Option Investor
Newsletter

Daily Newsletter, Monday, 6/13/2011

Table of Contents

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

Market Wrap

You Call These Gains?

by Todd Shriber

Click here to email Todd Shriber
Coming off a sixth consecutive weekly loss that saw the S&P 500 slide 2.24% last week and the Dow Jones Industrial Average give up 1.64%, the only thing that can be said for Monday's action is that at least those two indexes found their way to gains, as meager as they were. The Nasdaq Composite and the Russell 2000 continued their losing ways.

Stats Table

Speaking of extending losing streaks, that is just what oil did, tumbling 2% and that slide was helped by at least two negative headlines. China's lending rate slid to $85 billion in May, well below the $100 billion analysts were forecasting, providing further evidence that the world's second-largest oil consumer behind the U.S. is home to a slowing economy.

Making matters worse for oil, Bloomberg reports that a drought in Texas is threatening oil output in the Eagle Ford Shale, home to booming oil production recently, and that hot weather is forcing producers to go out of their way to acquire water from farmers and municipalities. As anyone that has spent time in Texas between May and September will tell you, it gets pretty darn hot in the Lone Star state and this a problem that will not be easy to solve for oil companies without some help from Mother Nature. For more news and commentary on the energy sector, register for the OilSlick free daily newsletter (HERE).

Oil Chart

We have not seen a real ''Merger Monday'' in several weeks, if not longer, and while the price tags being thrown about today were on the low end, the pickup in mergers and acquisitions activity could still be viewed as a positive and perhaps more of the same going forward will provide some comfort to those that are long the market.

Transatlantic Holdings (TRH), a former unit of American International Group (AIG), got the ball rolling on Sunday evening when it agreed to sell itself to Allied World Assurance for $3.2 billion, a deal that values Transatlantic at less than 80% of book value. Allied World's offer values Transatlantic at $51.10 a share, or a 16% premium to where the shares closed on Friday.

That is not a huge premium and given the percentage of book value that Allied World is offering, Transatlantic may see some rival bids come in. Barclays said as much. That price ''could result in other property-casualty insurers and reinsurers competing for Transatlantic,'' Barclays said, according to Bloomberg News. The bank did not identify other potential suitors for Transatlantic.

Shareholders love a bidding war for their company and that much was evident in Transatlantic's action today as the stock soared nearly 10% on volume that was better than five times the daily average.

Transatlantic Chart

Footwear maker Timberland (TBL) was another stock on the move thanks to M&A news as VF Corp. (VFC) offered $2 billion for the maker of work boots and casual footwear. The deal values Timberland at $43 a share, a 43% premium to where the shares closed on Friday. North Carolina-based VF, the maker of the Nautica and North Face brands, said the Timberland acquisition will add $2 to annual earnings per share by 2015, and add about $700 million to VF's 2011 revenue, according to Reuters.

VF plans to finance the acquisition, which is expected to close in the third quarter, through a combination of cash on hand and commercial paper. The company is looking to grow its outdoor segment to fuel revenue and profit growth, making the Timberland deal an ideal fit, at least on the surface, for VF. As for Timberland shareholders, this was welcome news to say the least because the stock had lost more than a third of its value since early May. Today, Timberland shares were up 44% on volume that was better than 30 times the daily average.

Timberland Chart

I do not know what it is about the packaging sector, but it sure does appear to be fertile ground for M&A activity these days. Last Monday, I wrote about the unsolicited $3.3 billion takeover offer Temple-Inland (TIN) had received from rival International Paper (IP). This week, there is news of yet another unsolicited offer for another packaging firm, that being Graham Packaging (GRM).

Pennsylvania-based Graham makes custom-molded plastic containers for consumer products companies and a quick look at the company's Web site shows that it has a roster of well-known customers including Coca-Cola (KO), PepsiCo (PEP) and Heinz (HNZ), just to name a few.

Apparently, that is an attractive feature to Rank Group, the New Zealand-based private equity firm that is offering $1.64 billion for Graham. Again, there's a potential battle brewing here because Silgan Holdings (SLGN) previously offered $22.10 a share for Graham. Rank's offer values Graham at $25 a share.

No word yet on whether Silgan is mulling a new bid, but investors do not like the idea of the company missing out on Graham. Silgan plunged almost 6% on volume that was more than five times the daily average.

Silgan Chart

Perhaps the biggest news of the day involves a company that is not yet even public. Of course, I am referring to social networking king Facebook, the most visited site on the Internet. For all the talk of about LinkedIn's (LNKD) IPO and the imminent offering from daily deal Web site Groupon, the reality is Facebook is the one IPO everyone and his sister is talking about.

CNBC reported today that the word on Wall Street is that Facebook could be targeting an IPO in the first quarter of 2012 that values the company at a staggering $100 billion. Staggering is truly the appropriate term because in recent months the rumored valuation for Facebook has risen from $50 billion to $70 billion to now $100 billion.

Just for fun, I ran a quick screen of only NYSE-listed stocks that have market values in the $100 billion area and the roster of companies that Facebook would be in the same ballpark with, assuming the $100 billion number proves accurate, is nothing short of impressive. In the oil patch, $100 billion puts Facebook on par with ConocPhillips (COP) and makes the company a lot more valuable (try 20%+) than Occidental Petroleum (OXY), the third- and fourth-largest U.S. oil companies respectively.

At $100 billion, Facebook would sport a larger market value than a pretty hefty percentage of the Dow Jones Industrial Average. I stopped counting when I realized $100 billion is more than the market caps of the following Dow stocks: AA, AXP, CAT, DIS, HD, HPQ, KFT, MCD, and MMM.

I realize the chart that I have included below is a bit dated, but it does paint the picture of Facebook's epic valuation surge. Plus, the chronology of it is fun to study. Take a peak at where Microsoft (MSFT) got involved. There are plenty of reasons to criticize Mr. Softy these days. Investing $240 million in Facebook in 2007 is NOT one of them.

Facebook Valuation Chart

Looking at the charts, given the small gains and losses seen across the major indexes today, I am afraid I do not have a lot of material to work with that is noticeably different from what Jim had to say in the weekend commentary. A gain of less than one point for the S&P 500 is not going to do much to inspire confidence and with the index almost 56 points below its 50-day moving average, next support looks like 1250. The 200-day line is just four points above there.

If 1250 does not hold as support, there is further downside risk to 1225 and then to 1275.

S&P 500 Chart

The margin of advancers to decliners on the Dow was 19-11, but even that is not worth writing home about because CAT, CVX, IBM and XOM were all lower on the day. On the bright side, financials perked up...sort of. Still, the blue chip languishes under 12,000 and the longer it does that, the more realistic a fall to 11,600 becomes. Go there and the Dow could be on its way to 11,000.

Dow Chart

With the summer doldrums officially setting in, this is not the season to be embracing tech and the Nasdaq's chart confirms that sentiment. The Nasdaq's cascade from its May peak is now close to 200 points and I would not be betting on the 200-day moving average at 2630 holding as support. Support is more firm at 2600 and if that does not work, then 2540-2550 area could be the next stop. With the charts for AAPL, GOOG, PCLN, FFIV and several other big-name Nasdaq stocks looking very ugly right now, more pain probably awaits the Nasdaq.

Nasdaq Chart

At this point, it is hard to envision the Russell 2000 not following another eight points or so to its 200-day moving average at 769. If that is not support, well, I will just say you probably will not want to be long small-caps or Russell 2000 Index ETFs because the carnage from there will be palpable. I am talking a downturn to the 700-710 area.

Russell 2000 Chart

These waters are still too dangerous to jump into, at least not without patience and an insurance policy in the form of puts or an inverse ETF. A ''law of averages'' bounce is possible this week. After all, the market has slid for six straight weeks, but even if such a bounce occurs, it will not be enough to erase six weeks' worth of damage. I still think restraint is the order of the day. What one may be thinking about buying today can be probably be had next week at an even better price.


New Plays

Brokerage Firm

by James Brown

Click here to email James Brown


NEW BEARISH Plays

Charles Schwab - SCHW - close: 16.01 change: -0.03

Stop Loss: 17.55
Target(s): 15.25
Current Gain/Loss: unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see trigger

Company Description

Why We Like It:
Financial stocks have been market under performers in the month of June and some of the asset management names have seen significant breakdowns. SCHW is one of them with a breakdown under support near $17.00 and its 200-dma. We don't want to chase it at current levels, especially with the market looking oversold and due for a bounce.

I am suggesting we use a trigger to launch bearish positions at $16.75, near the 200-dma, which should be technical resistance. More conservative traders could wait for a failed rally under $17.00 instead before launching positions. If triggered we'll use a stop loss at $17.55 and aim for a drop to $15.25. This could take several weeks but we do not want to hold over the mid July earnings report.

Trigger @ 16.75

Suggested Position: short SCHW stock @ $16.75

- or -

Buy the July $17.00 PUT (SCHW1116S17) current ask $1.25 (this will be cheaper when SCHW bounces to our trigger)

Annotated chart:

Entry on June x at $xx.xx
Earnings Date 07/18/11 (unconfirmed)
Average Daily Volume: 10.2 million
Listed on June 13th, 2011



In Play Updates and Reviews

MAR Marks Our Target

by James Brown

Click here to email James Brown

Editor's Note:
Shares of MAR hit our first profit target today. I'm also suggesting we take profits now on our Ford trade.

-James

Current Portfolio:


BULLISH Play Updates

Cheesecake Factory Inc. - CAKE - close: 30.18 change: +0.29

Stop Loss: 28.95
Target(s): 33.95, 37.00
Current Gain/Loss: - 4.2%
Time Frame: 8 to 10 weeks
New Positions: see below

Comments:
06/13 update: CAKE is still trying to rebound but shares reversed late this afternoon paring its gains to just +0.9%. Volume was above average on today's session. I remain cautious. The close over $30 is bullish but the intraday reversal concerns me. No new positions at this time.

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

06/09 CAKE is bouncing from the 200-dma as expected.
06/04 More conservative traders may want to exit early. We are expecting a drop to the 200-dma.

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


Dr. Pepper Snapple Group - DPS - close: 40.77 change: +0.46

Stop Loss: 38.95
Target(s): 44.90
Current Gain/Loss: + 1.2%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
06/13 update: DPS is once again showing relative strength. The stock rallied to its 20-dma near $41.15 before trimming its gains. Volume is picking up on the bounce, which is a good sign. I remain cautious given the down trend in the major indices. If you're looking for a new entry point consider waiting for another dip or bounce near $40.50 and its 50-dma.

Current Position: Long DPS stock @ $40.25

- or -

Long Aug $45 call (DPS1120H45) Entry @ $0.30

06/04 new stop loss @ 38.95

Entry on June 3 at $40.25
Earnings Date 07/28/11 (unconfirmed)
Average Daily Volume: 2.1 million
Listed on May 14th, 2011


Ecolab Inc. - ECL - close: 54.04 change: +0.24

Stop Loss: 51.90
Target(s): 57.00, 59.90
Current Gain/Loss: + 1.2%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
06/13 update: It was a quiet Monday for ECL with shares hovering near the $54 level all day long. I am still expecting a dip toward what should be support near $53.00. More conservative traders may want to wait for a bounce from the 50-dma instead before considering new positions.

Current Position: Long ECL stock @ 53.35

- or -

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

06/04 new stop loss @ 51.90

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


Nanometrics Inc. - NANO - close: 16.60 change: -0.19

Stop Loss: 15.85
Target(s): 19.25, 22.00
Current Gain/Loss: - 1.3%
Time Frame: 6 to 8 weeks or more
New Positions: see below

Comments:
06/13 update: NANO spent Monday's session consolidating sideways. I don't see any changes from my weekend comments. I'm still suggesting new positions at current levels. Or readers could wait for a dip near $16.00 instead. More aggressive traders may want to place their stop under $15.50 or even the $15.00 level, since both should offer some support. I'd rather keep our stop tight and if we get stopped out at $15.85 we can try again and buy a dip or bounce near $15.00.

We'll start with multi-week targets at $19.25 and $22.00. FYI: NANO does have options but the spreads are so wide I wouldn't trade them.

Current Position: Long NANO stock @ $16.82

Entry on June 13 at $16.82
Earnings Date 08/04/11 (unconfirmed)
Average Daily Volume: 467 thousand
Listed on June 11th, 2011


NVIDIA Corp. - NVDA - close: 17.00 change: -0.13

Stop Loss: 16.59
Target(s): 19.50
Current Gain/Loss: - 2.3%
Time Frame: 1 to 2 weeks
New Positions: see below

Comments:
06/13 update: Readers may want to hit the eject button and abandon ship on our aggressive, higher-risk NVDA trade. The SOX semiconductor index continues to sink and the index closed under the 400 mark today. Meanwhile NVDA is flirting with a breakdown under the $17.00 level. The 200-dma might offer some support (currently at 16.69). I'm inching our stop loss a little bit lower from 16.70 to 16.59. No new positions at this time. Our plan was to keep our position size small to limit our risk.

- Small Positions Only -

Current Position: Long NVDA stock @ $17.40

- or -

Long July $18 call (NVDA1116G18) Entry @ $0.68

06/13 adjust stop loss from 16.70 to 16.59

Entry on June 10 at $17.40
Earnings Date 08/11/11 (unconfirmed)
Average Daily Volume: 19.8 million
Listed on June 9th, 2011


BEARISH Play Updates

Aon Corp. - AON - close: 50.47 change: +0.27

Stop Loss: 52.75
Target(s): 46.50
Current Gain/Loss: + 2.2%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
06/13 update: AON managed a +0.5% bounce from the $50.00 level. We were expecting a bounce so it's not surprising. The stock should have overhead resistance near $51.00 and near $52.00. Keep in mind that our June put will expire after Friday. Cautious traders may want to exit early. I am not suggesting new positions at this time.

Earlier Comments:
Our target is the $46.50 level. 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


AO Smith Corp. - AOS - close: 39.04 change: -0.07

Stop Loss: 42.05
Target(s): 36.00, 33.00
Current Gain/Loss: + 2.2%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
06/13 update: The afternoon bounce attempt in AOS didn't get very far and shares closed near their lows for the session. There is no change from my prior comments. You can launch positions here or wait for a new relative low under $38.86.

FYI: The Point & Figure chart for AOS is bearish with a $33 target. Traders should also note that the most recent data listed short interest at 5% of the relatively small 38.2 million share float. That does raise the risk for a possible short squeeze and explains the volatile rallies in this stock.

NOTE: AOS does have options but the spreads appear too wide for us to trade them.

Current Position: short AOS stock @ $39.92

Entry on June 6 at $39.92
Earnings Date 07/20/11 (unconfirmed)
Average Daily Volume: 312 thousand
Listed on June 4th, 2011


Ford Motor Co. - F - close: 13.14 change: -0.21

Stop Loss: 14.26
Target(s): final target @ 12.55
Current Gain/Loss: + 8.7%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
06/13 update: Hmm... I'll be honest. I was expecting a bigger sell-off in Ford. Over the weekend we lowered our target to $12.75. Ford gapped open lower at $13.14 and then declined to $12.78 before bouncing. The intraday bounce back could be the sign of a new short-term bottom.

I am suggesting we take profits immediately! Sell at least half of our positions. The option has a bid of $1.89 (+110%). I'm lowering our stop loss to $14.26. We will adjust our final target to be $12.55. I am not suggesting new positions at this time. The plan was to 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

06/13 New stop loss @ 14.26. Final target at $12.55
06/13 Take Profits Now! Ford @ 13.14 (+8.75%), Option @ $1.89 (+110%)
06/11 new targets at $12.75 and TBD.
06/11 new stop loss @ 14.55
06/08 new stop loss @ 15.01

chart:

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


Honeywell Intl. - HON - close: 55.71 change: +0.18

Stop Loss: 60.15
Target(s): 54.00
Current Gain/Loss: + 3.3%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
06/13 update: This morning HON announced it was buying EMS Technologies for $491 million or $33 a share. The news did not have much impact on HON's stock price but ELMG's rallied +32%. There is no change from my weekend comments on HON. The trend is down but HON looks a little bit oversold. I am not suggesting new positions at this time. More conservative traders may want to take profits early near $55.00. Currently our target is $54.00.

Earlier Comments:
We do want to keep our position size small to limit our risk.

- Small Positions -

Current Position: short HON stock @ 57.65

- or -

Long July $55 PUT (HON1116S55) Entry @ $0.75

Entry on June 2 at $57.65
Earnings Date 07/22/11 (unconfirmed)
Average Daily Volume: 4.1 million
Listed on June 1st, 2011


Kohl's Corp. - KSS - close: 49.80 change: +0.04

Stop Loss: 51.75
Target(s): 47.50, 45.25
Current Gain/Loss: + 0.0%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
06/13 update: KSS didn't move much today. Shares opened at $49.80 and closed at $49.80. The intraday bounce off its lows might suggest KSS will rebound tomorrow. I don't see any changes from my weekend comments and I would still consider new positions here. As an alternative you could wait for KSS to rally towards or fail near its 10-dma (currently near $51.00). Let's keep our position size small to limit our risk. FYI: The Point & Figure chart for KSS is bearish with a $43 target.

- Small Positions-

Current Position: short KSS stock @ $49.80

- or -

Long July $47.50 put (KSS1116S47.5) Entry @ $0.75

Entry on June 13 at $49.80
Earnings Date 08/11/11 (unconfirmed)
Average Daily Volume: 4.1 million
Listed on June 11th, 2011


Marriott Intl. Inc. - MAR - close: 33.77 change: -0.07

Stop Loss: 36.55
Target(s): 33.65, and 30.50
Current Gain/Loss: + 4.5%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
06/13 update: Target achieved. MAR hit our new target at $33.65 (+4.9%) while the option was trading with a bid at 0.90 (+50.0%). I do want to urge caution here. MAR has essentially tested its April lows and it could bounce. We could see MAR rebound back to $35.00 or higher. I am lowering our stop loss down to $36.55. I am not suggesting new positions at this time.

Current Position: Short MAR stock @ $35.39

- or -

Long July $33 PUT (MAR1116S33) Entry @ $0.60

06/13 1st Target Hit @ $33.65 (+4.9%), Option @ 0.90 (+50%)
06/13 New stop loss @ 36.55
06/11 Adjusted exit targets to $33.65 and 30.50

chart:

Entry on June 8 at $35.39
Earnings Date 07/13/11 (unconfirmed)
Average Daily Volume: 3.7 million
Listed on June 7th, 2011


St. Jude Medical - STJ - close: 48.94 change: +0.04

Stop Loss: 51.05
Target(s): 47.00, 45.75
Current Gain/Loss: + 4.0%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
06/13 update: STJ produced a very quiet session with shares hovering near $49 and its 100-dma all day. I am not suggesting new positions at this time. We'll wait and see if shares fail at overhead resistance near $50.00 or at the $51.00 levels.

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

06/04 New stop loss @ 51.05, added second target at $45.75
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


Target Corp. - TGT - close: 46.43 change: -0.27

Stop Loss: 50.15
Target(s): 45.15
Current Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see trigger

Comments:
06/13 update: TGT continues to sink without us. I don't' want to chase it here. The plan is to wait for an oversold bounce back toward what should be new resistance in the $48.50-49.00 area. I'm suggesting a trigger to open bearish positions at $48.50. If triggered we'll use a stop loss at $50.15. Our first target is $45.15. FYI: The Point & Figure chart for TGT is bearish with a $43 target.

Trigger @ 48.50

Suggested Position: short TGT stock @ 48.50

- or -

buy the July $47 PUT (TGT1116S47) current ask $1.24

Entry on June x at $xx.xx
Earnings Date 08/18/11 (unconfirmed)
Average Daily Volume: 7.1 million
Listed on June 4th, 2011