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Weekend Newsletter for
December 6, 2009
Read our Weekend Report online.
Table Of Contents
1) MARKET SUMMARY
2) STOCK SPLIT PLAY
3) TECHNICAL PLAY
4) COVERED CALL PLAY
Stock Split Notices Investing Q & As Glossary
1) MARKET SUMMARY
> >From "The Daily" at InvestmentHouse.com
Jobs report shows some tantalizing progress.
- Jobs report surprises with some positives but is not out of the woods yet.
- Dollar explodes higher and the related trades take a hit.
- Stocks and bonds acting as they should with a better economic outlook: growth is growing, bonds are selling.
- Leadership may be starting to rotate away from dollar trades to growth trades.
- Despite the rally on good news, the indices remain in their ranges: watching the small and mid-caps for the true direction.
Market Summary (continued)
All the action was related to the jobs report on Friday. It was much better than expected (-11K non-farm payrolls versus -125K expected). There was a sharply reduced number for October (-111K versus original -190K) and September, with a net of 159K fewer lost jobs than originally anticipated. The unemployment rate fell to 10.0% from 10.2% on top of that. It was expected to clone that for the month, so there was a significant gain. Those positives gapped futures higher; indeed, it gapped it over the midday action on Thursday. The SP futures topped out over the Thursday peak and then fell off. There were fewer losses, the revisions were positive, and the most important factor (for us) was the average workweek. It went up to 30.2 hours from 30.0. This is not just a one tenth bump as usual, so that shows significant action. Temporary employees were up. There have not been any temporaries hired of late, and those are where the full-time employees usually come from. It is good to see temps being picked up.
It was not all candy and roses, however. The work force fell by 100K. Those people have given up. It now stands at 861K, and that is significant. They say 65% of the workforce is disgruntled that is something to consider. When people start seeing the good job numbers, they will come back out in the labor force and the unemployment rate will likely rise even more. The administration was hinting at that today because that is the way it works. People hear that things are better and they go looking for jobs, but there are no real jobs yet. They will have rejoined the pool and not found a job, so the unemployment rate will tick higher. For people putting a lot of stock in 10% versus 10.2%: Remember there was a drop from 9.5% to 9.4% in September, and Robert Gibbs said this was a sign that the economy had pulled back from the brink and everything would be okay. It then immediately ran up to 10% and 10.2%, so you cannot put too much stock in one month. It could be a rogue month. The good news is the 10.2% may have been overly negative. There will be a move back up to 10.1-10.3 (or even higher) as the months unfold because more people will be looking for work given the "good news" shown on Friday.
Emergency benefits were up 265K even though the job market is supposedly getting better. They have been extended repeatedly. Someone can effectively have been on unemployment for two years now, and it is the small businesses paying that. The government keeps coming back to extort more money from them for people who are no longer working. It is a tough racket when you are a small business and your business is down. You cannot afford to have the employees anymore, yet you still have to pay for them.
Read "The Daily" Entire Weekend Summary
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Here's a trade from "The Daily" and insights into our trading strategy:
Chart by StockCharts.com
IOC (Interoil Corp.)
Company Profile
As the world industrialization spreads so too does the need for more oil, and therefore the search for oil spreads out as well. IOC engages in exploration in Papua New Guinea as well as oil and gas refining out of Australia and elsewhere.
That demand has pushed IOC higher and higher, and after a nice base and breakout in October, it tested that break in early November, coming back near the 50 day EMA. As it came off the 50 day test we put it on the report on 11/9. On 11/10 IOC broke higher and we moved in with some stock at $48.85 and some January $45 strike call options for $9.10.
IOC bounced a bit more the next session and tested the 10 day EMA on the next; it was close to the move and we were in at a good price. On 11/13 IOC gapped higher and rallied almost 7%, closing near its session high. The move looked to be on. Well, not quite. Over the next five sessions IOC tested back, coming back to the 18 day EMA at $50.21. This time that was enough testing. It started back up and logged a 12% gain in two sessions. It paused two days and then gapped higher over 8% on 12/1/09, reaching $62 on the high. That session it gapped but could not extend the move. It was at our initial target with that gap so we banked part of the gain, selling some stock for $60.95 or a 24.7% gain. We also sold some of our options for $17.10, banking $8 profit per option or 88%.
IOC is holding its move thus far, finishing the week with a lateral move. Bullish action, and as the 10 day EMA rises to meet it we will watch for a continued run higher. While IOC has returned us a nice gain to this point, this is where it gets more interesting. With this kind of trend in place a stock can continue to run far past our expectations. Thus we take some gain and let the rest run as far as it will, letting the market take us out when the stock has reached its peak. If we do otherwise we are saying we know when the stock has peaked. Sometimes it gives you a clear signal; oftentimes it just continues to work such as our plays on GLD, AAPL, BEN, etc. that just continued to run and run and run, turning very nice gains into outstanding 200% and more returns. Patience can indeed be a good thing even in the stock market.
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2) STOCK SPLIT PLAY
Playing stock splits can be very profitable, but it takes know-how. Our stock split service focuses on three main types of plays:
1) pre-announcement (where we forecast an upcoming split prior to the company making the announcement); 2) pre-split (these plays are made in the days leading up to the actual split day); and 3) post-split plays (plays made after the actual stock split where the stock is showing continued or renewed strength).
For post-splits, we can play them as we would pre-splits (very short term), but we prefer to stretch our horizons, playing the trend. When playing options, we look further out, 2 or more months at least. We let the trend carry us along if there is one, but we will also take profits if the technical pattern degenerates, e.g., breaks a trendline. The main difference between post-splits and pre-splits plays is that we really have to like the pattern. Pre-splits can run right before their splits even with poor technical indicators. For post-splits, we are looking at the stocks from more of a longer term "would I buy this stock at this juncture?" position. Now there are times when a hot stock splits and investors pile in to get in while the stock is 'cheaper.' We play those, but with more of a short-term, pre-splits mentality in that we will be ready to get out fast if the momentum fades.
Remember, everything we do has to pass muster with the market that day ... don't fight the market on these plays.
Listen to Stock Split Report Editor Jon Johnson's
stock split interview on CNBC-TV [ Broadband | Dial-up ]
Here's a post-split play and our current analysis.
Chart by StockCharts.com
DBRN (Dress Barn--$21.29; +0.36; optionable): Apparel stores
Company Profile
After Hours: $21.29
EARNINGS: 11/19/2009
STATUS: Flag. DBRN is always a retail winner, and after gapping higher on earnings it is testing near support, setting up a new entry point for us. Strong volume on the upside move, nice easy volume on the test as it holds the 38% Fibonacci level, tapping that Friday and then rebounding sharply. Plenty of pop here and ready to enter as DBRN continues the run.
CHART VIDEO
Volume: 768.466K Avg Volume: 1.125M
BUY POINT: $21.61 Volume=1.5M Target=$24.95 Stop=$20.31
POSITION: DTQ CD - Mar. $20c (64 delta) &/or Stock
Learn more about our Stock Split Report and how we have made gains of 321% with our powerful stock split plays!
Details Here.
Chart by StockCharts.com
3) TECHNICAL PLAY
LM (Legg Mason--$28.99; +0.28; optionable): Asset Management
Company Profile
After Hours: $28.95
EARNINGS: 10/22/2009
STATUS: Bear flag. After a solid run from March through September on the back of the TARP money and the liquidity from central bankers, the financial sector is in need of a rest or consolidation. LM is interesting for a number of reasons. As it hit a new high in September MACD was not bad. As it hit another new high in October, however, MACD made a lower high sign of weakness. Sold off into early November, bounced off some support at 28, but made a lower high. Indeed the lower high was at the 78% Fibonacci retracement, the point where you look for a bounce to stall. Bounced the past week but is running into resistance at the 18 day EMA and below the 50 day EMA; looks to be making a lower high in preparation for a test of the next support at 26. On a continued move lower we look to move in. That run makes us a 48% to 50% gain on our options.
CHART VIDEO
Volume: 2.59M Avg Volume: 2.403M
BUY POINT: $28.78 Volume=3.1M Target=$26.05 Stop=$29.88
POSITION: LM NF - Feb. $30p (-54 delta)
Learn more about our Technical Traders Report - Issued 5 Times Per Week
Chart by StockCharts.com
Market Data 
Markets 
