Option Investor

Daily Newsletter, Tuesday, 7/28/2009

Table of Contents

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

Market Wrap

Dour News, Down Day

by Todd Shriber

Click here to email Todd Shriber
A spate of glum news reports caught up with the market today, and in a reverse of Friday's action when the Nasdaq was the only loser among the three major US indexes, the tech-heavy index was the only winner in Tuesday's trade. Technology and healthcare names tried to prop the market up, but the pressure of worse-than-expected consumer confidence data coupled with some glum earnings reports was too much for the Dow Jones Industrial Average and the S&P 500 to handle. The S&P 500 fell 0.3% to 979.63, retreating from an eight-month high and ending a two-week long rally in the process. The Dow lost almost 12 points to close at 9096.72, while the Nasdaq inched higher by 7.62 to close at 1975.51.

Market Stats Table

Tuesday's declines were not altogether surprising and I opined about the prospects for a pullback in yesterday's market wrap. Stocks barely extended their rally yesterday on tepid volume, pointing to signs of a possible drop. Fortunately for the bulls, today's retreat barely measures as a blip on the radar of the recent market rally. The S&P 500's 2.56-point drop today hardly puts a ding in a rally that has carried the index up nearly 110 points in three weeks. The Dow still hovers close to the all-important 9100 level and the Nasdaq is making its way toward 1980 so it is fair to say the bears did not make much of a proclamation today.

Still, it is impossible to gloss over one of the culprits behind today's decline: The consumer confidence survey. The Conference Board said consumer confidence fell further in July as concerns about rising unemployment continue to weigh on the minds of consumers. The market expected a reading of 49, which would have been below June's number of 49.3, but instead got doused with some cold water with a reading of 46.6 for July.

It appears that consumers are increasingly unwilling to part with their dollars and that is not good news for stocks. I mentioned yesterday that companies can only cut their way to profitability for so long before they have to actually boost revenues to appease Mr. Market. It appears that the time is now for companies to start doing just that.

Consumer Confidence Chart

Another round of good news from the housing sector was not enough to ignite the bulls on Tuesday, either. The Case-Shiller/S&P Home Price Index reported that home values jumped in May for the first time in nearly three years. That report comes on the heels of yesterday's news that new home sales increased 11% in June, so perhaps there are some signs of stabilization in the housing sector, but if they do exist, the market seemed to gloss over them today.

Case Shiller Chart

I know I may be harping on it, but it is clear the market is starting to demand more when it comes to earnings reports. The reality is it is not all that hard to beat estimates that have lowered, cut, pared and pruned to death, especially when companies are reducing payrolls the way they are. The first week of earnings season when the likes of Goldman Sachs (GS), Intel (INTC) and others sent investors hearts fluttering with joy seems it was ages ago.

Just look at some data from the fine folks at Bloomberg that shows per-share-profits have dropped on average 27% since July 17. The data shows companies reporting since then are beating profit estimates by almost 10%, but there has been nary a surpass in revenue forecasts.

Even as recently as last week, a company could report a big drop in earnings and as long as that number beat the pathetic estimates offered by the Street, the stock would probably pop a dollar or two, maybe more. That trend seemed to end yesterday as stocks like Honeywell (HON) beat estimates, but only moved up fractionally. Today, the market seemed to actually take some stocks to task for reporting punk numbers.

Take Coach (COH) for example. I mentioned the fancy handbag maker in yesterday's wrap as a stock to watch today (Just to be clear, I merely said it would be worth watching. I did not offer a bullish assessment). Coach is a luxury goods retailer, but it does have some products that are affordable for the so-called ''average'' consumer and its outlet stores have made its products accessible to denizens of new buyers. In other words, Coach is a pretty good temperature check on the consumer.

The temperature is cold apparently. Coach said fiscal fourth-quarter profit declined to $145.8 million, or 45 cents a share, from $213.5 million, or 62 cents, a year earlier. The bright sides were that sales only fell less than 1% and the stock only lost 49 cents to close at $27.53. Still, betting on the consumer is a risky proposition at this point and the chart for Coach is not too inviting.

Coach Chart

Retail earnings will start flowing in a big way over the coming days, but even Coach and a very punk report from Office Depot (ODP), the biggest loser in the S&P 500 today, did not make retail the worst performing of the 10 industry groups in the S&P 500. That dubious distinction falls to the energy sector as a spate of oil-related names disappointed investors with sour earnings reports today. Crude oil's decline on the day did not help the cause and black gold appears to keep getting stuck in the mid-60s, hampering its chances of breaking $70 a barrel in the near-term.

Crude Chart

On the earnings front, as I mentioned above, oil stocks of all stripes disappointed investors today. Explorer BP (BP) earned 23 cents a share, beating the average estimate of 15 cents, but profits plunged 53% and the company said it is not seeing a recovery in demand. Refiner Valero (VLO) lost 48 cents a share, good for just its first second-quarter loss in a decade. Analysts were expecting a loss of 39 cents a share. And adding to the misery was oil services giant National Oilwell Varco (NOV), another name I mentioned in yesterday's wrap and one that I have been admittedly bullish on in the past. Second-quarter net income fell 48%, but that wasn't as much as expected, and on adjusted basis, NOV earned 90 cents a share, beating analysts' estimates of 88 cents. Still, the stock was down 2.4% on the day.

With an eye towards Wednesday's action, the economic release du jour is the Fed's Beige Book survey, which surveys economic activity in the Fed's 12 regions. That news comes at 2 pm Eastern time, so volume may be light for an hour or two heading into the numbers. The Mortgage Bankers Association also releases mortgage application data before the open and it will be interesting to see if the bullish housing sector news can continue for a third consecutive day.

And in news that will surprise no one, there is, gasp, another Treasury auction on the docket tomorrow with $39 billion in five-year notes on the block. Uncle Sam hold no problem unloading $42 billion in two-year notes on Tuesday at a yield of 1.08%, showing that the appetite for US debt is as robust as ever. Expect tomorrow's auction to go off without a hitch.

Of course there are some earnings reports worth watching and one was released after the close on Tuesday. Just as retail stocks are a check on the consumer, transport names are historically a gauge on the health of the economy at large. That makes railroad operator Norfolk Southern (NSC) worth watching tomorrow. Norfolk Southern reported second-quarter profits of $247 million, or 66 cents a share, on sales of $1.86 billion. Analysts had been expecting a profit of 64 cents a share on revenue of $2.05 billion.

Railroad operators, Norfolk Southern being no exception, have been among the most voracious cost-cutters, furloughing workers and taking train cars off the tracks as demand for their shipping services has plummeted. As you can see with Norfolk Southern, those cuts may be good for beating analyst profit estimates, but they don't result in increased revenue.

The transports have been on fire recently with the iShares Dow Jones Transportation Average ETF (IYT) making a series of higher highs over the past eight weeks. Make of the chart what you will, but a near-term decline appears to be in the offing.

IYT Chart

Other big names to watch on the earnings front tomorrow include ArcelorMittal (MT), the world's largest steel maker. Analysts are calling for a loss of 21 cents a share and US Steel (X) did not do much to inspire confidence with its report on Tuesday, posting a second-quarter loss and saying demand remains weak.

Defense contractor General Dynamics (GD) also reports before the bell and analysts expect the company to post a profit if $1.57. If Tuesday did not bring enough oil news for you, not only are oil inventories reported tomorrow, but ConocoPhillips (COP) reports before the bell with analysts calling for 85 cents a share in profits. For what it is worth, Warren Buffet's Berkshire Hathaway is one of the largest shareholders in ConocoPhillips. Refiner and Valero rival Tesoro (TSO) is expected to report a loss of 40 cents a share.

Taking a look at market technicals, I cannot say much as changed since we chatted yesterday. Yes, the Dow closed below 9100, but today's loss was tolerable. Hey, it could always be worse. With Beige Book report coming tomorrow and the GDP number looming Friday, fundamental catalysts do exist to rejuvenate the rally or spark some new selling. The 14-day RSI on the Dow inched closer to 70 today and a cross below could signal a retreat from these lofty overbought conditions. What is clear is that the bulls want to keep the Dow closing above 9000.

Dow Chart

As I lamented yesterday, the S&P 500 is going to encounter fortress-like resistance when it gets to 1000, but no one knows when that is going to happen. Holding the 980 area would be a good place to start and the index is hovering around there, but adding more than 100 points in less than two weeks is a boffo move for sure, and that leads me to believe a breather wouldn't be such a bad thing. Just as long as 955-965 holds as support.

S&P 500 Chart

The Nasdaq is now in the 1980 neighborhood, which may offer some resistance, but nothing like 1995-2000 is going to put up. Tech has fanned the flames of this rally and if the Nasdaq starts to find slippery footing, that may be the confirmation that the market is ready for a rest.

Nasdaq Chart

The bottom line is Tuesday was another lethargic day and the market has not much of anything through the first two days of this week. Then again, that is not such a bad thing on a down day. If nothing else, it shows the bears are not ready to growl just yet. Mr. Market will likely pick a direction for the week after tomorrow's Beige Book news, so stay tuned.

New Option Plays

If you can't beat them...

by James Brown

Click here to email James Brown


S&P 100 index - OEX - close: 456.38 change: -0.96 stop: 451.90

Why We Like It:
If you can't beat them, join them! We've been waiting for a correction in the market but it may not happen until the S&P 500 tags overhead resistance near 1,000 first. Instead of sitting on our thumbs let's see if we can capture part of that move. However, instead of trading the S&P 500 or any of its ETFs I want to use the OEX, which tends to be a little more volatile so we can get more bang for our buck.

I'm suggesting a trigger to buy OEX calls at 458.10. If triggered our target to exit is 469.00. More aggressive traders may want to aim for the 480 region.

FYI: An alternative trade could be the double-long S&P 500 ETF the SSO. Use a trigger above $29.75 and a stop at $28.90. Or you could try the small cap ETF (symbol IWM) and use a trigger above $55.50 and a stop under today's low. Or even the midcap ETF (MDY) with a trigger just over $114.00 and a stop just under $112.00. Target the $117.50 region. These are all very aggressive, very short-term. I would use a very small position size. No matter what you trade just keep an eye on the S&P 500 index and the 1,000 level.

Suggested Options:
I'm suggesting the August calls.

BUY CALL AUG 455 OXB-HK open interest=1557 current ask $10.10
BUY CALL AUG 460 OXB-HL open interest=3347 current ask $ 7.60
BUY CALL AUG 465 OXB-HM open interest=2515 current ask $ 5.50

Annotated Chart:

Picked on     July xx at $ xx.xx <-- see TRIGGER @ 458.10
Change since picked:      + 0.00
Earnings Date           00/00/00 
Average Daily Volume =        x  xxxxxx  
Listed on  July 28, 2009         

In Play Updates and Reviews

Tech Continues to Lead

by James Brown

Click here to email James Brown

CALL Play Updates

Fluor Corp. - FLR - close: 53.65 change: -1.32 stop: 47.45

Traders were quick to buy the dip in FLR near $52.50. The afternoon bounce has the stock poised to retest resistance near $55.00. Shares still look overbought here. We want to buy a dip back in the $50.00-48.00 zone. Officially our entry point will be $50.25. If triggered our first target is $54.80. Our second target is $59.00 but we may not have time. FLR is due to report earnings in less than three weeks. We do not want to hold over the announcement.

Picked on     July xx at $ xx.xx <-- see TRIGGER
Change since picked:      + 0.00
Earnings Date           08/10/09 (unconfirmed)
Average Daily Volume =       2.4 million  
Listed on  July 25, 2009         

Euro Currency ETF - FXE - close: 141.70 chg: -0.67 stop: 139.40

The U.S. dollar managed a bounce from its recent lows and the FXE hit some profit taking. I've been warning readers to expect a dip towards $141 or $140 but it's not there yet. 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:      + 0.94
Earnings Date           00/00/00
Average Daily Volume =       461 thousand    
Listed on  June 23, 2009         

Gold Miner ETF - GDX - close: 38.35 change: -1.50 stop: 36.49

The bounce in the dollar sent gold prices lower and the gold miners followed. The GDX gapped down and opened at $38.78 but eventually found some support in the 37.50-37.00 zone. I'm not suggesting new bullish positions in the GDX at this time. GDX has already exceeded our first target. Our second target is $42.40.

Picked on     July 13 at $ 36.49 /gap higher entry
                               /originally listed at $35.93
Change since picked:      + 1.86
            gap higher exit   /1st target hit @ 39.95 (+9.4%)
Earnings Date           00/00/00
Average Daily Volume =       6.8 million  
Listed on  July 13, 2009         

IDEXX Labs - IDXX - close: 49.19 change: -0.80 stop: 44.95

IDXX is slowly starting to contract. There is no change from my prior comments. We are waiting for a pull back toward previous resistance and what should be new support.

The plan is to buy calls on a dip at $47.50. If triggered our first target is $52.00. Our second target is $54.90. Our time frame is four to eight weeks.

Picked on     July xx at $ xx.xx <-- see TRIGGER
Change since picked:      + 0.00
Earnings Date           07/24/09 (confirmed)
Average Daily Volume =       383 thousand 
Listed on  July 25, 2009         

Legg Mason - LM - close: 27.39 change: -0.32 stop: 23.75

It's clear that upward momentum is stalling. LM has been trading sideways the last couple of sessions. We just need to be patient here. The plan is to buy calls on the stock at $25.25 but we can really use the 25.25-24.00 zone as an entry point. If triggered our first target is $29.50. Our second target is $33.40. My time frame is four to eight weeks.

Picked on     July xx at $ xx.xx <-- see TRIGGER
Change since picked:      + 0.00
Earnings Date           07/20/09 (confirmed)
Average Daily Volume =       3.4 million  
Listed on  July 25, 2009         

Polaris - PII - close: 36.91 change: +0.24 stop: 31.45

PII has closed above potential resistance at its May 2009 high but it has yet to break resistance near its July 2008 lows. We might want to raise our trigger to buy calls toward the $34.00 level but for now I am suggesting readers wait for a dip in the $33.00-32.00 zone with a tight stop at $31.45. Our first target is $37.25. Our second target is $39.50.

Picked on     July xx at $ xx.xx <-- see TRIGGER
Change since picked:      + 0.00
Earnings Date           07/16/09 (confirmed)
Average Daily Volume =       436 thousand 
Listed on  July 18, 2009         

PUT Play Updates

Alliant Techsystems - ATK - close: 78.74 change: -0.14 stop: 81.15

After under performing for days the defense sector actually managed a bounce today. Yet ATK lagged its peers and closed lower. I don't see any changes from the new play description and would still buy puts right here.

Our first target is $75.25. Our second target is $72.00 but we may not have time for ATK to reach $72.00. Earnings are due out on August 6th and we don't want to hold over the announcement. I'm suggesting a stop loss at $81.15. FYI: The Point & Figure chart is bearish with a $62 target.

Picked on     July 27 at $ 78.88
Change since picked:      - 0.14
Earnings Date           08/06/09 (confirmed)
Average Daily Volume =       443 thousand 
Listed on  July 27, 2009         

LEAP Wireless - LEAP - close: 26.76 change: +0.26 stop: 29.45

Larger rival Sprint Nextel (S) bought Virgin Mobile USA (VM) for $483 million. This makes S a bigger competitor with LEAP for the prepaid wireless market.

LEAP rallied toward $27.50 and reversed. This could be used as a new bearish entry point but I would hesitate to actually launch new positions until we see the S&P 500 fail under 1,000 or break the short-term up trend. 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. FYI: The P&F chart is bearish with a $19.00 target.

Picked on     July 17 at $ 26.80 *triggered    
Change since picked:      - 0.04
Earnings Date           08/06/09 (confirmed)
Average Daily Volume =       2.2 million  
Listed on  July 16, 2009         

Nike - NKE - close: 52.91 change: +0.54 stop: 53.51

NKE is still inching higher. Wait and watch for a failed rally under the $53.50 mark or wait for a new drop under $50.00 to launch positions. Our first target is the $46.00-45.00 zone.

Picked on     July 23 at $ 51.14
Change since picked:      + 1.57
Earnings Date           09/23/09 (unconfirmed)
Average Daily Volume =       3.8 million  
Listed on  July 23, 2009         

United Technologies - UTX - close: 52.44 change: +0.33 stop: 55.05

UTX delivered a minor bounce. Some of the short-term technicals are suggesting the bounce will continue. I'm not suggesting new positions at this time but watch for a failed rally under $54.00. Our first target to take profits is at $50.15.

Picked on     July 22 at $ 53.12
Change since picked:      - 0.68
Earnings Date           07/21/09 (confirmed)
Average Daily Volume =       5.9 million  
Listed on  July 22, 2009         

Strangle & Spread Play Updates

(What is a strangle? It's when a trader buys an out-of-the-money (OTM) call and an OTM put on the same stock. The strategy is neutral. You do not care what direction the stock moves as long as the move is big enough to make your investment profitable.)

McDonald's - MCD - close: 56.47 change: +0.50 stop: n/a

This is the fourth day in a row that MCD has tried to bounce from its 100-dma and today it was successful. Yet the rally stalled at its simple 200-dma. We're not suggesting new strangle positions at this time.

I suggested the August $60 calls (MCD-HL) and the August $55 puts (MCD-TK). Our estimated cost is $1.25 (0.70 + 0.55). We want to sell if either option hits $2.75 or higher. This may take a few weeks to succeed.

Picked on     July 18 at $ 57.84
Change since picked:      - 1.37
Earnings Date           07/23/09 (unconfirmed)
Average Daily Volume =       7.8 million  
Listed on  July 18, 2009         


Compass Minerals Intl. - CMP - cls: 49.09 change: +0.25 stop: 50.05

The plan was to exit this put play tonight at the closing bell to avoid earnings. The company beat both the earnings estimate and the revenue estimate, which has been a rare feat this season.


Picked on     July 06 at $ 52.25 *triggered     
Change since picked:      - 3.16 *exit early @ $49.09 (-6.0%)
                               /1st target hit @ 47.50 (-9.0%)
Earnings Date           07/28/09 (confirmed)
Average Daily Volume =       792 thousand 
Listed on  June 29, 2009         

Genzyme Corp. - GENZ - close: 54.72 change: +0.99 stop: 54.15

The biotech sector continued to rally thanks to better than expected earnings from AMGN last night. GENZ broke through the $54.00 level and closed our play at $54.15. The overall trend in GENZ is still bearish and I would keep it on your watch list. Our strategy was to open 1/2 a position in the $52.00-53.00 zone and the second half on a breakdown under $50.00, which was never triggered.


1st Entry on  July 23 at $ 52.17 *1/2 of position
2nd Entry on  July xx at $ xx.xx (2nd half @ trigger 49.90)*not opened*
Change since picked:      + 1.98 <-- stopped @ 54.15 (+3.7%)
Earnings Date           07/22/09 (confirmed)
Average Daily Volume =       2.8 million  
Listed on  July 22, 2009