Option Investor
Newsletter

Daily Newsletter, Monday, 8/24/2009

Table of Contents

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

Market Wrap

Financials Lead Stocks Lower On A Day Lacking Catalysts

by Todd Shriber

Click here to email Todd Shriber
Monday was a fairly docile day for stocks as a lack of catalysts, earnings, economic or otherwise, kept equities in a tight range for most of the day. The Dow Jones Industrial Average, the only index of the major three to advance on the day, finished up a scant 3.32 points to hold 9500, closing at 9509. The S&P 500 shed just over half a point to close at 1025 and the Nasdaq remains above 2000 after losing almost three points to close just below 2018.

Stats Table

Monday's lukewarm market action was not altogether surprising considering the average volume, lack of substantial news and the wild bull move on Friday. The bulls had their way on Friday as options expiration, new home sales data and positive comments from Federal Reserve Chairman Ben Bernanke sent stock soaring into the weekend. One could argue that it was not all that surprising to see stocks pullback a bit today and the declines are certainly nothing to lose sleep over. After all, stocks rarely move up in a straight line.

I continue to monitor trading volume, if for no other reason than that volume is usually a good indicator of price action. That said, volume for Monday appeared decent, at least on the surface. Add up Nasdaq and New York Stock Exchange trade you get something in the neighborhood of 4.8 billion shares. Delve a little deeper into the details and you will find the devil. Well, not really, but you will see that almost 1.2 billion Citigroup shares changed hands and disgraced mortgage firms Fannie Mae (FNM) and Freddie Mac (FRE) combined for more than 1.2 billion shares.

Yes, there a multitude of other exchanges where equity orders are processed so total volume was higher than 4.8 billion shares, but you see my point. It is not all that impressive to see just three stocks combine for the bulk of the day's activity. It is fair to say Monday's activity was similar to last Thursday, when I last visited with you, where Citigroup (C) and Bank of America (BAC) accounted for a disproportionate share of the day's trade. And if you are wondering about Bank of America's trade on Monday, it was no slouch with more than 315 million shares changing hands.

By now you see that financials were in the limelight today, which stands to reason as there was a distinct lack of data points to really juice other sectors. The Financials Select SPDR ETF (XLF) was another harbor of busy trade on the day, though nearly 121 million shares could only spur a range of 46 cents. XLF still rests well above its 50 and 200-day moving averages despite closing down 11 cents to $14.44.

XLF Chart

You know it is a day light on catalysts when some press reports are attributing the down day to comments made by SunTrust Banks (STI) CEO James Wells III about the banking sector being a long way from ''declaring victory.'' Not to knock SunTrust, but these comments were not made by someone at Goldman Sachs (GS). Heck, they were not made by someone at Wells Fargo (WFC) or PNC Financial (PNC), all far larger institutions than SunTrust. Who knew that SunTrust held such cache? Speaking of Wells Fargo and PNC, those stocks shed 2.2% and 4.1%, respectively.

I find the prospect of SunTrust continuing to move markets to be a bit dubious going forward, but it is worth noting that after last week's gain of 2.2% for the S&P 500, the index was valued at almost 19 times the earnings of its member companies, the highest level since 2004. In other words, as so many folks keep saying, a little pullback is not such a bad thing when stocks reach those lofty levels.

And what usually goes up when equities go down? The U.S. dollar. Now I'm not going to turn this space into a currency wrap, but the U.S. Dollar Index was up on the day and the greenback even rose against the Euro. The dollar has been in a tailspin against the Euro for months, though some might argue the dollar has been in a tailspin since the Bretton Woods Accord, but that is a story for another day and I will just leave you with a chart of the dollar index to make your own conclusions.

Dollar Index Chart

Commodities shared some of the spotlight today, though in a bullish way. Copper for December delivery touched an 11-month high, rising 1.3% to $2.93 a pound. Of course the theme for copper remains demand, namely Chinese demand and it appears traders in China may be pricing in some increased demand for the red metal as copper futures rose 5% in Shanghai, the daily limit, according to press reports. And I cannot mention copper without mentioning the world's largest copper producer, Freeport McMoRan (FCX). The shares were up 38 cents to $65.44 and $70 continues to look like a strong resistance zone for the stock.

Copper Chart

No conversation about commodities would be complete without mentioning the most heavily traded of the lot, crude oil. Black gold for October delivery closed up 12 cents to $74.01, though it traded as high as $74.81, coming within earshot of the all-important $75 a barrel level before retreating. Obviously oil bulls want to see crude break through $75 with some veracity sooner rather than later, especially since oil has come into the low to mid-70s several times recently only to fall back. Working in the bulls' favor is the fact that today's close for crude is the highest since June.

Crude Chart

So after reading those last two paragraphs and looking at the corresponding charts, you might be feeling groovy about commodities. Far be it from me to rain on the parade, but I did come across an interesting anecdote. The Baltic Dry Index (BDI), which usually rises as more commodities, like copper and oil, are shipped around the world, is down a fair bit since July. And by fair bit, I mean more than 1000 points. Here's the chart.

Baltic Dry Index Chart

With an eye toward Tuesday's trade, the day should not be as light as Monday was in terms of catalysts. Before the market opens, weekly chain stores sales data is released, though most pre-market eyes will be focused on the Case-Shiller Home Price Index. Housing data has been fairly robust lately, or less bad, depending on your purview, and more good/not-so-bad news tomorrow could serve as an early boost to stocks.

The big kahuna of economic reports on Tuesday is the consumer confidence report, which is released at 10 AM Eastern. The consensus estimate is for a reading of 48 and that would be a nice uptick from the previous report of 46.6. Any uptick in consumer confidence is considered good news at this point. For as irrational as the market may be, most participants seem to have the good sense to acknowledge earnings quality and the health of the economy at large cannot improve without the help of the American consumer.

Consumer Confidence Chart

The Federal Reserve releases manufacturing data for the Richmond region, also at 10 AM, and a follow up to the bullish news out of the Philadelphia region last week could also rejuvenate the bulls. Speaking of the Federal Reserve, there is also an auction for $42 billion in two-year Treasuries tomorrow. As I have mentioned a few times recently, the Fed seems to be gobbling up Treasuries to give the impression that demand for Uncle Sam's debt is better than reality says it is. I am not sure if it is better to have international buyers, led by the Chinese, snatching up Treasuries or if it is better to have the Fed being the primary buyer. Not being able to make a decision on that riddle, I am left to think it might be best if the Treasury did not need to issue any new debt at all, but that is probably wishful thinking.

If you are in need of some decent earnings plays to watch tomorrow, there are a few. Really, just a few. I mentioned some bearish options activity surrounding Bank of Montreal (BMO) today in the Market Monitor. The Canadian bank is expected to earn 96 cents a share. Discount retailer Big Lots (BIG) also reports before the bell and analysts are calling for 30 cents a share in profits.

Ladies apparel retailer Chico's FAS (CHS) also steps into the earnings confessional and the consensus estimate is for 10 cents a share. A more obscure name that may be worth watching given depressed poultry prices is poultry processor Sanderson Farms (SAFM). The Street is expecting $1.76 a share in profits. This is not a bad lot of companies reporting results, but I am willing to bet consumer confidence and the home price data will set the tone for the day, not these reports.

Looking at the charts, the Dow continued its march above 9500, albeit modestly. Support can probably be found at the old resistance point in the 9420 area and it is fair to peg new resistance at last November's high of 9625. From there, there is a lot of room to run to 10000. A break above 9625 on strong volume could be a nightmare for the shorts and their covering would only fan the flames of the move toward five digits. I remain committed to the posture that volume needs to strengthen and earnings updates need to show some top-line increases to get the Dow over 10,000 in the next few weeks.

Dow Chart

Factoring in last Monday's decline, the S&P 500 has surged about 4.5% from the lows made during that session. The index dipped below support at 980, but rebounded nicely. The 14-day RSI shows the S&P 500 is not nearly as overbought as it was earlier this month, but 1050 must be cleared before a discussion about 1100 can begin.

S&P 500 Chart

The Nasdaq finally made its way back above 2000 last week and is now hovering around a three-year old resistance level. Technology issues played a big part in leading the market higher, but that well may drying up as there are not many catalysts remaining for tech stocks until third-quarter earnings updates start emerging. Even if the Nasdaq can hold around current levels, it still needs to move to the low 2060 area and fight more resistance there. Consider me in the neutral camp regarding the current state of affairs with the Nasdaq.

Nasdaq Chart

As I have been saying for a couple of weeks now, volume is going to be a challenge heading into Labor Day and September is historically a bad month for stocks, but if the market's down days have taught us one thing recently it is that those days are buying opportunities, not the beginnings of bearish moves.


New Plays

Relative Strength in Oil Services

by James Brown

Click here to email James Brown


NEW BULLISH Plays

Bristow Group - BRS - close: 30.77 change: +1.01 stop: 28.80

Why We Like It:
BRS provides helicopter services to offshore oil platforms. The stock is bouncing from its trendline of higher lows. This looks like a lower-risk entry point. The volume behind today's rally is bullish. I'm suggesting long positions now. More patient traders could try and wait for a dip back toward $30.00. We're going to use a stop under the recent low. Our target is $33.90. The Point & Figure chart is much more bullish with a $49 target.

Annotated chart:

Entry on    August 24 at $30.77 
Change since picked:     + 0.00   			
Earnings Date          11/05/09 (unconfirmed)    
Average Daily Volume:       289 thousand
Listed on  August 24, 2009    


Superior Energy - SPN - close: 19.76 change: +0.66 stop: 17.80

Why We Like It:
SPN is another oil service stock showing relative strength. The stock is nearing round-number resistance at $20.00 and I'm expecting a little correction. The plan is to buy SPN on a dip in the $18.80-18.25 zone. We'll use a stop loss at $17.80. We'll sell half our position (1st target) at $19.95. We'll sell the rest (2nd target) at $21.75. Time frame is about six to eight weeks.

Annotated chart:

Entry on    August xx at $xx.xx <-- TRIGGER 18.80
Change since picked:     + 0.00   			
Earnings Date          10/29/09 (unconfirmed)    
Average Daily Volume:       927 thousand
Listed on  August 24, 2009    



In Play Updates and Reviews

Updated Triggers As Rally Stalls

by James Brown

Click here to email James Brown


BULLISH Play Updates

America Movil - AMX - close: 46.90 change: -0.35 stop: 44.15

AMX may be getting tired. The stock spiked to $48.28 this morning and slide lower the rest of the session. I would expect another dip toward $46.00 and possibly $45.00. Wait for the bounce to jump in. Our first target to take profits is at $49.75.

*Breakout Trade*
Entry on    August 20 at $46.51 *triggered stop 44.15
Change since picked:     + 0.39   			

*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: 17.35 change: -0.11 stop: 16.35

The rally in banks might also be out of gas, at least short-term. BAC rallied to $18.20 and then gave it all back and more. The stock is probably headed for the $17.00-16.75 zone. The plan was to open small positions (1/2 to 1/4 our normal size). Our new target is $19.75.

*Aggressive, buy-the-breakout strategy*
Entry on    August 21 at $17.50 *triggered (small positions)
Change since picked:     - 0.15   			
Earnings Date          07/17/09 (confirmed)    
Average Daily Volume:       310 million 
Listed on  August 01, 2009    


Cardinal Health - CAH - close: 35.44 change: -0.19 stop: 32.40

Most of the healthcare stocks were able to maintain their gains today. CAH was not one of them. The stock lost 0.5%. I would wait for a dip into the $35.00-34.00 zone before considering new bullish positions. 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:     + 0.46   			
Earnings Date          11/17/09 (unconfirmed)    
Average Daily Volume:       2.8 million 
Listed on  August 19, 2009    


Continental Airlines - CAL - close: 13.05 change: +1.01 stop: 11.79 *new*

Uh-oh! The action in CAL today looks dangerous. The stock spiked toward $14.50 and then gave back almost all of its gains. This looks like a blow-off top. Volume was strong. I am lowering our trigger to buy CAL down to $12.20 and I'm upping our stop loss to $11.79. We want to trade small position sizes. Our target is $15.50.

Entry on    August xx at $xx.xx <-- TRIGGER @ 12.20 *new*
Change since picked:     + 0.00   			
Earnings Date          10/15/09 (unconfirmed)    
Average Daily Volume:       7.2 million 
Listed on  August 22, 2009    


Corn Products - CPO - close: 30.78 change: +0.53 stop: varies

CPO began to rally this morning but it rolled over and CPO closed back in its 31-30 trading range. The high today was $31.13 so our play is still unopened. We have two different entry points.

Our breakout entry point to buy CPO is at $31.15. We'll use a stop loss at $29.85. Our first target would be $33.90.

Our buy the dip entry point is at $29.25 with a stop loss at $27.90. Our first target would be $32.30.

We want to trade small at only 1/2 to 1/4 our normal position sizes. FYI: The Point & Figure chart is bullish with a $45.00 target.

Entry on    August xx at $xx.xx <-- TRIGGER @ 29.25 or 31.15
Change since picked:     + 0.00   			
Earnings Date          10/22/09 (unconfirmed)    
Average Daily Volume:       687 thousand
Listed on  August 15, 2009    


Fomento Economico Mexicano - FMX - close: 38.40 chg: -0.52 stop: 35.90

The action in FMX today also looks like a short-term top/reversal. I am lowering our trigger to buy the dip from $37.50 down to $37.00. I'm adjusting the stop loss to $35.90. 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.

Entry on    August xx at $xx.xx <-- TRIGGER @ 37.00
Change since picked:     + 0.00   			
Earnings Date          10/26/09 (unconfirmed)    
Average Daily Volume:       766 thousand
Listed on  August 20, 2009    


IDEX Corp. - IEX - close: 27.62 change: +0.02 stop: 25.40

It looks like the rally in IEX is also losing some steam. Don't be surprised to see another dip back toward $26.00. We can use a dip or a bounce near $26.00 as a new entry point. 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:     + 1.52   			
Earnings Date          07/20/09 (confirmed)    
Average Daily Volume:       570 thousand
Listed on  July 25, 2009    


Imperial Oil - IMO - close: 36.74 change: -0.31 stop: 34.49

The bounce in IMO is fading a bit but volume was light today. I would expect a dip back toward the $35.50-35.00 zone. Shares do have potential resistance near $38.00 and a rather large cloud of moving averages. 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:     - 0.01   			
Earnings Date          10/30/09 (unconfirmed)    
Average Daily Volume:       291 thousand
Listed on  August 19, 2009    


Jacobs Engineering - JEC - cls: 46.68 chg: -0.11 stop: 41.90

JEC hit new highs only to give up its gains on the session. We want to jump on board with a dip back toward $45.00. Our trigger to open positions is $45.25. Our stop loss is at $41.90. If triggered our first target is $49.75. Our second target is $53.00. Our time frame is four to six weeks.

Entry on    August xx at $xx.xx <-- TRIGGER @ 45.25
Change since picked:     + 0.00   			
Earnings Date          11/17/09 (unconfirmed)    
Average Daily Volume:       1.8 million 
Listed on  August 22, 2009    


J.P.Morgan Chase - JPM - close: 43.01 change: -0.65 stop: 39.99

JPM tagged a new high at $44.24 and then gave back about half of Friday's gains. I would look for a dip back toward $42.00. Our target is $47.40. My time frame is about six weeks.

Entry on    August 21 at $43.50 *triggered (1/2 to 1/4 normal size)
Change since picked:     - 0.49   			
Earnings Date          07/16/09 (confirmed)    
Average Daily Volume:        55 million 
Listed on  July 18, 2009    


Lindsay Corp. - LNN - close: 45.48 change: +0.35 stop: varies

LNN challenged resistance at $46.00 again but it held. We have two different entry points to open bullish positions.

Our aggressive buy the breakout trigger is at $46.25 with a stop loss at $41.95 and a target at $49.95. If triggered at $46.25 we want to use small positions.

Our buy the dip trigger is at $40.10 with a stop loss at $37.95. Our first target is $44.90. FYI: The point & figure chart is bullish with a $56.00 target.

Entry on    August xx at $xx.xx <-- TRIGGER @ 40.10 or 46.25
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: 29.65 change: -0.04 stop: 27.90

Both GS and MS gave up their early morning gains. We can probably expect MS to dip back toward its trendline of support around $28.50 and its 50-dma. MS has exceeded our first target at $31.50. We're currently aiming for our second target at $34.90 but MS has to breakout over resistance at $32.00 first.

Entry on    August 04 at $29.50 *triggered (1/2 position)  
Change since picked:     + 0.15
                              /1st target hit @ 31.50 (+6.7%)
Earnings Date          09/16/09 (unconfirmed)    
Average Daily Volume:        24 million 
Listed on  July 23, 2009    


Microsoft - MSFT - close: 24.64 change: +0.23 stop: 22.75

MSFT is still showing relative strength with a 0.9% gain on Monday. I would use dips near $24.00 or $23.50 as an entry point. I'm raising the stop loss to $22.75. Currently our target is $27.75. FYI: I do have to offer one word of caution. MSFT is now testing the bottom edge of its previous bullish channel. This might actually be resistance, which should facilitate the next dip.

Entry on      July 27 at $23.00
Change since picked:     + 1.64   			
Earnings Date          07/23/09 (confirmed)    
Average Daily Volume:        58 million 
Listed on  July 23, 2009    


Oil States Intl. - OIS - close: 31.59 change: +0.94 stop: 27.95

OIS continues to rally following Friday's breakout above resistance. The stock displayed impressive relative strength with a 3% gain on above average volume. Our first target is $34.00. Our second target is $38.00. My time frame is six to eight weeks.

Entry on    August 21 at $30.20 *triggered          
Change since picked:     + 1.39   			
Earnings Date          10/29/09 (unconfirmed)    
Average Daily Volume:       738 thousand
Listed on  August 13, 2009    


Raytheon Co. - RTN - close: 47.99 change: -0.23 stop: 46.40

There is no change from my weekend comments. We're waiting for RTN to breakout over resistance near $48.50. Our trigger to buy the stock is at $48.65. We'll use a stop loss under the recent low. If triggered our first target is $52.50. Our second target is $54.85.

Entry on    August xx at $xx.xx <-- TRIGGER 48.65
Change since picked:     + 0.00   			
Earnings Date          10/22/09 (unconfirmed)    
Average Daily Volume:       2.7 million 
Listed on  August 22, 2009    


TEVA Pharmaceuticals - TEVA - close: 52.22 change: +0.68 stop: 48.95

TEVA gapped higher this morning and spent the rest of Monday churning sideways. More conservative traders may want to use a stop loss closer to $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 17 at $50.50 *triggered                
Change since picked:     + 1.72   			
Earnings Date          11/05/09 (unconfirmed)    
Average Daily Volume:       5.3 million 
Listed on  August 05, 2009    


Titan Machinery - TITN - close: 13.34 change: +0.22 stop: 11.30

TITN continues to inch higher although volume was pretty light. More conservative traders may want to raise their stops toward $12.00. I'd look to buy dips in the $13.00-12.50 zone. Our upside targets are $14.75 and $15.85.

Entry on    August 15 at $12.55 /gap down entry
                              /originally listed at $13.12
Change since picked:     + 0.79   			
Earnings Date          09/15/09 (unconfirmed)    
Average Daily Volume:       248 thousand
Listed on  August 15, 2009    


BEARISH Play Updates

Akamai Tech. - AKAM - close: 18.06 chg: -0.36 stop: 19.11 *new*

AKAM produced a bearish reversal/bearish engulfing candlestick pattern. This could be used as a new entry point but readers should take careful note that volume was very light today. I'm lowering our stop loss to $19.11. If you want to launch positions now you may want to lower your stop closer to $18.50 instead. Our first target is $16.25.

Entry on    August 11 at $18.44 
Change since picked:     - 0.38   			
Earnings Date          10/29/09 (unconfirmed)    
Average Daily Volume:      10.4 million 
Listed on  August 11, 2009    


St. Jude Medical - STJ - close: 37.92 change: +0.13 stop: 38.75

STJ drifted higher for a minor gain. I am 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:     - 0.40   			
Earnings Date          10/15/09 (unconfirmed)    
Average Daily Volume:       4.4 million 
Listed on  August 04, 2009