Option Investor
Newsletter

Daily Newsletter, Monday, 11/8/2010

Table of Contents

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

Market Wrap

A Monday Breather

by Todd Shriber

Click here to email Todd Shriber
Stocks took a break from last week's stellar rally on Monday as the news flow was basically slow and there was little in the way of major economic news to report. Beyond that, this was no ''Merger Monday'' as you will see in momentarily when I highlight the day's marquee deal. Overall, it was not the most exciting of days, Monday or otherwise, as the Dow Jones Industrial Average and the S&P 500 endured small losses while the Nasdaq and Russell 2000 posted meager gains.

Stats Table

One interesting tidbit was released today, courtesy of Amherst Securities Group, and it features more bad news about the residential real estate market. It seems the pace of first-time mortgage defaults in the U.S. is quickening for the first time in a year. September first-time defaults rose to 1.1% of mortgages that were previously deemed ''always performing'' from the August rate of 1%.

The good news, if you choose to view it as such, is that the rate was as high as 2.5% early in 2009, but Amherst said declining home values may provide an impetus for some homeowners to simply stop paying their mortgages. As Federal Reserve Chairman Ben Bernanke said last month, more than 20% of homeowners owe more than what their home is worth and another 33% are only in the green by 10% or less.

Case-Shiller data shows home prices lost almost half a percent in July and August after the home-buyer tax credit expire and values are down almost 30% from their 2006 peak, according to Bloomberg News.

The disconnect between profits at the dinner table and the table in board room is growing as U.S. CEOs are apparently quite chipper about their companies' profitability. In fact, Bloomberg reported today that more CEOs than ever are boosting earnings forecasts. During the month of October, 196 companies raised profit estimates compared to 130 that lowered, the biggest gap since Bloomberg started keeping such data in 1999.

That works out to be about 1.5 companies raising estimates for every one that lowers, or the equivalent of three times the historical average. The bulls should like this news because the last time executives were this optimistic, stocks climbed 39 percent over the next 3.5 years, data compiled by Bloomberg show. Remember that today's news regarding corporate profitability comes on the heels of a 200-point rally for the S&P 500 since July and five consecutive weekly gains.

Corporate Profits Chart

In M&A news, highlighting the fact that this was not the typical Monday when it comes to M&A activity, Amazon.com's (AMZN) $500 purchase of privately held Quidsi was the deal of the day. The all-cash deal allows Amazon to get its hands on the Diapers.com and Soap.com Web properties. While those aren't the sexiest businesses to be in, the deal does help Amazon eliminate a competitor.

Amazon started selling diapers online in 2006, shortly after Diapers.com made its debut. Analysts said, Quidsi is expected to post revenue of $300 million this year, a 67% jump from 2009. In addition, the company recently launched the BeautyBar.com Web site, which will give Amazon exposure to consumers seeking high-end skin care products.

One analyst said the deal positions Washington-based Amazon to be a dominant player in the baby products category. Not to mention, Amazon probably irked Wal-Mart (WMT) with this deal because the world's largest retailer had also set its sights on New Jersey-based Quidsi. Amazon will assume $45 million in debt as part of the deal.

Amazon Chart

If you are disappointed that $500 million represents the big deal of the day, those glum feelings probably will not last too long as other tech titans such as Dell (DELL) and Google (GOOG) plan to go shopping in a big way. There has already been $60 billion worth of mergers and acquisitions activity in the tech sector this year, but the sector will remain an investment banker's dream as Google looks for more deals that are the same size as ValueClick and YouTube, the search giant's two biggest purchases to date.

Dell, which has been fighting a losing battle against rivals Hewlett-Packard (HPQ) and International Business Machines (IBM), is hunting for more deals to bolster its data center business. Last week, Dell said it would purchase software developer Boomi and Google spent $1.6 billion on 20 different deals through the first nine months of this year.

Sticking with the theme of acquisition rumors, a surprise loser on the day was Anadarko Petroleum (APC). The independent oil and gas producer slumped $2.90, or 4.3%, to close at $64.71 on the heels of news that BHP Billiton (BHP) may target Anadarko after missing out on Potash Corp. (POT). This rumor started a few weeks after BHP initially made its bid for Potash with an Australian newspaper deeming Anadarko as a potential ''backup plan'' for BHP if the mining giant was not able to win Potash.

That rumor died pretty quickly, but it resurfaced last week when a UBS analyst published a note naming Anadarko and Australia's Woodside Petroluem as possible targets for BHP now that the Potash deal is all but dead. We will be covering this issue more extensively at OilSlick.com, but to get to the crux of the matter, Anadarko would make for a logical takeover target for BHP, at least on the surface.

BHP has said it is looking for ways to bolster its oil and gas production and the company is active in the Gulf of Mexico, where Anadarko has a major footprint as well. That said, Anadarko still has to contend with the possibility of liabilities related to its 25% non-operating interest in the Macondo well project and there was an interesting piece in the Wall Street Journal recently that showed Anadarko would have done little to add to BHP's EBITDA over the past several years.

In related news, Royal Dutch Shell (RDS-A), Europe's largest oil company, said today it will sell 10% of its stake of in Woodside, fueling speculation the latter is going to be taken out in the near-term.

Anadarko Chart

Looking at the charts, the S&P 500 retreated just a couple of points today after coming to a stop right near significant resistance at 1228 on Friday. I doubt that Monday's declines represent a buy the dip opportunity because the dip was so minor, but it is interesting to note that tech remains solid and could be supported by further M&A activity in the sector.

In addition, financials, while most of the major ones were down today, started to show some signs of life last week. Considering that the group has basically been absent from the recent rally, it would be extremely bullish for the S&P 500 if its second-largest sector component actually started pulling its weight. The 1175 area is support.

S&P 500 Chart

After the Dow found its way to back to pre-Lehman collapse levels last week, a loss of less than 40 points probably does not warrant cause for concern. From top to bottom, the Dow's range was a scant 70 points today and it looks like 11,400 is working as firm support. On the upside, the index will need to contend with resistance at 11,750, which is a fair bit away.

Dow Chart

After putting on an impressive show last week, gaining over 70 points, the Nasdaq would have been an ideal candidate for some profit-taking today and maybe that happened, but the index still found a way to close higher on the day. With today's close at 2580, the Nasdaq has plenty of real estate in front of it before running into next resistance at 2720. From there, 2850 becomes the big hurdle to clear.

Neither of those numbers will be challenged this week, but if the Nasdaq just keeps doing what it has been doing recently, 2720 becomes a realistic target within a few weeks and 2850 could be seen early next year. Support is 2570.

Nasdaq Chart

The Russell 2000 barely moved from Friday's close, but at least it did not move lower. After last week's 5% jump, it would not have been surprising to see the Russell sell-off a bit today, but that did not happen and that may be a positive sign. The index has clear sailing for another 25 points or so before it bumps into resistance at 760. Making a run above 800 before the end of the year probably is not too much to expect as performance-chasing money managers will need to pour some money into small-caps to jolt returns.

Russell 2000 Chart

This is a slow week on both the economic news and earnings fronts with Cisco (CSCO) the headliner in terms of profit reports. My personal feelings about the dollar-decimating QE2 fiasco aside, it is obvious that the market likes the Fed's stimulative efforts, at least for now. If the market continues its torrid pace, Ben Bernanke may stumble his way into some ''man of the year'' awards. Per typical U.S. policy, worry about the impact of QE2 at a later date.


New Plays

Early Promotion

by James Brown

Click here to email James Brown
Editor's Note:
I mentioned this stock in my editor's note over the weekend. The relative strength today is encouraging. I am promoting CVS to an active candidate earlier than expected.

-James


NEW BULLISH Plays

CVS Caremark Corp. - CVS - close: 31.23 change: +0.29

Stop Loss: 30.45
Target(s): 33.50, 34.90
Current Option Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

Company Description:
CVS Caremark is the largest pharmacy health care provider in the United States. Through our integrated offerings across the entire spectrum of pharmacy care, we are uniquely positioned to provide greater access to engage plan members in behaviors that improve their health, and to lower overall health care costs for health plans, plan sponsors and their members. CVS Caremark is a market leader in mail order pharmacy, retail pharmacy, specialty pharmacy, and retail clinics, and is a leading provider of Medicare Part D Prescription Drug Plans. As one of the country's largest pharmacy benefits managers (PBMs), we provide access to a network of more than 64,000 pharmacies, including over 7,100 CVS/pharmacy® stores that provide unparalleled service and capabilities. Our clinical expertise includes one of the industry's most comprehensive disease management programs. (source: company press release or website)

Why We Like It:
I mentioned CVS as a bullish candidate in my editor's note over the weekend. Shares have been building a bull-flag pattern for weeks now and CVS looks poised to breakout from this pattern. The relative strength today is encouraging. The stock has short-term resistance at $31.75. I'm suggesting a trigger to buy the stock (or calls) at $31.80. CVS will probably have additional resistance at its 200-dma (currently near $32.40) but our first target is $33.50. Our second, longer-term target is $34.90.

BULLISH TRIGGER @ 31.80

Suggested Position: stock @ 31.80
- or
BUY the 2011 January $33.00 call (symbol: CVS1122A33)

Annotated chart:

Entry on November xx at $xx.xx
Earnings Date 02/08/11 (unconfirmed)
Average Daily Volume: 10.1 million
Listed on November 8th, 2010


In Play Updates and Reviews

Pat, I'd like to buy a dip.

by James Brown

Click here to email James Brown

Editor's Note:
It has been years since I've watched "Wheel of Fortune" where participants could buy a vowel. I'd sincerely like to ask the market if we could buy a dip.

There is very little change from my weekend comments. Stocks remain overbought and we need a dip to trigger some entry points. Readers may want to take some profits out of the Citigroup trade.

-James

Current Portfolio:


BULLISH Play Updates

Alcoa Inc - AA - close: 13.96 change: -0.04

Stop Loss: 12.75
Target(s): 14.95, 15.95
Current Option Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

Comments:
11/8: Normally a strong dollar is bearish for commodity-related names but the commodity space held up pretty well on Monday in spite of a dollar bounce. AA actually performed well considering one firm downgraded the stock to a "neutral" this morning. We are still waiting for a dip. There is no change from my prior comments.

Earlier Comments:
Wait for a dip to $13.50 to buy shares of AA. If triggered we'll use a stop loss at $12.75.

Suggested Position: Buy AA stock @ 13.50

Entry on November xx at $xx.xx
Earnings Date 01/10/11 (unconfirmed)
Average Daily Volume: 26.1 million
Listed on November 6th, 2010


Citigroup Inc - C - close 4.50 change -0.05

Stop Loss: 4.08
Target(s): 4.60, 4.75, 4.95
Current Option Gain/Loss: + 8.1%
Time Frame: 4 to 6 weeks
New Positions: NO

Comments:
11/8: Financial stocks faltered on Monday as the sector was hit with some profit taking after last week's big gains. The action today in Citigroup could be a short-term top for the stock. More conservative traders will want to seriously consider taking some money off the table right now. I would expect a correction toward $4.30, which should be new support. No new positions at this time.

Current Position: Long C stock, entry was at $4.16
Options Traders: Long December $4.00 CALL

Entry on October 27, 2010
Earnings Date 01/19/11 (unconfirmed)
Average Daily Volume: 523 million
Listed on October 25, 2010


Hansen Natural Corp. - HANS - close: 50.97 change: -0.57

Stop Loss: 46.75
Target(s): 51.75
Current Option Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

Comments:
11/8: There is no change from my previous comments. HANS looks vulnerable to more profit taking. We want to see a dip.

Earlier Comments:
Use a trigger at $48.25 to buy HANS or buy calls. If triggered we'll use a stop loss at $46.75.

Suggested Position: BUY the stock at $48.25

- or -

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

Entry on November xx
Earnings Date 11/04/10 (confirmed)
Average Daily Volume: 4.5 million
Listed on October 16, 2010


Kroger Co. - KR - close 22.71 change -0.40

Stop Loss: 21.45
Target(s): 23.70
Current Option Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

Comments:
11/8: Almost there! KR gave up -1.7% on Monday thanks in part to rival Safeway getting downgraded this morning. Shares of KR slipped to $22.66 intraday. We want to see a dip to $22.55 (more cautious traders may want to wait for a dip closer to $22.00 instead).

Earlier Comments:
Use a dip at $22.55 to launch bullish positions. Stop loss at $21.45. Our target is $23.70 near the April highs. We'll set a secondary, longer-term target at $24.75.

Trigger to open positions @ 22.55

Suggested Position: Buy KR stock

Entry on November XX
Earnings Date 12/8/2010 (unconfirmed)
Average Daily Volume: 6 million
Listed on November 3, 2010


NYSE Euronext - NYX - close: 30.34 change: -0.45

Stop Loss: 29.40
Target(s): 34.50
Current Option Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

Comments:
11/8: Shares of NYX faded from resistance near $31.00 as investors digested a press release from the NYX regarding October trading volumes. Year over year the average volume was up +6.2% but October saw declines of -2.9% compared to September this year. I don't see any changes from my prior comments.

Earlier Comments:
We want to use a trigger at $31.25 to buy NYX (or calls) with an initial target of $34.50. More conservative traders could wait for a close over $31.25 instead of an intraday move above this level.

Trigger @ 31.25

Suggested Position: Buy NYX stock @ 31.25

Entry on November xx at $xx.xx
Earnings Date 02/09/11 (unconfirmed)
Average Daily Volume: 2.5 million
Listed on November 6th, 2010


SPDR Financial ETF - XLF - close 15.46 change -0.12

Stop Loss: 14.45
Target(s): 17.25
Current Option Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

Comments:
11/8: After last week's monster gains in the financial sector the group was due for some profit taking. The XLF gave up -0.77% on Monday. That's not enough. The low today was only $15.32. I'm suggesting a trigger at $15.25 and more conservative traders could wait for a dip closer to $15.00 before launching positions. There is no change from my weekend comments.

Earlier Comments:
Trigger at $15.25. Stop loss at $14.45. Our first target is $17.25. You might want to buy call options instead of the ETF because the XLF doesn't move very fast (I'm thinking the 2011 January calls).

Trigger to open bullish positions @ 15.25

Suggested Position: Buy XLF stock

- or -

Options Traders: Buy 2011 January $15.00 call

Entry on November XX
Earnings Date N/A (unconfirmed)
Average Daily Volume: 83 million
Listed on November 4, 2010


BEARISH Play Updates

None. No bearish plays currently.