Option Investor
Newsletter

Daily Newsletter, Wednesday, 4/14/2010

Table of Contents

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

Market Wrap

Earnings, Economic Data Lift Stocks

by Todd Shriber

Click here to email Todd Shriber
It was a day spent in the green for equities as positive economic news and earnings reports helped stocks to fresh highs. The Dow Jones Industrial Averge plowed through 11,000 to book a triple-digit gain, adding almost 104 points to close at 11,123.11, right near the next resistance level at 11,125. Perhaps more importantly, the S&P 500 strongly moved past 1200, adding over 13 points to close at 1210.65 while the Nasdaq posted a strong gain of its own, gaining almost 39 points to finish the day at 2504.86. Hey, the Nasdaq merely needs to double again to return to its all-time high.

Stats Table

The rally in equities was aided by some positive economic news, including March retail sales, which show the consumer may be on his way back. March retail sales surged 1.6% over February's tally, helped by gains in auto and apparel sales and the fact that more folks seem to be dining out again. In a Wall Street Journal survey, many economists are now saying their economic growth forecasts for the next 18 months may prove too low and that they may be ''underestimating'' the vibrancy of the economic recovery.

If the return of the consumer proves legitimate and job growth follows, estimates for 3.1% GDP growth in the U.S. this year may prove too conservative. Barclays Capital boosted its GDP estimate to 3.5% on Wednesday after the retail sales news, the Journal reported. That makes sense because as the famous anecdote says, the consumer accounts for 70% of U.S. GDP. The Commerce Department said consumers spent $363 billion in March, up almost 8% from March 2009.

Retail Sales Chart

The Federal Reserve's Beige Book report also had investors smiling on Wednesday. The report showed economic growth in 11 of the Fed's 12 districts with the St. Louis region showing some soft economic conditions. The Beige Book data echoed the sentiments of the retail sales data, with the Fed saying retail and auto sales were firming across the country. Manufacturing activity was up in all regions except for St. Louis and real estate and tourism activity also made gains in many regions.

Auto sales were higher in eight of the 12 districts and it is fair to say in summary that the Beige Book update offered a rosy assessment of the U.S. economy. Fortunately, Fed Chairman Ben Bernanke's testimony on Capitol Hill today helped the cause. Bernanke signaled that interest rate increases were not in his near-term plans and that makes sense as inflation does not appear to be an issue right now. For those that follow bonds, I have included a chart that illustrates spreads between 10-year Treasuries and 10-year TIPS are below the averages of 2004-2007, indicating inflationary pressures are relatively benign in the current market environment.

Treasury/TIPS Spreads

We are at the start of another earnings season and after Intel (INTC) and CSX (CSX) delivered excellent reports yesterday after the close, it was JPMorgan Chase's (JPM) turn to step into the earnings confessional Wednesday morning. The Dow component and second-largest U.S. bank is widely viewed as the strongest U.S. bank and it is the first of the major U.S. financials to deliver earnings results, so yes, this news is kind of a big deal.

JPMorgan did not disappoint, reporting a first-quarter profit jump of 57% to $3.3 billion, or 75 cents a share, from $2.1 billion, or 40 cents a share, a year earlier. The bank posted revenue of $27.7 billion up from $25 billion, handily beating analyst estimates as the bank's trading and investment banking operations were standouts, accounting for $2.47 billion in profit.

The profit numbers were more tame in JPMorgan's retail banking business, but the good news is that the bank is seeing a decline in 30-day credit card delinquencies, which were down from the prior quarter and the year earlier period. The company said it had $19 billion in non-performing assets at the end of the first quarter, down from $19.74 billion at the end of last year. Non-performing loans comprised just 2.39% of the total loan portfolio, a decline from 2.77% in the fourth quarter.

That means JPMorgan set aside less cash for bad loans in the first quarter than it had in prior quarters. The first-quarter loan-loss reserve was $6.99 billion, down from $7.17 billion in the fourth quarter and $8 billion in the third quarter of 2009. One might take that to mean the economy is improving and the next logical step from there is to ponder when the bank will raise its meager dividend. After all, CEO Jamie Dimon has said that he wants to the economy improve and bad loans to subside before a dividend increase is considered.

JPMorgan currently pays a quarterly dividend of just 5 cents a share and when it comes to candidates for dividend hikes, JPMorgan is probably the most watched company out there. For his part, Dimon has tantalized and teased regarding the subject. Dimon's own forecast is for a possible dividend hike in the second half of this year. So take your pick, you have six months to choose from regarding when the market will finally be blessed with this news.

Sure, JPMorgan shares enjoyed a good day on Wednesday, adding over 4%, but it is worth noting that over the near-term, the stock has been outperformed by eight of the 10 largest U.S. banks. That may just be a footnote, but I bet a dividend increase would almost certainly boost JPMorgan shares higher.

JPMorgan Chase Chart

The positive earnings news continued to flow after the market closed as economic bellwether United Parcel Service (UPS) pre-announced its first-quarter numbers with a big upside surprise. The largest package delivery firm in the world said it earned 71 cents a share in the first quarter, compared with 52 cents a share a year earlier, easily beating the consensus estimate of 57 cents a share. Increased demand in international markets helped revenue jump 7%, UPS said.

The good news from UPS did not stop there. The company said it expects to earn $3.05 to $3.30 a share in 2010, well above the guidance of $2.70 to $3.05 a share the company issued in February. Take the middle of that range, which is $3.18 a share, and UPS would easily surpass the Street estimate of $2.95 a share.

The stock was up almost 1% during regular hours on volume that was about 20% higher than the daily average, but UPS shares rocketed higher in the after-hours session and are up $2.97, or 4.54%, to $68.42 as of this writing. As I always say, transportation companies are a great way to gauge the overall health of the economy. Combine the CSX and UPS news and this recovery might be for real after all.

UPS Chart

UPS credited strength in international markets as one reason for the boffo numbers and not to be outdone when it comes to benefiting from global markets was Yum! Brands (YUM), the operator of the Kentucky Fried Chicken, Pizza Hut and Taco Bell fast-food chains. Yum! said it earned $241 million, or 50 cents a share, in the first quarter. Excluding items, the company earned 59 cents a share, beating Street estimates of 53 cents. Yum! earned 48 cents a share a year earlier.

Revenue rose 5.8% to $2.35 billion, beating the consensus estimate of $2.26 billion. Since the chains that Yum! owns are familiar to most Americans, some folks may not realize how important international markets are to the company. Well, let me put it this way: KFC is a big hit in China. Yum! Earned $176 million in China, where it owns 3500 stores, during the first quarter.

Not surprisingly, the company said it expects Taco Bell, its strongest U.S. brand, and international markets to account for 90% of its profits this year, up from 70% in 2004, according to the Wall Street Journal. Yum! shares gained almost 2% during Wednesday's trading session on volume that was more than twice the daily average. After-hours, the stock added another 93 cents, or 2.35%, to move to an all-time high at $42.66.

YUM! Chart

Taking a look at the charts, the Dow had closed above 11,000 a couple of times prior to today, but did so in less-than-impressive fashion. Obviously, Wednesday's close was a different story and the Dow closed right near its intraday high. Where the Dow goes from here will be interesting to watch and of particular importance is whether old resistance at 11,000 can now act as support. There are no Dow members reporting earnings tomorrow, but the break in the action will be short-lived with Bank of America (BAC) and General Electric (GE) stepping to plate on Friday morning.

Dow Chart

The S&P finally made its way beyond legitimate resistance at 1200 to close right at its high of the day. The move above 1200 could prove significant as the index had failed in its two previous attempts to surpass that number. If the earnings reports that are scheduled for the rest of this week mirror what we have seen the past two days, the S&P 500 should continue its march higher.

S&P 500 Chart

Aided by Intel's earnings report, the Nasdaq is looking quite strong and has moved beyond resistance at 2500. Like the S&P 500, the Nasdaq closed right at its high of the day. Internet search giant Google (GOOG) delivers earnings after the close tomorrow and this will be another marquee report for tech investors to digest. Google shares have significantly lagged the Nasdaq in the past three months, gaining just 2% in that time compared to an almost 10% run for the Nasdaq. Analysts are expecting Google to earn $6.57 a share on revenue of $4.93 billion.

Nasdaq Chart

As long as earning reports continue to beat to the upside and companies keep offering bullish full-year guidance, the path of least resistance will be up. Investors are clearly starting to feel better about the economy and even if Google disappoints, that may be a one-off event that can be easily dealt with, particularly if Bank of American can do its best JPMorgan impression on Friday and if GE can continue its bullish ways.


New Option Plays

We Are Adding a Refiner to Our Call Plays

by Scott Hawes

Click here to email Scott Hawes


NEW DIRECTIONAL CALL PLAYS

Holly Corp - HOC - close: 26.86 change: +0.40 stop: 24.95 XXX

Company Description:
Holly Corporation is an independent petroleum refiner that produces light products, such as gasoline, diesel fuel, jet fuel, specialty lubricant products, and specialty and modified asphalt. The Company’s operations are organized into two reportable segments: Refining and Holly Energy Partners, L.P. (HEP). As of December 31, 2009, it owned and operated three refineries consisting of a petroleum refinery in Artesia, New Mexico that is operated in conjunction with crude oil distillation and vacuum distillation and other facilities situated 65 miles away in Lovington, New Mexico (collectively, the Navajo Refinery), a refinery in Woods Cross, Utah (the Woods Cross Refinery) and the Tulsa Refinery; owned and operated Holly Asphalt Company, which manufactures and markets asphalt products from various terminals in Arizona, New Mexico and Texas; owned a 75% interest in a 12-inch refined products pipeline project from Salt Lake City, Utah to Las Vegas, Nevada, and owned a 34% interest in HEP. (source: company press release or website)

Why We Like It:
HOC has touched the bottom of an upward channel which began in December. The stock has also formed two bottoming tail candlesticks (see ovals on chart) which signals that buyers are stepping in and sellers appear to be waning. I think the HOC is poised for a rally and we like it at current levels. There is overhead resistance at the 50-day and 20-day SMA's just below $28.00 which could pose some resistance, however, I think the stock will ultimately break through these levels. We will place a stop just below recent support and the 200-day SMA. Our 1st target is $28.90 and our 2nd target is $29.95.

From a fundamental/contrarian perspective, the Energy Information Administration recently indicated that consumer demand for gasoline this summer will increase only +0.5%, which may have sparked the sell-off in HOC on April 6. However, if consumers are truly making a comeback – as the recent economic data indicates - then I suspect they will be traveling this summer. If any news surfaces that demand for gas will be stronger than last week's forecasts it could be a catalyst for HOC to trade higher.

Suggested Position: Buy CALL MAY $25.00, current ask $2.70

Annotated Chart:

Entry on April 15th at $ xx.xx
Earnings Date May 6th (unconfirmed)
Average Daily Volume = 811,000
Listed on April 14th, 2010


In Play Updates and Reviews

F5 Networks Hit Our Target And We Are Out For A Gain

by Scott Hawes

Click here to email Scott Hawes

Editor's Note:

Good evening traders. I mentioned in my updates last night that when Intel reported similar earnings on January 14 the markets traded higher initially and then sold off hard which sparked a -9% decline in the ensuing weeks. That didn't exactly happen this time around as the rally was stoked by stellar results from CSX and JP Morgan. JP Morgan's earnings were so good this morning that it may be setting other banks up for an earnings disappointment. Any sort of earnings miss by the banks in the coming days/weeks could get a market correction going. This would be the "excuse" traders are looking for to take profits off the table and could spark some selling. Whether this happens or not will soon play out. So continue to be nimble when managing positions, tighten stops, and exit when you can, not when you have to.

Current Portfolio:


CALL Play Updates

Coca-Cola - KO - close: 54.95 change: -0.07 stop: 52.95

KO is seeing resistance in the congestion/resistance area we have been mentioning in the $55 to $56 area. I would like to see if KO can muster up a rally in the coming days to break through this congestion. KO also tends to be a defensive play so it could rally if the overall market is weak. Our target to exit the position remains at $57.00 but I will consider closing the position prior to this level if KO starts to struggle. Conservative traders should consider exiting their positions if KO rallies into the aforementioned congestion zone, with $55.25 as a potential target.

Current Position: 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: 95.61 change: +0.43 stop: N/A

Our highly speculative trade broke out to new 52-week highs today but our call is still probably too far out of the money. The April 100 calls purchased for $0.30 are now essentially worthless. At this point we will need some sort of a catalyst or news event on LLL to make any money. If LLL happens to spike and the options become worth something we will sell them immediately. I am not suggesting any new positions in LLL at this time.

We chose the out of the money $100 calls to keep our capital investment very small and our position size limited.

Current Position: 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


Occidental Petrol. - OXY - close: 86.16 change: +.47 stop: 83.45

OXY continues to see buyers step in near $85.00. On the daily chart OXY has 5 consecutive bottoming tail candlesticks. Monday's price bar could be considered a doji but the point is that buyers continue to step in. I expect OXY to rally from here but we will need crude oil and overall market strength to be in our favor. Our first target is $88.75 which is just below last weeks highs. I am looking for OXY to rally to this level in the next week and if it does it will ensure a nice profit on our position. We'll use a longer-term target at $94.00 but this could take several weeks to achieve.

Current Position: BUY CALL MAY $85.00 (OXY 10E85.00) at $3.25

Entry on April 7th at $85.50
Earnings Date 04/29/10 (unconfirmed)
Average Daily Volume = 5.5 million
Listed on April 6th, 2010


PartnerRe Ltd. - PRE - close: 80.97 change: +1.32 stop: $78.75

PRE had a great day, closing at its highs +1.66%. The stock looks poised to break out above our key $81.05 resistance level and we expect it to test its October 2009 highs of $81.70. If PRE follows through and breaks out above $81.70 we have a good chance to reach our second target of $83.90 (just below the late 2007 highs). The stock in now firmly above its 20-day SMA and is its upward trend line which began on March 10. Our stop is $78.75. PRE has support at $79.30 and $79.00. We are about break-even on our calls right now and the stock is entering a resistance area. I suggest conservative traders consider lightening up positions or taking profits now, especially if PRE continues its rally tomorrow into the $81.70 level, which will also produce a nice winning trade.

Current Position: CALL MAY $80.00 (PRE 10E80.00) $ $2.40

Entry on April 6th at $ 80.55
Earnings Date 04/27/10
Average Daily Volume = 989 thousand
Listed on March 20th, 2010


PUT Play Updates

SPDR S&P 500 Index - SPY - close: 119.74 change: +0.19 stop: 123.05 XXX

Ouch! The trio of earnings reports from Intel, JPM, and CSX sent SPY +1.13% higher today. Our puts took a beating but I am not throwing in the towel quite yet. SPY has technical resistance overhead and I want to stick to our plan. I mentioned in my updates last night that after Intel reported similar earnings on January 14th, the market proceeded to decline -9% in the coming weeks. In addition, JPM's earnings were so good that any sort of earnings miss by the banks in the coming days/weeks could get the market correction going. This may not start until next week after options expiry this Friday though. I am keeping our target at $115.50 and we have a time frame of a couple of weeks. Our stop is $123.05 but expect to lower the stop if the trade gets moving in our direction.

Current Position: SPY PUT MAY $119.00, entry at $2.05

Entry on April 13th at $ 2.05
Earnings Date Not Applicable
Average Daily Volume = 164 million
Listed on April 12th, 2010


CLOSED BULLISH PLAYS

F5 Networks - FFIV - close: 65.21 change: +1.22 stop: 61.40

FFIV spiked higher today on the heels of a price target upgrade from $61 to $73 at Piper Jaffray. The stock rallied and closed +3.27% higher. Our lowered target of $65.95 was hit and we are now flat on the calls at $4.10 for a +36.67% gain. Our initial target of $69.75 could still be hit but I would encourage any readers with positions to tighten stops and exit positions soon on any continued strength. Trying to squeeze out the extra gain will become more stressful.

Closed Position: CALL MAY $65.00 (FFIV 10E65.00) @ $4.10, entry was at $3.00

Annotated Chart:

Entry on April 6th at $ 65.26
Earnings Date 04/21/10
Average Daily Volume = 1.0 million
Listed on April 5th, 2010


Silicon Laboratories – SLAB – close: 52.11 change: +1.60 stop: 47.95

After Intel's blowout earnings yesterday semiconductors broke out to new highs last seen in May 2008. I don't think it is worth chasing SLAB right now as it has already traded through our target. As such we are going to drop the play for now and look for other opportunities when the semiconductors have a meaningful correction.

Suggested Position: Dropped

Annotated Monthly Chart:

Entry on April xxth at $ xx.xx
Earnings Date 4/28/10
Average Daily Volume = 762,000
Listed on April 10th, 2010