Option Investor
Newsletter

Daily Newsletter, Monday, 10/26/2009

Table of Contents

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

Market Wrap

Commodities, Financials Lead Stocks Lower

by Todd Shriber

Click here to email Todd Shriber
This certainly was not the start to the week that the bulls were hoping for as it has become apparent that the Dow Jones Industrial Average and S&P 500 have failed at their critical levels of 10000 and 1100. Extending last week's losses, the Dow turned in another triple-digit loss, sliding 104 points, or 1.1%, to close at 9867.96. The S&P 500 tumbled 1.2% to finish the day at 1066.95. The Nasdaq was less bad, but still down, retreating 12.62 points to close at 2141.85.

Market Stats Table

In a sign that volatility that may be returning (did it ever leave?), Monday marked the Dow's third consecutive triple-digit move and the second straight triple-digit loss. Factor in a 97-point for the index last Monday and a 92-point move last Wednesday and the Dow has been behaving like it did a year ago. Proving that any excuse will fly to answer for down days, one of the culprits behind Monday's declines was the allegedly ''stronger'' U.S. dollar. The greenback rebounded from a 14-month low against the euro and that was supposedly one reason why five stocks on the New York Stock Exchange fell for every one advancing issue.

I am not buying it as one day of dollar advances against the euro, or any other currency, does not beget a new trend. Nor does it signal a reversal in the current trend of extreme dollar weakness, which I have mentioned several times recently. I included the latest U.S. Dollar Index chart below, which illustrates nothing but a bearish trend for the greenback.

Dollar Index Chart

Have a look at a chart of the euro/dollar. Sure, the euro may be stalling out around 1.50, but that is by no means a reversal in a trend that is now more than six months old. In other words, dollar strength as a reason for down day in stocks today is nothing more than a lame excuse.

EUR/USD

By all appearances, this should have been a decent day for stocks. The market moved higher for much of the morning as investors continued to be jovial over third-quarter profit reports. Nearly 80% of the S&P 500 members that have reported results have beaten estimates, compared with 72.3% for the period ended in June, according to Bloomberg News. There were only a few big earnings reports before the bell and they were not that bad.

Verizon (VZ), a Dow component and the largest wireless carrier in the U.S., earned 60 cents a share excluding items and that met analyst estimates. Revenue climbed 10.2% to $27.27 billion in the third quarter. Still, Verizon shares finished the day down. Oil services giant National Oilwell Varco (NOV) said third-quarter profits fell by 30%, but the company managed to beat both profit and revenue estimates, yet the shares got rocked, shedding 5.4%.

That brings me to at least a more plausible reason for why stocks decline today. Both gold and crude oil were taken to the woodshed. Crude for December delivery failed to hold the $80 per barrel level, shedding 2.3% to close at $78.63. Gold lost nearly $16, finishing the day below $1040 an ounce at $1039.90. So it was not just equity indexes that failed to hold to critical levels, it was commodities as well.

The carnage was well spread throughout the commodities sector. Monsanto (MON), the world's largest maker of agriculture seeds, shed more than 6% after Goldman Sachs lowered its earnings estimates on the company. Closing at $70.69, Monsanto is now much closer to its 52-week low of $63.47 than it is to its 52-week high of $94.95. Today's plunge took Monsanto below both its 50 and 200-day moving averages and the chart (below) shows a series of lower highs and lower lows.

Monsanto Chart

Metals miners were certainly not immune either. Newmont Mining (NEM), the largest U.S. gold producer, fell 3.5% and Freeport-McMoRan Copper & Gold (FCX), the world's largest copper producer, shows it does now to do something other than go up, as it fell below mental resistance at $80 a share to close at $79.48.

With AK Steel (AKS) and U.S. Steel (X) slated to report earnings tomorrow, the commodities sector will once again be in play and that could make the SPDR S&P Metals & Mining Index (XME) worth watching. The aforementioned steel stocks and Freeport are among this ETF's top 10 holdings and with XME nearing support at its 50-day line, tomorrow could be an interesting day for XME and its constituents.

XME Chart

And not surprisingly, financials joined in on the fun, falling 3.3% as a group, good for the steepest decline of any sector tracked by the S&P 500. In what is becoming a familiar refrain, noted bank analyst Dick Bove makes some negative comments about a bank or two and the market reacts accordingly. This scenario was evident last week when Bove questioned the sustainability of Wells Fargo's (WFC) earnings and it was once again apparent today.

Bank of America (BAC), the largest U.S. bank by assets and a Dow member, fell 5.1% after Bove warned that Uncle Sam wants the bank to raise $45 billion in capital before it can redeem preferred shares issued under TARP. That means Bank of America might have to significantly dilute current shareholders by issuing up to 3 billion new shares, increasing its current float by 35%.

Bank of America was actually down as much 7.1% during Monday's session, but rival Citigroup added Bank of America to its ''top picks list'' calling the shares ''attractive'' after today's bearish trade. Bove's comments were not limited to Bank of America. The analyst said loan losses at regional players like Fifth Third (FITB), SunTrust (STI) and U.S. Bancorp (USB) remain problematic. Then again, these comments should not be surprising since Bove said essentially the same thing last week about Wells Fargo.

U.S. Bancorp, a Warren Buffett favorite, was the ''winner'' of the group, falling just 3.2%. Fifth Third lost nearly 8% and SunTrust, the seventh-largest U.S. bank, shed 5.4%. All of that dour trade led to a glum day for the iShares Dow Jones US Regional Banks ETF (IAT), which counts those three banks among its top 10 holdings. IAT lost 2.7% on Monday and dipped below support at the 50-day moving average. Holding $20 might be a tough feat for IAT if the Street continues to voice concern about rising loan losses and commercial real estate exposure at the regional banks.

IAT Chart

In addition to the steel names I already mentioned, stocks to watch on Tuesday include Baidu (BIDU). The Google (GOOG) of China took a nasty dive in after-hours trading after third-quarter revenue missed Street estimates and the company warned fourth-quarter sales would come in between $174 million and $180 million, well below the average analyst estimate of $204.7 million. Baidu shares closed at $432.97, but as I write this, they are trading at $376.50 in the after-hours session. Yikes.

Oil stocks should also be on the move again as BP (BP) delivers third-quarter results. Analysts are expecting the oil explorer to post a profit of $1.04 a share on revenue of $63.7 billion. That would be a significant drop from the year-earlier profit of $2.84 a share. Refiner Valero (VLO) is expected to post a loss of 10 cents a share on revenue of $19.24 billion. Refiners have been hamstrung recently by rising oil inventories and Valero's results will likely reflect that glum sentiment.

Visa (V) could give a jolt to the financials as it delivers earnings before the bell with analysts expecting a profit of 72 cents a share. If you are looking for an earnings report to watch after the close tomorrow, Norfolk Southern (NSC) should be of interest given the negative comments delivered by several of its railroad rivals last week. There are several earnings reports from minor players in the railroad space later this week and Norfolk Southern's report could set the tone for the group's weekly performance.

The Dow Jones Transportation Average has been a mess recently and the corresponding ETF, the iShares Dow Jones Transportation Index (IYT) has now closed below its 50-day moving average for two consecutive days. Norfolk Southern is one of the ETF's 10 largest holdings and the chart below is not the prettiest picture in the world.

IYT Chart

The economic calendar is fairly light with the Case Shiller Home Price Index due out at 9 AM and the Consumer Confidence due out at 10 AM. The latter is expected to show a reading of 51 down from 53.1 in September. The Richmond Fed Survey will also be released at 10 AM.

Looking at the charts, it is apparent that the Dow failed to break resistance at 10100 three times and today's break of support at 9950 is not the most encouraging sign, especially since it came on decent volume. The Dow has been finding support at most of the 50-point intervals and bounced off today's low of 9849, but continued moves lower could make 9550 an issue. From there, 9410 could come into play.

That said, there are some catalysts that could lift the Dow later in the week as both Procter & Gamble (PG) and ExxonMobil (XOM) report earnings, but if the Dow is below 9800 by that time, those two reports may not be enough to lift the index back above 10000.

Dow Chart

The S&P 500 failed twice at 1100 and typically after a bad Friday, the index bounces back on Monday. That trend did not continue today and while I am not going to say that is a bearish signal, I will say that closing below 1075 is. That could mean 1050 is in play over the near-term and a violation of 1050 could take us to 1020. Sure, the earnings reports are there to lift stocks higher, but if stocks are moving lower as 80% of the S&P 500 member firms beat estimates, what is it going to take to get stocks back on track?

S&P 500 Chart

The Nasdaq retreated on Friday despite the help it got from Amazon (AMZN) and Microsoft (MSFT) and not that Baidu is as important as the other two, but it is reasonable to expect the Nasdaq might open lower on Tuesday due to Baidu's disappointing earnings update. If investors continue to cast aside commodities, financials, energy and transports that could lead them into the waiting arms of tech stocks. Then again, there are no guarantees.

The Nasdaq could not muster the strength to break 2200 and support at 2160 is a thing of the past. Monday's close at 2141.85 indicates a move to 2100 might be more probable than a move to 2200.

Nasdaq Chart

Over the course of this rally higher, there have been calls that stocks look ''tired'' or the market looks to be ''topping'' or the bulls look to ''losing steam.'' Whatever way you choose to describe such a situation, the bulls have been resilient and that is why it is hard to count them out now. The other side of the coin is earnings enthusiasm is waning and if that condition persists, the bulls will lack the cache to move stocks higher.


New Plays

Losing Momentum

by James Brown

Click here to email James Brown


NEW BEARISH Plays

Financial SPDRs - XLF - close: 14.71 change: -0.39 stop: 15.51

Why We Like It:
The banks look weak. While longer-term the trend from the March lows is still up they're definitely losing momentum. I am suggesting small bearish positions now on the XLF to capture any short-term correction. Our target is $13.10 but that might be a little optimistic. The rising 100-dma and the exponential 200-dma will probably offer some support. A very similar play would be bearish positions on the IYF financial ishares.

Annotated chart:

Entry on   October 26 at $14.71 (small positions) 
Change since picked:     + 0.00   			
Earnings Date          --/--/-- 
Average Daily Volume:       102 million 
Listed on   October 26, 2009    



In Play Updates and Reviews

Getting Smaller

by James Brown

Click here to email James Brown

Our play list is shrinking as the stock market contracts.


BULLISH Play Updates

Airgas Inc. - ARG - close: 48.71 change: -0.63 stop: 48.49

ARG has pulled back to very short-term support. If it doesn't bounce here we'll be stopped out very quickly tomorrow. I am not suggesting new bullish positions at this time. We plan to exit ahead of the October 29th earnings report.

Our first target is $52.45.

Entry on September 25 at $47.25
Change since picked:     + 1.46  			
Earnings Date          10/29/09 (confirmed)    
Average Daily Volume:       1.5 million 
Listed on September 19, 2009    


Sotheby's - BID - close: 17.06 change: -0.54 stop: 16.80

I talked about the $17.00 level with its 50-dma acting as support. That's exactly where BID fell to this afternoon. If we don't see a bounce tomorrow morning we'll bet stopped out very soon. I'm not suggesting new bullish positions at this time.

The plan was to use small position sizes to limit our risk. Our first target is $19.95 since the $20.00 mark could be round-number resistance. Our second target is $22.00. Currently the Point & Figure chart is bullish with a $30 target. We do not want to hold over the early November earnings report.

Entry on   October 13 at $18.21 (small pos 1/2 to 1/4)
Change since picked:     - 1.15   			
Earnings Date          11/05/09 (unconfirmed)    
Average Daily Volume:       861 thousand
Listed on   October 13, 2009    


HMS Holdings - HMSY - close: 41.24 change: +0.40 stop: 39.90

HMSY held up reasonably well on Monday. However, more cautious traders may want to exit early anyway given the weakness in the S&P 500. I'm not suggesting new positions. We only have three days left. The plan is to exit on Thursday at the closing bell to avoid holding over earnings on Friday morning.

Our upside target is $44.90.

Entry on   October 17 at $41.55 /gap open higher 
                           /originally listed at $41.30
Change since picked:     - 0.71   			
Earnings Date          10/30/09 (confirmed)    
Average Daily Volume:       227 thousand
Listed on   October 17, 2009    


Jacobs Engineering - JEC - close: 45.99 change: -0.93 stop: 44.75

JEC painted an ugly session. The stock traded to $47.90, a new relative high, and then fell back toward $46.00. This could be interpreted as a short-term bearish reversal pattern. More cautious traders may want to exit early right now. I am not suggesting new bullish positions. Our first target is $49.50. Our second target is $53.00 but we'll plan to exit ahead of the mid November earnings report.

Entry on   October 15 at $45.88 
Change since picked:     + 0.11   			
Earnings Date          11/17/09 (unconfirmed)    
Average Daily Volume:       1.2 million 
Listed on   October 15, 2009    


Petrobras - PBR - close: 49.06 change: -0.53 stop: 45.95

There is no surprise here. I've been warning readers to expect a dip back toward the $47-46 zone. More conservative traders not interested in enduring that sort of volatility will want to exit early now. I'm not suggesting new positions at this time.

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:     + 2.26  			
Earnings Date          11/13/09 (unconfirmed)    
Average Daily Volume:      12.8 million 
Listed on   October 07, 2009    


Pride Intl. Inc. - PDE - close: 31.99 change: -0.96 stop: 31.15

The dollar strength pulled oil lower and the oil stocks sold off. PDE fell 2.9%. We only have a few days left. More conservative traders may want to exit early now. We plan to exit ahead of the October 29th earnings. Our final target remains $34.75. I am not suggesting new positions at this time.

Entry on   October 08 at $31.15
Change since picked:     + 0.84
                         /sell half @ 32.95 (+5.7%)
Earnings Date          10/29/09 (confirmed)    
Average Daily Volume:       3.7 million 
Listed on September 12, 2009    


UltraShort Russell - TWM - close: 29.01 change: +0.60 stop: 26.30

The TWM is still bouncing as the market corrects. This is the ultra-short (double short) ETF on the Russell 2000 index that seeks to deliver twice the inverse of the daily performance of the Russell 2000.

Our first target is $31.90. Our second target is $34.50.

Entry on   October 24 at $28.41 
Change since picked:     + 0.60   			
Earnings Date          00/00/00 
Average Daily Volume:       4.2 million 
Listed on   October 24, 2009    


VisionChina Media - VISN - close: 9.64 change: -0.63 stop: 8.65

I want to repeat that if you haven't taken profits yet in VISN I strongly suggest you do so now. More conservative traders may want to raise their stops closer to $9.00. I expect the pull back to continue. We are not suggesting new positions at this time.

Over the weekend we adjusted the plan to sell half (shares were at $10.40 this morning). Our second and final target is $12.45. I'm not suggesting new positions at this time. This is a very aggressive trade and we wanted to keep our positions small.

Entry on   October 07 at $ 8.53 
Change since picked:     + 1.11
                          /take profits 10/24/09 (+20.3%)
Earnings Date          10/29/09 (unconfirmed)    
Average Daily Volume:       407 thousand
Listed on   October 07, 2009    


BEARISH Play Updates

Avis Budget Group - CAR - close: 9.96 change: -0.41 stop: 12.05

CAR continues to sink. Shares are testing round-number support at $10.00. We can expect to see a short-term oversold bounce from here but a failed rally under the 50-dma could be used as a new entry point. Our target is $9.55.

NOTE: CAR has a high amount of short interest, about 9% of the 101 million-share float. That raises the risk of a short squeeze. Readers may want to consider using put options to limit risk. A stop loss doesn't always work.

Entry on   October 20 at $11.25
Change since picked:     - 1.29   			
Earnings Date          11/02/09 (confirmed)    
Average Daily Volume:       3.8 million 
Listed on   October 17, 2009    


Navistar Intl. - NAV - close: 35.32 change: -0.09 stop: 40.25

NAV is still testing support at $35.00. We only want to open half of our position now. We'll plan on opening the second half of our position on a bounce to $37.50. Our first target is $30.50. Our second target is $27.75.

Entry on   October 24 at $35.41 (buy half a position)
Change since picked:     - 0.09   			
Earnings Date          12/30/09 (unconfirmed)    
Average Daily Volume:       1.5 million 
Listed on   October 24, 2009    


NASDAQ OMX Group - NDAQ - close: 19.24 chg: -0.61 stop: 20.65

Our new play on the NDAQ is now open. Shares broke down to new lows and hit our trigger to open bearish positions at $19.45. Our target to take profits is at $17.85. We'll plan to exit ahead of the November 5th earnings report.

chart:

Entry on   October 26 at $19.45
Change since picked:     - 0.21   			
Earnings Date          11/05/09 (confirmed)    
Average Daily Volume:       2.8 million 
Listed on   October 24, 2009    


Steel Dynamics - STLD - close: 14.71 change: -0.32 stop: 16.21

I don't see any changes from my weekend comments. I'm suggesting bearish positions now. Our target to take profits is at $12.60. Keep an eye on the simple 200-dma near $13.50, which will probably act as short-term support so expect a bounce there.

Entry on   October 24 at $15.03 
Change since picked:     - 0.32   			
Earnings Date          10/19/09 (confirmed)    
Average Daily Volume:       8.0 million 
Listed on   October 24, 2009    


Exide Tech - XIDE - close: 6.74 change: -0.42 stop: 8.05

XIDE under performed the market today with a 5.8% decline. Shares broke down under round-number support at $7.00.

Our target is $6.10. I'm considering a second target at $5.55. The stock can be a little volatile so we'll use a stop loss above resistance at $8.00. The set up makes this an aggressive, higher-risk trade. We want to exit ahead of the early November earnings report.

Entry on   October 21 at $ 7.21 
Change since picked:     - 0.47   			
Earnings Date          11/05/09 (unconfirmed)    
Average Daily Volume:       545 thousand
Listed on   October 21, 2009    


CLOSED BULLISH PLAYS

Gold Fields Ltd - GFI - close: 13.52 change: -0.64 stop: 13.80

The U.S. dollar bounced and that sparked profit taking in gold. The gold miners fell as a result. GFI broke support near $14.00 and hit our stop at $13.80.

chart:

Entry on September 30 at $13.78 
Change since picked:     + 0.02<-- stopped @ 13.80 (+0.0%)
Earnings Date          10/29/09 (unconfirmed)    
Average Daily Volume:       7.7 million 
Listed on September 30, 2009    


Patriot Coal - PCX - close: 11.19 change: -0.38 stop: 10.90

We got the pull back to $11.00 just like we planned but the bounce was pretty anemic and we've run out of time. We wanted to exit tonight at the close to avoid earnings.

chart:

Entry on   October 05 at $12.14 /gap open higher
                            /originally listed at $11.78
Change since picked:     - 0.95 <-- exit @ 11.19 (-7.8%)
                          /1st target hit @ 13.90 (+14.5%)
Earnings Date          10/27/09 (confirmed)    
Average Daily Volume:       6.4 million 
Listed on   October 05, 2009    


Playboy Ent. - PLA - close: 3.35 change: -0.33 stop: 3.35

Someone flashed the "sell" signal on PLA and the stock fell almost 9% today. Shares hit our stop loss at $3.35 closing the play. Hopefully readers didn't have much of a position left after taking profits at $3.12 and at $3.68.

chart:

Entry on September 01 at $ 2.65
Change since picked:     + 0.70 <-- stopped @ 3.35 (+26.4%)
                            /take profits 09/16/09 (+17.7%)
                           /take profits 10/24/09 (+38.8%)
Earnings Date          11/05/09 (unconfirmed)    
Average Daily Volume:       370 thousand
Listed on  August 29, 2009    


NYSE Euronext - NYX - close: 28.26 change: -0.89 stop: 28.49

The early morning bounce failed under the $30 level and NYX reversed to break down under short-term support. Shares hit our stop at $28.49 closing the play. The plan was to use small positions to limit our risk.

chart:

Entry on   October 22 at $29.33 (small pos 1/2 to 1/4)
Change since picked:     - 0.84 <-- stopped @ 28.49 (-2.8%)
Earnings Date          10/30/09 (confirmed)    
Average Daily Volume:       2.8 million 
Listed on   October 22, 2009