Option Investor
Newsletter

Daily Newsletter, Thursday, 9/29/2011

Table of Contents

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

Market Wrap

Economic Numbers, Europe Help For A Change

by Todd Shriber

Click here to email Todd Shriber
In an odd, but pleasant turn of events, some good economic news here in the U.S. and more encouraging signs out of Europe helped ignite a rally in stocks as the S&P 500 gained nearly 1% and the Dow Jones Industrial Average notched a triple-digit gain. Politicians in Germany voted to expand a bailout fund and that was definitely one of the day's catalysts.

Market Stats

On the jobs front, finally some good news. The Labor Department said today that 391,000 Americans filed for jobless benefits last week, down from the revised 428,000 claims in the previous week. That is good for the first reading below 400,000 since August and the lowest reading since April.

Words of caution: The Labor Department said the big decline may be attributable to season factors and six million Americans have been out of work for six months or longer, according to the Wall Street Journal. Last week's claims number also soundly beat the reading of 420,000 claims economists expected. The four-week moving average fell to 417,000 from 422,250.

Jobless Claims

There was also surprising news on the GDP front and I mean surprising in a good way. The Commerce Department's latest estimate of second-quarter GDP growth checked in at 1.3%, topping the previous estimate of 1%. Economists expected a final second-quarter reading of 1.1%. Most economists have said the economy picked up some steam in the current quarter, which ends Friday, but the growth rates are far from robust. Most third-quarter GDP estimates hover in the 2%-2.5% range. Consumer spending grew 0.7% in the quarter, but that is still the smallest increase since the fourth quarter of 2009.

After-tax corporate profits rose at a 4.3% rate in the second quarter, the largest increase in a year, instead of 4.1%, according to the New York Times.

GDP Chart

Keeping with the theme of positive economic news, the Kansas City Fed's manufacturing composite index rose to six in September from an August reading of three. The Kansas City region was the last and best of the September regional Fed updates. The other four regions – New York, Philadelphia, Dallas and Richmond – all showed contraction last month. In the Kansas City region, the new orders index surged to five in September from one in August.

States included in the Kansas City Fed region are Colorado, Kansas, Nebraska, Oklahoma, Wyoming, northern New Mexico and western Missouri.

Kansas City Fed Chart

Economic Calendar

You may have noticed in the stats table that the Nasdaq Composite and Nasdaq 100 were in the red and it is easy to explain why. Start with one stock that can certainly be considered a fallen star that at this point, no one knows when it will shine again. I am talking about Netflix. The movie rental company plunged another 11% today on volume that was more than triple the daily average after Microsoft (MSFT) rolled out a service that rivals what Netflix has to offer.

Microsoft plans to leverage its Xbox Live platform to feature online paid TV services from Comcast (CMCSA) and Verizon (VZ). Video game consoles such as Xbox are the most popular avenue for accessing Netflix streaming content, Bloomberg reported. Translation: If you own an Xbox, you suddenly do not need Netflix anymore.

A survey by Knowledge Networks found 10% of Netflix customers said they would be ''very likely'' to cancel if their cable or satellite TV provider offered a similarly priced, comparable service, Bloomberg reported. Add to that Amazon's (AMZN) Kindle Fire tablet introduced yesterday appears to be one more way Amazon is looking to compete with Netflix and there is a recipe for disaster for Netflix shares.

Bottom line: Netflix was over $300 in July. There is little reason to believe it will be a triple-digit stock for much longer. If companies with far more cash such as Amazon and Microsoft decide they want to bury Netflix, they can and will. I have no skin in the Netflix game, long or short, but I think it is pretty obvious what the path of least resistance is here.

Netflix Chart

Speaking of tech names that have seen better days, Research In Motion (RIMM) got knocked around again today after Collins Stewart published an analyst note suggesting RIM was throwing in the towel on the PlayBook tablet. RIM denied that claim and said it remains committed to the PlayBook.

I think the Wall Street Journal sums it best when asking ''but is the tablet market committed to it?'' It being the PlayBook. The answer is probably ''no.'' PC World reports Best Buy has slashed prices on the PlayBook by $200. Even with that, the RIM offering is $299 compared to $199 for the new Amazon tablet.

The reality of the tablet market is this: Apple's (AAPL) iPad is viewed as the best product and one that consumers have been willing to pay up for. That means the only way a competing product can really compete is to offer a product that is almost as good at far lower price points. Amazon gets this and can afford to sacrifice profit margins for revenue growth. After so many quarters of disappointing investors, RIM does not have the luxury of putting profits on the back burner just to sell more tablets.

The tablet race has two horses right now: Apple and Amazon.

RIM Chart

It was a terrible day for an array of Chinese internet stocks, even the crown jewel of the group, Baidu (BIDU) after the SEC confirmed the Justice Department is looking into accounting irregularities at some U.S.-listed Chinese companies. Common sense tells us the combination of two government agencies and the phrase ''accounting irregularities'' in the same sentence is never a good thing.

The selling pressure was so intense in Baidu and some others that the SEC has implemented a temporary short-selling ban on some of the Chinese Internet names. Regulators are really zeroing on the use of reverse mergers and shell companies by some of the more dubious Chinese firms listed here in the U.S., but the baby often gets thrown out with the bathwater.

That explains Baidu falling 9.2% on volume that was about 2.5% times the daily average. SOHU was off almost 5% on roughly triple the usual turnover and SINA plunged 10% on volume that was also about 2.5 times the daily average. Somehow the Guggenheim China Technology ETF (CQQQ), of which BIDU, SINA and SOHU account for 28% of, was only down 1.9%.

Chinese Internet ETF Chart

Looking at the charts, an up day is better than a down day, but the S&P 500 did not do enough to address resistance just over 1200. The dip to 1139 was bought (support is in the 1135 area), but index really needs to make a run to the 1195-1205 to get buyers excited. As Keene noted last night, bearish below 1130 is probably the way to look at things. From there, things get progressively more ugly as 1100 then 1060 would come into play.

S&P 500 Chart

The Dow's final tally looks good on paper, but the blue-chip index fell short of taking out its 50-day moving average at 11,429 or taking out stiffer resistance just a few points from there. The price action here still is not much to write home about and the Dow remains vulnerable. That said, another 200 points on top of Thursday's close, and the near-term setup for the Dow would be a bit more attractive. Problem is support is not too far away at 10,930.

Dow Chart

I am willing to give the Nasdaq a pass for today, sort of, because most of the decline can probably be tied to NFLX, RIMM and the government looking into the aforementioned Chinese tech stocks. Eliminate just one or two of those factors and there is a fair chance the Nasdaq Composite takes out its 50-day line 2557. The flip side is the close below 2500 could be a bearish sign and the Composite could easily return to 2460 from here and perhaps as low as 2400.

Nasdaq Chart

I am not backing down from my conviction that this market is beholden to two catalysts: Europe and U.S. economic data. For one day at least, both of those situations looked pretty good. I am not a believe in the positive sentiment on Europe lasting too long, but I will be flat heading into the weekend because that is the prudent thing to do. Have a great weekend.

Todd Shriber


New Option Plays

End of the Quarter

by James Brown

Click here to email James Brown

Editor's Note:

Unless you're a day trader it's tough to trade when the Dow Industrials Average experiences not one but three triple-digit swings in the same day. That doesn't mean day traders had it easy. It can be nerve-racking trying to catch the intraday swings. The DJIA saw its +260-point rally this morning reverse into a -306 point drop from its highs and then reverse again with a +188 point bounce late in the day.

The positive news out today was Germany's successful vote to expand the EFSF bailout program. Plus, the U.S. Q2 GDP number was revised higher. Then the weekly U.S. jobless claims came in less than expected.

On the other hand the market reacted negatively to an earnings warning from semiconductor company AMD. Plus, there were renewed concerns over economic challenges in China (these concerns ebb and flow quite a lot).

You could argue that traders are confused with all the back and forth volatility. Meanwhile I don't trust the late day bounce. It was probably fueled by end of quarter window dressing since tomorrow is the end of the third quarter. Looking at the market today the weakness in the semiconductors and retailers is bearish but this was offset by strength in financials and transports. The question is, will investors be buying stocks heading into the weekend? Or will traders be selling stocks because they are afraid of the headline risk over the weekend?

There is too much volatility and tomorrow could see more end of quarter window dressing. We are not adding any new trades tonight. Look for new trades in the weekend newsletter!

- James


In Play Updates and Reviews

A Very Volatile Day

by James Brown

Click here to email James Brown

Editor's Note:

It was another very volatile day of trading in the stock market. The Dow Industrial Average saw its +260-point rally this morning reverse into a -306 point drop from its highs and then reverse again +188 points.

That's a very tough market to trade. Sometimes investors would rather exit than get run over in all this cross traffic. We saw CERN, DLTR, HANS, and WFM all get stopped out. On the positive side our CAT put play did hit our first target.

-James

Current Portfolio:


CALL Play Updates

Celgene Corp. - CELG - close: 62.93 change: +0.53

Stop Loss: 61.75
Target(s): 69.00
Current Option Gain/Loss: -20.9%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
09/29 update: As we expected, shares of CELG tested support near $62.00 and bounced. The low today was $61.84 but traders bought the dip near $62 multiple times. Technically this looks like a new entry point to buy calls but I will point out that the MACD indicator on the daily chart is nearing a new sell signal. Readers may want to keep any new positions pretty small.

Please note our new stop loss at $61.75

- Suggested Positions -

Long OCT $65 call (CELG1122J65) Entry $1.53

09/29 new stop loss @ 61.75
09/27 new stop loss @ 61.25

Entry on September 26 at $63.03
Earnings Date 10/27/11 (unconfirmed)
Average Daily Volume = 4.0 million
Listed on September 22, 2011


Check Point Software - CHKP - close: 53.41 change: -0.18

Stop Loss: 50.80
Target(s): 55.75 , 57.75
Current Option Gain/Loss: -16.6%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
09/29 update: The stock market's afternoon swoon lower pushed CHKP to support near $52.00 and its 200-dma. The intraday low was $51.83. The late day bounce could be used as a new bullish entry point to buy calls but I would keep positions small and probably raise the stop toward $51.80. Officially we'll keep the stop at $50.80 tonight.

- Suggested Positions -

Long OCT $55 call (CHKP1122J55) Entry $1.80

09/26 trade opened.

Entry on September 26 at $53.00
Earnings Date 10/20/11 (unconfirmed)
Average Daily Volume = 1.6 million
Listed on September 20, 2011


Hewlett Packard - HPQ - close: 23.78 change: +0.59

Stop Loss: 21.45
Target(s): 29.50
Current Option Gain/Loss: +21.9%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
09/29 update: The headlines for HPQ today were dominated over a growing "war of words" between the Autonomy CEO and Oracle (ORCL). Oracle claims that Autonomy came to them first to buy the company but ORCL turned them down because Autonomy was overvalued at $6 billion. Why is this relevant? HPQ is currently under contract to buy Autonomy for more than $11.5 billion. The story did not seem to affect trading of HPQ shares today but you have to wonder if activist shareholders will try and kill the deal or will the new HPQ CEO Meg Whitman scuttle the deal. I'm sure there is a breakup fee but it has to be less than the $6 billion difference that Autonomy wanted from Oracle and what HPQ is paying.

Just looking at the chart of HPQ today the stock looks poised to bounce. I would be tempted to buy calls here but readers may want to raise their stop closer to $22.00 or even closer to the $23.00 level to really limit your risk.

- Suggested Positions -

Long 2012 Jan. $24 call (HPQ1221A24) Entry $2.14

09/27 new stop loss @ 21.45

Entry on September 23 at $22.52
Earnings Date 11/21/11 (unconfirmed)
Average Daily Volume = 26.6 million
Listed on September 22, 2011


Watson Pharmaceuticals - WPI - close: 70.91 change: +0.30

Stop Loss: 69.75
Target(s): 74.75, 78.50
Current Option Gain/Loss: Oct$75: -35.0% & NOV$75: -21.4%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
09/29 update: WPI dipped to short-term support near $70.00 and its 10-dma. The late afternoon bounce from this level looks like a bullish entry point. However, I would only consider new positions if both WPI and the S&P500 index both open positive tomorrow and I would keep positions small. This is a very volatile market!

The low today was $69.88. Our stop is at $69.75.

- Suggested Positions -

Long OCT $75 call (WPI1122J75) Entry $1.00

- or -

Long NOV $75 call (WPI1119K75) Entry $2.10

09/27 new stop loss @ 69.75

Entry on September 26 at $71.26
Earnings Date 11/01/11 (confirmed)
Average Daily Volume = 1.4 million
Listed on September 24, 2011


PUT Play Updates

Caterpillar Inc. - CAT - close: 75.39 change: +0.31

Stop Loss: 80.25
Target(s): 73.50, 70.50
Current Option Gain/Loss: +36.5%
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
09/29 update: Target achieved. CAT gapped open higher, fell to $73.20 intraday, and then reversed back into positive territory. Our first target to take profits was hit at $73.50. At the moment I would be concerned that if the broader market continues to bounce tomorrow that we could see CAT challenge the $79-80 zone. Wait for a new failed rally under $80 before considering new positions.

- Suggested Positions -

Long OCT $75 PUT (CAT1122V75) Entry $2.93

09/29 1st target hit at $73.50. option bid $5.00 (+70.6%)

chart:

Entry on September 28 at $78.13
Earnings Date 10/24/11 (unconfirmed)
Average Daily Volume = 11.2 million
Listed on September 27, 2011


Flowserve Corp. - FLS - close: 78.60 change: +0.70

Stop Loss: 82.75
Target(s): 71.00, 66.00
Current Option Gain/Loss: Oct$75: +18.0% & Nov$70: +21.4%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
09/29 update: The stock market's morning strength pushed FLS to gap open higher at $80.23 but the rebound failed at $81.41. Shares then fell more than -3% from its intraday highs but still managed to post a gain for the session. Overall I don't see any changes from my prior comments. The gap higher helped us by knocking down the put prices for our entry point.

Our first target is $71.00. Our secondary, more aggressive target is $66.00.

- Suggested Positions -

Long OCT $75 PUT (FLS1122V75) Entry $2.50

- or -

Long NOV $70 PUT (FLS1119W70) Entry $2.80

Entry on September 29 at $80.23
Earnings Date 10/26/11 (unconfirmed)
Average Daily Volume = 721 thousand
Listed on September 28, 2011


Regal-Beloit - RBC - close: 49.04 change: +1.09

Stop Loss: 51.55
Target(s): 43.50, 40.50
Option Gain/Loss: (wide spreads) Oct$45: -30.0% & Nov$45: -30.4%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
09/29 update: Thursday proved to be a rocky day for RBC. Shares gapped open at $49.01, dipped back to a new 52-week low at $47.47, before bouncing all the way back to where it started the session near $49.00. Overall I don't see any changes from my prior comments but readers may want to wait for a new failed rally near $51.00 or $50.00 before initiating new positions.

Warning! The option spreads are a little wide. We want to keep our position size small to limit our capital at risk.

- Suggested Positions - (small positions)

Long OCT $45 PUT (RBC1122V45) Entry $1.00

- or -

Long NOV $45 PUT (RBC1119W45) Entry $2.30

Entry on September 29 at $49.01
Earnings Date 11/02/11 (unconfirmed)
Average Daily Volume = 456 thousand
Listed on September 28, 2011


CLOSED BULLISH PLAYS

Cerner Corp. - CERN - close: 70.49 change: +0.13

Stop Loss: 69.50
Target(s): 74.90, 78.50
Current Option Gain/Loss: -41.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
09/29 update: CERN managed to eke out a small gain but the intraday volatility was too much. Shares dipped to $68.52 this afternoon. Our stop loss was hit at $69.50.

- Suggested Positions -

OCT $75 call (CERN1122J75) Entry $1.95, Exit $0.90 (-53.8%)

09/29 stopped out at $69.50
09/27 new stop loss @ 69.50

chart:

Entry on September 27 at $72.79
Earnings Date 10/27/11 (unconfirmed)
Average Daily Volume = 1.6 million
Listed on September 26, 2011


Dollar Tree Inc. - DLTR - close: 75.28 change: -1.28

Stop Loss: 74.75
Target(s): 79.75, 82.50
Current Option Gain/Loss: Oct$77.50: -55.5% & Nov$80: -31.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
09/29 update: Another extremely volatile day of trading in the markets helped kill our DLTR trade. Shares dipped to $73.35 intraday. Our stop loss was $74.75. After Tuesday's reversal lower I would hesitate to launch new bullish positions.

NOTE: It was a pretty ugly day for the October call. Ouch!

Earlier Comments:
09/28 - NOTE: Readers might want to consider an early exit right now. Even though DLTR held up today the broader market looks very vulnerable. Traders may want to cut their losses early.

- Suggested Positions -

OCT $77.50 call (DLTR1122J77.5) Entry $2.70, Exit $1.20 (-55.5%)

- or -

NOV $80.00 call (DLTR1119K80) Entry $2.90, Exit $2.00 (-31.0%)

09/29 stopped out at $74.75
09/27 new stop loss @ 74.75, DLTR showing relative weakness today

chart:

Entry on September 26 at $76.51
Earnings Date 11/17/11 (unconfirmed)
Average Daily Volume = 1.7 million
Listed on September 24, 2011


Hansen Natural Corp. - HANS - close: 88.32 change: -0.98

Stop Loss: 86.90
Target(s): 94.75, 99.00
Current Option Gain/Loss: -57.1%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
09/29 update: HANS is already a volatile stock. The market volatility today only made things worse. Shares dipped to $86.70 this afternoon. That was just enough to hit our stop loss (86.90).

Earlier Comments:
This stock can be volatile so we do want to keep our position size small.

- Suggested Positions - (Small Positions)

Long OCT $95 call (HANS1122J95) Entry $3.50 exit $1.50 (-57.1%)

09/29 stopped out at $86.90
09/27 new stop loss @ 86.90

chart:

Entry on September 27 at $92.17
Earnings Date 11/03/11 (unconfirmed)
Average Daily Volume = 1.5 million
Listed on September 26, 2011


Whole Foods Market - WFM - close: 67.07 change: -3.02

Stop Loss: 67.45
Target(s): 73.00, 77.50
Current Option Gain/Loss: OCT$70: -35.5% & NOV$72.50: -20.7%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
09/29 update: I could not find any specific news to explain WFM's relative weakness. The stock underperformed with a -4.3% plunge. Shares hit new two-week lows today. The breakdown under support near $68 and its trendline of higher lows is bearish. Now the failed rally earlier this week is starting to look like a bearish double top pattern.

Earlier Comments:
09/28 - More conservative traders may just want to abandon ship now. I am not suggesting new positions at this time.

- Suggested Positions - (Small Positions)

OCT $70 call (WFM1122J70) Entry $3.18, exit $2.05 (-35.5%)

- or -

NOV $72.50 call (WFM1119K72.5) Entry $4.10, exit $3.25 (-20.7%)

09/29 stopped out at $67.45
09/27 new stop loss @ 67.45
09/26 new stop loss @ 65.90

chart:

Entry on September 26 at $69.10
Earnings Date 11/02/11 (unconfirmed)
Average Daily Volume = 2.2 million
Listed on September 22, 2011