Option Investor
Newsletter

Daily Newsletter, Wednesday, 9/23/2009

Table of Contents

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

Market Wrap

Indexes Up, then Down, After Fed Action

by Judy Alster

Click here to email Judy Alster
What we lacked Wednesday in the quantity of economic reports we made up for with intensity. Take the Federal Reserve's Open Market Committee meeting, wherein it was announced, to the surprise of no one, that the Fed funds rate would stay the same for time being. As is usual on Federal Reserve meeting days, investors mostly twiddled their thumbs until word came in. Then the indexes jumped. And then they fell.

S&P 500, INTRADAY:

One exception was the energy sector, which fell early and stayed down in response to the morning's report of a bigger-than-expected 2.8-million-barrel rise in crude oil inventories last week, coupled with a drop in demand.

WEST TEXAS CRUDE:

The major indexes rose steeply on the Fed report, topping 9,900 on the Dow (a gain of almost 90 points and only 82 points shy of magic 10,000), 1,080 on the S&P and 2,167 on the Nasdaq, but only for a flash. Those gains were a memory by late afternoon, leaving the Dow down 81.3 points or 0.83%, the S&P down 10.79 points or 1.01% and the Nasdaq down 14.88 or 0.69%. Losers outnumbered winners by about 3 to 2 on the New York Stock Exchange.

INDEX WRAPUP:

Telecommunications moved up nicely after a dark few days. The category had lagged this week, off 1.3% over the last two trading sessions on a shaky profit outlook, gloomy analyst remarks and especially uncertainty over how federal "net neutrality" proposals might affect the industry: those are proposed rules that would prevent Internet providers from blocking or slowing bandwidth-hogging Web traffic such as streaming video, some kinds of file-sharing and other applications that strain their networks. Telecom, wireless and cable companies like AT&T (T), Verizon (VZ) and Comcast (CMCSA) are less than wild about this idea; Google and Amazon among others are backers.

TELECOMMUNICATIONS INDEX:

In a late earnings report, telecom Comtech (CMTL) beat profit expectations by three cents at 21 cents a share but missed on revenues; the stock stayed flat at $34.45

The main event was the Fed who, after its two-day closed-door meeting, reported that economic activity has "picked up," kept the Fed funds rate at ground level and went right on gobbling up debt. As expected, the Fed kept the federal funds rate set at a range of zero to 0.25%, and with far, far more fancy words than necessary (Who started that pompous stuff? Greenspan? Volcker?), said we can expect it to keep rates low for a while.

Also as expected, the Fed said it will stretch out its purchase of mortgage-backed securities and agency debt from December into the first quarter of next year. It has already purchased $857 billion of a scheduled $1.25 trillion in mortgage-backed securities, and has also bought $129.2 billion of a planned $200 billion in so-called agency debt issued by Fannie Mae, Freddie Mac and the Federal Home Loan Banks, which finance mortgage purchases. As long as this action continues, theoretically at least mortgage rates should stay low.

DOW JONES INDUSTRIAL AVERAGE:

If the Fed hadn't extended its deadline, it would have had to buy more than $600 billion in mortgage-backed securities by December alone. A sudden pullout after such heavy purchases could have caused nasty volatility, so the move was probably well-advised.

S&P 500:

The report was an echo of comments made recently by Fed Chairman Ben Bernanke, who said he thought the recession was probably over: In a word, conditions in financial markets have improved, activity in the housing sector has increased, household spending seems to be stabilizing. Businesses have slowed the pace at which they're cutting back on fixed investment and staffing and continuing to bring inventory into better alignment with sales.

But there are ongoing job losses, invisible wage increases, reduced factory capacity, lower housing wealth and tight credit -- which can expected to keep inflation low, in any event. Bottom line, according to the Fed? Don't expect miracles any time soon because growth will stay slow, but the worst is over and things are looking up.

NASDAQ:

In perhaps a distant early indication of better times ahead, Paychex (PAYX) reported after hours that despite revenue down 6%, its earnings of 34 cents a share were in line with predictions, and added this: "While we have not seen improvement in any of our key indicators, we have not seen any significant deterioration either . . . . This is the first quarter in the last four sequential quarters that we have not had a noticeable decline in checks per client; the largest sequential decline in fiscal 2009 peaked in the third quarter at 2.2%." Up during the day, the stock fell after hours.

PAYCHEX:

As for the late-afternoon plummet: With major market indicators more than 50% off their March lows, we can surmise that investors are worried that stocks are overvalued (and overbought: look at that just-under-70 relative strength index on the Nasdaq), especially with the recovery being only so-so. (Instinct tells me that at least some of today's buying was the work of individual investors and most of the selling the work of institutional investors and automated sell programs.)

As investors moved out of energy stocks, they apparently put that money to work in consumer staples, which tend to hold up during hard time. General Mills (GIS) was among the day's big winners after reporting first-quarter profits up a jaw-dropping 51% year-over-year and raising its full-year outlook. The company makes Yoplait, Cheerios and a raft of others edibles, and credited lower ingredient costs and unceasing demand for its products. Shares soared:

GENERAL MILLS:

Crude and gasoline prices fell sharply on more evidence of a huge glut in supply, as the West Texas Crude graph (above) reveals. The Energy Information Administration shocked the audience with its report that supplies of crude, gasoline and distillate fuel used for diesel and heating oil surged well above all expectations last week. Crude supplies jumped by 2.8 million barrels and gasoline by 5.4 million barrels. Analysts had expected crude levels to decline by almost that much.

Crude prices have finally fallen, and sharply, after staying high (even with ample inventories) with the help of the low, low dollar. Benchmark crude for November delivery tumbled nearly 2.79 or nearly 4% to settle at $68.97 a barrel on the New York Mercantile Exchange. Yes, I said oil prices wouldn't drop below $68 and I still have a few more cents to go.

Natural gas, which is seeing the same buildup in supply because of still-shabby industrial production, continued to spike, with prices up nearly 7%.

Refiners that make gasoline are indeed feeling pain due to the lack of demand and thin industry margins. At the same time, however, the price they're paying for their feedstock just fell and could fall more. Here's a two-year graph of a major U.S. refiner. Notice its price a year ago, and in February of 2008.

VALERO:

And here's a graph of India's Tata Motors (TTM), about whose tiny car, the Nano, you may have been reading. Tata is India's largest vehicle maker. In July (Cn youell?) it started deliveries of the Nano, the world's cheapest car. Unless India is somehow different from every other developing country on record, its huge, burgeoning middle class will be snapping this car up. And that gasoline has to come from somewhere.

TATA MOTORS:

The Mortgage Bankers' Association purchase index rose again last week, 5.6%, thanks to applications for government-insured loans. The share of government-insured purchases, at 45.7%, is the highest since 1990. The refinance index rose 17.4 percent as mortgage rates dipped steeply, down 9 basis points for 30-year loans to 4.97%, the first under-5% percent level since mid-May. Housing stocks, backing up after a good run, continued to sell on the news:

PHILADELPHIA HOUSING INDEX:

The falling dollar was on people's minds Wednesday, or at least on mine. It was once a given that stocks and bonds would move in different directions, like those little black-and-white dog magnets that repelled each other -- you remember those. Equity prices would rise on a good outlook for the economy since investors would be willing to take on some risk . . . while bonds would rise with a weakening (or already weak) economy as investors moved to safer government debt.

Not lately. With the dollar now one of the cheapest currencies to borrow, stocks are rising and people are still bidding for Treasurys. In fact, Treasurys rose Wednesday, pushing the yield on the benchmark 10-year note down 0.03 percentage points to 3.42%. Earlier, the $40 billion 5-year auction was nothing much, possibly muted by anticipation of the Fed meeting; demand was a bit below last month's auction but still slightly above the long-term average.

With U.S. rates doing their disappearing act, many investors overseas are borrowing in dollars to buy higher-yielding assets purely to gain from the difference -- the so-called carry trade. These strategies could be one reason the U.S. market has been moving up, with the S&P 500 gaining more than 15% this quarter.

In addition, the falling dollar has been causing foreign central banks to continue buying U.S. Treasurys, either because they're comparatively cheaper or to support their own currencies. Overseas investors, particularly foreign central banks, hold more than half of all U.S. debt outstanding. It's the reason Treasury yields have stayed low, incidentally helping to keep down other borrowing costs for businesses and homebuyers.

However, the dollar did manage to rise from a one-year low today:

US DOLLAR INDEX:

The dollar usually isn't the world's choice of a "borrowing currency," only when it's uncomfortably cheap. This happened in the early 1990s, under former Fed chief Greenspan: The dollar was the lowest borrowing currency in the developed world, and U.S. stocks and Treasury prices both rose, with the S&P up over 35% and 10-year Treasury yields -- then as now, central banks prefer longer investment horizons -- dropping 29% to 5.74%.

Despite a lot of bluster from Chinese and Russian officials about the need to diversify out of dollars, these countries continue to be big buyers of Treasurys. Foreign officials and private investors increased their holdings of Treasury debt by $31.4 billion in the last week, the second- highest amount ever, according to the Fed. After all, if you want to hold dollars, and you're a central bank who knows better than to risk your citizens' hard-earned money, what smarter way to do it than with securities backed by the full faith and credit of the U.S. government. You know you'll get paid one way or another.

A weak currency can certainly boost markets -- ask China about that -- but keeping your currency artificially low inevitably backfires in the long run. But it's such a nice day out, let's not trouble our heads about every action having an equal and opposite reaction, or what's likely to happen when U.S. rates inevitably rise and those carry trades start to unwind . . .

The Treasury auctions $29 billion of 7-year notes Thursday, closing out a record week of supply. Also expect reports on jobless claims, natural gas and existing home sales.


New Plays

Wireless Telecom

by James Brown

Click here to email James Brown


NEW BULLISH Plays

NII Holdings - NIHD - close: 30.22 change: -0.77 stop: 24.90

Why We Like It:
NIHD provides wireless telecom services for Latin and South America. The stock has truly out performed with a huge rally from its late August lows. We want to jump on board if the stock corrects. Aggressive traders may want to jump in around $28.00. I'm suggesting a trigger at $26.75 with a stop loss at $24.90. If triggered our first target is $31.00. FYI: The P&F chart is very bullish with a $57 target.

Annotated chart:

Entry on September xx at $xx.xx <-- TRIGGER @ 26.75
Change since picked:     + 0.00   			
Earnings Date          10/22/09 (unconfirmed)    
Average Daily Volume:       3.4 million 
Listed on September 23, 2009    



In Play Updates and Reviews

Hoping for More

by James Brown

Click here to email James Brown

Editor's Note:

Stocks have been very overbought so a pull back would be both normal and healthy. However, I expect any profit taking to be shallow. There are too many traders waiting on the sidelines to buy the dip.


BULLISH Play Updates

Agrium Inc. - AGU - close: 51.28 change: -1.04 stop: 48.90

I'm not surprised to see AGU slip again. The stock lost 1.9%. I've been suggesting readers look for a bounce from the $50.00 level. Our first target is $54.75. Our second target is $59.75. Currently the Point & Figure chart is bullish with a $59 target.

FYI: Agrium (AGU) is trying to buy rival firm CF Industries (CF) but CF keeps rejecting the offer calling it too low. At the same time CF is trying to buy Terra Industries (TRA) and TRA keeps rejecting the offer calling it too low. Eventually one of these companies is going to give up or they're finally going to make a big enough offer or somebody else might step in and start bidding. There is a risk that someone bids too much and the market could think they overpaid, which might push the stock lower. This M&A dance has been going on for months and it will probably continue for months so I'm not expecting it to have much short-term impact on the stock.

Entry on September 08 at $50.65 /gap higher entry  
Change since picked:     + 0.63   			
Earnings Date          11/05/09 (unconfirmed)    
Average Daily Volume:       1.9 million 
Listed on September 05, 2009    


Airgas Inc. - ARG - close: 48.91 change: -1.30 stop: 44.75

ARG is correcting and will hopefully hit our trigger soon. 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: 20.77 change: +0.56 stop: 17.45

BEAV displayed relative strength with a 2.7% gain and a new 2009 high. 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:     + 1.58   			
Earnings Date          10/27/09 (unconfirmed)    
Average Daily Volume:       834 thousand
Listed on September 12, 2009    


China Mobile Ltd. - CHL - close: 51.82 chg: -0.31 stop: 47.90

CHL spiked to $52.73 before fading this afternoon. I would look for a dip or a bounce near $50.00 now as a new entry point. Our first target is $54.00. Our second target is $58.00. Our time frame is several weeks.

Entry on    August 31 at $48.73 /gap down entry point
Change since picked:     + 3.09  			
Earnings Date          00/00/?? (unconfirmed)    
Average Daily Volume:       2.3 million 
Listed on  August 29, 2009    


Carpenter Tech. - CRS - close: 25.19 change: -0.13 stop: 21.45

CRS held up pretty well only suffering a fractional decline. Shares are short-term overbought. I'd look for a dip back toward $22.50-22.00. 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:     + 3.74
                             /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: 35.08 chg: -1.70 stop: 33.95

Ouch! DRI under performed with a 4.6% decline. We were expecting a dip back toward $35.00 but not all at once. This level should be support. I would consider new positions on a bounce. 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:     + 0.26   			
Earnings Date          09/29/09 (unconfirmed)    
Average Daily Volume:       2.6 million 
Listed on September 05, 2009    


E M C Corp. - EMC - close: 17.10 change: -0.06 stop: 15.24

Tech stocks were strong today with the NASDAQ and EMC hitting new highs for the year before the late day sell-off. We have a trigger to buy EMC at $15.75. 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: -0.01 stop: 14.75

GE also held up pretty well. The stock rallied toward its highs a week ago. The late-day failure here is starting to look like a bearish double top pattern. More conservative traders may want to exit completely right now. I am 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:     + 1.51
                            /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: 32.83 change: -1.23 stop: 28.95

HOT erased yesterday's gains with a 3.6% pull back. Today's session has produced a bearish reversal pattern but I still expect support near $30.00. The plan is to buy HOT at $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: 38.58 change: -1.10 stop: 37.15

Oil service stocks were hit by the drop in crude oil futures today. The oil inventory numbers came in bearish this morning. We have a relatively tight stop loss and should only have half our normal position size open. If we do get stopped out I would look for support near the $36.00-35.00 levels. 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:     - 0.35   			
Earnings Date          11/19/09 (unconfirmed)    
Average Daily Volume:       1.2 million 
Listed on September 21, 2009    


IDEX Corp. - IEX - close: 28.20 change: -0.05 stop: 26.75

IEX didn't see much profit taking but the short-term trend is still bearish. 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:     + 2.10   			
Earnings Date          07/20/09 (confirmed)    
Average Daily Volume:       570 thousand
Listed on  July 25, 2009    


J.P.Morgan Chase - JPM - close: 45.06 change: -1.41 stop: 41.90

After soaring to new highs yesterday JPM gave 3% this afternoon. A bounce in the $44.00-43.00 zone is probably a new bullish entry point. 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:     + 1.56   			
Earnings Date          10/14/09 (confirmed)    
Average Daily Volume:        55 million 
Listed on  July 18, 2009    


Kirby Corp. - KEX - close: 37.47 change: -0.39 stop: 35.85 *new*

Short-term the action in KEX looks bearish with another failed rally under the 10-dma. I am expecting a dip toward $36.00 and its rising 50-dma. We can buy a bounce near $36.00. However, if shares don't bounce we want to exit. I'm raising our stop loss to $35.85. 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:     - 0.23   			
Earnings Date          10/29/09 (unconfirmed)    
Average Daily Volume:       310 thousand
Listed on September 05, 2009    


Koppers Holdings - KOP - close: 31.37 change: -0.42 stop: 27.45

The profit taking continues. 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: 25.71 change: -0.06 stop: 22.95

MSFT spiked to new multi-month highs at $26.25 this afternoon before reversing into negative territory. This could be a short-term top. I'd look for a dip toward $24.50-24.00. Our target is $27.75.

Entry on      July 27 at $23.00
Change since picked:     + 2.71   			
Earnings Date          07/23/09 (confirmed)    
Average Daily Volume:        58 million 
Listed on  July 23, 2009    


Pride Intl. Inc. - PDE - close: 30.20 change: -0.68 stop: 26.40

The bounce is struggling. 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: 3.01 change: +0.08 stop: 2.59 *new*

Hmm... it was an interesting session for PLA. The stock under performed the first half of the day with a plunge toward $2.75 and its 30-dma and exponential 200-dma. Then the stock bounced back into positive territory and ignored the market's late-day sell-off. I'd almost call this bounce a new bullish entry point if the S&P 500 didn't look so vulnerable to more weakness.

Yesterday I did suggest buying a dip in the $2.75-2.60 zone. I'm raising our stop loss to $2.59.

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:     + 0.34 
                            /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: 44.06 change: -0.34 stop: 39.95

ROK briefly traded above resistance at $45.00 before retreating. 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:     + 0.35   			
Earnings Date          11/10/09 (unconfirmed)    
Average Daily Volume:       1.4 million 
Listed on September 10, 2009    


Schlumberger - SLB - close: 60.26 change: -1.31 stop: 56.95

The bearish oil inventory numbers this morning sparked a sell-off in crude oil and SLB was shaken for a 2.1% decline. I would consider buying dips or a bounce in the $58.00-57.00 zone. 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:     + 3.33
                             /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: 54.27 change: -0.62 stop: 47.49

Hopefully the pull back continues and SLX retests supportn ear $50.00.

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: 50.61 change: -0.33 stop: 49.75

I don't see any changes from my prior comments on TEVA. 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:     + 0.11   			
Earnings Date          11/03/09 (unconfirmed)    
Average Daily Volume:       5.3 million 
Listed on  August 05, 2009    


Ultra(Long) Financials - UYG - close: 6.01 change: -0.23 stop: 5.40

Financials led the market lower this afternoon. If the profit taking continues we might see another entry point near $5.60-5.50. 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:     + 0.72
                             /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*