Option Investor
Newsletter

Daily Newsletter, Monday, 9/12/2011

Table of Contents

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

Market Wrap

China Wants To Eat Italian...Maybe

by Todd Shriber

Click here to email Todd Shriber
What started looking like another down day at the hands of Europe's sovereign debt catastrophe turned positive late in the trading session on news that China may purchase large amounts of Italian sovereign debt. Those late-breaking headlines sparked the S&P 500 and the Dow Jones Industrial Average to respectable gains of just under 1% while the Nasdaq popped 1.1%.

Market Stats

China, with trillions of dollars in foreign currency reserves, is looking to spend some of that cash and has previously shown no fear about gobbling up sovereign debt from some of the world's largest, but most fiscally-challenged economies. Already one of the largest holders of U.S. and Japanese bonds, China may make for a strange bedfellow for Italy, but then again, not really. Remember, yields on Italian sovereign debt surging in the past month, finding buyers has become a challenge.

The Financial Times reports that Italian officials traveled to Beijing a couple of weeks to ago to meet with their counterparts from China Investment Corp. and China's State Administration of Foreign Exchange. Last week, officials from China Investment traveled to Rome. With a debt-to-GDP ratio approaching 120%, the second-worst in the Eurozone behind Greece, Italy may also be shopping stakes in state-run companies to China.

Not surprisingly, that would include Eni SpA, Italy's largest oil company, according to the FT. Still, these talks appear to be in the nascent stages and China is not believed to currently be a major holder of Italian debt, but the news was enough to send stocks rallying into the close. Stocks are one things. The spreads on Italian bonds versus German bunds are another and very wide I might ad.

Italian Bond Spreads

Even there is good news on the horizon for Italy, and that is a ''big'' maybe, investors still have to deal with Greece. The Mediterranean country has done little to assuage investors that it can skirt default and the chance of a Greek default sometime in the next five years have surged, according to Bloomberg News. Credit default swaps to protect Greek debt have blown out. On Friday, the upfront cost of insuring $10 million Greek debt for five years was $5.5 million. Today it was $5.8 million, according to CMA.

A Greek default could and probably should happen much sooner than five years. Over on Intrade, the financial predictions market, you can buy contracts that wager on Standard & Poor's to rate Greece as in default before midnight Dec. 31. Trading at $6.50 per contract, that implies a 65% chance Greece will default before year-end.

Greek Default Odds

In one Bloomberg story I came across today regarding the European mess, an analyst astutely compared the situation in Europe to a firing line where things will go from Greece to Italy to Spain and so forth. Unfortunately, France is in that firing line.

Allow me to preface what follows by saying that I got an email from a reader a while back that stated I am anti-French. I am not. If I were anti-French then the amount of time I have spent in France is downright odd, but I digress. The fact is France's three largest banks, BNP Paribas, Societe Generale and Credit Agricole, could see their credit ratings pared by Moody's as soon as this week.

All three banks currently have investment-grade ratings. BNP Paribas and Credit Agricole would probably see their ratings taken down one level while SocGen would probably go down two notches. Bloomberg reported on Sunday. If these downgrades do materialize, that is very bad news for the iShares MSCI France Index Fund (EWQ). On an intraday basis, the ETF touched prices not seen in over two years. Financials account for over 15% of this ETF's sector allocation. Draw your own conclusions from there.

France ETF Chart

Here in the U.S., there was some M&A activity in the tech sector worth noting. California-based Broadcom (BRCM), the maker of chips for cable boxes and mobile phones, among other gadgets, will dole out $3.7 billion in cash for NetLogic Microsystems (NETL). NetLogic surged 51% on volume of 46.8 million shares. That compares with average daily turnover of 1.5 million shares.

Broadcom is paying $50 a share for NetLogic, a 57% premium to where the acquired company's shares closed on Friday. That $50 also represents a substantial to premium to NetLogic's all-time high, which was just over $43 before today.

That is arguably a rich premium, but Broadcom did say the deal, which is expected to close in the first half of next year, will add to 2012 earnings by 10 cents a share. Plus, it's pretty obvious to see why Broadcom wanted to bring NetLogic into its fold. Not only does NetLogic make chips for smartphones, it is also a supplier of chips to Apple (AAPL) for the iPad, the world's most popular tablet device.

NetLogic Chart

Shares of Bank of America (BAC) closed higher by 1% on the day on volume that was better than twice the daily average and that is saying something because that means more than 286 million in the downtrodden Dow component changed hands today. BofA CEO Brian Moynihan said the bank plans to reduce its workforce by 30,000 jobs to trim expenses by $5 billion 2014. That amounts to about 10% of BofA's current workforce, but the 30,000 number is also well below the 40,000 job cuts many media outlets reported on last week.

A Reuters story on the news said there are 50 senior level workers parsing through 150,000 ideas on how to save costs. Here is one from me and it comes free of charge. I will even admit BofA is on to it in a way, but it probably took them too long. Branch closures. Just as an anecdote, I go to four different BofA branches in Southern California depending on where I am at the time and all those branches are big enough to the point where I would not mind living in them and they all have multiple fancy TVs in there. The TVs remain on all day and night, even when the branch is closed.

I know it is not an asset sale or some other more sophisticated way of raising cash, but why not start by cutting the power bill when you need as much cash as BofA is believed to need? For his part, Moynihan said today that the bank has not been required by regulators to look for outside capital, but he also did not rule out a bankruptcy filing for Countrywide.

Bank of America Chart

Looking at the charts, the S&P 500 did not test support around 1120 today, but the index did spend a good part of the day languishing below support at 1155. The late-day bounce took the S&P back above that level, but there is still a lot of work to be to done to retest resistance around 1225.

How much upside is left from here is not all that encouraging if you are a believe in targets from various banks. Wells Fargo cut its year-end price forecast on the S&P 500 10% to 1250 today while Barclays lowered its year-end target to 1325 from 1450. Bank of America said a retest of the 1020-1100 area is possible and from the S&P 500 could fall to 910-985.

S&P 500 Chart

The Dow's chart is even worse off than the S&P 500's, but if there is a glimmer of up it is that the blue-chip index flirted with critical support at 10,800 today and buyers stepped in there. A violation of 10,800 would probably send the Dow back to 10,000. For now, the Dow faces resistance just ahead at 11,100 and then again just over 11,300.

Dow Chart

Give the Nasdaq some credit for looking good by comparison today. The index made its way to within spitting distance of resistance at 2500 and is now a fair bit removed from support at 2400 and 2335. Above 2500, next resistance for the Nasdaq is 2550 and then 2600.

Nasdaq Chart

On a closing basis, at least the Russell 2000 continues to honor support at 675. If that area does not hold, it is back to 650 and probably lower. The 700 area is more psychological support and I think it takes a move back above 725-728 to get fund managers and new buyers involved with the small-cap Index again.

Russell 2000 Chart

Color me skeptical, but even if China does come to Italy's rescue, that is not enough ammunition to fuel anything more than a day or two of gains. Look at it this way: Just because China may buy Italian debt, does not mean it will want buy the Greek, Portuguese, Spanish and, gasp, French equivalents. I remain convinced the EU should allow Greece to default sooner than later. The sooner the bloodletting starts, the sooner it will end.

Even without Europe dominating the headlines, this week is fraught with risk as there are several key economic reports due out here in the U.S. Those will either exacerbate or ameliorate (albeit temporarily) the challenges being endured thanks to Europe.


New Plays

Options & Robotics

by James Brown

Click here to email James Brown

Editor's Note:

In addition to tonight's new trading candidates, check these out:

MXIM - some of the semiconductor stocks are showing strength. MXIM is breaking out from its recent trading range. Today's move could be an entry point for bullish positions.

NVLS - here is another tech stock that is poised to breakout from its trading range. I would be tempted to buy it now.

- James


NEW BULLISH Plays

CBOE Holdings, Inc. - CBOE - close: 26.30 change: +0.63

Stop Loss: 24.75
Target(s): 29.50
Current Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Option trading volumes are surging, which should mean a strong quarter for the CBOE. The stock has developed a bullish trend of higher lows and higher highs since the first week of August. In just the last few days CBOE has broken out above its 200-dma and retested it as new support. Today's close over potential resistance at $26.00 is bullish.

I am suggesting bullish positions now but only if the CBOE and the S&P 500 index both open positive tomorrow. I do need to label this as a slightly more aggressive trade. While things look good on a short-term basis the long-term weekly chart is showing potential resistance (see below). Readers may want to wait for a close over that trendline before considering new bullish positions.

*See Play Details for Entry Point*

Suggested Position: buy CBOE stock @ the open

- or -

buy the OCT $27 call (CBOE1122J27) current ask $1.05

Annotated chart:

Weekly chart:

Entry on September xx at $ xx.xx
Earnings Date 11/03/11 (unconfirmed)
Average Daily Volume = 703 thousand
Listed on September 12, 2011


Hansen Medical Inc. - HNSN - close: 4.20 change: +0.19

Stop Loss: 3.73
Target(s): 4.85, 5.20
Current Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
HNSN is in the medical robotics industry. Shares have spent about two weeks consolidating sideways under resistance at the $4.00 level. The stock closed at $4.01 on Friday. Today shares displayed relative strength with a +4.7% gain and a confirmation of the breakout past $4.00.

The stock can be volatile so we want to keep our position size small. I am suggesting bullish positions now but only if HNSN and the S&P 500 index both open positive tomorrow morning. We'll start with a stop loss at $3.73. Conservative traders may want a stop closer to today's low (3.90) while aggressive traders may want a stop under Friday's low (3.61).

*See Play Details for Entry Point*

Suggested Position: buy HNSN stock @ open

Annotated chart:

Entry on September xx at $ xx.xx
Earnings Date 11/03/11 (unconfirmed)
Average Daily Volume = 963 thousand
Listed on September 12, 2011



In Play Updates and Reviews

Stopped Out

by James Brown

Click here to email James Brown

Editor's Note:
The market's opening drop and its slow fade lower through most of the session was enough to trigger some of our stop losses. Unfortunately the market reversed higher into the close. The only bright spot was a strong performance by STMP.

-James

Current Portfolio:


BULLISH Play Updates

Research In Motion - RIMM - close: 30.17 change: +0.49

Stop Loss: 28.90
Target(s): 34.75
Current Gain/Loss: -4.6%
Time Frame: exit before Sep. 15th
New Positions: see below

Comments:
09/12 update: RIMM gapped open lower at $29.19 and dipped to a new two-week low (29.08) before rebounding back into positive territory. Our stop loss remains at $28.90. I would be tempted to use the afternoon bounce as a new entry point to launch bullish positions. Unfortunately we're almost out of time. We want to exit prior to earnings on Sept. 15th. We will have to choose to either exit at the close on Sept. 14th or at the close on the 15th. Earnings are supposed to be announced after the closing bell on the 15th.

Current Position: Long RIMM stock @ $31.64

- or -

Long OCT $33 call (RIMM1122J33) Entry $2.40

09/10 Remember, we want to exit prior to earnings (9/15)
09/07 trade is now open. RIMM gapped open at $31.64
09/06 trade not open yet. try again. New stop @ 28.90

Entry on September 7 at $31.64
Earnings Date 09/15/11 (confirmed)
Average Daily Volume = 26.9 million
Listed on September 3, 2011


SodaStream Intl. - SODA - close: 38.84 change: +0.09

Stop Loss: 36.95
Target(s): 45.75, 49.75
Current Gain/Loss: unopened
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
09/12 update: Our entry point conditions were not met this morning. I am suggesting we try again. Buy SODA tomorrow but only if SODA and the S&P 500 index both open higher. We'll use a stop at $36.95. You could adjust your stop toward today's low of $37.25 instead.

Earlier Comments:
If this stock can rally then SODA could see a huge short squeeze. The most recent data listed short interest at more than 75% of the very, very small 14.6 million-share float.

Remember, we want to use small positions to limit our risk.

open bullish positions if SODA and S&P500 index both open positive tomorrow (small positions only)

Suggested Position: buy SODA @ the open

- or -

buy the OCT $45 call (SODA1122J45)

Entry on September xx at $ xx.xx
Earnings Date 11/29/11 (unconfirmed)
Average Daily Volume = 3.8 million
Listed on September 8, 2011


Stamps.com Inc. - STMP - close: 21.16 change: +1.72

Stop Loss: 18.45
Target(s): 22.25, 24.50
Current Gain/Loss: +4.2%
Time Frame: 6 to 10 weeks
New Positions: see below

Comments:
09/12 update: It was a big day for STMP. The stock was showing lots of strength. Our secondary entry point strategy (buy STMP at $20.25) was met at the open. Shares opened at $20.29 and surged to $21.30 intraday. The stock closed up +8.8% with volume more than double the norm.

I would not chase it now. Broken resistance near $20.00 should be new support. Wait for a new dip or bounce near the $20 area.

We are adjusting our stop loss to $18.45.

Current Position: Long STMP stock @ $20.29

- or -

Long OCT $20 call (STMP1122J20) Entry $1.50

09/12 STMP gapped open at $20.29, above our entry point.

Entry on September 12 at $20.29
Earnings Date 10/27/11 (unconfirmed)
Average Daily Volume = 248 thousand
Listed on September 10, 2011


WABCO Holdings - WBC - close: 45.06 change: -0.34

Stop Loss: 43.40
Target(s): 49.50, 54.00
Current Option Gain/Loss: - 2.7%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
09/12 update: The action in WBC was a bit disappointing. Shares did follow the market higher in the widespread late day bounce but WBC failed to close in positive territory. You could use the late day move as an entry point but keep positions very small. The low today was $43.67. Our stop is at $43.40.

- Suggested Positions -

current Position: Long WBC stock @ $46.32

09/08 1st target hit at $49.50 (+6.8%)
09/07 trade now open. WBC gaps higher at $46.32
09/06 trade not open yet. Try again. New stop loss 43.40. new targets 49.50 and 54.00

Entry on September 7 at $46.32
Earnings Date 10/27/11 (unconfirmed)
Average Daily Volume = 900 thousand
Listed on September 3, 2011


BEARISH Play Updates

Greif, Inc. - GEF - close: 46.36 change: -1.02

Stop Loss: 50.60
Target(s): 44.00, 40.50
Current Gain/Loss: +1.2%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
09/12 update: GEF continues to underperform. The stock opened lower at $46.93 and fell to $45.38 intraday. Volume was heavy as GEF closed with a -2.1% decline.

If the market rebounds then look for GEF to retest the $48 level as overhead resistance. A failed rally near $48 (or $50) could be used as a new entry point.

Earlier Comments:
FYI: The Point & Figure chart for GEF is bearish with a $30 target. I am not suggesting the options. The spreads are too wide.

*Small Bearish Positions*

Current Position: short GEF stock @ $46.93

Entry on September 12 at $46.93
Earnings Date 12/07/11 (unconfirmed)
Average Daily Volume = 247 thousand
Listed on September 10, 2011


CLOSED BULLISH PLAYS

Bon-Ton Stores Inc. - BONT - close: 6.08 change: -0.16

Stop Loss: 5.85
Target(s): 7.50, 8.25
Current Gain/Loss: - 8.8%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
09/12 update: After several days of holding support at the $6.00 level BONT broke down below this key level today. Shares managed a meager rally at the close but ended the session off -2.5%. I did not find any specific news to account for this relative weakness. We were stopped out at $5.85.

closed Position: Long BONT stock @ $6.42, exit $5.85 (-8.8%)

09/12 stopped out at $5.85

chart:

Entry on September 7 at $ 6.42
Earnings Date 11/17/11 (unconfirmed)
Average Daily Volume = 311 thousand
Listed on September 3, 2011


Ultra Oil & Gas ETF - DIG - close: 39.66 change: +0.41

Stop Loss: 37.65
Target(s): 44.50, 49.50
Current Gain/Loss: -9.0%
Time Frame: 2 to 6 weeks
New Positions: see below

Comments:
09/12 update: The stock market's intraday weakness was too much. The DIG saw a dip to $37.45 this afternoon only to reverse back into positive territory as the market turned higher. Our stop loss was hit at $37.65.

Remember, the plan was to keep our position size small.

closed Position: Long DIG @ $41.41, exit 37.65 (-9.0%)

09/12 stopped out @ 37.65
09/07 trade re-opened. DIG at $41.41
09/06 prior trade stopped out. Reload with a new entry point.

chart:

Entry on September 7 at $41.41
Earnings Date --/--/--
Average Daily Volume = 1.4 million
Listed on September 6, 2011


MAKO Surgical Corp. - MAKO - close: 34.91 change: -0.52

Stop Loss: 34.85
Target(s): 39.90, 43.75
Current Gain/Loss: - 10%
Time Frame: 4 to 10 weeks
New Positions: see below

Comments:
09/12 update: The market volatility this morning was too much. MAKO gapped open lower at $35.08 and quickly saw a spike down toward $34.00. Our stop loss was hit at $34.85. The stock managed an intraday bounce but failed to close in positive territory.

Earlier Comments:
Keep in mind that MAKO could see a short squeeze. The most recent data listed short interest at more than 26% of the small 31.7 million-share float.

SMALL POSITIONS

closed Position: Long MAKO stock @ $38.76, exit 34.85 (-10%)

- or -

OCT $40 call (MAKO1122J40) Entry $2.10, exit $1.35 (-35.7%)

09/12 stopped out at $34.85

chart:

Entry on September 7 at $38.76
Earnings Date 11/02/11 (unconfirmed)
Average Daily Volume = 1.3 million
Listed on September 3, 2011


Peet's Coffee & Tea - PEET - close: 54.26 change: -0.65

Stop Loss: 53.50
Target(s): 62.00
Current Gain/Loss: -5.5%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
09/12 update: PEET managed to limit its losses to -1.1% and it closed near support at $54 and its 100-dma. Yet the intraday volatility stopped us out at $53.50.

Earlier Comments:
There is a good chance that PEET could see another short squeeze. The most recent data listed short interest at 23.7% of the very small 12.6 million-share float. I would keep our position size small. We are not trading the options. The spreads are too wide.

closed Position: Long PEET stock @ $56.64, exit 53.50 (-5.5%)

09/12 stopped out at $53.50
09/10 Caution - PEET has formed a bearish H&S pattern
09/06 intraday bounce from 100-dma is a new bullish entry point.
09/06 new stop loss @ $53.50

chart:

Entry on August 29 at $56.64
Earnings Date 11/02/11 (unconfirmed)
Average Daily Volume = 268 thousand
Listed on August 27, 2011


Steel ETF - SLX - close: 50.82 change: -0.33

Stop Loss: 49.49
Target(s): 55.90, 59.50
Current Gain/Loss: - 7.0%
Time Frame: 2 to 6 weeks
New Positions: see below

Comments:
09/12 update: The SLX followed the market lower and by early afternoon it was breaking down under the $50.00 level. Our stop loss was hit at $49.49. Nimble traders may want to reload this trade and buy the afternoon bounce with a stop loss under $49.39. Shares are at the bottom of their trading range and poised to rebound. You can target the $54-56 area.

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

CAUTION: The October options have wide spreads!

closed Position: Long SLX @ $53.25, exit $49.49 (-7.0%)

- or -

OCT $55 call (SLX1122J55) Entry $2.50, exit $1.00* (-60%)

09/12 stopped out @ 49.49
*9/12 option did not trade today, this is an estimate.
09/07 trade is re-opened. SLX gaps higher at $53.25
09/06 prior trade stopped out. Reload with a new entry point.

chart:

Entry on September 7 at $53.25
Earnings Date --/--/--
Average Daily Volume = 126 thousand
Listed on September 6, 2011