Option Investor
Newsletter

Daily Newsletter, Tuesday, 12/22/2009

Table of Contents

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

Market Wrap

Santa Claus Rally Comes Early

by Jim Brown

Click here to email Jim Brown

Santa came early this year with the S&P and Nasdaq closing at new highs for the year. The good economic news was spreading holiday spirit and rewarding the bulls for their faithfulness.

Market Stats Table

The economic calendar favored the bulls today with strong existing home sales a major plus. Existing home sales rose +7.4% in November. That was on top of a +10.1% increase in October. Sales came in at an annualized rate of 6.54 million homes. That is a +44% increase over the sales rate one year ago and the strongest pace since early 2007. It is well over the 5 million unit average over the last 12 months. Home inventories fell to 6.5 months of supply and that is a major drop from the 11.2 months of supply in November 2008. Sales have now gained on a year ago basis for four consecutive months and the longest string of such gains since the end of 2005.

November was the last month for the initial homebuyer tax credit and sales in November were obviously influenced by this event. The homebuyer credit was eventually extended and enhanced with an additional credit for existing home owners as well as new buyers. This will help sales in the spring but probably not in December. I would expect this hot pace of sales to slow in December but pick up sharply in February and March.

Analysts believe the housing market will not really begin to improve until late in 2010 and the overhang of two million foreclosures is expected to wane. Prices overall are still expected to continue declining through the third quarter of 2010 and bottom at a -37% decline. Obviously some areas have already bottomed but several states are still seeing persistent declines. The chart below is very positive with the pace of sales well off the bottom and moving nearly vertically thanks to the buyer tax credit.

Existing Home Sales Chart

Weekly chain store sales rose +0.6% compared to +0.4% in the prior week. This is actually a very small increase for the last week before Christmas. The winter storm in the northeast impacted sales and there may be a carry over into this week. Still consumers are just not buying as they have in years past but with over 15 million out of work that is to be expected.

The last revision of the Q3 GDP came in lower than expected at +2.2% gain compared to the consensus for +2.9% gain. The prior reading was a +2.78% gain and the initial reading was a gain of +3.53%. The drop came from downward revisions in business investment, inventories and consumer spending. Corporate profits rose +$132 billion from Q2 levels.

The slow decline through all the revisions suggests the strength of the rebound was a lot weaker than previously thought. The recession may be over thanks to the stimulus and the record intervention by the Fed and Treasury but the economy has not yet found any real traction. Employment is still very weak and not expected to really improve until Q2/Q3 of 2010.

The Richmond Fed Manufacturing survey fell to a -4 in December from +1 in November and a high of 14 back in Aug/Sep. The backlog of orders fell to -12 and shipments fell -12 points to -6 and the lowest level since March. However the six-month outlook rose to +29 from +24 and the employment index rose +7 points to -2. This manufacturing report was negative as far as the outlook for economic activity growth but it was exactly what the market needed today.

Richmond Fed Survey Chart

The Richmond Fed Survey, GDP and weak chain store sales were all market positive because it means the Fed will not be raising rates any time soon. It is a weak recovery with a weak job market and the Fed should be vindicated for their current "extended period" stance on rates.

Add to that the jump in home sales even if it was motivated by tax credit stimulus and you have signs of a recovery but clearly signs of a weak recovery. If this kind of mixed improvement continues we could see the Fed on hold until the middle of 2010. That will keep the dollar weak assuming we don't have any sovereign defaults overseas. This was a good day for economics and that seems strange to say but it was exactly what the market wanted to see.

Adding to the positive spin was a drop in the mass layoffs for November. The number of layoff events impacting 50 or more workers fell to 1,797 in November from 2,127 in the prior month. The number of workers impacted in November fell to 165,346, down from 217,182 in October. This was the third straight monthly decline. Manufacturing still accounted for 28% of all layoffs but down from 39% in November 2008. Compared to the same period in 2008 the number of mass layoffs has been cut nearly in half. This was another market positive report.

Reports due out tomorrow include Mortgage Applications, Personal Income, Consumer Sentiment, New Home Sales and Oil Inventories. Short of a nuclear event in one of those reports they will be ignored. The markets are already shutting down for the holidays. Volume on Tuesday was only 6.4 billion shares and there are two days left in the week. Volume on Wednesday should be less than 6 billion and Thursday could be under 3 billion. Christmas Eve in 2008 only have 2.3 billion shares across all markets.

In stock news Micron (MU) blew through analyst estimate and posted earnings of 23 cents per share. Analysts were expecting only a 7-cent profit. Revenue rose +24% and Micron was positive on the conference call. Reaction in the stock during the after hours session was muted because nobody was around to hear the news.

One stock that did have interested investors was RedHat (RHT). RedHat posted earnings of 17-cents and beat the street by a penny. Normally a penny beat is not a market mover. They also raised guidance slightly but the real boost for the stock came from comments from the CEO that he was seeing strength "across the board" in North America and Europe but growth was picking up more strongly in the United States. He said customers were starting new projects again. "Our pipeline remains quite strong. We are optimistic about the business going forward." RHT rose from $29.86 to $31.80 in after hours.

RedHat Chart

Google (GOOG) moved over $600 again to close at a new 52-week high and the target prices are starting to rise again. The google chart is a perfect picture of a bullish chart and the 30-day average as been support since March. Most analysts are starting to wake up to the fact that Google has a PE that is roughly half of the 78 PE carried by Amazon. The online retailers margins are a fraction of Google's margin and they have a lot more overhead and consumer risk. Despite the $600 stock price analysts are saying again that Google is cheap. A 10:1 stock split announcement would give the stock a major boost.

Google Chart

The positive housing news produced winners in the homebuilders and the building supply stores. Home Depot closed at a new 52-week high and attracted a new round of positive comments from analysts. Home builders are expected to double over the next 12 months as they restart their building cycles. I have noticed dormant fields here in the Denver area that were graded and plotted a couple years ago but then abandoned are being revived and graders are back to groom them for housing starts in the next couple months. KB Home (KBH) and Ryland (RYL) were getting lots of press today but the chart on DR Horton looks the most appealing to me with a nice rounded bottom.

Chart of DR Horton

OPEC met in Angola and as expected they didn't change a thing. They are already cheating to the tune of about 2 million barrels per day above their "official" quotas and the price of oil is holding over $70 so according to them this is a perfect world. Saudi Oil Minister al-Naimi actually said "the price is perfect." The price rallied on the news to close at $74.30 as the new February front month contract tries to find equilibrium in market place since it is no longer tied to the January contract that expired on Monday.

Crude Oil Chart

The airlines are thriving despite the price of oil being over $70. The price of jet fuel is low because of extra refining capacity and excess crude inventories. The XAL Airline index closed at a new 52-week high. I continually scratch my head since the papers were full of stories over the last week about airline ticket prices being slashed by up to 78% for holiday travel. Airlines were canceling their requirements for booking travel two weeks in advance and basically saying, "come on down and fly today" with discount rates. The problem is a -4% drop in travel over the same period in 2008 and plenty of vacant seats for holiday travel. Think about that for a minute. We know how bad travel was in Q4 of 2008. It was Armageddon in the financial sector with major financial institutions failing every week. Consumers were boarding up their windows for the coming depression rather than boarding airplanes for holiday travel. Now in December 2009 holiday travel is down another 4%? So why are the airlines at 52-week highs?

Airline Index Chart

I think the obvious reason that airline stocks, housing stocks, tech stocks and others are rising is the bursting of the bubble. Got you there, you are thinking I mistyped that last sentence. The bubble that is bursting is the pessimism bubble. Optimism is breaking out all over and the economic bears don't know what to do. I have not gone off the deep end and I still expect a short dip in January but I believe things are looking up long term and the market will reflect this in 2010. I keep hearing about analyst upgrades for earnings estimates for Q4 and now all of 2010 and the bulls are starting to be more prevalent on the airwaves than gloomy sound bites from Nouriel Roubini.

According to TrimTabs.com this is shaping up to be the best year in the markets since 2003. The S&P is up +23% for the year, +55% since March and earnings estimates are rising. This strong market performance has come despite record outflows from stock funds, record inflows into bond funds, record new offerings, record lows for insider buying and stock buybacks. This was a monster wall of worry for the bulls to overcome and it will still be the best year since 2003. Somebody pinch me, this must be a dream. I am looking forward to a buying opportunity in January and I hope everyone else is as well.

I have to cut this short tonight. My mother (90) went into the hospital last week and the doctors called me in for a conference this afternoon and I lost two hours of writing time.

The Dow closed at 10464 and the chart below has not changed from then I drew it two weeks ago. The trading range on the Dow is still rock solid with resistance at 10500. However, based on the performance of the Nasdaq, S&P and Russell I view this shortfall on the Dow as a positive. Money is no longer being spent only on blue chips. There is a clear move to small caps and techs and that is a positive indicator for the overall markets.

The Dow has had two nice days and despite the volatility this afternoon still posted a gain of 50 points. We still have about five days before year-end and the trend is actually becoming more bullish. I could easily see a move over 10500 before the January dip.

Dow Chart

The S&P picked up some speed and managed to close at 1118 and over resistance of 1115 despite a strong dollar hitting a new three-month high. The S&P closed at a new high for the year and could be poised to really gain some ground in a low volume market if the shorts are forced to begin covering. Resistance at 1115 has been an easy short for nearly two months and a break in that trend could produce some serious short covering. Resistance over 1115 is well above at around 1175.

SPX Chart

The Nasdaq is in breakout mode and considering it broke out of a bearish wedge this could continue to be strong once over 2252. You may remember my Nasdaq charts from the last couple weeks with the 61% fib retracement resistance at 2252. This is the 61% rebound point for the bear market drop. It should be at least minimal resistance and guess where the Nasdaq stopped today? Yes, 2252. I would expect this to be a challenge but based on some of the short covering I saw on some individual tech stock charts we could move past this quickly. This is a bullish breakout and it could be accentuated by the thin market over the next two days.

Nasdaq Chart

The Russell has not yet broken over October resistance but sprinted out of congestion to challenge that resistance on Tuesday. I can't emphasize how critically important this level is to the markets. If fund managers are shifting enough buying out of blue chips and into small caps to push the Russell over 623 then we may be in for a major change in market sentiment. This would be very bullish and depending on the strength could even negate or reduce the potential for an early January dip.

Russell Chart

The problem traders face tonight is knowing whether the two day rally is just a pull forward from the normal post Christmas rally, window dressing or new buying and a change in trend from the last two months. If this is a new push higher that triggers short covering in a thin market on Wed/Thr then we could be off to the races. If this is just window dressing then we should stall at today's closing levels and go sideways until next week. I would like to think we are facing a new paradigm and the bulls are starting to get aggressive again. Time will tell.

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New Plays

Building Up Steam

by James Brown

Click here to email James Brown


NEW BULLISH Plays

CSX Corp. - CSX - close: 49.48 change: +0.31 stop: 47.40

Why We Like It:
The DJUSRR railroad index has been consolidating sideways for weeks. If this sector can breakout it could really power the transports higher. KSU is already breaking out and on the newsletter. CSX acts like it's not far behind. Shares of CSX currently have resistance near $50.00. I am suggesting a trigger to buy CSX at $50.30. If triggered our first target is $54.90. We will plan to exit ahead of the mid January earnings report.

Annotated chart:

Entry on  December xx at $xx.xx <-- TRIGGER @ 50.30
Change since picked:     + 0.00   			
Earnings Date          01/19/10 (unconfirmed)    
Average Daily Volume:       3.0 million 
Listed on  December 22, 2009    



In Play Updates and Reviews

Extending Gains

by James Brown

Click here to email James Brown

We're seeing a number of our bullish candidates extend their gains this week. Tonight's newsletter has three updated stop losses.


BULLISH Play Updates

Bank of Hawaii - BOH - close: 47.82 change: +0.66 stop: 45.40 *new*

The breakout in BOH is still in progress and shares soared to another new 2009 high. I am raising our stop loss to $45.40. Our first target is $49.85. Our second target is $53.50.

Entry on  November 18 at $46.20 
Change since picked:     + 1.62   			
Earnings Date          01/25/10 (unconfirmed)    
Average Daily Volume:       424 thousand
Listed on  November 17, 2009    


Broadcom - BRCM - close: 32.00 change: +0.03 stop: 28.75

BRCM is still trying to rally past the $32.00 level but it's taking its time. There is no change from my prior comments. 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:     + 0.75   			
Earnings Date          01/28/10 (unconfirmed)    
Average Daily Volume:       7.4 million 
Listed on  December 05, 2009    


Cal-Maine Foods Inc. - CALM - close: 29.47 change: +0.87 stop: 27.49

CALM has produced some follow through on the recent bounce from $28.00. So far so good.

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:     + 0.81   			
Earnings Date          12/28/09 (unconfirmed)    
Average Daily Volume:       125 thousand
Listed on  December 09, 2009    


Disney - DIS - close: 32.31 change: -0.09 stop: 29.99

DIS failed to participate in the market-wide rally on Tuesday. 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:     + 0.61   			
Earnings Date          02/09/10 (unconfirmed)    
Average Daily Volume:      11.0 million 
Listed on  December 12, 2009    


EMCOR Group - EME - close: 27.33 change: +0.15 stop: 24.99

EME managed to eke out a new closing high for the year. There is no change from yesterday's comments. 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.

Entry on  December 21 at $27.18 
Change since picked:     + 0.15   			
Earnings Date          02/25/10 (unconfirmed)    
Average Daily Volume:       514 thousand
Listed on  December 21, 2009    


Home Depot - HD - close: 29.29 change: +0.33 stop: 27.40

The rise in home sales was seen as a positive for HD. If you're buying a home then you might have some fix up to do. I heard that if you buy a bank-owned foreclosure that the average renovation cost was about $5,700. That's got to be good news for HD and LOW. Shares of HD hit new 2009 highs today. Our first target is $30.60. Our second target is $32.45. 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:     + 0.47   			
Earnings Date          02/23/10 (unconfirmed)    
Average Daily Volume:      15.7 million 
Listed on  December 12, 2009    


HMS Holdings - HMSY - close: 48.67 change: +1.19 stop: 44.90 *new*

HMSY displayed relative strength with a 2.5% rally and a new 2009 high. I am raising our stop loss to $44.90. 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:     + 2.95   			
Earnings Date          02/18/10 (unconfirmed)    
Average Daily Volume:       192 thousand
Listed on  December 05, 2009    


Johnson & Johnson - JNJ - close: 64.53 change: +0.20 stop: 59.90

JNJ spent another day drifting sideways. There is no change from my prior comments. 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:     + 1.48   			
Earnings Date          01/26/10 (unconfirmed)    
Average Daily Volume:      12.6 million 
Listed on  November 21, 2009    


Kansas City Southern - KSU - close: 33.18 chg: +0.53 stop: 28.75

KSU jumped again. The stock gapped open higher and closed with a 1.6% gain and a new high for the year. 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:     + 2.28   			
Earnings Date          01/28/10 (unconfirmed)    
Average Daily Volume:       677 thousand
Listed on  December 14, 2009    


Potlatch Corp. - PCH - close: 31.55 change: +0.19 stop: 29.49

PCH is inching higher and back into its December trading range. 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:     + 0.95   			
Earnings Date          02/11/10 (unconfirmed)    
Average Daily Volume:       503 thousand
Listed on  November 11, 2009    


Renolds American - RAI - close: 53.43 change: +0.22 stop: 50.90

RAI tried to breakout past $54.00 again and failed. As long as shares maintain the bullish trend of higher lows we should be okay. I'm not suggesting new bullish positions. Our target to exit is $54.90.

Entry on  November 14 at $50.32 
Change since picked:     + 3.11   			
Earnings Date          02/11/10 (unconfirmed)    
Average Daily Volume:       1.6 million 
Listed on  November 14, 2009    


Starbucks Corp. - SBUX - close: 23.72 change: +0.58 stop: 21.75

SBUX erased yesterday's losses with a 2.5% rally on Tuesday. The stock is back at its 2009 highs. s Our first target is $24.90.

Entry on  December 10 at $22.25
Change since picked:     + 1.47   			
Earnings Date          01/28/10 (unconfirmed)    
Average Daily Volume:      10.9 million 
Listed on  November 30, 2009    


Seagate Technology - STX - close: 17.83 change: +0.15 stop: 15.99

STX erased yesterday's losses and closed back at 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:     - 0.00  			
Earnings Date          01/19/10 (unconfirmed)    
Average Daily Volume:       8.2 million 
Listed on  December 19, 2009    


Texas Instruments - TXN - close: 25.64 change: -0.20 stop: 24.85

It looks like we would have been better offer with one of the smaller semiconductor stocks. TXN is under performing its peers. The stock failed to breakout past $26.00 today. More conservative traders may want to exit early. Our first target is $29.75.

Entry on  December 02 at $26.15
Change since picked:     - 0.51   			
Earnings Date          01/26/10 (unconfirmed)    
Average Daily Volume:      12.6 million 
Listed on  December 01, 2009    


United Parcel Service - UPS - close: 58.58 change: -0.04 stop: 56.95

UPS remains stuck in its sideways consolidation. 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:     - 0.41   			
Earnings Date          02/02/10 (unconfirmed)    
Average Daily Volume:       4.2 million 
Listed on  December 14, 2009    


Warner Chilcott - WCRX - close: 28.08 change: +0.53 stop: 25.45 *new*

WCRX has bounced back toward its 2009 highs. I am raising our stop loss to $25.45.

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:     + 3.31   	
                         /1st target hit @ 27.40 (+10.6%)
Earnings Date          02/25/10 (unconfirmed)    
Average Daily Volume:       1.8 million 
Listed on  November 28, 2009    


Williams Sonoma Inc. - WSM - close: 22.41 change: +0.23 stop: 20.95

WSM is still inching higher but it remains under resistance near $22.50. 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.

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    


Wright Express Corp. - WXS - close: 31.83 change: -0.21 stop: 29.99

The relative weakness in WXS today is worrisome. I am suggesting readers wait for a new rise over $32.50 to open bullish 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.

Entry on  December 21 at $32.30
Change since picked:     - 0.47   			
Earnings Date          02/10/10 (unconfirmed)    
Average Daily Volume:       209 thousand
Listed on  December 19, 2009    


Wyndham Worldwide - WYN - close: 20.98 change: -0.09 stop: 18.88

It was a quiet day for WYN with the stock trading sideways in a narrow range. 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:     + 2.10
                          /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: 10.87 change: -0.11 stop: 11.45

ATVI continues to look weak and shares under performed the market today.

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:     - 0.28   			
Earnings Date          02/04/10 (unconfirmed)    
Average Daily Volume:        20 million 
Listed on  November 28, 2009    


Wells Fargo - WFC - close: 27.16 change: -0.18 stop: 27.55

There was no follow through on WFC's recent bounce but that doesn't mean we're not still in jeopardy. If the banks show any strength this week we'll probably get stopped out. 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:     + 1.41   			
Earnings Date          01/27/10 (unconfirmed)    
Average Daily Volume:        37 million 
Listed on  December 08, 2009    


CLOSED BULLISH PLAYS

GATX Corp. - GMT - close: 29.23 change: -0.37 stop: 28.49

Our aggressive trade on GMT is not panning out. I'm suggesting an early exit now.

chart:

Entry on  December 16 at $30.52 -use small positions-
Change since picked:     - 1.29 <-- early exit @ 29.23 (-4.2%)
Earnings Date          01/21/10 (unconfirmed)    
Average Daily Volume:       314 thousand
Listed on  December 16, 2009