Option Investor

Daily Newsletter, Thursday, 7/16/2009

Table of Contents

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

Market Wrap

The Thank-You Card Goes To...

by Todd Shriber

Click here to email Todd Shriber

It seems like there has been at least one catalyst everyday this week to spark bullish trade. Tuesday it was Goldman Sachs (GS) and their blowout earnings. Wednesday it was Intel (INTC) that got the bulls running. Thursday's move higher may be attributable to several catalysts, so more than one thank-you card may have to go out in the mail. Regardless of who gets the kudos, stocks were up for the fourth consecutive day, marking their longest winning streak in six weeks.

The S&P 500 closed up 8.06 points to 940.74, inching ever close to the critical 950 level. While the Dow Jones Industrial Average did not turn in another triple-digit performance, it tried pretty hard, closing up almost 96 points, or 1.1%, to 8711.82, and the Nasdaq finished the day up 22.13 points, or 1.2%, to 1885.03. That brings 1900 into sight. Hey, today's closing areas for all three major indexes appeared to wishful thinking as recently as last week, so it would appear that the bulls have gotten off the beach and have reasserted themselves.

Market Stats Table

As stated above, there was a host of factors moving the market today, but before diving into the stocks that made many investors smile on Thursday, it is worth noting that highly-regarded economist Nouriel Roubini made remarks that the worst of the economic malaise may be behind us. An economist's remarks are not usually market movers on this level, but Roubini is not any old economist. Roubini was one of the first voices heard calling the market downturn in 2007 and his bearish slant has earned him the moniker ''Dr. Doom'' in some circles, so his comments were enough to spark a rally in stocks.

Fortunately, or unfortunately depending on you look at things, Roubini clarified his comments after the close and said his remarks were taken out of context and reiterated his view that he does not expect economic growth this year. Good thing he made his clarification after the bell.

What may make today's rally all the more impressive is the fact that finacials were a drag. Concerns that CIT Group (CIT) will have to file for bankruptcy protection after not receiving further bailout assistance from Uncle Sam weighed on the sector, as did news that JP Morgan Chase (JPM) expects that it credit card business will not turn a profit next year. JP Morgan Chase set aside $9.7 billion in the second quarter for credit losses, more than double the amount from a year earlier. That was enough to distract investors from an otherwise bullish second-quarter earnings performance that saw the banking giant report a 36% jump in profits led by a robust investment banking operation. The stock finished down 13 cents to $36.13 and the KBW Bank Index (BKX), which tracks the 24 largest US banks, also finished the day down a small bit, losing 6 cents to close at $37.90.

BKX Chart

Perhaps another catalyst for today's rally came from the fertilizer sector where Mosaic (MOS) surged almost 12% after a Brazilian newspaper reported that Vale (VALE), the world's largest iron ore maker, may bid $25 billion for Mosaic. While the marriage of a fertilizer giant with an iron ore king may seem odd, consider that Vale has spent $850 million this year on acquiring potash assets in Argentina and Canada, according to press reports.

Some analysts speculated that Cargill, the majority owner of Mosaic, may want more than $25 billion to part with the fertilizer asset, so there could be more M&A drama brewing in the fertilizer sector. Who knew that the tangled love web of Agrium (AGU), CF Industries (CF) and Terra Industries (TRA) was a starting point rather than an end to the fertilizer M&A soap opera? Either way, it may be time to take a look at the Market Vectors Agribusiness ETF (MOO). In addition to the cute ticker, Mosaic is the ETF's second-largest holding and the chart shows MOO popped above its 50-day moving average at $35.18 today. A protracted battle between Vale and Cargill for Mosaic will likely benefit Mosaic shares and MOO.

MOO Chart

Another encouraging sign for the bulls is the fact that the market seemed to shrug not only the bad news on CIT Group, but also a dour 2009 forecast from Finnish cell phone maker Nokia (NOK). Nokia said it expects its market share for 2009 to be little changed from 2008's level of 38%, a sign that the company still has not found a way to combat smart phone offerings from the likes of Apple (AAPL) and Research In Motion (RIMM). Investors punished Nokia shares, sending the stock down $2.22, or 14%, to $13.46. The chart looks foreboding as Thursday's beating sent Nokia's stock plunging below both the 50 and 200-day moving averages. The 200-day moving average at $13.67 could act as a resistance point meaning Nokia could struggle to see $14 in the near-term.

NOK Chart

With an eye towards Friday, there was a pair of noteworthy earnings reports after the bell Thursday and the results were split, so getting a handle on how the market is going to open Friday is anyone's guess. Technology bellwethers Google (GOOG) and International Business Machines (IBM) both announced second-quarter results after the close Thursday.

It is fair to say that if the market trades down Friday, Google will be one of the culprits. The king of Internet search said profits for the quarter rose 19%, but that paid clicks are declining and revenue continues to slow. That is not the best of news, especially when considering that Google might be facing its first real competition in Internet searches in the form of Microsoft's (MSFT) Bing search engine. While Google closed up $4.43 to $442.60, after-hours traders took the stock to the woodshed, sending the shares down more than $14.

On the other hand, there is IBM. Big Blue's second-quarter report was 180 degrees removed from Google's. IBM said second-quarter profits rose 12%, obviously less than Google's increase, and that sales slumped 13%. While that doesn't sound like good news, IBM did something that Wall Street loves: It raised full-year 2009 estimates by 50 cents to $9.70 a share from $9.20 a share.

The after hours session was far more kind to Big Blue as traders sent the stock up as much as 2% from its close of $110.64. We cannot forget that IBM is a Dow component and the company's bullish outlook could lift the index off the open tomorrow. Technology has been strong this week on the back of Intel's earnings, so it will be interesting to see how the market reacts to the divergent reports from IBM and Google.

The iShares Global Information Technology Sector ETF (IXN) may be worth watching as both IBM and Google are among its top 10 holdings. IXN closed Thursday at $46.62, well above its 50-day moving average of $43.81, and above its June high of $46.44.

IXN Chart

Of course tech will not be the only sector to have a hand in Friday's market performance. After all, we are still in the sweet spot (if you are inclined to call it that) of bank earnings season and Friday brings us earnings news from two of the market's favorite whipping boys: Bank of America (BAC), a current Dow member, and Citigroup )C), which was recently expelled from the venerable index. Analysts are calling for a profit of 24 cents a share from Bank of America and a loss of 37 cents a share from Citigroup.

It is probably fair to assume that no one is going to confuse the earnings reports out of these two banks with that of Goldman Sachs, and probably not JP Morgan Chase, either. Bank of America's stock is basically unchanged year-to-date while Citigroup's shares are down more than 50%, so ''less bad'' may be what the Street is looking for with the earnings reports tomorrow.

Two catalysts that could possibly stoke Bank of America tomorrow might be good news pertaining to improved digestion of the Merrill Lynch acquisition and lower credit loss reserves than JP Morgan. It is probably reasonable to expect that Bank of America will set aside an amount similar to JP Morgan's to cover delinquent card card tabs, but it appears that the market is realizing that poor Ken Lewis had a gun to his head and was forced to save Merrill Lynch from going the way of Bear Stearns and Lehman Brothers. I do not want to say that Bank of America shareholders should cut Lewis some slack, but it would be nice to hear that this Merrill Lynch fiasco may eventually work out for BofA.

Credit losses will also be at the forefront of Citigroup's earnings report. To his credit, Citi CEO Vikram Pandit has been diligently trying to unload troubled assets and get a better handle on operations and while that may be enough to save Citi from penny stock status, the question remains will that be enough to get investors truly excited about owning this stock? Tomorrow's numbers, which wil include a one-time gain of $2.8 billion tied to Smith Barney's joint venture with Morgan Stanley, could have a defined impact on how the stock trades for the rest of 2009.

There are a couple regional banks reporting on Friday before the bell that may also be worth watching. BB&T (BBT) is expected to report a profit of 28 cents a share and Marshall & Ilsely is expected to report a loss of 64 cents a share. The Street will of course be watching credit losses at both banks, but in the case of BB&T, its residential acquisition, development and construction loans could be cause for concern. Again, don't expect a Goldman-esque number out of either of these names tomorrow and keep a watchful eye on BB&T's real estate portfolio.

With so many financials reporting on Friday, the Financials Select SPDR ETF (XLF) should see some brisk trade as well. XLF is finding support at its 50-day moving average of $11.94 and the more closes above $12 XLF makes, the better.

XLF Chart

Last, but certainly not least on the Friday earnings front, General Electric (GE) will deliver second-quarter results. GE beat expectations by five cents in the first quarter and a similar performance tomorrow could be good for a rally into the weekend. Analysts are calling for 23 cents a share out of GE, which would be a 57% decline from the year earlier period. GE kind of stalled out around $13 recently and now labors below $12.50, making tomorrow's earnings numbers all the more important for GE bulls.

Looking at market technicals, the Dow's almost stunning run above resistance at 8600 to today's close of 8711 brings 8800 into play as the next resistance level and the critical psychological level of 9000 looms beyond that. The focus should be on 8800 for now because if a perfect storm of earnings surprises from Bank of America and GE combines with IBM's bullish numbers, those three Dow members could lift the index above 8800 heading into the weekend. I will eschew using the word capitulation, but a close above 8800 tomorrow could send the bears scurrying for cover. The Dow is up more than 720 points in the past four days and that performance is nothing to sneeze at.

Dow Chart

Like the Dow, it is all about earnings with the S&P 500 as it tries to climb above the all-important 950 level, which is the next resistance point. Up close to 8% in the last four days, it may be fair to argue that the measure of the 500 largest US stocks is a tad overbought here, but it would take some pretty dour earnings news on Friday to bring the S&P 500 back to support in the 920-925 area.

S&P 500 Chart

The Nasdaq's near-term fortunes had been buoyed by Intel, as the chipmaker helped lift the tech-heavy index 85 points over the past four days, but Google will likely control Nasdaq action on Friday. Will the tepid outlook out of Google hamper the Nasdaq's trip to 1900? Perhaps, but the more pressing concern may be over whether the index starts to move back down to support in 1855-1860 area. Even if Google does weigh on the Nasdaq, a retreat to former resistance at 1870 may be more likely than a slump into the 1860s.

Nasdaq Chart

While it is possible to overstate the importance of just one trading day, the earnings reports coming out on Friday could prove critical for the market's fortunes in terms of breaking some important technical levels. With the market looking somewhat overbought and Fridays in the summer time notoriously sluggish, the chances of an upside move on strong volume tomorrow are 50-50 at best.

New Option Plays

No Participation

by James Brown

Click here to email James Brown


LEAP Wireless - LEAP - close: 27.24 change: -1.84 stop: 29.45

Why We Like It:
LEAP is showing a lot of relative weakness. The late June-early July sell-off broke the neckline to a potential head-and-shoulders pattern. This past week while the market was in rally mode LEAP has been churning sideways. Today saw a 6% decline on above average volume. The P&F chart has turned bearish and broken support at the 200-dma and the $30.00 level are now new resistance.

I am suggesting readers use a trigger at $26.80 to buy puts. LEAP has a trading range from $26.90 to 29.40 and we want to catch a breakdown. More aggressive traders may want to jump in now. Our first target is $22.65. Our second target is $20.25. The $22.50 level could be strong support so I suggest readers take off most of their position there.

Suggested Options:
I am suggesting the August puts but we will plan to exit ahead of the early August earnings report.

BUY PUT AUG 25.00 UAO-TY open interest= 410 current ask $1.10
BUY PUT AUG 22.50 UAO-TX open interest= 644 current ask .45

Annotated Chart:

Picked on     July xx at $ xx.xx<-- see TRIGGER
Change since picked:      + 0.00
Earnings Date           08/06/09 (unconfirmed)
Average Daily Volume =       2.2 million  
Listed on  July 16, 2009         

In Play Updates and Reviews

Stocks Look Tired After 7% Rally

by James Brown

Click here to email James Brown

CALL Play Updates

AutoZone Inc. - AZO - close: 157.85 change: -0.15 stop: 151.49

I remain concerned about AZO and its refusal to participate with the market's widespread strength. I'm not suggesting new bullish positions at this time and more conservative traders may want to up their stop loss. Our target is $169.00.

Picked on     July 14 at $158.77
Change since picked:      - 0.92
Earnings Date           09/22/09 (unconfirmed)
Average Daily Volume =       1.0 million  
Listed on  July 14, 2009         

Bunge Ltd. - BG - close: 65.05 change: +1.50 stop: 57.49

We like the strength in shares of BG but the stock is short-term overbought with a run from $54.00 to $65.00 in just six days. We don't want to chase it here. We want to buy calls on a dip at $61.00. More conservative traders can wait for a dip closer to $60.00. Our first target is $67.40. We don't want to hold over the July 23rd earnings report.

Picked on     July xx at $ xx.xx <-- see TRIGGER
Change since picked:      + 0.00
Earnings Date           07/23/09 (unconfirmed)
Average Daily Volume =       1.5 million  
Listed on  July 15, 2009         

Euro Currency ETF - FXE - close: 141.40 chg: +0.33 stop: 137.90

The dollar continues to sink and FXE continues to drift higher. If you're looking for an entry point look for a dip near $140. I would use the September calls. 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:      + 0.64
Earnings Date           00/00/00
Average Daily Volume =       461 thousand    
Listed on  June 23, 2009         

Gold Miner ETF - GDX - close: 38.33 change: +0.04 stop: 34.90 *new*

The rally in gold and the miners stalled on Thursday. Look for a dip near $37.00 to $36.00. I'm raising our stop loss to $34.90. Our first target is $39.50. Our second target is $42.40.

Picked on     July 13 at $ 36.49 /gap higher entry
                               /originally listed at $35.93
Change since picked:      + 1.84
Earnings Date           00/00/00
Average Daily Volume =       6.8 million  
Listed on  July 13, 2009         

O'Reilly Automotive - ORLY - close: 41.09 change: +0.21 stop: 38.49

ORLY provided traders another entry point near $40.00 this morning and then rallied to new highs again. Our first target is $44.00.

Picked on     July 13 at $ 40.00
Change since picked:      + 1.09
Earnings Date           07/29/09 (confirmed)
Average Daily Volume =       1.9 million  
Listed on  July 13, 2009         

SPX Corp. - SPW - close: 51.84 change: +0.12 stop: 47.45

I also think SPW is short-term overbought. We want to buy calls on a dip in the $50.25-48.00 zone with a stop loss at $47.45. Our first target is $53.75. Our second target is $57.00 but we'll plan to exit ahead of the July 29th earnings report.

Picked on     July xx at $ xx.xx <-- see TRIGGER
Change since picked:      + 0.00
Earnings Date           07/29/09 (unconfirmed)
Average Daily Volume =       777 thousand 
Listed on  July 15, 2009         

PUT Play Updates

Compass Minerals Intl. - CMP - cls: 49.93 change: +0.25 stop: 52.55

This is the second day in a row the early morning rally in CMP has failed under its 10-dma, which is good news for the bears. I'm not suggesting new positions at this time. CMP has exceeded our first target at $47.50. Our second target is $43.00.

Picked on     July 06 at $ 52.25 *triggered     
Change since picked:      - 2.32
                               /1st target hit @ 47.50 (-9.0%)
Earnings Date           07/27/09 (unconfirmed)
Average Daily Volume =       792 thousand 
Listed on  June 29, 2009         

Sears Holdings - SHLD - close: 63.25 change: +0.30 stop: 65.05 *new*

Upon closer inspection SHLD's trendline of lower highs puts resistance around $64.50. I'm raising our stop loss to $65.05. It is worth noting that the current bearish channel could actually end up being a bull-flag pattern should the retail sector, and SHLD, breakout higher. I'm not suggesting new positions at this time but watch for a failed rally in the $64-65 zone. More conservative traders may want to consider an early exit especially if the market continues to march higher. Our first target is $55.10. Our second target is $50.50.


Picked on     July 07 at $ 59.75
Change since picked:      + 3.50
Earnings Date           08/27/09 (unconfirmed)
Average Daily Volume =       1.2 million  
Listed on  July 07, 2009         

Weyerhaeuser - WY - close: 30.54 change: +0.12 stop: 31.51

WY is still inching higher and nearing resistance near $31.00. I'm not suggesting new positions at this time. Our first target is $26.00. Our second target is $23.00. The P&F chart points to a $24 target.

Picked on     July 04 at $ 29.51
Change since picked:      + 1.03
Earnings Date           07/31/09 (unconfirmed)
Average Daily Volume =       2.1 million  
Listed on  July 04, 2009         


Agrium Inc. - AGU - close: 38.44 change: +1.30 stop: 40.05

There was news out this morning that VALE was considering a bid to buy Mosaic (MOS). Shares of MOS gapped open higher and closed with a 12% gain. This potential-merger news lifted the entire fertilizer industry. AGU spiked higher and hit our stop loss at $40.05.


Picked on     July 06 at $ 38.75 *triggered     
Change since picked:      + 1.30 <-- stopped @ 40.05 (+3.3%)
Earnings Date           07/27/09 (unconfirmed)
Average Daily Volume =       4.2 million  
Listed on  June 30, 2009         

United Parcel Serv. - UPS - close: 52.93 change: +2.40 stop: 51.05

Shipping stocks like Fedex (FDX) and UPS were soaring today as investors sifted through FDX's recent 10-K filing. FDX said they continue to see a tough business environment but also suggested some of their divisions were poised for improvement in the second half. This produced a real short-covering rally in FDX as it broke through the 200-dma and UPS followed. Shares of UPS hit our stop loss at $51.05.


Picked on     June 26 at $ 49.50 *triggered     
Change since picked:      + 1.55<-- stopped out @ 51.05 (+3.1%)
Earnings Date           07/23/09 (confirmed)
Average Daily Volume =       5.2 million  
Listed on  June 17, 2009