Option Investor
Newsletter

Daily Newsletter, Thursday, 9/2/2010

Table of Contents

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

Market Wrap

Bulls Notch Another Win

by John Gray

Click here to email John Gray
I will be filling in for Keene tonight. He had a small emergency. He crashed his airplane - had to make a forced landing after the engine abruptly quit on him. He is OK, except for a bruised rib and wounded pride. I am having some issues as well. I have been without an Internet connection most of the day. I had to drag my laptop down to the local library (wireless connection) in order to finish this commentary. Jim assisted in the effort by adding charts.

The Markets bravely hung onto its gains from yesterday's massive rally, and actually added a few more notches in the bulls' column.

Market Stats

Pending home sales in July rose 5.2% from downwardly revised June levels, the National Association of Realtors reported Thursday, and the indicator shows the market for existing homes is still depressed after the expiration of a key tax benefit. As the availability of a home buyer tax credit worth as much as $8000 expired at the end of April, the pending home sale index plunged 29.9% in May and another 2.8% in June. The NAR had initially reported a 2.6% drop in June. The July index came in better than the 1% monthly drop that economists had forecast, though sales in July were nonetheless 19.1% below those during the same month 2009.

For the week ending August 28th, Initial Claims were 472,000, a decrease of 6000 from the previous week's revised figure of 478,000. The median consensus was for 470,000 and 456,682 initial claims in the comparable week in 2009. The four-week moving average was 485,500, a decrease of 2500 from the previous week's revised average of 488,000.

Factory orders increased a slim 0.1% in July, held down by declining orders for computers and machinery, the Commerce Department said Thursday. Orders for durable goods rose 0.4% in July on higher aircraft orders. This was revised up from the 0.3% gain estimated a week ago. Factory inventories rose 1%, the biggest gain since February.

According to the Bureau of Labor Statistics, non-farm business productivity was revised down to -1.8% in the second quarter from the original estimate of -.9%, due to a slowdown in business output after cutting labor cost to the bone. This followed the 3.9% jump in the first quarter. The market had forecast a -1.9% dip in the revised productivity.

There was also some good news from the retailers. Total August same-store sales rose 3.5%, topping analysts tempered estimates of 2.8% and marking the first positive surprise since March. More than two-thirds of the retailers beat expectations.

Dell, Inc. said Thursday morning that it will not revise its latest bid for 3Par, Inc., effectively ending the month-long bidding war with Hewlett Packard for the small data storage company. Dell says it is entitled to a $72 million break-up fee, under the terms of its agreement with 3Par.

Dell Chart

Burger King (BKC) has gained 50% in two days as the fast food chain announced that it had agreed to be acquired by the private equity firm 3G Capital for $24 per share.

Burger King Chart

Mariner Energy's Vermillion 380 oil rig, located about 80 off the coast of Louisiana, exploded today. Thirteen people are reported overboard and one was injured. Mariner reports that all wells are shut in and there is no oil spilling. The fire was not well related. Mariner said crews were maintaining the rig at the time, which included sand blasting and painting the structure.

The fire occurred around the living quarters and it was thought to have been caused by sparks igniting the fumes from the paint and solvent being used. The rig produces 1,400 barrels of oil and 9.2 mcf of gas per day. Mariner Energy is in the process of being acquired by Apache. Mariner shares dropped $4 on the news but quickly recovered the majority of those losses once it was determined there was no well fire.

Mariner Chart

The markets are basically on "hold" today ahead of tomorrow Non-Farm Payroll report. SPX has climbed slightly above 1080, which acted as resistance on August 23rd. The payrolls report tomorrow will no doubt provide the catalyst to extend this rally, or put an end to this exuberant run. Yesterday's rally left a huge gap below that will, undoubtedly get filled at some point. SPX has successfully tested 1040 three times before. Therefore that appears to be the "line in the sand" for the bulls. On the resistance side, SPX hit 1100 on August 17th and 18th before rolling over. Above that is the downtrend line from April at 1108, and its 200 DMA is currently resides at 1115.

S&P-500 Chart

September is historically the worst month of the year. So far, the first two days have been anything but bearish. However, the week leading up to Labor Day is usually bullish and, so far, it has not disappointed. When fund managers and traders return to their desks after the long weekend we shall get the full measure of their intentions.

The economic reports over that past week or so have been a mixed bag. Generally speaking, we are seeing an economy that is not improving as fast as many had hoped. Jobs (or lack thereof) are the elephant in the room. Until (and unless) businesses begin to hire again, none of the problems that plague the country (foreclosures, bankruptcies, lackluster retail sales, etc.) will go away. Unfortunately, businesses have learned to live with fewer employees, and they like it that way. They will not add staff until demand returns, and demand won't return until more people have jobs - it's a Catch 22. Personally, I am fearful that this is a process that will take years, not months, to solve.

The current estimates for the Non-Farm Payroll report on Friday range from a gain of 50,000 jobs to a loss of 150,000. The wide estimates are due to a lack of clarity on the number of census jobs left to terminate. Estimates vary up to 150,000 census jobs could have ended in August. The private sector is thought to have added 30,000 jobs for the month according to MarketWatch. This report will be critical for the elections. Candidates are actively campaigning all this month and they will be using Friday's jobs data in their speeches. A big headline loss will benefit the challengers and a gain will benefit the incumbents.

And, while we are on the subject of jobs, it does not matter if you are a Democrat, Republican, Independent (or none of the above) if you are honest with yourself; you realize that government can only do so much to create jobs. However, that is not going to stop angry voters in November from taking it out on the incumbents. Opinions vary, but I think the Republicans stand an excellent chance of retaking the House, but frankly I would be a little surprised if they took the Senate too. Wall Street kind of likes gridlock because that means they will get less accomplished (less is best). It reminds me of the plaque that I saw hanging on the wall above of a wise old trader's desk. It said, "No man's life, liberty, or property is safe while the Legislature is in session".

To say this market has been a challenge to trade would be an understatement. Hardly a day goes by that the market does not gap one way or the other. Wednesday was a 90% up day, the third 90% day in four days (two up, and one down). The problem is exacerbated by the fact that a large portion of the move occurs in futures trading before the markets are even open. Yesterday, for example, over half of the day's gain occurred before the opening bell. This makes holding positions overnight (long or short) dangerous.

And then there is the problem of volume. Most of the big rallies that have occurred this summer have been on extremely low volume. One might attribute that to simply slow summer trading, however the sharp declines that we have seen have been on much higher volume. These are not the kind of ingredients that the bulls want to see. Volume is the ally of the bulls.

Volume today was slightly better than some of the record low days we have had recently but nowhere close to the 8+ billion days on Tuesday and Wednesday. Volume today was 6.5 billion shares with 5.5 billion in up volume and only 973 million shares of down volume. Most shares were up fractionally and new highs were well below the new highs from Wednesday. It was a bullish day ahead of a major jobs report on Friday.

Considering the markets added to yesterday's +255 point Dow rally this could be considered a bullish day. Adding 50-points on top of that 255 ahead of the payroll report could also be additional short covering. The economic sentiment seems to be improving slightly and traders may be practicing common sense by not holding shorts over the report. The improving sentiment may also have induced some traders to position themselves in longs on hopes of a better than expected jobs number.

The Dow rallied over 10300 but remains under resistance at 10350. The majority of the Dow gains came in the last hour, which suggests short covering. Support is now 10260.

Dow Chart

The Nasdaq rallied back to resistance at 2200 after a strong two day gain in the semiconductor stocks. The SOX was severely oversold on Tuesday with a new 52-week low at 305. After two days of gains the SOX is back to resistance at 325. The majority of those gains were short covering.

The Nasdaq has decent resistance at 2200 and 2225 and I am sure that will be tested if we get a positive jobs report on Friday. After two days of gains support is now well below at 2100.

Nasdaq Chart

All the hourly ISEE readings today were well above 200, suggesting heavy call buying ahead of tomorrow's payroll report. It looks like everybody is leaning in the same direction. We could have a "sell the news" reaction. Be careful out there!

John Gray


New Plays

Breakout Candidate

by Scott Hawes

Click here to email Scott Hawes
Editor's Note:
In addition to the play below I have listed three other stocks on my watch list for potential breakout plays tomorrow if the employment report is favorable. These may or may not make it in the model portfolio but I thought I would mention them for readers interested.

EQR, VTR, BKCC - All are at pivotal levels and could breakout in a strong market. Otherwise, timing entries on a pullback is certainly an option.


NEW BULLISH Plays

Coeur d'Alene Mines - CDE - close 17.30 change +0.07 stop 15.90

Company Description:
Coeur d'Alene Mines Corporation (Coeur) is a silver producer with gold assets located in North America. The Company, through its subsidiaries, is engaged in the operation, ownership, development and exploration of silver and gold mining properties and companies located primarily within South America (Chile, Argentina and Bolivia), Mexico (Chihuahua), United States (Nevada and Alaska) and Australia (New South Wales).

Target(s): 18.95, 19.95
Key Support/Resistance Areas: 17.80, 16.70
Time Frame: 1 to 3 weeks

Why We Like It:
Demand for industrial metals such as silver is increasing and prices are rising. CDE has broken out of a longer term downtrend line from its October highs and price is now consolidating above it. The stock is forming a bull flag and is above all of its moving averages. I suggest we buy CDE on a breakout if it trades to $17.90 or on pullback to $16.90 which is just above the stock's 200-day SMA. Our initial stop will be $15.90 but it will be adjusted once we are in the position.

Suggested Position: Long CDE stock if it trades to $17.90 or $16.90

Options Traders: Buy October $18 CALL, current ask $0.85

Annotated daily chart:

Entry on September XX
Earnings 11/4/10 (unconfirmed)
Average Daily Volume: 2.0 million
Listed on September 1, 2010


In Play Updates and Reviews

Cloud Computing Play Surges

by Scott Hawes

Click here to email Scott Hawes

Editor's Note:
Good evening. I do not have specific updates for you this evening with the exception of the following comments. My comments on plays from the previous day or two are all still valid and the model portfolio snapshot is current.

DPS - We missed our trigger to open long positions by 7 cents. We may get an opportunity tomorrow on a pullback. Nimble traders may consider buying a breakout.

RAX - The stock surged higher today and we are up +6.4% in the trade. Protect profits if things reverse tomorrow. $20.25 could be considered as a tighter stop. Short Positions - There are no changes to my comments from the past few days. Our stops are in if the rally continues tomorrow.

Tomorrow is the highly anticipated non-farm payroll report. A bad number could send the broader market plummeting very quickly and erase many of the gains experienced this week. If the report is bad and stocks begin to sell-off getting out of long positions is probably the right course of action. However, a good report may extend this rally further. There is one thing for certain and that is the indexes are approaching major resistance levels. I'm not so sure a good employment report will be enough for the indexes to break through overhead resistance but if it does watch out above. The S&P 500 is 10 points away from 1,100 resistance and 25 points away from its 200-day SMA at 1,115. I believe a good employment report will send the S&P 500 into this range tomorrow which puts us back in no man's land. Regardless, we may have some opportunities tomorrow to book profits. Please email me with any questions.

Current Portfolio: