Option Investor
Newsletter

Daily Newsletter, Monday, 5/3/2010

Table of Contents

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

Market Wrap

Economic Reports, M&A Jolt Stocks Higher

by Todd Shriber

Click here to email Todd Shriber
A round of cheery economic reports, some mergers and acquisitions news and positive comments about Goldman Sachs (GS) by Warren Buffett helped stocks to a solid start to May, the ''sell in and go away'' month. The Dow Jones Industrial Average turned in its best performance since February, rising 143.22 points to settle at 11,151.83. The S&P 500 made its way back above 1200, rising 15.58 points to close at 1202.26 while the Nasdaq added almost 38 points, but could not find its way back above 2500, closing at 2498.74.

Stats Table #1

Consumers are showing some strength and that is good news for retail stocks and the broader market. Monday's consumer spending update showed spending was back in vogue as shoppers rang the register more than they had at anytime during the previous five months. On an inflation adjusted basis, spending was up 0.5% for the second straight month.

The increase in consumer spending in March has some pundits pontificating about how strong those spending numbers will be when the economy starts to see some legitimate job and wage growth. Incomes rose just 0.3% in February while wages and salaries advanced a scant 0.2% in March. Consumer spending accounts for about 70% of U.S. GDP and when the consumer is feeling good about his personal economic situation, he is apt to part with some of his cash and splurge on new purchases. Friday's job report will be telling about how strong the consumer recovery really is.

Consumer Spending/GDP Chart

Another positive economic data point in the form of the Institute for Supply Management (ISM) monthly manufacturing update was in the news today. The ISM report said U.S. manufacturing activity rose to 60.4 in April from 59.6 in March. Most economists were expecting a reading of 60 and any number above 50 is considered a sign of expansion. The index now resides at its best level since June 2004 and has risen for nine straight months and 13 of the last 16 months. ISM said the purchasing manager's index was also above 42 for the 12th consecutive month, another sign the economy is expanding.

ISM Chart

In stock-specific news, Goldman Sachs got a decent bounce after getting a vote of confidence from Warren Buffett at the Berkshire Hathaway (BRK-A, BRK-B) shareholder meeting over the weekend. Goldman shares were up $4.30, or 2.96%, to close at $149.50. Nearly 28.3 million shares changed hands compared to average daily volume of almost 16 million shares. Not be Debbie Downer, but it should be noted this was a $160 stock last Thursday.

It is actually pretty easy to discern why positive comments from Buffett alone would not be enough for Goldman shares to make up more last week's decline. Berkshire's stake in Goldman is just $5 billion, an investment that pales in comparison to other Berkshire investments such as the firm's $44 billion purchase of Burlington Northern.

Beyond that, Berkshire is collecting $500 million a year on its $5 billion Goldman stake. That is a lot better than the 1% yield regular shareholders of Goldman get. Buffett also has a say in what executives occupy the top three spots at Goldman and Berkshire has warrants to acquire Goldman shares at $115. So when the mainstream media asks Buffett whether or not he would do this deal again, it seems like a waste of time and calling his comments on Goldman ''eye-popping'' as some did, is just a gross overstatement. The reality is no investor would pass on a deal that is basically guaranteed to make money. The unfortunate reality is that not every investor can get their hands on a deal like Buffett has with Goldman.

Goldman Sachs

Onto companies that actually provide services that are readily attainable to most consumers, Continental Airlines (CAL) and UAL (UAUA) finally agreed to terms on a $3 billion merger, creating the world's largest airline in the process. On their own, United and Continental are the third- and fourth-largest U.S. carriers, respectively.

Under the terms of the stock-swap transaction, United will acquire Continental and the new airline will sport the United name, but use the Continental logo. The two money-losing carriers said they expect annual savings of $1 billion to $1.2 billion by 2013 and revenue increases of up to $900 million. The combined company will have more than half its routes in the U.S. with hubs in Chicago, Cleveland Denver, Houston, Los Angeles, Newark and San Francisco.

From the standpoint of international travel for U.S. customers, competition will be diminished as a result of this deal. There will be only three U.S.-based carriers with significant access to international routes Delta (DAL), American (AMR) and the new United. The deal must be approved by the Justice Department and the European Commission and labor issues could be a problem for the carriers to deal with as headcount reductions usually do not go over well when the airline industry consolidates. Still, the news was warmly received by investors as both stocks were up more than 2% and the Claymore Airline ETF (FAA) was also up more than 2%.

FAA Chart

Apple (AAPL) was another name on the receiving end of some positive trade on news of strong iPad sales. The company said today that the millionth iPad was sold last Friday. Putting that statistic into context, it took 73 days for the first iPhone to reach 1 million units sold. The iPad reached the million unit mark in 28 days. According to Fortune's Apple 2.0 Blog, Piper Jaffray analyst Gene Munster said he and his team called 50 Apple stores on Sunday and 49 had run out of the 3-G iPad and most were out of all versions of the product.

Given the robust demand here in the U.S., it will certainly be interesting to see how the iPad performs when it makes its international debut in June. Apple has delayed selling the product outside of the U.S. due to strong demand here, but the company is planning to announce international release dates next Monday. As is the case with the iPhone, apps are also a lucrative revenue for stream Apple when it comes to the iPad. Two of the three most popular iPad apps to date are developed by Apple and they cost $10 each to download.

iPad Sales Estimates

The bottom line is Steve Jobs said demand for the iPad is outpacing supply and that is a nice problem to have. Apple was up $5.26, or 2% to $266.35 today. The 52-week high is $272.46.

Apple Chart

Oil services names that had been battered in the wake of the oil spill in the Gulf of Mexico caused by an explosion at the Deepwater Horizon rig got a boost on rumors that BP (BP) has stemmed the flow of leaking oil from the well. Unfortunately, BP confirmed that the flow of leaking oil remains unchanged. Some estimates put the flow of leaking oil as high as 5,000 barrels per day.

What may have been behind the jump in oil services stocks is the thought that the bulk of the costs related to this disaster are going to arrive on BP's doorstep. President Obama placed the blame squarely on BP's shoulders this weekend and federal law dictates that if the oil being extracted by the rig belongs to BP, then BP is liable.

That could spell some relief for oil services names like Cameron International (CAM), Halliburton (HAL) and Transocean (RIG), all of which traded higher today. Cameron led the way, gaining 3.32% on more than five times its average daily volume. The costs for BP still are not clear, but one analyst estimated the Horizon spill could cost the company $5 billion to $15 billion in cleanup costs and legal bills. That compares with $4 billion Exxon (XOM) had to shell for the Valdez spill.

OIH Chart

Looking at the charts, volatility is back in a big way as the Dow has swung in triple-digit ranges for the past three days and six of the past seven. The Dow found support at 11,000, a level that has been support since mid-April. If 11,000 is violated, 10,850 should be the first support level and from there we could see 10,700. Uptrend resistance would be found at the recent high of 11,258 and with today's close, the Dow was able to move back above its 21-day moving average just above 11,050.

Dow Chart

The S&P 500 flirted with an important support level at 1185 with Friday's close, but rebounded today to reclaim 1200. Even with Monday's bullish move, the S&P 500 remains locked in a range that we have seen since mid-April. A breakout above 1225 would be bullish while a violation of 1185 would encourage selling.

S&P 500 Chart

Apple and its iPad sales were not enough to move the Nasdaq to a close above 2500 and the intraday high was just 2503, but there were some other positive signs, though faint. After being battered last week, semiconductor makers rebounded on Monday with the Semiconductor HOLDrs ETF (SMH) gaining 2.1%. Uptrend resistance looms around 2520, but if support at 2450 is broken, 2400 becomes the next number to worry about and after that, things really get ugly.

Nasdaq Chart

A confluence of factors ranging from a lack of clarity over Greece's bailout package to ratings downgrades for Portugal and Spain to the Gulf oil spill and further pressure on Goldman Sachs contributed to last week's sell off. Remember that stocks had advanced for eight consecutive weeks, so the aforementioned factors only exacerbated selling that was probably overdue.

It appears that Greece finally has a bailout package in place, so that would serve to possibly remove one negative story from the market and if BP can finally deliver some positive news on its spill containment efforts, energy names should see further relief. Monday was a good day for stocks overall, but it was just one day of trading and not we are not deep enough into the month to know if ''sell in May and go away'' is going to work this year.


New Plays

Long Play on Oil Services

by Scott Hawes

Click here to email Scott Hawes

Nabors Industries Ltd - NBR - close 21.57 change +0.00 stop 20.40

Company Description:
Nabors Industries Ltd. (Nabors) is a drilling contractor that conducts oil, gas and geothermal land drilling operations in the United States Lower 48 states, Alaska, Canada, South America, Mexico, the Caribbean, the Middle East, the Far East, Russia and Africa. As of December 31, 2009, the Company marketed approximately 542 land drilling rigs. It also operates as a land well servicing and workover contractor in the United States and Canada. The majority of the Company’s business is conducted through its various Contract Drilling operating segments, which include its drilling, workover and well servicing operations, on land and offshore. Its oil and gas exploration, development and production operations are included in the Oil and Gas operating segment. Nabors’ operating segments engaged in drilling technology and top drive manufacturing, directional drilling, rig instrumentation and software, and construction and logistics operations are included in its Other Operating segments. (source: company press release or website)

Why We Like It:
NBR convincingly broke a downtrend line on April 21st that began on January 8th. The stock immediately rallied and has since retraced about half of the gain from April 19th to April 26th. The stock has spent the last 3 or 4 sessions consolidating and has found buyers step in each day around the $21.00 level. This provides us a good reference point for placing a stop just below at $20.40, which is also below the 20-day SMA. I believe NBR is poised to move higher from here and suggest readers buy NBR stock at current levels or on any weakness. There is limited resistance up to $22.75 and then $23.45 which we will use as targets. Our time frame is a couple of weeks.

Suggested Position: Long NBR stock at current levels.

Option Traders:
Suggested Position: Buy JUNE $22.00 CALL, current ask $1.30

Annotated chart:

Entry on April xx at $xx.xx
Earnings Date July 5, 2010 (unconfirmed)
Average Daily Volume: 230,000
Listed on April 29, 2010


In Play Updates and Reviews

FSYS Sells Off On Bad News

by Scott Hawes

Click here to email Scott Hawes

Editor's Note:

Good evening traders. Many of our positions found reprieve on Monday after Friday's sell off, but we were stopped out of FSYS on bad news from April car sales in Italy. We are still waiting to be triggered on HITK (long), MCO (short) and SINA (short).

The wide market swings and volatility is making it difficult to manage swing trades. I wrote in the weekend updates that I anticipated volatility to continue and that we would probably see another bounce early this week before a bigger drop comes later. I just didn't expect the hard reversal that we got today, so I am cautiously bearish on the market. I still suggest tightening stops on long positions, especially with today's strength. Our portfolio has some stocks from defensive sectors on the long side but we are still waiting to be triggered on short trades in MCO and SINA. The balance of longs and shorts will enable you to take profits in both directions. Staying nimble in the name of the game right now.

Current Portfolio:


BULLISH Play Updates

Corning, Inc - GLW - close 19.81 change +0.56 stop 18.80

We got some reprieve today on GLW as it bounced off of its 50-day SMA and closed higher by +2.91%. My only concern is that the volume from today's gains was significantly lighter than the previous 4 days of selling so I urge traders to be cautious. The stock's upward trend line support has remained intact and the GLW has good fundamentals. The recent heavy selling could have been the capitulation that was needed for the stock to move higher from here. I have listed four potential targets traders can use as a guide to exit this position: $19.80 (this stock closed right at this level today, $20.25, $20.90, and $21.70. If the market continues its rally I will look for GLW to at retest its highs near $20.90. Our stop remains at $18.80 and our time frame is several weeks. Readers who have not entered positions can do so at these levels.

Current Position: Long GLW stock at $20.10

Option Traders:
Suggested Position: Buy JUNE $20.00 CALL

Entry on April 29 at $20.10
Earnings Date Over two months
Average Daily Volume: 14 million
Listed on April 26, 2010


Enzo Biochem, Inc. - ENZ - close 6.18 change +0.21 stop 5.74

ENZ rebounded nicely today after Friday's sell-off closing +3.52% higher. My comments about how to manage exiting this position remain the same. First, the stock is above a congestion area that lasted about two months from November to January (see shaded rectangle on chart). Second, ENZ still finds itself in a bull flag that has formed since March 2nd. This bull flag is above the aforementioned congestion area. These two facts tell me that ENZ should find support here. However, if the stock breaks below our stop at $5.74 it is my queue that the stock has technically failed and will probably trade down another 40 or 50 cents, so we will step aside if that happens. In addition, overall market weakness will probably cause weakness in ENZ, although the biotechnology sector can be defensive. Our stop remains at $5.74 and I have listed multiple targets which we will be using as a guide to exit the position. The targets are $6.30, $6.40, $6.70 and $6.95. These are areas where ENZ will most likely find resistance. I suggest traders tighten stops at these levels or simply exit the position. Our time frame is a couple of weeks. Readers who haven't initiated positions can do so using $5.74 as a stop and could be nicely rewarded nicely if ENZ can recover from here, however, I would be prepared for a quick trade.

*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


Gold Fields Ltd - GFI - close 13.44 change +0.18 stop 12.25

Gold miners took a breather today and so did GFI closing down -1.64%. I expected the miners momentum to continue today but it just wasn't meant to be. The company reports earnings Thursday before the bell so I suggest readers exit this position prior to Wednesday's close to limit risk and preserve capital. There may not be enough time to reach our target of $13.75 so I would like to lower the target to $13.50 which is just below Friday's high. If GFI can make back up here I will gladly take a small profit on the trade. Gold Miners were one of the strongest sectors on Friday while the market was under severe pressure. This could happen again if the market breaks lower tomorrow. Our stop is $12.79 which is just below the low from April 28th and the 20-day SMA. Our time frame is 1 to 2 days. I am not suggesting new positions at this time. *NOTE: Please use small position size to limit risk as gold stocks tend to be volatile.*

Current Position: Long GFI stock at $13.21

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

Entry on April 29 at $25.21
Earnings Date May 6, 2010 (unconfirmed)
Average Daily Volume: 5.3 million
Listed on April 28, 2010


Hi-Tech Pharmacal Co. - HITK - close 25.23 change +0.90 stop 22.45

We almost were triggered on HITK at $25.25 but the stock closed just shy. The stock has now closed above the downtrend line that started on January 4th. It also has upward trend line support from August 2009. I suggest readers use one of two triggers to buy HITK stock. If the stock pulls back buy the stock on weakness. However, if HITK breaks out to $25.25 before pulling back buy the stock. There is little resistance up to $26.50 which is our first target. A more aggressive second target is $27.85. Our initial stop is $22.45 which is below the stock's 20-day and 50-day SMA. Our time frame is several weeks.

Trigger to buy HITK on weakness or a breakout above $25.25, whichever happens first.

Suggested Position: Long HITK stock at one of two triggers listed above.

Entry on April xx at $xx.xx
Earnings Date July 5, 2010 (unconfirmed)
Average Daily Volume: 230,000
Listed on April 29, 2010


BEARISH Play Updates

Moody's Corp. - MCO - close 25.23 change +0.51 stop 28.60

MCO is still not cooperating with our entry trigger which is now $25.45. The stock traded up to $25.28 today and closed +2% higher. My comments from the weekend remain the same. I am essentially suggesting short positions on any relief bounce in MCO. There is strong resistance in the $26.00 to $26.50 area which I expect to hold if MCO can even make it back up there. MCO's chart is broken and a lot of damage has been done. The stock is forming bear flags 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 last week. I am bearish on MCO and if the market starts a significant pullback MCO could be a nice winner for us. Our initial stop is $28.60 but will be adjusted after our entry is triggered. There is plenty of resistance and congestion just overhead. Our target is $23.25, with a more aggressive target of $21.85 which could get hit if things get ugly. Our time frame is a couple of weeks.

Suggested Position: Short MCO at $25.65

Option Traders:
Suggested Position: Buy JUNE $25.00 PUT, current ask $1.58

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


Sina Corporation - SINA - close 36.68 change +0.45 stop 42.25

We did not get triggered on SINA today as it traded in a tight range. The stock traded as high $37.31 in the first 15-minutes but was weak the remainder of the day. My comments from the weekend remain the same. SINA is forming a descending triangle on its daily and weekly charts. The stock did find support at $35.25 last week and bounced nicely. However, I feel the conditions are ripe for this stock trade lower in the coming weeks, especially if we get a sustainable market correction. Its 20-day SMA and 20-week SMA are overhead which should provide good resistance. The 50-period and 200-period SMA's are providing some support for the stock right now, but I feel it is only a matter of time before the stock breaks these SMA's. I suggest readers short SINA if it trades up to $37.60 or if the stock trades down to $34.95, whichever occurs first. I am going to place a wide initial stop at $42.50 until we know where the position was entered. Once we are triggered the stop will be adjusted. Our first target is $33.25 which is a point where I would tighten stops to protect profits. A more aggressive 2nd target is $30.50. If a market correction gets going I think SINA could easily trade down to this level.

Suggested Position: Short SINA at $37.60 or $34.95, whichever occurs first.

Option Traders:
Suggested Position: JUNE $35.00 PUT, current ask $1.55

Entry on May xx at $xx.xx
Earnings Date June 9, 2010 (unconfirmed)
Average Daily Volume: 1.1 million
Listed on May 1, 2010


CLOSED BULLISH PLAYS

Fuel Systems, Inc. – FSYS – close 29.84 change -1.63 stop 29.39

The rally off of Friday's lows continued in FSYS early Monday morning as the stock traded +3% higher, but that was immediately stopped dead in its tracks when news broke that April new car registrations in Italy fell -15.7%. The stock proceeded to sell off -17% during the next 45 minutes before it found its footing, closing the day down -5.18%. FSYS has a major operation in Italy and traders puked up the stock on the news which triggered our stop at $29.39. So we are flat on the position for a bad loss of -10.26%. Stops that were not taken out on Friday's "whoosh" certainly were today so it will be interesting to see if FSYS can recover from here. For readers who may still have positions I listed 3 targets on the chart to focus on when exiting positions: $30.80, $32.25 and $33.90. These will most likely be areas of resistance. Remember FSYS has earnings on May 6th before the market opens.

Current Position: Long FSYS stock @ $32.75

Annotated chart:

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