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Newsletter

Daily Newsletter, Thursday, 12/1/2011

Table of Contents

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

Market Wrap

No Material Headlines

by Jim Brown

Click here to email Jim Brown
For a market that is addicted to headlines today was a disappointment. It would be tough to beat the headline flurry from Wednesday so today was a pause to reflect.

Market Statistics

Today was a lackluster day as traders digested the massive short squeeze from Wednesday. Any day that fails to sell off appreciably after a +490 point Dow gain should be considered a bullish day. The minor declines on the Dow and S&P suggest that even without any material headlines to produce movement the sentiment has turned slightly more bullish.

Obviously shorts are afraid to load up again after a very painful three days of trading. European leaders are meeting again on Friday and the Nonfarm Payrolls due out as well so there is headline risk.

On the U.S. economic front we saw November same store sales numbers from the retailers and several positive economic reports. The national ISM for November came in at 52.7 and well over the 50.8 for October. This was a substantial uptick when the consensus was for a small rise to 51.5.

New Orders increased sharply to 56.7 from 52.4 and production increased to 56.6 from 50.1. Each of those components account for 20% of the headline number. That was the second monthly improvement on new orders and the largest increase since January. Back orders declined slightly to 45.0 from 47.5 most likely due to the sharp increase in production.

The sharp increase in factory conditions suggest the Q3 GDP will be well above the latest 2.0% revision for Q3. The economy appears to be accelerating but still not healthy. Fears over Europe continue to weigh on manufacturers and they don't want to overbuild inventories if the problems in Europe are going to shrink demand.

ISM Chart

Construction spending rose +0.8% in October compared to estimates for +0.4% growth. This was the third consecutive month of growth. Residential construction rose +3.4% and non-residential +1.3%. The public sector saw spending decline -1.8% as budget woes weighed on new projects.

Chain store sales for November rose +3.2% and that was the smallest gain since March. Sales increases averaged +5% from May through September. Heavy discounting and warm weather were drags on November but extra Black Friday hours were a plus. Wholesale club stores did the best with a +9.0% gain with luxury stores a solid second at +6.5%. Department stores fared the worst with an increase of only +0.4%.

Chain Store Sales Chart

Individual chain stores posted their same store sales data for November. Some of the highlights in the table below show that Saks is knocking the cover off the ball. However, the low end retailers of JC Pennys and Kohl's were having a rough time. Both missed estimates with Kohl's missing the mark entirely. Kohl's (KSS) shares were knocked for a -6% loss on the news.

Same Store Sales

Kohl's Chart

Auto sales continued to surprise to the upside with a rise to 13.6 million units (annualized). That is the fastest pace of sales since the Cash for Clunkers program in mid-2009. Auto sales rose to 6.7 million and light trucks-SUVs to 6.9 million. Improved incentives, pent up demand and higher availability helped to fuel the gains. New models also helped to drive sales. The robust auto sales will also help to lift Q4 GDP numbers.

Moody's Auto Sales Chart

The one report that disappointed was the weekly jobless claims. The headline number rose to 402,000 and the prior week was revised higher by 3,000 to 396,000 claims. We can't quite seem to shake that 400,000 level even though we saw numbers below that level for the prior three weeks. The unemployment rate is likely to remain stubbornly high for some time to come. Claims need to be under 350,000 per week to make any real gains in hiring.

Jobless Claims Chart

The Nonfarm Payrolls report is due out on Friday and after Wednesday's ADP surprise analysts have been raising their numbers. Originally the estimates were in the 90,000-110,000 range and many analysts have been raising those estimates to 120,000-140,000. One estimate I heard was 190,000. I don't think the estimates really rose dramatically so I don't think there is too much risk of a negative surprise unless the new jobs come in well under 100,000. Last month saw 80,000 new jobs created. Everyone will want to see improvement so any number under 80K would likely create some market stress. Conversely a strong number over about 140,000 would likely be a headline that could support future market gains. After the +750 point rally so far this week I would be doubtful we would see those gains on Friday but potentially next week if the jobs are strong.

Economic Calendar

The news out of Europe continues to suggest the euro zone is headed to come kind of climax event next week. The bond yields for euro zone countries imploded over the last two days with Spain's 10-year yields declining over 50 basis points today alone. The yield on France declined over 30 basis points. This is expectations that some magic solution will be found by the Dec-9th EU summit next week.

The next ten days are critical in Europe. The EU finance ministers and the EU leaders are both meeting next week and there is a strong call to take decisive action to solve the problem. The failed German bond auction last week struck fear into the stronger countries that the contagion could really migrate to their markets and endanger their own budgets. This is a powerful signal and suddenly it appears they are ready to go beyond planning to make another plan.

Comments from highly placed politicians this week in Europe suggests they finally realize the potential of the crisis to destroy the euro zone and possibly the European Union. EU President Herman Van Rompuy said today, "We have to show that the euro is an irreversible project - an irreversible project." He said it twice for emphasis.

The European Union's Monetary Chief, Olli Rehn, made comments even more ominous. He said, "We are now entering the critical period of ten days to complete and conclude the crisis response of the European Union. Ten days to save the euro. Ten days that will shake the financial world. Ten days to decide how Europeans will go forward."

That ten days will end with the EU Leaders Summit on December 9th. The 27 leaders have tried to talk the problem away and that did not work. They tried throwing pocket change as the beggar countries and that did not work. They tried a 400 billion euro Financial Stability Fund and that did not work because it was not big enough.

Germany has remained firm against helping out the over spending nations saying they should pay for their own mistakes. That inaction and resistance to action has been the main cause for the stop gap measures to fail. They never went far enough because Germany would not commit to do whatever it took.

The Polish foreign minister said in Berlin this week, "I will probably be the first Polish foreign minister in history to say so, but here it is, I fear German power less than I am beginning to fear German inactivity…The biggest threat to the security and prosperity of Poland would be the collapse of the euro zone." He said this 72 years after Germany invaded Poland.

Merkel and Sarkozy are making plans to force a much closely coordinated fiscal policy in Europe. They have agreed that in order to have a common currency they must have common finances. That means budget approvals across country borders with the EU able to approve or deny budgets and spending plans. This will eventually mean a change in labor laws and potentially an end to many of the welfare states in Europe. Even France will have to change from its strict and protective labor laws.

"The solution exists. It is audacious," said Laurence Parisot, head of the business lobby Medef. "It is called the United States of Europe."

Is that going to be the end result? Obviously nobody knows but getting 17 countries to give up their fiscal sovereignty and allow some distant commission to dictate their budgets would seem like an impossible task to me. That would mean an end to the welfare states and you can imagine the riots that would result. Sarkozy has said many times recently that cutting the French workweek to 35 hours was major mistake. He also said lowering the retirement age to 60 was a major mistake. Obviously raising those numbers today would face major citizen resistance.

Whatever the eventual outcome the next ten days are critical and the EU leaders finally appear to realize that disaster is only a decision away. I believe they will try to put some solution in motion by the end of next week. That would be very bullish for the global markets.

In stock news Barnes & Noble (BKS) posted a loss of 17-cents compared to market estimates of a 3-cent profit. The company warned that full year earnings would be at the low end of the previously announced range. Sales were down -17% over the prior year. However, Barnes said the Nook Tablet was the fastest selling Nook product in history and overall Nook business revenue was $220 million for the quarter an increase of +85%. The CEO said, "We expect to sell millions of devices during the current quarter and add to the millions of current Nook customers." The Nook Tablet competes with the Kindle Fire from Amazon and Amazon does not release numbers of Kindles sold.

BKS Chart

Apple shares got a boost today after a major analysts said numbers out of Wintec suggest Apple sales are booming. He said Apple did build more iProducts than they needed for last quarter but that inventory is plunging fast and new orders for iPads and iPhones are surging thanks to the heavy sales in Q4.

Apple shares bounced off the 200-day average at $363 on Friday and that was the buy point I suggested several times in past commentaries. Shares closed today at $387 and just over the 100-day average. A move over resistance at $390 would be confirmation of the move and another buy signal.

Apple Chart

Research in Motion (RIMM) is catching upgrades from multiple analysts as chatter increases about a possible acquisition. Microsoft continues to be mentioned as a possible suitor. With a decline in market cap to only $10 billion and a global brand this would be a good time for somebody to make a run at RIMM. RIMM shares have been up for four consecutive days now.

RIMM Chart

Yahoo (YHOO) is back in the spotlight as multiple firms are letting it be known they are planning making a bid for the company. Unfortunately the rumors are getting shot down about as fast as they appear. A group led by Blackstone, Bain Capital, Japan's Softbank and China's Alibaba Group were reportedly considering an offer in the range of $20 per share. Late Thursday Alibaba said it had not yet made a decision to join the group.

Yahoo owns 40% of Alibaba and Yahoo and Softbank are partners in Yahoo Japan with Yahoo owning 35%. Having both of those entities together in one group would be a powerful incentive to do a deal. They all have deep pockets as well. There is an overall consensus that Yahoo's business is weakening and it needs to do a deal before it becomes irrelevant. Yahoo management including founder Jerry Yang are still reported to be considering a play to take the company private through a leveraged buyout. Multiple shareholders have threatened to sue if Yang proceeds on that course.

I believe a buyout will occur. When that will happen is the $64 question.

Yahoo Chart

This has been a tough week to trade. If you were not already long on Monday and Wednesday morning then you missed the gains. Monday's afternoon fade from resistance suggested the spike would be sold. Tuesday's fade from the same resistance suggested the same and allowed shorts to load up again. Wednesday's pole vault jump over resistance at the open crushed anyone already short. Thursday's lack of selling was clearly telling us that traders were gun shy and for good reason. Any shorts with capital left were afraid of a new revelation coming out of the Merkel-Sarkozy meeting in Paris on Friday and there was also the potential for a much stronger payroll number before the open on Friday. Those same factors kept longs in the market in hopes that either or both of those events would come to pass.

While I expect some plan to come out of the EU next week I have serious doubts about whether it will be enough to convince the world they have solved the problem. The first hurdle will be getting 17 countries to agree to any new plan. That will take weeks to months if it is a comprehensive plan with pain for everyone and there is no assurance everyone will agree and any change must be unanimous to pass.

It is my opinion the EU leaders will kick the can down the road again and announce another plan to make a plan. I hope I am wrong. Either way the next week is going to be critical for the health of the euro zone.

The S&P closed today at 1244 and that is not really heavy resistance. It was simple consolidation while we wait for the next set of headlines. The real resistance is 1265 and the 200-day average. If the next headline can vault us over that level then Santa Claus may actually come to Wall Street. Currently his sleigh is bogged down in the euro zone and without a real plan next week he may be stuck there for the rest of the year.

S&P Chart

The Dow has the same strong and clear resistance at just over 12,000 that was solid in early November. This will be a critical test of market strength. However, a move over 12,200 would be very bullish and setup a retest of 12,750 by year end.

Dow Chart

The Nasdaq was the only major index to close positive on Thursday. This was thanks to gains in Apple +6, Google +15, Amazon +5, Ross Stores +4 on +5% same store sales. Nasdaq 2625 was strong support on the way down and equally strong resistance on the way up. The next major resistance is 2700. Since tech stocks have plenty of reasons to be weak this quarter based on the Thailand flood disruptions and falling chip orders I see any gain after yesterday's big short squeeze as bullish. Support is now 2600.

Nasdaq Chart

I have mixed emotions about Friday's market direction. It will be headline driven but it appears the market sentiment has changed. We were massively oversold last week and sentiment was terrible. The continued improvement in the U.S. economics and the plan to make a new plan potential in Europe is helping create holiday cheer.

However, a headline driven market can be driven equally fast in either direction. The next week is going to be critical for Europe although the U.S. appears to be doing fine. I would hesitate to buy the market on Friday simply because of the extreme event risk over the weekend. That risk works both ways so a big gap open on Monday would be a missed opportunity if you don't have at least a small position.

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Jim Brown

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New Option Plays

Nearing New Highs

by James Brown

Click here to email James Brown

Editor's Note:

We are listing a couple of bullish candidates tonight but readers should be cautious here. The S&P 500 is still sitting at resistance (remember yesterday's chart). Then again you could argue the lack of any real profit taking on yesterday's rally is positive. I would not be in a rush to open new trades and if you do I would keep positions small.

P.S. don't forget that December calls expire in about two weeks!

- James


NEW DIRECTIONAL CALL PLAYS

Alexion Pharmaceuticals - ALXN - close: 69.26 change: +0.60

Stop Loss: 67.40
Target(s): 74.75 or 79.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
ALXN has spent almost two months consolidating sideways under resistance near the $70.00 level. Now the stock is on the verge of breaking out to new all-time highs. I am suggesting we use a trigger at $70.55 to open small bullish positions. If triggered we'll use a stop loss at $67.40.

I am setting our exit target at $74.75 but if you're patient I could see ALXN make a run towards $80. FYI: The Point & Figure chart for ALXN is bullish with an $82 target.

Trigger @ $70.55 (Small Positions)

- Suggested Positions -

buy the Jan $75 call (ALXN1221A75) current ask $1.55

Annotated Chart:

Entry on December xx at $ xx.xx
Earnings Date 02/09/12 (unconfirmed)
Average Daily Volume = 1.1 million
Listed on December 01, 2011


Boston Beer Co. Inc. - SAM - close: 100.90 change: +0.99

Stop Loss: 97.75
Target(s): 109.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
The fourth quarter is usually the strongest quarter of the year for sales of alcohol. Shares of SAM already have a lot of short interest and if the company or an analyst says anything positive or if the stock can hit a new high then we could see SAM experience a short squeeze higher.

I am suggesting a trigger to open small bullish positions at $102.00 with a stop loss at $97.75. Our exit target is $109.50. More aggressive traders may want to aim higher. FYI: The Point & Figure chart for SAM is bullish with a $117 target.

NOTE: The most recent data listed short interest at 20% of SAM's extremely small 8.3 million-share float. That's definitely a recipe for a short squeeze.

Trigger @ $102.00 (small positions

- Suggested Positions -

buy the JAN $105 call (SAM1221A105) current ask $1.75

Annotated Chart:

Entry on December xx at $ xx.xx
Earnings Date 03/08/12 (unconfirmed)
Average Daily Volume = 72.3 thousand
Listed on December 01, 2011



In Play Updates and Reviews

Churning Sideways

by James Brown

Click here to email James Brown
Current Portfolio:


CALL Play Updates

Donaldson Company - DCI - close: 67.64 change: -0.56

Stop Loss: 63.80
Target(s): 69.50
Current Option Gain/Loss: - 4.4%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/01 update: Hmm... it looks like I need to issue a warning here. The action in DCI today is bearish. The stock rallied toward the mid November high and reversed. This has the potential to turn into a bearish double top pattern. I would expect a dip toward $66.00 or even $65.00. Wait for the dip (or a bounce) from these levels before considering new positions.

More conservative traders may just want to exit now. Our exit target has been $69.50 and the stock hit $69.43 this morning.

(small positions) - Suggested Positions -

Long JAN $65 call (DCI1221A65) Entry $4.50*

12/01/11 DCI hit $69.43. Our target is 69.50. The reversal looks bearish. Readers may want to go ahead and exit early now
11/30/11 new stop loss @ 63.80
11/30/11 DCI gapped higher at $66.15. Our trigger was $65.55.
*entry price is an estimate. Option did not trade on Wednesday morning.

Entry on November 30 at $66.15
Earnings Date 02/16/12 (unconfirmed)
Average Daily Volume = 306 thousand
Listed on November 29, 2011


Edwards Lifesciences - EW - close: 66.83 change: +0.80

Stop Loss: 61.95
Target(s): 69.50
Current Option Gain/Loss: Dec$65c: +35.8% & Jan$70c: +14.3%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/01 update: The rally in EW continues with the stock outperforming the market today thanks to EW's +1.2% gain. I am not suggesting new positions at this time. More conservative traders might want to consider raising their stop toward the $64 area.

- Suggested Positions -

Long DEC $65 call (EW1117L65) Entry $1.95

- or -

Long 2012Jan $70 call (EW1221A70) Entry $1.70

11/30 new stop loss @ 61.95
11/28 trade opened. EW gapped higher at $63.97
11/26 trade still not open. Adjusting stop loss to $59.90
11/23 still not open
11/22 not open yet

Entry on November 28 at $63.97
Earnings Date 02/02/12 (unconfirmed)
Average Daily Volume = 1.2 million
Listed on November 21, 2011


Family Dollar Stores - FDO - close: 59.06 change: -0.36

Stop Loss: 56.45
Target(s): 64.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
12/01 update: FDO saw a small rally toward round-number resistance at $60.00 before paring gains and closing with a fractional loss. There is no change from my prior comments. We have a buy-the-dip trigger at $58.50.

Earlier Comments:
We want to keep our position size small because the spreads on the options below are getting wide, making this trade more risky.

buy the dip Trigger @ 58.50 (small positions)

- Suggested Positions -

buy the DEC $60 call (FDO1117L60)

- or -

buy the JAN $60 call (FDO1221A60)

11/30 New strategy to account for FDO's bullish breakout higher. We want to use a trigger at $58.50 to open bullish positions with a stop at $56.45. New target is $64.00. I've updated our option strikes.
11/26 new strategy. buy a dip at $54.50, stop loss @ 53.75. Keep positions small because option spreads are wide.
11/22 not open yet

Entry on November xx at $ xx.xx
Earnings Date 01/04/12 (unconfirmed)
Average Daily Volume = 1.0 million
Listed on November 21, 2011


JB Hunt Transport Services - JBHT - close: 45.47 change: -0.25

Stop Loss: 42.45
Target(s): 48.25
Current Option Gain/Loss: +12.1%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
12/01 update: JBHT experienced a very minor pull back today. I would not be surprised to see shares correct lower toward their simple 10-dma or the $44.00 level. Look for a new entry point there.

Earlier Comments:
Our multi-week target is $48.25. JBHT doesn't move super fast so give yourself time for the trade to work. FYI: The Point & Figure chart for JBHT is bullish with a $63 target.

- Suggested Positions -

Long 2012JAN $45 call (JBHT1221A45) Entry $2.05

11/30/11 new stop loss @ 42.45
11/29/11 triggered at $44.35

Entry on November 29 at $44.35
Earnings Date 01/30/12 (unconfirmed)
Average Daily Volume = 1.0 million
Listed on November 22, 2011


NetApp, Inc. - NTAP - close: 36.92 change: +0.09

Stop Loss: 33.95
Target(s): 39.50
Current Option Gain/Loss: +23.5%
Time Frame: 3 to 5 weeks
New Positions: see below

Comments:
12/01 update: NTAP managed to eke out another gain (+0.2%) thanks to an early afternoon rally that lifted it to new two-week highs. I don't see any changes from yesterday's comments. The stock is testing resistance near the bottom of its Nov. 17th gap down around the $36.90 area. Readers may want to wait for a dip into the $36.00-35.00 zone before considering new positions.

Earlier Comments:
I do consider a more aggressive trade. We want to keep our position size small to limit risk. FYI: Readers should note that there is a risk that NTAP might make an acquisition soon. There are rumors floating around that NTAP could buy Quantum (QTM) or CommVault (CVLT) in an effort to better compete with rival EMC. If NTAP does make a bid for either company typically shares of the buyer go down while shares of the target go up.

- Suggested Positions - (small positions)

Long JAN $35 call (NTAP1221A35) Entry $2.51

Entry on November 29 at $35.82
Earnings Date 02/16/12 (unconfirmed)
Average Daily Volume = 9.2 million
Listed on November 28, 2011


O'Reilly Automotive - ORLY - close: 77.70 change: +0.46

Stop Loss: 73.85
Target(s): 82.50
Current Option Gain/Loss: Dec$75c: -33.9% & Jan$80c: -10.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/01 update: Wow! I don't know what happened but the spreads just exploded on ORLY's Dec. $75 calls. I almost wonder if it's an error. The stock did manage to hit new two-week highs. The next hurdle for the bulls is ORLY's all-time highs set three weeks ago near $79.00. I am not suggesting new positions at this time.

Earlier Comments:
Our target is $82.50 but more conservative traders may want to exit in the $79.50-80.00 zone instead. FYI: The Point & Figure chart for ORLY is bullish with a $103 target.

- Suggested Positions -

Long DEC $75 call (ORLY1117L75) Entry $2.80

- or -

Long JAN $80 call (ORLY1221A80) Entry $1.50*

11/28/11 ORLY gapped open higher at $76.96, which was above our trigger to buy calls at $76.15.
*Jan $80 call did not trade today. Entry price is an estimate.

Entry on November 28 at $76.96
Earnings Date 02/16/12 (unconfirmed)
Average Daily Volume = 1.0 million
Listed on November 26, 2011


Phillip Morris Intl. - PM - close: 75.69 change: -0.55

Stop Loss: 71.40
Target(s): 78.50
Current Option Gain/Loss: +108.9%
Time Frame: 6 to 9 weeks
New Positions: see below

Comments:
12/01 update: PM hit a record high at $77.00 this morning but eventually gains faded. The stock hit some profit taking and closed down -0.7%. Don't be surprised if we see PM retest the $74.00 area soon. I am not suggesting new positions at this time.

Earlier Comments:
Our multi-week target is $78.50. FYI: The Point & Figure chart for PM is bullish with a $95 target.

- Suggested Positions -

Long 2012 Jan $75 call (PM1221A75) Entry $1.12

11/30 new stop loss @ 71.40
11/23 adjusted stop loss to $69.49
11/22 trade opened. PM opened at $72.11

Entry on November 22 at $72.11
Earnings Date 02/09/12 (unconfirmed)
Average Daily Volume = 7.3 million
Listed on November 19, 2011


PUT Play Updates

Alliance Resource Partners - ARLP - close: 72.69 chg: +1.24

Stop Loss: 72.55
Target(s): 60.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
12/01 update: ARLP outperformed the market with another push higher and shares closed up +1.7%. If we do not see ARLP roll over with a decline tomorrow then I'll drop it as a bearish candidate.

Earlier Comments:
I am suggesting we use a trigger at $68.45 to buy puts and we'll use a stop loss at $72.55. It's a bit wide for a stop but ARLP can be a volatile stock. Our target is $60.50. FYI: The Point & Figure chart for ARLP is bearish with a $62 target.

NOTE: Previously I did not list the January puts because they spreads were too wide. They have come in a bit. They're still uncomfortably wide but we'll list them as a potential trade.

Trigger @ 68.45 (small positions)

- Suggested Positions -

buy the DEC $65 PUT (ARLP1117X65)

- or -

buy the JAN $65 PUT (ARLP1221M65) bid $0.95/ask $1.75

Entry on November xx at $ xx.xx
Earnings Date 01/30/12 (unconfirmed)
Average Daily Volume = 45 thousand
Listed on November 26, 2011


SPDR S&P 500 ETF - SPY - close: 124.97 change: -0.02

Stop Loss: 127.55
Target(s): 120.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
12/01 update: The market essentially churned sideways on Thursday and the SPY closed almost unchanged on the session. The high today was $125.64. There is no change from my Wednesday night comments.

I am suggesting a trigger to open small bearish put positions at $126.00 on the SPY with a stop loss at $127.55. Our target is $120.50. We want to keep our position size small to limit our risk.

Trigger @ 126.00

- Suggested Positions -

buy the 2012Jan $120 PUT (SPY1221M120) current ask $3.16

Entry on December xx at $ xx.xx
Earnings Date --/--/--
Average Daily Volume = 224 million
Listed on November 30, 2011