Option Investor
Newsletter

Daily Newsletter, Monday, 10/5/2009

Table of Contents

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

Market Wrap

Gold And Goldman Boost Stocks

by Todd Shriber

Click here to email Todd Shriber
A weak dollar, surging gold and crude oil prices combined with a Goldman Sachs upgrade of large cap banks to send stocks soaring on Monday, helping equities rebound from their first two week drop since July. The S&P 500 added 1.5% to close at 1040.46, its best performance in a week, while the Dow Jones Industrial Average rose 112 points, or 1.2%, to close at 9599.75. Technology issues got a jolt from mergers and acquisitions scuttlebutt and that sent the Nasdaq higher by 20 points to a close of 2068.15.

Stats Table

Last week, stocks were dragged down by a spate of bad economic news, namely Friday's unemployment number, but this week got off to a markedly better start on the data-point front as the Institute for Supply Management's (ISM) non-manufacturing index rose to 50.9% in September from 48.4% in August. That marked the first expansion in a year and that sent the index to its highest reading since May 2008. The reading, which shows the services sector is expanding, came in well above the consensus estimate of 50%.

ISM Chart

While the market did not deliver a sequel to last Monday's ''Merger Monday,'' the Nasdaq benefited from news that Brocade Communication Systems (BRCD) is seeking a suitor. Back in the go-go days of the technology boom, Brocade once traded for close to $180 a share. Closing at $9.09, on Monday, it is fair to say that Brocade is shadow of its former self, but that also means an acquisition of the company may come at a decent price. Brocade competes with Cisco Systems (CSCO) in the data and telecom gear arenas and while Cisco's penchant for acquisitions is well-documented, press reports said the most likely suitors for Brocade would likely be Hewlett-Packard (HWP) and another voracious Silicon Valley acquirer, Oracle (ORCL).

Another tech name to get a boost from acquisition-related news was NetApp (NTAP), the provider of data storage services. NetApp's CEO Thomas Georgens said in an interview with Barron's that a sale of his company may make sense at some point. It is worth noting that NetApp has been the subject of takeover talks in the past and, obviously, no deal has materialized. After being bested for Data Domain by rival EMC (EMC) this summer, NetApp may find life easier in the arms of a larger rival.

Another big catalyst that helped lift the Dow to a triple-digit day was a Goldman Sachs upgrade of large bank stocks, saying that the big boys would deliver better profits than their regional rivals over the coming quarters. Capital One (COF) was added to Goldman's Conviction Buy List, while Wells Fargo (WFC) was upgraded to ''buy'' and Comerica (CMA), actually a regional bank, got a boost to ''neutral'' from ''sell.''

Not to nitpick, and it truly is hard to argue with Goldman, but they might a tad late to this party. The worst performer of this trio, Comerica, is up 50% in the past six months, while Wells Fargo is up more than 60% and Capital One is up more than 150% in the same period. Regardless, the Goldman upgrade got investors feeling cheery about financials for at least one day and the trickle-down effect was obvious as Dow components Bank of America (BAC) and J.P. Morgan Chase both finished the day higher by 3.8% and 4.6%, respectively.

Commodities, namely gold and crude oil, had their say in the market bounce today as well. December gold futures rose $13.50 to settle at $1017.80 an ounce and crude oil for November delivery again appears to be making its way toward $71 a barrel, closing at $71.46. Of course, both commodities were bolstered by a weaker dollar, but gold might legitimately be in its own bull market right now. The yellow metal has added more than $50 an ounce in just a month.

Gold Chart

As far as crude goes, black gold's consistent failures in the mid-70s range has become almost comical, if not predictable at this point, so one of day of gains is not much to get excited about if you are an oil bull. Crude oil stocks now rest 11.4% above year-earlier levels and Wednesday's inventory data is expected to show a rise 1.3 million barrels over the price week. That would add 400,000 barrels to the highest inventory level in more than 26 years, according to press reports.

When I talk about oil, I usually like to use the Oil Services HOLDRs ETF (OIH) as a reference point. I am not going to do that today, but I am going to bring up an interesting anecdote from of OIH's largest holdings, Diamond Offshore (DO). As you might surmise, Diamond Offshore is engaged in the offshore drilling business and that makes the stock especially sensitive to the price fluctuations in crude futures.

So what's the punchline? Diamond Offshore priced $500 million in 30-year notes today at yield of 5.7%. That is fairly mediocre compensation on a corporate bond issue of that duration given the volatility of the oil market. For less risk, investors could get a higher yield on the stocks of both AT&T (T) and Verizon (VZ). Not to mention, Diamond Offshore's chart (below), indicates the stock may have some downside in its near-term future.

Diamond Offshore Chart

Cyclicals, materials, commodities stocks, whatever the vernacular, have played a major part in the market rally and one of those names is Dow component Caterpillar (CAT), which is becoming a frequent guest here in the Monday Market Wrap. I have mentioned more than once the gloomy sales reports that Caterpillar, the world's largest maker of construction and mining equipment, has been turning in recently. Well, the company apparently is not worried about that and announced today it would be raising prices on most of its offerings by 2% in January. The announcement appeared to assuage investors that were bracing for price cuts. Caterpillar chipped into the Dow's rally, rising $1.92 to $50.75.

If you are feeling bullish on the mining sector and ready to take a tad more risk, Bucyrus International (BUCY) and Joy Global (JOYG) might be names to consider. Both are up about 85% in the past six months and both are within sniffing distance of their 52-week highs. Bucyrus looks like it has found support at the 50-day moving average of $32.26 and with more room to run to its 52-week high, I included that chart below.

Bucyrus Chart

All of this talk of commodities and cyclicals is a good segue to the all-important third-quarter earnings season that is now upon us. As the chart below illustrates, commodities-related stocks are fairly important contributors to the S&P 500's earnings (encompassed in the ''other'' category) and that will have investors combing over Alcoa's (AA) earnings report on Wednesday with a fine-tooth comb.

S&P 500 Sector Earnings

The largest U.S. aluminum producer and Dow component is expected to post a fourth consecutive quarterly loss. Analysts expect Alcoa to post a loss of 11 cents a share on sales of $4.5 billion for the third quarter. Aluminum prices picked up a bit in the third quarter from the second quarter, but lower production and foreign currency issues will likely hold Alcoa's bottom line back. That means the Street will be looking for, no surprise here, lower costs. Any upside surprise out of Alcoa could juice the market through the end of the week.

While Alcoa traditionally signals the start of a new earnings season, there was another materials name that delivered results after the close Monday. Mosaic (MOS), the second-largest producer of potash fertilizer, delivered glum news, saying its fiscal first-quarter profit slumped by 91% to $100.6 million, or 23 cents a share, from $1.8 billion, or $2.65 a share, a year earlier. Sales fell 66% to $1.46 billion. Analysts had been expecting Mosaic to earn 35 cents a share on sales of $1.54 billion.

I am not going to say Mosaic's grim report portends anything for the rest of earnings and for some reason the stock was actually up a little bit in after hours trading, but it certainly would have been nice to get earnings season off to a better start. Monsanto (MON), another agriculture issue, reports on Wednesday and a disappointing number there could spell disaster for at least one part of the commodities complex.

There is not much in the way of earnings fanfare before the bell on Tuesday, but after the market closes, Yum! Brands reports third-quarter results. The operator of the KFC, Pizza Hut and Taco Bell fast-food chains is expected to earn 58 cents a share on sales of $2.79 billion. While not quite the blue chip that rival McDonald's (MCD) is, Yum! has exhibited some blue chip-esque traits recently, raising its dividend by 11% and initiating a $300 million share repurchase program.

Do not expect much in the way of robust numbers from Yum! in the U.S., but that is OK. No matter how you cook it, Yum! is a China play because KFC is the largest fast-food chain in the world's largest country. Yum! is just about $2 off its 52-week and the chart shows it just cleared resistance at $34.50, so the earnings report should have a heavy hand in the stock's near-term fortunes.

YUM Chart

Taking a look at the charts, the Dow just barely missed out on a close at 9600, but appears to be finding support at the 50-day moving average of 9468. The August peak of 9630 could be a minor resistance point on the way back to 9800. While Alcoa is just one of 30 stocks in the index, an upbeat earnings report on Wednesday would help the Dow on its march to 9800 and then to 10000. Just remember that as a price-weighted index, Alcoa has the smallest impact on the Dow's daily performance because it is the lowest priced stock in the index.

It is all about earnings and a cascade of disappointing reports from Dow components could have us talking about 9300, then 9100 and worse. We will just have to wait and see if third-quarter estimates were set too high.

Dow Chart

It is a similar refrain with the S&P 500 as the measure of the 500 largest U.S. stocks is finding support at its 50-day moving average of 1022.93. With a close at 1040.46, the next resistance point for the index probably looms around 1052. Today's close is also significant because it put the S&P 500 in position to get back above the six-month uptrend line that had been broken late last week.

The 50-day average needs to hold as support and a violation of that level means 975 could become an issue and that means earnings quality is likely suspect.

S&P 500 Chart

Not much is different on the Nasdaq as the tech-heavy index, like the S&P 500, is trying to get back above the six-month upward trend line and finding support at the 50-day moving average of 2035.35. Until tech earnings start to pour in, the Nasdaq will likely take its cues from the other major indexes while waiting for more clarity on the aforementioned M&A news.

At nearly 100 points away from the recent peak of 2167.70, the Nasdaq has some work to do, but with the disappointing earnings report from Research In Motion (RIMM) out of the way, the index is poised to absorb more positive (hopefully) updates from its other major drivers including Apple (AAPL), Google (GOOG), Intel (INTC) and Microsoft (MSFT). A disappointing earnings season could have the Nasdaq down to 1950 and perhaps lower.

Nasdaq Chart

The last time all three indexes were hovering this close to their 50-day lines was in July and they proceeded to rocket higher. If that scenario is going to replay itself, then it will only do so on the back of earnings reports that have rejuvenated the market's previously bullish tenor.


New Plays

Coal Stocks Heating Up

by James Brown

Click here to email James Brown

Editor's Note:

FYI: There are a lot of commodity and material-related names showing strength today. Check out steel, oil, and coal names as potential candidates.


NEW BULLISH Plays

Patriot Coal - PCX - close: 11.78 change: +0.88 stop: 9.95

Why We Like It:
PCX soared on Monday as investors bought the bounce. The three-week correction had shaved off nearly 40% of PCX's stock price. Normally I would try and avoid buying a big bounce like PCX's 8% gain today but this is the sort of stock that could run away from us if we wait for a dip. Of course more conservative traders may want to do just that and wait for a little pull back, maybe near $11.25-11.00.

I'm using a wide stop loss given PCX's recent volatility. Buy the stock now. We'll take profits at $13.90. We'll cautiously set a secondary target at $16.75 but the plan is to exit ahead of the late October earnings report.

Annotated chart:

Entry on   October 05 at $11.78 
Change since picked:     + 0.00   			
Earnings Date          10/28/09 (unconfirmed)    
Average Daily Volume:       6.4 million 
Listed on   October 05, 2009    



In Play Updates and Reviews

Financials & Commodities Rally

by James Brown

Click here to email James Brown


BULLISH Play Updates

Airgas Inc. - ARG - close: 47.60 change: +0.30 stop: 44.75

ARG's bounce was a bit of an under performer with a 0.6% gain versus the S&P 500's 1.4% gain. If shares can clear their 10-dma then maybe I'd be willing to jump in again. Otherwise wait for another test lower near $46.00.

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 $77 target.

Entry on September 25 at $47.25
Change since picked:     + 0.35   			
Earnings Date          10/29/09 (confirmed)    
Average Daily Volume:       1.5 million 
Listed on September 19, 2009    


BE Aerospace - BEAV - close: 18.88 change: +0.59 stop: 17.90

The almost always volatile BEAV didn't disappoint. Shares rallied with a 3.2% gain. This looks like a new bullish entry point to buy the stock. Our first target is $22.25.

Entry on September 12 at $19.19 
Change since picked:     - 0.31   			
Earnings Date          10/27/09 (unconfirmed)    
Average Daily Volume:       834 thousand
Listed on September 12, 2009    


Cullen Frost Bankers - CFR - close: 50.59 change: +0.21 stop: 48.90

Financial stocks rallied the most on Monday and yet CFR failed to participate. The trend in CFR is still bullish but I'm a little surprised by the relative weakness today. Our first target is $53.00.

Entry on September 26 at $50.42 
Change since picked:     + 0.17   			
Earnings Date          10/21/09 (unconfirmed)    
Average Daily Volume:       419 thousand
Listed on September 26, 2009    


Carpenter Tech. - CRS - close: 23.53 change: +1.26 stop: 21.45

Over the weekend I suggested buying the dip. If you missed it this morning I would still be tempted to do so now.

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:     + 2.08
                             /1st target hit @ 24.90 (+16.0%)
Earnings Date          10/28/09 (unconfirmed)    
Average Daily Volume:       536 thousand
Listed on September 05, 2009    


General Electric - GE - close: 15.83 change: +0.47 stop: 14.75

GE displayed relative strength with a 3% gain but the stock is nearing what could be short-term resistance near $16.00. I'm not suggesting new positions at these levels.

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:     + 0.34
                            /1st target hit @ 17.25 (+11.3%)
Earnings Date          10/16/09 (confirmed)    
Average Daily Volume:        83 million 
Listed on September 14, 2009    


Gold Fields Ltd - GFI - close: 13.97 change: +0.69 stop: 12.99

A drop in the U.S. dollar fueled a nice rally for commodities. Gold futures bounced back toward their recent highs. GFI delivered a nice return with a 5.1% gain. I would now consider new bullish positions again.

Our first target is $15.75. The Point & Figure chart is very bullish with a $21 target.

Entry on September 30 at $13.78 
Change since picked:     + 0.19   			
Earnings Date          10/29/09 (unconfirmed)    
Average Daily Volume:       7.7 million 
Listed on September 30, 2009    


Starwood Hotels - HOT - close: 30.98 change: +1.28 stop: 28.95

HOT delivered a nice bounce (+4.3%). This looks like a new bullish entry point but I could see waiting for a little more confirmation. Consider using a move over $31.30 as a potential entry. Remember to use very small position sizes.

Our first target is $34.75. Our second target is $37.50. FYI: HOT has above average short interest (more than 15% of the float).

Entry on   October 01 at $31.00
Change since picked:     - 0.02   			
Earnings Date          10/27/09 (unconfirmed)    
Average Daily Volume:       3.4 million 
Listed on September 19, 2009    


Microsoft - MSFT - close: 24.64 change: -0.32 stop: 23.70

Hmm... MSFT under performed the rest of the market. Shares lost 1.2%. If MSFT closes under Friday's low (24.43) it will be a breakdown of the three-month bullish trendline, which may be a signal to exit. Our target is $27.75.

Entry on      July 27 at $23.00
Change since picked:     + 1.64   			
Earnings Date          07/23/09 (confirmed)    
Average Daily Volume:        58 million 
Listed on  July 23, 2009    


NII Holdings - NIHD - close: 28.96 change: +0.53 stop: 24.90

There is no change from my prior comments. We're looking to buy a dip at $26.75. If triggered our first target is $31.00. FYI: The P&F chart is very bullish with a $57 target.

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    


Pride Intl. Inc. - PDE - close: 29.72 change: +0.94 stop: 25.49

The bounce in PDE is certainly encouraging but we don't want to chase it. Currently our trigger to buy PDE is at $27.00.

If triggered our first target is $30.75. 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 @ 27.00
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: 2.88 change: -0.04 stop: 2.69

Uh-oh! PLA showed relative weakness and closed under short-term technical support at the 30-dma. 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:     + 0.23 
                            /take profits 09/16/09 (+17.7%)
Earnings Date          11/05/09 (unconfirmed)    
Average Daily Volume:       370 thousand
Listed on  August 29, 2009    


Pioneer Natural Res. - PXD - cls: 36.11 change: +1.72 stop: 28.95

Readers may want to consider small, aggressive positions on a breakout above resistance near $36.75. For the moment our plan is to buy a dip at $30.50.

If triggered our first target is $34.50. Our second target is $38.50. The Point & Figure chart is bullish with a $50 target.

Entry on September xx at $xx.xx <-- TRIGGER @ 30.50
Change since picked:     + 0.00   			
Earnings Date          11/04/09 (unconfirmed)    
Average Daily Volume:       2.1 million 
Listed on September 26, 2009    


Rockwell Automation - ROK - close: 41.29 change: +0.54 stop: 39.95

ROK is still bouncing from the $40 zone but shares remain under their 50-dma. Wait for a new bounce over $42.00 before considering new positions. Our first target is the $49.00 mark. Our time frame is several weeks.

Entry on September 10 at $43.71 /gap higher entry
                           /originally listed at $43.15
Change since picked:     - 2.42   			
Earnings Date          11/10/09 (unconfirmed)    
Average Daily Volume:       1.4 million 
Listed on September 10, 2009    


Market Vectors: Steel - SLX - close: 52.23 change: +1.93 stop: 47.49

Commodity stocks performed well and the SLX gained 3.8%. I suggested waiting for some follow through and we got it today!

Our first target is $54.75. Our second target is $59.50. Our time frame is several weeks.

Entry on   October 01 at $50.25 *triggered
Change since picked:     + 1.98   			
Earnings Date          00/00/00 
Average Daily Volume:       309 thousand
Listed on September 19, 2009    


Stryker Corp. - SYK - close: 44.54 change: +0.61 stop: 40.65

I was expecting SYK to dip toward $42.00 but shares found support at their 40-dma for the second day in a row. If SYK can break the two-week trendline of lower highs then we may want to adjust our entry point to buy strength instead of a pull back.

Currently our trigger is to buy SYK at $42.50. Keep an eye on the $45.00 level. If SYK closes over $45.00 we might adjust our entry point.

If triggered at $42.50 our first target is $46.00.

Entry on   October xx at $xx.xx <-- TRIGGER @ 42.50
Change since picked:     + 0.00   			
Earnings Date          10/20/09 (confirmed)    
Average Daily Volume:       3.2 million 
Listed on   October 03, 2009    


BEARISH Play Updates

Eli Lilly & Co - LLY - close: 32.47 change: -0.04 stop: 32.85

We may not have enough time for this trade to play out.

I'm suggesting a trigger to open bearish positions at $31.85. If triggered our first target is $30.05. We don't want to hold over LLY's earnings announcement in the latter half of October.

Entry on September xx at $xx.xx <-- TRIGGER 31.85
Change since picked:     + 0.00   			
Earnings Date          10/20/09 (unconfirmed)    
Average Daily Volume:       6.6 million 
Listed on September 26, 2009    


U.S. Oil ETF - USO - close: 36.18 change: +0.31 stop: 37.25

A drop in the U.S. dollar fueled a rally in commodities and the USO gained 0.8%. This ETF is still under previous support and what should be new resistance at its long-term trendline it broke in September. Yet on a short-term basis today almost looks like a bullish breakout over the three-week pattern of lower highs. Readers may want to wait for a new drop under $35.50 or $35.00 before launching bearish positions. Our first target is $33.00 near the 200-dma. Our second target is $30.25.

Entry on   October 03 at $35.87 
Change since picked:     + 0.31   			
Earnings Date          00/00/00 
Average Daily Volume:      13.7 million 
Listed on   October 03, 2009