Option Investor
Newsletter

Daily Newsletter, Tuesday, 2/23/2010

Table of Contents

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

Market Wrap

OOPS!

by Jim Brown

Click here to email Jim Brown

Economic numbers out today suggest the markets are way ahead of the economy. On the surface this was a serious blow to market sentiment.

Market Stats Table

Consumer confidence for February plunged 10 points to 46.0 and shocked the markets into a triple digit loss. The headline number was a 10-point drop from the 55.9 reading in January. This was the lowest level for sentiment since April 2009. Leading the decline was a drop to 63.8 for the expectations component, down from 77.3 in January. The present conditions component fell to 19.4, down from 25.2 in January, and the lowest level in 27 years.

These are monumental drops and were completely unexpected. The deterioration is so severe that it appears there is some bad data in the system but obviously they would have checked for that before releasing the report.

Those who believe jobs are plentiful fell from 4.4% to 3.6% and that suggests the non-farm payrolls next week could be weaker than expected.

One analyst said the drop in consumer confidence was related to the blizzards in the northeast. He claimed that being snowed in and unable to get to work created irritable consumers. If that were the case you would think the decline in confidence would only have been in the northeast. The actual numbers showed the decline was nationwide with the exception of the West South Central division (AR, LA, OK, TX) and New England. Since there were no blizzards in the other seven geographic divisions I seriously doubt it was weather related or at least not completely weather related.

Consumer Confidence Chart

US Census Division Map

The Case Shiller home prices for December were also released today and prices rose but only by +0.32% and a smaller gain than expected. December is a tough month for home sales and that could have been a factor in the slower price rise. That was the seventh consecutive month of price improvement. However, December sales fell -16% as fewer first time buyers purchased homes.

A threat to the continued streak of price improvement is the rising number of pending foreclosures. A separate study showed that 11.3 million homes, 24% of existing loans, are now underwater. There is also an increase in homes coming on the market as more people give up the fight to make payments and are preparing for the spring buying season in hopes of unloading their home and escaping the mortgage before they too go negative.

Mass layoffs for January increased to 1,726 events impacting 182,261 workers. This was higher than the December level of 1,726 events and 153,127 workers. Layoffs need to fall below 150,000 workers for the economy to show positive job growth.

Cold weather was again blamed for the higher layoffs, particularly in construction. Layoffs in nonresidential electrical contractors experienced the largest decline and I don't see how that would have been specifically weather related and layoffs were the lightest in the northeast. On the positive side layoffs shrank in durable goods manufacturing as manufacturers are finally rebuilding inventories after the two-year sell down.

The Richmond Fed Manufacturing Survey rose to +2 for February from a -2 in January. Any number in positive territory represents an expanding manufacturing conditions. However, this is still well below the +14 we saw for three months from July-Oct 2009. The year-end slump to -4 in December is easing but very slowly. New orders did improve to +9 from +1 and back orders improved to zero from -13.

Manufacturers are still having trouble with credit either for supplies and inventory or for purchasers unable to get inventory financing. Until normalized financing becomes available we can expect the manufacturing sector to continue to struggle.

Richmond Fed Survey Chart

The economic calendar for the rest of the week contains two appearances by Ben Bernanke in front of lawmakers in his twice a year testimony on the economy. Thursday has the Health Care Summit. Friday is the big day with the GDP revision and the ISM Chicago.

Economic Calendar

Home Depot (HD) and Lowe's (LOW) both reported earnings today and both were better than expected. They said they did not have to discount merchandise as much or put more merchandise on sale. There were also reports that some consumers were splurging on higher-priced goods and services like carpet installation and counter tops. I know last time I visited Home Depot I had three different salesmen approach me in the isles and each tried to book an in home upgrade appraisal for carpets, counters and lighting. NEVER before has anyone ever approached me and I shop there all the time. It appears Home Depot and probably Lowe's as well, have shifted from strictly a merchandiser to a service seller as well and that is benefiting their profits.

Home Depot said all but two of their top 40 markets in the U.S. showed year over year improvement in Q4. The CEO said there was cause for optimism in 2010 but it would be a transitional year and not a year of robust growth. He also said, "Calling the year transitional does not sound very exciting but we have been waiting for this transition for a long time." Same store sales rose +1.2% for the first increase in years. HD also increased its quarterly dividend for the first time since 2006. HD closed at anew 52-week high.

Lowe's posted a profit of $205 million on sales of $10.2 billion but same store sales decline by -1.6%. That was the best same store sales in three years but still a decline. The Lowe's CEO was not as optimistic as the HD CEO but he did say, "The worst of the economic cycle is likely behind us." Both retailers expected business to pickup towards the end of 2010.

Radio Shack (RSH) reported earnings Monday night and although it beat estimates the stock was crushed on Tuesday for a -7% loss. Same store sales rose +6.1% but was offset by lower sales at mall kiosks. Kiosk revenue fell -15.3% due mostly to the closing of the Sprint branded kiosks. Analysts dumped on the Shack due to lower sales on accessories. While their sales of mobile phones and related equipment were strong the sales of nearly everything else was weak. Radio Shack is trying to rebrand itself as The Shack and focus on wireless technology.

Chart of The Shack

Target (TGT) reported earnings that beat the street with better than expected holiday sales and improved margins. A lower tax rate also helped push earnings higher. Target gave a mixed message on the call by saying its shoppers are increasingly confident and willing to buy more discretionary items, BUT, they said Q1 profit estimates are too aggressive. Basically they beat on the basis of the lower tax rate and gave weak guidance. The markets dipped again intraday when Target warned on guidance.

Wal-Mart reported earnings last week and also said sales at its U.S. stores fell during the holiday quarter and traffic declined. Every major broad line retailer has cautioned on sales in the current quarter. When coupled with the falling consumer confidence this is painting a relatively clear picture of our economic health or maybe I should say consumer health. We have seen millions of consumers have their credit cards cancelled and/or credit lines cut ahead of the new CARD rules that went into effect on Monday. This is limiting the amount of money consumers can spend for discretionary items. Not everyone can walk into a Home Depot and order a house full of carpet or a complete kitchen remodel. The average consumer just wants to go into the grocery story and come out with change.

The dollar recovered from Monday's decline and that pressured commodity stocks including copper, gold and oil. The Euro returned to nine month lows as did the British pound. Gold fell to within 1 point of 1100 and oil fell from $80.50 to $78.22 intraday. Many energy stocks fell 3-4% with coal stocks hit especially hard. Patriot Coal (PCX) lost -12% on news of a mine closure. Massey Energy (MEE) lost -6% and Peabody Energy (BTU) -4%. The natural gas ETF (UNG) declined another 2.3% to $8.79 on worries that demand is going to drop sharply now that winter is nearly over.

Xerox sued Google and Yahoo over search patents granted to Xerox back in 2001. Xerox claims the companies, including Google Maps, You-Tube and Adsense advertising software are illegally using patents owned by Xerox and Xerox wants them to stop using the technology and compensate Xerox for searches made using the technology in the past. A Yahoo spokeswoman said they would fight the case. Let's see, the other option would be to cough up a couple billion for past searches? Google said the claims were entirely without merit and they would "defend against them vigorously." Wow, that is a surprise!

Xerox has a market cap of $12 billion and Google's is $130 billion. Wouldn't it be a real shock to see the courts side with Xerox and award billions in damages to a company that has been on the verge of going out of business multiple times in the last decade. Back in the late 1990s there were entire teams of people hired by major corporations to do nothing but try to decide how to patent every conceivable function of Internet activity. Email, payments, credit card charges, shopping carts, even web page coding. The idea was to find one idea that nobody had thought to patent and everybody needed. This may be the result of one of those teams. Obviously Xerox never had a search engine like Firefox, Opera, Netscape, etc. Why would they have patents for Internet searching? That may turn out to be money well spent.

For the markets, today was a reaction day and a profit-taking day using an economic excuse. Volume was slightly higher than the 6.9 billion shares on Monday and 4:1 to the downside. The Dow gained +400 points in the last week and a half and it was time to rest. The decline could have been blamed on anything but the drop in consumer confidence was a perfect excuse.

In the daily chart below you can see the Dow rallied exactly to resistance where it struggled for three days before finally giving up. When a market has rallied 400 points and then fails to make a meaningful attempt at breaking through resistance, most traders will tighten those stops really close just in case the trend ends. What we saw at the open was one big stop loss blowout.

Consumer Confidence was released at 10:00. Stops were crushed and the Dow fell to support at 10300 very quickly. Once back at 10300 the worst was over and we traded sideways the rest of the day. Several attempts to push it lower were unsuccessful.

Dow Chart - 5 Min

Dow Chart - Daily

The S&P-50 rallied almost exactly to the 50%retracement level at 1115 and failed after two days of attempts to break it. The decline today to 1095 is still 10 points away from decent support at 1085. I know there are a lot of people expecting the S&P to return to its lows and reach a full 10% correction or worse. I think we are too soon in the process to even begin to think about that possibility. We had nearly two weeks of gains and one day of declines. It is not time to start crying wolf until that support at 1085 fails.

S&P-500 Chart - Daily

The Nasdaq rallied to exactly the Fib retracement at 2250 on Monday. The -1.27% decline today was led by a -2.83% decline in semiconductors. The sector that led the Nasdaq higher also led it lower but this is just a typical pattern of profit taking. The Nasdaq rallied stronger than the other indexes from the February lows because "techs are supposed to lead out of a recession" and chips lead techs. The Nasdaq returned to support at 2200 and without a new story to continue the selling that 2200 level should hold. However, if we see that level break I would revert to a bearish bias.

Nasdaq Chart - Daily

The Russell managed a weak -1.13% decline and came to a dead stop on support at 623-625. This is the line in the sand that bears watching. A break here means fund managers are bailing on small caps and the sentiment of the market has changed. That strong rebound from 580 to 633 was a +9.1% rebound in 10 days. We should see profit taking after that kind of rally.

Russell Chart - Daily

In summary we had a day of profit taking on the economic excuse. Those sectors that rose the quickest over the prior two weeks were the hardest hit today. It was a picture perfect bout of news event profit taking. Stops were hit and buyers came back into the market when stronger support levels were reached. I am not bearish today but I would turn bearish if those support levels I mentioned were broken. That is what will tell us that the simple profit taking has turned into something else.

We have Bernanke testifying twice over the next two days and we have the healthcare summit on Thursday. I doubt we will see anything come out of the summit other than a lot of face time on camera. Senator Orin Hatch was on TV today complaining that the summit was an attempt to put a coat of fresh paint on a condemned building. That should give you a clue as to the outcome. Regardless of your political views President Obama has staged a masterpiece of political theater for Thursday. Regardless of the outcome he will be seen as trying to bring the parties together. Even if the effort fails he will have gained points with Americans when the news reports spin their 2 minutes of coverage. If the event fails to produce a bill the republicans will be profiled as the party of "no" despite any valid reasons for the failure. By showing up at the televised event they are walking into a political battle they can't win in the press. It is a masterful piece of political strategy on the part of Obama.

On Friday the GDP revision and the dual ISM reports should be positive and hopefully breakup any market doldrums still in place.

Jim Brown


New Option Plays

Coal, Currencies, and more

by James Brown

Click here to email James Brown


NEW DIRECTIONAL PUT PLAYS

Caterpillar - CAT - close: 56.66 change: -1.37 stop: 59.01

Why We Like It:
Investors are once again starting to wonder about the health of the global economy and CAT could be a real under performer if this concern turns into fear. The stock did a huge amount of damage to its chart in January with the false breakout, reversal and sell-off. Now the oversold bounce is stalling. I do consider this an aggressive trade since CAT might have some support in the $56-55 zone but I suspect shares will retreat even further.

I'm suggesting put positions now. We'll use a tight stop above yesterday's high. Our target to exit is $51.00. Please note that the $54.00 level might offer some support.

Suggested Options:
This should be a quick trade with a one to two week time frame. I'm suggesting the March $55 puts.

BUY PUT MAR 55.00 (CAT1020O55) open interest=17,418 current ask $1.25

Annotated Chart:

Entry  on  February 23 at $ 56.66 
Change since picked:       + 0.00
Earnings Date            04/21/10 (unconfirmed)
Average Daily Volume =         12 million  
Listed on  February 23, 2010         


Australian Dollar ETF - FXA - close: 89.01 change: -1.16 stop: 90.60

Why We Like It:
The Federal Reserve has hinted that it's ready to raise rates when needed and they have already begun to "normalize" the system from its state of emergency. This should be good news for the dollar. Don't get me wrong. We're not expecting the Fed to raise rates for a quite a while but the dollar appears to be on a bullish path and that's going to weigh on commodities and currencies like the Australian dollar.

One way to play the Australian dollar is the FAX currencyshares ETF. Looking at the chart you can see that the FXA has topped out around the $93-94 level and now we're starting to see a pattern of lower highs and lower lows. This past week saw the FXA struggle with resistance near $90.50. I am suggesting we open bearish positions now. Two or three months from now this ETF could be a lot lower. There is potential support at the 200-dma near $86.00 but I'm setting our first target at $83.00. Our second target at $80.00.

Suggested Options:
I do consider this an aggressive trade for several reasons. First, there isn't a lot of volume on the FXA. Second, there is even less volume in some of the options. Third, the spreads are a little bit wide. Keep your positions small to limit risk! I'm suggesting the April $85 puts or the June $85 puts.

BUY PUT APR 85.00 (FGA1017P85) open interest= 0 current ask $0.80
-or-
BUY PUT JUN 85.00 (FGA1019R85) open interest= 67 current ask $1.90

Annotated Chart:

Entry  on  February 23 at $ 89.01 
Change since picked:       + 0.00
Earnings Date            --/--/--
Average Daily Volume =        200 thousand 
Listed on  February 23, 2010         


Walter Energy - WLT - close: 77.33 change: -2.87 stop: 81.25

Why We Like It:
It looks like the rally in coal stocks has run out of steam. Shares of WLT have been struggling with resistance near $81.00 the last few days. The stock is definitely short-term overbought. I am suggesting short-term bearish positions now. Our target is $72.00. More aggressive traders could aim lower. Keep in mind that WLT can be a volatile stock. I would keep positions small to limit your risk.

Suggested Options:
This should be a short-term trade. I'm suggesting the March $75 puts.

BUY PUT MAR 75.00 (WLT1020O75)interest=2326 current ask $2.95

Annotated Chart:

Entry  on  February 23 at $ 77.33 
Change since picked:       + 0.00
Earnings Date            04/29/10 (unconfirmed)
Average Daily Volume =        2.8 million  
Listed on  February 23, 2010         



In Play Updates and Reviews

Entry Point!

by James Brown

Click here to email James Brown

Stocks are rolling over and for a handful of our plays this is a new entry point.


CALL Play Updates

Autozone Inc - AZO - close: 164.24 change: +1.17 stop: 159.40 *new*

AZO displayed some relative strength today with a 0.7% gain. Yet the rally stalled this morning near its highs from last week. I'm bullish on AZO but we're running out of time. We want to exit ahead of the March 2nd earnings report. Please note that I am raising our stop loss to $159.40.

Given our time frame I'm reducing our targets down to one. Plan to exit at $167.50.

Entry  on  February 16 at $161.75 (small positions)
Change since picked:       + 2.49
Earnings Date            03/02/10 (unconfirmed)
Average Daily Volume =        538 thousand 
Listed on  February 13, 2010         


Celgene Corp. - CELG - close: 59.14 change: -0.54 stop: 53.90 *new*

CELG produced another failed rally near $60.50 today. This is the fourth day in a row the stock has failed at this level. I suspect the pull back might be a little deeper than we previously planned. I'm adjusting our entry point to buy calls from $58.00 down to $56.50. I'm moving the stop loss to $53.90 so it's under the February low. If triggered at $56.50 our first target is $62.50. Our second, longer-term multi-week target is $69.00.

Entry  on  February xx at $ xx.xx <-- TRIGGER @ 56.50
Change since picked:       + 0.00
Earnings Date            04/29/10 (unconfirmed)
Average Daily Volume =        3.6 million  
Listed on  February 20, 2010         


Colgate Palmolive - CL - close: 81.89 change: -0.19 stop: 78.85

CL is still consolidating sideways between $81 and $82.50. There is no change from my prior comments. Readers can choose to try and buy dips in the $81-80 zone or look for a breakout over $82.75. Our target to exit is $86.00.

Entry  on  February 20 at $ 81.75 
Change since picked:       + 0.33
Earnings Date            04/29/10 (unconfirmed)
Average Daily Volume =        2.8 million  
Listed on  February 20, 2010         


Sina Corp. - SINA - close: 36.96 change: -0.90 stop: 34.95

SINA produced the correction we were looking for and shares hit our trigger to buy calls at $36.50. The low today was $36.28 and SINA bounced off its simple 200-dma. If you missed the entry point I would still consider buying calls now. Our first target to take profits is at $39.95.

Chart:

Entry  on  February 22 at $ 36.50
Change since picked:       + 0.46
Earnings Date            03/15/10 (unconfirmed)
Average Daily Volume =        1.4 million  
Listed on  February 18, 2010         


TEVA Pharmaceuticals - TEVA - close: 59.45 change: -0.42 stop: 56.40

It shouldn't be a surprise to see TEVA step back with shares facing resistance at $60.00 and the market slipping lower. If this stock corrects any further we could see a dip toward $58.00-57.00 or its 50-dma. Wait for the dip or buy the bounce after the dip occurs. Our first target is $64.00.

Entry  on  February 20 at $ 58.74 
Change since picked:       + 0.71
Earnings Date            05/05/10 (unconfirmed)
Average Daily Volume =        5.1 million  
Listed on  February 20, 2010         


PUT Play Updates

Apple Inc. - AAPL - close: 197.06 change: -3.36 stop: 206.26

Entry point alert! Yesterday I reiterated my suggestion to open new put positions on a drop below $198.50. AAPL obliged us with a 1.6% decline and a close under its 100-dma. However, instead of buying the March $180 puts I am suggesting the March $190 puts (current ask $2.91).

Our first target to take profits is at $182.50. Our second target is $165.00 although we might exit at the 200-dma. The plan was to use small positions to limit our risk.

Entry  on   January 28 at $201.08 (small positions)/gap open entry
Change since picked:       - 4.02
Earnings Date            01/25/10 (confirmed)
Average Daily Volume =         26 million  
Listed on   January 28, 2010         


Abbott Labs - ABT - close: 53.97 change: -0.43 stop: 55.05

ABT is retreating and the stock has fallen under several key moving averages but I remain cautious on the stock. No new positions at this time.

Our first target was $50.15. More aggressive traders can target the 200-dma or support near $48.00.

Entry  on  February 10 at $ 52.80
Change since picked:       + 1.17
Earnings Date            04/21/10 (unconfirmed)
Average Daily Volume =        7.5 million  
Listed on  February 09, 2010         


Franklen Resources Inc. - BEN - close: 100.03 change: -1.33 stop: 104.26 *new*

BEN's bounce is rolling over as we expected. The low today was $99.61. If you don't want to buy puts now then look for a new decline under $99.50 as your entry point. Our exit target is $95.00. Please note our new stop at $104.26.

Entry  on   January 30 at $ 99.59 /gap higher entry point (small positions)
Change since picked:       + 0.44 
Earnings Date            01/28/10 (confirmed)
Average Daily Volume =        1.2 million  
Listed on   January 30, 2010         


Goldman Sachs - GS - close: 156.70 change: -0.01 stop: 156.05

GS was showing some relative strength this morning but the rally reversed at $160 resistance. The stock eventually closed nearly unchanged on the session. The bad news for shareholders is that the move does look like a failed rally. More aggressive traders may want to go ahead and buy puts now. I am sticking to our plan outlined below:

We have two triggers on GS. One trigger at $147.45 to buy puts. Another trigger at $163.00 to buy calls.

If triggered at $147.45 we'll use a stop loss at $156.06 and our first target will be $138.00. I'm suggesting the March $140 puts.

If triggered at $163.00 to buy calls we'll use a stop loss at $155.75 and our target will be $177.50. I'm suggesting the March $170 calls.

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         


Intl. Bus. Mach. - IBM - close: 126.46 change: -0.39 stop: 130.51

There is no change for us with IBM. The stock is still bouncing around the $126-128 zone. Technically today does look like another failed rally under resistance. Readers can open positions now or wait for a new drop under $126.00. More conservative traders may want to consider a stop loss closer to $128.00. Our first target is $122.00. Our second target is the 200-dma.

Entry  on  February 18 at $127.00
Change since picked:       - 0.54
Earnings Date            04/20/10 (unconfirmed)
Average Daily Volume =        8.2 million  
Listed on  February 03, 2010         


JPMorgan Chase - JPM - close: 39.88 change: -0.97 stop: 41.65

Entry point alert! JPM's bullish breakout over resistance has reversed with today's 2.3% decline. More conservative traders may want to lower their stop toward today's high of $41.25. I am suggesting the March $40.00 puts (current ask $1.40). 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: 58.53 change: -1.40 stop: 61.55 *new*

Shares of MCK under performed the market with a 2.3% decline. I could not find any news to account for the gap down this morning. Volume was slightly above average on the drop. I don't see any changes from my prior comments but we will adjust the stop loss down to $61.55 (still above the 50-dma). Our first target to take profits will be $54.00.

Entry  on   January 30 at $ 58.82 
Change since picked:       - 0.29
Earnings Date            01/26/10 (confirmed)
Average Daily Volume =        2.8 million  
Listed on   January 30, 2010         


SIEMENS - SI - close: 86.21 change: -2.04 stop: 92.05

The oversold bounce in SI is rolling over and shares are testing their 200-dma again. I don't see any changes from my prior comments. SI has already hit our first target at $87.55. Our second and final target is $81.00.

Entry  on   January 26 at $ 94.34 /gap higher entry
Change since picked:       - 8.13
                            /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: 67.79 change: -0.61 stop: 69.26

This looks like a new entry point in UTX. The oversold bounce is rolling over under resistance near the 50-dma. Readers can launch new put positions now. More conservative traders could take profits early near support at $65.00. Our target to take profits is $61.00 near the rising 200-dma.

Entry  on  February 04 at $ 66.38 
Change since picked:       + 1.41
Earnings Date            04/21/10 (unconfirmed)
Average Daily Volume =        5.1 million  
Listed on  February 04, 2010