Option Investor
Newsletter

Daily Newsletter, Thursday, 3/31/2011

Table of Contents

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

Market Wrap

Boring End To Q1

by Todd Shriber

Click here to email Todd Shriber
This sounds familiar: Rising oil prices and heightened concerns about the European sovereign debt crisis combine to weigh on stocks. That was the scenario on Thursday as the Dow Jones Industrial Average and the S&P 500 both closed slightly lower on the day while the Nasdaq fought its way to a small gain. Even the with the less-than-inspiring trade on Thursday, this was the best first quarter for U.S. stocks in over a decade.

Stats Table

In economic news, weekly jobless claims fell for the third consecutive week to 388,000 last week from the upwardly revised 394,000 new claims the previous week. While the four-week moving averaged ticked higher, it remains below the all-important 400,000 level at 394,250. Heading into the March jobs report tomorrow, it appears the labor market is at least improving, but upside surprises will be just that: Surprises. Most analysts forecast that the economy added 185,000 nonfarm jobs, down from 192,000 in February, and that the unemployment rate held unchanged at 8.9%, according to Reuters.

Jobless Claims Chart

Speaking of things that weigh on the economy, oil ended the first quarter at a 30-month high as the market continues to be concerned about lost supply due to the Libyan imbroglio. Headlines crossed the wires today that forces loyal to embattled dictator Muammar Qaddafi regained control of Ras Lanuf, a critical Libyan oil port, and were aiming to do the same at Brega, another important Libyan oil outpost.

Libya, home to Africa's largest oil reserves and the continent's third-largest producer behind fellow OPEC members Angola and Nigeria, has seen its daily output slashed in dramatic fashion since the onset of violence in the country. How bad is the production decline in Libya? Libyan oil production tumbled by 995,000 barrels in March to 390,000 barrels a day, according to a Bloomberg News survey.

As was seen in today's trading, oil now faces pretty stiff resistance at $107, the high touched earlier this month. Oil's move to the upside did not carry over to the major U.S. integrateds as CVX and XOM both closed lower to weigh on the Dow and COP was down 1%. On the other hand, both Chevron and ConocoPhillips touched new 52-week highs today. For more news and commentary on the energy sector, register for the OilSlick daily newsletter (HERE).

Oil Chart

One of the day's big winners was Tesla Motors (TSLA), a stock that I admit to having poked some fun at in the past. The still-not-profitable company sells sporty electric cars that are by no means inexpensive and I have openly wondered what car lover would drop six figures on a Tesla car when there a plenty of gas-powered, prestigious European models available at similar and lower price-points.

Morgan Stanley disagrees with me and the bank's 50-page novel/report on Tesla sent the stock soaring 17% on volume that more than nine times the daily average. The stock closed at $27.75 but Morgan Stanley placed a $70 price target on the stock, representing potential upside of more than 200%.

A 50-page analyst report is not an everyday event, but they are published from time to time and when a report is that long, it certainly leaves plenty of room for bold proclamations and Morgan Stanley does not disappoint on that front saying Tesla has the potential to become the fourth major U.S. car producer behind Chrysler, Ford (F) and General Motors (GM).

Morgan Stanley notes that the biggest risk facing Tesla is the company's ability to execute its own business plan and that the company's long-term independence hinges on its ability to make its pricey vehicles more accessible to more buyers.

Perhaps Tesla could legitimize itself among the titans of the U.S. auto industry if it can start profitably producing cars with $30,000 price tags. At least in theory, with the specter of $4 gasoline facing Americans (it is already here in Southern California), Tesla should be in a sweet spot in terms of ramping up sales and profits IF it can produce cheaper cars.

Tesla Chart

One of the noteworthy losers on the day was Warren Buffett's Berkshire Hathaway (BRK-A, BRK-B) on news of David Sokol's controversial departure from the company that was announced Wednesday after the close of U.S. markets. Sokol was widely believed by Wall Street and Berkshire followers to be one of the leading contenders to replace Buffett at the helm of the legendary company upon Buffett's retirement.

No more. If you were following this story when it broke Wednesday evening, its evolution was pretty interesting. It started off with the usual speculation that Sokol was leaving to devote more time to personal causes and philanthropy. Follow financial markets long enough and you will inevitably hear the same canned excuses for executive departures. Perhaps you find yourself wondering if there is anymore to these departures than meets the eye.

In the case of Sokol, there is and we only need to go back a few weeks to see what it is. Earlier this month, Berkshire announced it is buying specialty chemicals maker Lubrizol for $9 billion, and in the days following the announcement, Sokol was widely heralded as the architect behind the deal. Buffett said as much in a statement issued yesterday, confirming that Sokol brought the idea of Berkshire buying Lubrizol up to him in January.

Now this is where it gets really interesting. Buffett was not initially wowed by the idea, but Sokol was able to convert him later in January. Of course, all of this happened two weeks after Sokol scooped up 96,000 shares of Lubrizol for himself. Assuming he still owns his Lubrizol shares, Sokol would be up $3 million and that's on top of the almost $60 million in salary he made at Berkshire's MidAmerican Energy unit over the past five years.

I highly recommend watching Sokol's interview with CNBC where he says he did nothing wrong. My soapbox ends here and you can draw your own conclusions about this situation.

Berkshire-Hathaway Class B Chart

Looking at the charts, today's minor losses did little to inflict any real damage on the Dow and the S&P 500 and it is not likely any of the pundits that have been out in force in recent weeks that have been calling for S&P 500 1400 recently are going to change their tune. Before approaching that lofty level, the index will have to contend with some resistance around 1335 and then again in the low 1350 area.

A move to 1400 from where the S&P 500 closed today would be 5.6% upside. Looking further out, there is resistance between 1400 and 1440 and for those willing to dream big, a move to 1440 is almost 9% from Thursday's close.

S&P 500 Chart

How about Dow 13,000? Well, the last time that lofty level was seen was nearly three years ago on May 19, 2008. From here, the Dow needs to conquer resistance at 12,400, then do the same at 12,800 before 13,000 becomes a legitimate topic of conversation. I think earnings seasons pushes the Dow higher, but 13,000 may prove tricky to surpass heading into the Federal Reserve press event on April 27. Support is 12,170.

Dow Chart

To the Nasdaq goes the honor of being the only one of the three major U.S. indexes close higher today and it did so just a point below resistance at 2782, so there is some work to be done to get back to the February peak of 2840. If 2840 is broken, another 30-40 points could be tacked on. Near-term support is 2755 and then perhaps the 50-day moving average at 2744.

Nasdaq Chart

As Keene noted yesterday, the Russell 2000 was the first of the indexes to set a new high for the year and the index was back at it today with a small gain. The Russell 2000 looks poised to take out old resistance at 852 and that would be significant because as Keene's chart showed last night, that resistance is from October 2007. Support is 820.

Russell Chart

Despite the anemic volume, the path of least resistance is up and I suspect that will remain the case as first-quarter earnings start to flow in. A lot of emphasis is placed on the monthly jobs number, but I get the feeling that this is going to be a non-event unless there is a significant upside or downside surprise. We know what the international issues are that the market has to contend with, but on the domestic front, circle April 27 as an upcoming day to watch. That is the first of Ben Bernanke's quarterly press updates on what the Fed is up to, also known as ''The Defense Of Quantitative Easing and Reasons Why QE3 Is A Good Idea.''


New Plays

Jobs Data Tomorrow

by James Brown

Click here to email James Brown

Editor's Note:

Once again the stock market is looking toward the monthly jobs report for evidence of the labor market's improvement. After a sharp, two-week bounce from the stock market's March lows there is a chance that traders could use the news tomorrow as an excuse to take profits. Then again if the results are better than expected it could easily kick stocks higher.

I will be curious to see if stocks rally into the close or do they sell-off into the closing bell. How willing are traders to hold positions over the weekend? Tomorrow's market direction will most likely be dictated by the jobs data, which comes out before the opening bell.

I am not adding any new candidates tonight as we wait to see wait to see the jobs number.

- James


In Play Updates and Reviews

More than Ten Years

by James Brown

Click here to email James Brown

Editor's Note:
The S&P 500 is up about +5.4% for the first quarter of 2011. That's the best Q1 performance in over 10 years. The trend is up but stocks look a little bit overbought given the big bounce off its mid March lows.

The jobs report tomorrow morning could be pivotal. Traders could use it as a catalyst to take profits if the jobs numbers is disappointing, or as a catalyst to push higher if the jobs data is strong. Of course there is the chance that stocks pop higher in the morning on strong data and then reverse into profit taking ahead of the weekend. Readers may want to wait for a dip before considering new bullish positions.

-James

Current Portfolio:


BULLISH Play Updates

ACI Worldwide Inc. - ACIW - close: 32.80 change: -0.10

Stop Loss: 29.75
Target(s): --.--, 34.75
Current Gain/Loss: +10.7%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
03/31 update: ACIW is still hovering under resistance at the $33.00 level. Shares are arguably short-term overbought here. Readers may want to seriously consider an early exit right here to lock in gains.

Currently we're aiming for the $34.75 level but plan to exit ahead of the late April earnings report. I am not suggesting new positions at this time.

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

03/24 first exit was at $32.25 (+8.8%)
03/23 Sell half now! exit price at the open on 3/24
03/22 New stop loss @ 29.75, 1st Target adjusted to $32.85
03/19 New stop loss @ 29.35

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


AutoNation, Inc. - AN - close: 35.37 change: -0.34

Stop Loss: 33.49
Target(s): 38.00, 39.75
Current Gain/Loss: + 0.3%
Time Frame: 3 to 5 weeks
New Positions: see below

Comments:
03/31 update: AN was kind enough to provide us another bullish entry point with a dip near $35.00 today. I would still buy the stock now at current levels.

Our upside targets are $38.00 and $39.75 although that might be a little optimistic. We do not want to hold over the late April earnings report.

Current Position: Long AN stock @ $35.25

- or -

Long the May $36 calls (AN1121E36) Entry @ $1.15

Entry on March 30 at $35.25
Earnings Date 04/26/11 (unconfirmed)
Average Daily Volume: 972 thousand
Listed on March 29th, 2011


Dick's Sporting Goods Inc. - DKS - close: 39.98 change: -0.35

Stop Loss: 36.75
Target(s): 42.25, 44.50
Current Gain/Loss: +1.5%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
03/31 update: There is nothing new to report on for DKS. Shares continue to churn sideways near $40.00. Readers may want to wait for a new two-week high over $40.46 before considering new positions. I'm suggesting profit targets at $42.25 and $44.50.

FYI: The Point & Figure chart for DKS is bullish with a $65 target.

- Small Positions -

Current Position: Long DKS stock @ $39.39

- or -

Long the June $40 calls (DKS1118F40) Entry @ $2.35

Entry on March 21 at $39.39
Earnings Date 05/18/11 (unconfirmed)
Average Daily Volume: 1.6 million
Listed on March 19th, 2010


eBay Inc. - EBAY - close: 31.04 change: -0.59

Stop Loss: 29.49
Target(s): 34.90, 39.00
Current Gain/Loss: - 0.6%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
03/31 update: Hmm... EBAY is seeing its bounce fail at technical resistance near its 30 and 50-dma. The stock erased yesterday's rebound with a -1.8% drop today. Wait for another dip into the $30.75-30.25 zone as our next entry point. We have a stop loss at $29.49. Our first target is $34.90. We do not want to hold over EBAY's late April earnings report.

Current Position: Long EBAY stock @ $31.25

- or -

Long the May $33.00 calls (EBAY1121E33) Entry @ $0.75

Entry on March 28 at $31.25
Earnings Date 04/27/11 (unconfirmed)
Average Daily Volume: 10 million
Listed on March 24th, 2011


Ford Motor Co. - F - close: 14.91 change: +0.05

Stop Loss: 14.19
Target(s): 16.45, 17.45
Current Gain/Loss: - 0.9%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
03/31 update: Unfortunately shares of Ford have been stuck in neutral all week long. Readers may want to wait for a new rally past $15.00 before considering new bullish positions. Our targets are $16.45 and $17.45.

Current Position: Long F stock @ $15.05

- or -

Long the April $15 calls (F1116D15) Entry @ $0.33

Entry on March 24 at $15.05
Earnings Date 04/21/11 (unconfirmed)
Average Daily Volume: 82 million
Listed on March 15th, 2010


Gildan Activewear - GIL - close: 32.77 change: +0.04

Stop Loss: 29.70
Target(s): 34.85, 38.00
Current Gain/Loss: + 7.9%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
03/31 update: GIL posted a very minor gain and shares spent the day churning sideways. I am not suggesting new positions at this time.

Current Position: long GIL stock @ 30.35

- or -

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

03/19 New stop loss @ 29.70
03/08 Triggered $ 30.35
03/01 Adjusted buy-the-dip trigger to $30.35
03/01 Adjusted stop loss to $28.99

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


Harley Davidson - HOG - close: 42.49 change: +0.19

Stop Loss: 39.75
Target(s): 47.00, 49.75
Current Gain/Loss: + 0.8%
Time Frame: 3 to 5 weeks
New Positions: see below

Comments:
03/31 update: HOG opened lower at $42.13 but quickly recovered. Shares eventually outperformed the S&P 500 with a +0.44% gain. I would still consider new positions now or you could look for dips into the $42.00-41.50 zone. Keep an eye on potential resistance near $43.00. Readers will want to keep their position size small to limit our risk. We only have a few weeks since we will plan to exit ahead of the late April earnings report.

Current Position: long HOG stock @ $42.13

- or -

Long the May $45 calls (HOG1121E45) entry @ $0.95

Entry on March 31 at $42.13
Earnings Date 04/19/11 (unconfirmed)
Average Daily Volume: 2.0 million
Listed on March 30th, 2011


KLA-Tencor - KLAC - close: 47.32 change: -0.30

Stop Loss: 44.95
Target(s): 49.90
Current Gain/Loss: + 1.4%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
03/31 update: Semiconductor stocks were underperformers today. The SOX slipped -0.9%. KLAC gave up -0.6%. The stock should have decent support in the $46.70-46.00 zone. We can buy dips there or wait for a breakout past $48.00. I am thinking about raising our stop loss closer to $46.00. Our target is $49.90.

Current Position: Long KLAC stock @ $46.65

- or -

Long the April $45 calls (KLAC1116D45) Entry @ $2.85

Entry on March 24 at $46.65
Earnings Date 04/28/11 (unconfirmed)
Average Daily Volume: 2.5 million
Listed on March 23rd, 2011


NVIDIA Corp. - NVDA - close: 18.46 change: +0.01

Stop Loss: 16.85
Target(s): 19.95, 21.75
Current Gain/Loss: + 1.4%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
03/31 update: There was virtually no change in shares of NVDA today. The stock continues to churn in the $18.20-18.60 area. Aggressive traders could buy this dip but if you do I would consider a tighter stop close to the $18 level. Our first target to take profits is at $19.95. Our second target is $21.75.

Prior Comments:
This is a very speculative, higher-risk trade. Remember to keep your positions small to limit your risk.

- small bullish positions -

Current Position: long NVDA stock @ $18.19

- or -

Long the April $20 calls (NVDA1116D20) Entry @ $0.72

Entry on March 14 at $18.19
Earnings Date 05/12/11 (unconfirmed)
Average Daily Volume: 35 million
Listed on March 12th, 2010


Polycom Inc. - PLCM - close: 51.85 change: +0.26

Stop Loss: 46.90
Target(s): 54.85,
Current Gain/Loss: + 3.3%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
03/31 update: PLCM is still drifting higher and tagged another high today at $52.16. There is no change from my prior comments. I would still consider new positions here or you could wait for a dip near the $50.50-50.00 zone. Our upside target is $54.85.

- Small Bullish Positions -

Current Position: Long PLCM stock @ $50.18

- or -

Long the May $52.50 calls (PLCM1121E52.5) Entry @ $2.00

03/23 Entry price on the May $52.50 call is an estimate.

Entry on March 23 at $50.18
Earnings Date 04/21/11 (unconfirmed)
Average Daily Volume: 967 thousand
Listed on March 22nd, 2011


Patterson-UTI Energy Inc. - PTEN - close: 29.39 change: +0.48

Stop Loss: 25.95
Target(s): 31.50, 34.00
Current Gain/Loss: + 4.0%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
03/31 update: PTEN displayed some relative strength with a +1.6% gain and another new relative high. The stock is approaching what might be round-number resistance at the $30.00 level. Don't be surprised to see some profit taking soon. Dips in the $28.50-28.00 zone could be used as a new entry point.

Prior Comments:
The $30.00 mark might offer some resistance but I'm targeting a climb to $31.50 and the $34.00 levels.

Current Position: Long PTEN stock @ 28.25

- or -

Long the May $30 calls (PTEN1121E30) Entry @ $0.95

Entry on March 25 at $28.25
Earnings Date 04/28/11 (unconfirmed)
Average Daily Volume: 2.8 million
Listed on March 17th, 2010


Ryder Systems Inc. - R - close: 50.60 change: +0.42

Stop Loss: 47.40
Target(s): 53.00
Current Gain/Loss: + 0.7%
Time Frame: 3 to 5 weeks
New Positions: see below

Comments:
03/31 update: R is marching higher and added +0.8% on strong, rising volume. I would still consider new positions now or on a dip near the $49 area. Our target is the $53.00 level. We do not want to hold over the late April earnings report.

Current Position: Long R stock @ $50.25

- or -

Long the May $50 call (R1121E50) Entry @ $2.55

Entry on March 30 at $50.25
Earnings Date 04/21/11 (unconfirmed)
Average Daily Volume: 388 thousand
Listed on March 26th, 2011


Southwestern Energy Co. - SWN - close: 42.97 change: -0.27

Stop Loss: 38.49
Target(s): 44.85
Current Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

Comments:
03/31 update: It looks like upward momentum might be temporarily stalling for SWN. I remain bullish on the stock but we don't want to buy it here. Furthermore, if we don't see SWN start to correct lower tomorrow then I'll probably remove it from the newsletter and just place it on my personal watch list where we can wait for a dip back toward support near the $40 area. Currently our trigger to buy the dip is at $40.55.

FYI: The Point & Figure chart for SWN recently broke out past resistance and is now signaling a bullish target of $51.

Buy-the-Dip Trigger @ $40.55

Suggested Position: Buy SWN stock @ 40.55

- or -

Buy the June $42 calls (SWN1118F42)

Entry on March x at $xx.xx
Earnings Date 04/28/11 (unconfirmed)
Average Daily Volume: 6.9 million
Listed on March 19th, 2010


Tesoro Corp - TSO - close: 26.83 change: -0.93

Stop Loss: 23.95
Target(s): 29.90
Current Gain/Loss: + 2.6%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
03/31 update: Ouch! Profit taking in TSO shaved off -3.3%. Look for this stock to test the 10-dma near $26.25 or the $26.00 level. A dip to either spot can be used as a new bullish entry point. Our target to exit is $29.90. Readers may want to adjust their stop loss higher.

Prior Comments:
Given the stock's recent volatility over the last month or so I would consider this a higher-risk trade. Keep your position size small. FYI: The most recent data listed short interest in TSO at more than 13% of the stock's 141 million-share float. A breakout past resistance could spark another short squeeze.

Current Position: Long TSO stock @ 26.15

- or -

Long the May $27.00 calls (TSO1121E27) Entry @ $1.60

Entry on March 24 at $26.15
Earnings Date 04/25/11 (unconfirmed)
Average Daily Volume: 8.2 million
Listed on March 21st, 2010


Williams Companies, Inc. - WMB - close: 31.18 change: -0.27

Stop Loss: 29.45
Target(s): 34.50
Current Gain/Loss: - 0.2%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
03/31 update: WMB spiked to a new relative high at $31.77 this morning but the strength faded. WMB looks poised to retest support near $31.00 or a dip toward its 20-dma closer to $30.50. We can still launch positions now or wait for a dip in this area as a new entry point.

Current Position: long WMB stock @ $31.26

- or -

Long the May $30 calls (WMB1121E30) Entry @ $2.10

Entry on March 28 at $31.26
Earnings Date 05/05/11 (unconfirmed)
Average Daily Volume: 7.0 million
Listed on March 26th, 2011


Weyerhaeuser Co. - WY - close: 24.60 change: -0.02

Stop Loss: 23.40
Target(s): 27.25, 29.25
Current Gain/Loss: - 0.3%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
03/31 update: Thursday was a quiet session for WY. Traders bought the morning dip near $24.50 but the stock closed virtually unchanged for the session. I'm in a wait and see mode right now. Let's see how the market reacts to the jobs report before considering new positions in WY.

Prior Comments:
Keep your positions small to limit your risk.

Suggested Position: long WY stock @ $24.68

- or -

Long the July $25 calls (WY1116G25) Entry @ $1.64

03/24 New stop @ 23.40

Entry on March 16 at $24.68
Earnings Date 04/29/11 (unconfirmed)
Average Daily Volume: 6.4 million
Listed on March 15th, 2010


BEARISH Play Updates

Overseas Shipholding Group - OSG - close: 32.14 change: -0.64

Stop Loss: 33.55
Target(s): 27.75, 25.25
Current Gain/Loss: + 0.1%
Time Frame: 8 to 9 weeks
New Positions: see below

Comments:
03/31 update: The bounce in OSG has reversed at technical resistance near its 50-dma. This looks like a new bearish entry point. Conservative traders could adjust their stop closer to the $33.00 level.

Our plan was to use small positions to limit our risk. The P&F chart is forecasting a $25 target.

- Small Bearish Positions -

Current Position: Short OSG stock @ $32.20

- or -

Long the April $30 PUTS (OSG1116P30) Entry @ $0.75

03/16 New stop loss @ 33.55

Entry on March 11 at $32.20
Earnings Date 05/04/11 (unconfirmed)
Average Daily Volume: 705 thousand
Listed on March 10th, 2010