Option Investor
Newsletter

Daily Newsletter, Tuesday, 2/7/2012

Table of Contents

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

Market Wrap

Grecian Formula 16

by Jim Brown

Click here to email Jim Brown
Greece teased the market for the 16th straight day that a resolution might appear soon.

Market Statistics

It was a low key day with limited economic data and limited earnings reports. The highlight for the morning was Ben Bernanke appearing before the Senate Budget Committee and repeating his testimony from last week word for word including estimates for payrolls, which of course were released on Friday. He did not even update the comments to reflect the actual payroll numbers. Needless to say the market was not impressed but at least it rebounded off its lows.

In answer to questions he did not rule out further QE programs but he said nothing that indicated there were further Fed moves coming in the near future. He warned that lawmakers should not make any material changes in fiscal policy to create a "huge pothole" in the economy. He also warned that the unemployment rate at 8.3% could be sending false signals about the health of the labor market. The decline in the unemployment rate has been due more to workers becoming discouraged and leaving the workforce rather than finding jobs.

Economic reports were lackluster with the Job Openings and Labor Turns Survey (JOLTS) reported only a minor improvement in December. Job openings did increase slightly to 3.376 million from 3.118 million. However, the rate of hiring remained relatively flat at 2.5% compared to 2.3% in November. However, December is not a strong period for hiring due to seasonal inhibitions.

Separations also remained relatively unchanged at 3.909 million compared to 3.986 million. Layoffs did decline slightly to 1.644 million from 1.718 million. The JOLTS report showed continued slow improvement in the job market but nothing to get excited about. Next month's report for January should show better improvement.

The weekly Chain Store Sales rose +1.8% compared to +0.1% the prior week. This is a weekly number with high volatility and is normally ignored. The increase in sales was attributed to buying ahead of the Super Bowl parties.

Consumer Credit for December rose $19.3 billion from $20.4 billion in November. Consensus estimates had been for only a gain of +$7.2 billion. A sharp uptick in non-revolving balances was the primary driver with a +$16.6 billion gain. Credit in revolving accounts rose +$2.8 billion. Consumer credit rose in all but one month in 2011 by an annualized +9.8% rate. Balances have now reached their highest rate since mid-2009. This suggests consumers are confident enough about the future to begin borrowing again. Of course many consumers don't have any choice and need to borrow to live.

The economic calendar for the rest of the week is uneventful. Jobless Claims and Consumer Sentiment are the only items that might capture some investor interest.

Economic Calendar

The market moving news was again Greece. Markets were down in the morning on news there was still no deal and Greece was moving ever closer to disaster. By mid afternoon the news had improved slightly and the markets recovered from early losses.

As of late Tuesday evening in Greece the prime minister is meeting with the troika (IMF, EU, ECB) to finalize the terms for the second bailout and avoid a bankruptcy. The troika meeting pushed off the scheduled meetings with the leaders of the various political parties in Greece in an effort to sell the new terms. The meeting with the political parties has been postponed until Wednesday.

A government official said a draft agreement was being prepared in the troika meeting which suggests there is a general agreement sufficient enough to begin preparation of the papers. Obviously that draft agreement has to be sold to the party heads on Wednesday. Several have already voiced opposition but at this point they don't have much choice. Either agree to the troika's terms or drop out of the euro and watch economic conditions plunge even further using a vastly devalued drachma and no credit.

It would take several years to rebuild enough trust before they could sell debt and in the meantime they could not pay their vastly overstuffed public workforce in any currency that has value. They would have to bring back the drachma which probably would see an exchange ratio for euros in the hundreds. A government worker making 1,000 euros a month would have to be paid tens of thousands of drachmas. Those drachmas would have no real backing since the country would be bankrupt.

For this reason a deal will more than likely get done. It will not prevent a future default but kick the can a little farther down the road and at least take Greece out of the headlines for the next few months.

Greek workers staged a strike to protest the terms of the bailout and riot police had to use tear gas in Athens as the crowd massed outside Parliament chanting "Nazis out!" The riot was due to an acceptance of a requirement to cut government workers. The troika wants 150,000 workers to be terminated over the next several years and the prime minister agreed to cut 15,000 in 2012. Greek government workers are guaranteed jobs for life so that is a major problem for job layoffs. The minimum wage is 750 euros and the troika wants that wage cut back to the same level as other EU countries in the 600 euro range.

The news today suggests there will be further progress on Wednesday but I seriously doubt a signed deal will appear. This is just one more day added to months of meetings. As we get closer to a deal the markets should strengthen but anything can still happen. Remember, there are still rumors Greece has a plan to default in mid March after they get the first tranche of bailout money. Nearly every major analyst expects Greece to eventually default so this dance with the troika is just a delaying tactic. As the terms of the bailouts become more stringent the ability of the prime minister to a) remain in office and b) continue selling the need to comply, will become increasingly impossible.

The euro rallied nearly 1% on the hope a deal was coming together. The rally to 132.09 against the dollar was a two month high. The dollar index declined to a two month low.

Euro Chart

Dollar Index Chart

The plunge in the dollar helped boost gold, silver and oil. Gold rallied +23 to close just under $1750 and recent resistance. A Greek deal could continue to strengthen the euro and push gold back over $1800. Silver is trading in a narrow range under resistance at $35 but holding over support at $34. This consolidation pattern could breakout to the upside and trigger additional short covering once a deal is announced.

Gold Chart

Silver Chart

Oil prices rallied +1.92 to $98.83 on the weak dollar plus a multitude of stories over Iran, Syria, Nigeria, Sudan, etc. The support for crude prices heading into the summer is very strong. February is normally the seasonal low for crude prices and a summer launch from this level could be very strong. Add in the potential for supply disruptions from Iran and other Middle East nations and we could easily see prices break through resistance at $102.

The price was also boosted by an update from the EIA. The government agency raised its demand growth estimates for 2012 by 50,000 bpd to 1.32 million barrels per day. It also raised 2013 estimates by 20,000 bpd to growth of 1.49 mbpd. This is the first time the EIA has raised its demand forecast in four months. The agency also cut its production forecast for output from non-OPEC countries by -140,000 bpd to 52.54 mbpd. The EIA also warned the full year average price for WTI could average more than $100 per barrel for the first time ever.

The price of Brent crude spiked to $117.50 because Brent is the benchmark price for waterborne crude and all oil coming out of the Persian Gulf is benchmarked to some extent to Brent. I expect Brent prices to rise to $125 or higher in the coming months.

WTI Crude Oil Chart

Brent Crude Chart

Earnings news was also lackluster. More than 300 S&P companies have already reported earnings and only 60% have beaten the estimates. Over the last 11 years the average has been 69%. If you go back to 1994 that drops to 62%.

Only 12% have reported in line with estimates and 29% have missed their numbers. The average for earnings misses is 20% so this quarter has definitely been subpar. However, is that the fault of the company or the fault of the analysts? Could it be that analysts were simply being overly optimistic and not taking into account the impact from the Thailand floods, Japan earthquake and the drag from the daily Greek headlines?

After the close Panera (PNRA) reported earnings of $1.42 that matched analyst estimates. Same store sales rose +5.9% at company owned units and +3.2% at franchised units. Panera forecasted earnings of $1.34 per share in Q1 compared to analyst estimates of $1.28. Shares of PNRA dropped -$5 in afterhours trading to $155.40. Given the gains over the last week a $5 decline is minimal.

Panera Chart

Disney (DIS) declined in late trading after announcing earnings that fell short of revenue estimates. Earnings of 80-cents beat expectations of 72-cents but revenue of $10.78 billion was below estimates of $11.2 billion. Disney CEO Robert Iger said the NBA lockout was costly but higher attendance at theme parks was "very encouraging" and a sign of a strengthening economy. The NBA lockout cost ESPN weeks of lucrative games but current viewing of the current NBA games was up. Shares of Disney declined slightly after the report.

Disney Chart

Generating plenty of trades after the close was Buffalo Wild Wings (BWLD). Buffalo shares were dipped in the hot wing sauce with an $11 spike in afterhours trading. Q4 earnings rose +34% to 73-cents compared to estimates of 67-cents. Revenue rose to $220.5 million compared to estimates of $210.2 million. The company operates 817 stores in the U.S. and Canada as of the end of the quarter. Same store sales rose +8.9% for company stores and +5.9% at franchised locations. The company said it expects earnings to grow by +20% in 2012. Shares rallied from the $70 close to more than $81 after the report.

Buffalo Wild Wings Chart

The markets dipped at the open for the second consecutive day but the hope over Greece helped push the indexes to new highs. The S&P rallied to just over 1346 and initial resistance but moving much above that level was a struggle. This 1345-1350 level is going to be a challenge until the Greek problem is resolved. The daily chart remains very over extended without a decent pullback since mid December.

S&P Chart - 5 Min

S&P Chart - Daily

The Dow has broken through strong resistance at 12,750-12,810 and is making new multi year highs every day. The strength today came from McDonalds, Exxon and IBM. The Dow actually pulled back slightly in late January so it should be relatively stronger than the S&P. All the material gains have come from opening gaps with intraday trading over the last three days in a very narrow range. This is the result of low volume and a lack of conviction.

Dow Chart - 5 Min

Dow Chart

The Nasdaq vaulted over prior resistance at 2885 on Friday and then used that level as support both days this week. However, the index has been struggling to move much over 2900. Tech buyers appear to have run out of steam but they are content to buy the dips.

Nasdaq Chart - 5 Min

Nasdaq Chart - Daily

The Russell 2000 has stalled at uptrend resistance at 830 and has traded perfectly flat the last two days. Fund manager interest in small caps appears to have dissipated but at least there is no selling.

Russell Chart - Daily

The market is waiting for the next big headline. Volume was very low on Monday at 5.8 billion shares and only improved slightly on Tuesday to 6.4 billion. Without a headline to move the market nobody knows which way to go. Dips are being quickly bought but on low volume. Market spikes are not being aggressively sold so it appears the bias is still to the upside.

I believe investors are afraid to bet on the 17th version of the "imminent deal" in Greece and are content to wait for an actual deal to appear. The analysts on stock TV continue to say a deal is imminent but Greece will eventually default so the common retail investor does not know what to do. Until we get past this current hurdle and Greece agrees to something we are probably stuck. Once past the "announced" agreement stage there will be various other hurdles to cross as the various votes are held and performance criteria set. Until Greece gets the first tranche of the next 130 billion euro bailout and makes the 14 billion debt payment on March 20th the entire deal is still a moving target. If they do a deal with the troika they still have to do a deal with the private sector creditors on the debt swap. In theory that deal is done pending only a final agreement with the troika. This means we could have a multiple day period with positive headlines where the retail investing public believes the all clear has sounded.

This daily bout of dueling headlines could keep the market sentiment alternating between fear, boredom and exuberance depending on the headline of the day. Expect periods of very low volatility interspersed with extreme volatility.

We need to follow the trend until it ends. So far the trend is still pointing higher.

Jim Brown

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New Option Plays

Another Year, Another Dividend Increase

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

3M Co. - MMM - close: 87.89 change: +0.33

Stop Loss: 86.45
Target(s): 94.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Dow-component MMM continues to drift higher. Shares are consolidating under resistance near $88.00 with a bullish trend of higher lows. The stock looks poised to breakout soon. I am suggesting a trigger to buy calls at $88.50. The $90 level could be round-number resistance but we're setting our exit target at $94.00. We'll use a lower target for our February calls.

In the news headlines today MMM announced it was raising its cash dividend by 7% to 59 cents a share. This is the 54th year in a row that MMM has raised its dividend. It's the 95th year that MMM has paid a dividend without interruption (source: company press release). Dividend is payable on March 12 to shareholders of record on Feb. 17th.

FYI: The Point & Figure chart for MMM is bullish with a $109 target.

Breakout Trigger (buy calls) @ $88.50

- Suggested Positions -

buy the Feb $87.50 call (MMM1218B87.5) current ask $0.80
(Feb. options expire after Feb. 17th)

- or -

buy the MAR $90 call (MMM1217C90) current ask $0.82

Annotated Chart:

Entry on February xx at $ xx.xx
Earnings Date 04/26/12 (unconfirmed)
Average Daily Volume = 3.4 million
Listed on February 07, 2012



In Play Updates and Reviews

Dip Buying

by James Brown

Click here to email James Brown

Editor's Note:

Traders bought the dip this morning but small caps underperformed the major indices today.

CTSH was stopped out. CTXS has been triggered.

Current Portfolio:


CALL Play Updates

Chicago Bridge & Iron - CBI - close: 43.73 change: -0.67

Stop Loss: 43.25
Target(s): 49.25
Current Option Gain/Loss: Unopened
Time Frame: up to the Feb. 23rd earnings report
New Positions: Yes, see below

Comments:
02/07 update: Hmm... CBI underperformed the market today. Upward momentum has stalled a bit but the trend is still higher. We are still on the sidelines waiting for a breakout past resistance.

I am suggesting a trigger to open bullish positions at $45.25. If triggered we'll use a stop at $43.25. Our exit target is $49.25. We do not want to hold over the Feb 23rd earnings report. FYI: The Point & Figure chart for CBI is bullish with a long-term $70 target.

(Buy Calls) Trigger @ $45.25

- Suggested Positions -

buy the MAR $45 call (CBI1217C45)

Entry on February xx at $ xx.xx
Earnings Date 02/23/12 (unconfirmed)
Average Daily Volume = 852 thousand
Listed on February 04, 2012


Citrix Systems - CTXS - close: 70.69 change: +1.25

Stop Loss: 67.45
Target(s): Feb calls: $74.75, Mar calls: $76.50
Current Option Gain/Loss: Feb70c: + 0.0% & Mar70c: - 3.0%
Time Frame: 2 to 4 weeks
New Positions: Yes, see below

Comments:
02/07 update: Our new trade on CTXS has already been triggered. The stock opened at $69.49 and rallied to $71.65 before paring its gains. Our trigger to buy calls was hit at $70.50.

The plan was to keep our position size small. Our target is $74.75 for the February calls and $76.50 for the March calls. There are less than two weeks left for February calls.

(small positions!) - Suggested Positions -

Long Feb $70 calls (CTXS1218B70) Entry $1.85

- or -

Long Mar $70 calls (CTXS1217C70) Entry $3.30

Entry on February 07 at $70.50
Earnings Date 04/26/12 (unconfirmed)
Average Daily Volume = 2.4 million
Listed on February 06, 2012


Dollar Tree - DLTR - close: 86.03 change: +0.20

Stop Loss: 84.75
Target(s): 89.75 & 92.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
02/07 update: DLTR is still slowly drifting higher. The stock looks like it is coiling for a breakout past resistance. I am suggesting we only open small positions if DLTR hits our trigger at $86.75.

Earlier Comments:
I am setting individual targets for our options below. Keep a wary eye on the $90.00 level since it might be round-number resistance. FYI: The Point & Figure chart for DLTR is bullish with a long-term $113 target.

(Buy Calls) Trigger @ 86.75 (small positions)

- Suggested Positions -

buy the Feb $87.50 call (DLTR1218B87.5)
exit target: 89.75

- or -

buy the Mar $87.50 call (DLTR1217C87.5)
exit target: 92.50

02/04/12 Only open small (half-sized) positions if DLTR hits our entry point at $86.75

Entry on February xx at $ xx.xx
Earnings Date 02/22/12 (unconfirmed)
Average Daily Volume = 1.1 million
Listed on February 02, 2012


Flowserve Corp. - FLS - close: 114.61 change: -0.34

Stop Loss: 109.45
Target(s): 114.50 for Feb call & 118.00 for April call
Current Option Gain/Loss: (Feb $110c: +48.2%) & Apr$115c: +45.0%.
Time Frame: 3 to 4 weeks
New Positions: , see below

Comments:
02/07 update: FLS recovered from its early morning lows and spent the rest of the day consolidating sideways. More conservative traders may want to raise their stop loss. I am not suggesting new positions at this time. FYI: The Point & Figure chart for FLS is bullish with a $139 target.

- Suggested Positions -

Long APR $115 call (FLS1221D115) Entry $4.00
exit target: $118.00

02/04/12 new stop loss @ 109.45
02/03/12 exit target hit at $114.50 for Feb. $110 calls. exit $5.00 (+48.2%)
02/02/12 new stop loss @ 107.95
02/01/12 new stop loss @ 106.95
02/01/12 adjusted exit targets: $114.50 for Feb call, $118.00 for Apr call
01/30/12 new stop loss at $105.75
01/26/12 trade opened on FLS' gap open higher at $109.21.
01/25/12 adjusted entry point strategy to buy calls when FLS hits $109.05, and use a stop loss at $105.45

Entry on January 26 at $109.21
Earnings Date 02/23/12 (unconfirmed)
Average Daily Volume = 400 thousand
Listed on January 21, 2012


iShares Transportation - IYT - close: 94.97 change: -0.22

Stop Loss: 93.40
Target(s): 98.50
Current Option Gain/Loss:(Jan$95c: -100%) Feb$95c: -20.6%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
02/07 update: The IYT spiked down toward its trend line of higher lows this morning. The stock did temporarily trade under its 10-dma. More conservative traders may want to raise their stops closer to the $94.00 level.

I am not suggesting new positions at this time.

- Suggested Positions -

Long Feb $95 call (IYT1218B95) entry $1.45
target 98.50

02/04/12 new stop loss @ 93.40
01/31/12 new stop loss @ 92.45
01/28/12 new stop loss @ 91.75
01/21/12 new stop loss @ 91.40
01/21/12 January $95 calls have expired.
01/12/12 new stop loss @ 89.45
01/07/12 new stop loss @ 88.75
01/03/12 IYT gapped open higher at $91.20, above our trigger at $90.75

Entry on January 03 at $91.20
Earnings Date --/--/--
Average Daily Volume = 582 thousand
Listed on December 22, 2011


Laboratory Corp. - LH - close: 91.95 change: +0.95

Stop Loss: 90.75
Target(s): 94.00
Current Option Gain/Loss: + 73.3%
Time Frame: up to the Feb. 10th earnings report.
New Positions: see below

Comments:
02/07 update: Whew! It doesn't get much closer than that. LH gapped open lower at $90.76 before bouncing to a +1.0% gain. That was the low for the day. Our stop loss remains at $90.75. Readers may want to exit early now. I am not suggesting new positions at this time. Remember, we plan to exit prior to the Feb. 10th earnings report.

- Suggested Positions -

Long Feb $90 call (LH1218B90) Entry $1.50

02/04/12 new stop loss @ 90.75, adjust target to $94.00
02/01/12 new stop loss @ 89.65
01/31/12 If you haven't done so yet readers may want to take profits now (+80%)
01/28/12 new stop loss @ 88.40
01/26/12 sold half @ the open, bid @ $2.65 (+76.6%)
01/25/12 sell half at the open tomorrow. Bid on the Feb. $90 call is at $3.10 (+106%).
01/25/12 new stop loss @ 87.90
01/24/12 rival DGX delivers a strong earnings report
01/23/12 trade triggered at $89.00
01/21/12 new stop loss at $86.90. Still waiting for LH to hit our entry point at $89.00.

Entry on January 23 at $89.00
Earnings Date 02/10/12 (confirmed)
Average Daily Volume = 564 thousand
Listed on January 10, 2012


Pall Corp. - PLL - close: 62.53 change: +0.20

Stop Loss: 59.45
Target(s): 64.75
Current Option Gain/Loss: Feb$60c: +45.7% & Mar$60c: +24.1%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
02/07 update: PLL spent a second day consolidating sideways. I don't see any changes from my prior comments. If the market corrects lower I would look for PLL to dip toward the $61-60 zone. Our target is $64.75.

FYI: The Point & Figure chart for PLL is bullish with an $83 target.

- Suggested Positions -

Long FEB $60 call (PLL1218B60) Entry $1.75

- or -

Long MAR $60 call (PLL1217C60) Entry $2.90

02/04/12 new stop loss @ 59.45

Entry on February 02 at $61.00
Earnings Date 03/12/12 (unconfirmed)
Average Daily Volume = 769 thousand
Listed on January 31, 2012


SPX Corp. - SPW - close: 72.94 change: -0.48

Stop Loss: 69.90
Target(s): 74.75
Current Option Gain/Loss: +60.0%
Time Frame: up to the Feb. 16 earnings report
New Positions: see below

Comments:
02/07 update: SPW is digesting its recent gains. I would not be surprised to see a dip back toward $72.00-71.50. Our exit target is $74.75 but more conservative traders may want to go ahead and exit early now. I am not suggesting new positions at this time.

Earlier Comments:
Our target is the $74.75 mark but more aggressive traders could aim higher. We do not want to hold over the Feb. 16th earnings report. FYI: The Point & Figure chart for SPW is bullish with an $82 target.

- Suggested Positions -

Long Feb $70 call (SPW1218B70) Entry $2.25

02/04/12 new stop loss @ 69.90, readers may want to exit now to lock in gains.

Entry on January 31 at $70.50
Earnings Date 02/16/12 (unconfirmed)
Average Daily Volume = 711 thousand
Listed on January 26, 2012


S&P Oil ETF - XES - close: 38.16 change: +0.00

Stop Loss: 36.45
Target(s): 43.00
Current Option Gain/Loss: Feb37c: -11.1% & Mar36c: - 2.0%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
02/07 update: Traders bought the dip in the XES this morning and shares bounced back to close unchanged on the session.

Earlier Comments:
The option spreads on the XES a bit wide, which makes this a higher-risk trade. I am suggesting we keep our position size small to limit our risk. Our multi-week exit target is $43.00. I prefer the March calls but short-term traders can use February options but these expire in two weeks.

(small positions) - Suggested Positions -

Long Feb $37 call (XES1218B37) Entry $1.35

- or -

Long Mar $36 call (XES1217C36) Entry $2.45

Entry on February 06 at $37.75
Earnings Date --/--/--
Average Daily Volume = 177 thousand
Listed on February 04, 2012


PUT Play Updates

Currently we do not have any active put trades.


CLOSED BULLISH PLAYS

Cognizant Technology - CTSH - close: 72.01 change: -0.36

Stop Loss: 71.45
Target(s): 76.50
Current Option Gain/Loss: -52.9%
Time Frame: exit prior to the Feb. 8th earnings
New Positions: see below

Comments:
02/07 update: The stock market's early morning spike down was enough to push CTSH below short-term support. Our stop loss was hit at $71.45.

- Suggested Positions -

Long Feb $75 call (CTSH1218B75) Entry $0.85 exit $0.40 (-52.9%)

02/07/12 stopped out at $71.45
02/04/12 new stop loss @ 71.45
02/01/12 new stop loss @ 69.75
01/24/12 trade opened at $71.05

chart:

Entry on January 24 at $71.05
Earnings Date 02/08/12 (confirmed)
Average Daily Volume = 2.3 million
Listed on January 21, 2012