Option Investor
Newsletter

Daily Newsletter, Wednesday, 3/31/2010

Table of Contents

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

Market Wrap

Stocks Derailed By Employment Forecast

by Todd Shriber

Click here to email Todd Shriber
A glum employment outlook from ADP that showed employers surprisingly cut jobs in March helped push stocks lower on Wednesday with the Dow Jones Industrial Average losing almost 51 points to close at 10,856.63. The S&P 500 absorbed a loss of nearly four points to settle at 1169.43 while the Nasdaq closed below the critical 2400 level after losing about 13 points to close at 2397.96. Equities were lethargic for the most part on Wednesday, until another late-day sell-off kicked in around 2pm Eastern time, worsening the day's losses.

Stats Table

Optimism had been high that Friday's monthly jobs report would show employers added jobs in March, but the ADP Employment Report showed employers cut another 23,000 jobs this month. While that is the smallest monthly decline in two years, the news was nothing to get excited about as most observers were forecasting an addition of 40,000 new jobs in the ADP report. That probably put investors in a pensive state mind ahead of the Labor Department's jobs number, which many economists are expecting to show an increase of 185,000 new jobs.

Friday's number may still prove to be better than today's ADP report because the government report reflects weather-related improvements in hiring and the addition of census workers, while the ADP does not include those numbers. Of course, census jobs are temporary jobs and the economy is going to need more than temporary jobs to truly pick up steam.

ADP Chart

The Case-Shiller Home Price Index did nothing to encourage a cheery mood on Wall Street today as its January report showed home prices in 20 U.S. cities fell by 0.4% in January from December. Today's number was not seasonally adjusted. Los Angeles was the only city of the 20 included in the survey to show improving home prices in January. On a seasonally adjusted basis, prices rose 0.3%.

Compared with January 2009, prices were lower in 11 of 20 cities, with Las Vegas sporting the biggest decline with a drop of 17.4%. Home prices in Charlotte, Las Vegas, Seattle and Tampa hit their worst post-financial crisis levels, according to press reports.

Home Price Chart

The Dow backed off an 18-month high, but energy names did get a boost after President Obama said he would permit drilling off the East Coast. A federal ban on drilling in waters off both the East and West Coasts expired in 20008 and while the Obama plan is certainly better than not exploiting these resources at all, it does keep explorers from drilling within 125 miles of Florida's coastline and cancels the development of Alaska's Bristol Bay.

According to Bloomberg News, the U.S. Minerals Management Service estimates that Alaska's Outer Continental Shelf has 26.6 billion barrels of recoverable oil, seven times the estimate for the East Coast, and 132.1 trillion cubic feet of natural gas. If nothing else, those numbers indicate the decision to stop development at Bristol Bay is vexing at best.

The news led to a mixed day for oil stocks. Exxon Mobil (XOM), the biggest U.S. oil company, was down seven cents to $66.98, but fellow Dow component Chevron (CVX), the number two U.S. oil firm, was the Dow's top gainer on the day, adding 53 cents to close at $75.83. The oil services names were on the receiving end of most of the positive trade regarding the new drilling plan as Diamond Offshore (DO) and Transocean (RIG) both gained more than $3. National Oilwell Varco (NOV) and Schlumberger also finished the day higher and that helped the Oil Services HOLDRS ETF (OIH) gainn $2.01, or 1.67% to close at $122.59.

OIH Chart

Greece continues to be a problem even though the country has taken care of its April cash needs. That is just one month and Greece will need to raise another $15.6 billion by the end of May. The country is planning at least two dollar-denominated bond auctions in the next month to raise cash, but that news was not enough to prevent Moody's Investors Service from downgrading the debt and deposit ratings of five of the nine Greek banks in its coverage universe.

This news did not help the U.S. Dollar much, which was down today against 11 of the 16 major currencies, but with the Dollar weak and a lack of enthusiasm for the Euro still obvious, gold may be once again be a safe-haven for wary investors. Gold for April delivery gained $8.40 an ounce to close at $1112.50 today and it is worth noting that the the SPDR Gold Shares (GLD) is up nearly 2% in the past five days compared to 0.5% loss for the S&P 500.

Gold Chart

Speaking of bad news, tech investors got a big dose of troubling headlines after the close today when BlackBerry maker Research In Motion (RIMM) delivered fourth-quarter earnings results that certainly qualify as disappointing. The company said it earned $710.1 million, or $1.27 a share, in the fourth quarter, compared with $518.3 million, or 92 cents a share, a year earlier. Revenue jumped 18% to $4.08 billion, but analysts were expecting a profit of $1.28 a share on sales of $4.31 billion. RIMM shipped 10.5 million smart phones in the fourth quarter, fewer than the expected total of 11 million.

RIMM did offer an upbeat profit forecast for the current quarter, saying it expects to earn $1.31 to $1.38 a share. That is well ahead of the consensus estimate of $1.23 a share, but the Canadian company is forecasting revenue of $4.25 billion to $4.45 billion while analysts are expecting $4.33 billion. The company said it expects first-quarter gross margins in the neighborhood of 44.5% and is forecasting subscriber growth of 4.9 million to 5.2 million.

BNP Paribas initiated coverage of RIMM and rival Apple (AAPL) today with ''outperform'' ratings and noted that while an Apple partnership with Verizon (VZ) poses risks for RIMM, the growth of the BlackBerry in emerging markets should help buffer subscriber losses in developed markets. BNP Paribas put a $90 price target on RIMM and I bet the analyst would like to lower that number. RIMM closed at $73.97, but as of this writing, the stock is trading lower by $3.67, or 5%, to $69.89 in the after-hours session.

RIMM also said it expects its average selling price per phone to fall to $305 to $310 per phone in the current quarter, down from $311 per phone in the previous quarter. Combine those numbers with slumping shipments and perhaps it is apparent that RIMM is losing market share to the iPhone Google's (GOOG) Android.

RIMM Chart

On Monday I mentioned the aerospace sector as one group that has been showing a lot of strength and if you were looking for a pullback in some of that group's stronger constituents such as Boeing (BA), that pullback may have occurred today after the Dow component said it expects to take a $150 million first-quarter charge related to new health care reform bill. Boeing was down 1.25% on the news.

At this point, it is hard to reconcile the health news as good news from an investor's standpoint. In less than a week, AT&T (T), Boeing, Caterpillar (CAT) and 3M (MMM) form a quartet of Dow components saying the health care bill negatively impact first-quarter earnings. Throw in Deere (DE), Goodrich (GR) and Boeing rival Lockheed Martin (LMT), which said today it will take a $96 million charge in the first quarter, and it is clear that industrial names are being hampered by Uncle Sam.

Boeing Chart

Here we are at the end of the first quarter and stocks did not close the quarter in robust fashion. The Dow's almost 51-point haircut moved the index below support at 10,880 and if traders really fret about the jobs number on Thursday (the number is released on Friday, but the market is closed) then support at 10,825 could be washed away. The Dow is now a fair bit removed from resistance at 10,950 and assuming volume will be thin on Thursday, perhaps the best we can hope for the is the Dow holding 10,850 heading into the long weekend.

Dow Chart

The S&P 500 remains locked in a tight range, still hovering around the 1170 area. Again, I would not expect much action tomorrow, at least not much after the morning. If the S&P 500 can at least stay in its current neighborhood going into the next week, that might be a positive sign. After Friday's jobs report, first-quarter earnings will be the driver here. The destination is still unknown.

S&P 500 Chart

With RIMM's earnings announcement, we have a different set of circumstances for the Nasdaq. The Nasdaq was not all that impressive in March, save for Apple, and the RIMM news makes it difficult to envision a positive day for the Nasdaq on Thursday. I do not know if volume will be sufficient to force a break of support at 2385 tomorrow, but I find the prospects of a close above 2400 to be dubious.

Nasdaq Chart

I expect a volatile Thursday morning followed by some lethargic action for the rest of the day as traders head out of town to get an early start on the long weekend. RIMM is a bellwether name and that is going to hamper the Nasdaq and perhaps the broader market, so one more down day is likely in the offing.


New Option Plays

Home Healthcare

by James Brown

Click here to email James Brown


NEW DIRECTIONAL PUT PLAYS

Amedisys Inc. - AMED - close: 55.22 change: -0.31 stop: 59.05

Company Description:
Amedisys is a leading provider of home health care and hospice services, with agencies located across the United States and Puerto Rico. The company was incorporated 1982. In 1994, the company became public and currently trades on The Nasdaq Market under the symbol “AMED”. (source: company press release or website)

Why We Like It:
Shares of AMED broke their up trend on March 25th when the stock was downgraded. AMED fell below technical support at the 50-dma and its trend of higher lows. The oversold bounce on Tuesday this week failed near $59.00. Healthcare stocks have not been that strong following the passage of the reform bill and with the market poised for a correction AMED could see a pull back toward $50 or the 2009 summer highs. I am suggesting we launch bearish put positions now. We'll put our stop above Tuesday's high. Our target to exit is $50.25. Our time frame is about two weeks.

Suggested Position: BUY PUT APRIL $50.00 (AMED 10P50.00) current ask $0.90

Annotated Chart:

Entry on April 1st at $ 55.22(?)
Earnings Date 04/28/10
Average Daily Volume = 749 thousand
Listed on March 31st, 2010



In Play Updates and Reviews

Small Caps Roll Over Late Afternoon

by James Brown

Click here to email James Brown

Editor's Note:

Check out an intraday chart of the small cap index. Investors were selling it hard into the close. This could be the very beginning of a market correction now that the first quarter is over. I suspect stocks may trade sideways tomorrow as the market waits for the jobs report out on Friday.

Current Portfolio:


CALL Play Updates

Apple Inc - AAPL close: 235.00 change: -0.85 stop: 228.00

AAPL spent the session trading sideways. Traders were probably hesitant to sell with the iPad launch this weekend and rival RIMM's earnings report after the closing bell tonight. RIMM missed earnings by a penny and it looks like the company lost about 1% market share, which many feel AAPL probably stole away. Shares of RIMM are down about $5 after hours while AAPL is up slightly (less than $1).

I still think that we might want to exit tomorrow or Monday. Right now I'm leaning toward an exit on Monday but that is the riskier exit. If the jobs report disappoints on Friday the market including AAPL could gap down Monday morning. I am not suggesting new bullish positions at this time.

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

03/30/10 - 1st Target Exceeded on gap open
AAPL opened at $236.60. The April $230 call opened at $9.20 (+75%)

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


Express Scripts - ESRX - close: 101.76 change: +0.16 stop: 99.40

Traders bought the dip again in ESRX as shares tested the rising 20-dma near $100 this morning. Volume was very light thanks to the quarter end. I remain bullish with ESRX above $100 but if we see a new lower high we'll consider an early exit. I hesitate to launch new positions until we see the jobs report on Friday. 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: 55.00 change: +0.13 stop: 52.95

KO displayed a little relative strength on Wednesday. Traders bought the dip near very short-term support at the $54.50 level. Volume was almost normal at more than 11 million shares (still low). I don't see any changes from my prior comments. Lets wait for a bounce from the 200-dma or a break higher past $55.50 before initiating new bullish positions. 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: 91.63 change: -1.31 stop: 88.90

Bingo! Right on cue shares of LLL accelerated lower. We were expecting this pull back. Right now we're watching for support near $90.00, which should be underpinned by the rising 50-dma. Wait for a bounce from $90.00 before re-evaluating new bullish entries. 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: 41.68 change: +0.36 stop: 39.60

NIHD was showing some relative strength with a 0.8% gain and a rise toward its 52-week high near $42.00. The April $40 calls are now trading over $2.00. More conservative traders may want to take some money off the table to limit your exposure should the market correct. The stock remains overbought and I am not suggesting new bullish positions at this time. 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: 255.00 change: - 0.99 stop: 239.85

Shares of PCLN rallied toward $259 midday but eventually rolled over. The April $260 calls traded to $6.40 intraday. I am still suggesting that more conservative traders may want to take profits early, either now or on another rise toward $259-260. This remains a very 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: 76.49 change: -0.68 stop: 74.75

No one should be surprised by the weakness in PNRA. We have been expecting a pull back toward the $75 level for several days now. Broken resistance near $75.00 should be support that is now bolstered by the 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: 79.72 change: +0.06 stop: 77.75

Traders bought the dip in PRE this morning and shares were slowly inching higher the rest of the session. I do not see any changes from my previous comments. If the stock closes under $79.00 we'll drop it as a bullish candidate. Currently 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.

Please note that I have changed the option to MAY $80 calls.

Trigger to buy calls at $80.55

Suggested Position: BUY CALL MAY $80.00 (PRE 10E80.00) current ask $2.10

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: 75.83 change: -1.42 stop: 69.20 *new*

The correction in shares of WYNN may have started today with a 1.8% decline. Hopefully that means we could see an entry point in the next few days. We are waiting to buy calls on a dip. The plan is to use a trigger at $71.50. I have inched the stop loss down to $69.20. Our first target is $76.50. Our second target is $79.90. Longer-term traders could aim a lot higher. Please note that I have changed the option to MAY $75 calls.

Trigger to buy calls at $71.50

Suggested Position: BUY CALL MAY $75 (WYNN 10E75.00) current ask $5.55

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

AvalonBay Comm. - AVB - close: 86.35 change: -0.64 stop: 90.15

Traders bought the dip near $86 again but the bounce rolled over midday at $87.27 (under its 10-dma). I see this as another sign that AVB is rolling over and shares are about to correct. More aggressive traders could jump in now. I am suggesting a trigger to buy puts at $85.75. Our target is $80.50. The simple 50-dma might be technical support but once the market begins to correct I don't believe the 50-dma will stop it. We should consider this somewhat aggressive since the P&F chart for AVB is still bullish and shares offer a 4% dividend yield, which might attract some capital in a prolonged downturn. Plus, our stop loss is a little wide.

Trigger to buy puts at $85.75

Suggested Position: BUY PUT APRIL $85.00 (AVB 10P85.00) current ask $1.25

Entry on March xxth at $ xx.xx
Earnings Date 04/28/10
Average Daily Volume = 5.67 million
Listed on March 30th, 2010


ishares China - FXI - close: 42.10 change: -0.16 stop: 42.55

Hmm... it was an interesting session for the FXI. The Chinese markets lost about 0.6% on Wednesday. The FXI gapped open lower, rallied toward Tuesday's highs, and rolled over. Volume was very strong for the fifth day in a row. While this looks like a potential failed rally I would not launch new positions yet. I'd rather see some follow through.

Previous comments: 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: 67.80 change: -0.59 stop: 70.15

Take a look at an intraday chart in the IWM. The ETF quickly rolled over late in the day and was falling fast toward the closing bell. This could be the very beginning of the market's correction. There is no change from my prior comments.

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. More aggressive traders could aim for the $62-60 zone.

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: 35.78 chg: -0.36 stop: 37.26

Basic material stocks could not build on their previous gains in spite of a dip in the U.S. dollar today. It looks like the UYM is going to roll over under the $37.00 level. There is no change from my prior comments.

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


CLOSED BULLISH PLAYS

Cognizant Technology - CTSH - close: 50.98 change: -0.48 stop: 49.95

We have been cautious on CTSH for days. Last night I suggested we exit early if shares did not close above $51.65 today. Unfortunately CTSH has continued to slip lower after yesterday's failed rally near the 10-dma. Therefore we're closing the play. I would keep CTSH on your watch list. A bounce near $48.00 and its rising 50-dma or the 100-dma closer to $47.00 could be a new bullish entry point.

Exit early

Closed Position: CALL APRIL $55 (CTSH 10D55.00) @ $0.05
Entry was at $0.40

Chart:

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