Option Investor

Daily Newsletter, Monday, 11/23/2009

Table of Contents

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

Market Wrap

Stocks Move Higher Led By Weak Dollar, Strong Home Sales Data

by Todd Shriber

Click here to email Todd Shriber
Just when it seemed that the bears might be emerging from their slumber, the bulls said not so fast and ran stocks higher on Monday, sending the Dow Jones Industrial Average to another triple-digit gain. The blue chip index finished the day up almost 133 points to close at 10450.95. The S&P 500 gained 1.36% to stay above 1100, closing at 1106.24. The Nasdaq added nearly 30 points to finished the day at 2176.01. An up day is always nice, but the Nasdaq continues to have issues getting to and surpassing the 2200 level.

Market Stats

Monday was light in terms of economic reports, but existing home sales rose by 10.1% in October from September and that was enough to get the bulls excited, at least for today. Year-over-year, existing home sales surged 23.5%, but do not forget that October 2008 was the apex of the financial crisis with AIG (AIG), Lehman Brothers and Fannie Mae (FNM) all falling apart and Bank of America (BAC) and Citigroup (C) nearly accomplishing the same ominous feat. In other words, home sales in October 2009 should have been better than they were in October 2008 and they were.

Still, it is worth noting that homes on the lower end of the price spectrum jolted the sales number higher. Condos and co-ops led the way and the September sales number was revised downward, erasing the gains for that month that were originally reported. On the bright side, the National Association of Realtors claims that seasonally adjusted home sales are at their highest level since February 2007. I am always a little leery of any statistic that is seasonally adjusted, simply because it makes me think the number is being adjusted to cover up a negative underlying picture.

Yes, it is good news that home inventories are being reduced, but the market will probably want to see the pace of sales at the higher end of the housing market pick up before getting too excited about the battered residential real estate space.

Existing Home Sales

All 10 industry groups tracked within the S&P 500 moved higher on Monday, led by technology, telecom and financial issues. As has been par for the course on these big up days, the dollar was weak and gold was strong. In fact, gold futures touched a record $1174 per ounce in New York trading before settling at $1164.30.

Pity those that are short the yellow metal because calling a top in gold prices seems to be a futile endeavor. More central banks across the globe are bolstering their gold reserves, the financial media is reporting a couple of hedge fund geniuses are starting gold funds and throw in the dollar's pathetic performance, and some might say gold is in a secular bull market. Secular or not, the chart below illustrates how strong gold's run has been and it is increasingly difficult to fight this trend.

Gold Chart

Gold's bullish ways have a trickle-down effect on other metals, lending efficacy to my point that the rally in stocks has indeed been fueled by commodities and materials names. Copper for March delivery gained nearly 1% on Monday, closing at $3.16 a pound after trading as high as $3.20. Copper fought the $3 area for a while and this former resistance level looks like it may have turned to support as the red metal has plenty room in front of it to move higher.

Copper Chart

And do not forget about silver. Yes, silver is the reward for second-place finishers in Olympic events, but the metal has been no second fiddle to gold. In fact, the iShares Silver Trust (SLV), the most liquid silver ETF, has actually outperformed the SPDR Gold Shares ETF (GLD) by about 5% over the past three months. Silver is used in more industrial applications than gold is and is similarly used as a currency backer, so the bottom line is silver does not necessarily need gold to move higher to move higher on its own, but gold's action is clearly a boon for silver bulls.

Silver ETF

Speaking of commodities, Deere (DE), the largest U.S. maker of farm equipment, rose by more than 2% after Morgan Stanley upgraded the shares to ''overweight'' from ''equal-weight.'' Morgan Stanley said that increased demand for farm equipment is a ''secular phenomenon that is underestimated.'' Deere shares touched a new a 52-week high of $53.59 on the news, but closed at $51.85.

Oil services giant Schlumberger (SLB) also rose more than 2% after Credit Suisse upped its rating to ''outperform'' from ''neutral'' and its price target to $76 from $72. Dow component Chevron (CVX) joined the party, rising 2.57%.

And speaking of Dow components, Hewlett-Packard (HPQ), the world's largest computer maker, reported a fiscal fourth-quarter profit of $2.4 billion, or 99 cents a share, after the close on Monday. That compares with $2.1 billion, or 84 cents a share, a year earlier. Adjusted income was $1.14 a share, ahead of the average analyst estimate of $1.13 a share. Revenue fell to $30.8 billion from $33.6 billion, but that number also beat analysts' estimate of $30.4 billion.

The PC business reported an 8% increase in shipments but a 12% drop in sales, while the printing and imaging business reported a 15% drop in sales and a 20% decline in shipments. For the current quarter, HP expects to earn $1.03-$1.05 a share on sales of $29.6 billion to $29.9 billion. Analysts expect a profit of $1.04 a share on revenue of $29.7 billion.

HP shares are up 40% year-to-date, roughly double the performance of the S&P 500 and despite that sterling run, management apparently still sees value in the stock. The company said it is tripling its stock repurchase plan to $12 billion from $4 billion. HP closed at $51.02, but was down 24 cents to $50.78 in after-hours trading.

Once upon a time, Dell (DELL) was whipping HP, but those tables have turned in dramatic fashion. Now Dell cannot seem to get out of its own way, losing market share to HP at an alarming rate. While many on the Street say Dell overpaid for Perot Systems, HP appears to have gotten good value in its purchase of EDS and its recently announced acquisition of 3Com (COMS). How stark are the differences between these two rivals? Dell expects 2010 revenue of $60 billion. HP expects $119 billion in 2010 sales. Enough said.

HP Chart

With an eye towards what to look for on Tuesday, several economic reports line the agenda with the revised third-quarter GDP number being released before the bell. Most economists expect a downward revision to 2.9% growth from the previous reading of 3.5%. More important will be any guidance about 2010 GDP growth. Considering the U.S. is emerging from a deep recession, 2.9% growth may not be enough to excite many forecasters and more robust growth prospects could be needed to fuel the rally in stocks.

The Conference Board will deliver consumer confidence data for November tomorrow and that number could retreat to 47.5 from 47.7 in October. To top it all off, the Federal Reserve releases minutes from its last meeting at 2PM Eastern time.

In addition to Hewlett-Packard, there are several other earnings reports that may be worth watching before the bell. Medical device maker Medtronic (MDT) is expected to earn 74 cents a share on sales of $3.75 billion. H.J. Heinz (HNZ), the maker of Heinz ketchup and Ore-Ida french fries, is expected to earn 69 cents a share on revenue of $2.63 billion. Heinz counts on international markets for the bulk of its sales, so the bottom line could get a boost from the weaker dollar.

Another report to keep an eye on is Barnes & Noble (BKS). Analysts expect the book retailer to post a loss of 33 cents a share on revenue of $1.16 billion, but outlook for the current quarter may be what investors focus on. Barnes & Noble has been marketing the Nook, a competitor to Amazon's (AMZN) e-reader, the Kindle. By all appearances, Nook sales have been robust and Barnes & Noble said they will not be able to deliver any more nooks before Christmas. Then again, that might mean Barnes & Noble hurried the Nook's introduction and could lose market share to the already dominant Kindle in the process.

Taking a look at the charts, 10400 for the Dow looked like it would act as a resistance point, but that theory was disregarded on Monday and the Dow looks primed to move toward 10500 and perhaps beyond. One thing that is interesting about the Dow is that different members are helping the club higher on various days. Last week, the likes of Coca-Cola (KO), Merck (MRK) and McDonald's (MCD) were positive catalysts. On Monday, it was Chevron, AT&T (T) and Verizon (VZ). Tomorrow, HP could be one catalyst and we will have to wait and see about who else joins the party.

Thanksgiving week is normally a light volume, bullish period, so it is hard to envision the bears exerting any pressure during this short week. If the Dow starts to peel back a bit, support should be found at 10200 and then at 10000. A move above 10600 before the week is out could put the bulls in a good position for one of those Santa Claus rallies.

Dow Chart

The S&P 500 made its way above 1100 last week, but failed to advance much beyond that point and went into the weekend below that important mark. Those ills were cured on Monday, so the index has another chance to move beyond last week's high of 1113.69 and challenge resistance at 1120. If stocks start to move lower, it is critical that the S&P 500 hold support at 1085. Any violation of that level could confirm that the rally is at least ready for a break, if not over altogether.

S&P 500 Chart

The Nasdaq had its problems last week with Dell's disappointing earnings and a downgrade of the semiconductor sector. Those negative catalysts brought the Nasdaq close to support at 2140. The Nasdaq's failure at 2200 was similar to what the S&P 500 did above 1100 last week, but the Nasdaq appears to need more help to get back to 2200. Maybe HP's earnings will jolt tech stocks on Tuesday, but it would be asking a lot for a stock that is not even listed on the Nasdaq to help the index move 20+ points. If 2140 fails as support, the downside is substantial and the Nasdaq could move down to 2050.

Nasdaq Chart

There is no need to sound an alarmist tone for this week and in the absence of substantive events to bolster stocks, give thanks for the easy trade. Of course, I mean long commodities and short the dollar. Happy Thanksgiving to all.

New Option Plays

Drug Stocks Hit New Highs

by James Brown

Click here to email James Brown


Vertex Pharma - VRTX - close: 39.36 change: +0.82 stop: 38.49

Why We Like It:
The DRG Drug index is one of the strongest sectors in the market these days. I want to add some exposure to the drug industry with a bullish trade on VRTX. The recent correction appears to be ending. I'm suggesting a trigger to buy calls at $40.25. We'll use a stop under last week's low. Our target to exit is at $44.25. My time frame is several weeks.

Suggested Options:
I'm suggesting the 2010 January call. More aggressive traders could try December calls. My preference is the $40 strike.

BUY CALL JAN 40.00 VQR-AH open interest=3673 current ask $1.85

Annotated Chart:

Picked on  November xx at $ xx.xx <-- TRIGGER @ 40.25
Change since picked:       + 0.00
Earnings Date            02/09/10 (unconfirmed)
Average Daily Volume =        3.2 million  
Listed on  November 23, 2009         

In Play Updates and Reviews

Rally Falters for Some

by James Brown

Click here to email James Brown

The markets turned higher on Monday but not all stocks were able to keep their gains.

CALL Play Updates

Arch Cap Group - ACGL - close: 69.50 change: +0.19 stop: 67.95

Uh-oh! ACGL did not rebound higher as much as the rest of the market. That's a warning sign. If this under performance continues tomorrow we might close this play early. I'm not suggesting new bullish positions at this time. Our target is the $74.00 level.

Picked on  November 07 at $ 68.81
Change since picked:       + 0.69
Earnings Date            10/26/09 (confirmed)
Average Daily Volume =        444 thousand 
Listed on  November 07, 2009         

Deere & Co - DE - close: 51.85 change: +1.02 stop: 49.90 *new*

Shares of DE gapped open higher and hit $53.59 thanks to an analyst upgrade this morning. The stock gave back a good chunk of its gains. I'm adjusting our exit target to $54.50 and our stop loss to $49.90. See below for the reason.

Strategy update: Traders have a decision to make. DE is due to report earnings on November 25th before the opening bell. Normally we avoid holding over earnings and that means we'd need to exit tomorrow at the closing bell. I have a suspicion that DE's earnings could send the stock higher but the newsletter will officially play it safe and exit tomorrow (Tuesday) at the close. More aggressive traders may want to hold over the earnings report or maybe hold just a small chunk of your original position over the announcement. Market volume on Wednesday should be extremely low and that means DE's move (up or down) could be exacerbated by extremely low volume.

Picked on  November 18 at $ 50.52 *gap open higher   
Change since picked:       + 1.33
Earnings Date            11/25/09 (confirmed)
Average Daily Volume =        6.2 million  
Listed on  November 09, 2009         

Gold ETF - GLD - close: 114.29 change: +1.35 stop: 107.95 *new*

The U.S. dollar sank toward its lows and the price of gold shot to a new all-time high at $1,174 an ounce (on an intraday basis). The GLD hit $115.11. I'm upping our stop loss to $107.95. Our second target to exit (completely) is at $119.00. Our time frame is still several weeks.

Picked on   October 06 at $102.28
Change since picked:       +12.01
                               /1st target hit @ 109.50 (+7.0%)
Earnings Date            00/00/00
Average Daily Volume =       14.2 million  
Listed on   October 06, 2009         

MSC Industrial Direct - MSM - close: 46.80 change: +0.90 stop: 44.49

MSM rallied to new three-week highs and broke through resistance near $46.50. Shares may fill the gap near $46.00 first but the trend is up. Our first target is $49.75. Our second target is $52.50.

Picked on  November 17 at $ 46.62
Change since picked:       + 0.18
Earnings Date            01/07/10 (unconfirmed)
Average Daily Volume =        513 thousand 
Listed on  November 17, 2009         

Norfolk Southern - NSC - close: 52.02 change: +0.62 stop: 49.75

Most of NSC gains occurred on the opening gap higher at $51.84. The gap open has changed our entry point. I would still consider new positions here but the stock might dip toward $51.40 and fill the gap before moving higher.

Our first target to take profits is at $54.90. Our second target is $58.50. Our time frame is several weeks. FYI: The Point & Figure chart is bullish with a $65 target.

Picked on  November 21 at $ 51.84 (small positions)/gap higher entry
Change since picked:       + 0.18
Earnings Date            01/27/10 (unconfirmed)
Average Daily Volume =        5.4 million  
Listed on  November 21, 2009         

Waters Corp - WAT - close: 59.03 change: -0.01 stop: 58.75

WAT failed to truly participate in the market's rally today. If we don't see some strength tomorrow I'll drop it as a bullish candidate. For now we're still waiting for a new relative high with a trigger to buy calls at $61.50. If triggered our first target is $64.90. We'll cautiously set a secondary target at $67.45.

Picked on  November xx at $ xx.xx <-- TRIGGER @ 61.50
Change since picked:       + 0.00
Earnings Date            01/27/10 (unconfirmed)
Average Daily Volume =        1.2 million  
Listed on  November 12, 2009         

PUT Play Updates

Green Mountain Coffee Roasters - GMCR - cls: 65.44 chg: +0.43 stop: 71.05

At first glance I was surprised that GMCR didn't rally further today given the widespread strength. The stock stalled near $66.00 and technical resistance at its 100-dma. It seems that GMCR could be involved in a bidding war to acquire Diedrich Coffee (DDRX) and investors could be nervous GMCR might end up paying too much. Peet's Coffee (PEET) has offered $26 a share to buy DDRX but GMCR has a competing offer at $30 a share. As of this morning PEET upped their bid to $32 a share. Many analysts think the final price will be higher.

I remain bearish on GMCR but it would be risky to open new bearish positions with the stock market hitting new highs and GMCR is already a dangerous stock to be bearish one. GMCR still has extremely high short interest. Our first target is $60.25. Our second target is $55.50.

Picked on  November 19 at $ 64.75
Change since picked:       + 0.69
Earnings Date            01/28/10 (unconfirmed)
Average Daily Volume =        1.5 million  
Listed on  November 18, 2009         

Goldman Sachs - GS - close: 172.00 change: +1.99 stop: 176.05

GS bounced from support and hit $173.63 intraday but eventually pared its gains. We're still waiting for a breakdown under support with a trigger to buy puts at $168.75. If triggered first target is $155.50. More aggressive traders could aim for the $150 area or the 200-dma.

I want to remind readers that the big brokerage stocks used to rally sharply ahead of their earnings reports and then sell-off on the announcement. GS' earnings report is about three weeks away.

If you don't want to make a directional bet on GS then check out the strangle play listed in the strangle section.

Picked on  November xx at $ xx.xx <-- TRIGGER @ 168.75
Change since picked:       + 0.00
Earnings Date            12/15/09 (unconfirmed)
Average Daily Volume =        9.5 million  
Listed on  November 21, 2009         

iShares Biotech - IBB - close: 78.17 change: +0.56 stop: 80.05

I'm still seeing mixed messages in the IBB. Looking at the daily chart shares produced another failed rally at the 50-dma. Yet the intraday chart has taken on a more bullish tone. Readers might want to wait for a new decline under $77.00 to open positions. The biotech stocks can be a volatile group so I'm suggesting small positions. Our target is near the November lows at $73.50.

Picked on  November 19 at $ 77.18 /gap down entry point
                             /originally listed at $77.86
Change since picked:       + 0.99
Earnings Date            --/--/--
Average Daily Volume =        4.9 million  
Listed on  November 19, 2009         

Northern Trust - NTRS - close: 48.16 change: +0.92 stop: 50.26

Traders were hungry for all sorts of risk on Monday and the financial stocks performed well. NTRS, which was already oversold, gained 1.9%. The $50.00 level should be overhead resistance. I'm not suggesting new positions at this time. Our first target is $45.85. Our second target is $41.00. The Point & Figure chart is bearish and its target has fallen from $39 down to $35 in just the last few days.

Picked on  November 12 at $ 49.18
Change since picked:       - 1.02 
Earnings Date            01/21/10 (unconfirmed)
Average Daily Volume =        3.0 million  
Listed on  November 12, 2009         

Research In Motion - RIMM - close: 60.00 change: +0.28 stop: 65.26

The market's early morning rally lifted RIMM to $61.49 but shares pared their gains with a slide back to $60.00. Technically, today's gain on top of Friday's bullish engulfing candlestick pattern, would be a new bullish reversal. More conservative traders may want to lower their stops or consider an early exit. I'm not suggesting new positions at this time.

Our first target is $55.25. Our second target is $50.50. RIMM can be a volatile stock so I'm suggesting smaller position sizes.

Picked on  November 16 at $ 61.80
Change since picked:       - 1.80
Earnings Date            12/17/09 (unconfirmed)
Average Daily Volume =       18.9 million  
Listed on  November 12, 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.)

Goldman Sachs - GS - close: 172.00 change: +1.99 stop: n/a

I'm not too surprised to see a little oversold bounce from support in GS, especially with the market up sharply on Monday. Yet the future direction of GS is still very much in doubt. I would still open new strangles positions in the $172-168 zone but the closer to $170 the better.

The options suggested were the December $180 calls (GPY-LP) and the December $160 puts (GPY-XL). Our estimated cost is about $4.61. We want to sell if either option hits $9.00 or higher.

Picked on  November 21 at $171.67 /gap open entry
Change since picked:       + 0.33
Earnings Date            12/15/09 (unconfirmed)
Average Daily Volume =        9.5 million  
Listed on  November 21, 2009         

Ultra(Long)-S&P500 - SSO - close: 37.57 change: +0.95 stop: n/a

The SSO spiked toward its 2009 highs but failed to close above resistance. I don't see any changes from my weekend comments. This week could be volatile as volume will probably be light thanks to the Thanksgiving holiday. I'm not suggesting new positions.

The options suggested for this strangle were the December $40 calls (SUC-LN) and the December $34 puts (SOJ-XH). Our estimated cost was $1.70. We want to sell if either option hits $3.00 or higher.

Picked on  November 11 at $ 37.08
Change since picked:       + 0.49
Earnings Date            --/--/--
Average Daily Volume =         32 million  
Listed on  November 11, 2009         

United Parcel Service - UPS - close: 58.16 change: +0.65 stop: n/a

UPS gapped open higher at the open to $57.99 and hit $58.80 intraday. I would still consider new strangle positions in the $58.50-56.50 zone but the closer to $57.50 the better. The options suggested for this trade were the December $60 calls (UPS-LL) and the December $55 puts (UPS-XK). Our estimated cost is $1.05. We want to sell if either option hits $3.00 or more.

Picked on  November 21 at $ 57.99 /gap open entry
Change since picked:       + 0.17
Earnings Date            02/02/10 (unconfirmed)
Average Daily Volume =        4.7 million  
Listed on  November 21, 2009         


Deckers Outdoor - DECK - close: 94.70 change: -1.02 stop: 96.95

DECK under performed the market on Monday. Shares gapped open higher and spiked to $99.08 but immediately reversed lower and eventually closed in negative territory. The relative weakness here is a big warning sign. More nimble traders may want to consider bearish positions if DECK breaks down under the $93.70 level.


Picked on  November xx at $ xx.xx <-- TRIGGER @ 100.75
Change since picked:       + 0.00            *never opened*
Earnings Date            02/25/10 (unconfirmed)
Average Daily Volume =        659 thousand
Listed on  November 16, 2009