Option Investor

Daily Newsletter, Monday, 1/25/2010

Table of Contents

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

Market Wrap

Stocks Reverse Losing Ways, But Not In Impressive Fashion

by Todd Shriber

Click here to email Todd Shriber
After enduring several days of intense selling pressure, stocks reversed course, sort of, on Monday and inched higher for the first time since last Tuesday. Yes, stocks were higher, but the gains were tepid at best and did little to put a dent in the losses incurred last week. After posting five consecutive triple-digit moves, four of which were losers, the Dow Jones Industrial Average gained almost 24 points to close at 10,196.86. The S&P 500 gained five points to close at 1096.78 and the Nasdaq rose 5.51 to 2210.80.

Stats Table

As you can see from the table above, all three major U.S. indexes finished the day closer to their intraday lows than their highs and volume on the New York Exchange was unimpressive to say the least. Then again it may not be surprising to see stocks turn in a lethargic day given that Monday was the only logical day to take a break this week with 130 members of the S&P 500 scheduled to report earnings starting today after the close. On the other hand, one might argue that Monday's action was not the least bit encouraging when considering that the Senate appears likely to extend Ben Bernanke the courtesy of one more seven-year as head of the Federal Reserve. Speculation that Bernanke would be shown the door spooked investors last week.

After being bludgeoned last week, financials showed some signs of life on Monday and that helped the S&P 500 curb its worst three-day run since last March. Bank of America (BAC), Goldman Sachs (GS), JPMorgan Chase (JPM) and Wells Fargo (WFC) all put together small gains as did the Financial Select SPDR ETF (XLF) as it appears at least a few investors are willing to try the ''buy the dips'' approach one more time. If there are any bulls left in the financials' corner, they will need to try a little bit harder to jolt XLF back to its 50-day moving average because even with today's positive trade, the ETF still languishes below that important area.

XLF Chart

Given the catalysts behind the recent sell-off, namely concerns regarding emerging markets growth (read: China's curb on bank lending) and populist political rhetoric, stock picking has become that much harder. It certainly pays to commit oneself to proper due diligence and being selective. One such example that emerged while the market was open was industrial conglomerate Johnson Controls (JCI).

To be sure, Johnson Controls is not one of those alluring, high-beta names that helped propel the market higher last year. Of course it is those same high-fliers that have taken it on the chin recently. All that aside, stodgy Johnson Controls, which makes auto parts, heating and cooling systems and other boring fare, was up more than 3% today after increasing its 2010 guidance to $1.70 to $1.75 a share from $1.35 to $1.45 a share. The company is ''cautiously optimistic'' about growth in the second half of this year and says it expects robust growth in China to continue. Shares of Johnson Controls have nearly quadrupled from their March 2009 lows.

Johnson Controls Chart

In all fairness to Johnson Controls, a fine company in its own right, I imagine most readers of this market wrap are tuning in for an update on some of the after-hours earnings reports, namely Apple's (AAPL) quarterly update. After turning in the best performance of the three major indexes in 2009, the Nasdaq is off to a slow start in 2010. Intel (INTC) reported a very nice quarter, but investor reaction was not as positive as one would have hoped. Google (GOOG) disappointed and the stock is down 7.5% in the past five days, more than twice the loss turned in by the Nasdaq and S&P 500 over the same time frame.

In other words, tech investors were probably desperate to see Apple do what Apple does best and that is report another quarter of boffo profit results. The maker of the ubiquitous iPod and iPhone did not disappoint. Apple reported its most profitable quarter ever, saying that iPhone and Mac sales led to an almost 50% increase in quarterly profits.

Helped by the iPhone's debut in several international markets, including China and South Korea, Apple sold 8.7 million iPhones during its fiscal fourth quarter, which ended December 26. Mac sales surged 33%. Apple changed the accounting methods it uses to calculate sales and profits and under those new reporting methods, the company earned $3.4 billion, or $3.67 a share, compared with $2.3 billion, or $2.50 a share a year earlier. Sales soared 32% to $11.9 billion.

Apple did not disclose the accounting change until its conference call started this afternoon, so analysts were expecting the company to earn $2.07 a share on sales of $12 billion. One analyst said the company increased its already tidy free cash flow by $6 billion. The chart below illustrates Apple's free cash situation as of mid-December 2009.

Apple Cash Flow

The lone cause for concern, if it can be called that, was an 8% drop in iPod sales to 21 million units from 22.7 million a year earlier. Apple said it expected iPod sales to drop a bit because the iPhone has many of the same features the iPod has and with the iPhone's rising popularity, some consumers just do not see the need to own both products.

For the current quarter, Apple said it expects to earn $2.06 to $2.18 per share on revenue of $10.4 billion to $11.4 billion. That probably will not be the only news to jolt Apple shares higher, saying that scenario plays out. After launching the iPhone with 17 new carriers in December, speculation is again swirling that Apple's exclusive U.S. agreement with AT&T (T) will soon end, making the iPhone available to Verizon (VZ) customers. It should be noted that Apple did not comment on working with any additional carriers during Monday's conference call.

Of course, I cannot forget to mention that another one of Apple's widely anticipated product launches is scheduled for Wednesday and while the company declined to comment on what product or products will be unveiled, some Apple enthusiasts have already dubbed Wednesday as the ''Day When Apple Changes The World.'' More than likely, Steve Jobs & Co. will ''change the world'' with the introduction of a tablet computing device.

If the product is as revolutionary as expected, that could be the tonic the shares need to move higher. As it was, the stock was up less than 3% during traditional trading hours and moved up less than 1% in the after-hours session after the results were released.

Apple Chart

The quarterly report from chipmaker Texas Instruments (TXN) may have gotten lost in the after-hours shuffle, but it probably should not be overlooked. The second-largest U.S. semiconductor producer behind Intel turned in its best profit report in two years, saying it earned $665 million, or 52 cents a share on sales of $3 billion. Analysts had expected TI to earn 50 cents a share on revenue of $2.98 billion.

The company said its four-quarter operating margin was 29.1%, a level not seen since the fourth quarter of 2007. For the current quarter, TI is forecasting a profit of 48 cents a share on sales of $3.07 billion, above Street estimates of 44 cents and sales of $2.83 billion. Despite the rosy forecast, shares of Texas Instruments were down 40 cents to $23.29 in after hours trading.

Texas Instruments Chart

Looking toward, there is a flood of earnings reports from Dow members that could help the index regain positive footing. Chemicals giant DuPont (DD) is expected to earn 41 cents a share on revenue of $6.16 billion. Johnson & Johnson (JNJ) is expected to post a profit of 97 cents a shares on sales of $15.7 billion. Insurance firm Travelers (TRV) is slated to deliver a profit of $1.49 a share on revenue of $5.27 while analysts are expecting Verizon to earn 54 cents a share on revenue of $27.33 billion. All of these reports are scheduled to be released before the market opens.

Taking a look at the charts, with the Dow losing more than 4% last week, Monday's meager 0.23% gain does little to put a dent in those losses, but as I just mentioned, there are plenty of earnings reports on the docket that could help or hinder the Dow. Call Monday's gain 24 points and subtract it from 562 and the Dow has lost 538 points in the last four sessions.

If the Dow cannot advance from here, or worse, if 10,100 does not hold as support, a retreat to 9650 could be just around the corner. There are at least eight more Dow members due to step into the earnings confession booth after Tuesday so the coming days should provided plenty of clarity about the direction of the index.

Dow Chart

The S&P 500 tried to regain 1100 on Monday, but a late day sell-off and anemic volume stopped the index just below 1097. That is perilously close to support at 1085. Granted, 1085 has proved resilient as support several times over the past couple of months, but if it fails this time around, 1035 becomes a legitimate possibility. From there, 1000 could be tested.

S&P 500 Chart

The Nasdaq failed just above 2300 and is now hovering far closer to 2200 and like the Dow, there are earnings reports abound to either jolt or weigh on the index. Tuesday will be telling as investors react to the Apple and Amgen (AMGN) reports. Yahoo (YHOO) chimes in after the bell tomorrow and Amazon (AMZN) and Microsoft join the fray on Thursday.

If the Apple number is not met with open arms, forget about 2200 as support and take a look at 2040-2050. An optimistic scenario would be that Apple's product announcement on Wednesday and Amazon's earnings report on Thursday are enough to lift the Nasdaq back to 2250.

Nasdaq Chart

Personally, I am not a fan of the current level of political interference equities are contending with because a lot of quality earnings reports are being overlooked due to the White House's laser-like focus on punishing a few banks. The fact of the matter is if concerns persist about who is or is not leading the Fed, Treasury, whatever, then stocks are not going to move higher.

Hopefully, as more solid earnings report are delivered and if we get a good GDP number on Friday, the market will move past these political headwinds. Until then, the current dip probably does not avail investors of the good buying opportunities that other recent pullbacks have.

New Plays

Basic Materials

by James Brown

Click here to email James Brown


RTI Intl. - RTI - close: 25.83 change: +0.52 stop: 27.65

Why We Like It:
Metal and mining related stocks were some of the worst performers today. The oversold bounce in RTI didn't get very far. Shares now have short-term resistance at the 10-dma. I am suggesting small bearish positions right here. More conservative traders could wait for a new relative low under $24.90 to initiate positions. I'm suggesting small positions because RTI does have above average short interest at 9% of the small 29 million-share float. That raises the risk of a short squeeze.

RTI is due to report earnings in early February so our time frame is about a week and a half. Our first target is $23.00. Don't be surprised to see RTI bounce from the 50 or 100-dma. Our second target is $20.75.

Annotated chart:

Entry on   January 25 at $25.83 (small positions)
Change since picked:     + 0.00   			
Earnings Date          02/03/10 (unconfirmed)    
Average Daily Volume:       720 thousand
Listed on   January 25, 2009    

In Play Updates and Reviews

Stocks Remain Fragile

by James Brown

Click here to email James Brown

BULLISH Play Updates

CVR Energy - CVI - close: 8.54 change: +0.02 stop: 7.50

CVI is still holding up but shares remain under technical resistance at the 200-dma. I think odds are growing that CVI could dip back toward $8.00 before continuing much higher. More conservative traders may want to up their stop loss closer to $8.00. Our target long-term target is $12.50. CVI has to push past resistance at the 200-dma (near $8.74) and the $10.00 level first.

Entry on   January 19 at $ 8.20 
Change since picked:     + 0.34 
Earnings Date          03/10/10 (confirmed)         
Average Daily Volume:       411 thousand     
Listed on   January 17, 2009    

Hologic Inc. - HOLX - close: 15.83 change: +0.04 stop: 14.95

Gains in HOLX were very mild today but that might be due to the fact shares didn't see much of a sell-off. There is no change to my weekend comments. The stock should have some support near $15.50 (near its 100-dma) and the $15.00 level. I'm inching up our stop loss to $14.95. More conservative traders may want to use a higher stop loss. I am not suggesting new positions at this time. Our first target to take profits is at $16.45. Our second target is $17.25.

Entry on   January 13 at $15.15   (small positions)
Change since picked:     + 0.68   			  
Earnings Date          02/01/10 (unconfirmed)      
Average Daily Volume:       2.7 million      
Listed on   January 04, 2009    

North American Palladium - PAL - close: 4.13 change: +0.04 stop: 3.85

PAL is bouncing between its moving averages. On Friday it bounced from its 21-dma. Today the rally reversed at the 10-dma. Overall the lack of any real rebound on Monday is worrisome. More conservative traders may want to exit early and cut your losses now. I'm not suggesting new positions at this time. Consider keeping your position size small to limit your risk. Our first target is $7.00.

Entry on   January 19 at $4.50 
Change since picked:    - 0.37   			
Earnings Date         02/22/10 (unconfirmed)   
Average Daily Volume:      1.4 million 
Listed on   January 17, 2009    

BEARISH Play Updates

Atlas Air Worldwide - AAWW - close: 36.91 change: -0.15 stop: 40.05

Shares of AAWW gapped open higher at $37.66, which changes our entry point. The bounce quickly failed and AAWW closed with a 0.4% loss. That's not a good sign when the rest of the market is trying to bounce. I would still open new positions now. Our first target is $32.60. We might consider a second target near $30. My time frame is two or three weeks.

Entry on   January 23 at $37.66 /gap open entry
Change since picked:     - 0.75   			
Earnings Date          02/24/10 (unconfirmed)    
Average Daily Volume:       291 thousand
Listed on   January 23, 2009    

Best Buy - BBY - close: 37.53 change: +0.38 stop: 40.26

BBY saw an oversold bounce but it stalled under the $38.00 level. There is no change from my prior comments. Our target to exit is $35.25.

Entry on   January 12 at $38.95 (small positions)
Change since picked:     - 1.42   			
Earnings Date          03/25/10 (unconfirmed)    
Average Daily Volume:       8.0 million      
Listed on   January 02, 2009    

Companhia Brasileira de Distribuicao - CBD - cls: 71.32 chg: +0.82 stop: 74.05

CBD also gapped open higher this morning. Shares didn't make it very far with the bounce running out of steam around $71.50. The plan here is to wait for a breakdown under support near $70.00 although if we get the chance a failed rally in the $74-75 zone would be a better entry point. Overall there is no change from my weekend comments here:

I am labeling this a very aggressive trade. I could not find any good figures on CBD's outstanding shares or float. There could be huge short interest in this stock. We want to use very small positions. I'm suggesting a trigger at $69.40 to open bearish positions. The stock can be volatile so we have a wide stop at $74.05. Our first target is $61.00. Our second target is $56.00. Time frame is several weeks.

Entry on   January xx at $xx.xx <-- TRIGGER @ 69.40
Change since picked:     + 0.00  (very small positions)
Earnings Date          03/03/10 (unconfirmed)    
Average Daily Volume:       261 thousand
Listed on   January 23, 2009    

Oshkosh Corp. - OSK - close: 35.53 change: +0.72 stop: 37.51

OSK provided a decent oversold bounce with a 2% gain. Readers may want to wait for shares to trade near short-term resistance at its 10-dma (near $37.00) or wait for a new low (under $34.50) before initiating positions. Our first target is $30.25. Our time frame is only a few days. OSK reports earnings on Jan. 28th and we do not want to hold over the announcement.

Entry on   January 22 at $35.25
Change since picked:     + 0.28   			
Earnings Date          01/28/10 (confirmed)    
Average Daily Volume:       977 thousand
Listed on   January 20, 2009    

Children's Place - PLCE - close: 32.42 change: +0.01 stop: 35.05

Almost no bounce in shares of PLCE is not a good sign for the bulls. There is no change from my weekend comments. I'm suggesting bearish positions now with a stop at $35.05. Our target is $28.05. My time frame is about three weeks.

Entry on   January 23 at $32.41 
Change since picked:     + 0.01   			
Earnings Date          03/18/10 (unconfirmed)    
Average Daily Volume:       598 thousand
Listed on   January 23, 2009    


ParkerVision Inc. - PRKR - close: 1.76 change: -0.09 stop: 1.79

PRKR was hit with another round of profit taking. Shares closed with a 4.8% loss and hit our stop loss at $1.79 on the way down. Readers may want to keep PRKR on their watch list for a breakout past the $2.10 level as a new entry point.


Entry on   January 19 at $ 2.01 (small positions)
Change since picked:     - 0.22 <-- stopped @ 1.79 (-10.9%)
Earnings Date          03/15/10 (unconfirmed)    
Average Daily Volume:       183 thousand
Listed on   January 19, 2009