Option Investor

Daily Newsletter, Tuesday, 11/04/2008

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Table of Contents

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

Market Wrap

And The Winner Is...

Wall Street celebrated the end of the election cycle with a solid gain in the blue chips and tech stocks. Negative news from high profile tech stocks failed to blunt the rally.

Market Stats Table
[Image 1]

There was only one material economic report for today and that was the Factory Orders for September. Orders fell another -2.5% after a monster -4.3% drop in August. The consensus was for only a minor decline of -0.7%. The headline number would have been much worse than -2.5% were it not for a large airplane order lifting the number higher. Without the airplane order the headline number would have been down -3.7%. The drop in new orders was the largest percentage drop since the report began in 1992. Manufacturing shipments ex-transportation fell by -3.4%. A portion of the headline decline was due to the decline in oil prices. This lowered the value of some energy related orders. The report was still very negative and it is a lagging number covering the September period. We know from the regional reports that the acceleration of the economic decline occurred in October suggesting Factory Orders for October are going to be down very sharply.

The next big economic report is the non-Farm Payrolls on Friday. The official consensus has risen to a loss of 200,000 jobs from -175,000 jobs just two days ago. Many whisper numbers are still over -300,000 and a number that would be inline with our other recessionary indicators. This report could be the real wakeup call for those investors clinging to hope that a recession can be avoided.

The markets rallied sharply at the open rising to more than +300 points. Some said it was relief that the election cycle was finally over. Others said it was powered by gains in Europe where Obama is heavily favored because of his liberal views. Surveys overseas showed 78% of the French, 72% of Germans and 68% of Spaniards would like to see Obama in office. Whatever the reason nobody was complaining about the gains.

On Wednesday any gains may be questioned when Cisco reports their earnings. Earnings are expected to be strong but the outlook is going to be the key. We have already heard downbeat forecasts from Intel, Apple and Microsoft. However, CEO John Chambers is seen to be perpetually bullish in his forecasts. If Chambers gives a downbeat outlook it could be a negative for the markets. Several analysts have already cut their current quarter sales outlook on Cisco by as much as half in anticipation of a downward revision by Cisco. Cisco is widely expected to lower its year over year current quarter growth to +3% from the current 7.5% to 9.5% guidance they gave in August. Cisco hit a 5-year low at $15.90 last week in anticipation of the lowered guidance. With guidance expected to be slashed it is possible Cisco could energize the tech sector if their guidance was stronger than the expectations even if it is weaker than their prior forecast.

The Gartner Group slashed their 2009 chip sales forecast by $25 billion or -7%. Gartner said the global recession was depressing sales of computers and consumer electronics. "Semiconductor growth was surprisingly strong until recently but this will change in the fourth quarter" according to Bryan Lewis, VP of research for Gartner. "In a recession, it is important to remember that there will not only be a potential reduction in the number of systems sold, but also a move to lower cost systems with less semiconductor content." Global NAND sales fell from $3.1 billion to $2.8 billion in Q3 despite a 25% increase in the amount of product shipped. DRAMeXchange said NAND flash memory prices fell 30% in Q3.

Intel announced it was selling half its stake in Vmware (VMW). Intel said it recently sold one million shares and would sell another 3.75 million shares in the open market on Tuesday. 500,000 shares of the first million were sold to Cisco and 500,000 shares to EMC, parent of Vmware. Intel picked a good week to sell with VMW up +12 (+60%) from the prior week's lows. 4.75 million shares is about seven times the daily average and knocked about $2 off VMW intraday. Intel gave no reason for the sale but the 60% gain may have been the trigger given the recent decline in VMW.

VMW Chart
[Image 2]

Google made waves on Tuesday after news broke they instituted an unofficial hiring freeze over the last month. Google has doubled the size of its workforce from 9,300 in Sept 2006 to 20,100 in Sept 2008. Google spends lavishly on its employees with free meals, gourmet chefs, in house massages, etc. Rumors claim those perks are fading in an apparent move to cut costs. Those in charge of hiring were told last month to hire nobody and fill all vacancies internally according to news that broke today. Analysts suggested that Google could just be managing costs to improve margins OR they could be taking action to preserve profits from a sharp downturn in advertising over the last month. Google was up +20 at $370, which is strong resistance, but began to decline as the news was disseminated.

Dell also announced after lunch that it was going to make another significant reorganization. Part of this effort would be an immediate hiring freeze followed by voluntary buyouts of full time workers and termination of all contract workers. They also said existing workers would be asked to take time off without pay. Expense accounts were frozen and Dell said it was going to be reprioritizing its current capital expenditure plans. Dell previously announced a 10% cutback in workforce.

Dell Computer
[Image 3]

Goldman Sachs said weeks ago it was going to cut 10% of its workforce. Those pink slips are going out this week and rumors suggest it could be more in the 15% range. Goldman said its fund Goldman Sachs Investment Partners, which raised $6 billion initially, told investors this week it lost $989 million in September. The fund lost -13% in Q3 and -15.5% YTD. The managers said the fund was not alone in taking heavy losses and "they anticipate fund results will lead to net outflows from the hedge fund industry." Half of the funds losses in Q3 came from investments in commodities, basic materials, metals, mining and energy. This news could have been the reason for the decline in Goldman stock over the last couple weeks.

JP Morgan, the nations largest bank and one of the strongest in the sector, it was closing the proprietary trading desk and eliminating a group that traded the bank's own money in areas ranging from stocks, bonds and commodities. They will also layoff traders associated with this effort. Banks have no excess money left to trade and several have announced similar changes. The WSJ said almost every major Wall Street bank is expecting at least a 15% cut in headcount by year-end.

GE and CIT jumped sharply after the Treasury Dept said it was considering expanding the capital injection program to include specialty finance firms. GE said it "was not something we expect" but if it were offered they would evaluate it. GE shares jumped +8% and CIT +33% on the news.

Boeing (BA) said the first flight of the 787 Dreamliner has been pushed from the fourth quarter and into 2009. They gave no expected date for the flight. Boeing saw schedules slip significantly after a 58-day machinist strike that ended last weekend. Boeing gained slightly for the day on the positive news about the strike.

Oil prices soared +6.62 to close at $70.53 on the falling dollar and on news out of OPEC of production cuts being put into place. There was also an analyst report suggesting China and India would continue to grow consumption and offset demand declines in mature economies. An AAA analyst said U.S. gasoline prices could average $2 by year-end. This would be extremely bullish for demand and quickly reverse the current demand decline caused by the recession.

December Crude
[Image 4]

Mastercard's spending pulse survey for last week showed U.S. demand rose +1.3% for the week but overall demand was still off -3.9% over the same period in 2007. However, those year ago numbers were running at -8 to -10% just a couple weeks ago. This suggests a substantial increase in demand already underway. The price spike was also due to news that Saudi Arabia had cut production by 900,000 bpd. This was not confirmed but the rumor was moving the markets. Saudi had not been seen in the markets notifying buyers of smaller quantities available for purchase. Some other countries had taken the highly visible step of notifying buyers and stating how big their production cuts would be. Algeria told buyers to expect 70,000 bpd less. Qatar cut exports by 40,000 bpd. These announcements were in addition to several countries making cuts last week. It appears on the surface that the 1.5 mbpd production cut sought by OPEC may actually come to pass and that helped boost prices. The U.S. Dollar Index also fell sharply losing -2.18% for the day. A lower dollar helps push oil prices higher but a 2% drop in the dollar is not responsible for a 10% spike in oil. Do you remember the extreme call/put imbalance I reported last week? There were 30 times more put contracts on crude futures than call contracts. That is an explosion waiting to happen and we may have seen some of that pressure equalize today.

The market was positively boring today despite the +300 point gain in the Dow. All the market chatter was election oriented and there were dozens of analysts projecting their thoughts on the assumed outcome. I can only take about 30 min of that without glazing over. The market movement was nearly ignored.

The Dow pulled back from its +320 opening spike to only +137 late in the afternoon but a strong end of day buy program spiked it back over 9600 at the close. Technically this close was very bullish and a four week high. Resistance at 9400 was broken and this could be a great setup for the rest of the week. The sellers have definitely faded for the blue chips.

Dow Chart
[Image 5]

Nasdaq Chart
[Image 6]

The S&P-500 broke over strong resistance at 985 and closed at 1005. The next resistance level is 1010. The S&P was helped over that 985 resistance level by a strong performance from banks and energy stocks. Those two sectors account for nearly 38% of the index. The banking ETF (XLF) gained +5.63%. The service oriented oil baskets (OIH, OSX) were up over 10% while the broader based oil baskets (XOI, XLE) were up +6%. If the S&P can hold over that 985 level we have a very good chance of moving higher.

The Nasdaq completed its 6th day of gains with a whopping +54 point move. Tech stocks shook off the negativity from Dell, Google, Cisco and Gartner to break over initial resistance at 1750. The Nasdaq is still not out of the woods but it appears to be getting stronger on a daily basis.

S&P Chart
[Image 7]

Russell Chart
[Image 8]

The Russell was the fly in the ointment and that is disturbing. After a week of out performance today's +7 point gain was disappointing. Resistance at 545 held for the last two days and I am unsure how to decipher this. Fund managers may be holding their breath on small caps until they see what the market does on a post election basis. The blue chips were strong because they make great safe havens for idle cash while waiting for a market direction to appear. If the broad market rally continues tomorrow I suspect the small caps will catch up and even surpass the blue chips. Today's pause may have simply been fund manager caution.

I am not going to touch on the election because you will be force fed enough on network news tonight. The last projection map I saw as I was writing this commentary is the one below. It will be very interesting to see how close this will come to reality. 270 electoral votes are required to win.

Latest Election Polling Map
[Image 9]

I am skeptical of this rally but I am also long. If we do get a post election continuation I would be thrilled but I am not counting on it. Once a winner is decided the analysts will switch focus from "who" to "what" and start trying to project the pluses and minuses of that particular president. The non-Farm payrolls on Friday will snap the economy back into focus and the media focus on the election should quickly fade. It is then we will need to be vigilant in monitoring our positions.

Jim Brown

New Plays

Metals, Oil and Financials

Play Editor's Note: The market delivered some surprising strength on election day. It is conceivable that stocks might see an post-election pop. If you're a nimble enough trader I'd consider shorting such a pop. My plan is to buy a dip. It may not be tomorrow but it should occur in the next few days.

FYI: I would keep an eye on X, XTO and YHOO as potential buy the dip plays.


Alcoa Inc. - AA - close: 12.47 change: +0.59 stop: 10.45

Why We Like It:
It looks like many of the metal and mining stocks have bottomed. Shares of AA displayed some strength today but we don't want to chase the rally. We're suggesting readers buy the stock on a dip into the $11.50-11.00 zone. We'll start with a stop loss at $10.45. If triggered our target is $14.85.

Annotated chart:

Picked on November xx at $xx.xx <-- see TRIGGER  
Change since picked:     + 0.00   			
Earnings Date          01/08/09 (unconfirmed)    
Average Daily Volume:      24.2 million     

Nat. Oilwell - NOV - close: 32.92 change: +3.21 stop: 27.25

Why We Like It:
Oil service stocks have produced an impressive rebound off their lows and it could easily continue if oil prices rebound further. We don't want to open positions now. The plan is to buy a dip in the $29.50-29.00 zone. More aggressive traders may want to jump in early around $30.00. If triggered our first target is $34.50. Our second target is $39.00. The Point & Figure chart has turned bullish with a $54 target.

Annotated chart:

Picked on November xx at $xx.xx <-- see TRIGGER  
Change since picked:     + 0.00   			
Earnings Date          02/05/09 (unconfirmed)    
Average Daily Volume:      13.5 million     

Ultra Financials ProShares - UYG - cls: 10.94 chg: +0.70 stop: 9.25

Why We Like It:
It looks like the financials have built a bullish double bottom with the lows in October. The sector is up sharply in the last week and a half. We want to see a minor correction before opening bullish positions. Our suggested entry point is a dip in the $9.85-9.65 zone. We'll start with a stop loss at $9.25. If triggered our first target is $12.40. Our secondary target is $14.40.

FYI: The Ultra Financials ProShares is an exchange traded fund (ETF) that typically moves twice the daily performance of the Dow Jones Financial index.

Annotated chart:

Picked on November xx at $xx.xx <-- see TRIGGER  
Change since picked:     + 0.00   			
Earnings Date          00/00/00 
Average Daily Volume:       114 million     

In Play Updates and Reviews

It may not happen tomorrow but...

Play Editor's Note: The market delivered some surprising strength on election day. It is conceivable that stocks might see an post-election pop. If you're a nimble enough trader I'd consider shorting such a pop. My plan is to buy a dip. It may not be tomorrow but it should occur in the next few days.

FYI: I would keep an eye on X, XTO and YHOO as potential buy the dip plays.

BULLISH Play Updates

American Express - AXP - close: 29.82 change: +1.50 stop: 24.75

The market is up about six days in a row and we don't want to chase it here. We will wait for our entry point. However, we are going to adjust our entry point to buy AXP from $25.75-25.00 to $26.50-25.50. We'll leave our stop loss at $24.75 for now. Truly nimble traders could use a post-election rally as an entry point for short-term bearish positions to catch the drop toward $26.50. We are adjusting out target, if triggered at $26.50, to 31.75.

Picked on November xx at $xx.xx <-- see TRIGGER
Change since picked:     + 0.00  			
Earnings Date          10/20/08 (confirmed) 	
Average Daily Volume:      19.4 million   

BB&T Corp. - BBT - close: 36.15 change: +0.65 stop: 31.75

BBT temporarily traded to new three weeks highs as banking stocks posted some strong gains. Unfortunately, BBT actually under performed its peers. The short-term trend remains bullish but we want to stick to our buy the dip plan. We're suggesting readers buy a dip in the $34.00-33.75 zone with a stop loss at $31.75. If triggered our target is $39.90. FYI: Readers should note that BBT has been rumored to be a merger candidate in recent weeks.

Picked on November xx at $xx.xx <-- see TRIGGER 	
Change since picked:     + 0.00 	  
Earnings Date          10/16/08 (confirmed) 
Average Daily Volume:      10.5 million  	

BHP Billiton - BHP - close: 39.28 change: +0.40 stop: 36.45 *new*

Wow! After an 8.8% move in BHP it certainly looks like the stock is running away from us. The breakout over resistance at $40.00 is definitely a bullish move. Yet volume continues to be very light, which does not confirm the rally higher. We are not going to chase shares of BHP higher but we will adjust our entry point. Instead of waiting for a dip to $36.25 we are suggesting readers buy BHP on a dip into the $37.75-37.00 zone. We'll use a stop loss at $36.45 for now. Our first target will become $44.00. The P&F chart's bullish target has risen from $63 to $72.

Picked on November xx at $xx.xx <-- see TRIGGER	 
Change since picked:     + 0.00	  
Earnings Date          10/30/08 (unconfirmed)
Average Daily Volume:       6.7 million  

Broadcom - BRCM - close: 17.69 change: +0.61 stop: 16.45 *new*

BRCM kept pace with the market's election-day rally but the stock remains under short-term resistance at $18.00. We are upping our stop loss to $16.45. Currently our target is $18.45 near the simple 50-dma.

Picked on October 24 at $16.10 *triggered 10/24 
Change since picked:    + 1.59 	  
Earnings Date         10/21/08 (confirmed) 
Average Daily Volume:       14 million 

CIENA Corp. - CIEN - close: 9.17 change: +0.33 stop: 8.49 *new*

It was a volatile session for CIEN. The stock gapped higher at $9.07 and shot to $9.79 near yesterday's high before sharply paring its gains back to $9.17. Overall this looks like a short-term failed rally pattern, which is bearish. We are choosing to reduce our risk by raising the stop loss to $8.49. We have two targets. The first target is $11.75. Our secondary target is $13.85. This play might take a few weeks to reach its conclusion. FYI: The P&F chart is bullish with a $15.00 target.

Picked on November 03 at $ 9.00 *triggered 11/03	
Change since picked:     + 0.17	  
Earnings Date          12/11/08 (unconfirmed) 	 
Average Daily Volume:       5.9 million 

Ingersoll-Rand - IR - close: 18.72 change: +0.90 stop: 16.99

IR dipped to $17.57 before rebounding to a 5% gain and closing back above the $18.00 level. This looks like another entry point to get long IR. More conservative traders might want to up their stop loss toward $17.50. Our target is the $22.00 mark. More aggressive traders may want to aim higher, say the $25-26 zone.

Picked on October 31 at $18.65 	 
Change since picked:    + 0.07  	 
Earnings Date         10/24/08 (confirmed)
Average Daily Volume:      4.8 million     

Lam-Research - LRCX - close: 24.77 change: +1.86 stop: 19.95 *new*

Here is another stock where it looks like we may have missed the move. Shares are up from $20 to $25 in just a few days. LRCX was up more than 8% today following an analyst upgrade and a $25 price target. We are not going to chase it. Our plan is to buy a dip. However, we're going to alter that entry point from $21.00-20.00to $22.00-21.00. We'll adjust the stop loss to $19.95 while more conservative traders may want to use a stop loss closer to $21.00. We're adjusting the target to $25.85. FYI: Nimble traders could use a move toward $26.00, more specifically a failed rally near $26, as an entry point for a short-term bearish play to catch a drop back to $22.50-22.00.

Picked on November xx at $xx.xx <-- see TRIGGER	
Change since picked:     + 0.00	  
Earnings Date          10/22/08 (confirmed)
Average Daily Volume:       4.0 million   

Nucor - NUE - close: 39.66 change: +1.83 stop: 33.75

Iron and steel stock NUE is still consolidating under resistance near $40-41 and its 50-dma. We don't see any changes from our previous comments. We are suggesting readers buy NUE on a pull back into the $36.50-34.50 zone. If triggered our first target is $41.00. Our second target is $44.75.

Picked on November xx at $xx.xx <-- see TRIGGER	
Change since picked:     + 0.00	  
Earnings Date          01/22/09 (unconfirmed) 
Average Daily Volume:       9.7 million   

Ultra(Long) Real Estate - URE - cls: 11.49 change: +1.04 stop: 9.75*new*

The URE produced another big move today. This double-long real estate ETF soared 9.9% and set a new two-week high. We are going to adjust our trigger point to buy the URE from $10.00-9.75 to $10.50-10.00. Our new stop loss will be $9.75. If we are triggered our first target is $12.45. Our second target is $14.75.

FYI: The URE is an exchange-traded fund (ETF) that typically moves twice the daily performance of the Dow Jones Real Estate index.

Picked on November xx at $xx.xx <-- see TRIGGER
Change since picked:     + 0.00	  
Earnings Date          00/00/00 	  
Average Daily Volume:       1.6 million  

Wal-Mart - WMT - close: 56.13 change: +0.16 stop: 53.90 *new*

The action in WMT continues to raise concern. The stock significantly under performed the market today. Shares produced another failed rally under its 50-dma and the $57.50 level. We are not suggesting new bullish positions at this time and we're raising our stop loss to $53.90. We remain worried that the 50-dma and 100-dma around $57.40-57.50 will be unbeatable resistance in the short-term. If we don't see some improvement very soon we're going to drop this play. Should the stock manage a breakout our target is $59.95. We don't want to hold over the mid November earnings report.

Picked on October 29 at $56.25 *triggered 
Change since picked:    - 0.14	 
Earnings Date         11/13/08 (unconfirmed) 
Average Daily Volume:       25 million   


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