Option Investor
Newsletter

Daily Newsletter, Monday, 10/19/2009

Table of Contents

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

Market Wrap

Earnings Reports Continue To Buoy Stocks

by Todd Shriber

Click here to email Todd Shriber
Monday's trade certainly provided an excellent start to the week as all three major indexes reached one-year highs as better-than-expected earnings reports continued to provide the tonic investors needed to bid stocks higher. In a familiar refrain from what I mentioned last Monday, when the S&P 500 made its way to a one-year high, the dollar fell today and commodity prices rose, a combination that served to boost equities as well.

The S&P 500 touched the 1100 mark before peeling back a tad to close at 1097.91. The Dow Jones Industrial Average was working on a triple-digit performance for much of the afternoon before closing up 96.28 points, or 1%, to 10,092.19. The Nasdaq added nearly 20 points to finish the day at 2176.32, though that number is likely to open higher on Tuesday (more on that later).

Stats Table

It would appear that the most recent spate of earnings reports has been good enough to keep the bulls in charge and has more than a few market observers expecting stocks to continue to move higher for the rest of 2009. Forty one S&P 500 members have reported earnings since October 7th and 34 of them have delivered what would be considered ''better-than-expected'' results. And with earnings being the primary driver of stock returns, that makes this week pivotal with 130 S&P 500 companies reporting.

The growth estimates for the S&P 500 in 2009 are still meager, but the bright side of that equation is that it is not all that difficult for good news to be manufactured. According to Bloomberg data, profits at S&P 500 companies have fallen for nine consecutive quarters, but a rebound of 65% is forecast for the fourth quarter.

S&P 500 Growth Estimates

In terms of noteworthy performers during Monday's trade, a couple of consumer discretionary names helped lead the S&P 500, and that may help fuel speculation that the economy is indeed improving. Nordstrom (JWN), the operator of ritzy department stores, saw its price target boosted to $40 from $25 at Barclays. Barclays noted Nordstrom's earnings will improved for the rest of this year as sales recover and inventories remain low. Nordstrom shares closed up $1.43, or 4.15%, to $35.85 after touching a new 52-week high of $36.52 earlier in the day.

Believe it or not, the publishing sector has been pretty hot, and while newspaper circulation and ad revenues remain bad (there is really no other way of describing it), publishing stocks have certainly benefited from the market rally. One of those names is Gannett (GCI), the publisher of USA Today. Gannett, already up more than 50% year-to-date, fit the ''better-than-expected'' bill today. It is a testament to what an earnings surprise is these days when a stock rises more than 8% after the company said profits fell 53% and sales slid 18%.

Gannett, the largest U.S. newspaper publisher, actually missed analysts' profit and sales targets, but the stock touched a new 52-week high apparently on the sentiment that Gannett's lethargic recovery will at least mirror that of the economy at large and that is better than lagging a recovery that is forecast to be fairly anemic.

Give the pressure facing Gannett and its rivals, the chart below illustrates a run for the shares that can only be classified as staggering.

Gannett Chart

Financials in the S&P 500 rose 0.5% as a group, led by gains in Dow component American Express (AXP) and Goldman Sachs (GS). The black mark in the group belonged to regional banking giant BB&T (BBT), which is actually the eighth-largest U.S. bank. BB&T certainly is not afforded the bellwether status in the financial sector that Goldman, J.P. Morgan Chase (JPM) and Bank of America (BAC) receive, but if you watch regional banks, BB&T is a bellwether for that particular subsector.

For months, if not longer, the Street has chattered about the dangers commercial real estate exposure at regional banks like BB&T. Operating primarily in the Southeast, BB&T does have some significant commercial real estate exposure. Considered one of the safer names among the financials, BB&T's third-quarter profit tumbled by 57% as credit losses continued to mount. The company said those losses are nearing a peak, but that peak may still be two or three quarters away.

BB&T had a third-quarter loss provision of $709 million and added $263 million to its loss reserves during the quarter. The regional banking earnings docket is full this week with Comerica (CMA) and M&T Bank (MTB) reporting tomorrow and further glum news about non-performing loans, particularly those of the commercial real estate varietal, will likely hamper the performance of these names going forward.

Commercial Real Estate Woes

As I like to say, that is a good segue because there are more than a few noteworthy reports out tomorrow, but I shall start with a pair that reported after the close today that will move technology issues on Tuesday. I will start with the ''minor'' one first. Texas Instruments (TXN), the largest maker of chips for mobile phones, posted third-quarter profits of $538 million, or 42 cents a share, beating the average analyst estimate of 40 cents a share. Better yet if you are a bullish on Texas Instruments, the company had sales of $2.88 billion and that beat analysts' average expectation of $2.82 billion.

The company joined semiconductor giant Intel (INTC) in announcing some bullish fourth quarter guidance. TI said it will earn 42 cents to 50 cents a share on sales of $2.78 billion to $3.02 billion in the fourth quarter. Analysts had been expecting sales of around $2.79 billion. TI also recently raised its dividend, so maybe the recovery in chip demand is legitimate.

Alright, the TI news is all well and fine, but the eyes of the technology world were on Apple (AAPL) after the close today. Apple did what Apple normally does and that is crush Wall Street estimates. Net income rose to $1.67 billion, or $1.82 a share, from $1.26 billion, or $1.14 a share a year earlier. Sales surged to $9.87 billion from $7.9 billion last year. Analysts had forecast profit of $1.42 a share on sales of $9.2 billion, so I do not think I am going out on a limb when I say the Nasdaq will open higher on Tuesday and that Apple is likely open around $200. Apple shares closed up $1.81 to $189.86 today. In after hours trading, the shares were up $12.29 to $201.97

Things were so good at Apple during the third quarter that is actually hard to pinpoint a catalyst. Mac sales were up as Apple shipped 2.6 million during the third quarter, a number that would make any PC maker green with envy. Not surprisingly, the iPhone was huge for Apple. The company sold 5.2 million iPhones during the third quarter compared to 720,000 a year earlier. If you want to nitpick, iPod sales slid by 7% and that means ''only'' 10.2 million of the ubiquitous music-playing devices were sold in the most recent quarter.

Apple is one of the few stocks for which enough superlatives probably do not exist. The iPhone is one thing, but the seemingly unending stream of revenue from iPhone apps sales (1.5 billion apps were downloaded in the third quarter) is simply a boon for Apple's shares.

Apple Unit Sales

At this point, the biggest problem Apple may be facing is meeting or beating investors' expectations. The stock has already doubled this year. Combine that robust performance with the most recent quarter's sterling results and Steve Jobs & Co. may need to download the ''management of expectations'' app. Apple is projecting earnings for the December quarter of $1.70 a share, but analysts have that number pegged at $1.91.

It should be fairly to easy to figure out if Apple is going to deliver another upside earnings surprise and you can even do the research yourself. With the holiday shopping season practically upon us, just take a look at how many of the folks you are shopping for are asking for iPods and iPhones. Then when you head to the mall, take a quick look at the traffic at the Apple store. If Santa delivers a lot of iPods and iPhones, Apple will likely deliver another strong quarter.

Apple Chart

Tuesday will also be a big day on the Dow earnings front with five members of the venerable index reporting third-quarter earnings. Pharmaceuticals giant Pfizer (PFE) is expected to post earnings of 48 cents a share and it will be interesting to see what Pfizer's free cash position is because there has been some talk that the company could raise its previously slashed dividend. Coca-Cola (KO) chimes in as well and analysts are calling for 82 cents a share.

Chemicals giant DuPont (DD) joins the group and the consensus estimate if for 33 cents a share. DuPont is another dividend payer worth watching because the company has shown a firm commitment to its payout despite a payout ratio that rests in a dangerous neighborhood at 231%. Given that controlling costs is such a big part of the chemicals business, DuPont may be able to skate by telling investors they met profit targets by employing costs-cuts, but the Street will also be wanting to see some improved demand for DuPont's products from the manufacturing sector.

United Technologies (UTX) is another Dow name stepping into the earnings confessional tomorrow and the expectation there is for a profit of $1.12 a share. All of those Dow reports aside, the one that the market is likely to focus on the most is that of Caterpillar (CAT), the world's largest maker of construction equipment.

Caterpillar shares were up more than 6% on Monday and touched a new 52-week high, perhaps indicating investors are poised to hear some bullish news from the company before the bell tomorrow. Caterpillar already juiced expectations earlier this month when it said it would raise prices for most of its equipment starting early next year.

The average analyst estimate is seven cents a share on sales of $7.49 billion. Investors will likely demand more than a beat that is attributable to cost cuts, but a lot of the near-term performance will rest with any 2010 guidance Caterpillar delivers, particularly concerning when its machinery unit will return to profitability. That is the Caterpillar unit that makes mining, forestry and construction equipment.

Of course, some bullish news about sales in emerging markets (read: China) would be a positive catalyst for a stock that is already up 30% year-to-date. Any bullish hints about China and 2010 could spark Caterpillar shares even higher on Tuesday.

Caterpillar Chart

Looking at the charts, the Dow has broken through some uptrend resistance and as I outlined earlier, there is plenty of ammunition to help the index make its way higher tomorrow. The Dow did trade as high 10117.96 on Monday before settling at 10092.19. There is some room to run to the next resistance point, which is likely 10318.50, but with five member companies reporting earnings tomorrow, a solid flow of good news and corresponding strong volume could lift the Dow to a minor resistance point at 10200.

If most of those earnings reports fail to inspire and the Dow starts to make it way downward, a couple of closes below 10000 could have investors worried about support at 9850.

Dow Chart

The S&P 500 finally traversed 1100 today, albeit barely, and failed to close there so that still remains the primary resistance point the index needs to contend with. As is the case with the Dow, the catalysts exist for the S&P 500 to finally cross 1100 and stay there as early as tomorrow. Just above 1100 looms a resistance point at the 50% Fibonacci retracement line and the S&P 500 currently borders on overbought when looking at the RSI, but that has been a familiar refrain that has been ignored.

A breakdown would take the S&P 500 to support at 1050 and any further downside could bring the 975-985 range into play.

S&P 500 Chart

The Nasdaq story on Tuesday is going to be penned by Apple and whether Apple on its own can lift the Nasdaq to 2200 on its own remains to be seen. The Nasdaq has cleared resistance in the 2167 area, but there is likely to be a fight at 2200, a level the Nasdaq has not seen in more than a year. If 2150 fails to hold as support, a breakdown to 2063 could be in the offing.

Nasdaq Chart

Tomorrow should be a telling day for the near-term performance of stocks as the Nasdaq absorbs Apple's good news and the Dow has the potential for a triple-digit day in either direction. Beyond those catalysts, there are several marquee financials reporting including Bank of New York Mellon (BK) and State Street (STT) those names will have their say in the S&P 500's daily result. With more than 75% of the companies in the S&P 500 beating estimates, it is hard to bet on a down day tomorrow.


New Option Plays

Overweight

by James Brown

Click here to email James Brown

Editor's Note:

The market continues to show strength and managed to hit new highs for the year. However, the S&P 500 was unable to close above the 1100 level, which is currently overhead, round-number resistance. The small cap Russell 2000 and the Transportation index are both still under resistance and until these last two breakout they're facing bearish double tops.

Apple Inc.'s (AAPL) earnings tonight were very strong and TXN also delivered better than expected results. Both stocks were up strongly in after hours. This could carry over tomorrow morning and lift the market but I would remain cautious. Even if the S&P 500 closes over 1100 the 1120 level is the 50% retracement of the bear market decline and for many investors it's their target to lock in profits (a.k.a. sell).

My bias is bullish but I hesitate to add more bullish plays to a newsletter that is already overweight with bullish candidates.



In Play Updates and Reviews

New Targets & Stops

by James Brown

Click here to email James Brown

We had a couple of targets hit today. I'm updating several new stop losses and a few upside targets.


CALL Play Updates

Amazon.com - AMZN - close: 94.68 change: -0.64 stop: 92.75

Bulls should be worried. AMZN did not participate in the market's rally today. Shares edged higher at the open but spent the session trading lower. Are investors starting to worry about a price war? Over the weekend I mentioned a price war on select new books between Wal-mart and AMZN with both companies dropping the price to $9.00. Now Target (TGT) is getting in on the action with an announcement today that TGT will sell certain hardcovers for $8.99. I think I'll be buying a few books this holiday season!

The much better than expected AAPL earnings news could bleed over into stocks like AMZN tomorrow. I am suggesting that we exit our AMZN call play tomorrow (Tuesday) at the closing bell. More aggressive traders may want to stick with it.

Picked on   October 08 at $ 95.05
Change since picked:       - 0.37
Earnings Date            10/22/09 (confirmed)
Average Daily Volume =        6.2 million  
Listed on   October 07, 2009         


Apollo Group - APOL - close: 73.91 change: -0.07 stop: 71.90

APOL did not participate in the market's strength today either. I would turn more defensive on this stock. More conservative traders may want to up their stops or start scaling out of positions.

Our first target is $79.90. This should be a short-term play as we plan to exit ahead of the October 27th earnings report. FYI: The Point & Figure chart is bullish with a $95 target.

Picked on   October 14 at $ 75.25
Change since picked:       - 1.34
Earnings Date            10/27/09 (unconfirmed)
Average Daily Volume =        2.6 million  
Listed on   October 13, 2009         


AvalonBay - AVB - close: 74.28 change: +2.23 stop: 69.95 *new*

AVB erased most of Friday's losses with a 3.0% rally on Monday. Shares challenge resistance at $75.00 again but failed to breakout. The $72.00 level has become new short-term support. More conservative traders may want to raise theirs stop near the $72 mark. I'm raising our stop to $69.95.

Our first target is $77.75. More aggressive traders could aim higher but we don't want to hold over the early November earnings report.

Picked on   October 08 at $ 72.60
Change since picked:       + 1.68
Earnings Date            11/04/09 (unconfirmed)
Average Daily Volume =        1.8 million  
Listed on   October 07, 2009         


Core Labs - CLB - close: 109.04 change: +1.27 stop: 105.90 *new*

Target achieved. Strength in oil continues to fuel a rally in the oil service stocks. CLB hit $110.34 today. Our first target to take profits was $109.90. I am raising our stop loss to $105.90. The plan is to exit at the close on Wednesday to avoid holding over earnings. Our second target is $114.50.

Chart:

Entered on  October 08 at $105.25
Change since picked:       + 3.79
                             /1st target hit @ 109.90 (+4.4%)
Earnings Date            10/21/09 (confirmed)
Average Daily Volume =        175 thousand 
Listed on September 23, 2009         


Consol Energy - CNX - close: 51.08 change: +1.43 stop: 47.49 *new*

CNX traded to new 2009 highs near $52.00 today. The stock closed with a 2.8% gain. Please note our new stop at $47.49 and our second target has been changed to $54.00.

More conservative traders may want to exit completely right now. We only have two days left for CNX. The company reports earnings on October 22nd before the opening bell. That means we need to exit on Wednesday at the closing bell.

CNX has already hit our first target at $48.50. Our second and final target is $54.00.

Picked on September 25 at $ 43.77 /gap down entry
Change since picked:       + 7.31
                                /1st target hit @ 48.50 (+10.8%)
Earnings Date            10/22/09 (confirmed)
Average Daily Volume =        3.0 million  
Listed on September 19, 2009         


Dril-Quip, Inc. - DRQ - close: 55.12 change: +0.65 stop: 49.45

DRQ set a new closing high with today's 1.1% gain. The stock is short-term overbought and I'm not suggesting new positions at this time.

DRQ has already hit our first target at $53.00. I am adjusting our second target down to $57.00. The Point & Figure chart is bullish with a $65.00 target.

Picked on September 28 at $ 48.50
Change since picked:       + 6.62
                              /1st target hit @ 53.00 (+9.2%)
Earnings Date            11/10/09 (unconfirmed)
Average Daily Volume =        282 thousand 
Listed on September 26, 2009         


EOG Resources - EOG - close: 94.35 change: +1.54 stop: 87.40 *new*

I would strongly consider taking profits again right here! EOG rallied to $94.53 this afternoon. Our second target is $94.75. I am raising our stop loss to $87.40. I'm not suggesting new positions at this time.

EOG has exceeded our first target at $89.90. Our second target is $94.75. We actually have a third target a $99.50 but that might be too optimistic given our time frame. We do not want to hold over the early November earnings report.

Picked on   October 07 at $ 85.24 /gap higher entry
                               /originally listed at $84.71
Change since picked:       + 9.11
                              /1st target hit @ 89.90 (+5.4%)
Earnings Date            11/03/09 (unconfirmed)
Average Daily Volume =        2.9 million  
Listed on   October 07, 2009         


Express Scripts - ESRX - close: 82.28 change: +0.93 stop: 77.75

ESRX continues to bounce from $80 and added 1.1%. Our second target is $84.95. We plan to exit ahead of the October 28th earnings report.

Picked on   October 06 at $ 77.42 /gap down entry
                              /originally listed at $78.04
Change since picked:       + 4.86
                             /1st target hit @ 82.50 (+6.6%)
Earnings Date            10/28/09 (confirmed)
Average Daily Volume =        2.1 million  
Listed on   October 06, 2009         


Flowserve - FLS - close: 106.78 change: +1.77 stop: 101.90 *new*

FLS rallied to new highs for the year with a 1.6% gain. I am raising our stop loss to $101.90. Our first target is $109.75.

We will plan to exit ahead of the late October earnings report.

Picked on   October 12 at $102.60
Change since picked:       + 4.18
Earnings Date            10/28/09 (unconfirmed)
Average Daily Volume =        1.2 million  
Listed on September 19, 2009         


Gold ETF - GLD - close: 104.23 change: +1.05 stop: 97.40

Another decline for the U.S. dollar lifted gold futures and the GLD gained 1%. If you're looking for new positions consider waiting for a dip near $100, which should offer support. Our plan calls for small positions to limit risk.

Our first target is $109.90. We are still contemplating a second, longer-term target.

Picked on   October 06 at $102.28
Change since picked:       + 1.95
Earnings Date            00/00/00
Average Daily Volume =       14.2 million  
Listed on   October 06, 2009         


Intercontinental Exchange - ICE - close: 106.03 chg: +0.19 stop: 94.90

After Friday's big rally I was expecting a pull back in ICE. Shares just traded sideways given the market's bullishness. I'm sticking to the plan.

Use a trigger at $101.00 to buy calls. We'll use a stop at $94.90. Our first target is $109.75. Our second target is $114.75. More aggressive traders could aim higher but we want to exit ahead of the November 3rd earnings report.

Picked on   October xx at $ xx.xx <-- TRIGGER @ $101.00
Change since picked:       + 0.00
Earnings Date            11/03/09 (confirmed)
Average Daily Volume =        1.3 million  
Listed on   October 17, 2009         


Mobile Telesys - MBT - close: 54.54 change: +1.95 stop: 49.75 *new*

Target achieved. MBT showed relative strength and gained 3.7% on the session. The stock hit $54.61. Our first target to take profits was at $54.50. I am raising our stop loss to $49.75.

Our second target is $59.00. We do not want to hold positions over the early November earnings report.

Chart:

Picked on   October 12 at $ 50.15
Change since picked:       + 4.39
                            /1st target hit @ 54.50 (+8.6%)
Earnings Date            11/05/09 (unconfirmed)
Average Daily Volume =        1.5 million  
Listed on   October 10, 2009         


Martin Marietta - MLM - close: 95.62 change: +2.62 stop: 91.19

Our play on MLM is open. The stock broke out over resistance at $95.00 and hit our trigger to buy calls at $95.15. I would still consider new bullish positions now in the $95.50-95.00 area. Our first target to take profits is at $99.90. More aggressive traders could aim for the September highs.

Chart:

Picked on   October 19 at $ 95.15
Change since picked:       + 0.47
Earnings Date            11/06/09 (unconfirmed)
Average Daily Volume =        418 thousand 
Listed on   October 15, 2009         


Transocean Ltd. - RIG - close: 92.70 change: +1.62 stop: 86.85

The strength in oil services allowed RIG to set a new closing high for the year. Our target is $99.50.

Picked on   October 15 at $ 90.94 /gap down entry
                             /originally listed at $91.48
Change since picked:       + 1.76
Earnings Date            11/04/09 (confirmed)
Average Daily Volume =        4.1 million  
Listed on   October 15, 2009         


Waters Corp. - WAT - close: 58.82 change: +1.35 stop: 54.90

WAT rallied to $59.00 intraday and closed with a 2.3% gain. Shares are within striking distance of our target at $59.50. More aggressive traders may want to aim higher!

I'm not suggesting new positions at this time. The plan was to use small position sizes (1/2 to 1/4 our normal size) to minimize risk. We do not want to hold over the October 27th earnings report.

Picked on September 28 at $ 55.43 *new entry
Change since picked:       + 3.39
Earnings Date            10/27/09 (confirmed)
Average Daily Volume =        809 thousand 
Listed on September 12, 2009         


Whirlpool Corp. - WHR - close: 73.76 change: +1.03 stop: 68.45

WHR Is still struggling with resistance near $74.00 but shares did set a new closing high for the year. The stock also hit our first target at $73.90 this afternoon.

We are down to our last three days. WHR reports earnings on Friday morning. The plan is to exit on Thursday at the closing bell (Oct. 22nd). More conservative traders may want to take profits now.

Our second target remains at $78.50.

Chart:

Picked on   October 10 at $ 70.50
Change since picked:       + 3.26
                               /1st target hit @ 73.90 (+4.8%)
Earnings Date            10/23/09 (confirmed)
Average Daily Volume =        1.5 million  
Listed on   October 10, 2009         


PUT Play Updates

BIOGEN IDEC - BIIB - close: 49.39 change: +0.19 stop: 52.15

BIIB produced another failed rally at the $50.00 level today. Tomorrow should be a volatile session. The company reports earnings before the opening bell. Wall Street is looking for a profit of $1.04 a share. This is a high-risk, aggressive play because we're choosing to hold over the report.

Our first target to take profits is at $44.50. Our second target is $40.50. FYI: The P&F chart is bearish with a $36 target.

Picked on   October 03 at $ 48.89
Change since picked:       + 0.50
Earnings Date            10/20/09 (confirmed)
Average Daily Volume =        2.6 million  
Listed on   October 03, 2009         


FUQI Intl. - FUQI - close: 27.38 change: +2.08 stop: 28.75

I suggested over the weekend that a better entry point would be a bounce back toward $27.00 and FUQI obliged us today. Shares gapped open at $26.05 and soared 8.2%. The rally was exacerbated by some positive analyst comments for the company's upcoming earnings report. The stock has resistance in the $28.00-28.50 zone but if the stock market continues to rally this resistance may not hold. Readers may want to wait for the rebound to roll over first before initiating new positions.

This is an aggressive trade and the plan was to use small positions (1/2 to 1/4 our normal trade size). Our first target is $22.00. Our second target is $20.25. The P&F chart is currently bearish with an $18.00 target. We'll plan to exit ahead of the mid November earnings report.

Picked on   October 17 at $ 26.05 /gap higher entry
                          /originally listed at $25.30
Change since picked:       + 1.23
Earnings Date            11/12/09 (unconfirmed)
Average Daily Volume =        1.3 million  
Listed on   October 17, 2009         


Netease.com - NTES - close: 39.36 change: +0.89 stop: 41.65

Both the U.S. and Chinese markets were in rally mode so it's not a surprise to see NTES bounce a little. A failed rally near $40.00 can be used as a new bearish entry point.

Our first target is $35.25. Our second target is $33.00, just above the simple 200-dma. We want to exit ahead of the mid November earnings report. FYI: The P&F chart is bearish with a $25 target.

Picked on   October 17 at $ 38.47
Change since picked:       + 0.89
Earnings Date            11/12/09 (unconfirmed)
Average Daily Volume =        2.7 million  
Listed on   October 17, 2009         


CLOSED BULLISH PLAYS

Caterpillar - CAT - close: 57.85 change: +3.28 stop: 51.90

Monday was the last day for our CAT call play and what an exciting finish! CAT was one of the best performers on the DJIA with a 6% rally. Our plan called for exiting positions at the closing bell tonight. Earnings are out tomorrow morning.

Chart:

Picked on   October 01 at $ 50.00
Change since picked:       + 7.85 <- early exit @ 57.85 (+15.7%)
Earnings Date            10/20/09 (confirmed)
Average Daily Volume =         10 million  
Listed on September 19, 2009         


Precision Cast Parts - PCP - cls: 104.72 change: +2.21 stop: 99.90

We are out of time. The plan was to exit any positions at the closing bell tonight. PCP reports earnings tomorrow morning. Shares of PCP were nice enough to rally for us and breakout over resistance near $104 again.

Chart:

Picked on   October 12 at $104.05
Change since picked:       + 0.68 <-- earl exit ahead of earnings
Earnings Date            10/20/09 (confirmed)
Average Daily Volume =        1.0 million  
Listed on   October 10, 2009