Option Investor

Daily Newsletter, Monday, 3/15/2010

Table of Contents

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

Market Wrap

Stocks Rise, But Nasdaq Falters

by Todd Shriber

Click here to email Todd Shriber
It was another positive, but middling day for U.S. stocks, although the Nasdaq did not participate in Monday's gains. The tech-heavy index, which had been leading the broader market higher over the past few weeks, shed 5.45 points to close at 2362.21. The Dow Jones Industrial Average turned in another small gain, rising almost 17.5 points to close at 10642.15 and the S&P 500 notched an even smaller gain, adding half a point to finish the day right at 1150 and some change, the index's critical resistance area.

Stats Table

Stocks got a lift on the back of news that industrial production rose 0.1% in February, the eighth consecutive monthly increase. Economists were projecting the number would be unchanged, so even this slight increase could be viewed as a pleasant surprise. The report, issued by the Federal Reserve, showed upticks in utility use and mining demand along with more orders for computers and semiconductors, which may indicate U.S. businesses are starting to see activity ramp up again. Utility output was up 0.5%, while mining activity was up 2%, likely led by increases in oil and gas drilling activity.

The Fed's New York branch reported that manufacturing in that region expanded again in March, the eighth straight month of gains. The Empire State Index showed a reading of 22.9 in March, down from 24.9 in February, but the employment index reached its highest level since October 2007, according to Bloomberg News. Readings above zero on the Empire State Index are considered positive.

Empire State Survey

Despite the positive industrial production data, Monday was not a good day for commodities. NYMEX-traded crude oil for April delivery fell $1.44 to $79.80. That is the first close below $80 for crude in almost two weeks. A stronger U.S. Dollar did not help matters, nor did concerns that China is eying another interest rate hike, perhaps as soon as next month. Of course, demand worries also pressured oil prices.

The winter demand season has passed and we are still a fair bit away from the summer driving season and those factors may be fueling concerns about the recent rally in crude prices (no pun intended.) Still, gas prices are up more than 16 cents in the past month and more than 88 cents higher than where they were a year ago. News from the Fed and OPEC meetings this week is likely to have a heavy hand in where crude futures finish the week. Thirty-eight of the 40 energy stocks in the S&P 500 traded lower today.

Crude Chart

When there is news about Beijing taking steps to cool economic growth, oil is not the only commodity to feel the pain. Predictably, copper received a haircut on Monday due to China concerns. Copper for May delivery slipped 6.5 cents $3.315 per pound. The red metal has lost 10.5 cents since March 5th and if concerns about China's ability to lead a global economic recovery persist, copper prices could be hampered even further.

Copper Chart

Proving just how powerful China is these days, the world's largest country's head-butting with Internet search giant Google (GOOG) was probably the reason why the Nasdaq was down today. As I mentioned earlier, orders for computers and semiconductors were up and that should have been a positive catalyst for the Nasdaq.

Alas, it was not and Google shares were slammed $16.36, or nearly 3%, to close at $563.18 on renewed speculation that the company may in fact leave China. Yes, we have heard this news before, but the fact that it is swirling again is not a good thing for Google. Google's volume was roughly 30% higher than average today and as of this writing, the shares were down another $1.62 to $561.97 in the after hours session.

A report in the Financial Times said that censorship talks between Beijing and Google have reached an ''impasse'' and that Google is ''99.9%'' certain to close down its Chinese Internet search engine. To be sure, Google is a gigantic company and the leading search provider in many markets, but we are not talking about an insignificant market of 50 million people here. There are 1.4 billion people living in China and China, perhaps even more so than the U.S., represents a market where Google has a legitimate competitor.

China's home-grown search provider Baidu (BIDU) soared $26.60, or almost 5%, to $576.84 on news that Google may depart China. Volume in Baidu was nearly triple the daily average and the shares are up another $2.66 to $579.50 in after-hours trading. How important is the China market to Google, at least in the eyes of investors? In the past three months Google shares are down about 3% while Baidu is up nearly 30%.

Google Chart

Financials got a bit of lift late in Monday's session as reaction to Sen. Christopher Dodd's (D-CT) financial reform package was not as negative as some may have expected. While plenty of folks on Wall Street may not like the idea that the Dodd bill includes a version of the now infamous Volcker Rule, which requires regulators to ban proprietary trading and limit the relationships banks have with hedge funds, there were no surprises in the proposed legislation.

The other side of the financial reform coin is that support for the Dodd bill remains tepid at best. After all, this is an election year and for all of the recent missteps by Republicans, they are still projected to make gains in both houses of Congress. Many Democrats who face tough reelection battles may feel the path of least resistance (read: the path to reelection) is to stay away from the Dodd bill altogether. At the end of the day, Dodd is retiring (because he knows he could not win his own reelection bid) and this bill is his swan song. My bet is that politicians in both parties realize this and that could imperil the bill's success.

Political chatter aside, financials spent most of the day trading lower, but got a nice bounce at the end of the day and that helped many of the marquee constituents in the group finish the day higher. The Financial Select SPDR (XLF), the most heavily traded financial ETF, finished the day unchanged at $15.54, just three cents off its intraday high and less than a quarter away from its 52-week high. XLF's chart still looks pretty strong.

XLF Chart

In other stock-specific news, Wal-Mart (WMT), the world's largest retailer, was the biggest winner in the Dow today after Citigroup boosted its rating on the stock to ''buy'' from ''hold.'' It was the first upgrade of Wal-Mart in over a month. Wal-Mart shares rose $1.52, or 2.82%, to close at $55.42 after touching a new 52-week high of $55.54 earlier in the session.

Citi analyst Deborah Weinswig said Wal-Mart is preparing to reenter the fray to become a dominant player in the U.S. supermarket battle. She expects Wal-Mart to increase its share of that market to 21.6% in 2010 up from 20.5%. Basically what is happening here is that Wal-Mart is going to use price reductions to put the pressure on traditional supermarket chains in an effort to gain market share. Weinswig raised her price target on Wal-Mart to $64 from $54.

Wal-Mart Chart

Speaking of blue chip names that play in the consumer staples space, PepsiCo (PEP), the number two soft drink maker behind Coca-Cola (KO), matched its rival's recent dividend increase by announcing a 7% dividend increase of its own. Dow component Coke announced a 7% dividend increase last month. Pepsi will now pay annual dividend of $1.92 a share, which is more than what Coke pays at a $1.76 a share.

Pepsi went a step further, perhaps in another attempt to trump its rival, by announcing a $15 billion share repurchase plan. The new buyback plan will replace an existing plan was set to expire in June that has $6.4 billion remaining on it. Pepsi said it plans to repurchase $4.4 billion of its own shares this years. The new buyback program will last through 2013. Pepsi shares gained $1.05, or 1.61%, on the news to close at $66.15 just below the new 52-week high of $66.26 set earlier in today's session.

Based on today's closing price, $15 billion would allow Pepsi to repurchase about 226.7 million of its 1.57 billion shares outstanding. Regardless of one's preference for Coke over Pepsi or vice versa, the choice is clear from an investor's perspective, at least over the last six months when Pepsi is up almost 12% compared to Coke's gain of less than 2%.

Pepsi Chart

Looking at the charts, the Dow remains the only one of the three major U.S. indexes that has not made its way to a new, but Monday's small gain puts the Dow within 85 points of the January peak of 10,729 and less than 110 points away from resistance at 10,750. The Dow traded as low as 10,570, so 10,600 did not hold as intraday support, leading me to believe support is probably stronger at the 10,550 level. Slow and steady appears to be the order of the day for the Dow.

Dow Chart

The S&P 500 has climbed the wall of worry to the 1150, but has not broken through that level with any veracity. On the other hand, it can be argued that the bears have done little to force the index back below the 1150 level, at least when it comes to closing prices and it would appear that 1140 has now emerged as support. The SPDR S&P 500 ETF (SPY), the largest ETF by assets in the world and tracking ETF for the S&P 500, rose for a 12th straight day on Monday, its best winning streak since 1995, according to Bloomberg.

S&P 500 Chart

Heading into today, the Nasdaq looked primed for some profit taking, but given the small decline, it is hard to argue that real profit taking occurred. Of the Nasdaq's four horsemen, Amazon (AMZN), Apple (AAPL), Google (GOOG) and Research In Motion (RIMM), only Google declined in earnest for the reasons I highlighted earlier. Amazon and Apple booked small losses and RIMM was actually up. Remember that Baidu is also a member of the Nasdaq 100, so if Google moves down on China news, that loss is muted by a Baidu gain. Nasdaq support looks firm at 2325.

Nasdaq Chart

Minutes from the FOMC meeting will be released tomorrow at 2:15PM Eastern time, so it would not be surprising to see lethargic trade heading into the that announcement. Language from the minutes will be what the market is watching and any hint, no matter how faint, that the Fed is moving toward rate tightening would be negative news for equities. Positive Fed sentiment could give the S&P 500 the gas it needs to really break out.

New Option Plays

Rising Prices No Help

by James Brown

Click here to email James Brown


Rock-Tenn Co. - RKT - close: 42.84 change: -0.02 stop: 44.26

Company Description:
RockTenn (NYSE: RKT) is a leading North American producer of paperboard, containerboard and consumer and corrugated packaging, with annual net sales of approximately $2.8 billion. Based in Norcross, GA, we employ approximately 10,000 people and operate more than 90 facilities in the United States, Canada, Mexico, Chilé and Argentina. (source: company press release or website)

Why We Like It:
RKT has been raising prices on some of its products for months now and yet the company still missed earnings expectations back in January. The stock has formed a bearish double top back in 2009 and the breakdown under the $45-44 level of support was very bearish. Now the oversold bounce is beginning to roll over under old support and what is new resistance. I am very tempted to buy puts right now. However, I'm suggesting we wait for a little more confirmation. Use a trigger to initiate positions at $41.90. If triggered our target is $38.00. RKT found support back in February around $37.25.

Use a trigger to buy puts @ 41.90

Suggested Position: BUY PUT APRIL $40 (RKT 10P40.00) @ x.xx?

Annotated Chart:

Entry on March xxth at $ xx.xx
Earnings Date 04/27/10
Average Daily Volume = 645 thousand
Listed on March 15th, 2010

In Play Updates and Reviews

Expecting A Pull Back

by James Brown

Click here to email James Brown
Current Portfolio:

CALL Play Updates

ADSK - Autodesk - $29.26 Change +0.10 Stop $27.50

The market refuses to go down and ADSK is still inching higher. There is no change from my prior comments. ADSK is overbought and due for a correction. I am raising our stop loss to $27.95 to reduce our exposure. I am not suggesting new bullish positions in ADSK at this time.

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

Entry on March 8th at $ 28.72
Earnings Date 02/24/10 (confirmed)
Average Daily Volume = 2.75 million
Listed on March 6th, 2010

Cash America - CSH - close: 40.23 change: -0.41 stop: 35.95

We were expecting some profit taking in CSH. Shares hit $39.81 before bouncing back. This may take some patience. The plan is to buy calls on a correction near support at $38.00. Our trigger to open positions is at $38.25. If triggered our first target is $41.00. Our second target is $44.00. Our time frame is several weeks.

Use a trigger at $38.25 to buy calls.

Suggested Position: BUY CALL APRIL $40 (CSH 10D40.00) current ask $1.95

Entry on March xxth at $ xx.xx
Earnings Date 04/22/10
Average Daily Volume = 272 thousand
Listed on March 13th, 2010

Cognizant Technology - CTSH - close: 50.85 change: +0.05 stop: 48.95

CTSH briefly dipped under its rising 10-dma before bouncing back into positive territory. The trend is certainly up but some of the technical oscillators like the RSI and MACD are suggesting the upward momentum is losing steam. More conservative traders may want to scale back their position size. If the market corrects I would expect CTSH to correct with it. I hesitate to launch new positions but a close over the current high near $51.31 could be used as an entry point. Our initial target is $54.75. FYI: Don't go overboard just because the option looks cheap. If CTSH does correct the value will vanish.

Current Position: BUY CALL APRIL $55 (CTSH 10D55.00) @ 0.40

Entry on March 11th at $ 50.54
Earnings Date 05/04/10
Average Daily Volume = 4.05 million
Listed on March 10th, 2010

Green Mountain Coffee Roasters - GMCR - cls: 93.09 chg: +0.44 stop: 83.45

GMCR displayed some volatility today but that's pretty normal for this stock. The early morning rally reversed at $94.65 and traders then bought the dip at $91.12. We need to be patient and wait for our entry point. If the market corrects GMCR could easily retrace back toward the $88 or $85 levels. Currently the plan is to buy calls at $88.00 but more conservative traders could wait for a dip closer to $85.50. I do consider this an aggressive trade because shares of GMCR can be so volatile. If triggered at $88.00 our first target is $93.00. Our second target is $99.00 but that could take a few weeks.

Use a trigger at $88.00 to buy calls

Suggested Position: BUY CALL APRIL $90 (GMCR 10D90.00) current ask $5.80

Entry on March xxth at $ xx.xx
Earnings Date 04/29/10
Average Daily Volume = 1.17 million
Listed on March 13th, 2010

Mobile Telesystems - MBT - close: 56.26 change: -0.81 stop: 51.90

MBT erased Friday's gains with a 1.4% decline on Monday. If the market corrects I would expect MBT to pull back toward the $54.00 or the $52.50 region. Readers may want to wait on launching new positions and buy calls on the rebound. More conservative traders may want to use a tighter stop loss with a plan to exit positions if the market retreats. Our first target to take profits is at $59.85.

Suggested Position: BUY CALL APR 60.00 (MBT 10D60.00) @ 1.10

Entry on March 12th at $ 56.34
Earnings Date 03/31/10 (unconfirmed)
Average Daily Volume = 1.26 million
Listed on March 11th, 2010

NII Holdings Inc. - NIHD - close: 40.26 change: -0.31 stop: 37.90

NIHD tagged a new 52-week high this morning at $40.84. While the trend is up some of the technical indicators are suggesting that momentum is waning. More conservative traders might want to raise their stops or scale back their position size. If the market really corrects we could get stopped out. More aggressive traders may want to consider new positions on a new closing high (above $40.60) or buy a bounce from $39.00. Our first target is the $44.00 level.

Suggested Position: BUY CALL APRIL $40 (NIHD 10D40.00) @ $1.85

Entry on March 11th at $ 40.10
Earnings Date 04/22/10
Average Daily Volume = 2.68 million
Listed on March 10th, 2010

Panera Bread Co. - PNRA - close: 78.03 change: -1.12 stop: 74.75

PNRA suffered another day of profit taking with a 1.4% pull back. I would wait for another bounce near the $75 or $76 levels before considering new positions. Remember, this is an aggressive trade with both PNRA and the market so overextended. Our first target is $82.45. FYI: It is worth noting that PNRA could announce a stock split one of these days. The last time shares split was in the $75-80 zone back in June 2002.

Suggested Position: CALL APR 80.00 (PNRA 10D80.00) @ $1.35

Entry on March 11th at $ 77.18
Earnings Date 04/28/10
Average Daily Volume = 519 thousand
Listed on March 9th, 2010

TEVA Pharmaceuticals - TEVA - close: 60.98 change: -0.32 stop: 59.75

I know I'm starting to sound like a broken record on TEVA but traders should stay cautious. Friday's failed rally and today's decline combined with the waning technical indicators make it look like TEVA is about to roll over. I am inching up our stop loss to $59.95. More conservative traders may want to exit early. March options expire this Friday. Our target to exit is currently $63.00.

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*


ATHN - AthenaHealth Inc - $37.29 Change -0.84 Stop $36.50

What happened to ATHN today? I couldn't find any news to explain the sell-off. One possible answer was investors looking to exit ahead of the earnings report tonight. The stock fell from $38.00 to $35.83 before paring its losses. Our stop loss was hit at $36.50.

After the closing bell ATHN reported earnings that were only in-line with estimates and missed on the revenue number. Yet shares are trading higher after hours around $39.30.

Closed Position: CALL APR 40.00 (ATHN 10D40.00) about $0.75
entry price was $2.00

Annotated Chart:

Entry on March 8th at $ 39.20
Earnings Date = 03/15/2010
Average Daily Volume = 600,000
Listed on March 6th, 2010

BUCY - Bucyrus International - $63.81 Change -1.02 Stop $62.50

Investors are concerned that the Chinese government is going to raise bank reserve ratios again as an attempt to slow down their economy. If they are successful in slowing down their economy it should mean less demand for commodities. This pushed the mining stocks lower today. Shares of BUCY dipped to $62.41 before paring its losses. Unfortunately the stock hit our stop loss at $62.50 closing the play.

Closed Position: CALL APR 65.00 (BUCY 10D6500) @ $2.45 Entry price was $3.82

Annotated Chart:

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