Option Investor

Daily Newsletter, Wednesday, 2/10/2010

Table of Contents

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

Market Wrap

Not Much Action While Waiting for Greece's Bailout

by Judy Alster

Click here to email Judy Alster
Greece's bailout plan to be announced soon . . . . U.S. trade deficit higher than expected . . . . and also making news Wednesday was Federal Reserve Chairman Ben Bernanke's remarks prepared for but not delivered to a House committee, due to the blizzard strafing the mid-Atlantic coast; the Fed released them nevertheless. Bernanke's comments about raising interest rates as soon as the economy firms up didn't come as a big surprise, really, but the first method he mentioned of doing it was kind of interesting. Instead of the customary decades-old method of loosening or tightening credit, namely, raising the federal funds rate -- the interest rate, now near zero, that banks charge each other for very-short-term loans -- one Fed remedy for excess liquidity will be something different: It plans to raise the amount of interest it pays to banks on their excess reserves that are in effect "left" at the central bank.

That rate is currently 0.25%. Raising it would give banks an incentive to keep money parked at the Fed, rather than lend it, effectively reducing the amount of money available for loans (and doubtless forcing the rates for borrowers to rise). It's an effective way of "mopping up" some of the excess cash that may be sloshing around in a financial system without -- it's hoped -- tipping the economy back into a recession.

The indexes mostly sulked all day, not even responding to better-than-expected December export data. Sulky is probably the market's true mode, since yesterday's big gain was mostly attributable to headlines regarding the EU's bailout of Greece. The details of that bailout should be made public Thursday, according to the French press. As for today, the hint at higher interest rates couldn't exactly be expected to cheer the market. Financials managed to get today's gold star, but barely:


Paying interest on excess reserves is fairly new for the U.S., authorized here only in late 2008 in the depths of the financial meltdown, although many foreign central banks have used it for years. As for when to expect a rise in the record low discount rate, Bernanke said that will depend on economic and financial conditions, but evidently the Fed wants to keep interest rates low until the economy is stronger, with Bernanke repeating his "extended period" trademark phrase.

Many observers seemed to think that raising interest on excess reserves would in effect be a policy tightening, in much the same way an expired tax cut is a tax hike. In addition to pulling money out of the system, the hike would raise rates tied to the prime rate of commercial banks and thus affect many consumer loans, making it more expensive for businesses and you and I to borrow money. And incidentally, whose tax dollars do you think would be paying that higher interest?


(Kudos to whoever came up with that in-joke of an acronym for knowing what an excrescence is . . . ) The Dow Jones Industrial Average ended the day down 20.26 points or 0.20% at 10,038.38, far away from the 10,325 or so we need to breathe really easily, and with nothing on the immediate horizon to take it there.


The S&P500 lost 2.39 points or 0.22%, closing at 1,068.13, similarly needing a roughly-3% gain to make it to safety.


The Nasdaq fell 3 points or 0.14%, ending at 2,147.87.


The dollar also advanced -- even after the government reported the U.S. trade deficit widened to $40.2 billion in December from $36.4 billion the month before. An interesting equity, the Powershares DeutscheBank US Dollar Index Bullish Fund (UUP), composed solely of long futures contracts, replicates pretty closely the performance of being long the US dollar against the Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc. Here's how you'd have done if you bought it in December:


If you're ever feeling down on the buck, there's also a bearish dollar fund (UDN). A stronger dollar usually pressures commodity prices, as it makes them more expensive for holders of other currencies and in fact, March crude prices fell Wednesday morning. They later turned around and gained 77 cents to end the day at $74.52. Individual oil company prices were generally flat to down, with Chevron (CVX), BP and Exxon-Mobil (XOM) all off a fraction of a percent.


Financial stocks fell immediately after Bernanke's comments were made public but they rebounded faintly and closed mildly higher. Tuesday's big market jump was due mainly to the expected resolution to Greece's debt crisis, for which we have Germany and the other EU partners to thank. Wednesday it seemed banks and others were waiting for the details of exactly how that bailout would work.

Before the open came news that the U.S. trade deficit unexpectedly soared in December. But it's not quite as bad as it sounds -- we can mostly blame higher oil prices and restocking oil inventories. The overall U.S. trade deficit ballooned to $40.2 billion from a revised $36.4 billion gap in November, with the December shortfall coming in far worse than forecast, with a $35.7 billion differential. Imports jumped 4.4% but exports rose a heartening 3.3%.

The worsening in the trade deficit was largely due to a widening of the petroleum deficit, which came in at $23.5 billion, due to both higher prices and more barrels imported. The nonpetroleum gap actually shrank to $26.9 billion from $27.2 billion in November. The widening in the petroleum deficit was due to both a gain in prices and more barrels -- a lot more. Physical barrels imported jumped 12.9% after a 5.2% decline in November. The price of imported oil increased from $72.54 a barrel in November to $73.20 in December.


Of course, a low starting point helps but until-recent weakness in the dollar combined with Asian economic growth continue to boost U.S. non-petroleum exports. Year-over-year, overall exports in December rose to 7.4% from minus 2.4% the previous month, as imports increased to 4.6% percent from minus-5.6%. In a word, overall trade continues to increase, although both imports and exports are still below the pre-financial crisis levels. The jump in oil imports is likely to reverse next month but the widening trade gap might bode ill for the dollar.

As for earnings, no stories moved the market Wednesday but there were a few items of interest: The New York Times Co. (NYT) reported that fourth-quarter profit more than tripled to $90.9 million, the publisher's highest quarterly earnings since mid-2007. Credit an 18% cut in the company's work force (yikes!) that more than offset the steep slide in ad sales. The company expects more ad erosion this year, probably leading to more job cuts. Investors really don't like that kind of earnings quality; shares fell $1.05 or 9% to $10.62 . . . .

NEW YORK TIMES bleeding ad money:

Berkshire-Hathaway's rating was cut two notches to AA by Fitch ahead of the company's planned acquisition of Burlington Northern Santa Fe. Fitch says is concerned about the deal's effect on Berkshire's "asset profile, capitalization, and interest coverage" as Berkshire-Hathaway sells $8 billion in notes to help finance its purchase. The stock dropped $150, but when you're starting out at $111,700, and when your stock has risen over 10% since the middle of January (yes), that's a mere 0.13% drop . . . . Big Irish drug maker Elan (ELN) lost 10 cents in the fourth quarter but said it expects an operating profit in 2010 for the first time in nearly a decade, thanks in part to its multiple-sclerosis drug Tysabri, although revenue growth would slow before accelerating next year; the stock fell five cents to $7.02 . . . . Advertising conglomerate Omnicom Group (OMC) announced a not-surprising 15% drop in earnings for its fourth quarter due to tight marketing budgets that reduce profits from media and advertising agencies, although international revenue increased slightly (In journalism school I was taught that in tough times you increase advertising) . . . .

European shares gained on Wednesday, helped by hopes that Greece's financial woes won't bring down the EU. Luxembourg's steel mammoth ArcelorMittal (MT) obviously missed that news, as it declined on much-lower-than-expected earnings and a disappointing outlook, with rising costs and lower selling prices offsetting higher shipments, along with an increase in debt for the first quarter. Many steel stocks on this side of the ocean followed MT down: AK Steel (AKS) fell 27 cents to $20.48, U.S. Steel (X) tumbled $1.64 to $44.37 and Steel Dynamics (STLD) was down 37 cents to $15.06 has fallen 2.3% (note the fair-enough 2% dividend). Hopes that the EU will come to Greece's rescue may be helping, but at the risk of being a spoilsport, what will happen when markets start looking at the debt problems of Spain, Portugal and Italy?

ARCELOR-MITTAL, not a part of Europe's hopeful celebration Wednesday:

Other than Jobless Claims, Thursday will be a slow day as regards economic reports. Pepsi, Viacom, Rio Tinto, McAfee, Diageo and AutoNation are among companies reporting earnings. The EIA's petroleum and natural gas reports have been moved to Friday.

New Plays

Market in "wait" mode.

by James Brown

Click here to email James Brown
Editor's Note:

No new plays tonight. The market appears to be in "wait mode" as investors look for some decision on Greece's debt problem.

My market bias is still bearish. However if you are looking for a bullish candidate I suggest you check out the restaurant stocks. CMG, PFCB, and BWLD all have bullish shares and appear to be resisting the market's weakness. CMG and BWLD do have some resistance directly overhead but they might be worth a look on a breakout higher.

If you're looking for bearish candidates check out stocks like AVP, ICUI, and EBAY. AVP has broken down but it looks oversold. ICUI's oversold bounce is reversing at the top of its gap. This could be an entry point for shorts in ICUI with a relatively tight stop. Aim for $30. EBAY is breaking down from a significant consolidation but has possible support at its simple 200-dma.

In Play Updates and Reviews

Losing Steam

by James Brown

Click here to email James Brown

BULLISH Play Updates

Estee Lauder - EL - close: 56.06 change: -0.19 stop: 53.49

EL is still trading near its highs. If the market can see a decent bounce EL should be able to breakout. I'm still concerned the market is heading lower and suggest caution on opening new bullish positions.

We want to keep positions small. Our target is $59.50. Our time frame is three to four weeks. FYI: The Point & Figure chart is forecasting at $69 target.

Entry on  February 06 at $55.40 
Change since picked:     + 0.66   			
Earnings Date          04/27/10 (unconfirmed)    
Average Daily Volume:       2.5 million 
Listed on  February 06, 2009    

Illionois Tool Works - ITW - close: 42.99 change: -0.30 stop: 41.75

The bounce from ITW's 200-dma is struggling. That's not a good sign. I would expect shares to retest the $42.00 level very soon. Keep in mind this is a very aggressive trade. Our first target is $44.85. Our second target is the $46.45 level. Keep positions small.

Entry on  February 06 at $42.66 (small positions)
Change since picked:     + 0.33   			
Earnings Date          04/15/10 (unconfirmed)    
Average Daily Volume:       3.6 million 
Listed on  February 06, 2009    

Joy Global - JOYG - close: 45.29 change: -0.44 stop: 42.25

JOYG is facing a similar situation where the bounce from its simple 200-dma is already struggling. More conservative traders will want to consider an early exit now! JOYG is going to move with commodities. If Greece does get an aid package soon then the euro will bounce, the dollar will decline, and commodities will rally, which should lift JOYG. If no aid package appears then JOYG is probably headed lower.

This is a very aggressive trade. The plan was to use small positions. Our target to exit is $49.75. The $50.00 level should be resistance. We might consider switching directions and going short on a failed rally near $50.

Entry on  February 06 at $44.54 (small positions)
Change since picked:     + 0.75   			
Earnings Date          02/24/10 (unconfirmed)    
Average Daily Volume:       4.1 million 
Listed on  February 06, 2009    

Patterson Companies - PDCO - close: 28.86 change: -0.30 stop: 27.95

The bounce has failed near short-term resistance. Today's move actually looks like a bearish engulfing candlestick. I am suggesting readers wait for a move over $29.50 before initiating new positions. This is an aggressive trade. Our stop loss at $27.95 doesn't offer a really good risk-reward ratio.

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:     - 0.30   			
Earnings Date          02/18/10 (unconfirmed)    
Average Daily Volume:       1.3 million 
Listed on  February 02, 2009    

BEARISH Play Updates

American Tower Corp. - AMT - close: 41.59 change: +0.14 stop: 42.75

The rebound in AMT continues but it appears to be running out of steam near resistance at $42.00. I am suggesting readers use this move as a new bearish entry point! Our second target to exit 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:     - 0.31  
                          /1st target hit @ 40.10 (-4.2%)
Earnings Date          02/24/10 (unconfirmed)    
Average Daily Volume:       2.8 million 
Listed on   January 26, 2009    

Ameritrade - AMTD - close: 17.07 change: +0.47 stop: 18.60

Financial stocks were showing relative strength on Wednesday. AMTD was oversold and due for a bounce and shares rallied 2.8%. The move today looks like a bullish engulfing (reversal) pattern. This type of reversal normally needs to see confirmation first. However, even if AMTD does reverse higher it should find significant resistance near $18.00 and its 50 and 200-dma. Wait for the rebound to fail before launching new positions. Our first target is $16.10. Our second target is $15.05. Our time frame is about six weeks.

Entry on   January 28 at $17.88 
Change since picked:     - 0.81   			
Earnings Date          04/21/10 (unconfirmed)    
Average Daily Volume:       6.1 million 
Listed on   January 28, 2009    

Best Buy - BBY - close: 35.40 change: -0.58 stop: 38.75

BBY's bounce is already fading. Shares lost 1.6% to close near its lows. I am not suggesting new positions at this time. BBY has already hit our first target at $35.25. Our second and final target is $32.25.

Entry on   January 12 at $38.95 (small positions)
Change since picked:     - 3.55
                           /1st target hit @ 35.25 (-9.4%)
Earnings Date          03/25/10 (unconfirmed)    
Average Daily Volume:       8.0 million      
Listed on   January 02, 2009    

Companhia Brasileira de Distribuicao - CBD - cls: 69.34 chg: -0.07 stop: 72.65

The bounce in CBD has reversed under the $72.00 level. Today's action looks like a new entry point to open bearish positions! Keep your positions small. CBD can be very volatile. 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:     - 0.06 
Earnings Date          03/03/10 (unconfirmed)    
Average Daily Volume:       261 thousand
Listed on   January 23, 2009    

Rockwell Collins - COL - close: 52.90 change: -0.16 stop: 55.26

Hmm... the bounce in COL stalled on Wednesday. We want to open bearish positions on a bounce near $55.00 (trigger 54.50). More nimble traders may want to consider new positions on a drop under $52.00. If triggered at $54.50 our first target is $50.25. More aggressive traders may want to aim for the 200-dma currently near $48.00. Our time frame is less than three weeks.

Entry on  February xx at $xx.xx <-- TRIGGER @ 54.50
Change since picked:     + 0.00   			
Earnings Date          04/28/10 (unconfirmed)    
Average Daily Volume:       834 thousand
Listed on  February 09, 2009    

F5 Networks - FFIV - close: 49.96 change: -0.29 stop: 52.55

The bounce in FFIV has also stalled although that doesn't mean it's over yet. We can launch new positions now or you can look for a move toward resistance near the 50-dma (51.30). I'd prefer to see the bounce begin to roll over first before initiating positions. Our first target is $46.10. Our second target is $44.00.

Entry on   January 29 at $49.45 
Change since picked:     + 0.51   			
Earnings Date          04/22/10 (unconfirmed)    
Average Daily Volume:       1.2 million 
Listed on   January 28, 2009    

FISERV Inc. - FISV - close: 45.53 change: +0.05 stop: 47.26

There is no change from my prior comments on FISV. We're waiting for a breakdown under support near $45.00. I am suggesting a trigger to open bearish positions at $44.70. If triggered our first target is $40.15.

Entry on  February xx at $xx.xx <-- TRIGGER @ 44.70
Change since picked:     + 0.00   			
Earnings Date          04/29/10 (unconfirmed)    
Average Daily Volume:       1.4 million  
Listed on  February 00, 2009    

GATX Corp. - GMT - close: 26.18 change: -0.19 stop: 27.65

There is no change from my previous comments on GMT. Shares are consolidating sideways. Traders might be better off waiting for a breakdown under $25.65 to initiate positions but a breakdown seems nearly imminent.

Our first target is $23.15. Our second target is $21.00. It could take several weeks to get there.

Entry on  February 04 at $25.95 
Change since picked:     + 0.23   			
Earnings Date          04/22/10 (unconfirmed)    
Average Daily Volume:       467 thousand
Listed on  February 04, 2009    

Life Technologies - LIFE - close: 47.35 change: -0.47 stop: 52.01

Like most of the market the bounce in LIFE is struggling. Shares gave up nearly 1% on Wednesday. There is no change from my prior comments. Look for resistance near $50.00 and its 50 or 100-dma ($49-50 zone). Our target to take profits is at $45.55. More aggressive traders could aim lower but the 200-dma is probably support.

Entry on   January 30 at $49.71 
Change since picked:     - 2.36   			
Earnings Date          01/28/10 (confirmed)    
Average Daily Volume:       2.6 million 
Listed on   January 30, 2009    

SBA Communications - SBAC - close: 33.24 change: +0.27 stop: 35.05

The bounce in SBAC continues. Look for resistance near the 50-dma (around $34.00). Our target is $30.15. More aggressive traders could aim for the 200-dma.

Entry on   January 28 at $33.45
Change since picked:     - 0.21   			
Earnings Date          02/25/10 (unconfirmed)    
Average Daily Volume:       1.5 million 
Listed on   January 26, 2009    

J.M.Smucker CO - SJM - close: 59.71 change: +0.02 stop: 61.51

I think my quote service is playing tricks on me. It says SJM is up 2 cents today. Yet yesterday SJM closed at $60.04 and today it closed at $59.71. That looks like a 33-cent drop. I am not seeing any after hours action to influence the closing price. The short-term trend is still down. I'm suggesting new positions now. More conservative traders can wait for a new drop under $59.50. Our target is $55.15.

Entry on  February 05 at $59.49
Change since picked:     - 0.22   			
Earnings Date          02/24/10 (unconfirmed)    
Average Daily Volume:       698 thousand
Listed on   January 30, 2009    

Warner Chilcott - WCRX - close: 25.46 change: -0.05 stop: 28.05

Once again traders bought the dip near support around $25.00. Fortunately for us the bounce didn't make much progress. The trend of lower highs certainly suggest that WCRX will break lower from here. WCRX has already hit our first target at $25.00. Our second target is $22.25.

Entry on   January 30 at $26.65 /gap down entry point
Change since picked:     - 1.19
                             /1st target hit @ 25.00 (-6.1%)
Earnings Date          02/26/10 (unconfirmed)    
Average Daily Volume:       1.3 million 
Listed on   January 30, 2009    

WIPRO Ltd - WIT - close: 20.03 change: +0.02 stop: 22.15

The bounce in WIT has stalled with shares hugging support at the $20.00 level. More aggressive traders may want to consider bearish positions now. I am lowering our trigger to open positions from $21.40 down to $20.95. I'm also lowering the stop loss down to $22.15. If we are triggered at $20.95 our first target is $18.05.

Entry on  February xx at $xx.xx <-- TRIGGER @ 20.95
Change since picked:     + 0.00   			
Earnings Date          04/22/10 (unconfirmed)    
Average Daily Volume:       934 thousand
Listed on  February 00, 2009