Option Investor
Newsletter

Daily Newsletter, Monday, 7/20/2009

Table of Contents

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

Market Wrap

Simply En Fuego

by Todd Shriber

Click here to email Todd Shriber
Stocks continued their torrid run on Monday with all three major US indexes inching above critical psychological levels to close at, or close to, their intraday highs. The S&P 500, which rose 1.1% to close close at 951.13, above the oft-mentioned 950 level, now rests at its highest level since November. The Dow Jones Industrial Average turned in a triple-digit performance (the good kind), buoyed by strong runs by Caterpillar (CAT) and Alcoa (AA), both of which rose nearly 4%. The Nasdaq gained 1.2% to close above 1900 at 1909.29.

Market Stats Table

News that embattled financial services firm CIT Group (CIT) may avoid bankruptcy sparked the bulls, as did a couple of solid earnings reports from the likes of Hasbro (HAS) and Eaton (ETN). All 10 S&P 500 industry groups finished the day higher, with commodity and industrial stocks leading the way. Speaking of commodities, crude oil inched closer to $64 a barrel, closing at $63.98. Although crude oil closed up 42 cents on the day, that was not enough to cover up a pair of glum earnings reports from oil services firms Haliburton (HAL) and Weatherford International (WFT).

Speaking of crude, it appears to have established support in the $60 area. Whether or not that signals another run to $70 a barrel and beyond is another story. The national average for gas prices is around $2.47 a gallon currently, compared to close to $4 just a year ago. Inventories remain high and folks are still driving less, but it appears that stocks are responding to some stabilization in oil prices. Or maybe it is the other way around.

Crude Chart

And speaking of oil services stocks, as I mentioned above Haliburton and Weatherford did not set the world on fire with their earnings reports on Monday. Haliburton said second-quarter profits tumbled 48%, but that was not as bad as expected. Weatherford missed analysts' estimates by reporting an 89% drop in second-quarter earnings. Combine that with some bearish options trade today in offshore driller Diamond Offshore (DO), which I highlighted in the Market Monitor, and one might expect that entire oil services was down today. That was not the case. Sure, Weatherford closed down almost 5%, but Haliburton and Diamond Offshore were both up.

The Oil Services HOLDRS ETF (OIH), which counts the three aforementioned stocks among its top 10 holdings, also finished up on the day, popping $1.46 to $102.44. The close above $100 is important, as I have lamented before, not to mention the 50-day average of $100.50 looks to be acting as support for OIH, at least in the near-term.

OIH Chart

Another commodity that is experiencing a resurgence of sorts is copper. The bronze metal has been surging throughout July as the chart below shows and copper futures are up over 50% this year. Emerging market demand, particularly from China, has buoyed copper's fortunes this year. Copper for September delivery finished Monday at $2.47 a pound, good for a nine-month high.

Copper Chart

That may spell good news for Freeport McMoRan (FCX), the world's largest copper producer. The company reports second-quarter results before the bell on Tuesday and analysts are expecting a profit of 69 cents a share on sales of $3.4 billion. The shares went for $16.80 on December 5th. On Monday, they closed at $57. That is an impressive run to be sure, but consider that Freeport's stock performed that well in the face of an exceptionally weak US housing market and that market is a prime destination for copper.

The market is all about earnings right now, for the most part anyway, and Freeport's results will be closely scrutinized. Sure, bulls would love to see Freeport beat estimates, but higher guidance is really what the bulls want to see here and that could send Freeport shares above $60 as soon as tomorrow and perhaps on their way to the June high of $61.55. The shares are well above the 50-day moving average at $51.25, and support probably rests in the low $55 area.

FCX Chart

One interesting element to the market's recent surge is the performance of cyclical stocks. You know, commodities shares like Freeport and Alcoa and construction equipment stocks like Caterpillar. Alcoa, the smallest member of the Dow yet one of the largest aluminum firms in the world, rose 38 cents or, 3.7%, on Monday to close at $10.60.

Caterpillar, perhaps the epitome of a cyclical stock given its exposure to construction and infrastructure demand, received one of the more interesting upgrades you will hear about, which I highlighted in the Monitor. On Monday, Bank of America/Merrill Lynch upgraded Caterpillar to ''buy'' from ''hold.'' By itself, the upgrade is not all that noteworthy, but Caterpillar reports earnings on Tuesday and not many on the Street are expecting anything stellar in the way of upside surprises. That did not deter Bank of America/Merrill Lynch, which said that construction machine sales reached a cyclical bottom in the second quarter and that earnings do not matter as they apply to Caterpillar.

That is a bold assessment, but the market apparently agrees, at least it did on Monday as buyers sent Caterpillar shares up $2.66, or 7.8%, to $36.65. The dividend yield is tidy at 4.9%.

So it is safe to assume that Mr. Market will be picking over Caterpillar and Freeport's earnings before the bell tomorrow, but there was another important after-market profit announcement out of the semiconductor sector. Last week, Intel's (INTC) bullish after-hours report helped fuel the market for the rest of the week. After the close Monday, Texas Instruments (TXN), the biggest maker of chips used in mobile phones, said second-quarter profits fell by more than 50%, but guess what? That was not as bad as expected.

Ah, the wonders of significantly reduced earnings estimates. Sarcasm aside, Texas Instruments earned 20 cents a share on sales of $2.46 billion. Analysts had been expecting a profit of 19 cents a share on sales of $2.41 billion. Certainly not an Intel-esque beat of analyst estimates, but Texas Instruments likely shifted the Street's focus from the previous quarter's results to the current quarter by forecasting third-quarter profits of 29 cents to 39 cents a share on sales of $2.5 billion to $2.8 billion. Analysts are estimating 28 cents a share on sales of $2.53 billion.

The chart shows Texas Instruments is in the midst of undoubtedly bullish run and it will be interesting to see if investors send the stock above $25 tomorrow in the wake of this afternoon's earnings report. It is worth noting that Texas Instruments traded down in the after-hours session. Intel traded up in after-hours trade when it announced its sterling results last week.

TXN Chart

With a light economic calendar tomorrow and 25% of the S&P 500 reporting earnings this week, I am going to keep the focus on those earnings reports. Staying in the tech sector, Apple (AAPL) reports fiscal third-quarter results after the close tomorrow. Analysts are expecting a record quarter out of the maker of iPods and iPhones with a profit of $1.16 a share. Everyone knows the superlatives that Wall Street loves to tack on Apple, juggernaut, stalwart, etc. I will just leave it to the charts below to show that iPhone and iPod sales are not likely to show any negative surprises.

iPhone Chart

iPod Chart

In addition to Caterpillar, four other Dow components report earnings before the bell tomorrow, so it is fair to say there will be no shortage of catalysts. Chemical giant DuPont is expected to earn 53 cents a share for the second quarter. I am not in the business of making predictions, but it is worth noting that Goldman Sachs added DuPont rival Dow Chemical (DOW) to its conviction buy list on Monday. Perhaps that is a sign that the specialty chemicals sector is looking up after a brutal 2008. Either way, DuPont yields a robust 5.9%.

Drugmaker Merck (MRK) is another Dow name reporting second-quarter results tomorrow and analysts are forecasting 77 cents a share in profits. Coca-Cola (KO) also reports before the bell and analysts are calling for the world's largest soft drink maker to earn 89 cents a share. Rounding out the cavalcade of Dow earnings tomorrow, United Technologies (UTX) is expected to report profits of $1.04 a share. So yeah, the Dow is probably in for an action-packed day on Tuesday.

Not to be ignored is the financial sector. Even though bellwethers such as Goldman Sachs (GS) and Bank of America (BAC) have already delivered results, there are a few more financials slated to step into the earnings confessional this week. State Street (STT) is one to watch tomorrow. State Street is the largest US manager of assets for other institutions and one of the ''Group of 10'' banks that promptly repaid TARP loans from Uncle Sam.

While it is tough to compare State Street to Goldman Sachs, it is hard to ignore that State Street's shares have nearly tripled since March, outperforming King Goldman in the process. State Street fits in a space between money center and investment banks and fills that space quite nicely. Put another, way there are few superior major financial institutions in the U.S. at this point. Analysts are calling for 97 cents a share for the second quarter.

STT Chart

For those looking to extend the Goldman trade, I present you with Jefferies (JEF). Again, this is a name that is hard to draw direct comparisons to Goldman Sachs with, but Jefferies is a boutique investment bank that has done quite well for itself lately, even in a tough operating environment for companies of this nature. I guess pilfering talent from the likes of Bear Stearns and Lehman Brothers will do that. Two interesting tidbits about Jefferies that could make it worth watching: The company increased has increased its share of the global M&A advisory market this year and it did not take one red cent of money from Uncle Sam during the financial crisis.

Looking at market technicals, I talked about the importance of Dow 8800 last week and the index shot through that resistance level today with ease. While 8800 was believed to be a higher hurdle than it proved to be, significant resistance does lie ahead at 9000. That is not all that far off and with five Dow stocks reporting earnings on Tuesday, 9000 could come into play within the next couple of days. That of course depends on the news from those companies.

Dow Chart

The S&P 500 cleared the 950 level and that is important as resistance was pegged around 940 and the close above the psychological 950 area could mean 1000 is on the horizon. You can bet that is another area of strong resistance, but if a close above that level is seen in the next week or so, you can bet bulls will run the index higher from there.

S&P 500 Chart

As if Friday's close at a nine-month high was not enough for the Nasdaq, the tech-laden index marched higher again on Monday, blasting through resistance at 1895 to close above 1900. I get the feeling that 2000 this week might be asking a bit much of the Nasdaq, but then again the catalysts exist beyond Apple's earnings. Yahoo (YHOO), eBay (EBAY), Microsoft (MSFT) and Amazon (AMZN) all report earnings this week. A close in the 1950-1960 area on strong volume could signal 2000 is near by.

Nasdaq Chart

It cannot be argued that 81% of the major companies that have reported earnings thus far have beaten estimates by an average of 15%. I would not want to be on the wrong end of that trend, but any downbeat surprises from some of the names mentioned here could bring the bears out of hibernation.


New Plays

Meat Products & Vitamins

by James Brown

Click here to email James Brown


NEW BULLISH Plays

Hormel Foods - HRL - close: 35.25 change: +0.65 stop: 34.20

Why We Like It:
HRL is slowly marching higher. Investors have consistently been buying dips in this stock. Now after a multi-week consolidation the indicators are turning bullish again. I'm suggesting readers buy HRL here above $34.50. I'm going to try and really limit our risk with a tight stop at $34.20. More aggressive traders may want to put their stop under $34.00 or under the July low of $33.73. My first target is $37.90. My second target is $39.90. My time frame is mid to late August because we need to exit in front of earnings. More aggressive traders may want to contemplate holding over the report and giving HRL more time. FYI: The Point & Figure chart is very bullish with a $50 target.

Annotated chart:

Entry on      July 20 at $35.25 
Change since picked:     + 0.00   			
Earnings Date          08/20/09 (unconfirmed)    
Average Daily Volume:       486 thousand
Listed on  July 20, 2009    


NEW BEARISH Plays

Usana Health Sciences - USNA - close: 25.05 chg: -1.34 stop: 28.21

Why We Like It:
USNA is breaking down. In early July shares broke their four-month up trend. The oversold bounce failed near $28.00. Now the stock is under performing the market and sinking on strong volume. Please note that I consider this an aggressive, higher-risk trade because shares have very, very low daily volume (54,000) and the stock has above average short interest (about 12%). That's not a great combination should a short squeeze appear. I am suggesting traders only use very small position sizes (at least half or less than your normal trade size). We're gong to use a stop loss above the recent high. I am suggesting bearish positions now but if you're patient we might get a better entry point on a bounce near $26.00-27.00. My first target to take profits is $21.00.

Annotated chart:

Entry on      July 20 at $25.05 
Change since picked:     + 0.00   			
Earnings Date          07/23/09 (unconfirmed)    
Average Daily Volume:        54 thousand
Listed on  July 20, 2009    



In Play Updates and Reviews

Oil and Tech Keep Rising.

by James Brown

Click here to email James Brown


BULLISH Play Updates

Alcoa - AA - close: 10.22 change: -0.22 stop: 9.35

At this point it would be easy to regret not buying the rally past $10.00 last week. Yet AA and the market itself remains overbought and due for a dip. I still don't want to chase it. Volume in AA has not been very impressive. The plan is to buy AA on a dip at $9.75. Our first target is $10.90. Our second target is $12.25. FYI: The Point & Figure chart is very bullish with a $19.50 target.

Entry on      July xx at $xx.xx <-- see TRIGGER  
Change since picked:     + 0.00   			
Earnings Date          07/08/09 (confirmed)    
Average Daily Volume:        41 million 
Listed on  July 16, 2009    


Ameron Intl. - AMN - close: 71.88 change: +2.12 stop: 64.95

With the market in rally mode AMN can always get more overbought. Shares spiked higher at the open and then trades sideways the rest of the session. Volume was way below average. I remain concerned that the S&P 500 and AMN are due for a dip. Our target is $79.50. My time frame is six to eight weeks. I do consider this somewhat aggressive because AMN does not trade with a lot of volume.

Entry on      July 16 at $70.50 *triggered       
Change since picked:     + 1.38   			
Earnings Date          09/21/09 (unconfirmed)    
Average Daily Volume:       150 thousand
Listed on  July 15, 2009    


Aegean Marine Petrol. - ANW - close: 17.60 change: +0.01 stop: 14.95

ANW is going to have to dip deeper than that. Shares slipped to $17.16 before rising back to unchanged. The relative strength is great but the stock is short-term overbought.

We want to buy ANW in the $16.60-16.00 zone. We'll start the play with a stop loss at $14.95. More conservative traders might be able to get away with a stop in the 15.50-16.00 region. If triggered at $16.60 our first target to take profits is at $18.25. Our second target is $19.75.

Entry on      July xx at $xx.xx <-- see TRIGGER  
Change since picked:     + 0.00   			
Earnings Date          08/12/09 (unconfirmed)    
Average Daily Volume:       284 thousand
Listed on  July 18, 2009    


Diana Shipping - DSX - close: 14.57 change: +0.36 stop: 12.70

Hmm... DSX is showing a little more strength than expected. We might want to adjust our entry point to the $14.00 level but for now the plan is to wait for a dip in the $13.50-13.00 zone. Our first target is $16.40.

Entry on      July xx at $xx.xx <-- see TRIGGER  
Change since picked:     + 0.00   			
Earnings Date          08/06/09 (unconfirmed)    
Average Daily Volume:      1.27 million 
Listed on  July 15, 2009    


J.P.Morgan Chase - JPM - close: 36.98 change: +0.09 stop: 33.90

JPM spent the session moving sideways. It could just be a pause in the rally or a sign the rally is tired and could back track. Short-term shares look a little overbought. We want to buy a dip at $35.25. Our first target is 38.75.

Entry on      July xx at $xx.xx <-- see TRIGGER  
Change since picked:     + 0.00   			
Earnings Date          07/16/09 (confirmed)    
Average Daily Volume:        55 million 
Listed on  July 18, 2009    


Morgan Stanley - MS - close: 28.34 change: +0.35 stop: 27.25 *new*

Tomorrow is our last day for this trade. We want to exit at the close on Tuesday to avoid holding over earnings on Wednesday morning. I'm upping our stop loss to $27.25. I'm not suggesting new positions. MS has exceeded our first target at $27.75. Our second target is $29.75.

--New Trade, buy dip @ 25.25 --
Entry on      July 08 at $25.25 *triggered       
Change since picked:     + 3.09
                              /1st target hit @ 27.75 (+9.9%)
Earnings Date          07/22/09 (unconfirmed)    
Average Daily Volume:      29.4 million 
Listed on  June 23, 2009    


NATCO Group - NTG - close: 35.26 change: +1.24 stop: 31.00 *new*

NTG continues to show strength. I'm raising our stop loss to $31.00. The close over $35.00 is very short-term bullish. Our exit target is $37.50. We do not want to hold over the early August earnings report.

Entry on      July 15 at $32.56 *triggered/gap higher entry
Change since picked:     + 2.70   			
Earnings Date          08/03/09 (unconfirmed)    
Average Daily Volume:       270 thousand
Listed on  July 14, 2009    


Ross Stores - ROST - close: 43.71 change: +0.29 stop: 39.95

ROST marched back toward new all-time highs. I'm not suggesting new bullish positions at this time. Our first target is $45.75. Our second target is $49.45. My time frame is about six weeks.

Entry on      July 13 at $41.60 
Change since picked:     + 2.11   			
Earnings Date          08/20/09 (unconfirmed)    
Average Daily Volume:       2.4 million 
Listed on  July 13, 2009    


BEARISH Play Updates

Gen-Probe - GPRO - close: 39.49 change: -0.12 stop: 42.01

GPRO continues to look bearish with the stock rolling over under $40.00 and ignoring strength in the major indices. Our first target is $38.05. Our second target is $35.25. FYI: The P&F chart is bearish with a $32.00 target.

Entry on      June 23 at $42.03 /gap higher entry
                             /originally listed at $41.64
Change since picked:     - 1.95   			
Earnings Date          07/30/09 (unconfirmed)    
Average Daily Volume:       449 thousand
Listed on  June 23, 2009    


Humana Inc. - HUM - close: 29.05 change: +0.07 stop: 31.05

The healthcare sector under performed the rest of the market on Monday. HUM only gained 7 cents. Readers can launch new bearish positions anywhere in the $29.50-30.00 zone. More conservative traders may want to consider a stop loss closer to $30.00. Our target is $25.25.

Entry on      July 16 at $29.50 *triggered       
Change since picked:     - 0.45   			
Earnings Date          08/03/09 (confirmed)    
Average Daily Volume:       3.1 million 
Listed on  July 14, 2009    


Intl. Speedway - ISCA - close: 25.00 chg: -0.03 stop: 27.05

ISCA is also under performing the market. Shares churned sideways all session and closed in the red. More conservative traders may want to lower their stop loss to $26.15. Our first target is $22.10. Our second target is $20.25. My time frame is six to eight weeks.

Entry on      July 09 at $24.75 *triggered       
Change since picked:     + 0.25   			
Earnings Date          07/07/09 (confirmed)    
Average Daily Volume:       342 thousand
Listed on  July 08, 2009    


Medtronic Inc. - MDT - close: 34.75 change: +0.08 stop: 35.35

Just as I suspected MDT saw an intraday spike over the $35.00 level. Shares hit $35.11 this morning before immediately reversing. Over the weekend we had raised our stop loss to $35.35. Today's move looks like a failed rally near $35.00 resistance but readers may want to wait for confirmation first before launching positions. A drop under $34.00 should work as a new entry point. Our first target to take profits is $30.10. Our second target is $28.25.

Entry on      July 11 at $32.80 
Change since picked:     + 1.95   			
Earnings Date          08/18/09 (unconfirmed)    
Average Daily Volume:       6.3 million 
Listed on  July 11, 2009    


Walgreen Co. - WAG - close: 30.07 change: +0.25 stop: 30.31

I believe our WAG play is in trouble. The stock managed to rally above and close above the $30.00 level. Shares still have technical resistance at their 50-dma but it won't take much for WAG to hit our stop loss at $30.31. I'm not suggesting new positions at this time. Our first target is $26.10.

Entry on      July 11 at $28.84 
Change since picked:     + 1.23   			
Earnings Date          09/21/09 (unconfirmed)    
Average Daily Volume:       8.4 million 
Listed on  July 11, 2009    


CLOSED BULLISH PLAYS

Double-Long Oil ETN - DXO - close: 4.18 change: +0.20 stop: 3.45

Second target achieved. Oil continued to spike higher as traders try to position themselves ahead of August oil futures expiration tomorrow night. The DXO shot to $4.21 intraday. Our second target to exit this trade was $4.20.

chart:

Entry on      July 09 at $ 3.48 /gap down entry
                              /originally listed at $3.60
Change since picked:     + 0.72 <<--2nd target hit @ 4.20 (+20.6%)
                              /1st target hit @ 3.90 (+12.0%)
Earnings Date          00/00/00 
Average Daily Volume:      12.4 million 
Listed on  July 09, 2009    


MEDNAX Inc. - MD - close: 42.33 change: -0.39 stop: 41.99

MD has hit our stop loss at $41.99. The stock failed to participate in the market's strength. MD produced a failed rally at $43.00 this morning and dipped under $42.00. Short-term this stock looks poised to move lower.

chart:

Entry on      July 01 at $43.01 *triggered       
Change since picked:     - 1.02 <-- stopped @ 41.99 (-2.3%)
Earnings Date          08/03/09 (unconfirmed)    
Average Daily Volume:       367 thousand
Listed on  June 30, 2009    


Western Digital - WDC - close: 28.92 chg: -0.32 stop: 26.95

Target achieved. WDC gapped open higher at $29.53. Our new target to exit this trade was $29.45. I would keep WDC on your watch list for a new entry point on a pull back toward its 30 or 40-dma but avoid holding over earnings in late July.

chart:

Entry on      June 25 at $26.10 *triggered       
Change since picked:     + 3.43<-- target hit @ 29.53 (+13.1%)
                              /gap higher exit
Earnings Date          07/28/09 (unconfirmed)    
Average Daily Volume:       4.6 million 
Listed on  June 24, 2009    


CLOSED BEARISH PLAYS

Gamestop - GME - close: 22.34 change: +0.38 stop: 22.51

Over the weekend we raised our stop loss on GME to $22.51. Shares managed to hit $22.52 midday so our play is closed. Shares remain in a down trend. Readers may want to keep it on their watch list for another failed rally pattern.

Previously GME had hit our first target at $22.05 and our second target at $20.25.

chart:

Entry on      June 02 at $24.32 
Change since picked:     - 1.81 <-- stopped @ 22.51 (-7.4%)
                              /1st target hit @ 22.05 (-9.3%)
                             /2nd target hit @ 20.25 (-16.7%)
Earnings Date          08/20/09 (unconfirmed)    
Average Daily Volume:       6.3 million 
Listed on  June 02, 2009