Option Investor
Newsletter

Daily Newsletter, Monday, 2/8/2010

Table of Contents

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

Market Wrap

European Debt Concerns Pummel Stocks...Again

by Todd Shriber

Click here to email Todd Shriber
So much for Mutual Fund Monday. Monday had become the most reliable day of the week for the bulls with 17 of the previous 19 Mondays being up days, but that run was thwarted today as concerns over Europe's looming debt problems continued to weigh on the minds of investors. Monday's trade proved that no one should have been fooled by the rally we saw into the close on Friday. If you speculated that the reversal of U.S. indexes from big losses to small gains on Friday was nothing more than the shorts scurrying to cover before the weekend, you would have been correct.

The Dow Jones Industrial Average turned in another triple-digit loss today to close at 9908.39, the index's first close below 10,000 since November. The S&P 500 surrendered almost 9.5 points to finish at 1056.74 and the Nasdaq lost just over 15 points to close at 2126.05 as investors shrugged off a spate of analyst upgrades for blue chip companies in favor of selling stocks due to the aforementioned European debt concerns.

Stats Table

Friday's short-covering rally was fueled by speculation some type of recovery package would emerge over the weekend to help imperiled European Union members (or the EU's weakest links, depending on your perspective) such as Greece, Portugal and Spain. That help has yet to emerge and that gave the bears the green light to punish U.S.-based financials on Monday. American Express (AXP) and Bank of America (BAC) were among the Dow's biggest losers on Monday, finishing down 2.8% and 3.47%, respectively. Financials were the biggest losers among the 10 industry groups tracked by the S&P 500, shedding 2.2% on the day.

Here is an interesting anecdote about the impact Europe's PIGS (Portugal, Italy, Greece and Spain) are having on global markets. According to the CIA's World Factbook, Italy is merely the EU's third-largest economy, trailing Germany and France by a healthy margin, and the seventh-largest economy in the world, though it will probably lose that perch to Brazil in a couple of years. Spain is number four in the EU and tenth overall in the world, but Greece and Portugal? Respectively, those are the 28th and 38th largest economies in the world. That means California, Texas and the island of Manhattan have bigger economies than Greece and Portugal, yet those two countries are playing a heavy hand in the recent performance of stocks.

I would hate see what would happen if the Netherlands, the world's fourteenth ranked economy, reported similar problems. Here is a chart from last year that illustrates that Europe's debt problems are far from being contained to the PIGS.

Public-Private Debt Chart

Commodities saw some relief today after being taken to the woodshed last week. Copper futures for March delivery rose 5.55 cents to $2.91 a pound on the New York Mercantile Exchange. The red metal's front-month contract posted its biggest gain since January 19th, according to Bloomberg News. Copper traders were encouraged by signs of stable demand in China, the world's top consumer of the metal. Analysts that follow copper seem to be echoing a familiar refrain and that is prices for the metal will remain volatile in the near-term, but long-term demand looks bullish.

Trading below $3 a pound, copper has moved past several key support levels. Support can probably be found around $2.87 and $2.7517 represents the 38.2% Fibonacci retracement from copper's 52-week high.

Copper Chart

Crude oil for March delivery rose 1% to finish at $71.89 a barrel on the NYMEX, ending a three-day skid that delivered a decline of almost 8%. Doubts over a global economic recovery have hampered oil recently, but black gold got some relief, at least for a day, on speculation that demand would improve ahead of the summer driving season in the U.S.

That is a risky proposition as demand in the U.S. remains weak and inventories remain high. Oil inventory data is due out on Wednesday and analysts are forecasting another weekly rise of 1.4 million barrels of oil and 200,000 barrels for gasoline stocks.

Crude Chart

Another way of looking at how bad things were for blue chips on Monday is to look at industrial conglomerate and Dow component United Technologies (UTX). I am not picking United Technologies here, but it should be noted that the maker of Otis elevators and Sikorsky helicopters announced it would raise its quarterly dividend by 10%, but due to broader market concerns, the stock continued a tailspin that started last month, shedding another 1.65%.

The dividend increase will cost United Technologies a mere $150 million and the company has been a steady dividend payer for over 70 years. I guess these are things that get overlooked when Greece's financial situation is front-page news.

United Technologies Chart

There were some good performances turned in by select stocks on Monday. Take Hasbro (HAS) for example. The maker of the Monopoly board game and Transformers toys among other popular games and toys, soared by nearly 13% to touch a new 52-week high at $35.19 before settling at $34.71 after reporting fourth-quarter profit and revenue results that handily beat analysts' estimates.

In the fourth quarter, Hasbro earned $1.09 a share and sales of $1.38 billion. Analysts had been expecting the company to earn 81 cents a share on revenue of $1.34 billion. Hasbro achieved those stellar numbers even though it reduced its advertising expenditures by $6.4 million from the year earlier period.

While Hasbro, the biggest gainer in the S&P 500 today, did not offer much in the way of 2010 guidance, one can surmise that these results were helped by the release of films such as the Transformers sequel, so it was not surprising to hear the company give some bullish comments regarding the release of ''Iron Man II'' and ''Toy Story III'' later this year.

For you longer-term investors, ''Transformers III'' and a couple of big Disney (DIS) movies are due out in 2011 and those releases could be positive catalysts for Hasbro because the company has the licensing rights for the toys associated with these movies. Hasbro also boosted its quarterly dividend by 25% last week.

Hasbro Chart

Speaking of fun and games, it was anything but for video game maker Electronic Arts (ERTS), the maker of the ''Madden'' football and ''Call of Duty'' games. EA had warned about its fiscal third-quarter results in January, but the stock was hammered on a glum outlook for the current quarter. In the fiscal third quarter, EA lost $82 million, or 20 cents a share, a sharp improvement from the $641 million, or $2 per share, it lost a year earlier. Revenue slid 25% to $1.24 billion.

For the current quarter, California-based EA expects to earn two cents to six cents a share on sales of $800 million to $850 million. That is below analysts' estimates of a profit of 13 cents a share on revenue of $851 million. With football season over, gamers are likely to pass on the ''Madden'' games and the latest ''Call of Duty'' has already been on the market for a while, so EA will hope the relase of ''Mass Effect 2'' and ''Dante's Inferno'' will jolt profits going forward.

EA is also the maker of the Tiger Woods golf games and it is doubtful that franchise will help the company's bottom line in the near-term as the golf superstar is taking an indefinite leave of absence from the PGA tour in order to get his personal life, which looks about as bullish as Greece's financial state, in order. As of this writing, EA shares were getting battered in the after-hours session, down $1.48, or 8.46%, to $16.02. The 52-week low is $14.75.

Electronic Arts Chart

Taking a look at the charts, with the Dow's close below 10,000 that round number may become a new resistance point if stocks continue to languish. From there, 10,300 would be the next logical hurdle, but expecting to see that number in the next few days might prove to be very wishful thinking. Even if Greece gets it act together, that is no guarantee that risk appetite will be vigorously renewed.

If 9650 cannot hold as support, watch out. From there, 9500 could be the next stopping point, but even that is a tough bet to make because the current 200-day moving average is just below 9500 at 9491. In other words, there is plenty of room to the downside for the Dow.

Dow Chart

The S&P 500 is sporting an equally dour posture, closing right near its intraday low on Monday. Old support at 1085 could act as new resistance and from there 1100 could be the next point of contention, but the index rests a fair bit from both of those areas. In fact, the S&P 500 is now within earshot of support at 1035. That area needs to hold for the bulls because from there, 1010 comes into play. The near-term technicals are not pretty as the 50-day moving average crossed below the 20-day line last week, and if you like the MACD indicator, take a look at it on an S&P 500 chart. It is downright ugly.

S&P 500 Chart

The Nasdaq's technical problems resemble those of the S&P 500's and to highlight how weak the tech sector has become this year, the Nasdaq notched another down day on Monday when both Google (GOOG) and Amazon (AMZN) received analyst upgrades. As is the case with the S&P 500, the Nasdaq's 50-day line crossed the 20-day line last week and if support at 2115 does not hold (keep in mind we are just 11 points away from there), the next support area is 2020-2035. So if 2115 is violated, the best case scenario becomes a loss of at least another 70 points and that is not an encouraging best case scenario.

Nasdaq Chart

As I have been saying, there has been something fishy about this current dip that has made it tough to advocate a bullish stance. It appears Greece and friends are absorbing much of the blame and rightfully so, but as I said earlier, does the fact some relatively mid-tier economies are setting the course for U.S. equities not highlight some underlying weaknesses here in the States?

And if the Greece situation passes, that may only provide a temporary jolt to stocks. The market has already shrugged off a steady stream of good earnings reports, analysts upgrades and dividend increases, and that may compel some investors to wonder what is it going to take to get stocks moving higher again?


New Option Plays

Financials Are Struggling

by James Brown

Click here to email James Brown


NEW DIRECTIONAL PUT PLAYS

Goldman Sachs - GS - close: 151.10 change: -3.06 stop: 156.05

Why We Like It:
The sideways consolidation in GS looks vulnerable. The stock could breakdown again. If it slips lower the next level of support is the $135-137.50 zone. The low last month was $147.81. I am suggesting a trigger to buy puts at $147.45. If triggered our first target to take profits is at $138.00.

Suggested Options:
I am suggesting the March $140 puts.

BUY PUT MAR 140 GS1020O140 open interest=4816 current ask $3.65

Annotated Chart:

Entry  on  February xx at $ xx.xx <-- TRIGGER @ 147.45
Change since picked:       + 0.00
Earnings Date            04/13/10 (unconfirmed)
Average Daily Volume =         17 million  
Listed on  February 00, 2010         



In Play Updates and Reviews

No Confirmation

by James Brown

Click here to email James Brown

Editor's Note:

Over the weekend I said the bullish reversal on Friday needs to see confirmation on Monday. That did not happen. There was no confirmation and stocks look poised to drop!


CALL Play Updates

Freeport McMoran - FCX - close: 69.20 change: -1.03 stop: 65.85

Wow! The lack of follow through on Friday's bounce is really bearish. FCX has produced a new lower high with today's failure. This was labeled an aggressive trade and more conservative traders may want to seriously consider an early exit immediately! I am not suggesting new bullish positions unless we see FCX bounced from $66.50 again. We want to use small positions. Out first target to take profits is at $74.75. Our second target is the 100-dma near $77.50.

Entry  on  February 06 at $ 70.23 
Change since picked:       - 1.03
Earnings Date            04/22/10 (unconfirmed)
Average Daily Volume =       20.6 million  
Listed on  February 06, 2010         


Teva Pharmaceutical - TEVA - close: 56.92 change: +0.16 stop: 54.95

TEVA managed to outperform the market with a minor gain. I remain cautious. Readers may want to up their stop loss toward the 50-dma near $55.80. 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.

Entry  on  February 02 at $ 57.58 
Change since picked:       - 0.66
Earnings Date            02/16/10 (confirmed)
Average Daily Volume =        6.0 million  
Listed on  February 02, 2010         


PUT Play Updates

Apple Inc. - AAPL - close: 194.12 change: -1.34 stop: 210.51

The bounce in AAPL is failing near its 10 and 100-dma. This could be used as a new bearish entry point. More conservative traders may want to lower their stops closer to $206.

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:       - 6.96
Earnings Date            01/25/10 (confirmed)
Average Daily Volume =         26 million  
Listed on   January 28, 2010         


Franklen Resources Inc. - BEN - close: 96.30 change: -1.70 stop: 106.80

Financials continue to underperform. Shares of BEN saw zero follow through on its Friday bounce. Shares gave up another 1.7%. The path of least resistance is down. Our target to exit is $92.50.

Entry  on   January 30 at $ 99.59 /gap higher entry point (small positions)
Change since picked:       - 3.29
Earnings Date            01/28/10 (confirmed)
Average Daily Volume =        1.2 million  
Listed on   January 30, 2010         


Gymboree - GYMB - close: 40.76 change: +0.10 stop: 42.26

GYMB is still advancing but shares stalled at their 50-dma this morning. The very short-term trend is up but I'm expecting this rally to reverse in the $42.00 region. Over the weekend we moved the stop loss down to $42.26. Today's move could be the failed rally at $42 we're looking for as a new entry point. More conservative traders could wait for a new drop under $40.00 to launch 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:       + 1.02
Earnings Date            03/04/10 (unconfirmed)
Average Daily Volume =        513 thousand 
Listed on   January 23, 2010         


Intl. Bus. Mach. - IBM - close: 121.88 change: -1.09 stop: 131.55

The lack of any follow through for IBM's bounce on Friday is very bearish and shares set a new relative closing low today. I do think IBM is going lower. However, I suspect that the $120 level and the 200-dma near $118 could be support. The risk-reward to buy puts now doesn't seem very attractive. More aggressive traders may want to go ahead. I'm sticking to the plan and waiting for another failed rally/bounce we can short. Currently the trigger to buy puts is at $127.75. If triggered at $127.75 our first target is $122.00. Our second target is the 200-dma.

Entry  on  February xx at $ xx.xx <-- TRIGGER @ 127.75
Change since picked:       + 0.00
Earnings Date            04/20/10 (unconfirmed)
Average Daily Volume =        8.2 million  
Listed on  February 03, 2010         


Infosys Tech. - INFY - close: 51.12 change: +0.19 stop: 55.15

INFY eked out a gain today but shares failed at short-term resistance near $52.00. The stock looks poised to retest its lows from Friday.

Currently the plan is to open new put positions on a bounce to $54.50. If triggered on this new trade we'll take profits again at $50.15 and $46.50.

-2nd Entry-
Entry  on  February 00 at $ 00.00 <-- trigger @ 54.50
Change since picked:       - 0.00

-1st Entry Closed-
Entry  on   January 28 at $ 53.40
Change since picked:       - 2.47 <-- early exit @ 50.93 (-4.6%)
                            /1st target hit @ 50.15 (-6.0%)
Earnings Date            04/15/10 (unconfirmed)
Average Daily Volume =        1.5 million  
Listed on   January 25, 2010         


JPMorgan Chase - JPM - close: 37.70 change: -0.60 stop: 41.65

There was zero follow through on the bounce in JPM. Shares opened weak and spent the day churning sideways to close with a 1.5% loss. This is good news for our put play. 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:       - 1.44
Earnings Date            04/15/10 (unconfirmed)
Average Daily Volume =         46 million  
Listed on   January 26, 2010         


Mckesson Corp. - MCK - close: 58.31 change: -0.03 stop: 62.51

The bounce in MCK may not be over yet. I am suggesting we look for new bearish positions on a bounce near $60.00 or the 50-dma. Our first target to take profits will be $54.00.

Entry  on   January 30 at $ 58.82 
Change since picked:       - 0.51
Earnings Date            01/26/10 (confirmed)
Average Daily Volume =        2.8 million  
Listed on   January 30, 2010         


Retail Holders - RTH - close: 90.60 change: +0.04 stop: 94.10

The RTH managed a gain but today was anything but bullish. The bounce failed at the 10-dma and shares were sliding lower into the close. This looks like another bearish entry point to buy puts. 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:       - 0.82
Earnings Date            --/--/--
Average Daily Volume =        1.7 million  
Listed on   January 23, 2010         


SIEMENS - SI - close: 84.80 change: -0.67 stop: 94.05

The oversold bounce in SI has stalled at the $86.00 level. I'm not suggesting new positions at this time.

Our second and final target is $81.00. More aggressive traders may want to aim lower.

Entry  on   January 26 at $ 94.34 /gap higher entry
Change since picked:       - 9.54
                            /1st target hit @ 87.55 (-7.1%)
Earnings Date            01/26/10 (confirmed)
Average Daily Volume =        368 thousand 
Listed on   January 26, 2010         


United Technology - UTX - close: 65.40 change: -1.10 stop: 69.05

The bounce in UTX has already failed under its 100-dma. This looks like another entry point for bearish positions. Our target to take profits is $61.00, just above the simple 200-dma. Our time frame is just two or three weeks.

Entry  on  February 04 at $ 66.38 
Change since picked:       - 0.98
Earnings Date            04/21/10 (unconfirmed)
Average Daily Volume =        5.1 million  
Listed on  February 04, 2010         


CLOSED BULLISH PLAYS

Intl Bus. Mach. - IBM - close: 121.88 change: -1.09 stop: 121.49

We have IBM on the newsletter as a put play with a trigger to buy puts on a bounce near resistance. Instead of waiting for the bounce to happen we added this call play to try and profit from the rebound. Unfortunately, no rebound occurred. IBM has erased Friday's afternoon rebound and look poised to breakdown. I'm hitting the "eject" button and suggesting an early exit immediately.

Chart:

Entry  on  February 06 at $123.52 
Change since picked:       - 1.09 <-- exit early (-0.88%)
Earnings Date            04/20/10 (unconfirmed)
Average Daily Volume =        8.3 million  
Listed on  February 06, 2010         


U.S.Steel - X - close: 44.09 change: -0.64 stop: 42.25

The oversold bounce in X has already rolled over. The lack of follow through on Friday's rebound is very bearish. I still think X is very oversold and due for a larger correction higher but today's action is negative. I'm suggesting an early exit immediately. More aggressive traders can let it ride and hope for a bounce from the 200-dma. I'd keep X on your watch list. We'll probably see another opportunity soon. This was labeled an aggressive trade with small positions to limit our risk.

Chart:

Entry  on  February 06 at $ 44.78 (small positions)
Change since picked:       - 0.64 <-- exit early $ 44.09 (-1.4%)
Earnings Date            04/27/10 (unconfirmed)
Average Daily Volume =       22.4 million  
Listed on  February 06, 2010