Option Investor
Newsletter

Daily Newsletter, Monday, 8/10/2009

Table of Contents

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

Market Wrap

A Little Breather, Is There More To Come?

by Todd Shriber

Click here to email Todd Shriber
With stocks rallying hard and fast from their March lows, expectations have begun to swell for a pullback, or at least a short rest and Monday's trade may show the first signs of equities taking a little break from their recent run. To be sure, the Monday's declines were small with the S&P 500 slipping just 0.3% to 1000.71, but the all-important 1000 level was held. The Dow Jones Industrial Average likewise fell 0.3% to close at 9337.95 with four stocks slumping for every three rising on the New York Stock Exchange. Tech issues were not immune to the declines as the Nasdaq shed eight points to close below 2000 at 1992.24.

Stats Table

Volume was not exactly awe-inspiring on a day when blue chips led the market lower and it was not just equity volume that languished on Monday. Options volume was also light at around just 50% of the daily average. I do not want to get in the business of forecasting events that may or may not occur, but it is worth noting that stocks have been on fire during the typically benign summer months. That certainly speaks to the strength of the rally, but August has a penchant for being one of the more sluggish months on the calendar and September is typically a sour month for stocks, so if equities are going to take a step back, August seems like the ideal time.

Something else worth noting is the fact that traders appear to be primed for a sharp increase in the volatility index, or VIX. According to Bloomberg, traders are betting on a 13% pop in the VIX over the next five weeks, signaling the biggest spread since last August and we all remember the carnage that followed August 2008. August VIX futures trade around $25.90, which is a small premium to Monday's spot close of $24.99, indicating some traders may be willing to pay up for some downside options protection.

VIX Chart

As I noted above, it was blue chip names that did the market in today with familiar names like Alcoa (AA), 3M (MMM) and Cisco Systems (CSCO) contributing to the Dow's fall. Eli Lilly (LLY) and Best Buy (BBY) were taken to the woodshed after Goldman Sachs pared its ratings on both companies. Best Buy, the electronics retail giant, slid 5.3% to $37.66 after Goldman lowered its rating on the stock to ''neutral'' from ''buy,'' saying Best Buy will have to spend aggressively to spur growth. Pharma giant Eli Lilly was added to Goldman's conviction sell list on the basis of looming patent expirations for key drugs.

Curious among the top declining sectors today was the raw materials/commodities group, which tumbled 1.6%, making the sector the biggest loser of the 10 industry groups tracked in the S&P 500. I say curious because materials names had certainly enjoyed their fair share of the recent rally, once again gaining favor among investors after being thrown out with the bathwater late last year.

The Materials Select Sector SPDR ETF (XLB), which counts Dow components Alcoa and DuPont (DD) among its top 10 holdings along with Dow Chemical (DOW) and steelmaker Nucor (NUE), slumped 40 cents to $49.81 today, but keep in mind all of XLB's top holdings were down today and the ETF is up 30% year-to-date, far outpacing the S&P 500's 10% gain. So if ever there was a sector that might be ready to give some of its recent gains back, it might be the materials group. XLB has been consolidating between $30-$31 and today's close below $30 could be bearish, at least in the short-term.

XLB Chart

Another thing to keep in mind regarding the efficacy of a near-term pullback for stocks is that the economic calendar for this week, while busy, is not littered with potential catalyst-type news. Beyond the Federal Open Market Committee's two-day meeting that starts on Tuesday, there is not much in the way of news that will have traders sitting on the edge of their seats. The reality is few investors, if any, are expecting the FOMC to make any interest rate changes.

Of course it behooves the Fed to keep interest rates low in an attempt to fan the flames of economic growth and to aid the Treasury in another week of massive debt auctions. That is right. Treasury is at it again this week with a $37 billion 3-year note auction slated for Tuesday followed by $23 billion in 10-year notes on Wednesday and $15 billion in 30-year bonds on Thursday. Oddly enough, I came across a press report this weekend that pointed out interest in Uncle Sam's debt has been tepid recently and the report went so far as to say that the Fed is picking up the slack by buying billions in bonds on the open market. It seems Treasury doesn't need China to buy all of our debt after all.

The process of the Fed buying Treasury debt is known as debt monetization and there might be something to the press report I saw if you have a look at the chart below that illustrates just how much the Fed's debt holdings have grown recently.

Fed Debt Holdings

Another issue that may hold stocks back a bit is the lack of earnings catalysts. Most of the heavy hitters have already graced us with their most recent earnings results and this week is pretty bare in terms of marquee names reporting profit results until we hear from Wal-Mart (WMT), the nation's largest retailer on Thursday. There is actually a spate of retail earnings that will come out later in the week with Kohls (KSS) and Nordstrom (JWN) joining Wal-Mart on Thursday and JC Penney (JCP) announcing results on Friday.

Combining the upcoming retail earnings reports with Monday's decline in Best Buy, it might be worth keeping an eye on retailers for the remainder of the week, if for no other reason than other sectors appear to be facing light news calendars. I like to watch the SPDR S&P Retail ETF (XRT) when there is the potential for a lots of moves among lots of retailers. XRT has been chugging along, tacking on 25% in the past month, but the ETF closed below $32 on Monday and its Stochastics are screaming overbought. Make of that what you will and have a look at the chart below.

XRT Chart

Other names worth watching tomorrow may include State Street (STT). The manager of $1.6 trillion in assets said on Monday that it may deplete $625 million in reserves set aside to settle lawsuits related to subprime mortgage losses. You did not think those pesky subprime mortgage losses went away with the market rally, did you? State Street made $432 million in payments as of June 30 and has $193 million remaining to cover lawsuits filed in 2007. This issue could weigh on the bank in near-term, the stock shed $1.29 to close at $52.57 on Monday, but the long-term trend is hard to argue with. After all, State Street traded for below $15 in late January and has more than tripled since then.

There was some cheery news on Monday in select names. Take Hormel Foods (HRL) for example. The maker of SPAM boosted its 2009 guidance to $2.36 to $2.42 a share from $2.15 to $2.25 a share after saying its fiscal third quarter was stronger than expected. Hormel reports those results on August 20. Priceline.com's boffo second-quarter results sent the stock soaring $18.92, or 14%, to $150.24 today and this news could provide more fodder that the economy is starting to turn around. Priceline said leisure travel demand was better-than-expected in the second quarter and the company's profits were 35% better than the year earlier period. And, drum roll please, Priceline actually obtained these stellar numbers by growing revenue by 18%, not solely by cutting costs.

Revenue per available room at hotels in many key US markets is expected to decline this year, but the Priceline report could a be a sign that some consumers are feeling comfortable enough to spend on leisure travel and that may just qualify as an unofficial green shoot. Official or not, any news that shows the consumer is feeling a bit more cheery could help the bulls move the market high. After all, the consumer accounts for about 70% of US GDP.

RevPAR Chart

While Monday's declines were nothing to lose any sleep over, as I noted earlier and the chart below shows, September is not exactly the market's favor month. Yes, we are still several weeks away from the dawn of September, but it would be encouraging to see the bulls continue to assert themselves for the duration of August. That may be hard if more traders are hitting the beach early rather than staying attached to their computers.

Either way, ending August on a positive note could prove pivotal in terms of extending the rally through the end of the year. The chart I found only goes up to 2007 and shows September averages a decline of 0.70%, making it the only losing month of the year. And we all remember how bloody September 2008 was, so if you are a bull, keep your fingers crossed that August lives up to its historical billing as one of the stronger months for market returns.

Monthly Performance Chart

Taking a look at the technicals for the three major indexes, the Dow never traversed the 9400 on Monday, which it needs to do before it can begin combating what appears to be strong resistance in the 9420 area. Certainly the bulls would point to the Dow's close that is still above 9300 and that is significant for the time being. If the Dow cannot break the 9420 area and 9300 fails as support, 9200 could be the next resting point and a break there could lead the index back to 9000.

Friday's run to 9437 appears to be no more than a tease and a lack of earnings catalysts could impact the index in the near-term. Do not bank of Wal-Mart being the rising tide to lift all sails with its quarterly report this Thursday.

Dow Chart

A similar scenario is in place for the S&P 500 where Monday's declines were not too punitive and the bulls will surely be glad the measure of the 500 largest US stocks clung to the 1000 level for another day. Keep in mind the S&P 500 is up nearly 50% from its March lows and a little breather does not spell a change in the bullish trend. The index appears to be fighting resistance around 1014 and if it can break through that level, there is a lot of room to run unabated to 1100.

Even if the S&P 500 does take a pause, 980-990 should offer solid support. Only a break of 980 would be troublesome in the short-term.

S&P 500 Chart

Yeah, I know the Nasdaq closed below the critical 2000 level, the tech-laden index has been leading the broader market higher for months and 2000 has proven to be an area that the Nasdaq has frequently stalled out since the tech bubble burst in 2000. What the bulls want to see is the Nasdaq reclaim 2000 and then make its way to 2050, a level that has not been seen in close to a year.

It is probably a fair bet the Nasdaq is going to find tough sledding without the aid of the semiconductor sector. The Philadelphia Semiconductor Index (SOX) has peeled back from 300 and now labors around 295. A move back to the 305 area by the SOX should pull the Nasdaq back above 2000 and within striking distance of 2020.

Nasdaq Chart

If you are a believer that Monday sets the tone for the week, then it would not be surprising to see a lethargic tone loom over the market, but as it is early in the week, I do not want to commit to that sentiment quite yet. This may be one of those middling weeks where a lack of bullish and bearish catalysts simply have the market treading water.


New Option Plays

Looking for Follow Through

by James Brown

Click here to email James Brown


NEW DIRECTIONAL PUT PLAYS

Marvel Entertainment - MVL - close: 38.67 change: -0.23 stop: 40.01

Why We Like It:
MVL has delivered quite a ride with the stock surging from $23 in March to $41.00 last week. Unfortunately for the bulls it appears that momentum is waning fast. Last week's performance has produced a big bearish reversal pattern. One a short-term basis the stock has support near $38.00. I am suggesting a trigger to buy puts at $37.90. If triggered our target is $34.10 as the $34.00 level could be support. I'm listing a stop loss at $40.01 but more conservative traders might be able to use a tighter stop at $39.55 or just above $39.00. Nimble traders may want to try and launch put positions on a failed rally in the $39.50-40.00 zone.

Suggested Options:
Trigger at $37.90. I am suggesting the September puts.

BUY PUT SEP 40.00 MVL-UH open interest=1208 current ask $2.30
BUY PUT SEP 35.00 MVL-UG open interest=2571 current ask .50

Annotated Chart:

Picked on   August xx at $ xx.xx <-- TRIGGER @ 37.90
Change since picked:      + 0.00
Earnings Date           11/04/09 (unconfirmed)
Average Daily Volume =       710 thousand 
Listed on August 10, 2009         



In Play Updates and Reviews

A Quiet Day

by James Brown

Click here to email James Brown


CALL Play Updates

Fluor Corp. - FLR - close: 58.21 change: +2.21 stop: 49.45

FLR may have produced a short-term bearish reversal today but shares only traded in a $1.50 range as investors waited for the earnings report. FLR announced after the closing bell that its second quarter earnings came in at 93 cents, which was 2 cents better than expected. Revenues came in under Wall Street's estimates, which has been a common occurrence this season. Management reaffirmed prior guidance for the rest of the year. The stock was trading lower after hours and appears to be headed for the $55.00 level, which as broken resistance should be support.

I am upping our entry point to buy calls to $52.25 (from 51.00). We'll leave our stop loss at $49.45 for now.

Picked on     July xx at $ xx.xx <-- TRIGGER @ 52.25
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: 141.33 chg: -0.34 stop: 139.95

The U.S. dollar has continued to bounce and the FXE dipped to $141.00 and traded near its rising 50-dma. 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:      + 0.57
Earnings Date           00/00/00
Average Daily Volume =       461 thousand    
Listed on  June 23, 2009         


Gold Miner ETF - GDX - close: 39.10 change: -0.88 stop: 36.90

The rising dollar also weighed on commodities and gold slipped lower. The GDX followed and gave up 2.2%. Look for a bounce from here as a new entry point but I'd probably wait for a bounce back above the $40.00 mark. 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:      + 2.61
            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: 50.95 change: -0.02 stop: 44.95

IDXX displayed some relative strength by only losing two cents on the session. Shares consolidated sideways and if you look at an intraday chart you can see the coiling pennant-shaped pattern. IDXX should see a breakout one way or the other pretty soon. I hesitate to buy new call positions here. Currently we have two strategies for IDXX.

Aggressive strategy: Entry point at $51.10. Stop loss at $48.99. Our first target is $54.85. I suggest very small positions sizes (about 1/4 of your normal trading size).

Original plan is to buy calls at $47.50 with a stop at $44.95. If triggered at $47.50 our first target is $52.00. Our second target is $54.90. Our time frame is six to eight weeks once triggered.

FYI: The Point & Figure chart is bullish with a $77 target.

*Aggressive Strategy*
Entry on    August 05 at $ 51.10 *stop loss @ 48.99   
Change since picked:      - 0.15

*Original Strategy*
Picked on     July xx at $ xx.xx <-- TRIGGERs @ 47.50 
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: 33.21 change: -1.22 stop: 29.99

Retail stocks were hot on Friday and they hit some profit taking today with the RLX retail index losing about 2%. JCP, which soared almost 10% on Friday gave up 3.5% today. I am not suggesting new positions at this time. JCP has exceeded our first target. Our second and final target to exit is $34.90. This was an aggressive trade using half our normal position size.

Picked on   August 03 at $ 31.05 *triggered /gap higher entry
Change since picked:      + 2.16
                               /1st target hit @ 32.75 (+5.4%)
Earnings Date           08/14/09 (confirmed)
Average Daily Volume =       5.5 million  
Listed on August 01, 2009         


Legg Mason - LM - close: 27.84 change: -0.66 stop: 23.99

LM lost 2.3% and it looks like shares are finally ready to correct. On a short-term basis there appears to be a bearish double top near $29.00. Momentum indicators are rolling over. I'm sticking with our plan to buy a dip. Our trigger is $25.55. If triggered our first target is $29.75. Our second target is $33.40. My time frame is six to eight weeks. FYI: The P&F chart is bullish with a $39 target.

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: 73.49 change: +0.68 stop: 69.45

The MACD on the daily chart is very close to turning bearish in spite of today's 0.9% bounce. We are still waiting for a dip near $70.00 with a trigger to buy calls at $70.50. Our first target is $74.50. Our second target is $77.00. FYI: The Point & Figure chart is bullish with a $92.00 target.

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         


Polaris - PII - close: 38.91 change: +0.13 stop: 31.95

PII tried to rally again but stalled under $39.60. 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.

Note: More aggressive traders could buy puts right here with a stop loss just above $40.00 and exit in the $35 region.

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

Genzyme - GENZ - close: 50.54 change: +2.34 stop: 52.55

Is this a bullish reversal in shares of GENZ or a one-day pop by short covering? The company issued a press release today regarding its Boston plant, the same plant it shut down in June to clean up an infection in its bio-reactors. GENZ said the facility is back online but they have decided to trash 80% of its "work in progress" components for one of its key drugs Cerezyme. Management said the move would result in a second quarter charge and guided full year earnings toward the low end of its prior forecasts.

I suspect that the company's move to dump the current crop of Cerezyme material may have been interpreted as a positive by the market. The company is taking a short-term hit but they're removing longer-term liability of producing potentially tainted treatments.

Technically volume on the move was strong and the close over $50.00 is short-term bullish but GENZ still has resistance in the $51-52 zone. Watch for the bounce to roll over under $52.00 and use it as a new entry point to buy puts. 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.

Picked on   August 03 at $ 49.90 *triggered         
Change since picked:      + 0.64
Earnings Date           10/22/09 (unconfirmed)
Average Daily Volume =       3.9 million  
Listed on August 01, 2009         


Biotech Ishares - IBB - close: 76.83 change: -0.09 stop: 80.75

Biotech stocks continued to slip but they were bouncing from their Monday afternoon lows before the closing bell sounded. I am not suggesting new bearish positions at this time. Currently our exit target is $75.10. More aggressive traders may want to aim for the $74-73 area.

Picked on     July 30 at $ 79.44
Change since picked:      - 2.52
Earnings Date           00/00/00
Average Daily Volume =       892 thousand 
Listed on  July 30, 2009         


Intl.Business Machines - IBM - cls: 118.70 change: -0.63 stop: 120.55

IBM gapped lower at the open and spent the day churning sideways. I've adjusted our entry point. I would still open put positions in the $118.00-120.00 zone. Our first target to take profits is at $113.75, which is just above the top of the gap from mid July. Our second and final target is $111.25, which is near the bottom of the gap.

FYI: If IBM does fill the gap it may turned into a bullish candidate.

Picked on   August 08 at $118.17 /gap down entry
                               /originally listed at $119.33
Change since picked:      + 0.53
Earnings Date           10/08/09 (unconfirmed)
Average Daily Volume =       7.9 million  
Listed on August 08, 2009         


Intercontintental Exchange - ICE - cls: 93.68 change: +0.08 stop: 98.25

ICE spent the session drifting sideways. I see no changes from the weekend play description.

The plan is to buy half our put position now and then buy the second half when ICE breaks support at $90.00. We'll use a trigger at $89.85 to fill the second half. ICE can be a very volatile stock so we should consider this an aggressive trade. Our target to exit is $83.75. More aggressive traders can aim lower.

Picked on   August 08 at $ 93.60 Buy Half Now   
Change since picked:      + 0.08

Picked on   August xx at $ xx.xx <-- TRIGGER @ 89.85 for 2nd half
Change since picked:      + 0.00

Earnings Date           10/29/09 (unconfirmed)
Average Daily Volume =       2.1 million  
Listed on August 08, 2009         


QQQ ProShares - QLD - close: 45.01 change: +0.49 stop: 46.55

The NASDAQ composite and NDX continue to slip and the QLD lost 1%. Momentum indicators are definitely turning more bearish. Our target is $40.50.

Picked on     July 30 at $ 44.89 
Change since picked:      + 0.12
Earnings Date           00/00/00 
Average Daily Volume =      13.5 million  
Listed on  July 30, 2009         


Shanda Interactive - SNDA - close: 49.96 chg: +2.13 stop: 51.25

The Chinese market was soft but the Hong Kong market soared to new highs on Monday. Shares of SNDA gained 4.4% yet the move failed to close over $50.00 and the move look like an "inside day". If you're nimble enough look for a failed-rally sort of move here near $50.00 to launch positions. Otherwise I would wait for a new decline under $48.00 to launch new bearish positions.

SNDA is a volatile stock so readers may want to use smaller position sizes. Shares should see support near $45.00 and again at $40.00. I am targeting a drop into the $41.50-40.00 zone.

Picked on   August 08 at $ 48.10 /gap higher entry
                               /originally listed at $47.83
Change since picked:      + 1.86
Earnings Date           09/01/09 (unconfirmed)
Average Daily Volume =       1.5 million  
Listed on August 08, 2009         


Wynn Resorts - WYNN - close: 56.40 change: -2.07 stop: 60.26

Entry point! WYNN has provided us another entry point to buy puts with another failed rally under $60.00.

Due to the high-risk nature of the trade I am suggesting very small position sizes at least 1/2 to 1/4 your normal trade. Our first target is $51.00. Our second target is $48.00.

Picked on   August 05 at $ 56.57
Change since picked:      - 0.17
Earnings Date           10/29/09 (unconfirmed)
Average Daily Volume =       4.7 million  
Listed on August 05, 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: 56.27 change: +1.07 stop: n/a

What happened to MCD? Here's an excerpt from the intraday update: "Dow-component McDonald's (MCD) said that worldwide same-store sales rose 4.3% in July. U.S. same-store sales gained 2.6% while European same-store sales soared 7.2%. The company benefited from penny-pinching consumers and the introduction of MCD's new line of coffee drinks." The stock gapped open higher at $55.80 and closed above $56.00 but under its 100-dma and its 200-dma. The rally erased several days of declines but is it just a one-day pop? I am 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 $2.50 or higher.

Picked on     July 18 at $ 57.84
Change since picked:      - 1.67
Earnings Date           07/23/09 (unconfirmed)
Average Daily Volume =       7.8 million  
Listed on  July 18, 2009         


CLOSED BEARISH PLAYS

VistaPrint - VPRT - close: 44.33 change: +1.33 stop: 44.05

I could not find any news to account for the early morning strength in shares of VPRT. The stock spiked higher and pushed through short-term resistance near $44.00. The aggressive trade on VPRT had a stop loss at $44.05.

We had suggested small, aggressive positions in the $42-44 zone with a stop at $44.05. Our original strategy called for a trigger at $38.80 to open positions but was never hit.

I'm dropping VPRT as a bearish candidate. A breakout higher past $45.50 might be a bullish entry point.

Chart:

*Original Strategy*
Picked on   August xx at $ xx.xx <-- TRIGGER @ 38.80 (never opened)
Change since picked:      + 0.00
Earnings Date           07/30/09 (confirmed)
Average Daily Volume =       1.3 million  
Listed on August 01, 2009         

*Aggressive Trade (small position 1/2 to 1/4 your normal size)*
Picked on   August 04 at $ 42.59   (stop loss @ 44.05)
Change since picked:      + 1.46 <-- stopped @ 44.05 (+3.4%)