Option Investor
Newsletter

Daily Newsletter, Monday, 11/16/2009

Table of Contents

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

Market Wrap

Stocks Surge To Fresh 2009 Highs Buoyed By Familiar Themes

by Todd Shriber

Click here to email Todd Shriber
This is starting to become a trend: The Dow Jones Industrial Average turns in another triple-digit gain as equities move to 13-month highs. The blue chip index rallied to a new 2009 high, gaining more 136 points to close at 10406.96. The S&P 500 finally broke through 1100 (again) and did so in style, rising almost 16 points to close at 1109.30. Only the Nasdaq failed to close above a key resistance level. The Nasdaq did peek above 2200, traversing that key level for the first time in over a year before closing at 2197.85.

Stats Table

As I said, Monday's trade sported some familiar themes. The U.S. dollar continued its perilous decline and that bolstered commodities and materials stocks, which have been among the biggest drivers of this market rally. The greenback slumped to a 15-month a low and investors took a pass on bonds, sending yields on two-year Treasuries to their lowest levels since January. Even comments from Federal Reserve Chairman Ben Bernanke regarding future economic headwinds attributable to high unemployment and constrained access to credit could not deter stocks on Monday.

Not to rain on the bulls' parade, but this weak dollar business is only avoidable when one chooses to reside in the ''ignorance is bliss'' camp. The dollar is being thrashed as investors favor commodities and commodities-related currencies. The two best performing currency ETFs in 2009 are those that track the Brazil real and the Australian dollar, two commodity currencies if there was a such a thing.

How bad are things for the buck? The chart below illustrates the performance of the 10 major currency ETFs in 2009. Nine are up on the year and I doubt it will take anyone long to guess which one is the lone loser.

Forex ETFs

There are numerous problems that a weak dollar creates, but as it pertains to this equity market rally the problem lies with familiarity possibly breeding contempt. Allow me to elaborate: Stocks are being led higher by materials names benefiting from the flimsy dollar, commodities stocks and financials that some would debate are far from out of the woods. This scenario should ring a bell. After all, this confluence of factors led the market to its last bubble and everyone that was not living in a cave in 2008 remembers the calamity that ensued.

I offer up an anecdote that may be the epitome what may be wrong with this rally, if you dare believe there is anything wrong. Last week, China said it may have purchased too much copper earlier this year and that it may export some of its excess stockpiles. If you are talking copper, like it or not, you are talking China, and a China turned copper exporter should not be music to the ears of copper producers. The chart below shows China has been purchasing less copper in recent months.

China Copper Purchases

Oddly enough, this news had no impact on a stock I mention here frequently: Freeport McMoRan Copper & Gold (FCX). Freeport touched another 52-week high today at $85 before settling at $84.48. Freeport is the largest copper producer in the U.S., but China is one of its biggest end markets. Even with news of China not needing as much copper as it did earlier this year, Freeport made another new high, something it has done quite frequently recently, as the chart below indicates. Just a little illustration to highlight that even when it looks like there might be a reason for stocks to slowdown, they do no such thing.

FCX Chart

Speaking of metals, gold continues to shine (no pun intended.) Gold for November delivery climbed to a record high of $1144.20 an ounce before settling at $1138.60, up more than 2% on the day. Gold's rally has meant good things for miners like Barrick Gold (ABX) and Newmont Mining (NEM), both of which were up more than 2.5% today. Gold miners do not usually outperform the underlying commodity because the miners face high capital equipment and production costs that can often crimp profits.

While this fact is well-known by those that actively follow the industry, somehow, someway, the Market Vectors Gold Miners ETF (GDX) is up almost 35% in the past three months compared to a 20% gain for the SPDR Gold Shares (GLD), the most heavily traded gold ETF that actually holds physical gold. Oh yeah, GDX made a 52-week high today on volume that was roughly 30% higher than normal.

GDX Chart

From precious metals to industrial metals, steelmakers also participated in Monday's rally. U.S. Steel (X), the largest U.S. steelmaker, gained almost 5% and rival AK Steel (AKS) surged nearly 8% after JPMorgan Chase added the stocks to its ''Focus List.'' JPMorgan said the companies may be able to raise prices as demand rebounds. Steel demand has been tepid at best throughout 2009 and increased demand for the industrial material may portend that the global economy is in fact getting better.

Steel Demand

I admit I have had my doubts about this rally and continue to have them, but that does not mean I am advocating bucking the trend. If some other sectors besides the usual suspects could really lend a hand, stocks may still have some room to run. Apparently, Goldman Sachs thinks high-end retailers may be willing to chip in. Goldman upgraded shares of luxury retailers Coach (COH), Nordstrom (JWN), Saks (SKS) and Tiffany (TIF), slapping ''buy'' ratings on Coach and Nordstrom.

Not only is this bullish news because we are in the midst of another holiday shopping season, this is also bullish because this recession has seen even the most affluent among us tighten their purse strings. Checkout the parking lot at your local Wal-Mart (WMT) and you will probably see a lot more expensive cars there than you did a couple of years ago. Still, Goldman not only upgraded those fancy retailers, it downgraded J.C. Penney (JCP) to ''sell'' from ''neutral'' and Dollar Tree (DLTR) to ''neutral'' from ''buy.'' And it is fair to say that Dollar Tree and Coach operate in two completely different ends of the retail spectrum.

Most retailers were up on Monday as the Commerce Department said retail sales rose 1.4% to $347.5 billion in October. Then again, as is so often the case, the devil is in the details. Strip out auto sales and retail sales rose just 0.2% last month. With unemployment residing at a 26-year high and the holiday shopping season underway, retailers may be hard-pressed to deliver good results, save for a Christmas miracle.

Speaking of retailers, home improvement giant Lowe's (LOW) met analyst estimates when it reported third-quarter results on Monday, but the stock closed down 11 cents. Rival and Dow member Home Depot (HD) reports before the bell on Tuesday. Analysts are calling for a profit of 36 cents a share on sales of $16.27 billion.

Home Depot and Lowe's are not prime holiday shopping destinations, so Target's (TGT) pre-market earnings report may be the more important of the two news items. Analysts expect Target to earn 50 cents a s share on sales of $15.25 billion. Saks and The TJX Cos. (TJX), the operator of T.J. Maxx and Marshalls stores, also report before the bell on Tuesday.

Looking at the charts, you may have been thinking that the 600+ points the Dow tacked on over the previous two weeks would have been enough, but that obviously was not the case. Today's close has moved the Dow well above resistance in the 10320 area. There is a lot of room to run to the next Fibonacci level around 11225, but some resistance will probably emerge around 10500 and 11000 should be another fight.

If support is a concern, 10200 should be the first backstop with 10100 helping out from there. While these levels are worth noting, it is going to take either an unforeseen negative surprise or several days of protracted selling to bring them into play.

Dow Chart

The S&P 500 finally broke through 1100 again, topping its October peak of 1101.36. The index could see its next fight in 1020-1025 area and Monday's trade could be considered the beginning of another breakout. Bulls may dare to dream of 1200 before the end of the year, but 1150 is probably more reasonable. Support looms around 1093 and if stocks break down there, 1075 should be the next pit stop.

S&P 500 Chart

As I mentioned earlier, the Nasdaq inched above 2200 today, but did not hold there. Just as the S&P 500 seemed to beat its head into 1100 before breaking through, the Nasdaq may be doing the same with 2200. The other side of this coin is that since tech issues have played a big role in leading the market higher, even a slight faltering could lead to more down side. If the Nasdaq can break 2200, 2251 should be the next resistance area. There are some earnings reports this week that could give the index a jolt, including Dell's (DELL) third-quarter results on Thursday.

Nasdaq Chart

It seems that market gurus keep trying to pinpoint the life expectancy of the rally. Some say it is bound to expire at any moment because the fundamentals simply are not there to support further gains. Others insist that 80% of the S&P 500 member have beaten earnings estimates and that most companies are earning the bulk of their profits from international markets meaning the U.S. economy matters less and less. I have my doubts, as articulated here, but remain convinced it would be foolish to be anything but bullish at this point.

Perhaps the only way the bears can exert any strength in the near-term is with the sudden end of the commodities trade and a new beginning of dollar strength and that is a tough bet to make right now.


New Plays

Trucks & Software

by James Brown

Click here to email James Brown


NEW BULLISH Plays

PACCAR Inc. - PCAR - close: 39.68 change: +0.72 stop: 38.25

Why We Like It:
Today's retail sales data from the Commerce Department showed a big improvement in auto sales, which should be good news for all the vehicle makers. PCAR has a strong bullish trend of higher lows but has yet to breakout over resistance near $40.00. The October high was $40.26. I'm suggesting a trigger to buy PCAR at $40.35. If triggered our first target is $44.75. FYI: The Point & Figure chart is bullish with a $48.00 target.

Annotated chart:

Entry on  November xx at $xx.xx <-- TRIGGER @ 40.35
Change since picked:     + 0.00   			
Earnings Date          01/28/10 (unconfirmed)    
Average Daily Volume:       3.3 million 
Listed on  November 16, 2009    


Symantec - SYMC - close: 17.80 change: +0.35 stop: 17.24

Why We Like It:
The sideways consolidation in SYMC is coiling for a bullish breakout over major resistance near $18.00. I'm suggesting readers use a trigger to buy SYMC at $18.20. If triggered our first target to take profits is at $19.90. The $20.00 level will probably act as round-number resistance. Our second target, with a much longer time frame, is $21.75. Currently the Point & Figure chart is bullish with a $23 target.

Annotated chart:

Entry on  November xx at $xx.xx <-- TRIGGER @ 18.20
Change since picked:     + 0.00   			
Earnings Date          01/27/10 (unconfirmed)    
Average Daily Volume:      11.8 million 
Listed on  November 16, 2009    



In Play Updates and Reviews

Exiting Bearish Positions

by James Brown

Click here to email James Brown


BULLISH Play Updates

Best Buy Inc. - BBY - close: 42.93 change: +1.05 stop: 39.40

Retail stocks continue to show strength even though the retail sales numbers out of the Commerce Department this morning were a little misleading. The big gains last month were in auto sales. Ex-autos sales were actually under expectations. That's not stopping the rally in retailers and BBY gained 2.5%. This looks like another bullish entry point to buy the stock. 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:     + 0.73   			
Earnings Date          12/15/09 (unconfirmed)    
Average Daily Volume:       5.1 million 
Listed on  November 09, 2009    


Baker Hughes Inc. - BHI - close: 43.34 change: +1.89 stop: 40.49

Dollar weakness and a big surge in crude oil (+3%) helped the energy sector out perform today. BHI surged 4.5% and it looks poised to breakout over the $44.00 level. Given the S&P 500's close over the 1100 level I would go ahead and buy BHI right here. Our first target is $47.00. Our second target is $49.85.

Entry on  November 09 at $43.06 
Change since picked:     + 0.28   			
Earnings Date          01/28/10 (unconfirmed)    
Average Daily Volume:       5.6 million 
Listed on  November 09, 2009    


Dreamworks Animation - DWA - close: 34.09 change: +0.10 stop: 32.95

Gains in DWA were kind of disappointing. Shares barely moved and struggled to close over their 50-dma. Shares did end up hitting our trigger to buy the stock at $34.25 so the play is open. Our target is $37.40. FYI: The P&F chart is bullish with a $51 target. Plus, DWA has been considered a takeover target for some of the larger media companies.

chart:

Entry on  November 16 at $34.25
Change since picked:     - 0.16   			
Earnings Date          02/24/10 (unconfirmed)    
Average Daily Volume:       763 thousand
Listed on  November 14, 2009    


ENERSYS - ENS - close: 24.15 change: +0.37 stop: 22.40

ENS managed to breakout over resistance at the $24.00 level and hit our trigger to open bullish positions at $24.20. The play is open. I would still launch new positions now. Our first target is $27.00. Our second target is $29.75. Our time frame is several weeks.

chart:

Entry on  November 16 at $24.20
Change since picked:     - 0.05   			
Earnings Date          02/10/10 (unconfirmed)    
Average Daily Volume:       530 thousand
Listed on  November 14, 2009    


Potlatch Corp. - PCH - close: 30.17 change: +0.66 stop: 27.95

PCH finally broke through resistance near $30.00. The stock hit our trigger to open bullish positions at $30.30. I would still initiate new positions right here. 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.

chart:

Entry on  November 16 at $30.30
Change since picked:     - 0.13   			
Earnings Date          02/11/10 (unconfirmed)    
Average Daily Volume:       503 thousand
Listed on  November 11, 2009    


Southern Copper Corp. - PCU - close: 35.81 change: +1.21 stop: 31.75

Commodity stocks were in rally mode with the dollar in decline. PCU surged 3.49% and hit $36.05. Shares are facing potential resistance near their October highs around $36.25 but if they can get past this level it should be a straight shot toward $40.00. Our target is $39.50.

Our plan called for small positions (25% to 50% your normal size).

Entry on  November 04 at $33.80
Change since picked:     + 2.01   			
Earnings Date          10/22/09 (confirmed)    
Average Daily Volume:       3.5 million 
Listed on  November 03, 2009    


Polaris Industries - PII - close: 46.02 change: +0.80 stop: 42.40

PII delivered some follow through on its intraday bounce from Friday but the stock struggled with the $46.00 level. The trend is up. If you launch new positions now I'd consider a tight stop near $44.00.

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:     + 0.87   			
Earnings Date          01/28/10 (unconfirmed)    
Average Daily Volume:       516 thousand
Listed on  November 07, 2009    


Renolds American - RAI - close: 51.01 change: +0.69 stop: 47.90

RAI hit another new 2009 high with a 1.3% gain. I don't see any changes from my weekend comments. Our target is $54.50. Our time frame is several weeks!

Entry on  November 14 at $50.32 
Change since picked:     + 0.69   			
Earnings Date          02/11/10 (unconfirmed)    
Average Daily Volume:       1.6 million 
Listed on  November 14, 2009    


Travelers Companies - TRV - close: 52.94 change: -0.34 stop: 49.75

While we want shares of TRV to correct lower toward support I was surprised to see the relative weakness today. 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: 19.53 change: +0.59 stop: 16.40

WYN spiked to $19.98 this morning. The $20.00 level is normally round-number resistance so it's not a surprise to see it pull back this afternoon. I am raising our stop loss to $16.90, just under the 50-dma.

Our first target is $21.00. FYI: The point & figure chart is bullish with a $27 target. Our time frame is several weeks. The plan was to use small positions (1/2 a position).

Entry on  November 10 at $18.88 (1/2 position) /gap open higher
Change since picked:     + 0.65   			
Earnings Date          02/11/10 (unconfirmed)    
Average Daily Volume:       3.5 million 
Listed on  November 10, 2009    


BEARISH Play Updates

*We currently do not have any bearish play updates*


CLOSED BULLISH PLAYS

Yanzhou Coal Mining - YZC - close: 18.31 change: +0.33 stop: 14.95

I would love to hop on the YZC bandwagon but shares are just too overbought. The stock soared another 5.9% today. I would wait for a retracement and keep the stock on your watch list. Our trigger at $16.35 was never hit.

chart:

Entry on  November xx at $xx.xx <-- TRIGGER @ 16.35
Change since picked:     + 0.00   			*never opened*
Earnings Date          04/10/10 (unconfirmed)    
Average Daily Volume:       418 thousand
Listed on  November 07, 2009    


CLOSED BEARISH PLAYS

Activision-Blizzard - ATVI - close: 11.72 change: +0.03 stop: 11.85

ATVI failed to breakout over its 50-dma and the $12.00 level but the intraday rally was enough to hit our stop loss at $11.85. I'd keep ATVI on your watch list as a bearish candidate should this market rally fizzle.

chart:

Entry on  November 11 at $11.20
Change since picked:     + 0.65 <-- stopped @ 11.85 (+5.8%)
Earnings Date          02/04/10 (unconfirmed)    
Average Daily Volume:      17.3 million 
Listed on  November 10, 2009    


Exelon Crop. - EXC - close: 47.41 change: +0.80 stop: 47.71

I'm giving up on EXC. With the major market averages breaking out the recent action in EXC is starting to look more like a short-term bullish double bottom. The stock never hit our trigger for bearish positions at $45.75.

chart:

Entry on  November xx at $xx.xx <-- TRIGGER @ 45.75
Change since picked:     + 0.00   			*never opened*
Earnings Date          01/21/10 (unconfirmed)    
Average Daily Volume:       4.4 million 
Listed on  November 12, 2009    


Maxim Integrated - MXIM - close: 18.46 change: +0.44 stop: 18.55

The NASDAQ failed to close over round-number resistance at the 2200 level but technology stocks still look poised to move higher. Somehow shares of MXIM managed to close above the November high and still failed to breakout over the $18.50 level. I'm suggesting an early exit now to cut our losses.

chart:

Entry on  November 12 at $17.77 
Change since picked:     + 0.69 <-- early exit @ 18.46 (+3.8%)
Earnings Date          01/28/10 (unconfirmed)    
Average Daily Volume:       5.3 million 
Listed on  November 12, 2009    


Navistar Intl. - NAV - close: 36.00 change: +0.36 stop: 36.55

NAV is still churning sideways but it looks like odds of a bullish breakout higher are growing. I'm suggesting an early exit now to limit any losses.

FYI: We initiated this play with half a position.

chart:

Entry on   October 24 at $35.41 (buy half a position)
Change since picked:     + 0.59 <-- exit early $36.00 (+1.6%)
Earnings Date          12/30/09 (unconfirmed)    
Average Daily Volume:       1.5 million 
Listed on   October 24, 2009    


Financial SPDRs - XLF - close: 14.82 change: +0.16 stop: 15.21

The afternoon failed rally near $15.00 is bearish and casts some doubt on the strength of this rally. However, with the S&P 500 closing over key resistance at 1100 I'm suggesting an early exit out of bearish XLF positions.

chart:

Entry on   October 26 at $14.71 (small positions) 
Change since picked:     + 0.11 <-- early exit @ 14.82 (+0.00%)
Earnings Date          --/--/-- 
Average Daily Volume:       102 million 
Listed on   October 26, 2009