Option Investor
Newsletter

Daily Newsletter, Saturday, 10/16/2010

Table of Contents

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

Market Wrap

Don't Fight the Fed

by Jim Brown

Click here to email Jim Brown

All of my investing life the only axiom that always proved to be true was don't fight the Fed. They have an unlimited supply of money and investors have limits.

Market Statistics

When the Fed wants the market to react in a certain way they can apply all the power they need to make it happen. It may not be an immediate reaction but they will apply pressure until they get the desired result. Their influence on the markets can outweigh and cancel prevailing historical trends both on the upside and the downside.

For instance the markets normally decline in September and October but an aggressive Fed can negate that trend as we have seen in 2010. The markets normally rally in November and December but a Fed with a strong tightening bias can create a bear market in any environment.

It all boils down to the cost of money. If the Fed decides to launch a major quantitative easing program to drive down rates and stimulate the economy then the dollar suffers. Dollar denominated assets like metals, oil, commodities, real estate and even stocks are forced to rise in dollar cost in order to maintain parity with their prior real valuations. An ounce of gold is still an ounce of gold and it worth the same today as it was the same time last year. It just takes more cheap dollars to buy the same ounce of gold today. The reverse for everything is true when the Fed is raising rates. Our dollars rise in value and that pushes down the price of everything denominated in dollars because it takes fewer expensive dollars to purchase those items.

Everyone reading this should understand this relation between Fed actions and the reaction of the stock market. As commentators we get caught up in the technical and fundamental reasons for market movements or lack of movements. It is hard to mentally make the continued connection on a daily basis between an extremely overbought market that continues to rise for no specific reason and a three-cent drop in the dollar. Most investors don't really understand the complex linkage that goes on in the currency markets. Hedge funds, institutional investors, sovereign funds, large banks and even companies like Berkshire Hathaway play the currency game with trillions of dollars in trades.

A 3-cent drop in the dollar may not seem like much but when played using billion dollar trades in the derivatives market that is a big move. There are roughly $653 trillion in outstanding derivatives contracts and much of that is currency based. Traders are shorting the dollar, which produces cash they use to go long another currency, commodities or stocks. This is a VERY crowded trade today but it is still gathering momentum. Suffice it to say there are thousands of entities still leveraging up these trades as each day passes. That is putting upward pressure on everything denominated in dollars including stocks.

For the time being this trade will continue. Bernanke alluded to another QE program in his speech on Friday. As long as the Fed is applying pressure to rates and the dollar the market will continue higher. Eventually it will end badly. Probably very badly but that could be weeks, months or even a year down the road. Don't fight the Fed.

One of the most common quotes used in the market came from John Keynes. "The market can remain irrational longer than you can remain solvent." He was making a case that the markets could remain overbought or oversold for a very long time and far longer than an investor who was betting against the market could remain solvent.

Every investor has a bias. It is either bullish or bearish based on the tone and content of the articles they read. If you only paid attention to the whining about the U.S. debt and unemployment you could not help but be bearish. If you only paid attention to the random green shoots in the economics and S&P company guidance then you could be bullish and have blinders on to the things the bearish investor was seeing. It is what makes a market. If you only listened to Larry Kudlow and Jim Cramer you would probably be a raging bull today. If you only listened to Robert Prechter and Nouriel Roubini you would probably be turning all your assets into gold and hiding it under your bed. Your bias depends completely on what information sources you listen to daily.

At Option Investor we have always prided ourselves for giving a balanced view by having a different commentator do the market wrap every day. That way you can profit from receiving input from multiple sources. If we were all bullish or all bearish we would not be doing our readers a service. There are some times when there is overwhelming evidence for one direction or the other but that is rare. We nearly always have a difference of opinion and that is a positive point for readers. That also means some of the writers may not be correct in their bias on any given week. If we were always 100% right the newsletter would cost $10,000 a month and be worth every penny. Nobody is ever right 100% of the time even when they are making seven figures for their services like analysts at Goldman Sachs.

In this period of Fed induced market rally I have asked everyone on staff to make an extra effort to present both sides of the market. Every market has three potential outcomes and by knowing the factors that could influence each direction you can make a better decision in your personal trades. Our goal is to produce the best independent market analysis possible. If you feel we are not achieving that goal please click on the email link at the top of the page and let us know.

Friday's economic reports were led by the NY Empire State Manufacturing Survey for October, which rose to 15.7 from 4.1 in September. This was a very strong rebound and the internal components were explosive. The new orders component surged to 12.9 from 4.3 in the prior month. Inventories fell sharply to -11.5 from +1.5 producing a monster inventory/order gap of 24.6 suggesting business is increasing significantly. The headline number was the highest since June. If the rest of the regional manufacturing reports come in this strong it would indicate a significant improvement in conditions.

NY Empire State Manufacturing Survey

That was the only report with a major gain. The Retail sales for September rose +0.6% compared to +0.4% in August. In this report August was revised higher to +0.7%. Sales rose +7.3% over September 2009 but that comparison was more favorable because of the post cash for clunkers decline in 2009. That is the strongest year over year performance since April. Electronics and appliances had a strong monthly gain at +1.5% with motor vehicles and parts rising +1.6%. Despite the decent results most retailers reported a lackluster back to school shopping season.

Consumer Sentiment for October declined fractionally to 67.9 from 68.2 in September. This is the preliminary report and will be revised in a couple weeks. The present conditions component declined to 73.0 from 79.6 and offset a rise in the expectations component from 60.9 to 64.6.

Consumer Sentiment Chart

Consumer Prices were nearly flat again in September with a +0.1% gain. The core rate was zero for the second consecutive month. This pushed the core inflation rate to the lowest in nearly 40 years at 0.8%. This is what the Fed is fighting with the additional policy accommodation. Headline inflation should increase due to the rise in grain prices and the price of oil but the core rate is stuck in a rut. The threat of deflation is low but the Fed wants to make absolutely sure there is no chance for it to occur. Just the threat of further Fed easing is already pushing prices higher because of the falling dollar. I am not sure this is a winning situation to artificially inflate the price of goods by making dollars cheaper but we don't get a say in the matter.

Consumer Price Index

Another green shoot was the slightly better than expected gain in Business Inventories. The headline number showed a +0.6% gain for August. This is a lagging number so little attention was paid to it but this was the eighth consecutive month of gains.

Next week has two reports that should get the market's attention. The Fed Beige Book is the latest update of economic conditions in the various Fed districts. This is a detailed report that should tell us if the August soft patch is really behind us or still dragging us down. I suspect, based on the Fed speakers recent tone, that it will show only minor improvement. Otherwise they would not be talking up QE2 in every appearance. You know the various Fed presidents talk to each other and they know which districts are improving and which are not.

The second report is the Philly Fed Manufacturing Survey. This is viewed as a proxy for the national ISM at month end. The Philly Fed will give analysts a last chance to alter estimates before the end of October. Expectations are for a minor improvement in the Richmond district.

Economic Calendar

It was a tale of two markets on Friday with the Nasdaq posting a +33 point gain while the Dow posted a 31 point loss. The problem with the Dow was the decline in Bank of America, JP Morgan and GE. Pushing the banks lower was a downgrade on Bank of America by S&P due to the new mortgage foreclosure crisis. GE was suffering from disappointing earnings.

On Friday S&P cut Bank America to a hold from a strong buy due to ongoing foreclosure woes. The problems stem from the major banks using robo-signers to sign tens of thousands of foreclosure documents without adequately researching each loan. These employees simply signed thousands of affidavits testifying to facts about the loans when they actually had no real knowledge of the specific loan. They were just pushing paper as fast as they could in order to process foreclosures.

The use of robo-signers has prompted foreclosure halts by the major lenders until a review of the process can be completed. At least one state has already sued Ally Financial and expects to sue the other major banks. The allegations of fraud at "every level of the process" is prompting thousands of homeowner suits as well as suits from the investors who bought the packaged loans. Earlier this week attorneys general from all 50 states launched a joint investigation into allegations that mortgage companies mishandled documents in foreclosing hundreds of thousands of homes. There were foreclosure proceedings on 930,437 properties in Q3 according to RealtyTrac. One in every 139 homes received a foreclosure notice in Q3 and a record 288,345 homes were actually seized by the banks.

Dick Bove, with Rochdale Securities, said the banks could lose up to $80 billion from the various suits and forced buybacks. The investors who bought the original loans may have a way to force the banks to buy back all the mortgage securities at face value if they can prove there was fraud at any point in the process. The Federal Home Loan Bank of Chicago sued the major lenders claiming they failed to disclose various underwriting standards and had errors in the documentation. They are trying to recover more than $3.3 billion they paid for residential mortgage bank securities that soured.

Banks were struggling to post decent profits before this mess and now they are faced with having to take charges for litigation expenses and potential settlements. If this progresses to the point of having to buy back previously packaged loans it could set them back several years in the recovery process. The halt in foreclosures as the mess is sorted out will slow down the housing market even more as the nearly 300,000 homes slated for foreclosure in Q4 are pushed out into Q1 or even Q2 with an associated slippage of even more distressed sales in Q1. Since more than a third of home sales are distressed homes this delay will be a serious blow to the housing industry. The same homes will eventually be foreclosed but it will be many months down the road. When the foreclosure halt is eventually ended there will be an even bigger surge of homes in foreclosure and all those homes coming on the market at the same time will depress prices. Banks have to pay an estimated $1,000 per month for every home in foreclosure to cover upkeep, property management and legal fees. Extending the foreclosure period for 3-6 months on hundreds of thousand of homes will be very costly to the banks.

We are also likely to see the major lenders like BAC, WFC and JPM slow or even halt making new loans until they decide what the impact of the foreclosure problem will be to their balance sheets. That will retard the home market even more than the foreclosure halt. The housing sector is 20% of the economy and this mess could be a material impact. This could be the next shock that pushes us back into a recession. For that reason the administration should be proactive in making sure the investigation and resolution is done quickly and with a minor amount of pain to the system.

Bank America Chart

Late Friday is was revealed the SEC has opened a probe into the banks foreclosure practices. This is in addition to investigations by the Department of Justice, Office of the Comptroller of the Currency and the FDIC.

While on the subject of banks, Countrywide CEO, Angelo Mozilo, agreed to settle with the SEC over insider trading charges. His trial was due to start on Tuesday but Friday's settlement ended that proceeding. He agreed to pay $67.5 million in penalties to settle civil fraud and insider-trading charges while admitting no wrongdoing. Actually Mozilo will end up paying ony $22 million of the fine. Bank of America will be forced to pay the rest under an indemnification agreement signed when BAC acquired Countrywide in 2008. Bank of America said in a statement it will advance funds on Mozilo's behalf as required by the agreement. BAC is insured to some extent for this loss. Mozilo, otherwise known as the "tan man" for his frequent tanning visits will be banned for life from being an officer or director of a public company. At age 71 I suspect he will spend the rest of his life living large on the remnants of the compensation he received from 1998 to 2008 of $250 million plus an additional $406 million from sales of Countrywide stock.

Angelo Mozilo

GE earnings disappointed with revenue of $35.9 billion and $1.7 billion short of estimates. Earnings per share of 29-cents was 2-cents over analyst estimates but disappointing for retail investors. CEO Jeffrey Immelt said both equipment and service orders increased for the first time in two years and he projected better results in 2011. He said they were seeing a "slow recovery in a few areas." Income fell -18% over the same period in 2009. GE had to put up an additional $1.1 billion in reserves for a finance subsidiary and that dragged down earnings. GE shares gave back 86-cents to close at $16.30.

Better earnings news came from Google on Thursday night and the stock gained +60.52 on Friday to close at 601.45. Google's earnings garnered a $700 price target from Goldman Sachs and after Friday's gains they are well on their way.

Google Chart

Amazon blasted off to another new high with a +$9 gain after news broke that margins on e-books were improving significantly. Evidently Amazon's volume has increased to the point where they have even more clout with publishers. Also, I have noticed prices for e-books rising. One I bought last week was $12.99 and the highest price I have paid for an e-book although I have seen some higher. Since they are selling more e-books than paper books the rise in margins is a good sign. Citigroup raised their price target to $194 and the stock closed just under $165.

Amazon Chart

It must have been new high Friday in the tech sector. Apple also broke out to a new high with a $12 gain after Goldman gave them a new price target at $500. Apple will report earnings on Monday and they are expected to beat estimates by a mile. Sales of the iPhone, iPad and Mac computers are improving briskly. This will be the first full quarter of sales for the iPhone 4 and it has been sold out all quarter with most sales backordered. Net income is expected to rise +130% to $3.83 billion. That equates to earnings per share of $4.09 on revenue of $18.9 billion. IPad sales are expected to be 4.8 million units. IPad was about the only tablet in the market in Q3 but that will change dramatically in Q4 as everyone else rushes to get products out for the holidays. Should Apple stub its toe when it reports earnings the drop could be dramatic.

I did see an advertisement for the iPad from Verizon on Friday. That will help their sales somewhat but the catch is the device has to be anchored to a hotspot rather than 3G. Since all the Verizon Android phones are also hotspots it makes any Verizon Droid customer a prospect for an iPad.

Apple Chart

Shares of Seagate (STX) rose +22% on Friday after news broke they could be taken private by either KKR or Bain Capital. Sources at Seagate said on Thursday it was in talks with TPG Capital about a potential buyout. Silver Lake Partners reportedly held talks with Seagate in September about a buyout. With all this activity it is only a matter of time before they get a deal done. Seagate is the leading disk drive maker and has a market cap of about $7 billion.

One problem all the manufacturers have is the high drop out rate of the new drives. The extremely dense media on 1TB through 2TB drives means there is no margin for error. I have heard of extremely high reject rates and very high failure rates upon installation. If you go to the sites with a large quantity of user reviews like NewEgg.com there is a very large number of RMA requests for drives that were DOA or died in the first couple weeks. The tolerances are simply so close there is little margin for error. This has got to be impacting margins.

Seagate Chart

Chip stocks posted only a minor gain on Friday after an analyst expressed worries that the falling dollar would impact margins on a product that was already commoditized. Earnings are already depressed due to competition and excess capacity and another hit from currency translation could be deadly. An 8% to 10% currency hit could be the difference between profits and losses. Texas Instruments reports on the 25th and several other chip stocks including LSCC, XLNX and CREE report earnings next week.

The dollar rebounded on Friday after Bernanke's speech. Bernanke warned that a prolonged period of high unemployment could delay the U.S. recovery and the low level of inflation presented an uncomfortable risk of deflation. "There would appear, all else being equal, to be a case for further action." This was seen as a guarantee that the Fed would add some more bond purchases when it meets in November.

Ironically interest rates on treasuries ROSE along with the dollar after the speech. Analysts claim the rebound was due to expectations the Fed would be successful in its actions. Personally I believe it was just a sell the news event. Bond traders knew the Fed was planning to act and they knew the speech was Friday. It was simply a sell the news event given the already record low yields and severely oversold dollar.

Bernanke also left himself an escape clause saying the Fed was still analyzing the costs, limitations and risks of a new program. One risk is the 10-month low on the dollar on Thursday night. This is causing some severe irritation to emerging market economies as capital chases yields around the world and forcing other countries to react to this capital flight.

Dollar Index Chart

Gold Chart

Gold prices declined slightly after hitting an intraday high of $1388 on Thursday. Goldman Sachs raised its twelve-month target price to $1,650. Goldman said gold could rise another 28% by the end of 2012, also Silver +30%, Copper +28% and Cotton +54%. Their estimate was based on rising demand in Asia and the falling dollar.

After a strong rally crude oil has been stuck under resistance for the last two weeks and gave up -$1.44 on Friday as the dollar rebounded and demand faded. U.S. gasoline demand for last week fell to the lowest level since November. Oil demand may be rising around the world but the U.S. is still mired in the quicksand of high unemployment. The various factors supporting prices last week including the dollar, hurricane, OPEC, closing of the Houston ship channel etc, have all faded from view and the current November contract expires next Wednesday. I would expect some volatility over the next three days.

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Crude Oil Chart

The Business Council, a group of the CEOs from the 150 largest U.S. corporations, said a recent survey of members showed a decline in sentiment. Only a third believe their industries will improve over the next six months. This is down from two-thirds in the prior survey back in May. The Council said the majority of members now believe the acceleration phase of the recovery is over. More than 75% of the CEOs expressed some hesitancy about the ability of the economy to grow at all.

The survey results did not project another recessionary dip but suggested 2011 would be more like 2010 in terms of overall economic growth. Over 70% of CEOs said the Federal budget deficit, the increased risk of regulation and unemployment were the biggest problems. 27 million Americans are either out of work, underemployed or too discouraged to even look for work according to the Labor Department. Jamie Dimon, JPM CEO, penned the introduction to the survey saying, "The momentum in the U.S. and global economy evident in recent surveys has subsided." Let's hope he is wrong.

Earnings are now expected to increase +24.2% over Q3-2009. This was a slight improvement from the 23.6% estimate just a week ago. A total of 109 S&P-500 companies report next week along with 11 Dow components. Only 46 S&P companies have reported with 83% beating estimates and 9% missing their targets. Since 1994 an average of 62% normally beat. That has risen to 77% over the last four quarters due to easy comparisons in the prior year.

However, analysts are expecting earnings of only $20.46 for the S&P-500 and that would be the first quarter-to-quarter decline since the recession. This reflects the soft patch experienced in August.

There are some important earnings next week with Apple, IBM and Citigroup starting the week off with a bang. I expect to see more upside surprises and I hope to see them from IBM and UPS. IBM is important because of the number of big ticket service contracts that will give us an idea on whether companies are going to spend some of their cash hoard. From UPS we will get an idea of package flow and the rate of business shipping. Hopefully it is increasing.

There is a pretty diverse array of companies reporting next week and by Friday we will know how the earnings season will end.

Earnings Calendar

When you look at the indexes for Friday it was a six stock story. Google, Amazon and Apple powered the Nasdaq 100 to a new high and BAC, JPM and GE tanked the Dow. We have not seen such a strong divergence between the two indexes in a long time.

The clearest evidence of the tech strength came on the Nasdaq 100 where Google, Apple and Amazon forced a breakout of major proportions. After two days of being pinned to the prior resistance at 2050 the index tacked on more than 40 points for a major breakout. This would be extremely bullish if the gains were not focused in just those three stocks. On a technical basis it looks great but on a macro basis there is reason to worry. With Google posting a $60 point one day gain what will it do for an encore next week?

Hopefully Apple will copy Google's performance with earnings on Monday and keep the move alive. Then we have to wait for Thursday and Amazon to have another chance for a big move on the index. I personally find it unlikely that anyone would choose to go long on Google early next week after a 60-point gain. Same with Apple after a 12-point gain on Friday and the potential for another big move on Monday. In normal times these would be perfect setups for the shorts. Eventually this insanity will run its course and we will see some profit taking.

Nasdaq 100 Chart

The Nasdaq Composite moved to a new five month high on the strength of those same three stocks. Unfortunately it has yet to return to the same resistance high at 2519 that the NDX succeeded in crossing on Friday. The chip stocks are holding it back. Of course "back" is a relative term with the +33 point gain on Friday.

Even though the composite is over extended I could see it running to 2519 on the strength of Apple and others next week. There are dozens of Nasdaq companies reporting so plenty of reasons for the normal trader to remain long.

Nasdaq Composite Chart

The S&P is far less bullish than the tech indexes. Friday's minimal gain of only two points was held back by the financial sector. The mortgage mess is going to be a drag on financials for weeks and we need to prepare ourselves now for some tough times ahead unless BAC and JPM mount a strong offense against the claims and do it quickly. As long as analysts like Dick Bove and Meredith Whitney are quoting liabilities in the $70-$80 billion range the banks are not moving higher. This is a major blow to market sentiment. Other sectors may continue higher but we will be dragging the financials along behind us.

The S&P closed out the week still shackled to the prior resistance at 1175. We closed over that level twice in the last three days but only by a couple of points. There is still a gravitational pull at that level. Should it break free the next major resistance is 1210-1220 and that could be a difficult level to cross even with the Fed cheerleading from the sidelines. A breakout there could run to 1300. I know that sounds crazy but don't fight the Fed and the anticipation of the elections.

S&P-500 Chart

For the Dow I believe we will test 11,200 next week even with the drag from JPM and BAC. The initial shock value of the mortgage mess has passed and it will require another chapter in the saga to knock another 10% off those banks in a single day. They will probably be laggards but they should not sink the Dow. There are 11 Dow components reporting next week and all should beat street estimates. Unfortunately that is now expected so anything less than a really good report could produce some selling in the individual stocks.

The Dow has support at 10,975 and resistance at 11,200. As long as we stay in that range next week I would be a happy camper because it would allow individual stocks to move without being hampered by a big Dow decline.

Dow Chart

Over the last 62 years the S&P averaged a +4.7% gain in Q4. Only 14 times in those 62 years has the S&P been negative. While that sounds promising, prior performance is no guarantee of future results. Also, 4.7% is only 55 points and the S&P has gained +35 since October 1st. That only leaves another 20 points to meet the average. Fortunately this is probably going to be an above average year.

Most analysts believe the market will finish the year higher. I believe Abby Joseph Cohen is expecting 1275-1300 on the S&P. I have heard a lot of analysts talking in that 1250-1300 range. The positive factors are of course the Fed and the election. I have already discussed the Fed so the election is the next topic.

Most polls have the republicans gaining control of the House and polls are split on control of the Senate. For the market to continue moving higher only one body needs to switch to republican control. That would guarantee gridlock for the next couple years and a lot of regulatory efforts would die a slow death. That would be bullish for the markets. How much of that is already baked into the current rally is unknown.

What we do know is that any continuing rally will struggle without the participation of the financials. Secondly we know that there is a potential for the mortgage mess to cause another shock to the system that could be seriously damaging. We are at that point where accusations and flying and government agencies are gearing up to make a nuisance of themselves. Unless this escalation of intensity is ratcheted down really quickly I fear we could have another crisis on our hands. Fortunately $80 billion, to use Dick Bove's number, is not the end of the world. It would be painful for the banks but they would survive. I am just not sure they would survive another cycle of investor flight. Mutual funds are still reporting withdrawals from equity funds and another crisis of confidence could accelerate that process.

We made it through option expiration without any major volatility and that is slightly bullish. The Dow declined nearly 100 points on Friday and recovered once again. That is slightly bullish because it had plenty of excuses to stay down. Volume accelerated beginning on Wednesday to nearly nine billion shares per day with expiration Friday trading 9.56 billion shares. Obviously the increase in volume for all three days was expiration related but higher volume is normally positive. Unfortunately two of those days were lopsided with 2:1 declining volume to advancing volume. Even with the selling imbalance the markets broke out to new relative highs and that is also bullish.

I believe the majority of traders are still in denial that the rally has come so far in the last six weeks and denial is normally bullish because it means many people are still shorting the rally. Until proven wrong I am still in buy the dip mode.

Jim Brown

The government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it. - Ronald Reagan.


New Plays

Groceries, Drinks, and Drugs

by James Brown

Click here to email James Brown
Editor's Note:
I'm filling in for Scott tonight.

-James


NEW BULLISH Plays

Companhia Brasileira de Distribuicao - CBD - cls: 76.39 chg: -0.46 stop: see below

Target(s): 39.00
Key Support/Resistance Areas: 35.00, 36.50, 39.00
Current Gain/Loss: +0.00%
Time Frame: 4 to 6 weeks
New Positions: Yes, see entry point below

Company Description:
With gross revenue of R$ 26.2 billion in 2009 and a market share of 14.8%, Companhia Brasileira de Distribuição is the largest retailer in Brazil. The Company operates 1,080 stores in 18 states and in Distrito Federal, with more than 1.7 million square meters sales area, near 88 thousand employees and 18 distribution centers. Its business is based on a multiformat structure, with a balance between supermarkets, hypermarkets, stores of eletronic products/ household appliances, convenience stores, cash-and-carry segment and e-commerce operations, allowing a wide range of consumers’ needs and expectations in different regions and diverse social and economic classes: neighborhood supermarkets for class levels A and B (Pão de Açúcar), supermarkets for class levels C, D and E (CompreBem, Extra Supermercado and Sendas), hypermarkets (Extra), electronic and home appliance stores (Ponto Frio and Extra-Eletro), cash-and-carry (Assai), and convenience stores (Extra Fácil), gas station and drugstores. (source: company press release or website)

Why We Like It:
Shares of Brazilian grocery food chain CBD appear to be in breakout mode. The Brazilian economy continues to grow and the surging middle class likes to spend. This has pushed CBD toward all-time highs. Now normally I wouldn't list a stock in the $70s as a PremierInvestor play. However, CBD will see a 2-for-1 split on Monday morning (Oct. 18th). The stock should open around $38.20. I am suggesting we look to buy CBD on a pull back. Broken resistance near $73.50 (post-split will be $36.75) should be new support. Thus, use a trigger at $36.75 to open bullish positions. We'll use a stop loss at $34.75 since the $70 level (post-split: $35) should be additional support.

If triggered our first target is $39.00 (pre-split $78.00). Our second, longer-term target is $42.00. The inverse (bullish version) head-and-shoulders pattern would suggest a bullish target of $88 (post-split would be $44). The Point & Figure chart is very bullish with a price target of $101.00 (post-split $50.50).

Suggested Position: Buy the stock (CBD) at $36.75, stop loss 34.75.

CBD does have options but the symbols will change post-split so look them up on Monday.

Annotated chart:

Entry on October xx at $xx.xx
Earnings Date 11/10/10 (unconfirmed)
Average Daily Volume: 545 thousand
Listed on October 16th, 2010


Hansen Natural Corp. - HANS - close: 50.16 change: -0.57 stop: 44.95

Target(s): 50.00, 52.50,
Key Support/Resistance Areas: 45.00, 47.50, 50.00, etc.
Current Gain/Loss: +0.00%
Time Frame: 4 to 6 weeks
New Positions: Yes, see below for details

Company Description:
Based in Corona, California, Hansen Natural Corporation markets and distributes Hansen's(R) natural sodas, sparkling beverages, apple juice and juice blends, fruit juice smoothies, multi-vitamin juice drinks in aseptic packaging, iced teas, energy drinks, Junior Juice(R) juices and water beverages, Blue Sky(R) brand beverages, Monster Energy(R) brand energy drinks, Nitrous(TM) Monster Energy(R) brand energy drinks, Monster Hitman(TM) energy shooters, Java Monster(TM) brand non-carbonated coffee + energy drinks, X-Presso Monster(TM) brand non-carbonated espresso energy drinks, Peace Tea(TM) iced teas, Lost(R) Energy(TM) brand energy drinks, Rumba(R), Samba and Tango brand energy juices, Vidration(TM) brand vitamin enhanced waters and Admiral(TM) iced teas (source: company press release or website)

Why We Like It:
HANS is probably best known for their Monster brand energy drinks. The stock has been a monster in its own right and shares have been a popular momentum trade over the years. Well once again shares of HANS are surging higher. We'd like to hop on board but we don't want to chase it at these levels. I'm suggesting a trigger to buy the stock (or call options) at $48.25 since broken resistance at $48.00 should be new support. I'm suggesting a stop loss at $44.95 but we may want to raise the stop closer to the rising 50-dma (technical support) currently near 46.20.

If triggered at $48.25 our first target is $51.00. Our second target is $52.50. FYI: The point & figure chart is very bullish and is forecasting a long-term target of $78.

Suggested Position: BUY the stock at $48.25

- or -

BUY the November $50.00 calls (on a dip at $48.25).

Annotated chart:

Entry on October xx at $xx.xx
Earnings Date 11/04/10 (unconfirmed)
Average Daily Volume: 4.5 million
Listed on October xxth, 2010


Mylan Inc. - MYL - close: 19.31 change: +0.37 stop: 18.45

Target(s): 20.00, 21.00, 22.00
Key Support/Resistance Areas: 18.50, 19.00, 20.00, 20.50,
Current Gain/Loss: +0.00%
Time Frame: 4 to 6 weeks
New Positions: Yes

Company Description:
Mylan Inc. ranks among the leading generic and specialty pharmaceutical companies in the world and provides products to customers in more than 140 countries and territories. The company maintains one of the industry's broadest and highest quality product portfolios supported by a robust product pipeline; operates one of the world's largest active pharmaceutical ingredient manufacturers; and runs a specialty business focused on respiratory, allergy and psychiatric therapies (source: company press release or website)

Why We Like It:
MYL is a short squeeze candidate. Bigger picture the generic drug makers are facing a potential boom for the next few years as more brand name drugs lose their patent protection. On a short-term basis MYL just broke out over heavy resistance at $19.00 and its 200-dma following news the FDA has approved to generic versions of Merck's Hyzaar and Cozaar blood pressure drugs. Now don't get too excited here since TEVA has already begun selling generic versions of these drugs months ago but it does mean MYL can try and grab its slice of the pie. Technically MYL is seeing a bullish breakout and could see a short squeeze. The most recent data available listed short interest at almost 29% of the 260 million-share float.

I do consider this an aggressive trade so keep your positions somewhat smaller. Buy the stock now (or the calls) and target a move to $20.00, $21 and beyond. FYI: The P&F chart is forecasting at $33 target.

Suggested Position: Buy MYL stock now at current levels

- or -

BUY the November $20.00 calls (current ask $0.36)

Annotated chart:

Entry on October 18 at $xx.xx
Earnings Date 10/28/10 (unconfirmed)
Average Daily Volume: 4.5 million
Listed on October 16th, 2010



In Play Updates and Reviews

Little Change

by James Brown

Click here to email James Brown

Editor's Note:
I'm filling in for Scott tonight who will return on Monday.

-James

Current Portfolio:


BULLISH Play Updates

Boyd Gaming - BYD - close 7.68 change -0.34 stop 7.28

Target(s): 8.95, 9.20, 9.50
Key Support/Resistance Areas: 9.60, 9.25, 8.75, 8.00, 7.40
Time Frame: 1 to 2 weeks

Comments:
10/16 (James): Uh-oh! BYD was showing some relative weakness on Friday. We were expecting a pull back but the $8.00 level should have offered stronger support. While I do think BYD has put in a bottom with the September low, I am somewhat concerned that shares are seeing above average volume lately. Normally above average volume on the rally, like we saw in early October, is bullish but we're also seeing strong volume on the pullback, which can be bearish. On a short-term basis I would expect BYD to hit support near $7.50 and its 50-dma. Readers may want to wait for a bounce from the $7.50 level before considering new bullish positions.

10/14 (James): Our wait is over. Shares of BYD saw some profit taking today with a -3.4% decline. Traders bought the dip near support at $8.00 and its rising 10-dma. The low was $7.89, which was pretty close to the 38.2% Fibonacci retracement of the three-week rally. Our trigger to buy BYD stock was hit at $8.20. We're using a stop loss at $7.28. More conservative traders may want to consider raising their stop toward the $7.50 level, which is both psychological support and the 50-dma. Our first target is $8.95. Triggered on Thursday, Oct. 14th.

Current Position: Long BYD stock @ $8.20

Annotated chart:

Entry on October 14
Earnings 10/27/10 (unconfirmed)
Average Daily Volume: 1.8 million
Listed on October 9, 2010


Itron, Inc - ITRI - close 62.25 change -0.25 stop 57.45 (varies)

Target(s): 63.75, 65.00
Key Support/Resistance Areas: 66.00, 64.00, 60.50, 59.00, 57.00
Time Frame: 1 to 3 weeks

Comments:
10/16 (James): We are still waiting for an entry point. There are no changes from my Thursday comments, which include an alternative entry point. FYI: ITRI is due to report earnings on October 27th, after the closing bell. Wall Street expects a profit of $0.84 a share.

10/14 (James): So far we're still waiting on an entry point in ITRI. Shares held up pretty well with bulls immediately buying the dip this morning near $61.60. The trend is up but the stock is struggling with resistance near $63.00 and its exponential 200-dma. If you don't mind I would like to adjust our entry point strategy. Let's plan on buying the dip at $60.25, not 61.00 and if triggered at $60.25 we'll move the stop loss to $57.45.

Plus, just in case ITRI does not correct, I'd like to use a trigger to buy a breakout at $63.55. If this trigger is hit we'll move the stop loss to $59.49. The 200-dma near $65 is probably overhead resistance but I would aim for resistance near $67.50.

Suggested Position: Long ITRI stock if it trades down to $60.25
- or - buy a breakout at $63.55 (stop loss 59.45).

Options Traders: Buy November $60.00 or $65.00 calls depending on the entry point.

Annotated chart:

Entry on October XX
Earnings 10/28/2010 (unconfirmed)
Average Daily Volume: 412,000
Listed on October 4, 2010


PerkinElmer, Inc - PKI - close 23.21 change -0.09 stop 22.35

Target(s): 24.25, 24.85, 25.35
Key Support/Resistance Areas: 25.40, 24.40, 23.30, 22.50
Time Frame: 1 to 2 weeks
New Positions: Yes

Comments:
10/16 (James): There hasn't been any news on PKI lately and shares aren't moving much as they consolidate sideways. Traders bought the dip again at short-term technical support near the 10-dma and 20-dma on Friday. The trend is up but stochastics are suggesting this rally is losing steam. Yet that doesn't mean PKI can't keep climbing. Cautious traders might want to tight stops closer to the $22.50 level. I am a little concerned that PKI appears to be forming a bear-wedge pattern. Readers may want to keep their position size small. FYI: This company is due to report earnings on Nov. 4th. Analysts are estimating a profit of 29 cents a share.

10/14 (James): It looks like PKI experienced some minor profit taking on Thursday. The trend is still up. Volume was very low on today's pullback, which is a positive signal for us. I would still consider new positions here or near $23.00. More conservative traders could wait for the next bounce.

10/11: PKI has been in a solid uptrend since its July lows and is finding resistance at $23.30. The stock is forming a high tight ascending triangle and looks poised to breakout and retest its 52 week highs which are more than +8% higher than current levels. Conservative traders may want to wait for a break above today's high and enter positions at $23.50, while more nimble traders could try to time a pullback into the $23.00 area or its 20-day SMA. Officially, we'll use a trigger of $23.10 (just above today's low) or $23.50 (just above today's high), whichever occurs first. The stock is consolidating above its 20-day SMA (currently $22.81 and rising) and an upward trend line. Our stop is just below the recent swing low which will keep losses under control if the pattern fails.

Current Position: Long PKI stock, entry was at $23.10

Annotated chart:

Entry on October 12, 2010
Earnings 11/4/10 (unconfirmed)
Average Daily Volume: 1.4 million
Listed on October 11, 2010


Thompson Creek Metals - TC - close 11.61 change -0.07 stop 10.45

Target(s): 11.75, 12.40
Key Support/Resistance Areas: 12.60, 11.80, 11.00, 10.55
Time Frame: 1 to 3 weeks
New Positions: Yes, on pullbacks

Comments:
10/16 (James): There is no change from my Thursday comments on TC. The stock saw a little volatility on Friday morning but consolidated sideways into the weekend. A pull back toward the $11.15-11.00 zone should be a new bullish entry point.

10/13: TC hit our first target at $11.75.

10/9: It seems there is no stopping the basic materials sector as the lackluster employment report is sure to be followed by additional stimulus. Molybdenum is high strength metal and is used to make aircraft parts, electrical contacts, industrial motors and filaments to name a few. Technically, TC broke through resistance near $11.00 and touched its 200-day SMA on Friday. I would like to see the stock retrace some of those gains and suggest we enter long positions with a trigger of $11.10 which is -18 cents lower than Friday's close. Our targets are about +6% and +11.5% higher than our trigger.

Current Position: Long TC stock, entry was at if it trades $11.10

Options Traders: Buy November $11.00 CALL

Annotated chart:

Entry on October 12
Earnings 10/4/2010 (unconfirmed)
Average Daily Volume: 1.7 million
Listed on October 9, 2010


BEARISH Play Updates

FLIR Systems - FLIR - close 25.79 change +0.25 stop 27.05

Target(s): 24.25, 21.00
Key Support/Resistance Areas: 28.00, 27.00, 26.50, 25.50, 24.00
Current Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Comments:
10/16 (James): On Thursday night I adjusted our entry point to launch bearish positions immediately. FLIR gapped open higher on Friday morning at $25.81 (Thursday's high and our new entry point). The rally failed at $26.00 but FLIR still managed a +0.9% gain, showing some relative strength. I still think this is just an oversold bounce and the overall trend is down. I would still launch positions at current levels. More conservative traders could wait and watch for a failed rally near the 50-dma instead as their entry point. FYI: FLIR is due to report earnings on Oct. 21st, before the opening bell. Analysts are expecting a profit of 38 cents a share. We normally don't like to hold over earnings. Readers may want to adjust their stops prior to the report.

10/14 (James): Attention! I am adjusting our entry point on FLIR. Our plan was to launch bearish positions when FLIR bounced to $25.85. Shares hit $25.81 this morning and then faded lower. I am suggesting we go ahead and launch bearish positions now. However, this can be a very volatile stock and readers may want to start with small positions first and add to it as the play progresses. More conservative traders may want to wait. Obviously a failed rally near $26.00 or even the 50-dma near $26.50 would be a much more attractive entry point. Please note I'm adjusting our stop loss to $27.05.

Current Position: Short FLIR stock @ $25.81, stop loss @ $27.05

Annotated chart:

Entry on October 15
Earnings Date 10/21/10 (unconfirmed)
Average Daily Volume: 1.7 million
Listed on October 2nd, 2010


SanDisk Corp - SNDK - close 39.21 change +0.51 stop 42.20

Target(s): 38.15, 37.10, 35.60
Key Support/Resistance Areas: 41.00 to 40.00, 38.00, 36.00
Time Frame: 1 to 2 weeks
New Positions: NO

Comments:
10/16 (James): Some of the storage device stocks have been rising on buyout rumors. SNDK hasn't been mentioned lately as a target but the M&A rumors in the sector could lift shares anyway. I don't see any changes from my comments on Thursday. There are a lot of conflicting signals and cross currents with SNDK so we're not suggesting new positions at this time. However, the $40.00 level should be significant resistance and more aggressive traders can look for failed rallies in this area a possible entry points. FYI: SNDK is due to report earnings on Oct. 21st. The street expects a profit of $1.05 a share.

10/14 (James): Hmm... I think both bulls and bears have a case for SNDK. Bigger picture the pattern looks kind of ominous. Short-term the trend of higher lows is certainly bullish. Traders bought the dip near $38.00 on Thursday and the simple 200-dma could also offer some additional support. I am not suggesting new positions of any kind in SNDK at the moment.

Prior comments:
SNDK has rallied right into a prior support level in the $40 to $41 area which was a shelf before the stock cratered in August. This is the first time the stock has rallied back to test the prior support level and I expect it to act as resistance. Further, the stock has rallied right into a primary downtrend line which should provide additional resistance. Nimble traders may want to time a bounce of another 50 cents or so higher (near $40.65) but I'm not convinced we will get it. I suggest we open positions at current levels and target a $2 to $3 move lower, which is -5% to -7.5% lower than current levels.

Current Position: Short SNDK stock, entry was at $40.59

Annotated chart:

Entry on October 13, 2010
Earnings: 10/21/10 (unconfirmed)
Average Daily Volume: 11 million
Listed on October 12, 2010


Xilinx, Inc. - XLNX - close 26.48 change -0.00 stop 27.42

Target(s): 25.00, 24.60, 24.30
Key Support/Resistance Areas: 26.75, 26.00, 25.30, 25.00, 24.00
Current Gain/Loss: -3.99%
Time Frame: 1 to 2 weeks
New Positions: Yes

Comments:
10/16 (James): I am still neutral on XLNX as a bearish trade. The semiconductor index is still trying to dig its way out of a bearish trend. Bigger picture XLNX actually has a more bullish posture than the SOX index. Depending on your time frame and bias XLNX is rising in a new bullish channel or consolidating in a bear flag pattern. It is true that the 50-dma just crossed under the 200-dma (a "death cross), which is normally a very bearish development. I'll repeat my comments from Thursday: . If you're going to launch new bearish positions consider using a very tight stop loss!

10/14 (James): I am somewhat neutral on XLNX at the moment. I do see plenty to worry about. The MACD is about to roll over into a new sell signal. The simple 50-dma is about to perform a "death cross" and slip under the 200-dma, which is normally a very bearish event. RSI is rolling over. On Wednesday the stock produced a failed rally at $27.00. However, at the same time XLNX has a bullish trend of higher lows dating back to late August. If you're going to launch new bearish positions consider using a very tight stop loss!

10/12: XLNX touched its primary downtrend line today so this is the logical spot for the stock to turn lower. There were mixed earnings results from the semi's after the bell. Intel beat slightly while Linear Technology lowered guidance. We'll have to see how the sector trades tomorrow. Our stop is in place if XLNX breaks higher. My comments below remain valid.

Current Position: Short XLNX stock, entry was at $25.80

Options Traders: Long November $25.00 PUT

Annotated chart:

Entry on October 7, 2010
Earnings: 10/20/10 (unconfirmed)
Average Daily Volume: 7.3 million
Listed on October 6, 2010


CLOSED BEARISH PLAYS

Microsoft - MSFT - close 25.54 change +0.31 stop 25.72

Target(s): 23.50, 23.10
Key Support/Resistance Areas: 25.50, 24.75, 23.75, 23.00
Current Gain/Loss: -4.24%
Time Frame: 1 to 2 weeks
New Positions: Neutral

Comments:
10/16 (James): I'm hitting the eject button on this MSFT play. Per my comments on Thursday, MSFT is showing too much relative strength and we wanted to exit early if shares continued to climb on Friday. Shares of MSFT are facing some resistance near $25.50 but I find toe overall pattern has turned bullish for this tech titan. We are closing this trade.

10/14 (James): Everyone has an opinion and some people are more than happy to share it with you even if you don't want it. Well, my opinion is that MSFT isn't a bearish candidate right now. Personally, the bullish breakout on Wednesday was our signal to exit. However, the stock still has resistance near $25.50. If MSFT does not show any weakness on Friday (tomorrow) I will close this trade. Actually, I'm starting to think MSFT might be a long-term (call LEAPS) trade.

Closed Position: short MSFT stock @ $24.50, closed $25.54 (-4.24%)

Annotated chart:

Entry on October 7, 2010
Earnings: 10/28/10 (unconfirmed)
Average Daily Volume: 60 million
Listed on October 5, 2010