Option Investor

Daily Newsletter, Saturday, 11/7/2009

Table of Contents

  1. Leaps Trader Commentary
  2. Portfolio
  3. Play Updates
  4. Watch

Leaps Trader Commentary

10% Unemployment Fails To Scare the Bulls

by James Brown

Click here to email James Brown

It is amazing what a difference a week can make. Seven days ago the market had closed out October on a down note with a nasty breakdown under support. In the last five trading days the market has waded through a parade of mixed economic news and managed to post some decent gains for the week. Is it a bounce worth buying or is this a head fake before the next drop? More than one chart reader is suggesting the S&P 500 could be forming the right shoulder on a bearish head-and-shoulders pattern.

The biggest economic report of the week was Friday's non-farm payrolls (jobs) report. This report has already been talked about ad nauseam for the last couple of days so I'll try to be brief. Economists were expecting 175,000 in job losses in October with the headline unemployment rate ticking up from 9.8% to 9.9%. What we got was 195,000 in job losses with unemployment rising to 10.2%. Both numbers were worse than expected. August job losses were revised down for a second time from -201,000 to -154,000. September's numbers were revised lower from -263,000 to -219,000. October's read was one of the smallest amount of job losses for the year but sadly they are still job losses.

Thus far the U.S. economy has lost about 7.3 million jobs since the recession began back in December 2007. About 3.5 million have been lost since January 2009. Make no mistake about it this is a very, very tough labor market. Over 5.5 million Americans have been out of work for more than six months. The official headline number is 10.2% unemployment, which is a 26-year high. Yet the real unemployment rate, which includes those who are under employed and working part time when they really need full time work, has hit a high at 17.5% unemployment.

So why didn't the market collapse on this news? Economists have been warning us for months that unemployment would rise above 10% even as the economy began to recover. You could say we've been expecting 10% unemployment. Unfortunately we weren't really expecting it until early 2010. While job losses are getting smaller we shouldn't expect to see a big rebound in job creation. One of the worst statistics I saw this week was the average hours worked per week, which remained at a record low of 33 hours. If you're a manager you're not going to hire someone new when your current staff needs more hours. As a matter of fact you'll probably start offering overtime before you consider adding to your payroll. I've said it before. Unemployment is going to be the Achilles heel of this recovery.

Not all the data last week was bad. Retail sales figures on Thursday were better than expected. That was not too surprising since comparable figures to a year ago were terrible and easy to beat. Consumer spending remains a challenge. Jobless consumers don't spend much. Exacerbating this problem are the banks. Banks continue to reduce available credit to the consumer. It's a trend that's been happening for months. Banks just removed nearly $15 billion in consumer credit in September. That's $15 billion less that consumers have to spend with.

The big banks have another problem. They're not lending money. Instead they are hoarding cash as fast as they can. We're talking hundreds of billions of dollars. A few pundits out there believe the banks are hoarding cash because they're worried about an implosion in the commercial real estate (CRE) market. This recession start with residential real estate but banks have an even bigger exposure to CRE. There is over one trillion dollars in CRE loans that come due in the next few years. Shopping center vacancies are at a 17-year high and office-space vacancies are at a five-year high and it's going to get worse. We've heard about CRE being the "next shoe to drop" for months and months and it looks like it's starting to happen.

Now let me tell what's not happening. The inventory-rebuilding phase we keep waiting for. September was the 13th month in a row that businesses cut their inventories. That is the longest streak on record. If we combine last week's data of better than expected retail sales and add it to record low inventories one would hope that we're that much closer to the restocking phase. When it does start it should give GDP a boost for a quarter or two. Unfortunately, I concerned that it will be temporary. You may have heard analysts talking about the "new normal" where consumers are saving more and spending less. That's bad news for an economy built on consumer spending. The inventory build out may not be as robust as many hope or expect. The build-out's affect on the economy may be over estimated when it happens.

The economic calendar is pretty light this week. I would keep an eye on the dollar and interest rates. The U.S. Treasury will sell another $81 billion in bonds and the Federal Reserve will not be there to keep a floor under prices now that their $300 billion program to buy bonds has run out of money. This means that interest rates could start creeping higher as investors expect more reward for their risk of buying U.S. debt. Meanwhile the dollar will remain in the spotlight and continue to have a major influence on commodities.

Technically the market is flashing some mixed signals. If you look at the S&P 500 index the broken trendline of higher lows (support) is now acting as overhead resistance. This is normal. The S&P 500 also has resistance at its September high near 1075 and its October high near 1100. Another problem is volume. Volume on the recent sell-off was huge. Volume on the current bounce has been light. This suggests the bounce could be a head fake before the next move lower. Stocks and markets don't move in a straight line. Three steps forward and two back is normal no matter what the direction the market is moving. Bulls could argue that the market's trend of higher lows is still intact and they'd be right for the S&P 500 and the Dow Industrials. The NASDAQ, and the Russell 2000 both made lower lows. If you're looking at key sectors then the transportation sector, the semiconductor sector, and the banking sector all made lower lows. Yet oil stocks, cyclicals, retailers, and Internet stocks all made higher lows. You could say the market is fragmenting and becoming more of a stock picker's market.

I would remain VERY cautious here when it comes to launching new long-term positions. If you do I'd start with small position sizes and if the trade moves in your favor consider slowly adding to your position. If the S&P can produce a strong close over the 1100 level it would do a lot to reinforce the bullish trend and probably launch a new leg higher.

Chart of the S&P 500 Index:

Weekly Chart of the S&P 500 Index:

Chart of the Russell 2000 Index:


Previous Comments on my Long-Term Outlook:

My long-term outlook has not changed. I still expect the economy to see a double-dip, "W"-shaped rebound with the second dip in 2010 (some analysts are predicting it will not show up until 2011). Lousy consumer spending, rising foreclosures, and lagging job growth will be the main culprits. Several weeks ago there were some comments out of the U.S. Treasury concerning foreclosures. The Obama administration's HAMP loan modification program can only help a certain number of homeowners and one official said that even if the HAMP program was a total success we should still expect millions of new foreclosures. This only reinforces my own belief that we will see another tidal wave of foreclosed homes in 2010 and 2011. Some analysts are forecasting upwards of six million foreclosures in the next three years. What is that going to do to consumer confidence and consumer spending? It's not going to help! You can review my long-term outlook here. It's the second half our my "Two Months Left" commentary.

~ James Brown


Portfolio Update

by James Brown

Click here to email James Brown

Current Portfolio

Portfolio Comments:

The stock market remains volatile as investors question the sustainability of the economic recovery.

I'm concerned the S&P 500 could be building a bearish head-and-shoulders pattern. More conservative traders may want to familiarize themselves with the(their) exit should the need arise.

Disclaimer: At any given time the author may have positions in any or all of any companies mentioned in the Leaps Newsletter.

--Position Summary Table--
Table lists Directional CALL or PUT/LEAPS only.
Insurance puts, if applicable, are not shown.

Red symbol/name represents a dropped play this week.

Jim's portfolio and updates has been included in the normal play updates section.

Play Updates

Stay Cautious

by James Brown

Click here to email James Brown

Closed Plays

XIDE - stopped out

Play Updates

ACI $22.16 -0.52 -- Arch Coal Inc.

The action in coal stocks has been mixed last week with ACI under performing some of its peers. The short-term trend still looks down. I'm expecting a dip toward what should be significant support near $20.00. I would wait for to test that support near $20 before considering new bullish positions.

Our long-term target is the $30 region.

May 14th, 2009 - entry price on ACI @ 16.00, option @ 2.40
symbol: OSE-AF, 2011 JAN $30 LEAP call - current bid/ask $2.35/2.60
-stop loss on ACI @ 18.95

Chart of ACI:

ANR $37.86 -0.72 - Alpha Natural Resources, Inc.

While ANR may have out performed some of its peers last week the bounce appears to be fading under round-number resistance at $40.00. To make matters worse if shares retreat from here it will look like the right shoulder to a bearish head-and-shoulders pattern.

I am raising our stop loss to $32.40, which is under the October low and under its 100-dma and exponential 200-dma. I'm not suggesting new positions at this time.

Our long-term target is the $50-60 zone.

Aug. 25th, 2009 - entry price on ANR @ 34.00, option @ 7.00
symbol: VJV-AH, 2011 JAN $40 LEAP call - current bid/ask $8.30/9.50
-stop loss on ANR @ 29.50
bought 1/2 LEAP position on 08/25/09 (option price @ 7.00)

Chart of ANR:

BAC $15.05 -0.08 - Bank of America Corp.

I am repeating my warning from last week. BAC has broken several layers of significant support. I would STRONGLY consider a complete exit right here if you have not done so already. It looks like BAC has formed a top over the last three months. The Point & Figure chart has turned bearish and is forecasting a drop toward $10.00. A pull back toward $10 would be close to a 50% retracement of its rally off the March lows.

The only reason I am not closing BAC right now is the current bounce in the S&P 500. If the market can keep inching higher then maybe the banks will recover. If you're not willing to exit right here then consider a stop loss just under $14.00 on BAC (or maybe a stop at $4.00 on the LEAP option).

I'm not suggesting new positions at this time. Our long-term target is the $25-30 zone.

Jan 25th, 2009 - entry price on BAC @ 6.24, option @ 2.38
symbol: VBA-AB, JAN 2011 $10 LEAP call - current bid/ask $6.30/6.35
-stop loss on BAC @ 11.90

10/31/09 Sell Half -- option at $6.00 (+152%)

Chart of BAC

CHK $24.22 -0.60 -- Chesapeake Energy Corp.

CHK still looks a little oversold here given the sell-off from its highs. I'd keep an eye on natural gas prices. Natural gas has been falling but it could bounce from its September lows soon, which could form a bullish double bottom. This means we can probably expect more weakness in CHK on a short-term basis. Look for support near $22.00 and its 200-dma. Our long-term target is $40.00.

Oct 30th, 2009 - entry price on CHK @ 24.00, option @ 4.70
symbol: VEC-AE, JAN 2011 $25 LEAP call - current bid/ask $4.60/4.80
-stop loss on CHK @ 20.75

Chart of CHK:

CNX $42.81 -3.00 -- Consol Energy Inc.

While CNX did bounce last week I don't think it will last. The bounce was fueled with declining volume and the stock appears to be rolling over. I still expect a decline toward support near $40.00.

I'm not suggesting new positions at this time. CNX has already hit our first target at $48.50. We will plan to sell the second half or our position at $57.50.

Sep 1st, 2009 - entry price on CNX @ 36.50, option @ 7.80(estimate)
symbol: VTL-AH, 2011 JAN $40 LEAP call - current bid/ask $12.50/13.00
-stop loss on CNX @ 37.40

Target hit 09/16/09 @ 48.50, option price $15.40 (+97%)

Chart of CNX

EMR $41.23 +0.11 -- Emerson Electric Co.

EMR showed some relative strength last week thanks to a better than expected earnings report. The close over $40.00 is bullish. I am not suggesting new positions at this time. Our target is $47.50.

Sept. 8th, 2009 - entry price on EMR @ 38.00, option @ $4.50
symbol: VHH-AH, 2011 JAN $40 call - current bid/ask $5.30/5.70
-stop loss on EMR @ 33.50.

Chart of EMR:

FSLR $117.93 - 2.83 -- First Solar

FSLR continues to sink with the oversold bounce quickly rolling over. The stock might find some support at its September 2009 lows around $112. Don't be surprised if the stock bounces from $112.

We're not suggesting new positions at this time. At the moment we're long the 2010 January $100 put and we have a covered call play that should be fine if FSLR stays above $90.

Covered Call position:

Long 100 shares of FSLR @ $128.00
Short 2010 $150 LEAPS Call LZL-AA @ $40.70
Profit if called is $40.70 in option premium + $22 in stock (+49%) if FSLR is above $150.00.

Put Spread position:

Long 2010 $100 LEAPS Put LQM-MT @ $32.90
Short 2010 $250 LEAPS Put LZL-MJ @ $135.70, net credit $103

- Update 08/15/09 -
Cover the 2010 $250 Put at $109.40. Keep the $100 put.

Currently the 2010 Jan. $100 put is worth (bid) $4.70.
If you're curious the 2010 Jan. $150 call is at $ 2.48.

Chart of FSLR

FST $20.30 -0.29 -- Forest Oil Corp.

Last Tuesday's rebound in FST was a bullish reversal pattern but there hasn't been much follow through. I'm concerned that crude oil could be weak short-term and that might drag FST down toward $18.00 again. With our stop at $17.35 I'd still consider buying LEAPS on a bounce near $18.00. Our long-term target is $37.50.

Oct 15th, 2009 - entry price on FST @ 23.85, option @ 7.40
symbol: OJG-AD, 2011 $20 LEAP call - current bid/ask $4.80/5.30
-stop loss on FST @ 17.35

Chart of FST:

GHM $16.70 +0.41 -- Graham Corp.

GHM out performed the market last week with gains five days in a row. The stock is back above the $16.00 level, which was prior resistance. I'd probably wait for another dip and bounce near $15.00 before launching new positions.

Our target is $24.00. Our stop is at $12.40.

Oct 26th, 2009 - entry price on GHM @ 15.15, option @ 2.65
symbol: GHM-FC, 2010 JUNE $15 call - current bid/ask $3.30/3.90
-stop loss on GHM @ 12.40

- or -

Oct. 26th 2009 - entry price on GHM (the stock) @ 15.15
- stop loss on GHM @ 12.40

Chart of GHM:

INTC $18.93 +0.04 -- Intel Corp.

The NASDAQ composite, the SOX semiconductor index, and shares of Intel have all produced new relative lows. This is bearish and could be forecasting a deeper correction to come. Short-term the stock is bouncing but the current intermediate trend is down. I would give some thought to taking some money off the table if we saw another failed rally near $20.00 again. Right now the $18 level and the top of the gap should be support but longer-term I'd expect INTC to fill the gap and trade near $17.00. This is supposed to be a long-term trade and it's going to be tough to sit through the corrections.

I am not suggesting new long-term positions at this time. However, if we see a bounce from the $17.00 level or the 200-dma it might be a new entry point. Our long-term target is the $24-26 zone.

FYI: Shares of Intel don't move very fast. Readers might want to consider turning this play into a calendar or diagonal spread to further maximize your gains.

June 13th, 2009 - entry price on INTC @ 16.31, option @ 1.36
symbol: VNL-AD, 2011 LEAP $20 call - current bid/ask $2.19/2.24
-stop loss on INTC @ 15.90.

Chart of INTC:

MSFT $28.52 +0.05 -- Microsoft Corp.

MSFT managed to rebound back above $28.00 before it filled the gap from its earnings report. I am adjusting our exit target from $30.00 to $29.75. More conservative traders may want to start taking profits early (like right now). We're not suggesting new positions at this time. More aggressive traders may want to aim for $32 or $34.

June 2nd, 2009 - entry price on MSFT @ 21.60, option @ 2.20
symbol: VMF-AE, 2011 Jan. $25 call - current bid/ask $5.35/5.50
-stop loss on MSFT @ 21.95.

10/31/09 - Sell Half @ 27.73, option @ 4.80 (+118%)

Chart of MSFT:

MTW $10.58 -0.17 -- Manitowoc Inc.

MTW delivered a strong bounce from technical support near its 50-dma and exponential 200-dma. Unfortunately volume was pretty light on the rally and that makes me a little cautious here. I'm not suggesting new positions at this time. Our long-term target is $17.00.

Oct 30th, 2009 - entry price on MTW @ 9.10, option @ 2.61
symbol: VMT-AB, 2011 JAN $10 call - current bid/ask $3.30/3.60
-stop loss on MWT @ 7.49

- or -

Oct. 30th 2009 - entry price on MTW (the stock) @ 9.10
- stop loss on MTW @ 7.49

Chart of MTW:

PBR $49.01 -0.25 -- Petroleo Brasiliero

In spite of all the volatility the oil sector has been able to maintain its bullish up trend. I am concerned that if crude oil breaks down under short-term support near $76 it will spark a sharper sell-off in the oil stocks. Shares of PBR should have relatively strong support near $45.00 and its long-term up trend but I would hesitate to launch new positions there. It will depend on the strength of the broader market.

More conservative traders may want to exit early right now to avoid a loss. FYI: Earnings are expected on November 13th.

I'm suggesting we sell half our position at $54.50. We'll sell the second half at $59.50.

Apr. 4th, 2009 - entry price on PBR @ 35.10, option @ $2.80
symbol: PMJ-AJ, 2010 $50.00 LEAP call - current bid/ask $3.05/3.15
-stop loss on PBR at $43.40

Chart of PBR:

PEP $61.76 +0.53 -- PEPSICO Inc.

PEP continues to look strong. The stock bounced from support near its 50-dma and the bottom of its rising bullish channel (see chart). While the trend is positive I hesitate to launch new positions at this time.

More conservative traders might want to raise their stops toward the $55 region. Our exit target is the $69.90 mark.

July 7th, 2009 - entry price on PEP @ 57.25, option @ $4.50(estimate)
symbol: VP-AL, 2011 $60.00 LEAP call - current bid/ask $6.00/6.40
-stop loss on PEP at $51.50

Chart of PEP:

RAI $48.48 -0.15 -- Reynolds American Inc.

RAI has been churning sideways now for about two weeks. The stock's lack of a sell-off in the last week of October has been matched by its lack of a bounce the first week of November. Normally when a stock consolidates sideways it tends to breakout in the direction of the prevailing trend, which in this case is up but it's not a guarantee. I'm not suggesting new positions at this time.

Our second and final target is $57.50.

July 24th, 2009 - entry price on RAI @ 42.50, option @ $4.50(estimate)
symbol: OWO-AH, 2011 JAN $40.00 LEAP call - current bid/ask $ 8.70/ 9.20
-stop loss on RAI at $39.75

Sold Half on 10/19 @ 49.50, option @ $8.90 (+97%)

Chart of RAI:

TEX $20.53 -0.56 -- Terex Corp.

TEX has tried to bounce multiple times now from support near $20.00 and its rising 50-dma. This level is still support but TEX's inability to make any progress on these rebound attempts is a cautionary warning. Should TEX breakdown from here look for additional support near $18.00. I'm not suggesting new positions at this time.

Our final target is $29.50.

Sept. 11th, 2009 - entry price on TEX @ 18.25, option @ 4.10
symbol: VXQ-AD, JAN 2011 $20 LEAP call - current bid/ask $5.50/6.10
-stop loss on TEX @ 17.75

Sell half (10/24/09), option at $7.50 (+82.9%)

Chart of TEX:

UYG $5.40 -0.06 - ProShares Ultra Financials (2x) ETF

I am repeating my warning from last week. More conservative traders may want to exit completely right here. The October correction broke significant support and the financials under performed on the bounce last week. The UYG still has technical support near $5.00 and its rising 100-dma but I wouldn't buy it here. Technically the UYG hasn't yet broken its trendline from the March lows so the trajectory is still bullish. I am not suggesting new positions at this time. Our second and final target is $9.50.

FYI: The UYG trades off the DJUSFN index.

Our strategy called for buying the ETF instead of the options.

Current position in the UYG = $1.50 entry (stop loss: 4.40)

10/14/09 Exit - Sell Half @ 6.31 (gap open exit, +320%)

Chart of UYG:


XIDE $7.25 +0.23 Exide Technologies

Last week's bounce in XIDE was impressive. The stock rallied more than 18%. Unfortunately XIDE dipped to $5.72 on Monday and hit our new stop at $5.75 in the process closing the play.

Sep 2nd, 2009 - entry price on XIDE @ 6.50, option @ 1.25
symbol: FRU-CU, 2010 MAR $7.5 call - exit @ 0.55 on 11/02/09
-stop loss on XIDE @ 5.75


Buy the stock @ 6.50, stopped at $5.75 on 11/02/09 (-11.5%)

Chart of XIDE:


Tweaking the Triggers

by James Brown

Click here to email James Brown
Editor's Note:

I remain cautious on the market and thus I'm not adding a lot of new material to the watch list tonight. We are adding one new play (RGLD), which is listed in our new plays section tonight.

I did update a few triggers in tonight's watch list.

New Watch List Entries

No new candidates

Active Watch List Candidates

AVY - Avery Dennison

BQI - Oilsands Quest, Inc.

CR - Crane Co.

ESV - ENSCO Intl. Inc.,

PCX - Patriot Coal Corp.

TXT - Textron Inc.

New Watch List Candidates:

No new watch list candidates tonight.

Active Watch List Candidates:

AVY $ 37.75 +0.21 -- Avery Dennison

A week ago AVY was breaking support and look poised to correct sharply lower. Now the stock is drifting back toward its 2009 highs. I'm not willing to chase it here. Stocks will see a correction eventually. We will raise our trigger from $30.50 to $31.50. If triggered our stop loss is $27.40. Our long-term target is $44.50.

Buy-the-Dip trigger: $31.50

BUY the 2010 April $35 calls (symbol: AVY-DG)

Chart of AVY:

BQI $1.22 -0.02 -- Oilsands Quest Inc.

BQI managed to find and hold support at its rising 50-dma. This is short-term bullish. However, I'm concerned that oil might be weak over the next several days. We want to keep our trigger on BQI at $1.05. If triggered our stop loss is at $0.85. Please use wise judgment when it comes to your position size. Don't over do it just because the stock is "cheap".

I'm setting our long-term target at $2.90.

Buy-the-Dip trigger: $1.05

BUY the stock (not options) at $1.05

Chart of BQI:

CR $29.18 -0.38 -- Crane Co.

On a short-term basis I could see traders looking to buy a dip in the $27.00-26.00 zone and use a tight stop. For a longer-term position I'd rather wait for a more significant correction. Right now I'm suggesting a trigger at $22.60 but we might want to raise our entry point near $24.00 and its 100-dma instead. If triggered our target is $34.75. (It could take a few weeks before CR hits our trigger).

Buy-the-Dip trigger: $22.60

BUY the 2010 JUNE $25 calls (CR-FE)

Chart of CR:

ESV $48.03 -0.71 -- ENSCO Intl. Inc.

ESV is showing more relative strength than expected. Last week saw a bullish engulfing candlestick on Tuesday and the bounce carried toward $49. We still don't want to chase it here but I will raise our trigger to buy a dip from $40.50 to $42.50. If triggered at $42.50 we'll use a stop at $37.25. We're going to aim for the $55-60 zone.

Buy-the-Dip trigger: $42.50

BUY the 2011 January $45 call (VKS-AI)
(More aggressive traders may want to trade January 2010 or March 2010 calls instead)

Chart of ESV:

PCX $12.45 -0.05 -- Patriot Coal Corp.

Coal stocks remain volatile. PCX rallied from $10.60 to $13.00 last week. I am still expecting a deeper correction. The $10.00 level could offer more support but I'm expecting a decline toward the 200-dma. It could take several weeks before PCX hits our trigger. We'll use an entry point at $8.50 and a stop loss at $7.75.

Buy-the-Dip trigger: $ 8.50

BUY the 2011 January $10 LEAP call (OKI-AB)


Buy the stock @ 8.50.

Chart of PCX:

TXT $19.33 +0.20 -- Textron Inc.

TXT is still churning sideways. Technicals can't help much with the stock oscillating up and down for several weeks. I am adjusting our trigger to buy LEAPS at $13.50. We'll use a stop loss at $11.75. Our long-term target is the $30 region.

Buy-the-Dip trigger: $13.50

BUY the 2011 January 15.00 call (symbol: XUD-AC)

Chart of TXT: