Option Investor
Newsletter

Daily Newsletter, Monday, 3/15/2010

Table of Contents

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

Market Wrap

Stocks Rise, But Nasdaq Falters

by Todd Shriber

Click here to email Todd Shriber
It was another positive, but middling day for U.S. stocks, although the Nasdaq did not participate in Monday's gains. The tech-heavy index, which had been leading the broader market higher over the past few weeks, shed 5.45 points to close at 2362.21. The Dow Jones Industrial Average turned in another small gain, rising almost 17.5 points to close at 10642.15 and the S&P 500 notched an even smaller gain, adding half a point to finish the day right at 1150 and some change, the index's critical resistance area.

Stats Table

Stocks got a lift on the back of news that industrial production rose 0.1% in February, the eighth consecutive monthly increase. Economists were projecting the number would be unchanged, so even this slight increase could be viewed as a pleasant surprise. The report, issued by the Federal Reserve, showed upticks in utility use and mining demand along with more orders for computers and semiconductors, which may indicate U.S. businesses are starting to see activity ramp up again. Utility output was up 0.5%, while mining activity was up 2%, likely led by increases in oil and gas drilling activity.

The Fed's New York branch reported that manufacturing in that region expanded again in March, the eighth straight month of gains. The Empire State Index showed a reading of 22.9 in March, down from 24.9 in February, but the employment index reached its highest level since October 2007, according to Bloomberg News. Readings above zero on the Empire State Index are considered positive.

Empire State Survey

Despite the positive industrial production data, Monday was not a good day for commodities. NYMEX-traded crude oil for April delivery fell $1.44 to $79.80. That is the first close below $80 for crude in almost two weeks. A stronger U.S. Dollar did not help matters, nor did concerns that China is eying another interest rate hike, perhaps as soon as next month. Of course, demand worries also pressured oil prices.

The winter demand season has passed and we are still a fair bit away from the summer driving season and those factors may be fueling concerns about the recent rally in crude prices (no pun intended.) Still, gas prices are up more than 16 cents in the past month and more than 88 cents higher than where they were a year ago. News from the Fed and OPEC meetings this week is likely to have a heavy hand in where crude futures finish the week. Thirty-eight of the 40 energy stocks in the S&P 500 traded lower today.

Crude Chart

When there is news about Beijing taking steps to cool economic growth, oil is not the only commodity to feel the pain. Predictably, copper received a haircut on Monday due to China concerns. Copper for May delivery slipped 6.5 cents $3.315 per pound. The red metal has lost 10.5 cents since March 5th and if concerns about China's ability to lead a global economic recovery persist, copper prices could be hampered even further.

Copper Chart

Proving just how powerful China is these days, the world's largest country's head-butting with Internet search giant Google (GOOG) was probably the reason why the Nasdaq was down today. As I mentioned earlier, orders for computers and semiconductors were up and that should have been a positive catalyst for the Nasdaq.

Alas, it was not and Google shares were slammed $16.36, or nearly 3%, to close at $563.18 on renewed speculation that the company may in fact leave China. Yes, we have heard this news before, but the fact that it is swirling again is not a good thing for Google. Google's volume was roughly 30% higher than average today and as of this writing, the shares were down another $1.62 to $561.97 in the after hours session.

A report in the Financial Times said that censorship talks between Beijing and Google have reached an ''impasse'' and that Google is ''99.9%'' certain to close down its Chinese Internet search engine. To be sure, Google is a gigantic company and the leading search provider in many markets, but we are not talking about an insignificant market of 50 million people here. There are 1.4 billion people living in China and China, perhaps even more so than the U.S., represents a market where Google has a legitimate competitor.

China's home-grown search provider Baidu (BIDU) soared $26.60, or almost 5%, to $576.84 on news that Google may depart China. Volume in Baidu was nearly triple the daily average and the shares are up another $2.66 to $579.50 in after-hours trading. How important is the China market to Google, at least in the eyes of investors? In the past three months Google shares are down about 3% while Baidu is up nearly 30%.

Google Chart

Financials got a bit of lift late in Monday's session as reaction to Sen. Christopher Dodd's (D-CT) financial reform package was not as negative as some may have expected. While plenty of folks on Wall Street may not like the idea that the Dodd bill includes a version of the now infamous Volcker Rule, which requires regulators to ban proprietary trading and limit the relationships banks have with hedge funds, there were no surprises in the proposed legislation.

The other side of the financial reform coin is that support for the Dodd bill remains tepid at best. After all, this is an election year and for all of the recent missteps by Republicans, they are still projected to make gains in both houses of Congress. Many Democrats who face tough reelection battles may feel the path of least resistance (read: the path to reelection) is to stay away from the Dodd bill altogether. At the end of the day, Dodd is retiring (because he knows he could not win his own reelection bid) and this bill is his swan song. My bet is that politicians in both parties realize this and that could imperil the bill's success.

Political chatter aside, financials spent most of the day trading lower, but got a nice bounce at the end of the day and that helped many of the marquee constituents in the group finish the day higher. The Financial Select SPDR (XLF), the most heavily traded financial ETF, finished the day unchanged at $15.54, just three cents off its intraday high and less than a quarter away from its 52-week high. XLF's chart still looks pretty strong.

XLF Chart

In other stock-specific news, Wal-Mart (WMT), the world's largest retailer, was the biggest winner in the Dow today after Citigroup boosted its rating on the stock to ''buy'' from ''hold.'' It was the first upgrade of Wal-Mart in over a month. Wal-Mart shares rose $1.52, or 2.82%, to close at $55.42 after touching a new 52-week high of $55.54 earlier in the session.

Citi analyst Deborah Weinswig said Wal-Mart is preparing to reenter the fray to become a dominant player in the U.S. supermarket battle. She expects Wal-Mart to increase its share of that market to 21.6% in 2010 up from 20.5%. Basically what is happening here is that Wal-Mart is going to use price reductions to put the pressure on traditional supermarket chains in an effort to gain market share. Weinswig raised her price target on Wal-Mart to $64 from $54.

Wal-Mart Chart

Speaking of blue chip names that play in the consumer staples space, PepsiCo (PEP), the number two soft drink maker behind Coca-Cola (KO), matched its rival's recent dividend increase by announcing a 7% dividend increase of its own. Dow component Coke announced a 7% dividend increase last month. Pepsi will now pay annual dividend of $1.92 a share, which is more than what Coke pays at a $1.76 a share.

Pepsi went a step further, perhaps in another attempt to trump its rival, by announcing a $15 billion share repurchase plan. The new buyback plan will replace an existing plan was set to expire in June that has $6.4 billion remaining on it. Pepsi said it plans to repurchase $4.4 billion of its own shares this years. The new buyback program will last through 2013. Pepsi shares gained $1.05, or 1.61%, on the news to close at $66.15 just below the new 52-week high of $66.26 set earlier in today's session.

Based on today's closing price, $15 billion would allow Pepsi to repurchase about 226.7 million of its 1.57 billion shares outstanding. Regardless of one's preference for Coke over Pepsi or vice versa, the choice is clear from an investor's perspective, at least over the last six months when Pepsi is up almost 12% compared to Coke's gain of less than 2%.

Pepsi Chart

Looking at the charts, the Dow remains the only one of the three major U.S. indexes that has not made its way to a new, but Monday's small gain puts the Dow within 85 points of the January peak of 10,729 and less than 110 points away from resistance at 10,750. The Dow traded as low as 10,570, so 10,600 did not hold as intraday support, leading me to believe support is probably stronger at the 10,550 level. Slow and steady appears to be the order of the day for the Dow.

Dow Chart

The S&P 500 has climbed the wall of worry to the 1150, but has not broken through that level with any veracity. On the other hand, it can be argued that the bears have done little to force the index back below the 1150 level, at least when it comes to closing prices and it would appear that 1140 has now emerged as support. The SPDR S&P 500 ETF (SPY), the largest ETF by assets in the world and tracking ETF for the S&P 500, rose for a 12th straight day on Monday, its best winning streak since 1995, according to Bloomberg.

S&P 500 Chart

Heading into today, the Nasdaq looked primed for some profit taking, but given the small decline, it is hard to argue that real profit taking occurred. Of the Nasdaq's four horsemen, Amazon (AMZN), Apple (AAPL), Google (GOOG) and Research In Motion (RIMM), only Google declined in earnest for the reasons I highlighted earlier. Amazon and Apple booked small losses and RIMM was actually up. Remember that Baidu is also a member of the Nasdaq 100, so if Google moves down on China news, that loss is muted by a Baidu gain. Nasdaq support looks firm at 2325.

Nasdaq Chart

Minutes from the FOMC meeting will be released tomorrow at 2:15PM Eastern time, so it would not be surprising to see lethargic trade heading into the that announcement. Language from the minutes will be what the market is watching and any hint, no matter how faint, that the Fed is moving toward rate tightening would be negative news for equities. Positive Fed sentiment could give the S&P 500 the gas it needs to really break out.


New Plays

Casino Games

by James Brown

Click here to email James Brown


NEW BEARISH Plays

Bally Technologies - BYI - close: 37.83 change: -0.90 stop: 40.05

Company Description:
Bally Technologies, Inc., incorporated in September 1968, is a diversified, worldwide gaming company that designs, manufactures, operates and distributes slot and video machines to a global gaming industry that includes casino, racino, video lottery, central determination and Class II markets. It also designs, integrates and sells highly specialized computerized monitoring systems that provide casinos with networked accounting and security services for their gaming machines with more than 300,000 game monitoring units installed worldwide at more than 225 locations. Based in Las Vegas, the Company conducts its machine and systems operations, and operates Rainbow Casino, a 35,000-square foot dockside location in Vicksburg, Mississippi, which has approximately 12 table games and 900 gaming devices. (source: company press release or website)

Why We Like It:
This casino games maker has been under performing the market and its peers the last few weeks. The company's latest earnings report failed to impress and investors have started selling into strength. Shares just closed under their simple 200-dma and exponential 200-dma after a week of consolidating sideways near this technical support.

I am suggesting traders open bearish positions now. Our first target to take profits is at $35.05 since the $35.00 level has been support in the past. Our second target is $32.00. More aggressive traders could aim for the $30 level.

FYI: This should be considered an aggressive trade. The most recent data available listed short interest at nearly 13% of the 52 million-share float. That is above average and if BYI makes a sudden move higher it raises the risk of a short squeeze.

Suggested Position: SHORT BYI stock @ 37.83(?)

Annotated chart:

Entry on March xx at $xx.xx
Earnings Date 05/06/10 (unconfirmed)
Average Daily Volume: 1.9 million
Listed on March 15th, 2010



In Play Updates and Reviews

Ford Hits Our Target

by James Brown

Click here to email James Brown
Current Portfolio:


BULLISH Play Updates

Broadcom Corp. - BRCM - close: 32.61 change: -0.02 stop: 30.70

BRCM held up reasonably well. Shares did not see any serious intraday declines and closed virtually unchanged on the session. Volume was light, which is what I would expect the day before a Fed meeting. If the market corrects we could easily get stopped out. However, in the meantime the trend is up and the $32.00 level should be short-term support. More conservative traders may want to tighten their stops. I am suggesting readers consider opening new positions on a dip closer to $32.00. Our first target is $34.95. Our second, more aggressive target is $37.40 with a time frame of several weeks.

Current Position: BRCM stock @ 32.66

Entry on March 11 at $32.66
Earnings Date 04/21/10 (unconfirmed)
Average Daily Volume: 8.0 million
Listed on March 10th, 2010


CITRIX Systems - CTXS - close: 49.00 change: +0.92 stop: 44.95 *new*

CTXS continues to stand out. The stock posted another multi-year high with today's 1.9% gain. Shares are very short-term overbought and way overdue for a pull back. I am lowering our exit target to $49.65. I am also raising our stop loss to $44.95.

Current Position: CTXS stock @ 46.08

Entry on March 10 at $46.08
Earnings Date 04/29/10 (unconfirmed)
Average Daily Volume: 4.5 million
Listed on March 9th, 2010


FWLT - Foster Wheeler $26.99 change -0.07 stop $24.85

FWLT rebounded from its intraday lows near the 21-dma but still closed in negative territory. If the bounces continues then I think FWLT has a decent shot at hitting $28.00. If it rolls over under the $27.30 level then we may want to exit early. I am not suggesting new positions at this time. Our target to exit is $28.00.

Current Position: FWLT @ $25.13 with a stop at $24.85.

Option buyers:
Current Position: APR $26.00 CALL (FWLT 10D2600) @ $1.10

Entry on March 04 at $25.13
Earnings Date 05/06/10
Average Daily Volume: 4.5M
Listed on March 3rd, 2010


Inland Real Estate Corp. - IRC - close: 8.98 change: +0.08 stop: 8.49

IRC continues to show relative strength and set a new six-week high today. I don't see any changes from my weekend comments. REIT stocks have been showing relative strength, possibly due to investors chasing their dividend yield. Shares of IRC offer a pretty strong dividend in the 6-7% level. It seems like investors are losing their fear that the commercial real estate market is going to implode. I like IRC because the stock has built a significant base over the last several months. A breakout over resistance should be herald a major change in trend.

I am suggesting a trigger to buy IRC at $9.25. The April 2009 high was $9.24. The January 2010 high was $9.17. I'm going to give this trade a relatively wide stop loss at $8.49. If triggered at $9.25 our first target to take profits is $9.99. Our second target is $10.95. Investors could probably hold on to IRC for months and aim for the $12.50-13.00 zone. Our time frame is several weeks and I do mean several!

Use a trigger to open positions at $9.25

Suggested Position: IRC stock @ $9.25 (unopened)

Entry on March xx at $xx.xx
Earnings Date 05/06/10 (unconfirmed)
Average Daily Volume: 417 thousand
Listed on March 13th, 2010


Linear Tech. - LLTC - close: 27.39 change: -0.21 stop: 26.95

Shares of LLTC continue to pull back. I'd like to think it's coiling for a breakout higher but that could change if the market eventually corrects. Our plan is to buy LLTC on a breakout over resistance near $28.00 and its 50-dma. The trigger to open positions is at $28.25. If triggered our first target is $29.95. Our second target is $30.95.

Trigger to open positions: 28.25

Suggested Position: LLTC stock @ 28.25

If you trade options consider this:

Suggested Position: BUY CALL APR 28.00 (LLTC 10D28.00) current ask $0.80

Entry on March xx at $xx.xx
Earnings Date 04/13/10 (unconfirmed)
Average Daily Volume: 3.9 million
Listed on March 11th, 2010


NUCOR - NUE - close: 45.12 change: -0.16 stop: 43.45

It could have been worse. Investors are concerned that China is going to raise bank reserve requirements again. This is an attempt by the Chinese government to slow down their economy. Anything that slows down China, slows down demand for commodities. NUE could have seen a steeper decline this morning. Fortunately traders bought the dip at $44.63 and the stock drifted sideways.

I don't see any changes from my weekend comments. More nimble traders may want to consider new positions on a move over $45.50 with a tight stop close to $44.00 and a target of $49.85.

Our first target to take profits is at $46.75. Our second and final target is $49.85. Our time frame is several weeks.

Current Position: NUE stock @ $42.98

Entry on February 16 at $42.98 (small positions)/gap higher entry
Earnings Date 04/22/10 (unconfirmed)
Average Daily Volume: 6.1 million
Listed on February 16, 2009


POWR - Powersecure Intl $8.28, Change -0.30, stop $7.95

POWR suffered some profit taking after last week's big rally. That's not too surprising. The decline today following Friday's blow-off top looks like a possible bearish reversal. I'm suggesting more conservative traders exit early now. I am not suggesting new positions. We'll set a final exit target of $9.25 on the stock.

Current Position: POWR stock with a stop at $7.45

Option buyers:
Closed Position: MARCH $7.50 CALL (POWR 10C0750) @ $1.45 Entry price on the option was $0.55

Entry on March 03 at $ 7.64
Earnings Date 03/11/10 (confirmed)
Average Daily Volume: 78K
Listed on March 2nd, 2010


Palomar Medical Tech. - PMTI - close: 10.35 change: -0.03 stop: 9.74

Traders bought the dip this morning and PMTI looks poised to rally higher. There is no change from my weekend comments. The stock has been building a base in the $8.75-10.50 zone for months. I am suggesting we use a trigger at $10.55 to open bullish positions. We will use a relatively wide stop loss to give PMTI room to maneuver. If triggered our first target is $11.45. Our second target is $12.75 but PMTI will have to push past technical resistance at the 200-dma first. Our time frame is several weeks.

Use a trigger to buy PMTI at $10.55

Suggested Position: PMTI stock @ 10.55 (unopened)

Entry on March xx at $xx.xx
Earnings Date 04/29/10 (unconfirmed)
Average Daily Volume: 132 thousand
Listed on March 13th, 2010


ParkerVision Inc. - PRKR - close: 2.12 change: -0.22 stop: 1.99

It looks like someone wanted to get out of PRKR before they reported earnings. Shares gapped open lower at $2.32 and plunged 9.4% by the close. PRKR reported earnings after the closing bell and managed to beat estimates with a loss of 13 cents a share. I am not seeing any movement afterhours. The $2.00 level should be support and traders may want to buy a bounce. More aggressive traders could widen their stop loss just a little bit.

PRKR has already hit our first target at $2.49. Our second target is $2.95 but PRKR will face potential resistance at its 200-dma first.

Current Position: PRKR stock @ 2.30

Entry on March 10 at $ 2.30
Earnings Date 03/15/10 (unconfirmed)
Average Daily Volume: 114 thousand
Listed on March 9th, 2010


Wells Fargo - WFC - close: 29.89 change: +0.26 stop: 27.90

WFC displayed some relative strength. Traders bought the dip near $29.26 and shares rallied back into positive territory with a 0.8% gain. The stock looks poised to breakout over the $30.00 level soon. Our first target is $31.35. The inverse H&S pattern would suggest a target at $34 target.

Current Position: WFC stock @ 29.53

Entry on March 11 at $29.53
Earnings Date 04/22/10 (unconfirmed)
Average Daily Volume: 38.1 million
Listed on March 10th, 2010


BEARISH Play Updates

Dragonwave - DRWI - close: 9.56 change: +0.31 stop: 10.75

DRWI is trying to defend its stock price with a press release the company would buy up to 10% of the public float with a "normal course issuer bid" on the Toronto Stock Exchange. Seems like they're trying to protect their share price after a pull back from $14.00 to $9.00 last week. You'd think they would have been better off announcing this buy back when the stock was under $2.00 back in early 2009 and late 2008. Shares did manage to bounce on the news and combined with Friday's big intraday rebound this could be a bullish reversal in progress. I am not suggesting new positions at this time. Our target to exit is currently $8.85.

Current Position: (SHORT) DRWI @ $10.48

Entry on March 8th at $10.48
Earnings Date April (unconfirmed)
Average Daily Volume: 1.2 million
Listed on March 6th, 2010


PALM - Palm Inc - close: 5.58 change: +0.05 stop: 6.50

PALM isn't moving. The stock is merely drifting sideways and this trend may continue as investors wait for the company's earnings report on March 18th. It's dangerous to hold a position over earnings. I am suggesting we sell/close half our position before the closing bell on March 18th. You never know what the company might say in its conference call that might spark a short squeeze. Technically a drop under $5.40 would be very bearish and reinforce the downtrend. Our first target to take profits is at $4.00.

Current Position: (SHORT) PALM @ $ 5.80

Entry on March 8th at $ 5.80
Earnings Date 03/18/10 (confirmed)
Average Daily Volume: 25 million
Listed on March 6th, 2010


CLOSED BULLISH PLAYS

Ford Motor Co. - F - close: 13.40 change: +0.06 stop: 12.75

Target achieved. Over the weekend we raised the final exit target on Ford from $13.40 to $13.50. Shares gapped open at $13.46 and spiked to $13.63 before paring its gains. The trend is still up but I wouldn't want to chase it with the market looking vulnerable. I would keep Ford on your watch list. A bounce in the $12.50-12.00 zone might be another bullish entry point.

Closed Position: Ford stock @ $13.50
Entry price was $11.72

Annotated chart:

Entry on February 23 at $11.72 /gap higher entry
Earnings Date 04/22/10 (unconfirmed)
Average Daily Volume: 96 million
Listed on February 23, 2010