Option Investor
Newsletter

Daily Newsletter, Wednesday, 8/5/2009

Table of Contents

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

Market Wrap

Service-Sector News Helps Cool Rally

by Judy Alster

Click here to email Judy Alster
Today started off with a plummet thanks partly to the weak service sector report. Even so, some kind of breather was to be expected after the heartening rally that sent the Dow and the S&P 500 up some 14% in 16 days, especially with all the tension ahead of Friday's jobs report. The Dow got as low as 9206, the S&P500 slid to 994 and the Nasdaq got as far down as 1980. The market closed lower almost across the board, but made a valiant effort to recover and did regain a lot of ground:

INDEX WRAPUP, Aug. 5:

DOW JONES INDUSTRIAL AVERAGE:

S&P 500:

NASDAQ:

S&P500, intraday:

It was a very big morning for economic reports, and they did have an effect on the markets. Before the open came two reminders that employment usually lags a recovery. Challenger's July count of layoff announcements jumped to 97,373, up from 74,393 in June. (Note that factory shutdowns and re-openings in the auto sector have been skewing job-cut reports and jobless claims all over the place for the last month.) The Challenger Job-Cut Report categorizes announcements of corporate layoffs based on mass layoff data from state departments of labor and is considered a decent leading indicator of new jobless claims.

Caution, though: Job-cut reports don't distinguish between layoffs scheduled for the short-term or the long term, or whether job cuts are being handled through attrition or actual layoffs, it doesn't include jobs eliminated little by little over time and it's not adjusted for seasonal variation. Announcements of layoffs don't correlate immediately to actual layoffs, since not every layoff announcement results quickly in a near-term job loss.

The numbers are different, but this Department of Labor Graph confirms the recent spike up in the job-cut report:

JOBLESS CLAIMS

Automatic Data Processing's national employment report focuses on monthly changes in payrolls and it wasn't too bad: minus-371,000 for July, down from a loss of 463,000 jobs in June. In other words, people are still losing jobs but at the slowest rate since October of last year. The labor market could be stabilizing and at this rates bodes hopeful for Friday's jobs report. Some consider the ADP figure a stand-in for the government's non-farm payroll reading. The ADP report represents about 400,000 U.S. businesses and 24 million U.S. private sector employees and also looks like a confirmation of, if not a bright employment picture, at least an unemployment picture that's getting definitely less bleak.

This Department of Labor graph shows the slowing of unemployment beginning in March:

CHANGE in NONFARM EMPLOYMENT:

The Mortgage Bankers' Association index of mortgage purchase applications was reported as rising 0.9% in the July 31 week "to an undisclosed level," with the MBA saying only that "It's been little changed over the last three weeks between 260 and 265. (When you add 0.9% to last week's 262, you get 262.9.) Likewise, the MBA did not post a level for the refinance index, saying it increased 7.2% in the week and is about 35% higher than the low in June. Mortgage rates were mostly lower in the week with 30-year loans down 19 basis points to an average 5.17 percent. Here's a look at 30-year mortgage rates through July and their virtual twin, 10-year Treasury yields:

30-YEAR MORTGAGE RATES TRACKED BY 10-YEAR TREASURY YIELDS:

Helping to throw cold water on the rally was the Institute of Supply Management's Non-Manufacturing Index report, which said business at service companies was weaker than expected last month. The group's services index, which measures the health of retail, financial services, transportation and health care companies, fell to 46.4 from 47 in June, falling short of expectations and marking the 10th straight month of declines; a reading below 50 indicates the sector is shrinking.

Prices also fell, down more than 12 points. That reflected a drop in energy prices but more important than that, it signified poor pricing power. That's nice for consumers who can afford anything, but it's not good for future earnings and consequently could drag on stocks and commodities.

Look at it in context, though. The last four NMI reports are all well off the March low, and the latest month is still well above the 12-month average. Should we really jump off a bridge because of a six-tenths-of-one-percent drop?

NON-MANUFACTURING INDEX, 12 months:

Even some cheerful news from the Commerce Department didn't help much: Factory orders, the dollar level of new orders for both durable and non-durable goods, improved in June for the fourth time in five months. The 0.4% gain fell short of May's 1.1% but was much better than the expected 1% decline. Inventories continued to fall and one day soon those rapidly-emptying shelves will transform into big new orders. Some analysts think that could happen as early as next month, since the Institute for Supply Management reported an increase in shipments in June, up 1.4% after a 0.8% fall in May.

Despite these recent signs of improvement in manufacturing and housing, the market is evidently still worried that rising unemployment will stop consumers from spending and put the kibosh on the recovery.

I'm not so sure. Look at this unassuming government graph, below; it shows domestic purchases and demand rising markedly in the second quarter. They're still in negative territory, but at their best level in almost a year. On this very topic, I was in Las Vegas for a couple of days last month and all I could mumble to my friends, as we attempted vainly to navigate the 24-hour-a-day crowds without getting stepped on, was, "What recession?" Big cigar-chomping guys were lined up three deep at the craps tables as they always have been and nobody blinked an eye at paying $150 to see a show or $19 for the calamari appetizer. If Vegas is any indication at all, we may be seeing the light at the end of the tunnel soon.

REAL DOMESTIC PURCHASES and DOMESTIC FINAL DEMAND:

Today there were several announcements of upcoming Treasury auctions. On the 11th the Treasury will auction $37 billion in three-year notes; on the 12th, $23 billion in 10-year notes and on the 13th, $15 billion in 30-year bonds. I mention this as a prelude to telling you that you -- you personally, the regular individual investor -- can bid on these instruments. As of last year, all Treasury marketable securities -- bills, notes, bonds and TIPS -- are sold and transferred in increments of $100, replacing the $1,000 minimum purchase and transfer amount that had been in effect since 1998. Go to www.treasurydirect.gov to read about it.

Maybe not surprisingly, the Energy Information Administration said crude supplies continued to grow. Crude oil stocks rose 1.7 million barrels in the July 31 week to 349.5 million. To try to offset the buildup, product stocks fell, down 0.2 million barrels for gasoline to 212.9 million, and down 1.1 million barrels for distillates to 161.5 million. Demand continued weak, at just +0.5% year-over-year for gasoline; for the month of July, demand was down 3.1%. Refineries are limiting output, continuing to operate at less than 85% percent of capacity.

As some have pointed out, of course demand is down: Millions of people don't have jobs to drive to. One also suspects that driving patterns may be slowly changing, even without $4-a-gallon gasoline, as more people think twice before using the car for a single errand.

Crude prices bounced around in initial reaction to the EIA report but despite weak demand and rising supplies, closed higher, at $71.97 a barrel. This chart tells us what spot crude's been doing since 2005 through Tuesday:

U.S. SPOT CRUDE PRICES:

Gold futures, in response to the job-cut and service-sector reports, fell from their highest levels in two months. It gave the dollar a lift. August gold futures fell $4.10 or 0.4% to $963.40 an ounce; precious metals indexes followed suit:

GOLD and SILVER INDEX:

In stock news, financials outperformed the broader market with ease for the second straight session, remaining in the green for almost the entire session before closing up over 3%. Regional banks advanced 2.9%, diversified banks climbed 5.4% and diversified financial services stocks were up 5.4%, including Bank of America (BAC), and JPMorgan Chase (JPM). Financials are now up more than 8% this week.

FINANCIAL SELECT SECTOR:

News Corp (NWS) lost $203 million in the fourth quarter on a MySpace writedown and operating profit worse than expected due to, what else, the economy. The net loss of 8 cents per share compared was way down from a net profit of $1.1 billion or 43 cents per share a year ago. News Corp. bought MySpace, you'll recall, in 2005 for $580 million. Hamlet was right: Timing is everything. The stock gained one cent today.

Cisco earnings fell 46% but beat expectations anyway. The company says it sees the recession loosening and is confident this is the bottom. Sales fell 18% to $8.5 billion and earnings were an adjusted-for-stock-compensation 31 cents share; analysts were expecting 29 cents. Cisco sees another drop in revenue this quarter, but says its cost-cutting program -- which was fierce -- is over, and it's going to focus on growth. The stock lost about $1 to $21.42 but it's probably no big deal since it's clearly trading well into new territory,

CISCO:

Some stocks were up wildly with the kind of charts we haven't seen in a long time. Some big gainers included mortgage insurer Radian Group (RDN), who surged more than 83% after announcing a second-quarter profit and revenue that more than doubled. The stock closed at $6.72, up $3.05. Radian earned almost $232 million or $2.82 a share on revenue up 58% to $577 million.

RADIAN GROUP:

Also on a tear was embattled insurer American International Group Inc. (AIG), up $8.48 at $22. The company gained more than 60% and it doesn't even announce earnings until Friday. Obviously a lot of that jump was short-covering after better-than-expected earnings from Marsh & McLennan (MMC) gave insurers a boost.

AIG:

Shares of auto supplier American Axle (AXL) leapt $1.14 or 44%. Investors were responding to the announcement that the company had cut its second-quarter losses by more than half, despite the fact that its revenue plummeted due to extended shutdowns at General Motors and Chrysler Group plants. The Detroit company reported a loss of $288.6 million or $5.20 per share, compared with a loss of $644.3 million or $11.98 per share last year. Revenue fell 50% to $245.6 million. Can you imagine what the reaction would have been if they'd turned a profit?

AMERICAN AXLE:

So . . . What do we take away from today's session? That a big concern on Wall Street is layoffs and the concomitant drop in personal income. Job cuts have to slow for the economy to have a solid recovery. In the meantime, the market is perceptibly creeping up. There are signs of strength and one is the fact that Wednesday's mild loss was the biggest point drop in the Dow since July 7. Investors were expecting the market to pause: as we know, trees don't grow to the sky. Stock dips will probably stay muted because investors who missed the early part of the rally will look to buy on weakness. Me, I'm looking for shipping prices to firm and will discuss the Baltic Dry Index next week.

Tomorrow's economic reports bring the inflation-fighting Bank of England's announcement and that of the European Central Bank, the Natural Gas Report, Jobless Claims and others.

A fraction of the companies scheduled to release earnings tomorrow are Unilever, Sun Life, Abiomed, Theragenics, Comcast, Abraxis BioScience, Blue Nile, Brinker International, Beazer Homes, Gerdau SA, Linn Energy, Maxwell Technologies, Crocs, Dollar Tree, Diana Shipping, Hansen Natural, Immunogen, IMAX, Manulife Financial, NovoNordisk, Nvidia, Portugal Telecom, ResMed, Sapient, Silicon Graphics, VeriSign, Westar Energy, WestJet and Williams Partners.


New Plays

52-Week Highs

by James Brown

Click here to email James Brown


NEW BULLISH Plays

TEVA Pharmaceuticals - TEVA - close: 52.43 change: -1.27 stop: 47.95

Why We Like It:
After a strong rally to new all-time highs shares of TEVA look like they're topping out or at least correcting. The $50.00 level was significant resistance so it should now act as support. We want to buy TEVA on a dip in the $50.25-48.00 zone and we'll use a tight stop loss to limit our risk. If triggered at $50.00 our first target is $54.75. Our second target is $59.50. Our time frame is eight to ten weeks.

Annotated chart:

Entry on    August xx at $xx.xx <-- TRIGGER @ 50.25
Change since picked:     + 0.00   			
Earnings Date          11/05/09 (unconfirmed)    
Average Daily Volume:       5.3 million 
Listed on  August 05, 2009    



In Play Updates and Reviews

Technology and Biotech Fade

by James Brown

Click here to email James Brown


BULLISH Play Updates

Ameron Intl. - AMN - close: 73.66 change: -1.08 stop: 70.95

Yesterday AMN was up $1.08. Today AMN is down $1.08. The low was $72.65. I am not suggesting new bullish positions at this time. More conservative traders may want to up their stops toward $72.00 or $72.50 or just exit completely. 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: 45.56 change: -0.06 stop: 37.95

Nothing has changed for us with AMX. 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: 18.88 change: +0.39 stop: 16.25

ANW set another new four-month closing high. Broken resistance near $18.00 should offer some new support. ANW has exceeded our first target at $18.20. Our second target is $19.75.

Entry on      July 29 at $16.50 *triggered      
Change since picked:     + 2.38
                               /1st target hit @ 18.20 (+10.3%)
Earnings Date          08/12/09 (unconfirmed)    
Average Daily Volume:       284 thousand
Listed on  July 18, 2009    


Bank of America - BAC - close: 16.66 change: +1.02 stop: 12.45

There is a lot of money chasing the rally in BAC right now. Stocks that go up really fast usually come down just as fast. I am willing to consider a higher entry point but let's wait for some sort of correction first. Currently the 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    


Hormel Foods - HRL - close: 36.00 change: -0.33 stop: 34.75

Upward momentum in HRL is really starting to stall. Shares have essentially traded sideways the last two weeks. I am adjusting the stop loss to $34.95 but more conservative traders may want to raise their stops toward $35.40 instead.

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:     + 0.60   			
Earnings Date          08/20/09 (confirmed)    
Average Daily Volume:       486 thousand
Listed on  July 20, 2009    


IDEX Corp. - IEX - close: 27.48 change: -0.77 stop: 24.75

Ouch! IEX gave up 2.7% and the stock has produced a bearish engulfing candlestick reversal pattern. That's good news for us since it probably means the correction has started.

We want to use 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: 41.78 change: +1.57 stop: 34.45

The banks have been the leadership group this week. Unfortunately the sector is VERY overbought from their July lows. We do not want to chase this move. We may want to raise our trigger to buy a dip but for now the plan is unchanged with a trigger at $35.50. The first target is $39.50. Our second target is $42.50.

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: 31.05 change: +0.98 stop: 26.45

MS produced a 3.2% gain thanks to strength in the financials. Shares closed near their high for the day, which is bullish for tomorrow's open. MS could hit our first target tomorrow. Be prepared to take profits. Our first target is $31.50. Our second target is $34.50. Our stop loss is now $26.45.

Entry on    August 04 at $29.50 *triggered (1/2 position)  
Change since picked:     + 1.55   			
Earnings Date          07/22/09 (confirmed)    
Average Daily Volume:        24 million 
Listed on  July 23, 2009    


Microsoft - MSFT - close: 23.81 change: +0.04 stop: 21.80

Technology stocks were the under performers today and MSFT gave back its early morning gains. 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:     + 0.81   			
Earnings Date          07/23/09 (confirmed)    
Average Daily Volume:        58 million 
Listed on  July 23, 2009    


UltraShort NASDAQ - QID - close: 26.46 change: +0.40 stop: 25.35

The action in the NASDAQ and NASDAQ-100 index looks like a possible bearish reversal today. That means this bounce in the QID is probably another aggressive entry point to speculate on a correction. Or you could wait for a move over $27.00 if you want a little more confirmation.

This is a very aggressive, counter-trend trade and suggested very small position sizes. Our first target is $29.90.

Entry on      July 30 at $26.63 
Change since picked:     - 0.17   			
Earnings Date          00/00/00 
Average Daily Volume:      23.9 million 
Listed on  July 30, 2009    


Grupo Televisa - TV - close: 17.98 change: -0.27 stop: 17.24

Nothing has changed for us with the TV trade. 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: 47.62 change: -0.99 stop: 50.05

The bounce is fading. I would use this move 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:     + 0.26   			
Earnings Date          07/16/09 (confirmed)    
Average Daily Volume:      3.28 million 
Listed on  July 30, 2009    


St. Jude Medical - STJ - close: 38.10 change: -0.22 stop: 40.20

I don't see any changes from my Tuesday night comments. I would use today's decline as another entry point to open bearish positions. Our first target is $35.50 near the simple 200-dma. Our second target is $33.00. The Point & Figure chart is bearish with a $30.00 target.

Entry on    August 04 at $38.32 
Change since picked:     - 0.22   			
Earnings Date          10/15/09 (unconfirmed)    
Average Daily Volume:       4.4 million 
Listed on  August 04, 2009