Option Investor
Newsletter

Daily Newsletter, Monday, 11/30/2009

Table of Contents

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

Market Wrap

Stocks Rise As Dubai Fears Cool

by Todd Shriber

Click here to email Todd Shriber
U.S. equities put fears over the Dubai financial crisis behind them on Monday as all three major indexes moved higher on the day. The S&P 500 extended its gains for November, adding 8.36 points to close at 1095.63. The Dow Jones Industrial Average gained almost 35 points to finish the day at 10344.84 and the Nasdaq added just over six points to close at 2144.60.

Stats Table

As I always say, an up day is better than a down day, but given the losses incurred on Friday in the wake of the Dubai news, Monday's gains were not enough to get the major indexes back to their pre-Thanksgiving levels. The S&P 500 still trades below the critical 1100 area and any hopes for 2200 Nasdaq 2200 may have to be shelved for awhile as the index could not even reclaim 2150 on Monday. The weak trade in the Nasdaq was curious to say the least given the bullish trade in two big Nasdaq components, Amazon (AMZN) and eBay (EBAY).

In recent years, the Monday following Thanksgiving has become known as “Cyber Monday,” the online retail world's answer to “Black Friday.” Analysts are expecting Cyber Monday sales to reach a record this year as more shoppers opt for the ease of Internet shopping over a trip to the local shopping mall. Web tracking firm comScore said as much as $900 million could be spent online today as retailers offer big discounts and free shipping. That would represent a hefty increase from the $595 million that was spent online on Black Friday.

This should be good news for Amazon, considered one of the Four Horsemen of the Nasdaq, and it was as Amazon shares touched an all-time high of $136.08 before settling at $135.91. The chart below shows a significant gap up for Amazon in October around the time of the company's last earnings report and conventional wisdom says gaps normally get filled in, but Amazon has shown nothing but strength over the past month and the company appears poised to be a prime beneficiary of the online holiday shopping trend.

Amazon Chart

Amazon trades at a lofty 53.7 times forward earnings meaning the stock is neither cheap by price nor by underlying fundamentals. That could mean investors may start to favor eBay, which was up 5.4% on Monday. eBay is far cheaper at just 15 times forward earnings and $24.47 a share, but the trade in the stock was robust on Monday. Volume was about 40% higher than the daily average and the 52-week high of $25.80 isn't that far off. There are two reasons eBay may be another winner this holiday season. First, transaction volume at the company's PayPal unit is increasing. Second, eBay is a bargain hunter's nirvana and with newly frugal consumers looking for every chance to spend less this year while still giving nifty gifts, eBay may actually benefit as shopper hunt for the best deals.

The bottom line here is that two of the Nasdaq's most visible members are looking bullish, but the index in general looks lethargic. Perhaps this is the market's way of saying the Nasdaq needs more help than what Amazon and eBay can offer. Or maybe not. Either way, time will tell.

With all of this fervor over Cyber Monday, one might expect retailers to have led the market advance on Monday. Oddly enough, financials were the best performers of the 10 industry groups tracked in the S&P 500. Dow component JPMorgan Chase (JPM) added 2.81% and Wells Fargo (WFC) gained 3.32% to lead the sector higher. Goldman Sachs issued a bullish research note on Monday, saying it continue to favor big banks and credit card issuers over their regional counterparts. Goldman says it is still bullish on JPMorgan Chase, Bank of America (BAC) and Capital One (COF).

One black mark for financials on Monday came a from a name that seems to be a perpetual black on the sector. American International Group (AIG), the infamous insurance concern, plunged nearly 15% after a Sanford C. Bernstein analyst said the company has an $11 billion shortfall in property-casualty claims and that may impair the company's ability to repay its debt to the U.S. government. Bernstein lowered its price target on AIG by 40% to $12, a far cry from $28.40 where the shares closed at.

AIG owes Uncle Sam something in the neighborhood of $182 billion and some rivals say the company was selling insurance products too cheaply in an effort to simply retain clients. Good luck keeping clients when you cannot pay their claims. If you are in the mood for a chuckle, the AIG chart is below.

AIG Chart

Speaking of Goldman Sachs calls, the steel sector also curried some favor from Goldman on Monday, earning an upgrade to ''attractive'' from ''neutral.'' Goldman placed U.S. Steel (X), the largest U.S. steelmaker, on its highly regarded ''conviction buy'' list. Goldman also likes AK Steel (AKS), Nucor (NUE) and Steel Dynamics (STLD). Goldman is forecasting a return to growth for the steel industry in 2010, buoyed by demand from automakers and other industrial customers. In addition, low inventories and a weak dollar should help firm up steel prices in the U.S. Of course a rebound in steel demand could lend some help to the market rally. Materials names, including steel issues, have certainly helped the market move higher, but many steel stocks have posted gains on the back of sketchy fundamentals.

Steel Demand

And all this talk of materials reminds me that is to time to mention gold. By now, most of you probably think I am a goldbug given the frequency with which I mention the yellow metal. Personal feelings aside, the trend for gold is undeniable. December gold futures were up $6.90 to $1181 an ounce on Monday and my best guess is that they will soon traverse last week's record high of $1188 an ounce. Gold rose 13% in November, posting only three losing sessions, good for the metal's best month since November 2008. Futures were up 14% on the month, and that's good for the best performance in a decade.

A weak dollar and renewed buying by global central banks bolstered gold prices in November and catalysts like the Dubai debt crisis do not hurt gold's cause. Gold's run higher has lifted the precious metals group at large and I would be remiss if I did not mention the iShares Silver Trust ETF (SLV) again. SLV has traded in lockstep with comparable gold ETFs over the last several months, but have a look at the chart below, which illustrates the divergence in gold and silver price performance since March. In what may be a surprise to some, silver is the clear winner. So while the market continues to laud gold with most of the precious metals headlines, there are certainly other profitable opportunities to be had.

Gold/Silver Chart

Looking ahead to Tuesday, expect a busy day in terms of economic data. Frankly, this week is chocked full of important economic reports. The Institute for Supply Management (ISM) delivers its November manufacturing report, which is expected to show a reading of 54.8, down from 55.7 in October. That number comes out at 10 AM Eastern time and at the same time, the National Association of Realtors (NAR) should report a 0.5% dip in pending home sales for October after a 6.1% jump in September.

The Census Bureau is expected to report a 0.4% drop in construction spending in October, which will erase part of September's 0.8% gain. Monthly auto sales will also be reported on Tuesday. Expect a drop from the October number. There are a couple of other pivotal reports this week, but the crown jewel will be November non-farm payrolls number, which will be released Friday before the market opens.

Taking a look at the charts, the Dow bounced off support in the 10300 area today and that is a good sign as a move to 10200 area would not have been good news. Resistance continues to loom in the 10500 area where the Dow peaked at 10495 before moving down last week on the Dubai news. Even if the fallout from Dubai looms longer than expected or wanted, the impact is likely to be felt more on emerging markets stocks than on blue chips and some investors may run to the relative safety offered by many Dow members.

Dow Chart

The S&P 500 is a different, perhaps more concerning story. While the index found support at 1085 last week, even with today's pop, the index still languishes below 1100. Monday's trade still leaves the S&P 500 a healthy 18 points away from the November peak of 1113.69. If 1085 can hold firm as support, that is a good sign. If not, well let me just say that the holidays may not be so cheery for many on Wall Street.

S&P 500 Chart

And if you really want some reasons to be concerned, check out the Nasdaq. As I mentioned earlier, the Nasdaq managed only a tepid gain on a day when two of its biggest players, Amazon and eBay, were heavily embraced by investors. Techs have been a key catalyst of the market rally, but the Nasdaq was beaten away by resistance at 2200. The near-term trend for the Nasdaq is not all that encouraging as the index peaked below its 50-day moving average last week and barely moved back above that line on Monday.

Another dip below the 50-day moving average could show us how strong support at 2100 is and if it is not strong, a move below 2050 could be in the offing.

Nasdaq Chart

I do not normally opine about the Russell 2000, but maybe I should. Small-caps may be in some trouble as evidenced by news that the iShares Russell 2000 Index ETF (IWM) is seeing significant outflows. After gaining $2.2 billion in new investments from July to September, $1 billion has departed IWM since the beginning of October. Remember that small-caps typically outperform their larger peers coming out of bear markets and recessions, so this outflow news may be a negative sign.

Russell 2000 Chart

While it was encouraging to see stocks move past the Dubai news on Monday, I think the technical pictures for the Nasdaq and S&P 500 are less than rosy. If at least one of those two could start moving back to and beyond their critical resistance levels, that might give the bulls some more ammo to carry this rally into the holidays. Caution appears warranted at this junction.


New Option Plays

Transports and Consumer Electronics

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Fedex Corp. - FDX - close: 84.45 change: +1.80 stop: 80.75

Why We Like It:
The transportation index is still struggling with resistance around the 4,000 level but shares of FDX are poised to breakout to new highs. Shares displayed relative strength today with a 2.1% gain. More aggressive traders might want to buy calls now. I want to see a new high so I'm suggesting a trigger to buy calls at $85.75. I am suggesting readers use small positions given the uninspired performance in the transportation index. If triggered our first target to take profits is at $89.95. Our second target is $94.00. The Point & Figure chart is bullish with a $112 target.

FYI: Readers should note that I'm listing December options, which expire in three weeks. I would prefer to buy January calls but FDX is going to report earnings before December option expiration and we'll exit ahead of the earnings report so there is no need to pay for January's premium.

Suggested Options:
I'm suggesting the December calls. My preference is the $85 strike.

BUY CALL DEC 85.00 FDX-LQ open interest=7085 current ask $2.55

Annotated Chart:

Picked on  November xx at $ xx.xx <-- TRIGGER @ 85.75 (small pos). 
Change since picked:       + 0.00
Earnings Date            12/17/09 (confirmed)
Average Daily Volume =        2.6 million  
Listed on  November 30, 2009         


NEW MARKET NEUTRAL STRANGLE PLAYS

(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.)

Apple Inc. - AAPL - close: 199.91 change: -0.68 stop: n/a

Why We Like It:
AAPL looks like it's at a turning point. The stock has been under performing the market the last few days. Shares have pulled back toward round-number support at the $200 level. This is close to support at its rising 50-dma and the bottom of its rising bullish channel. We should see AAPL rally from here or breakdown. You could argue that the trend is your friend but the rally looks tired off its March lows.

That's why I'm suggesting a strangle. This way we don't care what direction AAPL goes. Our risk is that shares just trudge sideways. I'm listing two different strangles. The December one is cheaper but we've only got three weeks for it to work. The January strangle gives us more time.

Suggested Options:
December Strangle: I'm suggesting the December $210 calls (AJL-LV) and the December $190 puts (APV-XR). Our estimated cost is $3.83. We want to sell if either option hits $8.00 or more.

BUY CALL DEC 210 AJL-LV open interest=42,508 current ask $1.96
-and-
BUY PUT DEC 190 APV-XR open interest=19,295 current ask $1.87

January Strangle: I'm suggesting the January $220 calls (AJL-LV) and the January $180 puts (APV-XR). Our estimated cost is $5.60. We want to sell if either option hits $10.00 or more.

BUY CALL JAN 220 AJL-AX open interest=36,748 current ask $2.82
-and-
BUY PUT DEC 190 APV-MP open interest=11,708 current ask $2.78

Annotated Chart:

Picked on  November 30 at $199.91
Change since picked:       + 0.00
Earnings Date            01/21/10 (unconfirmed)
Average Daily Volume =       15.1 million  
Listed on  November 30, 2009         



In Play Updates and Reviews

Not Alarmed

by James Brown

Click here to email James Brown

It looks like investors are not that concerned about the Dubai World problem. Traders bought the dip midday and stocks posted gains by the closing bell.


CALL Play Updates

Capella Education - CPLA - close: 71.28 change: +0.23 stop: 69.65 *new*

CPLA has produced a two-week correction but traders bought the bounce from support near $70.00 and its rising 50-dma. The low was actually $69.70. I see the rebound from $70 as a new bullish entry point. Right now the December $75 calls are $0.75 each. If you were waiting for an entry this is it. We can up our stop loss to $69.65. If you open positions now you can take profits at $74.90. I do consider this an aggressive, higher-risk trade. Currently the Point & Figure chart is bullish with an $85 target. The target for our earlier position is $79.50.

Picked on  November 24 at $ 72.55
Change since picked:       - 1.27
Earnings Date            02/11/10 (unconfirmed)
Average Daily Volume =        126 thousand 
Listed on  November 24, 2009         


Gold ETF - GLD - close: 115.64 change: +0.58 stop: 109.49

Friday's bounce in the dollar is fading and gold posted another gain. The GLD was up 0.5% on Monday. I am repeating my comments from earlier that more conservative traders will want to seriously consider an early exit right now to lock in a gain.

Last week I lowered our final exit target to $118.50. I am not suggesting new positions at this time.

Picked on   October 06 at $102.28
Change since picked:       +13.36
                               /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: 45.90 change: -0.31 stop: 44.90 *new*

This could be another entry point in MSM. Traders bought the dip near at $45.39. I have been suggesting a bounce near $45 as a new entry point. At this point I'm upping our stop loss to $44.90. Our first target is $49.75. Our second target is $52.50.

Picked on  November 17 at $ 46.62
Change since picked:       - 0.72
Earnings Date            01/07/10 (unconfirmed)
Average Daily Volume =        513 thousand 
Listed on  November 17, 2009         


Norfolk Southern - NSC - close: 51.40 change: +0.21 stop: 49.75

NSC managed a bounce but it barely kept pace with the S&P 500. I'm still suggesting readers wait for more relative strength (like a new relative high) before launching new 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:       - 0.44
Earnings Date            01/27/10 (unconfirmed)
Average Daily Volume =        5.4 million  
Listed on  November 21, 2009         


Precision Castparts - PCP - close: 103.68 change: -1.59 stop: 103.49

PCP under performed the market on Monday with a 1.5% decline. I didn't see any news to account for this relative weakness.

I am suggesting a trigger to buy calls at $107.35. If triggered our first target to take profits is at $112.45. Our second target is $118.75. The Point & Figure chart is bullish with a $131 target.

Picked on  November xx at $ xx.xx <-- TRIGGER @ 107.35
Change since picked:       + 0.00
Earnings Date            01/20/10 (unconfirmed)
Average Daily Volume =        817 thousand 
Listed on  November 28, 2009         


Vertex Pharma - VRTX - close: 38.82 change: -0.18 stop: 38.49

Investors are still buying the dip in the $38.50-39.00 zone but VRTX can't seem to break the short-term bearish trend of lower highs. You can see the simple 10-dma putting pressure on the stock. Our plan hasn't changed. 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         


PUT Play Updates

FISERV Inc. - FISV - close: 46.24 change: -0.05 stop: 48.55

FISV slipped to $45.55 and bounced. I would not be surprised to see a little oversold bounce from here. Over the weekend I suggested that more patient traders wait for a failed rally in the $47.50-48.00 zone, which will probably happen. I would expect a bounce on the first touch at the $45 level. The P&F chart is bearish with a $41 target. I'm listing our exit target at $42.25. More aggressive traders could aim for the $40 level.

Picked on  November 28 at $ 46.29
Change since picked:       - 0.05
Earnings Date            02/02/10 (unconfirmed)
Average Daily Volume =        1.4 million  
Listed on  November 28, 2009         


Green Mountain Coffee Roasters - GMCR - cls: 62.98 chg: +0.03 stop: 71.05

Monday turned out to be a quiet session for GMCR with shares churning in a narrow range. I don't see any changes from my prior comments.

This is a higher-risk trade. 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:       - 1.77
Earnings Date            01/28/10 (unconfirmed)
Average Daily Volume =        1.5 million  
Listed on  November 18, 2009         


Goldman Sachs - GS - close: 169.66 change: +5.85 stop: 176.05

Banking stocks rallied sharply when it looked like the Dubai World crisis might be contained. Shares of GS completely erased Friday's losses with a 3.5% rally toward resistance near $170.00. Previously I suggested that GS would try and fill the gap and it has now. Wait for the bounce to roll over before considering new positions. Our first target is $155.50. More aggressive traders could aim for the $150 area or the simple 200-dma.

Picked on  November 25 at $168.75
Change since picked:       + 0.91
Earnings Date            12/15/09 (unconfirmed, could be in January)
Average Daily Volume =        9.5 million  
Listed on  November 21, 2009         


iShares Biotech - IBB - close: 78.41 change: +0.06 stop: 80.05

Biotech stocks under performed the major indices on Monday. Shares of the IBB remain under their trendline of lower highs. Yet I remain cautious here and see no changes from my weekend update. I am not suggesting new bearish positions at this time. We may want to consider switching directions and buy 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:       + 1.23
Earnings Date            --/--/--
Average Daily Volume =        4.9 million  
Listed on  November 19, 2009         


Northern Trust - NTRS - close: 49.49 change: +1.80 stop: 50.26

The bounce in the financials was widespread and NTRS saw short covering lift it to a 3.7% gain. The close over $49.00 is short-term bullish and more conservative traders will want to seriously consider an early exit right here. 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:       + 0.31 
Earnings Date            01/21/10 (unconfirmed)
Average Daily Volume =        3.0 million  
Listed on  November 12, 2009         


Research In Motion - RIMM - close: 57.89 change: -0.25 stop: 62.75

Big cap tech giant RIMM continues to under perform. The early morning rally failed under the $60 level. RIMM is nearing potential support at a trendline from the March lows. 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:       - 3.91
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: 169.66 change: +5.85 stop: n/a

The big bounce in GS really doesn't help. We need the stock to pick a direction and run. We've got three weeks left before December options expire. I am no longer suggesting new strangle positions on the stock.

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:       - 2.01
Earnings Date            12/15/09 (unconfirmed, could be January)
Average Daily Volume =        9.5 million  
Listed on  November 21, 2009         


Ultra(Long)-S&P500 - SSO - close: 36.90 change: +0.24 stop: n/a

The SSO is still stuck in a $36-38 trading range. 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:       - 0.18
Earnings Date            --/--/--
Average Daily Volume =         32 million  
Listed on  November 11, 2009         


United Parcel Service - UPS - close: 57.47 change: +0.04 stop: n/a

It was a very quiet day for UPS with the stock trading in a $1.00 range and closing nearly unchanged on the session. The close here at $57.50 is a new entry point for strangle positions. I'd limit new positions to the $58.00-56.00 zone.

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:       - 0.52
Earnings Date            02/02/10 (unconfirmed)
Average Daily Volume =        4.7 million  
Listed on  November 21, 2009