Option Investor

Daily Newsletter, Monday, 5/17/2010

Table of Contents

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

Market Wrap

Stocks Erase Losses, Book Small Gains

by Todd Shriber

Click here to email Todd Shriber
It was another volatile day on Wall Street as Europe's debt woes continued to be a thorn in the side of the bulls with the Euro falling to a four-year low intraday. That helped the Dow Jones Industrial Average plunge as much as 184 points before reversing course to notch a gain of almost six points to finish the day at 10,625.83. The S&P 500 gained just over a point to settle at 1136.94 while the Nasdaq added about 7.4 points to close at 2354.23. Small-caps saw some positive trade as well with the Russell 2000 adding 1.73 points to finish the day at 695.71.

Stats Table

Showing how fragile investor sentiment is these days and how deep the impact of the European imbroglio really is, there were really no negative headlines or news events to encourage such a steep sell-off this morning. Lowe's (LOW), the second-largest U.S. home improvement retailer, said its first-quarter profit rose 2.7% to $489 million, or 34 cents a share, from 32 cents a share a year earlier. Sales jumped 4.7% to $12.39 billion. The North Carolina-based company raised its 2010 outlook, but the forecast stilled missed analyst estimates and Lowe's shares finished the day lower by 3.1%. So in the search for negative Monday catalysts, the Lowe's profit report may have been among them.

Lowe's Chart

There were a couple of economic data points that probably would have had stocks trading much higher in a more docile market environment, but with volatility being the order of the day recently, bullish news from the likes of the National Association of Home Builders is easy for investors to gloss over. The NAHB said its home builders confidence index rose to 22 in May from 18 in April, the highest level in almost three years as builders are feeling more optimistic for the market for single-family homes.

The latest survey shows about 20% of builders feel the market is ''good.'' A reading of 22 is a far cry from the all-time of 72 seen in June 2005, the go-go days of the real estate bubble, but 22 is also a lot better than the eight the index registered in January 2009. It should be noted that the $8,000 home buyer tax credit expires in June and that may impact the confidence of builders going forward.

The May Empire State Manufacturing Index was also released on Monday, and while the index showed manufacturing activity in the New York region continues to increase, it did so at a slower pace in May, falling to 19.1 from 31.9 in April. While new orders and shipments trended lower, the index of the number of employees rose to its highest level in six years. Overall, investors did not appear to be impressed by the report and this is not the market environment in which to attach the word '''slower'' to the word ''growth.''

Empire State Manufacturing Index

A spate of mergers and acquisitions news was also overshadowed by declining risk appetite. Three deals each worth over $1 billion were announced on Monday. Astellas Pharma, Japan's second-biggest drugmaker, said it will acquire OSI Pharmaceuticals (OSIP) for $4 billion in cash. United Health Services (UHS) agreed to by Psychiatric Solutions (PSYS), an operator of mental health facilities for $2 billion in cash and Man Group said it will purchase hedge fund GLG Partners (GLG) for $1.6 billion.

The Wall Street Journal reported that private equity firm Apollo Group is interested in acquiring Pactiv (PTV), the maker of Hefty trash bags. No price tag was reported, but with today's jump of almost 19%, Pactiv is now sporting a market cap of almost $3.80 billion. Pactiv shares had been flat this year and some analysts had applied the ''undervalued'' tag to the stock, but the shares may have some more upside in them if Apollo announces a bid above $30 per share. One media report did note that anything above $33 a share might be a bit rich.

Pactiv Chart

So even with a vibrant M&A market, stocks still managed to post only meager gains, showing that they are still in fact held hostage to substantial declines in risk appetite. High-beta, risky fare, whatever label one chooses to use are places to avoid these days. Among the riskiest of that risky fare is oil and the Euro. Crude and the Euro are seemingly joined at the hip these days, which is only good news if you are a Dollar bull.

Concerns over Europe's debt situation abated for all of one day (last Monday). The region's debt woes make its common currency perhaps the most accurate temperature check on investors' willingness to incur risk and that temperature is quite low right now. Only Monday's late-day rally saved the Euro from finishing the U.S. trading session at a four-year low against the greenback.

If you watch enough CNBC, you are bound to hear more than a handful of pundits say that Euro is do for a near-term technical bounce. That would be good news for stocks because the Euro and the S&P 500 are 87% correlated to each other, according to Reuters. On the other hand, the Euro's fundamentals are still dubious, meaning any rally will probably only be technical in nature and short-lived at that.

Euro/Dollar Chart

Oil is not offering any shelter. NYMEX-traded crude for June delivery tumbled for a fifth straight session, trading as low as $69.27 a barrel on Monday. It seems like ages ago that oil traversed $87.15 a barrel, but in reality, that event took place two weeks ago today. With Monday's close at $70.08, oil has plunged almost 21% in two weeks and volatility should remain high this week ahead of the June contract's expiration on Thursday.

A couple of weeks ago, I wrote piece on Oilslick.com citing a technical analysis report that said if oil fell below $80, $65 could be the next stopping point. At the time, I was not sure that would actually happen. Now it looks like a matter of when, not if. Either way, Monday's closing price was crude's lowest since December 14, 2009 and speculation that Chinese demand may be topping out is not helping matters for oil bulls.

Oil Chart

Sure, the Dow finished last week in positive territory, but that was more a result of last Monday's European bailout rally than anything else. By the end of the week, that 400-point gain had been pared to 239 due to Friday's loss of 163 points. Given that the index spent a good part of Monday down by triple digits, it is hard to be excited by a gain of less than six points.

Support at 10,700 failed and the lower high at 10,900 may be near-term resistance, assuming the Dow can reclaim 10,700. Monday's close at 10,625.83 means support at 10,350 could become an issue as early as this week if European debt concerns continue to pressure stocks.

Dow Chart

Prior to this recent decline, I mentioned several times that analysts would probably have to adjust year-end targets for the S&P 500 because 1200 was taken out earlier than most investors had expected. With the index hovering around 1136, support at 1100 could be tested in the near-term and that is the 200-day moving average as well.

With ''sell in May and go away'' already at work, a violation of 1100 would test old support at 1085. Further declines in the Euro and oil could make either of those numbers a reality sooner rather than later and with resistance appearing firm in the 1175 neighborhood, the S&P 500 is going to have its work cut out if it wants to take out the April peak of 1219 by the time fourth quarter rolls around.

S&P 500 Chart

The Nasdaq had a couple of shots to break above 2400 last week, but it failed and Monday's close barely nudged the index above Fridy's close, which was the lowest since the crash. Leadership from big-cap tech names appears to be a broken theme and there is something else to consider regarding the Nasdaq's weakness. The index is home to a healthy amount of Chinese stocks and with that market officially in bear market territory, even names like Baidu (BIDU) could be more of a drag than a helping hand for the Nasdaq. A violation of 2300 brings 2215 into play.

Nasdaq Chart

Small-caps are showing signs of strength, a curious phenomenon given that most investors are shying away from risk. The Russell 2000 added to last week's gains today and the iShares S&P SmallCap 600 Index (IJR) was also up on more than triple its average daily volume. Closing at almost 696 puts the Russell 2000 well above support at 650, but that could mean a sell-off in small-caps could be fast and furious.

I am a believer that small-caps outperform large-caps coming out of a recession and the historical data supports this assertion, but running into this asset class right now may not be advisable, particularly when better prices may be right around the corner.

Russell 2000 Chart

Overall, I am far from impressed that stocks rallied off their lows on Monday and do not view that move as a sign to start buying. Enthusiasm for Europe's bailout package waned quickly and the unfortunate reality is that the Eurozone does not have much more in the way of good news to offer. I would not be running to buy much of anything beyond inverse ETFs and puts to protect existing profitable long positions.

New Plays

Two New Long Candidates

by Scott Hawes

Click here to email Scott Hawes


Broadridge Financial Solutions - BR - close 21.32 change -0.28 stop 20.36

Company Description:
Broadridge Financial Solutions, Inc. (Broadridge) is a provider of technology-based solutions to the financial services industry. The Company operates in three business segments: Investor Communication Solutions, Securities Processing Solutions, and Clearing and Outsourcing Solutions. Broadridge serves the clients in the financial services industry, including retail and institutional brokerage firms, global banks, mutual funds, annuity companies, institutional investors, specialty trading firms, and clearing firms. The Company also provide services to the corporate issuers. During the fiscal year ended June 30, 2009 (fiscal 2009), the Company distributed over one billion investor communications, including proxy materials, investor account statements, trade confirmations, tax statements and prospectuses; processed an average of over 1.6 million equity trades, and served over 100 correspondents through its securities clearing services. (source: company press release or website)

Target(s): 22.40, 22.75
Key Support Areas: 21.00, 20.65
Key Resistance Areas: 22.00, 22.45, 23.00
Time Frame: Several weeks

Why We Like It:
BR has pulled back right into an upward trend line from October 2, 2009 and I believe the stock is poised to bounce from here. The stock also has strong horizontal support just above $21.00 and again at $20.75 and $20.50. Our stop will be below these levels at $20.36. From a fundamental perspective BR trades at a low 13.3 PE ratio and I believe this stock would benefit from financial reform due to the record keeping and technology services they specialize in. I believe the overall market could bounce from here as well which will help long positions. Our time frame several weeks and our target $22.40.

Suggested Position: Long BR Stock at current levels.

Annotated Chart:

Entry on May xx
Earnings Date More than 2 months (unconfirmed)
Average Daily Volume: 1.2 million
Listed on 5/15/10, 2010

AMR Corp. - AMR - close 7.31 change +0.15 stop 6.60

Company Description:
AMR Corporation (AMR), incorporated in October 1982, operates in the airline industry. The Company’s principal subsidiary is American Airlines, Inc. (American). As of December 31, 2009, American provided scheduled jet service to approximately 160 destinations throughout North America, the Caribbean, Latin America, Europe and Asia. AMR Eagle Holding Corporation (AMR Eagle), a wholly owned subsidiary of AMR, owns two regional airlines, which do business as American Eagle - American Eagle Airlines, Inc. and Executive Airlines, Inc. (Executive) (collectively, the American Eagle carriers). American also contracts with an independently owned regional airline, which does business as AmericanConnection (the AmericanConnection carrier). (source: company press release or website)

Target(s): 7.95, 8.25, 8.65
Key Support Areas: 7.00, 6.85
Key Resistance Areas: 8.00, 8.30, 8.70
Time Frame: Several weeks

Why We Like It:
Prices of AMR stock are coiling from a period of higher lows and lower highs dating back to October 2008. The stock is sitting on an upward trend line dating back to March 2009 and appears to be headed to the longer term downtrend line which is up towards $9.00. The stock also just broke out above a shorter term downtrend line that started with the highs on April 26th and has turned down to retest the backside of that trend line (see oval on chart). AMR also made a double bottom at about $7.00 from 5/12 and today and bounced nicely. There is also strong support $6.85 which provides a great reference point to place a stop just below at $6.60. I am looking for AMR to rally up to $7.95 which is our first target and about +9% from current levels. Our second and third targets are $8.25 and $8.65 respectively.

Suggested Position: Long AMR stock at current levels.

Annotated Weekly Chart:

Entry on May xx
Earnings Date More than 2 months (unconfirmed)
Average Daily Volume: 19 million
Listed on 5/15/10, 2010

In Play Updates and Reviews

Two Winners Closed

by Scott Hawes

Click here to email Scott Hawes

Editor's Note:

Good evening. We closed our IWM and USG short positions today for nice gains of +5% and +6%, respectively. We also opened TIE as it traded down near our trigger. KWK and LEG were opened as well from the weekend's new plays.

I am expecting a relief rally in the market here to potentially close the gap lower from Thursday to Friday. This is about +20 S&P 500 points from today's close. In reality, I think we may be in a sideways consolidation mode for weeks or months which will eventually resolve itself to the downside. The S&P range I'm focused on is 1,115 to 1,170. However, I believe there is more downside risk than upside opportunity. I urge readers to take profits on positions when they can as getting chopped around is not fun. Stay on your toes.

Current Portfolio:

BULLISH Play Updates

Dr. Pepper Snapple Group - DPS - close 38.00 change +0.75 stop 32.49

Target(s): 36.80, 38.80
Key Support Areas: 35.75, 34.75, 32.70
Key Resistance Areas: 36.80, 37.45
Current Gain/Loss: N/A
Time Frame: Several weeks
New Positions: Waiting for trigger

DPS continues to show overall relative strength compared to the market but at some point it has to trade to its 20-day and 50-day SMA's which currently are near our trigger $35.00. For this reason I would like to leave this position open for a few more days to see if selling kicks in. So we will wait patiently for the pullback to our trigger near $35.00. If there is significant weakness in the market DPS should make it down here and I want to be ready to take advantage of it. If triggered our stop is $32.49. Please keep your position size small since the market has been so volatile.

Suggested Position: Long DPS stock if it trades near $35.00

Entry on: May xx
Earnings Date: More than 2 months (unconfirmed)
Average Daily Volume: 1.9 million
Listed on: May 8, 2010

Quicksilver Resources, Inc. - KWK - close 12.59 change -0.24 stop 11.75

Target(s): 14.25
Key Support Areas: 12.35, 12.00
Key Resistance Areas: 13.25, 14.00
Current Gain/Loss: -0.55%
Time Frame: Several weeks
New Positions: Yes

KWK sold off hard after the open but recovered nicely. A looking for a move up to the $14.25. My comments from the weekend remain the same. Natural gas has built a nice base over the last two months and I believe the commodity and natural gas stocks are due for a rally. KWK has exhibited great overall strength during the past week as the overall market has been under pressure. The stock has very strong support at $12.00 which was a prior resistance level dating back to October 2008. KWK has been trading in sideways channel between $12.00 and $16.00 for the past 9 months and now finds itself at the lower end of the channel. The stock broke an upward trend line from November 2009 a couple of weeks ago and I am looking for it to turn back higher and retest the back side of that trend line which is right where our target of $14.25 is. This price is about +11% higher than today's price. In addition, KWK made a double bottom from 11/2009 2 weeks ago and has responded nicely. I suggest readers initiate long positions at current levels to take advantage of the momentum. We are going to place a wide stop at $11.75 which is below the double bottom and sideways channel.

Current Position: Long KWK Stock at $12.70.

Entry on May 17, 2010
Earnings Date More than 2 months (unconfirmed)
Average Daily Volume: 3.0 million
Listed on 5/15/10, 2010

Titanium Metals - TIE - close 16.84 change -0.57 stop 14.70

Target(s): 17.30, 18.00
Key Support Areas: 16.00, 15.50, 15.00
Key Resistance Areas: 16.00, 16.70, 17.25
Current Gain/Loss: +2.34%
Time Frame: Several weeks
New Positions: Yes

TIE traded down near our entry target at so we are long the stock $16.25. TIE traded as low as $16.08, then bounced and turned back to test the low but it didn't make it that far. When the stock made the higher low it was our queue to enter. TIE has support just above $16 which we need it hold for this trade to work. The 20-day SMA and 50-day SMA are just below as well and should act as good support. We are looking for TIE trade back up $17.30, which would garner a nice +6.5% gain. Our second more aggressive target is $18.00 which is near recent highs and highs from May 2008. Readers who haven't entered positions can do so on pullbacks. There is intraday support around $16.40 to $16.50 level. Tighter stops to could also be place at $15.70 and $15.20 for readers who want to limit risk.

Current Position: Long TIE Stock at $16.25

Entry on May 17, 201
Earnings Date 8/4/2010 (unconfirmed)
Average Daily Volume: 3.8 million
Listed on 5/10/10, 2010

BEARISH Play Updates

Baidu, Inc. ADR - BIDU - close 73.98 change -1.66 stop 79.10

Target(s): 71.50, 65.10
Key Support Areas: 71.40, 68.50, 65.00
Key Resistance Areas: 75.64, 78.50, 82.25
Current Gain/Loss: +3%
Time Frame: Several Weeks
New Positions: Yes

BIDU came very close to hitting our first target at $71.50 today. The stock traded down to $71.64 before buyers stepped in. I still think BIDU looks vulnerable from here but if there is a bounce in the overall market we may endure a little pain before its heads back down. We need BIDU to break below $71.50 to get moving towards our final target of $65.10. From a fundamental perspective BIDU trades at a PE ratio of about 100 which makes no sense when compared to its American counterpart GOOG which trades at a PE of about 23. Our stop is $79.10 which is above last Wednesday's high. This stock can be volatile and is prone to gaps so please be smart when considering position size.

Current Position: Short BIDU stock at $74.25.

Option Traders:
Suggested Position: Buy JUNE $73.00 PUT

Entry on May 14, 2010
Earnings July 15, 2010 (unconfirmed)
Average Daily Volume: 68 million
Listed on May 13, 2010

Leggett & Platt, Inc. - LEG - close 24.18 change +0.10 stop 25.35

Target(s): 22.25
Key Support Areas: 23.75, 23.00
Key Resistance Areas: 24.75, 25.15
Current Gain/Loss: -3%
Time Frame: Several Weeks
New Positions: Yes

LEG traded as low as $23.42 at about noon today and our short position was rocking, however, buyers stepped in and the stock closed +3.2% off of its lows. This has created a huge bottom wick on its daily candlestick chart. We are still well below the highs from 4/30 and 5/13 which is the recent downward trend line. Today's price action has me a little concerned but I want to give this some room to develop. I'll leave my comments from the play release over the weekend. LEG is making a lower high on its daily chart and appears overextended at these levels. The stock has upward trend line support below but this support is about -8% lower from current levels. Resistance just overhead includes downward trend line resistance and recent highs at $24.75 and $25.15. I am looking for LEG to trade lower from here to about the $22.25 area which is our target. I suggest readers take advantage of this by initiating short positions in the stock. The overall market looks vulnerable here and LEG probably won't be spared. Our stop is $25.35.

Current Position: Short LEG stock at $24.00

Option Traders:
Suggested Position: Buy JUNE $25.00 PUT

Sina Corporation - SINA - close 34.85 change -0.26 stop $37.05

Target(s): 33.25 (hit), $33.50, 32.50, 30.50
Key Support Areas: $33.40 32.50, 30.50
Key Resistance Areas: 35.40, 36.00, 36.80
Current Gain/Loss: +0.29%
Time Frame: 1 week
New Positions: Aggressive traders only

SINA reported earnings after the bell that were better than expected but their Q2 revenue forecast was lower than consensus estimates. The after hours reaction is fairly muted but it is well off its highs. I'm a little concerned that China's market sold off on hard Monday (-5%) but SINA hung in there relatively well. So if the overall market gets a relief bounce, including Chinese markets, SINA could go against us here. The stock opened at $34 and was immediately bought up to $34.34 which was near our anticipated resistance of $35.40. The stock sold off quickly but was bought up again at the close. I'd like to see how the stock reacts tomorrow and may be looking for a quick exit of SINA trades higher from here.

Current Position: Short SINA stock at $34.95

Option Traders:
Suggested Position: JUNE $35.00 PUT

Entry on May 4,2010 at $34.95
Earnings Date May 17, 2010 (unconfirmed)
Average Daily Volume: 1.1 million
Listed on May 1, 2010


iShares Russell 2000 - IWM - close 69.56 change -1.37 stop 73.10

Target(s): 69.05 (hit), 68.05 (hit), 67.05
Key Support Areas: 68.60, 67.75, 66.75
Key Resistance Areas: 70.50, 72.10, 72.60
Current Gain/Loss: +5.16%
Time Frame: About 2 weeks
New Positions: Closed

IWM plunged down to our $68.05 target so we are flat the position for +5.16% gain. worked out beautifully this week and our first target of $69.05 was hit twice on Friday. After the stock hit our target it traded down to $67.75 and then spent about the next hour hovering just above $68.00, but then the bounce started pushed IWM to about breakeven on the day. For readers who still have positions I would be careful of a further bounce from here. There is intraday resistance near $70.50 which you could use as a tighter protective stop. $70.75 is probably where I would place the stop. But I'm concerned IWM could blow right through this level.

Closed Position: Short IWM stock at $68.05, entry was at $71.75

Option Traders:
Suggested Position: Buy JUNE $72.00 PUT

Annotated Chart:

Entry on May 13
Earnings Date More than 2 months (unconfirmed)
Average Daily Volume: 79 million
Listed on May 12, 2010

USG Corp. - USG - close 20.53 change -0.42 stop 23.25

Target(s): 20.50 (hit), 19.25, 18.25
Key Support Areas: 20.85, 20.25, 19.25.
Key Resistance Areas: 21.70, 22.50
Current Gain/Loss: +6.39%
Time Frame: About 2 weeks
New Positions: Closed

USG had another big down day closing -2.00% lower. USG hit our target of $20.50 so we are flat the position for a +6.39% gain. USG traded as low as $19.58 and if readers closed positions at this level it would have been over a +9% gain. But I'm not complaining about a healthy gain. If USG rallies from here we may consider reloading for another short. For readers who still have positions I urge you to protect profits and not let USG reverse higher. I see intraday resistance at current levels and at about $21.25.

Closed Position: Short USG stock at $19.50, entry was at $21.90

Option Traders:
Suggested Position: Buy JUNE $20.00 PUT

Annotated Chart:

Entry on May 12, 2010
Earnings Date More than 2 months (unconfirmed)
Average Daily Volume: 7.5 million
Listed on May 11, 2010