Option Investor
Newsletter

Daily Newsletter, Wednesday, 11/11/2009

Table of Contents

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

Market Wrap

Dow, S&P Hit Highs as Rally Continues

by Judy Alster

Click here to email Judy Alster
Veteran's Day closed the U.S. bond market and government offices, so no critical reports came out of any government agency or U.S. business group. Still, the market turned in an okay performance, even after falling from its morning highs.

MARKET INDEXES, WEDNESDAY, Nov. 11:

PRICE AND VOLUME ADVANCES/DECLINES:

Price and volume advancers beat decliners, but even though volume wasn't bad for a bank holiday, it still wasn't as convincing as we'd like to see it. In fact, it hasn't been very convincing this month, making one wonder how good this rally's legs really are.

A (very) mild dollar rise caused the broad backup off the day's highs, but the Dow rose for a sixth straight session to end the day at a 52-week high of 10,291.26, up 44.29 points or 0.43%; the S&P500 squeaked to a 52-week high close, too, of 1,098.51, up 5.50 points or 0.05%; the Nasdaq, although not at a high, managed a rise of 0.74% or 15.82 to close at 2166.9.

DOW JONES INDUSTRIAL AVERAGE at a 52-week high:

The Dow, busy trying to retrace the bear market fall, will probably encounter headwinds around 10,400, and almost certainly around 11,000 as it tries to surpass its levels of September 2008. But we're getting ahead of ourselves. For now, let's enjoy this rally because it looks like it might soon be taking a rest.

S&P500 valiantly tries to top 1,100:

The important number for the S&P500, and maybe for the market, is 1,100, which the index touched intraday but did not close at. The Nasdaq had a higher percentage gain than either the Dow or the S&P:

NASDAQ:

Continuing its bounce off a two-month low, the small-cap Russell 2000 put in an even better percentage gain: 0.98% or 5.78 points, to 592.71. But there's still what looks like a double top to overcome here:

RUSSELL 2000 — small caps post a nice gain:

A dearth of economic reports, yes, but there was news to keep us occupied. For instance, Chinese factory output for October rose to a 19-month high, thanks in part to China's own massive ($585 billion) economic stimulus. Chinese industrial output was up 16.1%, even better than the forecasts of 15.5%, and retail sales were up 16.2% vs. a 15.8% forecast. A lot of China's growth is the result of their stimulus package but the run is still expected to last into 2010. Expect China, in a mirror image of the U.S., to tighten money to keep inflation under control. The yuan, up just a fraction, isn't yet reflecting that.

The iShares FTSE/Xinua China 25 Index, (FTI), which tracks 25 of the largest and most liquid Chinese companies, had a nothing day, up less than appoint or 0.20%, but that could be because it's been on a roll since March. China Southern Airlines (ZNH) on the other hand was up over 3%. Two other companies had big moves of their own, apart from the country's improved output. Sinovac Biotech (SVA) got an order from the Chinese government for an additional 5.19 million doses of its H1N1 flu vaccine, and won a bid to supply a seasonal flu vaccine as well, marking its entry into a new public market.

CHINA SOUTHERN AIRLINES:

Semiconductor Manufacturing Intl. (SMI) was up over 60% on a legal settlement that could allow Taiwan Semiconductor to take a 10% stake in it. Semiconductors as a group have been up lately, possibly in hopes of a better-than-expected holiday shopping season.

SEMICONDUCTOR MANUFACTURING INTL. (wow):

The news out of Asia sufficed to spark an early and enthusiastic wave of buying in commodities with investors assuming that the world's third-largest economy is getting back on its feet. Then the greenback roused itself from its torpor after hitting a 15-month low under 74.80; it turned higher and managed to dig in its heels just above 75, which took most of the market off its highs, although stocks managed to make up part of their losses.

US DOLLAR INDEX squeezes out a gain right at support:

The dollar's good twin, gold, hit a record high near $1,120 an ounce. Shipping stocks jumped up and stayed up as the hair-trigger Baltic Dry Index, which tracks shipping rates, gained on the news that China is busy again, rising to a three-and-a-half month high.

BALTIC DRY INDEX UP:

EXCEL MARITIME, like other shippers, made big gains:

Early in the session, stocks responded to Tuesday's comments by Fed officials who told us again that the course of the U.S. recovery, like love, will not run smooth — the translation being that money is going to stay cheap as dirt well into next year. The certainty of low interest rates and the government's pro-recovery efforts may be kicking in; it could be why the market has been moving consistently up for more than a week, despite 10% unemployment. Long stretches of low rates are always a boost for the stock market, at least in the short run, because where else are you going to go to make money on your money legally? If you happen to have any CDs coming due, you know what I mean. (Try not to laugh in the bank guy's face when he asks you to roll it over into a new one at current rates. Just say "No, thanks" and hang up.)

In fact, the S&P's advance was led by a 1.4% gain in the financial sector, which is especially sensitive to low rates. The only category in the broad index to post a decline was utilities, off 0.3%.

BANK OF AMERICA, reflecting financial sector gains:

One very big winner today was luxury homebuilder Toll Brothers (TOL) who announced that its new contracts are up 42% and that it expects fourth-quarter revenue to top Wall Street's expectations. From preliminary fourth-quarter results, the company said it predicts revenue of $486.6 million; sure, it's lower than the last year's $691.1, but it's also $100 million more than analysts forecast. The company's contract cancellation rate was a rock-bottom 6.9%, the lowest since the fourth quarter of fiscal 2005. Buyers signed 765 contracts for homes valued at $430.8 million during the quarter. Investors sucked it right up:

TOLL BROTHERS broke out the champagne:

More huge news: Hewlett-Packard (HPQ) said late Wednesday that it will acquire 3Com Corp. (COMS) for $2.7 billion. It was a shot across the bow, as they say, of Cisco Systems (CSCO) in the market for networking, servers and storage products. The deal values 3Com at $7.90 a share, should close in the first half of 2010. Hewlett-Packard was largely unchanged; 3Com moved up just 28 cents or 5.18 % during the session but shot up another 35% after hours to $7.69.

3COM CORP to be acquired by Hewlett-Packard:

Food purveyor Ralcorp (RAH) reported disappointing fourth quarter earnings, despite the profit boost from its acquisition of Post Foods and Harvest Manor. The company reported earnings of $1.14 per share, off estimates by 10 cents; revenue rose over 12% year-over-year to $983.2 million, just shy of consensus.

RALCORP came in under estimates:

Late Tuesday broadband operator Clearwire (CLWR) reported a Q1 loss of 43 cents on revenue that rose about 13% to $68.8 million, which was about in line with estimates. The company maintained its outlook through next year: revenue will stay the same, some subscribers may leave its pre-WIMAX markets during the transition to WIMAX, and get set for a $1.5 billion round of equity financing.

CLEARWIRE did not please investors:

Macy's (M) reported a third quarter loss of three cents a share, better than the consensus that expected a loss of seven cents. Revenues fell 3.9% year-over-year to $5.28 billion, which was not better than estimates; same-store sales for the quarter fell 3.6%, while online sales were up 21.1%. This quarter, Macy's expects same-store sales to be down 1-2%, although fourth quarter earnings should range from $1.00 to $1.05 per share, up from earlier guidance of 70 to 80 cents but still —you guessed it — below the current consensus of $1.17.

MACY's: Sometimes you just can't win:

Software giant Adobe Systems (ADBE) reported not earnings, but a regulatory filing foreshadowing a cut of some 9% of its workforce, or about 680 full-time positions, in an effort to reduce costs . . . . The company expects to record approximately $65 million to $71.0 million in pretax restructuring charges associated with the plan. The stock, up over 70% this year, lost 68 cents or 1.9% . . . . United Parcel Service (UPS) gained $1.15 or over 2% after its chief executive said volume will grow next year as the global economy gradually recovers . . . . One big percentage mover in the Dow was Home Depot (HD), up almost 2% to $27.33 . . . Insurer American International Group (AIG) fell 99 cents or 2.6% after its CEO threatened to quit . . .

What to take away from today's session? That it's not easy getting past resistance and without real volume, one mustn't expect miracles.

Earnings season continues to wind down Thursday with announcements from Walmart, Vivendi, Walt Disney, Benetton Group, Anheuser Busch, Blockbuster, Kohl's, Nordstrom, North American Palladium, Darling International, Repsol, Taseko Mines and Urban Outfitters, among others.

We also have Wednesday's customary weekly mortgage application index from the Mortgage Bankers' Association and the Energy Information Administration's petroleum status report (often a market mover), along with reports on jobless claims (also capable of moving the market) and the Treasury budget, nicely balanced by 3-, 6- and 12-month bill announcements and the 3-year bond auction. After hours Thursday, the curious might be interested in the Fed balance sheet and the money supply.


New Plays

Sprouting Higher

by James Brown

Click here to email James Brown


NEW BULLISH Plays

Potlatch Corp. - PCH - close: 29.93 change: +0.59 stop: 27.95

Why We Like It:
PCH is a REIT that sells timber on the land it owns. With the global economy slowly improving, demand for timber should be increasing. Shares of PCH look ready to breakout from a three-month consolidation under resistance near $30.00.

I'm suggesting a trigger to buy PCH at $30.30. If triggered our first target to take profits is at $33.60. We will cautiously set a secondary target at $35.75. FYI: The Point & Figure chart is bullish with a $56 target.

Annotated chart:

Entry on  November xx at $xx.xx <-- TRIGGER @ 
Change since picked:     + 0.00   			
Earnings Date          02/11/10 (unconfirmed)    
Average Daily Volume:           thousand
Listed on  November 11, 2009    



In Play Updates and Reviews

Stocks Inching Higher

by James Brown

Click here to email James Brown


BULLISH Play Updates

Best Buy Inc. - BBY - close: 42.25 change: +0.01 stop: 39.40

It turned out to be a quiet session for BBY. Investors have been hoping for encouraging news out of the retailers and Macy's (M) bearish fourth quarter guidance could have been a stumbling block for traders today. Of course BBY and Macy's are extremely different from one another and shares of BBY closed unchanged on the session. The RLX retail index lost 0.3% while Macy's fell 8%.

I remain bullish on BBY and would still consider new positions at current levels (or on a dip near $40.00. Our first target is $46.00. Our second target is $49.80. Our time frame is several weeks.

Entry on  November 10 at $42.20
Change since picked:     + 0.05   			
Earnings Date          12/15/09 (unconfirmed)    
Average Daily Volume:       5.1 million 
Listed on  November 09, 2009    


Baker Hughes Inc. - BHI - close: 43.22 change: +0.72 stop: 40.49

BHI posted a 1.69% gain, which was better than the major averages. I'd still consider new bullish positions here but more cautious traders might want to wait for a close over $44.00, which could be short-term resistance. Our first target is $47.00. Our second target is $49.85.

Entry on  November 09 at $43.06 
Change since picked:     + 0.16   			
Earnings Date          01/28/10 (unconfirmed)    
Average Daily Volume:       5.6 million 
Listed on  November 09, 2009    


Southern Copper Corp. - PCU - close: 35.02 change: +0.28 stop: 30.95

PCU managed to extend its gains with another 0.8% rise. The close over $35.00 is bullish but shares actually look a little bit overbought here with the rally off its early November low. More conservative traders may want to raise their stops. Our target is $39.50.

I suggested small positions (25% to 50% your normal size).

Entry on  November 04 at $33.80
Change since picked:     + 1.22   			
Earnings Date          10/22/09 (confirmed)    
Average Daily Volume:       3.5 million 
Listed on  November 03, 2009    


Polaris Industries - PII - close: 46.47 change: +0.35 stop: 41.80

PII delivered a 0.7% gain. I don't see any changes from my previous comments. If you're looking for a new entry point I'd wait for a dip near the $45.00-44.75 zone.

Our target to exit is $49.65. I consider this an aggressive play and suggest smaller position sizes.

Entry on  November 09 at $45.15
Change since picked:     + 1.32   			
Earnings Date          01/28/10 (unconfirmed)    
Average Daily Volume:       516 thousand
Listed on  November 07, 2009    


Travelers Companies - TRV - close: 54.31 change: +0.38 stop: 49.75

There is no change from my prior comments on TRV. Shares of TRV are still running away from us. We don't want to chase it. I'm suggesting readers use a trigger to buy the dip at $52.15. If triggered our target is $57.40.

Entry on  November xx at $xx.xx <-- TRIGGER @ 52.15
Change since picked:     + 0.00   			
Earnings Date          01/27/10 (unconfirmed)    
Average Daily Volume:       5.3 million 
Listed on  November 07, 2009    


Wyndham Worldwide - WYN - close: 19.25 change: +0.59 stop: 16.40

WYN is off to a strong start. Shares gapped open higher at $18.88 and closed with a 3.1% gain. The $20.00 level could offer some round-number resistance but I'm setting our first target at $21.00. FYI: The point & figure chart is bullish with a $27 target. Our time frame is several weeks.

I'm suggesting small positions (at least 50% of your normal trade size).

Entry on  November 10 at $18.88 (1/2 position) /gap open higher
Change since picked:     + 0.37   			
Earnings Date          02/11/10 (unconfirmed)    
Average Daily Volume:       3.5 million 
Listed on  November 10, 2009    


Yanzhou Coal Mining - YZC - close: 18.04 change: +0.18 stop: 14.95

YZC managed to hit another new high at $18.37 this morning.

There is no change from my prior comments. We don't want to chase the rally in YZC. I'll keep our trigger to buy a dip at $16.35 for now but we'll probably end up adjusting it higher. Our target is $19.95. Our time frame is several weeks.

Entry on  November xx at $xx.xx <-- TRIGGER @ 16.35
Change since picked:     + 0.00   			
Earnings Date          04/10/10 (unconfirmed)    
Average Daily Volume:       418 thousand
Listed on  November 07, 2009    


BEARISH Play Updates

Activision-Blizzard - ATVI - close: 11.38 change: -0.04 stop: 11.85

According to some of my younger male friends the new Call of Duty, Modern Warfare 2 game that just came out is awesome. Yet strong sales of ATVI's new game isn't stopping the profit taking. ATVI hit our trigger to open bearish positions at $11.20 this morning. Our first target is $10.10. Our second target is $9.25. Our time frame is several weeks.

chart:

Entry on  November 11 at $11.20
Change since picked:     + 0.18   			
Earnings Date          02/04/10 (unconfirmed)    
Average Daily Volume:      17.3 million 
Listed on  November 10, 2009    


Navistar Intl. - NAV - close: 35.40 change: -0.25 stop: 36.55

I'm actually surprised that NAV did not hit our stop loss today. The market was showing strength this morning yet NAV failed to break resistance near $36.00. I hesitate to launch new positions but if NAV trades under $34.00 we may want to initiate new bearish plays. 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 (buy half a position)
Change since picked:     - 0.01   			
Earnings Date          12/30/09 (unconfirmed)    
Average Daily Volume:       1.5 million 
Listed on   October 24, 2009    


Financial SPDRs - XLF - close: 14.97 change: +0.20 stop: 15.21

Financials were some of the best performers today. The XLF hit $15.13 intraday. If the rally continues tomorrow we'll probably get stopped out. If the XLF somehow manages to close over $15.00 but fails to hit our stop at $15.21 we'll close the play early. I'll probably close this play early if the S&P 500 can close above the 1100 level. I'm not suggesting new positions at this time.

Entry on   October 26 at $14.71 (small positions) 
Change since picked:     + 0.26   			
Earnings Date          --/--/-- 
Average Daily Volume:       102 million 
Listed on   October 26, 2009    


CLOSED BULLISH PLAYS

UltraShort Russell - TWM - close: 29.21 change: +0.40 stop: 28.49

The market's spike higher this morning was enough to send the TWM down to $28.19. Shares hit our stop at $28.49 closing the play.

chart:

Entry on   October 24 at $28.41 
Change since picked:     + 0.08 <-- stopped @ 28.49 (+0.0%)
                            /1st target hit @ 31.90 (+12.2%)
Earnings Date          00/00/00 
Average Daily Volume:       4.2 million 
Listed on   October 24, 2009