Option Investor

Daily Newsletter, Monday, 3/29/2010

Table of Contents

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

Market Wrap

Once Again, Commodities Lead Stocks Higher

by Todd Shriber

Click here to email Todd Shriber
A slumping U.S. dollar along with a rise in commodities prices and materials stocks helped lead the broader market high on Monday with all three major U.S. indexes booking solid gains on the day. The Dow Jones Industrial Average continued its march to 11,000, adding 45.5 points to close at 10,895.86 while the S&P 500 gained 6.73 points to settle at 1173.32. The index is now up 5.2% since December 31. The Nasdaq regained the 2400 level by adding 9.23 points to close at 2404.36.

Stats Table

Stocks also got a lift on news that consumer spending rose 0.3% in February, according to the Commerce Department. February represents the fifth consecutive of gains for the consumer spending number and this is indeed significant when considering that consumer spending accounts for roughly 70% of U.S. GDP. The income numbers were not all that impressive as the chart below indicates. Personal incomes rose less than 0.1% in February while disposable income, that is personal income minus taxes, rose about 0.1%. The report showed Americans saved $340 billion in February, down from about $375 billion in January.

Combine these numbers with the downward revision to fourth-quarter GDP that we saw on Friday and it is evident that while the economy is slowly getting back on the right track, it is also clear that consumers currently lack the firepower to spark the economic recovery on their own. That makes sense. After all, if income is not rising and unemployment still remains a major issue, how is the consumer going to fan the flames of the recovery?

Personal Income Chart

As I mentioned at the start, commodities and energy names saw some bullish trade on Monday as NYMEX-traded crude oil for May delivery snapped an uncharacteristic three-day losing streak, gaining $2.17 to close at $82.17 per barrel. Monday's trade in oil represented the biggest single-session gain in five weeks and the closing price is a seven-session high.

The consumer spending number helped oil prices as did a weaker U.S. dollar, but the biggest catalyst may have been news of a tragic terrorist attack at a Moscow subway station that killed 38 people and wounded another 60. Russia is one of the biggest oil and natural gas exporters in the world and analysts speculated that there are concerns more terrorist attacks may follow Monday's due to Russia's status as a major energy exporter.

Hopefully, that will not be the case, but if the market starts pricing in crimped supplies from Russia, oil prices would almost certainly move higher. As it was, Dow components Exxon Mobil (XOM) and Chevron (CVX), the two largest U.S. oil producers, both gained more than 1% on Monday. International oil majors BP (BP) and Petrobras (PBR) also made solid gains.

Oil Chart

Of course a weaker Dollar is also a boon for metals and that was evident in copper on Monday as the red metal gained 3%. Copper prices are a good segue into some talk about Freeport McMoRan Copper & Gold (FCX), a stock that I have frequently mentioned in the past, but have taken a bit of a break from over the past couple of months.

Freeport is one of the bellwether names in the materials space and if you are an investor that is looking for a quality name that still has plenty of room to run before hitting a new 52-week high, Freeport may fit the bill. The shares gained $3.71, or 4.7%, to close at $82.88 on Monday, but even after that bullish move, the shares are still well off their January peak of $90.55, also the 52-week high.

Freeport is one of the higher-beta stocks around, but it has actually lagged the S&P 500 over the past month, albeit by a small amount. If stocks continue to rally, it is unlikely that Freeport will continue lagging the broader market.

Freeport Chart

In other stock-specific news, Citigroup (C) got a 3% haircut on Monday on news that the Treasury Department will sell the 7.7 billion shares of the bank that it currently owns. The Treasury Department said it plans to part with its stake in Citi this year under a pre-defined trading plan. Assuming Citi shares keep trading around current levels, Uncle Sam would net a profit of $7 billion on the common shares and when factoring in preferred shares and warrants, the government's profit on Citi is about $15 billion.

Investors had been fretting about how Treasury would sell its stake in Citi and this appears to be the most calm and orderly way of doing so. At the end of the day, the government is getting out of Citi's way to some extent and that should be good news, so today's decline may have been a bit of ''buy the rumor, sell the news'' trading. It should also be noted that Citi has gained 30% in the past three months, so a little breather was not all that surprising. What may be surprising is the fact that Goldman Sachs (GS) is not advising Treasury on the share sale. That privilege was won by Morgan Stanley (MS).

Citigroup Chart

If you want some really bullish news, checkout one of the usual suspects, Apple (AAPL). Apple shares were fairly benign during regular trading hours, gaining $1.49, though they did make a new all-time high at $233.87 before closing at $232.39. Kiss those numbers because, as of this writing, Apple is up $6 to $238.26 in the after-hours session on news that the company is planning to introduce a new iPhone this summer that is compatible with the Verizon (VZ) network.

Verizon is the number one mobile phone carrier in the U.S., but since the iPhone's debut, AT&T (T) has had exclusive rights to the popular phone. To be sure, there has been plenty of speculation about when Verizon would begin selling the iPhone, almost to the point that the headlines became just another annoying news item.

That said, today's news appears to have some real efficacy to it. Pegatron Technology is slated to begin mass production of CDMA-capable iPhones in September and it is worth noting that Verizon uses a CDMA network. AT&T uses a GSM network. The news that Pegatron is manufacturing an iPhone is noteworthy because Apple's normal supplier is Taiwan-based Hon Hai. Hon Hai will still make iPhones, but not the CDMA-capable version.

Apple Chart

Even if a Verizon deal does not materialize in the near-term for Apple, there is still a lot of positive news regarding the use of smart phones in the U.S. The Nielsen research company issued a report today that said smart phones such as the iPhone and Research In Motion's (RIMM) BlackBerry will surpass traditional mobile phones in terms of U.S. sales by the end of 2011. The report said U.S. smart phone sales will continue moving higher over the next 18 months and account for just under half of total cellular phone sales by the fall of 2011. Smart phones currently have 29% market share in the U.S., Nielsen said.

Analysts are forecasting similar market share gains for smart phones in international markets and the iPhone should find some success in lucrative mobile phone markets such as Japan and South Korea, both of which use CDMA for the bulk of their cellular networks.

Smart Phone Sales Chart

If you are looking for a sector that has really taken off (no pun intended) take a look at aerospace. Dow component Boeing (BA) made another 52-week high after announcing positive test results for the 787 Dreamliner. Boeing has already sold 851 787s, but production delays and materials issues have put the project three years off schedule. Analysts are bullish on the stock and there has been a spate of price target increases recently that bet on Boeing rising to $85 or higher, a fair amount above Monday's close of $74.11.

Bullishness on Boeing has benefited fellow Dow component United Technologies (UTX) and General Dynamics, both of which made fresh 52-week highs on Monday. And all of this is good news for the PowerShares Aeropsace & Defense ETF (PPA), which is up 10% year-to-date, double the return offered by the S&P 500.

PPA Chart

Looking at the charts, the Dow could not make its way back above 10,900, but it did close within a whisker of that level. It remains to be seen if fund managers can dress the windows enough in the next two days to push the Dow above 11,000 before the end of the first quarter. The 10,850 area is acting as support, but a move below that number might test support at 10,700.

Dow Chart

It was encouraging to see the S&P 500 move beyond the important resistance area at 1165 today. That neighborhood could emerge as new support, but I think a firmer floor is found at 1150. Seeing 1200 this week probably is not in the cards, but I would not rule out a flirtation with 1185, particularly if the whisper number for the jobs report starts to move higher.

S&P 500 Chart

The Nasdaq was not looking healthy at the end of last week as Oracle's (ORCL) earnings report failed to move the index higher, but today's move back above 2400 may be a near-term positive. Keep in mind that the iPhone news was not reported until after the market closed, so it might be reasonable to expect the Nasdaq to get off to a good start tomorrow morning. We are still fair bit away from resistance at 2430 and much closer to support at 2385.

Nasdaq Chart

This is a short trading week and volatility should increase as we move closer to Friday's jobs report, but it appears the bulls were back in business on Monday and Apple may help that trend continue on Tuesday. Something else that caught my eye: On Friday, bellwether industrial names such as Caterpillar (CAT), Deere (DE), 3M (MMM) and AT&T all announced they would be taking charges on earnings related to the new healthcare bill and it won't be surprising to see other companies follow suit, yet all four of those stocks were up on Monday, three of them by more than 1%.

New Plays

Lower Highs

by James Brown

Click here to email James Brown


Warner Chilcott - WCRX - close: 25.69 change: +0.37 stop: 26.26

Company Description:
Warner Chilcott is a global specialty pharmaceutical company currently focused on the gastroenterology, women's healthcare, dermatology and urology segments of the North American and Western European pharmaceuticals markets. Since being spun out of Warner-Lambert in 1996, Warner Chilcott has evolved, through a series of acquisitions and divestitures, from a small seller of undifferentiated products to a fully integrated pharmaceutical company with a broad portfolio of leading branded products. The acquisition of The Procter & Gamble Company's global branded pharmaceuticals business on October 30, 2009 transformed Warner Chilcott into a global pharmaceuticals company with significant scale and geographic reach. Today, Warner Chilcott has an expanded sales force and infrastructure to better promote products in the U.S., major Western European and other markets, increased diversity of revenue sources, enhanced product development capabilities and a deeper product development pipeline. (source: company press release or website)

Why We Like It:
Shares of WCRX have had a massive run from their 2009 lows under $10.00. Yet after months of gains the trend appears to have changed. After peaking in January the stock corrected down toward the $25.00 level. The oversold bounce in March reversed producing a lower high. Now the trend of lower highs is suggesting WCRX will breakdown under round-number, psychological support at the $25.00 level.

I am suggesting we use a trigger to open bearish positions at $24.80. If triggered our first target is $22.60. The 200-dma is nearing the $22.50 region and could offer technical support. Our second, more aggressive target is the $20.25 mark.

Trigger to open bearish positions @ 24.80

Suggested Position: SHORT WCRX stock at $24.80 (unopened)

Option Traders:
BUY the April $25.00 PUT (WCRX 10P25.00) current ask $0.50

Annotated chart:

Entry on March xx at $xx.xx
Earnings Date 05/11/10 (unconfirmed)
Average Daily Volume: 1.5 million
Listed on March 29th, 2010

In Play Updates and Reviews

Unopened Plays

by James Brown

Click here to email James Brown

Editor's Note:

I am cleaning up the play list today and trimming a few of our unopened candidates.

Current Portfolio:

BULLISH Play Updates

Broadcom Corp. - BRCM - close: 33.31 change: +0.19 stop: 31.75

BRCM delivered a bounce but the short-term trend is still down. I am expecting BRCM to test support near $32.00. I am not suggesting new bullish positions at current levels. Wait for a bounce from $32.00 before considering new positions. 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

CITRIX Systems - CTXS - close: 47.98 change: -0.11 stop: 46.75

It was a rather quiet day for CTXS with shares drifting sideways in a narrow range. I'm very cautious on the stock at current levels and if we don't see a bounce soon we'll drop it from the newsletter. We are not suggesting new bullish positions at this time. Currently our target to take profits is at $49.65. More aggressive traders may want to aim for the $52.00 area.

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

Linear Tech. - LLTC - close: 28.42 change: +0.46 stop: 27.70 *new*

Semiconductor stocks saw a bounce on Monday and LLTC out performed the SOX with a 1.6% gain. This looks like a new short-term entry point for bullish positions on LLTC. If you choose to jump in now be sure to adjust your stop. We are moving our stop loss to 27.70, which is just under Friday's low.

FYI: Over the weekend I suggested readers wait for a move over $28.50 before launching new positions and wouldn't you know it - LLTC failed at $28.50 today. You may want to wait for the stock to get above this 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: 10.87 change: -0.13 stop: 10.60

The correction in shares of PMTI continues and the stock lost another 1.1%. The close under $11.00 and its 10-dma is short-term bearish. If this trend continues we could get stopped out tomorrow.

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

Shaw Group - SHAW - close: 35.73 change: +0.38 stop: 33.90

SHAW outperformed the S&P 500 with a 1.0% gain (versus +0.5%) yet I remain cautious here. Shares failed at the $36.00 level several times today. I hesitate to open new bullish positions with SHAW under $36.00.

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.

Current Position: SHAW stock @ 36.25

Entry on March 25 at $36.26
Earnings Date 04/07/10 (unconfirmed)
Average Daily Volume: 669 thousand
Listed on March 24th, 2010

UltraShort Basic Materials - SMN - close: 6.99 change: -0.22 stop: 7.15

Basic material stocks got a boost from the currency markets. The euro bounced from multi-month lows against the dollar. This dollar weakness gave commodities a boost and the rally in commodities drove gains in the basic material stocks. The SMN fell 3.0% on the session. That's okay because we're waiting for a breakout.

Use a trigger to buy the SMN at $7.70. If triggered our first target is $8.80. Our second, more aggressive target is $9.75. It could take the SMN several weeks to get this high. By its very nature this can be a volatile issue. Keep your position size small.

Trigger to buy the SMN at $7.70

Suggested Position: BUY SMN stock @ 7.70 (unopened)

Entry on March xx at $xx.xx
Earnings Date --/--/--
Average Daily Volume: 3.3 million
Listed on March 27th, 2010

UltraShort Russell2000 ETF - TWM - close: 20.39 change: -0.22 stop: 19.99

The market experienced a widespread rebound on Monday but gains were mild. Our strategy on the TWM has not changed. When the market correction begins the small caps will probably lead the way lower.

Aggressive traders could open positions now. I am suggesting a trigger to open small bullish positions at $21.55. If triggered we'll use a stop at $19.99. Our first target is $23.95 since the $24.00 level was support in the past it could be resistance now.

Trigger to buy the TWM at $21.55

Suggested Position: BUY TWM stock @ $21.55 (unopened)

Entry on March xx at $xx.xx
Earnings Date --/--/-- (unconfirmed)
Average Daily Volume: 4.5 million
Listed on March 27th, 2010

BEARISH Play Updates

Corrections Corp. of America - CXW - close: 19.82 chg: +0.21 stop: 21.26

The oversold bounce in CXW continues and shares gained 1.0% on Monday. There is no change from my prior comments. I would look for a failed rally near $20.00 or the $20.50 level before launching new bearish positions. 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


Check Point Software - CHKP - close: 34.65 change: -0.05 stop: 33.90

We have had CHKP on the newsletter for about a week and shares can't seem to get past the $35.00 level. I am temporarily removing it from the play list. I'll keep it on my watch list for an opportunity down the road. Readers may want to watch for a bounce from the rising 100-dma or a close over $35.25 as possible entry points.


Trigger to open bullish positions at $35.35

Suggested Position: BUY CHKP stock at $35.35 (unopened)

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


Entry on March xx at $xx.xx *NEVER OPENED*
Earnings Date 04/27/10 (unconfirmed)
Average Daily Volume: 1.6 million
Listed on March 23rd, 2010

EMC Corp. - EMC - close: 18.06 change: -0.50 stop: 18.45

Ouch! What happened to EMC today? The stock underperformed with a 2.69% loss on no apparent news. Traders did buy the dip near the $18.00 region, which has been support/resistance in the past. I am very concerned by the relative weakness on strong volume of 44 million shares. We are going to drop EMC as a bullish candidate. Our plan was to open positions at $19.11, which has not been triggered yet.


Trigger to buy the stock at $19.11

Suggested Position: BUY EMC stock at $19.11 (unopened)


Entry on March xx at $xx.xx *NEVER OPENED*
Earnings Date 04/21/10 (unconfirmed)
Average Daily Volume: 20.4 million
Listed on March 23rd, 2010

Fortune Brands Inc. - FO - close: 49.34 change: +0.28 stop: 44.70

I am temporarily giving up on FO. We've been waiting on the stock to correct for over a week now. Shares remain very overbought. I would move FO to your watch list and re-evaluate the stock on a dip into the $46-45 zone. Our entry point has not been triggered yet.


Use a trigger to buy the dip at $46.00

Suggested Position: FO stock @ 46.00 (unopened)


Entry on March xx at $xx.xx *NEVER OPENED*
Earnings Date 04/30/10 (unconfirmed)
Average Daily Volume: 805 thousand
Listed on March 20th, 2010