Option Investor

Daily Newsletter, Tuesday, 11/18/2008

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Table of Contents

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

Market Wrap

Begging For A Bailout

The focus on Tuesday was the potential bailout for the automakers. This is a very contentious topic and the congressional testimony was very heated. The grilling automakers took on Tuesday was ugly and odds are good there will be some serious strings on any money they receive.

Market Stats Table
[Image 1]

Before I get to the automaker bailout I will touch on the new records being made in today's economic reports. The Producer Price Index (PPI) headline number fell -2.8% for October. That was a record one-month drop driven by a sharp -12.8% drop in finished energy products. Strangely core inflation rose by +0.4% to push core inflation at the producer level over the last 12 months to +4.4% and well over what the Fed feels is reasonable. The annualized inflation rate over just the last quarter is +5.4%. This is very troubling for those expecting the Fed to cut rates again next month. However there are signs of falling inflation in the pipeline but it just has not shown up in the current reports. The drop in energy prices is a big drag on inflation but the lag time for the price drops to be shown in the price of finished goods is months not weeks. The drop in consumer demand will also pressure prices as manufacturers discount goods to try and stimulate buying. The consumer price index (CPI) will be out on Wednesday to show how inflation is trending at the consumer level.

The NAHB Housing Market Index fell from 14 in October to 9 in November and a new record low. The index was over 70 during the recent housing boom. Since it is impossible for the index to go below zero we have to assume we are nearing a bottom at only 9. Expectations for single-family sales fell to 8 from 14 and buyer traffic fell to 7 from 11. The NAHB Index emphasizes the need for the government to provide an incentive package for qualified buyers to stimulate sales. Until sales improve, home prices will continue lower along with rising foreclosures.

NAHB Housing Market Index Chart
[Image 2]

In the "no kidding" department the U.S. Risk of Recession report for October showed there was a 58% chance of the U.S. falling into a recession. That did not take a rocket scientist to figure out. Thirty states are already in recession and 19 others are close. Only Alaska is still growing. The forecast calls for real GDP to decline through mid 2009 and unemployment is expected to peak at 8% in early 2010. GDP in Q4 could decline by as much as -2.5%. This report is a lagging indicator and November's numbers could be over 75%.

The big report for Wednesday will be the FOMC minutes for the October meeting. This will give analysts a better idea of what the Fed was seeing behind the scenes and what chance there is for another rate cut in December.

On Thursday the Philly Fed Survey will give us another look at manufacturing in that region as a proxy for the U.S. as a whole. I am sure it will be weak again but I also think this is old news. We have had so many weak reports that anyone paying even the slightest bit of attention already knows manufacturing is in a recession. I think we are near the point where bad news will no longer have any impact on the markets. Traders are going to begin watching for signs of improvement rather than stressing over continued weakness.

Shares of Hewlett Packard spiked +10% at the open after the company reported stronger than expected preliminary results and a strong outlook for 2009. HPQ had been crushed and lost 30% of its market value on recent warnings from Intel, Microsoft, Dell and BBY. Cross Research said HP was rapidly gaining market share and were being very aggressive with cost reductions. Their preliminary earnings numbers were for $1.03 per share and analysts were expecting $1.00 per share. Final earnings are due out next Monday. HP said in September it was laying off 24,600 workers as a result of its acquisition of EDS. Today HP said it was extending its planned one-week holiday shutdown to two weeks to cut costs. HP also gave a surprisingly strong forecast for 2009 but it was still below current analyst estimates. Most had been marking estimates down but were waiting for the earnings report on Monday to make their next revisions. HP shares gained +15% for the day or +$4.37 on the news.

Hewlett Packard Chart
[Image 3]

Yahoo stock rose +8% today after news broke that Co-Founder and CEO Jerry Yang will step down as soon as the company finds a replacement. His second term in office lasted 17 months and he presided over several failed buyout attempts by Microsoft and a botched deal by Google to provide an advertising partnership. The stock spiked because many investors feel Microsoft is just waiting for Yang to go away before making another run for the company now that there are board members friendly to their offers. After Yang steps down from the CEO job he will still retain his board position. I doubt that board position will garner much respect once somebody takes a run at Yahoo again. The board is suspected of running Yang off as the share price heads for the single digits. Yahoo traded as low as $9.76 last week. The news of Yang's departure boosted Yahoo back to $12.40 intraday and an $11.50 close.

Yahoo Chart
[Image 4]

Google (GOOG) traded as low as $285 today after CEO Eric Schmidt was heard complaining about revenues in Q4 and 2009. He spoke on the sidelines of the CEO Council Conference. He is one of a dozen executives and government officials meeting to discuss the opportunities for the incoming Obama administration. Schmidt said nobody knows when the financial system will unlock and companies need to act responsibly. That means companies have to cut back on spending if they don't know where their future capital is coming from. Schmidt declined to comment specifically on Google revenues saying Google provides no guidance but the inference seemed to be "everybody" was seeing lower revenues for Q4 and 2009. Google trades as low as $285 but rebounded to close at $297 on the end of day buy program.

Google Chart
[Image 5]

Research in Motion (RIMM) closed up +$5.21 or +12% at $47.25 on positive news about the new Blackberry Bold and Blackberry Storm. The Bold copied some features from the iPhone and added some new ones including a true 3G network instead of the AT&T Edge. The bold has a half-VGA color display, 1Gb of memory, GPS and WiFi connectivity. The Storm is a touch screen device that includes tactile feedback for easier typing and it will run on the Verizon high-speed network. RIMM was also out last week saying their outlook for 2009 was not as bad as others and expected new products to keep the growth alive. I said last week I thought $40 was strong support for RIMM and a good entry point and a $7 rebound has not changed my mind although I would try to buy a dip.

RIMM Chart
[Image 6]

GM tanked -11% intraday on fears that any bailout of the automakers would involve so many strings they would be unable to actually work their way out of trouble. Lawmakers were so hostile at the thought of giving automakers money that CEOs of the big three were walking into the lion's den when they showed up to testify. Executives warned of "costs to society that would be catastrophic" if the automakers were allowed to fail. GM CEO Risk Wagoner said 3 million jobs would be lost in the first year and U.S. personal income would fall by $150 billion. Automakers said a minimum of $25 billion should be handed out immediately. Some lawmakers fear it could run over $100 billion before they could operate profitably again. There is a real dislike of having to bail out the automakers and that dislike runs deep even in consumers.

The market wandered all over the board on Tuesday before catching a bid at the close to push the Dow up +151. Unfortunately that was a onetime buy program thanks to the Budweiser-Inbev deal. Inbev completed its purchase of BUD at Thursday's close and the S&P swapped Wyeth (WYE) in the S&P-100 in place of BUD. Wyeth had a market cap of just over $40 billion where BUD was just over $52 billion. Wyeth was already widely held but index funds needed to grab more to rebalance their portfolios to the new weighting. Stericycle was named to replace BUD in the S&P-500. Here is where the buy program came in. SRCL only has a market cap of $5 billion where BUD's was $52 billion. That means index funds had to not only raise their position on SRCL but add the equivalent of $47 billion of other S&P-500 stocks to bring their index funds into balance with the index ratios. I would love to tell you that investors rushed into the market at the close because of a successful retest of the market lows but I don't believe it to be so.

The Dow rallied +151 points, +315 off the lows, to close at 8421. Unfortunately it was a pure S&P-100, S&P-500 rally. The tech stocks barely made it back to green after being down -35 late in the afternoon. Even worse the Russell closed down -3.79. This is a clear sign there are no legs to this rally unless there is some news event that changes investor sentiment all at once. The trend on the Dow is down with support at 8200 and 8000. The S&P is struggling to hold over support at 820-840. Even the afternoon rebound did not take it out of range for new lows.

Dow Chart
[Image 7]
Nasdaq Chart
[Image 8]

The Nasdaq continues to be weak with support at 1450 looking very fragile. Were it not for the S&P buy programs at the close it could have been a very different ending. I hate to keep repeating this twice a week but without a rally in small caps the blue chip rally is just noise. When the Russell failed to return to positive at day's end it set off clear alarm bells for Wednesday's open.

Russell Chart
[Image 9]

I don't want to be bearish here but I see no signs of a material rebound ahead. I really want to be bullish but I am just not seeing it, yet. Just look at the internals in the opening market stats graphic. Ten new 52-week highs and 1,344 new 52-week lows and this was technically a positive day. TrimTabs said company buybacks were a "mere $400 million a day" over the last seven trading days. This compares to an average of $3.6 billion a day in Nov-2007. This suggests companies are expecting further weakness due to falling revenues. If companies were seeing a light at the end of the tunnel they would be scooping up shares at this cheap price. Secondly, shrinking cash flows are making it difficult for companies to buy stock even if they wanted to take advantage of the market weakness. I know Keene is starting to talk about why a bottom could be near but I have bought the bottom several times now and low and behold a new bottom appeared a couple days later. At this point I would rather wait until a bottom appears instead of trying to pick one in advance. This would be a good spot for one to form based on both technicals and fundamentals but markets tend to move to extremes in both directions. This may not be extreme enough to pull investors back into the market just on bargain pricing alone. There is plenty of cash on the sidelines and once a bottom does appear the rebound could be explosive. When that happens we won't have to ask, "Is this rally real?"

Jim Brown

New Plays

Tall Cool One


Molson Coors Brewing - TAP - close: 43.03 change: +1.32 stop: 40.65

Why We Like It:
BUD probably made more headlines today as INBEV completed its acquisition of the beer giant. Yet shares of TAP were showing relative strength and outperforming the market. TAP rose more than 3% and closed above technical resistance at its 50-dma. The stock has been outperforming the market the last few weeks and looks ready to breakout from its current trading range.

We're suggesting readers buy TAP if the stock hits our trigger at $43.55. If triggered our target is the $49.50 mark. However, we have to point out that the 100-dma and the exponential 200-dma could be overhead resistance. Currently the Point & Figure chart is bullish with a $56.00 target.

Annotated chart:

Picked on November xx at $xx.xx <-- see TRIGGER  
Change since picked:     + 0.00   			
Earnings Date          02/12/09 (unconfirmed)    
Average Daily Volume:       1.8 million  

In Play Updates and Reviews

A Quiet Day

BULLISH Play Updates

*Currently we don't have any bullish play updates*

BEARISH Play Updates

Chemed Corp. - CHE - close: 39.99 change: -0.30 stop: 42.55

CHE was actually setting new lows for November before the late afternoon buy program hit the market. We would still consider new positions here. However, readers could choose to wait for a failed rally in the 41.00-42.00 zone or wait for a new relative low under $38.75 as an entry point.

We are suggesting a stop loss at $42.55, just above Friday's high. We have two targets. Our first target is $35.25. Our second target is $31.50.

FYI: It is important for traders to note that CHE's short interest is about 9.5% of the 21.4 million-share float. That is a relatively high amount of interest and a very small float. Together they raise the risk of a short squeeze. Consider this a higher-risk play.

Picked on November 15 at $39.93 
Change since picked:     + 0.06   			
Earnings Date          02/19/09 (unconfirmed)    
Average Daily Volume:       357 thousand    

iShares Germany - EWG - close: 16.40 change: +0.05 stop: 18.01

We have nothing new to report on for the EWG. Shares of the German ETF slipped to last week's support near $16.00 and bounced. If the bounce continues we would watch for the momentum to stall near $17.00 or its 10-dma near $17.25. A new lower high could be used as another entry point for shorts.

More conservative traders may want to use a tighter stop. The October low was $14.75. We're aiming for $15.05. More aggressive traders may want to aim lower.

Picked on November 15 at $16.71 
Change since picked:     - 0.31   			
Earnings Date          00/00/00 
Average Daily Volume:       1.0 million     

iShares S&P SmallCap 600 - IJR - close: 39.93 chg: -0.07 stop: 43.55

Yesterday the small caps displayed a little bit of relative strength. Today they showed a little bit of relative weakness. Overall we're going nowhere fast. However, we need to point out that the Russell 2000 index (RUT) and thus the IJR rebounded from last week's lows. Bulls may try to seize that and run with it as some sort of mini double bottom. We would wait and watch for the bounce to fail in the $42.00 region for the IJR and use it as a new entry point for bearish positions.

Our target is $35.50. The Point & Figure chart is bearish with a $17.00 target.

Picked on November 15 at $40.35 
Change since picked:     - 0.42   			
Earnings Date          00/00/00 
Average Daily Volume:       2.9 million     

J.C.Penney - JCP - close: 16.46 change: -0.26 stop: 20.01

JCP hit new multi-year lows before trying to bounce back this afternoon. The retailers continue to sink and rightly so given the state of the consumer and the economy. However, it's worth noting two things. JCP is looking short-term oversold and that the stock is getting pretty close to its 2003 low near $15.57. We still think the trend is lower but readers may want to watch for a bounce or another failed rally before opening new bearish positions.

We have two targets. Our first target is $15.05 since the $15.00 mark might offer some psychological support. Our second, much more aggressive target is $11.00. Again, the $10.00 level could offer round-number support. The weekly chart suggests some support near $14.00-14.50. The Point & Figure chart is bearish and forecasting an $8.00 target.

Picked on November 15 at $17.27 
Change since picked:     - 0.81   			
Earnings Date          02/13/09 (unconfirmed)    
Average Daily Volume:       7.4 million     

Juniper Networks - JNPR - close: 14.66 change: -0.06 stop: 16.15

JNPR briefly traded under last week's lows around $14.20 today. The trend is definitely bearish but the stock might try to stage an oversold bounce from here. Watch for a failed rally under $16.00 as another entry point for shorts.

We're suggesting a stop loss at $16.15, just above Thursday's high. Our target is only $11.00. The P&F chart is forecasting a drop toward $10.00.

Picked on November 15 at $15.03 
Change since picked:     - 0.37   			
Earnings Date          01/22/09 (unconfirmed)    
Average Daily Volume:      12.9 million     

Northrop Grumman - NOC - close: 39.11 change: -0.57 stop: 43.01

NOC set another new multi-year closing low today. Should the stock surprise us with a bounce watch for resistance in the $42.00-42.50 zone. We don't see any changes from our previous comments. The Point & Figure chart is forecasting a drop toward $29.00.

We're suggesting a stop loss at $43.01. Our target is $35.50. More aggressive traders may want to aim lower.

Picked on November 15 at $40.34 
Change since picked:     - 1.23   			
Earnings Date          01/22/09 (unconfirmed)    
Average Daily Volume:       3.6 million     

Pitney Bowes Inc. - PBI - close: 23.93 change: +0.67 stop: 24.75

PBI managed a pretty good late day bounce and ended the day up 2.8%. Yet the rally struggled near the $24.00 level and its trend of lower highs. Look for the stock to roll over under $24.50 and use it as another entry point for shorts. We don't see any changes from our weekend comments. The Point & Figure chart is extremely bearish with a $6.00 target.

We're suggesting bearish positions now with a stop loss at $24.75. Our first target is $21.00 and we suggest that readers exit the majority of their position here. We are setting an aggressive, secondary target at $18.00.

Picked on November 15 at $23.37 
Change since picked:     + 0.56   			
Earnings Date          02/05/09 (unconfirmed)    
Average Daily Volume:       2.1 million     

Market Vectors Steel ETF- SLX - cls: 26.08 change: -0.59 stop: 30.05

The SLX steel sector ETF continues to sink but it also bounced near its lows from last week. If the bounce continues then readers can watch for it to fail in the $28.00-29.00 zone and use it as a new entry point for shorts. More conservative traders may want to wait for the SLX to trade under $25.00 before initiating positions.

We're suggesting a stop loss at $30.05. Our target is $21.00. The P&F chart is bearish with an $18.00 target.

Picked on November 15 at $27.39 
Change since picked:     - 1.31   			
Earnings Date          00/00/00 
Average Daily Volume:       459 thousand    

Staples Inc. - SPLS - close: 16.94 change: +0.46 stop: 18.25*new*

It was an interesting day for SPLS. The morning low bounced from the $16.00 level but the midday bounce failed under its trend of lower highs. At the end of the day SPLS had produced a bullish engulfing candlestick pattern. That should bears on the defensive and readers may want to tighten their stops to reduce their risk should the bounce continue. We are moving the stop to $18.25. Overall technicals remain bearish.

More conservative trades may want to try a slightly tighter stop loss. Our target is $14.00. The October lows were near $13.60.

Picked on November 15 at $17.09 
Change since picked:     - 0.15   			
Earnings Date          12/02/08 (unconfirmed)    
Average Daily Volume:      13.4 million     

UnitedHealth Group - UNH - close: 19.03 change: +0.14 stop: 21.05

UNH slipped toward last week's low near $18.00 and bounced back this afternoon. If the bounce continues watch for it to fail near $20.00 or under its 10-dma near $20.65 and use it as a new entry point for shorts. We don't see any changes from our new play description on Nov. 17th.

Our target is the $15.15 mark. The October low was $14.51 and the $15.00 level might offer some support.

Picked on November 17 at $18.89 
Change since picked:     + 0.14   			
Earnings Date          01/22/09 (unconfirmed)    
Average Daily Volume:      11.4 million     


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