Option Investor
Newsletter

Daily Newsletter, Thursday, 9/17/2009

Table of Contents

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

Market Wrap

Stocks Fall, But Rally Is Probably Resting, Not Faltering

by Todd Shriber

Click here to email Todd Shriber
Stocks finished Thursday in the red, but the declines were negligible and probably not enough to stoke the flames of the bears, assuming they have any fire left in them. After finishing Wednesday's session at 11-month highs, stocks pulled back on Thursday, but none of the declines among the three major U.S. indexes broke into double-digit territory. The S&P 500 fell 3.27 points to close at 1065.49 while the Dow Jones Industrial Average retreated less than eight points to finish the day at 9783.92. The Nasdaq show similarly tepid losses, falling just 6.4 points to close at 2162.75.

Stats Table

The declines were disappointing, as they always are, when considering that Thursday's session got off to a good start on news that weekly jobless claims fell by 12,000 last week, beating expectations. The Labor Department said 545,000 people filed new unemployment claims last week. Estimates were calling for that number to come in at 560,000. Today's number is below the four-week moving average and any good news on the jobs front is welcomed by the market at this point.

Jobless Claims

Unfortunately, the jobs news was not enough to prop stocks up for the entire session as a couple of glum economic data points sent the bulls into sell mode and proceeded to keep equities locked in tight, lethargic ranges for the remainder of the day. Housing starts rose by a less-than-forecast 1.5% in August and continuing jobless claims rose to 6.23 million from 6.1 million. Housing starts hit 598,000 in July, but analysts had been expecting 600,000. On the bright side, building permits were up 2.7% month-over-month.

Housing Starts

One aspect of today's decline that is noteworthy is that marquee, blue chip names endured the brunt of the selling. Down days have recently been marked by either the financials or commodities-related stocks being the epicenters of the sell-offs. That was not the case on Thursday as telecoms took their turn in the negative spot light. The group was the biggest loser among the 10 industry groups tracked in the S&P 500.

A mixed bag of comments from the chief executive officers of America's two telecom giants, AT&T (T) and Verizon (VZ), both Dow components, had investors feeling squeamish about the sector. AT&T CEO Randall Stephenson told attendees at a Goldman Sachs investor conference said that while he expects his company to add more mobile phone subscribers, he expects the company's overall growth to be ''flattish for some time'' and that opportunities for growth may appear in the second half of 2010.

Lukewarm comments to be sure and certainly not enough to send the bulls running into AT&T shares, which finished the day down 17 cents to $26.37. Verizon CEO Ivan Seidenberg gave a more dour assessment, noting the U.S. economy is still shrinking and that growth among small business customers was ''not as fast as you'd like.'' Seidenberg said very little job creation is taking place and that it is too soon to estimate when key markets will start to recover.

Seidenberg's comments sent Verizon shares down 90 cents to $29.51, meaning Verizon closed at the low of the day making the stock the biggest loser in the Dow Jones Industrial Average. Verizon's chart is not a pretty picture. The recent highs have been lower and the recent lows have been lower, too, and today's drop sent the stock tumbling below both its 50 and 200-day moving averages.

Given the glum comments from AT&T and Verizon, it appears that the biggest point of attraction for either stock is that they both yield 6.1%, the best level in the Dow, and both firms are reliable dividend payers. Verizon recently hiked its payout and it would not be a surprise to see AT&T follow suit. See, I do like to point out positives from time-to-time.

Verizon Chart

As I said earlier, this was a blue-chip led decline today and AT&T and Verizon were certainly not the only culprits. Oracle (ORCL), the largest maker of enterprise software in the world, tumbled during Thursday's trade after Wednesday's after-the-close earnings report missed analyst estimates. Oracle earned 22 cents a share on sales of $5.1 billion during its usually slow fiscal first quarter. Those numbers missed analyst estimates of earnings of 30 cents a share and sales of $5.2 billion and Oracle's decline weighed on the Nasdaq.

The Nasdaq and its many tech issues have led the market higher over the past six months and during that time, Oracle's share performance has tracked that of its home index, but there has been some divergence over the past three months with the Nasdaq up about 17% and Oracle lagging at ''just'' 11%. Today's close for Oracle saw the stock finish below support in the $21.85 area, also the 50-day moving average.

Oracle Chart

FedEx (FDX) chimed in with its own not-so-great news. The second-largest U.S. package-shipping firm said quarterly sales fell 20% to $8.01 billion, missing analyst estimates of $8.23 billion. That led to a 2.23% decline for FedEx shares, but all was not lost. The company said a global economic recovery is under way and that should bolster demand for FedEx's shipping services.

No, FedEx is not the sexiest stock on the Street, but it is considered a bellwether for the U.S. economy and the fact that FedEx CEO Fred Smith said industrial production should improve by 4% in 2010 is significant, not only for his company's shares, but for the broader economy as well. Transportation stocks are historically viewed as harbingers for the performance of the U.S. economy and if you find yourself in the bullish camp, cheering the Dow toward 10000 and the S&P 500 to 1100, you should also have a rooting interest in seeing the Dow Jones Transportation Average make its way to 4200-4300.

The home to 20 of the largest transportation-related issues was down today, closing below 4000, but the index is up nearly 30% since early July, so a little hiccup like Thursday's trade probably is not anything to get too concerned about.

Transports Chart

Keeping with the mixed bag and not-so-bad decline themes, I need to be fair and highlight a few blue chip names that performed well during Thursday's session. One Dow component that turned in a sterling performance was Caterpillar (CAT). The maker of construction and mining equipment gained a $1.27 to close at $53.89. Oddly enough, I happened to come across a press report a couple of weeks ago where an analyst hypothesized that Caterpillar was a candidate for a dividend cut.

I cannot say for certain if that is going to happen, but it appears Caterpillar shares are poised to clear $55 sooner rather than later and there is some room to run from there before psychological resistance at $60 becomes an issue. Frankly, the chart looks pretty good. After making a double top around $48.95, Caterpillar has surged higher and $50 should act as support.

Caterpillar Chart

Caterpillar is a pretty venerable name and a good day for the stock will not come as a surprise to many investors, but one sector that is not normally associated with strong moves is the airline group and that group was a leader today. Allow me to be honest, it is hard to be a fan of the airlines even when the economy is good and as someone who just returned from vacation, I am definitely a fan of donating $30 to have my bags make the journey with me.

And whenever I think about the perils of investing in this sector, I remember the scene in ''Wall Street'' where Gordon Gekko expressed disdain for airlines. Hey, sometimes art does imitate life. All of this aside, I did mention in the Market Monitor today that AMR Corp. (AMR), parent of American Airlines was up in a big way. News that the company will get $2.9 billion in fresh financing enabling it to stave off another visit to bankruptcy court was the bullish catalyst.

Part of the financing comes in the form of $1 billion from the advance sale of frequent flier miles to Citigroup. Citigroup (C) will issue those miles to holders of the popular American Airlines credit cards. If you ever thought frequent flier miles were worthless, at least in dollar terms, think again. Other major carrier such as Delta (DAL), and United (UAUA) have also done advanced miles sales to raise cash.

I also noted in the Monitor that there was heavy buying in the October 12 calls of Southwest Airlines (LUV), the discount carrier, but perhaps even more noteworthy is the fact that the Claymore Airline ETF (FAA) has gained nearly 50% since June. ETFs get a lot of publicity, but for some reason FAA tends to fly under the radar (no pun intended), though I will pat myself on the back for mentioning it here in early July.

The chart shows a rapid ascent and some overbought Stochastics, but those traits have appeared dozens of times over the past few months and the stocks or ETFs have just kept going higher.

FAA Chart

Taking a look at market technicals, the S&P 500 closed Wednesday 20.1% above its 200-day moving of 889.64. According to Bloomberg, the index has only climbed 20% above the 200-day line three times since World War II, the most recent trip coming in 1986. The resulting gains a year out have been proven robust, ranging between 13% and 20%.

The index may be dealing with some resistance in the 1075-1080 area right now, but it is hard to ignore the recent uptrend and once 1080 is cleared with some vigor, there should be clear sailing to the 1116 area. Prior resistance of 1035 appears to be new support.

S&P 500 Chart

The Dow seems to be having a fight around 9800, the current resistance zone, but from there a move to 10300 could be a possibility. That is not to say there will not be hiccups along the way, there will, especially at 10000. Support can be found at 9575, but it might take some seriously bearish news to bring that number into play over the near-term.

Dow Chart

The Nasdaq went from leader to weakest link to leader again all in a fairly short amount of time. With the all important 2000 level having been cleared weeks ago, 2063 is looking like support. Even with the glum news from Oracle, it still appears that the Nasdaq is on track to make a move to resistance at 2160. From there, a move to the 61.8% retracement level at 2251.84 could be in the works.

Nasdaq Chart

The bottom line there was nothing about Thursday's trade to make me want to say the bears are back. If anything, the dip, mild as it was, probably represents an opportunity to add to currently profitable positions. At this point, there is simply no reason to buck the trend.


New Plays

Updating The Watch List

by James Brown

Click here to email James Brown

Editor's Note:

The stock market looks a little tired after its multi-day rally. I still expect corrections to be shallow with fund managers chasing performance. Here's a small list of stocks to watch for potential pull backs:

ACI - This is a coal stock that's been on fire lately. Broken resistance at $20.00 should be new support.

BUCY - Watch for a dip near $34.00 as a possible entry point.

CCJ - This uranium miner has closed over resistance at $30.00. Watch to see if there is any profit taking tomorrow. I suspect it will close near $30.00 for September's option expiration.

CLF - This metal producer has rallied past key resistance near $32.50 but I suspect any profit taking would bring it back toward $30.00.

CX - A bounce near $13.00 could be a new entry point.

PII - Today's action looks like a short-term reversal. Look to see if the stock bounces on a test of support near $40.00.

SLX - Steel stocks have been strong. This steel-sector ETF is at new 2009 highs. Broken resistance near $50.00 should be support. Watch for a pull back.


In Play Updates and Reviews

Stocks Look A Little Tired

by James Brown

Click here to email James Brown


BULLISH Play Updates

Agrium Inc. - AGU - close: 53.29 change: +0.97 stop: 47.40

The chemical-fertilizer industry continues to show relative strength. AGU gained 1.8% and hit new relative highs at $54.43. 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:     + 2.64   			
Earnings Date          11/05/09 (unconfirmed)    
Average Daily Volume:       1.9 million 
Listed on September 05, 2009    


BE Aerospace - BEAV - close: 19.68 change: -0.22 stop: 17.45

BEAV is still testing round-number resistance at $20.00. I am not suggesting new positions at this moment. Look for a dip towards $18.50. Our first target is $22.25.

Entry on September 12 at $19.19 
Change since picked:     + 0.49   			
Earnings Date          10/27/09 (unconfirmed)    
Average Daily Volume:       834 thousand
Listed on September 12, 2009    


China Mobile Ltd. - CHL - close: 50.17 chg: -0.80 stop: 47.90

The Chinese stock markets were up today and yet CHL traded lower. I remain bullish on it with shares above $48.00. I'd prefer to buy bounces at this point instead of dips. 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:     + 1.44  			
Earnings Date          00/00/?? (unconfirmed)    
Average Daily Volume:       2.3 million 
Listed on  August 29, 2009    


Carpenter Tech. - CRS - close: 25.39 change: -0.27 stop: 21.45

CRS produced some much needed profit taking but the pull back today doesn't seem to be enough. A normal correction would probably be a dip back toward $23.75 or $23.00. 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:     + 3.94
                             /1st target hit @ 24.90 (+16.0%)
Earnings Date          10/28/09 (unconfirmed)    
Average Daily Volume:       536 thousand
Listed on September 05, 2009    


Darden Restaurants - DRI - close: 36.64 chg: +0.28 stop: 32.95

DRI displayed relative strength again with another gain but shares failed near $37.00. The stock is due for a little dip. I would consider new positions on a dip near $35.00. Our first target is the $39.40 mark.

Entry on September 05 at $34.82 
                              /originally listed at $34.41
Change since picked:     + 1.82   			
Earnings Date          09/29/09 (unconfirmed)    
Average Daily Volume:       2.6 million 
Listed on September 05, 2009    


E M C Corp. - EMC - close: 16.98 change: -0.04 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: 16.66 change: -0.24 stop: 14.45

Target achieved. GE rallied to $17.52 intraday and then began to see some profit taking. Our first target to take profits was at $17.25. I would not be surprised to see a dip back toward $15.75-15.00. We do have a second target at $18.50. I do consider this an aggressive trade so we want to keep our positions small.

chart:

Entry on September 14 at $15.49 /gap higher entry
                             /originally listed at $15.35
Change since picked:     + 1.17
                            /1st target hit @ 17.25 (+11.3%)
Earnings Date          10/16/09 (confirmed)    
Average Daily Volume:        83 million 
Listed on September 14, 2009    


Goldcorp Inc. - GG - close: 42.12 change: -0.81 stop: 37.75

Mining stocks suffered some profit taking again as gold contracted. I would still consider new bullish positions in the $42.00-40.00 zone. 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:     - 0.98   			
Earnings Date          10/29/09 (unconfirmed)    
Average Daily Volume:       8.1 million 
Listed on September 15, 2009    


IDEX Corp. - IEX - close: 28.66 change: -0.04 stop: 26.75

Hmmm... the action today in IEX was bearish. The bounce failed and the stock looks poised to move lower again. More conservative traders may want to exit completely right here. I'm not suggesting new positions at this time. The $28.00 level is the next level of support. 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:     + 2.56   			
Earnings Date          07/20/09 (confirmed)    
Average Daily Volume:       570 thousand
Listed on  July 25, 2009    


J.P.Morgan Chase - JPM - close: 44.96 change: +0.31 stop: 39.90

JPM displayed relative strength with another gain and another new relative high. Readers looking for a new entry point may want to wait for a dip near $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:     + 1.46   			
Earnings Date          07/16/09 (confirmed)    
Average Daily Volume:        55 million 
Listed on  July 18, 2009    


Kirby Corp. - KEX - close: 38.00 change: -0.77 stop: 35.25

KEX is back down near the bottom of its short-term trading range. The stock looks ready to drop toward the $37-36 zone. I'm not suggesting new positions at this time. 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:     + 0.30   			
Earnings Date          10/29/09 (unconfirmed)    
Average Daily Volume:       310 thousand
Listed on September 05, 2009    


Koppers Holdings - KOP - close: 32.56 change: +1.36 stop: 27.45

KOP does not have an unusually high amount of short interest but the last two days definitely looks like a short squeeze. We don't want to chase this move, not with the market short-term overbought.

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.

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    


Microsoft - MSFT - close: 25.30 change: +0.10 stop: 22.95

MSFT is not moving much and I expect it will close near $25.00 for options expiration tomorrow. 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:     + 2.30   			
Earnings Date          07/23/09 (confirmed)    
Average Daily Volume:        58 million 
Listed on  July 23, 2009    


Pride Intl. Inc. - PDE - close: 30.19 change: -1.82 stop: 26.40

PDE finally suffered some profit taking after a huge run from its late August lows. We need to see a little more of a pull back. 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: 3.03 change: -0.09 stop: 2.45

PLA is also seeing some profit taking and could be poised to dip back toward $2.80 or the $2.75 levels. I'm not suggesting new positions at this time. Our second target remains the $3.95 level. FYI: The Point & Figure chart is bullish with a long-term $7.50 target.

Entry on September 01 at $ 2.65
Change since picked:     + 0.38
                            /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: 44.12 change: -0.39 stop: 39.95

It was a quiet day for ROK. 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:     + 0.41   			
Earnings Date          11/10/09 (unconfirmed)    
Average Daily Volume:       1.4 million 
Listed on September 10, 2009    


Schlumberger - SLB - close: 61.79 change: -0.62 stop: 56.95

Crude oil pulled back from its intraday highs and the oil service stocks retreated a bit. SLB lost about 1%. The stock has already hit our first target. Our second target is $67.50.

Entry on September 05 at $56.93 /gap higher entry
                             /originally listed at $55.87
Change since picked:     + 4.86
                             /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: 50.81 change: -0.58 stop: 49.75

The bounce in TEVA is struggling, which is not a good sign. Readers may want to wait for another rebound closer to the $50.00 zone.

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:     + 0.31   			
Earnings Date          11/03/09 (unconfirmed)    
Average Daily Volume:       5.3 million 
Listed on  August 05, 2009    


Ultra(Long) Financials - UYG - close: 6.11 change: -0.06 stop: 5.40

The intraday reversal in financials might be seen as a short-term top. I'm not suggesting new positions at this time. UYG has already hit our first target. Our second target is $7.00.

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:     + 0.82
                             /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

*We currently do not have any bearish play updates*


CLOSED BULLISH PLAYS

Changyou.com Ltd - CYOU - close: 39.54 change: -1.49 stop: 38.80

Yesterday I warned that if we didn't see more relative strength in CYOU I'd drop it. We'll shares broke down under $40.00 again. There is still some support near $39.00 and its 50-dma but I would rather cut our losses early here.

chart:

Entry on September 10 at $41.69 
Change since picked:     - 2.15<-- exit early (-5.1%)
Earnings Date          10/26/09 (unconfirmed)    
Average Daily Volume:       408 thousand
Listed on September 10, 2009    


CLOSED BEARISH PLAYS

Electronic Arts - ERTS - close: 18.74 change: -0.11 stop: 19.15

Last night we lowered our stop loss on ERTS to $19.15. What happens today? ERTS spikes to $19.20 and reverses. The play is closed but I'd keep ERTS on your watch list.

chart:

Entry on    August 29 at $18.31 /gap down entry
                              /originally listed at $18.76
Change since picked:     + 0.84 <-- stopped @ 19.15 (+4.5%)
Earnings Date          10/29/09 (unconfirmed)    
Average Daily Volume:       9.3 million 
Listed on  August 29, 2009