Option Investor
Newsletter

Daily Newsletter, Monday, 8/3/2009

Table of Contents

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

Market Wrap

Psychological Barriers? Yeah, Right

by Todd Shriber

Click here to email Todd Shriber
For the past few weeks, there has been a lot of chatter about psychological barriers. Surely the Dow Jones Industrial Average would stumble at 9000, some experts lamented. The S&P 500 would have a fight at 1,000, they opined. Nasdaq 2000? Another fight at a psychological barrier, market gurus pontificated. Well, the so-called experts that made those prognostications were wrong on all counts as the bulls continued to run on Monday, sending the S&P 500 above 1000 for the first time since November 2008.

The measure of the 500 largest US stocks finished the day up 15.15 points at 1002.63, just a point off its intraday high. The Dow appears to be inching its way to 9300, closing up nearly 115 points to 9286.56. The venerable index came within 1.57 points of 9300 before retreating a tad. Of course the Nasdaq, which has been the leader of this rally, joined the party, skating past 2000 with the greatest of ease to close up 30.11 points to 2008.61. Monday's close represents the first time the Nasdaq has closed above 2000 since October 2008.

Market Stats Table

A couple of good economic reports got the market off to fine start this morning and it never looked back. The Institute for Supply Mana agement's manufacturing survey helped fan the flames of the rally by reporting a rise to 48.9% in July from 44.8% in June. That is the strongest level for the temperature check of US manufacturers since September 2008 and well ahead of the consensus estimate of 46.2%. The survey has been steadily rising for the past several months, which gives the bulls fodder that the economy is indeed recovering, but it pays to note that only readings above 50% signal actual expansion.

ISM Chart

Not to be outdone was the construction sector with Commerce Department's report that construction spending rose 0.3% in June. The 12-month growth rate in private construction spending improved to -16.3% in June from -18% in May.

Construction Spending

This pair of data points may be classified as those notorious green shoots that the bulls have been clamoring for quite a while now. Another interesting anecdote is the fact the only method of tempering this rally that the bears have devised is to mention that stocks are still 30% or more removed from their 2007 highs. Yes, that talking point is true and it cannot be argued, but the other side of the coin is that the Dow has tacked on more than 500 points in two weeks, the Nasdaq has added close to 120 points and the S&P has soared past 1,000.

Those are strong moves in a short amount of time that few, if any, market observers saw coming so quibbling over the fact that stocks are still off their 2007 highs is kind of like passing on New York strip and demanding a filet mignon.

Even news that Bank of America (BAC) would settle charges with the Securities and Exchange Commission over fibs told to investors regarding the Merrill Lynch acquisition could not derail the bulls on Monday. The SEC said Bank of America was less than forthright to shareholders regarding bonuses that were paid to keep Merrill executives around after the acquisition and saddled the bank with a $33 million fine.

And what was the outcome for the stock? The Dow member rose 53 cents, or 3.6%, to $15.37 and has nearly tripled in the past six months. News of management reshuffling that included the hiring of former Citigroup (C) CFO Sallie Krawcheck to lead BofA's wealth management unit had some investors speculating that a succession plan for embattled CEO Ken Lewis is closer to being established and that was enough to send buyers into the stock.

Turnover at the highest levels of Bank of America has been brisk in recent months and the Street seems to favor these moves. It was just a couple of months ago that I mentioned here that some major BofA shareholders wanted the entire board removed. That did not happen at the most recent shareholders meeting, but since then, 10 board members have departed.

Solid earnings reports from UK banks Barclays (BCS) and HSBC (HBC) helped bank stocks book decent gains on Monday. Both Barclays and HSBC, the largest European bank, have American Depositary Receipts (ADRs) that trade in the U.S., and their bullish reports may show that things are improving in the U.K. Do not underestimate the value of that news as it was just a short while ago the U.K. banks found themselves to be even more imperiled than their American counterparts.

The Philadelphia Bank Index (BKX), which tracks the 24 largest US banks, continued its March higher on Monday, rising $1.06 to $41.50. BKX now rests well above its 50 and 200-day moving averages and looks poised to break through its May high of $43.80.

BKX Chart

The bullish market tenor on Monday also helped lift commodity prices, with copper's rise noteworthy among the metals. I mentioned copper prices in the Market Wrap a couple of weeks ago, discussing their rapid rise and how some market mavens use the metal's prices to measure the strength of market rallies and recoveries. Copper climbed to its highest level in 10 months with the August contract closing near $2.74 an ounce.

Copper Chart

As an equity play on copper, I mentioned Freeport McMoRan (FCX), the largest US copper producer. That was July 20 when the stock was in the mid-50s. Well, the rally, at least the rally in copper prices, appears to be for real as Freeport's shares closed Monday at $65.15. That is good for almost 20% in two weeks and the chart does not show much in the way of resistance until the psychological level (see the theme developing?) at $70.

FCX Chart

What about crude oil you ask? The Monday commodities rally did not pass over black gold as crude for September delivery closed above the psychologically important $70 a barrel level. That was good to help lift the fortunes of major explorers like Exxon (XOM) and Chevron (CVX), which delivered less than stellar earning reports last week. Both stocks were up on Monday, but the gains were nothing to write home about.

By now, you know what I like to watch when it comes to the oil patch and that is the Oil Services HOLDRs ETF (OIH). OIH put in a bottom around $86 in early July and has since soared back above $100, adding $4.50 today, to close at $108.02. The critical $100 level now acts as support for OIH and a move to the June high of $115.64 could be in the offing if crude can break $75 a barrel.

Crude Chart

Tuesday promises to be an eventful day on both the economic and earnings news fronts. Before the bell, the Commerce Department may give us some insight regarding the health of the consumer with personal income and spending data. Predictably, personal incomes are expected to decline 1% for June after a 1.4% rise in May. June's personal spending number is expected to inch up 0.3% in June after rising one percent in May. Not a gain worth bragging about, but hey, a gain is better than a decline when it comes to these data points.

There is also more news from the housing sector on the docket for tomorrow. The National Association of Realtors will deliver news of June's pending-home-sales and the market is expecting a 0.3% increase after a 0.1% pop in May. Remember that last week's housing news was a positive and a continuation of this theme is a must for the bulls to continue their recent market dominance.

On the earnings front, CVS Caremark (CVS), the drug store operator, reports second-quarter results before the bell and analysts are forecasting profits of 64 cents a share on sales of $24.4 billion. CVS would do well to excite the Street by beating those numbers and upping its guidance after the bullish reports by rivals Express Scripts (ESRX) and MedcoHealth Solutions (MHS).

Another company reporting before the bell that could be a catalyst for Tuesday's market sentiment is homebuilder D.R. Horton (DRI), the largest US homebuilder. Analysts are calling for a loss of 21 cents a share, so an upside surprise and/or encouraging words about the housing sector would be welcomed with open arms by investors. It is worth noting that D.R. Horton rival Putle Homes (PHM) reported a second-quarter loss of $189.5 million, or 74 cents a share, on Monday.

Other names that might be worth watching include agriculture giant Archer Daniels Midland (ADM). The Street consensus there is a profit of 45 cents a share. Emerson Electric (EMR), the industrial conglomerate, is expected to post a profit of 57 cents a share. For a check on construction and infrastructure spending, keep an eye on Martin Marietta Materials (MLM) where analysts are expecting a profit of 77 cents a share.

What superlatives are left to heap on the market at this juncture? The Dow was up 9% in July, good for its best July performance since 1989. That is certainly nothing to scoff at and leads me to talk more about resistance areas than support. Picking a level at which the Dow is going to struggle has proven futile. After all, the index blew 8800, 9000 and 9100 with such ease that as long as bad news doesn't emerge, 9300 will probably be broken as soon as Tuesday.

On the all-important psychological basis, 9500 is probably the next resistance point and 9000 seems to have been established as the first support area. I mentioned the Stochastics showing an overbought condition last week in the low 70s. They now rest around 93. Make of that what you will.

Dow Chart

The scenario is similar with the S&P 500 with Monday's close above 1000 showing that support has been established around 980-985 and resistance still a fair bit off in the 1020-1025 area. A break of 1025 could take the index to, you guessed, another psychological barrier at 1050. That probably will not happen on Tuesday, but a close in the 1020s could give the bulls more fuel for their fire. A move to 1100 gets the S&P 500 back to its pre-Lehman Brothers collapse level.

S&P 500 Chart

The Nasdaq posted a 7.7% gain in July and appeared to be stalling toward the end of last week, which probably led more than a few investors to bet on a decline for the tech-heavy index today. Mr. Market obviously had a different plan in mind. Like the Dow, the Nasdaq Stochastics resided in the 70s a week ago. They now hover around 92.5. With a lack of catalysts outside of Cisco's (CSCO) earnings report, the Nasdaq could be the first of the major indexes to see its rally stall. Even if that happens, only a fall to or below the 1950 would be truly concerning.

Nasdaq Chart

The biggest news catalyst for the week comes on Friday in the form of July unemployment data so with no real stumbling blocks on the horizon until then, it would be no surprise to see the bulls continue their run over the next few days. Sure, stocks appear overbought at this point and the market has rallied hard and fast in a condensed period of time, but is this a trend worth betting against? Probably not.


New Plays

Check Out This Apparel Retailer

by James Brown

Click here to email James Brown


NEW BULLISH Plays

Aeropostale - ARO - close: 37.89 change: +1.49 stop: 35.95

Why We Like It:
I hate to suggest new bullish positions with the stock market this overbought but stocks can always get more overbought than you think. It wouldn't surprise me to see the market keep climbing the next few days, especially after today's close over 1,000 for the S&P 500 and 2,000 for the NASDAQ. We already have several bullish candidates to buy a dip but what if that dip doesn't come until next week?

Let's try a more aggressive trade. I'm suggesting we try small bullish positions on ARO. The stock has been showing relative strength and looks poised to breakout to new all-time highs. We'll try and limit our risk with a tight stop under today's low but we still want to use positions sizes at least half if not smaller than your normal trades. We'll take some money off the table at $39.95. Our final exit will be $42.00.

Annotated chart:

Entry on    August 03 at $37.89 
Change since picked:     + 0.00   			
Earnings Date          08/20/09 (unconfirmed)    
Average Daily Volume:       2.6 million 
Listed on  August 01, 2009    



In Play Updates and Reviews

NTG scores!

by James Brown

Click here to email James Brown


BULLISH Play Updates

Ameron Intl. - AMN - close: 73.66 change: -0.86 stop: 70.95

We should view today's action in AMN as a warning. The stock failed to rally with the wider market. The low today was $72.50. More conservative traders may want to up their stops toward $72.00 or $72.50 or just exit completely. I'm not suggesting new bullish positions at this time. AMN has already exceeded our first target at $74.70. Our second and final exit target is $79.50.

Entry on      July 16 at $70.50 *triggered       
Change since picked:     + 3.16
                              /1st target hit @ 74.70 (+5.9%)
Earnings Date          09/21/09 (unconfirmed)    
Average Daily Volume:       150 thousand
Listed on  July 15, 2009    


America Movil - AMX - close: 45.00 change: +1.99 stop: 37.95

AMX continues to rally and broke out past the July highs. Shares remain overbought and we don't want to chase it. I am suggesting readers buy AMX on a dip in the $40.50-40.00 zone (a minor adjustment from the weekend update). We'll use a stop loss at $37.95. Our first target is $44.50. Our second target is $47.40. Our time frame is four to six weeks.

Entry on    August xx at $xx.xx <-- TRIGGER @ 40.50
Change since picked:     + 0.00   			
Earnings Date          07/21/09 (confirmed)    
Average Daily Volume:       4.3 million 
Listed on  August 01, 2009    


Aegean Marine Petrol. - ANW - close: 17.97 change: +0.97 stop: 15.49

ANW displayed some impressive relative strength with a 5.7% gain. The rally stalled right at resistance near $18.00 and its exponential 200-dma. I'm not suggesting new positions at this time. More conservative traders may want to raise their stop closer to $16.00. Our first target is $18.20 and our second target is $19.75.

Entry on      July 29 at $16.50 *triggered      
Change since picked:     + 1.47   			
Earnings Date          08/12/09 (unconfirmed)    
Average Daily Volume:       284 thousand
Listed on  July 18, 2009    


Bank of America - BAC - close: 15.32 change: +0.53 stop: 12.45

A stronger than expected earnings report from Europe's biggest bank, HSBC, helped set the bullish tone for financials today. Here in the states BAC helped eliminate some investor uncertainty by settling with the SEC and agreeing to pay a $33 million fine over materially misleading statements regarding the acquisition of Merrill Lynch. Investors also applauded news that BAC was hiring former Citigroup executive to manage BAC's global wealth and investment management division.

Technically today's move in BAC is a bullish breakout past resistance at its May 2009 highs and resistance at the $15.00 level. Yet I don't want to chase it here. The stock looks overbought with the bounce from $12.00. Our plan is to buy BAC on a dip at $13.70. If triggered our first target is $15.75. Our second target is $17.90. The Point & Figure chart is bullish with a long-term target at $31.00.

Entry on    August xx at $xx.xx <-- TRIGGER @ 13.70
Change since picked:     + 0.00   			
Earnings Date          07/17/09 (confirmed)    
Average Daily Volume:       310 million 
Listed on  August 01, 2009    


Electronic Arts - ERTS - close: 21.55 change: +0.08 stop: 20.49

Tomorrow is our last day for ERTS. We plan to exit at the closing bell on Tuesday to avoid holding over earnings. You can see how the stock failed to participate in today's market rally because investors are waiting to hear the earnings news. If the major markets indices start showing weakness tomorrow readers may want to exit early! Our target to exit is $22.95.

Entry on      July 28 at $21.10 
Change since picked:     + 0.37   			
Earnings Date          08/04/09 (confirmed)    
Average Daily Volume:       6.5 million 
Listed on  July 28, 2009    


Hormel Foods - HRL - close: 36.12 change: +0.21 stop: 34.75

I have nothing new to report on for HRL. The trend is up but when the market corrects we can expect HRL to follow. I'm not suggesting new positions at this time. Our first target is $37.90. Our second target is $39.90. My time frame is mid to late August because we need to exit in front of earnings. FYI: The Point & Figure chart is very bullish with a $50 target.

Entry on      July 20 at $35.40 /gap higher entry
                              /originally listed at $35.25
Change since picked:     + 0.72   			
Earnings Date          08/20/09 (confirmed)    
Average Daily Volume:       486 thousand
Listed on  July 20, 2009    


IDEX Corp. - IEX - close: 27.98 change: +0.70 stop: 24.75

More aggressive traders may want to consider a breakout trigger to buy IEX above $28.00 (and adjust your stop loss higher). The stock's consolidation has a bullish pattern of higher lows and it's coiling for a breakout higher. Unfortunately, I'm more concerned with the larger market. Even a strong stock will normally trend lower if the market is correcting.

I'm suggesting a trigger to buy IEX at $26.10 but readers could use a $26.25-25.00 zone as an entry range. The Point & Figure chart is bullish and points to a $39.00 target. If we are triggered near $26.00 our first target is $29.85. My time frame is six to eight weeks.

Entry on      July xx at $xx.xx <-- see TRIGGER  
Change since picked:     + 0.00   			
Earnings Date          07/20/09 (confirmed)    
Average Daily Volume:       570 thousand
Listed on  July 25, 2009    


J.P.Morgan Chase - JPM - close: 39.60 change: +0.95 stop: 33.90

Stocks just get more and more overbought. The better than expected earnings from HSBC this morning helped fuel the rally in banking stocks. JPM gained 2.4% but the rally stalled under the $40.00 mark. I am suggesting we remain patient and wait for the right entry point.

The plan is to buy JPM on a dip at $35.50. Our first target is 38.75. Our time frame is four to six weeks. FYI: JPM's P&F chart is bullish with a $51 target.

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: 29.31 change: +0.81 stop: 25.75

Strength in the financials has lifted MS to a 2.8% gain and a rally right to resistance in the $29.30-29.40 zone. We do have a trigger to buy MS at $29.50 but we only want to trade half our normal position size. Actually we have two triggers.

If we buy the dip at $26.75 our first target is $29.30 and our second target is $31.50.

If we buy a breakout at $29.50 our first target is 31.50 and our second target is $34.50.

Entry on      July xx at $xx.xx <-- TRIGGER @ 26.75 or 29.50
Change since picked:     + 0.00   			
Earnings Date          07/22/09 (confirmed)    
Average Daily Volume:        24 million 
Listed on  July 23, 2009    


Microsoft - MSFT - close: 23.83 change: +0.31 stop: 21.80

MSFT spent the session trading sideways in a narrow range. I don't see any changes from my weekend comments.

More aggressive traders could buy dips near the rising 50-dma. I'd prefer to wait for a dip near support around $22.00. More aggressive traders may want to widen their stop loss to under $21.00 or under $20.00 depending on your risk tolerance. Our ten to twelve week target will be $27.75.

Entry on      July 27 at $23.00
Change since picked:     + 0.83   			
Earnings Date          07/23/09 (confirmed)    
Average Daily Volume:        58 million 
Listed on  July 23, 2009    


UltraShort NASDAQ - QID - close: 26.07 change: -0.76 stop: 25.69

It looks like we're a little early calling a top in the NASDAQ and a bottom in shares of QID. The QID edged down toward the $26.00 level again and if the NASDAQ can build on its close over the 2,000 level today then we'll probably be stopped out on Tuesday. We knew this was a very aggressive, counter-trend trade and suggested very small position sizes. At this time I'd wait for a move over $27.00 or 27.50 or even $28.00 before considering new positions.

Entry on      July 30 at $26.63 
Change since picked:     - 0.56   			
Earnings Date          00/00/00 
Average Daily Volume:      23.9 million 
Listed on  July 30, 2009    


Ross Stores - ROST - close: 43.72 change: -0.35 stop: 42.49 *new*

I am very surprised that we did not get stopped out today. Shares of ROST were downgraded this morning and the stock gapped open lower at $43.20 and dipped to $42.56 before paring its losses. I am not suggesting new positions and more conservative traders may want to exit completely. I'm inching up our stop loss to $42.49.

ROST has already hit our first target at $45.75. Our second and final target is $49.45.

Entry on      July 13 at $41.60 
Change since picked:     + 2.12
                              /1st target hit @ 45.75 (+9.9%)
                              /sell half @ 44.00 (+5.7%)
Earnings Date          08/20/09 (unconfirmed)    
Average Daily Volume:       2.4 million 
Listed on  July 13, 2009    


Grupo Televisa - TV - close: 18.30 change: +0.21 stop: 17.24

Shares of TV gapped open higher this morning at $18.22 and rallied toward resistance near $18.50. Yet the rally stalled and reversed course at $18.55. Nothing has changed for us. We want to buy a breakout but the trigger is still at $18.60. If triggered our first target is $19.95. Our second target is $21.45. The Point & Figure chart is bullish with a $25 target.

Entry on    August xx at $xx.xx <--  TRIGGER @ 18.60
Change since picked:     + 0.00   			
Earnings Date          07/16/09 (confirmed)    
Average Daily Volume:       2.2 million 
Listed on  August 01, 2009    


BEARISH Play Updates

Biogen Idec Inc. - BIIB - close: 48.36 change: +0.81 stop: 50.05

The biotech sector was bouncing today after a minor pull back late last week. The group still looks very overbought and due for a correction. Shares of BIIB managed a 1.7% bounce but the trend is still down. Readers may want to watch for a failed rally in the $49.00-50.00 zone as a new entry point for bearish positions. Our first target is $43.00. Our second target is $40.50. My time frame is four to six weeks.

Entry on      July 30 at $47.36 
Change since picked:     + 1.00   			
Earnings Date          07/16/09 (confirmed)    
Average Daily Volume:      3.28 million 
Listed on  July 30, 2009    


CLOSED BULLISH PLAYS

LDK Solar Co. - LDK - close: 11.37 change: +0.43 stop: 9.49

I am temporarily moving LDK off the play list. We've been waiting for a correction that doesn't want to show up. I would keep the stock on your watch list for a dip near $10.00 or its 100-dma. Don't forget to avoid earnings on August 12th.

chart:

Entry on      July xx at $xx.xx <-- see TRIGGER  
Change since picked:     + 0.00   			*never opened*
Earnings Date          08/12/09 (confirmed)    
Average Daily Volume:       4.0 million 
Listed on  July 25, 2009    


NATCO Group - NTG - close: 38.15 change: +2.09 stop: 33.90

Target achieved. NTG gapped open higher at $37.16 and quickly rallied toward the $38.00 level. Our final target to exit was $37.50.

chart:

Entry on      July 15 at $32.56 *triggered/gap higher entry
Change since picked:     + 4.94 <-- target hit @ 37.50 (+15.1%)
                              /sell 1/2 @ 36.65 (+12.5%)
Earnings Date          08/03/09 (unconfirmed)    
Average Daily Volume:       270 thousand
Listed on  July 14, 2009