Option Investor
Newsletter

Daily Newsletter, Monday, 7/25/2011

Table of Contents

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

Market Wrap

We've Been Down This Road Before

by Todd Shriber

Click here to email Todd Shriber
Another Monday at the office for U.S. stocks as investors departed riskier assets in favor of gold and other safe havens such as the Swiss franc as the market once again fretted over the debt ceiling stalemate on Capitol Hill. Monday's action was predictable to say the least. If you own a smart phone and get those real-time alerts from CNBC, you got at least three text messages over the weekend (I stopped counting after the third) regarding the debt ceiling talks, and with little progress being made on that front, it was obvious Monday would be a down day.

Stats Table

Again, the deadline is August 2nd for a deal to emerge on the debt ceiling and counting that day, there are six trading days left for a deal to surface. Until that happens, Wall Street will be held hostage by Capitol Hill. I will not get in the business of critiquing and endorsing the various plans being floated on both sides of the aisle because I do not want to offend anyone's personal politics, but for those that opt to see the forest through the trees, this debt ceiling imbroglio has highlighted a fact that few from either party want to address.

That is there are really only two ways to salvage Uncle Sam's ugly balance sheet: Raise taxes or dramatically cut spending on Medicare, Medicaid and Social Security. The politician that suggests either will be seeking new employment opportunities after November 2012.

And if debt is being discussed, our friends on the other side of the Atlantic always have something to say about the matter. European policymakers reached another last-minute deal to avoid an outright Greek default and (hopefully) stave off contagion. That did not stop Moody's Investors Service from downgrading Greek sovereign by several levels to Caa1 from Ca, a move that all but guarantees banks and other private sector owners of Greek sovereigns will lose money on those investments.

As myriad press reports noted, this is basically pre-default status. In terms of other beleaguered peripherals, Moody’s noted that while they would be buoyed by the possibility of borrowing at substantially lower rates, and by positive market reaction, the precedent of restructurings casts a shadow over their outlooks, according to Forbes.

As the chart below indicates, the decline in the quality of Greek debt has been nothing short of dramatic.

Greek Credit Ratings

Back here in the U.S., there was some good news from a familiar source that being Apple (AAPL). Shares of the iPad and iPhone maker touched an all-time high of exactly $400 before falling back a bit, the stock closed higher by 1.3%. That is no small feat when considering the broader market and the Nasdaq were in the red and Bloomberg News reported, citing a note from Strategy Analytics, that Samsung may have sold more smartphones than Apple in the second quarter.

The research firm estimates South Korea-based Samsung sold between 18 million and 21 million smartphones in the quarter compared with 20.3 million iPhones for Apple. No matter. Apple's run is nothing short of jaw-dropping. The day before the 9/11 terrorist attacks, Apple was trading around $8, yet even with a dip below $80 during the financial crisis the shares have gained about 4,050% since Sept. 10, 2011. And that does not include dividends or splits because Apple engages in neither activity.

Apple Chart

In earnings news, consumer products maker Kimberly-Clark (KMB) said its second-quarter profit slid 18% to $408 million, or $1.03 per share, from $498 million, or $1.20 per share, a year earlier. Revenue climbed 8% to $5.26 billion. On an adjusted basis, Texas-based Kimberly-Clark earned $1.18 a share. Analysts were expecting $1.14 a share on revenue of $5.11 billion.

Kimberly-Clark reiterated full-year profit guidance of $4.80-$5.05 a share, but said it expects revenue growth of 5%-7% compared with a previous forecast of revenue growth of 4%-6%. Analysts expect a full-year profit of $4.85 a share on revenue of $20.73 billion. The stock fell more than 2% on volume that was more than 50% above the daily average, but Kimberly-Clark deserves this much credit: Its stock has sharply outperformed rival Procter & Gamble (PG) this year.

Kimberly-Clark Chart

There were several marquee names reporting earnings in the after-hours session and I will start with the better of the two reports that I am going to cover. Anadarko Petroleum, the second-largest U.S. independent oil and natural gas producer, said its second-quarter profit jumped to $544 million, or $1.08 a share, reversing a loss of $40 million or 8 cents a share, in the year-earlier period. Revenue rose 46% to $3.5 billion.

''We expect the next six to nine months to be the most active period of deepwater exploration and appraisal drilling in our company's history,'' said CEO Jim Hackett in a statement. ''Our exploration program is designed to deliver upon our goal of discovering more than 500 million BOE of net risked resources this year. We are continuing to advance our deep inventory of high-impact prospects, and the new rig agreements reinforce our long-term commitment to the safety and success of our global exploration program.''

Anadarko shares were slightly higher in the after-hours session, but there was no news on any settlement talks with BP (BP) regarding Anadarko's 25% non-operating interest in the Macondo well project. Energy names dominate the earnings calendar this week, making now a great time to register for a free trial of the OilSlick daily newsletter (HERE).

Anadarko Chart

In the ''red alert'' section of today's market wrap we have Netflix (NFLX), a stock that has put in Apple-esque run of its own over the past year or more, but unlike Apple, Netflix has its fair share of detractors that have been taken to the woodshed by shorting the stock. Today might be the day of reckoning for Netflix bulls and offer up some vindication for those that have dared get in the way of this juggernaut. Or it could be a buying opportunity.

I will let you draw your own conclusions, but this much is clear: Netflix posted some impressive second-quarter results, but no one is going to care about those because the online and DVD-by-mail provider committed the ultimate sin for richly valued tech stocks: It guided lower on third-quarter profits and revenue, citing its own recent voluntary price hikes as cutting into subscriber growth.

California-based Netflix projected a third-quarter profit of 72 cents to $1.07 a share on revenue of $828.5 million, well below the $1.11 on revenue of $842.9 million Wall Street was forecasting. Trading at nearly 81 times trailing earnings and almost 43 times forward earnings with a price to book value of almost 54 makes Netflix extremely vulnerable to a beating on any disappointing news. After closing at $281.53, the stock was down to $255 in the after-hours session.

Netflix Chart

Looking at the charts, the S&P 500 pulled back from resistance at 1345, but support at 1325 did not come into play either. There are no shortage of earnings catalysts this week, particularly from the energy patch, but the reality is the debt talks will probably the drag or the spark the market deals with this week. In a best of both worlds scenario, solid earnings and outlooks combined with the debt ceiling being extended, the S&P 500 could make a run to 1365, though asking for both may be asking for too much.

S&P 500 Chart

With today's loss, the Dow did fall below some support at 12,600, but a firmer floor is found at 12,400. Resistance remains at 12,700 and 12,800. There is not a large amount of Dow members reporting earnings this week, but the ones that are are of the high price-tag variety (MMM, XOM, CVX). Upside from guidance from MMM and increased production outlooks from XOM and CVX would be headlines that could help the Dow navigate debt-talk waters.

Dow Chart

The Netflix report could weigh on the Nasdaq tomorrow and the Index has been finding stiff resistance at 2860. Support is still a ways off at 2800 and then again around 2765. AMZN reports after the close Tuesday and since that is a much larger company than Netflix, positive guidance could undo any damage from Netflix by Wednesday. Or Apple could just keep chugging the long, motivating new buyers to get involved with tech.

Nasdaq Chart

The Russell 2000 is kind of in no man's land right now, resting in between support at the 50-day moving average at 818 and below resistance at 855 (the 2007 high) and more resistance above 865. The biggest issue facing the Russell 2000 this week is not earnings, but how much money managers decide to scale back risk as these debt talks wear on.

Russell 2000 Chart

While I remain skeptical of the ability of most politicians to understand even basic tenants of how financial markets function, a deal on the debt ceiling will likely materialize before the Aug. 2nd deadline. The folks on Capitol Hill may not be wizards of Wall Street, but they sure know how to read a calendar. Before we know it, it will be 2012 and no politician wants to head into an election with the burden of trying to defend a weak stock market. That will be the primary impetus behind an agreement on the debt ceiling.


New Option Plays

Lacking Direction

by James Brown

Click here to email James Brown

Editor's Note:

The stock market did not provide us many clues today. Monday's session looks like a slightly exaggerated version of Friday. Market participants are growing concerned over the debt ceiling issue and lawmakers' inability to get a deal done. These worries prompted the gap down and spike lower this morning. The same worries probably fueled the afternoon weakness. Odds seem to be rising that we might see the S&P 500 retest the 1320 level. I'd rather look for new positions there.

In the meantime, these stocks are on my radar screen: ATI, CHRW, HFC, NSC.

No new trades tonight.

- James


In Play Updates and Reviews

New Stop Losses

by James Brown

Click here to email James Brown

Editor's Note:

We are updating a few stop losses tonight. The market is nervous that lawmakers will not get a deal done before the Aug. 2nd deadline. These concerns prompted the stock market to spike lower at the open. Many stocks gapped open lower. Yet there wasn't any follow through and most equities saw an intraday bounce that unfortunately faded lower into the closing bell.

-James

Current Portfolio:


CALL Play Updates

Agrium Inc. - AGU - close: 92.40 change: -0.16

Stop Loss: 87.75
Target(s): 94.00, 98.00
Current Option Gain/Loss: +51.8% & +64.8%
Time Frame: 4 to 5 weeks
New Positions: see below

Comments:
07/25 update: AGU managed to hit a new relative high at $93.49 this afternoon before the market began to rollover this afternoon. Shares have since pared their gains. The sharp pull back from its intraday high almost looks like a short-term top. I would not be surprised to see a correction back toward support near $90.00 and its simple 10-dma. Currently our stop loss is at $87.75 but I'm tempted to raise it into the $88.50-89.00 zone.

- Suggested Positions -

Long AUG $90 call (AGU1120H90) Entry @ $2.70

- or -

Long AUG $95 call (AGU1120H95) Entry @ $0.94

07/21 New stop @ 87.75
07/19 Breakout past $90.00 is a new entry point.
07/19 new stop @ 86.90

Entry on July 11 at $88.54
Earnings Date 08/03/11 (unconfirmed)
Average Daily Volume = 1.7 million
Listed on July 9, 2011


Caterpillar Inc. - CAT - close: 105.66 change: +0.51

Stop Loss: 102.95
Target(s): 110.00,
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
07/25 update: Neither CAT nor the S&P 500 opened higher this morning. Concerns over the lack of a debt ceiling compromise pushed stocks lower at the open. Yet CAT has produced a decent intraday bounce. Shares are still struggling with the 100-dma as technical resistance but the stock acts like it wants to rally.

I am suggesting we try again. We want to buy calls if both CAT and the S&P 500 open in positive territory tomorrow morning.

buy calls if both CAT & S&P 500 are positive tomorrow morning

- Suggested Positions -

buy the AUG $105 call (CAT1120H105)

- or -

buy the AUG $110 call (CAT1120H110)

Entry on July xx at $ xx.xx
Earnings Date 07/22/11 (confirmed)
Average Daily Volume = 8.5 million
Listed on July 23, 2011


Diamond Foods Inc. - DMND - close: 74.92 change: -0.44

Stop Loss: 73.60
Target(s): 79.50, 83.00
Current Option Gain/Loss: -31.1%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
07/25 update: DMND spent the session trading sideways in a narrow range. This has been the trend for the last three days in a row. I am growing more concerned and I'm tempted to raise our stop loss but the low on July 18th was $73.77. DMND has been using the rising 30-dma as technical support and the stock has rebounded from this moving average several times over the last several weeks. Currently the 30-dma is at $74.72. Readers may want to use that as a guide for raising their stop loss. We are leaving our stop at $73.60 tonight. I am not suggesting new bullish positions at this time. Cautious traders may want to just abandon ship and exit now since DMND has not been performing. You could jump back in later.

- Suggested (small) Positions -

Long AUG $75 call (DMND1120H75) Entry @ $2.25

07/23 Cautious traders may want to exit early now
07/19 new stop loss @ 73.60
07/15 triggered at $74.25
07/14 Adjusted entry point to $74.25 and stop to $72.75

Entry on July 15 at $74.25
Earnings Date 10/05/11 (unconfirmed)
Average Daily Volume = 237 thousand
Listed on July 11, 2011


Helmerich & Payne Inc. - HP - close: 72.60 change: +0.04

Stop Loss: 68.45
Target(s): 76.50
Current Option Gain/Loss: +28.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
07/25 update: The combination of the market's morning weakness and an analyst downgrade prompted shares of HP to open lower at $71.20. Shares bought the dip near $71 and the stock has recouped its losses. The trend is up but we're running out of time.

HP reports earnings on Friday morning (July 29th). We will plan to exit on Thursday at the closing bell if we don't see an exit or get stopped before then. More conservative traders may want a stop closer to $70.00 instead.

- Suggested Positions -

Long AUG $75 call (HP1120H75) Entry @ $1.25

07/23 new stop loss @ 68.45
07/23 Plan to exit on July 28th at the close

Entry on July 20 at $71.49
Earnings Date 07/29/11 (confirmed)
Average Daily Volume = 1.3 million
Listed on July 19, 2011


Joy Global - JOYG - close: 100.21 change: +0.36

Stop Loss: 96.45
Target(s): 104.50, 107.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
07/25 update: We just can't seem to get an entry point in JOYG. The plan was to buy calls if both the S&P 500 and JOYG opened positive this morning. That didn't happen. We're still on the sidelines. JOYG did manage to recoup its morning losses. I am suggesting we try again. Bear in mind this is an aggressive, higher-risk entry point. Plus, the ongoing debt ceiling issue could really start to undermine investor confidence. If you are going to trade I am suggesting you trade very small (position size) to limit your risk.

Tomorrow, if both JOYG and the S&P 500 open positive, we'll buy calls with a stop loss at $96.45.

Open SMALL positions if JOYG and S&P 500 are positive tomorrow morning.

- Suggested Positions - Buy the Aug $100 call (JOYG1120H100)

07/25 try again.
07/23 Open positions if JOYG and market are positive on Monday morning
07/21 New entry point. Buy calls, small positions only, if the stock and the S&P 500 are positive at the open.
07/21 New stop loss @ 96.45. New targets are $104.50 and $107.50
...please see earlier updates for previous notes here...

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


Nu Skin Enterprises - NUS - close: 40.52 change: +0.12

Stop Loss: 38.90
Target(s): 44.00
Current Option Gain/Loss: - 9.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
07/25 update: Once again traders bought the dip in NUS near round-number support at $40 and short-term technical support at the simple 10-dma. This is encouraging and the stock outperformed the market today by closing in positive territory. I am still concerned NUS looks overbought. I am not suggesting new positions at this time. More conservative traders may want to use a stop loss closer to $39.40 or even $39.60 instead.

Earlier Comments:
Our target is the $44.00 mark but we will plan to exit ahead of the early August earnings report. FYI: The Point & Figure chart for NUS is bullish with a $62 target. Investors should note that the most recent data did list short interest at 14.4% of the 53.4 million-share float. That does provide some fuel for a short squeeze.

- Suggested Positions -

Long AUG $40 call (NUS1120H40) Entry @ $2.10
07/23 new stop loss @ 38.90
07/20 Entered at $40.80
07/19 buy calls tomorrow if NUS and S&P 500 are both up at the open.
07/19 new stop loss @ 38.40
07/18 Our play has not been opened yet. We're going to wait 24 hours and reconsider.

Entry on July 20 at $40.80
Earnings Date 08/02/11 (confirmed)
Average Daily Volume = 700 thousand
Listed on July 16, 2011


Open Text Corp. - OTEX - close: 68.86 change: -0.62

Stop Loss: 67.45
Target(s): 74.50
Current Option Gain/Loss: Unopened
Time Frame: 2 to 3 weeks
New Positions: Yes, see below

Comments:
07/25 update: Our conditions to open positions were not met. Neither OTEX or the S&P 500 opened higher today. Shares of OTEX did find support at the bottom of its current trading range near $68.00. Aggressive traders may want to go ahead and buy the intraday bounce today. I am suggesting we try again and launch positions if both OTEX and the S&P 500 open in positive territory tomorrow morning. More conservative traders will want to strongly consider waiting for a new breakout past $70.00 (maybe use a trigger at $70.25 to open positions).

A breakout over $70.00 could produce another short squeeze. The most recent data listed short interest at more than 10% of the 55.9 million-share float. We do not want to hold over the August earnings report.

If both S&P 500 and OTEX open positive tomorrow morning

- Suggested Positions -

buy the AUG $70 call (OTEX1120H70)

Entry on July xx at $ xx.xx
Earnings Date 08/10/11 (unconfirmed)
Average Daily Volume = 300 thousand
Listed on July 23, 2011


Potash Corp. - POT - close: 61.82 change: +0.18

Stop Loss: 59.60
Target(s): 63.75, 68.00
Current Option Gain/Loss: +33.3%
Time Frame: exit prior to July 28th
New Positions: see below

Comments:
07/25 update: POT opened lower like most of the market did this morning but shares quickly surged to a new multi-month high above $62.00. Unfortunately the rally faded. The pull back from its intraday highs now looks like a potential short-term top. We only have a few days left so readers may want to go ahead and exit early now. Please note our new stop loss at $59.60.

POT is due to report earnings on Thursday morning (July 28th). We will plan to exit on Wednesday at the closing bell assuming shares have not hit our target or stop before then. I am not suggesting new bullish positions at this time.

- Suggested Positions -

Long AUG $60 call (POT1120H60) entry @ $2.40
07/25 new stop loss @ 59.60
07/23 New stop loss @ 58.95
07/23 Time is running out. Prepare to exit on Wednesday
07/19 Play is opened. POT gapped open at $59.98
07/18 We are still unopened. Try again. Both POT and S&P 500 need to open higher on July 19th to buy calls.
07/18 new stop @ 56.70

Entry on July 19 at $59.98
Earnings Date 07/28/11 (confirmed)
Average Daily Volume = 7.4 million
Listed on July 16, 2011


PowerShares QQQ - QQQ - close: 59.48 change: -0.12

Stop Loss: 57.75
Target(s): 62.50, 64.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
07/25 update: Investors are growing worried about the lack of a deal in Washington over the debt ceiling extension. That prompted stocks to open lower this morning. The QQQs were no exception. Traders bought the dip near $59.00 this morning. Aggressive traders may want to go ahead and launch positions now since our condition to initiate plays was not met. I am suggesting we try again. Buy calls if the QQQ opens in positive territory tomorrow. FYI: The Point & Figure chart for QQQ is bullish with a $89 target.

Trigger @ if the QQQs open positive in the morning.

- Suggested Positions -

buy the AUG $60 call (QQQ1120H60)

- or -

buy the AUG $62 call (QQQ1120H62)

Entry on July xx at $ xx.xx
Earnings Date --/--/--
Average Daily Volume = 61.7 million
Listed on July 23, 2011


Teradata Corp. - TDC - close: 56.95 change: -0.32

Stop Loss: 56.25
Target(s): 62.00
Current Option Gain/Loss: -38.7%
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
07/25 update: Cautious traders may want to exit early immediately. On the positive side TDC has bounced from support near $56.50 for the fourth time in about a week. Yet the bounces keep getting smaller so the stock is creating a trend of lower highs. If the 50-dma was not such a significant level of support for this stock I would exit now. We will raise our stop loss to $56.25. I am not suggesting new positions at this time. FYI: The Point & Figure chart for TDC is bullish with a $79 target.

- Suggested Positions -

Long AUG $60 call (TDC1120H60) Entry @ $1.55

07/25 New stop loss @ 56.25
07/21 TDC is underperforming. Cautious traders may want to exit
07/19 new stop @ 55.40
07/19 Trade is open. TDC gaps up at $57.69.

Entry on July 19 at $57.69
Earnings Date 08/04/11 (confirmed)
Average Daily Volume = 1.5 million
Listed on July 18, 2011


PUT Play Updates

FactSet Research - FDS - close: 95.61 change: -0.49

Stop Loss: 100.25
Target(s): 90.50, 86.00
Current Option Gain/Loss: -47.1% & -39.5%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
07/25 update: FDS followed the market and opened lower this morning. Yet the dip failed to breakdown past last Wednesday's or Thursday's lows. Thus FDS is forming a $94.75-96.50 trading range. Cautious traders could narrow their stop loss based on the $96.50 level. I'd rather keep our stop above technical resistance at the 200-dma. I am not suggesting new positions at this time.

Earlier Comments:
Our targets are $90.50 and $86.00 but the $90.00 level is support and FDS will probably see a bounce from this level. The Point & Figure chart for FDS is bearish with a $64 target.

- Suggested (SMALL) Positions -

Long AUG $95 PUT (FDS1120T95) Entry @ $3.50

- or -

Long SEP $90 PUT (FDS1117U90) Entry @ $2.40

Entry on July 18 at $94.48
Earnings Date 09/21/11 (unconfirmed)
Average Daily Volume = 363 thousand
Listed on July 16, 2011