Option Investor
Newsletter

Daily Newsletter, Wednesday, 8/12/2009

Table of Contents

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

Market Wrap

Stocks Roar Back on Fed Report

by Judy Alster

Click here to email Judy Alster
The Federal Reserve's Open Market Committee wrapped up its two-day, behind-closed-doors meeting much as expected, promising to keep interest rates in the sub-basement "for an extended period of time," even though it cited a stronger economic outlook and upbeat indicators. The target rate will stay at 0% to 0.25%.

Stocks, not surprisingly, finished nicely higher on Wednesday after two bad sessions. The day's highs saw the Dow rising about 175 points, but the close moderated somewhat to 9,361.61, up 120.16, or 1.3%. The S&P 500 gained 11.46 points, or 1.2%, to close at 1,005.81 after a high of 1012, while the Nasdaq Composite rose 28.99 points, or 1.5%, to 1,998.72, off a high of 2015.

INDEX WRAPUP, Aug. 12:

The three major indexes all seem to be leveling off in new higher territory:

DOW JONES INDUSTRIAL AVERAGE:

S&P500:

NASDAQ COMPOSITE:

To get back to the Fed, it said in addition that it will rein in its purchases of long-term Treasurys and let the program fade away by the end of October, a decision that could send long-term yields higher. (The Fed's plan to buy $300 billion in long-term government bonds drew a lot of fire and didn't do much to keep long-term rates down.)

However, it also said it will continue to purchase up to $1.25 trillion in mortgage-backed securities and other debts from Fannie Mae and Freddie Mac in an effort to keep mortgage rates down and stimulate the housing market.

Economic activity is leveling out and conditions in financial markets have improved further in recent weeks, the committee reported, pointing to stabilizing household spending -- although that's still not terrific, what with job losses, stagnant income, low housing wealth and tight credit.

The FOMC said it expected the economy to remain weak for a while but at least with so many unused resources, inflation shouldn't be a problem for some time to come.

Since the last meeting in late June, most economic indicators have improved, even if they are still showing a contracting economy. Here are seven promising signs:

--The Leading Economic Indicators, according to The Conference Board, have risen for three straight months after falling steadily since their peak in July 2007, and their six-month growth has picked up to the highest rate since the first quarter of 2006. Seven of the 10 Conference Board indicators were up; starting with the largest they were interest rate spread, building permits, stock prices, weekly initial claims (inverted), average weekly manufacturing hours, index of supplier deliveries and manufacturers' new orders for consumer goods and materials. The negative contributors were real money supply, manufacturers' new orders for nondefense capital goods and index of consumer expectations. The index now stands at 100.9, with 2004 equaling 100.

--The country's gross domestic product fell at a 1% annualized rate in the second quarter, compared with the 6.4% drop in the first quarter. Which is to say, the economy is no longer falling at terminal velocity.

GROSS DOMESTIC PRODUCT, latest:

--Stock prices are considerably up since March; the S&P, for instance, has gained 48% since its March low; note the chart above.

--Nonfarm payrolls fell by the smallest number in nearly a year in July -- 247,000 -- and the unemployment rate fell back to 9.4%.

NONFARM PAYROLL LOSSES:

--The Institute for Supply Management index inched in July toward the 50% line that marks expansions from contractions, and new orders were the best in two years.

--Home sales and construction data seem to have bottomed, although prices are still falling.

--Industrial production seems about to rise for the first time in nine months, as companies in almost every industry slash their inventories at a record pace.

Not all the data have been positive. Consumer sentiment remains weak, owing largely to massive job losses. The only growth in incomes has come from government transfers like unemployment benefits and the tax cut. Credit remains very tight. Households continue to pay off their debts, though, very good for consumers if not immediately good for the economy:

OUTSTANDING HOUSEHOLD DEBT AS A RATIO OF DISPOSABLE INCOME (4-quarter moving average)

Most private sector economists agree with the Fed that the recession will be over soon, but that consumer spending will stay subdued. The Fed's balance sheet has grown from about $800 billion before the crisis to about $1.97 trillion. At some point, however, the Fed will want to reduce its balance sheet -- very, very cautiously, one hopes -- as bank lending returns.

More interesting news: The Mortgage Bankers' Association index rose 1.1% last week for the third straight small gain in a row. The refinance index fell 7.2%, probably reflecting a 21-basis-point jump in the 30-year fixed rate, at 5.38% at week's end, in turn reflecting the greater demand. (Median home prices fell a record 15.6% year-over-year in the second quarter, but that came after the traditional rise in spring prices, in this case 4%, from $167,000 to $174,000.)

Equally important is that total housing inventory fell for the third month in June, dropping 0.7% to 3.82 million units on the market. At the current sales pace, that represented a 9.4-month supply, down from a 9.8-month supply in May. Even better, year over year inventory was down by 14.9%. True, about a third of that drop was due to sales of foreclosed homes, but anything that lessens housing inventory is to be desired. Beware, though: Prices and sales could trend down again, especially when the impact of the first-time homebuyers tax credit starts to fade after December 1.

MONTHS OF HOUSING INVENTORY as of June:

In stocks, advancers were ahead of decliners by about 2.7 to 1 on the NYSE and 2.5 on the Nasdaq. Banks and insurers made up some of yesterday's losses, with Citigroup (C) and Hartford Financial (HIG) both up over 7% , and Wells Fargo (WFC) and Bank of America (BAC) in the green.

CITIGROUP:

On the Nasdaq, another bank was a top gainer, Community Capital Corp. (CPBK), up 30%:

COMMUNITY CAPITAL CORP.:

Continuing in not-bad economic reports, the U.S. trade deficit in tangible goods and services expanded moderately in June largely due to higher oil prices and a larger oil deficit (the number of barrels that were imported in June rebounded 7.1%) as the overall U.S. trade gap widened to $27.0 billion from a revised $26.0 billion deficit the previous month. But exports advanced 2% while imports rebounded 2.3%, and excluding petroleum, the gap shrank significantly to $20.0 billion from $22.6 billion in May.

Which producers in the U.S. went to the head of the class? By end-use categories, the June advance in exports was led by industrial supplies (up $1.2 billion) and by capital goods except autos (up .4 billion). Also posting gains were foods, feeds, and beverages exports. Automotive was in the positive category but essentially was flat; consumer goods exports edged down marginally.

U.S. TRADE BALANCE, IN BILLIONS, seasonally adjusted:

Outside of oil, import numbers show weak domestic demand. Businesses are not adding to stockroom shelves, at least not from imports. Consumer goods imports dropped a sizeable $1.7 billion and capital goods imports were down but basically flat. Today's report is good news for manufacturers of exports in the U.S. as exports have been boosted by a weaker dollar. However, businesses apparently are still concerned about domestic demand as they have cut back on nonoil imports. The market didn't have much of a response to the news.

One thing I'm looking for is a sharp and sustained rise in the Baltic Dry Index, a leading indicator that provides a clear view into the global demand for commodities and raw materials. The index measures shipping rates for dry bulk goods -- coal, iron, ore, grain, steel -- on dry bulk cargo ships on some three dozen sea routes around the world.

Demand for raw materials gives us a glimpse into the future. Producers naturally buy raw materials when they want to start building more finished goods and infrastructure like automobiles, heavy machinery, roads, factories, houses and such. Producers stop buying raw materials when they have excess inventory and when they stop capex projects -- period.

The Baltic Dry Index is also a compelling indicator because it's difficult to manipulate the cost of moving raw materials by sea in container ships. If fewer producers need dry bulk cargo, ships will be in less demand, causing a drop in the price that shippers can charge, and the Baltic will fall. Conversely, as shipping increases, you can bet that shipping rates will rise. It's driven by very clear forces of supply and demand.

BALTIC DRY INDEX:

The demand that affects the Baltic Dry Index is the demand of commodity buyers who need the raw goods for production. With shipping rates easily capable of hitting over $150,000 a day, nobody is going to pay to book a Capemax cargo ship who isn't actually going to use it.

The supply that affects the Baltic Dry Index is the supply of ships available to move materials around the globe. This can't be distorted either, because it takes years to build a new ship that could be put into service to increase supply, and it costs far too much to leave ships empty in an attempt to decrease supply.

Here's what it typically means when the Baltic Dry Index turns around and starts moving up:

--Global economies are starting to, or continuing to, grow

--Companies are starting to, or continuing to, grow

--Commodity prices should start to, or continue to, increase in value

--Stock prices should start to, or continue to, increase in value

This chart of Diana Shipping (DSX), as do other dry-bulk shipping company charts, largely tracks the Baltic Dry Index:

DIANA SHIPPING:

While the BDI typically declines in the lead-up to and during a recessions, a decline in the index doesn't always necessarily mean a recession is imminent, but a steep fall must be watched. Is the Baltic Dry Index the grail, the big kahuna -- the one leading indicator that will say to us, "Buy now"? Of course not. But in conjunction with four or five others, it can tell us a great deal.


New Plays

Wait for Follow Through

by James Brown

Click here to email James Brown
Editor's Note:

The rally today was definitely unexpected, especially since it began in front of the FOMC decision and not afterward. Usually stocks are quiet ahead of a fed decision. The market's are always volatile immediately following a fed meeting and often enough the first post-meeting move in stocks is not necessarily the true move, if that makes sense. Traders were already taking profits in the last 30 to 60 minutes of trading today. The rally in the S&P 500 back above 1,000 is bullish but it could end up being a new, short-term lower high. The NASDAQ's (and NASDAQ-100's) rally was just enough to briefly pierce the recent highs and it rolled over in the last hour. Essentially the NASDAQ is still under resistance in the 2015 region.

I don't trust this move higher but neither do I want to short it. The market is overbought and due for a correction but stocks can always get more overbought. If you forced me to trade I would be looking for bearish candidates and use really tight stops. Instead of adding new candidates tonight I suggest we wait and see if there is any follow through tomorrow. Wal-Mart (WMT) reports earnings tomorrow morning and their comments could have a big affect on the market.


In Play Updates and Reviews

Bulls Put Up A Fight

by James Brown

Click here to email James Brown


BULLISH Play Updates

America Movil - AMX - close: 45.16 change: +0.60 stop: 37.95

AMX is still consolidating sideways in the $44.00-45.50 zone. Nimble traders could use a trigger under $44.00 as a bearish entry point and exit near $40.50. 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: 19.05 change: +0.57 stop: 17.45*new*

Oil and oil service stocks bounced. Shares of ANW did even better with a 3% gain and a new relative high (19.49) this afternoon. I am raising the stop loss to $17.45. I am not suggesting new bullish positions at this time. 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:     + 2.55
                               /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: 15.93 change: +0.08 stop: 13.40

Traders were quick to buy the dip in BAC this morning when shares hit $15.40. I still think BAC will correct but it may take a little longer than expected to hit our trigger. After the closing bell tonight it was just released that influential hedgefund manager John Paulson bought more than $2 billion worth of BAC stock in the second quarter. Many see this as a big vote of confidence for BAC and the stock is up around $16.45 in after hours trading.

We want to buy BAC on a dip at $14.75 although more patient traders may want to wait for a dip closer to $14.00. 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: 37.93 change: -0.08 stop: 35.95

HRL continues to see some minor profit taking after Monday's big gain. I am not suggesting new bullish positions at this time. HRL has exceeded our first target but we still have a second and final target at $39.90.

Entry on      July 20 at $35.40 /gap higher entry
                              /originally listed at $35.25
Change since picked:     + 2.53
                            /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: 27.41 change: +0.04 stop: 24.75

IEX struggled to participate in the market's rally today. Odds are growing that IEX finally correct. We want to buy the stock on a pull back into the $26.10-25.00 zone. If we are triggered our first target is $29.85. My time frame is six to eight weeks.

Entry on      July xx at $xx.xx <-- TRIGGER @ 26.10
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: 42.21 change: +0.97 stop: 34.90

There is no change from my prior comments on JPM. Currently our trigger to buy JPM is at $37.75. 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: 29.98 change: +0.09 stop: 27.75

MS spent the session drifting sideways. Wait for a dip back toward the $29.00-28.00 zone before considering new bullish positions. 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:     + 0.58
                              /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: 23.53 change: +0.40 stop: 21.80

MSFT was a big part of the rally in technology and the NASDAQ with a bounce from $23.00 to $23.90 intraday. One of the stories fueling the move was a report that MSFT had inked a deal with Nokia (NOK) to develop a mobile phone version of MSFT's Office suite.

I am still suggesting readers wait for a dip near $22.00 before launching new MSFT positions.

More aggressive traders may want to go ahead and widen their stop loss to under $21.00 or under $20.00 depending on your risk tolerance. Currently our target is at $27.75 but that might be too optimistic. We may have to stretch out our time frame from several weeks to a few months.

FYI: An alternative would be to just exit early now and re-enter on a dip near $22.00 or $21.00. This way your capital isn't tied up and you can use it for other trades while we wait for MSFT to retest support.

Entry on      July 27 at $23.00
Change since picked:     + 0.53   			
Earnings Date          07/23/09 (confirmed)    
Average Daily Volume:        58 million 
Listed on  July 23, 2009    


TEVA Pharmaceuticals - TEVA - close: 51.77 change: +0.30 stop: 47.95

TEVA rallied with the market today but the bounce stalled at its 10-dma. 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    


BEARISH Play Updates

Akamai Tech. - AKAM - close: 18.37 chg: -0.07 stop: 20.05

So far so good. The bounce in AKAM this morning stalled near $19.00. I'm still bearish and would still open bearish positions here. Our first target is $16.25. FYI: There have been rumors that AKAM is a takeover target. Readers may want to choose put options, which limit your risk to what you paid, versus shorting the stock, which has unlimited risk. A stop loss at $20.05 isn't going to work if AKAM gets an offer for a lot higher. Shares will gap open.

Entry on    August 11 at $18.44 
Change since picked:     - 0.07   			
Earnings Date          10/29/09 (unconfirmed)    
Average Daily Volume:      10.4 million 
Listed on  August 11, 2009    


Expedia Inc. - EXPE - close: 22.97 change: +0.35 stop: 23.55

EXPE is still ticking higher. Nothing goes up in a straight line for very long and definitely not at the current pace in EXPE. I will repeat that this is a very aggressive trade. The plan is to open bearish positions at $21.85. You could short the stock or buy put options, which help limit your risk. If triggered our first target is $19.75. Our second target is $18.00. I suggest traders use smaller than normal position sizes.

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    


St. Jude Medical - STJ - close: 38.20 change: -0.17 stop: 40.20

STJ's failure to participate in the market's widespread rally is good news for the bears. 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:     - 0.12   			
Earnings Date          10/15/09 (unconfirmed)    
Average Daily Volume:       4.4 million 
Listed on  August 04, 2009    


TJX Cos. Inc. - TJX - close: 35.88 change: +0.79 stop: 37.05

Retailers were stronger thanks to better than expected earnings and improved guidance from Macy's (M) this morning. Tomorrow is the big day with earnings out of Wal-Mart (WMT). Readers might want to wait and see how investors react to the WMT news tomorrow before launching new TJX positions.

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:     + 0.40   			
Earnings Date          08/18/09 (confirmed)    
Average Daily Volume:       5.4 million 
Listed on  August 08, 2009    


Williams Cos. - WMB - close: 17.17 change: +0.39 stop: 17.55

WMB turned in a 2% bounce but it failed to break the trend of lower highs. If you're feeling cautious then wait for a new drop under yesterday's low (near 16.71) as an entry point for bearish positions. Our first target is $15.10. Our second target is $14.10.

Entry on    August 11 at $16.78 
Change since picked:     + 0.39   			
Earnings Date          11/05/09 (unconfirmed)    
Average Daily Volume:       5.6 million 
Listed on  August 11, 2009    


CLOSED BULLISH PLAYS

UltraShort NASDAQ - QID - close: 26.18 change: -0.87 stop: 25.80

The market was trending lower the first two days of the week and I felt confident raising the stop loss on QID to $25.80. It was going to take a new high for the NASDAQ-100 to push QID past its all-time lows at $25.85. Today's unexpected rally was just strong enough to tag a new high in the NDX and our QID was stopped out.

I am sorely tempted to re-open the play immediately with a stop loss just under today's low but I'm suggesting we wait. While I believe the market is extremely overbought and due to correct it can always get more overbought. This was a very aggressive, counter-trend trade and I suggested very small position sizes.

chart:

Entry on      July 30 at $26.63 
Change since picked:     - 0.83<-- stopped out @ 25.80 (-3.1%)   			
Earnings Date          00/00/00 
Average Daily Volume:      23.9 million 
Listed on  July 30, 2009    


Grupo Televisa - TV - close: 18.28 change: -0.16 stop: 17.24

I'm turning cautious on TV and suggesting an early exit. Shares did not participate in the market's rally today. Furthermore today's decline following yesterday's inside day is suggesting the breakout was a bull trap. I want to exit now and we can put TV on our watch list for a new bullish entry point on a new rally past $18.75 or $19.00.

chart:

Entry on    August 10 at $18.60 *triggered
Change since picked:     - 0.32<-- exit early @ 18.28 (-1.7%)
Earnings Date          07/16/09 (confirmed)    
Average Daily Volume:       2.2 million 
Listed on  August 01, 2009    


CLOSED BEARISH PLAYS

Biogen Idec Inc. - BIIB - close: 49.00 change: +1.19 stop: 50.05

It's time to throw in the towel on BIIB. More aggressive traders may want to let it ride. BIIB still has resistance near $50.00 and its 100-dma and exponential 200-dma. The reason I want to exit now is the breakout over its multi-week trendline of lower highs. Cut our losses now.

chart:

Entry on      July 30 at $47.36 
Change since picked:     + 1.64<-- exit early @ 49.00 (+3.4%)
Earnings Date          07/16/09 (confirmed)    
Average Daily Volume:      3.28 million 
Listed on  July 30, 2009