Option Investor
Newsletter

Daily Newsletter, Thursday, 7/5/2012

Table of Contents

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

Market Wrap

Dow Down On Mixed Data

by Thomas Hughes

Click here to email Thomas Hughes
Future's for the major market indexes were slightly lower going into today's open. A string of mixed domestic economic data hit the market today, following yesterday's holiday, that failed to spark a rally. Job data is still lackluster and other indications are uninspiring. World banking leaders announced a number of moves in efforts of further quantitative easing.



Initial jobless claims came in much lower than expected at a seasonally adjusted 374,000. Analysts had been expecting a much smaller drop of 2,000. The previous weeks data was revised upward as well by 2,000 to 388,000. The four week moving average of initial claims dropped by 1500 but remains near the years highs.


Continuing claims continued to rise in this weeks data, as laid off workers fail to find new jobs. Claims for a second week of unemployment benefits rose by 4,000 to 3.31 million Americans.


Total claims for unemployment for the week ending 6/17 fell to 5.87 million. This is a tic down from last week buts still above the years lows.


ADP released its estimates for June non-farm payroll additions. They are estimating that the US non-farm sector added 176,000 new jobs in June, compared to 136,000 in May. Job increases for the month of June were led by the services sector. The US Census Beaureau releases its own data for June employment tommorow. The comprehensive reading is expected to be in the range of about 90,000 new jobs for the month. This is a bit lower than the 125,000 level that economist believe will get the US economy back on track.


Jobless and job creation data failed to rally the market after the open. The Dow hung around -60 for the first half hour until the ISM services gauge came in weaker than expected. The reading was reported at 52.1%, near contraction and 0.8% lower than forecast. This is the lowest level for the indicator since January , 2010. Data within the reading reveal that employment is up within the sector while production and new orders have fallen.

Banking leaders around the world announced further policy easing in a seemingly syncronous effort at economic stimulus. The Bank of England held steady with its key interest rates but did announce an increase in asset acquisition totaling 50 billion Euros. In a similar move ECB chairman Mario Draghi announced that the central bank would lower the benchmark rate by .25% to an all time low of .75%. The ECB also lowered its overnight deposit rate for banks to 0% in hopes of stimulating inter-bank lending.

Reports from China this morning announced that the government had cut its key lending rate for the second time in a month. The Chinese central bank lowered its one year deposit rate on the Yuan by 25 basis points and the lending rate by 31 bps. The central bank also relaxed the rules on lending for the country's banks by allowing to lend at a rate 70% below the benchmark.

European shares posted modest declines on the slew of economic information from around the world. The CAC 40 led the decline with a -1.41% loss, followed by the XETRA DAX's -0.89% and the FTSE 100 with a much smaller -0.15% retreat. Asian shares ended a little bit more upbeat with the Nikkei losing -0.27% and the Hand Seng gaining +0.5% and the Shanghai Composite shedding -1.17%.

The price of gold fell about -0.8% following the European and Chinese rate cuts. The CBOE Gold Index lost about -.5% in response to the decline in gold prices. The index is still above the short term moving average, a level regained earlier this week.

GOX, daily

The prices of oil and gas traded mixed today. Oil inventory data was released today due to the Independence Day holiday yesterday and revealed a larger than expected decline. Oil inventories fell by 4.3 million barrels in the last week but the diminished supply did not outweigh speculation over the slowing economy and global demand. The prices of gasoline and Brent crude however rose in today's trading. The iPath Total Return Crude Oil ETF dropped about 1% today but remained above the short term moving average.

OIL, daily

The nations retailers who participate in providing comparable store sales figures release their data today. The sector as a whole was dissapointing but there were a few bright spots. The stagnant jobs market and sluggish global economy has had its impact on the sector and has caused some companies to revisit this years guidance. Cato Group was one of the biggest dissapointments. The stock posted one of the days biggest percentage declines. The chain of women's apparel retailers posted a whopping 10% drop in comp store sales during June, down from the 3% increase in May. The company reported the declines as “below expectations” and continues to open and continues to make adjustments to operations in effort to improve results.

Cato, daily

Target reported a 2.6% gain in same store sales for the five week period. The increase was at the low end of their own expectations but above analyst estimates. The company's CEO restated that the company is expecting to perform as previously stated in earlier guidance. The stock traded in a wide range today but was able to stay above the short term moving average.

Target, daily

Limited Brands made an impressive 7% gain in comparable store sales. The operator of brands like Victoria's Secret also reported a 7% gain in sales for the quarter-to-date. Net sales for the period are slightly lower than last year but when adjusted for one time gains made last year attributable to sales of business assets are ahead of last year. The stock made a 5% jump today on a mild spike in volume and improving technical indicators.

Limited, daily

Kohl's posted a larger than expected decline in comparable store sales but was able to maintain its guidance for the quarter but at the low end of the expected range. The stock made a 7% jump today on high volume to come right up to a resistance level.

Kohl's, daily

Two coal companies were among today's most heavily traded stocks. James River Coal and Patriot Coal both made high volume breaks above their short term moving averages today. The coal sector has been hit hard over the last six months but expectations for record demand out of China has speculators moving toward the sector. James River Coal Company rose more than 16% today and could spark some short covering. Patriot Coal gained a stunning 25% in today's session.

James River Coal Company, daily

Patriot Coal Company, daily

The energy sector as a whole helped to lead the entire market lower, posting the biggest losses among the S&P sectors. The Energy Sector Spider fell by about 1.5% today. The ETF has recently broken above its short term moving average but is facing resistance at $70.

Energy Sector Spider, daily

Apple was heavily traded today as well. The stock broke back above $600 for the first time in two months. Rumors of a new “mini” i-Pad were out in the news and could have something to do with today's gain in the stock. Apple appears to have solid support at the $550 level and is moving up from there with supportive technical indicators.

Apple, daily

Netflix shares surged over 10% today on news the company's streaming business is booming. The company's CEO boasted on Facebook that over 1 billion hours of entertainment were streamed from the website. This comes on the heels of bullish comments from a Citi analyst earlier this week. Option activity in the stock is about three times normal with put/call ratio at 0.44.

Netflix, daily

The banking sector was also fairly active today. Bank of America, JP Morgan and Citigroup all traded down today following the moves made by the European and Chinese central banks. JP Morgan made the biggest decline, leading the entire sector lower. The entire sector is facing a lot of headwinds, including heavy technical resistance. The Financial Sector Spyder just crested a one month high on waning momentum as it approaches resistance at $15 and $16.

Bank of America, daily

JP Morgan, daily

Citigroup, daily

XLF, daily

The Dow Jones Industrial Average traded down today by about -.35% on very light volume. The economic data today was more or less as expected and have not given any new insight into the second half of the year. The moves made by the Chinese and European Central Banks could help stimulate economic growth in the second half of 2012 but the question of whether or not it is enough is still being asked. The Dow is approaching long term resistance set during the steep decline of 2008 and currently has bearish momentum. Tomorrows job report could be the catalyst to move the market higher but I think it will take more than one months data to make any significant bullish impact right now. The shorter term chart suggests that the Dow is at resistance and the index's momentum is divergent from the most recent short term high.

Dow, weekly

Dow, daily

The S&P 500 is similiarly positioned, approaching long term resistance set back in 2008. Momentum is divergent from the short term advance from June into July and suggests weakness.

S&P 500, daily

The Nasdaq managed to eke out a gain today, led by tech stocks. The index is also at a one month high trending weakly.

Nasdaq, daily

Tomorrow watch out for two important numbers from the job sector. US non-farm payroll numbers and the unemployment rate for June. The non-farm payrolls number is expected to be around 90,000 but I have seen estimates ranging from 50,000 to 150,000. The unemployment number is expected to remain steady at 8.2% in light of the recent up-tick in jobless claims.

Thomas Hughes


New Option Plays

Expect the Market to Move

by James Brown

Click here to email James Brown

Editor's Note:

The stock market has stalled as traders wait for the June jobs report, which is due out tomorrow morning before the opening bell. A month ago the May jobs report showed a disappointing +69,000 gain. Economists are expecting tomorrow's report to show +90,000 new jobs. However, in just the last few days it seems that analysts have grown more positive on tomorrow's report. Many are expecting a number in the +100K to +125K instead. A better than expected report could help refuel the market's rally. On the other hand if investors are expecting good news then a disappointing number would spark an exaggerated sell-off, especially in this low-volume environment.

We are not adding any new trades tonight as we wait for tomorrow's market-moving economic data.


In Play Updates and Reviews

Stocks Churn Ahead of Jobs Report

by James Brown

Click here to email James Brown

Editor's Note:

The market's rally has paused as investors wait for the jobs report due out at 8:30 a.m. tomorrow morning.

Our SAM trade was closed at the opening bell this morning.

Current Portfolio:


CALL Play Updates

American Tower Corp. - AMT - close: 71.22 change: -0.21

Stop Loss: 69.35
Target(s): 74.50
Current Option Gain/Loss: +23.2%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
07/05/12 update: Thursday was a quiet day for AMT. Shares spent the session drifting sideways in a narrow range. Readers may want to look for a dip back toward the $70.50-70.00 zone as a new entry point.

- Suggested Positions -

Long Aug $70 call (AMT1218H70) entry $2.15

07/02/12 new stop loss @ 69.35
06/29/12 triggered @ 70.25

Entry on June 29 at $70.25
Earnings Date 08/02/12 (unconfirmed)
Average Daily Volume = 2.3 million
Listed on June 27, 2012


Athenahealth, Inc. - ATHN - close: 83.12 change: +0.51

Stop Loss: 79.85
Target(s): 89.00
Current Option Gain/Loss: +30.0%
Time Frame: exit prior to earnings on July 19th
New Positions: see below

Comments:
07/05/12 update: ATHN bounced between $82 and $84 and eventually settled with a +0.6% gain. That's good enough to outperform the major indices on Thursday. I am not suggesting new positions at this time. The $80.00 mark should be support.

Earlier Comments:
We'll aim for $89.00 but conservative traders may want to exit early near the June highs (about $87). We will plan to exit prior to the July 19th earnings report. FYI: The Point & Figure chart for ATHN is bullish with a $92 target.

- Suggested Positions -

Long Jul $85 call (ATHN1221G85) Entry $2.00

07/03/12 new stop loss @ 79.85

Entry on July 03 at $81.51
Earnings Date 07/19/12 (confirmed)
Average Daily Volume = 481 thousand
Listed on July 02, 2012


Costco Wholesale - COST - close: 94.00 change: -0.42

Stop Loss: 93.25
Target(s): 99.00
Current Option Gain/Loss: Jul$92.50c: +31.0% & Aug95c: + 73.8%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
07/05/12 update: Analysts were expecting June same-store sales of +3.7% for COST. The company reported +3.0% and the stock initially spiked lower almost hitting our new stop loss. It looks like the disappointment might have been a reflection of a drop in gasoline prices because excluding gas sales COST's same-store sales were up +5%. Shares spent the rest of the day moving sideways. I am not suggesting new positions at this time.

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

07/03/12 new stop loss @ 93.25, readers may want to take profits now
06/30/12 new stop loss @ 91.75
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


McKesson Corp. - MCK - close: 94.53 change: -1.14

Stop Loss: 93.25
Target(s): 99.00
Current Option Gain/Loss: Jul92.50c: + 8.5% & Aug95c: + 5.2%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
07/05/12 update: MCK underperformed the market on Thursday with a -1.1% decline. Shares look headed toward the $94.00 level. I am not suggesting new positions at this time.

- Suggested Positions -

Long Jul $92.50 call (MCK1221G92.5) Entry $2.21

- or -

Long Aug $95 call (MCK1218H95) Entry $1.90

07/03/12 new stop loss @ 93.25
06/29/12 triggered on gap higher at $94.47 (trigger was 93.55)

Entry on June 29 at $94.47
Earnings Date 07/30/12 (unconfirmed)
Average Daily Volume = 1.6 million
Listed on June 28, 2012


PUT Play Updates

Deckers Outdoor Corp. - DECK - close: 47.49 change: +3.31

Stop Loss: 50.05
Target(s): 42.00
Current Option Gain/Loss: Jul45p: - 48.1% & Aug45P: -15.5%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
07/05/12 update: Today looks like a short squeeze on DECK. Low volume in the market due to the midweek holiday combined with some retail-sector strength helped spark a squeeze. DECK outperformed with a +7.49% gain.

The $50.00 level should be overhead resistance. 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

06/29/12 DECK almost hit our target but bounced at $42.16
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


FLIR Systems - FLIR - close: 19.76 change: +0.05

Stop Loss: 20.35
Target(s): 17.75
Current Option Gain/Loss: Jul20p: -42.1% & Aug19p: -38.4%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
07/05/12 update: FLIR rallied up to tag its 20-dma before starting to pare its gains. The $20.00 level should also be overhead resistance. I am not suggesting new positions at this time.

FYI: The Point & Figure chart for FLIR is bearish with a $7 target.

- Suggested Positions -

Long Jul $20 PUT (FLIR1221S20) Entry $0.95

- or -

Long Aug $19 PUT (FLIR1218T19) Entry $0.65

Entry on July 02 at $19.56
Earnings Date 07/20/12 (unconfirmed)
Average Daily Volume = 1.7 million
Listed on June 30, 2012


J.C.Penney Co. - JCP - close: 22.50 change: +0.62

Stop Loss: 22.51
Target(s): 19.50, 15.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
07/05/12 update: Overall the trend in June same-store sales figures for the retail sector were a bit disappointing. Yet the sector managed to rally anyway. JCP managed a +2.8% gain in this low-volume market.

Currently we're waiting for a breakdown. We are suggesting a trigger to launch bearish positions at $21.30. Our first target is the 2010 lows near $19.50. Our second much more aggressive target is $15.50.

FYI: The Point & Figure chart for JCP is bearish with a $7.00 target.

Trigger @ 21.30

- Suggested Positions -

buy the Jul $20 PUT (JCP1221S20)

- or -

buy the Aug $20 PUT (JCP1218T20)

Entry on July xx at $ xx.xx
Earnings Date 08/08/12 (unconfirmed)
Average Daily Volume = 9.3 million
Listed on July 03, 2012


Youku Inc. - YOKU - close: 20.54 change: -0.28

Stop Loss: 21.25
Target(s): 16.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
07/05/12 update: YOKU is hovering just under short-term resistance at the $21.00 mark. I don't see any changes from my prior comments.

I am suggesting we launch small bearish positions if YOKU trades at $19.90 or lower. We'll use a stop loss at $21.25. More conservative traders may want to wait for YOKU to trade under the May low of $19.47 before initiating positions instead. If triggered our target is $16.00.

FYI: We want to keep our position size small because YOKU already has a high amount of short interest. The most recent data listed short interest at almost 19% of the 50.2 million share float and that raises the risk of a short squeeze higher.

Trigger @ 19.90 *Small Positions*

- Suggested Positions -

buy the Jul $19 PUT (YOKU1221S19)

- or -

buy the Aug $19 PUT (YOKU1218T19)

Entry on July xx at $ xx.xx
Earnings Date 08/08/12 (unconfirmed)
Average Daily Volume = 1.3 million
Listed on July 02, 2012


CLOSED BULLISH PLAYS

Boston Beer Co. - SAM - close: 127.98 change: +0.97

Stop Loss: 117.25
Target(s): 127.50
Current Option Gain/Loss: +49.2%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
07/05/12 update: Our plan was to exit at the open to lock in gains. If you chose to hold on then SAM would have hit our exit target at $127.50. The option closed with a bid at $6.80. Our exit was at $5.00**.

Shares opened at $126.99 (virtually flat).

- Suggested Positions -

Long Aug $125 call (SAM1218H125) Entry $3.35* exit $5.00** (+49.2%)

**option price is an estimate since it did not trade at the time of our exit. 07/05/12 exit at the open
07/03/12 prepare to exit at the open on Thursday morning
*option entry price is an estimate. option did not trade when our play opened
06/29/12 triggered @ 120.25

chart:

Entry on June 29 at $120.25
Earnings Date 08/02/12 (unconfirmed)
Average Daily Volume = 117 million
Listed on June 27, 2012