Option Investor
Newsletter

Daily Newsletter, Monday, 4/18/2011

Table of Contents

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

Market Wrap

AAA May Be Slipping Away

by Todd Shriber

Click here to email Todd Shriber
The major U.S. indexes closed well of their lows of the day, but that does not cover losses of more than 1% for the S&P 500, Dow Jones Industrial Average and the Nasdaq following Standard & Poor's slapping a ''negative'' outlook on the AAA rating on U.S.-issued debt. The Russell 2000 was the worst performer among the major indexes, plunging 1.6%.

Stats Table

For those of you that enjoy reading about the odds of an event occurring, the odds are one-in-three that S&P cuts Uncle Sam's AAA rating due to ballooning budget deficits and debt within the next two years, according to Bloomberg News.

''Because the U.S. has, relative to its 'AAA' peers, what we consider to be very large budget deficits and rising government indebtedness and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating,'' S&P said in a statement.

One analyst pointed out, and I tend to agree with this summation, that S&P may be trying to get ahead of the crowd with the ''negative'' outlook on U.S. debt because ratings agencies have been notoriously behind the 8 ball for far too long. Just look at the situation with the PIGS in Europe. S&P, Moody's and others were so far behind that curve that by the time they got around to cutting outlooks and ratings on sovereign debt issued by the likes of Greece and Portugal, spreads had already blown out and equity markets had already reacted.

Perhaps the silver lining in S&P's move to ''negative'' is that it is just one more catalyst to bring the budget debate front and center, making it a Main Street issue, which it is, not just a Capitol Hill/Wall Street issue. I will not get into politics, but I will point out that every year for the past 42, Congress has spent more than the revenue its takes in. Take a look at the chart below to get a sense for where some of the money goes.

Congressional Spending Chart

As you can now tell, it was a grizzly day for stocks, a fact highlighted by declines in 29 of the Dow's 30 members. Only Boeing (BA) traded higher and that is probably because of a ''Barron's bounce'' following the aerospace giant's appearance on the cover of the most recent issue of the financial magazine.

Financials were particularly ugly with Bank of America (BAC) and JPMorgan Chase (JPM) shedding 3% and 2%, respectively. Given those performances, it is almost a wonder that Citigroup (C), the third-largest U.S. bank by assets finished flat on the day after reporting that its first-quarter profit dipped 32% to $3 billion, or 10 cents per share, from $4.4 billion, or 15 cents a share, a year earlier as revenue tumbled 22% to $19.7 billion. Citi said its investment banking revenue fell 25% during the quarter.

As the previous reports from BofA and JPMorgan showed us, it is hard to find good cheer in this earnings season when it comes to bank stocks, but Citi CEO Vikram Pandit did make some slightly encouraging comments on today's conference call. Pandit said the bank wants ''to get to some sort of normalized dividend policy'' and ''With the stock trading below book value, it becomes awfully interesting to think about share repurchases as well.''

Citi has pledged to pay a dividend of a penny a share starting this quarter and the company will execute a 1-for-10 reverse split early next month to lower its enormous shares outstanding count. Only time will tell if those gambits result in meaningful returns for Citi shareholders.

Citigroup Chart

Also bucking the downward trend today was Halliburton (HAL), the world's second-largest oilfield services provider, which said its first-quarter earnings more than doubled to $511 million or 56 cents per share, compared with $206 million, or 23 cents per share, a year earlier as revenue climbed 40% to a record $5.28 billion. That is not a first-quarter revenue record for Halliburton; that is an all-time record. On an adjusted basis, Halliburton earned 61 cents a share. Analysts were expecting a profit of 58 cents on revenue of $4.87 billion.

The company said growth in land-based drilling projects is helping it cope with the mess in Libya and the federal government's slow permit approval process for new deepwater projects in the Gulf of Mexico. Halliburton President and CEO Dave Lesar was bullish in his outlook for the oil services group in 2011 and even said he is optimistic about Libya.

We will have plenty of news on oil services earnings this week at OilSlick.com, but I will just briefly say this is a critical week of earnings for the Oil Services HOLDRs (OIH), which has been under some pressure lately. Counting Halliburton, roughly 38% of the ETF's weight reports earnings this week. For more energy news and commentary, register for the free OilSlick daily newsletter (HERE).

Halliburton Chart

Check out the chart of the Semiconductor HOLDRs (SMH), which is looking less-than-impressive with big earnings reports ahead this week.

Semiconductors HOLDRs Chart

There is a very good chance that the chart will look a little worse tomorrow following a disappointing first-quarter earnings report from Texas Instruments (TXN), the largest analog chip maker, today after the close. The company said it earned 55 cents a share on revenue of $3.39 billion, but analysts were expecting a profit of 58 cents on revenue of $3.4 billion.

The revenue number was at the lower end of the $3.34 billion-$3.48 billion TI forecast last month and the profit number missed the 56-60 cents a share the company was expecting. A charge of two cents a share was taken related to costs in Japan and this could be just the beginning of plenty of U.S. tech giants reporting slack results because of the tragedy in Japan.

For the second quarter, TI expects revenue of $3.41 billion to $3.69 billion and a profit of 52-60 cents. Analysts were expecting a profit of 62 cents on sales of $3.52 billion. That guidance includes Japan-related costs of a nickel a share. Investors are none too pleased as TI's shares are down 3% in the after-hours session as of this writing.

Intel (INTC), the world's largest semiconductor maker, reports its first-quarter numbers after the bell tomorrow and a disappointment there could send the Nasdaq and SMH careening lower. TI and Intel combine for more than 39% of SMH's weight.

Looking at the charts, the S&P 500 spent a good portion of the day below 1300 before a late-day rally lifted the index above that level, but there are problems here, not the least of which is that with 1300 having been violated on an intraday basis, that may give short-sellers more gumption going forward.

Below 1300, support looks to be 1285 while a move below 1275 could mean a retest of the March low around 1257. Headline risk is abundant this week and I am just talking about earnings. I will merely point out what looms on the earnings front tomorrow. High-beta names such as BTU and CSX step into the earnings confessional along with GS and Intel and several others. Thus far, earnings season has done the bulls no favors.

S&P 500 Chart

The Dow looks like it could be in trouble as Monday's action took the blue-chip index to a close below its 50-day moving average. Old support at 12,200 could turn to new resistance and that resistance could prove hard to break without the benefit of some strong earnings reports. Before the bell, JNJ announces, but this is a company littered with recall issues, so I would not expect much help there. INTC and IBM chime in after the close and those are the marquee Dow earnings for Tuesday. If the Dow cannot muster some upside from here, next support is 12,000.

Dow Chart

The Nasdaq might be in the worst shape of the major indexes at this juncture. Monday's close took the index well below its 50-day line and if the 2735 area is supposed to be support, that is where the Nasdaq came to rest when all was said and done on Monday.

AAPL and RIMM were both ended higher today, the latter because of a bullish piece in Barron's, but AMZN, GOOG and PCLN were all lower. If Intel and Apple do not step up big-time, 2700 could make an appearance this week.

Nasdaq Chart

Things were looking good for the Russell 2000 with the move above 830 on Friday, but that was all for naught as the index faltered today, closing just one point above its 50-day line. A move below 820 puts the lower end of the 800-810 range in play.

Russell 2000 Chart

I hate sounding alarm bells, but I view the next week as an important, to put it delicately, for stocks. There is no getting around that the fundamentals for most companies, particularly excluding financials, are quite strong. One can even make the argument that big tech names such as Google and RIM have been unjustly punished by one-off events in their recent reports. (I am referring to RIM's PlayBook spending and Google's hiring spree).

So maybe the market is just selling off in advance of the April 27 Federal Reserve press event. The problem is if Chairman Bernanke does not tell the bulls what they want to hear, the ''sell in May and go away'' crowd will have all the excuses they need to run the market even lower.


New Plays

Sector Showing Strength

by James Brown

Click here to email James Brown


NEW BULLISH Plays

MGM Resorts - MGM - close: 13.77 change: -0.23

Stop Loss: 12.99
Target(s): 15.90
Current Gain/Loss: + 0.0%
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Gaming and casino stocks were showing relative strength today with the DJUSCA index up +1.7%. MGM lagged its peers but the stock produced an intraday bounce from support near $13.50. I am suggesting we buy this bounce from $13.50 with a stop loss at $12.99. More conservative traders may want to use a stop at $13.25 or closer to $13.40 instead. An alternative entry point would be to wait for MGM to clear last week's highs near $14.10 instead.

We do want to keep our position size small. The news out this morning about S&P putting U.S. debt on creditwatch negative is a big concern and just one more dark cloud for the bulls to navigate. Meanwhile earnings season has not been off to a very strong start. On the other hand the fact that stocks did not see worse losses is somewhat encouraging.

We will plan to exit this trade in front of MGM's early May earnings report.

(Small Positions)

Suggested Position: buy MGM stock @ current levels

- or -

Buy the May $14.00 call (MGM1121E14) current ask $0.63

Annotated chart:

Entry on April 19 at $xx.xx
Earnings Date 05/05/11 (unconfirmed)
Average Daily Volume: 19 million
Listed on April 18th, 2011


In Play Updates and Reviews

Gapping Down

by James Brown

Click here to email James Brown

Editor's Note:
A lot of stocks gapped open lower this morning as investors reacted to negative headlines in Europe and news that Standard & Poor's had put U.S. debt on creditwatch negative.

ACIW and AON both hit our stop losses today. We had already planned to exit PCAR tonight. I adjusted our stop loss on the OSG trade.

-James

Current Portfolio:


BULLISH Play Updates

Discover Financial Services - DFS - close: 23.85 change: -0.43

Stop Loss: 21.75
Target(s): 24.90
Current Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

Comments:
04/18 update: Financial stocks continue to sink. We are still waiting for DFS to dip toward support. At the moment our buy-the-dip entry point is at $22.55.

Buy-the-Dip Trigger @ $22.55

Suggested Position: buy DFS stock @ $22.55

- or -

Buy the May $24 calls (DFS1121E24)

Entry on April x at $xx.xx
Earnings Date 06/23/11 (unconfirmed)
Average Daily Volume: 5.9 million
Listed on April 12th, 2011


Danaher Corp. - DHR - close: 52.01 change: -0.70

Stop Loss: 50.75
Target(s): 55.90
Current Gain/Loss: - 1.0%
Time Frame: about 3 weeks
New Positions: see below

Comments:
04/18 update: DHR slipped toward recent support near $51.00 and rallied off its 40 and 50-dma. The intraday bounce almost looks like a new bullish entry point. Yet we're running out of time. DHR reports earnings on April 21st before the opening bell. That means we need to exit this trade on Wednesday, April 20th, at the closing bell to avoid holding over the earnings announcement.

Current Position: long DHR stock @ $52.57

- or -

Long the May $55 call (DHR1121E55) entry @ $0.70

04/18 Prepare to exit on April 20th at the close
04/16 New stop loss @ 50.75

Entry on April 4 at $52.57
Earnings Date 04/21/11 (confirmed)
Average Daily Volume: 2.9 million
Listed on April 2nd, 2011


Dick's Sporting Goods Inc. - DKS - close: 40.08 change: -1.12

Stop Loss: 38.95
Target(s): 42.75, 44.75
Current Gain/Loss: +1.7%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
04/18 update: Uh-oh! DKS underperformed the rest of the market on Monday with a -2.7% decline. The breakdown under $40.00 is worrisome. I am not suggesting new positions at this time. Our first target is $42.75.

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

04/16 New stop loss @ 38.95
04/09 New stop loss @ 38.45, New targets @ 42.75 and $44.75
04/02 New stop loss @ 37.45

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


Ford Motor Co. - F - close: 14.62 change: -0.09

Stop Loss: 14.45
Target(s): 16.45, 17.45
Current Gain/Loss: - 2.8%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
04/18 update: Ford flirted with a breakdown under support near $14.50 and its 200-dma but this level held up, which is encouraging. Unfortunately Ford still has a short-term bearish trend of lower highs.

Ford's inability to break the short-term trend of lower highs makes me wary. I would prefer to see a rally past $15.15 before considering new bullish positions.

Our targets are $16.45 and $17.45.

Our April $15.00 calls have expired worthless (-100%).

Current Position: Long F stock @ $15.05

- or -

April $15 calls (F1116D15) Entry @ $0.33, Expired -100%

04/16 April $15 calls have expired (-100%)

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


FLIR Systems - FLIR - close: 33.09 change: -0.44

Stop Loss: 32.40
Target(s): 37.25
Current Gain/Loss: - 0.0%
Time Frame: less than two weeks.
New Positions: see below

Comments:
04/18 update: FLIR is a new trade from this weekend's letter. The stock gapped open lower at $33.12 (our new entry) and dipped to a new relative low at $32.83 before trimming its losses. Shares seemed to find support near their 40 and 50-dma this morning. We can use this dip as a new bullish entry point or readers can wait for a rally past $33.75.

Remember, we want to use small positions to limit our risk. We don't have a lot of time. We plan to exit ahead of its earnings report on April 29th. Our first target is $37.25.

- Small Bullish Positions -

Current Position: Long FLIR stock @ $33.12

- or -

Long the May $34 calls (FLIR1121E34) Entry @ $0.60

Entry on April 18 at $33.12
Earnings Date 04/29/11 (confirmed)
Average Daily Volume: 926 thousand
Listed on April 16th, 2011


iShares Gold Trust - IAU - close: 14.62 change: +0.09

Stop Loss: 13.75
Target(s): 15.75
Current Gain/Loss: + 1.8%
Time Frame: 9 to 12 weeks
New Positions: see below

Comments:
04/18 update: Gold continues to rally. Gold futures traded over $1,498 an ounce intraday. The IAU hit $14.63. There is no change from my prior comments. I wouldn't chase it here. We'll wait for a dip before considering new entries.

We do want to keep our position size small. Our first upside target is $15.75.

FYI: If the IAU moves too slowly for you then check out the double-long (2x) gold ETF (symbol: DGP).

- Small Positions Only -

Current Position: Long the IAU @ $14.36

- or -

Long the July $14.00 call (IAU1116G14) Entry @ $0.60

Entry on April 11 at $14.36
Earnings Date --/--/--
Average Daily Volume: 3.8 million
Listed on April 9th, 2011


Keynote Systems Inc. - KEYN - close: 21.16 change: -0.68

Stop Loss: 19.45
Target(s): 22.25, 24.75
Current Gain/Loss: +4.4%
Time Frame: less than two weeks
New Positions: see below

Comments:
04/18 update: After hitting new relative highs on Friday KEYN suffered some profit taking today with a -3.1% drop. The $20.00 level should be new support. Over the weekend I suggested waiting for a dip into the $21.00-20.50 zone as a new entry point and KEYN hit $20.55 this morning.

This remains an aggressive, higher-risk trade. Our upside targets are $22.25 and $24.75 but this is a very speculative play and we will not hold over the earnings announcement on April 26th.

FYI: The Point & Figure chart for KEYN is bullish with a $41 target.

- Small Bullish Positions -

Current Position: Long KEYN stock @ $20.25

- or -

Long the May $20 calls (KEYN1121E20) entry @ $1.65

04/16 New stop loss @ 19.45
04/15 1st Target Hit @ 22.25 (+9.8%), Option @ +18.1%

Entry on April 14 at $20.25
Earnings Date 04/26/11 (confirmed)
Average Daily Volume: 193 thousand
Listed on April 13th, 2011


Ryder Systems Inc. - R - close: 49.59 change: -1.37

Stop Loss: 48.75
Target(s): 53.00
Current Gain/Loss: - 1.3%
Time Frame: 3 to 5 weeks
New Positions: see below

Comments:
04/18 update: Ryder is nearing support near $49.00. Readers can buy a dip near te $49.00 level or wait for a bounce. Just remember our plan to exit ahead of the April 26th earnings report. Our target is the $53.00 level.

Current Position: Long R stock @ $50.25

- or -

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

04/16 New stop loss @ 48.75
04/09 New stop loss @ 47.95

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


SAIC, Inc. - SAI - close: 16.98 change: -0.02

Stop Loss: 16.75
Target(s): 18.40
Current Gain/Loss: - 2.0%
Time Frame: 8 to 9 weeks
New Positions: see below

Comments:
04/18 update: SAI did not see a lot of movement today. I am starting to get concerned about what the budget battle in Washington might mean for SAI. The U.S. defense budget is huge and could get trimmed. That might have a negative impact on SAI or at least raise investors worries that SAI might be impacted. I would hesitate to launch new positions at this time.

Our first bullish target is $18.40. Keep in mind that SAI does not move very fast. While the stock does have options I prefer the stock to avoid the time decay on the options. I will list the August $18 calls for more aggressive traders.

Current Position: long SAI stock @ $17.33

- or -

Long the August $18.00 call (SAI1120H18) entry @ $0.55

Entry on April 6 at $17.33
Earnings Date 06/02/11 (unconfirmed)
Average Daily Volume: 2.4 million
Listed on April 5th, 2011


Sunoco, Inc. - SUN - close: 41.93 change: -0.97

Stop Loss: 41.40
Target(s): 46.50
Current Gain/Loss: - 0.8%
Time Frame: about 3 weeks
New Positions: see below

Comments:
04/18 update: Warning! The action in SUN today looks like a breakdown under its long-term trendline of support. Technically it is a breakdown under its 100-dma. The stock gapped open lower at $42.27 (our entry point) but I am not suggesting new positions at this time. We have a stop loss at $41.40 and if there is any follow through lower tomorrow we'll likely get stopped out.

Current Position: Long SUN stock @ $42.27

- or -

Long the May $45 calls (SUN1121E45) Entry @ $0.62

Entry on April 18 at $42.27
Earnings Date 05/05/11 (confirmed)
Average Daily Volume: 2.0 million
Listed on April 16th, 2011


Waste Connections Inc. - WCN - close: 29.36 change: -0.45

Stop Loss: 28.80
Target(s): 32.00
Current Gain/Loss: - 0.6%
Time Frame: five trading days
New Positions: see below

Comments:
04/18 update: Our new play on WCN is off to a rough start. Shares gapped open lower at $29.54 due to the market's weakness this morning. Shares hit a new multi-day low before paring its losses. I would hesitate to launch new positions here. We only have a few days for this trade to play out. If we don't see a bounce tomorrow we may want to abandon ship and close this trade early. Keep our position size small to limit our risk.

We'll plan to exit on April 25th at the closing bell to avoid earnings.

NOTE: WCN does not have a lot of option volume and the option spreads are very wide. Only aggressive traders willing to take the extra risk should consider these.

- Small Positions -

Current Position: Long WCN stock @ $29.54

- or -

Long the May $30 calls (WCN1121E30) Entry @ $0.40

Entry on April 18 at $29.54
Earnings Date 04/25/11 (confirmed)
Average Daily Volume: 687 thousand
Listed on April 16th, 2011


BEARISH Play Updates

Overseas Shipholding Group - OSG - close: 27.26 change: -0.78

Stop Loss: 30.35
Target(s): 27.75, 26.25
Current Gain/Loss: +15.3%
Time Frame: 8 to 9 weeks
New Positions: see below

Comments:
04/18 update: The stock market's decline this morning helped OSG to gap open lower. Shares spent most of the day flirting with the $27.00 level. I am adjusting our stop loss down to $30.35. I am not suggesting new positions at current levels. Our second and final target is the $26.25 level.

Our plan was to use small positions to limit our risk.

- Small Bearish Positions -

Current Position: Short OSG stock @ $32.20

04/18 New stop loss @ 30.35
04/12 Exit April Puts now ($1.45bid, +93.3%)
04/12 Take Profits (sell half) of our OSG position (+11.5%)
04/11 New stop loss @ 32.25
04/05 New stop loss @ 33.10
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


CLOSED BULLISH PLAYS

ACI Worldwide Inc. - ACIW - close: 31.28 change: -0.69

Stop Loss: 30.90
Target(s): --.--, 34.75
Current Gain/Loss: + 4.2%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
04/18 update: The market's widespread sell-off pushed ACIW toward its 50-dma. Unfortunately the intraday low was $30.85. Our stop loss was hit at $30.90.

SMALL bullish positions

Closed Position: Long ACIW stock @ $29.63, Exit @ 30.90 (+4.2%)

04/18 Stopped @ $30.90 (+4.2%)
04/02 New stop loss @ 30.90
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

chart:

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


Aon Corp. - AON - close: 51.49 change: -0.98

Stop Loss: 51.70
Target(s): 59.00
Current Gain/Loss: -3.8%
Time Frame: 4 to 5 weeks
New Positions: see below

Comments:
04/18 update: AON was already testing support near $52 and its 50-dma last week. The market weakness today pushed the stock lower and hit our stop loss at $51.70.

Closed Position: Long AON stock @ $53.76, Exit @ 51.70 (-3.8%)

- or -

May $55.00 call (AON1121E55) Entry @ $0.95, Exit @ 0.25 (-73.6%)

04/18 Stopped out @ 51.70 (-3.8%), Option @ -73.6%
04/12 New stop loss @ 51.70

chart:

Entry on April 4 at $53.76
Earnings Date 05/02/11 (unconfirmed)
Average Daily Volume: 2.2 million
Listed on April 2nd, 2011


PACCAR Inc. - PCAR - close: 50.31 change: -1.12

Stop Loss: 48.95
Target(s): 54.75, 57.00
Current Gain/Loss: - 1.3%
Time Frame: two or three weeks
New Positions: see below

Comments:
04/18 update: PCAR slipped toward last week's lows before paring its losses. It was our plan to exit this trade today, at the closing bell, to avoid holding over PCAR's earnings report tomorrow.

closed Position: Long PCAR stock @ 51.00, exit $50.31 (-1.3%)

- or -

May $49.70 call (PCAR1121E49.70) Entry @ $3.00, Exit @ 2.15 (-28.3%)

04/18 Exit @ $50.31 (-1.3%), Option @ -28.3%
04/18 Planned exit.
04/16 Plan to exit on Monday, April 18th, at the close.

chart:

Entry on April 11 at $51.00
Earnings Date 04/19/11 (unconfirmed)
Average Daily Volume: 2.8 million
Listed on April 6th, 2011