Option Investor

Daily Newsletter, Monday, 11/30/2009

Table of Contents

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

Market Wrap

Stocks Rise As Dubai Fears Cool

by Todd Shriber

Click here to email Todd Shriber
U.S. equities put fears over the Dubai financial crisis behind them on Monday as all three major indexes moved higher on the day. The S&P 500 extended its gains for November, adding 8.36 points to close at 1095.63. The Dow Jones Industrial Average gained almost 35 points to finish the day at 10344.84 and the Nasdaq added just over six points to close at 2144.60.

Stats Table

As I always say, an up day is better than a down day, but given the losses incurred on Friday in the wake of the Dubai news, Monday's gains were not enough to get the major indexes back to their pre-Thanksgiving levels. The S&P 500 still trades below the critical 1100 area and any hopes for 2200 Nasdaq 2200 may have to be shelved for awhile as the index could not even reclaim 2150 on Monday. The weak trade in the Nasdaq was curious to say the least given the bullish trade in two big Nasdaq components, Amazon (AMZN) and eBay (EBAY).

In recent years, the Monday following Thanksgiving has become known as “Cyber Monday,” the online retail world's answer to “Black Friday.” Analysts are expecting Cyber Monday sales to reach a record this year as more shoppers opt for the ease of Internet shopping over a trip to the local shopping mall. Web tracking firm comScore said as much as $900 million could be spent online today as retailers offer big discounts and free shipping. That would represent a hefty increase from the $595 million that was spent online on Black Friday.

This should be good news for Amazon, considered one of the Four Horsemen of the Nasdaq, and it was as Amazon shares touched an all-time high of $136.08 before settling at $135.91. The chart below shows a significant gap up for Amazon in October around the time of the company's last earnings report and conventional wisdom says gaps normally get filled in, but Amazon has shown nothing but strength over the past month and the company appears poised to be a prime beneficiary of the online holiday shopping trend.

Amazon Chart

Amazon trades at a lofty 53.7 times forward earnings meaning the stock is neither cheap by price nor by underlying fundamentals. That could mean investors may start to favor eBay, which was up 5.4% on Monday. eBay is far cheaper at just 15 times forward earnings and $24.47 a share, but the trade in the stock was robust on Monday. Volume was about 40% higher than the daily average and the 52-week high of $25.80 isn't that far off. There are two reasons eBay may be another winner this holiday season. First, transaction volume at the company's PayPal unit is increasing. Second, eBay is a bargain hunter's nirvana and with newly frugal consumers looking for every chance to spend less this year while still giving nifty gifts, eBay may actually benefit as shopper hunt for the best deals.

The bottom line here is that two of the Nasdaq's most visible members are looking bullish, but the index in general looks lethargic. Perhaps this is the market's way of saying the Nasdaq needs more help than what Amazon and eBay can offer. Or maybe not. Either way, time will tell.

With all of this fervor over Cyber Monday, one might expect retailers to have led the market advance on Monday. Oddly enough, financials were the best performers of the 10 industry groups tracked in the S&P 500. Dow component JPMorgan Chase (JPM) added 2.81% and Wells Fargo (WFC) gained 3.32% to lead the sector higher. Goldman Sachs issued a bullish research note on Monday, saying it continue to favor big banks and credit card issuers over their regional counterparts. Goldman says it is still bullish on JPMorgan Chase, Bank of America (BAC) and Capital One (COF).

One black mark for financials on Monday came a from a name that seems to be a perpetual black on the sector. American International Group (AIG), the infamous insurance concern, plunged nearly 15% after a Sanford C. Bernstein analyst said the company has an $11 billion shortfall in property-casualty claims and that may impair the company's ability to repay its debt to the U.S. government. Bernstein lowered its price target on AIG by 40% to $12, a far cry from $28.40 where the shares closed at.

AIG owes Uncle Sam something in the neighborhood of $182 billion and some rivals say the company was selling insurance products too cheaply in an effort to simply retain clients. Good luck keeping clients when you cannot pay their claims. If you are in the mood for a chuckle, the AIG chart is below.

AIG Chart

Speaking of Goldman Sachs calls, the steel sector also curried some favor from Goldman on Monday, earning an upgrade to ''attractive'' from ''neutral.'' Goldman placed U.S. Steel (X), the largest U.S. steelmaker, on its highly regarded ''conviction buy'' list. Goldman also likes AK Steel (AKS), Nucor (NUE) and Steel Dynamics (STLD). Goldman is forecasting a return to growth for the steel industry in 2010, buoyed by demand from automakers and other industrial customers. In addition, low inventories and a weak dollar should help firm up steel prices in the U.S. Of course a rebound in steel demand could lend some help to the market rally. Materials names, including steel issues, have certainly helped the market move higher, but many steel stocks have posted gains on the back of sketchy fundamentals.

Steel Demand

And all this talk of materials reminds me that is to time to mention gold. By now, most of you probably think I am a goldbug given the frequency with which I mention the yellow metal. Personal feelings aside, the trend for gold is undeniable. December gold futures were up $6.90 to $1181 an ounce on Monday and my best guess is that they will soon traverse last week's record high of $1188 an ounce. Gold rose 13% in November, posting only three losing sessions, good for the metal's best month since November 2008. Futures were up 14% on the month, and that's good for the best performance in a decade.

A weak dollar and renewed buying by global central banks bolstered gold prices in November and catalysts like the Dubai debt crisis do not hurt gold's cause. Gold's run higher has lifted the precious metals group at large and I would be remiss if I did not mention the iShares Silver Trust ETF (SLV) again. SLV has traded in lockstep with comparable gold ETFs over the last several months, but have a look at the chart below, which illustrates the divergence in gold and silver price performance since March. In what may be a surprise to some, silver is the clear winner. So while the market continues to laud gold with most of the precious metals headlines, there are certainly other profitable opportunities to be had.

Gold/Silver Chart

Looking ahead to Tuesday, expect a busy day in terms of economic data. Frankly, this week is chocked full of important economic reports. The Institute for Supply Management (ISM) delivers its November manufacturing report, which is expected to show a reading of 54.8, down from 55.7 in October. That number comes out at 10 AM Eastern time and at the same time, the National Association of Realtors (NAR) should report a 0.5% dip in pending home sales for October after a 6.1% jump in September.

The Census Bureau is expected to report a 0.4% drop in construction spending in October, which will erase part of September's 0.8% gain. Monthly auto sales will also be reported on Tuesday. Expect a drop from the October number. There are a couple of other pivotal reports this week, but the crown jewel will be November non-farm payrolls number, which will be released Friday before the market opens.

Taking a look at the charts, the Dow bounced off support in the 10300 area today and that is a good sign as a move to 10200 area would not have been good news. Resistance continues to loom in the 10500 area where the Dow peaked at 10495 before moving down last week on the Dubai news. Even if the fallout from Dubai looms longer than expected or wanted, the impact is likely to be felt more on emerging markets stocks than on blue chips and some investors may run to the relative safety offered by many Dow members.

Dow Chart

The S&P 500 is a different, perhaps more concerning story. While the index found support at 1085 last week, even with today's pop, the index still languishes below 1100. Monday's trade still leaves the S&P 500 a healthy 18 points away from the November peak of 1113.69. If 1085 can hold firm as support, that is a good sign. If not, well let me just say that the holidays may not be so cheery for many on Wall Street.

S&P 500 Chart

And if you really want some reasons to be concerned, check out the Nasdaq. As I mentioned earlier, the Nasdaq managed only a tepid gain on a day when two of its biggest players, Amazon and eBay, were heavily embraced by investors. Techs have been a key catalyst of the market rally, but the Nasdaq was beaten away by resistance at 2200. The near-term trend for the Nasdaq is not all that encouraging as the index peaked below its 50-day moving average last week and barely moved back above that line on Monday.

Another dip below the 50-day moving average could show us how strong support at 2100 is and if it is not strong, a move below 2050 could be in the offing.

Nasdaq Chart

I do not normally opine about the Russell 2000, but maybe I should. Small-caps may be in some trouble as evidenced by news that the iShares Russell 2000 Index ETF (IWM) is seeing significant outflows. After gaining $2.2 billion in new investments from July to September, $1 billion has departed IWM since the beginning of October. Remember that small-caps typically outperform their larger peers coming out of bear markets and recessions, so this outflow news may be a negative sign.

Russell 2000 Chart

While it was encouraging to see stocks move past the Dubai news on Monday, I think the technical pictures for the Nasdaq and S&P 500 are less than rosy. If at least one of those two could start moving back to and beyond their critical resistance levels, that might give the bulls some more ammo to carry this rally into the holidays. Caution appears warranted at this junction.

New Plays

Caffeinated Window Shopping

by James Brown

Click here to email James Brown


Starbucks Corp. - SBUX - close: 21.90 change: +0.47 stop: 20.95

Why We Like It:
Did you or your spouse go shopping this past weekend? How many Starbucks cups did you see in shoppers hands while you were out? This morning the National Retail Federation said crowds were bigger but they were spending less than last year. They may have been spending less in the stores but at least one firm believes they were all stopping by Starbucks. It makes sense. Consumers could be watching their wallets but they're probably willing to pop for an overpriced coffee to make the occasion more enjoyable.

The stock performed well on Monday with a 2.1% gain. Shares are poised to breakout over resistance near $22.00. I'm suggesting a trigger to buy the stock at $22.25. If triggered our first target is $24.90.

Annotated chart:

Entry on  November xx at $xx.xx <-- TRIGGER @ 22.25
Change since picked:     + 0.00   			
Earnings Date          01/28/10 (unconfirmed)    
Average Daily Volume:      10.9 million 
Listed on  November 30, 2009    

In Play Updates and Reviews

Financials bounce while Tobacco under performs.

by James Brown

Click here to email James Brown

It was a quiet day for much of the market but the banking sector rebounded sharply.

BULLISH Play Updates

Analogic Corp. - ALOG - close: 40.51 change: +0.32 stop: 38.99

Traders bought the dip in ALOG near $39.00. This intraday bounce looks like a new bullish entry point to buy the stock. 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:     - 1.00   			
Earnings Date          12/09/09 (confirmed)    
Average Daily Volume:      41.5 thousand
Listed on  November 24, 2009    

Best Buy Inc. - BBY - close: 42.83 change: -0.00 stop: 39.85

BBY management had some positive comments on store traffic over the weekend. Shares of BBY rallied this morning but eventually gave it all back to close unchanged on the session. I remain bullish on BBY but I'm not suggesting new positions at this time. 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:     + 0.63   			
Earnings Date          12/15/09 (unconfirmed)    
Average Daily Volume:       5.1 million 
Listed on  November 09, 2009    

Bank of Hawaii - BOH - close: 45.70 change: +0.86 stop: 43.90

Banking stocks were some of the strongest performers on Monday. Investors must have felt that the Dubai World problem would be contained. Add to that some positive comments from Goldman Sachs on the financials and the sector rebounded sharply. BOH only gained 1.9%, which is actually a little under performance compared to the banking indices. I'd still wait for a new move over $46.00 before launching new positions.

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:     - 0.50   			
Earnings Date          01/25/10 (unconfirmed)    
Average Daily Volume:       424 thousand
Listed on  November 17, 2009    

Johnson & Johnson - JNJ - close: 62.84 change: -0.05 stop: 59.90

Monday proved to be a quiet session for JNJ. The stock traded sideways in an 80-cent range. I don't see any changes from my prior comments. I'd be tempted to buy a bounce from $61.00. Keep positions small. 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:     - 0.21   			
Earnings Date          01/26/10 (unconfirmed)    
Average Daily Volume:      12.6 million 
Listed on  November 21, 2009    

Potlatch Corp. - PCH - close: 29.44 change: +0.90 stop: 27.95

The rally in PCH really began to pick up speed late this afternoon. Shares ended the session up 3.1%. I would prefer to see a new breakout over $30.00 before launching new 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:     - 0.86   			
Earnings Date          02/11/10 (unconfirmed)    
Average Daily Volume:       503 thousand
Listed on  November 11, 2009    

Southern Copper Corp. - PCU - close: 34.84 change: +0.22 stop: 33.80

There was no follow through in the dollar's rally from Friday and commodities managed a bounce on Monday. PCU traded sideways in a narrow range but closed the day up 0.65. I'm not suggesting new positions at this time.

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:     + 1.04   			
Earnings Date          10/22/09 (confirmed)    
Average Daily Volume:       3.5 million 
Listed on  November 03, 2009    

Renolds American - RAI - close: 49.96 change: -1.36 stop: 49.49

RAI unexpectedly sold off on Monday. The stock posted a 2.6% decline. I suspect RAI was weak because PM was selling off (-3.8%) but I could not find any news to explain why either stock was falling today. Shares of RAI have pulled back toward the $50.00 level, which should be support. The fractional close under $50.00 is somewhat bearish. If there is any follow through lower it wouldn't take much to stop us out at $49.49. Given the unexpected pull back I'm not suggesting new positions at this time. Our target is $54.50. Our time frame is several weeks!

Entry on  November 14 at $50.32 
Change since picked:     - 0.36   			
Earnings Date          02/11/10 (unconfirmed)    
Average Daily Volume:       1.6 million 
Listed on  November 14, 2009    

Symantec - SYMC - close: 17.75 change: +0.06 stop: 17.24

There is no change from my prior comments on SYMC. We're still waiting on a breakout higher with a trigger to open 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: 52.39 change: +0.74 stop: 49.75

TRV traded sideways all day until shares suddenly began to climb in the last hour of trading. Look for a move over $52.70 or $53.00 to launch new positions. Our target is $57.40.

Entry on  November 27 at $51.94 /gap down entry point 
Change since picked:     + 0.45   			
Earnings Date          01/27/10 (unconfirmed)    
Average Daily Volume:       5.3 million 
Listed on  November 07, 2009    

Warner Chilcott - WCRX - close: 24.58 change: +0.11 stop: 22.49

WCRX made another new 52-week high this morning but failed to hit our trigger. I'm suggesting readers use a trigger at $24.65 to open small bullish positions. If triggered our first target is $27.40. We'll consider a second target closer to $29.50 if the market cooperates.

Entry on  November xx at $xx.xx <-- TRIGGER @ 24.65 (use small positions)
Change since picked:     + 0.00   			
Earnings Date          02/25/10 (unconfirmed)    
Average Daily Volume:       1.8 million 
Listed on  November 28, 2009    

Wyndham Worldwide - WYN - close: 18.57 change: +0.01 stop: 17.20

It looks like WYN still thought it was the weekend. The stock barely moved and closed almost unchanged on the session. I'm not suggesting new positions at this time.

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:     - 0.31   			
Earnings Date          02/11/10 (unconfirmed)    
Average Daily Volume:       3.5 million 
Listed on  November 10, 2009    

BEARISH Play Updates

Activision-Blizzard - ATVI - close: 11.39 change: -0.19 stop: 12.01

ATVI under performed the market with a 1.6% decline. I'm suggesting a trigger to launch small bearish trades at $11.15. More conservative traders could wait for a drop under $11.00 first. If triggered our first target is $10.05. Our second target is $9.25. Our time frame is several weeks. FYI: The Point & Figure chart is currently forecasting a $7.50 target.

Entry on  November xx at $xx.xx <-- TRIGGER @ 11.19
Change since picked:     + 0.00   			
Earnings Date          02/04/10 (unconfirmed)    
Average Daily Volume:        20 million 
Listed on  November 28, 2009    

Bank of New York - BK - close: 26.64 change: +0.34 stop: 27.16

Fears began to fade over the Dubai World crisis and financial stocks rallied on Monday. BK gained 1.29%. At this time we're still waiting for a breakdown.

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: 19.29 change: -0.49 stop: 21.26

LBTYA sank to another new relative low. Shares hit $18.75 midday and closed with a 2.4% decline. 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:     - 0.56   			
Earnings Date          02/24/10 (unconfirmed)    
Average Daily Volume:       2.5 million 
Listed on  November 21, 2009    

Lam Research - LRCX - close: 33.99 change: -0.50 stop: 36.26

LRCX under performed the NASDAQ and the SOX semiconductor index with a 1.4% decline on Monday. I don't see any changes from my weekend comments. I'm suggesting small bearish positions now. More conservative traders may want to wait for a breakdown under $32.00 and its 100-dma first. Keep in mind that we're setting our first target to take profits at $30.25. Our second target at $28.25 (or the simple 200-dma).

Shares of LRCX appear to have formed a bearish head-and-shoulders pattern but where the neckline falls is a matter of opinion. Traders should also note that this is a higher-risk trade. The most recent data listed short interest at more than 14% of the 126 million-share float. That is above average short interest and raises our risk of a short squeeze.

Entry on  November 28 at $34.49 (small positions)
Change since picked:     - 0.50   			
Earnings Date          01/28/10 (unconfirmed)    
Average Daily Volume:       1.8 million 
Listed on  November 28, 2009    

Metlife Inc. - MET - close: 34.19 change: +0.91 stop: 36.05

MET spent most of the day in a 60-cent range. That changed late in the session when word hit that Dubai had announced some sort of restructuring for a portion of its debt. This launched a rally in financials and MET shot higher. If there is another explanation for the late day rally in MET I don't know what it is.

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    


ENERSYS - ENS - close: 22.76 change: -0.16 stop: 22.40

ENS under performed on Monday morning with a spike down toward $22.00. That was enough to stop us out at $22.40. Technically the larger trend is still up and the intraday bounce makes today's session look like another higher low. More nimble traders may want to reconsider bullish positions if ENS sees any follow through higher.


Entry on  November 16 at $24.20
Change since picked:     - 1.80 <-- stopped @ 22.40 (-7.4%)
Earnings Date          02/10/10 (unconfirmed)    
Average Daily Volume:       530 thousand
Listed on  November 14, 2009