Option Investor

Daily Newsletter, Monday, 10/11/2010

Table of Contents

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

Market Wrap

Calm Before The Storm?

by Todd Shriber

Click here to email Todd Shriber
It was not the most exciting of Mondays and there may good reason for that as a flood of earnings reports start trickling in tomorrow. Whether it was traders taking a breather before the profit reports start coming or speculation that more quantitative easing is on the way from the folks at the Fed, volume fell to its lowest level of the year today. No major economic or earnings reports and the bond pits being closed for Columbus Day made for a pretty boring Monday.

Stats Table

Well, commodities continue to be a thrill-ride and I am talking about much more than just gold and oil. Obviously, the weak dollar is good news for a batch of other commodities and several have been on fire over the past few months. Coffee, cotton and corn among others have been juggernauts recently, fueled not only by the weaker greenback, but also by legitimate demand and therefore supply concerns.

The U.S. Agriculture Department published a report on Friday that said this year's corn crop in the U.S. would come in at 12.7 billion bushels, down from last year's 13.1 billion bushels. Barclays put out a report today that said U.S. corn production is on track for its third-highest level on record. That may sound like bad news, but with high levels of consumption here at home and international buyers craving more corn, these are go-go days for corn futures.

Corn futures jumped over 5% today to close at $5.5575, the highest price seen since 2008. Combine consumption and export demand and U.S. corn supplies are at their lowest levels in 14 years, according to the Associated Press. Barclays describes the situation well, saying ''The global corn market...suddenly finds itself on thin ice.''

Corn Chart

The boom in agriculture commodities means good things for the shares of fertilizer producers and farm equipment companies like Deere (DE), but if you are looking for a name beyond the usual suspects that is looking strong, try farm equipment maker AGCO (AGCO). The stock was up as much as 10% intraday last Friday as options volume soared, most of it on the bullish side, and the shares tacked on another 2.34% today on better-than-average volume.

AGCO Chart

While volume left a bit to be desired, there was some mergers and acquisitions news worth noting today. Last week, I mentioned that specialty apparel retailer Gymboree (GYMB) was looking to sell itself, likely to a private equity buyer, and that is exactly what happened today. Bain Capital will take Gymboree private in a deal worth $1.8 billion. That values Gymboree at $65.40 a share, a tidy 23.5% premium to where the shares closed on Friday.

More impressive is that Bain is paying a 57% premium to where Gymboree shares traded before the rumors crossed the wires in late September. San Francisco-based Gymboree looks to be a solid bet for Bain Capital given that the retailer had beaten earnings estimates in the past six quarters and is sitting on over $132 million in free cash and no long-term debt. News of the Gymboree takeover sent rivals like Carter's (CRI) and Children's Place (PLCE) higher on speculation that they would be the next retail targets of a private equity buyer.

Oddly enough, Bain Capital was not among the suitors initially mentioned as having an interest in Gymboree. Even more odd is that an analyst at Buckingham Research downgraded Gymboree last week. The shares surged $11.88, or 22.4%, to $64.83 today on volume that was over 20 times the daily average.

Gymboree Chart

Not surprisingly, there was a healthy dose of M&A news out of the energy patch today. The energy sector has been the most active in terms of international M&A activity this year and looks intent on holding onto that crown with some shale acquisition news that was announced over the weekend.

When it comes to shale plays, it seems like Bakken and Marcellus grab most of the headlines, but it was the Eagle Ford Shale in south Texas that was at the epicenter of this weekend's M&A activity. Norway's Statoil (STO), one of Europe's five largest oil companies, and Canada's Talisman Energy (TLM) said they will pay $1.33 billion to acquire oil shale properties in Eagle Ford. The properties the companies are acquiring may offer up to 1000 drilling sites and an estimated 800 million barrels of oil equivalent. Statoil and Talisman also have an option to acquire an additional 22,000 acres in the region.

Perhaps the bigger news is Cnooc's (CEO) agreement to pay $2.16 billion for a third of Chesapeake Energy's (CHK) Eagle Ford project. Okalhoma-based Chesapeake has been a voracious seller of shale assets to international buyers this year, having sold shale acreage to Indian and European companies, but the deal with Cnooc represents the largest purchase of a U.S. energy asset by a Chinese company to date.

Remember that Cnooc tried to acquire Unocal in 2005 and was rebuffed due to political opposition. China's largest offshore oil driller and the country's third-largest oil producer will pay Chesapeake $1.08 billion for 33.3% of the U.S. firm's 600,000 Eagle Ford acres and pay another $1.08 billion toward Chesapeake's drilling costs.

Press reports also mentioned Cnooc as a likely suitor for BP's (BP) 60% stake in Argentina's Pan American Energy, that country's largest oil exporter and second-largest oil producer. The reports said Cnooc could pay up to $10 billion for the BP interest in Pan American. Cnooc already owns 20% of the Argentine firm through its acquisition of Bridas. For more extensive coverage of these issues, head over to OilSlick.com.

Cnooc Chart

Earnings season really gets going after the close on Tuesday when Intel (INTC), the world's largest semiconductor manufacturer, delivers third-quarter results. With the Nasdaq managing a close above 2400 today, tech bulls need Intel to get back to handily beating estimates and guiding higher to give the Nasdaq a near-term pop before the likes of Amazon (AMZN) and Apple (AAPL) deliver their results. Analysts are expecting Intel to post a profit of 50 cents a share on revenue of $10.99 billion.

Do not forget about railroad operator CSX (CSX), which usually reports on the same day at the same time as Intel. That means the CSX report has a tendency to be overshadowed by the Intel news, but it is no less important. As I am always so fond of saying, railroad operators are an excellent way of gauging the health of the broader economy, so listen for what CSX has to say about shipments of cars, construction products and other economically sensitive fare. Analysts are expecting a profit of $1.04 a share on revenue of $2.66 billion.

Looking at the charts, with today's meager gain the S&P 500 is still hovering just above 1165, meaing the index is still locked in the 1155-1165 trading range. As long as support at 1150 holds, that is a positive sign, but the catalysts should be in place this week for the S&P 500 to make a run at resistance at 1175. If the earnings reports do not support the index at least challenging 1175, I would be concerned.

S&P 500 Chart

The Dow Jones Industrial Average is in a similar spot. One earnings report, Alcoa (AA), has come and gone and did not mean much, as I predicted. In addition to Intel, JPMorgan Chase (JPM) and General Electric (GE) are the Dow members slated to deliver earnings updates this week. Resistance is 11,200 and support is 10,975.

Dow Chart

Well, the Nasdaq has managed two consecutive closes above 2400 and that is probably the most exciting thing about the index that can be noted until we get the Intel number. On its own, the Intel number probably will not be to get the Nasdaq to its next resistance hurdle in the 2420-2425 area, but if the report is bullish, it should help the Nasdaq's cause. Support can be found at 2370.

Nasdaq Chart

The Russell 2000 did not do much of anything on Monday, but the chart continues to look strong as the index is trading well above support at 675. Round-number resistance at 700 needs to be taken care of before more significant resistance at 725 can be addressed.

Russell 2000 Chart

I am not overwhelmed by the last couple of days of trade in stocks, but the bears have not been able to make any progress. The rally has not gotten much help from financials and JPMorgan Chase could do something to change that later this week with a strong profit report. If financials started to participate, that would legitimize this rally in a significant way.

New Plays

Medical Services

by Scott Hawes

Click here to email Scott Hawes


PerkinElmer, Inc - PKI - close 23.27 change +0.39 stop 22.35

Company Description:
PerkinElmer, Inc. is a provider of technology, services and solutions to the diagnostics, research, environmental, safety and security, industrial and laboratory services markets. The Company operates in two business segments: Human Health and Environmental Health.

Target(s): 24.25, 24.85, 25.35
Key Support/Resistance Areas: 25.40, 24.40, 23.30, 22.50
Time Frame: 1 to 2 weeks

Why We Like It:
PKI has been in a solid uptrend since its July lows and is finding resistance at $23.30. The stock is forming a high tight ascending triangle and looks poised to breakout and retest its 52 week highs which are more than +8% higher than current levels. Conservative traders may want to wait for a break above today's high and enter positions at $23.50, while more nimble traders could try to time a pullback into the $23.00 area or its 20-day SMA. Officially, we'll use a trigger of $23.10 (just above today's low) or $23.50 (just above today's high), whichever occurs first. The stock is consolidating above its 20-day SMA (currently $22.81 and rising) and an upward trend line. Our stop is just below the recent swing low which will keep losses under control if the pattern fails.

Suggested Position: Long PKI stock if it trades to $23.10 or $23.50. whichever occurs first.

Annotated chart:

Entry on October xx
Earnings 11/4/10 (unconfirmed)
Average Daily Volume: 1.4 million
Listed on October 11, 2010

In Play Updates and Reviews

Little Movement Monday

by Scott Hawes

Click here to email Scott Hawes

Editor's Note:
Good evening. Monday was a painfully light volume day in the equity markets as US bond markets and banks were closed for the Columbus Day federal holiday. There was virtually no movement in our model portfolio with the exception of a set-back in our short XLNX position. As a result, I do not have many changes to my weekend comments. I have provided an updated portfolio snapshot, along with a few new comments on each position, plus reprinted comments from the weekend that remain valid. We currently have 4 positions that have not been triggered (LOGI has been dropped). We have come close on all of them and patience should payoff with good entries should we get triggered in the coming days. Please refer to the weekend updates for more details and feel free to email me with any questions.

Current Portfolio:

BULLISH Play Updates

BYD - The stock traded to within 9 cents of our trigger before bouncing more than +2% higher. Let's remain patient and see what BYD gives us in the coming days.

ITRI - The dip was bought again in ITRI. Our trigger remains at $61.00 and suggest we use the dip as a buying opportunity. If triggered, our targets are +4.5% and +6.5% higher. The stock has trend line support along with its 20-day SMA which is rising but not at as rapid of a pace as last week.

TC - TC came within 12 cents of our $11.10 trigger to enter long positions. $11.00 offers solid support so I suggest we remain patient. Please refer to the released play on Saturday for more details.

BEARISH Play Updates

FLIR - My comments from the weekend remain the same. We may have missed the move in FLIR. I can not chase it lower at these levels. Let's see what the stock give us in the next few days. If it can manage a bounce back up towards $26.00 it will find a brick wall at its declining 20-day SMA and prior resistance. Let's adjust the trigger down 5 cents to $25.85.

MSFT - MSFT gained +2 cents today and my comments from the weekend have not changed. The stock is consolidating below its converging moving averages and looks like it wants to turn back down. The stock tends to be a slow mover but if the market corrects it has the potential to go quick. I think our stop is in the right place and suggest we give this some time to work.

QQQQ - QQQQ gained +2 cents today and I suggest we initiate the same strategy to manage the play as today. I remain leery of any gap higher which could be sold into. I am also leery of possible volatility with the FOMC minutes released tomorrow afternoon as it feels like we could get a false breakout. As such, this is how I suggest readers manage the trade. Temporarily remove the stop and wait for Monday's open. If there is a gap higher near our stop, place a new protective stop above the opening range. This provides us the chance to measure the true strength or weakness of QQQQ. Often times this will keep you in the trade and looking for a better exit. At these elevated levels it would not surprise me to see a gap higher and an immediate sell-off so we don't want to have a GTC stop in place that gets taken out if QQQQ is only going to head lower. This is just a scenario. If the markets are surging higher and convincingly break the opening range then we need to get out of the way.

XLNX - The stock closed +2% today on no news that I could find. The whole semiconductor space performed well which may be in anticipation of Intel's earnings tomorrow after the bell. XLNX has resistance at current levels but I think our stop may be too tight. I want to temporarily raise the stop to $27.42 to account for possible volatility tomorrow and Wednesday. This is an aggressive move so conservative traders may want to leave it in place or simply exit positions.


LOGI - LOGI refused to let us in long positions and broke out, closing nearly +4% higher on the day. As such, we have dropped the play. Playing the breakout is an intraday proposition and I would be using tight stops.