Option Investor

Daily Newsletter, Wednesday, 11/4/2009

Table of Contents

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

Market Wrap

Good News Wasn't Much Help

by Judy Alster

Click here to email Judy Alster
There were several helpings of promising news on Wednesday, not to mention the fulfilled expectation of a no-surprises Fed meeting. Didn't help. The market got off to a roaring start, the Dow gaining as much as 155 points or 1.5% during the session and the S&P500 adding 16 points or an equal percentage. Then, as is sometimes the case after a Fed meeting, it couldn't hang on to its gains and thudded in late trading. At the finish there were scant increases in the Dow and the S&P500, up 0.31% and 0.10% respectively; the Nasdaq, after gaining as much as 24 points or 1.16%, lost 1.8 points or 0.09%.


Contributing to the glowing start were two jobs reports before the open, both of them boding well for Friday's government employment report. First, Challenger's October count of layoff announcements, not a big mover but watched nevertheless, fell to 55,679 from 66,404 in September — the lowest total since March 2008. October last year saw 112,884 layoffs announced, so year over year improvement, if you want to consider less badness an improvement, is undeniable.


Shortly thereafter the Automatic Data Processing (ADP) payroll count reported a fall of 203,000 private-sector jobs in October compared to the 227,000 drop in September (itself revised upward from 254,000) — the fewest jobs lost since July 2008. Goods-producing jobs fell by 117,000 in October, including 65,000 in manufacturing and 51,000 in construction; services-producing jobs fell by 86,000. In total, private-sector employment stood at 108.5 million last month by ADP's calculations, down 7.2% from 115.6 million in December 2007 when the recession got under way. That about squares with government estimates.


The ADP report comes two days before the government releases its own estimate of October nonfarm payrolls. Economists expect payrolls to drop by 150,000 in the government survey, the smallest decline since August 2008.


Incidentally, the world's largest payroll processing company reported its own higher-than-expected results today, largely due to cost-cutting. Income climbed 2 cents year over year to 56 cents while revenue fell 4%. Naturally, as employment goes, so goes ADP's revenue, since it processes one out of every six payroll checks. ADP, who surely has its finger on the pulse of employment every bit as accurately as the government, says "Certain market indicators suggest that the U.S. economy has reached the trough of the downturn and has begun to stabilize." They ought to know. The company raised its full-year revenue forecast, and its shares are near a 52-week high.


The mid-morning announcement of the non-manufacturing index (NMI) by the Institute of Supply Management was down a sliver from the previous month but still indicated growth. Every month the ISM asks purchasing managers whether business is better or worse than the month before; a reading above 50 indicates that more respondents say growth is improving while a reading below 50 means it's worsening.

The NMI composite index came in at 50.6%, down from September's 50.9%. The NMI business conditions index, analogous to a production index, showed a faintly stronger rate of month-to-month growth. The new orders index was even better, up 1.4 points to a solid 55.6; this index is accelerating, unlike the ISM's new orders index for manufacturing. Order backlogs were also higher, up 2 points to 53.5.


Fully nine of 18 industries grew, including real estate, rental & leasing; management & support services, construction and utilities. Seven slid, including entertainment & recreation — although Disney was one of the day's winners after getting the go-ahead from China to pursue plans to build a theme park in Shanghai (see graph above) -- food services, transportation and finance & insurance. In a slightly jarring note, the non-manufacturing employment index fell more than 3 points to 41.1, indicating that fewer businesses were hiring in October even as production and new orders increased, a bit of a negative for Friday's employment report. Only real estate, mining, and management services said they added employees last month:


If you find yourself in one of those uncomfortable conversational lulls at your next cocktail party, you might casually mention that one of the commodities down in price last month was chicken, one commodity not surprisingly in short supply was masks for TB/H1N1 use, and one up price was cheese.


The market drifted somewhat lower until the main event Wednesday afternoon gave it a jolt. At its Open Market Committee, the Federal Reserve made only minor edits in its policy statement, holding a steady course and repeating that it expects to keep interest rates low. It kept its target for its federal funds rate in a range of zero to 0.25%, repeating polysyllabically that it "continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period." (We've been hearing that "extended period" phrase since March.)

The Fed again this month cited low resource utilization and negligible inflation as reasons for unusually low rates. Of course, one of the earmarks of clinical insanity is continuing to do precisely the same thing over and over and over again in the absence of the desired result, but we'll talk about that another time. The Fed also said it would purchase $175 billion of agency debt, down from prior plans to purchase $200 billion.

The economy grew at a 3.5% annual pace in the third quarter, the Fed reminded us, absolutely in line with expectations and the fastest pace in two years. Still, members were unconvinced that a sustainable recovery was in the making: The economy "is likely to remain weak for a time," said the statement, also noting that "businesses are still cutting back on fixed investment and staffing, though at a slower pace." However, U.S. consumers weren't holding on too tightly to their wallets, it seems, according to the Bureau of Economic Analysis:


Economists expect the Fed to hold interest rates close to zero into 2010; some see no action at all until 2011. Still, a few mavericks think there's a wisp of a chance the Fed could start changing its mind at its next policy meeting December 15-16. If that's the case, over the next six weeks the Fed could start subtly preparing markets for a rise in rates. Bernanke will give a speech in New York on Nov. 16; some Fed watchers will be listening very, very closely for any hint of a shift.

All things considered, it looks like the slender recovery will probably continue into the fourth quarter. But the economy should pass two tests before the central bank gets entirely out of the way. There has to be some sense that the economy is moving on its own and that growth is not only from massive government stimulus plans. And maybe even tougher, growth will have to be fast and strong enough to bring unemployment down, with real signs of capital spending.

The late-day slump was certainly due in part to institutional investors locking in profits on any good news before the end of the year. Investors especially avoided small-cap stocks and financials as the day wore on, keeping to defensive stocks that are often popular in times of economic uncertainty.


Insurers were particularly hard hit, with American International Group (AIG) off 14%, Genworth Financial (GNW) off 6.9%, and Hartford Financial Services Group (HIG) off 4.1%. Despite the sector's bad cold, financial-services-to-the-wealthy firm National Financial Partners (NFP) responded to Tuesday evenings's way-better-than-expected earnings announcement and added $1.06 or 13.37%. The company tripled earnings to 24 cents a share; cash profit of 61 cents a share beat estimates by 16 cents.


Treasury prices were lower, with the 10-year note down almost a half of a percentage point to a yield of 3.526% and the 30-year bond off 1/32 to yield 4.394%. After a few up days, the dollar fell against every major foreign denomination except the Japanese yen. That strengthened commodity prices. Gold kept climbing, up $2.40 to a fairly eye-popping $1,086.70 per ounce.


Oil futures fell from the day's high but stayed above $80 a barrel after the Energy Information Administration reported an unexpected drawdown in U.S. reserves of crude. The drawdown came to 4 million barrels last week; also down were supplies of gasoline and distillates. The crude drop is tied to a falloff in imports, down some 750,000 barrels a day. Blame decreasing refinery output, now at a very low 80.6% of capacity, for the distillate drop. Gasoline demand is also falling (who's driving to work?). Still, there's no shortage of crude out there, so we can assume that speculation is playing its part in all this. Oil is up over 78% this year.

All in all, this is a strange market to try to read. If I had to guess, I'd say a drift sideways or even higher could last through the middle of the month. Let us hope the indexes go on to surpass mid-October's high: Nobody but shorts wants to see a double top.

And now, having taken too many plane trips in the last couple of months, I thought I'd share with you my tale of aviation woe. No doubt you know what I mean:

Tomorrow's movers should be reports on natural gas, jobless claims, and productivity and costs, along with rate announcements from the Bank of England and the European Central Bank. Earnings continue with CBS, Boston Beer, Air Methods, Lincoln Educational Services, Jones Soda, International Game Technology, Omnicare, Unilever, Manulife Financial, Dynegy, Nvidia, ResMed, SGL Carbon, Starbucks and World Wrestling Entertainment, among a raft of others.

New Option Plays

Volatile Afternoon

by James Brown

Click here to email James Brown

Editor's Note:

The action in the stock market today felt bearish with the afternoon reversal following the FOMC announcement. Yet stocks still look a little short-term oversold. Further complicating matters is Cisco Systems (CSCO) earnings report after the bell tonight. The company beat the estimate, beat on revenues, guided higher and raised their stock buy back program. All in all it was a very bullish report from CSCO and John Chambers shared positive comments on the recovery. This could easily fuel a rally in technology stocks on Thursday. Yet I suspect the market will just chop sideways in a volatile fashion until we see the October non-farm payrolls data due out Friday morning.

I am not adding new candidates to the newsletter at this time. However, if you are looking for a trade consider a strangle on Starbucks (SBUX). The company reports earnings after the bell on Thursday night. Traders could open a strangle position ahead of earnings with the expectation that shares will see a big post-earnings move on Friday.

In Play Updates and Reviews

Fading Fast

by James Brown

Click here to email James Brown

The oversold bounce in the market is fading fast.

CALL Play Updates

Gold ETF - GLD - close: 107.10 change: +0.64 stop: 99.75

The rally in gold continues and gold futures hit a new all time high trading over $1,095 an ounce. Gold, like stock, pulled back from its intraday highs. The GLD only hit $107.68 at its best levels. I am not suggesting new positions at this time.

We want to take profits at $109.90. If you have the November calls you will want to exit completely. If you own the January calls I'd sell part of your position. Our second target is $119.00.

Picked on   October 06 at $102.28
Change since picked:       + 4.82
Earnings Date            00/00/00
Average Daily Volume =       14.2 million  
Listed on   October 06, 2009         

Parker Hannifin - PH - close: 54.53 change: -0.72 stop: 52.39

Our new call play in PH is not off to a strong start. Given the lack of follow through on yesterday's rally readers may want to wait for another bounce from the $53.00 region and its 50-dma before launching new positions.

Our first target is $58.50. We will cautiously set a second target at $62.00 but the $60.00 level could prove to be strong resistance. I would use small positions. The rest of this week could be very volatile due to economic data.

Picked on  November 03 at $ 55.25
Change since picked:       - 0.72
Earnings Date            01/20/09 (unconfirmed)
Average Daily Volume =        1.6 million  
Listed on  November 03, 2009         

UltraShort Treasury ETF - TBT - close: 47.72 change: +0.74 stop: 43.90

The TBT managed to hit a new relative high over the $48.00 level this afternoon. It's now facing technical resistance at the 200-dma near $48.50. It's worth noting that volume was a little bit above average on today's gain.

Our first target is $54.50. Our second target is $58.50. Our time frame is several weeks (possibly year end).

Picked on   October 26 at $ 47.89 (1/2 position)
Change since picked:       - 0.17

2nd entry on   October 30 at $ 45.50 (1/2 position)
Change since picked:          + 2.22

Earnings Date            --/--/--
Average Daily Volume =        6.0 million  
Listed on   October 26, 2009         

PUT Play Updates

BIOGEN IDEC - BIIB - close: 42.80 change: -0.45 stop: 47.25

The oversold bounce in BIIB has been anemic. The stock looks like it could roll over again soon. I'm not suggesting new positions at this time. BIIB has already hit our first target. Our second and final target to exit is $40.50.

Picked on   October 03 at $ 48.89
Change since picked:       - 6.09
                               /1st target hit @ 44.50 (-8.9%)
Earnings Date            10/20/09 (confirmed)
Average Daily Volume =        2.6 million  
Listed on   October 03, 2009         

Bank of Montreal - BMO - close: 47.05 change: +0.18 stop: 51.25

The financials were some of the worst performers today with the BKX and BIX banking indices down 2.1% and 2.7%, respectively. Shares of BMO appear to have reversed under the 10-dma. I would prefer to launch new put positions on a failed rally near the 50-dma but traders might want to consider opening small positions here. Our first target is $42.75. Our second target is $40.50.

Picked on   October 27 at $ 47.37
Change since picked:       - 0.32
Earnings Date            11/24/09 (unconfirmed)
Average Daily Volume =        539 thousand 
Listed on   October 27, 2009         

UltraDow30 - DDM - close: 38.64 change: +0.32 stop: 41.26

I've been suggesting readers look for short-term resistance near $40.00. The DDM hit $39.60 this afternoon and reversed. I would consider new positions here but traders might want to tighten their stops. I'm suggesting readers use small positions to limit risk.

Our first target is $35.25. The 100-dma near $35.00 could be technical support. I would consider a second target at $32.50 but for now we'll exit completely at $35.25. The 100-dma and exponential 200-dma could offer some support.

Picked on   October 31 at $ 37.82 (1/2 position size)
Change since picked:       + 0.82
Earnings Date            --/--/--
Average Daily Volume =        3.2 million  
Listed on   October 31, 2009         

Intuitive Surgical - ISRG - close: 251.32 change: +3.33 stop: 261.00

This could be a new entry point with the late day pull back from its highs but I'd rather see some confirmation first. Wait for follow through on the afternoon reversal. More cautious traders could wait for a drop under $240 to open positions (just consider a tighter stop loss).

Remember, this is an aggressive trade. ISRG can be very volatile and options aren't cheap. I would use very small positions about 25% your normal trade size. Our first target is $226.00. Our second target is $202.00.

Picked on   October 31 at $246.35
Change since picked:       + 4.97
Earnings Date            10/20/09 (confirmed)
Average Daily Volume =        939 thousand 
Listed on   October 31, 2009         

Russell 2000 iShares - IWM - close: 56.25 change: -0.82 stop: 62.55

It looks like the IWM is rolling over a lot sooner than expected. I really thought the Monday-Tuesday action this week in the Russell was forecasting a bigger bounce. I'm not ready to give up yet. The plan is unchanged. Wait for a rally toward $60.00 and use a trigger at $59.00 to buy puts. An alternative entry point would be to look for a drop under support near $55.00 and its exponential 200-dma. If triggered at $59 our first target is $55.50. Our second target is $52.00 or the 200-dma, whichever the IWM hits first.

Picked on  November xx at $ xx.xx <-- TRIGGER @ 59.00
Change since picked:       + 0.00
Earnings Date            --/--/--
Average Daily Volume =       54.5 million  
Listed on  November 02, 2009         

iShares Transports - IYT - close: 66.68 chg: -1.03 stop: 70.60

There was no real follow through on yesterday's bounce in the transports. The IYT spiked to $68.43 at the open and quickly faded lower. This could be a new entry point to buy puts. IYT has already hit our first target. Our second and final target is $62.00.

Picked on   October 24 at $ 68.29
Change since picked:       - 1.61
                              /1st target hit @ 65.25 (-4.4%)
Earnings Date            --/--/--
Average Daily Volume =        664 thousand 
Listed on   October 24, 2009         

Life Tech. - LIFE - close: 48.20 change: +0.10 stop: 50.10

The tug of war between the bulls and the bears in LIFE continues. If you look at the weekly chart it's easy to see that the $50 region is resistance. Upward momentum is waning. Yet readers may want to wait for another clearly defined failed rally near $50 or a close under $46.50 to open positions. At this point I would use small positions if opening new plays. The $45.00 level and the $44.00 level are both short-term support. Another level of support to watch is the rising 100-dma. Our target is $41.00.

Picked on   October 28 at $ 45.83 /gap down entry point 10/29/09
                              /originally listed at $46.61
Change since picked:       + 2.37
Earnings Date            10/27/09 (confirmed)
Average Daily Volume =        2.1 million  
Listed on   October 28, 2009         

Precision CastParts - PCP - close: 96.12 change: +0.07 stop: 100.55

The bounce in PCP failed near $98 and its 10-dma and 50-dma. I was hoping for a failed rally near $100 but this may be it and readers could use it as a new bearish entry point to buy puts.

I'm suggesting small positions about 50% your normal trade size. Our only target is $90.25. More aggressive traders may want to aim lower but I'm concerned about the trendline off the March lows, which could be strong support.

Picked on   October 31 at $ 95.53
Change since picked:       + 0.59
Earnings Date            10/20/09 (confirmed)
Average Daily Volume =        1.3 million  
Listed on   October 31, 2009         

Research In Motion - RIMM - close: 57.61 change: -2.00 stop: 62.65 *new*

Good news! The oversold bounce in RIMM is already fading. Shares reversed near $60 and its 38.2% Fibonacci retracement of its recent decline. I am lowering our stop loss to $62.65. The stock has already hit our first target. We're currently aiming for $53.00.

Picked on   October 28 at $ 62.93 /gap open entry    
Change since picked:       - 5.32
                               /1st target hit @ 58.55 (-6.9%)
Earnings Date            12/17/09 (unconfirmed)
Average Daily Volume =       17.9 million  
Listed on   October 26, 2009