Option Investor
Newsletter

Daily Newsletter, Monday, 8/10/2009

Table of Contents

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

Market Wrap

A Little Breather, Is There More To Come?

by Todd Shriber

Click here to email Todd Shriber
With stocks rallying hard and fast from their March lows, expectations have begun to swell for a pullback, or at least a short rest and Monday's trade may show the first signs of equities taking a little break from their recent run. To be sure, the Monday's declines were small with the S&P 500 slipping just 0.3% to 1000.71, but the all-important 1000 level was held. The Dow Jones Industrial Average likewise fell 0.3% to close at 9337.95 with four stocks slumping for every three rising on the New York Stock Exchange. Tech issues were not immune to the declines as the Nasdaq shed eight points to close below 2000 at 1992.24.

Stats Table

Volume was not exactly awe-inspiring on a day when blue chips led the market lower and it was not just equity volume that languished on Monday. Options volume was also light at around just 50% of the daily average. I do not want to get in the business of forecasting events that may or may not occur, but it is worth noting that stocks have been on fire during the typically benign summer months. That certainly speaks to the strength of the rally, but August has a penchant for being one of the more sluggish months on the calendar and September is typically a sour month for stocks, so if equities are going to take a step back, August seems like the ideal time.

Something else worth noting is the fact that traders appear to be primed for a sharp increase in the volatility index, or VIX. According to Bloomberg, traders are betting on a 13% pop in the VIX over the next five weeks, signaling the biggest spread since last August and we all remember the carnage that followed August 2008. August VIX futures trade around $25.90, which is a small premium to Monday's spot close of $24.99, indicating some traders may be willing to pay up for some downside options protection.

VIX Chart

As I noted above, it was blue chip names that did the market in today with familiar names like Alcoa (AA), 3M (MMM) and Cisco Systems (CSCO) contributing to the Dow's fall. Eli Lilly (LLY) and Best Buy (BBY) were taken to the woodshed after Goldman Sachs pared its ratings on both companies. Best Buy, the electronics retail giant, slid 5.3% to $37.66 after Goldman lowered its rating on the stock to ''neutral'' from ''buy,'' saying Best Buy will have to spend aggressively to spur growth. Pharma giant Eli Lilly was added to Goldman's conviction sell list on the basis of looming patent expirations for key drugs.

Curious among the top declining sectors today was the raw materials/commodities group, which tumbled 1.6%, making the sector the biggest loser of the 10 industry groups tracked in the S&P 500. I say curious because materials names had certainly enjoyed their fair share of the recent rally, once again gaining favor among investors after being thrown out with the bathwater late last year.

The Materials Select Sector SPDR ETF (XLB), which counts Dow components Alcoa and DuPont (DD) among its top 10 holdings along with Dow Chemical (DOW) and steelmaker Nucor (NUE), slumped 40 cents to $49.81 today, but keep in mind all of XLB's top holdings were down today and the ETF is up 30% year-to-date, far outpacing the S&P 500's 10% gain. So if ever there was a sector that might be ready to give some of its recent gains back, it might be the materials group. XLB has been consolidating between $30-$31 and today's close below $30 could be bearish, at least in the short-term.

XLB Chart

Another thing to keep in mind regarding the efficacy of a near-term pullback for stocks is that the economic calendar for this week, while busy, is not littered with potential catalyst-type news. Beyond the Federal Open Market Committee's two-day meeting that starts on Tuesday, there is not much in the way of news that will have traders sitting on the edge of their seats. The reality is few investors, if any, are expecting the FOMC to make any interest rate changes.

Of course it behooves the Fed to keep interest rates low in an attempt to fan the flames of economic growth and to aid the Treasury in another week of massive debt auctions. That is right. Treasury is at it again this week with a $37 billion 3-year note auction slated for Tuesday followed by $23 billion in 10-year notes on Wednesday and $15 billion in 30-year bonds on Thursday. Oddly enough, I came across a press report this weekend that pointed out interest in Uncle Sam's debt has been tepid recently and the report went so far as to say that the Fed is picking up the slack by buying billions in bonds on the open market. It seems Treasury doesn't need China to buy all of our debt after all.

The process of the Fed buying Treasury debt is known as debt monetization and there might be something to the press report I saw if you have a look at the chart below that illustrates just how much the Fed's debt holdings have grown recently.

Fed Debt Holdings

Another issue that may hold stocks back a bit is the lack of earnings catalysts. Most of the heavy hitters have already graced us with their most recent earnings results and this week is pretty bare in terms of marquee names reporting profit results until we hear from Wal-Mart (WMT), the nation's largest retailer on Thursday. There is actually a spate of retail earnings that will come out later in the week with Kohls (KSS) and Nordstrom (JWN) joining Wal-Mart on Thursday and JC Penney (JCP) announcing results on Friday.

Combining the upcoming retail earnings reports with Monday's decline in Best Buy, it might be worth keeping an eye on retailers for the remainder of the week, if for no other reason than other sectors appear to be facing light news calendars. I like to watch the SPDR S&P Retail ETF (XRT) when there is the potential for a lots of moves among lots of retailers. XRT has been chugging along, tacking on 25% in the past month, but the ETF closed below $32 on Monday and its Stochastics are screaming overbought. Make of that what you will and have a look at the chart below.

XRT Chart

Other names worth watching tomorrow may include State Street (STT). The manager of $1.6 trillion in assets said on Monday that it may deplete $625 million in reserves set aside to settle lawsuits related to subprime mortgage losses. You did not think those pesky subprime mortgage losses went away with the market rally, did you? State Street made $432 million in payments as of June 30 and has $193 million remaining to cover lawsuits filed in 2007. This issue could weigh on the bank in near-term, the stock shed $1.29 to close at $52.57 on Monday, but the long-term trend is hard to argue with. After all, State Street traded for below $15 in late January and has more than tripled since then.

There was some cheery news on Monday in select names. Take Hormel Foods (HRL) for example. The maker of SPAM boosted its 2009 guidance to $2.36 to $2.42 a share from $2.15 to $2.25 a share after saying its fiscal third quarter was stronger than expected. Hormel reports those results on August 20. Priceline.com's boffo second-quarter results sent the stock soaring $18.92, or 14%, to $150.24 today and this news could provide more fodder that the economy is starting to turn around. Priceline said leisure travel demand was better-than-expected in the second quarter and the company's profits were 35% better than the year earlier period. And, drum roll please, Priceline actually obtained these stellar numbers by growing revenue by 18%, not solely by cutting costs.

Revenue per available room at hotels in many key US markets is expected to decline this year, but the Priceline report could a be a sign that some consumers are feeling comfortable enough to spend on leisure travel and that may just qualify as an unofficial green shoot. Official or not, any news that shows the consumer is feeling a bit more cheery could help the bulls move the market high. After all, the consumer accounts for about 70% of US GDP.

RevPAR Chart

While Monday's declines were nothing to lose any sleep over, as I noted earlier and the chart below shows, September is not exactly the market's favor month. Yes, we are still several weeks away from the dawn of September, but it would be encouraging to see the bulls continue to assert themselves for the duration of August. That may be hard if more traders are hitting the beach early rather than staying attached to their computers.

Either way, ending August on a positive note could prove pivotal in terms of extending the rally through the end of the year. The chart I found only goes up to 2007 and shows September averages a decline of 0.70%, making it the only losing month of the year. And we all remember how bloody September 2008 was, so if you are a bull, keep your fingers crossed that August lives up to its historical billing as one of the stronger months for market returns.

Monthly Performance Chart

Taking a look at the technicals for the three major indexes, the Dow never traversed the 9400 on Monday, which it needs to do before it can begin combating what appears to be strong resistance in the 9420 area. Certainly the bulls would point to the Dow's close that is still above 9300 and that is significant for the time being. If the Dow cannot break the 9420 area and 9300 fails as support, 9200 could be the next resting point and a break there could lead the index back to 9000.

Friday's run to 9437 appears to be no more than a tease and a lack of earnings catalysts could impact the index in the near-term. Do not bank of Wal-Mart being the rising tide to lift all sails with its quarterly report this Thursday.

Dow Chart

A similar scenario is in place for the S&P 500 where Monday's declines were not too punitive and the bulls will surely be glad the measure of the 500 largest US stocks clung to the 1000 level for another day. Keep in mind the S&P 500 is up nearly 50% from its March lows and a little breather does not spell a change in the bullish trend. The index appears to be fighting resistance around 1014 and if it can break through that level, there is a lot of room to run unabated to 1100.

Even if the S&P 500 does take a pause, 980-990 should offer solid support. Only a break of 980 would be troublesome in the short-term.

S&P 500 Chart

Yeah, I know the Nasdaq closed below the critical 2000 level, the tech-laden index has been leading the broader market higher for months and 2000 has proven to be an area that the Nasdaq has frequently stalled out since the tech bubble burst in 2000. What the bulls want to see is the Nasdaq reclaim 2000 and then make its way to 2050, a level that has not been seen in close to a year.

It is probably a fair bet the Nasdaq is going to find tough sledding without the aid of the semiconductor sector. The Philadelphia Semiconductor Index (SOX) has peeled back from 300 and now labors around 295. A move back to the 305 area by the SOX should pull the Nasdaq back above 2000 and within striking distance of 2020.

Nasdaq Chart

If you are a believer that Monday sets the tone for the week, then it would not be surprising to see a lethargic tone loom over the market, but as it is early in the week, I do not want to commit to that sentiment quite yet. This may be one of those middling weeks where a lack of bullish and bearish catalysts simply have the market treading water.


New Plays

Lack of Oxygen

by James Brown

Click here to email James Brown


NEW BEARISH Plays

Expedia Inc. - EXPE - close: 22.77 change: +0.25 stop: 23.55

Why We Like It:
Rival online travel merchant Priceline.com (PCLN) reported earnings today that were significantly better than expected. Not only did PCLN beat on the top and bottom lines but they raised their third quarter guidance. This sent shares of PCLN soaring to new 9-year highs. Shares of EXPE only gained 1% on the news. Of course EXPE already looks extremely overbought with a nearly non-stop rally from its July lows near $13.50. EXPE had its own post-earnings post back on July 30th.

I suspect that all the good news is already baked into these stock prices. EXPE has already reported. PCLN has reported and raised guidance. What catalyst is left to drive these stocks higher? Eventually the rally, or the short covering, will run out. That is what a lot of this rally has been about. Both PCLN and EXPE had above average short interest but PCLN's was around 22% versus EXPE's 9% of the float (number of shares available for trading).

I am suggesting that readers use a trigger to open bearish positions (short positions or buy put options) at $21.85. If triggered our first target is $19.75. Our second target is $18.00. This should be considered a very aggressive trade so I suggest smaller than normal position sizes.

Annotated chart:

Entry on    August xx at $xx.xx <-- TRIGGER 21.85
Change since picked:     + 0.00   			
Earnings Date          10/29/09 (unconfirmed)    
Average Daily Volume:       5.0 million 
Listed on  August 10, 2009    



In Play Updates and Reviews

Targets, Triggers and Stops

by James Brown

Click here to email James Brown


BULLISH Play Updates

Ameron Intl. - AMN - close: 72.98 change: +0.23 stop: 71.25 *new*

AMN displayed a little bit of strength but failed to break the new trend of lower highs developing. I'm inching up our stop loss to $71.25. More conservative traders may want to exit early now. I am 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:     + 2.48
                              /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: 45.18 change: +0.51 stop: 37.95

AMX bounced again but our strategy hasn't changed. Last Thursday's move was a short-term bearish reversal. Nimble traders may want to consider very short-term bearish positions. We want to buy AMX on a dip. I am suggesting readers buy AMX on a dip in the $40.50-40.00 zone. 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 once triggered.

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: 18.98 change: +0.57 stop: 16.99 *new*

ANW showed some impressive relative strength with a 3% rally toward short-term resistance near $19.00. I don't see any specific news behind the rally but oil and energy stocks ended up as some of the best performers today. I am raising our stop loss again, this time to $16.99. More conservative traders may want to put their stop closer to $17.50ish. 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:     + 2.48
                               /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: 16.68 change: +0.26 stop: 13.40

BAC also showed some relative strength with a 1.5% gain. Our plan hasn't changed. We want to buy BAC on a dip at $14.75. If triggered at $14.75 our first target is $16.75 and 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 @ 14.75
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: 36.12 change: +0.19 stop: 35.95 *new*

Wow! The 5.7% rally in HRL today was unexpected. The company issued a surprise earnings warning to the upside and said 2009 results would be better than expected. The stock gapped open higher at $38.74 and closed above resistance at the $38.00 level. Our first target to take profits was $37.90. If you have not taken profits yet I suggest you do so now. I would probably exit 75% of the position. We still have a second and final target at $39.90. However, we will exit ahead of HRL's late August earnings report.

Please note that I am upping our stop loss to $35.95. There is a possibility that HRL will fill the gap.

chart:

Entry on      July 20 at $35.40 /gap higher entry
                              /originally listed at $35.25
Change since picked:     + 2.81
                            /1st target exceeded @ 38.74 gap (+9.4%)
Earnings Date          08/20/09 (confirmed)    
Average Daily Volume:       486 thousand
Listed on  July 20, 2009    


IDEX Corp. - IEX - close: 28.13 change: -0.28 stop: 24.75

There is no change from the weekend update. I still don't want to chase this move. Shares are very overbought from their $22.25 lows from early July.

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: 42.36 change: +1.61 stop: 34.90 *new*

JPM continues to rise. We are still waiting for a correction and I don't see any changes from the weekend update. If you throw a Fibonacci tool on the July rally a 38.2% retracement would be back around $38.65. A 50% retracement would be near $37.35. The stock found resistance near $37.50 back in late May 2009. Let's raise our trigger to buy JPM to $37.75. We'll also raise our stop loss to $34.90. Money managers are still chasing performance so corrections in JPM will probably be shallow. I don't expect a full 50% retracement of the rally.

If triggered at $37.75 our first target is $41.75. Our longer-term target is $44.00. Our time frame is eight to ten weeks.

Entry on      July xx at $xx.xx <-- TRIGGER @ 37.75
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: 30.83 change: -0.39 stop: 27.75

MS dipped 1.2% and hopefully the pull back continues. Wait for a dip back toward the $29.00-28.00 zone before considering new bullish positions. I'm raising the stop loss to $27.75. MS has exceeded our first target at $31.50. I am raising our second target to $34.90.

Entry on    August 04 at $29.50 *triggered (1/2 position)  
Change since picked:     + 1.43
                              /1st target hit @ 31.50 (+6.7%)
Earnings Date          07/22/09 (confirmed)    
Average Daily Volume:        24 million 
Listed on  July 23, 2009    


Microsoft - MSFT - close: 23.42 change: -0.14 stop: 21.80

MSFT continues to under perform. Shares drifted sideways for another day and edged closer to a breakdown under its 50-dma. I am not suggesting new bullish positions at this time. The long-term trend is now up but we'd rather buy a dip near $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. I'm starting to think our target at $27.75 might be too optimistic.

Entry on      July 27 at $23.00
Change since picked:     + 0.42   			
Earnings Date          07/23/09 (confirmed)    
Average Daily Volume:        58 million 
Listed on  July 23, 2009    


UltraShort NASDAQ - QID - close: 26.53 change: +0.34 stop: 25.35

The QID is still bouncing but if you look at the NASDAQ, NASDAQ-100 index and the QID you can see they're all churning sideways. Readers may want to wait for the QID to rise above $27.15 before launching positions or you could wait for another bounce from the $26.00 level.

I hesitate to suggest new bullish positions at this time. 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:     - 0.10   			
Earnings Date          00/00/00 
Average Daily Volume:      23.9 million 
Listed on  July 30, 2009    


TEVA Pharmaceuticals - TEVA - close: 51.51 change: -0.21 stop: 47.95

TEVA is still correcting, which is healthy. The plan is to buy TEVA on a pull back into the $50.25-48.00 zone. 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.

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    


Grupo Televisa - TV - close: 18.99 change: +0.60 stop: 17.24

Our bullish play on TV is now open. The stock burst through resistance near $18.50 this morning and hit our trigger to buy the stock at $18.60. Our first target is $19.95. Our second target is $21.45. The Point & Figure chart is bullish with a $25 target.

chart:

Entry on    August 10 at $18.60 *triggered
Change since picked:     + 0.39   			
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: 47.93 change: +0.65 stop: 50.05

BIIB displayed some relative strength with a 1.3% gain on Monday. I'm still bearish and would use the bounce as an entry point but more conservative traders may want to wait for the rebound to rollover first. 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:     + 0.57   			
Earnings Date          07/16/09 (confirmed)    
Average Daily Volume:      3.28 million 
Listed on  July 30, 2009    


St. Jude Medical - STJ - close: 38.23 change: +0.88 stop: 40.20

Uh-oh! I have to issue a warning. STJ's 2.3% gain today has produced a bullish engulfing reversal pattern. Now these normally need to see some confirmation but it should put the bears on a defensive posture. I'm not suggesting new positions at this time. 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:     - 0.09   			
Earnings Date          10/15/09 (unconfirmed)    
Average Daily Volume:       4.4 million 
Listed on  August 04, 2009    


TJX Cos. Inc. - TJX - close: 35.17 change: -0.31 stop: 37.05

TJX is still inching lower. I don't see any changes from the weekend play description. Don't forget that this is an aggressive trade because we're going to hear some earnings out of the retail sector this week. Their results will have a big influence on TJX. I am setting our first target to take profits at $32.25 and would exit about 75% of the position at $32.25. Our second target to exit is $30.50. We do not want to hold over the August 18th earnings report.

Entry on    August 08 at $35.48 
Change since picked:     - 0.31   			
Earnings Date          08/18/09 (confirmed)    
Average Daily Volume:       5.4 million 
Listed on  August 08, 2009    


CLOSED BEARISH PLAYS

Lincoln National - LNC - close: 23.08 change: +0.44 stop: 23.51

Our aggressive short play on LNC didn't last very long. Shares rallied to a new high over $23.50 and hit our stop loss closing the play.

chart:

Entry on    August 08 at $22.64 
Change since picked:     + 0.87<-- stopped @ 23.51 (+3.8%)
Earnings Date          10/28/09 (unconfirmed)    
Average Daily Volume:       7.4 million 
Listed on  August 08, 2009