Option Investor
Newsletter

Daily Newsletter, Thursday, 7/19/2012

Table of Contents

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

Market Wrap

Earnings Trump Data

by Thomas Hughes

Click here to email Thomas Hughes
Earnings news seems to be trumping economic data. A surprise jump in unemployment claims, weak home sales and drop in the leading indicators failed to reverse the short term rally.



This mornings futures trading pointed to a continuation of the bounce up from last weeks lows. A surprising jump in jobless claims failed to dampen the earnings driven advance which continued into the first hour of trading. Initial claims for unemployment made a “surprising” jump this week, far exceeding analysts expectations. The jump is blamed on seasonal volatility associated with expected auto industry lay offs. If the volatility was and is expected I don't understand why the increase of 34,000 claims was such a surprise. Initial claims came in at an elevated 386,000 in the week ending July 14, just shy of the years highest levels, set back during the Easter season lay offs. Economists are expecting the volatility in claims to continue through July so initial claims will be less important than the four week moving average. The average fell this week by 1500 to 375,000 claims, the fourth week of declines in this metric.


Continuing claims rose by a small 1,000 to 3.31 million. There is still downward bias in the trend of continuing claims but the data has been holding steady around 3.3 million for nearly two months now. The total number of claims for unemployment, lagging the initial claims data by two weeks, fell by 121,000 to the years lows 5.75 million. The jobs data has been weak all year and is not expected to improve if statements from Ben Bernanke and the FOMC over the last few weeks concerning the jobs market are to be believed.



Traders seemed to shrug off the unemployment data in the face of earnings and focus has turned to the bottom line. A number of big names have reported so far, beating Wall Street estimates for bottom line earnings. One trend that has been recognized by more than one pundit is how many companies are beating estimates for earnings but missing the target on revenue.

The markets did indeed open higher today and the gains extended into the first hour of trading. Around 10:30 another round of discouraging data sent the markets into negative territory, if only briefle. Once again, however, the evidence of our slowing economy failed to contain the markets and they moved higher again, testing and surpassing the days highs.

Existing home sales fell by 5% in June, possibly in response to a slight rise in prices. June was the weakest month for home sales since last October but is still up +4% over the same time last year. Though improving, the housing market remains depressed and below rates considered to be healthy for the economy. First time buyers were only 32% of the market, another indicator of the sluggishness of the housing recovery.

The Philadelphia Federal Reserve Business Outlook Survey came in at -12.9%. A larger than expected negative reading but an increase from the previous months -16%. Regardless of the number, the reading indicates contraction among businesses surveyed by the Philly Fed. Adding to the gloom was the leading indicators index, also falling more than expected. More than half of the indicators, 6 of 10, declined. Analysts had been predicting a -0.1% drop, the actual was -0.3%.

There was little news from Asia or Europe, their eyes are on us for the time. Nothing has changed since last week and US earnings are just more interesting now. Asia ended their trading day up, helping to support our own opening. The Hang Seng led the Asian markets with a 1.66% advance, followed by the Nikkei and Shang Hai indexes with 0.79% and 0.73%. China reported that it's big four banks had double their lending in July, but was mostly on government backed investments. The biggest story from the region is Yum! Brands. The company released its earnings yesterday and revealed some interesting things. The company's China revenue makes up about 50% of its total, and were hurt by rising inflation in the country. Rising wage and food prices were cited as reasons for declining margins and lower profits. Now, with corn prices surging, China and the rest of Asia are expected to face even more inflationary pressure. Yum! Brands is expecting to recover from the slump and meet its full year guidance of at least 12% eps growth.

Yum! Brands, daily

Europe even quieter than Asia. European shares climbed modestly and hit a four month high on a string of positive earnings reports from some European based companies. The Xetra Dax gained 1.11%, followed by the CAC 40 and FTSE with 0.87% and 0.5%.

The precious metals gained some ground today on a slightly weaker dollar. The advance was led by copper, gaining around 1.75% during today's trading. Gold traded up as much as 1% today, followed by silver's more modest .3%. The rising stock prices in Europe led to a strengthening of the Euro versus the Dollar, which lost ground against several other world currencies today. The Gold Index moved up today but is still trading near multi-year lows.

CBOE Gold Index, daily

Oil gained 3% as eyes turned to Syria. Escalating hostilities there are threatening to disrupt supply and boosting energy prices. Oil is now at a two month high and could continue to rise while the Syrian conflict ensues.

Walgreen's was the story stock of the morning, announcing a deal with Express Scripts. The long awaited deal was a relief to investors, boosting the stock by more than 12%. The deal is expected to benefit both companies. The jump brought the stock above the 200 day moving average but failed to breach long term resistance. Momentum is bullish but I would like to see a strong move above $35 in order to get bullish on this one.

Walgreen Co, daily

Morgan Stanley continued the trend set by the other big banks this earnings season. The investment giant reported higher earnings on lower revenue. The gains are a reversal of losses in the same period last year and an added sign that the company and its business have been improving. Unfortunately, when taking into consideration the top line short comings of Morgan Stanley and others like American Express revenues are not growing despite the improvements to operations. The earnings, while an improvement over last year, also fell short of expectations and sent the stock looking for support. MS lost over 6.5% today and is approaching long term support.

Morgan Stanley, daily

The Financial Sector Spider (XLF) lost about 1% today. The ETF has been trading to the negative all week, in spite of the up beat earnings reports. The ETF failed to make a new high in the short term and is facing technical resistance moving forward. That, combined with expectations of further economic decline in the second half of the year, could hinder any advances.

Financial Spider, daily

The smaller, regional financials are reporting results surpassing their larger counterparts. BB&T announced record quarterly earnings today and a 62% increase in earnings per share. The bank made improvements in interest and non-interest income, increased margins and lowered costs. Shares of the stock jumped significantly today, piercing long term resistance and forming an interesting candle. This one bears close watching. A move above $32.50 could signal further gains in the stock.

BB&T, daily

FifthThird Bancorp reported some decent results today as well but the stock did respond favorably. The bank improved revenue over the same period last year on increased revenues. FifthThird beat the expectations of $0.35 per share by a full nickel. The stock traded up briefly today only to touch a resistance level and trigger some selling. If FifthThird can maintain this level, and break through $14.00, it could continue upward. The company reported positive earnings trends and favorable credit conditions that it expects to continue.

FifthThird Bancorp, daily

Dole Food Company traded quietly today in anticipation of earnings results reported after the bell. Based on the 16% short interest I would say that investor expectations were low. Dole reported earnings and revenue in line with corporate guidance and announced the possibility of spinning off one or more parts of its business as part of restructuring. The stock, which has been trading near five year lows, climbed over 2% in after hours trading. Tomorrow could see a short squeeze in this stock.

Dole Food Company, daily

Technology giants AMD, Microsoft, Google and Sandisk also reported after the bell. AMD stock traded down today on elevated volume but did not break through its support zone. The company was expected to earn $0.07 per share on revenue of $1.41 billion. AMD had previously announced lowered preliminary results so there was nothing surprising in the report. The bad news is that AMD further lowered its guidance for the next quarter and sent shares down in after hours trading.

AMD, daily

Sandisk was expected to earn about $0.19 per share but actually earned $0.21 on a non-gaap basis. The company beat earnings estimates on a reported a 25% decline in revenues on a year-over-year basis. Sound familiar? The stock made some big gains today ahead of the announcement and extended them following it. The momentum indicators are consistent with a bottom, at least in the short term, indicating that Sandisk could move up. A move to the next resistance level of $40 would close the window opened in May.

Sandisk, daily

Google and Microsoft both reported results echoing those of other big names this quarter; Earnings beat but revenue fell short. Microsoft jumped in after hours trading to break through near term resistance. The stock looks good to advance to the $33 level where it will faced further technical resistance. Microsoft also announced the arrival of Windows 8 this October. The release of the new operating system should be a strong driver of sales and help Microsoft increase revenue in the fourth quarter of calendar 2012. Google reported earnings of $10.12 per share, up from $8.74 in the year ago period. Analysts had been expecting slightly lower earnings on slightly higher revenue. Google also jumped in after market trading to cross above near term resistance with a spike in volume.

Microsoft, daily

Google, daily

Fast casual food retailer Chipotle Mexican Grill was not able to please investors. The stock, which had gained about 5% during today's trading lost it all and more following the earnings release. The company was able to produce gains that met or beat expectations except in one area, same store sales. Same store sales increases were a mere 8% versus the expected 10% and sent the shares tumbling.

Chipotle Mexican Grill, daily

The afternoon trading today turned out to be as directionless as the morning. After reaching the days highs around 12:30 pm stocks drifted back down toward the days lows only to bounce back up to end near the middle of the days range. The S&P 500 has moved into the lower end of my target zone of 1370-1400, coincident with the 78% retracement of the 2008-2009 bear market. In the near term, the S&P is making a new high, but it is very weak and comes on divergent momentum. Earnings may continue to push the market higher but I think that the reality of global economic conditions will weigh heavily on any advances.

SPX, one day

SPX, daily

The VIX continued to work its way down to the 15 level. The fear index is near its multi-year lows and could be signaling further advance in the S&P 500 for the near term. In the long term, with the VIX at such low levels, I will be looking out for spikes in volatility and indications of a potential market turnaround.

VIX, daily

The Dow also traded up to its resistance line today before retreating. The momentum indicators for the blue chip index are even weaker than in the S&P. The index is being pushed up by positive earnings, but the earnings reports are only positive because of reduced estimates. To me, this only means that business is not quite as bad as feared. In order to have a sustainable rally corporate earnings are going to have start beating increased estimates, proving growth. The fact that bottom line numbers are better than expected does reveal that businesses are improving, but the top line misses are highlighting the fact that the global economy is still slowing. The Dow is climbing the proverbial wall of worry and may be setting itself up for a fall.

Dow Jones Industrial Average, daily

The Nasdaq traded near to its resistance line but did not touch it. The Nasdaq could lead the general markets higher tomorrow in the wake of the Google and Microsoft earnings releases.

Nasdaq,daily

Relief over this quarters earnings will probably keep the markets moving higher in the short term. In the longer view, economic data does not support hopes for corporate growth, at least in an international perspective. The American market remains a driver of growth for many businesses but may not be enough to drive earnings growth, especially if China and Europe keep slowing. Tomorrow is free of any major economic releases and will be dominated by earnings, there are a handful of regional banks reporting as well as General Electric, Schlumberger, Ingersoll-Rand and Xerox.

Thomas Hughes


New Option Plays

Industrial Goods & Biotech

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Mohawk Industries - MHK - close: 72.55 change: +1.09

Stop Loss: 69.75
Target(s): 78.50
Current Option Gain/Loss: Unopened
Time Frame: exit prior to the Aug. 2nd earnings
New Positions: Yes, see below

Company Description

Why We Like It:
MHK makes flooring and carpet. The stock has spent the last three weeks churning under resistance near $70.00. The last two days have seen a breakout past this level with today's session retesting $70 as new support.

I am suggesting we buy calls at the open tomorrow with a stop under today's low. There is potential resistance at the May highs (near $75.00) but we're aiming for $78.50. FYI: The Point & Figure chart for MHK is bullish with an $85 target.

- Suggested Positions -

buy the Aug $75 call (MHK1218H75) current ask $2.05

Annotated Chart:

Entry on July xx at $ xx.xx
Earnings Date 08/02/12 (unconfirmed)
Average Daily Volume = 408 thousand
Listed on July 19, 2012


NEW DIRECTIONAL PUT PLAYS

Pharmacyclics Inc. - PCYC - close: 49.70 change: -2.80

Stop Loss: 51.05
Target(s): 45.05
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
PCYC, like most stocks that go parabolic, the rally eventually runs out of gas. It appears that PCYC has peaked at resistance near $60.00 back in early July. The initial correction took it down to $50 and the oversold bounce struggled at $55. Now PCYC is breaking down under short-term support at $50.00.

I am suggesting puts if PCYC confirms this breakdown. Today's low was $48.53. We'll use a trigger at $48.40. Our target is $45.05 but readers could aim for the simple 50-dma instead (currently near $42). FYI: The most recent data listed short interest at 11% of the 45 million-share float.

Trigger @ 48.40

- Suggested Positions -

buy the Aug $45 PUT (PCYC1218T45) current ask $1.90

Annotated Chart:

Entry on July xx at $ xx.xx
Earnings Date 09/12/12 (unconfirmed)
Average Daily Volume = 1.8 million
Listed on July 19, 2012



In Play Updates and Reviews

Earnings Season Diet

by James Brown

Click here to email James Brown

Editor's Note:

Our current portfolio of plays is getting slim thanks to earnings season. In the last few days we have had a number of stocks either hit our exit target or get stopped out. We try to avoid holding positions over an earnings report and that has made adding new candidates a challenge. However, that will change soon as we move deeper into earnings season with more and more companies reporting.

Today we had CVS, FLIR, FOSL, and JCP all hit our stops. JOY was removed. I am suggesting an early exit to lock in profits on WLK.

Current Portfolio:


CALL Play Updates

Costco Wholesale - COST - close: 95.95 change: -0.01

Stop Loss: 93.95
Target(s): 99.75
Current Option Gain/Loss: -11.4%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
07/19/12 update: COST churned sideways with traders buying the intraday dip near $95.00. The stock closed virtually unchanged. Readers may want to wait for a new high over $96.50 before initiating positions.

FYI: The Point & Figure chart for COST is bullish with a $116 target.

- Suggested *SMALL* Positions -

Long AUG $97.50 call (COST1218H97.5) Entry $0.96

Entry on July 18 at $95.68
Earnings Date 10/11/12 (unconfirmed)
Average Daily Volume = 2.0 million
Listed on July 17, 2012


PetSmart, Inc. - PETM - close: 69.55 change: +0.01

Stop Loss: 67.75
Target(s): 74.75
Current Option Gain/Loss: Unopened
Time Frame: exit prior to the mid August earnings report
New Positions: Yes, see below

Comments:
07/19/12 update: PETM also spent the day consolidating sideways and closed almost unchanged on the session. We are waiting for a breakout past resistance at $70.00.

I am suggesting a trigger to buy calls at $70.25. Our target is $74.75.

Trigger @ 70.25

- Suggested Positions -

Buy the Aug $70 call (PETM1218H70)

Entry on July xx at $ xx.xx
Earnings Date 08/15/12 (unconfirmed)
Average Daily Volume = 1.0 million
Listed on July 18, 2012


Westlake Chemical Corp. - WLK - close: 58.79 change: +0.50

Stop Loss: 52.35
Target(s): 62.00
Current Option Gain/Loss: +78.5%
Time Frame: exit prior to earnings on August 2nd
New Positions: see below

Comments:
07/19/12 update: WLK continues to march higher although the rally did start to stall once shares neared overhead resistance at $60.00. The high today was $59.69.

We are going to take a cautious approach here and exit positions at the open tomorrow morning to lock in gains. The current bid on our call is $2.00 (+78.5%).

- Suggested Positions -

Long Aug $60 call (WLK1218H60) Entry $1.12

07/19/12 prepare to exit at the open tomorrow
07/13/12 trade triggered @ 54.55
07/12/12 adjusted the trigger to buy calls to $54.55, stop to 52.35
07/11/12 removed the July option

Entry on July 13 at $54.55
Earnings Date 07/31/12 (unconfirmed)
Average Daily Volume = 543 thousand
Listed on July 09, 2012


PUT Play Updates



Currently we do not have any active put trades.




CLOSED BULLISH PLAYS

CVS Caremark Corp. - CVS - close: 45.43 change: -3.02

Stop Loss: 46.75
Target(s): 52.00
Current Option Gain/Loss: - 2.1%
Time Frame: exit prior to the August 76th earnings
New Positions: see below

Comments:
07/19/12 update: It was not a good day for shares of CVS. The company's rival, Walgreens (WAG) finally settled a long-running dispute with drug plan manager Express Scripts (ESRX). CVS has been the beneficiary of this quarrel, gaining business while WAG and ESRX argued over contracts. Today's news of a multi-year deal between WAG and ESRX definitely knocked shares of CVS for a loss. The stock (CVS) opened lower at $45.98 and closed under what should have been support near $46.00 and managed to hold the 100-dma (for now).

We had a stop loss at $46.75 but the gap open lower immediately closed our trade.

- Suggested Positions -

Aug $50 call (CVS1218H50) Entry $0.47 exit $0.21 (-55.3%)

07/19/12 stopped out on gap open lower at $45.98
07/17/12 triggered @ 48.40

chart:

Entry on July 17 at $48.40
Earnings Date 08/076/12 (confirmed)
Average Daily Volume = 7.3 million
Listed on July 14, 2012


CLOSED BEARISH PLAYS

FLIR Systems - FLIR - close: 19.47 change: +0.32

Stop Loss: 19.45
Target(s): 17.05
Current Option Gain/Loss:(Jul20p: +42.1%) & Aug19p: -38.4%
Time Frame: exit prior to the late July earnings report
New Positions: see below

Comments:
07/19/12 update: I cautioned readers yesterday that FLIR would likely hit our stop loss at $19.45 if there was any follow through higher on yesterday's rally. Sure enough, the stock continued to inch higher and added another +1.6%. Our stop was hit.

- Suggested Positions -

*closed 07/18/12 at the open*
Jul $20 PUT (FLIR1221S20) Entry $0.95 exit $1.35 (+42.1%)

- or -

Aug $19 PUT (FLIR1218T19) Entry $0.65 exit $0.40 (-38.4%)

07/19/12 stopped out at $19.45
07/18/12 closed the Jul $20 put at the open
07/17/12 prepare to exit the July $20 puts at the open tomorrow
07/16/12 Exit Strategy Change: New Target: 17.05
after the bell tonight FLIR issued an earnings warning.
*07/14/12 can't get a good quote on the July 20 put. This is an estimate.
07/12/12 new stop loss @ 19.45
07/11/12 odd bid/ask spread on the July $20 puts affecting our P/L.

chart:

Entry on July 02 at $19.56
Earnings Date 07/26/12 (confirmed)
Average Daily Volume = 1.7 million
Listed on June 30, 2012


Fossil, Inc. - FOSL - close: 72.15 change: +4.05

Stop Loss: 70.05
Target(s): 60.50
Current Option Gain/Loss: -46.1%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
07/19/12 update: It looks like bulls have the bears on the run. FOSL broke through short-term resistance at $68 and at $70.00 and now FOSL is testing its 50-dma. Our stop loss was hit at $70.05. Yesterday I cautioned readers that FOSL wasn't cooperating and that readers should consider an early exit.

- Suggested Positions -

Aug $60 PUT (FOSL1218T60) Entry $2.60 exit $1.40 (-46.1%)
07/19/12 stopped out at $70.05
07/18/12 FOSL is not cooperating. Readers may want to exit early now!
07/12/12 FOSL has produced a one-day bullish reversal pattern.

chart:

Entry on July 11 at $65.99
Earnings Date 08/07/12 (unconfirmed)
Average Daily Volume = 1.3 million
Listed on July 10, 2012


J.C.Penney Co. - JCP - close: 20.66 change: +0.95

Stop Loss: 21.35
Target(s): 19.50, 15.50
Current Option Gain/Loss: -10.8%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
07/19/12 update: Influential investor Bull Ackman issued bullish comments on JCP today and they sparked some short covering in the stock. JCP gapped open higher near $20.00 and then spiked toward $21.50 before paring its gains. Our stop loss was hit at $21.35.

- Suggested Positions -

Aug $20 PUT (JCP1218T20) Entry $1.20 exit $1.07 (-10.8%)

07/19/12 JCP hit our stop at $21.35
07/16/12 If you missed it the first time JCP hit our 1st target at $19.50 again.
07/12/12 new stop loss @ 21.35
1st target hit at $19.50, option bid @ $1.75 (+45.8%)
07/10/12 triggered @ 21.30

chart:

Entry on July 10 at $21.30
Earnings Date 08/08/12 (unconfirmed)
Average Daily Volume = 9.3 million
Listed on July 03, 2012


Joy Global, Inc. - JOY - close: 52.90 change: +1.07

Stop Loss: 51.05
Target(s): 45.25 and 41.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
07/19/12 update: JOY is not cooperating. Our plan was to buy puts as JOY continued lower. Yet shares have managed to bounce instead. The larger trend is still down and I would not consider bullish traders until we saw JOY close over technical resistance at its 50-dma.

We are choosing to drop JOY as a candidate for now.

Trigger @ 48.49

Our trade did not open.

07/19/12 removed. Trade did not open.

chart:

Entry on July xx at $ xx.xx
Earnings Date 08/29/12 (unconfirmed)
Average Daily Volume = 2.2 million
Listed on July 16, 2012