Option Investor
Newsletter

Daily Newsletter, Wednesday, 4/28/2010

Table of Contents

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

Market Wrap

PIIGS Continue To Drop, But Stocks Rebound

by Todd Shriber

Click here to email Todd Shriber
More news of European fiscal woes was not enough to deter stocks from taking a small part of yesterday's big losses back as all three major U.S. indexes managed gains on Wednesday. The Dow Jones Industrial Average moved back above 11,000, gaining 53 points to finish the day at 11,045.27, but the S&P 500 could not reclaim 1200, adding less than eight points to settle at 1191.36. The Nasdaq, held back by restaurant stocks, added less than three tenths of one point to close at 2471.73.

Stats Table

While those gains are not much to get excited about and they certainly pale in comparison to Tuesday's loss, it can be argued that stocks moving higher by any amount on a day when Europe's sovereign debt woes continued to dominate the headlines is no small feat. Stocks and commodities were roiled yesterday on news of Portugal's credit rating being cut and continued concerns about the ability of the Eurozone and the International Monetary Fund to actually get a bailout package together for Greece.

The Portugal downgrade really should have not caught anyone by surprise as that country was widely speculated to be the next shoe to drop after Greece, and as I have previously noted, Portugal's economy is even smaller than Greece's. That said, this Greek tragedy is dragging on far too long and the amount of money the country may need seems to grow, and exponentially at that, every few days. For a while there it seemed like Greece needed about $60 billion to meet a May 19 deadline on debt coming due. That total is far higher than Greece originally said it would need.

To make matters worse, several media outlets reported today Dominique Strauss-Kahn, the head of the IMF, told German officials that Greece may need close to $160 billion over the next several years. At the close of trading on Tuesday, Greek bonds were sporting the highest yields in the world, even higher than comparable Venezuelan issues.

All of this is bad news, but remember that the acronym is ''PIIGS'' and that means there are several other candidates to make a mess of equity markets. Portugal and Greece have already chimed in. On Wednesday the ''S'' had its day in the day in the sun and I do not mean that in a good way. Standard & Poor's downgraded Spain's credit rating to ''AA'' from ''AA+.'' That means the country has a ''very strong capacity'' to pay its debts and the rating is still investment grade.

Again, this turn of events cannot be considered shocking. Sure, Spain's debt load is 53% of national income compared to 115% for Greece, according to the Associated Press, but Spain is the ninth largest economy in the world, so this is kind of a big deal. I say the Spain news is not surprising because in some regards, Spain's economy is eerily similar to that of the U.S. A real estate bubble fueled by easy access to credit spurred Spain's GDP in the go-go days of 2005-2007, but when the bubble burst, the aftermath was not pretty. Now Spain faces the specter of one of the highest unemployment rates in the Eurozone and future growth that can only be deemed sluggish.

There are no country-specific ETFs for Greece and Portugal, much to the chagrin of many short sellers, but there is a Spain ETF, the iShares MSCI Spain Index (EWP). To its credit, EWP was down less than 2% on volume that was more than triple the daily average. Then again, EWP is down almost 20% year-to-date.

Spain ETF Chart

The effects of the European contagion may be more wide-reaching than many investors previously imagined. I mean who would have thought this company would be taken to the woodshed on concerns of a European sovereign debt crisis? Aflac Duck

That is right, Aflac (AFL), a company known perhaps more for its advertising campaign than the products it sells, has roughly $2 billion in exposure to Greek and Portuguese debt. According to Bloomberg News, Aflac owns $1 billion in Greek bank debt, $750 million in Portuguese bank debt and another $285 million Greek sovereign debt. A toxic investment portfolio if there ever was one. The end result is on a day that Aflac reported first-quarter results that beat Street estimates, the stock still traded down by more than 5% on almost five times the average daily volume.

Alfac Chart

There were some bright spots for stocks on Wednesday. Dow Chemical (DOW), the largest U.S. chemicals maker, said its first-quarter profit rose to $466 million, or 41 cents a share, from $24 million, or three cents a share, a year earlier. Sales soared 48% to $13.42 billion from $9.04 billion. Analysts were expecting a profit of 30 cents a share on revenue of $12.9 billion.

Like rival DuPont (DD) said yesterday, Dow noted it is seeing signs of a strong economy. Dow's chemicals are used in a variety of products from agriculture seeds to furniture to electronics and appliances, so this is one company that has its pulse on the consumer and the economy at large. Improving home sales and durable goods data are positive catalysts for companies like Dow, but while the company did give a rosy assessment of the U.S. economy, demand growth was fueled by emerging markets, led by Brazil, China, India and Eastern Europe.

Dow also noted that it realized $275 million in synergies related to its acquisition of Rohm & Haas, a purchase that was viewed as controversial when the transaction was announced. Shares of Dow Chemical rose $1.76, or 5.85% to close at $31.83 after earlier touching a new 52-week high of $31.96.

Dow Chemical Chart

Comcast (CMCSA), the largest U.S. cable company, said its first-quarter operating income jumped 6.8% to $1.9 billion on revenue of $9.2 billion. Analysts had forecast a top line of $9.15 billion. In another sign that the economic recovery may be gaining some steam, Comcast said its cable advertising revenue rose 23% in the quarter. That marks the company's first quarterly ad growth in two years, according to the New York Times.

Sanford C. Bernstein analyst Craig Moffet said Comcast has ''an awfully nice tailwind...'' Comcast is losing subscribers to rivals such as AT&T (T), Verizon (VZ) and DirecTV (DTV), but it did gain 590,000 new Internet, telephone and video subscribers. Comcast's free cash flow rose by 38% to $1.89 billion. The stock was up 35 cents to $18.81 after making a new 52-week high at $19.20 earlier in the day. Volume was more than twice the daily average.

Comcast Chart

After the market closed, a knight in shining armor finally emerged to save struggling smart phone maker Palm (PALM). Dow component Hewlett-Packard (HPQ), the world's largest maker of personal computers, will pay about $1.2 billion in cash for Palm in a deal that values Palm at $5.70 a share. News of the deal, which is expected to close in the third quarter, sent Palm shares up almost 26% to $5.83 after the stock closed at $4.63.

Analysts are already saying that a bidding war for Palm is not likely to materialize given the high price HP is paying. Remember that Palm was trading around $3 earlier this month and that the acquisition news had been tossed around for weeks, so it may not be reasonable to expect other suitors to emerge for Palm. Palm is not a profitable company and HP has plenty of cash to throw around, making a challenge to HP's offer an unattractive proposition for other comopanies.

Palm Chart

There was not a lot of good news to go around on the Nasdaq while the market was open as a surprising sector hampered the index. Restaurant stocks were bludgeoned as several of the sector's marquee names offered disappointing outlooks. Panera Bread fell by more than 7% after saying it will earn 81 cents to 83 cents a share in the second quarter. Analysts had been expecting a profit of 84 cents a share. The stock is still up close to 50% in the past year.

PF Chang's China Bistro (PFCB) fell 2.54% due to a weak first-quarter report and outlook. The Cheesecake Factory (CAKE) joined in the declines, falling by 7% on the back of its own disappointing second-quarter outlook while Texas Roadhouse (TXRH) fell by more than 6% after Global Hunter Securites downgraded the stock to ''neutral'' from ''buy,'' while saying there is limited upside in the shares.

All of those declines pale in comparison to the tumble endured by Buffalo Wild Wings (BWLD), which dropped $8.71, or 17%, to close at $42.30. Volume was almost 10 times the daily average. The company's first-quarter results beat estimates, but April same-store sales are looking sluggish and investors seem to be doubting the company's ability to meet 2010 profit growth of 20%. Making matters worse was an Oppenheimer downgrade of Buffalo Wild Wings to ''perform'' from ''outperform.''

Buffalo Wild Wings Chart

For now, it looks like 11,000 will act as support for the Dow. After that 10,850 is the next support level, but good news from the Federal Reserve regarding its stance on keeping interest rates low for an ''extended period,'' 10,850 may not be seen in the coming days. Of course, all bets are off if things get worse for Greece and friends. Exxon Mobil (XOM) and Procter & Gamble (PG) report earnings before the bell tomorrow.

Dow Chart

With the S&P 500 residing below 1200, it is evident that 1180-1185 is the first support area, but the 1210 range could once again act as a resistance. Along with the aforementioned earnings reports, there are several other marquee names from the energy and materials sectors reporting tomorrow that could boost the S&P 500 higher, if the outlooks are good. Apache (APA), ConocoPhillips (COP), Occidental Petroleum (OXY) and Potash (POT) all report before the bell.

S&P 500 Chart

The Nasdaq is still lingering right around critical support at 2470, so it will be interesting to see if the restaurant stocks remain a drag on the index for the rest of this week. I believe the Nasdaq would have traded a little bit higher today had it not been for the carnage seen in that particular group. Closes below 2470 would be concerning because that could spell a return to 2400.

Nasdaq Chart

No, Wednesday's trade was not strong enough to make up for Tuesday's losses, but it does appear dip buying is still a relevant theme. The ''X'' factor in how stocks finish the week is likely to revolve around Europe. If some convincing Greece bailout news does not emerge before markets close on Friday, I would not be surprised to see some choppy trade as neither buyers nor shorts will want to be carrying positions into the weekend.


New Plays

Gold Miner and LCD Glass Maker

by Scott Hawes

Click here to email Scott Hawes


NEW BULLISH Plays

Gold Fields Ltd - GFI - close 13.28 change +0.23 stop 12.25

Company Description:
Gold Fields Limited (Gold Fields) is a producer of gold and holder of gold reserves in South Africa, Ghana, Australia and Peru. In Peru, Gold Fields also produces copper. Gold Fields is primarily involved in underground and surface gold and copper mining and related activities, including exploration, extraction, processing and smelting. Gold Fields also has an interest in a platinum group metal exploration project. The majority of Gold Fields’ operations, based on gold production, are located in South Africa. Its South African operations are Driefontein, Kloof, Beatrix and South Deep. Gold Fields also owns the St. Ives and Agnew gold mining operations in Australia and has a 71.1% interest in each of the Tarkwa gold mine and the Damang gold mine in Ghana. (source: company press release or website)

Why We Like It:
Gold Miners and gold appear to be ready to make another leg higher and I suggest readers take advantage of the momentum that is building. The FOMC is keeping interest rates low and this is stoking fears of inflation, or inflationary bubbles, and I believe traders are beginning to pour into gold mining stocks once again. GFI has been trading in an upward channel since late February and appears ready to break out of resistance at $13.36. I believe the stock will quickly trade to the $13.95 over the next week. GFI reports earnings on May 6th so I plan to be out of this trade on that date. We'll place a stop below the 50-day SMA at $12.25 and our target is $13.95 which is just below the YTD highs. Our time frame is about one week or shorter. *NOTE: Please use small position size to limit risk as gold stocks tend to be volatile.*

Suggested Position: Long GFI stock at $13.25

Option Traders:
Suggested Position: Buy MAY $13.00 CALL, current ask $0.60

Annotated chart:

Entry on April xx at $xx.xx
Earnings Date May 6, 2010 (unconfirmed)
Average Daily Volume: 5.3 million
Listed on April 26, 2010


Corning, Inc - GLW - close 20.07 change -0.05 stop 18.80

Company Description:
Corning Incorporated (Corning)is a technology-based corporation that operates in five reportable business segments: Display Technologies, Telecommunications, Environmental Technologies, Specialty Materials and Life Sciences. Corning manufactures and processes products at approximately 60 plants in 13 countries. Its subsidiaries include Corning Cable Systems LLC, Corning Cable Systems Polska Sp. Z o.o, Axygen BioScience, Inc and Corsam Technologies LLC. In September 2009, Corning acquired Axygen BioScience, Inc. (source: company press release or website)

Why We Like It:
GLW reported earnings today that beat expectations by 10-cents and once again raised its forecast for LCD glass demand. The stock has been punished over the last couple of days and I suggest readers take advantage of the dip. I suggest readers enter the stock at current levels and I expect a move to $21.70 in short order, which is near the bottom of a congestion area in 2007. The stock has been in an upward channel since November 2008 and I don't foresee this being compromised. The stock has support on its daily chart all the way down to its 50-day SMA and 20-week SMA near $19.00, but I don't expect much more selling. If the trade works we will be looking at a gain of +8.5%. Our stop will be $18.80 and our time frame is several weeks.

Suggested Position: Long GLW stock at current levels

Option Traders:
Suggested Position: Buy JUNE $20.00 CALL, current ask $0.96

Annotated weekly chart:

Entry on April xx at $xx.xx
Earnings Date Over two months
Average Daily Volume: 14 million
Listed on April 26, 2010


In Play Updates and Reviews

ENZ Bounces Back, Still Waiting on MCO

by Scott Hawes

Click here to email Scott Hawes

Editor's Note:

Good evening traders. Our ENZ position is at least starting to move in our direction after the sell-off on Tuesday. We are still waiting to be triggered on our short MCO position which I expect to be opened tomorrow. FSYS appeared ready to break higher today but couldn't gather enough steam. I've released two long plays tonight, one of which is on a gold miner that I expect to be a quick trade.

The FOMC meeting was an absolute dud. This may be the excuse the market is looking for to continue this rally. It will be interesting to see how it all plays out and I would not be surprised to see an attempt at new highs. If nothing else the extended low rates seems to be causing inflationary fears which is why I like our new gold miner play. Good luck trading to you all!

Current Portfolio:


BULLISH Play Updates

Enzo Biochem, Inc. - ENZ - close 6.18 change +0.15 stop 5.74 *NEW*

ENZ had a decent recovery today closing higher by +2.49%, however, the rally was stopped in its tracks at the 20-day SMA. I am looking for ENZ to close above the 20-day SMA in the coming days and we will re-asses our targets and stops. For now I am keeping our stop at $5.74 to prevent from getting shaken out of the trade if there is more volatility in the coming days. I am optimistic ENZ can continue higher from here and like the story behind the stock (see new play release). Our target remains $7.20 and our time frame is a couple of weeks. Readers who haven't initiated positions can do so using the above stop.

*NOTE: Please use small position size to limit risk as I consider this to be an aggressive trade. The stock's average daily volume is 160,000 shares which can add to volatility.*

Current Position: Long ENZ stock @ $6.52

Entry on April 26 at $6.52
Earnings Date 6/15/10 (unconfirmed)
Average Daily Volume: 160,000
Listed on April 24, 2010


Fuel Systems, Inc. – FSYS – close 31.50 change +0.09 stop 29.39

FSYS surged higher this morning but then retraced its gains, and pulled a repeat in the afternoon. The good news is that FSYS is still above its uptrend line from March 4th and it remains above its 50-day SMA today. FSYS is still in an upward trend on its daily chart and is also forming an ascending triangle that has some time to play out. I still like our chances of FSYS rallying into its earnings report on May 6th, especially if we get a bounce in the market from here. But I will feel more comfortable if FSYS can close above today's high of $32.16. Our target is $34.65 with a second target of $37.00, but there is probably not enough time to reach this level prior to the earnings report. If FSYS reaches our target we will earn +5.8% on the trade. We will use a stop at $29.39 which is below its 50-day SMA and a recent swing low. Traders can initiate new positions now but please be prepared for a quick exit as FSYS tends to be volatile. Our time frame is about one to two weeks.

Current Position: Long FSYS stock @ $32.75

Entry on April 26 at $32.75
Earnings Date 05/06/10 (unconfirmed)
Average Daily Volume: 720,000
Listed on April 22, 2010


Medicis Pharmaceutical Corp. – MRX – close: $25.10 change -0.09 stop: $24.29

MRX continued to sell-off this morning but buyers showed up at the $24.90 level which is acting as decent support. This is the near the low from April 22 so it appears to be a double bottom on the intraday charts, but it needs to follow through tomorrow morning. My concern is the stock may get stuck between $25.00 and $26.00. I have been suggesting that traders consider tightening stops if MRX rallies into to the $25.80 area to protect profits. The touch of this level yesterday made the 7th time the stock had tested the area since April 12 before being knocked back down. The stock is also forming a symmetrical triangle on its daily chart. This simply means that prices are compressing and should break out soon. Obviously we are hoping for a break to the upside but we will need cooperation from the overall market. A positive sign is that MRX has been in a bull flag for about a month. But the longer price sits here without breaking out, the greater the chance the bull flag resolves itself to the downside. I think it is best to start thinking about an exit to this position to preserve capital and potentially book a small gain. I would like to keep our target at $25.75 and will gladly take a small +3% profit at this level. MRX has support down to $24.88 which is where it bounced today. Our stop is $24.29 which is below the 50-day SMA. I am not suggesting new positions at this time.

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


BEARISH Play Updates

Moody's Corp. - MCO - close 25.61 change +0.76 stop 28.60

MCO rallied today +3.06% and almost made it to our trigger to enter short positions at $25.90. There is strong resistance in the $26.00 to $26.50 area which I expect to hold if MCO makes back up here. My comments the past few nights remain the same. MCO's chart is broken and a lot of damage has been done. The stock is forming a bear flag on its daily chart and I believe conditions are ripe for the decline to continue. The stock was hanging on to a recent support level and its 200-day SMA (both in the $26.00 area) which was broken on Monday. I am bearish on MCO and if the market starts to pullback MCO could be a nice winner for us. I would like to place an initial wide stop at $28.60 just in case there is a spike in the stock from short covering or a news event. If that happens I am confident MCO will be sold by many who may still be holding long shares creating additional pressure. There is plenty of resistance and congestion just overhead as well. Our target is $23.25 and our time frame is a couple of weeks.

Suggested Position: Short MCO at $26.25

Option Traders:
Suggested Position: Buy JUNE $25.00 PUT, current ask $1.23

Entry on April xx at $xx.xx
Earnings Date Over two months
Average Daily Volume: 3.5 million
Listed on April 26, 2010