Option Investor

Daily Newsletter, Wednesday, 11/25/2009

Table of Contents

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

Market Wrap

Decent News Wednesday Keeps Dow, S&P Up

by Judy Alster

Click here to email Judy Alster
A decent spate of data and a new 52-week low for the dollar — down more than 1% against other major currencies, its worst single-day loss in almost four months — kept the three major indexes in the green Wednesday, although barely.

MAJOR MARKET INDEXES, Wednesday, Nov. 25:

Volume was unsurprisingly lower than yesterday's on this day before Thanksgiving.


The Dow gained a decent 30.69 or 0.29% to 10464.40 . . . .


. . . the S&P500 gained a respectable 4.98 or 0.45% to 1110.63, maintaining its critical foothold above 1,100 . . . .


. . . and the Nasdaq added 6.87 or 0.32% to 2176.05.


A lot of economic data was announced today. For openers, you can partly thank the Labor Department for keeping today's numbers up. According to Labor's early-morning jobless claims report, the number of newly laid-off workers filing claims for unemployment benefits fell more than expected last week to the lowest level in over a year. In addition, the number of people filing first-time claims for jobless benefits fell by 35,000 to 466,000, the lowest level for initial claims since the week of Sept. 13, 2008 and far better than the 500,000 that economists had expected, having a beneficial effect on all three major indexes.


The number of workers receiving benefits fell sharply too, dropping 190,000 to 5.42 million, the lowest level for continuing claims since February. (Caution: Try not to read too much into this drop. Part of the improvement reflected large seasonal adjustment factors, which smooth out the changes that normally occur at certain times of the year. Excluding seasonal adjustments, claims rose, which is normal at this time of year when a large number of construction workers face layoffs because of worsening weather conditions.)

Regular state-level continuing initial jobless claims run out after 26 weeks; after that, people are moved to federally funded extended initial jobless claims (part of the stimulus package), so the continuing claims number does not tell the whole story. But the extended benefits figure also declined this week, hinting that some people are actually finding new jobs rather than simply running out of time for even the extended benefit program. For retailers, this news could not have come at a better time.

The concern is that this improvement will be merely temporary because even with all this upbeat news, the unemployment rate hit a 26-year high of 10.2% (!) in October. Many economists think the recovery will remain so dull that the jobless rate will keep rising, possibly topping 10.5% by the middle of next summer. The consensus is that claims need to drop to around 425,000 to signal any actual growth in employment. The big problem in the labor market this time around is not that layoffs are that abnormally high, but that hiring is abnormally low. Once a job is lost, you can fairly safely bet that's it's gone for good.

THE U.S. JOBLESS RATE continues up:

Even now, companies are not finished laying off workers. Internet pioneer AOL plans to cut up to 2,500 jobs, more than a third of its work force, once it is spun off from the media conglomerate Time Warner (TWX). (And we all remember how wildly expensive that wedding was.) Health insurance mammoth Aetna (AET) will kill 625 jobs by the end of this year and another 600 next year, a reduction of 3.5%. The number of customers Aetna has for medical coverage is more than 19 million, up 8% in the third quarter, but it expects to lose 225,000 in the fourth quarter and another 650,000 in the first quarter of 2010. Blame high unemployment, the sickening increases in the cost of health care, and the topper, uncertainty about the effects of the health care reform bills being considered by Congress. The announcement gave the stock a boost, though:

AETNA rises on job cut news:

Boeing (BA) will say goodbye to about 250 employees after losing a $3.8 billion Air Force contract to Northrop Grumman (NOC). Alcoa (AA) is cutting 250 jobs in its power and propulsion division, what with demand for gas turbines 'way down.

Nobody can seem to answer the question, "Where will new jobs come from?" Some members of Congress, possibly not the wisest, want to spend money to retain workers in rapidly-shrinking industries. This is less than visionary: Industries shrink for a reason and all the money in the universe isn't going to rejuvenate them. Moreover, it's difficult and time-consuming for displaced, often older, workers to learn new skills after long years of working in another field. Oh, but "green industries" are going to lead us to a wonderful economic boom with plenty of new jobs!, I can hear the greenies burbling. Uh huh. Sure. Maybe after half a dozen years and billions in investment. As it stands right now, unless a whole new sector of the economy is created Friday, or if Asia magically vanishes and we start manufacturing again, high unemployment and a lower standard of living for many people are going to be the new norm, if they aren't already. That's harsh, but it's best to call 'em like you see 'em. You'll lose friends, but at least history will record your true worth.

As far as manufacturing is concerned, that outlook cooled off last month. New orders for durable goods in October fell 0.6% after a revised 2% rebound in September. Expectations were for a 0.5% boost but even so, the market didn't stumble. Excluding the transportation component, new durables orders actually fell 1.3% after 1.8% jump in September.

Apropos just briefly of the rise in transportation orders, the American Trucking Associations’ advance seasonally adjusted For-Hire Truck Tonnage Index oddly decreased 0.2% in October, following a 0.3% contraction in September. Year over year, though, tonnage fell "only" 5.2%, the best year-over-year showing since November 2008. Trucking does serve as a fair barometer of the U.S. economy. Since consumer spending and manufacturing haven't been surging, trucking shouldn’t expect robust growth yet.

KEEP ON TRUCKIN,' eventually:

The drop in new orders was led by machinery, which fell a hefty monthly 8%; computers & electronics fell 2.1%, accompanied by declining communications equipment and "other" durables. Moving up were primary metals, fabricated metals, electrical equipment, and transportation. New orders for capital equipment continued to rebound from a drop in August with the gain due to aircraft. New orders for nondefense capital goods rose 1.2% in October; alas, excluding aircraft, new orders for nondefense capital goods fell 2.9% after a 2.6% rebound in September.

Year over year, overall new orders for durable goods improved to minus-11.9% last month from minus-18.8%. Eliminate transportation and new durables orders rose to down-11.3% from down 16.3%. Obviously, the recovery in manufacturing is not running entirely smoothly, which is to be expected.

The Mortgage Bankers' Association purchase index jumped 9.6% last week, laughing at the declines of the prior two weeks. Possibly the disappointment over the temporary end of the first-time buyer credit was just a nasty blip. We'll see. Refinancing applications fell 9.5% in the week, but still make up more than 70% of all applications (why they don't separate the two is a continuing mystery), a reflection of very low mortgage rates, an average 4.82% percent for 30-year fixed loans.


A few words about the MBA Index. Since 2007, the index, ordinarily predictive of future sales, has needed to be taken with a grain of salt. The increase in 2007 was due to the method used to construct the index: the combination of lender failures and borrowers filing multiple applications pushed up the index in 2007 even though activity was actually declining. Recently there have been a large number of cash buyers, so the MBA index has missed some of the strength of the recent existing home sales increase. Still, the housing market is far, far from out of the woods. Housing stocks did nothing much today; luxury builder Toll Brothers (TOL), for example, can expect to sell just so many half-million dollar homes in this economy, and that fact would seem to be catching up with the stock:


In genuine good news, new home sales showed real gains in October, also tied to the extension after the expiration of that tax credit. New home sales jumped 6.2% to a much higher-than-expected annual rate of 430,000. Supply is low, the result of improving sales but also reflecting the heavy and probably healthy cutback in housing starts. Only 239,000 new homes were on the market in October in what is the lowest number since 1971. Supply at the current sales rate fell to 6.7 months after September's 7.4 months and much more promising than 11.1 months a year ago.

Thin supply is helping prices with the median price up 0.7% in the month to $212,200 for a year-over-year rate of a just minus-0.5%. Before we jump up and down, remember that October's results were skewed by stimulus effects and probably won't be repeated as strongly in November. It's an improvement, though, and did its bit to offset dreary consumer sentiment news. Commodities moved higher in reaction to today's report.


Personal income was mildly up in October and so was spending as auto sales rebounded. Income nudged up 0.2%, in line with estimates, after a revised 0.2% rise in September; personal consumption expenditures jumped 0.7% after a 0.6% drop in September, beating the market estimate and led by durables. Year over year, personal income growth for October came in at minus-1%, a little better than September's minus -.6%. Wages and salaries were unfortunately flat after a fractional dip in September, indicating that consumer spending power has little or no tailwind. The announcement didn't do much to move the market either way, although consumer-goods leader Wal-Mart (WMT) has been moving up steadily. Does it see signs of a fair Christmas holiday?

WAL-MART quietly rising:

Layoffs may be falling, spending may be rising, but consumers aren't feeling too good themselves. x The Reuters/University of Michigan's consumer sentiment index came in at 67.4 for November, down from 70.6 in October. Let’s look at the bright side: It's well up from February and March of this year.

In a related note, I was happy to come across this graph from calculatedriskblog.com showing that the savings rate has actually been rising, a very good thing.

SAVINGS RATE has been rising:

Incidentally, one of today's most gripping stories, to me, anyway, was the one that reported that even hedge funds, notorious for picking volatile and sometimes even wacky, stocks, have lately been making conservative dividend picks. (This is like saying, "A spokesman for Evel Knievel has announced that the world-famous motorcycle daredevil is working at the Second Avenue Deli behind the bagel counter.") Being an eternal fan of dividend stocks, I was gratified to find that oldies but goodies like McDonald's (MCD), Wal-Mart (WMT), Johnson&Johnson (JNJ), Procter & Gamble (PG), Exxon Mobil (XOM) and Teva Pharmaceuticals (TEVA) are popular hedge fund picks. Purely as one investor to another, I would suggest Altria (MO, yielding 7%), and Waste Management (WM, yielding 3.50%) as starting points for further research. (Disclosure: I do not own any of the stocks mentioned.)

JOHNSON&JOHNSON, a dividend-bearing favorite even among the risk-tolerant . . . .

. . . and high-yielding ALTRIA, worth a look:

Agricultural-equipment-maker Deere & Co. (DE) swung to a fourth-quarter loss. The company significantly devalued its landscaping business and felt the wallop from a sharp decline in demand for farming, construction and forestry equipment. Net loss was $222.8 million or 53 cents a share, down sharply from $345 million or 81 cents a share last year. Without one-time items, it would have recorded a profit. The stock rose on the news, with analysts saying the company is now positioned for growth.

DEERE: the worst is probably behind it:

Tiffany & Co. (can you get further away from John Deere than that) posted a better-than-expected third-quarter profit on Wednesday and raised its full-year outlook. Net income fell to $43.3 million from $43.8 million, with per-share earnings unchanged at 35 cents. Sales fell about 3%. The third-quarter rate of sales decline in the U.S. slowed, while demand picked up more than expected in Asia and Europe. So far, November sales have tracked favorably to its expectations. The stock had a good day:

TIFFANY up on raised outlook:

J. Crew Group's (JCG) stock soared $3.20 or 7.8%, reversing a downtrend after announcing Tuesday after hours that its profit more than doubled, surpassing Wall Street's projections . . . .Microsoft (MSFT) slipped a few cents on the company's announcement that its highly-admired chief financial officer will soon leave . . . Data storage firm EMC (EMC) cited an expected fourth-quarter reorganization charge of about $100 million for its lower earnings projections for the fourth quarter . . . Russian dairy giant Wimm-Bill-Dann (WBD; they named it after Wimbledon, the tennis venue; I don't know why) saw its net up 44% but sales off 25%; the stock lost 14 cents . . .

Petroleum and natural gas reports were both out today. Low demand meant upticks in oil and gasoline stocks last week, with oil stocks up one million barrels. Oil imports were up too, as were gasoline stocks on flat demand. Increased refinery output helped the gasoline buildup. Oil prices fell slightly on the report, then regained their composure.


Natural gas in storage also rose last week rose, 2 billion cubic feet.


Gold futures climbed to a crazy record above $1,182 an ounce Wednesday, up over $14, after a report that India is open to buying more gold from the International Monetary Fund drew even more investors into the bullion market. In early November, India bought 200 metric tons of gold for $6.7 billion; it was almost half the total sales volume of 403.3 metric tons that the IMF approved in September . . . . The U.S. dollar fell yet again against other major currencies, to below 75 this time, further boosting gold's appeal as a hedge against inflation.

GOLD just keeps going:

No reports tomorrow and of course, no trading. Not much in the way of market movers until Tuesday when we get the manufacturing index and pending home sales.

Wishing you all a delightful Thanksgiving.

New Plays

Friday will be lower

by James Brown

Click here to email James Brown

Editor's Note:

Volume has evaporated to the lowest levels of the year. Investors are focused on their Thanksgiving holiday plans. The tone is still generally positive but we're probably not going to see much action in the market until next week.

I'm not adding any new plays tonight as volume on Friday will be even lower. Look for new candidates in the weekend newsletter.

Have a wonderful Thanksgiving. We have much to be thankful for.

- James

In Play Updates and Reviews

Trimming the List

by James Brown

Click here to email James Brown

I'm trimming two candidates from our play list. Overall Wednesday's session was rather boring.

BULLISH Play Updates

Analogic Corp. - ALOG - close: 41.53 change: +0.68 stop: 38.99

Thankfully we didn't have to wait very long for ALOG to breakout past resistance and hit our trigger to buy it at $41.51. The stock hit an intraday high of $42.01 and closed with a 1.6% gain to out perform the rest of the market. The trade is open. Our first target to take profits is at $44.90. I'd aim higher but ALOG is due to report earnings on December 9th and we don't want to hold over the report. FYI: The P&F chart is bullish with a $54 target.


Entry on  November 25 at $41.51 
Change since picked:     + 0.02   			
Earnings Date          12/09/09 (confirmed)    
Average Daily Volume:      41.5 thousand
Listed on  November 24, 2009    

Best Buy Inc. - BBY - close: 43.26 change: +0.41 stop: 39.85

BBY managed to bounce from short-term support at its rising 10-dma. Bulls remain in control. It will be interesting to see how the retailers react on Friday and next week as the media dissects the "Black Friday" crowds. 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:     + 1.06   			
Earnings Date          12/15/09 (unconfirmed)    
Average Daily Volume:       5.1 million 
Listed on  November 09, 2009    

Bank of Hawaii - BOH - close: 45.72 change: -0.65 stop: 43.90

Banking stocks under performed the rest of the market today. BOH lost 1.4% and closed back under short-term support/resistance at the $46.00 level. I'm not suggesting new positions with the stock under $46.00. More conservative tarders might want to up their stops toward the $45.00 region.

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:     - 0.48   			
Earnings Date          01/25/10 (unconfirmed)    
Average Daily Volume:       424 thousand
Listed on  November 17, 2009    

ENERSYS - ENS - close: 23.49 change: -0.18 stop: 22.40

ENS is still churning sideways. I would remain cautious with the stock under resistance at the $24.00 mark. Readers can choose to buy dips near the 50-dma or wait for a breakout over $24.50.

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:     - 0.71   			
Earnings Date          02/10/10 (unconfirmed)    
Average Daily Volume:       530 thousand
Listed on  November 14, 2009    

Halliburton - HAL - close: 30.21 change: -0.25 stop: 29.80

HAL gapped open lower this morning but traders bought the dip at the rising 50-dma. Nimble traders may want to consider bearish positions if HAL trades under $29.30 again. We're still sitting on the sidelines waiting for a breakout over resistance at $32.00. If we don't see some signs of strength in the next day or two I'll drop HAL as a bullish candidate. The long-term up trend is in jeopardy.

We have a trigger to open bullish positions 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    

Johnson & Johnson - JNJ - close: 63.30 change: +0.12 stop: 59.90

JNJ continues to march higher although bears could argue the stock is overbought given its four-week rally. I remain bullish here but I'd keep positions small until we see a correction in the stock. The $65.00 level might offer some resistance but our target first target is $67.50.

Entry on  November 23 at $63.05
Change since picked:     + 0.25   			
Earnings Date          01/26/10 (unconfirmed)    
Average Daily Volume:      12.6 million 
Listed on  November 21, 2009    

Potlatch Corp. - PCH - close: 29.31 change: -0.20 stop: 27.95

It was a forgettable day for PCH with the stock trading in a narrow range. Readers might want to wait for a new close over $30.00 before initiating positions.

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:     - 0.99   			
Earnings Date          02/11/10 (unconfirmed)    
Average Daily Volume:       503 thousand
Listed on  November 11, 2009    

Southern Copper Corp. - PCU - close: 35.86 change: +1.04 stop: 33.80

Today's drop in the U.S. dollar was significant and it could breathe new life into the commodity-stocks. Copper rallied to new 2009 highs. This lifted PCU toward its highs and resistance near $36.00. The drop in the dollar is so bad that I would consider new positions in PCU on a move over $36.50.

Our first target is $39.50. Our second target is $41.50. Our plan called for small positions (25% to 50% your normal size).

Entry on  November 04 at $33.80
Change since picked:     + 2.06   			
Earnings Date          10/22/09 (confirmed)    
Average Daily Volume:       3.5 million 
Listed on  November 03, 2009    

Polaris Industries - PII - close: 45.07 change: +0.10 stop: 43.25

The sideways consolidation in PII continues to narrow. A breakout one way or the other is imminent. If you're looking for a new entry point consider waiting for a move over $46.00.

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:     - 0.08   			
Earnings Date          01/28/10 (unconfirmed)    
Average Daily Volume:       516 thousand
Listed on  November 07, 2009    

Renolds American - RAI - close: 51.37 change: +0.06 stop: 49.49

RAI is not making much progress this week but the path of least resistance continues to be higher. Our target is $54.50. Our time frame is several weeks!

Entry on  November 14 at $50.32 
Change since picked:     + 1.05   			
Earnings Date          02/11/10 (unconfirmed)    
Average Daily Volume:       1.6 million 
Listed on  November 14, 2009    

Symantec - SYMC - close: 18.02 change: +0.08 stop: 17.24

There is still no change from my prior comments. We are waiting for a breakout higher with a trigger to open bullish positions 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: 52.76 change: -0.33 stop: 49.75

TRV is still consolidating sideways. We have a trigger to buy a dip at $52.15. Plus, we have an alternative entry point to open small positions (1/2 to 1/4 your normal size) if TRV hits $53.60. If triggered our target is $57.40.

Entry on  November xx at $xx.xx <-- TRIGGER @ 52.15 (or 53.60 small 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: 19.00 change: +0.17 stop: 17.20

WYN has been consolidating sideways for a week and a half now. Unfortunately the consolidation may not be over yet. I'm not suggesting new positions at these levels.

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:     + 0.12   			
Earnings Date          02/11/10 (unconfirmed)    
Average Daily Volume:       3.5 million 
Listed on  November 10, 2009    

BEARISH Play Updates

Bank of New York - BK - close: 26.62 change: +0.17 stop: 27.16

Banking stocks were some of the worst performers on Wednesday yet BK managed to out perform its peers. There is no change from my prior comments.

I'm suggesting a trigger to open bearish positions at $25.49. More cautious trader could wait for a drop under $25.00 since it might be round-number support.

If the newsletter is triggered at $25.49 our first target is $22.25. Our second target is $20.50. Our time frame is several weeks.

Entry on  November xx at $xx.xx <-- TRIGGER @ 25.49
Change since picked:     + 0.00   			
Earnings Date          01/20/10 (unconfirmed)    
Average Daily Volume:      11.4 million 
Listed on  November 21, 2009    

Liberty Global - LBTYA - close: 20.17 change: +0.04 stop: 21.26

LBTYA spent Wednesday's session quietly trading sideways near support at the $20.00 level. Shares have been under performing the market the last two weeks. I believe the trend continues but look for a new relative low (under 19.79) before opening positions. Our first target is $18.20. Our second target is $16.20. Our time frame is several weeks.

Entry on  November 24 at $19.85
Change since picked:     + 0.32   			
Earnings Date          02/24/10 (unconfirmed)    
Average Daily Volume:       2.5 million 
Listed on  November 21, 2009    

Metlife Inc. - MET - close: 34.59 change: +0.17 stop: 36.05

MET has been churning sideways in a narrow range all week long. I'm still bearish but readers may want to wait for a new drop under $34.00 or $33.60 to open positions. There is potential support at the 200-dma near $31.00 but I'm suggesting we target a drop to $30.25. More aggressive traders could aim lower.

Entry on  November 21 at $34.39 /gap higher entry
                           /originally listed at $33.90
Change since picked:     + 0.20   			
Earnings Date          02/04/10 (unconfirmed)    
Average Daily Volume:       7.2 million 
Listed on  November 21, 2009    


PACCAR Inc. - PCAR - close: 38.21 change: -0.17 stop: 38.25

PCAR has been under performing the broader market the last few days. Shares have been testing support near the $38.00 level and the short-term action in the stock is suggesting PCAR will breakdown under this level. I'm dropping PCAR as a bullish candidate. We had a trigger to buy the stock at $40.35, which has not been hit.


Entry on  November xx at $xx.xx <-- TRIGGER @ 40.35
Change since picked:     + 0.00   			*never opened*
Earnings Date          01/28/10 (unconfirmed)    
Average Daily Volume:       3.3 million 
Listed on  November 16, 2009    


Exelon Corp. - EXC - close: 48.29 change: +0.86 stop: 47.25

After three weeks of consolidating sideways EXC is breaking out to the upside. The stock appears to have built a base over the last few weeks but I hesitate to buy this breakout since the larger trend is still very bearish for EXC. We had a trigger to open bearish positions at $45.80, which doesn't look like it will be hit any time soon. I'm dropping EXC as a bearish candidate.


Entry on  November xx at $xx.xx <-- TRIGGER @ 45.80
Change since picked:     + 0.00   			*never opened*
Earnings Date          01/21/10 (unconfirmed)    
Average Daily Volume:       4.2 million 
Listed on  November 19, 2009