Option Investor
Newsletter

Daily Newsletter, Monday, 12/14/2009

Table of Contents

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

Market Wrap

Positive Catalysts Abound As Stocks Start The Week Higher

by Todd Shriber

Click here to email Todd Shriber
News of a massive energy sector acquisition, Citigroup's TARP repayment and a bailout for Dubai combined to help stocks start the week on a positive note, sending the S&P 500 higher by nearly eight points to a close of 1114.11. The Dow Jones Industrial Average posted a gain of nearly 30 points to finish the day at 10501.05 and the Nasdaq gained almost 22 points to close at 2212.10.

Stats Table

Abu Dhabi assuaged nervous investors with news that it would bailout Dubai's Nakheel PJSC, the investment fund that sent markets tumbling last month on news of a possible default. Dubai will receive $10 billion from Abu Dhabi to help get its financial house in order, but that may not be enough to convince investors the long-term outlook is rosy. According to Goldman Sachs, Dubai and its state-controlled enterprises have $55 billion in debt coming due in the next three years. Dubai, the second-largest of the states that make up the United Arab Emirates, borrowed $80 billion over the past few years to morph into a financial and tourism hub, but with the crash of global credit markets, real estate values in the state fell by as much as 50%.

Dubai-based companies may need to restructure as much as $46.7 billion in debt and more firms there may need help making repayments, a Morgan Stanley report noted. So the bottom line here is that while Abu Dhabi's bailout is a step in the right direction, Dubai is likely to need a lot more cash before investors become convinced all is well. So-called ''risky'' assets like commodities suffered at the hands of the Dubai news, as evidenced by the chart below, but today's bailout news did little to jolt the price of crude oil or gold.

Dubai Chart

Stocks also got a boost from news that Citigroup (C) would repay $20 billion it borrowed under the Troubled Asset Relief Progam (TARP), making the bank the last of the Wall Street giants to exit the now infamous program. With Citi's TARP repayment, PNC Financial (PNC) and stands out as the remaining big bank that has yet to repay taxpayer funds. That little factoid may leave some investors wondering why PNC and is lagging behind in the repayment process given that it used TARP money to its acquisition of National City. Wells Fargo (WFC) announced after the close of U.S. markets that it will exit the TARP program by raising $25 billion in fresh capital.

Citi will issue about $17 billion in new shares this week and another $7.2 billion early next year to repay Uncle Sam, further diluting a stock that put the ''D'' in diluted. Assuming a closing price of $3.70, Citi's capital raises will result in roughly 654 million more shares being added to its already gargantuan shares outstanding sum of 22.86 billion shares. I am not sure exactly how many new shares will be issued by the downtrodden bank, but assuming the offerings result in 650 million-700 million new shares, that is about a day and a half worth of volume for Citi, which averages 452.5 million shares traded per day.

Much like the Dubai bailout news, news of Citigroup's TARP repayment is a step in the right direction, but it is highly doubtful this will be enough to send the bulls running into the stock. Keep in mind the shares languish below $4 and Citigroup has been shedding prime assets to raise cash. In addition, many fund managers cannot touch stocks below $10 and even more cannot buy stocks below $5, so expecting retail investors and day traders to lift Citi shares more than a couple of percentage points is probably asking for too much.

Citigroup Chart

The biggest news on Monday came from Exxon Mobil (XOM), the largest U.S. oil producer and a member of the Dow, said it would acquire natural gas firm XTO Energy (XTO) for $31 billion in stock. XTO shareholders will receive nearly 0.71 shares of Exxon Mobil for each of their shares. Bloomberg News reported this is the energy sector's largest acquisition since 2006 and it is Exxon's biggest buy since acquiring Mobil in 1999. The deal values XTO at a 25% premium to XTO's Friday closing price.

Even though Exxon Mobil shares are down about 10% year-to-date, the cash-rich company can use those shares as currency for acquisitions and did so with the purchase of XTO. The acquisition bolsters Exxon's presence in the U.S. natural gas market at a time when oil companies, struggling to find high-quality crude reserves, are making significant bets on natural gas as a future alternative to crude oil. XTO gives Exxon exposure to the gas-laden Barnett Shale area of Texas, the largest unconventional natural gas field in the U.S. XTO is also a significant player in the Bakken Shale in North Dakota and the Marcellus Shale in Pennyslvania.

An Exxon executive said last month that worldwide energy demand will rise 30% by 2030 and that natural gas may eventually surpass coal as the number two energy source behind crude oil. The chart below illustrates that natural gas demand in the coming years is expected to be quite robust.

Natural Gas Demand Chart

The acquisition predictably fueled speculation about what companies may be next to run the altar of energy mergers and acquisitions. One analyst speculated that European firms such as Royal Dutch Shell (RDS) and Total (TOT) that are looking to increase natural gas production may be on the prowl for acquisitions. Press reports mentioned EnCana (ECA), Range Resources (RRC) and Ultra Petroleum (UPL) as possible targets. Another analyst highlighted Anadarko Petroluem (APC), Devon Energy (DVN) and EOG Resources (EOG) as potential takeover plays.

An interesting way to play increased M&A activity in the natural gas sector may be the iShares Dow Jones US Oil & Gas Exploration Index (IEO). IEO has one of the largest weightings to XTO of any ETF and Anadarko, Devon and EOG can all be found among the IEO's top holdings. The ETF got a 5% pop on news of the Exxon-XTO deal and is now close to regaining its 50-day moving average.

IEO Chart

Looking ahead to the rest of the week, considering we are not in earnings season, there are several noteworthy reports on the horizon, including an update from Best Buy (BBY) tomorrow. The stock was up 2.32% on Monday and has gained 15% in the past three months. Best Buy is expected to post earnings of 43 cents a share on sales of $11.98 billion and Citigroup upped its estimate to 45 cents from 38 cents today.

As Jim mentioned in the weekend Market Wrap, investors will most likely be paying more attention to Best Buy's fourth-quarter guidance than the third-quarter results. After all, Best Buy is a prime Christmas shopping destination and it does not have to compete with Circuit City this holiday season. With less than two weeks left before Christmas, any disappointing news from Best Buy regarding the fourth quarter would likely spell an end to Best Buy's recent rally.

Best Buy Chart

Tuesday also marks the start of another Federal Open Market Committee meeting and the market will absorb Producer Price Index (PPI) news at 8:30 A.M. Eastern time. The November PPI number is expected to rise to 0.8% from a previous reading of 0.3%. Another number worth watching is the November industrial production report, which is expected to rise to 0.5% from October's reading of 0.1%.

Again, considering that we are not in the throws of earnings season, Thursday is a big day for corporate reports. Updates on Thursday will give investors clues about the strength of the economic recovery as Oracle (ORCL), FedEx (FDX), General Mills (GIS), Nike (NKE), Research In Motion (RIMM) and Palm (PALM) all step into the earnings confessional. That is a broad swath of industries and some of those reports, namely FedEx, Nike and RIMM, may join Best Buy in giving investors further insight as to how much consumers are spending this holiday season.

RIMM was throttled the last time it delivered results and the stock is especially active when it announces quarterly results. Last week, the company announced it is expanding its presence in China, a move investors seemed to cheer. I noted in the Market Monitor last week that there was some bullish options activity in RIMM, including brisk volume in the January 80 calls, which are obviously deep out-of-the-money.

RIMM Chart

Moving to the charts, the Dow's close at 10,501 means the index is just barely above resistance at 10,500. A couple of more closes above this key level could bring resistance at 10,650 into play before the end of the year. Still, the Dow is locked in a range between 10,250 and 10,500, and has resided in that area for about four weeks now. With time running out on 2009, 11,000 appears to be off the table, but any close above support at 10,250 could be a positive catalyst heading into next year.

Dow Chart

With a close in the area of 1114, the S&P 500 once again finds itself above the all-important 1100 level and in decent position to make another attempt at breaking through resistance at 1120. The lingering question is if the index can snap out of a month-long range move higher, above and beyond 1120.

Consolidation patterns always end, it is just a matter of when, and as I have been saying for several weeks, the more closes above 1100, the better. In fact, it would be best if 1100 could emerge as support because a move to previous support at 1085 would signal another failure, giving the bears some room to exert pressure on stocks.

S&P 500 Chart

Three cheers for the Nasdaq remaining above 2200 and those higher lows the chart is sporting. This is kind of an interesting week the Nasdaq because the catalysts do exist for a move higher in the form of Oracle and RIMM's earnings reports. Curious has been the lack of support from Apple (AAPL) and Amazon (AMZN) over the last month. Apple is down 4% in that time and Amazon is flat. The Nasdaq is up only fractionally over the same time frame and that makes me wonder if I should be impressed or worried that tech stocks are living on borrowed time. Until support at 2160 is violated, and may be that does not happen, tech names continue to be compelling.

Nasdaq Chart

Overall, Monday's trade was a decent start to the week and if Best Buy delivers good news on Tuesday, stocks should get another boost. I like the fact that higher-quality, large cap stocks are asserting themselves and we could see more of that through out the week. If investors, fund managers and average Joes alike, are going to make one last dash for big year-end gains, this is the week to do it because volume will start to be an issue with Christmas coming up next week and New Year's Eve the following week.

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New Plays

Double Down on Transports

by James Brown

Click here to email James Brown

Editor's Note:

Strength in the transports has been and will be a key sector to help lead and support this market's new rally attempt. We're adding a couple of bullish candidates in this sector.


NEW BULLISH Plays

Kansas City Southern - KSU - close: 30.90 chg: +1.29 stop: 28.20

Why We Like It:
We usually try to avoid chasing a big move but today's 4.3% rally in KSU is also a significant breakout past resistance at the $30.00 level. This move also follows an inverse (bullish) H&S pattern. I am suggesting bullish positions now with a stop loss at $28.20. More patient traders could wait for a dip back toward $30.00, which should be new support. Or try buying a portion of your position now and then add to it on a dip near $30.00. Our target is $34.90.

Annotated chart:

Entry on  December 14 at $30.90 
Change since picked:     + 0.00   			
Earnings Date          01/28/10 (unconfirmed)    
Average Daily Volume:       677 thousand
Listed on  December 14, 2009    


United Parcel Service - UPS - close: 58.99 change: +0.98 stop: 56.95

Why We Like It:
Shares of UPS have been lagging behind their rival FDX and the rest of the transportation sector. I suspect that UPS will try and "catch up" to its peers. Today's rally is a bullish breakout from a multi-week trading range. We want to open positions now. We'll use a tight stop at $56.95. Readers may want to use small positions now and just add to it when UPS makes it past potential resistance at $60.00. Our target is $64.50.

Annotated chart:

Entry on  December 14 at $58.99 
Change since picked:     + 0.00   			
Earnings Date          02/02/10 (unconfirmed)    
Average Daily Volume:       4.2 million 
Listed on  December 14, 2009    



In Play Updates and Reviews

Drug Trade Hits Target

by James Brown

Click here to email James Brown


BULLISH Play Updates

Bank of Hawaii - BOH - close: 46.27 change: +0.70 stop: 43.90

Banking stocks continued to lag the rest of the market but the Dubai bailout news is positive for the global banking system. Today's 1.5% gain in BOH is a bullish breakout from the short-term consolidation but shares still have some overhead resistance. Aggressive traders might want to consider small positions now. I'm sticking to my earlier comments - wait for a move past $46.50 or the Nov. 23rd high of $46.75 before considering new positions. Our first target is $49.85. I'm adding a second target at $53.50.

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    


Broadcom - BRCM - close: 30.56 change: +0.40 stop: 28.75

Friday's action still looks ominous but I'd buy this bounce from $30.00. More conservative traders could use a tighter stop loss.

The stock may not move much as investors wait to hear what the company has to say at their "analyst day" on Tuesday. Our first BRCM target is $34.75. Our second target is $37.00. Our time frame is several weeks.

Entry on  December 07 at $31.25
Change since picked:     - 0.69   			
Earnings Date          01/28/10 (unconfirmed)    
Average Daily Volume:       7.4 million 
Listed on  December 05, 2009    


Cal-Maine Foods Inc. - CALM - close: 29.03 change: +0.00 stop: 27.49

It was a quiet session for CALM. The stock closed unchanged on the session. I don't see any changes from my weekend comments. Our first target to take profits is at $30.95. Our target is somewhat aggressive since we only have two or three weeks before CALM reports earnings and we don't want to hold over the report.

Entry on  December 09 at $28.66 -small positions-
Change since picked:     + 0.37   			
Earnings Date          12/28/09 (unconfirmed)    
Average Daily Volume:       125 thousand
Listed on  December 09, 2009    


Disney - DIS - close: 31.83 change: +0.13 stop: 29.99

DIS hit a new high for the year. I don't see any changes from my weekend comments.

Shares of DIS are testing a trendline of higher highs. Patient traders may want to wait for a dip back toward $31.00-30.50 before initiating positions. Our target is a little optimistic at $34.75 but we will plan to exit ahead of the February earnings report. FYI: The Point & Figure chart currently points to a $45 target.

Entry on  December 12 at $31.70 
Change since picked:     + 0.13   			
Earnings Date          02/09/10 (unconfirmed)    
Average Daily Volume:      11.0 million 
Listed on  December 12, 2009    


Home Depot - HD - close: 28.87 change: +0.38 stop: 27.40

We didn't have to wait long for HD to hit our trigger. Actually shares gapped open higher at $28.82, which was above our trigger to open bullish positions at $28.60. I would still consider new bullish positions in the $29.00-28.00 zone. Our first target is $30.60. We'll plan to exit ahead of the February earnings report. FYI: The P&F chart is very bullish with a $44 target.

Entry on  December 14 at $28.82 *gap higher entry  
Change since picked:     + 0.05   			
Earnings Date          02/23/10 (unconfirmed)    
Average Daily Volume:      15.7 million 
Listed on  December 12, 2009    


HMS Holdings - HMSY - close: 46.79 change: +1.15 stop: 43.90

The widespread market rally helped push HMSY to a 2.5% gain and a new 2009 high. 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:     + 1.07   			
Earnings Date          02/18/10 (unconfirmed)    
Average Daily Volume:       192 thousand
Listed on  December 05, 2009    


Johnson & Johnson - JNJ - close: 64.96 change: +0.11 stop: 59.90

In spite of the market's strength JNJ is still fighting with resistance near $65.00. JNJ remains short-term overbought and due for a correction. Broken resistance in the $62.00-62.50 level should offer some support. I'm not suggesting new positions at this time. Our target first target is $67.50.

Entry on  November 23 at $63.05
Change since picked:     + 1.91   			
Earnings Date          01/26/10 (unconfirmed)    
Average Daily Volume:      12.6 million 
Listed on  November 21, 2009    


Potlatch Corp. - PCH - close: 32.17 change: +0.67 stop: 29.49

Traders bought the dip in PCH at its rising 10-dma. This is short-term bullish. 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:     + 1.87   			
Earnings Date          02/11/10 (unconfirmed)    
Average Daily Volume:       503 thousand
Listed on  November 11, 2009    


Renolds American - RAI - close: 53.40 change: +0.40 stop: 50.90

RAI spiked to $54.00 this morning but eventually pared its gains to just +0.75%. I don't see any changes from my prior comments. I'm not suggesting new positions at this time. Our target to exit is $54.90.

Entry on  November 14 at $50.32 
Change since picked:     + 3.08   			
Earnings Date          02/11/10 (unconfirmed)    
Average Daily Volume:       1.6 million 
Listed on  November 14, 2009    


Starbucks Corp. - SBUX - close: 22.84 change: +0.44 stop: 20.95

SBUX extends its gains with a 1.9% rally. More conservative traders might want to raise their stops. Our first target is $24.90.

Entry on  December 10 at $22.25
Change since picked:     + 0.59   			
Earnings Date          01/28/10 (unconfirmed)    
Average Daily Volume:      10.9 million 
Listed on  November 30, 2009    


Travelers Companies - TRV - close: 51.02 change: +0.32 stop: 49.75

TRV is still struggling with short-term resistance near $51.00. I am not suggesting new positions at this time. Our last upside target was $57.40.

Entry on  November 27 at $51.94 /gap down entry point 
Change since picked:     - 0.92   			
Earnings Date          01/27/10 (unconfirmed)    
Average Daily Volume:       5.3 million 
Listed on  November 07, 2009    


Texas Instruments - TXN - close: 25.98 change: +0.34 stop: 24.40

Volume was relatively light for TXN's 1.3% gain. I would prefer to open new positions on a dip near the 30-dma (25.35) but a move over $26.25 could work as a momentum entry point. Our first target is $29.75.

Entry on  December 02 at $26.15
Change since picked:     - 0.17   			
Earnings Date          01/26/10 (unconfirmed)    
Average Daily Volume:      12.6 million 
Listed on  December 01, 2009    


Warner Chilcott - WCRX - close: 27.40 change: +0.43 stop: 23.90

Target achieved. WCRX extended its gains and set a new 2009 high at $27.70. I am not suggesting new positions at this time. Our first target was $27.40. Our second target is $29.45.

chart:

Entry on  December 01 at $24.77 gap open entry point (small positions)
Change since picked:     + 2.63   	
                         /1st target hit @ 27.40 (+10.6%)
Earnings Date          02/25/10 (unconfirmed)    
Average Daily Volume:       1.8 million 
Listed on  November 28, 2009    


Wyndham Worldwide - WYN - close: 20.66 change: +0.64 stop: 18.45 *new*

WYN rallied from the $20.00 level to close near its highs. I'm raising our stop loss to $18.45. Our first target is $21.00. Our second and final target is $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:     + 1.78   			
Earnings Date          02/11/10 (unconfirmed)    
Average Daily Volume:       3.5 million 
Listed on  November 10, 2009    


Financial SPDR - XLF - close: 14.47 change: +0.08 stop: 14.15

Financials rallied but they continue to lag behind the rest of the market. I remain cautious on this sector.

At this point I would wait for a move over $15.00 before considering new bullish positions. Our target is $16.40.

Entry on  December 03 at $14.85 
Change since picked:     - 0.38   			
Earnings Date          --/--/-- (unconfirmed)    
Average Daily Volume:        82 million 
Listed on  December 02, 2009    


BEARISH Play Updates

Activision-Blizzard - ATVI - close: 10.83 change: +0.08 stop: 11.45 *new*

ATVI failed to move much on the market's rally. That's good news for the bears but if the S&P 500 really breaks out higher we may want to consider an early exit out of this trade. At the moment the trend is still down.

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:     - 0.32   			
Earnings Date          02/04/10 (unconfirmed)    
Average Daily Volume:        20 million 
Listed on  November 28, 2009    


Bank of New York - BK - close: 27.04 change: +0.10 stop: 27.16

BK continues to trade sideways in a narrow range.

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    


Wells Fargo - WFC - close: 25.49 change: +0.08 stop: 28.01

If the financials don't participate this market rally isn't going very far. Shares of WFC failed under the $26.00 level today. Technically this is a new bearish entry point but I would hesitate to launch positions with the S&P 500 poised to break higher. Our first bearish target for WFC is $23.10. Our second and final target is $21.00.

Entry on  December 10 at $25.75 (small positions)
Change since picked:     - 0.26   			
Earnings Date          01/27/10 (unconfirmed)    
Average Daily Volume:        37 million 
Listed on  December 08, 2009    


CLOSED BULLISH PLAYS

Best Buy Inc. - BBY - close: 45.37 change: +1.03 stop: 42.95

Our BBY play is closed. The plan was to exit today at the closing bell to avoid earnings tomorrow morning. The stock rallied 2.3% thanks to a widespread market rally.

chart:

Entry on  November 10 at $42.20
Change since picked:     + 3.17 <-- early exit (+7.5%)
Earnings Date          12/15/09 (unconfirmed)    
Average Daily Volume:       5.1 million 
Listed on  November 09, 2009