Option Investor
Newsletter

Daily Newsletter, Monday, 9/20/2010

Table of Contents

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

Market Wrap

Breakout Monday

by Todd Shriber

Click here to email Todd Shriber
This could be the day the bulls point to at year-end if the S&P 500 is sitting well above 1200 or flirting with 1250 or higher. Getting excited about just one trading day is not a prescription for successful investing, but this is September and September is supposed to be ugly for stocks. History shows us that, but here we are 14 trading days into the month and the S&P 500 now resides at a four-month high and the Nasdaq is poised for its best September performance since 1998.

Stats Table

Call me a doubting Thomas, but volume remains light, but the bulls have flipped the script on the bears and that is worth noting. The bears seemed to feast on light volume in August, but the bulls are enjoying a light-volume party of their own this month. Volume was just over 2 billion shares on the NYSE and the Nasdaq, not terrible, but nothing to write home about either.

News flow was fairly light for a Monday with one of the marquee headlines coming from the National Bureau of Economic Research, which said the recession officially ended in June 2009. That was enough to propel the S&P 500 above 1143 at one point, the index's highest intraday level since mid-May. The index is now up almost 6% in the past three weeks and with only eight trading days left in September, the bears are clearly running out of time to make their case.

Of course, a good day for equities rarely carries over into a good day for the U.S. dollar, which fell against most of its major counterparts today after falling to a five-week low against the euro last week. In another sign that risk appetite is starting to pick up a little bit, the Australian dollar moved higher against the greenback and traders seem to be speculating that when the Federal Open Market Committee meets tomorrow, the Fed's low interest rate posture will remain in tact. Either way, the U.S. dollar has been in a bad way since June.

Dollar Index Chart

Low interest rates are not good for the dollar and the negative sentiment toward the greenback lifted gold futures to a record high for the third straight session. While plenty of pundits have been chirping lately that gold is the next asset class headed for a bubble, it has to be acknowledged that the yellow metal has continued a torrid pace while equities have moved higher. Gold's momentum is so strong at this point that futures traded as high as $1285.20 per ounce today.

Plenty of analysts and traders have forecasts that call for gold to trade to $1300 an ounce next year. Clearly, some of those estimates are going to have to be adjusted higher because $1300 an ounce could happen this week. While it can be argued that gold is overbought at this point and some analysts are making that argument, keeping interest rates low only pressures the dollar further, making gold all the more attractive. Gold futures are up 17% year-to-date and are poised to run to their tenth consecutive annual gain, according to Bloomberg News. That is the best run of consecutive annual gains for gold since the 1920s.

Gold Chart

Staying in the metals space, Goldman Sachs was out with some bullish comments on copper today and Freeport McMoRan Copper & Gold (FCX) was on the receiving end of much of that praise. While Freeport is the world's largest publicly traded copper producer, the company did get 17% of its 2009 revenue from gold, so gold prices are providing lift to the shares as well.

Goldman lifted its rating on Freeport to ''buy'' from ''neutral'' and boosted its price target on the stock to $94 from $79. Freeport shares were already up almost 15% this month at last Friday's close, but tacked on another 2% today to close above $80 for the first time since March. The stock has a had tough time breaking through to $90 the last couple of times it has traded into the high 80s, so it will be interesting to see how long it takes for the Goldman price target to prove accurate.

Freeport Chart

In other stock-specific news, Lennar (LEN), the third-largest U.S. homebuilder by sales, delivered a profitable third quarter as the real estate market was a little less bad than it has been. Actually, Lennar CEO Stuart Miller said June was the worst the month of the quarter, but called July and August ''a little less horrible.''

Perhaps a little less horrible is all it takes to get investors excited about homebuilders these days as Lennar shares jumped more than 8% on more than double the average daily volume. Florida-based Lennar said it earned $30 million, or 16 cents a share, during the quarter compared with a loss of $171.6 million, or 97 cents a share, a year earlier. Revenue jumped 14% to $825 million from $720.7 million. Analysts were expecting a profit of five cents a share on revenue of $777.5 million.

Good news for Lennar, but one real estate factoid that cannot be glossed over is that the National Association of Home Builders said today that its homebuilders confidence index is still at the the lowest level in 18 years and that is two straight months of that dour reading.

Lennar Chart

What would a Monday be these days with some mergers and acquisitions news out of the tech sector? An exception, but investors did not have to worry about that thanks to Dow component International Business Machines (IBM) announcing that it will acquire data-sorting firm Netezza (NZ) for $1.7 billion. IBM is using the deal to expand its footprint in the analytics business, which accounted for $9 billion in sales for IBM last year. The company is looking to boost that total to $16 billion by 2015.

IBM is quite serious about the analytics business as the Netezza acquisition represents IBM's 24th purchase in this arena in the last four years, according to the Associated Press. The Netezza buy is IBM's biggest analytics purchase since the $1.2 billion buy of SPSS in 2009. IBM will pay $27 a share for Massachusetts-based Netezza, a 10% premium to where the stock closed last Friday.

Another reason why IBM may have been keen to acquire Netezza: There were rumors that, surprise, surprise Hewlett-Packard (HPQ) was also interested in the company.

Netezza Chart

Looking at the charts, at Friday's close, the S&P 500 was honoring an extremely tight range of 1120-1130. If you are in the bullish camp, the good news is that range was broken in decisive fashion today as the S&P 500 closed just below 1143. There might be some token psychological resistance at 1150 and againbat 1200, but the if the bulls can continue to control the market, there is plenty of real estate for the index to run to its next significant hurdle at 1240. Another bullish sign would be for old resistance at 1130 to turn into new support.

S&P 500 Chart

The Dow had been slow to work its way back to August resistance at 10,700, but that issue was taken care of with authority today as the blue-chip index jumped all the way to 10,753. The index huffed and puffed its way to gain of just 37 points last week and then proceeded to almost quadruple that gain today. Next resistance lies at 11,000, but the catalysts probably are not there for the Dow to traverse that lofty level this week. If 10,700 turns into support, that would be another point in the bulls' favor.

Dow Chart

Tech stocks had disappointed for a good part of the summer, but the news flow out of the sector has turned positive in recent weeks and that has been a boon for the Nasdaq. Dividend news out of Cisco (CSCO) and Microsoft (MSFT) helped as did Oracle's (ORCL) earnings report last week. Those headlines are old news and they had already helped the Nasdaq conquer resistance at 2300. Monday's close just below 2356 brings resistance in the 2385-2400 area into view. Support is 2290.

Nasdaq Chart

Small caps are not being left behind by this rally and the Russell 2000 is flirting with the area that would prompt me to become even more bullish on the group. I have previously said that 675 is the area to watch on the upside with Russell 2000 and the index traded as high as 670 today. The index easily dealt with 650 today, but must traverse 675 to encourage buyers to come off the small-cap sidelines.

Russell 2000 Chart

The FOMC meeting will be big news on Tuesday and there are three more housing reports this week that could throw a curve ball at the bulls, so this week could represent a test of the September rally's strength. At the stock level, more buybacks, dividend increases and upgrades are the catalysts needed to fan the flames of the rally heading into October.

I admit there is no science involved in this little anecdote, but the ''Wall Street'' sequel debuts this week. When the original debuted in December 1987, the Dow added about 7% over the next two months. Consider that my fun fact for the day, not an invitation to buy stocks simply because of a movie debut.


New Plays

Short Retail Candidate

by Scott Hawes

Click here to email Scott Hawes


NEW BEARISH Plays

Deckers Outdoor Corp - DECK - close 49.31 change +1.43 stop 51.15

Company Description:
Deckers Outdoor Corporation is engaged in designing, producing, marketing and brand managing of footwear and accessories. The Company sells its products, including accessories, such as handbags, headwear, packs and outerwear, through domestic retailers and international distributors and directly to the consumers, both domestically and internationally, through its Websites, call centers, retail concept stores and retail outlet stores. The Company markets its products under three brands: UGG, Teva and Simple.

Target(s): 47.40, 46.10
Key Support/Resistance Areas: 50.25, 45.00, 43.50
Time Frame: 1 to 2 weeks

Why We Like It:
The retail sector has experienced an impressive string of consecutive advances and is due for pullback with the broader market. DECK has overhead resistance and is sitting just below a downtrend line that began with its 52-week highs in June. I suggest readers initiate short positions at current levels and play for -4% to -6.5% pullback. Our stop will be above the downtrend line and it will be adjusted after we are in the trade.

Suggested Position: Short DECK stock at current levels.

Annotated chart:

Entry on September xx
Earnings: 10/21/2010 (unconfirmed)
Average Daily Volume: 859,000
Listed on September 20, 2010


In Play Updates and Reviews

Two Short Positions Closed

by Scott Hawes

Click here to email Scott Hawes
Current Portfolio:


BULLISH Play Updates

Brocade Communications - BRCD - close 5.67 change -0.01 stop 5.34

Target(s): 5.95, 6.20, 6.50
Key Support/Resistance Areas: 6.60, 6.20, 6.00, 5.75, 5.40, 5.00
Current Gain/Loss: -1.39%
Time Frame: 1 to 3 weeks
New Positions: Yes

Comments:
9/18 & 9/20: I am concerned about BRCD per my 9/15 comments. However, the stock has held its ground and remains in a bull flag. It could just as easily break higher or lower. If a breakout occurs before a pullback I suggest readers begin to look for an exit or tighten stops to protect profits. $5.95 and $6.20 are the primary targets.

9/15: Oh what a day makes. At an analyst day this afternoon BRCD said they were expecting gross margins to be at the low end of their estimated range in 2011. This news sent the stock tumbling. As such, I want to tighten the stop $5.34 and suggest we step aside if it is hit. I've lowered the first target to $5.95 which is just below today's high.

9/14: BRCD pulled a repeat of yesterday and printed its third consecutive bottoming tail candlestick. The stock remains in a bull flag but could pullback with the broader market. I think pullbacks can be bought and will be short lived.

Current Position: Long BRCD stock, entry was at $5.75

Options Traders: Long October $6 CALL

Entry on September 10, 2010
Earnings 11/23/10 (unconfirmed)
Average Daily Volume: 12.7 million
Listed on September 4, 2010


Noble Corp - NE - close 35.37 change +0.29 stop 32.25

Target(s): 35.90, 36.80, 38.30
Key Support/Resistance Areas: 36.95, 38.50, 33.50
Current Gain/Loss: +2.23%
Time Frame: 1 to 3 weeks
New Positions: Yes, on pullbacks

Comments:
9/20: NE continues to look strong but I am concerned about the overbought conditions. My comments below remain valid.

9/18: NE made a nice recovery today closing +1.7% on the day. The stock remains in a bull flag on its daily chart. If we break higher prior to a pullback I suggest readers look for an exit or tighten stops to lock in profits. I've added $35.90 as a target which is approximately +4% from our entry, while $36.80 is +6%. I'll be looking to take profits or tighten stops as these levels approach.

9/15: NE traded down to $34.36 and bounced hard into the close. Our first target is just under the 200-day SMA and near the 8/4 highs. Our stop is below the converging 20, 50, and 100 day moving averages. My comments from the play release remain the same.

Current Position: Long NE stock, entry was at $34.60

Options Traders: Long October $36.00 CALL

Entry on September 15, 2010
Earnings 10/20/10 (unconfirmed)
Average Daily Volume: 3.7 million
Listed on September 11, 2010


Northern Oil & Gas - NOG - close 15.51 change +0.45 stop 14.25

Target(s): 15.68, 15.95, 16.50
Key Support/Resistance Areas: 17.25, 16.20, 15.75, 15.00, 14.60
Current Gain/Loss: +3.06%
Time Frame: 1 to 3 weeks
New Positions: Yes, on pullbacks

Comments:
9/20: NOG broke to the upside today and out of its bull flag. This trade has some potential but I am concerned about the overbought conditions in the broader market. Our first target is overhead and readers should consider taking profits or tightening stops to protect them as they approach.

9/18: NOG bounced nicely off of its 50-day SMA on Thursday and remains above support. The stock is forming bull flag on its daily chart and we're looking for a breakout. If NOG heads higher before going lower be prepared to take profits as our targets approach. I'm concerned we may see a spike higher only to see it fail. I've added a target of $15.68 which is +4% higher than our entry. My comments from below remain valid.

9/14: We are long NOG at $15.05. There is solid support all the way down to $14.60 including an upward trend line, the 20 and 50-day moving averages and prior support/resistance levels. Pullbacks should get bought and I like new positions on any further dips. Our first target has been lowered 5 cents to $15.95 which is +6% higher than our entry. The play release is below.

Current Position: Long NOG stock, entry was at $15.05

Options Traders: Long October $15.00 CALL

Entry on September 14, 2010
Earnings 10/25/10 (unconfirmed)
Average Daily Volume: 506,000
Listed on September 8, 2010


iPath S&P 500 VIX ST Futures - VXX - close 17.16 change -0.22 stop NONE

Target(s): 18.45, 19.50, 20.40
Key Support/Resistance Areas: 17.50, 18.50, 19.75, 20.60
Current Gain/Loss: -5.48%
Time Frame: 1 week
New Positions: Yes, with tight stops.

Comments:
NOTE: I view this as an aggressive trade so small position size is recommended. Long VXX is a bearish play on equities, however, it is listed as long play because we are long the underlying instrument.

9/20: I want to temporarily remove the stop in VXX as it is too close to current levels. We will get a spike in volatility in the coming days which is when we will close VXX for a profit, or tighten stops. This is risky move and a judgment call based on the current overbought conditions and low volatility levels. My comments below remain valid.

9/18: My guess is that a breakout prior to a pullback will most likely stop us out in VXX. But I like volatility here as the market is in much need of a healthy pullback. A pullback will likely be fast and furious and VXX should spike 5% to 10% which will give us an opportunity to close this position for a profit. I've added a target of $18.50. Be ready to take profits or tighten stops to protect them as our targets approach. My comments from below have not changed.

9/15: VXX opened higher today but struggled to hold on to its gains as the market recovered from early losses. Tomorrow's jobless claims is likely to set the tone for the broader market for the remainder of the week. If there is a sell-off I can easily see VXX surging 5% to 10% higher. Otherwise, it will inch closer to our stop and we may need to exhibit some patience.

Current Position: Long VXX stock, entry was at 17.70

Options Traders: Long October $19.00 CALL

Entry on September 14, 2010
Earnings N/A (unconfirmed)
Average Daily Volume: 21 million
Listed on September 13, 2010


BEARISH Play Updates

Freeport-McMoRan - FCX - close 83.35 change +1.63 stop 84.55

Target(s): 80.20, 79.40, 78.00
Key Support/Resistance Areas: 84.25, 76.50, 75.00
Current Gain/Loss: -2.96%
Time Frame: 1 week
New Positions: Yes, if playing for quick pullback

Comments:
9/20: A Goldman Sachs upgrade on FCX to buy from neutral sent the stock +2% higher today. As a result, our position suffered greatly and now we need to look for an exit. This move higher in FCX can not continue but it appears any dips will most likely get bought. I've added an immediate target of $80.20, while $79.40 will fill a gap higher. FCX should make it down to these levels on a pullback and is where I suggest readers close positions or tighten stops to protect capital, even if it means a loss. This could all come at once on one big down day.

9/18: FCX looks toppy and ready for pullback, but then again most things do right now. We are looking for a retracement of some of the recent gains which could come quick and hit our targets. Be ready to close positions if it occurs.

Current Position: Short FCX stock, entry was at $80.95

Options Traders: Long October $75.00 PUT

Entry on September 15, 2008
Earnings: 10/20/2010 (unconfirmed)
Average Daily Volume: 10 million
Listed on September 14, 2010


CLOSED BEARISH PLAYS

Temple-Inland - TIN - close 18.90 change -1.18 stop 19.80

Target(s): 18.60, 18.10
Key Support/Resistance Areas: 20.25, 18.00
Final Gain/Loss: +4.99%
Time Frame: 1 to 2 weeks
new Positions: Closed

Comments:
9/20: That was quick! Goldman Sachs made some cautious comments about the sector/stock and TIN triggered our short entry at the open. The wave of selling I referred to in the play release began in earnest. Our final target was hit very quickly so the position was closed for a +5% gain. After the lambasting the stock took this morning I suspect TIN will experience resistance near current levels and another wave of selling could begin if the broader market begins a correction.

9/18: We are back with a short play in TIN after closing a nice winning trade several weeks ago. On 8/31 the stock broke to the upside on heavy volume and has rallied +30% ever since. Over the past two weeks TIN has been drifting higher in an ascending channel on light volume, which is sign this move higher is built on weak foundation and may be coming to an end. If TIN falls out of the channel I believe it could create a wave of selling as traders who bought the stock will run for the exits to lock in profits. The stock is also underneath its 100-day and 200-day SMA's. I suggest we initiate short positions if TIN trades to $19.30 which is below Thursday's low and the 50-day SMA. More nimble traders may want to consider a short position at current levels but it is a riskier situation. If triggered, our two targets are -4.5% and -6.5% lower.

Closed Position: Short TIN stock at $18.10, entry was at $19.10

Annotated chart:

Entry on September 20, 2010
Earnings: 10/19/2010 (unconfirmed)
Average Daily Volume: 2.3 million
Listed on September 18, 2010


Intuit, Inc. - INTU - close 45.52 change +0.63 stop 45.52

Target(s): 42.90, 42.20, 41.40
Key Support/Resistance Areas: 45.00, 43.25, 42.00, 41.35, 50-day SMA
Current Gain/Loss: -5.05%
Time Frame: 1 to 2 weeks
New Positions: Closed

Comments:
9/20: INTU simply won't pullback, despite downgrades and price targets from analysts being reached. Our stop was hit this morning so we are flat for -5% loss.

9/18: We could be in trouble in this play as the stock broke its intraday downtrend line on Thursday and is consolidating near its all-time highs. A double top scenario is still in play but broader market strength will most likely cause our stop to get hit. I like new positions here with tight stops, i.e. you are either right or right out of the trade with little at risk. I've adjusted the targets and the stop up a few cents. If INTU falls be ready to close positions or tighten stops as I think dips will get bought.

9/11: We got a little unlucky with the gap lower in INTU on Friday but it was expected on the heels of a downgrade. Nonetheless, I'm looking for the stock to continue lower. The broader market will most likely determine how far this goes. Our first two targets are -3% and -4.5% lower from here. The play write-up is below.

Closed Position: Short INTU stock at $45.52, entry was at $43.33

Annotated chart:

Entry on September, 10, 2010
Earnings: 11/18/2010 (unconfirmed)
Average Daily Volume: 4 million
Listed on September 9, 2010