Option Investor
Newsletter

Daily Newsletter, Monday, 9/19/2011

Table of Contents

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

Market Wrap

Greece...Again

by Todd Shriber

Click here to email Todd Shriber
It was another day at the Greek office for Mr. Market as speculation swirled that everyone's favorite Mediterranean problem will not be able to procure additional financing needed avoid a sovereign debt default. I have been saying for months that Greece should be allowed to default and the sooner the better, but European policymakers apparently do not agree and the result was another triple-digit move, this time down, for the Dow, and a slide of almost 1% for the S&P 500. Once again, the Nasdaq held up pretty well.

Stats Table

No shock here: Financials were punished following the Greece news. Bank of America published a note on Friday that said the following: ''Due to financial trading relationships and off-balance sheet exposure to European banks, the U.S. banking system will not go unscathed.'' BofA is not outright predicting that the Greece fiasco will push the U.S. into another recession, but the bank is not wiping that scenario off the table either.

The Bank for International Settlements said that U.S. banks had $41 billion in Greece exposure at the end of last year. Most of that is believed to be in the form of credit default swaps and that could be fueling speculation about counter-party risk. Forty-one billion is far less than the market caps of some major U.S. banks, but it is still more in Greece exposure than Germany had at the end of last year.

Greece Exposure Chart

Things are so gloomy out there that another bank has pared its year-end price target for the S&P 500. You may remember that I mentioned similar news from a couple of banks in last Monday's wrap. Today, it was Citigroup stepping into the booth of lower broader market expectations. The bank pared its 2011 year-end forecast for the S&P 500 to 1325 from 1400. Unfortunately, the bank does not see much in store for the more patient among us and projected a 2012 year-end target of just 1375.

The chart below shows the median expectation for the S&P 500 at the end of this year at 1,400, but that number is lower now as several banks have ratcheting their forecasts back recently. I do not know if it is good news or bad news, but typically when a decent amount of analysts and banks go in the same direction on these types of forecasts, something else happens. With that something else is better or worse than what is being predicted today remains to be seen.

S&P 500 Forecasts

Despite the nasty tumble for the Dow, a couple of non-Dow industrial stocks enjoyed very nice days. Aircraft components maker Goodrich (GR) surged another 16% on volume that was roughly 10 times the daily average following up on a monster Friday gain that was prompted by speculation Dow component United Technologies (UTX) was looking to procure financing for a big acquisition.

Goodrich was one of several companies believed to be in United Technologies' sights. Now it looks like Goodrich is the lone object of the Dow component's affections. Goodrich closed just below $108, still a 30-year high and the price could go even higher as analysts have speculated that United Technologies could offer in the $122-$128 a share range for Goodrich.

A deal for Goodrich may be valued at more than $17 billion, including $1.9 billion of net debt, based on previous deals in the U.S. aerospace and defense industry and that works out to $122 a share, according to Bloomberg News. Two unidentified sources quoted by Reuters today said United Technologies is trying lineup $10 billion to $20 billion to make an offer.

United Technologies has been making add-on acquisitions for years, limiting its deals to the $1 billion to $3 billion range. The company has not really ''gone big'' in M&A since losing out on Honeywell (HON) in 2000.

Goodrich Chart

Tyco International (TYC), once one of the largest industrial conglomerates in the U.S., jumped 2.4% on volume that was roughly five times the daily average on some news that a lot of companies seem to be taking part in these days: A corporate breakup.

Tyco has been down the breakup road before. Last time, the breakup followed former CEO Dennis Kozlowski's resignation. The last breakup involved Tyco separating its Covidien medical products and Tyco Electronics businesses. This time around, Tyco will split into three companies focused on home security, fire protection and pipes and valves, according to the Wall Street Journal.

FBR Capital Markets said the combined value of the three Tyco companies could be $52-$56 a share while JPMorgan put the price tag as high as $65 a share. Not matter how you slice it, $52-$65 is a lot better than the $44.75 Tyco closed at today. As I said, spin-offs have become popular this year. Marathon Oil (MRO) and Sara Lee (SLE) are among the companies that have already done them. ConocoPhillips (COP), the third-largest U.S. oil company, Kraft (KFT), the largest U.S. food company, and McGraw-Hill (MHP) are among the companies eying spin-offs in the near future.

Tyco Chart

As you can see, breakup news is often embraced, but there is always an exception to the rule. Netflix (NFLX) was that exception today. The movie rental company said it will separate its DVD-by-mail business from the streaming movies and TV shows operation. Investors were less than enthused as Netflix tumbled another 7.4% on volume that was more than quadruple the daily average. Factor in today's loss and Netflix is now down 30% in the last five trading days. That is while the S&P 500 and the Nasdaq are up nearly 5% each over the same five days.

If you want to keep receiving DVDs by mail, Netflix will enroll you in its new Qwikster service. The streaming business will keep the Netflix name. In other words, after ticking off customers on the matter of price, Netflix will now ask subscribers to deal with not one, but two companies. Have a problem with Qwikster? You have to call Qwikster. Same thing goes for Netflix.

Even though CEO Reed Hastings apologized for how last week's price hikes were communicated, he did not actually say he was sorry for the increases themselves. He even said that no more price increases are imminent and that Netflix is working diligently to boost its streaming content. All of that may be too little too late for Netflix. It was nice of Hastings to apologize and admit his arrogance, though all of that is of little compensation to anyone that was long Netflix from $300. Haircuts of 50% are not repaired with words.

Netflix Chart

Looking at the charts, the S&P 500 was able to pare its earlier losses and close right at support at 1204-1205. Next support should be 1190 followed by 1150. Resistance remains at 1225. Either support at 1190 or the aforementioned resistance could come into play this week, though which we way go depends on Greece and friends.

The market is clearly pricing in a Greek default, but there is little clarity on exactly when or if that will happen. For now, the reality is correlations are elevated and Europe is not only the story of the day, it is the story of EVERY day.

S&P 500 Chart

Just four Dow components were higher today. Congrats to IBM, MCD, MSFT and UTX for the feat. Days like today are not going to help the blue-chip index conquer resistance at 11,650-11,700, that much is obvious. The Dow did honor support at 11,250. In fact, the intraday low was 11,255. There are no marquee Dow earnings this week, so it will probably be Greece and the Fed moving the Dow this week. What else is new?

Dow Chart

Take Netflix and a couple of other laggards out of the equation and the Nasdaq is looking pretty solid. Apple touched a new all-time high today over $413 before closing above $411. Amazon (AMZN) is also part of the all-time high club and the Nasdaq 100 was able to muster a positive close today. Encouraging was the Composite's close above 2600. That could turn to new support, but should that not hold as support, the Nasdaq could fall back to 2550 and then 2500. Resistance can be found at 2650.

Nasdaq Chart

The Russell 2000 closed above support at 700 and that is the best thing that can be said after the index slid 1.7%. There really is no reason to be enthused about small caps as they continue to lag large caps. Failure to hold 700 could take the Russell 2000 back to 650. It will take a break of resistance at 725 to get fund managers off the small-cap sidelines.

Russell 2000 Chart

I wish I could find a legitimate reason to be long right now equities right now, but the combination of high correlations, Europe and weak economic data here in the U.S. has me thinking otherwise. There are some pretty lofty expectations being placed on the Federal Reserve this week and that certainly opens the door to disappointment. That is just one more factor to consider and it also means the ingredients in this week's pot are anything but delicious.

Todd Shriber


New Plays

High-end Retail Relative Strength

by James Brown

Click here to email James Brown

Editor's Note:

Short-term traders might want to check out Red Hat Inc. (RHT). I was poised to write up a bullish trade on the stock tonight but then I noticed that the company is due to report earnings on September 21st (Wednesday). Nimble traders could buy RHT tomorrow and exit prior to the closing bell on Wednesday to avoid holding over earnings out Wednesday night.

- James


NEW BULLISH Plays

Nordstrom Inc. - JWN - close: 47.98 change: +0.09

Stop Loss: 45.90
Target(s): 51.75
Current Gain/Loss: unopened
Time Frame: 2 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Some of the high-end retail names were showing relative strength today. JWN bounced from its morning lows near $46.60 to close in positive territory. I am suggesting we take advantage of this strength and launch positions now. However, we only want to open bullish positions if both JWN and the S&P 500 index both open positive tomorrow morning.

The $50.00 level might offer some round-number, psychological resistance but our final target is $51.75.

*see Entry Point Details Above*

Suggested Position: buy stock @ the open

- or -

buy the OCT $50 call (JWN1122J50) current ask $1.76

Annotated chart:

Entry on September xx at $ xx.xx
Earnings Date 11/10/11 (unconfirmed)
Average Daily Volume = 3.8 million
Listed on September 19, 2011



In Play Updates and Reviews

STMP Hits Our Target

by James Brown

Click here to email James Brown

Editor's Note:
Shares of Stamps.com quickly rebounded from their morning low and hit our final target today.

Please note that I have updated some of our stop losses tonight.

-James

Current Portfolio:


BULLISH Play Updates

CBOE Holdings, Inc. - CBOE - close: 27.24 change: -0.04

Stop Loss: 25.85
Target(s): 29.50
Current Gain/Loss: + 3.0%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
09/19 update: CBOE gapped open lower thanks to the market's widespread weakness. Yet shares did not breakdown under support in the $26.25-26.00 area. Traders were quick to buy the dip. The stock closed almost unchanged on the session. I am suggesting readers use this intraday bounce as a new entry point. We will raise our stop loss up to $25.85.

Earlier Comments:
We 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. Readers may want to wait for a close over that trendline before considering new bullish positions.

Current Position: Long CBOE stock @ $26.43

- or -

Long OCT $27 call (CBOE1122J27) Entry $0.99

09/19 new stop loss @ 25.85
09/17 new stop loss @ 25.40

Entry on September 13 at $26.43
Earnings Date 11/03/11 (unconfirmed)
Average Daily Volume = 703 thousand
Listed on September 12, 2011


Electronic Arts - ERTS - close: 22.87 change: -0.14

Stop Loss: 21.90
Target(s): 24.85
Current Gain/Loss: unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see below

Comments:
09/19 update: Our new trade on ERTS is not open yet. The market weakness negated our entry point. Traders bought the dip at $22.47 and ERTS drifted back to almost unchanged. I am suggesting we try again.

We want to open bullish positions now but only if ERTS and the S&P 500 index both open positive on tomorrow morning. Alternative entry points could be a new relative high over $23.25 or a dip back toward $22.00, which should be short-term support.

NOTE: I am raising our stop loss to $21.90.

*see Entry Point Details Above*

Suggested Position: buy ERTS stock @ open

- or -

buy the OCT $24 call (ERTS1122J24) current as $0.78

09/19 new stop loss @ 21.90

Entry on September xx at $ xx.xx
Earnings Date 11/01/11 (unconfirmed)
Average Daily Volume = 8.6 million
Listed on September 17, 2011


Hansen Medical Inc. - HNSN - close: 4.20 change: +0.08

Stop Loss: 3.90
Target(s): 4.85, 5.20
Current Gain/Loss: - 1.1%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
09/19 update: Traders bought the dip at $4.00 this morning and shares rallied to a +1.9% gain. This show of relative strength is encouraging. I would use the bounce as a new entry point. More conservative traders might want to adjust their stop loss to the $3.98-3.99 area.

Earlier Comments:
The stock can be volatile so we want to keep our position size small.

Current Position: Long HNSN stock @ $4.25

09/14 new stop loss @ 3.90

Entry on September 14 at $4.25
Earnings Date 11/03/11 (unconfirmed)
Average Daily Volume = 963 thousand
Listed on September 12, 2011


NVIDIA Corp. - NVDA - close: 15.14 change: -0.32

Stop Loss: 13.49
Target(s): 16.75, 18.25
Current Gain/Loss: +1.5%
Time Frame: 6 to 12 weeks
New Positions: see below

Comments:
09/19 update: I was expecting a bigger sell-off in NVDA. The fact that shares managed to hold the $15.00 level is a positive. Over the weekend I suggested launching new positions on a dip into the $15.00-14.50 zone and we got that dip today. More conservative traders could wait for a dip into the $14.50-14.00 zone instead.

Current Position: Long NVDA stock @ $14.91

- or -

Long OCT $15 call (NVDA1122J15) Entry $1.10

- or -

Long 2012 JAN $15 call (NVDA1122A15) Entry $2.28

09/17 added secondary target of $18.25
09/14 new stop loss @ 13.49
09/14 gap open higher entry point @ 14.91

Entry on September 14 at $14.91
Earnings Date 11/10/11 (unconfirmed)
Average Daily Volume = 19.3 million
Listed on September 13, 2011


SodaStream Intl. - SODA - close: 42.26 change: +0.58

Stop Loss: 38.75
Target(s): 45.75, 49.75
Current Gain/Loss: +3.4%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
09/19 update: Just as expected the $40 level acted as short-term support. I've been suggesting readers buy a dip near $40.00, which we saw today. If you're still looking for an entry point I would buy this bounce. Please note that I am raising our stop loss to $38.75. More conservative traders might want to up their stop closer to $40.00 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.

Current Position: Long SODA @ $40.84

- or -

Long OCT $45 call (SODA1122J45) Entry $3.00

09/19 new stop loss @ 38.75
09/13 new stop loss at $37.20
09/13 trade is open. SODA @ 40.84

Entry on September 13 at $40.84
Earnings Date 11/29/11 (unconfirmed)
Average Daily Volume = 3.8 million
Listed on September 8, 2011


virgin Media, Inc. - VMED - close: 26.05 change: -0.08

Stop Loss: 24.40
Target(s): 29.50
Current Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Comments:
09/19 update: Our new trade on VMED is not open yet. Shares bounced from the 50-dma again. I am suggesting we try again. The plan is to open bullish positions now but only if VMED and the S&P 500 index both open higher on Monday morning.

We do want to keep our position size small to limit our risk. VMED is facing additional resistance at its 200-dma and near the $28.00 level. We'll start with a multi-week target at $29.50. I'm suggesting a stop loss at $24.40. FYI: The most recent data listed short interest at 14% of the 310 million-share float.

*see Entry Point Details Above*

Suggested Position: buy VMED stock @ open

- or -

buy the OCT $27 call (VMED1122J27) current ask $1.10

Entry on September xx at $ xx.xx
Earnings Date 10/26/11 (unconfirmed)
Average Daily Volume = 4.5 million
Listed on September 17, 2011


WABCO Holdings - WBC - close: 47.87 change: -1.25

Stop Loss: 46.35
Target(s): 49.50, 54.00
Current Option Gain/Loss: + 3.3%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
09/19 update: WBC displayed some relative weakness with a -2.5% loss. The stock did not see the same rebound that most of the market experienced this afternoon. Volume was pretty light but I am not suggesting new positions at this time. Cautious traders may want to exit early now.

- Suggested Positions -

current Position: Long WBC stock @ $46.32

09/15 new stop loss @ 46.35
09/14 new stop loss @ 43.60
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: 47.28 change: -0.80

Stop Loss: 49.55
Target(s): 44.00, 40.50
Current Gain/Loss: -0.7%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
09/19 update: GEF gapped open lower at $46.98 and ended the session down -1.6%. That's slightly worse than the broader market's -0.9% decline. The overall trend for GEF remains lower. I am adjusting our stop loss down to $49.55.

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

09/19 new stop loss @ 49.55

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

Stamps.com Inc. - STMP - close: 23.78 change: +1.38

Stop Loss: 21.40
Target(s): 22.25, 24.75
Current Gain/Loss: +21.9%
Time Frame: 6 to 10 weeks
New Positions: see below

Comments:
09/19 update: Target achieved. STMP gapped open lower at $22.20, dipped to $21.80, and then surged to an intraday high of $25.24. That's a +15.7% gain off its morning low. Our final target was hit at $24.75.

closed Position: Long STMP stock @ $20.29, exit 24.75 (+21.9%)

- or -

OCT $20 call (STMP1122J20) Entry $1.50, exit $5.00* (+233.3%)

09/19 2nd target hit @ 24.75 (+21.9%)
*option did not trade at the time our target was hit. This is an estimate.
09/17 new stop loss @ 21.40
09/14 new stop loss @ 19.75
09/14 1st target hit @ 22.25 (+9.6%)
option bid near $2.70 (+80%)
09/12 STMP gapped open at $20.29, above our entry point.

chart:

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