Option Investor
Newsletter

Daily Newsletter, Saturday, 1/2/2010

Table of Contents

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

Leaps Trader Commentary

January's Focus: Jobs and Earnings

by James Brown

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The year 2009 may be gone but it could be many more months before investors will be able to look back and decide - was 2009 one of the biggest bear-market rallies of all time or was it the beginning of a new bull market?

When stocks finally began to bounce in March 2009 many investors didn't believe it. If you bought the bounces in 2008 you were crushed as stocks rolled over and plunged to new lows. Then as the rebound from March gained steam more and more traders were forced to cover their shorts. Disbelief turned into panic that the market was going to rally without them. Money managers felt forced to put money to work lest the market run away from them. The chase for performance powered stocks higher and higher. Yet the rally began to lose steam in November and the chase for performance turned into a waiting game as managers try to run down the clock on 2009 to hold their gains. The fourth quarter on 2009 is finally over and a new game begins. With the starting gun for 2010 about to go off money managers are no longer faced with the same need to chase stocks higher.

On a short-term basis the market is in jeopardy of big investors looking to lock in their 2009 gains and that means selling. The major indices are overdue for a significant correction. While there is no guarantee one will occur it makes sense that it happens now in January. Traders can sell now and push any tax consequences out to April 2011. I would like to think the market will just trade sideways as we wait for the next jobs report due out Friday, January 8th. However, the very late-day sell-off on New Year's Eve cast an ominous shadow that the correction may have already begun.

The first week of January will see a handful of economic reports but the real headline report will be the non-farm payroll report for December (due out before the bell on January 8th). Economists are expecting a gain of 25,000 jobs. Odds are really good that the last job report of -11,000 could be revised into positive territory. However, the question is, will stocks rally on a good report or will investors just sell the news since a positive number is already expected?

I know I'm repeating myself but I strongly suspect that stocks could correct into the first week of earnings season (about the third week of January). If the first round of major earnings reports are positive that's when I would expect stocks to bottom and this is where I think our next bullish entry point could show up. However, I want to remind readers that while the first half of 2010 is setting up for a positive bounce in economic data it's the second half I'm worried about. Keep an eye on the dollar. The oversold bounce in the dollar appears to have grown into a more significant rally and that's going to put pressure on commodities.

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 Christmas rally breakout has begun to falter and stocks are correcting. Could this be a sign of things to come as investors take profits in the new year? Was the S&P 500's breakout to new high just a head fake (or bull trap) after a six-week consolidation?

Our market outlook for January is not very bullish. Traders will want to reconsider their stop loss placement and how much risk they're willing to take. Many of the commodity-related stocks have begun to correct again. Once again I'm suggesting that readers may want to take profits now in the RAI position.

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

A Test of Patience

by James Brown

Click here to email James Brown


Patience, Patience, Patience...


Editor's Note:

I am concerned that the S&P 500's Christmas rally breakout to new highs may end up being a bull trap. The outlook for January was already cloudy before stocks decided to rally into the holidays. Odds are good that January could see a significant correction ahead of earnings season. This is not the time to be launching new long-term bullish positions. As disciplined traders we need to be patient and wait for our entry point.


Play Updates

Already Begun

by James Brown

Click here to email James Brown

It looks like the market correction has already begun for coal stocks, oil stocks, healthcare stocks, financials, and more.

Editor's Note:

By definition LEAP options are long-term options on stocks and ETFs. When we're faced with a potential trend change or correction of unknown duration it could get tough to keep our timeline in perspective. Nearly all of our current trades are using 2011 January calls. That's twelve months from now but it could be a very volatile twelve months from now. We're currently expecting a correction in January and you might want to consider taking some profits early right now, raising your stops, or reducing your positions (or any combination of the three) before January gets any older. Of course you could just sell everything and start 2010 with a fresh slate.


Closed Plays


ESV


Play Updates


ACI $22.25 -0.47 -- Arch Coal Inc.

The rally in coal stocks has stalled and the profit taking in ACI has been a little steeper than many of its peers. ACI is already nearing a 38.2% Fib retracement of the December rebound. It shares breakdown under $21.00 again and its 100-dma. It's very possible that ACI could dip back to its December lows if the correction we're expecting in January shows up. We already have a stop loss under the December lows. If you're not willing to endure that pull back then consider an early exit now. We do have more than one stock in the coal sector on the LEAS trader portfolio. If you own more than one then consider exiting ACI now since it seems to be showing the most relative weakness.

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 $1.60/1.75
-stop loss on ACI @ 19.40

Chart of ACI:


ANR $43.38 -0.87 - Alpha Natural Resources, Inc.

ANR was also caught up in some year-end profit taking. I would expect a pull back toward $40.00. If you're feeling cautious then consider raising your stop loss toward $35.00 or the 100-dma near $37.50. Currently our long-term target to exit is sell half 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 $10.30/11.00
-stop loss on ANR @ 32.40
bought 1/2 LEAP position on 08/25/09 (option price @ 7.00)

Chart of ANR:


BAC $15.06 -0.01 - Bank of America Corp.

The oversold bounce in the banking stocks has rolled over in the last several days. We're not seeing any strength in BAC and shares still have a bearish trend of lower highs. Right now I'm expecting a dip toward the November lows near $14.25 and/or its 200-dma as it nears $14.00. If BAC corrects too fast it could hit our stop loss at $13.85. Investors may want to exit early given the bearish trend. The downward trend suggests there is no confidence in BAC's earnings, which are coming up in late January. 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 $5.85/5.90
-stop loss on BAC @ 13.85

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

Chart of BAC


BQI $1.15 -0.04 -- Oilsands Quest Inc.

Sadly the rally in oil the past few weeks has not translated into gains for BQI. It still looks like the stock has formed an important long-term bottom but readers can take them time on an entry point. Wait for dips near $1.00 or a breakout over $1.20-1.25. 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 $25.88 -0.48 -- Chesapeake Energy Corp.

I warned readers last week that the rally in CHK was too sharp and the stock was due for a correction. When natural gas prices began to stall and roll over shares of CHK dropped in a hurry. Traders rushed to lock in gains. On a short-term basis CHK has hit the 38.2% Fibonacci retracement of its December rally. We can probably look for traders to buy the dip in the $26.00-24.0 zone. 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 $4.55/4.65
-stop loss on CHK @ 20.95

Chart of CHK:


CNX $49.80 -0.76 -- Consol Energy Inc.

The correction in coal stocks hit CNX for a $3.00 haircut. I wouldn't be surprised to see a dip back toward the 50-dma or the $45.00 level. Right now the plan is to sell half the remainder of our 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 $14.50/14.80
-stop loss on CNX @ 41.00

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

Chart of CNX


DE $54.09 -0.68 -- Deere & Co.

DE could be a prime candidate for profit taking now that the calendar has hit 2010. Don't be surprised to see a pull back toward $50.00, which should be decent support. If $50 breaks then the $47.50 region. 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 $ 9.35/ 9.50
-stop loss on DE @ 44.00

Chart of DE:


EMR $42.60 -0.74 -- Emerson Electric Co.

EMR was holding up pretty well until Thursday. We should probably expect a dip toward the 50-dma and I wouldn't be surprised to see a pull back toward $40.00. More conservative traders might want to consider a stop loss closer to $37.50. Sell half of our position 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 $5.80/6.00
-stop loss on EMR @ 35.90.

Chart of EMR:


FSLR $135.40 -1.39 -- First Solar

We are down to our last couple of weeks for January 2010 options. Our covered call play is looking good. On the other hand our remaining put position is almost gone.

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) $0.42.
If you're curious the 2010 Jan. $150 call is at $ 0.74.

Chart of FSLR


FST $22.25 -0.71 -- Forest Oil Corp.

The December rally in FST has run out of steam and shares saw some profit taking. Don't be surprised to see FST dip toward $20 and its rising 100-dma. 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 $5.70/5.90
-stop loss on FST @ 17.85

Chart of FST:


GHM $20.70 -0.30 -- Graham Corp.

GHM is still holding up pretty good. The stock might be a candidate for some profit taking now that it's 2010. I would look for any pull back to find support near the $18.00 region. There is some good news on the options. The spreads have narrowed significantly. The bad news is they are still very wide! As we get closer to June these spreads should narrow. When you choose to exit you may not want to use a market order.

Considering our outlook for the markets in January I would seriously consider taking some profits in GHM right here, especially with the improvement in the option spreads!

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 $6.00/7.50
-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 $22.38 -0.18 -- Genco Shipping

Shares of GNK have closed virtually unchanged for the week even though the Baltic Dry Goods index has continued to slide. Traders may want to seriously consider an early exit on GNK and just cut your losses early. I am not suggesting new positions at this time.

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 $2.60/2.85
-stop loss on GNK @ 19.65

Chart of GNK:


HON $39.20 change: -0.61 - Honeywell Intl. Inc.

I have to warn you that the action in shares of HON has turned bearish. We can expect a dip toward the $37.00-38.00 zone. If it breaks $37.00 we'll probably get stopped out shortly thereafter. I am not suggesting new bullish positions at this time. Our stop is at $36.85.

Our first target to take profits is at $49.00. Our second target is at $54.00.

Dec 11th, 2009 - entry price on HON @ 41.00, option @ 3.25
symbol: VAD-AI, 2011 $45 LEAP call - current bid/ask $1.90/2.05
-stop loss on HON @ 36.85

Chart of HON:


INTC $20.40 -0.19 -- Intel Corp.

The SOX semiconductor index managed to set a string of new 2009 highs in December. Intel had no such luck although the stock has rallied back to the top of its trading range. Friday's move looks like a failed rally near resistance and we can expect a dip back toward $19.00 now. This could be a good spot to sell some calls. 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 $2.45/2.47
-stop loss on INTC @ 17.90.

Chart of INTC:


MTW $ 9.97 -0.07 -- Manitowoc Inc.

The rebound in MTW has stalled and now it looks more like a new lower high, which is bearish for the stock. Shares should have support near its rising 100-dma and if that breaks then at the $9.00 level. More conservative traders may want to consider adjusting their stops closer to the $9.00 region. The December low is near $8.90. I am not suggesting new positions at this time. 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 $2.40/2.55
-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 $24.53 -0.40 -- Oracle Corp.

It looks like the post-earnings rally in ORCL is finally starting to slow down. Nothing has changed from my prior comments. I'm still expecting shares to fill the gap. I'd prefer to launch new positions on a dip near $23.00. 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 $2.63/2.67
-stop loss on ORCL @ 21.75.

Chart of ORCL:


PBR $47.68 +0.00 - Petroleo Brasiliero

We are still in danger here with PBR. There are only two weeks left before January options expire and the oversold bounce is stalling under its old trendline of support, which is now resistance. Given our less than bullish outlook for January the odds are against us.

Our adjusted 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 $0.41/0.44
-stop loss on PBR at $44.40

Chart of PBR:


PEP $60.80 -0.51 -- PEPSICO Inc.

I have to warn you that the action in PEP looks bearish. The oversold bounce is reversing under resistance at its 50-dma. Shares could be poised for a significant correction. More conservative traders will want to seriously consider an early exit right here! I would expect a pull back toward the 200-dma but there is no guarantee it will hold up as support.

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

FYI: I heard one 2010 forecast/prediction that Inbev could make a bid for PEP.

July 7th, 2009 - entry price on PEP @ 57.25, option @ $4.50(estimate)
symbol: VP-AL, 2011 $60.00 LEAP call - current bid/ask $5.10/5.30
-stop loss on PEP at $54.95

Chart of PEP:


RAI $52.97 -0.50 -- Reynolds American Inc.

I'm a little concerned that given the huge gains in RAI for 2009 the stock could be a target for profit taking in January 2010. More conservative traders will want to seriously consider a complete exit right here! 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 $13.00/13.50
-stop loss on RAI at $47.45

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

Chart of RAI:


RGLD $47.09 +0.42 -- Royal Gold Inc.

Gold prices are still correcting on dollar strength. Thus the pull back in RGLD may not be over yet. I am still suggesting readers look for a dip near $45.00. Keep an eye on the dollar and wait for signs of a bounce from the $45 zone before considering new bullish positions. If you do initiate a new position consider buying the $50 or $55 strikes.

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 $4.20/4.50
-stop loss on RLGD @ 41.95

Chart of RGLD


TEX $19.81 -0.40 -- Terex Corp.

A little profit taking after the Christmas week rally isn't that surprising. However, the close under $20.00 is a bit worrisome. We are concerned that stocks could see a correction in January. Readers may want to take a wait and see approach before considering new positions. 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 $4.10/4.40
-stop loss on TEX @ 17.75

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

Chart of TEX:


UNH $30.48 -0.53 -- UnitedHealth Group Inc.

There is no real change from my previous comments on UNH. As expected the stock is correcting with a decline back toward $30.00. The $30 level should be significant support. While I would normally consider buying LEAPS on a pull back near $30 considering our outlook for January readers may want to just wait and see how the month shakes out before initiating new positions.

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 $2.74/2.82
-stop loss on UNH @ 27.25

Chart of UNH:


UYG $5.63 -0.06 - ProShares Ultra Financials (2x) ETF

The oversold bounce in the UYG is starting to roll over. What looked like a breakout over the trend of lower highs and its 50-dma is in jeopardy. I am 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:


VICR $ 9.30 +0.00 -- VICOR Corp.

It has been a quiet week for VICR with the stock drifting sideways. On a short-term basis the stock reversed lower on Thursday just like everything else. If you're patient we might get a better entry point on a dip near $8.75 or maybe near the 50-dma. As I suggested in last week's play description readers might want to wait until after the January correction before initiating positions.

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.

Dec 26th, 2009 - entry price on VICR@ 9.30, option @ 1.40
symbol: VQV-GB, 2010 JUL $10 LEAP call - current bid/ask $1.05/1.40
-stop loss on VICR @ 7.45

- or -

Dec. 26th 2009 - entry price on VICR (the stock) @ 9.30
-stop loss on VICR @ 7.45

Chart of VICR:


CLOSED Plays

ESV $39.94 -0.63 -- ENSCO Intl. Inc.

We need to abandon ship with ESV. The stock is underperforming its sector and completely ignoring the strength in oil. The breakdown this past week has been painful with a drop under multiple levels of support.

Dec. 3rd, 2009 - entry price on ESV @ 42.50, option @ $6.80
symbol: VKS-AI, 2011 JAN $45 call - current bid/ask $4.40/4.70
-stop loss on ESV @ 37.25.

Early exit: option @ 4.40 (-35.2%)

Chart of ESV:



Watch

Looking Ahead to Earnings Season

by James Brown

Click here to email James Brown


New Watch List Entries

None.


Active Watch List Candidates

DSX - Diana Shipping Inc.

PPDI - Pharmaceutical Product Development Inc.


Dropped Watch List Entries

None.


New Watch List Candidates:

Editor's Note:

I'm going to say the same thing here that I said in the new plays section. We're concerned that January could see a significant market correction of up to 10%. Right now is not the best place to be adding new long-term bullish positions. As we get deeper into January I plan on adding new candidates to the watch list to buy the dip. Currently we anticipate a bounce as earnings season begins but it will depend on earnings results and how investors choose to interpret the news.

Active Watch List Candidates:


DSX $14.48 -0.12 - Diana Shipping Inc.

The Baltic Dry Goods index continued to slide into yearend yet shares of DSX merely drifted sideways. Has the shipping sector found a new trading bottom? Aggressive and nimble traders may want to consider buying a breakout over $15.00 and its 50-dma. I'm suggesting we stick to our plan and use a trigger at $16.25. If triggered we'll use a stop loss at $14.25. Our long-term target is $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:


PPDI $23.44 -0.12 -- Pharmaceutical Product Development Inc.

The rally in PPDI ran out of gas at its October highs. Shares look like they are poised to correct. Nimble traders may want to consider selling calls right here (an aggressive, higher-risk trade) or even short-term put positions. We're going to stick to our plan with a trigger to buy LEAPS at $24.25. If triggered we'll use a stop loss at $21.90. Our first target is $29.25.

Breakout trigger: $24.25

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

Chart of PPDI: