Option Investor
Newsletter

Daily Newsletter, Thursday, 12/6/2012

Table of Contents

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

Market Wrap

World Markets Rally, We Wait

by Thomas Hughes

Click here to email Thomas Hughes
Introduction

The rhetoric remains the same in regards to White House and congressional posturing over the fiscal cliff. However, a new development in today's headlines points to dealings behind closed doors that may pave the way for a concrete solution. Senator ( R) Jim Demint announced today he was leaving the Senate in favor of the private sector. He is leaving to take charge of the conservative Heritage Foundation. Demint was seen as an obstacle to republican measures to reach a compromise. Earlier in the week Demint was critical of Speaker of the House John Boehner's proposals for increased tax revenue. Even though Demint was already planning on retirement there is already speculation that this move was arranged to help smooth the way for a quick end to the negotiations.

Stock markets around the world have rallied to new highs. Markets ranging from Germany to India, South Africa and Japan are reaching multi-month and multi-year highs. Investor confidence seems to be on the rise despite the gloomy outlooks put forth by world leaders and our own major corporations.


Economic Data

Futures were slightly negative this morning ahead of today's releases of economic data. As a whole the new numbers were mild and show a return to pre-Sandy conditions. On the jobless front it appears that Sandy has had little long term effect on unemployment. There is still some lingering effects on regional employment numbers but the overall impact has been negligible.

Initial claims dropped back to the 370,000 range we saw just before the storm came. This is a drop of 25,000 from the previous weeks upward revision and 10,000 below this weeks estimates. The four week moving average continued to climb, reaching a 14 month high. This new high in the average should be the peak unless we get a sudden jump in initial claims.


The Challenger report states that planned layoffs jumped more than 20% in November, a number that suggests we could see a spike in initial claims. However, this spike probably won't be enough to do any long term damage to the labor market. There are some seasonal factors to consider in this as well as the fact that lay offs are still down 30% from last November and 13% on a year to date basis. Most of the job cuts can be attributed to two factors, Hostess and HPQ. The most losses occurred in the food industry, led by Hostess going out of business. The sector with the second largest number of layoff's was the computer industry, led by HPQ and its restructuring plans.

Continuing claims and total claims for unemployment both fell to new low levels. The continuing claims fell by 100K to 3.21 million for the week ending 11/29. This is the fourth week of declines in this data since the storms and the second lowest weekly data point this year. Total claims for unemployment fell to a new multi-year low of 4.9 million. This is 224K lower than last week and the lowest levels since 2008. The total number of people on unemployment is about 25% lower than last year. Based on these two number I might expect to see unemployment fall despite the potential impact from hurricane Sandy. The November unemployment data is scheduled to be released tomorrow at 8:30AM. I have seen a couple of different estimates ranging from holding steady at 7.9% to an increase of as much as 0.2% to 8.1%



We also get new jobs data from the Labor Department. Yesterday ADP reported their data, showing a slight drop in jobs creation. The US data is expected to show a similar decline. The consensus estimates are ranging from 90,000-100,000, a drop of about 70,000 from last month.


Around The World

European markets climbed today with several reaching new highs in the face of even lower expectations. The ECB held their meeting this week and today announced their rated decision and outlook going into 2014. The rates were held steady at 0.75%, which was not unexpected. Draghi went on to say in the statements prepared by the ECB to say that the outlook remained weak going into 2013 and lowered the outlook once again. Now the ECB is expecting the Eurozone to grow at a rate of -0.9%-+0.3%, which to me is quite a large range and a sign of real uncertainty. They also lowered this years expectation by -0.1%. Looking forward the ECB expects the region to return to growth in late 2013 with 2014 showing GDP in the range of 0.2%-2.2%.

Asian indexes closed the day mixed with most hovering around flat line. The Heng Seng and Thai Set indexes both flirted with and/or made new highs. News from the region was tame, focusing primarily on business and earnings. Japan led the region with a gain of 0.81%, reaching a 14 month high. The impending election, depreciating yen and expected easing from the BOJ are driving this trade in the short term. Anyone trading Japan needs to keep a look out to next weeks elections as a possible turning point.

Oil And Gold

Today's new Eurozone statements, which really did not say anything new in my opinion, helped to send the price of oil down by around 2%. Oil remains trapped in this range between $85 and $90 and is now down near the lower end. This commodity, and gold as well, could remain range bound until the current fiscal issues are laid to rest. World growth and oil demand are in question and at this time the ol fiscal cliff is clouding the view.

The Oil Index has been trading sideways in similar fashion to the underlying commodity. The index has been consolidating between a support level and a convergence of moving averages. A break above could take the index to 1250-1275 while a break below could take it down to 1150 or lower. I am tending to think the index will move up rather than down in the short term but it will be affected by every bit of economic news.

The Oil Index, daily

Gold traded to the plus side today and regained the $1700 level. Gold has also been trading in a range over the last few months as world wide easing measures have taken effect. Gold could bounce back up to $1750 on weak European expectations and fiscal cliff worries.

The Gold Index continued its bounce downward over the last week. The thought of prolonged higher prices for gold was not enough to keep investors interested in the gold miners. The index is retracing the run up it made over the summer and is nearing the 78% level. Before reaching the 78% retracement the index will have to break the rising up trend line created by connecting the two dips of May and July 2012. If the index does reach the 78% level, breaking this trend line, a full retracement becomes probable. Momentum on the Gold Index is diverging from price. This suggests that the down leg is nearing its end and that the index could find support at the uptrend line.

The Gold Index, daily

Story Stocks

Well, its less than 30 days to the fiscal cliff and many corporations are racing to fight it. Another round of special dividends was announced today bringing the practice into sharper focus. I tried to find an etf or index that tracks dividend payers but couldn't find anything like what I wanted. If anyone knows of a good one please let me know. I heard of three today. Sirius XM, General Dynamics and Safeway FoodStores. Sirius upped the ante adding a $2 million stock buyback to the deal. Sirius XM jumped on the news, much like other stocks providing the special dividend, and then sold off during the day.

Sirius XM, daily

Apple had a $35 turnaround today. The stock opened under heavy selling pressure in continuation of yesterday's declines. After reaching bottom in mid morning trading the stock regained all its daily losses and then some of yesterday's. Today's candlestick is very bullish and supported by an increase in volume.

Apple, daily

Broadcom updated its guidance and sent shares of its stock higher. The company raised the lower end of its guidance range based on stronger than expected sales. Strength in mobile and wireless sales increased more than expected in the fourth quarter and will significantly impact revenue and earnings. The stock gained more than 2% in trading on average volume, moving up toward the middle of its 52 week range.

Broadcom, daily

Men's Warehouse reported that earnings were up 20% over last year but a disappointing outlook sent shares lower. The company now expects earnings to range from -5 cents per share to +1 cent per share. This is down from a previous estimate of +12 cents. The stock dropped sharply in pre market trading but the new low prices were met with enthusiasm. Buyers stepped in and drove prices up from the day's low of $27.50 to regain most of today's losses.

Men's Warehouse

Lululemon also reported earnings today. The company surprised investors with earnings and an 18% jump in comp store sales. The yoga/workout clothing retailer posted earnings of $0.39 per share, 2 cents above expectations. Revenue increased 37% in the quarter, also ahead of expectations. The company also issued fourth quarter guidance that was slightly below consensus estimates. The stock sold off after the open but quickly found support and regained yesterday's closing price on high volume.

Lululemon

The S&P 500

This morning the futures trade hung just under flat line. There was little movement ahead of and after the release of the economic data. The index has been trading in a tight range over the last two weeks, just above a support level confirmed by long and short term moving averages. This consolidation is a good sign following the support bounce of mid-November. The bounce was fueled in part by perceived fiscal cliff progress, and I use that term loosely, and is now awaiting further developments.

S&P 500 with consolidation, daily

I see two short term technical possibilities at this time. The first is that the index is making a flag formation following the bounce. This suggests that the bounce began last month is only half over and that the market will drift upward, maybe until we get a fiscal cliff solution. This could take the index up to the 1490-1500 level and significant resistance by the end of the year. This resistance dates back to the 2007 market reversal and 2008 bear market.

S&P 500 with flag formation, daily

The other is a short term rounding top. This top could bring the index back down to the recent lows, a move that is also being forecast by momentum indicators. As I have noted many times before the series of lower lows in the index from mid-October to mid-November are coincident with a series of lower peaks in bearish MACD. This coincidence suggests that the recent selling is not over and that a retest or at least an attempted retest of the November lows is in the cards.

S&P 500 with MACD, daily

Longer term the index is still in an uptrend and making a bounce from the long term trend line. This uptrend is weakening, as evidenced by declining peaks in momentum, and possibly nearing completion. The index is trading at/near resistance and faces more when it moves higher. At this time there are still no signs of long term topping or reversal in the S&P 500. The index looks good for another advance but faces resistance at 1465, 1500 and 1565.

S&P 500, weekly with MACD

It is without doubt that the fiscal cliff is important to us, our country and our future. However, I think that in the end it will only be a blip on the screen. The term Fiscal Cliff gives the situation an ominous name but one more ominous than may really be deserved. Something will be done to move past this just like every other time the national budget has been in question and we will move on.

It is possible the rest of the world is already moving on. China has had its transition for the year and is now focusing on the work at hand. Europe is getting its house in order; Spain requested aid and Greece got its funding package. The point is that much of what has been clouding the future is dissipating and world markets are responding to all this by reaching new high levels. Is it possible that a resolution will send our markets to new highs?

There is a lot to consider and it is all being clouded by fiscal cliff conjecture. The stagnant economy and weak global outlook is leading many to speculate on further fiscal easing from world central banks as well as our own. We may get some more insight into that next week when the FOMC makes their interest rate decision. However, the current budget negotiations are still in the way, preventing a clear view of 2013 and what our economy will need. Once the fiscal cliff is off the table, or at least shelved for a while, Ben and the FOMC will be able to make better estimates of our own needs.

As always, keep a close eye on your technicals and choose your underlying stocks with care. Look for stocks with liquid markets, tight bid/ask spreads and favorable technicals. We're in a stock pickers market and there are good plays out there for every trader.

Thomas Hughes


New Option Plays

Batteries Not Included

by James Brown

Click here to email James Brown

Editor's Note:

In addition to tonight's new candidate(s), 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) FLR, MPC, ECL, LNKD, AMP, NDSN


NEW DIRECTIONAL CALL PLAYS

Energizer Holdings - ENR - close: 80.40 change: +1.39

Stop Loss: 78.40
Target(s): 84.50
Current Option Gain/Loss: + 0.0%
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
It's Christmas time and that means lots of shopping for many Americans. A lot of those presents might require batteries. When ENR reported earnings back in November it was one of the few companies that raised their guidance. Shares have since rallied to major resistance near $80.00.

Now after a few days consolidating sideways under this resistance level the stock is breaking out higher. I am suggesting bullish positions at the open tomorrow. We'll use a stop loss at $78.40. Our multi-week target is $84.50.

- Suggested Positions -

buy the 2013 Jan $85 call (ENR1319a85) current ask $0.80

Annotated Chart:

Entry on December xx at $ xx.xx
Average Daily Volume = 784 thousand
Listed on December 06, 2012



In Play Updates and Reviews

PCYC and SHLD Hit Our Targets

by James Brown

Click here to email James Brown

Editor's Note:

Thursday was rather quiet on Wall Street but we saw two trades hit our exit targets (PCYC and SHLD).

Our TRMB trade has been triggered.

Current Portfolio:


CALL Play Updates

Dover Corp - DOV - close: 63.43 change: -0.07

Stop Loss: 61.75
Target(s): 67.50
Current Option Gain/Loss: + 7.1%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/06/12: DOV continues to churn sideways. The stock seems stuck in the $62-64 zone. I am not suggesting new positions at this time.

- Suggested Positions -

Long 2013 Mar $65 call (DOV1316c65) entry $2.10

11/28/12 new stop loss @ 61.75
11/19/12 triggered @ 62.30

Entry on November 19 at $62.30
Average Daily Volume = 1.7 million
Listed on November 17, 2012


Flowserve Corp. - FLS - close: 141.39 change: +0.18

Stop Loss: 138.90
Target(s): 148.50
Current Option Gain/Loss: -11.1%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/06/12: FLS also spent Thursday's session drifting sideways. I would still consider new positions now or you could wait for a rally past $142.00. FYI: The Point & Figure chart for FLS is bullish with a $153 target.

- Suggested Positions -

Long 2013 Jan $145 call (FLS1319a145) Entry $2.70

Entry on December 05 at $141.50
Average Daily Volume = 518 thousand
Listed on December 04, 2012


Home Depot - HD - close: 64.34 change: +0.32

Stop Loss: 62.90
Target(s): 69.50
Current Option Gain/Loss: -28.2%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
12/06/12: HD had been acting weak the last couple of days but shares bounced today. I remain cautious on this stock. Readers may want to wait for a new rally past $65.00 before considering new positions.

More conservative traders may want to raise their stops to limit their risk further. More aggressive traders might want to adjust their stops so it's under $62.00. I am not suggesting new positions at this time.

- Suggested Positions -

Long 2013 Jan $65 call (HD1319a65) entry $1.95

Entry on December 03 at $65.35
Average Daily Volume = 8.5 million
Listed on December 01, 2012


Ingredion Inc. - INGR - close: 65.74 change: -0.20

Stop Loss: 63.25
Target(s): 69.00
Current Option Gain/Loss: + 0.0%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/06/12: INGR saw a tiny bit of profit taking today. There is no change from my prior comments. Readers may want to wait for a dip or a bounce near $65.00 as our next entry point.

- Suggested Positions -

Long 2013 Jan $65 call (INGR1319a65) entry $2.00

Entry on December 04 at $65.25
Average Daily Volume = 504 thousand
Listed on December 03, 2012


O'Reilly Automotive - ORLY - close: 90.68 change: -0.70

Stop Loss: 89.95
Target(s): 95.75
Current Option Gain/Loss: -73.6%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/06/12: ORLY is getting worse. The stock is down four days in a row. First it broke down below its 10-dma and now its 20-dma. The next level of support should be $90 and its 200-dma. I am not suggesting new positions at this time.

- Suggested Positions -

Long DEC $95 call (ORLY1222L95) entry $1.90

Entry on November 20 at $92.05
Average Daily Volume = 1.8 million
Listed on November 19, 2012


Precision Castparts - PCP - close: 182.95 change: -1.14

Stop Loss: 179.75
Target(s): 188.00
Current Option Gain/Loss: - 5.4%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/06/12: PCP is struggling to see any follow through. Shares are just churning sideways between $180 and $185. I am not suggesting new positions at this time.

- Suggested *Small* Positions -

Long DEC $185 call (PCP1222L185) Entry $1.85

12/05/12 new stop loss @ 179.75

Entry on November 29 at $182.04
Average Daily Volume = 762 thousand
Listed on November 28, 2012


Rockwell Automation - ROK - close: 80.11 change: -0.28

Stop Loss: 78.90
Target(s): 84.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 5 weeks
New Positions: Yes, see below

Comments:
12/06/12: ROK came close but didn't quite hit our entry trigger at $80.60 this morning. Shares look poised to try again tomorrow.

I am suggesting a trigger to buy calls at $80.60 with a stop loss at $78.90. Our target is $84.75.

Trigger @ 80.60

- Suggested Positions -

buy the 2013 Jan $85 call (ROK1319a85)

Entry on December xx at $ xx.xx
Average Daily Volume = 1.0 million
Listed on December 05, 2012


Trimble Navigation - TRMB - close: 56.73 change: +0.66

Stop Loss: 53.40
Target(s): 59.75
Current Option Gain/Loss: + 7.6%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/06/12: The rally in TRMB continues and the stock has broken out past resistance to hit new all-time highs. Our trigger to buy calls was hit at $56.15.

- Suggested Positions -

Long 2013 Jan $57.50 call (TRMB1319a57.5) entry $1.30

Entry on November 06 at $56.15
Average Daily Volume = 708 thousand
Listed on November 28, 2012


PUT Play Updates

Humana Inc. - HUM - close: 65.19 change: +0.13

Stop Loss: 66.51
Target(s): 60.25
Current Option Gain/Loss: -44.4%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/06/12: HUM is still churning sideways between $64 and $66. Readers may want to wait for a new low under $64.00 before launching new positions.

- Suggested Positions -

Long DEC $65 PUT (HUM1222x65) entry $1.98

Entry on November 28 at $64.20
Average Daily Volume = 3.0 million
Listed on November 27, 2012


InterOil Corp. - IOC - close: 51.47 change: -2.88

Stop Loss: 56.05
Target(s): 50.50
Current Option Gain/Loss: +75.9%
Time Frame: 3 to 5 weeks
New Positions: see below

Comments:
12/06/12: Great news! There was no follow through on yesterday's bounce in IOC. Quite the opposite happened. The stock reversed sharply and posted a -5.2% decline today. I am lowering our stop loss to $56.05. Our option is up +75%. Readers may want to take profits now. I am not suggesting new positions at this time.

I want to remind readers that this is a more aggressive, higher risk trade. IOC is volatile and has a high amount of short interest.

*Small positions* - Suggested Positions -

Long DEC $55 PUT (IOC1222x55) entry $2.70

12/06/12 new stop loss @ 56.05
12/04/12 new stop loss @ 57.55
11/28/12 new stop loss @ 60.15

Entry on November 21 at $58.50
Average Daily Volume = 790 thousand
Listed on November 20, 2012


Range Resources - RRC - close: 64.58 change: -0.03

Stop Loss: 66.05
Target(s): 56.50
Current Option Gain/Loss: -16.6%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/06/12: Thursday was a quiet session for RRC. The stock churned sideways between $65 and $64. Yesterday I suggested wait for a drop under $65.00 before launching new positions. I meant to say $64.00.

Earlier Comments:
I do consider this an aggressive, higher-risk trade. RRC can be volatile and there has been takeover chatter in the past. We want to keep our position size small to limit our risk.

- Suggested *Small* Positions -

buy the 2013 Jan $60 PUT (RRC1319m60) entry $1.20*

*option entry price is an estimate since the option did not trade at the time our play was closed. The first trade on Dec. 5th was at $1.00.

Entry on December 05 at $63.72
Average Daily Volume = 1.5 million
Listed on December 04, 2012


Teradata Corp. - TDC - close: 58.70 change: +0.76

Stop Loss: 62.10
Target(s): 55.15
Current Option Gain/Loss: +27.9%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/06/12: I cautioned readers that yesterday looked like a potential bullish reversal. The bounce continued today and TDC added +1.3%. Yet the stock remains under what should be short-term resistance near $60.00. I am not suggesting new positions at this time.

Our target is $55.15. More aggressive traders could aim a lot lower. The Point & Figure chart for TDC is bearish with a $44 target.

- Suggested Positions -

Long 2013 Jan $55 PUT (TDC1319m55) entry $0.86

Entry on December 03 at $60.00
Average Daily Volume = 2.2 million
Listed on December 01, 2012


CLOSED BULLISH PLAYS

Pharmacyclics Inc. - PCYC - close: 55.01 change: +1.42

Stop Loss: 51.45
Target(s): 56.50
Current Option Gain/Loss: - 16.6%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/06/12: After a two-day decline PCYC bounced and the stock hit our exit target at $56.50. The rally ran out of steam at $57.00.

Unfortunately the bid/ask spread on PCYC's December $55 call is too wide and it got worse today. Even though PCYC hit our bullish target the option did not post a profit for us.

Earlier Comments:
I do consider this a more aggressive, higher-risk trade.

- Suggested *Small* Positions -

Dec $55 call (PCYC1222L55) entry $3.60 exit $3.00 (-16.6%)

12/06/12 target hit @ $56.50
12/03/12 new stop loss @ 51.45
11/20/12 new stop loss @ 49.65
11/19/12 trade opened with PCYC's gap open higher @ 52.21

chart:

Entry on November 19 at $52.21
Average Daily Volume = 1.0 million
Listed on November 17, 2012


CLOSED BEARISH PLAYS

Sears Holding - SHLD - close: 40.25 change: -0.96

Stop Loss: 44.05
Target(s): 40.25
Current Option Gain/Loss: +39.5%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/06/12: Target achieved.

SHLD continues to underperform. The stock spiked down to $39.20 intraday. Our exit target was $40.25. We are somewhat fortunate that the option spreads improved for us. Yesterday they were outrageously too wide. They remain wide but the spreads did narrow and we managed a gain on the trade.

- Suggested Positions -

2013 Jan $45 PUT (SHLD1319m45) entry $2.15 exit $3.00 (+39.5%)

12/06/12 target hit at $40.25
12/03/12 new stop loss @ 44.05
12/01/12 new stop loss @ 45.25
11/28/12 triggered

chart:

Entry on November 28 at $45.75
Average Daily Volume = 1.2 million
Listed on November 26, 2012