Option Investor
Newsletter

Daily Newsletter, Monday, 7/25/2011

Table of Contents

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

Market Wrap

We've Been Down This Road Before

by Todd Shriber

Click here to email Todd Shriber
Another Monday at the office for U.S. stocks as investors departed riskier assets in favor of gold and other safe havens such as the Swiss franc as the market once again fretted over the debt ceiling stalemate on Capitol Hill. Monday's action was predictable to say the least. If you own a smart phone and get those real-time alerts from CNBC, you got at least three text messages over the weekend (I stopped counting after the third) regarding the debt ceiling talks, and with little progress being made on that front, it was obvious Monday would be a down day.

Stats Table

Again, the deadline is August 2nd for a deal to emerge on the debt ceiling and counting that day, there are six trading days left for a deal to surface. Until that happens, Wall Street will be held hostage by Capitol Hill. I will not get in the business of critiquing and endorsing the various plans being floated on both sides of the aisle because I do not want to offend anyone's personal politics, but for those that opt to see the forest through the trees, this debt ceiling imbroglio has highlighted a fact that few from either party want to address.

That is there are really only two ways to salvage Uncle Sam's ugly balance sheet: Raise taxes or dramatically cut spending on Medicare, Medicaid and Social Security. The politician that suggests either will be seeking new employment opportunities after November 2012.

And if debt is being discussed, our friends on the other side of the Atlantic always have something to say about the matter. European policymakers reached another last-minute deal to avoid an outright Greek default and (hopefully) stave off contagion. That did not stop Moody's Investors Service from downgrading Greek sovereign by several levels to Caa1 from Ca, a move that all but guarantees banks and other private sector owners of Greek sovereigns will lose money on those investments.

As myriad press reports noted, this is basically pre-default status. In terms of other beleaguered peripherals, Moody’s noted that while they would be buoyed by the possibility of borrowing at substantially lower rates, and by positive market reaction, the precedent of restructurings casts a shadow over their outlooks, according to Forbes.

As the chart below indicates, the decline in the quality of Greek debt has been nothing short of dramatic.

Greek Credit Ratings

Back here in the U.S., there was some good news from a familiar source that being Apple (AAPL). Shares of the iPad and iPhone maker touched an all-time high of exactly $400 before falling back a bit, the stock closed higher by 1.3%. That is no small feat when considering the broader market and the Nasdaq were in the red and Bloomberg News reported, citing a note from Strategy Analytics, that Samsung may have sold more smartphones than Apple in the second quarter.

The research firm estimates South Korea-based Samsung sold between 18 million and 21 million smartphones in the quarter compared with 20.3 million iPhones for Apple. No matter. Apple's run is nothing short of jaw-dropping. The day before the 9/11 terrorist attacks, Apple was trading around $8, yet even with a dip below $80 during the financial crisis the shares have gained about 4,050% since Sept. 10, 2011. And that does not include dividends or splits because Apple engages in neither activity.

Apple Chart

In earnings news, consumer products maker Kimberly-Clark (KMB) said its second-quarter profit slid 18% to $408 million, or $1.03 per share, from $498 million, or $1.20 per share, a year earlier. Revenue climbed 8% to $5.26 billion. On an adjusted basis, Texas-based Kimberly-Clark earned $1.18 a share. Analysts were expecting $1.14 a share on revenue of $5.11 billion.

Kimberly-Clark reiterated full-year profit guidance of $4.80-$5.05 a share, but said it expects revenue growth of 5%-7% compared with a previous forecast of revenue growth of 4%-6%. Analysts expect a full-year profit of $4.85 a share on revenue of $20.73 billion. The stock fell more than 2% on volume that was more than 50% above the daily average, but Kimberly-Clark deserves this much credit: Its stock has sharply outperformed rival Procter & Gamble (PG) this year.

Kimberly-Clark Chart

There were several marquee names reporting earnings in the after-hours session and I will start with the better of the two reports that I am going to cover. Anadarko Petroleum, the second-largest U.S. independent oil and natural gas producer, said its second-quarter profit jumped to $544 million, or $1.08 a share, reversing a loss of $40 million or 8 cents a share, in the year-earlier period. Revenue rose 46% to $3.5 billion.

''We expect the next six to nine months to be the most active period of deepwater exploration and appraisal drilling in our company's history,'' said CEO Jim Hackett in a statement. ''Our exploration program is designed to deliver upon our goal of discovering more than 500 million BOE of net risked resources this year. We are continuing to advance our deep inventory of high-impact prospects, and the new rig agreements reinforce our long-term commitment to the safety and success of our global exploration program.''

Anadarko shares were slightly higher in the after-hours session, but there was no news on any settlement talks with BP (BP) regarding Anadarko's 25% non-operating interest in the Macondo well project. Energy names dominate the earnings calendar this week, making now a great time to register for a free trial of the OilSlick daily newsletter (HERE).

Anadarko Chart

In the ''red alert'' section of today's market wrap we have Netflix (NFLX), a stock that has put in Apple-esque run of its own over the past year or more, but unlike Apple, Netflix has its fair share of detractors that have been taken to the woodshed by shorting the stock. Today might be the day of reckoning for Netflix bulls and offer up some vindication for those that have dared get in the way of this juggernaut. Or it could be a buying opportunity.

I will let you draw your own conclusions, but this much is clear: Netflix posted some impressive second-quarter results, but no one is going to care about those because the online and DVD-by-mail provider committed the ultimate sin for richly valued tech stocks: It guided lower on third-quarter profits and revenue, citing its own recent voluntary price hikes as cutting into subscriber growth.

California-based Netflix projected a third-quarter profit of 72 cents to $1.07 a share on revenue of $828.5 million, well below the $1.11 on revenue of $842.9 million Wall Street was forecasting. Trading at nearly 81 times trailing earnings and almost 43 times forward earnings with a price to book value of almost 54 makes Netflix extremely vulnerable to a beating on any disappointing news. After closing at $281.53, the stock was down to $255 in the after-hours session.

Netflix Chart

Looking at the charts, the S&P 500 pulled back from resistance at 1345, but support at 1325 did not come into play either. There are no shortage of earnings catalysts this week, particularly from the energy patch, but the reality is the debt talks will probably the drag or the spark the market deals with this week. In a best of both worlds scenario, solid earnings and outlooks combined with the debt ceiling being extended, the S&P 500 could make a run to 1365, though asking for both may be asking for too much.

S&P 500 Chart

With today's loss, the Dow did fall below some support at 12,600, but a firmer floor is found at 12,400. Resistance remains at 12,700 and 12,800. There is not a large amount of Dow members reporting earnings this week, but the ones that are are of the high price-tag variety (MMM, XOM, CVX). Upside from guidance from MMM and increased production outlooks from XOM and CVX would be headlines that could help the Dow navigate debt-talk waters.

Dow Chart

The Netflix report could weigh on the Nasdaq tomorrow and the Index has been finding stiff resistance at 2860. Support is still a ways off at 2800 and then again around 2765. AMZN reports after the close Tuesday and since that is a much larger company than Netflix, positive guidance could undo any damage from Netflix by Wednesday. Or Apple could just keep chugging the long, motivating new buyers to get involved with tech.

Nasdaq Chart

The Russell 2000 is kind of in no man's land right now, resting in between support at the 50-day moving average at 818 and below resistance at 855 (the 2007 high) and more resistance above 865. The biggest issue facing the Russell 2000 this week is not earnings, but how much money managers decide to scale back risk as these debt talks wear on.

Russell 2000 Chart

While I remain skeptical of the ability of most politicians to understand even basic tenants of how financial markets function, a deal on the debt ceiling will likely materialize before the Aug. 2nd deadline. The folks on Capitol Hill may not be wizards of Wall Street, but they sure know how to read a calendar. Before we know it, it will be 2012 and no politician wants to head into an election with the burden of trying to defend a weak stock market. That will be the primary impetus behind an agreement on the debt ceiling.


New Plays

No Deal

by James Brown

Click here to email James Brown

Editor's Note:

The stock market did not provide us many clues today. Monday's session looks like a slightly exaggerated version of Friday. Market participants are growing concerned over the debt ceiling issue and lawmakers' inability to get a deal done. These worries prompted the gap down and spike lower this morning. The same worries probably fueled the afternoon weakness. Odds seem to be rising that we might see the S&P 500 retest the 1320 level. I'd rather look for new positions there.

In the meantime, these stocks are on my radar screen: KSU, FAST, WEN, BRCM, D, KLAC,

No new trades tonight.

- James


In Play Updates and Reviews

Investors Are Nervous

by James Brown

Click here to email James Brown

Editor's Note:
The market is struggling because investors are nervous about the debt ceiling deadline and no signs of a deal yet.

-James

Current Portfolio:


BULLISH Play Updates

CROCS Inc. - CROX - close: 28.26 change: +0.02

Stop Loss: 26.45
Target(s): 29.90, 31.75
Current Gain/Loss: + 3.4%
Time Frame: up to its earnings report
New Positions: see below

Comments:
07/25 update: CROX did not see the same morning sell-off most of the market did. Shares instead spiked to a new relative high but faded after hitting the $29 level. The move almost looks like a short-term top. We're almost out of time so readers may want to exit early now. We plan to exit on July 27th at the close to avoid holding over earnings that evening.

Earlier Comments:
There is a chance CROX could see a lot more short covering with shares nearing new multi-year highs. The most recent data listed short interest at 12.6% of the 83.9 million-share float. FYI: The Point & Figure chart for CROX is bullish with a $52.50 target.

Suggested Position: Long CROX stock @ $27.31

- or -

Long AUG $28 call (CROX1120H28) Entry @ $1.15

07/23 new stop loss @ 26.45.
07/23 Prepare to exit prior to earnings on July 27th.

Entry on July 20 at $27.31
Earnings Date 07/27/11 (confirmed)
Average Daily Volume = 2.1 million
Listed on July 19, 2011


China Sunergy Co. Ltd. - CSUN - close: 1.62 change: -0.02

Stop Loss: 1.48
Target(s): 2.00, 2.25
Current Gain/Loss: - 2.9%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
07/25 update: CSUN opened at $1.67 and then surged to $1.78 for a +5.9% gain before giving it all back and closing in negative territory. The move looks like a short-term top. Readers may want to wait for a dip closer to $1.55-1.50 or wait for a bounce before initiating new positions.

Earlier Comments:
We should consider this an aggressive, higher-risk trade given the trend lower so trade small. Our first target is $2.00. I would expect some resistance at the 50-dma. Our final target is $2.25 but we do not want to hold over the earnings report in mid August.

Current Position: Long CSUN stock @ $1.67

Entry on July 25 at $ 1.67
Earnings Date 08/15/11 (unconfirmed)
Average Daily Volume = 325 thousand
Listed on July 23, 2011


Globe Specialty Metals, Inc. - GSM - close: 24.83 change: -0.02

Stop Loss: 23.80
Target(s): 27.25, 29.50
Current Gain/Loss: - 1.3%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
07/25 update: GSM was showing some intraday strength midday. Unfortunately the stock could not hold its rally above resistance at $25.00 and shares closed back in its previous trading range. The high today was $25.15. Traders could wait for a new rise past $25.15 or a close over $25.00 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

07/20 New stop loss @ 23.80

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: 55.83 change: -0.17

Stop Loss: 53.75
Target(s): 59.75
Current Gain/Loss: + 4.2%
Time Frame: 3 to 5 weeks
New Positions: see below

Comments:
07/25 update: Monday was a very light volume day for KALU. Shares continued to consolidate sideways. There is no change from my prior comments. Readers may want to exit early now and lock in a gain. Currently the newsletter plans to exit on July 27th at the closing bell to avoid holding over earnings that evening.

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

07/23 new stop loss @ 53.75
07/23 Prepare to exit on July 27 at the close
07/20 New stop loss @ 52.49

Entry on July 11 at $53.56
Earnings Date 07/27/11 (confirmed)
Average Daily Volume = 183 thousand
Listed on July 9, 2011


Kennametal Inc. - KMT - close: 44.25 change: -0.15

Stop Loss: 43.15
Target(s): 49.00
Current Gain/Loss: + 0.2%
Time Frame: up to its earnings report 7/28
New Positions: see below

Comments:
07/25 update: KMT saw a dip under short-term support at $44.00 this morning. Shares recovered and spent the rest of the day churning sideways. Cautious traders may want to exit immediately. Earnings are coming up soon. Right now the plan is to exit on July 27th at the closing bell to avoid earnings the next morning.

Earlier Comments:
I do consider this a somewhat aggressive, higher-risk trade.

Current Position: Long KMT stock @ $44.13

07/23 new stop loss @ 43.15
07/23 prepare to exit on July 27th at the close

Entry on July 19 at $44.13
Earnings Date 07/28/11 (confirmed)
Average Daily Volume = 826 thousand
Listed on July 18, 2011


Macy's Inc. - M - close: 29.94 change: -0.56

Stop Loss: 29.25
Target(s): 29.90, 32.25
Current Gain/Loss: + 5.8%
2nd Position Gain/Loss: + 0.2% Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
07/25 update: There was no follow through on Macy's Friday rally. Instead the widespread market weakness this morning had shares of M gapping open lower. The stock is back in the middle of its trading range. I am not suggesting new positions at current levels.

Earlier Comments:
Our plan was to keep positions small to limit our risk. Our final target is $32.25 but we might consider adjusting this target higher.

- 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

07/23 new stop loss @ 29.25
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


Sandridge Energy, Inc. - SD - close: 11.92 change: -0.19

Stop Loss: 11.20
Target(s): 13.20, 13.90
Current Gain/Loss: + 1.1%
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
07/25 update: Good news! I was hoping for a dip in SD and we got it. Shares opened at $11.78 and the stock saw several dips toward the $11.60 level this afternoon. I would still consider new positions now.

Earlier Comments:
SD could see a short squeeze. The most recent data listed short interest at almost 10% of SD's 346 million-share float. We do not want to hold over the August 4th earnings report so we don't have much time. FYI: The Point & Figure chart for SD is bullish with a long-term target at $31.

Current Position: Long SD stock @ $11.78

Entry on July 25 at $11.78
Earnings Date 08/04/11 (unconfirmed)
Average Daily Volume = 12.1 million
Listed on July 23, 2011


Vanguard Natural Resources - VNR - cls: 30.45 chg: -0.16

Stop Loss: 28.99
Target(s): 33.25
Current Gain/Loss: - 0.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
07/25 update: There is no change from my prior comments on VNR. The stock is still churning sideways in the $30-31 trading range. More conservative traders may want to use a higher stop loss!

Nimble traders could try and buy dips near $30.00. If you prefer to see more strength then wait for a breakout past $31.00.

Current Position: Long VNR stock @ $30.61

- or -

Long AUG $30 call (VNR1120H30) Entry @ $1.20

07/19 Play is opened @ 30.61
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 19 at $30.61
Earnings Date 08/04/11 (unconfirmed)
Average Daily Volume = 193 thousand
Listed on July 16, 2011


Western Refining Inc. - WNR - close: 21.44 change: +0.64

Stop Loss: 19.75
Target(s): 22.00, 24.50
Current Gain/Loss: + 9.9%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
07/25 update: WNR is outperforming its peers and the market again. The stock quickly saw a bounce off its morning lows near the 10-dma. Shares managed to tag a new 52-week high and closed up +3.0% on the session. Cautious traders may just want to take profits now.

Earlier Comments:
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

07/21 new stop loss @ 19.75
07/20 expect a dip toward the $20.35 area.
07/19 New stop loss @ 18.90. New targets @ 22.00 and $24.50

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: 15.49 change: -0.15

Stop Loss: 16.05
Target(s): 14.05, 13.65
Current Gain/Loss: - 1.6%
Time Frame: about 2 weeks
New Positions: see below

Comments:
07/25 update: OXPS did a pretty good job of playing dead today. Shares gapped down at the open and then just laid there. Shares traded in a very narrow range. Keep in mind that we are planning to exit on Tuesday (tomorrow) at the closing bell to avoid holding over earnings!

Current Position: short OXPS stock @ $15.24

- or -

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

07/23 Prepare to exit on Tuesday at the close
07/21 OXPS is testing resistance at $16.00.
07/20 Failure at the 200-dma is a new bearish entry point.

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