Option Investor
Newsletter

Daily Newsletter, Wednesday, 1/27/2010

Table of Contents

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

Market Wrap

No Surprises from the Fed, Market Up Slightly

by Judy Alster

Click here to email Judy Alster
MAJOR MARKET INDEXES, JAN. 27, 2010: SQUEAKING OUT A GAIN

A lackluster morning took no cheer from a report of fewer mass layoffs in December, but the stock market managed to turn higher Wednesday afternoon after the Federal Reserve's semi-chipper assessment of the economy. The major indexes fell lackadaisically before the Fed released the report following its periodic two-day meeting on interest rates, but they moved up decisively on the news, which included the intelligence that interest rates would stay the same, i.e., around zero, for "an extended period." Treasury prices actually reversed direction and fell after the statement as investors withdrew money from safe haven holdings and decided to gamble on the market. The dollar strengthened a bit.

DOW JONES INDUSTRIAL AVERAGE:

The Dow Jones Industrial Average closed up 41.87 points or 0.4% at 10,236.16; the S&P 500 gained 5.33 points or 0.49% to 1,097.50, while the Nasdaq finished up 17.68 or 0.8% at 2,221.41, all trading in a very narrow range for the third consecutive day. It wasn't a dazzling performance. All three have suffered technical damage in the last week and it wouldn't be a shock if they fell further. The small cap Russell 2000 managed to beat them all with a gain of more than 1%.

S&P 500 INDEX:

NASDAQ:

RUSSELL 2000:

As for the Fed, it believes "economic activity has continued to strengthen" since its last meeting in December. However, it carefully neglected to say much about the housing market, where new home sales have declined since November, although prices are stabilizing.

The Fed's economic assessment held few surprises: The economy is strengthening, deterioration in the labor market is abating (translation: not so many people are losing their jobs), and household spending is expanding about as well as you can expect with 10% of the labor force out of work. Inflation is not a worry (yet), mainly due to low resource utilization, which is a little like saying "The rivers aren't flooding because it hasn't rained in six months." Bank lending is still very dull. One change was a positive comment for equipment and software investment which the Fed claims is "picking up." Non-residential construction stayed weak and employers are still hesitating to hire.

To digress on that subject for a moment, heavy hiring is still nothing but a dream but the number of mass layoffs of U.S. workers fell in December, the fourth straight monthly decline. The month saw 1,726 mass layoffs -- that's any layoff affecting 50 or more workers. The total number was 153,127, the lowest since July 2008 and down by 87,000 from November. That's something, I guess.

Mass layoff actions now total 51,978 since the start of the recession in December 2007, resulting in the loss of 5.3 million jobs. Last year, the total numbers of mass layoff events (28,030) and initial claims (2,796,456) were at their highest annual levels on record since data started being kept in 1996. The national unemployment rate was 10% in December 2009, seasonally adjusted, unchanged from the prior month but up from 7.4% a year earlier. Below, a chart of layoff over all industries, reflective of the numbers released by the Bureau of Labor Statistics:

MASS LAYOFFS, ALL INDUSTRIES, SEASONALLY ADJUSTED:

It's interesting to note that Kansas City Federal Reserve President Thomas Hoenig voted against the group's decision to keep rates low, which I for one applaud (even though low rates do tend to steer money into the stock market), if for no other reason than it might jolt people into borrowing and spending money before rates are raised again. True, the dollar is up more than 5% against other major currencies since December. But a low dollar contributes to expensive commodities and zero interest rates won't exactly entice hordes of foreign investors to buy more of our debt. I'll bet that as early as this spring we can expect some highly cryptic, labyrinthine message about the economy's having strengthened enough to think about upping the Fed funds rate.

What was surely no surprise was Chairman Ben Bernanke's decision to fall back and punt rather than forthrightly address the stubborn economic weaknesses that the Fed has yet to deal with. Congress's voting on his confirmation starts Thursday -- his current term ends Sunday.

Sales of new home took a dive last month, largely the result, no doubt, of November's first-round expiration of buyer credits. New home sales fell 7.6% to an annual rate of 342,000 units -- 28,000 lower than expected but at least offset by an upward revisions to prior months of 23,000. Supply on the market rose to 8.1 months vs. November's 7.6 months.

On the up side, prices seem to be firming in most parts of the country. The median price (the price right in the middle, on either side of which there are equal numbers of prices) rose 5.2% to $231,000 while the average price (total of all the prices divided by the number of prices) rose 7.6% to $290,600. (My old statistics professor would have demanded to know the modal price, too -- the price that occurs with the greatest frequency.) Still, there's a slowdown in the rebound rate which will probably worsen as banks start getting serious about foreclosures again ahead of the second round of buyer tax credits. That will last through the end of April, and may result in some gains for the housing market. With anything like luck sales won't all pile up in April. The housing market has been so far down for so long that one subtle but important factor has become simply getting people used to the idea of buying houses again.

CASE-SHILLER HOME PRICES:

It had been hoped that rising demand from China would offset high U.S. inventories, but no. Although a drop in oil imports last week contributed to a 3.9-million barrel draw in U.S. crude stocks, there was still a build in crude products. Gasoline stocks rose 2 million barrels thanks to another downtick in gasoline demand, now down 0.8% year-over-year. Other distillates rose 0.4 million barrels, illustrating weakness in the industrial sector and some unseasonably warm weather. Refineries are operating at what I'm going to call a scarily low 78.5% of capacity.

West Texas Intermediate Crude (WTIC -- light crude contracts) jumped up and then down, apparently reacting first to the crude drawdown and then falling on the too-much-distillate news. It not only tested $74 a barrel, but closed down $1 at $73.71. The US Oil Fund (USO) also continued a long downward run, off 0.9% at $33.17.

WEST TEXAS INTERMEDIATE CRUDE (WTIC) CONTINUES DOWN:

Financial stocks led the late-afternoon rally, helped by the prospect of continued low rates and the slight uptick in American International Group (AIG) who was one of the subjects of The Big Grill Wednesday, with Treasury Secretary Tim Geithner sitting under a hot light as Congress asked him what he knew about the AIG bailout and when he knew it. (See also Geithner's role -- excuse me, alleged role -- in strongarming Bank of America into buying Merrill Lynch. A heck of a story.) Geithner naturally said he "had no role in making decisions regarding what to disclose about the specific financial terms" of AIG's payments to its counterparties, which is a little tough to credit from somebody who was president of the New York Fed at the time. Well, maybe he was napping.

Anyway, bank stocks did fairly well Wednesday. Bank of America (BAC) and Citigroup (C) moved up 3% and 2% respectively after a few days of losses, the most-heavily traded issues on the NYSE, and S&P bank ETF's KBE and KRE were up over 2.6%. United Bankshares (UBSI) took a gold star after it reported Q4 and fiscal year earnings Wednesday. In the fourth quarter the bank took home $17.4 million or 40 cents a share, up from $16.5 million or 38 cents in the quarter last year; earnings for 2009 were $67.3 million or $1.55 per share, down from $87 million or $2 in 2008. The bank had a return on average assets of 0.85% for the first nine months of 2009, compared to its peer group's return of -0.21%. The market liked what it heard. Note: This stock pays a 5% dividend.

UNITED BANKSHARES, UP ON A GOOD Q4:

And of course on Wednesday Apple (AAPL) CEO Steve Jobs unveiled the company's much-anticipated $499 iPad tablet computer, calling it a "new third category" of mobile device. Jobs said the device would be useful for reading books, playing games or watching video, describing it as "so much more intimate than a laptop and so much more capable than a smart phone." Hm. The price seems reasonable, and below what analysts had thought, but Jobs. & Co. must still persuade consumers who already have other perfectly good devices to shell out money in a decidedly no-longer-frivolous economy. Apple plans to begin selling the iPad in two months. After trading in an $11 range, the stock closed up $1.94 or 0.94% at 207.10 Also on Wednesday, heavy-equipment maker Caterpillar reported that fourth-quarter profit fell 65% to $232 million or 36 cents a share as demand remained weak, but that it expects a rebound this year with the economy trying to improve and dealers replacing inventory. The company's profit estimate for the year, about $2.50 a share disappointed analysts and took the stock down $2.32 or 4.32%.

CATERPILLAR, ALL BEAT UP:

Boeing (BA) reported a quarterly profit that handily beat expectations on a 42% revenue increase and lower-than-expected costs, sending its shares nicely higher. Profit came in at $1.27 billion or $1.75 per share, compared to a year-ago loss of $86 million or 12 cents, leaving Wall Street's estimates of $1.36 a share in the dust. The company finally saw the first flight of its too-long-delayed 787 Dreamliner, which it says it will deliver in the fourth quarter of this year. The company had a tough year with fewer orders due to falling travel demand and defense cuts. Although the company's outlook fell short of analyst hopes, the stock flew $4.22 or 7.31%.

BOEING BEATS THE STREET, FINALLY SET TO DELIVER ITS DREAMLINER:

General Dynamics (GD) reported largely flat sales and earnings for the fourth quarter and took its lumps, down $1.49 or 2.17% to $67.23 . . . New York Community Bank (NYB), who zoomed in December after taking over failed AmTrust's $8 billion in deposits, posted fourth-quarter operating profit that missed analysts view by a cent: it had better lending margins but the higher provision for bad loans cut into earnings; with items, operating profit was $170.2 million or 26 cents a share. The stock lost 6 cents or 0.4% . . . . After the close Etrade (ETFC) reported a quarterly net loss of $67 million . . . . Also after the bell, Qualcomm (QCOM) topped analysts' profit expectations but missed on sales estimates and outlook; shares fell 7.5% after hours . . . After the close on Tuesday, pharma Gilead (GILD) reported income of $802 million, or 87 cents a share, well up from last year; Wednesday the stock gained $3.17 or 7.06% to $48.04 . . . . Investors were less impressed with Abbott Laboratories' (ABT) results, basically unchanged from last year; the stock lost 58 cents or 1.06% . . . . In energy, ConocoPhillips (COP), the nation's third biggest oil company, and Hess (HES) beat consensus profit estimates; refiner Valero Energy (VLO) had a smaller-than-anticipated loss. All were down slightly.

Thursday we'll see how the market responds to the President's State of the Union address. Also look for durable goods orders and jobless claims to have an effect, along with the natural gas report. Another raft of earnings comes our way with Ford, 3M, Bristol-Myers Squibb and Amazon in the spotlight and eyes also on Procter & Gamble, U.S. Airways, JetBlue, Tyco and Xcel Energy, among others.


New Option Plays

Waiting for Obama's Address

by James Brown

Click here to email James Brown

Editor's Note:

It is very common for the stock market to get a little crazy following an FOMC decision on interest rates. Even though no one expected a change in rates and there was no change in rates the market still produced some late-day volatility. These moves tend to reverse and I don't put a lot of faith in the bounce but stocks were short-term oversold and due for a bounce anyway.

If you're market bias is bullish then you'll want to buy this bounce and use a tight stop under today's low. If you're market bias is bearish then wait for this bounce to run out of steam tomorrow or Friday and then look for new bearish positions. Keep in mind that President Obama addresses the nation with his first State of the Union speech tonight. There is no telling how the market will choose to interpret his comments tomorrow so don't be surprised to see more volatility on Thursday.

I'm listing a few stocks on my watch list:
ATK - wait for shares to bounce and roll over as a new bearish entry point.
MCK - shares are breaking support. Look for a bearish entry point.
NILE - My bias is bearish but NILE is very short-term oversold and has found support at the 200-dma. This could be a good spot to buy calls for a short-term trade with a tight stop only to switch directions when the bounce begins to fade and buy puts.
RIMM - right now my bias is bearish but the stock is bouncing from support near $60.00. I'm watching for a breakdown under $60.00.
BRK.B - These are the Class B shares of Berkshire Hathaway that are being added to the S&P 500. The 50-to-1 split that just occurred has brought the price down to $71. I am really tempted to launch long-term positions in this stock. The $65-66 zone appears to be support.



In Play Updates and Reviews

Beware the Bounce

by James Brown

Click here to email James Brown

The stock market is notorious for wild reversals following any FOMC meeting and it could take a day or two before the real post-meeting move appears.


CALL Play Updates

*Currently we do not have any call play updates*


PUT Play Updates

FEDEX Corp. - FDX - close: 80.42 change: -0.34 stop: 82.55

The late day market bounce pulled FDX off its lows but shares still closed with a decline. I have been warning readers that FDX looks a little oversold and could bounce but watch for resistance near $82.00. A failure near $82 would be a better entry point to open new positions. Our first target is $75.25.

Entry  on   January 25 at $ 79.45 
Change since picked:       + 0.97
Earnings Date            03/18/10 (unconfirmed)
Average Daily Volume =        3.0 million  
Listed on   January 23, 2010         


Gymboree - GYMB - close: 39.67 change: +0.63 stop: 42.75

We are starting to see a little oversold bounce in GYMB. A failure at $40 would be great news for the bears but I suspect the stock could rebound toward $42 before rolling over, which would be a much better entry point to launch put positions. 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:       - 0.07
Earnings Date            03/04/10 (unconfirmed)
Average Daily Volume =        513 thousand 
Listed on   January 23, 2010         


Infosys Tech. - INFY - close: 54.43 change: +0.37 stop: 56.25

Technically it looks like INFY has produced a bullish engulfing (reversal) pattern today but it needs confirmation. Right now our plan is to buy puts at $53.40 (the low today was $53.65). If instead INFY bounces from here we might consider bearish positions on a failed rally near $56-57. If triggered at $53.40 our first target is $50.15. Our second target is $46.50.

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         


JPMorgan Chase - JPM - close: 39.33 change: +0.89 stop: 41.55

The oversold banks finally produced a bounce. JPM gained 2.3% but remains under resistance near $40.00 and its 200-dma. Even if shares do rally past $40 the stock should find additional resistance in the $41-42 zone. More aggressive traders may want to raise their stops to just above $42.00. We'll keep our stop at $41.55. Our first target to take profits is at $35.25. Our second target is $32.00.

Entry  on   January 26 at $ 38.44 
Change since picked:       + 0.89
Earnings Date            04/15/10 (unconfirmed)
Average Daily Volume =         46 million  
Listed on   January 26, 2010         


Mettler Toledo Intl. - MTD - close: 98.23 change: -0.74 stop: 102.25

MTD dipped to technical support at its 100-dma and bounced. Don't be surprised if MTD's bounce carries it to $100 or even toward $102. The 50-dma is overhead and should be resistance near the $101 region. Look for the bounce to roll over as a new bearish entry point. 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:       - 1.17
Earnings Date            02/04/10 (unconfirmed)
Average Daily Volume =        134 thousand 
Listed on   January 21, 2010         


Retail Holders - RTH - close: 92.19 change: +0.23 stop: 95.05

The RTH is still trying to bounce. Readers may want to wait for the rebound to reach the $93-94 zone and then open up new bearish positions. The 50-dma overhead near $94 should be resistance. 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:       + 0.77
Earnings Date            --/--/--
Average Daily Volume =        1.7 million  
Listed on   January 23, 2010         


SIEMENS - SI - close: 94.66 change: +1.06 stop: 98.30

SI is trying to push through a small cloud of moving averages around the $94 level. The U.S. market's late day bounce gave SI a lift and boosted shares toward $95. An analyst upgrade to a "buy" didn't hurt either. SI has already produced a lower high following the bearish double top formed in 2009. Shares should find resistance again in the $95-98 region. Wait for the rebound to roll over and buy puts. Please note that SI gapped open higher this morning at $94.34, which changes our entry point. Our first target is $87.55. Our second target is $81.00. Our time frame is three to four weeks.

Entry  on   January 26 at $ 94.34 /gap higher entry
Change since picked:       + 0.32
Earnings Date            01/26/10 (confirmed)
Average Daily Volume =        368 thousand 
Listed on   January 26, 2010