Option Investor
Newsletter

Daily Newsletter, Monday, 11/9/2009

Table of Contents

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

Market Wrap

Bulls Stampede On Monday, Led By Blue Chips

by Todd Shriber

Click here to email Todd Shriber
Equity bulls reasserted themselves with some authority on Monday as the Dow Jones Industrial Average rallied to a 13-month high. It was another triple-digit day for the Dow, the second such gain in the last four trading sessions. The S&P 500 added 2.22%, but continued to trade below the all-important 1100 level. Same goes for the Nasdaq. The tech-laden index made its way higher by nearly 2%, but failed to traverse a key resistance level at 2200, closing day at 2154.

Stats Table

As was the case last Thursday when I previously visited with you, there were a host of catalysts today to attribute the rally to. A weak dollar, some mergers and acquisitions news, the G-20 agreeing to maintain economic stimulus efforts and other news combined to give the bulls the greenlight to run stocks higher. Nine New York Stock Exchange stocks rose for each one that declined. Of course, a weak dollar means good news in the commodities pits. Gold continued to benefit from the weak greenback, doing what the S&P 500 could not do, that is breaking above 1100. Gold for November delivery closed at a record high of $1103.60 an ounce and there really does not seem to be any stopping the yellow metal.

If futures trading is not your bag, keep an eye on the SPDR Gold Shares (GLD) ETF, which holds physical gold. GLD holds so much physical gold that is the sixth-largest owner of gold in the world, so yes, this ETF moves when the underlying commodity moves, as the chart below attests to. As you can see, volume on GLD's up days usually far outpaces volume on the down days and GLD was up again today on 40% higher than average volume.

GLD Chart

As I said, there probably is not much to get in the way of gold's ascent higher. The primary stumbling block would be a stronger dollar, but in all likelihood, the dollar is not going to find enough strength in to knock gold off its course. It is hard to argue with the long-term dollar trend, which is down. Just take a look at the U.S. Dollar Index. The dollar index measures the dollar's strength against six major currencies, the Euro, the Japanese Yen, the British Pound, the Canadian Dollar, the Swiss Franc and the Swedish Krona.

The dollar index was established in 1973 at a trade weighted average of 100 or $100. On Monday, the dollar index closed just above 75 and if you interpret that as the dollar shedding 25% of its value since 1973, you are probably correct.

Dollar Index Chart

When it comes to metals, copper has been no slouch and one might argue the red metal is more indicative of economic health because it has far more industrial uses than does gold. Copper continued its bullish ways on Monday as the December contract inched closer to $3. That translates to good news for a stock that I frequently mention here: Freeport McMoRan Copper & Gold (FCX). Freeport added nearly 5% on the day and is now within earshot of its October peak of $84.28.

But I am not going to include a chart of Freeport today. I thought might be a good idea to look at another copper stock and that is Southern Copper (PCU). Obviously a rival to Freeport, Southern Copper has been making bullish moves of its own and added 3.25% on Monday. Year-to-date, Southern Copper has more than doubled.

PCU Chart

As I mentioned earlier, today's rally was led by the blue chips with 29 of the 30 Dow stocks finishing higher. Kraft (KFT) was the lone laggard, which is not surprising given that the company is engaged in a contentious battle for Cadbury (CBY). General Electric (GE) added 3.4% and Intel (INTC), the world's largest semiconductor maker, tacked on 2.8%. Both names still have a little bit of room to go to get back to their 52-week highs.

And proving that commodities and materials issues are integral to the strength of this rally, another name that I mention here frequently, Caterpillar (CAT), the world's largest maker of mining and construction equipments, rose by more than 4%. Caterpillar closed right at $60 and now resides just $1.28 off its 52-week high.

By now, you might be expecting that commodities issues were the leading industry group today and while that it is a fair guess, it is also incorrect. Financials won that distinction on Monday, gaining 3.6% as a group. Absent significant news, Dow components American Express (AXP) and Bank of America (BAC) both charged higher (no pun intended) by more than 4%.

It is worth noting that American Express, a Warren Buffett favorite, has been on a tear lately, adding 15% in the past three months, more than double the Dow's performance over the same time. American Express made a new 52-week high of $39.16 today before closing at $39.05 while volume was nearly 50% higher than usual.

AXP Chart

Things were so good for financials today that Goldman Sachs (GS) traded higher by $4.79, or 2.79%, on news that it is underwriting a $400 million bond offering backed by an Ohio real estate firm's shopping centers. In Goldman's world $400 million is someone's Christmas bonus (I think I am using some hyperbole there, but not much), so it is a testament to how strong the buyers were on Monday that Goldman would gain nearly $5 on a $400 million underwriting deal.

Google (GOOG) got in on the action as well on news that it will acquire start-up AdMob, a mobile advertising firm, for $750 million stock. Acquirers normally fall on acquisition news, but the Street apparently thinks Google is getting a steal here and sent Google shares higher by $11.41 to close at $562.51. That's just seven cents off the 52-week high set earlier in Monday's session. Perhaps Google is getting AdMob for a song. Assuming Google trades around $560, $750 million requires only 1.33 million Google shares to get the deal done.

There were a couple of earnings reports out after the close that may give the Nasdaq a lift tomorrow. Video game publisher Electronic Arts (ERTS) said it earned six cents a share, excluding items, on sales of $788 million. The company gave a full-year forecast of 70 cents to $1 a share on non-GAAP revenue of $4.2 billion-$4.4 billion. Analysts are expecting earnings of 89 cents on sales of $4.28 billion.

Electronic Arts also said it will cut 1,500 jobs to save $100 million and that it acquired closely held Playfish, a social gaming firm, for $275 million.

Online travel firm Priceline.com (PCLN) delivered a more bullish report after the close. Priceline said its third-quarter profit tripled to $6.42 a share from $1.74 a year earlier as hotel room reservations rose 56%. Revenue soared 30% to $730.7 million. Analysts were expecting earnings of $2.92 a share on sales of $694 million. The icing on the cake may be Priceline's fourth-quarter forecast of $1.52-$1.62 a share, well above Street estimates of $1.49 a share.

Priceline started to pullback in October, but has rebounded and the stock is trading at $185.85 in the after hours session as I write this. That is well above the 52-week high of $182.32 and means there could be a big gap up at the opening of Tuesday's trade.

Priceline Chart

Looking at the charts, yes, it is good news for the bulls that Dow closed above 10000 again and turned in such a strong performance on Monday, but the real story is going to be the S&P 500's ability to break 1100. The index made a high of 1101.36 in October before declining and with Monday's close at 1093, the S&P 500 could break the October high as early as tomorrow.

The issue is not necessarily breaking 1100, it is holding there and then making another move higher. If the S&P 500 can do that, 1150 is a legitimate near-term possibility, while another failure at 1100 could send the index down to support areas at 1075 or 1050.

S&P 500 Chart

The Dow looks slightly more bullish than the S&P 500 and Monday's close of 10226.96 took the blue chip index well above the October high of 10119.47. That means the next significant hurdle for the Dow to clear may be in the 10320 area. The Dow may be far enough above 10000 at this point to consider that level first support.

Dow Chart

Like the S&P 500, the Nasdaq is oh so close to a key resistance level, but I am referring to 2160, not 2200. The 2160 area has been a thorn in the Nasdaq's side for quite a while. Granted, the Nasdaq cleared 2160 in October only to fail at 2190, so the Nasdaq may need to walk to 2160 before it can run to 2200. If 2200 is cleared, 2250 could be the next target. A lack of earnings catalysts could hamper the Nasdaq's ascent in the near-term.

Nasdaq Chart

While earnings season is all but over, there also is not much in the way of negative catalysts, at least scheduled ones, that could knock stocks from their lofty perch. Look at things this way: If Friday's unemployment report was not enough to send the market lower, what is it going to take? There are only 35 trading days left in 2009. Figuring that the week of Thanksgiving will deliver light volume and the week before Christmas will likely show the same (probably the week after, too), it may be the bears that find themselves in even deeper trouble than they are already in.


New Option Plays

Industrial Goods and Real Estate

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Deere & Co - DE - close: 48.48 change: +1.32 stop: 46.85

Why We Like It:
If this market rally has any legs and the S&P 500 breaks out over resistance at 1100 then odds are good DE will break through resistance at $50.00. The stock has been building a long-term base and could see a sustained rally higher. I'm suggesting a trigger to buy calls at $50.25. If triggered our first target is $54.90. Our second target is $59.00. Keep in mind that we'll plan to exit ahead of DE's earnings report later in the month.

Suggested Options:
Trigger to buy calls at $50.25. I'm suggesting the December calls. My preference is the $50 strike.

BUY CALL DEC 50.00 DGV-LJ open interest=7997 current ask $1.87

Annotated Chart:

Picked on  November xx at $ xx.xx <-- TRIGGER @ 50.25
Change since picked:       + 0.00
Earnings Date            11/25/09 (unconfirmed)
Average Daily Volume =        6.2 million  
Listed on  November 09, 2009         


Essex Property - ESS - close: 79.67 change: +2.35 stop: 76.40

Why We Like It:
We keep hearing about the coming disaster in commercial real estate. Yet the chart on ESS doesn't appear to be forecasting a disaster. Shares are bouncing from support near their exponential 200-dma. More aggressive traders may want to jump in now. I want to see more confirmation first. I'm suggesting a trigger to buy calls at $80.65. If triggered our first target is $86.00. Our second target is $92.50.

Suggested Options:
Trigger at $80.65. I'm suggesting the December calls. My preference is for the December 85s.

BUY CALL DEC 85.00 ESS-LQ open interest= 108 current ask $1.90

Annotated Chart:

Picked on  November xx at $ xx.xx <-- TRIGGER @ 80.65
Change since picked:       + 0.00
Earnings Date            02/03/10 (unconfirmed)
Average Daily Volume =        500 thousand 
Listed on  November 09, 2009         



In Play Updates and Reviews

Bulls Stampede Higher

by James Brown

Click here to email James Brown


CALL Play Updates

Arch Cap Group - ACGL - close: 69.73 change: +0.92 stop: 66.90

ACL continued to bounce and posted a 1.3% gain. Shares are nearing the $70.00 level and could see resistance near the 2009 highs in the $70.50-71.00 zone but the trend is up and I'm expecting a bullish breakout higher. Our target is the $74.00 level and our time frame is several weeks.

Picked on  November 07 at $ 68.81
Change since picked:       + 0.92
Earnings Date            10/26/09 (confirmed)
Average Daily Volume =        444 thousand 
Listed on  November 07, 2009         


Canadian Nat. Res. - CNQ - close: 67.99 change: +2.85 stop: $61.95

CNQ was one of the market's better performers today with a 4.3% rally. Unfortunately, shares gapped open higher at $67.74 so they didn't move much after the gap. The drop in the dollar should keep commodity stocks trending higher. I am suggesting readers wait for a dip near $66.00 to launch new positions.

I'm adjusting our target to $74.00.

Chart:

Picked on  November 09 at $ 67.74 *gap open higher entry
                          /original trigger was $66.05
Change since picked:       + 0.25
Earnings Date            03/04/10 (unconfirmed)
Average Daily Volume =        2.8 million  
Listed on  November 07, 2009         


Gold ETF - GLD - close: 108.19 change: +0.76 stop: 99.75

Weakness in the dollar continues to lift gold prices. Gold futures almost hit $1,110.00 an ounce this morning. The GLD spiked to $108.75. I am not suggesting new positions at this time.

We want to take profits at $109.90. If you have the November calls you will want to exit completely. If you own the January calls I'd sell part of your position. Our second target is $119.00.

Picked on   October 06 at $102.28
Change since picked:       + 5.91
Earnings Date            00/00/00
Average Daily Volume =       14.2 million  
Listed on   October 06, 2009         


Parker Hannifin - PH - close: 57.46 change: +1.32 stop: 52.39

PH extends its gains with another +2.3% rally on Monday. I am not suggesting new bullish positions at these levels.

Our first target is $58.50. We will cautiously set a second target at $62.00 but the $60.00 level could prove to be strong resistance. I would use small positions.

Picked on  November 03 at $ 55.25
Change since picked:       + 2.21
Earnings Date            01/20/09 (unconfirmed)
Average Daily Volume =        1.6 million  
Listed on  November 03, 2009         


UltraShort Treasury ETF - TBT - close: 47.61 change: -0.08 stop: 44.90

All the action was in stocks and currencies today. The bond market didn't move much and the TBT just drifted sideways. I would expect another pull back toward the $46.00 level in the next day or two.

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

Picked on   October 26 at $ 47.89 (1/2 position)
Change since picked:       - 0.28

2nd entry on   October 30 at $ 45.50 (1/2 position)
Change since picked:          + 2.21

Earnings Date            --/--/--
Average Daily Volume =        6.0 million  
Listed on   October 26, 2009         


PUT Play Updates

BIOGEN IDEC - BIIB - close: 45.41 change: -0.35 stop: 47.25

The BTK biotech index is up three days in a row and up five out of the last six sessions. BIIB failed to participate in the rally on Monday. The stock slipped to $44.91 before paring its intraday losses.

I'm not suggesting new positions at this time. BIIB has already hit our first target. Our second and final target to exit is $40.50.

Picked on   October 03 at $ 48.89
Change since picked:       - 3.48
                               /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: 48.80 change: +2.21 stop: 50.15

The banks were very strong today and BMO has broken out higher from its recent sideways consolidation. More conservative traders will want to seriously consider an early exit right now. The rally today stopped at BMO's 50-dma and I still see potential resistance near $50.00 so the newsletter isn't exiting yet. I'm not suggesting new positions at this time. Our first target is $42.75. Our second target is $40.50.

Picked on   October 27 at $ 47.37
Change since picked:       + 1.43
Earnings Date            11/24/09 (unconfirmed)
Average Daily Volume =        539 thousand 
Listed on   October 27, 2009         


Russell 2000 iShares - IWM - close: 59.22 change: +1.14 stop: 62.55

Does this rally have legs? Is this just another short squeeze? The big caps are leading the market's rally. The small cap Russell 2000 index is nearing resistance at its 50-dma and the 600 level. Our plan was to buy puts on a bounce in the IWM at $59.00, which was hit today. More conservative traders may want to adjust their stop loss down closer to $60.00. Readers might want to wait for the rally to stall and roll over first before initiating new positions. Our first target is $55.50. Our second target is $52.00 or the 200-dma, whichever the IWM hits first.

Chart:

Picked on  November 09 at $ 59.00
Change since picked:       + 0.22
Earnings Date            --/--/--
Average Daily Volume =       54.5 million  
Listed on  November 02, 2009         


Life Tech. - LIFE - close: 49.87 change: +0.23 stop: 50.10

Resistance at the $50.00 level must be tougher than I previously expected. The market surged higher today but LIFE remains trapped under $50.00. I'm not suggesting new positions and if the technology sector can rally tomorrow I would expect LIFE to hit our stop loss and close this play. More conservative traders will want to consider an early exit now.

Picked on   October 28 at $ 45.83 /gap down entry point 10/29/09
                              /originally listed at $46.61
Change since picked:       + 4.04
Earnings Date            10/27/09 (confirmed)
Average Daily Volume =        2.1 million  
Listed on   October 28, 2009         
Whirlpool - WHR - close: 73.54 change: +2.72 stop: 74.10

WHR erased a large chunk of Friday's losses with a bounce back toward short-term resistance near $74.00. Our plan hasn't changed. I'm suggesting a trigger at $69.75 to buy puts. If shares can close over $74.00 I'll drop it as a bearish candidate.

If triggered our first target to take profits is at $65.25. Our second and final target is $61.50.

Picked on  November xx at $ xx.xx <-- TRIGGER @ 69.75
Change since picked:       + 0.00
Earnings Date            02/09/10 (unconfirmed)
Average Daily Volume =        1.7 million  
Listed on  November 07, 2009         


CLOSED BEARISH PLAYS

Intuitive Surgical - ISRG - close: 264.11 change: +8.11 stop: 261.00

Technology stocks were pretty strong today and ISRG managed a 3.1% rally. The stock hit our stop loss early this morning at $261.00 ending the trade.

Chart:

Picked on   October 31 at $246.35
Change since picked:       + 9.65
Earnings Date            10/20/09 (confirmed)
Average Daily Volume =        939 thousand 
Listed on   October 31, 2009         


iShares Transports - IYT - close: 70.15 chg: +1.25 stop: 70.16

The transport definitely participated in today's widespread rally and the IYT broke through resistance near its 50-dma and the $70.00 level. Shares hit our stop loss at $70.16.

Chart:

Picked on   October 24 at $ 68.29
Change since picked:       + 1.87 <--stopped @ 70.16 (+2.7%)
                              /1st target hit @ 65.25 (-4.4%)
Earnings Date            --/--/--
Average Daily Volume =        664 thousand 
Listed on   October 24, 2009         


Precision CastParts - PCP - close: 101.70 change: +2.18 stop: 100.55

Industrial and cyclical stocks were doing very well and PCP gained 2.19% with a bullish breakout over round-number resistance at $100.00. Shares hit our stop loss at $100.55 early in the session.

Chart:

Picked on   October 31 at $ 95.53
Change since picked:       + 5.02 <-- stopped @ 100.55 (+5.2%)
Earnings Date            10/20/09 (confirmed)
Average Daily Volume =        1.3 million  
Listed on   October 31, 2009         


Research In Motion - RIMM - close: 61.56 change: +2.84 stop: 62.65

Shares of RIMM were downgraded this morning but that didn't stop shares from surging 4.8%. The close over $60.00 is short-term bullish and this weekend I said we'd close this play if RIMM closes above $60.

Chart:

Picked on   October 28 at $ 62.93 /gap open entry    
Change since picked:       - 1.37 <-exit early @ 61.56 (-2.1%)
                               /1st target hit @ 58.55 (-6.9%)
Earnings Date            12/17/09 (unconfirmed)
Average Daily Volume =       17.9 million  
Listed on   October 26, 2009