Option Investor
Newsletter

Daily Newsletter, Tuesday, 11/10/2009

Table of Contents

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

Market Wrap

Consolidation Day

by Jim Brown

Click here to email Jim Brown

After Monday's big short squeeze the markets wandered aimlessly as traders consolidated recent gains. Considering the +475 point gain in the Dow over the last week this was a needed rest.

Market Stats Table

The market had little in the way of news to digest today with the economic calendar anemic and earnings news dwindling. On the economic front the National Association of Realtors reported home prices for Q3 and there was considerable improvement. Prices improved to only an -11.2% decline over the last twelve months compared to the -15.7% decline in Q2. There was still some weakness with only 30 of the 153 metro areas surveyed reporting gains in prices. This is only slightly better than the 26 areas with improvements in Q2. Of the top ten metro areas Denver +1.7% and Houston +0.1% were the only two areas actually showing higher prices than Q3-2008. Las Vegas -34.5% and Miami -24.5% were the two areas with the largest continued declines. Prices are rebounding sharply in a few markets like Cumberland MD where prices are 19% over the Q2 prices. The extension of the homebuyer tax credit and the addition of a move up buyer credit should continue to push prices higher.

The other report today was the Job Openings and Labor Turnovers Survey or JOLTS. This report is mostly ignored because it is a lagging report and secondary to the ADP and Non-Farm Payrolls. However, the report did show job openings increased slightly in September despite a drop in employment. This report showed that 4 million workers found new jobs but 4.3 million left their jobs. There were 3.8 million unfilled jobs in September.

JOLTS Chart

This was a boring day to watch with the Dow trading in slightly more than a 50-point range all day. The only movement was directly related to the moves in the dollar. This is really getting to be a nuisance and unfortunately I don't see it changing any time soon.

Dollar Index Compared to Dow

Investors are very nervous about their current positions and the short interest is still high. Take Priceline for instance. Priceline reported strong earnings and the travel agent said summer bookings were "exceptionally strong." They raised their guidance for the full year by an average of +8 cents over what analysts were expecting. So what would you expect for a $175 stock on a less than a dime increase in guidance? Try a gain of +$30 to $204 on the news. It was not as if the news was unexpected. Expedia (EXPE) reported a jump in profits and raised guidance just a couple weeks ago. The problem is the shorts. Since the shorts have been unsuccessful in shorting the market they are piling up on momentum stocks like PCLN and AMZN. This results in extremely big short squeezes when news breaks.

Priceline Chart

Sometimes the short position works as with MBIA this week. MBIA shares fell -26% on Tuesday after they reported a loss of $3.50 per share, which included an $810 million loss on insured credit derivatives. MBIA is struggling to write new business to offset its portfolio of losses because it's credit rating was cut to junk and it can no longer attract new customers.

Ambac, (ABK) a competitor of MBIA lost -33% on Tuesday after warning that it may file for bankruptcy protection and that regulators could launch proceedings at any time in order to protect policy holders. Ambac said it should have enough liquidity to make it until Q2-2011 but long term the outlook was grim. ABK closed at 79-cents after losing more than $90 in stock price over the last 24-months. You can bet even the faithful hard core employees are dusting off their resumes.

Ambac Chart

MBIA Chart

All the financials had a tough day after Senator Dodd announced a bold plan to reform financial regulation that is even stronger than anything previously proposed. The 1,136 page bill calls for creating three new government agencies regulating derivatives, hedge funds, credit rating agencies and executive pay. They have been talking about a too big to fail plan for banks but I would bet this plan is too big to pass in one monster bill. There are simply too many sacred cows being taken to the slaughterhouse in Dodd's bill.

The bill would create an agency called the Financial Institutions Regulatory Administration and would abolish the Office of Thrift Supervision and the Comptroller of the Currency. The FIRA would also strip all regulatory powers from the Federal Reserve and the FDIC. The plan would also create a National Insurance Office to regulate insurance companies. That is currently handled by the individual states. Needless to say the plan did not meet with much support in the financial community. Any time you try to rock the regulatory boat there will be so much indecision about the final outcome that investors in bank stocks may decide to find somewhere else to park their money. Fortunately the sheer size of the bill and the number of critical changes will doom it to various committees for months to come.

Banks lost ground today on a knee jerk reaction to the news but since the bill won't get a final vote until probably the second quarter of 2010 the weakness is probably temporary. After Monday's rally the banks needed to rest even without the announcement of the proposed changes.

Chart of the XLF

News Corp billionaire Rupert Murdoch is taking aim at free content on the web and said companies like Google were "content kleptomaniacs" and were driving newspapers out of business by providing the content for free. He said Google "steals their stories" and uses them to generate ad revenue for themselves. Google immediately responded that they could eliminate the Wall Street Journal articles from the search engine. However, they said the WSJ gets 25% of its readership from Google searches. If Google did not index their articles a web search for the topic would not display any WSJ links. It would be as if the WSJ ceased to exist for the general public. Very, very few people actually go to the WSJ to search for news. If Murdoch has his way and all the WSJ articles are pay per view then far fewer people will go to WSJ.com for news. Why go when Google and Yahoo offer a ready index of dozens of other content providers with the same news for free. One analyst said that would be a major step for Murdoch and one that would take him right off a very large cliff.

News Corp Chart

For me the most positive event for the day was an announcement by FedEx that package traffic would be up about 8% in Q4 and it expects to ship 13 million packages on Dec-14th. That will be the busiest day ever for FedEx. In 2008 FedEx shipped about 12 million packages on that day. That was up from 11.5 million in 2007. FedEx ships about 7.5 million packages on an average day. Mike Glenn, VP of market development, said the estimate was based on retail sales growth projections and projections from their largest customers. FedEx said it would hire 14,000 additional part time workers during Nov/Dec. Competitor UPS said it would hire 50,000 seasonal workers this year compared to the 60,000 it hired in 2007. UPS did not release statistics for 2008. December 14th is projected to be the busiest shipping day, Dec 17th the last day to ship ground and Dec 23rd the last day to ship overnight for Christmas delivery.

FedEx Chart

UPS Chart

It is Christmas in November for Activision (ATVI). Activision released its much awaited sequel to Call of Duty, named Modern Warfare 2, today and the simultaneous launch at over 10,000 stores should mean over one million copies will be sold today. My 28 yr old son in law waited in line at midnight Monday night to get a copy. He said they had pallets of Xbox 360 game consoles and games and they expected to sell out by tonight. Call of Duty 2 is expected to sell 13 million copies by year-end. At the $59 list price that is a serious cash infusion. ATVI actually closed down fractionally despite the hype. Buy the rumor, sell the news.

Hurricane Ida is history and has fallen back into a disorganized band of showers after zipping through the gulf last weekend. Ida did not cause any real damage because it is too far into the fall and the water temperatures would not support a full-fledged storm. However, the Minerals Management Service reported this afternoon that 43% of oil production from the Gulf had been shut in as a precaution. 28% of gas production was also offline. All of that production should be back in operation by next week.

Crude prices were crushed at the open with a drop from $80.50 to $77.89 when Ida failed to cause any damage and the dollar rebounded from overnight lows. The dollar index found resistance at 75.20 intraday and is trading at $74.94 as I type this commentary. That suggests tomorrow will see a rebound in crude prices as a dollar hedge.

Crude Oil Chart

It would be tough to make any kind of market call based on today's market action. With the +475 point rally in the Dow over the last five days and the volatility in the dollar pushing equity prices higher the fundamentals have little impact. Monday was a dollar denominated short squeeze when the dollar index fell over 1% in overnight trading. Today was simply a consolidation day ahead of the Veterans Day holiday on Wednesday. The equity markets will remain open but banks and the bond market will be closed in the USA.

You may remember I mentioned over the weekend that Dow 10100 was important but it was not the number controlling the markets. That number is S&P 1100. The Dow rallied this week from Friday's close of 10,023 to today's close of 10,245 and yet the rest of the indexes were mixed today. The Dow has hyper extended thanks to the cash flowing into blue chips while the S&P has failed to even reach the October highs. The Dow is only 100 points away from strong resistance at 10350 and I believe we will see that test this week. Support for the Dow today was 10200.

Dow Chart

The S&P broke through the long-term downtrend resistance from October 2007 and then used that resistance as support on Tuesday's decline. This is a very bullish breakout in view of how strongly it repulsed the S&P back in October. The S&P has one last test at 1100 and that is the one the market will be watching. If the S&P can break over 1100 this week I believe the stage is set for a test of 1140-1150. You have probably heard numerous analysts claim that 1150 is their year-end target for the S&P. We will have to wait to see if the S&P rolls over and dies when that number is reached or proves them all wrong with a move to higher levels.

S&P-500 Chart

The Nasdaq composite finished slightly negative but the Nasdaq 100 closed with a decent gain. That is money flowing into big cap techs rather than the average tech stock. The composite has strong resistance at 2180 and closed today at 2150. The Nasdaq composite needs to move over 2180 to avoid the potential for a H&S in the index. I believe it will be successful because the Nasdaq 100 is only a couple ticks short of a breakout over resistance at 1775. A breakout by the big cap techs should have the Nasdaq soldiers falling in line and saluting. Support on the composite is 2140 and the NDX is 1765 after today's intraday dip.

Nasdaq Composite Chart

Nasdaq 100 Chart

This is where the analysis becomes painful. I believe the Nasdaq will breakout and I believe the S&P will overcome 1100 but the small caps have suddenly ceased to perform. The out performance by the blue chips in the Dow and the Nasdaq big caps coupled with the sudden slowing of the Russell suggests fund managers have suddenly begun to shift money back into the higher liquidity blue chips as though they were expecting some market weakness ahead. This is a cause for concern for me. I turned bullish last Tuesday when the Russell outperformed the other indexes and completed a successful test of support at 550. In theory the Russell should be at least back to resistance at 623 that corresponds to S&P 1100 and Nasdaq 2160. It should definitely not be lagging to the extent we see today.

This causes me to be cautious about the overall market until we do cross all those thresholds I mentioned above and the Russell wakes up from its slumber. If we were to see the Russell begin to roll over I would immediately turn bearish again. Initial support is 580.

Russell Chart

Since Wednesday is a partial holiday with the bond market and banks closed I didn't expect any major moves. However, if the dollar continues to fall further below 75 on the Dollar Index overnight I would expect a low volume rally on Wednesday. We have seen several of these dollar driven rallies recently and with volume likely to be the lowest in months it could be powerful. Volume on Tuesday was the second lowest since Oct-7th at 7.7 billion shares. Obviously it was pre-holiday but tomorrow should be significantly worse. Be prepared!

Jim Brown


New Option Plays

Big Cap Oil

by James Brown

Click here to email James Brown

Editor's Note:

In addition to tonight's new play I suggest traders looking for a new bullish candidate check out shares of ZMH. The stock looks like it's ready to break higher with short-term support near its rising 40-dma. The next level of resistance appears to be $60.


NEW DIRECTIONAL CALL PLAYS

Chevron Corp. - CVX - close: 78.34 change: +0.68 stop: 76.75

Why We Like It:
Both CVX and the price of oil are showing similar charts with a four-week sideways consolidation. Shares of CVX look poised to breakout from this trading range. I'm suggesting readers use a trigger at $78.75 to buy calls. Our first target is $84.00. More conservative traders may want to wait for oil to close above its October highs (watch the USO) before launching bullish positions in the oil sector.

Suggested Options:
I am suggesting the December calls. My preference is the $80 strike.

BUY CALL DEC 80.00 CVX-LP open interest=17530 current ask $1.26

Annotated Chart:

Picked on  November xx at $ xx.xx <--  TRIGGER @ 78.75
Change since picked:       + 0.00
Earnings Date            01/28/10 (unconfirmed)
Average Daily Volume =       10.6 million  
Listed on  November 10, 2009         



In Play Updates and Reviews

Stocks Turn in a Quiet Session

by James Brown

Click here to email James Brown


CALL Play Updates

Arch Cap Group - ACGL - close: 69.49 change: -0.24 stop: 66.90

The stock market rally stalled and that left ACGL drifting under round-number resistance at $70.00. Look for a dip or a bounce near $68.50-68.00 as a new bullish entry point. Our target is the $74.00 level and our time frame is several weeks.

Picked on  November 07 at $ 68.81
Change since picked:       + 0.68
Earnings Date            10/26/09 (confirmed)
Average Daily Volume =        444 thousand 
Listed on  November 07, 2009         


Canadian Nat. Res. - CNQ - close: 67.50 change: -0.49 stop: $61.95

CNQ almost filled the gap from Monday morning, which was what we were expecting. The low was $66.22. Readers can buy this bounce but CNQ may still retest the $66.00-65.50 zone before actually moving higher. Our upside target is $74.00.

Picked on  November 09 at $ 67.74 *gap open higher entry
                          /original trigger was $66.05
Change since picked:       - 0.24
Earnings Date            03/04/10 (unconfirmed)
Average Daily Volume =        2.8 million  
Listed on  November 07, 2009         


Deere & Co - DE - close: 48.35 change: -0.13 stop: 46.85

There is no change from my Monday night comments. We're waiting for a bullish breakout over major resistance at $50.00. 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.

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: 80.39 change: +0.72 stop: 76.40

ESS displayed some relative strength and hit new six-week highs. The stock hit our trigger to buy calls at $80.65 so the play is open. Our first target is $86.00. Our second target is $92.50.

Chart:

Picked on  November 10 at $ 80.65
Change since picked:       - 0.26
Earnings Date            02/03/10 (unconfirmed)
Average Daily Volume =        500 thousand 
Listed on  November 09, 2009         


Gold ETF - GLD - close: 108.39 change: +0.20 stop: 99.75

A minor bounce in the dollar sparked some profit taking in gold this morning. The GLD recovered from its intraday lows to close in positive territory. I am not suggesting new positions at this time.

Please note that I'm adjusting our first target to $109.50. 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:       + 6.11
Earnings Date            00/00/00
Average Daily Volume =       14.2 million  
Listed on   October 06, 2009         


Parker Hannifin - PH - close: 57.15 change: -0.31 stop: 52.90 *new*

It was a quiet day for PH. I would look for support near $55.00 or $54.00. The 50-dma has risen to $53.00 so I'm raising the stop loss to $52.90.

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:       + 1.90
Earnings Date            01/20/09 (unconfirmed)
Average Daily Volume =        1.6 million  
Listed on  November 03, 2009         


UltraShort Treasury ETF - TBT - close: 47.93 change: +0.32 stop: 44.90

The TBT displayed some minor strength today. Shares gapped open lower but recovered to close in positive territory. If you're looking for a new entry point consider waiting for a dip or bounce near $46.00.

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:       + 0.04

2nd entry on   October 30 at $ 45.50 (1/2 position)
Change since picked:          + 2.53

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


PUT Play Updates

BIOGEN IDEC - BIIB - close: 45.51 change: +0.10 stop: 47.25

The rally attempts in BIIB continue to struggle. Shares hit $46.15 this morning. I don't see any changes from my prior comments.

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:       - 3.38
                               /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: 49.12 change: +0.32 stop: 50.15

Banking stocks were some of the worst performers today and yet BMO managed to post a 0.6% gain. I remain very cautious here and more conservative traders will want to consider an early exit. Today's close over the 50-dma is short-term bullish. I'm still expecting round-number resistance at $50.00. 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:       + 1.75
Earnings Date            11/24/09 (unconfirmed)
Average Daily Volume =        539 thousand 
Listed on   October 27, 2009         


Russell 2000 iShares - IWM - close: 58.85 change: -0.37 stop: 62.55

The Russell 2000 index was the worst performer among the major indices. Shares of IWM failed to see any follow through higher as they stalled under resistance. I would still consider small bearish positions here.

More conservative traders may want to adjust their stop loss down closer to $60.00. Our first target is $55.50. Our second target is $52.00 or the 200-dma, whichever the IWM hits first.

Picked on  November 09 at $ 59.00
Change since picked:       - 0.15
Earnings Date            --/--/--
Average Daily Volume =       54.5 million  
Listed on  November 02, 2009         


Whirlpool - WHR - close: 73.90 change: +0.36 stop: 74.10

WHR spent the day churning under resistance at $74.00. I don't see any changes from my prior comments. 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

Life Tech. - LIFE - close: 50.51 change: +0.64 stop: 50.10

Shares of LIFE finally broke through resistance at $50.00 and managed to close over this psychological level. Our stop loss was hit at $50.10. More agile traders may want to consider bullish positions given the breakout.

Chart:

Picked on   October 28 at $ 45.83 /gap down entry point 10/29/09
                              /originally listed at $46.61
Change since picked:       + 4.27 <-- stopped @ 50.10 (+9.3%)
Earnings Date            10/27/09 (confirmed)
Average Daily Volume =        2.1 million  
Listed on   October 28, 2009