Option Investor
Newsletter

Daily Newsletter, Tuesday, 9/22/2009

Table of Contents

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

Market Wrap

What A Difference A Day Makes

by Todd Shriber

Click here to email Todd Shriber
As I noted yesterday, Tuesday's trade would be an ideal opportunity for the bulls to catch the bears napping and snatch back some of Monday's losses. They did that and more, sending the major indexes toward yearly highs. The S&P 500 rose 0.7% to 1071.66 and the Dow Jones Industrial Average got a boost from a spate of upgrades, rising 51 points, or 0.5%, to 9829.87. The Nasdaq was no slouch either as the tech-laden index added to yesterday's gains, rising 8.26 points to close at 2146.30, ever closer to the important 2150 level.

Stats Table

Tuesday's trade was basically a complete 180-degree turn from Monday's action. Yesterday, stocks were done in by concerns that the rally had come too far too fast. Not to mention declines among the financials and commodities-related names. Oil was down, the dollar was up and investors just were not feeling all that groovy about equities. Fast forward a mere 24 hours and the script flipped. Investors were once again ebullient and financials and materials names were the toast of the party.

Oil was hampered on Monday by news that Chinese demand is waning, then the Asian Development Bank came out on Tuesday and raised its growth forecasts for China, India and Indonesia. One can only surmise that oil is going to be part of the recipe that fuels the growth in those countries. That news helped crude for November delivery make its way back above $71 a barrel and that of course bolstered the fortunes of Dow components ExxonMobil (XOM) and Chevron (CVX), the two largest U.S. oil explorers.

Crude Chart

The trend of Monday's trash becoming Tuesday's treasure extended to other names that I mentioned yesterday, not the least of which was Caterpillar (CAT). Yesterday, the world's largest construction and mining equipment maker said August sales tumbled 48% on a year-over-year basis. Today, the Dow component got a boost as speculation swirled that global economic growth would fuel increased demand for Caterpillar's products. The stock resumed its recent bullish ways, charging higher by $1.88 to close at $54.34. Despite the glum sales news over the past few months, Caterpillar's chart (below) looks pretty good and you can fetch a fair 3.1% yield for your trouble.

Caterpillar Chart

As I mentioned there was a plethora of Dow stocks that benefited from analyst upgrades today and Hewlett-Packard (HPQ) was among them. Credit Suisse upped its rating on the stock to ''outperform'' from ''neutral,'' citing a bottom in the printer business and improved outlook for HP's hardware business. Credit Suisse hiked its EPS and revenue estimates for HP's next fiscal year, which commences in November, to $4.26 a share from $4.03 on sales of $118.3 billion, up from $117.1 billion.

Allow me to read see the forest through the trees for a minute. The thesis behind the Credit Suisse upgrade of HP, while solid, may have a lot to do with something that did not directly involve HP itself and that would be Dell's (DELL) $3.9 billion acquisition of Perot Systems (PER), which was announced on Monday. More than a few so-called experts have opined that Dell is overpaying for Perot and that led Credit Suisse to downgrade Dell today.

J.P. Morgan Chase (JPM) was another Dow name that was on the receiving end of some kindness. In this case it was rival Bank of America (BAC) upping its third-quarter earnings estimates on J.P. Morgan to 49 cents a share from 46 cents and that was a good for a 4.3% gain in J.P. Morgan's shares. The stock closed at $46.47 and is now within sniffing distance of its 52-week high of $50.63.

Speaking of familiar financials, there was a dash to trash as embattled bond insurers MBIA (MBI) and Ambac (ABK) rose 22% and 14%, respectively. The pops were odd considering there was no news. On the other side of the spectrum was an apparent dash away from trash, at least for a day, as American International Group (AIG) fell more than 5%. The culprit was familiar. AIG apparently has not learned a lesson from other the regional banks as rumors swirled that the downtrodden insurance will commence a secondary share offering.

I should note that the company did not comment on this news, but a secondary offering makes sense because AIG needs the cash. For really no good reason, this stock has been on fire for the past few months, but if support in the low 40s does not hold, there could be more pain on the way.

AIG Chart

Of course, I cannot fail to mention Bank of America, the largest U.S. bank. Even amidst news that Bank of America's executives are meeting with congressional leaders regarding the Merrill Lynch acquisition and increasingly intense speculation that if Chief Executive Officer Ken Lewis is charged with misleading investors by the Securities and Exchange Commission (SEC), he will resign, the stock moved higher.

None of this kept noted bank analyst Dick Bove of Rochdale Securities from upping his price target on BofA to $25 from $19. That's nearly 33% higher than today's closing price. I am not a Ken Lewis apologist, but I keep wondering when cooler heads will prevail and Congress, the SEC and a certain attorney general from New York will realize that Lewis was forced to take on Merrill Lynch and if he did not, what was the alternative? Probably a fall into the abyss for the U.S. financial system.

At the end of the day, congressional ''leaders'' and the New York attorney general do not really care about BofA shareholders. If they did, they would just be quiet. After all, this is one of the most widely held stocks in the U.S. What they really care about is getting reelected to Congress and eventually becoming governor of New York and that serves no one's interests but their own. Bank of America's chart looks fair and it makes me wonder how good it would look with a little less chatter.

Bank of America Chart

Before I get too bogged down in the minutia of individual stocks, it is worth noting that volume was decent today, especially considering that the Federal Open Market Committee commenced a two-day meeting. It appears that Fed Chairman Ben Bernanke is caught between a rock and a hard place as he tries to jolt economic growth while spurring banks to lend more. The likely outcome of the FOMC's two-day meeting will be the Fed leaving interest rates unchanged at 0.25% while saying that limited access to credit is holding back economic growth.

Another interesting tidbit to note is that there eight initial public offerings scheduled for the remainder of this week. That is a pretty robust pipeline given how lethargic the IPO market has been in the U.S. this year. Activity seems to be picking up as of late, as the chart below illustrates, and that is a good thing if you own shares of Goldman Sachs (GS) and Morgan Stanley (MS). This week could prove to be the most active period for IPOs since the end of 2007.

Some of the names expected to make their public debuts this week are Foursquare, a mortgage real estate investment trust (REIT) backed by AllianceBernstein (AB). That deal is expected to price at $500 million. Ladder Capital Realty might be picking a good time to come public because this REIT focuses on acquiring distressed commercial real estate asset. There should be plenty of pickings for the company after its $400 million offering. Perhaps the most widely anticipated new offering is that of China's Shanda Games, the video game business of Shanda Interactive (SNDA). That deal is expected to price at $725 million.

IPO Chart

With an eye toward Wednesday's trade, the news docket is light beyond the Fed update. Treasury Secretary Timothy Geithner is set to testify before the House Financial Services Committee, which might be worth watching for entertainment purposes only. It can be kind of fun to watch the irascible Barney Frank (D-Mass.), the committee's chairman, go to work on those giving testimony.

There are a couple of earnings plays coming out before the bell. AutoZone (AZO), the auto parts retailer that is one of hedge fund genius Eddie Lampert's biggest holdings, is expected to report profits of $4.45 a share. One of my favorite stocks, General Mills (GIS), also reports before the bell and analysts are calling for profits of $1.03 a share.

As investors have renewed their appetite for risk during the recent market rally, General Mills has kind of been left behind, gaining ''only'' 10% in the past three months compared to about 20% for the S&P 500. The stock recently cleared psychological resistance at $60 and if tomorrow's earnings report is encouraging, that could keep General Mills on its ascent toward its 52-week high of $71. If you are not a short-term trader, General Mills has something for you as well. The five-year dividend growth rate is 9% and the current yield of 3.1% is nearly 50% higher than the S&P 500 dividend yield.

General Mills Chart

Taking a look at the charts, it is hard to say that much has changed since I visited with you yesterday, but I looked at a 30-minute chart of the S&P 500 earlier today and it is becoming clear that 1075 looks like the next point of resistance. The 1057 area is the first support area, but a violation of that level could take us to the August peak around 1039. As long as the market keeps bouncing back from days the way it did today, it is hard to argue with the fact that 1100 is going to come into play sooner rather than later.

S&P 500 Chart

Of course everyone wants to know about 10000 when it comes to the Dow. Today's close near 9830 is a good sign and that means 9850 can be taken out with just a lukewarm day tomorrow. The Dow should see support at 9725 and then an even firmer floor at 9625, just below the Augst high, but it is a stretch to think that 9625 is going to be an issue over the next few days. It is probably reasonable to expect some mild consolidation before the Dow ratchets higher.

Dow Chart

As I noted earlier, the Nasdaq is inching ever closer to 2150, and again, it will not take much for that level to be broken as early as tomorrow. The index is a strong uptrend that mirrors that of its 50-day moving average. The 2150 area is where the Nasdaq really started to breakdown last year, but if it can hold there this time and get some help during earnings season, the index could make its way back to the August 2008 high of 2473 before the end of this year. Near-term support can be found around 2118 and then at 2050.

Nasdaq Chart

It is hard to disagree with the fact that ''buy the dips'' lives on and market leadership by financials and materials names indicates risk appetite is also alive and well. None of this changes my stance that stocks are richly valued at this point, but it would be foolish to buck the overall trend.


New Plays

A Fresh Watch List

by James Brown

Click here to email James Brown

Editor's Note:

I'm not adding any new plays tonight but check out these stocks as potential bullish candidates.

AA - I came close to adding AA tonight as an aggressive bullish candidate. The material stocks have been showing strength.

BRCM - Just broke out to new 52-week highs after a week-long consolidation.

EXPE - Technicals are turning bullish again with the stock at new one-year highs but the $25.00 level could be round-number resistance.

FWLT - This engineering stock looks a little overbought. I'd prefer to wait for a pull back near the $32 region.

LRCX - The SOX semiconductor index rallied to new highs today. LRCX is bouncing from its recent correction. This bounce could be another entry point.


In Play Updates and Reviews

Banks Lead The Rally

by James Brown

Click here to email James Brown

Financials helped lead the market higher with JPM really out performing and setting new highs for 2009.


BULLISH Play Updates

Agrium Inc. - AGU - close: 52.32 change: +0.66 stop: 48.90

AGU delivered a minor bounce. I would still 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:     + 1.67   			
Earnings Date          11/05/09 (unconfirmed)    
Average Daily Volume:       1.9 million 
Listed on September 05, 2009    


Airgas Inc. - ARG - close: 50.21 change: +0.52 stop: 44.75

ARG continues to run higher. The stock is clearly short-term overbought. 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: 20.21 change: -0.03 stop: 17.45

BEAV is still hovering around the $20.00 level. Volume was a little above average, which might suggest someone was selling into the new highs. 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:     + 1.02   			
Earnings Date          10/27/09 (unconfirmed)    
Average Daily Volume:       834 thousand
Listed on September 12, 2009    


China Mobile Ltd. - CHL - close: 52.13 chg: +1.49 stop: 47.90

CHL appears to be done consolidating. The stock gapped open higher and rallied past the $52.00 level in addition to its 30 and 50-dma. Shares closed up with a 2.9% gain. 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:     + 3.40  			
Earnings Date          00/00/?? (unconfirmed)    
Average Daily Volume:       2.3 million 
Listed on  August 29, 2009    


Carpenter Tech. - CRS - close: 25.32 change: +0.90 stop: 21.45

Steel and metal stocks were strong on Tuesday and CRS gained 3.6%. 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:     + 3.87
                             /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: 36.78 chg: +0.06 stop: 33.95

DRI is still holding on to its gains. I'd look for a dip back toward $35.00, which should be new support. 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:     + 1.96   			
Earnings Date          09/29/09 (unconfirmed)    
Average Daily Volume:       2.6 million 
Listed on September 05, 2009    


E M C Corp. - EMC - close: 17.16 change: +0.31 stop: 15.24

Tech stocks were strong with the NASDAQ hitting a new high for the year. EMC managed its best close over $17.00 in months. We might want to consider raising our trigger but I'm keeping it at $15.75 for now. 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: 17.01 change: +0.25 stop: 14.75

GE gained almost 1.5% and closed over $17.00. Shares still look a little overbought. I'm not suggesting new positions at this time. 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:     + 1.52
                            /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: 34.06 change: +1.21 stop: 28.95

HOT delivered a nice bounce (+3.6%) but remains under resistance near $35.00. I'm raising our trigger to buy HOT from $30.50 to $31.00. If triggered our first target is $34.75. 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 @ 31.00
Change since picked:     + 0.00   			
Earnings Date          10/27/09 (unconfirmed)    
Average Daily Volume:       3.4 million 
Listed on September 19, 2009    


Helmerich & Payne Inc. - HP - close: 39.68 change: +0.75 stop: 37.15

The U.S. dollar fell to new 2009 lows, which fueled a rally in crude oil. This translated into gains for the oil stocks and HP rose 1.9%. 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.

Entry on September 21 at $38.93 (1/2 a position)
Change since picked:     + 0.75   			
Earnings Date          11/19/09 (unconfirmed)    
Average Daily Volume:       1.2 million 
Listed on September 21, 2009    


IDEX Corp. - IEX - close: 28.25 change: -0.03 stop: 26.75

The trading in IEX is starting to turn a little more bearish. I expect a break under $28.00 soon. More conservative traders may want to exit completely right here. 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:     + 2.15   			
Earnings Date          07/20/09 (confirmed)    
Average Daily Volume:       570 thousand
Listed on  July 25, 2009    


J.P.Morgan Chase - JPM - close: 46.47 change: +1.92 stop: 41.90 *new*

JPM had its earnings estimates raised this morning and the stock responded with a big 4.3% gain and a close over the $45.00 level. The stop loss has been raised to $41.90. I'm not suggesting new positions at this time. Please note a change in our exit strategy. We want to sell half at $47.40. We'll sell the second half at $49.80.

Our plan was to use smaller position sizes (1/2 to 1/4 our normal size). We plan to 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:     + 2.97   			
Earnings Date          10/14/09 (confirmed)    
Average Daily Volume:        55 million 
Listed on  July 18, 2009    


Kirby Corp. - KEX - close: 37.86 change: +0.23 stop: 35.25

Short-term technicals for KEX are starting to improve again. The stock looks ready to bounce back into 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:     + 0.16   			
Earnings Date          10/29/09 (unconfirmed)    
Average Daily Volume:       310 thousand
Listed on September 05, 2009    


Koppers Holdings - KOP - close: 31.79 change: -0.20 stop: 27.45

KOP is still slowly consolidating. 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: 25.77 change: +0.47 stop: 22.95

Relative strength in MSFT with a 1.8% gain was a big help for the all the major averages that this stock is a component for. The stock has now closed above its pre-earnings July high of $25.72. Our target is $27.75.

Entry on      July 27 at $23.00
Change since picked:     + 2.77   			
Earnings Date          07/23/09 (confirmed)    
Average Daily Volume:        58 million 
Listed on  July 23, 2009    


Pride Intl. Inc. - PDE - close: 30.88 change: +0.66 stop: 26.40

Nothing has changed. We're still waiting for a deeper pull back. 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: 2.93 change: -0.13 stop: 2.55

PLA is seeing some profit taking. Today's session has painted a small bearish engulfing candlestick pattern. I am expecting a pull back toward the $2.75 region. Consider buying the stock on a bounce in the $2.75-2.60 zone. 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:     + 0.26 
                            /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: 44.40 change: +0.66 stop: 39.95

ROK is rebounding back towards resistance at $45.00. I would prefer to open new bullish positions on a dip near $42.00. 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:     + 0.69   			
Earnings Date          11/10/09 (unconfirmed)    
Average Daily Volume:       1.4 million 
Listed on September 10, 2009    


Schlumberger - SLB - close: 61.57 change: +0.78 stop: 56.95

Strength in crude oil today helped SLB bouncing from the $60.00 level. 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:     + 4.64
                             /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: 54.89 change: +1.26 stop: 47.49

Material stocks were strong on Tuesday and steel stocks helped lead the rally higher. The SLX gained 2.3%. I still don't want to chase it.

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: 50.94 change: -0.88 stop: 49.75

TEVA under performed on Tuesday and the recent action almost looks like a bear-flag pattern. However, TEVA has been trading sideways in the $50-53 zone for several weeks. I would still be tempted to buy dips in the $50.50-50.00 region. 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:     + 0.44   			
Earnings Date          11/03/09 (unconfirmed)    
Average Daily Volume:       5.3 million 
Listed on  August 05, 2009    


Ultra(Long) Financials - UYG - close: 6.24 change: +0.25 stop: 5.40

Financial stocks were showing relative strength and the UYG has rallied toward last week's highs. 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:     + 0.95
                             /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*