Option Investor
Newsletter

Daily Newsletter, Thursday, 8/20/2009

Table of Contents

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

Market Wrap

Real Rebound Or Just A Head Fake?

by Todd Shriber

Click here to email Todd Shriber
Stocks inched higher for a third consecutive day, but the way the recent rally has been going, three straight up days is not much of big deal anymore. Investors have gotten somewhat spoiled and might be more accustomed to three consecutive weeks of gains, rather than just a few days. Still, after the drubbings of last Friday and this Monday, three consecutive up days is a nice feather in Mr. Market's hat.

At this point, it certainly looks like the bears have gone into a deep slumber as nearly everyone and his uncle was pointing toward signs of the market topping at over the past few days, but the market has continued to advance. There really was not much noteworthy in terms of the gains made by the major US indexes today with the S&P 500 closing up almost 11 points to 1007.37. The Dow Jones Industrial Average settled up nearly 71 points to close at 9350 and the Nasdaq finished the day up nearly 20 points to close at 1989.22.

Stats Table

So the major indexes either advanced (again) through important technical levels or inched closer to them. By that I mean, the Dow now rests above 9300 again, the S&P 500 is now back above 1000 and the Nasdaq continues to inch its way toward 2000. Those are nice footnotes to be sure, but the volume was anemic. That should not come as a surprise. After all it is Thursday in August and more than a few members of the ''smart money'' crowd start their weekends early in the summer time.

So tepid was the volume today, that if you add up the shares traded on the New York Stock Exchange and the Nasdaq, you get something in the neighborhood of 3.3 billion shares. One stock, Citigroup, accounted for nearly a third of that volume by itself. I was watching CNBC right before the market closed and one of the pundits there noted that more than 125 million of those Citigroup shares traded on the NYSE, accounting for roughly 10% of the exchanges total volume today. Throw in the 183 million Bank of America shares that traded today, and you have two stocks accounting for close to half of the day's total volume.

Those are nice segues, if I do say so myself, because one of the market catalysts today came from the financial sector. Actually, it came from a sub-sector of the financials that I call ''Uncle Sam's Mutual Fund.'' And no I'm not referring to Citi or Bank of America. American International Group (AIG), the former Dow member and insurance firm for whom not enough snarky adjectives exist, continued to do its best Lazarus impression, soaring $5.66, or 21%, to $32.30 after the new CEO (yeah, that's something like three in the past year), said that AIG believes it can pay off its tab with the US taxpayer.

The tab is pretty hefty. American taxpayers own 80% of AIG, which includes a $60 billion credit line, a $70 billion direct investment and another $52.5 billion to purchase mortgage-based securities owned or issued by the company. Add that up and you get $182.5 billion, which is more than 40 times AIG's market cap of $4.35 billion. Put another way, $182.5 billion is more than twice the market cap of PepsiCo (PEP).

AIG even said, gasp, that it may be able to create some value for shareholders going forward. To be fair, the company has been doing exactly that over the past month or two. If you were fortunate enough to buy some shares after the reverse split in June AND after the stock got taken to the woodshed following the reverse split, you could have gotten in at $12 on July 20 and you'd be quite happy today.

The stock has now soared through its 50 and 200-day moving averages and there does not appear to be a lot of near-term resistance. Still, there are risks in getting involved with AIG, especially from the short side. The stock is one of the most heavily shorted on the Street and even mildly positive comments from the company send the bears running for cover and the shares soaring. In other words, the flames of the AIG rally are being fanned by short covering, not good fundamentals, and short covering has a finite shelf life.

AIG Chart

In 1990, the rock band Poison soared to the top of the charts with their hit ''Something To Believe In'' and AIG probably is not something to believe in, but Google (GOOG) probably is. Five years and a day after gracing the Nasdaq with its IPO, the Internet search giant was added to the widely-followed Goldman Sachs Conviction Buy List. That was one legitimate catalyst on the day, especially for the Nasdaq, as Google shares rose $16.44, or 3.7%, to $460.41. While Google certainly is not cheap on a dollar basis or when considering it trades at 32 times trailing earnings, the stock seems to have found support at the 50-day moving average of $431.62 and from here, the shares probably don't encounter resistance until they hit $485 or higher.

Google Chart

Beyond those individual equity stories there were a coupe of economic data points that helped buoy the bulls today. Leading economic indicators rose in July for the fourth consecutive month with the Conference Board's economic outlook survey rising 0.6%. A Federal Reserve report showed manufacturing activity in the Philadelphia region rose for the first time in nearly a year. And that latter point is nothing to scoff as manufacturing is a fairly important contributor to US GDP, as the chart below illustrates.

GDP/Manufacturing Chart

The big thing with manufacturing is whether or not an increase in activity will lead to some new hires. The sector has been hemorrhaging jobs at an alarming rate and has been a significant contributor to the bleak unemployment situation the U.S. currently faces. July's unemployment report showed more than 52000 manufacturing jobs were lost in July. If that trend reverses course, that could lead to an overall improvement in the jobs situation.

Unemployment Chart

Speaking of impacts on US GDP, no one has a greater affect on that particular data point than the consumer and with eye an toward tomorrow's trade, there were a couple of retailers that reported earnings after the close today that might provide a good temperature on back-to-school spending and the health of the consumer at large.

Apparel retailer Aeropostale (ARO) said second-quarter profit rose due to $38.6 million, or 57 cents a share, from $21.1 million, or 31 cents, a year earlier. Aeropostale actually increased sales, a novel idea in an earnings season littered with faux estimate-beaters that only did so by cutting costs. Sales at Aeropostale soared 20% to $453 million from $377.1 million and the company beat Street estimates by a penny.

Things were different at the Gap (GPS), the largest US clothing chain. While net income of $228 million, or 33 cents a share, also beat analyst estimates by a penny, sales tumbled eight percent to $3.25 billion. That was better than last year's 10% decline, but that means the Gap had to find other ways to beat estimates and the company did that by raising merchandise margins. An effective tactic for a quarter or two, but at some point the market will want to see more consumers buying jeans and khakis at the Gap before turning bullish on the stock.

Another retailer that might be worth watching tomorrow is Ann Taylor (ANN), which reports earnings before the bell. Analysts are calling for a profit of two cents a share at the lady's apparel retailer. And as I always do when there is a spate of retail news, I call your attention to the SPDR S&P Retail Index ETF (XRT).

Still resting above its 50 and 200-day moving averages, XRT has peeled back a little bit lately, but it is holding above $30 and with a few retail earnings reports still left, XRT could see some volatility in the coming days.

XRT Chart

Speaking of volatility, tomorrow is options expiration day and volume-depraved investors can only hope that might spark a rise in volume, but that is a tough bet to make given that it is Friday in August. In advance of options expiration, I included a chart of the CBOE Put/Call Ratio.

Put/Call Chart

I was looking for some interesting options activity today, as I usually do for the Market Monitor, and after the close today I found some interesting stuff considering that tomorrow is an expiration day. The most active name in a single equity options contract today was pharma giant and Dow member Johnson & Johnson (JNJ), which saw 69500 AUGUST 60 calls change hands. All caps because these contracts expire tomorrow. Bank of America also some brisk trade in options that expire tomorrow, namely the August 17 calls and puts. Nearly 74000 calls and 46357 puts changed hands. The volume was below open interest in both the puts and the calls, but again noteworthy given that someone was gobbling these contracts up to hold them for barely a day.

Taking a look at market technicals, the bulls have once again popped the S&P 500 back above 1000, which is fairly significant. A report issued today by J.P. Morgan said the index will reach 1100 by the end of 2009. I am not going to argue with the fine folks at J.P. Morgan and support seems firm at 980, but it is reasonable to expect some choppy, lethargic action until we get past the Labor Day holiday and then the market will have to contend with September.

I say contend with, because as I pointed out right here last week, September is historically the worst month of the year for stocks. I will hazard a guess that the S&P 500 heads into September somewhere between 985 and 1010. So if September proves to be bearish and there isn't further improvement in employment (We get August numbers right around Labor Day), a retreat to 970 could be possible and if 970 doesn't hold, 905-910 becomes a concern.

Factor in third-quarter earnings will start coming out in late September/early October and the cost-cutting theme probably will not be enough to buoy stocks again. Long story short, 1100 is possible by the end of the year, but the next few weeks will go a long way to determining the reality of that lofty level.

S&P 500 Chart

Obviously, the next big thing for the Dow is 10000 and if the market was to undergo a real correction in the near-term, 10% pullback would take the blue chip index back below 8500. The Dow recently had a fight in the 9420 area and has retreated from there. With light volume looming as a thorn in the side of the bulls, 9000 could be tested again before 9500 is broken.

That is not to say I am bearish, it is just a way of noting that the Dow and S&P 500 still remain overbought. Then again, the same argument could have been made at 8800 and 9000, so I will just make things simple and say that a break below 9000 would be worrisome for the bulls.

Dow Chart

Things are a little more precarious with the Nasdaq. Google's pop today did trickle down to other Nasdaq titans such as Apple (AAPL), Cisco (CSCO) and Research In Motion (RIMM), but the volume theme has to be acknowledged. The tech-laden index bumped against 2007 resistance levels that are just over 2000 several times without breaking through. That was bad sign Number 1. The second ominous omen came when the Nasdaq fell below support at 1950. Sure, the index is once again threatening 2000, but with light volume, it is hard to see the index making a real move to toward 2050-2100.

Nasdaq Chart

Obviously, I like up days that are marked by strong volume and with a lack of earnings catalysts left for investors to point to, there are probably more light trading days left until after Labor Day. There are seven trading days left in August and the combination of light volume and overbought conditions does is not ideal for the bulls. It would be considered a victory if the major indexes head into September at or near current levels.


New Option Plays

Regional Banks

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

State Street (Bank) STT - close: 54.06 change: +2.79 stop: 48.90

Why We Like It:
I mentioned STT last night in my editor's note as a bullish candidate should the financials continue to lead the market higher. Sure enough the stock breaks higher and rallies more than 5%. We want to jump on the bandwagon. However, we'll get a better price in the options if we wait for a dip. The plan is to buy calls when STT dips back to $52.50. We'll use a stop under the recent low. Our first target is $55.00. Our second target is $59.50. Currently the Point & Figure chart is bullish with a $62 target.

Suggested Options:
I am suggesting the September calls.

BUY CALL SEP 50.00 SPJ-IJ open interest=2704 current ask $5.30
BUY CALL SEP 55.00 SPJ-IK open interest=8108 current ask $2.25

Annotated Chart:

Picked on   August xx at $ xx.xx <-- TRIGGER 52.50
Change since picked:      + 0.00
Earnings Date           10/13/09 (unconfirmed)
Average Daily Volume =       5.3 million  
Listed on August 19, 2009         



In Play Updates and Reviews

Stocks Continue to Drift Higher

by James Brown

Click here to email James Brown


CALL Play Updates

FISERV Inc. - FISV - close: 47.85 change: -0.20 stop: 46.60

FISV tried to rally this morning but failed after gapping higher at $48.48. The plan is to buy calls at $48.60. Our first target to take profit is at $52.50.

Picked on   August xx at $ xx.xx <-- TRIGGER @ 48.60
Change since picked:      + 0.00
Earnings Date           10/28/09 (unconfirmed)
Average Daily Volume =       1.5 million  
Listed on August 19, 2009         


Fluor Corp. - FLR - close: 54.44 change: +1.22 stop: 49.95 *new*

FLR continues to bounce and tagged its 20-dma today. The high was $54.68. I'm raising our stop loss to $49.95. More conservative traders may want to raise their stop toward $51.00. I would still buy calls on dips. Our first target is $54.80. Our second target is $59.00. This could take several weeks.

Picked on   August 17 at $ 51.00 *triggered            
Change since picked:      + 3.44
Earnings Date           08/10/09 (confirmed)
Average Daily Volume =       2.4 million  
Listed on  July 25, 2009         


Flowserve - FLS - close: 89.29 change: +1.80 stop: 72.45

FLS is still climbing but volume is falling fast. Shares are nearing resistance at $90.00. Right now the plan is to wait and buy calls on a dip at $76.00 but we might want to up that trigger toward $80.00.

More conservative traders can use a stop closer to $74.00. If triggered at $76.00 our first target is $83.50. Our second target is $89.00. Our time frame is several weeks.

Picked on   August xx at $ xx.xx <-- TRIGGER @ 76.00
Change since picked:      + 0.00
Earnings Date           10/28/09 (unconfirmed)
Average Daily Volume =       1.1 million  
Listed on August 17, 2009         


Genesse & Wyoming - GWR - close: 29.44 change: +0.27 stop: 27.35 *new*

GWR is still climbing but shares are under performing their peers. GWR gained 0.9%. The railroad index climbed 1.9%. Look to initiate new positions in the $28.50-27.50 zone. An alternative would be to wait for a rise over $30.00 before launching positions. Our first target is $32.90. Our second target is $34.75. Please note that I'm adjusting the stop loss to $27.35.

FYI: The plan was to use small position sizes to limit our risk.

Picked on   August 15 at $ 28.66 /gap down entry
                               /originally listed at $29.30
Change since picked:      + 0.78
Earnings Date           11/03/09 (unconfirmed)
Average Daily Volume =       230 thousand
Listed on August 15, 2009         


IDEXX Labs - IDXX - close: 50.58 change: +0.13 stop: $44.95

There is no change from my prior comments on IDXX. The plan is to buy calls on a dip at $47.50. 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.


*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         


Legg Mason - LM - close: 28.25 change: +0.41 stop: 24.95 *new*

I am adjusting our trigger to buy calls to $26.60. We'll inch up our stop loss to $24.95. Aggressive traders might want to consider a trigger to buy LM above $28.50 or above the August high (29.20).

If triggered our first target is $29.95. Our second target is $33.45. 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 26.60 *new*
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: 73.59 change: +0.43 stop: 69.45

There are no changes from my previous comments on LO. We have 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 <-- TRIGGER @ 70.50
Change since picked:      + 0.00
Earnings Date           07/27/09 (confirmed)
Average Daily Volume =       1.5 million  
Listed on August 01, 2009         


U.S. Oil Fund - USO - close: 38.12 change: +1.26 stop: 33.75

It was very interesting to see the U.S. dollar down yet almost all of the commodities were down as well. Normally if the dollar is down commodities are up. The USO has stalled at its August highs. We are waiting for a dip. The plan is to buy calls at $35.00. Our first target is $37.90 (new)

Picked on   August xx at $ xx.xx <-- TRIGGER @ 35.00 
Change since picked:      + 0.00
Earnings Date           00/00/00
Average Daily Volume =      11.5 million  
Listed on August 15, 2009         


PUT Play Updates

Ultra-Short Oil&Gas - DIG - close: 28.71 change: +0.51 stop: 29.10

The rally in oil has stalled a bit and oil stocks saw their momentum stall as well. The DIG gained 1.8% but failed to rise past the $29.00 mark. The DIG is now testing its three-week trendline of lower highs. If stocks (and oil) can rally again tomorrow we'll probably be stopped out. I would wait for a new decline under $27.75 or $27.50 before initiating new put positions. Our first target is $24.50.

Picked on   August 19 at $ 27.75 *triggered 
Change since picked:      + 0.96
Earnings Date           00/00/00
Average Daily Volume =       5.9 million  
Listed on August 18, 2009         


First Solar - FSLR - close: 130.42 chg: -1.01 stop: 146.00 *new*

FSLR tried to rally this morning but shares stalled at $135.00. The early morning rise was fueled by an earnings report from rival SunTech Power (STP) that managed to beat the estimates but missed on the revenue number. Both STP and FSLR ended up getting downgraded on the session. I am lowering our stop loss to $146.00.

We have two targets. Our first target is $122.50. Our second target is $111.00. This is a very aggressive trade and FSLR can be an extremely volatile stock. I'm suggesting very small position sizes. FYI: the Point & Figure chart is bearish with a $108 target.

Picked on   August 17 at $135.88 *triggered/gap down entry
Change since picked:      - 5.46
Earnings Date           11/03/09 (unconfirmed)
Average Daily Volume =       3.5 million  
Listed on August 15, 2009         


Intl.Business Machines - IBM - cls: 118.95 change: +0.38 stop: 120.10

IBM is inching back toward resistance at $120.00. Readers may want to consider buying a straddle at the $120 level, which involves buying a call and a put at the same strike or consider buying a strangle, which involves buying an out of the money call and put. That way you don't care what direction IBM moves as long as it picks a direction.

I'm not suggesting new positions at this time but a failed rally under $120 would be a new bearish entry point. 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: The newsletter will buy calls at $120.25 should IBM breakout higher. Use the September strikes. I prefer the $120s and $125s.

Picked on   August 08 at $118.17 /gap down entry
                               /originally listed at $119.33
Change since picked:      + 0.78
Earnings Date           10/08/09 (unconfirmed)
Average Daily Volume =       7.9 million  
Listed on August 08, 2009         


iShares Transports - IYT - close: 65.90 change: +0.50 stop: 66.75

The IYT bounced past the $66.00 level twice but both times it stalled near $66.15. I would still consider new bearish positions here but readers may want to wait for some sign of weakness in the broader market first. More aggressive traders can place their stop above resistance at $68.00 instead. We'll take some money off the table at $62.00 (1st target) and exit completely at $60.25 (2nd target).

Picked on   August 19 at $ 65.40
Change since picked:      + 0.50
Earnings Date           00/00/00
Average Daily Volume =       772 thousand 
Listed on August 19, 2009         


Marvel Entertainment - MVL - close: 38.01 change: +0.35 stop: 39.26

MVL rallied back above resistance at $38.00 and its 50-dma. More conservative traders may want to tighten their stop down toward $38.50 to reduce their risk. Our target is $34.10 as the $34.00 level could be support. I am lowering the stop loss to $39.26.

Picked on   August 17 at $ 37.90 *triggered         
Change since picked:      + 0.11
Earnings Date           11/04/09 (unconfirmed)
Average Daily Volume =       710 thousand 
Listed on August 10, 2009         


Shanda Interactive - SNDA - close: 48.79 chg: +2.24 stop: 50.75 *new*

A huge +4% bounce in the Chinese market helped SNDA gain 4.8%. The MACD on the daily chart for SNDA is nearing a new buy signal. I am adjusting our stop loss down to $50.75. Watch for a failed rally under $50.00 as a new entry point for puts. Our target is the $41.50-40.00 zone. Remember, SNDA is a volatile stock and readers may want to use smaller position sizes.

Picked on   August 08 at $ 48.10 /gap higher entry
                               /originally listed at $47.83
Change since picked:      + 0.69
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: 56.14 change: +0.49 stop: n/a

Unless MCD just collapses tomorrow it looks like game over for our strangle play. 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 $1.75 or higher.

Picked on     July 18 at $ 57.84
Change since picked:      - 1.70
Earnings Date           07/23/09 (unconfirmed)
Average Daily Volume =       7.8 million  
Listed on  July 18, 2009         


Schlumberger - SLB - close: 53.80 change: +0.93 stop: n/a

SLB is trading back near the $53-54 zone where we decided to launch positions. If you are looking for a new entry point then this is it.

The options we suggested were the September $60.00 calls (SLB-IL) and the September $45.00 puts (SLB-UI). Our estimated cost is $1.00 and we want to sell if either option hits $2.50 or higher.

Picked on   August 15 at $ 52.00 /gap down entry Aug. 17th
Change since picked:      + 1.80
Earnings Date           10/15/09 (unconfirmed)
Average Daily Volume =       9.2 million  
Listed on August 15, 2009         


CLOSED BULLISH PLAYS

Ultra-Short S&P 500 - SDS - close: 44.98 chg: -0.92 stop: 44.90

Our aggressive bet that the market bounce would roll over did not pan out. The SDS hit our stop loss at $44.90 late this afternoon with stocks' final push higher.

Chart:

Picked on   August 18 at $ 46.70 
Change since picked:      - 1.80<-- stopped out @ 44.90 (-3.8%)
Earnings Date           00/00/00
Average Daily Volume =        38 million  
Listed on August 18, 2009         



CLOSED BEARISH PLAYS

Genzyme - GENZ - close: 52.42 change: +1.39 stop: 52.55

It looks like a positive review in Barron's Online sparked some buying or short covering in GENZ this morning. The stock spiked higher and powered past the $51-52 zone to hit our stop loss at $52.55 closing the play. the long-term trend is still bearish and readers can watch for a failed rally under $55.00 or a new drop under $49.00 as an entry point to buy puts.

Chart:

Picked on   August 03 at $ 49.90 *triggered         
Change since picked:      + 2.65<-- stopped @ 52.55 (+5.3%)
Earnings Date           10/22/09 (unconfirmed)
Average Daily Volume =       3.9 million  
Listed on August 01, 2009         


Intercontintental Exchange - ICE - cls: 95.00 change: +5.15 stop: 92.55

ICE was one of our more promising put plays. The initial position had an $8.00 gain at one time. The potential gains (declines in the stock) vanished over the last couple of sessions. Today's move appears to be inspired by news that the CFTC and England's FSA have agreed to cooperate on regulation of the oil markets, which will affect all of ICE futures Europe contracts.

Once shares of ICE shot through resistance at $90.00 and technical resistance at its 30-dma the short covering began in earnest and ICE gained 5.7% on the session. Our stop was hit at $92.55.

Chart:

Picked on   August 08 at $ 93.60 Buy Half 
Change since picked:      - 1.05 <-- stopped @ 92.55 (-1.1%)

Picked on   August 13 at $ 89.85 triggered 2nd half
Change since picked:      + 2.65 <-- stopped @ 92.55 (+2.9%)

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