Option Investor
Newsletter

Daily Newsletter, Monday, 2/14/2011

Table of Contents

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

Market Wrap

Monday Much Ado About Nothing

by Todd Shriber

Click here to email Todd Shriber
Monday's trading did not bear much resemblance to the Valentine's Day Massacre, but then again, if it was excitement you were after, it was a pretty agonizing day. The Dow Jones Industrial Average endured a small loss while the most noteworthy statements that can be made about the Nasdaq and the S&P 500 is that they found a way to close higher, but the gains are hardly worth bragging about.

Stats Table

On an individual basis, there are always some stocks and/or ETFs trading in broad ranges or making unusual gains even on boring days like today. I will start with one that probably will not surprise you: The Market Vectors Egypt ETF (EGPT) jumped almost 4% on the first full trading of post-Mubarak life in Egypt. Another dollar or so to the upside and EGPT, an ETF hardly anyone talked about up until late January, will be right back where it was before the protests/revolution got underway.

Call me a doubting Thomas if you must, but I have my doubts regarding EGPT. First, it should be noted for the fans of stochastics and RSI that neither is showing an overbought condition, but both are pretty darn close. Second, and probably more importantly, revolutions rarely go smoothly. After the initial euphoria of regime change wears off, there are often contentious political battles waged behind the scenes that pit former revolution allies against each other. Think back to U.S. history class in high school for what happened in the colonies after the Revolutionary War. That is just one example.

I saw some headlines over the weekend about Egypt that I take issue with. Paraphrasing, one said something about Egypt would make the founding fathers proud while they would be distressed about the current state of affairs here in the States. The other was something about how Egypt's revolution proves the U.S. policy of military offensives in the Middle East to instil democracy is vastly ineffective.

Here's my issue with those claims: Egypt is just days removed from Mubarak's resignation. No one knows what form of government is going to emerge next and to claim it will be a true democracy is premature to say the least. Egypt is nearing a fork in the road. One way to go is to opt for true democracy, free of the unproductive anti-America, anti-Israel sentiment that has kept so much of the Middle East living, shall we say, behind the times. The other option is Iran post-Shah. That was supposedly a revolution and look where Iran is now. As for EGPT, we'll see what Mr. Market has in store for this suddenly popular ETF.

Egypt ETF Chart

Keeping with African politics and since it is Valentine's Day, it is pretty easy to see why I bring this up. Maybe you bought some chocolates for your sweetie and perhaps you noticed higher prices than usual. Easy to explain: Cocoa is a commodity, traded just like, gold, oil, etc. and thanks to some political theater in another part of Africa, cocoa prices have been moving higher.

The cocoa trade kind of got lost in the shuffle when the Egypt situation was growing worse by the day, but here's a quick recap: Ivory Coast is the world's largest cocoa exporter. On Nov. 28, Alassane Ouattara defeated Laurent Gbagbo in the country's presidential election. The U.S., the UN and the International Monetary Fund all recognize Ouattara as the winner.

Problem is Gbagbo will not leave office, so Ouattara authorized a ban on cocoa exports because Gbagbo uses proceeds from those exports to fund the military and public services. The ban is set to expire on Feb. 23, but if Gbagbo is still in office, Ouattara said he will extend the export ban. That is good news for cocoa bulls.

Cocoa Chart

Sticking with the commodities theme, despite the fact that crude futures declined a bit today, oil equities mustered some impressive performances. Some of that probably had to with China's January export number. The world's fastest growing major economy said its exports surged almost 38% last month, double the December level. That can be interrupted as a sign that Chinese oil demand will remain robust this year.

Another catalyst was General Electric's (GE) $2.8 billion acquisition of John Wood Group's well service business. The business, which also helps extract gas from shale, had sales of $947 million and EBITDA of $166 million in 2010, according to Bloomberg News. The deal is the second in the oil services arena for GE, a Dow component, since December when it acquired Wellstream. Press reports said GE outbid Halliburton (HAL), the world's second-largest provider of oilfield services, for the John Wood business.

The news touched of speculation of more consolidation in the oil services sector, though I hasten to call it speculation at this point. Flush with cash, energy companies are expected to spend $490 billion this year and some of that is going to be devoted to acquisitions and no, I am not going out on a limb by saying that. Every one of the top-10 holdings in the Oil Services HOLDRs (OIH) was up today and the ETF is now trading at levels not seen since late 2008.

OIH Chart

Checking in on the parabolic side of the market, there is Netflix, which jumped 7.1% today. A 7% move for any stock is a pretty big deal, but when we are talking about a stock that trades over $200, that means there is some significant appreciation on a dollar basis as well. To be exact, shares of Netflix rose $16.48 to close at $247.55 after Caris & Co. raised its price target on the stock to $316 to $224. Good thing Whitney Tilson covered his short position in this name.

Netflix Chart

Looking at the charts, with today close at 1332, the S&P 500 has basically completed a double from the March 2009 low of 666.79. This could prove to be significant resistance, but a move below psychological support at 1320 down to 1309 is what would be needed to create a valid ''buy on the dip'' opportunity. A move above 1333 should send the shorts running to cover.

S&P 500 Chart

The loss on the Dow was so miniscule today that no support levels are in play and there is still a long way to trek before we get to 13,000, the next stiff resistance area. There are currently two triple-digit stocks in the Dow, Caterpillar (CAT) and IBM (IBM), but Chevron (CVX) and 3M (MMM) could easily join that illustrious club in the coming weeks. At this point, anyone fooling around with inverse Dow ETFs and related fare is messing with fire.

Dow Chart

The Nasdaq has another 10-15 points left to run before encountering some old resistance from 2007 in the 2830 area. How significant that resistance proves to be lies in the hands of the usual suspects such as Amazon (AMZN), Apple (AAPL) and Google (GOOG), but expect Netflix (NFLX) and Panera Bread (PNRA) to play their parts as well. OpenTable (OPEN) would be another name to add to that list as that is another stock that seems destined for the $100 club.

Nasdaq Chart

Looking at the earnings and economic calendars, this should be a slow save for the FOMC minutes on Wednesday and barring any flare ups in the Middle East or renewed concerns about European sovereign debt, I have the feeling the market could see some choppy trading over the next few days. That is not necessarily a bad thing, but there is a lack of scheduled catalysts to move the market sharply in one direction or the other. The big deal will be the S&P 500's ability to crack 1333, which should induce some short covering, bringing the market to more new highs.


New Plays

Industrial Goods

by James Brown

Click here to email James Brown


NEW BULLISH Plays

Kennametal Inc. - KMT - close: 41.49 change: +0.15

Stop Loss: 39.90
Target(s): 44.90
Current Gain/Loss: + 0.0%
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Company Description:
Kennametal Inc. delivers productivity to customers seeking peak performance in demanding environments by providing innovative custom and standard wear-resistant solutions. This proven productivity is enabled through our advanced materials sciences and application knowledge. Our commitment to a sustainable environment provides additional value to our customers. Companies operating in everything from airframes to coal mining, from engines to oil wells and from turbochargers to construction recognize Kennametal for extraordinary contributions to their value chains. In fiscal year 2010, customers bought approximately $1.9 billion of Kennametal products and services – delivered by our approximately 11,000 talented employees doing business in more than 60 countries – with more than 50 percent of these revenues coming from outside North America (source: company press release or website)

Why We Like It:
KMT has been trending higher for months. Shares are just now starting to rally again off technical support at its rising 50-dma. This looks like an opportunity to hop on board. We can place our stop loss under the 50-dma at $39.90. I would consider small bullish positions now or on a dip in the $41-40 zone. I am expecting the $45 level to offer some overhead resistance so we'll set our exit target at $44.90.

If you study the chart you'll note that the big down days in late January and early February had some huge volume. That is a worrisome sign so we want to keep our positions small to limit our risk. KMT does have options but they don't have a lot of volume so I'm going to stick to the stock itself.

- Small Bullish Positions -

Suggested Position: Buy KMT stock @ current levels

Annotated chart:

Entry on February 15 at $xx.xx
Earnings Date 04/28/11 (unconfirmed)
Average Daily Volume: 960 thousand
Listed on February 14th, 2010


In Play Updates and Reviews

S&P 500 Marks Another High

by James Brown

Click here to email James Brown

Editor's Note:
The market continues to climb led by energy and material stocks today. Our bullish trade on AA has been opened.

-James

Current Portfolio:


BULLISH Play Updates

Alcoa Inc - AA - close: 17.59 change: +0.22

Stop Loss: 16.25
Target(s): 18.50, 19.75
Current Gain/Loss: - 0.3%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
02/14 update: Material-related stocks were showing some relative strength on Monday in spite of a bounce in the dollar. Shares of AA broke out from its trading range and hit our breakout trigger at $17.65 so the play is now open with a stop loss at $16.25. I would still consider new positions right here. Our upside targets are $18.50 and $19.90. The early 2010 high near $17.60 could be short-term resistance but the trend for AA looks pretty healthy.

Current Position: Long AA stock @ $17.65

- or -

Long the March $17.00 calls (AA1119C17) Entry @ $0.98

02/14 AA hits our breakout trigger @ 17.65, Stop @ 16.25

chart:

Entry on February 14 at $17.65
Earnings Date 04/11/11 (unconfirmed)
Average Daily Volume: 41 million
Listed on February 2nd, 2010


Autodesk, Inc. - ADSK - close: 42.34 change: -0.35

Stop Loss: 39.90
Target(s): 46.00
Current Gain/Loss: + 0.5%
Time Frame: 2 weeks
New Positions: see below

Comments:
02/14 update: ADSK underperformed on Monday with a failed rally near short-term resistance at $43.00. This stock could be setting up for a drop toward the bottom of its bullish channel near $41.00-40.75. Readers could buy the dip or wait for the bounce near that level as another entry point (just remember our time frame). This is a short-term, two-week trade. ADSK is due to report earnings in late February and we do not want to hold over the announcement.

Current Position: Long ADSK stock @ 42.10

- or -

Long the March $45 call (ADSK1119C45) Entry @ $0.90

Entry on February 9 at $42.10
Earnings Date 02/23/11 (unconfirmed)
Average Daily Volume: 2.5 million
Listed on February 7th, 2010


AnnTaylor Stores - ANN - close: 23.73 change: -0.12

Stop Loss: 20.95
Target(s): 25.90, 27.85
Current Gain/Loss: - 0.5%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
02/14 update: Shares opened at $23.86 and continued its sideways consolidation. I would still consider new positions here but nimble traders could wait for a dip near $23.00 or $22 instead. Shares of ANN still have some short-term resistance near the $24.40-24.50 zone and the 50-dma could be a problem but the strength in the RLX retail index bodes well for stocks like ANN.

Our targets are $25.90 and $27.85. FYI: The P&F chart is still long-term bullish in spite of the January correction.

Small Positions

Current Position: Long ANN stock @ $23.86

- or -

Long the March $22.50 calls (ANN1119C22.5) Entry @ $2.35

Entry on February 14 at $23.86
Earnings Date 03/11/11 (confirmed)
Average Daily Volume: 3.0 million
Listed on February 8th, 2010


BMC Software - BMC - close: 50.87 change: +0.70

Stop Loss: 46.70
Target(s): 54.50
Current Gain/Loss: + 3.1%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
02/14 update: The breakout rally in BMC continues. Shares are up another +1.39%. Volume is improving too. At this point I would wait for a dip into the $50-49 area before considering new positions. Our first target is $54.50.

FYI: The Point & Figure chart for BMC is bullish with a $78 target.

Current Position: Long BMC stock @ 49.30

- or -

Long the March $50 call (BMC1119C50) Entry @ $1.40

Entry on February 11 at $49.30
Earnings Date 05/05/11 (unconfirmed)
Average Daily Volume: 1.9 million
Listed on February 10th, 2010


Garmin Ltd. - GRMN - close: 32.50 change: -0.58

Stop Loss: 31.65
Target(s): 35.95
Current Gain/Loss: - 1.5%
Time Frame: six trading days
New Positions: see below

Comments:
02/14 update: Bingo! GRMN did indeed pull back toward the $32.50 area. If you didn't open positions this morning I would still consider new positions here. Or you could wait and see if GRMN dips toward $32.00 and buy the stock then. Keep in mind that this is a very short-term trade. GRMN is due to report earnings on Feb. 23rd and we do not want to hold over the report. Given the recent strength GRMN could see a short squeeze or at least some short covering. The most recent data listed short interest at 19% of the 106 million-share float.

FYI: The Point & Figure chart for GRMN is bullish with a $49 target.

Open Small Positions

Current Position: Long GRMN stock @ $33.01

- or -

Long the March $34 calls (GRMN1119C34) Entry @ $1.23

Entry on February 14 at $33.01
Earnings Date 02/23/11 (confirmed)
Average Daily Volume: 1.1 million
Listed on February 12th, 2010


Hansen Natural Corp. - HANS - close: 56.39 change: -0.18

Stop Loss: 53.75
Target(s): 59.50
Current Gain/Loss: + 1.5%
Time Frame: just a couple of weeks left.
New Positions: see below

Comments:
02/14 update: HANS is due to report earnings in late February so we only have a couple of weeks left. I would still consider new positions now. Small positions only to limit our risk.

- Small Positions to limit our risk -

Current Position: HANS stock @ $55.54

02/12 New stop loss @ 53.75
01/29 Exit call positions early. @ $1.15 (-23.3%)
01/26 the CBOE listed the MAR $60 call's open @ $1.50

Entry on January 26 at $55.54
Earnings Date 02/24/11 (unconfirmed)
Average Daily Volume: 654 thousand
Listed on January 25th, 2010


Home Depot - HD - close: 37.58 change: +0.10

Stop Loss: 36.25
Target(s): 39.95
Current Gain/Loss: + 0.2%
Time Frame: 5 trading days
New Positions: Yes, see below

Comments:
02/14 update: Monday was a very boring day for HD. Once past the first hour of trading the stock was stuck in a very narrow range. There is no change from my weekend comments. I would consider new positions now but we only have four trading days left. We want to close this trade on Friday, unless shares hit our target first ($39.95).

Current Position: Long HD stock @ $37.47

- or -

Long the March $38 calls (HD1119C38) Entry @ $0.74

Entry on February 14 at $37.47
Earnings Date 02/22/11 (confirmed)
Average Daily Volume: 9.8 million
Listed on February 12th, 2010


Lincare Holdings Inc. - LNCR - close: 28.76 change: +0.41

Stop Loss: 26.90
Target(s): 29.90, 31.75
Current Gain/Loss: + 1.3%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
02/14 update: LNCR was kind enough to give us a dip this morning as we apply our new entry point strategy. Shares eventually outperformed the broad market indices with a +1.4% gain. Although technically LNCR still looks like it's inside the recent trading range.

Take note that LNCR will probably see some resistance near $29.25 and the $30.00 levels.

FYI: The Point & Figure chart for LNCR is bullish with a $40 target. Plus, investors will be interested to note that LNCR has relatively high short interest. The most recent data listed short interest at 11.6% of the 86-million share float. With the recent breakout this stock could see a short squeeze.

- Small Bullish Positions -

Current Position: Long LNCR stock @ 28.37

- or -

Long the March $29.00 calls (LNCR1119C29) Entry @ $0.75

02/12 Adjusted entry point to current levels.

Entry on February 14 at $28.37
Earnings Date 04/19/11 (unconfirmed)
Average Daily Volume: 932 thousand
Listed on February 9th, 2010


Oracle Corp. - ORCL - close: 33.29 change: -0.18

Stop Loss: 31.65
Target(s): 34.90
Current Gain/Loss: + 2.0%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
02/14 update: Monday proved to be a quiet session for ORCL. There is no change from my prior comments. Odds are pretty good we might see another entry point on a dip near the $33.00-32.80 zone.

Our target on ORCL is the $34.90 mark since $35.00 looks like the next level of resistance.

small positions to limit our risk.

Current Position: ORCL stock @ $32.62

- or -

Long the 2011 March $33 calls (ORCL1119C33) Entry @ $0.80

02/12 New stop loss @ 31.65
02/10 ORCL is improving. This looks like a new entry point.
01/29 Consider an early exit, especially the calls.
01/27 The CBOE listed the open for our calls at $0.80

Entry on January 27 at $32.62
Earnings Date 03/24/11 (unconfirmed)
Average Daily Volume: 27 million
Listed on January 26th, 2010


Solutia Inc. - SOA - close: 25.47 change: +0.14

Stop Loss: 23.65
Target(s): 27.25, 29.50
Current Gain/Loss: + 0.8%
Time Frame: 8 to 10 weeks
New Positions: see below

Comments:
02/14 update: Shares of SOA spent the day consolidating sideways. I would still consider new positions now or on a dip near $25.00.

Current Position: Long SOA stock @ $25.25

- or -

Long the March $25 calls (SOA1119C25) Entry @ $1.35

- or -

Long the June $25 calls (SOA1118F25) Entry @ $2.50

Entry on February 11 at $25.25
Earnings Date 01/26/11
Average Daily Volume: 1.7 million
Listed on February 10th, 2010


The TJX Companies - TJX - close: 49.54 change: -1.26

Stop Loss: 47.45
Target(s): 52.00, 54.50
Current Gain/Loss: unopened
Time Frame: 2 to 3 weeks
New Positions: Yes, see trigger

Comments:
02/14 update: TJX underperformed on Monday with a -2.4% loss. I couldn't find any news to explain the sudden weakness. Retail stocks in general were down thanks to Wal-Mart (WMT) getting a downgrade. Shares of TJX are due for some profit taking. That's why we're waiting for a dip. Right now our plan is to launch bullish positions at $49.25. Patient traders could wait for a dip closer to $48.00 instead.

TJX has earnings in about two weeks and we'll exit ahead of the report. We'll be aiming for $52.00 and $54.50.

Trigger @ 49.25

Suggested Position: buy TJX stock @

- or -

Buy the March $50.00 calls (TJX1119C50)

02/12 New trigger @ 49.25, New stop loss @ 47.45

Entry on February xx at $xx.xx
Earnings Date 02/23/11 (unconfirmed)
Average Daily Volume: 3.4 million
Listed on February 5th, 2010


Toll Brothers - TOL - close: 21.16 change: -0.30

Stop Loss: 20.49
Target(s): 23.45
Current Gain/Loss: - 1.5%
Time Frame: 6 trading days
New Positions: Yes, see below

Comments:
02/14 update: TOL opened at $21.49, which proved to be the high for the day. Shares faded lower to settle on its lows for the session, which is not a great sign for tomorrow's open. Readers may want to wait and see if TOL can hold the $21.00 level or not. I would be temped to buy a dip or a bounce in the $20.75-20.50 zone but only because we have a stop loss at $20.49.

There is a chance TOL could see some short covering. The most recent data listed short interest at 13% of the 145 million-share float. Our target is $23.45 but that might be a little too optimistic given our timeframe.

- Small Positions -

Current Position: Long TOL stock @ $21.49

- or -

Long the March $22.50 calls (TOL1119C22.5) Entry @ $0.50

Entry on February 14 at $21.49
Earnings Date 02/23/11 (confirmed)
Average Daily Volume: 2.6 million
Listed on February 12th, 2010


UnitedHealth Group - UNH - close: 42.46 change: +0.08

Stop Loss: 41.25
Target(s): 44.75
Current Gain/Loss: + 3.1%
Time Frame: 8 to 10 weeks
New Positions: see below

Comments:
02/14 update: UNH recovered from its morning weakness to settle in positive territory. The bounce has done little to alleviate concerns that UNH is about to roll over. No new positions at this time.

Current Position: UNH stock @ $41.15

02/12: New stop loss @ 41.25
02/12: Exit the call options early (bid $1.47 +22.5%)
02/08: New stop loss @ 40.75

Entry on January 28 at $41.15
Earnings Date 01/20/11 (unconfirmed)
Average Daily Volume: 5.9 million
Listed on January 20th, 2010