Option Investor
Newsletter

Daily Newsletter, Tuesday, 10/9/2012

Table of Contents

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

Market Wrap

Suddenly Economics Matter?

by Jim Brown

Click here to email Jim Brown

The IMF cut its global growth forecasts and warned of "alarmingly high risk" of a deeper global slump.

Market Statistics

The IMF blamed the U.S. and Europe for not doing enough to address economic threats. The IMF warned that U.S. lawmakers had to resolve the fiscal cliff issues that will send the country into recession in 2013 and depress global markets. The IMF warned that Europe must follow through on the plan for a integrated fiscal union, good luck with that, cut interest rates and stop austerity to keep Europe from falling into a deeper, longer term recession.

The IMF cut estimates for global GDP to +3.3% for 2012 compared to their last estimate cut to +3.5% in July. They cut global GDP estimates for 2013 from +3.9% to +3.6% with a 20% chance of growing at less than 2%.

This downgrade of expectations should not be a surprise to anyone. They have been routinely cutting estimates for some time but it was the addition of the "alarmingly high risk" statement that got everyone's attention.

The IMF said global confidence remains "exceptionally fragile" and increased risk aversion has slowed capital flows to emerging markets.

The 17 nation eurozone is expected to see negative GDP growth of -0.4% for 2012 and grow only +0.2% in 2013. That is extremely wishful thinking on the part of the IMF given the disasters in progress in Greece, Spain, Portugal, etc. They think Spain will decline -1.3% in 2013. That compares to some estimates as high as -4.5%.

When the IMF claims the global GDP will only increase by +3.6% in 2013 they are taking into account China +8.2% and India +6.0% growth. Those two nations account for 40% of the global population but only a fraction of the global economy. They are growing rapidly but still have a ways to go.

Another risk stated by the IMF was a hike in the average price of oil to more than $105 for all of 2013. That estimate has risen from $94.16 as recently as July.

It is not like we have not been aware of the deterioration in global economics. We hear it every day. The Teflon market has been in ignore mode. Eventually fundamentals matter and the weak global economics are going to have an impact on Q3 earnings. Why was today different? When the market needs to take profits traders will find an excuse. In this case it was the "alarmingly high risk" phrase in the IMF press release.

In the U.S. it was a light day for economics. The California Manufacturing Survey for Q4 declined from 61.1 to 58.0. That is the first slowdown in California manufacturing since 2011. New orders declined from 65.7 to 60.9 but anything over 50 is still growth. Employment fell from 56.0 to 52.9. The California survey is normally ignored by the market so no waves here.

The big news headlines came from Europe. The Troika said it was considering extending the deadline for Greece to meet a +4.5% GDP surplus from 2014 to 2016. Since Greece can't meet it anyway the Troika has no choice but to save face, avoid pushing Greece out of the euro and instead kick the can farther down the road. However, extending the deadline means Greece will need more money. There would be a 12 billion euro financing gap in addition to the 31 billion that has been on hold since June. The Troika spokesman said there was no consensus on who would contribute to the gap and how it would be handled. The IMF is adamant that Greece's debt be sustainable in order for the IMF to continue financing the bailout. For the IMF that means a debt to GDP of not more than 120% by 2020. Greece has zero chance of making that happen without another wholesale write-down of existing debt.

No big shock from the Troika review of Greece. More than 89 actions agreed to in the prior bailouts have yet to be completed and the IMF said all must be completed before they get any future funds. In a press conference IMF head, Christine Lagarde, said much more work needs to be done. "Acting means acting not just speaking" and "The list of prior actions MUST be implemented."

These headlines are all for show. Greece has no money and will default and go bankrupt without the next tranche of funds. EU Finance Ministers are going to whine and complain but in the end they will give Greece the money. The same process will apply to Spain when it begins the bailout dance later this month. Headlines will fly and officials will make demands but eventually they will buckle under and give Spain support.

A bigger headline was the tens of thousands of Greek citizens that showed up to protest the visit of German Chancellor Angela Merkel to Greece. Despite a ban on protests and beefed up security in certain areas a crowd of as many as 25,000 demonstrated in central Athens. Despite the protests the visit concluded peacefully with Merkel claiming Greece was a valued partner in the eurozone. I am very glad the demonstrations did not turn deadly and cause an international incident. Still, the video of protestors in the news was a weight on the market.

Tomorrow the eurozone finance ministers meet and will discuss Greece and Spain along with other issues. This meeting should be tame and headlines muted.

The Fed Beige Book on Wednesday afternoon will update economic conditions in all the Fed regions. No material change is expected and the report will try to put a positive spin on any negative points.

Economic Calendar

The headlines everyone was waiting for was the start of the Q3 earnings cycle with earnings from Alcoa and Yum Brands. Alcoa (AA) reported earnings after the close of 3 cents excluding charges. Analysts were expecting breakeven earnings so this was a small beat. Revenue declined from $6.42 billion to $5.83 billion and beat the estimates of $5.56 billion.

Alcoa's minor earnings beat was tempered by its lowered guidance. Alcoa said demand would rise only +6% in 2013 compared to prior estimates in July of 7% growth. That compares to actual growth in 2011 of +10% and +13% in 2010. The shrinking demand is crushing prices. Aluminum on the LME averaged $1,950 a ton in Q3, a -20% decline from the same period in 2011. The metal was trading at $2,054 in London today. The high in 2008 was $3,300 and the 2011 high was $2,803 per ton. Bloomberg expects aluminum to average $2,212 in 2013.

Shares of Alcoa were flat in afterhours trading.

Alcoa Chart

Yum Brands (YUM) posted earnings after the close of 99 cents, two cents above analyst estimates. That was a +23% increase in profits thanks to increased sales in the USA. Same store sales in the U.S. rose +6% compared to analyst estimates of +4.4%. Revenue was light at $3.57 billion compared to the $3.63 billion estimate.

In China same store sales also rose +6% with a whopping +22% increase in sales from all stores thanks to an aggressive store opening program. KFC and Pizza Hut opened +192 new stores. U.S. sales at all stores rose +16.7% compared to +12.1% in the prior period. The CEO announced YUM was going to open 1,750 new stores outside the USA. YUM expects full year 2012 earnings to grow +13% and another +10% in 2013. Shares rallied nearly $3 in afterhours.

YUM Chart

All the earnings news was not good. Cummins (CMI) warned after the close for the second time this year. CMI cited a slowdown in customer spending due to the weakening global economy. The company said it would cut up to 1,500 jobs and reduce the number of hours worked by the remaining personnel. Cummins said full year sales were now expected to be $17 billion, -$1.0 billion from its prior estimate. The CEO said demand in China had weakened in most end markets and they also lowered their forecast for global mining revenues.

Analysts were expecting a guidance cut from Cummins because of the slowdown in China. The one they got was sharper than they expected. CMI shares declined -4% in extended trading.

CMI Chart

Intel (INTC) was hit with a double downgrade from both Nomura Equity Research and RW Baird. Tristan Gerra, an analyst for Baird, said notebook shipments surged in September but overall end user demand remains weak. Inventories are too high and will impact margins.

Romit Shah, analyst at Nomura, has a sell rating on Intel and warned that margins could decline another 3%. He also warned that stock buybacks were slowing because of weak cash flow and the need to conserve cash for what is expected to be a weak first half in 2013. The analyst expects Intel's cash to have shrunk from $10 billion in Q2-2011 to $3 billion in Q4-2012.

Intel shares declined -3% on the downgrades.

Intel Chart

Late in the day the U.S. Attorney in Manhattan and the U.S. Dept of Housing and Urban Development, announced they had filed a civil mortgage fraud suit against Wells Fargo for its part in the housing boom and bust. The suit seeks damages and civil penalties from WFC under the False Claims Act and another federal law for more than ten years of alleged misconduct related to FHA loans. The bank denied the allegations saying it always acted in good faith and compliance with FHA and HUD rules. WFC said it had previously disclosed the investigation and will vigorously defend itself.

Shares of WFC declined -2% on the news. Shares of Bank of America, purchaser of Countrywide Mortgage, also declined but only fractionally. You can bet the AG will get around to BAC sooner rather than later.

WFC Chart

Apple (AAPL) shares may have found a bottom today. Shares declined to $623 after trading as high as $705 back on Sept 21st. The 100-day average at $621 was close enough for the bulls to jump in and the stock rebounded +17 intraday but faded at the close to end at $636. After an $80 decline the 100-day average was a clear support level and the iPad Mini is just around the corner.

Apple Chart

Crude oil rallied $3 to $92.30 on rising tensions between Syria and Turkey and news that Israeli PM Netanyahu had called for early elections and would probably dismiss the parliament. NATO head, Anders Fogh Rasmussen, warned on Tuesday about the increased danger of conflict between Syria and Turkey after both countries traded fire across their common border.

Netanyahu said the parliament had not been able to reach agreement on a budget and called for quick elections in three months rather than wait until the end of 2013. This is seen as a play to consolidate his support for his position on Iran and by cutting the lead time on the elections from 8 months to 3 months it gives his opponents less time to garner support. It also suggests there will not be any attack on Iran over the next three months but oil prices still rose.

On Saturday Israel shot down an unmanned drone over Israel and preliminary indications are that it came from Iran. It was probably launched locally by Hezbollah to gain intelligence on Israel.

Crude prices rallied on the news above despite the IMF warning of slowing global growth and comments by Saudi Oil Minister Ali al-Naimi. His comments at a ministerial meeting in Saudi Arabia were bearish on crude. He repeated the often said, "We will give the market whatever it needs. We will work to moderate prices." He warned that rising oil prices would further slow economic growth, mainly in developing countries.

WTI Crude Oil Chart

Brent Crude Chart

Tuesday was the five year anniversary of the 2007 market highs. The S&P closed at 1565.15 and the Dow at 14,164.53. The next day began a two month decline that would knock -150 points off the S&P and -1440 points off the Dow. Eventually after chopping around for a few months the financial crisis took hold and the rest as they say is history. The S&P declined to 666.79 in March 2009.

I sincerely hope that we are not in for another bout of market volatility anywhere close to what we saw after the highs in 2007. Just because equity funds have seen outflows for 15 of the last 16 months and half the world is in recession is no reason to drop -150 points on the S&P. Unfortunately, that could very well push us into a repeat of the 2007 drop as evidenced by the Goldman Sachs call for a return to 1250 by year end and Morgan Stanley's forecast of 1167.

Eventually fundamentals will matter. Even if the Fed were to up its injection of QE3 cash there is only so much the Fed can do as we rush towards the fiscal cliff. Unless the Fed starts using that money to buy stocks instead of bonds the cliff dive fears should weaken the market by year end. Was today the beginning? Who knows? That kind of analysis is best done long after the fact.

The S&P lost -14 points today to close at 1441. That is still +11 points over critical support although the futures are in dive mode tonight as a result of the WFC news, Alcoa and Cummins. There is still a lot of darkness before morning and the futures were crazy volatile last night. High volatility means increased indecision and uncertainty and that is not good for the market.

Support is 1430 and 1440 followed by 1400.

S&P Chart

The Dow lost -110 points but remains above critical support at 13,400. The WFC and CMI news will be bearish for the Dow on Wednesday. The CMI news will impact Caterpillar and the WFC news will impact all the financials in the Dow. Alcoa was neutral but with CMI trash talking the mining sector we could see Alcoa trade down as well.

You never know what news headline will break the back of a rally. Also, one daily drop does not change the trend. Until the Dow trades under 13,400 the bulls will keep the faith. Once the critical support levels begin to get hit we could see a run for the exits.

Dow Chart

Apple lost only $2.82 and was barely a speed bump for the Nasdaq. Unfortunately there were other big losers. GOOG -16, PCLN -13, ISRG -12, AMZN -8, NFLX -8, BIDU -8. The large cap safe deposit boxes for fund managers to store cash were all being emptied on Tuesday. The Nasdaq lost -45 points at the open and never recovered. We just can't blame Apple today.

Support at 3100 and 3085 did not even slow the morning dip as tech stocks headed south at a high rate of speed after the double downgrade of Intel. Nasdaq 3050 is the next support level and it is not far off. A break there takes us to 3000 and we don't want to even think about a break of the 3000 level.

The Nasdaq 100 fell below the 50-day average at 2776 for the first time since July 25th.

Nasdaq Composite Chart

S&P futures are down -3 points at 9:PM. So far that is just a hiccup on the WFC, AA, CMI news. If the futures don't get any worse then the bulls have a chance to resurrect the upward trend. Once news from Europe begins to hit the tape overnight we could see some positive sentiment return if the EU Finance Ministers are in can kicking mode.

This is the week I was expecting a decline in the markets so I am watching carefully for signs of additional weakness or underlying strength. As long as the big caps are being sold there is only one direction. Eventually those same fund managers will put that money back to work before month end so we need to look for signs of a bottom being made.

Until then, enter passively, exit aggressively!

Jim Brown

Send Jim an email


New Option Plays

Multi-Year Lows

by James Brown

Click here to email James Brown


NEW DIRECTIONAL PUT PLAYS

Deckers Outdoor - DECK - close: 35.48 change: -0.38

Stop Loss: 36.55
Target(s): 30.25
Current Option Gain/Loss: Unopened
Time Frame: exit prior to the late October earnings report
New Positions: Yes, see below

Company Description

Why We Like It:
DECK is a shoe maker. The stock is trading near multi-year lows. Shares appear to be breaking down from a bear-flag consolidation pattern. More aggressive traders may want to launch bearish positions right now.

I want to caution readers that there are already a lot of bearish traders in DECK. The most recent data listed short interest at 33% of the small 30 million share float. That raises the risk of a short squeeze. Therefore we want to limit our position size to reduce our risk.

I am suggesting a trigger to buy puts at $34.45. Our target is $30.25. FYI: The Point & Figure chart for DECK is bearish with a long-term $20 target.

Trigger @ 34.45

- Suggested Positions -

buy the NOV $35 PUT (DECK1211w35) current ask $3.10

Annotated Chart:

Entry on October xx at $ xx.xx
Average Daily Volume = 2.5 million
Listed on October 9, 2012



In Play Updates and Reviews

Lowered Forecasts

by James Brown

Click here to email James Brown

Editor's Note:

Lowered forecasts from the IMF and a round of earnings warnings helped spark a sell-off on Tuesday.

WFM and PXP were both stopped out.

Current Portfolio:


CALL Play Updates

Commvault Sys. - CVLT - close: 55.46 change: -1.12

Stop Loss: 54.90
Target(s): 62.00
Current Option Gain/Loss: -95.9%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
10/09/12: CVLT came extremely close to hitting our stop loss today. Shares dipped to $54.91 at its lows. The stock spent most of its time in the $55.00-55.50 zone. The $55.00 level should be support but if the market's major indices decline again tomorrow I would expect CVLT to hit our stop loss at $54.90. I am not suggesting new positions at this time.

- Suggested Positions -

Long Oct $60 Call (CVLT1220j60) Entry $1.24

10/03/12 adjust exit target to $62.00
10/01/12 new stop loss @ 54.90
09/29/19 new stop loss @ 54.40

Entry on September 20 at $56.07
Average Daily Volume = 427 thousand
Listed on September 19, 2012


EQT Corp. - EQT - close: 60.49 change: +0.44

Stop Loss: 57.75
Target(s): 63.00
Current Option Gain/Loss: +88.5%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
10/09/12: EQT displayed relative strength with a +0.7% gain. The close above resistance at $60.00 is bullish. Yet EQT will not be immune to a market wide decline if the indices continue to fall.

More conservative traders may want to take profits right now. I am not suggesting new positions at this time.

- Suggested Positions -

Long Oct $60 call (EQT1220j60) Entry $0.61

10/08/12 readers may want to take profits now
10/06/12 new stop loss @ 57.75
10/04/12 new stop loss @ 57.45
09/27/12 new stop loss @ 56.45

Entry on September 24 at $ xx.xx
Average Daily Volume = 1.0 million
Listed on September 22, 2012


NetSuite Inc. - N - close: 59.89 change: -2.32

Stop Loss: 59.75
Target(s): 67.50
Current Option Gain/Loss: Oct65: -85.7% & Nov65c: -43.1%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
10/09/12: I could not find any news to explain the relative weakness in shares of N today. The stock broke down under short-term support near $62 and pierced the next level of support at $60.00. EQT underperformed with a -3.7% decline. The low today was $59.83. If there is any follow through lower tomorrow the stock will hit our stop loss at $59.75. I am not suggesting new positions at this time.

Our multi-week target is $67.50. FYI: The Point & Figure chart for N is bullish with an $82 target.

- Suggested Positions -

Long Oct $65 call (N1220j65) Entry $1.05

- or -

Long Nov $65 call (N1217k65) Entry $2.90

10/01/12 triggered @ 62.50

Entry on October 01 at $62.50
Average Daily Volume = 565 thousand
Listed on September 29, 2012


Noble Energy, Inc. - NBL - close: 94.37 change: +0.07

Stop Loss: 91.75
Target(s): 99.75
Current Option Gain/Loss: Oct95c: -10.3% & Nov95c: - 6.4%
Time Frame: exit prior to earnings on Oct. 25th
New Positions: see below

Comments:
10/09/12: Traders bought the dip in NBL, twice in fact, near $93.85, and the stock rebounded to close in positive territory. The relative strength is encouraging. If the market opens positive tomorrow then I would use today's move in NBL as a new bullish entry point. Keep in mind that we do not want to hold over the late October earnings report.

Trigger @ 94.25

- Suggested Positions -

Long Oct $95 call (NBL1220j95) Entry $1.45

- or -

Long Nov $95 call (NBL1217k95) Entry $3.10

Entry on October 08 at $94.25
Average Daily Volume = 1.0 million
Listed on October 2, 2012


Sears Holding Corp. - SHLD - close: 58.90 change: +0.32

Stop Loss: 54.75
Target(s): 62.50
Current Option Gain/Loss: +48.5%
Time Frame: 3 to 5 weeks
New Positions: see below

Comments:
10/09/12: SHLD continues to drift higher and shares are nearing potential round-number resistance at $60.00. More conservative traders may want to take profits now.

Earlier Comments:
SHLD could see some short covering. The most recent data listed short interest at 37% of the 31.3 million share float.

NOTE: There are two October $57.50 option strikes. Make sure you pick the normal one. Pay attention to the symbol.

- Suggested Positions -

Long Oct $57.50 call (SHLD1220j57.5) Entry $1.75

10/06/12 new stop loss @ 54.75

Entry on September 28 at $56.11
Average Daily Volume = 1.7 million
Listed on September 27, 2012


PUT Play Updates

CACI Intl. - CACI - close: 49.26 change: -0.43

Stop Loss: 52.01
Target(s): 45.25
Current Option Gain/Loss: + 0.0%
Time Frame: 3 to 4 weeks
New Positions: , see below

Comments:
10/09/12: CACI tried to rally this morning with a gap higher but shares struggled with new resistance near $50.00. The stock ended the day with a -0.8% decline. I would still consider new bearish positions at current levels. FYI: The Point & Figure chart for CACI is bearish with a $20 target.

- Suggested Positions -

Long Nov $50 PUT (CACI1211w50) Entry $2.30

Entry on October 09 at $49.64
Average Daily Volume = 373 thousand
Listed on October 8, 2012


ITT Educational Services - ESI - close: 30.84 change: -0.51

Stop Loss: 32.05
Target(s): 25.15
Current Option Gain/Loss: -25.1%
Time Frame: exit prior to earnings on Oct. 25th
New Positions: see below

Comments:
10/09/12: Right on cue ESI encountered resistance near short-term resistance. The stock gave up -1.6% today. Readers can use today's move as a new entry point for bearish positions.

Earlier Comments:
I want to reiterate my caution about using small positions. ESI already has a high amount of short interest because so many investors think this stock is going lower.

- Suggested *SMALL* Positions -

Long 2013 Jan $27.50 PUT (ESI1319m27.5) Entry $3.10

Entry on October 04 at $29.47
Average Daily Volume = 408 thousand
Listed on October 3, 2012


Juniper Networks - JNPR - close: 16.58 change: -0.03

Stop Loss: 17.75
Target(s): 14.10
Current Option Gain/Loss: + 1.3%
Time Frame: Exit prior the late October earnings report
New Positions: see below

Comments:
10/09/12: It was a relatively quiet session for JNPR with shares rebounding off its intraday lows but failing to post any gains.

Earlier Comments:
The plan was to keep our position size small to reduce our risk. FYI: The Point & Figure chart for JNPR is bearish with a $13.50 target.

- Suggested *SMALL* Positions -

buy the Nov $16 PUT (JNPR1211W16) Entry $0.72

Entry on October 04 at $16.74
Average Daily Volume = 6.6 million
Listed on October 3, 2012


Starbucks Corp. - SBUX - close: 47.35 change: -1.41

Stop Loss: 50.05
Target(s): 44.00
Current Option Gain/Loss: +28.2%
Time Frame: exit prior to the early November earnings report
New Positions: see below

Comments:
10/09/12: As we expected shares of SBUX have continued to decline. Shares accelerated lower today with a -2.8% drop and a breakdown under its 50-dma, its 300-dma and the $48.00 level. So far, so good.

Our target is $44.00. More aggressive traders could aim lower since SBUX appears to be in a new trend of lower highs and lower lows.

- Suggested Positions -

Long Nov $50 PUT (SBUX1211w50) Entry $2.73

Entry on October 08 at $48.40
Average Daily Volume = 8.1 million
Listed on October 6, 2012


Tech Data Corp. - TECD - close: 43.19 change: -0.93

Stop Loss: 45.15
Target(s): 42.00
Current Option Gain/Loss: +30.7%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
10/09/12: TECD broke down to new 2012 lows today. I am adjusting our stop loss down to $45.15. Our target is $42.00. More aggressive traders could aim lower. I am not suggesting new positions at this time.

Earlier Comments:
I would keep our position size small to limit our risk.

*Small Positions* - Suggested Positions -

Long Nov $45 PUT (TECD1211w45) Entry $1.95

10/09/12 new stop loss @ 45.15
10/03/12 new stop loss @ 45.75
10/01/12 triggered @ 44.90

Entry on October 01 at $44.90
Average Daily Volume = 333 thousand
Listed on September 29, 2012


CLOSED BULLISH PLAYS

Whole Foods Market - WFM - close: 97.99 change: -2.46

Stop Loss: 98.75
Target(s): 104.75
Current Option Gain/Loss: -12.7%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
10/09/12: WFM proved to be a dud. With a market-wide decline on Tuesday, shares of WFM reversed lower and underperformed with a -2.4% decline. Shares opened at $100.14 and quickly hit our stop loss at $98.75.

- Suggested Positions -

closed Nov $105 call (WFM1211K105) entry $2.27, exit $1.98 (-12.7%)

10/09/12 stopped out at $98.75
10/09/12 entry at $100.14

Chart:

Entry on October 09 at $100.14
Average Daily Volume = 1.3 million
Listed on October 8, 2012


CLOSED BEARISH PLAYS

Plains Exploration & Production - PXP - close: 37.00 change: +0.93

Stop Loss: 37.25
Target(s): 31.50
Current Option Gain/Loss: -31.2%
Time Frame: exit prior to earnings on Nov. 1st.
New Positions: see below

Comments:
10/09/12: PXP did not cooperate. Oil and energy stocks were some of the few exceptions to today's widespread market decline. PXP surged +2.5% and reached even higher intraday to hit our stop loss at $37.25.

*Small Positions* - Suggested Positions -

Nov $35 PUT (PXP1211w35) Entry $1.60 exit $1.10 (-00.0%)

10/09/12 stopped out at $37.25

chart:

Entry on October 08 at $35.75
Average Daily Volume = 4.3 million
Listed on October 6, 2012