Option Investor
Newsletter

Daily Newsletter, Tuesday, 5/31/2011

Table of Contents

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

Market Wrap

Out With A Bang

by Todd Shriber

Click here to email Todd Shriber
For one day at least, it looked like the bad news bulls were back in control of the market as investors shook off a couple of disappointing economic reports here in the States to focus more on speculation that European Union leaders will decide on a new bailout package for Greece by the end of June. That news sent all of the major U.S. indexes higher by more than 1% and had advancers outpacing losers on the NYSE by a margin of better than 3-to-1.

Stats Table

Call me skeptical, but this is the second bailout package for Greece and the concern here should be, as it has been all along, that if the EU is moving to bailout the likes of Greece, its hand would certainly be forced to do the same for Italy if need be and definitely for France if the sovereign debt contagion worsened appreciably.

As I just mentioned, the two key economic reports delivered today were unimpressive to say the least. On the housing front, the latest batch of data has plenty of folks speculating that a double-dip in the housing market is underway as the S&P/Case-Shiller home price index fell 5.1% from year earlier levels, reaching the lowest point since 2002. The index tracking 20 major metropolitan areas also declined in March for the eighth consecutive month. Washington, D.C. was the only metro area to see prices jump in March.

In its report, Standard & Poor's comes right and says what most of us already knew: The ''recovery'' in housing prices that was seen in 2009 and 2010 was due to the first-time home buyer tax credit. In other words, Uncle Sam created the false impression of a housing recovery.

From S&P: ''Excluding the results of that policy, there has been no recovery or even stabilization in home prices during or after the recent recession. Further, while last year saw signs of an economic recovery, the most recent data do not point to renewed gains.''

Case-Shiller Index

Consumer news was also pretty bleak today. The Conference Board's Consumer Confidence index fell to 60.8 in May from a revised reading of 66 last month. Economists were expecting a May reading of 67. The May number represents a six-month low. The sentiment indexes were all lower in May, indicating any number of factors, be it job and income worries, inflation worries or the gloomy housing market, are weighing on the minds (and wallets) of consumers.

Consumer Confidence Chart

So when the dust settled, Tuesday was a nice way to end an otherwise dour month for equities. In fact, May was the worst month for stocks since August 2010, but at least the last day of the month was positive. One of the benefit of days like today when nearly everything is in the green and advancers outnumber decliners by such a wide margin is that it is easy to find the weak stocks. You know, the ones that almost require an act of a higher power to move higher.

Enter Nokia (NOK). On a day when the tech sector was on a tear, the world's largest cellphone maker plunged 14% on volume that was about seven times the daily average after saying its second-quarter revenue will be well below the $8.7 billion to $9.4 billion previously forecast. The Finnish company also warned its operating margins will also be significantly below the 6%-9% previously forecast.

Again, call me skeptical, but I think the juicy yield Nokia sports, 5.7% as of the close today, is more value trap than value. Yes, Nokia is the largest handset maker in the world, but that is by total units. The company lost the top revenue spot to Apple (AAPL) last year and the iPhone has eaten Nokia's lunch so many different ways, it is not even worth counting.

There is almost no time horizon on which Nokia shares are positive, be it one month or five years. Over the past two years, the stock is down nearly 50% while Apple is up 150%. If not for a $26 billion market cap, Nokia's $7 price tag would make it almost a penny stock.

Nokia Chart

Speaking of Apple, the stock's 3.1% jump today does a lot to help explain the Nasdaq's rally. After spending much of May in the tank, Apple's $10-plus move today helped the stock reclaim its 50-day moving average.

The catalyst appears to be another major product announcement from the tech juggernaut. No, I am not talking about a new iPhone or iPad, but Apple's cloud-based music service. Once again, Steve Jobs & Co. have bested rivals Google (GOOG) and Amazon (AMZN). Apple has already reached agreements with three of the four major record labels for its cloud music service and a deal with Vivendi's Universal Music Group is likely to be signed this week, according to the Wall Street Journal.

Earlier this month, when Google launched its Music Beta service, the company did so without the benefit of agreements with the major record labels. If cloud music services really take off, it seems pretty clear that Amazon and Google are already at a deficit to Apple. Adding to the good cheer, Apple CEO Steve Jobs is expected to appear at the company's developer's conference next week, the Journal reports. At the conference, Apple is expected to debut new versions of the iOS and Mac operating systems.

Apple Chart

In mergers and acquisitions news, there must be something about the specialty chemicals sector as shares of Ashland (ASH), the maker of Valvoline motor oil, jumped almost 12% on volume that was better than five times the daily average after the Kentucky-based company announced that it will acquire privately held International Specialty Products for $3.2 billion in cash.

The transaction is the second big deal announced in the specialty chemicals space this year. Berkshire Hathaway (BRK-A, BRK-B) said earlier this year it will acquire Lubrizol (LZ) for $9 billion. After the ISP purchase, which is scheduled to close in September, Ashland said specialty chemicals will account for almost three-quarters of its sales. ISP generated sales of $1.6 billion in the past four quarters, with 59% of revenue outside North America, Bloomberg reported. Ashland said the deal will immediately add to its earnings.

Ashland Chart

Looking at the charts, today's action on the S&P 500 was quite bullish indeed as the big gain helped the index move back above its 50-day moving average. That took the index above downtrend resistance at 1335, so now the key is for that old resistance to turn to new support so the S&P 500 can make run into the 1560-1570 area. If support at 1335 does not hold, next support is 1315.

S&P 500 Chart

The Dow's pattern is similar to that of the S&P 500 and today's bullish performance also took the blue-chip index back above its 50-day line. The Dow cleared some downtrend resistance around 12,440 today and now has plenty of room to run back to its May peak at 12,876. On the downside, support should be 12,440 and then 12,200. Today, 29 of the Dow's 30 constituents closed higher with MCD the lone loser. The dead-money pair of PFE and CSCO were the leaders along with AA.

Dow Chart

The Nasdaq moved through resistance at 2800 with some authority today as AAPL and CSCO were big helpers, along with INTC and SNDK among others in the Nasdaq 100. If the Nassdaq can takeout 2850, it should have pretty clear sailing back to the May peak at 2888. Support is 2800 and then 2750. There is one earnings report to watch this week and it comes from JOYG on Thursday. While the mining equipment maker is not a typical Nasdaq stock, it is a member of the Nasdaq 100 and it is a marquee materials name.

Nasdaq Chart

Not much is different on the Russell 2000, but the index did push above the important 838 level, perhaps suggesting either more short-covering or that fund managers are starting to take a shine to small caps again. I cannot say I am dying to get back involved with small-caps right this minute, but a move above 855 could change my mind. Below 840, support is 810.

Russell 2000 Chart

It would be nice to see today's rally mark the start of a new leg higher, but ''sell in May and go away'' does not end just because June is here. Nor does Europe's sovereign debt crisis vanish into thin air just because Greece is getting another bailout. Of course this week is littered with headline risk with the May jobs report looming on Friday. Needless to say, it will be interesting to see if somehow the jobs report runs counter to what we got today from the consumer and housing reports. I am not betting on it.


New Plays

Gaming & Homebuilders

by James Brown

Click here to email James Brown


NEW BULLISH Plays

Electronic Arts Inc. - ERTS - close: 24.41 change: +0.51

Stop Loss: 23.25
Target(s): 26.25, 28.00
Current Gain/Loss: + 0.0%
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
You could certainly argue that ERTS looks overbought here and I would probably agree with you. Yet ERTS spent two weeks consolidating its gains under the $24.00 level of resistance. There was plenty of opportunity for investors to take profits and sell the stock with the market falling four weeks in a row and that didn't happen. Thus today's breakout past resistance looks like a new bullish entry point.

I am suggesting that we keep our position size small to limit our risk. We'll start with a stop loss at $23.25. Our targets are $26.25 and $27.00.

- Small Positions -

Suggested Position: buy ERTS stock @ current levels

- or -

buy the July $25 call (ERTS1116G25) current ask $0.77

Annotated chart:

Entry on June 1 at $xx.xx
Earnings Date 08/02/11 (unconfirmed)
Average Daily Volume: 5.8 million
Listed on May 31st, 2011


Lennar Corp. - LEN - close: 18.98 change: +0.08

Stop Loss: 18.15
Target(s): 21.00
Current Gain/Loss: + 0.0%
Time Frame: 8 to 9 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
The real estate market is still suffering from serious problems and yet the homebuilders have been able to rally in spite of all the bad news. The last few days have seen a bullish breakout for many stocks in this industry. LEN rallied past resistance at its 50-dma and its trendline of lower highs last week. Traders bought the dip today near the 50-dma intraday. In spite of my concerns about the long-term outlook for real estate the technical picture for stocks like LEN have turned bullish.

I am suggesting bullish positions now but we want to keep our position size small to limit our risk. We'll start with a stop loss at $18.15. Our target is $21.00. FYI: The Point & Figure chart for LEN is bullish with a $26 target.

- Small Positions -

Suggested Position: buy LEN stock @ current levels

- or -

buy the July $20 call (LEN1116G20) current ask $0.49

Annotated chart:

Entry on June 1 at $xx.xx
Earnings Date 06/23/11 (unconfirmed)
Average Daily Volume: 3.4 million
Listed on May 31st, 2011


In Play Updates and Reviews

Buying The Intraday Dip

by James Brown

Click here to email James Brown

Editor's Note:
There was a common theme today. The early morning strength faded but traders were buying the midday dip. Today's move looks like a bullish breakout for the major averages. If this rally continues it's going to be really tough to trade any bearish positions.

-James

Current Portfolio:


BULLISH Play Updates

Cheesecake Factory Inc. - CAKE - close: 31.77 change: +0.21

Stop Loss: 28.95
Target(s): 33.95, 37.00
Current Gain/Loss: + 0.7%
Time Frame: 8 to 10 weeks
New Positions: see below

Comments:
05/31 update: CAKE delivered another gain on Tuesday but it was disappointing to see shares struggle at the $32 level. Readers may want to wait for a dip near $31.00 or $30.50 before considering new positions.

Earlier Comments:
Keep in mind that CAKE doesn't move very fast (at least not normally) so we'll need some patience for this trade to work. FYI: The Point & Figure chart for CAKE is bullish with a $59 target.

Current Position: Long CAKE stock @ $31.53

- or -

Long the July $33 call (CAKE1116G33) Entry @ $0.75

Entry on May 20 at $31.53
Earnings Date 07/21/11 (unconfirmed)
Average Daily Volume: 1.0 million
Listed on May 19th, 2011


Capital One Financial - COF - close: 54.34 change: +0.30

Stop Loss: 51.75
Target(s): 57.00, 59.50
Current Gain/Loss: + 2.3%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
05/31 update: Tuesday proved to be a quiet day for COF. Shares consolidated sideways near $54.00 most of the session. I would still consider new bullish positions here or you could wait for another dip or bounce near $53.00. However, COF might be forming a bearish wedge pattern. I'd keep new positions small to limit our risk.

Current Position: Long COF stock @ $53.07

- or -

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

05/17 New stop loss @ 51.75

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


Corn Products Intl. - CPO - close: 56.73 change: +0.13

Stop Loss: 53.60
Target(s): 59.90
Current Gain/Loss: + 0.8%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
05/31 update: The early morning spike in CPO failed but traders bought the dip near $56 midday. I would still prefer to wait and launch new positions near $55. The $58.00 mark is probably resistance but we'll set our first target at $59.90. FYI: The Point & Figure chart for CPO is bullish with an $82 target.

Current Position: Long CPO stock @ 56.28

- or -

Long June $55 call (CPO1118F55) Entry @ $2.10

Entry on May 27 at $56.28
Earnings Date 07/25/11 (unconfirmed)
Average Daily Volume: 688 thousand
Listed on May 26th, 2011


Danaher Corp. - DHR - close: 54.53 change: +0.09

Stop Loss: 52.65
Target(s): 58.00-60.00 zone
Current Gain/Loss: - 1.1%
Time Frame: 8 to 10 weeks
New Positions: see below

Comments:
05/31 update: DHR also saw its morning spike fail only to see shares bounce off its midday lows. The afternoon bounce can be used as a new bullish entry point.

Current Position: Long DHR stock @ $55.17

- or -

Long the Sept. $57.50 call (DHR1117I57.5) Entry @ $1.90

Entry on May 19 at $55.17
Earnings Date 07/21/11 (unconfirmed)
Average Daily Volume: 3.5 million
Listed on May 18th, 2011


Dr. Pepper Snapple Group - DPS - close: 41.20 change: +0.14

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

Comments:
05/31 update: DPS briefly traded under its 20-dma before bouncing. Our plan hasn't changed. We've been waiting for a correction so hopefully it continues this week. I'm suggesting a buy-the-dip entry point 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


Ecolab Inc. - ECL - close: 54.88 change: +0.89

Stop Loss: 50.95
Target(s): 57.00, 59.90
Current Gain/Loss: + 2.8%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
05/31 update: ECL extended its gains and settled at new highs. I suspect the $55.00 level could be round-number resistance so don't be surprised to see a little profit taking soon. Fortunately broken resistance near $53.00 should be new support. I am not suggesting new positions at current levels.

Current Position: Long ECL stock @ 53.35

- or -

Long July $55 call (ECL1116G55) Entry @ $0.60

Entry on May 26 at $53.35
Earnings Date 07/26/11 (unconfirmed)
Average Daily Volume: 1.5 million
Listed on May 18th, 2011


EMC Corp. - EMC - close: 28.47 change: +0.04

Stop Loss: 26.45
Target(s): 29.95, 32.25
Current Gain/Loss: + 3.3%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
05/31 update: EMC dipped to $28.10 before traders bought the dip around lunch time. The $28.70 level remains overhead resistance. I'm not suggesting new positions at this time. Our first target is $29.95.

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


Expedia Inc. - EXPE - close: 28.01 change: +0.32

Stop Loss: 26.25
Target(s): 27.75, 29.75
Current Gain/Loss: + 8.3%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
05/31 update: EXPE continues to show relative strength. Shares are on the verge of breaking out past resistance near $28.00. I am raising our stop loss to $26.25. EXPE still looks a little overbought in spite of a week-long consolidation so I'm not suggesting new positions at this time. Our final target is $29.75.

Current Position: Long EXPE stock @ 25.85

- or -

Long the June $25 call (EXPE1118F25) Entry @ $1.20

- or -

Long the July $27 call(EXPE1116G27) Entry @ $0.95

05/31 new stop loss @ 26.25
05/21 New stop loss @ 25.40
05/20 1st Target Hit @ 27.75 (+7.3%), June $25 call @ $2.70 (+125%), July $27 call @ $1.40 (+47.3%)

Entry on May 18 at $25.85
Earnings Date 07/28/11 (unconfirmed)
Average Daily Volume: 5.5 million
Listed on May 17th, 2011


Jabil Circuit Inc. - JBL - close: 21.58 change: +0.36

Stop Loss: 19.90
Target(s): 22.95, 24.75
Current Gain/Loss: + 0.6%
Time Frame: until June 21st, 2011
New Positions: see below

Comments:
05/31 update: JBL gapped open higher at $21.44 and spent the rest of the day slowly drifting higher. I would consider new positions here but there is a good chance we'll see JBL retest the $21.00 area so patient traders might want to wait and buy a dip there.

Shares do still have overhead resistance near $22 but if this trend continues we should see JBL breakout past this level in the next week or two.

We only have a few weeks for this trade to work as JBL reports earnings on June 21st and we don't want to hold over the announcement.

- Use Small Positions -

Current Position: Long JBL stock @ $21.44

- or -

Long July $22 call (JBL1116G22) Entry @ $1.05

Entry on May 31 at $21.44
Earnings Date 06/21/11 (confirmed)
Average Daily Volume: 3.6 million
Listed on May 28th, 2011


Kansas City Southern - KSU - close: 58.89 change: +0.41

Stop Loss: 53.45
Target(s): 59.75, 62.50
Current Gain/Loss: + 4.4%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
05/31 update: KSU underperformed its peers in the railroad industry. Shares still managed a +0.7% gain after traders bought the dip near $58.00 midday. I would not launch new positions at current levels. Consider waiting for a dip near $57 instead. Our upside targets are $59.75 and $62.50.

Current Position: Long KSU stock @ $56.39

- or -

Long the June $60 call (KSU1118F60) Entry @ $0.53

Entry on May 19 at $56.39
Earnings Date 07/27/11 (unconfirmed)
Average Daily Volume: 1.0 million
Listed on May 18th, 2011


Rosetta Resources - ROSE - close: $49.15 change: +1.02

Stop Loss: 43.90
Target(s): 54.00
Current Gain/Loss: + 3.8%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
05/31 update: Shares of ROSE rallied toward their early May highs and stalled. After trimming its gains ROSE still posted a +2.1% advance today. The $50 level remains resistance. Consider waiting for a dip into the $47.00-46.00 area before launching positions.

-Small Bullish Positions-

Current Position: Long ROSE stock @ $47.35

- or -

Long July $50 call (ROSE1116G50) Entry @ $1.95

Entry on May 26 at $47.35
Earnings Date 08/08/11 (unconfirmed)
Average Daily Volume: 967 thousand
Listed on May 25th, 2011


Riverbed Technology, Inc. - RVBD - close: 37.92 change: -0.01

Stop Loss: 34.95
Target(s): 39.90, 43.00
Current Gain/Loss: + 1.8%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
05/31 update: Hmm... RVBD failed to post a gain today. Shares saw their early strength fade but traders did buy the dip at $37.00. I remain cautiously bullish but would hesitate to launch 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


DENTSPLY Intl. - XRAY - close: 39.24 change: +0.10

Stop Loss: 37.30
Target(s): 42.00, 44.50
Current Gain/Loss: + 0.6%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
05/31 update: XRAY spent most of the day trading sideways above the $39 level. I would still consider buying this bounce but readers may want to raise their stop loss. Keep in mind that XRAY doesn't move that fast. 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

Aon Corp. - AON - close: 52.15 change: +0.78

Stop Loss: 52.75
Target(s): 46.50
Current Gain/Loss: - 1.0%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
05/31 update: Warning! AON has closed above short-term resistance at $52.00. More conservative traders may want to exit early now considering the market's bullish breakout today. AON still has overhead resistance in the $52.50 area so I'm not giving up yet but we're not suggesting new positions at this time. Please note our new stop loss at $52.75.

Earlier Comments:
Our target is the $46.50 level. I would expect some support near $50.00 and the 100-dma so don't be surprised to see an initial bounce near this area. NOTE: The option spreads on AON are a little wide. Conservative traders may not want to play the options.

(small positions only)

Current Position: short AON stock @ 51.61

- or -

Long the June $50 PUT (AON1118R50) entry @ $0.45

05/31 New stop loss @ 52.75
05/23 gap down entry @ 51.61

Entry on May 23 at $51.61
Earnings Date 07/29/11 (unconfirmed)
Average Daily Volume: 1.7 million
Listed on May 21st, 2011


Ford Motor Co. - F - close: 14.92 change: +0.32

Stop Loss: 15.15
Target(s): 13.25
Current Gain/Loss: - 3.6%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
05/31 update: The market's strength today helped fuel a +2.1% bounce in shares of Ford. The stock nearing what should be significant resistance near $15.00 and its 50 and 200-dma. Wait for this bounce to fail before launching new bearish positions. Currently our target is $13.25. Do not be surprised if Ford produces a short-term bounce near its March lows near $13.75. I would keep our position size small to limit our risk.

Small Positions!

Current Position: Short F stock @ $14.40

- or -

Long July $15 PUT (F1116S15) Entry @ $0.90

Entry on May 25 at $14.40
Earnings Date 07/21/11 (unconfirmed)
Average Daily Volume: 57 million
Listed on May 24th, 2011


H&R Block - HRB - close: 16.20 change: +0.23

Stop Loss: 16.55
Target(s): 14.10
Current Gain/Loss: unopened
Time Frame: until June 23rd, 2011
New Positions: Yes, see trigger

Comments:
05/31 update: HRB spent most of the day trading sideways near $16.00. Shares saw a rally late in the day and HRB closed up +1.4%. We are waiting for the stock to break the new trend of higher lows in what looks like a bear-flag pattern.

I am suggesting a trigger to open bearish positions at $15.60, which is under last week's low. More conservative traders may want to wait for a breakdown under the rising 100-dma, which could act as possible support. If we are triggered at $15.60 our target is $14.15 near the 200-dma.

Trigger @ 15.60

Suggested Position: Short HRB stock @ $15.60

- or -

buy the July $15.00 PUT (HRB1116S15) current ask $0.65

Entry on May x at $xx.xx
Earnings Date 06/23/11 (confirmed)
Average Daily Volume: 5.8 million
Listed on May 28th, 2011


St. Jude Medical - STJ - close: 50.67 change: +0.11

Stop Loss: 52.26
Target(s): 47.00
Current Gain/Loss: + 0.6%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
05/31 update: The good news here is that STJ didn't see much of a bounce (+0.2%) but the bad news is that the bounce may not be over yet. We're looking for overhead resistance near $51.00 or the 50-dma closer to $52. Wait for the bounce to reverse before initiating new positions. Keep in mind that bearish plays are going to be tough to trade if the market accelerates higher. Currently our target is $47.00. More aggressive traders may want to aim lower.

Earlier Comments:
We wanted to keep our position size small (about half or less than a normal trade) to limit our risk.

(Small Positions)

Current Position: Short STJ stock @ 51.00

- or -

Long the June $50 PUT (SJT1118R50) Entry @ $1.00

05/23 New stop loss @ 52.26

Entry on May 20 at $51.00
Earnings Date 07/21/11 (unconfirmed)
Average Daily Volume: 2.6 million
Listed on May 16th, 2011