Option Investor
Newsletter

Daily Newsletter, Monday, 10/12/2009

Table of Contents

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

Market Wrap

Earnings Optimism Lifts Stocks To One-Year High

by Todd Shriber

Click here to email Todd Shriber
Stocks got a boost on Monday as market participants continue to remain optimistic about the latest round of earnings reports, sending the S&P 500 higher by 0.4% to a one-year high of 1076.19. The Dow Jones Industrial Average added 20.86 points to close at 9885.8 while the Nasdaq was the laggard of the major U.S. indexes, shedding less than a point to close 2139.14. Trading was light due to the Columbus Day holiday with just 6.6 billion shares changing hands across all U.S. exchanges, the lowest total since the first trading day of 2009.

Market Stats Table

As I always say, an up day, at least for two of the three major indexes, is better than a down day, but in no way was Monday's trade a sequel to Columbus Day 2008, which delivered a 1000 point gain for the Dow. Familiar themes continued to play out, helping bolster stocks, namely a plummeting U.S. dollar and rising crude oil and gold prices. Simply put, the U.S. dollar is weak and there appears to be little dollar bulls can do to right the ship as Uncle Sam continues to issue debt at a prodigious pace and investors renew their favor for stocks that derive a bulk of their sales from international markets.

With earnings season set to kick into high gear this week, it is reasonable to expect that more than a few bellwether names will report higher profits due to favorable currency exchanges. So there is some benefit to a weak dollar, at least in small doses, prolonged dollar weakness, which the market appears to be factoring, is not the best news in the world. The chart of the U.S. Dollar Index below shows just how ugly things have been for the greenback over the past few months.

The S&P 500 and the dollar are as uncorrelated as they have been at any point in the last 40 years, according to Bloomberg data. While the S&P 500 is up 59% from its March 9 lows, the Dollar Index is down 14% in the same period.

Dollar Index

Of a course a weak dollar usually buoys the fortunes of oil bulls and that was the case on Monday as crude rose for a third day, gaining 2.1% to $73.27. Yeah, oil is certainly approaching ''been there, done that'' territory with this latest move toward $75 a barrel, where it has faltered several times in previous months. The latest commitment of traders report shows that oil traders are leaning bullish with 50,000 more long positions than short in the latest report, but that is also significantly less bullish than when oil made a similar move to $75.

Crude has not trade above $75 a barrel since August and that figure has firmly established itself as the next resistance point for black gold. Demand statistics and inventory data do not help crude's cause, so oil bulls will likely continue to rely on a faltering dollar to lift crude higher.

Crude Chart

Oil stocks benefited from the rally in the underlying commodity as oil and gas producers led the gains among the 10 industry groups tracked within the S&P 500. ExxonMobil (XOM) gained 1.2% to $70.13, good for a sixth consecutive up day for America's largest energy producer. Chevron, the second-largest U.S. oil explorer, added 91 cents to close at $73.67 as gains in both ExxonMobil and Chevron helped lift the Dow higher.

Oil services names also got a jolt today, not surprising given that they are actually more intimately correlated to the price of crude than the likes of Chevron and ExxonMobil. Halliburton (HAL) and Schlumberger (SLB) were both up more than 2% today while Diamond Offshore (DO) and National Oilwell Varco (NOV) barely missed joining the 2% gainer club. That means it was a bullish day for the Oil Services HOLDRs ETF (OIH), which I mention frequently. OIH touched a new 52-week high of $125.36 before dropping back a bit to close at $123.91.

With crude hovering near a critical resistance area, a strong move beyond $75 a barrel could lift OIH a few points and a move beyond $80 a barrel could take OIH toward the $135 area. The chart is below.

OIH Chart

But allow me to be honest. The market is in throws of a new earnings season and those numbers are going to be the catalyst that moves stocks over the next several weeks and that means all eyes are going to be turned toward the quality of the reports and any guidance that is delivered. Some strategists are advocating a cautious approach because stocks have already priced in better-than-expected earnings and with so many stocks resting at or near their 52-week highs, a little caution is probably warranted.

S&P 500 members are expected to report a ninth consecutive quarter of declining earnings, the longest streak since the Great Depression, according to Bloomberg. Earnings will decline in the third quarter by roughly 22% from the third quarter of 2008 before growth resumes in the fourth quarter.

S&P 500 Earnings

One stock that got earnings season off to a good start was Black & Decker (BDK), which soared $3.58, or 7.6%, to $50.82 on Monday. The maker of Delta and Dewalt tools raised its third-quarter outlook due to some help from, what else, cost-cutting. In all fairness to Black & Decker, the company did say its third-quarter results would be helped by lower tool prices and a lower tax rate.

The company said it expects to earn 91 cents a share, well above previous guidance of 35 cents to 45 cents. Sure, 1,200 job cuts probably made that lofty new number attainable and the new tax rate is chipping in 14 cents a share, but beating previous guidance and analyst estimates by more than double, regardless of the circumstances, is a move that the Street will applaud and did so with Black & Decker today. A Sterne Agee analyst raised his price target on Black & Decker to $56 from $41.

While Black & Decker does not have ''bellwether'' status, the news from the company might serve to increase investor optimism that this earnings season will be chocked full of positive surprises. More clarity on that theory should be delivered as early as tomorrow when Dow component and drug giant Johnson & Johnson (JNJ) reports third-quarter results.

Analysts are expecting J&J to earn $1.13 a share, though it is probably a fair to expect that number to come in around $1.14 or $1.15 a share given what the company has done its previous four earnings reports. The stock is relatively cheap at less than 14 times trailing earnings and is within earshot of its 52-week high. J&J has cleared some resistance below $62 and has some room to run to $67 and perhaps beyond.

J&J Chart

And if you are looking for bellwethers, the after market action on Tuesday will be worth watching with two significant reports. I will start with the ''minor'' one of the pair before getting into the more popular one.

Truthfully, it is not fair to underestimate the earnings from a major railroad operator like CSX (CSX), which reports after the close tomorrow. Transportation stocks like CSX are usually good barometers for the overall health of the economy and that means the CSX report is worth watching. If you find yourself in the Dow Theory camp, you probably believe that the Dow Jones Transportation Average portends moves in the Industrials and as CSX is a member of the Transportation index, it does have some bellwether-like status.

CSX is expected to post earnings of 71 cents a share and the stock has nearly doubled the returns offered by the S&P 500 over the past three months, but still has some room to run to its 52-week high of $53.84.

While the CSX report will be worth watching, it is very well could be overshadowed by Intel's third-quarter report, which is also released after the close Tuesday. Intel's report is sure to drive Wednesday's trade, but before I jump that far ahead, it is worth remembering that a bullish second-quarter report from Intel was one of the primary catalysts that drove stocks higher during the previous earnings season.

Intel is a Dow component, one of the largest members of the Nasdaq 100 and the largest chipmaker in the world, so to say Intel's earnings report is ''important'' is somewhat of an understatement. The stock touched a 52-week high of $20.65 on Monday before peeling back a bit and that may indicate some investors were gobbling up shares ahead of the earnings report.

Intel is a bellwether and good earnings there might portend good earnings for a majority of blue chip firms. If nothing else, a bullish report from Intel should bolster the fortunes of the technology sector and perhaps rejuvenate Nasdaq bulls. Analysts are expecting Intel to post a profit of 27 cents a share and an upside surprise means we should see a higher open for stocks on Wednesday morning.

Supported by its 50-day moving average, a strong earnings report could bring Intel to not only a fresh 52-week high, but close to resistance in the $22.50 area as well.

Intel Chart

Looking at the charts, it was disappointing to see the Dow tease 9900 and not close there, but that may have been more the product of anemic volume than anything. With two Dow components, J&J and Intel, reporting earnings tomorrow, the index will have ample ammunition with which to traverse 9900 and establish another run toward 10000.

A worst case scenario would be that J&J disappoints and Intel follows that up with its own dour news and that could lead to open in the 9750-9775 area on Wednesday. From there, 9600 could become an issue, but positive earnings announcements might 9600 unthinkable in the near-term.

Dow Chart

With Monday's close at 1076.19, the S&P 500 is residing comfortably near the September peak of 1080.15, indicating investors may truly be expecting some cheery earnings report. Once 1080 is cleared, 1100 becomes the number everyone will focus on, if they are not doing so already. After 1100, the index should bump into resistance around 1120-1125. If earnings disappoint and 1050 is violated on the downside, a tumble to 1025 could be in the offing and from there the picture gets a lot less attractive with 975 becoming a possibility.

S&P 500 Chart

It would not be surprising to see some lethargic trade on the Nasdaq tomorrow as tech investors wait for the Intel numbers to be released. Another scenario to consider is that investors just will not be able to contain themselves and will buy up Intel shares during Tuesday's session and that could drive the Nasdaq higher.

Clearing the September peak of 2167.70 would be a good starting point and that needs to happen before resistance around 2180 can be dealt with. Earnings season should be the deciding factor in the Nasdaq's chances to conquer 2200 or fall back to 2050 or worse.

Nasdaq Chart

Earnings season is here and, believe it or not, that actually makes things pretty simple. Can companies across a healthy spectrum of sectors quench investors' thirst for top line AND profit growth? Or will the third quarter provide a sequel to the second quarter where companies could only beat meager estimates on the back of cost-cutting? The answers to those questions will play a heavy hand not only in the near-term, but for the rest of 2009 as well. I am filling in for Jim tomorrow, so I look forward to seeing again in 24 yours.


New Plays

Testing The Highs

by James Brown

Click here to email James Brown

Editor's Note:

Our bias is bullish for the market but the S&P 500 index is testing resistance near 1,080. This would be a logical spot for stocks to pull back just a bit after last week's impressive rally.

I'm not adding any new candidates tonight.


In Play Updates and Reviews

Low-Volume Monday

by James Brown

Click here to email James Brown

Monday turned out to be a relatively quiet session with the bond market closed and investors waiting for earnings season to pick up speed.


BULLISH Play Updates

Apartment Investment & Mgmt - AIV - cls: 15.47 chg: +0.08 stop: 13.49

AIV added another 0.5% on Monday. We can look for short-term support at $15.00 and $14.50. More conservative traders may want to raise their stop toward $14.00. Our first target to take profits is at $16.50. Our second target is $18.50 but we may not have time. The plan is to exit ahead of the October 30th earnings report.

Entry on   October 07 at $14.72 /gap open higher
                            /originally listed at $14.52
Change since picked:     + 0.75   			
Earnings Date          10/30/09 (confirmed)    
Average Daily Volume:       3.6 million 
Listed on   October 07, 2009    


Airgas Inc. - ARG - close: 48.31 change: -0.17 stop: 45.85

ARG is still struggling with the $49.00 level. I would expect a dip toward $47.00 or its 50-dma.

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:     + 1.06   			
Earnings Date          10/29/09 (confirmed)    
Average Daily Volume:       1.5 million 
Listed on September 19, 2009    


AZZ Inc. - AZZ - close: 39.55 change: -0.73 stop: 37.85

AZZ has been showing some volatility lately with an up one day down the next march higher. I'm cautious with the stock under $40.00. Consider buying another bounce near $38.00. Our first target is $44.00. Our second target is $47.50.

Entry on   October 07 at $40.08 /gap open higher
                             /originally listed at $39.73
Change since picked:     - 0.53   			
Earnings Date          01/07/09 (unconfirmed)    
Average Daily Volume:       120 thousand
Listed on   October 07, 2009    


BE Aerospace - BEAV - close: 20.62 change: -0.37 stop: 18.49 *new*

This could be a short-term top for BEAV. The stock rallied to $21.36 and reversed. Look for support near $20.00. I'm raising our stop loss to $18.49. I'm not suggesting new positions at this time. Our target is $22.25.

Entry on September 12 at $19.19 
Change since picked:     + 1.43   			
Earnings Date          10/27/09 (unconfirmed)    
Average Daily Volume:       834 thousand
Listed on September 12, 2009    


Cracker Barrel - CBRL - close: 36.60 chg: +0.60 stop: 32.80

CBRL hit another new high today. I don't see any changes from my weekend comments. If you don't want to chase it here wait for a dip near $35.00. Our first target is $39.75. The Point & Figure chart is forecasting a $57 target.

Entry on   October 10 at $36.00 
Change since picked:     + 0.60   			
Earnings Date          11/24/09 (unconfirmed)    
Average Daily Volume:       322 thousand
Listed on   October 10, 2009    


Check Point Software - CHKP - cls: 29.88 change: +0.26 stop: 27.35

CHKP garnered some positive analyst comments today. The stock gained another 0.8% and is nearing round-number resistance at $39.00. I would prefer to open new positions on a dip near $28.50. Our first target is $32.50.

Entry on   October 06 at $29.19 
Change since picked:     + 0.69   			
Earnings Date          10/27/09 (unconfirmed)    
Average Daily Volume:       2.4 million 
Listed on   October 06, 2009    


Capstone Turbine - CPST - close: 1.36 change: -0.04 stop: 1.18

I would still consider new positions here but readers may want to wait for a dip near $1.30 or the 50-dma. Our first target is $1.75. Our second target is $1.95 but that may be too aggressive given our time frame. We don't want to hold over the November earnings report. FYI: The Point & Figure chart is bullish with a $2.75 target.

Entry on   October 10 at $ 1.40 
Change since picked:     - 0.04   			
Earnings Date          11/09/09 (unconfirmed)    
Average Daily Volume:       3.7 million 
Listed on   October 10, 2009    


Carpenter Tech. - CRS - close: 23.59 change: -0.35 stop: 21.90

CRS displayed some volatility this morning with a gap down at $22.73 and a high of $24.75. I'm not suggesting new 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:     + 2.14
                             /1st target hit @ 24.90 (+16.0%)
Earnings Date          10/28/09 (unconfirmed)    
Average Daily Volume:       536 thousand
Listed on September 05, 2009    


DELL Inc. - DELL - close: 15.42 change: -0.39 stop: 14.75

I warned readers over the weekend that Friday's action looked bearish. Shares lost 2.4% on some follow through lower. We can look for support near $15.00 and its 50-dma. Readers may want to wait for a bounce before considering new positions.

Our first target to take profits is at $16.95. Our second target is $19.75. DELL doesn't move super fast so this play could take several weeks. We'll plan to exit ahead of the mid November earnings report.

Entry on   October 06 at $15.51 
Change since picked:     - 0.09   			
Earnings Date          11/19/09 (unconfirmed)    
Average Daily Volume:      25.6 million 
Listed on   October 06, 2009    


F5 Networks - FFIV - close: 41.68 change: +0.39 stop: 37.75

FFIV hit another new relative high today. I would look for a dip back toward $40.00 as a new entry point. Our first target to take profits is at $44.50. I'd like to aim higher but we may not have time. Earnings are in a couple of weeks.

Entry on   October 07 at $40.63 
Change since picked:     + 1.05   			
Earnings Date          10/21/09 (unconfirmed)    
Average Daily Volume:       1.2 million 
Listed on   October 07, 2009    


General Electric - GE - close: 16.33 change: +0.15 stop: 14.75

GE is still drifting sideways under short-term resistance at $16.50. I'm not suggesting new positions at this time. Please note that we will plan to exit on Thursday, October 15th at the closing bell to avoid holding over earnings on Friday morning.

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:     + 0.84
                            /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: 14.66 change: +0.02 stop: 12.99

Gold stocks were showing a little relative weakness even though gold futures rallied on the session. GFI gained a mere two cents versus a fractional loss for the XAU index and the GDX gold miner ETF. Watch for $14.00 to act as short-term support.

Our first target is $15.75. I'm adding a second target at $19.75. The Point & Figure chart is very bullish with a $21 target.

Entry on September 30 at $13.78 
Change since picked:     + 0.88   			
Earnings Date          10/29/09 (unconfirmed)    
Average Daily Volume:       7.7 million 
Listed on September 30, 2009    


Starwood Hotels - HOT - close: 33.09 change: -0.17 stop: 29.49

HOT spiked to $34.09 this morning but eventually closed lower on the session. If you're looking for a new entry point I'd watch for a bounce in the $31.00-32.00 zone. I'm upping our stop loss to $29.49. Our plan was to use small position sizes to limit our risk.

Our first target is $34.75. I am adjusting our second target to $39.00. FYI: HOT has above average short interest (more than 15% of the float).

Entry on   October 01 at $31.00
Change since picked:     + 2.09   			
Earnings Date          10/27/09 (unconfirmed)    
Average Daily Volume:       3.4 million 
Listed on September 19, 2009    


Microsoft - MSFT - close: 25.72 change: +0.17 stop: 24.40

MSFT is still churning sideways. I don't see any changes from my weekend comments. MSFT reports earnings on October 23rd, which gives about two weeks left for this play. I am raising our stop loss to $24.40. Our target is $27.75.

Entry on      July 27 at $23.00
Change since picked:     + 2.72   			
Earnings Date          10/23/09 (confirmed)    
Average Daily Volume:        58 million 
Listed on  July 23, 2009    


NII Holdings - NIHD - close: 30.78 change: +0.40 stop: 27.60

NIHD is still bouncing and shares are nearing potential resistance at the September and 2009 highs around $31.30. More conservative traders may want to raise their stops. The plan was to use small position sizes (1/2 to 1/4 normal size) to limit risk. Our first target is $33.75. FYI: The P&F chart is very bullish with a $57 target.

Entry on   October 08 at $30.60
Change since picked:     + 0.18   			
Earnings Date          10/22/09 (unconfirmed)    
Average Daily Volume:       3.4 million 
Listed on September 23, 2009    


Petrobras - PBR - close: 48.28 change: +0.32 stop: 43.70

PBR hit another new high for the year. If you are looking for a new entry point I'd wait for a dip near $46.50.

The $50.00 level is likely round-number, psychological resistance so don't be surprised to see PBR pull back on its initial test of the $50 mark.

Our first target is $52.50. Our second target is $59.00. The P&F chart is bullish with a $63 target.

Entry on   October 08 at $46.80
Change since picked:     + 1.48   			
Earnings Date          11/13/09 (unconfirmed)    
Average Daily Volume:      12.8 million 
Listed on   October 07, 2009    


Patriot Coal - PCX - close: 12.77 change: -0.30 stop: 9.95

PCX was looking short-term overbought so it's natural go see some profit taking. I'd look for a dip toward the $11.75-11.00 zone.

I'm using a wide stop loss given PCX's recent volatility. 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.

Entry on   October 05 at $12.14 /gap open higher
                            /originally listed at $11.78
Change since picked:     + 0.63   			
Earnings Date          10/28/09 (unconfirmed)    
Average Daily Volume:       6.4 million 
Listed on   October 05, 2009    


Pride Intl. Inc. - PDE - close: 31.93 change: +0.42 stop: 28.25

I want to urge caution here. The action in PDE looks like a short-term top or bearish reversal although it needs confirmation first. Watch for PDE to find support at $31.00 and $30.00.

Our first target is $34.75. We'll plan to exit ahead of the late October earnings report.

Entry on   October 08 at $31.15
Change since picked:     + 0.78   			
Earnings Date          10/29/09 (unconfirmed)    
Average Daily Volume:       3.7 million 
Listed on September 12, 2009    


Playboy Ent. - PLA - close: 3.35 change: +0.18 stop: 2.78

I'm still not seeing any news on this rally in PLA but I'm not complaining. The stock is up another 5.6% in what could be short covering or takeover speculation. There has been some discussion that Hugh Hefner may be open to selling the company.

The stock tested resistance near $3.40 this morning. It might be time for a little profit taking. 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:     + 0.70 
                            /take profits 09/16/09 (+17.7%)
Earnings Date          11/05/09 (unconfirmed)    
Average Daily Volume:       370 thousand
Listed on  August 29, 2009    


Parker Hannifin - PH - close: 52.78 change: -0.09 stop: 49.90

PH did provide a dip but the low of $52.35 wasn't deep enough. I'm suggesting readers use a trigger to buy PH on a dip at $51.75. If triggered our first target is $55.75. Keep in mind that this is going to be a very short-term play. PH has earnings on October 20th and we don't want to hold over the report.

Entry on   October xx at $xx.xx <-- TRIGGER @ 51.75
Change since picked:     + 0.00   			
Earnings Date          10/20/09 (confirmed)    
Average Daily Volume:       1.6 million 
Listed on   October 10, 2009    


Pioneer Natural Res. - PXD - cls: 40.20 change: +0.67 stop: 33.40

PXD is growing more overbought by the day. I'm unwilling to chase it here. If we don't see some profit taking tomorrow I'll drop it.

We'll keep the trigger to buy a dip at $36.50 for now. If triggered our first target is $39.95. Our second target is $43.50. The Point & Figure chart is bullish with a $50 target.

Entry on September xx at $xx.xx <-- TRIGGER @ 36.50
Change since picked:     + 0.00   			
Earnings Date          11/04/09 (unconfirmed)    
Average Daily Volume:       2.1 million 
Listed on September 26, 2009    


Market Vectors: Steel - SLX - close: 54.85 change: -0.15 stop: 49.95

SLX is still testing resistance in the $55-56 zone. It might be time for a little pull back. I'm not suggesting new positions at this time. SLX has already hit our first target at $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:     + 4.60   			
                            /1st target hit @ 54.75 (+8.9%)
Earnings Date          00/00/00 
Average Daily Volume:       309 thousand
Listed on September 19, 2009    


Stryker Corp. - SYK - close: 45.40 change: -0.12 stop: 42.49

The short-term trend in SYK is still up but I remain cautious on the stock. More conservative traders may want to raise their stops a bit.

Our first target is $47.75.

Entry on   October 06 at $44.54 *new entry 
Change since picked:     + 0.86   			
Earnings Date          10/20/09 (confirmed)    
Average Daily Volume:       3.2 million 
Listed on   October 03, 2009    


Tractor Supply Co. - TSCO - close: 53.71 change: +0.38 stop: 47.40

TSCO retested last week's high but failed to close above it. The stock is very short-term overbought and due for a pull back. I would expect TSCO to fill the gap, which means a dip back toward $51.00.

Our first target to take profits is at $54.75. Our second target is $57.45. FYI: The Point & Figure chart is very bullish with a $72 target.

Entry on   October 06 at $50.56 
Change since picked:     + 3.15   			
Earnings Date          10/21/09 (unconfirmed)    
Average Daily Volume:       384 thousand
Listed on   October 06, 2009    


VisionChina Media - VISN - close: 8.72 change: +0.20 stop: 7.45

VISN may have posted a gain but the action today was bearish. The stock produced a failed rally under $9.00 this morning. I am still expecting a dip toward $8.15-8.00.

Our first target is $10.90. Our second target is $13.75. The Point & Figure chart is bullish with a $15.00 target. My time frame is several weeks (maybe year end).

Entry on   October 07 at $ 8.53 
Change since picked:     + 0.19   			
Earnings Date          10/29/09 (unconfirmed)    
Average Daily Volume:       407 thousand
Listed on   October 07, 2009    


BEARISH Play Updates

*We currently do not have any bearish play updates*