Option Investor

Daily Newsletter, Saturday, 12/12/2009

Table of Contents

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

Leaps Trader Commentary

Stock Market Scrooge

by James Brown

Click here to email James Brown

Consumers are showing an increase in Christmas cheer this year. The preliminary consumer sentiment numbers for December surged to 73.4 from November's 67.4. The Commerce Department said November's retail sales figures soared +1.3% compared to estimates for +0.6% gain. Yet the market has turned scrooge-like on us and shrugged off this news with a "bah humbug".

The consumer has been the missing ingredient in this economic recovery so it's a mystery why stocks didn't rally further on these improvements. I am sure that a coin counter like Scrooge would happily point out that nearly half of the November retail sales gain was due to an increase in gasoline prices. That's not so good news because every dollar that goes to filling the gas tank is another dollar that doesn't get spent somewhere else. It will be interesting to see what Best Buy (BBY) has to say about the consumer when the company reports earnings this week on Tuesday (Dec. 15th) before the opening bell.

Bigger picture the improvement in business inventories could be a significant turning point. I've been talking about the slide in business inventories for months. The belief has been that one of these days the shelves will get so bare that business will have to restock their inventory and the replenishment phase will add big numbers to our GDP. Well, it looks like that might finally happen. After 13 months in a row the business inventory report actually turned positive. It should be no surprise that China reported a significant surge in their industrial output. Odds are good these are not unrelated events.

The inventory-rebuilding bounce could be so strong that the Federal Reserve might have to raise rates sooner than expected - at least that's the fear. I don't believe it's a very rational fear with unemployment still at 25-year highs. We're starting to hear some economists raise their Q4 GDP estimates to +4 to +5 percent. Just the fear of rising interest rates has helped fuel a massive short squeeze in the U.S. dollar and that's unraveling the commodity trade. You could argue this is just a sharp oversold bounce (bear market-rally?) in the dollar but short-term the trend is up for the currency. All eyes will be fixed on the FOMC meeting this week, which concludes on Wednesday. Ben Bernanke's comments on the economy and monetary policy will set the tone for the rest of 2009.

A week ago we were reacting to the -11,000 jobs report. In addition to an improving labor market we can add improving consumer sentiment, sales, and output. Plus, for the first time in a long time, the dollar rallied and stocks didn't tank lower on the move. Yes, it certainly seems like conditions are improving. It's all part of my forecast for two or three quarters of positive GDP growth before we fall back into the W-shaped recession. On a short-term basis I remain cautiously optimistic but I think I was cautiously optimistic last week. So maybe I'm a little bit more cautious or a little bit less optimistic than a week ago if stocks can't rally on good news.

The answer to the market's mysterious refusal to rally is probably a lack of desire by fund managers to put more money to work. They're already long the market. With the major averages up 60% off their lows they don't want to sell before year end and potentially create a taxable event. Yet their desire to chase stocks has cooled with the weather. Without any sellers I suspect that stocks will slowly drift higher and we'll probably see a little window dressing right before the month end to paint the tape and make sure the quarterly reports look good for you. Or maybe I'm just being hopeful that we'll wrap up the last two weeks of the year on a high note. I would certainly be a lot more optimistic if the S&P 500 can breakout from this five-week trading range.

Chart of the S&P 500 Index:

Weekly Chart of the S&P 500 Index:

Chart of the Transportation Index:

Weekly Chart of the Transportation 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

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Portfolio Update

by James Brown

Click here to email James Brown

Current Portfolio

Portfolio Comments:

The market remains stuck in a trading range. It's not surprising that many of our LEAPS candidates are also meandering sideways. Coal stocks delivered an oversold bounce while energy-related stocks suffered under oil's decline. The financials continue to under perform the rest of the market.

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.

New Plays

Happy With the Status Quo

by James Brown

Click here to email James Brown

Our Watch List is Working

Editor's Note:

Normally December is one of the best months of the year for stocks. Thus far this year is shaping up to be a disappointment. Fund managers are happy with the status quo and just want to make it to January. The major averages are in a multi-week trading range and until we see a breakout one way or the other it could be slim pickings for our new plays. Fortunately our watch list is working. Candidates from the watch list are getting triggered and graduating to the play list. We just added HON to the portfolio on Friday when it hit our trigger at $41.00. This weekend we've added UNH to the watch list.

No new plays tonight. Cross your fingers and hope that the market breaks out from the range this week.

Play Updates

Industrials Strengthen, Financials and Energy Lag the Market

by James Brown

Click here to email James Brown

Closed Plays


Play Updates

ACI $20.53 +0.07 -- Arch Coal Inc.

Last week was a bit of a nail biter. Shares of ACI dipped to $19.41 on Tuesday. Our stop loss to exit this trade is $19.40. Fortunately coal stocks managed an oversold bounce off their midweek lows. The four-week trend is still down and ACI still has technical resistance at its 100-dma, exponential 200-dma and its 50-dma overhead. If the major indices can breakout from their trading range it will create a more positive environment for coal stocks to bounce in (despite the short-term oversupply of coal). The recent rise in industrial output in China should be bullish for global coal consumption.

I am not suggesting new bullish positions at this time. 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 $1.40/1.55
-stop loss on ACI @ 19.40

Chart of ACI:

ANR $39.44 -0.36 - Alpha Natural Resources, Inc.

ANR was upgraded last week and shares managed a bounce from the $36.00 level. The breakout past its small cloud of moving averages is bullish but the stock still has overhead resistance. I'm not suggesting new bullish 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 $8.50/9.40
-stop loss on ANR @ 32.40
bought 1/2 LEAP position on 08/25/09 (option price @ 7.00)

Chart of ANR:

BAC $15.63 +0.42 - Bank of America Corp.

It was not a very good week for BAC. The stock may not have declined that much but shares did break another key trendline of support. BAC actually produced a new relative low compared to the late November low. I am not very optimistic here. More conservative traders may want to up their stops toward $15.00. A rise past $17.00 or $18.00 would significantly change the general posture in BAC and we can think about opening new bullish positions.

Our long-term target is the $25-30 zone. Please note that we're raising our stop loss to $13.85.

Jan 25th, 2009 - entry price on BAC @ 6.24, option @ 2.38
symbol: VBA-AB, JAN 2011 $10 LEAP call - current bid/ask $6.40/6.50
-stop loss on BAC @ 13.85

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

Chart of BAC

BQI $1.11 -0.03 -- Oilsands Quest Inc.

The dollar's rally has been rough on crude oil and the oil stocks have followed crude lower. The retracement in shares of BQI brought the stock back down toward our entry point near $1.05 and its rising 100-dma. I would consider new bullish positions on this pull back. Our long-term goal is $2.90.

Nov 27th, 2009 - entry price on BQI @ 1.05, (buy the stock)
-stop loss on BQI @ 0.89

Chart of BQI:

CHK $23.03 -0.14 -- Chesapeake Energy Corp.

Another oversold bounce in natural gas futures has helped stall the sell-off in CHK. We were expecting the $22.00 level and the stock's 200-dma to act as support and thus far they are. However, I'm not suggesting investors buy the dip given the stock's currently bearish trend of lower highs and lower lows. 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 $3.45/3.55
-stop loss on CHK @ 20.95

Chart of CHK:

CNX $44.09 -0.75 -- Consol Energy Inc.

The bounce in CNX hasn't been quite as strong as its peers. The rebound is already struggling with resistance near $45.00. Overall nothing has really changed. CNX did bounce from support near $42.50 but the stock has a bearish head-and-shoulders pattern. At this point I'd say the odds are against us but a widespread market rally could change things.

We have a stop loss at $41.00. I am not suggesting new bullish 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 $10.90/11.30
-stop loss on CNX @ 41.00

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

Chart of CNX

DE $52.44 +0.04 -- Deere & Co.

Last week's sideways consolidation had some volatile moments. This pull back toward $52.00 could be used as an entry point but if you're patient we might see a better entry near $50.00, which should be stronger support.

Our long-term target on DE is $69.50. The Point & Figure chart is bullish with a $66 target.

Nov 18th, 2009 - entry price on DE @ 51.00, option @ 8.75(estimate)
symbol: VER-AJ, 2011 JAN $50 LEAP call - current bid/ask $ 9.05/ 9.20
-stop loss on DE @ 44.00

Chart of DE:

EMR $42.00 +0.29 -- Emerson Electric Co.

Nothing has changed for us with EMR. Shares continue to consolidate sideways. The bull-flag pattern is getting a bit easier to see. Depending on your personal style you can buy a dip near $41.00 or look for a breakout past resistance near $43.00 as a potential entry point. I am raising our stop loss to $35.90. 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 $6.00/6.20
-stop loss on EMR @ 35.90.

Chart of EMR:

ESV $41.95 +0.08 -- ENSCO Intl. Inc.

The selling pressure seems to have stalled. Traders bought the dip near $40.50 twice last week. ESV is hovering near its long-term trendline of higher lows and its exponential 200-dma. I would prefer to see more conviction on the bounce before launching new bullish positions. Our target is the $55-60 zone.

Dec. 3rd, 2009 - entry price on ESV @ 42.50, option @ $6.80
symbol: VKS-AI, 2011 JAN $45 call - current bid/ask $5.80/6.20
-stop loss on ESV @ 37.25.

Chart of ESV:

FSLR $133.10 + 0.16 -- First Solar

The bounce in FSLR has stalled. Shares are struggling with technical resistance near their 50-dma. Volume has slowly declined day after day as the stock trades sideways. I would anticipate a breakout (either way) sooner than later. We only have a few weeks left before our 2010 January options expire.

I am not suggesting new positions at this time. Currently we are long the 2010 January $100 put and we have a covered call play that should be fine if FSLR stays above $90. At this point the $100 put, part of an old spread, is nearly worthless.

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) $1.14.
If you're curious the 2010 Jan. $150 call is at $ 2.73.

Chart of FSLR

FST $20.10 +0.25 -- Forest Oil Corp.

FST has managed to bounce off its rising 100-dma again. The technical picture is improving. Look for a new rise past $22.00 as our next entry point for bullish positions. I am encouraged that shares have been showing strength in spite of the weakness in crude oil. 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 $4.50/4.80
-stop loss on FST @ 16.85

Chart of FST:

GHM $19.01 +0.89 -- Graham Corp.

Traders are buying the dip near GHM's rising 30-dma. The action lately almost looks like a bull-flag pattern. I suspect GHM is poised to rally again if the market will at least cooperate. I am raising our stop loss to $13.90. More conservative traders may want to adjust their stops toward $15.00 or even closer to $16.00.

Our target is $24.00.

Oct 26th, 2009 - entry price on GHM @ 15.15, option @ 2.65
symbol: GHM-FC, 2010 JUNE $15 call - current bid/ask $4.90/5.50
-stop loss on GHM @ 13.90

- or -

Oct. 26th 2009 - entry price on GHM (the stock) @ 15.15
- stop loss on GHM @ 13.90

Chart of GHM:

GNK $22.12 -0.27 -- Genco Shipping

GNK has suffered as the Baltic Dry Goods index turned lower last week. I suspect this downturn in shipping is temporary. China just reported some strong economic numbers and the surge in industrial output should mean the global economy is bouncing since the country is such a huge exporter. While I would buy a bounce from current levels in GNK, readers may want to wait for a new rise over $24.50 or even $26.00 before initiating new positions. If the stock continues to sink look for support near $20.00 and its 200-dma.

Our plan was to use small positions to keep our risk limited. Our long-term target is $39.00.

Nov 21st, 2009 - entry price on GNK @ 25.46, option @ 5.00
symbol: OKJ-AF, 2011 $30 LEAP call - current bid/ask $2.85/3.30
-stop loss on GNK @ 19.65

Chart of GNK:

HON $40.87 change: +0.56 - Honeywell Intl. Inc.

HON was a watch list candidate. Rival UTX issued its 2010 outlook on Thursday and the guidance was generally bullish. This powered a rally in shares of HON on Friday morning and the stock hit $41.06. Our trigger to buy the 2011 January $45 LEAPS call was at $41.00 so our play is now open. Investors are probably expecting similar news from HON this week when the company releases their 2010 outlook on December 16th. Let's hope they don't disappoint investors.

Our first target to take profits is at $49.00. Our second target is at $54.00. We'll use a stop loss at $35.75 although more conservative traders may want to use a stop closer to $38.00.

Dec 11th, 2009 - entry price on HON @ 41.00, option @ 3.25
symbol: VAD-AI, 2011 $45 LEAP call - current bid/ask $3.10/3.30
-stop loss on HON @ 35.75

Chart of HON:

INTC $19.90 -0.25 -- Intel Corp.

The SOX semiconductor sector has started to see some profit taking after a multi-day rally. Shares of INTC started correcting a little early a few days before its peers. Shares seem to be struggling with resistance in the $20.50 region. I am not suggesting new long-term positions at this time. 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 $2.34/2.40
-stop loss on INTC @ 16.90.

Chart of INTC:

MTW $ 9.14 +0.00 -- Manitowoc Inc.

The correction in shares of MTW has now reached four weeks in a row. The stock has pulled back to technical support at its rising 100-dma near the $9.00 level. If MTW breaks this level we're probably looking at a fast decline to $8.00. 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 $2.20/2.35
-stop loss on MWT @ 7.90

- or -

Oct. 30th 2009 - entry price on MTW (the stock) @ 9.10
- stop loss on MTW @ 7.90

Chart of MTW:

PBR $48.17 -0.51 - Petroleo Brasiliero

Ouch! It was a painful week for PBR. The sell-off in crude oil has finally caught up with this Brazilian producer. Selling pressure stalled at its long-term trendline of support (see chart). The expectation is that PBR will bounce from here. However, if the dollar continues to rise it should pressure oil lower and that's bad news for the oil stocks. More conservative traders will want to seriously consider an early exit right here since we only have a few weeks left before January options expire.

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 $1.36/1.40
-stop loss on PBR at $44.40

Chart of PBR:

PEP $61.27 -0.57 -- PEPSICO Inc.

Uh-oh! I have to issue a warning that PEP has broken support at the bottom of its bullish channel and its rising 50-dma. The company reaffirmed its earnings guidance on Dec. 8th and the stock was downgraded on Dec. 9th, which sparked the gap down. A normal correction could bring PEP down to $58.00 or $56.00. A move to either level would coincide with a test of its exponential or simple 200-dma. More conservative traders may not want to endure that sort of retreat and will want to think about taking profits now with an early exit.

I'm not suggesting new bullish positions at this time. 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 $5.90/6.30
-stop loss on PEP at $54.95

Chart of PEP:

RAI $53.00 +0.07 -- Reynolds American Inc.

Early last week saw some excitement in shares of RAI but the last few days have been very quiet. RAI is arguably short-term overbought again. I wouldn't be surprised to see another pull back toward $52 or $50. The option is up almost 200%. Readers may want to take profits early. 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 $13.10/13.60
-stop loss on RAI at $47.45

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

Chart of RAI:

RGLD $50.08 -1.46 -- Royal Gold Inc.

The dollar's rally has been painful for gold, which has fallen more than $100 in the last several days. RGLD has retreated with gold but the stock is trying to hold support at the $50.00 level. Technically this pull back to $50 is a bullish entry point on RGLD. However, gold could easily fall another $100 and still keep its long-term up trend. Another $100 decline in gold might push RGLD down toward $46-45. I would be tempted to wait and see if we get a better entry point ear the rising 100-dma on RGLD (currently near $46).

Our target to exit is $64.50.

Nov. 7th, 2009 - entry price on RGLD @ 50.70, option @ 7.50
symbol: ZMO-AL, 2011 JAN $60 LEAP call - current bid/ask $6.00/6.70
-stop loss on RLGD @ 41.95

Chart of RGLD

TEX $18.64 +0.22 -- Terex Corp.

TEX has continued to decline albeit slowly. The stock is trying to hold support near $18.50 but last week's breakdown under the rising 100-dma is bearish. If shares continue to decline at their current speed TEX could hit our stop in the next week or two. I'm not suggesting new bullish 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 $3.80/4.10
-stop loss on TEX @ 17.75

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

Chart of TEX:

UYG $5.52 +0.07 - ProShares Ultra Financials (2x) ETF

The financials have been under performing the rest of the market for weeks. Last week nothing changed. Most of the banking stocks just drifted silently in a narrow range. Investors could be waiting for developments in Congress on the latest financial reform bill. Or traders could be waiting on the FOMC meeting that concludes on Wednesday this week.

Technically it looks like the sector is still in the process of rolling over and poised to move lower. I am not suggesting new bullish positions at this time. Our stop loss remains at $5.25.

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: 4.80)

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

Chart of UYG:


Healthcare On the Rise

by James Brown

Click here to email James Brown

New Watch List Entries

UNH - UnitedHealth Group Inc.

Active Watch List Candidates

DSX - Diana Shipping Inc.

ORCL - Oracle Corp.

Dropped Watch List Entries

HON - Honeywell Intl., graduated to the play list.

New Watch List Candidates:

UNH $30.48 +0.17 -- UnitedHealth Group Inc.

Haggling over the healthcare bill is heating up again. The healthcare stocks are in rally mode because it seems like this time the government-run public option for healthcare is dead, really, we mean it this time. Obviously we don't know what the final shape of the bill will look like but right now the future for healthcare companies looks a lot brighter than it did a couple of months ago. Keep in mind that the debate could always change again making this a more aggressive, higher-risk trade. I'd keep positions relatively small to limit your risk.

Shares of UNH are breaking out past major resistance at the $30.00 level. Technically this looks like an entry point right now. However, UNH has flirted with the $30 level so much that I'd rather see a little more conviction this time before launching longer-term positions. I am suggesting traders buy LEAPS with a trigger at $31.55. That's about 50 cents from Friday's high. More conservative traders may want to wait for a close over $32.00. Our trigger is good on an intraday move at $31.50 or higher. If triggered our stop loss is $27.25. Our $42.50.

Company Info:
UnitedHealth Group is a diversified health and well-being company dedicated to making health care work better. Headquartered in Minneapolis, Minn., UnitedHealth Group offers a broad spectrum of products and services through six operating businesses: UnitedHealthcare, Ovations, AmeriChoice, OptumHealth, Ingenix and Prescription Solutions. Through its family of businesses, UnitedHealth Group serves more than 70 millions individuals nationwide. (source: company press release or website)

Breakout trigger: $31.55

BUY the 2011 January $35 calls (symbol: VUH-AG)

Chart of UNH:

Active Watch List Candidates:

DSX $14.77 +0.01 - Diana Shipping Inc.

Last week we switched our strategy to buy a breakout with a trigger at $17.05. Unfortunately DSX has continued to fall. The stock is back under what should have been support at $15.00 but it is consolidating near its 50-dma. This level just happens to coincide with the 61.8% Fibonacci retracement of the November rally. I'm not willing to bet this support will hold, not with the Baltic Dry Goods index sliding lower.

I'm sticking to the plan and suggesting readers wait for a move over $17.00. We'll use the 2011 January $20 LEAP calls. If we're triggered at $17.05 I'm setting our long-term target at $24.00. We'll use a stop loss at $13.85.

Buy-the-Breakout trigger: $17.05 *new*

BUY the 2011 January $20.00 LEAPS (symbol: XDJ-AD)

Chart of DSX:

ORCL $22.78 change: +0.19 Oracle Corp.

This could be the week that ORCL hits our trigger. The company is due to report earnings on December 17th after the market's closing bell. Wall Street expects a profit of 36 cents a share. A positive report could send ORCL past resistance. I'm suggesting a trigger to buy LEAPS at $24.05. If triggered we'll use a stop loss at $21.75. Our long-term target is $29.75.

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

Breakout trigger: $24.05

BUY the 2011 January $25 LEAP call (VOC-AE)

Chart of ORCL: