Option Investor

Daily Newsletter, Wednesday, 12/9/2009

Table of Contents

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

Market Wrap

Indexes Make Small Gains, but Nothing Special Wednesday

by Judy Alster

Click here to email Judy Alster
Maybe you remember a play, which was later a movie, called "Marty." In it, Marty's friend Angelo would frequently say, "Hey, Marty -- Whaddaya wanna do?" and Marty would invariably reply, "I don't know, Ange -- Whadda you wanna do." That's the kind of market we had Wednesday — vacillating, irresolute, but at least we ended higher than we began. The dollar, like Marty and Ange, was undecided, and in reaction stocks were choppy, but narrowly. The major indexes managed a fractional rise:

INDEX WRAP, Wednesday, Dec. 9:

The dollar's early jump came not on any particular sign that the greenback was strengthening, but on word that Standard & Poor's revised its outlook for Spain from stable to negative just a day after Greece's credit rating was cut and Moody's grumbled about massive debt in the U.K. (As a friend puts it, "It's like winning the spelling bee because all the smart kids are home with the flu.")

U.S. DOLLAR INDEX, a breather after four good sessions:

After jolting commodities, as it's done by rising more than 1.5% since last week, the buck ended the day slightly lower due to falls against the euro and the yen, helping stocks make a comeback on the day. Gold put the brakes on after three losing sessions, closing around $1,134.58, up $8.22.


Non-farm commodities were not happy, though:


The Dow rose 51 points or 0.5%, the S&P 500 index gained 4 points or 0.4%, and the Nasdaq put on almost 11 points or 0.49%. Advancers and decliners were roughly equal; volume was okay.

S&P 500 leaves 1,100 behind for the second day:

U.S. home loan demand rose last week to the highest level in about two months as the Mortgage Bankers Association's purchase index jumped 4%. It was boosted mainly by buyers (owners, really) locking in low rates with refinancing, which was up a hefty 11.1%; nearly three of every four loan requests last week was for a refinancing rather than a purchase. Also helping were purchase applications tied to government stimulus.


An $8,000 credit that was set to end November 30 for first-time buyers was extended, with contract signings now due by April 30 and loan closings by June 30; a new $6,500 tax credit to bait move-up buyers was added. Supporting it all is extremely low (although higher than the previous week's) mortgage rates, averaging 4.88% for 30-year loans. Although it won't be all smooth sailing — another wave of foreclosures by late next year is not out of the question — things are certainly improving. Unbridled optimism won't be called for next year or even the year after, but at least the housing market no longer gives you that horrible sick feeling in the pit of your stomach.

Like housing stocks, some major residential REITs have been lagging the uptick:

MORTGAGE MARKET: Apps up last week, REITs down:

Most homebuilder stocks are well off their August and September highs, and today's news about D.H. Horton (DHI) didn't help matters. When Horton's CEO Donald Tomnitz recently exercised the right to sell a chunk of company stock that was part of his compensation package, investors took it as a bearish sign and pulled out of the stock. As it happens, Tomnitz just needed a few bucks for a tax bill -- he wasn't bearish on his own company, but try telling that to other shareholders, especially with Horton announcing a fiscal-year loss of $542 million or $1.72 a share.

We can expect to see more scenes like this, what with the shift to increased stock-based compensation in American corporations, since CEO sales of stock can be and are easily misconstrued as harbingers of bad news. On Wednesday it became clear that the share sale by Horton's Tomnitz was only half the story: New SEC filings showed just how much Tomnitz was paid this year while his company otherwise cut costs: his comp package is valued at about $6.4 million, more than half in stock and option awards and a performance-based cash bonus of about $2.3 million, up 26% from last year's bonus. Listen, I don't mind CEOs of public companies making a pile of dough —but only if it's well-deserved, and that number strikes me as a whole lotta money to pay a skipper whose vessel is still navigating red ink. If I'm wrong, tell me. I don't mean to pick on the man; he's not alone, nor is he the worst case. Examples abound (so do studies) that show a strong inverse correlation between outsized CEO compensation and below-average stock performance. If you have an idle moment, Google "CEO compensation related to below-average stock performance". Here's what Horton looks like lately; it's similar to most other homebuilders:

D.R. HORTON, correlating inversely to CEO pay:

As to the Commerce Department's wholesale trade report, inventories rose 0.3% in October, ending more than a year of declines (13, to be exact) and offering new evidence that the inventory correction is at least trying to wind down. Despite the buildup, inventories relative to sales slipped to 1.16; sales at the wholesale level rose 1.2% in the month, better than the expected 0.7%. Petroleum products contributed, up 4.6%, and an 11.4% rise in farm-product inventories accounted for much of the month's build, as this agribusiness ETF shows, gaining over 3% in October:


The results for components were actually mixed, with many of them still posting significant reductions. Specifically, there was a big draw in apparel inventories matched by strong sales. Machinery and furniture saw declines in both inventories and sales during the month; the decline in machinery is no surprise given deep slumps for it in durable goods data and continuing weak business investment in capital goods. Furniture sales at the retail level were also weak in October but more recent reports from retailers hint at a rebound. Both inventories and sales of autos were up in October.

Hiring (not job creation: they're two completely different things) depends to a significant extent on the broad need to build inventory, both of which we have yet to see. October's round-up of inventory data concludes with Friday's Business Inventories report.

Wednesday the Energy Information Administration reported a 2.5-million-barrel build in crude stocks at the West Texas Intermediate Crude delivery point in Oklahoma, along with a 2.2 million barrel build in total gasoline stocks and a 1.6 million build in distillates. On the other hand, it announced a 3.8- million-barrel draw in total crude inventories to 336.1 million barrels. Oil and gasoline imports were both down last week; domestic output of gasoline and distillates were up with refineries finally rousing themselves and operating at 81% of capacity, still very low but better than previously. The major refiners Demand for gasoline was steady in the week but demand for other distillates dipped. Oil first fell $1 then rebounded $1 to trade at $73. It closed lower, however:


Supply in the petroleum market, despite the week's draw in crude, is still heavy and a threat to the oil industry should the global economic recovery stall. As I've said before, refiners usually zoom in an economic turnaround after demand for gasoline and distillates rises, and they pay dividends, always to be desired. Three I watch are Valero (VLO, yielding 3.7%), Tesoro (TSO, yielding 1.6%; it just cut its dividend in half) and Western Refining (WNR, who recently raised its dividend, yielding 5%).

In earnings, retail stocks fell Wednesday after venerable timepiece company Movado Group (MOV) and clothing retailer Men's Wearhouse (MW) among others delivered disappointing outlooks and took dives themselves. The watchmaker reported third-quarter results that fell short of Street expectations, swinging to a loss of $20.9 million or 85 cents a share, from a profit of $15.7 million or 62 cents a share last year; sales fell to $129 million from $135.8 million. On top of which Movado lowered its fiscal 2010 forecast to a loss of $1.40 to $1.50 a share, including $1.05 a share in charges. Analysts didn't like that, especially since they were expecting a profit of 62 cents a share in Q3 and a full-year profit of 46 cents. Blame tight inventory control and "destocking" as many jewelers closed their operations and liquidated inventory during the last year, which hasn't helped sales at high-end stores like Movado.


Men's Wearhouse shares responded to the company's after-hours Tuesday announcement that its third-quarter net income rose to $19.7 million or 37 cents a share from $14.6 million or 28 cents last year on increased revenue, beating estimates on both, by falling 7%: Investors were disappointed in the outlook of a 15-to-19-cent Q4 loss while same-store sales are projected to be flat to down.


Maker of popular athletic wear Lululemon Athletica (LULU) announced a very fine third quarter with revenue up 29.7% to $112.9 million; net income of $14.1 million, up from $8.8 million; and earnings per share of 20 cents, up from 13 cents; the company beat on revenue and earnings, and apparently didn't disappoint with its outlook, since the stock finished nicely higher. It's had a staggering run, up some 520% since March. The stock now looks like it's running out of steam, with its flattening top and non-confirming MACD. But one never knows, does one.

LULULEMON, what a run:

Tuesday night Texas Instruments narrowed its earnings and sales outlook, but pointed to a much better fourth quarter. The stock gapped down on the open but managed to crawl back some, losing only 34 cents or 1.29% to $25.99 . . . . Fluid management company Pall Corp. (PLL) said sales were down but profit up in the latest quarter. Pall shares fell 18 cents to $31.39 in regular trading; after the report in after-hours trading, they gained $2.33 to $33.90 . . . . I'd be remiss if I didn't mention CIT Group (CITGQ), who boldly expects to emerge from bankruptcy protection, all shiny and reorganized, on Thursday. CIT was the largest lender to small and mid-sized businesses in the U.S. It filed for bankruptcy protection on Nov. 1, a few weeks after the Federal Deposit Insurance Corp. refused to guarantee CIT's debt. Its plan calls for a $10.5 billion reduction in its debt load. It closed Wednesday at around 4 cents.

Nothing looks primed for a big move up right now, and of course nobody likes to see the S&P under 1,100. We could see a drift more or less lower till Christmas . . . then possibly some strength to take us into the new year. Buying on dips is not a bad idea.

With Christmas almost upon us, those of you who live with members of the under-six-year-old set may be noticing this phenomenon:


Thursday could bring us one or two market movers. There's the Bank of England rate announcement, the International Trade Report, Jobless Claims (always worth watching), the Natural Gas Report and the Treasury Budget.

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New Plays

12-week highs

by James Brown

Click here to email James Brown


Cal-Maine Foods Inc. - CALM - close: 28.66 change: +0.49 stop: 27.49

Why We Like It:
The farm-products company specializes in eggs. The stock appears to have formed a higher bottom or base near $25.00 in October and now it's starting to breakout past resistance in the $28.00-28.50 zone. I'm suggesting small bullish positions now. We'll use a stop loss at $27.49. Our first target to take profits is at $30.95. Our target is somewhat aggressive since we only have two or three weeks before CALM reports earnings and we don't want to hold over the report.

Annotated chart:

Entry on  December 09 at $28.66 
Change since picked:     + 0.00   			
Earnings Date          12/28/09 (unconfirmed)    
Average Daily Volume:       125 thousand
Listed on  December 09, 2009    

In Play Updates and Reviews

Pockets of Strength

by James Brown

Click here to email James Brown

We're seeing a few spots of relative strength. We're updating one stop loss and closing one play.

BULLISH Play Updates

Best Buy Inc. - BBY - close: 43.03 change: -0.51 stop: 39.85

Retail stocks under performed the broader market today. The RLX index lost 0.7%. Shares of BBY did a little bit worse with a 0.9% decline. Look for BBY to find some support near $42.00. More conservative traders might want to inch up their stops toward the $41.00 level. I am still not suggesting new bullish 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:     + 0.83   			
Earnings Date          12/15/09 (unconfirmed)    
Average Daily Volume:       5.1 million 
Listed on  November 09, 2009    

Bank of Hawaii - BOH - close: 45.56 change: +0.17 stop: 43.90

There is no change from my prior comments on BOH. Shares are trading sideways in a narrow range. I'm not suggesting new bullish positions at this time.

Our first target is $49.85. I'm adding a second target at $53.50. FYI: The Point & Figure chart is bullish with a $59 target.

Entry on  November 18 at $46.20 
Change since picked:     - 0.64   			
Earnings Date          01/25/10 (unconfirmed)    
Average Daily Volume:       424 thousand
Listed on  November 17, 2009    

Broadcom - BRCM - close: 31.27 change: +0.49 stop: 28.75

BRCM has rallied back toward its highs with a 1.5% gain today. The SOX continues to march higher as well. Our first BRCM target is $34.75. Our second target is $37.00. Our time frame is several weeks.

Entry on  December 07 at $31.25
Change since picked:     + 0.02   			
Earnings Date          01/28/10 (unconfirmed)    
Average Daily Volume:       7.4 million 
Listed on  December 05, 2009    

Expeditors Intl. - EXPD - close: 32.56 chg: -0.10 stop: 30.90

EXPD is still bouncing from dips near the $32.00 level. More aggressive traders may want to consider bullish positions with a very tight stop. I'd prefer to buy on strength here.

I'm suggesting a trigger to buy EXPD (small positions) at $33.75. There is some resistance near $35.00 but if triggered our target is $37.00. Our time frame is several weeks.

Entry on  December xx at $xx.xx <-- TRIGGER @ 33.75 (small pos)
Change since picked:     + 0.00   			
Earnings Date          02/09/10 (unconfirmed)    
Average Daily Volume:       1.5 million 
Listed on  December 05, 2009    

HMS Holdings - HMSY - close: 45.36 change: +0.69 stop: 43.49

HMSY delivered a nice bounce from the $44.35 level. I remain bullish on HMSY and readers might want to buy this bounce. Or you could wait for a new close over $46.00. Our multi-week target is $49.75. FYI: The P&F chart is bullish with a $69 target.

Entry on  December 05 at $45.72 
Change since picked:     - 0.36   			
Earnings Date          02/18/10 (unconfirmed)    
Average Daily Volume:       192 thousand
Listed on  December 05, 2009    

Johnson & Johnson - JNJ - close: 64.38 change: +0.13 stop: 59.90

JNJ erased yesterday's minor loss but the stock is still consolidating sideways. I'm not suggesting new positions at this time. Our target first target is $67.50.

Entry on  November 23 at $63.05
Change since picked:     + 1.33   			
Earnings Date          01/26/10 (unconfirmed)    
Average Daily Volume:      12.6 million 
Listed on  November 21, 2009    

Potlatch Corp. - PCH - close: 32.08 change: +0.53 stop: 29.49 *new*

PCH is back to showing relative strength. The stock gained 1.6% and closed at new four-month highs. I am raising our stop loss to $29.49.

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:     + 1.78   			
Earnings Date          02/11/10 (unconfirmed)    
Average Daily Volume:       503 thousand
Listed on  November 11, 2009    

Renolds American - RAI - close: 52.86 change: +0.91 stop: 50.90

The volatility in shares of RAI continues. It was a relief to see RAI's 1.7% bounce after shares unexpectedly dove lower on Tuesday. I'm not suggesting new positions at this time. Our target to exit is $54.90.

Entry on  November 14 at $50.32 
Change since picked:     + 2.54   			
Earnings Date          02/11/10 (unconfirmed)    
Average Daily Volume:       1.6 million 
Listed on  November 14, 2009    

Starbucks Corp. - SBUX - close: 21.30 change: +0.08 stop: 20.95

There is no change from my previous comments on SBUX. The stock is still hovering near the bottom of its trading range. More aggressive traders might want to consider bearish positions under $20.75. I would be concerned about support near $20 and its 100-dma.

We are waiting for a breakout higher. I'm suggesting a trigger to buy the stock at $22.25. If triggered our first target is $24.90.

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    

Travelers Companies - TRV - close: 50.10 change: +0.18 stop: 49.75

TRV came very close to stopping us out with an intraday low of $49.78. Shares managed a bounce back above $50.00 but we're still very much at risk should the market turn lower again. More conservative traders will definitely want to exit early. I am not suggesting new positions at this time.

Entry on  November 27 at $51.94 /gap down entry point 
Change since picked:     - 1.84   			
Earnings Date          01/27/10 (unconfirmed)    
Average Daily Volume:       5.3 million 
Listed on  November 07, 2009    

Texas Instruments - TXN - close: 25.99 change: -0.34 stop: 24.40

TXN gapped down this morning following yesterday's mid-quarter guidance. Shares dipped to $25.50 before finding support. I remain bullish on TXN but traders might want to hold out for a dip closer to $25.00 before launching positions. Our first target is $29.75.

Entry on  December 02 at $26.15
Change since picked:     - 0.16   			
Earnings Date          01/26/10 (unconfirmed)    
Average Daily Volume:      12.6 million 
Listed on  December 01, 2009    

Warner Chilcott - WCRX - close: 26.20 change: +0.72 stop: 22.90

WCRX out performed the market with a 2.8% gain and set a new closing high. Our first target is $27.40. Our second target is $29.45.

Entry on  December 01 at $24.77 gap open entry point (small positions)
Change since picked:     + 1.43   			
Earnings Date          02/25/10 (unconfirmed)    
Average Daily Volume:       1.8 million 
Listed on  November 28, 2009    

Wyndham Worldwide - WYN - close: 20.20 change: -0.10 stop: 17.85

This dip toward $20.00 may end up being a new bullish entry point but if you're launching positions here you'll want to raise your stop loss. Our first target is $21.00. Our second and final target is $22.40. 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:     + 1.32   			
Earnings Date          02/11/10 (unconfirmed)    
Average Daily Volume:       3.5 million 
Listed on  November 10, 2009    

Financial SPDR - XLF - close: 14.31 change: +0.05 stop: 14.15

We were almost stopped out of XLF when the ETF dipped to $14.18 this morning. Banks recovered off their lows but they are still trading sideways. I remain cautious here. I am not suggesting new positions at this time. Our target is $16.40.

Entry on  December 03 at $14.85 
Change since picked:     - 0.54   			
Earnings Date          --/--/-- (unconfirmed)    
Average Daily Volume:        82 million 
Listed on  December 02, 2009    

BEARISH Play Updates

Activision-Blizzard - ATVI - close: 10.79 change: +0.05 stop: 11.81

ATVI spent Wednesday drifting sideways in a narrow range. The short-term trend is down but the stock is arguably short-term oversold too. Look for a failed rally in the $11.25-11.50 zone as a new entry point.

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  December 04 at $11.15
Change since picked:     - 0.36   			
Earnings Date          02/04/10 (unconfirmed)    
Average Daily Volume:        20 million 
Listed on  November 28, 2009    

Bank of New York - BK - close: 27.14 change: +0.23 stop: 27.16

We are still waiting for BK to breakdown from its trading range. 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    

Wells Fargo - WFC - close: 25.96 change: -0.07 stop: 28.01

WFC under performed its peers with a 0.2% decline. The stock hit a new relative low intraday (25.82).

I'm suggesting traders open small bearish positions on WFC with a trigger at $25.75, which would be a new four-month low. The stock will probably see a oversold bounce at the 200-dma but if the market is breaking down the bounce is probably temporary. If we are triggered our first bearish target is $23.10. Our second and final target is $21.00. Remember, use small positions. The financials have proven they can be volatile over the last few months.

Entry on  December xx at $xx.xx <-- TRIGGER @ 25.75 (small positions)
Change since picked:     + 0.00   			
Earnings Date          01/27/10 (unconfirmed)    
Average Daily Volume:        37 million 
Listed on  December 08, 2009    


Boston Beer Inc. - SAM - close: 42.65 change: +0.06 stop: 41.74

It was a volatile session for SAM. The stock suffered an intraday spike lower to $41.30 only to reverse and then eventually see a similar spike higher this afternoon to $43.58. Our stop loss was hit at $41.74 closing the play.


Entry on  December 05 at $42.74 
Change since picked:     - 1.00 <-- stopped @ 41.74 (-2.3%)
Earnings Date          03/10/10 (unconfirmed)    
Average Daily Volume:        98 thousand
Listed on  December 05, 2009