Option Investor
Newsletter

Daily Newsletter, Monday, 7/18/2011

Table of Contents

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

Market Wrap

Debt's Broken Record Plays On

by Todd Shriber

Click here to email Todd Shriber
Debt. Debt. Debt. It is all about debt these days, whether it is of the European sovereign varietal or the now seemingly endless debate on Capitol Hill regarding raising the U.S. debt ceiling, an event that if it does not take place before the Aug. 2 deadline could throw global equity markets into turmoil. Some of that turmoil was seen today as all three of the major U.S. indexes flirted with loss of almost 1% and decliners outpaced advancers on the NYSE by a margin of nearly five-to-one.

Stats Table

All of these debt concerns are great for gold bugs. The yellow metal advanced to a new record high in nominal terms above $1600 an ounce today. When adjusting for inflation, gold traded around $2400 an ounce in early 1980. Whether or not that lofty level appears again remains to be seen, but one analyst quoted by the Associated Press says gold is headed to $1800 by the end of next year, a price target that almost seems too conservative at this point.

Gold has been a reliable buy on the dip candidate for more than a year now as every pullback to the 50-day moving average would have represented a decent entry point. With the dollar and euro looking shaky at best and investor demand for gold soaring, the path of least resistance here is easily higher. And hey, miners are finally getting in on the act as well. In the past month, the Market Vectors Junior Gold Miners ETF (GDXJ) and Market Vectors Gold Miners ETF (GDX) are up 16% and 14%, respectively, while the SPDR Gold Shares (GLD) is up about 4%.

(gold #2) Speaking of things that can be mined, shares of coal miner Walter Energy (WLT) surged $7.61, or 6.9% to $118.55 today on volume that was well above double the daily average. Citigroup initiating coverage of Walter with a ''buy'' rating and a $140 price target certainly helped, but that was not the real catalyst behind Walter's pop.

No, that honor belongs to Audley Capital Advisors, one of Walter's largest shareholders, said it has contacted the Alabama-based company's board, urging it to retain an investment bank and evaluate a sale of the company. Using the $5.1 billion offered for Australia's Macarthur Coal by Peabody Energy (BTU) and ArcelorMittal (MT), Audley Capital thinks Walter is worth a whopping $240 a share, more than doubled where the shares closed today.

Walter Energy Chart

In earnings news, shares of Halliburton (HAL), the world's second-largest oilfield services provider, closed fractionally higher on strong volume, as the Texas-based company kicked off what is a busy week of earnings reports for the oil services sector by saying its second-quarter profit jumped 54% to $739 million, or 80 cents per share, from $480 million, or 53 cents per share, a year earlier as revenue soared 35% to $5.9 billion. Excluding one-time items, Halliburton earned 81 cents a share. Analysts were expecting a profit of 74 cents on revenue of $5.71 billion.

Once again, the North American market (Read: Shale) buoyed Halliburton's quarterly results as sales there soared 63% to $3.45 billion. The company is forecasting a small slowdown in North American revenue in the back half of this year, but expects international sales to pickup incrementally. Either way, Halliburton is in a sweet spot right now. Dahlman Rose is forecasting oil and natural gas producers will spend $122 billion on exploration and production this year in the U.S. alone, 22% above last year's level, Bloomberg reported. We will have plenty of commentary and earnings updates on the energy sector at OilSlick.com. Signup for a free trial (HERE).

Halliburton Chart

The after-hours session was chock full of headlines today. Starting with Dow component IBM, Big Blue does what it usually does and that is deliver a set of quarterly results that beat Wall Street estimates. For the second quarter, New York-based IBM said it earned $3.66 billion, or $3 a share, compared with $3.39 billion, or $2.61 a s share, a year earlier. Excluding one-time items, IBM earned $3.09 a share. Analysts were expecting a profit of $3.02. Revenue came in at $26.7 billion, topping the $25.4 billion analysts were forecasting.

IBM slightly raised its 2011 profit outlook, saying it expects to earn at least $13.25 a share, up from previous guidance of $13.15. That is good news, but how much of an impact it will have on the stock is debatable because IBM has set the ambitious goal of producing operating earnings of $20 per share by 2015. In other words, investors expect increased guidance and that is what it is going to take to get to $20 per share in profits.

Still, IBM is something of a tech bellwether and as the highest priced stock in the Dow, any positive sentiment regarding IBM's results and outlook could jolt the Dow higher tomorrow. The shares were up almost 2% in the after-hours session.

IBM Chart

Staying with tech, a fallen and long ago at that, tech star was making news after the market closed. Cisco Systems (CSCO), the largest maker of networking gear, said it is planning to trim 6500 , or 9% of its full-time staff, to save $1 billion in annual costs. Earlier this month, press reports said Cisco was planning job cuts of up to 10,000.

The cuts announced this evening will sting those highest up in Cisco the hardest. According to one estimate, 15% of those with vice president designation or higher will be shown the door at the California-based company.

In connection with this plan, Cisco estimates that it will recognize total pre-tax restructuring charges to its GAAP financial results in an amount not expected to exceed $1.3 billion over several quarters, consisting of severance and other one-time termination benefits, the company said in a statement. The company said $750 million in charges will be recognized in its fiscal fourth quarter.

I am not a Cisco expert, but I doubt this news will do much to galvanize the stock. Pick a time frame, six months, one year, two years or five years, and Cisco shares are down by double digits in each. Dead money is an appropriate descriptor here.

Cisco Chart

Wynn Resorts (WYNN) was also on the move in the after-hours session, jumping more than 2.3% after saying its second-quarter profit more than doubled to $122 million, or 97 cents per share, from $52.4 million, or 42 cents per share, a year earlier. On an adjusted basis, Las Vegas-based Wynn said it earned $1.60 a share compared with 52 cents a year earlier as revenue climbed to $1.37 billion from $1.03 billion. Analysts were expecting a profit of $1.02 on revenue of $1.26 billion.

Vegas revenue rose 23%, but the real story with Wynn, as it probably will be with rival Las Vegas Sands (LVS), is Macau. Wynn's revenue on the Chinese island, the world's largest gambling mecca, surged 37%. Wynn already has two casinos in Macau, the only Chinese territory where gambling is legal, and is planning to open a third there in 2015.

Wynn Chart

Looking at the charts, the S&P 500 closed just below some support at 1307, but did find support in the 1295 area. There is some resistance looming in the 1318-1320 area. The earnings calendar is jam-packed this week, so the catalysts are there, both good and bad. Plenty of financials are reporting this week and I would not expect much out of that group. On the other hand, Apple (AAPL) reports Tuesday after the close and expectations are in place for Apple to do what Apple always does: Crush estimates.

S&P 500 Chart

The Dow violated support around 12,415 and from here, next support is 12,310. There is still some stiff resistance in the 12,750 area. IBM's earnings should help a little bit and there are 13 more Dow constituents left to report earnings this week. The INTC report after the bell Wednesday and CAT before the market opens Friday are the marquee reports from that group.

Dow Chart

The Nasdaq looked vulnerable today, falling through support at 2772. Next support is 2740 with resistance around 2825. We saw the impact GOOG had on the Nasdaq last week, now it is Apple's turn to do the same. The Nasdaq could be in for an up day tomorrow as traders buy Apple ahead of earnings and do not forget that WYNN is a Nasdaq-100 stock.

Nasdaq Chart

On a percentage basis, the Russell 2000 was by far the worst performer of the major indexes today and the close around 816 has the small-cap index within earshot of support at 810. From there, next support is further back around 790. Resistance is 825-830 and then 840.

Russell 2000 Chart

Aside from earnings, the headlines this week will be dominated by the debt ceiling talks in Washington and whatever toxic dish Europe decides to send the world's way. Good news on either front should be taken with a grain of salt because all it will be is trading near-term gain for more pain down the road. Moody's actually suggested eliminating the debt ceiling altogether and that is not a terrible idea when you think about it.

Polls show Americans favor raising the debt ceiling by a slim majority and my guess is they favor this because they see what all the rancor on this issue is doing to their investment portfolios. Raising the debt ceiling in the U.S. is like giving a gold AmEx card to a 21-year-old and telling that kid he or she does not have to pay the bill. The bad behavior that will ensue will not be surprising, but it will still stink.

As for Europe, it is painfully clear the EU and Euro we're ill-fated concepts and that Greece is now bossing Germany around when the scenario should be reversed. The lessons on both sides of the Atlantic are easy to see, but hard to implement: Governments are terrible fiscal stewards, but that is the world today. Here's to hoping that at least the debt ceiling stalemate is broken this week. I would put my money on that happening before any more good news emerges from Europe.


New Plays

Industrial Goods

by James Brown

Click here to email James Brown


NEW BULLISH Plays

Kennametal Inc. - KMT - close: 43.64 change: -0.79

Stop Loss: 42.30
Target(s): 49.00
Current Gain/Loss: unopened
Time Frame: up to its earnings report 7/28
New Positions: Yes, see trigger

Company Description

Why We Like It:
KMT appears to be breaking out from a bull-flag consolidation pattern. The breakout actually happened on Friday and today appears to be simple profit taking on low volume. The stock has broken out of a multi-month trading range back in early July. Shares are within striking distance of a new all-time high.

I do consider this a somewhat aggressive, higher-risk trade. More than one of KMT's technical indicators on the daily chart are at or nearing a bearish signal. Plus, the stock has resistance near the $45 level, which is where KMT failed two weeks ago. I suspect the stock will breakout to new highs if the market cooperates but we do not want to hold this position over the July 28th earnings report.

Please note that we only want to open positions tomorrow if both KMT and the S&P 500 are both positive at the open. I'm setting our target at $49.00 but that's way too high given our time frame. We'll just plan on exiting in front of the earnings report. FYI: The Point & Figure chart for KMT is very bullish with an $80 target.

(You could buy calls but the spreads are too wide!)

- if KMT and S&P 500 are positive at the open -

Suggested Position: buy KMT stock @ current levels

Annotated chart:

Entry on July xx at $ xx.xx
Earnings Date 07/28/11 (confirmed)
Average Daily Volume = 826 thousand
Listed on July 18, 2011


In Play Updates and Reviews

Losing Confidence

by James Brown

Click here to email James Brown

Editor's Note:
Investors seem to be losing confidence as debt worries in Europe continue and the debt ceiling talks in the U.S. have stalled. We had AXP, DPS, KLAC all get stopped out. We had a planned exit for UNH, which reports earnings tomorrow. Our new bullish trade on VNR is not yet open.

-James

Current Portfolio:


BULLISH Play Updates

Cheesecake Factory Inc. - CAKE - close: 32.70 change: +0.01

Stop Loss: 31.90
Target(s): 33.60, 37.00
Current Gain/Loss: + 3.7%
Time Frame: 8 to 10 weeks
New Positions: see below

Comments:
07/18 update: CAKE has gone nowhere two days in a row. We are almost out of time. The plan is to exit positions on July 20th at the closing bell to avoid holding over earnings. More conservative traders may want to exit early. I am not suggesting new positions.

Current Position: Long CAKE stock @ $31.53

07/16 plan on exiting July 20th at the close
07/09 new stop loss @ 31.90
07/07 Target hit @ 33.60. CAKE +6.5%, option @ $0.80 (+6.6%)
07/05 adjusted 1st target to $33.60
07/02 new stop loss @ 30.75
06/30 consider the opportunity cost of staying in CAKE. maybe you should exit early
06/28 New stop loss @ 29.65
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 07/20/11 (confirmed)
Average Daily Volume: 1.0 million
Listed on May 19th, 2011


Ecolab Inc. - ECL - close: 55.01 change: -0.71

Stop Loss: 53.90
Target(s): --.--, 59.90
Current Gain/Loss: + 3.1%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
07/18 update: As expected ECL dipped toward the $55.00 level. The question is will it hold this level or fall toward its 50-dma near $54.25? I am not suggesting new positions at this time. We do not want to hold bullish positions over the late July earnings report.

Current Position: Long ECL stock @ 53.35

07/09 new stop loss @ 53.90
07/08 planned exit. July $55 call @ $1.45 (+141.6%)
07/07 Plan on exiting our July calls tomorrow at the close
07/02 Sell half. ECL @ 56.76 (+6.3%), Option @ $1.75 (+191.6%)
06/30 new stop loss @ 53.45
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


Globe Specialty Metals, Inc. - GSM - close: 24.18 change: -0.08

Stop Loss: 23.40
Target(s): 27.25, 29.50
Current Gain/Loss: - 3.9%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
07/18 update: Profit taking in GSM was pretty mild with a -0.3% decline. The stock is still holding above short-term support at the 10-dma, which is pretty impressive. I remain cautious here. The action late last week could still be a top. Readers may want to wait for a rally past $24.60 before initiating new positions. The plan was to keep our positions small to limit our risk.

Earlier Comments:
We should consider this an aggressive, higher-risk trade so let's keep our position size small to limit risk. We can always add to positions down the road. FYI: The Point & Figure chart for GSM is bullish with a $28.50 target.

- SMALL positions -

Current Position: Long GMS stock @ $25.18

- or -

Long AUG $25 call (GSM1120H25) Entry @ $1.60

Entry on July 14 at $25.18
Earnings Date 09/15/11 (unconfirmed)
Average Daily Volume = 874 thousand
Listed on July 13, 2011


Kaiser Aluminum - KALU - close: 53.80 change: -0.44

Stop Loss: 51.90
Target(s): 59.75
Current Gain/Loss: + 0.4%
Time Frame: 3 to 5 weeks
New Positions: see below

Comments:
07/18 update: Be careful here. KALU's early morning rally past $55.00 quickly failed. Shares closed down -0.8% and are testing short-term support at its rising 20-dma again. I remain longer-term bullish on KALU but readers may want to wait for some strength in the U.S. indices before initiating new positions here. Keep in mind that we do not want to hold over the July 27th earnings report.

Earlier Comments:
Our target is the $59.75 mark since the $60 level looks like resistance. Investors could certainly aim higher. KALU has a high amount of short interest and the stock could experience a short squeeze. FYI: Investors should note that the most recent data listed short interest at 9.9% of the very small 18.5 million share float.

- Small Positions -

Current Position: Long KALU @ $53.56

- or -

Long AUG $55 call (KALU1120H55) Entry @ $1.30

Entry on July 11 at $53.56
Earnings Date 08/01/11 (unconfirmed)
Average Daily Volume = 183 thousand
Listed on July 9, 2011


Macy's Inc. - M - close: 29.69 change: -0.29

Stop Loss: 28.90
Target(s): 29.90, 32.25
Current Gain/Loss: + 4.9%
2nd Position Gain/Loss: - 0.5% Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
07/18 update: Macy's gave up nearly one percent today. I don't see a lot of changes from my weekend comments. Shares should still have some short-term support near $29.00 or the 50-dma. At this point a dip to the 50-dma would stop us out. I am not suggesting new positions at this time. Our final target is $32.25 but we might consider adjusting this target higher.

Earlier Comments:
Our plan was to keep positions small to limit our risk.

- small positions -

Current Position: Long M stock @ $28.30

- or -

Long Aug. $30 call (M1120H30) Entry @ $0.85

- 2nd Position, entry 7/11/11 -

suggested position: Long M stock @ $29.86

Long Aug. $32 call (M1120H32) Entry @ $0.63

07/16 new stop loss @ 28.90
07/09 new stop loss @ 28.49
07/09 Add 2nd position, buy stock/calls now
07/08 Planned exit. July $29 call @ $1.50 (+167.8%)
07/07 plan on exiting July calls tomorrow at the close
07/02 new stop loss @ 27.90
07/01 1st Target Hit @ 29.90 (+5.6%), options @ +107.1% (July) & +52.9% (Aug)

Entry on June 28 at $28.30
Earnings Date 08/10/11 (unconfirmed)
Average Daily Volume: 8.6 million
Listed on June 27, 2011


Vanguard Natural Resources - VNR - cls: 30.69 chg: +1.22

Stop Loss: 28.99
Target(s): 33.25
Current Gain/Loss: + 0.0%
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
07/18 update: Our new play on VNR is unopened. The stock opened higher at $30.84 but the S&P 500 opened lower. We only wanted to launch positions if both were higher. Personally I see the intraday dip to $30.00 and afternoon bounce as a new entry point. Readers could launch positions now. However, I want to use the qualifying statement again. Both VNR and the S&P 500 need to open in positive territory as our green light to buy the stock or calls. Cautious traders might want to consider an alternative stop in the $29.30-29.40 area instead. Our target is $33.25.

Suggested Position: buy VNR stock @ current levels

- or -

buy the AUG $30 call (VNR1120H30)

07/18 The requirements to launch positions was not met. Try again. Both VNR and the S&P 500 need to open higher tomorrow.

Entry on July 18 at $ xx.xx
Earnings Date 08/04/11 (unconfirmed)
Average Daily Volume = 193 thousand
Listed on July 16, 2011


Western Refining Inc. - WNR - close: 20.78 change: -0.35

Stop Loss: 18.45
Target(s): 24.00, 27.50
Current Gain/Loss: + 6.5%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
07/18 update: WNR suffered some profit taking on Monday with a -1.6% decline. There is no change from my prior comments. I would not chase it here. Traders could look for a dip near $20.00 or the 10-dma as a potential entry point but keep your position size small.

FYI: The Point & Figure chart for WNR is bullish with a $28.50 target. Plus, the most recent data listed short interest at 38% of the 54.2 million-share float. That's plenty of fuel for a short squeeze.

Current Position: Long WNR stock @ 19.50

- or -

Long AUG. $22 call (WNR1120H22) Entry @ $0.65

Entry on July 11 at $19.50
Earnings Date 08/04/11 (unconfirmed)
Average Daily Volume = 4.0 million
Listed on July 9, 2011


BEARISH Play Updates

OptionsXpress Holdings - OXPS - close: 15.13 change: -0.08

Stop Loss: 16.05
Target(s): 14.05, 13.65
Current Gain/Loss: + 0.7%
Time Frame: about 2 weeks
New Positions: see below

Comments:
07/18 update: OXPS opened at $15.24 and sank to $14.65 intraday. The big intraday bounce has me worried. Readers may want to wait for a failed rally near $15.50 or even $16.00 before initiating new positions now.

Earlier Comments:
Our first target is $14.05 as the $14.00 level is likely support.

Current Position: short OXPS stock @ $15.24

- or -

Long AUG $15 PUT (OXPS1120T15) Entry @ $0.45

Entry on July 18 at $15.24
Earnings Date 07/27/11 (unconfirmed)
Average Daily Volume = 696 thousand
Listed on July 16, 2011


VanceInfo Technologies - VIT - close: 17.25 change: -0.83

Stop Loss: 20.15
Target(s): 15.15, 12.75
Current Gain/Loss: + 4.4%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
07/18 update: Our new trade on VIT is off to a good start. Shares opened at $18.06 and closed at new 52-week lows with a -4.5% decline. I want to remind readers that this is a higher-risk trade. VIT remains very oversold and due for a bounce. Cautious traders could wait for the next lower high before initiating positions. The most recent data listed short interest at more than 30% of the very small 23.6 million-share float. There is definitely reason to worry over a potential short squeeze, which explains the sharp oversold bounces. Thus readers may want to buy the puts to limit your risk instead of shorting the stock. FYI: The Point & Figure chart for VIT is bearish with a $6.00 target.

Current Position: short VIT stock @ $18.06

- or -

Long AUG $17.50 PUT (VIT1120T17.5) Entry @ $2.15

Entry on July 18 at $18.06
Earnings Date 08/15/11 (unconfirmed)
Average Daily Volume = 1.0 million
Listed on July 16, 2011


CLOSED BULLISH PLAYS

American Express Co. - AXP - close: 51.33 change: -0.48

Stop Loss: 50.95
Target(s): 54.95
Current Gain/Loss: - 1.0%
Time Frame: exit on July 20th at the close
New Positions: see below

Comments:
07/18 update: Financials continued to lead the market lower as investors worried about U.S. banks exposure to Europe. That helped AXP gap open lower at $51.50 and then dip to $50.54 before bouncing. Unfortunately, we had a stop loss at $50.95. It does look like AXP is ready to bounce from current levels but we're out of time. AXP reports earnings on July 20th.

- open SMALL positions now -

Closed Position: Long AXP stock @ $51.50, exit $50.95 (-1.0%)

- or -

Aug. $52.50 call (AXP1120H52.5) Entry @ $1.11, exit 0.95 (-14.4%)

07/18 Entered and stopped on the same move lower. Stopped out @ 50.95
07/16 new entry point strategy. buy AXP now. small positions
07/16 new stop loss @ 50.95
07/13 AXP is underperforming. New trigger @ 51.00, stop @ 49.85
07/12 new trigger @ 51.75
07/11 new stop loss @ 50.90

chart:

Entry on July 18 at $51.50
Earnings Date 07/20/11 (confirmed)
Average Daily Volume: 7.0 million
Listed on July 2, 2011


Dr. Pepper Snapple - DPS - close: 39.77 change: -1.06

Stop Loss: 39.90
Target(s): 46.00
Current Gain/Loss: - 4.3%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
07/18 update: Ouch! What happened to DPS? I couldn't find any specific news on the company today. KO lost -0.6%. PEP lost -0.7%. Yet DPS plunged -2.59%. Our stop loss was hit at $39.90.

closed Position: Long DPS stock @ $41.71, exit 39.90 (-4.3%)

- or -

Aug. $45 call (DPS1120H45) Entry @ $0.30, exit 0.05 (-83.3%)

07/18 stopped out @ 39.90
07/16 DPS is underperforming. Cautious traders may want to exit

chart:

Entry on July 11 at $41.71
Earnings Date 07/28/11 (unconfirmed)
Average Daily Volume: 1.8 million
Listed on June 30, 2011


KLA-Tencor - KLAC - close: 40.53 change: -0.42

Stop Loss: 39.95
Target(s): 45.75
Current Gain/Loss: - 5.9%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
07/18 update: The SOX semiconductor index sank to another new low for the year. KLAC gapped open lower at $40.64 and then dipped to $39.92 before paring its losses. Our stop was hit at $39.95.

closed Position: Long KLAC @ $42.49, exit 39.95 (-5.9%)

- or -

AUG $45 call (KLAC1120H45) Entry @ $1.20, exit 0.30 (-75%)

07/18 stopped out @ 39.95
07/14 Traders may want to exit early here.

chart:

Entry on July 11 at $42.49
Earnings Date 07/27/11 (confirmed)
Average Daily Volume = 2.4 million
Listed on July 9, 2011


UnitedHealth Group Inc. - UNH - close: 51.95 change: -0.02

Stop Loss: 49.85
Target(s): 54.75
Current Gain/Loss: + 1.3%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
07/18 update: We have run out of time with our UNH trade. The company reports earnings tomorrow morning. It was our plan to exit on Monday at the closing bell. Shares did see an intraday dip to $51.00 and managed to bounce back to almost unchanged.

- small positions -

Closed Position: Long UNH stock @ $51.25, exit 51.95 (+1.3%)

07/18 planned exit
07/16 Prepare to exit on July 18th at the close.
07/15 exit July $50 call (bid $1.90 -8.2%)
07/16 new stop loss @ 50.40
07/02 new stop loss @ 49.85

chart:

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