Option Investor
Newsletter

Daily Newsletter, Tuesday, 3/23/2010

Table of Contents

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

Market Wrap

Melt-Up Gains Speed

by Jim Brown

Click here to email Jim Brown

The markets accelerated into the close as the S&P broke over 1170 and the Nasdaq broke over 2400. Both were seen as psychological resistance.

Market Stats Table

The morning started off slow after we saw some negative news on the housing front. The existing home sales for February declined for the third consecutive month although the pace of the decline slowed. Existing sales fell to 5.02 million units on an annualized basis. This was a decline from 5.05 million and actually less of a decline than analysts expected to a rate of 4.95 million units. This was another example of "less bad" economic news.

As we come out of the winter and into the spring selling season we should see sales in March and April increase but once the homebuyer tax credit ends on April 30th analysts are expecting a sharp decline in home sales. Noted banking analyst Richard Bove expects home prices to fall another 10-15% by year-end.

The report showed that for the first time since 2008 the number of homes listed for sale increased over the same period in the prior year. Inventory increased by +9.5% with the addition of more than 312,000 units. That is the biggest increase in over 20 years. The number of months of inventory rose to 8.6 and the highest level since last August. The normal level is a six-month supply. Home prices fell by an average of 2% but home prices in the west fell by -9.8%.

I would not attach too much importance to this report given the heavy snowstorms in the northeast in January. This report is based on closings of previously contracted sales so the two February storms will probably have impacted March closings more than February.

Existing Home Sales Chart

The FHFA Purchase-Only Home Price Index fell by -3.3% in January according to data released today. This is a lagging report and shows prices are down -13.2% from the peak in 2007. This index only tracks homes where the mortgages are held or guaranteed by Fannie of Freddie. These are the least volatile home prices because they are in the lower end of the housing market. This is also the hottest area of sales right now because the first time homebuyers eligible for the tax credit are buying the lower priced starter homes. I would not apply too much weight to the FHFA numbers.

The Mortgage Bankers Association claims there are more than two million homes currently in the foreclosure process with another million or more likely by year-end. This is pressuring the middle to the higher end of the price curve where the tax credit for first time buyers is rarely used. According to the MBA there are more than three million homes currently for sale. The government's short sale incentive program begins on April 5th with a $1,500 payment for concluding a short sale. Some analysts believe it will have no impact since many of the short sales are tens of thousands of dollars underwater. Lenders may decide to keep the homes rather than take the losses. The rental market is hot today with rents rising monthly as more and more prior homeowners are unable to finance a new home after losing their house to foreclosure. Lenders could resort to a rental program until the sales market improves.

On a more positive note the Richmond Fed Manufacturing Survey for March rose to 6.0 from 2.0 in February. The recovery is accelerating in the Richmond region after two months of decline in Dec/Jan. The 6.0 reading is back into expansion territory. New orders rose to 10.0 from 9.0 but backorders fell to -7 from zero. The employment component rose to zero after being negative for the prior four months. This was a positive report but still contained some elements of concern like the falling backorders.

Richmond Fed Chart

The monthly Mass Layoff Report showed layoffs declined again in February to 1,570 events from 1,761 in January. Those layoffs involved 155,718 workers compared to 182,261 in January. The drop in layoffs suggests the job losses in the Non-Farm Payroll report probably came from weather issues rather than continued firing from corporations. The inclement weather probably delayed hiring and that suggests the March report could show a snap back jump in employment.

The largest number of layoffs at 24% came from the manufacturing sector with transportation equipment the largest sub sector. The pace of layoffs has slowed the most in areas like computer and electronic parts and furniture producers. Layoffs for February increased in only five states. State government employment continues to fall as states slash services due to shrinking revenues.

Wednesday's reports will include Durable Goods, New Home Sales, Mortgage Applications and Oil & Gas Inventories.

In stock news the Semiconductor Index (SOX) broke out to close at a new high after Credit Suisse said concerns about a slowdown in demand are overblown. Credit Suisse said channel checks up and down the supply chain showed increasing demand not declining demand. The analyst, John Pitzer, found that many chip buyers are "double ordering" or buying twice the inventory they need to make sure they don't run out. Pitzer said with the double ordering there is not enough manufacturing capacity to meet existing orders much less double orders.

This is a two edged sword. If consumer demand does not continue to ramp up then tech companies are going to be slashing future orders after chip companies have ramped up operations to meet the current demand. There appears to be no happy medium. Pitzer favorites include Intel (INTC), Broadcom (BRCM), Marvel (MRVL), Micron (MU), ON Semi (ONNN) and Linear (LLTC).

Semiconductor Chart

You would think the flood of new tablet PCs would be enough to keep all the chipmakers busy for the next year. Apple broke out to a new high on Tuesday at $228 as they near the launch date for the iPad. Apple has gained nearly 14% since Feb-4th despite the post iPad announcement dip. Ipad web orders in the first week of sales passed 190,000. However, they have slowed to 5,000 per day despite new discounts for schools. Apple has a lot of competition and many of the competitors offer significantly more features. Apple's iPad does not run flash, which nearly every website has today. It does not have a camera so no video calls and it does not run more than one application at the same time. Most of the competitors offer these features.

Of course Apple has the Apple image going for it to give it a boost in sales. We will see how long that Apple name can keep the faithful from straying to another of the 20+ tablet PCs that have already been announced, released or are currently in production. For a slide show of the top 12 with their features
click here

Apple Chart

After the bell Adobe (ADBE) reported earnings of 40-cents that beat the street estimate of 37-cents. Revenue rose +9% to $858.7 million and beat estimates for $827 million. Adobe issued guidance that was slightly higher than analysts expected on earnings but significantly higher on revenue. Shares of Adobe rallied +6% in after hours to $37.48.

Adobe Chart

Carnival Cruise Lines (CCL) reported earnings of 22-cents compared to analyst estimates of 14-cents but the earnings contained a 5-cent profit from the sale of a ship. However, the best news came from the footnotes. Bookings are up +8% but prices paid for cruises are up +17%. This is a clear indicator that consumers are finally starting to loosen their purse strings. The CEO said Carnival was surprised that the rebound has been so dramatic but it was too early to know if the trend would hold. Carnival's profit fell -33% from the year ago quarter and most of that was due to the increased cost of fuel from Q4-2008. Carnival paid nearly 80% more for fuel in this quarter compared to the prior year. Carnival raised its full year profit estimates to between $2.25-$2.35 from its December forecast of $2.10-$2.30. Carnival shares broke out to a new high on the news.

Carnival Cruse Lines Chart

The major indexes rallied to new 17-month highs as anxiety over the healthcare bill, Greek debt crisis and China's yuan support faded. The healthcare debate is behind us and there was no implosion in the market. The Monday morning dip was bought and the melt up is in danger of turning into a real rally. At least that is the sentiment on Wall Street. This rally over the last month has been on low volume with increasing denial of its existence.

They say a market is built by bulls climbing a wall of worry. We have definitely had that wall with the drop in economic indicators in Dec/Jan and increasing worry about a second dip. The jobs numbers have been all over the chart with the February numbers much worse than expected. Jobless claims have remained stubbornly high. Add in the Greek debt crisis and the high volatility in the currency markets as another negative factor. Remember the Dubai debt crisis? That disappeared from the front page but still exists for more than 300 banks that are being hung out to dry. All of those worries are now factored into the market and the economics numbers are improving. Trimtabs reported last week that year-to-date job postings had increased 18%. That is a huge number that suggests companies are finally starting to hire again.

Conviction in the market is so light that the quadruple witching barely nudged the volume meter. Both days this week the volume has been light in the mid seven billion range. There is no conviction but the dips continue to get bought. You know my idea that fund managers are in a race for performance now that the economic risk appears to be behind us. I believe that fund managers are seeing money begin to trickle into equity funds and they were moving into small caps in a big way until last week.

Last week the Russell was the only major index to post a loss for the week. It was very over extended. The rally last week was led by the Dow and S&P as large caps started to get a bid. The big caps were responsible for today's rally and especially responsible for the end of day surge. I believe fund managers are starting to hedge their bets toward the end of the quarter and are beginning to favor large caps as highly liquid safety stocks in case the market corrects once the quarter is over. That has a very good chance of occurring.

The economy may be improving but we are a long way from booming. This continues to be a case of "less bad" economics but the bulls have factored this into the equation. The wall of worry has been scaled and we are becoming more overbought as each day progresses. I am not sure the markets can make it to month end without a pause but I would like to see them try.

The Dow closed at a new high just under 10,900 and the burst of buying into the close was bullish. If this daily end of day buying binge that started last week can continue then the bullish sentiment will continue to feed on itself. Only when the end of day brings selling will the buyers start to become wary again. Support on the Dow is now 10,700 but I doubt we will see that level again in March without some ugly news item that is completely unexpected. Resistance would be 11,000 as a round number with somewhere around 11,050 as technical resistance.

Dow Chart

The S&P enjoyed the big cap rally at the close and broke out to a new high with a ways to go before new resistance just under 1200. This was clearly a big cap buy program at the close that triggered some decent short covering. There is nothing negative about this chart until we close in on that 1200 range. Support is now 1160.

S&P-500 Chart

The big cap techs all caught a bid this afternoon with the exception of the biotechs. Those are still suffering from a healthcare hangover. The leaders were AAPL, RIMM, DELL, ORCL, MSFT and INTC. Even QCOM caught the big cap fever. The Nasdaq punched through resistance at 2400 and never looked back. I told you I was worried about the Nasdaq in my weekend commentary but the tech bulls took Monday's opening dip as a buying opportunity and it has been straight up from there. Initial support is 2395 and resistance is now in the 2435 range.

Nasdaq Chart

I have been calling this afternoon's rally a big cap event but the Russell went along for the ride. That is the beauty of a big cap buy program. It tends to pull the other indexes higher along with it. We went for weeks with the Russell leading and the big caps paying halfhearted attention. However, today the small caps stood up and saluted as the big caps led the way. Resistance is now around 700 and support is clearly 670.

Russell Chart

In summary, I believe the rally will continue into Friday but I am not sure if it can maintain the momentum after that. Fund managers will start to worry about what happens when the quarterly books close although there should be a ton of end of quarter retirement cash flowing into funds after this breakout. There are not any earth shaking economic reports the rest of the week and the jobs report is not until the following Friday. There is nothing on the calendar that should deter the market and the earnings guidance has been improving. Continue to buy the dips until we are proven wrong.

Jim Brown


New Plays

Bullish but not too overbought, Round 2

by James Brown

Click here to email James Brown

Editor's Note:

Bullish candidates are plentiful given the market's rally. I wanted to list a few additional stocks that caught my eye.

SLXP - The stock just broke out past the $32.00 level. I'd be tempted to buy a dip back toward $32 with a stop under $30.00.

SBIB - This stock looks a lot like PMTI and IRC before they broke out. SBIB might be a candidate on a breakout past the January high.

FRED - Shares look pretty bullish with the two-day rally. I would prefer to see a dip or a close over the 200-dma.

LRCX - Semiconductor stocks have been showing strength. LRCX just broke out past resistance near $36.00 and its 100-dma. Consider looking for a dip back towards $36.

FWLT - The stock could be forming an inverse H&S pattern. A close over $28.25 or its 200-dma might be a bullish entry point.

SRCL - I would be tempted to launch bullish positions on a move over $57.00. My target would be the $62 area but that could take weeks to achieve.


NEW BULLISH Plays

Check Point Software - CHKP - close: 34.85 change: +0.04 stop: 29.95

Company Description:
Check Point Software Technologies Ltd. (www.checkpoint.com), the worldwide leader in securing the Internet, is the only vendor to deliver Total Security for networks, data and endpoints, unified under a single management framework. Check Point provides customers with uncompromised protection against all types of threats, reduces security complexity and lowers total cost of ownership. Check Point first pioneered the industry with FireWall-1 and its patented stateful inspection technology. (source: company press release or website)

Why We Like It:
Technology stocks have been leaders in this market rally. I like CHKP because the trend is up but shares don't look so overbought. The stock has been consolidating under resistance near the $35.00 level. In just the last couple of days that consolidation has narrowed suggesting a breakout is imminent. I am suggesting a trigger to buy CHKP at $35.25. If triggered our target is $37.90. We'll use a stop loss at $33.90.

Trigger to open bullish positions at $35.25

Suggested Position: BUY CHKP stock at $35.25 (unopened)

Option Traders:
Suggested Position: BUY APRIL $35 call (CHKP 10D35.00) current ask $0.65

Annotated chart:

Entry on March xx at $xx.xx
Earnings Date 04/27/10 (unconfirmed)
Average Daily Volume: 1.6 million
Listed on March 23rd, 2010


EMC Corp. - EMC - close: 18.94 change: +0.11 stop: 18.35

Company Description:
EMC Corporation (NYSE: EMC) is the world's leading developer and provider of information infrastructure technology and solutions that enable organizations of all sizes to transform the way they compete and create value from their information. (source: company press release or website)

Why We Like It:
EMC is another technology stock that while near new highs doesn't look quite so overbought. EMC has been consolidating sideways under the $19.00 level the last couple of weeks after breaking out from a five-month trading range. The rally will probably continue if shares can make it past the $19.00 level. I'm suggesting a trigger to buy the stock at $19.05. If triggered our first target is $20.00, since this level has been resistance in the past. Our second target is $21.00 but that could take a few weeks to achieve.

Trigger to buy the stock at $19.05

Suggested Position: BUY EMC stock at $19.05 (unopened)

Annotated chart:

Entry on March xx at $xx.xx
Earnings Date 04/21/10 (unconfirmed)
Average Daily Volume: 20.4 million
Listed on March 23rd, 2010



In Play Updates and Reviews

The Melt Up Continues

by James Brown

Click here to email James Brown

Editor's Note:

I remain very cautiously bullish. The trend is up but traders need to stay on top of their stop losses. Adding new positions could be difficult with the market so overbought.

Current Portfolio:


BULLISH Play Updates

Broadcom Corp. - BRCM - close: 34.20 change: +0.11 stop: 31.40

BRCM continues to drift higher. The stock appears to be facing short-term resistance at the $34.30 level but it looks like shares should break out soon. The semiconductor stocks were strong performers today with the SOX breaking out past its January highs. 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: 48.00 change: -0.19 stop: 46.25

I remain very cautious on CTXS and today's under performance only reinforces that outlook. Shares were under performing this morning and tried to bounce back but didn't quite make it to positive territory. 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


Fortune Brands Inc. - FO - close: 49.80 change: +0.78 stop: 44.70

The market refuses to correct so we're still sitting on the sidelines with FO. I do not want to chase it with a 20% bounce from its February lows. Currently shares are testing resistance at the $50 level.

Right now 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: 9.71 change: +0.04 stop: 8.49

IRC saw a little bit of volatility this morning but eventually closed higher albeit not by much. The lack of profit taking is a show of strength but shares are very overbought. 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: 28.98 change: +0.14 stop: 27.45 *new*

I'm a little disappointed with LLTC. The consolidation is narrowing and the stock looks poised to rally higher. Yet the SOX broke out to new highs and I would have expected LLTC to breakout to new relative highs. I am raising our stop loss to $27.45. 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: 11.66 change: +0.08 stop: 10.40

PMTI started to see some profit taking this morning but traders bought the dip at $11.35 and shares eventually closed higher. The stock is very overbought. I am not suggesting new positions at this time. PMTI has already hit our first target at $11.45. Our second and final target is $12.75. We expect to see resistance and probably a pull back near $12.00 and its 200-dma.

Current Position: PMTI stock @ 10.55

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

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


Veeco Instruments - VECO - close: 43.36 change: +3.48 stop: 37.95 *new*

VECO looked bullish yesterday but I wasn't expecting an 8.7% rally today. The stock exploded higher on strong volume to close at new multi-year highs. Our first target is $44.00. I'm adding a second target at $47.40. We will adjust our stop loss to $37.95.

Suggested Position: VECO stock @ 39.99

Entry on March 23 at $39.99
Earnings Date 04/27/10 (unconfirmed)
Average Daily Volume: 1.7 million
Listed on March 22nd, 2010


Wells Fargo - WFC - close: 31.08 change: +0.67 stop: 29.24 *new*

Banking stocks were struggling a little to keep pace with the rally today but the trend is still up. WFC out performed its peers with a 2.2% gain. The high today was $31.12. I am adjusting our stop loss to $29.24. 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: 38.56 change: +0.24 stop: 40.05

The rally in gambling stocks seemed to stall after yesterday's huge gains. BYI only rose 0.6% and failed to breakout over its simple 200-dma. I remain nervous given the strength of the sector so I'm not suggesting new bearish positions in BYI 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: 19.40 chg: -0.25 stop: 21.26

The sell-off in CXW continues. Shares lost another 1.2% while the rest of the market rallied higher. I don't see any changes from my prior comments. 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