Option Investor
Newsletter

Daily Newsletter, Monday, 9/21/2009

Table of Contents

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

Market Wrap

Investors Want More, Can The Market Deliver?

by Todd Shriber

Click here to email Todd Shriber
Stocks fell on Monday with the Dow Jones Industrial Average retreating from an 11-month high on the light volume that is typical following a quadruple-witching Friday. Monday's declines were similar to what the market delivered last Thursday when I was last visited with you. Nothing too alarming, at least on the surface, but the drop may portend more weakness to come. The Dow fell 41.34 points to close at 9778.96 and the S&P 500 gave up 3.64 points to close at 1064.66. The Nasdaq, as has been the case so often through this rally, was the ''shining star,'' gaining 5.18 points to finish the day at 2138.04. Eight of the 10 industry groups tracked by the S&P 500 declined on the day with healthcare and technology the lone gainers.

Stats Table

Again, speculation that stocks are overextended continues to be the reason most pundits attribute to these little declines that the market has been delivering. Of course, the other side of that argument is that the market rarely moves up on a straight line. Still, it appears that the camp expecting a pullback after such a voracious rally is growing and it might be reasonable to expect that investors want to see more than companies beating already anemic earnings estimates by slashing payrolls and cutting production. In other words, the chorus singing ''Show me the money,'' or in this case, ''Show me the growth'' is growing ever louder.

Last week's 2.5% rally for the S&P 500 bumped valuations to nearly 20 times reported earnings from continuing operations of the member companies, the highest level since 2004, according to Bloomberg data. If that does not convince you that stocks are richly valued at current levels, perhaps this next tidbit will. At the end of August, the P/E ratio for the S&P 500 was an eye-popping 129.2. That figure assumes the previous four quarters worth of reported earnings for the period that ended on June 30, 2009. And since the market is up since the end of August, it's safe to assume the S&P 500 P/E ratio now hovers in the mid to high 130s area. Probably not a sustainable level.

A press report I read over the weekend said the trailing four quarters showed S&P 500 earnings of $7.51. Two years ago, that figure was $84.92, but the P/E ratio then was less than 18. Another way of describing this scenario is to say what many already know: Stocks certainly benefited from earnings estimates that were pared, pruned and every other adjective that means cut to such low levels that most companies could not help but beat analyst forecasts.

S&P 500 P/E Ratio

All of that is useful information, particularly with another earnings season right around the corner, but it is bigger picture stuff and probably only played a small role in Monday's glum market action. With a Federal Reserve meeting looming on Wednesday, energy issues took it on the chin today. The October crude oil contract expires on Tuesday, so traders shifted their focus to crude for November delivery, which fell $2.56 to close at $69.93 a barrel, marking a third consecutive day of declines. Platts reported that Chinese oil demand tumbled 5.4% in August from July. Allow me to be candid: It is not a good sign for oil bulls if the Chinese are tempering their demand for black gold.

Not surprisingly, 33 of 40 energy names tracked in by the S&P 500 slid on the day leading to declines for ExxonMobil (XOM) and Chevron (CVX) and that of course weighed on the Dow as both stocks are Dow components. On a percentage basis, the two companies were down less than one percent each, but the oil services names endured steeper declines. Halliburton (HAL) slid 2.5%, Transocean (RIG) fell 2.2% and Schlumberger (SLB) and National Oilwell Varco (NOV) were both down well over one percent each.

Of course, oil's failure to hold $70 and make its way above $75 a barrel is not the best news for one of my favorite ETFs, the Oil Sevices HOLDRs (OIH). With Monday's close at $117.81, OIH is nearly as close to its 52-week high as it to its 52-week low. I don't know if that means anything, but it does appear that OIH needs to break $120 to induce some fresh buying. I have include the OIH chart and a crude chart to illustrate the correlation between oil services names and the underlying commodity.

Crude Chart

OIH Chart

When I wrote last Thursday's market wrap, I noted that the declines that day were not led by financials and materials stocks. The same cannot be said for Monday's action and as far as the commodities patch is concerned, it was fairly easy to predict a down day for the group after fertilizer giant Potash (POT) warned of lower 2009 profits after the close on Friday. Bad news on a Friday afternoon rarely turns into positive things the following Monday and Potash was no exception, falling 4.2% after saying it will earn $3.25-$3.75 a share this year, below analyst estimates and its own previous guidance of $4 to $5 a share.

Rival Mosaic (MOS), the second-largest crop nutrient maker in North America tumbled 5.2%. Fertilizer stocks have a deep correlation to oil prices as well and crude's drop did nothing to help the likes of Potash and Mosaic. Rather than rattle off all the agriculture-related names that were taken to the woodshed today, I will just mention the Market Vectors Agribusiness ETF (MOO), which holds names like Potash, Mosaic, Monsanto (MON) and Deere (DE). The ETF was down today and the chart might be saying the ETF could challenge support at the 50-day moving average of $37.84.

MOO Chart

As I mentioned earlier, investors may be starting to demand more from stocks and that means they want to hear some good news (finally) about top-line growth. One place where they are not going to find it is Caterpillar (CAT). The world's largest maker of construction and mining equipment said in an 8-K filing today that global sales were down 48% in August compared with August 2008. North American sales slid 57% in August. Not good news and even worse when considering the June and July sales declines were 47% and 48% respectively.

Then again, it appears that some of this dour news is priced into Caterpillar's stock as the shares are up about 65% in the past three months. That is correct. A stock whose sales have been falling by nearly 50% a month on a year-over-year basis for the past three months is up 65% in the same time. At its core, Caterpillar, a Dow component, is a good company, but it probably is not a good company right now. This would be a fine example of why many consider the current run in stocks to be a tad overextended.

And it is not really a true day of declines without the financials, which endured the biggest drop among the 10 S&P 500 industry groups. Bank of America (BAC) was in the spotlight on news that the largest U.S. bank will drop a loss-sharing agreement with the Treasury Department and Federal Reserve related to the acquisition of Merrill Lynch. Exiting the agreement will cost Bank of America $425 million.

Bank of America is also drawing the ire of a congressional oversight panel by missing a Monday deadline to provide the panel with documents pertaining to the Merrill Lynch acquisition. Bank of America officials will meet with the panel's chairman, Rep. Edolphus Towns (D-NY) on Tuesday. It is hard to speculate on what the outcome of those talks will be, but Bank of America shareholders, at least the long-term investors, can only hope that the Merrill buy will eventually pay dividends. In the near-term, the addition of Merrill is a real thorn in Bank of America's side.

And speaking of finanicals, there is an active Treasury auction schedule this week. Monday saw the auction of four and six-month bills and Tuesday brings an auction of four-week and one-year bills and two-year notes. A five-year note auction is slated for Wednesday and a seven-year note auction is scheduled for Thursday.

Normally, these Treasury auctions are not the biggest deal in the world. At this point, nearly everyone knows that Uncle Sam has an addiction to spending and that he needs a way to finance something in the order of $9 trillion in deficits, but what is curious is something I mentioned earlier this summer and that is who is buying the Treasury's various offerings.

I mentioned in a previous wrap that the Fed's balance sheet was rapidly expanding due to its rampant purchases of Treasuries, designed to give the impression that demand is more robust than it actually is. Well, I found more information over the weekend that indicates there is something to this theory. In fact, it is not a theory. In the second quarter, the Fed purchased $164 billion in Treasuries compared to a combined $130 billion for foreign entities and households. Foreign purchases of Treasuries declined 40% in the second quarter from the first quarter. Have a look at the chart below to see how bad the situation really is.

Treasury Purchases

With an eye toward Tuesday, it would not be surprising to see tepid volume as the Fed begins its two-day meeting and the economic docket thin. The Federal Housing Finance Agency is scheduled to release its July home price index at 10 A.M. EST. Economists are expecting 0.5% increase to follow up on the same increase in June.

There are a couple of earnings plays before the bell tomorrow. CarMax (KMX) is expected to post a profit of 18 cents a share. Carnival (CCL), the cruise operator, is expected to earn $1.18 a year and food maker ConAgra Foods reports as well. The average analyst estimate there is 34 cents a share.

Looking at the charts, Friday's closed hinted at a strong up move for the S&P 500 that did not materialize today, perhaps giving more ammunition to those that reside in the overbought camp. A string of closes below the 1068 area could take the index even further down, probably below 1060. The 1060 area should act as a support, but a violation of that level means 1045-1048 should come into play. From there 1022 becomes an issue.

Taking a fundamental and longer-term view, with the expectation that the financials will complete massive write-offs in the fourth quarter and that annual S&P earnings are expected to return to $41-$45 thereafter, a P/E ratio ratio of between 25 and 30 should be enough to get the S&P 500 above 1100, if not higher.

S&P 500 Chart

The Dow technicals paint a similar picture with patterns that usually mean a downside move is imminent turning quickly into upside breakouts. The 9820 area now appears to be acting as resistance though further closes below 9800 could bring the 9645 area into play. If the bulls can stave off all this overbought talk and break 9850, 9921 could be the next minor hurdle on the Dow's trip to 10000. If the Dow and S&P enter into consolidation patterns that could mean both indexes are vulnerable to downside breaks.

Dow Chart

The Nasdaq's Monday ''leadership'' likely does not mean much in the big scheme of things given the lukewarm increases, but the index's move to the psychologically important 2150 is worth watching. This is the next critical level for the Nasdaq to clear and if it fails there, a tumble down to 2122 could be in the works. For you indicator lovers, the 14-day RSI for the Nasdaq is just above overbought territory at 73.42 and the Stochastics show a steep overbought condition, residing near 96.

Nasdaq Chart

Tuesday will likely bring another lethargic day as a lack of scheduled catalysts and the Fed meeting will probably keep volume light. That said, the bulls do have an ideal opportunity to catch the bears sleeping and at least take back some of Monday's losses. If not, a second consecutive day of losses, even if those losses are muted, will only stoke the flames of the overbought/overextended crowd.

Keep in mind that since July 3rd, the S&P 500 has only declined for three consecutive two times, July 27-29 and August 31-September 2. In other words, this market is not accustomed to consecutive declines so it will be interesting to see if ''buy the dips'' holds up again tomorrow. I am filling in for Jim tomorrow, so I will see you again in 24 hours.


New Plays

Aggressive Entry Point

by James Brown

Click here to email James Brown


NEW BULLISH Plays

Helmerich & Payne Inc. - HP - close: 38.93 change: +0.63 stop: 37.15

Why We Like It:
HP is an oil services (drilling) company that has seen its stock breakout to new 2009 highs last week. Shares have already seen some profit taking with a dip from $41 last week to $37.21 this morning. This bounce today looks like an aggressive, short-term entry point. I call it aggressive because the profit taking may not be over yet. HP has stronger support near $36.00-35.00. Plus oil has pulled back to its major trendline of higher lows (check out a chart of the USO). A breakdown here in oil could yank the carpet out from under the oil stocks and we could be quickly stopped out.

I'm suggesting small positions sizes to buy the bounce with a stop loss under today's low. More aggressive traders could use a wider stop. The P&F chart is bullish with a $52 target. I'm setting our first target at $42.50.

Annotated chart:

Entry on September 21 at $38.93 (1/2 a position)
Change since picked:     + 0.00   			
Earnings Date          11/19/09 (unconfirmed)    
Average Daily Volume:       1.2 million 
Listed on September 21, 2009    



In Play Updates and Reviews

Shallow Declines

by James Brown

Click here to email James Brown

With so much money looking to buy the dip the market's pullback will not have much depth.


BULLISH Play Updates

Agrium Inc. - AGU - close: 51.66 change: -1.89 stop: 48.90

AGU gapped down on Monday but spent the rest of the session drifting sideways. I warned readers to look for a dip toward $50.00. It can still happen. Wait for a bounce near $50.00 as a new bullish entry point. 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:     + 1.01   			
Earnings Date          11/05/09 (unconfirmed)    
Average Daily Volume:       1.9 million 
Listed on September 05, 2009    


Airgas Inc. - ARG - close: 49.69 change: -0.15 stop: 44.75

Nothing has changed for us with ARG. I'm suggesting readers buy ARG on a dip at $47.25. If triggered our first target is $52.45. Our second target is $54.85. More aggressive traders could aim higher. The Point & Figure chart is bullish and predicting a $74 target.

Entry on September xx at $xx.xx <-- TRIGGER @ 47.25
Change since picked:     + 0.00   			
Earnings Date          10/22/09 (unconfirmed)    
Average Daily Volume:       1.5 million 
Listed on September 19, 2009    


BE Aerospace - BEAV - close: 20.24 change: +0.43 stop: 17.45

BEAV displayed relative strength with a 2.1% gain and a close over 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:     + 1.05   			
Earnings Date          10/27/09 (unconfirmed)    
Average Daily Volume:       834 thousand
Listed on September 12, 2009    


China Mobile Ltd. - CHL - close: 50.64 chg: +0.36 stop: 47.90

CHL showed relative strength on Monday. Yet I still don't see any changes from my prior comments. We can still buy bounces in the $50-48 zone or if you prefer more upward momentum look for a move over $51.00 again. 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:     + 1.91  			
Earnings Date          00/00/?? (unconfirmed)    
Average Daily Volume:       2.3 million 
Listed on  August 29, 2009    


Carpenter Tech. - CRS - close: 24.42 change: -0.68 stop: 21.45

Traders bought the dip when CRS hit a 10% pull back from its recent high. I doubt the pull back is over though. I'm not suggesting new bullish positions at this time. CRS has already hit our first target. Our secondary target is $27.40.

Entry on September 05 at $21.45 /gap higher entry
                             /originally listed at $20.92
Change since picked:     + 2.97
                             /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: 36.72 chg: -0.40 stop: 33.95

Nothing has changed for us. I'd look for a dip back toward $35.00, which should be new support. I am raising our stop loss to $33.95. Our first target is the $39.40 mark.

FYI: Earnings are coming up at the end of September. We do not want to hold over the report.

Entry on September 05 at $34.82 
                              /originally listed at $34.41
Change since picked:     + 1.90   			
Earnings Date          09/29/09 (unconfirmed)    
Average Daily Volume:       2.6 million 
Listed on September 05, 2009    


E M C Corp. - EMC - close: 16.85 change: -0.15 stop: 15.24

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: 16.76 change: +0.26 stop: 14.75

The relative strength in GE today is encouraging but I wouldn't buy the bounce yet. GE has already hit our first target. We're currently aiming for $18.50. 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:     + 1.27
                            /1st target hit @ 17.25 (+11.3%)
Earnings Date          10/16/09 (confirmed)    
Average Daily Volume:        83 million 
Listed on September 14, 2009    


Starwood Hotels - HOT - close: 32.85 change: -1.24 stop: 28.95

HOT is pulling back and we are looking for a dip toward $30.00. I'm suggesting readers buy HOT on a dip at $30.50. If triggered our first target is $34.00. Our second target is $37.50. FYI: the Point & Figure chart is bullish with a $53 target. Plus HOT has above average short interest (more than 15% of the float) that can keep the rally going as bears cover their positions.

Entry on September xx at $xx.xx <-- TRIGGER @ 30.50
Change since picked:     + 0.00   			
Earnings Date          10/27/09 (unconfirmed)    
Average Daily Volume:       3.4 million 
Listed on September 19, 2009    


IDEX Corp. - IEX - close: 28.28 change: -0.39 stop: 26.75

IEX is still retreating but it's holding above the $28.00 level for now. I'm not suggesting new positions at this time. Our first target has still not been hit at $29.85. Our second target is $32.00. The P&F chart is forecasting a $39 target.

Entry on    August 17 at $26.10 *triggered         
Change since picked:     + 2.18   			
Earnings Date          07/20/09 (confirmed)    
Average Daily Volume:       570 thousand
Listed on  July 25, 2009    


J.P.Morgan Chase - JPM - close: 44.55 change: -0.40 stop: 39.90

Financials led the profit taking in Europe but the selling pressure for the sector was not so bad here in the states. I would consider new positions near $43.50-43.00.

Our plan was to use smaller position sizes (1/2 to 1/4 our normal size). Our target is $47.40 but we'll exit ahead of the mid October earnings report.

Entry on    August 21 at $43.50 *triggered (1/2 to 1/4 normal size)
Change since picked:     + 1.05   			
Earnings Date          10/14/09 (confirmed)    
Average Daily Volume:        55 million 
Listed on  July 18, 2009    


Kirby Corp. - KEX - close: 37.63 change: -0.15 stop: 35.25

KEX tested the $37.00 level and its 30-dma this morning. Readers can use this bounce as a new entry point or wait for a pull back close to $36.00. 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:     - 0.07   			
Earnings Date          10/29/09 (unconfirmed)    
Average Daily Volume:       310 thousand
Listed on September 05, 2009    


Koppers Holdings - KOP - close: 31.99 change: -0.25 stop: 27.45

Our plan is unchanged. 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: +0.04 stop: 22.95

There is no change from my previous comments on MSFT. I would consider new bullish entries on a dip near $24.00 or its 50-dma (currently 24.15). Our target is $27.75.

Annotated chart:
%IMG12%

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: 30.22 change: +0.45 stop: 26.40

The relative strength in PDE today is surprising given the weakness in crude oil on Monday. We still don't want to chase it. A dip near $27.00 would be a 61.8% Fibonacci retracement of the August-September rally. 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: 3.06 change: -0.02 stop: 2.55

PLA acts like it wants to pull back further. I would expect a dip toward the $2.80-2.60 zone. Readers can use a bounce in that area as a new bullish entry point. Our second target remains the $3.95 level. Please note our new stop loss at $2.55. FYI: The Point & Figure chart is bullish with a long-term $7.50 target.

Entry on September 01 at $ 2.65
Change since picked:     + 0.39
                            /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: 43.74 change: -0.45 stop: 39.95

The pull back in ROK is normal. My only concern here would be the bearish divergence between last week's new high in ROK's price and a lower high in its daily chart's MACD indicator. I expect ROK to dip towards $42.00 or lower. Wait for a bounce as our next entry point. 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:     + 0.03   			
Earnings Date          11/10/09 (unconfirmed)    
Average Daily Volume:       1.4 million 
Listed on September 10, 2009    


Schlumberger - SLB - close: 60.79 change: -1.06 stop: 56.95

Crude oil was down sharply thanks to dollar strength and oil stocks suffered. SLB gave up 1.7%. Broken resistance near $58.00 should offer some support. I'm not suggesting new positions at this time. 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:     + 3.86
                             /1st target hit @ 62.50 (+9.7%)
Earnings Date          10/23/09 (unconfirmed)    
Average Daily Volume:       8.7 million 
Listed on September 05, 2009    


Market Vectors: Steel - SLX - close: 53.63 change: -0.57 stop: 47.49

So far so good. We want to see SLX correct back toward support. I'm suggesting readers buy the SLX at $50.25. We'll use a stop loss at $47.49 just in case it tries to fill the gap from September 8th. If triggered our first target is $54.75. Our second target is $59.50. Our time frame is several weeks.

Entry on September xx at $xx.xx <-- TRIGGER @ 50.25
Change since picked:     + 0.00   			
Earnings Date          00/00/00 
Average Daily Volume:       309 thousand
Listed on September 19, 2009    


TEVA Pharmaceuticals - TEVA - close: 51.82 change: -0.06 stop: 49.75

With the market going nowhere on Monday shares of TEVA flirted with short-term resistance at $52.00. Our first target is $54.75. Our second target is $59.50. Our time frame is eight to ten weeks.

Entry on    August 17 at $50.50 *triggered                
Change since picked:     + 0.25   			
Earnings Date          11/03/09 (unconfirmed)    
Average Daily Volume:       5.3 million 
Listed on  August 05, 2009    


Ultra(Long) Financials - UYG - close: 5.99 change: -0.10 stop: 5.40

The profit taking in financials was relatively mild. I would still expect a dip back toward the $5.50 zone. 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:     + 0.70
                             /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*