Option Investor
Newsletter

Daily Newsletter, Wednesday, 12/15/2010

Table of Contents

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

Market Wrap

Dollar Rally, Spain Plague Stocks

by Todd Shriber

Click here to email Todd Shriber
Another day in the life of Europe's sovereign debt crisis sent the U.S. dollar higher and stocks lower with the S&P 500 putting the breaks on a six-day rally. When the dust settled on Wednesday, the index was off by half a percent. The Dow Jones Industrial shed 19 points on the day while the Nasdaq lost 10.5 points. Gold was adversely impacted by the dollar's jump, careening to a 1.3% loss. Stats Table

The euro slid against the dollar, helping the U.S. Dollar Index to a solid day. If you're long stocks and commodities or short the dollar, blame Spain for your Wednesday headache. The ''S'' in the PIIGS acronym and the second-largest economy in that motley crew behind Italy dominated the headlines in a big way today on news that Moody's Investors Service is mulling a downgrade of Spain's debt rating.

Throughout this European debt saga, I have opined in this space that it has been frustrating and vexing to see economic lightweights such as Greece, Ireland and Portugal weigh on global equity markets. After all, these aren't lead actors on the global economic stage. I also noted that Spain is a different ballgame, the ninth-largest economy in the world, and if the contagion spread its way, there would be unfortunate repercussions.

The other side of this coin is that Moody's or any other ratings agency for that matter, is not doing anyone any favors by considering a downgrade to Spain's debt rating now. It is practically 2011 and Spain's problems have been well-known for a couple of years. There have been a couple of times in the past year that I have highlighted the iShares MSCI Spain Index Fund (NYSE: EWP), the only Spain-specific ETF listed in the U.S., on days when the ETF has been subject to some unusual bearish trade and I highlighted the reasons why Spain was likely to be on the receiving end of some pain.

In the go-go days of the easy credit economy, Spain went the way of U.S, which is to say ''houses for all.'' When the real estate bubble burst, the same thing happened in Spain that happened here in the States: Folks were stuck with homes that were less than what they paid. Factor in an unemployment rate that is close to if not the highest in the Eurozone (it was once as high as 20%) and it is no wonder Spain is in trouble. Welcome to the party Moody's because these statistics were readily available in 2008. As the chart illustrates, dollar bulls do not care how late these downgrades come because buying the news in this case seems to work.

The timing of all this is quite bad for Spain, which will commence its final bond sale of 2010 on Thursday. Moody's says the country needs to raise $226 billion next year.

Dollar Index Chart

As has been the problem throughout the European fiasco, the problems faced by Spain and friends are not confined to their borders because foreign banks have exposure to these countries as well. In the case of Spain, German banks own almost $217 billion in Spanish debt, French banks own over $200 billion and the U.S. is vulnerable as well with almost $173 billion in Spanish debt holdings, according to the Bank of International Settlements.

Spain Debt Exposure Chart

Belgium is no peach either. Standard & Poor's took the knife to its outlook for Belgium on Tuesday, cutting that rating to ''negative'' from ''stable'' while warning the country could be in for credit rating downgrade within the next six months.

''We believe that Belgium's prolonged domestic political uncertainty poses risks to its government's credit standing, especially given the difficult market conditions many eurozone governments are facing,'' S&P said. Belgium's current credit rating is AA+, just one notch below the perfect AAA rating. It does not look like the country will be obtaining that lofty rating any time soon, but it does look like the iShares MSCI Belgium Index Fund (EWK) is quite vulnerable right now.

Belgium ETF Chart

Staying in Europe, a couple of European companies that are not going to win any popularity contests this year were in the news and not the good kind of news. Well, it is rarely good when the Justice Department gets involved and that is a lesson BP (BP) and Transocean (RIG) are bound to learn. Both stocks were doing alright today until the Justice Department announced it is seeking an unspecified amount of civil damages from BP, Transocean and several other companies with ties to the Gulf of Mexico oil spill.

The suit, filed today in a New Orleans federal court, shows DOJ is pursuing damages under the Clean Water Act and that the agency wants to hold BP, Transocean and Anadarko Petroleum (APC), which owned a 25% non-operating interest in the Macondo well project, liable under the Oil Pollution. BP's Australian-based insurance provider was also named, but Cameron International (CAM) and Halliburton (HAL) escaped the wrath of DOJ, at least for the time being.

BP slid 1% after the news broke, giving back some of Tuesday's gains that were accumulated on the back of takeover rumors. For more extensive coverage, head over to OilSlick.com.

BP Chart

While it may seem like today was a pretty glum day, there is some positive news to report and one such example comes from the materials sector. Joy Global (JOYG), the mining equipment maker whose primary rival, Bucyrus (BUCY), is being acquired by Caterpillar (CAT), reported stellar fiscal fourth-quarter results AND gave an outlook for 2011 that investors cheered.

Wisconsin-based Joy Global said it earned $1.39 a share on sales of $1.05 billion in its fiscal fourth quarter. Analysts were expecting a profit of $1.16 a share on revenue of $922.8 million. That is a pretty good beat, but even better was the outlook. Joy Global said it expects to earn $5-$5.30 a share on revenue of $3.9 billion to $4.1 billion for fiscal 2011. That tops the Street estimate of a profit of $4.79 a share on revenue of $3.86 billion.

Mining companies have increased capital spending this year by as much as 35% and spending is expected to rise another 15%-20% next year as emerging markets continue their thirst for commodities. Analysts said Joy Global will be targeting emerging markets for growth and will probably expand its product line to better compete with the combined Caterpillar/Bucyrus.

Joy Global said its fourth-quarter bookings rose by 48%, driven by North America, Australia and Russia, Reuters reported. The shares surged as much as 8% to a new 52-week high before settling up 6.94%.

Joy Global Chart

Looking at the charts, I do not want to be the one that rains on the rally's parade, but the S&P 500 is having a tough go of things with regard to surpassing 1250. To be specific, 1251.70, the index's close on Sept. 12, 2008, is next resistance. That number is the pre-Lehman collapse high, so it is probably very psychological. Support is fair bit back at 1225-1228.

S&P 500 Chart

Yesterday, the Dow got a small boost from a trio of constituents, Caterpillar, Kraft (KFT) and Verizon (VZ) on some upgrade news. Today it was a trio all falling by at least 1.1% -- Alcoa (AA), General Electric (GE) and JPMorgan Chase (JPM)-- that dragged the index lower. Today's loss is hardly alarming the Dow is still a long way from support at 11,335.

Dow Chart

After eight consecutive up days, the Nasdaq has fallen back for two straight days and today's decline violated initial support at 2625. Some Nasdaq darlings did not pull their weight today. Google (GOOG) retreated below its 50-day moving average. F5 Networks (FFIV) endured a nasty tumble and Apple (AAPL) barely moved.

Nasdaq Chart

It was another down day for the Russell 2000 and the index is now flirting with support at 765. How firm this support is should be a tell as to how strong small-caps will be heading into year-end.

Russell 2000 Chart

As Keene is filling in for me next Monday, I will not be back with you until after Christmas, but I wanted to leave you with a fun, and perhaps profitable, fact. According to Bespoke Investment Group, the trading day before and after Christmas are usually positive for the S&P 500, but make your preference the day before, which sees an average gain of 0.21% as that day is positive almost two-thirds of the time over the past 25 years. Happy holidays to you and your family.

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New Plays

Catch Its Breath

by James Brown

Click here to email James Brown

Editor's Note:

The market's December sprint higher has finally stalled. Stocks need a chance to catch their breath. You know the drill. Three steps higher, two steps back, repeat. After two weeks of gains and new two-year highs it's not surprising to see some profit taking.

Thursday's session could be interesting. There is a lot of economic data hitting the wires. We'll see the housing starts, building permits, the U.S. current account balance, the Philadelphia Federal Reserve economic survey, and the weekly initial jobless claims. Meanwhile stocks look a little tired. We've been hoping for a correction to offer another entry point to load up on bullish positions. The newsletter already has several bullish candidates with buy-the-dip triggers. I'm not adding any new candidates tonight.

- James


In Play Updates and Reviews

How Long Will It Last?

by James Brown

Click here to email James Brown

Editor's Note:
The stock market is starting to correct lower after two weeks of gains. How long will the correction last? There is no way to know but the S&P 500 should find some support in the 1210-1200 zone. As the S&P 500 nears 1200 we can turn up our focus on buying the dip!

-James

Current Portfolio:


BULLISH Play Updates

Alcoa Inc - AA - close: 13.96 change: -0.24

Stop Loss: 12.90
Target(s): 14.95, 15.95
Current Option Gain/Loss: + 5.9%
Time Frame: 8 to 10 weeks
New Positions: Yes, but see below

Comments:
12/15 update: AA gave up about -1.7% and broke short-term support at $14.00. We've been expecting a pull back toward the $13.60-13.50 area. It looks like that correction has begun. I would wait for a dip near $13.60 before considering new positions. (If we do see another entry point we might consider buying some 2011 call options).

Current Position: Long AA stock @ 13.18

Entry on November 16 at $13.18
Earnings Date 01/10/11 (unconfirmed)
Average Daily Volume: 26.1 million
Listed on November 6th, 2010


Alaska Air Group - ALK - close: 56.59 change: +0.25

Stop Loss: 54.90
Target(s): 59.75
Current Option Gain/Loss: + 3.0%
Time Frame: 8 to 9 weeks
New Positions: see below

Comments:
12/15 update: ALK was showing relative strength again. The stock bounced from the $56.0 level to post a +0.4% gain. The XAL airline index lost -1.4%. I am still concerned that the XAL's breakdown under its 50-dma is a bearish warning signal for ALK. Cautious traders may want to exit ALK now. I am not suggesting new bullish positions at this time.

Current Position: Long ALK stock @ $54.91

- or -

Long the 2011 January $60 calls (symbol: ALK1122A60) entry @ $1.60

Entry on November 22 at $54.91
Earnings Date 01/27/11 (unconfirmed)
Average Daily Volume: 331 thousand
Listed on November 20th, 2010


American Express - AXP - close: 46.12 change: -0.17

Stop Loss: 41.95
Target(s): 47.50, 49.85
Current Option Gain/Loss: unopened
Time Frame: 10 to 12 weeks
New Positions: Yes, see trigger

Comments:
12/15 update: AXP has failed three days in a row under the $46.80 level. Aggressive traders could try an high-risk tactic and open bearish positions now with a stop loss just above $46.80 in an attempt to scalp a couple of points on a correction lower. I am suggesting the less risk adverse crowd just wait for the dip toward $44. We want to open bullish positions on a dip to $44.50.

Trigger @ $44.50 Suggested Position: Buy AXP stock at $44.50

- or -

Buy the 2011 April $45 calls (AXP1116D45)

Entry on December xx at $xx.xx
Earnings Date 01/20/11 (unconfirmed)
Average Daily Volume: 9.0 million
Listed on December 2nd, 2010


Popular Inc. - BPOP - close: 2.93 change: -0.08

Stop Loss: 2.69
Target(s): 3.40, 3.95
Current Option Gain/Loss: - 2.3%
Time Frame: 12 to 16 weeks
New Positions: Yes, see below

Comments:
12/15 update: I have been warning readers that BPOP might see a dip toward $2.90 and that occurred today. The stock's underperformance is a bit concerning but shares can be somewhat volatile. The $2.90 level and its rising 200-dma are both short-term support. This pull back looks like another bullish entry point. More cautious traders may want to wait and buy a bounce from here instead. Our first target is $3.40. Our second, much longer-term target is $3.90.

Current Position: Long BPOP stock @ $3.00

- or -

Long the 2011 April $3.00 calls (BPOP1116D3) Entry @ $0.34

Entry on December 14 at $ 3.00
Earnings Date 01/20/11 (unconfirmed)
Average Daily Volume: 11.7 million
Listed on December 11th, 2010


Companhia Brasileira de Distribuicao - CBD - close: 40.34 change: -0.47

Stop Loss: 36.75
Target(s): 44.95, 49.00
Current Option Gain/Loss: + 0.2%
Time Frame: 10 to 12 weeks
New Positions: Yes, see below

Comments:
12/15 update: CBD followed the market lower and posted a -1.1% decline. A dip into the $40.00-39.00 zone would still be an entry point for me but cautious traders could wait. If the market really pulls back then CBD could test support near $38.00.

FYI: We have a wide stop because CBD can be so volatile. Bear in mind this is a higher-risk trade.

Current Position: Long CBD stock @ $40.25

Entry on November 23 at $40.25
Earnings Date 03/02/11 (unconfirmed)
Average Daily Volume: 608 thousand
Listed on November 20th, 2010


City National Corp. - CYN - close: 60.18 change: +0.18

Stop Loss: 54.75
Target(s): 60.00, 64.00
Current Option Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

Comments:
12/15 update: CYN managed to post a gain but shares produced a failed rally intraday. There is no change from my prior comment. We want to see a correction in this stock. The plan is to wait for a dip to $57.00. FYI: The Point & Figure chart is bullish with a $77 target.

Trigger @ $57.00

Suggested Position: buy CYN stock @ $57.00

- or -

Buy the 2011 February $60 calls (cyn1119B60)*

*Caution: most of the option spreads on CYN seem a little too wide. I consider the options a more aggressive trade. You may want to keep your position size small.

Entry on December xx at $xx.xx
Earnings Date 01/27/11 (unconfirmed)
Average Daily Volume: 223 thousand
Listed on December 4th, 2010


JB Hunt Transport Services - JBHT - close: 39.29 change: -0.53

Stop Loss: 36.75
Target(s): 40.70, 43.75
Current Option Gain/Loss: unopened
Time Frame: 8 to 10 weeks
New Positions: Yes, see trigger

Comments:
12/15 update: The correction in JBHT got a little help this morning after the stock was downgraded to a "hold". Shares opened at $39.07. I am expecting a pull back into the $38.00-37.00 region. Currently our plan is to open bullish positions at $38.00.

FYI: A week ago the NASDAQ announced they were removing JBHT from the NASDAQ-100 index and this removal takes place on Dec. 20th. Firms should start selling shares of JBHT to make room for those stocks being added to the index.

Trigger to buy the dip at $38.00

Suggested Position: Buy JBHT stock @ 38.00

- or -

Buy the 2011 February $40 calls (JBHT1119B40)

Entry on December xx at $xx.xx
Earnings Date 01/28/11 (unconfirmed)
Average Daily Volume: 1.2 million
Listed on December 13th, 2010


Microsoft Corp. - MSFT - close: 27.85 change: +0.23

Stop Loss: 25.45
Target(s): 27.45, 29.00
Current Gain/Loss: + 9.0%
Time Frame: 8 to 10 weeks
New Positions: see below

Comments:
12/15 update: The relative strength in MSFT is impressive but I wouldn't chase it. The stock managed to gain +0.8% and closed at new six-month highs. I am still concerned that MSFT is short-term overbought. I'm not suggesting new bullish positions at current levels.

Current Position: Long MSFT stock @ 25.55

- or -

Buy the 2011 January $25.00 calls (symbol: MSFT1122A25) Entry @ $1.39

12/14/10 Target hit @ 27.45 (+7.4%), option @ $2.55 (+83.4%)
12/11/10 New stop @ 25.45
11/29/10 New stop @ 24.70

Entry on November 17 at $25.55
Earnings Date 01/27/11 (unconfirmed)
Average Daily Volume: 68.4 million
Listed on November 15th, 2010


Starbucks Corp. - SBUX - close: 31.87 change: -0.24

Stop Loss: 29.90
Target(s): 34.75
Current Option Gain/Loss: unopened
Time Frame: 8 to 10 weeks
New Positions: Yes, see trigger

Comments:
12/15 update: SBUX is slowly sinking. Shares should have support near $31.00 and near $30.00. We have a trigger to launch bullish positions at $31.25. If triggered our first target is $34.75.

FYI: SBUX is currently in a legal battle with Kraft Foods (KFT) over distribution of SBUX's ground coffee brand but investors seem to be ignoring it.

Trigger @ $31.25

Suggested Position: Buy SBUX stock @ $31.25

- or -

Buy the 2011 January $32.00 call (SBUX1122A32)
Buy the 2011 April $33.00 call (SBUX1116D33)

Entry on December xx at $xx.xx
Earnings Date 01/20/11 (unconfirmed)
Average Daily Volume: 7.1 million
Listed on December 8th, 2010


SAKS Inc. - SKS - close: 11.45 change: -0.15

Stop Loss: 10.90
Target(s): 13.95, 14.95
Current Option Gain/Loss: - 4.2%
Time Frame: 10 to 12 weeks
New Positions: No

Comments:
12/15 update: The action in SKS wasn't very healthy today. The odds of us getting stopped out just jumped on us. SKS should still have some support at $11.00 and its 50-dma, also near $11.00. Yet if the market sees any serious pull back we could easily get stopped out on an intraday spike lower. I am not suggesting new bullish positions at this time.

Suggested Position: Long SKS stock @ $11.98

- or -

Buy the 2011 February $12.50 calls (SKS1119B12.5) Entry @ $0.65

Entry on December 13 at $11.98
Earnings Date 02/22/11 (unconfirmed)
Average Daily Volume: 3.1 million
Listed on December 11th, 2010


Sara Lee Corp - SLE - close: 16.15 change: -0.11

Stop Loss: 14.70
Target(s): 17.00, 17.90
Current Option Gain/Loss: + 3.0%
Time Frame: 10 to 12 weeks
New Positions: see below

Comments:
12/15 update: It was a quiet day for SLE. The stock hit a new relative high intraday but pared its gains to close in the red. Shares look a little overbought and a correction back toward support near $15.50 would not surprise me.
FYI: the Point & Figure chart is suggesting a long-term bullish target of $32 for SLE.

Current Position: Long SLE stock @ $15.68

- or -

Long the 2011 April $15.00 calls (SLE1116D15) Entry @ $1.35

Entry on December 8 at $15.68
Earnings Date 02/03/11 (unconfirmed)
Average Daily Volume: 7.6 million
Listed on December 7th, 2010


Sony Corp. - SNE - close: 35.65 change: +0.02

Stop Loss: 33.45
Target(s): 36.50, 39.00
Current Option Gain/Loss: unopened
Time Frame: 10 to 12 weeks
New Positions: Yes, see trigger

Comments:
12/15 update: There is no change from my previous comments on SNE. We want to open bullish positions on a dip at $34.50.

Trigger @ $34.50

Suggested Position: Buy SNE stock
- or -
Buy the 2011 APRIL $35 calls (SNE1116D35)

Entry on December xx at $xx.xx
Earnings Date 02/03/11 (unconfirmed)
Average Daily Volume: 888 thousand
Listed on November 23rd, 2010


Trimble Navigation - TRMB - close: 39.79 change: -0.97

Stop Loss: 36.40
Target(s): 41.00, 43.00
Current Option Gain/Loss: unopened
Time Frame: 8 to 10 weeks
New Positions: Yes, see trigger

Comments:
12/15 update: We've been expecting this pull back in TRMB. The stock should have support near $38.00. Our plan is to open bullish positions at $38.50.

Trigger @ $38.50

Suggested Position: Buy TRMB stock @ $38.50

- or -

Buy the 2011 February $40.00 calls (TRMB1119B40) current ask $2.35

Entry on December xx at $xx.xx
Earnings Date 02/02/11 (unconfirmed)
Average Daily Volume: 435 thousand
Listed on December 4th, 2010


Ternium S.A. - TX - close: 39.12 change: -0.46

Stop Loss: 35.85
Target(s): 43.00, 45.00
Current Option Gain/Loss: unopened
Time Frame: 12 to 14 weeks
New Positions: Yes, see trigger

Comments:
12/15 update: TX lost -1.1% on Wednesday. We are expecting a correction back toward the $38-37 zone. I am suggesting we buy this stock on a dip at $38.25. If triggered we'll use a stop loss at $35.85. Our targets are $43.00 and $45.00. Keep in mind that it could take several weeks for TX to hit these targets.
FYI: The Point & Figure chart for TX is forecasting a bullish target of $48.

Buy-the-Dip Trigger @ $38.25

Suggested Position: Buy TX stock

Note: TX does have options but the spreads are horrendously wide so I'm not suggesting any calls on this trade.

Entry on December xx at $xx.xx
Earnings Date 02/23/11 (unconfirmed)
Average Daily Volume: 295 thousand
Listed on December 14th, 2010


Wells Fargo & Co - WFC - close: 29.79 change: -0.03

Stop Loss: 27.90
Target(s): 29.25, 31.90
Current Option Gain/Loss: +10.8%
Time Frame: 10 to 12 weeks
New Positions: see below

Comments:
12/15 update: Profit taking in WFC was very mild today. There is no change from my prior comments. If you're looking for a new entry point I would wait for WFC to pull back and redefine short-term support. That support might be $29.25 or it could be the 200-dma near $28.00. Our final target to exit is $31.90.

Current Position: Long WFC stock @ $26.88

- or -

Long the 2011 January $27.50 call (WFC1122A27.5) Entry @ $1.16

12/09: New stop loss @ $27.90
12/08: Target Hit $29.25 (+8.8%), Option @ $2.30 (+98.2%)

Entry on November 30 at $26.88
Earnings Date 01/19/11 (unconfirmed)
Average Daily Volume: 32.7 million
Listed on November 29th, 2010


World Wrestling Entertainment - WWE - close: 14.25 change: -0.20

Stop Loss: 13.75
Target(s): 14.95, 16.40
Current Option Gain/Loss: + 1.0%
Time Frame: 10 to 12 weeks
New Positions: see below

Comments:
12/15 update: Widespread market weakness pushed WWE to a -1.3% loss. Shares erased Tuesday's gain. The stock could pull back to test support near $14.00 and its 50-dma. Readers may want to wait for that dip (near $14.00) before considering new bullish positions.

Suggested Position: Long WWE stock @ $14.10

- or -

Buy the 2011 April $15.00 calls (WWE1116D15), entry @ $0.45

*Note: The call options on WWE have very large spreads, making them a higher-risk trade.

Entry on December 13 at $14.10
Earnings Date 02/10/11 (unconfirmed)
Average Daily Volume: 242 thousand
Listed on December 9th, 2010


CLOSED BULLISH PLAYS

Peir 1 Imports - PIR - close: 10.38 change: -0.03

Stop Loss: 10.24
Target(s): 11.90
Current Option Gain/Loss: + 1.3%
Time Frame: 10 to 12 weeks
New Positions: No

Comments:
12/15 update: Yesterday I warned readers to play defensive on PIR and exit today at the closing bell. Shares ended at $10.38 near their 10-dma. We wanted to exit today to avoid holding over earnings tomorrow. I would still keep PIR on your watch list just in case we see another entry point in the next couple of weeks.

Current Position: Long PIR stock @ $10.24, exit @ 10.38 (+1.37%)

- or

Buy the 2011 March $10.00 calls (PIR1119C10) Entry @ $1.55, exit $1.30 (-16.1%)

chart:

Entry on December 2 at $10.24
Earnings Date 12/16/10 (confirmed)
Average Daily Volume: 2.3 million
Listed on December 1st, 2010