Option Investor
Newsletter

Daily Newsletter, Wednesday, 3/17/2010

Table of Contents

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

Market Wrap

Stocks Celebrate St. Patrick's Day The Right Way

by Todd Shriber

Click here to email Todd Shriber
Taking the theme of St. Patrick's Day to heart, stocks wore green on Wednesday continuing their march higher. The Dow Jones Industrial Average led the gains, soaring nearly 48 points to close at 10,733.67 while the S&P 500 has apparently kissed resistance at 1150 good bye with an almost seven-point gain today to close at 1166.21. The Nasdaq participated in the festivities as well, flirting with 2400 before settling 2389.09, gaining just over 11 points on the day. For those that like fun facts, the Dow closed at a 17-month high today.

Stats Table

A broad swath of Dow constituents helped the index move higher today as 23 of the 30 Dow stocks rose on the day. International Business Machines (IBM) was the biggest loser, shedding 0.91% to close at $127.76. Oddly enough, not one Dow stock gained 1% or more. Exxon Mobil (XOM), the largest U.S. oil company was the top gainer at 0.79%, followed by Caterpillar (CAT), the largest maker of construction and mining equipment, which notched a gain of 0.77%. JPMorgan Chase (JPM), the second-largest U.S. bank, led the gains for Dow financials, adding 0.55%.

In at least a couple of ways, Wednesday's trade was reminiscent of many of the up days we saw in 2009 in that commodities and financials were in favor while the U.S. dollar declined. The greenback fell against 12 of the 16 major currencies today. News that the Federal Reserve intends to keep interest rates ''exceptionally'' low for an extended period is music to the ears of equity bulls and bad news for the Dollar. The Dollar Index had a nice rally while stocks languished in late January and early February, but it appears that rally has subsided as riskier fare has become popular again and the Dollar Index now resides at its lowest level in a month.

Dollar Index Chart

Dollar weakness helped the S&P 500 rise for a third consecutive day. The index has now rallied over 70% since the March 2009 lows while the Dow extended its winning streak to seven straight days. As I mentioned earlier, commodities played a heavy hand in extending stocks' gains today. Goldman Sachs boosted its outlook for commodities today, saying it expects commodities to return 17.6% over the next year. Not surprisingly, Goldman was bullish on crude oil and copper, along with corn and platinum.

Despite the fact that the Energy Information Administration said crude inventories rose by 1 million barrels last week, NYMEX-traded crude for April delivery flirted with $83 a barrel, gaining $1.23 to close at $82.93 a barrel. OPEC announced it would not scale back production quotas, but it is hard to argue with the that fact oil prices seem poised to keep moving higher.

Oil Chart

Speaking of commodities, it was a strong day for coal stocks as the Market Vectors Coal ETF (KOL) gained 2.1%. The gains were led by KOL's tenth-largest holding, Massey Energy (MEE). Massey's big day is a testament to the strength of the coal sector and offers further proof that certain commentators that enjoy ripping coal stocks are costing the people that heed this foolish advice a pretty penny.

Look at Massey this way. The company announced a $960 million acquisition of privately held rival Cumberland Resources yesterday. That is a pretty big purchase for a company with a market cap of just $4.53 billion and one would think the buyer's shares would trade lower. Throw in the fact that Massey said it expects to miss first-quarter profit estimates and one would have logically thought Wednesday would have been a good time to short Massey.

I will just say that I hope you did not short Massey after the close yesterday because that turned out to be a painful move today. Massey shares soared $2.93, or 5.83%, to close at $53.15 after touching a new 52-week high of $54.09 earlier in today's session. There was good reason for the move. As I mentioned in the Market Monitor, Massey said the Cumberland acquisition will help double its sales of metallurgical coal by 2012. Metallurgical coal is the place to be in the coal business. This is the stuff that is in high demand by steel producers in emerging markets such as Brazil, China and India. It is the future of coal and Massey shares responded to this news.

Massey Energy Chart

Emerging markets, save for Brazil, were stellar performers on Wednesday, led by a market that does not get a lot of press here in the States. I am referring to Indonesia. The Jakarta Composite Index gained 3.3% today, its biggest gain since July, according to Bloomberg News. I mention this because there is in fact a way for U.S. investors to play Indonesia's bullish ways and that is with the Market Vectors Indonesia Index (IDX). IDX is a thinly traded ETF, but it has nearly tripled in the past year and gained another 3.6% today to close at $70.79, just nine cents off the new 52-week high it set earlier today. Volume was nearly 50% higher than usual.

IDX Chart

Taking a look at a more benign U.S.-based stock, athletic apparel and footwear giant Nike (NKE) should be worth watching on Thursday after the company delivered solid fiscal third-quarter results after the close today. Nike said it earned $4.96 billion, or $1.10 a share, on sales of $4.7 billion. Those results blew away the average analyst estimate, which called for the company to earn 89 cents a share on sales of $4.59 billion.

Apparel and shoe orders to be delivered between March and July rose 9% to $7.1 billion. Nike said consumer demand is picking up, even in Europe and the U.S., and not surprisingly, China and other emerging markets are helping Nike bolster its top and bottom lines as well. UBS said Nike increased its U.S. market share by 2% in the fiscal third quarter. Barclays Capital added that Nike is ''well positioned'' to be continue its industry leadership over the next several quarter. The stock closed at $70.88 today after hitting a new 52-week high of $71.33 earlier in the day. As of this writing, Nike shares are up, $2.46, or 3.47%, to $73.34 in after-hours trading.

Nike Chart

Regarding other bellwether names, while it may feel like earnings season just ended and it did, another important earnings report will be delivered before the bell tomorrow. FedEx (FDX), the world's second-largest delivery company, is expected to report a profit of 72 cents a share for its fiscal third quarter. FedEx and rival UPS (UPS) are often viewed as temperature checks on the health of the broader economy, so comments from FedEx regarding pricing and shipping volumes will be what the Street is watching.

The basic premise here is that if more customers are opting for pricier FedEx services, such as Express shipping, that is a good sign for the economy. When the economy slumped, customers scaled back to traditional ground shipping or left FedEx for lower-cost alternatives. UPS said in February that its fourth-quarter profit almost tripled from the year-earlier period, so FedEx would do well to report similarly bullish results.

Transportation issues have been strong lately and that is good news for Dow theorists that believe moves in the transportation average confirm moves in the industrial index. The iShares Dow Jones Transportation Average ETF (IYT), of which FedEx is the second-largest constituent, made a new 52-week high today and is up almost 10% in the past month while FedEx shares are up nearly 11%. Another element of the FedEx earnings report to watch: Fuel costs. Higher oil prices could hinder the company's report and outlook and could do the same for the broader economy.

FedEx Chart

Looking at the charts, the Dow closed above the all-important 10,725 level and above its January peak. If not for another late-day sell-off, we could be looking at the Dow taking out 10,775 tomorrow. That could still happen, but triple witching volatility could be an issue on Thursday and Friday. The next few weeks could prove to be sluggish in terms of news flow for Dow stocks, but one story to watch is dividends. Over the next month, Exxon Mobil, Johnson & Johnson (JNJ), Pfizer (PFE) and Procter & Gamble (PG) declare their quarterly dividends and I would be surprised it at least one member of that quartet did not announce a higher payout. Next resistance for the Dow looms at 11,250.

Dow Chart

The S&P 500 has made a nice move beyond the 1150 area and today's close should be encouraging for the bulls. Many eyes are probably starting to focus on 1200 as the next stopping point, but 1185 is the first hurdle to be cleared. Now that 1150 has evaporated as resistance, it should emerge as a support area for any potential selling stocks see in the coming weeks.

S&P 500 Chart

I do not want to say tech is looking ''tired,'' but it should be noted that on strong day for stocks, the biggest gainer in dollar terms in the Nasdaq 100 was Celgene (CELG), which was up $1.89. The Nasdaq was able to turn in another positive day and move closer to resistance just above 2400 despite the fact that Apple (AAPL), Amazon (AMZN) and Research In Motion (RIMM) were all down today and Google (GOOG) only chipped in a fractional gain. The Nasdaq has plenty of room to run to 2425 and the 2350 should provide firm support.

Nasdaq Chart

Stocks are strong, there is no getting around that and with the end of the first quarter just a couple of weeks away, I expect cash to continue to flow into equities as fund managers need to show clients strong first-quarter results. That performance will not be obtained through cash investments. A good sign for the bulls is that stock-specific catalysts are emerging again. The Massey and Nike news I highlighted earlier are two examples. FedEx needs to keep the ball rolling on Thursday.


New Plays

Locked Up

by James Brown

Click here to email James Brown


NEW BEARISH Plays

Corrections Corp. of America - CXW - close: 20.67 chg: -0.33 stop: 21.26

Company Description:
CCA founded the private corrections management industry more than 25 years ago, establishing industry standards for future-focused, forward-thinking correctional solutions. A commitment to innovation, efficiency, cost effectiveness and achievement has made the company the private corrections management provider of choice for federal, state and local agencies since 1983. CCA houses approximately 75,000 offenders and detainees in more than 60 facilities, 44 of which are company-owned, with a total bed capacity of more than 80,000. CCA currently partners with all three federal corrections agencies (The Federal Bureau of Prisons, the U.S. Marshals Service and Immigration and Customs Enforcement), nearly half of all states and more than a dozen local municipalities. (source: company press release or website)

Why We Like It:
CXW reported earnings back in February and the company guided earnings lower for both the Q1 and the year. What happened next? The stock exploded higher for the next three weeks. Now that rebound has run out of steam. Shares have been consolidating sideways around its 50-dma and 200-dma. Speaking of which the 50-dma just crossed under the 200-dma, which has been affectionately nicknamed the "death cross" because it is such a bearish signal.

CXW has not been participating in the market's recent rally and today the stock produced a bearish reversal pattern. I want to see some confirmation. Therefore I'm suggesting a trigger to open bearish positions at $19.90. If triggered our target is $18.00. The low in February 2010 was $17.50.

Trigger to open bearish positions at $19.90

Suggested Position: SHORT CXW stock @ 19.90 (unopened)

Annotated chart:

Entry on March xx at $xx.xx
Earnings Date 05/06/10 (unconfirmed)
Average Daily Volume: 1.1 million
Listed on March 17th, 2010



In Play Updates and Reviews

FWLT Turns Green

by James Brown

Click here to email James Brown

Editor's Note:

FWLT gapped open above our exit target. IRC hit our trigger to open positions. Downgrades are starting to become a problem. The rally has stalled for CTXS, NUE, and POWR.

Current Portfolio:


BULLISH Play Updates

Broadcom Corp. - BRCM - close: 33.61 change: +0.09 stop: 31.40

The rally in BRCM seemed to stall after one analyst firm started coverage on the stock with a "hold". The trend is up and shares are leading the sector higher but I am not suggesting new positions at current levels. 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: 47.43 change: -1.52 stop: 44.95

Ouch! CTXS lost 3.1% thanks to a downgrade. Shares were downgraded from a "buy" to a "neutral" this morning. Traders eventually bought the dip near $47.00. Volume was very high on today's move at nearly three times the normal volume. That could be a bad sign that investors were liquidating their positions. I am not suggesting new bullish positions at this time. Our target to exit is $49.65.

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


Goldcorp - GG - close: 39.80 change: -0.26 stop: 38.49

Gold was initially trading higher this morning on dollar weakness but the dollar reversed its losses and gold reversed its gains. Shares of GG opened higher but eventually closed in negative territory. We are still waiting for a breakout higher.

It looks like the dollar has rolled over in spite of today's move. If the dollar retreats it will be bullish for gold and thus the gold miners. I am suggesting a trigger to buy GG at $41.10. If triggered our target is $44.90.

Trigger to open positions @ 41.10

Suggested Position: GG stock @ 41.10(unopened)

Option traders may want to consider the following:

BUY CALL APRIL $42 (GG 10D42.00) current ask $0.85

Entry on March xx at $xx.xx
Earnings Date 05/06/10 (unconfirmed)
Average Daily Volume: 7.5 million
Listed on March 16th, 2010


Inland Real Estate Corp. - IRC - close: 9.31 change: +0.14 stop: 8.49

The rally in IRC continues and shares hit our trigger to open bullish positions at $9.25 today. This is a new 52-week high and a move over significant resistance. On a short-term basis IRC is overbought but longer-term the stock has built a significant base to rally higher from.

Our play is open but more patient traders may want to wait to buy a dip near $9.00. The 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!

IRC hit our trigger at $9.25

Current Position: IRC stock @ $9.25

chart:

Entry on March 17 at $ 9.25
Earnings Date 05/06/10 (unconfirmed)
Average Daily Volume: 417 thousand
Listed on March 13th, 2010


Linear Tech. - LLTC - close: 28.80 change: +0.31 stop: 26.95

The SOX semiconductor index was a strong performer today but it could face significant resistance at its January highs. Meanwhile LLTC hit a new six-week high at $29.13 but pared its gains by the close. If you're looking for a new entry point I would wait for a new bounce from the $28.00 area. Our first target is $29.95. Our second target is $30.95.

Current Position: LLTC stock @ 28.25

If you trade options consider this:

Current Position: CALL APR 28.00 (LLTC 10D28.00) @ $1.00

Entry on March 16 at $28.25
Earnings Date 04/13/10 (unconfirmed)
Average Daily Volume: 3.9 million
Listed on March 11th, 2010


NUCOR - NUE - close: 45.11 change: -0.96 stop: 43.85

Uh-oh! NUE has completely erased yesterday's gain and bullish breakout. The move looks like a possible bull-trap pattern. Today's relative weakness was fueled by an analyst downgrade for NUE. I am suggesting caution here. No new positions at this time.

Our first target to take profits is at $46.75. Our second and final target is $49.85.

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 $8.32 Change +0.00 stop $7.95

POWR tried to rally again this morning but traders sold into strength. On the other hand they're still buying the dip near $8.00. The trend is still up even if momentum has stalled. I am not suggesting new positions. Our final target to exit the stock is $9.25.

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: 10.51 change: +0.16 stop: 9.74

That's odd. We have two stocks in a row that closed unchanged on the session. Shares of PMTI dipped toward $10.20 and its 10-dma before bouncing back. I remain bullish with the stock above $10.40. 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.

Current Position: PMTI stock @ 10.55

Entry on March 16 at $10.55
Earnings Date 04/29/10 (unconfirmed)
Average Daily Volume: 132 thousand
Listed on March 13th, 2010


Wells Fargo - WFC - close: 30.55 change: +0.27 stop: 28.75 *new*

Banking stocks were some of the best performers here in the U.S. and in Europe. Shares of WFC continue to rally and hit new four-month highs. I am raising our stop loss to $28.75. Our target is $31.35. More aggressive traders could aim higher.

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

Bally Technologies - BYI - close: 39.08 change: +0.34 stop: 40.05

I remain very cautious on BYI given yesterday's sudden rebound. More conservative traders may want to lower their stop loss closer to the $39.50 level, which is very short-term resistance. I am not suggesting new bearish positions at this time.

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.

Current Position: SHORT BYI stock @ 37.63

Entry on March 16 at $37.63
Earnings Date 05/06/10 (unconfirmed)
Average Daily Volume: 1.9 million
Listed on March 15th, 2010


PALM - Palm Inc - close: 5.37 change: -0.02 stop: 6.50

PALM did not participate in the market's widespread rally today. Although I will note that PALM bounced off its intraday lows at $5.29. Tomorrow and Friday could be volatile. The company reports earnings after the closing bell on Thursday. Holding over an earnings report is risky. Our plan is to sell half our position at the close on Thursday to reduce our risk. 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

FWLT - Foster Wheeler $27.50 change -0.34 stop $25.85

Target achieved. FWLT actually gapped open higher at $28.02 and hit $28.11 before reversing. Our target to exit was $28.00 so the play was closed this morning.

Closed Position: FWLT @ $28.02
Entry was $25.13

Option buyers:
Closed Position: APR $26.00 CALL (FWLT 10D2600) @ $2.48
Entry was $1.10

chart:

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