Option Investor
Newsletter

Daily Newsletter, Thursday, 2/23/2012

Table of Contents

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

Market Wrap

Decent Data, Decent Day

by Todd Shriber

Click here to email Todd Shriber
Thursday was one of those days where it was hard to be excited about the gains posted by the major indexes at the end of the session, but gains are gains and the slow grind higher keeps on, well, grinding after getting some support from solid economic data courtesy of the U.S. and Germany. Those data points also proved to be a boon for oil prices, which have now entered parabolic territory.

Market Stats

The weekly jobless claims number of 351,000 was the same as the prior week's reading, but that was still better than the 355,000 economists were expecting. More importantly, the four-week moving average, which is less volatile, fell 7,000 to 359,000, the lowest level since March 2008.

Germany's Ifo institute said its German business climate index, based on a survey of 7,000 executives, climbed to 109.6 in February from January's 108.3 beating the reading of 108.8 economists were expecting, Bloomberg reported. Remember, Germany is the European Union’s largest economy, one of the 10 largest economies in the world and an export-driven economy that needs oil.

That leads me to my next point of the aforementioned oil prices. NYMEX-traded crude for April delivery rallied $1.55, or 1.5%, to settle at $107.83 a barrel. In London, Brent crude added just over half a percent to settle at $123.62 a barrel.

Not to diminish what has been a string of nice gains for West Texas Intermediate, but as I am sure Jim mentions on OilSlick, Brent is the global benchmark. Brent over $120 a barrel is getting into an area where global equity markets are going to be concerned about oil prices crimping growth and where OPEC might need to consider boosting output.

Those geopolitical concerns require more examination than I can offer at the moment. What I can tell you is that for the first time in what feels like ages, the controversial U.S. Oil Fund (NYSE: USO) sharply outperformed the U.S. Brent Oil Fund (NYSE: BNO) today. Still, BNO was up, made another 52-week high and did so on impressive volume. Check out the chart.

BNO Chart

In stock-specific news, shares of biotech firm Vivus (VVUS) surged almost 78% on volume that was almost 29 times the daily average after an FDA advisory panel voted 20-to-2 to approve the company’s experimental weight-loss drug, Qnexa. It should be noted that while impressive, that 78% gain is actually a pullback when considering Vivus shares doubled during the Wednesday after-hours session when the advisory panel vote was first reported.

The advisory panel vote puts Vivus in a strong postion to see Qnexa become the first weight-loss drug approved by the FDA in 13 years. The Vivus news also lifted shares of Orexigen Therapeutics (OREX), which is working on a competitor to Qnexa. Shares of Arena Pharmaceuticals (ARNA) were down on heavy volume, odd considering that company is also working on a rival to Qnexa. Qnexa has also completed Phase II clinical trials for type 2 diabetes and obstructive sleep apnea, but weight-loss is apparently what investors are paying attention to here.

Vivus Chart

In the laggards turned leaders category, there is the case of embattled Sears Holdings (SHLD). Remember way back when hedge fund legend Eddie Lampert acquired Sears and folks were proclaiming him the next Warren Buffett? Yeah, it is hard to remember that because Sears has not exactly turned out to be a Buffett-esque investment for Lampert. Then again, this deal was arguably a real estate grab, not an effort to turn Sears and Kmart around.

Problem with that is the market pays more attention to the bottom lines of Sears and Kmart than it does the real estate and that has plagued Sears investors, at least until recently. The shares soared almost 19% today on volume that was nearly triple the daily average after the company was able to assuage investors regarding liquidity concerns. The company expects to raise $400-$500 million through a rights offering that separate its hardware, hometown and outlet stores and raise another $270 million in a real estate deal.

As you can see, this stock has more than doubled this year after being one of the worst and most hated stocks last year.

Sears Chart

Shares of retailer Kohl's (KSS) plunged almost 6% after the company forecast a first-quarter profit of 60 cents a share and full-year EPS of $4.75. Analysts were expecting 77 cents for the current quarter and $4.93 for the full year. The company said its fourth-quarter profit fell to $455 million, or $1.81 a share, from $494 million, or $1.66 a share, a year earlier. Revenue was flat $6 billion. Analysts expected a profit of $1.94 a share and revenue of $6.2 billion. Volume today was more than double the daily average. On the bright side, Wisconsin-based Kohl's boosted its dividend by 28% to 32 cents a share payable on March 28.

Kohl's Chart

More earnings woes: Shares of Dow component Hewlett-Packard (HPQ) slid 6.5% today, a day after the company new CEO Meg Whitman did not exactly thrill the Street with results and outlook. The Thursday tumble made HP by far the worst performer of the 10 Dow losers. The company said its fiscal first-quarter profit fell to $1.47 billion, or 73 cents per share, from $2.6 billion, or $1.17 a share, a year earlier. Revenue fell to $30 billion from $32.3 billion. On an adjusted basis, HP earned 92 cents a share. Analysts were expecting 87 cents on revenue of $30.7 billion.

On the conference call Wednesday evening, Whitman cautioned investors that HP's turnaround story could take up to five years. Who in their right mind is going to wait for that? It is a good question to ask because five years is a obviously a long time and with a yield of just 1.6%, an investor will not really be compensated for his or her time waiting for the HP turnaround to materialize.

I say that not only because blindfolded any of us could pick 100 better stocks with better yields, but also because this company, aside from myriad obvious issues that negatively impact the share price, does not possess a rich dividend tradition. Sure, last year's 50% increase was nice, but that was first dividend increase by HP since 1997. Coca-Cola (KO) and Procter & Gamble (PG) HP is not when it comes to dividends and that makes the prospect of holding this dog for four or five years unappealing, at least to me.

HP Chart

Looking at the charts, the S&P 500’s close just over 1363 puts the index basically in the middle of trying to make a run at next resistance in 1375-1378 area and threatening to pullback to first support at 1350. I get the impression there is a decent amount of cash on the sidelines waiting for that pullback, but the danger is there are no guarantees the pullback will arrive. Should it show up and 1350 proves vulnerable, next support should be 1340.

S&P 500 Chart

The Dow traded in a range of about 114 points today, but even with all of that commotion, the blue chips did not peak above 13,000. Granted, the Dow tried, trading as high as 12,996 and as noted earlier, 20 of the 30 components were higher. Most of the gains came courtesy of PG, but I would not overlook IBM's move to $200. It is more a matter of when, not if. As Keene noted last night, it would be bullish to see the Dow move above 13,111 and concerning to see a retreat below 12,750.

Dow Chart

The Nasdaq enjoyed a solid day and that is despite Apple gaining ''just'' 0.56%. Biotech fever certainly helped matters here, but the Nasdaq still needs to clear 2975 before addressing considerable round-number resistance at 3000. Look for support at 2900 and then 2850.

Nasdaq Chart

Overall, it is hard to not at least respect the market’s bullish way and it was nice to see U.S. and European economic data combine to help the cause, even if it was just one day of seeing that scenario. Hopefully, it serves as a reminder to investors everywhere that countries like the U.S. and Germany are far more important on the global economic stage than Greece. My newest position is VNM, which I added Tuesday.

Todd Shriber


New Option Plays

Services Showing Strength

by James Brown

Click here to email James Brown

Editor's Note:

In addition to tonight's new candidates, consider these stocks as possible trading ideas and watch list candidates:

bullish candidates: FFIV, SRCL, CLB, TPX, ORLY,


NEW DIRECTIONAL CALL PLAYS

Airgas Inc. - ARG - close: 81.83 change: +0.71

Stop Loss: 78.90
Target(s): 84.90 or 88.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
ARG manufacturers specialty gas for industrial uses. The stock has been on quite a run from last summer. Shares experienced a correction in late December but ARG has since recovered. Now the stock is breaking out to new record highs.

I am suggesting bullish positions tomorrow morning but only if both ARG and the S&P 500 index open positive. We'll use a stop under yesterday's low. Please note I am setting a conservative target at $84.90 and an aggressive target at $88.50. FYI: The Point & Figure chart for ARG is bullish with a $92 target.

Do not enter position unless ARG and the S&P 500 are both positive at the open

- Suggested Positions -

buy the Mar $82.50 call (ARG1217C82.5) current ask $0.95

Annotated Chart:

Entry on February xx at $ xx.xx
Earnings Date 05/07/12 (unconfirmed)
Average Daily Volume = 528 thousand
Listed on February 23, 2012


Weight Waters Intl. - WTW - close: 80.02 change: +1.31

Stop Loss: 77.45
Target(s): 86.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
WTW could see a potential short squeeze. The most recent data listed short interest at 24.6% of the relatively small 35.1 million-share float. The stock has rallied to significant resistance near $80.00. A breakout could spark some short covering.

I am suggesting a trigger to open bullish positions at $80.25 with a stop loss at $77.45, just under the 10-dma. If triggered our target is $86.50 near its 2011 highs. More aggressive traders could definitely aim higher. FYI: The Point & Figure chart for WTW is bullish with a $106 target.

Trigger @ $80.25

- Suggested Positions -

buy the Mar $80 call (WTW1217C80) current ask $1.50

Annotated Chart:

Entry on February xx at $ xx.xx
Earnings Date 05/07/12 (unconfirmed)
Average Daily Volume = 1.8 million
Listed on February 23, 2012



In Play Updates and Reviews

Stocks Bounce Higher

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. markets bounced with widespread gains thanks in part to strength in financials and energy stocks.

Current Portfolio:


CALL Play Updates

BorgWarner Inc. - BWA - close: 80.75 change: +0.53

Stop Loss: 78.75
Target(s): 89.00
Current Option Gain/Loss: -67.7%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
02/23 update: BWA dipped to $79.40, just under its simple 10-dma, before rebounding. The intraday bounce looks like a new bullish entry point to buy calls although readers may want to wait and see that BWA follows through with new gains tomorrow morning before initiating positions.

Earlier Comments:
A breakout would mean new record highs and could produce a some short covering in BWA. The most recent data listed short interest at 14% of the 108 million share float. FYI: The Point & Figure chart for BWA is bullish with a $108 target.

- Suggested Positions -

Long Mar $85 call (BWA1217C85) Entry $1.55

02/17/12 trade opened on BWA's gap open higher at $82.49

Entry on February 17 at $82.49
Earnings Date 04/30/12 (unconfirmed)
Average Daily Volume = 1.3 million
Listed on February 16, 2012


Caterpillar, Inc. - CAT - close: 116.20 change: +0.39

Stop Loss: 112.75
Target(s): 119.75
Current Option Gain/Loss: - 3.4%
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
02/23 update: Traders bought the dip in CAT near $115.00 but shares are still unable to breakout past its 2011 highs near $116.50. At this point readers may want to wait for a rise pat $116.75 before considering new positions. I am raising our stop loss up to $112.75.

The Point & Figure chart for CAT is bullish with a $165 target.

- Suggested Positions -

Long Mar $120 call (CAT1217C120) Entry $1.15

02/23/12 new stop loss @ 112.75

Entry on February 21 at $115.25
Earnings Date 04/26/12 (unconfirmed)
Average Daily Volume = 7.5 million
Listed on February 14, 2012


Capital One Financial - COF - close: 49.30 change: +1.05

Stop Loss: 47.75
Target(s): 54.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
02/23 update: Financial stocks closed the day with strength. Yesterday's underperformance was reversed with outperformance today. COF bounced +2.1% and is back above $49.00 and its 10-dma. I am suggesting a trigger to buy calls at $50.25. We want to keep our position size small to limit our risk. Our multi-week exit target is $54.75.

Trigger @ $50.25 (small positions)

- Suggested Positions -

buy the Mar $50 call (COF1217C50)

Entry on February xx at $ xx.xx
Earnings Date 04/23/12 (unconfirmed)
Average Daily Volume = 6.4 million
Listed on February 15, 2012


Eastman Chemical Co. - EMN - close: 54.05 change: +0.12

Stop Loss: 53.25
Target(s): 59.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
02/23 update: The bounce in EMN was pretty anemic. Fortunately we're still on the sidelines waiting for a breakout.

I am suggesting a trigger to open small bullish positions at $55.05 with a stop loss at $53.25. Our target is $59.00. More conservative traders may want to wait for EMN to trade past its all-time high of $55.36 (set in 2011) before initiating positions. FYI: The Point & Figure chart for EMN is bullish with a long-term $91 target.

Trigger @ $55.05

- Suggested Positions -

buy the Mar $55 call (EMN1217C55)

Entry on February xx at $ xx.xx
Earnings Date 04/30/12 (unconfirmed)
Average Daily Volume = 2.6 million
Listed on February 18, 2012


Goldman Sachs - GS - close: 115.80 change: +1.44

Stop Loss: 114.75
Target(s): 125.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
02/23 update: GS spiked lower at the open but shares reversed after testing technical support at its 200-dma near the $113 level. The intraday rebound pushed GS to a +1.2% gain. More aggressive traders might want to consider new bullish positions tomorrow if both GS and the S&P 500 index open positive. I am still suggesting we wait for a breakout past $118.00. We have a trigger to buy calls (small positions) at $118.25. GS can be a volatile stock at times so we want to keep our position size small. If triggered at $118.25 we will aim for $125.00.

Trigger @ $118.25 (small positions)

- Suggested Positions -

buy the Mar $120 call (GS1217C120) current ask $1.96

Entry on February xx at $ xx.xx
Earnings Date 04/19/12 (unconfirmed)
Average Daily Volume = 6.2 million
Listed on February 21, 2012


Jones Lang LaSalle - JLL - close: 82.45 change: +1.50

Stop Loss: 79.95
Target(s): 89.50
Current Option Gain/Loss: -58.3%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
02/23 update: The market's widespread bounce allowed JLL to rebound from the bottom of its recent trading range. At this point I would not launch new positions. The next level of resistance is the $84.00 mark.

- Suggested Positions -

Long Mar $85 call (JLL1217C85) Entry $2.40

Entry on February 17 at $83.75
Earnings Date 04/26/12 (unconfirmed)
Average Daily Volume = 518 thousand
Listed on February 16, 2012


3M Co. - MMM - close: 87.90 change: +0.14

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

Comments:
02/23 update: MMM is still not making much progress. We are waiting for a breakout from this multi-week trading range.

Currently I am suggesting a trigger to buy calls when MMM trades at $88.50 or higher. More conservative traders may want to wait for MMM to actually close over $88.50 before considering bullish positions.

Earlier Comments:
The $90 level could be round-number resistance but we're setting our exit target at $94.00. FYI: The Point & Figure chart for MMM is bullish with a $109 target.

Breakout Trigger (buy calls) @ $88.50

- Suggested Positions -

buy the MAR $90 call (MMM1217C90)

02/09/12 removed the February call.

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


Parker-Hannifin - PH - close: 90.42 change: +0.42

Stop Loss: 88.45
Target(s): 96.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
02/23 update: PH recovered from its morning dip to close up +0.4% but the high today was only $90.65. More aggressive traders may want to buy calls on a rally past $90.50. I am suggesting at trigger to buy calls at $91.05 with a stop loss at $88.45. Our target is $96.50. FYI: The Point & Figure chart for PH is bullish with a $111 target.

Trigger @ 91.05

- Suggested Positions -

buy the Mar $90 call (PH1217C90)

Entry on February xx at $ xx.xx
Earnings Date 04/26/12 (unconfirmed)
Average Daily Volume = 1.5 million
Listed on February 22, 2012


Rockwell Automation - ROK - close: 81.64 change: -0.56

Stop Loss: 79.90
Target(s): 89.50
Current Option Gain/Loss: -64.5%
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
02/23 update: Uh-oh! ROK did not participate in the market's widespread bounce today. That's a bit worrisome. ROK did pare its losses and shares still have a bullish trend of higher lows so I'm not giving up yet. FYI: The Point & Figure chart for ROK is bullish with a $95 target.

- Suggested Positions -

Long Mar $85 call (ROK1217C85) Entry $1.55

Entry on February 21 at $82.75
Earnings Date 04/26/12 (unconfirmed)
Average Daily Volume = 1.2 million
Listed on February 18, 2012


Sherwin-Williams - SHW - close: 100.96 change: +1.38

Stop Loss: 98.25
Target(s): 104.75
Current Option Gain/Loss: + 4.7%
Time Frame: 3 to 5 weeks
New Positions: see below

Comments:
02/23 update: SHW temporarily traded under its 10-dma before bouncing back to outperform the major indices with a +1.3% gain. The intraday low was $99.10. More conservative traders may want to adjust their stop loss closer to this low.

If SHW and the S&P 500 index open positive tomorrow I would consider buying calls again.

- Suggested Positions -

Long Mar $100 call (SHW1217C100) Entry $2.10

02/22/12 new stop loss @ 98.25

Entry on February xx at $ xx.xx
Earnings Date 04/23/12 (unconfirmed)
Average Daily Volume = 1.0 million
Listed on February 14, 2012


S&P Oil ETF - XES - close: 39.74 change: +0.59

Stop Loss: 36.90
Target(s): 43.00
Current Option Gain/Loss:(Feb37c: -48.1%) & Mar36c: +38.7%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
02/23 update: Crude oil continued to rally in spite of a bearish inventory number. Oil's strength helped fuel the rally in energy stocks. The XES added +1.5%.

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.

(small positions) - Suggested Positions -

Long Mar $36 call (XES1217C36) Entry $2.45

02/18/12 new stop loss @ $36.90
02/14/12 exited Feb. calls at the close: bid @ $0.70 (-48.1%)
02/13/12 prepare to exit our Feb. $37 calls at the closing bell tomorrow.

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


Oil & Gas Exploration ETF - XOP - close: 61.14 change: +0.80

Stop Loss: 57.85
Target(s): 63.00
Current Option Gain/Loss: Mar$60c: +32.3% & Jun$60c: +15.8%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
02/23 update: The XOP erased yesterday's losses. This ETF bounced off short-term technical support at its rising 10-dma this morning. Yesterday I suggested readers look for a dip near the 10-dma as a possible entry point. We will raise our stop loss up to $57.85. FYI: The Point & Figure chart for XOP is bullish with a $74 target.

- Suggested Positions -

Long Mar $60 call (XOP1217C60) Entry $1.70

- or -

Long Jun $60 call (XOP1216F60) Entry $4.10

02/23/12 new stop loss @ 57.85

Entry on February 14 at $58.75
Earnings Date --/--/--
Average Daily Volume = 3.8 million
Listed on February 13, 2012


PUT Play Updates

Currently we do not have any active put trades.