Option Investor

Daily Newsletter, Tuesday, 2/23/2010

Table of Contents

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

Market Wrap


by Jim Brown

Click here to email Jim Brown

Economic numbers out today suggest the markets are way ahead of the economy. On the surface this was a serious blow to market sentiment.

Market Stats Table

Consumer confidence for February plunged 10 points to 46.0 and shocked the markets into a triple digit loss. The headline number was a 10-point drop from the 55.9 reading in January. This was the lowest level for sentiment since April 2009. Leading the decline was a drop to 63.8 for the expectations component, down from 77.3 in January. The present conditions component fell to 19.4, down from 25.2 in January, and the lowest level in 27 years.

These are monumental drops and were completely unexpected. The deterioration is so severe that it appears there is some bad data in the system but obviously they would have checked for that before releasing the report.

Those who believe jobs are plentiful fell from 4.4% to 3.6% and that suggests the non-farm payrolls next week could be weaker than expected.

One analyst said the drop in consumer confidence was related to the blizzards in the northeast. He claimed that being snowed in and unable to get to work created irritable consumers. If that were the case you would think the decline in confidence would only have been in the northeast. The actual numbers showed the decline was nationwide with the exception of the West South Central division (AR, LA, OK, TX) and New England. Since there were no blizzards in the other seven geographic divisions I seriously doubt it was weather related or at least not completely weather related.

Consumer Confidence Chart

US Census Division Map

The Case Shiller home prices for December were also released today and prices rose but only by +0.32% and a smaller gain than expected. December is a tough month for home sales and that could have been a factor in the slower price rise. That was the seventh consecutive month of price improvement. However, December sales fell -16% as fewer first time buyers purchased homes.

A threat to the continued streak of price improvement is the rising number of pending foreclosures. A separate study showed that 11.3 million homes, 24% of existing loans, are now underwater. There is also an increase in homes coming on the market as more people give up the fight to make payments and are preparing for the spring buying season in hopes of unloading their home and escaping the mortgage before they too go negative.

Mass layoffs for January increased to 1,726 events impacting 182,261 workers. This was higher than the December level of 1,726 events and 153,127 workers. Layoffs need to fall below 150,000 workers for the economy to show positive job growth.

Cold weather was again blamed for the higher layoffs, particularly in construction. Layoffs in nonresidential electrical contractors experienced the largest decline and I don't see how that would have been specifically weather related and layoffs were the lightest in the northeast. On the positive side layoffs shrank in durable goods manufacturing as manufacturers are finally rebuilding inventories after the two-year sell down.

The Richmond Fed Manufacturing Survey rose to +2 for February from a -2 in January. Any number in positive territory represents an expanding manufacturing conditions. However, this is still well below the +14 we saw for three months from July-Oct 2009. The year-end slump to -4 in December is easing but very slowly. New orders did improve to +9 from +1 and back orders improved to zero from -13.

Manufacturers are still having trouble with credit either for supplies and inventory or for purchasers unable to get inventory financing. Until normalized financing becomes available we can expect the manufacturing sector to continue to struggle.

Richmond Fed Survey Chart

The economic calendar for the rest of the week contains two appearances by Ben Bernanke in front of lawmakers in his twice a year testimony on the economy. Thursday has the Health Care Summit. Friday is the big day with the GDP revision and the ISM Chicago.

Economic Calendar

Home Depot (HD) and Lowe's (LOW) both reported earnings today and both were better than expected. They said they did not have to discount merchandise as much or put more merchandise on sale. There were also reports that some consumers were splurging on higher-priced goods and services like carpet installation and counter tops. I know last time I visited Home Depot I had three different salesmen approach me in the isles and each tried to book an in home upgrade appraisal for carpets, counters and lighting. NEVER before has anyone ever approached me and I shop there all the time. It appears Home Depot and probably Lowe's as well, have shifted from strictly a merchandiser to a service seller as well and that is benefiting their profits.

Home Depot said all but two of their top 40 markets in the U.S. showed year over year improvement in Q4. The CEO said there was cause for optimism in 2010 but it would be a transitional year and not a year of robust growth. He also said, "Calling the year transitional does not sound very exciting but we have been waiting for this transition for a long time." Same store sales rose +1.2% for the first increase in years. HD also increased its quarterly dividend for the first time since 2006. HD closed at anew 52-week high.

Lowe's posted a profit of $205 million on sales of $10.2 billion but same store sales decline by -1.6%. That was the best same store sales in three years but still a decline. The Lowe's CEO was not as optimistic as the HD CEO but he did say, "The worst of the economic cycle is likely behind us." Both retailers expected business to pickup towards the end of 2010.

Radio Shack (RSH) reported earnings Monday night and although it beat estimates the stock was crushed on Tuesday for a -7% loss. Same store sales rose +6.1% but was offset by lower sales at mall kiosks. Kiosk revenue fell -15.3% due mostly to the closing of the Sprint branded kiosks. Analysts dumped on the Shack due to lower sales on accessories. While their sales of mobile phones and related equipment were strong the sales of nearly everything else was weak. Radio Shack is trying to rebrand itself as The Shack and focus on wireless technology.

Chart of The Shack

Target (TGT) reported earnings that beat the street with better than expected holiday sales and improved margins. A lower tax rate also helped push earnings higher. Target gave a mixed message on the call by saying its shoppers are increasingly confident and willing to buy more discretionary items, BUT, they said Q1 profit estimates are too aggressive. Basically they beat on the basis of the lower tax rate and gave weak guidance. The markets dipped again intraday when Target warned on guidance.

Wal-Mart reported earnings last week and also said sales at its U.S. stores fell during the holiday quarter and traffic declined. Every major broad line retailer has cautioned on sales in the current quarter. When coupled with the falling consumer confidence this is painting a relatively clear picture of our economic health or maybe I should say consumer health. We have seen millions of consumers have their credit cards cancelled and/or credit lines cut ahead of the new CARD rules that went into effect on Monday. This is limiting the amount of money consumers can spend for discretionary items. Not everyone can walk into a Home Depot and order a house full of carpet or a complete kitchen remodel. The average consumer just wants to go into the grocery story and come out with change.

The dollar recovered from Monday's decline and that pressured commodity stocks including copper, gold and oil. The Euro returned to nine month lows as did the British pound. Gold fell to within 1 point of 1100 and oil fell from $80.50 to $78.22 intraday. Many energy stocks fell 3-4% with coal stocks hit especially hard. Patriot Coal (PCX) lost -12% on news of a mine closure. Massey Energy (MEE) lost -6% and Peabody Energy (BTU) -4%. The natural gas ETF (UNG) declined another 2.3% to $8.79 on worries that demand is going to drop sharply now that winter is nearly over.

Xerox sued Google and Yahoo over search patents granted to Xerox back in 2001. Xerox claims the companies, including Google Maps, You-Tube and Adsense advertising software are illegally using patents owned by Xerox and Xerox wants them to stop using the technology and compensate Xerox for searches made using the technology in the past. A Yahoo spokeswoman said they would fight the case. Let's see, the other option would be to cough up a couple billion for past searches? Google said the claims were entirely without merit and they would "defend against them vigorously." Wow, that is a surprise!

Xerox has a market cap of $12 billion and Google's is $130 billion. Wouldn't it be a real shock to see the courts side with Xerox and award billions in damages to a company that has been on the verge of going out of business multiple times in the last decade. Back in the late 1990s there were entire teams of people hired by major corporations to do nothing but try to decide how to patent every conceivable function of Internet activity. Email, payments, credit card charges, shopping carts, even web page coding. The idea was to find one idea that nobody had thought to patent and everybody needed. This may be the result of one of those teams. Obviously Xerox never had a search engine like Firefox, Opera, Netscape, etc. Why would they have patents for Internet searching? That may turn out to be money well spent.

For the markets, today was a reaction day and a profit-taking day using an economic excuse. Volume was slightly higher than the 6.9 billion shares on Monday and 4:1 to the downside. The Dow gained +400 points in the last week and a half and it was time to rest. The decline could have been blamed on anything but the drop in consumer confidence was a perfect excuse.

In the daily chart below you can see the Dow rallied exactly to resistance where it struggled for three days before finally giving up. When a market has rallied 400 points and then fails to make a meaningful attempt at breaking through resistance, most traders will tighten those stops really close just in case the trend ends. What we saw at the open was one big stop loss blowout.

Consumer Confidence was released at 10:00. Stops were crushed and the Dow fell to support at 10300 very quickly. Once back at 10300 the worst was over and we traded sideways the rest of the day. Several attempts to push it lower were unsuccessful.

Dow Chart - 5 Min

Dow Chart - Daily

The S&P-50 rallied almost exactly to the 50%retracement level at 1115 and failed after two days of attempts to break it. The decline today to 1095 is still 10 points away from decent support at 1085. I know there are a lot of people expecting the S&P to return to its lows and reach a full 10% correction or worse. I think we are too soon in the process to even begin to think about that possibility. We had nearly two weeks of gains and one day of declines. It is not time to start crying wolf until that support at 1085 fails.

S&P-500 Chart - Daily

The Nasdaq rallied to exactly the Fib retracement at 2250 on Monday. The -1.27% decline today was led by a -2.83% decline in semiconductors. The sector that led the Nasdaq higher also led it lower but this is just a typical pattern of profit taking. The Nasdaq rallied stronger than the other indexes from the February lows because "techs are supposed to lead out of a recession" and chips lead techs. The Nasdaq returned to support at 2200 and without a new story to continue the selling that 2200 level should hold. However, if we see that level break I would revert to a bearish bias.

Nasdaq Chart - Daily

The Russell managed a weak -1.13% decline and came to a dead stop on support at 623-625. This is the line in the sand that bears watching. A break here means fund managers are bailing on small caps and the sentiment of the market has changed. That strong rebound from 580 to 633 was a +9.1% rebound in 10 days. We should see profit taking after that kind of rally.

Russell Chart - Daily

In summary we had a day of profit taking on the economic excuse. Those sectors that rose the quickest over the prior two weeks were the hardest hit today. It was a picture perfect bout of news event profit taking. Stops were hit and buyers came back into the market when stronger support levels were reached. I am not bearish today but I would turn bearish if those support levels I mentioned were broken. That is what will tell us that the simple profit taking has turned into something else.

We have Bernanke testifying twice over the next two days and we have the healthcare summit on Thursday. I doubt we will see anything come out of the summit other than a lot of face time on camera. Senator Orin Hatch was on TV today complaining that the summit was an attempt to put a coat of fresh paint on a condemned building. That should give you a clue as to the outcome. Regardless of your political views President Obama has staged a masterpiece of political theater for Thursday. Regardless of the outcome he will be seen as trying to bring the parties together. Even if the effort fails he will have gained points with Americans when the news reports spin their 2 minutes of coverage. If the event fails to produce a bill the republicans will be profiled as the party of "no" despite any valid reasons for the failure. By showing up at the televised event they are walking into a political battle they can't win in the press. It is a masterful piece of political strategy on the part of Obama.

On Friday the GDP revision and the dual ISM reports should be positive and hopefully breakup any market doldrums still in place.

Jim Brown

New Plays

ETFs, Cars, Fast-Food, and more

by James Brown

Click here to email James Brown


UltraShort Europe - EPV - close: 24.96 change: +1.00 stop:21.75

Why We Like It:
The EPV is the UltraShort MSCI Europe ProShares ETF, which is a double (200%) inverse ETF based off the MSCI Europe index. If Europe goes down this ETF will go up twice as fast. I strongly suspect that Europe's problems are far from over and if Greece has trouble with its next bond auction then European market and the euro should accelerate lower. Let's try to take advantage of this set up with an inverse ETF.

I do consider this somewhat aggressive since we're trading a double ETF, which tends to be volatile. The good news is that volume is picking sharply. I am suggesting small bullish positions now with a stop loss at $21.75. We're going to use a wide, aggressive stop to give us some room. Our first target to take profits is at $29.50.

Annotated chart:

Entry on  February 23 at $24.96 
Change since picked:     + 0.00   			
Earnings Date          --/--/-- 
Average Daily Volume:        98 thousand
Listed on  February 23, 2010    

Ford Motor Co. - F - close: 11.60 change: +0.39 stop: 10.99

Why We Like It:
Shares of F look like a relative strength play. The stock is ignoring the recent market movement and marching to the beat of its own drum. Shares of F have been consolidating sideways the past several weeks and today's 3.4% gain appears to be a bullish breakout from this narrowing consolidation.

I am suggesting we open small bullish positions now. We'll use a relatively tight stop at $10.99. There is potential resistance at the January highs but our first target is $12.50. Our second, longer-term target is $13.40. Our time frame is several weeks.

Annotated chart:

Entry on  February 23 at $11.60 
Change since picked:     + 0.00   			
Earnings Date          04/22/10 (unconfirmed)    
Average Daily Volume:        96 million 
Listed on  February 23, 2010    


LuLuLemon - LULU - close: 27.93 change: -0.39 stop: 29.51

Why We Like It:
LULU is an athletic apparel company specializing in yoga attire. They have been enjoying a very strong growth rate, which as powered the stock higher. Now it seems the stock has gotten ahead of itself and it's starting to correct. The oversold bounce is reversing under resistance near $29.50 and its 50-dma. I am suggesting bearish positions now. Our first target to take profits is at $25.10. Our second target is $22.75.

Annotated chart:

Entry on  February 23 at $27.93 
Change since picked:     + 0.00   			
Earnings Date          03/25/10 (unconfirmed)    
Average Daily Volume:       668 thousand
Listed on  February 23, 2010    

Yum Brands - YUM - close: 33.58 change: -0.10 stop: 34.15

Why We Like It:
You probably know YUM by its multiple fast-food brands like Taco Bell, KFC, Pizza Hut, and Long John Silver. Some investors consider YUM a good defensive play with some growth given their expansion into emerging markets like China. Unfortunately all that growth overseas seems to be baked in. The stock has been trading sideways in a $32-37 trading range for several months. Now it appears the stock might be in jeopardy of breaking down from that trend.

I'm suggesting small bearish positions now since YUM still has support near $32.00. If it breaks $32.00 we can add to positions. We'll use a relatively tight stop loss. Our first target is $30.15. Our longer-term target is $28.00.

Annotated chart:

Entry on  February 23 at $33.58 
Change since picked:     + 0.00   			
Earnings Date          02/24/10 (unconfirmed)    
Average Daily Volume:       4.3 million 
Listed on  February 23, 2010    

In Play Updates and Reviews

Another Chance

by James Brown

Click here to email James Brown

The stock market action on Tuesday is offering traders another chance to launch bearish positions

BULLISH Play Updates

Lennox Intl. - LII - close: 42.94 change: -0.70 stop: 39.75

No changes here. We're still waiting for LII to correct and it looks like the correction has started with a 1.6% decline today. 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: 42.00 change: -1.66 stop: 39.95

Ouch! It was a painful day for NUE with a 3.8% decline but I cautioned traders yesterday to look for a dip to $42.00. The question is will support in the $40 region hold?

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:     - 0.98   			
Earnings Date          04/22/10 (unconfirmed)    
Average Daily Volume:       6.1 million 
Listed on  February 16, 2009    

Patterson Companies - PDCO - close: 29.65 change: -0.37 stop: 27.99

PDCO only lost 1.2% today but the move is technically a bearish engulfing candlestick pattern. I am lowering our trigger to buy PDCO from $29.25 to $29.00. More conservative traders may want to up their stop toward the $28.50 region. If we are triggered at $29.00 our first target is $32.50. Our time frame is four to six weeks.

Entry on  February xx at $xx.xx <-- TRIGGER @ 29.00
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: 47.02 change: -0.13 stop: 44.85

ROST is still drifting sideways. There were four big earnings reports out of the retail sector this morning. All of them beat analysts' estimates on the earnings front but most were cautious on sales growth going forward. Yet the retail sector didn't really see much of a move on the news and obviously neither did shares of ROST. I am not suggesting new positions at this time but might reconsider on a bounce from $46.00. Our target to exit is $49.75.

Entry on  February 13 at $46.43 (small positions)
Change since picked:     + 0.75   			
Earnings Date          03/18/10 (unconfirmed)    
Average Daily Volume:       2.4 million 
Listed on  February 13, 2009    

Raytheon Co - RTN - close: 55.51 change: -0.34 stop: 52.75

As expect the rally is starting to lose momentum. 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: 17.40 change: -0.20 stop: 18.26

So far so good. AMTD provided us another entry point yesterday. I'd still consider new positions now. 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:     - 0.48   			
Earnings Date          04/21/10 (unconfirmed)    
Average Daily Volume:       6.1 million 
Listed on   January 28, 2009    

Life Technologies - LIFE - close: 49.50 change: -0.66 stop: 52.01

LIFE is offering us another entry point with shares rolling over under resistance at the 50-dma. More conservative traders may want to wait for a new drop under $49.00 before launching positions. I am concerned that the 200-dma could be support. I'm setting one target to take profits at $46.50. We'll use a second, more aggressive target at $44.00.

Entry on   January 30 at $49.71 
Change since picked:     - 0.21   			
Earnings Date          01/28/10 (confirmed)    
Average Daily Volume:       2.6 million 
Listed on   January 30, 2009    

PACCAR Inc. - PCAR - close: 34.90 change: -0.46 stop: 36.65

Thankfully we didn't have to wait very long for PCAR to hit our trigger. The plan was to open bearish positions if PCAR hit $34.90. Shares did so today. I would still consider new positions now. 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 23 at $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: 34.38 change: +0.16 stop: 35.05

Uh-oh! We were not expecting to see any relative strength in SBAC today. Traders bought the dip near its 10-dma and shares closed in positive territory. We only have two days left but more conservative traders may want to exit early right now.

Currently the plan is to exit on February 25th at the closing bell to avoid holding over the earnings report.

Entry on   January 28 at $33.45
Change since picked:     + 0.93   			
Earnings Date          02/25/10 (confirmed)    
Average Daily Volume:       1.5 million 
Listed on   January 26, 2009    

WIPRO Ltd - WIT - close: 20.79 change: -0.28 stop: 22.15

WIT is starting to drift lower. It's not too late to open up bearish positions. More conservative traders could lower their stop down toward the $21.50 area. Our target is $18.05.

Entry on  February 17 at $21.35
Change since picked:     - 0.56   			
Earnings Date          04/22/10 (unconfirmed)    
Average Daily Volume:       934 thousand
Listed on  February 00, 2009    


DSW Inc. - DSW - close: 26.18 change: -0.38 stop: 25.95

I'm throwing in the towel on DSW. Shares are rolling and a breakdown under $26.00 seems imminent. Exit early now. Remember, our plan was to keep your positions small to limit risk.


Entry on  February 16 at $27.60 (small positions)
Change since picked:     - 1.42 <-- early exit @ 26.18 (-5.1%)
Earnings Date          03/24/10 (unconfirmed)    
Average Daily Volume:       416 thousand
Listed on  February 13, 2009    


J.M.Smucker CO - SJM - close: 60.11 change: -0.28 stop: 61.31

Time has run out for us. The plan was to exit at the close today to avoid holding over earnings tomorrow morning.


Entry on  February 05 at $59.49
Change since picked:     + 0.62 <-- closed early @ 60.11 (+1.0%)
Earnings Date          02/24/10 (unconfirmed)    
Average Daily Volume:       698 thousand
Listed on   January 30, 2009