Option Investor
Newsletter

Daily Newsletter, Tuesday, 2/2/2010

Table of Contents

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

Market Wrap

Short Squeeze Surprise Continues

by Jim Brown

Click here to email Jim Brown

You have to love a market that can take the worst internals in months and the worst sentiment and turn it into two days of triple digit gains.

Market Stats Table

I noted in the weekend newsletter "Markets rarely go down all at once so expect a short squeeze or two" and the market quickly complied. The S&P is back to 1100 and well over that 1085 support that broke on Friday and the Nasdaq is knocking on the 2200 door once again. How quickly conditions can reverse given the right set of circumstances.

The economic calendar was very light today with only the Pending Home Sales, Chain Store Sales and Vehicle Sales for January. The chain store sales for last week were flat with only a +0.1% gain. However, flat was an improvement over the -2.5% the prior week.

The Pending Home sales index rose slightly to 96.6 for December from 96.0 the prior month. The index hit a high of 114.3 in October and then fell off a cliff when the first homebuyer tax credit expired. Sales fell -16% in November on the expiration of the credit. Now that the tax credit has been reinstated and expanded the sales numbers should begin to climb rapidly over the next three months. The current tax credit stimulus requires contracts to be signed before May 1st and closed before July 1st. Even buyers who are not U.S. citizens can buy a home and get up to $8,000 cash back from the government.

Pending Home Sales

Auto sales improved for U.S. automakers in January but hit a wall for Toyota. The carmaker currently recalling 7 million cars for a sticking accelerator saw sales decline -8.7% in January because they lost most of the last week due to the recall and halt in sales. Ford reported sales that rose +35% and said its market share increased to 16%, up +2% from January 2008. That is the first full year gain in market share since 1995.

GM sales rose +23% to 146,825 vehicles. However, GM fleet sales of 42,703 cars accounted for 28% of the total sales. GM VP of Sales, Susan Docherty, said GM was seeing an improvement in consumer confidence. Sales of Hondas rose +2.9% but the marginal performance came from a decline in truck sales of -11.2%. Sales of the Honda Accord were up +35.6%. Nissan posted sales of +25.8%. Chrysler sales decreased by -0.4% mostly due to slower sales of trucks.

GM said last week they were increasing production of SUVs and higher performance cars and cutting production on smaller economy cars because they were not selling well in North America. With gasoline at $2.50 Americans are kicking the tin can cars to the curb in favor of the larger cars to carry the 2.8 kids, dogs and gear around town. Gasoline demand may be down -2% from last January but the current car-buying spree should eliminate that decline very quickly.

Remember the Cash for Clunkers program removed 690,114 cars off the street and replaced them with new higher mileage vehicles. 84% of the cars traded in were SUVs and trucks, which typically get horrible gas mileage. The government said the average trade in MPG was 15.8. Over 59% of the new cars sold were passenger cars so quite a few people opted to go economical rather than get a new SUV. The government said the average MPG for new cars sold was 24.9 for an average increase of 9 mpg. The top three cars purchased were the Toyota Corolla (31 mpg), Honda Civic (31 mpg, 42 mpg if hybrid) and Toyota Camry (25 mpg, 34 mpg hybrid). Why is gasoline demand down 2% over January 2008? Two reasons. Cash for clunkers increased the MPG for 690,114 cars by 9 mpg each on average. If each car averaged 100 miles per week that equates to a savings of 1.6 million gallons of gasoline per week. Secondly demand is down because over 15 million people are unemployed and not commuting.

Economic reports due out on Wednesday include the Challenger employment report, ISM Nonmanufacturing Index and oil and gas inventories. The Challenger report is a precursor to the Non-Farm Payrolls on Friday and will allow analysts to fine turn their "official" estimates for Friday's report. The official consensus estimate today is for a gain of 5,000 jobs. The unofficial whisper number is for a loss of -59,000 jobs. There are still plenty of conflicting opinions with the report only two days away.

The oil and gas inventory report should show a dramatic drop in crude oil inventories due to problems in Texas. For the first couple days the Houston ship channel was closed for heavy fog and that delayed deliveries. For almost the entire week the Sabine Neches Waterway was close after two vessels collided and spilled 450,000 gallons of oil into the channel. Last Wednesday more than 16 tankers were lined up in the gulf waiting for the channel to reopen for traffic.

Tanker drivers play a game of Texas Chicken while navigating the 67 mile, 400 foot wide channel. Basically navigators steer the arriving and departing tankers towards each other and at the last minute veer away and allow the water pressure between the converging ships to keep them apart. The tankers are each 100 feet wide and the water pressure from an oncoming tanker closing at a combined speed of 20 mph can push a tanker coming from the other direction into the mud on the banks if there is not enough forward momentum to keep them from being pushed around. A tanker and a passing string of barges got too close last week and collided almost head on to cause the oil spill. Refineries along the waterway produce about 1.2 million barrels per day and tanker traffic can be several times that amount. Having the channel closed for six days should put a serious dent in the crude inventory report.

Sabine Ship Collision

Helping boost stocks on Tuesday was an earnings report from DR Horton (DHI). Horton posted their first quarterly profit in three years and predicted it would remain profitable for at least the first half of the year. What happens after the homebuyer tax credit expires in June is a question for all builders. Builders are worried that home sales will collapse in July after the government support expires. I would not be surprised if the tax credit was extended one more time to offset the four million expected foreclosures in 2010.

Horton said the number of new orders surged +45% and completed sales increased +36%. Horton posted a profit of 56-cents per share compared to a 20-cent loss in the comparison quarter. Horton operates in 27 states. Horton shares rallied +11% on the news. Market sentiment turned strongly positive after the report.

DR Horton Chart

Aflac (AFL) posted earnings of $1.18 after the close and beat street estimates of $1.15. Revenue rose+8% to $4.6 billion but was well below analyst estimates for $4.99 billion. Aflac raised guidance to $5.29 to $5.43 for the year and analysts were expecting $5.29 per share. Shares rose a buck in after hours trading. Quack!

News Corp (NWS) reported earnings of 25-cents that beat the street estimates of 20-cents. Earnings were $254 million. The strong earnings came on the strength of Alvin & the Chipmunks, X-Men and Ice Age franchises. The blockbuster hit Avatar was released right at the end of the quarter and there was minimal profits attributed to this movie. Avatar has become the largest grossing movie of all time with global receipts already over $2 billion and theaters are still selling out of tickets. One analyst pointed out that News Corp will earn more from Avatar alone in the current quarter than the $259 million the company made from its entire business in Q4. With the Supreme Court paving the way for businesses to pay for political ads News Corp is on the verge of an explosion of profits. News Corp gained a buck in after hours.

News Corp Chart

Shares of CH Robinson Worldwide (CHRW) were not so lucky. CHRW posted earnings of 52-cents compared to analyst estimates for 56-cents. The company said it saw little upside and limited margin growth in 2010. The CEO said CHRW was excited by volume growth accelerating in January but margins remain very low due to the overall weak freight market. Shares of CHRW fell -10% in after hours.

CH Robinson Chart

Goldman Sachs put AMD on its conviction sell list and predicted sizeable losses for the chipmaker in 2010. AMD posted a profit last quarter but only because of a $1.3 billion settlement with Intel. Without that profit they would have lost $57 million for the quarter. Goldman said AMD will suffer from low exposure to the low-end desktop business and may lose additional market share in the server market. Looks like a permanent short from here.

AMD Chart

The big earnings for the week remains Cisco after the close on Wednesday. The street is looking for 35-cents and odds are good they will beat strongly. John Chambers was very positive on global business conditions in an interview last week. He has said more than once that 2010 is going to be the recovery year and now its guidance time for John. The Microsoft claim that corporate IT spending had not yet begun will be tested when Cisco reports.

Cisco had about $35 billion in cash when they last reported earnings and it is about time for them to spend some of it on an acquisition or some monster stock buyback program.

Cisco Chart

Oil prices completed a two day ramp of +$5 on no specific news. It was a short squeeze prompted by the two-day decline in the dollar and possibly anticipation of a sharp drop in inventories on Wednesday morning. Nothing has changed fundamentally and those inventories will spike right back up the following week once those 16 tankers unload their cargoes. Trust me, if there was a reason to be bullish about oil prices here I would be the first to pound the table and tell you to buy. Note the inverse relationship in the two charts below.

Crude Oil Chart

Dollar Index Chart

Pork is the new Viagra according to the president of Argentina. No, I am not making this up. The president, Cristina Fernandez, yes a woman, said she was unaware of the sexual abilities of pork until meeting with representatives of the pork industry last week. She learned from them that pork not only makes you smarter it also works as an aphrodisiac. I repeat, I am not making this up. She said she conducted some research over the weekend with her husband and some barbecued pork and can testify, "Things went very well." "It is much more gratifying to eat some grilled pork than to take Viagra." Pork as the new Viagra, who would have ever believed it? I can see it now. Pamela Anderson doing pork commercials during the Super Bowl?

President Cristina Fernandez

After my novel length market commentary over the weekend I am not going to drone on about who missed earnings and who beat. I am sure you are much more interested in what the markets will do the rest of the week. Me too! If you figure it out let me know. (grin) I would say it pretty much rests in the hands of Cisco and the Non-Farm Payrolls on Friday.

The housing news today was a boost to sentiment as was the positive comments about consumer buying from GM. Is that enough to push the market higher? I seriously doubt it. The market was oversold at the close of last week and due for a short squeeze. Now that the squeeze has occurred we are again at that directional inflection point.

The two day short squeeze has pushed the indexes back to resistance and it remains to be seen if that resistance can be broken. The S&P futures stalled at exactly 1100 and exactly where you would have expected it to stall so the bears could reload. If the S&P moves over 1100 then the rally has a chance. Note that the cash index chart has exactly the same resistance at 1105.

S&P Futures Chart

S&P 500 Index Chart

The Wilshire 5000, the broadest of the market indexes has the exact same resistance at 11,400. When 5,000 stocks rebound to the exact same level and then stall it should give you some indication of the strength of the resistance.

Wilshire 5000 Chart

The Dow closed about 8 points above the identical resistance but as a 30 stock index the out performance by one or two stocks can influence the Dow by a few points either way on any given day. Only one Dow stock gained more than a buck and that was Merck at $1.24. For a +111 point day there was not a lot of excitement. I read the Dow chart exactly as I do the dead stop at resistance in the charts above. For all practical purposes the Dow stopped right on resistance.

Dow Chart

The Nasdaq and Russell both failed to reach the same relative level as the Dow and S&P. Big cap techs were crushed last week so the Nasdaq had farther to recover and did not make the trip. The small caps sold off less the prior week and rebounded less this week. It is as though they were the forgotten sector watching the big cap show from the sidelines. Remember, the big caps have been the main attraction for over a month as funds cautious over a potential correction put money in the highly liquid large caps so they could exit quickly if needed. Now is the time to start watching small caps in the Russell again. If managers start moving some of that large cap money into the Russell then sentiment will improve.

Nasdaq Chart

Russell 2000 Chart

Here is where I am supposed to tell you that volume was strong on this week's rally and the bulls are buying with conviction. Sorry, but that is not happening today. On Monday's big squeeze to start the week the volume was only 7.7 billion shares across all markets. That was the lowest volume day since January 14th. Tuesday was a little better at 8.9 billion shares. However, the sell offs last week came on 10-11 billion shares each. The prior Thursday and Friday declines came on 12 billion shares of volume. Monday's short squeeze at 7.7 billion shares was only 63% of the 12.2 billion volume high on the Jan-21st decline. There are no bulls hitting the buy button on their mouse this week. This is a low volume short squeeze as stop losses are getting hit.

Will that continue or will the bulls get tired of waiting and mount a credible charge? That depends on Cisco tomorrow and more on what traders expect them to say instead of what they say. The morning's economic reports are not likely to generate much excitement so it will be a case of planning your bets ahead of the Cisco announcement. Since everyone already expects them to do good there is a strong possibility those expectations are already priced into the stock. That will setup another sell the news event like we saw on Apple, Google and Microsoft. I can't imagine what Cisco would have to report to kick their stock up a couple bucks. Also, guess what chart pattern Cisco has today? Yep, the exact same resistance pattern as the indexes.

Cisco 30 Min Chart

Once past Cisco the market has to deal with the confusion over the nonfarm payrolls on Friday. If jobs are created then it will be seen as the economy gaining traction. I doubt anyone will be telling you that it was Census Bureau jobs that were created and there will be 1.15 million new part time jobs over the next three months. Politicians will be telling you the stimulus is working.

If jobs are created and the economy is presumed to be gaining traction then the Fed problem will come back to haunt us. When will they raise rates? Personally I would trade slightly higher rates for an economy expanding quickly but the home mortgage market needs low rates for the next six months to help offset the millions of new foreclosures. I doubt the Fed will raise until Q4 but the talking heads on TV will be popping the question to every guest if the economy created jobs in January.

I think Tuesday's dead stop at resistance is a perfect shorting opportunity. If I am wrong then the exit is clearly marked with a move over those resistance lines. If I am right then I expect lower lows ahead.

Jim Brown


New Option Plays

Not Broken

by James Brown

Click here to email James Brown

Looking for stocks that did not break their bullish trend during the January correction.


NEW DIRECTIONAL CALL PLAYS

Teva Pharmaceutical - TEVA - close: 57.58 change: +0.92 stop: 54.95

Why We Like It:
Our OptionInvestor.com play list is heavily weighted toward bearish trades. My bias remains bearish until the S&P 500 can close over 1120 again. However, there are still stocks out there that are climbing. TEVA is one of them. Shares did see a correction from their January highs but TEVA did not break its up trend. Today's bounce looks like an entry point to buy calls. I would keep positions small. This isn't the best risk-reward ratio. More conservative traders may want to use a stop loss under last Friday's low, which was $55.88. This should be a short-term trade. TEVA reports earnings on Feb. 16th and we do not want to hold over the announcement. Our short-term target to take profits is at $59.50. Our second target is $61.50.

Suggested Options:
I'm suggesting the February $57.50 calls. We will plan to exit before they expire.

BUY CALL FEB 57.50 TVQ1020B57.50 open interest=7403 current ask $1.16

Annotated Chart:

Entry  on  February 02 at $ 57.58 
Change since picked:       + 0.00
Earnings Date            02/16/10 (confirmed)
Average Daily Volume =        6.0 million  
Listed on  February 02, 2010         



In Play Updates and Reviews

Adjusting Some Stops

by James Brown

Click here to email James Brown

The oversold bounce continues. Just remember that two days does not make a trend. We're adjusting a couple of stop losses.


CALL Play Updates

Volatility Index - VIX - close: 21.48 change: -1.11 stop: 19.90

The market's oversold bounce continues. As stocks move higher the VIX is slipping. I still think this is temporary. My market bias is bearish until the S&P can close over 1120 again. That doesn't mean we can't get stopped out first if the VIX spikes under 20.00. I suspect that the VIX will hold near 20.00 and as soon as we see the market start to roll over again I would initiate new bullish positions in the VIX. Our original plan called for March 30 calls. 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: 195.86 change: +1.13 stop: 216.00

AAPL is underperforming the NASDAQ and most of the big caps. Shares managed a 0.5% gain but still closed under its 100-dma and the $200 level. I am suggesting we use any bounce near $200, even $205, as a new entry point to buy puts. More conservative traders will want to wait for any such bounce to roll over first before initiating positions.

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.

Entry  on   January 28 at $201.08 (small positions)/gap open entry
Change since picked:       - 5.22
Earnings Date            01/25/10 (confirmed)
Average Daily Volume =         26 million  
Listed on   January 28, 2010         


Franklen Resources Inc. - BEN - close: 101.79 change: +0.34 stop: 106.80

BEN also underperformed today with a 0.3% gain versus 1.2% in the S&P 500. Of course most of the financials were struggling with their gains on Tuesday. I'm repeating my comments from Monday. 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:       + 2.20
Earnings Date            01/28/10 (confirmed)
Average Daily Volume =        1.2 million  
Listed on   January 30, 2010         


Gymboree - GYMB - close: 40.80 change: +1.13 stop: 42.75

Retail stocks delivered a bounce on Tuesday. GYMB outperformed its peers with a 2.8% gain. I couldn't find any company-specific news to account for the relative strength. The close over $40.00 is short-term bullish but shares failed to breakout past resistance at the 200-dma. Even if GYMB does make it past the 200-dma there should be additional resistance near $42 and its 50-dma. Wait for a failed rally before launching new bearish 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:       + 1.06
Earnings Date            03/04/10 (unconfirmed)
Average Daily Volume =        513 thousand 
Listed on   January 23, 2010         


Infosys Tech. - INFY - close: 53.07 change: +0.21 stop: 56.25

INFY's bounce underperformed on Tuesday. It still looks like shares are headed for the $54-55 zone so I would wait for the bounce or wait for the bounce to rollover before initiating new put positions. Our first target is $50.15. Our second and final target is $46.50.

Entry  on   January 28 at $ 53.40
Change since picked:       - 0.33
Earnings Date            04/15/10 (unconfirmed)
Average Daily Volume =        1.5 million  
Listed on   January 25, 2010         


JPMorgan Chase - JPM - close: 40.55 change: +0.92 stop: 42.26 *new*

On a short-term basis JPM's breakout past $40.00 and its 200-dma is very bullish. It is interesting to note that the rebound today stalled at the 38.2% Fib retracement of its January decline. The stock is probably headed for the $41.50-42.00 zone but I think this bounce is temporary. Readers have a choice to make. Do you lower your stop loss and close the play somewhere near $40.75-41.00 and just re-enter when JPM rolls over near $42.00? Or do you raise your stop loss toward the $42.00-42.50 region and try and ride out this rebound? If JPM doesn't roll over then the second strategy doesn't sound very appealing.

Today I'm opting for the second and raising our stop loss to $42.26. If shares begin to falter and roll over as we expect they will then we'll double down on our puts (with March puts). 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:       + 2.11
Earnings Date            04/15/10 (unconfirmed)
Average Daily Volume =         46 million  
Listed on   January 26, 2010         


Mckesson Corp. - MCK - close: 60.46 change: +0.93 stop: 62.51

MCK's close over $60.00 is short-term bullish but the stock has plenty of resistance in the $61-62 zone. Wait for the bounce to roll over under $62.00 and then launch new positions. 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:       + 1.64
Earnings Date            01/26/10 (confirmed)
Average Daily Volume =        2.8 million  
Listed on   January 30, 2010         


Mettler Toledo Intl. - MTD - close: 98.10 change: +0.42 stop: 100.15 *new*

We have two days left. The plan is to exit on February 4th at the closing bell to avoid holding over earnings that same day. I am moving our stop loss down to $100.15. More conservative traders may want to exit right now! Our target to exit is $95.25.

Entry  on   January 22 at $ 99.40
Change since picked:       - 1.30
Earnings Date            02/04/10 (unconfirmed) 
Average Daily Volume =        134 thousand 
Listed on   January 21, 2010         


Retail Holders - RTH - close: 93.01 change: +0.95 stop: 95.05

The 1% bounce in the RTH really doesn't change anything. Shares are still building a bear-flag shaped consolidation. I've been suggesting readers open new positions near $94.00. I'd move that down to the $93.50 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:       + 1.59
Earnings Date            --/--/--
Average Daily Volume =        1.7 million  
Listed on   January 23, 2010         


SIEMENS - SI - close: 92.54 change: +1.93 stop: 95.75

European markets were up across the board on Tuesday. This gave SI a positive environment and shares gapped higher this morning. Nothing has changed for us. Readers can use a bounce near $94 or wait for the bounce to roll over as a new entry point for 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:       - 1.80
Earnings Date            01/26/10 (confirmed)
Average Daily Volume =        368 thousand 
Listed on   January 26, 2010         



CLOSED BEARISH PLAYS

FEDEX Corp. - FDX - close: 82.33 change: +2.32 stop: 82.55

We have been stopped out of FDX. Shares hit $82.55 very late in the day. I mentioned this was a risk yesterday. I'm still bearish on FDX and would watch for a failed rally near the 50-dma (84.50) or the $85.00 level and use that as a new entry point.

Chart:

Entry  on   January 25 at $ 79.45 
Change since picked:       + 3.10 <-- stopped out @ 82.55 (+3.9%)
Earnings Date            03/18/10 (unconfirmed)
Average Daily Volume =        3.0 million  
Listed on   January 23, 2010