Option Investor
Newsletter

Daily Newsletter, Monday, 4/25/2011

Table of Contents

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

Market Wrap

Stocks Dinged By Commodity Prices

by Todd Shriber

Click here to email Todd Shriber
It was bound to happen sooner or later. That is stocks having an off day with the blame being laid at the doorstep of higher commodities prices. The S&P 500 endured a small loss, ending a three-day winning streak that had sent the index to its highest level since February. The Dow Jones Industrial Average and the Russell 2000 also absorbed small losses on the day while the Nasdaq was the lone winner of the group with a gain of almost 6 points.

Stats Table

Speaking of commodities, gold and silver continued moves that can only be considered parabolic at this point. Maybe the metals were advancing today ahead of the Federal Reserve press event on Wednesday. That could just be a tidy reason because I am not sure either metal knows how to do anything but go higher. Gold's winning streak is now eight consecutive days and those eight days, the last six have all seen record closes for the yellow metal.

So it may not be much of a surprise that on a Monday that was extremely quiet on the mergers and acquisitions front that the one noteworthy deal of the day comes courtesy of the gold mining sector. Shares of Barrick Gold (ABX) slid nearly 7% on volume that was more than triple the daily average after the Toronto-based company announced it will acquire Equinox Minerals for $7.7 billion in cash, besting an offer for the Canadian company made by China's Minmetals Resources earlier this month by 16%. Equinox's board has unanimously approved the Barrick bid.

This deal is much more about copper than gold as Equinox owns one of Africa's largest copper mines and Barrick is already a major copper producer. The acquisition will double Barrick's current production to around 600 million pounds, Reuters reported. Still, when a chart looks the way gold's does, that means at least a few of the the well-run, large-cap miners have the currency with which to do some shopping.

Gold Chart

Silver continues to astound as well, probably more so than gold. The white metal flirted with the $50 area early in today's session before pulling back, but even with that price retreat, we're still looking at nine consecutive days of gains for silver, the best winning streak streak in over three years, and near-record prices.

Silver's ascent has been so intense in recent weeks that the $50 price target so many analysts offered up earlier this year now looks far too conservative. Eric Sprott of Sprott Asset Management recently said silver could see $100 an ounce. That may seem far-fetched, but is this a chart to bet against?

Silver Chart

Probably not and the options market seems to agree. On Monday, about 919,000 calls traded in the iShares Silver Trust (SLV) compared to 515,000 puts. There have been plenty of calls recently that silver is in a bubble and that inflation fears are fueling this rally and that when the bubble bursts, it is going to be ugly.

It probably will be, but it seems a lot of folks that are calling for silver's demise forget the key fact that 50% of silver demand is industrial. Silver is used to make bearings for jet engines and while Boeing's (BA) new orders are expected to be flat this year, analysts are forecasting a sizeable increase in 2012. There's one fundamental factor in silver's favor. Silver is also used in water purification systems, a high-growth area when considering that much of the world does not have access to suitable drinking water. I could list dozens of other uses for silver, that particularly in a recovering economy, should pick up, but I will just end the discussion by saying there are fundamentals in place to support more gains in silver.

Of course, the commodities sword is of the double-edged variety. Just look at the announcements today out of the consumer products sector. Dow component Procter & Gamble (PG) said it will raise prices on Pampers diapers, Charmin toilet paper and Bounty paper towels, citing rising pulp, oil and gas prices as reasons shoppers will feel more of a pinch.

Shares of P&G rival Kimberly-Clark (KMB) slumped almost 3% today on volume that was more than double the daily average after the company said its first-quarter profit 9% to $372 million, or 86 cents per share, from $411 million, or 92 cents per share, a year earlier as revenue rose 4% to $5 billion. Excluding one-time items, Kimberly Clark earned $1.09 a share. Analysts were expecting $1.17.

Last month, Texas-based Kimberly-Clark said it would raise prices 3%-7% on items such as diapers and toilet paper, but today the company again said it was raising prices on various, the third such declaration by Kimberly-Clark in barely over a month. Investors may be tired of hearing the commodities prices bit from any number of companies and shoppers are not fans of it either. Both groups have alternatives, and neither is appealing to companies Kimberly-Clark and P&G. Investors can dump the stocks and shoppers can buy store brands to save a few bucks.

Kimberly-Clark Chart

Just when it was looking safe to get back in the tech waters, there was an epic disappointment after the close today from a company that can ill afford any negative surprises, that being Netflix (NFLX). The company reported strong first-quarter results after the bell, but in the essence of time, I will not highlight those numbers because the real story here is the outlook.

The company added 3.6 million new subscribers in the first quarter and over 3 million in the fourth quarter of 2010. That is great, but it also makes the stock vulnerable to disappointing news on subscriber growth an that's exactly what Netflix served up. The company is forecasting 1.3 million to 2.25 million new subscribers in the current quarter and a profit of $1.15 a share. Analysts were expecting $1.19.

Another cause for concern may be the $192 million Netflix spent on streaming rights in the first quarter, more than four times what the company spent in the comparable period a year ago. The company now has 23.6 million subscribers, but none outside of the U.S. and Canada. These are exactly the types of bullet points short sellers love when it comes to stocks with a P/E ratio of 85.

Plenty of traders have gotten burned in recent months trying to short Netflix and with good reason. The company was delivering plenty of reasons to make it dangerous to be short the stock, but the shorts may be getting their due as the disappointing outlook has Netflix down almost 5% in after-hours trading.

Netflix Chart

Looking at the charts, I am going to start with the Nasdaq for a change because I just discussed Netflix and there are a couple of big earnings reports from Nasdaq constituents tomorrow after the close. When considering how strong the Nasdaq's rally to 2820 was last week, the expectation of some profit-taking today would have been reasonable. Instead, the index was the only gainer among the major indexes today. No guarantees, but I think that changes tomorrow as the market absorbs the Netflix report.

Netflix alone will not drag the Nasdaq back to support at 2800, but if Amazon (AMZN) and Panera (PNRA) deliver strong guidance after the close, the Nasdaq could rally into resistance at 2835 leading up to the Fed event on Wednesday.

Nasdaq Chart

The S&P 500 offered little in the way of excitement today, trading in a range of just six points, meaning the index needs to conquer mental resistance at 1340 and then the February high at 1344 before we get to 1350 and a new round of price-target revisions from analysts. Think Fed Chairman Ben Bernanke does not know this? I do not want to diminish the impact earnings will have on the S&P 500 this week, but Wednesday will be the big day for stocks and that will have little to do with earnings. There are a bunch of oil earnings this week, but that story is pretty obvious at this point.

S&P 500 Chart

This is a monster week for Dow earnings, but leading up to the Fed even on Wednesday, I doubt the Dow runs up to resistance at 12,530, even with 3M (MMM) reporting tomorrow. As I said with regards to the S&P 500, the oil earnings story probably will not surprise many investors, so I would turn my attention to Caterpillar's (CAT) earnings on Friday as the marquee report to watch post-Fed Wednesday.

Dow Chart

The Russell 2000's bounce off support at 820 earlier this month has been nothing short of impressive and today's meager decline did little to knock the index off a track that seems to be leading back to that old resistance at 855. I'd be watching the Russell tomorrow, particularly late in the day to see if buyers are stepping in ahead of Fed Wednesday.

Russell 2000 Chart

I wouldn't be expecting much in the way of fireworks over the next couple of days as traders will probably take it slow ahead of the Fed event. In other words, Ben Bernanke has the weight of the investing world on his shoulders. If he tells the market what it wants to hear, we'll be probably be looking at some new highs. Of course, the alternative scenario is far less attractive.


New Plays

Stepping Out

by James Brown

Click here to email James Brown


NEW BULLISH Plays

Steven Madden, Ltd. - SHOO - close: 51.02 change: +0.28

Stop Loss: 48.75
Target(s): 54.75
Current Gain/Loss: + 0.0%
Time Frame: less than 2 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
You might naturally think that rising gasoline prices would put the brakes on consumers' ability to buy high-priced shoes from stores like Steven Madden. Yet the market doesn't think so. Otherwise, why are shares of SHOO hitting new all-time highs? After almost two weeks of consolidating sideways under resistance near $50.00 the stock is breaking out. There are less than two weeks until the earnings report (although the May 4th date is unconfirmed) and I suspect SHOO could see an old fashioned pre-earnings rally. The last couple of quarters the company raised guidance so investors could be expecting strong numbers here!

I would launch new positions now or wait for a dip near $50.00. I would not buy the options because the spreads are very wide and put us at a disadvantage. We want to keep our position size small to limit our risk. We do not want to hold over the earnings report.

(open Small Bullish Positions now)

Suggested Position: buy SHOO stock @ current levels

Annotated chart:

Entry on April 26 at $xx.xx
Earnings Date 05/04/11 (unconfirmed)
Average Daily Volume: 235 thousand
Listed on April 25th, 2011


In Play Updates and Reviews

Exit Ahead of Earnings

by James Brown

Click here to email James Brown

Editor's Note:
We are closing two trades (F & R) tonight to avoid holding over their earnings report.

-James

Current Portfolio:


BULLISH Play Updates

Autodesk Inc. - ADSK - close: 45.55 change: +0.67

Stop Loss: 41.90
Target(s): 48.50
Current Gain/Loss: unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see trigger

Comments:
04/25 update: ADSK was a little stronger than I expected. Shares rallied to a new two-year high. Aggressive traders can buy the breakout. I am moving our buy-the-dip entry point from $43.75 to $44.25. Our target is $48.50 but we'll plan on exiting ahead of the mid May earnings report.

Trigger @ $44.25

Suggested Position: buy ADSK stock @ $43.75

- or -

Buy the May $45 calls (ADSK1121E45) current ask $1.60

Entry on April x at $xx.xx
Earnings Date 05/19/11 (unconfirmed)
Average Daily Volume: 2.1 million
Listed on April 23rd, 2011


Sothebys Holding - BID - close: 49.56 change: -1.00

Stop Loss: 47.45
Target(s): 54.90
Current Gain/Loss: - 1.5%
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
04/25 update: BID displayed some relative weakness this morning but traders bought the dip at its rising 50-dma again. This intraday bounce off its lows looks like another entry point to launch positions. Or you can wait for a new relative high over $50.56. Our target is $54.90. We do not want to hold positions over the early May earnings report. FYI: The Point & Figure chart for BID is bullish with an $80 target.

Current Position: long BID stock @ $50.35

- or -

Long the May $50 calls (BID1121E50) entry @ $2.60

Entry on April 21 at $50.35
Earnings Date 05/05/11 (unconfirmed)
Average Daily Volume: 1.0 million
Listed on April 20th, 2011


Corn Products Intl. - CPO - close: 53.80 change: -0.27

Stop Loss: 50.75
Target(s): 57.50
Current Gain/Loss: + 0.9%
Time Frame: just over 2 weeks
New Positions: see below

Comments:
04/25 update: The lack of action in the wider market left CPO to drift sideways. Readers may want to wait for another dip near $53.00 before initiating new positions. Our target is $57.50. However, we will plan on exiting ahead of the early May earnings report.

Let's keep our position size small since CPO has a trendline of higher highs it has yet to break through. FYI: The Point & Figure chart for CPO is bullish with a $67 target.

(Small Positions)

Current Position: long CPO stock @ $53.32

- or -

Long the May $55.00 call (CPO1121E55) Entry @ $1.05

Entry on April 20 at $53.32
Earnings Date 05/02/11 (confirmed)
Average Daily Volume: 771 thousand
Listed on April 19th, 2011


Discover Financial Services - DFS - close: 24.50 change: -0.26

Stop Loss: 22.45
Target(s): 24.90
Current Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

Comments:
04/25 update: There is no change from my weekend comments. At the moment we have a trigger to open bullish positions on a dip at $23.00. However, I'm considering an alternative entry on a dip or a bounce near its rising 30-dma or even higher near $24.40ish. Another alternative would be a close over $25.15.

Buy-the-Dip Trigger @ $23.00

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


Dick's Sporting Goods Inc. - DKS - close: 41.63 change: +0.09

Stop Loss: 38.95
Target(s): 42.75, 44.75
Current Gain/Loss: +5.6%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
04/25 update: DKS eked out a gain but is still trading under resistance near $42.00. We have two targets. Our first target is $42.75. Our second target is $44.75. You could certainly raise your target but we do not want to hold over the mid May earnings report.

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


FLIR Systems - FLIR - close: 34.19 change: +0.00

Stop Loss: 32.40
Target(s): 37.25
Current Gain/Loss: + 3.2%
Time Frame: less than two weeks.
New Positions: see below

Comments:
04/25 update: Monday proved to be a quiet day for the stock market and FLIR was a great example. The stock closed unchanged on the session. There is no change from my weekend comments.

Technically I would look for a dip near $33.50 before considering new positions. However, you need to consider our time frame. Earnings are coming up on April 29th and we do not want to hold over the report.

Remember, we want to use small positions to limit our risk. 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: 14.72 change: +0.02

Stop Loss: 13.75
Target(s): 15.75
Current Gain/Loss: + 2.5%
Time Frame: 9 to 12 weeks
New Positions: see below

Comments:
04/25 update: Warning! Gold spiked higher at the open and then faded quickly lower. This could be a short-term top for gold. I would expect a dip. Longer-term the trend is still very much higher. I would wait for a dip before considering new bullish positions.

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: 21.19 change: +0.11

Stop Loss: 20.45
Target(s): 22.25, 24.75
Current Gain/Loss: +4.6%
Time Frame: less than two weeks
New Positions: see below

Comments:
04/25 update: The midday gains in KEYN faded and shares closed up +0.5%. Tomorrow is our last day. The plan is to exit on April 26th at the closing bell to avoid holding over earnings.

Please note our new stop loss at $20.45.

This remains an aggressive, higher-risk trade.

- Small Bullish Positions -

Current Position: Long KEYN stock @ $20.25

- or -

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

04/25 New stop loss @ 20.45
04/20 New stop loss @ 19.85
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


MGM Resorts - MGM - close: 13.34 change: -0.05

Stop Loss: 12.99
Target(s): 13.95
Current Gain/Loss: - 3.3%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
04/25 update: I am losing patience for our MGM trade. I am suggesting we cut our losses and exit this trade tomorrow (Tuesday) at the closing bell.

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

(Small Positions)

Current Position: long MGM stock @ $13.80

- or -

Long the May $14.00 call (MGM1121E14) entry @ $0.65

04/25 Plan on exiting tomorrow at the close
04/20 Start looking for an early exit. New exit target at $13.95

Entry on April 19 at $13.80
Earnings Date 05/05/11 (unconfirmed)
Average Daily Volume: 19 million
Listed on April 18th, 2011


Oracle Corp. - ORCL - close: 34.75 change: +0.64

Stop Loss: 32.95
Target(s): 38.00
Current Gain/Loss: + 0.3%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
04/25 update: ORCL opened at $34.70 and slowly drifted higher throughout Monday's session. I would still consider positions now or you can wait for a dip into the $34.25-34.00 area instead.

Current Position: Long ORCL stock @ $34.70

- or -

Long the June $35 call (ORCL1118F35) Entry @ $0.98

Entry on April 25 at $34.70
Earnings Date 06/23/11 (unconfirmed)
Average Daily Volume: 25.1 million
Listed on April 23rd, 2011


SAIC, Inc. - SAI - close: 17.22 change: -0.03

Stop Loss: 16.75
Target(s): 18.40
Current Gain/Loss: - 0.6%
Time Frame: 8 to 9 weeks
New Positions: see below

Comments:
04/25 update: SAI rallied off its intraday lows, which is encouraging but I am reluctant to launch new positions. I am not suggesting new positions at this time.

Our first bullish target is $18.40.

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


BEARISH Play Updates

Overseas Shipholding Group - OSG - close: 28.29 change: +0.17

Stop Loss: 30.35
Target(s): 27.75, 26.25
Current Gain/Loss: +12.4%
Time Frame: 8 to 9 weeks
New Positions: see below

Comments:
04/25 update: OSG rebounded off its intraday lows but remains under its simple 10-dma. I'm not suggesting new bearish positions at this time. More conservative traders may still want to consider an early exit now to lock in a gain. 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

Ford Motor Co. - F - close: 15.54 change: +0.11

Stop Loss: 14.85
Target(s): 16.45, 17.45
Current Gain/Loss: + 3.2%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
04/25 update: Ford popped higher and closed near the $15.50 level. Our plan was to exit today at the closing bell to avoid holding over the earnings report tomorrow morning.

Current Position: Long F stock @ $15.05

04/25 Early Exit @ $15.54 (+3.2%)
04/23 New stop loss @ 14.85
04/20 Prepare to exit on Monday, April 25th at the close
04/16 April $15 calls have expired (-100%)

chart:

Entry on March 24 at $15.05
Earnings Date 04/26/11 (confirmed)
Average Daily Volume: 82 million
Listed on March 15th, 2010


Ryder Systems Inc. - R - close: 50.46 change: -0.67

Stop Loss: 49.25
Target(s): 53.00
Current Gain/Loss: + 0.4%
Time Frame: 3 to 5 weeks
New Positions: see below

Comments:
04/25 update: Shares of Ryder (R) underperformed on Monday with a -1.3% decline. It was our plan to exit this trade today at the closing bell to avoid holding over earnings tomorrow.

Current Position: Long R stock @ $50.25

- or -

May $50 call (R1121E50) Entry @ $2.55, Exit @ 1.60 (-37.2%)

04/25 Exit Early @ 50.46 (+0.4%), Option @ -37.2%
04/20 New stop loss @ 49.25
04/16 New stop loss @ 48.75
04/09 New stop loss @ 47.95

chart:

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