Option Investor

Daily Newsletter, Wednesday, 11/11/2009

Table of Contents

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

Market Wrap

Dow, S&P Hit Highs as Rally Continues

by Judy Alster

Click here to email Judy Alster
Veteran's Day closed the U.S. bond market and government offices, so no critical reports came out of any government agency or U.S. business group. Still, the market turned in an okay performance, even after falling from its morning highs.



Price and volume advancers beat decliners, but even though volume wasn't bad for a bank holiday, it still wasn't as convincing as we'd like to see it. In fact, it hasn't been very convincing this month, making one wonder how good this rally's legs really are.

A (very) mild dollar rise caused the broad backup off the day's highs, but the Dow rose for a sixth straight session to end the day at a 52-week high of 10,291.26, up 44.29 points or 0.43%; the S&P500 squeaked to a 52-week high close, too, of 1,098.51, up 5.50 points or 0.05%; the Nasdaq, although not at a high, managed a rise of 0.74% or 15.82 to close at 2166.9.


The Dow, busy trying to retrace the bear market fall, will probably encounter headwinds around 10,400, and almost certainly around 11,000 as it tries to surpass its levels of September 2008. But we're getting ahead of ourselves. For now, let's enjoy this rally because it looks like it might soon be taking a rest.

S&P500 valiantly tries to top 1,100:

The important number for the S&P500, and maybe for the market, is 1,100, which the index touched intraday but did not close at. The Nasdaq had a higher percentage gain than either the Dow or the S&P:


Continuing its bounce off a two-month low, the small-cap Russell 2000 put in an even better percentage gain: 0.98% or 5.78 points, to 592.71. But there's still what looks like a double top to overcome here:

RUSSELL 2000 — small caps post a nice gain:

A dearth of economic reports, yes, but there was news to keep us occupied. For instance, Chinese factory output for October rose to a 19-month high, thanks in part to China's own massive ($585 billion) economic stimulus. Chinese industrial output was up 16.1%, even better than the forecasts of 15.5%, and retail sales were up 16.2% vs. a 15.8% forecast. A lot of China's growth is the result of their stimulus package but the run is still expected to last into 2010. Expect China, in a mirror image of the U.S., to tighten money to keep inflation under control. The yuan, up just a fraction, isn't yet reflecting that.

The iShares FTSE/Xinua China 25 Index, (FTI), which tracks 25 of the largest and most liquid Chinese companies, had a nothing day, up less than appoint or 0.20%, but that could be because it's been on a roll since March. China Southern Airlines (ZNH) on the other hand was up over 3%. Two other companies had big moves of their own, apart from the country's improved output. Sinovac Biotech (SVA) got an order from the Chinese government for an additional 5.19 million doses of its H1N1 flu vaccine, and won a bid to supply a seasonal flu vaccine as well, marking its entry into a new public market.


Semiconductor Manufacturing Intl. (SMI) was up over 60% on a legal settlement that could allow Taiwan Semiconductor to take a 10% stake in it. Semiconductors as a group have been up lately, possibly in hopes of a better-than-expected holiday shopping season.


The news out of Asia sufficed to spark an early and enthusiastic wave of buying in commodities with investors assuming that the world's third-largest economy is getting back on its feet. Then the greenback roused itself from its torpor after hitting a 15-month low under 74.80; it turned higher and managed to dig in its heels just above 75, which took most of the market off its highs, although stocks managed to make up part of their losses.

US DOLLAR INDEX squeezes out a gain right at support:

The dollar's good twin, gold, hit a record high near $1,120 an ounce. Shipping stocks jumped up and stayed up as the hair-trigger Baltic Dry Index, which tracks shipping rates, gained on the news that China is busy again, rising to a three-and-a-half month high.


EXCEL MARITIME, like other shippers, made big gains:

Early in the session, stocks responded to Tuesday's comments by Fed officials who told us again that the course of the U.S. recovery, like love, will not run smooth — the translation being that money is going to stay cheap as dirt well into next year. The certainty of low interest rates and the government's pro-recovery efforts may be kicking in; it could be why the market has been moving consistently up for more than a week, despite 10% unemployment. Long stretches of low rates are always a boost for the stock market, at least in the short run, because where else are you going to go to make money on your money legally? If you happen to have any CDs coming due, you know what I mean. (Try not to laugh in the bank guy's face when he asks you to roll it over into a new one at current rates. Just say "No, thanks" and hang up.)

In fact, the S&P's advance was led by a 1.4% gain in the financial sector, which is especially sensitive to low rates. The only category in the broad index to post a decline was utilities, off 0.3%.

BANK OF AMERICA, reflecting financial sector gains:

One very big winner today was luxury homebuilder Toll Brothers (TOL) who announced that its new contracts are up 42% and that it expects fourth-quarter revenue to top Wall Street's expectations. From preliminary fourth-quarter results, the company said it predicts revenue of $486.6 million; sure, it's lower than the last year's $691.1, but it's also $100 million more than analysts forecast. The company's contract cancellation rate was a rock-bottom 6.9%, the lowest since the fourth quarter of fiscal 2005. Buyers signed 765 contracts for homes valued at $430.8 million during the quarter. Investors sucked it right up:

TOLL BROTHERS broke out the champagne:

More huge news: Hewlett-Packard (HPQ) said late Wednesday that it will acquire 3Com Corp. (COMS) for $2.7 billion. It was a shot across the bow, as they say, of Cisco Systems (CSCO) in the market for networking, servers and storage products. The deal values 3Com at $7.90 a share, should close in the first half of 2010. Hewlett-Packard was largely unchanged; 3Com moved up just 28 cents or 5.18 % during the session but shot up another 35% after hours to $7.69.

3COM CORP to be acquired by Hewlett-Packard:

Food purveyor Ralcorp (RAH) reported disappointing fourth quarter earnings, despite the profit boost from its acquisition of Post Foods and Harvest Manor. The company reported earnings of $1.14 per share, off estimates by 10 cents; revenue rose over 12% year-over-year to $983.2 million, just shy of consensus.

RALCORP came in under estimates:

Late Tuesday broadband operator Clearwire (CLWR) reported a Q1 loss of 43 cents on revenue that rose about 13% to $68.8 million, which was about in line with estimates. The company maintained its outlook through next year: revenue will stay the same, some subscribers may leave its pre-WIMAX markets during the transition to WIMAX, and get set for a $1.5 billion round of equity financing.

CLEARWIRE did not please investors:

Macy's (M) reported a third quarter loss of three cents a share, better than the consensus that expected a loss of seven cents. Revenues fell 3.9% year-over-year to $5.28 billion, which was not better than estimates; same-store sales for the quarter fell 3.6%, while online sales were up 21.1%. This quarter, Macy's expects same-store sales to be down 1-2%, although fourth quarter earnings should range from $1.00 to $1.05 per share, up from earlier guidance of 70 to 80 cents but still —you guessed it — below the current consensus of $1.17.

MACY's: Sometimes you just can't win:

Software giant Adobe Systems (ADBE) reported not earnings, but a regulatory filing foreshadowing a cut of some 9% of its workforce, or about 680 full-time positions, in an effort to reduce costs . . . . The company expects to record approximately $65 million to $71.0 million in pretax restructuring charges associated with the plan. The stock, up over 70% this year, lost 68 cents or 1.9% . . . . United Parcel Service (UPS) gained $1.15 or over 2% after its chief executive said volume will grow next year as the global economy gradually recovers . . . . One big percentage mover in the Dow was Home Depot (HD), up almost 2% to $27.33 . . . Insurer American International Group (AIG) fell 99 cents or 2.6% after its CEO threatened to quit . . .

What to take away from today's session? That it's not easy getting past resistance and without real volume, one mustn't expect miracles.

Earnings season continues to wind down Thursday with announcements from Walmart, Vivendi, Walt Disney, Benetton Group, Anheuser Busch, Blockbuster, Kohl's, Nordstrom, North American Palladium, Darling International, Repsol, Taseko Mines and Urban Outfitters, among others.

We also have Wednesday's customary weekly mortgage application index from the Mortgage Bankers' Association and the Energy Information Administration's petroleum status report (often a market mover), along with reports on jobless claims (also capable of moving the market) and the Treasury budget, nicely balanced by 3-, 6- and 12-month bill announcements and the 3-year bond auction. After hours Thursday, the curious might be interested in the Fed balance sheet and the money supply.

New Option Plays

Pick A Direction

by James Brown

Click here to email James Brown


(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.)

Ultra(Long)-S&P500 - SSO - close: 37.08 change: +0.37 stop: n/a

Why We Like It:
The S&P 500 has rallied to its 2009 highs and what has been significant resistance at the 1100 level. This could be a major turning point for the market. A breakout over 1100 could ignite a new leg higher. If the S&P 500 fails here again it could spark a sharp correction. If we use a strangle on the market then we don't care what direction is goes.

Initially I was going to use the S&P 500 SPDRs (SPY) but put options were significantly more expensive than the calls. If we use the SSO the price for puts and calls is a lot closer to even. I'm suggesting strangle positions in the $36.50-37.50 zone. We'll use December options. Readers may want to consider January options.

Suggested Options:
We want to buy both the December $40 calls and the December $34 puts. Our initial cost is estimated at $1.70. We want to sell if either option hits $3.00 or higher.

BUY CALL DEC 40.00 SUC-LN open interest=1661 current ask $0.77
BUY PUT DEC 34.00 SOJ-XH open interest=1934 current ask $0.93

Annotated Chart:

Picked on  November 11 at $ 37.08
Change since picked:       + 0.00
Earnings Date            --/--/--
Average Daily Volume =         32 million  
Listed on  November 11, 2009         

In Play Updates and Reviews

GLD Hits Our Target

by James Brown

Click here to email James Brown

CALL Play Updates

Arch Cap Group - ACGL - close: 70.20 change: +0.71 stop: 66.90

The rally resumed on Wednesday and ACGL closed above the $70.00 level, which is a good sign for the bulls. There is potential resistance near $71.00. Our target is the $74.00 level and our time frame is several weeks.

Picked on  November 07 at $ 68.81
Change since picked:       + 1.39
Earnings Date            10/26/09 (confirmed)
Average Daily Volume =        444 thousand 
Listed on  November 07, 2009         

Canadian Nat. Res. - CNQ - close: 67.64 change: +0.14 stop: $61.95

CNQ spiked higher this morning but couldn't hold its gains and closed near its low for the session. I'm still bullish on CNQ but readers might want to wait for another dip closer to $66.00 before initiating new positions. Our upside target is $74.00.

Picked on  November 09 at $ 67.74 *gap open higher entry
                          /original trigger was $66.05
Change since picked:       - 0.10
Earnings Date            03/04/10 (unconfirmed)
Average Daily Volume =        2.8 million  
Listed on  November 07, 2009         

Chevron Corp. - CVX - close: 78.51 change: +0.17 stop: 76.75

Our new bullish play on CVX was opened this morning. Shares gapped open higher at $78.87 and we had a trigger to buy calls at $78.75. Traders bought the dip near $78.00 midday. I would still initiate new positions right here. Our first target is $84.00. More conservative traders may want to wait for oil to close above its October highs (watch the USO) before launching bullish positions in the oil sector.


Picked on  November 11 at $ 78.87 /gap higher entry point
Change since picked:       - 0.36
Earnings Date            01/28/10 (unconfirmed)
Average Daily Volume =       10.6 million  
Listed on  November 10, 2009         

Deere & Co - DE - close: 48.01 change: -0.34 stop: 46.85

There is no change from my Monday night comments. We're waiting for a bullish breakout over major resistance at $50.00. I'm suggesting a trigger to buy calls at $50.25. If triggered our first target is $54.90. Our second target is $59.00. Keep in mind that we'll plan to exit ahead of DE's earnings report later in the month.

Picked on  November xx at $ xx.xx <-- TRIGGER @ 50.25
Change since picked:       + 0.00
Earnings Date            11/25/09 (unconfirmed)
Average Daily Volume =        6.2 million  
Listed on  November 09, 2009         

Essex Property - ESS - close: 81.94 change: +1.55 stop: 76.40

ESS displayed some relative strength with a 1.9% gain on Wednesday. Our first target is $86.00. Our second target is $92.50.

Picked on  November 10 at $ 80.65
Change since picked:       + 1.29
Earnings Date            02/03/10 (unconfirmed)
Average Daily Volume =        500 thousand 
Listed on  November 09, 2009         

Gold ETF - GLD - close: 109.60 change: +1.21 stop: 99.75

Target achieved. The U.S. dollar sank to new 15-month lows and that pushed gold futures to new all-time highs near $1,115.00 an ounce. The GLD gold ETF hit $109.71. Our first target to take profits was hit at $109.50. I suggested that traders with November calls exit completely at this level since November options expire next week. Holders of January calls will want to take some money off the table. Our second, longer-term target is still $119.00 but it's not going to be straight. Expect a bumpy ride higher. I'm not suggesting new positions at this time.


Picked on   October 06 at $102.28
Change since picked:       + 7.32
                               /1st target hit @ 109.50 (+7.0%)
Earnings Date            00/00/00
Average Daily Volume =       14.2 million  
Listed on   October 06, 2009         

Parker Hannifin - PH - close: 56.11 change: -1.04 stop: 52.90

The relative weakness in PH today may be a warning sign. I'm not suggesting new positions at this time.

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.

Picked on  November 03 at $ 55.25
Change since picked:       + 0.86
Earnings Date            01/20/09 (unconfirmed)
Average Daily Volume =        1.6 million  
Listed on  November 03, 2009         

UltraShort Treasury ETF - TBT - close: 47.30 change: -0.63 stop: 44.90

We're not seeing much follow through higher in TBT. If you're looking for a new entry point consider waiting for a dip or bounce near $46.00.

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:       - 0.59

2nd entry on   October 30 at $ 45.50 (1/2 position)
Change since picked:          + 1.90

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

PUT Play Updates

BIOGEN IDEC - BIIB - close: 46.43 change: +0.92 stop: 47.05 *new*

BIIB displayed relative strength with a 2% gain. The stock has rallied to short-term resistance near $46.50. This level has held for a few days now. I am lowering our stop loss to $47.05. More conservative traders may want to lower their stop closer to $46.50 or consider an early exit right now. If the S&P 500 can hit another new high tomorrow BIIB has a decent chance of breaking higher and stopping us out.

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:       - 2.46
                               /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: 49.17 change: +0.05 stop: 50.15

Banks were strong performers today but this time BMO under performed. The stock rallied toward resistance near $50.00 and reversed. This could be a new entry point for bearish positions but with the market's trajectory higher I'm not suggesting new positions just yet. Our first target is $42.75. Our second target is $40.50.

Picked on   October 27 at $ 47.37
Change since picked:       + 1.80
Earnings Date            11/24/09 (unconfirmed)
Average Daily Volume =        539 thousand 
Listed on   October 27, 2009         

Russell 2000 iShares - IWM - close: 59.26 change: +0.41 stop: 62.55

The small caps continue to under perform larger caps and the Russell 2000 is still struggling with resistance near 600 and its 50-dma. You can see it in the IWM, which is nearing resistance near $60.00 and its 50-dma. I would still consider small bearish positions here. More conservative traders may want to wait for a new decline under $58.00 first.

More conservative traders may want to adjust their stop loss down closer to $60.00. Our first target is $55.50. Our second target is $52.00 or the 200-dma, whichever the IWM hits first.

Picked on  November 09 at $ 59.00
Change since picked:       + 0.26
Earnings Date            --/--/--
Average Daily Volume =       54.5 million  
Listed on  November 02, 2009         


Whirlpool - WHR - close: 74.43 change: +0.53 stop: 74.10

The market's strength has pushed WHR above short-term resistance at $74.00. I'm dropping the stock as a bearish candidate. Shares never hit our trigger to buy puts at $69.75.


Picked on  November xx at $ xx.xx <-- TRIGGER @ 69.75
Change since picked:       + 0.00             *never opened*
Earnings Date            02/09/10 (unconfirmed)
Average Daily Volume =        1.7 million  
Listed on  November 07, 2009