Option Investor
Newsletter

Daily Newsletter, Wednesday, 9/16/2009

Table of Contents

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

Market Wrap

Market's on a Roll, for Now

by Judy Alster

Click here to email Judy Alster
It was a very good day, with green numbers almost everywhere you looked. On broad-based support, the market headed higher for the third straight session to a new high for the year. The S&P 500 saw its best single-session gain in nearly a month, and a gratifying number of prices move into new and higher territory, helped by several generally good economic reports, about which more in a moment. (This column might be showing up in extremely small type. If so, I don't know the cause, but I'll get it fixed.)

MARKET INDEX WRAPUP:

The financial sector did well, up 3.4%. Big movers were multiline insurers, up 5.9%; diversified banks, up 3.1%, and regional banks, up 4.9%.

REGIONAL BANKING INDEX:

Commodities were strong, helping the CRB Commodity Index rise almost 2%. Gold settled 1.4% higher at $1020.20 an ounce and silver, not to be outdone, climbed 2.5% to a new 12-month high of $17.43 per ounce. Oil prices jumped 2.2% and natural gas prices settled 12.2% higher at $3.77 per contract. Natural gas is now up more than 55% from the 7-year lows that were set earlier this month.

DOW JONES INDUSTRIAL AVERAGE:

Maybe it's just me (and if it is, let me know), but I can't help noticing that the MACD isn't making higher highs to strongly confirm the new highs of the Dow. Or the S&P or the Nasdaq. Maybe it doesn't mean much when you're pretty surely exiting a recession, but it's worth keeping an eye on.

S&P500:

NASDAQ:

Helping the Nasdaq along, software pioneer Adobe (ADBE) announced Wednesday that it's acquiring marketing-software firm Omniture (OMTR). Adobe fell $2.25 or 6.3% — it's still at an 11-month high — but Omniture took off, gaining $4.55 or $26.2% to $21.88.

OMNITURE:

There was a seemingly strange drop in the weekly Mortgage Bankers' Association purchase index last week, which monitors mortgage applications. It fell a large 10.3% — but considering that a lot of people may not have been shopping during the Labor Day week, it doesn't look too horrifying. The refinance index also fell; it dropped 7.4% However, a look at the four-week average, useful when containing a short period, shows the purchase index down just 0.4% and the refinance index up 5.2%. Loan rates were mixed in the week with 30-year mortgages up 6 basis points to 5.08% and 15-year and 1-year adjustable rate mortgages down slightly. Despite this report, housing data have been showing real improvement.

We learned today from the Labor Department that consumer prices rose month-over-month in August on a spike in gasoline costs. Even so, the underlying trend shows very modest inflation, mercifully, as we crawl gasping, on all fours, out of recession. The Consumer Price Index (CPI) was up 0.4% percent last month after a flat July; that was still faintly above the 0.3% expectation. You may thank gasoline prices, which soared 9.1% after falling 0.8% the month before.

CONSUMER PRICE INDEX, all inclusive, for AUGUST:

Year over year, though, consumer prices fell 1.5% last month. They've been falling on an annual basis since March, although I'd like you to tell that to my local supermarket who is trying to charge me $1.89 for a head of Romaine lettuce. The consensus seems to be that we're in the part of the economic cycle where "inflation isn't an imminent concern." In the energy component, in addition to the gasoline jump, fuel oil spiked 6.2%, piped natural gas was up 0.4% and electricity actually fell 0.1%. Several factors kept the core rate down: The cash-for-clunkers tax credits helped push prices for new vehicles down by 1.3%, apparel slipped 0.1% and shelter costs were sluggish, notably rent (although see below). Prescription drugs and airline fares were up.

Okay, real quick, a fun refresher on the CPI (you can skip it, but there may be a quiz). You already know that the CPI measures inflation in consumer prices and is used by the Federal Reserve to modify economic policies; it's also used to adjust prices in other economic indicators and to re-evaluate government benefits. It includes the price changes of about 80,000 items purchased by urban households representing around 87% of the population. Sales taxes are included, income tax and prices of investments aren't. (Hmm.) Neither is the sales price of homes; instead, the CPI calculates the monthly equivalent of owning a home, which it derives from rents. (This is somewhat loony, since the CPI is likely to give an inaccurately low reading when home prices are high and rents are low, and an inaccurately high reading when home prices are low and rents are high.)

Two measures of inflation are reported: non-core, which includes everything, and core, which does not include food and energy costs. This is the one the Federal Reserve uses to adjust the Fed funds rate. Is that smart? Many no longer think so, if indeed they ever did. The Fed says it uses core CPI because food and energy are "too volatile" to accommodate the Fed's slow-acting Fed funds-rate adjustments and besides, to get a better gauge of the underlying inflation trend, you should cut those items out. Really? We all remember from Introduction to Statistics that you don't want to contaminate your data, so ignoring outlier results ("Hey, one guy scored 1,000!") is usually acceptable. But are food and energy truly outliers -- especially when they're on a consistent uptrend?

CORE CPI -- no food, no energy:

Some economists say that ignoring them could be understating the inflationary threat. Food and fuel are the very sectors where the ultimate results of a loose monetary policy will become the ugliest and most difficult to reverse.

Anyway, whether the recession, as Ben Bernanke said Tuesday, is "officially over" doesn't matter at all. It's going to feel like a very weak economy for a long time because so many people are still out of work, struggling with mortgage payments, or both. According to more than one analyst, Bernanke was slow to cut interest rates and now he's being too slow to raise them. This easy money is likely to lead to more dollar weakness, probably more gold strength, and right back into inflation.

S&P GOLD TRUST SHARES:

Today's monthly industrial production report shows the manufacturing sector in recovery for two straight months. Industrial production posted a large gain in August, causing more recession-is-over hoopla, especially for manufacturing. Overall industrial production increased 0.8%, following an upwardly-revised 1% boost in July; it came in above expectations of a 0.7% increase.

And in fact, it was from more than rebuilding auto inventories after the cash-for-clunkers boost: Overall production excluding motor vehicles was still up a healthy 0.6% for August after rising 0.4% in July. The motor vehicle component managed to jump a monthly 5.5% in August after July's anomalous 20.1%, utilities rebounded 1.9% and mining output moved up 0.5%.

Year over year, industrial production was up at minus-10.7%, better than July's minus 12.4%. Also edging up from the depths is overall capacity utilization, which hints at more hiring in the future; in August it continued to rise from its recent historical low of 68.3% in June, hitting 69.6% last month and topping expectations.

CAPACITY UTILIZATION:

In more pretty good news, the current account gap, our quarterly international trade balance in goods, service and one-way transfers, narrowed to $98.8 billion in the second quarter vs. the first quarter's revised $104.5 billion. The gap is now (a mere) 2.8% of GDP, down a sliver from the first quarter and the lowest percentage since 1991. A narrowing in the goods & services gap reflecting weakened domestic demand is responsible for the improvement.

I would be a lot happier to see it based on increased foreign demand but for now I'll take what I can get. When outside money is buying your goods and services — that's growth. Manufacturing a lot of your own producer and consumer goods and services — that's also growth. When those two activities stop, so does growth. Look at any country that has ever enjoyed a tremendous growth spurt, and has then stopped growing — start with the U.S. and Japan — and you'll see the correlation. I've held this formula up to the light and turned it every which way over and over again, and there's no denying it.

CURRENT ACCOUNT BALANCE:

Anyway, on the related topic of Treasury International Capital, net long-term inflows of financial instruments into the U.S. were not sensational in July — $15.3 billion vs. a strong inflow in June of a revised $90.2 billion. Net foreign purchases of equities were strong; purchases of corporate bonds and agency debt fell. Net foreign purchases of Treasury notes and bonds were good, with old friends our China and Japan holding up their end. Total flows, including short-term securities, were minus-$97.5 billion compared to June's minus-$56.8 billion. What can you expect from a see-through greenback? I've included the 200-day moving average on this graph to show just how low the dollar has sunk:

THE DOLLAR:

The Energy Information Administration's weekly petroleum status report told of a big 4.7 million barrel drawdown in crude oil stocks last week. At the same time, demand for gasoline was up, showing a 3.5% year-over-year rate of increase. Refineries produced less gasoline in the week but more of other distillates; it may be 82 degrees in the shade but winter will soon be a'comin' in and heating oil supplies, and oil stocks, are set to climbing.

Oil jumped a full dollar to $71.50 in immediate reaction; October light crude closed around $72.40 on the New York Mercantile Exchange. Oil prices have held firm despite heavy supply (Speculation? You think?) The fall in supply and the rise in demand will surely shoot prices higher, despite Libya's announcement that it will boost oil production capacity from the current 1.8 million barrels per day to three million barrels per day by 2013. It's a drop in the world's oil bucket, Libya.

OCTOBER OIL on the NYMEX:

The market moved fairly steadily up almost from the open but the news that seemed to keep it happy was the 1:00 p.m. release of the Housing Market Index from the National Association of Home Builders. It's a fairly comprehensive survey which shows how Association members perceive present and expected sales of new homes and prospective new-home-buyer traffic.

September showed the third straight gain for the index -- up one point to 19 with strength in current single-family purchases. Traffic was up, too. The single-family component of the housing starts report, by the way, is on a five-month roll. Home builder stocks were strong, gappng up at the open and staying up; Lennar, for example:

LENNAR CORP.:

So today's take-home is: We certainly seem from all reports to be coming out of the recession. Just maybe . . . the market is getting ahead of itself and is due for a pullback. Still worth buying on dips? Yes, with stops in place, as always. Commodities, metals, industrials, some tech, some financials often thrive in this part of the cycle.

You know, I couldn't tell you why, but every so often the party of the second part at my house goes through phases of absolutely maniacal online buying (in which he has a lot in common with his mother-in-law, who thinks he's the greatest thing since yogurt with fruit in it). Anyway, delivery times have been a major topic around here lately. Perhaps this touching graph will speak to you, too:


On tap tomorrow are housing starts and jobless claims, which could be movers, along with the EIA natural gas report and the Philadelphia Fed Survey.


New Plays

Industrial Goods

by James Brown

Click here to email James Brown


NEW BULLISH Plays

Koppers Holdings - KOP - close: 31.20 change: +2.60 stop: 27.45

Why We Like It:
This industrial goods stock is breaking out to new highs and over resistance with strong volume. We don't want to chase the 9% rally so I'm suggesting readers buy a dip at $30.10. We'll use a stop loss at $27.45. Our first target is $34.50. Our second target is $37.50 but it could take several weeks to get there. FYI: The P&F chart has a new triple-top breakout buy signal.

Annotated chart:

Entry on September xx at $xx.xx <-- TRIGGER @ 30.10
Change since picked:     + 0.00   			
Earnings Date          11/05/09 (unconfirmed)    
Average Daily Volume:       159 thousand
Listed on September 16, 2009    



In Play Updates and Reviews

Two Targets and Five Stops

by James Brown

Click here to email James Brown

We are updating five stop losses and noting that two bullish plays hit our targets today. I'm also suggesting readers take profits on another stock up more than 17%.


BULLISH Play Updates

Agrium Inc. - AGU - close: 52.32 change: +1.16 stop: 47.40

The chemical fertilizer names are still bouncing. AGU closed at new three-month highs with a 2.2% gain. 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:     + 1.66   			
Earnings Date          11/05/09 (unconfirmed)    
Average Daily Volume:       1.9 million 
Listed on September 05, 2009    


BE Aerospace - BEAV - close: 19.90 change: +0.68 stop: 17.45

BEAV rallied to new 2009 highs and it's testing round-number, psychological resistance at $20.00. I am not suggesting new positions at this moment. Our first target is $22.25.

Entry on September 12 at $19.19 
Change since picked:     + 0.72   			
Earnings Date          10/27/09 (unconfirmed)    
Average Daily Volume:       834 thousand
Listed on September 12, 2009    


China Mobile Ltd. - CHL - close: 50.97 chg: +1.24 stop: 47.90

CHL is looking better with a bounce back above $50.00. 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:     + 2.24  			
Earnings Date          00/00/?? (unconfirmed)    
Average Daily Volume:       2.3 million 
Listed on  August 29, 2009    


Carpenter Tech. - CRS - close: 25.66 change: +1.02 stop: 21.45

When the rally starts to get too hot I get nervous but CRS' close over $25.00 is bullish. CRS has already hit our first target. I'm not suggesting new positions at this time. Our secondary target is $27.40.

Entry on September 05 at $21.45 /gap higher entry
                             /originally listed at $20.92
Change since picked:     + 4.21
                             /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: 41.03 change: -0.25 stop: 38.80

My enthusiasm for CYOU is cooling quickly. There are too many bullish candidates to see this one under perform. Readers may want to start scaling out of positions now. If we don't see some more strength by the end of the week I'll drop it. Our first target is $45.75.

Entry on September 10 at $41.69 
Change since picked:     - 0.66   			
Earnings Date          10/26/09 (unconfirmed)    
Average Daily Volume:       408 thousand
Listed on September 10, 2009    


Darden Restaurants - DRI - close: 36.36 chg: +1.41 stop: 32.95 *new*

Wow! The 4% rally in DRI was unexpected but when shares finally broke out past the $35.00 level it could have sparked some short covering. Volume was strong on the move. I am upping our stop loss to $32.95 and more conservative traders may want to raise their stops even higher. Our first target is the $39.40 mark.

Entry on September 05 at $34.82 
                              /originally listed at $34.41
Change since picked:     + 1.54   			
Earnings Date          09/29/09 (unconfirmed)    
Average Daily Volume:       2.6 million 
Listed on September 05, 2009    


E M C Corp. - EMC - close: 17.02 change: +0.12 stop: 15.24

Nothing has changed for us. We're still waiting for a dip in EMC. 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: 17.00 change: +1.00 stop: 14.45 *new*

GE continues to shine. The stock rallied another 6.2% on even strong volume of 269 million shares. This has been a big move on truly massive volume for this stock. Our first target is $17.25. I'm setting a second target at $18.50. We're raising the stop loss to $14.45. I do consider this an aggressive trade so we want to keep our positions small.

Entry on September 14 at $15.49 /gap higher entry
                             /originally listed at $15.35
Change since picked:     + 1.51   			
Earnings Date          10/16/09 (confirmed)    
Average Daily Volume:        83 million 
Listed on September 14, 2009    


Goldcorp Inc. - GG - close: 42.93 change: +0.66 stop: 37.75

Gold rallied to new relative highs thanks to another drop in the dollar. GG only gained 1.5%. Unfortunately as the stock reacted to the rise in gold shares gapped open higher. Our entry point was affected with the open at $43.10. 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.

Entry on September 15 at $43.10 /gap higher entry
                            /originally listed at $42.28
Change since picked:     - 0.17   			
Earnings Date          10/29/09 (unconfirmed)    
Average Daily Volume:       8.1 million 
Listed on September 15, 2009    


IDEX Corp. - IEX - close: 28.70 change: -0.81 stop: 26.75 *new*

IEX was downgraded to a neutral this morning and shares gapped open lower on the news. Traders did buy the dip at $28.00. I am raising our stop loss to $26.75. 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:     + 2.60   			
Earnings Date          07/20/09 (confirmed)    
Average Daily Volume:       570 thousand
Listed on  July 25, 2009    


J.P.Morgan Chase - JPM - close: 44.65 change: +1.46 stop: 39.90

Banks led the rally on Wednesday and JPM closed at new 2009 highs. The MACD is nearing a new buy signal.

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:     + 1.15   			
Earnings Date          07/16/09 (confirmed)    
Average Daily Volume:        55 million 
Listed on  July 18, 2009    


Kirby Corp. - KEX - close: 38.77 change: +0.26 stop: 35.25

KEX continues to trade in its 38-39 trading range. 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:     + 1.07   			
Earnings Date          10/29/09 (unconfirmed)    
Average Daily Volume:       310 thousand
Listed on September 05, 2009    


Microsoft - MSFT - close: 25.20 change: +0.00 stop: 22.95

It was a quiet day for MSFT with the stock closing unchanged. Odds are pretty good that MSFT will close near the $25.00 level for the September options expiration on Friday. 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: 32.01 change: +1.31 stop: 26.40

PDE is growing more and more overbought. 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: 3.12 change: -0.01 stop: 2.45

Take profits now! The action in PLA was a little worrisome. Shares hit $3.24 and then reversed to close in the red. I didn't see any news to account for this relative weakness. I'm suggesting readers take profits now instead of waiting for our first target at $3.30. We'll still keep our second target at $3.95. FYI: The Point & Figure chart is bullish with a long-term $7.50 target.

chart:

Entry on September 01 at $ 2.65
Change since picked:     + 0.47
                            /take profits 09/16/09 (+17.7%)
Earnings Date          11/05/09 (unconfirmed)    
Average Daily Volume:       370 thousand
Listed on  August 29, 2009    


Rockwell Automation - ROK - close: 44.51 change: +0.45 stop: 39.95

ROK reaffirmed its earnings guidance and shares spiked toward round-number resistance at $45.00. I would expect a dip back toward the $43.00-42.50 zone before moving much higher. 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:     + 0.80   			
Earnings Date          11/10/09 (unconfirmed)    
Average Daily Volume:       1.4 million 
Listed on September 10, 2009    


Schlumberger - SLB - close: 62.41 change: +2.58 stop: 54.95

Target hit. A bigger than expected drop oil inventories and another drop in the dollar boosted crude oil. That gave oil stocks a pop and SLB gained 4.3%. Shares of SLB hit our first target at $62.50. I am raising our stop loss to $56.95. Our second target is $67.50.

chart:

Entry on September 05 at $56.93 /gap higher entry
                             /originally listed at $55.87
Change since picked:     + 5.48
                             /1st target hit @ 62.50 (+9.7%)
Earnings Date          10/23/09 (unconfirmed)    
Average Daily Volume:       8.7 million 
Listed on September 05, 2009    


TEVA Pharmaceuticals - TEVA - close: 51.39 change: +0.61 stop: 49.75

As expected TEVA is bouncing from support. I would still consider new positions here.

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:     + 0.89   			
Earnings Date          11/03/09 (unconfirmed)    
Average Daily Volume:       5.3 million 
Listed on  August 05, 2009    


Ultra(Long) Financials - UYG - close: 6.17 change: +0.38 stop: 5.40 *new*

Target achieved. Financial stocks led the rally today and the UYG hit $6.17. Our first target was $6.00. I am raising our second target to $7.00. I'm also raising our stop loss to $5.40.

This can be a very volatile security. It's not for the faint of heart.

chart:

Entry on September 03 at $ 5.29 
Change since picked:     + 0.88
                             /1st target hit @ 6.00 (+13.4%)
Earnings Date          00/00/00 
Average Daily Volume:      47.8 million 
Listed on September 03, 2009    


BEARISH Play Updates

Electronic Arts - ERTS - close: 18.85 change: +0.80 stop: 19.15 *new*

The stock market is in full-fledged rally mode and it's going to be tough to find bearish plays. ERTS gained 4.4% and is challenging short-term resistance at $19.00. I am lowering our stop loss from $19.55 to $19.15, which is just above the simple 200-dma. I'm not suggesting new positions at this time. More conservative traders may want to exit early right now.

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:     + 0.54   			
Earnings Date          10/29/09 (unconfirmed)    
Average Daily Volume:       9.3 million 
Listed on  August 29, 2009    


CLOSED BULLISH PLAYS

Hornbeck Offshore - HOS - close: 27.64 change: +1.75 stop: 21.75

It looks like HOS will turn out to be another fish that got away. We were waiting for a dip toward $23.00 and shares never really broke the $24.00 mark. Now shares are soaring to new relative highs. I'm dropping HOS as a bullish candidate for now.

chart:

Entry on September xx at $xx.xx <-- TRIGGER @ 23.25
Change since picked:     + 0.00   			*NEVER OPENED*
Earnings Date          11/05/09 (unconfirmed)    
Average Daily Volume:       344 thousand
Listed on September 12, 2009