Option Investor

Daily Newsletter, Saturday, 6/26/2010

Table of Contents

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

Leaps Trader Commentary

A Reversal or a Consolidation?

by James Brown

Click here to email James Brown

The final GDP numbers for the first quarter of 2010 were a disappointment. Investors were also unhappy with the latest earnings report from RIMM Thursday night. The early morning tone on Friday was bearish and stocks were poised to hit their fifth decline in a row. Yet a better than expected consumer sentiment number and a watered down financial reform bill helped reverse early losses. Leadership in the banks played a big role in lifting the S&P 500 to a meager gain and end the streak of declines.

The U.S. dollar posted its third decline in a row and appeared to be accelerating lower on Friday. This gave commodities a boost. Gold rose more than $9 to $1,255 an ounce, close to its all-time high. Copper made a big move as well with a +2.7% rally on Friday. Crude oil surged to $79 a barrel (+3.3%) but part of this move was fueled by hurricane fears. News that a tropical depression could turn into a hurricane and move into the Gulf of Mexico lifted oil higher and shares of BP lower. BP's stock sank to a 14-year low as traders try to discern what a hurricane would do to clean up efforts. Should the storm intensify and move north it would force a two-week delay as crews dismantle their operations, outrun the storm and then restart their attempts to plug the leak. This would leave the well gushing unchecked for several days!

The stock market sell-off has been worldwide. The Japanese NIKKEI broke through support near 10,000 and the 9,800 level for its biggest weekly loss in a month. The next level of support is the 9400 level, where the NIKKEI has bounced twice. The Chinese and Hong Kong markets are also rolling over but have yet to test their June lows. In Europe stocks fell for the fourth session in a row closing at two-week lows. Miners were weak on demand concerns with several countries trying to trim their budgets. Morgan Stanley issued cautious comments on British retailers. The German DAX index produced a failed rally under key resistance near the 6300 level. Not everyone has a bearish attitude. More than one analyst believes that when EU regulators disclose their bank stress test results it could lift investor sentiment and stocks. Of course we'll have to wait and see if that data is released.

I am a little surprised the U.S. markets didn't see deeper declines on Friday morning. The Q1 GDP numbers came in at +2.7% growth compared to the prior estimate of +3.0%. Then again there were whisper numbers that GDP could have fallen to +1.5% growth so maybe there was a quiet sigh of relief. Friday's report confirms the recent string of disappointing economic data. Economists are concerned that the growth spurt could run out of gas as the inventory build out begins to slow down. The latest numbers showed inventories grew from prior estimates of $33.9 billion to $41.2 billion. The Q1 data also shows an increase in imports and weakness in consumer spending.

The GDP figures placed consumer spending at +3.0%, which was almost double the Q4 numbers of +1.6% but less than May's +3.5% growth rate. If you read this column then you already know that consumer spending is widely quoted as 70% of the U.S. economy. Consumer sentiment is normally a good indicator of consumer spending. Yet I am wondering if there is a disconnect between consumer's feelings and their actual purchases. We'll have to wait and see what June's numbers are but last month the Commerce Department said May retail sales fell -1.2% breaking a seven-month streak of gains.

Hopefully the University of Michigan consumer sentiment figures on Friday are a sign of things to come since confidence numbers increased from 73.6 in May to 76 in June. Economists were expecting a rise to 75.5. The bump to 76 happens to be a two-year high but it's worth noting that the ten-year averages is 84.5 so consumer confidence remains weaker than normal. Most of the gains in confidence came from the current conditions component with a jump from 81 in May to 85.6 in June. The expectations component, which is supposed to measure consumer confidence about the economy six months into the future, inched up from 68.6 in May to 69.8 in June. The decline in GDP growth could be a sign of things to come. Analysts are starting to downgrade their GDP estimates for the second half of 2010. It is estimated that we need a minimum of +3% growth to balance job creation with our population growth (that's about 125,000 new jobs a month).

The bigger story on Friday was the financial reform bill (a.k.a. fin-reg). A Bloomberg article probably said it best, "Banks dodged a bullet". Investors have been concerned over what might be inside the biggest banking reform bill since the 1930s. This uncertainty has been a black cloud over the financial sector, one of the largest chunks of the stock market. You already know that Wall Street hates uncertainty. Knowing that the House and the Senate have finalized the fin-reg bill removes a lot of uncertainty and naturally the banking stocks rallied.

It could have been worse was the general opinion. The final version of the bill has a watered down Volcker Rule, which limits a bank's ability to invest their own money in hedge funds or propriety trading. The new rules limit this to 3% for any particular fund. A lot of the major banks are already in this 3% range so it's no big change for them (which is positive). The bill does require more regulation of derivative trading, which will need to be cleared through an exchange. Yet this was widely expected and thus not a surprise for the banks. Exchange stocks like the CME and ICE rallied on expectations they will see more business.

I'm only skimming the surface of fin-reg. Details of the 1,500-page financial reform bill have not been released yet and the bill still has to pass its final vote in Congress. The major point here is that Wall Street has a lot more clarity on what the new rules will be and the banks be able to make the appropriate changes and carry on. Removing the cloud of uncertainty eliminates a major obstacle for a significant portion of the stock market. This increases any chance of a sustainable rally if stocks can turn higher.

Chart of the BIX Banking index:

Normally summer Fridays can be volatile, low-volume sessions as traders leave early for the weekend. Not this Friday. Volume surged thanks to the annual Russell index rebalancing. The Russell 1000 (big caps) and Russell 2000 (small caps) indices were shuffled and money managers need to raise $14 billion to buy the new additions. Where did they get the cash to make these purchases? They sold shares of the remaining Russell components. Normally it's not a big deal. Unfortunately this past Friday was special because Berkshire Hathaway B-shares were being added to the Russell 1000 index, making this year's rebalancing larger than normal. The end result saw several big cap, highly liquid names like WMT and PEP get crushed as fund managers sold stocks to raise money for the rebalancing.

The market technicals look ugly, especially short-term. Monday's bearish reversal was very widespread and we're seeing lots of bearish reversal patterns on the weekly charts too but these need to be confirmed. I will note that the Russell 2000 ($RUT), the Semiconductor index ($SOX), and the Dow Transportation index ($TRAN) all paused at their 61.8% Fibonacci retracement of their mid June bounce. It's probably wishful thinking on my part that these indices will rebound from this technical level but it is something short-term traders could watch.

Chart of the S&P 500 index:

A week ago in our watch list I mentioned that stocks were in no man's land. Well given the reversal in the S&P 500 and its drop back below the 1100 level that is definitely true today. The S&P has support at the 1040 level and resistance near 1,110 and its 50-dma (1127). The S&P 500's weekly chart has produced a bearish engulfing (reversal) pattern but it needs to be confirmed first. On the daily chart we're only a few days away from a "death cross". That's where the simple 50-dma crosses under the simple 200-dma, which is traditionally seen as a very bearish signal.

Two weeks ago I proposed that the market is getting tossed around by several cross currents. For every good economic data point it's followed by a bearish one. Do you remember the positives like strong cargo traffic at the port of Los Angeles or the +50% surge in Chinese exports. Someone has to be buying those goods. Just a week ago Europe was reacting to positive news about Spain's successful bond auction and a positive report card on Greece's austerity measures. These seem to be forgotten. Now we're focused on all-time record low new home sales and a sharp four-week plunge in the Baltic Dry Goods index. I haven't mentioned the $BDI index in a while. This measures prices for day rates on dry-good ships. Rising prices equal rising demand and vice versa. The $BDI has been plunging, which doesn't bode well for June or Q2 economic activity. It seems that we have more and more ammunition for the double-dip camp.

Chart of the Baltic Dry Goods index:

Another concern is a slowdown in government spending. The controversial U.S. stimulus package is due to expire (i.e. run out of money) on January 1st, 2011. In addition to federal money slowing down we have 46 U.S. states that are facing a budget crisis. Income tax and sales revenues have fallen five consecutive quarters in a row. That has not happened since the early 1960s. These states will have to slash services, building projects and cut spending to meet a $125 billion short fall. How many of these states are going to raise taxes to try and fill the gap? The combination of higher taxes and slower government spending is going to depress economic growth in this country and overseas. That's the same recipe that is going to push Europe back into a double-dip recession.

Looking ahead there is a G20 meeting this weekend. You can bet that Europe's debt challenges will be at the top of the discussion list. I doubt this will be a market mover on Monday but you never know. We do have a lot of economic data coming out this week. The big reports will be the ISM numbers and the Non-farm payrolls (jobs) report on Friday. The jobs report could be a big surprise. The U.S. census is almost over and temporary workers have been getting laid off. The headline number could show a drop of -150,000 jobs. To make matters even worse there could be tens of thousands of lost jobs thanks to the moratorium on deepwater drilling in the Gulf and the lost economic activity due to the spill. Friday's report could certainly be a shock!

Investors need to be very cautious. Summer is normally a slow time for businesses. If we add to the mix high unemployment, a very weak housing market, record foreclosures, worries about higher taxes in 2011, a slowdown in the inventory replenishment phase, a slowdown in government spending here in the U.S. and in Europe, and put it all together - it doesn't seem like a bullish recipe to be buying stocks. Regular readers know I've been concerned about a double-dip recession in the U.S. for many, many months but the bulls can always surprise you. There are times when stocks can climb the "wall of worry". Sadly I just can't see what the catalyst is to buy stocks right now.

Until the major averages actually break down under their June lows there is hope. We may be stuck in a trading range as investors wait for more data thankfully we won't have to wait very long. As mentioned previously this week we'll get lots of economic data but the major report will be Friday's jobs number. Even then the market may be range bound until we hit earnings season, which doesn't start for another couple of weeks.


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 late 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. Estimates were in the 3 to 5 million foreclosures over the next three years but a White House advisor was quoted with estimates in the six to ten million range over the next three years. This only reinforces my own belief that we will see another tidal wave of foreclosed homes in 2010 and 2011. 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:

After a four-day decline the S&P 500 ekes out a very minor gain on Friday. The Russell index rebalancing wreaked havoc on several large cap names. The very short-term trend for stocks is down but major indices have yet to test support near their June lows. Stocks could end up drifting sideways as investors wait for the upcoming Q2 earnings season to begin in a couple of weeks.

There is a new stop loss for MCK.

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.

New Plays

Awaiting Confirmation

by James Brown

Click here to email James Brown

Editor's Note:

It was an ugly week. The S&P 500 and several indices have produced a bearish reversal pattern on both the daily and weekly charts. The pattern on the weekly chart needs confirmation.

Evidence seems to be building for a double-dip recession in the U.S. but until we see the S&P 500 break down under support at the 1040 level there is still hope. Even if stocks do rally the S&P faces heavy resistance near the 1150 area and a failure there would look like the right shoulder to a very bearish head-and-shoulders pattern.

One very possible scenario is the market churns sideways in the 1040-1100 zone until we see the next Jobs report on July 2nd or until we hear the first week or two of Q2 earnings (middle of July).

We need to be very cautious when it comes to launching new long-term trades. We did see WYNN jump from the watch list to the play list and I have added two more watch list candidates tonight.

Play Updates

Wal-Mart Nosedives - Breaks Major Support

by James Brown

Click here to email James Brown

Closed Plays

Both FO and WMT have been closed.

Play Updates

Boeing Co. - BA - close: 68.77 change: +1.34

The markets struggled last week with four days of declines and a meager bounce on Friday. It was a different story for BA. Traders bought the dip early on Wednesday near the stock's 30-dma and the bounce continued and BA managed to breakout and close above its simple 50-dma on Friday - normally a bullish signal. News surfaced on Thursday that BA had temporarily grounded its entire fleet of 23 test planes for its 787 Dreamliner model. The company said they had found a problem with the horizontal stabilizers on the tail. It would take eight days to fix the problem but the delay would not have an impact on BA's current delivery schedule.

The relative strength in BA is encouraging. More aggressive traders may want to consider launching small speculative positions if BA can close over $70.00. I'm still concerned the market may weaken further so dips in the $65-61 zone (or better yet bounces in this area) would be a preferable entry point.

Remember we want to keep our positions very small. I'm suggesting a stop loss at $59.45. Our long-term target is $79.00.

FYI: Readers may want to consider 2012 calls.

Jun 12th, 2010 - entry price on BA @ 66.22, option @ 5.55
symbol: BA1122A70 2011 JAN $70 LEAP call - current bid/ask $6.20/6.35
-stop loss on BA @ 59.45

Chart of BA:

Popular Inc. - BPOP - close: 2.93 change: +0.06

The banking sector had been leading the market lower as investors awaited the latest news regarding financial regulation. It appears that investors fears were overdone. The Senate and House committees have agreed on a final version of the bill, which is a lot less stringent than feared. Markets hate uncertainty and today's news regarding the final version, which still has to be voted on in Congress, removes a lot of uncertainty. Thus the banking sector rallied on Friday.

BPOP did post a loss for the week but most of its trading was sideways. You could argue BPOP was outperforming its peers. Now the stock looks poised to rally higher. Readers could still open positions now but BPOP does have resistance near $3.10. More cautious traders may want to wait for a breakout or a close over the $3.10 mark before initiating positions.

Remember, keep your position size limited to reduce your risk. BPOP is still a bank and nonperforming loans could be a problem, especially since unemployment in Puerto Rico is more than 15% (Puerto Rico is BPOP's home base).

I am suggesting a stop loss at $2.40. Our first long-term target is $4.00. More aggressive traders may want to aim higher.

BUY the STOCK (BPOP) not the option.
06/14/10 Entry Point: BPOP opened @ 2.91.
Stop loss at $2.40.

Chart of BPOP:

BorgWarner Inc. - BWA - close: 39.30 change: -0.37

It may look like a nasty reversal in BWA this past week but shares have merely filled the gap from the June 15th gap higher. Traders were buying the dip near the stock's 50-dma on Friday. I am not suggesting new bullish positions at this time. More conservative traders who have not exited yet may want to raise their stop toward $36.00.

We have already taken profits once at $44.50. Our second and final long-term target is $49.75.

Feb 17th, 2010 - entry price on BWA @ 37.55, option @ 3.90
symbol: BWA1122A40 2011 JAN $40 LEAP call - current bid/ask $4.60/5.00
-stop loss on BWA @ 34.75

05/29/10 Sell half of remaining position, BWA @ 37.26, option @ 3.90 (+0.00%)
04/29/10 1st Target Hit, BWA @ 44.50, option @ $7.63 (+95%)

Chart of BWA:

Cliffs Natural Resources - CLF - close: 56.37 change: +2.43

CLF, like many stocks like last week, produced a nasty failed rally pattern near resistance. For CLF it was resistance near the 50-dma and the $60.00 level. Shares retraced toward $54 where traders have been buying the dips for the last few days. I suspect that CLF is poised to rally higher from here.

In the news CLF issued a press release late Friday night stating that the company had once again upped its offer to buy Canadian company Spider Resources Inc. CLF has raised their offer from $0.13 (Canadian $) to $0.19 per share and said they have executed a lock-up agreement with Spider's largest shareholder. It looks like CLF has managed to outbid KWG who was also pursuing a merger with Spider.

More aggressive traders might want to consider positions here with a stop loss under $50.00. Or you could wait for CLF to close over resistance near $60.00, which would confirm the move higher. Alternatively, if CLF retreats further look for support at $50 and its 200-dma and buy a dip (or a bounce) there!

Prior Comments:
This is an aggressive trade. CLF can be volatile. Plus, there is a chance that Australia will levy a new tax on resource names like CLF. I suggested readers keep their position size small. Our first target is $75.00.

May 21, 2010 - entry price on CLF @ 46.50, option @ 6.65
symbol: CLF 11A60.00 2011 JAN $60 call - current bid/ask $7.85/8.10
-stop loss on CLF @ 44.90

- or -

May 21, 2010 - entry price on CLF @ 46.50, option @ 7.55
symbol: CLF 12A70.00 2012 JAN $70 call - current bid/ask $ 9.80/10.30
-stop loss on CLF @ 44.90

06/05/10 Suggested Cautious Traders Exit Early!

Chart of CLF:

ConocoPhillips - COP - close: 51.92 change: -0.59

Ouch! It was a rough week for COP. Shares gapped open higher on Monday and then proceeded to trade down for five days in a row. The OIX oil index also posted five declines in a row while the OSX oil services index managed a bounce on Friday probably due to a big bounce in crude oil prices. If you look at a weekly chart of COP the stock has produced a big bearish engulfing (reversal) pattern. This pattern does need to be confirmed but it remains an ominous sign. The selling in COP stalled near $52 and its rising 200-dma. Another technical worry is the rising volume on the sell-off. I would stay very cautious on COP. Wait for a new close over $54.00 before considering new bullish positions. Our first target is $69.00.

May 20, 2010 - entry price on COP @ 51.00, option @ 3.75
symbol: COP 11A55.00 2011 JAN $55 call - current bid/ask $2.97/3.05
-stop loss on COP @ 47.99

- or -

May 20, 2010 - entry price on COP @ 51.00, option @ 4.75
symbol: COP 11A55.00 2012 JAN $60 call - current bid/ask $3.45/3.65
-stop loss on COP @ 47.99

Chart of COP:

EMC Corp. - EMC - close: 19.24 change: +0.59

Bingo! Right on cue EMC pulled back. Shares dipped toward $18.50 and its 30-dma before bouncing on Friday. EMC really outperformed on Friday with a 3.1% gain. If the market cooperates we could see EMC trading near $20 resistance in a couple of weeks. The $20.00 mark has been key resistance in the past. Don't expect EMC to breakout on its first try.

Currently our stop loss is at $16.75. More aggressive traders may want to use a wider stop (maybe $15.90). Our first target is $22.50. Our second, longer-term target is $24.75.

May 6, 2010 - entry price on EMC @ 18.25, option @ 1.40
symbol: EMC 11A20.00 2011 Jan $20 call - current bid/ask $1.39/1.44
-stop loss on EMC @ 16.75

- or -

May 6, 2010 - entry price on EMC @ 18.25, option @ 2.50
symbol: EMC 12A20.00 2012 Jan $20 call - current bid/ask $2.65/2.70
-stop loss on EMC @ 16.75

Chart of EMC:

Lockheed Martin - LMT - close: 78.05 change: -0.07

Defense stocks were no exception to the market's weakness last week. After struggling with resistance in the $81-82 zone LMT rolled over and dipped toward $78. Several technical indicators have turned bearish and we may have just witnessed a new lower high following a bearish double top with the March and April peaks. There has been a lot of volatility in the defense sector lately and investors are nervous as the Pentagon tries to cut its massive budget.

I would be seriously tempted to exit positions early right here and cut my losses. However, LMT still has support near $76.00. More aggressive traders may want to put their stop loss under additional support near $74.00. More conservative traders will want to exit early. On a short-term basis, the trend seems to be down. I am not suggesting new positions at this time.

Our first target is $99.00. Our second, longer-term target is $109.00.

FYI: Our plan was to only use small (half) positions to limit our risk.

May 6, 2010 - entry price on LMT @ 80.50, option @ 6.50
symbol: LMT 11A85.00 2011 Jan $85 call - current bid/ask $ 2.65/ 2.85
-stop loss on LMT @ 74.75

- or -

May 6, 2010 - entry price on LMT @ 80.50, option @ 7.70
symbol: LMT 12A90.00 2012 Jan $90 call - current bid/ask $ 4.30/ 4.80
-stop loss on LMT @ 74.75

06/26/10 Repeat - Conservative traders may want to exit early.
06/05/10 More Conservative traders may want to exit early!

Chart of LMT:

Mckesson - MCK - close: 68.16 change: +0.45

Warning! MCK appears to be breaking support and its weekly chart just produced a bearish reversal pattern. Of course a lot of stocks produced bearish reversal patterns last week and these still need to be confirmed. Unfortunately I do expect MCK to consolidate lower after spending weeks failing to breakout past the $71.00 level.

Short-term MCK has fallen outside of its channel and is struggling to hold its 50-dma. I am expecting a pull back toward the $64.00 area, which should offer some support, bolstered by the simple 200-dma near $63.00. That presents a little problem since our stop loss is at $63.99. I'm suggesting we give MCK a little more room to maneuver and move the stop loss to $62.90. More aggressive and nimble traders may want to go so far as to buy some short-term puts just in case MCK does not bounce near the $64 level. No new positions at this time. We will re-evaluate if MCK does hold the $64 level.

Remember, MCK a couple of weeks ago this stock saw a sharp increase in short interest as it struggled with resistance near $71.

Previous Comments:
This was labeled an aggressive trade with a plan to keep positions small. Our first target is $94.50.

May 18, 2010 - entry price on MCK @ 71.00, option @ 3.25
symbol: MCK 11A75.00 2011 Jan $75 call - current bid/ask $ 2.70/ 2.85
-stop loss on MCK @ 62.90*new*

- or -

May 18, 2010 - entry price on MCK @ 71.00, option @ 4.10
symbol: MCK 12A80.00 2012 Jan $80 call - current bid/ask $ 4.40/ 5.00
-stop loss on MCK @ 62.90*new*

Chart of MCK:

Millicom Intl. - MICC - close: 86.45 change: +0.45

Investors could fall asleep watching shares of MICC. The stock has been stuck trading sideways in the $85-88 zone for nearly two weeks. The long-term trend is still higher but if you're looking for a new entry point I'd wait for a bounce from the $80 area near its rising 200-dma. More aggressive traders could look for dips near $85. It won't trade in this range forever but I don't know what the next catalyst will be. MICC's next earnings report is in the first half of July.

Previous Comments:
If you open positions keep them small to limit your risk. MICC is (normally) a volatile stock. Our long-term target is $99.50 and the $109.00 levels.

May 6, 2010 - entry price on MICC @ 80.00, option @ 8.60
symbol: MICC 11A90.00 2011 Jan $90 call - current bid/ask $ 7.70/ 9.00
-stop loss on MICC @ 74.40

Chart of MICC:

NovaGold Resources - NG - close: 7.37 change: +0.12

I certainly wish our trade in NG was more exciting. The stock posted a massive 1-cent gain for the week. Unfortunately for us our entry point made the week's performance a little worse. NG gapped open on Monday at $7.50 and immediately reversed lower. Traders bought the dip near $7.00 and NG is once again challenging the $7.50 level but it's a little disappointing. Gold prices have rallied back toward their all-time highs. You'd think NG would perform better.

I suggested this play was a little more risky since NG had been underperforming its peers. Yet bigger picture the trend in NG remains higher. Nimble traders could try and jump in on another dip near $7.00. Readers may want to wait for NG to actually close over the $7.50 level and its 50-dma (currently 7.56) before initiating positions.

Previous Comments:
I consider this an aggressive, speculative play on the gold miners, which can be a very volatile group. Our stop loss is at $6.26. More cautious traders could use a stop near $6.50. Our first target is $9.00. Our second target is $9.90. I prefer the stock over the option because the spreads on the option are so wide.

Keep your position size small to limit your risk!

Buy the Stock: NG @ current levels, stop loss: 6.25

- or -

Jun 21, 2010 - entry price on NG @ 7.50, option @ 1.40
symbol: NG 11A7.50 2011 Jan $7.50 call - current bid/ask $ 1.25/ 1.40
-stop loss on NG @ 6.26

Chart of NG:

PEPSICO Inc. - PEP - close: 60.77 change: -1.63

PEP has just produced a six-day slide. The declines from Monday-Thursday we can blame on the market's weakness. I don't see a reason for PEP to under perform on Friday and under perform it did. Shares lost 2.6% with a new four-month close. This does not bode well at all. Volume soared to 22 million versus the normal 6.8 million shares a day. The most logical explanation might be the Russell index rebalancing. As the index adds new components, fund managers need sell part of the stake in the rest of the index to raise cash to buy the new components. At least that's one possibility. I find the action on Friday to be very bearish and odds just spiked significantly that PEP will hit our stop loss at $59.85 soon. More conservative traders will want to seriously consider an early exit right now! If you exit now you can minimize or avoid a loss with the option at $4.45. Our final target has been $72.25.

July 7th, 2009 - entry price on PEP @ 57.25, option @ $4.50(estimate)
symbol: VP-AL, 2011 $60.00 LEAP call - current bid/ask $4.45/4.55
-stop loss on PEP at $59.85

06/26/10 Repeat - More cautious traders will want to consider an exit.
06/05/10 More cautious traders may want to exit now to avoid a loss.

03/27/10 SELL HALF: PEP $ 66.59, Option @ $8.00 (+77.7%)

Chart of PEP:

Transocean Ltd. - RIG - close: 49.77 change: +0.02

Volatility could be a constant companion with us in this RIG trade. Shares soared +16% a week ago and just gave back about 10% this week. The dip to $50 this week isn't that surprising considering the widespread market declines. I would use this pull back as a new bullish entry point just remember to keep your positions small.

The oil sector was in the headlines this past week as a judge with the U.S. district court in New Orleans overturned the Obama administration's six-month moratorium on deepwater drilling. The Justice Department appealed the decision and asked for a "stay" but the judge said now to a stay on his decision. The courts felt that Obama's moratorium was a punitive measure. The court battle isn't over yet. Prosecutors could appeal it to a higher court. The concern is if this judge's decision is overruled then drilling companies will move their rigs elsewhere and production in the Gulf could dry up for years, which will negatively impact the entire nation.

Previous Comments:
This is a very aggressive trade given the unknown risks associated with RIG's connection to the Gulf oil spill. Our stop loss is at $38.45. More conservative traders could place theirs closer to $40.00 or the low near $41.88. Our long-term targets are $59 and $75.

Jun 09, 2010 - entry price on RIG @ 43.50, option @ 6.50
symbol: RIG 11A50.00 2011 Jan $50 call - current bid/ask $ 8.40/ 8.65
-stop loss on RIG @ 41.80

- or -

Jun 09, 2010 - entry price on RIG @ 43.50, option @ 7.25
symbol: RIG 12A60.00 2012 Jan $60 call - current bid/ask $ 9.30/ 9.65
-stop loss on RIG @ 41.80

Chart of RIG:

Ruby Tuesday Inc. - RT - close: $ 9.13 change: +0.16

Consumer-related stocks were hammered pretty good last week. Investors were shocked by the record-breaking decline in new home sales. Shares of RT were pummeled from short-term resistance near $10.50 toward support near $9.00. The low on Friday was $8.83, which was almost to tag the 200-dma near $8.76. I think the decline is overdone. However, the better than expected consumer sentiment numbers on Friday did not have much impact on RT or the rest of the consumer-related stocks.

Traders can use this dip as an entry point. More conservative traders might want to raise their stop loss toward the $8.75 level.

Previous Comments:
I prefer buying the stock over the option. Our long-term targets are $12.00 and $14.75.

Jun 08, 2010 - entry price on RT stock @ 9.05
-stop loss on RT @ 8.40

- or -

Jun 08, 2010 - entry price on RT @ 9.05, option @ 1.90
symbol: RT 11A10.00 2011 Jan $10 call - current bid/ask $ 0.90/ 1.50
-stop loss on RT @ 8.40

Chart of RT:

U.S. Natural Gas ETF - UNG - close: 8.31 change: +0.24

The U.S. dollar oscillated sideways most of the week before turning lower on Friday. Aside from Monday's decline the UNG has been trading sideways near the $8.00 level. Friday's drop in the dollar boosted commodities. A week ago I suggested readers wait for a dip near $8.00 before launching new positions. UNG provided that pull back. If you missed it I would still be tempted to buy this ETF on the bounce.

Prior Comments:
Look for the $9.00 level and the 200-dma to offer some overhead resistance. Our first long-term target is $10.85 but we will probably adjust this as necessary. Just because the options look "cheap" don't buy too many. Be disciplined with your position size. You can add to positions later once UNG confirms the trend change.

Jun 12, 2010 - entry price on UNG @ 8.17, option @ 1.38
symbol: UNG1122A8 JAN 2011 $8 LEAP call - current bid/ask $1.37/1.41
-stop loss on UNG @ 7.35

- or -

Jun 12, 2010 - entry price on UNG @ 8.17, option @ 1.59
symbol: UNG1221A10 JAN 2012 $10 LEAP call - current bid/ask $1.43/1.55
-stop loss on UNG @ 7.35

Chart of UNG:

WLT - Walter Energy Inc. close: $70.86 change: +2.56

WLT gapped higher on Monday as the markets reacted to news that China was going to allow for a more flexible yuan. That excitement proved to be short lived. The rally in WLT failed at the $75.00 level. The 3.7% gain on Friday could have been influenced by the drop in the U.S. dollar. I doubt the lower than expected GDP numbers inspired any buying interest.

Thus far WLT is struggling with a trend of lower highs. I would wait for another dip (or bounce) near $65.00 as our next entry point. Or you could wait for a close over $75.00 (or even $80). I do want to warn readers that the 50-dma is about to cross under the 200-dma. This event is normally a very bearish signal. It's been nicknamed the "death cross".

Prior Comments:
Keep an eye open on news regarding China. The plan was to use small positions to limit our risk. Our first target is $99.00.

May 6, 2010 - entry price on WLT @ 73.00, option @ 12.00
symbol: WLT 11A80.00 2011 Jan $80 call - current bid/ask $ 7.60/ 8.00
-stop loss on WLT @ 63.90

- or -

May 6, 2010 - entry price on WLT @ 73.00, option @ 14.10
symbol: WLT 12A90.00 2012 Jan $90 call - current bid/ask $11.30/12.00
-stop loss on WLT @ 63.90

Chart of WLT:

Wynn Resorts - WYNN - close: 89.04 change: +3.01

WYNN has jumped from our watch list to our play list. Shares hit our breakout trigger point at $87.75 on Monday, June 21st when shares opened at $86.97 and spiked to $88.50. After a week of churning sideways WYNN managed to surge 3.5% on Friday with strong volume. The stock garnered an upgrade on Thursday with one firm boosting WYNN to a "buy" and raising their price target from $85 to $115.

If you don't want to chase it here you could wait for a dip back toward $85.00. Given the $87.75 entry point we have a stop loss at $79.45. Our long-term target is $112.50.

This was labeled an aggressive, higher-risk trade. WYNN is a volatile stock. We want to keep our position size small to limit our risk.

Jun 21, 2010 - entry price on WYNN @ 87.75, option @ 11.90
symbol: WYNN 11A90.00 2011 Jan $90 call - current bid/ask $12.70/12.95
-stop loss on WYNN @ 79.45

- or -

Jun 21, 2010 - entry price on WYNN @ 87.75, option @ 16.25
symbol: WYNN 12A100.00 2012 Jan $100 call - current bid/ask $17.45/18.15
-stop loss on WYNN @ 79.45

Chart of WYNN:


Fortune Brands - FO - close: 42.29 change: +0.16

Yuck! FO has suffered an ugly two weeks. The bounced attempt from the 200-dma quickly failed on Monday. Tuesday saw FO breakdown under technical support at its 200-dma. The dismal new home sales sent shockwaves through anything related to the consumer and FO eventually closed the week at four-month lows. Our stop loss at $42.90 was hit on June 23rd.

We have already chosen to sell half our position near $52.

Mar. 12th, 2009 - entry price on FO @ 47.55, option @ $2.20
symbol: FO1018I50 SEP 2010 $50 call - current bid/ask $0.65/ 0.80
-stop loss on FO @ 42.90

06/23/10 - Stopped out @ 42.90, option at $0.35
05/29/10 -Conservative traders should exit now-
04/17/10 Sell Half - FO @ $52.00, option @ $4.30 (+95%)

Chart of FO:

Wal-Mart Stores Inc. - WMT - close: 48.80 change: -1.23

We all know WMT is famous for "slashing prices" but not with regards toward its stock price. Shares were pummeled this week as investors worried about the state of the consumer. The abysmally low new home sales numbers raised concerns about consumer spending even though we knew home sales would be down because of the tax credit expiration. To make a bad week even worse WMT significantly underperformed the market on Friday with a 2.4% decline. This breakdown under psychological support at $50.00 is very bearish as it also breaks the long-term trendline of support dating back to the 2007 low.

So why did WMT underperform so badly? In addition to the reasons above the Obama administration is pressing for cardcheck again, which would allow employees to automatically create a union if more than 50% agree to it no matter what the business has to say about it. Would you believe that the financial regulation bill could have played a part? WMT has been trying to start a bank in the U.S. for a while now but kept running into obstacles. It makes perfect sense. If you have millions and millions of consumers in your store every week, why not provide them the convenience of placing a bank right there in the store. WMT would immediately have a huge customer base. There was chatter today that the 1,500-page fin-reg bill could have something in it that might prevent WMT from finally starting a bank in the U.S.

One of the biggest reasons WMT underperformed on Friday was probably the Russell indices rebalancing. This time fund managers had to account for the new Berkshire Hathaway B shares being added to the index. This created a need to raise a lot more cash than normal. Money managers sell stocks to raise cash so they can afford to buy the new components and match the index. Big cap, highly liquid stocks like WMT (and PEP) were sold so funds could raise cash.

WMT hit our stop loss at $48.95 on Friday closing our play.

Mar 7th, 2009 - entry price on WMT @ 54.14, option @ 4.60
symbol: WWT1221A55 JAN 2012 $55 LEAP call - current bid/ask $3.35/3.50
-stop loss on WMT @ 48.95

06/25/10 - Stopped out @ 48.95, option @ $2.75 (-40%)

Chart of WMT


Outsourcing & Life Insurance

by James Brown

Click here to email James Brown

New Watch List Entries

INFY - Infosys Technologies

MET - MetLife Inc.

Active Watch List Candidates

BVN - Compania de Minas Buenaventura

CRM - Salesforce.com

CRS - Carpenter Technology


MCD - McDonald's Corp.

Dropped Watch List Entries

WYNN has graduated to the play list after hitting our trigger.

New Watch List Candidates:

Infosys Technologies - INFY - close: 62.32 change: +0.81

Investor fears of a double-dip recession here in the U.S. and Europe are growing. Thus tonight we're looking at a company based in India. India is seeing a widespread boom but it's constantly being overshadowed by the growth in China. This is not a pure play on India. Many of INFY's clients are western companies in the U.S. Yet in this environment, where cost-cutting reigns supreme, an outsourcing giant like INFY should hold up well.

INFY tagged a new high on Monday and retreated. I am suggesting we open very small positions on a dip to $59.00. If triggered we will use a stop loss at $54.90, just under the 200-dma. Our long-term target is $79.00, which happens to coincide with the Point & Figure chart that has an $81 target.

Company Info:
Infosys defines, designs and delivers IT-enabled business solutions that help Global 2000 companies win in a Flat World. These solutions focus on providing strategic differentiation and operational superiority to clients. With Infosys, clients are assured of a transparent business partner, world-class processes, speed of execution and the power to stretch their IT budget by leveraging the Global Delivery Model that Infosys pioneered. Infosys has over 113,000 employees in over 50 offices worldwide (source: company press release or website)

Keep your positions small!

Buy-the-Dip trigger: $59.00

BUY the 2011 January $60.00 calls (INFY 11A60.00)


BUY the 2012 January $65.00 calls (INFY 12A65.00)

Chart of INFY:

MetLife Inc. - MET - close: 41.01 change: +1.61

The rebound in the insurance industry looks tempting. The sector did step backward this past week but the correction was not as bad as the rest of the market. The group actually looks poised to rally higher this week. I like MET as a bullish candidate. Barrons ran a nice article on MET describing how MET, the largest life insurer in the U.S. and Mexico, is poised to grow now that is has bought the Alico unit from AIG, which gives MET exposure to China and Brazil.

Technically MET still has a bullish trend of higher lows but on a short-term basis MET is facing resistance at $42.00 and its 50-dma closer to $42.50. I am suggesting we use a trigger at $42.75 as our entry point to buy call LEAPS. If triggered we'll use a stop loss at $36.40, which is just under the May low. There is some resistance near $48 and $50 but our long-term target is the $55-60 zone.

Company Info:
MetLife, Inc. is a leading provider of insurance, employee benefits and financial services with operations throughout the United States and the Latin America, Europe and Asia Pacific regions. Through its subsidiaries and affiliates, MetLife, Inc. reaches more than 70 million customers around the world and MetLife is the largest life insurer in the United States (based on life insurance in-force). The MetLife companies offer life insurance, annuities, auto and home insurance, retail banking and other financial services to individuals, as well as group insurance and retirement & savings products and services to corporations and other institutions (source: company press release or website)

Keep your positions small. We can add to this trade as MET reaffirms the up trend.

Breakout trigger: $42.75

BUY the 2011 January $45 call (MET 11A45.00)

- or -

BUY the 2012 January $50 call (MET 12A50.00)

Chart of MET:

Active Watch List Candidates:

Compania de Minas Buenaventura - BVN - close: 40.41 change: +1.26

Mining stock BVN surged to a new six-month high on Friday as gold prices rally back toward their recent (and record) highs. The trend for BVN is up but volume has been very light the past week. We do not want to chase the stock here. Gold miners can be a volatile group and it will see another pull back. Of course that doesn't mean BVN won't hit $42 first before consolidating. Right now we'll keep our trigger to open bullish positions at $35.15. More aggressive traders may want to eye another bounce from $38.00 instead.

Unfortunately we don't have any LEAPS so the longest-dated options available are December 2010 calls. If triggered we'll use a stop loss at $29.90. Our first target is $42.25. Our second, more aggressive target is $47.50.

Buy-the-Dip trigger: $35.15

BUY the 2010 December $40 calls (BVN1018L40)

Chart of BVN:

Salesforce.com - CRM - close: 91.62 change: +0.58

CRM has been in the headlines as the legal battle with Microsoft (MSFT) heats up. The two companies are arguing over patent infringement violations and stolen intellectual property. At the moment I don't see it having an affect on CRM's share price. We've been expecting a correction and CRM dipped toward short-term support near $90.00. The fact that not one but two analyst firms raised their price targets on CRM last week did not stop shares from participating in the market's decline. One firm upped their price target to $110, another to $115.

I'm hoping the correction continues. Our plan is to launch bullish positions no a dip near $80. Officially our entry point is $81.00. If triggered our stop loss is $74.00. Our new long-term target is $119.00.

Buy-the-Dip trigger: $81.00

BUY the 2011 January $85 calls (CRM 11A85.00)
- or -
BUY the 2012 January $90 calls (CRM 12A90.00)

Chart of CRM:

Carpenter Technology - CRS - close: $36.28 change +0.62

Volume has been falling as CRS followed the market lower. That's a good sign. I suspect CRS is poised to bounce and I was tempted to make it a new play tonight. However, the market's short-term trend is still down and until proven otherwise we're better off waiting for CRS to dip toward its June lows. We will keep the trigger at $34.00. More conservative traders could still hold out hope for a dip nearer to the 200-dma. If we are triggered at $34.00 we'll use a stop loss at $29.40. I would initiate small positions only. We can add to positions as CRS confirms the trend. Our long-term target is $44.75.

Buy-the-Dip trigger: $34.00

BUY the 2010 December $35 calls (CRS 10L35.00)

Chart of CRS:

SPDR Gold ETF - GLD - close: 122.76 change: +1.46

Money continues to pour into gold and the precious metal has bounced back toward its all-time highs after testing its 12-week trendline of higher lows. There are plenty of pundits suggesting this is a bubble and just as many crying that gold will rally for years to come. Given the troubles in Europe and our own debt burden here in the U.S. the demand for gold might be strong for a long time.

We don't want to chase the GLD here near its highs. I am actually adjusting our trigger point lower. It looks like the GLD is coiling for a breakout. Now it could be for a breakout higher but it also looks like a subtle bear-wedge pattern. I suspect the GLD will breakdown, retest its long-term trendline of support, and then rally again. Our new entry point to buy call LEAPS on the GLD is $115.00. We'll adjust the stop loss to $108.45. Our target is $140.

Buy-the-Dip trigger: $115.00

BUY the 2010 March $120 call (GLD 11C120.00)

- or -

BUY the 2012 Jan. $130 call (GLD 12A130.00)

Chart of GLD:

Weekly Chart of GLD:

McDonald's Corp. - MCD - close: 67.42 change: -0.31

A four-day decline in the stock market turned into a five-day loss for shares of MCD. The bounce has rolled over and MCD just formed a new lower high. We need to be defensive with any bullish positions. MCD should still have support near $66.00 and the $65.00 levels but keep your positions small. MCD paused at its 100-dma on Friday and you could argue MCD is very short-term oversold. I suggest we stick to our plan and wait for a dip toward $66. Officially our entry point to buy calls is at $66.50. We will use a stop loss at $63.25, just under the 200-dma. Our long-term target is $79.75.

Buy-the-Dip trigger: $66.50

BUY the 2011 January $70 calls (MCD1122A70)
- or -
BUY the 2012 January $80 calls (MCD1221A80)

Chart of MCD: