Option Investor
Newsletter

Daily Newsletter, Monday, 2/8/2010

Table of Contents

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

Market Wrap

European Debt Concerns Pummel Stocks...Again

by Todd Shriber

Click here to email Todd Shriber
So much for Mutual Fund Monday. Monday had become the most reliable day of the week for the bulls with 17 of the previous 19 Mondays being up days, but that run was thwarted today as concerns over Europe's looming debt problems continued to weigh on the minds of investors. Monday's trade proved that no one should have been fooled by the rally we saw into the close on Friday. If you speculated that the reversal of U.S. indexes from big losses to small gains on Friday was nothing more than the shorts scurrying to cover before the weekend, you would have been correct.

The Dow Jones Industrial Average turned in another triple-digit loss today to close at 9908.39, the index's first close below 10,000 since November. The S&P 500 surrendered almost 9.5 points to finish at 1056.74 and the Nasdaq lost just over 15 points to close at 2126.05 as investors shrugged off a spate of analyst upgrades for blue chip companies in favor of selling stocks due to the aforementioned European debt concerns.

Stats Table

Friday's short-covering rally was fueled by speculation some type of recovery package would emerge over the weekend to help imperiled European Union members (or the EU's weakest links, depending on your perspective) such as Greece, Portugal and Spain. That help has yet to emerge and that gave the bears the green light to punish U.S.-based financials on Monday. American Express (AXP) and Bank of America (BAC) were among the Dow's biggest losers on Monday, finishing down 2.8% and 3.47%, respectively. Financials were the biggest losers among the 10 industry groups tracked by the S&P 500, shedding 2.2% on the day.

Here is an interesting anecdote about the impact Europe's PIGS (Portugal, Italy, Greece and Spain) are having on global markets. According to the CIA's World Factbook, Italy is merely the EU's third-largest economy, trailing Germany and France by a healthy margin, and the seventh-largest economy in the world, though it will probably lose that perch to Brazil in a couple of years. Spain is number four in the EU and tenth overall in the world, but Greece and Portugal? Respectively, those are the 28th and 38th largest economies in the world. That means California, Texas and the island of Manhattan have bigger economies than Greece and Portugal, yet those two countries are playing a heavy hand in the recent performance of stocks.

I would hate see what would happen if the Netherlands, the world's fourteenth ranked economy, reported similar problems. Here is a chart from last year that illustrates that Europe's debt problems are far from being contained to the PIGS.

Public-Private Debt Chart

Commodities saw some relief today after being taken to the woodshed last week. Copper futures for March delivery rose 5.55 cents to $2.91 a pound on the New York Mercantile Exchange. The red metal's front-month contract posted its biggest gain since January 19th, according to Bloomberg News. Copper traders were encouraged by signs of stable demand in China, the world's top consumer of the metal. Analysts that follow copper seem to be echoing a familiar refrain and that is prices for the metal will remain volatile in the near-term, but long-term demand looks bullish.

Trading below $3 a pound, copper has moved past several key support levels. Support can probably be found around $2.87 and $2.7517 represents the 38.2% Fibonacci retracement from copper's 52-week high.

Copper Chart

Crude oil for March delivery rose 1% to finish at $71.89 a barrel on the NYMEX, ending a three-day skid that delivered a decline of almost 8%. Doubts over a global economic recovery have hampered oil recently, but black gold got some relief, at least for a day, on speculation that demand would improve ahead of the summer driving season in the U.S.

That is a risky proposition as demand in the U.S. remains weak and inventories remain high. Oil inventory data is due out on Wednesday and analysts are forecasting another weekly rise of 1.4 million barrels of oil and 200,000 barrels for gasoline stocks.

Crude Chart

Another way of looking at how bad things were for blue chips on Monday is to look at industrial conglomerate and Dow component United Technologies (UTX). I am not picking United Technologies here, but it should be noted that the maker of Otis elevators and Sikorsky helicopters announced it would raise its quarterly dividend by 10%, but due to broader market concerns, the stock continued a tailspin that started last month, shedding another 1.65%.

The dividend increase will cost United Technologies a mere $150 million and the company has been a steady dividend payer for over 70 years. I guess these are things that get overlooked when Greece's financial situation is front-page news.

United Technologies Chart

There were some good performances turned in by select stocks on Monday. Take Hasbro (HAS) for example. The maker of the Monopoly board game and Transformers toys among other popular games and toys, soared by nearly 13% to touch a new 52-week high at $35.19 before settling at $34.71 after reporting fourth-quarter profit and revenue results that handily beat analysts' estimates.

In the fourth quarter, Hasbro earned $1.09 a share and sales of $1.38 billion. Analysts had been expecting the company to earn 81 cents a share on revenue of $1.34 billion. Hasbro achieved those stellar numbers even though it reduced its advertising expenditures by $6.4 million from the year earlier period.

While Hasbro, the biggest gainer in the S&P 500 today, did not offer much in the way of 2010 guidance, one can surmise that these results were helped by the release of films such as the Transformers sequel, so it was not surprising to hear the company give some bullish comments regarding the release of ''Iron Man II'' and ''Toy Story III'' later this year.

For you longer-term investors, ''Transformers III'' and a couple of big Disney (DIS) movies are due out in 2011 and those releases could be positive catalysts for Hasbro because the company has the licensing rights for the toys associated with these movies. Hasbro also boosted its quarterly dividend by 25% last week.

Hasbro Chart

Speaking of fun and games, it was anything but for video game maker Electronic Arts (ERTS), the maker of the ''Madden'' football and ''Call of Duty'' games. EA had warned about its fiscal third-quarter results in January, but the stock was hammered on a glum outlook for the current quarter. In the fiscal third quarter, EA lost $82 million, or 20 cents a share, a sharp improvement from the $641 million, or $2 per share, it lost a year earlier. Revenue slid 25% to $1.24 billion.

For the current quarter, California-based EA expects to earn two cents to six cents a share on sales of $800 million to $850 million. That is below analysts' estimates of a profit of 13 cents a share on revenue of $851 million. With football season over, gamers are likely to pass on the ''Madden'' games and the latest ''Call of Duty'' has already been on the market for a while, so EA will hope the relase of ''Mass Effect 2'' and ''Dante's Inferno'' will jolt profits going forward.

EA is also the maker of the Tiger Woods golf games and it is doubtful that franchise will help the company's bottom line in the near-term as the golf superstar is taking an indefinite leave of absence from the PGA tour in order to get his personal life, which looks about as bullish as Greece's financial state, in order. As of this writing, EA shares were getting battered in the after-hours session, down $1.48, or 8.46%, to $16.02. The 52-week low is $14.75.

Electronic Arts Chart

Taking a look at the charts, with the Dow's close below 10,000 that round number may become a new resistance point if stocks continue to languish. From there, 10,300 would be the next logical hurdle, but expecting to see that number in the next few days might prove to be very wishful thinking. Even if Greece gets it act together, that is no guarantee that risk appetite will be vigorously renewed.

If 9650 cannot hold as support, watch out. From there, 9500 could be the next stopping point, but even that is a tough bet to make because the current 200-day moving average is just below 9500 at 9491. In other words, there is plenty of room to the downside for the Dow.

Dow Chart

The S&P 500 is sporting an equally dour posture, closing right near its intraday low on Monday. Old support at 1085 could act as new resistance and from there 1100 could be the next point of contention, but the index rests a fair bit from both of those areas. In fact, the S&P 500 is now within earshot of support at 1035. That area needs to hold for the bulls because from there, 1010 comes into play. The near-term technicals are not pretty as the 50-day moving average crossed below the 20-day line last week, and if you like the MACD indicator, take a look at it on an S&P 500 chart. It is downright ugly.

S&P 500 Chart

The Nasdaq's technical problems resemble those of the S&P 500's and to highlight how weak the tech sector has become this year, the Nasdaq notched another down day on Monday when both Google (GOOG) and Amazon (AMZN) received analyst upgrades. As is the case with the S&P 500, the Nasdaq's 50-day line crossed the 20-day line last week and if support at 2115 does not hold (keep in mind we are just 11 points away from there), the next support area is 2020-2035. So if 2115 is violated, the best case scenario becomes a loss of at least another 70 points and that is not an encouraging best case scenario.

Nasdaq Chart

As I have been saying, there has been something fishy about this current dip that has made it tough to advocate a bullish stance. It appears Greece and friends are absorbing much of the blame and rightfully so, but as I said earlier, does the fact some relatively mid-tier economies are setting the course for U.S. equities not highlight some underlying weaknesses here in the States?

And if the Greece situation passes, that may only provide a temporary jolt to stocks. The market has already shrugged off a steady stream of good earnings reports, analysts upgrades and dividend increases, and that may compel some investors to wonder what is it going to take to get stocks moving higher again?


New Plays

Six Months

by James Brown

Click here to email James Brown


NEW BEARISH Plays

FISERV Inc. - FISV - close: 45.26 change: -0.47 stop: 47.26

Why We Like It:
FISV has been trading sideways in the $45-50 zone for six months. In the last few weeks the stock's trading has taken on a more bearish tone as the market corrected. The oversold bounce failed at the 50-dma. Now shares look poised to breakdown from this trading range. The recent lows were near $44.80. I am suggesting a trigger to open bearish positions at $44.70. If triggered our first target is $40.15.

Annotated chart:

Entry on  February xx at $xx.xx <-- TRIGGER @ 44.70
Change since picked:     + 0.00   			
Earnings Date          04/29/10 (unconfirmed)    
Average Daily Volume:       1.4 million  
Listed on  February 00, 2009    



In Play Updates and Reviews

Bears In Control

by James Brown

Click here to email James Brown


BULLISH Play Updates

Estee Lauder - EL - close: 55.67 change: +0.27 stop: 53.49

EL is still outperforming the market with another gain on Monday but shares saw their rally fail at last week's high. That's short-term bearish and a potential double top pattern. Readers may want to wait for another bounce from $54.00 before launching new bullish positions. We want to keep positions small. Our target is $59.50. Our time frame is three to four weeks. FYI: The Point & Figure chart is forecasting at $69 target.

Entry on  February 06 at $55.40 
Change since picked:     + 0.27   			
Earnings Date          04/27/10 (unconfirmed)    
Average Daily Volume:       2.5 million 
Listed on  February 06, 2009    


Illionois Tool Works - ITW - close: 42.25 change: -0.41 stop: 41.75

The lack of follow through on Friday's bounce is VERY bearish and more conservative traders will want to seriously consider an early exit right here! I am not suggesting new positions at this time. Hopefully ITW will rebound again from Friday's low near $42.00. Our first target is $44.85. Our second target is the $46.45 level. This is an aggressive trade. Keep positions small.

Entry on  February 06 at $42.66 
Change since picked:     - 0.41   			
Earnings Date          04/15/10 (unconfirmed)    
Average Daily Volume:       3.6 million 
Listed on  February 06, 2009    


Joy Global - JOYG - close: 44.51 change: -0.03 stop: 42.25

JOYG also looks very bearish with the lack of follow through on Friday's rebound. More conservative traders will want to seriously consider an early exit right here! I'm not suggesting new positions. The plan was to use small positions because this was an aggressive trade. Our target to exit is $49.75. The $50.00 level should be resistance. We might consider switching directions and going short on a failed rally near $50.

Entry on  February 06 at $44.54 (small positions)
Change since picked:     - 0.03   			
Earnings Date          02/24/10 (unconfirmed)    
Average Daily Volume:       4.1 million 
Listed on  February 06, 2009    


Patterson Companies - PDCO - close: 28.62 change: +0.04 stop: 27.95

The bounce from the 50-dma is already failing. PDCO has produced a lower high. Readers will want to honestly consider an early exit right here! I am not suggesting new bullish positions. We already have a tight stop at $27.95.

Our first target to take some money off the table is $30.90. Our second target is $32.45. We do not want to hold over the February 18th earnings report so PDCO may not reach our second target in time.

Entry on  February 02 at $29.16 /gap down entry
Change since picked:     - 0.54   			
Earnings Date          02/18/10 (unconfirmed)    
Average Daily Volume:       1.3 million 
Listed on  February 02, 2009    


BEARISH Play Updates

American Tower Corp. - AMT - close: 40.67 change: +0.57 stop: 42.75

AMT managed a decent bounce with a 1.4% gain. That was a lot better than the major indices. Shares remain oversold and could bounce toward resistance near $42.00. Wait for the bounce to stall or roll over before considering new positions. Our second target to exit 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:     - 1.23  
                          /1st target hit @ 40.10 (-4.2%)
Earnings Date          02/24/10 (unconfirmed)    
Average Daily Volume:       2.8 million 
Listed on   January 26, 2009    


Ameritrade - AMTD - close: 16.78 change: -0.18 stop: 18.60

Financial stocks continued to suffer on Monday. There wasn't much of a bounce in AMTD on Friday and there was no follow through today. I don't see any changes from my prior comments. Our first target is $16.10. Our second target is $15.05. Our time frame is about six weeks.

Entry on   January 28 at $17.88 
Change since picked:     - 1.10   			
Earnings Date          04/21/10 (unconfirmed)    
Average Daily Volume:       6.1 million 
Listed on   January 28, 2009    


Best Buy - BBY - close: 35.47 change: -0.35 stop: 38.75

The oversold bounce in BBY didn't get very far. Traders sold the rebound near $36.25. The stock looks ready to breakdown under the $35.00 level. Our second and final target is $32.25.

Entry on   January 12 at $38.95 (small positions)
Change since picked:     - 3.48
                           /1st target hit @ 35.25 (-9.4%)
Earnings Date          03/25/10 (unconfirmed)    
Average Daily Volume:       8.0 million      
Listed on   January 02, 2009    


Companhia Brasileira de Distribuicao - CBD - cls: 66.47 chg: +0.33 stop: 72.65

CBD produced a bounce on Monday but shares spent most of the session trading sideways. I would look for the oversold bounce to carry CBD toward $69-70 again before rolling over. We wanted 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:     - 2.93 
Earnings Date          03/03/10 (unconfirmed)    
Average Daily Volume:       261 thousand
Listed on   January 23, 2009    


DSW Inc. - DSW - close: 24.93 change: -0.07 stop: 25.55

More aggressive traders might want to consider bearish positions with DSW's breakdown under the $25.00 mark. I'm suggesting we stick to the plan. We're listing a trigger to open 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: 48.52 change: +0.09 stop: 52.55

FFIV may have produced a gain on Monday but the action was bearish. The intraday rebound reversed under $50.00. This looks like a new entry point for shorts. Our first target is $46.10. Our second target is $44.00.

Entry on   January 29 at $49.45 
Change since picked:     - 0.93   			
Earnings Date          04/22/10 (unconfirmed)    
Average Daily Volume:       1.2 million 
Listed on   January 28, 2009    


GATX Corp. - GMT - close: 26.03 change: -0.40 stop: 27.65

GMT is back to testing support near the $26.00-25.75 zone. More conservative traders may want to wait for a new decline under $25.65 before initiating new positions.

Our first target is $23.15. Our second target is $21.00. It could take several weeks to get there.

Entry on  February 04 at $25.95 
Change since picked:     + 0.08   			
Earnings Date          04/22/10 (unconfirmed)    
Average Daily Volume:       467 thousand
Listed on  February 04, 2009    


Life Technologies - LIFE - close: 47.42 change: +0.06 stop: 52.01

The rebound in LIFE didn't get very far. Unfortunately I don't see any changes from my weekend comments. Look for a failed rally near $49-50 as a new entry point. Our target to take profits is at $45.55.

Entry on   January 30 at $49.71 
Change since picked:     - 2.29   			
Earnings Date          01/28/10 (confirmed)    
Average Daily Volume:       2.6 million 
Listed on   January 30, 2009    


SBA Communications - SBAC - close: 32.18 change: +0.39 stop: 35.05

The oversold bounce in SBAC produced a 1.2% gain on Monday. The bounce may not be over yet. Look for resistance near the 50-dma. Wait for the bounce to stall or reverse before launching new 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:     - 1.27   			
Earnings Date          02/25/10 (unconfirmed)    
Average Daily Volume:       1.5 million 
Listed on   January 26, 2009    


J.M.Smucker CO - SJM - close: 59.38 change: -0.13 stop: 61.51

The oversold bounce in SJM failed at the $60.00 level. This looks like a new bearish entry point for SJM. Our target is $55.15.

Entry on  February 05 at $59.49
Change since picked:     - 0.11   			
Earnings Date          02/24/10 (unconfirmed)    
Average Daily Volume:       698 thousand
Listed on   January 30, 2009    


Warner Chilcott - WCRX - close: 25.21 change: -0.32 stop: 28.05

WCRX is inching closer and closer to support near $25.00 and its 100-dma. The trend of lower highs suggest the stock will breakdown. WCRX has already hit our first target at $25.00. Our second target is $22.25.

Entry on   January 30 at $26.65 /gap down entry point
Change since picked:     - 1.44
                             /1st target hit @ 25.00 (-6.1%)
Earnings Date          02/26/10 (unconfirmed)    
Average Daily Volume:       1.3 million 
Listed on   January 30, 2009    


WIPRO Ltd - WIT - close: 19.33 change: -0.23 stop: 22.55

WIT is still sinking. Aggressive traders may want to consider bearish positions here. The stock is under support at $20.00 and its 100-dma. I think shares look a little oversold and would rather open positions on a bounce. Currently the plan is to use a trigger at $21.40 to open bearish trades. If we are triggered at $21.40 our first target is $18.05.

Entry on  February xx at $xx.xx <-- TRIGGER @ 21.40
Change since picked:     + 0.00   			
Earnings Date          04/22/10 (unconfirmed)    
Average Daily Volume:       934 thousand
Listed on  February 00, 2009