Option Investor
Newsletter

Daily Newsletter, Monday, 4/11/2011

Table of Contents

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

Market Wrap

IMF Report, Oil Prices Plague Stocks

by Todd Shriber

Click here to email Todd Shriber
Despite another Monday littered with deal-making, retreating oil prices and a less-than-enthusiastic outlook on the U.S. economy from the International Monetary Fund (IMF) weighed on U.S. stocks, sending the S&P 500 to its third consecutive loss. The Nasdaq and the Russell 2000 followed suit, and in fact, were quite worse, while the Dow Jones Industrial Average managed a meager one-point gain.

Stats Table

In perhaps the most obvious statements we're likely to hear all week, the IMF said that higher oil prices and the slack pace of job growth are factors that will hamper the U.S. recovery. Goldman Sachs was out with a report telling clients that commodities prices may falter and that they should take profits, citing what the bank called ''nascent signs of demand destruction in the United States.'' Yep, $4 gasoline will do that. Personally, I am glad I work from home because you really do not want to know how high gas prices are here in Southern California.

By most technical measures, oil is over-bought and several media outlets have quoted various analysts as saying as much in recent days. If a cease-fire in Libya is reached and if Nigeria's go smoothly, two very big ''If's,''crude will probably be in for a near-term decline. Traders may have started pricing those factors in today as oil equities faltered across the board. I will not run through all the big oil stocks as I have included a chart of the Energy Select Sector SPDR (XLE), but I will mention that CVX and XOM did the Dow no favors today and APC was down 4.3% while OXY was off 3.2%.

For more news and commentary on the energy sector, head over to OilSlick.com and register for the free daily newsletter (HERE).

XLE Chart

While there several M&A announcements, it is pretty easy to surmise why none of them did much to spark the market higher. Add up the price tags of three of the more marquee announcements and you get less than $6 billion with almost all of that total belonging to two deals.

Level 3 Communications (LVLT) will pay $3 billion in stock and debt for rival Global Crossing (GLBC) a deal that will combine two unprofitable telecom companies that had $6.26 billion in revenue last year between the two of them. Endo Pharmaceuticals (ENDP) said it will pay $2.9 billion for American Medical Systems (AMMD), a deal Endo is using to bolster its exposure to the fast growing urology products market.

Not mega deals, but the pace of M&A has been brisk to say the least in 2011. Earlier this year, Citigroup forecast that global M&A will total $2.9 trillion this year, representing 25% growth from 2010. Other firms forecast 35% or better in terms of M&A volume. I included chart that shows M&A revenue as a portion of investment banking revenue. It is from February so it does not reflect some of the big recent deals such as the AT&T (T)/T-Mobile deal or Berkshire Hathaway's (BRK.A, BRK.B) $9 billion deal for Lubrizol (LZ), but it illustrates that we are likely to see plenty more takeovers before the end of the year.

Investment Banking Revenue

Actually, what may be more interesting than the deals that are getting done are the ones that are not. For example, NYSE Euronext (NYX) rebuffed a takeover offer from Nasdaq OMX (NDAQ) and IntercontinentalExchange (ICE), opting to stick with the original takeover bid from Germany's Deutsche Boerse. The Nasdaq/ICE offer, which is higher than Deutsche Boerse's offer, valued NYX at $43.13 a share in cash and stock.

Nasdaq and ICE accurately note that a combination with NYX would create an exchange giant on two fronts: Cash equities and derivatives. Seems like a pretty compelling deal, but NYX apparently feels otherwise, leading Nasdaq and ICE to feel mystified.

''NYSE Euronext’s Board of Directors is depriving its stockholders of the benefits of a superior proposal, disregarding the fundamental corporate governance principles that it has espoused for the rest of corporate America. The feedback we have received from NYSE Euronext stockholders is very positive, and we would expect NYSE Euronext would, at the very least, meet with us and our advisors to discuss the merits of the proposed combination,'' Nasdaq CEO Robert Grefield said in a statement.

NYSE Euronext Chart

It is the first Monday of a new earnings season and you know what that means: Dow component Alcoa (AA) delivered its first-quarter results after the close today. Since I usually have the privilege of reviewing Alcoa's report, I always say that while it is newsworthy, it probably will not do much for the Dow one way or the other because it is one of the lowest-priced stocks in a price-weighted index. Actually, Alcoa is the Dow's third-lowest priced stock. Bank of America gets the dubious distinction of having the Dow's lowest price tag.

As for Alcoa, the company posted a profit of $308 million, or 27 cents a share, compared with a net loss of $201 million, or 20 cents a share, a year earlier as revenue jumped to $5.96 billion from $4.9 billion. The profit is of course better than a loss, but analysts were expecting a profit of 27 cents a share on revenue of $6.19 billion. Excluding one-time items, Alcoa earned 28 cents a share.

While Alcoa shares were down more than 3% in the after-hours session, there were some positive sentiments from the largest U.S. aluminum producer. CEO Klaus Kleinfeld reiterated that his company is comfortable with a 12% increase in global aluminum demand this year.

''Our outlook for the rest of 2011 and beyond remains very positive,'' Kleinfeld said in a statement. The company also said its average selling price for aluminum jumped 15% in the first quarter to $2,682 per metric ton.

Alcoa Chart

Looking at the charts, the S&P 500's small drop on Monday was enough to take the index back below 1325, so it could be pivotal for buyers to step in and buy this dip. If 1320 does not hold has as support, a retreat back to 1300 could be seen. Nothing has changed in terms of upside resistance looming at 1333 and again at 1340. Going forward, earnings had better be good. If they disappoint, there will be no better excuse for the market to sell off.

S&P 500 Chart

There was not too much excitement with Dow's end-of-day result today and support at 12,320 did not come into play today. I am not convinced that Alcoa alone could drag the Dow down there tomorrow, but JPMorgan Chase (JPM) reports before the bell on Wednesday and Bank of America (BAC) chimes in on Friday, so there will be some more noteworthy catalysts (perhaps) for the Dow later this week.

Dow Chart

The Nasdaq is probably the most concerning of the three major indexes at this point, closing just a point above support 2770, indicating the index needs to patch together some closes above 2780 or it could be in for more downside. Even a close above 2780 is not the most bullish of signs because resistance is stout at 2800. Google (GOOG), the largest U.S. Internet search provider, reports Thursday after the close.

Nasdaq Chart

For as good as the Russell 2000 was looking a couple of weeks ago, it is looking very ugly right now. A couple of failed attempts to really break through that old resistance from 2007 have sent the index careening back to the 830 area. If that does not hold as a support, the next stop could be the 50-day moving average at 817.

Russell 2000 Chart

For the most part, S&P 500 constituents should treat investors to some good news regarding first-quarter earnings, but that news is probably priced in at this point. As I mentioned earlier, any disappointments on the profit front provide the perfect excuse for a sell-off. Another decent excuse is higher raw materials costs whether those costs are attributable to oil, corn or copper prices, they have the potential to result in some gloomy sentiment for full-year outlooks.

Something else to consider is that while so many companies are flush with cash, it appears one of the preferred methods for spending that cash is M&A. That is great for the bankers, but acquisitions rarely lead to job creation and at some point, the market will probably want to see some upside surprises in the monthly jobs reports.

Today's fun fact is one I came up with on my own and should be considered as entertainment, not investment advice, nor is it a slight against South Africa. Charles Scwartzel, a South African, won the green jacket at Augusta National yesterday. The average yearly return for the S&P 500 in the previous four years a South African has won the Masters is -7.5%. In all fairness, it should be noted that statistic is skewed by a 37% drop for the index in 2008 when South African Trevor Immelman won.


New Plays

Cautious Ahead of Earnings

by James Brown

Click here to email James Brown

Editor's Note:

Global markets were down almost across the board. The Dow Industrials was an exception. Overall investors are in a wait and see mode as Q1 earnings start to trickle in.

I am not adding any new candidates tonight. I did notice that QCOM looks like a potential short. I was tempted to launch bearish positions with a stop loss near $55.10 and a target at $50.00. Oil prices look like they could reverse. If that happens the transports could rally and oil stocks are likely to decline - at least on a short-term basis.

- James


In Play Updates and Reviews

Still Lacking Leadership

by James Brown

Click here to email James Brown

Editor's Note:
The markets are still lacking leadership. Stocks were unable to build on their early morning gains. PCAR hit our buy-the-dip entry point. Our OSG bearish trade is accelerating lower.

-James

Current Portfolio:


BULLISH Play Updates

ACI Worldwide Inc. - ACIW - close: 31.98 change: -0.46

Stop Loss: 30.90
Target(s): --.--, 34.75
Current Gain/Loss: + 7.9%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
04/11 update: There are no surprises here. We've been expecting a dip toward $32.00. Once again I am suggesting more conservative traders to take profits early. I am not suggesting new positions.

Officially we're aiming for the $34.75 level but plan to exit ahead of the late April earnings report.

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

04/02 New stop loss @ 30.90
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


AutoNation, Inc. - AN - close: 33.95 change: -0.90

Stop Loss: 33.49
Target(s): 38.00, 39.75
Current Gain/Loss: - 3.6%
Time Frame: 3 to 5 weeks
New Positions: see below

Comments:
04/11 update: I cautioned readers to expect AN to dip toward the $34.00-33.50 zone. Shares really underperformed today with a -2.5% decline. Readers can buy this dip or better yet wait for a bounce before considering new positions.

Our upside targets are $38.00 and $39.75 although that might be a little optimistic. We do not want to hold over the late April earnings report.

Current Position: Long AN stock @ $35.25

- or -

Long the May $36 calls (AN1121E36) Entry @ $1.15

Entry on March 30 at $35.25
Earnings Date 04/26/11 (confirmed)
Average Daily Volume: 972 thousand
Listed on March 29th, 2011


Aon Corp. - AON - close: 53.37 change: +0.10

Stop Loss: 50.90
Target(s): 59.00
Current Gain/Loss: -0.7%
Time Frame: 4 to 5 weeks
New Positions: see below

Comments:
04/11 update: AON spiked lower this morning but managed to close the session in positive territory. The good news is that AON did not confirm the bearish reversal pattern from Friday. However, I would stay cautious on launching new positions. If you do, keep you position size very small. Our time frame is the end of April since earnings are due out in early May. FYI: The Point & Figure chart for AON is bullish with a $90 target.

Current Position: Long AON stock @ $53.76

- or -

Long the May $55.00 call (AON1121E55) Entry @ $0.95

Entry on April 4 at $53.76
Earnings Date 05/02/11 (unconfirmed)
Average Daily Volume: 2.2 million
Listed on April 2nd, 2011


Danaher Corp. - DHR - close: 51.73 change: +0.18

Stop Loss: 49.95
Target(s): 55.90
Current Gain/Loss: - 1.6%
Time Frame: about 3 weeks
New Positions: see below

Comments:
04/11 update: DHR spent Monday consolidating sideways and actually posted a gain. Readers could wait for a rally past $52.00 as a potential entry point since a rise past $52.00 would break the short-term trend of lower highs. We have less than two weeks with earnings coming up on April 21st. I'm listing a stop loss at $49.95 but more conservative traders might want to use a stop closer to the $51.00 level (the $50.80 mark would work).

Current Position: long DHR stock @ $52.57

- or -

Long the May $55 call (DHR1121E55) entry @ $0.70

Entry on April 4 at $52.57
Earnings Date 04/21/11 (confirmed)
Average Daily Volume: 2.9 million
Listed on April 2nd, 2011


Dick's Sporting Goods Inc. - DKS - close: 40.98 change: -0.09

Stop Loss: 38.45
Target(s): 42.75, 44.75
Current Gain/Loss: +4.0%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
04/11 update: There is no change from my weekend comments on DKS. The stock is still consolidating sideways. Wait for another dip or bounce in the $40.50-40.00 zone before considering new bullish positions. More conservative traders might want to tighten their stop even higher.

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

04/09 New stop loss @ 38.45, New targets @ 42.75 and $44.75
04/02 New stop loss @ 37.45

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: 31.19 change: +0.05

Stop Loss: 29.90
Target(s): 34.90, --.--
Current Gain/Loss: - 0.1%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
04/11 update: Traders bought the dip near $31.00 again in EBAY. I don't see any changes from my weekend comments. More conservative traders may want to consider an early exit now to avoid and/or minimize any losses. I am not suggesting new positions at this time.

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

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


Ford Motor Co. - F - close: 14.86 change: -0.47

Stop Loss: 14.45
Target(s): 16.45, 17.45
Current Gain/Loss: - 1.2%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
04/11 update: Shares of Ford plunged -3% on Monday and closed under technical support at its 50-dma and under the $15.00 mark. This appears to be an overreaction to news that Ford said the disaster in Japan could force a stoppage of production of vehicles for their Asian operations. This is in addition to the supply disruption of paints for certain red and black hues here in the U.S. Yet overall Ford doesn't expect any material impact from the earthquake disruptions.

I would take advantage of this decline and use it as an entry point to buy Ford or calls on the stock. 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: 32.02 change: -0.35

Stop Loss: 30.95
Target(s): 34.85, 38.00
Current Gain/Loss: + 5.5%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
04/11 update: I have been warning readers to expect GIL to dip toward support near $32.00. Shares finally hit this level today. Aggressive traders could use this dip as an entry point but I am not suggesting new positions at this time.

FYI: In the news this morning GIL announced a deal to buy Gold Toe Moretz Holdings Corp. for $350 million. Gold Toe Moretz manufactures athletic, casual and dress socks.

Current Position: long GIL stock @ 30.35

- or -

April $30 call (GIL1116D30) Entry @ $1.60, Exit @ 2.20 (+37.5%)

04/09 New stop loss @ 30.95
04/09 Exit the April $30 calls now! Option @ +37.5%
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


iShares Gold Trust - IAU - close: 14.30 change: -0.09

Stop Loss: 13.75
Target(s): 15.75
Current Gain/Loss: + 0.0%
Time Frame: 9 to 12 weeks
New Positions: see below

Comments:
04/11 update: A bounce in the U.S. dollar sparked a little profit taking in gold. The IAU opened at $14.36 and settled down -0.6%. I would still consider bullish positions now or you can wait for dips closer to $14.00.

I am adding a call option as an alternative to buying the ETF. See below.

We do want to keep our position size small. Going long anything gold these days is a very crowded trade. If and when it reverses gold could drop quickly. Until then the trend is up. Our first upside target is $15.75.

- Small Positions Only -

Current Position: Long the IAU @ $14.36

- or -

BUY the July $14.00 call (IAU1116G14) current ask $0.65

Entry on April 11 at $14.36
Earnings Date --/--/--
Average Daily Volume: 3.8 million
Listed on April 9th, 2011


NVIDIA Corp. - NVDA - close: 17.32 change: -0.23

Stop Loss: 16.85
Target(s): 19.95, 21.75
Current Gain/Loss: - 4.7%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
04/11 update: NVDA is inching closer and closer toward support near the $17.00 level. I would still consider new bullish positions now or you can wait for shares to actually bounce from $17.00 first. Buying NVDA now is somewhat aggressive. More conservative traders will want to consider an early exit instead. Our April calls are pretty much out of luck at this point unless NVDA suddenly rockets higher.

Our first target for NVDA 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


PACCAR Inc. - PCAR - close: 50.72 change: -0.56

Stop Loss: 48.95
Target(s): 54.75, 57.00
Current Gain/Loss: - 0.5%
Time Frame: two or three weeks
New Positions: see below r

Comments:
04/11 update: Our buy-the-dip trigger in PCAR has been hit. Shares fell toward technical support at their simple 50-dma. Our plan was to launch bullish positions on a dip at $51.00. I would still consider new positions now or you can look for a dip closer to the $50.00 mark instead.

This could end up being a really short-term trade with April earnings coming up quick. Our first target is $54.75.

Current Position: Long PCAR stock @ 51.00

- or -

Long the May $49.70 call (PCAR1121E49.70) Entry @ $3.00

chart:

Entry on April 11 at $51.00
Earnings Date 04/19/11 (unconfirmed)
Average Daily Volume: 2.8 million
Listed on April 6th, 2011


Patterson-UTI Energy Inc. - PTEN - close: 28.69 change: -0.54

Stop Loss: 26.75
Target(s): 31.50, 34.00
Current Gain/Loss: + 1.5%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
04/11 update: Energy stocks struggled today with the drop in oil prices. I would wait for another dip near $28.00 before considering new positions.

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

04/09 New stop loss @ $26.75

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: 49.97 change: +0.25

Stop Loss: 47.95
Target(s): 53.00
Current Gain/Loss: - 0.5%
Time Frame: 3 to 5 weeks
New Positions: see below

Comments:
04/11 update: There was no follow through on R's big drop on Friday. We can use this dip near $50.00 as an entry point. However, a dip closer to $49.00 and its 50-dma would be a more attractive entry point. Our target is the $53.00 level. We do not want to hold over the late April earnings report.

Current Position: Long R stock @ $50.25

- or -

Long the May $50 call (R1121E50) Entry @ $2.55

04/09 New stop loss @ 47.95

Entry on March 30 at $50.25
Earnings Date 04/21/11 (unconfirmed)
Average Daily Volume: 388 thousand
Listed on March 26th, 2011


SAIC, Inc. - SAI - close: 17.44 change: +0.19

Stop Loss: 16.75
Target(s): 18.40
Current Gain/Loss: + 0.6%
Time Frame: 8 to 9 weeks
New Positions: see below

Comments:
04/11 update: SAI delivered a nice bounce (+1.1%) off short-term support near $17.20. This looks like a new entry point but given the market's overall weakness we may want to wait for a dip closer to $17.00 before initiating new positions.

Our first bullish target is $18.40. Keep in mind that SAI does not move very fast. While the stock does have options I prefer the stock to avoid the time decay on the options. I will list the August $18 calls for more aggressive traders.

Current Position: long SAI stock @ $17.33

- or -

Long the August $18.00 call (SAI1120H18) entry @ $0.55

Entry on April 6 at $17.33
Earnings Date 06/02/11 (unconfirmed)
Average Daily Volume: 2.4 million
Listed on April 5th, 2011


Williams Companies, Inc. - WMB - close: 30.68 change: -0.15

Stop Loss: 29.90
Target(s): 34.50
Current Gain/Loss: - 1.8%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
04/11 update: WMB is still consolidating sideways. I don't see any changes from my weekend comments. I am not suggesting new positions at this time. More conservative traders may want to exit early to minimize any losses.

Current Position: long WMB stock @ $31.26

- or -

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

04/09 New stop loss @ 29.90

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


BEARISH Play Updates

Overseas Shipholding Group - OSG - close: 29.66 change: -1.51

Stop Loss: 32.25
Target(s): 27.75, 25.25
Current Gain/Loss: + 7.8%
Time Frame: 8 to 9 weeks
New Positions: see below

Comments:
04/11 update: OSG accelerated lower on Monday. The stock lost -4.8% and closed under round-number support at $30.00. Volume was strong on the sell-off, which is not healthy. Readers could use this as a new entry point for bearish positions but if you choose to buy put options, don't buy Aprils. Our April puts will expire after Friday so we will need to exit these in the next couple of days.

Please note our new stop loss at $32.25. Our first target is $27.75.

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

04/11 New stop loss @ 32.25
04/05 New stop loss @ 33.10
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