Option Investor
Newsletter

Daily Newsletter, Monday, 3/28/2011

Table of Contents

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

Market Wrap

Excuses Abound As Stocks Slide

by Todd Shriber

Click here to email Todd Shriber
For those that believe markets love to have an excuse to sell-off, that scenario was certainly at play on Monday as investors digested at a glum earnings report from a marquee consumer discretionary name and had to contend with renewed headline risk out of Japan and the Middle East. The combination was enough to erase the middling gains notched earlier in the trading day and send all three major U.S. indexes to negative closes right at their intraday lows.

Stats Table

Using the economic data points that were released this morning as a guide, this should have been a much stronger start to the week for stocks than it ended up to be. Consumer spending rose 0.7% in February and personal incomes jumped 0.3%, thanks to a tax cut, the Commerce Department said. As I often say with regards to these types of reports, the devil is in the details: Adjusted for inflation, incomes fell 0.1% and consumer spending jumped just 0.3%. In other words, rising gas and food prices may be starting to pinch the consumer a tad.

On the other hand, Julia Coronado, chief economist at BNP Paribas, said in an interview with Bloomberg, that rising food and energy costs are not derailing consumer spending. I consider myself a stock/ETF guy as that is my background in both trading and writing, so I like to leave the macro commentary to others more qualified, but it is becoming at least slightly apparent that inflation is a concern.

Consumer Spending/Personal Incomes

There was another dose of good economic news and believe it or not, it came from the housing market. Pending sales of previously owned homes climbed 2.1% in February to a reading of 90.8, according to the National Association of Realtors. Economists were expecting a decline of 1%. Yep, this is what passes for good housing news these days.

There is no doubt, and the chart below illustrates the point, that residential real estate has suffered some mighty declines over the past few years. It is certainly safe to say that gone are the halcyon days of 2005-2006 and one has to wonder when, if ever, those times will return. As I have noted recently, part of the problem is that first-time buyers are still facing barriers to entry. They only accounted for 29% of existing home purchases in January and just 34% in February. Those numbers should be 40%-45%.

Housing Chart

Taking a look Marriott's (MAR) performance today, maybe there is reason to still be concerned about consumer and business spending. The largest U.S. hotel chain plunged almost 6.3% to its lowest level in 10 months after saying slack demand in North America will weigh on revenue per available room (RevPAR) and come in at the low end of estimates.

The company said first-quarter RevPAR will jump about 7%, that's the low end of previous guidance of 7%-9% Marriott issued last month. Large group hotels in New York, Atlanta, Washington a Orlando, according to Bloomberg. Maryland-based Marriott said it expects first-quarter RevPAR in North America of 5%-6%, below the previous guidance of 6%-8%.

While Marriott is still optimistic on international markets, today's news from the company was also damaging for rivals Starwood (HOT) and Hyatt (H), which lost 5.7% and 6.3%, respectively.

Marriott Chart

Now if you want some better news and news that will keep you guessing about which direction the economy is headed, take a look at Wabtec (WAB). Shares of Pennsylvania-based Wabtec jumped over 12% after the company boosted its first-quarter and full-year guidance. What does Wabtec do and why should investors and traders care?

The company makes rail parts, stuff used for locomotives and freight cars. Wabtec offered up first-quarter guidance of a profit of 77-82 cents a share and for the full year, the company expects to earn $3.15-$3.25 a share. The company originally forecast a full-year profit of $2.90 a share. Analysts were forecasting a first-quarter profit of 69 cents a share and a full-year profit of $2.98.

Given those numbers, it is probably reasonable to assume that CSX, NSC, UNP and friends are ordering parts and related fare. Now if railroad operators are doing that, perhaps it means they are also hauling more coal, autos, raw materials, etc. and that of course would be good news for the U.S. economy. We will see in a few weeks. CSX steps into the earnings confessional on April 19 and UNP follows on April 20.

Wabtec Chart

It was a docile day on the mergers and acquisitions front as the biggest deal of the day comes in the form of EBay's (EBAY) $2.4 billion deal to acquire GSI Commerce (GSIC). EBay will pay $29.25 a share for GSI, a 51% premium to where the shares closed on Friday. EBay already has a relationship with GSI, which manages e-commerce Web sites for some major retailers, through PayPal and the online auction giant is hoping to leverage that relationship by taking advantage of GSI's distribution network.

The acquisition, which will be financed with cash and debt, indicates that EBay wants to take the fight to rival Amazon (AMZN). Amazon has the larger distribution network, making it more attractive to third-party sellers. At a 51% premium, EBay is paying up for GSI. The buyers of more than 300 similar companies during that past five years paid a premium of 44% compared with the target’s average price over 20 trading days before the announcement, according to Bloomberg.

GSI has 40 days to solicit offers from other companies and EBay can then match any other offer, so it will be interesting to see if Amazon, which has $8.76 billion in cash on hand, wants to get involved here. What is clear is that EBay needs to do something to galvanize its shares. Of course the run off the March 2009 low is impressive, but that can be said of almost every stock. Look out over the past five years and the Nasdaq has sharply outperformed EBay. Of course, today was a great day to be a GSI shareholder.

GSI Chart

Looking at the charts, no it was not pleasant to see stocks closer lower on the day, but if you had similar feelings about Friday's late-day sell-off that cut some impressive gains down, there's good reason for that: Volume was once again weak today. If the 6.4 billion shares that changed hands on Friday did not excite you, the 5.91 billion that was Monday's volume will not either. That is the lowest volume day since New Year's Eve.

With a close around 1310, the S&P 500 is still far enough off support at 1300 that it would take a pretty dismal day to get us back there, but I am getting the feeling that there is going to be quite a tussle in the 1320-1330 range, assuming the S&P 500 can get there, before Friday's jobs report.

S&P 500 Chart

A loss of almost 23 points on the Dow is nothing to be alarmed about and it is pretty easy to see why this meager loss transpired today. While CAT found its way to small gain, CVX, MMM and XOM all closed lower. On an intraday basis, Monday was the second consecutive day the Dow made its away above, but failed to close at or above resistance in the 12,250-12,275 area. Just below 12,200, the blue-chip Index is obviously far closer to resistance than it is to mental support at 12,000 and the more firm floor at 11,800.

Dow Chart

In this week's version of ''Apple (AAPL) cannot do all the work,'' the Nasdaq found its way to a lower close despite news that the iPad 2 sold out in its international debut over the weekend. If you are reading this from Australia, Canada, France, Germany or the U.K. and were able to procure an iPad, congratulations, because from the reports I read, the odds were not in your favor.

Still, that was not enough for the Nasdaq today. At 2730, the Nasdaq could go either way to support at 2700 or resistance at 2766. We are still several weeks away from most of the big earnings reports from Nasdaq stars, so I would bet the Nasdaq just follows the broader market for the rest of this week.

Nasdaq Chart

Rather than regale you with a fun fact this week in the form of words, I will let a chart, courtesy of Bespoke Investment Group, do the talking. The chart shows that while the S&P 500 has not climbed all the way back to its February peak, the advance/decline line is now at its highest levels of the bull market.

Advance/Decline Line


New Option Plays

Uninspired

by James Brown

Click here to email James Brown

Editor's Note:

The market's performance on Monday was sleep inducing, right up until the last half hour. After a +5% bounce off its mid March lows I'm not surprised to see some profit taking. Yet at the same time stocks could see end of quarter window dressing keep any dips to a minimum. Add in a week with lots of economic data coming out and there is a good chance that stocks merely churn sideways for a few days here.

Keep an eye on the OIX oil index and the OSX oil services index. Both of these indices have rallied right toward their previous highs and stalled. A reversal here will look like a potential bearish double top formation.

If you like to trade tech stocks I'd keep an eye on GOOG. The stock looks weak here and could be vulnerable to more profit taking.

No new candidates tonight.

- James


In Play Updates and Reviews

Lackluster Finish

by James Brown

Click here to email James Brown

Editor's Note:

The market's early gains faded by the closing bell. Overall it was a lackluster session. We did see CSX hit one of our profit targets.

-James

Current Portfolio:


CALL Play Updates

Baker Hughes - BHI - close: 73.76 change: +2.68

Stop Loss: 67.95
Target(s): 76.50, 79.75
Current Option Gain/Loss: +63.0% and +32.1%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
03/28 update: It was a relatively quiet day for the stock market but not for BHI. Some of the oil service plays were showing relative strength. BHI was one of them. The stock broke out again past resistance near $72.00 and tagged new two-year highs near $75 before paring its gains. Over the weekend I suggested waiting to buy calls on a move above $72.50. If you missed the entry point this morning you could look for a dip near the $73.00-72.50 zone. Our first target is $76.50. Our second target is $79.75. More aggressive traders could aim higher. FYI: If BHI can breakout past the $72.00 level it would create a new quadruple top breakout buy signal on its Point & Figure chart.

- Suggested Positions -

Long the April $75 calls (BHI1116D75) Entry @ $1.00

- or -

Long the May $75 calls (BHI1121E75) Entry @ $2.61

Entry on March 24th at $72.35 *gap higher*
Earnings Date 05/03/11 (unconfirmed)
Average Daily Volume = 4.6 million
Listed on March 23rd, 2011


Baidu, Inc. - BIDU - close: 133.67 change: -1.25

Stop Loss: 124.00
Target(s): 139.00, 147.50
Current Option Gain/Loss: + 39.0%, and + 62.7%
Time Frame: 4 to 5 weeks
New Positions: see below

Comments:
03/28 update: Reversal alert! The action in BIDU looks like a short-term bearish reversal. This isn't too surprised since I've been warning readers to look for a dip near the $130 or $125 areas. Wait for a dip or a bounce from support before considering new bullish positions.

Our first target to take profits is at $139.00. We will plan to exit ahead of BIDU's late April earnings report. BIDU can be a volatile stock so I would consider this a more aggressive, higher-risk trade.

- Suggested Positions -

Long the April $130 calls (BIDU1116D130) entry @ $3.20

- or -

Long the May $135 calls (BIDU1121E135) entry @ $5.10

03/26 New stop loss @ 124.00

Entry on March 22 at $127.00
Earnings Date 04/28/11 (unconfirmed)
Average Daily Volume = 6.0 million
Listed on March 21st, 2010


Caterpillar Inc. - CAT - close: 109.40 change: +0.31

Stop Loss: 103.75
Target(s): 109.00, 114.00
Current Option Gain/Loss: +35.2%, and +31.7%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
03/28 update: CAT tagged another new high. This time at $110.49 before spending most of the day hugging the $110 level. Nothing has changed from my prior comments. CAT looks short-term overbought and due for a dip. Our secondary target to exit is $114.00 but expect a dip first. I am not suggesting new positions at this time.

- Suggested Positions -

Long the April $105 calls (CAT1116D105) Entry @ $3.40

- or -

Long the May $110 calls (CAT1121E110) Entry @ $3.15

03/26/11 New stop loss @ 103.75
03/25/11 1st Target Hit @ 109.00, Options @ +58.8%, +37.7%

Entry on March 18th at $104.99 (gap higher)
Earnings Date 04/29/11 (unconfirmed)
Average Daily Volume = 7.4 million
Listed on March 17th, 2010


Capital One Financial - COF - close: 51.58 change: -0.65

Stop Loss: 49.49
Target(s): 54.75, 59.00
Current Option Gain/Loss: -13.3% and -66.1%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
03/28 update: Warning - the action in COF today looks like a short-term bearish reversal. I would expect a pull back toward support near $50 and its 50-dma. Wait for that pull back before launching new positions. Our targets are $54.75 and $59.00.

- Suggested Positions -

Long the April $50 call (COF1116D50) Entry @ $2.63

- or -

Long the April $55 call (COF1116D55) Entry @ $0.65

03/24 New stop loss @ 49.49

Entry on March 16th at $51.08
Earnings Date 04/21/11 (unconfirmed)
Average Daily Volume = 4.4 million
Listed on March 15th, 2010


CSX Corp. - CSX - close: 79.78 change: +0.62

Stop Loss: 73.45
Target(s): 79.90, 83.75
Current Option Gain/Loss: +66.9%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
03/28 update: Target achieved. CSX was showing some relative strength today. Shares hit $80.27 late this afternoon before paring its gains. Our first target to take profits was hit at $79.90. The option was trading with a bid near $1.90 at that time. I want to remind readers that CSX looks short-term overbought and due for some profit taking. I would expect a dip toward the $77-75 zone. Wait for the pull back before considering new bullish positions. Don't forget that we plan to exit before CSX reports earnings in two or three weeks.

Our plan was to keep our position size small to limit our risk. FYI: The Point & Figure chart for CSX is bullish with a $98 target.

- Small Bullish Positions -

Long the April $80 calls (CSX1116D80) Entry @ $1.06

03/28 1st Target Hit @ 79.90, Option @ $1.90 (+79.2%)

chart:

Entry on March 21 at $77.25
Earnings Date 04/13/11 (unconfirmed)
Average Daily Volume = 3.4 million
Listed on March 19th, 2010


Jones Lang Lasalle Inc. - JLL - close: 100.91 change: -0.51

Stop Loss: 95.40
Target(s): 102.50, 109.00
Current Option Gain/Loss: - 2.9%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
03/28 update: Monday was a quiet session for JLL. Shares spent the day in a relatively narrow range. There is no change from my weekend comments. There is a good chance JLL will retest the $100 level soon and possibly the $98 level again. Wait for the dip or a bounce before considering new bullish positions.

Prior Comments:
We wanted to keep our position size small to limit our risk. Our targets are $102.50 and $109.00.

- Suggested Positions - (Small Positions)

Long the April $100 calls (JLL1116D100) Entry @ $3.40

03/24 New stop loss @ 95.40
03/17 Exited March calls @ open, Estimated exit @ 0.10 (-94.2%)
03/10 New stop loss @ 93.85

Entry on February 28th at $97.96
Earnings Date 04/27/11 (unconfirmed)
Average Daily Volume = 386 thousand
Listed on February 26th, 2010


Norfolk Southern - NSC - close: 68.77 change: +0.09

Stop Loss: 64.90
Target(s): 72.00, 74.90
Current Option Gain/Loss: +40.0%, and +21.4%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
03/28 update: NSC spent the entire session in a narrow range struggling with resistance at the $69.00 level. Readers may want to wait for a dip into the $67.50-66.00 zone before launching new positions. Our targets are $72.00 and $74.90. We do not want to hold past NSC's late April earnings report.

- Suggested Positions -

Long the April $70 calls (NSC1116D70) Entry @ $0.50

- or -

Long the May $70 calls (NSC1121E70) Entry @ $1.40

Entry on March 25th at $67.84
Earnings Date 04/27/11 (unconfirmed)
Average Daily Volume = 3.0 million
Listed on March 24th, 2011


Polaris Industries, Inc. - PII - close: 84.35 change: -0.76

Stop Loss: 79.75
Target(s): 84.95, 89.00
Current Option Gain/Loss: -12.5%
Time Frame: 4 to 7 weeks
New Positions: see trigger

Comments:
03/28 update: PII hit some profit taking on Monday but that's not surprising. I am suggesting readers look for a dip near the rising 10-dma before considering new bullish positions.

Our plan was to keep our position size small. FYI: The Point & Figure chart for PII is bullish with a $98 target.

- Small Positions -

Long the April $85 calls (PII1116D85) Entry @ 2.00

03/26/11 New stop loss @ 79.75
03/25/11 1st Target Hit @ 84.95, Option @ $2.10 (+5%)

Entry on March 18th at $82.25
Earnings Date 04/21/11 (unconfirmed)
Average Daily Volume = 396 thousand
Listed on March 14th, 2010


Panera Bread Co. - PNRA - close: 121.83 change: +0.99

Stop Loss: 119.00
Target(s): 129.50, 134.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 5 weeks
New Positions: Yes, see TRIGGER

Comments:
03/28 update: There is no change from my weekend comments on PNRA. The stock is hovering near its highs. I am suggesting we wait for a breakout. We want to use a trigger at $123.55 to open small bullish positions in PNRA. If triggered we will start with a stop loss at $118.00. More conservative traders may want to consider a stop closer to $120.00. Our upside targets are $129.50 and $134.50. We do not want to hold over the late April earnings report but that date is currently unconfirmed.

FYI: PNRA is currently trading in the $120 area. The last time the company had a stock split it was back in June 2005 with shares in the $120s. You never know when they might announce a split although if they do it would probably be with their earnings report.

Trigger @ $123.55

- Suggested Positions -

Buy the April $125 call (PNRA1116D125) current ask $1.70

- or -

Buy the May $130 call (PNRA1121E130) current ask $2.80

Entry on March xxth at $ xx.xx
Earnings Date 04/27/11 (unconfirmed)
Average Daily Volume = 363 thousand
Listed on March 26th, 2011


Quality Systems Inc. - QSII - close: 82.08 change: +0.09

Stop Loss: 78.60
Target(s): 87.25, 94.50
Current Option Gain/Loss: -55.5%, and -13.2%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
03/28 update: QSII managed to eke out a gain on Monday, which is better than most of the market. Shares are still trading under resistance in the $82.50-83.00 zone. I would expect another dip near $81.00 or even $80 soon. Wait for the dip as our next entry point.

Prior Comments:
FYI: Readers will be interested to note that the most recent data listed short interest in QSII at almost 28% of the very small 17.5 million-share float. That's definitely a recipe for a short squeeze. Plus, the Point & Figure chart for QSII is bullish with a $119 target.

- Suggested Positions -

Long the April $85 calls (QSII1116D85) Entry @ $1.35

- or -

Long the June $85 calls (QSII1118F85) Entry @ $3.40

03/24 New stop loss @ 78.60

Entry on March 4th at $81.44
Earnings Date 05/31/11 (unconfirmed)
Average Daily Volume = 154 thousand
Listed on March 3rd, 2010


Whole Foods Market Inc. - WFMI - close: 63.36 change: -0.60

Stop Loss: 58.49
Target(s): 64.75, 69.00
Current Option Gain/Loss: +20.0%, and +19.1%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
03/28 update: After last week's gains WFMI finally hit some profit taking. I'm expecting a dip toward the $62-61 area. Wait for the dip before considering new bullish positions.

Our upside targets are $64.75 and $69.00. FYI: The Point & Figure chart for WFMI is bullish with an $86 target.

- Suggested Positions -

Long the April $65 calls (WFMI1116D65) Entry @ $0.65

- or -

Long the May $65 calls (WFMI1121E65) Entry @ $2.25

03/26/11 New stop loss @ 58.49

Entry on March 21 at $61.55
Earnings Date 05/11/11 (unconfirmed)
Average Daily Volume = 1.9 million
Listed on March 19th, 2010


Wellpoint Inc. - WLP - close: 68.96 change: -0.38

Stop Loss: 65.75
Target(s): 72.25, 74.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 5 weeks
New Positions: Yes, see trigger

Comments:
03/28 update: WLP is getting closer! This past weekend we added WLP with a trigger to buy calls on the dip at $68.25. Shares slipped to $68.44 before bouncing intraday. There is no change from my prior comments.

If we are triggered at $68.25 our targets are $72.25 and $74.75. We do not want to hold over the late April earnings report.

FYI: Readers may want to keep their position size small. If WLP reverses lower following Friday's test of resistance at $70 it could look like a big, bearish double top pattern on the weekly chart.

Trigger @ 68.25

- Suggested Positions -

Buy the April $70 call (WLP1116D70) current ask $1.23

- or -

Buy the May $70 call (WLP1121E70) current ask $2.45

Entry on March xxth at $ xx.xx
Earnings Date 04/27/11 (unconfirmed)
Average Daily Volume = 3.4 million
Listed on March 26th, 2011


PUT Play Updates

Everest Re Group Ltd. - RE - close: 82.61 change: -0.34

Stop Loss: 84.25
Target(s): 76.00, 71.00
Current Option Gain/Loss: -45.0%, and -34.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
03/28 update: RE spent the day consolidating sideways in a very narrow range. There is no change from my weekend comments. I remain very cautious on this trade. More conservative traders may want to exit early right now. I am not suggesting new bearish positions at this time.

Our plan was to keep our position size small to limit our risk. Our targets are $76.00 and $71.00.

- Small Bearish Positions -

Long the April $80 PUTs (RE1116P80) Entry @ $1.00

- or -

Long the May $80 PUTs (RE1121Q80) Entry @ $2.50

Entry on March 23rd at $81.43
Earnings Date 04/28/11 (unconfirmed)
Average Daily Volume = 381 thousand
Listed on March 22nd, 2011