Option Investor

Daily Newsletter, Monday, 12/21/2009

Table of Contents

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

Market Wrap

Healthcare, M&A Boost Stocks

by Todd Shriber

Click here to email Todd Shriber
Stocks got off to a good start in what will be a short week, bolstered by a fresh round of mergers and acquisitions activity and good news for healthcare stocks. The S&P 500 added 1% to finish at 1114.05, but the index is still having problems making its way above resistance at 1120. The Dow Jones Industrial gained more than 85 points to close at 10414.14 with all 30 of its constituents finishing higher and it was a good day for technology issues with the Nasdaq gaining almost 26 points to finish the day at 2237.66.

Stats Table

In the wee hours of Monday morning, 58 Democrats and two independents that are basically Democrats, voted to pass the massive and controversial healthcare reform package, clearing the way for the bill to arrive on President Obama's desk as early as later this week. The news was a boon for health insurance names like Aetna (AET), which was up 4.7%, and rival Cigna (CI), which gained nearly 4%. WellPoint (WLP) added nearly 3% and United Health (UNH) was up 2%.

News that the bill passed by the Senate does not include an option for a government-run plan comforted investors in the aforementioned names. Investors had been fearful of the so-called ''public option'' because it would have given private insurance firms government financing, creating fears of low reimbursement levels. With those concerns set aside, investors flocked to the aforementioned names, sending the iShares Dow Jones US Healthcare Provider ETF (IHF) up 2.32%. IHF holds all of the names mentioned above.

IHF Chart

The healthcare sector was also the epicenter of a flurry of M&A on Monday as pharmaceuticals giants continued the trend of picking off their more nimble biotech peers to bolster drug pipelines. French pharma company Sanofi-Aventis (SNY), a Warren Buffett Favorite, agreed to acquire Chattem (CHTT), a maker of over-the-counter healthcare products for $1.9 billion. Chattem shares finished the day 33.1% higher on the news.

Pfizer (PFE), the Dow component and largest U.S. drugmaker, entered into an agreement with Athersys (ATHX) for the commercialization of the latter's inflammatory bowel disease treatment. Athersys will receive $6 million upfront and up to $105 million in future royalty payments. Eli Lilly (LLY) said it entered into a licensing agreement with Incyte (INCY) to commercialize Incyte's rheumatoid arthritis drug, which is currently in Phase II clinical trials.

In other news, GlaxoSmithKline (GSK) made a deal with Seattle Genetics (SGEN) to utilize Seattle Genetics' antibody-drug conjugate technology. GSK will pay Seattle Genetics $12 million and there is potential for $390 million in future royalty payments. Israel's generic drug giant Teva Pharmaceuticals (TEVA) entered a global licensing agreement with OncoGenex Pharmaceuticals (OGXI) for OncoGenex's cancer treatment. The deal results in a $60 million equity investment by Teva. Future milestone payments could be as high as $370 million.

Not surprisingly, Monday's M&A activity in the pharmaceuticals sector lead to speculation about what other names may be next to catch the eye of an acquisitive drug giant. One name that was thrown around was Biogen Idec (BIIB), the company in which corporate raider Carl Icahn is a major shareholder. Biogen shares were up 2% on the day. Oddly enough, the iShares Nasdaq Biotechnology ETF (IBB) was only up 1.22% on Monday on weak volume.

IBB Chart

The M&A party actually started on Sunday when Bucyrus International (BUCY), a stock I have mentioned several times here over the past few months, announced it would purchase Terex's (TEX) mining business for $1.3 billion in cash. Terex is the world's third-largest maker of earth-moving equipment.

Bucyrus said it expects $100 million in synergies from the acquisition. The ball may now be in Joy Global's (JOYG) to make a similar move. Joy Global and Bucyrus are chief rivals in the mining equipment space and regardless of what Joy Global's next move is, it might be reasonable to speculate that the Bucyrus acquisition is a sign that the company expects commodities demand to remain robust in 2010.

Speaking of commodities, after a bit of a sell-off last week, fertilizer names got a boost on Monday from some bullish comments from Goldman Sachs. Goldman upgraded Mosaic (MOS), the second-largest maker of potash fertilizer to ''buy'' from ''hold'' and added Potash (POT), the biggest maker of its namesake fertilizer, to the conviction buy list.

By now, the fertilizer story is pretty well-documented. These stocks soared in 2007 through the first half of 2008 as the commodities bull market ran higher on a near daily basis. Then these names crashed back to Earth when the commodities bubble burst. At their peak, potash prices were $1000+ per metric ton in some parts of the world. They now reside around $400, but farmers around the world may be prepared to ramp up demand next year due to higher crop prices.

One way to play this trend may be with the Market Vectors Agribusiness ETF (MOO), another name that I have frequently mentioned in this space. MOO was up 1.32% on Monday, not much to write home about, but its top holding is Potash and if the triple-digit price tag on Potash is seems a little intimidating, MOO might prove to be a fine alternative for getting some agriculture exposure.

MOO Chart

And speaking of upgrades, Dow component Alcoa (AA), the largest U.S. aluminum producer, got a jolt from a Morgan Stanley upgrade of the shares to ''overweight'' from ''equal-weight.'' Morgan Stanley also put a price target of $22 on Alcoa and boosted its earnings forecast to 75 cents a share from 50 cents for 2010 and $1.20 a share from $1 for 2011. On average, analysts are expecting earnings of 59 cents a share for 2010 and 91 cents for 2011.

Alcoa also announced a $10.8 billion joint venture with Saudi Arabia to develop an aluminum industry complex. Saudi Arabia's Ma'aden will control 60% of the of the joint venture and Alcoa will control the remaining 40%. Alcoa and its partners will invest $900 million over four years in addition to their share of project financing, according to press reports. There is a little bit of bad news here and that is Moody's Investors Service said it may cut its ratings on Alcoa to junk status on news of the joint venture. Alcoa currently has a rating of ''Baa3'' from Moody's, the lowest investment grade.

Intel (INTC), the world's largest semiconductor maker, was another Dow member benefiting from a Monday upgrade. Likewise, the Nasdaq probably got a bit of a pop from news that Barclays Capital boosted its rating on Intel to ''overweight'' from ''equal-weight.'' Barclays Capital said Intel's valuation, which is 12 times 2010 per share earnings, looks ''intriguing'' given that the five-year average is 16 times forward earnings. Some other good news for Intel: World Semiconductor Trade Statistics is forecasting 2010 semiconductor sales growth of 12.2%.

Semiconductor Sales

Perhaps another catalyst for stocks on Monday was not a stock at all, but further strength in the U.S. dollar. The U.S. Dollar Index, which measures the strength of the greenback against six major currencies, has moved higher for eight straight days, punishing gold and crude oil along the way. Oil was down on the day and gold moved below $1100 an ounce, but the greenback was strong.

Some analysts are forecasting further gains for the dollar on speculation that the Federal Reserve is preparing to withdraw economic stimulus. The euro is hovering near three-month lows against its American rival with equities and the dollar are moving in positive unison for the first time in over a year, perhaps indicating the dollar is poised to benefit from an improving economic outlook in the U.S.

Dollar Index Chart

Given that this week will be shortened by a day and a half (half day on Christmas Eve and the market is closed on Christmas), the economic calendar is light. One report to watch on Tuesday is the third quarter GDP update. The consensus estimate is for 2.9% following a previous reading of 2.78%. Existing home sales for November are due out at 10 AM Eastern time. An uptick to 6.25 million from 6.10 million in October is expected. The Richmond Fed's manufacturing survey is also due out at 10 AM. That report is expected to show a contraction of 2.8% for December after falling 3% in November.

With an eye toward the charts, it bears remembering that December's end is historically bullish and with just six trading days left in 2009, it is unlikely that institutional players are going to be spending a lot of time at their respective trading desks. The Dow continues to move between the 10,265-10,500 range and it appears that I will be proven right in my prediction that 11,000 will not be obtainable in 2009.

At least Monday's closing above 10,400 puts the Industrials a fair bit above support at 10,265 and in a position to make another run at breaking resistance at 10,500. Volume was decent on Monday considering we are in the midst of a holiday-shortened week, but that was probably a result of M&A activity and analyst upgrades more than anything else. Unless those conditions persist for the rest of the week, the Dow is likely to hold its current range.

Dow Chart

The S&P 500 moved back to the higher end of its recent range, but is still struggling to get to the all-important 1120 level. There are no noteworthy earnings reports slated for the rest of the week, so if the S&P 500 is finally going to get above 1120 before the end of the year, traders (the ones who haven't closed up shop for the year) are going to need some more bullish analyst chatter to drive stocks higher over the coming days.

I will go out on a limb and say that I do not expect support at 1085 to be tested this week, save for unforeseen negative catalysts, and I imagine the S&P 500 will head into Christmas not far from where it currently rests.

S&P 500 Chart

The Nasdaq's close at 2237.66 got the index above resistance at 2235 and whether that begets a legitimate breakout remains to be seen. There were several positive catalysts to move the Nasdaq higher at the end last week in the form of Oracle (ORCL) and Research In Motion's (RIMM) earnings, and as I mentioned earlier, the Intel upgrade certainly helped on Monday. Negative catalysts probably are not there to move the Nasdaq down to support at 2175 and 2160, but it might be quite a task to make a real run at 2260-2275 before year end.

Nasdaq Chart

Monday may prove to be the start of one of those Santa Claus rallies we hear so much about at this time of year or it may not. I expect volume will be light for the duration of 2009 and that means a cautious approach is best. I wish you and your families a very happy holiday season and leave you with a trivia question (there are no prizes): What is the Dow's top performing stock year-to-date?

Answer: American Express (AXP), which is up 120%.

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New Option Plays

High End Moving Higher

by James Brown

Click here to email James Brown


Blue Nile Inc. - NILE - close: 60.39 change: +0.82 stop: 57.40

Why We Like It:
It would be natural to think that given the tough economy that a jewelry website would be struggling. Yet shares of NILE are up 200% off their 2009 lows. Shares have been consolidating sideways under resistance at $60.00 and technical support at the 100-dma. Today's move is a bullish breakout over $60.00 and its 50-dma. I am suggesting we open small bullish call positions on the breakout. Our first target is $64.90.

Suggested Options:
Unfortunately NILE only has 2010 and 2011 January calls. Given these two choices I'm suggesting the 2010 January calls. My preference is the $60 strike or $65 strike.

BUY CALL JAN 60.00 JWU-AL open interest=2139 current ask $2.70
BUY CALL JAN 65.00 JWU-AM open interest=1404 current ask $0.75

Annotated Chart:

Entry  on  December 21 at $ 60.39
Change since picked:       + 0.00
Earnings Date            02/18/10 (unconfirmed)
Average Daily Volume =        144 thousand 
Listed on  December 21, 2009         

In Play Updates and Reviews

Signs of Strength

by James Brown

Click here to email James Brown

It was a bullish day on Wall Street and we're definitely seeing some signs of strength on our play list.

CALL Play Updates

EQUINIX Inc. - EQIX - close: 107.31 change: +0.82 stop: 99.75

EQIX rallied toward last week's and its 52-week highs. The stock closed up with a 0.7% gain albeit on below average volume. More conservative traders will want to seriously consider raising their stop loss. Our first target is $109.50. Our second target is $113.50. The plan was to use small position sizes to limit risk.

Entry  on  December 09 at $103.02
Change since picked:       + 4.29 
Earnings Date            02/10/10 (unconfirmed)
Average Daily Volume =        501 thousand 
Listed on  December 09, 2009         

Infosys Tech. - INFY - close: 54.08 change: -0.56 stop: 49.90

It was a quiet day for INFY. I'm a bit surprised too since the NASDAQ rallied to new highs. Shares of INFY continued to trade sideways in the $53-55 zone. Readers may want to use a dip or a bounce near $53.00 as a new entry point. Our first target to take profits is at $55.75. Our second and final target is $59.50. We will plan to exit ahead of the January 12th earnings report.

Entry  on  December 05 at $ 51.88 /gap down entry point
                           /originally listed at $52.46
Change since picked:       + 2.20
Earnings Date            01/12/10 (confirmed)
Average Daily Volume =        1.4 million  
Listed on  December 05, 2009         

General Dynamics - GD - close: 68.59 change: +0.35 stop: 67.45

GD is bouncing from its trendline of support but the rebound today wasn't very inspiring. I would still consider buying calls here but more cautious traders may want to see more follow through on the bounce first.

Our first target to take profits in GD is $74.95. FYI: The Point & Figure chart is bullish with a $105 target.

Entry  on  December 14 at $ 70.66 (half position)
Change since picked:       - 2.07
Earnings Date            01/27/10 (unconfirmed)
Average Daily Volume =        1.6 million  
Listed on  December 14, 2009         

Mettler Toledo - MTD - close: 103.77 change: +0.74 stop: 99.45

MTD produced a small gap down this morning, which gave us a better entry point on our option price. Traders quickly bought the dip and MTD closed at new 2009 highs. I am suggesting bullish positions but keep positions small. A better entry point would be a dip closer to $100, which should be round-number support. Our first target is $109.00.

Entry  on  December 19 at $102.66 (small positions) /gap down entry
Change since picked:       + 0.74
Earnings Date            02/04/10 (unconfirmed)
Average Daily Volume =        106 thousand
Listed on  December 19, 2009         

Norfolk Southern - NSC - close: 53.08 change: +1.04 stop: 49.75

It was a decent day for railroad stocks with the DJUSRR index up 1.4%. Unfortunately this sector index is still trading under resistance near 520. Shares of NSC rallied 1.99% slightly outperforming its peers. A move over today's high (53.27) could be a new entry point to buy calls. Our first target is now $56.50. Our second and final target is $59.50. 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:       + 1.24
Earnings Date            01/27/10 (unconfirmed)
Average Daily Volume =        5.4 million  
Listed on  November 21, 2009         

Precision Castparts - PCP - close: 113.82 change: +1.44 stop: 107.25

PCP tagged a new 2009 high at $113.91. I don't see any changes from my weekend comments. PCP has already hit our first target at $112.45. Our second target is $118.75. The Point & Figure chart is bullish with a $131 target.

Picked on  December 01 at $107.35
Change since picked:       + 6.47
                            /1st target hit $112.45 (+4.7%)
Earnings Date            01/20/10 (unconfirmed)
Average Daily Volume =        817 thousand 
Listed on  November 28, 2009         

Stifel Financial - SF - close: 57.67 change: +0.70 stop: 54.95

SF gained 1.2% and set a new closing high but we still want to see a little more confirmation. Aggressive traders could open positions now. I'm suggesting a trigger to buy calls at $58.05. If triggered our first target is $64.50. Our time frame is January expiration. The P&F chart is bullish and points to a $70 target.

Entry  on  December xx at $ xx.xx <-- TRIGGER @ 58.05
Change since picked:       + 0.00
Earnings Date            02/11/10 (unconfirmed)
Average Daily Volume =        207 thousand 
Listed on  December 16, 2009         

UnitedHealth Group - UNH - close: 32.17 change: +0.63 stop: 27.99

Healthcare stocks were some of the best performers today with the HMO index up 3% on news that the Senate democrats had scored a key victory to prevent a republican filibuster on the healthcare bill. This bill is one step closer to getting passed and it could happen before the year is out.

I'd consider buying new call positions on a dip or bounce near $30.50-30.00. Our first target is $34.00. Our longer-term target is $36.00. Our time frame is several weeks. If you buy March calls you might want to think about holding over the late January earnings report.

Entry  on  December 10 at $ 30.31 
Change since picked:       + 1.86
Earnings Date            01/21/10 (unconfirmed)
Average Daily Volume =        819 thousand 
Listed on  December 10, 2009         

United Tech. - UTX - close: 69.36 change: -0.10 stop: 67.45

I'm a little surprised by the under performance in UTX the last few days. Shares are still hovering in the $69-70 zone. I'm suggesting readers wait for a new rise over $70.25 to launch positions. More conservative traders may want to use a tighter stop loss. Our first target is $74.75. The Point & Figure chart is bullish with a $95.00 target.

Entry  on  December 15 at $ 70.25
Change since picked:       - 0.89
Earnings Date            01/21/10 (unconfirmed)
Average Daily Volume =        4.0 million  
Listed on  December 12, 2009         

Valmont Industries - VMI - close: 82.35 change: +2.07 stop: 78.45

VMI displayed relative strength with a 2.5% gain on Monday. Shares set a new eight-week closing high. Over the weekend I suggested looking for a rebound over $81.00 as a new entry point and we got it. Our first target to take profits is at $84.90. Our second target is $88.75. FYI: The most recent data list short interest at 9% of the very small 20.1 million-share float.

Entry  on  December 10 at $ 81.00
Change since picked:       + 1.35
Earnings Date            02/10/10 (unconfirmed)
Average Daily Volume =        238 thousand 
Listed on  December 05, 2009         

Vertex Pharma - VRTX - close: 42.15 change: -0.19 stop: 39.75

Hmm... it was odd to see VRTX under performing the drug and biotech sector but shares still closed near their 52-week highs. Our target to exit is at $44.25. My time frame is several weeks.

Entry  on  December 03 at $ 40.25
Change since picked:       + 1.90
Earnings Date            02/09/10 (unconfirmed)
Average Daily Volume =        3.2 million  
Listed on  November 23, 2009         

Whirlpool - WHR - close: 83.55 change: +2.86 stop: 74.99

WHR is showing lots of relative strength with a 3.5% rally following Friday's bullish breakout over $80.00. Believe it or not our option actually ticked lower at the open, which provided a slightly better entry point. At this time readers may want to wait for a dip back toward the $81-80 zone before launching new positions. Our first target to take profits is at $84.75. Our second target is $89.00. FYI: The Point & Figure chart is bullish with a $103 target.

Entry  on  December 19 at $ 80.76 /gap higher entry
Change since picked:       + 2.79
Earnings Date            02/08/10 (unconfirmed)
Average Daily Volume =        1.6 million  
Listed on  December 19, 2009         

PUT Play Updates

Freeport McMoran - FCX - close: 77.96 change: +1.42 stop: 80.55

Gold and gold mining stocks ticked lower on dollar strength today. Yet FCX managed to buck the trend and post a 1.8% bounce. Readers can look for a failed rally in the $79-80 zone as a new entry point to buy puts.

Remember, we should consider this an aggressive, higher-risk trade because the dollar, commodities, and shares of FCX can be somewhat volatile. The plan was to use very small positions to limit risk. Our first target is $72.50. I'm adding a second target at $68.50.

Entry  on  December 12 at $ 76.81 
Change since picked:       + 1.15
Earnings Date            01/26/10 (unconfirmed)
Average Daily Volume =       12.6 million  
Listed on  December 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.)

Apple Inc. - AAPL - close: 198.23 change: +2.80 stop: n/a

AAPL has broken out past its multi-week trendline of lower highs but shares have yet to break resistance at the $200 mark. I am not suggesting new strangle positions at this time.

The options in the January strangle were January $220 calls (AJL-LV) and the January $180 puts (APV-XR). Our estimated cost is $5.60. We want to sell if either option hits $10.00 or more.

Picked on  November 30 at $199.91
Change since picked:       - 1.68
Earnings Date            01/21/10 (unconfirmed)
Average Daily Volume =       15.1 million  
Listed on  November 30, 2009         

United Parcel Service - UPS - close: 58.62 change: +0.64 stop: n/a

Today is one of the busiest days of the year for the likes of UPS and FDX with tens of millions of packages getting shipped across the country for Christmas. Yet shares of UPS are still stuck in a trading range.

January Strangle
The options suggested for the January strangle were the January $60.00 calls (UPS-AL) and the January $55.00 puts (UPS-MK). Our estimated cost was $1.35. I would plan to sell if either option hit $3.50 or more.

Picked on  November 21 at $ 57.99 /gap open entry
Change since picked:       + 0.63 
Earnings Date            02/02/10 (unconfirmed)
Average Daily Volume =        4.7 million  
Listed on  November 21, 2009