Option Investor

Daily Newsletter, Tuesday, 2/16/2010

Table of Contents

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

Market Wrap

Two In A Row

by Jim Brown

Click here to email Jim Brown

Tuesday was the second day of gains for the Dow/S&P and we have not seen back-to-back gains since Feb-2nd.

Market Stats Table

There were two bombs stimulating the market this morning and both were unexpected. The first bomb came overnight when Barclays (BCS) posted $10.45 billion in profits, $18.18 billion for the full year. This included the sale of BGI to Blackrock but it was still a blowout quarter. Those were great earnings but that was not the highlight of the report. The highlight came in comments from president Bob Diamond. He said the recovery is accelerating in the U.S. and around the world although Europe was still progressing slowly. "We see very strong signs of an accelerated recovery as we move further into 2010."

The futures exploded higher at 2:AM after the announcement was made. BCS rallied 14% in the U.S. and helped power the banking sector to a strong gain. The U.S. markets gapped open and never looked back as initial resistance was broken at the bell and shorts were forced to scramble to close positions.

The second bomb came from the EU where the Finance Ministers meeting concluded with tough talk for Greece and options for solving the liquidity problem if Greece can prove they are taking the necessary steps. One of the options discussed was an advance of future monies due Greece from the EU in order to relieve the liquidity crisis and allow Greece time to let the austerity measures work. The news prompted a huge spike in the Euro because the crisis appeared to be over or at least under control. The dollar was crushed and gave back all the gains for the past week and threatened to hit a new two week low. The crashing dollar pushed commodities sharply higher with dollar longs and commodity shorts having a really bad day.

Helping power sentiment higher was two stronger than expected economic reports. The NY Empire Manufacturing Survey spiked sharply higher to 24.9 in February from 15.9 in January. Consensus estimates were for a decline to 14.9. For the first time since August 2008 the inventory component was not negative. It was flat at zero but that was far better than the -17.3 reading in January. This suggests the inventory replenishment cycle has begun. Even more astounding 64% of the companies surveyed planned on hiring over the next 12-months. In January of 2009 only 45% planned on adding workers.

Empire Manufacturing Survey

The second unexpected economic improvement came from the NAHB Housing Market Index, which rose sharply to 27 from 15 in January. The consensus was for a flat reading at 15. This is a gain of +13.3% from January and +88.9% since February 2009. The single-family sales component rose to 17 from 15 and the six-month outlook rose to 27 from 26. Traffic remained flat at 12. Despite the relative gains this was a bullish report because January and February are not normally strong months for home sales. This boosted already excited investor sentiment at the open.

NAHB Housing Market Index Chart Survey

The dollar fell hard against the Euro and the pound. The decline against the Euro was the biggest one-day drop in a year. A JP Morgan analyst said the move in the Euro was expected because of the extremely high short interest. It only took a small uptick in sentiment to generate a major short squeeze. The analysts said JPM expects the Euro to decline to 115-120 over the next two years because of structural problems in the EU. The charts below are an exact inverse of each other and clearly shows institutional traders were long the dollar and short the Euro in large quantities.

Chart of the Euro

US Dollar Index Chart

The drop in the dollar sent commodity prices surging higher with gold surging nearly $30 and crude oil up +$3.14. Anything denominated in dollars saw a monster short squeeze including equities. Oil prices had been fighting resistance a $74 and again at $75 but today's rally on the falling dollar catapulted crude to $77 at the open. Energy stocks went along for the ride but the gains were far less spectacular. This was the biggest one-day gain for oil since September. The weekly inventory report will be delayed until Thursday morning because of the holiday.

Crude Oil Chart

Simon Property Group (SPG) offered to buy General Growth Properties (GGWPQ) for $10 billion today. SPG owns nearly 400 retail properties nationwide. Chicago based General Growth Properties, currently in bankruptcy, would see $7 billion go towards the company's creditors and the rest go to shareholders. The offer equates to roughly $9 per share and General Growth shares quickly rallied to more than $12. This suggests there could be another bidder or a raised bid.

Brookfield Asset Management (BAMA) has been buying up millions of dollars in General Growth unsecured debt and has also expressed an interest in acquiring the company. General Growth has always said it preferred to emerge from bankruptcy as a stand-alone company. Investor William Ackerman owns 25% of General Growth shares and has repeatedly said that the shares are worth between $24 and $43. Simon Properties said General Growth has refused to return calls or respond to requests to negotiate. If the acquisition were to occur Simon would own 30% of the malls in the U.S. and 60% of the class A malls.

Chart of General Growth

Norway's Yara International agreed to buy Terra Industries (TRA) for $4.1 billion in order to increase its presence in the USA. Terra had been under hostile attack by CF Industries but the company withdrew its offer for Terra last month. Terra's stock fell from $43 to $32 when the offer was withdrawn. The Yara offer roughly equates to $41.10 per share and a 23% premium over Friday's closing price. This will give Yara about 30% of the U.S. market. Most analysts expect a big year for the fertilizer sector as farmers try to replenish their fields after skipping the fertilizer in 2009 in order to save money. Everyone who owned Terra at $43 and dumped their stock at $32 when the CF offer was canceled, are kicking themselves today.

Terra Chart

Whole Foods Markets (WFMI) report earnings after the close and profits rose +79%. Whole Foods exploded after the close after raising its guidance for 2010. WFMI saw sales plunge during the recession as consumers shied away from higher priced foods. WFMI cut back on expansion plans added some lower cost products and those efforts appear to be paying off. They saw more traffic in the last quarter and sales rose +7%. Same store sales rose +3.5%. Earnings rose to 32-cents from 20-cents. Analysts were only expecting 26-cents.

Whole Foods Chart

Research in Motion co-CEO Mike Lazaridis blasted wireless carriers on Tuesday saying there was a shortage of bandwidth capacity in the U.S. and if cell phone makers did not start developing less bandwidth-guzzling applications the network was going to choke. Wireless traffic has exploded since the advent of the iPhone and the dozens of copycats that followed. Users are already suffering from slower downloads and dropped calls. AT&T is the poster child for bandwidth complaints and dropped calls because they carry the majority of the iPhone traffic.

With netbooks already gorging on bandwidth and now iPads poised to start sucking even more bandwidth with enhanced browsing and hundreds of thousands of applications the implications are clear. Smart phones consume 30 times more bandwidth than a traditional cell phone prompting network engineers to nickname iPhones as iHogs. Netbooks and portable personal computers consume 450 times the amount of bandwidth as cell phones. BlackBerrys are at least five times more efficient at email and attachment viewing and three times more efficient than other phones on Internet browsing according to RIMM. For a carrier that means three times the paying customers using a BlackBerrys in the same amount of bandwidth needed for a regular smart phone. AT&T is racing to add more bandwidth but bandwidth consumption is expanding at a faster rate than the network is increasing so access is still lousy. The wireless spectrum is relatively skinny in terms of bandwidth capabilities compared the fiber optic network once the content leaves the phone.

Chart of AT&T

The calendar for tomorrow has Hewlett Packard (HPQ) earnings and today's rally probably removed some of the coiled spring tension from the HPQ stock price. Other earnings include GENZ, MSO, CHK and PCLN. Also on Wednesday is the FOMC minutes and Industrial Production. Analysts will be looking for the fork in the road for the Fed but I don't think they will see it tomorrow.

When I wrote in the weekend commentary I felt like a breakout was imminent I did not expect +170 Dow points but when those resistance levels break the short squeeze is always good for an unexpected run. Unfortunately the breakout came on the lightest volume since January 14th with only 7.53 billion shares traded across all markets. The internals were strong with 6.5 billion shares in advancing volume and only 960 million shares declining. The A/D line was very positive with 5,180 advancers and only 1,416 decliners. Despite the good internals there is no confirmation a breakout on such low volume.

That does not mean that the rally can't continue but the pressure has been released. The relief valve let the steam out and now some new event will have to appear to move us higher. The squeeze was over done but the short-term trend is still positive.

The Dow rallied to 10268 with strong resistance at 10300. You may remember my cautions over the last couple weeks that I would not really change to a bullish bias until the Dow was over 10300 on high volume. Today was a good attempt but there needs to be some significant follow on before it will be a bullish indicator. With support just over 10,000 there is plenty of room to the downside if the market loses traction here. A breakout over 10300 would be very bullish and should trigger another wave of short covering.

Dow Chart

The S&P-500 rallied over resistance at 1085 and the 100-day average at 1092 but remains trapped below the much stronger resistance at 1100-1105. It would be very bullish if that 1100 resistance was broken. Support is now 1075-1080.

S&P-500 Chart

The Nasdaq gapped just over initial resistance at 2200 and held there most of the day until a new surge of buying appeared just before the close. The chip stocks were strong with the SOX gaining 2.5% and leading the Nasdaq higher. The big caps were not particularly strong and some closed off their highs for the day. It was mostly short covering rather than a sudden surge of interest in tech stocks other than chips. The Hewlett Packard earnings on Wednesday and Dell on Thursday will be a big factor on whether the Nasdaq can continue its climb. Strong resistance at 2225 is not likely to be broken on low volume or on the first attempt.

Nasdaq Chart

The Russell 2000 is on fire. The index surged to strong resistance at 620-623 and a breakout here would be very bullish for the broader market. I believe the buying in the small caps is a sign fund managers are becoming increasingly comfortable with the current market and the potential for it to move higher into Q1 earnings. The Russell is the only index that declined to correction levels and the rebound is going vertical.

Russell 200 Chart

In summary, the market rally was due to a very low volume short squeeze and not an overall change in sentiment. The positive motivators were the economic guidance comments from Barclays and the better than expected NY Empire Manufacturing report and the NAHB Housing Market Index. The anticipated successful resolution of the Greece debt crisis sent the Euro spiking higher and the dollar crashing. That caused commodities to rocket higher along with commodity and materials stocks. It was all event related and not a sudden overwhelming urge to buy something.

I would continue to be cautious until the Dow moves over 10,300 and S&P over 1105 on strong volume. There is always the potential for a bear trap if those indexes just peek over those levels on light volume and setup a new shorting opportunity.

Jim Brown

New Plays

Basic Materials Bounce

by James Brown

Click here to email James Brown


NUCOR - NUE - close: 42.69 change: +1.56 stop: 39.95

Why We Like It:
Tuesday's bounce in the euro pushed the dollar lower, which fueled a surge in commodities. The steel and metal stocks produced an impressive bounce. NUE was already trying to bounce from support near the $39-40 zone. I would prefer to buy NUE on a dip near $41.50 but that may not happen so I'm suggesting small bullish positions now. This is a volatile sector and this trade could reverse easily if the dollar rallies again and commodities reverse lower.

I'm suggesting a stop loss at $39.95 but more aggressive traders may want to put their stop under the February low of $38.93. There is potential resistance with a virtual cloud of moving averages between $44 and $45 but if this rally is for real then NUE should be able to claw its way higher. Our first target to take profits is at $46.75. Our second and final target is $49.85. Our time frame is about four to six weeks.

Annotated chart:

Entry on  February 16 at $42.69 (small positions)
Change since picked:     + 0.00   			
Earnings Date          04/22/10 (unconfirmed)    
Average Daily Volume:       6.1 million 
Listed on  February 16, 2009    

In Play Updates and Reviews

Commodities Lead

by James Brown

Click here to email James Brown

BULLISH Play Updates

DSW Inc. - DSW - close: 27.69 change: +0.43 stop: 25.75

Fortunately we did not have to wait very long for DSW to hit our trigger. The stock rallied this morning and hit our trigger to buy it at $27.60 closing at new highs. Our first target is $29.95. Remember, keep your positions small to limit risk.


Entry on  February 16 at $27.60 (small positions)
Change since picked:     + 0.09   			
Earnings Date          03/24/10 (unconfirmed)    
Average Daily Volume:       416 thousand
Listed on  February 13, 2009    

Estee Lauder - EL - close: 58.36 change: +1.70 stop: 54.75 *new*

EL continues to show relative strength and set new all-time highs with today's 3% rally. I am adjusting our target to exit from $59.50 to $59.75. We're moving the stop loss to $54.75. More aggressive traders may want to aim higher.

Entry on  February 06 at $55.40 
Change since picked:     + 2.96   			
Earnings Date          04/27/10 (unconfirmed)    
Average Daily Volume:       2.5 million 
Listed on  February 06, 2009    

Illionois Tool Works - ITW - close: 44.69 change: +1.05 stop: 41.95

ITW has rallied past very short-term resistance at $44.00 with today's 2.4% gain. The high today was $44.78 almost enough to hit our target. Our first target is only $44.85. Our second target is $46.45.

Entry on  February 06 at $42.66 (small positions)
Change since picked:     + 2.03   			
Earnings Date          04/15/10 (unconfirmed)    
Average Daily Volume:       3.6 million 
Listed on  February 06, 2009    

Joy Global - JOYG - close: 49.17 change: +1.89 stop: 44.95 *new*

Euro strength produced dollar weakness and that fueled a rally in commodities. Commodity-related stocks like JOYG surged on Tuesday. Shares of JOYG hit an intraday high of $49.19. I am raising our stop loss to $44.95. Our target to exit is $49.90. More aggressive traders may want to aim higher.

Entry on  February 06 at $44.54 (small positions)
Change since picked:     + 4.63   			
Earnings Date          02/24/10 (unconfirmed)    
Average Daily Volume:       4.1 million 
Listed on  February 06, 2009    

ROSS Stores - ROST - close: 46.61 change: +0.18 stop: 44.85

Retail stocks were showing strength today. Unfortunately ROST was not one of them. Shares did inch higher but they under performed their peers and the broader market, which might be a warning sign. Readers may want to wait for ROST to trade over its early February high of $47.00 before initiating positions. Our target to exit is $49.75.

Entry on  February 13 at $46.43 (small positions)
Change since picked:     + 0.18   			
Earnings Date          03/18/10 (unconfirmed)    
Average Daily Volume:       2.4 million 
Listed on  February 13, 2009    

BEARISH Play Updates

Ameritrade - AMTD - close: 17.33 change: +0.31 stop: 18.60

The stronger than expected earnings out of Barclays this morning fueled a widespread rally for the financials. Even AMTD participated and the stock gained 1.8%. I am suggesting readers wait for a failed rally near the $18.00 level before considering 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:     - 0.55   			
Earnings Date          04/21/10 (unconfirmed)    
Average Daily Volume:       6.1 million 
Listed on   January 28, 2009    

Best Buy - BBY - close: 36.43 change: +0.67 stop: 36.51

Over the weekend I was concerned that BBY had found too much support at $35.00 so we lowered the stop loss to $36.51. Shares rallied 1.8% but the high today was only $36.45. I think odds are really good we will get stopped out tomorrow. The risk now is will BBY gap open above our stop loss. No 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:     - 2.52
                           /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: 70.78 chg: +1.81 stop: 72.65

The widespread rally across much of the globe lifted CBD with a 2.6% gain and a close back above the $70.00 level. Shares look poised to challenge resistance near $72.00 and its 50-dma near $72.40. Wait for the rebound to fail or reverse before considering new positions. 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:     + 1.38 
Earnings Date          03/03/10 (unconfirmed)    
Average Daily Volume:       261 thousand
Listed on   January 23, 2009    

Rockwell Collins - COL - close: 54.13 change: +1.07 stop: 55.26

Today's 2% gain is a short-term bullish breakout from COL's recent consolidation. Yet shares are still under resistance at $55.00 and its 50-dma. We were expecting this bounce. Our plan is to open bearish positions at $54.50. 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    

FISERV Inc. - FISV - close: 46.95 change: +0.60 stop: 47.26

Today's rally pushed FISV above technical support at its 200-dma. If shares close above their 50-dma we'll drop them as a bearish candidate. We're still on the sidelines waiting for FISV to breakdown. The plan is to open bearish positions with a trigger 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: 26.63 change: +0.22 stop: 27.65

The rebound in GMT was anemic compared to the rest of the market. I am reiterating my comments from the weekend. More conservative traders may want to lower their stop or just exit early since I'm expecting a bounce toward resistance at the 200-dma. You could exit now and jump back in on a failed rally. I'm not suggesting new positions at this time.

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:     + 0.66   			
Earnings Date          04/22/10 (unconfirmed)    
Average Daily Volume:       467 thousand
Listed on  February 04, 2009    

Life Technologies - LIFE - close: 48.92 change: +0.76 stop: 52.01

There should be no surprises here. I warned readers to expect a bounce. LIFE should find resistance near $49.50-50.00. More conservative traders may want to lower their stops since $50 should be new resistance. Wait for the rally to reverse before launching new positions. 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:     - 0.79   			
Earnings Date          01/28/10 (confirmed)    
Average Daily Volume:       2.6 million 
Listed on   January 30, 2009    

SBA Communications - SBAC - close: 34.33 change: +0.38 stop: 35.05

Wow! SBAC extends the bounce for yet another day. The stock gained 1.1% to close over resistance near $34.00 and its 50-dma but just barely. Shares are now arguably short-term overbought. I'm expecting this bounce to fail. Wait for the reversal to launch new positions. Our target is $30.15. More aggressive traders could aim for the 200-dma.

Entry on   January 28 at $33.45
Change since picked:     + 0.88   			
Earnings Date          02/25/10 (unconfirmed)    
Average Daily Volume:       1.5 million 
Listed on   January 26, 2009    

J.M.Smucker CO - SJM - close: 59.85 change: +0.83 stop: 61.51

SJM was not immune to the market-wide rebound and shares gained 1.4%. The rally stalled at resistance near $60.00. Readers may want to wait for another failed rally under $61.00 before initiating positions. Our target to exit is $55.15 although I am starting to think we may have to exit early to avoid holding over earnings.

Entry on  February 05 at $59.49
Change since picked:     + 0.36   			
Earnings Date          02/24/10 (unconfirmed)    
Average Daily Volume:       698 thousand
Listed on   January 30, 2009    

Warner Chilcott - WCRX - close: 26.07 change: +0.18 stop: 28.11

Over the weekend we adjusted our strategy to exit the previous bearish position and plan to open a new one on a bounce/failed rally near resistance. Right now the plan is to open bearish positions at $27.75.

-2nd Trade-
Entry on February xx @ xx.xx <-- trigger @ 27.75 
Change since picked:  - 0.00 

-1st Trade - Closed 02/13/10 -
Entry on   January 30 at $26.65 /gap down entry point
Change since picked:     - 0.76 <-- exit early @ 25.89 (-2.8%)
                             /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: 21.20 change: +0.67 stop: 22.15

This is it. We were expecting this oversold bounce in WIT. Shares hit $21.24 this afternoon. Our plan is to launch bearish positions if WIT hits $21.35. If triggered at $21.35 our first target is $18.05.

Entry on  February xx at $xx.xx <-- TRIGGER @ 21.35
Change since picked:     + 0.00   			
Earnings Date          04/22/10 (unconfirmed)    
Average Daily Volume:       934 thousand
Listed on  February 00, 2009