Option Investor
Newsletter

Daily Newsletter, Thursday, 6/28/2012

Table of Contents

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

Market Wrap

Market Slumps Health Care Jumps

by Thomas Hughes

Click here to email Thomas Hughes
Rising joblessness and weaker than expected GDP data has investors worried about the second half of the year. The Supreme Courts landmark ruling on Obama care helped push the markets lower while giving hospitals a boost.



Initial jobless claims fell from an upwardly revised 392,000 to 386,000 in the week ending June 23. The number is still high,despite the larger than expected fall. The four week moving average of initial claims also fell this week, by 750, to 386,750. The trend in jobless claims is still to the upside and at elevated levels.


Continuing claims fell by 15,000 to a seasonally adjusted 3.3 million. This number has been holding steady over the last month, just off this years lows.


Total claims for unemployment, which lags initial claims by two weeks, gained for the first time this year. Total claims rose by just over 71,000 to 5.9 million. The rise in initial and continuing claims during June is starting to make itself seen in the total claims figures.


The final revision for first quarter GDP was also released today. The number was confirmed at the previously released 1.9%. The release was not unexpected but some of the internal figures were below expectations and are leading further speculation on the quality of growth in the second half of the year. Consumer spending, which accounts for about 70% of US economic activity, grew by 2.5%, slower than the previously estimated 2.7%. Exports and business inventories also grew less than expected. Exports gained 4.2% versus the estimated 7.2% and business inventories grew by $54.4 billion, $3.3 billion less than expected.


Speculation over the second quarter outlook was over shadowed by the supreme court ruling on Obama care. The court ruled that the law as written is constitutional and sparked heated debate. Health care stocks jumped on the news while health insurers declined. The Health Care Spider (XLV) dropped today on heavy volume. The downward move was halted at the 30 day moving average, which is pointing up. The ETF is approaching resistance at $38.

Health Care Spider, daily

Health care providers like Universal Health Services and Team Health Holdings made significant gains on the supreme court ruling. These companies provide health services in the form of hospitals, clinics and staffing, all areas set to benefit from the new health reform laws. Universal Health Services climbed more than 7.5% on high volume. Team Health Holdings also gained significantly, climbing close to 9% today and making a new all-time high. Today's gains could be short lived as the health law is not yet in effect.

Universal Health Services, daily

Team Health Holdings, daily

Oil fell again today on continued worries of Eurozone trouble and slowing world growth. Light sweet crude led the decline, losing $2.31. Brent crude and gasoline also fell. The iPath S&P Crude Oil Total Return ETF (OIL) fell today in tandem with the drop in crude prices. The ETF has been trending down for two months and broke long term support in today's session.

iPath S&P Crude Oil Total Return ETF, daily

Gold and other precious metals were also hit hard today. The price of gold fell more than $27 during the day, coming close to $1550 an ounce. Silver was the hardest hit of the metals, losing more than 2.5%. The CBOE gold index fell by 2% today.

CBOE gold index, daily

JPMorgan hit the headlines again today. This morning a release stated that losses from the London Whale could total $9 billion. Later on in the day, further reporting revealed that the estimation was more than a month old, was a worst case scenario and that JPMorgan has nearly completed exiting the bad trades. Shares of the stock fell below the short term moving average for a time before rallying into the close.

JPMorgan, daily

The Financial Sector Spider is trading near the middle of its 12 month range. The ETF fell about 1.5% intraday but recouped most of the days loss before the closing bell.

XLF, daily

AOL announced a $400 million stock buyback plan today. The move is the first of several that are re-investing proceeds from patent sales to Microsoft earlier this year. The stock jumped in early trading and managed to hold onto some of the gains through the close of trading. Today's jump in price pierced a resistance level and could signal further advancement.

AOL, daily

Rupert Murdoch's announcement of the splitting of News Corp has kept the stock price up this week. The stock made a break out earlier this week and looks strong in the near term.

News Corp, daily

About two dozen companies released earnings statements today. Nike, Smith & Wesson, Family Dollar and Research in Motion were prominent on the list. Nike shares were hit hard during the day in anticipation of earnings released after the bell. The shares continued their fall in after hours trading when Nike announced it's profits were shrinking in the face of growing revenue.

Nike, daily

Smith & Wesson announced after the bell that quarterly and yearly profits increased by 27 and 20% respectively. The gains were made on improving sales and reduced overhead costs. The stock climbed in after hours trading, gaining roughly 10%.

Smith & Wesson, daily

Family Dollar stores reported the 17th consecutive quarter of double digit earnings growth. Comparable store sales drove earnings growth with a 5% increase over last year. Earnings per share were $1.05, a company record. Total income in the period increased by over 12% and were positively impacted by two sale-leaseback transactions. Management also reaffirmed this years guidance in the statement. The stock opened sharply lower but found support during the day.

Family Dollar, daily

Research in Motion also reported after the bell today. The Blackberry maker has been struggling with sales of its Blackberry devices and a new CEO this year. The Zacks consensus estimate was for a loss of $0.02 per share, a massive 100% drop from the same period last year. The actual results were far worse. RIMM posted a net loss of $0.99 per share and has pushed back the release of Blackberry 10 until early 2013. In the release the company also stated that it is going to be laying off 5,000 employees. The shares, which had been suffering, took a beating in after hours trading dropping close to 20%.

Research in Motion, daily

Stifel Nicolas initiated coverage on Ford Motor Company with a hold rating. Slow sales were cited as a reason for the rating. Several other analysts have been commenting on Ford recently with an average price target around $12. The stock is currently trading around $10, where the stock has had support in the past.

Ford Motor Company, daily

The volatility index climbed earlier today, crossing back above the 20 level, but fell before the close to end the day at $19.71.

Volatility Index, daily

Futures were down about 80 points this morning before the release of economic data. The basically expected news failed to move the markets one way or the other. After the open, the major indexes maintained their ground until the Supreme Court ruling on Obama care added bearish momentum to the mornings trading. Following the announcement stocks began to slide, hitting their lows for the day around 2:30.

A late day rally brought the Dow Jones index back up above 12500, a previously important support/resistance level. Today's move was made on weak volume and mixed internals. Advancing stocks were outnumbered by declining stocks by about 1:2 for most of the day. The Nasdaq suffered more than the NYSE or AMEX, with an advance/decline ratio closer to 1:3. The afternoon rally brought more stocks into the green.

Dow Jones Industrial Average, one day

Dow Jones Industrial Average, daily

The S&P traded in a similar range as the Dow. The broader index recovered enough ground to close just below the short term moving average. Momentum remains weakly bullish.

S&P 500, daily

The Nasdaq suffered the steepest loss today, closing down by more than 1%.

Nasdaq, daily

I am expecting to see more sideways market action as traders and investors prepare for the second half of the year. The economic data is mixed, showing a growing but listless economy and deteriorating business conditions. Tomorrow look out for Personal Income and Spending figures, Chicago PMI reading and the Michigan Sentiment indicator. Next week look out for June data including car sales and job creation figures.

Thomas Hughes


New Option Plays

Multi-Year Highs

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. Many of these need to see a break past key support or resistance:

(bullish ideas) TM, SLG, LO, RE, RRC, ESRX, CBRL, HSIC, CHTR

(bearish ideas) CXO, AYI, WBC, FFIV


NEW DIRECTIONAL CALL PLAYS

McKesson Corp. - MCK - close: 93.27 change: +0.96

Stop Loss: 91.45
Target(s): 99.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
According to their website, " As a pharmaceutical distributor and health care information technology company, McKesson provides systems for medical supply management, clinical workflow, practice management, pharmacy automation and care management." The stock's bullish trend of higher lows has pushed MCK back toward the ten-year highs set a week ago. A breakout here could herald a run toward the $100 area.

I am suggesting a trigger to buy calls at $93.55. We'll use a stop loss at $91.45, just under today's low. Our exit target is $99.00.

Trigger @ 93.55

- Suggested Positions -

buy the Jul $92.50 call (MCK1221G92.5) current ask $1.90

- or -

buy the Aug $95 call (MCK1218H95) current ask $1.80

Annotated Chart:

Entry on June xx at $ xx.xx
Earnings Date 07/30/12 (unconfirmed)
Average Daily Volume = 1.6 million
Listed on June 28, 2012



In Play Updates and Reviews

Down on Court Ruling, Up on EU Speculation

by James Brown

Click here to email James Brown

Editor's Note:

Stocks were initially weak as investors reacted to the Supreme Court's decision on Obamacare. Then, late in the day, stocks surged higher on hopes of a deal or improvement in the EU summit.

COST was triggered. IBB, WFM, and WTW were stopped out.

Current Portfolio:


CALL Play Updates

American Tower Corp. - AMT - close: 69.68 change: +0.05

Stop Loss: 67.40
Target(s): 74.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
06/28/12 update: AMT rallied off its morning lows but remains under resistance at the $70.00 level.

I am suggesting a trigger to buy calls at $70.25. We'll use a stop loss at $67.40. Our target is $74.50.

Trigger @ 70.25

- Suggested Positions -

Buy the Aug $70 call (AMT1218H70)

Entry on June xx at $ xx.xx
Earnings Date 08/02/12 (unconfirmed)
Average Daily Volume = 2.3 million
Listed on June 27, 2012


Costco Wholesale - COST - close: 92.92 change: +1.60

Stop Loss: 89.90
Target(s): 99.00
Current Option Gain/Loss: Jul$92.50c: + 9.9% & Aug95c: + 6.8%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
06/28/12 update: It was a volatile day for shares of COST. The stock initially moved lower with the market and dipped under support at $90.00. COST quickly recovered and surged past the $92 level. Our trigger to buy calls was hit at $92.50.

The plan was to keep our position size small. FYI: The Point & Figure chart for COST is bullish with a $116 target.

- Suggested *Small* Positions -

Long Jul $92.50 call (COST1221G92.5) entry $1.61

- or -

Long Aug $95 call (COST1218H95) entry $0.88

06/28/12 triggered @ 92.50

Entry on June 28 at $92.50
Earnings Date 10/11/12 (unconfirmed)
Average Daily Volume = 2.3 million
Listed on June 26, 2012


Boston Beer Co. - SAM - close: 117.96 change: -1.05

Stop Loss: 117.25
Target(s): 127.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
06/28/12 update: SAM saw a dip toward $115 and short-term support near its 10-dma but it didn't quite get there before paring its losses. There is no change from my prior comments.

The $120 level looks like round-number resistance. I am suggesting a trigger to buy calls at $120.25. If triggered we'll use a stop loss at $117.25. Our target is $127.50.

Trigger @ 120.25

- Suggested Positions -

buy the Aug $125 call (SAM1218H125)

Entry on June xx at $ xx.xx
Earnings Date 08/02/12 (unconfirmed)
Average Daily Volume = 117 million
Listed on June 27, 2012


U.S. Oil ETF - USO - close: 29.50 change: -0.70

Stop Loss: 28.49
Target(s): 33.00
Current Option Gain/Loss: Jul$30c: -27.6% & Aug30c: -13.9%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
06/28/12 update: The USO spiked down under recent support near $29.30 and it also traded below its 2011 low of $29.10 before bouncing near the $29.00 mark. I am not suggesting new positions at this time. Readers may want to wait for a close over the 10-dma before considering new positions.

Earlier Comments:
Make no mistake, this is an aggressive trade since we're trying to call a short-term bottom in oil prices here. The commodity could definitely see some strength as we get closer to the EU oil embargo against Iran, which is scheduled to start on July 1st.

- Suggested Positions -

Long Jul $30 call (USO1221G30) Entry $0.94

- or -

Long Aug $30 call (USO1218H30) Entry $1.36

Entry on June 22 at $29.57
Earnings Date --/--/--
Average Daily Volume = 8.6 million
Listed on June 21, 2012


PUT Play Updates

Cummins Inc. - CMI - close: 92.26 change: +1.63

Stop Loss: 92.55
Target(s): 82.50
Current Option Gain/Loss: -55.3%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
06/28/12 update: The oversold bounce in CMI continues. Shares actually outperformed the market today with a +1.8% gain. If this continues CMI will hit our stop loss at $92.55 soon. More aggressive traders will want to consider adjusting their stop loss higher and give CMI more room to move before rolling over again inside the channel. CMI's bearish channel should put resistance near $94.00 or its 30-dma (95.35).

I am not suggesting new positions at this time.

- Suggested Positions -

Long Jul $87.50 PUT (CMI1221S87.5) Entry $2.80

06/25/12 triggered on the gap down at $89.06 (trigger was 89.35)

Entry on June 25 at $89.06
Earnings Date 07/31/12 (unconfirmed)
Average Daily Volume = 2.8 million
Listed on June 23, 2012


Deckers Outdoor Corp. - DECK - close: 43.25 change: -1.03

Stop Loss: 50.05
Target(s): 42.00
Current Option Gain/Loss: Jul45p: +107.4% & Aug45P: +51.7%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
06/28/12 update: DECK continues to underperform and closed at new 52-week lows today.

Readers may want to take profits now. I'm not suggesting new positions at this time.

Earlier Comments:
This is an aggressive trade because so many investors are already short this stock. The most recent data listed short interest at 26% of the small 36.7 million share float. That does raise the risk of a short squeeze, although DECK hasn't seen a squeeze in a while. FYI: The Point & Figure chart for DECK is bearish with a $34 target.

- Suggested (SMALL) Positions -

Long Jul $45 PUT (DECK1221S45) Entry $1.35

- or -

Long Aug $45 PUT (DECK1218T45) Entry $2.90

06/25/12 readers may want to take profits early now.

Entry on June 21 at $47.31
Earnings Date 07/26/12 (unconfirmed)
Average Daily Volume = 1.45 million
Listed on June 20, 2012


Joy Global, Inc. - JOY - close: 53.93 change: +2.02

Stop Loss: 55.05
Target(s): 47.50
Current Option Gain/Loss: -40.6%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
06/28/12 update: JOY is another industrial name (like CMI) that was outperforming the market today. The relative strength is a bit perplexing. Right now it's just an oversold bounce within the longer-term down trend. Yesterday I suggested readers look for a failed rally near $54.00 as a new bearish entry point. Well, JOY is at $54.00 now. We need to see the bounce reverse.

We do want to keep our position size small because JOY can be a volatile stock at times. It is possible that the $50.00 level could act as round-number, psychological support but we are aiming for a drop to $47.50.

- Suggested *SMALL* Positions -

Long Jul $50 PUT (JOY1221S50) Entry $1.60

Entry on June 26 at $52.23
Earnings Date 08/29/12 (unconfirmed)
Average Daily Volume = 2.6 million
Listed on June 25, 2012


CLOSED BULLISH PLAYS

iShares Biotech - IBB - close: 126.55 change: -3.43

Stop Loss: 124.90
Target(s): 134.85
Current Option Gain/Loss:Jul$130c: -73.9% & Sep135c: -63.4%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
06/28/12 update: It was a volatile day for IBB thanks to market reaction to the Supreme Court's decision on Obamacare. Shares of the IBB initially fell to short-term support at $126 and it looked like it might hold there. Then later in the afternoon the stock dropped to the next support level at $125.00 and dipped under $125.00 just low enough to hit our stop loss before reversing higher as the market reversed higher late this afternoon.

Our trade is closed but the larger trend for IBB (up) is unchanged.

- Suggested Positions -

Jul $130 call (IBB1221G130) Entry $2.30 exit $0.60 (-73.9%)

- or -

Sep $135 call (IBB1222I135) Entry $2.60 exit $0.95 (-63.4%)

06/28/12 stopped out @ 124.90
06/27/12 triggered at $129.25

chart:

Entry on June 27 at $129.25
Earnings Date --/--/--
Average Daily Volume = 576 thousand
Listed on June 23, 2012


Whole Foods Market, Inc. - WFM - close: 93.72 change: -1.27

Stop Loss: 93.25
Target(s): 95.00 & 98.50
Current Option Gain/Loss: Jul $92.50c: -19.6% & Aug $95c: -11.3%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
06/28/12 update: WFM followed the market lower this morning. Unfortunately that meant a breakdown under support near $94.00. WFM hit our stop loss at $93.25 on the way down.

Our July calls went from +66% to -19%.

- Suggested Positions -

Jul $92.50 call (WFM1221G92.5) Entry $3.30 exit $2.65 (-19.6%)

- or -

Aug $95 call (WFM1218H95) Entry $4.40 exit $3.90 (-11.3%)

06/28/12 stopped out
06/23/12 Readers will want to seriously consider taking profits and exiting right now
06/18/12 new stop loss @ 93.25
06/15/12 first target hit at $95.00, options values at:
Jul $92.50 call @ $4.50 (+36.3%)
Aug $95.00 call @ $5.05 (+14.7%)
06/15/12 triggered at $92.05

chart:

Entry on June 15 at $92.05
Earnings Date 07/25/12 (unconfirmed)
Average Daily Volume = 1.8 million
Listed on June 12, 2012


CLOSED BEARISH PLAYS

Weight Watchers Intl - WTW - close: 49.54 change: -1.96

Stop Loss: 52.25
Target(s): 45.50, 42.00
Current Option Gain/Loss: Jul$50P -41.9% & Aug47.50P -30.6%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
06/28/12 update: WTW saw an intraday spike higher today. The initial move higher could have been a reaction to the Supreme Court's ruling on Obamacare. Corporate America could start focusing on solutions for obesity as a way to cut down their healthcare expenses. Does that mean they're going to start catering WTW meals to their employees? Or offer some sort of incentive for employees to diet? It's too early to tell but the chatter in WTW today was the impact of the court's ruling.

I do find it suspicious that WTW surged late morning with a rise from under $51.00 to over $52.50 and its 10-dma in less than five minutes only to see that rally reverse lower. Maybe it was just a midday short squeeze.

The larger trend for WTW is still down and I would keep an eye on for another bearish entry point!

Earlier Comments:
We do want to keep our position size small since the most recent data listed short interest at 10% of the very small 26.6 million share float.

- Suggested Positions -

Jul $50 PUT (WTW1221S50) Entry $1.55 exit $0.90 (-41.9%)

- or -

Aug $47.50 PUT (WTW1218T47.5) Entry $2.45 exit $1.70 (-30.6%)

06/28/12 stopped out at $52.25
06/27/12 triggered @ 49.75

chart:

Entry on June 27 at $49.75
Earnings Date 08/02/12 (unconfirmed)
Average Daily Volume = 667 thousand
Listed on June 26, 2012