Option Investor
Newsletter

Daily Newsletter, Monday, 1/25/2010

Table of Contents

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

Market Wrap

Stocks Reverse Losing Ways, But Not In Impressive Fashion

by Todd Shriber

Click here to email Todd Shriber
After enduring several days of intense selling pressure, stocks reversed course, sort of, on Monday and inched higher for the first time since last Tuesday. Yes, stocks were higher, but the gains were tepid at best and did little to put a dent in the losses incurred last week. After posting five consecutive triple-digit moves, four of which were losers, the Dow Jones Industrial Average gained almost 24 points to close at 10,196.86. The S&P 500 gained five points to close at 1096.78 and the Nasdaq rose 5.51 to 2210.80.

Stats Table

As you can see from the table above, all three major U.S. indexes finished the day closer to their intraday lows than their highs and volume on the New York Exchange was unimpressive to say the least. Then again it may not be surprising to see stocks turn in a lethargic day given that Monday was the only logical day to take a break this week with 130 members of the S&P 500 scheduled to report earnings starting today after the close. On the other hand, one might argue that Monday's action was not the least bit encouraging when considering that the Senate appears likely to extend Ben Bernanke the courtesy of one more seven-year as head of the Federal Reserve. Speculation that Bernanke would be shown the door spooked investors last week.

After being bludgeoned last week, financials showed some signs of life on Monday and that helped the S&P 500 curb its worst three-day run since last March. Bank of America (BAC), Goldman Sachs (GS), JPMorgan Chase (JPM) and Wells Fargo (WFC) all put together small gains as did the Financial Select SPDR ETF (XLF) as it appears at least a few investors are willing to try the ''buy the dips'' approach one more time. If there are any bulls left in the financials' corner, they will need to try a little bit harder to jolt XLF back to its 50-day moving average because even with today's positive trade, the ETF still languishes below that important area.

XLF Chart

Given the catalysts behind the recent sell-off, namely concerns regarding emerging markets growth (read: China's curb on bank lending) and populist political rhetoric, stock picking has become that much harder. It certainly pays to commit oneself to proper due diligence and being selective. One such example that emerged while the market was open was industrial conglomerate Johnson Controls (JCI).

To be sure, Johnson Controls is not one of those alluring, high-beta names that helped propel the market higher last year. Of course it is those same high-fliers that have taken it on the chin recently. All that aside, stodgy Johnson Controls, which makes auto parts, heating and cooling systems and other boring fare, was up more than 3% today after increasing its 2010 guidance to $1.70 to $1.75 a share from $1.35 to $1.45 a share. The company is ''cautiously optimistic'' about growth in the second half of this year and says it expects robust growth in China to continue. Shares of Johnson Controls have nearly quadrupled from their March 2009 lows.

Johnson Controls Chart

In all fairness to Johnson Controls, a fine company in its own right, I imagine most readers of this market wrap are tuning in for an update on some of the after-hours earnings reports, namely Apple's (AAPL) quarterly update. After turning in the best performance of the three major indexes in 2009, the Nasdaq is off to a slow start in 2010. Intel (INTC) reported a very nice quarter, but investor reaction was not as positive as one would have hoped. Google (GOOG) disappointed and the stock is down 7.5% in the past five days, more than twice the loss turned in by the Nasdaq and S&P 500 over the same time frame.

In other words, tech investors were probably desperate to see Apple do what Apple does best and that is report another quarter of boffo profit results. The maker of the ubiquitous iPod and iPhone did not disappoint. Apple reported its most profitable quarter ever, saying that iPhone and Mac sales led to an almost 50% increase in quarterly profits.

Helped by the iPhone's debut in several international markets, including China and South Korea, Apple sold 8.7 million iPhones during its fiscal fourth quarter, which ended December 26. Mac sales surged 33%. Apple changed the accounting methods it uses to calculate sales and profits and under those new reporting methods, the company earned $3.4 billion, or $3.67 a share, compared with $2.3 billion, or $2.50 a share a year earlier. Sales soared 32% to $11.9 billion.

Apple did not disclose the accounting change until its conference call started this afternoon, so analysts were expecting the company to earn $2.07 a share on sales of $12 billion. One analyst said the company increased its already tidy free cash flow by $6 billion. The chart below illustrates Apple's free cash situation as of mid-December 2009.

Apple Cash Flow

The lone cause for concern, if it can be called that, was an 8% drop in iPod sales to 21 million units from 22.7 million a year earlier. Apple said it expected iPod sales to drop a bit because the iPhone has many of the same features the iPod has and with the iPhone's rising popularity, some consumers just do not see the need to own both products.

For the current quarter, Apple said it expects to earn $2.06 to $2.18 per share on revenue of $10.4 billion to $11.4 billion. That probably will not be the only news to jolt Apple shares higher, saying that scenario plays out. After launching the iPhone with 17 new carriers in December, speculation is again swirling that Apple's exclusive U.S. agreement with AT&T (T) will soon end, making the iPhone available to Verizon (VZ) customers. It should be noted that Apple did not comment on working with any additional carriers during Monday's conference call.

Of course, I cannot forget to mention that another one of Apple's widely anticipated product launches is scheduled for Wednesday and while the company declined to comment on what product or products will be unveiled, some Apple enthusiasts have already dubbed Wednesday as the ''Day When Apple Changes The World.'' More than likely, Steve Jobs & Co. will ''change the world'' with the introduction of a tablet computing device.

If the product is as revolutionary as expected, that could be the tonic the shares need to move higher. As it was, the stock was up less than 3% during traditional trading hours and moved up less than 1% in the after-hours session after the results were released.

Apple Chart

The quarterly report from chipmaker Texas Instruments (TXN) may have gotten lost in the after-hours shuffle, but it probably should not be overlooked. The second-largest U.S. semiconductor producer behind Intel turned in its best profit report in two years, saying it earned $665 million, or 52 cents a share on sales of $3 billion. Analysts had expected TI to earn 50 cents a share on revenue of $2.98 billion.

The company said its four-quarter operating margin was 29.1%, a level not seen since the fourth quarter of 2007. For the current quarter, TI is forecasting a profit of 48 cents a share on sales of $3.07 billion, above Street estimates of 44 cents and sales of $2.83 billion. Despite the rosy forecast, shares of Texas Instruments were down 40 cents to $23.29 in after hours trading.

Texas Instruments Chart

Looking toward, there is a flood of earnings reports from Dow members that could help the index regain positive footing. Chemicals giant DuPont (DD) is expected to earn 41 cents a share on revenue of $6.16 billion. Johnson & Johnson (JNJ) is expected to post a profit of 97 cents a shares on sales of $15.7 billion. Insurance firm Travelers (TRV) is slated to deliver a profit of $1.49 a share on revenue of $5.27 while analysts are expecting Verizon to earn 54 cents a share on revenue of $27.33 billion. All of these reports are scheduled to be released before the market opens.

Taking a look at the charts, with the Dow losing more than 4% last week, Monday's meager 0.23% gain does little to put a dent in those losses, but as I just mentioned, there are plenty of earnings reports on the docket that could help or hinder the Dow. Call Monday's gain 24 points and subtract it from 562 and the Dow has lost 538 points in the last four sessions.

If the Dow cannot advance from here, or worse, if 10,100 does not hold as support, a retreat to 9650 could be just around the corner. There are at least eight more Dow members due to step into the earnings confession booth after Tuesday so the coming days should provided plenty of clarity about the direction of the index.

Dow Chart

The S&P 500 tried to regain 1100 on Monday, but a late day sell-off and anemic volume stopped the index just below 1097. That is perilously close to support at 1085. Granted, 1085 has proved resilient as support several times over the past couple of months, but if it fails this time around, 1035 becomes a legitimate possibility. From there, 1000 could be tested.

S&P 500 Chart

The Nasdaq failed just above 2300 and is now hovering far closer to 2200 and like the Dow, there are earnings reports abound to either jolt or weigh on the index. Tuesday will be telling as investors react to the Apple and Amgen (AMGN) reports. Yahoo (YHOO) chimes in after the bell tomorrow and Amazon (AMZN) and Microsoft join the fray on Thursday.

If the Apple number is not met with open arms, forget about 2200 as support and take a look at 2040-2050. An optimistic scenario would be that Apple's product announcement on Wednesday and Amazon's earnings report on Thursday are enough to lift the Nasdaq back to 2250.

Nasdaq Chart

Personally, I am not a fan of the current level of political interference equities are contending with because a lot of quality earnings reports are being overlooked due to the White House's laser-like focus on punishing a few banks. The fact of the matter is if concerns persist about who is or is not leading the Fed, Treasury, whatever, then stocks are not going to move higher.

Hopefully, as more solid earnings report are delivered and if we get a good GDP number on Friday, the market will move past these political headwinds. Until then, the current dip probably does not avail investors of the good buying opportunities that other recent pullbacks have.


New Option Plays

Closing In On Support

by James Brown

Click here to email James Brown


NEW DIRECTIONAL PUT PLAYS

Infosys Tech. - INFY - close: 54.50 change: +0.39 stop: 56.25

Why We Like It:
The trend for INFY is still up but shares are on the verge of breaking support near its rising 50-dma. The 2009 rally off its lows has been so strong that if INFY finally does breakdown the sell-off could be significant. I'm suggesting we use small put positions and use a trigger to initiate the trade at $53.40. If triggered our first target is $50.15. Our second target is $46.50.

Suggested Options:
If INFY hits our trigger I am suggesting the February $50 puts. $55s and $52.50 strikes would also work.

BUY PUT FEB 50.00 IUN-NJ open interest=431  current ask $0.45

New option format: IUN100220P00050000 or IUN1020N50

Annotated Chart:

Entry  on   January xx at $ xx.xx <-- TRIGGER @ 53.40
Change since picked:       + 0.00
Earnings Date            04/15/10 (unconfirmed)
Average Daily Volume =        1.5 million  
Listed on   January 25, 2010         



In Play Updates and Reviews

Very Little Bounce

by James Brown

Click here to email James Brown


CALL Play Updates

*Currently we do not have any call play updates*


PUT Play Updates

FEDEX Corp. - FDX - close: 80.69 change: +0.40 stop: 82.55

FDX continued to sink and hit $79.15 intraday. Our trigger to buy puts at $79.45 was hit and we now have a stop loss at $82.55. There is still a chance that FDX bounces again tomorrow. I would wait for either a failed rally closer to $82.00 or a new decline back under $79.75 to open new put positions.

Our first target is $75.25.

Chart:

Entry  on   January 25 at $ 79.45 
Change since picked:       + 1.24
Earnings Date            03/18/10 (unconfirmed)
Average Daily Volume =        3.0 million  
Listed on   January 23, 2010         


Gymboree - GYMB - close: 39.77 change: +0.03 stop: 42.75

There was almost zero bounce in shares of GYMB. That does not bode well for the bulls and suggest the path of least resistance is definitely lower. I would open positions now although you could hold out for a failed rally closer to $42.00. That's where I would expect to see resistance on a bounce. Our first target is $35.50. Our second, longer-term target is $32.00. We are going to use a slightly wider, more aggressive stop loss in case GYMB sees an oversold bounce. Consider using small positions to limit your risk. Over the weekend I suggested the February $40 puts (GQU-NH).

Entry  on   January 23 at $ 39.74 
Change since picked:       + 0.03
Earnings Date            03/04/10 (unconfirmed)
Average Daily Volume =        513 thousand 
Listed on   January 23, 2010         


Mettler Toledo Intl. - MTD - close: 99.09 change: +0.31 stop: 102.25

There was very little bounce in MTD, which is bullish. I would still consider new positions here in the $99-100 zone. Our first target is $95.25. Our second target is $90.50. Our time frame is a couple of weeks. We do not want to hold over the early February earnings report.

Entry  on   January 22 at $ 99.40
Change since picked:       - 0.31
Earnings Date            02/04/10 (unconfirmed)
Average Daily Volume =        134 thousand 
Listed on   January 21, 2010         


Retail Holders - RTH - close: 91.50 change: +0.08 stop: 95.05

There is no change from my weekend comments on the RTH. I'm suggesting small positions now. We can double down if we see another failed rally in the $93-94 region. Our first target is the $87.00 level. The 200-dma will probably be support. The RTH moves kind of slow.

Entry  on   January 23 at $ 91.42 
Change since picked:       + 0.08
Earnings Date            --/--/--
Average Daily Volume =        1.7 million  
Listed on   January 23, 2010         


CLOSED BULLISH PLAYS

Deckers Outdoor - DECK - close: 100.71 change: +0.03 stop: 99.75

I am hitting the eject button on our DECK bounce play. There was no bounce. The stock actually gapped open at $102 and then faded back toward the $100 level to closed almost unchanged on the day. The $100 level is still support and more aggressive traders may want to let it ride. I'm worried that DECK is going to break down if it can't keep pace with the market's bounce on Monday.

Chart:

Entry  on   January 23 at $102.00 /gap open entry point.
Change since picked:       - 1.29 <-- exit early at $100.71 (-1.2%)
Earnings Date            02/25/10 (unconfirmed)
Average Daily Volume =        549 thousand 
Listed on   January 23, 2010         


Joyg Global - JOYG - close: 48.68 change: -0.95 stop: 48.90

Metal and mining related stocks continued to sink on Monday. JOYG's oversold bounce made it to $50.90 before rolling over and sinking to new relative lows. Our stop loss was hit at $48.90.

Chart:

Entry  on   January 22 at $ 50.50 
Change since picked:       - 1.60 <-- stopped out @ 48.90 (-3.1%)
Earnings Date            03/03/10 (unconfirmed)
Average Daily Volume =        2.8 million  
Listed on   January 19, 2010