Option Investor
Newsletter

Daily Newsletter, Monday, 3/22/2010

Table of Contents

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

Market Wrap

Stocks Shrug Off Health-Care Bill To Book Monday Gains

by Todd Shriber

Click here to email Todd Shriber
Passage of the historic health-care reform package had futures trading down last night and got the market off to a sour start this morning, but the down move was short lived as stocks rebounded and all three major U.S. indexes finished another Monday in positive territory. The Dow Jones Industrial actually moved above 10,800 before settling at 10,785.89, up about 44 points on the day. The S&P 500 gained nearly six points to finish the day at 1165.81 and the Nasdaq continued its flirtation with 2400, gaining 21 points to close at 2395.40.

Stats Table

As is par for the course with major, controversial legislation, the House passed a health-care reform package of historic proportions last night when they were probably hoping no one was watching, but that was not the case. The Senate is expected to take up the bill on Tuesday with the intent of implementing some fixes to the House version, but press reports are saying that President Obama could sign the bill into law as early as tomorrow afternoon.

For their part, Republicans are not going quietly into the night on this issue. Sen. Jim DeMint (R-SC) and Rep. Steve King (R-IA) have filed bills in their respective houses to repeal the bill and it goes without saying tomorrow's Senate proceedings will be loaded with procedural gimmicks aimed at stopping this bill from seeing the light of day. One would think with all of these external factors weighing on health-care-related stocks, the sector would have been in for some pain today.

To be sure, health insurance providers were a mixed bag today with Aetna (AET) and Cigna (CI) both finishing the day higher, but Humana (HUM) and WellPoint (WLP) both closed lower. Investors in the pharmaceuticals space seem to like the bill as Abbott Labs (ABT) and Dow components Merck (MRK) and Pfizer (PFE) both finished up on the day, helping the Health Care Select SPDR (XLV) and the Pharmaceutical HOLDRs ETFs to finish in the green.

XLV Chart

PPH Chart

Not lost in the health-care shuffle is the fact that financial reform will now move to the front burner with the imminent passage of the health-care bill. Just hours after the health-care bill was passed by the House, the Senate Banking Committee voted to move ahead with financial reform. The vote was 13-10 along party lines, no surprise there.

The bill, sponsored by Sen. Chris Dodd (D-CT) may not be strong enough for the White House's taste, but it does have the support of the Wall Street crowd, making its passage somewhat dubious. Even if the bill makes it out of committee, it must be reconciled with a House version and then come back to the Senate for a full vote where the Democrats are one vote shy of cloture. Sixty votes are needed to avoid procedural wrangling and actually get a straight forward vote and the Democrats have 59 votes, assuming no Republicans jump ship.

Financials were a mixed bag on the news, with Goldman Sachs (GS) and Morgan Stanley (MS) finishing lower on the day, but banks with more retail exposure, such as Wells Fargo (WFC) and Dow members Bank of America (BAC) and JPMorgan Chase (JPM) all finished higher on the day. The Financial Select SPDR (XLF) ended up with a small gain on the day.

XLF Chart

In other stock-specific news, there were a couple of somewhat encouraging earnings reports out of the retail sector. High-end jeweler Tiffany (TIF) said its fourth-quarter profit more than quadrupled to $140.4 million, or $1.10 a share, from $31.1 million, or 25 cents a share, a year earlier. Sales rose 17% to $981.4 million from $837.6 million. The profit number missed the consensus estimate of $1.13 a share, but the top line number did beat the average estimate of $970.9 million.

Tiffany shares spent most of the day in positive territory, eking out a small gain and that gain was probably realized because the company said it expects to earn $2.45 to $2.50 a share this year on revenue of $3 billion. Analysts had been expecting a profit of $2.43 a share on sales of $2.9 billion. Analysts remain bullish on the name and Tiffany may be offering proof that when it comes to earnings, it's not what a company says it did, but what it expects to do.

Tiffany Chart

Williams-Sonoma (WSM) was another name on the higher-end of the retail spectrum that was in the news today. The home furnishings retailer said it earned $88.4 million, or 81 cents a share, in the fourth quarter, compared with $12.2 million, or 12 cents a share, a year earlier. Sales rose 8.1% to $1.1 billion from $1 billion. Excluding items, Williams-Sonoma earned 86 cents a share and that blew away the average analyst estimate of 74 cents.

The California-based company said robust sales at its Pottery Barn and Pottery Barn Kids stores helped drive the profit growth. Like Tiffany, Williams-Sonoma offered bullish 2010 guidance. The company said it expects earnings to rise 22% to 33% to $1.16 to $1.26 a share on sales of $3.2 billion to $3.3 billion. Analysts had been expecting earnings of $1.02 a share on revenue of $3.2 billion.

And just as Tiffany did earlier this year, Williams-Sonoma said it will boost its quarterly dividend to 13 cents a share from 12 cents. All of this good news helped the stock gain $2.96, or 12.26%, to close at $27.10 after touching a new 52-week high of $27.27 earlier in the trading session. Volume was nearly quadruple the daily average.

Williams-Sonoma Chart

Speaking of bullish 2010 guidance PepsiCo (PEP), the world's second-largest soft drink maker, started its two-day analyst meeting today at Yankee Stadium. Chief Executive Officer Indra Nooyi reiterated that the company expects earnings to rise by 11% to 13% this year and that the company is still aiming for low double-digit growth in 2011 and 2012.

Nooyi added that Pepsi is focusing on healthier drinks and snacks that have less calories, sugar and salt. The company, which raised its dividend and announced a $15 billion share buyback plan last week, said it plans to invest ''aggressively'' in emerging markets such as Brazil, China, India and Russia.

And speaking of emerging markets, China continues to be a real thorn in the side of Internet search king Google (GOOG). Google ended its four-year old policy of providing censored content to users in mainland China today. What this means is that if you go to the Chinese version of Google, google.cn, you will be redirected to Google's Hong Kong site, google.hk.

That is not much of an elixir because the Chinese government can still restrict the links that users on the mainland can view and shows that Google, for all of its power, was probably short on power and long on hubris when it came to dealing with the Chinese government. If push comes to shove, Beijing will not have any qualms about shutting off access to Google in China completely. They have already taken similar action with Facebook, Twitter and Google's YouTube, according to the Associated Press.

Google, which has about 700 staffers in China, said it might remove some sales staff from the country. As I mentioned last week, China has its own Google in the form of Baidu (BIDU), so Google's refusal to play by China's rules is vexing, particularly when considering how important the Chinese market is to American companies. When many American companies set up shop in global markets, they tailor their products to adhere to local customs, rules and traditions. For example, you will not find a Big Mac on the menu of a McDonald's (MCD) in Bangalore. Why Google thinks it is above similar practices is anyone's guess. Not surprisingly, the stock was down on the China news.

Google Chart

Looking at the charts, the Dow has notched gains in nine of the past 10 trading session with last Friday being the lone down day in that time frame. The index again traversed 10,800 today before settling below that mark, but it appears that resistance at 10,725 has now turned into support. Even with the retreat below 10,800, the Dow is still trading at a 14-month high.

Dow Chart

The S&P 500 snapped a small two-day losing streak today, but could not hold the highs of the day and closed just below 1160. The next hurdle for the index is 1170 and support looks firm at 1150. Neither the health-care news nor the financial reform headlines stood in the way of stocks on Monday and that is a bullish sign for the S&P 500.

S&P 500 Chart

As I mentioned earlier, the Nasdaq bumped into some resistance at 2400 today, the second-time it has done so since last Wednesday. Last Thursday and Friday, the Nasdaq did not even make it to 2400 intraday, so the bulls will need to push the Nasdaq through 2400 with some vigor to dispel any concerns regarding the near-term health of the index. If 2400 is broken on strong volume, there is a lot of room to run to 2473, which was the July 2008 high.

Oracle's (ORCL) earnings report on Thursday could help (or hinder) the Nasdaq's ascent. When Oracle delivers an earnings surprise, it is usually to the upside. The stock's moves off its last five earnings reports are 6%, -3%, 7%, 10% and 7% respectively.

Nasdaq Chart

It is hard not to be impressed by the resilience shown by equities on Monday in the face of political headwinds and it makes me wonder where the major indexes would be trading if Washington was not such a prevalent factor in the markets. Shorts are continually getting squeezed and they may wave the white flag any day now with the intent of regrouping if there is profit taking in early April. For now, the safe bet is on the bulls.


New Plays

Bullish but not overbought

by James Brown

Click here to email James Brown


NEW BULLISH Plays

Veeco Instruments - VECO - close: 39.88 change: +0.87 stop: 37.45

Company Description:
Veeco provides the tools to make, measure and visualize today's world-changing technologies. From LED, solar, data storage, semiconductor and wireless to the frontiers of life science, materials science and nanotechnology, Veeco drives the tiny changes that change everything. (source: company press release or website)

Why We Like It:
Technology stocks continue to perform well. I like VECO as a bullish candidate because the trend is up but shares don't look so overbought. The stock broke out over significant resistance about eight days ago. Since that time it has been consolidating sideways. Traders bought the dip on Friday and now VECO is poised to rally higher. I am suggesting small bullish positions now. Our target is $44.00. FYI: The Point & Figure chart is bullish with a $55 target.

Suggested Position: VECO stock @ 39.88(?)

Annotated chart:

Entry on March 23 at $39.88(?)
Earnings Date 04/27/10 (unconfirmed)
Average Daily Volume: 1.7 million
Listed on March 22nd, 2010



In Play Updates and Reviews

Furry Scurry

by James Brown

Click here to email James Brown

Editor's Note:

Bears began to scurry for cover when the market failed to retreat on Monday. Our bullish play on PMTI has hit our first target. NUE was stopped out on morning weakness. FSS, a new bearish play, has been closed.

Current Portfolio:


BULLISH Play Updates

Broadcom Corp. - BRCM - close: 34.09 change: +0.42 stop: 31.40

Semiconductor stocks were strong performers today; the SOX index gained 2.4%. Shares of BRCM did not see any follow through on Friday's bearish reversal pattern. Instead the stock rebounded 1.2%. I am not suggesting new bullish positions at these 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: 48.19 change: -0.15 stop: 46.25*new*

CTXS's lack of participation in today's rally could be a warning sign. More conservative traders may want to exit early. I am adjusting our stop loss to $46.25. I'd rather get stopped out near breakeven and have the freedom to look for a new entry point later. I am not suggesting new positions at current levels. 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


Fortune Brands Inc. - FO - close: 49.02 change: +0.13 stop: 44.70

We will probably have to exercise some patience with FO. The stock did not see any follow through on Friday's failed rally. Shares remain very overbought so we don't want to chase it. The plan is to buy FO on a dip at $46.00. If triggered our first target is $49.95. Our second target is $53.50 given enough time, which could take a few weeks. FYI: The Point & Figure chart is very bullish with a $60 target.

Use a trigger to buy the dip at $46.00

Suggested Position: FO stock @ 46.00 (unopened)

Entry on March xx at $xx.xx
Earnings Date 04/30/10 (unconfirmed)
Average Daily Volume: 805 thousand
Listed on March 20th, 2010


Inland Real Estate Corp. - IRC - close: 9.67 change: +0.27 stop: 8.49

IRC delivered another strong session with shares up 2.8% and closing at new 52-week highs. Another day like today and IRC could hit our first target. I am not suggesting new bullish positions at current levels.

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.

Current Position: IRC stock @ $9.25

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: 28.84 change: +0.48 stop: 26.95

Strength in technology, especially the semiconductors, helped fuel a 1.69% gain for LLTC. I would prefer to launch new positions near the $28.00 level. Our first target is $29.95. Our second target is $30.95.

Current Position: LLTC stock @ 28.25

Option Traders:

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


Palomar Medical Tech. - PMTI - close: 11.58 change: +0.61 stop: 10.40 *new*

Target achieved. The rally in PMTI continues and shares added 5.5% on Monday. Our first target to take profits was at $11.45. Shares hit $11.60 this afternoon. I am raising our stop loss to $10.40. We would not open new positions at current levels. Our longer-term target is $12.75. The next obstacle is potential resistance near $12.00 and the 200-dma.

Current Position: PMTI stock @ 10.55

1st Target Hit (03/22/10) @ 11.45

Annotated chart:

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: 30.41 change: +0.03 stop: 28.75

Shares of banking giant WFC are still consolidating sideways but it's taking on a more bullish posture. Financial stocks continue to look bullish but the group, like most of the market, is short-term overbought. Our first target to take profits on WFC is $31.35. Our second target is $32.40.

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: 38.32 change: +0.60 stop: 40.05

The gambling sector was one of the best performers today with a 6.0% rally. That makes me nervous about our bearish trade on BYI. The trend for BYI is still down and shares hit another new relative low this morning but the industry strength fueled a decent rebound inside of BYI today. If the casino stocks continue to rally BYI could try and catch up with its peers. I am not suggesting new positions at this time. If we see BYI close over $39.00 I'll be tempted to exit this trade.

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


Corrections Corp. of America - CXW - close: 19.65 chg: -0.18 stop: 21.26

CXW continues to underperform the market with a 0.9% decline on Monday. Nimble traders may want to consider launching new bearish positions on a bounce or failed rally near $20.50, which should be short-term resistance. Our target is $18.00. The low in February 2010 was $17.50.

Current Position: SHORT CXW stock @ 19.90

Entry on March 19 at $19.90
Earnings Date 05/06/10 (unconfirmed)
Average Daily Volume: 1.1 million
Listed on March 17th, 2010


CLOSED BULLISH PLAYS

NUCOR - NUE - close: 44.66 change: +0.27 stop: 43.85

Our NUE has been stopped out. Shares gapped open lower at $43.74, which was under our stop loss of $43.85. NUE did manage a nice bounce off its intraday lows but it looks like upward momentum from the February rally is fading.

Stopped out @ 43.85

Closed Position: NUE stock @ $43.74
Entry was $42.98

Annotated chart:

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


CLOSED BEARISH PLAYS

Federal Signal Corp. - FSS - close: 9.38 change: +0.46 stop: 9.31

The short-squeeze in shares of FSS continued on Monday. There was no follow through on Friday's failed rally pattern. The stock immediately began to climb and broke out past significant resistance near the $9.30 level. Our bearish trade was closed at $9.31. This was an aggressive, higher-risk trade.

Stopped out @ $9.31

Closed Position: (SHORT) FSS stock at $9.31
Entry was at $8.84.

Annotated chart:

Entry on March 22 at $ 8.84 small positions
Earnings Date 04/30/10 (unconfirmed)
Average Daily Volume: 257 thousand
Listed on March 20th, 2010