Option Investor
Newsletter

Daily Newsletter, Saturday, 7/31/2010

Table of Contents

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

Leaps Trader Commentary

July Jobs Report Looms

by James Brown

Click here to email James Brown

The month of July turned out to be the stock market's best month in a year. The major averages delivered +7% gains but readers should keep that in perspective. The second half of June saw an -8% decline and by the July 1st intraday low the April-July correction had sank to -17%. The market was oversold and better than expected earnings news was enough to fuel some short covering. Thus far of the 336 S&P 500 companies that have reported their Q2 earnings about 75% have beat Wall Street's earnings estimates. The number that have beat the revenue estimates slips to 64% but still a healthy figure. On average Q2 profits are up 45%, which is a lot higher than the 30% analysts were estimating a few weeks ago. Unfortunately, now that we're past the midpoint of earnings season the impact from earnings news will diminish.

Economic data continues to come in mixed. Most of the reports are confirming the U.S. economy is slowing down. This past week the markets digested news from the New York ISM, Chicago ISM, Consumer Sentiment, and the preliminary look at U.S. Q2 GDP. The economic slowdown is making investors nervous and money continues to flow into the safety of bonds and fixed income securities. Demand for the Treasury Department's recent bond auctions has been very strong. Meanwhile yields on the two-year note hit an all-time low of 0.549% on Friday. The yield on the ten-year bond sank to 2.91%.

Overall July was a good month for stocks around the globe with big gains in Asia and Europe. The Japanese market lagged its peers. The NIKKEI average lost -1.6% on Friday in spite of a wave of positive earnings reports from high-profile companies like Sony Corp., Panasonic Corp., Honda Motor Co., Hitachi Ltd., Sharp Corp., and Nissan Motor Co. For the month of July the NIKKEI gained +1.6% following a -4% decline in June.

The results were a lot stronger in China. The Hong Kong Hang Seng snapped an eight-day winning streak on Friday with a -0.3% decline but ended the month of July with a +4.48% gain, its best month since September 2009. The Chinese Shanghai index outperformed with a +10% gain in July but to keep that in perspective the Shanghai is still down almost -20% for the year. Economic data out of China this weekend could be a market mover on Monday. The Chinese government will announce their PMI data for July. Last month the China PMI sank from 53.9 in May to 52.1 in June. Economists are expecting July to slip to 51.1. Any number above 50 represents growth and expansion. If Sunday's report disappoints, we should expect some serious profit taking after a +10% rally in the Chinese market.

The major European market ended the month with gains that mirrored the U.S. The big event in July was the results from the European bank stress tests. While many believe these tests were flawed, investors seem to have accepted the news and run with it. It certainly seems like fears over Europe's debt crisis are fading if the euro's strength is any indication. I do want to point out that the rebound in the euro is now eight weeks old and could be nearing resistance in the $1.31-1.32 zone.

Chart of the FXE euro ETF:

Here at home the Q2 earnings season continues but we are moving into the last few innings of the game. We will hear from hundreds of companies this week but the major headlines will actually be dominated by economic reports. Let's look at the recent economic reports first. On Friday the Chicago ISM Purchasing Managers Index rose from 59.1 in June to 62.3 in July. This was above economists' estimates for a drop to 56.5. Unfortunately, this bounce appears to be a temporary effect given General Motors' decision to postpone the retooling process this year and keep their plants open, when normally there is a seasonal shutdown. Thus production for the Chicago area was artificially higher than normal. Not affected by GM's decision was the New York ISM, which saw a minor move from 458.9 in June to 463.1 in July. Yet the current conditions component fell from 69.3 to 58.4. The expectations component slipped from 69.6 to 67.5. These are the lowest levels in almost a year for both key components.

Of course the big report this past week was Friday's preliminary look at U.S. Q2 GDP growth. The market was expecting growth of +2.5% but evidently Wall Street's whisper number was closer to +4% growth. Naturally investors were disappointed when the Commerce Department said Q2 growth came in at +2.4%. There were a number of revisions with the Commerce Department adjusting the Q1 numbers from +2.7% growth to +3.7%. For all of 2009 U.S. GDP sank -2.6%, which was the worst drop since 1946.

Fueling the growth in Q2 was a +17% jump in business investment, up from +7.8% in the first quarter, this was the biggest gain since Q1 2006. Businesses ramped up spending on software and equipment, which saw their biggest growth in 13 years. Unfortunately the focus is on productivity so corporations can squeeze out more from their current staff instead of hiring. The GDP report showed that businesses continued to restock their shelves with inventory growth rising from $44.1 billion in Q1 to $75.7 billion in Q2. Part of this build up was due to a big increase in imports (consumers bought more imports than U.S. goods). This is actually fueling fears that American corporations could end the year with too much inventory. Another concern is that the big build up in inventories will mean business demand and manufacturing to restock shelves will slow down in the second half of 2010, thus further exacerbating any slowdown.

There is always a focus on the consumer and the GDP report showed that consumer spending is falling. The Commerce Department revised Q1 consumer spending from +3% to +1.9%. Their Q2 estimate put consumer spending at an anemic +1.6%. A recent survey showed that 80% of Americans are cutting back. They are putting off big purchases. They are downgrading to generic brands. They are eating out less and cooking more. Plus, Americans are saving more, a lot more. Friday's GDP report showed that the savings rate rose to 6.2%, the highest level in a year. This is long-term bullish as consumers repair their personal balance sheets and pay down debts but it will make the country's economic rebound that much slower since so much of our economy is fueled by consumer spending.

Overall the GDP report was disappointing. The government's record-breaking $862 billion stimulus package is winding down. Government spending will fade. Local and state governments are already facing huge budget shortfalls and will continue to cut back. Momentum is clearly slowing and the consumer is cutting back. This will keep businesses on the defensive and unlikely to hire. There are concerns the unemployment rate will bounce back above 10%. Economists believe that the U.S. needs to average +3% growth in GDP just to keep pace with our population increase. It is estimated that the U.S. would need to see an average of +5% GDP growth for an entire year just bring down the unemployment level by 1%. Now you see why the Fed believes it will take several years for the U.S. to reach "normal" unemployment levels again.

Speaking of the Fed, the Federal Reserve realizes the economy is still in jeopardy. Chairman Ben Bernanke shared the Fed's view that the economic outlook was "unusually uncertain". St. Louis Federal Reserve governor James Bullard made headlines this past week with interviews and a paper on his concerns that the U.S. could be facing a deflationary environment similar to Japan. Bullard is worried that the Fed's "extended period" stance on interest rates is dangerous and he favors more quantitative easing where the Fed resumes buying long-term U.S. treasuries to help spur the economy. While he isn't advocating immediate action he wants the Fed to be prepared should conditions worsen. Bullard feels that "The U.S. is closer to a Japan-style outcome today than at any time in recent history."

Another Fed head making headlines was Dallas Federal Reserve governor Richard Fisher, who had some very interesting comments on how this past year's regulatory changes on healthcare and finance reform is retarding our economic rebound. Fisher believes that,

"Businesses and consumers are being confronted with so many potential changes in the taxes and regulations that govern their behavior that they are uncertain about how to proceed downfield. Until business operators are provided the clarity they need, they will continue to hoard their cash, limit their payrolls and constrain investment in new plant and equipment-none of which provides hope for the unemployed or will put us on a more forceful path to recovery."
He suspects that American businesses will stay cautious until after the 2010 elections.

Market Action

Technically the market picture is still muddy. Short-term the pattern is bullish but at the same time the rally stalled at resistance for many of the major averages and most still have a bearish trend of lower highs. The S&P 500 failed near 1,120 and its simple 200-dma. On a short-term chart, traders have been buying the dips every time the S&P 500 sees a 50% retracement of the rally (from the July lows going forward). Longer term I still think there is a good chance the S&P 500 corrects down toward the 950 area but that could take several months and we could see a strong rally into the end of 2010 before this occurs. Currency moves will continue to have an influence on trading so we need to keep an eye on the euro and the U.S. dollar. I've produced a chart of the FXE euro ETF above. You'll see a chart of the UUP dollar ETF below.

Hourly chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

Weekly chart of the UUP dollar ETF:

The tech-heavy NASDAQ has a similar pattern of lower highs. Traders did buy the dip on Friday near the 50-dma. Short-term I would expect this index to bounce. Whether or not it can close over 2300 and its 100-dma is a good question.

Daily chart of the NASDAQ index:

This past week saw the 50-dma cross under the 200-dma on the small cap Russell 2000 index. This is normally a very bearish technical indicator but the rebound in July was pretty encouraging. The $RUT index failed at resistance near 670 but traders bought the dip twice near 640 and its major moving averages (50 & 200). The weekly chart looks like a potential top but I suspect the $RUT is ready to bounce higher again. Of course stocks might churn sideways until the jobs report on Friday.

Daily chart of the Russell 2000 index:

Two sectors I would keep an eye on are the banks and the transports. The financials are a major section of the market and without a rally in the financials the market will not be able to sustain a move higher. The BIX banking index has been struggling with resistance near the 140-141 zone but it also seems to be coiling for a bullish breakout higher. A close over 142, or especially the 145 mark, would be a bullish signal. Meanwhile the transports have seen a big run up off their July lows and stalled right at resistance. Traditionally Dow Theory suggests we can't have a prolonged bull market without participation in the transports. Earnings comments and guidance from heavy hitters like UPS and FDX were bullish as both companies raised their guidance. Short-term the transports look a little overbought but a close over the 4500 level would be a bullish development.

Daily chart of the BIX banking index:

Daily chart of the Dow Jones Transportation index:

I also want to point out that the Baltic Dry Goods index is improving. After a multi-week plummet the $BDI is seeing a two-week, oversold bounce. Has sentiment changed? Or is this just a technical correction? The $BDI measures prices for shipping rates on tankers. Lower demand for shipping means lower prices and vice versa. The plunge in rates suggest there is less demand for shipping and thus an indication that global business activity has slowed down dramatically. This uptick in the $BDI is a positive sign but it has a long way to go before I'd call it bullish.

Daily chart of the Baltic Dry Goods index:

Looking ahead economic headlines will likely overshadow any earnings news. There are lots of reports this week but the major ones will be the ISM numbers and the Jobs report. While not a complete list here are the reports to watch for: On Sunday night, the Chinese PMI release. On Monday, the ISM manufacturing report. On Tuesday, Factory Orders and Pending Home Sales. On Wednesday, ADP (private) employment report and the ISM services number. On Thursday, the weekly initial jobless claims and Chain Store (same-store) sales for July. Friday is the non-farm (jobs) payroll report. Right now estimates are for the two ISM reports to show a slowing pace of growth but growth nonetheless. On Friday economists are expecting the unemployment rate to tick up from 9.5% to 9.6% and they expect private businesses to add +90,000 jobs. The actual headline jobs number will be -75,000 jobs due to temporary census jobs ending.

In summary the market's short-term trend is still up but I'm doubtful it will last. There is a strong chance that stocks will merely chop sideways until Friday's jobs report. I would actually rather see the market correct lower, retest its early July lows and then rally. A bounce from the July lows could be a bullish entry point to ride a rally into Christmas. It is important to note that the risk of a double-dip recession is still front and center but the positive spin from the Q2's earnings season has been pretty strong. Corporate guidance was a lot healthier than expected. Maybe the market can grind its way higher. However, readers need to bear in mind that the 2010 election cycle will be a heated one with several tight races. There will be lots of negative publicity about how bad the economy is and how the candidate speaking can make it all better. All of the negative ads and newsbytes could have a bearish effect on an already weak consumer sentiment. This could end up keeping the markets in neutral (or worse) until after the elections are over.

I would hesitate to place any big bets in the next several weeks but we need to be flexible and adjust as market conditions change. I am still concerned about a double-dip recession. Cautious businesses are unlikely to hire, which will keep unemployment high, and this will encumber any economic recovery.

~ James Brown


Portfolio

Portfolio Update

by James Brown

Click here to email James Brown


Current Portfolio


Portfolio Comments:

The month of July turned out to be the market's best month in a year. Traders should keep that in perspective. The decline from the April highs has been a painful one. Thus far the major averages have not broken the bearish trend of lower highs. I remain concerned about the market given the bearish trend of economic data the last several weeks. Readers may want to reconsider their stop loss placement and/or consider taking profits if you have one (like our play on BWA, MCD and PEP).

Please note there are new stop losses for BWA (35.95) and MICC (79.90).

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.




New Plays

Cautious Ahead of Jobs Report

by James Brown

Click here to email James Brown

Editor's Note:

Look at the last six weeks in the market. We had an -8% plunge in the last half of June and now a +7% bounce in July. Investors are obviously confused and stocks are getting tossed around as sentiment reacts to economic data and news. I suspect that the market might chop around sideways as we wait for the upcoming Jobs report this Friday.

Given the volatility and lack of clarity on the state of the economic rebound, longer-term investors will want to stay very defensive and keep their capital ready. We would much rather buy a bounce from the July lows than chase the move now with the major averages still struggling with overhead resistance.

There will be individual exceptions and that's why I've added a couple of new watch list candidates tonight.


Play Updates

July Cools Off

by James Brown

Click here to email James Brown


Closed Plays


MCK has been closed.


Play Updates


BorgWarner Inc. - BWA - close: 43.86 change: +1.38

It was a rocky week for shares of BWA, bouncing around the $42-44 range. Shares spiked toward their 2010 April highs on Friday morning following their earnings announcement. BWA delivered a profit of 78 cents a share, which was 11 cents better than expected. Revenues soared +55% to $1.42 billion for the quarter, which beat the $1.32 billion estimate. Management raised their earnings guidance for the rest of 2010. It was a very bullish report but the fact that BWA failed to breakout past resistance on the news is a bit concerning.

The trend is still up but with BWA trading under resistance at its 2010 highs near $44.00-44.50 I would not open new bullish positions at this time. Please note that I'm raising the stop loss to $35.95, which is about 65 cents under the simple 200-dma. More conservative investors may want to go ahead and take profits now or raise their stops even higher.

Prior Comments:
We have already taken profits once at $44.50. Our second and final long-term target is $49.75.

Feb 17th, 2010 - entry price on BWA @ 37.55, option @ 3.90
symbol: BWA1122A40 2011 JAN $40 LEAP call - current bid/ask $7.00/7.90
-stop loss on BWA @ 35.95

05/29/10 Sell half of remaining position, BWA @ 37.26, option @ 3.90 (+0.00%)
04/29/10 1st Target Hit, BWA @ 44.50, option @ $7.63 (+95%)

Chart of BWA:


ConocoPhillips - COP - close: 55.22 change: +0.66

Oil-sector stocks have spent the last four or five days churning sideways. Shares of COP failed to move much on its earnings report on July 28th. The company delivered a profit of $1.67 a share, which was 11 cents better than expected. Traders were buying dips near the $54 level and volume improved the closer we got to the weekend. While the short-term trend is up, COP is still facing a pattern of lower highs over the last three months. The stock is up three out of the last four weeks. I'd like to see a higher low before we consider new bullish positions.

Prior Comments:
Our first target is $69.00.

May 20, 2010 - entry price on COP @ 51.00, option @ 3.75
symbol: COP 11A55.00 2011 JAN $55 call - current bid/ask $3.90/4.00
-stop loss on COP @ 47.99

- or -

May 20, 2010 - entry price on COP @ 51.00, option @ 4.75
symbol: COP 11A55.00 2012 JAN $60 call - current bid/ask $4.15/4.35
-stop loss on COP @ 47.99

07/17/10 COP's bounce has failed. Consider an early exit!
07/03/10 More Conservative traders may want to exit early!

Chart of COP:


Carpenter Technology - CRS - close: $34.95 change -0.73

I am not surprised to see some profit taking in CRS after shares rallied almost +20% off its July 20th lows. The company reported earnings on July 29th with a Q2 profit of 13 cents a share, which is a significant improvement over the 48-cent loss a year ago. Yet the 13-cent profit failed to meet analysts expectations. Revenues were a different story. CRS said Q2 revenues rose almost +42% to $364.2 million, which exceeded Wall Street's estimates of $354.6 million. CRS' management expect FY2011 revenue growth to hit the mid-to-high teens and they expect revenues to grow each quarter. Unfortunately the news didn't have much affect on the stock price.

While I am cautious on the market I still think CRS has potential. More aggressive traders may want to reconsider bullish positions if we see a new close over $36.50 (or above the trendline of lower highs). If you're launching new positions you will want to reconsider your stop loss. I am tempted to move our stop toward the July 20th low of $31.63.

Previous Comments:
The plan was to initiate small positions to limit our risk. Our long-term target is $44.75.

June 29, 2010 - entry price on CRS @ 34.00, option @ 5.30*
symbol: CRS 10L35.00 2010 DEC $35 call - current bid/ask $3.90/4.10
-stop loss on CRS @ 29.90 *(entry price is an estimate)

Chart of CRS:


EMC Corp. - EMC - close: 19.79 change: -0.13

Shares of EMC are still consolidating sideways after that huge rally in early July. Shares could chop sideways for several days before we see a decisive break one way or the other. If the broad market indices reverse lower that is going to make further gains in EMC more challenging. The longer-term trend is still higher but I'm not suggesting new long-term bullish positions at this time.

Previous Comments:
Our first target is $22.50. Our second, longer-term target is $24.75.

May 6, 2010 - entry price on EMC @ 18.25, option @ 1.40
symbol: EMC 11A20.00 2011 Jan $20 call - current bid/ask $1.45/1.49
-stop loss on EMC @ 17.45

- or -

May 6, 2010 - entry price on EMC @ 18.25, option @ 2.50
symbol: EMC 12A20.00 2012 Jan $20 call - current bid/ask $2.76/2.86
-stop loss on EMC @ 17.45

07/17/10 new stop @ 17.45
07/03/10 More Conservative Traders may want to exit early!

Chart of EMC:


Infosys Technologies - INFY - close: 60.48 change: +0.07

The Indian market is still flirting with two-year highs but the short-term trend has been down the last few days. This has been a headwind for shares of INFY. The U.S. traded shares of INFY have been consolidating sideways. I suspect the stock is ready to breakout higher over $61.00 soon but that will probably depend on the wider market environment. Right now I would be patient and wait. We might get a better entry point on a bounce near the simple 200-dma (that is quickly approaching the $57 area).

Previous Comments:
We have a stop loss at $54.90. Our long-term target is $79.00.

July 1, 2010 - entry price on INFY @ 59.00, option @ 7.50
symbol: INFY 11A60.00 2011 Jan $60 call - current bid/ask $5.10/ 5.40
-stop loss on INFY @ 54.90

- or -

July 1, 2010 - entry price on INFY @ 59.00, option @ 8.20
symbol: INFY 12A65.00 2012 Jan $65 call - current bid/ask $6.70/ 7.90
-stop loss on INFY @ 54.90

Chart of INFY:


McDonald's Corp. - MCD - close: 69.73 change: +0.35

It was a relatively quiet week for shares of MCD's stock price. It did see a new three-week low but traders bought the dip on Friday morning near technical support at its 50-dma and 100d-ma. If the selling continues we can look for additional support near the $66.00 level and its rising 200-dma. Meanwhile MCD made headlines this past week for its bond auction. The company raised $750 million with a 10-year bond auction and a 30-year bond auction. The event made headlines because MCD's 10-year bonds only yield 3.5% (actually 3.54%) but that is the lowest yielding corporate bond in nearly 15 years. If you're curious the 30-year bonds are yielding 4.92%. Why is this important? You could surmise that MCD's bond auction confirms what we already see in the U.S. bond market. Investors are nervous and they are seeking safety in fixed income securities.

I remain long-term bullish on MCD but I don't see a new entry point at this time. Potential entry points are another bounce from $66.00 or a close over $72.

Prior Comments:
Keep your positions small. Our long-term target is $79.75. FYI: The Point & Figure chart forecasting an $82 (long-term) target.

June 29, 2010 - entry price on MCD @ 66.50, option @ 2.65
symbol: MCD 11A70.00 2011 Jan $70 call - current bid/ask $3.80/ 3.95
-stop loss on MCD @ 64.75

- or -

June 29, 2010 - entry price on MCD @ 66.50, option @ 2.20
symbol: MCD 12A80.00 2012 Jan $80 call - current bid/ask $2.80/ 2.95
-stop loss on MCD @ 64.75

07/17/10 Take Profits! 2011 Jan $70 call @ 4.00 (+51%), 2012 $80 call @ 3.50 (+59%)

Chart of MCD:


Millicom Intl. - MICC - close: 93.22 change: +1.32

Shares of MICC have continued to drift sideways following the July 22nd gap higher. On a positive note MICC does appear to be drifting higher with new short-term support near $90. The stock continues to have resistance near the April highs in the $93.00-94.30 zone. We might as well consider the $95 level to be the resistance. I am not suggesting new bullish positions at this time. Please note that I am raising our stop loss to $79.90. More conservative traders may want to raise theirs toward the $84 area.

Previous Comments:
Keep your positions small to limit your risk. MICC is (normally) a volatile stock. Our long-term target is $99.50 and the $109.00 levels.

May 6, 2010 - entry price on MICC @ 80.00, option @ 8.60
symbol: MICC 11A90.00 2011 Jan $90 call - current bid/ask $ 9.30/10.70
-stop loss on MICC @ 79.90

Chart of MICC:


PEPSICO Inc. - PEP - close: 64.91 change: +0.02

PEP managed to breakout over resistance in the $65 area but the midweek rally stalled. Hopefully this wasn't a bull trap where PEP rallied just enough to fill the mid May gap down before reversing. It is worth noting that volume has been below average all week long. The four-week trend is up but I'm not suggesting new bullish positions at this time.

Previous Comments:
Our final target remains $72.25.

July 7th, 2009 - entry price on PEP @ 57.25, option @ $4.50(estimate)
symbol: VP-AL, 2011 $60.00 LEAP call - current bid/ask $6.25/6.35
-stop loss on PEP at $59.85

06/26/10 Repeat - More cautious traders will want to consider an exit.
06/05/10 More cautious traders may want to exit now to avoid a loss.

03/27/10 SELL HALF: PEP $ 66.59, Option @ $8.00 (+77.7%)

Chart of PEP:


Transocean Ltd. - RIG - close: 46.21 change: -1.18

The good news is that shares of RIG have stopped declining (for now). The bad news is the bounce was very anemic and stalled at the simple 10-dma. RIG has been underperforming its peers and the market. Naturally investors are still nervous that RIG might have some liability toward BP's oil spill but I think those fears are way overblown. I suspect that shares of RIG, and BP for that matter, might see a pop when they finally get the leaking well closed in the next week or two.

Investors need to be aware that RIG is due to report earnings on Wednesday, August 4th, after the market's closing bell. Wall Street expects a profit of $1.71 a share. There is a risk that RIG's earnings results could disappoint due to some unforeseen expense but I think the downside is limited given the massive drop from its April highs. If you are really concerned you could always buy some short-term puts just ahead of Wednesday's close to protect yourself. I would avoid launching new positions ahead of the earnings report. Use a dip or a bounce in the $42-40 zone as a new bullish entry point (post earnings) or wait for a new close over $50.00.

Previous Comments:
This is a very aggressive trade given the unknown risks associated with RIG's connection to the Gulf oil spill. Our stop loss is now at $39.80. Our long-term targets are $59 and $75. FYI: The P&F chart is forecasting an $82 target.

Jun 09, 2010 - entry price on RIG @ 43.50, option @ 6.50
symbol: RIG 11A50.00 2011 Jan $50 call - current bid/ask $ 4.80/ 5.05
-stop loss on RIG @ 39.80

- or -

Jun 09, 2010 - entry price on RIG @ 43.50, option @ 7.25
symbol: RIG 12A60.00 2012 Jan $60 call - current bid/ask $ 6.00/ 6.35
-stop loss on RIG @ 39.80

Chart of RIG:


U.S. Oil Fund - USO - close: 35.34 change: +0.28

The U.S. dollar has continued to sink, hitting new three-month lows on Friday. That is giving commodities, including crude oil, a boost. Oil managed to reverse higher following the bearish weekly inventory report that showed a much big build up in stock piles when economists were expecting a decline. I am willing to admit that short-term the USO looks poised to move higher (although it only gained five cents for the entire week). More conservative traders may want to consider an early exit to cut your losses now. However, I think the dollar is pretty oversold and could bounce soon. I am not suggesting new bearish positions in the USO at this time but a close under $34.00 might change my mind.

Previous Comments:
I'm suggesting a stop loss at $36.15. Our first target to take profits is $28.00. Our second is $25.25. Keep your positions small to limit your risk.

- PUT PLAY -

July 06, 2010 - entry price on USO @ 33.06, option @ 2.34
symbol: USO 11M30.00 2011 Jan $30 PUT - current bid/ask $ 1.29/ 1.33
-stop loss on USO @ 36.15

- or -

July 06, 2010 - entry price on USO @ 33.06, option @ 2.70
symbol: USO 12M25.00 2012 Jan $25 PUT - current bid/ask $ 1.83/ 1.99
-stop loss on USO @ 36.15

Chart of USO


Consumer Discretionary Sector - XLY $31.44 +0.21

Whew! Last week was a close call for our put play on the XLY. Shares rallied to $32.18 on July 27th before reversing. Shares of this ETF bounced near their 200-dma on Friday and the four-week trend is still higher. However, I really don't see the reason for consumer discretionary stocks to be rising. Bulls could argue that the Q2 earnings season was stronger than expected and that's true. However, the economic data, the bearish decline in consumer confidence, even the recent Q2 GDP figures are all suggesting that consumer spending should be falling. The consumer savings rate is up, which means less spending money in the stores.

I am not suggesting new positions at this time. Let's see what happens after the jobs report on Friday before evaluating new entry points. More aggressive traders may want to raise their stop loss so it's above the 100-dma (32.45).

Previous Comments:
Use a stop loss at $32.25. Our first target is $26.00.

This is a PUT play!

July 19, 2010 - entry price on XLY @ 30.09, option @ 1.95
symbol: XLY 11M28.00 2011 Jan $28 PUT - current bid/ask $ 1.18/ 1.31
-stop loss on XLY @ 32.25

- or -

July 19, 2010 - entry price on XLY @ 30.09, option @ 2.81
symbol: XLY 12M25.00 2012 Jan $25 PUT - current bid/ask $ 2.10/ 2.24
-stop loss on XLY @ 32.25

Chart of XLY


CLOSED Plays

Mckesson - MCK - close: 62.82 change: -1.06

After Friday's performance I think investors were ready to sell MCK's stock no matter what the earnings news was. Shares were still struggling mid week but traders were buying the dips near the exponential 200-dma (around $63.25). Then on Friday morning, before the bell, MCK reported earnings that beat estimates by 1 cent. The company's Q2 profit came in at $1.10 a share. Revenues came in at $27.5 billion compared to analysts' estimates of $27.25 billion. It looks like a win on both fronts. Management reaffirmed their earnings guidance. How did the stock react? Poorly. Shares gapped open on Friday at $63.25, immediately spiked down to $59.63, and bounced back to close with a 1.6% loss. on the session. Volume was almost double the norm.

Our LEAPS trade was stopped out early Friday morning at $62.90. It would appear that MCK has broken its long-term up trend.

07/30/10 Stopped out @ 62.90 (reaction to earnings)

May 18, 2010 - entry price on MCK @ 71.00, option @ 3.25
symbol: MCK 11A75.00 2011 Jan $75 call - closed at $0.95 (-70.7%)
-stop loss on MCK @ 62.90

- or -

May 18, 2010 - entry price on MCK @ 71.00, option @ 4.10
symbol: MCK 12A80.00 2012 Jan $80 call - closed @ $2.50 (-39%)
-stop loss on MCK @ 62.90

Chart of MCK:



Watch

Internet and Transport

by James Brown

Click here to email James Brown


New Watch List Entries

BIDU - Baidu Inc. (Baidu.com)

CHRW - CH Robinson Worldwide


Active Watch List Candidates

BUCY - Bucyrus Intl.

BVN - Compania de Minas Buenaventura

GLD - SPDR Gold ETF

MA - Mastercard Inc.

NTAP - NetApp, Inc.


Dropped Watch List Entries

CRM has been dropped.


New Watch List Candidates:

Baidu, Inc. (Baidu.com) - BIDU - close: 81.41 change: +2.21

I'm sure that many of you probably agree with me that shares of BIDU look grossly overbought and way too expensive (with a P/E of 107). However, we have to consider that BIDU is the major Internet search player in China, the world's fastest growing and eventually the largest Internet population on the planet. Shares took off like a rocker earlier this year when BIDU's main rival, Google Inc.(GOOG), announced legal troubles with the Chinese government. GOOG was ready to pull out of China due to the Chinese government's firewall and censorship restrictions they were placing on GOOG's operations. Many were surprised that GOOG appears to have capitulated to Chinese government demands and announced Beijing was going to renew their license to due business in China but that hasn't stopped the rally in BIDU.

After topping out in May, shares of BIDU have spent the last three months consolidating gains from the previous four months. Now the stock looks ready to breakout again. Aggressive traders may want to consider small bullish positions now. Currently shares of BIDU are trading under their all-time high of $82.29 from May (this would have been $820.00 pre-split, actual high was $716.67). Odds are good BIDU will breakout again. I am suggesting a trigger to buy (small) bullish positions if BIDU hits $83.50. If triggered we'll use a wide (aggressive) stop loss at $73.40. Our first long-term target is $99.50.

Company Info:
Baidu, Inc. is the leading Chinese language Internet search provider. As a technology-based media company, Baidu aims to provide the best way for people to find information. In addition to serving individual Internet search users, Baidu provides an effective platform for businesses to reach potential customers. Baidu's ADSs currently trade on the NASDAQ Global Select Market under the symbol "BIDU". Each of Baidu's Class A ordinary shares is represented by 10 ADSs. (source: company press release or website)

Breakout trigger: $83.50

BUY the 2011 January $90 calls (BIDU1122A90) current ask $6.85

- or -

BUY the 2012 January $100 calls (BIDU1221A100) current ask $11.80

Chart of BIDU:


CH Robinson Worldwide Inc. - CHRW - close: 65.20 change: +0.57

Shares of transportation stock CHRW surged this past week on a much better than expected earnings report. The breakout over resistance near $62.00 could be a significant buy signal. There is still some long-term resistance near $67.50 but I suspect CHRW will retest the $62 level before making much progress. I am suggesting we use a trigger to buy call LEAPS on a dip at $62.25. If triggered we will use a stop loss at $57.75. Our first long-term target is $67.50. Our second, long-term target is $72.50.

Company Info:
Founded in 1905, C.H. Robinson Worldwide, Inc., is one of the largest non-asset based third party logistics companies in the world. C.H. Robinson is a global provider of multimodal transportation services and logistics solutions, currently serving over 35,000 customers through a network of 233 offices in North America, South America, Europe, Asia, Australia, and the Middle East. C.H. Robinson maintains one of the largest networks of motor carrier capacity in North America and works with over 47,000 transportation providers worldwide. (source: company press release or website)

Buy-the-Dip trigger: $62.25

NOTE: I prefer the 2012 calls!

BUY the 2011 January $65.00 calls (CHRW1122A65) current ask $4.30

- or -

BUY the 2012 January $70.00 calls (CHRW1221A70) current ask $5.30

Chart of CHRW:


Active Watch List Candidates:

Bucyrus Intl. - BUCY - close: 62.22 change: +1.42

I don't see any changes from my prior comments on BUCY. Traders did buy the dip near $59.00 this past week and the stock looks poised to rally higher. More aggressive traders may want to consider small bullish positions now or on a move over $63.00. I would rather not chase it. Instead I am suggesting readers wait for a dip back toward $56.00 as the $55.00 level should be support.

If triggered we'll use a stop loss at $49.50. Our first target is $69.00, which coincides with the bullish point & figure chart target. FYI: I prefer the 2012 call LEAPS but the 2011s should work.

Buy-the-Dip trigger: $56.00

BUY the 2011 Jan $65 calls (BUCY1122A65)

- or -

BUY the 2012 Jan $70 calls (BUCY1221A70)

Chart of BUCY:


Compania de Minas Buenaventura - BVN - close: 38.32 change: -1.03

Shares of BVN continue to consolidate sideways. The pattern of lower highs and higher lows is normally neutral but odds favor a breakout in the direction of the preceding trend (this time the trend is up). Therefore I'm starting to think we may want to adjust our trigger to wait for a breakout over the $42.50 or $43.00 levels. For the moment we will keep our trigger at $35.00 but we want to keep positions very, very small as a breakdown from the current consolidation would be bearish. If triggered I'm upping our stop loss to $31.95.

If triggered at $35.00, our first target is $42.25. Our second, more aggressive target is $47.50.

Buy-the-Dip trigger: $35.00

BUY the 2011 March $40 calls (BVN1119C40)

Chart of BVN:


Salesforce.com - CRM - close: 98.95 change: +1.16

I am giving up on CRM. The stock moved higher, which is what we expected, but shares never hit our entry point. I regret adjusting our trigger from $75 as we would have been triggered on the spike lower in May. While I am still bullish on CRM and expect it to trade higher short-term I do not want to chase it with a long-term bullish LEAP position. Short-term trades may want to aim for the $110 area.


SPDR Gold ETF - GLD - close: 115.49 change: +1.20

The correction in gold prices continued last week and the GLD dipped toward the $113.00 level. For the moment our play remains untriggered but I am very tempted to buy this bounce. The short-term trend is still down so I am adjusting our buy-the-dip entry point from $112.50 down to $112.00. However, I am adding another trigger to buy a move higher. If the GLD closes above $118.00 we want to initiate small bullish positions.

If triggered at $112.00 our stop loss is $106.90. If triggered above $118.00 our stop loss is $111.00. Our target is $140.

Buy-the-Dip trigger: $112.00

- or - Buy calls on a close over $118.00

BUY the 2010 March $120 call (GLD 11C120.00)

- or -

BUY the 2012 Jan. $130 call (GLD 12A130.00)

Weekly Chart of GLD:


Mastercard Inc. - MA - close: 210.04 change: + 1.67

MA could see even more volatility this week as the company reports earnings on August 3rd. Wall Street expects a profit of $3.33 a share. I don't see any changes from my prior comments. If MA closes above $220 I'll drop it as a bearish candidate. For now the bearish H&S pattern is still in play. More conservative traders may want to wait for a close under $192.00 before initiating positions. I'm suggesting an intraday trigger at $192.00 to launch small bearish PUT LEAP positions. If triggered we'll use a wide stop loss at $213.00. Our first target is $161.00. FYI: MA is due to report earnings on August 3rd.

Break Down trigger: $192.00

I prefer the 2012 PUT LEAPS but the 2011 PUTS should also work well.

Keep your positions small. MA can be a very volatile stock!

BUY the 2011 Jan $180 PUT LEAPS (MA1122M180)

- or -

BUY the 2012 Jan $160 PUT LEAPS (MA1221M160)

Chart of MA:


NetApp, Inc. - NTAP - close: 42.30 change: -0.12

The rally in NTAP may be running out of steam. Shares peaked over the $44 level and faded. It looks like a potential top on the weekly chart. Longer-term the trend is still higher. I don't see any changes from my prior comments. Wait for a correction. I'm suggesting a trigger at $38.50. If triggered we'll use a stop loss at $34.75 (although we might want to put the stop under the 200-dma instead). If triggered our long-term target is $49.00. FYI: NTAP is due to report earnings on August 18th.

Buy-the-Dip trigger: $38.50

BUY the 2011 Jan $40.00 calls (NTAP1122A40)

- or -

BUY the 2012 Jan $45.00 calls (NTAP1221A45)

Chart of NTAP: