Option Investor
Newsletter

Daily Newsletter, Tuesday, 9/15/2009

Table of Contents

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

Market Wrap

What Correction?

by Jim Brown

Click here to email Jim Brown

Money manager Laszlo Birinyi said today that investors who wait to buy stocks until the recession is actually declared to be over will miss out on some huge gains. Bernanke said today, "The recession is very likely over." Is that the proverbial fat lady singing?

Market Stats Table

Investors must have taken Laszlo's words to heart because the major indexes have now broken over all short-term resistance and are clearly in breakout mode. Of course other reasons for the rally include end of quarter window dressing and Friday's triple witching option expiration.

Friday's rally got a lift from the economics with the NY Empire State Manufacturing Survey spiking to 18.9 in September. This was up from only 12.1 in August. This was a much stronger showing than analysts had expected at 14.0. New orders rose to 19.8 from 13.4 indicating an improving trend. This was the third consecutive month of improvement in new orders. At the same time inventories are contracting at an accelerating pace. As inventories contract there are rising expectations from the replenishment cycle. However, the report showed that employment is still declining although losses in August were half the rate of June.

Empire State Bar Chart

Producer Prices for August rose sharply by +1.7% because of increases in energy costs. Excluding food and energy the core inflation was only a mild +0.2%. Core prices for intermediate and crude goods have definitely improved. The deflation scare from large declines in prices early in 2009 has eased. Prices for inputs to the manufacturing process were higher than any point during the recession. Rising orders along with rising prices supports the idea that the recession is over. However, orders are still weak relative to growth periods and will probably remain weak for the rest of 2009.


Retail sales for August spiked unexpectedly by +2.7% compared to analyst estimates for +1.4% growth. The gains were led by autos but there was broad based strength across the board. Apparel, department stores and sporting goods stores had very strong sales gains. Building materials and home furnishings were the only two sectors to post a drop in sales.

The headline number was the strongest gain since January 2006 but obviously the cash for clunkers program generated the sales. Auto dealers posted a +10.6% sales gain for the month. Back to school purchases were also strong at more than +2% and confounding to analysts who had previously said they were weak. We should expect a sharp decline in September without an auto stimulus program to provide the boost.

Retail Sales Chart

Economic reports due out on Wednesday include Mortgage Applications, Current Account, Consumer Price Index, Treasury Capital Flows, Industrial Production, Housing Market Index and Oil & Gas Inventories.

The U.S. dollar is still under pressure and today's close on the dollar index at 76.54 is the lowest close since the 76.46 on Sept-23rd last year. The 52-week lows came at 75.89 on September 22nd as AIG was crashing. Lehman filed bankruptcy on Sept-15th and AIG lost 60% of its value. On the 16th AIG hit its low for the year and the government stepped up to prevent its failure. The dollar index plunged to the 75.89 low but rebounded sharply to 88.46 over the next two months as it became apparent the financial system was not going to collapse.

Today there is a tougher problem. The dollar is crashing on worries over the debt load assumed by the U.S. Fed and Treasury to prevent the collapse of the financial system. This is not something that can be resolved over a couple months. This is going to take a decade to work off the stimulus debt and any new spending by the current administration. The dollar is going to continue to decline and could easily return to the early 2008 lows at 70.69. This almost guarantees that dollar based commodities are going to continue to rise.

Crude oil rose to $71.19 intraday as the dollar fell and Ben Bernanke said the recession is technically over. The prospect for increased demand in a rebounding global economy and the falling dollar rescued it from Monday's drop to $68.02. We are also only a week away from the expiration of crude futures next Tuesday. Oil inventories on Wednesday morning are expected to show a drop of 3-million barrels for the week. There are also three storms forming in the Atlantic. None are currently expected to turn into hurricanes but having three separate storms heading our way is a reason to be cautious. We have been very fortunate over the last several years without a material storm since Katrina. Eventually our luck is going to run out.

Natural gas prices have really been explosive. After reaching an extremely oversold price of $2.41 on Sept 4th on fears of an UNG futures dump the price has rocketed higher. The $2.41 was a 7.5-year low. The CFTC is going to meet on Wednesday to discuss position limits on commodities and that probably triggered some short covering on both oil and gas futures today.

Crude Oil Chart

Natural Gas Futures Chart

In stock news Adobe (ADBE) announced earnings after the bell of 35-cents. This was down from the 50-cents earned in the year ago period. Adobe was happy to maintain its earnings in a tough economy and projected earnings of 23-29 cents in the current quarter. Adobe also announced it was purchasing web analytic company Omniture (OMTR) for $1.8 billion. That represents a $21.50 per share purchase of Omniture and 24% over the Tuesday close.

Omniture Chart

Blockbuster (BBI) said today it might close nearly 1,000 stores by the end of 2010. The once mighty giant of the rental business has been knocked down to size by NetFlix (FLIX) and Redbox. A SEC filing today said Blockbuster would close between 810-960 locations by the end of 2010 and that would be more than a fifth of its current stores. Blockbuster's prior guidance anticipated closing only 380-425 stores. BBI said 35% of its stores were "core" and 47% of all stores were profitable but the remaining stores were losing money. BBI is moving to convert its 4,356 domestic stores to the smaller city based footprint and shutdown the large anchor store concept. BBI is also moving to compete with Redbox and currently has 500 video dispensers in place with an expected 10,000 by the end of 2010. Redbox has over 15,000 today. Redbox was originally funded by McDonalds (47% owner) and Coinstar (47%). In February Coinstar purchased the portion it did not own for $175 million.

For those readers not familiar with Redbox this is a coke machine sized dispenser which has an inventory of the top 100 or so DVDs. Users swipe their credit card and select a DVD and it drops into the pickup slot. The cost per DVD is $1 per day. When you return it the machine reads the barcode on the DVD and cancels the billing. These machines are showing up in McDonalds, 7-11s, gas stations, etc. Seems like everywhere I look there is a new Redbox location. Blockbuster is going to really need to explode its rental machine presence if it is going to compete in the new normal. Blockbuster only claims 1.6 million online subscribers while Netflix claims 9.4 million so BBI has its work cut out for it there as well.

Redbox DVD Station

Online brokers Etrade, Schwab ad Ameritrade all said online trades rose significantly in August with double digit percentage gains. Schwab said daily trades were 334,300 in August, up +24% over August 2008 and +15% over July. Ameritrade said trades rose +71% year over year and 16% from July. Etrade posted a +37% rise in trades. Etrade said it had a record number of accounts at 2.7 million.

Fed Chairman Ben Bernanke lifted the markets when he said during some Q&A today "the recession is very likely over at this point." This came in early afternoon and the markets rallied sharply off the comments. Industrial stocks like CAT and AA were already moving higher and his comments pushed them even farther. GE has finally broken out over long term resistance at $15 with a 10% move over the last two days.

For all practical purposes the fear of a correction appears to have passed. That may make it even more likely since everyone appears to be throwing money at the market. Instead of the daily dose of bears on CNBC the bulls are appearing more often. Laszlo Birinyi said U.S. stocks have "A lot of room to run." Laszlo said he expects to see the S&P at 1700 over the next couple of years. He made that prediction back on May 20th and repeated it again this week on Bloomberg. He is still recommending buying financial stocks that are outperforming. I am surprised we have not seen Abbey Joseph Cohen out with a higher prediction this week. Even noted bear Barton Biggs called himself "unfashionably bullish" and said he believed the S&P would rise to 1200-1250 before a material correction appeared.

With all the bears turning bullish and talk of a correction disappearing it makes you wonder what the future has in store for us. I always worry when everyone moves to the same side of the boat. When that happens the boat has a tendency to capsize. If everyone is turning bullish that means we are running out of bears to keep the market moving higher as they cover their shorts. Once everyone is "all in" on the bullish side there is nobody left to buy.

Somebody is buying this market and volume has definitely increased. Volume today was 10.3 billion shares. Really significant was the spike in new 52-week highs to 447. That is the highest level we have seen this year. New 52-week lows totaled only 47. Some of this could be short covering ahead of triple witching. When portfolio managers close their puts they are using for portfolio insurance it provides a bullish lift to the market. This along with end of quarter window dressing could be pushing the market higher. I don't really care why it is happening as long as it continues.

The S&P rallied well over prior resistance to close at 1052 and is in blue-sky territory until it hits the 50% retracement level at 1116. That does not mean there is no upside resistance but the trend is solid. The SPX should run into uptrend resistance around 1075 but that does not mean a crash is imminent. We saw buyers rush into the market on Monday's gap down open and the pace of buying and volume is increasing. Support today is prior resistance at 1035.

S&P-500 Chart

The Dow finally broke over resistance at 9625 and moved over 9700 intraday. Uptrend resistance is about 9800 but the Dow is really in a free fly zone until about 10318. The path should be higher but I am sure there will be thunderstorms along the way. Initial support is 9575.

Dow Chart - Daily

Long term Dow chart

The Nasdaq has gone from weak sister to leader of the pack in two short weeks. The Nasdaq has broken over the 50% retracement level at 2063 and appears to be headed for a test of 2160 this week. Several sectors in the Nasdaq are fueling the rise but nearly all tech stocks are gaining ground. The Nasdaq went from the lagging index in a range bound pattern to exploding higher above major resistance. The Nasdaq actually has more room to run and short covering into triple witching could be the power.

Nasdaq Chart - Daily

Long Term Nasdaq Chart

The small caps in the Russell 2000 are proclaiming a new bull market. If the small caps were not participating I would be telling you that fund managers were not onboard with this rally. If only large cap stocks were rising then fund managers were looking for liquidity for a quick exit. The Russell broke over major resistance at 600 that dates back to 2004. The angle of ascent has gone vertical and while scary it does show that the rally has breadth.

Russell Chart

I have been telling everyone to buy the dips for quite a while now and that message is still true. Eventually we will buy a dip that doesn't rebound but until proven wrong that is the trade that is working. I would also remind you to "sell too soon" because rallies like this don't last forever. Lock in profits by selling early or at the very least make sure you have trailing stop losses. You can always get back into the market but you can't always recover that lost profit.

Sell too soon!

Jim Brown


New Plays

Gold Poised to Run

by James Brown

Click here to email James Brown


NEW BULLISH Plays

Goldcorp Inc. - GG - close: 42.28 change: +1.45 stop: 37.75

Why We Like It:
The U.S. dollar is falling to new relative lows and that's boosting gold futures. As a matter of fact gold is in the process of breaking out past key resistance near $1,000 an ounce. If gold can clear the early 2008 highs it would have a lot of room to run and pull the gold miners along with it. GG is a Canadian gold company who's stock has broken out above resistance near $40.00. The recent bounce looks like a new bullish entry point. I'm suggesting long positions now with a stop loss at $37.75. More conservative traders may want to use a stop closer to $39 instead. The P&F chart is bullish with a $54 target. Our first target is $47.00. Our second target is $49.85.

Annotated chart:

Entry on September 15 at $42.28 
Change since picked:     + 0.00   			
Earnings Date          10/29/09 (unconfirmed)    
Average Daily Volume:       8.1 million 
Listed on September 15, 2009    



In Play Updates and Reviews

Citigroup Sinks, CRS Scores

by James Brown

Click here to email James Brown

The rally continues for most of the market but Citigroup sank on fears the government would start dumping stock. Meanwhile CRS hits our target.


BULLISH Play Updates

Agrium Inc. - AGU - close: 51.16 change: +1.70 stop: 47.40

AGU produced a nice bounce today with a 3.4% gain. The stock looks poised to breakout to new relative highs soon. I'd still consider bullish positions here. 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:     + 0.51   			
Earnings Date          11/05/09 (unconfirmed)    
Average Daily Volume:       1.9 million 
Listed on September 05, 2009    


BE Aerospace - BEAV - close: 19.22 change: -0.05 stop: 17.45

The market hit new highs but BEAV only traded sideways? Is it a sign of relative weakness or just a pause in the rally? Shares do look a little overbought. Consider waiting for a dip toward $18.00 as our next entry point. Our first target is $22.25.

Entry on September 12 at $19.19 
Change since picked:     + 0.03   			
Earnings Date          10/27/09 (unconfirmed)    
Average Daily Volume:       834 thousand
Listed on September 12, 2009    


China Mobile Ltd. - CHL - close: 49.73 chg: -0.63 stop: 47.90

CHL is dipping back toward its supporting trendline. I would use the pull back as a new bullish entry point. 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:     + 1.00  			
Earnings Date          00/00/?? (unconfirmed)    
Average Daily Volume:       2.3 million 
Listed on  August 29, 2009    


Carpenter Tech. - CRS - close: 24.64 change: +0.31 stop: 21.45

Target achieved. CRS rallied to $25.04 intraday. Our main target to take profits was at $24.90. The $25.00 level is major resistance and I'd expect a pull back here. I'm not suggesting new positions at this time. Our secondary target is $27.40.

chart:

Entry on September 05 at $21.45 /gap higher entry
                             /originally listed at $20.92
Change since picked:     + 3.19
                             /1st target hit @ 24.90 (+16.0%)
Earnings Date          10/28/09 (unconfirmed)    
Average Daily Volume:       536 thousand
Listed on September 05, 2009    


Changyou.com Ltd - CYOU - close: 41.28 change: +0.74 stop: 38.80

CYOU is still bouncing and I would still consider new bullish positions here. Our first target is $45.75.

Entry on September 10 at $41.69 
Change since picked:     - 0.41   			
Earnings Date          10/26/09 (unconfirmed)    
Average Daily Volume:       408 thousand
Listed on September 10, 2009    


Darden Restaurants - DRI - close: 34.95 chg: +0.05 stop: 32.45

I'm a little surprised that DRI didn't show more strength on the better than expected U.S. retail sales data this morning. Shares are still hovering under resistance at $35.00 but the short-term trend is bullish with a pattern of higher lows. More cautious traders might want to up their stop closer to $33.00. Our first target is the $39.40 mark.

Entry on September 05 at $34.82 
                              /originally listed at $34.41
Change since picked:     + 0.13   			
Earnings Date          09/29/09 (unconfirmed)    
Average Daily Volume:       2.6 million 
Listed on September 05, 2009    


E M C Corp. - EMC - close: 16.90 change: -0.02 stop: 15.24

EMC is still floating under resistance at $17.00. We don't want to chase it here. Currently the plan is to 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.

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    


General Electric - GE - close: 16.00 change: +0.65 stop: 13.80

The rally in GE continues. The stock actually gapped open higher this morning at $15.49 so we have adjusted our entry point. The $15.00 level was serious resistance so this could be fueled by short covering. Volume was definitely strong at more than 200 million shares. I'd look for a dip back toward the $15.50-15.00 zone instead of chasing GE here. I do consider this an aggressive trade so we want to keep our positions small. Our first target is $17.25.

Entry on September 14 at $15.49 /gap higher entry
                             /originally listed at $15.35
Change since picked:     + 0.51   			
Earnings Date          10/16/09 (confirmed)    
Average Daily Volume:        83 million 
Listed on September 14, 2009    


Hornbeck Offshore - HOS - close: 25.89 change: +1.14 stop: 21.75

It was a strong session for HOS with a 4.6% gain on strong volume. Unfortunately our plan is to buy a dip at $23.25. We don't want to chase this move. If triggered our first target is $26.45. Our second target is $29.00.

Entry on September xx at $xx.xx <-- TRIGGER @ 23.25
Change since picked:     + 0.00   			
Earnings Date          11/05/09 (unconfirmed)    
Average Daily Volume:       344 thousand
Listed on September 12, 2009    


IDEX Corp. - IEX - close: 29.51 change: +0.18 stop: 25.75

IEX is still drifting sideways under new resistance in the $29.70 region. Shares look poised to move higher but I strongly suggest that readers consider taking some profits off the table right here. Officially our first target to exit is $29.85. We have a secondary target at $32.00. The P&F chart is forecasting a $39 target.

Entry on    August 17 at $26.10 *triggered         
Change since picked:     + 3.41   			
Earnings Date          07/20/09 (confirmed)    
Average Daily Volume:       570 thousand
Listed on  July 25, 2009    


J.P.Morgan Chase - JPM - close: 43.19 change: -0.56 stop: 39.90

Lack of follow through on yesterday's bullish session is disappointing. Investors were unhappy to hear that JPM, DFS, and COF all said their consumer credit card defaults rose in August. I'm still bullish on the stock but readers could wait for a new relative high (about 44.30) to open positions.

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:     - 0.31   			
Earnings Date          07/16/09 (confirmed)    
Average Daily Volume:        55 million 
Listed on  July 18, 2009    


Kirby Corp. - KEX - close: 38.51 change: -0.13 stop: 35.25

KEX is still churning sideways in the $38-39 zone. Volume has been pretty light during this consolidation. I am suggesting readers open new positions on a pullback into the $37.50-37.00 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:     + 0.81   			
Earnings Date          10/29/09 (unconfirmed)    
Average Daily Volume:       310 thousand
Listed on September 05, 2009    


Microsoft - MSFT - close: 25.20 change: +0.20 stop: 22.95

Tech stocks displayed some strength and MSFT closed higher. I'd look for another pull back toward $24.00 and its 50-dma before launching new positions. Currently our target is $27.75.

Entry on      July 27 at $23.00
Change since picked:     + 2.20   			
Earnings Date          07/23/09 (confirmed)    
Average Daily Volume:        58 million 
Listed on  July 23, 2009    


Pride Intl. Inc. - PDE - close: 30.70 change: +0.93 stop: 26.40

PDE extends its gains but volume is fading. Average volume is 3.7 million shares. Volume today only hit 2.0 million. The plan is to buy PDE at $27.65. Our first target is $30.45. Our second target is $33.45. We'll plan to exit ahead of the late October earnings report.

Entry on September xx at $xx.xx <-- see TRIGGER @ 27.65
Change since picked:     + 0.00   			
Earnings Date          10/29/09 (unconfirmed)    
Average Daily Volume:       3.7 million 
Listed on September 12, 2009    


Playboy Ent. - PLA - close: 3.13 change: +0.09 stop: 2.45

PLA is back to showing relative strength again with a 2.9% gain. More conservative traders may want to take some money off the table now. Our plan is to take profits at our first target of $3.30. Our second target is $3.95. FYI: The Point & Figure chart is bullish with a long-term $7.50 target.

Entry on September 01 at $ 2.65
Change since picked:     + 0.48   			
Earnings Date          11/05/09 (unconfirmed)    
Average Daily Volume:       370 thousand
Listed on  August 29, 2009    


Rockwell Automation - ROK - close: 44.06 change: +0.34 stop: 39.95

ROK is slowly marching higher. I'm still suggesting bullish positions in the $42.00-44.00 zone. Our first target is the $49.00 mark. Our time frame is several weeks. FYI: The Point & Figure chart is bullish with a $61 target.

Entry on September 10 at $43.71 /gap higher entry
                           /originally listed at $43.15
Change since picked:     + 0.35   			
Earnings Date          11/10/09 (unconfirmed)    
Average Daily Volume:       1.4 million 
Listed on September 10, 2009    


Schlumberger - SLB - close: 59.83 change: +0.02 stop: 54.95

I'm somewhat surprised that given the strength in crude oil today that SLB didn't perform better. More conservative traders may want a stop closer to $56.00 instead. 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:     + 2.90   			
Earnings Date          10/23/09 (unconfirmed)    
Average Daily Volume:       8.7 million 
Listed on September 05, 2009    


TEVA Pharmaceuticals - TEVA - close: 50.78 change: -0.91 stop: 49.75

TEVA displayed relative weakness with a 1.7% decline. Traders bought the dip near $50.00 support. Is this a delayed reaction to the Mylan Labs news about potential competition for MS drugs? Or is this a reaction to Obama's speech on healthcare? I didn't see any big declines in the Tel-Aviv (Israeli) stock exchange so we can't blame it on a drop in the company's homeland market.

The $50.00 level is support so I'd still buy the dip. 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:     + 0.28   			
Earnings Date          11/03/09 (unconfirmed)    
Average Daily Volume:       5.3 million 
Listed on  August 05, 2009    


Ultra(Long) Financials - UYG - close: 5.79 change: +0.04 stop: 4.90

The UYG managed to hit a new relative high by one cent. The group looks a little overbought so look for a dip toward $5.50. More conservative traders may want to up their stop loss to breakeven at $5.29. I'm not suggesting new bullish positions at this time.

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:     + 0.50   			
Earnings Date          00/00/00 
Average Daily Volume:      47.8 million 
Listed on September 03, 2009    


BEARISH Play Updates

Electronic Arts - ERTS - close: 18.05 change: +0.06 stop: 19.55

ERTS is still under performing but I'm not suggesting new positions at this time. Our first target to take profits is at $17.05. Our second and final target is at $16.15. 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:     - 0.26   			
Earnings Date          10/29/09 (unconfirmed)    
Average Daily Volume:       9.3 million 
Listed on  August 29, 2009    


CLOSED BULLISH PLAYS

Citigroup - C - close: 4.12 change: -0.40 stop: 4.29

Our aggressive trade on Citigroup has been stopped out. Shares have been acting strangely the last few days and I've commented several times on the relative weakness and potential for volatility. Today's 1.3 billion shares of volume and 8.8% decline was fueled by news on the government's plan to unload their stock in Citigroup. As part of the bailout to save Citigroup the government converted their debt into common shares of the bank. The Treasury Department now owns about 34% of Citigroup or 7.69 billion shares. The conversion price was $3.25 and at the recent levels the government had a paper profit closer to $10 billion. Now concerns that the government might start dumping stock to collect on their "investment" has pushed Citigroup lower.

We were stopped out a $4.29. This was an aggressive play and the plan was to trade small. Now I'd watch to see if Citigroup finds any support near $3.75 or the $3.50 zone.

chart:

Entry on September 03 at $ 4.87 /gap higher entry
                             /listed at $4.77
Change since picked:     - 0.58<-- stopped @ 4.29 (-11.9%)
Earnings Date          10/16/09 (unconfirmed)    
Average Daily Volume:       1.0 billion    
Listed on September 03, 2009    


Altria Group Inc. - MO - close: 17.91 change: -0.08 stop: 17.90

The relative weakness in MO continues. Maybe it's a post-dividend decline. The stock fell to $17.77 intraday. Our stop loss was hit at $17.90.

chart:

Entry on September 05 at $18.50 
Change since picked:     - 0.60 <-- stopped @ 17.90 (-3.2%)
Earnings Date          10/22/09 (unconfirmed)    
Average Daily Volume:      15.5 million 
Listed on September 05, 2009