Option Investor

Daily Newsletter, Wednesday, 11/24/2010

Table of Contents

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

Market Wrap

Breakout Imminent?

by Jim Brown

Click here to email Jim Brown
It would not be a normal market without a gap open and our daily change of character. Did Wednesday serve notice of a breakout ahead?

Market Statistics

After a week of negative news events we saw a flurry of positive news on Wednesday morning that helped propel the markets higher on the backs of the shorts. Starting the pre-market off on the right foot was the weekly jobless claims, which fell to 407,000 from 441,000 the prior week. This is the lowest level since the summer of 2008 and the 34,000-claim drop was the largest since July 17th. Continuing claims fell by -142,000 to 4.182 million.

This is a strongly watched number and the sharp decline was market positive. However, last week is when all the hiring peaks ahead of Black Friday. This might have been just a seasonal blip. Claims have been trending down but very slowly.

The Consumer Sentiment number took a sharp turn higher we I had been expecting. I have written about this before. Now that the elections are over I believe consumers are relieved and positive about the future of taxes and regulations. The headline number for November jumped to 71.6 and a +3.9 point spike. That is the highest level since June but still well below historical norms. The present conditions component jumped nearly 6 points from 76.6 to 82.1 while the expectations component rose to 64.8 from 61.9. Since the majority of the survey is down in the first half of the month this second half jump suggests sentiment improved significantly as the month progressed. I expect something in the 75.0 range for the first report in December.

Consumer Sentiment Chart

Personal income for October shot up unexpectedly by +0.5% compared to a -0.1% decline in the prior month. Spending also rose by +0.4%, up from +0.3% in September. Wage income posted the strongest growth since May. The saving rate rose to 5.7%. This bodes well for the holiday spending season.

The Kansas City Fed's Manufacturing Survey rallied for the third consecutive month. The headline number jumped from 10 to 21 and the highest level since April. New orders spiked to 25 from 16 and the highest level since March 2005 and employment surged to +10 from -1 and the highest level since January 2008.

This was a very good report and continued the recent trend of the regional reports suddenly showing some decent growth.

Kansas Fed Manufacturing Chart

On the negative side Durable Goods Orders declined -3.3% for October and partially offset a +5% in September. I believe this is more of a data issue than an actual material decline in orders. The biggest declines were in computer and electronics orders which fell -7.7%. There was also a -5.2% decline in transportation orders. (Aircraft)

New Home Sales declined by -8.1% to an annualized rate of 283,000. This was a decline from 307,000 in September and well below estimates of 337,000. Sales prices fell -9% over 2009 levels. The southern region was the only region to post a gain. Sales in the West and Midwest both declined over 20%. Months of supply jumped from 7.9 to 8.6. The average price of a new home declined to $198,100 from $225,900 in September. That was a -12.3% decline. Slow job growth and tight credit were still the reasons given.

New Home Sales

In stock news Amazon was reiterated with a buy rating by Citigroup and the analyst could not say enough good things about the company. He said Amazon was the only store with all 20 of the Toy Insiders Top 20 Hot Toys List. He also said Amazon offered the industry leading toy retail selection compared to Wal-Mart and Target. He said that not only did Amazon have all 20 toys but had them all at cheaper prices. Target had 75% of the list and Wal-Mart 65%. The analyst said the Kindle remained the hottest of the e-readers and e-book sales would probably be stronger than others expected. When my wife was in the hospital last week I read three books on my Kindle DX and every nurse, doctor or orderly that came in the room wanted to play with it. Amazon gained +9 on the recommendation to a new high at $177.89.

I tried to buy some of Amazon's door buster items online on Wednesday and they were selling out faster than the page would refresh. Of course they still had them at retail prices. Amazon just announced their shopping app online where you can take a picture of an item or scan its barcode and the app will show you the prices at Amazon plus the prices at all the local competitors. You can't beat that. I still expect Amazon to take a run at acquiring Netflix sometime next year.

Netflix announced a new "streaming only" plan in the U.S. in an effort to increase its 16.9 million subscriber base. Now subscribers can pay $7.99 per month and stream their movies rather than wait for the red envelope to show up in the mail. Of course that is the entry level plan. Netflix is also raising prices by a buck on the various by mail DVD plans. Coinstar's Redbox DVD service is also planning a streaming content program but they are going to partner with either Amazon or Wal-Mart on the digital platform. All of these retailers are gearing up to do battle with Comcast and the 20,000 titles that company already has online for streaming.

Research firm ComScore said e-commerce spending is likely to increase by 11% this season to $32.4 billion. I can remember when I reported the first time consumers spent more than $10 billion in online holiday shopping. Consumers have already spent $9 billion online in the first three weeks of November.

Boeing finally said they were going to announce a new delivery schedule for the 787 within a few weeks. Boeing said "foreign debris" likely caused the fire on a 787 Dreamliner and caused a halt to all flight-testing. Boeing says they don't yet know how to fix the problem but should have a fix and a new schedule in a "few weeks."

The markets recovered their losses from Tuesday but stalled once again at strong resistance. The S&P closed just under 1200 and the Dow was nipping at 11,200. However, the Nasdaq, Russell, Semiconductor Index and the Dow Transports all exceeded their resistance highs from last week and that suggests we could move higher from here.

Just because those indexes had the best day in the last two weeks does not mean the bulls are back. All were heavily shorted after the week of declines and the sudden outpouring of good news simply produced another monster short squeeze. The fact they exceeded recent resistance is a plus. I would have preferred the S&P was along for the ride but we don't always get what we wish for.

The S&P made its second round trip to support at 1175 in the last two weeks. The first drop to that level was on the 16th and the second one on Tuesday. However, Tuesday's dip had higher lows and support was solid. This makes me believe the next test will be to the upside and not back to 1175. That really depends on the news events ahead. Anything is possible.

S&P-500 Chart

The Dow came very close to 11,200 but there were still bears perched there to short the attempt even on the very low volume. A couple analysts are seeing a potential head and shoulders forming but I don't see it yet. Inside the U.S. the conditions are suddenly improving and corporate profits for Q3 were a record. Employment is starting to improve even if only marginally but it is improving. Outside the U.S. the Eurozone problems are making headlines but they really don't impact us other than demand for exports into those regions will slow. The news is pushing up our dollar and that has weighed on stocks and commodities. Korea is a non-event. This is the quarterly "in your face" provocation and it will go away. China issued some new rules and the market has accepted it.

This means the industrials in the Dow should begin to make some gains. "Should" being the operative word. I think the markets are about done looking for an excuse to sell off and should begin looking for an excuse to rally. Improving economics, rising employment and record profits are three good reasons.

If the Dow can more over 11,200 I think we would see an acceleration to the upside as the bears suddenly become converts and fund managers begin chasing performance again.

Dow Chart

The Nasdaq rallied back over the resistance at 2520-2530 and the internals were strong thanks to the corresponding rally in the semiconductors. If the traffic reports from places like Best Buy are positive for Black Friday sales then we could move higher. This is going to be an electronics Christmas and the ads for tablets, TVs, phones and computers are already blanketing the airwaves. This is positive for the Nasdaq. Let's hope it produces some follow on gains.

Nasdaq Chart

The SOX moved up very strong past the November resistance highs. It appears almost certain to break through the April highs at 400 on even a marginally positive market. Once over 400 it should trigger additional short covering and performance chasing.

Semiconductor Index Chart

The Russell turned in a terrific performance on Wednesday and appears ready to finally break through that strong resistance at 740 from April. If the Russell is successful we could begin a very nice rally through year-end.

Russell Chart

Dow Transports are on the verge of a breakout as well. The transports should energize the industrials and provide confirmation of a positive change in economic trends.

Dow Transport Chart

I was encouraged by Wednesday's rally even though it was powered by the shorts. A rebound all the way back to resistance and even higher on some indexes suggested there was also some retail buying helping to push the markets higher.

For the day before Thanksgiving the six billion shares of volume was higher than expected. Internals were 10:1 positive and there was no real evidence of any attempted selling. The bears may be on the edge of capitulation.

Asian markets are up strong on Wednesday night and our markets won’t be open on Thursday to contradict their rally. I remain bullish over 1175 and reenergized after questioning my thought process in Tuesday's decline.

Jim Brown

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New Plays

390 Years Ago

by James Brown

Click here to email James Brown

Editor's Note:

The first Thanksgiving feast was held in 1621 in the Plymouth colony in Massachusetts. That was almost 390 years ago. Yet Thanksgiving was not an official U.S. holiday until 1941.

According to the National Turkey Federation this country eats approximately 46 million turkeys at Thanksgiving. I hope you like turkey leftover sandwiches since the average turkey you find at the store is about 15 pounds, which equates to 690 million pounds of turkey meat.

Don't forget to buckle your seat belt this holiday. According to AAA more than 38 million Americans will travel more than 50 miles from home over the Thanksgiving holiday.

Speaking of Thanksgiving, I am saying "thanks" to you, our readers! Without you we wouldn't have a newsletter. It doesn't matter if you live in the U.S. or not. We all have a lot to be thankful for!

I'm not adding any new plays tonight. Enjoy your friends and family tomorrow. Don't forget that the markets are only open half a day on Friday.

- James

In Play Updates and Reviews

Airlines Soar

by James Brown

Click here to email James Brown

Editor's Note:
The XAL airline index was a big performer on Wednesday and our airline play rallied toward its highs. I remain in a buy-the-dip mode but we are starting to see more and more breakouts past resistance. If the set up looks right I'm not too opposed to buying a breakout.


Current Portfolio:

BULLISH Play Updates

Alcoa Inc - AA - close: 13.31 change: +0.18

Stop Loss: 12.45
Target(s): 14.95, 15.95
Current Option Gain/Loss: + 0.9%
Time Frame: 6 to 8 weeks
New Positions: Yes, but see below

11/24 update: AA rallied with the markets and closed with a +1.3% gain. Yet the stock is still trading under its simple 10-dma. I would use the bounce as a bullish entry point but more conservative traders may want to wait for a little follow through first.

Current Position: Long AA stock @ 13.18

Entry on November 16 at $13.18
Earnings Date 01/10/11 (unconfirmed)
Average Daily Volume: 26.1 million
Listed on November 6th, 2010

Alaska Air Group - ALK - close: 56.00 change: +1.37

Stop Loss: 59.50
Target(s): 51.90
Current Option Gain/Loss: + 1.9%
Time Frame: 8 to 9 weeks
New Positions: Yes, see below

11/24 update: Airline stocks were some of the best performers today with the XAL index up +3.7%. Shares of ALK delivered a +2.5% gain to close at new two-week highs. If you're looking for a new entry point I'd wait for a dip in the $55.00-54.50 zone. Our first target is $59.50. FYI: The Point & Figure chart is bullish with a $79 target.

Current Position: Long ALK stock @ $54.91

- or -

Long the 2011 January $60 calls (symbol: ALK1122A60) entry @ $1.60

Entry on November 22 at $54.91
Earnings Date 01/27/11 (unconfirmed)
Average Daily Volume: 331 thousand
Listed on November 20th, 2010

Abercrombie & Fitch - ANF - close: 48.19 change: -0.25

Stop Loss: 43.95
Target(s): 49.95
Current Option Gain/Loss: unopened
Time Frame: 8 to 10 weeks
New Positions: Yes, see trigger

11/24 update: After yesterday's outperformance ANF is suddenly underperforming. The stock spiked toward round-number resistance at $50.00 and reversed although shares held short-term support near $48.00. I don't see any changes from my prior comments and suggest readers buy a dip in the $46.10-45.00 zone.

Trigger to buy ANF @ $46.10

Suggested Position: Buy ANF stock @ $46.10
- or -
Buy the 2011 January $50 call (symbol: ANF1122A50)

Entry on November xx at $xx.xx
Earnings Date 02/15/11 (unconfirmed)
Average Daily Volume: 3.1 million
Listed on November 17th, 2010

Citigroup Inc - C - close 4.17 change +0.07

Stop Loss: 4.08
Target(s): 4.60, 4.75, 4.95
Current Option Gain/Loss: + 0.2%
Time Frame: 4 to 6 weeks
New Positions: Yes

11/24 update: Banking stocks bounced on Wednesday but Citigroup did not quite recover all of yesterday's losses. Shares of C are still trading in a bearish trend of lower highs and lower lows over the last two and a half weeks. I would rather see a close over $4.25 before considering new bullish positions.

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

Entry on October 27, 2010
Earnings Date 01/19/11 (unconfirmed)
Average Daily Volume: 523 million
Listed on October 25, 2010

Companhia Brasileira de Distribuicao - CBD - close: 40.98 change: +1.37

Stop Loss: 36.75
Target(s): 44.95, 49.00
Current Option Gain/Loss: + 1.8%
Time Frame: 10 to 12 weeks
New Positions: Yes, see below

11/24 update: I did mention that CBD is a volatile stock and shares rebounded with a +3.4% gain on Wednesday. Currently I would try and time new entries on dips near $40.00.

Current Position: Long CBD stock @ $40.25

Entry on November 23 at $40.25
Earnings Date 03/02/11 (unconfirmed)
Average Daily Volume: 608 thousand
Listed on November 20th, 2010

Hansen Natural Corp. - HANS - close: 54.02 change: +1.55

Stop Loss: 48.95
Target(s): 54.90, 57.45
Current Option Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

11/24 update: I am starting to worry that we have missed our entry point in HANS but I am reluctant to chase it here. However, we will adjust our entry point trigger from $51.50 to $52.00.

Trigger @ 52.00 <-- new trigger

Suggested Position: BUY the stock

- or -

BUY the January $55.00 calls (symbol:HANS1122A55)

Entry on November xx
Earnings Date 11/04/10 (confirmed)
Average Daily Volume: 750 thousand
Listed on October 16, 2010

Kroger Co. - KR - close 23.02 change +0.01

Stop Loss: 21.95
Target(s): 23.70, 24.75
Current Option Gain/Loss: + 2.0%
Time Frame: 8 to 10 weeks
New Positions: Yes, but see below

11/24 update: KR churned sideways and closed virtually unchanged on the session. There is no change from my prior comments. We can look for new entry points on a pull back into the $22.75-22.50 zone.

FYI: KR is due to report earnings before the opening bell on the morning of December 2nd. More conservative traders may want to exit ahead of the earnings report.

Current Position: Long KR stock @ 22.55

Entry on November 9th @ 22.55
Earnings Date 12/2/2010 (confirmed)
Average Daily Volume: 6 million
Listed on November 3, 2010

Lam Research - LRCX - close: 47.20 change: +1.19

Stop Loss: 42.75
Target(s): 48.50, 52.50
Current Option Gain/Loss: unopened
Time Frame: 8 to 10 weeks
New Positions: Yes, see trigger

11/24 update: The semiconductor sector continues to rally and the SOX added +2.6% today. LRCX kept pace with a +2.58% gain. While the relative strength is encouraging I don't want to chase the bounce. Use our trigger at $45.25. More conservative traders could wait for a dip into the $45.00-44.00 zone instead as their entry point.

Trigger @ $45.25

Suggested Position: Buy LRCX stock @ 45.25
- or -
Suggested Position: Buy the 2011 January $45 calls (LRCX1122A45)

Entry on November xx at $xx.xx
Earnings Date 01/27/11 (unconfirmed)
Average Daily Volume: 4.5 million
Listed on November 18th, 2010

Microsoft Corp. - MSFT - close: 25.37 change: +0.25

Stop Loss: 24.90
Target(s): 27.45, 29.00
Current Option Gain/Loss: - 0.7%
Time Frame: 8 to 10 weeks
New Positions: Yes

11/24 update: MSFT delivered a minor bounce and failed to break the two-week trend of lower highs. While I'm long-term bullish on this stock the short-term action is worrisome. I don't see any changes from my prior comments. This pull back into the $25.00-25.50 zone looks like an entry point but the short-term trend is down! Alternatively more conservative traders could wait for a close over $26.10 instead.

Current Position: Long MSFT stock @ 25.55

- or -

Buy the 2011 January $25.00 calls (symbol: MSFT1122A25) Entry @ $1.39

Entry on November 17 at $25.55
Earnings Date 01/27/11 (unconfirmed)
Average Daily Volume: 68.4 million
Listed on November 15th, 2010

Onyx Pharmaceuticals - ONXX - close: 29.82 change: +0.31

Stop Loss: 26.45
Target(s): 32.00, 34.50
Current Gain/Loss: unopened
Time Frame: 8 to 10 weeks
New Positions: Yes, see trigger

11/24 update: ONXX is bouncing from the bottom of its trading range. Currently our trigger is to buy a dip at $28.60 but more aggressive traders may want to consider an entry point on a breakout past $30.60 instead.

Trigger @ $28.60

Suggested Position: Buy ONXX stock @ 28.60

Entry on November xx at $xx.xx
Earnings Date 02/23/11 (unconfirmed)
Average Daily Volume: 1.1 million
Listed on November 13th, 2010

Overseas Shipholding Group - OSG - close: 36.60 change: +0.54

Stop Loss: 34.75
Target(s): 39.90, 42.00
Current Option Gain/Loss: + 0.2%
Time Frame: 4 to 6 weeks
New Positions: Yes

11/24 update: OSG delivered a bounce from $36.00 and matched +1.49% gain seen in the S&P 500 on Wednesday. I remain bullish on the stock and would use this bounce as a new entry point.

Previous Comments:
If OSG can breakout to new relative highs the stock could see a short squeeze. The most recent data listed short interest at 20% of the float. We should consider this trade higher risk. The Baltic Dry Goods index has been falling, which suggest shipping rates are sinking. OSG has managed to trend higher in spite of this decline in the $BDI. Investors should also be worried about the long-term trend of lower highs in OSG. Keep your position size small to limit risk.

Current Position: Long OSG stock @ $36.50

- or -

Long the 2011 January $40 calls (OSG1122A40) Entry @ $0.78

Entry on November 23 at $36.50
Earnings Date 03/01/11 (unconfirmed)
Average Daily Volume: 600 thousand
Listed on November 22nd, 2010

Sony Corp. - SNE - close: 35.00 change: +0.55

Stop Loss: 32.90
Target(s): 35.75, 39.00
Current Option Gain/Loss: unopened
Time Frame: 10 to 12 weeks
New Positions: Yes, see trigger

11/24 update: Foreign markets bounced with Japan up +0.4%. SNE outpaced its homeland with a +1.59% gain. There are no changes from my prior comments. I'm suggesting we wait for a dip toward short-term support near $34.00. If triggered our first target is $35.75 with a stop loss t $32.90.

Trigger @ $34.00

Suggested Position: Buy SNE stock
- or -
Buy the 2011 APRIL $35 calls (SNE1116D35) current ask $2.45

Entry on November xx at $xx.xx
Earnings Date 02/03/11 (unconfirmed)
Average Daily Volume: 888 thousand
Listed on November 23rd, 2010

Tractor Supply Co. - TSCO - close: 42.39 change: +0.55

Stop Loss: 39.45
Target(s): 44.95
Current Option Gain/Loss: unopened
Time Frame: 8 to 10 weeks
New Positions: Yes, see trigger

11/24 update: TSCO managed to breakout past short-term resistance near $42.00 but it did not see much follow through past the opening gap higher. I don't see any changes from my previous comments. More aggressive traders will want to seriously consider launching bullish positions on a breakout over $42.00. For now our trigger remains at $40.75.

Buy-the-Dip Trigger @ $40.75

Suggested Position: Buy TSCO stock
- or -
Buy the 2011 January $45 calls (symbol:TSCO1122A45)

Entry on November xx at $xx.xx
Earnings Date 01/27/11 (unconfirmed)
Average Daily Volume: 751 thousand
Listed on November 11th, 2010

BEARISH Play Updates

Corporate Office Properties - OFC - close: 34.29 change: +0.47

Stop Loss: 36.65
Target(s): 32.25, 30.25
Current Change: - 2.2%
Time Frame: 6 to 8 weeks
New Positions: No

11/24 update: After sinking to new multi-month lows yesterday OFC eked out a +1.3% bounce today. The trend is down but shares are arguably short-term oversold. Look for overhead resistance near $35.00. I am not suggesting new bearish positions at current levels. Our first target is $32.25.

Current Position: Short OFC stock @ 35.07

Entry on November 10 at $35.07
Earnings Date 02/09/11 (unconfirmed)
Average Daily Volume: 1.0 million
Listed on November 9th, 2010