Option Investor

Daily Newsletter, Wednesday, 12/16/2009

Table of Contents

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

Market Wrap

Many Reports, Not Much Action for the Broad Indexes

by Judy Alster

Click here to email Judy Alster
It was a busy day Wednesday for economic reports of all kinds. But in the absence of any really earth-shattering announcements, the major indexes, while finishing mostly up, made no surprise moves.


However, the Nasdaq did manage a new 52-week high of 2,206.91, up 5.86 points or 0.27%. Where it's headed still remains to be seen.


After a more-than-weeklong rise that was the mirror-image of gold's fall, the dollar fell as much as 0.4%, which helped boost stocks early in the session. But other than the opening jump and a post-Fed-Open-Market Committee-meeting fall, things were pretty rangebound. The S&P500 ended up a point at 1,109.18 and the Dow fell 10.9 points or 0.10% to 10,441.12. Both have been trading in a narrow range for over a month. It would have been helpful for them to make a decisive move one way or the other after the FOMC announcement. But no.



In mid-afternoon the committee released its latest report of economic activities, resource utilization, inflation trends et cetera, and its always-highly-anticipated Fed funds decisions. The committee told us that economic activity has continued to pick up and that deterioration in the labor market is abating (we knew that). Fed Chairman Ben Bernanke says he thinks slack in the economy -- meaning idle plants and the weak job market -- will keep inflation in check. (We're really out of luck if it doesn't.) The Fed also said that conditions in financial markets are looking up, so we shouldn't expect them to keep the money pumps open: the special liquidity programs will end as planned.

The main event as always was the target range for the federal funds rate, which will remain at 0.00% to 0.25%. The committee, as it did last time, cited low rates of resource utilization and very mild inflation trends and expectations, ergo, why not keep interest rates where they are for a long time to come. Well, why not indeed, except for the fact that inflation trends, like the weather, can and do change suddenly, leaving the Fed with no choice but to say Oops and renege. We'll see.


The economy is weak enough to keep inflation down but strong enough to increase the pace of home construction and raise hopes for a sustained recovery. Such was the Consumer Price Index report for November, mostly soothing despite the slight rise in the all-inclusive, or headline, number. That number -- and especially the core (excluding food and energy) CPI -- were less inflationary than yesterday's producer price index numbers, which gave the Fed the breathing room it needed to keep rates at record lows. Apparently, core inflation isn't rising through the economy. Companies find it a little tough to jack up prices when consumers are tight-fisted, the job market is weak and the recovery is slow.

Headline consumer price inflation jumped 0.4% in November after gaining 0.3% the month before, matching the consensus forecast. You can blame a 4.1% jump in energy prices (on top of October's 1/4% rise) for the higher headline number, as well as gasoline, up 6.4% after a 1.6% gain the month before. Food prices stayed well-behaved, up a mere 0.1%, same as October. Core CPI inflation, unlike Tuesday's core PPI jump, showed scant change after a 0.2% rise in October, beating estimates.

Down: shelter, including rent and away-from-home lodging, off 0.2%. Up: new and used motor vehicles, medical care, airline fares, and tobacco.


Year over year was a different story. Although the core number was unchanged from last year at +1.7% -- the first time core inflation was unchanged after 10 straight monthly year-over-year increases -- headline inflation was at +1.9% vs. -0.2% last October. So inflation is still up there when you add in energy and eats, which must make the Fed nervous.

On a related note, as soon as I read in a lead paragraph that the House of Representatives passed legislation Wednesday authorizing the government to borrow $290 billion to finance its operations for six additional weeks, I immediately stopped reading and looked at gold stocks. Hardly to my surprise, or yours I bet, I found that after a steady nine-session slide, the S&P Gold Trust (GLD) was up 1.67% and to name merely a few miners, Barrick (ABX) and Goldfields (GFI) were up 2.4% and 1.9% respectively, and Yamana (AUY) up 2.25%. As the night will follow the day, devalue your currency and gold will rise.


Two pieces of housing news were out Wednesday. First, the purchase index of the Mortgage Bankers' Association slipped 0.1% last week; even the refinance index (which counts as mortgage applications, don't ask me why), which was up 0.9% in the same week, couldn't boost the final numbers, despite mortgage rates still averaging only 4.92% for 30-year loans. I promise you we will look back on these rates one day and kick ourselves for not buying every house in sight.

Housing starts were announced later Wednesday morning, and that was better news. Starts -- groundbreaking for new construction -- had dropped 10% in October but rebounded 8.9% last month although yes, most of the gain was a comeback in volatile multifamily starts, up 67.3%; the single-family component posted only a mild rebound of 2.1% after a 7.1% fall the month before. The November annualized pace came in almost exactly as expected, but was down 12.4% year over year. Meanwhile the single-family component edged up 2.1 percent after a 7.1 percent fall the month before. Major homebuilders' stocks -- Toll Brothers (TOL), Lennar (LEN), Beazer (BZH), Pulte (PHM) and DR Horton (DHI) responded very positively to the news, reversing a month-long slide:


By region, the November rebound in starts was led by 16.4% rebound in the Northeast with welcome gains also seen in the South, up 12.3%. Housing permits, another quiet sign to look for, rebounded 6% in November after a 4.2% fall the previous month to an annual rate of 584,000 thousand units, stronger than hoped for. Lest we get over-excited, let's keep in mind that October's numbers were depressing. But the last two months together indicate that housing is in a recovery, but a slow one. The bad news is that the recovery is slow. The good news is that slow probably means sustainable.

As to petroleum, refineries, already operating at a bare 80% of capacity, cut back output last week to the accompaniment of reduced imports, producing a large 3.7 million barrel draw in crude oil -- almost twice what analysts expected -- to 332.4 million barrels. It was slightly offset by a rise in West Texas crude stocks. Distillate supplies fell 2.9 million barrels, but that was offset as well by a 900,000 barrel build in gasoline.

Crude imports averaged 7.8 million barrels per day last week, down 365,000 barrels from the prior week and well below the four-week average. The demand side remains dull at 9 million barrels per day for gasoline and 3.6 million for distillates. Crude futures rose about $1 in reaction to the Energy Information Administration's report to top $73 a barrel, and West Texas Intermediate Crude went on to gain $1.83 or 2.4%; the US Oil Fund ETF (USO), which tracks it, was up too, with commodities having a fair enough day:


Also Wednesday, the government said its broadest measure of foreign trade posted a sharp increase in the July-September quarter, signaling higher demand for foreign goods. Economists think the current account deficit will continue to widen next year -- but not reach the record levels seen previously because a weaker dollar will boost U.S. exports and in fact U.S. companies have been seeing export sales rise in recent months.

Electronics retailer Best Buy (BBY) got a downgrade. It beat third-quarter expectations but mainly via a one-off tax settlement; and while same-store sales advanced (Circuit City's exit helped that), the product mix of notebook computers and entry-price TVs killed margins. Best Buy said to expect more of the same -- improved revenue but driven by lower-margin products. Christmas may not be the best time to announce that; the stock plunged yesterday and fell again today. Former resistance now looks strongly like support, so the fall may be over.


Health care wasn't a big mover but little pharma Achillion (ACHN) saw its stock jump more than 48% on promising results from an early-stage Hepatitis-C drug, making it the top mover on the Nasdaq.hem the top percentage gainer. Dramatic preliminary results showed what is called "proof of concept" for the drug, ACH-1625. Rather than deal with safety, as is usually the case in early stage trials, the company administered the drug to patients for five days. The next step, which is why the stock soared, will probably be for a big drug company to invest heavily in Achillion.

ACHILLION--small company, huge jump:

In an odd complaint filed Wednesday against Intel (INTC), the world’s largest chip maker, the Federal Trade Commission said it wanted to address anticompetitive abuses not only now and in the past, but in the future. The agency said it wants to prevent Intel from using its dominance in the market for microprocessors, the main control chips in personal computers, to squash competition in video graphics chips. The graphics-chip market is currently divvied up pretty much among giants Intel, Nvidia (NVDA) and Advanced Microdevices (AMD). Interesting. Nvidia's stock has been flying since November and kept running up today.

NVIDIA has a friend in the FTC:

After the close came the news that Bank of America (BAC) has named Brian T. Moynihan as chief executive and president. He assumes the helm on January 1. The morning will tell what the market thinks of the move. The stock was up a fraction during the day's trading.

No matter how indecisive this market may be in the short run, eventually it will move up more or less steadily and reward everyone who has been patiently buying on the dips. I hope some of your buys have been, and will continue to be, dividend-bearing stocks, including ETFs. After all, why shouldn't you get a piece of that profit every quarter? Or better yet, every month? The best dividend stocks will be your friends through fair weather and foul.

And here's a map of countries by alcohol consumption, measured in litres of pure alcohol consumed per capita annually by persons 15(!) or older, according to the most recent data from the World Health Organization. Good lord, what was the WHO thinking by including adolescents in that survey? Anyway, I guess it's nice that the U.S. is up there in the 5-to-10 liters division, but from their vantage point on the floor, Europe and Russia must be laughing at us.


Thursday's market mover could be the jobless claims report; the natural gas report could have an effect, while leading indicators and the Fed survey of the Philadelphia region should prove an interesting read.

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New Plays

Transports Ready to Roll

by James Brown

Click here to email James Brown

Editor's Note:

Our new play tonight in in the transportation sector but I wanted to alert readers to STX.

Seagate Technologies (STX) out performed the market with a 5.2% rally thanks to some positive analyst comments this morning. The stock surged right to its November highs and stalled. Shares have potential but I don't want to chase today's move with the market sinking into the close. I'd put it on your watch list and wait for an entry point.


GATX Corp. - GMT - close: 30.52 change: +0.71 stop: 28.49

Why We Like It:
The transportation sector looks ready to lead this market higher. GMT happens to be a component in the Dow Jones Transportation index. The stock is already breaking out to new eight-week highs. If this sector continues to climb GMT looks poised to outperform. However, one quick note, this is probably an aggressive entry point. If you look at the January 2009 peak, the May highs, and the September highs, you can see the trend is one of lower highs. GMT has not yet broken that trend. While I am suggesting small bullish positions here more conservative traders may want to wait for a rise past $30.75, which would over take the September highs and break the trend.

Our target is $34.75 but that's pretty optimistic since we plan to exit ahead of the late January earnings report.

FYI: GMT's business involves both the railroad industry and shipping industry.

Annotated chart:

Entry on  December 16 at $30.52 -use small positions-
Change since picked:     + 0.00   			
Earnings Date          01/21/10 (unconfirmed)    
Average Daily Volume:       314 thousand
Listed on  December 16, 2009    

In Play Updates and Reviews

Still Range Bound

by James Brown

Click here to email James Brown

Wednesday's session turned out to be a relatively lackluster session as investors sold the morning highs.

BULLISH Play Updates

Bank of Hawaii - BOH - close: 45.83 change: -0.23 stop: 44.49

BOH is still consolidating sideways but shares are slowly building on their short-term bullish trend of higher lows. We don't want to consider new positions until BOH trades above $46.50 again. Our first target is $49.85. Our second target is $53.50.

Entry on  November 18 at $46.20 
Change since picked:     - 0.37   			
Earnings Date          01/25/10 (unconfirmed)    
Average Daily Volume:       424 thousand
Listed on  November 17, 2009    

Broadcom - BRCM - close: 31.73 change: +1.38 stop: 28.75

Semiconductor stocks displayed relative strength and the SOX hit new relative highs. Shares of BRCM joined the party with a 4.5% gain and a new 2009 high. It looks like a few analysts had some positive comments on BRCM following yesterday's analyst day. 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:     + 0.48   			
Earnings Date          01/28/10 (unconfirmed)    
Average Daily Volume:       7.4 million 
Listed on  December 05, 2009    

Cal-Maine Foods Inc. - CALM - close: 28.68 change: -0.14 stop: 27.49

CALM may take some patience to play. Shares don't move that fast and we're seeing it consolidate sideways the last few days. The low today was $28.50. Use a dip near $28.00 as a new bullish entry point. 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.

Entry on  December 09 at $28.66 -small positions-
Change since picked:     + 0.02   			
Earnings Date          12/28/09 (unconfirmed)    
Average Daily Volume:       125 thousand
Listed on  December 09, 2009    

Disney - DIS - close: 32.43 change: +0.25 stop: 29.99

DIS set another new 52-week high but spent most of the day trading sideways in a very narrow range near $32.50. Our target is a little optimistic at $34.75 but we will plan to exit ahead of the February earnings report. FYI: The Point & Figure chart currently points to a $45 target.

Entry on  December 12 at $31.70 
Change since picked:     + 0.73   			
Earnings Date          02/09/10 (unconfirmed)    
Average Daily Volume:      11.0 million 
Listed on  December 12, 2009    

Home Depot - HD - close: 28.96 change: -0.06 stop: 27.40

HD started the day strong but eventually trimmed its gains and fell into negative territory. A dip or a bounce near $28.00 could be used as a new entry point. Our first target is $30.60. We'll plan to exit ahead of the February earnings report. FYI: The P&F chart is very bullish with a $44 target.

Entry on  December 14 at $28.82 *gap higher entry  
Change since picked:     + 0.14   			
Earnings Date          02/23/10 (unconfirmed)    
Average Daily Volume:      15.7 million 
Listed on  December 12, 2009    

HMS Holdings - HMSY - close: 47.11 change: -0.29 stop: 43.90

HMSY encountered a little bit of profit taking. Readers could use a dip or a bounce near $46.00 as a new bullish entry point. More conservative traders may want to inch up their stop loss. 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:     + 1.39   			
Earnings Date          02/18/10 (unconfirmed)    
Average Daily Volume:       192 thousand
Listed on  December 05, 2009    

Johnson & Johnson - JNJ - close: 64.80 change: +0.06 stop: 59.90

There is no change from my prior comments. JNJ is still drifting sideways near $65.00.

JNJ remains short-term overbought and due for a correction. Broken resistance in the $62.00-62.50 level should offer some support. 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:     + 1.75   			
Earnings Date          01/26/10 (unconfirmed)    
Average Daily Volume:      12.6 million 
Listed on  November 21, 2009    

Kansas City Southern - KSU - close: 31.62 chg: -0.00 stop: 28.20

KSU spiked to a new high at $32.28 but eventually fell back and closed unchanged on the session. This might suggest shares are poised to retest broken resistance near $30.00. I would use a dip or a bounce near $30.00 as a new bullish entry point. Our target is $34.90.

Entry on  December 14 at $30.90 
Change since picked:     + 0.72   			
Earnings Date          01/28/10 (unconfirmed)    
Average Daily Volume:       677 thousand
Listed on  December 14, 2009    

Potlatch Corp. - PCH - close: 31.59 change: -0.25 stop: 29.49

PCH is still stuck in the $31.00-32.50 trading range. I'm not suggesting new positions at this time. Our first target to take profits is at $33.60. Our second target is $35.75. FYI: The Point & Figure chart is bullish with a $56 target.

Entry on  November 16 at $30.30
Change since picked:     + 1.29   			
Earnings Date          02/11/10 (unconfirmed)    
Average Daily Volume:       503 thousand
Listed on  November 11, 2009    

Renolds American - RAI - close: 53.06 change: -0.05 stop: 50.90

RAI is still drifting sideways. There is no change from my previous comments. 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:     + 2.74   			
Earnings Date          02/11/10 (unconfirmed)    
Average Daily Volume:       1.6 million 
Listed on  November 14, 2009    

Starbucks Corp. - SBUX - close: 22.44 change: -0.29 stop: 20.95

It looks like SBUX is seeing a small correction. Broken resistance should be new support near $22.00. Use a dip near $22.00 as a new entry point. More conservative traders might want to raise their stops. Our first target is $24.90.

Entry on  December 10 at $22.25
Change since picked:     + 0.19   			
Earnings Date          01/28/10 (unconfirmed)    
Average Daily Volume:      10.9 million 
Listed on  November 30, 2009    

Texas Instruments - TXN - close: 25.58 change: +0.14 stop: 24.40

TXN is going nowhere right now. The stock has been stuck in a $25.40-26.20 trading range for five days in a row. While I'm still tempted to buy the stock on a dip near $25.00 more conservative traders may want to wait for a move over $26.20 before launching positions. If you do consider upping your stop loss. Our first target is $29.75.

Entry on  December 02 at $26.15
Change since picked:     - 0.57   			
Earnings Date          01/26/10 (unconfirmed)    
Average Daily Volume:      12.6 million 
Listed on  December 01, 2009    

United Parcel Service - UPS - close: 59.00 change: -0.25 stop: 56.95

UPS may have broken out from its previous trading range but it's not making much progress. I'd still consider new positions here but readers may want to use small positions now and just add to it when UPS makes it past potential resistance at $60.00. Our target is $64.50.

Entry on  December 14 at $58.99 
Change since picked:     + 0.01   			
Earnings Date          02/02/10 (unconfirmed)    
Average Daily Volume:       4.2 million 
Listed on  December 14, 2009    

Warner Chilcott - WCRX - close: 27.89 change: +0.16 stop: 24.77

Another day, another new high for WCRX. This can't go on forever. I am not suggesting new positions at this time. Our first target has been hit at $27.40. Our second target is $29.45.

Entry on  December 01 at $24.77 gap open entry point (small positions)
Change since picked:     + 3.12   	
                         /1st target hit @ 27.40 (+10.6%)
Earnings Date          02/25/10 (unconfirmed)    
Average Daily Volume:       1.8 million 
Listed on  November 28, 2009    

Wyndham Worldwide - WYN - close: 21.20 change: +0.59 stop: 18.88

WYN continues to rally and closed at new 2009 highs. Our first target has already been hit at $21.00. We're currently aiming for $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:     + 2.32
                          /1st target hit @ 21.00 (+11.2%)
Earnings Date          02/11/10 (unconfirmed)    
Average Daily Volume:       3.5 million 
Listed on  November 10, 2009    

BEARISH Play Updates

Activision-Blizzard - ATVI - close: 10.90 change: +0.11 stop: 11.45

ATVI is drifting toward the top of its trading range and round-number resistance at $11.00. Readers may want to watch for a failed rally in the $11.25 zone before considering new positions.

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:     - 0.25   			
Earnings Date          02/04/10 (unconfirmed)    
Average Daily Volume:        20 million 
Listed on  November 28, 2009    

Bank of New York - BK - close: 26.86 change: +0.25 stop: 27.16

If we don't see BK close under $26.50 in the next couple of days I'm dropping it as a bearish candidate. The plan is to wait for a new relative low. The trigger to open positions is at $25.49.

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: 25.84 change: +0.18 stop: 28.01

Banking stocks rallied on short covering in foreign markets thanks to news that international regulators will give banks more time (a grace period) before requiring higher capital requirements. That strength didn't translate well for American banks. WFC did manage to out perform its peers with a 0.7% gain. I remain cautious around this secondary offering by WFC to raise money to pay back the TARP. Technically it's bearish since it dilutes shareholders but investor sentiment has been tough to figure on the banks lately.

We knew this was going to be an aggressive, higher-risk trade so the plan was to use smaller positions. Our first bearish target for WFC is $23.10. Our second and final target is $21.00.

Entry on  December 10 at $25.75 (small positions)
Change since picked:     + 0.09   			
Earnings Date          01/27/10 (unconfirmed)    
Average Daily Volume:        37 million 
Listed on  December 08, 2009    


Travelers Companies - TRV - close: 49.70 change: -0.71 stop: 49.75

We've been cautious on TRV for days. It looks like some lackluster analyst comments are the culprit behind today's under performance. The stock dipped to $49.51 hitting our stop loss at $49.75 and closing the play.


Entry on  November 27 at $51.94 /gap down entry point 
Change since picked:     - 2.19<-- stopped @ 49.75 (-4.2%)
Earnings Date          01/27/10 (unconfirmed)    
Average Daily Volume:       5.3 million 
Listed on  November 07, 2009