Option Investor
Newsletter

Daily Newsletter, Monday, 11/29/2010

Table of Contents

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

Market Wrap

Europe Pressures Stocks Again

by Todd Shriber

Click here to email Todd Shriber
In a desperate search for some silver lining, one could say that the end result for the major U.S. indexes was a lot better than the worst levels of the day and that would be true. The S&P 500 peaked below critical support at 1175, the Nasdaq flirted with 2500 and the Dow Jones Industrial Average traded below 11,000. All three were able to muster some strength in the middle of the afternoon to close comfortably above those important levels, though all closed in the red.

Market Stats

Once again, it was Europe that roiled U.S. stocks. News of Ireland's $113 billion bailout failed to assuage investors and the reason is simple: The market loves to play the ''who is next'' game. While Greece was a thorn in the side of global markets, investors found a way to move past that situation, at least for a few months.

The problem with Ireland running to the front of the European handout line is that the continent's sovereign debt contagion has been confirmed and all a bailout for Ireland is send traders speculating on the fortunes, or lack thereof, of Portugal. Credit-default swaps used to insure Portuguese government debt against default soared 37 basis points to a record 539 basis points, according to Bloomberg News.

Assuming Portugal needs a bailout, that is when things get really dicey. Greece, Ireland and Portugal are far smaller economies than Spain, Europe's fourth-largest economy. The European Union and the International Monetary Fund have a $993 billion fund in place for European bailouts, according to the German news outlet Speigel. That would be enough to cover the likes of Greece, Ireland and Portugal, but as Speigel puts it, there could be problems if Spain needs a bailout.

That sent swaps on Spanish government debt higher by almost 29 basis points to 351.5 basis points, Bloomberg reported. That was enough to send the iShares MSCI Spain Index Fund (EWP) lower by almost 3% on volume that was nearly 75% above the daily average. The Spanish word for ugly is ''feo'' and that is exactly what EWP's chart is.

Spain ETF Chart

For the truly adventurous, look beyond Spain and attention shifts to Italy, which is no peach either. A planned sale of about $9 billion in Italian government bonds was less than successful and that sent swaps on Italian debt higher by 28 basis points to 244 basis points, the highest level in six months, Bloomberg reported. I could not find a more current chart, but the one below illustrates where Italian, Portuguese and Spanish swaps traded at in August. All have put in viscous runs to the upside in less than four months.

European Swaps Chart

No surprise here: The euro is suffering mightily, closing below $1.31 against the dollar today for the first time since September. That sent the euro below its 200-day moving average on the daily chart. The weekly chart shows the currency has a tendency to respect its 200-day line. When it moved below that line on the weekly chart in January, it stayed below that level until October.

Translation: There could be more pain in store for the common currency. As I mentioned earlier, traders and investors love to play the ''who is next'' game. When it comes to the euro, it is ''who will be first'' as in what country will be the first to drop out of the euro. Intrade is offering trades on that event taking place before the end this year, next year and several years beyond. One CNBC commentator opined on his blog today that the first country to depart the euro would be Germany sometime next year. If that happens, the euro's fate, already vulnerable, would be all but sealed.

Euro/Dollar Chart

In more pleasant Monday news, the shopping statistics from Black Friday are in and the average shopper spent $365.34 over Thanksgiving weekend, according to the National Retail Federation. That's a 6.4% increase from a year earlier. About 212 million shoppers visited brick and mortar stores or Web sites over the weekend, an increase of 8.7% over 2009's number, NRF said.

Speaking of online shopping, today is Cyber Monday. What was probably first viewed as a gimmick day is now a legitimate metric for evaluating companies with e-commerce exposure, at least for a couple of days. Shoppers spent $407 million online on Thanksgiving Day compared with $318 million a year earlier. On Black Friday, that number jumped to $648 million from $595 million in 2009.

Online Retail Sales

Of course increased online shopping is a boon for companies like Amazon.com (AMZN), one of the kings of the online shopping universe. Amazon was one of the few major Nasdaq stocks to close higher on the day, gaining $2.29, or 1.29%, to close at $179.49 after trading as high as $181.84. That was good for a new all-time high on a split adjusted basis. Hey, perhaps Henry Blodget, the former Merrill Lynch analyst who rode tech stocks all the way to a healthy dose of infamy, has been redeemed.

Not to rain on anyone's Amazon parade, but there is almost no getting around the fact that this is an expensive stock that has booked an eye-popping run since late July. Up about $70 in that time, Amazon trades for almost 73 times current earnings, more than 50 times forward earnings and almost 13 times book value.

On top of that, Amazon faces intense competition in the e-reader market from Apple (AAPL). The iPad does all the things Amazon's Kindle does plus plenty of other things the Kindle cannot do. Not to mention the fact that analysts and investors are concerned that Amazon has slashed the price of the Kindle so low that the company is now losing money on the product.

Amazon Chart

Looking at the charts, the 1175 continues to hold as critical support for the S&P 500 and the index continues to honor the 1175-1200 trading range. It seems like every time the index gets within earshot of 1175, or in Monday's case, dips just beneath that level, buyers immediately step in. Oddly enough, it was financials that played a big part in the late-day salvation for the S&P 500. Energy and materials names also chipped in.

The economic calendar is active this week with two ISM surveys out tomorrow, another on Wednesday along with the Fed Beige Book survey. Various employment reports follow throughout the week leading up to Friday's November jobs report, so the catalysts are in place for the S&P 500 to either breakout or breakdown.

S&P 500 Chart

The situation is much the same on the Dow as traders continue to buy 11,000 and sell 11,200. On a historical basis, this is usually a chipper time of year for stocks, but it is probably safe to assume that in many of the years in which the Dow and S&P 500 moved higher during the holiday season, Europe was not such a pressing concern. If headline risk subsides for a few days, the Dow could make a run back above 11,200.

Dow Chart

I am going to go out on a limb and say I was disappointed with the Nasdaq today given the strength tech stocks had shown coming into this week and the stellar online shopping news. That said, it was a volatile day for the Nasdaq as the index opened around 2535, traded below 2500 and then the buyers stepped in running the Nasdaq back to 2525.

Amazon cannot do all the work on the Nasdaq alone and my guess is it will not have to over the coming weeks, but I will say tech bulls probably wish NILE and OSTK were members of the Nasdaq 100. They are not, but those names were up 5.4% and 8.1% today, respectively. Nasdaq Chart

The Russell 2000 actually held pretty well today, opening around 735 and falling to just above 720, which is above support at 715. Buyers made sure support was not an issue and sent the Russell 2000 back to 732 by the close. A move above resistance at 740 would be a bullish sign.

Russell 2000 Chart

I am of the mind that credit should be given where credit is due and that leads me to point to two important factors for the bulls. First, dips continue to be bought and support on the major indexes continues to be honored. Second, the U.S. consumer is making a comeback and the data is there to support that claim.

Obviously, Europe is the problem the bulls have to contend with. Even if Friday's job report impresses, if the market has to deal with news of a Portuguese, or worse, Spanish default, the jobs number will be glossed over.


New Plays

Banks Poised to Bounce?

by James Brown

Click here to email James Brown

Editor's Note:

Traders are still buying the dip. Positive economic news in the U.S. this afternoon helped spur stocks higher. I expect the positive news to continue this week. We want to stay bullish in spite of the recent volatility. Tonight I'm adding a somewhat aggressive trade in the banking sector.

In an effort to save some time and get the newsletter out a little bit faster I did not post the company description in the plays tonight. Instead you'll find a link to a company description. Just click on the word "description".

In addition to tonight's new play, keep an eye on these stocks: SNDK, PDCO, CVS, HAL, and SPLS. They all caught my eye as potential bullish candidates, although a few might need to see a slightly deeper pull back.

- James


NEW BULLISH Plays

Wells Fargo & Co - WFC - close: 27.20 change: +0.55

Stop Loss: 26.40
Target(s): 29.25, 31.90
Current Option Gain/Loss: + 0.0%
Time Frame: 10 to 12 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Shares of WFC have been sinking for the last three weeks but the stock has not shown the same sort of relative weakness you'll see in the rest of the banking sector. The action in WFC looks more like a correction and shares have found some support near prior resistance. While I'm probably a little too optimistic that the sector has found a bottom the financials are poised for a little oversold bounce. Shares of WFC produced a bullish engulfing (reversal) candlestick pattern today. It looks like a good spot to speculate on a rally since we can put our stop loss under today's low. Our first target is $29.25. Our second, much longer-term target is $31.90.

Suggested Position: Buy WFC stock @ current levels.

- or -

Buy the 2011 January $27.50 call (WFC1122A27.5) current ask $1.28

Annotated chart:

Entry on November 30 at $xx.xx
Earnings Date 01/19/11 (unconfirmed)
Average Daily Volume: 32.7 million
Listed on November 29th, 2010


In Play Updates and Reviews

Banks Bounce on Bailout

by James Brown

Click here to email James Brown

Editor's Note:
The bailout for Ireland actually produced a rebound in the financials. The banking sector was showing some strength for the first time in a long time. Let's hope it's not a one-day phenomenon. Just about everything saw an afternoon rebound.

-James

Current Portfolio:


BULLISH Play Updates

Alcoa Inc - AA - close: 13.29 change: +0.12

Stop Loss: 12.45
Target(s): 14.95, 15.95
Current Option Gain/Loss: + 0.8%
Time Frame: 6 to 8 weeks
New Positions: Yes, but see below

Comments:
11/29 update: Commodity related stocks were initially weak on dollar strength but the sector turned around. AA managed to break the bearish trend of lower highs. If you missed buying the dip at $13.00 this morning I would still consider buying this bounce. More conservative traders could wait for a move or close above $13.40 instead.

Current Position: Long AA stock @ 13.18

Entry on November 16 at $13.18
Earnings Date 01/10/11 (unconfirmed)
Average Daily Volume: 26.1 million
Listed on November 6th, 2010


Alaska Air Group - ALK - close: 55.50 change: -0.42

Stop Loss: 59.50
Target(s): 51.90
Current Option Gain/Loss: + 1.0%
Time Frame: 8 to 9 weeks
New Positions: Yes, see below

Comments:
11/29 update: Airline stocks are still holding up pretty well. ALK is still drifting sideways in the $54-56 zone. There is no change from my weekend comments. Depending on your style of trading you could wait for a dip back toward the $55-54 zone as your next entry point or wait for a breakout to new highs (over 56.50). Our first target is $59.50. FYI: The Point & Figure chart is bullish with a $79 target.

Current Position: Long ALK stock @ $54.91

- or -

Long the 2011 January $60 calls (symbol: ALK1122A60) entry @ $1.60

Entry on November 22 at $54.91
Earnings Date 01/27/11 (unconfirmed)
Average Daily Volume: 331 thousand
Listed on November 20th, 2010


Abercrombie & Fitch - ANF - close: 48.76 change: +0.30

Stop Loss: 43.95
Target(s): 49.95
Current Option Gain/Loss: unopened
Time Frame: 8 to 10 weeks
New Positions: Yes, see trigger

Comments:
11/29 update: Traders couldn't decide whether or not they wanted to buy or sell the retailers following Black Friday. Shares of ANF spiked toward its highs early this morning but eventually gave back most of its gains. I still don't want to chase it here. I'm suggesting readers look for a pull back into the $46.10-45.00 zone.

Trigger to buy ANF @ $46.10

Suggested Position: Buy ANF stock @ $46.10
- or -
Buy the 2011 January $50 call (symbol: ANF1122A50)

Entry on November xx at $xx.xx
Earnings Date 02/15/11 (unconfirmed)
Average Daily Volume: 3.1 million
Listed on November 17th, 2010


Citigroup Inc - C - close 4.15 change +0.04

Stop Loss: 4.08
Target(s): 4.60, 4.75, 4.95
Current Option Gain/Loss: - 0.2%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
11/29 update: I am honestly surprised that Citigroup did not hit our stop loss this morning. The bailout for Ireland was positive for financials but the group still looked weak first thing this morning. Fortunately the banking sector seemed to turn around midday and the banking indices closed in positive territory. C actually posted a +0.9% gain. This stock is on the verge of breaking the bearish trend of lower highs we've seen over the last three weeks. Readers may want to use a move over $4.20 as a new entry point.

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


Companhia Brasileira de Distribuicao - CBD - close: 40.86 change: -0.15

Stop Loss: 36.75
Target(s): 44.95, 49.00
Current Option Gain/Loss: + 1.5%
Time Frame: 10 to 12 weeks
New Positions: Yes, see below

Comments:
11/29 update: Traders bought the dip near $40.00 this morning and CBD rallied back toward the unchanged level. I have been suggesting readers buy a dip in the $40-39 zone and don't see any changes from my weekend comments. More conservative traders may want to consider a stop loss closer to $38.00. We have a wide stop because CBD can be so volatile. Bear in mind this is a higher-risk trade.

Current Position: Long CBD stock @ $40.25

Entry on November 23 at $40.25
Earnings Date 03/02/11 (unconfirmed)
Average Daily Volume: 608 thousand
Listed on November 20th, 2010


Genuine Parts Co. - GPC - close: 48.32 change: -0.21

Stop Loss: 46.85
Target(s): 51.50
Current Option Gain/Loss: + 0.0%
Time Frame: 6 to 8 weeks
New Positions: Yes

Comments:
11/29 update: GPC held up pretty well. This stock is a new play from the weekend and shares opened at $48.24. GPC bounced from technical support at its 20 and 30-dma near $47.70. If you missed buying the dip this morning I would still consider bullish positions on this afternoon bounce. Readers may want to buy the call options to leverage this move. FYI: The point & figure chart is bullish with a $52 target.

Current Position: Long GPC stock @ $48.24
- or -
Long the 2011 January $50.00 calls (GPC1122A50) Entry @ $0.40

Entry on November 29 at $48.24
Earnings Date 02/16/11 (unconfirmed)
Average Daily Volume: 763 thousand
Listed on November 27th, 2010


Hansen Natural Corp. - HANS - close: 53.13 change: -1.26

Stop Loss: 48.95
Target(s): 54.90, 57.45
Current Option Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

Comments:
11/29 update: The widespread market weakness finally sparked a little bit of profit taking in HANS. The stock gave up -2.3%. Yet that still isn't enough. We want to see a dip to $52.00. Fortunately, HANS did not see much of an afternoon bounce to the pull back may not be over yet.

Trigger @ 52.00

Suggested Position: BUY the stock

- or -

BUY the January $55.00 calls (symbol:HANS1122A55)

Entry on November xx
Earnings Date 11/04/10 (confirmed)
Average Daily Volume: 750 thousand
Listed on October 16, 2010


Kroger Co. - KR - close 23.08 change +0.01

Stop Loss: 21.95
Target(s): 23.70, 24.75
Current Option Gain/Loss: + 2.3%
Time Frame: 8 to 10 weeks
New Positions: No

Comments:
11/29 update: KR did not show that much volatility today and the stock closed virtually unchanged on the session. There is no change from my weekend comments.

11/27 update: This could be an exciting week for KR. The company is due to report earnings on Thursday, December 2nd before the opening bell. Holding over earnings is a high-risk endeavor. More conservative traders will want to exit the day before. I hesitate to launch new positions ahead of the earnings report but aggressive traders may want to buy dips in the $22.75-22.50 zone.

Current Position: Long KR stock @ 22.55

Entry on November 9th @ 22.55
Earnings Date 12/2/2010 (confirmed)
Average Daily Volume: 6 million
Listed on November 3, 2010


Lam Research - LRCX - close: 46.15 change: -0.46

Stop Loss: 42.75
Target(s): 48.50, 52.50
Current Option Gain/Loss: unopened
Time Frame: 8 to 10 weeks
New Positions: Yes, see trigger

Comments:
11/29 update: Volume remains light but the 2.1 million shares was the highest LRCX has seen in days. Shares slipped to $45.54 near its 30-dma before bouncing. I'm still holding out for a dip toward $45.00 with a trigger to launch positions at $45.25. More conservative traders could wait for a pull back closer to $44.00 instead.

Trigger @ $45.25

Suggested Position: Buy LRCX stock @ 45.25
- or -
Suggested Position: Buy the 2011 January $45 calls (LRCX1122A45)

Entry on November xx at $xx.xx
Earnings Date 01/27/11 (unconfirmed)
Average Daily Volume: 4.5 million
Listed on November 18th, 2010


Microsoft Corp. - MSFT - close: 25.31 change: +0.06

Stop Loss: 24.70
Target(s): 27.45, 29.00
Current Option Gain/Loss: - 0.9%
Time Frame: 8 to 10 weeks
New Positions: Yes

Comments:
11/29 update: Whew! It was a close one this morning. MSFT dipped to $24.93 intraday but managed to bounce back into positive territory. This pull back toward the $25.00 level should be a great entry point for bullish positions so I want to widen our stop loss a little bit to $24.70. If you aren't ready to buy this bounce yet consider waiting for a rally past $25.50 or $26.10.
FYI: We may need to adjust our time frame and focus on three or four months for MSFT to pay off. If you're buying calls, keep that in mind.

Current Position: Long MSFT stock @ 25.55

- or -

Buy the 2011 January $25.00 calls (symbol: MSFT1122A25) Entry @ $1.39

11/29/10 New stop @ 24.70

Entry on November 17 at $25.55
Earnings Date 01/27/11 (unconfirmed)
Average Daily Volume: 68.4 million
Listed on November 15th, 2010


Onyx Pharmaceuticals - ONXX - close: 29.47 change: -0.08

Stop Loss: 26.45
Target(s): 32.00, 34.50
Current Gain/Loss: unopened
Time Frame: 8 to 10 weeks
New Positions: Yes, see trigger

Comments:
11/29 update: Wow! ONXX almost hit our trigger today. That's the most excitement this stock has seen in weeks. Shares dipped to $28.80 before rebounding. I don't see any changes from my weekend comments. We have at trigger to launch bullish positions at $28.60. More conservative traders could wait for a dip closer to $28.00, which should be decent support.

Trigger @ $28.60

Suggested Position: Buy ONXX stock @ 28.60

Entry on November xx at $xx.xx
Earnings Date 02/23/11 (unconfirmed)
Average Daily Volume: 1.1 million
Listed on November 13th, 2010


Sony Corp. - SNE - close: 35.00 change: +0.42

Stop Loss: 32.90
Target(s): 35.75, 39.00
Current Option Gain/Loss: unopened
Time Frame: 10 to 12 weeks
New Positions: Yes, see trigger

Comments:
11/29 update: SNE displayed some relative strength on Monday. Aggressive traders may want to consider buying this bounce. I'm suggesting we wait for the dip to $34.00. If triggered our first target is $35.75 with a stop loss t $32.90.

Trigger @ $34.00

Suggested Position: Buy SNE stock
- or -
Buy the 2011 APRIL $35 calls (SNE1116D35) current ask $2.45

Entry on November xx at $xx.xx
Earnings Date 02/03/11 (unconfirmed)
Average Daily Volume: 888 thousand
Listed on November 23rd, 2010


Tractor Supply Co. - TSCO - close: 42.00 change: -0.29

Stop Loss: 39.45
Target(s): 44.95
Current Option Gain/Loss: unopened
Time Frame: 8 to 10 weeks
New Positions: Yes, see trigger

Comments:
11/29 update: There is no change from my weekend comments. TSCO only dipped to $41.26 this morning. Our trigger to launch bullish positions is at $40.75.

Buy-the-Dip Trigger @ $40.75

Suggested Position: Buy TSCO stock
- or -
Buy the 2011 January $45 calls (symbol:TSCO1122A45)

Entry on November xx at $xx.xx
Earnings Date 01/27/11 (unconfirmed)
Average Daily Volume: 751 thousand
Listed on November 11th, 2010


World Acceptance Corp. - WRLD - close: 44.84 change: -0.61

Stop Loss: 40.75
Target(s): 47.25, 49.75
Current Option Gain/Loss: + 1.3%
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Comments:
11/29 update: Our new trade on WRLD has been opened. The widespread weakness this morning was enough to push WRLD to $44.00. Our trigger to launch bullish positions was $44.25. If you missed the dip this morning I would still consider new positions now or on a dip in the $44-43 zone. Our first target is $47.25.

Current Position: Long WRLD stock @ 44.25
- or -
Long the 2011 January $45 calls (WRLD1122A45) Entry @ $2.40

Entry on November 29 at $44.25
Earnings Date 01/27/11 (unconfirmed)
Average Daily Volume: 122 thousand
Listed on November 27th, 2010


BEARISH Play Updates

Corporate Office Properties - OFC - close: 33.90 change: -0.25

Stop Loss: 36.15
Target(s): 32.25, 30.25
Current Change: - 3.3%
Time Frame: 6 to 8 weeks
New Positions: No

Comments:
11/29 update: OFC continues to underperform. Shares lost 0.7% today. I don't see any changes from my weekend comments.

11/27/10 New stop @ 36.15

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


CLOSED BULLISH PLAYS

Overseas Shipholding Group - OSG - close: 35.42 change: -0.09

Stop Loss: 34.75
Target(s): 39.90, 42.00
Current Option Gain/Loss: - 4.7%
Time Frame: 4 to 6 weeks
New Positions: No

Comments:
11/29 update: We knew OSG was a volatile stock and I labeled this play a higher-risk trade but shares were just a little too volatile for us this morning. The stock broke down under its 30, 40, 50 and 100-dma with a dip to $34.39. Our stop loss was hit at $34.75 closing this trade. Unfortunately, OSG managed to bounce back and recoup almost all of its losses. Aggressive traders may want to reconsider buying this afternoon bounce.

Closed Position: Long OSG stock @ $36.50 , exit @ 34.75 (-4.79%)

- or -

Long the 2011 January $40 calls (OSG1122A40) Entry @ $0.78, Exit @ $0.45 (-42.3%)

chart:

Entry on November 23 at $36.50
Earnings Date 03/01/11 (unconfirmed)
Average Daily Volume: 600 thousand
Listed on November 22nd, 2010