Option Investor
Newsletter

Daily Newsletter, Wednesday, 3/3/2010

Table of Contents

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

Market Wrap

Positive Economic Data Fails To Help The Bulls

by Todd Shriber

Click here to email Todd Shriber
It was a mixed bag for U.S. stocks on Wednesday as solid economic data points, while indicating the economic recovery may be gaining some steam, did not translate into impressive gains for equities. The Dow Jones Industrial Average was the biggest decliner among the major U.S. indexes, shedding nine points to close at 10,396.76. The S&P 500 drew closer to resistance at 1125 by turning in a paltry gain of 0.48 to finish the day just below 1119. The Nasdaq Composite lost just a tenth of a point to close at 2280.68 despite the fact that the Nasdaq 100 was up fractionally.

Stats Table

All and all, the S&P 500 was up for the fourth consecutive day and the losses turned in by the Dow and the Nasdaq are not really alarming. Or are they? Take a look at the intraday charts and you will see that the Dow was off to a fine start, but the bulls apparently ran out of gas as a mid-session sell-off erased some nice gains. Same for the Nasdaq. Perhaps some of those notorious sell programs kicked in around lunch time in New York and that suppressed the bulls.

As I mentioned on Monday, there was another Institute for Supply Management (ISM) report due out today, the ISM Non-Manufacturing Index, and the news was good. The data showed the U.S. services sector grew at its most rapid clip in two years during February. The non-manufacturing index surged to 53% in February from 50.5% in January. The index had been locked in a tight range of 48% to 51% since August. Like its manufacturing cousin that I highlighted on Monday, readings above 50% on the non-manufacturing index are bullish. Those below 50% are considered bearish.

Nine of the 18 industries tracked in the survey showed growth last month and the business activity index rose to 54.8% from 52.5% in January. February was the third straight month the business activity index increased. As the chart below indicates, the ISM non-manufacturing index now rests at its highest level in almost two years.

ISM Chart

Speaking of positive economic reports, U.S. employers cut payrolls at their most lethargic pace in two years during the month of February, according to ADP Employer Services. ADP, whose report is widely followed, said private sector job losses totaled 20,000 in February, representing the 25th consecutive month of declines, but the enthusiasm for February's numbers may have been tempered by an upward revision for January's job losses to 60,000 from 22,000.

Despite a gain of 3,000 manufacturing jobs, goods-producers still eliminated 37,000 jobs in February, ADP said. While the ADP report is important to a certain extent, investors place greater emphasis on the government-issued employment report, which will be delivered Friday. To be sure, there are stark differences between the ADP and Bureau of Labor Statistics numbers. For the week of the ADP survey, if an employee worked no hours, he is still considered ''employed'' by ADP, but that same worker is considered ''unemployed'' by the BLS standards.

That is one difference worth noting. The other is that neither the ISM nor ADP numbers reflect the impact of the recent snowstorms in some parts of the U.S. on the employment picture. The BLS number on Friday will and as I mentioned on Monday, White House economic advisor Larry Summers said storms of this magnitude usually lead to job losses of 100,000 to 200,000. Economists seem to be forecasting February job losses of 150,000 to 200,000.

ADP/BLS Chart

The Federal Reserve released its Beige Book data on Wednesday and there was not much of a difference between today's release and the most recent minutes from the last FOMC meeting. The Fed noted slight upticks in economic activity in nine of its 12 regions and pointed out that things were a little sluggish in the Richmond region due to the aforementioned snowstorms. Consumer spending improved from the last Beige Book report and the Fed highlighted energy exploration is also picking up. Inflation still appears benign.

Commodities enjoyed a solid day as the dollar was weak. Crude oil for April delivery made its way back above $80 a barrel, gaining $1.19 to close at $80.87. That is good for oil's best closing price in six weeks and crude futures are now up 94% in the past year, according to Bloomberg News. U.S. refineries are more active than they have been since October and that should increase demand for oil.

Oil Chart

Aided by rumors of a Greece bailout and speculation that the recent earthquake in Chile may hinder production, copper prices rose for the fourth straight session and have now tacked on more than 6% in the past three days. Copper for May delivering rose 2.35 cents to $3.435 a pound on the New York Mercantile Exchange. Chile is the world's largest copper producer, so it is reasonable to expect prices for the red metal would move higher in the wake of the horrific 8.8 magnitude earthquake that struck Chile on February 27.

That said, demand might be legitimately increasing and that matters more to the long-term prospects for copper prices than any natural disaster. Orders to deliver copper from warehouse-stored stockpiles surged 21% today and have soared 85% in the past three days, Bloomberg reported, citing data from the London Mercantile Exchange (LME). LME-tracked inventories fell today and increased bookings combined with declining inventories usually means demand is firming, if not increasing.

Copper Chart

In terms of stock-specific news, there was some mergers and acquisitions news hitting the wires today as Pfizer (PFE), the Dow component and largest U.S. pharmaceuticals firm, announced that it has bid $4.08 billion for Germany's Ratiopharm GmbH. Ratiopharm is a maker of generic drugs and Pfizer will likely be butting heads with a familiar rival, Israel's Teva Pharmaceuticals (TEVA), the world's biggest maker of generic drugs, to acquire Ratiopharm. Ratiopharm is Europe's largest generic drug maker.

Pfizer is like an enigma wrapped in a riddle. There was a time that owning Pfizer meant availing yourself of a nice dividend, but the dividend was cut last year so Pfizer could acquire Wyeth. To be fair, Pfizer has since raised its dividend, but not to pre-Wyeth buyout levels. Now, Pfizer is basically a company that can offer investors a decent yield, but not much in the way of growth prospects beyond more acquisitions. The imminent loss of patents on Lipitor and Effexor makes an acquisition of generic drug maker not only prudent, but almost necessary for Pfizer.

Pfizer has consistently been an investment banker's dream, regularly acquiring rival firms, but all those acquisitions have failed to impress Wall Street, as the chart below indicates.

Pfizer Chart

Speaking of Pfizer, the shares were down 1.6% today, but that was probably not due to the Ratiopharm news. News that Dimebon, an Alzheimer's drug Pfizer had been working on with Medivation (MDVN), failed to work in a late-state stage trial helped Pfizer end the day lower. Dimebon failed to improve cognitive function in patients that took the drug for six month. That is extremely disappointing news given the level of optimism surrounding the drug after its successful early and mid-stage trials.

Pfizer is already involved in the Alzheimer's market and Dimebon's failure probably will not hamper the company too much over the long-term. Unfortunately, Dimebon was believed to be the only Alzheimer's treatment close to approval that could stop or even reverse Alzheimer's.

As is often the case with these joint partnerships in the pharma world, when the trials fail to produce the desired results, it is not the blue chip name, Pfizer in this case, that absorbs most of the punishment from the Street. It is the smaller, biotech-esque partner. Regarding Dimebon, I am referring to Medivation (MDVN), Pfizer's partner on the drug. Shares of Medivation were bludgeoned to the tune of 67.5%, or a loss of $27.15, to close at $13.10 after touching a new 52-week low of $12.55 earlier in the session. More than 45 million shares changed hands compared to average daily volume of less than 622,000.

The March 15 calls on Medivation fell by $22.79 and the March 17.50 calls slumped $18.80. Normally, I include daily charts, but Medivation's weekly chart actually shows the decline in better detail. It is included here.

Medivation Chart

It was indeed a mixed day for stocks as 18 of the Dow's 30 constituents finished the day lower with Pfizer the biggest loser on the day. In fact, Pfizer was the only Dow component to lose more than 1%. Coca-Cola (KO) was the Dow's top performer, gaining almost 1.2%. Not a lot has changed since Monday as the Dow is still having trouble regaining 10,500 and 10,300 remains as the first support level. It would be surprising to see a volatile, wide trading range for the Dow on Thursday just one day before the jobs report.

Dow Chart

As I always say, a small up day is better than a down day and I will apply that maxim to the S&P 500 on Wednesday. The index is still above what was considered strong resistance at 1115, but 1125 is the next area that needs to be cleared to induce some fresh buying of any magnitude. Again, it would be surprising to see the S&P 500 flirt with resistance at 1125 or support at 1100 tomorrow. Of course, the jobs report will be the key factor in how stocks finish the week.

S&P 500 Chart

The Nasdaq posted a small loss today and that really is not a cause for concern when considering it was the index's first down in the past five and that the Nasdaq added 100 points between last Thursday and yesterday. Next resistance is 2325 and support looks firm at 2250. A move back below 2250 and toward 2200 could represent a decent buying opportunity. Further downward pressure from there might give the bears the upper hand.

Nasdaq Chart

I mentioned on Monday that we might see some sluggish trade heading into Friday's job report and that is exactly what we got on Wednesday. That said, it is worth noting that volume has been fair this week and the ratio of new highs to new lows on the NYSE and Nasdaq during Wednesday's session was impressive. If you are looking for a stock to watch on Thursday on some good company-specific news, try General Dynamics (GD). The defense contractor announced a 10% dividend increase after the close on Wednesday.


New Option Plays

Changing the Internet Forever

by Jim Brown

Click here to email Jim Brown
This networking company has scheduled a press conference for March 9th when they will announce a breakthrough that will "forever change the Internet."


NEW DIRECTIONAL CALL PLAYS

CSCO - Cisco Systems - $24.83, change +.23, stop $24.25

Company Description:

Cisco Systems, Inc. designs, manufactures and sells Internet protocol (IP)-based networking and other products related to the communications and information technology (IT) industry, and provides services associated with these products and their use. The Company provides a line of products for transporting data, voice, and video within buildings, across campuses, and around the world. Its products are designed to transform how people connect, communicate and collaborate. The Company’s products are installed at enterprise businesses, public institutions, telecommunications companies, commercial businesses and personal residences.

Why We Like It:
Cisco is on the verge of breakout out to a new high on the rebound in the tech sector. Next week, March 9th, Cisco is going to make an announcement that "will change the Internet forever." Their words, not mine. Analysts believe it will be some form of super fast broadband or ultra high-speed system for Internet traffic.

Google recently unveiled plans for its own ultra fast network but my money is on Cisco. Google promised to deliver Internet service at up to 100 times faster than most users have today. I doubt Cisco will let Google beat them and Google does have a nasty habit of announcing products that never appear.

The FCC is presenting a plan to Congress on March 17th that calls for 100 million homes to have access to 100-Megabit per second speeds by 2020. Most cable broadband uses have 2-Megabit speeds today so that would be a major upgrade.

Verizon already offers 50-Megabits on its FiOS wireline network and has tested 100-Megabit speeds.

All of these offerings and tests provide a threshold that Cisco will have to beat if they are going to "forever change the Internet." Let's hope they really pull a fast rabbit out of their announcement hat.

Suggested Options:

BUY CALL APR 25.00 (CSCO 10D25.00)

open interest=62,356 current ask $0.65

Annotated Chart:

Entry  on  March 4th at $ xx.xx 
Change since picked:       + 0.00
Earnings Date            N/A
Average Daily Volume =      50.0  million  
Listed on  March 03, 2010         



In Play Updates and Reviews

Market Getting Tired?

by Jim Brown

Click here to email Jim Brown
Twice now the indexes have rolled rallied at the open and rolled over to give back all their gains. This is not a pattern I want to see repeated.

Now that the ADP report and the Challenger report have produced higher expectations for the non-farm payroll report on Friday you would think the markets would behave better. Could it be that we are moving from the possibility for an upside surprise to a greater potential for a downside surprise?

Keep those stops tight in case this comes to pass.


CALL Play Updates

MYGN - Myriad Genetics - $23.10, stop $22.50

Myriad fell with the rest of the biotech sector today after the high profile disappointment of the Pfizer/Medivation drug trial for Alzheimer's disease. MDVN lost 67% of its value after the press conference this morning. MDVN dropped -$27 to $13 at the close. Pfizer was not hurt as bad because they have five other Alsheimer's drugs in development. For Myriad this was a case of guilty by association. Maintain the stop at $22.50.

Exit Target = $25.00

Position: CALL MAY 25.00 (MYGN 10E2500) @ $1.05

Entry  on  March 1st at $ 23.01 
Change since picked:       + 0.09
Earnings Date            02/3/10 
Average Daily Volume =  1.62   million  
Listed on  February 28, 2010  


BUCY - Bucyrus International - $64.48, Stop $62.50 *NEW*

Joy Global (JOYG) spread joy throughout the mining community this morning when it raised estimates for 2010 by 20-cents and projected order rates to continue rising through the rest of the year. JOYG posted a 22% spike in new orders in the first quarter.

BUCY reported earnings on Feb 18th and reported a 24% jump in profits.

Exit Target = $68.00

Position: CALL APR 65.00 (BUCY 10D6500) @ $3.82

Entry  on  March 1st at $ 62.56 
Change since picked:       + 1.92
Earnings Date            02/18/10 
Average Daily Volume =  1.75   million  
Listed on  February 28, 2010         


VMW - VMWare - $50.76 *Not Triggered*

Why We Like It:
VM Ware is taking over computing. The rush to virtualize to obtain maximum use of all your servers is revolutionizing the data center. IDC believes only 20% of datacenters are fully converted leaving a whopping 80% as a growing market. As corporations enter the Windows 7 upgrade cycle they will be building out their server farms with the newer software to support all those Windows 7 desktops and that means large numbers of virtualized servers. VMW does not own the market and there are other competitors but they are the strongest and the lead dog in the harness. For those competitors following in their tracks the view is always the same.

VMW tried to move higher on Wednesday but the Nasdaq rolled over and gave back its gains and that knocked VMW back to negative territory as well. No change in play. We are still untriggered.

We have a $49.50 trigger on entering this trade.

Suggested Options:
I am recommending the July $55 Calls because VMW has just edged over $50 and even if we buy it on a dip the premiums are going to be high for the $50 options.

BUY CALL JUL 55.00 (VMW 10G55)
open interest= 198 current ask $3.30

Entry  on  March 2nd at $ xx.xx <-- TRIGGER @ $49.50
Change since picked:       + 0.00
Earnings Date            04/26/10 (unconfirmed)
Average Daily Volume =       1.75    million  
Listed on  March 1st, 2010         


Colgate Palmolive - CL - close: 83.86 change: +.00 stop: 82.50

No news, no gain, no change in play.

Our target to exit is $85.00.

Entry  on  February 20 at $ 81.75 
Change since picked:       + 1.72
Earnings Date            04/29/10 (unconfirmed)
Average Daily Volume =        2.8 million  
Listed on  February 20, 2010         


TEVA Pharmaceuticals - TEVA - close: 60.20 change: -0.74 stop: 59.50

TEVA declined with the biotech sector to trade briefly under $60 but buyers came in at the close. TEVA garnered an upgrade from Citi and UBS on the generic ruling I detailed yesterday.

Our target to exit is $64.00.

Entry  on  February 20 at $ 58.74 
Change since picked:       + 1.88
Earnings Date            05/05/10 (unconfirmed)
Average Daily Volume =        5.1 million  
Listed on  February 20, 2010         


PUT Play Updates

SWI - Solar Winds - $18.45, change +.10, stop $19.25

Somebody is clearly sitting on SWI at the 18.50 level and they are not yet going lower. Note the flat top on the last three days of trading. The key here is whether that seller runs out of stock or gets tired of waiting and starts lowering the price.

Suggested Options:
I am looking for support to break and I am recommending the June $17.50 put. I wanted to recommend the April put but we don't normally recommend options with little or no open interest. The April cycle is new and it will need a week or so to develop open interest so I went with the June. I am going to list both but the official recommendation is the June strike.

First target = $17.00, second target = $14.00

Position: PUT APR 17.50 (SWI 10P1750) @ $ .75
Position: PUT JUN 17.50 (SWI 10R1750) @ $1.50 (recommended)

Chart:

Entry  on  March 3rd at $ 18.42 
Change since picked:     + 0.03
Earnings Date           02/8/10 
Average Daily Volume =  600K  
Listed on  March 2nd, 2010