Option Investor
Newsletter

Daily Newsletter, Monday, 12/21/2009

Table of Contents

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

Market Wrap

Healthcare, M&A Boost Stocks

by Todd Shriber

Click here to email Todd Shriber
Stocks got off to a good start in what will be a short week, bolstered by a fresh round of mergers and acquisitions activity and good news for healthcare stocks. The S&P 500 added 1% to finish at 1114.05, but the index is still having problems making its way above resistance at 1120. The Dow Jones Industrial gained more than 85 points to close at 10414.14 with all 30 of its constituents finishing higher and it was a good day for technology issues with the Nasdaq gaining almost 26 points to finish the day at 2237.66.

Stats Table

In the wee hours of Monday morning, 58 Democrats and two independents that are basically Democrats, voted to pass the massive and controversial healthcare reform package, clearing the way for the bill to arrive on President Obama's desk as early as later this week. The news was a boon for health insurance names like Aetna (AET), which was up 4.7%, and rival Cigna (CI), which gained nearly 4%. WellPoint (WLP) added nearly 3% and United Health (UNH) was up 2%.

News that the bill passed by the Senate does not include an option for a government-run plan comforted investors in the aforementioned names. Investors had been fearful of the so-called ''public option'' because it would have given private insurance firms government financing, creating fears of low reimbursement levels. With those concerns set aside, investors flocked to the aforementioned names, sending the iShares Dow Jones US Healthcare Provider ETF (IHF) up 2.32%. IHF holds all of the names mentioned above.

IHF Chart

The healthcare sector was also the epicenter of a flurry of M&A on Monday as pharmaceuticals giants continued the trend of picking off their more nimble biotech peers to bolster drug pipelines. French pharma company Sanofi-Aventis (SNY), a Warren Buffett Favorite, agreed to acquire Chattem (CHTT), a maker of over-the-counter healthcare products for $1.9 billion. Chattem shares finished the day 33.1% higher on the news.

Pfizer (PFE), the Dow component and largest U.S. drugmaker, entered into an agreement with Athersys (ATHX) for the commercialization of the latter's inflammatory bowel disease treatment. Athersys will receive $6 million upfront and up to $105 million in future royalty payments. Eli Lilly (LLY) said it entered into a licensing agreement with Incyte (INCY) to commercialize Incyte's rheumatoid arthritis drug, which is currently in Phase II clinical trials.

In other news, GlaxoSmithKline (GSK) made a deal with Seattle Genetics (SGEN) to utilize Seattle Genetics' antibody-drug conjugate technology. GSK will pay Seattle Genetics $12 million and there is potential for $390 million in future royalty payments. Israel's generic drug giant Teva Pharmaceuticals (TEVA) entered a global licensing agreement with OncoGenex Pharmaceuticals (OGXI) for OncoGenex's cancer treatment. The deal results in a $60 million equity investment by Teva. Future milestone payments could be as high as $370 million.

Not surprisingly, Monday's M&A activity in the pharmaceuticals sector lead to speculation about what other names may be next to catch the eye of an acquisitive drug giant. One name that was thrown around was Biogen Idec (BIIB), the company in which corporate raider Carl Icahn is a major shareholder. Biogen shares were up 2% on the day. Oddly enough, the iShares Nasdaq Biotechnology ETF (IBB) was only up 1.22% on Monday on weak volume.

IBB Chart

The M&A party actually started on Sunday when Bucyrus International (BUCY), a stock I have mentioned several times here over the past few months, announced it would purchase Terex's (TEX) mining business for $1.3 billion in cash. Terex is the world's third-largest maker of earth-moving equipment.

Bucyrus said it expects $100 million in synergies from the acquisition. The ball may now be in Joy Global's (JOYG) to make a similar move. Joy Global and Bucyrus are chief rivals in the mining equipment space and regardless of what Joy Global's next move is, it might be reasonable to speculate that the Bucyrus acquisition is a sign that the company expects commodities demand to remain robust in 2010.

Speaking of commodities, after a bit of a sell-off last week, fertilizer names got a boost on Monday from some bullish comments from Goldman Sachs. Goldman upgraded Mosaic (MOS), the second-largest maker of potash fertilizer to ''buy'' from ''hold'' and added Potash (POT), the biggest maker of its namesake fertilizer, to the conviction buy list.

By now, the fertilizer story is pretty well-documented. These stocks soared in 2007 through the first half of 2008 as the commodities bull market ran higher on a near daily basis. Then these names crashed back to Earth when the commodities bubble burst. At their peak, potash prices were $1000+ per metric ton in some parts of the world. They now reside around $400, but farmers around the world may be prepared to ramp up demand next year due to higher crop prices.

One way to play this trend may be with the Market Vectors Agribusiness ETF (MOO), another name that I have frequently mentioned in this space. MOO was up 1.32% on Monday, not much to write home about, but its top holding is Potash and if the triple-digit price tag on Potash is seems a little intimidating, MOO might prove to be a fine alternative for getting some agriculture exposure.

MOO Chart

And speaking of upgrades, Dow component Alcoa (AA), the largest U.S. aluminum producer, got a jolt from a Morgan Stanley upgrade of the shares to ''overweight'' from ''equal-weight.'' Morgan Stanley also put a price target of $22 on Alcoa and boosted its earnings forecast to 75 cents a share from 50 cents for 2010 and $1.20 a share from $1 for 2011. On average, analysts are expecting earnings of 59 cents a share for 2010 and 91 cents for 2011.

Alcoa also announced a $10.8 billion joint venture with Saudi Arabia to develop an aluminum industry complex. Saudi Arabia's Ma'aden will control 60% of the of the joint venture and Alcoa will control the remaining 40%. Alcoa and its partners will invest $900 million over four years in addition to their share of project financing, according to press reports. There is a little bit of bad news here and that is Moody's Investors Service said it may cut its ratings on Alcoa to junk status on news of the joint venture. Alcoa currently has a rating of ''Baa3'' from Moody's, the lowest investment grade.

Intel (INTC), the world's largest semiconductor maker, was another Dow member benefiting from a Monday upgrade. Likewise, the Nasdaq probably got a bit of a pop from news that Barclays Capital boosted its rating on Intel to ''overweight'' from ''equal-weight.'' Barclays Capital said Intel's valuation, which is 12 times 2010 per share earnings, looks ''intriguing'' given that the five-year average is 16 times forward earnings. Some other good news for Intel: World Semiconductor Trade Statistics is forecasting 2010 semiconductor sales growth of 12.2%.

Semiconductor Sales

Perhaps another catalyst for stocks on Monday was not a stock at all, but further strength in the U.S. dollar. The U.S. Dollar Index, which measures the strength of the greenback against six major currencies, has moved higher for eight straight days, punishing gold and crude oil along the way. Oil was down on the day and gold moved below $1100 an ounce, but the greenback was strong.

Some analysts are forecasting further gains for the dollar on speculation that the Federal Reserve is preparing to withdraw economic stimulus. The euro is hovering near three-month lows against its American rival with equities and the dollar are moving in positive unison for the first time in over a year, perhaps indicating the dollar is poised to benefit from an improving economic outlook in the U.S.

Dollar Index Chart

Given that this week will be shortened by a day and a half (half day on Christmas Eve and the market is closed on Christmas), the economic calendar is light. One report to watch on Tuesday is the third quarter GDP update. The consensus estimate is for 2.9% following a previous reading of 2.78%. Existing home sales for November are due out at 10 AM Eastern time. An uptick to 6.25 million from 6.10 million in October is expected. The Richmond Fed's manufacturing survey is also due out at 10 AM. That report is expected to show a contraction of 2.8% for December after falling 3% in November.

With an eye toward the charts, it bears remembering that December's end is historically bullish and with just six trading days left in 2009, it is unlikely that institutional players are going to be spending a lot of time at their respective trading desks. The Dow continues to move between the 10,265-10,500 range and it appears that I will be proven right in my prediction that 11,000 will not be obtainable in 2009.

At least Monday's closing above 10,400 puts the Industrials a fair bit above support at 10,265 and in a position to make another run at breaking resistance at 10,500. Volume was decent on Monday considering we are in the midst of a holiday-shortened week, but that was probably a result of M&A activity and analyst upgrades more than anything else. Unless those conditions persist for the rest of the week, the Dow is likely to hold its current range.

Dow Chart

The S&P 500 moved back to the higher end of its recent range, but is still struggling to get to the all-important 1120 level. There are no noteworthy earnings reports slated for the rest of the week, so if the S&P 500 is finally going to get above 1120 before the end of the year, traders (the ones who haven't closed up shop for the year) are going to need some more bullish analyst chatter to drive stocks higher over the coming days.

I will go out on a limb and say that I do not expect support at 1085 to be tested this week, save for unforeseen negative catalysts, and I imagine the S&P 500 will head into Christmas not far from where it currently rests.

S&P 500 Chart

The Nasdaq's close at 2237.66 got the index above resistance at 2235 and whether that begets a legitimate breakout remains to be seen. There were several positive catalysts to move the Nasdaq higher at the end last week in the form of Oracle (ORCL) and Research In Motion's (RIMM) earnings, and as I mentioned earlier, the Intel upgrade certainly helped on Monday. Negative catalysts probably are not there to move the Nasdaq down to support at 2175 and 2160, but it might be quite a task to make a real run at 2260-2275 before year end.

Nasdaq Chart

Monday may prove to be the start of one of those Santa Claus rallies we hear so much about at this time of year or it may not. I expect volume will be light for the duration of 2009 and that means a cautious approach is best. I wish you and your families a very happy holiday season and leave you with a trivia question (there are no prizes): What is the Dow's top performing stock year-to-date?

Answer: American Express (AXP), which is up 120%.

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New Plays

Industrials Goods and Retail

by James Brown

Click here to email James Brown


NEW BULLISH Plays

EMCOR Group - EME - close: 27.18 change: +0.50 stop: 24.99

Why We Like It:
Last week shares of EME broke out from a five-month trading range. Since the breakout traders have been buying the dips near $26.20. I am suggesting bullish positions now with a stop loss at $24.99. More conservative traders could use a tighter stop near $26. The Point & Figure chart is bullish with a $42 target. I'm listing our first target at $29.85. Our time frame is several weeks.

Annotated chart:

Entry on  December 21 at $27.18 
Change since picked:     + 0.00   			
Earnings Date          02/25/10 (unconfirmed)    
Average Daily Volume:       514 thousand
Listed on  December 21, 2009    


Williams Sonoma Inc. - WSM - close: 22.18 change: +0.57 stop: 20.95

Why We Like It:
Retailers are showing strength in spite of the huge snowstorm that is blanketing large sections of the country and potentially keeping shoppers at home and online. Shares of WSM have a bullish trend of lower highs and look ready to breakout past resistance in the $22.25-22.50 zone. I'm suggesting a trigger to buy WSM at $22.60. If triggered our first target is $24.90. Our time frame is several weeks.

Annotated chart:

Entry on  December xx at $xx.xx <-- TRIGGER @ 22.60
Change since picked:     + 0.00   			
Earnings Date          03/24/10 (unconfirmed)    
Average Daily Volume:       2.2 million 
Listed on  December 21, 2009    



In Play Updates and Reviews

Marching Higher

by James Brown

Click here to email James Brown

Stocks, for the most part, are marching higher. Banks got a boost from a rising yield curve, which means higher profit margins.


BULLISH Play Updates

Bank of Hawaii - BOH - close: 47.16 change: +0.99 stop: 44.99

After all this time it looks like our patience might get rewarded. Shares of BOH have broken out past resistance from a multi-week consolidation. I didn't see any company specific news behind the rally. Volume was a little light but I won't complain. Technically this does look like a new bullish entry point. Our first target is $49.85. Our second target is $53.50.

Entry on  November 18 at $46.20 
Change since picked:     + 0.96   			
Earnings Date          01/25/10 (unconfirmed)    
Average Daily Volume:       424 thousand
Listed on  November 17, 2009    


Broadcom - BRCM - close: 31.97 change: +0.42 stop: 28.75

The semiconductor sector extended their gains and BRCM closed at new 2009 highs. There is no change from my weekend comments. I remain bullish but readers may want to use a tighter stop loss. 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:     + 0.72   			
Earnings Date          01/28/10 (unconfirmed)    
Average Daily Volume:       7.4 million 
Listed on  December 05, 2009    


Cal-Maine Foods Inc. - CALM - close: 28.60 change: +0.11 stop: 27.49

CALM spiked higher this morning but I couldn't find a catalyst to explain the volatility. I don't see any changes from my weekend comments. Friday's bounce from $28.00 looks like a new entry point but readers may want to see some follow through first before initiating positions.

Our first target to take profits is at $30.95. Our target is somewhat aggressive since earnings are coming up in a few days. Odds of CALM actually hitting our target before the Dec. 28th report are growing slim but shares should be headed that direction.

Entry on  December 09 at $28.66 -small positions-
Change since picked:     - 0.06   			
Earnings Date          12/28/09 (unconfirmed)    
Average Daily Volume:       125 thousand
Listed on  December 09, 2009    


Disney - DIS - close: 32.40 change: +0.45 stop: 29.99

The market wide rally and strength in the DJIA helped DISH gain 1.4% and close near its highs. 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:     + 0.70   			
Earnings Date          02/09/10 (unconfirmed)    
Average Daily Volume:      11.0 million 
Listed on  December 12, 2009    


GATX Corp. - GMT - close: 29.60 change: +0.12 stop: 28.49

The action in GMT was a little disappointing on Monday. Shares bounced around the $29.50-30.00 zone. If we don't see it trade back above $30.00 soon we'll probably drop it early. Readers may want to wait for a new rise over $30.70 to initiate bullish positions.

Our target is $34.75 but that's pretty optimistic since we plan to exit ahead of the late January earnings report.

Entry on  December 16 at $30.52 -use small positions-
Change since picked:     - 0.92   			
Earnings Date          01/21/10 (unconfirmed)    
Average Daily Volume:       314 thousand
Listed on  December 16, 2009    


Home Depot - HD - close: 28.96 change: +0.31 stop: 27.40

Retail-related stocks generally performed well in spite of the massive snow storm hitting large chunks of the country. I don't see any changes from my weekend comments. We could launch positions now or wait for a dip closer to $28.00. 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:     + 0.14   			
Earnings Date          02/23/10 (unconfirmed)    
Average Daily Volume:      15.7 million 
Listed on  December 12, 2009    


HMS Holdings - HMSY - close: 47.48 change: +0.96 stop: 43.90

HMSY continues to bounce from its recent test of $46.00. More conservative traders may want to inch up their stop loss. 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:     + 1.76   			
Earnings Date          02/18/10 (unconfirmed)    
Average Daily Volume:       192 thousand
Listed on  December 05, 2009    


Johnson & Johnson - JNJ - close: 64.33 change: -0.04 stop: 59.90

JNJ is still trading sideways but the general posture seems to be growing more bearish. I've been expecting a dip back toward $62.00. More conservative traders may want to adjust their stop loss higher. 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:     + 1.28   			
Earnings Date          01/26/10 (unconfirmed)    
Average Daily Volume:      12.6 million 
Listed on  November 21, 2009    


Kansas City Southern - KSU - close: 32.65 chg: +0.97 stop: 28.75

The railroad index rallied toward the top of its trading range but it has yet to breakout. KSU on the other has already broken out and it extended its gains by another 3% today. Our first target is $34.90. Our second target is $37.50 but we'll still plan to exit ahead of the late January earnings report.

Entry on  December 14 at $30.90 
Change since picked:     + 1.75   			
Earnings Date          01/28/10 (unconfirmed)    
Average Daily Volume:       677 thousand
Listed on  December 14, 2009    


Potlatch Corp. - PCH - close: 31.36 change: +0.00 stop: 29.49

PCH is bumping up against short-term resistance and the stock closed unchanged on the session. I'm not suggesting new positions at this time. Our first target to take profits is at $33.60. Our second target is $35.75. FYI: The Point & Figure chart is bullish with a $56 target.

Entry on  November 16 at $30.30
Change since picked:     + 0.76   			
Earnings Date          02/11/10 (unconfirmed)    
Average Daily Volume:       503 thousand
Listed on  November 11, 2009    


Renolds American - RAI - close: 53.21 change: +0.08 stop: 50.90

RAI is still going nowhere as it consolidates sideways. I'm not suggesting new bullish positions. Our target to exit is $54.90.

Entry on  November 14 at $50.32 
Change since picked:     + 2.97   			
Earnings Date          02/11/10 (unconfirmed)    
Average Daily Volume:       1.6 million 
Listed on  November 14, 2009    


Starbucks Corp. - SBUX - close: 23.14 change: -0.54 stop: 21.75

SBUX gave back about a third of Friday's gains with a 2.2% decline. I am not suggesting new positions at this time. Our first target is $24.90.

Entry on  December 10 at $22.25
Change since picked:     + 0.89   			
Earnings Date          01/28/10 (unconfirmed)    
Average Daily Volume:      10.9 million 
Listed on  November 30, 2009    


Seagate Technology - STX - close: 17.68 change: +0.22 stop: 15.99

STX set another new 52-week high. Unfortunately shares gapped open higher at $17.83 affecting our entry point. I'm suggesting we keep our initial position small. Our target is $19.75 as the $20.00 level will probably act as round-number, psychological resistance. We will plan to exit ahead of the mid January earnings report.

Entry on  December 19 at $17.83 /gap open higher
Change since picked:     - 0.15  			
Earnings Date          01/19/10 (unconfirmed)    
Average Daily Volume:       8.2 million 
Listed on  December 19, 2009    


Texas Instruments - TXN - close: 25.84 change: +0.38 stop: 24.85

Semiconductor stocks continue to rally and TXN could try and catch up. Shares gained 1.49% but remain under resistance near $26.00. Our first target is $29.75.

Entry on  December 02 at $26.15
Change since picked:     - 0.31   			
Earnings Date          01/26/10 (unconfirmed)    
Average Daily Volume:      12.6 million 
Listed on  December 01, 2009    


United Parcel Service - UPS - close: 58.62 change: +0.64 stop: 56.95

This is one of the busiest days of the year for UPS and FDX with tens of millions of packages being processed for delivery this week ahead of Christmas. Unfortunately UPS is still stuck in its trading range. We might be better off waiting for a move over $60.00 to initiate bullish positions. Our target is $64.50.

Entry on  December 14 at $58.99 
Change since picked:     - 0.37   			
Earnings Date          02/02/10 (unconfirmed)    
Average Daily Volume:       4.2 million 
Listed on  December 14, 2009    


Warner Chilcott - WCRX - close: 27.55 change: +0.24 stop: 24.77

WCRX is hovering near its highs. Shares are arguably overbought and due for a pull back but thus far the stock is holding up.

If you haven't taken profits yet I strongly suggest you do so now. More cautious investors may want to exit completely. I am not suggesting new positions at this time. Our first target has been hit at $27.40. Our second target is $29.45.

Entry on  December 01 at $24.77 gap open entry point (small positions)
Change since picked:     + 2.78   	
                         /1st target hit @ 27.40 (+10.6%)
Earnings Date          02/25/10 (unconfirmed)    
Average Daily Volume:       1.8 million 
Listed on  November 28, 2009    


Wright Express Corp. - WXS - close: 32.04 change: -0.02 stop: 29.99

We wanted to see a little bit more strength in WXS and we got it. Shares hit $32.48 intraday. Unfortunately the stock failed to hold these gains. It makes me wonder if we didn't put the trigger high enough. Our play was opened this morning when shares hit our trigger at $32.30. I'd probably wait for a move over $32.50 before initiating new positions. Our target is $35.90. Our time frame is several weeks probably the first of February. FYI: The Point & Figure chart is bullish with a $41 target.

chart:

Entry on  December 21 at $32.30
Change since picked:     - 0.26   			
Earnings Date          02/10/10 (unconfirmed)    
Average Daily Volume:       209 thousand
Listed on  December 19, 2009    


Wyndham Worldwide - WYN - close: 21.07 change: +0.18 stop: 18.88

WYN is still drifting higher and added 0.8% on Monday. I am not suggesting new bullish positions. Our first target has already been hit at $21.00. We're currently aiming for $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:     + 2.19
                          /1st target hit @ 21.00 (+11.2%)
Earnings Date          02/11/10 (unconfirmed)    
Average Daily Volume:       3.5 million 
Listed on  November 10, 2009    


BEARISH Play Updates

Activision-Blizzard - ATVI - close: 10.98 change: -0.08 stop: 11.45

This could be the failed rally we've been talking about. Shares hit $11.15 intraday and reversed to close back under the $11.00 level. Traders could use this as a new entry point for bearish positions.

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:     - 0.17   			
Earnings Date          02/04/10 (unconfirmed)    
Average Daily Volume:        20 million 
Listed on  November 28, 2009    


Wells Fargo - WFC - close: 27.34 change: +0.56 stop: 27.55

Seeing the yield curve between the 2-year notes and 10-year notes hit an all-time high of more than 281 basis points fueled some buying in the banks. This super-wide yield curve means the banks should be raking in the money on any lending that they do. Shares of WFC gained 2.0% and is very close to hitting our stop loss at $27.55. More conservative traders may want to exit early immediately.

I am not suggesting new bearish positions at this time. We knew this was going to be an aggressive, higher-risk trade so the plan was to use smaller positions. 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:     + 1.59   			
Earnings Date          01/27/10 (unconfirmed)    
Average Daily Volume:        37 million 
Listed on  December 08, 2009