Option Investor
Newsletter

Daily Newsletter, Monday, 2/28/2011

Table of Contents

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

Market Wrap

A Buffett Bounce Tops Middle East Concerns

by Todd Shriber

Click here to email Todd Shriber
The major U.S. indexes, two of them at least, closed February in fine fashion as stocks posted their third straight monthly gain as investors opted to focus on news that was a bit more relevant to the U.S. Some mergers and acquisitions news and positive comments from Warren Buffett helped the S&P 500 gain more than half a percent while the Dow added almost 1% while the Nasdaq eked out a small gain.

Stats Table

Before getting into the stock-specific news, I will quickly review the economic data points that played a role in today's positive market action. The Chicago Purchasing Managers Index (PMI) was one of those bullish data points as the index soared to 71.2 in February from 68.8 in January, easily topping the reading of 67.7 expected by economists. Remember, anything above 50 is considered positive. Going beyond the headline number, there is more good news. The new orders index increased to 75.9, the best reading since late 1983 and the sixth-best reading ever. The production component rose to 78.2, which is the third highest reading in that index’s history, according to Bespoke Investment Group.

The headline number is the best since July 1988 and the backlog reading of 61.8 is tops since July 1994, so overall, this was a very bullish report.

PMI Chart

In other decent economic news, the Commerce Department said personal incomes increased 1% on a seasonally adjusted basis in January, good for the biggest jump in a year and a half. Consumer spending rose 0.2%. Economists were expecting personal incomes to rise 0.9% and consumer spending to increase by 0.4%.

No surprise here. If there was going to be tough economic report to absorb it was bound to involve the housing market and that was the case today. The National Association of Realtors said pending home sales slid 2.8% in January to 88.9 from 91.5 in December.

NAR Chief Economist Lawrence Yun made comments that, while somewhat dour, should not be viewed as a surprise, saying that there is still plenty of inventory that is the result of prior real estate sins that needs to dealt with. ''...there is still an elevated level of shadow inventory of distressed homes from past lending mistakes that need to go through the system,'' Yun said. For those that love economic data reports or trading around those events, this is a busy week on that front, culminating with Friday's February jobs report. As for today's reports, I will say two out of three is not bad at all.

Pending Home Sales

At the stock level, I believe it was good to see U.S. equities get a lift despite the fact that nothing has changed in the Middle East. In fact, one could argue the situation is worse. A mad man still controls Libya, though how strong the threads he is hanging on by appear up for debate. Protests have spread to Oman. The situation in Bahrain is tense and Saudi Arabia could very well see protests of its own in the coming days.

I do not think the timing of Warren Buffett's annual letter to Berkshire Hathaway (BRK-A, BRK-B) shareholders could have been better. The letter was released along with the company's fourth-quarter earnings report on Saturday and it made for some interesting and uplifting weekend reading. Well, I suppose if one is extremely bearish on stocks this was not an uplifting piece of correspondence, but these are the breaks the bears have to deal with.

To say Buffett was overtly bullish in the letter's tone is accurate. The Oracle of Omaha encouraged investors to ignore the doom and gloom prognostications that so many politicians and pundits offer up with such frequency adding that ''Human potential is far from exhausted.''

That was one of the uplifting parts of the letter. As for the stuff that investors and traders care about, Berkshire ended 2010 $38.2 billion in cash, leading Buffett to proclaim that Berkshire's ''elephant gun has been reloaded'' and that his ''trigger finger is itchy.'' In other words, Buffett wants to make another major acquisition, which is not surprising given that Berkshire's last big deal, the acquisition of railroad Burlington Northern Santa Fe, was viewed as a primary catalyst behind the Berkshire's stellar profit report.

I do not want to get in the guessing game of what companies could make for Berkshire takeover targets, but you can read the letter (HERE) and see what types of firms appeal to Buffett. I have included the chart of Berkshire's Class ''B'' shares since they are far more obtainable to most investors than the Class ''A'' shares.

Berkshire B Chart

It was not the most active of Merger Mondays that we have seen, but there was one deal of size worth noting and it may indicate that real estate investment trusts (REITs) are continuing a rebound that started last year.

Nationwide Health Properties (NHP) surged almost 10% after rival Ventas (VTR) announced it would acquire the company for $5.7 billion in stock, a deal that values Nationwide Health at a 15.5% premium to last Friday's closing price. The transaction, which is scheduled to close in the third quarter, only adds to the dominance of Ventas in the healthcare REIT sector as the company is already the largest in that market niche.

Nationwide operates assisted living facilities and nursing homes and Ventas will have more than 1,300 properties in the U.S. and Canada when the deal is completed. Ventas is one of the more acquisitive names in the REIT space, having paid $1.5 billion for Atria Senior Living back in October.

Nationwide Health Chart

One interesting case among stocks that did not participate in the broader market's party was apparel and fragrance maker Kenneth Cole (KCP), which shed more than 7% after the company said CEO Jill Granoff is leaving. Chairman and Chief Creative Officer Kenneth Cole will take over on an interim basis. The company also reported a narrower fourth-quarter loss of $2.7 million, or 15 cents per share, compared with $52 million, or $2.88 per share, a year earlier. Revenue jumped 10% to $107.9 million as same-store sales increased 14.1%.

I say Kenneth Cole's decline today is interesting because it could have been worse if not for the fact that the stock was among the first to have short-selling in it restricted as regulators are coming with new ways to keep short-sales in one name from spreading to others.

Kenneth Cole Chart

It looks like shorts are starting to throw in the towel. Shares borrowed and sold to profit from declines dropped four straight months and represented 3.3 percent of all stock in January, Bloomberg News reported, citing data from NYSE Euronext.

Looking at the charts, the S&P 500 was able to clear some Fibonacci resistance at 1325 to close at 1327 and that could help set the index up for a run back to 1340. Barclays adjusted its S&P 500 forecast to 1450 today, up from 1420 and boosted its profit estimate to $93 from $91. More good economic news will probably lead to more bullish forecast adjustments.

S&P 500 Chart

The Dow Jones Industrial Average endured quite a week last, but failed to present some buyers with the deep dip they were hoping for so that they could do some shopping. The blue-chip index was on the mend again today, taking out some resistance at 12,187 and falling just shy of another resistance point at 12,235. Chevron (CVX) was a catalyst with a gain of 1.6% and other high price-tag constituents such as McDonald's (MCD) and 3M (MMM) also posted noteworthy gains on the day.

Dow Chart

The Nasdaq's performance was not as stellar. The index gained barely more than a point and failed to move above resistance at 2788 after spending a good part of the afternoon in the red. Amazon (AMZN) may have been the culprit as that stock shed 2.3% after UBS lowered its rating to ''neutral'' from ''buy.'' Remember, the iPad 2 announcement is scheduled for Wednesday, and that is a potential catalyst to get the Nasdaq moving more in sync with its counterparts.

Nasdaq Chart

Today's fun fact is especially relevant since Tuesday is the first day of March. The first day of a new month is normally pretty good for stocks as highlighted by this factoid courtesy of Bloomberg News: The three biggest gains in the past seven months -- and 5 of the 25 biggest rallies in 2010 -- occurred on the first trading day of the month.

Before I depart and wish you a good week, I am going to take this opportunity to blow of a bit of market-related steam. I listened to a pair of comments over the weekend that have stuck with me. I will retell the stories in reverse order.

First, I am not a big fan of awards shows, but I go to my parents' house for dinner every Sunday and my mom had the Oscars on. While I never condone political interjections in acceptance speeches at the Oscars, I have to admit I enjoyed it when the directors of the best documentary, a film called the ''Inside Job,'' which chronicles the financial crisis, took the stage and one of them pointed out no executive involved in the crisis is in jail today.

Oddly enough, on Saturday night I was at local watering hole and was standing behind two people that work in the mortgage business from what I could gather of their conversation. Their conversation drifted to Countrywide when both agreed that Countrywide has ''gotten a bum wrap'' and really is a ''good company.'' I promptly finished my adult beverage and left because I was finding it hard to bite my tongue.


New Plays

Apparel and Consumer Electronics

by James Brown

Click here to email James Brown


NEW BULLISH Plays

Gildan Activewear - GIL - close: 31.98 change: +0.33

Stop Loss: 29.45
Target(s): 34.85, 38.00
Current Gain/Loss: Unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

Company Description

Why We Like It:
GIL has spent the last eight months consolidating sideways and building a new base. Shares are currently poised to breakout past resistance in the $32-33 zone. Aggressive traders may want to buy GIL now. I suspect we might get another chance to buy a dip so I'm suggesting a trigger to enter bullish positions at $31.00. We'll start the play with a stop loss at $29.45. Our targets are $34.85 and $38.00 but that might be a little too optimistic. Nimble traders may want to be on alert to buy a breakout past the June 2010 high of $32.73.
FYI: The Point & Figure chart for GIL is bullish with a $39.50 target.

Trigger @ 31.00

Suggested Position: buy GIL stock @ 31.00

- or -

Buy the April $30 call (GIL1116D30) current ask $2.75

Annotated chart:

Entry on March x at $xx.xx
Earnings Date 05/12/11 (unconfirmed)
Average Daily Volume: 634 thousand
Listed on February 28th, 2010


Sony Corp. - SNE - close: 36.84 change: +0.36

Stop Loss: 34.80
Target(s): 39.90, 43.50
Current Gain/Loss: + 0.0%
Time Frame: 8 to 10 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
SNE appears to be breaking out from a three-month consolidation. Given enough time SNE could make a run at the $40 and $45 levels, especially if the parade of economic data continues to show strength both here in the U.S. and abroad. My biggest concern with SNE would be further strength in the yen, which makes Japanese exports more expensive overseas.

I am suggesting bullish positions now. However, you could choose to wait for a dip near $36 and the 50-dma or wait for a stronger breakout past $37.00. Traders should expect SNE to gap open up or down each morning as shares adjust to trading back home in Japan.

FYI: The Point & Figure chart for SNE is bullish with a $53 target.

Suggested Position: Buy SNE stock @ current levels

- or -

Buy the April $38 calls (SNE1116D38) current ask $0.85

Annotated chart:

Entry on March 1 at $xx.xx
Earnings Date 05/12/11 (unconfirmed)
Average Daily Volume: 862 thousand
Listed on February 28th, 2010


In Play Updates and Reviews

Stocks Drift Toward March

by James Brown

Click here to email James Brown

Editor's Note:
Traders were buying the dip this afternoon. The U.S. continues to see positive economic data. We expect the trend of positive economic data to continue throughout this week. Use this afternoon dip on Monday as a new entry point for bullish positions.

-James

Current Portfolio:


BULLISH Play Updates

Alcoa Inc - AA - close: 16.85 change: +0.17

Stop Loss: 15.95
Target(s): 18.50, 19.75
Current Gain/Loss: - 4.5%
2nd Position Current Gain/Loss: + 0.0%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
02/28 update: AA turned in a quiet session. Shares are still trading under what could be short-term resistance near $17.00. I remain bullish on AA but that could change if shares fail at this level.

Current Position: Long AA stock @ $17.65

- or -

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

-2nd position, Entry Feb. 25th -

New Position: Buy AA stock @ 16.84

- or -

Buy the March $17.00 calls (AA1119C17) Entry @ $0.39

02/25 AA opened at $16.84. March $17 calls opened @ $0.39
02/24 Open new positions on the bounce.
02/23 use the bounce as a new entry point.
02/22 Adjust the stop loss to $15.95
02/18 AA provides another entry point
02/14 AA hits our breakout trigger @ 17.65, Stop @ 16.25

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


ACI Worldwide Inc. - close: 31.31 change: +0.60

Stop Loss: 27.80
Target(s): 33.00, 34.75
Current Gain/Loss: + 5.6%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
02/28 update: The action in ACIW today was encouraging. The stock did not see the same afternoon swoon that most of the market experienced. Shares were surging higher into the closing bell, which bodes well for tomorrow. I am not suggesting new positions at this time. Our upside targets are $33.00 and $34.75.

FYI: ACIW does have options but the spreads are very wide, which puts us at a significant disadvantage.

SMALL bullish positions

Current Position: Long ACIW stock @ $29.63

Entry on February 25 at $29.63
Earnings Date 04/28/11 (unconfirmed)
Average Daily Volume: 122 thousand
Listed on February 24th, 2010


AnnTaylor Stores - ANN - close: 23.21 change: -0.64

Stop Loss: 22.85
Target(s): 25.90, 27.85
Current Gain/Loss: - 2.7%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
02/28 update: ANN underperformed on Monday. This is do or die time for the stock. Shares will either rally with the market tomorrow or hit our stop loss at $22.85. No new positions at this time.

Small Positions

Current Position: Long ANN stock @ $23.86

- or -

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

02/23 New stop loss @ 22.85
02/22 New stop loss @ 22.40

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


Baxter Intl. - BAX - close: 53.15 change: +0.73

Stop Loss: 49.90
Target(s): 54.90, 57.50
Current Gain/Loss: + 2.2%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
02/28 update: BAX displayed some relative strength with a +1.3% gain. Volume remains light but there's not much we can do about it. More conservative traders may want to raise their stops toward $51.00 or the $51.40 level. We want to keep our position size small to limit our risk.

FYI: The Point & Figure chart for BAX is bullish with a $73 target.

(small positions only)

Current Position: Long BAX stock @ 52.00

- or -

Long the May $55 call (BAX1121E55) Entry @ $1.05

Entry on February 22 at $52.00
Earnings Date 04/21/11 (unconfirmed)
Average Daily Volume: 5.8 million
Listed on February 19th, 2010


Boston Scientific Corp. - BSX - close: 7.16 change: -0.02

Stop Loss: 6.85
Target(s): 7.80, 8.90
Current Gain/Loss: - 0.8%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
02/28 update: The performance in BSX today was underwhelming. Shares opened at $7.22 and then faded lower. Readers may want to wait for another dip or bounce near $7.00 before initiating positions. The plan is to keep our position size small to limit our risk.

- (Small Positions to Limit our Risk)

Current Position: Long BSX stock @ 7.22

- or -

Long the April $7.00 calls (BSX1116D7) Entry @ $0.44

Entry on February 28 at $ 7.22
Earnings Date 04/26/11 (unconfirmed)
Average Daily Volume: 16 million
Listed on February 26th, 2010


Intuit - INTU - close: 52.58 change: +0.18

Stop Loss: 49.49
Target(s): 54.75, 59.00
Current Gain/Loss: + 1.3%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
02/28 update: Monday proved to be a quiet day for INTU with the stock consolidating sideways in a narrow range. Readers may want to wait for another dip into the $52.00-51.00 zone before initiating new positions.

Current Position: Long INTU stock @ $51.87

- or -

Long the March $52.50 calls (INTU1119C52.5) Entry @ $1.10

- or -

Long the April $55.00 calls (INTU1116D55) Entry @ $1.05

Entry on February 25 at $51.87
Earnings Date 05/19/11 (unconfirmed)
Average Daily Volume: 2.8 million
Listed on February 24th, 2010


Lincare Holdings Inc. - LNCR - close: 29.34 change: -0.23

Stop Loss: 27.95
Target(s): 29.90, 31.75
Current Gain/Loss: + 3.4%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
02/28 update: Uh-oh! Reversal alert! LNCR spiked to $29.82 this morning and then faded lower throughout the session. While most of the market was bouncing higher into the closing bell LNCR was accelerating lower. Our first exit target at $29.90 has not been hit yet. I am suggesting we take some money off the table right now. Sell at least half of our position. I am not suggesting new bullish positions at this time.

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 11.5% 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

02/28 Sell Half to lock in a gain. LNCR @ $29.34 (+3.4%)
02/28 Sell Half: March $29 calls bid $0.85 (+13.3%)
02/22 New stop loss @ 27.95
02/19 New stop loss @ 27.45
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


Maxim Integrated Products - MXIM - close: 27.58 change: -0.05

Stop Loss: 25.95
Target(s): 29.90, 33.50
Current Gain/Loss: - 0.3%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
02/28 update: The stock opened at $27.68. Then MXIM provided a nice intraday dip for us to buy. I would still consider new positions now. Our targets are $29.90 and $33.50.

Current Position: Long MXIM stock @ $27.68

- or -

Long the April $30 calls (MXIM1116D30) Entry @ $0.35

Entry on February 28 at $27.68
Earnings Date 04/28/11 (unconfirmed)
Average Daily Volume: 3.3 million
Listed on February 26th, 2010


Omnicom Group Inc. - OMC - close: 50.90 change: +0.98

Stop Loss: 47.65
Target(s): 54.00
Current Gain/Loss: +1.7%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
02/28 update: OMC is off to a good start. Shares opened at $50.04 and closed with a +1.9% gain. The $51 level might be a little short-term resistance so nimble traders could look to buy a dip tomorrow. Our target is the $54.00 level since OMC has significant resistance in the $54-55 zone.

Current Position: Long OMC stock @ $50.04

- or -

Long the April $50 calls (OMC1116D50) Entry @ $1.65

Entry on February 28 at $50.04
Earnings Date 04/20/11 (unconfirmed)
Average Daily Volume: 2.8 million
Listed on February 26th, 2010


Signet Jewelers Limited - SIG - close: 43.87 change: +0.09

Stop Loss: 42.40
Target(s): 49.75
Current Gain/Loss: - 3.0%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
02/28 update: Be careful here. The action in SIG is not very encouraging. The stock spiked higher this morning and actually hit a new 52-week high at $45.52 but immediately reversed lower and gave back almost all of its gains. This is a warning signal for us. Readers may want to start scaling out of this position. Last week's low was $42.68. I am raising our stop loss to $42.65. I am not suggesting new positions at this time.

Current Position: Long SIG stock @ $45.25

- or -

Long the March $45 calls (SIG1119C45) Entry @ $1.85

02/28 Consider scaling back positions here.

Entry on February 18 at $45.25
Earnings Date 03/30/11 (unconfirmed)
Average Daily Volume: 436 thousand
Listed on February 16th, 2010


UnitedHealth Group - UNH - close: 42.58 change: +0.06

Stop Loss: 41.95
Target(s): 44.75
Current Gain/Loss: + 3.4%
Time Frame: 8 to 10 weeks
New Positions: see below

Comments:
02/28 update: UNH continues to consolidate sideways and traded in a narrow range today. I remain very cautious here. More conservative traders may want to go ahead and take profits now with an early exit. No new positions at this time.

Current Position: UNH stock @ $41.15

02/26: New stop loss @ 41.95
02/22: New stop loss @ 41.80
02/17: New stop loss @ 41.49
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


Wyndham Worldwide - WYN - close: 31.28 change: -0.08

Stop Loss: 29.90
Target(s): 34.50, 37.50
Current Gain/Loss: - 0.5%
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Comments:
02/28 update: There is no change from my weekend comments on WYN. I would still consider new positions here at current levels.

Current Position: Long WYN stock @ $31.45

- or -

Long the April $32 calls (WYN1116D32) Entry @ $1.15

Entry on February 28 at $31.45
Earnings Date 04/28/11 (unconfirmed)
Average Daily Volume: 3.2 million
Listed on February 26th, 2010


CLOSED BULLISH PLAYS

Vanguard National Res. - VNR - close: 32.74 change: +0.27

Stop Loss: 31.25
Target(s): 34.95
Current Gain/Loss: +1.7%
Time Frame: 1 week
New Positions: see below

Comments:
02/28 update: Our time has run out. We planned to exit VNR tonight to avoid holding over earnings tomorrow.

small bullish positions

Closed Position: Long GNR stock @ $32.17, Exit @ 32.74 (+1.7%)

- or -

March $30 call (VNR1119C30) Entry @ $2.80, Exit @ $2.45 (-12.5%)

02/28: Planned Exit. VNR +1.7%, Option @ -12.5%
02/26: Prepare to exit on Monday at the close.
02/26: New stop loss @ 31.25

chart:

Entry on February 23 at $32.17
Earnings Date 03/01/11 (unconfirmed)
Average Daily Volume: 277 thousand
Listed on February 22nd, 2010