Option Investor

Daily Newsletter, Tuesday, 7/28/2009

Table of Contents

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

Market Wrap

Dour News, Down Day

by Todd Shriber

Click here to email Todd Shriber
A spate of glum news reports caught up with the market today, and in a reverse of Friday's action when the Nasdaq was the only loser among the three major US indexes, the tech-heavy index was the only winner in Tuesday's trade. Technology and healthcare names tried to prop the market up, but the pressure of worse-than-expected consumer confidence data coupled with some glum earnings reports was too much for the Dow Jones Industrial Average and the S&P 500 to handle. The S&P 500 fell 0.3% to 979.63, retreating from an eight-month high and ending a two-week long rally in the process. The Dow lost almost 12 points to close at 9096.72, while the Nasdaq inched higher by 7.62 to close at 1975.51.

Market Stats Table

Tuesday's declines were not altogether surprising and I opined about the prospects for a pullback in yesterday's market wrap. Stocks barely extended their rally yesterday on tepid volume, pointing to signs of a possible drop. Fortunately for the bulls, today's retreat barely measures as a blip on the radar of the recent market rally. The S&P 500's 2.56-point drop today hardly puts a ding in a rally that has carried the index up nearly 110 points in three weeks. The Dow still hovers close to the all-important 9100 level and the Nasdaq is making its way toward 1980 so it is fair to say the bears did not make much of a proclamation today.

Still, it is impossible to gloss over one of the culprits behind today's decline: The consumer confidence survey. The Conference Board said consumer confidence fell further in July as concerns about rising unemployment continue to weigh on the minds of consumers. The market expected a reading of 49, which would have been below June's number of 49.3, but instead got doused with some cold water with a reading of 46.6 for July.

It appears that consumers are increasingly unwilling to part with their dollars and that is not good news for stocks. I mentioned yesterday that companies can only cut their way to profitability for so long before they have to actually boost revenues to appease Mr. Market. It appears that the time is now for companies to start doing just that.

Consumer Confidence Chart

Another round of good news from the housing sector was not enough to ignite the bulls on Tuesday, either. The Case-Shiller/S&P Home Price Index reported that home values jumped in May for the first time in nearly three years. That report comes on the heels of yesterday's news that new home sales increased 11% in June, so perhaps there are some signs of stabilization in the housing sector, but if they do exist, the market seemed to gloss over them today.

Case Shiller Chart

I know I may be harping on it, but it is clear the market is starting to demand more when it comes to earnings reports. The reality is it is not all that hard to beat estimates that have lowered, cut, pared and pruned to death, especially when companies are reducing payrolls the way they are. The first week of earnings season when the likes of Goldman Sachs (GS), Intel (INTC) and others sent investors hearts fluttering with joy seems it was ages ago.

Just look at some data from the fine folks at Bloomberg that shows per-share-profits have dropped on average 27% since July 17. The data shows companies reporting since then are beating profit estimates by almost 10%, but there has been nary a surpass in revenue forecasts.

Even as recently as last week, a company could report a big drop in earnings and as long as that number beat the pathetic estimates offered by the Street, the stock would probably pop a dollar or two, maybe more. That trend seemed to end yesterday as stocks like Honeywell (HON) beat estimates, but only moved up fractionally. Today, the market seemed to actually take some stocks to task for reporting punk numbers.

Take Coach (COH) for example. I mentioned the fancy handbag maker in yesterday's wrap as a stock to watch today (Just to be clear, I merely said it would be worth watching. I did not offer a bullish assessment). Coach is a luxury goods retailer, but it does have some products that are affordable for the so-called ''average'' consumer and its outlet stores have made its products accessible to denizens of new buyers. In other words, Coach is a pretty good temperature check on the consumer.

The temperature is cold apparently. Coach said fiscal fourth-quarter profit declined to $145.8 million, or 45 cents a share, from $213.5 million, or 62 cents, a year earlier. The bright sides were that sales only fell less than 1% and the stock only lost 49 cents to close at $27.53. Still, betting on the consumer is a risky proposition at this point and the chart for Coach is not too inviting.

Coach Chart

Retail earnings will start flowing in a big way over the coming days, but even Coach and a very punk report from Office Depot (ODP), the biggest loser in the S&P 500 today, did not make retail the worst performing of the 10 industry groups in the S&P 500. That dubious distinction falls to the energy sector as a spate of oil-related names disappointed investors with sour earnings reports today. Crude oil's decline on the day did not help the cause and black gold appears to keep getting stuck in the mid-60s, hampering its chances of breaking $70 a barrel in the near-term.

Crude Chart

On the earnings front, as I mentioned above, oil stocks of all stripes disappointed investors today. Explorer BP (BP) earned 23 cents a share, beating the average estimate of 15 cents, but profits plunged 53% and the company said it is not seeing a recovery in demand. Refiner Valero (VLO) lost 48 cents a share, good for just its first second-quarter loss in a decade. Analysts were expecting a loss of 39 cents a share. And adding to the misery was oil services giant National Oilwell Varco (NOV), another name I mentioned in yesterday's wrap and one that I have been admittedly bullish on in the past. Second-quarter net income fell 48%, but that wasn't as much as expected, and on adjusted basis, NOV earned 90 cents a share, beating analysts' estimates of 88 cents. Still, the stock was down 2.4% on the day.

With an eye towards Wednesday's action, the economic release du jour is the Fed's Beige Book survey, which surveys economic activity in the Fed's 12 regions. That news comes at 2 pm Eastern time, so volume may be light for an hour or two heading into the numbers. The Mortgage Bankers Association also releases mortgage application data before the open and it will be interesting to see if the bullish housing sector news can continue for a third consecutive day.

And in news that will surprise no one, there is, gasp, another Treasury auction on the docket tomorrow with $39 billion in five-year notes on the block. Uncle Sam hold no problem unloading $42 billion in two-year notes on Tuesday at a yield of 1.08%, showing that the appetite for US debt is as robust as ever. Expect tomorrow's auction to go off without a hitch.

Of course there are some earnings reports worth watching and one was released after the close on Tuesday. Just as retail stocks are a check on the consumer, transport names are historically a gauge on the health of the economy at large. That makes railroad operator Norfolk Southern (NSC) worth watching tomorrow. Norfolk Southern reported second-quarter profits of $247 million, or 66 cents a share, on sales of $1.86 billion. Analysts had been expecting a profit of 64 cents a share on revenue of $2.05 billion.

Railroad operators, Norfolk Southern being no exception, have been among the most voracious cost-cutters, furloughing workers and taking train cars off the tracks as demand for their shipping services has plummeted. As you can see with Norfolk Southern, those cuts may be good for beating analyst profit estimates, but they don't result in increased revenue.

The transports have been on fire recently with the iShares Dow Jones Transportation Average ETF (IYT) making a series of higher highs over the past eight weeks. Make of the chart what you will, but a near-term decline appears to be in the offing.

IYT Chart

Other big names to watch on the earnings front tomorrow include ArcelorMittal (MT), the world's largest steel maker. Analysts are calling for a loss of 21 cents a share and US Steel (X) did not do much to inspire confidence with its report on Tuesday, posting a second-quarter loss and saying demand remains weak.

Defense contractor General Dynamics (GD) also reports before the bell and analysts expect the company to post a profit if $1.57. If Tuesday did not bring enough oil news for you, not only are oil inventories reported tomorrow, but ConocoPhillips (COP) reports before the bell with analysts calling for 85 cents a share in profits. For what it is worth, Warren Buffet's Berkshire Hathaway is one of the largest shareholders in ConocoPhillips. Refiner and Valero rival Tesoro (TSO) is expected to report a loss of 40 cents a share.

Taking a look at market technicals, I cannot say much as changed since we chatted yesterday. Yes, the Dow closed below 9100, but today's loss was tolerable. Hey, it could always be worse. With Beige Book report coming tomorrow and the GDP number looming Friday, fundamental catalysts do exist to rejuvenate the rally or spark some new selling. The 14-day RSI on the Dow inched closer to 70 today and a cross below could signal a retreat from these lofty overbought conditions. What is clear is that the bulls want to keep the Dow closing above 9000.

Dow Chart

As I lamented yesterday, the S&P 500 is going to encounter fortress-like resistance when it gets to 1000, but no one knows when that is going to happen. Holding the 980 area would be a good place to start and the index is hovering around there, but adding more than 100 points in less than two weeks is a boffo move for sure, and that leads me to believe a breather wouldn't be such a bad thing. Just as long as 955-965 holds as support.

S&P 500 Chart

The Nasdaq is now in the 1980 neighborhood, which may offer some resistance, but nothing like 1995-2000 is going to put up. Tech has fanned the flames of this rally and if the Nasdaq starts to find slippery footing, that may be the confirmation that the market is ready for a rest.

Nasdaq Chart

The bottom line is Tuesday was another lethargic day and the market has not much of anything through the first two days of this week. Then again, that is not such a bad thing on a down day. If nothing else, it shows the bears are not ready to growl just yet. Mr. Market will likely pick a direction for the week after tomorrow's Beige Book news, so stay tuned.

New Plays

Very Short-term

by James Brown

Click here to email James Brown
Editor's Note:

The S&P 500 has been very resilient with traders ignoring bad news. I believe the index will probably hit the 1,000 area before correcting. That could happen tomorrow or it could take the rest of the week. The smarter play is to probably wait for the correction. I'm watching the 960-950 zone as potential support. I am adding a couple of new bullish trades tonight but they're very aggressive and very short-term.


Electronic Arts - ERTS - close: 21.10 change: +0.37 stop: 20.49.

Why We Like It:
Some of the video stocks have been under performing recently and today's earnings report from Ubisoft didn't inspire any confidence. Investors are worried about consumer spending and today's consumer confidence number would have been the perfect reason to sell ERTS and break its trendline of support. The sell-off didn't happen. Today's bounce looks like a short-term bullish entry point where we can limit our risk with a tight stop loss. I do expect some resistance near $22.00 but we're going to aim for the $22.95 mark. This is a short-term plan and we'll exit before the August 4th earnings.

Annotated chart:

Entry on      July 28 at $21.10 
Change since picked:     + 0.00   			
Earnings Date          08/04/09 (confirmed)    
Average Daily Volume:       6.5 million 
Listed on  July 28, 2009    

Steel Dynamics - STLD - close: 17.01 change: +0.59 stop: 15.90

Why We Like It:
Investors have been buying steel stocks. The market ignored negative comments from management at U.S.Steel (X) that the third quarter would be bad. Shares of STLD are rebounding and look poised to breakout from their $16-17 trading range. I'm suggesting bullish positions now. More conservative traders may want to wait for a new relative high (17.25 would work). Our first target to take profits is $18.45. Our second target is $19.85.

FYI: ArcelorMittal (MT), one of the largest steel makers in the world, reports earnings tomorrow morning. Their results and guidance could have an influence on STLD.

Annotated chart:

Entry on      July 28 at $17.01 
Change since picked:     + 0.00   			
Earnings Date          07/22/09 (confirmed)    
Average Daily Volume:       9.5 million 
Listed on  July 28, 2009    

In Play Updates and Reviews

Bears Still In Hiding

by James Brown

Click here to email James Brown

BULLISH Play Updates

Ameron Intl. - AMN - close: 73.68 change: -0.68 stop: 69.95

There is no change from yesterday's update. More conservative traders may want to start taking some money off the table now. I'm not suggesting new bullish positions at this time. 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:     + 3.18   			
Earnings Date          09/21/09 (unconfirmed)    
Average Daily Volume:       150 thousand
Listed on  July 15, 2009    

Aegean Marine Petrol. - ANW - close: 17.43 change: -0.45 stop: *varies*

The short-term trend may be changing. If you check out a 30-minute chart on ANW you can see that shares broke the pattern of higher lows today and the afternoon bounce started to fail before the close. This might be forecasting a drop toward our lower trigger.

Currently we have two triggers. We have a buy the dip trigger at $16.50. If triggered at $16.50 our first target is $18.20 and our second target is $19.75. Our stop loss will be $14.90.

Our breakout trigger is at $18.25. If ANW hits our breakout trigger we only want to buy 1/2 or 1/4 of our normal position size because it's a higher-risk entry point. If triggered at $18.25 our 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: 36.04 change: +0.12 stop: 34.20

HRL continues to look strong. Traders bought the dip again and HRL closed above $36.00. If the market wasn't so overbought I'd be a lot more bullish on HRL. 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:     + 0.64   			
Earnings Date          08/20/09 (unconfirmed)    
Average Daily Volume:       486 thousand
Listed on  July 20, 2009    

IDEX Corp. - IEX - close: 27.54 change: +0.21 stop: 24.75

We are waiting for a correction toward previous resistance and what should be new support. 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: 38.08 change: -0.05 stop: 33.90

I know this gets pretty boring but we have to be patient here. The current rally is running out of steam and JPM has not yet broken past the May highs. 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: 11.29 change: -0.70 stop: 9.49

Solar stocks are a volatile sector and LDK displayed some volatility today with a 5.8% drop. The relative weakness is a little surprising. Rival Sunpower (SPWRA) reported earnings last night that beat the earnings and revenue estimates and SPWRA guided earnings higher. You'd think with news like that the sector would show some strength. SPWRA gained about 1.8% but many of its peers trended lower. That's okay. We're waiting for a correction to buy LDK.

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 (confirmed)    
Average Daily Volume:       4.0 million 
Listed on  July 25, 2009    

Morgan Stanley - MS - close: 27.43 change: -0.62 stop: 24.90

MS is inching lower. We continue to wait for MS to dip back toward its trendline of support and its rising 100-dma. 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: 23.47 change: +0.36 stop: 21.99

MSFT erased yesterday's losses with a 1.5% rally today. While this move is bullish I suggest readers wait for a deeper decline before launching new positions. Our 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, which is where we might want to double down. Our ten to twelve week target will be $27.75.

Entry on      July 27 at $23.00
Change since picked:     + 0.47   			
Earnings Date          07/23/09 (confirmed)    
Average Daily Volume:        58 million 
Listed on  July 23, 2009    

NATCO Group - NTG - close: 35.53 change: -1.48 stop: 33.90

Uh-oh! The correction in NTG may have started. I did not see any company specific news but shares lost 3.99% and it looked worse midday. I continue to suggest that more conservative traders may want to take profits now. Our final exit is the $37.50 mark. I'm not suggesting new positions.

Entry on      July 15 at $32.56 *triggered/gap higher entry
Change since picked:     + 2.97   			
                              /sell 1/2 @ 36.65 (+12.5%)
Earnings Date          08/03/09 (unconfirmed)    
Average Daily Volume:       270 thousand
Listed on  July 14, 2009    

Ross Stores - ROST - close: 44.17 change: +0.11 stop: 41.60

The RLX retail index managed to close in positive territory in spite the fact that consumer confidence is slipping. Investors should be more concerned about the back-to-school shopping season. Shares of ROST managed a minor gain. I'm not suggesting new positions at this time.

If you haven't taken any profits yet I strongly suggest you do so now (at least 1/2). 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:     + 2.57
                              /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: 33.50 change: +0.16 stop: 28.75

We don't want to chase this breakout rally in SBS. Shares are short-term overbought. 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. 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

*We currently do not have any bearish play updates*


UltraShort QQQ - QID - close: 26.84 change: -0.14 stop: 26.75

Our super-aggressive bet that the NASDAQ was topping out has closed. The NASDAQ-100 index (NDX) has continued to inch higher and that pushed the QID to our stop loss at $26.75. We knew this was a very aggressive, contrarian play and suggested readers only trade small positions.

The market will eventually correct so keep an eye on the QID as a possible trading vehicle.


Entry on      July 22 at $28.75 
Change since picked:     - 2.00<-- stopped @ 26.75 (-6.9%)
Earnings Date          00/00/00 
Average Daily Volume:        19 million 
Listed on  July 21, 2009    


Charles River Labs - CRL - close: 32.17 chg: +0.92 stop: 32.15

Biotech stocks rallied on the AMGN news and CRL gained 2.9%. The stock broke through several moving averages and broke through the $32.00 level of resistance hitting our stop at $32.15.


Entry on      July 23 at $30.94 *new entry point
Change since picked:     + 1.21<-- stopped out @ 32.15 (+3.9%)
Earnings Date          08/04/09 (confirmed)    
Average Daily Volume:       459 thousand
Listed on  July 22, 2009    

Gen-Probe - GPRO - close: 41.84 change: +0.43 stop: 42.01

The bounce in GPRO has now hit six days in a row. Shares rallied past resistance near $42.00 and its 50-dma on above average volume. The stock hit our stop loss at $42.01 closing the play. I strongly suspect that this rebound is going to fail. I would keep GPRO on your watch list.


Entry on      June 23 at $42.03 /gap higher entry
                             /originally listed at $41.64
Change since picked:     - 0.02 <-- stopped @ 42.01 (-0.0%)			
Earnings Date          07/30/09 (confirmed)    
Average Daily Volume:       449 thousand
Listed on  June 23, 2009    

Intl. Speedway - ISCA - close: 25.46 chg: +0.31 stop: 26.15

I'm giving up on ISCA as a bearish play - at least for now. Let's cut our losses early. The S&P 500 is being magnetically pulled toward the 1000 level. That could be enough to spark a bullish breakout in ISCA from this consolidation pattern. Exit now.


Entry on      July 09 at $24.75 *triggered       
Change since picked:     + 0.70<-- exit early @ 25.46 (+2.8%)
Earnings Date          07/07/09 (confirmed)    
Average Daily Volume:       342 thousand
Listed on  July 08, 2009    

Usana Health Sciences - USNA - close: 29.41 chg: +1.42 stop: 28.21

The short-squeeze in USNA is picking up speed again. The stock's bounce has now reached fifth gain in a row. Today's move is a bullish breakout over resistance near $28.00 and its simple and exponential 200-dma. We knew this was going to be an aggressive play and that's why we suggested small position sizes. Our trade was stopped at $28.21.


Entry on      July 20 at $25.29 /gap higher entry
                              /originally listed at $25.05
Change since picked:     + 2.92 <-- stopped @ 28.21 (+11.5%)
Earnings Date          07/28/09 (confirmed)    
Average Daily Volume:        54 thousand
Listed on  July 20, 2009