Option Investor
Newsletter

Daily Newsletter, Wednesday, 8/26/2009

Table of Contents

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

Market Wrap

A Yawn, Despite Good News from Housing and Durables

by Judy Alster

Click here to email Judy Alster
Stocks just lounged around Wednesday, despite seemingly hopeful reports for housing and durable goods orders. Caution seems to be reigning after the heavy buying that sent stocks up over 40% since March. Investors, still remembering the pain and not wishing to tread too heavily on what may turn out to be thin ice, are apparently wondering whether the market can climb much higher in the absence of rock-solid evidence of economic growth. They seem to have already baked a housing recovery, much of it Federal-tax-credit driven, into their buy plans, while the capital goods orders were heavy on transportation, thanks to the Cash for Clunkers program. Take it for all in all, Wall Street should have stayed in bed:

MARKET INDEXES, WEDNESDAY, AUG. 26:

Declines in many industrial and material stocks were a drag on the market with commodities prices mostly flat. The long rally in commodities prices that started earlier this year has been comatose of late, partly on concerns of falling demand from China. Prices keep bumping their heads on the ceiling:

COMMODITIES:

On the New York Stock Exchange, decliners outnumbered advancers by a fraction; on the Nasdaq, advancers had a slight lead.

DOW JONES INDUSTRIAL AVERAGE:

S&P500:

NASDAQ:

A big drawdown in gasoline stocks -- they fell 1.7 million barrels last week -- caused a fast $1 jump in oil prices, but even that fell back as investors digested the fact that demand is down 0.3% year over year. Crude inventories were up 200,000, and other distillates rose a bit as well, according to the Energy Information Administration's weekly report. The drop in gasoline reflects that refineries are operating at a just-okay 84.1% of capacity. October crude dropped 58 cents to settle at $71.47, in a chart that looks like the one for commodities:

CRUDE PRICE:

As for the $39-billion 5-year Treasury note auction, demand was strong, with coverage (essentially that's bidder interest) at 2.51, above the long-term average. I guess the government isn't having much trouble financing its ballooning debt. Foreign and institutional investors took 56% of this issue, also not bad. The only negative of the sale from the government's point of view was that the yield came in a basis point above market expectations, at 2.494%. The yield on the benchmark 10-year Treasury note rose to 3.46% from 3.44% late Tuesday.

Incidentally, the yield curve is the flattest we've seen since the end of July, based on the difference between two- and 10-year yields. (Quick refresher: A normal yield curve shows that yields rise as maturities lengthen. The yield curve flattens when all maturities have similar yields. It tends to accompany uncertainty about the economy.)

5-YEAR TREASURY NOTES:

New home sales jumped a satisfying 9.6% in July, rising for the fourth straight month at the best clip since September of last year. On top of that, they beat expectations. The Commerce Department said sales rose to a seasonally adjusted annual rate (SAAR) 433,000 from an upwardly revised 395,000 or 9.1% in June; expectations were 390,000. Sales are now up more than 30% from the bottom in January, but are still 'way off from the fantasy-land peak of four years ago. And do we really want to see that kind of bubble again so soon?

The median sales price of $210,100, however, was off 11.5% from 2008 and down slightly from $221,400 in June. Well, at least they're selling, with sales gains concentrated in the South.

Last month's sales pace was the strongest since September. However, it's being pushed along by the tailwind of a federal tax credit that covers 10% of the home price, or up to $8,000, for first-time owners. Home sales must be completed by the end of November for buyers to qualify, so we might expect a slowdown after that. Builders and real estate agents are pressing Congress for the credit to be extended. Gee, ya' think they'll listen?

YAHOO RESIDENTIAL CONSTRUCTION INDEX, WEDNESDAY:

There were a mere 271,000 new homes for sale at the end of July, down from 280,000 in June. At the current sales rate, that represents 7.5 months of supply -- down from June's 8.5 months, the lowest since April 2007 and a real good sign, as this interesting self-explanatory months-of-inventory graph from calculatedrisk.com shows:

HOUSING INVENTORY IN AND OUT OF RECESSIONS:

Assuming this is real trend and not a tax-credit fluke, it could make builders more confident about moving along on new projects. That would lead to more jobs in the construction industry as well as to an increase in manufacturing orders for building supplies, which would translate into more jobs in those industries (and probably rising commodity prices). "These are crucial elements of a sustainable recovery," says the chief economist at Nomura Securities, which nobody can deny. Every new home built creates, on average, the equivalent of three jobs lasting one year and generates about $90,000 in taxes paid to local and federal authorities, according to the admittedly-not-disinterested National Association of Home Builders, but they're probably not far off the mark. Homebuilders' stocks are rising, and so is some housing infrastructure, like this wood-products company:

LOUISIANA-PACIFIC:

Shares of homebuilders were up for the second day. Other gainers in homebuilding and materials were Hovnanian Enterprises (HOV), up 9.4%; Standard Pacific (SPF), up 7.8%; D.R. Horton (DHI), up 5.6%, Beazer Homes (BZH), up 4.9% and Brazil's Gafisa, up 4.9%.

The Mortgage Bankers' Association's purchase index rose 1% last week, mainly on increased demand for government loans. It was the fourth straight jump for the longest streak since March. Since the mortgage purchase index can be assumed to lead new home sales, today's encouraging home sales reports shouldn't have been a pure surprise. Mortgage rates moved higher in the week with 30-year loans up 9 basis points to an average 5.24%, but even so it didn't slow things down. The refinance index rose 12.7% for a third straight gain.

In other decent news, the Census Bureau reported that total new orders for manufactured durable goods (the high-ticket ones you expect to last more than three years) increased $7.8 billion or 4.9% in July to $168.4 billion. It was the third increase in the last four months (June fell 1.3%), and the largest percentage increase since July 2007. New nondefense orders for capital goods jumped $4.6 billion or 8.6% to $57.5 billion; new defense orders were up $1.3 billion or 14.8% to $9.8 billion. Excluding the 18.4% increase in transportation goods, orders rose 0.8 percent, which was shy of analysts' expectations.

It was a surge in aircraft bookings and a jump in July auto orders -- undoubtedly nudged up by the elegantly-named Cash for Clunkers program that generated a reported 700,000 new-car sales -- that drove the increase. But even excluding the nudge from transportation, the 0.8% rise was the largest increase in two years. Excluding defense, orders were up 4.3%.

Capital goods orders were very good, up 9.5% following a 5.7% drop in June. The big gainers? Primary metals, fabricated metals, computers & electronics, communication equipment, and even electrical equipment in a hint of improving construction demand. Machinery orders did fall substantially but couldn't make a dent into the capital goods reading.

COMMUNICATIONS EQUIPMENT:

Not only orders, but shipments rose, up $3.5 billion or 2% to $173.1 billion, after a 0.7-percent June increase. Inventories of manufactured durable goods, which we always like to see fall, were down for the seventh consecutive month, off $2.7 billion or 0.8% to $314.1 billion, following a decline in June of 1.5%. Like the fall in months of housing inventory, this tells us that manufacturers are getting their formerly-crowded shelves back in line with demand, which should boost economic growth in the second half of the year.

The strong report suggested that business spending on equipment may actually post an increase in the third quarter after plunging at a record 36% rate in the first quarter and dropping 9% in the second quarter.

So with all this you'd think the market would jump, but investors evidently want a little more proof of growth There was a little excitement after the home sales reports but after that, not much. Of course, late August is notorious for low volume, one reason, in addition to no more white shoes, to look forward to September.

Retailers moved a little after good earnings from Dollar Tree (DLTR) and Williams-Sonoma (WSM). Dollar Tree reported a higher-than-expected jump in quarterly profit and boosted its full-year sales and earnings forecast on a substantial increase in customer traffic in its stores. Long-time customers are shopping there more frequently and new customers, who in better times might have spurned a store that sells most of its merchandise for a buck, are walking right in. In a telling detail, customers are not only buying basic merchandise like food there, but also discretionary goods like books and party supplies. The stock is not selling for a buck:

DOLLAR TREE:

Home improvement retailers like Home Depot (HD) and Loew's (LOW) gained, not surprisingly, on the new home sales report.

On the other end of the retail spectrum, Williams-Sonoma, a very high-end home goods retailer into which I have been walking for years without ever buying anything for myself, reported second quarter earnings of five cents a share excluding one-time items, better than analyst estimates of a 9-cent loss. The careful reader will note this sentence: "Revenues were primarily driven by stronger than anticipated merchandise margins and ongoing cost containment initiatives." Revenue fell 18% year-over-year to $672.1 million, above consensus. The company says it expects a third quarter and year above analyst expectations. (They'll have to do it without me, alas.) The stock jumped $1.68 or 10.6% today, to $17.15.

And in our never-ending but probably loony search for infallible "buy" signals (I know there aren't any): A number of quite intelligent people like the "trinity" of the New York Stock Exchange Advance-Decline Line, the McClellan Summation Index, and the Nasdaq New Highs-New Lows (one or two other similar indicators can be substituted). When all three are lined up and doing what they should, it's okay to jump off the deep end, so they say, and maybe they're right. What the Nasdaq New Highs-News Lows Index should show is new highs exceeding new lows and trending above the 10-day average price. As this graph shows, we're not quite there yet.

NASDAQ NEW HIGHS-NEW LOWS INDEX:

Still, other signals, like the bottom head-and-shoulders formation we looked at last week tell us it's probably okay to dip a few toes back into the pool lest we lose all the upside.

And as regards this week's Silly Graph, I guess I'm as much to blame as anybody. I refer, of course, to the price of cookies, cakes and cupcakes -- kept high, obviously, by unrelenting demand.

U.S. CITY AVERAGE PRICE of CAKES, CUPCAKEs AND COOKIES:

Tomorrow brings earnings for a number of companies including some late-reporting foreign firms like Accor, Avis Europe, China Sunergy, China Telecom, Royal Bank of Canada, The Nine, Ltd. and Vimpel Communications. In economic reports, stand by for Gross Domestic Product and Jobless Claims. They could be market movers.


New Plays

Oil Services & Consumer Credit

by James Brown

Click here to email James Brown


NEW BULLISH Plays

Weatherford Intl. - WFT - close: 20.52 change: +0.10 stop: 19.85

Why We Like It:
WFT produced a rather nasty looking bearish reversal on Tuesday as oil reversed under $75.00 a barrel. Yet investors barely hesitated to buy the dip at round-number support near $20.00 this morning. Oil service stocks look poised to continue this rebound. I'm suggesting bullish positions now but keep in mind this is an aggressive, higher-risk trade given yesterday's reversal. We want to use a relatively tight stop at $19.85 and we want to trade small position sizes (at least 1/2 to 1/4 our normal trade size). Our target to take profits is at $22.45.

FYI: If WFT continues to sell-off we can look for another entry point on a dip or bounce near $19.00 or its rising 100-dma.

Annotated chart:

Entry on    August 26 at $20.52 
Change since picked:     + 0.00   			
Earnings Date          10/19/09 (unconfirmed)    
Average Daily Volume:        11 million 
Listed on  August 26, 2009    


World Accept. Corp. - WRLD - cls: 26.47 chg: +0.52 stop: 25.45

Why We Like It:
WRLD has a lot of potential to skyrocket. The stock has a high amount of short interest. I'm not surprised. Consumer and business credit is a tough business to be in right now. Yet shares have been holding on to their July gains. The sideways consolidation is starting to coil more tightly and WRLD looks poised to break out.

We still want to trade small and use smaller position sizes. More aggressive traders could buy WRLD now. I'm suggesting a trigger at $27.05. We'll use a stop loss under this week's low. If triggered our first target to take profits is at $29.95. Our second target is $33.50. More aggressive traders may want to use a wider stop and place their stop under $25.00 or its 30-dma.

If WRLD sees another short squeeze it could move fast. The most recent data listed short interest at 36% of the very small 15-million share float.

Annotated chart:

Entry on    August xx at $xx.xx <-- TRIGGER 27.05
Change since picked:     + 0.00   			
Earnings Date          10/22/09 (unconfirmed)    
Average Daily Volume:       320 thousand
Listed on  August 26, 2009    



In Play Updates and Reviews

The Rally Looks Tired

by James Brown

Click here to email James Brown

The market had plenty of reasons to be a lot higher on Wednesday. Today's action did see one bullish candidate hit our trigger and one bearish candidate hit our stop.


BULLISH Play Updates

America Movil - AMX - close: 46.91 change: -0.75 stop: 44.75 *new*

AMX contracted a bit but volume was below average on the pull back. If you're looking for a new entry point I'd wait for a dip near $46.00 or $45.00. Our first target to take profits is at $49.75.

Please note the new stop loss at $44.75.

*Breakout Trade*
Entry on    August 20 at $46.51 (small 1/4 sized position)
Change since picked:     + 0.40   			

*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: 17.79 change: +0.04 stop: 16.35

Banks traded sideways and BAC eked out a 4-cent gain. A dip near $17.00 may be another (aggressive) entry point. Currently our target to take profits is at $19.75.

*Aggressive, buy-the-breakout strategy*
Entry on    August 21 at $17.50 *triggered (small positions)
Change since picked:     + 0.29   			
Earnings Date          07/17/09 (confirmed)    
Average Daily Volume:       310 million 
Listed on  August 01, 2009    


Bristow Group - BRS - close: 30.37 change: -0.12 stop: 28.80

BRS dipped to the $30.00 level (actually 29.73) and bounced. This looks like another entry point to buy the stock. Our target is $33.90. The Point & Figure chart is much more bullish with a $49 target.

Entry on    August 24 at $31.00 /gap higher entry
                              /originally listed at $30.77
Change since picked:     - 0.63   			
Earnings Date          11/05/09 (unconfirmed)    
Average Daily Volume:       289 thousand
Listed on  August 24, 2009    


Cardinal Health - CAH - close: 34.00 change: -0.50 stop: 32.90

The correction in CAH continues. The stock lost 1.4% and is still under performing its peers this week. The $34 level was previous resistance so it should offer some support. Thus this pull back should be a new entry point. 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:     - 0.98   			
Earnings Date          11/17/09 (unconfirmed)    
Average Daily Volume:       2.8 million 
Listed on  August 19, 2009    


Continental Airlines - CAL - close: 13.60 change: -0.05 stop: 11.79

CAL continues to show a lot of volatility. The stock gapped open higher only to reverse under the $14.00 level. Currently our plan is to buy CAL on a dip at $12.20. 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: 30.19 change: -0.06 stop: 29.85

Lack of any real follow through after yesterday's bearish move is good news for bulls in CPO. The stock is still drifting lower and looks like it wants to breakdown under support at $30.00. I am not suggesting new positions at this time. Our first target is $33.90.

Entry on    August 25 at $31.15 breakout trigger hit (small positions)
Change since picked:     - 0.96   			
Earnings Date          10/22/09 (unconfirmed)    
Average Daily Volume:       687 thousand
Listed on  August 15, 2009    


Fomento Economico Mexicano - FMX - close: 38.55 chg: -0.24 stop: 35.90

FMX traded sideways for another session. The plan is to buy the stock at $37.00. 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: 27.30 change: -0.32 stop: 25.40

IEX dipped toward $27.00 and its 30-dma before trying to bounce. I am not suggesting new positions at current levels. There is still a chance IEX will retest the $26.00 level. 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:     + 1.20   			
Earnings Date          07/20/09 (confirmed)    
Average Daily Volume:       570 thousand
Listed on  July 25, 2009    


Imperial Oil - IMO - close: 36.16 change: -0.52 stop: 34.49

IMO is still contracting. Weakness in oil and the oil sector didn't help us today. Readers may want to wait for a dip or a bounce near $35.00 and its 200-dma before launching new bullish positions. 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:     - 0.59   			
Earnings Date          10/30/09 (unconfirmed)    
Average Daily Volume:       291 thousand
Listed on  August 19, 2009    


Jacobs Engineering - JEC - cls: 45.10 chg: -1.30 stop: 41.90

Our play on JEC is now open. The stock was downgraded this morning, which explains the spike lower. Our trigger to buy the stock was at $45.25. Readers can open bullish positions anywhere in the $43.00-45.50 zone now. Our first target is $49.75. Our second target is $53.00. Our time frame is four to six weeks.

chart:

Entry on    August 26 at $45.25 *triggered         
Change since picked:     - 0.15   			
Earnings Date          11/17/09 (unconfirmed)    
Average Daily Volume:       1.8 million 
Listed on  August 22, 2009    


J.P.Morgan Chase - JPM - close: 43.30 change: -0.28 stop: 39.99

JPM is still consolidating sideways. Don't be surprised to see 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:     - 0.20   			
Earnings Date          07/16/09 (confirmed)    
Average Daily Volume:        55 million 
Listed on  July 18, 2009    


Lindsay Corp. - LNN - close: 43.95 change: -2.67 stop: 41.95

Ouch! LNN erased three days of gains with a 5.7% sell-off today. I couldn't find any company-specific news to account for the relative weakness. Shares had just broken out yesterday and hit our aggressive trigger to get long the stock. I would wait for signs of a bounce near $43.00-42.50 before considering new positions. Our first target is $49.95. FYI: The point & figure chart is bullish with a $56.00 target.

Entry on    August 25 at $46.25 *breakout trigger
Change since picked:     - 2.30   			
Earnings Date          10/07/09 (unconfirmed)    
Average Daily Volume:       256 thousand
Listed on  August 17, 2009    


Morgan Stanley - MS - close: 29.53 change: -0.66 stop: 27.90

MS contracted with a 2% decline. If the pull back continues readers can look for a new entry point on a dip near $29.00 or $28.50. I'm tempted to raise the stop loss closer to the 50-dma near 28.45 but I'll wait and leave it at $27.90 for now. 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:     + 0.03
                              /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: 24.55 change: -0.09 stop: 22.75

There is no change from my previous update.

I would use dips near $24.00 or $23.50 as an entry point. 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:     + 1.55   			
Earnings Date          07/23/09 (confirmed)    
Average Daily Volume:        58 million 
Listed on  July 23, 2009    


Oil States Intl. - OIS - close: 30.87 change: -0.56 stop: 27.95

Energy stocks were weak and OIS gave up 1.7%. Volume was light on the session. Readers can use a dip near $30.00 as a new bullish entry point. 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:     + 0.67   			
Earnings Date          10/29/09 (unconfirmed)    
Average Daily Volume:       738 thousand
Listed on  August 13, 2009    


Raytheon Co. - RTN - close: 47.60 change: -0.09 stop: 46.40

It was another quiet day for RTN. We're still waiting for a breakout higher. 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    


Ship Finance Intl. - SFL - close: 13.42 change: -0.12 stop: 11.70

SFL pulled back but found support near $13.25 most of the day. I am suggesting readers buy SFL on a dip at $12.80. More aggressive traders may want to jump in a little early above $13.00 instead. I'm using a wide stop at $11.70, which is just under the August lows. If triggered at $12.80 our first target is $14.80. Our second target is $17.00. Our time frame is several weeks.

Entry on    August xx at $xx.xx <-- TRIGGER @ 12.80
Change since picked:     + 0.00   			
Earnings Date          11/27/09 (unconfirmed)    
Average Daily Volume:       499 thousand
Listed on  August 25, 2009    


Superior Energy - SPN - close: 18.48 change: -0.56 stop: 17.80

Readers should note that today's decline (-2.9%) follows yesterday's bearish reversal candlestick. While I expect SPN to find support near $18.00 I believe the risk level of this trade just jumped. I'm suggesting readers open bullish positions on a dip into the $18.25-18.00 zone. You can always wait for SPN to dip toward $18.00 and then buy the bounce instead of buying the dip.

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.

Entry on    August xx at $xx.xx <-- TRIGGER 18.25
Change since picked:     + 0.00   			
Earnings Date          10/29/09 (unconfirmed)    
Average Daily Volume:       927 thousand
Listed on  August 24, 2009    


TEVA Pharmaceuticals - TEVA - close: 51.65 change: -0.87 stop: 48.95

TEVA stumbled a bit. The action over the last two days has turned more bearish. I would expect a dip toward the $51.00-50.00 zone. 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:     + 1.15   			
Earnings Date          11/05/09 (unconfirmed)    
Average Daily Volume:       5.3 million 
Listed on  August 05, 2009    


Titan Machinery - TITN - close: 13.04 change: -0.40 stop: 11.90

Profit taking in TITN produced a 2.9% decline and a dip back to the rising 10-dma. 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:     + 0.49   			
Earnings Date          09/15/09 (unconfirmed)    
Average Daily Volume:       248 thousand
Listed on  August 15, 2009    


BEARISH Play Updates

Akamai Tech. - AKAM - close: 18.10 chg: +0.26 stop: 19.11

I warned readers to watch for a bounce from the 200-dma. I am not suggesting new positions at this time. Our first target is $16.25.

Entry on    August 11 at $18.44 
Change since picked:     - 0.34   			
Earnings Date          10/29/09 (unconfirmed)    
Average Daily Volume:      10.4 million 
Listed on  August 11, 2009    


CLOSED BEARISH PLAYS

St. Jude Medical - STJ - close: 38.65 change: +0.63 stop: 38.75

Low volume days can exacerbate a stock's movement. STJ was upgraded this morning and the stock gapped open higher at $38.78 and rallied to $39.63 before trimming most of its gains. Our stop was at $38.75 so the play was closed immediately.

chart:

Entry on    August 04 at $38.32 
Change since picked:     - 0.46 <-- stopped out @ 38.78 (+1.2%)
                            /gap open exit 
Earnings Date          10/15/09 (unconfirmed)    
Average Daily Volume:       4.4 million 
Listed on  August 04, 2009