Option Investor

Daily Newsletter, Monday, 6/29/2009

Table of Contents

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

Market Wrap

Optimism Restored?

by Todd Shriber

Click here to email Todd Shriber

In the essence of keeping things simple, Monday was a nice day for the market, albeit on the light volume typical of a week leading into a holiday. Maybe it was Bernard Madoff's 150-year sentence for his orchestration of the biggest Ponzi scheme in US history that put buyers in a chipper mood. Perhaps it was the fact that the second quarter ends on Tuesday and fund managers may have been scurrying into stocks to bolster returns. Or maybe it was the familiar notion that things seem less bad than previously thought.

Regardless, buyers were in charge today and that sent the Dow up almost 91 points, or 1.1%, to 8529.38. The Nasdaq inched higher to close at 1844.06 and the S&P 500 closed up 8.33 points to 927.23 after two consecutive weekly declines. As it stands, this is the best quarterly performance for the S&P 500 since 1998.

Stats Table

While just how optimistic investors truly are remains to be seen, it is worth noting that the Chicago Board of Options Exchange Volatility Index, or VIX as it is commonly known, lost 2.5% to close at 25.29. The VIX measures the cost of using options to hedge against S&P 500 equity declines and is commonly regarded as a gauge of investor fear. Some press reports noted today's close for the VIX was below that of the day before the collapse of Lehman Brothers.

Vix chart

Monday was not an eventful day in terms of economic data, but that does not mean the rest of the week will be similarly light. Due to the Independence Day holiday, June unemployment data will be released this Thursday instead of the usual release date of Friday. Economists surveyed by Bloomberg News believe the jobless rate grew by 0.2% in June, but in the familiar refrain of less bad, that is the smallest monthly jump since November 2008.

Heading into second-quarter earnings, a positive surprise on the jobs front could be just the catalyst the bulls need to bid stocks higher. And catalysts will be needed to be sure. Today's light trading volume, while attributable to the looming holiday, could also be a sign that the summer doldrums are about to set in and given the market's sterling performance since March, many would argue the market is due for a breather. That makes Thursday's jobs number and the subsequent earnings releases all the more important for the bulls.

In another sign that the worst of bad news may have passed, Federal Reserve Bank of Boston President Eric Rosengren said today that US GDP may turn positive in the second half of this year, and if that proves to be the case, it could mean more fuel for the bulls' fire. Reports last week from the International Monetary Fund and World Bank indicated it may take the global economy longer to recover than previously expected, but if output starts to perk up in the U.S., that will likely be good news for the rest of the world.

At this point, any good news on the GDP front will be welcomed as the past couple of quarters have brought substantial declines in US ouput. Consumer confidence data for June is released on Tuesday and the estimate is for a reading of 55.3 compared to a May reading of 54.9. While not necessarily of harbinger of what to expect from the next GDP release, improved consumer sentiment is not something the market is apt to just shrug off. Take a look at the GDP chart below to get an idea of good news of any kind is welcomed.

GDP Chart

Certainly not weighing on the market's fortunes today was the pop in crude oil. Remember the days when there was a distinct divergence in the performance of black gold and the broader market? One would move higher, the other lower and vice versa. These days it appears as though the market and oil are joined at the hip. Well, that might be a touch of hyperbole, but news that Nigerian rebels attacked a Royal Dutch Shell (RDS-B) platform in that country sent light, sweet crude for August delivery higher by 3.4% to close at $71.49.

Crude chart

Exxon (XOM) and Chevron (CVX), both Dow members and the two largest US oil producers, advanced 2.2% and 1.4%, respectively. Oil is headed for its largest quarterly gain in 19 years, some press reports noted. That made the tepid trade in the Oil Services HOLDRs ETF (OIH) all the more curious today. Oil services stocks are deeply correlated to the price of crude and a close above the psychologically important $70-a-barrel level should have sparked more buying in the OIH. The ETF closed up a mere 5 cents to $99.13, below its 50-day moving average at $99.66.

OIH has not closed above $100 since June 19, and as I noted last week, its holdings may be taking a breather. Given recent trade in the ETF and major oil services stocks, crude probably needs to climb to $75 in the short-term to renew buyers' interest in this group. Oil services stocks are more volatile than their exploring and producing brethren like Exxon and Chevron, so buyers do need some impetus to get involved with the group.

OIH Chart

There was also some acquisition news out of the oil sector on Monday as Enterprise Products Partners LP (EPD, EPE) said it will purchase Teppco Partners LP (TPP) for $3.3 billion in stock, forming the nation's largest publicly traded energy partnership. The combined company will keep the Enterprise Products name and own 48,000 miles of crude oil and natural gas pipelines. Teppco previously rebuffed a $2.8 billion overture from Enterprise, but apparently could not say ''no'' this time around.

In other sector news from Monday, and feel free to be surprised, financials had the biggest gain among 10 major industries. Perhaps not so hard to believe considering the dour levels that they sank to is the fact that financials are the best performers since the March lows, nearly doubling since March 6. After all, this was the most downtrodden of sectors. Perhaps the market is signaling the worst of the credit crisis is behind us and that banks have taken a bulk of their expected write-downs to cover losses related to the subprime mortgage fiasco.

The KBW Bank Index (BKX), a measure of the 24 largest US banks, rose 58 cents to $36.99 today. That close puts it above its 50-day moving average of $36.45 and puts the 200-day moving average of $40.44 within reach in the near-term.

BKX chart

There was at least one positive catalyst for the financials today and that news emanated from where else but Goldman Sachs (GS). As I noted in the Market Monitor today, a FBR Capital Markets report said that Goldman, along with rival Morgan Stanley (MS), is flush with cash. Those record bonuses are not coming out of thin air, you know. FBR used the term ''overcapitalized'' to describe the cash positions for the two largest US investment banks and said Goldman holds between $6.6 billion and $8.6 billion in excess cash. That means the company could buyback as much as 11% of its outstanding shares.

While not nearly as impressive as Goldman, Morgan Stanley holds a tidy $1.5 billion in excess cash, though that sum could increase significantly as the company unwinds its stake in China Investment Corp. FBR said Morgan Stanley could have between $6.1 billion and $7.5 billion in excess cash by 2010 after unloading its China Investment holdings and that sum would be good enough to repurchase as much as 14% of its stock. Please note that neither company has made announcements regarding share buybacks. That was merely an anecdote from the FBR report.

Although the Nasdaq closed up only fractionally today, Microsoft (MSFT) was in the news. The world's largest software maker is looking to shed its Razorfish Internet ad agency and press reports are saying Publicis Groupe of France is a potential buyer. One analyst said Microsoft could fetch $600 million to $700 million for Razofish. Microsoft closed up 51 cents to $23.86, but the real story here is the impending release of its new operating system, Win 7.

Microsoft is up sharply since March and the company has over $23 billion in cash, giving it one of the strongest balance sheets in the U.S. If Win 7 proves to be a winner and prompts a new upgrade cycle, the stock could return to $30, a level it has not seen in over a year. The shares are well above both the 50 and 200-day moving averages and $25 represents some psychological resistance. A break above $25 could be just what the stock needs to march even higher.

MSFT chart

Looking ahead to Tuesday's trade, as previously noted, the Conference Board releases June consumer confidence data. That news is released at 9 AM New York time. The S&P/Case Shiller Home Price Index is also released at 9 AM and the expectation is for a decline of 18.63% for April after an 18.7% decline in March. The Chicago Purchasing Managers Index is expected to rise to 39 for June compared to 34.9 in May, a sign that manufacturing may be starting to rebound.

Stocks to watch include for-profit education provider Apollo Group (APOL), which reported fiscal third quarter results after the close today. I mentioned in the Market Monitor that the company was a candidate to beat estimates of $1.12 a share and it did, earning $1.26 a share. After closing down 4% during regular trading, Apollo was up the same amount in after-hours trading.

H&R Block (HRB), the largest US tax preparer, also reported results after the close Monday and the company said fiscal fourth-quarter profits rose 26%. On a per share basis, that was good for $2.09, better than the $2.05 forecast by analysts tracking the company. H&R Block said it expects to earn $1.60 - $1.80 per share in fiscal 2010. Analysts are currently calling for $1.64 a share.

Taking a look at market technicals, the S&P 500's visit below 900 was brief and the index again rests comfortably above its 50 and 200-day moving averages. Monday's close at 927.23 likely means 920 is the new support area. Oddly enough, 920 seems to have been alternating as support and resistance since May and even if a move to the 940 area is made, significant resistance awaits at 950.

Perhaps the best chance the index has to break that barrier this summer will come at the height of earnings season. Positive surprises could be just what the doctor ordered to combat lukewarm summer trade and send the S&P 500 above 950. In other words, 950 needs to be tested and broken sometime in the next several weeks or a move back down below 900 is possible.

SP500 Chart

Monday's close sent the Dow above its 50-day moving average, but the 30-stock outfit still rests below its 200-day moving average of 8479.80, which is probably a resistance point as well. Support is obviously in place at 8300. Aluminum giant and Dow component Alcoa (AA) kicks off second-quarter earnings for the index next Tuesday, but since Alcoa doesn't even trade for $11 and the Dow is a price-weighted index, even an upside surprise won't take the Dow to 8600, another critical resistance level.

Earnings reports, particularly from financials such as American Express (AXP), Bank of America (BAC) and JP Morgan Chase (JPM) are going to be what Dow watchers focus on in the coming weeks. If the Industrials are to make a serious run above the 8600 area, as I so often say, it needs to happen sooner rather than later.

Dow Chart

The Nasdaq seems well-supported at 1800, but some consecutive closes above 1850 would be nice and that didn't happen with Monday's close of 1844.06. The moving averages are not much of a downside concern right now, so a run to 1865 is probably what the bulls want to see to get excited again. That said, a break above 1900 would be a surprise, at least in the short-term.

The psychologically important level of 1900 could be eclipsed if the tech-laden Nasdaq can first make a run to 1880, which it saw earlier in June. A few closes in that range and some decent earnings surprises could take the index to 1900 in short order, but I would not bet the farm on that happening.

Nasdaq chart

With a new earnings season nearly upon us, these important technical levels become even more highly regarded. Second quarter earnings are the perfect catalysts to give the market direction for the rest of the summer and perhaps the year. If the bulls are really going to turn the corner, ''less bad'' is not going to cut it. A cool summer and a positive 2009 hinge on how many companies beat results and how many offer upside guidance for the rest of the year.

New Option Plays

Consolidation About Over

by James Brown

Click here to email James Brown


Compass Minerals Intl. - CMP - cls: 53.87 change: +0.95 stop: 56.26

Why We Like It:
The trading in CMP has moved from a huge bear-flag to just a large one. The two-month bounce from Aril is fading fast and CMP is poised to breakdown again. I'm suggesting readers use a trigger to buy puts at $52.25, which would be a breakdown under support at $52.50 and its 50-dma. If triggered at $52.25 our first target is $47.50. Our second target is $43.00.

Suggested Options:
I am suggesting the July or August puts. I prefer August strikes.

BUY PUT JUL 55.00 CMP-SK open interest= 426 current ask $2.45
BUY PUT JUL 50.00 CMP-SJ open interest= 380 current ask .60

BUY PUT AUG 55.00 CMP-TK open interest=  10 current ask $4.30
BUY PUT AUG 50.00 CMP-TJ open interest=  51 current ask $2.15

Annotated Daily Chart:

Annotated Weekly Chart:

Picked on     June xx at $ xx.xx <-- see TRIGGER
Change since picked:      + 0.00
Earnings Date           07/27/09 (unconfirmed)
Average Daily Volume =       792 thousand 
Listed on  June 29, 2009         

In Play Updates and Reviews

Window Dressing Continues

by James Brown

Click here to email James Brown

CALL Play Updates

Alcon Inc. - ACL - close: 117.74 change: +1.30 stop: 109.90

Right on cue ACL provides a dip toward $115.00 and an entry point to buy calls again. The stock bounced from this new support and posted a 1.1% gain. Our first target is $119.90. Our second target is $124.50.

Picked on     June 25 at $115.25 *triggered    
Change since picked:      + 2.49
Earnings Date           07/23/09 (unconfirmed)
Average Daily Volume =       688 thousand 
Listed on  June 24, 2009         

Becton Dickinson - BDX - close: 71.71 change: +0.77 stop: 67.75

Perfect! I suggested readers look for a dip near $70.00 as another entry point and BDX delivered. The low today was $70.01.

Our first target to take profits is $74.90. Our second target is $79.00. Currently the Point & Figure chart is bullish and forecasts an $86 target. We don't want to hold over the late July earnings report. Note: I'll admit that our second target at $79 is a little aggressive considering our time frame. Be sure to take some money off the table at $74.90.

Picked on     June 25 at $ 70.51 *triggered     
Change since picked:      + 1.20
Earnings Date           07/23/09 (unconfirmed)
Average Daily Volume =       1.8 million  
Listed on  June 18, 2009         

Bunge Limited - BG - close: 61.84 change: +0.00 stop: 58.49

Traders bought the dip in BG this morning at $60.60 but the stock failed to breakout over resistance at $62.50. I'm suggesting readers buy calls at $62.55. If triggered our first target is $67.45. Our second target is $69.95. More aggressive traders may want to aim for the $74-75 zone but we plan to exit ahead of the late July earnings report.

Picked on     June xx at $ xx.xx <-- see TRIGGER
Change since picked:      + 0.00
Earnings Date           07/23/09 (unconfirmed)
Average Daily Volume =       1.7 million  
Listed on  June 27, 2009         

Covance Inc. - CVD - close: 48.78 change: -0.08 stop: 45.49

Bulls bought the dip at $47.84 this morning. I don't see any changes from my weekend comments. I'm suggesting call positions now or on dips near $46.00. Our first target is $52.40. Our second target is $57.00 but we may run out of time.

Picked on     June 25 at $ 48.22
Change since picked:      + 0.56
Earnings Date           07/29/09 (unconfirmed)
Average Daily Volume =       654 thousand
Listed on  June 25, 2009         

Deckers Outdoor - DECK - close: 70.20 change: -3.70 stop: 67.75

DECK slipped on profit taking. Traders shaved off 5% following a new relative high on Friday. As expected short-term support at $70.00 held up. We can use this pull back as a new entry point to buy calls.

Our first target is $78.50. Our second target is $82.50 but traders need to take some profits at our first target! $82.50 is more aggressive.

Picked on     June 25 at $ 71.90
Change since picked:      - 1.70
Earnings Date           08/06/09 (unconfirmed)
Average Daily Volume =       630 thousand 
Listed on  June 25, 2009         

Quest Diagnostic - DGX - close: 56.14 chg: +0.89 stop: 51.95

Traders continue to buy the dip in DGX as well. Share hit $54.57 this morning and rebounded to a new relative high. Our first target to take profits is $58.25. We'll set our second target at $59.90. More aggressive traders may want to aim higher. The Point & Figure chart has a new triple-top breakout buy signal with a $75 target. We do not want to hold over the late July earnings report.

Picked on     June 24 at $ 54.28
Change since picked:      + 1.86
Earnings Date           07/22/09 (unconfirmed)
Average Daily Volume =       1.1 million  
Listed on  June 24, 2009         

Express Scripts - ESRX - close: 68.60 change: +0.81 stop: 63.75

Bulls bought the dip at $66.61 this morning. I don't see any changes from our weekend update. Our first target is $69.90. Our second target is $74.75.

Picked on     June 22 at $ 65.25
Change since picked:      + 3.35
Earnings Date           07/29/09 (unconfirmed)
Average Daily Volume =       3.7 million  
Listed on  June 18, 2009         

Euro Currency ETF - FXE - close: 140.82 chg: +0.11 stop: 137.90

The U.S. dollar closed almost unchanged but the trend was still down. The FXE produced a fractional gain. Readers can open new call positions near $140.00. Our first target is $144.50. Our second target is $148.50. The P&F chart is bullish with a $168 target.

Picked on     June 23 at $140.76
Change since picked:      + 0.06
Earnings Date           00/00/00
Average Daily Volume =       461 thousand    
Listed on  June 23, 2009         

Millicom Intl. - MICC - close: 57.01 change: +0.37 stop: 53.45

The bounce continues in MICC although progress was pretty slow today. Readers may want to wait for a dip near $55.00 to open positions. Our first target is $59.95. Our second target is $64.50. We only have about three weeks before MICC's earnings so we may not reach the second target.

Picked on     June 25 at $ 56.37
Change since picked:      + 0.64
Earnings Date           07/21/09 (unconfirmed)
Average Daily Volume =       1.0 million  
Listed on  June 25, 2009         

Murphy Oil - MUR - close: 54.72 change: +0.87 stop: 49.90

Oil stocks were strong thanks to a big rally in crude oil futures. MEND rebels in Nigeria attacked an offshore rig. This sent crude to more than $71 a barrel (+3.3%). Shares of MUR hit $55.46 this morning before paring its gains. I'm not suggesting new positions at this time. MUR looks ready for a dip. The stock hit our first target on Friday. We have a second target at $58.00.

Picked on     June 23 at $ 51.51
Change since picked:      + 3.21
                               /1st target hit @ 54.50 (+5.8%)
Earnings Date           07/29/09 (unconfirmed)
Average Daily Volume =       1.9 million  
Listed on  June 23, 2009         

Teva Pharma. - TEVA - close: 49.15 change: +0.55 stop: 45.95

TEVA is still showing relative strength. The stock's bounce marked its fourth gain in a row. Shares actually closed over $49.00 and hit $49.50 intraday. Our exit target is $49.85. My time frame is very late July. If you are willing to hold past the earnings report more aggressive traders may want to aim higher. We will plan to exit before the earnings announcement.

Picked on     June 03 at $ 46.49
Change since picked:      + 2.66 
Earnings Date           07/29/09 (unconfirmed)
Average Daily Volume =       5.0 million  
Listed on  June 03, 2009         

PUT Play Updates

L-3 Comm. - LLL - close: 69.94 change: +0.89 stop: 73.55

LLL tried to bounce back over $70.00 today but it couldn't hold the early morning gains. That doesn't mean the bounce won't be successful tomorrow. It's time to wait and watch for a failed rally in the $72-73 zone before considering a new entry point. Our first target is $66.00. Our second target is $61.00.

Picked on     June 16 at $ 71.75
Change since picked:      - 1.81
Earnings Date           07/23/09 (unconfirmed)
Average Daily Volume =       976 thousand  
Listed on  June 16, 2009         

Symantec - SYMC - close: 15.67 change: -0.24 stop: 16.10

SYMC ticked over resistance at $16.00, probably hit a few stops, and then reversed. The high was $16.03. Today's failed rally looks like a new bearish entry point. Our first exit target is $14.10.

Picked on     June 16 at $ 15.73
Change since picked:      - 0.06
Earnings Date           07/29/09 (unconfirmed)
Average Daily Volume =      16.8 million  
Listed on  June 16, 2009         

United Parcel Serv. - UPS - close: 50.32 change: +0.46 stop: 52.05

The close over $50.00 for UPS is short-term bullish. We can expect the stock to challenge technical resistance at its 200-dma near $51.50 soon. Look for a failed rally there.

Our first target to take profits is $45.50. We do not want to hold over the late July earnings report.

Picked on     June 26 at $ 49.50 *triggered     
Change since picked:      + 0.82
Earnings Date           07/23/09 (unconfirmed)
Average Daily Volume =       5.2 million  
Listed on  June 17, 2009         

Wynn Resorts - WYNN - close: 36.93 change: +0.21 stop: 37.65

WYNN is still churning sideways. The stock challenge resistance near $37.50 again. I suspect that if the market continues higher tomorrow that WYNN will breakout and hit our stop loss. Readers may want to wait for a new decline under $35.00 to open positions. Our first target is $30.25. Our second target is $26.00.

Picked on     June 22 at $ 34.28
Change since picked:      + 2.65
Earnings Date           07/30/09 (unconfirmed)
Average Daily Volume =       3.4 million  
Listed on  June 22, 2009         


Apollo Group - APOL - close: 65.99 change: -2.51 stop: 63.85

Education stocks were pretty volatile this morning, especially shares of APOL. The stock spiked to $69.84 this morning and then immediately turned south to tag $65.31. The move has created a bearish engulfing reversal candlestick pattern. It was our plan to exit at the closing bell if APOL didn't hit our target or stop. Our target was $69.95. After the close APOL reported earnings and beat estimates by 14 cents. Shares were volatile again after hours with a dip toward $64.00 and a bounce back toward $69.00.


Picked on     June 17 at $ 66.10 *triggered  
Change since picked:      - 0.11 <--exit early ( <-1%)
Earnings Date           06/29/09 (confirmed)
Average Daily Volume =       3.4 million  
Listed on  June 08, 2009         


AutoZone Inc. - AZO - close: 151.75 change: +1.90 stop: 152.25

We had a relatively tight stop on AZO and shares hit that stop this morning as the market turned higher. AZO actually gapped open higher at $151.15 and then proceeded to stop us out at $152.25.


Picked on     June 27 at $151.15 /gap higher entry
                              /originally listed at $149.85
Change since picked:      + 1.10<-- stopped out ( <-1%)
Earnings Date           09/22/09 (unconfirmed)
Average Daily Volume =       1.1 million  
Listed on  June 27, 2009         

MDC Holdings - MDC - close: 30.64 change: +0.08 stop: 31.05

I'm throwing in the towel on MDC as a put play. I'm still bearish on the homebuilders but MDC has turned higher and the rebound is gaining strength. The stock hit $31.03 this morning and traders bought the dip at $30.00 again. It's either exit early now or wait for MDC to hit our stop in the next day or two.


Picked on      May 20 at $ 32.31 /gap down entry
                               /originally listed at $32.87
Change since picked:      - 1.67<-- exit early (-5.1%)
Earnings Date           07/30/09 (unconfirmed)
Average Daily Volume =       1.1 million  
Listed on   May 20, 2009         

POSCO - PKX - close: 83.49 change: +1.23 stop: 84.05

Strength in commodities and building-related stocks helped PKX gain 1.5%. The stock hit our stop loss at $84.05 and cleared technical resistance at its last significant moving average. The breakdown under $80.00 last week looks like a bear-trap pattern.


Picked on     June 22 at $ 78.35
Change since picked:      + 5.70<-- stopped out @ 84.05 (+7.2%)
Earnings Date           07/09/09 (unconfirmed)
Average Daily Volume =       541 thousand 
Listed on  June 22, 2009