Option Investor
Newsletter

Daily Newsletter, Monday, 6/22/2009

Table of Contents

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

Market Wrap

Monday, Bloody Monday

by Todd Shriber

Click here to email Todd Shriber
This probably was not the start to the week the bulls had in mind after last week's slump. News out of the World Bank that the global economic situation is more dour than originally thought spooked investors, sending the S&P 500 down 3.1% to 893.04. Monday's drubbing of the index surpasses the 2.6% it shed last week. The Dow Jones Industrial Average tanked 200.72 points, or 2.4%, to 8339.01, reminding investors the venerable index still knows how to execute a triple-digit tumble. Technology provided little respite as the Nasdaq fell 61.28, or 3.35%, to 1766.19.

Market Stats

Investors left disappointed by a lack of volatility during last Friday's quadruple witching day got it in spades today. It seems the market is no longer impervious to bad news, though it seems like only yesterday a host of dire forecasts could be released, banks could clamor for capital and earnings could disappoint, and the market would rally. Things have obviously changed. According to the World Bank, things might be getting worse.

The World Bank said today it expects the global recession to be deeper than originally estimated and when growth resumes, (hopefully) sometime in 2010, it will be at a 2% clip, not the 2.3% forecast just three months ago. For 2009, the World Bank expects the global economy to contract by 2.9%, but poverty and unemployment will continue to rise. Those are anything but the green shoots this market so desperately craves.

And don't think that because equities spent the day being taken to the woodshed that commodities provided any shelter for beleaguered investors. Crude oil continued to fall, closing below $67 and Treasury prices climbed. Monday was just a glum day for commodities period as the Reuters/Jefferies CRB experienced its biggest drop in three weeks, closing at 246.07. The index tracks 19 commodities, so pick one and it was probably down today. News that miner Anglo American (AAUK) spurned a takeover offer from rival Xstrata did not do much to bolster sentiment in the commodities space and may have dampened hopes for consolidation in the sector.

Not surprisingly, this was not good news for commodities stocks. Dow component Alcoa (AA) shed 98 cents, or 8.9%, to close at $10.02. That's well below the 200-day moving average at $10.73 and next support may appear at the 50-day moving average of $9.74. Honestly, that level could be breached as early as tomorrow.

Chart of Alcoa

Copper mining giant Freeport McMoran (FCX) joined in the commodities calamity for the day, plunging $5.75, or 11.3%, to $45.18. Last Tuesday, this was a $55 stock, meaning you had a triple-bagger on your hands had you bought the stock roughly a week before last Christmas. It appears Freeport topped out at $61.55 earlier this month. Giving up $16 in a span of two weeks is never a good sign and the stock sliced below its 50-day moving average of $48.99 today. Volume was about 33% higher than usual today, indicating the selling pressure was intense to say the least.

Freeport is a well-managed company and investors would be hard-pressed to find a better large-cap play on international copper demand. That said, Freeport's most recent bullish run appears to have not only stalled, but perhaps ended and the chart is below so you may draw your own conclusions.

Chart of FCX

Speaking of the end of bullish of runs, after more than doubling in just four months, crude oil appears to be pulling back as well. Just a few weeks ago black gold seemed like it would make its way to $75 a barrel and from there other lofty heights seemed obtainable. Crude for July delivery closed at $66.93 on the NYMEX, but the bright side is several press reports today noted a decline in gasoline prices as well. In fact, gasoline futures contracts are down more than 10% since last week, so that's a bit of good news for consumers. Whether or not that news is a green shoot, well, only time will tell.

Crude's pullback probably should not startle anyone. Over the past several weeks, in the Market Monitor and in our Market Wraps, rising oil inventories and less miles driven have been noted as two factors that made oil's ascent somewhat dubious. In other words, the fundamentals really weren't there to support crude's climb higher and enthusiasm on the part of speculators was probably the driving forces behind oil's surge.

Crude futures were also hostage to the expiration of those futures at the close today. The USO and DXO as well as other oil ETFs had to be out of that contract before the close. Just the USO/DXO volume equates to more than 30% of the open interest in the July contract so the panic expiration decline was not really a surprise.

The USO ETF, which tracks the daily price action in crude oil futures, finished the day down $1.72 to $36.25 and has shed more than $3 in the past five sessions. It is now well below its 200-day moving average at $41.08 and any more pain could bring the 50-day moving average of $33.22 into play.

Chart of USO

Another oil ETF getting tarred and feathered today was the Oil Services HOLDRs ETF (OIH), which tracks a basket of oil services, a group I had been quite bullish on starting back in early May. Holdings include companies such as National Oilwell Varco (NOV), Diamond Offshore (DO) and Transocean (RIG). All fine companies to be sure, but all were down over $2 today and the OIH was down $6.62, or 6.5%, to $95.04. That is its first close below $100 in three weeks.

A comparison to Freeport McMoran is relevant here not only because the OIH and its holdings are deeply correlated to a physical commodity, but also because like Freeport, companies in the OIH fold have been on fire since December. Any investor astute enough to have bought National Oilwell along with Freeport on, say December 15, was celebrating well past the holiday season. Now Mr. Market seems to be saying that he hopes you took some profits as the rally in oil services stocks looks to be taking a breather (and that may be the optimistic way of describing the recent declines).

The OIH looks to have topped at $115.93 earlier this month and the ETF slammed through its 50-day moving average of $98.44 today. The 200-day at $91.84 could be seen sooner rather than later unless the bulls can wrest control of the oil market this week.

Chart of OIH

On a day when culprits were not hard to come by, it was no surprise to find negative news in the banking sector. Two board members left Bank of America (BAC) and oddly enough, both have military backgrounds. Retired U.S. Navy Admiral Joseph Prueher and retired U.S. Army General Tommy Franks are leaving Bank of America's board, bringing the total board departures in recent weeks to six. Just a few weeks ago, CALPERS, the pension plan for California's public employees and a major Bank of America shareholder, was clamoring for changes on the bank's board. Unsuccessful at the annual shareholders meeting, it appears CALPERS ultimately got its wish.

Bank of America slid $1.28, or 9.68%, to $11.94, but misery loves company and JP Morgan Chase (JPM) tumbled 6% and Wells Fargo (WFC) fell nearly 7%. Financials were the biggest loser among 10 main industry groups. The KBW Bank Index (BKX), which tracks 24 of the largest US banks, fell $2.48 to $34.84 to close well below both its 50 and 200-day moving averages. After falling from its high of $43.80 in May, the BKX consolidated in the $38 area and today's move below the 50-day line could be a bearish signal.

Chart of BKH

So given all the glum news from Monday's session, Tuesday's trade becomes all the more important for the bulls. The primary catalyst for the day will be the release of existing home sales before the market opens. Economists are forecasting sales of 4.82 million units in May, up from 4.68 million in April. Any surprise, up or down, will likely set the tone for the markets tomorrow.

The housing market has been at the epicenter of the slacking economy and it is hard to envision a true recovery without substantial improvement in the housing sector. Unfortunately, that improvement may be a way's off as the Mortgage Bankers Association (MBA) said today it expects new home sales for 2009 to be 27% lower than they were in 2008 and that median home prices will fall by 10% with no signs of an uptick until next year. Proving that bad news often comes in droves, MBA also lowered its mortgage origination forecast for 2009 to $2.03 trillion from over $2.7 trillion. Yes, $700 billion is quite a chunk of change.

Assuming there is no dramatic upside surprise in the existing home sales data, the market may also be happy with some signs of stability, which may have started to appear last month. Actually, the charts indicate some stabilization in both new and existing home sales, so a continuation of that trend tomorrow would be encouraging.

Chart of Existing Home Sales

Chart of New Home Sales

In addition to the home sales data, all eyes will be on the Federal Open Market Committee meeting that commences tomorrow. A decision on interest rates won't be announced until Wednesday and economists expect rates to remain unchanged. Fed funds futures indicated a 55% chance of a rate increase two weeks ago and that number fell to 47% by last Friday's close.

And while earnings season has been over for a few weeks now, there are still some sporadic reports worth watching. Before the bell tomorrow grocery store giant Kroger (KR) is expected to report first-quarter results and analysts are calling for 62 cents a share in profits. Oracle (ORCL), the largest enterprise software maker, reports after the close and the average analyst estimate is 44 cents a share.

Taking a look at market techincals, today was the broadest sell-off for US stocks since May 13 and now that Dow 9000 doesn't seem to be a reasonable possibility in the near-term, attention may turn to the Dow's ability to find support at 8300. The index is now negative for the year and whether or not that gives the bears the impetus they need to growl once again remains to be seen.

While the 50-day moving average at 8377.89 didn't act as support today, this could be an important level for the Dow to surge past in the coming days to reestablish some positive momentum. Three recent tests of 8500 as support held until Monday's lambasting, so 8500 and the 200-day moving average at 8552.81 could be the Dow's next resistance levels.

Chart of the Dow

The S&P 500 is now negative for the year as well and is down 5.6% since June 12. Today's close below 900 probably was not a good thing and the close below the 50-day moving average at 898.63 may be worse. As I have lamented before it is hard enough to make up the losses after severe down days such as today. It is even more difficult in the summer with a lack of positive catalysts on the horizon. Not to be overly simplistic, but the S&P needs to get back above 900 in a hurry. Too many closes below that critical level and the bulls may wave a white flag.

Chart of the S&P-500

The Nasdaq situation may be a little trickier to decipher at this point. Was today's decline a result of what happened on the Dow and S&P 500? Were sellers buoyed by news of Apple (AAPL) CEO Steve Jobs covering up his liver surgery? Keep in mind Apple did say it sold more than 1 million iPhone 3G S units over the weekend. Perhaps it would behoove Apple's investor relations department to be a little more forthright about Mr. Jobs' health.

Either way, support for the Nasdaq probably rests at the 50-day moving average of 1741.75. Good news out of Oracle after the close tomorrow could sustain tech investors through the rest of the week and keep the Nasdaq out of bearish hands. At this point, it might be fair to say the near-term prospects for the Nasdaq are less bleak than they are for its major-index counterparts, but I would not stake all my chips here either.

Chart of the Nasdaq

Given the recent tenor of the market over the past couple of days, it is not hard to imagine the bulls keeping their fingers crossed for some positive news on existing home sales on Tuesday. My next guess is those that are still long will be on bended knee Tuesday night hoping and praying Chairman Bernanke can rustle up something positive to say at the end of the FOMC meeting on Wednesday.

Todd Shriber


New Plays

South of the Border

by James Brown

Click here to email James Brown
Editor's Note:

The sell-off today was pretty ugly. Breakdowns under support were pretty common. Aggressive traders looking for a little more volatility may want to check out EEV and EDZ as leveraged ETFs on the emerging markets. If the commodity trade is truly broken then these could see pretty big moves.


NEW BEARISH Plays

iShares Mexico - EWW - close: 34.92 change: -1.33 stop: 37.05

Why We Like It:
There are a number of reasons to be worried about Mexico. If oil is going to correct then the Mexican market could decline sharply. The Mexican government depends on its oil exports. Secondly, we're approaching earnings season. The outbreak of swine flu may have taken a huge toll on Mexican businesses. I'm suggesting readers open bearish positions on the EWW now. An alternative entry point would be a new low under $34.50 or a failed rally under $36.50. Our target is $30.25. Traders need to be aware of the 100-dma and 200-dma, which might offer some support.

Annotated chart:

Entry on      June 22 at $34.92 
Change since picked:     + 0.00   			
Earnings Date          00/00/00 
Average Daily Volume:       3.9 million 
Listed on  June 22, 2009    



In Play Updates and Reviews

Stopping Out

by James Brown

Click here to email James Brown


BULLISH Play Updates

A.O.Smith Corp. - AOS - close: 31.04 change: -0.83 stop: 29.75

The market's widespread decline produced a 2.6% loss in AOS. I'd focus on the lower entry point. Currently we have two potential entry points to buy AOS. One is a dip into the $30.25-30.00 zone. The other is a breakout higher at $32.60. I'm adjusting our stop loss down to 29.75. If triggered at either our first target is $34.95. Our second target is $37.00.

Entry on      June xx at $xx.xx <-- see TRIGGER  
Change since picked:     + 0.00   			
Earnings Date          07/16/09 (unconfirmed)    
Average Daily Volume:       195 thousand
Listed on  June 20, 2009    


Bank of America - BAC - close: 11.94 change: -1.28 stop: 11.85

Financial stocks were crushed today. The BKX banking index lost 6.6% and the BIX banking index lost 6.1%. Shares of BAC under performed with a 9.6% plunge toward recent support near $12.00. Investors may have been a little fearful after learning that two board members resigned. Shares of BAC are also up about 300% off their 2009 lows so investors want to lock in profits. If there is any follow through tomorrow we'll be stopped out at $11.85. I hesitate to buy this dip considering the extreme weakness in the market today. FYI: I also heard that BAC is in the process of converting up to $2 billion in debt to common stock, which could have pressured the stock price today.

The plan is to sell at least half to 75% of our position at $14.20 but we need to lower this to $14.00 because the 200-dma is falling so quickly. We want to take profits before BAC hits technical resistance at its 200-dma or at its May highs near $15.00. We'll plan on exiting completely at $16.45.

Entry on      June 04 at $12.24 /gap higher entry
                              /listed at $11.87
Change since picked:     - 0.28   			
Earnings Date          07/20/09 (unconfirmed)    
Average Daily Volume:       537 million 
Listed on   May 19, 2009    


Dell Inc. - DELL - close: 12.98 change: -0.31 stop: 11.70

DELL tagged resistance at $13.50 again this morning before sliding lower. Today's failed rally builds on the potential bearish double top at the $13.50 level. I would expect a dip toward $12.50 at a minimum and probably toward $12.00. Wait for the dip near $12.00 as our next entry point. Our first target is $14.90.

Entry on      June 09 at $12.55 
Change since picked:     + 0.43   			
Earnings Date          08/27/09 (unconfirmed)    
Average Daily Volume:        29 million 
Listed on  June 06, 2009    


3x Energy Bear ETF- ERY - close: 24.29 change: +3.09 stop: 15.99

Target achieved. The front month July oil futures expired today and they plunged more than 4%. The rest of the oil sector was hit worse. Shares of ERY soared 14.5% and hit $24.32 and its 50-dma. Our first target to take profits was $24.00. I'm moving our stop loss to $19.95. Our second target to exit completely is $27.50. More aggressive traders may want to aim for the $30.00 region.

This is a VERY volatile triple-leveraged ETF that moves higher as oil stocks move lower. The ERY moves based on the Russell 1000 Energy index. This is a very aggressive trade. I'm suggesting readers trade smaller than normal position sizes. More conservative traders may want to use a stop loss near $18.00.

chart:

Entry on      June 16 at $20.10 /gap higher entry
                              /originally listed t $19.68
Change since picked:     + 4.19
                              /1st target hit @ 24.00 (+19.4%)
Earnings Date          00/00/00 
Average Daily Volume:       2.7 million 
Listed on  June 16, 2009    


PerkinElmer Inc. - PKI - close: 17.47 change: -0.52 stop: 16.45

We were expecting a pull back in PKI but the market's weakness is worrisome. Our plan is to buy PKI in the $17.15-17.00 zone but readers may want to wait and not open new bullish positions if the S&P 500 keeps falling (or you could raise your stop toward $16.75 to further reduce your risk). Our first target is $19.45.

Entry on      June xx at $xx.xx <-- see TRIGGER  
Change since picked:     + 0.00   			
Earnings Date          07/23/09 (unconfirmed)    
Average Daily Volume:       1.1 million 
Listed on  June 20, 2009    


Pharma Prod. Dev. - PPDI - close: 22.48 chg: -0.72 stop: 21.75

I'm suggesting traders turn more defensive here on PPDI. The action over the last three days has switched from a bullish breakout to a potential three-day bearish reversal pattern. Today's close back under the 100-dma is bearish. I fully expect a dip toward the 10-dma (22.25) or the $22.00 level. I'm not suggesting new bullish positions at this time. Our first target is $25.90 (or its 200-dma). FYI: The Point & Figure chart is bullish with a $31.00 target.

Entry on      June 18 at $23.38 /gap higher entry
                              /originally listed at $23.05
Change since picked:     - 0.90   			
Earnings Date          07/21/09 (unconfirmed)    
Average Daily Volume:       1.5 million 
Listed on  June 18, 2009    


Wellpoint Inc. - WLP - close: 48.82 change: -2.11 stop: 47.25

Our new play on WLP is now open. Shares did pull back toward what should have been support at $49.00. Our trigger to buy WLP was $49.25. The market's decline was a bit overwhelming and WLP actually closed under the $49.00 level. That's a bit concerning. I would consider buying a bounce from $47.50 but otherwise wait for signs of strength. Our first target is $54.00. Our second target is $57.40.

chart:

Entry on      June 22 at $49.25 *triggered       
Change since picked:     - 0.43   			
Earnings Date          07/29/09 (unconfirmed)    
Average Daily Volume:       4.4 million 
Listed on  June 20, 2009    


BEARISH Play Updates

DuPont - DD - close: 24.10 change: -0.87 stop: 27.65

DD has failed to bounce. The stock lost 3.4% and closed under its 100-dma. It's time to start thinking about adjusting our stop loss lower. Our first target $22.25. Our second target is $20.25.

Entry on      June 16 at $25.20 
Change since picked:     - 1.10   			
Earnings Date          07/21/09 (unconfirmed)    
Average Daily Volume:       9.1 million 
Listed on  June 16, 2009    


Gamestop - GME - close: 21.96 change: -0.99 stop: 25.65 *new*

Target achieved. GME hit $21.94 intraday. Our first target to take profits was $22.05. I'm lowering the stop loss to $25.65. I'm not suggesting new positions at this time. We still have two targets let. We want to take more money off the table at $20.25. Our third targetis $18.15.

chart:

Entry on      June 02 at $24.32 
Change since picked:     - 2.36
                              /1st target hit @ 22.05 (-9.3%)
Earnings Date          08/20/09 (unconfirmed)    
Average Daily Volume:       6.3 million 
Listed on  June 02, 2009    


iShares Materials - MXI - close: 44.41 change: -2.69 stop: 48.55 *new*

Commodity and material stocks were crushed today. The MXI gave up 5.7% and broke down under its exponential 200-dma and its rising 50-dma. This ETF almost hit our first target. Readers may want to start profit taking now. I'm adjusting our stop loss to $48.55. Our first target is $44.00. Our second target is $41.00.

Entry on      June 16 at $47.55 
Change since picked:     - 3.14   			
Earnings Date          00/00/00 
Average Daily Volume:       170 thousand
Listed on  June 16, 2009    


Pulte Homes - PHM - close: 8.77 change: -0.01 stop: 9.75

The homebuilders could see some volatility this week. Investors will be eager to see the latest new home sales and existing home sales figures for the last month. I'm not suggesting new positions at this time.

Our target to exit is $7.25. More conservative traders may want to exit at $7.80 instead.

Entry on       May 20 at $ 9.38 /gap down entry
                              /originally listed at $9.52
Change since picked:     - 0.61   			
Earnings Date          07/23/09 (unconfirmed)    
Average Daily Volume:        11 million 
Listed on   May 20, 2009    


Homebuilders ETF - XHB - close: 11.21 change: -0.37 stop: 12.55 *new*

The XHB has now closed under technical support at its 100-dma. I am adjusting our stop loss to $12.55.

Our target is $10.10. I am tempted to set a longer-term target in the $9.00-8.00 region.

Entry on       May 23 at $11.96 
Change since picked:     - 0.75   			
Earnings Date          00/00/00
Average Daily Volume:        10 million 
Listed on   May 23, 2009    


CLOSED BULLISH PLAYS

Flextronics - FLEX - close: 3.97 change: -0.38 stop: 3.95 *new*

Ouch! Tech stocks were hit hard today. The NASDAQ lost 3.3%. The SOX gave up 3.7%. Yet FLEX sank more than 8.7%. I could not find any company specific news to account for the weakness. It looks like panicked profit taking. Our stop loss was hit at $3.95.

chart:

Entry on      June 10 at $ 4.35 
Change since picked:     - 0.40 <-- stopped @ 3.95 (-9.1%)
Earnings Date          07/29/09 (unconfirmed)    
Average Daily Volume:       7.9 million 
Listed on  June 09, 2009    


JDS Uniphase - JDSU - close: 5.48 change: -0.09 stop: 5.45

As the tech sector broke lower JDSU helped lead the charge with a 6.6% sell-off. The stock broke down under potential support at its exponential 200-dma, at its 30-dma and at the $5.50 level. Our stop loss was hit at $5.45.

chart:

Entry on      June 01 at $ 5.65 *triggered       
Change since picked:     - 0.20<-- stopped out @ 5.45 (-3.5%)
Earnings Date          08/20/09 (unconfirmed)    
Average Daily Volume:       3.6 million 
Listed on   May 30, 2009    


McDermott Intl. - MDR - close: 18.40 change: -2.14 stop: 19.35

The profit taking in MDR continued. Shares gapped open lower at $19.97 and quickly hit our stop loss at $19.35. Shares eventually broke technical support at the 50-dma. I'd keep an eye on MDR for possible strength near the $16-15 zone. FYI: The stock is now off more than 23% from its recent highs.

chart:

Entry on      June 17 at $20.12 
Change since picked:     - 0.77<-- stopped out @ 19.35 (-3.8%)
Earnings Date          08/11/09 (unconfirmed)    
Average Daily Volume:       3.9 million 
Listed on  June 17, 2009    


Southern Copper - PCU - close: 19.26 change: -2.08 stop: 19.85

Our buy the dip plan in PCU didn't work. Commodities were crushed as traders exited in a rush. PCU gapped open lower at $20.90 and quickly hit our stop loss at $19.85. Shares have now broken several layers of support.

chart:

Entry on      June 17 at $21.25 *triggered     
Change since picked:     - 1.40<-- stopped out @ 19.85 (-6.5%)
Earnings Date          07/20/09 (unconfirmed)    
Average Daily Volume:       4.1 million 
Listed on  June 01, 2009    


RTI Intl. Metals - RTI - close: 17.20 change: -2.10 stop: 17.99

Our aggressive trade in RTI has melted on us. Commodities were hit very hard and RTI has hit new relative lows tagging our stop loss at $17.99 in the process.

chart:

Entry on      June 18 at $20.35 /gap higher entry
                              /originally listed at $19.94
Change since picked:     - 2.36<-- stopped out @ 17.99 (-11.5%)
Earnings Date          07/28/09 (unconfirmed)    
Average Daily Volume:       913 thousand
Listed on  June 18, 2009    


Urban Outfitters - URBN - close: 20.47 chg: -1.08 stop: 19.95

Now that the market is breaking down owning retailers is not the best place to be. I'm suggesting an early exit out of URBN immediately. I might reconsider bullish positions on a bounce from support near $18.00.

chart:

Entry on      June 04 at $21.10 *triggered       
Change since picked:     - 0.63<-- early exit (-2.9%)
Earnings Date          08/13/09 (unconfirmed)    
Average Daily Volume:       4.8 million 
Listed on  June 01, 2009