Option Investor
Newsletter

Daily Newsletter, Monday, 6/27/2011

Table of Contents

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

Market Wrap

Europe Fears Subside As Stocks Bounce

by Todd Shriber

Click here to email Todd Shriber
Speculation that the Euro zone might be able to avert a widespread sovereign debt crisis sent U.S. stocks soaring today. News that French banks will accept slower repayment of Greek debt and that Greek lawmakers are expected to vote later this week on sweeping austerity measures sent the S&P 500, Dow Jones Industrial Average and Russell 2000 higher by at least 0.9% each while the Nasdaq Composite raced to a 1.3% gain on the day.

Stats Table

The Greek austerity vote later this week is critical for the Mediterranean country because it is bascially the only way at this point that the country can procure additional funds from the European Union and the International Monetary Fund. As I mentioned above, French banks have been kind enough to accept slower repayment of Greek debt and they have proposed that other institutions holding Greek debt slash that exposure by half by rolling half the debt over.

For their part, the French banks have almost been forced into this position as they are most heavily exposed to Greek debt holding the bag on roughly $503 billion worth of Greek bonds. As the Guardian, the London daily, called it, today's news is a ''silver lining,'' but the folks in Athens still have to get around to approving the austerity plan and there is no guarantee of that happening.

Polls show a vast majority of Greeks oppose further budget cuts. Not an unreasonable point of view given that the country has instituted some pretty severe wage and pension cuts in the past year. As the Guardian reports, Greece would have to slash another 155,000 public sector jobs at a time when it is suffering through 16.2% unemployment.

Still, the euro traded higher during the U.S. session and that move came even as George Soros, who knows a thing or two about the currency market, said it is possible at least one country will depart from the common currency. Soros did not identify a candidate, but did he really need to?

EUR/USD Chart

Here in the States, the economic data points released today represented more of the same of what we have been seeing lately and that is not good news. The Commerce Department said consumer spending slipped by 0.1% on an inflation-adjusted basis in May, the second consecutive month the reading declined. One reason given for the disappointing May number was that consumers bought fewer cars following the March earthquake that struck Japan. So maybe the May number is a temporary blip. Maybe not.

On a sort of bright note, disposable personal income rose 0.2% last month, matching the gain seen in April. That is good for eight straight months of gains, but as the chart below indicates, there is still a decent-sized gap between spending and income. With oil prices continuing to look weak, at least in the near-term, gasoline prices are falling as a result. Maybe the cash that consumers were devoting to gas will be transferred over to more dinners out and more trips to the mall. If so, that would be a boon for the economy in the second half of the year. Personally, I am a tad skeptical of this scenario playing out.

Personal Income Chart

Speaking of oil, most of the big-name oil stocks were in the green today with Exxon Mobil (XOM) and Chevron (CVX), the two largest U.S. oil companies, playing their part to fuel the Dow's triple-digit gain, but one lesser-known name was absent from the rally and was one of the worst performers in any sector today.

That unfortunate distinction belongs to Exco Resources (XCO), which plunged 7.1% on volume that was more than seven times the daily average on news that CEO Douglas Miller is having difficulty obtaining financing to take the entire company private. In November, Miller offered $4 billion to take his company private, but now is considering taking only part of Exco private because he cannot lineup the funds necessary to get the entire deal done.

Exco did say in January it would be open to selling itself so perhaps Miller's struggles will mean another buyer steps in, but I did not see any news to that effect. For more news and commentary on the energy sector, register for the OilSlick free daily newsletter (HERE).

Exco Chart

One day does not make a trend, but for those that are long the market, it must have been nice to see financials and tech names finally participate in some upside. Starting with financials, the group got a lift after the new capital requirements set forth by the Basel Committee on Banking Supervision proved to be less burdensome than expected. Some of the banking sector's more controversial names will be required hold as much as 2.5 percentage points in additional capital as part of efforts to prevent another financial crisis, Bloomberg reported, citing the Basel Committee.

The view from some analysts and money managers is the less additional capital members of the too-big-to-fail club are required to hold, the more they can distribute in the form of dividends and share repurchase plans. Citigroup (C) jumped 1% on the news and Bank of America (BAC), the largest U.S. bank by assets, surged 3% after noted bank analyst called the bank ''massively undervalued.''

Bank stocks do need all the help they can get and the Financial Select Sector SPDR (XLF) got in on the act today, but the ETF's chart remains ugly to say the least. While XLF may have found a floor in the $14.60-$14.70 area, the 50-day moving average just crossed below the 200-day line, indicating it is going to take a lot more days like today for XLF to get back to its 2011 high at $17.09.

XLF Chart

There were plenty of reasons to be bullish on tech today. Apple (AAPL) gained nearly 2% after reports surfaced that the company may debut not one, but two new iPhones at the end of September. Morgan Stanley said the fifth generation iPhone could be in production by August and out by the end of the third quarter, which is the end of September.

Deutsche Bank added that Apple is sensing some opportunity to enter the mid-range smartphone market and could bring another nail into the coffins of Nokia (NOK) and Research In Motion (RIMM) by introducing an iPhone 4S, which would be priced at $350. Hmmm, NOK and RIMM are already getting their lunches eaten by more expensive fare, such as the iPhone. I wonder what will happen if Apple can compete with those companies in terms of pricing.

Shares of Amazon (AMZN) jumped $8.70, or 4.52%, to close at $201.25, just below the 52-week high at $206.39 after Morgan Stanley added the stock to its ''Best Ideas List'' while reiterating an ''overweight'' rating and raising its price target on the stock to $245 from $225. Morgan Stanley said recent weakness in the broader market makes for a buying opportunity in Amazon.

The bank said Amazon has a ''long global runway'' and a large opportunity in international e-commerce. That makes sense as e-commerce sales still account for less than 6% of global retail sales. Remember that the second half of the year is usually when Amazon's stock kicks it up a notch, so between Amazon and Apple, perhaps the Nasdaq will start to look more appealing as we get into the back half of 2011.

Amazon Chart

Looking at the index charts, Monday's move to 1280 by the S&P 500 puts the index almost right in the middle of support at 1263-1264 and resistance at 1300. That support is the 200-day moving average and the more important number is 1250. If Greece gets it act together this week, stocks will likely rally, but I still think we are going to see a move to 1250, maybe even a tad lower. Should this occur on strong volume, but if the S&P 500 is able to avoid consecutive weekly closes below 1250, the index would be set up for a rally through the year-end.

S&P 500 Chart

The Dow made its way back above the psychologically important 12,000 level and like the S&P 500, the blue-chip index finds itself caught almost right in the middle of support at 11,600 and resistance at 12,400. In the near-term, it is still doubtful that we will see a lot of days like today when the Dow's energy, financial and tech components were all chipping in.

Dow Chart

As was the case with the Dow today, the Nasdaq got some help nearly all of its major constituents. Name a member of the Nasdaq triple-digit club and chances are it was higher today and that has the Nasdaq back within flirting distance of resistance at 2700. Get over that hump and that probably means a breakout. If the 2655 area, also the 200-day moving average, does not hold as support, 2615 is the next support level.

Nasdaq Chart

With regards to the Russell 2000, I do not want to be too much of a doubting Thomas, but I wonder if the move above 800 today was more a result of the index rebalancing than legitimate buying of small-caps by fund managers. A move above resistance at 820 is the real breakout area and support remains 785.

Russell 2000 Chart

Barring unforeseen events, this week is going to be all about Greece and the country's ability and willingness to accept a lot of near-term pain for the benefit of its economic future. Europe's sovereign debt woes have hung over the market for far too long and finally putting part of the problem to rest would be a positive catalyst. What that translates into in terms of percentage gains for U.S. stocks is a murky issue because the market is closed next Monday and that means volume will be light on Friday. I am happy to sit tight another week, but that is just my two cents.


New Plays

Department Stores

by James Brown

Click here to email James Brown


NEW BULLISH Plays

Macy's Inc. - M - close: 28.15 change: +0.13

Stop Loss: 27.45
Target(s): 29.90, 32.25
Current Gain/Loss: + 0.0%
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Over the next few days the stock market might rally on end of quarter window dressing. Macy's is already up +16% for the quarter and could garner more attention from money managers looking to dress up their portfolio. I consider this somewhat of an aggressive trade since my market bias is still not bullish. Of course stocks could bounce for several days before resuming their downtrend. We want to keep our M positions small to limit our risk. Plus, I'm using a tight stop loss at $27.45 to really reduce our exposure. if M doesn't continue to bounce we will quickly get stopped out. Aggressive traders will want to consider a wider stop loss.

- small positions -

Suggested Position: buy M stock @ current levels

- or -

(short-term)
Buy the July $29 call (M1116G29) current ask $0.48

- or -

(a bit longer-term)
buy the Aug. $30 call (M1120H30) current ask $0.78

Annotated chart:

Entry on June 28 at $xx.xx
Earnings Date 08/10/11 (unconfirmed)
Average Daily Volume: 8.6 million
Listed on June 27, 2011


In Play Updates and Reviews

Stocks Rebound on Light Volume

by James Brown

Click here to email James Brown

Editor's Note:
Investors are already thinking about the upcoming fourth of July market holiday as volume was very light and will probably remain light all week.

There were no significant changes in our play list except for a big move higher in NANO.

-James

Current Portfolio:


BULLISH Play Updates

Cheesecake Factory Inc. - CAKE - close: 31.28 change: +0.37

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:
06/27 update: CAKE continues to bounce and shares added +1.1%. I am not suggesting 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


Ecolab Inc. - ECL - close: 54.55 change: +0.13

Stop Loss: 52.45
Target(s): 57.00, 59.90
Current Gain/Loss: + 2.2%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
06/27 update: ECL recovered from its morning lows but its final gain lagged behind the market's major indices. I am not suggesting new positions at this time.

Current Position: Long ECL stock @ 53.35

- or -

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

06/18 new stop loss @ 52.45
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: 18.31 change: +1.45

Stop Loss: 15.85
Target(s): 19.25, 22.00
Current Gain/Loss: + 8.8%
Time Frame: 6 to 8 weeks or more
New Positions: see below

Comments:
06/27 update: I could not find any specific news to account for NANO's +8.6% rally. Initially I thought it may have been a reflection of a low volume day but volume on NANO was actually above average. The rally did stall near its early April highs at $18.33 so odds are good NANO might see some profit taking tomorrow. I am not suggesting new positions at this time.

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


UnitedHealth Group Inc. - UNH - close: 51.03 change: +0.57

Stop Loss: 48.75
Target(s): 54.75
Current Gain/Loss: - 0.4%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
06/27 update: Traders bought the dip at $50.00 again and UNH added +1.1% on Monday. Readers could use this bounce as a new entry point to launch positions. My weekend comments regarding stop loss placement still apply.

We do not want to hold over the July 19th earnings report.

- small positions -

Suggested Position: Long UNH stock @ $51.25

- or -

Long July $50 call (UNH1116G50) Entry @ $2.07

Entry on June 24 at $51.25
Earnings Date 07/19/11 (confirmed)
Average Daily Volume: 7.9 million
Listed on June 23, 2011


BEARISH Play Updates

Aon Corp. - AON - close: 49.29 change: +0.17

Stop Loss: 52.05
Target(s): 47.00
Current Gain/Loss: + 4.5%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
06/27 update: AON managed a minor bounce that stalled at its simple 10-dma. Nimble traders may want to consider new bearish positions on another failed rally near $50.00 (just consider a tighter stop loss). At the moment our target is $47.00 but we may have to adjust it down the road to stay above the 200-dma.

(small positions only)

Current Position: short AON stock @ 51.61

06/18 adjusted exit target to $47.00
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


Allegheny Technologies - ATI - close: 59.11 change: -0.90

Stop Loss: 62.05
Target(s): 52.75, 50.50
Current Gain/Loss: unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see trigger

Comments:
06/27 update: ATI is still churning sideways inside the $58-62 trading range but the stock underperformed on Monday and is poised to breakdown under its 200-dma again. I am suggesting a trigger to launch positions at $57.40. We do not want to hold over the late July earnings report.

Trigger @ $57.40

Suggested Position: Short ATI stock @ $57.40

- or -

buy the July $55 PUT (ATI1116S55) current ask $1.60

06/22 FYI: ATI did produce an alternative entry point with a failed rally near $62.00. Aggressive traders may want to launch positions now. The newsletter will keep our trigger at $57.40.

Entry on June x at $xx.xx
Earnings Date 07/27/11 (unconfirmed)
Average Daily Volume: 1.9 million
Listed on June 18th, 2011


Eaton Corp. - ETN - close: 48.23 change: +0.04

Stop Loss: 50.75
Target(s): 42.50
Current Gain/Loss: - 1.2%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
06/27 update: ETN managed another bounce off its 10-dma this morning. Shares remain under resistance at $49.00 and at $50.00. I would prefer to see a drop under $47.50 or under $47.00 before considering new bearish positions.

Current Position: short ETN stock @ $47.62

- or -

Long July $47.50 PUT (ETN1116S47.5) Entry @ $1.40

- or -

Long Aug. $45 PUT (ETN1120T45) Entry @ $1.50

Entry on June 23 at $47.62
Earnings Date 07/20/11 (unconfirmed)
Average Daily Volume: 3.8 million
Listed on June 22, 2011


Ford Motor Co. - F - close: 13.46 change: +0.22

Stop Loss: 13.85
Target(s): final target @ 12.55
Current Gain/Loss: + 6.5%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
06/27 update: After Friday's weakness Ford managed to recover on Monday (+1.6%) but shares are still trading near resistance at the $13.50 level. 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: 56.79 change: +0.44

Stop Loss: 59.05
Target(s): 54.00
Current Gain/Loss: + 1.4%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
06/27 update: HON slowly drifted higher and some of the short-term technical indicators are starting to look bullish. The recent consolidation may just be a bear-flag pattern and HON does have overhead resistance in the $58-59 area. I am not suggesting new positions at this time.

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

06/18 new stop @ 59.05

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


Ingersoll-Rand - IR - close: 43.53 change: +0.40

Stop Loss: 45.25
Target(s): 40.25, 37.50
Current Gain/Loss: - 0.7%
Time Frame: 3 to 5 weeks
New Positions: see below

Comments:
06/27 update: There was no follow through on IR's reversal lower from Friday but the intraday bounce today did stall at the $44.00 level. I would still consider new positions now. Our targets are $40.25 and $37.50. More aggressive traders could aim lower but we do not want to hold over the late July earnings report. FYI: The Point & Figure chart for IR is bearish with a $33 target.

NOTE: IR's August options do not have much volume or open interest. Prices could be erratic.

- small positions -

Current Position: short IR stock @ $43.21

- or -

Long AUG. $40 PUT (IR1120T40) Entry @ $0.90

Entry on June 27 at $43.21
Earnings Date 07/25/11 (unconfirmed)
Average Daily Volume: 3.0 million
Listed on June 25, 2011


Kohl's Corp. - KSS - close: 50.22 change: +0.77

Stop Loss: 51.75
Target(s): 47.50, 45.25
Current Gain/Loss: - 0.8%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
06/27 update: KSS recovered a significant chunk of Friday's losses with its +1.5% gain today. The close back above the $50.00 level is technically bullish but volume was pretty light today. I am not suggesting new positions at this time.

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: 34.08 change: +0.12

Stop Loss: 36.05
Target(s): 33.65, and 30.50
Current Gain/Loss: + 3.7%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
06/27 update: MAR is still churning sideways. There is no change from my prior comments. We've been expecting MAR to see an oversold bounce back toward $35.00 or its 50-dma. I'm not suggesting new positions at this time.

Current Position: Short MAR stock @ $35.39

- or -

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

06/21 readers may want to exit July options now
06/18 new stop loss @ 36.05
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: 15.81 change: +0.03

Stop Loss: 16.55
Target(s): 14.00
Current Gain/Loss: unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see trigger

Comments:
06/27 update: SCHW briefly traded to a new relative low of $15.64 and then recovered. I am suggesting a trigger to open bearish positions at $15.60. More conservative traders may want to use a trigger at $15.49 instead. If triggered we'll use a stop loss at $16.55. Our first target is $14.00 but we do not want to hold over the mid July earnings report.

Keep our position size small!

Trigger @ 15.60 (small positions)

Suggested Position: short SCHW stock @ $15.60

- or -

Buy the July $15.00 PUT (SCHW1116S15)

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: 46.35 change: +0.05

Stop Loss: 50.05
Target(s): 47.00, 45.25
Current Gain/Loss: + 9.1%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
06/27 update: Considering the stock market's widespread bounce today the lack of a bounce in STJ is a good sign for the bears. Volume in STJ was actually pretty strong today. I don't see any changes from my prior comments. I'm not suggesting new positions at this time. More conservative traders may want to exit early now.

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

06/25 Adjusted final target to $45.25
06/23 1st target exceeded. Gap down at $46.50 (+8.8%)
06/23 new stop loss @ 50.05
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


Xerox Corp. - XRX - close: 9.91 change: +0.02

Stop Loss: 10.40
Target(s): 9.25, 9.00
Current Gain/Loss: + 0.2%
Time Frame: 4 to 5 weeks
New Positions: see below

Comments:
06/27 update: XRX spent Monday's session churning sideways under the $10.00 level. There is no change from my weekend comments. I would still consider new bearish positions now with a stop at $10.40. We want to keep our position size small. More conservative traders could reduce their risk and use a stop closer to Wednesday's high near $10.17 instead.

I'm setting our targets at $9.25 and $9.00. More conservative traders may want to take profits early at $9.40 instead. We do not want to hold over the late July earnings report.

- open small positions now -

Suggested Position: short XRX stock @ current levels

- or -

Buy the August $9.00 PUT (XRX1120T9) current ask $0.21

Entry on June 27 at $xx.xx
Earnings Date 07/21/11 (unconfirmed)
Average Daily Volume: 11.7 million
Listed on June 25, 2011