Option Investor
Newsletter

Daily Newsletter, Wednesday, 3/31/2010

Table of Contents

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

Market Wrap

Stocks Derailed By Employment Forecast

by Todd Shriber

Click here to email Todd Shriber
A glum employment outlook from ADP that showed employers surprisingly cut jobs in March helped push stocks lower on Wednesday with the Dow Jones Industrial Average losing almost 51 points to close at 10,856.63. The S&P 500 absorbed a loss of nearly four points to settle at 1169.43 while the Nasdaq closed below the critical 2400 level after losing about 13 points to close at 2397.96. Equities were lethargic for the most part on Wednesday, until another late-day sell-off kicked in around 2pm Eastern time, worsening the day's losses.

Stats Table

Optimism had been high that Friday's monthly jobs report would show employers added jobs in March, but the ADP Employment Report showed employers cut another 23,000 jobs this month. While that is the smallest monthly decline in two years, the news was nothing to get excited about as most observers were forecasting an addition of 40,000 new jobs in the ADP report. That probably put investors in a pensive state mind ahead of the Labor Department's jobs number, which many economists are expecting to show an increase of 185,000 new jobs.

Friday's number may still prove to be better than today's ADP report because the government report reflects weather-related improvements in hiring and the addition of census workers, while the ADP does not include those numbers. Of course, census jobs are temporary jobs and the economy is going to need more than temporary jobs to truly pick up steam.

ADP Chart

The Case-Shiller Home Price Index did nothing to encourage a cheery mood on Wall Street today as its January report showed home prices in 20 U.S. cities fell by 0.4% in January from December. Today's number was not seasonally adjusted. Los Angeles was the only city of the 20 included in the survey to show improving home prices in January. On a seasonally adjusted basis, prices rose 0.3%.

Compared with January 2009, prices were lower in 11 of 20 cities, with Las Vegas sporting the biggest decline with a drop of 17.4%. Home prices in Charlotte, Las Vegas, Seattle and Tampa hit their worst post-financial crisis levels, according to press reports.

Home Price Chart

The Dow backed off an 18-month high, but energy names did get a boost after President Obama said he would permit drilling off the East Coast. A federal ban on drilling in waters off both the East and West Coasts expired in 20008 and while the Obama plan is certainly better than not exploiting these resources at all, it does keep explorers from drilling within 125 miles of Florida's coastline and cancels the development of Alaska's Bristol Bay.

According to Bloomberg News, the U.S. Minerals Management Service estimates that Alaska's Outer Continental Shelf has 26.6 billion barrels of recoverable oil, seven times the estimate for the East Coast, and 132.1 trillion cubic feet of natural gas. If nothing else, those numbers indicate the decision to stop development at Bristol Bay is vexing at best.

The news led to a mixed day for oil stocks. Exxon Mobil (XOM), the biggest U.S. oil company, was down seven cents to $66.98, but fellow Dow component Chevron (CVX), the number two U.S. oil firm, was the Dow's top gainer on the day, adding 53 cents to close at $75.83. The oil services names were on the receiving end of most of the positive trade regarding the new drilling plan as Diamond Offshore (DO) and Transocean (RIG) both gained more than $3. National Oilwell Varco (NOV) and Schlumberger also finished the day higher and that helped the Oil Services HOLDRS ETF (OIH) gainn $2.01, or 1.67% to close at $122.59.

OIH Chart

Greece continues to be a problem even though the country has taken care of its April cash needs. That is just one month and Greece will need to raise another $15.6 billion by the end of May. The country is planning at least two dollar-denominated bond auctions in the next month to raise cash, but that news was not enough to prevent Moody's Investors Service from downgrading the debt and deposit ratings of five of the nine Greek banks in its coverage universe.

This news did not help the U.S. Dollar much, which was down today against 11 of the 16 major currencies, but with the Dollar weak and a lack of enthusiasm for the Euro still obvious, gold may be once again be a safe-haven for wary investors. Gold for April delivery gained $8.40 an ounce to close at $1112.50 today and it is worth noting that the the SPDR Gold Shares (GLD) is up nearly 2% in the past five days compared to 0.5% loss for the S&P 500.

Gold Chart

Speaking of bad news, tech investors got a big dose of troubling headlines after the close today when BlackBerry maker Research In Motion (RIMM) delivered fourth-quarter earnings results that certainly qualify as disappointing. The company said it earned $710.1 million, or $1.27 a share, in the fourth quarter, compared with $518.3 million, or 92 cents a share, a year earlier. Revenue jumped 18% to $4.08 billion, but analysts were expecting a profit of $1.28 a share on sales of $4.31 billion. RIMM shipped 10.5 million smart phones in the fourth quarter, fewer than the expected total of 11 million.

RIMM did offer an upbeat profit forecast for the current quarter, saying it expects to earn $1.31 to $1.38 a share. That is well ahead of the consensus estimate of $1.23 a share, but the Canadian company is forecasting revenue of $4.25 billion to $4.45 billion while analysts are expecting $4.33 billion. The company said it expects first-quarter gross margins in the neighborhood of 44.5% and is forecasting subscriber growth of 4.9 million to 5.2 million.

BNP Paribas initiated coverage of RIMM and rival Apple (AAPL) today with ''outperform'' ratings and noted that while an Apple partnership with Verizon (VZ) poses risks for RIMM, the growth of the BlackBerry in emerging markets should help buffer subscriber losses in developed markets. BNP Paribas put a $90 price target on RIMM and I bet the analyst would like to lower that number. RIMM closed at $73.97, but as of this writing, the stock is trading lower by $3.67, or 5%, to $69.89 in the after-hours session.

RIMM also said it expects its average selling price per phone to fall to $305 to $310 per phone in the current quarter, down from $311 per phone in the previous quarter. Combine those numbers with slumping shipments and perhaps it is apparent that RIMM is losing market share to the iPhone Google's (GOOG) Android.

RIMM Chart

On Monday I mentioned the aerospace sector as one group that has been showing a lot of strength and if you were looking for a pullback in some of that group's stronger constituents such as Boeing (BA), that pullback may have occurred today after the Dow component said it expects to take a $150 million first-quarter charge related to new health care reform bill. Boeing was down 1.25% on the news.

At this point, it is hard to reconcile the health news as good news from an investor's standpoint. In less than a week, AT&T (T), Boeing, Caterpillar (CAT) and 3M (MMM) form a quartet of Dow components saying the health care bill negatively impact first-quarter earnings. Throw in Deere (DE), Goodrich (GR) and Boeing rival Lockheed Martin (LMT), which said today it will take a $96 million charge in the first quarter, and it is clear that industrial names are being hampered by Uncle Sam.

Boeing Chart

Here we are at the end of the first quarter and stocks did not close the quarter in robust fashion. The Dow's almost 51-point haircut moved the index below support at 10,880 and if traders really fret about the jobs number on Thursday (the number is released on Friday, but the market is closed) then support at 10,825 could be washed away. The Dow is now a fair bit removed from resistance at 10,950 and assuming volume will be thin on Thursday, perhaps the best we can hope for the is the Dow holding 10,850 heading into the long weekend.

Dow Chart

The S&P 500 remains locked in a tight range, still hovering around the 1170 area. Again, I would not expect much action tomorrow, at least not much after the morning. If the S&P 500 can at least stay in its current neighborhood going into the next week, that might be a positive sign. After Friday's jobs report, first-quarter earnings will be the driver here. The destination is still unknown.

S&P 500 Chart

With RIMM's earnings announcement, we have a different set of circumstances for the Nasdaq. The Nasdaq was not all that impressive in March, save for Apple, and the RIMM news makes it difficult to envision a positive day for the Nasdaq on Thursday. I do not know if volume will be sufficient to force a break of support at 2385 tomorrow, but I find the prospects of a close above 2400 to be dubious.

Nasdaq Chart

I expect a volatile Thursday morning followed by some lethargic action for the rest of the day as traders head out of town to get an early start on the long weekend. RIMM is a bellwether name and that is going to hamper the Nasdaq and perhaps the broader market, so one more down day is likely in the offing.


New Plays

Services and REITs

by James Brown

Click here to email James Brown


NEW BEARISH Plays

EastGroup Properties - EGP - close: 37.74 change: -0.84 stop: 39.55

Company Description:
EastGroup Properties, Inc. is a self-administered equity real estate investment trust focused on the acquisition, development and operation of industrial properties in major Sunbelt markets throughout the United States with an emphasis in the states of Florida, Texas, Arizona and California. Its strategy for growth is based on its property portfolio orientation toward premier business distribution facilities clustered near major transportation features. EastGroup's portfolio currently includes 28.1 million square feet. (source: company press release or website)

Why We Like It:
The rally in REIT stocks is reversing. Investors have already begun to do some profit taking. In EGP's case this looks like a new lower high and a bull-trap pattern with last week's failed rally. The high was $39.44. I'm suggesting bearish positions now with a stop at $39.55. There is a handful of moving averages all converging near the $37 level so I would not be surprised to see EGP bounce near this area but any bounce should be temporary with the sector already beginning to correct. I would consider this trade somewhat aggressive since the most recent data listed short interest around 5% of the very small 25.8 million-share float. That's about eight days worth of short interest. Our target is the $34.00 level.

Suggested Position:(SHORT) EGP stock at $37.74(?)

Annotated chart:

Entry on April 01 at $37.74(?)
Earnings Date 04/28/10 (unconfirmed)
Average Daily Volume: 137 thousand
Listed on March 31st, 2010


MAXIMUS Inc. - MMS - close: 60.93 change: -0.34 stop: 62.11

Company Description:
MAXIMUS is a leading provider of government services worldwide and is devoted to providing health and human services program management and consulting services to its clients. The Company has more than 6,500 employees located in more than 220 offices in the United States, Canada, Australia, the United Kingdom, and Israel. Additionally, MAXIMUS is included in the Russell 2000 Index and the S&P SmallCap 600 Index. (source: company press release or website)

Why We Like It:
Shares of MMS exploded higher after the company reported better than expected earnings back on February 4th and guided earnings higher for the rest of 2010. Yet that was back at $48.00. The rally has stalled and shares have been consolidating sideways in the $60-62 zone for three weeks now. I suspect that MMS will correct before moving higher and we have a very clearly defined entry point and stop loss placement.

I am suggesting a trigger at $59.80 to open bearish positions and we will use a stop loss at $62.11. If triggered our target is $55.25. I do need to label this trade somewhat aggressive since we normally do not trade stocks with average volume under 250K a day.

Trigger for bearish positions at $59.80

Suggested Position: (SHORT) MMS stock at $59.80 (unopened)

Annotated chart:

Entry on April xx at $59.80 (unopened)
Earnings Date 05/06/10 (unconfirmed)
Average Daily Volume: 83 thousand
Listed on March 31st, 2010



In Play Updates and Reviews

Adjusted Entry Points

by James Brown

Click here to email James Brown

Editor's Note:

I have adjusted the entry points on both the SMN and TWM plays.

Current Portfolio:


BULLISH Play Updates

Broadcom Corp. - BRCM - close: 33.20 change: -0.02 stop: 31.75

No change yet. BRCM is slowly consolidating lower and we're looking for a dip toward short-term support near $32.00. I am not suggesting new bullish positions at current levels. Wait for a bounce from $32.00 before considering new positions. 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


Linear Tech. - LLTC - close: 28.25 change: -0.35 stop: 27.70

Uh-oh! The action in LLTC looks like another short-term bearish reversal. If the stocks sees any follow through lower we could end up getting stopped out soon. I am not suggesting new bullish positions at this time. Keep an eye on the simple 30-dma for potential support. I'm also watching the SOX to see if it breaks down. 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: 10.87 change: +0.16 stop: 10.60

After five days of profit taking PMTI finally managed a bounce. Shares dipped to $10.65 this morning before bouncing back toward the $11.00 level. The bounce coincided with a test of the rising 20-dma. It also coincided with a test of the 38.2% Fibonacci retracement of the March rally. Aggressive traders may want to consider new positions here but given the status of the wider market I am not suggesting new positions.

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 pullback 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


UltraShort Basic Materials - SMN - close: 7.07 change: -0.00 stop: 6.90

Basic material stocks did not see any follow through on their recent bounce even though the dollar edged lower today. I suspect this sector is about to correct. We are adjusting our strategy for the SMN. We'll move the trigger to buy the SMN to $7.45. We'll adjust the stop loss to $6.90. If triggered our first target is $8.80. Our second, more aggressive target is $9.75. It could take the SMN several weeks to get this high. By its very nature this can be a volatile issue. Keep your position size small.

FYI: Don't forget the SMN is the ultrashort, which will rally higher as the basic material sector retreats.

Trigger to buy the SMN at $7.45

Suggested Position: BUY SMN stock @ 7.45 (unopened)

Entry on March xx at $xx.xx
Earnings Date --/--/--
Average Daily Volume: 3.3 million
Listed on March 27th, 2010


UltraShort Russell2000 ETF - TWM - close: 20.61 change: +0.36 stop: 19.65

If you look at an intraday chart for the small cap index it looks like someone was trying to get out early with a sudden move lower in the last hour of trading. This could be the very beginning of a market correction now that the first quarter is over. You can see the affect this had on the TWM with the spike higher.

I am adjusting our entry point. More aggressive traders may want to jump in right now. I am moving our trigger for bullish positions to $20.85 and we'll adjust the stop to $19.65, which is under the March low. Our first target is $23.95 since the $24.00 level was support in the past it could be resistance now.

Trigger to buy the TWM at $20.85

Suggested Position: BUY TWM stock @ $20.85 (unopened)

Entry on March xx at $xx.xx
Earnings Date --/--/-- (unconfirmed)
Average Daily Volume: 4.5 million
Listed on March 27th, 2010


BEARISH Play Updates

Corrections Corp. of America - CXW - close: 19.86 chg: -0.01 stop: 21.05 *new*

The oversold bounce in CXW appears to be struggling with round-number resistance near $20.00. This could be a new entry point for bearish positions. I am adjusting our stop loss down a little to $21.05. 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


MACERICH Co. - MAC - close: 38.31 change: -0.61 stop: 41.51

Our new bearish play on MAC is off to a good start. Shares opened at $38.80 and slipped 1.5% toward the $38 level. I would still consider new bearish positions at current levels. Our target is the $35.15 level. Keep in mind the 50-dma nearing $35.00 could offer some technical support. I do consider this somewhat aggressive. The most recent data listed short interest at 10% of the float, which is above average and raises our risk of a short squeeze. Plus, the Point & Figure chart is still bullish. I would keep positions small.

Current Position: SHORT MAC stock at $38.80

Entry on March 31 at $38.80
Earnings Date 05/04/10 (unconfirmed)
Average Daily Volume: 1.6 million
Listed on March 30th, 2010


Warner Chilcott - WCRX - close: 25.52 change: +0.09 stop: 26.26

WCRX managed another bounce from support near $25.00 but the path of least resistance appears to be down. I am suggesting we use a trigger to open bearish positions at $24.80. If triggered our first target is $22.60. The 200-dma is nearing the $22.50 region and could offer technical support. Our second, more aggressive target is the $20.25 mark.

Trigger to open bearish positions @ 24.80

Suggested Position: SHORT WCRX stock at $24.80 (unopened)

Option Traders:
BUY the April $25.00 PUT (WCRX 10P25.00) current ask $0.50

Entry on March xx at $xx.xx
Earnings Date 05/11/10 (unconfirmed)
Average Daily Volume: 1.5 million
Listed on March 29th, 2010