Option Investor
Newsletter

Daily Newsletter, Monday, 3/22/2010

Table of Contents

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

Market Wrap

Stocks Shrug Off Health-Care Bill To Book Monday Gains

by Todd Shriber

Click here to email Todd Shriber
Passage of the historic health-care reform package had futures trading down last night and got the market off to a sour start this morning, but the down move was short lived as stocks rebounded and all three major U.S. indexes finished another Monday in positive territory. The Dow Jones Industrial actually moved above 10,800 before settling at 10,785.89, up about 44 points on the day. The S&P 500 gained nearly six points to finish the day at 1165.81 and the Nasdaq continued its flirtation with 2400, gaining 21 points to close at 2395.40.

Stats Table

As is par for the course with major, controversial legislation, the House passed a health-care reform package of historic proportions last night when they were probably hoping no one was watching, but that was not the case. The Senate is expected to take up the bill on Tuesday with the intent of implementing some fixes to the House version, but press reports are saying that President Obama could sign the bill into law as early as tomorrow afternoon.

For their part, Republicans are not going quietly into the night on this issue. Sen. Jim DeMint (R-SC) and Rep. Steve King (R-IA) have filed bills in their respective houses to repeal the bill and it goes without saying tomorrow's Senate proceedings will be loaded with procedural gimmicks aimed at stopping this bill from seeing the light of day. One would think with all of these external factors weighing on health-care-related stocks, the sector would have been in for some pain today.

To be sure, health insurance providers were a mixed bag today with Aetna (AET) and Cigna (CI) both finishing the day higher, but Humana (HUM) and WellPoint (WLP) both closed lower. Investors in the pharmaceuticals space seem to like the bill as Abbott Labs (ABT) and Dow components Merck (MRK) and Pfizer (PFE) both finished up on the day, helping the Health Care Select SPDR (XLV) and the Pharmaceutical HOLDRs ETFs to finish in the green.

XLV Chart

PPH Chart

Not lost in the health-care shuffle is the fact that financial reform will now move to the front burner with the imminent passage of the health-care bill. Just hours after the health-care bill was passed by the House, the Senate Banking Committee voted to move ahead with financial reform. The vote was 13-10 along party lines, no surprise there.

The bill, sponsored by Sen. Chris Dodd (D-CT) may not be strong enough for the White House's taste, but it does have the support of the Wall Street crowd, making its passage somewhat dubious. Even if the bill makes it out of committee, it must be reconciled with a House version and then come back to the Senate for a full vote where the Democrats are one vote shy of cloture. Sixty votes are needed to avoid procedural wrangling and actually get a straight forward vote and the Democrats have 59 votes, assuming no Republicans jump ship.

Financials were a mixed bag on the news, with Goldman Sachs (GS) and Morgan Stanley (MS) finishing lower on the day, but banks with more retail exposure, such as Wells Fargo (WFC) and Dow members Bank of America (BAC) and JPMorgan Chase (JPM) all finished higher on the day. The Financial Select SPDR (XLF) ended up with a small gain on the day.

XLF Chart

In other stock-specific news, there were a couple of somewhat encouraging earnings reports out of the retail sector. High-end jeweler Tiffany (TIF) said its fourth-quarter profit more than quadrupled to $140.4 million, or $1.10 a share, from $31.1 million, or 25 cents a share, a year earlier. Sales rose 17% to $981.4 million from $837.6 million. The profit number missed the consensus estimate of $1.13 a share, but the top line number did beat the average estimate of $970.9 million.

Tiffany shares spent most of the day in positive territory, eking out a small gain and that gain was probably realized because the company said it expects to earn $2.45 to $2.50 a share this year on revenue of $3 billion. Analysts had been expecting a profit of $2.43 a share on sales of $2.9 billion. Analysts remain bullish on the name and Tiffany may be offering proof that when it comes to earnings, it's not what a company says it did, but what it expects to do.

Tiffany Chart

Williams-Sonoma (WSM) was another name on the higher-end of the retail spectrum that was in the news today. The home furnishings retailer said it earned $88.4 million, or 81 cents a share, in the fourth quarter, compared with $12.2 million, or 12 cents a share, a year earlier. Sales rose 8.1% to $1.1 billion from $1 billion. Excluding items, Williams-Sonoma earned 86 cents a share and that blew away the average analyst estimate of 74 cents.

The California-based company said robust sales at its Pottery Barn and Pottery Barn Kids stores helped drive the profit growth. Like Tiffany, Williams-Sonoma offered bullish 2010 guidance. The company said it expects earnings to rise 22% to 33% to $1.16 to $1.26 a share on sales of $3.2 billion to $3.3 billion. Analysts had been expecting earnings of $1.02 a share on revenue of $3.2 billion.

And just as Tiffany did earlier this year, Williams-Sonoma said it will boost its quarterly dividend to 13 cents a share from 12 cents. All of this good news helped the stock gain $2.96, or 12.26%, to close at $27.10 after touching a new 52-week high of $27.27 earlier in the trading session. Volume was nearly quadruple the daily average.

Williams-Sonoma Chart

Speaking of bullish 2010 guidance PepsiCo (PEP), the world's second-largest soft drink maker, started its two-day analyst meeting today at Yankee Stadium. Chief Executive Officer Indra Nooyi reiterated that the company expects earnings to rise by 11% to 13% this year and that the company is still aiming for low double-digit growth in 2011 and 2012.

Nooyi added that Pepsi is focusing on healthier drinks and snacks that have less calories, sugar and salt. The company, which raised its dividend and announced a $15 billion share buyback plan last week, said it plans to invest ''aggressively'' in emerging markets such as Brazil, China, India and Russia.

And speaking of emerging markets, China continues to be a real thorn in the side of Internet search king Google (GOOG). Google ended its four-year old policy of providing censored content to users in mainland China today. What this means is that if you go to the Chinese version of Google, google.cn, you will be redirected to Google's Hong Kong site, google.hk.

That is not much of an elixir because the Chinese government can still restrict the links that users on the mainland can view and shows that Google, for all of its power, was probably short on power and long on hubris when it came to dealing with the Chinese government. If push comes to shove, Beijing will not have any qualms about shutting off access to Google in China completely. They have already taken similar action with Facebook, Twitter and Google's YouTube, according to the Associated Press.

Google, which has about 700 staffers in China, said it might remove some sales staff from the country. As I mentioned last week, China has its own Google in the form of Baidu (BIDU), so Google's refusal to play by China's rules is vexing, particularly when considering how important the Chinese market is to American companies. When many American companies set up shop in global markets, they tailor their products to adhere to local customs, rules and traditions. For example, you will not find a Big Mac on the menu of a McDonald's (MCD) in Bangalore. Why Google thinks it is above similar practices is anyone's guess. Not surprisingly, the stock was down on the China news.

Google Chart

Looking at the charts, the Dow has notched gains in nine of the past 10 trading session with last Friday being the lone down day in that time frame. The index again traversed 10,800 today before settling below that mark, but it appears that resistance at 10,725 has now turned into support. Even with the retreat below 10,800, the Dow is still trading at a 14-month high.

Dow Chart

The S&P 500 snapped a small two-day losing streak today, but could not hold the highs of the day and closed just below 1160. The next hurdle for the index is 1170 and support looks firm at 1150. Neither the health-care news nor the financial reform headlines stood in the way of stocks on Monday and that is a bullish sign for the S&P 500.

S&P 500 Chart

As I mentioned earlier, the Nasdaq bumped into some resistance at 2400 today, the second-time it has done so since last Wednesday. Last Thursday and Friday, the Nasdaq did not even make it to 2400 intraday, so the bulls will need to push the Nasdaq through 2400 with some vigor to dispel any concerns regarding the near-term health of the index. If 2400 is broken on strong volume, there is a lot of room to run to 2473, which was the July 2008 high.

Oracle's (ORCL) earnings report on Thursday could help (or hinder) the Nasdaq's ascent. When Oracle delivers an earnings surprise, it is usually to the upside. The stock's moves off its last five earnings reports are 6%, -3%, 7%, 10% and 7% respectively.

Nasdaq Chart

It is hard not to be impressed by the resilience shown by equities on Monday in the face of political headwinds and it makes me wonder where the major indexes would be trading if Washington was not such a prevalent factor in the markets. Shorts are continually getting squeezed and they may wave the white flag any day now with the intent of regrouping if there is profit taking in early April. For now, the safe bet is on the bulls.


New Option Plays

Window Dressing Candidate

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Apple Inc - AAPL close: 224.75 change: +2.50 stop: 219.80

Company Description:
Apple ignited the personal computer revolution in the 1970s with the Apple II and reinvented the personal computer in the 1980s with the Macintosh. Today, Apple continues to lead the industry in innovation with its award-winning computers, OS X operating system and iLife and professional applications. Apple is also spearheading the digital media revolution with its iPod portable music and video players and iTunes online store, and has entered the mobile phone market with its revolutionary iPhone. (source: company press release or website)

Why We Like It:
As much as I want the market to correct to offer us a better entry point it may not happen. Given the show of strength in stocks today we could end up seeing a late-month surge as money managers buy stocks as window dressing for quarter end. Shares of AAPL look like a nice target for window dressing. Shares are trading near their highs and yet AAPL has been consolidating sideways for the last several days. More aggressive traders could buy calls now and use a stop loss under today's low and support near $220.00. I would rather see a breakout from this trading range ($220-227). I'm suggesting a trigger to buy calls at $228.00. If triggered our first target is $234.90. Our second target is $239.75. We'll use a stop loss at $222.49. FYI: I'm still concerned that stocks are overbought. I would keep your position size small.

Trigger to buy calls at $228.00

Suggested Position: BUY CALL APRIL $230 (AAPL 10D230.00) current ask $3.95

Annotated Chart:

Entry on March xxth at $ xx.xx
Earnings Date 04/21/10
Average Daily Volume = 18.6 million
Listed on March 22nd, 2010



In Play Updates and Reviews

Shorts Scramble

by James Brown

Click here to email James Brown

Editor's Note:

The stock market refuses to correct. After Friday's decline and weakness in Europe prior to the open, many traders were looking for another down day. When stocks rebounded from their morning lows shorts scrambled to cover.

Current Portfolio:


CALL Play Updates

Cash America - CSH - close: 39.88 change: -0.34 stop: 36.75

After Friday's reversal under resistance CSH is seeing some follow through. Shares lost 0.8% and closed under the $40 level. I do not see any changes from my prior comments. We still have two different entry points just be aware that the breakout entry point is very aggressive and higher risk.

Our first is the buy-the-dip strategy with a trigger to buy calls at $38.25. If CSH hits $38.25 we want to buy the April $40 calls and we'll use a stop loss at $36.75. Our first target is $41.00. Our second target is $44.00.

We also have a breakout trigger to buy calls on CSH if shares hit $41.20. This is a much more aggressive entry point so we want to keep positions small. If CSH hits our trigger at $41.20 we'll use a stop loss at $39.40. Our target is $44.25. We want to buy the April $45 calls. They are cheap so don't go overboard. Remember, small positions! This way if CSH reverses on us we will limit our risk.

Buy-the-Dip: Use a trigger at $38.25 to buy calls.

Suggested Position: BUY CALL APRIL $40 (CSH 10D40.00) current ask $1.55

Buy-the-Breakout: Use a trigger at $41.20 to buy calls.

Suggested Position: BUY CALL APRIL $45 (CSH 10D45.00) current ask $0.15

Entry on March xxth at $ xx.xx
Earnings Date 04/22/10
Average Daily Volume = 272 thousand
Listed on March 13th, 2010


Cognizant Technology - CTSH - close: 51.87 change: +0.62 stop: 49.75

CTSH displayed some relative strength with an early morning rally but the stock stalled at its recent highs near $52.00. The good news here was the lack of follow through on Friday's bearish reversal pattern. I am not suggesting new bullish positions at this time. More conservative traders may want to up their stops toward the $50.50 level. Our initial target is $54.75.

Current Position: CALL APRIL $55 (CTSH 10D55.00) @ 0.40

Entry on March 11th at $ 50.54
Earnings Date 05/04/10
Average Daily Volume = 4.05 million
Listed on March 10th, 2010


L-3 Communications - LLL - close: 94.17 change: +0.00 stop: 91.25

Hmm... today is the second day in a row that LLL has closed virtually unchanged on the session. Friday saw a failed rally at $95 and dip to unchanged. Today saw a spike lower to $93.21 before bouncing back to drift sideways. If we step back and look at the bigger trend LLL is still climbing and today looks like a bounce from the rising 10-dma. I would consider new positions here but keep them small. More conservative traders may want to raise their stop a tad. Our first target is $97.00. Our final target is $99.75.

We chose the $100 calls to keep our capital investment very small. Keep your position size limited.

Current Position: BUY CALL APRIL 100.00 (LLL 10D100.00) @ $0.30

Entry on March 18th at $ 93.88
Earnings Date 04/22/10
Average Daily Volume = 908 thousand
Listed on March 17th, 2010


NII Holdings Inc. - NIHD - close: 40.93 change: +0.73 stop: 38.45

Traders bought the dip Monday morning and NIHD erased Friday's decline. Unfortunately the technical indicators still look like they are about to roll over. More conservative traders may want to raise their stop loss. I am not suggesting new bullish positions at this time. Our first target is the $44.00 level.

Suggested Position: BUY CALL APRIL $40 (NIHD 10D40.00) @ $1.85

Entry on March 11th at $ 40.10
Earnings Date 04/22/10
Average Daily Volume = 2.68 million
Listed on March 10th, 2010


Panera Bread Co. - PNRA - close: 78.70 change: -0.29 stop: 74.75

PNRA is still consolidating with a bullish trend of higher lows while testing resistance near $80.00. I am not suggesting new positions at this time. This was an aggressive trade given our entry point. Our first target is $82.45. FYI: It is worth noting that PNRA could announce a stock split one of these days. The last time shares split was in the $75-80 zone back in June 2002.

Suggested Position: CALL APR 80.00 (PNRA 10D80.00) @ $1.35

Entry on March 11th at $ 77.18
Earnings Date 04/28/10
Average Daily Volume = 519 thousand
Listed on March 9th, 2010


PartnerRe Ltd. - PRE - close: 78.78 change: -0.32 stop: 77.75

Monday was a relatively quiet session for PRE. Traders bought the dip around lunch time so shares were bouncing higher into the closing bell. I don't see any changes from my weekend comments.

The plan is to buy calls if PRE hits our trigger at $80.55. If triggered we'll use a stop loss at $77.75 (under Friday's low). Our first target is $84.75. Our second, longer-term target is $89.00. There is potential resistance near the October 2009 highs so don't be surprised to see some congestion there. If the market does retreat this week we'll be watching for an alternative entry point in PRE to buy the rebound.

Trigger to buy calls at $80.55

Suggested Position: BUY CALL APRIL $80.00 (PRE 10D80.00) current ask $1.05

Entry on March xxth at $ xx.xx
Earnings Date 04/27/10
Average Daily Volume = 989 thousand
Listed on March 20th, 2010


PUT Play Updates

*Currently we do not have any put play updates*


CLOSED BULLISH PLAYS

Green Mountain Coffee Roasters - GMCR - cls: 95.79 chg: +1.89 stop: 92.95

GMCR may be a bit too volatile for us. Shares opened at $92.98 but spiked down to $91.82 before rebounding sharply higher. GMCR ended the day with a 2% gain. Unfortunately we were stopped out at $92.95. We knew this was an aggressive, higher-risk trade, which is why I suggested small positions.

Closed Position: BUY CALL APRIL $100 (GMCR 10D100.00) @ $1.00
Entry was at $2.00

Annotated Chart:

Entry on March 17th at $ 95.26
Earnings Date 04/29/10
Average Daily Volume = 1.17 million
Listed on March 13th, 2010


CLOSED BEARISH PLAYS

Sears Holding - SHLD - close: 107.47 change: +3.86 stop: 106.26

SHLD just whipsawed us right out of this trade. The stock opened weak, spiked down to $102.06, and the ricocheted higher. SHLD broke out past resistance near $106 to hit new 52-week highs. We had a trigger to buy calls at $102.40 so the morning spike lower opened the play and the spike higher stopped us out. This was labeled an aggressive, higher-risk trade and we wanted to keep our positions small.

Triggered at $102.40, stopped at $106.26.

Closed Position: BUY PUT APRIL $100 (SHLD 10P100.00) closed near $1.60
Entry was near $2.65.

Annotated Chart:

Entry on March 22nd at $102.40
Earnings Date 05/20/10
Average Daily Volume = 900 thousand
Listed on March 20th, 2010


Varian Semiconductor - VSEA - close: 30.57 change: +1.28 stop: 30.55

We have a similar situation with VSEA. The stock opened weak ($29.26), dipped to $20.02 before suddenly spiking higher and eventually hitting our stop loss at $30.55 late in the day. This was a tough day for shorts with bears on the run and looking for cover.

VSEA hit our stop loss at $30.55

Closed Position: BUY PUT APRIL $30.00 (VSEA 10P30.00) @ $0.90
Entry was at $1.55

Annotated Chart:

Entry on March 22nd at $ 29.29(?)
Earnings Date 04/29/10
Average Daily Volume = 743 thousand
Listed on March 20th, 2010