Option Investor
Newsletter

Daily Newsletter, Wednesday, 3/17/2010

Table of Contents

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

Market Wrap

Stocks Celebrate St. Patrick's Day The Right Way

by Todd Shriber

Click here to email Todd Shriber
Taking the theme of St. Patrick's Day to heart, stocks wore green on Wednesday continuing their march higher. The Dow Jones Industrial Average led the gains, soaring nearly 48 points to close at 10,733.67 while the S&P 500 has apparently kissed resistance at 1150 good bye with an almost seven-point gain today to close at 1166.21. The Nasdaq participated in the festivities as well, flirting with 2400 before settling 2389.09, gaining just over 11 points on the day. For those that like fun facts, the Dow closed at a 17-month high today.

Stats Table

A broad swath of Dow constituents helped the index move higher today as 23 of the 30 Dow stocks rose on the day. International Business Machines (IBM) was the biggest loser, shedding 0.91% to close at $127.76. Oddly enough, not one Dow stock gained 1% or more. Exxon Mobil (XOM), the largest U.S. oil company was the top gainer at 0.79%, followed by Caterpillar (CAT), the largest maker of construction and mining equipment, which notched a gain of 0.77%. JPMorgan Chase (JPM), the second-largest U.S. bank, led the gains for Dow financials, adding 0.55%.

In at least a couple of ways, Wednesday's trade was reminiscent of many of the up days we saw in 2009 in that commodities and financials were in favor while the U.S. dollar declined. The greenback fell against 12 of the 16 major currencies today. News that the Federal Reserve intends to keep interest rates ''exceptionally'' low for an extended period is music to the ears of equity bulls and bad news for the Dollar. The Dollar Index had a nice rally while stocks languished in late January and early February, but it appears that rally has subsided as riskier fare has become popular again and the Dollar Index now resides at its lowest level in a month.

Dollar Index Chart

Dollar weakness helped the S&P 500 rise for a third consecutive day. The index has now rallied over 70% since the March 2009 lows while the Dow extended its winning streak to seven straight days. As I mentioned earlier, commodities played a heavy hand in extending stocks' gains today. Goldman Sachs boosted its outlook for commodities today, saying it expects commodities to return 17.6% over the next year. Not surprisingly, Goldman was bullish on crude oil and copper, along with corn and platinum.

Despite the fact that the Energy Information Administration said crude inventories rose by 1 million barrels last week, NYMEX-traded crude for April delivery flirted with $83 a barrel, gaining $1.23 to close at $82.93 a barrel. OPEC announced it would not scale back production quotas, but it is hard to argue with the that fact oil prices seem poised to keep moving higher.

Oil Chart

Speaking of commodities, it was a strong day for coal stocks as the Market Vectors Coal ETF (KOL) gained 2.1%. The gains were led by KOL's tenth-largest holding, Massey Energy (MEE). Massey's big day is a testament to the strength of the coal sector and offers further proof that certain commentators that enjoy ripping coal stocks are costing the people that heed this foolish advice a pretty penny.

Look at Massey this way. The company announced a $960 million acquisition of privately held rival Cumberland Resources yesterday. That is a pretty big purchase for a company with a market cap of just $4.53 billion and one would think the buyer's shares would trade lower. Throw in the fact that Massey said it expects to miss first-quarter profit estimates and one would have logically thought Wednesday would have been a good time to short Massey.

I will just say that I hope you did not short Massey after the close yesterday because that turned out to be a painful move today. Massey shares soared $2.93, or 5.83%, to close at $53.15 after touching a new 52-week high of $54.09 earlier in today's session. There was good reason for the move. As I mentioned in the Market Monitor, Massey said the Cumberland acquisition will help double its sales of metallurgical coal by 2012. Metallurgical coal is the place to be in the coal business. This is the stuff that is in high demand by steel producers in emerging markets such as Brazil, China and India. It is the future of coal and Massey shares responded to this news.

Massey Energy Chart

Emerging markets, save for Brazil, were stellar performers on Wednesday, led by a market that does not get a lot of press here in the States. I am referring to Indonesia. The Jakarta Composite Index gained 3.3% today, its biggest gain since July, according to Bloomberg News. I mention this because there is in fact a way for U.S. investors to play Indonesia's bullish ways and that is with the Market Vectors Indonesia Index (IDX). IDX is a thinly traded ETF, but it has nearly tripled in the past year and gained another 3.6% today to close at $70.79, just nine cents off the new 52-week high it set earlier today. Volume was nearly 50% higher than usual.

IDX Chart

Taking a look at a more benign U.S.-based stock, athletic apparel and footwear giant Nike (NKE) should be worth watching on Thursday after the company delivered solid fiscal third-quarter results after the close today. Nike said it earned $4.96 billion, or $1.10 a share, on sales of $4.7 billion. Those results blew away the average analyst estimate, which called for the company to earn 89 cents a share on sales of $4.59 billion.

Apparel and shoe orders to be delivered between March and July rose 9% to $7.1 billion. Nike said consumer demand is picking up, even in Europe and the U.S., and not surprisingly, China and other emerging markets are helping Nike bolster its top and bottom lines as well. UBS said Nike increased its U.S. market share by 2% in the fiscal third quarter. Barclays Capital added that Nike is ''well positioned'' to be continue its industry leadership over the next several quarter. The stock closed at $70.88 today after hitting a new 52-week high of $71.33 earlier in the day. As of this writing, Nike shares are up, $2.46, or 3.47%, to $73.34 in after-hours trading.

Nike Chart

Regarding other bellwether names, while it may feel like earnings season just ended and it did, another important earnings report will be delivered before the bell tomorrow. FedEx (FDX), the world's second-largest delivery company, is expected to report a profit of 72 cents a share for its fiscal third quarter. FedEx and rival UPS (UPS) are often viewed as temperature checks on the health of the broader economy, so comments from FedEx regarding pricing and shipping volumes will be what the Street is watching.

The basic premise here is that if more customers are opting for pricier FedEx services, such as Express shipping, that is a good sign for the economy. When the economy slumped, customers scaled back to traditional ground shipping or left FedEx for lower-cost alternatives. UPS said in February that its fourth-quarter profit almost tripled from the year-earlier period, so FedEx would do well to report similarly bullish results.

Transportation issues have been strong lately and that is good news for Dow theorists that believe moves in the transportation average confirm moves in the industrial index. The iShares Dow Jones Transportation Average ETF (IYT), of which FedEx is the second-largest constituent, made a new 52-week high today and is up almost 10% in the past month while FedEx shares are up nearly 11%. Another element of the FedEx earnings report to watch: Fuel costs. Higher oil prices could hinder the company's report and outlook and could do the same for the broader economy.

FedEx Chart

Looking at the charts, the Dow closed above the all-important 10,725 level and above its January peak. If not for another late-day sell-off, we could be looking at the Dow taking out 10,775 tomorrow. That could still happen, but triple witching volatility could be an issue on Thursday and Friday. The next few weeks could prove to be sluggish in terms of news flow for Dow stocks, but one story to watch is dividends. Over the next month, Exxon Mobil, Johnson & Johnson (JNJ), Pfizer (PFE) and Procter & Gamble (PG) declare their quarterly dividends and I would be surprised it at least one member of that quartet did not announce a higher payout. Next resistance for the Dow looms at 11,250.

Dow Chart

The S&P 500 has made a nice move beyond the 1150 area and today's close should be encouraging for the bulls. Many eyes are probably starting to focus on 1200 as the next stopping point, but 1185 is the first hurdle to be cleared. Now that 1150 has evaporated as resistance, it should emerge as a support area for any potential selling stocks see in the coming weeks.

S&P 500 Chart

I do not want to say tech is looking ''tired,'' but it should be noted that on strong day for stocks, the biggest gainer in dollar terms in the Nasdaq 100 was Celgene (CELG), which was up $1.89. The Nasdaq was able to turn in another positive day and move closer to resistance just above 2400 despite the fact that Apple (AAPL), Amazon (AMZN) and Research In Motion (RIMM) were all down today and Google (GOOG) only chipped in a fractional gain. The Nasdaq has plenty of room to run to 2425 and the 2350 should provide firm support.

Nasdaq Chart

Stocks are strong, there is no getting around that and with the end of the first quarter just a couple of weeks away, I expect cash to continue to flow into equities as fund managers need to show clients strong first-quarter results. That performance will not be obtained through cash investments. A good sign for the bulls is that stock-specific catalysts are emerging again. The Massey and Nike news I highlighted earlier are two examples. FedEx needs to keep the ball rolling on Thursday.


New Option Plays

Looking At Defense

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

L-3 Communications - LLL - close: 94.01 change: +1.06 stop: 91.25

Company Description:
L-3 Communications is a prime contractor in Command, Control and Communications, Intelligence, Surveillance and Reconnaissance (C³ISR), Government Services, Aircraft Modernization and Maintenance (AM&M) and has the broadest base of Electronic Systems in the industry. L-3 is also a major provider of homeland defense products and services for a variety of emerging markets. (source: company press release or website)

Why We Like It:
Readers know that while I am bullish on the market I'm also cautious about opening new positions at current levels. All of the major indices are extremely overbought but that doesn't mean they can't get more overbought before eventually correcting. With that in mind the best trade right now is to probably sit on your hands and just wait for the pull back, which could last a few days. If you just have to trade then LLL might work. The defense sector has been performing well with both the defense sector indices at new 52-week highs. I like LLL because shares are not quite so overbought and extended following the recent consolidation in the $91.50-93.50 zone.

Aggressive traders willing to take the risk of buying calls in this environment can buy calls on LLL at current levels. We'll use a stop loss at $91.25. Our first target is $97.00. Our final target is $99.75.

Normally I would probably choose the $95 calls but this is a very aggressive entry point given the market's condition. I'd rather have the least amount of capital invested so I'm suggesting the $100 strike. Keep your position size limited.

Suggested Position: BUY CALL APRIL 100.00 (LLL 10D100.00) @ $0.30

Annotated Chart:

Entry on March xxth at $ xx.xx
Earnings Date 04/22/10
Average Daily Volume = 908 thousand
Listed on March 17th, 2010



In Play Updates and Reviews

New Highs

by James Brown

Click here to email James Brown

Editor's Note:

The market may have seen a strong number of new 52-week highs but only a few of the stocks on our play list joined the club with new highs. GMCR broke out and hit our trigger. TEVA hit our stop loss. We're dropping RKT.

The market is overbought but it can always get more overbought. Tread carefully here. Eventually there will be a correction. The more stocks climb the deeper the pull back will be.

Current Portfolio:


CALL Play Updates

ADSK - Autodesk - $29.52 Change +0.21 Stop $28.75 *new*

Shares of ADSK gapped open higher and hit $29.96 this morning. The early morning strength was fueled by news that Goldman Sachs had added ADSK to their "conviction buy" list. ADSK is now testing round-number resistance near $30.00. More conservative traders may want to use this strength today as an exit since the April $30 calls have bounced to $0.60. That way you can exit without a loss. I am raising our stop loss to $28.75. I am not suggesting new bullish positions in ADSK at this time.

Current Position: CALL APR 30.00 (ADSK 10D30.00) @ $0.55

Entry on March 8th at $ 28.72
Earnings Date 02/24/10 (confirmed)
Average Daily Volume = 2.75 million
Listed on March 6th, 2010


Cash America - CSH - close: 40.60 change: +0.28 stop: 35.95

The major indices are breaking out to new highs but CSH is still hovering under the $41.00 level. I don't see any changes from my prior comments. Currently the plan is to wait for a dip and use a trigger at $38.25 to buy calls. More aggressive traders may want to consider buying calls on a move over $41.00 instead. If triggered at $38.25 our first target is $41.00. Our second target is $44.00. Our time frame is several weeks.

Use a trigger at $38.25 to buy calls.

Suggested Position: BUY CALL APRIL $40 (CSH 10D40.00) current ask $1.95

Entry on March xxth at $ xx.xx
Earnings Date 04/22/10
Average Daily Volume = 272 thousand
Listed on March 13th, 2010


Cognizant Technology - CTSH - close: 51.62 change: +0.36 stop: 49.49

CTSH set a new all-time high with today's rise. The stock hit $52.02 before paring its gains. CTSH looks poised to rally after breaking out from its two-week consolidation. Our initial target is $54.75.

Current Position: BUY CALL APRIL $55 (CTSH 10D55.00) @ 0.40

Entry on March 11th at $ 50.54
Earnings Date 05/04/10
Average Daily Volume = 4.05 million
Listed on March 10th, 2010


Green Mountain Coffee Roasters - GMCR - cls: 97.61 chg: +3.68 stop: 92.75 *new*

GMCR is breaking out to new highs with today's rally past the $95.00 level. Yesterday we added an aggressive entry point to buy calls if GMCR hit $95.26. That trigger has been hit and the play is now open. I suggested readers use small positions given the aggressive nature of the trade. Please note that I'm upping our stop loss to $92.75. Our first target to take profits is at $99.75, which could get hit tomorrow! More aggressive traders may want to aim higher.

GMCR hit our trigger to open positions at $95.26.

Current Position: BUY CALL APRIL $100 (GMCR 10D100.00) @ $2.00

Chart:

Entry on March 17th at $ 95.26
Earnings Date 04/29/10
Average Daily Volume = 1.17 million
Listed on March 13th, 2010


Mobile Telesystems - MBT - close: 58.08 change: +0.05 stop: 54.40

The action in MBT today was a little disappointing. The market is hitting new highs and MBT only gained five cents. The trend is up but we might need to worry about waning momentum. I am not suggesting new positions at this time. Our target to exit is at $59.85.

Suggested Position: BUY CALL APR 60.00 (MBT 10D60.00) @ 1.10

Entry on March 12th at $ 56.34
Earnings Date 03/31/10 (unconfirmed)
Average Daily Volume = 1.26 million
Listed on March 11th, 2010


NII Holdings Inc. - NIHD - close: 41.24 change: +0.77 stop: 37.90

NIHD spiked higher this morning but the trade over $42 appears to be a bad tick. Most quote services are probably going to list today's high at $41.49. Today is a new 52-week high for NIHD. I remain cautious given the waning technical indicators. Our first target is the $44.00 level.

Suggested Position: BUY CALL APRIL $40 (NIHD 10D40.00) @ $1.85

Entry on March 11th at $ 40.10
Earnings Date 04/22/10
Average Daily Volume = 2.68 million
Listed on March 10th, 2010


Panera Bread Co. - PNRA - close: 78.27 change: -0.13 stop: 74.75

PNRA displayed some relative weakness on Wednesday and refused to participate in the market's rally. This could be a sign that the rally is tired. I am not suggesting new positions at current levels. Remember, this is an aggressive trade with both PNRA and the market so overextended. Our first target is $82.45. FYI: It is worth noting that PNRA could announce a stock split one of these days. The last time shares split was in the $75-80 zone back in June 2002.

Suggested Position: CALL APR 80.00 (PNRA 10D80.00) @ $1.35

Entry on March 11th at $ 77.18
Earnings Date 04/28/10
Average Daily Volume = 519 thousand
Listed on March 9th, 2010


Transocean Ltd. - RIG - close: 86.36 change: +1.66 stop: 83.45

It was an interesting session for RIG. Early morning weakness in the dollar was bullish for commodities but the dollar eventually erased its losses. The OSX oil service index broke out to new six-week highs but pared its gains by the close. The action in RIG was odd. Shares spiked higher this morning and then reversed actually closing in negative territory. Furthermore RIG has now produced a bearish engulfing candlestick (reversal) pattern. Normally these patterns require confirmation. Fortunately we are still on the sidelines. The high today was $87.12. Our trigger to buy calls is at $87.55.

I don't see any changes yet. We will still buy calls at $87.55. If triggered our first target to take profits is at $93.50. Our second and final target is $99.00 but that could take a few weeks.

Trigger to buy calls @ 87.55

Suggested Position: BUY CALL APRIL $90 (RIG 10D90.00) current ask $1.25

Entry on March xxth at $ xx.xx
Earnings Date 05/05/10
Average Daily Volume = 7.0 million
Listed on March 16th, 2010


PUT Play Updates

*Currently we do not have any put play updates*


CLOSED BULLISH PLAYS

TEVA Pharmaceuticals - TEVA - close: 59.94 change: -0.40 stop: 59.95

TEVA has continued to under perform. The stock did not participate in the market rally this week. Shares broke down under the $60.00 level and hit our stop loss at $59.95 closing the play. Looks like we should have followed my suggestion to exit on Friday.

Stopped out @ $59.95

Closed Position: CALL MAR 60.00 (TVQ 10C6000) @ $0.35
Entry price was $0.70

Chart:

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


CLOSED BEARISH PLAYS

Rock-Tenn Co. - RKT - close: 46.50 change: +4.13 stop: 44.26

Whoa! What happened to RKT today? It looks like a short squeeze yet there was no company-specific news. The only news I could find was a report that Standard & Poor's had put Temple-Inland (TIN), another paper company similar to RKT, on credit watch with positive implications. Shares of TIN surged 9.1%. Yet I fail to see why RKT soared 9.7% on a potential credit upgrade for a rival. I suspect there were just too many people short RKT and with the market hitting new highs there was a sudden crowd at the exit door to cover their shorts. The most recent data did not suggest there was too much short interest but the data tends to be a lagging indicator.

I am dropping RKT as a bearish candidate. Our plan was to open bearish positions if the stock hit $41.90, which it did not hit. The play never opened.

RKT never hit our trigger at $41.90 (never opened)

Suggested Position: BUY PUT APRIL $40 (RKT 10P40.00)

Chart:

Entry on March xxth at $ xx.xx
Earnings Date 04/27/10
Average Daily Volume = 645 thousand
Listed on March 15th, 2010