Option Investor
Newsletter

Daily Newsletter, Monday, 8/24/2009

Table of Contents

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

Market Wrap

Financials Lead Stocks Lower On A Day Lacking Catalysts

by Todd Shriber

Click here to email Todd Shriber
Monday was a fairly docile day for stocks as a lack of catalysts, earnings, economic or otherwise, kept equities in a tight range for most of the day. The Dow Jones Industrial Average, the only index of the major three to advance on the day, finished up a scant 3.32 points to hold 9500, closing at 9509. The S&P 500 shed just over half a point to close at 1025 and the Nasdaq remains above 2000 after losing almost three points to close just below 2018.

Stats Table

Monday's lukewarm market action was not altogether surprising considering the average volume, lack of substantial news and the wild bull move on Friday. The bulls had their way on Friday as options expiration, new home sales data and positive comments from Federal Reserve Chairman Ben Bernanke sent stock soaring into the weekend. One could argue that it was not all that surprising to see stocks pullback a bit today and the declines are certainly nothing to lose sleep over. After all, stocks rarely move up in a straight line.

I continue to monitor trading volume, if for no other reason than that volume is usually a good indicator of price action. That said, volume for Monday appeared decent, at least on the surface. Add up Nasdaq and New York Stock Exchange trade you get something in the neighborhood of 4.8 billion shares. Delve a little deeper into the details and you will find the devil. Well, not really, but you will see that almost 1.2 billion Citigroup shares changed hands and disgraced mortgage firms Fannie Mae (FNM) and Freddie Mac (FRE) combined for more than 1.2 billion shares.

Yes, there a multitude of other exchanges where equity orders are processed so total volume was higher than 4.8 billion shares, but you see my point. It is not all that impressive to see just three stocks combine for the bulk of the day's activity. It is fair to say Monday's activity was similar to last Thursday, when I last visited with you, where Citigroup (C) and Bank of America (BAC) accounted for a disproportionate share of the day's trade. And if you are wondering about Bank of America's trade on Monday, it was no slouch with more than 315 million shares changing hands.

By now you see that financials were in the limelight today, which stands to reason as there was a distinct lack of data points to really juice other sectors. The Financials Select SPDR ETF (XLF) was another harbor of busy trade on the day, though nearly 121 million shares could only spur a range of 46 cents. XLF still rests well above its 50 and 200-day moving averages despite closing down 11 cents to $14.44.

XLF Chart

You know it is a day light on catalysts when some press reports are attributing the down day to comments made by SunTrust Banks (STI) CEO James Wells III about the banking sector being a long way from ''declaring victory.'' Not to knock SunTrust, but these comments were not made by someone at Goldman Sachs (GS). Heck, they were not made by someone at Wells Fargo (WFC) or PNC Financial (PNC), all far larger institutions than SunTrust. Who knew that SunTrust held such cache? Speaking of Wells Fargo and PNC, those stocks shed 2.2% and 4.1%, respectively.

I find the prospect of SunTrust continuing to move markets to be a bit dubious going forward, but it is worth noting that after last week's gain of 2.2% for the S&P 500, the index was valued at almost 19 times the earnings of its member companies, the highest level since 2004. In other words, as so many folks keep saying, a little pullback is not such a bad thing when stocks reach those lofty levels.

And what usually goes up when equities go down? The U.S. dollar. Now I'm not going to turn this space into a currency wrap, but the U.S. Dollar Index was up on the day and the greenback even rose against the Euro. The dollar has been in a tailspin against the Euro for months, though some might argue the dollar has been in a tailspin since the Bretton Woods Accord, but that is a story for another day and I will just leave you with a chart of the dollar index to make your own conclusions.

Dollar Index Chart

Commodities shared some of the spotlight today, though in a bullish way. Copper for December delivery touched an 11-month high, rising 1.3% to $2.93 a pound. Of course the theme for copper remains demand, namely Chinese demand and it appears traders in China may be pricing in some increased demand for the red metal as copper futures rose 5% in Shanghai, the daily limit, according to press reports. And I cannot mention copper without mentioning the world's largest copper producer, Freeport McMoRan (FCX). The shares were up 38 cents to $65.44 and $70 continues to look like a strong resistance zone for the stock.

Copper Chart

No conversation about commodities would be complete without mentioning the most heavily traded of the lot, crude oil. Black gold for October delivery closed up 12 cents to $74.01, though it traded as high as $74.81, coming within earshot of the all-important $75 a barrel level before retreating. Obviously oil bulls want to see crude break through $75 with some veracity sooner rather than later, especially since oil has come into the low to mid-70s several times recently only to fall back. Working in the bulls' favor is the fact that today's close for crude is the highest since June.

Crude Chart

So after reading those last two paragraphs and looking at the corresponding charts, you might be feeling groovy about commodities. Far be it from me to rain on the parade, but I did come across an interesting anecdote. The Baltic Dry Index (BDI), which usually rises as more commodities, like copper and oil, are shipped around the world, is down a fair bit since July. And by fair bit, I mean more than 1000 points. Here's the chart.

Baltic Dry Index Chart

With an eye toward Tuesday's trade, the day should not be as light as Monday was in terms of catalysts. Before the market opens, weekly chain stores sales data is released, though most pre-market eyes will be focused on the Case-Shiller Home Price Index. Housing data has been fairly robust lately, or less bad, depending on your purview, and more good/not-so-bad news tomorrow could serve as an early boost to stocks.

The big kahuna of economic reports on Tuesday is the consumer confidence report, which is released at 10 AM Eastern. The consensus estimate is for a reading of 48 and that would be a nice uptick from the previous report of 46.6. Any uptick in consumer confidence is considered good news at this point. For as irrational as the market may be, most participants seem to have the good sense to acknowledge earnings quality and the health of the economy at large cannot improve without the help of the American consumer.

Consumer Confidence Chart

The Federal Reserve releases manufacturing data for the Richmond region, also at 10 AM, and a follow up to the bullish news out of the Philadelphia region last week could also rejuvenate the bulls. Speaking of the Federal Reserve, there is also an auction for $42 billion in two-year Treasuries tomorrow. As I have mentioned a few times recently, the Fed seems to be gobbling up Treasuries to give the impression that demand for Uncle Sam's debt is better than reality says it is. I am not sure if it is better to have international buyers, led by the Chinese, snatching up Treasuries or if it is better to have the Fed being the primary buyer. Not being able to make a decision on that riddle, I am left to think it might be best if the Treasury did not need to issue any new debt at all, but that is probably wishful thinking.

If you are in need of some decent earnings plays to watch tomorrow, there are a few. Really, just a few. I mentioned some bearish options activity surrounding Bank of Montreal (BMO) today in the Market Monitor. The Canadian bank is expected to earn 96 cents a share. Discount retailer Big Lots (BIG) also reports before the bell and analysts are calling for 30 cents a share in profits.

Ladies apparel retailer Chico's FAS (CHS) also steps into the earnings confessional and the consensus estimate is for 10 cents a share. A more obscure name that may be worth watching given depressed poultry prices is poultry processor Sanderson Farms (SAFM). The Street is expecting $1.76 a share in profits. This is not a bad lot of companies reporting results, but I am willing to bet consumer confidence and the home price data will set the tone for the day, not these reports.

Looking at the charts, the Dow continued its march above 9500, albeit modestly. Support can probably be found at the old resistance point in the 9420 area and it is fair to peg new resistance at last November's high of 9625. From there, there is a lot of room to run to 10000. A break above 9625 on strong volume could be a nightmare for the shorts and their covering would only fan the flames of the move toward five digits. I remain committed to the posture that volume needs to strengthen and earnings updates need to show some top-line increases to get the Dow over 10,000 in the next few weeks.

Dow Chart

Factoring in last Monday's decline, the S&P 500 has surged about 4.5% from the lows made during that session. The index dipped below support at 980, but rebounded nicely. The 14-day RSI shows the S&P 500 is not nearly as overbought as it was earlier this month, but 1050 must be cleared before a discussion about 1100 can begin.

S&P 500 Chart

The Nasdaq finally made its way back above 2000 last week and is now hovering around a three-year old resistance level. Technology issues played a big part in leading the market higher, but that well may drying up as there are not many catalysts remaining for tech stocks until third-quarter earnings updates start emerging. Even if the Nasdaq can hold around current levels, it still needs to move to the low 2060 area and fight more resistance there. Consider me in the neutral camp regarding the current state of affairs with the Nasdaq.

Nasdaq Chart

As I have been saying for a couple of weeks now, volume is going to be a challenge heading into Labor Day and September is historically a bad month for stocks, but if the market's down days have taught us one thing recently it is that those days are buying opportunities, not the beginnings of bearish moves.


New Option Plays

Specialty Chemicals and Fertilizers

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

CF Industries - CF - close: 83.12 change: +1.33 stop: 79.75

Why We Like It:
The large fertilizer-chemical names are starting to look bullish again. CF is one of them and shares are drifting higher toward resistance in the $84.50-85.00 zone. I am suggesting a trigger to launch small call positions at $85.25. CF and this sector can be a volatile bunch so we want to trade smaller position sizes.

If triggered at $85.25 our stop loss is at $79.75 and our first target is $89.85. Our second target is $97.50. My time frame is four to six weeks. FYI: A breakout over $85.00 would produce a new triple-top breakout buy signal on the Point & Figure chart.

Trading note: Investors should note that Agrium (AGU) has been trying to buy CF for months. CF has been trying to buy Terra Industries (TRA) for months. Nobody is selling because they claim the offers don't fully value the company (a.k.a. it's not enough money). There is potential upside if AGU finally makes a high enough offer or someone else steps in. There is potential downside if CF makes too high a bid for TRA and the market thinks they overpaid. This M&A merger dance hasn't affected the stock much lately but it is a risk either direction.

Suggested Options:
I am suggesting the September or October calls.

BUY CALL SEP 85.00 CF-IQ open interest=2276 current ask $2.90
BUY CALL SEP 90.00 CF-IR open interest=2515 current ask $1.20

BUY CALL OCT 85.00 CF-JQ open interest=   0 current ask $4.50
BUY CALL OCT 90.00 CF-JR open interest=   0 current ask $2.50
BUY CALL OCT 95.00 CF-JS open interest=   0 current ask $1.30

Annotated Chart:

Picked on   August xx at $ xx.xx <-- TRIGGER 85.25
Change since picked:      + 0.00
Earnings Date           10/27/09 (unconfirmed)
Average Daily Volume =       872 thousand 
Listed on August 24, 2009         


Newmarket Corp. - NEU - close: 83.54 change: +4.42 stop: 76.49

Why We Like It:
NEU is a specialty chemical company that has broken out over major resistance near $80.00. The next level of significant resistance appears to be the $88-93 zone. I am suggesting a two-part strategy. Buy half our call position now at $83.54 and we'll buy the second half on a dip back to $80.50.

Our first target to take profits is at $88.50. Our second and final target is $92.50. FYI: More conservative traders may want to consider a stop loss closer to $78.50-79.00 instead.

Suggested Options:
I am suggesting the September or October calls. FYI: I currently don't see any October $90 strikes available. They should show up soon.

BUY CALL SEP 80.00 NEU-IP open interest=1141 current ask $6.70
BUY CALL SEP 85.00 NEU-IQ open interest= 225 current ask $3.90
BUY CALL SEP 90.00 NEU-IR open interest= 227 current ask $2.10

BUY CALL OCT 85.00 NEU-JQ open interest=   0 current ask $5.80

Annotated Chart:

Picked on   August 24 at $ 83.54 <- buy half now 8/24/09
Picked on   August xx at $ xx.xx <-- TRIGGER @ 80.50 for 2nd half
Change since picked:      + 0.00
Earnings Date           10/27/09 (unconfirmed)
Average Daily Volume =       141 thousand 
Listed on August 24, 2009         



In Play Updates and Reviews

IBM breaks higher only to fade lower.

by James Brown

Click here to email James Brown


CALL Play Updates

EOG Res. Inc. - EOG - close: 75.83 change: +0.04 stop: 70.80

Crude oil spiked higher this morning but the strength didn't last. EOG followed oil higher and then faded, which is fine by me. Our plan is to buy calls on a dip at $74.00. Our first target is $79.50. Our second target is $88.00. The daily chart is building an inverse H&S pattern that is forecasting a rally toward $100.

Picked on   August xx at $ xx.xx <-- TRIGGER @ 74.00
Change since picked:      + 0.00
Earnings Date           11/03/09 (unconfirmed)
Average Daily Volume =       2.4 million  
Listed on August 22, 2009         


FISERV Inc. - FISV - close: 49.30 change: +0.21 stop: 46.60

The rally in FISV stalled a bit. I would still consider new positions near $49.00 but odds are pretty good that FISV will see a dip toward $48.50-48.00 zone, which would be a better entry point. Our first target to take profit is at $52.50. I'm setting a second target to exit completely at $54.00.

Picked on   August 21 at $ 48.60 *triggered         
Change since picked:      + 0.70
Earnings Date           10/28/09 (unconfirmed)
Average Daily Volume =       1.5 million  
Listed on August 19, 2009         


Fluor Corp. - FLR - close: 55.48 change: -0.39 stop: 49.95

The rally in FLR stalled twice at $57.00 this morning and then shares gave up about 0.7% on light volume. If you're looking for a new entry point I'd wait for a dip near $52.00. FLR has already hit our first target near $55.00. Our second and final target is $59.00.

Picked on   August 17 at $ 51.00 *triggered            
Change since picked:      + 4.48
                           /1st target exceeded @ 55.10 gap open (+8.0%)
Earnings Date           08/10/09 (confirmed)
Average Daily Volume =       2.4 million  
Listed on  July 25, 2009         


Flowserve - FLS - close: 89.90 change: -1.22 stop: 84.75

We upped our entry point to a more aggressive level at $87.50 but due to the aggressive nature of the play we only want to trade small positions (1/2 our normal size or less). FLS looks poised to dip toward $87.00 soon. If triggered at $87.50 our first target is $92.25. Our second target is $98.50. Our time frame is several weeks.

Picked on   August xx at $ xx.xx <-- TRIGGER @ 87.50 (1/2 pos)
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: 31.36 change: +0.35 stop: 27.75

GWR displayed relative strength with a 1.1% gain versus a 1.0% loss in the railroad index. Volume was above average on today's rally. More conservative traders may want to take a little profit off the table now. Our first target is $32.90. Our second target is $34.75.

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:      + 2.70
Earnings Date           11/03/09 (unconfirmed)
Average Daily Volume =       230 thousand
Listed on August 15, 2009         


Grainger W.W. - GWW - close: 88.87 change: -0.95 stop: 84.50

Uh-oh! Not only did GWW produce a failed rally pattern near $90.00 it also produced a bearish engulfing candlestick pattern. I am lowering our trigger to buy calls from $88.00 to $86.50. Our first target is $93.50.

Picked on   August xx at $ xx.xx <-- TRIGGER @ 86.50 *new*
Change since picked:      + 0.00
Earnings Date           10/14/09 (unconfirmed)
Average Daily Volume =       635 thousand 
Listed on August 22, 2009         


Intl.Business Machines - IBM - cls: 119.32 change: -0.58 stop: 117.45

IBM had been a put play but we knew there was a risk shares would breakout over resistance at $120.00. Several days ago we added a breakout trigger to buy calls at $120.25. That trigger was hit this morning. Our stop loss is at $117.45. Our first target would be $124.50. Our second target will be $129.00.

NOTE: I would be a little careful here. IBM failed to hold the breakout so the move looks like a failed rally, which is short-term bearish. Wait for a new move over today's high or a close over $120.00 before launching new call positions.

Chart:

Picked on   August 24 at $120.25 
Change since picked:      - 0.93
Earnings Date           10/08/09 (unconfirmed)
Average Daily Volume =       7.9 million  
Listed on August 08, 2009         


IDEXX Labs - IDXX - close: 50.85 change: +0.12 stop: varies

IDXX spent the session trading sideways in a relatively narrow range. There is no change from my weekend update. We have two different entry points.

Our aggressive entry point is at $51.75. We want to open very small call option positions (1/2 to 1/4 normal size) with a stop loss at $49.75. Our first target is $54.90.

Our buy-the-dip entry point is at $47.50 with a stop loss at $44.95.

Picked on     July xx at $ xx.xx <-- TRIGGERs @ 47.50 or 51.75
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: 28.18 change: -0.45 stop: varies

This is the third time in about four weeks that the rally has reversed near resistance at $29.00. Odds just jumped that LM will dip and hit our trigger. The plan is to open small call option positions (1/2 to 1/4 our normal size) on a dip at $26.60 with a stop loss at $24.95.

We also have a more aggressive entry point to buy a breakout with a trigger at $29.50 and a stop at $26.40. Again, we want to trade small. FYI: The P&F chart is bullish with a $39 target.

Picked on     July xx at $ xx.xx <-- TRIGGER 26.60 & 29.50
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: 78.04 change: +3.17 stop: 72.75 *new*

Over the weekend we added an aggressive breakout-trigger to buy calls at $75.75. That trigger was hit today. The stock was one of the market's best performers with a 4.2% rally. I could not find any specific news to account for the rally and the sharp move higher looks like a short squeeze. The most recent data listed short interest at more than 5% of the float. Volume was strong on the move. Right now our only target to take profits is at $79.90.

Chart:

Picked on   August 24 at $ 75.75 *triggered   
Change since picked:      + 2.29
Earnings Date           07/27/09 (confirmed)
Average Daily Volume =       1.5 million  
Listed on August 01, 2009         


Mettler Toledo - MTD - close: 87.38 change: -0.14 stop: 83.95

MTD spent most of its day in a 90-cent range hovering on either side of $87.50. We're waiting to buy calls on a dip into the $86.50-85.00 zone. If triggered our first target is $93.50. Our second target is $99.00. I am labeling this an aggressive play because volume is pretty light for this stock.

Picked on   August xx at $ xx.xx <-- TRIGGER @ 86.50
Change since picked:      + 0.00
Earnings Date           11/05/09 (unconfirmed)
Average Daily Volume =       234 thousand 
Listed on August 22, 2009         


State Street (Bank) STT - close: 53.30 change: -0.22 stop: 48.90

The banks started strong this morning and then faded. STT struggled under $55.00 again. That's okay. We're looking for a dip. Our plan is to buy calls on a dip at $52.50. Actually we can use the $52.50-50.00 zone as an entry point. Our first target is $55.00. Our second target is $59.50. Currently the Point & Figure chart is bullish with a $62 target.

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         


U.S. Oil Fund - USO - close: 38.30 change: +0.07 stop: 34.15

Crude oil rallied strongly again this morning but then it drifted lower. I'm suggesting readers be patient here for their entry point. The plan is to buy calls on the USO at $36.00. If triggered at $36.00 our first target to take profits is $39.75.

Picked on   August xx at $ xx.xx <-- TRIGGER @ 36.00 
Change since picked:      + 0.00
Earnings Date           00/00/00
Average Daily Volume =      11.5 million  
Listed on August 15, 2009         


PUT Play Updates

First Solar - FSLR - close: 124.08 chg: +2.54 stop: 141.50

Monday wasn't so bad for the bears in FSLR. The stock shot higher at the open with a nice oversold bounce. Shares were extremely oversold and definitely due for a rebound. Yet as the market began to fade this afternoon so did FSLR. I am not suggesting new bearish positions at this time. FSLR has already hit our first target at $122.50. Our second and final target is $111.00.

Picked on   August 17 at $135.88 *triggered/gap down entry
Change since picked:      -11.80
                               /1st target hit @ 122.50 (-9.8%)
Earnings Date           11/03/09 (unconfirmed)
Average Daily Volume =       3.5 million  
Listed on August 15, 2009         


Marvel Entertainment - MVL - close: 38.27 change: -0.18 stop: 39.05

MVL rose to $38.75 and reversed. I would look for a new drop under $38.00 before launching new put plays. Our target is $34.10.

Picked on   August 17 at $ 37.90 *triggered         
Change since picked:      + 0.37
Earnings Date           11/04/09 (unconfirmed)
Average Daily Volume =       710 thousand 
Listed on August 10, 2009         


Shanda Interactive - SNDA - close: 48.75 chg: +0.17 stop: 50.75

SNDA is normally a volatile stock. Today's narrow, sideways action is pretty unusual. It suggests indecision by traders. They're waiting for something. I would hesitate to open new bearish positions with the U.S. markets breaking out higher. More conservative traders may want to ratchet down their stops closer to the $50.00 level. 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:      + 0.65
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.)

Schlumberger - SLB - close: 57.34 change: +0.78 stop: n/a

SLB rallied again with the strength in oil this morning but gave up a good chunk of its gains. I am not suggesting new positions at this time.

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:      + 5.34
Earnings Date           10/15/09 (unconfirmed)
Average Daily Volume =       9.2 million  
Listed on August 15, 2009         


CLOSED BEARISH PLAYS

Intl.Business Machines - IBM - cls: 119.32 change: -0.58 stop: 120.10

IBM traded sideways for about 25 minutes this morning and then without warning the stock shot higher. IBM broke through resistance at $120.00. Shares hit our stop loss for the put play at $120.10 and then hit our trigger to buy calls at $120.25.

Chart:

Picked on   August 08 at $118.17 /gap down entry
                               /originally listed at $119.33
Change since picked:      + 1.93<-- stopped @ 120.10 (+1.6%)
Earnings Date           10/08/09 (unconfirmed)
Average Daily Volume =       7.9 million  
Listed on August 08, 2009