Option Investor
Newsletter

Daily Newsletter, Wednesday, 11/25/2009

Table of Contents

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

Market Wrap

Decent News Wednesday Keeps Dow, S&P Up

by Judy Alster

Click here to email Judy Alster
A decent spate of data and a new 52-week low for the dollar — down more than 1% against other major currencies, its worst single-day loss in almost four months — kept the three major indexes in the green Wednesday, although barely.

MAJOR MARKET INDEXES, Wednesday, Nov. 25:

Volume was unsurprisingly lower than yesterday's on this day before Thanksgiving.

ADVANCERS, DECLINERS:

The Dow gained a decent 30.69 or 0.29% to 10464.40 . . . .

DOW JONES INDUSTRIAL AVERAGE:

. . . the S&P500 gained a respectable 4.98 or 0.45% to 1110.63, maintaining its critical foothold above 1,100 . . . .

S&P500 INDEX:

. . . and the Nasdaq added 6.87 or 0.32% to 2176.05.

NASDAQ:

A lot of economic data was announced today. For openers, you can partly thank the Labor Department for keeping today's numbers up. According to Labor's early-morning jobless claims report, the number of newly laid-off workers filing claims for unemployment benefits fell more than expected last week to the lowest level in over a year. In addition, the number of people filing first-time claims for jobless benefits fell by 35,000 to 466,000, the lowest level for initial claims since the week of Sept. 13, 2008 and far better than the 500,000 that economists had expected, having a beneficial effect on all three major indexes.

WEEKLY JOBLESS CLAIMS fall:

The number of workers receiving benefits fell sharply too, dropping 190,000 to 5.42 million, the lowest level for continuing claims since February. (Caution: Try not to read too much into this drop. Part of the improvement reflected large seasonal adjustment factors, which smooth out the changes that normally occur at certain times of the year. Excluding seasonal adjustments, claims rose, which is normal at this time of year when a large number of construction workers face layoffs because of worsening weather conditions.)

Regular state-level continuing initial jobless claims run out after 26 weeks; after that, people are moved to federally funded extended initial jobless claims (part of the stimulus package), so the continuing claims number does not tell the whole story. But the extended benefits figure also declined this week, hinting that some people are actually finding new jobs rather than simply running out of time for even the extended benefit program. For retailers, this news could not have come at a better time.

The concern is that this improvement will be merely temporary because even with all this upbeat news, the unemployment rate hit a 26-year high of 10.2% (!) in October. Many economists think the recovery will remain so dull that the jobless rate will keep rising, possibly topping 10.5% by the middle of next summer. The consensus is that claims need to drop to around 425,000 to signal any actual growth in employment. The big problem in the labor market this time around is not that layoffs are that abnormally high, but that hiring is abnormally low. Once a job is lost, you can fairly safely bet that's it's gone for good.

THE U.S. JOBLESS RATE continues up:

Even now, companies are not finished laying off workers. Internet pioneer AOL plans to cut up to 2,500 jobs, more than a third of its work force, once it is spun off from the media conglomerate Time Warner (TWX). (And we all remember how wildly expensive that wedding was.) Health insurance mammoth Aetna (AET) will kill 625 jobs by the end of this year and another 600 next year, a reduction of 3.5%. The number of customers Aetna has for medical coverage is more than 19 million, up 8% in the third quarter, but it expects to lose 225,000 in the fourth quarter and another 650,000 in the first quarter of 2010. Blame high unemployment, the sickening increases in the cost of health care, and the topper, uncertainty about the effects of the health care reform bills being considered by Congress. The announcement gave the stock a boost, though:

AETNA rises on job cut news:

Boeing (BA) will say goodbye to about 250 employees after losing a $3.8 billion Air Force contract to Northrop Grumman (NOC). Alcoa (AA) is cutting 250 jobs in its power and propulsion division, what with demand for gas turbines 'way down.

Nobody can seem to answer the question, "Where will new jobs come from?" Some members of Congress, possibly not the wisest, want to spend money to retain workers in rapidly-shrinking industries. This is less than visionary: Industries shrink for a reason and all the money in the universe isn't going to rejuvenate them. Moreover, it's difficult and time-consuming for displaced, often older, workers to learn new skills after long years of working in another field. Oh, but "green industries" are going to lead us to a wonderful economic boom with plenty of new jobs!, I can hear the greenies burbling. Uh huh. Sure. Maybe after half a dozen years and billions in investment. As it stands right now, unless a whole new sector of the economy is created Friday, or if Asia magically vanishes and we start manufacturing again, high unemployment and a lower standard of living for many people are going to be the new norm, if they aren't already. That's harsh, but it's best to call 'em like you see 'em. You'll lose friends, but at least history will record your true worth.

As far as manufacturing is concerned, that outlook cooled off last month. New orders for durable goods in October fell 0.6% after a revised 2% rebound in September. Expectations were for a 0.5% boost but even so, the market didn't stumble. Excluding the transportation component, new durables orders actually fell 1.3% after 1.8% jump in September.

Apropos just briefly of the rise in transportation orders, the American Trucking Associations’ advance seasonally adjusted For-Hire Truck Tonnage Index oddly decreased 0.2% in October, following a 0.3% contraction in September. Year over year, though, tonnage fell "only" 5.2%, the best year-over-year showing since November 2008. Trucking does serve as a fair barometer of the U.S. economy. Since consumer spending and manufacturing haven't been surging, trucking shouldn’t expect robust growth yet.

KEEP ON TRUCKIN,' eventually:

The drop in new orders was led by machinery, which fell a hefty monthly 8%; computers & electronics fell 2.1%, accompanied by declining communications equipment and "other" durables. Moving up were primary metals, fabricated metals, electrical equipment, and transportation. New orders for capital equipment continued to rebound from a drop in August with the gain due to aircraft. New orders for nondefense capital goods rose 1.2% in October; alas, excluding aircraft, new orders for nondefense capital goods fell 2.9% after a 2.6% rebound in September.

Year over year, overall new orders for durable goods improved to minus-11.9% last month from minus-18.8%. Eliminate transportation and new durables orders rose to down-11.3% from down 16.3%. Obviously, the recovery in manufacturing is not running entirely smoothly, which is to be expected.

The Mortgage Bankers' Association purchase index jumped 9.6% last week, laughing at the declines of the prior two weeks. Possibly the disappointment over the temporary end of the first-time buyer credit was just a nasty blip. We'll see. Refinancing applications fell 9.5% in the week, but still make up more than 70% of all applications (why they don't separate the two is a continuing mystery), a reflection of very low mortgage rates, an average 4.82% percent for 30-year fixed loans.

MORTGAGE APPLICATIONS since 2002:

A few words about the MBA Index. Since 2007, the index, ordinarily predictive of future sales, has needed to be taken with a grain of salt. The increase in 2007 was due to the method used to construct the index: the combination of lender failures and borrowers filing multiple applications pushed up the index in 2007 even though activity was actually declining. Recently there have been a large number of cash buyers, so the MBA index has missed some of the strength of the recent existing home sales increase. Still, the housing market is far, far from out of the woods. Housing stocks did nothing much today; luxury builder Toll Brothers (TOL), for example, can expect to sell just so many half-million dollar homes in this economy, and that fact would seem to be catching up with the stock:

TOLL BROTHERS:

In genuine good news, new home sales showed real gains in October, also tied to the extension after the expiration of that tax credit. New home sales jumped 6.2% to a much higher-than-expected annual rate of 430,000. Supply is low, the result of improving sales but also reflecting the heavy and probably healthy cutback in housing starts. Only 239,000 new homes were on the market in October in what is the lowest number since 1971. Supply at the current sales rate fell to 6.7 months after September's 7.4 months and much more promising than 11.1 months a year ago.

Thin supply is helping prices with the median price up 0.7% in the month to $212,200 for a year-over-year rate of a just minus-0.5%. Before we jump up and down, remember that October's results were skewed by stimulus effects and probably won't be repeated as strongly in November. It's an improvement, though, and did its bit to offset dreary consumer sentiment news. Commodities moved higher in reaction to today's report.

DEUTSCHE BANK COMMODITIES INDEX:

Personal income was mildly up in October and so was spending as auto sales rebounded. Income nudged up 0.2%, in line with estimates, after a revised 0.2% rise in September; personal consumption expenditures jumped 0.7% after a 0.6% drop in September, beating the market estimate and led by durables. Year over year, personal income growth for October came in at minus-1%, a little better than September's minus -.6%. Wages and salaries were unfortunately flat after a fractional dip in September, indicating that consumer spending power has little or no tailwind. The announcement didn't do much to move the market either way, although consumer-goods leader Wal-Mart (WMT) has been moving up steadily. Does it see signs of a fair Christmas holiday?

WAL-MART quietly rising:

Layoffs may be falling, spending may be rising, but consumers aren't feeling too good themselves. x The Reuters/University of Michigan's consumer sentiment index came in at 67.4 for November, down from 70.6 in October. Let’s look at the bright side: It's well up from February and March of this year.

In a related note, I was happy to come across this graph from calculatedriskblog.com showing that the savings rate has actually been rising, a very good thing.

SAVINGS RATE has been rising:

Incidentally, one of today's most gripping stories, to me, anyway, was the one that reported that even hedge funds, notorious for picking volatile and sometimes even wacky, stocks, have lately been making conservative dividend picks. (This is like saying, "A spokesman for Evel Knievel has announced that the world-famous motorcycle daredevil is working at the Second Avenue Deli behind the bagel counter.") Being an eternal fan of dividend stocks, I was gratified to find that oldies but goodies like McDonald's (MCD), Wal-Mart (WMT), Johnson&Johnson (JNJ), Procter & Gamble (PG), Exxon Mobil (XOM) and Teva Pharmaceuticals (TEVA) are popular hedge fund picks. Purely as one investor to another, I would suggest Altria (MO, yielding 7%), and Waste Management (WM, yielding 3.50%) as starting points for further research. (Disclosure: I do not own any of the stocks mentioned.)

JOHNSON&JOHNSON, a dividend-bearing favorite even among the risk-tolerant . . . .

. . . and high-yielding ALTRIA, worth a look:

Agricultural-equipment-maker Deere & Co. (DE) swung to a fourth-quarter loss. The company significantly devalued its landscaping business and felt the wallop from a sharp decline in demand for farming, construction and forestry equipment. Net loss was $222.8 million or 53 cents a share, down sharply from $345 million or 81 cents a share last year. Without one-time items, it would have recorded a profit. The stock rose on the news, with analysts saying the company is now positioned for growth.

DEERE: the worst is probably behind it:

Tiffany & Co. (can you get further away from John Deere than that) posted a better-than-expected third-quarter profit on Wednesday and raised its full-year outlook. Net income fell to $43.3 million from $43.8 million, with per-share earnings unchanged at 35 cents. Sales fell about 3%. The third-quarter rate of sales decline in the U.S. slowed, while demand picked up more than expected in Asia and Europe. So far, November sales have tracked favorably to its expectations. The stock had a good day:

TIFFANY up on raised outlook:

J. Crew Group's (JCG) stock soared $3.20 or 7.8%, reversing a downtrend after announcing Tuesday after hours that its profit more than doubled, surpassing Wall Street's projections . . . .Microsoft (MSFT) slipped a few cents on the company's announcement that its highly-admired chief financial officer will soon leave . . . Data storage firm EMC (EMC) cited an expected fourth-quarter reorganization charge of about $100 million for its lower earnings projections for the fourth quarter . . . Russian dairy giant Wimm-Bill-Dann (WBD; they named it after Wimbledon, the tennis venue; I don't know why) saw its net up 44% but sales off 25%; the stock lost 14 cents . . .

Petroleum and natural gas reports were both out today. Low demand meant upticks in oil and gasoline stocks last week, with oil stocks up one million barrels. Oil imports were up too, as were gasoline stocks on flat demand. Increased refinery output helped the gasoline buildup. Oil prices fell slightly on the report, then regained their composure.

WEST TEXAS CRUDE:

Natural gas in storage also rose last week rose, 2 billion cubic feet.

NATURAL GAS INDEX up too:

Gold futures climbed to a crazy record above $1,182 an ounce Wednesday, up over $14, after a report that India is open to buying more gold from the International Monetary Fund drew even more investors into the bullion market. In early November, India bought 200 metric tons of gold for $6.7 billion; it was almost half the total sales volume of 403.3 metric tons that the IMF approved in September . . . . The U.S. dollar fell yet again against other major currencies, to below 75 this time, further boosting gold's appeal as a hedge against inflation.

GOLD just keeps going:

No reports tomorrow and of course, no trading. Not much in the way of market movers until Tuesday when we get the manufacturing index and pending home sales.

Wishing you all a delightful Thanksgiving.


New Option Plays

Tryptophan Coma

by James Brown

Click here to email James Brown

Editor's Note:

Trading on Wednesday was extremely slow. It looks like the market has already fallen into the carbohydrate and turkey-induced coma so common after a Thanksgiving feast. The market's overall tone is still generally positive but we're probably not going to see much action in the market until next week.

I'm not adding any new plays tonight as volume on Friday will be even lower. Look for new candidates in the weekend newsletter.

Have a wonderful Thanksgiving. We have much to be thankful for.

- James



In Play Updates and Reviews

Traditionally Quiet

by James Brown

Click here to email James Brown

Editor's Note:

It comes as no surprise to see the stock market quietly trading sideways ahead of the Thanksgiving holiday here in the U.S. This trend could continue on Friday but the day after Thanksgiving has always been something of a wildcard (although it tends to be bullish more often than not). We did not see a lot of movement in our current trading candidates.


CALL Play Updates

Arch Cap Group - ACGL - close: 69.95 change: -0.01 stop: 67.95

ACGL delivered a very quiet session with a sideways consolidation near $70.00. I'm not suggesting new bullish positions at this time. Our target is the $74.00 level.

Picked on  November 07 at $ 68.81
Change since picked:       + 1.14
Earnings Date            10/26/09 (confirmed)
Average Daily Volume =        444 thousand 
Listed on  November 07, 2009         


Capella Education - CPLA - close: 72.03 change: -0.52 stop: 69.49

Our new aggressive trade on CPLA is not off to a very good start. Shares under performed the market with a 0.7% decline. At this point I'd probably look for a bounce over $73.50 to initiate new positions (or a bounce from $70.00). More conservative traders can wait for a move over resistance at $75.00 (and/or up their stops toward this week's low).

We suggested small positions. If CPLA does breakout over $75.00 we can choose to add to our positions. I do consider this an aggressive, higher-risk trade. Currently the Point & Figure chart is bullish with an $85 target. I'm setting our first target at $79.50.

Picked on  November 24 at $ 72.55
Change since picked:       - 0.52
Earnings Date            02/11/10 (unconfirmed)
Average Daily Volume =        126 thousand 
Listed on  November 24, 2009         


Gold ETF - GLD - close: 116.62 change: +1.89 stop: 109.49 *new*

The price of gold continues to soar. Today's breakdown in the U.S. dollar pushed gold to a new all-time high near $1,190.00 an ounce. That lifted the GLD to $116.88 intraday. This commodity is so overbought here then when it does see a correction it will be a sharp one. However, it can always get more overbought. My target on gold is the $1,300 region.

I am turning more cautious on the GLD and more conservative traders will want to seriously consider taking some money off the table right now! I am adjusting our final exit target down to $118.50 and our stop loss up to $109.49. I am not suggesting new positions at this time.

Picked on   October 06 at $102.28
Change since picked:       +14.34
                               /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: 47.22 change: +0.56 stop: 44.49

MSM displayed some relative strength with a 1.2% gain and a close over short-term resistance near $47.00. Our first target is $49.75. Our second target is $52.50.

Picked on  November 17 at $ 46.62
Change since picked:       + 0.60
Earnings Date            01/07/10 (unconfirmed)
Average Daily Volume =        513 thousand 
Listed on  November 17, 2009         


Norfolk Southern - NSC - close: 51.84 change: +0.35 stop: 49.75

NSC is bouncing back but the current trend is still a sideways consolidation. I'm bullish on NSC but more cautious traders might want to wait for a new relative high first (over 52.85) to initiate positions.

Our first target to take profits is at $54.90. Our second target is $58.50. Our time frame is several weeks. FYI: The Point & Figure chart is bullish with a $65 target.

Picked on  November 21 at $ 51.84 (small positions)/gap higher entry
Change since picked:       - 0.00
Earnings Date            01/27/10 (unconfirmed)
Average Daily Volume =        5.4 million  
Listed on  November 21, 2009         


Vertex Pharma - VRTX - close: 39.38 change: +0.32 stop: 38.49

VRTX is still trying to bounce but shares are facing short-term resistance at the 10-dma and at the $40.00 mark. I'm suggesting a trigger to buy calls at $40.25. We'll use a stop under last week's low. Our target to exit is at $44.25. My time frame is several weeks.

Picked on  November xx at $ xx.xx <-- TRIGGER @ 40.25
Change since picked:       + 0.00
Earnings Date            02/09/10 (unconfirmed)
Average Daily Volume =        3.2 million  
Listed on  November 23, 2009         


Waters Corp - WAT - close: 59.78 change: +0.36 stop: 58.75

I don't see any changes from yesterday's comments. More aggressive traders might want to consider bullish positions on a move over $60.00. I'm suggesting readers wait for a move over $61.50. If triggered at $61.50 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

Green Mountain Coffee Roasters - GMCR - cls: 63.36 chg: -0.60 stop: 71.05

GMCR continues to under perform the market. Meanwhile the bidding war for DDRX has yet to be concluded but GMCR is in the stronger position and has the ability to outbid PEET.

I remain bearish on GMCR but it would be risky to open new bearish positions with the stock market drifting toward new highs. GMCR is already a dangerous stock to be bearish on. GMCR has extremely high short interest. Our first target is $60.25. Our second target is $55.50.

Picked on  November 19 at $ 64.75
Change since picked:       - 1.39
Earnings Date            01/28/10 (unconfirmed)
Average Daily Volume =        1.5 million  
Listed on  November 18, 2009         


Goldman Sachs - GS - close: 168.92 change: -2.21 stop: 176.05

I find it very interesting that GS under performed the market today. The stock broke several layers of support near the $170.00 level and hit our trigger to buy puts at $168.75. Our play is open. Our first target is $155.50. More aggressive traders could aim for the $150 area or the 200-dma.

Editor's note on GS' earnings:
A reader brought up a good question last night. GS traditionally reports their Q4 earnings in the middle of December. Yet the company changed their reporting period last quarter and instead of announcing Q3 numbers in September they announced them in October. That might mean that GS' next earnings release may not happen until January.

Chart:

Picked on  November 25 at $168.78
Change since picked:       + 0.14
Earnings Date            12/15/09 (unconfirmed)
Average Daily Volume =        9.5 million  
Listed on  November 21, 2009         


iShares Biotech - IBB - close: 79.11 change: +0.61 stop: 80.05

More conservative will want to consider an early exit now that the IBB has closed over its 50-dma. I'm keeping the play open. The IBB still has resistance at its nine-week trendline of lower highs and at the $80.00 level. Yet I will admit with the S&P 500 drifting higher we're at a disadvantage here and odds are growing that we'll get stopped out. I am not suggesting new bearish positions at this time. We may want to consider switching directions and buying calls if the IBB can close over resistance at $80.00.

The biotech stocks can be a volatile group so I'm suggesting small positions. Our target is near the November lows at $73.50.

Picked on  November 19 at $ 77.18 /gap down entry point
                             /originally listed at $77.86
Change since picked:       + 1.93
Earnings Date            --/--/--
Average Daily Volume =        4.9 million  
Listed on  November 19, 2009         


Northern Trust - NTRS - close: 48.21 change: +0.14 stop: 50.26

Banking stocks under performed the rest of the market on Wednesday yet NTRS displayed relative strength versus its peers. I'm not suggesting new positions at this time. Our first target is $45.85. Our second target is $41.00. The Point & Figure chart is bearish and its target has fallen from $39 down to $35 in just the last few days.

Picked on  November 12 at $ 49.18
Change since picked:       - 0.97 
Earnings Date            01/21/10 (unconfirmed)
Average Daily Volume =        3.0 million  
Listed on  November 12, 2009         


Research In Motion - RIMM - close: 59.76 change: +0.23 stop: 65.26

I remain very cautious on RIMM. I'm not suggesting new positions at this time. 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:       - 2.04
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.)

Goldman Sachs - GS - close: 168.92 change: -2.21 stop: n/a

The move past $170.00 offered another entry point to launch strangle positions on GS. I don't see any changes from my previous comments.

The options suggested were the December $180 calls (GPY-LP) and the December $160 puts (GPY-XL). Our estimated cost is about $4.61. We want to sell if either option hits $9.00 or higher.

Picked on  November 21 at $171.67 /gap open entry
Change since picked:       - 2.75
Earnings Date            12/15/09 (unconfirmed)
Average Daily Volume =        9.5 million  
Listed on  November 21, 2009         


Ultra(Long)-S&P500 - SSO - close: 37.87 change: +0.26 stop: n/a

SSO is butting up against resistance near the $38.00 level. More nimble traders may want to consider directional call plays on a breakout above $38.00. I'm 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:       + 0.79
Earnings Date            --/--/--
Average Daily Volume =         32 million  
Listed on  November 11, 2009         


United Parcel Service - UPS - close: 58.20 change: +0.28 stop: n/a

UPS spent the session drifting sideways. I don't see any changes from my prior comments. The options suggested for this trade were the December $60 calls (UPS-LL) and the December $55 puts (UPS-XK). Our estimated cost is $1.05. We want to sell if either option hits $3.00 or more.

Picked on  November 21 at $ 57.99 /gap open entry
Change since picked:       + 0.21
Earnings Date            02/02/10 (unconfirmed)
Average Daily Volume =        4.7 million  
Listed on  November 21, 2009