Option Investor
Newsletter

Daily Newsletter, Monday, 5/10/2010

Table of Contents

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

Market Wrap

Stocks Rally On European Loan Deal

by Todd Shriber

Click here to email Todd Shriber
Global equity markets soared on Monday after Eurozone policy makers announced a bailout package worth almost $1 trillion to end the regions sovereign debt crisis and defend the floundering Euro. U.S. stocks turned in their best single day performance in months as the Dow Jones Industrial Average rallied almost 405 points to close at 10785.14, the index's best showing since March 2009. The S&P 500 gained almost 49 points, or 4.4%, to settle just below 1160. The Nasdaq gained 109 points, or almost 5%, to finish the day at 2374.67 and small-caps enjoyed a nice rally as well with the Russel 2000 adding nearly 37 points, or 5.61%, to finish the day at 689.61.

Stats Table

On Sunday evening, news of the European bailout hit the wires, sending equity markets in that region higher and futures for U.S. exchanges soaring. Simply put, the effort by the European Central Bank and policy makers from the 16-country Eurozone to defend their common currency and alleviate fears of a sovereign debt crisis is nothing short of massive. The tally for the bailout package is around $960 billion, far larger than the $700 billion the U.S. government committed to the TARP program to save major U.S.-based banks.

Fears of the Euro's collapse and ensuing speculation that several countries that use the common currency may be forced out of the monetary union fueled an equity market sell-off of epic proportions in recent weeks. Concerns about Greece's fiscal tribulations and a potential European contagion erased $3.7 trillion from global equity markets last week alone, according to Bloomberg News. Still, the news was not much of a help to the faltering Euro, which did see a small rally against the 16 other major currencies, but gains against the U.S. dollar were pared by the end of the U.S. trading session. The Euro is still down 15% against the greenback since November.

Euro/Dollar Chart

News of the bailout package was greeted with open arms in the commodities complex as crude oil ended a slide that saw $11 per barrel shaved off its price last week. NYMEX-traded for June delivery gained $1.69, or 2.3%, to close at $76.80 per barrel. Last week's 13% tumble had oil trading at its lowest level since mid-February. The Reuters/Jefferies CRB Commodities Index enjoyed a nice day as well, gaining 1.6% as commodities, gold being the exception, moved higher thanks to news of the bailout package. That said, oil still has a way to go to reclaim the $85 a barrel mark and it remains to be seen if today's rally is more than just a one-day affair.

Oil Chart

The rally in oil did not help shares of BP (BP), which continues a precipitous decline due to the oil spill in the Gulf of Mexico. BP's efforts to stem the flow of oil at its Macondo well this weekend did not go as planned and press reports said on Sunday that oil could reach Louisiana's shoreline in a matter of days. Visitors to Alabama's Dauphin Island said they saw tarballs the size of golf balls there this weekend and that can be attributed to the spill.

BP has already absorbed $350 million in cleanup costs and that number is likely to grow much higher regardless of when the leak is finally contained. The company is due to give congressional testimony regarding its handling of the disaster on Tuesday and that could mean more pressure on shares of Transocean (RIG).

Transocean, the world's largest provider of offshore contract drilling services, leased the Deepwater Horizon Rig to BP and while BP is on the hook for the cleanup costs, BP still sees fit to throw some bad public relations Transocean's way and will likely implicate Transocean as being responsible for the rig explosion. Shares of Transocean were down almost 2.5% on Monday and that is concerning given that oil was up. Oil services names like RIG are intimately correlated to price action in the underlying commodity. Prior to moving below $70 a share last week, RIG had not traded below that price level since March 2009. How bad was the trade in RIG on Monday? The stock is the largest holding in the Oil Services HOLDRs ETF (OIH) and the only one of the ETF's top-10 holdings to book a decline today.

Transocean Chart

Not surprisingly, Monday was a fine day to be long emerging markets stocks and ETFs and not just because of the European bailout news. Large-cap Chinese equities had been laggards this year, hindered by Beijing's efforts to cool economic growth and prevent a real estate bubble from forming. The Shanghai Composite Index has been truly disappointing as it has been among the worst performing major indexes in the world this year.

Fears of the European contagion predictably weighed on China, but the world's larges country population showed there is still some pop left in its economy with news of an April trade surplus of $1.68 billion after notching a trade deficit in March. Economists had been forecasting an April deficit of $1.44 billion. The March deficit was China's first in six years and now appears to be more of a one-off event than the beginning of a negative trend for China.

Chinese imports also rose during April, but economists expect that trend to wane later this year as the country's stimulus package is gradually withdrawn. Expect growth should remain robust and JPMorgan is predicting a $100 billion trade surplus for China this year.

China Trade Surplus

As I mentioned, plenty of high-beta stocks and ETFs were on the receiving end of some bullish trade on Monday as all 10 of the S&P 500's industry groups traded higher. Of course, ETFs that offer exposure to Europe were in play and many of these country-specific offerings notched big gains. One member of that group that I would be leery of is the iShares MSCI Spain Index (EWP), which gained $4.86, or 14.6%, to close at $38.27. Volume was more than seven times the daily average.

Spain, the ''S'' in the PIIGS acronym, was frequently mentioned as another shoe to drop following Greece and Portugal because the country was facing a budget deficit that was greater than 11% of its GDP. That may not sound like much to someone living in the U.S., but that is a dangerous level for an economy the size of Spain's. The country is now faced with some tough choices because it must cut the deficit to 9.3% of GDP this year and to 6.5% next year.

Spanish officials did not delve into details as to how they plan to accomplish these objectives, but spending cuts seem to be preferred over tax hikes. With 20% unemployment, tax hikes may not even be an option for Spain.

Spain ETF Chart

Before anyone gets too excited about the Nasdaq's rally on Monday, a wet blanket may have already been thrown on that bullish move by Priceline.com (PCLN). The online travel reservations firm reported solid first-quarter earnings after the close on Monday, saying it earned $53.9 million, or $1.06 a share, compared with a profit of $25 million, or 53 cents a share, a year earlier. Revenue jumped to $584.4 million from $462.1 million. Excluding items, the company earned $1.70 a share. Analysts had been expecting $1.66.

Whether it was a case of investors anticipating a strong number from Priceline or the stock participating in the broader market rally, Priceline shares jumped $24.36, or 10.8%, to $249.75. Those gains were undone by a tepid second-quarter outlook. A confluence of factors is going to hamper results for the current quarter with Priceline pointing to the volcano in Iceland, political protests in Europe and a weaker Euro caused by the sovereign debt crisis as reasons it expects a second-quarter profit of $2.50 to $2.70 a share. Analysts had been expecting $2.83 a share.

That news erased all of Monday's gains and then some in the after-hours session. As of this writing, Priceline is down $30.24, or 12.1%, to $219.51. While Priceline is not afforded the same status on the Nasdaq that Apple (APPL) or Google (GOOG) have, it is not far behind. In other words, Priceline is a momentum stock and momentum stocks had been battered before this week without a change in fundamentals. Now there is a change in Priceline's fundamentals and it is not a good change, so the market is going to react accordingly.

Priceline Chart

Taking a look at the charts, the Dow's big bounce has the index in position to challenge resistance just over 10,800 and the bounce shows that support in the 10,250-10,300 area was respected. The Dow's ascent on Monday was bolstered by gains of almost 7% for Bank of America (BAC), General Electric (GE) and Caterpillar (CAT), uncommon moves for those names. Further moves higher will have be to fueled by the belief that Europe is going to follow on its debt-reduction efforts.

Dow Chart

In the past two weeks, the S&P 500 shed 105 points, so taking back almost of those losses in a single day is no small feat, but that is just what the index did on Monday. That puts the S&P 500 in a position to challenge resistance at 1165, also a former support level. Support should be firm in the 1085-1095 area.

S&P 500 Chart

The Nasdaq joined the party on Monday, but Priceline may ensure that the party is short-lived, at least for tech stocks. Cisco (CSCO) reports earnings after the close on Wednesday, but recent earnings reports have not had the desired impact, regardless of how marquee the reporting company is. Sure, the index is closer to resistance at 2400 than it is to 2300, but 2400 could be off the table for next couple of days due to Priceline's glum guidance.

Nasdaq Chart

Small-caps got a nice lift on Monday as well, but the Russell 2000 could not reclaim its 50-day moving average at 693.28. Support held firm in the 650 area last week, but if that level is violated, there could be another 20-25 points in downside for this index.

Russell 2000 Chart

Monday's rally was not surprising. By that I mean stocks were going to react in kind to whatever the news out of Europe was. If no bailout had emerged, I would have had to write about another triple-digit Dow loss. For now, it appears the European fiasco is behind us, but that is not an engraved invitation for buying. There are still other issues for stocks to contend with, particularly commodities-related issues. The Gulf spill is nowhere close to departing from the headlines. Australia's proposed tax hike on mining firms is not dead either.

Conversely, it is somewhat difficult to come up with reasons to be a buyer here beyond the fact that this is another dip. I think better prices for astute buyers will appear over the coming days.


New Plays

Commodities Play

by Scott Hawes

Click here to email Scott Hawes


NEW BULLISH Plays

Titanium Metals - TIE - close 16.60 change +1.20 stop 14.70

Company Description:
Titanium Metals Corporation (TIMET) is a producer of titanium melted and mill products. The Company has titanium production facilities in the United States and Europe. The Company’s products include titanium sponge, the basic form of titanium metal used in titanium products; melted products (ingot, electrode and slab), the result of melting titanium sponge and titanium scrap, either alone or with various alloys; mill products that are forged and rolled from ingot or slab, including long products (billet and bar), flat products (plate, sheet and strip) and pipe, and fabrications (spools, pipe fittings, manifolds and vessels) that are cut, formed, welded and assembled from titanium mill products. (source: company press release or website)

Target(s): 16.95, 18.00
Key Support Areas: 16.00, 15.50, 15.00
Key Resistance Areas: 16.00, 16.70, 17.25
Time Frame: Several weeks

Why We Like It:
TIE reported earnings on May 5th of 9 cents versus about 3 cents estimates. The stock reacted favorably even though the overall market plunged late last week. The stock has been consolidating in a bull flag for the past month and I suggest readers take advantage of any pullback in the stock to the $15.60 area. This is just above the 50-day SMA and the midpoint of the bull flag, which I think TIE will eventually break out of. This sets up a good risk reward trade: we are risking $0.90 to make $1.35. If triggered we our looking for the stock to trade back up $16.95, which would garner a nice +8.6% gain. Our second more aggressive target is $18.00 which is near highs from May 2008. Note, it may take several days to a week to get filled on this trade but I wanted to list the trade in case there is significant weakness in the coming days.

Suggested Position: Long TIE Stock if it trades down to the $15.60 area

Annotated Chart:

Entry on xx at xx
Earnings Date 8/4/2010 (unconfirmed)
Average Daily Volume: 3.8 million
Listed on 5/10/10, 2010


In Play Updates and Reviews

Waiting For Triggers

by Scott Hawes

Click here to email Scott Hawes

Editor's Note:

Good evening traders. We are still waiting to be triggered on DPS and WFC. I suggest readers be patient here and wait for a pullback prior to entering long positions. Today's bounce back was probably not just the result of the Euro Zone bailout package, but rather a combination of the latter and shorts covering positions. Volatility will continue and the indices still face a lot of overhead resistance.

The volatility over the past couple of weeks continues to make trades very difficult to manage. In this environment I believe it is necessary to have hedged positions on the long and short side of the market. This enables traders to enter (or take profits) on positions when there are wild swings in price. But this also requires intraday management so if you can't manage trades intraday I suggest keeping position size extremely small, or simply staying away. Good luck!

NOTE: I am trying a slightly different format for our daily play updates that I think you will like. I am simply listing important information such as our targets, key support/resistance levels, and time frames at the top of the play update. My hope is that this information will help you better manage the trade by quickly being able to identify important facts about the trade as opposed to sifting through the text of the play update. If you have any suggestions or comments please email me.

Current Portfolio:


BULLISH Play Updates

IMAX Corporation - IMAX - close 18.90 change -0.15 stop 16.75

Target(s): 19.25, 20.95
Key Support Areas: 17.75, 16.95, 50-day SMA
Key Resistance Areas: 18.74 (intraday), 19.20, 19.90, 21.30
Current Gain/Loss: -1.57%
Time Frame: 1 to 2 weeks
New Positions: Aggressive traders only

Comments:
IMAX bounced back today after Friday's sell-off in the stock, closing +4.90% higher. The stock traded as high as $19.39 early this morning and then the sellers showed up sending the stock down over $1 lower to close at $18.21. IMAX made a double top with the intraday highs of today and last Thursday which probably sparked the selling. Double tops and bottoms can produce powerful moves in stocks and in IMAX's case the stock closed -6% lower than the double top high and +2.2% off of its lows. The stock traded in an 8% range today. I urge readers to be careful here with the volatility and protect capital. I listed a lower first target above which can be used to manage exiting the position, along with several support areas above our stop. $17.75 could be used as a tighter stop to protect capital.

Current Position: Long JUNE $20.00 CALL, entry at $1.10

Annotated Chart:

Entry on May 5th at $1.10
Earnings Date More than 2 months (unconfirmed)
Average Daily Volume: 1.9 million
Listed on May 4, 2010


BEARISH Play Updates

Sina Corporation - SINA - close 33.00 change -1.50 stop 36.80 *NEW*

Target(s): 32.50, 30.50
Key Support Areas: 32.50, 30.50
Key Resistance Areas: 35.30, 36.00, 37.60
Current Gain/Loss: +1.32%
Time Frame: 1 to 2 weeks
New Positions: No

Comments:
SINA continues to look vulnerable and is below broken support near $35.00. The stock is below all of its major daily and weekly SMA's. The 50-day SMA crossed below the 200-day SMA which is a bearish signal that confirms our outlook for this stock. I expect the overhead resistance and SMA's to hold. I would like to move our stop down to $36.80 to protect capital if SINA somehow manages to continue higher from here.

Current Position: Short SINA stock at $34.95

Option Traders:
Suggested Position: JUNE $35.00 PUT

Entry on May 4,2010 at $34.95
Earnings Date June 9, 2010 (unconfirmed)
Average Daily Volume: 1.1 million
Listed on May 1, 2010