Option Investor
Newsletter

Daily Newsletter, Thursday, 11/5/2009

Table of Contents

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

Market Wrap

Hello Again: Dow Traverses 10000 In Best Trading Day Since July

by Todd Shriber

Click here to email Todd Shriber
Pick a catalyst: Better-than-expected jobless claims, increased worker productivity or Cisco Systems' (CSCO) bullish comments on the economy and any or all may explain the stellar performance turned by the three major indexes today. The Dow Jones Industrial Average rose 203.82 points to close above 10,000 once again. The S&P 500 gained nearly 2% to close at 1066.63 and the Nasdaq added almost 50 points to finish the day 2105.32. All 10 industry groups tracked by the S&P 500 finished the day higher.

Stats Table

All 30 stocks in the Dow finished higher, but American Express, not Cisco was the top gainer. Cisco was a positive catalyst to be sure after the largest maker of networking gear delivered fiscal first-quarter results that beat analyst estimates after the close yesterday. The company expects positive revenue growth for the current quarter, marking the first time in a year Cisco has seen positive sales growth and CEO John Chambers said he is seeing signs of a global economic recovery.

Those positive comments led to a 2.8% pop for Cisco shares on Thursday, but in some ways, the trade was disappointing. On a day when the stock should have made a new 52-week high, it failed to do so. Cisco closed at $24.07, a fair bit off its 52-week high of $24.83 set last month. Maybe the bulls are waiting to drive the stock higher, but if that is the case, one has to wonder why they are waiting at all.

Cisco Chart

Financials enjoyed the party as well after noted bank analyst Dick Bove made positive comments on the group, going so far as to say bank stocks could double from here over the next year and that accomplishing such a feat is not the improbable task that some investors may perceive it to be. This is a change of tune for Bove who has recently made bearish comments about several of the major banks, including Wells Fargo (WFC) and Bank of America (BAC). Still, Bove said the 20 largest U.S. financial institutions are in ''extraordinarily good condition.''

The comments lifted the Philadelphia Bank Index, which had been getting pummeled over the past few weeks. The index tracks the largest U.S. bank stocks and still rests below its 50-day moving average, but well above the 200-day line.

Philly Bank Index

Simply put, name a major financial and it was up today. Even lowly Citigroup (C) got in on the action, rising 2.3% after announcing that it would spin-off its Primerica life insurance business in a $100 million IPO. Given how much Citi is into Uncle Sam for, $100 million is a drop in the bucket, but the IPO is at the very least a way of returning some value to long-suffering shareholders and a better strategy than selling profitable businesses for fire-sale prices, which Citi has already done.

One stock that I do not often mention here is DuPont (DD), but the Dow component delivered some noteworthy news today. Chemicals makers, of which DuPont is one of the largest, have seen their top-line growth stifled in the past year and the primary way that DuPont and its rivals have been able to meet or beat Street estimates is through massive cost reductions, namely lay-offs, factory closures and asset sales.

That makes the news that DuPont expects to outperform the market and its peers as the economy rebounds good news for investors. The company expects year-over-year earnings per share growth of 20% in 2009-2012. Even better, the company said it expects top-line growth of 10% over the same period. DuPont was up 3.7% today and the shares yield 5%.

Stocks also got a jolt from economic news that is in a way conflicting. Worker productivity rose more-than-expected in the third quarter, which basically means employers are making a smaller number of workers do more work. On the other hand, last week's jobless claims fell to a 10-month low. In fact, the new jobless claims trend has been fairly positive over the past few months, but continuing claims continue to creep higher.

Jobless Claims

I say those data points are conflicting because if companies can squeeze more out of a smaller labor pool and continue to beat Wall Street estimates with fewer workers, what will be the impetus to hire more folks and increase payrolls when the economy improves? It is a question worth pondering on the eve of the release of October's unemployment data.

That is right. Tomorrow is the first Friday of November, so unemployment news will be the driver behind stocks' performance on Friday. U.S. employers cut 175,000 jobs in October, according to the median forecast offered by Bloomberg News. That is a far better number than the 263,000 jobs shed in September, but the unemployment rate is still expected to move higher to 9.9% and that would represent a new 26-year high.

While the unemployment picture is far from rosy (as the chart below illustrates), the market seems to have priced in the fact that positive job growth will not be seen until sometime in 2010 and that means less bad reports should be welcome with open arms by stock bulls. In other words, if tomorrow's number comes in at 175,00 or better, stocks will head into the weekend higher, barring any unforeseen surprises from other corners of the market.

Unemployment Chart

Earnings season is winding down, but there are a couple of reports that may be worth watching for tomorrow's session. Coffee-retailer Starbucks (SBUX) released fiscal fourth-quarter results after the close today and the news had the stock trading up almost 4% in the after-hours session. Excluding restructuring costs, Starbucks earned 24 cents a share, ahead of analyst estimates of 21 cents a share. Revenues fell a little bit, but the company said it is seeing higher traffic in its stores and expects fiscal 2010 EPS to come in 15%-20% higher than 2009's number of 80 cents a share.

CBS (CBS), owner of the most-watched U.S. television network, also posted a bullish report after the close. The company earned 39 cents a share, well above the average analyst estimate of 23 cents. CBS appears to be the leader in garnering lucrative satellite transmission fees from cable and satellite TV operators. Those fees could be worth as much as $200 million annually by 2012 or 2013, CBS said. The stock is up about 35% in the past three months.

And if you are so inclined, American International Group (AIG), the insurance firm that is one of Uncle Sam's biggest holdings, reports earnings before the bell on Friday. Believe it or not, AIG's stock has quadrupled in the past eight months and maybe more unbelievable was AIG's profitable second quarter.

Analysts are expecting the company to be profitable once again, at least on an operating basis, and are calling for operating profit of $2.39 a share. AIG boasts a $355 billion fixed-income portfolio that has benefited from soaring corporate bond and mortgage-backed securities prices. As of June 30, nearly 60% of AIG's bond portfolio resided in those two asset classes, according to Bloomberg. The irony here is that mortgage backed products were one reason that AIG was on the brink of bankruptcy in the first place.

More irony: AIG's Financial Products unit, the group that sold derivatives on those mortgage securities may post a profit of $2.5 billion for the third quarter. AIG is 80% owned by Uncle Sam, making it tough to endorse as a long-term holding, but the stock is extremely volatile and is likely to have a good move or two in it tomorrow.

AIG Chart

Taking a look at the charts, now that the Dow has closed above 10000 again, it has a lot of room to run to its October peak of 10119.47. Resistance looms close to that area around 10139 and from there another resistance spot in the 10215-10220 range will probably appear. Support can be spotted at 9850 and then at the 50-day moving average of 9743.73.

Dow Chart

The S&P 500 looks like it is going to try to break 1100 again and perhaps break its high of 1101.36 set a few weeks ago. The 1080 area was where the index started to slow on at its last advance toward 1100, so it will be interesting to see if that number poses a problem again. It appears that is the 61.8% Fibonacci retracement off the March low, so 1080 is certainly a significant number for the S&P 500. It does not appear that support at the 1020-1025 area is much of an issue right now, but if that area becomes a concern next week and 1000 doesn't hold, 980 may not be that far off.

S&P 500 Chart

The Nasdaq closed right at its high for the day and like the Dow, has a fair amount of distance to cover before getting to its October high of 2190.64. And of course, 2200 still looms as major resistance. Still, today's close was barely good enough to keep the Nasdaq above its 50-day moving average, so the bulls will probably want to see the index rattle off a few more consecutive closes above 2100. Failure to hold 2050 could bring us back to 2025 or worse.

Nasdaq Chart

Not to oversimplify things, but tomorrow's market action will be determined by the labor report. The Dow's ability to hold 10000 and the S&P 500's move to 1100 hang in the balance.


New Plays

Volatility Continues

by Keene Little

Click here to email Keene Little

Editor's Note:

The market is manic depressive. It can't decide which way to go and what is actually good vs. bad news. When it closes at its low it springboards up and then closes at its high. The next day it reverses again. So whether today's little capitulation move into the close will result in an immediate reversal back down on Friday (following the jobs numbers) can't be known yet but there's a reasonable setup for it. But no matter, we have our plays and we'll stay disciplined and honor stops if they're hit before our target prices.

I am not adding new candidates to the newsletter at this time. However, yesterday it was suggested to look at AIPC as a bearish play and ADSK as a bullish play. AIPC continued to look weak today as it struggles below its exponential 200-dma near $27.00. This could be a new bearish entry point. ADSK did rally today with the techs but could be short-term overbought. We will watch it closely to see if a pullback affords us a bullish entry.


In Play Updates and Reviews

Weaker Than It Looks, Part II

by Keene Little

Click here to email Keene Little
I'm filling in for James tonight but will pick up where he left off with his commentary from last night.

Stocks rallied right into the close today and that looks bullish. Think of it as a mirror version of the selloff into the close on Wednesday which looked bearish.


BULLISH Play Updates

Southern Copper Corp. - PCU - close: 33.95 change: +0.91 stop: 30.95

The action in PCU was worrisome yesterday and I can't say I feel much better about it today, even though it added almost a dollar to its price. The quick high this morning and then a retest of it into the close is leaving some negative divergences. Shares once again have stalled at the $34.00 level. At this time I would look for another bounce in the $31.00-32.00 zone before launching new positions. Our target is $39.50.

Commodity-related stocks are bound to be volatile with the dollar moving so much (although it was flat today). I'm suggesting small positions (25% to 50% your normal size).

Entry on  November 04 at $33.80
Change since picked:     +0.15   			
Earnings Date          10/22/09 (confirmed)    
Average Daily Volume:       3.5 million 
Listed on  November 03, 2009    


UltraShort Russell - TWM - close: 30.10 change: -1.98 stop: 28.49

Naturally with the strong market rally, and even stronger small cap rally, our TWM play suffered. But not much below today's low at 29.41 is the 50-dma.

TWM has already hit our first target. We're currently aiming for $34.00.

Entry on   October 24 at $28.41 
Change since picked:     + 1.69
                            /1st target hit @ 31.90 (+12.2%)
Earnings Date          00/00/00 
Average Daily Volume:       4.2 million 
Listed on   October 24, 2009    


BEARISH Play Updates

Emerging Market iShares - EEM - close: 39.7 change: +0.80 stop: 40.25

Yesterday readers were warned to expect a bounce and we got one. Its price pattern looks very similar to our major averages. I would consider new positions here, especially since the stop is relatively close for a limited risk. Our plan called for very small positions (25% of normal size).

Our first target to take profits is at $33.55. Our second target is $31.00.

Entry on   October 31 at $38.13 /gap open entry
                   /originally listed at $37.57 (1/4 position size)
Change since picked:     + 1.57   			
Earnings Date          --/--/-- 
Average Daily Volume:        77 million 
Listed on   October 31, 2009    


Navistar Intl. - NAV - close: 34.84 change: +0.65 stop: 38.05

NAV made a lower high today and while it rallied it looks to be underperforming the broader market which is exactly what we want to see. This continues to look like a new bearish entry point. More conservative traders may want to use a stop closer to today's high of $35.30 or yesterday's high of $36.25. Our first target is $30.50. Our second target is $27.75.

FYI: We initiated this play with half a position.

Entry on   October 24 at $35.41 (half a position)
Change since picked:     - 0.57   			
Earnings Date          12/30/09 (unconfirmed)    
Average Daily Volume:       1.5 million 
Listed on   October 24, 2009    


Ross Stores - ROST - close: 45.54 change: +0.66 stop: 46.55

ROST looks like NAV with a lower high today than yesterday's and it looks weaker than the broader market. Its 50-dma is at 46.45, 0.10 below our stop so if a bounce approaches that level you can consider another entry for this play.

Our target to exit is $40.25. We will plan to close this play ahead of the earnings report.

Entry on   October 31 at $44.29 /gap open entry
                           /originally listed at $44.01
Change since picked:     + 1.25   			
Earnings Date          11/19/09 (confirmed)    
Average Daily Volume:       2.1 million 
Listed on   October 31, 2009    


Seagate Technology - STX - close: 15.37 change: +0.65 stop: 15.55

CSCO's earnings report got the techs feeling good and STX rallied with them, closing above its 50-dma and coming within 0.04 of our stop. It settled into the close, unlike the broader averages so our play will be dependent on an immediate selloff tomorrow.

I remain bearish on STX but we're at risk of getting stopped out on an opening pop higher. Resistance at $15.50 held so it was an opportunity to try a new entry, as it will be tomorrow if we don't get stopped out. The plan was to use small positions (50%) to limit risk. Our first target is $12.05. Our second target is $10.50.

Entry on   October 31 at $13.95 (small positions 1/2)
Change since picked:     + 1.42   			
Earnings Date          10/21/09 (confirmed)    
Average Daily Volume:        13 million 
Listed on   October 31, 2009    


Toro Co. - TTC - close: 40.03 change: +1.51 stop: 38.25

TTC closed near its October highs and looks poised to continue higher. Our play hasn't been triggered yet so we're still watching this one. I'm sticking to our plan, which is to wait for a drop under support with a trigger to open bearish plays at $35.75.

If triggered at $35.75 our target is $30.50. I am suggesting small positions to limit risk.

Entry on  November xx at $xx.xx <-- TRIGGER @ 35.75
Change since picked:     + 0.00   			
Earnings Date          12/08/09 (unconfirmed)    
Average Daily Volume:       293 thousand
Listed on  November 31, 2009    


Western Digital Corp. - WDC - close: 35.21 change: +1.42 stop: 35.65

WDC and STX are in the same boat and both rallied with the techs today. WDC also closed above its 50-dma and came close to our stop. As the day wore on the rally was petering out so it's a good place to try a new entry, especially since the stop is so tight.

I suggested traders start positions about 1/4 (25%) of their normal trade size. Our initial target is the $30.50 mark. Our second target is $27.75.

Entry on   October 28 at $33.58 
Change since picked:     + 1.63   			
Earnings Date          10/22/09 (confirmed)    
Average Daily Volume:       4.2 million 
Listed on   October 28, 2009    


Financial SPDRs - XLF - close: 14.37 change: +0.36 stop: 15.51

Banks continue to whip up and down and not go anywhere. Only with some afternoon buying did the banks finally join today's bullish party. Their lack of participation in the broader market rally is bearish and with our stop above the 50-dma I would consider a new bearish entry on any rally attempt in the banks. The XLF has potential support at its rising 100-dma and exponential 200-dma, both coinciding at 13.74 so instead of a new entry now, wait for that support level to break. Our target is $13.10.

Entry on   October 26 at $14.71 (small positions) 
Change since picked:     - 0.34   			
Earnings Date          --/--/-- 
Average Daily Volume:       102 million 
Listed on   October 26, 2009