Option Investor
Newsletter

Daily Newsletter, Thursday, 5/17/2012

Table of Contents

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

Market Wrap

Dow Sinks in Volatile Session

by Thomas Hughes

Click here to email Thomas Hughes
Weak economic data and renewed fear of Europe's financial crisis send stocks plummeting.

Futures remained flat today after the release of jobless data. The market was awaiting further news scheduled for ten o'clock. Advancing and declining stocks were evenly matched at market open and maintained the balance until stocks turned negative about 30 minutes into trading. Trading turned choppy after unexpected news about the index of leading indicators and the Philadelphia Federal Reserve business survey sent the markets into a dive.



Initial claims were reported flat from the previous weeks upwardly revised 370,000. Last weeks reported figure was increased by 3000 new claims for unemployment. Analysts and economists had been expecting initial claims to be 367,000, which would have been in line with the unrevised data. Initial claims have fallen from the spike seen around the early Easter holiday but are still above Februaries lows. The four week moving average of initial jobless claims fell by 4,750 to 375,000. The moving average is also trending lower but is still above the low levels seen earlier in the year.


Continuing jobless claims, data which counts people filing for a second week of benefits, rose by 18,000 to 3.27 million. The small jump comes right after continuing claims hit a low for the year. The trend in continuing claims is down and remains so.


The total number of people filing for unemployment benefits, which lags initial claims by two weeks, is 6.27 million. This is a drop of 147,000 from the previous information and continues the downward trend in total unemployment claims. The downward trends in continuing and total claims is seemingly at odds with initial claims. Traders are keeping a close eye on initial claims for a sign of weakness in the economy.


The indexes doubled their early losses when the readings on the index of leading indicators and Philadelphia Federal Reserve survey were announced. The index of leading indicators retreated by -0.1% versus an expected gain of 0.1%. Economists had been expecting a drop from March's reading of 0.3% but the negative reading was more than what they had been looking for. Two areas negatively impacting the indicator were rising joblessness and falling home prices. Joblessness will impact the next reading less as the spike in jobless claims seen last month falls behind us. In the statement economic growth was referred to as “slow, but choppy”. Over the past 6 months the leading indicators have risen 1.8% versus 0.1% in the previous six month period.

The Philadelphia Fed survey compounded today's negative sentiment. In the prior survey business was reported as expanding with a gain of 8.5. Economists were expecting a slight gain in business with an increase to 10 but were shocked at the -5.8 that was reported. Negative readings show a contraction in business.

Energy continued to fall today. Fears of further slowing and economic contagion in Europe combined with increasing inventories helped to pressure the markets. Natural gas inventories, which are already at all time highs and near capacity, increased by 61 billion cubic feet. This gain surpassed the prediction of 52 BCF and sent the price of natural gas down by 2.5%.

The price of gold rose 2.5% today as the low prices attracted new buyers into the market. Some of the gains were attributed to impending options expiration. Silver rose as well, outpacing gold, to reach a gain of 3.5% in today's trading. Copper remained unchanged.

The yields on US treasuries fell today. The uncertainty and fear stemming from the ever unfolding European crisis have investors seeking the safety of US backed securities. Five, Ten and Thirty year notes and bonds all fell in yield with the thirty year bond leading the way with a 0.0765% drop in yield.

Thirty Year Bond interest rates, daily

Fear of European debt issues spreading from Greece, Spain and Italy throughout the European system are seemingly bearing fruit. Spanish banks are feeling the pain and are facing a round of massive downgrades from Moody's, Fitch and other credit rating agencies. The fear sparked what was initially reported as a “run” on one partially nationalized Spanish bank. In other news, the European Central bank blocked four Greek banks from receiving aid through a regularly scheduled credit lending facility. The move was due to the uncertainty of Greece's standing with the European Union.

European shares tumbled today. The European markets are facing another weekly decline, the sharpest in nearly six months. The FTSE, Xetra DAX and CAC 40 all lost more than 1.1%.

Shares traded mixed in Asian markets. The Shang Hai index gained 1.39%, the Nikkei gained 0.8% and the Hang Seng shed 0.31%.

The IPO scene is hot this week even with only two scheduled openings. The much anticipated and overly hyped sale of Facebook is scheduled to go off tomorrow. The social media behemoth is set to sell over 330 million shares for an expected price between $36-$40. The price is scheduled to be firmed up before the start of trading tomorrow. The IPO is heavily oversubscribed and shares are expected to soar at open. Because of SEC rulings the shares will have a maximum opening price of $45. The company is expected to raise close to $16 billion, putting Google's previous tech IPO record to shame.

Shares of Zynga, social media game site and former proxy for Facebook, have been volatile since its opening and is down 12% from its opening price.

Zynga, daily

The other opening scheduled for tomorrow is Cancer Genetics (CGIX). It is an early stage diagnostic company developing and commercializing genomic services for the medical industry. The company is expected to sell 4 million shares in the range of $11-$13.

News from JP Morgan is hitting the stock and the sector hard. The company announced today that the losses reported last week stemming from hedging activities were already reaching close to $3 billion. In the original announcements losses were expected to double in the next quarter but the this mornings news is an acceleration of the expected damages. The stock lost another 3% in today's trading.

JP Morgan, daily

The entire financial sector is suffering from the JP Morgan fall out. The financial Spider (XLF) is down over 1% today. The index has reached an important pivot/support level at $14 and bears close watch.

The financial Spider (XLF), daily

Earnings rolled on today with about 60 companies reporting. Today's roster is dominated by retailers, with about a dozen reporting today, and Wal-Mart is at the top of the list. The discount giant beat the street's expectations for revenue and profits, growing sales by 8.6% in the quarter. The company earned $1.09 per share versus the expected $0.98 and the estimates for next quarter are around $1.16. Same store sales count for a large portion of the gains, increasing by 2.6%, ahead of the expected 2%. The stock jumped over 5% today on strong volume but halted at the $62.50 resistance set earlier this year.

Wal-Mart, daily

Aeropostale did not make its investors nearly as happy as Wal-Mart did. Stock in the clothing chain lost around 3% today in anticipation of earnings released after the bell. The mall-based retailers earnings per share fell despite an increase in revenue. The company is expecting earnings per share to decline again in the current quarter to between $.03 and $.05 per share.

Aeropostale, daily

Cato, based in Charlotte, NC, reported a 5% increase in quarterly earnings. The company also reported a 1% rise in sales but disappointed with a 2% drop in same store sales. The stock has been trading sideways this year and is now moving up from the short term moving average.

Cato, daily

Ross Stores traded down today after reporting strong earnings growth and increasing its full year guidance. The company earned $0.94 per share versus a split adjusted $0.76. This is a 26% gain over last years first quarter and the second year of gains greater than 25%. Total sales increased 14% and same store comparable sales rose by 9%. The company is expecting sales to increase 3%-4% in the next quarter and for earnings around $0.76 per share, a 14% increase from last year's second quarter. The stock has been trending up steadily over the past ten months and is now trading just above the short term moving average.

Ross Stores, daily

Stein Mart reported a drop in net income despite flat sales. The company has been struggling with its efforts to return to an “everyday” pricing structure. Stein Mart has been reducing it's coupon and sales marketing and reenforcing the value of its brand. The stock responded positively to the news and gained over 3.5%. The stock is currently trading near 12 month lows.

Stein Mart, daily

Perry Ellis beat consensus estimates for revenue and earnings for the first quarter of fiscal 2013. In the statement the company reaffirmed its full year guidance range. In the first quarter revenue declined from the year ago period but did come in ahead of analysts expectations. The company had been expecting the decline in revenue following the lack luster fall and holiday department store sales. The company has been focusing on revitalizing its brand image and is beginning to see positive results from the efforts. The stock gained over 2% today but met resistance at the short term moving average.

Perry Ellis, daily

The retail sector slumped today on the generally uninspiring news and outlook for the second quarter. The retail sector Spider (XRT) dropped over 2.25% today on above average trading. Nearest support is at $55, another 4.5% lower.

Retail Sector Spider (XRT), daily

Advance Auto Parts made a big miss on revenue and lost over 15% of its share value. The company made impressive gains in revenue and earnings over last year but missed expectations. The gains were based on increased sales and lowered costs. Expectations for revenue and earnings had been much higher. The company's outlook for the year was reaffirmed but “constrained”. The stock has lost more than 25% of its value in the last few weeks and selling has reached an extreme level.

Advance Auto Parts, daily

Red Robin Gourmet Burgers also had a big revenue miss that sent shares plummeting. The stock dropped about 13% after the company reported that earnings per share were $0.71, up 22% from last year. Total revenues increased by 4.4% due to higher check averages but were offset by lower traffic volumes. The increase in earnings per share was aided by an increase in profit margin of 1.4%. Needless to say, investors and analysts had been expecting more from the fast growing restaurant chain.

Red Robin Gourmet Burgers, daily

Three big name tech companies reported after the bell and will be impacting the tech sector tomorrow. Autodesk reported an 11% increase in first quarter revenue over the same period last year. Earnings per share increased by roughly 20% and the second quarter outlook matches the first quarter results.

Autodesk, daily

Applied Materials reported strong results for the second quarter but its outlook for the third quarter may send the shares down tomorrow. The company expects that revenues could be down as much as 10% in the next period. The company also reiterated its full year guidance to the high end of the previously stated range.

Applied Materials, daily

Marvell Technologies increased first quarter revenue 7% over the fourth quarter of last year but fell short of last years year-over-year gain. The results were driven by better than expected sales of its TD smart phone products.

Marvell Technologies, daily

Sears earnings are up 11% in the recent quarter as the ailing department store begins to show signs that it is fixing itself. Shares of the stock jumped in the early trading but sold off during the day. The stock still managed to post a 3.5% gain for the day with high volume.

Sears, daily

Trading was volatile today while different bits of data and earnings news were disseminated by the markets. The Dow started the day in positive territory but quickly lost ground and turned negative. Signs the economy is slowing more than expected mixed with renewed fear of the European financial crisis to send Dow down more than 75 points. The index quickly rebounded from the unexpected bad economic data but selling pressure continued the rest of the day and sent the Dow even lower. By the end of the day the Dow had given up 1.25%.

Dow, one day

The Dow made a new low today with bearish technicals. Bearish momentum is on the rise and indicators suggest that it is gaining traction. This has been one of the worst weeks of declines in the index in the past ten months.

Dow, daily

The S&P 500 made a similar move down today, closing at the day's low. The broad index, like the blue chip Dow, moved below it's 200 day exponential moving average today. The move could signal continued weakness in equities.

The S&P 500

The VIX spiked today, gaining nearly 10%.

The VIX, daily

The Nasdaq moved down in tandem with the other major indexes today. It too crossed and moved below it's 200 day moving average. The morning could be volatile following the after hours releases of earnings reports today.

Nasdaq, daily

Earnings and the world economy will continue to drive the markets tomorrow. Moody's downgrade of Spanish banks this evening will put pressure on the European markets and US index futures. There are no US economic announcements tomorrow.

Thomas Hughes


New Option Plays

Relative Strength in Telecom

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Verizon Communication - VZ - close: 41.37 change: +0.49

Stop Loss: 39.95
Target(s): 45.75
Current Option Gain/Loss: Unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Shares of this telecom giant are ignoring the market's weakness. Instead VZ is marching higher with a bullish trend of higher highs and higher lows. The breakout past $40 a couple of weeks ago was a big win for the bulls.

I am suggesting a trigger to buy calls at $41.55. We'll start with a stop loss at $39.95 but more conservative traders may want to use a stop closer to $40.50 instead. Keep in mind that VZ does not move super fast so we'll need to show some patience.

Trigger @ 41.55

- Suggested Positions -

buy the Jun $42 call (VZ1216F42) current ask $0.54

- or -

buy the Jul $43 call (VZ1221G43) current ask $0.49

Annotated Chart:

Entry on May xx at $ xx.xx
Earnings Date 07/19/12 (unconfirmed)
Average Daily Volume = 13.8 million
Listed on May 17, 2012



In Play Updates and Reviews

FLR Hits Our Target

by James Brown

Click here to email James Brown

Editor's Note:

Shares of Fluor Corp. (FLR) hit our bearish exit target today. Meanwhile, I am suggesting we wait on launching new put positions on the IWM. Plus, we want to take profits on our HUM trade at the open tomorrow.

Current Portfolio:


CALL Play Updates

Amgen Inc. - AMGN - close: 70.54 change: -0.44

Stop Loss: 69.40
Target(s): 74.90
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
05/17 update: Hmmm...I checked a couple of different quote services. Both listed the intraday high at $71.18 in AMGN. Yet if you look at an intraday chart shares appeared to open near $71.40. We're going to go with the official quote data, which means our AMGN trade is not open yet.

The plan has been to buy calls if AMGN trades at $71.25 or higher. I am going to move that trigger up to $71.50 instead. We'll move the stop loss up to $69.40.

Trigger @ $71.50 (small positions)

- Suggested Positions -

buy the Jun $70 call (AMGN1216F70)

05/17/12 adjusted trigger to $71.50.

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


Mead Johson Nutrition - MJN - close: 82.53 change: -1.73

Stop Loss: 82.25
Target(s): 89.25
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
05/17 update: MJN is not off to a good start. Shares succumbed to the market's widespread weakness and erased yesterday's gains with a -2.0% pullback today. If MJN closes under $82.00 we'll drop it as a bullish candidate. Currently I am suggesting a trigger to buy calls at $85.05. We'll use a stop loss at $82.25, just under Tuesday's low. Our target is $89.25.

Trigger @ 85.05

- Suggested Positions -

buy the Jun $85 call (MJN1216F85)

Entry on May xx at $ xx.xx
Earnings Date 07/26/12 (unconfirmed)
Average Daily Volume = 1.7 million
Listed on May 16, 2012


PUT Play Updates

Baidu, Inc. - BIDU - close: 117.40 change: -4.86

Stop Loss: 125.50
Target(s): 115.50
Current Option Gain/Loss:(May125P: +128.5%) & Jun120P: +145.7%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/17 update: After consolidating sideways the last few days BIDU broke down sharply today and fell to new relative lows. Today's close under potential support at $120 is definitely bearish. I am tweaking our exit target to $115.50. Cautious traders will want to take profits now (currently +145% on the June puts). Aggressive traders may want to aim lower. I am moving our stop loss down to $125.50.

- Suggested Positions -

-closed position-
May $125 put (BIDU1219Q125) Entry $2.10, exit $4.80 (+128.5%)

- or -

Long Jun $120 put (BIDU1216R120) Entry $2.95

05/17/12 new stop loss @ 125.50, adjust exit to $115.50
05/14/12 planned exit to sell our May $125 puts at the open this morning.
They opened with a bid at $4.80 (+128.5%)
05/12/12 new stop loss @ 130.25
Prepare to exit May $125 puts at the open on Monday, current bid $4.05
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


Fiserv, Inc. - FISV - close: 65.33 change: -0.63

Stop Loss: 68.25
Target(s): 63.50
Current Option Gain/Loss:(May$70p: +12.5%) & Jun65P: +61.1%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
05/17 update: FISV closed under technical support at its 100-dma today. Shares have yet to breakdown under the $65.00 level. I am not suggesting new positions at this time. I am lowering our stop loss down to $68.25.

- Suggested Positions -

- closed position -
May $70 put (FISV1219Q70) Entry $3.02 exit $3.40 (+12.5%)

- or -

Long Jun $65 put (FISV1216R65) Entry $0.90

05/17/12 new stop loss @ 68.25
05/15/12 closed May $70 puts at the open: bid @ 3.40 (+12.5%)
05/14/12 prepare to exit the May $70 puts at the open tomorrow
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: 63.72 change: -1.48

Stop Loss: 66.55
Target(s): 61.50
Current Option Gain/Loss: +56.6%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/17 update: We are finally starting to see some follow through lower on GD. Shares broke down under $65.00 and underperformed the market with a -2.2% decline. I am moving our stop loss down to $66.55.

FYI: The Point & Figure chart for GD is bearish with a $60 target.

- Suggested Positions -

Long Jun $65 PUT (GD1216R65) Entry $1.50

05/17/12 new stop loss @ 66.55
05/15/12 triggered @ 65.75

Entry on May 15 at $65.75
Earnings Date 07/25/12 (unconfirmed)
Average Daily Volume = 1.9 million
Listed on May 09, 2012


Humana Inc. - HUM - close: 75.68 change: -0.38

Stop Loss: 80.25
Target(s): 71.50
Current Option Gain/Loss: Jun80p: +70.0% Jun75P: +91.3%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/17 update: Change of plans!

I am suggesting an early exit in our HUM trade. We want to exit positions at the open tomorrow. The trend is down but HUM is short-term oversold here. I've been warning you that the $75 area could be support. I'd rather take profits now and we can look at new bearish positions again if the bounce fails near $80.

- Suggested Positions -

Long Jun $80 put (HUM1216R80) Entry $3.00

- or -

Long Jun $75 put (HUM1216R75) Entry $1.15

05/17/12 Prepare to exit positions at the open tomorrow
05/16/12 new stop loss @ 80.25

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


Informatica - INFA - close: 42.27 change: -0.13

Stop Loss: 45.25
Target(s): 40.25
Current Option Gain/Loss: +50.0%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/17 update: After yesterday's big drop shares of INFA tried to produce an oversold bounce but the rebound didn't get very far. I am not suggesting new positions at this time. FYI: The Point & Figure chart for INFA is bearish with a $39 target.

- Suggested Positions -

Long Jun $45 PUT (INFA1216R45) Entry $2.40

05/16/12 new stop loss @ 45.25
05/14/12 triggered at $44.50

Entry on May 14 at $44.50
Earnings Date 07/26/12 (unconfirmed)
Average Daily Volume = 1.3 million
Listed on May 10, 2012


iShares Russell 2000 ETF - IWM - close: 75.40 change: -1.76

Stop Loss: 80.05
Target(s): 72.00-70.00 zone
Current Option Gain/Loss: Unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Comments:
05/17 update: - Strategy change! -

We have been expecting a breakdown in the IWM but the plunge under $77 was a bit more dramatic than I expected. This ETF closed at $77.16 yesterday and then fell to technical support at its 200-dma today. Our prior strategy was to wait for IWM to close under $77.00 and then buy puts the next day, which would be tomorrow. However, I am suggesting we make some changes here.

I remain bearish on the IWM. The breakdown from its head-and-shoulders pattern is still forecasting much lower levels. Yet the market is oversold here and there is a good chance the IWM bounces tomorrow.

I want to wait on buying puts. Let's wait and see if the IWM does bounce tomorrow or not. Nimble traders could look for a failed rally near the $78.00 level as a new entry point since $78.00 should be new resistance. We will wait and see where the IWM closes on Friday and re-evaluate our entry point over the weekend.

Temporarily removing our entry point.

Just wait and watch tomorrow. We'll re-evaluate this weekend.

05/17/12 temporarily wait on buying puts. We will re-evaluate tomorrow.

Entry on May xx at $ xx.xx
Earnings Date --/--/--
Average Daily Volume = 53 million
Listed on May 12, 2012


Siemens AG - SI - close: 83.02 change: -1.20

Stop Loss: 87.75
Target(s): 80.25
Current Option Gain/Loss: +33.3%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
05/17 update: SI fell to another new 52-week low with a -1.4% decline today. More conservative traders might want to lower their stops. I am not suggesting new positions at this time. FYI: The Point & Figure chart for SI is bearish with a $74 target.

- Suggested (SMALL) Positions -

Long Jun $80 PUT (SI1216R80) Entry $1.35

05/16/12 SI gapped open higher at $84.94

Entry on May 16 at $84.94
Earnings Date --/--/--
Average Daily Volume = 832 thousand
Listed on May 15, 2012


Tiffany & Co. - TIF - close: 60.07 change: -2.08

Stop Loss: 64.25
Target(s): 59.00
Current Option Gain/Loss: +22.5%
Time Frame: exit prior to the May 24th earnings report
New Positions: see below

Comments:
05/17 update: TIF raised its dividend by 10% to 32 cents a share yet the news failed to life the stock price. TIF actually underperformed with a -3.3% plunge toward the $60.00 mark. It is possible that $60.00 is round-number support so readers may want to take profits right now.

I am not suggesting new positions at this time. Our exit target is $59.00. We do not want to hold over the May 24th earnings report.

- Suggested Positions -

Long Jun $60 put (TIF1216R60) Entry $2.35

05/17/12 TIF is testing $60 readers may want to take profits now
05/16/12 new stop loss @ 64.25
05/14/12 TIF gapped down at $61.67, under our trigger.

Entry on May 14 at $61.67
Earnings Date 05/24/12 (confirmed)
Average Daily Volume = 1.5 million
Listed on May 12, 2012


CLOSED BEARISH PLAYS

Fluor Corp. - FLR - close: 50.20 change: -1.12

Stop Loss: 55.05
Target(s): 50.25
Current Option Gain/Loss: +60.4%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/17 update: Target achieved.

FLR continues to sink and shares are down several days in a row. The stock closed near potential round-number support at $50.00. If FLR was going to see an oversold bounce this is a good spot to expect one. Shares hit our exit target at $50.25.

- Suggested Positions -

Long Jun $52.50 PUT (FLR1216R52.5) Entry $2.15 exit $3.45 (+60.4%)

05/17/12 target hit
05/15/12 new stop loss @ 55.05

chart:

Entry on May 14 at $53.05 (gap down)
Earnings Date 05/03/12
Average Daily Volume = 1.8 million
Listed on May 12, 2012