Option Investor
Newsletter

Daily Newsletter, Wednesday, 9/9/2009

Table of Contents

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

Market Wrap

S&P, Nasdaq Close at 11-Month Highs

by Judy Alster

Click here to email Judy Alster
Not a bad day, all in all. The stock market extended its gains Wednesday for the fourth straight session thanks partly to rising commodity prices and some fairly hopeful news from the Fed. The S&P 500 and the Nasdaq reached 11-month highs as industrial stocks rallied; the Dow Jones industrial average rose 50 points to its second-highest close of the year.

MARKET INDEX WRAPUP, WEDNESDAY, SEPT. 9

The market slipped briefly after the release of the Fed's report on regional economies, which said consumer spending would rise -- but only because of car purchases linked to the government's brief Cash for Clunkers program. The report also said the job market remains weak. (No!) Manufacturing news showed some promise, though; more on the Beige Book report below. (Of all the days to experience technical difficulties . . . .arrrgggghh! . . . that's why I was delayed posting this. In addition, regular readers will notice that these are not my usual graphs; the majority are courtesy of the excellent BigCharts.com. With luck I'll have my usual graphics back next week.)

Industrial shares were big gainers, as investors bet that higher commodity prices will mean increased profits if the economy strengthens; the weaker dollar also makes the goods of U.S. exporters cheaper outside the U.S. — but no economy has ever achieved a lasting strength on weak currency. Caterpillar Inc. (CAT) was a big mover; shares of the maker of construction and mining equipment rose $1.44 or 3.1% to $48.41.

CATERPILLAR:

Boeing Co. (BA) rose $1.03 or 2.1% to $50.53, while General Electric (GE) was up 37 cents or 2.6 % to $14.87.

The Energy Information Administration usually releases its weekly petroleum supplies report on Wednesdays, but this week will release it on Thursday along with the natural gas report. Thanks to a late rebound by the broader market, energy and materials stocks were able to close with at least some dignity. Crude oil prices showed real strength early in the day, finishing with a 0.5% gain at $71.49 per barrel.

AMEX OIL INDEX:

The Dow rose 49.88, or 0.5 percent, to 9,547.22. The index has added 267 points, or 2.9%, in four days. It was the Dow's second-highest close of the year, just below its Aug. 27 finish of nearly 9,581.

DOW JONES INDUSTRIAL AVERAGE:

The broader S&P500 gained 7.98, or 0.8%, to 1,033.37, while the Nasdaq composite rose 22.62, or 1.1 percent, to 2,060.39. It was the highest close for the S&P 500 index and the Nasdaq since October.

S&P 500:

NASDAQ:

Gold prices fell slightly but still within touching distance of $1000 after crossing that mark Tuesday. I mean, where else do you go when the dollar is weak? Gold ended the day at $997.10 per ounce, down a fraction.

Financials had lagged in the early going, but managed to make their way to a 1.4% gain and give support to the broader market. AIG (AIG) was a leader as it bounced back from a two-session slide. Capital One (COF) led financial stocks, thanks partly to an upgrade by analysts at Citigroup, who also said "yes" to shares of MasterCard (MA). Fortress Investment Group (FIG) showed unusual volume at 14.5 million and rose 19% to $5.32, thanks to its own upgrade by Barclay's, who like the whole asset-manager group.

MASTERCARD:

FORTRESS INVESTMENT GROUP:

Advancing stocks outpaced decliners by about 5 to 2 on the New York Stock Exchange.

Bond prices mostly rose. The yield on the 10-year Treasury note was flat at 3.48%.

One thing you may notice about several of today's charts is that prices have moved solidly into new territory and formed support. A good sign. But even little children know that trees don't grow to the sky, so if I were forced to predict, which I'm not really, I'd say that this rally will level off soon and probably make a nice floor.

As for economic reports, they seem — seem — to be getting rosier. Mortgage applications, for example, jumped 'way up last week, as the housing market (except on my block) continues to recover from its anemia. The Mortgage Bankers' Association's purchase application index, admittedly being goosed by the impending end of the government's first-time homebuyer credit, rose 9.5% for the biggest gain since April. The refinance index rose 22.5% for the biggest gain since March. To ice the cake, the average 30-year loan dropped 13 basis points to 5.02%.

One hates to be a party-pooper, but all this hoopla could fade when the first-time homebuyers' tax credit ends at midnight on December 1. In a related note, the Treasury Department released a report of its own which showed that although over 360,000 homeowners had their mortgages reworked lower in August, up over 50% from July, that's still only 12% of eligible homeowners.

Treasury has started releasing monthly reports on its Home Affordable Modification Program, or HAMP, which was launched in February. But the program, which pays cash incentives to mortgage servicers to reduce monthly payments to 31% of a borrower's income, is off to a slow start. Of course, 31% of an unemployed person's income is zero, so it's perhaps understandable that some lenders aren't jumping all over this. If it continues, according to Treasury, we can expect many, many more foreclosures and a revival of the infamous "cramdown" legislation. I'd be remiss if I didn't tell you.

Okay, enough housing gloom.

Shoppers parted with some cash last week: Chain-store sales rose 0.6% from the previous week to an above-trend, year-over-year minus-0.1%, said the International Council of Shopping Centers-Goldman's same-store sales tally (those are stores open at least a year). This is a weekly measure of comparable store sales at major retail chains; it's related to the "general merchandise" portion of retail sales and accounts for about 10% of all of total retail sales. A similar study from Redbook Research showed department stores, which have not been faring well, continuing to struggle, while discount stores did nicely, including in food sales.

RETAIL SALES:

Despite that finding, proven by the fact that every major department store except Kohl's was down significantly year-over-year in August, department store stocks have been doing pretty well. Saks (SKS), Dillards (DDS), Nordstrom (JWN) and Macy's (M), to name a few, are all climbing, although the last two weeks show them taking a rest. Nordstrom is representative:

J.W. NORDSTROM:

True, cooler-than-normal weather, combined with a late start for the school year in some parts of the country, helped the numbers. We should start to see positive year-over-year results in October and November, but it still won't be comparing apples to apples, since those were the months last year when spending really took a dive.

The Census Bureau's quarterly services survey was out today, too; it estimates revenue from information and technology-related service industries -- professional, scientific and technical services; IT; administrative and support services, and waste management and remediation services.

Total revenues for information businesses fell 0.4% in the second quarter to $274.3 billion; year over year, revenues were down 3.3%, same as the first quarter. Revenues at employment services, you won't be shocked to discover, fell 2.7% from the previous quarter for an 11.5% year-over-year decline.

SERVICE SECTOR THROUGH Q1:

And the big dog news that all were waiting for: The Fed's Beige Book, a snapshot of economic conditions in the 12 Federal Reserve districts. According to the Beige Book, economic activity is stabilizing or improving in the vast majority of the country, adding to evidence that the worst recession since the 1930s is drawing to an end.

All but one of the Fed's 12 regions indicated that economic activity was "stable," showed "signs of stabilization" or had "firmed." The one exception was the St. Louis region, which at least reported that the pace of decline in economic activity appeared to be "moderating." This confirms predictions by Fed Chairman Ben Bernanke and most other analysts that the economy has started to grow again in the current quarter.

Businesses in most Fed regions said they were "cautiously positive" about the economic outlook, more optimistic than late July's report. Analysts predict the economy is growing in the current July-September quarter at anywhere between 3% and 4%. Sounds optimistic to me, but I could be wrong. Most of that growth should come from more spending from businesses, which had slashed investments -- often by double-digits -- during the recession.

Before we get too breathless, consumer spending is expected to turn up only because of the binge-buying of automobiles generated by the short-lived Cash for Clunkers program, which like you I don't want to hear too much more about. Aside from brisk businesses at auto dealerships, other merchants struggled, leaving consumer spending soft in most Fed regions.

The prolonged slump in consumer spending has been one of the most serious points of worry for economists, and the Fed's warning about it deflated some of the market's optimism. About 70% of the U.S. economy depends — alas — on spending by consumers.

(All this reminds me of the folk tale about the mythical village of Chelm, where everyone made money by taking in everyone else's laundry. This madness is largely how Gross Domestic Product is calculated and it will be fodder for another column.)

Manufacturers in most regions, though, reported "modest" improvements — a sign I've always considered more indicative of an upturn than consumer spending, as enjoyable as that may be. The San Francisco region said orders rose for semiconductors and other IT products; Richmond, Atlanta, Chicago and Minneapolis reported increases or planned increases in automobile production ad several regions noted more production for pharmaceutical products:

INDUSTRIAL PRODUCTION, JULY:

The Fed also said that the residential real-estate market is no longer comatose, although most Action is coming in at the lower end of the market, again possibly due to that first-time tax credit.

The commercial real-estate market continued to drag. Demand for space remained weak and construction fell again in all regions.

On the jobs front, employment conditions remained weak in all the Fed regions. (No!) The nation's unemployment rate climbed to a 26-year high of 9.7% in August. It is expected to top 10% this year. Many economists predict that rising unemployment will keep consumers cautious.

UNEMPLOYMENT RATE:

The Fed's survey found that some staffing firms reported a "slight pickup" in demand for temporary workers. That's an encouraging sign because employers usually boost use of temp workers before they hire new employees.

And in keeping with the consumer-oriented theme, today's silly graph reveals a fact of shopping life that cannot be denied:


Thursday look for interest rate announcements from the Banks of England and Canada, the International Trade report, jobless claims, and the EIA petroleum and natural gas report. Will we have a fifth straight up day?


New Plays

Data Storage

by James Brown

Click here to email James Brown


NEW BULLISH Plays

E M C Corp. - EMC - close: 16.60 change: +0.29 stop: 15.24

Why We Like It:
Tech stocks were leading the market higher on Wednesday and I want to increase our exposure to the group. EMC has been showing relative strength and just hit a new 52-week high. Instead of chasing this move I'm suggesting we buy EMC on a dip at $15.75. We'll use a stop loss under the September low. Our target to exit is $18.00. We'll plan to exit ahead of the late October earnings report.

Annotated chart:

Entry on September xx at $xx.xx <-- TRIGGER @ 15.75
Change since picked:     + 0.00   			
Earnings Date          10/22/09 (unconfirmed)    
Average Daily Volume:      19.6 million 
Listed on September 09, 2009    



In Play Updates and Reviews

Intraday Stops

by James Brown

Click here to email James Brown

The market's strength was enough to close out a couple of bearish plays today.


BULLISH Play Updates

Agrium Inc. - AGU - close: 50.93 change: +0.13 stop: 47.40

Traders bought the dip near $50.25 this afternoon. I remain bullish on AGU with the stock over $50.00. Our first target is $54.75. Our second target is $59.75. Currently the Point & Figure chart is bullish with a $59 target.

FYI: Agrium (AGU) is trying to buy rival firm CF Industries (CF) but CF keeps rejecting the offer calling it too low. At the same time CF is trying to buy Terra Industries (TRA) and TRA keeps rejecting the offer calling it too low. Eventually one of these companies is going to give up or they're finally going to make a big enough offer or somebody else might step in and start bidding. There is a risk that someone bids too much and the market could think they overpaid, which might push the stock lower. This M&A dance has been going on for months and it will probably continue for months so I'm not expecting it to have much short-term impact on the stock.

Entry on September 08 at $50.65 /gap higher entry  
Change since picked:     + 0.28   			
Earnings Date          11/05/09 (unconfirmed)    
Average Daily Volume:       1.9 million 
Listed on September 05, 2009    


Citigroup - C - close: 4.66 change: -0.02 stop: 4.29

The action in C was disappointing. Shares failed to participate in the rally and I'm seeing more short-term technicals begin to roll over into a bearish posture. You need to be sure you're comfortable with how much volatility you're willing to stomach here. C can easily dip back toward $4.30. and possibly the $4.20 level. More aggressive traders might want to adjust their stops down to $4.19-4.15. I'm not suggesting new bullish positions at this time. Let's see where C can bounce first. Keep an eye on the $4.50-4.60 zone. Due to the volatility I'm suggesting very small position sizes.

Our first target to take profits is at $5.40. Our second target to exit is $5.95.

Entry on September 03 at $ 4.87 /gap higher entry
                             /listed at $4.77
Change since picked:     - 0.21   			
Earnings Date          10/16/09 (unconfirmed)    
Average Daily Volume:       1.0 billion    
Listed on September 03, 2009    


Cracker Barrel - CBRL - close: 31.69 chg: +0.45 stop: 27.90

The rally continues for CBRL. I think shares are a little overbought here. We want to buy the stock near $30.00. I'm suggesting traders buy the dip at $30.15 but we can really use the $30.15-29.00 zone as an entry point. If triggered our first target is $32.75. Our second target is $34.90. Our time frame is six to eight weeks.

Entry on September xx at $xx.xx <-- TRIGGER @ 30.15
Change since picked:     + 0.00   			
Earnings Date          10/27/09 (unconfirmed)    
Average Daily Volume:           thousand
Listed on September 08, 2009    


China Mobile Ltd. - CHL - close: 50.78 chg: -0.29 stop: 47.90

CHL delivered a normal pull back after its multi-day bounce. I don't see any changes from my previous updates. Our first target is $54.00. Our second target is $58.00. Our time frame is several weeks.

Entry on    August 31 at $48.73 /gap down entry point
Change since picked:     + 2.05   			
Earnings Date          00/00/?? (unconfirmed)    
Average Daily Volume:       2.3 million 
Listed on  August 29, 2009    


Capstone Turbine - CPST - close: 1.55 change: +0.19 stop: 0.98

Unless you're willing to chase this move we may have to give up on CPST. The stock's bullish posture has produced another 14% gain and new highs for the year. Volume was big on the rally. The $1.50-1.70 level could be resistance so I hesitate to chase it.

I'm keeping CPST on the play list for a couple more days. The plan is to buy a dip at $1.15. Yesterday I suggested more aggressive traders buy it over $1.45.

CPST's P&F chart is bullish with a $2.88 target. I'm setting our first target to take profits at $1.50. We'll tentatively set a second target at $1.85. Remember, just because the stock is "cheap" don't go overboard.

Entry on    August xx at $xx.xx <-- TRIGGER @ 1.15
Change since picked:     + 0.00   			
Earnings Date          11/09/09 (unconfirmed)    
Average Daily Volume:       4.8 million 
Listed on  August 29, 2009    


Carpenter Tech. - CRS - close: 22.29 change: -0.28 stop: 19.75

CRS found some profit taking on Wednesday. Wait for a dip near $22.00 or for CRS to fill the gap near $21.00 as our next entry point. Our first target is $24.90. More aggressive traders may want to aim higher.

Entry on September 05 at $21.45 /gap higher entry
                             /originally listed at $20.92
Change since picked:     + 0.84   			
Earnings Date          10/28/09 (unconfirmed)    
Average Daily Volume:       536 thousand
Listed on September 05, 2009    


Darden Restaurants - DRI - close: 34.70 chg: +0.55 stop: 32.45

DRI was kind enough to provide us another entry point with a dip near its rising 10-dma this morning. Our first target is the $39.40 mark.

Entry on September 05 at $34.82 
                              /originally listed at $34.41
Change since picked:     - 0.12   			
Earnings Date          09/29/09 (unconfirmed)    
Average Daily Volume:       2.6 million 
Listed on September 05, 2009    


Ford Motor Co. - F - close: 7.39 change: +0.09 stop: 7.39

Ford is still drifting sideways. I don't see any changes from my prior comments. I'm suggesting we stay with the two strategies already listed.

We have a breakout trigger to buy F at $7.85 with a stop at $7.39.

We have a buy the dip trigger at $6.50 with a stop at $5.99. We want to trade small positions no matter what trigger F hits.

If triggered at $7.85 our first target is just under the old highs at $8.80. Our second target is $9.40.

Entry on    August xx at $xx.xx <-- TRIGGER @ 7.85 or $6.50
Change since picked:     + 0.00   			
Earnings Date          11/05/09 (unconfirmed)    
Average Daily Volume:        90 million 
Listed on  August 27, 2009    


IDEX Corp. - IEX - close: 29.25 change: +1.11 stop: 25.75

The rally in IEX is accelerating. Readers should prepare to take some money off the table. Our first target is $29.85. I am adding a second target at $32.00. I would sell most of our position at $29.85. The P&F chart is forecasting a $39 target.

Entry on    August 17 at $26.10 *triggered         
Change since picked:     + 3.25   			
Earnings Date          07/20/09 (confirmed)    
Average Daily Volume:       570 thousand
Listed on  July 25, 2009    


J.P.Morgan Chase - JPM - close: 42.86 change: +0.32 stop: 39.90

JPM struggled with the $43.00 level today. I'd prefer to buy the stock on another bounce from $41.00 or a move over $43.50 again. Our plan was to use smaller position sizes (1/2 to 1/4 our normal size). 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:     - 0.64   			
Earnings Date          07/16/09 (confirmed)    
Average Daily Volume:        55 million 
Listed on  July 18, 2009    


Kirby Corp. - KEX - close: 38.15 change: -0.29 stop: 35.25

KEX tagged resistance near $39.00 and stalled. Shares pulled back toward the $38.00 level. I'd prefer to open new positions in the $37.20-37.00 zone. Our first target to take profits is at $39.95. Our second and final target is $42.40. FYI: The P&F chart is bullish with a $57 target.

Entry on September 08 at $37.70 /triggered/gap higher entry
Change since picked:     + 0.45   			
Earnings Date          10/29/09 (unconfirmed)    
Average Daily Volume:       310 thousand
Listed on September 05, 2009    


Altria Group Inc. - MO - close: 18.59 change: +0.07 stop: 17.90

MO is inching higher, which is what we expected. If you're the patient type then we might see an entry point near $18.25-18.15. I'm suggesting bullish positions now with a stop at $17.90. Our first target is $19.90. The P&F chart is bullish with a $23.00 target. Our time frame is several weeks. Make sure you have the patience for this one before jumping in.

Entry on September 05 at $18.50 
Change since picked:     + 0.09   			
Earnings Date          10/22/09 (unconfirmed)    
Average Daily Volume:      15.5 million 
Listed on September 05, 2009    


Microsoft - MSFT - close: 24.78 change: -0.04 stop: 22.95

MSFT failed to participate in the rally even though tech stocks were leading the way higher. Currently our target is $27.75.

Entry on      July 27 at $23.00
Change since picked:     + 1.78   			
Earnings Date          07/23/09 (confirmed)    
Average Daily Volume:        58 million 
Listed on  July 23, 2009    


Playboy Ent. - PLA - close: 2.69 change: +0.00 stop: 2.45

It was another quiet session for PLA. The stock closed unchanged. I would still consider new positions here or readers can wait for another dip or bounce near $2.50.

Our first target to take profits is at $3.30. Our second target is $3.95. FYI: The Point & Figure chart is bullish with a $7.50 target.

Entry on September 01 at $ 2.65
Change since picked:     + 0.04   			
Earnings Date          11/05/09 (unconfirmed)    
Average Daily Volume:       370 thousand
Listed on  August 29, 2009    


Raytheon Co. - RTN - close: 46.44 change: +0.15 stop: 46.40

RTN managed a minor gain but the posture still looks a little bearish. We may want to watch for a bearish entry point instead of a bullish one. Currently the plan is to buy RTN on a breakout higher with a trigger at $48.65. If triggered our first target is $52.50. Our second target is $54.85. If RTN breaks $45 we may want to go short.

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: 12.03 change: +0.02 stop: 11.70

SFL is still clinging to the $12.00 level and its 50-dma. However, the failure to rally with the rest of the market today is not a good sign. More conservative traders may want to abandon ship right now! I'm not suggesting new bullish positions at this time. Our first target is $14.80. Our second target is $17.00. Our time frame is several weeks. FYI: The Point & Figure chart is bullish with a $28 target.

Entry on    August 27 at $12.80 *triggered
Change since picked:     - 0.77   			
Earnings Date          11/27/09 (unconfirmed)    
Average Daily Volume:       499 thousand
Listed on  August 25, 2009    


Schlumberger - SLB - close: 57.36 change: -0.74 stop: 53.85

After yesterday's big pop higher SLB hit some profit taking today. Look for a dip back toward $56.00 as an entry point. Our first target is $62.50. Our second target is $67.50. FYI: The P&F chart is bullish with a $73 target.

Entry on September 05 at $56.93 /gap higher entry
                             /originally listed at $55.87
Change since picked:     + 0.43   			
Earnings Date          10/23/09 (unconfirmed)    
Average Daily Volume:       8.7 million 
Listed on September 05, 2009    


TEVA Pharmaceuticals - TEVA - close: 52.41 change: +1.03 stop: 48.95

TEVA displayed relative strength today with a 2% gain and what appears to be a breakout over the trend of lower highs. 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:     + 1.91   			
Earnings Date          11/05/09 (unconfirmed)    
Average Daily Volume:       5.3 million 
Listed on  August 05, 2009    


Ultra(Long) Financials - UYG - close: 5.59 change: +0.15 stop: 4.90

Financials were starting to gain some steam today. The UYG has now rallied past its 10 and 20-dma.

Our first target to take profits is at $6.00. Our second target is $6.50. This can be a very volatile security. It's not for the faint of heart.

Entry on September 03 at $ 5.29 
Change since picked:     + 0.30   			
Earnings Date          00/00/00 
Average Daily Volume:      47.8 million 
Listed on September 03, 2009    


BEARISH Play Updates

Akamai Tech. - AKAM - close: 17.79 chg: +0.47 stop: 18.60

AKAM rallied toward $18.00 and resistance at its 200-dma. The rally stalled and volume was light. If shares roll over here it's probably a new entry point for bearish positions. More conservative traders may want to lower their stops closer to $18.00. I am not suggesting new positions at this time. Our first target is $16.25. More aggressive traders may want to aim lower.

Entry on    August 11 at $18.44 
Change since picked:     - 0.65   			
Earnings Date          10/29/09 (unconfirmed)    
Average Daily Volume:      10.4 million 
Listed on  August 11, 2009    


Electronic Arts - ERTS - close: 18.53 change: -0.40 stop: 19.55

The oversold bounce appears to be failing near the $19.00 level. This looks like a new entry point. Our first target to take profits is at $17.05. Our second and final target is at $16.15. FYI: The P&F chart is currently bearish with a $14 target.

Entry on    August 29 at $18.31 /gap down entry
                              /originally listed at $18.76
Change since picked:     + 0.22   			
Earnings Date          10/29/09 (unconfirmed)    
Average Daily Volume:       9.3 million 
Listed on  August 29, 2009    


CLOSED BEARISH PLAYS

Goodrich Petrol. - GDP - close: 24.62 change: +1.78 stop: 24.25

The short covering in GDP continued on Wednesday and shares hit our stop loss t $24.25. The stock closed up with a 7.7% gain. Aggressive traders may want to keep GDP on their watch list to see if the stock rolls over under its 200-dma. The longer-term trend for GDP is down.

chart:

Entry on September 01 at $22.44 
Change since picked:     + 1.81 <-- stopped @ 24.25 (+8.0%)
Earnings Date          11/04/09 (unconfirmed)    
Average Daily Volume:       524 thousand
Listed on September 01, 2009    


Northwest Pipe Co. - NWPX - close: 33.58 change: +0.66 stop: 34.10

The oversold bounce in NWPX has now reached four days in a row. Shares managed to peek over the $34.00 level and hit our stop loss at $34.10 before trimming its gains. If NWPX rolls over from here nimble traders may want to reload and try again. The trend is still down.

chart:

Entry on September 01 at $31.42 /gap down entry
                             /originally listed at $31.73
Change since picked:     + 2.68<-- stopped @ 34.10 (+8.5%)
Earnings Date          10/22/09 (unconfirmed)    
Average Daily Volume:        57 thousand
Listed on September 01, 2009