Option Investor

Daily Newsletter, Monday, 4/19/2010

Table of Contents

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

Market Wrap

Stocks Rebound From Friday Plunge...Sort Of

by Todd Shriber

Click here to email Todd Shriber
Stocks bounced back from Friday's Goldman Sachs (GS)-led sell-off, well at least two of the three major U.S. indexes did. The Nasdaq was the lone laggard, falling 1.15 points to close at 2480.11 while the Dow Jones Industrial Average gained just over 73 points to finish the day at 11,092.05 and the S&P 500 added about 5.4 points to settle at 1197.52. While volume was decent, breadth was not as decliners outpaced advancers on both the NYSE and the Nasdaq by roughly 600 issues. On the other hand, the ratio of new highs to new lows on both exchanges was about six-to-one.

Stats Table

Not surprisingly, there was more Goldman Sachs news for investors to contend with today as the Securities and Exchange Commission (SEC) reportedly voted 3-2 in favor of pursuing enforcement action against Wall Street's most profitable and vilified investment bank. According to unidentified sources, the vote, which was not public, took place along party with the SEC's two Democratic commissioners and Chairman Mary Schapiro voting in favor of the case while the two Republican members of the panel voted against pursuing enforcement action.

After shedding 13% on Friday and leading the broader market to one of its worst performances in months, Goldman shares were up on Monday, but they did little to put a dent in Friday's big loss. The stock was up $2.62, or 1.63%, to $163.32 on volume that was more than quadruple the daily average. Tuesday will be another busy day for Golman shares as the company reports first-quarter earnings at 7AM New York time. Analysts expect the company to earn $4.01 a share on revenue of $11.61 billion. Obviously, a significant upside surprise and robust guidance will be needed to help the stock regain more of Friday's losses.

Goldman Sachs Chart

Staying with financials, Citigroup (C) notched a solid gain on Monday, jumping 32 cents, or 7%, to settle at $4.88 after reporting better-than-expected first-quarter results. Citi said it earned $4.4 billion, or 15 cents a share, in the quarter, compared with a loss of $696 million a year earlier. Analysts were expecting the bank to post a small loss for the quarter. Citi's equity and fixed income trading operations were a boon for the bottom line in the quarter, but it should not be lost on investors that the bank did say bad loans fell for the third straight quarter and that it is setting aside less cash to cover loan losses.

If nothing else, Citi is following in the footsteps of rivals Bank of America (BAC) and JPMorgan Chase as both firms made similar comments last week when delivering their quarterly updates. CEO Vikram Pandit remains cautious about the broader economy, but one analyst went so far as to call Citi ''very healthy'' and name the firm ''the brightest of all the big banks these days.'' A glowing assessment to be sure, but Citi shares are still struggling to break above $5. When that happens, the stock may move another leg higher because many fund managers do not buy stocks that trade for less than $5.

Citigroup Chart

While financials may have enjoyed a decent day, the same cannot be said for commodities and materials names. Hampered by the trials and tribulations of Goldman Sachs, oil prices moved lower yet again. The May contract expires tomorrow, but the more active June contract declined $1.54, or 1.8%, to $83.13 on the NYMEX. The Monday sell-off in oil follows news that traders are actually liquidating some of their bullish bets on black gold. Data released by the Commodities Futures Trading Commission last week showed that more long positions were liquidated during the week ending April 13 than short positions.

Dow components Exxon Mobil (XOM) and Chevron (CVX) were able to shake off oil's decline and book small gains on Monday while Europe's two largest oil producers, BP (BP) and Royal Dutch Shell (RDS-A) were down fractionally. Splitting the tie was Brazil's Petrobras (PBR), which gained 1.42% on Monday.

Oil Chart

The integrated oil names do not start reporting first-quarter results until next week, but this week is active in terms of reports from the oil services group. Halliburton (HAL), the world's second-largest provider of oil services behind Schlumberger (SLB), said its first-quarter profit fell 46% to $206 million, or 23 cents a share, from $378 million, or 42 cents a share, a year earlier. Excluding one-time items, Halliburton earned 28 cents a share, topping the consensus estimate of 25 cents a share. Revenue slumped 4% to $3.76 billion.

Texas-based Halliburton said strength in the North American helped make up for some weakness in Latin America, but the company said it expects a ''resurgence'' in international activity through the second half of this year and into 2011. One indication that Halliburton is expecting things to get better in 2010 is the fact that the company hired 1200 new staffers in the first quarter after reducing its headcount by 6000 last year.

Other oil services name due to report earnings this week include Weatherford International (WFT) on Tuesday, Diamond Offshore (DO) on Thursday and Schlumberger on Friday.

Halliburton Chart

Technology was somewhat weak on Monday with both Apple (AAPL) and Google (GOOG) showing small losses, but the sector may have gotten a lift heading into Tuesday as Dow member IBM (IBM) delivered better-than-expected results after the market closed. IBM said it earned $2.6 billion, or $1.97 a share, in the first quarter compared with $2.3 billion, or $1.70 a share, a year earlier. IBM had been beating profit expectations by cutting costs, but the during the first quarter, the company actually showed top-line growth of 5% with sales of $22.9 billion.

Analysts had been expecting IBM to earn $1.93 a share on revenue of $22.8 billion. IBM executives did not comment on whether information technology spending is recovering in earnest, but the company did say it likes the way the current quarter is shaping up. The revenue rise in the first quarter was helped foreign currency fluctuations, but IBM said its second-quarter top line should increase without currency adjustments.

All was not rosy though as IBM said revenue in its services division, the company's largest business, would have declined 2% if not for forex adjustments. If you are looking for positives, IBM did say its software sales jumped 11% to $5 billion during the quarter and the company boosted its 2010 outlook to $11.20 a share. Analysts had been forecasting $11.12 a share. The shares were up $1.60 to $132.23 on Monday, but are down $2.83 to $129.40 in the after-hours session.

IBM Chart

In other news regarding members of the Dow, consumer products giant Procter & Gamble (PG) announced a 9.5% increase to its quarterly dividend. The company will now pay 48 cents a share up from 44 cents. The maker of Tide laundry detergent and Bounty paper towel raised its dividend by 10% last year has now raised its payout for 54 straight years and has been paying a dividend every year since it was founded in 1890. Procter & Gamble's new dividend is payable on or after May 17 to shareholders of record on April 30.

Looking at the charts, the Dow did see a nice rebound following Friday's ''crash.'' The up trend remains in place and it would appear that the index has found support at 11,000. Only six of the 30 stocks in the Dow were down on Monday with Alcoa (AA) the biggest percentage loser after shedding 1.37%. It would not be surprising to see the Dow open down a little bit tomorrow if IBM's earnings are now warmly received. By price tag, IBM is the most expensive stock in the price-weighted index.

It is a busy week for Dow earnings with Coca Kola (KO) and Johnson & Johnson (JNJ) both reporting tomorrow. JNJ is another name to watch for a dividend increase as April is typically the month when the company boosts its payout.

Dow Chart

Obviously the Goldman Sachs news is major obstacle for the S&P 500 returning to the 1210 area, but support can be found just below 1190. Goldman could help right the S&P 500's ship tomorrow with a good earnings report and there are still about 100 members of the index due to report earnings this week, so there may be some catalysts for a small bounce. In addition the other names that I mentioned that will deliver earnings tomorrow, Brinker International (EAT), Delta Airlines (DAL) and US Bancorp (USB) all report before the bell and each one could provide more clues regarding the health of the U.S. consumer.

S&P 500 Chart

Let's be honest. The Nasdaq ran into problems late last week because of Google and if the index is going to make its way back above 2500 to make some fresh highs, this is the week to do it. Yahoo (YHOO) reports after the bell tomorrow, but most eyes will be on Apple (AAPL), which also delivers earnings after the close. Analysts expect Apple to post a profit of $2.44 a share on sales of $12.06 billion, but simply meeting those expectations will not be enough. Apple needs to show blow-out results to energize the Nasdaq and get investors excited about technology again. eBay (EBAY) and Qualcomm (QCOM) report on Wednesday.

Nasdaq Chart

It is hard to forecast when this Goldman situation is going to abate and it is likely that some investors may take the earnings report tomorrow, no matter how good it is, with a grain of salt. Goldman may now be seeing the big disadvantage to becoming a bank holding company: The government can now scrutinize Goldman and its brethren in way that could have only been dreamed of prior to the financial crisis.

With plenty of earnings reports due out this week, the theme of bullish 2010 guidance needs to hold and any Nasdaq constituent that goes the way of Google and disappoints the Street will be punished in similar fashion. I expect a couple of more small up days, but nothing to get really excited about.

New Option Plays

Tires Anyone?

by Scott Hawes

Click here to email Scott Hawes


Goodyear Tire & Rubber Co. – GT – close 14.10 change -0.16 stop 13.50

Company Description:
The Goodyear Tire & Rubber Company (Goodyear) is a manufacturer of tires. The Company, along with its United States and international subsidiaries and joint ventures, develops, manufactures, markets and distributes tires for applications. Goodyear also manufactures and markets rubber-related chemicals for various applications. The Company is an operator of commercial truck service and tire retreading centers. In addition, it operates more than 1,500 tire and auto service center outlets where it offers its products for retail sale and provides automotive repair and other services. The Company manufactures its products in 57 manufacturing facilities in 23 countries, including the United States. During the year ended December 31, 2009, Goodyear operated its business through four segments: North American Tire; Europe, Middle East and Africa Tire; Latin American Tire, and Asia Pacific Tire.(source: company press release or website)

Why We Like It:
GT has broken a major downtrend line that began in October. The stock has pulled back from its impressive rally last week and I believe it is poised to move higher as the stock heads into earnings on April 28. There is a key pivot level at $14.00 which is holding, and some resistance at $14.75. If GT can break through $14.75 there is limited resistance up to $15.90. I am viewing the position as a quick trade and plan to be out prior to earnings. Our target is $14.75 with a second target at $15.90. Our stop is below today's low at $13.50. Our time frame is about one week.

Suggested Position: Buy MAY CALL $12.50, current ask $1.85

Annotated Chart:

Entry on April xxth at $ xx.xx
Earnings Date 4/28/10
Average Daily Volume = 4.3 million
Listed on April 19th, 2010

In Play Updates and Reviews

Stopped Out of PRE, Exit OXY at the Open Tomorrow

by Scott Hawes

Click here to email Scott Hawes

Editor's Note:

Good evening traders. The day ended up with a fierce rally into the close in anticipation of Goldman Sachs earnings tomorrow morning. The earnings report will give GS the chance to publicly speak and defend itself against the SEC allegations. Most analysts expect a very strong earnings report which may spark a rally, but one that I think will be sold into. It feels like the market is going to consolidate here as traders digest earnings. And the longer it sits here without making new highs the chances increase for a sell-off. We got defensive on our positions over the weekend and we our well positioned for a sell-off should it occur. I suggest being nimble with position management as the market is being driven by news which can create whipsaws in both directions.

Current Portfolio:

CALL Play Updates

Coca-Cola - KO - close: 55.32 change: +0.35 stop: $53.95 *NEW*

KO followed through today and is starting to chip away at the congestion/resistance area I have been mentioning in the $55 to $56 area. I am still suggesting readers consider selling positions on any continued strength in KO. For now our target remains at $57.00 but I our stop was moved up to $53.95 on Saturday, which is just below Thursday's low.

Current Position: CALL May $55.00 (KO 10E55.00) at $1.62

Entry on March 24th at $ 55.22
Earnings Date 04/21/10
Average Daily Volume = 14.6 million
Listed on March 23rd, 2010

Occidental Petrol. - OXY - close: $84.69 change: -0.37 stop: 83.45

OXY broke below our key support/resistance level at $84.50 today and is now below its 20-day SMA. The stock has not followed through and is also breaking its uptrend line support. All of this is telling me that the chart is broken and it is time to exit the position. I am suggesting traders exit the position at the open tomorrow and we will be flat OXY for a loss.

Current Position: CALL MAY $85.00 (OXY 10E85.00) at $3.25

Entry on April 7th at $85.50
Earnings Date 04/29/10 (unconfirmed)
Average Daily Volume = 5.5 million
Listed on April 6th, 2010

PUT Play Updates

Simon Property Group – SPG – close: 82.90 change: +0.63 stop: 86.35

Why We Like It:
SPG rallied right up to our trigger price at $83.75 this morning and then sold off hard, however, SPG rebounded to close +0.63% on the day. The stock is -$0.85 lower than our entry. I expect the $84.00 resistance to hold and I see limited support until our target at $79.50. The stock will have to contend with its 50-day SMA which is currently $80.87 but I suspect it will break though this level. Our 2nd target is $77.10. We'll place a stop at $86.35 which is above its 20-day SMA and at the top of a congestion area. Our time frame is about two weeks as SPG reports earnings on April 30.

Current Position: BUY MAY PUT $80.00, entry at $2.20.

Entry on April 19th at $ 83.75
Earnings Date 4/30/2010
Average Daily Volume = 2.6 million
Listed on April 17th, 2010

SPDR S&P 500 Index - SPY - close: 119.81 change: +0.45 stop: 123.05 XXX

SPY was very weak this morning but rallied back in the afternoon with the broad market to close just about flat. This created a bottom tail candlestick on its daily chart and SPY also bounced off of its 20-day SMA. But it also made new intraday lows so I still like the potential of the trade. Earnings could keep the markets buoyant this week but I feel at some point traders will be looking to take profits. Our target remains $115.50 and our stop is 123.05. I am looking for a better inflection point to move the stop down in the coming days.

Current Position: SPY PUT MAY $119.00, entry at $2.05

Entry on April 13th at $ 2.05
Earnings Date Not Applicable
Average Daily Volume = 164 million
Listed on April 12th, 2010


PartnerRe Ltd. - PRE - close: 79.65 change: +.06 stop: $79.10

PRE traded down to just below our stop today before rallying close about break-even on the day. We are flat on the position. PRE has broken its trend line support and did not follow through as we anticipated. The chart looks like it is failing so we stepping aside. If readers still have positions I suggest exiting them soon, or you could place a stop below the 50-day SMA if you want to give PRE more time.

Closed Position: CALL MAY $80.00 (PRE 10E80.00) @ $1.50, entry was at $2.40

Annotated Chart:

Entry on April 6th at $ 80.55
Earnings Date 04/27/10
Average Daily Volume = 989 thousand
Listed on March 20th, 2010