Monday saw the U.S. stocks climb to 6-month highs after finance ministers from the Group of 20 (G-20) emerged from their weekend retreat with a pledge to avoid a global currency war.
Also, an early report from the National Association of Realtors also fanned the bullish flames, with the data pointing to a larger-than-anticipated jump in existing-home sales in September. a report on housing sales came in much better than expected.
All three indexes had been up nearly 1% earlier in the morning, after the release of the strong report on existing home sales. Gains receded slightly as the day continued, but most sectors were still strong -- 23 of the 30 blue-chip Dow components were higher at the closing bell.
It marked the second time in the past week that the Dow has eclipsed its highest closing level this year, only to quickly pull back. It rose as high as 11,247.60 earlier Monday; the year's highest close was 11,205.03 on April 26. The intraday peak for the year was 11,258, also on April 26.
In addition to the strong housing data, stocks have recently gotten a boost from strong corporate earnings and bets that Republicans will win control of the House next week -- a shift that market participants believe will further lift stocks.
"President Obama has come out and said, 'I'm pro-business,'" said Kenny Landgraf, principal and founder at Kenjol Capital Management. "But if you have to keep insisting something over and over, it starts to sound like it isn't true."
Experts thought the election bets were already baked into the market, Landgraf said, but stocks have continued a somewhat steady climb throughout October.
Investors' initial optimism became somewhat deflated in afternoon trading, thanks to lingering foreclosure-related fears. Epitomizing those concerns was Bank of America Corp. (BAC), which fell to a new annual nadir after the lender acknowledged that it's already spotted mistakes in some of its foreclosure files under review.
Furthermore, U.S. Federal Reserve Chairman Ben Bernanke exacerbated the slide, announcing that regulators could report the preliminary results of their nationwide foreclosure investigation as early as next month.
Nevertheless, the bulls maintained control of the reins through the closing bell, with all three major market indexes extending their impressive month-to-date gains.
Results for Major Market Indexes
The Dow Jones Industrial Average (DJIA – 11,164.05) finished with a gain of 31.49 points, or 0.28%.
The S&P 500 Index (SPX – 1,185.62) also had a gain, on the day, of 2.54 points, or 0.21%.
The Nasdaq Composite (COMP – 2,490.85), ended the day with a gain of 11.46 points, or 0.46%.
The Russell 2000 Index of smaller companies had a good gain of 3.88 points, or 0.55%, to settle at 707.31.
While the markets reached the closing bell firmly in the green, they ended well off session highs as the dollar selloff lost steam and banks like Bank of America (BAC) lagged behind. The Dow had been up more than 100 points at one point.
“It’s all the dollar. If the dollar goes down, the market goes up. It’s as simple as that,” said NYSE trader Ben Willis of Sunrise Securities.
Wall Street tends to have an inverse relationship with the greenback because a weaker dollar boosts exports of multinationals like General Electric (GE) and lifts commodities. The dollar slid as this past weekend's G-20 meeting failed to produce any specifics or enforcement policies on currencies.
Most of the 30 Dow stocks landed in the green, led by DuPont (DD) and Kraft (KFT) . The index's worst financial giants Bank of America and JPMorgan Chase (JPM) , which continue to be dogged by the foreclosure crisis.
The Nasdaq Composite outperformed the broader markets amid strength from tech stocks like Google (GOOG) and SanDisk (SNDK) .
The stronger-than-expected housing data sparked rallies in home builders like Pulte (PHM) and Toll Brothers (TOL) that proved to be unsustainable.
Volume was light with about 7.2 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, below the year-to-date moving average of 8.76 billion.
Advancing stocks outnumbered declining ones on both the NYSE and the Nasdaq, by about 3 to 2.
Notes of Interest
• The Dow Jones Industrial Average (DJIA) boasted a triple-digit gain within the first hour of trading, but pared its rally as the session progressed, finishing 31.5 points, or 0.3%, higher.
Despite giving back the majority of its intraday lead, the Dow still finished north of the 11,150 level for the first time since early May.
If the Dow had closed above 11205, it would have made a new 2010 high, surpassing the level last seen on April 26. After tumbling to as low as 9686 in July amid concerns about a potential double-dip recession, the blue chips have surged this fall ahead of the midterm elections and more expected help from the Federal Reserve.
• The S&P 500 Index’s (SPX) gave back most of its lead by the close, finishing with a gain of 2.5 points, or 0.2%.
• The Nasdaq Composite (COMP), the tech-rich index, despite a couple of brief trips north of the 2,500 level, ended just 11.5 points, or 0.5%, in the black.
• Crude futures finished in the black today, as foreign-currency holders exploited the U.S. dollar's G-20-induced drop. In addition, black gold accelerated its late-session gains amid upbeat comments from across the pond, with Greek's central bank opining that the worst was over for the country's financial institutions. Against this backdrop, crude oil for December delivery tacked on 83 cents, or 1%, to end at $82.52 per barrel.
• Gold futures: also gained ground in the wake of the greenback's retreat, as foreign-currency holders rushed to scoop up the dollar-denominated commodity. Furthermore, some analysts say the widespread string of record-high commodities prices – from cotton to copper – could point to higher inflation on the horizon, bolstering gold's appeal as an inflationary hedge. By the close, December-dated gold futures added $13.80, or 1%, to settle at $1,338.90 an ounce.
• Bonds: The price on the benchmark 10-year U.S. Treasury was barely up, holding the yield at 2.56%
Existing Home Sales
Existing home sales rose at a stronger-than-expected pace of 4.53 million in September, according to a report by the National Association of Realtors released Monday, but prices and sales activity remain down from last year.
The NAR said the latest increases marks a 10% increase from the downwardly-revised 4.12 million-unit sales pace that was reported in August. The rise was also better than what economists had forecasted; on average, they were looking for sales of about 4.25 million units.
Since the expiration of the first-time home-buyers’ tax credit back in April, home-buying activity has remained at depressed levels with only a few signs of stabilization. Sales are down 19% from a year ago, according to the NAR.
“A housing recovery is taking place but will be choppy at times depending on the duration and impact of a foreclosure moratorium,” said Lawrence Yun, chief economist for the trade organization. “But the overall direction should be a gradual rising trend in home sales with buyers responding to historically low mortgage interest rates and very favorable affordability conditions.”
The housing market continues to remain fueled by distressed sales, which accounted for 35% of all sales in September compared to 29% from a year ago. The nation’s median price on an existing home stood at $171,700 in September, down 2.4% from a year ago.
The struggling housing activity comes despite on-average record low mortgage rates, which stood at 4.35% in September compared with the 5.06% average rate in September 2009.
Inventory levels fell to a 10.7-month supply.
“Vacant homes and homes where mortgages have not been paid for an extended number of months need to be cleared from the market as quickly as possible, with a new set of buyers helping the recovery along a healthy path,” Yun said.
Regionally, existing-home sales in the Northeast rose 10.1% but are down 20.8% from last year. Midwest sales increased 14.5% but are down 26.4% from September 2009. In the South, home sales rose 10.6% but remained down 14.9% from a year ago and in the West home sales rose 5% but are down 16.7% from a year ago.
In currencies: The dollar edged lower against the euro and British pound, and it fell against the yen to ¥80.41 -- a 15-year low.
European Markets closed higher Monday. Britain's FTSE 100 added 0.2%, Germany's DAX rose 0.5% and France's CAC 40 gained less than 0.1%.
Asian Markets, ended the session mixed. The Shanghai Composite rose 2.6%, while the Hang Seng in Hong Kong was up 0.5%. Japan's Nikkei dropped 0.3%.
Company Earnings Reports
Office Depot (ODP) soared as much as 10% after posting a surprise preliminary profit of 18 cents a share for the third quarter. Shareholders had been bracing for a loss of 2 cents a share. The office supplies retailer also announced the unexpected resignation of CEO Steve Odland. Neil Austrian, an Office Depot director, will serve as interim chairman and CEO.
RadioShack (RSH) tumbled 9% as the electronics retailer's EPS beat of 37 cents was overshadowed by concerns about falling profit margins.
Lorillard (LO) revealed a 17% increase in third-quarter profits and EPS of $1.81. Analysts had been looking for EPS of just $1.64. Excluding excise taxes, revenue jumped 14% to $1.07 billion, topping the Street’s view of $1.01 billion.
DuPont (DD) is expected to post a drop in third-quarter profit on Tuesday, but analysts continue to be bullish on the company, which operates in a wide range of industries such as chemicals, biotechnology and agriculture.
The improving global economy is boosting demand for the company's products, including paint and plastic for the auto market and materials to build solar panels. However, quarterly profit could be dented by DuPont's aggressive spending on research in its agricultural unit to compete with rival Monsanto Co (MON).
Analysts expect earnings of 34 cents a share for the third quarter, according to Thomson Reuters, down from 45 cents a share a year earlier.
The shares of DuPont, a component of the Dow Jones Industrial average, have risen about 39 percent so far this year, recently setting a two-year high.
By comparison, the S&P Chemicals index has risen 8.7 percent so far this year.
For a graphic contrasting DuPont with rival Dow Chemical see below:-
The resurgent U.S. auto market likely boosted sales of titanium dioxide, a key material for car paint that DuPont is currently sold out of.
"We believe that, as DuPont ekes out more efficiency gains through de-bottlenecking, there is potential for further margin expansion," BB&T Capital Markets analyst Frank Mitsch said of the company's titanium dioxide business.
In September, DuPont said it will hit $1 billion in solar sales this year. It previously expected to hit that mark in 2011. Executives also hope to push DuPont products into building materials, such as windows and shingles.
Another positive is the U.S. Environmental Protection Agency recently approved the blending of 15 percent ethanol in fuel, up from 10 percent, a development that bodes well for DuPont's research into biobutanol, a biofuel that can also be used in car engines.
However, DuPont continues to spend aggressively on research into new ways to "stack" genetic traits into seeds, which may eat into profit.
Company News and Movements
• Goldman Sachs (GS) has not called Berkshire Hathaway CEO Warren Buffett about whether or not it plans to pay back his $5 billion stake in the bank, Buffett told FOX Business. Goldman, which is paying Buffett $500 million a year in dividends as part of the deal, is reportedly considering repaying the investment. Goldman has received preliminary approval to buy back the stake from analysts at Moody’s.
• CommScope (CTV) surged 30% after the communication cable maker confirmed that it has been in buyout talks with private-equity giant the Carlyle Group. Under terms of the possible deal, Carlyle would take CommScope private for $31.50 a share. However, CommScope said no final deal has been reached.
• Microsoft (MSFT) trailed the broader markets after it was downgraded from “outperform” to “market perform” by FBR Capital Markets amid concerns about Windows 7 and tablet devices. FBR also lowered its price target by $5 on the stock to $27.
• Citigroup (C) jumped more than 2% after Goldman Sachs added the financial conglomerate to its “conviction” buy list. According to Reuters, Goldman strengthened its buy recommendation on Citi and upped its price target from $4.60 to $5.50 due to what it sees as limited mortgage bond buyback exposure.
• Bank of America (BAC) said it found errors in 10 to 25 of the first several hundred foreclosure cases it has started examining, The Wall Street Journal reported. The disclosure marks the first acknowledgement by BofA that there were mistakes in its foreclosure files.
Under Armour Inc. (UA)
Sports apparel maker Under Armour Inc. (UA) is expected to release its quarterly earnings report ahead of the open tomorrow morning, with analysts looking for a profit of 60 cents per share. In the same quarter last year, UA earned 52 cents per share. Surprisingly, options activity has been light on UA, with 2,050 calls and 922 puts changing hands so far today. However, while sifting through this activity, I came across a rather unusual pre-earnings trade.
Specifically, 61 contracts traded on UA's December 45 put at 11:08 a.m. Eastern time on the International Securities Exchange (ISE) for the bid price of $2.00, or $200 per contract.
Simultaneously, 61 December 49 calls crossed the tape on the same exchange for the bid price of $2.15, or $215 per contract. Given this data, it would appear that we are looking at a short strangle on Under Armour Inc.
While a long strangle anticipates a sharp move in the underlying stock beyond the purchased strikes, a short strangle is a strategy that requires the equity to remain pinned between the two sold strikes. Basically, a short strangle is a bet that the security will remain in a trading range, thus allowing the sold options to expire worthless, and the trader to retain the entire premium received at initiation.
The Anatomy of an Under Armour Inc. Short Strangle Position Getting down to business, the trade breaks down like this: The trader receives a credit of $13,115 for selling 61 December 49 calls -- ($2.15 * 100) * 61 = $13,115. Meanwhile, the trader receives an additional credit of $12,200 for selling 61 December 45 puts -- ($2.00 * 100) * 61 = $12,200.
So, we have one sold December 49 call for every sold December 45 put, and the trader has pocketed a premium of $253,150 -- ($12,200 + $13,115) = $253,150. The breakdown for this short strangle position is listed below:
The sweet spot for this trade lies between $45 and $49 per share. If UA closes within this range on December 17, when these options expire, the trader will be able to keep the entire $253,150 credit, which represents the maximum profit for this trade.
Meanwhile, there are two breakeven points for this position. The first is equal to the sold 45 strike minus the net credit received, or $40.85 -- 45 – 4.15 = $40.85. The second is equal to the sold 49 strike plus the net credit received, or $53.15 -- 49 + 4.15 = $53.15.
Finally, the maximum loss is theoretically unlimited to the upside, as there is no limit to how high UA could rally. On the downside, losses are potentially heavy, but limited to the sold 45 strike minus the net credit received. In this case, losses on a plunge in UA shares are limited to $40.85, or $4,850 per contract. Below is a chart for a visual representation of this trade's profit/loss scenario:
After the short strangle has been established, rising implied volatility becomes the bane of the trader's existence, so to speak. As implieds increase, the prices of the two sold options also increase, making an exit that much more expensive, should the trader need to cut and run. At the time of the trade, implieds for the December 45 put arrived at 43.75%, while the implied volatility for the December 49 call came in at 38.25%. For a point of reference, UA's two-month historical volatility was 21.25% as of the close of trading on Friday.
The following companies also had some impressive options movements :-
Massey Energy Company (MEE)
Massey Energy Company (MEE) will be reporting its third-quarter earnings on Tuesday, Oct. 26, with analysts anticipating a loss of 15 cents per share. MEE has a checkered history in the earnings spotlight; in the past four quarters, the company has twice exceeded, and twice fallen short of, the consensus profit estimate.
In fact, MEE has been on a tear lately, with the shares marching steadily higher since the start of October. The coal concern is now docked above the $41 level -- several points above its 10-week and 20-week moving averages. Prior to this breakout, MEE had been range-bound in the $28 to $34 neighborhood since May.
Call players have bombarded MEE ahead of Tuesday's report, with volume of 18,000 contracts traded so far today -- six times the energy issue's expected single-session call volume.
MEE's December 50 call has been the star of the show, with roughly 4,200 contracts traded on this strike -- 60% of which changed hands at the ask price, suggesting they were purchased. With today's volume exceeding open interest at this strike, it seems that fresh positions are being added here.
Technically speaking, MEE has not traded above $50 since April. Meanwhile, with short interest comprising 6.6% of the stock's total available float, it's possible that the shorts are simply hedging their bearish positions ahead of Tuesday's report by purchasing out-of-the-money calls.
Agrium Inc. (AGU
Agrium Inc. (AGU) scored yet another analyst endorsement this morning; according to Thomson Reuters, Stifel Nicolaus upgraded the stock to "buy" from "hold." In the wake of the bullish note, the shares of AGU have extended their recent quest for new highs, rallying as far north as the $88.70 level. What's more, the security's upward momentum – and likely Agrium's turn in the earnings spotlight next week – seems to have attracted another batch of optimistic options traders, with calls flying off the shelves at an accelerated pace today.
So far, the agricultural issue has already seen roughly 7,700 calls cross the tape – more than double its predicted single-session volume of fewer than 3,500 calls, and about 15 times the number of AGU puts exchanged.
The bulk of the attention has centered on the out-of-the-money November 90 call, which has seen close to 6,300 contracts traded – mostly at the ask price, suggesting they were bought. However, the 90 strike is already home to peak call open interest of nearly 13,000 contracts in the front-month series, making it difficult to say with certainty how much of today's action will translate into freshly opened positions.
If the latest trends on the International Securities Exchange (ISE) are any indication, though, I'd put my money on an overnight boost to call open interest at the November 90 strike. During the past couple of weeks, traders on the exchange have bought to open more than four AGU calls for every put, as evidenced by the equity's 10-day call/put volume ratio of 4.36. What's more, this ratio ranks in the 93rd percentile of its annual range, indicating that speculators have initiated bullish bets over bearish at a faster pace just 7% of the time during the past 52 weeks.
At last check, AGU has tacked on 0.8% to flirt with the $88.60 level.
**Bearish activity detected in Ambac Financial (ABK), with 14,614 puts trading, or 4x the recent average daily put volume in the name.
**Bullish flow detected in Skyworks Solutions (SWKS), with 6192 calls trading, or 3x the recent average daily call volume in the name.
**Bearish activity detected in Marvell Technology (MRVL), 11120 puts trading, or 2x the recent average daily put volume in the name.
**Increasing options volume is also being seen in Texas Instruments (TXN), Massey Energy (MEE), and Dow Chemical (DOW).
U.S. stocks rose to a five-and-a-half month high on Monday as a falling dollar, partly driven by expectations of further stimulus by the Federal Reserve, prompted investors to buy riskier assets.
The slide in the greenback continued after a weekend meeting of the Group of 20 stopped short of setting targets to reduce trade imbalances. Bets the Fed will stimulate growth by effectively printing money to buy assets has weakened the dollar, which in turn has lifted commodity prices.
"We have a lower dollar, we have low and benign interest rates, and you can't beat that combination for reflating the economy or stock prices," said Hugh Johnson, chief investment officer of Hugh Johnson Advisors LLC in Albany, New York.
Equities and the dollar have formed an inverse relationship, so as the dollar drops, equities often advance. Since September 1, the S&P has risen 13 percent while the dollar index .DXY, which measures its value against major currencies, has lost 7.4 percent.
"The promise of QE2 has put downward pressure on the dollar and put downward pressure on interest rates," said Hugh Johnson, chief investment officer of Hugh Johnson Advisors. That's "about as good a combination as you could ask for for the U.S. economy and earnings," he said.
"That's what's driving the dollar down," said Scott Armiger, portfolio manager of Christiana Bank & Trust. While that's helping stocks right now, he worried about the longer-term effects of the Fed's expected resumption of bond purchasing. "It's a pain reliever--it will wear off or we'll run out of pain relievers and then we'll be left with a huge deficit."
The S&P materials sector .GSPM, which is particularly sensitive to the weak dollar, gained 1.7 percent and was the index's best performing group. Freeport-McMoRan Copper and Gold Inc (FCX.N) advanced 2.2 percent to $96.07.
In a sign of investors' conviction the Fed will buy more bonds, the government sold five-year Treasury inflation-protected securities Monday at a negative yield for the first time ever. Further quantitative easing is expected to stoke inflation, making the TIPS' expected return positive over five years.
But stocks finished the session well off their highs as the dollar came off its lows late and the euro pared gains.
"It's all about the currency -- the dollar strengthened and euro faded," said Stephen Massocca, managing director at Wedbush Morgan in San Francisco.
Global finance ministers met over the weekend and agreed to avoid competitive devaluations of their currencies, but they didn't lay out specific guidelines. There has been growing concerns that countries would artificially drive the value of their currencies lower. Weakening a national currency can help a country boost exports because goods become cheaper overseas.
Right now, a weaker dollar could help U.S. companies at the expense of foreign economies.
"Our ability to export is strengthened," Cameron Short, a senior vice president at Stifel Nicolaus, said about the weakening dollar. That could help U.S. companies with future sales, boosting their profitability.
While a weaker currency can lift a country's economic growth, it also creates imbalances in global trade. That can lead to protectionist responses from other countries, threatening to slow or halt a broader global economic recovery.
Leaders from the countries whose finance ministers met over the weekend gather next month. More details about how countries can work together to avoid a currency war could be worked out then.
Other economic reports could further sway trading throughout the week, culminating with the government's first estimate on third-quarter gross domestic product. The report, the broadest measure of the nation's economy, is due out Friday.
Corporate earnings, which helped drive stocks modestly higher last week, could also play a central role in the coming days.
Companies including DuPont, Procter & Gamble, 3M and Colgate-Palmolive all release results during the week.
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