Option Investor
Newsletter

Daily Newsletter, Monday, 4/19/2010

Table of Contents

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

Market Wrap

Stocks Rebound From Friday Plunge...Sort Of

by Todd Shriber

Click here to email Todd Shriber
Stocks bounced back from Friday's Goldman Sachs (GS)-led sell-off, well at least two of the three major U.S. indexes did. The Nasdaq was the lone laggard, falling 1.15 points to close at 2480.11 while the Dow Jones Industrial Average gained just over 73 points to finish the day at 11,092.05 and the S&P 500 added about 5.4 points to settle at 1197.52. While volume was decent, breadth was not as decliners outpaced advancers on both the NYSE and the Nasdaq by roughly 600 issues. On the other hand, the ratio of new highs to new lows on both exchanges was about six-to-one.

Stats Table

Not surprisingly, there was more Goldman Sachs news for investors to contend with today as the Securities and Exchange Commission (SEC) reportedly voted 3-2 in favor of pursuing enforcement action against Wall Street's most profitable and vilified investment bank. According to unidentified sources, the vote, which was not public, took place along party with the SEC's two Democratic commissioners and Chairman Mary Schapiro voting in favor of the case while the two Republican members of the panel voted against pursuing enforcement action.

After shedding 13% on Friday and leading the broader market to one of its worst performances in months, Goldman shares were up on Monday, but they did little to put a dent in Friday's big loss. The stock was up $2.62, or 1.63%, to $163.32 on volume that was more than quadruple the daily average. Tuesday will be another busy day for Golman shares as the company reports first-quarter earnings at 7AM New York time. Analysts expect the company to earn $4.01 a share on revenue of $11.61 billion. Obviously, a significant upside surprise and robust guidance will be needed to help the stock regain more of Friday's losses.

Goldman Sachs Chart

Staying with financials, Citigroup (C) notched a solid gain on Monday, jumping 32 cents, or 7%, to settle at $4.88 after reporting better-than-expected first-quarter results. Citi said it earned $4.4 billion, or 15 cents a share, in the quarter, compared with a loss of $696 million a year earlier. Analysts were expecting the bank to post a small loss for the quarter. Citi's equity and fixed income trading operations were a boon for the bottom line in the quarter, but it should not be lost on investors that the bank did say bad loans fell for the third straight quarter and that it is setting aside less cash to cover loan losses.

If nothing else, Citi is following in the footsteps of rivals Bank of America (BAC) and JPMorgan Chase as both firms made similar comments last week when delivering their quarterly updates. CEO Vikram Pandit remains cautious about the broader economy, but one analyst went so far as to call Citi ''very healthy'' and name the firm ''the brightest of all the big banks these days.'' A glowing assessment to be sure, but Citi shares are still struggling to break above $5. When that happens, the stock may move another leg higher because many fund managers do not buy stocks that trade for less than $5.

Citigroup Chart

While financials may have enjoyed a decent day, the same cannot be said for commodities and materials names. Hampered by the trials and tribulations of Goldman Sachs, oil prices moved lower yet again. The May contract expires tomorrow, but the more active June contract declined $1.54, or 1.8%, to $83.13 on the NYMEX. The Monday sell-off in oil follows news that traders are actually liquidating some of their bullish bets on black gold. Data released by the Commodities Futures Trading Commission last week showed that more long positions were liquidated during the week ending April 13 than short positions.

Dow components Exxon Mobil (XOM) and Chevron (CVX) were able to shake off oil's decline and book small gains on Monday while Europe's two largest oil producers, BP (BP) and Royal Dutch Shell (RDS-A) were down fractionally. Splitting the tie was Brazil's Petrobras (PBR), which gained 1.42% on Monday.

Oil Chart

The integrated oil names do not start reporting first-quarter results until next week, but this week is active in terms of reports from the oil services group. Halliburton (HAL), the world's second-largest provider of oil services behind Schlumberger (SLB), said its first-quarter profit fell 46% to $206 million, or 23 cents a share, from $378 million, or 42 cents a share, a year earlier. Excluding one-time items, Halliburton earned 28 cents a share, topping the consensus estimate of 25 cents a share. Revenue slumped 4% to $3.76 billion.

Texas-based Halliburton said strength in the North American helped make up for some weakness in Latin America, but the company said it expects a ''resurgence'' in international activity through the second half of this year and into 2011. One indication that Halliburton is expecting things to get better in 2010 is the fact that the company hired 1200 new staffers in the first quarter after reducing its headcount by 6000 last year.

Other oil services name due to report earnings this week include Weatherford International (WFT) on Tuesday, Diamond Offshore (DO) on Thursday and Schlumberger on Friday.

Halliburton Chart

Technology was somewhat weak on Monday with both Apple (AAPL) and Google (GOOG) showing small losses, but the sector may have gotten a lift heading into Tuesday as Dow member IBM (IBM) delivered better-than-expected results after the market closed. IBM said it earned $2.6 billion, or $1.97 a share, in the first quarter compared with $2.3 billion, or $1.70 a share, a year earlier. IBM had been beating profit expectations by cutting costs, but the during the first quarter, the company actually showed top-line growth of 5% with sales of $22.9 billion.

Analysts had been expecting IBM to earn $1.93 a share on revenue of $22.8 billion. IBM executives did not comment on whether information technology spending is recovering in earnest, but the company did say it likes the way the current quarter is shaping up. The revenue rise in the first quarter was helped foreign currency fluctuations, but IBM said its second-quarter top line should increase without currency adjustments.

All was not rosy though as IBM said revenue in its services division, the company's largest business, would have declined 2% if not for forex adjustments. If you are looking for positives, IBM did say its software sales jumped 11% to $5 billion during the quarter and the company boosted its 2010 outlook to $11.20 a share. Analysts had been forecasting $11.12 a share. The shares were up $1.60 to $132.23 on Monday, but are down $2.83 to $129.40 in the after-hours session.

IBM Chart

In other news regarding members of the Dow, consumer products giant Procter & Gamble (PG) announced a 9.5% increase to its quarterly dividend. The company will now pay 48 cents a share up from 44 cents. The maker of Tide laundry detergent and Bounty paper towel raised its dividend by 10% last year has now raised its payout for 54 straight years and has been paying a dividend every year since it was founded in 1890. Procter & Gamble's new dividend is payable on or after May 17 to shareholders of record on April 30.

Looking at the charts, the Dow did see a nice rebound following Friday's ''crash.'' The up trend remains in place and it would appear that the index has found support at 11,000. Only six of the 30 stocks in the Dow were down on Monday with Alcoa (AA) the biggest percentage loser after shedding 1.37%. It would not be surprising to see the Dow open down a little bit tomorrow if IBM's earnings are now warmly received. By price tag, IBM is the most expensive stock in the price-weighted index.

It is a busy week for Dow earnings with Coca Kola (KO) and Johnson & Johnson (JNJ) both reporting tomorrow. JNJ is another name to watch for a dividend increase as April is typically the month when the company boosts its payout.

Dow Chart

Obviously the Goldman Sachs news is major obstacle for the S&P 500 returning to the 1210 area, but support can be found just below 1190. Goldman could help right the S&P 500's ship tomorrow with a good earnings report and there are still about 100 members of the index due to report earnings this week, so there may be some catalysts for a small bounce. In addition the other names that I mentioned that will deliver earnings tomorrow, Brinker International (EAT), Delta Airlines (DAL) and US Bancorp (USB) all report before the bell and each one could provide more clues regarding the health of the U.S. consumer.

S&P 500 Chart

Let's be honest. The Nasdaq ran into problems late last week because of Google and if the index is going to make its way back above 2500 to make some fresh highs, this is the week to do it. Yahoo (YHOO) reports after the bell tomorrow, but most eyes will be on Apple (AAPL), which also delivers earnings after the close. Analysts expect Apple to post a profit of $2.44 a share on sales of $12.06 billion, but simply meeting those expectations will not be enough. Apple needs to show blow-out results to energize the Nasdaq and get investors excited about technology again. eBay (EBAY) and Qualcomm (QCOM) report on Wednesday.

Nasdaq Chart

It is hard to forecast when this Goldman situation is going to abate and it is likely that some investors may take the earnings report tomorrow, no matter how good it is, with a grain of salt. Goldman may now be seeing the big disadvantage to becoming a bank holding company: The government can now scrutinize Goldman and its brethren in way that could have only been dreamed of prior to the financial crisis.

With plenty of earnings reports due out this week, the theme of bullish 2010 guidance needs to hold and any Nasdaq constituent that goes the way of Google and disappoints the Street will be punished in similar fashion. I expect a couple of more small up days, but nothing to get really excited about.


New Plays

This new play is on the global recovery

by Scott Hawes

Click here to email Scott Hawes


NEW BULLISH Plays

Excel Maritime Carriers Ltd. – EXM – close 6.55 change +0.00 stop 5.90

Company Description:
Excel Maritime Carriers Ltd. (Excel) is a provider of worldwide sea borne transportation services for dry bulk cargo, including among others, iron ore, coal and grain, referred to as major bulks, and steel products, fertilizers, cement, bauxite, sugar and scrap metal, referred to as minor bulks. The Company’s fleet consists of 40 vessels and, together with seven Panamax vessels under bareboat charters, it operates 47 vessels, consisting of five Capesize, fourteen Kamsarmax, 21 Panamax, five Handymax and two Supramax vessels. In addition, the Company has also assumed five joint venture vessel-owning companies, six shipbuilding contracts for six Capesize vessels. Its subsidiaries include Maryville Maritime Inc. (Maryville), Point Holdings Ltd. and Bird Acquisition Corp.(source: company press release or website)

Why We Like It:
EXM has broken a downtrend line from August and also has upward trend line support from February that is intact. The stock curled back around to test the broken trend line which intersected with its upward trend line today, and I feel EXM is poised to bounce from here. The stock is above its 20-day, 50-day, and 100-day SMA's but will have to contend with its 200-day SMA which it has recently retreated from. Today EXM tested its lows from Friday and bounced nicely as it did on Friday as well. I am suggesting opening bullish position at $6.50. I feel that the stock will test its YTD highs so we are placing a target at $7.45 which is just below the high from January 11. Our stop is below the 50-day SMA at $5.90. Our time frame is several weeks.

Trigger to buy EXM stock at $6.50

Suggested Position: Long EXM stock @ $6.50

Annotated chart:

Entry on April xx at $xx.xx
Earnings Date 05/19/10 (unconfirmed)
Average Daily Volume: 1.2 million
Listed on April 19th, 2010


In Play Updates and Reviews

Stopped Out of AUO

by Scott Hawes

Click here to email Scott Hawes

Editor's Note:

Good evening traders. The day ended up with a fierce rally into the close in anticipation of Goldman Sachs earnings tomorrow morning. The earnings report will give GS the chance to publicly speak and defend itself against the SEC allegations. Most analysts expect a very strong earnings report which may spark a rally, but one that I think will be sold into. It feels like the market is going to consolidate here as traders digest earnings. And the longer it sits here without making new highs the chances increase for a sell-off. We got defensive on our positions over the weekend and we our well positioned for a sell-off should it occur. I suggest being nimble with position management as the market is being driven by news which can create whipsaws in both directions.

Current Portfolio:


BULLISH Play Updates

Medicis Pharmaceutical Corp. – MRX – close: $25.12 change -0.15 stop: $23.95 *NEW*

MRX looked weak this morning but buyers stepped in at $24.40 and the stock rallied + $0.72 from there. The stock is still above its 50-day and 100-day SMA's, however, it also dipped below support at $24.75 and its upward trend line before taking them back. This may just be a head fake but we'll have to see how things play out in the coming days. Our stop remains at $23.95, which is below the 50-day SMA. Our first target is $26.50 and our second target is $27.75, which is just below its 52-week high. Readers who do not have positions can consider entering at current levels. Our time frame is a couple of weeks.

Current Position: MRX stock @ $25.00

Entry on April 14 at $25.00
Earnings Date 5/06/2010 (unconfirmed)
Average Daily Volume: 1.0 million
Listed on April 13th, 2010


Patterson Companies - PDCO - close: 31.80 change: -0.22 stop: 30.49

PDCO consolidated today closing down -0.69%. My comments are basically the same as Saturday's updates. I am still suggesting readers be defensive. It appears PDCO wants to test its highs from 2008 (see the weekly chart below), however, if the market corrects PDCO may not be able to get the legs to follow through. The stock is also forming a bearish wedge pattern and if it breaks too far below $31.00 I don't want to be involved. Therefore, we raised our stop to $30.49 and lowered our target to $33.25 on Saturday. Conservative traders should consider taking profits or tightening stops on any strength in the stock. Our time frame is a couple of weeks.

Current Position: PDCO stock at $31.50

Annotated chart:

Entry on April 14th at $31.50
Earnings Date 05/17/10 (unconfirmed)
Average Daily Volume: 975 thousand
Listed on April 6th, 2010


Powershares UltraShort Real Estate - SRS - close: 28.97 change: -0.26 stop: 27.60

After peeking below its 20-day SMA, SRS rallied back to close above it for the second consecutive day. Although SRS gave back some of our gains from last week closing down -0.92%. There is a congestion zone right at $30.00 which is where SRS started to sell-off today. This creates an inflection point and I would like to move down our 2nd target to $29.64 which is just below today's highs. Our 1st target was hit on Friday. A more aggressive 3rd target is $32.90. If SRS trades to our new 2nd target of $29.64 I suggest selling half of your position and move up stops on the remainder. A logical new stop could be placed at $28.25. But until that happens our stop remains at $27.60, which will ensure a +5% gain if SRS reverses from here. Conservative traders should consider exiting positions now to lock in gains.

I want to remind readers that I consider this is a very aggressive play so please use smaller position size to limit risk. *NOTE: Although this is listed as a long position in our portfolio, this is a bearish position on real estate stocks.*

Current Position: Long SRS @ $26.25

Entry on April 14th, 2010
Earnings Date Not Applicable
Average Daily Volume: 11.0 million
Listed on April 8, 2010


BEARISH Play Updates

Powershares QQQQ Trust - QQQQ - close: 49.50 change: -0.03 stop: 50.95

QQQQ was very weak this morning, trading down -1.27%, but rallied back in the afternoon with the broad market to close just about flat. This created a bottom tail candlestick on its daily chart, but QQQQ made new lows so I still like the set-up. In addition, QQQQ has not touched its 20-day SMA (currently at $48.72) since February and it is overdue for a meaningful pullback. Earnings could keep the markets buoyant this week but I feel at some point traders will be looking to take profits. 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

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

Entry on April 12th, 2010
Earnings Date Not Applicable
Average Daily Volume: 49.4 million
Listed on April 10, 2010


CLOSED BULLISH PLAYS

AU Optronics - AUO - close: 11.08 change: -0.14 stop: 11.04

AUO traded down to our stop this morning and we are flat on the position. The stock looks weak and is now below its 20-day, 50-day and 100-day SMA's. The stock has been in a recent downtrend and with the overall market under pressure it is time to exit. We are taking a -6.30% loss on the trade. If readers still have positions I would either place a stop below today's low at $10.95 or below the 200-day SMA, which is currently at $10.77. Note: We have considered this an aggressive trade and recommended small position size to limit risk.

Closed Position: AUO stock @ 11.04, entry was at 11.77

Annotated chart:

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