Option Investor
Newsletter

Daily Newsletter, Monday, 3/29/2010

Table of Contents

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

Market Wrap

Once Again, Commodities Lead Stocks Higher

by Todd Shriber

Click here to email Todd Shriber
A slumping U.S. dollar along with a rise in commodities prices and materials stocks helped lead the broader market high on Monday with all three major U.S. indexes booking solid gains on the day. The Dow Jones Industrial Average continued its march to 11,000, adding 45.5 points to close at 10,895.86 while the S&P 500 gained 6.73 points to settle at 1173.32. The index is now up 5.2% since December 31. The Nasdaq regained the 2400 level by adding 9.23 points to close at 2404.36.

Stats Table

Stocks also got a lift on news that consumer spending rose 0.3% in February, according to the Commerce Department. February represents the fifth consecutive of gains for the consumer spending number and this is indeed significant when considering that consumer spending accounts for roughly 70% of U.S. GDP. The income numbers were not all that impressive as the chart below indicates. Personal incomes rose less than 0.1% in February while disposable income, that is personal income minus taxes, rose about 0.1%. The report showed Americans saved $340 billion in February, down from about $375 billion in January.

Combine these numbers with the downward revision to fourth-quarter GDP that we saw on Friday and it is evident that while the economy is slowly getting back on the right track, it is also clear that consumers currently lack the firepower to spark the economic recovery on their own. That makes sense. After all, if income is not rising and unemployment still remains a major issue, how is the consumer going to fan the flames of the recovery?

Personal Income Chart

As I mentioned at the start, commodities and energy names saw some bullish trade on Monday as NYMEX-traded crude oil for May delivery snapped an uncharacteristic three-day losing streak, gaining $2.17 to close at $82.17 per barrel. Monday's trade in oil represented the biggest single-session gain in five weeks and the closing price is a seven-session high.

The consumer spending number helped oil prices as did a weaker U.S. dollar, but the biggest catalyst may have been news of a tragic terrorist attack at a Moscow subway station that killed 38 people and wounded another 60. Russia is one of the biggest oil and natural gas exporters in the world and analysts speculated that there are concerns more terrorist attacks may follow Monday's due to Russia's status as a major energy exporter.

Hopefully, that will not be the case, but if the market starts pricing in crimped supplies from Russia, oil prices would almost certainly move higher. As it was, Dow components Exxon Mobil (XOM) and Chevron (CVX), the two largest U.S. oil producers, both gained more than 1% on Monday. International oil majors BP (BP) and Petrobras (PBR) also made solid gains.

Oil Chart

Of course a weaker Dollar is also a boon for metals and that was evident in copper on Monday as the red metal gained 3%. Copper prices are a good segue into some talk about Freeport McMoRan Copper & Gold (FCX), a stock that I have frequently mentioned in the past, but have taken a bit of a break from over the past couple of months.

Freeport is one of the bellwether names in the materials space and if you are an investor that is looking for a quality name that still has plenty of room to run before hitting a new 52-week high, Freeport may fit the bill. The shares gained $3.71, or 4.7%, to close at $82.88 on Monday, but even after that bullish move, the shares are still well off their January peak of $90.55, also the 52-week high.

Freeport is one of the higher-beta stocks around, but it has actually lagged the S&P 500 over the past month, albeit by a small amount. If stocks continue to rally, it is unlikely that Freeport will continue lagging the broader market.

Freeport Chart

In other stock-specific news, Citigroup (C) got a 3% haircut on Monday on news that the Treasury Department will sell the 7.7 billion shares of the bank that it currently owns. The Treasury Department said it plans to part with its stake in Citi this year under a pre-defined trading plan. Assuming Citi shares keep trading around current levels, Uncle Sam would net a profit of $7 billion on the common shares and when factoring in preferred shares and warrants, the government's profit on Citi is about $15 billion.

Investors had been fretting about how Treasury would sell its stake in Citi and this appears to be the most calm and orderly way of doing so. At the end of the day, the government is getting out of Citi's way to some extent and that should be good news, so today's decline may have been a bit of ''buy the rumor, sell the news'' trading. It should also be noted that Citi has gained 30% in the past three months, so a little breather was not all that surprising. What may be surprising is the fact that Goldman Sachs (GS) is not advising Treasury on the share sale. That privilege was won by Morgan Stanley (MS).

Citigroup Chart

If you want some really bullish news, checkout one of the usual suspects, Apple (AAPL). Apple shares were fairly benign during regular trading hours, gaining $1.49, though they did make a new all-time high at $233.87 before closing at $232.39. Kiss those numbers because, as of this writing, Apple is up $6 to $238.26 in the after-hours session on news that the company is planning to introduce a new iPhone this summer that is compatible with the Verizon (VZ) network.

Verizon is the number one mobile phone carrier in the U.S., but since the iPhone's debut, AT&T (T) has had exclusive rights to the popular phone. To be sure, there has been plenty of speculation about when Verizon would begin selling the iPhone, almost to the point that the headlines became just another annoying news item.

That said, today's news appears to have some real efficacy to it. Pegatron Technology is slated to begin mass production of CDMA-capable iPhones in September and it is worth noting that Verizon uses a CDMA network. AT&T uses a GSM network. The news that Pegatron is manufacturing an iPhone is noteworthy because Apple's normal supplier is Taiwan-based Hon Hai. Hon Hai will still make iPhones, but not the CDMA-capable version.

Apple Chart

Even if a Verizon deal does not materialize in the near-term for Apple, there is still a lot of positive news regarding the use of smart phones in the U.S. The Nielsen research company issued a report today that said smart phones such as the iPhone and Research In Motion's (RIMM) BlackBerry will surpass traditional mobile phones in terms of U.S. sales by the end of 2011. The report said U.S. smart phone sales will continue moving higher over the next 18 months and account for just under half of total cellular phone sales by the fall of 2011. Smart phones currently have 29% market share in the U.S., Nielsen said.

Analysts are forecasting similar market share gains for smart phones in international markets and the iPhone should find some success in lucrative mobile phone markets such as Japan and South Korea, both of which use CDMA for the bulk of their cellular networks.

Smart Phone Sales Chart

If you are looking for a sector that has really taken off (no pun intended) take a look at aerospace. Dow component Boeing (BA) made another 52-week high after announcing positive test results for the 787 Dreamliner. Boeing has already sold 851 787s, but production delays and materials issues have put the project three years off schedule. Analysts are bullish on the stock and there has been a spate of price target increases recently that bet on Boeing rising to $85 or higher, a fair amount above Monday's close of $74.11.

Bullishness on Boeing has benefited fellow Dow component United Technologies (UTX) and General Dynamics, both of which made fresh 52-week highs on Monday. And all of this is good news for the PowerShares Aeropsace & Defense ETF (PPA), which is up 10% year-to-date, double the return offered by the S&P 500.

PPA Chart

Looking at the charts, the Dow could not make its way back above 10,900, but it did close within a whisker of that level. It remains to be seen if fund managers can dress the windows enough in the next two days to push the Dow above 11,000 before the end of the first quarter. The 10,850 area is acting as support, but a move below that number might test support at 10,700.

Dow Chart

It was encouraging to see the S&P 500 move beyond the important resistance area at 1165 today. That neighborhood could emerge as new support, but I think a firmer floor is found at 1150. Seeing 1200 this week probably is not in the cards, but I would not rule out a flirtation with 1185, particularly if the whisper number for the jobs report starts to move higher.

S&P 500 Chart

The Nasdaq was not looking healthy at the end of last week as Oracle's (ORCL) earnings report failed to move the index higher, but today's move back above 2400 may be a near-term positive. Keep in mind that the iPhone news was not reported until after the market closed, so it might be reasonable to expect the Nasdaq to get off to a good start tomorrow morning. We are still fair bit away from resistance at 2430 and much closer to support at 2385.

Nasdaq Chart

This is a short trading week and volatility should increase as we move closer to Friday's jobs report, but it appears the bulls were back in business on Monday and Apple may help that trend continue on Tuesday. Something else that caught my eye: On Friday, bellwether industrial names such as Caterpillar (CAT), Deere (DE), 3M (MMM) and AT&T all announced they would be taking charges on earnings related to the new healthcare bill and it won't be surprising to see other companies follow suit, yet all four of those stocks were up on Monday, three of them by more than 1%.


New Option Plays

Aggressive Traders Only

by James Brown

Click here to email James Brown

Editor's Note:

The market's recent strength could be a lack of sellers, not an over abundance of buyers. Money managers are just counting down the days until the first quarter ends (March 31st). This does not mean April 1st will see the market automatically roll over but the pressure for performance on fund managers will have eased.

I remain very cautious on launching new bullish positions. Yet with the market inching higher most of the candidates I found were bullish. I'm listing a few stocks that caught my eye but only aggressive traders should consider launching positions.

MICC - Shares of this wireless telecom operator were in rally mode after a two-week consolidation sideways near $90.00. Traders may want to open bullish positions above the recent high near $90.50. I would target $95 or the $99-100 zone.

FDX - FDX has rallied toward its 52-week highs near the March and December peaks. A breakout past the $92.75 level could be a new bullish entry point while a failure here would look like a bearish double top. Currently FDX is inching higher and suggesting the stock will breakout. If you do open bullish positions I would target the $97.50-100.00 zone.

OXY - This is an oil and gas company and the stock has been outperforming some of its peers with a more consistent bullish trend. The stock is now testing significant resistance near the $85.00 level. A breakout higher could be a bullish entry point.

DD - This is a stock I would watch for a dip back toward broken resistance and what should be support in the $35.50-35.00 zone.



In Play Updates and Reviews

Stocks Asleep

by James Brown

Click here to email James Brown

Editor's Note:

It looks like the market is asleep at the wheel. For many issues the session was very boring with a tight trading range. Don't be surprised to see the market continue to slowly drift higher into the end of the first quarter.

Current Portfolio:


CALL Play Updates

Apple Inc - AAPL close: 232.39 change: +1.49 stop: 224.75 *new*

There were a number of headlines for AAPL today. There is speculation that AAPL is devising a new iPhone specifically designed for Verizon's network and is due to be launched this summer. There were also analyst comments who were significantly raising their estimates on the number if iPads to be sold. Then there was a story that AAPL was going to delay the first round of iPad shipments from this week to April 12th. All together the mood was still positive. Shares of AAPL gapped open higher at $233.00 this morning and closed with a +0.6% gain. I remain bullish on the stock but I'm cautious about new positions at this time. Please note our new stop loss at $224.75.

Our first target is $234.90. Our second target is $239.75. I would keep your position size small.

Current Position: BUY CALL APRIL $230 (AAPL 10D230.00) current ask $5.25

Entry on March 23rd at $228.00
Earnings Date 04/21/10
Average Daily Volume = 18.6 million
Listed on March 22nd, 2010


Cognizant Technology - CTSH - close: 51.14 change: +0.05 stop: 49.95

Monday proved to be a very quiet session for CTSH with shares trading in a 60-cent range. Nothing has changed from my weekend comments. I would expect a dip toward $50.00. The question is, will support at $50.00 hold this time? Nimble traders could buy calls on a bounce near $50.00 but if you do I would keep your position size small. The market looks fragile here and CTSH is overbought with some bearish looking technical indicators. Our initial target is $54.75.

Current Position: 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


Express Scripts - ESRX - close: 102.24 change: +1.62 stop: 99.40

Healthcare stocks were showing some relative strength today. After a four-day consolidation the HMO index is bouncing from its 10-dma and the 1550 level. I mentioned that Friday's afternoon bounce in ESRX looked like a new entry point but warned it was an aggressive trade given the market's overbought condition and the fast approaching end to the first quarter.

Shares of ESRX added 1.6% and closed near its highs for the session, which is normally a bullish sign for tomorrow. Our first target is $104.90. Our second target is $107.45. Our time frame is just a couple of weeks.

Current Position: BUY CALL APRIL $105 (ESRX 10D105.00) at $1.10

Entry on March 24th at $101.99
Earnings Date 04/29/10
Average Daily Volume = 2.51 million
Listed on March 23rd, 2010


Coca-Cola - KO - close: 54.77 change: +0.12 stop: 52.95

Shares of KO slept through Monday's session. The stock drifted sideways in a 30-cent range. There is no change from my weekend comments. I strongly suspect shares are building up steam again for a new rally higher. Yet the correction may not be over yet. Readers could wait for a dip closer to $54.00 or wait for a convincing intraday bounce before launching new positions. The 200-dma near $53.00 should offer some technical support. The stock doesn't move super fast but I envision a rally toward the December highs over the next few weeks. Our target to exit is $59.00.

Current Position: BUY CALL May $55.00 (KO 10E55.00) at $1.62

Entry on March 24th at $ 55.22
Earnings Date 04/21/10
Average Daily Volume = 14.6 million
Listed on March 23rd, 2010


L-3 Communications - LLL - close: 93.59 change: +0.33 stop: 91.25

It was a bullish day for defense stocks. The DFI is coiling up against resistance and acts like it wants to breakout higher. The DFX defense index did breakout today and closed at new 52-week highs. Shares of LLL underperformed its peers with a +0.35% gain but the upward trend is still alive. I am still cautious on launching new bullish positions in LLL at this time. Our first target is $97.00. Our final target is $99.75.

We chose the $100 calls to keep our capital investment very small. Keep your position size limited.

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

Entry on March 18th at $ 93.88
Earnings Date 04/22/10
Average Daily Volume = 908 thousand
Listed on March 17th, 2010


NII Holdings Inc. - NIHD - close: 41.25 change: +0.42 stop: 39.60

NIHD delivered a boring performance. The stock gapped open higher at the open and then drifted sideways in a 40-cent range the rest of the session. I do not see any changes from my weekend comments. I would still be tempted to buy calls on a bounce from the $40.00 level but keep your positions very small. Technical indicators are looking bearish because the rally is so tired. Our first target is the $44.00 level.

Current 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


Priceline.com - PCLN - close: 255.67 change: + 3.56 stop: 239.85

PCLN displayed some relative strength with a morning rally toward the $260 level. The stock was upgraded to a "buy" and given a $350 price target. PCLN eventually pared its gains but managed to close with a 1.4% gain on the day. The April $260 call is trading in the $5.50-5.90 zone. More conservative traders may want to take profits early before the quarter ends. Don't forget this is an aggressive, higher-risk trade given PCLN's volatility and overbought stature. We need to keep our positions small. Our target is $275.00. Our time frame is about four weeks.

Current Position: BUY CALL APRIL $260 (PCLN 10D260.00) @ 2.15

Entry on March 25th at $246.60
Earnings Date 05/11/10
Average Daily Volume = 793 thousand
Listed on March 23rd, 2010


Panera Bread Co. - PNRA - close: 76.91 change: +0.00 stop: 74.75

There was no follow through for the recent pull back in shares of PNRA. Traders bought the dip this morning and the stock closed unchanged on the session. The larger trend is up but short-term I am expecting a dip toward $75.00 and its rising 50-dma.

I am not suggesting new positions at this time. This was an aggressive trade given our entry point. 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.

Current 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


PartnerRe Ltd. - PRE - close: 80.17 change: -0.03 stop: 77.75

The trend of quiet sessions and narrow ranges included PRE as well. The stock failed at $80.46 but traders were buying the dip at $80.00. I do not see any changes from my weekend comments. We have a trigger to buy calls at $80.55. More conservative traders may want to raise that trigger to $80.75 or higher just to reduce the chance we get triggered on an intraday spike higher.

If triggered we'll use a stop loss at $77.75 (under the March 19th low). Our first target is $84.75. Our second, longer-term target is $89.00. There is potential resistance near the October 2009 highs ($81.70) so don't be surprised to see some congestion there.

Trigger to buy calls at $80.55

Suggested Position: BUY CALL APRIL $80.00 (PRE 10D80.00) current ask $1.40

Entry on March xxth at $ xx.xx
Earnings Date 04/27/10
Average Daily Volume = 989 thousand
Listed on March 20th, 2010


Wynn Resorts - WYNN - close: 76.85 change: +0.22 stop: 69.29

Casino and gambling stocks continue to drift higher. WYNN was no exception. We are still waiting for a pull back. The plan is to wait for a dip to $71.50. If triggered at $71.50 we'll use a stop loss at $69.29. Our first target is $76.50. Our second target is $79.90. Longer-term traders could aim a lot higher.

Trigger to buy calls at $71.50

Suggested Position: BUY CALL APRIL $75 (WYNN 10D75.00) current ask $3.40

Entry on March xxth at $ xx.xx
Earnings Date 05/05/10
Average Daily Volume = 2.7 million
Listed on March 24th, 2010


PUT Play Updates

ishares China - FXI - close: 41.62 change: +0.79 stop: 42.55 *new*

Investors were in a bullish mood in China. The Chinese Shanghai index rallied just over 2% today. The FXI tried to keep pace and closed up 1.9%. This ETF opened at $41.15 creating our new entry point. Given this entry point I'm adjusting our stop loss to $42.55. The FXI should see resistance near $42.00 and its 100-dma. I would wait for this ETF to roll over before launching new positions.

More conservative traders may want to wait for a close under $40.00 before considering new bearish positions. Our target to exit is $35.75.

Current Position: BUY PUT MAY $40.00 (FXI 10Q40.00) @ $1.28

Entry on March 29th at $ 41.15
Earnings Date --/--/--
Average Daily Volume = 21.3 million
Listed on March 27th, 2010


iShares Russell 2000 - IWM - close: 68.18 change: +0.37 stop: 70.15

The market experienced a widespread bounce on Monday and yet the small cap stocks did not see much of a move. The Russell 2000 index rose +0.48% and the IWM gained +0.5%. I remain bearish on this ETF and would still open positions anywhere in the $67.00-69.30 zone. The small caps had the biggest move higher they could have a substantial pull back.

More conservative traders could wait until Thursday before initiating positions. Broken resistance near $65.00 should be new support. Our target will be $65.10. We're not trying to knock the ball of the cover with this trade. We're just looking for a decent gain on what could be a temporary correction for the small caps.

Keep in mind that April options expire in three weeks. You may want to trade May options instead.

Current Position: BUY PUT APRIL $65.00 (IWM 10P65.00) @ $0.47

Entry on March 29th at $ 68.11
Earnings Date --/--/--
Average Daily Volume = 60.4 million
Listed on March 27th, 2010


ProShares Ultra(Long) Basic Mat. - UYM - close: 36.03 chg: +0.87 stop: 37.26

Our new bearish play on the UYM is not open yet. The sector spiked higher this morning thanks to the dollar. The euro was bouncing from multi-month lows and this pushed the dollar weaker, which in turn boosted commodities. The rally in commodities fueled gains for several of the mining stocks. The UYM closed up 2.4%.

We are waiting for a decline and have a trigger to buy puts at $34.30. More nimble traders could try and jump in if they see a failed rally near resistance at the $37.00 level. Meanwhile if we are triggered at $34.30 we'll use a stop at $37.26. If triggered our target is the $30.25 mark. More aggressive traders could aim for the 200-dma closer to $28.00. I do consider this somewhat aggressive since our stop is so wide. Keep your position size small, especially since we're trading a double-long ETF.

Trigger to buy puts at $34.30

Suggested Position: BUY PUT MAY $30.00 (UYM 10Q30.00) current ask $1.20

Entry on March xxth at $ xx.xx
Earnings Date --/--/--
Average Daily Volume = 4.5 million
Listed on March 27th, 2010


Freeport McMoran - FCX - close: 82.88 change: +3.71 stop: 81.26

Currency moves are the reason shares of FCX rallied. Euro strength pushed the dollar lower and commodities rallied. Copper really performed well. Shares of FCX responded with a gap open at $80.93 and a 4.6% rally toward the March highs. I'm willing to watch FCX for another day. If the rally continues we'll drop it as a bearish candidate. Right now our plan is to open positions with a trigger at $77.90. If triggered our target is $72.00. I expect the 200-dma near $71.00 to act as technical support. This can be a volatile stock. I do consider this an aggressive, higher-risk trade. Keep your position size small.

Trigger to buy puts at $77.90

Suggested Position: BUY PUT APRIL $75.00 (FCX 10P75.00) current ask $1.07

Keep in mind that April options expire in three weeks. I expect this trade to be over before April options expire.

Entry on March xxth at $ xx.xx
Earnings Date 04/22/10
Average Daily Volume = 5.67 million
Listed on March 27th, 2010


CLOSED BULLISH PLAYS

Cash America - CSH - close: 39.80 change: +0.45 stop: 37.45

I am temporarily giving up on CSH. We have been watching it for two weeks and have yet to get an entry point on the stock. I'll move it to my personal watch list. Shares never hit our breakout entry point above $41.00 or our buy the dip entry point at $38.25. Keep an eye on the rising 50-dma for support. The short-term action today looks bearish.

NEVER OPENED

Buy-the-Dip: Use a trigger at $38.25 to buy calls.

Unopened Position: BUY CALL APRIL $40 (CSH 10D40.00)

Chart:

Entry on March xxth at $ xx.xx *never opened*
Earnings Date 04/22/10
Average Daily Volume = 272 thousand
Listed on March 13th, 2010