Option Investor

Daily Newsletter, Monday, 11/1/2010

Table of Contents

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

Market Wrap

Pre-Election Nothing

by Todd Shriber

Click here to email Todd Shriber
Bets on a pre-election rally looked safe early in Monday's trading session, but the major U.S. indexes could not hold the morning's gains eventually finding their way into the red. That is where the Nasdaq would finish with a small loss while the Dow Jones Industrial Average and the S&P 500 were able to manage only meager gains on the day. A close below 700 for the Russell 2000 could prove to be cause for concern.

Stats Table

It was another day of a mixed bag of economic data as personal incomes dropped for the first time in a year, leading to a smaller-than-expected rise in consumer spending during September. The Commerce Department said personal incomes fell 0.1% last month, the first decline since July 2009, and consumer spending rose by just 0.2%. The median estimate of 67 economists surveyed called for a 0.4% rise in consumer spending. On the bright side, the Commerce Department revised the August consumer spending number to an increase 0.5% from 0.4%.

Personal Incomes & Spending Chart

The Institute For Supply Management October manufacturing data was a bit more impressive, coming in at 56.9 compared to an estimate of 54.5. That is good for 15 consecutive months of expansion. ISM's Robert Nore detailed the following: ''Survey respondents note the recovery in autos, computers and exports as key drivers of this growth. Concerns about inventory growth are lessened by the improvement in new orders during October. With 14 of 18 industries reporting growth in October, manufacturing continues to outperform the other sectors of the economy.''

As I always, the devil is in the details as comments like these highlight: ''The dollar is weakening again, which is resulting in higher costs for our materials we purchase overseas. It is hurting our profit margins.'' And ''Currency continues to wreak havoc with commodity pricing.'' The first is from survey respondents in the transportation equipment group, the second is from those in the food, beverage and tobacco groups.

ISM Chart

One group that did shine on Monday was oil stocks. There was a some mergers and acquisitions news involving Exco Resources (XCO), an independent oil and gas producer. The company received a $4.36 billion management-led buyout offer and that helped the shares jump more than 30%, good for the biggest rally in the stock since its 2006 initial public offering.

Exco CEO Doug Miller is offering $20.50 a share in cash, an offer that values Exco at a 38% premium to where the stock closed on Friday. This is clearly a bet that natural gas prices will rebound from their recent lows as that fuel accounts for 93% of Exco's output, according to Bloomberg News. That may prove to be a tough bet to turn into a winner because energy producers seem intent on continuing to tap shale resources throughout North America, bringing more supply to market at a time when prices clearly show that is not the best of strategies.

Exco has over 1 trillion cubic feet of reserves and for those of you that are not familiar with the company, one of its largest shareholders is legendary energy investor T. Boone Pickens.

Exco Resources Chart

Staying in the oil patch, oil services firm Baker Hughes (BHI) caught a bid not only because oil services are extremely sensitive to price action in crude futures, but also on its own merits. By that I mean an excellent third-quarter earnings report that saw the company post a profit of $255 million, or 59 cents a share, compared with $55 million, or 18 cents a share, a year earlier. Revenue soared 83% to $4.08 billion $2.23 billion.

Analysts were expecting a profit of 47 cents a share on revenue of $3.8 billion. Texas-based Baker Hughes said the results were helped by its $5.5 billion acquisition of BJ Services, which closed in April. Going beyond that catalyst, the company's comments were inline with what other oil services and integrated names have been saying following their third-quarter results and that is the rush to onshore drilling (shale plays) was a positive catalyst in the quarter while the moratorium on deepwater drilling in the Gulf of Mexico restrained earnings to some degree.

Baker Hughes Chart

All was not well on the earnings front for energy names, though. After the bell, Anadarko Petroleum (APC), the independent oil and gas producer that owned a 25% non-operating interest in the now infamous Macondo well project, reported a third-quarter loss of $26 million, or 5 cents a share, compared with a profit of $200 million, or 40 cents a share, a year earlier. Excluding one-time charges, Anadarko earned 21 cents a share and that missed the consensus estimate of 28 cents a share.

In an environment where a profit miss is one thing, but a revenue miss is far worse, Anadarko went down that unfortunate road by saying revenue declined 11%. Anadarko has previously said it is refusing to pay BP (BP) for costs related to the Gulf spill, citing the British company's negligence in drilling the Macondo well.

BP reports earnings on Tuesday morning London time and in what cannot be considered a surprise, Bloomberg ran a headline today saying that the company's profit will probably be lower in the third quarter than it was in the same period in 2009. Not exactly a shocking revelation. Back to Anadarko. The shares are down almost 1.3% in the after-hours session.

Anadarko Chart

Obviously, this is week is chocked full of marquee events. Tuesday is Election Day. Wednesday brings the conclusion of the Federal Reserve's two-day meeting and the expecation of more quantitative easing. As if that is not enough, October non-farm payroll news will hit the wires on Friday morning. So unless you have been keeping a close eye on the soap opera that is BHP Billiton's (BHP) $38.6 billion hostile takover bid for Potash Corp. (POT), it would be easy to forget that Canada's government will make its ruling on BHP's offer on Wednesday.

Whether you are a fan of the materials space or not, this is a pretty interesting story that seems to change by the hour. Late Sunday night, press reports were saying BHP, the world's largest mining company, was considering raising its offer for Potash, the world's largest fertilizer maker, by 10%. That would value Potash at $143 a share, up from the current offer of $130.

Then some stories crossed the wires that said BHP would not rush to increase its offer. This morning, UBS was out with a note that saying that BHP could take its offer as high as $165 a share. What is important to remember is that while BHP has never officially ruled out raising its bid, it has not really embraced the idea either. At the end of the day, if Potash is looking to create shareholder value through a sale it has BHP's offer and... (insert crickets chirping here).

Potash Chart

Looking at the charts, it is the same old song with the S&P 500 and the 1185 area. It looked like the index was going to break resistance at 1190, and it did intraday, but those gains did not hold. Then it looked like the index would flirt with support at 1175, which it did, only to find its way back to 1184. With the election outcome effectively priced in, I would not expect an exciting day on Tuesday.

S&P 500 Chart

Looking at the Dow's six-point gain for the day might leave you thinking it was a boring day for the blue-chip index. In fact, the Dow was quite volatile, trading in a 180-point range. The Dow looked like it was going to conquer resistance at 11,200, but those gains could not be held either. That is still resistance and support can still be found at 10,975.

Dow Chart

The Nasdaq snapped its eight-day winning streak after starting the day off in fine form. The index opened at 2520, a significant resistance area and quickly made its way above that area only to give up those gains and trade below 2500. About the best thing that can be said about the Nasdaq is that it was able to muster a close above 2500. Support can still be found at 2490 and 2480.

Nasdaq Chart

The Russell 2000 closed below the psychologically important 700 level. This could be a case of some pre-election profi-taking or sign of bad things to come, but as I noted a couple of weeks ago, stocks have moved higher following the last 17 mid-term elections and the fourth quarter is favorable to stocks anyway, so it would be a surprise to see fund managers take a pass on small caps once we get out of this week.

Russell 2000 Chart

Nearly everyone has a rooting interest in tomorrow's election and no one seems to be lacking an opinion on QE2. Maybe it is time to relax a bit and just root for the Giants to win the World Series. Sorry Yankees and Red Sox fans, but on a historical basis, stocks perform better following a World Series victory by a National League team.

New Plays

Short Retail Play

by Scott Hawes

Click here to email Scott Hawes


SPDR S&P Retail ETF - XRT - close: 43.20 change: -0.41 stop: 44.55

Target(s): 41.40, 40.60
Key Support/Resistance Areas: 44.30, 42.50, 41.20, 40.40, 50-day SMA
Current Gain/Loss: Unopened
Time Frame: 1 to 2 weeks
New Positions: Yes

Company Description:
SPDR S&P Retail ETF (the Fund) seeks to replicate as closely as possible the performance of the S&P Retail Select Industry Index (the Index). The Index is an equal weighted market cap index. The Index represents the retail sub-industry portion of the S&P Total Market Index. The Fund invests in industries, such as apparel retail, automotive retail, food retail, department stores, Internet retail, general merchandise stores, drug retail, and hypermarkets and super centers.

Why We Like It:
Weak personal income and spending data released today, along with weak consumer sentiment that was released on Friday, could be hinting at another slow holiday shopping season. Throw in an overbought market and retailers are ripe for some profit taking. I suggest readers initiate short positions in XRT at current levels. XRT has support at $42.50 so conservative traders may want to wait for this level to break prior to entering positions. However, we also have a good reference point just above the the recent highs to place a tight protective stop if XRT decides to move higher first. Our targets are -4% and -6% lower than current levels.

Suggested Position: Short XRT stock
Options Traders: Buy December $43.00 PUT, current ask $1.71

Annotated chart:

Entry on November XX
Earnings Date N/A (unconfirmed)
Average Daily Volume: 10 million
Listed on November 1, 2010

In Play Updates and Reviews

Most Positions Performing Well

by Scott Hawes

Click here to email Scott Hawes
Current Portfolio:

BULLISH Play Updates

Boyd Gaming - BYD - close 8.34 change +0.03 stop 7.80

Target(s): 8.55, 8.70, 8.90
Key Support/Resistance Areas: 9.60, 9.25, 8.75, 8.00, 7.40
Current Gain/Loss: +1.71%
Time Frame: 1 to 2 weeks
New Positions: Neutral

11/1: Make that 5 days BYD has consolidated between support at $8.10 and resistance at $8.50 to $8.75. All of the comments below remain valid. Use strength to take profits or tighten stops to protect them. I've narrowed the targets slightly and our stop is just below to control losses if the stock breaks lower.

10/30 (James): BYD has spent the last four days consolidating sideways under resistance near $8.50. The overall pattern looks bullish but if the market corrects I wouldn't be surprised to see BYD retest its 50-dma (and stopping us out in the process). I hesitate to launch new positions at this time given our expectation for a market pull back later in the week. However, nimble traders could try and buy another bounce near $8.00. Please note I'm adjusting our stop to $7.80.

Current Position: Long BYD stock, entry was at $8.20

Entry on October 14, 2010
Earnings 10/27/10 (unconfirmed)
Average Daily Volume: 1.8 million
Listed on October 9, 2010

Citigroup Inc - C - close 4.15 change -0.02 stop 3.78

Target(s): 4.60, 4.75, 4.90
Key Support/Resistance Areas: 4.30, 4.00
Current Gain/Loss: -0.24%
Time Frame: 3 to 4 weeks
New Positions: Yes

11/1: News broke today that the SEC is investigating a CDO deal that involved JP Morgan. I bring this up because C was frequently involved in CDO transactions and if there is an inquiry at JPM maybe there will be one at C. There is now headline risk in the position, and considering a possible market correction may be on the horizon, readers should use caution. Tighter stops could be considered just under $4.00.

10/30 (James): Wow! If there was ever a sign that investors are just sitting on their hands look at the last four days in Citigroup. The stock closed at $4.18, $4.17, $4.17, and $4.17. I am cautious on the banking stocks. C does seem to have a little bullish channel growing but I would prefer to buy dips near the bottom of the channel (see chart).

Suggested Position: Long C stock, entry was at $4.16
Options Traders: Long December $4.00 CALL

Entry on October 27, 2010
Earnings Date More than two months (unconfirmed)
Average Daily Volume: 523 million
Listed on October 25, 2010

Hansen Natural Corp. - HANS - close: 51.48 change: +0.27 stop: 43.90

Target(s): 50.00, 52.50,
Key Support/Resistance Areas: 45.00, 47.50, 50.00, etc.
Current Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see below for details

10/30 (James) & 11/1: HANS is one of those stocks that has continued to run away from us. We don't want to chase it. The good news is that I'm expecting a market correction soon, following the FOMC announcement on Wednesday. The bad news is that HANS can be a volatile stock. While I agree that the $48.00 level should be support I suspect that HANS will fall further than $48. I'm adjusting our trigger to open positions to $45.50 (down from $48.25). We'll move our stop loss to $43.90. Hopefully we'll get triggered in the next week or two.

Suggested Position: BUY the stock at $45.50

- or -

BUY the December $50.00 calls (on a dip at $45.50).

Entry on October xx
Earnings Date 11/04/10 (unconfirmed)
Average Daily Volume: 4.5 million
Listed on October 16, 2010

TJX Companies - TJX - close 45.85 change -0.04 stop 44.75

Target(s): 46.70, 47.20, 47.95
Key Support/Resistance Areas: 48.50, 47.00, 45.40, 43.50
Current Gain/Loss: +0.72%
Time Frame: 2 to 4 weeks
New Positions: No

Comments :
11/1: TJX closed relatively flat on the day. I do not see many changes from the comments below and believe this is the best strategy. We have a tight stop below if TJX doesn't head higher from here. I would use strength as an opportunity to take profits or tighten stops to protect them.

10/30 (James): I am urging caution in TJX. The bullish breakout on October 25th lasted about four days. The action in just the last couple of days looks like a short-term bearish reversal. I would look for a pull back toward the $45.40 level again. I'm adjusting our stop loss even higher to $44.75. FYI: Earnings are due out around Nov. 16th.

Suggested Position: Long TJX stock if it trades to $45.52

Entry on October xx
Earnings Date 11/16/10 (unconfirmed)
Average Daily Volume: 3 million
Listed on October 18, 2010

iPath S&P500 Short-Term VIX ETF - VXX - close: 13.22 change: +0.10 stop: 11.99

Target(s): 15.00, 17.50
Key Support/Resistance Areas: 12.00, 14.00, 15.00, 17.50. 20.00
Current Gain/Loss: +0.92%
Time Frame: 1 to 2 weeks
New Positions: Yes

11/1: Volatility started to climb after the initial gap higher and early strength in the S&P 500. However, the early strength failed after the first 45 minutes of trading. We are long VXX per the play release below and are looking for a quick move higher.

10/30: I want you to look at a two-year chart of the VXX. That's what happens when volatility contracts from record levels. Plus, this ETN has been sabotaged by contango issues. Contango happens when future contracts are more expensive than spot (short-term) contracts. This VIX ETN lost money every time they had to replace expiring contracts with higher price ones. With that in mind we do NOT want to hold this ETN for very long.

This is a very short-term bet that volatility is going to spike significantly come this Wednesday after the FOMC announcement regarding any QE program. You can launch positions on Monday morning (with the newsletter) or you can wait until Wednesday. The key is to have bullish positions open ahead of the FOMC announcement. I'm only expecting to hold this position for a week maybe a little longer. I'm suggesting a stop loss at $11.99. Our first target is $15.00. Our second target is $17.50. More aggressive traders could aim higher.

FYI: You need to know that Barclays is planning a 1-for-4 reverse split for this ETN scheduled for November 9th, 2010. Hypothetically, if the VXX was trading at $13.00 on November 8th and you had 40 shares. On November 9th you would have 10 shares worth $52 each. It is possible we will be in and out of this trade before the reverse split occurs.

Current Position: Long the VXX (ETN), entry was $13.10

Entry on November 1, 2010
Earnings Date N/A (unconfirmed)
Average Daily Volume:
Listed on October 30, 2010

BEARISH Play Updates

Cree Inc. - CREE - close: 50.11 change: -1.18 stop: 54.05

Target(s): 48.00, 42.50
Key Support/Resistance Areas: 54.00, 52.00, 50.00, 48.00, 46.00, 40.00
Current Gain/Loss: +2.98%
Time Frame: 4 to 6 weeks
New Positions: Yes

11/1: Short positions in CREE were opened this morning. The stock gapped higher at the open and them immediately turned lower. CREE closed about -3% lower from its opening high and looks to be headed lower. $48.00 is the immediate target which is where the stock found support in September and October. A break below $47.30 should send the stock to $46.00 with ease.

10/30: Traders were unhappy with CREE's recent earnings report and shares collapsed to their 2010 lows. The oversold bounce has stalled under new resistance near $52.00. Given the stock's under performance I expect shares to break support near $48.00 and hit new lows before November is over.

I'm suggesting new bearish positions now. We'll use a stop at $54.05. Our first target to take some money off the table is $48.00. Our second, longer-term target is $42.50.

FYI: Traders may want to buy the puts on CREE instead of shorting the stock. There were some rumors last month that CREE was a takeover candidate. If a bid for the company appears it could be very painful for those short the stock. The put limits your risk to what you paid for the option. Plus, CREE already has a high amount of short interest (about 24% of the float) so any unexpected rallies could turn into short squeezes. For this reason you may want to limit your position size.

Current Position: Short CREE stock, entry was at $51.65
Options Traders: Long 2010 December $50 PUT (CREE1018X50)

Entry on November 1, 2010
Earnings Date more than two months (unconfirmed)
Average Daily Volume: 4.9 million
Listed on October 30, 2010

Leggett & Platt, Inc. - LEG - close 19.98 change -0.40 stop 21.75

Target(s): 19.80, 19.20
Key Support/Resistance Areas: 22.00, 21.70, 21.50, 21.30, 20.55, 19.70, 19.00
Current Gain/Loss: +2.98%
Time Frame: 1 to 3 weeks
New Positions: No

11/1: LEG lost nearly -2% today and came within 9 cents of reaching our first target. If the broader market corrects we should be able to take profits this week. Readers may want to consider a tighter stop near $20.75.

10/30 (James): Whew! LEG's chart is ugly but I'm not sure I would launch new bearish positions at these levels. There has not been much of an oversold bounce yet and that's a positive for us. At the same time, how much of the bad news has already been factored in? The path of least resistance is probably down but I might wait for a new failed rally before considering new positions.

Current Position: Short LEG stock, entry was at 20.49
Options Traders: Long December $20.00 PUT

Entry on October 25, 2010
Earnings Date: More than two months (unconfirmed)
Average Daily Volume: 1.5 million
Listed on October 23, 2010

Mechel OAO - MTL - close 23.68 change +0.13 stop 24.60

Target(s): 22.30, 21.25, 20.25
Key Support/Resistance Areas: 24.25, 24.00, 23.60
Current Gain/Loss: -1.63%
Time Frame: 1 to 3 weeks
New Positions: Yes

11/1: Friday's bounce in MTL continued on Monday and the stock closed above its 200-day SMA. The stock rallied up to touch its 50-day SMA from below for the first time since it broke below on 10/21, which is where today's selling began. There is resistance at current levels but we are going to need to see the broader market correct to see MTL make new lows and reach our targets. .

10/30 (James): Bingo! MTL has rebounded back toward short-term resistance near $23.50 and its 200-dma. Our trigger to launch bearish positions was hit at $23.30. If you missed the entry point I would still consider bearish positions today or you could wait for a bounce toward $24.00 and technical resistance at its 50-dma. Please note I am adjusting the stop loss to $24.65.

Current Position: Short MTL stock, entry was at $23.30
Options Traders: Long December $23.00 PUT (entry @ $1.30)

Entry on October 29, 2010
Earnings Date: More than two months (unconfirmed)
Average Daily Volume: 2.1 million
Listed on October 27, 2010