Option Investor
Newsletter

Daily Newsletter, Wednesday, 10/28/2009

Table of Contents

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

Market Wrap

Disappointing Reports Slam the Market

by Judy Alster

Click here to email Judy Alster
Put down that knife; I'm only the messenger. If you must beef at someone, try the Commerce Department who was up at dawn, busily releasing the Durable Goods Orders report for September. It wasn't horrifying but it wasn't great either, and it came in enough under expectations to help the market continue its downward move. Add a very disappointing new home sales report and a downward revision of GDP estimates by at least three investment firms, and whaddaya got:

MARKET INDEX WRAPUP for WEDNESDAY, OCT. 28:

Starting off with durable goods, we saw stronger orders for capital goods, defense goods and machinery in September for a $1.6 billion or 1% increase in orders, the second rise in three months. But excluding a 1.1% rise for transportation equipment, durable orders rose 0.9%; without defense, orders rose 0.5%. Investors weren't impressed, evidently, and neither were economists, who were expecting a 1.5% rise.

DOW JONES INDUSTRIAL AVERAGE:

Possibly they were glum because the August numbers were revised down from minus-2.4% to minus-2.6%, so the rise is smaller than it seems. And only two categories accounted for just about the entire $1.61 billion increase in orders: machinery with a gain of $1.7 billion (+7.9%) and defense aircraft with $618 million. (+12.5%).

S&P500:

Between this and other bleak news on Wednesday, it was almost a foregone conclusion that the major indexes would steadily make lower highs and lower lows all day, and they did. Major market indexes fell by the largest amount in about a month. The Dow Jones industrial average lost 119 points, or 1.2 percent, its third straight triple-digit drop. The Nasdaq composite index fell 2.7% while the S&P 500 fell 20.78 points or 1.95%. Decliners madly outpaced advancers by a factor of 8.7 on the NYSE and nearly six on the Nasdaq.

NASDAQ COMPOSITE:

Stocks have been mostly falling since hitting their highest levels in a year at the start of last week. The slide of the past week isn't surprising given the climb of the last eight months and the mixed economic readings. Corporate profits have been improving but investors are still waiting for that rebound in sales.

Most durable goods orders were off for September, including civilian aircraft down 2.1% — Boeing saw orders drop sharply in September from the month before — motor vehicles, computers & electronics and electrical equipment, although orders for primary metals were up slightly. Even looking at the two positive categories, machinery orders year-to-date are down a steep 29% year-over-year and as for defense aircraft, well, with a war on, how can that miss?

BOEING:

If we needed additional proof that consumers are continuing to play Hide the Wallet, new orders for big-ticket items were down 20.4% year over year. This graph from the St. Louis Fed indicates just how much of a manufacturing setback we've seen in this downturn:

DURABLE GOODS ORDERS VS. GDP:

Even after a couple of months of recovery, the dollar value of business is below the lowest point of the 2002 recession, even before you adjust for inflation. Not good. What’s picking up the some of the slack is the production of defense products, which is up 32% from July 2007. We need guns and butter. Swords and plowshares. Defense is only about 6% of durable goods, and it’s never a good portent for it to be the sole area of strength. It wasn't total gloom, of course: Machinery orders saw the biggest rise in 18 months. Nondefense capital equipment goods, excluding aircraft, rose 2% after two straight monthly declines, with the new-orders component of the Institute for Supply Management index remaining in positive territory. Industrial production increased 0.7% and manufacturing output 0.9%. Overall, new orders for durable goods are up year over year, although still in double-digit negative territory. These core capital goods orders are considered the best gauge of capital spending by businesses, and economists — some economists anyway — insist business spending has turned the corner, bringing the recession to an end. Those economists probably weren't taking calls Wednesday.

But to get back to the slide, the Mortgage Bankers' Association purchase index fell a not-insignificant 5.2% last week while the refinance index dropped a sharp 16.2%, despite rates continuing low with 30-year fixed loans down three basis points to an average 5.04%. The MBA had no comment.

Rubbing salt into the wound, Commerce told us new home sales fell 3.6% last month, surprisingly, for the first time in five months. They were at 402,000, down from 417,000 in August, well below the expected 4440,000 analysts had forecast/hoped for. The decline was due to a 10.6% drop in the West and a 10% drop in the South, the largest recorded since August 2007. Sales were flat I the Northeast and actually up by 34% in the Midwest. Even this report was not without its upside: The median sales price rose 2.5% in September to $204,800 (although somewhat heartening that's still 9.1% lower than the median price a year ago). The seasonally adjusted estimate of the number of new homes for sale at the end of September was 251,000, the lowest since November 1982, not including foreclosures.

NEW HOME SALES:

Home builders fell after the sales data. Hovnanian Enterprises (HOV), Beazer Homes (BZH) and Lennar (LEN) were all down about 7%. Further accentuating the negative, Goldman Sachs said that by its calculations, gross domestic product rose at an annualized rate of 2.7%, not 3% as it said earlier. Morgan Stanley cut its outlook to 3.8% from 3.9%. Bank of America-Merrill Lynch lowered its forecast to 2.3% from 2.5%. Economists in one survey still think GDP expanded at a 3.5% rate in the third quarter, the first growth in a year. The government reports tomorrow. Place your bets at that window right over there.

Auto lender GMAC Financial Services is in talks with the Treasury Department for yet another infusion of taxpayer aid, its third, as it faces a November deadline to raise the $11.5 billion capital cushion mandated by results of the government's "stress test" earlier this year. Of the 19 banks that underwent the government's stress tests, 10 were determined to be undercapitalized and GMAC is the only one of those to not have been able to raise all of its necessary capital from investors. It didn't appear to help the banking sector, which has been taking a severe hit lately. Expect Congress to fork over another $2.8 to $5.6 billion.

SPDR KBE BANKING INDEX ETF:

As if on cue, some earnings reports added to the worries. As one analyst put it, "It seems that unless you have a good report and good guidance and good analysts' expectations before the report, your stock is going to fall." Earnings that more than doubled weren't good enough for analysts, and Goodyear Tire and Rubber's (GT) shares fell $3.28 or 19.6% Wednesday after the tire giant shared its grim outlook for its big North American market. The company reported earnings of $72 million or 30 cents a share, up from $31 million or 13 cents a share in the year-ago period, as it cut costs and added products. Sales, however, fell to $4.39 billion from $5.17 billion on lower industry demand for tires and unfavorable exchange rates; analysts were looking for a profit of 36 cents on sales of $4.32 billion. The company expects to post a fourth-quarter operating loss in North America, its biggest segment by revenue, between $73 million and $123 million: Blame seasonal tire-buying trends and higher raw material costs. Goodyear continued to slash jobs in the quarter, cutting 300 more workers on top of the 5,500 or so in the year's first half. The stock fell $3.28 or 19.6% on almost nine times normal volume.

GOODYEAR TIRE & RUBBER:

Storage- and server-management company Symantec Corp. (SYMC) said Wednesday that its income rose 19% in its second quarter despite a decline in revenue, as the company managed to scale back costs. (That song again. Still . . . . cutting costs and running a lean ship are not to be sneezed at, assuming companies can continue to be cost-conscious after the good times return.) Income was $150 million or 18 cents a share compared with $126 million or 15 cents in the period last year; revenue declined 3% to $1.47 billion, although its consumer segment had a revenue increase of 6%. Symantec's stock is up 20% in the last 52 weeks and has been rising slowly in recent months; it traded near $16.70 after hours.

SYMANTEC CORP>:

It wasn't all bad. Unisys Corp. (UIS) shares surged as the tech-services provider swung to a third-quarter profit that exceeded Wall Street forecasts. The stock gained $4.10 or 17% after the company reported a quarterly profit of $61.1 million or $1.48 a share, compared with a loss of $34.7 million or 96 cents a year ago, even though earnings benefited from a reverse stock split and revenue declined, especially international sales. Government sales picked up, margins improved significantly, and of course there were cost efficiencies.

UNISYS:

Crude futures fell under pressure from unexpected rise in gasoline inventories and a rise in the dollar. The Energy Information Administration reported a build in crude inventories last week, up 0.8 million barrels, coupled with a build in gasoline inventories, up 1.7 million barrels. Gasoline demand was up only 1.9 percent year-over-year vs. the prior week. Although demand plays a smaller role than it used to, oil prices are dropping. Crude oil for December delivery finished down $2.09, or 2.6%, at $77.46 a barrel on the New York Mercantile Exchange; representative oil stocks such as the United States Oil Fund (USO)and the Powershares Oil Fund (DBO) fell along with it. Distillates, down 2.1 million barrels, are now being drawn down as the winter kicks in but distillate inventories are still far above average.

US OIL FUND:

Refineries continue to limit their runs, operating at only 81.8 percent of capacity. I always like to keep an eye on refineries like Valero (VLO), Calumet (CLMT), and Tesoro (TSO). Although not without volatility and despite thinning margins, their stock has risen over the last four months. Along with exploration and production companies, petroleum refining stocks stand to benefit early and heartily from an economic turnaround (take a look at where they were in 2002) and as I may have mentioned, they pay steady dividends.

TESORO:

Market talk this week that the OPEC cartel may increase production is also limiting the upside in the oil market. Several oil ministers have said in recent days that the Organization of the Petroleum Exporting Countries may raise output. Given what we know about OPEC, it could be just a lot of blahblah, but we'll see. The report lifted the dollar a bit and hurt commodities. Oil could correct further as the dollar firms and traders possibly lose their appetite for risk.

The dollar could strengthen considerably in coming weeks despite the current nonexistent interest rate. Since some investors figure the dollar can't get much lower, and that eventually the Fed will have to raise rates, they're buying calls on it. Lately, call options on a bullish dollar fund have been trading briskly, as have the shares. This is something to watch.

POWERSHARES US DOLLAR FUND:

For the Asia watchers among us, as we go to press Asian stock markets are having an awful start after Wednesday's losses here, with Japan's Nikkei 225 Average is below the 10,000 mark for the first time since Oct. 9.

Thursday look for the Gross Domestic Product report to move the market. In earnings, there's Burger King, AutoNation, Barrick Gold, Colgate-Palmolive, France Telecom, Libbey, McAfee, Office Depot and Office Max, Motorola and Procter & Gamble, among many others as earnings season continues.

Returning Tuesday night from a few days out of town, I discovered there had been a power surge, and it caused computer problems that you don't want to hear about. I apologize for the lateness of this posting.


New Option Plays

Reversal Under Resistance

by James Brown

Click here to email James Brown


NEW DIRECTIONAL PUT PLAYS

Life Tech. - LIFE - close: 46.61 change: -1.39 stop: 50.10

Why We Like It:
Life Technologies Corp. is classified as a biotech company. The stock has been an amazing performer off its late 2008 lows. Now it looks like shares are reversing or seeing a short-term top under resistance at $50.00.

I am suggesting bearish positions now. We're going against the flow with LIFE's long-term up trend so I'm suggesting small positions. The $45.00 level is probably short-term support bolstered by the 100-dma. Plus the $44.00 level should also offer some support. Expect a bounce near these levels. Yet if the S&P 500 continues to retreat I expect LIFE to follow. Stocks tend to go down a lot faster than they go up. Our target to take profits is at $41.00.

Suggested Options:
I am suggesting the November puts. My preferred strike is the $45 strike.

BUY PUT NOV 45.00 IUV-WI open interest=2726 current ask $0.95

Annotated Chart:

Picked on   October 28 at $ 46.61
Change since picked:       - 0.00
Earnings Date            10/27/09 (confirmed)
Average Daily Volume =        2.1 million  
Listed on   October 28, 2009         



In Play Updates and Reviews

Target Achieved

by James Brown

Click here to email James Brown

We had multiple trades hit our targets with today's market decline.


CALL Play Updates

Ultra Oil & Gas ProShares - DIG - close: 34.14 change: -2.29 stop 31.95

Crude oil sold off along with equities on Thursday. The DIG slipped toward support near $34.00 and its exponential 200-dma. This oil ETF hit our trigger to buy calls at $34.20 this afternoon. Our play is open. More conservative traders may want to wait for a bounce first before considering new bullish positions. Our first target is $39.50. Our second target is $43.50. I was suggesting the December calls. My preference was the $35 strike.

FYI: The DIG is an ultra-long ETF so it should have twice the volatility as a normal sector ETF.

Chart:

Picked on   October 28 at $ 34.20
Change since picked:       - 0.06
Earnings Date            00/00/00
Average Daily Volume =        4.3 million  
Listed on   October 17, 2009         


Gold ETF - GLD - close: 100.73 change: -1.12 stop: 97.40

The GLD is still correcting and is getting closer toward what should be support near $100.00. It's up to you, the reader, to decide on buying a dip or waiting for a bounce near the $100 level.

I would only buy January 2010 or longer-dated options as the GLD doesn't move very fast. 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:       - 1.55
Earnings Date            00/00/00
Average Daily Volume =       14.2 million  
Listed on   October 06, 2009         


UltraShort Treasury ETF - TBT - close: 46.03 change: -0.47 stop: 43.90*new*

The TBT is pulled back for a second day. The low was $45.72. Our plan is to fill the second half of our position on a dip at $45.50. Please note that I am raising our risk a little by edging the stop loss down to $43.90 (from 44.40) to give us a little more room.

Our first target is $54.50. Our second target is $58.50. Our time frame is several weeks (possibly year end).

Note: This same trade in reverse is puts on the TLT. The TLT will go down as yields rise.

Picked on   October 26 at $ 47.89 (1/2 position)
Change since picked:       - 1.86
Earnings Date            --/--/--
Average Daily Volume =        6.0 million  
Listed on   October 26, 2009         


Volatility Index - VIX - close 27.91 change: +3.08 stop: 21.90 *new*

Target achieved. As the market continued to breakdown the volatility escalated. The VIX hit 27.94 this afternoon. Our first target to take profits was at 27.25. I am raising our stop to 21.90.

Our second target is $29.25. More aggressive traders may want to aim higher. I consider this an aggressive trade and suggest readers use small positions.

We want to use the December calls. These are European style options and are settled for cash. The December options expire on Wednesday, December 16th, 2009.

Chart:

Picked on   October 24 at $ 23.06 /gap open entry
                            /originally listed at $22.27
Change since picked:       + 4.85
                            / 1st target hit @ 27.25 (+18.1%)
Earnings Date            --/--/--
Average Daily Volume =         -- million  
Listed on   October 24, 2009         


PUT Play Updates

BIOGEN IDEC - BIIB - close: 43.53 change: -1.02 stop: 48.55

BIIB's oversold bounce has reversed and shares are hitting new relative lows. I'm not suggesting new positions at this time. BIIB has already surpassed our first target at $44.50. Our second and final target is $40.50.

Picked on   October 03 at $ 48.89
Change since picked:       - 5.36
                               /1st target hit @ 44.50 (-8.9%)
Earnings Date            10/20/09 (confirmed)
Average Daily Volume =        2.6 million  
Listed on   October 03, 2009         


Bank of Montreal - BMO - close: 46.83 change: -0.54 stop: 51.25

BMO extended its losses to four days in a row. Shares found some support at its rising 100-dma. I wouldn't be surprised to see a little oversold bounce. Look for a bounce or failed rally near $48 or $49 as a new entry point to buy puts. My earlier update suggested we could double down and buy the second half of our position on a failed rally near $50. Our first target is $42.75. Our second target is $40.50.

Picked on   October 27 at $ 47.37
Change since picked:       - 0.54
Earnings Date            11/24/09 (unconfirmed)
Average Daily Volume =        539 thousand 
Listed on   October 27, 2009         


DST Systems - DST - close: 42.30 change: -1.14 stop: 45.25

DST lost 2.6% on the session and managed to close under support at its 100-dma and exponential 200-dma. This is good news for the bears. Our target to exit is $40.25.

Picked on   October 24 at $ 43.73
Change since picked:       - 1.43
Earnings Date            10/21/09 (confirmed)
Average Daily Volume =        462 thousand 
Listed on   October 24, 2009         


iShares Transports - IYT - close: 65.28 chg: -1.29 stop: 70.60 *new*

Target achieved. The transports have extended their losses to four in a row (and five out of the last six days). The IYT almost hit support near $65.00 and its 100-dma. The low today was $65.15. Our first target to take profits was at $65.25. This ETF is short-term oversold and due for a bounce. I'm not suggesting new positions at this time. Please note our new stop at $70.65.

Our second and final target is $62.00.

Chart:

Picked on   October 24 at $ 68.29
Change since picked:       - 3.01
                              /1st target hit @ 65.25 (-4.4%)
Earnings Date            --/--/--
Average Daily Volume =        664 thousand 
Listed on   October 24, 2009         


Netease.com - NTES - close: 36.00 change: +0.29 stop: 40.15

NTES traded sideways following yesterday's decline. I'm not suggesting new positions at these levels. More conservative traders may want to start taking profits now.

Our first target is $35.25. Our second target is $33.00, just above the exponential 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:       - 2.47
Earnings Date            11/12/09 (unconfirmed)
Average Daily Volume =        2.7 million  
Listed on   October 17, 2009         


Research In Motion - RIMM - close: 60.78 change: -2.97 stop: 67.55

Our new put play in RIMM is now open. Shares broke down under their July lows. The stock actually gapped open at $62.93. Our trigger to buy puts was $62.99 so the play was opened this morning. I would not chase it here with potential round-number support at $60.00.

Our first target is $58.55. Our second target is $53.00. Currently the P&F chart is bearish with a $41 target.

Chart:

Picked on   October 28 at $ 62.93 /gap open entry    
Change since picked:       - 2.15
Earnings Date            12/17/09 (unconfirmed)
Average Daily Volume =       17.9 million  
Listed on   October 26, 2009         


CLOSED BULLISH PLAYS

AvalonBay - AVB - close: 69.78 change: -2.96 stop: 71.90

AVB is still trading sideways but ended up losing 0.7% on the session. Tomorrow is our last day and we plan to exit at the closing bell to avoid earnings. Our upside target is $77.00.

Chart:

Picked on   October 08 at $ 72.60
Change since picked:       - 0.70 <-- stopped @ 71.90 (-0.9%)
Earnings Date            10/28/09 (confirmed)
Average Daily Volume =        1.8 million  
Listed on   October 07, 2009         



CLOSED BEARISH PLAYS

FUQI Intl. - FUQI - close: 19.26 change: -2.56 stop: 26.15

Target achieved! I wish all of our plays were this easy. FUQI conveniently broke down under support at $25.00 and immediately plunged more than 20% in two days. The low today was $19.14. Our target to exit was $20.50.

Chart:

Picked on   October 27 at $ 24.75
Change since picked:       - 4.25 <-- Target hit @ 20.50 (-17.1%)
Earnings Date            11/12/09 (unconfirmed)
Average Daily Volume =        1.3 million  
Listed on   October 26, 2009         


Psychiatric Solutions - PSYS - close: 18.67 change: -5.47 stop: 28.05

Look out below! PSYS reported earnings last night. Not only did the company miss lowered estimates but management warned again and lowered their guidance. The stock gapped open lower at $19.47 and hit $17.63 at its low today.

We had two targets to take profits. Our first target was $22.55. Our second target was $20.25. With PSYS opening at $19.47 this morning we would have exited 100% at the open.

FYI: My suggested option, the November 22.50 put, opened at $3.20 and closed at $4.80 today.

Chart:

Picked on   October 24 at $ 24.97, exit @ 19.47
Change since picked:       - 5.50 <-- gap down exit (-22.0%)
Earnings Date            10/27/09 (confirmed)
Average Daily Volume =        662 thousand 
Listed on   October 24, 2009