Option Investor
Newsletter

Daily Newsletter, Monday, 4/5/2010

Table of Contents

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

Market Wrap

Markets Cheer Friday's Jobs Report

by Todd Shriber

Click here to email Todd Shriber
Equity markets were closed on Friday due to the Good Friday holiday, so Monday was the first chance equity investors had to officially react to Friday's jobs report that showed 162,000 new jobs were added in March. Apparently, investors liked the news as the Dow Jones continued to rally, gaining nearly 46.5 points to settle at 10,973.55. The S&P 500 inched closer to 1200 by adding 9.34 points to close at 1187.44 while the Nasdaq enjoyed another solid day, gaining almost 27 points to move well above 2400 with a close of 2429.53.

Stats Table

With the positive employment data, risk appetite was healthy on Monday as stocks got a lift from soaring commodities prices. Both copper and crude oil futures closed at new multi-month highs and when I say multi-month highs, I am not talking about two or three months. NYMEX-traded copper for May delivery gained 3.15 cents per pound to close at $3.6155. That is good for a 20-month high.

As for crude oil, last week, all eyes were on the $85 a barrel level and that number is a thing of the past. At least for now. The jobs report sent crude above $86 in electronic trading over the weekend and when U.S. markets opened today, traders were inclined to keep the rally going. That they did as NYMEX crude for May delivery gained $1.96, or 2.31%, to close at $86.83 a barrel, a level last seen on the way down in October 2008. The intraday high was $86.90.

Oil Chart

That was good news for energy stocks as 39 of the 40 energy names in the S&P 500 posted gains on the day. Among the usual suspects, Dow components Exxon Mobil (XOM) and Chevron (CVX), the two largest U.S. oil companies, were among the Dow's 22 gainers on Monday. It would appear that the new floor for oil prices is $75 a barrel and with OPEC seeing no reason to increase production, prices may head even higher despite tepid demand in the U.S. and Europe.

The energy sector looked poised for a good start to the week after some mergers and acquisitions news broke on Sunday evening. Independent oil and natural gas producer SandRidge Energy (SD) said it will acquire rival Arena Resources (ARD) for $1.55 billion in cash and stock. That values Arena at $40 a share, a roughly 17% premium to where the stock closed last Thursday. The price tag is impressive considering that Oklahoma-based SandRidge had a market cap of $1.59 billion as of Monday's close.

By its own admission, SandRidge is buying Arena to increase its exposure to oil, not a bad idea given where oil prices currently reside. The company said the acquisition will make it one of the biggest producers of West Texas conventional oil and natural gas. SandRidge has been trying to bolsters its oil portfolio for two years and this acquisition jibes with that effort.

SandRidge Energy Chart

Venezuela's oil minister said on Friday that there is no need for OPEC, which produces 40% of the world's oil, to boost production and that his country is comfortable with oil prices between $80 and $100 a barrel. Obviously, we are still a way's away from $100 a barrel, but the prospect of triple-digit oil prices is not an enticing one for the U.S. OPEC would not complain (keep in mind that Venezuela was the third-largest supplier of crude to the U.S. in 2009), but $100 oil would almost certainly hamper an economic recovery that is still in its nascent stages.

If consumers are faced with higher oil prices, they likely will not be inclined to make big purchases for cars, clothes and gadgets. Then again, Apple's (AAPL) denizens of loyal followers may represent a different breed. The company's much heralded iPad was made available to shoppers over the weekend and Piper Jaffray estimates that 300,000 iPads sold in the first day and perhaps as many as 700,000 were sold over the weekend. That compares with the 200,000 iPhones that were sold when that device made its debut.

Research firm BroadPoint AmTech estimated the sales number was in the neighborhood of 500,000-525,000 and Apple itself estimated 450,000 iPads would be sold over the weekend. Obviously Sunday was Easter Sunday and that means some Best Buys (BBY) and other places where an iPad could be acquired were closed, so if not for the holiday, the sales could have been even better.

Indulge me for a minute and assume that 500,000 iPads were sold over the weekend. Of course, sales will level off over time, but it is hard to argue this is another strong debut for an Apple product. It could also mean that about half of the analyst estimates for 2010 iPad sales in the chart I have included below are too conservative.

iPad Sales Estimates

Perhaps the most impressive aspect of the iPad's boffo debut is a combination of the following: A holiday weekend launch, a launch in an economy that still cannot be characterized as vibrant and a lofty $499 price tag. So if you in a high sales tax state like California and Texas, an iPad is going to cost you more than $550 when the tax is factored in. Need or want more than 16 gigs? Apple has you covered with plans for 32GB and 64GB iPads that cost $599 and $699 before tax, respectively.

The bottom line is the reason why Apple is such an admired company and why the stock seems to do nothing but go up is because the company can keep introducing expensive products that consumers do not really need, but intensely desire. Apple shares gained ''just'' $2.52 today to close at $238.49. Oddly enough, the stock did not even touch the 52-week high of $238.73 today. Do not fret. That was taken care of after-hours where Apple is trading at $239 as of this writing.

Apple Chart

A broader market theme that the bulls will like hearing about is the pace of share buyback announcements thus far in 2010. After unprecedented cost-cutting in 2009, companies are flush with cash and shareholders are rightfully clamoring for companies to reward stock owners via either dividends, share repurchases or both.

2009 Cash Chart

Of course, 2009 was a down year for buybacks, with S&P 500 constituents repurchasing just $137.6 billion of their own stock, or 28% of operating profits, according to Bloomberg News. Repurchase plans started to increasing in number during the second half of 2009 and that trend has continued this year with more than 200 companies announcing buyback plans, Bloomberg reported.

There have been plenty of marquee names to announce buyback plans this year including Tiffany (TIF), Warren Buffet favorite Washington Post (WPO), ConocoPhillips (COP), the third-largest U.S. oil company, and Dow component United Technologies (UTX). All of those headlines represented good news for shareholders of those companies, but all of those buyback plans pale in comparison to PepsiCo's (PEP) $15 billion plan, which is far and away the largest repurchase effort announced this year.

I am not sure if there is a correlation between the size of a company's buyback and the future performance of the shares, but on a historical basis, repurchase plans are bullish for equities. The best year on record for these plans was 2007, the year the S&P 500 made a record high.

Taking a look at the charts, the Dow flirted came with 12 points of 11,000 intraday and that number remains the first resistance point to be taken out. From there, the 11,120 area will be the next hurdle, followed by the 11,250 neighborhood. On the downside, 10,850 should function as a support level with perhaps a firmer floor at 10,730.

Dow Chart

As with the Dow, the S&P needs to contend with some round-number resistance at 1200. From there, 1225 is the next significant hurdle to be cleared, but there might be some issues in the 1210-1215 area. As it is, the index is firmly in bullish territory close to the 1190 level and any moves to the downside may not be a cause for concern unless 1150 is violated. Based on where the index currently trades, 1170 could be the stopping point of any bearish move in the near-term.

S&P 500 Chart

It was not that long ago that the Nasdaq was looking a little challenged, but a truly troublesome sign would be a move below 2350 and that does not appear probable, at least not this week. The Nasdaq has been battling with 2400 for several days, but Monday's close near 2430 might be far enough removed from 2400 that the bulls have something to build on and challenge resistance at 2460. A move beyond 2450 would be a bullish sign.

Nasdaq Chart

Being a bear is hard these days, but the volume on the upside is pretty benign, if not downright weak. I took a look at a smattering of higher-beta materials names after the market closed and while the dozen or so stocks and ETFs I looked at were all up on the day, they all traded at least 20% less shares than their daily average and Monday is not the first time this has happened. My feeling is that first-quarter earnings expectations are already priced into many stocks, meaning that strong upside surprises will be needed to continue driving stocks higher.


New Plays

Try, Try Again

by James Brown

Click here to email James Brown


NEW BULLISH Plays

Cash America - CSH - close: 41.18 change: +0.91 stop: 38.99

Company Description:
Cash America International, Inc. provides specialty financial services to individuals in the United States and Mexico with over 1,000 locations. We are the largest provider of secured non-recourse loans, commonly referred to as pawn loans, and operate under the brand names Cash America Pawn, SuperPawn and Prenda Fácil. (source: company press release or website)

Why We Like It:
We had CSH on the PremierInvestor play list for a while but shares never hit our trigger to open positions. This time the stock has broken out past resistance near $41.00 and closed at new 52-week highs. CSH makes short-term loans and with unemployment still high and likely to stay high the company should be doing a booming business. After four weeks of consolidating sideways in the $39-41 zone I suspect CSH is poised for a new leg higher. I'm suggesting bullish positions now with a stop at $38.99. Our first target is $44.90.

Suggested Position: CSH stock at $41.18(?)

Annotated chart:

Entry on April 06 at $41.18(?)
Earnings Date 04/22/10 (unconfirmed)
Average Daily Volume: 263 thousand
Listed on April 5th, 2010



In Play Updates and Reviews

A Short Squeeze in REITs

by James Brown

Click here to email James Brown

Editor's Note:

Bulls appear to be firmly in control. We can refocus on bullish candidates but I would keep positions on the small side to limit your risk.

Current Portfolio:


BULLISH Play Updates

AU Optronics - AUO - close: 11.97 change: +0.32 stop: 10.90

The rally continues for shares of AUO. The stock actually gapped open higher at $11.77 and surged toward recent resistance near $12.00. Don't be surprised if the stock corrects first before moving higher. I would use any dip in the $11.70-11.50 zone as a new entry point. More conservative traders may want to wait for AUO to clear possible resistance at the $12.00 level first. Our target is the January highs in the $13.20-13.30 zone. FYI: The Point & Figure chart is very bullish and forecasts a $21 long-term target. I suggested we keep our position size small.

Current Position: AUO stock @ 11.77

Entry on April 05 at $11.77
Earnings Date 04/22/10 (unconfirmed)
Average Daily Volume: 2.5 million
Listed on April 3rd, 2010


Broadcom Corp. - BRCM - close: 34.63 change: +1.48 stop: 31.75

Semiconductor stocks were some of the best performers today. The SOX index rallied almost 3% and closed at new 52-week highs. Shares of BRCM managed to keep pace and closed higher with a 3% gain and a breakout past resistance. Odds look good that BRCM will hit our first target tomorrow. Nimble traders could use this move as a new entry point but consider a stop loss just under last week's low. 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


BorgWarner Inc. - BWA - close: 38.37 change: -0.85 stop: 36.90

I was surprised to see the relative weakness in shares of BWA on Monday. The stock saw a brief spike higher and quickly reversed on no news. Nimble traders may want to consider trying to buy a dip or a bounce near the 50-dma. I am suggesting readers stick with our original plan and wait for a breakout over $40.00.

We'll use a trigger to open bullish positions at $40.25. If triggered our target is $44.75. BWA doesn't move super fast so this could take a few weeks for the stock to get there. Our initial entry point and stop loss set up is somewhat aggressive. More conservative traders may want to use a tighter stop. My biggest concern is that BWA might see an intraday spike over $40.00 and then reverse on us. Overall the stock looks bullish after months of consolidating sideways. The Point & Figure chart looks very bullish and is forecasting a long-term $55 target.

Trigger to open bullish positions $40.25

Suggested Position: BWA stock @ 40.25 (unopened)

Option Traders:
Suggested Position: Buy CALL May $40.00 (BWA 10E40.00) current ask $1.15

Entry on April xx at $xx.xx
Earnings Date 04/29/10 (unconfirmed)
Average Daily Volume: 1.8 million
Listed on April 3rd, 2010


Linear Tech. - LLTC - close: 28.99 change: +0.58 stop: 27.70

Semiconductor stocks were showing relative strength on Monday. LLTC managed a 2% rally but shares stalled near $29.00 resistance. The trend of higher lows is still bullish and a close over $29.15 would confirm that the up trend is still alive. 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: 11.04 change: +0.16 stop: 10.60

PMTI outperformed the broader market with a 1.4% gain. The close over the $11.00 mark is also a bullish development. Aggressive traders may want to consider new positions here but if you do I would use a very tight stop loss.

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


BEARISH Play Updates

Corrections Corp. of America - CXW - close: 19.82 chg: +0.02 stop: 21.05

Once again CXW tried to rally and once again the stock failed at resistance near $20.00 and its 50-dma. This could be used as a new bearish entry point. However, more conservative traders may want to use a tighter stop loss. 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


MAXIMUS Inc. - MMS - close: 61.11 change: +0.23 stop: 62.11

Originally our plan was to open bearish positions on a breakdown with a trigger at $59.80. However, with the market's break higher today we are faced with the possibility that MMS will breakout higher from this four-week consolidation. If that happens we need to be flexible. I am adding a trigger to buy the stock at $62.25. If triggered at $62.25 we'll use a stop loss at $59.80. Our bullish target will be $67.00.

If triggered at $59.80 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.

TWO TRIGGERS, One Bearish, One Bullish

Trigger for bearish positions at $59.80

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

Trigger for bullish positions @ 62.25

Suggested Position: BUY MMS stock at $62.25 (unopened)

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


Warner Chilcott - WCRX - close: 26.08 change: +0.48 stop: 26.26

WCRX was not immune to the market's widespread gains on Monday. The stock added 1.8% but failed to breakout past its 50-dma. If we do see WCRX close above the $26.50 level we'll drop it as a bearish candidate.

I don't see any further changes from my prior comments. 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


CLOSED BULLISH PLAYS

UltraShort Russell2000 ETF - TWM - close: 19.43 change: -0.39 stop: 19.65

I am giving up on the TWM as a bullish candidate. The market's widespread strength and surge to new 52-week highs is evidence the bulls are still in control. This ETF never hit our trigger to open bullish positions so I'm dropping it as a trading candidate.

Trade Never Opened

Trigger to buy the TWM at $20.85

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

chart:

Entry on March xx at $xx.xx *never opened*
Earnings Date --/--/-- (unconfirmed)
Average Daily Volume: 4.5 million
Listed on March 27th, 2010


CLOSED BEARISH PLAYS

EastGroup Properties - EGP - close: 38.56 change: +0.86 stop: 39.55

The market's widespread rally spooked bearish investors on Monday and the REIT stocks saw a short squeeze. Shares of EGP gained 2.2%. While the larger picture for EGP still looks bearish I am suggesting we exit positions early right now to cut our losses. We can reconsider new positions if the rally fails under $40.00.

Exit Early

Closed Position:(SHORT) EGP stock at $38.56
Entry was at $37.83

chart:

Entry on April 01 at $37.83
Earnings Date 04/28/10 (unconfirmed)
Average Daily Volume: 137 thousand
Listed on March 31st, 2010


MACERICH Co. - MAC - close: 40.43 change: +1.66 stop: 41.51

MAC also saw a sharp rally most likely fueled by short covering. The breakout back above the $40.00 level is short-term bullish. I am suggesting we exit bearish positions early. The plan was to keep positions small.

Exit early

Closed Position: SHORT MAC stock at $40.43
Entry was at $38.80

chart:

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