Option Investor

Daily Newsletter, Monday, 3/8/2010

Table of Contents

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

Market Wrap

Not Terrible, But Kind Of Disappointing

by Todd Shriber

Click here to email Todd Shriber
All things considered, Monday was not a terrible day for stocks, but following Friday's big surge, Monday's trade was lackluster to say the least. On the back of the second-lowest volume day of 2010, the Dow Jones Industrial Average lost just under 14 points to close at 10,552.52 while the S&P 500 shed just about two tenths of a point to close at 1138.50. Of the major indexes, the Nasdaq was the lone gainer, adding almost six points to finish the day at 2332.21.

Stats Table

Six stocks rose for every five decliners, but new highs on the New York Stock Exchange outpaced new lows by better than a 10-to-1 margin. On the Nasdaq, the ratio of new highs to new lows was better than 20-to-1, so that might be some kind of silver lining on a day where a lack of marquee headlines was fairly obvious. To be sure, this was no replay of the ''Mutual Fund Monday'' or ''Merger Monday'' themes that many investors had become accustomed to seeing over the past few weeks.

Financials notched a meager 0.2% gain helped by what was the only significant sign of M&A activity on this Monday. It is hard to get excited about this kind of M&A action because it involves yet another asset sale by embattled insurance giant American International Group (AIG), but the news was good enough to send financials higher on the day.

AIG continues to do what it needs to do to whittle down its tab with Uncle Sam and announced today that it will sell its American Life Insurance Co. unit to MetLife (MET) for $15.5 billion. Throw in last week's news that AIG will sell its Asian insurance business to U.K.-based Prudential for $35.5 billion and it cannot be argued that AIG has swiftly reduced the amount of cash it owes to U.S. taxpayers. Now the company owes ''just'' $8 billion to the New York branch of the Federal Reserve and another $47 billion to the Treasury Department, according to the Financial Times.

AIG shares traded higher by nearly 4% on the news, but MetLife may be the real winner here. This deal transforms MetLife from a company with a heavy focus on the U.S. insurance market to a legitimate player on the international stage. The bottom line is this is a deal that never would have been struck during AIG's heyday, which seems harder and harder to remember, at least not at this price. So it is fair to say that MetLife is getting a good deal while AIG has had to part with two of its crown jewels in the span of a week and the company still owes the government a tidy sum of cash.

AIG Chart

One of the bright spots in the Dow was McDonald's (MCD). The world's largest fast-food chain rose 2.3% in what was the stock's biggest gain in over a month after the company said international sales rose by 4.8% in February. Analysts were forecasting an increase of 4%. McDonald's said same-store sales, the measure of restaurants open at least 13 months, were up 0.6% in the U.S. and 5.4% Europe. Decent numbers, but Africa, Asia and the Middle East sported a 10.5% increase for McDonald's, perhaps indicating the purveyor of Big Macs is a high-quality way for conservative investors to tap into the emerging markets growth theme.

McDonald's Chart

Another Dow constituent on the move, and probably the reason behind the Nasdaq's gain, was Cisco (CSCO). On the eve of the company's announcement that will supposedly ''forever change the Internet,'' investors were quite bullish on the biggest provider of networking gear, sending Cisco shares higher by nearly 4%. The stock closed at $26.13, but traded as high as $26.36, which if you are looking at a quote at most Internet financial portals will show up as a 52-week high, but Cisco actually touched a 21-month high today. More than 116 million Cisco shares changed hands on Monday, more than double the average daily volume.

Options traders were active in Cisco as well as 237,000 calls and 79,000 puts changed hands on Monday. The April 26 calls were especially active as were the January 2011 27.50 calls and January 2011 22.50 puts. No one outside of Cisco knows for sure what Tuesday's announcement will bring, but analysts are speculating the company may unveil a high-speed broadband network that works at speeds that are 100 times faster than what is available on the market today.

That makes sense as that type of initiative is not far removed at all from Cisco's bread-and-butter businesses. Factor in rising video traffic across the Internet and it stands to reason that Cisco might be unveiling something to help communications providers better cope with this trend. Delivering video data over the Web is more complex than other forms of data transmission and if Cisco is going to make this process more efficient, tomorrow's announcement really could be a ''game changer'' for the company.

Cisco Chart

Speaking of technology issues, Texas Instruments (TXN), the maker of chips for cell phones and other electronic devices, delivered its regularly scheduled quarterly update on Monday and raised the low end of its first quarter guidance. The company said it expects to earn 48 cents to 52 cents a share in the current quarter. That is higher than the previously issued estimate of 44 cents to 52 cents a share.

The revenue guidance was a bit more impressive as TI told investors it expects its top line to be between $3.07 billion to $3.19 billion for the current quarter. The company had previously said revenue for the quarter may be as low as $2.95 billion. Before the update, analysts were forecasting earnings of 49 cents a share on sales of $3.08 billion. Overall, this is pretty good news out of TI, but the stock traded down during regular trading hours and as of this writing, the shares were also down in the after-hours session.

Texas Instruments Chart

As I am so fond of articulating, new catalysts need to emerge in some form or fashion to keep this rally going, but fresh buying may be hard to come by as cash held by equity mutual funds has fallen to its lowest level since 2007, according to data published by the Investment Company Institute. In February, cash dropped to 3.6% of assets from 5.7% in January, the quickest burn rate in 18 years, the data shows. Equity fund managers now have $172 billion in cash following last year's tremendous market rally.

While $172 billion may sound like a lot of money, and it sure is under most circumstances, it is not that much when talking about the cash fund managers have left to play with. How quickly could mutual funds burn through $172 billion? Well, 10 million shares of Cisco would cost roughly $260 million, 10 million shares of Apple (AAPL) would cost another $2.19 billion and 10 million shares of Google would cost over $5.62 billion.

I use these examples because it is apparent to some degree that if fresh cash is going to be put to work, technology is one the likely destinations for said cash and to highlight the fact that $172 billion is not as much as it sounds like. The Investment Company Institute points to the robust amount of cash being held by investors in money market accounts, which as we all know, offering interest rates that can be characterized as anemic.

ICI says that $754.3 billion has flowed out of these funds over the past 14 months as investors have scurried to participate in the bull market for stocks, but another $3.17 trillion remains in cash and fixed income investments. Now that is an impressive sum and one that could certainly jolt stocks higher if that cash comes off the proverbial sidelines. Back to the $172 billion fund managers currently have. Bloomberg News offers an ominous anecdote regarding that total. I mentioned it is the smallest some since 2007, specifically September 2007, as Bloomberg reports. What followed September 2007 was a 57% drop for the S&P 500.

Tuesday marks the one-year anniversary of the market bottom/start of the rally and while the returns may not be as impressive this year as they were in 2009, it is difficult, at least in the near-term, to not be somewhat bullish. I like to mention weak volume as a potential problem for the bulls and it still may prove to be, but the other side of that coin is that there has been scant selling pressure recently. In other words, the bears are not taking advantage of these low volume days to knock stocks down a couple of pegs.

Taking a look at the charts, the Dow still looks strong despite today's small loss. The index held the all-important 10,550 level today and there is no resistance looming ahead until 10,725. A move beyond that level would be extremely bullish. After all, that is the neighborhood of the January peak and 10,750 is a resistance level that is nearly four years old. Support is first found at 10,400, but 10,300 is probably the more firm area. I am not going to start throwing around theories about where the Dow will end the year or what happens if 11,000 is broken. Let us just see what happens if the index can traverse 10,725 in the near-term and take things from there.

Dow Chart

The S&P 500 still needs to conquer the 1150 level and this is going to be important. Failure at 1150 would have the index sporting a potentially dangerous double-top chart pattern and that would mean a haircut to 1115 could be just around the corner and may be even a move down to 1085. The ideal scenario for the bulls would be a breakout on strong volume above 1150, say a close at 1157, 1160 or something along those lines. Consolidation in the high 1140s or low 1150s would either be a good sign for the bears or a bear trap.

S&P 500 Chart

The Nasdaq is certainly looking like it has resumed its 2009 leadership role and with several marquee tech names looking strong at this point (Apple and Cisco just to name a couple), we may not need to worry about support at 2275 in the near-term. It actually looks like the Nasdaq has made a double-top breakout and that 2350 may be next resistance. That level has not been seen by the Nasdaq since late 2008.

Nasdaq Chart

Cautiously bullish is my stance at this point and if some dips in tech leadership avail themselves, those would be solid buying opportunities. Dividend payers with decent yields, such as McDonald's, could prove themselves to be better insurance policies than cash investments as well. Speaking of dividends, if the market stays in a tight range over the next several months with the bears exerting no real pressure, more fuel for the rally could emerge IF (a big ''If'') financials such as Bank of America (BAC), JPMorgan Chase (JPM) and Wells Fargo (WFC) meaningfully raise their payouts in the second half of this year.

New Plays

Buy The Dip

by James Brown

Click here to email James Brown

Editor's Note:

The stock market looks a little tired after last week's impressive rally. While I believe the trend is up that doesn't mean stocks aren't poised to dip first before continuing their ascent. Readers may want to take a buy-the-dip approach. Just be aware that the 1150 level could be very tough resistance for the S&P 500 index to break.

I am not adding any new candidates tonight but here's a list of stocks I would be watching:

BBOX could be a bullish candidate on a dip or bounce near what should be support at $30.00.

FISV has rallied to major resistance near $50.00. A breakout past $50.00 or its 2009 high at $50.91 could be a bullish entry point.

JNPR has rallied to new 52-week highs. The stock looks a little overbought with its three-week rally. I would watch it for another bounce from $28.00.

SIG has a bullish trend and it is trying to hold its recent breakout over the $30.00 level. Readers may want to consider buying the next bounce from $29.00.

VZ has been under performing for most of 2010 but the stock is bouncing from the bottom of its trading range. Today's move over $29.40 actually looks like an aggressive, short-term bullish entry point. Just keep in mind that the $30 level and the 50 and 200-dma could be overhead resistance. I'd consider a target near $32.00.

In Play Updates and Reviews

Rally Looks Tired

by James Brown

Click here to email James Brown
Current Portfolio:

BULLISH Play Updates

Ford Motor Co. - F - close: 12.93 change: -0.07 stop: 12.45

The sideways market was no help to Ford on Monday. Shares drifted in a narrow range. I wouldn't be surprised to see Ford dip and retest prior resistance near $12.00 as new support. Of course if that happens we'll get stopped out at $12.45 but nimble traders could jump in again on a bounce from $12.00. We're not suggesting new positions at this time.

Ford has already hit our first target at $12.50. Our second, longer-term target is $13.40.

Current Position: Ford stock @ $11.72

Entry on February 23 at $11.72 /gap higher entry
Earnings Date 04/22/10 (unconfirmed)
Average Daily Volume: 96 million
Listed on February 23, 2010

NUCOR - NUE - close: 44.84 change: +0.28 stop: 42.75

The last couple of session has been pretty encouraging. On Friday NUE managed to close above its 200-dma and shares continued to rally today with another 0.6% gain. The stock is almost past the late February high. I am not suggesting new positions at this time. Our first target is $46.75. Our second and final target is $49.85. Our time frame is several weeks.

Current Position: NUE stock @ $42.98

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

Raytheon Co - RTN - close: 57.07 change: -0.04 stop: 56.35

The rally in defense stocks might be slowing down and it's definitely beginning to fade for RTN. Shares may need to dip and retest prior resistance near $55.00 as new support again. Of course if that happens we'll bet stopped out at $56.35. I am not suggesting new positions at this time. Our target to exit is $59.50. Our time frame is four to six weeks.

Current Position: RTN stock @ $55.85

Entry on February 25 at $55.85
Earnings Date 04/22/10 (unconfirmed)
Average Daily Volume: 2.9 million
Listed on February 20, 2009

POWR - Powersecure Intl $7.71, Change -0.02, stop $7.45

We have three days to go. POWR is due to report earnings after the closing bell on March 11th. Wall Street expects a profit of 4 cents a share. This is an aggressive bet that POWR will see a post-earnings rally on its results. Currently shares are testing overhead technical resistance at its 100-dma.

Current Position: POWR stock with a stop at $7.45

Option buyers:
Current Position: MARCH $7.50 CALL (POWR 10C0750) @ $0.55

Entry on March 03 at $ 7.64
Earnings Date 03/11/10 (confirmed)
Average Daily Volume: 78K
Listed on March 2nd, 2010

FWLT - Foster Wheeler $26.07, change +0.17, stop $24.35

Now it's my turn (James) to express a negative bias. I see nothing bullish about FWLT's stock. It has a pattern of lower highs and lower lows on top of breaking down from a five-month trading range. Now broken support near $28.00 should be heavy resistance. It's true that fundamentals for the business should be improving but long-term investors may get a better entry point near $20 not at current levels. I might change my mind if FWLT can close over $29.00 again (and its 50 and 200-dma). I'm not suggesting new bullish positions at this time. Jim did raise the stop this weekend to $24.35. His first upside target is $28.00.

(Nimble traders may want to consider bearish positions if we see a close under $25.75 and use a stop above today's high @ 26.51.)

Current Position: FWLT @ $25.13 with a stop at $23.75.

Option buyers:
Current Position: APR $26.00 CALL (FWLT 10D2600) @ $1.10

Entry on March 04 at $25.13
Earnings Date N/A
Average Daily Volume: 4.5M
Listed on March 3rd, 2010

BEARISH Play Updates

Dragonwave - DRWI - close: 9.91 change: -0.56 stop: 11.55

The sell-off continues for DRWI. The stock under performed with a 5.3% decline and a breakdown under the $10.00 level, which could have been round-number support. Volume was well above average, which is good news for the bears. Our first target to take profits is at $8.75.

Current Position: (SHORT) DRWI @ $10.48 with a stop at $11.55

Entry on March 8th at $10.48
Earnings Date April (unconfirmed)
Average Daily Volume: 1.2 million
Listed on March 6th, 2010

PALM - Palm Inc - close: 5.55 change: -0.16 stop: 6.50

PALM's meteoric rise in 2009 is quickly fading away. Shares under performed again on Monday with a 2.8% decline on rising volume. There appears to be no reason to buy PALM with the company trailing so far behind the competition. Eventually someone will claim the stock is undervalued but that may be a lot closer to $4.00 or the lows under $2.00. Our first target to take profits is at $4.00.

Current Position: (SHORT) PALM @ $ 5.80 with a stop at $6.50

Entry on March 8th at $ 5.80
Earnings Date April (unconfirmed)
Average Daily Volume: 25 million
Listed on March 6th, 2010