Option Investor

Daily Newsletter, Thursday, 11/5/2009

Table of Contents

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

Market Wrap

Hello Again: Dow Traverses 10000 In Best Trading Day Since July

by Todd Shriber

Click here to email Todd Shriber
Pick a catalyst: Better-than-expected jobless claims, increased worker productivity or Cisco Systems' (CSCO) bullish comments on the economy and any or all may explain the stellar performance turned by the three major indexes today. The Dow Jones Industrial Average rose 203.82 points to close above 10,000 once again. The S&P 500 gained nearly 2% to close at 1066.63 and the Nasdaq added almost 50 points to finish the day 2105.32. All 10 industry groups tracked by the S&P 500 finished the day higher.

Stats Table

All 30 stocks in the Dow finished higher, but American Express, not Cisco was the top gainer. Cisco was a positive catalyst to be sure after the largest maker of networking gear delivered fiscal first-quarter results that beat analyst estimates after the close yesterday. The company expects positive revenue growth for the current quarter, marking the first time in a year Cisco has seen positive sales growth and CEO John Chambers said he is seeing signs of a global economic recovery.

Those positive comments led to a 2.8% pop for Cisco shares on Thursday, but in some ways, the trade was disappointing. On a day when the stock should have made a new 52-week high, it failed to do so. Cisco closed at $24.07, a fair bit off its 52-week high of $24.83 set last month. Maybe the bulls are waiting to drive the stock higher, but if that is the case, one has to wonder why they are waiting at all.

Cisco Chart

Financials enjoyed the party as well after noted bank analyst Dick Bove made positive comments on the group, going so far as to say bank stocks could double from here over the next year and that accomplishing such a feat is not the improbable task that some investors may perceive it to be. This is a change of tune for Bove who has recently made bearish comments about several of the major banks, including Wells Fargo (WFC) and Bank of America (BAC). Still, Bove said the 20 largest U.S. financial institutions are in ''extraordinarily good condition.''

The comments lifted the Philadelphia Bank Index, which had been getting pummeled over the past few weeks. The index tracks the largest U.S. bank stocks and still rests below its 50-day moving average, but well above the 200-day line.

Philly Bank Index

Simply put, name a major financial and it was up today. Even lowly Citigroup (C) got in on the action, rising 2.3% after announcing that it would spin-off its Primerica life insurance business in a $100 million IPO. Given how much Citi is into Uncle Sam for, $100 million is a drop in the bucket, but the IPO is at the very least a way of returning some value to long-suffering shareholders and a better strategy than selling profitable businesses for fire-sale prices, which Citi has already done.

One stock that I do not often mention here is DuPont (DD), but the Dow component delivered some noteworthy news today. Chemicals makers, of which DuPont is one of the largest, have seen their top-line growth stifled in the past year and the primary way that DuPont and its rivals have been able to meet or beat Street estimates is through massive cost reductions, namely lay-offs, factory closures and asset sales.

That makes the news that DuPont expects to outperform the market and its peers as the economy rebounds good news for investors. The company expects year-over-year earnings per share growth of 20% in 2009-2012. Even better, the company said it expects top-line growth of 10% over the same period. DuPont was up 3.7% today and the shares yield 5%.

Stocks also got a jolt from economic news that is in a way conflicting. Worker productivity rose more-than-expected in the third quarter, which basically means employers are making a smaller number of workers do more work. On the other hand, last week's jobless claims fell to a 10-month low. In fact, the new jobless claims trend has been fairly positive over the past few months, but continuing claims continue to creep higher.

Jobless Claims

I say those data points are conflicting because if companies can squeeze more out of a smaller labor pool and continue to beat Wall Street estimates with fewer workers, what will be the impetus to hire more folks and increase payrolls when the economy improves? It is a question worth pondering on the eve of the release of October's unemployment data.

That is right. Tomorrow is the first Friday of November, so unemployment news will be the driver behind stocks' performance on Friday. U.S. employers cut 175,000 jobs in October, according to the median forecast offered by Bloomberg News. That is a far better number than the 263,000 jobs shed in September, but the unemployment rate is still expected to move higher to 9.9% and that would represent a new 26-year high.

While the unemployment picture is far from rosy (as the chart below illustrates), the market seems to have priced in the fact that positive job growth will not be seen until sometime in 2010 and that means less bad reports should be welcome with open arms by stock bulls. In other words, if tomorrow's number comes in at 175,00 or better, stocks will head into the weekend higher, barring any unforeseen surprises from other corners of the market.

Unemployment Chart

Earnings season is winding down, but there are a couple of reports that may be worth watching for tomorrow's session. Coffee-retailer Starbucks (SBUX) released fiscal fourth-quarter results after the close today and the news had the stock trading up almost 4% in the after-hours session. Excluding restructuring costs, Starbucks earned 24 cents a share, ahead of analyst estimates of 21 cents a share. Revenues fell a little bit, but the company said it is seeing higher traffic in its stores and expects fiscal 2010 EPS to come in 15%-20% higher than 2009's number of 80 cents a share.

CBS (CBS), owner of the most-watched U.S. television network, also posted a bullish report after the close. The company earned 39 cents a share, well above the average analyst estimate of 23 cents. CBS appears to be the leader in garnering lucrative satellite transmission fees from cable and satellite TV operators. Those fees could be worth as much as $200 million annually by 2012 or 2013, CBS said. The stock is up about 35% in the past three months.

And if you are so inclined, American International Group (AIG), the insurance firm that is one of Uncle Sam's biggest holdings, reports earnings before the bell on Friday. Believe it or not, AIG's stock has quadrupled in the past eight months and maybe more unbelievable was AIG's profitable second quarter.

Analysts are expecting the company to be profitable once again, at least on an operating basis, and are calling for operating profit of $2.39 a share. AIG boasts a $355 billion fixed-income portfolio that has benefited from soaring corporate bond and mortgage-backed securities prices. As of June 30, nearly 60% of AIG's bond portfolio resided in those two asset classes, according to Bloomberg. The irony here is that mortgage backed products were one reason that AIG was on the brink of bankruptcy in the first place.

More irony: AIG's Financial Products unit, the group that sold derivatives on those mortgage securities may post a profit of $2.5 billion for the third quarter. AIG is 80% owned by Uncle Sam, making it tough to endorse as a long-term holding, but the stock is extremely volatile and is likely to have a good move or two in it tomorrow.

AIG Chart

Taking a look at the charts, now that the Dow has closed above 10000 again, it has a lot of room to run to its October peak of 10119.47. Resistance looms close to that area around 10139 and from there another resistance spot in the 10215-10220 range will probably appear. Support can be spotted at 9850 and then at the 50-day moving average of 9743.73.

Dow Chart

The S&P 500 looks like it is going to try to break 1100 again and perhaps break its high of 1101.36 set a few weeks ago. The 1080 area was where the index started to slow on at its last advance toward 1100, so it will be interesting to see if that number poses a problem again. It appears that is the 61.8% Fibonacci retracement off the March low, so 1080 is certainly a significant number for the S&P 500. It does not appear that support at the 1020-1025 area is much of an issue right now, but if that area becomes a concern next week and 1000 doesn't hold, 980 may not be that far off.

S&P 500 Chart

The Nasdaq closed right at its high for the day and like the Dow, has a fair amount of distance to cover before getting to its October high of 2190.64. And of course, 2200 still looms as major resistance. Still, today's close was barely good enough to keep the Nasdaq above its 50-day moving average, so the bulls will probably want to see the index rattle off a few more consecutive closes above 2100. Failure to hold 2050 could bring us back to 2025 or worse.

Nasdaq Chart

Not to oversimplify things, but tomorrow's market action will be determined by the labor report. The Dow's ability to hold 10000 and the S&P 500's move to 1100 hang in the balance.

New Option Plays

Post-FOMC Bear Trap Leads to Sling Shot Higher

by Keene Little

Click here to email Keene Little

Editor's Note:

The market is manic depressive. It can't decide which way to go and what is actually good vs. bad news. When it closes at its low it springboards up and then closes at its high. The next day it reverses again. So whether today's little capitulation move into the close will result in an immediate reversal back down on Friday (following the jobs numbers) can't be known yet but there's a reasonable setup for it. But no matter, we have our plays and we'll stay disciplined and honor stops if they're hit before our target prices.

I am not adding new candidates to the newsletter at this time. However, if you followed James' suggestion to consider a strangle on Starbucks (SBUX) before tonight's earnings announcement it could work out on Friday. Earnings were good and their stock price took a big jump after hours--up about a dollar from its closing price of 19.70 before pulling back slightly.

In Play Updates and Reviews

Jammed Higher

by Keene Little

Click here to email Keene Little

Editor's Note:

I'm filling in for James tonight but will pick up where he left off with his commentary from last night.

The selloff into Wednesday's close sucked in some bear fuel to help get some short covering going on Thursday.

CALL Play Updates

Gold ETF - GLD - close: 106.98 change: -0.12 stop: 99.75

The US dollar was relatively flat today (although the ETF, UUP, did some funny things at the end of the day, supposedly because trading was suspended while new shares are issued). The flat dollar was matched by the metals also trading flat. 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:       + 4.70
Earnings Date            00/00/00
Average Daily Volume =       14.2 million  
Listed on   October 06, 2009         

Parker Hannifin - PH - close: 56.63 change: +2.10 stop: 52.39

Our new call play in PH stumbled yesterday, but it turned out to be just a day of consolidation before proceeding higher again. If it pulls back again to the $53.00 region and its 50-dma it would be a good time to consider entering a play. In the meantime we of course hope the rally will continue.

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. Friday could be very volatile due to economic data.

Picked on  November 03 at $ 55.25
Change since picked:       +1.38
Earnings Date            01/20/09 (unconfirmed)
Average Daily Volume =        1.6 million  
Listed on  November 03, 2009         

UltraShort Treasury ETF - TBT - close: 47.82 change: +0.10 stop: 43.90

Like the dollar and the metals, bonds were relatively flat today. Today's high of 48.28 shows the resistance at the 200-dma near 48.50 could hold things down for awhile.

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:       - 0.07

2nd entry on   October 30 at $ 45.50 (1/2 position)
Change since picked:          + 2.32

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

PUT Play Updates

BIOGEN IDEC - BIIB - close: 44.39 change: +1.59 stop: 47.25

The anemic bounce got a stronger lift today with the rest of the market. It's just below the bottom of the gap down on October 23rd, near 45.00, so I'm anticipating that will be resistance. The little selloff into the close could mean it's ready to resume its selloff. 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:       - 4.50
                               /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: 47.39 change: +0.34 stop: 51.25

Financials were lagging again today but then got a shot in the arm in the afternoon. BMO participated in the rally attempt which got it marginally into the green. I would prefer to launch new put positions on a failed rally near the 50-dma, at 48.92, 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:       +0.02
Earnings Date            11/24/09 (unconfirmed)
Average Daily Volume =        539 thousand 
Listed on   October 27, 2009         

UltraDow30 - DDM - close: 40.19 change: +1.55 stop: 41.26

I've been suggesting readers look for short-term resistance near $40.00 which is where it continues to struggle. 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:       + 2.37
Earnings Date            --/--/--
Average Daily Volume =        3.2 million  
Listed on   October 31, 2009         

Intuitive Surgical - ISRG - close: 259.91 change: +8.59 stop: 261.00

Today's strong rally brought ISRG up closer to its stop. It's either a very good entry level 9being so close to the stop level and therefore small risk) or else today's rally was simply one day before we get stopped out. 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:       + 13.56
Earnings Date            10/20/09 (confirmed)
Average Daily Volume =        939 thousand 
Listed on   October 31, 2009         

Russell 2000 iShares - IWM - close: 58.04 change: +1.79 stop: 62.55

Today we got the bigger bounce and we're now closer to our price trigger. 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: 68.13 chg: +1.45 stop: 70.60

IYT formed an inside day today and could be part of a reversal pattern back to the downside. It is trying to push back up to yesterday's early high and in so doing is leaving a negative divergence on the shorter-term charts. This could be a good setup for another entry into our bearish play. 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:       - 0.16
                              /1st target hit @ 65.25 (-4.4%)
Earnings Date            --/--/--
Average Daily Volume =        664 thousand 
Listed on   October 24, 2009         

Life Tech. - LIFE - close: 49.70 change: +1.50 stop: 50.10

The bulls managed to push this back up towards the October highs but if you look at the weekly chart it's easy to see that the $50 region is resistance and it continued to be today. Upward momentum is waning. Yet readers may want to wait for another clearly defined failed rally near $50 with a selloff tomorrow 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:       + 3.87
Earnings Date            10/27/09 (confirmed)
Average Daily Volume =        2.1 million  
Listed on   October 28, 2009         

Precision CastParts - PCP - close: 99.43 change: +3.31 stop: 100.55

PCP managed to push above its 50-dma and if it pushes much higher it will hit our stop. I was hoping for a failed rally near $100 and this may be our setup so readers can consider a new bearish entry point to buy puts and use a very tight stop.

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:       + 3.90
Earnings Date            10/20/09 (confirmed)
Average Daily Volume =        1.3 million  
Listed on   October 31, 2009         

Research In Motion - RIMM - close: 57.79 change: +0.18 stop: 62.65

Good news! The oversold bounce in RIMM is already fading and today's stock market rally barely budged RIMM. In fact an early morning rally, to a lower high, faded to a loss by the afternoon and only a late-day bounce kept it in the green. I lowered our stop loss to $62.65 yesterday and that continues to look like a good level for now. 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:       - 5.14
                               /1st target hit @ 58.55 (-6.9%)
Earnings Date            12/17/09 (unconfirmed)
Average Daily Volume =       17.9 million  
Listed on   October 26, 2009