Forbes/Schaeffer’s Options Report
WEEK OF Monday, November 03, 2008
|
please forward this to a friend! |
SPECIAL OFFER
| Option Idea of the Week: Biovail (BVF) |
Biovail (BVF)
Like most of Wall Street, the pharmaceutical sector has been impotent against the heavy selling pressure plaguing the broader market during the past few months. A slowdown in the economy and an influx of generic drugs has helped push this sector lower. Specifically, the AMEX Pharmaceuticals Index (DRG) has plunged more than 21% so far in 2008, breaking below long-term support in the 280 region and pulling its 10-week and 20-week moving averages into a bearish cross. What’s more, while the index has rebounded from its near-term lows in the 230 area, the DRG is now finding staunch resistance in the 270-275 area – a region that marked the index’s lows in September 2002.
Despite the sector’s weak performance, there is still some optimism lingering in its sentiment backdrop. The composite Schaeffer’s put/call open interest ratio (SOIR) for DRG components rests at 0.31, in the lower half of its annual range. Meanwhile, Zacks.com reports that only 6.6% of analysts covering DRG stocks rate them a "sell," despite the poor technical performance. This configuration leaves the sector vulnerable to potential downgrades, or an unwinding of lingering optimism from options traders, as the group stumbles lower.
Digging into the pharmaceutical sector, we find several potential candidates that appear primed for bearish trading opportunities. One stock that has performed particularly poorly is Biovail (BVF). As you might suspect, the company develops, manufactures, and distributes pharmaceutical products. BVF also provides a wide range of services – from research and development, clinical testing and regulatory filings, to full-scale manufacturing.
Technically speaking, the stock has been in a steep decline since July 2007, falling more than 68% from its highs near $26.50 per share. The equity is currently struggling to hold onto support at the 8-9 level, as it battles resistance at its descending 10-week and 20-week moving averages.
 Despite this weak performance in the shares, options players are betting on a rebound. The SOIR, which compares put open interest against call open interest among options that expire in less than 3 months, stands at 0.18. This low reading indicates that call open interest more than quintuples put open interest among near-term options. What’s more, this ratio is lower than 98% of all those taken during the past year, indicating that options traders have been more optimistic only 2% of the time in the prior 52 weeks.
The International Securities Exchange (ISE) and the Chicago Board Options Exchange (CBOE) have also reported a preference for call trading. During the past 10 trading days, the exchanges have reported an average of 18 calls purchased to open for every put. This ratio of calls to puts is higher than 76% of all those taken during the past year, underscoring the bullish sentiment we saw in the stock’s SOIR.
Finally, Wall Street remains mixed on the shares. According to Zacks, the stock has earned 3 "buys," 3 "holds," and 1 "sell" rating. That said, one would have expected to see more pessimism from this group, and given BVF’s poor technical performance, we could see potential downgrades exacerbate the stock’s downward momentum.
To take advantage of the stock’s downtrend, options players should consider an in-the-money (10 strike) intermediate-term put option – the January 2009 put (premium is 23% of the stock price) or April put (premium is 29% of the stock price) – to take advantage of this opportunity that is attractive from our Expectational Analysis® methodology perspective.
SPECIAL OFFER
WHAT’S UP WITH CANADIAN ROYALTY TRUSTS?These trusts that produce a steady stream of royalties from natural gas and oil production took a hit last year when the Canadian government proposed taking away their tax-advantaged status. They’ve mostly recovered, but now there’s a bill in the U.S. Congress that would strip their 15% dividend tax rate. Should you buy them now? And if so in which kind of account should you hold them? Click here for advice from Forbes fixed-income expert Richard Lehmann. Click here to start profiting from Richard’s Canadian trust picks today! Just click here.
|
| Stocks with Notable Option Activity for the Week Ending November 03, 2008 |
Merck (MRK)
Another pharmaceutical company in trouble is Merck (MRK). This member of the Dow Jones Industrial Average has produced some of the most well-known drugs in the industry, including Propecia, Singulair, Vioxx, and Zocor. Despite the company’s notoriety, the security has been trapped in a downtrend under its 10-week and 20-week moving averages since January. During this time frame, MRK has plunged more than 47%, tagging a fresh multi-year low in early October. But, while the shares have since rebounded from these lows, MRK continues to be capped by its 10-week moving average. This trendline has taken up residence in the 30-31 region, an area that has provided stiff short-term resistance for the equity since mid-October.
Investors remain defiantly bullish toward MRK, however. The stock’s SOIR of 0.87 indicates that calls outnumber puts among near-term options. Furthermore, this ratio ranks in the 39th percentile of its annual range, indicating a decidedly bullish slant from this speculative group. Data from the ISE and CBOE lend credence to this optimistic reading, as calls bought to open have outnumbered puts purchased on their exchanges by a ratio of more than 2.5-to-1 during the past 10 trading sessions. This ratio also ranks above 70% of all those taken during the past year.
One other concern is a distinct lack of "sell" ratings on the shares from Wall Street analysts. According to Zacks.com, MRK has garnered 5 "buy" or better ratings, and 7 "holds." With the shares in such a steep decline, we could see these holdouts shaken lose in the form of downgrades, thus increasing selling pressure.
EMC Corp. (EMC)
EMC Corp. (EMC) was the target of both bullish and bearish options speculators Thursday. More specifically, the stock saw roughly 58,500 puts change hands – nearly 6 times its average daily put volume of fewer than 21,000 contracts. More impressive, however, the stock saw almost 49,000 calls cross the tape yesterday – more than quadrupling its average daily call volume of nearly 12,000 contracts.
Further demonstrating that calls have been the option of choice lately is the stock’s descending Schaeffer’s put/call open interest ratio (SOIR). This ratio is currently docked at 0.37, indicating that calls more than double their put opponents among options slated to expire within 3 months. What’s more, the SOIR has backpedaled to an annual ranking of 2%, suggesting that short-term options players have been more confident in EMC’s prospects only 2% of the time during the past year.
So, why last week’s flurry in the options arena? Investors could’ve been responding to news that Pershing Square Capital Management yesterday took a 39.9-million-share stake in EMC, boosting its stake in the firm to roughly 2%, according to Reuters.
As a result of Pershing’s confidence, the shares of EMC rallied more than 7% to close at $11.46 on Thursday. In addition, the security’s recent journey higher pushed it through double-barreled resistance from its 20-day and 30-day moving averages for the first time since late August.
Meanwhile, emulating the optimism among options traders is the sentiment among the brokerage bunch. According to Zacks, EMC boasts an impressive 12 "strong buy" and 4 "buy" ratings, compared to only 4 "holds" and no "sells."
In conclusion, while investors are likely cheering the stock’s near-term rebound, the technical hurdles may not be over just yet. Should the equity extend its voyage into the black, it could face a speed bump in the 13.50-14.50 region, which acted as a foothold from mid-July into September. Furthermore, a jolt from resistance could spook the bulls; a reversal in sentiment in the options arena, or a fresh bout of downgrades, could place additional selling pressure on the equity. However, with EMC currently dawdling in the 11.50 neighborhood, investors may have some time before the security battles potential resistance.
SPECIAL OFFER
SLAM DUNK INVESTING IN OILCurtis Hesler, editor of Professional Timing Service, recommended Enerplus Resources (ERF) at $17. It’s now $25, and still pays a 4% dividend. He now believes that there are four major opportunities–crude oil, gold, stock, and bonds–that will make and break millionaires during the next 24 months. Click the link below or copy and paste it into your web browser for three more energy stocks set to double in his new special report, Oil: Slam Dunk Investing For Income & Capital Gains. just click here.
|
Will TAP Leave You Crying in Your Beer?
Posted: 11/3/2008 10:43:38 AM
Barron’s
"A Heady Brew at Molson Coors"
Published: 11/3/2008
Brief Summary:
This week, Barron’s investigates the bullish potential of brewing giant Molson Coors Brewing (TAP:  sentiment, chart, options) . The article notes that sales of the company’s flagship Coors Light beer increased 6.8% from July through September, which outpaced that overall beer market’s gain – which came in less than 1%. The article states that many analysts believe that Coors Light can sustain its "nice growth," which could "sharply" boost TAP. In addition, industry analysts believe the firm’s distribution venture with SABMiller is going to lead to market-share gains, strong cost savings, and double-digit earnings growth.
Kim Scott from Ivy MidCap Growth fund told Barron’s, "You don’t find many situations in this economy where you see clear opportunities to improve earnings, and these guys have that." The article also notes that Anheuser-Busch (BUD: sentiment, chart, options) holds 48% of the U.S. beer market, but "any problems caused by its pending purchase by Belgian-Brazilian InBev could let Molson Coors gain ground on Bud Light, the top U.S. brew with a 19% market share, according to Beer Marketer’s Insights." As for TAP’s Coors Light, it ranks fourth with a 7.9% share.
Contrarian Takeaway:
Even the article notes that TAP has dropped 25% on a year-to-date basis, and this is a bullish piece. Actually, the downtrend is worse when you span out to a 52-week picture. TAP has lost 33% during this time frame, thanks to its 10- and 20-day moving averages. Since the end of July, TAP has managed a handful of daily closes atop this double-barreled resistance. Furthermore, resistance may be found in the form of TAP’s 10-week moving average. However, with the stock currently trading in the upper 37 region, the shares would need to gain 12% before realizing this potential resistance.
Despite this drop, analysts maintain a bullish stance toward TAP. According to Zacks, TAP receives 6 "strong buys," 3 "holds," and 1 "strong sell." This configuration leaves the door wide open for downgrades from the supposedly rare and lofty "strong buy" perch. If there are downgrades, we could see potential support at TAP’s 80-month moving average put to the test. TAP has not closed a month below this trendline since its inception, but downgrades combined with TAP’s 52-week downtrend could bring this support to an end.
SPECIAL OFFER
| Highest Option Volume for the Week Ending Monday, November 03, 2008
|
| Ticker Symbol
| Call Volume
| Put Volume
| Total Volume*
| Put/Call Ratio
|
| Spdrs(SPY)
| 402,358
| 478,869
| 881,227
| 1.19
|
| Nasdaq 100 Index Trckng Stck(QQQQ)
| 282,612
| 306,130
| 588,742
| 1.08
|
| S&P 500 Index(SPX)
| 129,804
| 369,301
| 499,105
| 2.85
|
| Ishares Russell 2000 Index(IWM)
| 190,463
| 192,971
| 383,434
| 1.01
|
| Procter & Gamble Co(PG)
| 188,097
| 187,818
| 375,915
| 1.00
|
| Apple Inc(AAPL)
| 149,883
| 104,780
| 254,663
| 0.70
|
| Wells Fargo & Co(WFC)
| 45,779
| 132,586
| 178,365
| 2.90
|
| Sel Sec Spdrs Fd Financial(XLF)
| 122,731
| 53,415
| 176,146
| 0.44
|
| Ishares Msci Emerging Markets(EEM)
| 81,701
| 86,133
| 167,834
| 1.05
|
| Diamonds Trust Series I(DIA)
| 65,382
| 63,621
| 129,003
| 0.97 |
Highest Option Volume Compare to Average Volume
for Week Ending Monday, November 03, 2008
|
| Ticker Symbol
| Call Volume
| Put Volume
| Total Volume*
| 5-week Avg Volume
| Volume Ratio
| Put/Call Ratio
|
| Brinks Company (BCO)
| 48,477
| 1,581
| 50,058
| 15,633
| 30.66
| 0.03
|
| China Unicom Ltd (CHU)
| 2,717
| 4,401
| 7,118
| 2,615
| 0.62
| 1.62
|
| Ihop Cp (DIN)
| 4,093
| 3,882
| 7,975
| 2,798
| 1.05
| 0.95
|
| Energizer Holdings Inc (ENR)
| 2,181
| 10,932
| 13,113
| 4,368
| 0.20
| 5.01
|
| Ishares Msci Germany (EWG)
| 13,992
| 5,889
| 19,881
| 6,189
| 2.38
| 0.42
|
| Foundry Networks Inc (FDRY)
| 55,711
| 64,923
| 120,634
| 44,607
| 0.86
| 1.17
|
| Frontier Communications Cp (FTR)
| 8,347
| 5,527
| 13,874
| 4,020
| 1.51
| 0.66
|
|
| 4,881
| 12,915
| 17,796
| 5,462
| 0.38
| 2.65
|
| Rent a Center Inc (RCII)
| 4,577
| 14,267
| 18,844
| 6,667
| 0.32
| 3.12
|
| Tenet Healthcare Cp (THC)
| 1,852
| 16,658
| 18,510
| 6,814
| 0.11
| 8.99 |
*Minimum 10,000 contracts in weekly volume
SPECIAL OFFER
|
Dissecting The Sectors
|
| Sector
|
Insurance
Bearish<>
|
| Outlook: The government bailout of insurance giant American International Group (AIG) sharply adjusted the perception that the credit crisis was limited solely to the financial sector. Ever since, the group has come under heavy fire, with the S&P Insurance Index (IUX) falling more than 32% since September 16 – the day before the U.S. Federal Reserve Board approved the bailout loan. But trouble existed even before the AIG bailout, as IUX has fallen more than 60% since January, easily outpacing the S&P 500 Index’s (SPX) drop of about 34% for the same time frame. The insurance index is now trading at multi-year lows, as it battles overhead resistance at the 150 level. However, investors have yet to fully capitulate to this poor performance, as the KBW Insurance SPDR’s (KIE) Schaeffer’s put/call open interest ratio (SOIR) of 2.08 ranks in the lower half of its annual range. Furthermore, 7 of the 14 analysts following Aflac (AFL) rate the shares a "buy" or better, while 11 of the 14 brokerage firms following MetLife (MET) issue "buy" ratings. Should this elevated bullish sentiment begin to unwind, it could provide additional selling pressure for the sector.
|
|
|
| Sector
|
Gold
Bearish<>
|
| Outlook: Gold remains an unreliable safe-haven investment, as the December gold futures contract plunged 18% during October, logging its largest monthly percentage loss since February 1983. Metals traders continued to fear government efforts to rescue the ailing financial industry in the U.S. and Europe. As such, gold has plunged more than 29% from its March 2008 highs above $1,000 an ounce. What’s even more conspicuous is that gold prices reached that level following the Bear Stearns debacle. But the failure of Lehman Brothers, Washington Mutual, American International Group, Fannie Mae, and Freddie Mac has failed to elicit the same kind of panicked safe-haven buying in gold. Along these lines, sentiment toward gold remains heavily bullish. Specifically, the SPDR Gold Trust’s (GLD) Schaeffer’s put/call open interest ratio (SOIR) of 0.38 indicates that calls outnumber puts by a ratio of about 3 to 1. Should this wealth of optimism for a rebound in the malleable metal begin to unwind, it could provide additional selling pressure, thus sending gold steadily lower.
|
| Sector
|
Large-Cap Technology
Bearish<>
|
| Outlook: The tech-laden Nasdaq Composite (COMP) was the hardest hit during red October, plunging 17.7%. But while the COMP has rebounded from its recent multi-year lows, the index remains capped by overhead resistance in the 1,800-1,850 region. Furthermore, the Select Sector Technology SPDR Fund (XLK) is trading below resistance at its declining 10-week and 20-week moving averages and is battling long-term resistance in the 17-17.50 region. On the sentiment front, there are still a number of overloved names within the technology sector. Microsoft (MSFT) has garnered 15 "buys," 5 "holds," and no "sells," while Google (GOOG) has acquired 20 "buys," 2 "holds," and no "sells." Even Apple (AAPL), with its year-to-date decline of more than 45%, remains a heavy bullish favorite. Currently, AAPL’s SOIR of 0.77 rests in the lower quarter of its annual range, while 14 of the 20 analysts following the shares rate them a "buy" or better. With losses mounting, and confidence in the sector declining in the current economic environment, we could see this bullish sentiment unwind in the form of added selling pressure.
|
| |
For information about advertising in Forbes/Schaeffer’s Options Report, please call or e-mail lbentley@forbes.com or 212-367-3381.
About Schaeffer’s Investment Research
Schaeffer’s Investment Research, founded by Bernie Schaeffer in 1981, is a financial information and trading resources company. It publishes Bernie Schaeffer’s Option Advisor, the nation’s leading options subscription newsletter. The firm’s contrarian approach focuses on stocks with technical and fundamental trends that run counter to investor expectations. The firm’s website, http://www.SchaeffersResearch.com , is recognized as one of the leading information sources for stock and options traders and was cited as the top options website by both Forbes and Barron’s. Click here for more details about Schaeffer’s trading methodology.
Have a question about any of the content in this enewsletter, submit your question or call Schaeffer’s at 1-800-448-2080.
|
