Option Investor
Newsletter

Daily Newsletter, Monday, 5/16/2011

Table of Contents

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

Market Wrap

Europe Casts A Cloud Over The Market...Again

by Todd Shriber

Click here to email Todd Shriber
A familiar, negative catalyst weighed on the market today, leading to blood-letting on all the major indexes with the Nasdaq and the Russell 2000 bearing the brunt of the pain.

Stats Table

As I just mentioned, Europe was a big problem for the market today and one can pick his or her poison as to what the major European issue of the day was. It is never a good thing when someone as powerful as the head of the International Monetary Fund (IMF) is arrested on attempted rape charges, but that is the boat Dominique Strauss-Kahn finds himself in. On Monday, a New York judge denied bail for Stauss-Kahn after prosecutors were able to prove he presents a flight risk.

The alleged attack on a 32-year old employee of the Sofitel Hotel in Manhattan occurred on Saturday and it seems the decision to deny bail for the man once thought to be a leading contender for the French presidency is the right one as France does not extradite its nationals, according to Bloomberg News. Diplomatic immunity does not apply here and Strauss-Kahn could face up to 25 years in prison if convicted.

Dominique Strauss-Kahn

The IMF wants the world to know it is still a functioning body and it showed as much by approving a bailout of nearly $111 billion for the ''P'' in PIGS, Portugal. For those keeping score at home, a bailout of that magnitude is not a good thing when a country sports a 2010 GDP of less than $246 billion, which Portugal did last year, according to the IMF.

As for Greece, the ''G'' in PIGS, the country that some would credit with starting Europe's sovereign debt crisis, no decision is expected today, but the European Union is pushing the country to sell more than $107 billion in assets to in an effort to get its fiscal house in order. The chart below is a couple of days old, but it tells the story: Yields on Greek bonds are blowing out yet again.

Greek Bond Yields

Here in the States, investors had to contend with one economic report and it was not pretty. The New York Federal Reserve's Empire State manufacturing survey fell to 11.9 in May from 21.7 in April. Economists were expecting a reading of 19.7. While the May reading does signal expansion, it does so at a much slower rate than in previous months and making matters worse, the prices paid index soared to 69.9, the highest mark since August 2008.

Prices Paid Index

It was another wild day in the oil complex as oil futures, the West Texas varietal, remain below $100. The Commodities Futures Trading Commission reports that hedge funds and other speculators cut their long bets on crude by 10% for the week ending last Tuesday. Gasoline futures tumbled as well after the Army Corps of Engineers the Morganza Floodway north of Baton Rouge, La., over the weekend in a bid to lower the flood-swollen Mississippi River, easing concerns that flooding would hamper gasoline output on the East Coast, the Wall Street Journal reported.

Oil's slide weighed on Dow components XOM and CVX, both which were lower by just under 1%, but COP was flat on the day. Of course, oil's recent woes have resulted in a stellar performance for airline stocks. Whenever I think of airline stocks, I rarely think anything positive. I think of ''Wall Street'' (the first version) where Gordon Gekko says guys like him get burned on airline stocks. I think of real life where even Warren Buffett admits he was lucky on an old investment in US Air. And I think that oil needs to fall a lot more for airline stocks to pique my interest. Still, if you find yourself feeling bearish on oil, and do not have a futures account to short futures with or if you do not want to fool around with inverse ETFs, take a look at the Guggenheim Airline ETF (FAA). To be clear, I am not a buyer or seller of this ETF, my view is that it is worth a look as a conservative short oil play.

Airline ETF

Airlines provide me with an interesting segue as that sector has been home to plenty of mergers and acquisitions activity over the years, much of it dubious, and it was M&A drama that was behind an ugly slide for NYSE Euronext (NYX) today. Nasdaq OMX (NDAQ) and IntercontinentalExchange (ICE) scuttled their $11.3 billion bid for the operator of the New York Stock Exchange after the Justice Department threatened an antitrust lawsuit.

Now, NYSE Euronext shareholders are forced to embrace an inferior takeover from Germany's Deutsche Boerse. If you like M&A drama, you are in luck because the Deutsche Boerse/NYSE Euronext deal is by no means a foregone conclusion. While U.S. regulators will have less to crow about under this scenario, the folks at the European Commission in Brussels, typically a bit more ornery with their M&A concerns than their U.S. counterparts, are probably going to raise some issues.

If the deal with the Germans goes through, the two companies dominate the fixed income derivatives market in Europe because Liffe and Eurex would be residing under one roof, Bloomberg reported. Today's plunge of nearly 13% was the worst one-day performance for NYX since 2009 and if the deal with Deutsche Boerse is scrapped by European regulators, another day like today probably awaits NYX shareholders. I say that because two things are clear: The global exchange business is consolidating and if you have a chance to participate, you take it. Second, the list of rivals that could make a legitimate run at NYX, excluding Deutsche Boerse, is quite small.

NYX Chart

In better M&A news, shares of medical device maker Orthovita (VITA), surged 40.3% after larger rival Stryker (SYK) said it will acquire the company for $304 million in cash. Stryker is offering $3.85 a share for Orthovita, a 41% premium to where the stock closed on Friday. Stryker is using the deal to bolster its orthobiologic and biosurgery offerings. The deal is expected to close in the current quarter. Orthovita Chart
%IGM7%

The marquee earnings report of the day came courtesy of Lowe's (LOW), the second-largest U.S. home improvement retailer behind Dow component Home Depot (HD). North Carolina-based Lowe's said its fiscal first-quarter profit slid 6% to $461 million, or 34 cents per share, from $489 million, or 34 cents per share, a year earlier. Revenue tumbled 2% to $12.19 billion as same-store sales fell 3.3%. Analysts were expecting a profit of 36 cents on sales of $12.54 billion.

The company's guidance failed to give investors reason to cheer. Lowe's cut its full-year profit guidance to $1.56-$1.64 a share on revenue growth of 4% from $1.60-$1.72 a share on sales growth of 5%. Analysts were expecting a profit of $1.72. For the second quarter, the company expects a profit of 65-69 cents on revenue of $14.93 billion. Analysts are forecasting a profit of 68 cents on $14.82 billion.

Lowe's Chart

Looking at the charts, the close below 1330 on the S&P 500 is not a good sign. In the weekend wrap, Jim talked about the dangers here if the 1328 printed and it did today as the intraday low was 1327.32. If we see upside in the coming days, there is still stubborn resistance just over 1340 while further downside could see the index trade below 1300 over the coming weeks.

S&P 500 Chart

The Dow is facing a similar situation. Today's close below 12,550 could encourage further selling and drag the blue-chip index lower to 12,400 and perhaps all the way back to 12,200. Often times when I comment on the Nasdaq, I say that stocks like AAPL, AMZN, GOOG, etc. cannot do all the work. In the case of the Dow these days, it is not reasonable to expect seven stocks to do the work of 30. By seven, I mean the staples and pharma members of the Dow. The longer the high-beta trade stays off, weighing on CVX, CAT and XOM and the more financials fall, the more vulnerable the Dow becomes.

Dow Chart

The Nasdaq is looking really ugly, to put things simply. Support at 2825 was nowhere to be found today nor was psychological support at 2800. A close at 2782 has the index flirting with the 50-day moving average at 2773. If that does not act as support, a return to 2700 could be in the cards.

Nasdaq Chart

The best thing that can be said about the Russell 2000 is that it closed above critical support at 820 today. On the other hand, it also closed at its low for the day and below the 50-day moving average. A break below 820 violates the uptrend and could mean a move all the way back to 775.

Russell 2000 Chart

I am really not a fan of the current state of affairs in the market. International headline risk is too much of an issue. One week it is China. The next it is Europe and I would not ignore the Middle East. There is obvious technical concern facing every one of the major indexes as I just highlighted and stocks are getting no help from lower oil prices, making me think the ''sell in May'' crowd is having its way, at least for the time being.


New Plays

Failing At Resistance

by James Brown

Click here to email James Brown


NEW BEARISH Plays

St. Jude Medical - STJ - close: 51.68 change: -0.29

Stop Loss: 54.20
Target(s): 47.00
Current Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

Company Description

Why We Like It:
Long-term I suspect that STJ could end up being a great bullish investment. With 70 million baby boomers getting older there is going to be a growing demand for STJ's medical devices. On a short-term basis the rally has stalled at long-term resistance near $54.00. More aggressive traders could open bearish positions now. I want to see STJ breakdown under its 50-dma first so I'm listing a trigger to open positions at $51.00. Our first target is $47.00.

I would keep our position size small (about half or less than a normal trade) to limit our risk.

Trigger @ 51.00 (Small Positions)

Suggested Position: Short STJ stock @ 51.00

- or -

buy the June $50 PUT (SJT1118R50) current ask $0.95

Annotated chart:

Entry on May x at $xx.xx
Earnings Date 07/21/11 (unconfirmed)
Average Daily Volume: 2.6 million
Listed on May 16th, 2011


In Play Updates and Reviews

Financials Try to Bounce

by James Brown

Click here to email James Brown

Editor's Note:
The financial sector managed to bounce but gains were limited. I wouldn't get too excited yet. The banking indices pared their gains to close almost unchanged. Our bullish plays on COF and DFS were exceptions and both outperformed on Monday. The rest of the market looks vulnerable to more selling pressure.

-James

Current Portfolio:


BULLISH Play Updates

Autodesk Inc. - ADSK - close: 44.39 change: -1.18

Stop Loss: 42.75
Target(s): 48.50
Current Gain/Loss: + 0.3%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
05/16 update: We only have two days left on this trade and ADSK just erased most of our gains with a -2.5% decline. More conservative traders may want to exit immediately or up their stops closer to $44 instead.. I am not suggesting new positions at this time.

Current Position: Long ADSK stock @ $44.25

- or -

Long the May $45 calls (ADSK1121E45) Entry @ $1.19

05/10 New stop loss @ 42.75

Entry on May 3 at $44.25
Earnings Date 05/19/11 (confirmed)
Average Daily Volume: 2.1 million
Listed on April 23rd, 2011


Arrow Electronics, Inc. - ARW - close: 44.87 change: -0.99

Stop Loss: 43.90
Target(s): 49.90
Current Gain/Loss: - 3.0%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
05/16 update: ARW gave up -2.1% and closed under the $45.00 level. Readers may want to wait for a bounce from the $45 level before initiating new positions. Our target is $49.90. FYI: The Point & Figure chart for ARW is bullish with an $81 target.

Current Position: long ARW stock @ $46.30

- or -

long the June $47.50 call (ARW1118F47.5) Entry @ $1.20

Entry on May 11 at $46.30
Earnings Date 07/28/11 (unconfirmed)
Average Daily Volume: 1.1 million
Listed on May 10th, 2011


Capital One Financial - COF - close: 53.48 change: +1.14

Stop Loss: 50.85
Target(s): 57.00, 59.50
Current Gain/Loss: + 0.7%
Time Frame: 4 to 8 weeks
New Positions: Yes, see below

Comments:
05/16 update: I was about ready to give up on COF but financials outperformed on Monday. Shares of COF rallied from its 50-dma and produced a bullish engulfing candlestick pattern with today's gain. More aggressive traders might want to launch new positions now. Or you can wait for a rally past short-term resistance near $54.00.

Current Position: Long COF stock @ $53.07

- or -

Long the June $55 calls (COF1118F55) Entry @ $0.96

Entry on May 5 at $53.07
Earnings Date 07/21/11 (unconfirmed)
Average Daily Volume: 3.7 million
Listed on May 4th, 2011


Discover Financial Services - DFS - close: 25.07 change: +0.83

Stop Loss: 23.40
Target(s): 27.25
Current Gain/Loss: + 4.0%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
05/16 update: DFS displayed relative strength today with a +3.4% rally to new multi-year highs. Fueling the move was improving credit card numbers. DFS said charge offs and delinquencies were improving. The stock's big bounce today was fueled by strong volume. I am not suggesting new positions at this time.

(Small Positions)

Current Position: long DFS stock @ $24.10

- or -

Long the May $24 calls (DFS1121E24) Entry @

05/04 Triggered at $24.10.
04/30 Added an alternative entry point @ $25.25
04/26 New trigger @ 24.10, New stop loss @ 23.40

Entry on May 4 at $24.10
Earnings Date 06/23/11 (unconfirmed)
Average Daily Volume: 5.9 million
Listed on April 12th, 2011


Dr. Pepper Snapple Group - DPS - close: 41.86 change: +0.08

Stop Loss: 37.90
Target(s): 44.90
Current Gain/Loss: unopened
Time Frame: 8 to 10 weeks
New Positions: Yes, see trigger

Comments:
05/16 update: Monday proved to be a quiet day for DPS. Shares consolidated sideways in a narrow range. I am suggesting a buy-the-dip trigger to open bullish positions at $40.25. If triggered we'll use a stop loss at $37.90. Our target is $44.90.

buy-the-dip Trigger @ $40.25

Suggested Position: buy DPS stock @ $40.25

- or -

Buy the August $45 call (DPS1120H45) current ask $0.80

Entry on May x at $xx.xx
Earnings Date 07/28/11 (unconfirmed)
Average Daily Volume: 2.1 million
Listed on May 14th, 2011


EMC Corp. - EMC - close: 27.42 change: -0.18

Stop Loss: 26.45
Target(s): 29.95, 32.25
Current Gain/Loss: - 0.4%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
05/16 update: EMC held up reasonably well considering that tech stocks were some of the worst performers on Monday. Look for another dip near $27.00 and the 50-dma as a potential entry point. EMC has resistance at $28.75 but we're listing our targets at $29.95 and $32.25.

Current Position: Long EMC stock @ $27.55

- or -

Long the June $27.00 calls (EMC1118F27) Entry @ $1.35

Second Option Position (listed 05/12/11)

Long the June $29.00 calls (EMC1118F29) Entry @ $0.45

05/12 New entry point. Added second option position.

Entry on May 3 at $27.55
Earnings Date 04/20/11
Average Daily Volume: 21.4 million
Listed on April 27th, 2011


Gilead Sciences Inc. - GILD - close: 40.56 change: -0.64

Stop Loss: 39.75
Target(s): 44.75
Current Gain/Loss: - 1.9%
Time Frame: 8 to 9 weeks
New Positions: see below

Comments:
05/16 update: GILD retreated to the bottom of its recent range with today's -1.5% decline. Readers may want to wait for a bounce from current levels or the $40.00 mark before considering new bullish positions. FYI: The Point & Figure chart for GILD is bullish with a $57 target.

Current Position: Long GILD stock @ $41.38

- or -

Long the June $41 calls (GILD1118F41) Entry @ $1.44

Entry on May 13 at $41.38
Earnings Date 07/19/11 (unconfirmed)
Average Daily Volume: 10.9 million
Listed on May 12th, 2011


Ingersoll-Rand - IR - close: 49.73 change: -0.39

Stop Loss: 48.75
Target(s): 54.75
Current Gain/Loss: - 0.7%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
05/16 update: I am cautious on IR. The morning rally failed near $50.50. If the stock market continues to sink there is a very good chance that IR will breakdown under $49.00 and hit our stop loss. I am not suggesting new positions at this time. Our target is $54.75.

Current Position: long IR stock @ $50.12

- or -

Long the June $50 call (IR1118F50) Entry @ $1.80

Entry on May 9 at $50.12
Earnings Date 07/22/11 (unconfirmed)
Average Daily Volume: 2.6 million
Listed on May 7th, 2011


KLA-Tencor - KLAC - close: 43.48 change: -0.95

Stop Loss: 43.95
Target(s): 49.85
Current Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

Comments:
05/16 update: If KLAC doesn't bounce soon I'm going to give up on it as a bullish candidate. Nimble traders may want to consider bearish positions on a drop under $43.00 (I'd target a move toward $40 or the 200-dma). For the moment our bullish trade has a trigger to open positions at $46.25.

Trigger @ 46.25

Suggested Position: buy KLAC stock @ 46.25

- or -

buy the June $47.00 calls (KLAC1118F47) current ask $1.65

Entry on May x at $xx.xx
Earnings Date 07/28/11 (unconfirmed)
Average Daily Volume: 653 thousand
Listed on May 9th, 2011


Oracle Corp. - ORCL - close: 34.18 change: -1.01

Stop Loss: 33.95
Target(s): 38.00
Current Gain/Loss: - 1.5%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
05/16 update: Whoa! ORCL was a big underperformer today with a -2.8% loss. Technology stocks were hit hard in another day of "risk off" for traders. ORCL has broken down from its recent consolidation, which now looks like a small bear flag pattern. ORCLY stalled at support near $34.00 and its 40-dma. Any further declines will stop us out at $33.95.

Current Position: Long ORCL stock @ $34.70

- or -

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

05/10 New stop loss @ 33.95

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


Riverbed Technology, Inc. - RVBD - close: 36.87 change: -0.55

Stop Loss: 34.95
Target(s): 39.90, 43.00
Current Gain/Loss: - 1.0%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
05/16 update: RVBD displayed some volatility this morning but the intraday rally failed near last week's highs and the stock reversed. I am expecting a pullback into the $36-35 zone. Let's wait for a bounce before considering new positions.

Current Position: Long RVBD stock @ $37.25

- or -

Long the June $40 call (RVBD1118F40) Entry @ $1.15

Entry on May 12 at $37.25
Earnings Date 07/21/11 (unconfirmed)
Average Daily Volume: 5.1 million
Listed on May 11th, 2011


SAIC, Inc. - SAI - close: 17.32 change: -0.08

Stop Loss: 16.95
Target(s): 18.40
Current Gain/Loss: - 0.0%
Time Frame: 8 to 9 weeks
New Positions: see below

Comments:
05/16 update: There is no change from my prior comments on SAI. The stock is churning inside the $17.20-17.60 range. I am not suggesting new positions at this time.

Current Position: long SAI stock @ $17.33

- or -

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

04/30 Warning, SAI has produced a reversal. consider an early exit
04/27 New stop loss @ 16.95

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


Semiconductor HOLDRs - SMH - close: 36.13 change: -0.35

Stop Loss: 35.49
Target(s): 39.95
Current Gain/Loss: unopened
Time Frame: 8 to 12 weeks
New Positions: Yes, see trigger

Comments:
05/16 update: The SMH is trending toward the bottom of its trading range. Currently we're waiting for a breakout past resistance at $37.00. Our trigger to open positions is at $37.05. If the market's sell-off continues I might reconsider buying a dip near the 50-dma.

The SMH doesn't move very fast so it could take several weeks for this play to work out. Our first target is $39.95. The Point & Figure chart for SMH is bullish with a $61 target.

FYI: The top ten components in the SMH are: TXN, INTC, AMAT, ALTR, ADI, LLTC, XLNX, KLAC, BRCM, and ATML.

Trigger @ 37.05

Suggested Position: buy the SMH @ $37.05

- or -

Buy the August $40 calls (SMH1120H40) current ask $0.61

Entry on May x at $xx.xx
Earnings Date --/--/--
Average Daily Volume: 9.8 million
Listed on May 12th, 2011


DENTSPLY Intl. - XRAY - close: 39.16 change: +0.48

Stop Loss: 37.30
Target(s): 42.00, 44.50
Current Gain/Loss: + 0.4%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
05/16 update: XRAY is showing relative strength and closed at a new relative high. The rally is encouraging but I would hesitate to launch positions with the stock market's major averages slipping lower. Our profit targets are $42.00 and $44.50. FYI: The Point & Figure chart for XRAY is bullish with a $59 target.

NOTE: Readers may want to avoid the options. XRAY doesn't have a lot of option volume and the spreads are wide, which puts traders at a disadvantage.

Current Position: Long XRAY stock @ 39.00

- or -

Long the June $40 call (XRAY1118F40) Entry @ 0.60

Entry on May 12 at $39.00
Earnings Date 07/25/11 (unconfirmed)
Average Daily Volume: 904 thousand
Listed on May 7th, 2011


BEARISH Play Updates

Raytheon Co. - RTN - close: 49.07 change: -0.12

Stop Loss: 50.15
Target(s): 45.25
Current Gain/Loss: - 0.8%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
05/16 update: There is no change from my prior comments on RTN. The stock is consolidating sideways above short-term support at $49.00. I am not suggesting new bearish positions due to lack of movement.

Small Positions

Current Position: Short RTN stock @ $48.68

- or -

Long the May $47.00 PUTs (RTN1121Q47) Entry @ $0.28

Entry on May 2 at $48.68
Earnings Date 04/28/11
Average Daily Volume: 2.6 million
Listed on April 30th, 2011


Valero Energy - VLO - close: 26.23 change: -0.40

Stop Loss: 27.05
Target(s): 23.00
Current Gain/Loss: unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see trigger

Comments:
05/16 update: The early morning bounce in VLO failed near $27 and its converging 10-dma and 100-dma. More aggressive traders may want to open bearish positions now. I am suggesting a trigger to open bearish positions at $25.49. If triggered we'll use a stop at $27.05 and target a drop to $23.00 near the 200-dma. However, while we wait for VLO to hit our trigger at $25.49 I am watching for another failed rally type of move. If we see VLO bounce and reverse near $28 and its 50-dma then we'll probably switch our entry point, short the failure at resistance and adjust our stop.

Trigger @ $25.49

Suggested Position: Short VLO stock @ $25.49

- or -

buy the June $25 PUT (VLO1118R25) current ask $0.70

Entry on May x at $xx.xx
Earnings Date 07/27/11 (unconfirmed)
Average Daily Volume: 11 million
Listed on May 14th, 2011