Option Investor
Newsletter

Daily Newsletter, Tuesday, 4/13/2010

Table of Contents

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

Market Wrap

Typical Earnings Squeeze

by Jim Brown

Click here to email Jim Brown

The rebound into the close today was a typical pre earnings spike as shorts covered ahead of a possible upside surprise from Intel.

Market Stats Table

The short squeeze into the close was rather muted because of the early morning dip. Anyone who was short had a perfect chance to cover on the morning dip. When the market returned to its highs and stalled a few bears tried to short it again at 2:PM but it was a short-lived decline. They bailed ahead of the close leaving only those who wanted to be long over the Intel earnings. Overall it was a lackluster day but at leaset there was a successful test of initial support on the dip.

Intel rallied to close at its 52-week high at $22.80 ahead of earnings. Intel reported earnings of 43-cents per share compared to 11-cents in the year ago quarter. Revenue was $10.3 billion, up from $7.1 billion. Analysts were expecting earnings of 38-cents on revenue of $9.8 billion. Gross margins rose to 63% compared to estimates of 61.3%. They predicted margins of 64% +/- 2% for the current quarter. Since everyone had already raised their estimates as the quarter progressed they were already high. For Intel to beat those already high estimates by a nickel this was a really strong quarter. They are predicting revenue in Q2 of $10.2 billion and that is well above the $9.69 billion analysts expected. On the conference call they said they would hire 1000-2000 new workers. That is the first new hires in five years. Intel shares spiked to a new 52-week high at $23.73 in after hours on the earnings news.

Chart of Intel

The other major report after the close was CSX. The railroad reported a +21% jump in earnings to 78-cents compared to 64-cents in the year ago quarter. Revenue rose +11% to $2.5 billion. Analysts were expecting 70-cents and $2.38 billion. CSX said it had invested nearly $5 billion in upgrading its network over the last three years and is investing another $1.7 billion in 2010. The CSX network spans approximately 21,000 miles with service to 23 eastern states and 70 ports. CSX did not give guidance in the release and their conference call is scheduled for Wednesday morning. Shares of CSX gained +1.50 in after hours trading to a new 52-week high.

Chart of CSX

Alcoa reported earnings after the bell on Monday. Alcoa posted a better than expected loss of $201 million from the $497 million loss in the year ago quarter. However top line revenue was less than analysts expected. Positive guidance kept the stock from tanking but it did trade down on Tuesday. The weak report from Alcoa took some of the bloom off the earnings rose with markets around the world trading down on Tuesday.

Chart of Alcoa

On the earnings calendar for tomorrow we have JPM, SCHW, YUM, ASML, GWW, ADTN and LSTR. JP Morgan will be the most watched for input on the financial sector with Schwab the backup report on retail investor trends. Yum Brands will be another reading on the health of the consumer. We saw a marked decline in spending on restaurants and fast food during the recession. Yum should tell us that spending has increased.

However, we have seen recently that consumer spending has declined slightly as gasoline prices inch upward. Demand for petroleum products has declined for three consecutive weeks. The MasterCard spending pulse report showed today that gasoline purchases fell by -3.6% last week. The Oil Price Information Service reported today that the national average for gasoline rose to $2.84 per gallon over the weekend.

Fortunately crude prices have declined for the last week and appear to be losing some of their luster. This is a very good thing for the recovery. I wrote an article last night on why oil over $85 would lead to a slow down in the recovery or even a second dip. You can read it here. Triple Digit Recovery Killer


Are you getting my daily energy newsletter? If you want to know what is happening in the energy markets on a daily basis just click the link below to sign up. The cost is FREE and you can't beat a deal like that.

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On the economic front the Import & Export Price report for March showed that import prices rose only 0.7% in March compared to a -0.2% decline in February. The majority of this gain came from a +4% jump in crude prices. On a year over year basis crude prices are up +70.2%. Outside of oil prices there are no inflationary pressures coming from the import side. This is added assurance the Fed should be in no rush to raise rates. Export prices, the money we receive for goods, rose by +4.6%.

The International Trade report for February showed the trade deficit widened to -$39.7 billion from -$37.3 billion in January. Imports and exports both rose and returned to a pattern of growth. Imports increased +1.7% to $182.9 billion and exports rose +1% to $143.2 billion. Petroleum imports increased to $22.9 billion.

On the calendar for tomorrow we have Mortgage Applications, Consumer Price Index, Retail Sales, Business Inventories, Oil and Gas Inventories and the Fed Beige Book. Also, Ben Bernanke will testify on the hill and analysts will be watching to see if he drops the "E" bomb. By that I mean will he mention the FOMC statement on April 28th may not contain the extended period language. I seriously doubt he will mention it in this appearance but anything is always possible.

Secondly the Fed Beige Book has the potential to move the market if the Fed changes its regional outlook on the economy in any material way. If they maintain a level outlook then the report will be ignored.

Ford's president Mark Fields was spreading cheer today saying demand for Ford's cars and trucks was very strong. He said Ford was benefiting from the Toyota problems as well as customer good will since Ford did not take a bailout. Fields said Ford gained 2.7% additional market share in Q1. That is the largest market share gain since 1977. To put that in perspective Saturday Night Fever and Close Encounters of the Third Kind were the hot movies in theaters at the time. Fields said the F-Series pickup now has 38.5% of the U.S. market, up from 33.2% in Q1-2009. He said sales of the Ford Fusion jumped +81% for the quarter. Ford incentives declined -$300 in the quarter while Toyota's rose by +$700. Fleet sales to government, commercial and rental-car companies rose +81% in Q1 suggesting the quarter will not be repeatable without those monster gains. Sales to retail customers rose +21% compared to an industry average of +8%.

The banking sector lost ground ahead of the JP Morgan earnings but primarily because UBS downgraded the regional banks. UBS said the sector was "poised for a meaningful pullback." UBS said the pace of earnings recovery will fall well short of expectations and the rally and current valuations are unsustainable. UBS cut HBAN, KEY, RF and TCF to sell and CBSH to neutral from buy. However, UBS said banks could continue to rise through the earnings cycle and then begin their decline.

Chart of the Banking Index

The Dow transports closed at a new 52-week high and this was before the CSX earnings. The transports are up on a combination of airlines flying full planes and making more money through charges for baggage, seating preferences and now visits to the restroom. JetBlue spiked +7.4% today after projecting a 9% improvement in March traffic and a 17% increase in unit revenue. The shippers are up on higher package volume and railroads are seeing traffic increase. This should be a positive sign for the economic recovery as long as the price of oil remains under $85. The CSX earnings should provide a significant boost to the transport average. Airlines remain a trade but not a long-term investment.

Dow Transport Chart

Now that Intel has reported blowout earnings this should mean that other tech companies will also post good results. Intel is high up on the food chain and a strong sales forecast from Intel means that companies downstream from Intel are also seeing strong sales. It also means that investors now know what the rest of the tech earnings should look like. In recent past quarters we saw the market lose momentum once Intel reported. Since Intel reported a week early in this cycle it may be premature to suggest a decline this week. However, with more than 500 major companies reporting next week including Microsoft and IBM the incentive to remain invested after next week will fade.

Volume has picked up slightly and today's dip triggered enough stops to push volume over 9.1 billion shares on a consolidated basis. Unfortunately 1.3 billion of those shares were in only two stocks. Citigroup is always at the top of the leader board with 600 million but Ambac took the top spot today with 726 million shares. Ambac (ABK) rallied from 64-cents last Thursday to $3.39 this morning. The rally in Ambac was short covering after news broke about an unexpected tax benefit and a plan by regulators to split the bond insurer from its toxic assets and leave a company that would be self sustaining and profitable. This caused a monster short squeeze before the analysts started trashing these views. JP Morgan was quick to remind traders that Ambac shares have no equity value. "We believe a short in Ambac will generate attractive long-term returns" according to JPM. Once the short squeeze ended the selling was brutal.

Chart of Ambac

The Dow has closed over 11,000 twice now but the conviction has been very weak. After two positive closes over 11,000 the Dow has only managed to add +19 points. Obviously Wednesday's open should be strong because Intel is a Dow component BUT the S&P futures are already off their afterhour's highs. The Dow futures are only up +14 points and that is chump change for the Dow.

The morning dip was exactly to initial support at 10,950 and it was immediately bought. Bulls are still alive but they are not buying the highs. The telltale signal will be when the dips are no longer bought. That will be a clear sign the bulls have left the building.

Dow Chart - 30 Min

Dow Chart - Daily

I am more concerned about the S&P and its avoidance of 1200 than the Dow's flirtation with 11,000. I believe SPX 1200 is electric fence resistance on the S&P. When that level is touched the shock could know us back into last week. Whether it will occur or whether it will be lasting is of course up for debate. This is solid uptrend resistance and the recent S&P gains have been anemic. Now that quarter end retirement cash flows have faded we could have a difficult time moving over this level. Initial support is 1190, followed by 1180 and 1170.

S&P-500 Chart - 60 Min

S&P-500 Chart - Daily

On the positive side the Nasdaq has broken through uptrend resistance at 2450 and given Intel's earnings and the impact on other tech stocks we could see further upside on Wednesday. The next material resistance is 2500-2520. At this point the Nasdaq could be the index that keeps the rest for imploding at least until the rest of the big cap techs report next week. I am not specifically bullish on the Nasdaq but the chart is positive as long as the move over 2450 continues.

Nasdaq Chart

The Russell is in "me too" mode. The close over 705 is bullish but the miniscule size of that gain shows a definite lack of conviction. Traders bought the dip to 700 this morning but the momentum faded once the 705 level was reached. It is as though everyone is waiting for a signal from everyone else. Traders have run out of conviction and fears of an impending correction are growing.

Russell-2000 Chart

In summary, all the fundamental signs are bullish. Intel had great earnings (already priced in) and guided higher. Their conference call highlights suggested strong downstream sales of products at the retail level. This should mean those downstream companies also had a strong quarter. Unfortunately all of this information was already expected but we just did not know to what degree the earnings would exceed estimates.

I continue to believe the markets will maintain a positive bias through option expiration and possibly through the early part of next week when the other major companies report. Towards the end of next week I remain cautious. With the majority of the major earnings over by Thursday and a Fed meeting the following week I am concerned that traders will soon begin to take profits and move to the sidelines.

Jim Brown


New Plays

This Pharmaceutical Company Looks Ready for a Bounce

by Scott Hawes

Click here to email Scott Hawes


NEW BULLISH Plays

Medicis Pharmaceutical Corp. – MRX – close: $24.95 change -0.66 stop: $23.45

Company Description:
Medicis Pharmaceutical Corporation (Medicis) is a specialty pharmaceutical company focusing primarily on helping patients attain a healthy and youthful appearance and self-image through the development and marketing in the United States of products for the treatment of dermatological and aesthetic conditions. The Company also markets products in Canada for the treatment of dermatological and aesthetic conditions. It also has operations in Europe. The Company offers a range of products addressing various conditions or aesthetic improvements, including facial wrinkles, acne, fungal infections, rosacea, hyperpigmentation, photoaging, psoriasis, seborrheic dermatitis and cosmesis (improvement in the texture and appearance of skin). On June 10, 2009, the Company sold Medicis Pediatrics, Inc.(source: company press release or website)

Why We Like It:
MRX is approaching multiple support levels. The stock has been finding support at $24.75 level for the past couple of weeks, which is also just above prior resistance from October 2009. The stock's 50-day and 100-day SMA's are just below current levels and there is also an upward trend line that MRX touched today at $24.73. I like MRX at current levels and am expecting a bounce from here to at least re-test its highs from the last several weeks near $26.50, which is our first target. We have a second target at $27.75 which is just below its 52-week high. We will place a stop at $23.45 which is near a prior resistance level and also below the aforementioned SMA's. Our time frame is several weeks.

Suggested Position: Buy MRX stock @ $24.95 (?)

Annotated chart:

Entry on April xx at $xx.xx
Earnings Date 5/06/2010 (unconfirmed)
Average Daily Volume: 1.0 million
Listed on April 13th, 2010


In Play Updates and Reviews

Intel Earnings May Cause Markets to Gap Up

by Scott Hawes

Click here to email Scott Hawes

Editor's Note:

Good evening traders. In my market update this afternoon I alluded to the fact that trying to squeeze out more gains to the upside is becoming more and more stressful. As the markets appear to be continuing their melt-up - closing higher 8 out of the last 9 weeks - traders will be looking for reasons to take profits on their long positions in the coming days/weeks. This thought process enabled us to sell BRCM into strength today for a nice gain. However, we were also stopped out of CXW as the stock reversed hard. So until the next larger directional move becomes clear traders need to be nimble when managing positions.

Current Portfolio:


BULLISH Play Updates

AU Optronics - AUO - close: 11.40 change: -0.18 stop: 10.90

Buyers stepped into AUO today around the $11.20 area which also corresponds to the low from April 8. This may have formed a double bottom and AUO looks poised to rally, although I am cautious of a broader market sell-off. We need AUO to break above $12.00 for this trade to work and hit our target $13.25. If it breaks below $11.00 we will honor our stop at $10.90 and step aside to preserve capital. Aggressive traders could still consider entering the trade as I believe there is a lot of support with the SMA's just below AUO. Our time frame is one to two weeks. Note: I consider this an aggressive trade and recommend small position size to limit risk.

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


BorgWarner Inc. - BWA - close: 38.89 change: +0.15 stop: 37.95 *NEW*

BWA closed up +0.39% today. I am viewing this trade as an aggressive trade at this point. If the overall market rallies it should work just fine, however, I don't want the stock to trigger our entry and then reverse. Officially our trigger to open positions is at $40.25. If triggered our target is $44.75. If triggered I am moving our stop loss up to $37.95 to limit our risk in the trade. Aggressive traders may consider opening positions if BWA stays above $38.40 but I would view this as a quick trade with a tight stop. 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 $1.10

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


Cash America - CSH - close: 40.48 change: -0.25 stop: 38.99

CSH closed down -0.61% today and continues to find resistance just below the $41.00 level which is about break-even for our trade. CSH still looks poised to continue its rally and we are looking for the stock to at least retest its highs from last week at $41.50. If the stock trades to this level conservative traders should begin to tighten stops or sell into strength. We need to see CSH follow through or we will be looking exit our position. I am not suggesting new positions at this time. Our target on CSH is $42.90.

Current Position: CSH stock at $41.05

Entry on April 06 at $41.05
Earnings Date 04/22/10 (unconfirmed)
Average Daily Volume: 263 thousand
Listed on April 5th, 2010


MAXIMUS Inc. - MMS - close: 62.60 change: +0.27 stop: 59.75

MMS followed through with another 52-week high today and is still above our key $62.00 level. The stock looks poised to continue breaking out. This is another new all time high for MMS so I am suggesting readers be careful. I would like to place a stop at $59.75 to give this some room but if there is overall market weakness readers may want to exit the position early. Our time frame is several weeks. I would like to lower our target on MMS to $64.75. This has nothing to do with the relative strength in the stock but more to do with managing an overbought market and being nimble. I want to remind traders that this is a somewhat aggressive trade since we normally do not trade stocks with average volume under 250K a day.

Current Position: MMS stock at $62.25

Entry on April 9 at $62.25
Earnings Date 05/06/10 (unconfirmed)
Average Daily Volume: 83 thousand
Listed on March 31st, 2010


Patterson Companies - PDCO - close: 31.23 change: +0.20 stop: 29.95

PDCO backed off of the $31.30 level again today. The ascending triangle on its daily chart remains intact. We are waiting for PDCO to breakout to new relative highs prior to initiating long positions. I suspect that if the market continues to rally we will get triggered in the coming days. Our stop of $29.95 is below PDCO's 20-day and 50-day SMA's as well below a prior support and resistance level from early March and late February, respectively. I am suggesting we open bullish positions at $31.50. If triggered we'll use a stop at $29.95. Our multi-week target is the $34.50 level.

Trigger to open bullish positions at $31.50

Suggested Position: PDCO stock at $31.50(unopened)

Entry on April xx at $xx.xx
Earnings Date 05/17/10 (unconfirmed)
Average Daily Volume: 975 thousand
Listed on April 6th, 2010


Powershares UltraShort Real Estate - SRS - close: 5.34 change: -0.28 stop: 4.95 *NEW*

Real estate stocks are not taking a breather and I am re-thinking our strategy on SRS. I suspect there will be one more push lower in SRS (higher in RE stocks) to shake out the weak hands and I am suggesting opening bullish positions in SRS to take advantage of it if it happens. We will use a very tight stop and will be right out of trade if it doesn't work. Here is what I am thinking: use a trigger to open long positions in SRS (which is a bearish play on RE stocks) at $5.25. Our first target will be $6.10 which is just below the highs from March 22. Our 2nd target will be $6.85 which is prior support from December. Our third more aggressive target will be $7.15 which is just below the low on January 19. Aggressive traders can consider positions at current levels.

This is a very aggressive play so please use smaller position size to limit risk. If triggered, our stop will be $4.95 which is just below the recent swing low on March 25. Our time frame is about two to three weeks. *NOTE: Although this is listed as a long position in our portfolio, this is a bearish position on real estate stocks*

Trigger to open long positions at $5.25

Suggested Position: Buy SRS if it trades to $5.25, Stop Loss $4.95 (unopened)

Entry on (unopened)
Earnings Date Not Applicable
Average Daily Volume: 11.0 million
Listed on April 8, 2010


BEARISH Play Updates

Powershares QQQQ Trust - QQQQ - close: 49.32 change: +0.25 stop: 50.95

After opening lower and selling off to $48.86, QQQQ closed higher by about +.50% today. We need QQQQ to trade below $48.86 get this trade going on our direction. Intel reported earnings after the bell and the futures were higher at the time of this writing. They may gap higher tomorrow which I think will give traders an excuse to take profits. When Intel reported on January 14 the markets traded initially higher and then sold off which sparked a -9% decline in the ensuing weeks. Time will only tell if something similar happens this time around. QQQQ moving averages will also provide support if it sells off. Our target remains $47.00 which is just above the lows from March 15. Our stop is $50.95.

Current Position: Short QQQQ at $49.05, Stop Loss $50.95

Option Traders:
Suggested Position: Buy PUT May $49.00, Ask at entry, $1.00

Entry on (unopened)
Earnings Date Not Applicable
Average Daily Volume: 49.4 million
Listed on April 10, 2010


Warner Chilcott - WCRX - close: 25.68 change: +0.22 stop: 26.26

WCRX continues to look bearish and we are waiting for the stock to break below $24.80 to initiate bearish positions. The stock has been bouncing off of the $25.00 level since late January and appears to be forming a descending triangle. Its 20-day, 50-day, and 100-day SMA are all overhead. At this point we need the overall market to cooperate.

I am suggesting we use a trigger to open bearish positions at $24.80. If triggered our first target is $23.00. The 200-dma is nearing the $23.00 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 MAY $25.00 PUT (WCRX 10P25.00) current ask $1.00, estimated ask at trigger price $0.60

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

Broadcom Corp. - BRCM - close: 34.51 change: +0.45 stop: 33.25

BRCM hit our new target of $34.40 today and we are now flat on the position. I believe lowering our target from $34.95 to $34.40 and locking in our +5.33% gain today was the right thing to do. The market feels toppy and is way overdue for a correction, even it is just a small one. Plus with Intel reporting earnings after the bell I wanted to reduce our risk in this trade. The last time Intel reported earnings on January 14 the market began a -9% correction in the ensuing weeks. Time will only tell if something similar happens. But when there is a sell-off in the semiconductors we will be looking for more bullish set-ups.

Closed Position: BRCM stock @ 34.40, entry was $32.66

Annotated chart:

Entry on March 11 at $32.66
Earnings Date 04/21/10 (unconfirmed)
Average Daily Volume: 8.0 million
Listed on March 10th, 2010


CLOSED BEARISH PLAYS


Corrections Corp. of America - CXW - close: 20.52 chg: +0.81 stop: 20.55

Ouch! CXW reversed hard today closing up +4.11%. I couldn't find any news causing the stock to rally. In any event, the market makers found our stops at $20.55 (-3.27% loss) and we are stepping aside as the stock could keep running from here. It convincingly closed above its 20-day and 50-day SMA's, however, it is also currently at trend line resistance. If it breaks above this trend line we don't want to be involved. If traders still have a position I would place a new stop just above today's high at $20.76.

Closed Position: Stopped out of SHORT CXW stock @ 20.55, entry was 19.90

Annotated chart:

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