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Daily Newsletter, Saturday, 7/9/2011

Table of Contents

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

Market Wrap

Jobs Ate Our Rally

by Jim Brown

Click here to email Jim Brown

The ADP upside surprise produced a significant short squeeze rally but the Non-Farm Payrolls on Friday was equally market moving only it was in the opposite direction.

Market Statistics

Morgan Stanley said, "The June payrolls are an unmitigated disaster. Every facet of the data is sharply worse than anticipated." That pretty well sums up the Non-Farm Payroll report. The headline number showed a gain of +18,000 jobs compared to consensus estimates last weekend at +88,000 and radically increased estimates after the ADP report to as much as +175,000 jobs. Obviously analysts missed this one significantly.

It was actually worse than the +18,000 number suggests. The number for May was revised lower from a gain of +54,000 to only a gain of +25,000. In reality May was revised lower by more than the gain in June. The April gain of +232,000 was revised lower to +217,000 for a total decline in previously reported numbers of -44,00 jobs. These numbers are seasonally adjusted using the BLS "birth-death" model for guestimating the creation and failure of new businesses. If you back out the B/D adjustments the economy lost -113,000 jobs in June.

You want to see something really scary? (Twilight Zone Movie) The separate Household Employment Survey, where we get the unemployment rate, showed a LOSS of -445,000 jobs and increase in unemployment of +173,000. This pushed the unemployment rate up to 9.2% for the third consecutive monthly gain. That represents 14.1 million unemployed workers.

The broadest measure of unemployment (U-6) rose to 16.2% (24.85 million) and the highest since June 2010. That includes discouraged workers, those whose unemployment benefits have expired and those working part time because they can't find a full time job. The labor force participation rate fell to 64.1% and the lowest level since 1984.

The average duration of unemployment increased to 39.9 weeks but a large and growing number have been out of work more than two years.

Haver Analytics produced a chart showing the average length of unemployment dating back to 1948 and it is not pretty. Typically bad recessions saw unemployment terms top out around 20 weeks. At the current rate it will be over 40 weeks by the end of July and still rising. The outlook for putting everyone back to work is grim since it would take a minimum of four years at +250,000 jobs a month just to make a dent in the total and put 12 million people back to work. That would be only half of the current U-6 unemployment. The U.S. has to create 150,000 jobs per month just to stay even with population growth, graduations and immigration. In a month like June at +18,000 we are really falling farther behind. If we only added 18,000 jobs per month for the next six months we would actually see an increase of another 900,000 unemployed workers to the work force.

Haver Analytics Unemployment Duration Chart

The only thing that will help rectify this situation is the retirement of the baby boomers over the next decade. Starting in 2011 and continuing for the next 19 years more than 300,000 boomers reach age 65 every month. Obviously not all are going to quit working the day after their 65th birthday but quite a few will take that long walk to the parking lot for the last time. This will help create new hiring to fill those positions. However, because most boomers have not saved for retirement more than 40% claim they will work until they drop.

On a side note the social security system began paying out more in benefits in 2010 than it received in contributions. In 1950 there were 16 people working for every person on social security. Their contributions supported the one retiree. In 2010 there were only 3.3 workers per retiree. By 2025 that will decline to TWO workers. Interest costs on the national debt, social security payments and Medicare will consume 92-cents of every dollar of federal revenue by 2019. This is regardless of what happens to the debt limit talks in July.

Back to the present the majority of job losses in June were from state and local governments. They cut 39,000 jobs in June. The financial sector cut -15,000 and construction -9,000. Manufacturing gained +6,000 and retail +5,200. Without the hits from state and local governments the private sector created +57,000 jobs. The government sector has cut 911,000 jobs in the last 13 months. That includes 250,000 who were temporary census workers. There were -321,000 federal jobs, -306,000 state and local government jobs and -155,000 were education jobs.

Analysts believe the uncertainty over Europe's debt crisis, the debt limit crisis in Washington, rising fuel prices, the continued hit from the Japan supply chain and the May double dip recession scare were to blame for the lack of jobs in June. Whatever the reason those analysts were quick to lower estimates for future job growth. Moody's cut their estimates for the rest of the year to less than 200,000 a month even though they expect the economy to do better. They still expect job gains in 2012 to accelerate sharply. Seems to me back in 2010 everyone was expecting job gains to accelerate in 2011. Did we just lose a year? Will we be saying the same thing about 2013 when we are half way through 2012?

Non-Farm Payroll Chart

You may remember back when President Obama was trying to get the $800 billion stimulus bill passed the White House prepared the following graph showing how bad unemployment would be both with and without the stimulus plan. The good folks at E21 have updated the chart with the actual unemployment rates since Christina Romer initially produced it. The President promised unemployment would not go over 8% if the stimulus were passed. In reality if has been close to 10% for quite a few months.

Economics21.org Updated Unemployment Chart

Remember all those shovel ready jobs we were promised in the stimulus sales pitch? Two years later much of the money remains unspent and the shovel ready jobs did not appear. Instead there were more than 9,000 earmarks otherwise known as special pork projects included in the bill. These are things like the $3 million allocated to study the drinking habits of prostitutes. The White House claims the $800 billion bill created or "saved" three million jobs. That works out to a cost of $266,000 per job. Since we can pretty much bet those workers are not receiving $266,000 in salary it seems to be an awful large number to create a single job and that assumes you buy the White House claim of three million jobs. More than 650,000 government jobs cut over the last year were cut because the stimulus funds expired and there were not enough taxes to support them.

Contrary to public perceptions the government can't create jobs except by increasing the size of the government and adding government workers that you and I have to pay for with our taxes. We don't need bigger government as a make work program for the unemployed. The government needs to get out of the way and reduce restrictions and uncertainty over the business community. Only then will businesses feel comfortable about hiring.

There are six million corporations in the U.S. that employ one or more workers. Over 90% have less than 20 workers and they are run by small entrepreneurs making not much more than a $100K per year. When you raise taxes on small businesses or complicate their lives with unnecessary red tape and government mandates you are reducing jobs. Small business owners don't have the luxury of large cash flows to pay things like government mandated health care. In every survey on the potential impact of the healthcare law the majority of business owners said they would have to cut employees to raise the money to pay healthcare for the remaining workers. That impacts 90% of the employers in the U.S. and is just one example of why we are not seeing new jobs created. Employers are scared of what is coming and they are reducing head counts for a multitude of reasons.

I am sure Ben Bernanke probably had a very bad Friday. The rising unemployment for the third consecutive month suggests the Fed could be back with another stimulus program soon. Their dual mandate for rising employment and stable prices is failing. The appetite in Washington for a QE3 program is nonexistent. In the current fiscal environment any form of stimulus carries a negative connotation. The Fed does have ways to stimulate business other than low rates and quantitative easing but they are less desirable. One way they have discussed is to discontinue paying banks interest on reserves parked at the Fed. They are not paying much but it is still a risk free investment on something just under $1 trillion in reserves.

If they stop paying interest or even begin charging interest on those reserves it would force the banks to put the money to work elsewhere in places like construction loans or mortgages. The problem there is the credit quality. The current bank rules prevent loans to anyone with less than spotless credit and those types of borrowers have no trouble getting loans today so it is questionable how much those reserve changes would help.

Lawmakers should not be trying to find ways to raise taxes in a declining economic environment. Raising taxes on businesses and high-income individuals simply limits the amount of money left to invest in new ventures that will hire new workers. The government needs to pass a long-term incentive for businesses that will guarantee them a lower tax rate for years to come so they can plan for the future. The U.S. has the second highest corporate tax rate in the world and that makes it beneficial for companies to hire overseas rather than in the USA. Lawmakers should also allow U.S. corporations to bring money back into the U.S. without being taxed twice. There are estimates of as much as $200 billion in profits sitting in overseas accounts because corporations can't bring their profits back to the U.S. without double taxation.

There is almost no way the debt limit problem can be solved without additional layoffs. Any cut in spending will require further layoffs. We are facing a period of austerity that will not be even close to what Greece is going through but it will still result in a further slowing to the economy. You can't take $4 trillion out of the economy over the next decade without leaving a lot of holes and harming a lot of lives. Unfortunately it needs to be done and we will have to work through it. Analysts estimate any material debt limit compromise will reduce GDP by -1.5% per year for the rest of the decade.

Stupid government moves like the permit moratorium in the Gulf cost us between 35,000 and 55,000 jobs according to the governor of Louisiana. Nine rigs and their support staff left the Gulf for lack of work. It will be years before they come back because they now have new contracts elsewhere. It is not like we don't need the oil! The EIA has cut production estimates for the Gulf in 2012 by -335,000 barrels per day as a result of the permitorium. That means we will have to import that oil at the cost of $1.1 billion a month that we will be paying to countries like Venezuela, Nigeria and Saudi Arabia. Wouldn't it be better to produce our own oil and create our own jobs? Every government action has a reaction.

Another economic report on Friday was the Wholesale Trade for May. Wholesale inventories rose by +1.8% compared to estimates for a +0.7% gain. The April number was also revised higher from +0.8% to +1.1%. The rise in inventories was caused by a sudden decline in sales of -0.2%. That was the first decline since February and only the second in the last year. Sales rose by +0.5% in April and +3.0% in March. Some of the gain in inventories was also related to the snapback from the Japan supply chain break.

The rise in inventory and decline in sales was ignored to some extent because this was for the May period and therefore a lagging report. The market has already priced in the May soft patch but this will be a problem if it continues in future reports.

The economic calendar for next week is dominated by the FOMC minutes on Tuesday, Bernanke testimony on Wed/Thr and the PPI/CPI on Thr/Fri. The FOMC minutes may tell us what the Fed was thinking about as an alternative to QE3 during the June meeting. However, the minutes have less impact since Bernanke held the post-meeting press conference.

The price indexes are expected to show declines in inflation thanks in part to the decline in oil prices. There should be nothing in these reports that will worry the Fed or delay any future stimulus. Inflation is not a factor today.

Ben Bernanke will give his Semiannual Monetary Policy Report, formerly the Humphrey Hawkins Testimony, to Congress this week. The House testimony will be on Wednesday and he repeats it to the Senate on Thursday. I expect nothing new to be divulged but the testimony will be prime time viewing on stock TV. You never know when a specific comment will spike or tank the market.

Economic Calendar

The biggest stock news for next week will be the start of the Q2 earnings cycle. Alcoa (AA) is the first Dow component to report and that will happen on Monday. Marriott and Yum Brands will report on Wednesday. The biggest events will be the JP Morgan and Google earnings on Thursday. Google is expected to earn $7.86 for the quarter and they typically have major moves after they report. Next week should be no different. Expect a major move for Google.

JP Morgan will be the first major bank to report and with all the mortgage problems, charge backs and suits in the industry there is no telling what they will say. Analysts will be looking to see if lending has increased at all. The banking sector has been seeing existing loans mature and fall off the books but new loans are difficult to do so cash is piling up. Cash produces no revenue so analysts will be looking at the new business components. Citibank will report on Friday and they are expected to increase earnings by about 30%.

Google (GOOG) fell -$14 on Friday after the company was cut by Morgan Stanley from overweight to equal weight. (Buy to hold) and the price target dropped from $645 to $600. Google closed at $532. MS also cut full year earnings estimates from consensus at $40 to $34. MS said aggressive hiring plans, rising competition and heavy spending on Chrome and other products would narrow margins. Google is on track to hire 7,000 this year and well above the prior estimate of 4,000.

Google Chart

Airlines rebounded after the ugly jobs numbers because the lack of jobs suggests lack of demand for oil and oil prices in the U.S. dropped more than $2 per barrel. U.S. WTI closed just over $96 and right at support. Airlines initially fell on the jobs news because that suggests fewer travelers but rebounded slightly as oil prices declined.

Brent crude only declined 26-cents because weak jobs in the U.S. does not equate to lower demand in Europe. There were also notes passing in the market that tanker loadings in late July and August were going to drop due to falling production in the North Sea. This has been a problem for a couple years as depletion in the North Sea accelerates and production declines.

U.S. WTI Crude Chart

Brent Crude Chart

Gold and silver prices rallied again as a flight to quality hedge and on worries the debt crisis in Europe is not over. Comex gold rallied $14 to $1544. However, gold denominated in Euros rallied to €1,083 and a new nominal high. U.S. gold has rallied +$57 in the last week. Silver gained another 15-cents to $36.68 and ever so close to breaking through that resistance at the 100-day average at $37.

Gold Chart

In the U.S. we may feel like the Greece problem has disappeared. In reality Greece is still in the news but only at a lower volume level until the next crisis appears. The problem in Europe now is the worry about who will be next. The country indexes have been very volatile and some of them are dropping like a rock. For instance the Milan index declined -685 or -3.47% on Friday. The index is down -11% over the last three months with much of that decline in recent weeks. They saw a bounce last week after the Greek vote instilled a short-term burst of optimism but reality has returned. These countries either can't borrow in the open market or the rates are so high they can't afford the interest. Every analyst is confident Greece will eventually default and it will lead to other defaults of the weaker countries. This is pushing rates higher along with precious metals as a hedge.

FTSE MIB Italy Index Chart

Another data point worrying the market is a rapid increase in auto inventories. Actually it is a buildup of full size trucks. GM said it had 122 days of inventory as of the end of June. That is about 50% higher than the preferred level of 80 days and well above the industry average of 99 days. Chrysler has 93 days and Ford 79 days. There are three problems. First is the price of fuel and consumers are staying away from lower mpg vehicles. Secondly when the Japan quake occurred dealers canceled many incentives because of lower inventory while they waited for parts. Unfortunately the price of oil had already risen and buyers were focused on higher mileage vehicles instead of trucks. The last problem is buyer credit. Full size trucks carry a big sticker price and financing a $40K to $60K truck is not something every household can handle.

To solve this problem the automakers will probably put new incentives in place to spur sales. Current buyer incentives are currently $5,350 for the GMC Sierra, $4,880 for Silverado, $4,450 for Dodge Ram, $3,750 for Ford's F-series and $2,654 on the Toyota Tundra. If inventories don't decline soon and fuel prices continue to rise long term there is going to be a massive fire sale by year-end. Higher incentives cut into profits and automakers have been reluctant to raise the offers. Profits average $5,000 to $6,000 on a full size truck so they don't have a lot of room to maneuver. Analysts believe GM will cut truck production in Q3 to be 65,000 lower than Q2. That would cost GM about $500 million in lost profits.

GM Chart

The average vacancy rate for large U.S. shopping malls hit 11% in June and that is the highest level in the last 11 years and only 0.1% above a 20 year low. Regional mall vacancies rose to 9.3% and the highest level since 1990. The vacancies are a result of retailers pulling back from their aggressive expansion prior to the recession. Consumers have far less cash since they can't depend on their home equity as a personal ATM.

At regional malls there were many store closings for the anchor tenants and that loss of traffic prompted other specialty stores to close. In many cases the loss of an anchor tenant allows smaller stores to break their lease. Rents are flat to down with strip mall rents averaging $19.03 per square foot gross and $16.54 net after free months and other rental incentives. All those empty stores each represents dozens to hundreds of out of work employees.

Earnings begin next week and with the exception of a couple sectors they are not expected to be outstanding. S&P now expects a year over year earnings growth of +12.7% with revenue growth of +10.1%. However, guidance is not expected to be good. The soft patch has caused corporations to scale back expectations for the rest of the year and that will be reflected in the guidance they give with earnings. The table below shows the expected earnings growth for each of the ten major sectors on the S&P. Materials and Energy are by far the outstanding performers. If you took them out of the equation the rest of the S&P would be closer to 4% earnings growth. For me this is the Achilles heel for this quarter. The 12.7% earnings growth that is quoted so often in the press does not factor in the breadth of the earnings and the lackluster performance by six of the ten sectors. I am wondering if this will come out over the next several weeks or will the market cheerleaders keep glossing over the details?

S&P Q2 Earnings Growth By Sector

Despite everything I wrote above I believe Friday was bullish. It was bullish because the market did not crater even after a nearly 800-point gain in the Dow over the last eight days. By all rights we should have dropped -200 points on the jobs news and closed at that level or lower. To only lose -62 Dow points after an 800-point gain is phenomenal.

Volume was very low at 5.8 billion shares and the lowest since June 20th. Low volume on a down day is a bullish signal. Coming after that big gain is even more bullish.

I believe everyone who has been watching the rally since the 20th and cussing themselves for not boarding the bus at a lower level is thinking this weekend that Monday will be their opportunity.

The retail trader does not believe in the market or the rally. In June more than $20 billion was withdrawn from stock mutual funds. That is the most in a single month since October 2008 and on Thursday the markets were less than 1% from new highs. The sell in May crowd has been laughing at the market for two months. Now they have to be rethinking their position.

We are so close to those new highs the bullseye target is growing larger by the minute. For the bulls to give up this close to the goal would be unsettling. It would also create a possible head and shoulders top but we will deal with that in a couple weeks if it comes to pass.

The S&P declined to 1335 intraday and that turned into strong support on Tuesday and Wednesday. It is exactly where I would have scripted a pullback if I had that capability. The next material level would have been 1320-1325.

There was only a small amount of buying starting at the 11:AM low but it was persistent with a spike in the last hour of trading. I believe that spike was short covering and not a sudden desire by traders to get long over the weekend. More than likely it was shorts scared to be short over the weekend. With opening gaps the rule in recent days they probably did not want to be short with the president and party leaders meeting on Sunday to hammer out their differences. An announcement of a deal to end the debt limit stalemate could produce a 250-point spike on Monday. I definitely don't think it will happen but I think shorts were not willing to bet against it. Politicians always wait until the last minute in the hopes they can coerce one last bit of compromise out of the other party and milk the process for maximum gain.

The S&P closed at 1343 and managed to get back over that 1340 level that proved to be resistance earlier in the week. That is also a positive but it is not a guarantee of future performance. I am afraid I am reading positives into the charts because I want to believe the unexpected rally will continue. Because that troubles me I want to pay close attention to the market early next week. If we are going higher it should happen right away. The longer we loiter in the 1335-1340 range the more likely we are going lower. These rallies are impulsive more than rational. Once rational thought returns the odds of a continued rally begin to decline.

The temporary Greek resolution, suddenly improving economics and the shock of the ADP report combined to crush the shorts. The shock of the Non-Farm Payrolls caused a temporary decline with a decent rebound but it is entirely possible traders are in stunned disbelief rather than simply buying the dip. A market in motion tends to stay in motion so there is some momentum that tends to ignore bad news on the first reading. As the news and analysis is repeated in the days ahead that momentum may fade.

It is the equivalent of suddenly swerving to miss a pothole at 75 mph and not succeeding. You continue to flow with the traffic for a while trying to feel through the steering wheel if everything is all right. After a few hundred yards you begin to feel the drag and loss of control as the tire begins to go flat. You head for the shoulder and stop to change it. Had there been no telltale signs of a flat you would have continued down the road to your destination.

The jobs report was our sudden pothole and the pause on Friday was the questioning period where traders are getting the feel of the market to see if we lost a tire. The weekend news is going to be full of gloom and doom regarding jobs, the economy and the debt limit crisis. Investors less informed than Option Investor readers will be getting their news from the mainstream press over the weekend. Since bad news sells better than good news you know how the press will spin the story. Actually the majority of investors will be oblivious to the entire event. Only a very few actually pay attention to the economic news.

If enough investors hear the negative news then we could have a challenge on Monday that leads to investors pulling off the road to change the flat and wait for a new entry.

For the last three weeks I have been writing about the historical trend of a quarter end window dressing rally that extends through the first week of July. Historically that rally begins to fade during the second week and the July lows are later in the month. Because of the convergence of events we saw a much stronger rally than normal. We are within shouting distance of new highs but the calendar is wrong. There is no reason we can't go higher with earnings as our supporting reason but I remain skeptical.

After looking at the facts I am going to take a cautiously bullish stance for early next week. As we get some earnings behind us we should be able to make a more rational decision on the future trend. The key day will be Thursday with JPM and Google reporting. I would just like to get to Thursday without any material decline then take our cue from those reports.

S&P Chart - 20 Min

S&P Chart - Daily

The Dow punched through 12,600 to touch 12,750 on Thursday. Friday's job shock knocked it back to 12,567 at the open and a loss of -150 points. The dip was immediately bought and despite large declines in CAT, UTX and BA the Dow recovered to end down only -62 points. It may not have been a win but it was a strong effort. We could just as easily ended down triple digits instead of moving higher into the close.

The Dow's direction on Monday could be the result of Alcoa's earnings or any number of outside news events. The bloom came off the rose on Friday but the petals are still attached. We need an impulsive move higher early Monday or undecided investors could begin to reduce positions. Overhead resistance if 12,800 so plenty of room to move.

Dow Chart

The Nasdaq actually traded in new high territory on Thursday but could not close there. The sell off on Friday knocked -40 points off the index at the open but 30 of those points were recovered by the close. The rebound occurred without the help of Google (-14). All the other majors (NFLX, PCLN, AMZN, WYNN, AAPL) finished with a gain. F5 Networks was the exception to the trend. The failure of the Nasdaq to sell off significantly is bullish. Overcoming the -$14 drop in Google was bullish. The index is still over extended but the bulls are clearly in control.

Resistance remains 2873 and support is 2830.

Nasdaq Chart

The Russell 2000 spiked over 860 intraday on Thursday before closing at 858. Friday's decline was minimal and there was a little more elevation on the afternoon rebound than on the other indexes. This suggests fund managers were bargain hunting in the small caps. The prior long-term high from 2007 at 855.77 is the same resistance level that held in April and late May. If the Russell can close over 860 I think that will energize buyers and a move to a new high over 865 would be very bullish. However, this resistance is exactly where you would expect the Russell to fail. Market action on Monday is going to be very important for establishing the trend for the week.

Russell 2000 Chart

I have very mixed emotions about next week. As an option expiration week we could see some additional volatility in addition to the early earnings and the Bernanke testimony. I could also see us trading in a range as investors absorb the impact of the jobs report and the events of the week. I spent a lot of time analyzing the indexes and trying to project the impact of the coming events. I ended up with a cautiously bullish view for the week. This was based on the Russell and the Nasdaq charts rather than the S&P. Obviously there is never any guarantee and once the market opens on Monday and the news for the week begins to flow, all bets are off.

I believe the earnings guidance is going to be the key. If the guidance is weak we could see the markets move into a wait and see mode while the July economics play out. This would be the normal historical pattern. The only difference this year is the proximity to the recent highs. Those highs are a siren's call in an attempt to lure stocks higher. There is no real justification for a continued rally. With earnings outside of energy and materials running at a +4% growth pace, guidance expected to be lackluster and economics a wildcard there is no fundamental reason for a rally to new highs. I think that will eventually be our downfall.

Last week I said, "I need a dip to buy and I would be skeptical of a one-day wonder." Friday was our dip but so far it is just a one-day wonder although it did reach initial support. How the market reacts on Monday will be critical.

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Jim Brown

Send Jim an email

"A people that values its privileges above its principles soon loses both."
Dwight D. Eisenhower


Index Wrap

Potential For a Next Correction

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

The major market indexes have gotten to or near their prior highs and are overextended. I doubt that there's much more upside so those holding calls are at risk of a corrective pullback.

Those having bearish positions should sit tight as odds favor at least a modest pullback either from recent highs or after a retest of the early-May price peaks.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) chart is bullish but the rally is 'extended' on the upside as recent highs hit levels that are 3 percent above the 21-day moving average, suggesting that there is limited further upside without a corrective pullback. In some cases prices will work higher and move up along or 'hug' the upper (3%) envelope line. This could happen here but I'm first anticipating at least a modest pullback to the 21-day moving average.

Resistance is at 1356, extending to the prior high at 1370. Support is anticipated in the low-1300 area.

The 13-day RSI has nearly reached an overbought reading. The more bullish of my two key technical indicators is bullish/bearish sentiment, where bullish sentiment is only 'moderate'. This alone suggests that SPX could work still higher.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) chart is the other S&P bullish chart but as with the 500 (SPX) Index, the odds of a downside pullback outweigh the chances of a big further up leg. While the prior 611 intraday high or 608 closing high could be retested, I don't believe that there would be anything more than a nominal new high before the index is at least pulled back down toward its 21-day moving average. A recent close saw the 13-day RSI reach a fully overbought level.

Can OEX work still higher? No doubt, based on the strength seen in the past 10 days, but on a risk to reward basis, bullish strategies no longer have such a favorable risk to reward equation. If you bought calls where OEX was a screaming buy when it made a double bottom, you likely got more profit quicker than you anticipated. Old Wall Street saying: "take quick profits".

Resistance is at 603, extending to the area of prior highs in the 608-611 area. Initial support is at 590, then down in the 580-578 area.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) has held gains well since the very strong rally of the week before, but is rather 'extended' as I've been saying in regards to how far INDU is trading above its 21-day moving average. There could be a retest of the prior 12876 high with a pullback coming after that.

I rate the odds of another sizable up leg above 12800 as significantly lower than the risk of a pullback to support in the 12400 area, or to 12200.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) has held the gains of the prior week quite well. Most traders thought that the stocks in general would take more of a beating than they did, after the weak employment numbers. This suggests to me that this market still could have some upside surprises. However, on a risk to reward basis, it's prudent to take profits on call positions. If your entry was in the area where COMP made a double bottom, take the windfall.

Resistance is in the area of the prior 2887 intraday high, extending to 2900. COMP could get to 3000 but I don't see that happening in another straight up move from around current levels or after a retest of the aforementioned high. Support is at 2750, extending to 2710-2700.

The 13-day RSI hit a 'typical' overbought reading and this doesn’t bode well for hanging in longer with call positions. As I said with in regards to SPX, the more bullish of my two key technical indicators (RSI and CPRATIO) is my sentiment model; here, bullish sentiment is only moderate and traders have only been moderately bullish. Sentiment readings suggests that COMP has some room for surprises on the upside before any corrective action sets in.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) index made the same sky shoot as the Composite of course; more so, in the intraday high of this past Thursday (before employment numbers) hit the area of prior May highs. Even if NDX extends its gains, say to the 2450 area, the odds of a correction is growing. I don't say to short the trend; I don't like going against the dominant trend until there's a technical breakdown. I would take profits on call positions. Nice profit on calls or other bullish strategies, if you 'believed' the double bottom low in the 2600 area and acted accordingly.

Support is anticipated in the 2350 area, extending then to 2300.

Based on the chart, it wouldn't be surprising to see a rally to at least nominal new highs, but on a risk basis, I won't hang in longer with call positions but I don't generally hang in for what I think is the last 20% of a move. Shorting this market is risky too as the weekly long-term uptrend channel (not shown) would suggest potential yet to 2600-2650, which is how I see current major resistance.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQ) is bullish. The Q's have already hit their prior intraday high and with news that 'should' have hit this market harder than it did, I suspect higher highs are in offing. Nevertheless, I've been suggesting taking long profits. I generally look at current price levels and assess what I think is the upside 'reward' potential if I went long there, versus the downside risk in a correction. If I wouldn't take the trade on a current risk to reward basis, I won't hang in with long positions even when bought at much lower levels.

Initial resistance is at 59.3, extending to the 60 area. Support is at 57, then around 56.

Volume picked up this past week, no doubt on liquidation. On Balance Volume is still on a bullish upward track.

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT) is nearing its prior highs and I think there some chance, having come this far, that the index will retest it prior 868 high. At least I always assume that if a stock or index rallies so strongly and approaches a prior high(s), that it will be retested. It's hard to know if this will be straight away or after a correction. I don't favor hanging in with call positions to see if a last bit of gain will be achieved or not.

Friday's action would suggest that RUT is not ready to cave; when bearish news doesn't knock prices down, I give the benefit of the doubt to the dominant up trend. However, here I favor using rallies to exit bullish strategies.

Resistance is at 860, extending to 868-870 with next resistance likely to come in around 900. Support begins in the 840 area, extending to 827, then down to 810-800.



GOOD TRADING SUCCESS!


New Option Plays

Fertilizer, Food, Coffee, & Software

by James Brown

Click here to email James Brown

Editor's Note:

The stock market has been very resilient. The jobs number on Friday morning was a huge miss. Yet stocks rebounded off their morning lows. It could have been significantly worse. The lack of selling is bullish.

We are going to take a more aggressive approach to new plays and adjust some triggers on the current play list. Stocks remain overbought so readers will want to strongly consider keeping your position size small to limit risk. Earnings season is about to start and we could see a spike in volatility.

- James


NEW DIRECTIONAL CALL PLAYS

Agrium Inc. - AGU - close: 89.80 change: +1.17

Stop Loss: 85.90
Target(s): 94.00, 98.00
Current Option Gain/Loss: + 0.0%
Time Frame: 4 to 5 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
The fertilizer and agricultural chemical names have been on the rise. Analysts are expecting demand and prices for fertilizer to rise over the next several months. It looks like shares of AGU are breaking out over multiple layers of resistance. Shares have yet to break the trend of lower highs but we're suggesting an aggressive entry point now at current levels. AGU rebounded sharply off its Friday morning lows. We'll use a stop loss at $85.90. Our exit targets are $94.00 and $98.00. FYI: The Point & Figure chart for AGU is bullish with a $104 target.

- Suggested Positions -

buy the AUG $90 call (AGU1120H90) current ask $3.60

- or -

buy the AUG $95 call (AGU1120H95) current ask $1.55

Annotated Chart:

Entry on July 11 at $ xx.xx
Earnings Date 08/03/11 (unconfirmed)
Average Daily Volume = 1.7 million
Listed on July 9, 2011


Panera Bread Co. - PNRA - close: 131.94 change: -0.02

Stop Loss: 127.95
Target(s): 138.50, 144.00
Current Option Gain/Loss: + 0.0%
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
PNRA has rallied to new highs with a move past resistance at $130.00. Lately consumer-related stocks have been performing very well. Friday's jobs data failed to kill the up trend. PNRA actually has significant short interest and could see a short squeeze higher.

I am suggesting bullish call positions now. Our targets are $138.50 and $144.00 but we do not want to hold over the late July earnings report.

FYI: The most recent data listed short interest at 8.6% of the small 28.2 million-share float. Investors might also note that the Point & Figure chart for PNRA is bullish with a $166 target.

- Suggested Positions -

buy the AUG $135 call (PNRA1120H135) current ask $3.80

Annotated Chart:

Entry on July 11 at $ xx.xx
Earnings Date 07/26/11 (unconfirmed)
Average Daily Volume = 337 thousand
Listed on July 9, 2011


Starbucks Corp. - SBUX - close: 40.35 change: +0.03

Stop Loss: 39.45
Target(s): 44.00
Current Option Gain/Loss: + 0.0%
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Shares of coffee giant SBUX are holding up pretty in spite of some negative news lately. The stock and the restaurant industry were downgraded by Goldman Sachs on Thursday. The same day there was word of a strike by union SBUX employees in Chile. The stock rallied in spite of these headlines. Keep in mind that SBUX only has 31 stores in the country of Chile versus 17,000 worldwide. Only a third of their Chile employees are in a union.

Consumer-related names have been performing very, very well. SBUX has rallied past key resistance at $38.00 and $40.00 and hit new all-time highs this past week. I am somewhat concerned that SBUX is short-term overbought. Therefore readers will want to keep our position size small to limit risk. I would much prefer to open positions on a dip near support at $38.00 but that may not happen any time soon. Tonight I am suggesting bullish positions now with a stop loss at $39.45. Aggressive traders may want to put their stop loss under support at $38.00. We do not want to hold positions over the late July earnings report.

- Suggested (Small) Positions -

buy the AUG $40.00 call (SBUX1120H40) current ask $1.69

Annotated Chart:

Entry on July 11 at $ xx.xx
Earnings Date 07/28/11 (unconfirmed)
Average Daily Volume = 6.8 million
Listed on July 9, 2011


VMware, Inc. - VMW - close: 105.00 change: +2.02

Stop Loss: 99.75
Target(s): 109.75, 114.00
Current Option Gain/Loss: + 0.0%
Time Frame: seven trading days
New Positions: Yes, see below

Company Description

Why We Like It:
Technology stocks have been some of the market's best performers. VMW has managed to rally to new all-time, record highs. Traders immediately bought the dip on Friday morning and VMW actually closed up on the session. With VMW past major resistance at $100 the stock could see a strong rally into its earnings report.

We only have seven trading days. VMW is due to report earnings on July 19th and we do not want to hold over the announcement. I would keep positions small. VMW can be a little volatile. I am listing our stop at $99.75. Our targets are $109.75 and $114.00.

- Suggested Positions -

buy the AUG $110 call (VMW1120H110) current ask $3.90

Annotated Chart:

Entry on July 11 at $ xx.xx
Earnings Date 07/19/11 (confirmed)
Average Daily Volume = 1.9 million
Listed on July 9, 2011



In Play Updates and Reviews

Stocks Show Resilience

by James Brown

Click here to email James Brown

Editor's Note:

The stock market has been very resilient. The jobs number on Friday morning was a huge miss. Yet stocks rebounded off their morning lows. It could have been significantly worse. The lack of selling is bullish.

We are going to take a more aggressive approach to new plays and adjust some triggers on the current play list. Stocks remain overbought so readers will want to strongly consider keeping your position size small to limit risk. Earnings season is about to start and we could see a spike in volatility.

-James

Current Portfolio:


CALL Play Updates

Caterpillar - CAT - close: 110.41 change: -1.22

Stop Loss: 105.95
Target(s): 114.00
Current Option Gain/Loss: Unopened
Time Frame: Until the earnings report
New Positions: Yes, see trigger

Comments:
07/09 update: I would really prefer to buy CAT on a dip near support at $105 but the stock may not get that low. I am suggesting a new buy-the-dip trigger at $107.50 with a tight stop loss at $105.95. If we get stopped out we can try again on a bounce from $105.00. Keep positions small! I am concerned that the action in CAT over the last three days with the gap up and gap down on Thursday and Friday actually looks like a bearish reversal pattern. Cautious traders may want to hold off and wait for the dip to $105 instead.

Don't forget that we do not want to hold over the July 22nd earnings report.

Trigger @ 107.50

- Suggested Positions -

Buy the Aug. $110 call (CAT11H110)

07/09 adjusted trigger to $107.50, stop to $105.95, target to $114.00

chart:

Entry on July xx at $ xx.xx
Earnings Date 07/22/11 (confirmed)
Average Daily Volume = 8.4 million
Listed on July 2, 2011


Cerner Corp. - CERN - close: 64.06 change: -0.23

Stop Loss: 61.45
Target(s): 64.75
Current Option Gain/Loss: +125.0% & +78.1%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
07/09 update: Shares of CERN held up very well on Friday. If the markets are positive on Monday I would not be surprised to see CERN hit our final target at $64.75. More aggressive traders may want to aim higher. Shares remain short-term overbought here. Broken resistance in the $62.00 area should be new support. I am raising our stop loss to $61.45, keeping the stop under its 10-dma.

It was our plan to exit our July calls on Friday at the closing bell.

Earlier Comments:
We do not want to hold over the late July earnings report.

- Suggested (small) Positions -

July $60 call (CERN1116G60) Entry @ $1.60, exit $3.60 (+125.0%)

- or -

Long Aug. $62.50 call (CERN1120H62.5) Entry @ $1.60

07/09 new stop loss @ 61.45
07/08 Planned exit. July calls @ +125.0%
07/07 new stop loss @ 60.90
07/07 plan on exiting July calls on Friday at the close.
07/02 New stop loss @ 58.75
07/02 Cautious traders may want to exit the July calls now for a gain

chart:

Entry on June 29 at $60.76
Earnings Date 07/28/11 (unconfirmed)
Average Daily Volume = 624 thousand
Listed on June 28, 2011


Joy Global - JOYG - close: 97.25 change: -1.66

Stop Loss: 94.75
Target(s): 102.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see trigger

Comments:
07/09 update: We are taking a more aggressive approach to entries on JOYG. We're raising our buy-the-dip entry point to $96.00. More conservative traders could hold out for a dip closer to $95.00 instead. We will adjust our stop loss to $94.75. Our upside target is $102.00. I would keep positions small.

Trigger @ $96.00 (Small Positions)

- Suggested Positions - Buy the Aug $100 call (JOYG1120H100)

07/09 Adjusted trigger to $96.00, stop to $94.75, target to $102.00, and option strike to Aug. $100 call.

chart:

Entry on June xx at $ xx.xx
Earnings Date 08/31/11 (unconfirmed)
Average Daily Volume = 1.9 million
Listed on June 30, 2011


Norfolk Southern - NSC - close: 75.68 change: -1.31

Stop Loss: 73.40
Target(s): 79.75
Current Option Gain/Loss: Unopened
Time Frame: up until its earnings report.
New Positions: Yes, see trigger

Comments:
07/09 update: NSC is still trading near its all-time highs. Aggressive traders may want to buy calls now. I am keeping our buy-the-dip entry point at $74.50 but we're raising our stop loss to $73.40. More conservative traders could wait for a dip closer to $74.00 instead as your entry point. We do want to keep our position size small. Our target is $79.75 but we do not want to hold over the late July earnings report.

Trigger @ $74.50

- Suggested (SMALL) Positions -

Buy the Aug. $75 call (NSC11H75)

07/09 new stop loss @ 73.40. Small positions!
07/06 adjusted entry trigger to $74.50 and stop to 71.75

chart:

Entry on July xx at $ xx.xx
Earnings Date 07/27/11 (unconfirmed)
Average Daily Volume = 2.3 million
Listed on July 2, 2011


CLOSED BULLISH PLAYS

Sociedad Quimica Minera de Chile - SQM - close: 65.63 change: -0.17

Stop Loss: 59.75
Target(s): 67.25, 69.75
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see Trigger

Comments:
07/09 update: SQM saw a dip to $63.75 before paring its losses on Friday. I still believe that SQM offers opportunity on a dip in the $63-62 area but we are replacing it with a new trade in AGU tonight. See the AGU call trade in the new plays section.

Our trade in SQM was never opened.

Trade Never Opened.

chart:

Entry on July xx at $ xx.xx
Earnings Date 08/30/11 (unconfirmed)
Average Daily Volume = 558 thousand
Listed on July 6, 2011


Teradata Corp. - TDC - close: 61.17 change: -1.16

Stop Loss: 54.90
Target(s): 62.00, 64.50
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see trigger

Comments:
07/09 update: The up trend in TDC is very alluring. Shares gave back -1.8% on Friday after three weeks of gains. We seriously consider buying this dip but eventually agreed that TDC is just too overbought. The safer trade is to wait for a pull back closer to its longer-term up trend.

We are temporarily removing TDC as a candidate and will keep it on the watch list for a dip into the $57 area.

Our Trade Never Opened.

07/09 removed from the play list. Wait for a dip.
07/05 new trigger @ 58.50, new targets 62.00 and 64.50
07/02 New trigger @ 57.55, new stop @ 54.90, new targets @ 61.00 & 64.00

chart:

Entry on June xx at $ xx.xx
Earnings Date 08/04/11 (unconfirmed)
Average Daily Volume = 1.8 million
Listed on June 25, 2011


Toyota Motor Corp. - TM - close: 84.40 change: -0.24

Stop Loss: 79.40
Target(s): 85.75, 89.50
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see Trigger

Comments:
07/09 update: TM is still holding up reasonably well. I am replacing TM with new candidates this week. I still believe that Toyota offers potential. Most of the bad news is probably already priced into this stock. I'd keep it on your watch list and look for a dip or bounce in the $82 area.

Our Trade Never Opened.

chart:

Entry on July xx at $ xx.xx
Earnings Date 08/01/11 (unconfirmed)
Average Daily Volume = 539 thousand
Listed on July 05, 2011


CLOSED BEARISH PLAYS

Scotts Miracle Gro Co. - SMG - close: 51.85 change: +0.08

Stop Loss: 52.51
Target(s): 47.50, 45.50
Current Option Gain/Loss: -41.6%
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
07/09 update: I am giving up on SMG. There has been no follow through on Tuesday's failed rally at $52.00. Instead shares have been coiling for a breakout above resistance at $52 and SMG actually posted a gain on Friday. We don't need a put play with this kind of relative strength.

I am suggesting an early exit immediately. Our plan was to keep positions small to limit our risk.

- Suggested (small) Positions -

Aug. $50 PUT (SMG1120T50) Entry @ $1.80, exit $1.05 (-41.6%)

07/09 exit early. option @ $1.05 (-41.6%)

chart:

Entry on July 6 at $50.20
Earnings Date 08/02/11 (confirmed)
Average Daily Volume = 991 thousand
Listed on July 5, 2011