Option Investor
Newsletter

Daily Newsletter, Thursday, 6/16/2011

Table of Contents

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

Market Wrap

Two Days Of Gains, But Questions Remain

by Todd Shriber

Click here to email Todd Shriber
Stocks tried to turn lemons into lemonade on Thursday in the face of several less-than-stellar economic reports and rising political turmoil in Greece. Even with those headwinds, the Dow Jones Industrial Average posted a solid gain, while the S&P 500 and Russell 2000 showed gains of a more meager stature. The Nasdaq closed lower and will probably open lower tomorrow, a situation that will be addressed momentarily.

Stats Table

It was a busy day in terms of economic data and none of it was particularly wonderful, though that has become the norm in recent weeks. The Labor Department said initial claims for jobless benefit by 16,000 last week to 414,000. The decline is good news, the fact that the four-week moving average remains stubbornly above 400,000 is not. Last week was the tenth consecutive week the four-week moving average resided above 400,000. Still, last week's reading was below the 420,000 new claims economists were forecasting.

Jobless Claims Chart

The new residential construction report issued today was another case of ''not exactly great, but certainly less bad.'' Permits for single-family homes jumped 2.5% in May to a seasonally adjusted rate of 405,000 units. There ends the good news because the May 2011 number is 6.9% below the May 2010 number and almost 77.5% below the number posted in September 2005, according to Blytic.com. Single-family housing starts rose 3.7% last month, but that is almost 9% below the May 2010 level and 77% below the 2006 peak, Blytic reports. Ugly is all I can say.

Single-Family Housing Permits

And speaking of ugly, we have the Philly Fed manufacturing index which plunged to -7.7 in June from 3.9 in May. That gives us the worst reading in 31 months. Economists were expecting a reading of 5.5.

Philly Fed Manufacturing Index

Normally, I do not start with the after-hours action, but today I will make an exception because BlackBerry maker Research In Motion (RIMM) treated investors to yet another quarter of disappointing results and an even more disappointing outlook. Before getting into the most recent quarterly numbers from RIM, it pays to take a look at why the stock's chart, which I include momentarily, is so ugly. This chart help explains why.

Smartphone Market Share

What that chart shows is smartphones operating on Google's (GOOG) Android are eating everyone's lunch, at least here in the U.S., and that includes BlackBerry and the iPhone. To be sure, Apple's (AAPL) iPhone is nowhere near as vulnerable as BlackBerry and it is widely expected that iPhone will surpass BlackBerry this year for the second spot in U.S. smartphone market share. The problem for RIM is not only is it losing market share in the U.S., it is relying on international markets to make up for those lost subscribers, but in many of those markets, BlackBerry has to do battle with at least the iPhone, if not a host of other rival products.

For the most recently completed quarter, RIM earned $1.33 a share on revenue of $4.91 billion, but analysts were expecting a profit of $1.32 on sales of $5.14 billion. I have been saying for over a year that missing on the top line is a recipe for disaster for any company and given RIM's recent track record, this is damaging news.

Revenue outlook for the next quarter is even worse. RIM expects revenue of $4.2 billion to $4.8 billion, well below the $5.46 billion analysts were expecting. RIM's tablet, the PlayBook, did show sales of 500,000 units, 100,000 above estimates, but making headway against the iPad will be a formidable task and as one analyst quoted by the Wall Street Journal notes, investors are getting tired of hearing RIM say wait for new products in the back half of this year.

The company also cut its fiscal 2012 profit outlook to $5.25-$6 a share from $7.50. Co-CEO Jim Balsillie said ''Fiscal 2012 has gotten off to a challenging start.'' You don't say. The company also made a weird share repurchase announcement today, saying it will repurchase some of its own shares, but the amount and timing of the buybacks were not disclosed.

Well not to be snarky, but RIM will be getting a good deal on its own stock. The shares are plunging in the after-hours session, down 15% and hovering around $30. RIM has not traded below $30 since September 2006.

RIM Chart

In more positive news, there was a bit of mergers and acquisitions activity in the air on Thursday as Energy Transfer Equity (ETE) announced it will acquire Southern Union (SUG) for $4.2 billion, creating one of the largest U.S. natural gas pipeline operators in the process. The combined company would have more than 44,000 miles of natural gas pipelines and about 30.7 billion cubic feet per day of natural gas transportation capacity, according to the Associated Press.

The deal is the second big one for Energy Transfer in 2011. In March, the company paid $1.93 billion to acquire LDH Energy Asset Holdings. Energy Transfer will pay $33 a share for Texas-based Southern Union, a 17% premium to where the stock closed on Wednesday. Shares of Energy Transfer jumped 8.2% on volume that was nearly quadruple the daily average on news of the deal. Even with that big move higher, the stock still yields 5.2%.

For more news and commentary on the energy sector, register for the OilSlick Daily Newsletter (HERE).

Energy Transfer Chart

In the graphic evidence category, this continues to be a truly gruesome environment in which to take a company public. That statement is backed up with a quick view of almost every Chinese Internet IPO from late 2010 through this year. Remember when LinkedIn (LNKD) jumped to over $120 on its first day of trading? That is a hard event to recall when the stock closes near $68 as it did today.

Still, the allure of going public is too strong to ignore for some companies and they end up learning a lesson, at least a short-term one, the hard way. Pandora (P), the Internet music service went public yesterday and started off hot before fizzling into the close. Today was no better. With today's 24% plunge, investors that paid $26 for Pandora on Wednesday are now in the hole to the tune of nearly 50%.

Along the same lines, I read that Angie's List has selected a bank to manage its upcoming IPO. Angie's List is sort of Craigslist meets Yelp, but I have a feeling a fate similar to that of LinkedIn and Pandora awaits Angie and her list. By the way, a few years ago, banks were clamoring for Craig to take his list public, but he never did. Perhaps he made the right choice.

Pandora Chart

Looking at the charts, today's bounce for the S&P 500 really is not worth bragging about, but if the market is going to continue move higher, the Index would find resistance around 1290 and would then need to claw its way back above 1320. Support still looks to be 1250 and if that does not hold, the 1200-1210 area could be next.

S&P 500 Chart

Even with a decent move today, the Dow could not find its way back above 12,000 and resistance looms in the 12,070 area. If the blue-chip index can make its way above that area, another 150 points of upside is possible. Support is around 11,700 and if that does not hold, downside targets would be 11,450 and then perhaps below 11,200.

Dow Chart

The Nasdaq has been looking especially vulnerable and that tune will not change following RIM's terrible results. It would probably take a return to 2700 and higher to get buyers interested again, in the near-term, a run to 2600 is a real possibility. From there, 2545 could be the next stopping point.

Nasdaq Chart

The Russell 2000 seems to have found support at its 200-day moving average, but it would not be accurate to say that fund managers have suddenly embraced small-caps again. They have not. It will probably require a move above 800 to encourage small-cap buying. Likewise, a drop below 760 probably takes the Russell 2000 to 740 and then back to 700-710.

Russell 2000 Chart

I still no reason to be initiating long positions here, certainly not large ones, and I am also of the mind that the S&P 500 has probably gotten to the point where the financials need to finally start carrying their weight. Problem is, there is just too much headline risk for that group for it to start chipping in to broader market gains in any meaningful fashion.

The best I can say is that big financials ETFs like XLF and KBE are nearing critical support levels and if those areas hold, each could bounce a couple of bucks, but those moves probably will not put a Ferrari in your garage. I remain leery of financials and non-Apple tech until I find a reason not to be. Trust me, I would like to find that reason.


New Plays

Quadruple-Witching Options Friday

by James Brown

Click here to email James Brown

Editor's Note:

Will stocks bounce on Friday or will the market decline and post its seventh weekly loss in a row? Tomorrow is a quadruple-witching options and futures expiration Friday. Will we see more volatility or will the market quietly drift into the weekend? I suspect we'll see the later with stocks moving sideways, hugging the nearest option strike price.

We did see the S&P 500 tag its simple 200-dma and the 1260 level. Plus, the NASDAQ composite hit potential support at the 2600 level. There is probably decent chance that stocks actually bounce tomorrow. The small cap Russell 2000 index is also trying to bounce from technical support at its simple 200-dma and its lows from Monday. If that happens then the $RUT may have formed a short-term bullish double bottom.

However, even if stocks do bounce the intermediate trend is still down. We can use the bounce as a new entry point to launch bearish positions. Of course that requires waiting for the bounce to near overhead resistance or the trend of lower highs. We may not see a new bearish entry point tomorrow. It could take a day or two of the market bouncing before we see a new entry point.

If you feel compelled to trade tomorrow then I would be tempted to buy calls on the S&P 500, the NASDAQ, or the Russell 2000 index or their appropriate ETFs (SPY, QQQ, or IWM). If you do this would be a very short-term trade for one to three days and use a very tight stop loss under today's low. I'm probably least excited about the NASDAQ since the sell-off in RIMM tonight could have an impact on the NASDAQ.

Do not forget that while it's unlikely there is still the possibility that stocks experience some end-of-quarter window dressing in the second half of June. Whether that happens next week or the last week of June I can't say and it may not happen at all.

- James


In Play Updates and Reviews

Exit June Puts

by James Brown

Click here to email James Brown

Editor's Note:
Our plan was to exit our June options today at the closing bell since they expire after tomorrow's close. We closed our June puts in AON and STJ. I've also dropped CCMP since shares are unlikely to hit our trigger to open positions any time soon. Readers may want to take profits in Ford soon.

-James

Current Portfolio:


BULLISH Play Updates

Cheesecake Factory Inc. - CAKE - close: 29.99 change: -0.26

Stop Loss: 28.95
Target(s): 33.95, 37.00
Current Gain/Loss: - 4.8%
Time Frame: 8 to 10 weeks
New Positions: see below

Comments:
06/16 update: CAKE is hovering near the $30.00 level and I don't expect it to move much tomorrow. The stock will likely close near the $30 strike price thanks to Friday being options expiration. Let's wait for a bounce from $30 before considering new bullish 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

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: 40.68 change: -0.04

Stop Loss: 39.40
Target(s): 44.90
Current Gain/Loss: + 1.0%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
06/16 update: DPS bounced from its afternoon lows but it couldn't quite close above its 30-dma or 10-dma, which could act as overhead resistance. We can still buy DPS on the bounce but I'd prefer to wait for a dip or bounce closer to the $40.00 mark and its 50-dma.

Current Position: Long DPS stock @ $40.25

- or -

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

06/14 new stop loss @ 39.40
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: 54.49 change: -0.41

Stop Loss: 51.90
Target(s): 57.00, 59.90
Current Gain/Loss: + 2.1%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
06/16 update: ECL filled the gap from Tuesday and then bounced from its rising 20-dma. This intraday rebound looks like a new bullish entry point to launch positions. More conservative traders may want to raise their stops closer to the $53.00 level.

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: 16.64 change: -0.17

Stop Loss: 15.85
Target(s): 19.25, 22.00
Current Gain/Loss: - 1.0%
Time Frame: 6 to 8 weeks or more
New Positions: see below

Comments:
06/16 update: NANO dipped to the $16.50 area and stalled. I would be tempted to buy NANO here or you can wait for a dip closer to the $16.00 level instead.

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


BEARISH Play Updates

Aon Corp. - AON - close: 49.51 change: -0.61

Stop Loss: 52.05
Target(s): 46.50
Current Gain/Loss: + 4.0%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
06/16 update: AON displayed relative weakness with a -1.2% decline and a breakdown under round-number support at $50.00. Shares might see a bounce near its March lows at $49.36 but the trend is definitely down. I am lowering our stop loss to $52.05.

NOTE: It was our plan to exit our June $50 puts today at the closing bell. This option closed with a bid at $

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 -

June $50 PUT (AON1118R50) entry @ $0.45, exit $0.50 (+11.1%)

06/16 planned exit, June $50 put @ +11.1%
06/16 new stop loss @ 52.05
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: 39.22 change: +0.16

Stop Loss: 42.05
Target(s): 36.00, 33.00
Current Gain/Loss: + 1.7%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
06/16 update: AOS didn't see a lot of movement today and I wouldn't expect a lot of movement tomorrow either, not with Friday being options expiration. Readers may want to wait for a new relative low before initiating new positions.

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: 12.83 change: -0.32

Stop Loss: 13.85
Target(s): final target @ 12.55
Current Gain/Loss: +10.9%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
06/16 update: Ford continues to sink. Shares hit $12.68 intraday and closed down -2.4%. If there is any follow through lower Ford will likely hit our final target at $12.55 tomorrow. More aggressive traders may want to try and let this play run and just keep inching down your stop loss. If you try this approach you'll want a much tighter stop loss. While cautious traders may just want to exit now and book their gains. The July $15 put has a bid of $2.19 (+143%). Speaking of stops I am moving our stop down to $13.85.

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

06/16 new stop loss @ 13.85
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

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: 56.35 change: +0.30

Stop Loss: 60.15
Target(s): 54.00
Current Gain/Loss: + 2.2%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
06/16 update: HON is drifting sideways near $56.00. I'm still bearish and would still consider new positions here. Or you could wait for a failed rally near resistance at $58.00 and the 100-dma.

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


Johnson Controls Inc. - JCI - close: 36.28 change: +0.02

Stop Loss: 38.25
Target(s): 33.75, 31.00
Current Gain/Loss: + 0.2%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
06/16 update: JCI spent Thursday's session moving sideways. The stock opened at $36.36 (our entry point) and closed virtually unchanged on the session. There are no changes from my Wednesday night comments. I am suggesting we keep our position size small to limit our risk. Our first target is $33.75. FYI: The Point & Figure chart for JCI is bearish with a $33 target.

-Small Positions Only-

Current Position: Short JCI stock @ $36.36

- or -

Long July $35 PUT (JCI1116S35) Entry @ $0.90

Entry on June 16 at $36.36
Earnings Date 07/25/11 (unconfirmed)
Average Daily Volume: 4.4 million
Listed on June 15th, 2011


Kohl's Corp. - KSS - close: 49.98 change: +0.21

Stop Loss: 51.75
Target(s): 47.50, 45.25
Current Gain/Loss: - 0.3%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
06/16 update: KSS is hugging the $50.00 level and will probably due the same tomorrow due to Friday being options expiration. I would still consider new positions here or you can wait for a new relative low.

The plan was to 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: 33.35 change: -0.13

Stop Loss: 36.55
Target(s): 33.65, and 30.50
Current Gain/Loss: + 5.7%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
06/16 update: MAR sank to $32.95 intraday. Shares remain oversold and due for a bounce. 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

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


Charles Schwab - SCHW - close: 15.90 change: -0.17

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

Comments:
06/16 update: There is no change from my prior comments on SCHW. More aggressive traders might want to consider new bearish positions now. I'm willing to wait.

I am suggesting we use a trigger to launch bearish positions at $16.75. 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)

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


St. Jude Medical - STJ - close: 47.98 change: +0.24

Stop Loss: 51.05
Target(s): 47.00, 45.75
Current Gain/Loss: + 5.9%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
06/16 update: Thursday proved to be a quiet session for STJ. I am not suggesting new positions at this time. Our first target to take profits is at $47.00.

It was our plan to exit the June $50 puts today (Thursday) at the closing bell. The option closed with a bid at $

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 -

June $50 PUT (SJT1118R50) Entry @ $1.00, exit $1.95 (+95%)

06/16 exit June $50 put @ $1.95 (+95%)
06/15 prepare to exit our June $50 puts on Thursday at the close
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: 46.45 change: -0.26

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

Comments:
06/16 update: TGT is not cooperating and we're still waiting on an entry point. I will likely drop TGT as a candidate in the weekend newsletter. The plan has been to use 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


CLOSED BEARISH PLAYS

Cabot Microelectronics - CCMP - close: 44.25 change: -2.13

Stop Loss: 50.05
Target(s): 45.15 & 200-dma
Current Gain/Loss: unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see trigger

Comments:
06/16 update: Well, it was a good idea but we apparently missed the entry point in CCMP. The oversold bounce ended sooner than expected. The stock never hit our entry point to launch bearish positions. Now the stock is accelerating lower and has already exceeded our first target. I am removing CCMP as a candidate.

Our trade never opened!

chart:

Entry on June x at $xx.xx
Earnings Date 07/28/11 (unconfirmed)
Average Daily Volume: 141 thousand
Listed on June 14th, 2011