Option Investor
Newsletter

Daily Newsletter, Monday, 11/16/2009

Table of Contents

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

Market Wrap

Stocks Surge To Fresh 2009 Highs Buoyed By Familiar Themes

by Todd Shriber

Click here to email Todd Shriber
This is starting to become a trend: The Dow Jones Industrial Average turns in another triple-digit gain as equities move to 13-month highs. The blue chip index rallied to a new 2009 high, gaining more 136 points to close at 10406.96. The S&P 500 finally broke through 1100 (again) and did so in style, rising almost 16 points to close at 1109.30. Only the Nasdaq failed to close above a key resistance level. The Nasdaq did peek above 2200, traversing that key level for the first time in over a year before closing at 2197.85.

Stats Table

As I said, Monday's trade sported some familiar themes. The U.S. dollar continued its perilous decline and that bolstered commodities and materials stocks, which have been among the biggest drivers of this market rally. The greenback slumped to a 15-month a low and investors took a pass on bonds, sending yields on two-year Treasuries to their lowest levels since January. Even comments from Federal Reserve Chairman Ben Bernanke regarding future economic headwinds attributable to high unemployment and constrained access to credit could not deter stocks on Monday.

Not to rain on the bulls' parade, but this weak dollar business is only avoidable when one chooses to reside in the ''ignorance is bliss'' camp. The dollar is being thrashed as investors favor commodities and commodities-related currencies. The two best performing currency ETFs in 2009 are those that track the Brazil real and the Australian dollar, two commodity currencies if there was a such a thing.

How bad are things for the buck? The chart below illustrates the performance of the 10 major currency ETFs in 2009. Nine are up on the year and I doubt it will take anyone long to guess which one is the lone loser.

Forex ETFs

There are numerous problems that a weak dollar creates, but as it pertains to this equity market rally the problem lies with familiarity possibly breeding contempt. Allow me to elaborate: Stocks are being led higher by materials names benefiting from the flimsy dollar, commodities stocks and financials that some would debate are far from out of the woods. This scenario should ring a bell. After all, this confluence of factors led the market to its last bubble and everyone that was not living in a cave in 2008 remembers the calamity that ensued.

I offer up an anecdote that may be the epitome what may be wrong with this rally, if you dare believe there is anything wrong. Last week, China said it may have purchased too much copper earlier this year and that it may export some of its excess stockpiles. If you are talking copper, like it or not, you are talking China, and a China turned copper exporter should not be music to the ears of copper producers. The chart below shows China has been purchasing less copper in recent months.

China Copper Purchases

Oddly enough, this news had no impact on a stock I mention here frequently: Freeport McMoRan Copper & Gold (FCX). Freeport touched another 52-week high today at $85 before settling at $84.48. Freeport is the largest copper producer in the U.S., but China is one of its biggest end markets. Even with news of China not needing as much copper as it did earlier this year, Freeport made another new high, something it has done quite frequently recently, as the chart below indicates. Just a little illustration to highlight that even when it looks like there might be a reason for stocks to slowdown, they do no such thing.

FCX Chart

Speaking of metals, gold continues to shine (no pun intended.) Gold for November delivery climbed to a record high of $1144.20 an ounce before settling at $1138.60, up more than 2% on the day. Gold's rally has meant good things for miners like Barrick Gold (ABX) and Newmont Mining (NEM), both of which were up more than 2.5% today. Gold miners do not usually outperform the underlying commodity because the miners face high capital equipment and production costs that can often crimp profits.

While this fact is well-known by those that actively follow the industry, somehow, someway, the Market Vectors Gold Miners ETF (GDX) is up almost 35% in the past three months compared to a 20% gain for the SPDR Gold Shares (GLD), the most heavily traded gold ETF that actually holds physical gold. Oh yeah, GDX made a 52-week high today on volume that was roughly 30% higher than normal.

GDX Chart

From precious metals to industrial metals, steelmakers also participated in Monday's rally. U.S. Steel (X), the largest U.S. steelmaker, gained almost 5% and rival AK Steel (AKS) surged nearly 8% after JPMorgan Chase added the stocks to its ''Focus List.'' JPMorgan said the companies may be able to raise prices as demand rebounds. Steel demand has been tepid at best throughout 2009 and increased demand for the industrial material may portend that the global economy is in fact getting better.

Steel Demand

I admit I have had my doubts about this rally and continue to have them, but that does not mean I am advocating bucking the trend. If some other sectors besides the usual suspects could really lend a hand, stocks may still have some room to run. Apparently, Goldman Sachs thinks high-end retailers may be willing to chip in. Goldman upgraded shares of luxury retailers Coach (COH), Nordstrom (JWN), Saks (SKS) and Tiffany (TIF), slapping ''buy'' ratings on Coach and Nordstrom.

Not only is this bullish news because we are in the midst of another holiday shopping season, this is also bullish because this recession has seen even the most affluent among us tighten their purse strings. Checkout the parking lot at your local Wal-Mart (WMT) and you will probably see a lot more expensive cars there than you did a couple of years ago. Still, Goldman not only upgraded those fancy retailers, it downgraded J.C. Penney (JCP) to ''sell'' from ''neutral'' and Dollar Tree (DLTR) to ''neutral'' from ''buy.'' And it is fair to say that Dollar Tree and Coach operate in two completely different ends of the retail spectrum.

Most retailers were up on Monday as the Commerce Department said retail sales rose 1.4% to $347.5 billion in October. Then again, as is so often the case, the devil is in the details. Strip out auto sales and retail sales rose just 0.2% last month. With unemployment residing at a 26-year high and the holiday shopping season underway, retailers may be hard-pressed to deliver good results, save for a Christmas miracle.

Speaking of retailers, home improvement giant Lowe's (LOW) met analyst estimates when it reported third-quarter results on Monday, but the stock closed down 11 cents. Rival and Dow member Home Depot (HD) reports before the bell on Tuesday. Analysts are calling for a profit of 36 cents a share on sales of $16.27 billion.

Home Depot and Lowe's are not prime holiday shopping destinations, so Target's (TGT) pre-market earnings report may be the more important of the two news items. Analysts expect Target to earn 50 cents a s share on sales of $15.25 billion. Saks and The TJX Cos. (TJX), the operator of T.J. Maxx and Marshalls stores, also report before the bell on Tuesday.

Looking at the charts, you may have been thinking that the 600+ points the Dow tacked on over the previous two weeks would have been enough, but that obviously was not the case. Today's close has moved the Dow well above resistance in the 10320 area. There is a lot of room to run to the next Fibonacci level around 11225, but some resistance will probably emerge around 10500 and 11000 should be another fight.

If support is a concern, 10200 should be the first backstop with 10100 helping out from there. While these levels are worth noting, it is going to take either an unforeseen negative surprise or several days of protracted selling to bring them into play.

Dow Chart

The S&P 500 finally broke through 1100 again, topping its October peak of 1101.36. The index could see its next fight in 1020-1025 area and Monday's trade could be considered the beginning of another breakout. Bulls may dare to dream of 1200 before the end of the year, but 1150 is probably more reasonable. Support looms around 1093 and if stocks break down there, 1075 should be the next pit stop.

S&P 500 Chart

As I mentioned earlier, the Nasdaq inched above 2200 today, but did not hold there. Just as the S&P 500 seemed to beat its head into 1100 before breaking through, the Nasdaq may be doing the same with 2200. The other side of this coin is that since tech issues have played a big role in leading the market higher, even a slight faltering could lead to more down side. If the Nasdaq can break 2200, 2251 should be the next resistance area. There are some earnings reports this week that could give the index a jolt, including Dell's (DELL) third-quarter results on Thursday.

Nasdaq Chart

It seems that market gurus keep trying to pinpoint the life expectancy of the rally. Some say it is bound to expire at any moment because the fundamentals simply are not there to support further gains. Others insist that 80% of the S&P 500 member have beaten earnings estimates and that most companies are earning the bulk of their profits from international markets meaning the U.S. economy matters less and less. I have my doubts, as articulated here, but remain convinced it would be foolish to be anything but bullish at this point.

Perhaps the only way the bears can exert any strength in the near-term is with the sudden end of the commodities trade and a new beginning of dollar strength and that is a tough bet to make right now.


New Option Plays

Industrial Equipment & Footwear

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Caterpillar - CAT - close: 60.40 change: +1.62 stop: 57.75

Why We Like It:
Dow-component CAT is bouncing from the $58.00 level and closing above round-number resistance at the $60.00 mark. There is potential resistance at the October high but with the market in breakout mode I don't think it will slow down CAT. I'm suggesting bullish positions now. We'll use a relatively tight stop at $57.75. Our first target to take profits is at $64.00. Our second target is $68.00.

Suggested Options:
I am suggesting the December calls. My preference is the $60 strike.

BUY CALL DEC 60.00 CAT-LL open interest=9003 current ask $2.80

Annotated Chart:

Picked on  November 16 at $ 60.40
Change since picked:       + 0.00
Earnings Date            01/26/10 (unconfirmed)
Average Daily Volume =       11.3 million  
Listed on  November 16, 2009         


Deckers Outdoor - DECK - close: 98.95 change: +1.88 stop: 96.95

Why We Like It:
DECK is challenging resistance near the $100 level. If shares can breakout here it would be very bullish. The high today was $100.54. I'm suggesting a trigger to buy calls at $100.75. If triggered our first target is $107.50.

Suggested Options:
I'm suggesting the December calls. My preference is the $105 strike.

BUY CALL DEC 105 QUK-LA open interest= 367 current ask $2.45

Annotated Chart:

Picked on  November xx at $ xx.xx <-- TRIGGER @ 100.75
Change since picked:       + 0.00
Earnings Date            02/25/10 (unconfirmed)
Average Daily Volume =        659 thousand
Listed on  November 16, 2009         



In Play Updates and Reviews

Bullish Breakouts Abound

by James Brown

Click here to email James Brown


CALL Play Updates

Arch Cap Group - ACGL - close: 70.70 change: +0.75 stop: 67.40

The market's rally helped ACGL manage a 1% gain but it was not enough to breakout over resistance near $71.00 and its October highs. Our target is the $74.00 level and our time frame is several weeks.

Picked on  November 07 at $ 68.81
Change since picked:       + 1.89
Earnings Date            10/26/09 (confirmed)
Average Daily Volume =        444 thousand 
Listed on  November 07, 2009         


Canadian Nat. Res. - CNQ - close: 69.15 change: +2.40 stop: $63.95

Resource names were stronger on the weak dollar. Shares of CNQ gapped open higher at $68.15 and closed with a 3.5% gain. The stock is now back above its 50-dma but has yet to close above round-number resistance at $70.00. Our upside target is $74.00. If you are holding November calls we have to exit before Friday's closing bell.

Picked on  November 09 at $ 67.74 *gap open higher entry
                          /original trigger was $66.05
Change since picked:       + 1.41
Earnings Date            03/04/10 (unconfirmed)
Average Daily Volume =        2.8 million  
Listed on  November 07, 2009         


Coach Inc. - COH - close: 35.99 change: +0.43 stop: 33.75

It was a disappointing session for us even though COH posted a gain today. The stock was upgraded by Goldman Sachs this morning and shares gapped open higher at $36.93. COH was unable to hold on to these highs and trimmed its gains to just 1.2%. Sadly the gap open this morning negatively impacted our entry point. I'm still bullish on COH but readers may want to look for a dip near $35.50-35.00 to open positions.

Our first target is $38.00. Our second target is $39.85. My time frame is a few weeks. FYI: Traders should note that this week will bring several high-profile earnings reports in the retail sector. That could create volatility for stocks in this industry.

Picked on  November 14 at $ 36.93 /gap open higher
                               /originally listed at $35.56
Change since picked:       - 0.94
Earnings Date            01/21/10 (unconfirmed)
Average Daily Volume =        4.9 million  
Listed on  November 14, 2009         


Chevron Corp. - CVX - close: 78.61 change: +1.35 stop: 76.75

Crude oil delivered a strong surge higher on the weak dollar but CVX under performed the commodity. Oil rose more than 3%. CVX only managed a 1.7% gain. Shares do look poised to continue higher and I would initiate new call positions here. More conservative traders might want to wait for a breakout over $80.00 to buy calls. Our first target is $84.00.

Picked on  November 11 at $ 78.87 /gap higher entry point
Change since picked:       - 0.26
Earnings Date            01/28/10 (unconfirmed)
Average Daily Volume =       10.6 million  
Listed on  November 10, 2009         


Deere & Co - DE - close: 48.91 change: +1.33 stop: 46.85

The widespread market rally was enough to lift DE to resistance near $50.00 but not enough to push the stock through this level. We're still waiting for a breakout. I'm suggesting a trigger to open positions 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. More aggressive traders willing to hold over DE's earnings report will want to consider January 2010 calls.

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: 83.21 change: +1.65 stop: 78.90

ESS rallied 2% to close at new eight-week highs. I don't see any changes from my weekend comments. More conservative traders may want to edge their stops closer to $80.00. I would consider buying calls on another bounce from $80.00 but readers may want to wait for the S&P 500 to breakout over the 1100 level first. Our first target is $86.00. Our second target is $92.50.

Picked on  November 10 at $ 80.65
Change since picked:       + 2.56
Earnings Date            02/03/10 (unconfirmed)
Average Daily Volume =        500 thousand 
Listed on  November 09, 2009         


Gold ETF - GLD - close: 111.63 change: +1.89 stop: 104.90 *new*

Dollar weakness continues to fuel gold strength. Gold futures hit a new all-time high near $1,135 an ounce today. The GLD hit $112.16 intraday.

I am raising our stop loss on this play to $104.90. I'm not suggesting new bullish positions at this time. Any November positions need to be closed before expiration this week. The newsletter's remaining position are the January $110 calls. Our second target to exit is $119.00. Our time frame is still several weeks.

Picked on   October 06 at $102.28
Change since picked:       + 9.35
                               /1st target hit @ 109.50 (+7.0%)
Earnings Date            00/00/00
Average Daily Volume =       14.2 million  
Listed on   October 06, 2009         


Parker Hannifin - PH - close: 56.96 change: +1.96 stop: 52.90

PH finally decided to participate in the rally and shares gained 3.5%. Holders of November calls need to exit before expiration this week.

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:       + 1.71
Earnings Date            01/20/09 (unconfirmed)
Average Daily Volume =        1.6 million  
Listed on  November 03, 2009         


UltraShort Treasury ETF - TBT - close: 45.88 change: -1.14 stop: 45.40

Everything rallied today. Stocks, commodities, bonds all turned higher and that sent bond yields lower. The TBT lost 2.4% and almost hit our stop loss at $45.40. A bounce from here would technically be a bullish entry point but there are probably stronger bullish candidates than the TBT now that the S&P 500 has closed over the 1100 level. I'm not suggesting new positions.

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:       - 2.01

2nd entry on   October 30 at $ 45.50 (1/2 position)
Change since picked:          + 0.38

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


Volatility Index - $VIX - close: 22.89 change: -0.47 stop: 21.90

Typically traders get more complacent with a rising market and that pushes volatility lower. The VIX is in danger of breaking down under the 22.00 level. I'm not suggesting new bullish positions at this time and more conservative traders will want to strongly consider an early exit right here.

Our exit target is $30.00. This should be a relatively quick trade. I'm suggesting small positions.

Picked on  November 12 at $ 24.24 
Change since picked:       - 0.88
Earnings Date            --/--/--
Average Daily Volume =         xx million  
Listed on  November 12, 2009         


Waters Corp - WAT - close: 60.85 change: +0.13 stop: 58.75

The action in WAT today was disappointing. Shares did not participate in the market rally and failed near the $61.50 level. We're still waiting for a move higher with a trigger to buy calls at $61.50. If triggered our first target is $64.90. We'll cautiously set a secondary target at $67.45.

Picked on  November xx at $ xx.xx <-- TRIGGER @ 61.50
Change since picked:       + 0.00
Earnings Date            01/27/10 (unconfirmed)
Average Daily Volume =        1.2 million  
Listed on  November 12, 2009         


PUT Play Updates

Northern Trust - NTRS - close: 47.91 change: -0.13 stop: 52.25

NTRS did not participate in the market's rally and posted another loss. While this relative weakness is encouraging I'm not suggesting new positions. Our first target to take profits is at $45.25. Our second target is $41.00. The Point & Figure chart is bearish with a $39.00 target.

Picked on  November 12 at $ 49.18
Change since picked:       - 1.27 
Earnings Date            01/21/10 (unconfirmed)
Average Daily Volume =        3.0 million  
Listed on  November 12, 2009         


Research In Motion - RIMM - close: 61.27 change: -1.42 stop: 65.26

I am very surprised by the weakness in RIMM today. With the entire market higher I would have expected shares to follow the NASDAQ upward. The only news I could find was an analyst firm starting coverage on RIMM with a hold. That shouldn't be a reason for the stock to lose 2.2% on an up day in the market. I would hesitate to launch new positions now with the market in rally mode. Our first target is $55.25. Our second target is $50.50. RIMM can be a volatile stock so I'm suggesting smaller position sizes.

Picked on  November 16 at $ 61.80
Change since picked:       - 0.53
Earnings Date            12/17/09 (unconfirmed)
Average Daily Volume =       18.9 million  
Listed on  November 12, 2009         


Strangle & Spread Play Updates

(What is a strangle? It's when a trader buys an out-of-the-money (OTM) call and an OTM put on the same stock. The strategy is neutral. You do not care what direction the stock moves as long as the move is big enough to make your investment profitable.)

Ultra(Long)-S&P500 - SSO - close: 37.79 change: +1.06 stop: n/a

The S&P 500 is breaking out to new 2009 highs and the SSO is following in its shadow. I am not suggesting new positions at this time.

The options suggested for this strangle were the December $40 calls (SUC-LN) and the December $34 puts (SOJ-XH). Our estimated cost was $1.70. We want to sell if either option hits $3.00 or higher.

Picked on  November 11 at $ 37.08
Change since picked:       + 0.71
Earnings Date            --/--/--
Average Daily Volume =         32 million  
Listed on  November 11, 2009         


CLOSED BEARISH PLAYS

Baidu Inc. - BIDU - close: 438.32 change: +5.82 stop: 441.00

Shares of BIDU briefly traded above resistance near $440 and hit our stop loss at $441.00 before paring its gains. Our play has been closed but I find it interesting that BIDU was unable to close above resistance. I was suggesting very small positions for this high-risk trade.

Chart:

Picked on  November 12 at $427.15
Change since picked:       +13.85 <-- stopped @ 441.00 (+3.2%)
Earnings Date            02/18/09 (unconfirmed)
Average Daily Volume =        2.7 million  
Listed on  November 12, 2009         


Bank of Montreal - BMO - close: 49.31 change: +0.38 stop: 50.15

Shares of BMO are still trading under resistance at the $50.00 level but given the market's strength today I want to exit now and cut our losses early.

Chart:

Picked on   October 27 at $ 47.37
Change since picked:       + 1.94 <--exit early @ 49.31 (+4.0%)
Earnings Date            11/24/09 (unconfirmed)
Average Daily Volume =        539 thousand 
Listed on   October 27, 2009         


Russell 2000 iShares - IWM - close: 60.28 change: +1.55 stop: 60.55

The market's breakout higher today was not just in the big caps. The small cap Russell 2000 index broke through key resistance near 600 and its 50-dma. Shares of IWM did the same near the $60 level and hit our stop loss at $60.55.

Chart:

Picked on  November 09 at $ 59.00
Change since picked:       + 1.55 <-- stopped @ 60.55 (+2.6%)
Earnings Date            --/--/--
Average Daily Volume =       54.5 million  
Listed on  November 02, 2009