Option Investor
Newsletter

Daily Newsletter, Monday, 2/1/2010

Table of Contents

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

Market Wrap

Stocks Stop The Bleeding...At Least For A Day

by Todd Shriber

Click here to email Todd Shriber
After plunging to a three-month low last week, U.S. equities bounced back in fine fashion on Monday as the Dow Jones Industrial took a pass on the recent theme of triple-digit declines to post a triple-digit gain of 118.2 points to close at 10,185.53. The S&P 500 added more than 15 points to work its way back above the all-important 1085 level to finish the day at 1089.19 and the Nasdaq got a decent bounce despite Amazon's (AMZN) big drop to finish the day higher by 1.1% at 2171.2.

Stats Table

A bullish report from the Institute for Supply Management (ISM) and other cheery manufacturing reports from Europe and China encouraged the bulls as hopes that a global economic recovery will materialize quickly began to swirl again. The ISM said that U.S. manufacturing activity rose in January at its most rapid pace since August 2004. The ISM Manufacturing Index rose to 58.4 in January, up from 55.9 in December, beating expectations for a January number of 55.6. A number above 50 is viewed as bullish and reading below 50 is considered bearish.

Economists cited an end to inventory drawdown and the expansion of global trade as catalysts behind the rosy ISM report. The latter thesis would seem to fly in the face of the concerns that led to some of the panic selling the market endured last week. After all, prominent reasons behind the selling were China's curb on bank lending and fears of European sovereign debt default. Speaking of Europe, a report from Markit Economics indicated Europe's factory output rose more than expected in January.

Combine today's ISM report with last Friday's similarly bullish GDP number and encouraging ISM reports from the New York and Chicago regions and you have at least a few economic data points that, at the very least, are not all that bad. This is a big week for economic reports with the ISM non-manufacturing survey due out on Wednesday and factory orders due out on Thursday, but that all pales in comparison to the jobs report on Friday.

Those announcements will play a big part in how stocks perform for the rest of this week, but for at least one day, the bulls seemed to revel in the fact that the ISM and GDP numbers are improving as the chart below indicates.

ISM/GDP Chart

After being bludgeoned for much of the previous two weeks, emerging markets got a lift on Monday as the MSCI World Index gained 1% for its first positive run in nine trading sessions. The way to track that index is with the iShares MSCI Emerging Markets Index ETF (EEM), the most heavily traded emerging markets ETF. EEM has been ruthlessly hammered since peaking at $43.47 in January and the chart below shows the ETF has plenty of work cut out for it just to regain the 50-day moving average.

EEM Chart

Not surprisingly, China was the catalyst for lifting the emerging markets higher on Monday and perhaps renewing some of the lost risk appetite in the process. I was having a conversation with someone recently who is somewhat of an expert on Chinese equities and we discussed the point that the market seemed to misinterpret the news of limited bank lending as a sign that China's voracious demand for commodities was somehow going by the wayside.

It would appear that those concerns are somewhat unfounded as Bloomberg News reported today that China, the world's largest consumer of industrial metals, will spend more on copper, iron ore and oil this year than it did last year. Oh yeah, China spent a record $32 billion on those materials and related fare last year so if it is spending more this year that means another record will be set. That does not sound bearish to me, nor does the fact that Chinese copper demand may rise by nearly 15% this year, according to one analyst.

The fact of the matter is a middle class is trying to emerge in China and there are plenty of newly minted affluent folks there as well and that is fueling sales of new homes and cars. To build a house, there needs to be copper and a little bit of steel and last time I checked, most cars run on gasoline, so Chinese oil demand probably will not be diminishing anytime soon. Beijing is cognizant of its dependence on import materials and energy sources. As a result, many Chinese commodities and energy firms have signaled their intent to be on the prowl for acquisitions this year. That does not sound like the mark of a country where the commodities demand or the overall economy are slowing. The chart below illustrates demand growth for passenger cars in China, just one anecdote that illustrates this economy is far being sluggish.

China's Auto Demand

Speaking of oil, stocks got a boost from Exxon Mobil's (XOM) fourth-quarter earnings report. The largest U.S. oil producer said its fourth-quarter profit fell 23% as the company delivered its lowest quarterly profit since 2002. The company earned $6.05 billion, or $1.27 a share, compared with $7.82 billion, or $1.54 a share a year earlier. Revenue rose 6% to $89.8 billion. Still, the results beat analyst estimates and that was enough to have the stock up more than 3% intraday, an uncommon move for Exxon Mobil, before settling up 2.7% at $66.18.

For 2009, the company earned $3.98 a share, a far cry from the $8.66 a share the company earned in 2008 when oil prices were soaring. Even with that big decline, Exxon Mobil will be the highest-earning member of the S&P 500 for 2009, a spot it has held since 2000, according to the Associated Press.

Echoing sentiments from rivals such as Chevron (CVX) and ConocoPhillips (COP), Exxon said its U.S. refineries lost $287 million in the fourth quarter and profits from the company's international refining and marketing operations plunged 96% in the quarter. Refining margins have been hampered by plummeting demand and the surge in costs oil producers are paying for crude. Exxon said it does not see the need for significant alterations to its refining business, but added ''we'll see how things go.''

All and all, Exxon's stock has been beaten up recently, so even though today's report was less than earth-shattering, the Dow component was probably due for a little bit of a rally, which it got. Still, the shares languish below their 50 and 200-day moving averages.

Exxon Mobil Chart

Departing from the world of commodities, there was some interesting news from the world of books and e-readers. The Nasdaq was up on the day, but that positive move was probably hampered by Amazon, which was down more than 5% after the company lost a pricing battle with publisher MacMillan.

MacMillan wanted Amazon to charge $12.99 to $14.99 for its books that are available on Amazon's popular Kindle e-reader. Amazon wanted to charge $9.99. Amazon lost the spat and some analysts speculated this may encourage other publishers to alter their pricing structures with Amazon, perhaps threatening the e-reader business model. The New York Times said that the pricing is along the same lines of the terms five of the top six publishers agreed to with Apple (AAPL) for books sold on the newly unveiled iPad.

Some analysts say Amazon sells books on the Kindle at loss when priced at $9.99 and makes up for that loss through unit sales of the Kindle itself. One analyst noted that if Amazon has to charge higher prices for Kindle titles, profitability would improve and another said that even if prices for all books available on Kindle rise to $14.99 from $9.99, Kindle sales would have to slump by a third before Amazon sees any material impact to its bottom line. Amazon does not break out Kindle sales.

Amazon Chart

If you are looking for some good news from the world of books and a stock to watch on Tuesday, Barnes & Noble (BKS) fits the bill. After gaining almost 3% during Monday's session, the stock was higher by nearly 18% in the after-hours session on news that billionaire Ron Burkle wants to own as much as 37% of the book retailer.

This could end up being a contentious battle because of poison pill provision Barnes & Noble has that prevents a single outside investor from owning more than 20% of the company's shares. Chairman Leonard Riggio, his family and other insiders own about 37% of Barnes & Noble, according to press reports, and Burkle is going to the shareholders, asking them to pave the way for him to acquire his desired 37% stake.

The stock was trading above $21 as of this writing and if it opens there tomorrow, it will move above both its 50 and 200-day moving averages for the first time since December.

Barnes & Noble Chart

Looking at the charts, it would have been nice to see the Dow close above 10,200 from a mental standpoint and to bring the index closer to its 50-day moving average at 10,435. That did not happen, but after the bloodshed in the past two weeks, a triple-digit gain is nothing to be unhappy about. The other side of the coin is that if the bulls cannot get the Dow headed back in their desired direction sometime soon, a break below 10,000 brings 9650 into play.

And do not think that move would not happen in short order. It only took a few days to move from the January peak of 10,729.89 to 10,043.75 so for the Dow to shed another 550-600 points from here really would not be too difficult a task, especially with the absence of substantive reasons to buy.

Dow Chart

Yes, the S&P moved back above the critical 1085 level and is now resting at its 100-day moving average of 1089, but the problem is that the recent down days do not pick favorites, meaning there are no sectors for investors to seek refuge in. If selling pressure resumes later this week, one could hope for 1050 to act as mental support, but the better bet is that the selling would not abate until 1035. A move to 1100 tomorrow would keep the bears at bay for a little while longer, but as is the case with the Dow, the catalysts may not be there to buoy that kind of buying.

S&P 500 Chart

The Nasdaq has shrugged off plenty of good earnings report, Intel (INTC) and Microsoft (MSFT) only to be whacked by disappointing numbers from the likes of Qualcom (QCOM). Throw in the fact the Amazon news is another variable holding the index back and that the iPad failed to illicit much excitement and we have little in the way of help for the Nasdaq, save for Cisco's (CSCO) earnings report on Wednesday. If the current trend holds up, Cisco could report a solid number and the Nasdaq will not react in kind.

No, the Nasdaq is not all that far from 2200, but if buyers do not buy just for the sake of buying and the Nasdaq moves below 2100, the fall probably does not stop until the 2040-2060 area.

Nasdaq Chart

While today was certainly a good day, the gains barely put a dent in the losses of the past two weeks. Take a look at last week's volume and you will find that Monday's trade was anemic by comparison. The better scenario is to selling on weak volume and buying on strong volume, not vice versa. I still think this current dip feels different than the previous ones, so it is hard to advocate fresh buying until the market works some more kinks out.


New Option Plays

A Straight Line

by James Brown

Click here to email James Brown

Editor's Note:

I would not read too much into Monday's oversold bounce. The bounce could last a couple days or more but it will probably turn out to be a new entry point for bearish positions. Stocks don't usually move in a straight line for very long. It's three steps forward and two steps back, or vice versa on the way down.

Pick your entry points and let the market come to you. I'm expecting stocks to roll over at short-term overhead resistance. However, this week could be volatile or just the opposite, boring and sideways. It all depends on how investors choose to interpret the manufacturing and economic data out this week and whether or not traders decide to step to the sidelines ahead of the jobs report out on Friday.

No new trading candidates tonight.



In Play Updates and Reviews

Widespread Bounce

by James Brown

Click here to email James Brown

Stocks were short-term oversold and investors used the positive ISM report as an excuse to cover. This is a normal oversold bounce, which should begin to fade in a day or two. We can use it as a new entry point to launch put positions.


CALL Play Updates

Volatility Index - VIX - close: 22.83 change: -1.79 stop: 19.90

U.S. markets were seeing an oversold bounce on Monday thanks in part to a stronger ISM report. The VIX retreated with a 7.2% decline. Our play went from nearly +0.90 to -0.90. I would use a dpi back toward the 21.00-20.00 zone as a new bullish entry point to buy calls on the VIX. Our first target to take profits is at $29.50. Our second target is $34.00.

Entry  on   January 28 at $ 23.73 
Change since picked:       - 0.90
Earnings Date            --/--/--
Average Daily Volume =          x million  
Listed on   January 28, 2010         


PUT Play Updates

Apple Inc. - AAPL - close: 194.73 change: +2.66 stop: 216.00

After a $7 decline on Friday shares of AAPL are bouncing. The 1.3% rebound leaves it near the $195 level but still under prior support and what should be new resistance at its 100-dma. I would welcome a bounce back toward $200, which should also be new resistance, and we can use a rebound toward $200 as a new entry point to buy puts.

We're going to give this trade lots of room with a wide stop since shares have been so volatile lately. Our first target to take profits is at $182.50. Our second target is $165.00 although we might exit at the 200-dma. This is an aggressive trade and I'm suggesting small positions.

FYI: Amazon.com (AMZN) made headlines today when the company gave into publishers to raise their prices on e-books. AMZN wants to sell them for $9.99 but the publishers want to charge more. The new pricing for AMZN's books should be inline with what AAPL plans to charge on its new iPad device.

Entry  on   January 28 at $201.08 (small positions)/gap open entry
Change since picked:       - 6.35
Earnings Date            01/25/10 (confirmed)
Average Daily Volume =         26 million  
Listed on   January 28, 2010         


Franklen Resources Inc. - BEN - close: 101.45 change: +2.42 stop: 106.80

Financials produced a decent bounce on Monday. The $105-106 zone should be decent resistance with the 50-dma and 100-dma directly overhead. This is the area where shares failed last week. If the market is going to bounce then wait for BEN to move into the $104-106 zone as a new entry point to buy puts.

Our target is $91.50. This is a slightly more aggressive trade and I'm suggesting smaller positions. FYI: BEN gapped open higher this morning affecting our entry point (and significantly changed our entry price on the March $95 puts).

Entry  on   January 30 at $ 99.59 /gap higher entry point (small positions)
Change since picked:       + 1.86
Earnings Date            01/28/10 (confirmed)
Average Daily Volume =        1.2 million  
Listed on   January 30, 2010         


FEDEX Corp. - FDX - close: 80.67 change: +2.32 stop: 82.55

The transports delivered a nice bounce with a 1.7% gain. FDX outperformed its peers with a 2.9% rebound placing the stock back near prior support and new resistance near $80.00 and its 100-dma. Even if FDX continues to bounce the stock should have additional resistance at the 50-dma near $84.50. More aggressive traders may want to raise their stops toward $84.50 or just above $85.00 to give FDX room to maneuver. Such a move toward the 50-dma would hit our stop loss.

Wait for the bounce to roll over before launching new positions. Our first target to take profits is at $75.25. Our second target is $72.00. More aggressive traders could aim for the 200-dma.

Entry  on   January 25 at $ 79.45 
Change since picked:       + 1.22
Earnings Date            03/18/10 (unconfirmed)
Average Daily Volume =        3.0 million  
Listed on   January 23, 2010         


Gymboree - GYMB - close: 39.67 change: +0.66 stop: 42.75

We are starting to see an oversold bounce in shares of GYMB. The stock gained 1.69% but remains under resistance at $40.00 and its 200-dma. I would expect the rebound to carry GYMB toward $41.00-42.00 before rolling over again. Wait for the bounce to roll over before launching new positions. Our first target is $35.50. Our second, longer-term target is $32.00. Consider using small positions to limit your risk.

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: 52.86 change: +0.95 stop: 56.25

INFY gained 1.8% but failed to move out of Friday's range. I would expect INFY to bounce toward its 50-dma (near $54.00) or toward $55.00 and then roll over. We can use a move toward $55 as an entry point to buy puts. Our first target is $50.15. Our second and final target is $46.50.

Entry  on   January 28 at $ 53.40
Change since picked:       - 0.54
Earnings Date            04/15/10 (unconfirmed)
Average Daily Volume =        1.5 million  
Listed on   January 25, 2010         


JPMorgan Chase - JPM - close: 39.63 change: +0.69 stop: 41.55

JPM is still trying to bounce back above resistance at $40.00 and its 200-dma. If JPM is success shares should find additional resistance in the $41-42 zone. More aggressive traders may want to raise their stops a bit. 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:       + 1.19
Earnings Date            04/15/10 (unconfirmed)
Average Daily Volume =         46 million  
Listed on   January 26, 2010         


Mckesson Corp. - MCK - close: 59.53 change: +0.71 stop: 62.51

The bounce in MCK produced a 1.2% move. I am still suggesting bearish positions now but a better entry point would be a bounce or failed rally in the $61-62 zone. The next level of support looks like the 200-dma down near $53.00. I am suggesting bearish positions now. Our first target to take profits will be $54.00.

Entry  on   January 30 at $ 58.82 
Change since picked:       + 0.71
Earnings Date            01/26/10 (confirmed)
Average Daily Volume =        2.8 million  
Listed on   January 30, 2010         


Mettler Toledo Intl. - MTD - close: 97.68 change: +0.21 stop: 102.25

We have three days left. MTD is due to report earnings on February 4th. We do not want to hold over the announcement. On a short-term basis MTD is still holding on to support at the 100-dma. This bounce in the market could last a day or two, which doesn't help us given our very brief time frame. More conservative traders may want to exit right now! If it looks like MTD is going to close over $100 I would exit early. Our target to exit is $95.25.

Entry  on   January 22 at $ 99.40
Change since picked:       - 1.72
Earnings Date            02/04/10 (unconfirmed) 
Average Daily Volume =        134 thousand 
Listed on   January 21, 2010         


Retail Holders - RTH - close: 92.06 change: -0.01 stop: 95.05

The RTH underperformed the RLX retail sector index and the rest of the market. Shares appear to be forming a bear-flag pattern, which is easier to see on an intraday chart. I am still suggesting new positions but a better entry point would be a bounce in the $94 region. Our first target is the $87.00 level. The 200-dma will probably be support. The RTH moves kind of slow so make sure you use an option that gives you enough time.

Entry  on   January 23 at $ 91.42 
Change since picked:       + 0.64
Earnings Date            --/--/--
Average Daily Volume =        1.7 million  
Listed on   January 23, 2010         


SIEMENS - SI - close: 90.61 change: +1.50 stop: 95.75

SI's oversold bounce produced a 1.6% gain. Look for a rebound toward $94 as a new entry point to buy puts.

The Jan. 22nd low was $87.38. Our first target to take profits is at $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:       - 3.73
Earnings Date            01/26/10 (confirmed)
Average Daily Volume =        368 thousand 
Listed on   January 26, 2010