Option Investor
Newsletter

Daily Newsletter, Wednesday, 11/10/2010

Table of Contents

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

Market Wrap

Uneventful Wednesday

by Todd Shriber

Click here to email Todd Shriber
U.S. equities halted their two-day losing streak, perhaps highlighting that no matter how minor that dip was, it was worth buying. Higher oil prices helped lift energy stocks and a decline in initial jobless claims provided the bullish catalysts today as the Dow Jones Industrial Average traded in a range of nearly 100 points, but could only manage a gain of about 10 points. The S&P 500 and the Nasdaq were both far more solid in their end-of-the-day results.

Stats Table

Initial jobless claims declined by 24,000 last week to 435,000 last week, erasing the previous week's pop and stoking hopes that there might be some legitimate improvement on the job front sooner rather than later. It is worth noting that initial claims have been dwindling for the most part since touching what is viewed as the secondary peak of 504,000 in mid-August. Adding to the good news is the fact that the four-week moving average has fallen to 465,000.

The continuing claims data also provided a glimmer of hope as that number fell by 86,000 to about 4.3 million. That number has fallen by 24% in the past year. In less-than-chipper news, half of the unemployed have found themselves in that situation for more than 21 weeks, a level that is quite high by historical standards. Most economists seem to agree that the four-week moving average for continuing claims needs to find its way below 400,000 to signal a real reason for celebration.

Jobless Claims

Obviously, more folks going back to work would lead to an uptick in energy consumption, which would boost energy prices, but despite jobs data that is basically mediocre, oil prices have found a way to jump about 8% this month alone. The good times for oil bulls continued today as prices hit a two-year high after the Energy Department said crude stockpiles declined by 3.27 million barrels to 364.9 million last week.

One analyst quoted in Bloomberg's coverage of the inventory data called the number ''wildly bullish.'' A Goldman Sachs report published on Tuesday certainly adds to the bullish tone for oil. Wall Street's most profitable bank said it sees oil prices ''substantially higher'' by 2012 as the global economic recovery picks up steam and excess supplies dwindled. The report even said OPEC, responsible for 40% of the world's production, will be forced to bring more supply to market.

Oil Chart

No shocker here: Chevron (CVX), the second-largest U.S. oil company, was the top-performer in the Dow today, adding almost 2%. Rival Exxon Mobil (XOM) was modestly higher as well as the largest U.S. oil company is doing what it can to keep at Apple (AAPL) at bay for the title of largest company by market value.

That was really just a segue to talk about another Dow component, Boeing (BA). The aerospace giant had the dubious distinction of being the Dow's biggest loser today, tumbling more than 3% on more bad news related to the Dreamliner. Forgive me, but I cannot resist saying the Dreamliner has become a nightmare for Boeing.

Also known as the 787, the massive passenger jet has seen countless production delays, but Boeing said earlier this year it was on schedule to deliver the first Dreamliner to Japan's All Nippon Airways early next year. I would not be on that even taking place after Boeing was forced to ground a Dreamliner test flight due to a cabin fire. In fact, the company has grounded the entire Dreamliner test fleet. One analyst said this incident is ''serious even under a best-case scenario.''

Boeing has six planes in the Dreamliner test fleet and it was plane number two that caught fire and was forced to land in Laredo, Texas after a six-hour test run. The company said it will continue ground-based testing, but the FAA is now involved in the investigation. As I always say, it is rarely good news for a company to have one of Washington's alphabet soup agencies involved in its affairs and I do not expect Boeing shares to benefit from this news either.

Boeing Chart

Onto some good news, courtesy of Polo Ralph Lauren (RL), the purveyor of high-end fashion. Say what you want about the U.S. consumer, but Polo Ralph Lauren shares surged more than 7% today, briefly touching a new 52-week high, after the company posted a stellar set of fiscal second-quarter results and boosted its revenue outlook.

For the quarter ending October 2, the company earned $205.2 million, or $2.09 a share, compared with $177.5 million, or $1.75, a year earlier as sales jumped 11% to $1.53 billion. The New York-based company went on to say that it expects sales to increase at a low double-digit rate after previously forecasting sales growth in the mid to high single digits.

The one detail that makes Polo Ralph Lauren's results and outlook particularly impressive is the fact that the company depends on North America for 70% of its sales. For the third quarter, the company expects sales to rise by a high teens rate.

Polo Chart

Alright, back to the bad news. Cisco Systems (CSCO), the largest maker of networking gear and a bellwether technology stock, reported fiscal first-quarter results after the market closed today and while the quarterly numbers were fine, they will probably do little to impress investors and comments made by the company will likely have Cisco trading lower at Thursday's open.

California-based Cisco said it earned $1.9 billion, or 34 cents a share, compared with $1.8 billion, or 30 cents a share, a year earlier on revenue of $10.75 billion. Excluding charges, the company earned 42 cents a share. Analysts were expecting a profit of 40 cents a share on revenue of $10.74 billion. Analysts said investors will be disappointed that Cisco was not able to deliver an upside surprise on the top-line.

The company said it is expecting sales of $10.1 billion to $10.3 billion for the current quarter while analysts were forecasting sales growth of $11.1 billion. Making matters worse, Gartner Inc. said Cisco is likely to encounter ''lackluster'' corporate spending over the next five years. That is not good news for a company that is often viewed as a temperature check on the health of the U.S. economy.

Cisco shares have basically sat out the recent rally and that makes the company's dividend, planned for next year, perhaps the biggest impetus to own the shares. Speaking of the stock, it is getting slammed in the after-hours session, down 13.2% as of this writing.

Cisco Chart

Looking at the charts, not much has changed has since I was here on Monday. The big number for the S&P 500 to deal with is significant resistance at 1228. After a couple of days of profit-taking, the index rests about 10 points away from 1228. From there, the S&P 500 has a lot of room in front of it to make a run to 1300. Support should be found in the 1190-1200 area.

S&P 500 Chart

The Dow is honoring the 10,300-10,400 range, give or take a few points. Support looks firm at 10,100 and the index has a healthy amount of real estate in front of it before bumping into resistance at 10,775. Cisco's earnings news will not help tomorrow and the longer Boeing is under pressure, the more the burden falls to financials and energy stocks to stoke the Dow's rally.

Dow Chart

The Nasdaq put in a pretty solid day today and the good news regarding Cisco is that it does not account for an overwhelming percentage of the Nasdaq 100, so while I expect the Nasdaq to open in the red tomorrow just as a knee-jerk reaction to Cisco's results, the index could find its way to another higher close. Suppport at 2570 could be an issue early in the day and resistance at 2720 remains so far off that we do not need to dwell on that level this week.

Nasdaq Chart

The Russell 2000 was able to recoup of some of Tuesday's losses and is trading just two points below where it closed on Monday, so not much has changed and 760 remains the key resistance area to watch. I'm not sure the index can muster a run above 760 before the end of this week, but a close above 750 on Friday would set the Russell 2000 up for that run next week.

Russell 2000 Chart

As I mentioned on Monday, this week is light on economic data so stock-specific news is what we have to watch. If Wednesday is any indication, the market appears willing to put more emphasis on good news than bad. Consider the stocks I highlighted today. Boeing's Dreamliner problems are nothing new and Cisco has been absent from the rally, but when a consumer discretionary name like Polo Ralph Lauren chimes in with good news, the broader market found a way to a higher close.


New Plays

Credit Services

by James Brown

Click here to email James Brown
Editor's Note:
This financial stock is bouncing from prior resistance following the recent breakout from a multi-month consolidation.

-James


NEW BULLISH Plays

SLM Corp. - SLM - close: 12.39 change: +0.05

Stop Loss: 11.75
Target(s): 13.75
Current Option Gain/Loss: +0.00%
Time Frame: 6 to 8 weeks
New Positions: Yes

Company Description:
SLM Corporation (NYSE:SLM - News), commonly known as Sallie Mae, is the nation’s leading saving, planning and paying for education company. Sallie Mae’s saving programs, planning resources and financing options have helped more than 31 million people make the investment in higher education. The company services $202 billion in education loans and serves 10 million student and parent customers. Its affiliate Upromise Investments, Inc., manages $27 billion in 529 college savings plans, and members of Upromise by Sallie Mae have earned more than $575 million in rewards to help pay for college. Sallie Mae offers services to a range of institutional clients, including colleges and universities, student loan guarantors and state and federal agencies. (source: company press release or website)

Why We Like It:
It looks like the worst is behind it for SLM. The private student loan market probably isn't "healthy" but it's getting better. Investor sentiment on the financial sector has changed to bullish recently. SLM broke out from a multi-month consolidation and now traders are buying the dip near previous resistance. I am suggesting we take advantage of this dip and buy SLM stock now, at current levels. We'll use a stop loss at $11.75. Our first target is $13.75.

Suggested Position: Buy SLM stock @ current levels
- or -
BUY the 2011 January $12.50 call option (symbol:SLM1122A12.5) current ask $0.73

Annotated chart:

Entry on November 11 at $xx.xx
Earnings Date 01/20/11 (unconfirmed)
Average Daily Volume: 3.3 million
Listed on November 10th, 2010


In Play Updates and Reviews

Financials Rebound

by James Brown

Click here to email James Brown

Editor's Note:
After yesterday's underperformance the banking stocks were some of today's best performers.

-James

Current Portfolio:


BULLISH Play Updates

Alcoa Inc - AA - close: 13.68 change: +0.13

Stop Loss: 12.45
Target(s): 14.95, 15.95
Current Option Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

Comments:
11/10: The commodity space held up reasonably well given the U.S. dollar's fourth advance in a row. Traders bought the dip in AA near $13.60. I'm willing to wait for a better decline and with the dollar's rise it could happen soon. We have a trigger to launch bullish positions at $13.30.

Suggested Position: Buy AA stock @ 13.30

Entry on November xx at $xx.xx
Earnings Date 01/10/11 (unconfirmed)
Average Daily Volume: 26.1 million
Listed on November 6th, 2010


Citigroup Inc - C - close 4.42 change +0.12

Stop Loss: 4.08
Target(s): 4.60, 4.75, 4.95
Current Option Gain/Loss: + 6.2%
Time Frame: 4 to 6 weeks
New Positions: NO

Comments:
11/10: Yesterday the banks were some of the worst performers. Today they were some of the best performing stocks. Citigroup bounced from support near $4.30 and posted a +2.79% gain. I'm not suggesting new positions at this time.

Current Position: Long C stock, entry was at $4.16
Options Traders: Long December $4.00 CALL

Entry on October 27, 2010
Earnings Date 01/19/11 (unconfirmed)
Average Daily Volume: 523 million
Listed on October 25, 2010


CVS Caremark Corp. - CVS - close: 31.13 change: +0.10

Stop Loss: 30.45
Target(s): 33.50, 34.90
Current Option Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

Comments:
11/10: CVS is still consolidating sideways. There is no change from my prior comments. Nimble traders could look for a dip to the 50-dma or the $30.00 level as alternative entry points. I'm still waiting for a move higher to $31.80. CVS will probably have additional resistance at its 200-dma (currently near $32.40) but our first target is $33.50. Our second, longer-term target is $34.90.

BULLISH TRIGGER @ 31.80

Suggested Position: buy the stock @ 31.80
- or
BUY the 2011 January $33.00 call (symbol: CVS1122A33)

Entry on November xx at $xx.xx
Earnings Date 02/08/11 (unconfirmed)
Average Daily Volume: 10.1 million
Listed on November 8th, 2010


Hansen Natural Corp. - HANS - close: 49.58 change: -0.47

Stop Loss: 47.25
Target(s): 51.75
Current Option Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

Comments:
11/10: The correction continues in HANS. The stock lost -0.9% and while it did see a late day rebound it wasn't very convincing. There is no change from my previous comments. We want to use a trigger at $48.25 to launch bullish positions. Keep your positions small to limit your risk.

Earlier Comments:
Use a trigger at $48.25 to buy HANS or buy calls. If triggered we'll use a stop loss at $47.25.

Suggested Position: BUY the stock at $48.25

- or -

BUY the December $50.00 calls (on a dip at $48.25)

Entry on November xx
Earnings Date 11/04/10 (confirmed)
Average Daily Volume: 4.5 million
Listed on October 16, 2010


Kroger Co. - KR - close 22.66 change +0.05

Stop Loss: 21.45
Target(s): 23.70
Current Option Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

Comments:
11/10: If you missed our entry point yesterday KR provided another entry point today. Shares dipped to $21.54 and bounced. I would still consider new positions now but more conservative traders may want to use a tighter stop loss closer to $22.00.

Earlier Comments:
Stop loss at $21.45. Our target is $23.70 near the April highs. We'll set a secondary, longer-term target at $24.75.

Current Position: Long KR stock @ 22.55

Entry on November 9th @ 22.55
Earnings Date 12/8/2010 (unconfirmed)
Average Daily Volume: 6 million
Listed on November 3, 2010


NYSE Euronext - NYX - close: 29.77 change: +0.39

Stop Loss: 29.40
Target(s): 34.50
Current Option Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

Comments:
11/10: I remain cautious on NYX but I'm not ready to give up yet. There is no change from my prior comments.

Earlier Comments:
We want to use a trigger at $31.25 to buy NYX (or calls) with an initial target of $34.50. More conservative traders could wait for a close over $31.25 instead of an intraday move above this level.

Trigger @ 31.25

Suggested Position: Buy NYX stock @ 31.25

Entry on November xx at $xx.xx
Earnings Date 02/09/11 (unconfirmed)
Average Daily Volume: 2.5 million
Listed on November 6th, 2010


SPDR Financial ETF - XLF - close 15.34 change +0.17

Stop Loss: 14.45
Target(s): 17.25
Current Option Gain/Loss: + 0.59%
Time Frame: 6 to 8 weeks
New Positions: Yes

Comments:
11/10: Traders were in a buy-the-dip mood in financials. After yesterday's decline the banks reversed with widespread gains. If you missed yesterday's entry point we got another entry this morning. Actually, since there was no follow through lower on the market's bearish reversal on Tuesday, I would be tempted to go ahead and buy the XLF (or calls) right here.

Earlier Comments:
Stop loss at $14.45. Our first target is $17.25. You might want to buy call options instead of the ETF because the XLF doesn't move very fast (I'm thinking the 2011 January calls).

Current Position: Long the XLF (etf) @ 15.25

- or -

Options Traders: Long the 2011 January $15.00 call, entry @ $0.85

Entry on November 9th @ 15.25
Earnings Date N/A (unconfirmed)
Average Daily Volume: 83 million
Listed on November 4, 2010


BEARISH Play Updates

Corporate Office Properties - OFC - close: 35.71 change: +0.77

Stop Loss: 37.05
Target(s): 32.25, 30.25
Current Gain/Loss: -0.0%
Time Frame: 6 to 8 weeks
New Positions: Yes

Comments:
11/10: It remains a very tough market for bearish plays. The lack of follow through on yesterday's market reversal could be a warning here. Although I will point out that OFC has no been participating in the market's strength lately. I would look for a failed rally near the $36.00-36.50 zone as a new bearish entry point.

FYI: The P&F chart is currently bearish with a $29 target.

Current Position: Short OFC stock @ 35.07

Entry on November 10 at $35.07
Earnings Date 02/09/11 (unconfirmed)
Average Daily Volume: 1.0 million
Listed on November 9th, 2010