Option Investor
Newsletter

Daily Newsletter, Thursday, 5/10/2012

Table of Contents

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

Market Wrap

DOW SNAPS LOSING STREAK

by Thomas Hughes

Click here to email Thomas Hughes
Stock futures rose this morning on fresh economic data. Economic data and world news, or lack of it, boosted stocks through the day. Jobless claims and statements from Chairman Ben Bernanke helped to ease growing concerns of stagnating US domestic growth.



Initial jobless claims continued to trend down. Initial claims fell by 1,000 from an upwardly revised 368,000 to a seasonally adjusted 367,000. The upward revision increased the previous weeks figure by 3,000. The revision, while not surprising, is minimal compared to some other revisions over the past month and is still near post recession lows. Analysts had been giving conflicting estimates ranging from a gain of 365,000 to 369,000. The four week moving average moved lower this week by 5250 to 379,000. The recent spike in claims attributed to the Easter holiday and early spring will fall out of the calculation soon and the average could return to the trend seen in the early spring.


Continuing claims, which lags initial claims by one week, also fell. Claims for a second week of unemployment benefits fell by 61,000 to 3.23 million. The spike in initial claims seen over the weeks of 4/7, 4/14 and 4/21 barely register in the continuing claims data.


Total claims also continued the downward trend. Total claims for unemployment fell by more than 175,000 to 6.4 million. The unemployment data from this week and last week help relieve some of the concern over the softening economy. The unemployment rate is still falling and other signs of life exist in the economy. Last weeks jobs report was disappointing but was impacted by the shift in Easter and spring hiring and is expected to rebound as the summer approaches.



In other US economic news the trade gap widened by over 14% in March to $51.8 billion. In the report both imports and exports reached record levels but imports out paced exports by a wide margin. Economists had been expecting the increase to be around $50 billion. The report sparked some speculation that the US could lower its first quarter GDP figure. The first estimate, released last month, has US GDP expanding around 2.2% in the first quarter. Imports rose in the month by 5.2% and exports rose by 2.9%. Industrial supplies and capital goods made up a significant portion of the rise in exports and was seen as a good sign for American manufacturing.

Fed Chairman Ben Bernanke made statements in a press conference just as the markets were opening. He said that bank lending was “improving”. The improving availability of credit will “help the economy”. He also went on to say that domestic banks were benefiting from the financial crisis in Europe. The small and regional banks have been improving balance sheets and increasing revenues from deposit accounts and lending. The financial sector was one of today's leaders. The financial spider (XLF) gained close to 1% today. The financial sector could be finding support at the $15 level. The string of recent lows in the stock price are divergent from the momentum indicator.

Financial Sector Spider, daily

JP Morgan took a dive in after hours trading when the company reported significant trading losses. The banking giant said that losses could reach $800 million in the second quarter.


Asian markets ended their day mixed as weaker than expected trade data from China set traders on edge. Growth of China's exports came in about half as good as expected. Economists had been expecting a figure around 8.5% growth but the actual increase was 4.9%. The Hang Seng index lost 0.51%, the Nikkei lost -.39% and the Shang Hai index gained 0.07%.

European shares traded higher today and Spain gained over 3% as the embattled region looks past recent developments. European markets made broad gains but have not recovered from recent selling pressure. Spain, though up sharply in today's trading, is still down over 17% year to date. There are still hurdles and concerns for European growth. The Bank of England announced it is stopping its quantitative easing due to mounting inflationary concerns. In Greece, new government hopeful Tsipras seemingly went back on earlier statements that the bail out package was “null and void”. In today's statements he is reported as saying he will go “as far as he can” to keep Greece in the Euro zone.

The price of oil and gas held steady today as well. Uncertainty looms over the market as traders weigh new statements from OPEC. According to the cartel world demand has grown this year by 90,000 barrels a day but that the economic outlook remains fragile. The increase is mainly in America and Japan. Shut down of Japan's nuclear power facilities have given rise to their increased need. In the US demand is attributed to industrial consumption.

Gold prices remained steady through out the day. Prices traded up to $1600 but failed to cross that line in the first half of the day. Copper led the metals with a gain near 1%.

Bond rates rose today. The rate of the US 30 year bond closed at 3.05%.

30 Year Bond Rates, daily

Cisco's shares dropped more than 10% today following the announcement of earnings yesterday after the closing bell. The shares took a hit on weaker than expected sales outlook for the next quarter and full year. The guidance sent the entire complex lower from suppliers to rivals. Sales in the recently ended quarter were up over 6% and profits up 20% from last year. The outlook for the next quarter is weak due to slow enterprise sales and softness in Europe. The company guided growth estimates in the 2-3% range for the next quarter. The software maker received a round of downgrades this morning following the report.

Cisco, daily

Rivals Juniper Networks and Riverbed Technology made new lows in the wake of Cisco's warnings.

Juniper Networks, daily

Riverbed Technology, daily

Earnings rolled on today with over 120 expected reports. News Corp's third quarter earnings beat the Street's expectations and jumped 47%. The scandal that has rocked the journalism empire may have helped to boost sales. The stock gained close to 6% in today's trading.

News Corp, daily

Steel maker Arcelor-Mittal gained roughly 2.5% today after reporting a steep drop in quarterly profits from last year in the same period. The results are an improvement over the fourth quarter of 2011 when the company posted a loss. Strength in the US offset weakness in Europe, which the company says remains a challenge.

Arcelor-Mittal, daily

ATP Oil and Gas dropped 9% today following its release. The company reported a drop in revenue despite successfully shifting production to focus more heavily on oil and liquids. Now, with the price of oil dropping the shift may be too late. The drop came on heavy volume and declining momentum.

ATP Oil and Gas, daily

Retailer Kohl's failed to deliver earnings and lost 4.5% of share value on heavy trading. The discount retailer reported an increase in sales but heavy discounting cut deeply into margins. Kohl's says it is positioned well for the up coming summer and back to school season. It is also planning to open 10 new stores by the fall.

Kohl's, daily

LED maker Universal Display Corporation was another big loser today. The company missed big on revenue. The company earned just over $12 million in the quarter, about 25% less than expected and the outlook for the next quarter is not any better. Analysts are looking for revenue around $28 million.

Universal Display Corporation, daily

The IPO market is staying active. There were ten listed IPO's at the start of the week and one more added today. Facebook is officially listed as opening May 17, 2012. Ironically, at the same time the schedule was listed Facebook was announcing that mobile adds are not converting to revenue as expected. The business segment could negatively impact Facebook's earnings in the coming quarters.

WageWorks opened at the bottom end of its expected range but was met with investor enthusiasm. The company is a consumer-directed provider of on demand health spending account benefits. The stock opened at $9.88 and quickly gained $1 to close up by more than 20%.

WageWorks, one day

Audience is a provider of voice and audio solutions for mobile devices. The stock was expected top price in a range of $14-$16 and opened at $19.20. The stock traded around that level all day.

Audience, one day

Western Asset Mortgage Capital Corporation priced at $18.80, below the expected range. The stock trade sideways throughout the day. The company invests in GSE backed residential mortgage securities.

Western Asset Mortgage Capital Corporation, one day

Avon rallied early today as rival Coty increased its bid for the larger cosmetic distributor. The euphoria quickly wore off as the stock traded down from the morning high. Coty raised its bid for Avon to $24.75 per share. The offer has gained the attention of Warren Buffet who has put the backing of Berkshire-Hathaway behind the offer.

Avon Products, daily

Stocks struggled to maintain their gains today. Economic data was better but just not quite enough to alleviate concerns of further economic weakness in the second and third quarters of 2012. The Dow was up more than 60 points this morning after the open and managed to hold that level through the first hour of trading. Then, around 10:45, the indexes began to give up their gains with the Nasdaq leading the way and dropping into negative territory. The Dow held positive through the day and closed up by 0.2%. The Dow is trading toward the bottom of a recent trading range between 12,750 and 13,300.

Dow Jones Index, daily

The S&P is trading roughly in line with the Dow. The broader index is moving in a similar trading range between 1325 and 1425. The recent series of lows in the index is divergent from momentum and has brought the index to a support level.

S&P, daily

The VIX retreated 6% today to close below 19. The volatility index made a bounce down from the 200 day moving average to close below the 20 resistance level.

Volatility Index, daily

The Nasdaq was the loser of the day, dropping by 1 point below yesterday's close. The index was dragged down by Cisco and other computer network related stocks. The index is just above significant support at 2900 and bears close watching.

Nasdaq, daily

The JP Morgan news has S&P futures down in the after markets and could impact trading in the morning.

Economic data will be the driving force of the markets as the earnings season nears its end. The outlook for the next quarter is deteriorating and data will help give a clearer indication of whether fears are misplaced. China is releasing a string of important economic data points tomorrow and could mover the markets. At home look out for the Producer Price Index, more earnings and new developments from Europe.

Thomas Hughes


New Option Plays

Business Technology

by James Brown

Click here to email James Brown

Editor's Note:

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

(bullish ideas) FDO, SPW, MHK, PRA, NEE, ABT, PNC, TRV, FMC, HIBB, ICUI, ROST


NEW DIRECTIONAL PUT PLAYS

Informatica - INFA - close: 45.39 change: -1.40

Stop Loss: 46.25
Target(s): 40.25
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
INFA is a business technology company. Shares have been sinking the last few weeks under a bearish trend of lower highs. Now, after two weeks of consolidating near support at $45.00, the stock looks poised to breakdown.

I am suggesting a trigger to buy puts at $44.50. Our target is $40.25. We'll use a stop loss at 46.25. FYI: The Point & Figure chart for INFA is bearish with a $39 target.

Trigger @ 44.50

- Suggested Positions -

buy the Jun $45 PUT (INFA1216R45) current ask $2.00

Annotated Chart:

Entry on May xx at $ xx.xx
Earnings Date 07/26/12 (unconfirmed)
Average Daily Volume = 1.3 million
Listed on May 10, 2012



In Play Updates and Reviews

Stocks Were Quiet on Thursday

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. markets did not see much follow through on yesterday's intraday bounce. Financials continued to outperform but that might change tomorrow. After hours JPM was down sharply (-7%) after revealing significant losses in its credit portfolio.

Current Portfolio:


CALL Play Updates

Amgen Inc. - AMGN - close: 70.09 change: +0.47

Stop Loss: 68.95
Target(s): 74.90
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
05/10 update: Shares of AMGN were very quiet today with a narrow drift sideways. The stock remains in a bull flag pattern. I am suggesting small bullish positions if AMGN can trade at $71.25. We'll use a stop at $68.95. Our target is $74.90. More aggressive traders could aim higher.

Trigger @ $71.25 (small positions)

- Suggested Positions -

buy the Jun $70 call (AMGN1216F70)

Entry on May xx at $ xx.xx
Earnings Date 07/26/12 (unconfirmed)
Average Daily Volume = 3.9 million
Listed on May 08, 2012


Airgas Inc. - ARG - close: 92.49 change: +1.17

Stop Loss: 89.65
Target(s): 97.50
Current Option Gain/Loss: May92.5c: -17.3% & Jun95c: -24.1%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/10 update: ARG displayed relative strength and rallied to new record highs. Our trigger to buy calls was hit at $92.50. Our multi-week target is $97.50. FYI: The Point & Figure chart for ARG is bullish with a $119 target.

NOTE: We want to keep our position size small. You could argue that ARG is forming a wedge pattern, which could be considered bearish.

(small positions) - Suggested Positions -

Long May $92.50 call (ARG1219E92.5) Entry $1.15

- or -

Long Jun $95.00 call (ARG1216F95) Entry $1.45

05/10/12 triggered @ 92.50

Entry on May 10 at $92.50
Earnings Date 05/03/12
Average Daily Volume = 476 thousand
Listed on May 05, 2012


United Natural Foods - UNFI - close: 50.60 change: +0.69

Stop Loss: 48.25
Target(s): 54.50
Current Option Gain/Loss: -57.8%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/10 update: UNFI displayed relative strength with a +1.3% gain and a rally toward its recent highs. A breakout past $51.00 would be bullish.

FYI: The Point & Figure chart for UNFI is bullish with a long-term $82 target.

- Suggested Positions -

Long May $50 call (UNFI1219E50) Entry $0.95

Entry on May 03 at $49.90
Earnings Date 05/31/12 (unconfirmed)
Average Daily Volume = 250 thousand
Listed on May 02, 2012


PUT Play Updates

Baidu, Inc. - BIDU - close: 123.66 change: -0.04

Stop Loss: 133.05
Target(s): 115.00
Current Option Gain/Loss: May125P: +52.3% & Jun120P: +40.6%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/10 update: BIDU tagged a new relative low intraday and didn't really participate in the market's intraday rebound. There is no change from my prior comments. More conservative traders might want to lower their stop loss. FYI: The Point & Figure chart for BIDU is bearish with a $106 target.

- Suggested Positions -

Long May $125 put (BIDU1219Q125) Entry $2.10

- or -

Long Jun $120 put (BIDU1216R120) Entry $2.95

05/08/12 BIDU gapped open lower at $127.01

Entry on May 08 at $127.01
Earnings Date 07/25/12 (unconfirmed)
Average Daily Volume = 5.0 million
Listed on May 07, 2012


Rockwell Collins - COL - close: 52.26 change: -0.51

Stop Loss: 55.25
Target(s): 51.50
Current Option Gain/Loss: May $55p: +108.0% & Jun$55p: +62.1%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/10 update: COL underperformed with a -0.9% decline and a new five-month low. Our exit target is $51.50 but readers may want to take profits now. I am not suggesting new positions at this time.

- Suggested Positions -

Long May $55 PUT (COL1219Q55) Entry $1.25

- or -

Long Jun $55 PUT (COL1216R55) Entry $1.85

05/05/12 new stop loss @ 55.25
05/03/12 triggered at $54.75

Entry on May 03 at $54.75
Earnings Date 07/19/12 (unconfirmed)
Average Daily Volume = 1.3 million
Listed on April 25, 2012


Fiserv, Inc. - FISV - close: 66.47 change: +0.19

Stop Loss: 70.05
Target(s): 63.50
Current Option Gain/Loss: May$70p: + 5.9% & Jun65P: + 5.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
05/10 update: FISV saw a little bit of an oversold bounce, which isn't surprising given the rebound off support yesterday. The stock should find new resistance in the $68 area. I'm not suggesting new positions at this time.

- Suggested Positions -

Long May $70 put (FISV1219Q70) Entry $3.02

- or -

Long Jun $65 put (FISV1216R65) Entry $0.90

05/07/12 triggered on gap down at $67.26 (our trigger was 67.40)

Entry on May 07 at $67.26
Earnings Date 05/01/12
Average Daily Volume = 693 thousand
Listed on May 05, 2012


General Dynamic - GD - close: 66.54 change: +0.14

Stop Loss: 68.25
Target(s): 61.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
05/10 update: GD slid sideways in a narrow range under the $67 level today. We are waiting for further weakness. I am suggesting we buy puts if GD trades at $65.75 or lower. More conservative traders may want to wait for a drop under $65.00 instead. Our target is $61.50. FYI: The Point & Figure chart for GD is bearish with a $60 target.

Trigger @ 65.75

- Suggested Positions -

buy the Jun $65 PUT (GD1216R65)

Entry on May xx at $ xx.xx
Earnings Date 07/25/12 (unconfirmed)
Average Daily Volume = 1.9 million
Listed on May 09, 2012


Helmerich & Payne Inc. - HP - close: 46.38 change: -0.61

Stop Loss: 50.55
Target(s): 45.25
Current Option Gain/Loss: May50p: +48.0% & Jun45p: +50.0%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/10 update: HP tried to bounce and briefly traded above short-term resistance at $48.00. The rally eventually faded. Shares underperformed with a -1.2% decline. I am not suggesting new positions at this time.

- Suggested Positions -

Long May $50 PUT (HP1219Q50) Entry $2.50

- or -

Long Jun $45 PUT (HP1216R45) Entry $1.20

05/10/12 there has been no follow through on the bounce.
05/08/12 warning! HP has produced a big intraday bounce. This might be a short-term bullish reversal.
05/05/12 new stop loss @ 50.55
05/04/12 HP gapped down at $48.57

Entry on May 04 at $48.57
Earnings Date 07/27/12 (unconfirmed)
Average Daily Volume = 1.5 million
Listed on May 03, 2012


Humana Inc. - HUM - close: 79.40 change: +0.29

Stop Loss: 82.25
Target(s): 71.50
Current Option Gain/Loss: Jun80p: - 1.6% Jun75P: - 4.3%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/10 update: HUM opened higher but struggled with technical resistance with its 300-dma near $80.50. I would still consider new put positions now given the intraday reversal lower. FYI: The Point & Figure chart for HUM is bearish with a $69 target.

- Suggested Positions -

Long Jun $80 put (HUM1216R80) Entry $3.00

- or -

Long Jun $75 put (HUM1216R75) Entry $1.15

Entry on May 10 at $79.56
Earnings Date 07/30/12 (unconfirmed)
Average Daily Volume = 2.0 million
Listed on May 09, 2012


Jos. A Bank Clothiers - JOSB - close: 47.01 change: +0.36

Stop Loss: 49.25
Target(s): 45.25
Current Option Gain/Loss: May50p: - 3.3% or May$45p: -69.2%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
05/10 update: JOSB tried to bounce again this morning but is still having trouble with its trend of lower highs. The stock did close up +0.7%. More conservative traders might want to lower their stop closer to $48.50 or the $48.00 level instead. I am not suggesting new positions at this time.

Earlier Comments:
We want to limit our position size because JOSB has an elevated amount of short interest. The most recent data listed short interest at 18.7% of the very small 27.5 million share float and this raises the risk for a short squeeze. Our short-term target is $45.25. More aggressive traders may want to aim for the $42-41 area instead.

(small positions)

Long May $50 PUT (JOSB1219Q50) Entry $3.00

- or -

Long May $45 PUT (JOSB1219Q45) Entry $0.65

05/05/12 new stop loss @ 49.25

Entry on April 23 at $47.50
Earnings Date 05/30/12 (unconfirmed)
Average Daily Volume = 596 thousand
Listed on April 21, 2012