Option Investor

Daily Newsletter, Thursday, 9/16/2010

Table of Contents

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

Market Wrap

FedEx Warns, Economic Data Mixed

by James Brown

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Market Stats

The stock market's upward momentum has stalled in the last couple of days. British retail sales were worse than expected and the market was poised for some profit taking at the opening bell. The PPI report and weekly jobless claims came in slightly better than expected. Yet the Philly Fed report was a disappointment. Meanwhile the government said poverty has hit its highest levels in 15 years. Prior to the open FedEx delivered some bad news with an earnings miss, 1,700 in job cuts, and a less than bullish outlook.

The U.S. dollar was weak and gold hit a new high. There is growing speculation that the U.S. Federal Reserve is poised to announce more quantitative easing, which helps drive gold higher. Gold futures hit a new high of $1,279.50 an ounce this morning and the GLD gold ETF set a new closing all-time high of $124.63 this afternoon. Meanwhile stock market volume remains very low suggesting investors are still cautious and unsure of the rally. Fortunately, a late-day rebound in stocks pared their losses. The S&P 500 and Russell 2000 posted small losses but the NASDAQ and the Dow Industrials eked out gains. Technology was one of the best performing sectors on Thursday.

Foreign markets were trending lower. The Japanese NIKKEI index tagged a new five-week high this morning only to reverse course and close in negative territory. Yesterday the Japanese government sold an estimated two trillion yen in the currency markets to try and weaken its currency after a string of new 15-year highs against the dollar. This was the first currency intervention by Japan in six years and a record-breaking one-day sale. Yet the short-covering in the Japanese stock market stalled and the yen's decline slowed on Thursday. The NIKKEI ended the session off -0.07%.

In China the Hong Kong Hang Seng lost -0.16% after setting a one-month high on Wednesday. The Shanghai index displayed more volatility with a -1.89% correction. There could be more volatility tomorrow as traders react to comments from U.S. Treasury Secretary Tim Geithner. There is speculation that the U.S. will take a stronger stance on China and the trade deficit between the two countries. A few months ago China said it would allow the yuan to fluctuate but Geithner claims the yuan is not being allowed to move fast enough. The yuan did close at its high levels against the dollar since 1993.

European stock markets slipped toward new one-week lows. Economic data out of Britain didn't help matters. Economists were expecting U.K. retail sales to climb +0.3%. Instead the U.K. government said retail sales fell -0.5% in August after a +0.8% gain in July. This was the first decline in seven months. The English FTSE index lost -0.28%. The German DAX closed down -0.2%. The French CAC-40 fell -0.51%.

The major economic report out this morning was the August Producer Price Index (PPI). Economists were expecting a rise of +0.3%. The Labor Department reported an increase of +0.4% following a +0.2% gain in July. The headline number relieves some of the worry over deflation. Gains were driven by a big increase in energy costs. Analysts were expecting another rise in food prices but foods actually fell -0.3%. The "core-PPI", which excludes more volatile food and energy sectors, rose +0.1%, which was in-line with expectations. Tomorrow we will see the Consumer Price Index (CPI) where economists are also expecting a +0.3% increase.

The weekly initial jobless claims are improving, albeit slowly. Analysts were expecting an increase from 453,000 to 460,000. Yet the Labor Department said initial claims actually fell to 450,000. The trend has been improving after claims peaked at 504K back on August 13th. The four-week moving average fell from 478K to 465K. Continuing claims contracted 84K to 4.485 million.

One of the biggest disappointments today was the Federal Reserve Bank of Philadelphia's general economic index. Economists were hoping to see an increase from -7.7 in August to +2.0 in September. Unfortunately, the Philly Fed index came in at -0.7. It is improvement but readings under 0.0 indicate contraction in the Delaware, southern New Jersey, and eastern Pennsylvania region.

Another big disappointment today was earnings from Fedex (FDX). Wall Street was looking for a profit of $1.21 a share on revenues of $9.38 billion. The company delivered $1.20 a share on $9.46 billion. FDX said its FedEx ground, FedEx Express, and International Priority segments improved. The bigger headline was FDX's earnings warning for the current quarter, which is expected to see a profit in the $1.15-1.35 range compared to analysts' estimates at $1.36. Alan Graf, the CEO, said, "We expect continued strong demand for our package transportation services through at least December" but that may have left Wall Street wondering, what about next year? On the conference call the CEO, Frederick Smith, said "We expect a phase of somewhat slower economic growth going forward," which help set the bearish tone for FDX stock.

On a more positive note management did narrow their 2011 EPS estimates to $4.80-5.25 versus prior estimates of $4.60-5.20. FDX also claims that by consolidating some of its FedEx freight services they'll see increase profitability. This comes with a cost of 1,700 job cuts. For the quarter that just ended FDX saw revenues rise +18% to $9.46 billion. Operating income was up almost +100% to $628 million. Margins improved year over year from 3.9% to 6.6%. FDX is seen as a bellwether for the economy and the initial reaction to the news was bearish. The stock gapped open lower and closed down -3.7% at $82.72. Rival UPS lost -1.3% to close at $66.72.

In other news the U.S. Senate voted 61-38 to pass a tax-cut bill for small business. Democrats claim the new bill will create a $30 billion lending program with a focus on small business. The new bill also includes about $12 billion in tax breaks, mostly on depreciation of assets. The $30 billion in loan money is supposed to be headed for smaller banks and includes changes to the Small Business Administration's loan process that lowers fees and raises loan limits. The bill now heads back to the House for final approval. The government's Census Bureau reported this morning that our poverty level rose to 14.3% in 2009, the highest rate in 15 years. That equates to 43.6 million Americans with a family income of less than $21,954 a year or less than $10,956 for an individual. Analysts are estimating this number will hit 16% over the next ten years. Currently Mississippi, Arizona, and New Mexico have the highest levels of poverty at 20.6%, 19.6%, and 19.3% respectively.

The government-sponsored mortgage lender Freddie Mac said 30-year mortgage rates rose again for the second week in a row. Fixed rates inched up to 4.37%, which remains near all-time record lows. Unfortunately it's not helping the housing market and consumers are still finding a hard time getting approved. The Mortgage Bankers Association said mortgage applications fell 9% from a week ago. At the same time foreclosures are surging. RealtyTrac reported this morning that August was the worst month on record with foreclosures hitting a new high of more than 95,000 homes repossessed (this is the third new record in the last five months). The state of Nevada saw foreclosure filings decline 25% to one out of every 84 households. Sadly Nevada has spent the last three and a half years stuck at the top of the list for the highest foreclosure rate. Florida, Arizona and California round out the top four worst states for foreclosure filings. Housing stocks were down sharply on the news. The HGX index lost -1.9%. The DJUSHB index fell -2.9%. Shares of Pulte Group (PHM), one of the largest U.S. builders, helped lead the way with a -3.8% loss.

On a brighter note the tech sector could lead the market higher tomorrow. After hours there was bullish news from Oracle, Research in Motion, and Texas Instruments. Oracle (ORCL) reported earnings that beat the street. The company delivered a profit of 42 cents a share on revenues of $7.59 billion. Analysts were only expecting 37 cents on $7.27 billion. Operating margins improved to 39.0%, which were also better than expectations. Shares of ORCL closed at $25.36 but they were trading near $26.50 in after hours. Currently ORCL's 52-week high is $26.63.

Research In Motion (RIMM) reported earnings after the closing bell. Sentiment for the company has soured lately. The stock is down almost -40% from its highs in April. Investors are worried that RIMM is losing the smartphone battle to AAPL's iPhone and GOOG's Andriod line of phones. RIMM managed to surprise Wall Street with a profit of $1.46 a share, which was 11 cents better than expected. Revenues jumped +31% to $4.62 billion, which beat estimates for $4.47 billion. The company also raised their Q3 guidance to $1.62-1.70 a share compared to consensus estimates at $1.39. The earnings surprise and the improved guidance should have a positive impact on the stock tomorrow. RIMM closed up +2.1% at $46.49 during the regular session but shares were trading above $48.60 in after hours. Look for potential resistance near $50.00 and the 50-dma.

Semiconductor giant Texas Instruments (TXN) added to the bullish tone after hours when they announced a stock buyback program and dividend increase. Management approved an additional $7.5 billion share repurchase program on top of the $1.3 billion buyback still in place. Plus they raised the quarterly dividend to 13 cents a share. The next cash dividend is payable on Nov. 22nd to shareholders on record as of Nov. 1st. The stock was trading up over +3% in the afterhours market.

Technically the market looks tired. Stocks have seen a very sharp three-week rally that has stalled at the top of its trading range near resistance. Maybe the strong earnings news from ORCL and RIMM can provide enough of a spark to get stocks over this resistance. Maybe not. Beware an intraday reversal that sees a brief rally above resistance that fails to close over key levels. Right now the S&P 500 index looks overbought with a rally from 1040 to 1130 in a very short time. A close over resistance near 1130 could ignite a new round of short covering. A close over 1130 would also break the neckline to an inverse head-and-shoulders pattern and forecast a move toward 1240.

Daily Chart of the S&P 500 index:

Weekly Chart of the S&P 500 index:

The NASDAQ Composite could end up being the leader tomorrow. If the overnight action in ORCL and RIMM carries over then we could see the NASDAQ breakout past resistance near 2300-2310. Currently the NASDAQ looks very overbought with an almost non-stop rally from 2100 to 2300. My concern is we might see an early morning spike that fades away forming a bearish reversal pattern. If the NASDAQ fails to close over 2310 we can probably count on some profit taking. Look for a pull back toward the 2250-2230 zone.

Chart of the NASDAQ index:

The small cap Russell 2000 index has been consolidating sideways like the big cap names. However, the $RUT has yet to challenge its August highs. While I still see a bullish double bottom for the small caps this index is still trading with a bearish trend of lower highs. If stocks can mount another rally I would expect the $RUT to rise toward the 660-665 zone.

Chart of the Russell 2000 index:

Investors will continue to keep a close eye on economics. Tomorrow we'll get the consumer price index (CPI). Economists expect the CPI to rise +0.2% versus a +0.3% gain a month ago. The Core-CPI is expected to rise +0.1%. Friday will also bring the Michigan Sentiment numbers. This could be a wildcard report. Back-to-school shopping was better than expected, which suggests consumer sentiment has improved. Yet this report will also reflect attitudes during the August sell-off in stocks. Currently analysts are expecting sentiment to rise from 68.9 to 70.0.

Overall I'm optimistic given the market's recent strength but I would hesitate to launch new bullish positions with stocks overbought and struggling with resistance. I would prefer to see a correction and watch stocks build up more steam for a stronger breakout in a week or two than see a breakout tomorrow. We still have six weeks until the midterm elections.


New Plays

Breakout Tomorrow?

by Scott Hawes

Click here to email Scott Hawes
Editor's Note:
Good evening. The broader market is in a tough spot heading into OPEX. It appears we may get a breakout tomorrow on the heels of good earnings reports from RIMM and Oracle after the bell. But considering how extended this move higher has become the risk of "buying a top" is extremely high, while the risk of shorting remains elevated because prices have not started to turn down yet. Obviously there are stocks making individual moves but in general it is best to be swimming with the current, and not against it.

So it's a "catch 22" where you stand to lose in both long and short positions. Although the outlook has certainly tilted to the bullish side, the bottom line is we are stuck in an overbought situation that is unconvincing and unenthusiastic with moves in either direction. For swing trades it is smart to take a step back and wait for these conditions to be resolved which will present a lower risk situation for directional trades. I'm in the camp that dips will be bought but we need to see the retracement and it could come at anytime. And my biggest concern with a breakout is that it will turn into a head fake which is why I think it is a good idea to consider closing long positions, especially if a breakout occurs prior to a pullback.

Considering the circumstances, opening new positions without knowing a direction is not a smart move. There may be some opportunities with stocks tomorrow to short a breakout or buy pullbacks but we will not know a direction until we see the price action. Therefore, I have re-listed the two long trade set-ups from last night and have also provided two new short trade set-ups below. There is a good chance one or two of these plays will make it into the model portfolio but I wanted to give readers a heads up in case you want to time an entry. We will have new plays this weekend. Please email me with any questions or comments.

Short Set-ups:
DECK: The retail sector has been higher for 7 consecutive days but DECK looks vulnerable. The stock is consolidating below its 50-day SMA and forming a descending triangle on its daily chart. Target a move to the 200-day SMA which is about -8% lower than current levels.

TIN: The stock is close to falling out of an ascending channel formed on light volume after a strong move higher. If the pattern fails target a -$1.50 lower, which is -7.5% lower than current levels.

Long Set-ups (re-printed):
HD - Look for a pullback into the $29.00 to $29.25 area. A breakout could be considered but it a riskier trade for more nimble traders.

FWLT - The stock poked its head above prior resistance on Tuesday but closed below it today. Look for a pullback to the $23.00 to $23.50 area.

In Play Updates and Reviews

Winner Closed

by Scott Hawes

Click here to email Scott Hawes

Editor's Note:
Per last night's updates ANDE was closed today for a +5% gain. There were no significant changes to most of our positions on Thursday so I have not provided specific updates as my comments from Wednesday have not changed. The model portfolio snapshot below is current and I have provided a few notes below.

Current Portfolio:

INTU: We could be in trouble in this play as the stock broke its intraday downtrend line. A double top scenario is still in play but broader market strength could hit our stop.

VXX: I am a buyer of more volatility on a breakout and if it happens tomorrow I think new positions in VXX should be considered.


The Andersons, Inc - ANDE - close 39.00 change +1.75 stop 38.90

Target(s): 38.40 (hit), 38.95 (hit), 39.90, 41.50
Key Support/Resistance Areas: 41.50, 40.50, 39.20, 37.50 to 38.00, 35.50
Final Gain/Loss: +5.08%
Time Frame: 1 to 3 weeks
New Positions: No

9/16: Per last night's updates we are flat ANDE for a +5% gain. The stock came within 15 cents of third target before selling off. I wanted to protect profits with a tight stop in case the broader market sold off today. It looked like it was going happen on a couple of occasions during the session but stocks were saved once again. ANDE still looks great and any pullbacks to its rising moving averages may present more buying opportunities. Intraday support begins at $38.40 and $37.25 so these would be logical areas to consider looser stops. I'm happy with the gain.

9/15: ANDE has surged nearly +10% in about a week and the market is overbought so I suggest we close this position tomorrow and book a nice gain. The stock has rallied into a prior support area that lasted about 6 months from the fall of 2007 into the spring of 2008. It could be tough to break through this level without a pullback and I would rather protect profits here. Let's tighten the stop to $38.90 and if it is not hit exit the position at the close tomorrow if our targets are not reached. For readers who want to give this more time to work, additional intraday support begins at $38.40 and $37.25. These would be logical areas to consider looser stops.

9/14: We got the breakout today but it was short lived as ANDE closed only slightly positive after gaining nearly +3% in morning trading and almost hit our first target. The stock sold off the remainder of the day and printed an ugly topping tail candlestick. The good news is that today's closing price was a new 52-week high close. ANDE has solid support at current levels and below but the broader market looks ready to pullback. Readers may want to consider a tighter stop in $36.45 to $36.90 area.

9/13: ANDE closed right at $37.50 which is where the stock has struggled recently. If price keeps knocking at this level the door should open. Now we need a breakout.

Closed Position: Long ANDE stock at $38.90, entry was at $37.02

Annotated chart:

Entry on August 19, 2010
Earnings 10/28/2010 (unconfirmed)
Average Daily Volume: 180,000
Listed on August 18, 2010