Option Investor

Daily Newsletter, Wednesday, 4/14/2010

Table of Contents

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

Market Wrap

Earnings, Economic Data Lift Stocks

by Todd Shriber

Click here to email Todd Shriber
It was a day spent in the green for equities as positive economic news and earnings reports helped stocks to fresh highs. The Dow Jones Industrial Averge plowed through 11,000 to book a triple-digit gain, adding almost 104 points to close at 11,123.11, right near the next resistance level at 11,125. Perhaps more importantly, the S&P 500 strongly moved past 1200, adding over 13 points to close at 1210.65 while the Nasdaq posted a strong gain of its own, gaining almost 39 points to finish the day at 2504.86. Hey, the Nasdaq merely needs to double again to return to its all-time high.

Stats Table

The rally in equities was aided by some positive economic news, including March retail sales, which show the consumer may be on his way back. March retail sales surged 1.6% over February's tally, helped by gains in auto and apparel sales and the fact that more folks seem to be dining out again. In a Wall Street Journal survey, many economists are now saying their economic growth forecasts for the next 18 months may prove too low and that they may be ''underestimating'' the vibrancy of the economic recovery.

If the return of the consumer proves legitimate and job growth follows, estimates for 3.1% GDP growth in the U.S. this year may prove too conservative. Barclays Capital boosted its GDP estimate to 3.5% on Wednesday after the retail sales news, the Journal reported. That makes sense because as the famous anecdote says, the consumer accounts for 70% of U.S. GDP. The Commerce Department said consumers spent $363 billion in March, up almost 8% from March 2009.

Retail Sales Chart

The Federal Reserve's Beige Book report also had investors smiling on Wednesday. The report showed economic growth in 11 of the Fed's 12 districts with the St. Louis region showing some soft economic conditions. The Beige Book data echoed the sentiments of the retail sales data, with the Fed saying retail and auto sales were firming across the country. Manufacturing activity was up in all regions except for St. Louis and real estate and tourism activity also made gains in many regions.

Auto sales were higher in eight of the 12 districts and it is fair to say in summary that the Beige Book update offered a rosy assessment of the U.S. economy. Fortunately, Fed Chairman Ben Bernanke's testimony on Capitol Hill today helped the cause. Bernanke signaled that interest rate increases were not in his near-term plans and that makes sense as inflation does not appear to be an issue right now. For those that follow bonds, I have included a chart that illustrates spreads between 10-year Treasuries and 10-year TIPS are below the averages of 2004-2007, indicating inflationary pressures are relatively benign in the current market environment.

Treasury/TIPS Spreads

We are at the start of another earnings season and after Intel (INTC) and CSX (CSX) delivered excellent reports yesterday after the close, it was JPMorgan Chase's (JPM) turn to step into the earnings confessional Wednesday morning. The Dow component and second-largest U.S. bank is widely viewed as the strongest U.S. bank and it is the first of the major U.S. financials to deliver earnings results, so yes, this news is kind of a big deal.

JPMorgan did not disappoint, reporting a first-quarter profit jump of 57% to $3.3 billion, or 75 cents a share, from $2.1 billion, or 40 cents a share, a year earlier. The bank posted revenue of $27.7 billion up from $25 billion, handily beating analyst estimates as the bank's trading and investment banking operations were standouts, accounting for $2.47 billion in profit.

The profit numbers were more tame in JPMorgan's retail banking business, but the good news is that the bank is seeing a decline in 30-day credit card delinquencies, which were down from the prior quarter and the year earlier period. The company said it had $19 billion in non-performing assets at the end of the first quarter, down from $19.74 billion at the end of last year. Non-performing loans comprised just 2.39% of the total loan portfolio, a decline from 2.77% in the fourth quarter.

That means JPMorgan set aside less cash for bad loans in the first quarter than it had in prior quarters. The first-quarter loan-loss reserve was $6.99 billion, down from $7.17 billion in the fourth quarter and $8 billion in the third quarter of 2009. One might take that to mean the economy is improving and the next logical step from there is to ponder when the bank will raise its meager dividend. After all, CEO Jamie Dimon has said that he wants to the economy improve and bad loans to subside before a dividend increase is considered.

JPMorgan currently pays a quarterly dividend of just 5 cents a share and when it comes to candidates for dividend hikes, JPMorgan is probably the most watched company out there. For his part, Dimon has tantalized and teased regarding the subject. Dimon's own forecast is for a possible dividend hike in the second half of this year. So take your pick, you have six months to choose from regarding when the market will finally be blessed with this news.

Sure, JPMorgan shares enjoyed a good day on Wednesday, adding over 4%, but it is worth noting that over the near-term, the stock has been outperformed by eight of the 10 largest U.S. banks. That may just be a footnote, but I bet a dividend increase would almost certainly boost JPMorgan shares higher.

JPMorgan Chase Chart

The positive earnings news continued to flow after the market closed as economic bellwether United Parcel Service (UPS) pre-announced its first-quarter numbers with a big upside surprise. The largest package delivery firm in the world said it earned 71 cents a share in the first quarter, compared with 52 cents a share a year earlier, easily beating the consensus estimate of 57 cents a share. Increased demand in international markets helped revenue jump 7%, UPS said.

The good news from UPS did not stop there. The company said it expects to earn $3.05 to $3.30 a share in 2010, well above the guidance of $2.70 to $3.05 a share the company issued in February. Take the middle of that range, which is $3.18 a share, and UPS would easily surpass the Street estimate of $2.95 a share.

The stock was up almost 1% during regular hours on volume that was about 20% higher than the daily average, but UPS shares rocketed higher in the after-hours session and are up $2.97, or 4.54%, to $68.42 as of this writing. As I always say, transportation companies are a great way to gauge the overall health of the economy. Combine the CSX and UPS news and this recovery might be for real after all.

UPS Chart

UPS credited strength in international markets as one reason for the boffo numbers and not to be outdone when it comes to benefiting from global markets was Yum! Brands (YUM), the operator of the Kentucky Fried Chicken, Pizza Hut and Taco Bell fast-food chains. Yum! said it earned $241 million, or 50 cents a share, in the first quarter. Excluding items, the company earned 59 cents a share, beating Street estimates of 53 cents. Yum! earned 48 cents a share a year earlier.

Revenue rose 5.8% to $2.35 billion, beating the consensus estimate of $2.26 billion. Since the chains that Yum! owns are familiar to most Americans, some folks may not realize how important international markets are to the company. Well, let me put it this way: KFC is a big hit in China. Yum! Earned $176 million in China, where it owns 3500 stores, during the first quarter.

Not surprisingly, the company said it expects Taco Bell, its strongest U.S. brand, and international markets to account for 90% of its profits this year, up from 70% in 2004, according to the Wall Street Journal. Yum! shares gained almost 2% during Wednesday's trading session on volume that was more than twice the daily average. After-hours, the stock added another 93 cents, or 2.35%, to move to an all-time high at $42.66.

YUM! Chart

Taking a look at the charts, the Dow had closed above 11,000 a couple of times prior to today, but did so in less-than-impressive fashion. Obviously, Wednesday's close was a different story and the Dow closed right near its intraday high. Where the Dow goes from here will be interesting to watch and of particular importance is whether old resistance at 11,000 can now act as support. There are no Dow members reporting earnings tomorrow, but the break in the action will be short-lived with Bank of America (BAC) and General Electric (GE) stepping to plate on Friday morning.

Dow Chart

The S&P finally made its way beyond legitimate resistance at 1200 to close right at its high of the day. The move above 1200 could prove significant as the index had failed in its two previous attempts to surpass that number. If the earnings reports that are scheduled for the rest of this week mirror what we have seen the past two days, the S&P 500 should continue its march higher.

S&P 500 Chart

Aided by Intel's earnings report, the Nasdaq is looking quite strong and has moved beyond resistance at 2500. Like the S&P 500, the Nasdaq closed right at its high of the day. Internet search giant Google (GOOG) delivers earnings after the close tomorrow and this will be another marquee report for tech investors to digest. Google shares have significantly lagged the Nasdaq in the past three months, gaining just 2% in that time compared to an almost 10% run for the Nasdaq. Analysts are expecting Google to earn $6.57 a share on revenue of $4.93 billion.

Nasdaq Chart

As long as earning reports continue to beat to the upside and companies keep offering bullish full-year guidance, the path of least resistance will be up. Investors are clearly starting to feel better about the economy and even if Google disappoints, that may be a one-off event that can be easily dealt with, particularly if Bank of American can do its best JPMorgan impression on Friday and if GE can continue its bullish ways.

New Plays

Will the Market Follow Through?

by Scott Hawes

Click here to email Scott Hawes

Editor's Note: We are going to sit tight before initiating new plays to see if the markets follow through after strong earnings reports from Intel, JPM, and CSX. Our triggers to buy SRS and PDCO were hit today. Here are a couple of stocks to watch that are presenting good set-ups:

HOC - bouncing off of an upward channel intact since December, target $28.90.
MDR - breaking out of an ascending triangle, target $33.50

In Play Updates and Reviews

We Dropped WCRX, But SRS and PDCO Were Triggered Today

by Scott Hawes

Click here to email Scott Hawes

Editor's Note:

Good evening traders. The "sell the news" event after Intel earnings I mentioned in my updates last night didn't exactly happen this time around as the rally was stoked by stellar results from CSX and JP Morgan. JP Morgan's earnings were so good this morning that it may be setting other banks up for an earnings disappointment. Any sort of earnings miss by the banks in the coming days/weeks could get a market correction going. This could be the "excuse" traders are looking for to take profits off the table and could spark some selling. Whether this happens or not will soon play out but we have positions that will benefit from a decline.

Current Portfolio:

BULLISH Play Updates

AU Optronics - AUO - close: 11.50 change: +0.10 stop: 10.90

AUO closed on its 20-day moving average today. The stock needs to get above a resistance area at $11.60 which I think would get the stock moving toward the $12.00 area fast. I am still cautious of a broader market sell-off and suggest conservative traders tighten stops. Officially we are keeping our stop at $10.90 but a logical higher stop could be placed at $11.10 which is just below AUO's 50-day SMA and recent support. This is about 2% higher than our official stop. Aggressive traders may still consider positions as I believe there is a lot of support with the SMA's and support just below. Note: I consider this an aggressive trade and recommend small position size to limit risk.

Current Position: AUO stock @ 11.77

Entry on April 05 at $11.77
Earnings Date 04/22/10 (unconfirmed)
Average Daily Volume: 2.5 million
Listed on April 3rd, 2010

BorgWarner Inc. - BWA - close: 39.04 change: +0.15 stop: 37.95

My comments on BWA remain the same. The stock continues to melt-up and looks bullish; however, I am viewing this trade as an aggressive trade at this point. If the overall market rallies it should work just fine, however, I don't want the stock to trigger our entry and then reverse. Officially our trigger to open positions is at $40.25. If triggered our target is $44.75. I am moving our stop loss up to $37.95 to limit our risk in the trade if we get triggered. Aggressive traders may consider opening positions if BWA stays above $38.40 but I would view this as a quick trade with a tight stop. The Point & Figure chart looks very bullish and is forecasting a long-term $55 target.

Trigger to open bullish positions $40.25

Suggested Position: BWA stock @ 40.25 (unopened)

Option Traders:
Suggested Position: Buy CALL May $40.00 (BWA 10E40.00) current ask $1.10

Entry on April xx at $xx.xx
Earnings Date 04/29/10 (unconfirmed)
Average Daily Volume: 1.8 million
Listed on April 3rd, 2010

Cash America - CSH - close: 41.28 change: +0.80 stop: 38.99

CSH closed higher +1.98% today and looks poised to break out higher. There is support at the $41.00 level which is about break-even for our trade. We are looking for the stock to at least retest its highs from last week at $41.50. If the stock trades to this level conservative traders should begin to tighten stops or sell into strength. We need to see CSH follow through or we will be looking exit our position. I am not suggesting new positions at this time. Our target on CSH is $42.90.

Current Position: CSH stock at $41.05

Entry on April 06 at $41.05
Earnings Date 04/22/10 (unconfirmed)
Average Daily Volume: 263 thousand
Listed on April 5th, 2010

MAXIMUS Inc. - MMS - close: 62.60 change: +0.27 stop: 59.75

MMS keeps on going and tacked on another +1.34% today. The stock looks poised to continue breaking out. This is another new all time high for MMS so I am suggesting readers be careful. I would like to place a stop at $59.75 to give this some room but if there is overall market weakness readers may want to exit the position early. Our target on MMS is $64.75. This has nothing to do with the relative strength in the stock but more to do with managing an overbought market and being nimble. I want to remind traders that this is a somewhat aggressive trade since we normally do not trade stocks with average volume under 250K a day.

Current Position: MMS stock at $62.25

Entry on April 9 at $62.25
Earnings Date 05/06/10 (unconfirmed)
Average Daily Volume: 83 thousand
Listed on March 31st, 2010

Medicis Pharmaceutical Corp. – MRX – close: $25.00 change +0.49 stop: $23.45

We bought MRX at the open today for $25.00. MRX bounced off of the support we mentioned in the new plays last night. The stock has been finding support at $24.75 level for the past couple of weeks, which is also just above prior resistance from October 2009. The stock's 50-day and 100-day SMA's are just below current levels and there is also upward trend line support. Our first target is $26.50 and our second target is $27.75, which is just below its 52-week high. Our stop is $23.45 which is near a prior resistance level and also below the aforementioned SMA's.

Current Position: MRX stock @ $25.00

Entry on April xx at $xx.xx
Earnings Date 5/06/2010 (unconfirmed)
Average Daily Volume: 1.0 million
Listed on April 13th, 2010

Patterson Companies - PDCO - close: 31.82 change: +0.59 stop: 29.95

PDCO finally broke through resistance and hit our trigger at $31.50 and followed through. We are now long PDCO stock. Our stop of $29.95 is below PDCO's 50-day SMA as well below a prior support and resistance level from early March and late February, respectively. Our stop is $29.95 and target is $34.50.

Current Position: PDCO stock at $31.50

Entry on April 14th at $31.50
Earnings Date 05/17/10 (unconfirmed)
Average Daily Volume: 975 thousand
Listed on April 6th, 2010

Powershares UltraShort Real Estate - SRS - close: 5.34 change: -0.28 stop: 4.95

SRS quickly traded down to our new entry this morning and we are now long SRS. We are using a fairly tight stop at $4.95 and will be right out of the trade if this doesn't work. Our first target is $6.10 which is just below the highs from March 22. Our 2nd target is $6.85 which is prior support from December. And our third more aggressive target is $7.15 which is just below the low on January 19. Aggressive traders can consider positions at current levels.

I want to remind readers that I consider this is a very aggressive play so please use smaller position size to limit risk. *NOTE: Although this is listed as a long position in our portfolio, this is a bearish position on real estate stocks.*

Current Position: Long SRS @ $5.25

Entry on April 14th, 2010
Earnings Date Not Applicable
Average Daily Volume: 11.0 million
Listed on April 8, 2010

BEARISH Play Updates

Powershares QQQQ Trust - QQQQ - close: 49.91 change: +0.59 stop: 50.95

On the heels of Intel's earnings, QQQQ closed higher by +1.20% and the trade is not working in our favor. I must admit that I did not think the index would rally up to this level prior to correcting, obviously. However, I am sticking with the set-up as QQQQ is still below highs last seen in May 2008 and July 2007. We need QQQQ to trade below $48.86 to get this trade going on our direction. QQQQ moving averages will also provide support if it sells off. Our target remains $47.00 which is just above the lows from March 15. Our stop is $50.95. Traders that have not entered positions could do so now and be rewarded nicely if the trade works.

Current Position: Short QQQQ at $49.05, Stop Loss $50.95

Option Traders:
Suggested Position: Buy PUT May $49.00, Ask at entry, $1.00

Entry on April 12th, 2010
Earnings Date Not Applicable
Average Daily Volume: 49.4 million
Listed on April 10, 2010


Warner Chilcott - WCRX - close: 26.83 change: +1.15 stop: 26.26

WCRX gapped up this morning and never looked back closing higher by +4.48%. Our short set-up did not get triggered and we are dropping the trade as WCRX looks poised to continue higher. WCRX is approaching a downtrend line that began in January near the $27.50 level. We may be consider this short set-up down the road with a stop at $28.50.

Suggested Position: Dropped

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