Option Investor

Daily Newsletter, Wednesday, 2/3/2010

Table of Contents

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

Market Wrap

Mostly Static Session After a Double Rally

by Judy Alster

Click here to email Judy Alster
Two steps forward, one step back. Stocks jumped Monday and Tuesday on encouraging reports about housing and manufacturing -- the biggest two-day advance for the Dow in three months. But the market mostly fell back Wednesday, partly because growth in non-manufacturing businesses, although up after two contracting months, fell short of expectations, partly on disappointment from Pfizer, partly due to Barack Obama's promise in his Q&A with Senate Democrats to continue reforming (regulating?) banking and healthcare, and mostly on the sinking realization that this recovery isn't going to be the recovery of our dreams. With many tech companies reporting, the Nasdaq rose a fraction, helped by good earnings from Cisco and AOL, but still with a whole lot of ground to cover to make up for last week's rout. No sector was up today except technology:

INDEX WRAP, FEB. 3, 2010:

The Nasdaq had a 0.85-point or 0.04% rise to 2190.91:


The S&P kissed 1,100 goodbye to close down 6 points or 0.55% at 1097.28:


The Dow fell 26.30 points or 0.26% to 10,270.55. It too hewed very closely to resistance for the second day.


Declining issues and declining volume significantly beat advancers on all three exchanges -- two fell on the NYSE for every one that rose -- which is always worth noting, and volume was down from yesterday. After pausing Monday and Tuesday, the dollar continued its sharp climb to close at $79.40, up over 6% since early December. The market is a difficult read right now and resistance may be a tough nut to crack without some extraordinary earnings surprises coming up.

In economic reports, the Institute for Supply Management's index inched up to 50.5 last month (from a revised 49.8 in December). Didn't matter, as the January reading was below the 51 that analysts were expecting. Good-news junkies, please know that any number above 50 signals that the sector is -- generally -- expanding; readings below 50 signify contraction. Also to the good regarding non-manufacturing: The New Orders Index increased 2.7 percentage points to 54.7%, and the Employment Index increased one percentage point to 44.6%.

Although overall growth was up, there were areas of concern. First, only four non-manufacturing industries reported growth: Utilities, Information, Wholesale Trade and . . . . Other. Production (Business Activity) was down, as this chart shows, and prices were up, perhaps tiptoeing toward inflation. New export orders, unchanged from December, were still in "contracting" mode and inventories, never to be overlooked, were still too high and expanding substantially.


The weaker activity in non-manufacturing dampened cheer about the ADP report that private employers actually cut fewer jobs than expected last month. ADP said employers cut 22,000 non-farm, private-sector jobs last month, the best showing since employment started perceptibly to weaken in February 2008. That news from payroll administrator ADP comes to us as an appetizer before the government's January employment entrée on Friday, which is expected to show that employers added maybe 5,000 jobs in the first month of the year and that employment edge up from 10% to 10.1%.

The Mortgage Bankers' Association Index jumped a heartening 10.3% last week, with refinancing jumping 26.3%, both back at mid-December levels from mid-December. Coming after yesterday's market reaction to the mild improvement in pending home sales, it may prove significant. Thirty-year fixed loans averaged 5.01%, but we can expect mortgage rates to rise over the next few months as the Federal Reserve ends its mortgage-backed securities purchasing program. This will probably lead to a temporary decline in mortgage applications, but only temporary as people realize that rates can only get higher. In fact, they're up now from last year's lows. After yesterday's jump, we couldn't expect the housing sector to react wildly, and it didn't. The Philadelphia index of housing and materials stocks stayed quiet:


And lest we forget oil, a rise in imports and a decrease in refinery inputs caused a sizable build in crude stocks, up 2.3 million barrels last week to 329.0 million. In contrast, stocks of products fell as refineries cut output of both gasoline, where stocks fell 1.3 million barrels, and other distillates, where stocks fell 1 million. An oil spill of almost half a million gallons of crude off Houston waterway may have intensified the situation.

Refineries, operating at a ridiculous 77.7% of capacity, are cutting back production, and who can blame them: Demand for both gasoline and distillates is quite weak with gasoline demand down 1.2% from the previous week and 0.5% year over year. The market ignored the build and focused on the low demand, knocking the price of oil. Though an oil build was expected in the week, oil still settled below $77 Wednesday.


. In earnings, disappointing numbers and especially the forecast from drug maker Pfizer (PFE) were a drag on health care stocks. The world's biggest pharma fell 44 cents or 2.3% to close at $18.62 after it missed estimates and forecast below expectations, leading a decline in several healthcare sectors. Pfizer was one cent off (adjusted) earnings expectations with net income of $767 million or 49 cents per share, despite the fact that that figure was up 188% from $266 million a year ago (albeit those results were slammed by a legal settlement; unadjusted earnings doubled to 10 cents). Q4 sales jumped to $16.5 billion, up 34% from $12.3 billion and topping expectations of $15.9 billion.

Investors might have shrugged at the once-cent miss but they couldn't ignore Pfizer's 2010 forecast of from $2.10 to $2.20 a share, recently lowered because the strengthening dollar could hurt overseas sales: analysts said $2.27. Pfizer fell 40 cents or 2% to $18.66, breaking an almost-seven-month trendline of higher lows. However, Pfizer has been amazingly resilient, bouncing back from a 32% drop off January's price. Can it get back, and stay back, above $19.50? The drop was caused by a 50% cut in the dividend, briefly giving it a yield of 5.3%; even now the 64-cent payout yields 3.4%, not terrible.


Media conglomerate Time Warner (TWX) said Wednesday that better results at its movie studio and cable networks helped fourth-quarter revenue, and smaller one-time expenses helped it post a profit after reporting a loss a year ago. Time Warner, which once owned AOL, owns Time Inc. magazines, earned $627 million or 53 cents per share, up from a loss of $16 billion or $13.41 a year ago when the company had writedowns on its cable, publishing, and notably its AOL assets. Eliminate one-time items and the company earned 55 cents, surprising analysts who were looking for 52 cents. Revenue up 2% at $7.32 billion also beat expectations.

Time Warner has been losing all kinds of weight, getting rid of both AOL and Time Warner Cable to focus on creative content and leave delivery to others. So far, so good: the company's HBO and Turner cable networks pulled in more money from fees from cable and satellite providers, while its Warner Bros. movie studio did very well with "The Blind Side" and "Sherlock Holmes." The company is also raising its dividend 13% to an annual rate of 85 cents per share (3% at the current price) and increasing its stock repurchase plan.


Time Warner's erstwhile and now independent subsidiary AOL Inc. (AOL) squeezed out a small fourth-quarter profit in its first standalone earnings report. Income totaled $1.4 million or 1 cent a share compared with a loss of $1.96 billion or $18.52 a share a year ago. But subscription declines and a still-anemic advertising environment mean the company can't close its eyes for a minute. Revenue from Internet-search advertising and subscriptions fell 17% to $809.7 million year over year; it was a smaller drop than in recent quarters, but the company will probably stumble in the short-term from sales-force cuts and business-unit closures that are part of a major reorganization begun last year. It expects another revenue hit of $225 million from the closure of underperforming businesses, including operations in Spain and Sweden.

AOL became a dominant player in the early years of the Web by selling dial-up Internet service. (We all remember its annoying but effective ads.) Broadband caught the company by surprise; it struggled constantly to innovate to no avail, leaving it wide-open for the 2001 TWX takeover. Now the company is trying to reinvent itself as an ad-supported online publisher of news and entertainment. It's a tough business with some very experienced competition. The market rewarded the company's efforts:


Aiding the Nasdaq in its baby step up on Wednesday, wireless-equipment leader Cisco Systems (CSCO) reported higher-than-expected revenue growth as more customers resumed upgrading their networks to handle increasing wireless and Internet traffic. Revenue for its fiscal Q2 jumped 8% from a year earlier to $9.8 billion, beating analyst expectations. It was the company's first year-over-year revenue growth since October 2008. Profit was $1.9 billion or 32 cents a share, up from $1.5 billion or 26 cents; without items earnings were 40 cents a share, beating Wall Street's forecast of 35 cents. Cisco is one of the first major techs to report results that include much of January. Its performance and outlook are often an early indicator for the rest of the technology sector, especially as regards enterprise spending. The market applauded politely.


Shares of NetLogic Microsystems (Nasdaq: NETL) soared after the networking chipmaker reported strong Q4 earnings and proffered an upbeat outlook. Yes, the company lost $37.2 million or $1.43 per share, down from a loss of $1.1 million or 5 cents last year. Adjusted earnings, though -- and there was a whole bundle of adjustments, from compensation expenses to inventory adjustments and acquisition costs -- jumped to 59 cents, better than the 42-cent consensus, as revenue more than doubled to $69.5 million, much better than expected. For Q1, the company sees adjusted EPS of 56 cents on revenue of $85.0 million, about 37% better than analysts' predictions. Investors were quite pleased:


Cable operator Comcast (CMCSA) posted a Q4 profit of $955 million or 33 cents per share, up from $412 million or 14 cents in the year-ago period; adjusted earnings rose 16% to 29 cents, two cents better than Wall Street estimates. Revenue was higher too at $9.07 billion, above the $8.97 billion consensus. Comcast's cable-TV, Internet, and phone customers increased 3% to 45.6 million. Nevertheless, after a wildly-swinging session, the stock ended down 2%. The company was practically mum about its deal to acquire NBC Universal from General Electric:


In non-tech, Polo Ralph Lauren (NYSE: RL) shares sank 8.4% after the clothing company said that expenses related to its new Asia Pacific operations will hurt the current quarter. For Q3, the high-end clothier recorded net income of $111.1 million or $1.10 per share, up 6% from $1.05 per share last year; revenue was slightly lower at $1.24 billion. Analysts wanted $1.01 on sales of $1.26 billion. For Q4, the company said its Asian operations would hurt EPS by 8 to 10 cents and that revenue would slide considerably. The market was not amused and cut 8% off the share price:


And in the "How The Mighty Are Fallen" Corner: As if perilously sticky gas pedals weren't bad enough for Toyota's (TM) Lexus, on Wednesday came reports of faulty brake pedals on its popular Prius hybrid. At least 14 cases of possible brake malfunctions have been reported in Japan since the newest model went on sale in May. A Toyota spokewoman was good enough to admit that a brake defect "could not be ruled out." Are you ready to see what all this has done to the share price? (Viewer discretion advised):


And finally, the Oscar nominations, just announced, sometimes set one to wondering about the movies, if only for a moment. And if you think Americans like their movies, you ought to take a look at India. Worldmapper is an interesting website that gives you all manner of demographic information in an unusual format: It shows countries as relatively small or large, depending on the occurrence of whatever data you're looking for. It looks a little cartoony, but for at-a-glance information it's hard to beat. From the graph below we can see that America is consuming movies very healthily, that South America and Africa are not holding up their end at all, and that ballooning India is practically about to explode. Bollywood, indeed:


Thursday's economic reports include Jobless Claims, Productivity & Costs, and Natural Gas. Also on tap are Factory Orders and the European Central Bank announcement: Europe's interest rates are not without their effect. Earnings season continues with reports from, among many others, Toyota, Unisys, Microchip Technology, Kellogg, Sunoco, DeutscheBank, Cigna and Allergan.

New Plays

Can Techs Bounce?

by James Brown

Click here to email James Brown


WIPRO Ltd - WIT - close: 20.90 change: +0.23 stop: 23.55

Why We Like It:
WIT is an information technology (IT) services company. I suspect that technology stocks could rally tomorrow on CSCO's better than expected earnings tonight. Yet the rebound will probably be short lived and investors will sell the rally. I'm suggesting we use any bounce tomorrow as an entry point for bearish positions. Officially the newsletter is suggesting a trigger to open positions at $21.75 but you could use the $21.75-23.00 zone. If triggered our first target is $20.00. Our second target is $18.05.

Annotated chart:

Entry on  February xx at $xx.xx <-- TRIGGER @ 21.75
Change since picked:     + 0.00   			
Earnings Date          04/22/10 (unconfirmed)    
Average Daily Volume:       934 thousand
Listed on  February 00, 2009    

In Play Updates and Reviews

Already Failing

by James Brown

Click here to email James Brown

BULLISH Play Updates

CVR Energy - CVI - close: 8.12 change: -0.26 stop: 7.95 *new*

CVI erased yesterday's gains. If you look at the intraday chart it's easier to see the new short-term trend of lower highs. As I said earlier it looks like CVI is going to break support near $8.00. The 50-dma, which should also be support has risen to $7.57. I'm turning more cautious on CVI. We'll raise our stop loss to $7.95. If we get stopped out we'll watch for a rebound from the 50-dma and consider jumping back in. We want to take profits at $9.90. Our second target is $11.95 (new target).

Entry on   January 19 at $ 8.20 
Change since picked:     - 0.08 
Earnings Date          03/10/10 (confirmed)         
Average Daily Volume:       411 thousand     
Listed on   January 17, 2009    

Patterson Companies - PDCO - close: 29.21 change: -0.15 stop: 27.95

PDCO gapped open lower at $29.16 and spent the rest of the session drifting sideways in a narrow range. I've adjusted our entry point for the gap down. I'm still bullish on PDCO with shares above the 40-dma (currently near $28.50) so I would still consider new positions here. More cautious traders may want to use a stop closer to $28.40. Our first target to take some money off the table is $30.90. Our second target is $32.45. We do not want to hold over the February 18th earnings report so PDCO may not reach our second target in time.

Entry on  February 02 at $29.16 /gap down entry
Change since picked:     + 0.05   			
Earnings Date          02/18/10 (unconfirmed)    
Average Daily Volume:       1.3 million 
Listed on  February 02, 2009    

Wyndham Worldwide - WYN - close: 21.56 change: -0.35 stop: 20.80

WYN also gapped open lower and spent the session drifting sideways. I've adjusted our entry for the gap open at $21.71. We can initiate positions now or wait for a dip (better yet a bounce) from the 50-dma near $21.00. This should be a short-term trade. WYN is due to report earnings on Feb. 10th and we do not want to hold over the announcement. Our first target to take profits is at $23.45. Our second target is $24.45.

Entry on  February 03 at $21.71 /gap down entry
Change since picked:     - 0.15   			
Earnings Date          02/10/10 (confirmed)    
Average Daily Volume:       3.0 million 
Listed on  February 02, 2009    

BEARISH Play Updates

Atlas Air Worldwide - AAWW - close: 37.60 change: -0.74 stop: 39.10

There was no follow through on yesterday's rally above the 30-dma. We're looking for a failed rally as our next entry point. Today could be the beginning of that reversal. Readers may want to wait for a breakdown under the 50-dma (currently near $36.25). Our first target is $32.60.

Entry on   January 23 at $37.66 /gap open entry
Change since picked:     - 0.06   			
Earnings Date          02/24/10 (unconfirmed)    
Average Daily Volume:       291 thousand
Listed on   January 23, 2009    

American Tower Corp. - AMT - close: 42.79 change: -0.24 stop: 43.75

AMT tried to rally this morning but reversed near $43.40 and the top of its recent trading range. I remain somewhat cautious here. More conservative traders may want to lower their stop loss just a bit toward $43.50ish. We don't want to consider new bearish positions until AMT trades at $41.80 or lower.

Our first target is $40.10. Our second target is $37.75. We do not want to hold over the late February earnings report.

Entry on   January 27 at $41.90
Change since picked:     + 0.89   			
Earnings Date          02/24/10 (unconfirmed)    
Average Daily Volume:       2.8 million 
Listed on   January 26, 2009    

Ameritrade - AMTD - close: 17.27 change: -0.37 stop: 20.05

Financial stocks underperformed the market on Wednesday with a 2% decline. I suspect that AMTD's 2% drop wasn't due to bank weakness but yesterday's news that Fidelity was lowering their trading commissions. Our first target is $16.10. Our second target is $15.05. More conservative traders may want to use a stop closer to $19.00. Our time frame is about six weeks.

Entry on   January 28 at $17.88 
Change since picked:     - 0.61   			
Earnings Date          04/21/10 (unconfirmed)    
Average Daily Volume:       6.1 million 
Listed on   January 28, 2009    

Best Buy - BBY - close: 37.03 change: -0.25 stop: 40.26

Hmm... I find it interesting that BBY was unable to build on yesterday's oversold bounce. The stock remains oversold so I'm not suggesting new positions at this time. Our first target to exit is $35.25. Our second and final target is $32.25.

Entry on   January 12 at $38.95 (small positions)
Change since picked:     - 1.92   			
Earnings Date          03/25/10 (unconfirmed)    
Average Daily Volume:       8.0 million      
Listed on   January 02, 2009    

Companhia Brasileira de Distribuicao - CBD - cls: 69.41 chg: -2.76 stop: 74.05

There was no follow through on yesterday's bounce and CBD erased most of Tuesday's gains. I would use this as a new entry point for bearish positions. We wanted to use small positions to limit our risk. Our first target is $61.00. Our second target is $56.00. Time frame is several weeks.

Entry on   January 26 at $69.40 (very small positions)
Change since picked:     + 0.01 
Earnings Date          03/03/10 (unconfirmed)    
Average Daily Volume:       261 thousand
Listed on   January 23, 2009    

DSW Inc. - DSW - close: 26.46 change: +0.23 stop: 25.55

DSW is still creeping higher. There is no change from my prior comments. We're still on the sidelines waiting for a breakdown. Instead of waiting for a decline to open positions we might decided to jump in on a failed rally near $27.00. At the moment our trigger is at $23.75.

If triggered at $23.75 our first target is $21.50 (essentially we're aiming for the 100-dma). Our second target is $20.05.

Entry on   January xx at $xx.xx <-- TRIGGER @ 23.75
Change since picked:     + 0.00   			
Earnings Date          03/24/10 (unconfirmed)    
Average Daily Volume:       387 thousand
Listed on   January 26, 2009    

F5 Networks - FFIV - close: 50.46 change: -0.02 stop: 52.55

The early morning rally in FFIV failed at its 50-dma. This looks like a new bearish entry point. However, FFIV is in the same sector as CSCO and CSCO reported strong earnings tonight. The networking stocks could spike higher on Thursday morning. I suggest readers wait. FFIV could spike toward $52.00 or $52.50. Wait for any morning strength to fade before launching new bearish positions. Our first target is $46.10. Our second target is $44.00.

Entry on   January 29 at $49.45 
Change since picked:     + 1.01   			
Earnings Date          04/22/10 (unconfirmed)    
Average Daily Volume:       1.2 million 
Listed on   January 28, 2009    

Life Technologies - LIFE - close: 49.25 change: -1.25 stop: 52.01

LIFE completely erased Tuesday's gains. This looks like a new bearish entry point. Our first target is $45.25, just above possible support at the 200-dma. We will cautiously set a second target at $41.00 but I suggest exit the majority of the position at $45.25.

Entry on   January 30 at $49.71 
Change since picked:     - 0.46   			
Earnings Date          01/28/10 (confirmed)    
Average Daily Volume:       2.6 million 
Listed on   January 30, 2009    

Children's Place - PLCE - close: 34.40 change: +0.32 stop: 35.05

PLCE is still bouncing in spite of the market's weakness. Look for resistance near $35.00. Wait for the rally to fail and then launch positions. Our target is $28.05. My time frame is about three weeks.

Entry on   January 23 at $32.41 
Change since picked:     + 1.99   			
Earnings Date          03/18/10 (unconfirmed)    
Average Daily Volume:       598 thousand
Listed on   January 23, 2009    

SBA Communications - SBAC - close: 33.16 change: -0.90 stop: 35.55

The oversold bounce in SBAC is already failing. This could be a new entry point right here. Our target is $30.15. More aggressive traders could aim for the 200-dma.

Entry on   January 28 at $33.45
Change since picked:     - 0.29   			
Earnings Date          02/25/10 (unconfirmed)    
Average Daily Volume:       1.5 million 
Listed on   January 26, 2009    

J.M.Smucker CO - SJM - close: 61.87 change: -0.48 stop: 61.51

Traders bought the dip in SJM. I remain cautious on the stock. There are no changes from my prior comments. If SJM closes above $63.00 we'll drop it as a bearish entry point. Right now our plan is to open shorts at $59.49. Our target is $55.15. More nimble traders could try and open positions in the $61.50-52.00 zone.

Entry on   January xx at $xx.xx <-- TRIGGER @ 59.49
Change since picked:     + 0.00   			
Earnings Date          02/24/10 (unconfirmed)    
Average Daily Volume:       698 thousand
Listed on   January 30, 2009    

Warner Chilcott - WCRX - close: 26.24 change: -0.07 stop: 29.31

Lack of follow through on yesterday's bounce is a good sign for the bears. Wait for another failed rally in the $27-28 zone before considering new positions. We still have a second target at $22.25. FYI: I've adjusted our entry point to $26.65.

Entry on   January 30 at $26.65 /gap down entry point
Change since picked:     - 1.26
                             /1st target hit @ 25.00 (-6.1%)
Earnings Date          02/26/10 (unconfirmed)    
Average Daily Volume:       1.3 million 
Listed on   January 30, 2009