Monday saw the U.S. stocks slip as investors took a break from a four-week rally, but they remained optimistic the advance would resume as a flurry of deals suggested companies were seeing value in the market.
Defying September's track record as the worst month for stocks, Wall Street was on track for one of its best months in a decade. In order for the rally to continue, market sentiment hinges on a recent trend of declining volatility.
As economic readings have started convincing investors that the recovery is gaining ground, U.S. stocks soared to their highest levels in four months Friday, and are still poised to end September with the biggest monthly gains in more than a year.
"Today's pause was much needed after such a strong rally. If we get decent news from here, we could be looking at going beyond April highs of 1,217 to 1,219 on the S&P," said Stephen Massocca, managing director at Wedbush Morgan in San Francisco.
"The tone of economic news has gotten significantly stronger over the last four to six weeks," said Phil Orlando, chief equity strategist at Federated Investors. "This has provided investors with greater confidence that what we experienced over the summer months was simply an economic soft patch rather than the start of a double-dip recession."
In a session void of notable economic releases, stocks struggled to pick a direction today, with the Street instead weighing mounds of merger-and-acquisition headlines against discouraging news from across the pond. Several business deal announcements lifted sentiment.
On the buyout front, Southwest Airlines (LUV) shared the spotlight with Unilever plc (UL) and Wal-Mart Stores (WMT), with all three announcing plans to purchase smaller-cap peers.
"We do have a very aggressive [merger and acquisition] cycle, and that's good for the market," he said. "But the market doesn't go up 2% every day, so right now we're just nursing a hangover."
However, while investors may have interpreted the deluge of deal making as a sign of corporate confidence, any bullish momentum was eventually negated by resurfacing fears about Europe's fiscal health. More specifically, a high-profile downgrade for Anglo Irish Bank rekindled concerns about the financial stability in the euro zone, effectively stalling stocks' September rally.
"The credit markets remain strong and improving, as today's M&A activity suggests the recovery is alive and well," observed Schaeffer’s Senior Technical Strategist, Ryan Detrick, opting for the glass-half-full approach. "Something else that caught my eye was the nine IPOs set for this week -- the most in three years," he added. "Plus, with junk bonds, emerging market bonds, and corporate bonds all strong, I simply don't buy the double-dip arguments. In fact, I think this time next year the economy will be much better off."
Results for Major Market Indexes
The Dow Jones Industrial Average (DJIA – 10,812.04) finished with an loss of 48.22 points, or 0.44%.
The S&P 500 Index (SPX – 1,142.16) also had a loss, on the day, of 6.51 points, or 0.57%.
The Nasdaq Composite (COMP – 2,369.77) also suffered a loss of 11.45 points, or 0.48%.
The Russell 2000 Index of smaller companies had a loss of 2.72 points, or 0.41%, to settle at 668.29.
Without any major economic or earnings reports on the agenda, much of the focus was on a sell off among banks like Morgan Stanley (MS) and the latest deal headlines. Wal-Mart (WMT) revealed a bid to acquire a South African retailer, Southwest Airlines (LUV) scooped up rival discounter AirTran (AAI) and Unilever (UN) bought out rival Alberto Culver (ACV).
“Frankly I’m impressed the markets have held onto the gains from Friday and are not giving any back considering how poorly the financials are performing,” said Michael James, senior equities trader at Wedbush Morgan Securities. “For the market to overall not be down (more significantly) with that kind of a weight is pretty admirable. But I think it also highlights the difficulty the market will have in making a further leg up.”
U.S. markets closed the day at session lows, a potentially bearish sign. However, volume remained relatively light and the Dow moved in a very tight trading range of just 63 points. Most of the Dow's 30 components lost ground on the day, led by financial-related stocks JPMorgan Chase (JPM), Travelers (TRV) and Bank of America (BAC). The index's best performers were American Express (AXP) and AT&T (T). Wall Street, which typically cheers when acquisitions are announced because they often signal confidence in the business world, struggled to rally around a trio of M&A headlines on Monday. After going nearly silent for months, the M&A world have begun to come back to life, especially in the technology world.
But the enthusiasm for the deal news was overshadowed by the financial sector, which lost 1.1% amid declines for banks like U.S. Bancorp (USB) and PNC Financial (PNC) . The negative sentiment on the banking group has been triggered in part by concerns related to steep drop-offs in trading volumes that some banks rely on for profits.
Continuing a recent trend, volume was very light, with only 6.54 billion shares traded on the NYSE, Amex and Nasdaq, far under the previous year's daily average of 9.65 billion shares.
Declining stocks outnumbered advancing ones on the NYSE by a ratio of about 17 to 13. On the Nasdaq, about eight stocks fell for every five that rose.
Notes of Interest
• The Dow Jones Industrial Average (DJIA): Despite the blue chips' late-session sell-off, the index maintained its newfound perch atop the round-number 10,800 level.
• The S&P 500 Index’s (SPX) remains comfortably north of support from its 10-day moving averages. The S&P 500 is up 8.9 percent from a month ago as investors welcomed recent data that suggested the economy would avoid a double-dip recession. The benchmark has posted monthly gains of more than 9 percent only twice since the start of 1992.
But options investors seemed to be more concerned about current market conditions.
• The Nasdaq Composite (COMP), the tech-rich index, remains comfortably north of support from its 10-day moving averages.
• Crude futures finished an all-so session just modestly higher today. While an ailing U.S. dollar helped the front-month contract touch $77 per barrel in early trading, resurfacing concerns about the fiscal health of the euro zone – as well as expectations for a glut of domestic supplies – kept black gold's gains in check. By the close, November-dated crude oil futures added 3 cents, or 0.04%, at $76.52 per barrel.
• Gold futures extended their pursuit of record highs today, as sovereign debt concerns from across the pond heightened the metal's appeal as a safe-haven investment. Furthermore, lingering expectations for more bond purchases by the Federal Reserve, as well as the greenback's retreat versus the euro, proved positive for the dollar-denominated commodity. After briefly breaching the psychologically significant $1,300-an-ounce level, gold for December delivery settled at a record-high closing price of $1,298.60 an ounce – a gain of 50 cents.
• Bonds: The yield on the 10-year Treasury note fell to 2.53% from 2.61% late Friday.
The CBOE Volatility Index (VIX)
Larry McMillan, president of McMillan Analysis Corp, said the most extreme overbought conditions were seen in the "term structure" of VIX futures. The CBOE Volatility Index .VIX is Wall Street's most popular gauge of investor anxiety.
"There are very large premiums on the VIX futures, and their prices are aligned such that there is a steep upward slope from one month to the next. That is, the 'term structure' is very steep," he said on a website.
"While that reflects an ongoing bullish market, it is also an overbought condition. The last three times that the term structure approached levels this steep, sharp market corrections followed with the S&P dropping from 50 to 200 points."
The VIX was up 3.8 percent at 22.54.
He added that if the VIX falls below 21, along with the S&P staying above 1,130, it would be a positive confirmation. However, if the VIX doesn't follow through, it would be another warning indicator.
The VIX index usually has an inverse relationship with the Standard & Poor's 500 benchmark as it tracks option prices that investors are willing to pay as a protection against risk in the underlying stocks.
With no major economic reports to drive trading, investors focused on individual stocks after major deals in the airline, consumer products and retailing industries.
Traders who prefer to look at the broader economic picture will get plenty of data later in the week to review. Traders get reports on consumer sentiment, weekly jobless claims and a final reading on second-quarter gross domestic product before the month ends Thursday.
On Friday, traders receive a key report on the manufacturing sector. The same monthly report helped jump-start the September rally when it was released at the beginning of the month.
“The markets are in rally mode and are likely to continue until we see worse-than-expected economic data with the next major report next Friday – unemployment,” said Paul Nolte, managing director at Dearborn Partners.
Financial stocks mostly dipped as concern remains about the health of Europe's banking sector. Moody's Investors Service cut its rating on Anglo Irish Bank Corp., one of Europe's more troubled banks in recent months. Global banking giants like Barclays PLC and JPMorgan Chase & Co. each fell more than 1 percent.
In currencies, the dollar rose against the euro and the Japanese yen, but fell versus the British pound.
European Markets ended lower. Britain's FTSE 100 fell 0.5%, Germany's DAX slid 0.3% and France's CAC 40 dropped 0.4%.
Asian Markets finished the session with strong gains. Japan's Nikkei and the Shanghai Composite climbed 1.4%, and the Hang Seng in Hong Kong rallied 1%.
Company Earnings Reports
Cal-Maine Foods Inc (CALM)
Egg producer Cal-Maine Foods Inc (CALM) posted a surprise quarterly profit as the company saw better demand for its higher priced eggs as well as a modest improvement in volumes and pricing.
For the June-August quarter, the company reported a net income of $4.8 million, or 20 cents a share, compared with a loss of $3.8 million, or 16 cents last year.
The quarter included an insurance gain of about $2.6 million related to fire damage at the company's Farwell, Texas facility in July.
Excluding the gain, the company earned 9 cents a share.
Analysts on average were expecting the company to post a loss of 7 cents a share, according to Thomson Reuters.
Sales rose 1 percent to $190.4 million, edging past expectations of $190.1 million.
A massive salmonella outbreak sparked a recall of more than half a billion eggs from two Iowa plants in August, but the company said the nationwide recall had a minimal impact on first-quarter results.
However, Cal-Maine which makes and sells fresh shell eggs, said demand had dropped since the recall.
Shares of the company, down 11 percent year to date, closed at $30.30 Friday on Nasdaq.
Jeweler Zale Corp (ZLC)
Jeweler Zale Corp (ZLC) reported a narrower quarterly loss as margins expanded on lower costs and fewer merchandise discounts.
Zale reported a net loss of $28.5 million, or 89 cents per share, in its fourth quarter ended July 31, compared to a loss of $89.8 million, or $2.81 per share, last year.
Total sales fell 3.4 percent to $345.0 million, while sales at stores open at least one year fell 2.1 percent.
In contrast, Zale's most direct competitor, Signet Jewelers Ltd (SIG) reported U.S. same-store sales were up 5.9 percent in its most recent quarter.
Zale, which operates the Zales chain in the United States and Peoples Jewellers in Canada, has been contending with sharp sales declines for several years and has been losing market share to Kay Jewelers parent Signet Jewelers Ltd (SIG).
Zale last week reached an agreement with Citibank, a unit of Citigroup Inc (C), under which the bank would continue issuing store credit cards to the jeweler's customers for an initial five-year term, with automatic renewals for successive two-year terms, effective Oct. 1.
Roughly 40 percent of Zale's U.S. sales are made on those cards.
The company also said it agreed to pay Z Investment Holdings, an affiliate of Golden Gate Capital, $25 million to eliminate the minimum consolidated EBITDA covenant under its credit agreement.
Shares of the Dallas-based company were up 3 percent at $2.25 in trading before the bell on Monday. They closed at $2.19 Friday on the New York Stock Exchange.
Jabil Circuit Inc's (JBL)
Technology distributor Jabil Circuit Inc's (JBL) quarterly revenue missed Wall Street expectations, and the company forecast first-quarter 2011 sales below estimates, sending its shares down 2 percent in extended trade.
Jabil, whose rivals include Benchmark Electronics (BHE), Flextronics (FLEX)and Celestica Inc (CLS.TO) (CLS.N), said it expects first-quarter revenue of $3.9-$4 billion, below market expectations of $4.08 billion.
However, the company, whose fourth-quarter profit beat market expectations, said it expects first-quarter core earnings of 53-57 cents a share, which is largely above analysts' view of 53 cents a share.
For the June-August quarter, net income attributable to Jabil was $58.7 million, or 27 cents a share, compared with $5.5 million, or 3 cents a share, last year. Excluding items, it earned 52 cents a share.
Net revenue for the company, which produces components for tech giants such as Cisco Systems (CSCO), Hewlett-Packard (HPQ), IBM Corp (IBM), Nokia Corp (NOK1V.HE), and Research in Motion (RIM.TO), jumped 38 percent to $3.86 billion.
Analysts on average were expecting earnings of 48 cents a share, on revenue of $3.89 billion, according to Thomson Reuters.
Shares of the St. Petersburg, Florida-based company, which have gained 28 percent in value over the past one month, fell 17 cents to $13.72 after the bell. They closed at $13.89 Monday on the New York Stock Exchange.
Paychex Inc (PAYX)
Payroll processor Paychex Inc (PAYX) reported a quarterly profit above market view, helped by an increase in revenue from its human resources services segment.
The company said it expects net income in fiscal 2011 to improve slightly over fiscal 2010, but said payroll service revenue would be flat.
"Client retention has improved. Sales of new units continues to be difficult, but we are implementing changes to our sales process that should enable us to improve sales productivity in the near future, said B. Thomas Golisano, chairman of the board.
Net income for the Rochester, New York-based company's first fiscal quarter was $131.9 million, or 36 cents a share, compared with $123.6 million, or 34 cents a share last year.
Revenue climbed 4 percent to 518.3 million in the quarter.
Analysts on average were looking for a profit of 34 cents a share on revenue of $507.2 million, according to Thomson Reuters.
Paychex, which competes with larger rival Automatic Data Processing Inc (ADP), said payroll services was $360.7 million, up from $354.4 million, a year ago. Human resource services revenue increased 10 percent to $145.5 million.
Shares of the company, which have risen about 6 percent since its chief executive quit in July, closed at $26.93 Monday on Nasdaq.
Company News and Movements
Comcast (CMCSA) tapped Steve Burke, its chief operating officer, to succeed Jeff Zucker as CEO of NBC Universal. Burke, who will keep his title of COO at Comcast, will assume his new role after Comcast’s deal to acquire control of General Electric's (GE) NBCU closes.
Progress Energy (PGN) tripped a circuit breaker, causing trading of the energy company to pause for five minutes after shares briefly plunged 90%.
After the market close, BlackBerry maker Research in Motion (RIMM) announced plans for PlayBook, a new tablet computer to compete with Apple's iPad. Shares of the company jumped more than 1% in after-hours trading.
In deal news, consumer products giant Unilever NV agreed to buy beauty products maker Alberto Culver Co. for $3.7 billion.
Southwest Airlines Co. will purchase AirTran Holdings Inc. for about $1.4 billion. Wal-Mart Stores Inc. proposed to buy South African consumer goods distributor Massmart Holdings Ltd. for about $4.25 billion.
Shares of Unilever, which makes Dove soaps, Axe deodorants and Suave shampoos, rose 34 cents to $29.71. Alberto Culver, which makes beauty products such as TRESemme, VO5 and Simple, jumped $6.16, or 19.6 percent, to $37.64.
AirTran shares jumped $2.79, or 61.3 percent, to $7.34. The deal valued Airtran shares at $7.69. Southwest rose $1.07, or 8.7 percent, to $13.35.
Wal-Mart shares fell 60 cents to $53.48.
JPMorgan shares fell 67 cents to $39.08. Barclays dropped 22 cents to $19.59.
"We are starting to see firms actually putting their money to use instead of just being on the sidelines," Stephen Massocca, managing director at Wedbush Morgan in San Francisco said.
Cal-Maine Foods Inc. (CALM)
Earnings continue to trickle in, with results appearing this morning from egg producer Cal-Maine Foods Inc. (CALM). The company announced a surprise quarterly profit, with the company reporting better demand for its higher-priced eggs as well as a modest improvement in volumes and pricing. (Read full report on earnings above in “Company Earnings Reports”)
Heading into the earnings report, expectations among options players were relatively low. The International Securities Exchange (ISE) reports nearly 19 puts purchased to open for every one call purchased to open during the past 10 trading sessions. This ratio of puts to calls is higher than 97% of all those taken during the past year.
In addition, the ISE and Chicago Board Options Exchange (CBOE) reported that 2.6 puts have been purchased to open for every one call purchased to open during the past 10 trading sessions. This ratio of puts to calls is higher than 75% of all those taken during the past 12 months.
Elsewhere, we find that the put/call open interest ratio (SOIR) for CALM comes in at 1.07, as put open interest outnumbers call open interest among options slated to expire in less than three months. This ratio of puts to calls is higher than 58% of all those taken during the past year, pointing to a rising pessimism.
Meanwhile, short sellers are starting to unload their bearish bets. During the past month, the number of CALM shares sold short decreased by 7% to 2.8 million. However, this accumulation of pessimistic positions still accounts for 21% of the company's total float, and is 13.7 times the stock's average daily trading volume.
Technically speaking, the shares of CALM are down more than 11% since the beginning of the year. Since the equity peaked near the 39 level in April, the stock has stumbled lower under pressure from its declining 10-week and 20-week moving averages.
If the security can overcome intermediate-term technical resistance following the company's positive earnings report, it could shake loose some of these bears, creating a fresh wave of buying pressure for the stock.
Ford Motor Company (F)
Ford Motor Company (F) found itself in the headlines this morning, after President and CEO Alan Mulally predicted a "solid profit" in 2010 and an overall improvement in performance in 2011. Furthermore, the exec announced plans to invest GBP1.5 billion in the U.K. – Ford's second-largest market for vehicles outside the U.S. – over the next five years.
In light of the news, it appears a handful of very short-term options traders are betting on a bounce for the shares of F. Already today, the stock's weekly October 13 call has seen almost 2,100 contracts traded on open interest of fewer than 1,500, hinting at newly opened positions. Plus, more than half of the weekly calls have crossed at the ask price, suggesting they were bought.
By purchasing to open the weekly October 13 calls, the buyers are hoping the shares of F will finish the week north of the $13 level.
However, bullish bets are nothing new for F, as evidenced by the stock's 10-day call/put volume ratio of 8.40 on the International Securities Exchange (ISE). Not only does this ratio indicate that traders have bought to open more than eight calls for every put during the past two weeks, but it also ranks in the 99th annual percentile. In other words, speculators on the ISE have initiated bullish bets over bearish at a faster clip just 1% of the time during the past 52 weeks.
At last check, the shares of F are flirting with breakeven at the $12.56 level.
Amylin Pharmaceuticals, Inc. (AMLN)
Amylin Pharmaceuticals, Inc. (AMLN) was the target of a bullish brokerage note from Jefferies this morning. The brokerage firm said today that it sees nearly 50% upside in AMLN, citing a positive long-term view on the pharmaceutical's diabetes drug, Bydureon. Specifically, Jefferies stated "we have a long-term favorable view on Bydureon prospects based on its best-in-class efficacy/safety profile and our bet that Bydureon will be among the first diabetes drugs to show a cardiovascular outcomes benefit."
Jefferies already maintains a "buy" rating on AMLN; however, this optimistic outlook isn't shares by most analysts. According to Zacks, 11 out of 18 brokerage firms following the pharmaceutical issue call it a "hold" or worse.
Technically speaking, it's not surprising that analysts are skeptical of AMLN. After hitting a high around $24 in March, the shares have since retreated to the $21 level. In fact, the stock has been range-bound in the $21 to $22 neighborhood for the past several weeks.
In fact, it appears that option players sought to capitalize on AMLN's technical stagnation on Friday. The November 24 call saw volume of 7,188 contracts traded; however, the bulk of these contracts traded at the bid price, revealing they were likely sold. Open interest increased by 6,883 contracts over the weekend, indicating that new short positions were added here. By selling to open the November 24 call, traders are counting on AMLN to remain beneath the $24 level over the next two months. At last check, AMLN was hovering around $21.16.
AirTran Holdings Inc (AAI)
A number of well-timed bullish options bets appeared to have been placed on AirTran Holdings just a week before a takeover offer was announced.
Southwest Airlines Co (LUV) on Monday said it would buy smaller rival AirTran Holdings Inc (AAI) for about $1 billion, aiming to challenge bigger carriers in the East Coast market.
AirTran attracted unusual call option buying on Sept. 21 on volume that was above the few hundred contracts that typically trade on a daily basis on the stock.
Buyout announcements at times are preceded by an uptick in trading in the stock's options, which concerns some investors as the fine line between innocuous speculation and trading on inside information takes increasing importance in the U.S. options market.
The activity has prompted at least one option observer to question whether the news reached investors ahead of time. "On Sept. 21, when AirTran shares were trading at $4.47, one trader paid 15 cents per contract for 738 November $5 calls to open a new position," said Henry Schwartz, president of options analytics firm Trade Alert in New York.
Schwartz said the bullish transactions were "suspicious," because AirTran's average daily call volume over the last 22 days was just 210 contracts. "This suggests that somebody may have known that the deal was soon to be announced," he said.
The cash-and-stock deal values AirTran at a 69 percent premium to its Friday closing price at $4.55 on the New York Stock Exchange.
Others doubted it was a suspicious trade. "The action was not blatant and was more of an intelligent bet rather than suspicious activity because the small regional airlines were known to be takeover targets," said Joe Kunkle, a founder of options analytics firm OptionsHawk.com in Boston.
Investors often turn to equity call options, which provide the right to purchase shares at a fixed price up to a certain date, to speculate on potential share price appreciation. A put conveys the right to sell shares at a preset price any time until expiration.
By the end of the Sept. 21 session, traders exchanged 1,031 calls and zero puts in AirTran, more than three times its average daily turnover for September so far, excluding Monday's session, according to the Options Clearing Corp.
As AirTran shares rose 61.31 percent to $7.34 on Monday, the November $5 calls fetched a high of $2.35 per contract, Reuters data shows. For the purchaser of the 738 calls at 15 cents apiece, the profit was potentially $162,360 on an initial $11,070 investment.
"The other thing that was interesting is that the transaction was initiated by a market maker and not a customer, according to clearing data," Schwartz said.
To be sure, it can be hard to pin down whether unusual trading patterns in a target company's options stem from insider information; it could also reflect speculative bets.
"It could have been an intelligent speculator. It could also have been something nefarious. The trade was certainly a fortuitous one for the buyer," said Steve Sosnick, a trader at Timber Hill, a division of Interactive Brokers Group based in Greenwich, Connecticut.
The U.S. Securities and Exchange Commission, which looks into unusual share and options activity, declined to comment. In an email, AirTran did not immediately respond with a comment.
The following companies also had some impressive options movements :-
Baidu Inc. (BIDU) is being flooded by both puts and calls after the stock hit a fresh all-time high above $100 per share. In fact, both call and put volume has ballooned to nearly quadruple the stock's daily average, with traders zeroing in on the October 100 put and the October 105 call.
The iShares FTSE Xinhua China 25 Index Fund (FXI) is a favorite among put traders, with some 22,000 of these bearish bets pushing volume to more than three times the fund's daily average.
On the call side, AMR Corp. (AMR) is popular with call traders, as the 36,000 calls changing hands on the stock have swollen to nearly eight times AMR's average daily call volume.
**Bullish flow detected in Keryx Biopharmaceuticals (KERX), with 6494 calls trading, or 5x the recent average daily call volume in the name.
**Bullish flow detected in Vornado Realty Trust (VNO), with 2451 calls trading, or 3x the recent average daily call volume in the name.
**Bullish flow detected in Western Union (WU), with 2741 calls trading, or 3x the recent average daily call volume in the name.
**Increasing options volume is also being seen in AMR, US Airways (LCC), and Jet Blue (JBLU).
Stocks took a pause Monday from their big September rally as worries about the financial sector offset excitement over a fresh round of corporate dealmaking.
The Dow Jones industrial average lost 48 points in a late-day slide, but it's still up 8 percent for the month, putting it on track for its best September since 1939.
The blue-chip average remains on pace for its best September performance since 1939.
“The stock market remains reasonably valued, especially when compared to the ultra-low interest rates seen in the bond market,” said Fred Dickson, chief investment strategist at Davidson Cos., who calculates equities are trading at 12 times estimated 2011 S&P 500 operating earnings.
“It is normal to see periodic short-term market pullbacks after extended rallies,” Dickson said.
Chip Brian, CEO of SmarTrend, an electronic trend trading system, said Monday's modest decline was largely tied to investors pocketing profits racked up during the market's four-week rally.
Prior to Monday the Dow Jones industrial average had risen in each of the past four weeks, its longest winning streak since eight consecutive weekly gains ended in late April when stocks hit their highest levels of the year.
"The September rally has been surprisingly resilient," Brian said. But investors might be ready to put the brakes on the run-up so they can wait to see what happens during earnings season, which kicks off next week, Bryan said.
Michael Sansoterra, portfolio manager of the RidgeWorth Large Cap Growth Fund, said the latest deals are a sign companies are confident economic growth will pick up in the coming quarters. Acquisition activity has been booming this month as companies become more willing to invest some of their large cash reserves built up during the recession.
"The timing is never certain, but smart companies are saying, 'If not now, when?'" Sansoterra said. "This is the time to be doing it."
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