Option Investor
Newsletter

Daily Newsletter, Wednesday, 12/30/2009

Table of Contents

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

Market Wrap

Major Indexes Up Again, But for How Long?

by Judy Alster

Click here to email Judy Alster
Wednesday's indexes weren't quite as boring as watching grass grow, and the three major indexes did squeak out new 52-week closing highs, but when you've said that you've said it all. After a slide at the open followed by a short-lived jump on the Chicago PMI's strong manufacturing report, the trading range was pretty narrow.

INDEX WRAPUP, WEDNESDAY, DEC. 30:

On Wednesday the Chicago Purchasing Managers' Index showed that business activity in the U.S. expanded at a much faster-than-expected pace in December (except for the Kansas City region). The Chicago business activity index rose to 60.0% from 56.1% in November; readings over 50% indicate more firms in a survey believe business is improving better instead of getting worse. It was the fastest pace of Chicago-area business expansion since January 2006. In January of this year the Index stood at 31.4%. The survey is broad-based, canvassing purchasing professionals in both manufacturing and non-manufacturing, and confirms what we've been hearing since April: there's been a gradual improvement in the U.S. economy. If you're an early-ish Baby Boomer you may remember how aptly Jimmie Cliff phrased it in the movie of the same name: "The Harder They Come, the Harder They Fall," so gradual is just fine with me, and I hope you feel the same.

Most economists expect growth to accelerate in 2010, though few are predicting a strong recovery. Demand is still soft, unemployment refuses to move much off 10% and companies are not hiring in droves. Kind of a vicious cycle. But when inventories get low you must rebuild, and orders for goods and services seem to be creeping up. The Chicago new orders index, for example, rose to 63.5% in December from 62.8% in November. Order backlogs were similarly strong with month-to-month growth at 53.0. Similarly, the inventories index climbed to 39.4% from 34.9% and the production index jumped to 65.8% from 57.6%.

LATEST CHICAGO PURCHASING MANAGERS' INDEX:

The employment index managed to rise to 51.2% from 41.9%, indicating some firms have stopped cutting jobs and may even be adding workers; the employment index reached its highest level since just before the recession began in late 2007.

New highs: The Dow closed at 10,548 Wednesday, up 3.10 points or 0.03%; the S&P500 gained a hardly-worth-mentioning 0.23 points or 0.02% to 1,126.42 and the Nasdaq rose 2.88 points or 0.13% to 2,291.28. The Dow's low volume, contrary MACD and contracting range continue to be worrisome and make a January correction look likely:

DOW JONES INDUSTRIAL AVERAGE:

The S&P also looks like steam may be running out:

S&P500:

Volume, as befits the second-to-last trading day of the year, was underwhelming as many traders closed their books for 2009, partly not to be caught with too many losers on hand, partly to have some cash going into 2010. Composite volume in NYSE-listed names was well below the year's daily average. The caution, as is often the case, helped push up the dollar.

THE NASDAQ:

Something fairly exciting did happen, if you were at work in the Nasdaq building. Staff working there were evacuated around mid-day due to a "suspicious vehicle," a van, parked outside; the Nasdaq building was, oddly, the only one evacuated. After the vehicle was poked and prodded, pedestrians and vehicles were allowed to return to Times Square, which had been cordoned off. It didn't have much effect on Nasdaq trading, which is conducted electronically; the location isn't central to trading. And Nasdaq employees probably went home early.

You know, I'd be remiss if I didn't mention the VIX, subject of the well-known rhyme that all children learn in the nursery: "When the VIX is low/It's time to go." Especially when the VIX is below 20, a screaming "Sell" signal for many traders. It possible for the market to rise when the VIX is below 20, but it's rare.

VIX:

The Mortgage Bankers' Association is nobody's fool: Its offices are closed for the holidays until next Tuesday, when it opens with two weeks of data. So I have no mortgage purchases to report today. MBA's offices are closed for the holidays. The mortgage application report will resume Jan. 5 and will include two weeks of data.

Are we junk yet? Also on Wednesday, benchmark 10-year notes yielded 3.80%, while 2-year notes yielded 1.09%. As the economy continues to improve, consensus has it that Treasury bond prices will fall next year, lifting yields. It will give investors another reason to avoid a sector which just suffered its biggest annual loss in three decades. Concerns about increasing government debt will no doubt also lift yields: Many reasonably conservative investors will start favoring high-grade corporate debt over U.S. government debt, if they haven't already, which will increase the U.S.'s recently low, low borrowing costs. Yields on 2-year notes, closely linked to the Federal Reserve's key interest rate, are seen rising to 1.26% by mid-2010 and 1.95% a year from now, according to analysts.

Yields on 10-year notes, the benchmark for a broad slab of debt including corporate bonds and mortgage rates, are expected to stay around 3.76% in the next six months, but end 2010 near 4.16%, according to the survey. Some of the dealers surveyed believe the Fed could begin raising interest rates as early as June, others say no, not until late 2011, which about covers the field. (I'm on the earlier-rather-than-later side.) The biggest concern is that the government will issue even more debt in 2010, topping the heart-stopping 2009 record. At least one dealer expects the Treasury to sell $2.6 trillion in fiscal 2010, a% increase year-over-year.

Not only will the government have all those stimulus programs to fund, but the bond market will lose the Federal Reserve as its big buyer of securities as it ends it $300-billion Treasury-security buying spree to attack the credit crisis. That didn't seem to have much effect on prices, but in March the Fed will end its purchases of $1.425 trillion in mortgage-backed securities and debt from Fannie and Freddie. Those purchases have in fact redirected buyers away from the mortgage-bond market into other fixed-income instruments and the end of that program could help push up Treasury rates. Who'd've thought that one day only aggressive traders would be buying U.S. debt, once considered almost laughably conservative.

10-YEAR TREASURY NOTE YIELD:

Wednesday, Treasurys were mixed after a well-attended auction of $32 billion in seven-year notes. The two-year note was unchanged, yielding 1.091%. The benchmark-10 year note was up 1/32 to yield 3.8%.

The banking sector treaded water today but Horizon Bancorp (HBNC) gained 7% as it agreed to acquire the banking-related assets and deposits of American Trust & Savings Bank of Whiting, Ind., and its parent, Am Tru Inc.; the American Trust assets come to about $110 million.

HORIZON BANCORP up on acquisition news:

Semiconductor stocks were movers Wednesday, up after Tuesday's slump, with the Philadelphia Semiconductor Index (SOX) up 1.5%. Broadcom (BRCM) led the way with a 1.8% rise after agreeing to pay $160.5 million to settle a pending class-action lawsuit.

BROADCOM rises:

Marvell (MRVL) closed the day up 2.8% at $20.83, expecting to see growth in its storage semiconductor business . . . Nvidia (NVDA) closed trading up 3.6% at $18.67; the company is on a roll and on almost everybody's list of companies positioned to benefit from higher computing graphics sales . . . Chipmaker Broadcom Corp. (NASDAQ:BRCM) saw its shares rise 1.8% following news that it has settled a class-action shareholder lawsuit related to past stock-option practices. Intel (INTC), Dell (DELL), Apple (APPL), Hewlett-Packard (HPQ), Cisco (CSCO) and Yahoo (YHOO) and IBM (IBM) all managed gains.

NVIDIA looks invincible:

Decliners included China BAK Battery (CBAK), down a thudding 24% to $2.77 after it denied rumors that it would provide batteries for Google's new smartphone. The company's shares had rallied more than 60% on Tuesday. Hmm . . . . Japan Airlines (JALS.Y) is having a hard time and needs to file for bankruptcy in order for the government to bail it out; it was down 12% . . . . Trico Marine Services (TRMA) lost over 11%. The provider of ships and services for the offshore oil-and-gas industry expects to report a fourth-quarter impairment charge of possibly $120 million to reflect cancellation of shipbuilding contracts in India. Continued softness in the North Sea for all offshore activity isn't helping.

Crude stockpiles fell again in the week ending last Friday, this time by 1.5 million barrels, according to the Energy Information Administration's weekly report; it was the fourth decline in a row, coming in at a little better than analyst expectations of 1.7 million barrels. At 326 million barrels, crude inventories last week hit their lowest level in nearly a year. Also down were gasoline inventories by 300,000 barrels; distillate stockpiles, which include diesel and heating oil, declined two million barrels, also a bit better than expectations but still down. Very cold weather across much of the country played a part in depleting heating oil.

Demand for gasoline was moderate; it was lower for distillates except for jet fuel, where demand is on the rise. Refineries used more crude last week, which pushed inventories down as well (see yesterday's Market Wrap explaining the tax advantage of not having too much crude, which counts as property, on hand at year-end) and stayed steady at 80.3% of capacity.

Crude oil for February delivery finished Wednesday up 41 cents or 0.05%, at $79.28 on the New York Mercantile Exchange, its highest level in seven weeks. The oil-tracking US Oil Fund (USO) closed up as well, as did such majors as BP Plc. (BP) and Chevron (CVX).

US OIL FUND (USO):

Weighing somewhat on the crude rise Wednesday and on other dollar-denominated commodities was the dollar, which strengthened against most of its major rivals. The dollar index gained eight cents or 0.11% to $77.86, its best level since early September. If this keeps up, crude may retrace some of its recent sharp rise, or go sideways for a while.

U.S. DOLLAR INDEX FUTURES -- SPOT PRICE:

Helping the buck Wednesday was news from the IMF that holdings of U.S. dollars by foreign central banks bounced back in the third quarter. In countries who report their holdings, the share of U.S. dollars bounced up to 62% in the third quarter after an unusual drop to 37% in the second.

As for that rising demand for jet fuel, the Christmas-day foiled terrorist attack on Northwest Airlines didn't beat up airline stocks very much, even Northwest's owner, Delta (DLA); the major airlines are down just slightly on the news, but of course that could change. Airline stocks have been rising steadily in recent weeks, largely on word that OPEC will leave production volumes unchanged, it says which prompted a hearty upgrade. Even if travel demand doesn't continue to strengthen, passenger revenue could rise 5% by the end of February, by some estimates. Airlines were mostly unchanged today or off a few pennies, but United (UAUA) rose over 1%, AirTran (AAI) gained 0.78% and U.S. Airways (LCC) gained 0.43%.

UNITED AIRLINES:

(Oddly, late Tuesday the American Petroleum Institute reported an increase of 1.73 million barrels in U.S. inventories, a surprise that pushed down oil prices slightly in late trading Tuesday. The API also reported that gasoline inventories fell 1.4 million barrels while distillate supplies fell 3.46 million barrels. The EIA and the API use different criteria [obviously] to measure stockpiles.)

Even though trucking stocks are among the first to move up in an economic turnaround, it was announced Wednesday that trucker YRC Worldwide (YRCW) could file for bankruptcy and close its doors as early as this weekend despite its effort to complete a critical debt-to-exchange offer. (Arrow Trucking closed down messily just before Christmas.) The last time a trucking company about the size of YRC went out of business was in 2002, after Consolidated Freightways filed for Chapter 11 protection.

YRC WORLDWIDE . . . . not good:

So-called "less-than-truckload" carriers like Consolidated and YRC, which consolidate shipments from many sources at company terminals, do very well in a thriving economy but not in tough times mainly because of high fixed costs and greater difficulty making loads. Diversified transportation and logistics companies like Werner (WERN) and Landstar (LSTR) have done well and look like they're edging into new trading ranges. Arkansas Best (ABFS), trying to break through resistance, even pays a 1.9% dividend.

WERNER ENTERPRISES keeps on . . . .well, you know:

As long as I was a wet blanket about the VIX, before I go I may as well continue in that vein about market breadth. Promising breadth data may be the best, or certainly one of the best, indicators of a general uptrend, and I have to report that breadth is not looking terrific lately. First we have today's Advance/Decline Diary, which needs no explanation:

ADVANCING AND DECLINING ISSUES AND VOLUME:

Then we have the Trin, or the Arms Index, which as you know measures not just the breadth of advancers vs. decliners but also the volume that may, or may not, be supporting the market. Briefly, the lower the Trin, the greater the advancing volume in the market; the higher the Trin, the more declining volume there is. A value less than 1.0 is bullish; a value greater than 1.0 indicates bearish demand. Currently, the Trin is above 1.4; on the upside, it's better than it was Tuesday.

THE TRIN:

Finally, in the annals of Gee, I Shoulda Bought That: We have pork bellies. Norway has frozen salted salmon bellies. And had you only bought those babies a few years ago, what a zippy profit you'd have made. Ah, well:

THE LOX INDEX:

On Thursday as always, jobless claims and the Energy Administration's natural gas report may move the market. Friday is New Year's Day, on which we will wrench themselves away from our computer screens.

Best wishes for health, happiness and good trades in the coming year.

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New Option Plays

Computer Peripherals

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Zebra Technologies - ZBRA - close: 28.39 change: +0.01 stop: 27.45

Why We Like It:
ZBRA makes computer peripherals and RFID technology. The stock recently broke out over key resistance near $28.00. On Monday the stock produced a bearish reversal but there has been no follow through, which makes me think the path of least resistance is still higher. I do consider this an aggressive trade. Volume on the stock is low and volume on the options is low so keep positions small to limit your risk. I'm suggesting call positions now but readers could wait for a new relative high over Monday's $28.68. Our first target is $30.00. Our second target is $32.00 but that looks pretty aggressive and we may end up exiting early if the market does correct.

Suggested Options:
I'm suggesting the February calls. My preference is the $30 strike.

BUY CALL FEB 30.00 ZBQ-BF open interest= 68  current ask $0.50

Annotated Chart:

Entry  on  December 30 at $ 28.39 
Change since picked:       + 0.00
Earnings Date            02/09/10 (unconfirmed)
Average Daily Volume =        166 thousand 
Listed on  December 30, 2009         



In Play Updates and Reviews

Check Your Stops

by James Brown

Click here to email James Brown


CALL Play Updates

EQUINIX Inc. - EQIX - close: 106.84 change: -1.16 stop: 102.75

On a short-term basis EQIX is starting to look a little top heavy. The stock broke through short-term technical support at its rising 10-dma today. I wouldn't be surprised to see a correction toward the $105-104 zone but more conservative traders may want to go ahead and take profits now!

Our first target is $109.50. Our second target is $113.50. The plan was to use small position sizes to limit risk. I am not suggesting new positions at this time.

Entry  on  December 09 at $103.02
Change since picked:       + 3.82 
Earnings Date            02/10/10 (unconfirmed)
Average Daily Volume =        501 thousand 
Listed on  December 09, 2009         


Intl. Business Mach. - IBM - close: 132.57 change: +0.72 stop: 128.40 *new*

IBM displayed some relative strength on Wednesday with a 0.5% gain after traders bought the dip at $130.68 this morning.

I had a reader email asking about IBM and my thoughts on January. If the market does see a correction in mid January then yes I would expect IBM to follow the market lower. The question then is when will stocks correct? Right now the trend is up and the first week of January should see new inflows of money into the market. So I would start to turn very cautious on stocks around Thursday, January 7th. Investors could get nervous ahead of the next jobs report due out Friday, Jan. 8th. Once the jobs news is out the following week would be a prime target for all those investors waiting to lock in gains from 2009 to go ahead and sell. Now remember, this is just a guess. Stocks could tank next Monday but I suspect odds are stronger for a pullback following the jobs report. This outlook holds true for all the stocks on our play list.

Now can IBM hit our target between now and Friday, January 8th? Absolutely! It could hit our first target tomorrow. Our second target is a bit more optimistic and we may have to exit early. I am raising our stop loss to $128.40.

Our first target is $134.95. Our second target is $139.00. Our time frame is about four weeks. We do not want to hold over IBM's earnings report.

Entry  on  December 28 at $131.55
Change since picked:       + 1.02
Earnings Date            01/19/10 (unconfirmed)
Average Daily Volume =        5.8 million  
Listed on  December 26, 2009         


Infosys Tech. - INFY - close: 55.71 change: +0.14 stop: 51.95

Traders bought the dip near INFY's 10-dma again. Holding above the $55.00 level as new support is a good sign. I am not suggesting new positions at this time. INFY has already hit our first target at $55.75. Our second and final target is $59.50. We will plan to exit ahead of the January 12th earnings report.

Entry  on  December 05 at $ 51.88 /gap down entry point
                           /originally listed at $52.46
Change since picked:       + 3.83
                            /1st target hit @ 55.75 (+7.4%)
Earnings Date            01/12/10 (confirmed)
Average Daily Volume =        1.4 million  
Listed on  December 05, 2009         


L-3 Communications - LLL - close: 88.50 change: +1.32 stop: 84.40 *new*

Shares of LLL popped higher this morning on news that airports around the world and here in the U.S. were upping their security hardware with new technology. LLL spiked to $89.23 before paring its gains. I am raising our stop loss to $84.40. We should consider this an aggressive, higher-risk trade. Our first target to take profits is at $89.95. Our second and final target is $94.00. We want to exit ahead of the late January earnings report. FYI: The Point & Figure chart is bullish with a $104 target.

Entry  on  December 28 at $ 86.80 
Change since picked:       + 1.70
Earnings Date            01/28/10 (unconfirmed)
Average Daily Volume =        1.0 million  
Listed on  December 26, 2009         


Mettler Toledo - MTD - close: 105.97 change: +0.04 stop: 99.45

MTD remains stuck in its $105-107 trading range. There was virtually no change today. More conservative traders may want to adjust their stops higher toward $102.50 or even $105. We will leave our stop at $99.45 for now. Our first target is $109.00.

Entry  on  December 19 at $102.66 (small positions) /gap down entry
Change since picked:       + 3.31
Earnings Date            02/04/10 (unconfirmed)
Average Daily Volume =        106 thousand
Listed on  December 19, 2009         


Norfolk Southern - NSC - close: 53.24 change: -0.06 stop: 50.95

The railroads aren't moving this week and NSC is sinking closer toward short-term support near $53.00. I am tempted to raise our stop loss toward $52.00. Our first target is now $56.50. Our second and final target is $59.50. 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:       + 1.40
Earnings Date            01/27/10 (unconfirmed)
Average Daily Volume =        5.4 million  
Listed on  November 21, 2009         


NUCOR Corp. - NUE - close: 47.06 change: +1.00 stop: 42.75

NUE spiked lower this morning only to bounce back and out perform the rest of the market with a 2.1% gain. I am raising our stop loss up to $43.90. The $45 and $44 levels should offer some support. Our multi-week target is $49.50. We will plan to exit ahead of the late January earnings report.

Entry  on  December 22 at $ 45.85 (1/2 position or less) /gap higher entry
Change since picked:       + 1.21
Earnings Date            01/28/10 (unconfirmed)
Average Daily Volume =        4.5 million  
Listed on  December 22, 2009         


Precision Castparts - PCP - close: 111.75 change: -0.82 stop: 107.25

Hmm... Momemtnum in PCP is definitely waning. Shares have broken the 10-dma and now they're testing the 21-dma. At this point I would expect a dip toward $110 and possibly $107.50. A normal 38.2% Fib retracement would pull PCP toward the $107.50 region. With less than three weeks left to go for January options more cautious traders may want to exit early right now. I'm not suggesting new positions at this time. PCP has already hit our first target at $112.45. Our second target is $118.75. The Point & Figure chart is bullish with a $157 target (it was $131).

Picked on  December 01 at $107.35
Change since picked:       + 4.40
                            /1st target hit $112.45 (+4.7%)
Earnings Date            01/20/10 (unconfirmed)
Average Daily Volume =        817 thousand 
Listed on  November 28, 2009         


Stifel Financial - SF - close: 59.33 change: +0.24 stop: 54.95

SF displayed some relative strength and closed at new 52-week highs. Our first target is $64.50. Our time frame is January expiration. The P&F chart is bullish and points to a $70 target.

Entry  on  December 22 at $ 58.05
Change since picked:       + 1.28
Earnings Date            02/11/10 (unconfirmed)
Average Daily Volume =        207 thousand 
Listed on  December 16, 2009         


UnitedHealth Group - UNH - close: 31.01 change: +0.16 stop: 28.90 *new*

UNH dipped to $30.60 and bounced. I've been suggesting readers use a dip near $30.00 as a new entry point. I suspect that UNH could still trade closer to $30.00 but if there is follow through on this bounce we may want jump on board. I am raising our stop loss to $28.90. Our first target is $34.00. Our longer-term target is $36.00. Our time frame is several weeks. If you buy March calls you might want to think about holding over the late January earnings report.

Entry  on  December 10 at $ 30.31 
Change since picked:       + 0.70
Earnings Date            01/21/10 (unconfirmed)
Average Daily Volume =        819 thousand 
Listed on  December 10, 2009         


United Tech. - UTX - close: 70.49 change: +0.19 stop: 67.45

UTX has found a new trading range in the $70-71 zone. The trajectory is still up and I remain bullish with the stock above $70.00 but readers may want to narrow their stop loss. Our first target is $74.75. The Point & Figure chart is bullish with a $95.00 target.

Entry  on  December 15 at $ 70.25
Change since picked:       + 0.24
Earnings Date            01/21/10 (unconfirmed)
Average Daily Volume =        4.0 million  
Listed on  December 12, 2009         


Valmont Industries - VMI - close: 79.83 change: -0.69 stop: 78.45

I didn't see any news today for VMI but shares underperformed the market this morning and broke support near $80.00. Traders bought the dip near the 40-dma. I'm willing to hold it given the afternoon bounce but more conservative traders will want to seriously consider exiting right now. If we don't see any follow through on this bounce we'll want to exit early. Our first target to take profits is at $84.90. Our second target is $88.75. FYI: The most recent data list short interest at 9% of the very small 20.1 million-share float, which suggests this stock could see a short squeeze.

Entry  on  December 10 at $ 81.00
Change since picked:       - 1.17
Earnings Date            02/10/10 (unconfirmed)
Average Daily Volume =        238 thousand 
Listed on  December 05, 2009         


Vertex Pharma - VRTX - close: 43.55 change: +0.20 stop: 41.85 *new *

VRTX hit a new high over $44.00 this morning. The intraday high was $44.04. Unfortunately shares pared their gains and the move looks like a short-term top. More conservative traders will want to seriously consider a complete exit right here. I am raising our stop loss to $41.85. I am not suggesting new positions at this time. Our target to exit is at $44.25.

Entry  on  December 03 at $ 40.25
Change since picked:       + 3.30
Earnings Date            02/09/10 (unconfirmed)
Average Daily Volume =        3.2 million  
Listed on  November 23, 2009         


Whirlpool - WHR - close: 81.73 change: -0.44 stop: 78.45 *new*

Traders bought the dip in WHR at $80.75 and then again at $81.00. This looks like a new bullish entry point but readers will want to strongly consider raising their stops toward $80.00. I am upping our stop to $78.45. WHR has already hit our first target at $84.75. Our second target is $89.00. FYI: The Point & Figure chart is bullish with a $103 target.

Entry  on  December 19 at $ 80.76 /gap higher entry
Change since picked:       + 0.97
                             /1st target hit $84.75 (+4.9%)
Earnings Date            02/08/10 (unconfirmed)
Average Daily Volume =        1.6 million  
Listed on  December 19, 2009         


PUT Play Updates

*Currently we do not have any put play updates*


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: 211.64 change: +2.54 stop: n/a

AAPL really needs to move if our strangle is going to work. We have just over two weeks left before January options expire. The stock gained 1.2% on the session. I am not suggesting new strangle positions at this time.

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:       +11.73
Earnings Date            01/21/10 (unconfirmed)
Average Daily Volume =       15.1 million  
Listed on  November 30, 2009         


United Parcel Service - UPS - close: 58.18 change: -0.37 stop: n/a

The relative strength in UPS yesterday must have been a fluke. The stock promptly gave it back today. I'm not suggesting new strangle positions.

January Strangle
The options suggested for the January strangle were the January $60.00 calls (UPS-AL) and the January $55.00 puts (UPS-MK). Our estimated cost was $1.35. I would plan to sell if either option hit $3.50 or more.

Picked on  November 21 at $ 57.99 /gap open entry
Change since picked:       + 0.19 
Earnings Date            02/02/10 (unconfirmed)
Average Daily Volume =        4.7 million  
Listed on  November 21, 2009