Option Investor
Newsletter

Daily Newsletter, Wednesday, 12/2/2009

Table of Contents

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

Market Wrap

Employment Still Disappoints, Small-Caps Shine

by Judy Alster

Click here to email Judy Alster
Wednesday was unexciting for the major indexes, although some stocks did fly. We found November job losses slowing but less than expected, gold continuing to defy — what's that word that starts with a G? — and hiring still stubbornly low, all leading to mostly lower volume. Any of these could have riled the indexes under other circumstances, but the day was fairly quiet, with advancers outdoing decliners.

MAJOR INDEXES, WEDNESDAY, DEC. 2:

There was a mild early rise on news of the eighth straight decline in private-sector job losses. Then the market slipped after the announcement of a buildup in petroleum supplies coupled with unimpressive demand, and a minor rise in the dollar. The major indexes moved bare fractions, the Dow dropping, the S&P and the Nasdaq managing gains.

DOW JONES INDUSTRIAL AVERAGE:

The S&P kept above the 1,100 level, but volume here was lower than Tuesday's, as was the Dow's. A few more days of this could indicate that this rally is not strongly supported and may be running out steam.

S&P500 INDEX:

The Nasdaq was up slightly on encouraging news from the electronics sector about Black Friday (even I bought a hard drive Friday night), and volume here was actually close to Tuesday's.

NASDAQ:

Today's star? The small-cap-tracking Russell 2000 picked up, getting back above its 10-day average with a gain of 6.89 points or 1.17%. Steadily-moving-up small-caps can sustain a rally. With the emphasis on "steadily."

RUSSELL 2000 moves up:

Helping the Russell was little StemCells (STEM) on news that the National Institute of Health approved 13 stem cell lines to be used in research.

STEMCELLS MOVES BIG:

As to the specifics on employment: The ADP National Employment Report, compiled by payroll administrator Automatic Data Processing, said 169,000 private sector jobs were lost in November. That's fewer than the 195,000 jobs lost in October, but more than the 160,000 cuts that were expected.

The eighth straight decline in job losses at private companies provided evidence that the economy is recovering, but sloooooowly. The ADP report doesn't represent the entire economy but it's a fair enough indicator of what we might see Friday. Economists are expecting that the unemployment rate remained flat at 10.2% last month. All in all, it's no fun for investors. A choppy market without a clear sustainable trend is a discomfiting thing. (And another good reason to hold your dividend stocks close.)

Despite signs of life in manufacturing and housing, the job market remains pretty discouraging. Employers are reluctant to hire with memories of the recession still fresh in their minds, which is understandable. What if recent manufacturing and housing numbers are just flukes, and bound to disintegrate after the artificial government respiration wears off? What looks likely is a few more months of improvement in the economy, followed, say in April or May, by a sudden rush in hiring. Stay, as they say, tuned.

In related and grimmer news, outplacement consultant Challenger, Gray & Christmas reported that layoff intentions slipped to 50,349 in November vs. October's 55,679. In a reminder of how much layoffs have eased, the year-ago total for November was 181,671. But a bad sign is the lack of hiring intentions, totalling only 10,076 in November, down from October's 57,520.

According to SpendingPulse, electronics sales, helped by new video game releases, rose 6.6% iin November, helped by an 8% sales gain on Black Friday (so called because it's the day merchants get back into the black). In addition, online sales are coming back even more than expected, up 12.3% in November compared with November 2008, when sales increased 8.3%.

ONLINE SALES EXPECTATION MAY BE TOPPED THIS YEAR:

I won't show a chart of Wednesday's gold price; it looks just like Tuesday's, and Monday's, only higher. Gold futures closed at yet a new high for the 19th session since the beginning of November, briefly topping $1,217 an ounce as demand for gold as the eternal hedge against a weak national currency stayed strong, with the dollar remaining around 15-month lows. Gold futures closed up $12.90 or 1.1% at $1,212 an ounce. Gold futures have soared 37% this year, and have made gains in 17 out of the past 20 weeks. They advanced in all but two trading sessions in November, and have started December with two days of gains.

Oh, okay, here's a chart of Barrick Gold (ABX). Other gold stocks look similar, as does the S&P Gold Trust ETF (GLD).

BARRICK GOLD, a stand-in for most gold stocks and GLD:

The dollar actually gained 22 cents Wednesday, which helped tamp down the rise in stocks, but it's still under $75 against a basket of major currencies, closing at $74.64, down about 14% in the last 12 months. Maybe even more disturbing (the faint of heart may want to avert their eyes) is the chart below, the one that shows how much of U.S. debt is held by other countries. Think this might have anything to do with the gold story?

WHOM WE OWE (or, WHO OWNS US):

With the U.S. dollar so very anemic, commodities get a boost (as almost all commodities are denominated in dollars). That includes silver, copper, palladium and steel, which have enjoyed big rides lately. Copper especially benefits in a turnaround, although results have been muddied over the last year or so as Chinese manufacturers have been buying at lows, and hoarding

SOUTHERN COPPER, on a roll:

HECLA MINING, benefiting from silver's big move:

The defensive utilities industry had the best sector gain today, especially with American Electric Power (AEP) and Edison International (EIX) getting Buy ratings from Deutsche Bank:

AMERICAN ELECTRIC POWER:

The energy sector didn't fascinate us today, no doubt owing to the massive buildup in gasoline stocks, as well as big builds in overall oil supplies despite falling imports. Gasoline stocks rose 4.0 million barrels last week, said the Energy Information Administration, with oil stocks up 2.1 million (and delivery-point Cushing stocks up 1.4 million). Distillate stocks were down for the week by about 1.2 million barrels. Refineries operated at a mere 79.7% of capacity, answering the question, "Why are shares of Tesoro (TSO) and Valero (VLO) collapsing?" Demand stayed about the same. Crude futures lost $$1.77 to close at $76.60.

LIGHT CRUDE OIL PRICES:

Earnings continue to trickle in. Shoe retailer Collective Brands (PSS) said Wednesday its third-quarter profits fell 22% but still beat Wall Street expectations as sales rose slightly. The operator of Payless and Stride Rite earned $36.9 million or 57 cents per share, down from last year's $47.5 million or 74 cents. Excluding one-time items, the company said it would have earned 61 cents, handily beating the estimated 49 cents. Revenue rose to $867 million from $862.7 million last year, also beating analyst estimates.

COLLECTIVE BRANDS shows that consumers have been spending:

Shares of teen retailer Aeropostale Inc. (ARO) thudded sharply after hours when the company announced disappointing November same-store sales and gave guidance that was only in line with estimates. Actually, November same-store sales rose 7% compared to a decrease of 5% in November last year; it wasn't good enough for analysts who were looking for a 7.7% rise. Aeropostale expects to earn between $1.20 and $1.24 a share in the fourth-quarter of 2009; analysts wanted $1.22 a share. The company saw profit of $62.6 million or 92 cents a share on sales of $568 million, all sharply up from last year but again, not good enough. The stock was up 47 cents or 1.46% to $32.70, before falling $2.65 or 8.10% after-hours.

The Fed's Beige Book report came out Wednesday afternoon, reassuring us that the economic recovery gained a little traction recently as shoppers spent a little more and factories increased production. It was the most chipper assessment by the Federal Reserve since the recession began over two years ago. The Fed's new "snapshot" of business conditions nationwide found that things have generally improved since the last report in late October. Eight of the Fed's 12 regions surveyed reported some pickup in activity or improved conditions; four were mixed or about the same. The new report adds to evidence that the economy is rebounding.

TEXAS INSTRUMENTS -- consumers are coming out of their shells:

Consumers in late November did spend more, with general merchandise and auto sales improving across much of the country. (Most of that was non-U.S. car sales.) Although off 40 cents Wednesday, electronics retailer Best Buy (BBY) had a good month. But merchants are nevertheless keeping inventory low, which puts the kibosh on manufacturing, which hampers manufacturing . . . . Still, Dallas reported improved manufacturing for makers of high-tech equipment, paper and petrochemicals and in fact Texas Instruments (TXN) is up some 10% since the beginning of November. Upticks in food-related production also were mentioned in some regions. The stock of Sara Lee (SLE), on a number of institutional investors' Buy lists, had a sweet November.

SARA LEE:

The main challenge for Fed Chairman Ben Bernanke, though, is to sustain the rebound, especially after the benefits of government support fade next year. Naturally, the Fed is expected to hold a key bank lending rate at a record low near zero when it meets on Dec. 15-16. Economists predict the Fed will keep rates at basement levels well into next year, helped by the fact that inflation is behaving itself. The central bank continues to hope that low rates will encourage personal and especially business spending.

Hiring remains a sore spot in general, although in Boston, which has a very health-care- and biopharma-heavy economy, some businesses were starting to hire and reverse pay cuts or wage freezes implemented earlier in the year. In St. Louis, too, the service sector recently started to expand.

But holiday hiring expectations nationwide were mixed, the Fed said, going on to warn that it could take "five or six years" for the job market to return to normal. Terrific. Commercial real estate conditions continued to deteriorate, with most regions still experiencing rising vacancy rates, downward pressure on rents and little, if any, new commercial development.

By contrast, sales and construction activity in the housing market improved across much of the country, according to the Fed survey and also to the Mortgage Bankers' Association index last week. It rose 4.1% last week; the refinance index rose 1.7%. As always, low rates helped: 30-year loans averaged 4.79%, down three basis points for the lowest rate since May. Indications on the housing market are picking up steam. A sustained turnaround in housing would be a long, cool drink of water in the desert.

The main challenge for Fed Chairman Ben Bernanke is to sustain the rebound, especially after the benefits of government support fade next year. Naturally, the Fed is expected to hold a key bank lending rate at a record low near zero when it meets on Dec. 15-16. Economists predict the Fed will keep rates at basement levels well into next year, helped by the fact that inflation is behaving itself.

And in the Misery Loves Company Division: Mercifully, Dubai World's real-estate catastrophe (maybe you shouldn't try to build islands in the shape of giant palm trees) hasn't washed over the whole world, but it can't be much fun to be a big property holder in Dubai right now. Basically, too much easy money flowed into Dubai, fueling a massive construction boom financed with debt. For a while the debt looked sustainable because it was backed by valuable (for the time being) property. When the global financial crisis hit, Dubai property prices were walloped. Property prices per square foot there fell 45% from Q3 2008 to Q3 2009.

DUBAI PROPERTY VALUES at practically terminal velocity:

Del Monte Foods, Marvel Entertainment, Toll Brothers and Siemens are among those reporting earnings Thursday. Also look for the European Central Bank's interest rate announcement and reports on jobless claims, productivity and costs, and the ISM non-manufacturing index; jobless claims could especially be a market mover. A potentially huge mover -- the employment situation report -- comes out Friday. Investors are waiting for that.


New Plays

Eye on the Financials

by James Brown

Click here to email James Brown


NEW BULLISH Plays

Financial SPDR - XLF - close: 14.66 change: -0.01 stop: 14.15

Why We Like It:
After the closing bell tonight news hit the wires that Bank of America (BAC) was signing the paperwork to pay back the TARP funds. This should be interpreted as a bullish development for the banking sector and stocks could rally on this news. BAC itself said it will eventually raise more capital so instead of buying BAC I'd rather buy the XLF. On a short-term basis the XLF is still under a trendline of resistance.

I'm suggesting a trigger to buy small bullish positions at $14.85, which would be a breakout over multiple layers of resistance (namely the trendline and the 50-dma). If triggered at $14.85 our first target is $16.40.

Annotated chart:

Entry on  December xx at $xx.xx <-- TRIGGER @ 14.85 
Change since picked:     + 0.00   			
Earnings Date          --/--/-- (unconfirmed)    
Average Daily Volume:        82 million 
Listed on  December 02, 2009    



In Play Updates and Reviews

Semiconductors Show Strength (again)

by James Brown

Click here to email James Brown


BULLISH Play Updates

Analogic Corp. - ALOG - close: 40.02 change: -0.28 stop: 38.99

ALOG is struggling to keep any intraday gains. The stock reversed near $41.20 again. I'm growing more cautious as we approach earnings next week. If we see a close under $40.00 I'd probably exit early. Our first target to take profits is at $44.90. ALOG is due to report earnings on December 9th and we don't want to hold over the report. FYI: The P&F chart is bullish with a $54 target.

Entry on  November 25 at $41.51 
Change since picked:     - 1.49   			
Earnings Date          12/09/09 (confirmed)    
Average Daily Volume:      41.5 thousand
Listed on  November 24, 2009    


Best Buy Inc. - BBY - close: 43.13 change: -0.40 stop: 39.85

BBY is still consolidating sideways. Investors are probably waiting to hear the company's November same store sales numbers. Several retailers will start reporting these figures tomorrow. These results could provoke some volatility in the retail sector. I remain bullish on BBY but I'm not suggesting new positions at this time. 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:     + 0.93   			
Earnings Date          12/15/09 (unconfirmed)    
Average Daily Volume:       5.1 million 
Listed on  November 09, 2009    


Bank of Hawaii - BOH - close: 45.96 change: +0.44 stop: 43.90

BOH out performed its peers but failed to close above resistance at the $46.00 mark. Readers might want to wait for a rise over today's high (46.32) before initiating new positions.

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:     - 0.24   			
Earnings Date          01/25/10 (unconfirmed)    
Average Daily Volume:       424 thousand
Listed on  November 17, 2009    


Du Pont - DD - close: 35.38 change: +0.28 stop: 33.95

DD spent the session churning sideways in a very narrow range. The high today was $35.45. I'm suggesting we use a trigger to buy DD at $35.55. If triggered our first target is $39.50. Our time frame is several weeks. We'll plan to exit ahead of the late January earnings report. FYI: The Point & Figure chart is bullish with a $56 target.

Entry on  December xx at $xx.xx <-- TRIGGER @ 35.55
Change since picked:     + 0.00   			
Earnings Date          01/27/10 (unconfirmed)    
Average Daily Volume:       5.8 million 
Listed on  December 01, 2009    


Johnson & Johnson - JNJ - close: 63.88 change: +0.37 stop: 59.90

JNJ extends the rally and sets another new high for 2009. The $65.00 level might offer some resistance but our target first target is $67.50.

Entry on  November 23 at $63.05
Change since picked:     + 0.83   			
Earnings Date          01/26/10 (unconfirmed)    
Average Daily Volume:      12.6 million 
Listed on  November 21, 2009    


Potlatch Corp. - PCH - close: 30.45 change: +0.92 stop: 27.95

PCH displayed some relative strength with a 3.1% gain. The close over $30.00 is bullish and can be used as a new bullish entry point.

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:     + 0.15   			
Earnings Date          02/11/10 (unconfirmed)    
Average Daily Volume:       503 thousand
Listed on  November 11, 2009    


Southern Copper Corp. - PCU - close: 36.40 change: +1.12 stop: 33.80

Metals were ignoring any strength in the dollar today. Gold hit a new all-time high while copper and silver hit new 52-week highs. This strength fueled a 3.1% gain in shares of PCU. The close over resistance at $36.00 is bullish.

I am suggesting new bullish positions right here!

Our first target is $39.50. Our second target is $41.50. Our plan called for small positions (25% to 50% your normal size).

Entry on  November 04 at $33.80
Change since picked:     + 2.60   			

2nd Entry December 02 at $36.40
Change since picked:     + 0.00
Earnings Date          10/22/09 (confirmed)    
Average Daily Volume:       3.5 million 
Listed on  November 03, 2009    


Renolds American - RAI - close: 51.17 change: +0.33 stop: 49.49

RAI continues to bounce. Shares are nearing short-term resistance in the $51.50 zone. Today's gain, following yesterday's "inside day" should portend a new leg higher. Our target is $54.50. Our time frame is several weeks.

Entry on  November 14 at $50.32 
Change since picked:     + 0.85   			
Earnings Date          02/11/10 (unconfirmed)    
Average Daily Volume:       1.6 million 
Listed on  November 14, 2009    


Starbucks Corp. - SBUX - close: 21.68 change: -0.05 stop: 20.95

Shares of SBUX continue to percolate under resistance near $22.00. I don't see any changes from my Monday night comments. I'm suggesting a trigger to buy the stock at $22.25. If triggered our first target is $24.90.

Entry on  November xx at $xx.xx <-- TRIGGER @ 22.25
Change since picked:     + 0.00   			
Earnings Date          01/28/10 (unconfirmed)    
Average Daily Volume:      10.9 million 
Listed on  November 30, 2009    


Symantec - SYMC - close: 18.00 change: -0.01 stop: 17.24

SYMC is still hovering around the $18.00 mark. I'm suggesting 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.

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: 52.65 change: +0.05 stop: 49.75

TRV struggled with the $53.00 level again. I don't see any changes from my previous comments. Our target is $57.40.

Entry on  November 27 at $51.94 /gap down entry point 
Change since picked:     + 0.71   			
Earnings Date          01/27/10 (unconfirmed)    
Average Daily Volume:       5.3 million 
Listed on  November 07, 2009    


Texas Instruments - TXN - close: 25.96 change: +0.02 stop: 24.40

The SOX semiconductor sector continued to rally and posted a 1.6% gain, which was significantly better than the NASDAQ's 0.4% gain. The SOX is now testing resistance near its November highs around 325. Shares of TXN hit new 52-week highs at $26.33 this morning. Our trigger was hit at $26.15 so the play is now open. Our first target is $29.75.

chart:

Entry on  December 02 at $26.15
Change since picked:     - 0.19   			
Earnings Date          01/26/10 (unconfirmed)    
Average Daily Volume:      12.6 million 
Listed on  December 01, 2009    


Warner Chilcott - WCRX - close: 26.02 change: +0.50 stop: 22.49

The rally in WCRX continues with another new high. I'm adjusting our stop loss up to $22.90. Our first target is $27.40. Our second target is $29.45.

Entry on  December 01 at $24.77 gap open entry point (small positions)
Change since picked:     + 1.25   			
Earnings Date          02/25/10 (unconfirmed)    
Average Daily Volume:       1.8 million 
Listed on  November 28, 2009    


Wyndham Worldwide - WYN - close: 18.97 change: +0.02 stop: 17.85 *new*

This bounce in shares of WYN looks like a new entry point. The $20.00 is naturally round-number resistance but our first target is $21.00. FYI: The point & figure chart is bullish with a $27 target. Our time frame is several weeks. Please note our new stop loss at $17.85. 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:     + 0.09   			
Earnings Date          02/11/10 (unconfirmed)    
Average Daily Volume:       3.5 million 
Listed on  November 10, 2009    


BEARISH Play Updates

Activision-Blizzard - ATVI - close: 11.34 change: -0.32 stop: 12.01

ATVI failed at resistance again. Shares have fallen to the bottom of their short-term trading range. I'm suggesting a trigger to launch small bearish trades at $11.15. More conservative traders could wait for a drop under $11.00 first. If triggered our first target is $10.05. Our second target is $9.25. Our time frame is several weeks. FYI: The Point & Figure chart is currently forecasting a $7.50 target.

Entry on  November xx at $xx.xx <-- TRIGGER @ 11.19
Change since picked:     + 0.00   			
Earnings Date          02/04/10 (unconfirmed)    
Average Daily Volume:        20 million 
Listed on  November 28, 2009    


Bank of New York - BK - close: 27.36 change: +0.41 stop: 27.16

The oversold bounce in BK is gaining steam. Shares are up there days in a row after bouncing near $26.00. It will be interesting to see if BK can breakout past the 50-dma and 200-dma. If we see the stock close over $28.00 we'll drop it as a bearish candidate. For now we're still waiting for a breakdown.

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    


Liberty Global - LBTYA - close: 19.77 change: +0.46 stop: 21.26

The tone of the market seems to be growing more bullish. More conservative traders might want to tighten their stops on LBTYA. A close over $20.00 or its exponential 200-dma would be a good reason to close this play. Our first target is $18.20. Our second target is $16.20. Our time frame is several weeks.

Entry on  November 24 at $19.85
Change since picked:     - 0.08   			
Earnings Date          02/24/10 (unconfirmed)    
Average Daily Volume:       2.5 million 
Listed on  November 21, 2009    


Metlife Inc. - MET - close: 35.08 change: +0.89 stop: 36.05

More conservative traders may want to exit early right now. MET closed above its 30-dma and its exponential 200-dma. There is still potential resistance near $36.00 and its trendline of lower highs but the odds seem to be growing against the bears here. I'm not suggesting new positions at this time.

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:     + 0.69   			
Earnings Date          02/04/10 (unconfirmed)    
Average Daily Volume:       7.2 million 
Listed on  November 21, 2009    


CLOSED BEARISH PLAYS

Lam Research - LRCX - close: 36.81 change: +1.86 stop: 36.26

Our aggressive trade on LRCX did not pay off. The SOX semiconductor index has turned decisively more bullish in the last two sessions. Shorts ran for cover in LRCX and the stock surged past a small cloud of moving averages to post a 5.3% gain. Our stop loss was hit at $36.26.

chart:

Entry on  November 28 at $34.49 (small positions)
Change since picked:     + 1.77 <-- stopped @ 36.26 (+5.1%)
Earnings Date          01/28/10 (unconfirmed)    
Average Daily Volume:       1.8 million 
Listed on  November 28, 2009