Option Investor
Newsletter

Daily Newsletter, Wednesday, 11/18/2009

Table of Contents

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

Market Wrap

Market's Winning Streak Stalls

by Judy Alster

Click here to email Judy Alster
Just when housing was looking up, sort of, the Commerce Department tells us that U.S. housing starts in October unexpectedly fell to their lowest level in six months. Add a sharp decline in construction activity for both single-family and multi-family dwellings and there goes your winning streak. The Dow slipped 11.11 points or 0.1% to 10,426.31, the S&P 500 slipped 0.52 or 0.1% to 1,109.80 and the Nasdaq composite fell 10.64 or 0.5% to 2,193.14.

MARKET INDEXES for WEDNESDAY, NOV. 18:

Offsetting the sorry housing news and unpleasant forecasts from some tech companies, about which more below, inflation figures were mild enough, so stocks drifted only moderately lower Wednesday after a three-day rise, trading in a narrow range. Nobody was really shocked at the fall, what with major indexes closing at 13-month highs Tuesday.

DOW JONES INDUSTRIAL AVERAGE, up nine out of the last 11 days, looks due for a time out:

It hardly bears repeating that as the end of the year draws near, institutional traders and others are seeking to preserve gains — especially after this eight-month rally, with the S&P up more than 22% year to date.

S&P500:

In small caps too, the Russell 2000 also stalled today after rising 7% since the beginning of the month.

RUSSELL 2000 stalls, too:

Many tech stocks had a sad day after BMO Capital Markets downgraded Blackberry maker Research in Motion (RIMM), saying the company faces increased competition as consumers look for less expensive phones. There were worries about potential market-share loss at Verizon Wireless — the company's largest customer — as well as the shift to lower-priced phones and what that will do to future cash flow. Verizon (VZ) held steady but Research in Motion lost over 2.5%:

NASDAQ:

RESEARCH IN MOTION gets a downgrade:

Forecasts from software makers Autodesk (ADSK) and Salesforce.com (CRM) fell short of analysts' expectations and resulted in losses. Autodesk's stock followed through on yesterday's earnings report: Even though profit fell more than 72% year over year, earnings of 27 cents a share beat estimates by four cents, not bad. However, disappointing fourth-quarter guidance knocked more than 10% off shares Wednesday.

AUTODESK foresees a gloomy couple of quarters, at least:

Comments about the company were glum, especially with the stock near a 52-week high, and they could have applied to any number of software companies right now. Architectural and engineering firms -- Autodesk's main customers -- continue to lay off workers. Licensing revenue for Autodesk's popular automated design software fell 31% year over year. Companies will continue to hold back on information-technology spending until there's solid evidence of a turnaround, and even then there will be a lag before firms reach full capacity again, much less expand. Autodesk projected fourth-quarter revenue shy of consensus estimates and said it expects margins to be flat or down on a year-over-year basis for the first quarter of fiscal 2011.

Over in the "you just can't win" corner, Salesforce (CRM) shares plunged Wednesday after the company announced it would continue steadily hiring in the fourth quarter, thus adding to costs. Salesforce is a pioneer in cloud computing, or services and applications hosted on and accessed through the internet. The customer-relations management firm says it hired around 160 new employees in the third quarter and expects to add a total of 3,800. Worse, its results, thought excellent, were just about in line with analysts' forecasts. The company doubled its net income in the third quarter and says its customers are growing faster than ever; it added some 5,000 new customers in the third quarter to almost 70,000 with very little churn. The stock traded as low as $61.78 but managed to pull back from that low; volume was nearly double the average daily volume of 1.6 million shares within the first 90 minutes of trading.

SALESFORCE loses despite good results:

Seagate Technologies (STX) was downgraded, losing 4.13% to $16.47. Other techs down, but not badly, were Apple (AAPL), off 0.05% to $205.96; Cisco (CSCO), off 0.62% to $23.94, and Hewlett-Packard (HPQ), off 1.21% to $50.70.

Today came word that housing starts dropped 10.6% to a seasonally adjusted annual rate of 529,000 units, the lowest level since April and the biggest percentage drop since January. Groundbreaking for single-family homes fell 6.8% last month to an annual rate of 476,000 units, the lowest since May; starts for the unpredictable multifamily segment fell a grim 34.6% to an annual rate of 53,000, keeping September's slump on a roll. Compared to October last year, housing starts dropped 30.7%. Analysts actually expected starts to rise to 600,000 units after an upward September revision to 592,000 units, so imagine their chagrin.

New building permits, which give some idea of future home construction, fell 4% last month to 552,000 units, disappointing analysts who expected 580,000 units; compared to the same period a year ago, it was a drop of 24.3%. The inventory of total houses under construction dropped to a record low 560,000 units last month, while the total number of permits authorized but not yet started tumbled to an all-time low of 93,900 units.

The data could deal a blow to the housing market, which had started to stabilize after its three-year slide. In any event, housing stocks didn't seem too crushed by the news. Beazer Homes (BZH), up 240% since July, was down slightly; Toll Brothers (TOL) lost a fraction, Lennar (LEN) gained a fraction and Pulte Homes (PHM) added 44 cents or 4.6%, largely on the strength of an upgrade.

PULTE HOMES got an upgrade Wednesday:

The much-loved $8000 tax credit for first-time buyers was slated to expire in November, and that may have put a crimp in October starts. That credit has since been renewed and even extended to more buyers; we'll see the results of that, if any, in the next month or two.

The Mortgage Bankers' Association weekly index of purchase applications also reflected the lull last week with what the group says is the worst reading since 1997: down 4.7%. Refinance applications, which had been soaring, edged back 1.4% despite rates in the absolute sub-basement, down seven basis points to an average 4.83% for 30-year loans.

The graph below, however, provides a bit more hope. It's a quarterly comparison of housing starts and new home sales. In 2005 and most of 2006, starts were higher than sales and inventories of new homes rose sharply. For the last two years, though starts have been below sales – and new home inventories have been falling — strongly suggesting that homebuilders are selling more houses than they're starting.

STARTS VS. NEW HOME SALES shows some hope:

The figures, you will notice, suggest how much this young and tentative recovery depends on government support. In the medical profession, this is called tachyphylaxis: "A rapid decrease in the response to a drug after repeated doses over a short period of time." In other words, "Gee, two cups of coffee a day used to keep me awake . . . . but after a while I needed three . . . . and now I need five . . . " If every time the recovery falters the government props it up again with another jolt of taxpayer money, it's no big mystery where that will inevitably lead.

Moving along, from our friends at the Labor Department Wednesday we found that inflation, a.k.a. the Consumer Price Index, accelerated in October — with energy prices rising again and car prices increasing at the fastest rate since the early 1980s. The CPI increase was a seasonally adjusted 0.3% in October as energy prices rose for the fifth time in six months, offsetting a rare decline in rents.

The core CPI rate, which excludes food and energy prices to get a more accurate look at underlying inflation, and some cynics would say to point the spotlight away from often-inexplicably higher inflation in those categories, rose 0.2% last month. The indexes for used cars and trucks and for new vehicles both rose sharply and together accounted for over 90% of the increase for all items excepting food and energy; prices for new cars rose 1.6%, the most in 28 years. Used-car prices also increased, up 3.4%, the most in 29 years. The higher prices were not a surprise following the death of the government's automobile incentives program (much as falling housing starts shouldn't have surprised us after the temporary lapse of the first-time-homebuyer tax credit). Energy prices rose a seasonally adjusted 1.5%, including a 1.6% rise in gasoline prices and a 6.3% jump in fuel oil. Still, energy prices at the retail level are down 14% in the past year.

CONSUMER PRICE INDEX, all inclusive:

The all-item consumer price index has fallen 0.2% in the past year, while the core CPI is up 1.7% in the same period. For the curious only: Food prices rose 0.1%; dairy prices did the same; meat, fruit and vegetables declined (making me wonder why Publix Supermarket is trying to charge me $1.99 for a mediocre-looking head of Romaine lettuce); shelter prices, which account for more than 30% of the CPI, were flat in October; residential rents dropped 0.1% -- the second decline in a row; hotel and motel rooms rose 0.4%. Medical care and prescription drug prices were up, apparel prices down; with prices rising faster than wages, hourly and weekly earnings were down; prices for commodities, services, education, communication, airline fares and tobacco rose; prices for recreation fell.

The CPI still indicates not much inflationary pressure, reassuring in a way for an economy still mired in historical underperformance and sitting on a big pile of unused capacity. Fed Chairman Ben Bernanke said earlier this week that the economy is expected to grow too slowly to create many jobs or generate much inflation. Which we knew. But by pumping so much liquidity into the economy, Bernanke will almost surely cause a whole mess of inflation sooner or later. Expect to hear the phrase "mopping up liquidity," i.e., astutely removing the right stimulus at the right time, quite a bit in months to come.

I said it last week and I'll say it again: Dry-bulk shippers are glittering, although they too, along with shipping rates, look ready for a pullback. In the meantime, strong demand for marine transport services continues to drive rates higher with the Baltic Dry Index, which tracks daily changes on the spot market for vessels of all sizes, surging 6% Wednesday to 4,543. If you care to charter a Capesize ship, the largest bulk carrier, it will cost you an average $88,560 a day, up 8% (you should have called last week). Capesize rates may go higher yet. BHP Billiton, the giant Australian miner, booked a few capsizes Wednesday for trips to China at $105,000 to $112,000 a day roundtrip, up from $100,000 on Tuesday. All the major drybulkers were up today; Excel Maritime (EXM) took the cake:

EXCEL MARITIME led drybulk shippers up today:

Petroleum supplies fell last week. The Energy Information Administration reported that oil stocks were reduced by 0.9 million barrels along with a 1.7 million-barrel drop in gasoline stocks and a 0.3 drop in distillates. Despite operating at an almost-absurdly low 79.4% of capacity (this number gets lower every week), refineries did increase gasoline output to 9.1 million barrels a day. With another 0.6 million barrels a day of imported gasoline, the total "well" exceeds domestic demand, which the EIA says is around 8.9 million barrels a day, less than at any point since July. Even with the drawdown, excess supply makes the energy markets sad. Oil didn't react much to the news, trading after hours at $79.44, despite a still-falling U.S. dollar and a report that more U.S. drivers will be driving this Thanksgiving.

DECEMBER CRUDE FUTURES:

On a light earnings day, BJ's Wholesale Club (BJ) matched Wall Street expectations of quarterly profit at 45 cents a share, down four cents from last year; the stock fell less than 2% . . . Clothier Perry Ellis International (PERY) beat expectations by a wide margin despite falling sales, but fell 1.3% anyway . . . Limited Brands (LTD), who owns Victoria's Secret (whom I believe sells women's undergarments, or something) said its third-quarter profit beat its own forecast, even excluding the benefit of a tax gain. Profit rose to two cents a share after, up one cent year over year and better than the company's prediction of break even or lose up to four cents; revenue fell 4% to $1.78 billion, exceeding analysts' estimates of $1.77 billion. The stock closed slightly higher:

LIMITED BRANDS, who owns that company with the scantily-clad ladies — what's its name again?

Finally, I'd be remiss in not mentioning gold, which is having a truly amazing run. It closed at a record high today above $1,140 an ounce after an intraday high of $1,153. Hardly surprising, with U.S. debt in the trillions. After a steep rise, most mining stocks fell slightly.

GOLD is flying:

What to expect? After these highs, and considering technical indicators, a market top looks imminent. We could see a move down, but probably not too far down, into mid-December.

Thursday's earnings announcements are heavy on retailers; they include Dick’s Sporting Goods, Casual Male, Books-a-Million, Foot Locker, Ross Stores, Sally Beauty, Sears, The Buckle, Williams Sonoma, The Children’s Place, Shoe Carnival, Stein Mart, Wet Seal, Bon Ton Stores, Zumiez, Gap Inc., and Dress Barn; also reporting are China Medical Technologies, Helmerich & Payne, Infineon Technologies, Intuit, Patterson Dental, Raven Industries, SkillSoft Corp. and Suntech Power Holdings, among others.

Possibly-market-moving announcements Thursday include jobless claims and the Energy Information Administration’s natural gas report; also expect leading indicators (which occasionally have an effect) and the Philadelphia Fed survey of economic activity in that region.


New Option Plays

Not So Solid Grounds

by James Brown

Click here to email James Brown


NEW DIRECTIONAL PUT PLAYS

Green Mountain Coffee Roasters - GMCR - cls: 65.86 chg: -2.94 stop: 71.05

Why We Like It:
Looking back over 2009 shares of GMCR have left a bloody trail of dead bears in its path. Time and time again the stock has shot higher with short squeeze after short squeeze. Now it finally looks like the upward momentum has reversed. The peak in November is creating a new lower high. Investors are selling the stock following its recent earnings report several days ago.

GMCR is now testing support near $65.00 and its 100-dma. A breakdown under this level should forecast a much deeper decline. The Point & Figure chart has turned bearish and is targeting a drop toward $55.00. I am suggesting traders buy puts on GMCR if shares hit $64.75. If triggered our first target is $60.25. Our second target is $55.50. This is going to be a very aggressive play. GMCR still has extremely high short interest. The latest data listed short interest at more than 32% of the relatively small 37 million-share float. I would use small positions given the risk.

Suggested Options:
Stocks drop faster than they climb. I'm suggesting December puts. My preference is the $60 strike.

BUY PUT DEC 60.00 QGM-XL open interest=6750 current ask $1.50

Annotated Chart:

Picked on  November xx at $ xx.xx <--  TRIGGER @ 64.75
Change since picked:       + 0.00
Earnings Date            01/28/10 (unconfirmed)
Average Daily Volume =        1.5 million  
Listed on  November 18, 2009         



In Play Updates and Reviews

Markets Drift Sideways

by James Brown

Click here to email James Brown


CALL Play Updates

Arch Cap Group - ACGL - close: 71.01 change: +0.11 stop: 67.95 *new*

It's not very convincing but ACGL did manage to rise above and close over resistance at the $71.00 level. The 50-dma has risen over $68.00 so I'm raising our stop loss to $67.95. I'm not suggesting new positions at this time. Our target is the $74.00 level.

Picked on  November 07 at $ 68.81
Change since picked:       + 2.20
Earnings Date            10/26/09 (confirmed)
Average Daily Volume =        444 thousand 
Listed on  November 07, 2009         


Caterpillar - CAT - close: 59.41 change: -0.47 stop: 57.75

CAT continues to bounce along the $59.00 level. Lack of follow through on yesterday's intraday bounce makes me a little more cautious here. I'd look for a new rise over $61.00 to launch new positions (or maybe a stronger bounce from $58.00, which is stronger support than $59.00). Our first target to take profits is at $64.00. Our second target is $68.00.

Picked on  November 16 at $ 60.40
Change since picked:       - 0.99
Earnings Date            01/26/10 (unconfirmed)
Average Daily Volume =       11.3 million  
Listed on  November 16, 2009         


Canadian Nat. Res. - CNQ - close: 68.13 change: -0.85 stop: $63.95

CNQ produced another failed rally at the $70.00 level today. The lack of follow through on yesterday's afternoon bounce is cause for concern. I'd wait for a new move over resistance at $70 before launching new positions. 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:       + 0.39
Earnings Date            03/04/10 (unconfirmed)
Average Daily Volume =        2.8 million  
Listed on  November 07, 2009         


Coach Inc. - COH - close: 34.44 change: -0.04 stop: 33.75

COH spent the session churning sideways in a relatively narrow range. I'd wait for a new rise over $35.50 or maybe even a close over $35.50 before initiating new bullish 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:       - 2.49
Earnings Date            01/21/10 (unconfirmed)
Average Daily Volume =        4.9 million  
Listed on  November 14, 2009         


Chevron Corp. - CVX - close: 78.92 change: +0.11 stop: 76.75

There is no change from my prior comments.

Shares of CVX are still consolidating sideways. Yet if you look at the intraday chart the stock appears to be coiling for a bullish breakout higher. I would still consider new bullish positions here but readers might want to wait for a new high over $79.15 first (or consider waiting for a move over $80.00, which could also be psychological resistance). Our first target is $84.00.

Picked on  November 11 at $ 78.87 /gap higher entry point
Change since picked:       + 0.05
Earnings Date            01/28/10 (unconfirmed)
Average Daily Volume =       10.6 million  
Listed on  November 10, 2009         


Deere & Co - DE - close: 51.46 change: +2.31 stop: 46.85

DE has produced a bullish breakout over significant resistance at the $50.00 level. We had a trigger to buy calls at $50.25. The stock gapped open higher at $50.52 (our new entry point). I had suggested the December calls with a preference for the $50 strike.

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.

Chart:

Picked on  November 18 at $ 50.52 *gap open higher   
Change since picked:       + 0.94
Earnings Date            11/25/09 (unconfirmed)
Average Daily Volume =        6.2 million  
Listed on  November 09, 2009         


Deckers Outdoor - DECK - close: 99.11 change: -0.07 stop: 96.95

DECK continues to churn under resistance near the $100 level. We are still waiting for a bullish breakout higher. I'm suggesting a trigger to buy calls at $100.75. If triggered our first target is $107.50.

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         


Essex Property - ESS - close: 81.02 change: +0.55 stop: 78.90

ESS managed a bounce from support near $80.00 again. Traders can use this dip near $80 as a new entry point to buy calls. More conservative traders might want to inch up their stops closer to $80.00. Our first target is $86.00. Our second target is $92.50.

Picked on  November 10 at $ 80.65
Change since picked:       + 0.37
Earnings Date            02/03/10 (unconfirmed)
Average Daily Volume =        500 thousand 
Listed on  November 09, 2009         


Gold ETF - GLD - close: 112.25 change: +0.28 stop: 104.90

Another down day for the dollar pushed gold to another new all-time high over $1,150 an ounce. Gold eventually trimmed its intraday gains. The GLD hit $113.09 this morning. Both the price of gold and the GLD ETF look overbought. I'm not suggesting new 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:       + 9.97
                               /1st target hit @ 109.50 (+7.0%)
Earnings Date            00/00/00
Average Daily Volume =       14.2 million  
Listed on   October 06, 2009         


MSC Industrial Direct - MSM - close: 46.15 change: -0.47 stop: 44.49

MSM erased most of Tuesday's gains. I would still consider new positions here but more conservative traders may want to use the alternative entry points I suggested last night (a move over $46.75 or a bounce near $45.00). Our first target is $49.75. Our second target is $52.50.

Picked on  November 17 at $ 46.62
Change since picked:       - 0.47
Earnings Date            01/07/10 (unconfirmed)
Average Daily Volume =        513 thousand 
Listed on  November 17, 2009         


Parker Hannifin - PH - close: 55.81 change: -0.28 stop: 52.90

PH dipped toward last week's low and bounced late in the afternoon. The larger trend is still up so readers can use the afternoon bounce as an entry point (use December calls). More conservative traders could up their stops toward $54.50. I am raising our stop to $53.40. 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:       + 0.56
Earnings Date            01/20/09 (unconfirmed)
Average Daily Volume =        1.6 million  
Listed on  November 03, 2009         


Waters Corp - WAT - close: 59.97 change: -0.40 stop: 58.75

There is no change from my previous comments on WAT. 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         


Roper Industries - ROP - close: 53.63 change: -0.35 stop: 51.75

ROP is still consolidating sideways. Patient traders might get a better entry point if you wait for a pull back near $52.50-52.00. Our first target to take profits is at $58.50.

Picked on  November 17 at $ 53.98
Change since picked:       - 0.35
Earnings Date            02/04/10 (unconfirmed)
Average Daily Volume =        915 thousand 
Listed on  November 17, 2009         


PUT Play Updates

Northern Trust - NTRS - close: 48.68 change: +0.09 stop: 52.25

NTRS is still trying to bounce and has found new support near $48.00. Yet the stock continues to under perform its peers. The banking indices were up more than 1.3% today. NTRS only gained 0.18%. Look for shares to find some resistance in the $49.50-50.50 zone. Wait for the bounce to roll over before initiating new bearish trades. 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:       - 0.50 
Earnings Date            01/21/10 (unconfirmed)
Average Daily Volume =        3.0 million  
Listed on  November 12, 2009         


Research In Motion - RIMM - close: 59.85 change: -1.55 stop: 65.26

An analyst downgrade this morning pushed RIMM to a 2.5% decline and a close under round-number support at $60.00. This relative weakness is encouraging if you're a bear. I still hesitate to launch new positions given the upward trajectory in the major averages but RIMM is one of the better looking bearish candidates. 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:       - 1.95
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: 37.85 change: -0.02 stop: n/a

The S&P 500 and the SSO have been churning sideways the last two sessions. I am not suggesting new strangle 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:       + 0.77
Earnings Date            --/--/--
Average Daily Volume =         32 million  
Listed on  November 11, 2009