worst was over.

There is light at the end of the tunnel for Microsoft. They are going to release Windows 7 in October and this should be a very strong release and a cash cow for Microsoft. They are also seeing a rise in interest for Windows Server 2008. Many IT departments had not upgraded from Server 2003 to 2008 because of the Vista problem. There was some hesitancy to upgrade before the recession hit and during the recession nobody was spending money on upgrades. That is changing now and this is likely to be a low point for Microsoft. I would be thrilled to see a further decline to $22 for a long entry point.

Microsoft Chart

Amazon (Nasdaq:AMZN) was the other stinker on Friday after their earnings report failed to impress investors. Amazon earned 32-cents per share and analysts expected 31-cents. That was a -10% decline from the year ago quarter. However, the revenue number was a little light at $4.65 billion compared to $4.69 billion. Amazon guided inline for Q3. Basically sales were flat on books, CDs and DVDs while overall sales rose +14% thanks to sales of the $299 Kindle book reader. At least one analyst theorized that Amazon's margins declined because they were selling fewer paper books because they had sold so many Kindles. I question this theory. To sell a paper book they have to order it, store it while they wait for a buyer then a person pulls it from inventory, packs it using costly supplies and ships it by USPS to the buyer. All of these things are margin intensive.

I have a series of paperback books I have been reading for years. They cost $6.99 at Amazon plus $3.99 for shipping. The Kindle version is $5.04 with instant availability and no shipping charges. A Dale Brown hardcover is $19 plus shipping while the electronic version is $9.99. I don't know what Amazon pays for each electronic version they deliver but you can bet it is a lot less than the paper books they buy. I am sure Amazon makes a profit on the paper book shipping but I doubt it is very much and on orders over $25 shipping is free so they are eating that cost. Personally I think Amazon is poised for the future with the Kindle and I doubt Jeff Bezos would have gone to all the effort for a break-even product. I have also heard from Kindle users that they buy more electronic books than they ever bought paper books simply because of the convenience and the reduced cost.

Amazon dropped -$7.38 on Friday but that came after a +5.22 gain the day before. Several analysts upgraded Amazon and some downgraded it so the community is split on Amazon's future. With the Zappos.com acquisition they are proving they will remain the web's number one retailer. I was a bear on Amazon for a long time but I have switched sides over the last year. I would love to see a bout of Nasdaq profit taking so I could get long AMZN closer to $75-80. Resistance is strong at $88 but long term I think it is going higher.

Amazon Chart

CIT Group (Nyse:CIT) completed its fall from grace when it was removed from the S&P-500 at the close on Friday. It was replaced by RedHat (Nyse:RHT).

CIT Chart

RedHat Chart

The FDIC closed seven banks on Friday bringing the total for the year to 64. Six of the banks were in Georgia and were subsidiaries of Security Bank Corp. State Bank and Trust of Pinehurst Georgia assumed the deposits of all six banks. The FDIC will lose $807 million on the deal. State Bank received $300 million from a group of 26 investors to help the bank make the acquisition. In New York the Waterford Village Bank was closed. It only had assets of $61 million and will cost the FDIC $5.6 million to close. So far in July there have been 19 bank failures.

Guaranty Financial Group Inc, (Nyse:GFG) the second largest publicly traded bank in Texas with 150 branches, said on Friday it will probably fail after loan losses and writedowns left it "critically" short of capital. If it fails it will be the largest bank failure so far in 2009. GFG said it had turned over control to the Office of Thrift Supervision (OTS) until the final resolution. However, Carl Icahn owns 17% and Robert Rowling of Omni Hotels owns 19%, both through companies they control. With those heavyweights involved the outcome is not certain and you can bet they are negotiating with the FDIC for a bargain settlement. Last September Washington Mutual with $307 billion in assets was closed for the largest U.S. bank failure.

The +947 point Dow gain over the last two weeks is the best two-week gain for the Dow since 2000. There seems to be no stopping it after it moved over resistance at 9000 on Thursday. Friday would have been the perfect day for profit taking after Dow component Microsoft tanked both the Dow and the Nasdaq. Microsoft was responsible for about -17 Dow points and UTX another -10. However, the -65 point drop at the open was quickly erased and the Dow closed at another new seven-month high.

How much longer can this rally continue? It depends on whom you believe. Technicians are conflicted about the breakout versus future resistance. Some believe it could run for several more weeks and of course there are others who believe it won't last until the August 7th Jobs Report.

I heard an interesting report from Mary Ann Bartels, Chief U.S. Market Strategist and hedge fund tracker for Merrill Lynch. She publishes a weekly report of hedge fund trends. Bartels claimed on Friday that hedge funds were still net short Nasdaq stocks and were selling their S&P longs. She said there were continued outflows in Q2 but Q3 could see inflows of $40-$65 billion. She said for Q2 hedge funds will likely post their best quarterly gains since early 2000. Investors are moving back into hedge funds now that the market bottom is behind us and the financial system is intact. Hedge funds will need to put that money to work and that suggests they will have to close their Nasdaq shorts. Those Nasdaq shorts were planned to take advantage of the normal Aug-Oct Death Valley Days of summer for tech stocks. I would say that is not working out well for them this year.

Bartels said there was $3.65 trillion in cash in money funds, $1.21T in uninvested cash in brokerages accounts and another trillion or so in miscellaneous accounts. The combined buying power in the equity market was roughly $16 trillion and once the tide turned and hedge funds decided to go long again it was going to be a strong rally. Heck, if the events worked out as she expects we will be dusting off those Dow 10,000 hats again soon.

It is very hard for me to recommend anyone go long today. With the Dow up 10% in the last two-weeks it would seem to be the worst possible time. That is the way many rallies actually occur. They are unexpected and run much farther than anyone expects because the shorts just keep feeding the flames. It is not logical but it happens.

The advance/decline chart below was making the rounds on Friday in an attempt to illustrate the absurdity of going long the current market. (Must be those hedge fund guys trying to rescue their Nasdaq shorts) The S&P-500 10-day Advance/Decline line rose to its highest point in over a year. This is the same level where the advance failed after the end of December rally and the initial March rebound. Just reaching this point does not guarantee a correction but it does suggest that we have reached a market extreme that should require a pause.

S&P A/D Chart (Red overbought, Green oversold)

For chartaholics you can easily find your choice of oversold charts or charts showing breakouts and be content that your bias is still intact. Unfortunately your bias does not count. I have been expecting a short-term break in the upward trend for over a week. It didn't do me a lot of good because the market does not care what I think.

The market consists of millions of investors buying and selling stock based on their individual ideas of a stocks future. Most individuals don't try to time the markets. They just buy something that attracts their interest and then watch it every day for several weeks then they forget it. Fortunately the market is not driven by individuals or it would be very boring.

The market is driven by hedge funds, mutual funds and by Goldman Sachs. 25% of market volume is routinely attributed to program trading at Goldman Sachs. I have no idea if that GS claim is true or not but like an urban legend the story continues to make the rounds. On Monday they called for the S&P to rally 15.5% so they must have been long. Goldman said the forecast was due to better than expected Q2 earnings and the likelihood this trend will sustain itself through an economic rebound in the second half of 2009.

A noted insider trade tracker Jonathan Moreland said Goldman was full of hot air. According to Moreland insider buying over the last week fell to the lowest level since July 2002. If conditions were improving insiders would know it first and be loading up on stock. Maybe Goldman's hot air was actually smoke to pump up the market for their existing longs. TrimTabs Research agreed with Moreland and released their own list of statistics. This insider tracking is key because historically insiders are right about stock direction about 80% of the time. Both trackers are warning that the rally won't last.

You have to wonder if hedge funds really have any control of the market if they have been short the Nasdaq for the last month. If they are truly short as much as Bartels claims then we have them to thank for the rally but not because they got it right. Because they got it wrong we benefited from the monster short squeeze.

That leaves mutual funds as the balancing factor in the market. In theory they don't trade and purchases are driven by deposits into retirement accounts. Despite 10% unemployment the vast majority of those deposits are still flowing into mutual funds. Those investors who self direct their retirement accounts are seeing the markets rally and I would bet they are shifting some of that money from the safety of bonds and money markets and back into stock funds. These funds have to put the money to work. Most don't have the luxury of sitting on the cash until they feel the time is right. Some funds do but most do not. They have to invest the money within days of its receipt.

We know the average individual is not a market timer. Their idea of market timing is seeing a headline in the Saturday paper about the 5% Dow gain for the week. Gee whiz Mabel, the market is hot again. I am going to move that money back into stocks so we don't miss out. That is how a rally continues unexpectedly. There are roughly 140 million people in the U.S. with retirement accounts. If only a million people had this same thought that equates to a lot of money appearing in fund accounts over the next week.

I know this is true from past experience but I had it vividly brought to my attention on Friday. I was in a restaurant at lunch on Friday and the big screen TV was set to CNBC. I was watching one of the market reporters talking about the stocks higher for the day when an unknown male alone at the next table interrupted my thoughts with "Those solar stocks are hot but so is the entire market. I just transferred all my money back last week. I think we will be back over 12,000 by year-end." I never saw the guy before and that was the first and only words spoken between us. The dumb look on my face after his statement probably scared him off.

The point I am trying to make here is that market experts and technicians can chart and plot and predict until hell freezes over but it all boils down into cash flow. If John Q Public is moving money back into his stock funds and the top 5% of the tax paying public is buying back into hedge funds then the bottom is definitely behind us but that does not mean the economy has recovered. The market will recover well before the economy. The Dow has already rallied +2600 points off the Market lows but that does not mean it can't go higher.

In March stocks were priced for Armageddon. Today, even after the rebound they are only priced for today's less bad earnings. If the economy is going to be significantly better six months from now with GDP at +2.4% then the current rally is just the beginning. Remember most companies have cut the fat and trimmed down to their fighting weight. Once the economy finds traction the earnings are going to explode and stock prices will follow.

That brings me back to next week. After a +10% to +15% rally over the last two weeks I would have a hard time going long almost any stock. That is like watching red come up on roulette 10 consecutive spins and saying I am not going to bet on red because it has to be black soon. The law of averages says it should be black but nothing says it has to be black. The longest run I have ever seen was 27 reds in Mesquite NV 14 years ago. Tens of thousands of dollars were being lost on every roll because nearly everyone at the table along with every bystander who could throw down a bet were betting on black. After 27 rolls black did come up but most bettors had already busted out.

James and I were talking Friday night about Option Investor plays for the weekend. The conversation was something like "how can I suggest going long after the last two weeks?" There is no right answer. Just like red in the story above the market can remain irrational far longer than an investor can remain liquid. Sometimes you just have to wait and the right answer is to do nothing. I am having the same problem this week trying to find plays for Option Writer. My preferred strategy is to write puts but who in their right mind would write at the money puts on a stock today? Volatility is so low that only options at the money have any value. Go one strike in either direction and options are worth pennies. The VIX is now 23 and in full retreat. There is absolutely no fear in the market.

The Relative Strength (RSI) on the Dow chart hit 71.62 on Friday and the highest level since June 2007. This is extremely overbought but does not guarantee a bout of profit taking. For instance in the second chart from 2007 the RSI hit 81 followed by one day of profit taking and then five more days of gains. In 2006 the RSI hit 81 and saw four days of profit taking and went right back to rally mode for four more months. Nothing guarantees a bout of profit taking regardless of how badly traders want it.

Dow Chart

Dow 2007 Chart - RSI 81

Dow Chart 2006 - RSI 81

The Dow has rallied past 9000 and right to the extreme upper limit of what could be considered resistance from January at 9088. That would be stretching to accurately call it resistance but then rally failures have occurred on less resistance than that.

While I believe that we are over due for profit taking I believe it would only be a pause in the continued uptrend. On the Dow the next resistance is 9635 and well over the current 9088 level. A positive GDP on Friday could power that rally.

The ideal market move for next week would be a three-day pause before the Beige Book on Wednesday and then a light "preparation" rally into Thursday's close on hopes of a decent GDP on Friday. With that kind of setup any decent GDP number could kick start the next move higher. Likewise a depressing GDP could poison market sentiment again with worries about a double dip recession.

A double dip recession is one where the economy recovers into positive territory and then immediately falls back into recession. This is normally caused by a lack of consumer demand for goods and services due to a lack of jobs and tight money/credit. Sound like where we are today? I would rather not go there but several noted analysts are predicting this to happen.

Dr Doom, (Roubini) is predicting a long climb out of the current recession or a double dip if our current recovery loses traction. Economist Martin Feldstein, Professor of economics at Harvard, is predicting a double dip where the economy drops back into recession in Q4. There are several others circulating on the talking head circuit but you get the idea.

What the market does next week is not dependent on the double dip scenario. Next week the markets will be driven by cash flow into funds and continued Nasdaq short covering by hedge funds. The Dow will be looking to add one more day to its string and hopefully close over 9100 and then higher.

The S&P is showing the same chart pattern as the Dow only the S&P has resistance at 1005. The S&P has rallied +109 points since July 8th and only has the 1005 hurdle to cross before setting up for a long road higher, economy permitting. Like the Dow the RSI is climbing off the scale.

The ideal scenario for the S&P would be a pause early in the week and a rally to just below 1000 then a monster spike over that 1005 resistance on a positive GDP number. That is probably like wishing for 15 reds in a row but at least it gives a trader something to wish for.

S&P-500 Chart

The Nasdaq hit 13 days and got a double dose of bad luck. The double earnings whammy of a Microsoft miss and an Amazon disappointment combined to keep the Nasdaq 7 points in the red and snap the winning streak at 12. The +12% gain over those 12 days was not even close to the gains made in prior 12-day streaks. There were nine 12-day streaks since the Nasdaq began trading. The biggest gain was +29.31% that ended on 4/20/01 followed by 22.45% on June 9th, 2000 and 21.55% on Oct 26th 1998. The longest Nasdaq streak was 19 days ending on August 31st 1979 but the gain was only +5.64%.

I believe the Nasdaq took a well-deserved day of rest. Neither Microsoft or Amazon are going to remain down for long and the damage they caused was temporary. Monday will be a new day and a new chance for redemption. There is no material resistance until 2000 and again at 2200. However the biggest resistance may simply be the built up profit that needs to be equalized before it can go much higher.

Nasdaq Chart

The two biggest gains last week from primary indexes came from the Russell at +5.63% and the Dow Transports at +6.71%. Both of these outsized gains are providing confirmation of a major market move. The Russell lagged many times over the last couple months but caught fire last week and rebounded to close exactly at critical resistance at 550. The outsized gain suggests money managers are putting money to work despite the short term overbought conditions. Long term we are not even close to overbought. A breakout over 550 would be a major confirmation of bullish sentiment and fund manager involvement.

Russell Chart

Dow Transports Chart

There is no sure answer for next week. We are due for profit taking just like black eventually follows red. It could be Monday or two weeks from Monday, nobody knows for sure. When it does come I would view it as a buying opportunity. Unless the economy begins to weaken I believe the worst is over and any pauses will be to reload for the next push higher rather than the start of a new leg down. Beware the Beige Book and the $205 billion in debt for sale. Let's all keep our fingers crossed for a GDP surprise to the upside.

Jim Brown


Index Wrap

by Jim Brown

Click here to email Jim Brown
Leigh's Index Wrap will be posted to the website on Sunday.

New Option Plays

Construction, Diagnostic Testing, & Asset Management

by James Brown

Click here to email James Brown

Editor's Note:

I strongly suspect that we're going to see a lot of bullish buy-the-dip candidates in the next two weeks. Readers may want to raise cash to be ready to take advantage of this opportunity.


NEW DIRECTIONAL CALL PLAYS

Fluor Corp. - FLR - close: 53.40 change: +0.64 stop: 47.45

Why We Like It:
If investors are buying stocks on the belief that a recovery is in progress then FLR, a construction stock, should be a buy. Shares recently broke through resistance near $50.00. We want to buy a dip back in the $50.00-48.00 zone. Officially our entry point will be $50.25. If triggered our first target is $54.80. Our second target is $59.00 but we may not have time. FLR is due to report earnings in less than three weeks. We do not want to hold over the announcement.

Suggested Options:
Trigger at $50.25. I'm suggesting the August calls.

BUY CALL AUG 50.00 FLR-HJ open interest=2133 current ask $4.70
BUY CALL AUG 55.00 FLR-HK open interest=3819 current ask $1.95

Annotated Chart:

Picked on     July xx at $ xx.xx <-- see TRIGGER
Change since picked:      + 0.00
Earnings Date           08/10/09 (unconfirmed)
Average Daily Volume =       2.4 million  
Listed on  July 25, 2009         


IDEXX Labs - IDXX - close: 50.30 change: +2.31 stop: 44.95

Why We Like It:
IDXX has been consolidating sideways under resistance in the $47.00-47.50 zone for several weeks. Even the market's two-week rally was not enough to power a breakout. Investors were waiting for the company's earnings report. IDXX announced on Friday and beat Wall Street's estimates and guided higher. The stock finally broke resistance on the good news. With the market overbought odds are good that IDXX will retest broken resistance as new support.

The plan is to buy calls on a dip at $47.50. If triggered our first target is $52.00. Our second target is $54.90. Our time frame is four to eight weeks.

Suggested Options:
Trigger at 47.50. I'm suggesting the August or September calls.

BUY CALL AUG 50.00 UID-HJ open interest= 537 current ask $1.90

BUY CALL SEP 50.00 UID-IJ open interest=  7  current ask $2.80
BUY CALL SEP 55.00 UID-IK open interest=  0  current ask .80

Annotated Chart:

Picked on     July xx at $ xx.xx <-- see TRIGGER
Change since picked:      + 0.00
Earnings Date           07/24/09 (confirmed)
Average Daily Volume =       383 thousand 
Listed on  July 25, 2009         


Legg Mason - LM - close: 27.13 change: -0.78 stop: 23.75

Why We Like It:
LM rallied to new 2009 highs with the breakout over resistance near $25.00. With the market overbought and due to correct we want to buy a dip in LM. The plan is to buy calls on the stock at $25.25 but we can really use the 25.25-24.00 zone as an entry point. If triggered our first target is $29.50. Our second target is $33.40. My time frame is four to eight weeks.

Suggested Options:
I'm suggesting the August or September calls depending on your time frame. Our trigger is at $25.25.

BUY CALL AUG 25.00 JGM-HE open interest=4793 current ask $2.75
BUY CALL AUG 30.00  LM-HF open interest=2248 current ask .40

BUY CALL SEP 25.00 JGM-IE open interest=  60 current ask $3.30
BUY CALL SEP 27.00  LM-IU open interest= 239 current ask $2.05
BUY CALL SEP 30.00  LM-IF open interest=  82 current ask .80

Annotated Chart:

Picked on     July xx at $ xx.xx <-- see TRIGGER
Change since picked:      + 0.00
Earnings Date           07/20/09 (confirmed)
Average Daily Volume =       3.4 million  
Listed on  July 25, 2009         



In Play Updates and Reviews

Stocks Remain Overbought

by James Brown

Click here to email James Brown


CALL Play Updates

Euro Currency ETF - FXE - close: 142.15 chg: +0.20 stop: 139.40

The FXE spent most of last week churning sideways but the general trend is still up. Nothing has changed for us. I wouldn't be surprised to see a dip back toward $141.00 or $140.00. Our first target is $144.50. Our second target is $148.50. The P&F chart is bullish with a $168 target.

Suggested Options:
If we see another dip near $140 I would use the September calls.

Annotated Chart:

Picked on     June 23 at $140.76
Change since picked:      + 1.39
Earnings Date           00/00/00
Average Daily Volume =       461 thousand    
Listed on  June 23, 2009         


Gold Miner ETF - GDX - close: 39.90 change: -0.06 stop: 36.49 *new*

Unfortunately, gold also churned sideways last week and the GDX followed suit by hovering around the $40.00 level. I'm raising our stop loss to $36.49. More conservative traders may want to adjust theirs higher toward $38.00. I'm not suggesting new bullish positions in the GDX at this time. GDX has already exceeded our first target. Our second target is $42.40.

Suggested Options:
No new positions at this time.

Annotated Chart:

Picked on     July 13 at $ 36.49 /gap higher entry
                               /originally listed at $35.93
Change since picked:      + 3.41
            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         


O'Reilly Automotive - ORLY - close: 41.07 change: -0.03 stop: 39.95

ORLY managed to hit new highs last week but the upward momentum has stalled. Last week was more of a sideways consolidation. Earnings are due out on July 29th after the closing bell. We will plan to exit on Wednesday at the close. I'm not suggesting new positions at this time. Our first target is $44.00.

Suggested Options:
No new positions at this time.

Annotated Chart:

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: 36.12 change: -0.21 stop: 31.45

We've been waiting for a pull back in PII to launch positions. Yet after Thursday's high a pull back from here is going to look like a potential double top, which is bearish. The stock appears to have support at $34, 32 and 30, which is easier to see on an intraday chart. Normally you would think that falling consumer confidence would be bad for a company like PII and its high-end, discretionary products. Yet the stock is showing strength and the stock's P&F chart is bullish with a $49 target. I am suggesting readers stick to our plan and wait for a dip in the $33.00-32.00 zone with a tight stop at $31.45. Our first target is $37.25. Our second target is $39.50.

Suggested Options:
I am suggesting the September $35 and $40 calls.

Annotated Chart:

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         


PUT Play Updates

Compass Minerals Intl. - CMP - cls: 48.79 change: +1.90 stop: 51.05

Is this a bullish reversal in CMP? The stock almost erased Thursday's losses with a sharp 4% gain on Friday. Volume was above average but not even close to the volume on Thursday's drop. The overall trend is down and I remain bearish but we're running out of time. We will plan to exit on Tuesday, July 28th at the closing bell to avoid holding over earnings later that evening. CMP has exceeded our first target at $47.50 and I am adjusting our second target to $45.50.

Suggested Options:
No new plays at this time.

Annotated Chart:

Picked on     July 06 at $ 52.25 *triggered     
Change since picked:      - 3.46
                               /1st target hit @ 47.50 (-9.0%)
Earnings Date           07/28/09 (confirmed)
Average Daily Volume =       792 thousand 
Listed on  June 29, 2009         


Genzyme Corp. - GENZ - close: 52.78 change: +0.61 stop: 54.15

I was expecting more follow through lower after Thursday's failed rally near previous support. I would still consider new bearish positions here but readers may want to wait for a new drop under Friday's low near $51.60. Remember, we want to launch the first half of our position now and the second half of our position at $49.90. Our first target is $45.50. Our second, multi-week target is $40.50.

Suggested Options:
I'm suggesting the August and September puts for the shorter-term trades and the September-October puts for the longer-term ($40-target) trades.

Annotated Chart:

1st Entry on  July 23 at $ 52.17 *1/2 of position
2nd Entry on  July xx at $ xx.xx (2nd half @ trigger 49.90)
Change since picked:      + 0.61
Earnings Date           07/22/09 (confirmed)
Average Daily Volume =       2.8 million  
Listed on  July 22, 2009         


LEAP Wireless - LEAP - close: 25.95 change: +0.07 stop: 29.45

It's tough to profit on bearish plays with the market in rally mode but LEAP continues to under perform the market. I would wait and watch for a failed rally near $27.00 (maybe $28.00) as a new bearish entry point to buy puts. 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.

Suggested Options:
If LEAP provides a new entry point I would use the August puts.

Annotated Chart:

Picked on     July 17 at $ 26.80 *triggered    
Change since picked:      - 0.85
Earnings Date           08/06/09 (confirmed)
Average Daily Volume =       2.2 million  
Listed on  July 16, 2009         


Nike - NKE - close: 52.17 change: +1.03 stop: 53.51

A little bounce from the $50.50 level and NKE's 200-dma isn't surprising but the stock has been under performing for days. I expect that will continue. At this point we can wait for a failed rally move near $53.00 as our next entry point. Or as I suggested earlier more conservative traders may want to wait for a breakdown under $50.00 before initiating positions. Our first target is the $46.00-45.00 zone.

Suggested Options:
I am suggesting the August puts. Don't buy too many August $45 puts just because their cheap!

BUY PUT AUG 50.00 NKE-TJ open interest=6834 current ask .70
BUY PUT AUG 45.00 NKE-TI open interest=3169 current ask .10

Annotated Chart:

Picked on     July 23 at $ 51.14
Change since picked:      + 1.03
Earnings Date           09/23/09 (unconfirmed)
Average Daily Volume =       3.8 million  
Listed on  July 23, 2009         


United Technologies - UTX - close: 52.23 change: -1.15 stop: 55.05

UTX continues to under perform the market. Shares dropped 2.1% on Friday and clung desperately to the $52.00 level most of the session. I would wait for a failed rally in the $53-54 zone before launching new positions now. Our first target to take profits is at $50.15.

Suggested Options:
No new positions at this time.

Annotated Chart:

Picked on     July 22 at $ 53.12
Change since picked:      - 0.89
Earnings Date           07/21/09 (confirmed)
Average Daily Volume =       5.9 million  
Listed on  July 22, 2009         


WestAmerica - WABC - close: 48.40 change: -0.15 stop: 50.05

It looks like WABC caught a little short covering rally on Thursday when the market broke to new highs. Yet the bounce in WABC is stalling at its trend of lower highs. This looks like a new entry point to buy puts. 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.

Suggested Options:
We want to use the August or October puts. Septembers don't have any open interest. I prefer Octobers.

Annotated Chart:

Picked on     July 18 at $ 47.61 /gap higher entry
                               /originally listed at $47.07
Change since picked:      + 0.79 
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: 56.08 change: -0.01 stop: n/a

MCD closed virtually unchanged on Friday as investors bought the dip near its 100-dma for the second time in a row. Earnings came out last week so we are no longer suggesting new strangle positions.

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 a few weeks to succeed.

Suggested Options:
No new plays at this time.

Annotated Chart:

Picked on     July 18 at $ 57.84
Change since picked:      - 1.76
Earnings Date           07/23/09 (unconfirmed)
Average Daily Volume =       7.8 million  
Listed on  July 18, 2009         


CLOSED BULLISH PLAYS

Lorillard - LO - close: 71.90 change: -0.21 stop: 69.95

LO fought back from its intraday lows and almost closed unchanged on the session. It was our plan to exit on Friday at the closing bell to avoid holding positions over the Monday morning earnings report. Wall Street expects a profit of $1.43 a share. I would keep LO on your watch list. If shares dip and bounce from the $70.00 level again it would be a new bullish entry point.

Chart:

Picked on     July 22 at $ 70.50 *triggered  
Change since picked:      + 1.40 <-- early exit @ 71.90 (+1.9%)
Earnings Date           07/27/09 (confirmed)
Average Daily Volume =       1.5 million  
Listed on  July 18, 2009         


CLOSED BEARISH PLAYS

Caterpillar - CAT - close: 42.00 change: +0.74 stop: 41.65

During the first hour on Friday it looked like CAT was going to retreat but when the market didn't break on the AMZN/MSFT earnings disappointments stocks continued to climb and CAT hit new relative highs. Shares hit our new stop at $41.65. This stock is showing a lot of strength for a company that said they could lose money in the third quarter this year.

Chart:

Picked on     July 22 at $ 38.66
Change since picked:      + 2.99<-- stopped @ 41.65 (+7.7%)
Earnings Date           07/21/09 (confirmed)
Average Daily Volume =        15 million  
Listed on  July 22, 2009         


S&P 500 SPDRS - SPY - close: 98.06 change: +0.40 stop: 98.55

The bears are getting steamrolled as money managers desperately chase performance. Investors bought the dip Friday morning and the S&P 500 rallied to close over the $98.00 level. Thursday night stocks were sinking sharply on the AMZN and MSFT earnings reports. If this can't spark a correction I don't know what will. We may have to wait for a rally toward resistance near 1,000 or the August non-farm payrolls report. I am going to admit defeat here and suggest an early exit. Odds are growing every day for a market pull back but traders can go broke even when the odds are in your favor.

Annotated Chart:

** 2nd attempt, new entry @ 97.66 **
Entry  on     July 23 at $ 97.20 /gap down entry
                              /originally listed at $97.66
Change since picked:      + 0.86 <-- exit early! (+ <1%)
Earnings Date           00/00/00
Average Daily Volume =       197 million  
Listed on  July 21, 2009