Option Investor

Daily Newsletter, Monday, 2/22/2010

Table of Contents

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

Market Wrap

M&A News Not Enough To Boost Stocks

by Todd Shriber

Click here to email Todd Shriber
Despite the latest edition of Merger Monday coming to pass today, stocks ended a four-day winning streak even as financials moved mostly higher on the day. Weak volume may have been the culprit as trade was anything if not lethargic, especially for a Monday and especially for a day on which the biggest acquisition of 2010 was announced and another sizable offer was extended to one firm from another.

Overall, the losses were manageable with the Dow Jones Jones Industrial Average shedding less than 19 points to close at 10,383.38. The S&P 500 lost just over one point to finish the day at 1108.01 and the Nasdaq declined by nearly two points to close at 2242.03. The Russell 2000 eked out a small gain.

Stats Table

Among the decliners were energy issues, a curious fact considering that it would have been logical to assume that most eyes would have been on that sector after Schlumberger (SLB) announced on Sunday evening that it would acquire rival Smith International (SII) in an all-stock deal valued at north of $11 billion. The price tag of that deal is high enough to earn the top spot among U.S. mergers and acquisitions thus far in 2010, but aside from the pop that Smith got, energy shares were mostly in the red today.

It could be argued that news of the deal was not all that surprising given that the rumors started swirling on Friday, leading to a 13% jump in Smith's shares that day, and with the official announcement coming on Sunday, the impact of the news may have been tempered somewhat. Still, the performance of the Oil Services HOLDRs ETF (OIH) can only be characterized as disappointing. The ETF that is home to both Schlumberger, the largest oilfield services provider in the world, and Smith, was down on Monday. OIH's volume was higher than usual, but not by a noteworthy margin.

OIH Chart

Making the performance of the energy group even more disappointing to many investors is the point that when these deal announcements are made, the market longs to find the next company to be taken out. That was the case when Exxon Mobil (XOM) announced its massive $41 billion buyout of XTO Energy (XTO) late last year and the Schlumberger-Smith news had folks speculating about what oil services provider would be the next logical target of a larger suitor's affections.

Weatherford International (WFT) was the name that seemed to come up the most and to be fair, the volume in the name today was more than 50% higher than the three-month daily average. Then again, that robust volume was only enough to lift the stock, another OIH constituent, by less than 1%. No official word on who might be interested in Weatherford, but National Oilwell Varco (NOV), which was rumored to be in talks with Smith, has the size and the balance sheet to buy a company of Weatherford's size. Based on Monday's close, Weatherford has a market cap that is approximately 50% heftier than Smith's was on Friday.

Other oil services that have market values that may make them appealing include Cameron International (CAM), which was up fractionally on Monday, and Rowan (RDC), which traded lower. Those names were not mentioned as possible targets, at least not that I heard, so Weatherford might be the one to continue to watch.

Weatherford Chart

The other deal that should have helped stocks higher but did not was an announcement by Thermo Fisher Scientific (TMO), a maker of laboratory equipment, that it had offered to acquire Millipore (MIL), a maker of laboratory filters and purifiers, for $6 billion. That is a hefty premium to Millipore's Friday market value of around $4 billion and the news sent Millipore shares on a wild ride today as the stock opened at $71.19 and traded as high as $102.91 before settling at $87.35.

Millipore Chart

All and all, $17 billion in fresh deals, while not earth shattering, should have done a little more to illicit excitement from investors and it did not. As I mentioned earlier, Monday's benign trade is even more surprising when considering that financials were the top performers among the 10 industry groups tracked by the S&P 500. Dow components Bank of America (BAC) and JPMorgan Chase (JPM), the two largest U.S. banks both gained 2.1% on Monday.

Bank of America moved higher on news that it had reached a settlement to compensate shareholders to the tune of $150 million related to mismanagement of the Merrill Lynch takeover. That is a paltry sum for a company with a $140 billion market cap and may indicate, if nothing else, that a particular attorney general has failed in his attempts to demonize and vilify Bank of America.

I say that because this settlement comes with a twist. The $150 million is only going to legacy shareholders of the largest U.S. bank. Meaning that if you became a BofA shareholder via your ownership of Merrill Lynch stock, you are not entitled to any part of the $150 million. Not that it should matter. Bank of America is one of the most widely held stocks in the U.S. and $150 million distributed to shareholders is not going to be a big deal to any of them.

Bank of America Chart

In another testament to just how apathetic investors were feeling on Monday, Lowe's (LOW), the second-largest home improvement retailer in the U.S. got little credit for turning in a fourth-quarter profit report that showed a 27% increase in earnings. Ah, but there is a catch. Revenue fell 2.1% for fiscal 2009 and the company is saying bad weather in certain parts of the U.S. will hamper sales for the current quarter.

So despite the fact that Lowe's said it sold more big-ticket items on a year-over-year basis, perhaps offering some faint signs that an economic recovery is underway, the outlook was not enough to please investors and with rival and Dow component Home Depot reporting earnings tomorrow, there might be more pain to come for investors in the home improvement sector. Analysts are expecting Home Depot to post a profit of 17 cents a share.

Lowe's Chart

Something else to keep an eye on this week is a heavy slate of Treasury auctions, which got going today with the sale of three-month, six-month and 30-year TIPS. All told, our friends at the Treasury will sell around $120 billion in new debt this week. It should be noted that China has started to reduce some of its U.S. debt holdings, though when Beijing does that they must reinvest the proceeds in another dollar-denominated security. Chinese consumption of Uncle Sam's debt offerings over the past decade has been nothing short of amazing, but it might be in the best interest of Uncle Sam to find some more willing buyers or to not have to issue all this debt at all.

China Purchases of U.S. Debt

As I mentioned earlier, Monday's volume was slack to say the least, a continuation of a trend that started building last week, and that makes it difficult to decisively say where the market is headed this week, let alone be overtly bullish or bearish. New resistance for the Dow appears to be 10,500 and the index came to rest today a mere five points above its 50-day moving average.

While a move over 10,500 would be nice, the next stumbling block comes up at 10,750, assuming the former level can even be broken. Getting to 10,750 from here could be asking for a lot unless volume dramatically improves. Failure at 10,500 could mean a break of 10,000 on the downside and 9650 may not be that far behind.

Dow Chart

The S&P 500 also came to rest came to rest within earshot of its 50-day moving average on Monday and is less than eight points from serious resistance at 1116. An upside break there probably takes the index back to its January peak at 1150, but as is the case with the Dow, volume will need to improve. If 1100 fails as support, another stop in the 1050-1060 area could be seen, or worse, a tumble to 1035 would not be all that far flung.

S&P 500 Chart

It is encouraging to see the Nasdaq back above 2200, but with today's close at 2242, 2250 becomes the immediate level of significance the tech-heavy index must conquer. Failure there could mean a retreat to 2200 or to the 2185 neighborhood. The 50% Fibonacci retracement from the January peak is at 2063. In other words, it would behoove the bulls to start showing some real strength.

Nasdaq Chart

I continue to remain cautious about the near-term fortunes of equity markets due to the anemic volume we have been seeing lately. The case for prudence may have been highlighted on Monday when a fresh round of M&A news did nothing to spur volume higher. Look at all the positives that we have seen in recent weeks that have done nothing but help stocks to a middling performance at best. Solid earnings reports. A heavy dose of analyst upgrades. Over 70 dividend increases. Combined, this confluence of factors has offered little help to the bulls and I find that worrisome.

New Option Plays

Losing Steam?

by James Brown

Click here to email James Brown

Editor's Note:

The stock market's two-week bounce appears to be losing steam. If stocks roll over do you short it or buy the dip? That's the question right now. The Chinese Shanghai market failed to crash on Monday and the Hong Kong and Japanese markets saw a huge bounce today. Meanwhile European stock markets snapped a five-day winning streak, which is normal since they were due for a dip. Yet short interest on the euro has been at record levels for three weeks in a row. If the euro continues to slip the dollar will rise and commodities will retreat.

Investors could be waiting on this week's economic data or the small parade of earnings from the retail sector before making a decision. With the major indices closing almost unchanged on the session I'm not adding any new plays.

In Play Updates and Reviews

X Marks the Spot

by James Brown

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Shares of X hit our final target today. The rest of the market churned sideways in spite of a bounce in the banks and healthcare.

CALL Play Updates

Autozone Inc - AZO - close: 163.07 change: -0.60 stop: 157.90

The stock market is sliding sideways and AZO followed suit. It looks like shares might be poised to dip back toward support near $160.00. I would still considering buying calls on a bounce near $160 but keep our time frame in mind. We want to exit ahead of the March 2nd earnings report.

Our first target to take profits is at $167.50. Our second, more aggressive target is $174.00 but that will require AZO to break through resistance in the $170 region.

Entry  on  February 16 at $161.75 (small positions)
Change since picked:       + 1.32
Earnings Date            03/02/10 (unconfirmed)
Average Daily Volume =        538 thousand 
Listed on  February 13, 2010         

Celgene Corp. - CELG - close: 59.68 change: -0.36 stop: 54.75

The rally in CELG looks tired. I'm expecting it to retreat a couple of points before resuming. The plan is to buy calls on a dip at $58.00. If triggered at $58.00 our first target is $64.50. Our second, longer-term multi-week target is $69.00.

Entry  on  February xx at $ xx.xx <-- TRIGGER @ 58.00
Change since picked:       + 0.00
Earnings Date            04/29/10 (unconfirmed)
Average Daily Volume =        3.6 million  
Listed on  February 20, 2010         

Colgate Palmolive - CL - close: 82.08 change: +0.33 stop: 78.85

Traders bought the dip in CL this morning near the 50-dma. I don't see any changes from my weekend comments. You can launch positions now or look for a dip near $81-80 as an entry point. More conservative traders may want to wait for CL to trade above $82.75 before initiating positions. Our target to exit is $86.00.

Entry  on  February 20 at $ 81.75 
Change since picked:       + 0.33
Earnings Date            04/29/10 (unconfirmed)
Average Daily Volume =        2.8 million  
Listed on  February 20, 2010         

Sina Corp. - SINA - close: 37.86 change: +0.06 stop: 34.95

SINA continues to trade sideways. There was a lot of speculation that the Chinese market would trade down today following a weeklong holiday. The Shanghai index did inch lower but not by much. Meanwhile shares of SINA continue to drift sideways. Right now our plan is to buy calls on a dip at $36.50. If triggered our first target to take profits is at $39.95. More aggressive traders may want to consider buying calls on a new relative high above $38.50.

Entry  on  February xx at $ xx.xx <-- TRIGGER @ 36.50
Change since picked:       + 0.00
Earnings Date            03/15/10 (unconfirmed)
Average Daily Volume =        1.4 million  
Listed on  February 18, 2010         

TEVA Pharmaceuticals - TEVA - close: 59.87 change: +1.13 stop: 56.40

The relative strength in TEVA continues. I don't normally watch Jim Cramer but I did see him issue positive comments about TEVA on his lunchtime CNBC section today. The stock gained 1.9% and has cleared the January highs. The task now is breaking out past $60.00, which could be round-number resistance. I would still consider positions now but readers may want to wait for a dip back toward $58.50-58.00 as an entry point. Our first target is $64.00.

Entry  on  February 20 at $ 58.74 
Change since picked:       + 1.13
Earnings Date            05/05/10 (unconfirmed)
Average Daily Volume =        5.1 million  
Listed on  February 20, 2010         

PUT Play Updates

Apple Inc. - AAPL - close: 200.42 change: -1.25 stop: 206.26

AAPL was showing some weakness today. Traders did buy the dip at its rising 100-dma but the stock almost closed under round-number support at the $200 level. If you're optimistic on AAPL then this recent consolidation might be a little bull-flag pattern. Overall I don't see any changes from my weekend comments.

The low today was $199.19. I suggested waiting for a new decline under $198.50 before considering new put positions. If we get stopped out at $206.26 more nimble traders may want to buy calls an aim for the highs near $215.

Our first target to take profits is at $182.50. Our second target is $165.00 although we might exit at the 200-dma. The plan was to use small positions to limit our risk.

Entry  on   January 28 at $201.08 (small positions)/gap open entry
Change since picked:       - 0.66
Earnings Date            01/25/10 (confirmed)
Average Daily Volume =         26 million  
Listed on   January 28, 2010         

Abbott Labs - ABT - close: 54.40 change: +0.02 stop: 55.05

Biotech stocks continue to outperform the market so I'm wary about launching new positions in ABT. Traders bought the dip near $54.00 again. More nimble traders may want to consider buying calls if ABT breaks out over $55.00.

Our first target was $50.15. More aggressive traders can target the 200-dma or support near $48.00.

Entry  on  February 10 at $ 52.80
Change since picked:       + 1.60
Earnings Date            04/21/10 (unconfirmed)
Average Daily Volume =        7.5 million  
Listed on  February 09, 2010         

Franklen Resources Inc. - BEN - close: 101.36 change: -0.25 stop: 105.26

It looks like the bounce in BEN is starting to lose steam. Readers can choose to launch new positions now or wait for a new drop under $100.00. Our exit target is $95.00.

Entry  on   January 30 at $ 99.59 /gap higher entry point (small positions)
Change since picked:       + 1.77 
Earnings Date            01/28/10 (confirmed)
Average Daily Volume =        1.2 million  
Listed on   January 30, 2010         

Goldman Sachs - GS - close: 156.71 change: +0.53 stop: 156.05

The intraday rally in GS reversed at $158.00. Shares are stuck drifting sideways. We have two triggers on GS. One trigger at $147.45 to buy puts. Another trigger at $163.00 to buy calls.

If triggered at $147.45 we'll use a stop loss at $156.06 and our first target will be $138.00. I'm suggesting the March $140 puts.

If triggered at $163.00 to buy calls we'll use a stop loss at $155.75 and our target will be $177.50. I'm suggesting the March $170 calls.

Entry  on  February xx at $ xx.xx <-- TRIGGER @ 147.45
Change since picked:       + 0.00
Earnings Date            04/13/10 (unconfirmed)
Average Daily Volume =         17 million  
Listed on  February 00, 2010         

Intl. Bus. Mach. - IBM - close: 126.85 change: -0.34 stop: 130.51

The upward momentum is still slowing down. Readers can open positions now or wait for a new drop under $126.00. More conservative traders may want to consider a stop loss closer to $128.00. Our first target is $122.00. Our second target is the 200-dma.

Entry  on  February 18 at $127.00
Change since picked:       - 0.15
Earnings Date            04/20/10 (unconfirmed)
Average Daily Volume =        8.2 million  
Listed on  February 03, 2010         

JPMorgan Chase - JPM - close: 40.85 change: +0.82 stop: 41.65

Positive analyst comments on U.S. banks gave the banking sector a big boost today. JPM was showing some relative strength with a 2% gain. The stock's close over its 200-dma is certainly bullish. More conservative traders may want to consider an early exit now. I am not suggesting new bearish positions. Our first target to take profits is at $35.25. Our second target is $32.00.

Entry  on   January 26 at $ 38.44 
Change since picked:       + 2.41
Earnings Date            04/15/10 (unconfirmed)
Average Daily Volume =         46 million  
Listed on   January 26, 2010         

Mckesson Corp. - MCK - close: 59.93 change: -0.82 stop: 62.05

Entry point alert! The oversold bounce is rolling over and MCK closed back under the $60.00 mark. This looks like a new bearish entry point to buy puts or you could wait for a drop under $59.50 per my suggestion this weekend. Our first target to take profits will be $54.00.

Entry  on   January 30 at $ 58.82 
Change since picked:       + 1.11
Earnings Date            01/26/10 (confirmed)
Average Daily Volume =        2.8 million  
Listed on   January 30, 2010         

SIEMENS - SI - close: 88.25 change: +0.02 stop: 92.05

European markets snapped a five-day winning streak. Shares of SI failed to rally past their high from last week. I am expecting this bounce to reverse but no new positions at this time (unless you use a much tighter stop loss). SI has already hit our first target at $87.55. Our second and final target is $81.00.

Entry  on   January 26 at $ 94.34 /gap higher entry
Change since picked:       - 6.09
                            /1st target hit @ 87.55 (-7.1%)
Earnings Date            01/26/10 (confirmed)
Average Daily Volume =        368 thousand 
Listed on   January 26, 2010         

United Technology - UTX - close: 68.40 change: -0.12 stop: 69.26

The bounce in UTX appears to be stalling under $69.00 and its 50-dma. If shares reverse from here I would launch new positions. Look for a drop under $68.00 or $67.00 as your entry point. Our target to take profits is $61.00 near the rising 200-dma.

Entry  on  February 04 at $ 66.38 
Change since picked:       + 1.61
Earnings Date            04/21/10 (unconfirmed)
Average Daily Volume =        5.1 million  
Listed on  February 04, 2010         


Sears Holding - SHLD - close: 95.66 change: +0.62 stop: 91.75

The short-term trend in SHLD is still bullish but time has run out. The company reports earnings tomorrow morning. It was our plan to exit today at the closing bell. Keep an eye on it tomorrow. We might get another entry point if shares dip to $90.00 and bounce. Wall Street expects a profit of $3.54 a share.


Entry  on  February 16 at $ 93.07 (small positions) /gap open entry
Change since picked:       + 2.59 <- exit early @ 95.66 (+2.7%)
Earnings Date            02/23/10 (unconfirmed)
Average Daily Volume =        1.7 million  
Listed on  February 16, 2010         

United States Steel - X - close: 53.50 change: +0.21 stop: 48.95

Target achieved. Shares of X hit $54.13 intraday. Our final target to exit was $54.00. I would keep X on your watch list. We might jump in again on a little pull back.


Entry  on  February 13 at $ 49.23 (small positions)/gap higher entry
Change since picked:       + 4.77 <- 2nd target hit @ 54.00 (+9.6%)
                           /1st target hit @ 51.86 (gap open exit, +5.3%)
Earnings Date            04/27/10 (unconfirmed)
Average Daily Volume =       23.3 million  
Listed on  February 13, 2010