Option Investor
Newsletter

Daily Newsletter, Monday, 12/6/2010

Table of Contents

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

Market Wrap

Monday Snoozer Despite QE3 Talk

by Todd Shriber

Click here to email Todd Shriber
In movie studio fashion, no sooner is the sequel released and executives are already talking about a sequel to the sequel. Such is the case with quantitative easing. The market reacted in negative fashion today to comments made by Federal Reserve Chairman Ben Bernanke during his interview with ''60 Minutes'' on Sunday.

Bernanke basically said the Fed could expand its $600 bond purchase program known as QE2. So I am not sure if an expansion counts as the third part of this trilogy, but even the faint chance that the Fed would need to buy more bonds was enough to roil stocks today, snapping three-day winning streaks for the Dow Jones Industrial Average and the S&P 500, both of which endured small losses on the day. The Nasdaq moved to a three-year high and the Russell 2000 also found its way to a higher close.

Stats Table

Of course all that QE talk leads to talk about a debased currency (the old greenback) and that is music to the ears of gold bugs. Indeed, the price for gold you see in the stats table above is a fresh all-time high. Gold has been in a bull market of unprecedented proportions for an extended period of time and with each bullish day for the yellow metal today, I am reminded of an anecdote about this gold bull market that I have seen rehashed by several media outlets this year: Gold is in the midst of its best 10-year run since the 1920s.

There's good reason for this and I say that as someone who is only long gold through the ETFS Precious Metals Basket (GLTR), an ETF that holds four different precious metals, so I am not overweight gold. Perhaps I should be. After all, with the debasement of the dollar and persistent concerns about the viability of the euro, gold for all intents and purposes a de facto currency now.

Speaking of ETFs, I get a chuckle out when I see pundits blaming gold-backed ETFs for artificially pumping up the price of gold and creating a potential bubble for the yellow metal. As I just noted, there are sound fundamental reasons for owning gold and if an investor wants gold exposure without being involved in the futures market or collecting gold, the logical alternative is ETFs. Most folks that have followed financial markets for extended period of time know that gold is prone to bubbles and wicked falls after lengthy rallies. These events occurred long before the advent of gold ETFs and when this gold run expires, it will not be simply because of ETFs.

Gold Chart

Staying with the precious metals theme, silver closed at another 30-year high today. The cheaper, more industrially useful metal than gold has been on a tear of its own this year. Year-to-date, the iShares Silver Trust (SLV) is up about 70% compared to a 30% gain for the SPDR Gold Shares (GLD).

The run in silver, while equally as valid as the run in gold, comes with an element of a humor. By that I mean JPMorgan (JPM) is short a massive amount of paper silver. London's Guardian newspaper reports that the bank's short position in silver is 3.3 billion ounces. Other press reports and blogs say the bank's short position in the metal, which is believed to be naked, is larger than all of the physically available silver in the world.

With this comes the accusation that JPMorgan is trying suppress the price of silver on behalf of the Fed to make the dollar look more attractive. Forgive me for finding this kind of funny because as the chart below illustrates, JPMorgan has done quite a miserable job of taming silver prices. With no end in sight to silver's rally, the bank will be forced to cover its shorts and with so many positions to covered, it will be almost possible to do that without disrupting the market in favor of the bulls.

Silver Chart

And staying with materials that can be mined, Massey Energy (MEE), the largest coal miner in Central Appalachia, was one of the more noteworthy winners in the S&P 500 today on news that embattled CEO Don Blankenship will leave the company. Blankenship's departure, while abrupt, seemed to be a positive catalyst for the shares today as the stock gained $1.21, or 2.4%, to close at $51.63. Volume was almost double the daily average.

Analysts are speculating that Blankenship's departure frees Massey up to be acquired, a tidbit that was once a rumor, but the company did recently confirm it was open to shopping itself. On the hand, the Wall Street Journal reported early this morning that Massey could be looking to make an acquisition of its own.

No matter what the future holds for Massey, the stock has been on an impressive run over the past few months, reclaiming almost all of the lost shareholder value that was endured as a result of the Upper Big Branch mine explosion in April, the worst U.S. coal mine disaster in four decades.

Massey Chart

It was another rough day for Bank of America (BAC), the largest U.S. bank by assets. The shares slid almost 2% to close at $11.64, just a penny above the intraday low, after Nomura Holdings said the bank is at risk for a credit downgrade next year. On top of that, Bloomberg News reported that is losing financial adviser Michael Brown to a rival firm. Normally, this would not be big news, but when the adviser manages $5.9 billion in client assets, as Brown does, it becomes just one more bit of bad news for a stock already ravaged by negative news flow.

As Bloomberg reports, Brown's departure leads to concerns that BofA has had and will continue to have difficulties retaining top talent it acquired through its shot-gun purchase of Merrill Lynch. The only bright side to all the bad news BofA has had to contend with recently is that it could mean the looming WikiLeaks release of a data about a major U.S. bank, assuming it is about this bank, may not damage the stock price all that much.

Bank of America Chart

A 2% seems tame compared to an 8.2% loss, the thrashing endured by biotech firm Celgene (CELG). Biotech is almost always a hot sector, especially when it comes to mergers and acquisitions, a fact highlighted by over $3 billion in deals out of the sector in two days alone last week, but it appears that big pharma will probably be taking a pass on Celgene, at least for the time being.

The company said today that its best-selling blood cancer treatment Revlimid was found to cause cases of secondary cancer in multiple myeloma patients. It should be noted that the data sample was small and viewed to be inconclusive, but investors concluded otherwise, punishing Celgene shares on more than seven times the average daily volume.

Revlimid is not going by the wayside because it is expected to see 2010 sales of almost $2.5 billion, but it is not a good thing when a drug that is adept after suppressing myeloma is found to cause other forms of cancer. The hard times for Celgene shares are continuing in the after-hours session with the stock down 3% to $54 as of this writing on news that American Society of Hematology data from a study of Revlimid long-term maintenance therapy in multiple myeloma reported 15 cases of secondary malignancies in Revlimid patients compared to six cases of secondary cancer in placebo patients, according to TheStreet.com.

Celgene Chart

Looking at the charts, the S&P 500 did not even touch the important 1228 resistance level today, the same area that sent the index tumbling back twice last month. Rather, the S&P 500 was locked in a boring five-point range for the day and closed hovering near 1225. Round number support is 1200, but the more critical support zone is 1175.

S&P 500 Chart

The Dow offered little more in the way of excitement today, trading in a 42-point range from top-to-bottom. After last week's Wednesday/Thursday rally, a 20-point loss today does not mean much other than to say the index is probably still a tad overbought. Support below 11,000 is obviously a long way off, but it remains to be seen if the bulls can catapult the Dow above the November peak in the 11,440 area.

Dow Chart

The Nasdaq was the shining star among the major U.S. indexes today, closing at a three-year high, but failing to even trade above 2600 intraday. Monday's close at 2594 means resistance at 2592 has been cleared and there is plenty of room in front of the Nasdaq before encountering decade-old resistance at 2850.

Nasdaq Chart

As I said last week, give the Russell 2000 some credit. The small-cap index just keeps on chugging along and closed right at resistance at 760 today. Clearing this level on strong volume would be a bullish sign and probably take the index to 775. From there, the Russell 2000 could run to 850 without much interference.

Russell 2000 Chart

The bears missed a golden opportunity on Friday to reassert themselves. That disappointing jobs number should have been like mana from heaven for the shorts. Alas, it was not and the moment has passed. If Europe can keep its nose clean for the next few weeks, stocks should rally into year-end. If not, there is always gold and silver.

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New Plays

May Not Last

by James Brown

Click here to email James Brown

Editor's Note:

The S&P 500 has stalled near resistance at 1225. If the market sees a correction then broken resistance near 1200 should be support. There are still a lot of traders ready to buy the dip so when the decline comes the entry point may not last that long.

I'm not adding any new plays tonight. We already have a handful of bullish candidates with buy-the-dip triggers.

- James


In Play Updates and Reviews

Mild Profit Taking

by James Brown

Click here to email James Brown

Editor's Note:
Monday turned out to be a quiet session on Wall Street. Overall the trend today saw stocks drifting sideways in a narrow range.

-James

Current Portfolio:


BULLISH Play Updates

Alcoa Inc - AA - close: 14.23 change: +0.14

Stop Loss: 12.90
Target(s): 14.95, 15.95
Current Option Gain/Loss: + 8.0%
Time Frame: 8 to 10 weeks
New Positions: Yes, but see below

Comments:
12/06 update: Metals continued to rally even in the face of dollar strength this morning. Shares of AA eked out a very minor gain. I don't see any changes from my weekend comments. I would not chase new positions here. Wait for a dip back toward the $13.60-13.50 zone. (If we do see another entry point we might consider buying some call options).

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: 56.04 change: +0.15

Stop Loss: 51.90
Target(s): 59.75
Current Option Gain/Loss: + 2.0%
Time Frame: 8 to 9 weeks
New Positions: Yes, see below

Comments:
12/06 update: The XAL airline index underperformed today but ALK displayed a little strength and managed to close over resistance near $56.00. Unfortunately the "breakout" today is not very convincing. I'd rather see a move past the November high near $56.50. If the market slips this week look for ALK to retest the $55-54 zone. More conservative traders might want to consider a stop closer to $54.

FYI: On Friday ALK reported that their November traffic was up +15.5% compared to last year. Planes were 83.9% full for the month.

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


American Express - AXP - close: 45.00 change: +0.12

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

Comments:
12/06 update: AXP managed to outperform the banking sector indices today. Yet I still wouldn't chase this move higher. Wait for a dip. 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)

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


Citigroup Inc - C - close 4.45 change +0.00

Stop Loss: 4.08
Target(s): 4.60, 4.75, 4.95
Current Option Gain/Loss: + 6.9%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
12/06 update: The big headline on Citigroup today was news that the U.S. Treasury would sell its remaining 7% stake (2.4 billion shares) in a public offering. I did not see when they planned on selling this chunk of stock. This isn't a big surprise since Wall Street has been expecting the government to dump its last shares of Citigroup soon. Meanwhile shares of C spiked to $4.50 this morning but eventually settled at unchanged. I don't see any changes from my weekend comments.

If you're looking for a new entry point I would wait for a dip toward the $4.25-4.20 zone. If you like trading options I would look at February calls.

Current Position: Long C stock, entry was at $4.16

12/04 Exit the December $4.00 calls (+40%)

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: 41.46 change: -0.31

Stop Loss: 36.75
Target(s): 44.95, 49.00
Current Option Gain/Loss: + 3.0%
Time Frame: 10 to 12 weeks
New Positions: Yes, see below

Comments:
12/06 update: It was a very quiet day for CBD. The stock drifted sideways in a narrow 40-cent range. I don't see any changes from my prior 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


City National Corp. - CYN - close: 57.38 change: +0.64

Stop Loss: 52.95
Target(s): 58.00, 60.00+
Current Option Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

Comments:
12/06 update: It is encouraging to see CYN showing relative strength. Unfortunately we want it to dip first so we can hop on board. I don't see any changes from my weekend comments. Use a trigger to launch bullish positions at $55.50. FYI: The Point & Figure chart is bullish with a $68 target.

Trigger @ $55.50

Suggested Position: buy CYN stock @ $55.50

- or -

Buy the 2011 February $60 calls (cyn1119B60) current ask $1.90*

*Caution: most of the option spreads on CYN seem a little too wide. I consider the options a more aggressive trade. You may want to keep your position size small.

Entry on December xx at $xx.xx
Earnings Date 01/27/11 (unconfirmed)
Average Daily Volume: 223 thousand
Listed on December 4th, 2010


Genuine Parts Co. - GPC - close: 50.53 change: +0.47

Stop Loss: 46.85
Target(s): 51.50
Current Option Gain/Loss: + 4.7%
Time Frame: 6 to 8 weeks
New Positions: No

Comments:
12/06 update: The rally continues for GPC and the stock extended its gains to four days in a row. Another couple of days like today and GPC will hit our target. I am not suggesting new positions at current levels. GPC has significant resistance in the $52 area.

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: +0.19

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:
12/06 update: HANS finally dipped to $52.00 and bounced like we expected last week. Yet over the weekend I had moved the trigger to $51.00. If the market does see any profit taking after last week's gains there is still a good chance HANS will pull back toward the $51-50 zone. Aggressive traders may want to buy this bounce. I'm sticking with our trigger at $51.00.

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: 49.49 change: +0.27

Stop Loss: 44.90
Target(s): 48.50, 52.50
Current Option Gain/Loss: + 9.3%
Time Frame: 8 to 10 weeks
New Positions: Yes, see below

Comments:
12/06 update: LRCX quickly recovered from its morning dip and eventually made it to new highs after a very slow drift higher. There is no change from my prior comments. If the sector pulls back I would look for LRCX toward the $47.50-47.00 zone. Look for a new entry point there.

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

12/04 New stop loss @ $44.90
12/02 Target hit @ $48.50, LRCX +7.2%, option @ $4.55 (+59.5%)

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: 26.84 change: -0.18

Stop Loss: 24.70
Target(s): 27.45, 29.00
Current Option Gain/Loss: + 5.0%
Time Frame: 8 to 10 weeks
New Positions: Yes, see below

Comments:
12/06 update: I warned readers over the weekend to expect some profit taking in MSFT. Shares lost 0.6% on Monday. Wait for a dip toward the $26.00-25.50 zone before considering new positions.
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


Peir 1 Imports - PIR - close: 10.64 change: +0.34

Stop Loss: 9.15
Target(s): 11.90
Current Option Gain/Loss: + 3.9%
Time Frame: 10 to 12 weeks
New Positions: No

Comments:
12/06 update: PIR continues to run and shares hit new multi-year highs on Monday. There is no change from my weekend comment. I would consider new positions in the $10.30-10.00 zone.

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

- or

Buy the 2011 March $10.00 calls (PIR1119C10) Entry @ $1.55

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: 36.57 change: +0.25

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:
12/06 update: SNE is hovering above the $36.00 level. Yet if the market sees any significant profit taking I'm expecting a dip toward the 30-dma. 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: 46.02 change: +0.04

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:
12/06 update: TSCO held up reasonably well and managed to eke out another gain. There is no change from my prior comments. Shares are very short-term overbought. We don't want to chase it. We have moved the trigger to buy a dip at $43.00.

Buy-the-Dip Trigger @ $43.00

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


Trimble Navigation - TRMB - close: 39.85 change: -0.18

Stop Loss: 36.40
Target(s): 41.00, 43.00
Current Option Gain/Loss: unopened
Time Frame: 8 to 10 weeks
New Positions: Yes, see trigger

Comments:
12/06 update: TRMB saw a little bit of volatility this morning but the stock quickly settled into a very narrow range and drifted sideways. I am suggesting we wait for a dip to $38.50 and then open positions. If triggered we'll use a stop loss at $36.40. Our first target is $41.00. FYI: The Point & Figure chart is bullish with a $65 target for TRMB.

Trigger @ $38.50

Suggested Position: Buy TRMB stock @ $38.50

- or -

Buy the 2011 February $40.00 calls (TRMB1119B40) current ask $2.35

Entry on December xx at $xx.xx
Earnings Date 02/02/11 (unconfirmed)
Average Daily Volume: 435 thousand
Listed on December 4th, 2010


Wells Fargo & Co - WFC - close: 28.74 change: -0.31

Stop Loss: 26.40
Target(s): 29.25, 31.90
Current Option Gain/Loss: + 6.9%
Time Frame: 10 to 12 weeks
New Positions: Yes, see below

Comments:
12/06 update: After last week's big gains WFC hit some profit taking. I am expecting a pull back toward the $28.00 to $27.50 zone. 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: 48.52 change: -0.18

Stop Loss: 41.90
Target(s): 47.25, 49.75
Current Option Gain/Loss: + 9.6%
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Comments:
12/06 update: It is the same story here with WRLD. After last week's gains the stock saw some profit taking on Monday. I don't see any changes from my prior comments. I would look for a new entry point on a dip near $46.00.

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