Option Investor
Newsletter

Daily Newsletter, Saturday, 12/26/2009

Table of Contents

  1. Leaps Trader Commentary
  2. Portfolio
  3. New Plays
  4. Play Updates
  5. Watch

Leaps Trader Commentary

S&P 500 +24% YTD and Only 4 Days Left

by James Brown

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It looks like 2009 could go out with a bang as the major U.S. averages soar to new 52-week highs. The S&P 500 is up 69% from its March 2009 lows. The NASDAQ is up 80.6%, the Russell 2000 is up 81.6%, and the Dow Industrials are up 62.6% from their March 2009 lows. Year to date the S&P 500 is up 24.6%, the NASDAQ Composite is up 44.8%, the Russell 2000 is up 27.0%, and the DJIA is up 19.8%, making 2009 a pretty good year for investors.

This past week investors ignored the lower third-quarter GDP revisions and focused on positive expectations for the fourth-quarter GDP. Short-term the bullish breakout in the S&P 500 should herald a new leg higher for stocks. However, the rally in the Russell 2000, the NASDAQ, and the SOX semiconductor index has been so sharp that these all look overbought and due for a correction. Of course they could always grow more overbought before they pull back. More importantly the trend is up for now. Not only could we see window dressing by fund managers in the last four days of the year but investors both big and small will be loathe to sell their positions now and create any capital gains they'll have to pay taxes on in April.

You can imagine that if there is a large number of investors just holding their breath and waiting to lock in gains once the calendar year turns over it could make January a challenging month. While it might be disappointing to be thinking about a correction after the S&P 500 just broke out from a six-week trading range it is a strong possibility. Fortunately I see it as a potential entry point for new positions. Right now the tentative game plan is to look for a two or three week decline in mid January and then be ready to buy the bounce when earnings season begins (which is about a week after Alcoa reports).

Chart of the S&P 500 Index:

Weekly Chart of the S&P 500 Index:

Chart of the Russell 2000 Index:

Chart of the NASDAQ Composite:

LONGER TERM OUTLOOK

Previous Comments on my Long-Term Outlook:

My long-term outlook has not changed. I still expect the economy to see a double-dip, "W"-shaped rebound with the second dip in 2010 (some analysts are predicting it will not show up until 2011). Lousy consumer spending, rising foreclosures, and lagging job growth will be the main culprits. Several weeks ago there were some comments out of the U.S. Treasury concerning foreclosures. The Obama administration's HAMP loan modification program can only help a certain number of homeowners and one official said that even if the HAMP program was a total success we should still expect millions of new foreclosures. This only reinforces my own belief that we will see another tidal wave of foreclosed homes in 2010 and 2011. Some analysts are forecasting upwards of six million foreclosures in the next three years. What is that going to do to consumer confidence and consumer spending? It's not going to help! You can review my long-term outlook here. It's the second half our my "Two Months Left" commentary.

~ James Brown

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Portfolio

Portfolio Update

by James Brown

Click here to email James Brown


Current Portfolio


Portfolio Comments:

The short-term picture has improved significantly in the last week. The S&P 500 index, the NASDAQ and the small cap Russell 2000 index have all broken out to new 2009 highs. Stocks should be able to extend their gains into year end.

Coal stocks have accelerated their recent gains. Many of our bullish candidates in the coal industry are starting to look overbought and due for a pull back. Elsewhere on our portfolio investors may want to exit our BAC play. You may want to go ahead and take profits in our RAI position as well.

Disclaimer: At any given time the author may have positions in any or all of any companies mentioned in the Leaps Newsletter.

--Position Summary Table--
Table lists Directional CALL or PUT/LEAPS only.
Insurance puts, if applicable, are not shown.

Red symbol/name represents a dropped play this week.



Jim's portfolio and updates has been included in the normal play updates section.


New Plays

Relative Strength in Tech

by James Brown

Click here to email James Brown


A Bullish Trend That's Not Overextended


VICR $ 9.30 +0.00 -- VICOR Corp.

Why We Like It:
I looked at hundreds of stocks this weekend. There were plenty hitting new 52-week highs but a lot of them looked pretty extended and overbought. We are expecting a market correction in January and that makes launching new bullish positions now somewhat dangerous. Traders should start with very small position sizes or just wait until the January correction occurs before launching new trades.

I like VICR for a number of reasons. The trend is up but shares aren't over done and it's just now starting to breakout from a recent consolidation. Shares should have support at $8.50 and again at $8.00. The long-term trend is higher and the Point & Figure chart is bullish with a $16.00 target. The company has been beating Wall Street's earnings estimates the last three quarters, which is normally a good sign.

I'm suggesting bullish positions now. You can use the 2010 July calls, which are the longest options available or you can buy the stock. At this point I prefer the stock because the spreads on the calls are a little wide but I'm listing both. Our twelve-month target is the $13.50-14.00 zone (one reason I prefer the stock over the option). Remember, if the market dips in January VICR will probably dip with it. We may get a better entry point about four weeks from now. We'll use a stop loss at $7.45.

Company Info:

Vicor Corporation designs, develops, manufactures and markets modular power components and complete power systems based upon a portfolio of patented technologies. Headquartered in Andover, Massachusetts, Vicor sells its products primarily to the communications, information technology, industrial control and military electronics markets (source: company press release or website)

Use the 2010 July calls (Entry point - now, at current levels)
-or-
Buy the stock instead of the option (entry @ 9.30)

BUY CALL JUL 2010 $10.00 strike (VQV-GB) current ask $1.40

Chart of VICR:



Play Updates

Coal Stocks Are On Fire

by James Brown

Click here to email James Brown

The rebound in the coal sector has accelerated. Outside of coal gains were mild heading into Christmas.


Closed Plays


None.


Play Updates


ACI $23.26 +0.00 -- Arch Coal Inc.

The rebound in coal stocks continued last week. ACI broke out past its 50-dma. Shares are arguably short-term overbought and could find some resistance near $24.00 soon. I wouldn't be surprised to see a retracement back toward $22.00 before it moves much higher.

I am not suggesting new bullish positions at this time. Our long-term target is the $30 region.

May 14th, 2009 - entry price on ACI @ 16.00, option @ 2.40
symbol: OSE-AF, 2011 JAN $30 LEAP call - current bid/ask $2.00/2.10
-stop loss on ACI @ 19.40

Chart of ACI:


ANR $46.07 +0.48 - Alpha Natural Resources, Inc.

ANR is another coal stock and shares have broken out to new 2009 highs. The stock is up almost three weeks in a row and looks overbought and due for a correction. I am raising our stop loss to $35.75.

Previously our "target" was the $50-60 zone. I'm fine tuning our exit. The new plan is to sell half our position at $49.80. We'll sell the second half of our position at $57.25. I am not suggesting new bullish positions at this time.

Aug. 25th, 2009 - entry price on ANR @ 34.00, option @ 7.00
symbol: VJV-AH, 2011 JAN $40 LEAP call - current bid/ask $14.90/15.70
-stop loss on ANR @ 32.40
bought 1/2 LEAP position on 08/25/09 (option price @ 7.00)

Chart of ANR:


BAC $15.25 +0.06 - Bank of America Corp.

Once again I'm suggesting that more cautious traders exit early. The oversold bounce in BAC failed near $15.50 last week. This is just another lower high in the current bearish trend. At the current pace BAC will probably hit our stop loss in the next three or four weeks if not sooner. I am not suggesting new long-term LEAPS positions at this time.

Our long-term target is the $25-30 zone.

Jan 25th, 2009 - entry price on BAC @ 6.24, option @ 2.38
symbol: VBA-AB, JAN 2011 $10 LEAP call - current bid/ask $5.95/6.05
-stop loss on BAC @ 13.85

10/31/09 Sell Half -- option at $6.00 (+152%)

Chart of BAC


BQI $1.16 +0.02 -- Oilsands Quest Inc.

A bounce in oil prices has given BQI a small boost. Shares are finally back above the $1.15 level. At the moment I would still limit new positions to the $1.05-1.00 zone. Shares have some overhead resistance in the $1.20-1.25 region. Our long-term goal is $2.90.

Nov 27th, 2009 - entry price on BQI @ 1.05, (buy the stock)
-stop loss on BQI @ 0.89

Chart of BQI:


CHK $27.83 +0.51 -- Chesapeake Energy Corp.

CHK has been able to extend its gains. The stock is now up three weeks in a row and breaking out past several layers of resistance. The rebound has been very sharp - so sharp that CHK now looks overbought and due for a correction. Our long-term target is $40.00.

Oct 30th, 2009 - entry price on CHK @ 24.00, option @ 4.70
symbol: VEC-AE, JAN 2011 $25 LEAP call - current bid/ask $5.85/6.00
-stop loss on CHK @ 20.95

Chart of CHK:


CNX $52.66 -0.21 -- Consol Energy Inc.

Last week was very bullish for CNX. Coal stocks in general were strong. CNX rallied to new 2009 closing highs. Shares of CNX actually look a little overbought and probably due for a dip.

We should have about half of our original position. I am suggesting we fine tune our exit again. Sell half of our remaining position at $58.50. We'll sell everything we have left at $64.90.

Sep 1st, 2009 - entry price on CNX @ 36.50, option @ 7.80(estimate)
symbol: VTL-AH, 2011 JAN $40 LEAP call - current bid/ask $16.80/17.30
-stop loss on CNX @ 41.00

1st Target hit 09/16/09 @ 48.50, option price $15.40 (+97%)

Chart of CNX


DE $56.33 +0.27 -- Deere & Co.

DE set another round of new 2009 highs. The stock is up two weeks in a row and could be due for a little correction. I am not suggesting new bullish positions at this time. We might get a new entry point on a January pull back.

Our long-term target on DE is $69.50. The Point & Figure chart is bullish with a $66 target.

Nov 18th, 2009 - entry price on DE @ 51.00, option @ 8.75(estimate)
symbol: VER-AJ, 2011 JAN $50 LEAP call - current bid/ask $10.95/11.10
-stop loss on DE @ 44.00

Chart of DE:


EMR $43.36 +0.45 -- Emerson Electric Co.

EMR broke out to a fresh set of 2009 highs. After consolidating sideways for the last few weeks shares should be ready to run. If you were looking to buy LEAPS on a breakout you got it. I'm suggesting we fine tune our exit strategy. Sell half at our original target of $47.50. We'll sell the rest at $54.50.

Sept. 8th, 2009 - entry price on EMR @ 38.00, option @ $4.50
symbol: VHH-AH, 2011 JAN $40 call - current bid/ask $6.30/6.50
-stop loss on EMR @ 35.90.

Chart of EMR:


ESV $42.24 -0.10 -- ENSCO Intl. Inc.

I am concerned about the lack of strength in shares of ESV. The stock market is marching higher. Oil prices rebounded last week. Yet ESV is still clinging to its long-term trendline of support. The last couple of weeks look like a neutral consolidation pattern. If that's true then odds favor a breakout to the downside given the eight-week trend lower. More conservative traders may want to abandon ship early right here! I am raising our stop loss to $39.95. No new positions at this time. Our target is the $55-60 zone.

Dec. 3rd, 2009 - entry price on ESV @ 42.50, option @ $6.80
symbol: VKS-AI, 2011 JAN $45 call - current bid/ask $5.80/6.10
-stop loss on ESV @ 37.25.

Chart of ESV:


FSLR $133.80 + 1.22 -- First Solar

Shares of FSLR are starting to retreat again. We are down to our last three weeks for our January options.

I am not suggesting new positions at this time. Currently we are long the 2010 January $100 put and we have a covered call play that should be fine if FSLR stays above $90. At this point the $100 put, part of an old spread, is nearly worthless.

Covered Call position:

Long 100 shares of FSLR @ $128.00
Short 2010 $150 LEAPS Call LZL-AA @ $40.70
Profit if called is $40.70 in option premium + $22 in stock (+49%) if FSLR is above $150.00.

Put Spread position:

Long 2010 $100 LEAPS Put LQM-MT @ $32.90
Short 2010 $250 LEAPS Put LZL-MJ @ $135.70, net credit $103

- Update 08/15/09 -
Cover the 2010 $250 Put at $109.40. Keep the $100 put.

Currently the 2010 Jan. $100 put is worth (bid) $0.41.
If you're curious the 2010 Jan. $150 call is at $ 0.80.

Chart of FSLR


FST $23.52 +0.02 -- Forest Oil Corp.

Now here's an oil stock that has taken advantage of the recent bounce in oil. Shares of FST have soared these last two weeks so much so that the stock looks overbought and due for a dip. I am raising our stop loss to $17.85. More cautious traders may want to up their stops toward $20. Our long-term target is $37.50.

Oct 15th, 2009 - entry price on FST @ 23.85, option @ 7.40
symbol: OJG-AD, 2011 $20 LEAP call - current bid/ask $5.90/6.30
-stop loss on FST @ 17.85

Chart of FST:


GHM $21.05 +0.14 -- Graham Corp.

GHM has spent the last few days digesting its gains and consolidating sideways. Unfortunately the problem with the massive spreads in the LEAPS has not changed yet. When you choose to exit you may not want to use a market order.

Right now our target to exit is $24.00 but we may want to add a second, higher target.

Oct 26th, 2009 - entry price on GHM @ 15.15, option @ 2.65
symbol: GHM-FC, 2010 JUNE $15 call - current bid/ask $4.20/9.00
-stop loss on GHM @ 15.75

- or -

Oct. 26th 2009 - entry price on GHM (the stock) @ 15.15
- stop loss on GHM @ 15.75

Chart of GHM:


GNK $22.39 -0.01 -- Genco Shipping

GNK dipped to its simple 200-dma and bounced. The Baltic Dry Goods index has continued to plummet, which is a not so subtle sign that the global economy is cooling a little in spite of some of the more positive data seen elsewhere. Last week I suggested we buy LEAPS on a bounce from the 200-dma and GNK delivered on that entry point.

Our plan was to use small positions to keep our risk limited. Our long-term target is $39.00.

Nov 21st, 2009 - entry price on GNK @ 25.46, option @ 5.00
symbol: OKJ-AF, 2011 $30 LEAP call - current bid/ask $2.55/2.95
-stop loss on GNK @ 19.65

Chart of GNK:


HON $39.88 change: -0.05 - Honeywell Intl. Inc.

HON has arrested its fall with an oversold bounce but short-term the picture still looks bearish. Shares may fall toward their 100-dma near $38.00 before making any significant progress higher. I would hesitate to launch new positions. Please note that I'm raising our stop loss to $36.85. More conservative traders may want to use a stop near $38.00 instead.

Our first target to take profits is at $49.00. Our second target is at $54.00. We'll use a stop loss at $35.75 although more conservative traders may want to use a stop closer to $38.00.

Dec 11th, 2009 - entry price on HON @ 41.00, option @ 3.25
symbol: VAD-AI, 2011 $45 LEAP call - current bid/ask $2.20/2.35
-stop loss on HON @ 36.85

Chart of HON:


INTC $20.33 +0.23 -- Intel Corp.

The SOX semiconductor index has continued to accelerate higher and leaving INTC in the dust. INTC did drift higher last week but for the most part this stock remains stuck in a trading range. I'm a bit concerned about what will happen when the SOX finally corrects lower. How will INTC react? The simple 200-dma has risen to $17.90. I am raising our stop loss to $17.90. I am not suggesting new long-term positions at this time. Our long-term target is the $24-26 zone.

FYI: Shares of Intel don't move very fast. Readers might want to consider turning this play into a calendar or diagonal spread to further maximize your gains.

June 13th, 2009 - entry price on INTC @ 16.31, option @ 1.36
symbol: VNL-AD, 2011 LEAP $20 call - current bid/ask $2.15/2.22
-stop loss on INTC @ 17.90.

Chart of INTC:


MTW $10.37 +0.39 -- Manitowoc Inc.

The rebound in MTW is losing a little momentum but shares did rally past resistance near their 30 and 50-dma and the $10.00 level. I'm still looking for MTW to clear the trendline of lower highs. More conservative traders may want to raise their stops toward the December lows (8.90). Our long-term target is $17.00.

Oct 30th, 2009 - entry price on MTW @ 9.10, option @ 2.61
symbol: VMT-AB, 2011 JAN $10 call - current bid/ask $2.70/2.85
-stop loss on MWT @ 7.90

- or -

Oct. 30th 2009 - entry price on MTW (the stock) @ 9.10
- stop loss on MTW @ 7.90

Chart of MTW:


ORCL $24.95 +0.22 -- Oracle Corp.

ORCL has extended its post-earnings rally and hit new multi-year highs. The $25.00 level could be round-number resistance so don't be surprised to see some profit taking. I'd prefer to see ORCL fill the gap before launching new positions. Our stop loss is at $21.75. Our long-term target is $29.75.

FYI: Shares of ORCL don't move very fast. Readers might want to consider turning this play into a calendar or diagonal spread to further maximize your gains.

Dec. 18th, 2009 - entry price on ORCL @ 24.05, option @ 2.55
symbol: VOC-AE, 2011 LEAP $25 call - current bid/ask $2.80/2.85
-stop loss on ORCL @ 21.75.

Chart of ORCL:


PBR $46.56 -0.61 - Petroleo Brasiliero

PBR dipped to $45.45 on Monday. Traders bought the dip but the oversold bounce is struggling near old support and now new resistance near $48.00 and its old trendline. This is bearish set up and if we don't see PBR rally higher soon our options will expire worthless with less than three weeks to go. Our target to exit is $53.00 or higher.

Apr. 4th, 2009 - entry price on PBR @ 35.10, option @ $2.80
symbol: PMJ-AJ, 2010 $50.00 LEAP call - current bid/ask $0.53/0.57
-stop loss on PBR at $44.40

Chart of PBR:


PEP $60.96 +0.28 -- PEPSICO Inc.

The oversold bounce has lifted PEP back above the $60.00 level. Unfortunately, if you look at an intraday chart you can see PEP struggling with resistance near $61.00. The 50-dma, which is now overhead, could also be new resistance. I'm repeating my comments from last week that readers may want to raise their stops toward the December low (58.77).

I'm not suggesting new bullish positions at this time. Our exit target is the $69.90 mark.

July 7th, 2009 - entry price on PEP @ 57.25, option @ $4.50(estimate)
symbol: VP-AL, 2011 $60.00 LEAP call - current bid/ask $5.20/5.40
-stop loss on PEP at $54.95

Chart of PEP:


RAI $53.63 +0.31 -- Reynolds American Inc.

RAI is still consolidating sideways. The trend of higher lows suggest it will breakout higher but it's not guaranteed. Readers may want to take profits early. I'm not suggesting new positions at this time.

Our second and final target is $57.50.

July 24th, 2009 - entry price on RAI @ 42.50, option @ $4.50(estimate)
symbol: OWO-AH, 2011 JAN $40.00 LEAP call - current bid/ask $13.60/14.00
-stop loss on RAI at $47.45

Sold Half on 10/19 @ 49.50, option @ $8.90 (+97%)

Chart of RAI:


RGLD $48.85 -0.06 -- Royal Gold Inc.

Both gold and the gold miners have seen a little oversold bounce but that doesn't mean the correction is over yet. There is no change from my prior comments on RGLD. I would look for a dip or a bounce near $45.00 as our next entry point.

Our long-term target to exit is $64.50.

Nov. 7th, 2009 - entry price on RGLD @ 50.70, option @ 7.50
symbol: ZMO-AL, 2011 JAN $60 LEAP call - current bid/ask $4.80/5.20
-stop loss on RLGD @ 41.95

Chart of RGLD


TEX $21.24 +0.09 -- Terex Corp.

TEX saw a big rally last week when it was announced that BUCY paid $1.3 billion for TEX's mining equipment business. Readers may want to watch for a new bounce from $20.00 as a bullish entry point. Our final target is $29.50.

Sept. 11th, 2009 - entry price on TEX @ 18.25, option @ 4.10
symbol: VXQ-AD, JAN 2011 $20 LEAP call - current bid/ask $5.10/5.40
-stop loss on TEX @ 17.75

Sell half (10/24/09), option at $7.50 (+82.9%)

Chart of TEX:


UNH $31.68 +0.06 -- UnitedHealth Group Inc.

The rally in UNH has run out of steam, at least temporarily. The Democrat controlled Senate passed the healthcare reform bill on Christmas Eve. Now the bill must be melded together with the house version of the bill before it goes to President Obama to be signed into law.

I'm still bullish on UNH but investors will probably want to wait for a dip back toward $30.00, which should be significant support. The plan was to use small positions to limit our risk. Our long-term target is $42.50.

Dec 16th, 2009 - entry price on UNH @ 31.55, option @ 3.80
symbol: VUH-AG, 2011 JAN $35 LEAP call - current bid/ask $3.45/3.60
-stop loss on UNH @ 27.25

Chart of UNH:


UYG $5.74 +0.08 - ProShares Ultra Financials (2x) ETF

The UYG (actually the DJUSFN financial index) has been showing some strength the last few days. The UYG broke through its 50-dma. This is encouraging but I am still not suggesting new positions.

Our second and final target is $9.50.

FYI: The UYG trades off the DJUSFN index.

Our strategy called for buying the ETF instead of the options.

Current position in the UYG = $1.50 entry (stop loss: 4.80)

10/14/09 Exit - Sell Half @ 6.31 (gap open exit, +320%)

Chart of UYG:



Watch

A New Candidate in Healthcare

by James Brown

Click here to email James Brown
Editor's Note:

I was prepared to add Laclede Group Inc. (LG) as a new bullish candidate to the watch list with a trigger to buy calls on a breakout over resistance at $35.00 but the spreads on the options were so wide it seemed too risky. If you're willing to trade the stock instead it could still be a trade for you. The $30-35 zone appears to be a new base and a breakout could herald a new up trend.


New Watch List Entries

Pharmaceutical Product Development Inc. (PPDI)


Active Watch List Candidates

DSX - Diana Shipping Inc.


Dropped Watch List Entries

None


New Watch List Candidates:

PPDI $23.39 +0.13 -- Pharmaceutical Product Development Inc.

PPDI recently broke through resistance at $22.00 and its exponential 200-dma. Now the stock has a chance to face long-term resistance at the $24.00 level. A breakout here should be the beginning of a new bullish up trend. The Point & Figure chart has already turned bullish with a $31 target. I am suggesting we buy call LEAPS at $24.25. If triggered we'll use a stop loss at $21.90. Our first target is $29.25.

Company Info:
PPD is a leading global contract research organization providing discovery, development and post-approval services as well as compound partnering programs. Our clients and partners include pharmaceutical, biotechnology, medical device, academic and government organizations. With offices in 38 countries and more than 10,500 professionals worldwide, PPD applies innovative technologies, therapeutic expertise and a commitment to quality to help its clients and partners maximize returns on their R&D investments and accelerate the delivery of safe and effective therapeutics to patients. (source: company press release or website)

Breakout trigger: $24.25

BUY the 2010 July $25.00 calls (symbol: PJQ-GE)

Chart of PPDI:


Active Watch List Candidates:


DSX $14.63 -0.17 - Diana Shipping Inc.

The shipping sector is struggling as the Baltic Dry Goods index continues to fall. Shares of DSX did manage a bounce from technical support at its 200-dma but the trend of lower highs is still in place. I am lowering our trigger to buy LEAPS down to $16.25 and our stop loss to $14.25.

If we're triggered at $16.25 I'm setting our long-term target at $24.00. Investors might want to use the 2011 January $17.50 calls instead.

Buy-the-Breakout trigger: $16.25

BUY the 2011 January $20.00 LEAPS (symbol: XDJ-AD)

Chart of DSX: