Option Investor

Daily Newsletter, Monday, 3/8/2010

Table of Contents

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

Market Wrap

Not Terrible, But Kind Of Disappointing

by Todd Shriber

Click here to email Todd Shriber
All things considered, Monday was not a terrible day for stocks, but following Friday's big surge, Monday's trade was lackluster to say the least. On the back of the second-lowest volume day of 2010, the Dow Jones Industrial Average lost just under 14 points to close at 10,552.52 while the S&P 500 shed just about two tenths of a point to close at 1138.50. Of the major indexes, the Nasdaq was the lone gainer, adding almost six points to finish the day at 2332.21.

Stats Table

Six stocks rose for every five decliners, but new highs on the New York Stock Exchange outpaced new lows by better than a 10-to-1 margin. On the Nasdaq, the ratio of new highs to new lows was better than 20-to-1, so that might be some kind of silver lining on a day where a lack of marquee headlines was fairly obvious. To be sure, this was no replay of the ''Mutual Fund Monday'' or ''Merger Monday'' themes that many investors had become accustomed to seeing over the past few weeks.

Financials notched a meager 0.2% gain helped by what was the only significant sign of M&A activity on this Monday. It is hard to get excited about this kind of M&A action because it involves yet another asset sale by embattled insurance giant American International Group (AIG), but the news was good enough to send financials higher on the day.

AIG continues to do what it needs to do to whittle down its tab with Uncle Sam and announced today that it will sell its American Life Insurance Co. unit to MetLife (MET) for $15.5 billion. Throw in last week's news that AIG will sell its Asian insurance business to U.K.-based Prudential for $35.5 billion and it cannot be argued that AIG has swiftly reduced the amount of cash it owes to U.S. taxpayers. Now the company owes ''just'' $8 billion to the New York branch of the Federal Reserve and another $47 billion to the Treasury Department, according to the Financial Times.

AIG shares traded higher by nearly 4% on the news, but MetLife may be the real winner here. This deal transforms MetLife from a company with a heavy focus on the U.S. insurance market to a legitimate player on the international stage. The bottom line is this is a deal that never would have been struck during AIG's heyday, which seems harder and harder to remember, at least not at this price. So it is fair to say that MetLife is getting a good deal while AIG has had to part with two of its crown jewels in the span of a week and the company still owes the government a tidy sum of cash.

AIG Chart

One of the bright spots in the Dow was McDonald's (MCD). The world's largest fast-food chain rose 2.3% in what was the stock's biggest gain in over a month after the company said international sales rose by 4.8% in February. Analysts were forecasting an increase of 4%. McDonald's said same-store sales, the measure of restaurants open at least 13 months, were up 0.6% in the U.S. and 5.4% Europe. Decent numbers, but Africa, Asia and the Middle East sported a 10.5% increase for McDonald's, perhaps indicating the purveyor of Big Macs is a high-quality way for conservative investors to tap into the emerging markets growth theme.

McDonald's Chart

Another Dow constituent on the move, and probably the reason behind the Nasdaq's gain, was Cisco (CSCO). On the eve of the company's announcement that will supposedly ''forever change the Internet,'' investors were quite bullish on the biggest provider of networking gear, sending Cisco shares higher by nearly 4%. The stock closed at $26.13, but traded as high as $26.36, which if you are looking at a quote at most Internet financial portals will show up as a 52-week high, but Cisco actually touched a 21-month high today. More than 116 million Cisco shares changed hands on Monday, more than double the average daily volume.

Options traders were active in Cisco as well as 237,000 calls and 79,000 puts changed hands on Monday. The April 26 calls were especially active as were the January 2011 27.50 calls and January 2011 22.50 puts. No one outside of Cisco knows for sure what Tuesday's announcement will bring, but analysts are speculating the company may unveil a high-speed broadband network that works at speeds that are 100 times faster than what is available on the market today.

That makes sense as that type of initiative is not far removed at all from Cisco's bread-and-butter businesses. Factor in rising video traffic across the Internet and it stands to reason that Cisco might be unveiling something to help communications providers better cope with this trend. Delivering video data over the Web is more complex than other forms of data transmission and if Cisco is going to make this process more efficient, tomorrow's announcement really could be a ''game changer'' for the company.

Cisco Chart

Speaking of technology issues, Texas Instruments (TXN), the maker of chips for cell phones and other electronic devices, delivered its regularly scheduled quarterly update on Monday and raised the low end of its first quarter guidance. The company said it expects to earn 48 cents to 52 cents a share in the current quarter. That is higher than the previously issued estimate of 44 cents to 52 cents a share.

The revenue guidance was a bit more impressive as TI told investors it expects its top line to be between $3.07 billion to $3.19 billion for the current quarter. The company had previously said revenue for the quarter may be as low as $2.95 billion. Before the update, analysts were forecasting earnings of 49 cents a share on sales of $3.08 billion. Overall, this is pretty good news out of TI, but the stock traded down during regular trading hours and as of this writing, the shares were also down in the after-hours session.

Texas Instruments Chart

As I am so fond of articulating, new catalysts need to emerge in some form or fashion to keep this rally going, but fresh buying may be hard to come by as cash held by equity mutual funds has fallen to its lowest level since 2007, according to data published by the Investment Company Institute. In February, cash dropped to 3.6% of assets from 5.7% in January, the quickest burn rate in 18 years, the data shows. Equity fund managers now have $172 billion in cash following last year's tremendous market rally.

While $172 billion may sound like a lot of money, and it sure is under most circumstances, it is not that much when talking about the cash fund managers have left to play with. How quickly could mutual funds burn through $172 billion? Well, 10 million shares of Cisco would cost roughly $260 million, 10 million shares of Apple (AAPL) would cost another $2.19 billion and 10 million shares of Google would cost over $5.62 billion.

I use these examples because it is apparent to some degree that if fresh cash is going to be put to work, technology is one the likely destinations for said cash and to highlight the fact that $172 billion is not as much as it sounds like. The Investment Company Institute points to the robust amount of cash being held by investors in money market accounts, which as we all know, offering interest rates that can be characterized as anemic.

ICI says that $754.3 billion has flowed out of these funds over the past 14 months as investors have scurried to participate in the bull market for stocks, but another $3.17 trillion remains in cash and fixed income investments. Now that is an impressive sum and one that could certainly jolt stocks higher if that cash comes off the proverbial sidelines. Back to the $172 billion fund managers currently have. Bloomberg News offers an ominous anecdote regarding that total. I mentioned it is the smallest some since 2007, specifically September 2007, as Bloomberg reports. What followed September 2007 was a 57% drop for the S&P 500.

Tuesday marks the one-year anniversary of the market bottom/start of the rally and while the returns may not be as impressive this year as they were in 2009, it is difficult, at least in the near-term, to not be somewhat bullish. I like to mention weak volume as a potential problem for the bulls and it still may prove to be, but the other side of that coin is that there has been scant selling pressure recently. In other words, the bears are not taking advantage of these low volume days to knock stocks down a couple of pegs.

Taking a look at the charts, the Dow still looks strong despite today's small loss. The index held the all-important 10,550 level today and there is no resistance looming ahead until 10,725. A move beyond that level would be extremely bullish. After all, that is the neighborhood of the January peak and 10,750 is a resistance level that is nearly four years old. Support is first found at 10,400, but 10,300 is probably the more firm area. I am not going to start throwing around theories about where the Dow will end the year or what happens if 11,000 is broken. Let us just see what happens if the index can traverse 10,725 in the near-term and take things from there.

Dow Chart

The S&P 500 still needs to conquer the 1150 level and this is going to be important. Failure at 1150 would have the index sporting a potentially dangerous double-top chart pattern and that would mean a haircut to 1115 could be just around the corner and may be even a move down to 1085. The ideal scenario for the bulls would be a breakout on strong volume above 1150, say a close at 1157, 1160 or something along those lines. Consolidation in the high 1140s or low 1150s would either be a good sign for the bears or a bear trap.

S&P 500 Chart

The Nasdaq is certainly looking like it has resumed its 2009 leadership role and with several marquee tech names looking strong at this point (Apple and Cisco just to name a couple), we may not need to worry about support at 2275 in the near-term. It actually looks like the Nasdaq has made a double-top breakout and that 2350 may be next resistance. That level has not been seen by the Nasdaq since late 2008.

Nasdaq Chart

Cautiously bullish is my stance at this point and if some dips in tech leadership avail themselves, those would be solid buying opportunities. Dividend payers with decent yields, such as McDonald's, could prove themselves to be better insurance policies than cash investments as well. Speaking of dividends, if the market stays in a tight range over the next several months with the bears exerting no real pressure, more fuel for the rally could emerge IF (a big ''If'') financials such as Bank of America (BAC), JPMorgan Chase (JPM) and Wells Fargo (WFC) meaningfully raise their payouts in the second half of this year.

New Option Plays

Watch List

by James Brown

Click here to email James Brown

Editor's Note:

The stock market looks a little tired after last week's impressive rally. While I believe the trend is up that doesn't mean stocks aren't poised to dip first before continuing their ascent. Readers may want to take a buy-the-dip approach. Just be aware that the 1150 level could be very tough resistance for the S&P 500 index to break.

I am not adding any new candidates tonight but here's a list of stocks I would be watching:

AMG might be a buy if shares dip into the $72.50-71.00 zone.

GS could be a buy on a dip toward the $163-160 zone although I would prefer to buy calls on a bounce.

AMZN could be tempting on a dip or bounce in the $125-122 region.

PII appears to be breaking out over resistance right now but I hesitate to launch positions with the market looking tired. The next level of resistance for PII should be the $55 area.

V is breaking out over significant resistance at the $90.00 level. This is a new all-time high. More aggressive traders may want to buy calls on V right now!

In Play Updates and Reviews

Stocks Take It Easy on Monday

by James Brown

Click here to email James Brown

Current Portfolio:

CALL Play Updates

ADSK - Autodesk - $28.91, Change +0.06 Stop $27.50

The market didn't make much progress on Monday but neither did it see any profit taking. ADSK managed to tag a new intraday high, which is another show of strength. Our time frame is about six weeks. If the stock can breakout past resistance near $30.00 it could make a run toward the $35 level.

Current Position: CALL APR 30.00 (ADSK 10D30.00) @ $0.55

Entry on March 8th at $ 28.85
Earnings Date 02/24/10 (confirmed)
Average Daily Volume = 2.75 million
Listed on March 6th, 2010

ATHN - AthenaHealth Inc - $38.96, Change -0.24 Stop $36.50

The market's advance stalled on Monday and so did ATHN. Shares are fighting with technical resistance at the 200-dma and the exponential 200-dma directly overhead near $39.50. We labeled this an aggressive play because the plan is to hold over earnings (something we very rarely do). Speaking of earnings ATHN is due to announce on March 15th. More conservative traders may want to wait for ATHN to trade above $40.00 before considering new positions. I would expect some short-term resistance near $42.00 and then near $44.00.

Current Position: CALL APR 40.00 (ATHN 10D40.00) @ $2.00

Entry on March 8th at $ 39.18
Earnings Date = 03/15/2010
Average Daily Volume = 600,000
Listed on March 6th, 2010

CSCO - Cisco Systems - $26.13, change +0.92 stop $24.65

Not one but two analyst firms announced an "overweight" rating on CSCO this morning, which accounted for the 3.6% gain and another new 52-week high. Maybe these firms wanted to jump on the CSCO band wagon before the company makes their new product announcement tomorrow. Remember, we don't know what they're unveiling but CSCO is pretty proud of it whatever "it" is. Expect some volatility tomorrow up or down as investors react to any news.

Current Position: CALL APR 25.00 (CSCO 10D25.00) @ $0.65

Entry on March 4th at $ 24.84
Earnings Date N/A
Average Daily Volume = 50.0 million
Listed on March 03, 2010

BUCY - Bucyrus International - $66.12, Change +0.30 Stop $62.50

The rally in BUCY seems to be slowing a little bit as shares near potential resistance at their January 2010 highs. Fundamentally the outlook for the mining sector seems to be improving. The intraday high today was $66.93. Our target to exit is $68.00.

Current Position: CALL APR 65.00 (BUCY 10D6500) @ $3.82

Entry on March 1st at $ 62.56
Earnings Date 02/18/10
Average Daily Volume = 1.75 million
Listed on February 28, 2010

Colgate Palmolive - CL - close: 83.95 change: -0.26 stop: 83.25

CL's upward momentum does appear to be waning as shares stall under the $85 level. Traders did buy the dip at its rising 10-dma this morning so I haven't given up hope just yet. Please note we're making a small change to the exit target and will plan to exit at $84.90 if CL doesn't hit our stop first.

Current Position: CALL MAY 85.00 (CL 10E8500) @ $1.90

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

TEVA Pharmaceuticals - TEVA - close: 60.49 change: -1.17 stop: 59.50

TEVA hit some profit taking today. The Israeli market was weak and the news out of AZN this morning in Europe sent the drug sector lower. Traders did buy the initial dip near $60.00 in TEVA this morning. Nimble traders might want to consider buying calls on a bounce current levels. Our target to exit is $64.00. FYI: Don't forget that we only have two weeks left on March options.

Current Position: CALL MAR 60.00 (TVQ 10C6000) @ $0.70

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

PUT Play Updates

*Currently we do not have any put play updates*