Option Investor

Daily Newsletter, Tuesday, 3/23/2010

Table of Contents

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

Market Wrap

Melt-Up Gains Speed

by Jim Brown

Click here to email Jim Brown

The markets accelerated into the close as the S&P broke over 1170 and the Nasdaq broke over 2400. Both were seen as psychological resistance.

Market Stats Table

The morning started off slow after we saw some negative news on the housing front. The existing home sales for February declined for the third consecutive month although the pace of the decline slowed. Existing sales fell to 5.02 million units on an annualized basis. This was a decline from 5.05 million and actually less of a decline than analysts expected to a rate of 4.95 million units. This was another example of "less bad" economic news.

As we come out of the winter and into the spring selling season we should see sales in March and April increase but once the homebuyer tax credit ends on April 30th analysts are expecting a sharp decline in home sales. Noted banking analyst Richard Bove expects home prices to fall another 10-15% by year-end.

The report showed that for the first time since 2008 the number of homes listed for sale increased over the same period in the prior year. Inventory increased by +9.5% with the addition of more than 312,000 units. That is the biggest increase in over 20 years. The number of months of inventory rose to 8.6 and the highest level since last August. The normal level is a six-month supply. Home prices fell by an average of 2% but home prices in the west fell by -9.8%.

I would not attach too much importance to this report given the heavy snowstorms in the northeast in January. This report is based on closings of previously contracted sales so the two February storms will probably have impacted March closings more than February.

Existing Home Sales Chart

The FHFA Purchase-Only Home Price Index fell by -3.3% in January according to data released today. This is a lagging report and shows prices are down -13.2% from the peak in 2007. This index only tracks homes where the mortgages are held or guaranteed by Fannie of Freddie. These are the least volatile home prices because they are in the lower end of the housing market. This is also the hottest area of sales right now because the first time homebuyers eligible for the tax credit are buying the lower priced starter homes. I would not apply too much weight to the FHFA numbers.

The Mortgage Bankers Association claims there are more than two million homes currently in the foreclosure process with another million or more likely by year-end. This is pressuring the middle to the higher end of the price curve where the tax credit for first time buyers is rarely used. According to the MBA there are more than three million homes currently for sale. The government's short sale incentive program begins on April 5th with a $1,500 payment for concluding a short sale. Some analysts believe it will have no impact since many of the short sales are tens of thousands of dollars underwater. Lenders may decide to keep the homes rather than take the losses. The rental market is hot today with rents rising monthly as more and more prior homeowners are unable to finance a new home after losing their house to foreclosure. Lenders could resort to a rental program until the sales market improves.

On a more positive note the Richmond Fed Manufacturing Survey for March rose to 6.0 from 2.0 in February. The recovery is accelerating in the Richmond region after two months of decline in Dec/Jan. The 6.0 reading is back into expansion territory. New orders rose to 10.0 from 9.0 but backorders fell to -7 from zero. The employment component rose to zero after being negative for the prior four months. This was a positive report but still contained some elements of concern like the falling backorders.

Richmond Fed Chart

The monthly Mass Layoff Report showed layoffs declined again in February to 1,570 events from 1,761 in January. Those layoffs involved 155,718 workers compared to 182,261 in January. The drop in layoffs suggests the job losses in the Non-Farm Payroll report probably came from weather issues rather than continued firing from corporations. The inclement weather probably delayed hiring and that suggests the March report could show a snap back jump in employment.

The largest number of layoffs at 24% came from the manufacturing sector with transportation equipment the largest sub sector. The pace of layoffs has slowed the most in areas like computer and electronic parts and furniture producers. Layoffs for February increased in only five states. State government employment continues to fall as states slash services due to shrinking revenues.

Wednesday's reports will include Durable Goods, New Home Sales, Mortgage Applications and Oil & Gas Inventories.

In stock news the Semiconductor Index (SOX) broke out to close at a new high after Credit Suisse said concerns about a slowdown in demand are overblown. Credit Suisse said channel checks up and down the supply chain showed increasing demand not declining demand. The analyst, John Pitzer, found that many chip buyers are "double ordering" or buying twice the inventory they need to make sure they don't run out. Pitzer said with the double ordering there is not enough manufacturing capacity to meet existing orders much less double orders.

This is a two edged sword. If consumer demand does not continue to ramp up then tech companies are going to be slashing future orders after chip companies have ramped up operations to meet the current demand. There appears to be no happy medium. Pitzer favorites include Intel (INTC), Broadcom (BRCM), Marvel (MRVL), Micron (MU), ON Semi (ONNN) and Linear (LLTC).

Semiconductor Chart

You would think the flood of new tablet PCs would be enough to keep all the chipmakers busy for the next year. Apple broke out to a new high on Tuesday at $228 as they near the launch date for the iPad. Apple has gained nearly 14% since Feb-4th despite the post iPad announcement dip. Ipad web orders in the first week of sales passed 190,000. However, they have slowed to 5,000 per day despite new discounts for schools. Apple has a lot of competition and many of the competitors offer significantly more features. Apple's iPad does not run flash, which nearly every website has today. It does not have a camera so no video calls and it does not run more than one application at the same time. Most of the competitors offer these features.

Of course Apple has the Apple image going for it to give it a boost in sales. We will see how long that Apple name can keep the faithful from straying to another of the 20+ tablet PCs that have already been announced, released or are currently in production. For a slide show of the top 12 with their features
click here

Apple Chart

After the bell Adobe (ADBE) reported earnings of 40-cents that beat the street estimate of 37-cents. Revenue rose +9% to $858.7 million and beat estimates for $827 million. Adobe issued guidance that was slightly higher than analysts expected on earnings but significantly higher on revenue. Shares of Adobe rallied +6% in after hours to $37.48.

Adobe Chart

Carnival Cruise Lines (CCL) reported earnings of 22-cents compared to analyst estimates of 14-cents but the earnings contained a 5-cent profit from the sale of a ship. However, the best news came from the footnotes. Bookings are up +8% but prices paid for cruises are up +17%. This is a clear indicator that consumers are finally starting to loosen their purse strings. The CEO said Carnival was surprised that the rebound has been so dramatic but it was too early to know if the trend would hold. Carnival's profit fell -33% from the year ago quarter and most of that was due to the increased cost of fuel from Q4-2008. Carnival paid nearly 80% more for fuel in this quarter compared to the prior year. Carnival raised its full year profit estimates to between $2.25-$2.35 from its December forecast of $2.10-$2.30. Carnival shares broke out to a new high on the news.

Carnival Cruse Lines Chart

The major indexes rallied to new 17-month highs as anxiety over the healthcare bill, Greek debt crisis and China's yuan support faded. The healthcare debate is behind us and there was no implosion in the market. The Monday morning dip was bought and the melt up is in danger of turning into a real rally. At least that is the sentiment on Wall Street. This rally over the last month has been on low volume with increasing denial of its existence.

They say a market is built by bulls climbing a wall of worry. We have definitely had that wall with the drop in economic indicators in Dec/Jan and increasing worry about a second dip. The jobs numbers have been all over the chart with the February numbers much worse than expected. Jobless claims have remained stubbornly high. Add in the Greek debt crisis and the high volatility in the currency markets as another negative factor. Remember the Dubai debt crisis? That disappeared from the front page but still exists for more than 300 banks that are being hung out to dry. All of those worries are now factored into the market and the economics numbers are improving. Trimtabs reported last week that year-to-date job postings had increased 18%. That is a huge number that suggests companies are finally starting to hire again.

Conviction in the market is so light that the quadruple witching barely nudged the volume meter. Both days this week the volume has been light in the mid seven billion range. There is no conviction but the dips continue to get bought. You know my idea that fund managers are in a race for performance now that the economic risk appears to be behind us. I believe that fund managers are seeing money begin to trickle into equity funds and they were moving into small caps in a big way until last week.

Last week the Russell was the only major index to post a loss for the week. It was very over extended. The rally last week was led by the Dow and S&P as large caps started to get a bid. The big caps were responsible for today's rally and especially responsible for the end of day surge. I believe fund managers are starting to hedge their bets toward the end of the quarter and are beginning to favor large caps as highly liquid safety stocks in case the market corrects once the quarter is over. That has a very good chance of occurring.

The economy may be improving but we are a long way from booming. This continues to be a case of "less bad" economics but the bulls have factored this into the equation. The wall of worry has been scaled and we are becoming more overbought as each day progresses. I am not sure the markets can make it to month end without a pause but I would like to see them try.

The Dow closed at a new high just under 10,900 and the burst of buying into the close was bullish. If this daily end of day buying binge that started last week can continue then the bullish sentiment will continue to feed on itself. Only when the end of day brings selling will the buyers start to become wary again. Support on the Dow is now 10,700 but I doubt we will see that level again in March without some ugly news item that is completely unexpected. Resistance would be 11,000 as a round number with somewhere around 11,050 as technical resistance.

Dow Chart

The S&P enjoyed the big cap rally at the close and broke out to a new high with a ways to go before new resistance just under 1200. This was clearly a big cap buy program at the close that triggered some decent short covering. There is nothing negative about this chart until we close in on that 1200 range. Support is now 1160.

S&P-500 Chart

The big cap techs all caught a bid this afternoon with the exception of the biotechs. Those are still suffering from a healthcare hangover. The leaders were AAPL, RIMM, DELL, ORCL, MSFT and INTC. Even QCOM caught the big cap fever. The Nasdaq punched through resistance at 2400 and never looked back. I told you I was worried about the Nasdaq in my weekend commentary but the tech bulls took Monday's opening dip as a buying opportunity and it has been straight up from there. Initial support is 2395 and resistance is now in the 2435 range.

Nasdaq Chart

I have been calling this afternoon's rally a big cap event but the Russell went along for the ride. That is the beauty of a big cap buy program. It tends to pull the other indexes higher along with it. We went for weeks with the Russell leading and the big caps paying halfhearted attention. However, today the small caps stood up and saluted as the big caps led the way. Resistance is now around 700 and support is clearly 670.

Russell Chart

In summary, I believe the rally will continue into Friday but I am not sure if it can maintain the momentum after that. Fund managers will start to worry about what happens when the quarterly books close although there should be a ton of end of quarter retirement cash flowing into funds after this breakout. There are not any earth shaking economic reports the rest of the week and the jobs report is not until the following Friday. There is nothing on the calendar that should deter the market and the earnings guidance has been improving. Continue to buy the dips until we are proven wrong.

Jim Brown

New Option Plays

Breakouts and New Highs

by James Brown

Click here to email James Brown

Editor's Note:

There are plenty of bullish candidates available with the market showing so much strength. Here's a list of stocks that caught my eye.

WYNN has broken out to new 52-week highs. After months of consolidating sideways under $75 this could be a bullish candidate.

TEVA has been soaring higher. We were stopped out too soon. I would look for a pull back.

INFY has broken out and retested resistance as support near $60.00. This could be a bullish candidate.

DVN could be tempting for aggressive and nimble traders. The stock has been under performing but it just bounced from the bottom of its trading range and support near $62-63.

WLT is a coal energy stock that has just spiked to new highs. This can be a very volatile issue. I wouldn't be surprised to see it rally toward $100.


Express Scripts - ESRX - close: 102.00 change: -0.18 stop: 97.99

Company Description:
Express Scripts, Inc., one of the largest pharmacy benefit management companies in North America, is leading the way toward creating better health and value for patients through Consumerology(SM), the advanced application of the behavioral sciences to healthcare. This approach is helping millions of members realize greater healthcare outcomes and lowering cost by assisting in influencing their behavior. Headquartered in St. Louis, Express Scripts provides integrated PBM services including network-pharmacy claims processing, home delivery services, specialty benefit management, benefit-design consultation, drug-utilization review, formulary management, and medical and drug data analysis services. The company also distributes a full range of biopharmaceutical products and provides extensive cost-management and patient-care services (source: company press release or website)

Why We Like It:
Shares of ESRX are overbought with gains in seven out of the last eight weeks but that doesn't mean the rally is over. The stock has actually been consolidating sideways under resistance at the $100 level for a good portion of March as investors waited for the healthcare vote. Now that the vote is over and uncertainty has been removed the stock is breaking out to new relative highs. Many analysts believe that the PBM will see the biggest gains under then new healthcare reform.

I do consider this a very aggressive play since ESRX is so over extended but it can always get more extended. I'm suggesting small positions at current levels or you can wait for a dip back toward the $100 level. Our first target is $104.90. Our second target is $107.45. More aggressive traders could aim higher. Our time frame is just a couple of weeks.

Suggested Position: BUY CALL APRIL $105 (ESRX 10D105.00) at $1.10

Annotated Chart:

Entry on March xxth at $ xx.xx
Earnings Date 04/29/10
Average Daily Volume = 2.51 million
Listed on March 23rd, 2010

Coca-Cola - KO - close: 55.30 change: +0.76 stop: 52.95

Company Description:
The Coca-Cola Company (NYSE: KO) is the world's largest beverage company, refreshing consumers with more than 500 sparkling and still brands. Together with Coca-Cola®, recognized as the world's most valuable brand, the Company's portfolio includes 14 billion dollar brands, including Diet Coke®, Fanta®, Sprite®, Coca-Cola Zero®, vitaminwater, Powerade®, Minute Maid®, Simply® and Georgia® Coffee. Globally, we are the No. 1 provider of sparkling beverages, juices and juice drinks and ready-to-drink teas and coffees. Through the world‟s largest beverage distribution system, consumers in more than 200 countries enjoy the Company's beverages at a rate of 1.6 billion servings a day. (source: company press release or website)

Why We Like It:
Dow-component KO has been underperforming its rival PEP for weeks. Now shares have finally broken out from under resistance and could be poised to play catch up with rivals and the rest of the market. The stock doesn't move super fast but I envision a rally toward the December highs over the next few weeks. I'm suggesting positions now with a stop loss under the simple 200-dma. Our target to exit is $59.00.

Suggested Position: BUY CALL May $55.00 (KO 10E55.00) at $1.63

Annotated Chart:

Entry on March xxth at $ xx.xx
Earnings Date 04/21/10
Average Daily Volume = 14.6 million
Listed on March 23rd, 2010

Priceline.com - PCLN - close: 244.41 change: +1.39 stop: 236.00

Company Description:
Priceline.com is the leading travel service for value-conscious leisure travelers. No other travel service gives customers more ways to save on their airline tickets, hotel rooms, rental cars, vacation packages and cruises (source: company press release or website)

Why We Like It:
Investors are betting that consumer spending will remain healthy; just look at shares of restaurants, retailers and online travel sites. Shares of PCLN have soared to new multi-year highs. The stock has been consolidating under resistance in the $245-246 zone. The recent high was $246.01. I'm suggesting we buy calls at $246.50. This is a very aggressive trade. PCLN is overbought and a high-priced, volatile stock. Just look at what happened back in October 2009 when shares broke through resistance at $180 and suddenly reversed. That could happen to us. We need to keep our positions small. If triggered at $246.50 I'm suggesting a stop at $236.00. Our target is $275.00. Our time frame is about four weeks.

Trigger to buy calls a $246.50.

Suggested Position: BUY CALL APRIL $260 (PCLN 10D260.00) current ask $2.20

Annotated Chart:

Entry on March xxth at $ xx.xx
Earnings Date 05/11/10
Average Daily Volume = 793 thousand
Listed on March 23rd, 2010

In Play Updates and Reviews

Technology Leads The Rally

by James Brown

Click here to email James Brown

Editor's Note:

Stocks continue to melt higher as fund managers chase performance and try to dress up their portfolios before the quarter ends.

Current Portfolio:

CALL Play Updates

Apple Inc - AAPL close: 228.36 change: +3.61 stop: 222.49

The melt up continues and shares of AAPL broke out to new 52-week highs. Shares also hit our trigger to buy calls at $228.00. Now that our play is open I'm moving the stop to $222.49. Our first target is $234.90. Our second target is $239.75. More aggressive traders may want to keep their stop loss under support at the $220 level. FYI: I'm still concerned that stocks are overbought. I would keep your position size small.

Current Position: BUY CALL APRIL $230 (AAPL 10D230.00) current ask $5.25

Annotated Chart:

Entry on March 23rd at $228.00
Earnings Date 04/21/10
Average Daily Volume = 18.6 million
Listed on March 22nd, 2010

Cash America - CSH - close: 39.62 change: -0.26 stop: 36.75

CSH is still correcting but now we have to wonder about the stock's under performance. The $38.00 level should be strong support so our buy the dip entry point still works. Actually we have two suggested entry ideas just be aware that the breakout entry point is very aggressive and higher risk.

Our first is the buy-the-dip strategy with a trigger to buy calls at $38.25. If CSH hits $38.25 we want to buy the April $40 calls and we'll use a stop loss at $36.75. Our first target is $41.00. Our second target is $44.00.

We also have a breakout trigger to buy calls on CSH if shares hit $41.20. This is a much more aggressive entry point so we want to keep positions small. If CSH hits our trigger at $41.20 we'll use a stop loss at $39.40. Our target is $44.25. We want to buy the April $45 calls. They are cheap so don't go overboard. Remember, small positions! This way if CSH reverses on us we will limit our risk.

Buy-the-Dip: Use a trigger at $38.25 to buy calls.

Suggested Position: BUY CALL APRIL $40 (CSH 10D40.00) current ask $1.55

Buy-the-Breakout: Use a trigger at $41.20 to buy calls.

Suggested Position: BUY CALL APRIL $45 (CSH 10D45.00) current ask $0.15

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: 52.52 change: +0.65 stop: 49.75

CTSH displayed some relative strength with a 1.2% gain and a new 52-week high. Some of the technical indicators still look bearish but so far CTSH is forging higher. I am not suggesting new bullish positions at this time. More conservative traders may want to up their stops toward the $50.50 level. Our initial target is $54.75.

Current Position: 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

L-3 Communications - LLL - close: 94.62 change: +0.45 stop: 91.25

The defense sector indices both hit new 52-week highs (and both look very overbought). Shares of LLL gained 0.4% and while they are still under the $95.00 level the stock did set a new closing high. More conservative traders may want to raise their stop a tad. Our first target is $97.00. Our final target is $99.75.

We chose the $100 calls to keep our capital investment very small. Keep your position size limited.

Current Position: BUY CALL APRIL 100.00 (LLL 10D100.00) @ $0.30

Entry on March 18th at $ 93.88
Earnings Date 04/22/10
Average Daily Volume = 908 thousand
Listed on March 17th, 2010

NII Holdings Inc. - NIHD - close: 41.65 change: +0.72 stop: 39.45 *new*

NIHD is showing some relative strength with a 1.75% rally. The stock set a new closing 52-week high. I am raising our stop loss to $39.45. Readers could open new bullish positions here but they'll want to use a tight stop close to $40 and probably aim for the $45 level or higher. 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: 78.84 change: +0.14 stop: 74.75

PNRA didn't make much progress today. The stock was under performing this morning but managed to rebound back into positive territory by the closing bell. I am not suggesting new positions at this time. This was an aggressive trade given our entry point. 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

PartnerRe Ltd. - PRE - close: 78.91 change: +0.13 stop: 77.75

I am surprised that PRE is not performing better. Shares are still consolidating sideways. While the consolidation is developing a bullish posture shares just aren't having any success climbing higher. More aggressive traders may want to consider bullish positions now. I am suggesting we wait for a breakout.

The plan is to buy calls if PRE hits our trigger at $80.55. If triggered we'll use a stop loss at $77.75 (under Friday's low). Our first target is $84.75. Our second, longer-term target is $89.00. There is potential resistance near the October 2009 highs so don't be surprised to see some congestion there. If the market does retreat this week we'll be watching for an alternative entry point in PRE to buy the rebound.

Trigger to buy calls at $80.55

Suggested Position: BUY CALL APRIL $80.00 (PRE 10D80.00) current ask $1.05

Entry on March xxth at $ xx.xx
Earnings Date 04/27/10
Average Daily Volume = 989 thousand
Listed on March 20th, 2010

PUT Play Updates

*Currently we do not have any put play updates*