Option Investor
Newsletter

Daily Newsletter, Thursday, 8/20/2009

Table of Contents

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

Market Wrap

Real Rebound Or Just A Head Fake?

by Todd Shriber

Click here to email Todd Shriber
Stocks inched higher for a third consecutive day, but the way the recent rally has been going, three straight up days is not much of big deal anymore. Investors have gotten somewhat spoiled and might be more accustomed to three consecutive weeks of gains, rather than just a few days. Still, after the drubbings of last Friday and this Monday, three consecutive up days is a nice feather in Mr. Market's hat.

At this point, it certainly looks like the bears have gone into a deep slumber as nearly everyone and his uncle was pointing toward signs of the market topping at over the past few days, but the market has continued to advance. There really was not much noteworthy in terms of the gains made by the major US indexes today with the S&P 500 closing up almost 11 points to 1007.37. The Dow Jones Industrial Average settled up nearly 71 points to close at 9350 and the Nasdaq finished the day up nearly 20 points to close at 1989.22.

Stats Table

So the major indexes either advanced (again) through important technical levels or inched closer to them. By that I mean, the Dow now rests above 9300 again, the S&P 500 is now back above 1000 and the Nasdaq continues to inch its way toward 2000. Those are nice footnotes to be sure, but the volume was anemic. That should not come as a surprise. After all it is Thursday in August and more than a few members of the ''smart money'' crowd start their weekends early in the summer time.

So tepid was the volume today, that if you add up the shares traded on the New York Stock Exchange and the Nasdaq, you get something in the neighborhood of 3.3 billion shares. One stock, Citigroup, accounted for nearly a third of that volume by itself. I was watching CNBC right before the market closed and one of the pundits there noted that more than 125 million of those Citigroup shares traded on the NYSE, accounting for roughly 10% of the exchanges total volume today. Throw in the 183 million Bank of America shares that traded today, and you have two stocks accounting for close to half of the day's total volume.

Those are nice segues, if I do say so myself, because one of the market catalysts today came from the financial sector. Actually, it came from a sub-sector of the financials that I call ''Uncle Sam's Mutual Fund.'' And no I'm not referring to Citi or Bank of America. American International Group (AIG), the former Dow member and insurance firm for whom not enough snarky adjectives exist, continued to do its best Lazarus impression, soaring $5.66, or 21%, to $32.30 after the new CEO (yeah, that's something like three in the past year), said that AIG believes it can pay off its tab with the US taxpayer.

The tab is pretty hefty. American taxpayers own 80% of AIG, which includes a $60 billion credit line, a $70 billion direct investment and another $52.5 billion to purchase mortgage-based securities owned or issued by the company. Add that up and you get $182.5 billion, which is more than 40 times AIG's market cap of $4.35 billion. Put another way, $182.5 billion is more than twice the market cap of PepsiCo (PEP).

AIG even said, gasp, that it may be able to create some value for shareholders going forward. To be fair, the company has been doing exactly that over the past month or two. If you were fortunate enough to buy some shares after the reverse split in June AND after the stock got taken to the woodshed following the reverse split, you could have gotten in at $12 on July 20 and you'd be quite happy today.

The stock has now soared through its 50 and 200-day moving averages and there does not appear to be a lot of near-term resistance. Still, there are risks in getting involved with AIG, especially from the short side. The stock is one of the most heavily shorted on the Street and even mildly positive comments from the company send the bears running for cover and the shares soaring. In other words, the flames of the AIG rally are being fanned by short covering, not good fundamentals, and short covering has a finite shelf life.

AIG Chart

In 1990, the rock band Poison soared to the top of the charts with their hit ''Something To Believe In'' and AIG probably is not something to believe in, but Google (GOOG) probably is. Five years and a day after gracing the Nasdaq with its IPO, the Internet search giant was added to the widely-followed Goldman Sachs Conviction Buy List. That was one legitimate catalyst on the day, especially for the Nasdaq, as Google shares rose $16.44, or 3.7%, to $460.41. While Google certainly is not cheap on a dollar basis or when considering it trades at 32 times trailing earnings, the stock seems to have found support at the 50-day moving average of $431.62 and from here, the shares probably don't encounter resistance until they hit $485 or higher.

Google Chart

Beyond those individual equity stories there were a coupe of economic data points that helped buoy the bulls today. Leading economic indicators rose in July for the fourth consecutive month with the Conference Board's economic outlook survey rising 0.6%. A Federal Reserve report showed manufacturing activity in the Philadelphia region rose for the first time in nearly a year. And that latter point is nothing to scoff as manufacturing is a fairly important contributor to US GDP, as the chart below illustrates.

GDP/Manufacturing Chart

The big thing with manufacturing is whether or not an increase in activity will lead to some new hires. The sector has been hemorrhaging jobs at an alarming rate and has been a significant contributor to the bleak unemployment situation the U.S. currently faces. July's unemployment report showed more than 52000 manufacturing jobs were lost in July. If that trend reverses course, that could lead to an overall improvement in the jobs situation.

Unemployment Chart

Speaking of impacts on US GDP, no one has a greater affect on that particular data point than the consumer and with eye an toward tomorrow's trade, there were a couple of retailers that reported earnings after the close today that might provide a good temperature on back-to-school spending and the health of the consumer at large.

Apparel retailer Aeropostale (ARO) said second-quarter profit rose due to $38.6 million, or 57 cents a share, from $21.1 million, or 31 cents, a year earlier. Aeropostale actually increased sales, a novel idea in an earnings season littered with faux estimate-beaters that only did so by cutting costs. Sales at Aeropostale soared 20% to $453 million from $377.1 million and the company beat Street estimates by a penny.

Things were different at the Gap (GPS), the largest US clothing chain. While net income of $228 million, or 33 cents a share, also beat analyst estimates by a penny, sales tumbled eight percent to $3.25 billion. That was better than last year's 10% decline, but that means the Gap had to find other ways to beat estimates and the company did that by raising merchandise margins. An effective tactic for a quarter or two, but at some point the market will want to see more consumers buying jeans and khakis at the Gap before turning bullish on the stock.

Another retailer that might be worth watching tomorrow is Ann Taylor (ANN), which reports earnings before the bell. Analysts are calling for a profit of two cents a share at the lady's apparel retailer. And as I always do when there is a spate of retail news, I call your attention to the SPDR S&P Retail Index ETF (XRT).

Still resting above its 50 and 200-day moving averages, XRT has peeled back a little bit lately, but it is holding above $30 and with a few retail earnings reports still left, XRT could see some volatility in the coming days.

XRT Chart

Speaking of volatility, tomorrow is options expiration day and volume-depraved investors can only hope that might spark a rise in volume, but that is a tough bet to make given that it is Friday in August. In advance of options expiration, I included a chart of the CBOE Put/Call Ratio.

Put/Call Chart

I was looking for some interesting options activity today, as I usually do for the Market Monitor, and after the close today I found some interesting stuff considering that tomorrow is an expiration day. The most active name in a single equity options contract today was pharma giant and Dow member Johnson & Johnson (JNJ), which saw 69500 AUGUST 60 calls change hands. All caps because these contracts expire tomorrow. Bank of America also some brisk trade in options that expire tomorrow, namely the August 17 calls and puts. Nearly 74000 calls and 46357 puts changed hands. The volume was below open interest in both the puts and the calls, but again noteworthy given that someone was gobbling these contracts up to hold them for barely a day.

Taking a look at market technicals, the bulls have once again popped the S&P 500 back above 1000, which is fairly significant. A report issued today by J.P. Morgan said the index will reach 1100 by the end of 2009. I am not going to argue with the fine folks at J.P. Morgan and support seems firm at 980, but it is reasonable to expect some choppy, lethargic action until we get past the Labor Day holiday and then the market will have to contend with September.

I say contend with, because as I pointed out right here last week, September is historically the worst month of the year for stocks. I will hazard a guess that the S&P 500 heads into September somewhere between 985 and 1010. So if September proves to be bearish and there isn't further improvement in employment (We get August numbers right around Labor Day), a retreat to 970 could be possible and if 970 doesn't hold, 905-910 becomes a concern.

Factor in third-quarter earnings will start coming out in late September/early October and the cost-cutting theme probably will not be enough to buoy stocks again. Long story short, 1100 is possible by the end of the year, but the next few weeks will go a long way to determining the reality of that lofty level.

S&P 500 Chart

Obviously, the next big thing for the Dow is 10000 and if the market was to undergo a real correction in the near-term, 10% pullback would take the blue chip index back below 8500. The Dow recently had a fight in the 9420 area and has retreated from there. With light volume looming as a thorn in the side of the bulls, 9000 could be tested again before 9500 is broken.

That is not to say I am bearish, it is just a way of noting that the Dow and S&P 500 still remain overbought. Then again, the same argument could have been made at 8800 and 9000, so I will just make things simple and say that a break below 9000 would be worrisome for the bulls.

Dow Chart

Things are a little more precarious with the Nasdaq. Google's pop today did trickle down to other Nasdaq titans such as Apple (AAPL), Cisco (CSCO) and Research In Motion (RIMM), but the volume theme has to be acknowledged. The tech-laden index bumped against 2007 resistance levels that are just over 2000 several times without breaking through. That was bad sign Number 1. The second ominous omen came when the Nasdaq fell below support at 1950. Sure, the index is once again threatening 2000, but with light volume, it is hard to see the index making a real move to toward 2050-2100.

Nasdaq Chart

Obviously, I like up days that are marked by strong volume and with a lack of earnings catalysts left for investors to point to, there are probably more light trading days left until after Labor Day. There are seven trading days left in August and the combination of light volume and overbought conditions does is not ideal for the bulls. It would be considered a victory if the major indexes head into September at or near current levels.


New Plays

38.2% Fibonacci Retracement

by James Brown

Click here to email James Brown


NEW BULLISH Plays

Fomento Economico Mexicano - FMX - close: 38.15 chg: +1.57 stop: 35.99

Why We Like It:
FMX is one of the largest beverage companies in Latin America. The stock's recent correction had pulled back to its 38.2% Fibonacci retracement and its 30-dma. Then news surfaced that Coca-cola Co. (KO) and its partners would invest $5 billion in the next five years into Mexico. KO's biggest partner in Mexico is FMX. The stock shot up 4.2% today on strong volume. I'm suggesting readers buy FMX on a dip to $37.50. Our first target to take profits is $40.00. Our second target to exit is $42.40. Currently the Point & Figure chart is bullish with a $66.00 target.

Annotated chart:

Entry on    August xx at $xx.xx <-- TRIGGER @ 37.50
Change since picked:     + 0.00   			
Earnings Date          10/26/09 (unconfirmed)    
Average Daily Volume:       766 thousand
Listed on  August 20, 2009    



In Play Updates and Reviews

Latin Telecom Shows Strength

by James Brown

Click here to email James Brown


BULLISH Play Updates

America Movil - AMX - close: 46.40 change: +0.93 stop: 44.15 *new*

AMX has finally broken out to new highs and hit our aggressive trigger (1/2 to 1/4 position size) to buy the stock at $46.51. Our stop was too tight at $45.15 so I'm lowering it to $44.15. Our first target to take profits is at $49.75.

chart:

*Breakout Trade*
Entry on    August 20 at $46.51 *triggered stop 44.15
Change since picked:     - 0.11   			

*Buy the dip Trade*
Entry on    August xx at $xx.xx <-- TRIGGER @ 42.25, stop 39.95
Change since picked:     + 0.00   		
	
Earnings Date          07/21/09 (confirmed)    
Average Daily Volume:       4.3 million 
Listed on  August 01, 2009    


Bank of America - BAC - close: 17.14 change: +0.39 stop: 13.95

BAC is still drifting higher. I'm going to keep our buy the dip trigger at $15.55 but I'm also adding a buy the breakout trigger at $17.50. If BAC hits our breakout trigger at $17.50 I would use small position sizes 1/2 or 1/4 your normal trade due to the aggressive nature of the trade. If triggered at $17.50 our new stop will be $16.35 and our new target is $19.75.

Should BAC hit our $15.55 trigger our first target is $17.75 and our second target is $18.45. The Point & Figure chart is bullish with a long-term target at $31.00.

Entry on    August xx at $xx.xx <-- TRIGGER @ 15.55 & 17.50
Change since picked:     + 0.00   			
Earnings Date          07/17/09 (confirmed)    
Average Daily Volume:       310 million 
Listed on  August 01, 2009    


Cardinal Health - CAH - close: 34.74 change: -0.24 stop: 32.40

CAH produced some minor profit taking on Thursday. I would still open positions in the $34.00-35.00 zone. Our first short-term target to take profits is at $37.45. Our second is $39.85.

Entry on    August 19 at $34.98 
Change since picked:     - 0.24   			
Earnings Date          11/17/09 (unconfirmed)    
Average Daily Volume:       2.8 million 
Listed on  August 19, 2009    


Corn Products - CPO - close: 30.13 change: -0.33 stop: 27.49

CPO is still inching lower but has not yet broken support at $30.00. I think it's going to break. That's why our trigger is at $29.25. We can really open positions anywhere in the $29.25-28.00 zone. Our first target is $32.30. Our second target is $34.85. The Point & Figure chart is bullish with a $45.00 target.

Entry on    August xx at $xx.xx <-- TRIGGER @ 29.25
Change since picked:     + 0.00   			
Earnings Date          10/22/09 (unconfirmed)    
Average Daily Volume:       687 thousand
Listed on  August 15, 2009    


Ultra-Short Dow 30 - DXD - close: 38.29 change: -0.59 stop: 37.75 *new*

The Dow Industrials, along with the rest of the major averages, is inching higher but has not yet broken out to new highs. I'm adjusting our stop loss on the DXD play so that the DJIA has to hit a new high before we're stopped out. Our new stop is 37.75. Wait for a bounce from $38.00 or a new rise over $39.50 before launching new bullish positions on the DXD. Our first target is $41.50. Our second target is $43.00. This is an aggressive play. We want to use small position sizes.

Entry on    August 18 at $40.11 /gap open entry
                              /originally listed at $39.48
Change since picked:     - 1.82   			
Earnings Date          00/00/00 
Average Daily Volume:       6.3 million 
Listed on  August 18, 2009    


IDEX Corp. - IEX - close: 27.02 change: +0.41 stop: 24.75

IEX has risen toward short-term resistance near $27.00. Don't be surprised to see a dip here. Our first target is $29.85. My time frame is six to eight weeks.

Entry on    August 17 at $26.10 *triggered         
Change since picked:     + 0.91   			
Earnings Date          07/20/09 (confirmed)    
Average Daily Volume:       570 thousand
Listed on  July 25, 2009    


Imperial Oil - IMO - close: 36.23 change: +0.15 stop: 34.49

IMO spiked higher this morning and then spent the rest of the session trading sideways. I would still consider new bullish positions in the $36.50-35.00 zone. Our target is the $39.90 mark.

Entry on    August 19 at $36.75 /gap higher entry point
                               /originally listed at $36.08
Change since picked:     - 0.52   			
Earnings Date          10/30/09 (unconfirmed)    
Average Daily Volume:       291 thousand
Listed on  August 19, 2009    


J.P.Morgan Chase - JPM - close: 42.42 change: +1.01 stop: varies

A buy the dip entry continues to elude us so I'm adding an alternative entry point on a breakout. If JPM hits $43.50 we want to buy the stock but I am suggesting very small (1/2 to 1/4 your normal trade) positions. We'll use a stop loss at $39.99 and a target at $47.40.

Our buy the dip strategy is still in place with a trigger at $38.75. More patient traders can hold out hope for a dip closer to $36.00. We have a stop at $35.90. If triggered our first target is $42.50. Our longer-term target is $44.75. Our time frame is eight to ten weeks.

Entry on      July xx at $xx.xx <-- TRIGGER @ 38.75 or 43.50
Change since picked:     + 0.00   			
Earnings Date          07/16/09 (confirmed)    
Average Daily Volume:        55 million 
Listed on  July 18, 2009    


Lindsay Corp. - LNN - close: 43.84 change: +0.60 stop: 37.45

LNN is churning sideways. We want to launch bullish positions on a correction. The plan is to buy LNN on a dip in the $40.10-38.00 zone. If triggered our first target to take profits is at $44.75. Our second target is $48.50. Our time frame is six to ten weeks.

Entry on    August xx at $xx.xx <-- TRIGGER @ 40.10
Change since picked:     + 0.00   			
Earnings Date          10/07/09 (unconfirmed)    
Average Daily Volume:       256 thousand
Listed on  August 17, 2009    


Morgan Stanley - MS - close: 29.36 change: +0.53 stop: 27.90

Right on cue MS is bouncing from its long-term trendline of higher lows. I would still consider new bullish positions here. MS has exceeded our first target at $31.50. We're currently aiming for our second target at $34.90.

Entry on    August 04 at $29.50 *triggered (1/2 position)  
Change since picked:     - 0.14
                              /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: 23.67 change: +0.02 stop: 21.80

There is no change from my prior comments on MSFT.

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: MSFT doesn't move very fast and eventually the market will correct. 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:     + 0.67   			
Earnings Date          07/23/09 (confirmed)    
Average Daily Volume:        58 million 
Listed on  July 23, 2009    


Oil States Intl. - OIS - close: 29.19 change: +0.66 stop: 27.95

OIS displayed some relative strength but volume was pretty light. We're still waiting for a breakout over resistance with a trigger at $30.20. If triggered our first target is $34.00. Our second target is $38.00. My time frame is six to eight weeks.

Entry on    August xx at $xx.xx <--  TRIGGER @ 30.20
Change since picked:     + 0.00   			
Earnings Date          10/29/09 (unconfirmed)    
Average Daily Volume:       738 thousand
Listed on  August 13, 2009    


TEVA Pharmaceuticals - TEVA - close: 51.70 change: +0.25 stop: 47.95

TEVA rallied to $52.12 intraday before paring its gains. If you're looking for a new entry point wait for another dip near $50.50. Our first target is $54.75. Our second target is $59.50. Our time frame is eight to ten weeks.

Entry on    August 17 at $50.50 *triggered                
Change since picked:     + 1.20   			
Earnings Date          11/05/09 (unconfirmed)    
Average Daily Volume:       5.3 million 
Listed on  August 05, 2009    


Titan Machinery - TITN - close: 12.68 change: +0.38 stop: 11.30

TITN is beginning to bounce after four days of consolidation. The stock rose 3% albeit on light volume. Our upside target is $14.75 and $15.85.

Entry on    August 15 at $12.55 /gap down entry
                              /originally listed at $13.12
Change since picked:     + 0.13   			
Earnings Date          09/15/09 (unconfirmed)    
Average Daily Volume:       248 thousand
Listed on  August 15, 2009    


BEARISH Play Updates

Akamai Tech. - AKAM - close: 17.96 chg: +0.03 stop: 20.05

Gains in AKAM have been pretty anemic lately. I'm not suggesting new positions at this time. Our first target is $16.25.

Entry on    August 11 at $18.44 
Change since picked:     - 0.48   			
Earnings Date          10/29/09 (unconfirmed)    
Average Daily Volume:      10.4 million 
Listed on  August 11, 2009    


CA Inc. - CA - close: 22.63 change: +0.15 stop: 22.85

Bears are still on the defensive and CA inched up another 0.6% after bouncing back from its morning lows. I'd wait for a new drop under $22.00 before launching new positions.

Our first target to cover and take profits is at $20.15. Our second target is $19.25. I consider this an aggressive trade and readers will want to use smaller position sizes.

Entry on    August 17 at $21.75 
Change since picked:     + 0.88   			
Earnings Date          10/29/09 (unconfirmed)    
Average Daily Volume:       6.6 million 
Listed on  August 17, 2009    


Expedia Inc. - EXPE - close: 22.60 change: +0.72 stop: 23.55

Shorts were also rushing to cover in EXPE this morning. The stock spiked higher and then slowly drifted the rest of the day to a 3.2% gain. Volume was light on the session. I'm not suggesting new positions at this time. Our first target is $19.75. Our second target is $18.00. I suggest traders use smaller than normal position sizes.

Entry on    August 14 at $21.85 
Change since picked:     + 0.75   			
Earnings Date          10/29/09 (unconfirmed)    
Average Daily Volume:       5.0 million 
Listed on  August 10, 2009    


St. Jude Medical - STJ - close: 37.64 change: -0.22 stop: 39.05

The bounce in STJ stalled near $38.00 this morning. 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:     - 0.68   			
Earnings Date          10/15/09 (unconfirmed)    
Average Daily Volume:       4.4 million 
Listed on  August 04, 2009    


Williams Cos. - WMB - close: 16.96 change: +0.37 stop: 17.55

Today's move in WMB is a surprise. Natural gas collapses to new lows and WMB rallies 2.2%. Wait for the bounce to roll over before considering new bearish positions. Our first target is $15.10. Our second target is $14.10.

Entry on    August 11 at $16.78 
Change since picked:     + 0.18   			
Earnings Date          11/05/09 (unconfirmed)    
Average Daily Volume:       5.6 million 
Listed on  August 11, 2009    


CLOSED BULLISH PLAYS

U.S.Natural Gas ETF - UNG - close: 11.51 change: -0.50 stop: 11.80

Our aggressive bet on a bounce in the UNG has come up snake eyes! The natural gas ETF absolutely collapsed to new lows on big volume. Our stop was hit at $11.80. I suggested small positions due to the aggressive nature of the trade.

chart:

Entry on    August 18 at $12.07 
Change since picked:     - 0.27<-- stopped @ 11.80 (-2.2%)
Earnings Date          00/00/00 
Average Daily Volume:      34.3 million 
Listed on  August 18, 2009