Option Investor
Newsletter

Daily Newsletter, Thursday, 9/30/2010

Table of Contents

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

Market Wrap

Stellar September Ends With A Whimper

by Todd Shriber

Click here to email Todd Shriber
Not even some decent economic news could keep stocks from booking losses today, but with September now in the books it should be noted that stocks did notch their best September performance since 1939. All three major U.S. indexes suffered small losses with the S&P 500 and the Nasdaq each losing about 0.3% on the day.

Stats Table

Obviously today is Thursday and that means another jobless claims update. Initial claims fell by 16,000 to 443,000 and that more than reverses last week's uptick. The four-week moving average dropped by 6250 claims to 458,000. Continuing claims data was also fairly positive as that number dropped by 83,000 to 4.489 million. Continuing claims have dropped by 1.553 million, or almost 26%, from a year earlier. Another slightly positive sign may be that the number of folks receiving extended unemployment benefits fell last week by 293,000 to 4.879 million. Still, that number is up 22.3% in the past year.

Unemployment Claims

The Bureau of Economic Analysis also chimed in with a positive revision to the second-quarter GDP estimate, revising that number upward to growth of 1.7%, barely higher than the previous reading of 1.6%. That is still well below the original estimate of 2.4% and the second-quarter number represents the third-slowest quarter of growth since the fourth quarter of 2009.

On the bright side, business investment contributed 0.13% to the growth and consumer spending chipped in 0.16%. Bottom line: A small upward revision is better than a negative revision.

GDP Chart

While the economic news provided only minimal help to equities, oil was sure on the receiving end of some bullish trade. NYMEX-traded crude for November delivery jumped 2.7% to $79.97 a barrel, the best closing price in seven weeks. Today's rally in oil also may have been some follow through on Wednesday's news from the Department of Energy that oil inventories declined by 500,000 barrels last week. Friday's Institute for Supply Management manufacturing number could be the next catalyst to push oil above resistance at $80.

Oil Chart

In stock-specific news, Caterpillar (CAT), the world's largest maker of construction and mining equipment, was the biggest loser in the Dow today, tumbling 1.64% after leading the blue chip index with a gain of over 20% in September. The biggest news on Caterpillar today was the company's announcement that it will raise product prices as much as 2% next year.

As I have lamented many times before when talking about Caterpillar, the company's products, new or used, are not cheap to begin with and this is one shining example of a company that would not raise prices if it was not sure it could still move product at those elevated price points. In other words, this should have been good news for the stock.

In some regions, Caterpillar will raise prices by as much as 6%, but the stock still slipped on volume that was almost 4 million shares above the daily average. There have been a few reports out recently questioning the fact that Caterpillar is within striking distance of its all-time high set at the height of the commodities boom a couple of years ago. For what it is worth, Credit Suisse recently slapped a $95 price target on Caterpillar and if you like point & figure charts, you will like the fact that Caterpillar's point & figure says the stock is going to $113.

Caterpillar Chart

American International Group (AIG) was back in the news today. The former Dow component jumped by more than 4% on news that the company is drawing closer to ending its relationship with the Treasury Department and that the company's plan to do so may cut the cost of the government's bailout package by 50% to less than $50 billion.

The plan to convert Treasury's preferred shares in AIG to common stock could net a profit of $16.5 billion compared to a previous estimate that called for a loss of $45 billion, Reuters reported. Based on an actual cash cost of $47.5 billion, the Treasury Department's breakeven price on AIG shares is around $28.70, according to Reuters. That is more than $10 below where the shares closed today.

Of course the rub is that if AIG reverses its recent bullish ways and starts to decline, that would weigh on Uncle Sam's profits. Making it even harder to assess the government's profit potential here is the fact that the Treasury Department will not start selling its AIG stake until 2011.

AIG executives are touting the repayment plan as a sign of the company's strength and I heard someone on CNBC make an interesting point about AIG earlier this week. Paraphrasing, the gentleman said that for years AIG was an excellent stock and the company was brought to the brink by a small group of people that represented only a small part of the company's business.

That could mean AIG will once again be a solid name. On the other hand, the company is having to part with some attractive assets to raise cash and the overhang from the government selling the stock will probably depress AIG's share price once those share sales start. Uncle Sam is just like any other trader or investor: He wants the best price and is willing to wait to get it.

Ongoing government sales of Citigroup shares have depressed that stock's price to some degree and that scenario could play out again with AIG. Remember, the government is not hasty about selling its stakes in these companies either. Citi was 27% owned by the government in November 2008 and that stake is 18% today, according to the Wall Street Journal. Taking almost two years to dump 9% is certainly a slow process when the government is involved.

AIG Chart

There were plenty of headlines after the market closed as well. I will start with the less marquee name that is seeing some unusual after-hours action. Gymboree (GYMB), the specialty retailer that focuses on apparel for kids, is trading higher by almost 21% as of this writing after the company said it is exploring a sale. The Wall Street Journal is reporting that Gymboree is looking for a private equity buyer and that the company's bankers are weighing interest from potential bidders, though the auction process has yet to commence.

Gymboree Chart

The big after-hours news has to do with Dow component and tech titan Hewlett-Packard (HPQ) and no, it does not involve another acquisition for the world's largest computer maker. HP announced that Leo Apotheker will become the company's new CEO. This is a curious choice to say the least as most analysts and investors that closely follow HP were expecting the company to select an internal candidate.

The market did not react positively to announcement as the shares are down more than 3% as of this writing. There might be something to that negative reaction. Apotheker, 57, was most recently the CEO of SAP (SAP), the German software giant. He was appointed to that post in April 2008, but lasted less than two years on the job.

Pehaps the biggest executive news out of HP is not the hiring of Apotheker, but the appointment of Ray Lane to the roll of non-executive chairman. Lane is well-known in Silicon Valley as he is partner at the venture capital firm Kleiner Perkins. Lane joining HP may be the latest episode in what is becoming an interesting little spat between HP and rival Oracle (ORCL).

Lane helped Oracle deal with a big accounting scandal a while back, but Oracle founder and CEO Larry Ellison still sent Lane packing ten years ago. Of course, Oracle is where former HP CEO Mark Hurd now calls home.

Hewlett-Packard Chart

Looking at the charts, anyone that missed the September rally may be hoping for the S&P 500 to dip all the way back to 1100, but I think a down move, if it happens, will not be that dramatic and merely take the index back into the 1120-1130 range. The S&P 500 closed below 1150 today, so it needs to reclaim that level before it can go after resistance at 1170.

S&P 500 Chart

Not much has changed on the Dow as the index has been chopping around this week. Resistance remains in place at 10,870 and 10,900. The Dow could easily move higher if constituents beyond Caterpillar and DuPont (DD) would lend a hand.

Dow Chart

The 2380 area continues to be a thorn in the side of the Nasdaq. If the index can move beyond that level, next resistance is 2425 and then the April highs, but I get the sense tech may be a bit vulnerable to a small pullback after stocks like Amazon (AMZN) and Apple (AAPL) moved up in almost straight-line fashion in September.

Nasdaq Chart

The Russell 2000 could not build on Wednesday's move to a three-month high, but the index did close above the all-important 675 level on Thursday, a bullish sign. Watch for 700 and 725 to act as resistance and 650 to be support.

Russell 2000 Chart

September defied its historical precedent and now it is October's turn to do the same. Beyond earnings season, which starts in a couple of weeks, and the obvious catalysts that come from economic data, politics will play a heavy hand in October's performance. If it becomes more apparent as we get deeper into October that a change in power is coming at least in the House, then stocks should move higher. Keene should be back with you next Thursday.


New Plays

Stocks Close Near Monthly Highs

by Scott Hawes

Click here to email Scott Hawes
Editor's Note:
Good evening. It appears the broader market is on the verge of a much needed healthy pullback, but we need to see follow through in the coming days to take advantage it. The market left us hanging today as the end of Q3 window dressing prevented a larger decline. The economic calendar is stacked tomorrow so this will likely create a volatile trading session which could cause a break higher or lower. Regardless of what happens, the odds of a correction (which I think will get bought) at this point far outweigh any significant breakouts. Even if we break higher tomorrow I think the spike will be short lived and will provide better opportunities to initiate short positions at a better price. In light of the economic data due out tomorrow, I do not have new plays to release tonight. We have positions on both sides of the market to take advantage of a bigger move. Please email me with any questions/comments.

Trade Idea:
QQQQ - I like short positions in the NASDAQ 100 ETF - QQQQ. I believe there will be a rotation out of larger cap stocks into smaller cap stocks as Q4 takes shape. The immediate target is the $47 area which is about -4% lower than current levels.



In Play Updates and Reviews

Two Winners Closed

by Scott Hawes

Click here to email Scott Hawes

Editor's Note:
Thursday was a good day for our positions with the exception of CLNE and ATI which are not cooperating. However, we closed MTW for a healthy +12.5% gain and RRC for just shy of a +5% gain. We have a slight bearish lean in the portfolio as I anticipate a healthy market correction around the corner.

Current Portfolio:


BULLISH Play Updates

Clean Energy Fuels - CLNE - close 14.21 change -0.52 stop 13.90

Target(s): 16.15, 16.80
Key Support/Resistance Areas: 17.00, 16.20, 14.80
Current Gain/Loss: -6.20%
Time Frame: 1 to 3 weeks
New positions: Yes, with tight stops

Comments:
9/30: CLNE has simply not lived up to my expectations since opening the position last week. The stock has not followed through and if the broader market corrects we will likely be stopped out. There is a lot of support in the $14.00 area but the stock did down to $13.48 in May. That's where CLNE could be headed if things do not turn around soon. I have seen the stock buck the trend and we are still alive but readers should exercise caution.

9/29: CLNE bounced today but we need more follow through. I'm looking for a move back up to its recent swing high and possibly 200-day SMA if the market cooperates.

9/28: The sell-off in CLNE the past few days has been disappointing. The stock has a lot of support in the $14.00 area. I think the stop may be a little too tight so I would like to lower it to $13.90 for now to account for a possible spike down.

Current Position: Long CLNE stock, entry was at $15.15

Options Traders: Long November $16.00 CALL

Entry on September 23, 2010
Earnings 11/9/2010 (unconfirmed)
Average Daily Volume: 973,000
Listed on September 13, 2010


Noble Corp - NE - close 33.79 change -1.18 stop 32.85

Target(s): 35.90, 36.80, 38.30
Key Support/Resistance Areas: 36.95, 38.50, 33.50
Current Gain/Loss: -2.34%
Time Frame: 1 to 3 weeks
New Positions: Yes

Comments:
9/30: There is good news and bad news about NE today. The bad news is the stock lost the majority of yesterday's +4% rip higher after Capital One Southcoast downgraded the stock to Neutral from Add. The good news is the stock closed nearly +2% off of its lows and remains above its rising 50-day SMA. The stock has support in the $33.00 area and our stop is $32.85. A broader market correction will likely take us out. Readers should use caution.

9/29: Our patience has paid off so far as this position is back in positive territory. The stock surged higher today gaining nearly +4%. NE now sits on an intraday downtrend line but with a bull flag right below it. If the broader goes higher from here our targets should easily be easily. Our stop is in the right place if things reverse.

9/28: NE has tested the backside of its broken primary downtrend line and its 50-day SMA from above, but it has closed below its 20-day SMA the past two days. I like new positions here with a tight stop of $32.85. If we get a pullback in the broader market our stop will likely get hit.

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


iPath S&P 500 VIX ST Futures - VXX - close 17.29 change +0.36 stop 16.23

Target(s): 17.55, 18.45, 19.25
Key Support/Resistance Areas: 17.50, 19.75, 20.60
Current Gain/Loss: -2.32%
Time Frame: 1 to 2 weeks
New positions: Yes

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.

9/30: As the market spiked higher this morning volatility never really budged which was a signal the spike could fail, and it did. The question now is whether or not there will be follow through lower in the coming days. I believe there will be but I also think trading could be choppy which may fake traders out of positions. If we are patient our targets should be reached as the market is need of healthy correction. I suggest readers use further spikes in VXX as opportunities to take profits or tighten stops to protect them. My primary targets are $18.45 and $19.25. Our stop is in place.

9/29: Volatility broke an intraday downtrend line but still need to get above Wednesday's highs, which will come if there is broader market weakness. My comments below remain the same.

9/28: Volatility carried into this morning but reversed lower as the bulls stepped in pushing stocks back toward their highs. I want to add a target of $17.55 which should be considered as a place to exit positions or tighten stops. We have a tight stop which will most likely get hit if the broader market continues higher in the coming days.

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

Alleghany Technologies - ATI - close 46.45 change +0.10 stop 47.45 *NEW*

Target(s): 45.20, 44.65, 43.75, 43.05
Key Support/Resistance Areas: 46.25, 43.80, 42.00
Current Gain/Loss: -4.03%
Time Frame: 1 to 2 weeks
New Positions: No

Comments:
9/30: As I suspected ATI gapped above our stop so per last nights updates a new stop should have been placed above the opening range. This proved to be the right call as ATI trade lower out of the gate and closed below our stop. We've nearly missed revised targets in recent days and I still suggest readers look for an exit, preferably on weakness. Our new stop has been raised to $47.45 and our first target has been raised to $45.20, which would represent a loss on the trade.

9/29: I have been advocating exiting positions on weakness and there have been opportunities, but ATI has simply stopped short of our revised targets. Our +4% gain last Thursday has now turned into nearly a -4% loss. $46.60 has proven to be resistance the past few days but if there is more broader market strength our stop will likely get hit. There is a chance ATI could open near our stop tomorrow. If this happens I suggest we place the protective stop above the opening 15 or 30 minute range. This allows us to measure the true strength or weakness in the stock and often times keeps us in the trade looking for a better exit.

9/28: It appeared our first target of $44.65 was going to be reached this morning but ATI, and the broader market, reversed on a dime. The stock came within 20 cents of our first target and I have added a $45.00 target to account for the rising 20-day SMA. If strength continues in the coming days our stop will likely get hit.

Suggested Position: Short ATI stock, entry was at $44.65

Entry on September 22, 2010
Earnings: 10/20/2010 (unconfirmed)
Average Daily Volume: 1.7 million
Listed on September 20, 2010


Stifel Financial Corp - SF - close 46.29 change -0.28 stop 48.60

Target(s): 46.05 (hit), 45.05, 44.05
Key Support/Resistance Areas: 50.00, 48.00, 45.75, 45.00, 43.50
Current Gain/Loss: +2.59%
Time Frame: 1 to 2 weeks
New positions: Neutral

Comments:
9/30: SF tried to make run higher today but fell flat on its face. If the broader market corrects our more aggressive targets should be easily be reached. Our stop is above the 9/27 high so if we are wrong our loss will be small.

9/29: SF collapsed -3.5% today and our first target was reached. Let's move the stop down to $48.60. If the broader market corrects SF should head back to test its lows.

9/28: SF bounced off of its 20-day SMA today but remains under a fairly important intraday resistance level between $48.25 and $49.25. Tighter stops could be considered between $48.60 and $49.40. I think SF will print $46.05 prior to any significant move higher as long as the broader market pulls back.

Suggested Position: Short SF stock if it trades to $48.45 or $47.52

Options Traders: Buy November $45.00 PUT, current ask $1.50

Entry on September 23, 2010
Earnings: 11/09/2010 (unconfirmed)
Average Daily Volume: 250,000
Listed on September 22, 2010


Financial Sector SPDR - XLF - close 14.34 change -0.03 stop 14.75

Target(s): 13.85, 13.55
Key Support/Resistance Areas: 15.00, 14.60, 14.20, 13.70, 13.30
Current Gain/Loss: +0.83%

Time Frame: 1 to 2 weeks
New Positions: Yes

Comments:
9/30: XLF spiked higher at the open but tanked the remainder the day, closing at its lows. We are short the ETF at $14.46. Any broader market correction should send XLF below $14.00 fairly quick and we have a tight stop if we are wrong. I've adjusted the targets up 10 cents each. My comments below have not changed.

9/29: The financial services sector continues to trade terrible across all industries, from banks, to lenders, to broker dealers. While the broader market has surged higher in recent weeks, XLF has struggled. Either XLF catches up with the broader market or the broader market corrects sending XLF lower. I think the latter happens which should send XLF to test its recent lows. I suggest readers initiate short positions at current levels and play for a -4% to -6% pullback. We will keep a tight stop on the trade and be out for a small loss if we are wrong.

Current Position: Short XLF stock, entry was at $14.46

Options Traders: Long November $14.00 PUT

Entry on September 30, 2010
Earnings: N/A (unconfirmed)
Average Daily Volume: 74 million
Listed on September 29, 2010


CLOSED BULLISH PLAYS

Manitowoc Co., Inc - MTW - close 12.11 change +1.45 stop 9.65

Target(s): 11.00(hit), 11.25(hit), 11.50(hit)
Key Support/Resistance Areas: 11.50, 11.25, 11.00, 10.00, 9.70
Final Gain/Loss: +12.52%
Time Frame: 1 to 3 weeks
New Positions: Closed

Comments:
9/30: Wow! MTW spiked +13% higher today on news the company announced plans to refinance a portion of their term loans under its senior secured credit facility with senior unsecured notes to improve the balance and flexibility of its capital structure. This gives the company more flexibility and that is what investors wanted to hear. Regardless, all of our targets were hit today so we are flat the position for healthy +12.52% gain. The stock has gained +18.5% since our entry on Monday. Readers who want to stick with this position I suggest protecting profits as I've seen similar situations eventually give it all back. Don't let that happen. Tighter stops could be considered at $10.95, $11.25, and $11.55.

9/29: MTW continued bouncing higher today as the stock tacked on another +2.6%. Be prepared to take profits or tighten stops to protect them as our targets approach. My comments below have not changed.

9/28: MTW erased yesterday's losses and then some, gaining +3.38% on the day. I am looking for the stock to make a higher high if the broader market continues higher. Our three targets are all below the 200-day SMA.

9/25: MTW has pulled back to its rising 20-day and 50-day SMA's which I think will be a spring board for a move higher up towards its 200-day SMA. I suggest readers initiate long positions at current levels. Our targets range from +6.5% to +12% higher from current levels. Our stop is below both of the aforementioned SMA's and a prior support level from June.

Closed Position: Long MTW stock at $11.50, entry was at $10.22

Annotated chart:

Entry on September 27, 2010
Earnings 10/28/2010 (unconfirmed)
Average Daily Volume: 1.9 million
Listed on September 25, 2010


Range Resources Corp - RRC - close 38.13 change -0.62 stop 34.40

Target(s): 39.25 (hit), 40.00, 41.50
Key Support/Resistance Areas: 42.00, 40.75, 39.50, 37.38, 34.70
Final Gain/Loss: +4.72%
Time Frame: 1 to 3 weeks
New Positions: Closed

Comments:
9/30: I am inclined to take profits at our first target here as RRC spiked higher again today. There is certainly more upside possible in RRC but I am leery of a broader market correction. Tighter stops can be considered anywhere from $35.95 to $36.95. If the market corrects RRC will most likely head towards its rising 20-day SMA.

9/29: RRC reached our trigger as it broke higher this morning so we are long the stock at $37.48. RRC gained almost +5% on the day and we have already gained +3.39% in the position. There is resistance near current levels so we could get a retracement of some of today's gains. Protecting profits is recommended, especially if RRC continues motoring higher without a retracement. I've adjusted the 2nd and 3rd targets slightly to account for the declining 100-day SMA and a gap fill.

9/28: We are sticking with an energy play in a natural gas driller tonight. RRC surged higher and closed above its 50-day SMA today on heavy volume, while call activity was huge in the October and November strikes. RRC is forming an ascending triangle on its daily chart and I suggest readers play for a breakout. Let's use a trigger of $37.48 to initiate long positions in the stock. This is above the high on 9/10. More nimble traders may want to try to time a pullback to the $36.00 area. If triggered, our first two profit targets are +5% and +8% higher.

Closed Position: Long RRC stock at $39.25, entry was at $37.48

Annotated chart:

Entry on September 29, 2010
Earnings 10/18/2010 (unconfirmed)
Average Daily Volume: 3.2 million
Listed on September 25, 2010