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Daily Newsletter, Saturday, 2/18/2012

Table of Contents

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

Market Wrap

Optimism Reigns

by Jim Brown

Click here to email Jim Brown

Hope over a possible resolution of the Greek debt crisis helped push the markets higher on Friday with shorts exiting rather than risk a monster gap higher on Tuesday.

Market Statistics

On the surface all the components required to get a positive vote on the second Greek bailout appear to be in place. The EU ministers will meet on Monday and vote to approve the process. There is liable to be some heated differences of opinion but unless they are willing to really roil the markets by restructuring the plan they will probably take the path of least resistance and approve the bailout.

Obviously the market would like to see a simple solution where the bailout was approved, Greece drops out of the headlines and everyone goes back to business as usual. Unfortunately there are other options. The EU Ministers could agree to the bailout but add additional conditions. They could refuse to fund the bailout until certain austerity goals were reached. They could delay the bailout payments until after the April elections. It has already been discussed to do a bridge loan of 15 billion euros to get them past the March 20th debt payment and prevent a default. They could agree to fund that amount and then wait until after the elections and force another Greek vote by the new leaders. Of all the options the bridge loan and delay on payment for the rest until after the elections is getting the most bets this weekend. That would also delay the PSI debt swap deal as well.

The biggest problem for us is that Greece is unlikely to go away as a headline regardless of what option the EU leaders choose. That could set up a sell the news event on Tuesday.

One event agitating EU heads on Friday was news the ECB was going to swap $66 billion in Greek bonds for an equal amount of Greek debt that cannot be subordinated. That means the ECB is exchanging debt that could be restructured for debt that has a guarantee that it won't be restructured. The new debt is exempt from "collective action clauses" (CAC) which exempts them from forced losses. This takes the ECB out of danger of a Greek default and forced write down. The private investors are about to be hit with a 70% cut in the value of their debt. If Greece continues to find itself in trouble it can always default and restructure its remaining debt the same way it is cutting balances from the private sector owners.

The ECB took itself out of that future default risk and that angered many of European leaders. They feel like that sends a bad message to future buyers of debt for any European country. If the ECB is so worried about the future that they go out of their way to exchange their debt should future debt owners worry about the possibility of new debt not being paid? This was not going over well with European officials. Deutsche Bundesbank, Germany's central bank was strongly against the move. The bank believes this will create a two tier market for European debt. Those bonds that have CACs would be worth more than those that don't. Chris Walker, an analyst with UBS London, said "The risk of a voluntary restructuring morphing into a coercive one has arguably increased significantly." Never a dull day in Europe news.

In U.S. economics the Consumer Price Index (CPI) rose by +0.2%. After averaging only 0.033% for the last three months this was a large increase but it was still lower than the +0.3% analysts expected. The bulk of the increase came from rising gasoline prices and higher prices at restaurants. The core rate also rose +0.2% because of rising rents and higher apparel prices.

Compared to the same period in 2011 the headline inflation rate is +2.9% and the core rate, minus food and energy, is +2.3%. The food at home component declined sharply but the food away from home component continued to rise. Fruit and vegetables prices have declined sharply in recent months. Restaurants have been raising prices to compensate for a drop in the number of customers.

Gasoline prices are approaching $3.50 per gallon on their way to as much as $4.50-$5.00 this summer. That is going to be our next economic challenge. Consumers should not be quite so reactive until the price moves over $4 because they have seen prices over $3 for most of the last year. As prices move higher consumption of other products including eating out at restaurants will decline.

Consumer Price Index Chart

The Risk of Recession over the next six months fell to 26% in January from 29% in December. That was the fourth consecutive monthly drop, totaling -19 points, and well below the Q4 average at 34%.

The extension of the payroll tax holiday for the rest of 2012 is a factor in the lowered risk of recession. That was assumed in prior calculations and had it not passed it would have elevated the risk slightly. A resumption of those taxes would have resulted in a -0.4% decline in 2012 GDP. Not extending the unemployment insurance would have reduced GDP by another -0.3%.

The calendar for next week is relatively light with the EU vote on Greece on Monday the biggest event. The two Fed surveys are next in importance with the Chicago Fed National Activity Index the one to watch. The Kansas Fed survey is influenced by the pace of auto manufacturing and can be slightly higher than the rest of the regional surveys.

Economic Calendar

There were a couple of important economic events last week. The weekly jobless claims fell under 350,000 for the first time since April 2008. The pace of new claims has been declining steadily and that is very positive for the labor market.

Jobless Claims

The Philly Fed Manufacturing Survey for February came in at 10.2 and the second highest reading since April 2011. October was slightly higher at 10.8. This was a very good reading compared to January at 7.3 and consensus estimates at 9.5. New orders rose from 6.9 to 11.7 and backorders rose from -4.1 to +2.2. The negative component was a drop in employment from 11.6 to 1.1. However, this was a strong report and further confirmation the economy is improving.

Philly Fed Survey

One event that did not get much press in the U.S. was the -2.3% GDP for Q4 in Japan. Analysts were expecting a -1.3% decline. They posted a trade deficit of $32 billion for the year. That is the first deficit in 31 years. Exports were crushed by the impact of the earthquake and nuclear disaster. They are expecting 2012 to be better with a +1.7% GDP thanks to the rebuilding efforts around the quake zone.

The real problem for Japan is the mountain of debt and the potential for an earthquake under that debt mountain. Greece has 350 billion euros of debt. That is huge for Greece but compared to Japan is does not even register. Japan has more than $10 trillion in debt. This is more than 200% of Japan's GDP. The government borrows annually more than it receives in taxes. Half of Japan's revenues go to pay on the debt. Each year Japan borrows more than the combined GDP of Greece and Portugal.

Fortunately for Japan about 95% of its debt is held by Japanese. They are very frugal savers and investors. If the trend of citizens and institutions buying Japan's debt ever changed the country would have a very tough time selling $500 billion a year in debt to the international markets. With a debt load that massive any minute change in trends could send interest rates rocketing higher and Japan would not be able to service the debt. Every 1% in interest adds one trillion yen to the annual debt payments, currently 22 trillion yen annually. Japan is not too big to fail it is too big to save.

The Bank of Japan established a QE program in 2010 to buy 20 trillion yen in bonds annually. With that kind of central bank buying they can keep the bond rates low and protect the mountain of debt. The government is planning on raising sales taxes from 5% to 10% and that is expected to create significant hostility from citizens. That plan is due to be debated in March. Analysts estimate the tax would have to go to 25% to close the financing gap built up over the last 20 years.

Whenever the European debt crisis is discussed the Japanese debt crisis is the elephant in the room. Analysts claim Japan only has a couple years before the mountain of debt will begin to dissuade even the Japanese from investing. The European crisis has made the world more aware of debt levels and the impact of that debt. It is only a matter of time before Japan becomes the focus and the bond vigilantes take aim at that debt pile. Negative GDP and negative trade deficits as a result of the quake can be explained away but the long term effect of that rising debt will eventually be a crash. You can't add $500 billion in new debt every year to the $10 trillion in existing debt forever. There will come a point where that mountain will erupt and the Greek crisis will be a firefly by comparison.

James was proofing my commentary this weekend and after reading that last paragraph he asked, "If Japan's debt is the elephant in the room then what would the roughly $80 trillion in U.S. debt be?" Good point!

One last piece of depressing news. Art Cashin pointed out this week by way of a JP Morgan report that as unemployment goes down disability goes up. The reported unemployment at 8.3% is only the tip of the iceberg. When a person's unemployment benefits expire they fall off the unemployment rolls and are considered "discouraged" workers. The total unemployment including these discouraged workers and those working part time because they can't find a full time job is closer to 16.5%.

However, the point of the JP Morgan article was the rise in people on disability. Apparently the JP Morgan report estimated that nearly 25% of those whose unemployment benefits had expired had applied for and been accepted for disability payments. According to JPM as of January 8.5 million individuals were receiving federal disability payments along with another two million spouses and children of disabled workers. Since the recession and spike in unemployment the pace of filings for disability has grown faster than the overall size of the labor force. Currently 5.3% of the population aged 25-64 is on federal disability, up from 4.5% when the recession began.

Half of the recipients suffer from mental disorders, mood disorders or musculoskeletal disorders such as back pain. Those three reasons accounted for 54% of all claims in 2009. That is nearly double the rate of 1981 at 28%. Mood disorders alone accounts for 10% of the group. Once on disability it is almost impossible to be taken off. Only 1% lost their benefits in 2011 because they were no longer disabled. The report suggested 25% of the people whose unemployment insurance expired simply filed for disability insurance instead. Annual applications over the last ten years have increased by more than 123% to 2.9 million. More than 50% are declined but as many as 75% are approved on appeal with the lawyers receiving up to $6,000 (25% of back benefits) for taking the case. An entirely new breed of ambulance chasing lawyer has evolved. This is costing the government (you and I as taxpayers) more than $200 billion a year. That is more than the budgets of the Commerce Dept., Energy Dept., Homeland Security, Interior Dept., Justice Dept. and State Dept. combined.

There is a paradox here. Hard labor jobs like manufacturing and construction declined sharply over the last three years. You would have expected disability from those jobs to decline since the jobs no longer existed. Instead disability claims skyrocketed higher. More people were becoming disabled from the arduous task of cashing their unemployment checks and supposedly looking for work. Who knew filling out job applications could be so physically demanding?

In stock news it was a rather dull Friday ahead of a three-day weekend. Shares of Gilead Sciences (GILD) lost -14% after the company said many patients relapsed after receiving a combination of its experimental hepatitis C drug and the antiviral ribavirin. Six of eight patients receiving ribavirin relapsed after 12 weeks of treatment. However, patients in that group were those who had no prior responses to other regimens. That means they were drug resistance. Ordinarily this small a trial would not be big news but Gilead had said earlier this month that another group of the same type of patients were cured after just four weeks of treatment. Oops! The $7 spike in GILD shares from the earlier announcement was subtracted on Friday.

GILD Chart

Baidu (BIDU) was the unwelcome recipient of a short call by Morgan Stanley. The company posted earnings that rose +77% on revenue that rose +82.5%. Baidu said there were more than 513 million people online in China at year end. Morgan Stanley said Baidu's growth was slowing and suggested this was a shorting opportunity. BIDU guidance was seen as lackluster although it was in line with analyst estimates. Chinese portal Sohu.com gave guidance for Q1 that was only about half of what analysts expected. Ads are apparently slowing for everyone in China except BIDU at least on published guidance. This is why Morgan Stanley thinks there is a shorting opportunity as guidance catches up at BIDU. Baidu only posted a +7% rise in ad revenue quarter over quarter. Shares declined -$5 on the downgrade.

BIDU Chart

First Solar (FSLR) rallied after the Antelope Valley Solar Ranch One plant in Los Angeles County received permit approval. This $1.36 billion power project had been on hold after regulators froze its permits. The solar plant will receive $646 million in loan guarantees from the Energy Dept. First Solar sold the project to Exelon Corp (EXC) for $75 million in September. Exelon is going to invest $713 million in the project. First Solar shares have been on the skids all last year with a decline from $170 to $38. The permit news gave shares a +7% lift on Friday.

However, there may be more trouble brewing overseas. Deutsche Bank (DB) said Germany's next cut on solar subsidies could be worse than previously expected. The bank said a cabinet meeting had been called to discuss major cuts to the subsidy policy. Sources now expect a 15% cut in April followed by a monthly 2% cut. They are also considering a 900 KWh subsidy cap on new installations. That would mean that large installations would have to foot the entire bill over 900 KWh and that would reduce the size of future installations. Most solar projects around the world would not be built without significant government subsidies. Germany is the largest consumer of solar products with 7 gigawatts (GW) of installed capacity. In December alone nearly 4 GW of capacity came online.

First Solar Chart

The DNA mapping world just got a lot faster. Oxford Nanopore just announced two products that could dramatically change the field of DNA mapping. They announced a new DNA sequencer that may be able to handle a human genome in 15 minutes and a USB thumb drive DNA sequencer that can read DNA directly from blood without any preparation work. The device will cost $900 and be able to read DNA in 10,000 letter stretches compared to only a couple hundred in current technologies. This was the equivalent of a nuclear bomb in the DNA mapping sector. Life Technologies (LIFE) fell -8%, Illumina (ILMN) fell -4%, Pacific Biosciences (PACB) lost 8%.

LIFE Chart

FreightCar America (RAIL) blew away estimates with earnings of 71-cents compared to estimates of 13-cents. Revenue of $187.1 million was well above estimates of $126.8 million. Revenue rose +250%. New builds, sales and leasing revenue almost tripled. Full year revenue more than tripled to $487 million from $142 million. The company has large order backlogs for cars to transport coal, ore and other bulk commodities. The company delivered 2,489 railcars in Q4 compared to only 694 in Q4-2010. More than 4,481 units were ordered in Q4, up from 331 in the prior quarter.

RAIL Chart

Rackspace (RAX) was hit by a Merrill Lynch downgrade at the open from buy to neutral. The cut was based on valuation and the +27% year to date gains. The analyst said the market opportunity was becoming fully valued and in line with consensus estimates. Analysts are expecting +28% revenue growth. The outlook remains solid but the upside was limited with risk and reward evenly balanced. He raised his target price to $58 from $56 with the stock at $54. Shares spiked on earnings earlier in the week. The chart does look a little optimistic.

Rackspace Chart

Apple (AAPL) shares took a breather this week after hitting a new high at $526. Of the 57 analysts that cover Apple 26 of them have a strong buy and 26 have a buy. That means 91% of the analysts covering the stock still think it is going higher. The median price target is $600. Oppenheimer raised their target from $510 to $570 on Friday. Channel checks suggest the iPhone sales in January were strong but iPad sales slowed in advance of an expected iPad 3 announcement in early March.

Apple now has more than $100 billion in cash if the $3 billion a month in free cash flow continued through Jan and Feb. The company shareholder meeting is next Thursday and there are rumors Apple could announce a dividend. I would not hold my breath but Tim Cook did say he had no specific reason for holding on to the cash and the board was researching ways to use it. They could also do a stock buyback. Shareholders cannot force Apple to issue a dividend. That is up to the board and shareholders would have to replace the board with people favorable to a dividend. Without a concentrated effort by a large number of shareholders that is not going to happen.

Apple is facing a challenge in China where Shenzhen Proview Technology has asked regulators to seize iPads in China because Apple does not own the iPad trademark. Apple claims it bought the name from a Proview affiliate in Taiwan in 2009 for $55,000. Proview registered the name in China in 2001. Proview went to court to have the sale voided and a mainland court ruled in December it was not bound by that sale agreement. Proview is broke. It has been suspended for trading on the Hong Kong market since August 2010 and will be delisted in June if it can't show it has sufficient assets, business operations and working capital. Proview has filed a trademark violation suit that goes to court next Wednesday. Clearly they are looking for a big payment from Apple to revitalize the company. Apple is likely to settle rather than risk the unknowns of a Chinese court. Would the court side with the nearly bankrupt Proview or with Apple, which employs hundreds of thousands in China? In communist China where there is no real rule of law you never know.

Apple Chart

BP shares rose after their minority partner in the Macondo well disaster agreed to settle with the U.S. for $90 million. Mitsui through its MOEX Offshore 2007 LLC partnership owned 10% of the Macondo well. The company agreed to pay $45 million in civil penalties under the Clean Water Act and $25 million to the Gulf States affected by the spill. They will also pay $20 million for coastal protection projects. The judge said this was the largest civil penalty ever recovered by the Clean Water law enacted in 1972. That record will only be on the books for a matter of days before BP and others settle as well. MOEX already agreed to pay BP $1 billion to settle all claims between the companies.

The trial to asses liability for the disaster will begin on Feb 27th and there is a very good chance that BP and others will settle with the government before that trial. They would rather know in advance what the price will be rather than wait for a court to assign blame and possible prove gross negligence, which quadruples the damages.

Also on Friday BP and M-I LLC, a Houston based drilling mud company used at the well, dropped claims against each other in federal court. BP had accused M-I of several missteps in removing the mud that accelerated the blowout. M-I said it was shielded from responsibility because of the indemnification clause in the BP contract and accused BP of causing the blowout. Both companies said the terms of the settlement were confidential.

Companies still in the hunt for a settlement before the court trial begins on the 27th are BP, Transocean Offshore (RIG) and Halliburton (HAL). Any settlement between these firms removes a cloud that has been weighing on their stock prices over the last year. Transocean shares have already rallied after the court ruled BP must indemnify RIG as specified in the contract.

BP Chart

Transocean Chart - Weekly

Transocean Chart - Daily

While on the topic of oil the U.S. WTI crude contract is breaking out over eight months of resistance at $103. The +1.75 gain came as a result of the improving economics and the challenges in the Middle East. Syria, Egypt and Nigeria are seeing lower production because of internal strife. Iran is actively talking up prices and warning daily about the risk of following through on the various sanctions and embargos. It is in Iran's best interest to talk up the price of oil so they can raise more money before their oil exports are cut in half.

The former president of Shell Oil was making the rounds on the speaking circuit last week and warning about the possibility of $5 gasoline this summer. When the president of a top five oil company is warning about higher prices people tend to listen. He said $4 gasoline is a given and there is a 50% chance we will see $5 along with the sharp drop in economic activity that will bring.

Several analysts in recent months have predicted a return to $60 oil prices. I have never wavered on my projections of much higher oil prices not only this year but in the near future. Unless we have another recession I think WTI will be $150 by 2015 if not higher. Much of the quoted production numbers for shale liquids in the U.S. is not oil. It is natural gas liquids and that does not translate into gasoline or diesel. We hear constantly about the increase in production from the Bakken and the other shale oil fields but the increase is only about 100,000 bpd per year. We lost more production than that from the Gulf drilling moratorium and it will take us several years to regain that lost momentum.

Last week the U.S. produced 5.819 million barrels per day. In that same week a year ago we produced 5.610 mbpd. Despite all the hoopla about shale drilling, liquids production, etc and drilling of thousands of new wells our production increased only 200,000 bpd. We consume about 21.0 mbpd. That +200,000 bpd is less than 1% of our consumption. Everything is relative. When people tell you there is plenty of oil ask them where it is. If we had plenty of oil the price of gasoline would not be approaching $4 a gallon.

WTI Crude Chart

Brent Crude Chart

The S&P has started off 2012 with the best YTD performance since 1987. In that year through Feb-17th the S&P had rallied +17.9%. This year the S&P is up +8.2%. It seems like more because the lows were set in October at 1075. If you count from that low the S&P is up +26.6%. If you skip the November dip and start from the December dip at 1202 the gain to date is +12.2%.

Many investors are looking at those various statistics and at the strong resistance and calculating a pending decline. I have been in that category several times in the last two weeks. On the two days the market tested support I was pretty convinced we could trade lower. Much of that was probably due to wishful thinking in hopes of a decent dip to buy. So far no dip.

A one-day wonder of -10 points does not qualify given the magnitude of the gains and the severity of resistance. I am beginning to wonder if there is no dip in our future. I know as soon as I start believing that the bottom will fall out.

The resistance at 1350 finally broke and the next target is the April closing high at 1363.61. A breakout there puts the S&P at a three year high. New support has formed at 1340 so now a dip could cover -20 points and still not be a danger to the rally. I would really like to see a return to that level.

I said on Tuesday night I would be cautious about committing new money to longs without a decent dip or a break over 1350 on strong volume. It took two days for the market to move over 1350 and the gain was only +6 points. That is a definite lack of conviction and consolidated volume was only 6.5 billion shares. Hardly strong volume and hardly a real breakout. This inch by inch creep higher is frustrating for market technicians especially given the weak earnings with 64% of companies lowering guidance. If we do close over 1363 we have to hold our noses and remain long.

S&P Chart

The S&P 100, the largest 100 stocks in the S&P, have already broken out to a three year high. Like the Nasdaq 100 the primary reason for this gain has been Apple with help by IBM, PCLN, etc. Apple is 12% of the index and tech stocks in general are 20% of the S&P. The top five constituents in order are Apple, Exxon, Microsoft, IBM and Chevron. The S&P 100 is the largest market cap and highest liquidity stocks. It makes a perfect hiding place for fund managers who want to benefit from any future gains but want the capability of an instant exit if disaster strikes.

S&P 100 Chart

The Dow is an even smaller subset of the highly liquid blue chips and that is why it is also moving higher. Liquidity is a major factor because of the low volume, lack of conviction rally. The Dow is only 51 points away from Doe 13,000 and the media is making a big deal of the large even number. It is only a big deal in their eyes. It is just another number on the way to the next resistance level of 13,100. The number I would really worry about is 14,000-14,100. That is the 2007 highs and a lot of traders are going to want to escape with their principal intact after being relegated to the status of "accidental investor" when the Oct-2007 crash began. They lived through the recession and the flash crash and once stocks return to that level they will take the money and run.

The Dow has now established strong support at prior resistance of 12,750. That should protect the bulls from anything but a concerted onslaught of selling. It is 200 points away and we have yet to have a triple digit loss day in 2012. If we did break that support level I think it would cause a system reset on investor sentiment. Investors have become so accustomed to buying every dip a break of major support could be traumatic.

Dow Chart

The Nasdaq lost ground on Friday thanks to a minor decline in Apple and large declines in GILD, BIDU, LIFE, JAZZ, MSTR, etc. The entire biotech sector was down and that weighed heavily on the index without Apple tacking on any gains. The Nasdaq is over extended and it really needs to rest. The aftermath of the Apple shareholder meeting on Thursday could be the trigger for some profit taking.

Nasdaq Composite Chart

The Russell has moved sideways for the last ten days. It topped out at 833 on Jan 27th and has failed to reach that level again over the last two weeks. Support formed at 813 and it was tested twice. That gives us the range to watch and at 20 points there is plenty of room to run. A break below 813 should test 790.

A break over 833 still has a long way to go before strong resistance at 860 and the potential for a new high. Fund managers appear to have cooled on the small caps and the higher the blue chip market goes without a decent bout of profit taking the less likely they will shift their bets to small caps.

Russell 2000 Chart

Trouble on the tracks with the Dow Transports. They began topping out on Jan 26th and rolled over on Feb 6th. Dow Theory needs the transports to be making new highs at the same time as the Dow to confirm the rally and the transports are weakening. It may be simply a case of high oil prices and the anticipation of losses in the airline community.

However, if you go back and look at the charts late February is normally a particularly rough time for the transport sector. There have been some major February declines in past years so it could be a seasonal factor such as post holiday slowdown syndrome. After shipping tens of millions of packages a day in Q4 the decline to low single digit millions in Q1 could have institutional investors cycling out of the sector and into tech stocks or energy stocks. With February normally the seasonal lows for oil prices it would make perfect sense to exit transports and move into oil stocks. When oil begins to decline in August that would be the key to switch back into the transports to catch the holiday shipping season.

Whatever the reason the transports are no longer confirming the Dow rally and that should have institutional traders worried.

Dow Transport Chart

S&P Capital IQ warned on Friday that bullish sentiment was getting worrisome. While bullish sentiment hit 51.6% in the prior week on the AAII survey the number of traders betting against the market declined sharply. TrimTabs said NYSE short interest decreased -6.7% to 12.5 billion shares in early February. That is the lowest level on record and down from the record high of 16.1 billion shares on Sept 30th.

The Investment Company Institute (ICI) said retail mutual funds saw inflows of $1.9 billion for the week ended Feb 8th. That was the largest inflows since April 20th 2011, which was the week the market topped in 2011. This is even more unusual because funds have only had positive inflows for three weeks of 2012. Bond funds and fixed income funds have been receiving all the new money. Here we are at new market highs and retail investors are suddenly flocking back into the market. If you are a contrarian investor this has got to be a warning sign.

Need another reason to vote contrarian? The Barron's cover last week headlined Dow 15,000. That type of headline bullishness typically signals trouble ahead.

Barron's Cover

I have run a lot longer than usual this week. I hope I did not bore you. I can't emphasize enough the pivotal nature of the Greek vote by the EU on Monday. There are many ways it can go and all will impact our market in some form. The U.S. markets are not running on fundamentals so headline risk is the primary market mover. We have been waiting for a resolution on Greece for so long that a sell the news event is possible regardless of the outcome. However, with our positive economics and zero interest rates the path ahead is still promising for equities. That means we need to continue to buy the dip until proven wrong.

Jim Brown

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"I never knew what happiness was until I got married... and by then it was too late!"
Anonymous


Index Wrap

UP and UP MORE market

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

This Market hasn't been subject to 'normal' pullbacks as P/E ratios steadily expand (from historically below-average ratios) to reflect increasing economic growth/growth potential. This reality technically, especially with the big cap S&P and Nasdaq indexes, is evident by their steep up trendlines.

For the times that it seemed the major indexes were stalled and were 'too' overbought intermediate-term to continue much higher, key stocks have played 'gotcha' and pushed still higher. I am struck by how for example the highflying Nasdaq 100 (NDX) has held a very steephourly uptrend channel since mid-December as highlighted in my first chart. It seems that it would be 'simple' to buy calls and hold on to them, and resist the 'trader' impulse. You know, to trade in and out a bit or a lot. This could be a costly habit in this current trend!

Since the mid-December lows NDX is up approximately 17%! Hey, keep buying those iPhones, iPads, Macs, etc. Semiconductors, as reflected in the SOX index have had a good run also since its late-December low, which (along with tech bellwether, Apple (AAPL), has been a major propellant for NDX.

No doubt the market will have a deeper correction/pullback at some point but so far some pauses and sideways moves along the way have generally kept the indexes from reaching prolonged overbought extremes on a shorter-term basis. Occasional weeks where gains were moderate has also kept the longer-term weekly overbought indicators (e.g., the 8-week RSI) from reaching the extremes seen in the past when the market has been on one of these kind of super strong bull moves; e.g., the steep advance from September 2010 to May 2011.

The only fly in the ointment in terms of very long-term market models such as reflected by Dow Theory is the lagging transportation stocks. The Dow Industrial Average (INDU) has achieved a fairly decisive upside penetration of its weekly Closing high of 4/29/11 at 12810; its Friday close was 12950.

If the Dow Transportation Average (TRAN) also went to new high, it would 'confirm' the new highs in INDU. Instead, TRAN has slipped the past couple of weeks. Versus its Friday close at 5239, TRAN would need to close above 5548 to mirror the same move (to new closing highs) in the 30 Industrials. Such a move would be a gain of +6% in TRAN from its most recent close. This isn't an insurmountable challenge of course and Dow Theory reflects a market view that is very long-term 'investment' oriented. If there was less danger of an Iran conflict and a huge oil price spike, TRAN might match gains in INDU. Stay tuned.

I lived in Iran for 3 years back before the mullahs had the country in a strangle hold and don't have a lot of confidence in their rationality. We'll see. However, I know they're not suicidal!

A final note is that the Russell 2000 (RUT) has been lagging the other major indexes. Normally, RUT tracks the Nasdaq higher or lower. Once in a while the index is a 'bellwether' and achieves a breakout move first or reverses early. At other times this kind of disconnect simply reflects that the action is the big cap stocks. Besides Nasdaq, we also see this in that the S&P 100 has been tending to lead the broader-based S&P 500 higher. Still, I'm keeping an eye out for any downside reversal action in RUT.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

As discussed in my initial 'bottom line' commentary, the S&P 500 (SPX) went broke out again to the upside in yet another fake out to those expecting a correction and even minor pullback. I was thinking minor pullback last week and SPX did dip to near its rising 21-day average but then broke out above 1350 resistance and now looks quite capable of testing the 1370 high of 2011. S&P bellwether GE had been stalled and trading sideways over the past month but went to a new 5-week closing high.

I've noted resistance at 1370, then at 1390-1400, at the top end of SPX's uptrend channel. Support is highlighted at 1337, at the intersection of the up trendline; next support is in the low-1300 area.

The 13-day RSI continues to register at or above the level normally seen as 'overbought' and the RSI isn't 'confirming' the move to a new high. This bears watching but a top in a particular time frame can't be predicted from this divergence. The weekly chart RSI isn't yet registering the kind of overbought extremes seen on the run up to the 2011 May peak at 1370. On a weekly chart (not shown) basis resistance is suggested at 1430 currently. Bullish sentiment has risen along with prices but can go higher for a longer period before warning of a reversal.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) chart continues to maintain technical strength as seen in its bounce this past week from support implied by its up trendline. Friday's strong move with little retracement toward Thursday's lows, broke out above prior recent highs at 612. 611 was a 3+ year high made last May.

I continue to highlight potential next resistance at 620, with stronger technical resistance suggested at the top end of OEX's uptrend price channel currently intersecting at 632.

Implied support continues to be the 21-moving average, suggesting near support at 603 and then around 588-590.

I look for higher levels ahead. If the up trendline is pierced, corrections could fall back to the first or second level of anticipated support. A close below 590 isn't expected here but if it happened, there's potential for a dip back to 580. That's the worst case I see absent an unexpected major crisis especially if it involved a big spike in oil.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) continues bullish in its pattern, especially here confirmed by its move above a line of prior highs around 12900. There wasn't a further huge move of course, but the bullish chart isn't just about how far above prior highs but the fact that the daily range was also well above the prior day's low.

The week ending bullish breakout now suggests very near support at what had been strong resistance at 12900. Next support is 12800, then well under this level in my estimation, at 12500.

Predicting 'resistance' isn't easy or obvious but I've pegged it for the 13100 area, then 13265, at the top end of INDU's broad uptrend channel. I've overlooked so to speak the obvious fact that a big deal will be made for a close above 13000. I just don't see it as a big deal level in terms of potential resistance/selling pressure coming in there, but it should be watched as it has importance as our next big round Dow number.

Dow stocks that looked 'toppy' to me last week that saw more bullish price action this week includes CVX, GE, INTC, JNJ, MCD, MRK, VZ and XOM. These 8 added to the ones still in moderate to strong up trends, especially AXP, BAC, CAT, CSCO, DD, DIS, HD, HPQ, JPM, MSFT, UTX, and WMT. The aforementioned improved 8 and the 12 in strong uptrends are 2/3rds of the Dow. My expectations on a 'bottoms up' approach to the 30 stock charts is higher.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite (COMP) chart remains bullish in its pattern, with that latest that the Thursday-Friday advance pushed well above a prior line of resistance at 2932. COMP is now above the midpoint of its broad uptrend channel, which is characteristic of strong moves; more so when the stock or index gets to the top end of a channel like this.

I've written for awhile now on a projected or 'measured' move to the 3000 area for the Composite. Resistance is suggested just over this major milestone level. I anticipate COMP will get there. HOW is another question for COMP as to whether there's a correction coming here between now and a target of 3000. I've highlighted an expected first support at 2900, then at 2840, at the current intersection of COMP's uptrend channel.

I've highlighted an expected first support at 2900, then at 2840, at the current intersection of COMP's uptrend channel.

As noted last week, it was as almost as important to watch how Apple (AAPL) performed around $500 as to watch COMP directly. That continues to be true. It's become a strong bellwether. The stock is looking a little frothy above 500.

The index got quite overbought by daily chart standards judging by the 13-day RSI; it peaked recently at 82. When the 13-day RSI gets into the 80's chances are good that prices will pause enough (sideways moves) or pull back enough to 'throw off' those kinds of overbought extremes.

NASDAQ 100 (NDX); DAILY CHART:

The Nasdaq 100 (NDX) continues in its very strong move. NDX did appear to have strong resistance last week when it shot up to the top end of its narrow (and STEEP) uptrend channel. Next anticipated resistance at 2625 is suggested by the upper channel line highlighted on my daily NDX chart.

At 5 percent above the 21-day average, my upper envelope line currently intersects at 2645. This is not 'resistance' in the usual sense of a prior high, a trendline intersection, etc. but moves to this upper trading band in OEX has previously reflected an advance that was unlikely to be sustained much longer, at least without a nominal pullback.

On the subject of potential upside targets, the only longer-term technical 'resistance' I can project currently on the weekly chart (not shown here) comes in starting around 2900. This is a powerful move so I'm thinking 3000 even in terms of upside possibilities.

A key technical support is suggested by the current intersection of NDX's well-defined up trendline, highlighted at 2535 with further support at 2500. If 2500 gave way, next support is another 50 pts down, to the 2450 area.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nasdaq 100 tracking stock of course mirrors the strength of the underlying index. I was most struck with how the VOLUME pattern of QQQ shifted this past week. There was the predictable sharp jump in daily trading volume at midweek when the Q's fell sharply intraday after making a strong new high. This is the pattern we've seen with the stock in this market cycle. UNLIKE a 'regular' (i.e., company) stock, QQQ volume rarely expands on a rally.

So, the jump in trading volume on Thursday and Friday's rebound was striking to me. Weak hands sold Wednesday and then came back in the next day(s) to join the other buyers. I take jumps to well above average trading volume on strong up days in QQQ to suggest that bullish 'sentiment', at least on tech, is broadening out.

Support is suggested at 62.4, at the intersection of QQQ's up trendline; and just a hair's breath off from my chart construction seen below which didn't account for the President's Day Exchange holiday when I calculated a trendline intersection on the normal first day of the trading week. Support in the 62.4 area extends to 62 even; next key support is 61.0

RUSSELL 2000 (RUT); DAILY CHART:

The Russell 2000 (RUT) is bullish in its pattern but is lagging the other major indexes in the sense that it has failed to extend its gains after a belated rebound from its up trendline.

I didn't highlight near resistance on the chart, at 832. I have noted the fairly major resistance expected around 860, at the top end of the current uptrend price channel.

I don't have a strong opinion about RUT climbing again toward the upper end of the highlighted channel. If the index breaks 823-820 and especially if it falls toward 800, there's potential for more of a retracement of the last rally, such as back to 770, possible to 750.



GOOD TRADING SUCCESS!


New Option Plays

Chemicals & Industrial Goods

by James Brown

Click here to email James Brown

Editor's Note:

In addition to tonight's new candidates, consider these stocks as possible trading ideas and watch list ideas:

(bullish candidates) ORLY, AVB, GS, APA, NBL, GGG


NEW DIRECTIONAL CALL PLAYS

Eastman Chemical Co. - EMN - close: 54.61 change: +0.12

Stop Loss: 53.25
Target(s): 59.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Shares of EMN, a chemical company, are on the verge of a bullish breakout from its two-week trading range. The stock has resistance near $55.00. I am suggesting a trigger to open small bullish positions at $55.05 with a stop loss at $53.25. Our target is $59.00. More conservative traders may want to wait for EMN to trade past its all-time high of $55.36 (set in 2011) before initiating positions. FYI: The Point & Figure chart for EMN is bullish with a long-term $91 target.

Trigger @ $55.05

- Suggested Positions -

buy the Mar $55 call (EMN1217C55) current ask $1.45

Annotated Chart:

Entry on February xx at $ xx.xx
Earnings Date 04/30/12 (unconfirmed)
Average Daily Volume = 2.6 million
Listed on February 18, 2012


Rockwell Automation - ROK - close: 82.30 change: +1.05

Stop Loss: 79.90
Target(s): 89.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
ROK is an industrial goods company with a stock that continues to build on a bullish trend of higher lows. ROK is now testing resistance near the $82.00-82.50 zone. A breakout here could send the stock toward $90.00.

I am suggesting a trigger to buy calls at $82.75 with a stop loss at $79.90. Our exit target is $89.50. FYI: The Point & Figure chart for ROK is bullish with a $95 target.

Trigger @ 82.75

- Suggested Positions -

buy the Mar $85 call (ROK1217C85) current ask $1.30

Annotated Chart:

Entry on February xx at $ xx.xx
Earnings Date 04/26/12 (unconfirmed)
Average Daily Volume = 1.2 million
Listed on February 18, 2012



In Play Updates and Reviews

Stocks Post Another Weekly Gain

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. markets manage another weekly gain. We saw three candidates hit our triggers on Friday. BWA, JLL and SHW are now open trades. I've removed CVLT from the newsletter, which did not open.

Current Portfolio:


CALL Play Updates

BorgWarner Inc. - BWA - close: 81.21 change: -0.70

Stop Loss: 78.75
Target(s): 89.00
Current Option Gain/Loss: -38.7%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
02/18 update: BWA's performance on Friday was a bit disappointing. Shares gapped open higher at $82.49 and rose to $82.84 before reversing lower. The stock underperformed the major indices with a -0.8% decline. At the moment this looks like a potential failed rally at resistance. I would suggest waiting for a new bounce off the $80.00 level or a new rise past $82.85 before initiating new positions.

We had a trigger to buy calls at $82.35 and Friday's gap higher triggered our play.

Earlier Comments:
A breakout would mean new record highs and could produce a some short covering in BWA. The most recent data listed short interest at 14% of the 108 million share float. FYI: The Point & Figure chart for BWA is bullish with a $108 target.

- Suggested Positions -

Long Mar $85 call (BWA1217C85) Entry $1.55

02/17/12 trade opened on BWA's gap open higher at $82.49

chart:

Entry on February 17 at $82.49
Earnings Date 04/30/12 (unconfirmed)
Average Daily Volume = 1.3 million
Listed on February 16, 2012


Caterpillar, Inc. - CAT - close: 113.95 change: -0.01

Stop Loss: 111.95
Target(s): 119.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
02/18 update: CAT continues to drift sideways. The stock was showing relative weakness on Friday morning but recovered to close virtually unchanged for the session. CAT remains under resistance at the $115.00 level.

I am suggesting a trigger to open bullish positions in CAT at $115.25. If triggered we'll use a stop loss at $111.95. Our initial target is $119.75. It's possible that the 2011 high near $116.50 could be resistance but I doubt it, not after CAT spent the last two weeks building up steam for a new leg higher.

FYI: The Point & Figure chart for CAT is bullish with a $165 target.

Trigger @ 115.25

- Suggested Positions -

buy the Mar $120 call (CAT1217C120)

chart:

Entry on February xx at $ xx.xx
Earnings Date 04/26/12 (unconfirmed)
Average Daily Volume = 7.5 million
Listed on February 14, 2012


Capital One Financial - COF - close: 48.83 change: -0.46

Stop Loss: 47.75
Target(s): 54.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
02/18 update: COF underperformed the market on Friday. Shares spent most of the day drifting sideways in the $48.80-49.00 zone. Currently we're waiting for shares to breakout past resistance near $50.00. I am suggesting a trigger to buy calls at $50.25. I am suggesting we keep our position size small to limit our risk. Our multi-week exit target is $54.75.

Trigger @ $50.25 (small positions)

- Suggested Positions -

buy the Mar $50 call (COF1217C50)

chart:

Entry on February xx at $ xx.xx
Earnings Date 04/23/12 (unconfirmed)
Average Daily Volume = 6.4 million
Listed on February 15, 2012


Dollar Tree - DLTR - close: 89.35 change: +1.59

Stop Loss: 86.95
Target(s): 90.00
Current Option Gain/Loss:(Feb$87.5c:+130.0%) & Mar$87.5c: +47.8%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
02/18 update: DLTR displayed relative strength on Friday with a +1.8% gain. Shares are nearing what could be round-number resistance at the $90.00 level. Plus, we're almost out of time with only one day left prior to DLTR's earnings (since Monday is a market holiday).

I am suggesting we exit positions on Tuesday at the closing bell. However, just in case we will raise our stop loss to $86.95. I'll also adjust our exit target to $90.00.

(small positions) - Suggested Positions -

Long Mar $87.50 call (DLTR1217C87.5) entry $2.30

02/18/12 prepare to exit on Tuesday. new stop loss @ 86.95. New exit target at $90.00, or exit at the closing bell
02/14/12 scheduled close for the Feb. $87.50 calls at the closing bell tonight. bid on the call option was $1.15 (+130%).
02/13/12 prepare to exit our Feb. calls at the close tomorrow
02/09/12 trade opened
02/04/12 Only open small (half-sized) positions if DLTR hits our entry point at $86.75

chart:

Entry on February 09 at $86.75
Earnings Date 02/22/12 (unconfirmed)
Average Daily Volume = 1.1 million
Listed on February 02, 2012


Jones Lang LaSalle - JLL - close: 83.04 change: -0.37

Stop Loss: 79.95
Target(s): 89.50
Current Option Gain/Loss: -16.6%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
02/18 update: We need to be careful here. JLL displayed some follow through on Friday morning with a rise to $84.09 but the gains didn't last and shares closed in negative territory. Suddenly we are facing what might be a bull-trap pattern with a head fake above resistance at the top of its trading range.

Our trade was opened at $83.75 but I am not suggesting new positions at this time. Wait for a new rally past $84.00 before considering new positions. FYI: The Point & Figure chart for JLL is bullish with a $105 target.

- Suggested Positions -

Long Mar $85 call (JLL1217C85) Entry $2.40

chart:

Entry on February 17 at $83.75
Earnings Date 04/26/12 (unconfirmed)
Average Daily Volume = 518 thousand
Listed on February 16, 2012


3M Co. - MMM - close: 87.56 change: -0.09

Stop Loss: 86.45
Target(s): 94.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
02/18 update: MMM saw a brief rally past $88.00 but gains faded. Shares remain inside the $86.70-88.25 trading range. We are waiting on a breakout higher. Currently I am suggesting a trigger to buy calls when MMM trades at $88.50 or higher. More conservative traders may want to wait for MMM to actually close over $88.50 before considering bullish positions.

Earlier Comments:
The $90 level could be round-number resistance but we're setting our exit target at $94.00. FYI: The Point & Figure chart for MMM is bullish with a $109 target.

Breakout Trigger (buy calls) @ $88.50

- Suggested Positions -

buy the MAR $90 call (MMM1217C90)

02/09/12 removed the February call.

chart:

Entry on February xx at $ xx.xx
Earnings Date 04/26/12 (unconfirmed)
Average Daily Volume = 3.4 million
Listed on February 07, 2012


Sherwin-Williams - SHW - close: 100.32 change: +0.58

Stop Loss: 97.45
Target(s): 104.75
Current Option Gain/Loss: - 2.3%
Time Frame: 3 to 5 weeks
New Positions: see below

Comments:
02/18 update: SHW displayed some relative strength on Friday with a +0.5% gain. The stock was trading under resistance near $100 all day long until a late afternoon surge pushed it higher. Our trigger to buy calls was hit at $100.25.

- Suggested Positions -

Long Mar $100 call (SHW1217C100) Entry $2.10

chart:

Entry on February xx at $ xx.xx
Earnings Date 04/23/12 (unconfirmed)
Average Daily Volume = 1.0 million
Listed on February 14, 2012


S&P Oil ETF - XES - close: 38.67 change: +0.43

Stop Loss: 36.90
Target(s): 43.00
Current Option Gain/Loss:(Feb37c: -48.1%) & Mar36c: +10.2%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
02/18 update: Oil and energy stocks were showing some relative strength. The XES rallied to new multi-month highs with a +1.1% gain on Friday. I am raising our stop loss to $36.90.

Earlier Comments:
The option spreads on the XES a bit wide, which makes this a higher-risk trade. I am suggesting we keep our position size small to limit our risk. Our multi-week exit target is $43.00.

(small positions) - Suggested Positions -

Long Mar $36 call (XES1217C36) Entry $2.45

02/18/12 new stop loss @ $36.90
02/14/12 exited Feb. calls at the close: bid @ $0.70 (-48.1%)
02/13/12 prepare to exit our Feb. $37 calls at the closing bell tomorrow.

chart:

Entry on February 06 at $37.75
Earnings Date --/--/--
Average Daily Volume = 177 thousand
Listed on February 04, 2012


Oil & Gas Exploration ETF - XOP - close: 60.52 change: +0.17

Stop Loss: 56.45
Target(s): 63.00
Current Option Gain/Loss: Mar$60c: +33.5% & Jun$60c: +15.8%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
02/18 update: The XOP just posted its fifth gain in a row. Trading was a little choppy on Friday. Traders bought the dip near $60.00 late Friday morning. The XOP is arguably short-term overbought. Don't be surprised to see a dip near its rising 10-dma. FYI: The Point & Figure chart for XOP is bullish with a $74 target.

- Suggested Positions -

Long Mar $60 call (XOP1217C60) Entry $1.70

- or -

Long Jun $60 call (XOP1216F60) Entry $4.10

chart:

Entry on February 14 at $58.75
Earnings Date --/--/--
Average Daily Volume = 3.8 million
Listed on February 13, 2012


PUT Play Updates

Currently we do not have any active put trades.


CLOSED BULLISH PLAYS

CommVault Systems - CVLT - close: 54.71 change: +0.22

Stop Loss: 49.75
Target(s): 58.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
02/18 update: CVLT continues to drift higher. The stock's relative strength is a positive but shares look overbought. I don't want to chase it here. We've been waiting for a pullback that hasn't shown up yet. I am removing CVLT from the newsletter but would definitely keep this stock on your watch list.

buy-a-dip trigger @ 51.50

Our Trade Did Not Open.

02/18/12 removed CVLT from the newsletter. Our trade did not open
02/09/12 trade did not open (barely). Adjust entry point strategy to buy a dip at $51.50, stop loss $49.75

chart:

Entry on February xx at $ xx.xx
Earnings Date 05/10/12 (unconfirmed)
Average Daily Volume = 531 thousand
Listed on February 08, 2012