Option Investor

Daily Newsletter, Monday, 2/22/2010

Table of Contents

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

Market Wrap

M&A News Not Enough To Boost Stocks

by Todd Shriber

Click here to email Todd Shriber
Despite the latest edition of Merger Monday coming to pass today, stocks ended a four-day winning streak even as financials moved mostly higher on the day. Weak volume may have been the culprit as trade was anything if not lethargic, especially for a Monday and especially for a day on which the biggest acquisition of 2010 was announced and another sizable offer was extended to one firm from another.

Overall, the losses were manageable with the Dow Jones Jones Industrial Average shedding less than 19 points to close at 10,383.38. The S&P 500 lost just over one point to finish the day at 1108.01 and the Nasdaq declined by nearly two points to close at 2242.03. The Russell 2000 eked out a small gain.

Stats Table

Among the decliners were energy issues, a curious fact considering that it would have been logical to assume that most eyes would have been on that sector after Schlumberger (SLB) announced on Sunday evening that it would acquire rival Smith International (SII) in an all-stock deal valued at north of $11 billion. The price tag of that deal is high enough to earn the top spot among U.S. mergers and acquisitions thus far in 2010, but aside from the pop that Smith got, energy shares were mostly in the red today.

It could be argued that news of the deal was not all that surprising given that the rumors started swirling on Friday, leading to a 13% jump in Smith's shares that day, and with the official announcement coming on Sunday, the impact of the news may have been tempered somewhat. Still, the performance of the Oil Services HOLDRs ETF (OIH) can only be characterized as disappointing. The ETF that is home to both Schlumberger, the largest oilfield services provider in the world, and Smith, was down on Monday. OIH's volume was higher than usual, but not by a noteworthy margin.

OIH Chart

Making the performance of the energy group even more disappointing to many investors is the point that when these deal announcements are made, the market longs to find the next company to be taken out. That was the case when Exxon Mobil (XOM) announced its massive $41 billion buyout of XTO Energy (XTO) late last year and the Schlumberger-Smith news had folks speculating about what oil services provider would be the next logical target of a larger suitor's affections.

Weatherford International (WFT) was the name that seemed to come up the most and to be fair, the volume in the name today was more than 50% higher than the three-month daily average. Then again, that robust volume was only enough to lift the stock, another OIH constituent, by less than 1%. No official word on who might be interested in Weatherford, but National Oilwell Varco (NOV), which was rumored to be in talks with Smith, has the size and the balance sheet to buy a company of Weatherford's size. Based on Monday's close, Weatherford has a market cap that is approximately 50% heftier than Smith's was on Friday.

Other oil services that have market values that may make them appealing include Cameron International (CAM), which was up fractionally on Monday, and Rowan (RDC), which traded lower. Those names were not mentioned as possible targets, at least not that I heard, so Weatherford might be the one to continue to watch.

Weatherford Chart

The other deal that should have helped stocks higher but did not was an announcement by Thermo Fisher Scientific (TMO), a maker of laboratory equipment, that it had offered to acquire Millipore (MIL), a maker of laboratory filters and purifiers, for $6 billion. That is a hefty premium to Millipore's Friday market value of around $4 billion and the news sent Millipore shares on a wild ride today as the stock opened at $71.19 and traded as high as $102.91 before settling at $87.35.

Millipore Chart

All and all, $17 billion in fresh deals, while not earth shattering, should have done a little more to illicit excitement from investors and it did not. As I mentioned earlier, Monday's benign trade is even more surprising when considering that financials were the top performers among the 10 industry groups tracked by the S&P 500. Dow components Bank of America (BAC) and JPMorgan Chase (JPM), the two largest U.S. banks both gained 2.1% on Monday.

Bank of America moved higher on news that it had reached a settlement to compensate shareholders to the tune of $150 million related to mismanagement of the Merrill Lynch takeover. That is a paltry sum for a company with a $140 billion market cap and may indicate, if nothing else, that a particular attorney general has failed in his attempts to demonize and vilify Bank of America.

I say that because this settlement comes with a twist. The $150 million is only going to legacy shareholders of the largest U.S. bank. Meaning that if you became a BofA shareholder via your ownership of Merrill Lynch stock, you are not entitled to any part of the $150 million. Not that it should matter. Bank of America is one of the most widely held stocks in the U.S. and $150 million distributed to shareholders is not going to be a big deal to any of them.

Bank of America Chart

In another testament to just how apathetic investors were feeling on Monday, Lowe's (LOW), the second-largest home improvement retailer in the U.S. got little credit for turning in a fourth-quarter profit report that showed a 27% increase in earnings. Ah, but there is a catch. Revenue fell 2.1% for fiscal 2009 and the company is saying bad weather in certain parts of the U.S. will hamper sales for the current quarter.

So despite the fact that Lowe's said it sold more big-ticket items on a year-over-year basis, perhaps offering some faint signs that an economic recovery is underway, the outlook was not enough to please investors and with rival and Dow component Home Depot reporting earnings tomorrow, there might be more pain to come for investors in the home improvement sector. Analysts are expecting Home Depot to post a profit of 17 cents a share.

Lowe's Chart

Something else to keep an eye on this week is a heavy slate of Treasury auctions, which got going today with the sale of three-month, six-month and 30-year TIPS. All told, our friends at the Treasury will sell around $120 billion in new debt this week. It should be noted that China has started to reduce some of its U.S. debt holdings, though when Beijing does that they must reinvest the proceeds in another dollar-denominated security. Chinese consumption of Uncle Sam's debt offerings over the past decade has been nothing short of amazing, but it might be in the best interest of Uncle Sam to find some more willing buyers or to not have to issue all this debt at all.

China Purchases of U.S. Debt

As I mentioned earlier, Monday's volume was slack to say the least, a continuation of a trend that started building last week, and that makes it difficult to decisively say where the market is headed this week, let alone be overtly bullish or bearish. New resistance for the Dow appears to be 10,500 and the index came to rest today a mere five points above its 50-day moving average.

While a move over 10,500 would be nice, the next stumbling block comes up at 10,750, assuming the former level can even be broken. Getting to 10,750 from here could be asking for a lot unless volume dramatically improves. Failure at 10,500 could mean a break of 10,000 on the downside and 9650 may not be that far behind.

Dow Chart

The S&P 500 also came to rest came to rest within earshot of its 50-day moving average on Monday and is less than eight points from serious resistance at 1116. An upside break there probably takes the index back to its January peak at 1150, but as is the case with the Dow, volume will need to improve. If 1100 fails as support, another stop in the 1050-1060 area could be seen, or worse, a tumble to 1035 would not be all that far flung.

S&P 500 Chart

It is encouraging to see the Nasdaq back above 2200, but with today's close at 2242, 2250 becomes the immediate level of significance the tech-heavy index must conquer. Failure there could mean a retreat to 2200 or to the 2185 neighborhood. The 50% Fibonacci retracement from the January peak is at 2063. In other words, it would behoove the bulls to start showing some real strength.

Nasdaq Chart

I continue to remain cautious about the near-term fortunes of equity markets due to the anemic volume we have been seeing lately. The case for prudence may have been highlighted on Monday when a fresh round of M&A news did nothing to spur volume higher. Look at all the positives that we have seen in recent weeks that have done nothing but help stocks to a middling performance at best. Solid earnings reports. A heavy dose of analyst upgrades. Over 70 dividend increases. Combined, this confluence of factors has offered little help to the bulls and I find that worrisome.

New Plays

Earnings & Data

by James Brown

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Editor's Note:

The stock market's two-week bounce appears to be losing steam. If stocks roll over do you short it or buy the dip? That's the question right now. The Chinese Shanghai market failed to crash on Monday and the Hong Kong and Japanese markets saw a huge bounce today. Meanwhile European stock markets snapped a five-day winning streak, which is normal since they were due for a dip. Yet short interest on the euro has been at record levels for three weeks in a row. If the euro continues to slip the dollar will rise and commodities will retreat.

Investors could be waiting on this week's economic data or the small parade of earnings from the retail sector before making a decision. With the major indices closing almost unchanged on the session I'm not adding any new plays.

In Play Updates and Reviews

Market Indecision

by James Brown

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The market indices closed virtually unchanged. Investors can't decide what to do.

BULLISH Play Updates

DSW Inc. - DSW - close: 26.56 change: -0.17 stop: 25.95

More conservative traders will want to seriously consider an early exit out of DSW> The bounce is failing near $27.00. I'm concerned that if the market sees a sharp move lower DSW will break $26.00 and hit our stop loss. No new positions at this time. Our first target is $29.95. Remember, our plan was to keep your positions small to limit risk.

Entry on  February 16 at $27.60 (small positions)
Change since picked:     - 1.06   			
Earnings Date          03/24/10 (unconfirmed)    
Average Daily Volume:       416 thousand
Listed on  February 13, 2009    

Lennox Intl. - LII - close: 43.64 change: -0.17 stop: 39.75

LII spiked to $44.20 intraday. I still think this rally is getting tired. Shares are definitely short-term overbought and due for a dip. The plan is to buy LII on a dip at $41.00. More aggressive traders could use a stop under $39.00. If triggered our first target is $44.95. LII doesn't move super fast so be patient.

Entry on  February xx at $xx.xx <-- TRIGGER @ 41.00
Change since picked:     + 0.00   			
Earnings Date          04/22/10 (unconfirmed)    
Average Daily Volume:       591 thousand
Listed on  February 18, 2009    

NUCOR - NUE - close: 43.66 change: -0.69 stop: 39.95

I cautioned traders over the weekend that NUE was poised for a pull back. Look for support near $42.00.

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.

Entry on  February 16 at $42.98 (small positions)/gap higher entry
Change since picked:     + 0.68   			
Earnings Date          04/22/10 (unconfirmed)    
Average Daily Volume:       6.1 million 
Listed on  February 16, 2009    

Patterson Companies - PDCO - close: 30.02 change: +0.23 stop: 27.99

PDCO displayed some relative strength with a 0.77% gain and a close over the $30.00 mark. I still don't want to chase it. The plan is to buy PDCO on a dip at $29.25. Cautious traders could try a stop closer to the 50-dma. If we are triggered at $29.25 our first target is $32.50. Our time frame is four to six weeks.

Entry on  February xx at $xx.xx <-- TRIGGER @ 29.25
Change since picked:     + 0.00   			
Earnings Date          05/20/10 (unconfirmed)    
Average Daily Volume:       1.4 million 
Listed on  February 20, 2009    

ROSS Stores - ROST - close: 47.15 change: +0.05 stop: 44.85

Buckle your seat belts and double check your stop loss placement. This could be a volatile week for retail stocks. LOW reported today and warned that Q1 sales would be lower. Home Depot, Sears, Target, Macy's and the Gap all report earnings this week. The sector could definitely see some volatility. Readers may want to wait on a bounce from $46.00 before considering new positions. Keep positions small. I'm still concerned ROST could be forming a bear wedge pattern. Our target to exit is $49.75.

Entry on  February 13 at $46.43 (small positions)
Change since picked:     + 0.88   			
Earnings Date          03/18/10 (unconfirmed)    
Average Daily Volume:       2.4 million 
Listed on  February 13, 2009    

Raytheon Co - RTN - close: 55.85 change: +0.31 stop: 52.75

RTN extended its gains but I'm still expecting a correction back toward $54.00. Be patient and wait for your entry point. I'm suggesting a trigger at $54.25. If triggered at $54.25 our first target is $59.00. Our time frame is four to six weeks.

Entry on  February xx at $xx.xx <-- TRIGGER @ 54.25
Change since picked:     + 0.00   			
Earnings Date          04/22/10 (unconfirmed)    
Average Daily Volume:       2.9 million 
Listed on  February 20, 2009    

BEARISH Play Updates

Ameritrade - AMTD - close: 17.60 change: -0.43 stop: 18.26 *new*

AMTD is offering us another bearish entry point with a failed rally near $18 and under its 50-dma. Readers can launch positions now and tighten their stops toward Friday's high (18.22). I am lowering our stop loss down to $18.26. 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:     - 0.28   			
Earnings Date          04/21/10 (unconfirmed)    
Average Daily Volume:       6.1 million 
Listed on   January 28, 2009    

Life Technologies - LIFE - close: 50.16 change: +0.15 stop: 52.01

Shares of LIFE spiked above resistance at the 50-dma today but shares reversed after tagging $50.75. I am suggesting readers wait for this bounce to roll over before launching new bearish positions. A drop under $49.50 or $49.00 should work as a new entry point. 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:     + 0.45   			
Earnings Date          01/28/10 (confirmed)    
Average Daily Volume:       2.6 million 
Listed on   January 30, 2009    

PACCAR Inc. - PCAR - close: 35.36 change: -0.59 stop: 36.65

Shares of PCAR are rolling over just as expected. The stock closed under technical support at its 200-dma today. More aggressive traders may want to jump in now. We have a trigger to open bearish positions at $34.90. If we are triggered at $34.90 our first target is $32.00. Our second target is $30.50. Our time frame is several weeks. FYI: It is worth noting that the most recent data listed short interest at 7.5% of the 321-million share float.

Entry on  February xx at $xx.xx <-- TRIGGER @ 34.90
Change since picked:     + 0.00   			
Earnings Date          04/28/10 (unconfirmed)    
Average Daily Volume:       3.1 million 
Listed on  February 20, 2009    

SBA Communications - SBAC - close: 34.22 change: -0.56 stop: 35.05

Almost perfect! SBAC is presenting a new entry point with the bounce rolling over under resistance at $35.00. Unfortunately we are almost out of time. SBAC reports earnings on February 25th after the closing bell. That means we only have three days left. We will exit on the 25th at the close to avoid holding over earnings.

Entry on   January 28 at $33.45
Change since picked:     + 0.77   			
Earnings Date          02/25/10 (confirmed)    
Average Daily Volume:       1.5 million 
Listed on   January 26, 2009    

J.M.Smucker CO - SJM - close: 60.39 change: -0.16 stop: 61.31 *new*

Shares are still struggling under the 50-dma. It looks like an entry point but we're out of time. We're planning to exit tomorrow (Feb. 23rd) at the close to avoid holding over earnings on the 24th. I am lowering our stop loss to $61.31.

Entry on  February 05 at $59.49
Change since picked:     + 1.06   			
Earnings Date          02/24/10 (unconfirmed)    
Average Daily Volume:       698 thousand
Listed on   January 30, 2009    

WIPRO Ltd - WIT - close: 21.07 change: +0.11 stop: 22.15

Check out the intraday chart on WIT. The last four days in a row the stock gapped open and immediately reversed. Three out of those four days the stock gapped open higher only to reverse. I still think shares are ready to correct lower. Readers could launch positions now and more conservative traders could lower their stop down toward $21.50ish. Our target is $18.05.

Entry on  February 17 at $21.35
Change since picked:     - 0.28   			
Earnings Date          04/22/10 (unconfirmed)    
Average Daily Volume:       934 thousand
Listed on  February 00, 2009    


GATX Corp. - GMT - close: 27.73 change: +0.24 stop: 27.65

The rally in GMT continued for the seventh day in a row. Shares broke out past the 200-dma on Friday and opened at $27.66 this morning. Our stop loss was at $27.65 so the play was closed immediately. A week ago I suggested we may want to exit early. That would have been a good move. The larger trend for GMT is still very bearish. Look for resistance in the $28-29 zone.


Entry on  February 04 at $25.95 
Change since picked:     + 1.71 <-- stopped @ 27.66 (+6.5%)
Earnings Date          04/22/10 (unconfirmed)    
Average Daily Volume:       467 thousand
Listed on  February 04, 2009