Option Investor
Newsletter

Daily Newsletter, Monday, 3/28/2011

Table of Contents

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

Market Wrap

Excuses Abound As Stocks Slide

by Todd Shriber

Click here to email Todd Shriber
For those that believe markets love to have an excuse to sell-off, that scenario was certainly at play on Monday as investors digested at a glum earnings report from a marquee consumer discretionary name and had to contend with renewed headline risk out of Japan and the Middle East. The combination was enough to erase the middling gains notched earlier in the trading day and send all three major U.S. indexes to negative closes right at their intraday lows.

Stats Table

Using the economic data points that were released this morning as a guide, this should have been a much stronger start to the week for stocks than it ended up to be. Consumer spending rose 0.7% in February and personal incomes jumped 0.3%, thanks to a tax cut, the Commerce Department said. As I often say with regards to these types of reports, the devil is in the details: Adjusted for inflation, incomes fell 0.1% and consumer spending jumped just 0.3%. In other words, rising gas and food prices may be starting to pinch the consumer a tad.

On the other hand, Julia Coronado, chief economist at BNP Paribas, said in an interview with Bloomberg, that rising food and energy costs are not derailing consumer spending. I consider myself a stock/ETF guy as that is my background in both trading and writing, so I like to leave the macro commentary to others more qualified, but it is becoming at least slightly apparent that inflation is a concern.

Consumer Spending/Personal Incomes

There was another dose of good economic news and believe it or not, it came from the housing market. Pending sales of previously owned homes climbed 2.1% in February to a reading of 90.8, according to the National Association of Realtors. Economists were expecting a decline of 1%. Yep, this is what passes for good housing news these days.

There is no doubt, and the chart below illustrates the point, that residential real estate has suffered some mighty declines over the past few years. It is certainly safe to say that gone are the halcyon days of 2005-2006 and one has to wonder when, if ever, those times will return. As I have noted recently, part of the problem is that first-time buyers are still facing barriers to entry. They only accounted for 29% of existing home purchases in January and just 34% in February. Those numbers should be 40%-45%.

Housing Chart

Taking a look Marriott's (MAR) performance today, maybe there is reason to still be concerned about consumer and business spending. The largest U.S. hotel chain plunged almost 6.3% to its lowest level in 10 months after saying slack demand in North America will weigh on revenue per available room (RevPAR) and come in at the low end of estimates.

The company said first-quarter RevPAR will jump about 7%, that's the low end of previous guidance of 7%-9% Marriott issued last month. Large group hotels in New York, Atlanta, Washington a Orlando, according to Bloomberg. Maryland-based Marriott said it expects first-quarter RevPAR in North America of 5%-6%, below the previous guidance of 6%-8%.

While Marriott is still optimistic on international markets, today's news from the company was also damaging for rivals Starwood (HOT) and Hyatt (H), which lost 5.7% and 6.3%, respectively.

Marriott Chart

Now if you want some better news and news that will keep you guessing about which direction the economy is headed, take a look at Wabtec (WAB). Shares of Pennsylvania-based Wabtec jumped over 12% after the company boosted its first-quarter and full-year guidance. What does Wabtec do and why should investors and traders care?

The company makes rail parts, stuff used for locomotives and freight cars. Wabtec offered up first-quarter guidance of a profit of 77-82 cents a share and for the full year, the company expects to earn $3.15-$3.25 a share. The company originally forecast a full-year profit of $2.90 a share. Analysts were forecasting a first-quarter profit of 69 cents a share and a full-year profit of $2.98.

Given those numbers, it is probably reasonable to assume that CSX, NSC, UNP and friends are ordering parts and related fare. Now if railroad operators are doing that, perhaps it means they are also hauling more coal, autos, raw materials, etc. and that of course would be good news for the U.S. economy. We will see in a few weeks. CSX steps into the earnings confessional on April 19 and UNP follows on April 20.

Wabtec Chart

It was a docile day on the mergers and acquisitions front as the biggest deal of the day comes in the form of EBay's (EBAY) $2.4 billion deal to acquire GSI Commerce (GSIC). EBay will pay $29.25 a share for GSI, a 51% premium to where the shares closed on Friday. EBay already has a relationship with GSI, which manages e-commerce Web sites for some major retailers, through PayPal and the online auction giant is hoping to leverage that relationship by taking advantage of GSI's distribution network.

The acquisition, which will be financed with cash and debt, indicates that EBay wants to take the fight to rival Amazon (AMZN). Amazon has the larger distribution network, making it more attractive to third-party sellers. At a 51% premium, EBay is paying up for GSI. The buyers of more than 300 similar companies during that past five years paid a premium of 44% compared with the target’s average price over 20 trading days before the announcement, according to Bloomberg.

GSI has 40 days to solicit offers from other companies and EBay can then match any other offer, so it will be interesting to see if Amazon, which has $8.76 billion in cash on hand, wants to get involved here. What is clear is that EBay needs to do something to galvanize its shares. Of course the run off the March 2009 low is impressive, but that can be said of almost every stock. Look out over the past five years and the Nasdaq has sharply outperformed EBay. Of course, today was a great day to be a GSI shareholder.

GSI Chart

Looking at the charts, no it was not pleasant to see stocks closer lower on the day, but if you had similar feelings about Friday's late-day sell-off that cut some impressive gains down, there's good reason for that: Volume was once again weak today. If the 6.4 billion shares that changed hands on Friday did not excite you, the 5.91 billion that was Monday's volume will not either. That is the lowest volume day since New Year's Eve.

With a close around 1310, the S&P 500 is still far enough off support at 1300 that it would take a pretty dismal day to get us back there, but I am getting the feeling that there is going to be quite a tussle in the 1320-1330 range, assuming the S&P 500 can get there, before Friday's jobs report.

S&P 500 Chart

A loss of almost 23 points on the Dow is nothing to be alarmed about and it is pretty easy to see why this meager loss transpired today. While CAT found its way to small gain, CVX, MMM and XOM all closed lower. On an intraday basis, Monday was the second consecutive day the Dow made its away above, but failed to close at or above resistance in the 12,250-12,275 area. Just below 12,200, the blue-chip Index is obviously far closer to resistance than it is to mental support at 12,000 and the more firm floor at 11,800.

Dow Chart

In this week's version of ''Apple (AAPL) cannot do all the work,'' the Nasdaq found its way to a lower close despite news that the iPad 2 sold out in its international debut over the weekend. If you are reading this from Australia, Canada, France, Germany or the U.K. and were able to procure an iPad, congratulations, because from the reports I read, the odds were not in your favor.

Still, that was not enough for the Nasdaq today. At 2730, the Nasdaq could go either way to support at 2700 or resistance at 2766. We are still several weeks away from most of the big earnings reports from Nasdaq stars, so I would bet the Nasdaq just follows the broader market for the rest of this week.

Nasdaq Chart

Rather than regale you with a fun fact this week in the form of words, I will let a chart, courtesy of Bespoke Investment Group, do the talking. The chart shows that while the S&P 500 has not climbed all the way back to its February peak, the advance/decline line is now at its highest levels of the bull market.

Advance/Decline Line


New Plays

Market Rebound Stalls

by James Brown

Click here to email James Brown

Editor's Note:

The market's performance on Monday was sleep inducing, right up until the last half hour. After a +5% bounce off its mid March lows I'm not surprised to see some profit taking. Yet at the same time stocks could see end of quarter window dressing keep any dips to a minimum. Add in a week with lots of economic data coming out and there is a good chance that stocks merely churn sideways for a few days here.

Keep an eye on the OIX oil index and the OSX oil services index. Both of these indices have rallied right toward their previous highs and stalled. A reversal here will look like a potential bearish double top formation.

I am concerned that Bank of America (BAC) could lead the financial sector lower. The stock has been hovering near technical support near its 100 and 200-dma. Further weakness from here will likely see BAC testing support near $13.00 and then a drop toward the 12.75 area. Goldman Sachs (GS) doesn't look so hot either and looks ready to breakdown under its 200-dma.

No new candidates tonight.

- James


In Play Updates and Reviews

A Quiet Monday

by James Brown

Click here to email James Brown

Editor's Note:
The stock market produced a rather tepid session. Investors might be waiting for a week full of economic data. The big event will be the jobs report on Friday.

We did see EBAY hit our buy-the-dip trigger on its acquisition news.

-James

Current Portfolio:


BULLISH Play Updates

ACI Worldwide Inc. - ACIW - close: 32.43 change: +0.02

Stop Loss: 29.75
Target(s): --.--, 34.75
Current Gain/Loss: + 9.4%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
03/28 update: Monday was a quiet day for Wall Street and ACIW closed virtually unchanged on the session. I don't see any changes from my weekend comments. ACIW has short-term resistance at $33.00.

I am not suggesting new bullish positions at this time but that might change if we see anew bounce from the $31 level or its rising 30-dma. Our final target is $34.75.

FYI: ACIW does have options but the spreads are very wide, which puts us at a significant disadvantage.

SMALL bullish positions

Current Position: Long ACIW stock @ $29.63

03/24 first exit was at $32.25 (+8.8%)
03/23 Sell half now! exit price at the open on 3/24
03/22 New stop loss @ 29.75, 1st Target adjusted to $32.85
03/19 New stop loss @ 29.35

Entry on February 25 at $29.63
Earnings Date 04/28/11 (unconfirmed)
Average Daily Volume: 122 thousand
Listed on February 24th, 2010


Dick's Sporting Goods Inc. - DKS - close: 39.59 change: -0.32

Stop Loss: 36.75
Target(s): 42.25, 44.50
Current Gain/Loss: +0.5%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
03/28 update: Shares of DKS slipped toward short-term technical support at their 20-dma midday. Readers could buy this dip or wait for a pull back closer to the $38.50 area. I'm suggesting profit targets at $42.25 and $44.50.

FYI: The Point & Figure chart for DKS is bullish with a $65 target.

- Small Positions -

Current Position: Long DKS stock @ $39.39

- or -

Long the June $40 calls (DKS1118F40) Entry @ $2.35

Entry on March 21 at $39.39
Earnings Date 05/18/11 (unconfirmed)
Average Daily Volume: 1.6 million
Listed on March 19th, 2010


eBay Inc. - EBAY - close: 30.34 change: -1.36

Stop Loss: 29.49
Target(s): 34.90, 39.00
Current Gain/Loss: - 2.9%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
03/28 update: Our buy-the-dip play on EBAY is now open. This morning EBAY announced they would buy GSI Commerce (GSIC) for $29.25 a share (about $2.4 billion). As is normally the case, shares of the acquiring company went down. EBAY opened at $31.82 and dipped to $30.29 late this afternoon.

I was suggesting a trigger to buy the dip at $31.25 so the play is now open. More conservative traders could wait to buy a bounce from support near $30.00 instead. We have a stop loss at $29.49. Our first target is $34.90. We do not want to hold over EBAY's late April earnings report.

Current Position: Long EBAY stock @ $31.25

- or -

Long the May $33.00 calls (EBAY1121E33) Entry @ $0.75

chart:

Entry on March 28 at $31.25
Earnings Date 04/27/11 (unconfirmed)
Average Daily Volume: 10 million
Listed on March 24th, 2011


Ford Motor Co. - F - close: 14.86 change: -0.15

Stop Loss: 14.19
Target(s): 16.45, 17.45
Current Gain/Loss: - 1.2%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
03/28 update: There were a couple of articles out today about Ford choosing to idle one of its plants in Belgium for five days in April. This an attempt to avoid a shortage of parts from troubled Japanese manufacturers. Ford already had plans to idle the plant in May but moved it up to April. The company has also canceled overtime at a handful of plants around the globe.

Overall nothing has changed for our trade. Ford is nearing prior resistance and what should be support near $14.80. We can buy this dip or wait for a dip closer to $14.50 instead. Our targets are $16.45 and $17.45.

Current Position: Long F stock @ $15.05

- or -

Long the April $15 calls (F1116D15) Entry @ $0.33

Entry on March 24 at $15.05
Earnings Date 04/21/11 (unconfirmed)
Average Daily Volume: 82 million
Listed on March 15th, 2010


Gildan Activewear - GIL - close: 31.83 change: +0.14

Stop Loss: 29.70
Target(s): 34.85, 38.00
Current Gain/Loss: + 4.8%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
03/28 update: GIL displayed a little strength by posting a gain but the stock remains stuck in the $31.50-32.00 zone. I would expect another dip near the simple 40-dma. I am not suggesting new positions at this time.

Current Position: long GIL stock @ 30.35

- or -

Long the April $30 call (GIL1116D30) Entry @ $1.60

03/19 New stop loss @ 29.70
03/08 Triggered $ 30.35
03/01 Adjusted buy-the-dip trigger to $30.35
03/01 Adjusted stop loss to $28.99

Entry on March 8 at $30.35
Earnings Date 05/12/11 (unconfirmed)
Average Daily Volume: 634 thousand
Listed on February 28th, 2010


Jos. A Bank Clothiers Inc. - JOSB - close: 47.76 change: +0.50

Stop Loss: 44.75
Target(s): 49.85, 52.25
Current Gain/Loss: + 3.8%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
03/28 update: We are finally seeing some action in shares of JOSB. The stock briefly broke out above resistance at the $48.00 level but failed to hold these gains. Unfortunately the end effect looks like a failed rally pattern. I am not suggesting new positions since the company just announced that they will report earnings on March 31st. To avoid holding over the announcement we will plan to exit this trade on Wednesday, March 30th at the closing bell.

FYI: The most recent data listed short interest at almost 25% of JOSB's 27.3 million-share float. There is definitely room for some short covering here. Plus, the Point & Figure chart for JOSB is bullish with a $62 target.

- Small Bullish Positions -

Current Position: Long JOSB stock @ $45.99

- or -

Long the April $50 calls (JOSB1116D50) Entry @ $0.95

03/28 Prepare to exit on March 30th to avoid earnings.

Entry on March 7 at $45.99
Earnings Date 03/31/11 (confirmed)
Average Daily Volume: 355 thousand
Listed on March 5th, 2010


KLA-Tencor - KLAC - close: 47.30 change: +0.44

Stop Loss: 44.95
Target(s): 49.90
Current Gain/Loss: + 1.3%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
03/28 update: The SOX semiconductor index is hovering under short-term resistance at the 440 level. Meanwhile KLAC is hovering under resistance near $48.00 and its 30-dma. Both look poised for a little dip soon. I would consider new positions in KLAC on a dip into the $46.50-46.00 zone. Our target is $49.90.

Current Position: Long KLAC stock @ $46.65

- or -

Long the April $45 calls (KLAC1116D45) Entry @ $2.85

Entry on March 24 at $46.65
Earnings Date 04/28/11 (unconfirmed)
Average Daily Volume: 2.5 million
Listed on March 23rd, 2011


NVIDIA Corp. - NVDA - close: 19.32 change: +0.69

Stop Loss: 16.85
Target(s): 19.95, 21.75
Current Gain/Loss: + 6.2%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
03/28 update: Shares of NVDA were outperforming today thanks to an analyst upgrade. The stock tagged a new two-week high at $19.64 midday. I am not suggesting new bullish positions at current levels. Wait for a dip.

Our first target to take profits is at $19.95. Our second target is $21.75.

Prior Comments:
This is a very speculative, higher-risk trade. Remember to keep your positions small to limit your risk.

- small bullish positions -

Current Position: long NVDA stock @ $18.19

- or -

Long the April $20 calls (NVDA1116D20) Entry @ $0.72

Entry on March 14 at $18.19
Earnings Date 05/12/11 (unconfirmed)
Average Daily Volume: 35 million
Listed on March 12th, 2010


Polycom Inc. - PLCM - close: 48.90 change: -0.17

Stop Loss: 46.90
Target(s): 54.85,
Current Gain/Loss: - 2.5%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
03/28 update: More conservative traders may want to raise their stop loss closer to the $48.00 level. PLCM has been drifting lower for a week now. Nimble traders could try and buy a dip near $48.00 or wait for a breakout past $50.50 before initiating new positions. Our upside target is $54.85.

- Small Bullish Positions -

Current Position: Long PLCM stock @ $50.18

- or -

Long the May $52.50 calls (PLCM1121E52.5) Entry @ $2.00

03/23 Entry price on the May $52.50 call is an estimate.

Entry on March 23 at $50.18
Earnings Date 04/21/11 (unconfirmed)
Average Daily Volume: 967 thousand
Listed on March 22nd, 2011


Patterson-UTI Energy Inc. - PTEN - close: 28.16 change: -0.19

Stop Loss: 25.95
Target(s): 31.50, 34.00
Current Gain/Loss: - 0.3%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
03/28 update: Traders did a little bit of profit taking in PTEN but the stock held the $28.00 level, which is positive. I would still open positions now given the bullish breakout above resistance at $28.00.

Prior Comments:
The $30.00 mark might offer some resistance but I'm targeting a climb to $31.50 and the $34.00 levels.

Current Position: Long PTEN stock @ 28.25

- or -

Long the May $30 calls (PTEN1121E30) Entry @ $0.95

Entry on March 25 at $28.25
Earnings Date 04/28/11 (unconfirmed)
Average Daily Volume: 2.8 million
Listed on March 17th, 2010


Ryder Systems Inc. - R - close: 49.35 change: -0.30

Stop Loss: 47.40
Target(s): 53.00
Current Gain/Loss: unopened
Time Frame: 3 to 5 weeks
New Positions: Yes, see trigger

Comments:
03/28 update: So far so good. We were expecting R to pull back from the $50.00 level. Our plan is to open bullish positions on a dip at $48.75. More conservative traders could wait for a dip closer to $48.00 instead. If triggered we'll use a stop at $47.40. Our target is the $53.00 level. We do not want to hold over the late April earnings report.

Trigger @ 48.75

Suggested Position: buy R stock @ 38.25

- or -

Buy the May $50 call (R1121E50) current ask $2.20

Entry on March x at $xx.xx
Earnings Date 04/21/11 (unconfirmed)
Average Daily Volume: 388 thousand
Listed on March 26th, 2011


Southwestern Energy Co. - SWN - close: 42.55 change: -0.94

Stop Loss: 38.49
Target(s): 44.85
Current Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

Comments:
03/28 update: SWN is finally starting to see some much overdue profit taking. Our plan is to open bullish positions on a dip at $40.55.

FYI: The Point & Figure chart for SWN recently broke out past resistance and is now signaling a bullish target of $51.

Buy-the-Dip Trigger @ $40.55

Suggested Position: Buy SWN stock @ 40.55

- or -

Buy the June $42 calls (SWN1118F42)

Entry on March x at $xx.xx
Earnings Date 04/28/11 (unconfirmed)
Average Daily Volume: 6.9 million
Listed on March 19th, 2010


Tesoro Corp - TSO - close: 26.55 change: -0.02

Stop Loss: 23.95
Target(s): 29.90
Current Gain/Loss: + 1.5%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
03/28 update: I heard some very bullish comments about the oil refiners today. Shares of TSO spent the session consolidating sideways. I would still consider new positions now or you can wait for a dip into the $26.00-25.00 zone.

Prior Comments:
Given the stock's recent volatility over the last month or so I would consider this a higher-risk trade. Keep your position size small. FYI: The most recent data listed short interest in TSO at more than 13% of the stock's 141 million-share float. A breakout past resistance could spark another short squeeze.

Current Position: Long TSO stock @ 26.15

- or -

Long the May $27.00 calls (TSO1121E27) Entry @ $1.60

Entry on March 24 at $26.15
Earnings Date 04/25/11 (unconfirmed)
Average Daily Volume: 8.2 million
Listed on March 21st, 2010


Williams Companies, Inc. - WMB - close: 30.64 change: -0.49

Stop Loss: 29.45
Target(s): 34.50
Current Gain/Loss: - 1.9%
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Comments:
03/28 update: It was not a great day for our WMB play. Shares opened at $31.26 and then spent the rest of the session falling lower. The move today has painted a bearish engulfing candlestick pattern. These are normally one-day reversal patterns. I would expect WMB to dip toward $30.00 and possibly its 30-dma. Any farther and we'll get stopped out. Readers may want to wait for a dip (or bounce) near $30.00 before considering new positions.

Meanwhile in the news this morning WMB issued a press release about their long-term agreement to produce 17,000 barrels a day of ethane and ethylene for NOVA Chemicals Corp in Canada. WMB will spent CA$311 million to expand its facilities in Alberta to actually produce these two chemicals. Operations are expected to start in early 2013.

Current Position: long WMB stock @ $31.26

- or -

Long the May $30 calls (WMB1121E30) Entry @ $2.10

Entry on March 28 at $31.26
Earnings Date 05/05/11 (unconfirmed)
Average Daily Volume: 7.0 million
Listed on March 26th, 2011


Weyerhaeuser Co. - WY - close: 24.42 change: +0.20

Stop Loss: 23.40
Target(s): 27.25, 29.25
Current Gain/Loss: - 1.0%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
03/28 update: We have been expecting WY to bounce near $24.00 or near its 50-dma. Monday's session certainly looks like a rebound off the $24.00 level. Readers could use this as an entry point.

Prior Comments:
Keep your positions small to limit your risk.

Suggested Position: long WY stock @ $24.68

- or -

Long the July $25 calls (WY1116G25) Entry @ $1.64

03/24 New stop @ 23.40

Entry on March 16 at $24.68
Earnings Date 04/29/11 (unconfirmed)
Average Daily Volume: 6.4 million
Listed on March 15th, 2010


BEARISH Play Updates

Overseas Shipholding Group - OSG - close: 31.47 change: -0.57

Stop Loss: 33.55
Target(s): 27.75, 25.25
Current Gain/Loss: + 2.2%
Time Frame: 8 to 9 weeks
New Positions: see below

Comments:
03/28 update: OSG has failed near resistance. This move today looks like a new entry point for bearish positions. Readers might want to tighten their stop loss to reduce their risk.

Our plan was to use small positions to limit our risk. The P&F chart is forecasting a $25 target.

- Small Bearish Positions -

Current Position: Short OSG stock @ $32.20

- or -

Long the April $30 PUTS (OSG1116P30) Entry @ $0.75

03/16 New stop loss @ 33.55

Entry on March 11 at $32.20
Earnings Date 05/04/11 (unconfirmed)
Average Daily Volume: 705 thousand
Listed on March 10th, 2010