Option Investor
Newsletter

Daily Newsletter, Monday, 8/3/2009

Table of Contents

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

Market Wrap

Psychological Barriers? Yeah, Right

by Todd Shriber

Click here to email Todd Shriber
For the past few weeks, there has been a lot of chatter about psychological barriers. Surely the Dow Jones Industrial Average would stumble at 9000, some experts lamented. The S&P 500 would have a fight at 1,000, they opined. Nasdaq 2000? Another fight at a psychological barrier, market gurus pontificated. Well, the so-called experts that made those prognostications were wrong on all counts as the bulls continued to run on Monday, sending the S&P 500 above 1000 for the first time since November 2008.

The measure of the 500 largest US stocks finished the day up 15.15 points at 1002.63, just a point off its intraday high. The Dow appears to be inching its way to 9300, closing up nearly 115 points to 9286.56. The venerable index came within 1.57 points of 9300 before retreating a tad. Of course the Nasdaq, which has been the leader of this rally, joined the party, skating past 2000 with the greatest of ease to close up 30.11 points to 2008.61. Monday's close represents the first time the Nasdaq has closed above 2000 since October 2008.

Market Stats Table

A couple of good economic reports got the market off to fine start this morning and it never looked back. The Institute for Supply Mana agement's manufacturing survey helped fan the flames of the rally by reporting a rise to 48.9% in July from 44.8% in June. That is the strongest level for the temperature check of US manufacturers since September 2008 and well ahead of the consensus estimate of 46.2%. The survey has been steadily rising for the past several months, which gives the bulls fodder that the economy is indeed recovering, but it pays to note that only readings above 50% signal actual expansion.

ISM Chart

Not to be outdone was the construction sector with Commerce Department's report that construction spending rose 0.3% in June. The 12-month growth rate in private construction spending improved to -16.3% in June from -18% in May.

Construction Spending

This pair of data points may be classified as those notorious green shoots that the bulls have been clamoring for quite a while now. Another interesting anecdote is the fact the only method of tempering this rally that the bears have devised is to mention that stocks are still 30% or more removed from their 2007 highs. Yes, that talking point is true and it cannot be argued, but the other side of the coin is that the Dow has tacked on more than 500 points in two weeks, the Nasdaq has added close to 120 points and the S&P has soared past 1,000.

Those are strong moves in a short amount of time that few, if any, market observers saw coming so quibbling over the fact that stocks are still off their 2007 highs is kind of like passing on New York strip and demanding a filet mignon.

Even news that Bank of America (BAC) would settle charges with the Securities and Exchange Commission over fibs told to investors regarding the Merrill Lynch acquisition could not derail the bulls on Monday. The SEC said Bank of America was less than forthright to shareholders regarding bonuses that were paid to keep Merrill executives around after the acquisition and saddled the bank with a $33 million fine.

And what was the outcome for the stock? The Dow member rose 53 cents, or 3.6%, to $15.37 and has nearly tripled in the past six months. News of management reshuffling that included the hiring of former Citigroup (C) CFO Sallie Krawcheck to lead BofA's wealth management unit had some investors speculating that a succession plan for embattled CEO Ken Lewis is closer to being established and that was enough to send buyers into the stock.

Turnover at the highest levels of Bank of America has been brisk in recent months and the Street seems to favor these moves. It was just a couple of months ago that I mentioned here that some major BofA shareholders wanted the entire board removed. That did not happen at the most recent shareholders meeting, but since then, 10 board members have departed.

Solid earnings reports from UK banks Barclays (BCS) and HSBC (HBC) helped bank stocks book decent gains on Monday. Both Barclays and HSBC, the largest European bank, have American Depositary Receipts (ADRs) that trade in the U.S., and their bullish reports may show that things are improving in the U.K. Do not underestimate the value of that news as it was just a short while ago the U.K. banks found themselves to be even more imperiled than their American counterparts.

The Philadelphia Bank Index (BKX), which tracks the 24 largest US banks, continued its March higher on Monday, rising $1.06 to $41.50. BKX now rests well above its 50 and 200-day moving averages and looks poised to break through its May high of $43.80.

BKX Chart

The bullish market tenor on Monday also helped lift commodity prices, with copper's rise noteworthy among the metals. I mentioned copper prices in the Market Wrap a couple of weeks ago, discussing their rapid rise and how some market mavens use the metal's prices to measure the strength of market rallies and recoveries. Copper climbed to its highest level in 10 months with the August contract closing near $2.74 an ounce.

Copper Chart

As an equity play on copper, I mentioned Freeport McMoRan (FCX), the largest US copper producer. That was July 20 when the stock was in the mid-50s. Well, the rally, at least the rally in copper prices, appears to be for real as Freeport's shares closed Monday at $65.15. That is good for almost 20% in two weeks and the chart does not show much in the way of resistance until the psychological level (see the theme developing?) at $70.

FCX Chart

What about crude oil you ask? The Monday commodities rally did not pass over black gold as crude for September delivery closed above the psychologically important $70 a barrel level. That was good to help lift the fortunes of major explorers like Exxon (XOM) and Chevron (CVX), which delivered less than stellar earning reports last week. Both stocks were up on Monday, but the gains were nothing to write home about.

By now, you know what I like to watch when it comes to the oil patch and that is the Oil Services HOLDRs ETF (OIH). OIH put in a bottom around $86 in early July and has since soared back above $100, adding $4.50 today, to close at $108.02. The critical $100 level now acts as support for OIH and a move to the June high of $115.64 could be in the offing if crude can break $75 a barrel.

Crude Chart

Tuesday promises to be an eventful day on both the economic and earnings news fronts. Before the bell, the Commerce Department may give us some insight regarding the health of the consumer with personal income and spending data. Predictably, personal incomes are expected to decline 1% for June after a 1.4% rise in May. June's personal spending number is expected to inch up 0.3% in June after rising one percent in May. Not a gain worth bragging about, but hey, a gain is better than a decline when it comes to these data points.

There is also more news from the housing sector on the docket for tomorrow. The National Association of Realtors will deliver news of June's pending-home-sales and the market is expecting a 0.3% increase after a 0.1% pop in May. Remember that last week's housing news was a positive and a continuation of this theme is a must for the bulls to continue their recent market dominance.

On the earnings front, CVS Caremark (CVS), the drug store operator, reports second-quarter results before the bell and analysts are forecasting profits of 64 cents a share on sales of $24.4 billion. CVS would do well to excite the Street by beating those numbers and upping its guidance after the bullish reports by rivals Express Scripts (ESRX) and MedcoHealth Solutions (MHS).

Another company reporting before the bell that could be a catalyst for Tuesday's market sentiment is homebuilder D.R. Horton (DRI), the largest US homebuilder. Analysts are calling for a loss of 21 cents a share, so an upside surprise and/or encouraging words about the housing sector would be welcomed with open arms by investors. It is worth noting that D.R. Horton rival Putle Homes (PHM) reported a second-quarter loss of $189.5 million, or 74 cents a share, on Monday.

Other names that might be worth watching include agriculture giant Archer Daniels Midland (ADM). The Street consensus there is a profit of 45 cents a share. Emerson Electric (EMR), the industrial conglomerate, is expected to post a profit of 57 cents a share. For a check on construction and infrastructure spending, keep an eye on Martin Marietta Materials (MLM) where analysts are expecting a profit of 77 cents a share.

What superlatives are left to heap on the market at this juncture? The Dow was up 9% in July, good for its best July performance since 1989. That is certainly nothing to scoff at and leads me to talk more about resistance areas than support. Picking a level at which the Dow is going to struggle has proven futile. After all, the index blew 8800, 9000 and 9100 with such ease that as long as bad news doesn't emerge, 9300 will probably be broken as soon as Tuesday.

On the all-important psychological basis, 9500 is probably the next resistance point and 9000 seems to have been established as the first support area. I mentioned the Stochastics showing an overbought condition last week in the low 70s. They now rest around 93. Make of that what you will.

Dow Chart

The scenario is similar with the S&P 500 with Monday's close above 1000 showing that support has been established around 980-985 and resistance still a fair bit off in the 1020-1025 area. A break of 1025 could take the index to, you guessed, another psychological barrier at 1050. That probably will not happen on Tuesday, but a close in the 1020s could give the bulls more fuel for their fire. A move to 1100 gets the S&P 500 back to its pre-Lehman Brothers collapse level.

S&P 500 Chart

The Nasdaq posted a 7.7% gain in July and appeared to be stalling toward the end of last week, which probably led more than a few investors to bet on a decline for the tech-heavy index today. Mr. Market obviously had a different plan in mind. Like the Dow, the Nasdaq Stochastics resided in the 70s a week ago. They now hover around 92.5. With a lack of catalysts outside of Cisco's (CSCO) earnings report, the Nasdaq could be the first of the major indexes to see its rally stall. Even if that happens, only a fall to or below the 1950 would be truly concerning.

Nasdaq Chart

The biggest news catalyst for the week comes on Friday in the form of July unemployment data so with no real stumbling blocks on the horizon until then, it would be no surprise to see the bulls continue their run over the next few days. Sure, stocks appear overbought at this point and the market has rallied hard and fast in a condensed period of time, but is this a trend worth betting against? Probably not.


New Option Plays

Metal Fabrication

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Valmont Industries Inc. - VMI - cls: 73.88 chg: +2.06 stop: 69.94

Why We Like It:
The stock market is extremely overbought and way overdue for a pull back but that doesn't mean it can't get even more overbought. Money managers are chasing performance and with a new month they have more money they need to allocate. I suggest traders wait for a market correction to open new bullish positions but for those aggressive investors we're going to try and scalp a few points. I suspect this will be a very short-term three, maybe four-day trade. If stocks continue with their current trend the question will be "do we hold over the Friday morning jobs report or exit in front of it?"

The plan is to buy short-term calls on VMI with a stop loss under the recent low near $70.00. I consider this an aggressive trade and suggest readers only use small position sizes at least half or less than your normal trade size. Our target is $78.50.

FYI: I also considered Seacor Holdings (CKH) for a similar trade but the option spreads were pretty wide making it even higher risk.

Suggested Options:
This is a short-term trade so use August calls.

BUY CALL AUG 70.00 VMI-HN open interest= 328 current ask $5.10
BUY CALL AUG 75.00 VMI-HO open interest= 358 current ask $2.10
BUY CALL AUG 80.00 VMI-HP open interest= 128 current ask .65

Annotated Chart:

Picked on   August 03 at $ 73.88
Change since picked:      + 0.00
Earnings Date           07/21/09 (confirmed)
Average Daily Volume =       414 thousand 
Listed on August 03, 2009         



In Play Updates and Reviews

A Defiant S&P 500

by James Brown

Click here to email James Brown


CALL Play Updates

Fluor Corp. - FLR - close: 54.01 change: +1.21 stop: 47.45

The market continues to defy gravity and stocks rallied on the ISM data this morning. Shares of FLR look poised to breakout over resistance near $55.00. More aggressive traders may want to consider using a trigger to buy calls around the $55.50 level and target the $59-60 zone. I am still suggesting we wait for a dip. However, we will raise our suggested trigger from $48.50 to $50.50 and we'll inch up our stop loss to $47.95.

If triggered our first target is $54.80. Our second target is $59.00.

Picked on     July xx at $ xx.xx <-- TRIGGER @ 50.50
Change since picked:      + 0.00
Earnings Date           08/10/09 (confirmed)
Average Daily Volume =       2.4 million  
Listed on  July 25, 2009         


Euro Currency ETF - FXE - close: 144.07 chg: +1.60 stop: 139.95

The dollar continues to fall to new 2009 lows and the FXE almost hit our target today with an intraday high of $144.39. I am not suggesting new bullish positions at this time.

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:      + 3.31
Earnings Date           00/00/00
Average Daily Volume =       461 thousand    
Listed on  June 23, 2009         


Gold Miner ETF - GDX - close: 40.77 change: +1.00 stop: 36.90

The same dollar weakness helped fuel the rally in gold. That allowed the gold miner ETF to rally to new six-week highs. Unfortunately the gap open and the close near its open looks like indecision on the candlestick chart. If you look at the last several weeks the GDX has produced an inverse (bullish version) of the head-and-shoulders pattern and today almost qualifies as a bullish breakout.

I am not suggesting new bullish positions at this time. Wait for a dip (or bounce) near $39.00 or look for a new relative high over $41.25. GDX has already exceeded our first target. Our second target is $44.00.

Picked on     July 13 at $ 36.49 /gap higher entry
                               /originally listed at $35.93
Change since picked:      + 4.27
            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         


IDEXX Labs - IDXX - close: 49.58 change: +0.24 stop: 44.95

Nothing has changed for us with IDXX. The stock is still oscillating on either side of $50.00. We are waiting for a dip toward 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.

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         


J.C.Penney - JCP - close: 31.36 change: +1.21 stop: 28.40

Our new bullish play on JCP has been triggered. Actually JCP gapped open (31.05) above our trigger (30.51). The stock was upgraded to an "over weight" this morning. Our first target is $32.75. Our second target is $34.90. I would be tempted to aim higher but JCP is due to report earnings on August 14th and we do not want to hold positions over the announcement. Traders should consider this a more aggressive bullish play with the market overbought. I would trade half your normal position size.

Trading note: It's very possible that JCP fills the gap so patient traders can wait for a dip back to the $30.50-30.40 zone as your entry point to buy calls.

Chart:

Picked on   August 03 at $ 31.05 *triggered /gap higher entry
Change since picked:      + 0.31
Earnings Date           08/14/09 (confirmed)
Average Daily Volume =       5.5 million  
Listed on August 01, 2009         


Legg Mason - LM - close: 27.51 change: -0.63 stop: 23.99

Shares of LM under performed the market on Monday with a 2.2% decline. The reason appears to be a downgrade this morning. Nothing has changed for us. We are waiting for LM to correct back toward support near $25.00. Our trigger is $25.55. If triggered our first target is $29.75. Our second target is $33.40. My time frame is four to eight weeks.

Picked on     July xx at $ xx.xx <-- TRIGGER 25.55
Change since picked:      + 0.00
Earnings Date           07/20/09 (confirmed)
Average Daily Volume =       3.4 million  
Listed on  July 25, 2009         


Lorillard Inc. - LO - close: 73.45 change: -0.27 stop: 69.45

There is no change from my prior comments on LO. We are looking for a dip back toward $70.00, which should be new support. Buy calls on a dip in the $70.50-70.00 zone. Our first target is $74.50. Our second target is $77.00.

Picked on   August 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 August 01, 2009         


S&P 100 index - OEX - close: 466.27 change: +6.01 stop: 454.50 *new*

The S&P 500 continues to inch higher and it's pulling the OEX with it. The OEX hit $466.99 this afternoon. We plan to exit at $469.00. I am bumping our stop loss to $454.50. More aggressive traders may want to aim for the 480 region.

Picked on     July 30 at $458.10 *triggered              
Change since picked:      + 8.17
Earnings Date           00/00/00 
Average Daily Volume =        xx 
Listed on  July 28, 2009         


Polaris - PII - close: 38.00 change: +0.13 stop: 31.95

There is no change for our PII play. We're waiting for a correction. The plan is to buy calls at $34.15. Our first target is $37.50. Our second target is $39.90. FYI: The Point & Figure chart is bullish with a $43.50 target.

Picked on     July xx at $ xx.xx <-- TRIGGER @ 34.15
Change since picked:      + 0.00
Earnings Date           07/16/09 (confirmed)
Average Daily Volume =       436 thousand 
Listed on  July 18, 2009         


PUT Play Updates

Alliant Techsystems - ATK - close: 79.51 change: +0.79 stop: 81.15

The defense sector indices participated in the market's widespread rally but ATK under performed with only a 1% gain. It feels a little dangerous to buy puts with the market in rally mode, which may not stop until the jobs report on Friday. Traders may want to wait for more relative weakness in ATK before initiating new positions. Or you may want to consider a stop loss near $80.50.

Our first target is $75.25. Our second target is $72.00 but we may not have time for ATK to reach $72.00. Earnings are due out on August 6th and we don't want to hold over the announcement. I'm suggesting a stop loss at $81.15. FYI: The Point & Figure chart is bearish with a $62 target.

Picked on     July 27 at $ 78.88
Change since picked:      + 0.63
Earnings Date           08/06/09 (confirmed)
Average Daily Volume =       443 thousand 
Listed on  July 27, 2009         


Genzyme - GENZ - close: 50.38 change: -1.51 stop: 52.55

Our new put play on GENZ hit our trigger at $49.90 a lot faster than expected. UBS downgraded the stock to a "neutral" and investors reacted by sending GENZ to $49.55. The bounce back above $50.00 may be more of a product of the bullish market and short-term traders hoping for another bounce from support. Volume was pretty steep today at 11.5 million shares. I would wait for a new drop under today's low (49.55) before launching new positions but nimble traders could jump in on a failed rally under $52.00.

Our first target to take profits is $45.25. Our second target is $41.00. The P&F chart is bearish with a $40 target.

Annotated Chart:

Picked on   August 03 at $ 49.90 *triggered         
Change since picked:      + 0.48
Earnings Date           10/22/09 (unconfirmed)
Average Daily Volume =       3.9 million  
Listed on August 01, 2009         


Biotech Ishares - IBB - close: 79.16 change: +0.41 stop: 80.75

I think the bears may be in trouble. The IBB bounced from its intraday lows and shares look poised to re-challenge the $80.00 level and its recent highs tomorrow. Overall nothing has changed. Biotech and the wider market are still overbought and due for a correction but there is no law that says stocks can't get more overbought. Keep an eye on the BTK biotech index and resistance near 900. A failed rally in the 80.00-80.50 zone would be a great new entry point for puts on the IBB. Our target on the IBB is $75.50.

Picked on     July 30 at $ 79.44
Change since picked:      - 0.28
Earnings Date           00/00/00
Average Daily Volume =       892 thousand 
Listed on  July 30, 2009         


LEAP Wireless - LEAP - close: 24.96 change: +1.01 stop: 27.55

LEAP delivered a nice oversold bounce today with a 4.2% gain. Look for resistance near $26.00. More conservative traders may want to lower their stops toward the $26.50 region. I'm not suggesting new positions at this time.

Our first target for LEAP 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:      - 1.84
Earnings Date           08/06/09 (confirmed) 
Average Daily Volume =       2.2 million  
Listed on  July 16, 2009         


QQQ ProShares - QLD - close: 45.93 change: +1.35 stop: 46.55

The NASDAQ composite rallied 1.5% and managed to close over the 2,000 mark - a bullish feat. The NASDAQ-100 index (NDX) mirrored the move with a 1.5% gain but it failed to hit new highs. The QLD (double-long) gained 3% and rallied toward last week's highs. We knew this was a very speculative counter-trend bet on a possible top in the market last week. It looks like we may have been too early. Readers may want to wait for a new decline under $45.00 before considering new put positions. We want to trade very small position sizes given the aggressive nature of this play. Our target is $40.50.

Picked on     July 30 at $ 44.89 
Change since picked:      + 1.04
Earnings Date           00/00/00 
Average Daily Volume =      13.5 million  
Listed on  July 30, 2009         


VistaPrint - VPRT - close: 42.56 change: +1.31 stop: 42.05

VPRT printed out a 3.1% bounce on Monday but shares should have some short-term resistance in the $43.00-43.50 zone. We might want to jump in early with puts if the stock starts to roll over there. Currently the plan is to buy puts on a new relative low at $38.80. If triggered our first target is $35.20. Our second target is $31.50.

Picked on   August xx at $ xx.xx <-- TRIGGER @ 38.80
Change since picked:      + 0.00
Earnings Date           07/30/09 (confirmed)
Average Daily Volume =       1.3 million  
Listed on August 01, 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: 55.13 change: +0.07 stop: n/a

MCD continues to under perform but it might try produce a little oversold bounce from the $55.00 level. We're not suggesting new strangle positions at this time.

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.

Picked on     July 18 at $ 57.84
Change since picked:      - 2.85
Earnings Date           07/23/09 (unconfirmed)
Average Daily Volume =       7.8 million  
Listed on  July 18, 2009         


CLOSED BEARISH PLAYS

United Technologies - UTX - close: 55.18 change: +0.71 stop: 55.05

The rally in blue chips lifted UTX past resistance near $55.00 and stopped out our put play at $55.05. If the S&P 500 didn't look so overbought I'd say it's probably time we start looking for a bullish entry point instead.

Chart:

Picked on     July 22 at $ 53.12
Change since picked:      + 1.93 <-- stopped @ 55.05 (+3.6%)
Earnings Date           07/21/09 (confirmed)
Average Daily Volume =       5.9 million  
Listed on  July 22, 2009