Option Investor

Daily Newsletter, Wednesday, 11/18/2009

Table of Contents

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

Market Wrap

Market's Winning Streak Stalls

by Judy Alster

Click here to email Judy Alster
Just when housing was looking up, sort of, the Commerce Department tells us that U.S. housing starts in October unexpectedly fell to their lowest level in six months. Add a sharp decline in construction activity for both single-family and multi-family dwellings and there goes your winning streak. The Dow slipped 11.11 points or 0.1% to 10,426.31, the S&P 500 slipped 0.52 or 0.1% to 1,109.80 and the Nasdaq composite fell 10.64 or 0.5% to 2,193.14.


Offsetting the sorry housing news and unpleasant forecasts from some tech companies, about which more below, inflation figures were mild enough, so stocks drifted only moderately lower Wednesday after a three-day rise, trading in a narrow range. Nobody was really shocked at the fall, what with major indexes closing at 13-month highs Tuesday.

DOW JONES INDUSTRIAL AVERAGE, up nine out of the last 11 days, looks due for a time out:

It hardly bears repeating that as the end of the year draws near, institutional traders and others are seeking to preserve gains — especially after this eight-month rally, with the S&P up more than 22% year to date.


In small caps too, the Russell 2000 also stalled today after rising 7% since the beginning of the month.

RUSSELL 2000 stalls, too:

Many tech stocks had a sad day after BMO Capital Markets downgraded Blackberry maker Research in Motion (RIMM), saying the company faces increased competition as consumers look for less expensive phones. There were worries about potential market-share loss at Verizon Wireless — the company's largest customer — as well as the shift to lower-priced phones and what that will do to future cash flow. Verizon (VZ) held steady but Research in Motion lost over 2.5%:


RESEARCH IN MOTION gets a downgrade:

Forecasts from software makers Autodesk (ADSK) and Salesforce.com (CRM) fell short of analysts' expectations and resulted in losses. Autodesk's stock followed through on yesterday's earnings report: Even though profit fell more than 72% year over year, earnings of 27 cents a share beat estimates by four cents, not bad. However, disappointing fourth-quarter guidance knocked more than 10% off shares Wednesday.

AUTODESK foresees a gloomy couple of quarters, at least:

Comments about the company were glum, especially with the stock near a 52-week high, and they could have applied to any number of software companies right now. Architectural and engineering firms -- Autodesk's main customers -- continue to lay off workers. Licensing revenue for Autodesk's popular automated design software fell 31% year over year. Companies will continue to hold back on information-technology spending until there's solid evidence of a turnaround, and even then there will be a lag before firms reach full capacity again, much less expand. Autodesk projected fourth-quarter revenue shy of consensus estimates and said it expects margins to be flat or down on a year-over-year basis for the first quarter of fiscal 2011.

Over in the "you just can't win" corner, Salesforce (CRM) shares plunged Wednesday after the company announced it would continue steadily hiring in the fourth quarter, thus adding to costs. Salesforce is a pioneer in cloud computing, or services and applications hosted on and accessed through the internet. The customer-relations management firm says it hired around 160 new employees in the third quarter and expects to add a total of 3,800. Worse, its results, thought excellent, were just about in line with analysts' forecasts. The company doubled its net income in the third quarter and says its customers are growing faster than ever; it added some 5,000 new customers in the third quarter to almost 70,000 with very little churn. The stock traded as low as $61.78 but managed to pull back from that low; volume was nearly double the average daily volume of 1.6 million shares within the first 90 minutes of trading.

SALESFORCE loses despite good results:

Seagate Technologies (STX) was downgraded, losing 4.13% to $16.47. Other techs down, but not badly, were Apple (AAPL), off 0.05% to $205.96; Cisco (CSCO), off 0.62% to $23.94, and Hewlett-Packard (HPQ), off 1.21% to $50.70.

Today came word that housing starts dropped 10.6% to a seasonally adjusted annual rate of 529,000 units, the lowest level since April and the biggest percentage drop since January. Groundbreaking for single-family homes fell 6.8% last month to an annual rate of 476,000 units, the lowest since May; starts for the unpredictable multifamily segment fell a grim 34.6% to an annual rate of 53,000, keeping September's slump on a roll. Compared to October last year, housing starts dropped 30.7%. Analysts actually expected starts to rise to 600,000 units after an upward September revision to 592,000 units, so imagine their chagrin.

New building permits, which give some idea of future home construction, fell 4% last month to 552,000 units, disappointing analysts who expected 580,000 units; compared to the same period a year ago, it was a drop of 24.3%. The inventory of total houses under construction dropped to a record low 560,000 units last month, while the total number of permits authorized but not yet started tumbled to an all-time low of 93,900 units.

The data could deal a blow to the housing market, which had started to stabilize after its three-year slide. In any event, housing stocks didn't seem too crushed by the news. Beazer Homes (BZH), up 240% since July, was down slightly; Toll Brothers (TOL) lost a fraction, Lennar (LEN) gained a fraction and Pulte Homes (PHM) added 44 cents or 4.6%, largely on the strength of an upgrade.

PULTE HOMES got an upgrade Wednesday:

The much-loved $8000 tax credit for first-time buyers was slated to expire in November, and that may have put a crimp in October starts. That credit has since been renewed and even extended to more buyers; we'll see the results of that, if any, in the next month or two.

The Mortgage Bankers' Association weekly index of purchase applications also reflected the lull last week with what the group says is the worst reading since 1997: down 4.7%. Refinance applications, which had been soaring, edged back 1.4% despite rates in the absolute sub-basement, down seven basis points to an average 4.83% for 30-year loans.

The graph below, however, provides a bit more hope. It's a quarterly comparison of housing starts and new home sales. In 2005 and most of 2006, starts were higher than sales and inventories of new homes rose sharply. For the last two years, though starts have been below sales – and new home inventories have been falling — strongly suggesting that homebuilders are selling more houses than they're starting.

STARTS VS. NEW HOME SALES shows some hope:

The figures, you will notice, suggest how much this young and tentative recovery depends on government support. In the medical profession, this is called tachyphylaxis: "A rapid decrease in the response to a drug after repeated doses over a short period of time." In other words, "Gee, two cups of coffee a day used to keep me awake . . . . but after a while I needed three . . . . and now I need five . . . " If every time the recovery falters the government props it up again with another jolt of taxpayer money, it's no big mystery where that will inevitably lead.

Moving along, from our friends at the Labor Department Wednesday we found that inflation, a.k.a. the Consumer Price Index, accelerated in October — with energy prices rising again and car prices increasing at the fastest rate since the early 1980s. The CPI increase was a seasonally adjusted 0.3% in October as energy prices rose for the fifth time in six months, offsetting a rare decline in rents.

The core CPI rate, which excludes food and energy prices to get a more accurate look at underlying inflation, and some cynics would say to point the spotlight away from often-inexplicably higher inflation in those categories, rose 0.2% last month. The indexes for used cars and trucks and for new vehicles both rose sharply and together accounted for over 90% of the increase for all items excepting food and energy; prices for new cars rose 1.6%, the most in 28 years. Used-car prices also increased, up 3.4%, the most in 29 years. The higher prices were not a surprise following the death of the government's automobile incentives program (much as falling housing starts shouldn't have surprised us after the temporary lapse of the first-time-homebuyer tax credit). Energy prices rose a seasonally adjusted 1.5%, including a 1.6% rise in gasoline prices and a 6.3% jump in fuel oil. Still, energy prices at the retail level are down 14% in the past year.

CONSUMER PRICE INDEX, all inclusive:

The all-item consumer price index has fallen 0.2% in the past year, while the core CPI is up 1.7% in the same period. For the curious only: Food prices rose 0.1%; dairy prices did the same; meat, fruit and vegetables declined (making me wonder why Publix Supermarket is trying to charge me $1.99 for a mediocre-looking head of Romaine lettuce); shelter prices, which account for more than 30% of the CPI, were flat in October; residential rents dropped 0.1% -- the second decline in a row; hotel and motel rooms rose 0.4%. Medical care and prescription drug prices were up, apparel prices down; with prices rising faster than wages, hourly and weekly earnings were down; prices for commodities, services, education, communication, airline fares and tobacco rose; prices for recreation fell.

The CPI still indicates not much inflationary pressure, reassuring in a way for an economy still mired in historical underperformance and sitting on a big pile of unused capacity. Fed Chairman Ben Bernanke said earlier this week that the economy is expected to grow too slowly to create many jobs or generate much inflation. Which we knew. But by pumping so much liquidity into the economy, Bernanke will almost surely cause a whole mess of inflation sooner or later. Expect to hear the phrase "mopping up liquidity," i.e., astutely removing the right stimulus at the right time, quite a bit in months to come.

I said it last week and I'll say it again: Dry-bulk shippers are glittering, although they too, along with shipping rates, look ready for a pullback. In the meantime, strong demand for marine transport services continues to drive rates higher with the Baltic Dry Index, which tracks daily changes on the spot market for vessels of all sizes, surging 6% Wednesday to 4,543. If you care to charter a Capesize ship, the largest bulk carrier, it will cost you an average $88,560 a day, up 8% (you should have called last week). Capesize rates may go higher yet. BHP Billiton, the giant Australian miner, booked a few capsizes Wednesday for trips to China at $105,000 to $112,000 a day roundtrip, up from $100,000 on Tuesday. All the major drybulkers were up today; Excel Maritime (EXM) took the cake:

EXCEL MARITIME led drybulk shippers up today:

Petroleum supplies fell last week. The Energy Information Administration reported that oil stocks were reduced by 0.9 million barrels along with a 1.7 million-barrel drop in gasoline stocks and a 0.3 drop in distillates. Despite operating at an almost-absurdly low 79.4% of capacity (this number gets lower every week), refineries did increase gasoline output to 9.1 million barrels a day. With another 0.6 million barrels a day of imported gasoline, the total "well" exceeds domestic demand, which the EIA says is around 8.9 million barrels a day, less than at any point since July. Even with the drawdown, excess supply makes the energy markets sad. Oil didn't react much to the news, trading after hours at $79.44, despite a still-falling U.S. dollar and a report that more U.S. drivers will be driving this Thanksgiving.


On a light earnings day, BJ's Wholesale Club (BJ) matched Wall Street expectations of quarterly profit at 45 cents a share, down four cents from last year; the stock fell less than 2% . . . Clothier Perry Ellis International (PERY) beat expectations by a wide margin despite falling sales, but fell 1.3% anyway . . . Limited Brands (LTD), who owns Victoria's Secret (whom I believe sells women's undergarments, or something) said its third-quarter profit beat its own forecast, even excluding the benefit of a tax gain. Profit rose to two cents a share after, up one cent year over year and better than the company's prediction of break even or lose up to four cents; revenue fell 4% to $1.78 billion, exceeding analysts' estimates of $1.77 billion. The stock closed slightly higher:

LIMITED BRANDS, who owns that company with the scantily-clad ladies — what's its name again?

Finally, I'd be remiss in not mentioning gold, which is having a truly amazing run. It closed at a record high today above $1,140 an ounce after an intraday high of $1,153. Hardly surprising, with U.S. debt in the trillions. After a steep rise, most mining stocks fell slightly.

GOLD is flying:

What to expect? After these highs, and considering technical indicators, a market top looks imminent. We could see a move down, but probably not too far down, into mid-December.

Thursday's earnings announcements are heavy on retailers; they include Dick’s Sporting Goods, Casual Male, Books-a-Million, Foot Locker, Ross Stores, Sally Beauty, Sears, The Buckle, Williams Sonoma, The Children’s Place, Shoe Carnival, Stein Mart, Wet Seal, Bon Ton Stores, Zumiez, Gap Inc., and Dress Barn; also reporting are China Medical Technologies, Helmerich & Payne, Infineon Technologies, Intuit, Patterson Dental, Raven Industries, SkillSoft Corp. and Suntech Power Holdings, among others.

Possibly-market-moving announcements Thursday include jobless claims and the Energy Information Administration’s natural gas report; also expect leading indicators (which occasionally have an effect) and the Philadelphia Fed survey of economic activity in that region.

New Plays

Cause for Concern

by James Brown

Click here to email James Brown

Editor's Note:

The S&P 500 has been unable to build on Monday's bullish breakout over very significant resistance at the 1100 level. This should given traders cause for concern. The trend is up. My bias is still bullish. Yet I'm growing a bit more cautious about adding new positions. I looked at hundreds of stocks today and didn't find anything that compelling given the market's recent pause.

No new plays tonight.

In Play Updates and Reviews

Financials Display Relative Strength

by James Brown

Click here to email James Brown

Banks were the best performers and our bank trade has hit our trigger point.

BULLISH Play Updates

Best Buy Inc. - BBY - close: 42.48 change: +0.28 stop: 39.85 *new*

Not much happening in shares of BBY right now. The stock is stuck in a sideways trading range between $41.50 and $43.00. I would still consider new bullish positions near $41.50. At this time I'm inching our stop loss up to $39.85. Our first target is $46.00. Our second target is $49.80. Our time frame is several weeks.

Entry on  November 10 at $42.20
Change since picked:     + 0.28   			
Earnings Date          12/15/09 (unconfirmed)    
Average Daily Volume:       5.1 million 
Listed on  November 09, 2009    

Baker Hughes Inc. - BHI - close: 42.21 change: -0.85 stop: 40.49

Oil drifted sideways most of the session and eventually turned higher on dollar weakness. Unfortunately the oil stocks weren't so strong. BHI fell toward the bottom of its recent trading range. I would buy the stock on another bounce near $41.00 but readers could wait for a move over resistance near $44.00 instead. Our first target is $47.00. Our second target is $49.85.

Entry on  November 09 at $43.06 
Change since picked:     - 0.85   			
Earnings Date          01/28/10 (unconfirmed)    
Average Daily Volume:       5.6 million 
Listed on  November 09, 2009    

Bank of Hawaii - BOH - close: 46.10 change: +0.24 stop: 43.90

Banking stocks were the best performers in the market on Wednesday. The banking indices rose 1.3%. Shares of BOH only managed a 0.5% gain but it was enough to breakout over resistance at $46.00 and hit our trigger to buy the stock at $46.20.

Our first target to take profits is at $49.85. FYI: The Point & Figure chart is bullish with a $59 target.


Entry on  November 18 at $46.20 
Change since picked:     - 0.10   			
Earnings Date          01/25/10 (unconfirmed)    
Average Daily Volume:       424 thousand
Listed on  November 17, 2009    

Dreamworks Animation - DWA - close: 33.56 change: -0.24 stop: 32.95

DWA is still drifting lower. At this time I wouldn't be surprised to see it pull back toward $33.00 and its 30-dma. Wait for a bounce from $33.00 before considering new positions. More conservative traders could wait for a new relative high over $34.30. Our target is $37.40. FYI: The P&F chart is bullish with a $51 target. Plus, DWA has been considered a takeover target for some of the larger media companies.

Entry on  November 16 at $34.25
Change since picked:     - 0.69   			
Earnings Date          02/24/10 (unconfirmed)    
Average Daily Volume:       763 thousand
Listed on  November 14, 2009    

ENERSYS - ENS - close: 24.24 change: -0.03 stop: 22.40

There is no change from my prior comments on ENS. The stock traded sideways in a very narrow range.

I would still launch new positions now. Our first target is $27.00. Our second target is $29.75. Our time frame is several weeks.

Entry on  November 16 at $24.20
Change since picked:     + 0.04   			
Earnings Date          02/10/10 (unconfirmed)    
Average Daily Volume:       530 thousand
Listed on  November 14, 2009    

Halliburton - HAL - close: 31.69 change: -0.06 stop: 29.80

We are looking for HAL to breakout over resistance at the $32.00 level. I'm suggesting a trigger to buy HAL at $32.20. If triggered our first target is $34.90.

Entry on  November xx at $xx.xx <-- TRIGGER @ 32.20
Change since picked:     + 0.00   			
Earnings Date          01/26/10 (unconfirmed)    
Average Daily Volume:      15.7 million 
Listed on  November 17, 2009    

PACCAR Inc. - PCAR - close: 39.46 change: +0.08 stop: 38.25

The plan is to buy PCAR on a breakout over resistance. The October high was $40.26. I'm suggesting a trigger to buy PCAR at $40.35. If triggered our first target is $44.75. FYI: The Point & Figure chart is bullish with a $48.00 target.

Entry on  November xx at $xx.xx <-- TRIGGER @ 40.35
Change since picked:     + 0.00   			
Earnings Date          01/28/10 (unconfirmed)    
Average Daily Volume:       3.3 million 
Listed on  November 16, 2009    

Potlatch Corp. - PCH - close: 29.57 change: +0.13 stop: 27.95

PCH dipped toward $29.00 and bounced. Traders could use the afternoon bounce as an entry point but more cautious investors may want to wait for a new close over $30.00. Our first target to take profits is at $33.60. We will cautiously set a secondary target at $35.75. FYI: The Point & Figure chart is bullish with a $56 target.

Entry on  November 16 at $30.30
Change since picked:     - 0.73   			
Earnings Date          02/11/10 (unconfirmed)    
Average Daily Volume:       503 thousand
Listed on  November 11, 2009    

Southern Copper Corp. - PCU - close: 35.28 change: -0.77 stop: 32.80 *new*

Warning! PCU has produced a bearish engulfing candlestick (reversal) pattern at resistance near its highs around $36.00. This is very short-term bearish. I am upping our stop loss to $32.80. I'm not suggesting new positions at this time. More conservative traders may want to exit early.

Our target is $39.50. Our plan called for small positions (25% to 50% your normal size).

Entry on  November 04 at $33.80
Change since picked:     + 1.48   			
Earnings Date          10/22/09 (confirmed)    
Average Daily Volume:       3.5 million 
Listed on  November 03, 2009    

Polaris Industries - PII - close: 45.35 change: -0.38 stop: 42.40

The sideways consolidating in PII has taken on a bearish tone with a short-term pattern of lower highs. I'm not suggesting new positions at this time. More conservative traders may want to raise their stops toward $44.00.

Our target to exit is $49.65. I consider this an aggressive play and suggest smaller position sizes.

Entry on  November 09 at $45.15
Change since picked:     + 0.20   			
Earnings Date          01/28/10 (unconfirmed)    
Average Daily Volume:       516 thousand
Listed on  November 07, 2009    

Renolds American - RAI - close: 51.17 change: +0.09 stop: 47.90

Upward momentum in RAI appears to be slowing down. This is the fifth gain in a row for the stocks are shares are arguably short-term overbought. I'd prefer to open new positions on a dip near $50.00, which should be new support. Our target is $54.50. Our time frame is several weeks!

Entry on  November 14 at $50.32 
Change since picked:     + 0.85   			
Earnings Date          02/11/10 (unconfirmed)    
Average Daily Volume:       1.6 million 
Listed on  November 14, 2009    

Symantec - SYMC - close: 17.97 change: +0.15 stop: 17.24

SYMC is inching closer to resistance at the $18.00 level. I'm suggesting readers use a trigger to buy SYMC at $18.20. If triggered our first target to take profits is at $19.90. The $20.00 level will probably act as round-number resistance. Our second target, with a much longer time frame, is $21.75. Currently the Point & Figure chart is bullish with a $23 target.

Entry on  November xx at $xx.xx <-- TRIGGER @ 18.20
Change since picked:     + 0.00   			
Earnings Date          01/27/10 (unconfirmed)    
Average Daily Volume:      11.8 million 
Listed on  November 16, 2009    

Travelers Companies - TRV - close: 53.15 change: +0.00 stop: 49.75

Shares of TRV continue to trade sideways. Today's consolidation was pretty narrow and the stock closed unchanged on the day.

I'm keeping our trigger to buy the stock at $52.15 but I've added an aggressive trigger to open small positions if TRV hits $53.85 first. If triggered our target is $57.40.

Entry on  November xx at $xx.xx <-- TRIGGER @ 52.15 or 53.85 (1/2 pos)
Change since picked:     + 0.00   			
Earnings Date          01/27/10 (unconfirmed)    
Average Daily Volume:       5.3 million 
Listed on  November 07, 2009    

Wyndham Worldwide - WYN - close: 19.56 change: -0.14 stop: 16.90

WYN consolidating sideways, which seems to be the popular thing to do the last couple of days. I wouldn't be surprised to see a little profit taking before shares moved much higher. Look for a dip near $18.50 as a new entry point.

Our first target is $21.00. FYI: The point & figure chart is bullish with a $27 target. Our time frame is several weeks. The plan was to use small positions (1/2 a position).

Entry on  November 10 at $18.88 (1/2 position) /gap open higher
Change since picked:     + 0.68   			
Earnings Date          02/11/10 (unconfirmed)    
Average Daily Volume:       3.5 million 
Listed on  November 10, 2009    

BEARISH Play Updates

*We currently do not have any bearish play updates*