Option Investor
Newsletter

Daily Newsletter, Wednesday, 8/12/2009

Table of Contents

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

Market Wrap

Stocks Roar Back on Fed Report

by Judy Alster

Click here to email Judy Alster
The Federal Reserve's Open Market Committee wrapped up its two-day, behind-closed-doors meeting much as expected, promising to keep interest rates in the sub-basement "for an extended period of time," even though it cited a stronger economic outlook and upbeat indicators. The target rate will stay at 0% to 0.25%.

Stocks, not surprisingly, finished nicely higher on Wednesday after two bad sessions. The day's highs saw the Dow rising about 175 points, but the close moderated somewhat to 9,361.61, up 120.16, or 1.3%. The S&P 500 gained 11.46 points, or 1.2%, to close at 1,005.81 after a high of 1012, while the Nasdaq Composite rose 28.99 points, or 1.5%, to 1,998.72, off a high of 2015.

INDEX WRAPUP, Aug. 12:

The three major indexes all seem to be leveling off in new higher territory:

DOW JONES INDUSTRIAL AVERAGE:

S&P500:

NASDAQ COMPOSITE:

To get back to the Fed, it said in addition that it will rein in its purchases of long-term Treasurys and let the program fade away by the end of October, a decision that could send long-term yields higher. (The Fed's plan to buy $300 billion in long-term government bonds drew a lot of fire and didn't do much to keep long-term rates down.)

However, it also said it will continue to purchase up to $1.25 trillion in mortgage-backed securities and other debts from Fannie Mae and Freddie Mac in an effort to keep mortgage rates down and stimulate the housing market.

Economic activity is leveling out and conditions in financial markets have improved further in recent weeks, the committee reported, pointing to stabilizing household spending -- although that's still not terrific, what with job losses, stagnant income, low housing wealth and tight credit.

The FOMC said it expected the economy to remain weak for a while but at least with so many unused resources, inflation shouldn't be a problem for some time to come.

Since the last meeting in late June, most economic indicators have improved, even if they are still showing a contracting economy. Here are seven promising signs:

--The Leading Economic Indicators, according to The Conference Board, have risen for three straight months after falling steadily since their peak in July 2007, and their six-month growth has picked up to the highest rate since the first quarter of 2006. Seven of the 10 Conference Board indicators were up; starting with the largest they were interest rate spread, building permits, stock prices, weekly initial claims (inverted), average weekly manufacturing hours, index of supplier deliveries and manufacturers' new orders for consumer goods and materials. The negative contributors were real money supply, manufacturers' new orders for nondefense capital goods and index of consumer expectations. The index now stands at 100.9, with 2004 equaling 100.

--The country's gross domestic product fell at a 1% annualized rate in the second quarter, compared with the 6.4% drop in the first quarter. Which is to say, the economy is no longer falling at terminal velocity.

GROSS DOMESTIC PRODUCT, latest:

--Stock prices are considerably up since March; the S&P, for instance, has gained 48% since its March low; note the chart above.

--Nonfarm payrolls fell by the smallest number in nearly a year in July -- 247,000 -- and the unemployment rate fell back to 9.4%.

NONFARM PAYROLL LOSSES:

--The Institute for Supply Management index inched in July toward the 50% line that marks expansions from contractions, and new orders were the best in two years.

--Home sales and construction data seem to have bottomed, although prices are still falling.

--Industrial production seems about to rise for the first time in nine months, as companies in almost every industry slash their inventories at a record pace.

Not all the data have been positive. Consumer sentiment remains weak, owing largely to massive job losses. The only growth in incomes has come from government transfers like unemployment benefits and the tax cut. Credit remains very tight. Households continue to pay off their debts, though, very good for consumers if not immediately good for the economy:

OUTSTANDING HOUSEHOLD DEBT AS A RATIO OF DISPOSABLE INCOME (4-quarter moving average)

Most private sector economists agree with the Fed that the recession will be over soon, but that consumer spending will stay subdued. The Fed's balance sheet has grown from about $800 billion before the crisis to about $1.97 trillion. At some point, however, the Fed will want to reduce its balance sheet -- very, very cautiously, one hopes -- as bank lending returns.

More interesting news: The Mortgage Bankers' Association index rose 1.1% last week for the third straight small gain in a row. The refinance index fell 7.2%, probably reflecting a 21-basis-point jump in the 30-year fixed rate, at 5.38% at week's end, in turn reflecting the greater demand. (Median home prices fell a record 15.6% year-over-year in the second quarter, but that came after the traditional rise in spring prices, in this case 4%, from $167,000 to $174,000.)

Equally important is that total housing inventory fell for the third month in June, dropping 0.7% to 3.82 million units on the market. At the current sales pace, that represented a 9.4-month supply, down from a 9.8-month supply in May. Even better, year over year inventory was down by 14.9%. True, about a third of that drop was due to sales of foreclosed homes, but anything that lessens housing inventory is to be desired. Beware, though: Prices and sales could trend down again, especially when the impact of the first-time homebuyers tax credit starts to fade after December 1.

MONTHS OF HOUSING INVENTORY as of June:

In stocks, advancers were ahead of decliners by about 2.7 to 1 on the NYSE and 2.5 on the Nasdaq. Banks and insurers made up some of yesterday's losses, with Citigroup (C) and Hartford Financial (HIG) both up over 7% , and Wells Fargo (WFC) and Bank of America (BAC) in the green.

CITIGROUP:

On the Nasdaq, another bank was a top gainer, Community Capital Corp. (CPBK), up 30%:

COMMUNITY CAPITAL CORP.:

Continuing in not-bad economic reports, the U.S. trade deficit in tangible goods and services expanded moderately in June largely due to higher oil prices and a larger oil deficit (the number of barrels that were imported in June rebounded 7.1%) as the overall U.S. trade gap widened to $27.0 billion from a revised $26.0 billion deficit the previous month. But exports advanced 2% while imports rebounded 2.3%, and excluding petroleum, the gap shrank significantly to $20.0 billion from $22.6 billion in May.

Which producers in the U.S. went to the head of the class? By end-use categories, the June advance in exports was led by industrial supplies (up $1.2 billion) and by capital goods except autos (up .4 billion). Also posting gains were foods, feeds, and beverages exports. Automotive was in the positive category but essentially was flat; consumer goods exports edged down marginally.

U.S. TRADE BALANCE, IN BILLIONS, seasonally adjusted:

Outside of oil, import numbers show weak domestic demand. Businesses are not adding to stockroom shelves, at least not from imports. Consumer goods imports dropped a sizeable $1.7 billion and capital goods imports were down but basically flat. Today's report is good news for manufacturers of exports in the U.S. as exports have been boosted by a weaker dollar. However, businesses apparently are still concerned about domestic demand as they have cut back on nonoil imports. The market didn't have much of a response to the news.

One thing I'm looking for is a sharp and sustained rise in the Baltic Dry Index, a leading indicator that provides a clear view into the global demand for commodities and raw materials. The index measures shipping rates for dry bulk goods -- coal, iron, ore, grain, steel -- on dry bulk cargo ships on some three dozen sea routes around the world.

Demand for raw materials gives us a glimpse into the future. Producers naturally buy raw materials when they want to start building more finished goods and infrastructure like automobiles, heavy machinery, roads, factories, houses and such. Producers stop buying raw materials when they have excess inventory and when they stop capex projects -- period.

The Baltic Dry Index is also a compelling indicator because it's difficult to manipulate the cost of moving raw materials by sea in container ships. If fewer producers need dry bulk cargo, ships will be in less demand, causing a drop in the price that shippers can charge, and the Baltic will fall. Conversely, as shipping increases, you can bet that shipping rates will rise. It's driven by very clear forces of supply and demand.

BALTIC DRY INDEX:

The demand that affects the Baltic Dry Index is the demand of commodity buyers who need the raw goods for production. With shipping rates easily capable of hitting over $150,000 a day, nobody is going to pay to book a Capemax cargo ship who isn't actually going to use it.

The supply that affects the Baltic Dry Index is the supply of ships available to move materials around the globe. This can't be distorted either, because it takes years to build a new ship that could be put into service to increase supply, and it costs far too much to leave ships empty in an attempt to decrease supply.

Here's what it typically means when the Baltic Dry Index turns around and starts moving up:

--Global economies are starting to, or continuing to, grow

--Companies are starting to, or continuing to, grow

--Commodity prices should start to, or continue to, increase in value

--Stock prices should start to, or continue to, increase in value

This chart of Diana Shipping (DSX), as do other dry-bulk shipping company charts, largely tracks the Baltic Dry Index:

DIANA SHIPPING:

While the BDI typically declines in the lead-up to and during a recessions, a decline in the index doesn't always necessarily mean a recession is imminent, but a steep fall must be watched. Is the Baltic Dry Index the grail, the big kahuna -- the one leading indicator that will say to us, "Buy now"? Of course not. But in conjunction with four or five others, it can tell us a great deal.


New Option Plays

Editor's Note

by James Brown

Click here to email James Brown
Editor's Note:

The rally today was definitely unexpected, especially since it began in front of the FOMC decision and not afterward. Usually stocks are quiet ahead of a fed decision. The market's are always volatile immediately following a fed meeting and often enough the first post-meeting move in stocks is not necessarily the true move. Traders were already taking profits in the last 30 to 60 minutes of trading today. The rally in the S&P 500 back above 1,000 is bullish but it could end up being a new, short-term lower high. The NASDAQ's (and NASDAQ-100's) rally was just enough to briefly pierce the recent highs and it rolled over in the last hour. Essentially the NASDAQ is still under resistance in the 2015 region.

I don't trust this move higher but neither do I want to short it. If you forced me to trade I would be looking for bearish candidates and use really tight stops, or maybe some sort of neutral strangle play on one of the major indices. Instead of adding new candidates tonight I suggest we wait and see if there is any follow through tomorrow. Wal-Mart (WMT) reports earnings tomorrow morning and their comments could have a big affect on the market.


In Play Updates and Reviews

Last Hour Stops

by James Brown

Click here to email James Brown


CALL Play Updates

C.H.Robinson - CHRW - close: 55.52 change: +0.86 stop: 52.75

The market's widespread rally helped CHRW breakout over resistance near $55.00 and hit our trigger to buy calls at $55.35. The play is open. Our target is $59.50. I Currently the Point & Figure chart is bullish with a $69.00 target.

Chart:

Picked on   August 12 at $ 55.35 *triggered       
Change since picked:      + 0.17
Earnings Date           10/20/09 (unconfirmed)
Average Daily Volume =       1.7 million  
Listed on August 11, 2009         


Fluor Corp. - FLR - close: 54.83 change: +0.87 stop: 49.45

FLR delivered a decent bounce after yesterday's sharp post-earnings decline. I still think it's headed for $50.00. We want to buy calls on a dip in the $51.00-50.00 zone. If triggered at $51.00 our first target is $54.80. Our second target is $59.00. This could take several weeks.

I suggest readers use the September or October calls.

Picked on     July xx at $ xx.xx <-- TRIGGER @ 51.00
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: 142.03 chg: +0.61 stop: 139.95

Weakness in the dollar helped the FXE gain 0.4%. 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:      + 1.27
Earnings Date           00/00/00
Average Daily Volume =       461 thousand    
Listed on  June 23, 2009         


Gold Miner ETF - GDX - close: 38.79 change: +0.36 stop: 36.90

The oversold bounce in the GDX was rolling over this afternoon. I remain very cautious here. More conservative traders may want to exit early or maybe raise their stop loss toward the $37.50 level. I am not suggesting new positions at this time. 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:      + 2.30
            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: 50.44 change: +0.06 stop: varies

Momentum indicators are suggesting the next move is going to be down. I am raising our stop loss on the aggressive trade to $49.85. Currently we have two strategies for IDXX.

Aggressive strategy: Entry point at $51.10. Stop loss at $49.85. Our first target is $54.85. We do not want to open new aggressive positions at this time. I suggested 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 @ 49.85 *new*
Change since picked:      - 0.66

*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: +0.22 stop: 31.90 *new*

JCP didn't move much even though Macy's (M) delivered some strong earnings numbers and improved guidance. Tomorrow morning we'll get earnings out of Wal-Mart and that will have a big influence on the retail sector. Tomorrow is also our last day for this JCP play. We're exiting at Thursday's closing bell unless JCP hits our stop or target. With only one day left I'm raising the stop loss to $31.90. 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: 27.97 change: +1.17 stop: 23.99

In a move to reduce debt and interest payments LM said they have successfully exchanged almost 21 million "equity" units for 0.8881 shares of common stock and $6.25 in cash. Evidently investors were happy to hear it as the stock rallied more than 4% on the session. 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: 73.32 change: -0.65 stop: 69.45

There is no change from my prior comments on LO. 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. 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: 38.49 change: +0.51 stop: 31.95

There is no change from my previous update on PII. 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

Apple Inc. - AAPL - close: 165.31 change: +2.48 stop: 167.51

Technology stocks helped lead the market's widespread bounce on Wednesday. AAPL soared to $166.71 before reversing late in the session. Shares failed to penetrate resistance in the $167.00-167.50 zone so I would use today's pop as a better entry point to buy puts. Our first target to take profits is at $156.00. Our second and final target to take profits is at $151.50. If AAPL near $150 we'll start looking at buying calls.

Picked on   August 11 at $162.83
Change since picked:      + 2.48
Earnings Date           10/21/09 (unconfirmed)
Average Daily Volume =      17.1 million  
Listed on August 11, 2009         


Chevron Corp. - CVX - close: 68.72 change: +0.78 stop: 70.60

Today's bounce in CVX failed to close over the $69.00 level of its 200-dma. I see it as an improved entry point to buy puts. Our first target is $64.15. Our second target is $61.50.

Picked on   August 11 at $ 67.94
Change since picked:      + 0.78
Earnings Date           10/29/09 (unconfirmed)
Average Daily Volume =      10.7 million  
Listed on August 11, 2009         


Genzyme - GENZ - close: 50.31 change: +0.95 stop: 52.55

The biotech sector was one of the better performers today and it gave GENZ a boost. Shares rallied 1.9% and closed back above the $50.00 level. Yet the rebound failed to close over short-term resistance at its 10-dma. Volume was pretty light compared to recent sessions. More conservative traders may want to lower their stops toward the $51.00 or $51.50 levels if you're concerned that GENZ has produced a bullish reversal. 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:      + 0.41
Earnings Date           10/22/09 (unconfirmed)
Average Daily Volume =       3.9 million  
Listed on August 01, 2009         


Green Mtn Coffee - GMCR - close: 64.84 chg: -1.00 stop: 72.05

The action in GMCR today was pretty bearish. The stock failed to participate in the rally and when it did bounce it rolled over near $66.50. I see this as another entry point to buy puts.

This is a very aggressive bet that GMCR finally corrects. I suggest very small position sizes. We're going to use a very wide stop loss. Our first target to take some money off the table is $60.50. Our second target to exit completely is $55.50.

Picked on   August 11 at $ 65.84
Change since picked:      - 1.00
Earnings Date           11/12/09 (unconfirmed)
Average Daily Volume =       1.8 million  
Listed on August 11, 2009         


Biotech Ishares - IBB - close: 77.28 change: +0.78 stop: 80.75

IBB managed a bounce but it started to fail near the $78.00 level late this afternoon. I'm not suggesting new 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:      - 2.07
Earnings Date           00/00/00
Average Daily Volume =       892 thousand 
Listed on  July 30, 2009         


Intl.Business Machines - IBM - cls: 119.29 change: +1.50 stop: 120.10

In spite of the market's widespread strength shares of IBM just couldn't push past resistance at the $120.00 mark. I wasn't expecting this bounce today and more aggressive traders may want to widen their stop just a little bit to give IBM some breathing room. Consider moving it to just over $120.50. We're going to leave our stop at $120.10 for now and readers can use today's bounce as a new entry point to buy puts! 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 turn into a bullish candidate.

Picked on   August 08 at $118.17 /gap down entry
                               /originally listed at $119.33
Change since picked:      + 1.12
Earnings Date           10/08/09 (unconfirmed)
Average Daily Volume =       7.9 million  
Listed on August 08, 2009         


Intercontintental Exchange - ICE - cls: 91.15 change: +0.85 stop: 98.25

The bounce in ICE was pretty subdued. The rally stalled under the 92.50 level. ICE looks poised to breakdown soon. Our plan is to buy the second half of our put position when ICE hits $89.85. 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:      - 2.45

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         


Marvel Entertainment - MVL - close: 38.69 change: +0.26 stop: 40.01

MVL bounced back toward the top of its short-term trading range near $39.00. More aggressive traders may want to launch put positions now. Currently our plan is 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.

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         


Shanda Interactive - SNDA - close: 48.23 chg: -1.16 stop: 51.25

SNDA did not participate in the market's rally thanks to big declines back home in the Chinese markets. SNDA is inching closer to another big breakdown.

An alternative entry point would be to wait for a new decline under $48.00 to launch 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:      + 0.13
Earnings Date           09/01/09 (unconfirmed)
Average Daily Volume =       1.5 million  
Listed on August 08, 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: 56.26 change: +0.24 stop: n/a

MCD is still drifting sideways. We have seven trading days left. 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:      - 1.68
Earnings Date           07/23/09 (unconfirmed)
Average Daily Volume =       7.8 million  
Listed on  July 18, 2009         


CLOSED BEARISH PLAYS

QQQ ProShares - QLD - close: 45.56 change: +1.36 stop: 46.10

Hmm... looks like I should have left the stop loss where it was. Last night I lowered the stop to $46.10 and the QLD rallied to $46.32 late this afternoon. I am seriously tempted to immediately re-initiate the trade with a new put position and a tight stop above today's high but we won't. Let's way a day or two and see what happens.

Chart:

Picked on     July 30 at $ 44.89 
Change since picked:      + 1.21 <-- stopped out @ 46.10 (+2.6%)
Earnings Date           00/00/00 
Average Daily Volume =      13.5 million  
Listed on  July 30, 2009         


Wynn Resorts - WYNN - close: 59.52 change: +4.07 stop: 60.26

Shorts got hammered again. The market's unexpected rally sent bears running and WYNN rallied right up to resistance at $60.00 and then poked over it right before the close. WYNN hit our stop loss at $60.26 closing the play. We knew this was an aggressive, high-risk/high-reward trade and I suggested small positions 1/2 or 1/4 your normal size. I would keep WYNN on your watch list. Another opportunity will probably present itself soon.

Chart:

Picked on   August 05 at $ 56.57
Change since picked:      + 3.69<-- stopped out @ 60.26 (+6.5%)
Earnings Date           10/29/09 (unconfirmed)
Average Daily Volume =       4.7 million  
Listed on August 05, 2009