Option Investor

Daily Newsletter, Wednesday, 3/24/2010

Table of Contents

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

Market Wrap

European Concerns Pressure Stocks

by Todd Shriber

Click here to email Todd Shriber
The bulls took a breather on Wednesday as new home sales data failed to impress and a downgrade of Portugal's debt weighed on stocks. The declines, while not welcomed, were manageable with the Dow Jones Industrial Average shedding almost 53 points to close at 10,836.15. The S&P 500 lost less than 6.5 points to settle at 1167.72 while the Nasdaq dropped about 16.5 points to close at 2398.76. Declining issues outpaced advancers on both the Nasdaq and New York Stock Exchange by margins of roughly two-to-one.

Stats Table

News out of Europe continues to be a thorn in the side of equity bulls as Fitch Ratings downgraded Portugal's debt rating, saying the country may face problems in repaying its debts. This really should not have come as a surprise to many market observers as only the most optimistic of views believed that Greece's problems were isolated. Speculation has been widespread in the wake of Greece's fiscal issues that Portugal would be among the next proverbial shoes to drop.

Still, the Euro was battered on the news, dropping as much as 1.3% to its lowest level since May 2009. That helped the U.S. Dollar turn its best single-session percentage gain since December. The greenback was up against 15 of the 16 major currencies. Obviously, Euro weakness is good for the Dollar, but not the best of news for stocks. Unfortunately, a UBS analyst said today that Greece will in fact default at some point and Portugal's problems serve to further call the Euro's future into question.

As I mentioned several weeks ago with Greece, we are talking about the 28th largest economy in the world and the UBS analyst correctly noted that if the European Union cannot solve the Greek quagmire, how will it successfully deal with bigger problems that may arise from the likes of Italy and Spain? In an indication of how equity investors hate this kind of news, stocks suffered at the hands of the Portugal news. Portugal is merely the 38th largest economy in the world, smaller than the likes of Argentina, Finland, Iran, Thailand and Venezuela.

Euro Chart

To be sure, the economic data coming out of the U.S. today was not all good news as highlighted by the decline in February new home sales. The Commerce Department said new home sales fell for a fourth consecutive to a record annual low. New home sales fell 2.2% in February to 308,000 units compared with 315,000 sales in January. Economists were expecting the February number to come in at 315,000. Analysts noted that bad weather can be blamed for some of the decline, but that storms and what not do not cover up weakness in the U.S. housing market. On the bright side, the median home price rose 6.1% in February from January and 5.2% year-over-year.

Home Sales Chart

There was some positive economic news in the form of durable goods orders, which rose 0.5% in February, good for the third straight month of increased orders. Excluding transportation-related fare, orders rose by a better-than-expected margin of 0.9% after a 0.6% decline in January, according to the Commerce Department. Orders for non-defense related items, excluding aircraft, rose 1.1% last month as factories boosted their durable goods inventories by 0.3%, the biggest gain since December, Bloomberg News reported. This should be good news for industrial companies as it indicates the economy is getting back on the right track, but the news out of Europe tempered most of the enthusiasm investors had for stocks on Wednesday.

Durable Goods Chart

Somewhat surprising was the strength of financials on Wednesday, led by Bank of America (BAC), the largest U.S. bank. Bank of America was far and away the biggest gainer in the Dow in percentage terms, gaining 44 cents, or 2.57%, to close at $17.57. The Charlotte-based bank said it will forgive up to 30% of some customers' mortgage balances if those customers are at least two months past due and owe at least 20% more than the current value of their home.

The new initiative is part of an agreement Bank of America reached with various state attorneys general to settle charges related to high-risk loans made by Countrywide, which Bank of America acquired, according to the Associated Press. Bank of America said 45,000 customers with a total of $3 billion in principal are likely to qualify for the plan. The effort follows a similar move by Wells Fargo (WFC), modified 52,000 adjustable-rate mortgages through its acquisition of Wachovia.

Citigroup (C) did not say whether it has similar plans and JPMorgan Chase (JPM), another Dow member, did not comment at all. Wells Fargo was down on the day while Citi and JPMorgan were both up slightly. BofA's chart (below) is looking pretty strong and it is hard to deny Citi has had a nice run as of late while the durability of JPMorgan Chase and Wells Fargo has also been noteworthy. On the other hand, it would be encouraging to see, one or more members of this quartet do something meaningful regarding their dividends later this year.

Bank of America Chart

Speaking of dividends, coffee house giant Starbucks (SBUX) announced its first-ever quarterly dividend today at its analyst meeting. This is news that was widely expected and to its credit, Starbucks delivery of a 10-cent per share payout beats the six cents many analysts were expecting. A 40-cent annual dividend gives Starbucks a yield of about 1.6% based on Wednesday's closing price of $25.29.

The company also added 15 million shares to a repurchase plan that still has 6.3 million shares remaining, but the stock closed lower on the day and maybe the dividend was the reason why. For nearly its entire existence, Starbucks has been viewed as a growth company and the fact that the shares have doubled in the past year would do little to convince many investors otherwise, but dividends are often viewed as a tool used by more mature, even stodgy companies, to reward their shareholders in the absence of rapid capital appreciation. So it might be fair to assume some investors do not like the fact that Starbucks is evolving to a more of a value play than a growth stock.

Starbucks Chart

Then again, there is something to be said for those mature value stocks. Today's example: General Mills (GIS). The owner of some of the most ubiquitous cereal brands as well as the Pillsbury, Progresso, Haagen-Dazs and Betty Crocker labels among others, said its fiscal third-quarter earnings soared to $332.5 million, or 96 cents a share, from $288.9 million, or 85 cents, a year earlier. Excluding items, General Mills earned 97 cents a share, beating the Street estimate of 94 cents.

Sales rose 3% to $3.63 billion, led by a 6% increase in the cereal line and a 15% increase in the snack business. Gross profit margin jumped to 38% from 36.1%. Minnesota-based General Mills did what the good companies do and what investors should look for and that is beat, beat and guide. The company said it expects to earn $4.57 to $4.59 a share in fiscal 2010, up from previous guidance of $4.52 to $4.57 a share. This is the second time since September the company has upped its guidance.

Do not forget that General Mills offers a fair yield at 2.7% and that in 2009, one of the worst years ever for dividends, the company raised its payout not once, but twice. Showing what a pain Portugal and Greece are, General Mills shares closed lower by $1.39 at $72.18.

General Mills Chart

Looking at the charts, the Dow's decline today is not too alarming. After all, the index is up about 5% this month and large-cap blue chip names have played a big role in the recent rally, so a one-day pit stop to take a breather is nothing to fret about. Support is in place at 10,700, though it is unlikely that we see that level again this month with just five trading days left. The next hurdle remains 11,000.

Dow Chart

The S&P 500 certainly has enjoyed the aforementioned large-cap rally and I still think support is strong around 1150, though 1160 might we worth looking at as well. Again, it would take a large-scale negative surprise to get us back to 1150 before the end of the month. There are still a lot of shorts out there that need to do some covering and that could be the catalyst that gets the S&P 500 closer to resistance at 1200. Best Buy's (BBY) earnings report before the bell tomorrow is worth watching. Analysts are expecting the retail giant to post earnings of $1.79 a share.

S&P 500 Chart

It is difficult to surmise why the Nasdaq was down today beyond broader market weakness. Apple (AAPL) touched another 52-week high, Adobe (ADBE) was higher on a strong earnings report, both Baidu (BIDU) and Google (GOOG) enjoyed solid gains, but Research In Motion (RIMM) was down, helping the Nasdaq close below the all-important 2400 level. The index is just a few points away from support at 2395, but a catalyst in the form of Oracle's (ORCL) earnings report after the bell tomorrow is there to potentially help the Nasdaq close above 2400 by the end of the week.

Nasdaq Chart

The next two days are light regarding economic data points and save for the Best Buy and Oracle earnings updates, there are not any other marquee names scheduled to deliver quarterly reports, so it will be interesting to see if Wednesday's trade qualifies as a dip and if that dip is subsequently bought through the end of the week.

New Plays

Two Weeks

by James Brown

Click here to email James Brown


Shaw Group - SHAW - close: 35.89 change: +0.20 stop: 33.90

Company Description:
The Shaw Group Inc. (NYSE:SHAW) is a leading global provider of engineering, construction, technology, fabrication, remediation and support services for clients in the energy, chemicals, environmental, infrastructure and emergency response industries. A Fortune 500 company with fiscal year 2009 annual revenues of $7.3 billion, Shaw has approximately 28,000 employees around the world . (source: company press release or website)

Why We Like It:
SHAW is another bullish candidate that doesn't look overbought. Shares have been trending higher since the November 2009 lows but really got a boost back in January. The rally stalled when SHAW hit the $36.00 level. Yet now after five weeks of consolidating sideways in the $34-36 range shares finally look ready to breakout. I am suggesting a trigger to launch bullish positions at $36.25. The recent high was $36.15. If we are triggered at $36.25 our target to exit is $39.90. FYI: The point & figure chart is bullish with a $49 target. Please note that we will plan to exit ahead of the April 7th earnings report so we only have a couple of weeks.

Trigger to open bullish positions @ 36.25

Suggested Position: SHAW stock @ 36.25 (unopened)

Annotated chart:

Entry on March xx at $xx.xx
Earnings Date 04/07/10 (unconfirmed)
Average Daily Volume: 669 thousand
Listed on March 24th, 2010

In Play Updates and Reviews

Minor Profit Taking In Tech

by James Brown

Click here to email James Brown

Editor's Note:

Technology stocks, especially the semiconductor sector, finally saw some profit taking today. In the scope of the market's recent rally the dip today was very minor and stocks remain overbought. We have five days left before the first quarter ends.

Current Portfolio:

BULLISH Play Updates

Broadcom Corp. - BRCM - close: 33.53 change: -0.67 stop: 31.40

Ouch! Profit taking in the semiconductor sector shaved off 1.9% from the SOX. Shares of BRCM followed suit with a similar decline. If BRCM continues to dip I would look for support in the $32.50-32.00 zone. I am not suggesting new bullish positions at current levels. Our first target is $34.95. Our second, more aggressive target is $37.40 with a time frame of several weeks.

Current Position: BRCM stock @ 32.66

Entry on March 11 at $32.66
Earnings Date 04/21/10 (unconfirmed)
Average Daily Volume: 8.0 million
Listed on March 10th, 2010

Check Point Software - CHKP - close: 34.93 change: +0.08 stop: 29.95

CHKP displayed some strength today with a new 52-week high. The stock managed to briefly trade over resistance near $35.00 and hit $35.12 intraday. Volume was above average on the session. I don't see any changes from my prior comments.

I am suggesting a trigger to buy CHKP at $35.25. If triggered our target is $37.90. We'll use a stop loss at $33.90.

Trigger to open bullish positions at $35.25

Suggested Position: BUY CHKP stock at $35.25 (unopened)

Option Traders:
Suggested Position: BUY APRIL $35 call (CHKP 10D35.00) current ask $0.65

Entry on March xx at $xx.xx
Earnings Date 04/27/10 (unconfirmed)
Average Daily Volume: 1.6 million
Listed on March 23rd, 2010

CITRIX Systems - CTXS - close: 48.53 change: +0.53 stop: 46.25

Today was a good day for CTXS. Shares were showing relative strength with a 1.1% rally and the stock looks poised to breakout from this sideways consolidation we've seen over the last few sessions. I am not suggesting new bullish positions at this time. Our target to exit is $49.65.

Current Position: CTXS stock @ 46.08

Entry on March 10 at $46.08
Earnings Date 04/29/10 (unconfirmed)
Average Daily Volume: 4.5 million
Listed on March 9th, 2010

EMC Corp. - EMC - close: 18.82 change: -0.12 stop: 18.35

EMC failed at the $19.00 level again this morning. I'm surprised the stock did not show more strength, especially after shares were upgraded this morning. A Wall Street firm gave EMC a $23 price target. There is no change from my prior comments.

I'm suggesting a trigger to buy the stock at $19.05. If triggered our first target is $20.00, since this level has been resistance in the past. Our second target is $21.00 but that could take a few weeks to achieve.

Trigger to buy the stock at $19.05

Suggested Position: BUY EMC stock at $19.05 (unopened)

Entry on March xx at $xx.xx
Earnings Date 04/21/10 (unconfirmed)
Average Daily Volume: 20.4 million
Listed on March 23rd, 2010

Fortune Brands Inc. - FO - close: 49.21 change: -0.59 stop: 44.70

FO continues to drift sideways under resistance at the $50.00 level. There is no change from my previous comments. I do not want to chase it with a 20% bounce from its February lows.

Right now the plan is to buy FO on a dip at $46.00. If triggered our first target is $49.95. Our second target is $53.50 given enough time, which could take a few weeks. FYI: The Point & Figure chart is very bullish with a $60 target.

Use a trigger to buy the dip at $46.00

Suggested Position: FO stock @ 46.00 (unopened)

Entry on March xx at $xx.xx
Earnings Date 04/30/10 (unconfirmed)
Average Daily Volume: 805 thousand
Listed on March 20th, 2010

Inland Real Estate Corp. - IRC - close: 9.84 change: +0.13 stop: 8.99 *new*

The rally continues for IRC. Shares posted another rise with a 1.3% gain and another new multi-month high. Our first target to take profits is at $9.99. I full expect that shares will see a correction once they tag the $10.00 mark, which will probably be round-number resistance. More conservative traders may want to exit completely and just re-enter once the correction is over. We have a second, more aggressive target at $10.95. Please note I am raising our stop loss to $8.99. I am not suggesting new bullish positions at current levels.

Current Position: IRC stock @ $9.25

Entry on March 17 at $ 9.25
Earnings Date 05/06/10 (unconfirmed)
Average Daily Volume: 417 thousand
Listed on March 13th, 2010

Linear Tech. - LLTC - close: 28.24 change: -0.74 stop: 27.45

Profit taking in the semiconductor sector pushed LLTC to a 2.5% decline. Shares are nearing what should be support near $28.00. Nimble traders could buy a bounce near the $28 level. Our first target is $29.95. Our second target is $30.95.

Current Position: LLTC stock @ 28.25

Option Traders:
Current Position: CALL APR 28.00 (LLTC 10D28.00) @ $1.00

Entry on March 16 at $28.25
Earnings Date 04/13/10 (unconfirmed)
Average Daily Volume: 3.9 million
Listed on March 11th, 2010

Palomar Medical Tech. - PMTI - close: 11.49 change: -0.17 stop: 10.40

Uh-oh! The action in PMTI today looks like a failed rally and short-term top. The stock spiked to $11.83 before reversing. I would expect a dip back toward $11.00, possibly lower. More conservative traders may want to exit immediately.

I am not suggesting new positions at this time. PMTI has already hit our first target at $11.45. Our second and final target is $12.75. We expect to see resistance and probably a pullback near $12.00 and its 200-dma.

Current Position: PMTI stock @ 10.55

1st Target Hit (03/22/10) @ 11.45

Entry on March 16 at $10.55
Earnings Date 04/29/10 (unconfirmed)
Average Daily Volume: 132 thousand
Listed on March 13th, 2010

Veeco Instruments - VECO - close: 43.50 change: +0.14 stop: 37.95

Lack of profit taking in VECO after yesterday's big gain is a show of strength. The stock consolidated sideways the entire session and drifted higher into the close. Our first target to take profits is at $44.00. Our second target is $47.40. I am not suggesting new positions at this time.

Current Position: VECO stock @ 39.99

Entry on March 23 at $39.99
Earnings Date 04/27/10 (unconfirmed)
Average Daily Volume: 1.7 million
Listed on March 22nd, 2010

Wells Fargo - WFC - close: 30.86 change: -0.22 stop: 29.45 *new*

WFC almost hit our first target this morning with the spike to $31.28. The intraday reversal lower could be the sign of a short-term top. I am not suggesting new positions at this time and we are raising the stop loss to $29.45. Our first target to take profits on WFC is $31.35. Our second target is $32.40.

Current Position: WFC stock @ 29.53

Entry on March 11 at $29.53
Earnings Date 04/22/10 (unconfirmed)
Average Daily Volume: 38.1 million
Listed on March 10th, 2010

BEARISH Play Updates

Bally Technologies - BYI - close: 38.62 change: +0.06 stop: 40.05

Gambling and casino stocks continue to show relative strength but the sector pared its gains intraday, forming what might be a short-term top. Shares of BYI also trimmed its early morning gains. BYI is trading under technical resistance at its simple 200-dma. I remain cautious given the sector strength so I am not suggesting new positions at this time. If we see BYI close over $39.00 I'll be tempted to exit this trade.

Our first target to take profits is at $35.05 since the $35.00 level has been support in the past. Our second target is $32.00. More aggressive traders could aim for the $30 level.

FYI: This should be considered an aggressive trade. The most recent data available listed short interest at nearly 13% of the 52 million-share float. That is above average and if BYI makes a sudden move higher it raises the risk of a short squeeze.

Current Position: SHORT BYI stock @ 37.63

Entry on March 16 at $37.63
Earnings Date 05/06/10 (unconfirmed)
Average Daily Volume: 1.9 million
Listed on March 15th, 2010

Corrections Corp. of America - CXW - close: 19.50 chg: +0.10 stop: 21.26

CXW produced a minor oversold bounce but in reality spent the session drifting sideways in a very narrow range. I don't see any changes from my prior comments. Nimble traders may want to consider launching new bearish positions on a bounce or failed rally near $20.50, which should be short-term resistance. Our target is $18.00. The low in February 2010 was $17.50.

Current Position: SHORT CXW stock @ 19.90

Entry on March 19 at $19.90
Earnings Date 05/06/10 (unconfirmed)
Average Daily Volume: 1.1 million
Listed on March 17th, 2010