Option Investor
Newsletter

Daily Newsletter, Monday, 2/1/2010

Table of Contents

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

Market Wrap

Stocks Stop The Bleeding...At Least For A Day

by Todd Shriber

Click here to email Todd Shriber
After plunging to a three-month low last week, U.S. equities bounced back in fine fashion on Monday as the Dow Jones Industrial took a pass on the recent theme of triple-digit declines to post a triple-digit gain of 118.2 points to close at 10,185.53. The S&P 500 added more than 15 points to work its way back above the all-important 1085 level to finish the day at 1089.19 and the Nasdaq got a decent bounce despite Amazon's (AMZN) big drop to finish the day higher by 1.1% at 2171.2.

Stats Table

A bullish report from the Institute for Supply Management (ISM) and other cheery manufacturing reports from Europe and China encouraged the bulls as hopes that a global economic recovery will materialize quickly began to swirl again. The ISM said that U.S. manufacturing activity rose in January at its most rapid pace since August 2004. The ISM Manufacturing Index rose to 58.4 in January, up from 55.9 in December, beating expectations for a January number of 55.6. A number above 50 is viewed as bullish and reading below 50 is considered bearish.

Economists cited an end to inventory drawdown and the expansion of global trade as catalysts behind the rosy ISM report. The latter thesis would seem to fly in the face of the concerns that led to some of the panic selling the market endured last week. After all, prominent reasons behind the selling were China's curb on bank lending and fears of European sovereign debt default. Speaking of Europe, a report from Markit Economics indicated Europe's factory output rose more than expected in January.

Combine today's ISM report with last Friday's similarly bullish GDP number and encouraging ISM reports from the New York and Chicago regions and you have at least a few economic data points that, at the very least, are not all that bad. This is a big week for economic reports with the ISM non-manufacturing survey due out on Wednesday and factory orders due out on Thursday, but that all pales in comparison to the jobs report on Friday.

Those announcements will play a big part in how stocks perform for the rest of this week, but for at least one day, the bulls seemed to revel in the fact that the ISM and GDP numbers are improving as the chart below indicates.

ISM/GDP Chart

After being bludgeoned for much of the previous two weeks, emerging markets got a lift on Monday as the MSCI World Index gained 1% for its first positive run in nine trading sessions. The way to track that index is with the iShares MSCI Emerging Markets Index ETF (EEM), the most heavily traded emerging markets ETF. EEM has been ruthlessly hammered since peaking at $43.47 in January and the chart below shows the ETF has plenty of work cut out for it just to regain the 50-day moving average.

EEM Chart

Not surprisingly, China was the catalyst for lifting the emerging markets higher on Monday and perhaps renewing some of the lost risk appetite in the process. I was having a conversation with someone recently who is somewhat of an expert on Chinese equities and we discussed the point that the market seemed to misinterpret the news of limited bank lending as a sign that China's voracious demand for commodities was somehow going by the wayside.

It would appear that those concerns are somewhat unfounded as Bloomberg News reported today that China, the world's largest consumer of industrial metals, will spend more on copper, iron ore and oil this year than it did last year. Oh yeah, China spent a record $32 billion on those materials and related fare last year so if it is spending more this year that means another record will be set. That does not sound bearish to me, nor does the fact that Chinese copper demand may rise by nearly 15% this year, according to one analyst.

The fact of the matter is a middle class is trying to emerge in China and there are plenty of newly minted affluent folks there as well and that is fueling sales of new homes and cars. To build a house, there needs to be copper and a little bit of steel and last time I checked, most cars run on gasoline, so Chinese oil demand probably will not be diminishing anytime soon. Beijing is cognizant of its dependence on import materials and energy sources. As a result, many Chinese commodities and energy firms have signaled their intent to be on the prowl for acquisitions this year. That does not sound like the mark of a country where the commodities demand or the overall economy are slowing. The chart below illustrates demand growth for passenger cars in China, just one anecdote that illustrates this economy is far being sluggish.

China's Auto Demand

Speaking of oil, stocks got a boost from Exxon Mobil's (XOM) fourth-quarter earnings report. The largest U.S. oil producer said its fourth-quarter profit fell 23% as the company delivered its lowest quarterly profit since 2002. The company earned $6.05 billion, or $1.27 a share, compared with $7.82 billion, or $1.54 a share a year earlier. Revenue rose 6% to $89.8 billion. Still, the results beat analyst estimates and that was enough to have the stock up more than 3% intraday, an uncommon move for Exxon Mobil, before settling up 2.7% at $66.18.

For 2009, the company earned $3.98 a share, a far cry from the $8.66 a share the company earned in 2008 when oil prices were soaring. Even with that big decline, Exxon Mobil will be the highest-earning member of the S&P 500 for 2009, a spot it has held since 2000, according to the Associated Press.

Echoing sentiments from rivals such as Chevron (CVX) and ConocoPhillips (COP), Exxon said its U.S. refineries lost $287 million in the fourth quarter and profits from the company's international refining and marketing operations plunged 96% in the quarter. Refining margins have been hampered by plummeting demand and the surge in costs oil producers are paying for crude. Exxon said it does not see the need for significant alterations to its refining business, but added ''we'll see how things go.''

All and all, Exxon's stock has been beaten up recently, so even though today's report was less than earth-shattering, the Dow component was probably due for a little bit of a rally, which it got. Still, the shares languish below their 50 and 200-day moving averages.

Exxon Mobil Chart

Departing from the world of commodities, there was some interesting news from the world of books and e-readers. The Nasdaq was up on the day, but that positive move was probably hampered by Amazon, which was down more than 5% after the company lost a pricing battle with publisher MacMillan.

MacMillan wanted Amazon to charge $12.99 to $14.99 for its books that are available on Amazon's popular Kindle e-reader. Amazon wanted to charge $9.99. Amazon lost the spat and some analysts speculated this may encourage other publishers to alter their pricing structures with Amazon, perhaps threatening the e-reader business model. The New York Times said that the pricing is along the same lines of the terms five of the top six publishers agreed to with Apple (AAPL) for books sold on the newly unveiled iPad.

Some analysts say Amazon sells books on the Kindle at loss when priced at $9.99 and makes up for that loss through unit sales of the Kindle itself. One analyst noted that if Amazon has to charge higher prices for Kindle titles, profitability would improve and another said that even if prices for all books available on Kindle rise to $14.99 from $9.99, Kindle sales would have to slump by a third before Amazon sees any material impact to its bottom line. Amazon does not break out Kindle sales.

Amazon Chart

If you are looking for some good news from the world of books and a stock to watch on Tuesday, Barnes & Noble (BKS) fits the bill. After gaining almost 3% during Monday's session, the stock was higher by nearly 18% in the after-hours session on news that billionaire Ron Burkle wants to own as much as 37% of the book retailer.

This could end up being a contentious battle because of poison pill provision Barnes & Noble has that prevents a single outside investor from owning more than 20% of the company's shares. Chairman Leonard Riggio, his family and other insiders own about 37% of Barnes & Noble, according to press reports, and Burkle is going to the shareholders, asking them to pave the way for him to acquire his desired 37% stake.

The stock was trading above $21 as of this writing and if it opens there tomorrow, it will move above both its 50 and 200-day moving averages for the first time since December.

Barnes & Noble Chart

Looking at the charts, it would have been nice to see the Dow close above 10,200 from a mental standpoint and to bring the index closer to its 50-day moving average at 10,435. That did not happen, but after the bloodshed in the past two weeks, a triple-digit gain is nothing to be unhappy about. The other side of the coin is that if the bulls cannot get the Dow headed back in their desired direction sometime soon, a break below 10,000 brings 9650 into play.

And do not think that move would not happen in short order. It only took a few days to move from the January peak of 10,729.89 to 10,043.75 so for the Dow to shed another 550-600 points from here really would not be too difficult a task, especially with the absence of substantive reasons to buy.

Dow Chart

Yes, the S&P moved back above the critical 1085 level and is now resting at its 100-day moving average of 1089, but the problem is that the recent down days do not pick favorites, meaning there are no sectors for investors to seek refuge in. If selling pressure resumes later this week, one could hope for 1050 to act as mental support, but the better bet is that the selling would not abate until 1035. A move to 1100 tomorrow would keep the bears at bay for a little while longer, but as is the case with the Dow, the catalysts may not be there to buoy that kind of buying.

S&P 500 Chart

The Nasdaq has shrugged off plenty of good earnings report, Intel (INTC) and Microsoft (MSFT) only to be whacked by disappointing numbers from the likes of Qualcom (QCOM). Throw in the fact the Amazon news is another variable holding the index back and that the iPad failed to illicit much excitement and we have little in the way of help for the Nasdaq, save for Cisco's (CSCO) earnings report on Wednesday. If the current trend holds up, Cisco could report a solid number and the Nasdaq will not react in kind.

No, the Nasdaq is not all that far from 2200, but if buyers do not buy just for the sake of buying and the Nasdaq moves below 2100, the fall probably does not stop until the 2040-2060 area.

Nasdaq Chart

While today was certainly a good day, the gains barely put a dent in the losses of the past two weeks. Take a look at last week's volume and you will find that Monday's trade was anemic by comparison. The better scenario is to selling on weak volume and buying on strong volume, not vice versa. I still think this current dip feels different than the previous ones, so it is hard to advocate fresh buying until the market works some more kinks out.


New Plays

It All Depends

by James Brown

Click here to email James Brown

Editor's Note:

I would not read too much into Monday's oversold bounce. The bounce could last a couple days or more but it will probably turn out to be a new entry point for bearish positions. Stocks don't usually move in a straight line for very long. It's three steps forward and two steps back, or vice versa on the way down.

Pick your entry points and let the market come to you. I'm expecting stocks to roll over at short-term overhead resistance. However, this week could be volatile or just the opposite, boring and sideways. It all depends on how investors choose to interpret the manufacturing and economic data out this week and whether or not traders decide to step to the sidelines ahead of the jobs report out on Friday.

No new trading candidates tonight.



In Play Updates and Reviews

A Normal Oversold Bounce

by James Brown

Click here to email James Brown

Stocks had reached short-term oversold levels and the market managed a rebound. All in all a very normal session.


BULLISH Play Updates

CVR Energy - CVI - close: 8.25 change: +0.23 stop: 7.48

The market's bounce allowed CVI to rebound from the $8.00 level. Shares gained 2.8%. Yet I'm still concerned that CVI may dip toward $7.50. There is no change from my weekend comments. I am not suggesting new bullish positions at this time. We want to take profits at $9.90. Our second target is $11.95 (new target).

Entry on   January 19 at $ 8.20 
Change since picked:     - 0.18 
Earnings Date          03/10/10 (confirmed)         
Average Daily Volume:       411 thousand     
Listed on   January 17, 2009    


BEARISH Play Updates

Atlas Air Worldwide - AAWW - close: 37.37 change: +0.70 stop: 40.05

Airline stocks saw a big bounce with the XAL index gaining 3.3%. Shares of AAWW only rose 1.9%. The stock is now testing short-term resistance at the 10-dma. If AAWW Can breakout from here look for additional resistance in the $38-39 zone. If AAWW closes over $39.00 I would consider an early exit. Our first target is $32.60.

Entry on   January 23 at $37.66 /gap open entry
Change since picked:     - 0.29   			
Earnings Date          02/24/10 (unconfirmed)    
Average Daily Volume:       291 thousand
Listed on   January 23, 2009    


American Tower Corp. - AMT - close: 43.08 change: +0.63 stop: 43.75

Our bearish trade on AMT is now shaping up very well. We were triggered on an intraday spike under the 50-dma and $42.00. Now shares are trying to rebound from support in the same area. If there is any follow through tomorrow we could get stopped out. More aggressive traders may want to raise their stops and give AMT more room to maneuver. I'm not suggesting new positions at this time but we will be watching for a failed rally near $43.50. Our first target is $40.10. Our second target is $37.75. We do not want to hold over the late February earnings report.

Entry on   January 27 at $41.90
Change since picked:     + 1.18   			
Earnings Date          02/24/10 (unconfirmed)    
Average Daily Volume:       2.8 million 
Listed on   January 26, 2009    


Ameritrade - AMTD - close: 18.23 change: +0.47 stop: 20.05

AMTD managed to outpace most of the financials with a 2.6% bounce. Watch for resistance near $18.50 and its 200-dma. Look for a failed rally as a new entry point for bearish positions. Our first target is $16.10. Our second target is $15.05. More conservative traders may want to use a stop closer to $19.00. Our time frame is about six weeks.

Entry on   January 28 at $17.88 
Change since picked:     + 0.35   			
Earnings Date          04/21/10 (unconfirmed)    
Average Daily Volume:       6.1 million 
Listed on   January 28, 2009    


Best Buy - BBY - close: 36.76 change: +0.11 stop: 40.26

BBY did not see much participation in the market's rebound on Monday. That's good news for the bears although I still think the stock sees an oversold bounce toward its 200-dma. I am not suggesting new positions at this time. Our first target to exit is $35.25. Our second and final target is $32.25.

Entry on   January 12 at $38.95 (small positions)
Change since picked:     - 2.19   			
Earnings Date          03/25/10 (unconfirmed)    
Average Daily Volume:       8.0 million      
Listed on   January 02, 2009    


Companhia Brasileira de Distribuicao - CBD - cls: 69.12 chg: +2.40 stop: 74.05

CBD had grown every short-term oversold with its drop from $78 to $68 in two weeks. This oversold bounce from the 100-dma is normal. Look for resistance in the $70-72 zone. Remember this is a volatile stock and I'm expecting a bumpy ride lower. We want to use small positions to limit our risk. Our first target is $61.00. Our second target is $56.00. Time frame is several weeks.

Entry on   January 26 at $69.40 (very small positions)
Change since picked:     - 0.28 
Earnings Date          03/03/10 (unconfirmed)    
Average Daily Volume:       261 thousand
Listed on   January 23, 2009    


DSW Inc. - DSW - close: 25.13 change: +1.03 stop: 25.55

DSW's breakout over the $25.00 level is short-term bullish but the larger trend with the mid January breakdown still looks bearish. There is no change from my prior comments. I am suggesting a trigger for bearish positions at $23.75.

If triggered at $23.75 our first target is $21.50 (essentially we're aiming for the 100-dma). Our second target is $20.05.

Entry on   January xx at $xx.xx <-- TRIGGER @ 23.75
Change since picked:     + 0.00   			
Earnings Date          03/24/10 (unconfirmed)    
Average Daily Volume:       387 thousand
Listed on   January 26, 2009    


F5 Networks - FFIV - close: 50.39 change: +0.96 stop: 52.55

FFIV's oversold bounce produced a 1.9% gain and a close back above $50.00. The 50-dma near $51.00 and the $52.00 region should be overhead resistance. Wait for the stock to roll over again. Our first target is $46.10. Our second target is $44.00. Don't be surprised to see an oversold bounce at its rising 100-dma.

Entry on   January 29 at $49.45 
Change since picked:     + 0.94   			
Earnings Date          04/22/10 (unconfirmed)    
Average Daily Volume:       1.2 million 
Listed on   January 28, 2009    


Life Technologies - LIFE - close: 49.46 change: -0.25 stop: 52.01

LIFE's lack of participation in the market-wide bounce is a good sign for the bears. I would still consider bearish positions now or you can wait for a new lower high in the $51 region. Our first target is $45.25, just above possible support at the 200-dma. We will cautiously set a second target at $41.00 but I suggest exit the majority of the position at $45.25.

Entry on   January 30 at $49.71 
Change since picked:     - 0.25   			
Earnings Date          01/28/10 (confirmed)    
Average Daily Volume:       2.6 million 
Listed on   January 30, 2009    


Children's Place - PLCE - close: 32.82 change: +1.02 stop: 35.05

PLCE broke support near $32.00 but traders bought the dip at its 200-dma. By the close shares of PLCE had produced a bullish engulfing candlestick pattern. This is a short-term bullish reversal pattern that normally needs to see some confirmation. I am not suggesting new positions at this time. Let's way and see if shares fail in the $33.50-34.00 zone again. Our target is $28.05. My time frame is about three weeks.

Entry on   January 23 at $32.41 
Change since picked:     + 0.41   			
Earnings Date          03/18/10 (unconfirmed)    
Average Daily Volume:       598 thousand
Listed on   January 23, 2009    


RTI Intl. - RTI - close: 25.61 change: +0.86 stop: 27.01

RTI is still trying to bounce from its rising 40-dma. The $26-27 zone should hold some overhead resistance. I'd consider new positions on a failed rally but we're almost out of time. RTI is due to report earnings on Feb. 4th and we do not want to hold over the announcement. More conservative traders may want to exit early now before this turns into a potential loss. Our target to exit is $23.00.

Entry on   January 25 at $25.83 (small positions)
Change since picked:     - 0.22   			
Earnings Date          02/04/10 (confirmed)    
Average Daily Volume:       720 thousand
Listed on   January 25, 2009    


SBA Communications - SBAC - close: 34.06 change: +0.97 stop: 35.55

SBAC's oversold bounce produced a 2.9% gain. Shares are now back above the 50-dma. Look for resistance near $35.00 and wait for the bounce to roll over before initiating new bearish positions. Our target is $30.15. More aggressive traders could aim for the 200-dma.

Entry on   January 28 at $33.45
Change since picked:     + 0.61   			
Earnings Date          02/25/10 (unconfirmed)    
Average Daily Volume:       1.5 million 
Listed on   January 26, 2009    


J.M.Smucker CO - SJM - close: 61.12 change: +1.05 stop: 61.51

SJM is bouncing from its rising 50-dma. I don't expect the bounce to get very far. Nimble traders could try bearish positions in the $61.50-62.50 zone. I'm suggesting readers wait for a breakdown with a trigger to open positions at $59.49. Our target is $55.15. More nimble traders could try and open positions in the $61.50-52.00 zone.

Entry on   January xx at $xx.xx <-- TRIGGER @ 59.49
Change since picked:     + 0.00   			
Earnings Date          02/24/10 (unconfirmed)    
Average Daily Volume:       698 thousand
Listed on   January 30, 2009    


Warner Chilcott - WCRX - close: 25.46 change: -1.87 stop: 29.31

Target achieved and a lot faster than we expected. There were two broker comments out on WCRX this morning. One firmed raised their price target on WCRX to $35. Another firm downgraded shares of WCRX. You can see who won here. WCRX gapped open lower at $26.65 and hit $24.98 before paring its losses. Our first target to take profits was at $25.00.

I'm not suggesting new positions at this time. Wait for another failed rally in the $27-28 zone. We still have a second target at $22.25. FYI: I've adjusted our entry point to $26.65.

chart:

Entry on   January 30 at $26.65 /gap down entry point
Change since picked:     - 1.19
                             /1st target hit @ 25.00 (-6.1%)
Earnings Date          02/26/10 (unconfirmed)    
Average Daily Volume:       1.3 million 
Listed on   January 30, 2009