Option Investor
Newsletter

Daily Newsletter, Thursday, 12/2/2010

Table of Contents

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

Market Wrap

Economic Data Lifts Stocks

by Todd Shriber

Click here to email Todd Shriber
The combination of robust retail sales and surprisingly strong existing home sales data helped U.S. stocks extended Wednesday's rally as the Dow Jones Industrial Average notched its biggest two-day jump since July. The Dow booked another triple-digit pop, but was the only of the three major U.S. indexes to gain less than 1% on the day. The Nasdaq gained almost 1.2% and the S&P 500 added nearly 1.3%, respectively, while the Russell 2000 continued to flex its muscle, rising almost 1.1%.

Market Stats

The and home and retail sales data were able to overshadow to the weekly jobless claims data that came in at 436,000, well above the expected 422,000. Jobless claims jumped by 26,000 from last week and were also revised upward by 3000, so the weekly jump was basically 29,000. On the bright side, initial claims have been trending down since mid-August and the four-week moving average fell by 5750 to 431,000.

Relative to a year ago, the four-week moving average is down by 61,000 or 12.4%, according to Zack's Investment Research. Regular continuing claims for unemployment insurance also did little much excitement, rising 53,000 to 4.27 million.

Jobless Claims

Alright, so the jobless claims data was nothing to write home about and we will get a clearer picture regarding any progress on higher employment on Friday when the Labor Department delivers the November jobs update, but on Thursday investors were heartened by some impressive retail sales data. I mentioned on Monday that the U.S. consumer, roughly two-thirds of our country's GDP, was showing some strength and the data points were there to support that assertion.

Well, another one of those data points arrived on Thursday when it was reported that November retail sales surged 6%, signaling the best start to the holiday shopping season in three years. Analysts were expecting the number to come in at an increase of just 3.6%. Maybe it was holiday sales starting earlier than in years past, higher demand or just old fashioned improving consumer sentiment, but it is hard to argue with the positive nature of the November number.

Not to be Debbie Downer (trust me, I'm rooting for the economy to fully recover just as much as the next person, but it is worth remembering that strong retail sales in November do not always translate to good news in December and one does not have to go too far back to see this scenario at work. In 2008, November's retail sales were strong only for retailers to endure one of the worst holiday shopping seasons on record.

Retail Sales

As I mentioned earlier, some positive news from the real estate arena played a part in Thursday's bullish action. The National Association of Realtors releases its pending home sales data for October and the number was another pleasant upside surprise. The seasonally adjusted national index got a bump of 10.4% from September. That is the good news. The October number fell a startling 20.5% from October 2009.

Still NAR Chief Economist Lawrence Yun said the double-digit increase is a sign that the the housing market is recovering. “The housing market clearly is in a recovery phase and will be uneven at times, but the improving job market and consequential boost to household formation will help the recovery process going into 2011,” Yun said.

Pending Home Sales

If one is inclined to call or most of the aforementioned economic data ''positive,'' then that might be at least one catalyst behind oil's surge. NYMEX-traded crude for January delivery, closed at $88 per barrel, its best closing price since October 2008. Remember that $88 in October 2008 was on the way down. Heating oil and gasoline futures also found their way to two-year highs.

Brent crude trade, Europe's benchmark contract, settled above $90 after European Central Bank President Jean-Claude Trichet took a page from the Bernanke book of bank salvation and said the ECB will give European banks as much cash as they need through the first quarter.

As far as things go with the Brent contract, January is trading at a 3-cent premium to the February future, according to Bloomberg News. That is called backwardation and could indicate oil is more in demand now than it will be in the near future. Then again, oil is probably moving more on macro issues than legitimate supply and demand these days.

Oil Chart

Speaking of oil, today was a great day to be involved with Russian equities. Consider this the ''To Russia With Love'' section of today's wrap and allow me to say this was a bang-up day for Russia period. The least economically diverse (not debatable) and perhaps most corrupt (arguable) member of BRIC, some experts have gone so far as to wonder why Russia is even lumped in with high-fliers like Brazil, China and India. Some have said remove Russia, add Indonesia and make it ''BIIC.''

To that, Russia has said ''Nyet.'' Here is a perfect storm for investors that are bullish on Russia: Oil prices surge. Palladium does, too. Russia is the biggest palladium producer in the world. FIFA decides Russia will be hosting the 2018 World Cup. All that happened today.

And with all that Russian love, it might be easy to gloss over some mergers and acquisitions activity involving one of the few Russian companies listed on major U.S. exchange. Wimm-Bill-Dann (WBD), one of Russia's largest food and beverage firms, is selling a two-thirds stake in itself to PepsiCo (PEP) and the world's second-largest soft drink company wants to acquire all of the Russian firm for $5.4 billion.

That is a 32% premium to Wimm-Bill-Dann's pre-bid market value, according to the New York Times. Doing business in Russia is tricky to say the least, but Pepsi has maintained a presence there for four decades and while the acquisition looks expensive in the near-term consider this: Maybe more than any other emerging market, Russia's changing food and beverage tastes are decidedly western, meaning Pepsi may not have to spend millions of dollars developing scores of new products to suit Russian tastes.

Wimm-Bill-Dann Chart

Another group of big winners on the day were financials services stocks, which caught a bid thanks to some bullish comments by Goldman Sachs (GS). Goldman is constructive on the group for the first time since 2008 and investor reaction to the news was palpable on Thursday. In a note to clients, Goldman analysts said stronger economic growth, rising stock prices and a favorable interest rate environment would help financials outperform the broader market in 2011 and 2012.

Name a somewhat well-known financial, bank, brokerage, insurance provider, even a REIT and it was probably up today on the back of the Goldman comments. Even some beat-up regional bank stocks found favor among investors. Marshall & Isley (MI) and Regions Financial (RF), two banks whose best prospects may be to find a buyer, surged 12% and 7%, respectively. These two stocks trade for less than $10, but hey, a good day is a good day.

Goldman kept its conviction ratings on private equity firm Blackstone Group (BX), REIT Simon Property (SPG) and banks Citigroup (C) and JPMorgan Chase (JPM).

XLF Chart

Looking at the charts, the S&P 500 moved through resistance at 1200 yesterday and cleared another at 1220 today. This should be bullish as the index has now cleared its April peak. Targeting 1250-1300 by year end seems reasonable at this point, assuming Europe stays quiet.

S&P 500 Chart

The Dow has also traversed its April high. Actually, the blue-chip index is more than 100 points removed that high, but resistance is not that far off at 11,500. From there, the Dow has some room to running to the 11,860 area, which was last seen in mid-2008.

Dow Chart

The Nasdaq was weak on Monday and Tuesday, but it kept finding relief at 2500, a critical support area. In the last two days, the index has tacked on 80 points and easily busted through resistance at 2535. Remember, the fourth quarter usually is not kind to tech issues and the statistics aren't as favorable when it comes to positive Decembers on the Nasdaq as they are when it comes to the S&P 500. At this point, it looks like a safe bet that the Nasdaq will take out 2600 and the last time that happened was three years ago.

Nasdaq Chart

The Russell 2000 took at its April peak today and a close above 750 is bullish. The small-cap index has been flashing plenty of bullish signs lately and the real party could start if 775 is taken out.

Russell 2000 Chart

The last two days have been plenty of fun, but the mess that is Europe did not just evaporate overnight. Nor did the inflation concerns in the emerging markets, namely China. That is my cautious side. My cheery side tells me if Friday's jobs report is encouraging, oil continues to move higher and financials really join the party, Santa may be coming early this year for investors.


New Plays

Credit Services

by James Brown

Click here to email James Brown


NEW BULLISH Plays

American Express - AXP - close: 44.98 change: +0.68

Stop Loss: 41.49
Target(s): 47.50, 49.85
Current Option Gain/Loss: unopened
Time Frame: 10 to 12 weeks
New Positions: Yes, see trigger

Company Description

Why We Like It:
The rebound in financials is very encouraging. Dow Theory suggests that we can't have a sustained rally without the banks. AXP has been showing some strength the last three or four days. Plus, the stock has built an inverse head-and-shoulders pattern that is forecasting a move toward $50.00. I'm suggesting we launch bullish positions on a dip at $43.50. If triggered we'll use a stop loss at $41.49, under the 200-dma. We will plan on taking profits at $47.50 and at $49.85. Our time frame is several weeks.

Trigger @ $43.50 Suggested Position: Buy AXP stock at $43.50

- or -

Buy the 2011 April $45 calls (AXP1116D45)

Annotated chart:

Entry on December xx at $xx.xx
Earnings Date 01/20/11 (unconfirmed)
Average Daily Volume: 9.0 million
Listed on December 2nd, 2010


In Play Updates and Reviews

Techs & Financials Look Strong

by James Brown

Click here to email James Brown

Editor's Note:
Financials continue to rally and technology continues to show strength. LRCX hit our first target. Meanwhile KR and OFC have been stopped out. I have adjusted our trigger on HANS and TSCO.

-James

Current Portfolio:


BULLISH Play Updates

Alcoa Inc - AA - close: 14.09 change: +0.52

Stop Loss: 12.90
Target(s): 14.95, 15.95
Current Option Gain/Loss: + 6.9%
Time Frame: 6 to 8 weeks
New Positions: Yes, but see below

Comments:
12/02 update: It was another strong day for AA. Shares spiked higher at the open and settled with a +3.8% gain. The stock is nearing its recent highs from November just under $14.20. Don't be surprised to see a little pull back after AA tags this level. If you're looking for a new entry point I'd wait for a dip into the $15.60-15.50 zone. Please note that I'm raising the stop loss to $12.90.

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: 55.32 change: -0.14

Stop Loss: 51.90
Target(s): 59.75
Current Option Gain/Loss: + 0.7%
Time Frame: 8 to 9 weeks
New Positions: Yes, see below

Comments:
12/02 update: I remain disappointed in ALK. The stock is not participating in the market's widespread rally. The XAL airline index also sat out the rally today. This is worrisome. I'm not suggesting new positions at this time until we see a breakout past resistance near $56.00. I need to make a correction to ALK's stop loss and targets. Our stop loss is at $51.90 and our first target is now $59.76. More conservative traders might want to consider a stop closer to $54.

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


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: see below

Comments:
12/02 update: Financials were some of the best performers on Wall Street with the banking indices up about +4%. Shares of C managed to gain +2.8%. I don't see any changes from my previous comments. If you're looking for a new entry point I would consider dips into the $4.25-4.20 zone.

Don't forget the December calls expire in about two weeks. They are currently trading with a bid of $0.40. It looks like our entry point on the call was Oct. 28th at $0.29 or Oct. 28th at $0.30. Readers holding the calls may want to consider exiting for a profit soon, especially as C nears the $4.50 level.

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: 41.94 change: +0.29

Stop Loss: 36.75
Target(s): 44.95, 49.00
Current Option Gain/Loss: + 4.2%
Time Frame: 10 to 12 weeks
New Positions: Yes, see below

Comments:
12/02 update: It was a quiet day for CBD. I don't see any changes from my previous comments. If you're looking for an entry point wait for a dip into the $40.50-40.00 zone. 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: 49.60 change: +1.09

Stop Loss: 46.85
Target(s): 51.50
Current Option Gain/Loss: + 2.8%
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Comments:
12/02 update: GPC is showing strength again and the stock added +2.2% to close at new 52-week highs. Volume was strong, which is a good sign. If you missed our entry point and want to see another entry I'd wait for a dip toward $48.50ish. Readers may want to buy the call options to leverage this play. 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: 52.94 change: +0.43

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:
12/02 update: HANS is still under performing the rest of the market these last couple of days. Volume has been kind of light too. I'm a little bit cautious here. Let's move our trigger down to $51.00 and if HANS suddenly starts to act strong again we can re-evaluate.

Trigger @ 51.00

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


Lam Research - LRCX - close: 48.55 change: +0.85

Stop Loss: 43.80
Target(s): 48.50, 52.50
Current Option Gain/Loss: + 5.4%
Time Frame: 8 to 10 weeks
New Positions: Yes, see below

Comments:
12/02 update: Target achieved. The SOX semiconductor index has broken out to new relative highs. LRCX is not quite there. Shares added +1.7% as they approach their 2010 highs set last month near $48.75. The stock did hit $48.68 and that was enough to tag our first target at $48.50. If you're looking for an entry point I'd wait for a dip toward $45.40.

Current Position: Long LRCX stock @ 45.25
- or -
Current Position: Long the 2011 January $45 calls (LRCX1122A45) Entry @ $2.85

12/02 Target hit @ $48.50, LRCX +7.2%, option @ $4.55 (+59.5%)

chart:

Entry on November 30 at $45.25
Earnings Date 01/27/11 (unconfirmed)
Average Daily Volume: 4.5 million
Listed on November 18th, 2010


Microsoft Corp. - MSFT - close: 26.89 change: +0.85

Stop Loss: 24.70
Target(s): 27.45, 29.00
Current Option Gain/Loss: + 5.2%
Time Frame: 8 to 10 weeks
New Positions: Yes, see below

Comments:
12/02 update: Wow! MSFT is just screaming higher. Shares added another +3.2% and broke through technical resistance at its 200-dma on Thursday. Shares are short-term overbought at this point. If you're looking for an entry point I'd wait for a dip toward the $26.00-25.50 zone. Our first target to take profits is at $27.45.
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: 30.01 change: -0.17

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:
12/02 update: ONXX is still not participating in the market's rally. I'm about ready to drop it as a candidate. Aggressive traders may want to consider buying a breakout past $30.50. Currently our buy-the-dip trigger is at $28.60.

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


Peir 1 Imports - PIR - close: 10.00 change: -0.14

Stop Loss: 9.15
Target(s): 11.90
Current Option Gain/Loss: + 0.0%
Time Frame: 10 to 12 weeks
New Positions: No

Comments:
12/02 update: Investors were not sure hot to interpret today's data from PIR. The company said their comparable store sales were +10.2% but that was down from a year ago (+13.7%). Meanwhile margins were improving and PIR raised their revenue guidance. Yet the stock failed to really move. Shares spiked higher, which was bad news for our entry point, and then sank. This looks like a possible bearish engulfing candlestick pattern. If the stock closes under $9.80 soon I will close this play early! No new positions at this time. Let's wait and see how PIR reacts tomorrow.

Investors should know that PIR is due to report earnings on December 16th. We plan to hold over that event. I consider holding over the earnings announcement a high-risk event. Keep that in mind as you plan your trades.

Current Position: Long PIR stock @ $10.24

Entry on December 2 at $10.24
Earnings Date 12/16/10 (confirmed)
Average Daily Volume: 2.3 million
Listed on December 1st, 2010


Sony Corp. - SNE - close: 36.56 change: +0.09

Stop Loss: 33.45
Target(s): 36.50, 39.00
Current Option Gain/Loss: unopened
Time Frame: 10 to 12 weeks
New Positions: Yes, see trigger

Comments:
12/02 update: SNE extends its gains to four days in a row. We are still waiting for a pull back. Our trigger to open bullish positions is $34.50.

Trigger @ $34.50

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

Entry on December 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: 45.44 change: +1.65

Stop Loss: 39.90
Target(s): 47.50
Current Option Gain/Loss: unopened
Time Frame: 8 to 10 weeks
New Positions: Yes, see trigger

Comments:
12/02 update: Gosh, just a couple of days ago I was talking about buying TSCO instead of waiting for a dip. Can I have buyer's remorse without actually having bought TSCO yet? The stock is soaring higher and shares added +3.7%. Naturally I don't want to chase it here, not after this big move higher. We will move our trigger to $43.00.

Buy-the-Dip Trigger @ $43.00 <-- new trigger

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

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


Wells Fargo & Co - WFC - close: 28.78 change: +1.25

Stop Loss: 26.40
Target(s): 29.25, 31.90
Current Option Gain/Loss: + 7.0%
Time Frame: 10 to 12 weeks
New Positions: Yes, see below

Comments:
12/02 update: It was a good day for WFC. Financials performed very well and WFC added +4.5%. The stock has broken through technical resistance at its 200-dma. If you're looking for a new entry point I would wait for a dip toward $27.50.

Current Position: Long WFC stock @ $26.88

- or -

Long the 2011 January $27.50 call (WFC1122A27.5) Entry @ $1.16

Entry on November 30 at $26.88
Earnings Date 01/19/11 (unconfirmed)
Average Daily Volume: 32.7 million
Listed on November 29th, 2010


World Acceptance Corp. - WRLD - close: 47.78 change: +0.78

Stop Loss: 41.90
Target(s): 47.25, 49.75
Current Option Gain/Loss: + 7.9%
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Comments:
12/02 update: WRLD continues to inch higher and added another +1.6%. I don't see any changes from my previous comments. If you're looking for a new entry point I would wait for a dip into the $45-44 zone. FYI: The option was trading with a bid around $3.50 when WRLD hit our target.

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

12/01 First Target Hit @ $47.25 (+6.7%), Option @ $3.50 (+45.8%)
12/01 New stop @ 41.90

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


CLOSED BULLISH PLAYS

Abercrombie & Fitch - ANF - close: 56.02 change: +5.58

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:
12/02 update: I'm giving up on ANF. Shares exploded higher today after the company announced very strong same-store sales figures for November. Analysts were only looking for +6.4% sales growth and ANF reported +22.0%. The stock gapped open higher and posted a +11% gain. Shares never hit our trigger to buy the dip and we certainly don't want to buy it now. I would consider putting ANF on your watch list and wait for it to retest the $50.00 area. Broken resistance should be new support.

Our play never opened.

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


Kroger Co. - KR - close 21.63 change -2.23

Stop Loss: 22.45
Target(s): 23.70, 24.75
Current Option Gain/Loss: - 2.8%
Time Frame: 8 to 10 weeks
New Positions: No

Comments:
12/02 update: KR reported earnings this morning that were only inline with Wall Street's estimates of 32 cents each. Revenues were $18.7 billion versus the $18.5 billion estimate. KR narrowed its 2011 earnings guidance from $1.60-1.80 to $1.65-1.78. The market was very unhappy that they lowered their top line estimates. The stock gapped open lower at $21.90 and quickly fell toward its 200-dma. This is a great example of why we normally do not want to hold over an earnings report. Our stop loss was $22.45 so the play was closed at the opening bell.

Closed Position: Long KR stock @ 22.55, exit @ 21.90 (-2.8%)

12/02 Stopped out!
12/01 New stop @ 22.45
12/01 Target exceeded, gap higher @ 23.81 (+5.5%)

chart:

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


CLOSED BEARISH PLAYS

Corporate Office Properties - OFC - close: 35.20 change: +0.85

Stop Loss: 36.15
Target(s): 32.25, 30.25
Current Change: - 2.0%
Time Frame: 6 to 8 weeks
New Positions: No

Comments:
12/02 update: Yesterday I was growing concerned about what the market's bullish influence might have on OFC. That's why we lowered the stop loss down to $35.07. Shares surged +2.4% today and hit our stop loss this afternoon closing the play.

Closed Position: Short OFC stock @ 35.07, exit @ $35.07 (+0.0%)

12/02/10 Stopped out
12/01/10 New stop @ 35.07
11/27/10 New stop @ 36.15

chart:

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