Option Investor
Newsletter

Daily Newsletter, Wednesday, 12/2/2009

Table of Contents

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

Market Wrap

Employment Still Disappoints, Small-Caps Shine

by Judy Alster

Click here to email Judy Alster
Wednesday was unexciting for the major indexes, although some stocks did fly. We found November job losses slowing but less than expected, gold continuing to defy — what's that word that starts with a G? — and hiring still stubbornly low, all leading to mostly lower volume. Any of these could have riled the indexes under other circumstances, but the day was fairly quiet, with advancers outdoing decliners.

MAJOR INDEXES, WEDNESDAY, DEC. 2:

There was a mild early rise on news of the eighth straight decline in private-sector job losses. Then the market slipped after the announcement of a buildup in petroleum supplies coupled with unimpressive demand, and a minor rise in the dollar. The major indexes moved bare fractions, the Dow dropping, the S&P and the Nasdaq managing gains.

DOW JONES INDUSTRIAL AVERAGE:

The S&P kept above the 1,100 level, but volume here was lower than Tuesday's, as was the Dow's. A few more days of this could indicate that this rally is not strongly supported and may be running out steam.

S&P500 INDEX:

The Nasdaq was up slightly on encouraging news from the electronics sector about Black Friday (even I bought a hard drive Friday night), and volume here was actually close to Tuesday's.

NASDAQ:

Today's star? The small-cap-tracking Russell 2000 picked up, getting back above its 10-day average with a gain of 6.89 points or 1.17%. Steadily-moving-up small-caps can sustain a rally. With the emphasis on "steadily."

RUSSELL 2000 moves up:

Helping the Russell was little StemCells (STEM) on news that the National Institute of Health approved 13 stem cell lines to be used in research.

STEMCELLS MOVES BIG:

As to the specifics on employment: The ADP National Employment Report, compiled by payroll administrator Automatic Data Processing, said 169,000 private sector jobs were lost in November. That's fewer than the 195,000 jobs lost in October, but more than the 160,000 cuts that were expected.

The eighth straight decline in job losses at private companies provided evidence that the economy is recovering, but sloooooowly. The ADP report doesn't represent the entire economy but it's a fair enough indicator of what we might see Friday. Economists are expecting that the unemployment rate remained flat at 10.2% last month. All in all, it's no fun for investors. A choppy market without a clear sustainable trend is a discomfiting thing. (And another good reason to hold your dividend stocks close.)

Despite signs of life in manufacturing and housing, the job market remains pretty discouraging. Employers are reluctant to hire with memories of the recession still fresh in their minds, which is understandable. What if recent manufacturing and housing numbers are just flukes, and bound to disintegrate after the artificial government respiration wears off? What looks likely is a few more months of improvement in the economy, followed, say in April or May, by a sudden rush in hiring. Stay, as they say, tuned.

In related and grimmer news, outplacement consultant Challenger, Gray & Christmas reported that layoff intentions slipped to 50,349 in November vs. October's 55,679. In a reminder of how much layoffs have eased, the year-ago total for November was 181,671. But a bad sign is the lack of hiring intentions, totalling only 10,076 in November, down from October's 57,520.

According to SpendingPulse, electronics sales, helped by new video game releases, rose 6.6% iin November, helped by an 8% sales gain on Black Friday (so called because it's the day merchants get back into the black). In addition, online sales are coming back even more than expected, up 12.3% in November compared with November 2008, when sales increased 8.3%.

ONLINE SALES EXPECTATION MAY BE TOPPED THIS YEAR:

I won't show a chart of Wednesday's gold price; it looks just like Tuesday's, and Monday's, only higher. Gold futures closed at yet a new high for the 19th session since the beginning of November, briefly topping $1,217 an ounce as demand for gold as the eternal hedge against a weak national currency stayed strong, with the dollar remaining around 15-month lows. Gold futures closed up $12.90 or 1.1% at $1,212 an ounce. Gold futures have soared 37% this year, and have made gains in 17 out of the past 20 weeks. They advanced in all but two trading sessions in November, and have started December with two days of gains.

Oh, okay, here's a chart of Barrick Gold (ABX). Other gold stocks look similar, as does the S&P Gold Trust ETF (GLD).

BARRICK GOLD, a stand-in for most gold stocks and GLD:

The dollar actually gained 22 cents Wednesday, which helped tamp down the rise in stocks, but it's still under $75 against a basket of major currencies, closing at $74.64, down about 14% in the last 12 months. Maybe even more disturbing (the faint of heart may want to avert their eyes) is the chart below, the one that shows how much of U.S. debt is held by other countries. Think this might have anything to do with the gold story?

WHOM WE OWE (or, WHO OWNS US):

With the U.S. dollar so very anemic, commodities get a boost (as almost all commodities are denominated in dollars). That includes silver, copper, palladium and steel, which have enjoyed big rides lately. Copper especially benefits in a turnaround, although results have been muddied over the last year or so as Chinese manufacturers have been buying at lows, and hoarding

SOUTHERN COPPER, on a roll:

HECLA MINING, benefiting from silver's big move:

The defensive utilities industry had the best sector gain today, especially with American Electric Power (AEP) and Edison International (EIX) getting Buy ratings from Deutsche Bank:

AMERICAN ELECTRIC POWER:

The energy sector didn't fascinate us today, no doubt owing to the massive buildup in gasoline stocks, as well as big builds in overall oil supplies despite falling imports. Gasoline stocks rose 4.0 million barrels last week, said the Energy Information Administration, with oil stocks up 2.1 million (and delivery-point Cushing stocks up 1.4 million). Distillate stocks were down for the week by about 1.2 million barrels. Refineries operated at a mere 79.7% of capacity, answering the question, "Why are shares of Tesoro (TSO) and Valero (VLO) collapsing?" Demand stayed about the same. Crude futures lost $$1.77 to close at $76.60.

LIGHT CRUDE OIL PRICES:

Earnings continue to trickle in. Shoe retailer Collective Brands (PSS) said Wednesday its third-quarter profits fell 22% but still beat Wall Street expectations as sales rose slightly. The operator of Payless and Stride Rite earned $36.9 million or 57 cents per share, down from last year's $47.5 million or 74 cents. Excluding one-time items, the company said it would have earned 61 cents, handily beating the estimated 49 cents. Revenue rose to $867 million from $862.7 million last year, also beating analyst estimates.

COLLECTIVE BRANDS shows that consumers have been spending:

Shares of teen retailer Aeropostale Inc. (ARO) thudded sharply after hours when the company announced disappointing November same-store sales and gave guidance that was only in line with estimates. Actually, November same-store sales rose 7% compared to a decrease of 5% in November last year; it wasn't good enough for analysts who were looking for a 7.7% rise. Aeropostale expects to earn between $1.20 and $1.24 a share in the fourth-quarter of 2009; analysts wanted $1.22 a share. The company saw profit of $62.6 million or 92 cents a share on sales of $568 million, all sharply up from last year but again, not good enough. The stock was up 47 cents or 1.46% to $32.70, before falling $2.65 or 8.10% after-hours.

The Fed's Beige Book report came out Wednesday afternoon, reassuring us that the economic recovery gained a little traction recently as shoppers spent a little more and factories increased production. It was the most chipper assessment by the Federal Reserve since the recession began over two years ago. The Fed's new "snapshot" of business conditions nationwide found that things have generally improved since the last report in late October. Eight of the Fed's 12 regions surveyed reported some pickup in activity or improved conditions; four were mixed or about the same. The new report adds to evidence that the economy is rebounding.

TEXAS INSTRUMENTS -- consumers are coming out of their shells:

Consumers in late November did spend more, with general merchandise and auto sales improving across much of the country. (Most of that was non-U.S. car sales.) Although off 40 cents Wednesday, electronics retailer Best Buy (BBY) had a good month. But merchants are nevertheless keeping inventory low, which puts the kibosh on manufacturing, which hampers manufacturing . . . . Still, Dallas reported improved manufacturing for makers of high-tech equipment, paper and petrochemicals and in fact Texas Instruments (TXN) is up some 10% since the beginning of November. Upticks in food-related production also were mentioned in some regions. The stock of Sara Lee (SLE), on a number of institutional investors' Buy lists, had a sweet November.

SARA LEE:

The main challenge for Fed Chairman Ben Bernanke, though, is to sustain the rebound, especially after the benefits of government support fade next year. Naturally, the Fed is expected to hold a key bank lending rate at a record low near zero when it meets on Dec. 15-16. Economists predict the Fed will keep rates at basement levels well into next year, helped by the fact that inflation is behaving itself. The central bank continues to hope that low rates will encourage personal and especially business spending.

Hiring remains a sore spot in general, although in Boston, which has a very health-care- and biopharma-heavy economy, some businesses were starting to hire and reverse pay cuts or wage freezes implemented earlier in the year. In St. Louis, too, the service sector recently started to expand.

But holiday hiring expectations nationwide were mixed, the Fed said, going on to warn that it could take "five or six years" for the job market to return to normal. Terrific. Commercial real estate conditions continued to deteriorate, with most regions still experiencing rising vacancy rates, downward pressure on rents and little, if any, new commercial development.

By contrast, sales and construction activity in the housing market improved across much of the country, according to the Fed survey and also to the Mortgage Bankers' Association index last week. It rose 4.1% last week; the refinance index rose 1.7%. As always, low rates helped: 30-year loans averaged 4.79%, down three basis points for the lowest rate since May. Indications on the housing market are picking up steam. A sustained turnaround in housing would be a long, cool drink of water in the desert.

The main challenge for Fed Chairman Ben Bernanke is to sustain the rebound, especially after the benefits of government support fade next year. Naturally, the Fed is expected to hold a key bank lending rate at a record low near zero when it meets on Dec. 15-16. Economists predict the Fed will keep rates at basement levels well into next year, helped by the fact that inflation is behaving itself.

And in the Misery Loves Company Division: Mercifully, Dubai World's real-estate catastrophe (maybe you shouldn't try to build islands in the shape of giant palm trees) hasn't washed over the whole world, but it can't be much fun to be a big property holder in Dubai right now. Basically, too much easy money flowed into Dubai, fueling a massive construction boom financed with debt. For a while the debt looked sustainable because it was backed by valuable (for the time being) property. When the global financial crisis hit, Dubai property prices were walloped. Property prices per square foot there fell 45% from Q3 2008 to Q3 2009.

DUBAI PROPERTY VALUES at practically terminal velocity:

Del Monte Foods, Marvel Entertainment, Toll Brothers and Siemens are among those reporting earnings Thursday. Also look for the European Central Bank's interest rate announcement and reports on jobless claims, productivity and costs, and the ISM non-manufacturing index; jobless claims could especially be a market mover. A potentially huge mover -- the employment situation report -- comes out Friday. Investors are waiting for that.


New Option Plays

Banks Could Move on BAC News

by James Brown

Click here to email James Brown

Editor's Note:

Scanning the financial sector for potential trades tonight I noticed that some of the foreign banks are showing relative strength. Readers may want to check out BMO, CIB, and TD.


NEW DIRECTIONAL CALL PLAYS

Ishares Financial - IYF - close: 52.17 change: +0.00 stop: 49.99

Why We Like It:
The IYF is an exchange traded fund (ETF) that seeks to mimic the Dow Jones U.S. Financials Index. The banking stocks could turn higher tomorrow based on news out after the bell tonight that Bank of America (BAC) is returning the TARP money back to the government. On a short-term basis the IYF is still trading under a trend of lower highs. I'm suggesting we look for a breakout and use a trigger to buy calls at $52.60. If triggered our multi-week target is $59.00. I would use small positions.

Suggested Options:
February strikes have more open interest than January's so I'm suggesting February calls. My preference is the $55 strike.

BUY CALL FEB 55.00 IYF-BU open interest=229  current ask $1.55

Annotated Chart:

Picked on  December 01 at $ xx.xx <-- TRIGGER 52.60
Change since picked:       + 0.00
Earnings Date            --/--/--
Average Daily Volume =        3.1 million  
Listed on  December 02, 2009         



In Play Updates and Reviews

The GLD gold ETF Hits our Final Target

by James Brown

Click here to email James Brown

The path of least resistance appears to be higher for a good portion of the market.


CALL Play Updates

Bucyrus Intl. - BUCY - close: 52.61 change: -1.39 stop: 51.90

Shares of BUCY failed at the top of their trading range. If this pull back continues we can look for support near $50.50-50.00. Currently we're on the sidelines waiting for a breakout with a trigger to buy calls at $55.65. If triggered our first target is $59.90. Our second target is $64.00.

Picked on  December 01 at $ xx.xx <-- TRIGGER @ 55.65
Change since picked:       + 0.00
Earnings Date            02/18/10 (unconfirmed)
Average Daily Volume =        2.8 million  
Listed on  December 01, 2009         


Caterpillar - CAT - close: 58.94 change: -0.74 stop: 58.49

CAT failed near the $60.00 level and under performed the wider market with a 1.2% decline. We're also on the sidelines here with CAT. The plan is to buy calls with a trigger at $61.51. If triggered our first target is $64.95. Our second target is $69.00.

Picked on  December 01 at $ xx.xx <-- TRIGGER @ 61.51
Change since picked:       + 0.00
Earnings Date            01/26/10 (unconfirmed)
Average Daily Volume =        7.8 million  
Listed on  December 01, 2009         


Capella Education - CPLA - close: 71.64 change: +0.30 stop: 69.65

CPLA tried to rally but failed at its simple 10-dma. This is short-term bearish and definitely a concern. No new positions at this time.

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:       - 0.91
Earnings Date            02/11/10 (unconfirmed)
Average Daily Volume =        126 thousand 
Listed on  November 24, 2009         


Fedex Corp. - FDX - close: 87.10 change: +1.22 stop: 80.75

FDX displayed relative strength with a 1.4% gain and a new 2009 high. 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.

Picked on  December 01 at $ 85.75 
Change since picked:       + 1.35
Earnings Date            12/17/09 (confirmed)
Average Daily Volume =        2.6 million  
Listed on  November 30, 2009         


MSC Industrial Direct - MSM - close: 46.32 change: +0.44 stop: 44.90

MSM is slowly bouncing. The larger trend is still positive but I would hesitate to launch new positions right here. Our first target is $49.75. Our second target is $52.50.

Picked on  November 17 at $ 46.62
Change since picked:       + 0.30
Earnings Date            01/07/10 (unconfirmed)
Average Daily Volume =        513 thousand 
Listed on  November 17, 2009         


Norfolk Southern - NSC - close: 52.22 change: -0.13 stop: 49.75

NSC only gave back a little bit of yesterday's gains. I remain positive. More aggressive traders could buy calls here. Otherwise look for a move over $53.00.

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:       + 0.38 
Earnings Date            01/27/10 (unconfirmed)
Average Daily Volume =        5.4 million  
Listed on  November 21, 2009         


Precision Castparts - PCP - close: 107.75 change: +0.71 stop: 103.49

PCP rebounded from its morning lows near $106.15 to close at a new 2009 high. I would use this move as a new bullish entry point.

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  December 01 at $107.35
Change since picked:       + 0.40
Earnings Date            01/20/10 (unconfirmed)
Average Daily Volume =        817 thousand 
Listed on  November 28, 2009         


Vertex Pharma - VRTX - close: 39.49 change: -0.37 stop: 38.49

There is no change from my prior comments. Our trigger to buy calls is 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: 47.44 change: -0.04 stop: 48.55

FISV's bounce is struggling under resistance near $48.00. A move back under $47.00 could be used as a new bearish entry point. However, I would hesitate to launch new put positions if the S&P 500 breaks out from its recent trading range. Currently our bearish target o FISV is $42.25.

Picked on  November 28 at $ 46.29
Change since picked:       + 1.15
Earnings Date            02/02/10 (unconfirmed)
Average Daily Volume =        1.4 million  
Listed on  November 28, 2009         


Green Mountain Coffee Roasters - GMCR - cls: 60.89 chg: -1.15 stop: 67.15 *new*

GMCR is still sliding and posted a 1.8% decline. The low today was $60.40 compared to our first target at $60.25. More conservative traders will want to strongly consider taking profits now! The $60.00 level is naturally round-number support and GMCR could see an oversold bounce. I'm lowering our stop loss down to $67.15. I'm not suggesting new positions at this time.

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:       - 3.86
Earnings Date            01/28/10 (unconfirmed)
Average Daily Volume =        1.5 million  
Listed on  November 18, 2009         


Goldman Sachs - GS - close: 166.66 change: -0.97 stop: 176.05

GS is still lagging the markets. The stock spent most of today's session hovering around $166. I'm not suggesting new positions with the S&P 500 on the verge of a bullish breakout. 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:       - 2.09
Earnings Date            12/15/09 (unconfirmed, could be in January)
Average Daily Volume =        9.5 million  
Listed on  November 21, 2009         


Research In Motion - RIMM - close: 59.81 change: +0.08 stop: 62.75

RIMM rallied toward its November 23rd high and its 30-dma and reversed lower. On a short-term basis this looks bearish. Unfortunately, if the major indices continue to climb higher RIMM will probably try and catch up. I'm not suggesting new positions. More conservative traders may want to lower their stops.

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:       - 1.99
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.)

Apple Inc. - AAPL - close: 196.23 change: -0.74 stop: n/a

AAPL under performed the market again and dipped closer toward support near the bottom of its rising channel and its 50-dma. Volume is rising on the weakness, which is not normally a good sign.

More nimble traders might want to consider put options if AAPL breaks the 50-dma (currently at $195.00). I am no longer suggesting new strangle positions. We would prefer to launch new strangle positions in the $198-202 zone.

We have an aggressive December strangle and a less aggressive January strangle. The options in the December strangle were 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.

The options in the January strangle were 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.

Picked on  November 30 at $199.91
Change since picked:       - 3.68
Earnings Date            01/21/10 (unconfirmed)
Average Daily Volume =       15.1 million  
Listed on  November 30, 2009         


Goldman Sachs - GS - close: 166.66 change: -0.97 stop: n/a

The slow drift lower continues. It's interesting to see GS under performing the major indices. 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:       - 5.01
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: 37.80 change: +0.06 stop: n/a

The S&P 500 and the SSO are inching closer and closer to a new bullish breakout. 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:       + 0.72
Earnings Date            --/--/--
Average Daily Volume =         32 million  
Listed on  November 11, 2009         


United Parcel Service - UPS - close: 57.90 change: +0.02 stop: n/a

Shares of UPS are still stuck in a very narrow trading range. We want to launch new strangle positions in the $58.00-56.00 zone. More conservative traders may want to use January options instead of Decembers, which expire after December 18th.

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:       - 0.09
Earnings Date            02/02/10 (unconfirmed)
Average Daily Volume =        4.7 million  
Listed on  November 21, 2009         


CLOSED BULLISH PLAYS

Gold ETF - GLD - close: 119.18 change: +1.80 stop: 112.45

Target achieved. Gold futures surged to new highs near $1,218 an ounce. This prompted the GLD to gap open higher at $118.80 and post a 1.5% gain. Our target to exit was $118.50 so the play was closed at the open.

Chart:

Picked on   October 06 at $102.28
Change since picked:       +16.52 <-- 2nd exit @ 118.80 (+16.1%)
                               /1st target hit @ 109.50 (+7.0%)
Earnings Date            00/00/00
Average Daily Volume =       14.2 million  
Listed on   October 06, 2009         


CLOSED BEARISH PLAYS

iShares Biotech - IBB - close: 80.18 change: +0.62 stop: 80.05

Biotech stocks are breaking out past resistance. The IBB has broken through the $80.00 mark and hit our stop at $80.05. More nimble traders may want to switch directions and buy calls right here.

Chart:

Picked on  November 19 at $ 77.18 /gap down entry point
                             /originally listed at $77.86
Change since picked:       + 2.87 <-- stopped @ 80.05 (+3.7%)
Earnings Date            --/--/--
Average Daily Volume =        4.9 million  
Listed on  November 19, 2009         


Northern Trust - NTRS - close: 50.02 change: +0.64 stop: 50.26

Action in the banking sector was mixed on Wednesday but the oversold bounce in NTRS pushed shares past resistance near $50.00 and the stock hit our stop loss at $50.26.

Chart:

Picked on  November 12 at $ 49.18
Change since picked:       + 1.08 <-- stopped out @ 50.26 (+2.1%)
Earnings Date            01/21/10 (unconfirmed)
Average Daily Volume =        3.0 million  
Listed on  November 12, 2009