Option Investor
Newsletter

Daily Newsletter, Monday, 1/24/2011

Table of Contents

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

Market Wrap

Bulls Come Running Back

by Todd Shriber

Click here to email Todd Shriber
If one is to consider last week's small declines on the Nasdaq and the S&P 500 a dip then it was bought with a fair amount of enthusiasm today as the Dow Jones Industrial Average flirted with 12,000, reaching its highest level since 2008 after chalking up a triple-digit gain. That is a very impressive way to start the week considering the blue chip index has notched eight consecutive weekly gains. The S&P 500 gained just over half a percent while the Nasdaq closed higher by over 1%. The Russell 2000 made some headway toward erasing last week's loss by adding almost 1% today.

Stats Table

Whether it was some mergers and acquisitions news, share buyback headlines or speculation about higher dividends, there were plenty of catalysts to help the bulls reassert themselves on Monday and large-caps were the place to be. On the dividend front, 2011 is shaping up to be a dandy year for income investors. You may have heard the factoid thrown about that as of the end of the third quarter, U.S. nonfinancial companies were sitting on north of $1.9 trillion in cash and it would appear some of that stash is destined to be returned to shareholders this year in the form of higher dividends and share repurchases.

I assume Warren Buffett's Berkshire Hathaway (BRK-A, BRK-B) is not included in the $1.9 trillion figure because the company is a financial stock, but Berkshire could be sitting on $50 billion in cash by the end of 2011, according to Barron's, which issued a bullish report on the company over the weekend. While the recent chatter surrounding Buffett and Berkshire has been about the Oracle of Omaha's retirement plans, it is worth noting that Barron's says the company could pay a dividend this year.

That is assuming that Buffett cannot find a big acquisition to take part in and that is a very real possibility if equity markets continue to soar higher. A noted value investor such as Buffett probably will not be doing much shopping with stocks at higher levels than where they currently trade. The dividend chatter played a part in boosting Berkshire shares and I have included the chart of the ''B'' shares as they are more reasonably priced than the ''A'' shares.

A Berkshire dividend would be big news because, for all the dividend stocks Buffett has acquired over the years, his company has not paid a dividend since he took over in 1965.

Berkshire B Chart

Speaking of Buffett stocks, one of Berkshire's largest holdings, Dow component American Express (AXP) reported fourth-quarter results after the bell and the New York-based company said its profit soared 49% to $1.05 billion, or 88 cents a share, on revenue of $7.32 billion. Excluding severance charges, AmEx earned 94 cents a share. Analysts were expecting a profit of 95 cents a share on revenue of $7.28 billion.

The good news comes on two fronts for AmEx. Not only did large corporate customers, small businesses and consumers boost their spending in the fourth quarter, they have also gotten better about paying their bills on time, allowing the company to set aside less cash for bad accounts.

AmEx set aside $239 million for future losses, 68% less than the same period in 2009, and released $672 million from an account to cover soured loans while write-offs for bad loans fell to 4.1% in December from 7.1% a year earlier, according to Bloomberg News. Investors apparently wanted more as shares of AmEx are down 1.4% in the after hours session.

American Express Chart

In other Dow-related headlines, McDonald's (MCD), the world's largest fast-food chain, stepped into the earnings confessional before the bell, delivering a slight increase in fourth-quarter results that translated to a small bump higher for the stock today. Illinois-based McDonald's said its fourth-quarter profit rose 2.1% to $1.24 billion, or $1.16 a share, compared with $1.22 billion, or $1.11 a share, a year earlier.

Excluding a one-time charge, McDonald's earned $1.15 a share on sales of $6.21 billion, which was in line with analysts' estimates. Same stores sales in the U.S. rose 2.6% compared with the 4% estimate of analysts surveyed by Bloomberg.

Shares of McDonald's have been nothing if not volatile for a company of this nature over the past few months The stock surged roughly 25% from July through early December only to give back about 10%, tumbling from $80 to $72. Now at just over $75 with a forward P/E of just over 15, the purveyor of Big Macs could be a compelling play for income investors looking to start or add to a position on any market dips. The yield is fair at 3.24% and McDonald's has raised its dividend for 37 consecutive years.

McDonald's Chart

There is plenty of news to get in the world of semiconductors today. Intel (INTC), the world's largest semiconductor maker, got the ball rolling this morning by announcing a $10 billion share repurchase plan. The company had taken a break from share buybacks to conserve cash during the financial crisis, but waded back into the water late last year, repurchasing $1.5 billion of its own stock during the fourth quarter.

Intel also made good on its promise made last year to raise its first-quarter dividend. Still, some pundits were critical of the Intel buyback news, saying it means Intel is taking a pass on delving deeper into the lucrative smartphone market where it is a laggard, not a leader.

In the semiconductor sector, the smart play on smartphones may just be Nvidia, which surged $2.51, or 11.3%, to $24.73 thanks to a Barron's bounce. Barron's said Nvidia shares could run to $40 if the company's Tegra chip helps it boost market share.

Nvidia is banking on Tegra to help it become a market leader for mobile chips, the chips used in smartphones and tablet devices like the iPad. At the Consumer Electronics Show in Las Vegas earlier this month, Tegra chips were spotted in several new smartphones and tablets running on Google's (GOOG) Android operating, indicating Nvidia is ahead of rivals like Qualcomm and Texas Instruments (TXN) in the mobile chip market.

Nvidia Chart

After the bell, Texas Instruments, the largest maker of analog chips, said its fourth-quarter profit jumped 44% to $942 million, or 78 cents a share, from $655 million, or 52 cents, a year earlier as revenue surged 17% to $3.53 billion.

Texas Instruments said its inventory was up $318 million to $1.52 billion in the quarter and that is by design. As such, orders fell a bit as customers are not as worried as they previously have been about obtaining supply from TI. The company's first-quarter guidance left something to be desired and that is probably why the stock is 2.5% in the after-hours session.

The company said it expects to 54 cents to 62 cents a share on sales of $3.27 billion to $3.55 billion for the current quarter. Analysts polled by Bloomberg are currently forecasting a profit of 57 cents a share on revenue of $3.33 billion. By sales, TI was the third-largest U.S.-based chipmaker last year, trailing Intel and Qualcomm.

Texas Instruments Chart

Looking at the charts, the S&P 500 is back to 1290 and a move above that number means it is time to be long again. The first attempt at 1300 for the index failed, but the slide from there did not really test support at 1260, so that still remains the number where I would be looking for the bulls to step in if the market wants to move lower. From there, next support would be 1235-1240, but with more than 100 S&P 500 constituents left to report earnings this week, if we see bullish guidance and more positive dividend news, we could be talking about what to look for over 1300.

S&P 500 Chart

As I mentioned earlier, the Dow is now building on eight straight weekly gains and a move to 12,000 seems to be a foregone conclusion at this point. You would have to go back to 2008 to find the last time the Dow traded that high. AmEx may not be a problem for the Dow on Tuesday as Jonhson & Johnson (JNJ), Travelers (TRV) and Verizon (VZ) all report before the bell. The 11,600 area is where we go if the headlines turn noticeably negative over the coming weeks.

Dow Chart

I am still not overwhelmed by the Nasdaq because Apple's (AAPL) gain of over 3% today probably did most of the heavy lifting with Nvidia chipping in, but the index is back above 2700. Earnings reports from Netflix (NFLX) and Amazon (AMZN) should be watched closely later this week, particularly the former. I have mentioned before the problems facing Netflix and Whitney Tilson's short position in the name. Any news about higher costs and lost subscribers would be a disaster for this stock and perhaps help shorts get the Nasdaq to 2675.

Nasdaq Chart

After last week's plunge of almost 4.3%, a gain of 0.8% for the Russell 2000 leaves the index with some work to. The index is now just below old support at 780 and that may turn into new resistance. Multiple failures there could send the volatile index down to real support at 764.

Russell 2000 Chart

This week has the potential to be a real roller coaster with so many earnings reports left to come and a full economic calendar, which includes the FOMC announcement on Wednesday and GDP on Friday. In other words, this would not be a good week for marquee names to deliver disappointing results and forward guidance or for the market to have to contend negative non-U.S. events. The mental impact of the Dow hitting 12,000 and the S&P 500 topping 1300 may be enough to drive stocks higher for the rest of the week, but the indexes have to get there first.


New Plays

Semiconductors and Drugs

by James Brown

Click here to email James Brown

Editor's Note:

The market's major indices continue to march higher but the rally's leadership is narrowing. We're adding both bullish and bearish candidates tonight.

In addition to tonight's new trades check out these candidates.

SBUX - Shares appear to be breaking out higher from their multi-week sideways consolidation. This looks like a bullish candidate but I would not want to hold over the Jan. 26th earnings report.

GRMN - I would keep an eye on GRMN. The stock's consolidation is narrowing. We should see it breakout over resistance near $32 or breakdown under support near $30 in the next couple of weeks (probably less).

ALTR - This semiconductor stock is bouncing some short-term support. I was ready to buy it today with a tight stop loss. However, earnings are due out on Jan. 25th.

UA - Shares just failed at their 50-dma today. This stock looks like a short candidate. However, I would not want to hold over the earnings report on Jan. 27th.

- James


NEW BULLISH Plays

Microchip Technology - MCHP - close: 37.18 change: +0.71

Stop Loss: 35.95
Target(s): 39.95
Current Gain/Loss: +0.0%
Time Frame: 2 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
The SOX semiconductor index rallied off the bottom of its bullish channel breathing new life into the sector's rally. Shares of MCHP is bouncing from a recent test of support near $36 and its 10-dma. I am suggesting very small bullish positions as we try to ride this rebound in the chip sector. Stop loss at $35.95. Our first target is $39.90. However, we will plan to exit ahead of the February 2nd earnings report.

Open small bullish positions now.

Suggested Position: MCHP stock @ current levels

- or -

Buy the 2011 February $38 call (MCHP1119B38) current ask $0.60

Annotated chart:

Entry on January 25 at $xx.xx
Earnings Date 02/02/11 (unconfirmed)
Average Daily Volume: 1.6 million
Listed on January 24th, 2010


NEW BEARISH Plays

Endo Pharmaceuticals - ENDP - close: 33.91 change: +0.23

Stop Loss: 35.75
Target(s): 31.00
Current Gain/Loss: unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see trigger

Company Description

Why We Like It:
The breakdown on January 10th looks like it was a game changer for ENDP's stock. Shares managed an oversold bounce back toward prior support, which is now new resistance. The failed rally there is another bearish development. I am tempted to open bearish positions right now! However, I suspect the market could see another push higher. I'm suggesting we wait for ENDP to bounce to $34.50 and then launch new bearish positions. We'll try and limit our risk with a stop loss at $35.75. If triggered our first target is $31.00.

Trigger @ $34.50

Suggested Position: Short ENDP stock @ 34.50

- or -

Buy the 2011 February $35 PUT (ENDP1119N35)

Annotated chart:

Entry on January xx at $xx.xx
Earnings Date 02/22/11 (unconfirmed)
Average Daily Volume: 1.3 million
Listed on January 24th, 2010


In Play Updates and Reviews

ADP is Almost There

by James Brown

Click here to email James Brown

Editor's Note:
Our bullish ADP play almost hit our exit target today. We have more than one trade that is nearing an exit this week ahead of earnings.

-James

Current Portfolio:


BULLISH Play Updates

Automatic Data Processing - ADP - close: 49.52 change: +0.48

Stop Loss: 47.90
Target(s): 49.75
Current Gain/Loss: + 5.9%
Time Frame: 10 to 12 weeks
New Positions: see below

Comments:
01/24 update: Almost there! ADP rallied to $49.73 on Monday. Our exit target is $49.75. Readers may want to go ahead and exit now. Officially our plan is to exit this trade tomorrow (Tuesday) at the closing bell to avoid holding over the earnings report on Wednesday. Please note our new stop loss at $48.49.

Current Position: Long ADP stock @ $46.75

01/24: One more day. New stop @ 48.49
01/22: Two days left. new stop @ 47.90.
01/19: Take profits on Feb. call options @ $3.80 (+90%).
01/15: New stop loss @ 46.75
01/03: Entry @ $46.75
01/01: New stop loss @ 45.45
01/01: New entry point @ current levels, new option strike (Feb. $45)

Entry on January 3 at $46.75
Earnings Date 01/26/11 (confirmed)
Average Daily Volume: 2.8 million
Listed on December 16th, 2010


BE Aerospace Inc. - BEAV - close: 38.78 change: +0.73

Stop Loss: 37.75
Target(s): 43.40
Current Gain/Loss: - 0.2%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
01/24 update: BEAV managed to bounce from short-term support near $38.00. I am still very cautious on this stock given last week's bearish reversal. No new positions at this time. Our stop loss is at $37.75. The plan was to keep our position size small to limit our risk.

Current Position: BEAV stock @ $38.89

- or -

Long the 2011 February $40.00 calls (BEAV1119B40) Entry @ $1.35

01/15: new stop loss @ 37.75

Entry on January 11 at $38.89
Earnings Date 02/01/11 (unconfirmed)
Average Daily Volume: 542 thousand
Listed on January 10th, 2010


CA Technologies - CA - close: 25.57 change: +0.26

Stop Loss: 24.99
Target(s): 26.65, 27.90
Current Gain/Loss: + 1.4%
Time Frame: 6 to 7 DAYS
New Positions: see below

Comments:
01/24 update: CA dipped to $25.07 this morning but rallied back toward its recent highs. Shares look poised to breakout past the $25.60 level. Tomorrow is our last day. We will plan on exiting this position on Tuesday at the closing bell to avoid holding over the earnings announcement. Please note our new stop at $24.99.

Current Position: Long CA stock @ $25.21

- or -

Long the 2011 February $25 calls (CA1119B25) Entry @ $1.00

01/24 New stop loss @ 24.99
01/22 New stop loss @ 24.85

Entry on January 18 at $25.21
Earnings Date 01/25/11 (confirmed)
Average Daily Volume: 2.4 million
Listed on January 15th, 2010


Walt Disney Co. - DIS - close: 39.94 change: +0.20

Stop Loss: 37.85
Target(s): 39.90, 42.50
Current Gain/Loss: + 4.4%
Time Frame: 10 to 12 weeks
New Positions: see below

Comments:
01/24 update: DIS bounced from a dip near $39 this morning is spent the rest of the session churning under resistance at $40.00. While a breakout over $40 would be bullish I am not suggesting new positions at this time.

Our first target has already been hit. We're currently aiming for $42.50.

- Current Positions -

Long DIS stock @ 38.25

- or -

Long the 2011 February $40.00 calls (DIS1119B40) Entry @ $0.45

- or -

Long the 2011 April $40.00 calls (DIS1116D40) Entry @ $1.10

01/19: Consider an early exit from the option positions.
01/15: New stop loss @ 37.85
01/05: 1st Target Hit. Stock @ 39.90 (+4.3%)
01/05: 1st Target Hit. Feb. call @ $1.20 (+166%). April call @ 1.80 (+63.6%)
01/05: new stop loss @ 37.49
01/04: Play triggered @ 38.25

Entry on January 4 at $38.25
Earnings Date 02/08/11 (confirmed)
Average Daily Volume: 8.6 million
Listed on December 25th, 2010


FLIR Systems Inc. - FLIR - close: 29.69 change: +0.32

Stop Loss: 28.49
Target(s): 30.90, 33.00
Current Option Gain/Loss: + 2.0%
Time Frame: 10 to 12 weeks
New Positions: see below

Comments:
01/24 update: FLIR showed some strength today with a +1% gain. Shares are nearing resistance at the $30.00 mark. There is no change from my prior comments. I'm tempted to raise our stop closer to the $29.00 level but we'll leave it at $28.49 today. I am not suggesting new positions at this time.

Current Position: Long FLIR stock @ $29.10

- or -

Long the 2011 April $30.00 calls (FLIR1116D30) Entry @ $1.60

01/19: Consider an early exit from the option position (bid $1.30)
01/15: New stop loss @ 28.49
01/10: FLIR provided another entry point near $28.50
01/08: New stop loss @ 27.90

Entry on December 22 at $29.10
Earnings Date 02/09/11 (confirmed)
Average Daily Volume: 1.6 million
Listed on December 18th, 2010


Microsoft Corp. - MSFT - close: 28.38 change: +0.36

Stop Loss: 27.85
Target(s): 27.45, 29.75
Current Gain/Loss: +11.0%
Time Frame: 10 to 12 weeks
New Positions: see below

Comments:
01/24 update: Big cap stocks were in favor on Monday and MSFT erased Friday's declines. We only have three days left. Our plan is to exit on Thursday at the closing bell to avoid holding over the earnings report that night.

Current Position: Long MSFT stock @ 25.55

01/19/11 New stop loss @ 27.85
01/15/11 New stop loss @ 27.49
01/14/11 Follow up. Exit Jan $25 calls @ 3.25 (+133.9%)
01/13/11 Plan to exit our January calls tomorrow at the close.
01/06/11 raised final exit target to $29.75
01/06/11 new stop loss @ 26.95
12/25/10 new stop @ 25.95
12/18/10 new stop @ 25.70
12/14/10 Target hit @ 27.45 (+7.4%), option @ $2.55 (+83.4%)
12/11/10 New stop @ 25.45
11/29/10 New stop @ 24.70

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


NASDAQ OMX Group - NDAQ - close: 24.56 change: +0.26

Stop Loss: 23.49
Target(s): 26.50
Current Gain/Loss: + 2.3%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
01/24 update: NDAQ rallied to new 52-week highs. I don't see any changes from my prior comments. We're cautiously bullish and reluctant to open new positions. It was our plan to keep positions very small to limit our risk.

Current Position: Long NDAQ stock @ $24.00

01/22: New stop loss @ 23.49

Entry on January 19 at $24.00
Earnings Date 02/02/11 (unconfirmed)
Average Daily Volume: 1.5 million
Listed on January 18th, 2010


SXC Health Solutions - SXCI - close: 45.83 change: +0.86

Stop Loss: 43.40
Target(s): 49.00
Current Gain/Loss: + 3.4%
Time Frame: 8 to 9 weeks
New Positions: see below

Comments:
01/24 update: SXCI is showing strength. The stock hit new all-time highs at $46.20 this afternoon. SXCI closed with a +1.9% gain and set a new closing high as well. This is a positive development. Readers might want to consider a tighter stop closer to $44. I'm not suggesting new bullish positions at this time.

NOTE: Buying the options is a higher-risk trade. The calls on SXCI have wider than normal spreads put option traders at a disadvantage here.

Suggested Positions: Long SXCI stock @ $44.31

- or -

Long the 2011 February $45.00 calls (SXCI1119B45) Entry @ $1.44

01/22: New stop loss @ 43.40, Consider an early exit.
01/19: New stop loss @ 42.65

Entry on January 10 at $44.31
Earnings Date 03/03/11 (unconfirmed)
Average Daily Volume: 292 thousand
Listed on January 8th, 2010


UnitedHealth Group - UNH - close: 39.81 change: -0.60

Stop Loss: 36.90
Target(s): 42.00
Current Gain/Loss: unopened
Time Frame: 8 to 10 weeks
New Positions: Yes, see trigger

Comments:
01/24 update: UNH underperformed on Monday as did the HMO healthcare index. We're waiting for a correction toward support near $38.00. I am suggesting we launch bullish positions on a dip at $38.10 with a stop loss at $36.90. Our multi-week target is the $42.00 level.

Buy-the-Dip Trigger @ $38.10

Suggested Position: Buy UNH stock @ $38.10

- or -

Buy the 2011 March $40 calls (UNH1119C40) current ask $1.74

Entry on January xx at $xx.xx
Earnings Date 01/20/11 (unconfirmed)
Average Daily Volume: 5.9 million
Listed on January 20th, 2010


WellCare Health Plans, Inc. - WCG - close: 30.45 change: -0.00

Stop Loss: 29.85
Target(s): 33.75, 37.75
Current Gain/Loss: - 0.9%
Time Frame: 10 to 12 weeks
New Positions: see below

Comments:
01/24 update: WCG closed unchanged on the session after churning in a narrow range. The $30.00 level should be support but I'm worried about the relative weakness in the healthcare sector today. I'm somewhat reluctant to launch new positions near $30.00.

Keep in mind that investors will have to decide whether or not they are willing to take the risk of holding over WCG's earnings report in late February.

Current Position: WCG stock @ $30.75

- or -

Long the 2011 March $35.00 calls (WCG1119C35) Entry @ $0.60

01/15: new stop loss @ 29.85
01/06: Play triggered @ 30.75.

Entry on January 6 at $30.75
Earnings Date 02/17/11 (unconfirmed)
Average Daily Volume: 410 thousand
Listed on January 4th, 2010


BEARISH Play Updates

Informatica Corp. - INFA - close: 42.69 change: +0.72

Stop Loss: 44.25
Target(s): 39.00, 36.00
Current Gain/Loss: + 1.1%
Time Frame: 4 trading days
New Positions: see below

Comments:
01/24 update: INFA garnered some positive analyst comments this morning. That helped boost shares above $43 but INFA couldn't hold that level. The stock managed to close with a +1.7% gain but it failed to breakout over its 50-dma. This is a very short-term trade. I would still consider new positions here but keep in mind we plan to exit positions at the closing bell on Jan. 27th to avoid holding over earnings.

Our plan was to use small positions to limit our risk. Our first target is $39.00.

small positions

Current Position: Short INFA stock @ 42.20

- or -

Long the February $40 PUT (INFA1119N40) Entry @ $0.85

01/24 CBOE listed the PUT's opening price at $0.85

Entry on January 24 at $42.20
Earnings Date 01/27/11 (confirmed)
Average Daily Volume: 907 thousand
Listed on January 22nd, 2010


Reliance Steel - RS - close: 51.81 change: +0.58

Stop Loss: 55.05
Target(s): 45.05
Current Gain/Loss: + 0.7%
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
01/24 update: There is no change from my prior comments on RS. The stock produced a bearish reversal last week. I would still consider new bearish positions in the $53-51 area. More conservative traders might be tempted to use a tighter stop loss (maybe near $53.50ish). Our stop is at $55.05. There is potential support near $48 but I'm targeting a drop toward the $45 level and its 200-dma. We do not want to hold over the earnings in mid February.

Current Position: Short RS stock @ $51.41

- or -

Long the February $50 PUT (RS1119N50) Entry @ $1.35

01/24 CBOE listed the $50 PUT opening price at $1.35

Entry on January 24 at $51.41
Earnings Date 02/17/11 (unconfirmed)
Average Daily Volume: 654 thousand
Listed on January 22nd, 2010