Option Investor
Newsletter

Daily Newsletter, Thursday, 6/30/2011

Table of Contents

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

Market Wrap

Right On Schedule

by Jim Brown

Click here to email Jim Brown
The end of quarter window dressing rally was right on schedule and helped by favorable votes in Greece, seriously oversold conditions, better economics and the need for balanced funds to sell bonds and buy stocks.

Market Statistics

Greece dropped off the geopolitical radar with the final vote to implement the required austerity measures. The vote and the guarantee of the next installment of the $157 billion in funds promised last year will probably be good for about two weeks calm. Around the second week of July the conversations will begin on the next bailout requirement estimated to be another $140 billion to support Greece for the next five years. Enjoy the relative calm while it lasts.

Also helping the markets sprint higher was a very unexpected improvement in the Chicago ISM report. The Chicago ISM, formerly the Chicago PMI, rose to 61.1 from 56.6 when analysts were expecting a decline to 55.0. The surprise gain was due to an upsurge in the Chicago area in auto manufacturing as the parts shortage from Japan finally eased. New exploded higher by +8 points to 61.2. Production also increased sharply by +10 points to 66.9. All the components are still well off their highs but it was an excellent start to an expected second half recovery. Inventories fell unexpectedly to a 10-month low! The -14.7 point drop was the third largest decline since the report began in 1946.

Chicago ISM Table (green = cycle high)

Chicago ISM Chart

The Kansas Fed Manufacturing Survey also exploded unexpectedly higher to 14.0 from 1.0 in May. Good news appears to be breaking out all over in the manufacturing sector. New orders rebounded a whopping +25 points to +10 from -15. Back orders rebounded +29 points from -19 to +10. Shipments rebounded by +33 points from -8 to +25 and the workweek component jumped +12 points to +9. This was a very strong report after two months of declines.

Kansas Fed Chart

The NY-ISM also posted a small gain rising from 534.0 to 535.3 but this was not as important since this report only slowed in Q2 and never declined.

On the negative side the weekly Jobless Claims were flat at 428,000 with only a decline of 1,000 since the prior week. With the manufacturing reports suddenly improving you would think the weekly claims would be declining. This is a subtle warning that regional reports don't impact the national employment picture. The Non-Farm Payrolls next Friday will be a key update that could sour the recent economic improvements. The prior reading for May was a gain of 54,000 and estimates are all over the map from 25,000 to 175,000 for June.

Jobless Claims

The calendar for Friday is highlighted by the national ISM Manufacturing Index. With the strong moves in the local ISMs on Thursday the expectations for Friday's report could have gotten out of hand. Officially the index is expected to decline to 52.0 from 53.5 but the whisper number has suddenly jumped to more than 55.0 and possibly unobtainable.

Economic Calendar

After the bell today news hit the wires that Treasury Secretary Tim Geithner was going to resign his position. He will be adding his name to a long list of administration officials heading for the exits ahead of the election cycle. This would be a relative short term for a Treasury Secretary. Analysts believe his exit now could be positive for the market because it would imply there are no significant problems on the horizon. With a highly contentious election cycle building there will be little happening in the fiscal policy dept for the next 18 months. The person close to Geithner and breaking the news said he would probably remain until after the debt ceiling problem is resolved then head for the exit. The futures did not react to the news. Later in the day Bill Clinton asked him directly if he was planning to leave and Geithner said he did not plan on leaving in the "foreseeable future." Obviously we don't know what his version of foreseeable might be.

In stock news Research in Motion (RIMM) spent the day turning back a revolt after a 1,700 word article critical to RIMM management appeared on the Boy Genius website. The open letter to RIMM ripped the BlackBerry maker for failing to focus on the user experience and developer relations and being too chummy with carriers. The letter said RIMM spent too much effort in developing phones based on carrier requests instead of trying to please the actual users. Another website said it had several more letters from other highly placed RIMM employees that would be posted soon. RIMM replied to the open letter on their BlackBerry Blog (HERE) and acknowledged problems with management, marketing and production but strongly disagreed with the "anonymous" letter. Although the story made the hourly headlines the share of RIMM posted a minor gain.

Shares in Apollo Group (APOL) were highly volatile after the close. Profits for the quarter beat the street at $1.51 per share compared to estimates of $1.33. However, the profits came from price increases rather than rising enrolment. Overall enrolment fell -40.3% and those pursuing a degree declined by -16.4%. Apollo said in the wake of increased government regulation on the sector they had begun giving prospective students a three week orientation program designed to weed out students who would likely drop out before completing the program. Since most of their students use government loan programs to finance their schooling the high drop out rate after the three weeks hurt their enrollment numbers and the amount of funds received from the government. Shares of APOL traded between $41.50 and $47.50 in after hours after closing at 43.68.

Darden Restaurants (DRI) also posted profits of 99-cents for the quarter compared to 80-cents in the year ago period. Analysts were expecting $1.00. Profits rose +19% thanks to an upsurge in visit and spending by U.S. consumers. Same store sales rose +3.8% at Red Lobster, +6% at Longhorn, +5.3% at Capital Grill, Bahama Breeze and Seasons 52. Oilve Garden was flat. The CEO said the first month of their current quarter was off to a really good start and they planned to accelerate new store opening to 80-90 net new restaurants for the year. They also announced an increase in the quarterly dividend from 32-cents to 43-cents. Shares fell about 50-cents in after hours.

Shares of Visa (V) and MasterCard (MA) lost some of their luster today after a monster spike on Wednesday when the Fed approved a higher card swipe fee. The Fed approved a 21-cent swipe fee compared to the expectations for a cut all the way down to 12-cents. Mastercard rallied about $30 on Wednesday to $310 but gave back -$8.36 today. Visa rallied about $12 on Wednesday and gave back -$2.31 today. I am sure investors will take those kinds of gains every day.

MasterCard Chart

The four-day slide in the dollar failed to support commodities today. Oil finished with a small gain but gold and silver were basically flat. Apparently traders are not expecting this decline to continue. Corn and wheat were crushed after an inventory report found 11% more corn in inventory than previously expected. Just yesterday corn was up sharply for the second day after reports of wet fields in the Midwest had prevented corn from being planted. In the commodity sector you live by the spike and die on the dips. There always seems to be something knocking them around.

Silver Chart

The markets this week have seen their biggest four-day gain in ten months. There are multiple reasons for the sudden rally. The first would probably be the resolution of the problem in Greece. They kicked the can down the road a couple more weeks and there is no immediate threat of a sovereign debt default. That cloud has passed for the time being.

The markets were very oversold after declining for almost two complete months. When the Dow appeared to find a bottom at 11,900 and tested it twice it gave the all clear to the window dressers to buy the dip for quarter end. The positive events in Greece simply provided the timing on when the rally should begin.

Bonds had risen almost daily since April 8th and were very overbought. For those balanced funds that must hold a specific percentage each in bonds and stocks had seen their bond holdings increase significantly in relation to stocks over the last two months. They had to bring these back into balance by quarter end. Once it appeared that Greece would be resolved the asset allocation changes began.

Ten Year Bond Yield Chart

I would like to think the rally would continue but I have nearly zero expectations of that happening. June quarter end rallies typically see some profit taking by the second week in July. The markets have gone from severely oversold to strongly overbought in only four days. Key resistance levels have been broken but I would hesitate to suggest anyone buy this rally today. We need to wait for the normal July weakness or at least until this sprint runs out of momentum.

The S&P blew through 1300 and then past the 100-day average at 1316. This four day gain will likely run out of steam next week as the window dressers take some money back out of the market. Fund managers want to appear smart and be fully invested at quarter end when stocks are moving higher. Once past the quarter end they can take some profits on those EOQ gains and increase cash positions for new opportunities in the weeks ahead.

The S&P did punch through some strong resistance but there is even stronger resistance ahead at 1330-1350. The odds are very good we will see a decent dip before moving much higher. If the economics continue to improve that could derail any selling but we are still facing what could be a rocky earnings season that begins in two weeks. Support next week should be back in the 1295-1300 range.

S&P Chart

The Dow really powered ahead with strength in CAT, UTX, MMM, CVX, BA, COM, PG and IBM. It was a broad based rally with only BAC, MCD, TRV and PFE closing fractionally negative, all on news. The Dow closed over the February resistance high but just below the early April resistance. This would be a good spot for the Dow to pause and without window dressing on Friday I would be surprised at additional gains.

Support should be well back at 12,250.

Dow Chart

The Nasdaq was the relative laggard even though it gained more than 1% on Thursday. It failed to reach strong resistance at 2800 although it did move out of some heavy congestion. Google posted better than an $8 gain but Apple and NetFlix were the laggards.

I am neutral on the Nasdaq. There are far too many conflicting forces at work and July is not normally a strong month for tech stocks. PC sales are slowing and earnings guidance could be weak. Like the other indexes I expect some short-term weakness by the second week in July.

Nasdaq Chart

The Russell was the weakest index on Thursday with a gain of less than 1%. However, it came very close to decent resistance at 830 and it did move over the 100-day average. Small caps should be done with the reconstitution event from last week and we can use them for a sentiment indicator again next week. We need to be careful the index does not form a head and shoulders here with lasting implications.

Russell 2000 Chart

I would not be entering long positions on Friday. The end of quarter window dressing is over but there should still be some money flowing into funds from retirement contributions. By the end of next week that will end and managers will be raising cash for buying opportunities throughout the earnings cycle. Be patient and wait for the dip.

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Jim Brown

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New Option Plays

Industrial Goods Surge Higher

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Joy Global - JOYG - close: 95.24 change: +5.13

Stop Loss: 89.90
Target(s): 99.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see trigger

Company Description

Why We Like It:
A bullish turnaround in the stock market combined with some stronger Chicago PMI numbers helped fuel a big gain for JOYG today. A falling U.S. dollar also makes commodities rise. While JOYG doesn't actually do any farming or mining the stock does tend to benefit when commodities rally (the company creates the necessary equipment for these industries).

Thursday's rally pushed JOYG up through resistance near $92.00-$92.50 and its simple 100-dma. Shares may have gone too far too fast with a six-day rally from $84 to $95. I am expecting pull back. Broken resistance should be new support. Therefore I am suggesting we launch small bullish call positions on a dip at $92.75 with a stop loss at $89.90. Our upside target is $99.50. More conservative traders could wait for a dip closer to $92.00 instead as their entry point.

Aggressive traders could use July calls, which expire in about two weeks. I am suggesting the August calls.

Trigger @ $92.75 (Small Positions)

- Suggested Positions -

(Aggressive Traders Only - These Expire in 2 Weeks)
Buy the July $95 call (JOYG1116G95) current ask $2.56

- or -

Buy the Aug $95 call (JOYG1120H95) current ask $5.00

Annotated Chart:

Entry on June xx at $ xx.xx
Earnings Date 08/31/11 (unconfirmed)
Average Daily Volume = 1.9 million
Listed on June 30, 2011


In Play Updates and Reviews

A Strong Finish

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. stock market ended the second quarter on a strong note, up +4% in the last four days. Stocks are surging through overhead resistance levels, putting the bears on the run. Semiconductors and oil service stocks were some of the best performers today.

We did see both our bearish oil service plays get stopped out (DO and RIG).

-James

Current Portfolio:


CALL Play Updates

Abercrombie & Fitch Co - ANF - close: 66.92 change: -0.46

Stop Loss: 63.45
Target(s): 69.50, 71.50
Current Option Gain/Loss: - 6.6%
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
06/30 update: I am very disappointed in ANF's performance. The stock market's major averages continue to surge higher and are up +4% on the week. Yet ANF has stalled at short-term resistance near $68 while the S&P 500 is breaking through overhead resistance.

We only have two weeks left on July options. Cautious traders may want to exit early. I am not suggesting new bullish positions at this time!

- Suggested (SMALL) Positions -

Long July $67.50 call (ANF1116G67.5) Entry @ $1.50

Entry on June 28 at $65.48
Earnings Date 08/17/11 (unconfirmed)
Average Daily Volume = 2.8 million
Listed on June 27, 2011


Cerner Corp. - CERN - close: 61.11 change: +0.58

Stop Loss: 57.45
Target(s): 64.75
Current Option Gain/Loss: - 3.1% & - 9.3%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
06/30 update: CERN continues to inch higher. Shares almost kept pace with the rally in the NASDAQ today. The stock market looks short-term overbought and due for a dip so readers may want to wait for a dip to $60.00 in CERN before initiating new positions.

There is some resistance in the $62.50 area but I'm setting our target at $64.75. We do not want to hold over the late July earnings report. Keep in mind that July options expire in less than three weeks.

- Suggested (small) Positions -

Long July $60 call (CERN1116G60) Entry @ $1.60

- or -

Long Aug. $62.50 call (CERN1120H62.5) Entry @ $1.60

Entry on June 29 at $60.76
Earnings Date 07/28/11 (unconfirmed)
Average Daily Volume = 624 thousand
Listed on June 28, 2011


Teradata Corp. - TDC - close: 60.20 change: +0.88

Stop Loss: 53.45
Target(s): 59.75, 64.00
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see trigger

Comments:
06/30 update: TDC delivered a +1.4% gain but shares are still flirting with resistance at the $60.00 level. The stock looks short-term overbought so we don't want to chase it. At the moment we have a buy-the-dip entry point to buy calls at $56.50. FYI: TDC's P&F chart has produced a new triple-top breakout buy signal with a $79 target.

Trigger @ $56.50

- Suggested Positions -

buy the Aug. $60 call (TDC1120H60)

Entry on June xx at $ xx.xx
Earnings Date 08/04/11 (unconfirmed)
Average Daily Volume = 1.8 million
Listed on June 25, 2011


Tiffany & Co. - TIF - close: 78.52 change: +0.78

Stop Loss: 73.25
Target(s): 79.75, 84.00
Current Option Gain/Loss: + 6.8% & - 6.1%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
06/30 update: TIF is still marching higher and shares added +1.0%. The stock outperformed the RLX retail index's +0.5% gain. The $80.00 level is probably overhead resistance so I'd prefer to wait for a dip before considering new positions. Wait for a dip into the $77-75 area. Our targets are $79.75 for the July calls and $79.75 and $84.00 for the August calls. Readers may want to raise their target for the July calls.

- Suggested (SMALL) Positions -

Long July $77.50 call (TIF1116G77.5) entry @ $1.90

- or -

Long Aug. $80 call (TIF1120H80) entry @ $2.44

Entry on June 28 at $76.80
Earnings Date 08/26/11 (unconfirmed)
Average Daily Volume = 1.8 million
Listed on June 27, 2011


PUT Play Updates

Becton, Dickinson and Company - BDX - close: 86.17 change: +0.33

Stop Loss: --.--
Target(s): 81.50
Current Option Gain/Loss: -100.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
06/30 update: BDX keeps trying to climb higher but it's not making much progress. Shares remain under resistance near $87.00. I am still not suggesting new bearish positions at this time.

- Suggested (SMALL) Positions -

Long July $80 put (BDX1116S80) Entry @ $0.50

06/22 The bid for our option has vanished. I am removing our stop loss on this trade.

Entry on June 13th at $84.95
Earnings Date 07/28/11 (unconfirmed)
Average Daily Volume = 1.0 million
Listed on June 11th, 2011


Goldman Sachs - GS - close: 133.09 change: +0.56

Stop Loss: 135.55
Target(s): 121.00, 116.00
Current Option Gain/Loss: -89.6% & -46.1%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
06/30 update: Financials tried to bounce again but the group lost momentum on Friday. GS couldn't make it past resistance near $134.00. While this is encouraging for the bears the short-term trend for stocks is up and our trade is at risk. I am not suggesting new positions at this time.

I do consider this an aggressive trade. GS can be a very volatile stock at times. We do not want to hold over the mid July earnings report. FYI: The Point & Figure chart for GS is bearish with a $102 target.

- Suggested Positions -

Long July $125.00 PUT (GS1116S125) entry @ 1.65

- or -

Long Aug. $125.00 PUT (GS1120T125) entry @ 4.20

06/29 new stop loss @ 135.55

Entry on June 28 at $129.00
Earnings Date 07/19/11 (unconfirmed)
Average Daily Volume = 6.0 million
Listed on June 25, 2011


SanDisk Corp. - SNDK - close: 41.50 change: +1.01

Stop Loss: 42.55
Target(s): 40.50, 36.50
Current Option Gain/Loss: + 14.5% & - 21.7%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
06/30 update: SNDK is getting closer and closer to resistance in the $42.00-42.50 area. The stock produced a strong bounce today with a +2.4% gain. Today's rally followed a similar move in the SOX semiconductor index, which surged toward overhead resistance at its simple and exponential 200-dma. I am not suggesting new bearish positions at this time.

- Suggested Positions -

Long July $42.00 PUT (SNDK1116S42) Entry @ $1.10

- or -

Long July $40.00 PUT (SNDK1116S40) Entry @ $0.69

06/25 new stop loss @ 42.55, final target 36.50
06/24 1st target hit @ 40.50, Options @ $2.65 (+140.9%) & $1.55 (+124.6%)
06/18 new stop loss @ 45.05
06/08 New stop loss @ 46.25

Entry on June 6th at $44.31
Earnings Date 07/21/11 (unconfirmed)
Average Daily Volume = 5.8 million
Listed on June 4th, 2011


T.Rowe Price Associates - TROW - close: 60.34 change: +1.06

Stop Loss: 59.05
Target(s): 51.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see Trigger

Comments:
06/30 update: TROW has rallied over round-number resistance at $60.00 and is nearing technical resistance at its 50 and 200-dma. Speaking of which the 50-dma just crossed under its 200-dma, which is normally a very bearish development. Odds are that our current entry point at $55.75 is not going to work. We'll give TROW one more day and then re-evaluate a possible entry point in the $60-61 area. Otherwise we'll drop TROW as a bearish candidate.

Trigger @ 55.75

- Suggested Positions -

buy the July $55 PUT (TROW1116S55)

06/25 new strategy. Trigger @ 55.75, stop @ 59.05, Target 51.00

Entry on June xxth at $ xx.xx
Earnings Date 07/26/11 (unconfirmed)
Average Daily Volume = 2.0 million
Listed on June 13th, 2011


CLOSED BEARISH PLAYS

Diamond Offshore Drilling, Inc. - DO - close: 69.41 change: +1.31

Stop Loss: 70.55
Target(s): 64.50, 62.50
Current Option Gain/Loss: -80.8% & -83.7%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
06/30 update: Oil service stocks continued to soar higher and the OSX index rallied through technical resistance at its 50-dma. DO rallied as well and shares of DO traded above resistance at $70.00, at its 50-dma and at its 200-dma. Our stop loss was hit at $70.55.

Earlier Comments:
FYI: Traders should note that the most recent data listed short interest at more than 14% of the float. That does raise the risk of a short squeeze should the stock suddenly find strength.

- Suggested Positions -

July $67.50 PUT (DO1116S67.5) entry @ $2.09, exit @ 0.40 (-80.8%)

- Second Position -

July $67.50 PUT (DO1116S67.5) Entry @ $2.46, exit @ 0.40 (-83.7%)

06/30 Stopped out @ 70.55
06/22 failed rally at $70 is a new entry point. add 2nd position
06/15 new stop loss @ 70.55
06/13 new stop loss @ 71.55

chart:

Entry on June 8th at $68.91
Earnings Date 07/21/11 (unconfirmed)
Average Daily Volume = 1.8 million
Listed on June 7th, 2011


Transocean Ltd. - RIG - close: 64.56 change: +0.57

Stop Loss: 65.10
Target(s): 58.00, 55.25
Current Option Gain/Loss: -84.8%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
06/30 update: Oil service stocks continued to rebound higher on Thursday and RIG traded above resistance at $65.00. Our stop loss was hit at $65.10.

We wanted to keep our position size small to limit our risk.

- Suggested (SMALL) Positions -

Long July $60 puts (RIG1116S60) Entry @ $1.32, exit 0.20 (-84.8%)

06/30 stopped out @ 65.10
06/29 RIG is bouncing as expected.
06/25 new stop loss @ 65.10
06/20 RIG has hit $60. Cautious traders may want to take profits now (option @ +68%). The newsletter's target is $58.00

chart:

Entry on June 13th at $63.32
Earnings Date 08/04/11 (unconfirmed)
Average Daily Volume = 4.3 million
Listed on June 11th, 2011