Option Investor
Newsletter

Daily Newsletter, Tuesday, 3/8/2011

Table of Contents

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

Market Wrap

Whiplash Markets

by Jim Brown

Click here to email Jim Brown
We would not know how to act without a major short squeeze or major news event to power the markets to triple digit gains or losses. Volatility is extreme and there is no conviction on either side.

Market Statistics

Rumors that Gaddafi may be looking for a way to exit his current dilemma sent oil prices plunging and created another short squeeze to power the Dow to a triple digit gain. Oil prices declined intraday to $103 even though the Gaddafi rumor was unsubstantiated.

Bank of America CEO Brian Moynihan gave the banking sector a boost after he predicted a return to normalized profits by 2013 in the range of $35-$40 billion. Bank of America and others are also planning on reinstating dividends once the Fed approves the change on March 20th. BAC is planning some special dividends and stock buybacks when that approval arrives. Moynihan expects 30% dividend payout by 2013-2014.

It was a really boring day for economic news with only two reports. The Manpower Employment report showed an increase in those responders planning on increasing payrolls from 14% to 16%. Those planning on cutting positions declined to 6% from 10%. Basically that means the net hiring component increased from 4% of responders to 10%. That is a pretty big increase even though the numbers are still fairly low.

The Weekly Chain Store Sales increased by +2.3% compared to a -0.5% decline last week. Better weather was blamed for the increase in store traffic. The drag from higher gasoline prices appeared to minimal.

The economic calendar for the rest of the week is limited without any material reports.

Economic Calendar

The big news was not economic but the Bank of America outlook. Moving to pretax earnings of $35-$40 billion will be a major recovery for the bank and the sector. The bank had a pre-tax profit of $11 billion in 2010. BAC outlined its expectations in the first analyst conference since 2007. Moynihan said BAC was on its way to becoming a "capital generation machine" thanks to its acquisitions of MBNA and Merrill Lynch. He said he was changing the culture of the bank. "We have no acquisitions to do. We don't need anything." BAC shares jumped +5% to $14.69.

The news helped to power the financial stocks in the Dow and create the opening short squeeze. Other stocks that would benefit from the kind of increasing economic activity Moynihan was expecting also rallied hard. Those Dow stocks included IBM, CAT, MMM, BA and UTX.

The Gaddafi rumor was credited with knocking some of the wind off oil prices but they were already headed south before the rumor hit the wires. The price of crude is over extended but many think after a bit of profit taking it will move higher.

Francisco Blanch, Chief Global Strategist at BAC, raised his targets for the rest of 2011. He said Brent could average $122 in Q2 and WTI $101. That is up from a prior estimate of $87 for WTI. He expects Brent to top $130 in Q2 but decline in Q4 to $94. His rationale is the surging demand around the world and the drop in output from Libya. He said 1.1 mbpd of light crude was now offline and regardless of who won the battle it could take many months to repair damage to oil facilities and reopen supply. This is exactly what I wrote about over the weekend in OilSlick. If the rebels win they consist of 12-20 tribes who don't like each other and the problem of how to divide $150 million a day in oil revenues will be a hotly contested issue. If Gaddafi wins it could still take months because of the purge of opposition supporters and the time it will take to rebuild the damaged facilities.

Gasoline prices nationwide rose to $3.52 according to one survey and $3.57 by another. MasterCard's Spending Pulse report showed gasoline demand declined -1.8% last week. The decline was broad based across all regions. MasterCard said they saw demand destruction in 2008 when prices moved over $3.20 per gallon so destruction over $3.50 today should not be a surprise. The spike in gasoline prices over the last two weeks was the sharpest on record according to the EIA.

Oil prices rebounded from the opening dip as OPEC members claimed to be considering an increase in production. The president of OPEC was reportedly calling all members for their input. I would not expect a true production increase. They might say they are increasing just to cover some of their 2.2 mbpd of cheating on their current quotas but you know they are perfectly happy at $100 oil. Saudi Arabia, the only vote that really counts has repeatedly said this week there is no shortage of oil. "The market is well supplied and the high price is the result of speculation." Sounds like the same tired chorus they used in 2008 and you know how well that played out.

Chart of WTI Crude

Chart of Brent

Urban Outfitters was the big story stock of the day with a -16% decline after missing earnings estimates by nearly every metric possible. Earnings per share were 45 cents compared to the 52-cent estimate. Gross margins declined by -2% to 39.7% and inventory levels rose +23%. Wall Street Strategies analyst said URBN missed the mark on style, fit and value and it could take them a year to work out from under their bloated inventories. Another analyst at Weeden blamed the winter weather for keeping customers away.

Chart of URBN

NetFlix took another pounding on news Facebook was entering the video streaming market with a Time Warner offering. Goldman said Facebook was a bigger threat to NetFlix than Amazon. Not everybody agreed. Facebook is offering only one title, The Dark Knight, for $3 in Facebook credits for a 48-hour rental. Obviously this is a trial balloon by Time Warner and there will be a catalog of titles once the effort is tested and proves worthy. Another limiting factor requires the movie to be streamed on a computer through the Facebook application. Google already tried this with YouTube and it was a flop. I don't see Facebook as a real competitor to NetFlix but traders did sell the shares today.

Chart of Netflix

McDonalds (MCD) said same store sales rose +3.9% in February. However, shares of MCD decline because U.S. sales fell short of analyst projections. U.S. sales rose +2.7% and analysts were expecting a +3.6% gain. Sales rose +5.1% in France, the U.K. and Russia.

Nvidia (NVDA) saw shares decline -4.5% to close at $19.55 on a sell the news event. Nvidia continues to claim it is going to expand its foothold in tablet computing but again failed to unveil any new designs or time frames for new graphics processors. The +27% gain on expectations is running out of fuel without some concrete products in the pipeline.

Nvidia Chart

The Dow Transports rebounded +2.5% on the minor decline in oil. This is clearly a short covering rally after two days of declines. Airlines were the biggest gainers. They have been raising prices because of high oil and the potential for oil prices to decline suggests they may be out of trouble. The close at 5147 was a two-week high.

Dow Transports Chart

I was glad to see the short squeeze today but it was far from bullish. The squeeze ended at 11:30 and the indexes started to fade as the afternoon progressed. So far this is just a lower high and any further decline from here would be bearish. The recent rallies have taken a back seat to the sudden appearance of sell programs and we are only one good sell program away from retesting the lows from Monday. I would advise caution until we get past the FOMC meeting next Tuesday.

S&P-500 Chart - 90 Min

S&P-500 Chart - Daily

The Dow also lodged a lower high on the rebound and failed exactly at downtrend resistance. We had a successful retest of the early March low but we need to see a breakout above the 12,300 level on Wednesday or the bears are going to load up on shorts again in an attempt to break the rally. The support at 12,050 will be critical if tested again.

Dow Chart - 90 Min

The lower high on the Nasdaq was weaker than the equivalent rebounds on the Dow or S&P. This is not a good sign. Big cap tech stocks did not participate in the rally with Apple gaining only 40-cents as an example. This is bearish for Nasdaq sentiment. The weaker lower high and the weak +20 point gain for the day is a warning signal for the rest of the week.

Nasdaq Chart

Wednesday is the two-year anniversary of the bear market low and I hope that does not mean we have a serious bout of selling. Anniversaries always seem to make traders nervous. Billionaire investor Carl Icahn told the investors in his fund on Monday he was returning their money, roughly $1.7 billion, because he was afraid of a new market decline and did not want to be responsible for their money in a new market crash. At least that was his official reason for returning the money. Analysts said it was more likely he did not want to register his fund as would be required under the new financial reform laws. However, I am sure investors "heard" the worry over a new market crash and did not hear the suggestion it was regulation related.

I would continue to be cautious until after the FOMC meeting next Tuesday. Tighten up your stops and exit aggressively to maintain any profits.

Jim Brown

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New Plays

Long-term Trendline

by James Brown

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NEW BULLISH Plays

Citigroup Inc. - C - close: 4.64 change: +0.12

Stop Loss: 4.47
Target(s): 4.95, 5.40
Current Gain/Loss: + 0.0%
Time Frame: 8 to 10 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Financials were showing relative strength on Tuesday and the group helped keep the market afloat. The bounce is offering a tempting entry point in Citigroup. Shares had just tested support near its long-term trendline of higher lows (see weekly chart below) an this just happened to coincide with a dip near the $4.50 mark, which was prior resistance.

I am suggesting small positions now. Just because Citigroup is trading in the single digits does not mean we should buy too much of it. Trade carefully here. Citigroup has been rather volatile the last couple of weeks. We want to buy C now with a stop loss at $4.47. More aggressive traders could buy the call options. Our targets are $4.95 and higher.

Open Small Bullish Positions Now

Suggested Position: Buy Citigroup stock @ current levels

- or -

Buy the May $4.50 calls (C1121E4.5) current ask $0.32

Annotated chart:

Weekly chart:

Entry on March 9 at $ x.xx
Earnings Date 04/18/11 (unconfirmed)
Average Daily Volume: 460 million
Listed on March 8th, 2010


In Play Updates and Reviews

Banks Lead the Rebound

by James Brown

Click here to email James Brown

Editor's Note:
Financials were some of the market's best performers on Tuesday. The sector helped lift the market off its morning lows. We saw GIL hit our buy-the-dip entry point.

-James

Current Portfolio:


BULLISH Play Updates

Alcoa Inc - AA - close: 16.49 change: +0.24

Stop Loss: 15.95
Target(s): 18.50, 19.75
Current Gain/Loss: - 6.5%
2nd Position Current Gain/Loss: - 2.0%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
03/08 update: AA bounced from support near $16.00 again but the consolidation pattern has a bearish trend of lower highs. I remain very cautious here. I am not suggesting new positions at this time.

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


Arch Coal Inc. - ACI - close: 34.62 change: -0.51

Stop Loss: 31.95
Target(s): 39.50, 42.50
Current Gain/Loss: - 0.4%
Time Frame: 8 to 10 weeks
New Positions: see below

Comments:
03/08 update: Yesterday I suggested readers buy a dip near $34.00 and that's what ACI provided today. Shares slipped to $34.15 intraday. We might see ACI test the $34.00 region again tomorrow. More conservative traders might want to consider a stop loss closer to $34.00. Our multi-week targets are $39.50 and $42.50.
FYI: The Point & Figure chart for ACI is bullish with a $40 target.

Current Position: Long ACI stock @ 34.76

- or -

Long the April $35 calls (ACI1116D35) Entry @ $1.75

03/03 ACI gapped open at $34.76 (trigger was $34.75)

Entry on March 3 at $34.76
Earnings Date 04/19/11 (unconfirmed)
Average Daily Volume: 3.4 million
Listed on March 2nd, 2010


ACI Worldwide Inc. - ACIW - close: 31.30 change: +0.84

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:
03/08 update: ACIW produced a strong bounce (+2.7%) off support near the $30 level. I would hesitate to buy it now. Shares might provide another entry point near $30.00 again. Our bullish 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: 23.83 change: +0.10

Stop Loss: 22.85
Target(s): 25.90, 27.85
Current Gain/Loss: - 0.1%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
03/08 update: ANN is still churning sideways. More conservative traders may want to cut their losses early. 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: 53.05 change: -0.06

Stop Loss: 50.90
Target(s): 54.90, 57.50
Current Gain/Loss: + 2.0%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
03/08 update: BAX did not see much of a bounce today but shares eked out a +0.4% gain. I suspect this stock is still headed for the $52.50-52.00 zone. Readers may want to inch up their stops a little bit more. The plan was 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

03/05 New stop loss @ 50.90

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: 7.63 change: +0.16

Stop Loss: 6.85
Target(s): 7.80, 8.90
Current Gain/Loss: + 5.6%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
03/08 update: BSX was showing some relative strength with a +2.1% gain. The stock is now testing resistance near $7.70 again. I am not suggesting new positions at this time. 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


Cabot Microelectronics - CCMP - close: 49.17 change: +0.87

Stop Loss: 47.95
Target(s): 54.75
Current Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

Comments:
03/08 update: There is no change from my prior comments. I am suggesting a breakout trigger to open bullish positions at $50.25. Our target is $54.75.

FYI: The most recent data listed short interest at 13% of CCMP's small 22.75 million share float. That raises the chances for a short squeeze.

Trigger @ 50.25

Suggested Position: Buy CCMP stock @ $50.25

- or -

Buy the April $50 calls (CCMP1116D50) current ask $2.10

- or -

Buy the April $55 calls (CCMP1116D55) current ask $0.40

Entry on March x at $xx.xx
Earnings Date 04/21/11 (unconfirmed)
Average Daily Volume: 211 thousand
Listed on March 5th, 2010


Gildan Activewear - GIL - close: 30.83 change: +0.03

Stop Loss: 28.99
Target(s): 34.85, 38.00
Current Gain/Loss: + 1.5%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
03/08 update: Our buy-the-dip entry point has been hit. GIL slipped to $30.25 intraday. Our trigger to open positions was at $30.35. If you missed it we might get another shot as GIL could retest the $30 level again soon. We're suggesting a stop loss at $28.99.

Current Position: long GIL stock @ 30.35

- or -

Long the April $30 call (GIL1116D30) Entry @ $1.60

03/08 Triggered $ 30.35
03/01 Adjusted buy-the-dip trigger to $30.35
03/01 Adjusted stop loss to $28.99

chart:

Entry on March 8 at $30.35
Earnings Date 05/12/11 (unconfirmed)
Average Daily Volume: 634 thousand
Listed on February 28th, 2010


Intuit - INTU - close: 52.11 change: +0.18

Stop Loss: 49.90
Target(s): 54.75, 59.00
Current Gain/Loss: + 0.4%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
03/08 update: The rebound in INTU was relatively underwhelming. I remain cautious on this stock. Let's hold off on 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

03/03 New stop loss @ 49.90

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


Jos. A Bank Clothiers Inc. - JOSB - close: 46.30 change: +0.96

Stop Loss: 44.75
Target(s): 49.85, 52.25
Current Gain/Loss: + 0.6%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
03/08 update: JOSB is bouncing from support near $46.00. I would wait for dips near $45 or wait for a breakout past $48 before considering new positions.

The earnings date at the end of March is not yet confirmed but it does put a four to five week time frame on this trade.

FYI: The most recent data listed short interest at almost 25% of JOSB's 27.3 million-share float. There is definitely room for some short covering here. Plus, the Point & Figure chart for JOSB is bullish with a $62 target.

- Small Bullish Positions -

Current Position: Long JOSB stock @ $45.99

- or -

Long the April $50 calls (JOSB1116D50) Entry @ $0.95

Entry on March 7 at $45.99
Earnings Date 03/30/11 (unconfirmed)
Average Daily Volume: 355 thousand
Listed on March 5th, 2010


Lincare Holdings Inc. - LNCR - close: 29.68 change: +0.24

Stop Loss: 28.45
Target(s): 29.90, 31.50
Current Gain/Loss: + 4.6%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
03/08 update: LNCR managed to hit a new multi-month high before paring its gains. I am not suggesting new positions at this time. Our final target is $31.50 but LNCR has to breakout past $30 first.

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

03/05 New stop loss @ 28.45, Adjusted target to $31.50
03/01 The exit number below is updated for Tuesday's open
02/28 Sell Half to lock in a gain. LNCR @ $29.52 (+4.0%)
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: 26.79 change: +0.05

Stop Loss: 25.95
Target(s): 29.90, 33.50
Current Gain/Loss: - 3.2%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
03/08 update: Bears tried to take chip stocks lower again this morning but MXIM rallied off its lows. Sadly the actual gains were not that impressive. More conservative traders might want to inch up their stop loss. I am not suggesting new positions at this time.

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: 49.31 change: +0.38

Stop Loss: 47.65
Target(s): 54.00
Current Gain/Loss: -1.4%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
03/08 update: There is no change from my prior comments. OMC still looks vulnerable here. Odds are growing that OMC will test support near $48.00. I am not suggesting new positions at this time.

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: 43.53 change: -0.02

Stop Loss: 42.65
Target(s): 49.75
Current Gain/Loss: - 3.8%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
03/08 update: SIG did not see much of a bounce. Readers should remain defensive. I am not suggesting new bullish positions at this time.

Current Position: Long SIG stock @ $45.25

- or -

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

02/28 New stop loss @ 42.65
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


Sony Corp. - SNE - close: 35.32 change: +0.16

Stop Loss: 34.80
Target(s): 39.90, 43.50
Current Gain/Loss: - 3.8%
Time Frame: 8 to 10 weeks
New Positions: see below

Comments:
03/08 update: SNE bounced from its 100-dma near $35.00. I'd prefer to wait for shares to rally over $35.50 before considering new bullish positions.

Current Position: long SNE stock @ $36.72

- or -

Long the April $38 calls (SNE1116D38) Entry @ $0.85

Entry on March 1 at $36.72
Earnings Date 05/12/11 (unconfirmed)
Average Daily Volume: 862 thousand
Listed on February 28th, 2010


Wyndham Worldwide - WYN - close: 31.52 change: +0.10

Stop Loss: 29.90
Target(s): 34.50, 37.50
Current Gain/Loss: + 0.2%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
03/08 update: Yet another quiet session for WYN. The stock continues to drift sideways in a narrow range. Readers might want to wait for WYN to breakout past the $32.00 level before initiating new positions.

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


ZOLL Medical Corp. - ZOLL - close: 45.47 change: -0.47

Stop Loss: 43.95
Target(s): 49.80, 53.50
Current Gain/Loss: - 2.3%
Time Frame: 8 to 10 weeks
New Positions: see below

Comments:
03/08 update: If you missed buying the dip today the afternoon intraday bounce in ZOLL looks like it could be a bullish entry point. However, readers may want to wait and see if the rebound has any follow through first. More conservative traders might want to use a stop closer to $44.75.

FYI: The Point & Figure chart for ZOLL is bullish with a $55 target. ZOLL does have options but the spreads are too wide. You'll also find it interesting that the most recent data listed short interest in ZOLL at 10% of the very small 21.5 million-share float.

Suggested Position: Long ZOLL stock @ $46.54

Entry on March 4 at $46.54
Earnings Date 04/28/11 (unconfirmed)
Average Daily Volume: 180 thousand
Listed on March 3rd, 2010