Option Investor
Newsletter

Daily Newsletter, Wednesday, 3/24/2010

Table of Contents

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

Market Wrap

European Concerns Pressure Stocks

by Todd Shriber

Click here to email Todd Shriber
The bulls took a breather on Wednesday as new home sales data failed to impress and a downgrade of Portugal's debt weighed on stocks. The declines, while not welcomed, were manageable with the Dow Jones Industrial Average shedding almost 53 points to close at 10,836.15. The S&P 500 lost less than 6.5 points to settle at 1167.72 while the Nasdaq dropped about 16.5 points to close at 2398.76. Declining issues outpaced advancers on both the Nasdaq and New York Stock Exchange by margins of roughly two-to-one.

Stats Table

News out of Europe continues to be a thorn in the side of equity bulls as Fitch Ratings downgraded Portugal's debt rating, saying the country may face problems in repaying its debts. This really should not have come as a surprise to many market observers as only the most optimistic of views believed that Greece's problems were isolated. Speculation has been widespread in the wake of Greece's fiscal issues that Portugal would be among the next proverbial shoes to drop.

Still, the Euro was battered on the news, dropping as much as 1.3% to its lowest level since May 2009. That helped the U.S. Dollar turn its best single-session percentage gain since December. The greenback was up against 15 of the 16 major currencies. Obviously, Euro weakness is good for the Dollar, but not the best of news for stocks. Unfortunately, a UBS analyst said today that Greece will in fact default at some point and Portugal's problems serve to further call the Euro's future into question.

As I mentioned several weeks ago with Greece, we are talking about the 28th largest economy in the world and the UBS analyst correctly noted that if the European Union cannot solve the Greek quagmire, how will it successfully deal with bigger problems that may arise from the likes of Italy and Spain? In an indication of how equity investors hate this kind of news, stocks suffered at the hands of the Portugal news. Portugal is merely the 38th largest economy in the world, smaller than the likes of Argentina, Finland, Iran, Thailand and Venezuela.

Euro Chart

To be sure, the economic data coming out of the U.S. today was not all good news as highlighted by the decline in February new home sales. The Commerce Department said new home sales fell for a fourth consecutive to a record annual low. New home sales fell 2.2% in February to 308,000 units compared with 315,000 sales in January. Economists were expecting the February number to come in at 315,000. Analysts noted that bad weather can be blamed for some of the decline, but that storms and what not do not cover up weakness in the U.S. housing market. On the bright side, the median home price rose 6.1% in February from January and 5.2% year-over-year.

Home Sales Chart

There was some positive economic news in the form of durable goods orders, which rose 0.5% in February, good for the third straight month of increased orders. Excluding transportation-related fare, orders rose by a better-than-expected margin of 0.9% after a 0.6% decline in January, according to the Commerce Department. Orders for non-defense related items, excluding aircraft, rose 1.1% last month as factories boosted their durable goods inventories by 0.3%, the biggest gain since December, Bloomberg News reported. This should be good news for industrial companies as it indicates the economy is getting back on the right track, but the news out of Europe tempered most of the enthusiasm investors had for stocks on Wednesday.

Durable Goods Chart

Somewhat surprising was the strength of financials on Wednesday, led by Bank of America (BAC), the largest U.S. bank. Bank of America was far and away the biggest gainer in the Dow in percentage terms, gaining 44 cents, or 2.57%, to close at $17.57. The Charlotte-based bank said it will forgive up to 30% of some customers' mortgage balances if those customers are at least two months past due and owe at least 20% more than the current value of their home.

The new initiative is part of an agreement Bank of America reached with various state attorneys general to settle charges related to high-risk loans made by Countrywide, which Bank of America acquired, according to the Associated Press. Bank of America said 45,000 customers with a total of $3 billion in principal are likely to qualify for the plan. The effort follows a similar move by Wells Fargo (WFC), modified 52,000 adjustable-rate mortgages through its acquisition of Wachovia.

Citigroup (C) did not say whether it has similar plans and JPMorgan Chase (JPM), another Dow member, did not comment at all. Wells Fargo was down on the day while Citi and JPMorgan were both up slightly. BofA's chart (below) is looking pretty strong and it is hard to deny Citi has had a nice run as of late while the durability of JPMorgan Chase and Wells Fargo has also been noteworthy. On the other hand, it would be encouraging to see, one or more members of this quartet do something meaningful regarding their dividends later this year.

Bank of America Chart

Speaking of dividends, coffee house giant Starbucks (SBUX) announced its first-ever quarterly dividend today at its analyst meeting. This is news that was widely expected and to its credit, Starbucks delivery of a 10-cent per share payout beats the six cents many analysts were expecting. A 40-cent annual dividend gives Starbucks a yield of about 1.6% based on Wednesday's closing price of $25.29.

The company also added 15 million shares to a repurchase plan that still has 6.3 million shares remaining, but the stock closed lower on the day and maybe the dividend was the reason why. For nearly its entire existence, Starbucks has been viewed as a growth company and the fact that the shares have doubled in the past year would do little to convince many investors otherwise, but dividends are often viewed as a tool used by more mature, even stodgy companies, to reward their shareholders in the absence of rapid capital appreciation. So it might be fair to assume some investors do not like the fact that Starbucks is evolving to a more of a value play than a growth stock.

Starbucks Chart

Then again, there is something to be said for those mature value stocks. Today's example: General Mills (GIS). The owner of some of the most ubiquitous cereal brands as well as the Pillsbury, Progresso, Haagen-Dazs and Betty Crocker labels among others, said its fiscal third-quarter earnings soared to $332.5 million, or 96 cents a share, from $288.9 million, or 85 cents, a year earlier. Excluding items, General Mills earned 97 cents a share, beating the Street estimate of 94 cents.

Sales rose 3% to $3.63 billion, led by a 6% increase in the cereal line and a 15% increase in the snack business. Gross profit margin jumped to 38% from 36.1%. Minnesota-based General Mills did what the good companies do and what investors should look for and that is beat, beat and guide. The company said it expects to earn $4.57 to $4.59 a share in fiscal 2010, up from previous guidance of $4.52 to $4.57 a share. This is the second time since September the company has upped its guidance.

Do not forget that General Mills offers a fair yield at 2.7% and that in 2009, one of the worst years ever for dividends, the company raised its payout not once, but twice. Showing what a pain Portugal and Greece are, General Mills shares closed lower by $1.39 at $72.18.

General Mills Chart

Looking at the charts, the Dow's decline today is not too alarming. After all, the index is up about 5% this month and large-cap blue chip names have played a big role in the recent rally, so a one-day pit stop to take a breather is nothing to fret about. Support is in place at 10,700, though it is unlikely that we see that level again this month with just five trading days left. The next hurdle remains 11,000.

Dow Chart

The S&P 500 certainly has enjoyed the aforementioned large-cap rally and I still think support is strong around 1150, though 1160 might we worth looking at as well. Again, it would take a large-scale negative surprise to get us back to 1150 before the end of the month. There are still a lot of shorts out there that need to do some covering and that could be the catalyst that gets the S&P 500 closer to resistance at 1200. Best Buy's (BBY) earnings report before the bell tomorrow is worth watching. Analysts are expecting the retail giant to post earnings of $1.79 a share.

S&P 500 Chart

It is difficult to surmise why the Nasdaq was down today beyond broader market weakness. Apple (AAPL) touched another 52-week high, Adobe (ADBE) was higher on a strong earnings report, both Baidu (BIDU) and Google (GOOG) enjoyed solid gains, but Research In Motion (RIMM) was down, helping the Nasdaq close below the all-important 2400 level. The index is just a few points away from support at 2395, but a catalyst in the form of Oracle's (ORCL) earnings report after the bell tomorrow is there to potentially help the Nasdaq close above 2400 by the end of the week.

Nasdaq Chart

The next two days are light regarding economic data points and save for the Best Buy and Oracle earnings updates, there are not any other marquee names scheduled to deliver quarterly reports, so it will be interesting to see if Wednesday's trade qualifies as a dip and if that dip is subsequently bought through the end of the week.


New Option Plays

Big Winner

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Wynn Resorts - WYNN - close: 75.81 change: -0.52 stop: 69.29

Company Description:
Wynn Resorts, Limited is traded on the Nasdaq Global Select Market under the ticker symbol WYNN and is part of the S&P 500 and NASDAQ-100 Indexes. Wynn Resorts owns and operates Wynn Las Vegas (www.wynnlasvegas.com) and Wynn Macau (www.wynnmacau.com). Wynn Las Vegas, a luxury hotel and destination casino resort located on the Las Vegas Strip features 2,716 luxurious guest rooms and suites; an approximately 111,000 square foot casino; 22 food and beverage outlets; an on-site 18-hole golf course; approximately 223,000 square feet of meeting space; an on-site Ferrari and Maserati dealership; and approximately 74,000 square feet of retail space. Encore (www.encorelasvegas.com), the new signature resort in the Wynn collection, opened December 22, 2008 (www.encorelasvegas.com). Wynn Macau is a destination casino resort in the Macau Special Administrative Region of the People's Republic of China and currently features 600 deluxe hotel rooms and suites; approximately 205,000 square foot casino; casual and fine dining in five restaurants; approximately 46,000 square feet of retail space; a health club, pool and spa, along with lounges and meeting facilities. (source: company press release or website)

Why We Like It:
Gambling and casino stocks have been showing relative strength in this market. Some of the big players with exposure to Macau are poised to win big. With the Chinese economy chugging along at full speed more and more Chinese gamblers are choosing to visit the Macau resorts. WYNN just announced this week that its Macau operations posted a 77% rise in profits. Overall investors have been bidding up companies with exposure to discretionary consumer spending. Technically WYNN appears to be in the process of breaking out from a six-month consolidation phase. I am suggesting we use a trigger to buy calls on WYNN at $71.50. If triggered we'll use a stop loss at $69.29. Our first target is $76.50. Our second target is $79.90. Longer-term traders could aim a lot higher.

Trigger to buy calls at $71.50

Suggested Position: BUY CALL APRIL $75 (WYNN 10D75.00) current ask $3.40

Annotated Chart:

Entry on March xxth at $ xx.xx
Earnings Date 05/05/10
Average Daily Volume = 2.7 million
Listed on March 24th, 2010



In Play Updates and Reviews

Stocks Slip on Portugal Downgrade

by James Brown

Click here to email James Brown

Editor's Note:

Investors are still nervous about how the EU is going to solve the debt problems for their weakest members. Traders took a little money off the table in reaction to Portugal being downgraded by Fitch. Overall the trend remains up with only five days left in the first quarter.

Current Portfolio:


CALL Play Updates

Apple Inc - AAPL close: 229.37 change: +1.01 stop: 222.49

AAPL shrugged off market weakness to close at new highs. Shares did struggle with the $230 level all day long. If the stock sees a pull back I would look for support and a new entry point on a dip or a bounce near the $226-225 area. Our first target is $234.90. Our second target is $239.75. More aggressive traders may want to keep their stop loss under support at the $220 level. FYI: I'm still concerned that stocks are overbought. I would keep your position size small.

Current Position: BUY CALL APRIL $230 (AAPL 10D230.00) current ask $5.25

Entry on March 23rd at $228.00
Earnings Date 04/21/10
Average Daily Volume = 18.6 million
Listed on March 22nd, 2010


Cash America - CSH - close: 39.31 change: -0.31 stop: 36.75

CSH slipped lower again but shares seemed to find some support near their 30-dma. Our plans have not changed. We have two different entry points spelled out. Be aware that the breakout entry point is more 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: 51.92 change: -0.60 stop: 49.75

CTSH edged away from yesterday's 52-week high. Technical traders will note that the MACD indicator on the daily chart is about to produce a new sell signal. I am suggesting caution here and we are not suggesting new bullish positions at this time. More conservative traders may want to up their stops toward the $50.50 level. I see what could be short-term support near $51.00. 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


Express Scripts - ESRX - close: 100.83 change: -1.17 stop: 97.99

ESRX is fading back toward the $100 level. As broken resistance the $100 level should offer the stock some support. I suggested that more patient traders wait for a dip near $100 as their entry point. I do consider this an aggressive trade since ESRX is so over extended but it can always grow more overbought. Our first target is $104.90. Our second target is $107.45. More aggressive traders could aim higher. Our time frame is just a couple of weeks.

Current Position: BUY CALL APRIL $105 (ESRX 10D105.00) at $1.10

Entry on March 24th at $101.99
Earnings Date 04/29/10
Average Daily Volume = 2.51 million
Listed on March 23rd, 2010


Coca-Cola - KO - close: 54.62 change: -0.68 stop: 52.95

Shares of KO retreated after breaking out past the $55 level yesterday. Shares are near what should be technical support at the 50-dma. Readers can use this dip as an entry point or wait for a bounce from here. After breaking out from its nearly four-month consolidation I'm expecting KO to try and catch up with its rivals. The stock doesn't move super fast but I envision a rally toward the December highs over the next few weeks. Our target to exit is $59.00.

Current Position: BUY CALL May $55.00 (KO 10E55.00) at $1.62

Entry on March 24th at $ 55.22
Earnings Date 04/21/10
Average Daily Volume = 14.6 million
Listed on March 23rd, 2010


L-3 Communications - LLL - close: 93.52 change: -1.10 stop: 91.25

Shares of LLL followed defense stocks and the major market indices lower. The stock closed on its rising 10-dma. If you believe the trend is still up then this could be a new entry point to buy calls. Readers may want to wait for a bounce from the $92.50-92.00 zone before launching positions again. 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: 41.25 change: -0.40 stop: 39.45

NIHD is still trying to rally. Shares hit a new relative high this morning at $42.19. Unfortunately the stock reversed as the rest of the market contracted. I suspect NIHD is poised to retest the $40.00 level again soon. Wait for a bounce from $40 before considering new positions. Our first target is the $44.00 level.

Current 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


Priceline.com - PCLN - close: 243.80 change: -0.61 stop: 236.00

Wednesday turned out to be a quiet day for a high-dollar, somewhat volatile stock like PCLN. Shares just drifted sideways in a narrow range, which I see as a show of strength since traders could have used the market weakness as an excuse to take profits. Instead PCLN remains poised to breakout higher from this consolidation.

The recent high was $246.01. I'm suggesting we buy calls at $246.50. This is a very aggressive trade. We need to keep our positions small. If triggered at $246.50 I'm suggesting a stop at $236.00. Our target is $275.00. Our time frame is about four weeks.

Trigger to buy calls a $246.50.

Suggested Position: BUY CALL APRIL $260 (PCLN 10D260.00) current ask $2.20

Entry on March xxth at $ xx.xx
Earnings Date 05/11/10
Average Daily Volume = 793 thousand
Listed on March 23rd, 2010


Panera Bread Co. - PNRA - close: 78.84 change: +0.00 stop: 74.75

PNRA closed unchanged on the session. The early morning rally attempt faded after shares hit $79.64. The $80 region is proving to be overhead resistance. I don't see any changes from my prior comments. 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: 79.58 change: +0.67 stop: 77.75

PRE is finally starting to move again. The stock displayed relative strength with a 0.8% gain while the rest of the market retreated. This is a breakout from the consolidation over the last two weeks. More aggressive traders may want to jump in early and buy calls right here! I am suggesting we stick to our original plan.

That 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.

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*