Option Investor
Newsletter

Daily Newsletter, Monday, 12/7/2009

Table of Contents

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

Market Wrap

Mixed Message Monday

by Todd Shriber

Click here to email Todd Shriber
Monday's trade was a case of much ado about nothing as the Dow Jones Industrial Average eked out a 1.21-point gain to close at 10390.11 and the S&P 500 shed 2.73 points to finish the day at 1103.25. The Nasdaq lost 4.74 points to close at 2189.61. So two of the three major indexes declined and the Dow posted a meager gain on a day where investors seemed to take a pass on riskier assets in the wake of comments by Federal Reserve Chairman Ben Bernanke that the U.S. economy still faces significant headwinds in the forms of a weak labor market and constrained access to credit.

Stats Table

Perhaps more noteworthy than the action, or lack thereof in equities, were the declines in the commodities space, most notably with crude oil and gold. The two most heavily traded commodities both slid on the day, highlighting investors' desire for more conservative fare on Monday. Crude oil for January delivery slid below the all-important $75 a barrel level to close at $74.07. The $75 area had acted as significant resistance for black gold until late September when oil made its way above $80 per barrel. Recent weeks have not been kind to oil and futures now reside at an eight-week low as weak demand and concerns about the strength of the U.S. economic recovery continue to weigh on oil prices.

Crude Chart

Monday's trade did not feature big declines among the oil services group, the sector that is arguably most intimately correlated to oil prices, as stocks such as Halliburton (HAL), Diamond Offshore (DO), Schlumberger (SLB) and Transocean (RIG) were either unchanged, up fractionally or down fractionally. Even the Oil Services HOLDRs ETF (OIH) was only down 20 cents to close at $114.35. I say down ''only'' 20 cents because OIH has been under significant pressure since peaking at almost $127 in November. The ETF counts the aforementioned stocks and many others among its constituents and has been in a tailspin over the past month, trading below its 50-day moving average for about three weeks.

OIH Chart

While oil has been declining, the weak dollar trade certainly seemed to favor gold, which was making all-time highs on a near daily basis. I am not sure if this trade has gotten too crowded to use Wall Street speak, or if gold is just taking a little breather before rocketing higher again or if the bulls are completely vacating the gold trade altogether, but I will say that the last few days have been anything but dreamy for gold bugs. After soaring to a record high of $1227.50 last week, the yellow metal lost $50 after Friday's job report and shed another $5.50 today to close at $1164 an ounce.

Gold Chart

I have mentioned a couple of different ways to play gold over the past several weeks, mainly ETFs such as the SPDR Gold Shares (GLD) and the Market Vector Gold Miners ETF (GDX). For those that are new to watching the gold space, it is worth repeating that there is a big difference in owning physical gold, which GLD does, compared to owning shares of mining firms, which GDX does. Gold miners are like their oil services brethren in that there is a hard and fast price that the miners need gold futures to surpass to make their mining endeavors profitable. That price is usually around $350-$450 an ounce, so while we are a long way from seeing those levels on the downside, it is worth noting that down moves in gold are not a good thing for the miners.

As I mentioned in the Market Monitor today, there was some, shall I say curious options activity in Barrick Gold (ABX), the largest gold miner. More than 11,200 January 49 calls changed hands against open interest of just 398 contracts and most of those calls were sold, indicating that traders may be calling a top in Barrick's shares. Options activity in Barrick was more than 40 times the daily average with five calls sold for every one purchased. Put buying also exceeded sales furthering the bearish tenor options traders have toward Barrick Gold.

Now all of that glum news about gold and oil may have you thinking that the commodities trade that has helped lead the market higher since the March lows has expired. That may or may not be the case and it probably is not the case as investors are starting to favor another corner of the materials space and that is agriculture-related names. More specifically, fertilizers stocks look to be back in vogue. One catalyst is the mergers and acquisitions drama that permeates the fertilizer sector and that catalyst was at work today as CF Industries (CF) boosted its bid for Terra Industries (TRA) by $4.75 a share.

The new bid would give Terra shareholders $36.75 in cash and 0.1034 shares of CF common stock, valuing the new bid at $45.91 a share. The new offer, like the old one, includes $7.50 a share for a special dividend declared by Terra Industries earlier this year. Both stocks were up sharply on the news, as was Agrium (AGU), which is trying to acquire CF Industries. Agrium got a boost from a UBS upgrade and speaking of upgrades, Goldman Sachs upgraded Potash (POT), the largest maker of potash fertilizer.

Goldman lifted Potash to ''buy'' from ''neutral'' and set a 12-month price target of $140 on the stock. That is a fair bit above Potash's closing price of $121.17 on Monday. The market appears to be expecting a rebound in demand next year for crop nutrients after the epic collapse in 2008 and that rebound should benefit fertilizer names. One way to play this trend would be with the Market Vectors Agribusiness ETF (MOO), which counts Potash as its top holding. Other top holdings include Monsanto (MON), Mosaic (MOS) and Deere (DE).

MOO has a nifty looking chart, marked by a series of higher highs and higher lows, you know, the kind of stuff that technicians get really excited about. Maybe the commodities trade is not over after all, it may just be changing outfits.

MOO Chart

While the market action during traditional trading hours was fairly benign, that may change tomorrow as FedEx (FDX) brought an early Christmas package for the bulls after the market closed on Monday. The package delivery firm said it expects to earn $1.10 a share for the current quarter. Granted, that's down 30% from a year earlier, but well above the previous guidance of 65 cents to 95 cents a share. FedEx cited stronger-than-expected growth in its international priority and ground shipments segments as reasons for the bullish guidance.

FedEx shares finished down 41 cents at $87.52, but spiked more than 3% in the after-hours session to $90.27 at the time of this writing. The stock has not traded above $90 since August 2008 and despite the fact that FedEx shares are up more than 50% in the past six months, it appears there is more room to the upside. Jim noted in the weekend Market Wrap that the company hired over 35,000 seasonal workers and rival UPS (UPS) added 50,000. I have also noticed that when the big brown truck makes its daily stops on my street, there are two employees on board instead of just one. Anecdotes to be sure and this logically should be the busiest time of year for FedEx and UPS, but as I like to say, if you are a fan of the Dow Theory, good news for FedEx could mean good news for the Dow Jones Transportation Average, which confirms moves in the Industrials.

FedEx Chart

Looking at the charts, there really was not much to get excited about regarding the Dow on Monday. A one-point gain will usually temper enthusiasm. The Industrials still hover close to the important 10400 level and well above the 50-day moving average at 10054. A break below 10250 would be concerning, especially given the frothy look the Dow has to it. With just 17 trading days left in 2009, it is going to take a lot to get the Dow to 11000 before year end, but most investors will likely accept even a valiant attempt to get to that level.

Dow Chart

Again, the S&P 500 paints a somewhat different picture. The index traded in a tight 10-point range on Monday, making a low just below 1101, but managed to close above the psychologically important 1100 level. While continued closes above 1100 are appreciated, it bears repeating that real support for the S&P 500 is 1085 and true resistance is 1110. The bottom line is it was encouraging the S&P 500 did not dip below 1100 on Monday and the longer support at 1085 holds, the better. A violation of that level before the end of the year would certainly quell any hopes of a Santa Claus rally.

S&P 500 Chart

The Nasdaq led the decliners on Monday, but lost less than five points, so no big deal there. Or is it? Well, the positive side of the story is that the Nasdaq did briefly peak above 2200 and is still within earshot of that critical resistance level. Then again, it should be noted that the Nasdaq has been a laggard over the past couple of weeks and, believe it or not, Apple (AAPL) has been something of drag on techs as well. Both Apple and Amazon (AMZN) were down more than 2% on Monday, but if the former can make its way back to $200 and the latter back above $140, that might be enough to rejuvenate investor interest in tech stocks.

Nasdaq Chart

With a week light on key economic reports, the fate of the markets for this week lies not so much in macro themes as it does in the news that individual stocks provide to buoy positive investor sentiment. Granted, the final numbers on Monday did not reflect a bullish beginning to the week, but my gut tells me the FedEx news will have a positive impact on Tuesday's trade and there could be continued bullishness from the agriculture sector. So I lean toward not be picky and embracing good news on an individual stock level.

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New Plays

What Happened to Mondays?

by James Brown

Click here to email James Brown

Editor's Note:

The major market indices spent the session churning sideways in a very narrow range until stocks turned lower in the last two hours. Overall it was a forgettable day. Investors appear to be searching for a new catalyst to drive stocks higher. Until then we're just spinning our wheels. The trend of "mutual fund" Mondays with fund managers putting money to work appears to have stalled.

I don't see any changes from my weekend comments on the market. I'm not adding anything new tonight. The more this market narrows the closer we get to a breakout - one way or the other.



In Play Updates and Reviews

Semiconductors Post Fifth Gain

by James Brown

Click here to email James Brown

The SOX rallied for the fifth day in a row. Our trade in the sector hit new highs for the year.


BULLISH Play Updates

Best Buy Inc. - BBY - close: 43.97 change: +0.18 stop: 39.85

The RLX retail index closed virtually unchanged on the session. Shares of BBY inched up 0.4% but struggled with the $44.00 level. More conservative traders might want to inch up their stops toward the $41.00 level. I am still not suggesting new bullish 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:     + 1.77   			
Earnings Date          12/15/09 (unconfirmed)    
Average Daily Volume:       5.1 million 
Listed on  November 09, 2009    


Bank of Hawaii - BOH - close: 45.20 change: -0.42 stop: 43.90

Financial stocks are still stuck in their trading range although today's session had a bearish tone to it. At this point I would wait for a move over 46.50 before launching new positions.

Our first target is $49.85. I'm adding a second target at $53.50. FYI: The Point & Figure chart is bullish with a $59 target.

Entry on  November 18 at $46.20 
Change since picked:     - 1.00   			
Earnings Date          01/25/10 (unconfirmed)    
Average Daily Volume:       424 thousand
Listed on  November 17, 2009    


Broadcom - BRCM - close: 31.05 change: +0.28 stop: 28.75

The semiconductor sector and BRCM both showed relative strength on Monday. BRCM hit an intraday high of $31.40. Our trigger to buy the stock was $31.25. Our first target is $34.75. Our second target is $37.00. Our time frame is several weeks.

chart:

Entry on  December 07 at $31.25
Change since picked:     - 0.20   			
Earnings Date          01/28/10 (unconfirmed)    
Average Daily Volume:       7.4 million 
Listed on  December 05, 2009    


Expeditors Intl. - EXPD - close: 32.69 chg: -0.38 stop: 30.90

There is no change from my weekend comments on EXPD. I'm suggesting a trigger to buy EXPD (small positions) at $33.75. There is some resistance near $35.00 but if triggered our target is $37.00. Our time frame is several weeks.

Entry on  December xx at $xx.xx <-- TRIGGER @ 33.75 (small pos)
Change since picked:     + 0.00   			
Earnings Date          02/09/10 (unconfirmed)    
Average Daily Volume:       1.5 million 
Listed on  December 05, 2009    


HMS Holdings - HMSY - close: 45.25 change: -0.47 stop: 43.49

Lack of follow through on HMSY's rally from Friday is a little bit concerning but the larger trend is unchanged. I'm still suggesting small bullish positions but readers could choose to wait for a bounce from $44.00 or a new rise over $46.00 as their entry point. Our multi-week target is $49.75. FYI: The P&F chart is bullish with a $69 target.

Entry on  December 05 at $45.72 
Change since picked:     - 0.47   			
Earnings Date          02/18/10 (unconfirmed)    
Average Daily Volume:       192 thousand
Listed on  December 05, 2009    


Johnson & Johnson - JNJ - close: 64.37 change: +0.01 stop: 59.90

It was a forgettable day for JNJ with the stock trading sideways and closing almost unchanged. I would look for a bounce near the $62.00 level before considering new bullish positions. Our target first target is $67.50.

Entry on  November 23 at $63.05
Change since picked:     + 1.32   			
Earnings Date          01/26/10 (unconfirmed)    
Average Daily Volume:      12.6 million 
Listed on  November 21, 2009    


Potlatch Corp. - PCH - close: 31.80 change: +0.16 stop: 27.95

PCH continues to run higher with a 0.5% gain but it looks like momentum could be slowing down. If you're looking for a new entry point wait for a dip or bounce near $30.00. More conservative traders might want to raise their stops.

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:     + 1.50   			
Earnings Date          02/11/10 (unconfirmed)    
Average Daily Volume:       503 thousand
Listed on  November 11, 2009    


Renolds American - RAI - close: 53.94 change: +0.90 stop: 50.90 *new*

The rally in RAI continues with another 1.69% gain on Monday. Shares hit another 2009 high at $54.26. Our target to exit is $54.90. I'm raising our stop loss to $50.90. More aggressive traders may just want to let it run and keep adjusting your stops. No new positions at this time.

Entry on  November 14 at $50.32 
Change since picked:     + 2.72   			
Earnings Date          02/11/10 (unconfirmed)    
Average Daily Volume:       1.6 million 
Listed on  November 14, 2009    


Boston Beer Inc. - SAM - close: 42.98 change: +0.24 stop: 41.74

SAM gave us another chance to buy a dip near $42.00 midday. If you missed it the afternoon bounce is still a decent entry point. Our first target to take profits is at $46.00. Our second and final target is $49.75. FYI: The Point & Figure chart is bullish with a $58 target. Our time frame is several weeks.

Entry on  December 05 at $42.74 
Change since picked:     + 0.24   			
Earnings Date          03/10/10 (unconfirmed)    
Average Daily Volume:        98 thousand
Listed on  December 05, 2009    


Starbucks Corp. - SBUX - close: 21.40 change: -0.20 stop: 20.95

Thee is no change from my previous comments on SBUX. Shares are still stuck in a $21-22 trading range. 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: 17.66 change: -0.22 stop: 17.24

We could end up being the victim of a bull trap. Shares hit a new high on Friday only to reverse lower. Now the stock is down another 1.2%. The $17.50 level should offer some short-term support. I'm not suggesting new positions with SYMC under the $18.00 mark.

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  December 04 at $18.25 
Change since picked:     - 0.59   			
Earnings Date          01/27/10 (unconfirmed)    
Average Daily Volume:      11.8 million 
Listed on  November 16, 2009    


Travelers Companies - TRV - close: 50.57 change: -0.47 stop: 49.75

TRV's failure to rebound following Friday's intraday bounce is definitely short-term bearish. Shares are near their 50-dma and look like they're ready to test psychological support near $50.00 again. I'd buy a bounce from $50.00 but I'd probably wait for the bounce to clear $51.25 first. Our target is $57.40.

Entry on  November 27 at $51.94 /gap down entry point 
Change since picked:     - 1.37   			
Earnings Date          01/27/10 (unconfirmed)    
Average Daily Volume:       5.3 million 
Listed on  November 07, 2009    


Texas Instruments - TXN - close: 26.62 change: -0.23 stop: 24.40

Semiconductors managed to extend their gains today but TXN suffered a little profit taking after Friday's new 2009 high. I don't see any changes from my prior comments on TXN. The stock looks due for a pull back. TXN will probably retest the $26.00 level. I'd look for a new entry point near $26.00. Our first target is $29.75.

Entry on  December 02 at $26.15
Change since picked:     + 0.47   			
Earnings Date          01/26/10 (unconfirmed)    
Average Daily Volume:      12.6 million 
Listed on  December 01, 2009    


Warner Chilcott - WCRX - close: 25.99 change: +0.19 stop: 22.90

WCRX is clinging to the $26.00 level. I don't see any changes from my prior comments. Look for a bounce near $24.50-24.00 as a new entry point. 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:     + 1.22   			
Earnings Date          02/25/10 (unconfirmed)    
Average Daily Volume:       1.8 million 
Listed on  November 28, 2009    


Wyndham Worldwide - WYN - close: 20.49 change: -0.06 stop: 17.85

Profit taking today was very mild. Shares continue to look bullish above the $20.00 mark.

Our first target to take profits is at $21.00. I am adding a second target to exit completely at $22.40. 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:     + 1.61   			
Earnings Date          02/11/10 (unconfirmed)    
Average Daily Volume:       3.5 million 
Listed on  November 10, 2009    


Financial SPDR - XLF - close: 14.39 change: -0.24 stop: 14.15

Financial stocks were drifting sideways although the sector took a turn for the worse late this afternoon. The XLF has settled on technical support at its rising 100-dma. If this breaks there might be some support near $14.20 but I wouldn't bet on it. I want to see a move over Thursday's high (near $15.00) before launching new positions. Our target is $16.40.

Entry on  December 03 at $14.85 
Change since picked:     - 0.46   			
Earnings Date          --/--/-- (unconfirmed)    
Average Daily Volume:        82 million 
Listed on  December 02, 2009    


BEARISH Play Updates

Activision-Blizzard - ATVI - close: 10.93 change: -0.10 stop: 12.01

ATVI tried to bounce but failed early this morning and the close under $11.00 is just another bearish sign that shares are struggling.

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  December 04 at $11.15
Change since picked:     - 0.22   			
Earnings Date          02/04/10 (unconfirmed)    
Average Daily Volume:        20 million 
Listed on  November 28, 2009    


Bank of New York - BK - close: 26.81 change: -0.12 stop: 27.16

BK spent the session drifting lower.

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