Option Investor
Newsletter

Daily Newsletter, Wednesday, 8/17/2011

Table of Contents

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

Market Wrap

Dell, Tech Drag Most Stocks Lower

by Todd Shriber

Click here to email Todd Shriber
At least Wednesday was a pretty benign day in terms of domestic and international headline risk. Dell's (DELL) gloomy after-hours report on Tuesday carried over to today, making the Nasdaq the worst performer of the three major indexes. The S&P 500 and the Dow Jones Industrial Average were able to scrape together modest gains.

Stats Table

Gold continued its bullish ways as COMEX-traded gold for December delivery closed at a record $1793.80 an ounce. That is a record closing price in nominal terms and below the intraday record of $1817.60 set on August 11. The yellow metal got a boost from an unusual source. Then again, for those of us that actively follow the oil industry and the geopolitical issues that affect that business, gold's Wednesday run may not be that surprising at all.

Venezuelan President Hugo Chavez has decided to nationalize the South American country's gold industry, something he did several years ago with the OPEC member's oil business. This really does not mean much in terms of lost or gained supply, but Venezuelan gold will be withdrawn from the European banks where it is currently stored to come home to vaults run by Venezuela's central bank.

Venezuela's official gold reserves, of 365.8 metric tons as of June, make it the 15th largest gold holder in the world according to the World Gold Council, the Wall Street Journal reported. I admit I might be jumping ahead here, but it might be worth keeping an eye out for a similar move by Peru, which is major gold and silver producer. Peru's new president is something of a Chavez disciple and a known leftist, so nationalization of any business there can never be ruled out. Nevertheless, it still looks like gold is headed higher.

Gold Chart

In stock-specific news, I will not rehash all of the carnage surrounding Dell because Jim went over those numbers last night, but it is worth having a look at Dow component Hewlett-Packard (HPQ) because the world's largest personal computer maker reports earnings tomorrow. With the disappointing outlook provided by Dell, investors chose not to wait around for HP's numbers and opted to bail on the stock today, sending the stock lower by nearly 4% on strong than average volume.

Dell was only partially to blame for HP's day in the red. BMO Capital Markets analyst Keith Bachman cut his rating on HP to ''market perform'' from ''outperform'' and slashed his price target on the stock to $36 from $43, citing ''deteriorating financial performance.'' The new price target still implies significant upside from where HP currently trades, but the reality is this stock has been almost untouchable from the long side since the 2010 departure of former CEO Mark Hurd.

Shares of HP have tumbled 25% since Leo Apotheker replaced Hurd. Bachman also said it might be worthwhile for HP to consider selling its PC business, but acknowledged there would be a limited field of buyers and that HP might struggle to monetize the asset appropriately, MarketWatch reported.

Hewlett-Packard Chart

In earnings news, Deere (DE), the largest maker of agriculture equipment, said its fiscal third-quarter profit rose 15% to $712.3 million, or $1.69 per share, from $617 million, or $1.44 per share, a year earlier. Revenue jumped 22% to $8.4 billion. Analysts were expecting a profit of $1.67 a share on revenue of $7.52 billion.

Beating expectations was not enough to appease investors as Deere shares fell 1.2% on volume that was roughly double the daily average. Deere's report amounts to a mixed bag when considering the strength in the international agriculture business. On the bright side, the company said earlier this year that natural disasters that struck Japan could weigh on sales to the tune of $300 million. That number is looking more like $70 million. On the other hand, Deere is spending more on raw materials and research and development for new products.

The company remains bullish on the global ag market, though it did lower its estimate for Brazilian farm income to $20.2 billion from $26.1 billion, but that is still above the 2010 level of $15.4 billion, the AP reported. Overall, Deere forecast a 2011 profit of $6.40 a share on revenue of $29.47 billion. Analysts were expecting revenue of $29.05 billion.

Deere Chart

Keeping with the commodities theme, shares of apparel retailer Abercrombie & Fitch (ANF) plunged almost 9% on volume that was more than triple the daily average after the company said higher commodities costs will be an issue in the back half of this year. Obviously, that means cotton prices, which I find to be an interesting situation.

Take a look at the chart of the iPath Cotton ETN (BAL). It is trading around its lowest levels of 2011 and has been in tailspin for months. So while cotton prices are high by historical levels, it can be argued that a company like Abercrombie should be catching a break on cotton prices compared to earlier this year and late 2010, not complaining about cotton prices.

Any hint of a double-dip recession would bring the bears out in droves for Abercrombie for the simple reason that this particular company has a deeply flawed business model. The flaw is that the company wins sales from parents of teens and college kids because these parents often choose to indulge their kids with the Abercrombie and ignore the fact that shirts, khakis, etc. of comparable quality can be had at any number of retailers for lower prices.

Put another way, if you are a parent looking to save money on clothing for your kids, Abercrombie is probably one of the last places you want to shop. And to add my anti-Abercrombie musings, the company is essentially bribing the cast of ''Jersey Shore'' to stop wearing Abercrombie apparel. That is odd when considering the target age group for Abercrombie is basically the same as the target age group for the MTV show.

Abercrombie & Fitch Chart

Looking at the charts, make that three days in a row that the S&P 500 has stalled at 1200. Today, the index traded as high as 1208, but could not keep those gains and closed below 1200 once again. A close above 1205 would be inviting for buyers, but that is also the neighborhood where the sellers appear most viscous. On the downside, support appears firm at 1175, but if 1205 is cleared, a run back to 1250 appears likely.

S&P 500 Chart

With a gain of just four points on Wednesday, the Dow remains laboring in its 11,200-11,500 range, though on an intraday basis, the index was able to trade slightly above the 11,500 mark. The sad story that is Hewlett-Packard is known at this point and I would not expect that earnings report to have a material impact on the Dow one way or the other unless it is far more negative than expected.

Dow Chart

The Nasdaq honored support at 2500 today, no small feat given Dell's woes. Google continues to look weak, but Apple offsets that situation with strength of its own. Same song as yesterday: Short below 2500, long above 2565.

Nasdaq Chart

Perhaps the best thing that can be said about the Russell 2000 is that it remains above 700 and that old resistance could be turning into new support. On the other hand, the 715-720 range has become a hurdle that is hard to overcome for the small-cap index recently. If the Russell gets through there, it could run back to 775. If support at 700 fails, 650 is the next stopping point.

Russell 2000 Chart

There is a distinct lack of direction in this market and to go along with that, there is not much in the way of scheduled catalysts. As I mentioned on Monday, another week of jobless claims below 400,000 would provide an excuse for buyers to get going on Thursday and that would result in some short covering as well. Here's to hoping no negative surprises emerge from Europe.


New Plays

Still Oversold

by James Brown

Click here to email James Brown


NEW BULLISH Plays

PACCAR Inc. - PCAR - close: 37.26 change: -0.42

Stop Loss: 35.85
Target(s): 39.90, 43.00
Current Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
In late July shares of PCAR saw a sharp gap down as investors reacted to a 3-cent earnings miss even though revenues beat expectations. The earnings report sparked a handful of analyst upgrades. Unfortunately the market soon began its massive sell-off. Shares of PCAR were pummeled lower. From the July 25th close at $50.40 to the intraday low on August 9th at $34.48 shares of PCAR experienced a -31.5% correction.

The $35 region was support dating back to 2009 and PCAR managed a rebound. Shares continue to look very oversold. The stock has essentially moved too far too fast and it's time for a correction higher. I am suggesting small bullish positions in PCAR now but only if the stock and the S&P500 both open positive on Thursday morning. An alternative entry point would be to wait for another dip near the $35.00 level instead.

If we are triggered tomorrow I'm suggesting a stop loss at $35.85. Our first target is $39.90. Our second target is $43.00.

open small bullish positions if PCAR and S&P500 open positive tomorrow.

Suggested Position: buy PCAR stock @ open

- or -

buy the SEP $40 call (PCAR1117I40) current ask $0.75

Annotated chart:

Entry on August xx at $ xx.xx
Earnings Date 10/25/11 (unconfirmed)
Average Daily Volume = 5.6 million
Listed on August 17, 2011



In Play Updates and Reviews

A Mixed Bag

by James Brown

Click here to email James Brown

Editor's Note:
Our Chinese stocks are underperforming with CYOU and GA down today. CBOU was stopped out (as was CYOU). Yet APOL and AVP were both opened on the morning strength.

-James

Current Portfolio:


BULLISH Play Updates

Alexion Pharmaceuticals - ALXN - close: 51.74 change: -0.71

Stop Loss: 47.90
Target(s): 54.00, 57.00
Current Gain/Loss: + 2.1%
Time Frame: 2 to 5 weeks
New Positions: see below

Comments:
08/17 update: ALXN underperformed today with a second day of profit taking. I've been suggesting readers wait for a dip into the $51-50 zone before initiating new positions. The low today was $50.84. If the market dips again tomorrow then ALXN might test the $50 level and its 50-dma.

Our plan was to keep our position size small to limit our risk.

Current Position: ALXN stock @ $50.67

- or -

Long SEP $55 call (ALXN1117I55) Entry $1.40

08/15 new stop loss @ 47.90
08/12 trade is open.
08/11 open positions if ALXN and S&P500 are positive Friday morning
08/09 new entry point strategy, new stop loss, new targets.

Entry on August 12 at $50.67
Earnings Date 10/20/11 (unconfirmed)
Average Daily Volume = 1.7 million
Listed on August 8, 2011


Apollo Group Inc. - APOL - close: 46.78 change: -0.21

Stop Loss: 44.70
Target(s): 53.00
Current Gain/Loss: - 0.47%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
08/17 update: Our new trade on APOL was opened this morning by the smallest of margins. We wanted to buy the stock if the S&P500 and APOL both opened positive today. APOL opened up by one cent at $47.00, which was enough to trigger our trade. Shares failed near the $48.00 level for the second day in a row, which is a little worrisome. Readers may want to wait and watch to see if APOL offers an entry point near $46 or even the $45 level soon. Please note that I am raising our stop loss to $44.70.

Suggested Position: Long APOL stock @ $47.00

- or -

Long SEP $50 call (APOL1117I50) Entry $1.32

08/17 new stop loss @ 44.70

Entry on August 17 at $47.00
Earnings Date 10/12/11 (unconfirmed)
Average Daily Volume = 2.6 million
Listed on August 16, 2011


Avon Products Inc. - AVP - close: 21.74 change: -0.06

Stop Loss: 20.20
Target(s): 23.50, 24.40
Current Gain/Loss: - 0.7%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
08/17 update: Our trade in AVP is now open. Shares opened higher at $21.91. Combine that with the up tick in the S&P500 this morning and our trade is open. AVP climbed to $22.25 intraday before fading into negative territory. This failed rally near $22 is a little bit ominous. Readers may want to wait for a dip near $21.50 or the $21.25 levels before considering new bullish positions.

- small bullish positions -

Suggested Position: Long AVP stock @ $21.91

- or -

Long SEP $23 call (AVP1117I23) entry $0.50

Entry on August 17 at $21.91
Earnings Date 10/27/11 (unconfirmed)
Average Daily Volume = 5.1 million
Listed on August 15, 2011


Carpenter Technology - CRS - close: 47.53 change: -0.20

Stop Loss: 43.45 (stock only)
Target(s): 51.50, 56.50
Current Gain/Loss: + 3.3%
Time Frame: 1 to 3 weeks
New Positions: see below

Comments:
08/17 update: The pull back in CRS was relatively mild on Wednesday with a 20-cent drop. Shares spent most of the day hovering on either side of $47.50. I don't see any changes from my prior comments. I would wait for a dip near $47.00 or a bounce from the exponential 200-dma near $46.40 before initiating new bullish positions.

Cautious traders may want to raise their stop loss on the stock.

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

Current Position: Long CRS stock @ $46.01

08/15 exit Aug. $50 call now, bid $0.75 (+15.3%)
08/13 consider an early exit on the Aug. call
08/11 *entry is an estimate. option did not trade today.

Entry on August 11 at $46.01
Earnings Date 10/26/11 (unconfirmed)
Average Daily Volume = 622 thousand
Listed on August 9, 2011


Giant Interactive Group Inc. - GA - close: 7.97 change: -0.22

Stop Loss: 7.20
Target(s): 9.30
Current Gain/Loss: - 5.7%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
08/17 update: There seems to be a trend of Chinese stocks underperforming this week. GA dipped again with a -2.6% drop today. Once the stock broke down under the $8.00 level it hovered there between $8.00 and its 10 and 100-dma below it. I am not suggesting new bullish positions at this time. More conservative traders may want to consider a higher stop loss!

Earlier Comments:
Readers should consider this a higher-risk, more aggressive trade. We want to keep our position size small to limit our risk.

Current Position: Long GA stock @ $8.46

- or -

Long SEP $7.50 call (GA1117I7.5) Entry $0.95

Entry on August 15 at $ 8.46
Earnings Date 11/16/11 (unconfirmed)
Average Daily Volume = 1.3 million
Listed on August 13, 2011


Honeywell Intl. - HON - close: 45.99 change: +0.29

Stop Loss: 44.40 (stock only)
Target(s): 49.75, 53.50
Current Gain/Loss: - 2.3%
Time Frame: 2 to 6 weeks
New Positions: see below

Comments:
08/17 update: The trading in HON is almost identical to the trading in the S&P500 today. The early morning strength faded but shares recovered off their afternoon lows. It looks like a normal pull back off the big bounce from last week's lows. I would still consider new positions now if both HON and the S&P500 open positive tomorrow or you can exercise patience and see if HON will test the $45.00 mark and launch positions there.

Earlier Comments:
We want to keep our position size pretty small to limit our risk. We'll set our first upside targets at $49.75 and $53.50. We're not using a stop loss on our option positions.

Current Position: Long HON stock @ $47.10

- or -

Long SEP $50 call (HON1117I50) Entry $0.95

Entry on August 15 at $47.10
Earnings Date 10/21/11 (unconfirmed)
Average Daily Volume = 7.8 million
Listed on August 13, 2011


BEARISH Play Updates

None. No bearish plays currently.


CLOSED BULLISH PLAYS

Caribou Coffee Inc. - CBOU - close: 14.75 change: -1.00

Stop Loss: 14.75
Target(s): --.--, 18.00
Current Gain/Loss: + 4.9%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
08/17 update: Ouch! It was an ugly day for CBOU. Shares declined throughout the session and tested $14.51 at its lows before closing with a -6.3% loss. Our stop loss was hit at $14.75 ending this trade.

Bigger picture CBOU still looks bullish so I would keep this stock on your watch list.

- (small positions) -

closed Position: Long CBOU stock @ $14.06, exit $14.75 (+4.9%)

- or -

SEP $15 call (CBOU1117I15) Entry $1.30, exit $0.90 (-30%)

08/17 stopped out @ 14.75
08/11 new stop loss @ 14.75
08/10 CBOU almost hit our first target at $16.75. Don't wait. Go ahead and take profits now.
CBOU @ $16.28 (+15.7%), Sept.$15 call @ $2.05bid (+57.6%)
08/08 new stop loss @ 12.95

chart:

Entry on August 8 at $14.06
Earnings Date 11/10/11 (unconfirmed)
Average Daily Volume = 756 thousand
Listed on August 6, 2011


Changyou.com Ltd. - CYOU - close: 39.15 change: -1.06

Stop Loss: 39.75
Target(s): 43.75, 47.50
Current Gain/Loss: + 1.1%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
08/17 update: CYOU underperformed for the second day in a row and slipped to a new relative low at $38.03 this afternoon. Our stop loss was hit at $39.75. The stock has fallen more than -12% in just two days on no news. CYOU actually saw some positive analyst comments today. Bigger picture the larger trend is still a bullish one. I'd keep CYOU on your watch list.

closed Position: Long CYOU stock @ $39.31, exit $39.75 (+1.1%)

08/17 stopped out @ 39.75 (+1.1%)
08/15 new stop loss @ 39.75
08/11 new stop loss @ 38.40
08/08 new stop loss @ 37.45

chart:

Entry on August 8 at $39.31
Earnings Date 10/24/11 (unconfirmed)
Average Daily Volume = 417 thousand
Listed on August 6, 2011