Option Investor
Newsletter

Daily Newsletter, Monday, 11/23/2009

Table of Contents

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

Market Wrap

Stocks Move Higher Led By Weak Dollar, Strong Home Sales Data

by Todd Shriber

Click here to email Todd Shriber
Just when it seemed that the bears might be emerging from their slumber, the bulls said not so fast and ran stocks higher on Monday, sending the Dow Jones Industrial Average to another triple-digit gain. The blue chip index finished the day up almost 133 points to close at 10450.95. The S&P 500 gained 1.36% to stay above 1100, closing at 1106.24. The Nasdaq added nearly 30 points to finished the day at 2176.01. An up day is always nice, but the Nasdaq continues to have issues getting to and surpassing the 2200 level.

Market Stats

Monday was light in terms of economic reports, but existing home sales rose by 10.1% in October from September and that was enough to get the bulls excited, at least for today. Year-over-year, existing home sales surged 23.5%, but do not forget that October 2008 was the apex of the financial crisis with AIG (AIG), Lehman Brothers and Fannie Mae (FNM) all falling apart and Bank of America (BAC) and Citigroup (C) nearly accomplishing the same ominous feat. In other words, home sales in October 2009 should have been better than they were in October 2008 and they were.

Still, it is worth noting that homes on the lower end of the price spectrum jolted the sales number higher. Condos and co-ops led the way and the September sales number was revised downward, erasing the gains for that month that were originally reported. On the bright side, the National Association of Realtors claims that seasonally adjusted home sales are at their highest level since February 2007. I am always a little leery of any statistic that is seasonally adjusted, simply because it makes me think the number is being adjusted to cover up a negative underlying picture.

Yes, it is good news that home inventories are being reduced, but the market will probably want to see the pace of sales at the higher end of the housing market pick up before getting too excited about the battered residential real estate space.

Existing Home Sales

All 10 industry groups tracked within the S&P 500 moved higher on Monday, led by technology, telecom and financial issues. As has been par for the course on these big up days, the dollar was weak and gold was strong. In fact, gold futures touched a record $1174 per ounce in New York trading before settling at $1164.30.

Pity those that are short the yellow metal because calling a top in gold prices seems to be a futile endeavor. More central banks across the globe are bolstering their gold reserves, the financial media is reporting a couple of hedge fund geniuses are starting gold funds and throw in the dollar's pathetic performance, and some might say gold is in a secular bull market. Secular or not, the chart below illustrates how strong gold's run has been and it is increasingly difficult to fight this trend.

Gold Chart

Gold's bullish ways have a trickle-down effect on other metals, lending efficacy to my point that the rally in stocks has indeed been fueled by commodities and materials names. Copper for March delivery gained nearly 1% on Monday, closing at $3.16 a pound after trading as high as $3.20. Copper fought the $3 area for a while and this former resistance level looks like it may have turned to support as the red metal has plenty room in front of it to move higher.

Copper Chart

And do not forget about silver. Yes, silver is the reward for second-place finishers in Olympic events, but the metal has been no second fiddle to gold. In fact, the iShares Silver Trust (SLV), the most liquid silver ETF, has actually outperformed the SPDR Gold Shares ETF (GLD) by about 5% over the past three months. Silver is used in more industrial applications than gold is and is similarly used as a currency backer, so the bottom line is silver does not necessarily need gold to move higher to move higher on its own, but gold's action is clearly a boon for silver bulls.

Silver ETF

Speaking of commodities, Deere (DE), the largest U.S. maker of farm equipment, rose by more than 2% after Morgan Stanley upgraded the shares to ''overweight'' from ''equal-weight.'' Morgan Stanley said that increased demand for farm equipment is a ''secular phenomenon that is underestimated.'' Deere shares touched a new a 52-week high of $53.59 on the news, but closed at $51.85.

Oil services giant Schlumberger (SLB) also rose more than 2% after Credit Suisse upped its rating to ''outperform'' from ''neutral'' and its price target to $76 from $72. Dow component Chevron (CVX) joined the party, rising 2.57%.

And speaking of Dow components, Hewlett-Packard (HPQ), the world's largest computer maker, reported a fiscal fourth-quarter profit of $2.4 billion, or 99 cents a share, after the close on Monday. That compares with $2.1 billion, or 84 cents a share, a year earlier. Adjusted income was $1.14 a share, ahead of the average analyst estimate of $1.13 a share. Revenue fell to $30.8 billion from $33.6 billion, but that number also beat analysts' estimate of $30.4 billion.

The PC business reported an 8% increase in shipments but a 12% drop in sales, while the printing and imaging business reported a 15% drop in sales and a 20% decline in shipments. For the current quarter, HP expects to earn $1.03-$1.05 a share on sales of $29.6 billion to $29.9 billion. Analysts expect a profit of $1.04 a share on revenue of $29.7 billion.

HP shares are up 40% year-to-date, roughly double the performance of the S&P 500 and despite that sterling run, management apparently still sees value in the stock. The company said it is tripling its stock repurchase plan to $12 billion from $4 billion. HP closed at $51.02, but was down 24 cents to $50.78 in after-hours trading.

Once upon a time, Dell (DELL) was whipping HP, but those tables have turned in dramatic fashion. Now Dell cannot seem to get out of its own way, losing market share to HP at an alarming rate. While many on the Street say Dell overpaid for Perot Systems, HP appears to have gotten good value in its purchase of EDS and its recently announced acquisition of 3Com (COMS). How stark are the differences between these two rivals? Dell expects 2010 revenue of $60 billion. HP expects $119 billion in 2010 sales. Enough said.

HP Chart

With an eye towards what to look for on Tuesday, several economic reports line the agenda with the revised third-quarter GDP number being released before the bell. Most economists expect a downward revision to 2.9% growth from the previous reading of 3.5%. More important will be any guidance about 2010 GDP growth. Considering the U.S. is emerging from a deep recession, 2.9% growth may not be enough to excite many forecasters and more robust growth prospects could be needed to fuel the rally in stocks.

The Conference Board will deliver consumer confidence data for November tomorrow and that number could retreat to 47.5 from 47.7 in October. To top it all off, the Federal Reserve releases minutes from its last meeting at 2PM Eastern time.

In addition to Hewlett-Packard, there are several other earnings reports that may be worth watching before the bell. Medical device maker Medtronic (MDT) is expected to earn 74 cents a share on sales of $3.75 billion. H.J. Heinz (HNZ), the maker of Heinz ketchup and Ore-Ida french fries, is expected to earn 69 cents a share on revenue of $2.63 billion. Heinz counts on international markets for the bulk of its sales, so the bottom line could get a boost from the weaker dollar.

Another report to keep an eye on is Barnes & Noble (BKS). Analysts expect the book retailer to post a loss of 33 cents a share on revenue of $1.16 billion, but outlook for the current quarter may be what investors focus on. Barnes & Noble has been marketing the Nook, a competitor to Amazon's (AMZN) e-reader, the Kindle. By all appearances, Nook sales have been robust and Barnes & Noble said they will not be able to deliver any more nooks before Christmas. Then again, that might mean Barnes & Noble hurried the Nook's introduction and could lose market share to the already dominant Kindle in the process.

Taking a look at the charts, 10400 for the Dow looked like it would act as a resistance point, but that theory was disregarded on Monday and the Dow looks primed to move toward 10500 and perhaps beyond. One thing that is interesting about the Dow is that different members are helping the club higher on various days. Last week, the likes of Coca-Cola (KO), Merck (MRK) and McDonald's (MCD) were positive catalysts. On Monday, it was Chevron, AT&T (T) and Verizon (VZ). Tomorrow, HP could be one catalyst and we will have to wait and see about who else joins the party.

Thanksgiving week is normally a light volume, bullish period, so it is hard to envision the bears exerting any pressure during this short week. If the Dow starts to peel back a bit, support should be found at 10200 and then at 10000. A move above 10600 before the week is out could put the bulls in a good position for one of those Santa Claus rallies.

Dow Chart

The S&P 500 made its way above 1100 last week, but failed to advance much beyond that point and went into the weekend below that important mark. Those ills were cured on Monday, so the index has another chance to move beyond last week's high of 1113.69 and challenge resistance at 1120. If stocks start to move lower, it is critical that the S&P 500 hold support at 1085. Any violation of that level could confirm that the rally is at least ready for a break, if not over altogether.

S&P 500 Chart

The Nasdaq had its problems last week with Dell's disappointing earnings and a downgrade of the semiconductor sector. Those negative catalysts brought the Nasdaq close to support at 2140. The Nasdaq's failure at 2200 was similar to what the S&P 500 did above 1100 last week, but the Nasdaq appears to need more help to get back to 2200. Maybe HP's earnings will jolt tech stocks on Tuesday, but it would be asking a lot for a stock that is not even listed on the Nasdaq to help the index move 20+ points. If 2140 fails as support, the downside is substantial and the Nasdaq could move down to 2050.

Nasdaq Chart

There is no need to sound an alarmist tone for this week and in the absence of substantive events to bolster stocks, give thanks for the easy trade. Of course, I mean long commodities and short the dollar. Happy Thanksgiving to all.


New Plays

Almost A Trade

by James Brown

Click here to email James Brown

I'm listing two stocks to watch. Both are poised to move.

Editor's Note:

FYI: The market is trending higher but I noticed that Ross Stores Inc. (ROST) is under performing and looks like it's about to breakdown. If you're looking for a bearish trade consider ROST with a trigger under $43.70. Just watch for possible support at the 200-dma.

FYI Part II: I was going to add Medtronic Inc. (MDT) as a bullish trade tonight but halfway through my research saw that the company is poised to announce earnings tomorrow morning. Let's wait and see how the stock reacts to the earnings news. I was going to suggest bullish positions now with a stop loss at $38.90 since shares held the $39.00 level for the last two weeks. Target the $44-45 zone.



In Play Updates and Reviews

Watch Those Triggers

by James Brown

Click here to email James Brown


BULLISH Play Updates

Best Buy Inc. - BBY - close: 43.71 change: +0.41 stop: 39.85

Retailers continue to inch higher as we approach "Black Friday", which is supposed to push retailers "into the black" side of their balance sheet. Personally I'm a little concerned this group might sell-off next week but for now the trend is our friend. BBY hit a new relative high at $44.32 although the intraday pull back makes this almost look like a short-term top. 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:     + 1.51   			
Earnings Date          12/15/09 (unconfirmed)    
Average Daily Volume:       5.1 million 
Listed on  November 09, 2009    


Bank of Hawaii - BOH - close: 46.27 change: +0.55 stop: 43.90

Banks did well on Monday as traders increased their appetite for risk. BOH is back above resistance at $46.00 and I would reconsider new bullish positions at these levels.

Our first target to take profits is at $49.85. FYI: The Point & Figure chart is bullish with a $59 target.

Entry on  November 18 at $46.20 
Change since picked:     + 0.07   			
Earnings Date          01/25/10 (unconfirmed)    
Average Daily Volume:       424 thousand
Listed on  November 17, 2009    


ENERSYS - ENS - close: 24.01 change: +0.22 stop: 22.40

ENS managed to rally back above resistance at the $24.00 level but it's not very convincing. The stock actually hit a new high at $24.57 but shaved off a good chunk of those gains by the close. Consider waiting for another move over $24.50 before launching positions.

Our first target is $27.00. Our second target is $29.75. Our time frame is several weeks.

Entry on  November 16 at $24.20
Change since picked:     - 0.19   			
Earnings Date          02/10/10 (unconfirmed)    
Average Daily Volume:       530 thousand
Listed on  November 14, 2009    


Halliburton - HAL - close: 30.44 change: +0.56 stop: 29.80

HAL managed to erase Friday's decline but the action in oil today was noteworthy. The early morning rally in oil completely reversed. That's worrisome if you're bullish on energy stocks. We'll keep HAL on the play list with a trigger to open bullish positions at $32.20 but if the stock closes under $30.00 again we'll drop it as a candidate. If triggered our first target is $34.90.

Entry on  November xx at $xx.xx <-- TRIGGER @ 32.20
Change since picked:     + 0.00   			
Earnings Date          01/26/10 (unconfirmed)    
Average Daily Volume:      15.7 million 
Listed on  November 17, 2009    


Johnson & Johnson - JNJ - close: 62.69 change: +0.38 stop: 59.90

The early morning stock market gains were enough to push JNJ to a new 2009 high at $63.10. Our trigger to buy JNJ was at $63.05 so the play is now open. I'd still consider new positions here but readers will want to consider small position sizes to start. The $65.00 level might offer some resistance but our target first target is $67.50.

chart:

Entry on  November 23 at $63.05
Change since picked:     - 0.36   			
Earnings Date          01/26/10 (unconfirmed)    
Average Daily Volume:      12.6 million 
Listed on  November 21, 2009    


PACCAR Inc. - PCAR - close: 38.94 change: +0.45 stop: 38.25

I don't see any changes from my weekend comments on PCAR. We're still waiting for a breakout higher with a trigger to open bullish positions at $40.35. If triggered our first target is $44.75. FYI: The Point & Figure chart is bullish with a $48.00 target.

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    


Potlatch Corp. - PCH - close: 29.74 change: +0.53 stop: 27.95

PCH delivered a 1.8% gain but is still struggling with the $30.00 level. Readers might want to wait for a new close over $30.00 before initiating positions.

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.

Entry on  November 16 at $30.30
Change since picked:     - 0.56   			
Earnings Date          02/11/10 (unconfirmed)    
Average Daily Volume:       503 thousand
Listed on  November 11, 2009    


Southern Copper Corp. - PCU - close: 35.05 change: +0.18 stop: 33.80

A drop in the dollar sent commodities higher. Copper futures hit new relative highs for the year. Yet PCU appears to be under performing its commodity for the moment. Resistance at $36.00 held.

I am not suggesting new bullish positions at this time. 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:     + 1.25   			
Earnings Date          10/22/09 (confirmed)    
Average Daily Volume:       3.5 million 
Listed on  November 03, 2009    


Polaris Industries - PII - close: 45.35 change: +1.04 stop: 43.25 *new*

PII gapped higher and closed over round-number resistance at the $45.00 level. Unfortunately almost all of the stock's gains came at the opening gap. The 50-dma has risen to $43.50. I'll raise or stop loss to $43.25. I'm not suggesting new positions at this time.

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:     + 0.20   			
Earnings Date          01/28/10 (unconfirmed)    
Average Daily Volume:       516 thousand
Listed on  November 07, 2009    


Renolds American - RAI - close: 51.26 change: +0.38 stop: 49.49 *new*

RAI is looking bullish here. The stock may have under performed the S&P 500 for today but shares are poised to rally higher. Traders might want to buy a move over $51.50 but consider upping your stop loss toward last week's low (near $50.50). I am raising our stop loss to $49.49. Our target is $54.50. Our time frame is several weeks!

Entry on  November 14 at $50.32 
Change since picked:     + 0.94   			
Earnings Date          02/11/10 (unconfirmed)    
Average Daily Volume:       1.6 million 
Listed on  November 14, 2009    


Symantec - SYMC - close: 18.01 change: +0.29 stop: 17.24

SYMC managed to breakout over key resistance at the $18.00 level but it struggled to hold this gain. Shares hit $18.19 and settled right on resistance. Believe it or not we are still sitting on the sidelines. Our trigger to buy SYMC is at $18.20. I don't see any changes to our strategy.

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.

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    


Travelers Companies - TRV - close: 52.97 change: +0.59 stop: 49.75

As of last week it looked like TRV was going to hit our trigger at $52.15 soon. That may not happen now if the market continues to bounce. We'll keep our buy the dip trigger at $52.15 but I'll add a buy the bounce trigger at $53.60. Should TRV hit $53.60 I'd use small position sizes to manage your risk. If triggered our target is $57.40.

Entry on  November xx at $xx.xx <-- TRIGGER @ 52.15 (or 53.60 small pos)
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: 19.06 change: +0.07 stop: 17.20

WYN under performed the rest of the market today. Shares rallied toward $19.50 and trimmed its gains by the close. I'm not suggesting new positions at these levels.

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:     + 0.18   			
Earnings Date          02/11/10 (unconfirmed)    
Average Daily Volume:       3.5 million 
Listed on  November 10, 2009    


BEARISH Play Updates

Bank of New York - BK - close: 26.80 change: +0.61 stop: 27.16

Banking stocks performed well as traders increased their appetite for risk. BK gapped open higher and closed with a 2.3% gain. This looks like an oversold bounce. We'll stick to our plan and wait for a breakdown under support. I'm suggesting a trigger to open bearish positions at $25.49. More cautious trader could wait for a drop under $25.00 since it might be round-number support.

If the newsletter is triggered at $25.49 our first target is $22.25. Our second target is $20.50. Our time frame is several weeks.

Entry on  November xx at $xx.xx <-- TRIGGER @ 25.49
Change since picked:     + 0.00   			
Earnings Date          01/20/10 (unconfirmed)    
Average Daily Volume:      11.4 million 
Listed on  November 21, 2009    


Exelon Corp. - EXC - close: 47.40 change: +0.59 stop: 47.25

EXC continues to bounce around inside its $46-47.50 trading range. We're waiting for a breakdown. I'm suggesting readers use a trigger at $45.80, which is just under the November low. If triggered our first target is $42.25. Our second target is $40.25. The Point & Figure chart is already bearish with a $40 target.

Entry on  November xx at $xx.xx <-- TRIGGER @ 45.80
Change since picked:     + 0.00   			
Earnings Date          01/21/10 (unconfirmed)    
Average Daily Volume:       4.2 million 
Listed on  November 19, 2009    


Liberty Global - LBTYA - close: 20.63 change: +0.24 stop: 21.26

LBYTA is bouncing from support but the rebound struggled with a sharp reversal from the morning highs.

I'm suggesting a trigger to open bearish positions at $19.85. If triggered our first target to take profits is at $18.20 (near the 200-dma). Our second target is $16.20. Our time frame is several weeks.

Entry on  November xx at $xx.xx <-- TRIGGER @ 19.85
Change since picked:     + 0.00   			
Earnings Date          02/24/10 (unconfirmed)    
Average Daily Volume:       2.5 million 
Listed on  November 21, 2009    


Metlife Inc. - MET - close: 34.49 change: +0.59 stop: 36.05

MET gapped open higher on us but shares failed to see much follow through after the gap. I've changed our entry point to $34.39. At this point I'd look for a new drop under $34.00 or maybe $33.60 before launching new positions. There is potential support at the 200-dma near $31.00 but I'm suggesting we target a drop to $30.25. More aggressive traders could aim lower.

Entry on  November 21 at $34.39 /gap higher entry
                           /originally listed at $33.90
Change since picked:     + 0.10   			
Earnings Date          02/04/10 (unconfirmed)    
Average Daily Volume:       7.2 million 
Listed on  November 21, 2009