Option Investor

Daily Newsletter, Monday, 7/27/2009

Table of Contents

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

Market Wrap

Another Up Day On A Mixed Bag Of News

by Todd Shriber

Click here to email Todd Shriber
Monday was certainly one of the more lethargic days stocks have seen in the recent rally, but a late-day buying surge helped lead all three major US indexes higher, albeit by the thinnest of margins. The Dow Jones Industrial Average inched up just 15.27 points to close at 9108.51 while the S&P 500 made its way above 980 to close up 2.92 points at 982.18. The Nasdaq bounced back from Friday's decline to post a meager 1.93 point gain, finishing at 1967.89. Volume was nothing to write home about, as trade was anemic on both the Nasdaq and New York Stock Exchange, but hey, it was still an up day.

Stats Table

To be sure, things could have been worse today. A mixed bag of news had the market searching for direction after earnings announcements from Aetna (AET), RadioShack (RSH) and Verizon (VZ) disappointed the Street. Verizon, the largest US phone company and a Dow member, said second-quarter profit tumbled to $3.16 billion, or 52 cents a share, down from $3.4 billion, or 66 cents, a year earlier. Sales rose 11.3% to $26.9 billion, but that wasn't enough to keep the company from announcing that it would pare its workforce by 8,000 this year. To be clear, that is a workforce reduction of ANOTHER 8,000. Verizon had already lowered its headcount by the same amount in the past year.

Health insurance giant Aetna had its own glum earnings news to report. The company said second-quarter profits withered by 28% as higher costs ate into the company's bottom line. Aetna earned $346.6 million, or 77 cents a share, compared with $480.5 million, or 97 cents a share, a year earlier. Making matters worse, Aetna revised its 2009 earnings estimates to $2.75-$2.90 a share. That follows a downward revision on June 2 to $3.55-$3.70 a share. So that gives us two downward revisions from Aetna's original 2009 earnings estimate of $3.85-$3.95.

And offering further proof that the consumer is not fully recovered, RadioShack said second-quarter profits rose 18%, but that was due to a familiar theme: reduced costs. Sales fell 3% to $965.7 million and investors punished the stock, sending it down 7% to $15, erasing most of Friday's 10.2% gain.

While earnings results have been robust with 75% of the S&P 500 members that have reported beating estimates, it seems like many of these earnings beats are coming as a result of lowered costs, not organic growth. At some point, the market is going to demand profit growth that comes from increased market share and revenue, not from factory closings and reduced workforces. After all, a company can only cut its way to profitability for so long. Cost-cuts are a temporary bandage when many firms are likely in need of a tourniquet.

It is worth noting that positive earnings surprises probably cannot continue forever and today's news from Aetna, Verizon and RadioShack may signal that the market needs to readjust expectations and ready itself for more inline reports and maybe a few negative ones. Then again estimates were substantially lowered this year that it is not all that hard for companies to beat their numbers. The charts below highlight earnings surprises and S&P 500 profit estimates.

Earnings Surprise Chart

Earnings Estimate Chart

Along these lines, the CBOE Volatility Index, or VIX, was up more than 5% today. The VIX is a measure implied volatility on S&P 500 equity options over a 30-day period. Commonly regarded as the ''fear index,'' the VIX rises when options premiums rise as more investors seek protection for their equity positions with options.

Now I'm not saying that the VIX is headed back to the 89 area, where it resided late last year following the collapse of Lehman Brothers, but a pop in the VIX on a light volume day littered with earnings disappointments is worth taking note of.

VIX Chart

As I mentioned earlier, the news flow today was mixed and since the bad news has been highlighted, it is time to talk about the positives, or ''green shoots'' if you will. Sales of new homes surged 11% in June, the biggest gain in eight years and that provided fodder for chatter that the worst housing slump since the Great Depression may be waning. Sales rose to 384,000, leading economists at Deutsche Bank and Goldman Sachs to opine that the positive data signals an end to the decline in home starts and sales.

Prices are still expected to decline, due mainly to rising unemployment, but it is hard to ignore the positive tenor of today's news. The S&P/Case Shiller Index, which tracks home values in 20 major metro areas across the U.S., will be released before the open tomorrow and is expected to show a decline of 17.9% in May, a slight improvement from the 18.1% drop the survey showed April.

The housing news was met with such open arms that investors even sent shares of construction services firm Masco (MAS) up on the day, despite the company's report that second-quarter earnings tumbled 33%. Masco also said it still expects to lose money in 2009 and that housing starts will fall 40% to 550,000 units.

I would have to occupy a lot of real estate here (no pun intended) to address the action in shares of the major home builders, so it makes a little more sense to highlight the iShares Dow Jones US Home Construction ETF (ITB), which holds the largest home builder stocks. ITB rose 41 cents, or 3.6%, to close at $11.83 and now rests well above both its 50 and 200-day moving averages. ITB has tacked on roughly 20% in the past three weeks and more positive housing data is exactly what the bulls need here to keep the rally going.

ITB Chart

Honeywell (HON), the industrial conglomerate and former Dow member, is another stock that may be indicative of the fact that market be set to take a break. The company reported second-quarter earnings today that predictably were far below last year's numbers. That's no big deal, all the cool kids are doing that these days. What caught my eye about Honeywell was the fact that it said it will earn $2.85 a share on sales of $31.5 billion this year. The profit estimate is above analyst estimates of $2.83 a share, but the revenue estimate falls below analysts' forecast of $32.61 billion.

Honeywell had prepared investors for a tough year when it reported first-quarter numbers earlier this year, so today's news certainly was not overly negative. That said, I get the feeling that if Honeywell had reported earnings last week, the shares would have gone up a couple of bucks. Instead, they rose just 25 cents to close at $34.24. Like I said, the market may ready to demand a bit more than just beating already reduced estimates.

With an eye towards Tuesday's market action, I will stay with the theme of beating earnings estimates on lower costs. Amgen (AMGN), the biotech giant, reported a 40% jump in second-quarter profits after the close Monday due to what else? Lower costs. Amgen earned $1.27 billion, or $1.25 a share, compared with $906 million, or 84 cents, a year earlier.

Amgen also boosted its full-year profit forecast to $4.80-$4.95 a share on sales of $14.4 billion to $14.8 billion. That's up from previous guidance of $4.55-$4.75 a share. Analysts had been expecting $4.57 a share on sales of $14.3 billion. In other words, it would not be a surprise to see Amgen's shares trade higher tomorrow.

Amgen shares gapped up earlier this month, blasting through the 50 and 200-day moving averages and the stock closed at $60.77 today, above critical resistance at $60.

Amgen Chart

Volume might be a little stronger tomorrow, at least I hope it will be stronger. In addition to the home prices report, consumer confidence is expected to show a small decline to 49 from the previous reading of 49.3. In addition, another massive debt auction is on the docket. Following Monday's sale of $90 billion in T-bills, Tuesday will feature a $48 billion auction for two and 20-year notes. Uncle Sam just cannot keep the printing presses working fast enough.

On the other hand, with the Fed's Beige Book Report looming on Wednesday and the second-quarter GDP report slated for Friday, another light volume session could be in the offing on Tuesday. If that is the case, there are still a few important earnings reports worth watching. Starting in the oil patch, BP (BP) is expected to report profits of 92 cents a share, and a name I have mentioned frequently in the past, National Oilwell Varco (NOV) is expected to report 87 cents a share in profits. Both reports are due out before the bell.

I was bullish on NOV in early May and the stock has taken investors for a wild ride, topping out just below $41 in late May and retracing all the way below $29 earlier this month. In the past three weeks, NOV has gained about 30%. This stock is highly correlated to the price of oil, making tomorrow's earnings report worth watching, particularly if the company offers full-year guidance. Keep in mind that Schlumberger (SLB), the king of the oil services group, reported disappointing results on Friday.

NOV Chart

US Steel (X) is another commodities-related name reporting results before the open tomorrow. Analysts are calling for a loss of $3.45 a share, but it appears investors will be focusing on production data for the second half of 2009 to get a sense about whether or not the steel industry has found a bottom.

While there earnings reports aplenty tomorrow, I offer up one more interesting name to follow. Coach (COH), the purveyor of high-end handbags and wallets, is expected to post a profit of 43 cents for its fiscal fourth quarter. The stock has been on a tear lately and that led Lazard Capital Markets to downgrade Coach to ''hold'' from ''buy'' on Monday.

Coach could offer some insight regarding the health of the consumer and the company has been a voracious cash stasher over the past year, reporting $180 million in free cash flow at the end of the fiscal third quarter. Keep an eye on what Coach has to say about its cash position for the most recent quarter. After all, cash is king these days.

Taking a look at market technicals, the Dow's move above 9100 is significant, but the anemic volume in Monday's session has me leaning toward thoughts of a pullback. If you are an indicator/oscillator buff, the 14-day RSI on the Dow closed at 72 on Monday, showing an overbought condition. Support for the venerable index probably lies in the 8925 area, but if the Dow wants to continue its move higher, resistance looms in the low 9300 area.

Dow Chart

Likewise with the S&P 500, the RSI now rests at 72.26. Resistance is obviously looming at 1000 and it would be reasonable to expect that resistance to be quite strong. Given the recent rally, support has moved to 955-965 area. The S&P 500 is now up almost 112 points since July 8th. Make of that what you will, but too much too fast is what I am feeling.

S&P 500 Chart

The Nasdaq showed some weakness on Friday due to dour earnings reports from Amazon (AMZN) and Microsoft, shedding seven points and the tech-heavy index could only reclaim 1.92 of those lost points on Monday. The Nasdaq is appearing even more overbought than its major index brethren with an RSI reading above 73. Hovering around 1970, the 2000 area, a level that seemed unthinkable just a few weeks ago, appears to be the next resistance. That is after 1980 is broken. If the Nasdaq cannot hold 1950 on the downside it could retrace to the 1935 area.

Nasdaq Chart

It is hard to bet on a big move in either direction during Tuesday's trade, especially with the Beige Book and GDP numbers looming, but if the market does continue its bullish ways, a substantial uptick in volume would be a positive. That and some increased quality in earnings. Without those ingredients, the recipe will be for a sour sell-off, not a scrumptious rally.

New Plays

Is the S&P 500 headed for 1,000?

by James Brown

Click here to email James Brown
Editor's Note:

Our plan hasn't changed. We want to buy stocks on a dip. The challenge is exercising some patience and waiting for the dip. I'd focus on a pull back toward the 950 level for the S&P 500. Broken resistance should become new support. However, it's very possible that the S&P 500 rallies to 1,000 before correcting. Nimble traders could try opening bearish positions on a rise near the 1,000 level. Potential trading vehicles would be bearish positions on the SPY, SSO, or bullish positions on inverse ETFs like SH or SDS.

In Play Updates and Reviews

The Market Grows More Overbought

by James Brown

Click here to email James Brown

BULLISH Play Updates

Ameron Intl. - AMN - close: 74.36 change: +0.30 stop: 69.95 *new*

AMN is still ticking higher and looks poised to breakout over resistance at $75.00 soon. I'm inching up our stop loss to $69.95. We want to take profits at $74.70. Our second target is $79.50. I do consider this somewhat aggressive because AMN does not trade with a lot of volume.

Entry on      July 16 at $70.50 *triggered       
Change since picked:     + 3.56   			
Earnings Date          09/21/09 (unconfirmed)    
Average Daily Volume:       150 thousand
Listed on  July 15, 2009    

Aegean Marine Petrol. - ANW - close: 17.88 change: +0.10 stop: *varies*

Over the weekend I suggested a breakout trigger to buy ANW at $18.25. Keep in mind that ANW could breakout over resistance at $18.00 just as the S&P 500 rallies to resistance near 1,000. If the S&P 500 reverses under 1,000, and it should since it's overbought, then ANW's breakout over $18.00 will probably reverse too. It could be a bull-trap sort of entry point. I would only buy 1/2 or 1/4 of my normal position if ANW does hit our breakout trigger at $18.25.

Our buy the dip entry point is at $16.50. If triggered at $16.50 our first target is $18.20 and our second target is $19.75. If trigged at $18.25 then our first target is $19.75.

Entry on      July xx at $xx.xx <-- two triggers
Change since picked:     + 0.00   			
Earnings Date          08/12/09 (unconfirmed)    
Average Daily Volume:       284 thousand
Listed on  July 18, 2009    

Hormel Foods - HRL - close: 35.92 change: +0.03 stop: 34.20

HRL is still struggling with the $36.00 level. Yet the action today was bullish with a bounce from the $35.50 region. I still expect HRL to contract if the market corrects so I'm not suggesting new positions at this time. My first target is $37.90. My second target is $39.90. My time frame is mid to late August because we need to exit in front of earnings. FYI: The Point & Figure chart is very bullish with a $50 target.

Entry on      July 20 at $35.40 /gap higher entry
                              /originally listed at $35.25
Change since picked:     + 0.52   			
Earnings Date          08/20/09 (unconfirmed)    
Average Daily Volume:       486 thousand
Listed on  July 20, 2009    

IDEX Corp. - IEX - close: 27.33 change: -0.26 stop: 24.75

Nothing has changed from our weekend comments. I'm suggesting a trigger to buy IEX at $26.10 but readers could use a $26.25-25.00 zone as an entry range. The Point & Figure chart is bullish and points to a $39.00 target. If we are triggered near $26.00 our first target is $29.85. My time frame is six to eight weeks.

Entry on      July xx at $xx.xx <-- see TRIGGER  
Change since picked:     + 0.00   			
Earnings Date          07/20/09 (confirmed)    
Average Daily Volume:       570 thousand
Listed on  July 25, 2009    

J.P.Morgan Chase - JPM - close: 38.13 change: +0.21 stop: 33.90

JPM spiked higher this morning but the rally didn't last and the stock hovered around $38.00 all day. The plan is to buy JPM on a dip at $35.50. Our first target is 38.75. Our time frame is four to six weeks. FYI: JPM's P&F chart is bullish with a $51 target.

Entry on      July xx at $xx.xx <-- see TRIGGER  
Change since picked:     + 0.00   			
Earnings Date          07/16/09 (confirmed)    
Average Daily Volume:        55 million 
Listed on  July 18, 2009    

LDK Solar Co. - LDK - close: 11.99 change: +0.18 stop: 9.49

LDK posted another 1.5% gain as it grows even more overbought. We want to jump in on a dip at $10.25. The $10.00 level should offer support and the level is underpinned by the 50-dma. We'll start with a stop loss at $9.45 but more conservative traders could try a tighter stop. If triggered our first target is $11.80. We won't have a lot of time. Earnings are due out around August 12th.

Entry on      July xx at $xx.xx <-- see TRIGGER  
Change since picked:     + 0.00   			
Earnings Date          08/12/09 (unconfirmed)    
Average Daily Volume:       4.0 million 
Listed on  July 25, 2009    

Morgan Stanley - MS - close: 28.05 change: -0.20 stop: 24.90

We continue to wait for MS to dip back toward its trendline of support. We want to buy MS on a dip at $26.25. Our first target is $29.20. Our second target is $31.00.

Note: We might want to consider a buy the breakout entry point at $29.35.

Entry on      July xx at $xx.xx <-- see TRIGGER  
Change since picked:     + 0.00   			
Earnings Date          07/22/09 (confirmed)    
Average Daily Volume:        24 million 
Listed on  July 23, 2009    

Microsoft - MSFT - close: 23.11 change: -0.34 stop: 21.99

MSFT slipped to $22.90 this afternoon. We had raised the entry point to $23.00 so the trade is open. The stock is still honoring its bullish channel. Our new stop loss is $21.99, which doesn't give MSFT much room. More aggressive traders may want to widen their stop loss to under $21.00 or under $20.00 depending on your risk tolerance. If the market corrects MSFT could easily dip toward $22.00. We may want to increase our position on a dip near $22. Our ten to twelve week target will be $27.75.

Entry on      July 27 at $23.00
Change since picked:     + 0.11   			
Earnings Date          07/23/09 (confirmed)    
Average Daily Volume:        58 million 
Listed on  July 23, 2009    

NATCO Group - NTG - close: 37.01 change: -0.10 stop: 33.90

The rally ran out of steam at $37.35 today. I am still suggesting readers take profits here. Our final exit is the $37.50 mark. More aggressive traders may want to let this play run and just keep raising your stop loss but you'll need to raise it significantly to protect any profits. An alternative exit would be the June highs near $38.40. Readers may want to exit near there. I'm not suggesting new positions.

Entry on      July 15 at $32.56 *triggered/gap higher entry
Change since picked:     + 4.45   			
                              /sell 1/2 @ 36.65 (+12.5%)
Earnings Date          08/03/09 (unconfirmed)    
Average Daily Volume:       270 thousand
Listed on  July 14, 2009    

UltraShort QQQ - QID - close: 26.98 change: -0.04 stop: 26.75

I strongly suspect that our aggressive play on the QID, an inverse ETF on the NASDAQ 100, will be stopped out tomorrow. AMGN is a big component of the NDX and the company just reported better than expected earnings and raised guidance. The QID could actually gap open lower tomorrow morning.

I am not suggesting new bullish positions in the QID right now but we may want to launch new positions as the NASDAQ composite nears resistance at the 2,000 level. Currently the NASDAQ-100 index is testing resistance at the 1600 level.

We knew this was a very aggressive, contrarian play and suggested readers only trade small positions.

Don't forget that the QID is a double-short ETF so it should see twice the volatility of the NDX.

Entry on      July 22 at $28.75 
Change since picked:     - 1.77   			
Earnings Date          00/00/00 
Average Daily Volume:        19 million 
Listed on  July 21, 2009    

Ross Stores - ROST - close: 44.06 change: -0.43 stop: 41.60 *new*

ROST is holding up reasonably well but I'm turning more cautious and raising our stop loss to $41.60 (breakeven). If you haven't taken any profits yet I strongly suggest you do so now (at least 1/2). I'm not suggesting new bullish positions at this time. Our next target is $45.75. Our final target is $49.45. My time frame is about six weeks.

Entry on      July 13 at $41.60 
Change since picked:     + 2.46
                              /sell half @ 44.00 (+5.7%)
Earnings Date          08/20/09 (unconfirmed)    
Average Daily Volume:       2.4 million 
Listed on  July 13, 2009    

SBS - close: 33.34 change: +2.49 stop: 28.75

It looks like we weren't the only ones who noticed the bullish breakout in SBS on Friday. The stock gapped open higher today and soared over 8% on strong volume. We certainly can't blame it on the Brazilian Bovespa index, which barely closed in positive territory.

Right now I'm sticking to our buy the dip entry at $30.00 but we might want to up our trigger to the $31.15-31.00 zone. I'm raising the stop loss to $28.75. Our first target is $34.50. Earnings are due out in early August but the date is not confirmed.

Entry on      July xx at $xx.xx <-- see TRIGGER  
Change since picked:     + 0.00   			
Earnings Date          08/07/09 (unconfirmed)    
Average Daily Volume:       249 thousand
Listed on  July 25, 2009    

BEARISH Play Updates

Charles River Labs - CRL - close: 31.25 chg: -0.08 stop: 32.15

Today's action is hinting that the bounce is about over but readers may want to wait before launching new positions. More conservative traders could lower their stops toward today's high (31.60). I'm not suggesting new positions at this time. More conservative traders could try and lower their stops toward $31.60. Our first target is $26.25.

Entry on      July 23 at $30.94 *new entry point
Change since picked:     + 0.31   			
Earnings Date          08/04/09 (confirmed)    
Average Daily Volume:       459 thousand
Listed on  July 22, 2009    

Gen-Probe - GPRO - close: 41.41 change: +0.38 stop: 42.01

GPRO is still marching higher. There is no change from my weekend comments. I'm suggesting more conservative traders exit early right now. I'm not suggesting new bearish positions. The market is so overbought and due for a correction and that's the only reason I'm keeping this play open. Our first target is $38.05. Our second target is $35.25.

Entry on      June 23 at $42.03 /gap higher entry
                             /originally listed at $41.64
Change since picked:     - 0.62   			
Earnings Date          07/30/09 (confirmed)    
Average Daily Volume:       449 thousand
Listed on  June 23, 2009    

Intl. Speedway - ISCA - close: 25.15 chg: +0.09 stop: 26.15

ISCA is still consolidating sideways. I am not suggesting new positions at this time but readers could wait for a decline under $24.00. Our first target is $22.10. Our second target is $20.25. My time frame is six to eight weeks.

Entry on      July 09 at $24.75 *triggered       
Change since picked:     + 0.40   			
Earnings Date          07/07/09 (confirmed)    
Average Daily Volume:       342 thousand
Listed on  July 08, 2009    

Usana Health Sciences - USNA - close: 27.99 chg: -0.55 stop: 28.21

The oversold bounce in USNA continues. I'm concerned that USNA is going to temporarily rise over resistance at $28.00, hit our stop loss at $28.21 and then reverse lower again. We have to put our stop loss somewhere. More aggressive traders could raise theirs a little bit to just over the 200-dma near $28.28. I'm not suggesting new positions at this time.

Please note that I consider this an aggressive, higher-risk trade because shares have very, very low daily volume (54,000) and the stock has above average short interest (about 12%). That's not a great combination should a short squeeze appear. I am suggesting traders only use very small position sizes (at least half or less than your normal trade size). My first target to take profits is $21.00.

Entry on      July 20 at $25.29 /gap higher entry
                              /originally listed at $25.05
Change since picked:     + 2.70   			
Earnings Date          07/28/09 (confirmed)    
Average Daily Volume:        54 thousand
Listed on  July 20, 2009    


Arkansas Best - ABFS - close: 27.17 change: +0.81 stop: 27.05

The rally in transports continued and ABFS broke through short-term resistance at $27.00 hitting our stop loss.


Entry on      July 22 at $24.44 
Change since picked:     + 2.61<-- stopped out @ 27.05 (+10.6%)
Earnings Date          07/22/09 (confirmed)    
Average Daily Volume:       800 thousand
Listed on  July 22, 2009