Option Investor
Newsletter

Daily Newsletter, Thursday, 9/29/2011

Table of Contents

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

Market Wrap

Economic Numbers, Europe Help For A Change

by Todd Shriber

Click here to email Todd Shriber
In an odd, but pleasant turn of events, some good economic news here in the U.S. and more encouraging signs out of Europe helped ignite a rally in stocks as the S&P 500 gained nearly 1% and the Dow Jones Industrial Average notched a triple-digit gain. Politicians in Germany voted to expand a bailout fund and that was definitely one of the day's catalysts.

Market Stats

On the jobs front, finally some good news. The Labor Department said today that 391,000 Americans filed for jobless benefits last week, down from the revised 428,000 claims in the previous week. That is good for the first reading below 400,000 since August and the lowest reading since April.

Words of caution: The Labor Department said the big decline may be attributable to season factors and six million Americans have been out of work for six months or longer, according to the Wall Street Journal. Last week's claims number also soundly beat the reading of 420,000 claims economists expected. The four-week moving average fell to 417,000 from 422,250.

Jobless Claims

There was also surprising news on the GDP front and I mean surprising in a good way. The Commerce Department's latest estimate of second-quarter GDP growth checked in at 1.3%, topping the previous estimate of 1%. Economists expected a final second-quarter reading of 1.1%. Most economists have said the economy picked up some steam in the current quarter, which ends Friday, but the growth rates are far from robust. Most third-quarter GDP estimates hover in the 2%-2.5% range. Consumer spending grew 0.7% in the quarter, but that is still the smallest increase since the fourth quarter of 2009.

After-tax corporate profits rose at a 4.3% rate in the second quarter, the largest increase in a year, instead of 4.1%, according to the New York Times.

GDP Chart

Keeping with the theme of positive economic news, the Kansas City Fed's manufacturing composite index rose to six in September from an August reading of three. The Kansas City region was the last and best of the September regional Fed updates. The other four regions – New York, Philadelphia, Dallas and Richmond – all showed contraction last month. In the Kansas City region, the new orders index surged to five in September from one in August.

States included in the Kansas City Fed region are Colorado, Kansas, Nebraska, Oklahoma, Wyoming, northern New Mexico and western Missouri.

Kansas City Fed Chart

Economic Calendar

You may have noticed in the stats table that the Nasdaq Composite and Nasdaq 100 were in the red and it is easy to explain why. Start with one stock that can certainly be considered a fallen star that at this point, no one knows when it will shine again. I am talking about Netflix. The movie rental company plunged another 11% today on volume that was more than triple the daily average after Microsoft (MSFT) rolled out a service that rivals what Netflix has to offer.

Microsoft plans to leverage its Xbox Live platform to feature online paid TV services from Comcast (CMCSA) and Verizon (VZ). Video game consoles such as Xbox are the most popular avenue for accessing Netflix streaming content, Bloomberg reported. Translation: If you own an Xbox, you suddenly do not need Netflix anymore.

A survey by Knowledge Networks found 10% of Netflix customers said they would be ''very likely'' to cancel if their cable or satellite TV provider offered a similarly priced, comparable service, Bloomberg reported. Add to that Amazon's (AMZN) Kindle Fire tablet introduced yesterday appears to be one more way Amazon is looking to compete with Netflix and there is a recipe for disaster for Netflix shares.

Bottom line: Netflix was over $300 in July. There is little reason to believe it will be a triple-digit stock for much longer. If companies with far more cash such as Amazon and Microsoft decide they want to bury Netflix, they can and will. I have no skin in the Netflix game, long or short, but I think it is pretty obvious what the path of least resistance is here.

Netflix Chart

Speaking of tech names that have seen better days, Research In Motion (RIMM) got knocked around again today after Collins Stewart published an analyst note suggesting RIM was throwing in the towel on the PlayBook tablet. RIM denied that claim and said it remains committed to the PlayBook.

I think the Wall Street Journal sums it best when asking ''but is the tablet market committed to it?'' It being the PlayBook. The answer is probably ''no.'' PC World reports Best Buy has slashed prices on the PlayBook by $200. Even with that, the RIM offering is $299 compared to $199 for the new Amazon tablet.

The reality of the tablet market is this: Apple's (AAPL) iPad is viewed as the best product and one that consumers have been willing to pay up for. That means the only way a competing product can really compete is to offer a product that is almost as good at far lower price points. Amazon gets this and can afford to sacrifice profit margins for revenue growth. After so many quarters of disappointing investors, RIM does not have the luxury of putting profits on the back burner just to sell more tablets.

The tablet race has two horses right now: Apple and Amazon.

RIM Chart

It was a terrible day for an array of Chinese internet stocks, even the crown jewel of the group, Baidu (BIDU) after the SEC confirmed the Justice Department is looking into accounting irregularities at some U.S.-listed Chinese companies. Common sense tells us the combination of two government agencies and the phrase ''accounting irregularities'' in the same sentence is never a good thing.

The selling pressure was so intense in Baidu and some others that the SEC has implemented a temporary short-selling ban on some of the Chinese Internet names. Regulators are really zeroing on the use of reverse mergers and shell companies by some of the more dubious Chinese firms listed here in the U.S., but the baby often gets thrown out with the bathwater.

That explains Baidu falling 9.2% on volume that was about 2.5% times the daily average. SOHU was off almost 5% on roughly triple the usual turnover and SINA plunged 10% on volume that was also about 2.5 times the daily average. Somehow the Guggenheim China Technology ETF (CQQQ), of which BIDU, SINA and SOHU account for 28% of, was only down 1.9%.

Chinese Internet ETF Chart

Looking at the charts, an up day is better than a down day, but the S&P 500 did not do enough to address resistance just over 1200. The dip to 1139 was bought (support is in the 1135 area), but index really needs to make a run to the 1195-1205 to get buyers excited. As Keene noted last night, bearish below 1130 is probably the way to look at things. From there, things get progressively more ugly as 1100 then 1060 would come into play.

S&P 500 Chart

The Dow's final tally looks good on paper, but the blue-chip index fell short of taking out its 50-day moving average at 11,429 or taking out stiffer resistance just a few points from there. The price action here still is not much to write home about and the Dow remains vulnerable. That said, another 200 points on top of Thursday's close, and the near-term setup for the Dow would be a bit more attractive. Problem is support is not too far away at 10,930.

Dow Chart

I am willing to give the Nasdaq a pass for today, sort of, because most of the decline can probably be tied to NFLX, RIMM and the government looking into the aforementioned Chinese tech stocks. Eliminate just one or two of those factors and there is a fair chance the Nasdaq Composite takes out its 50-day line 2557. The flip side is the close below 2500 could be a bearish sign and the Composite could easily return to 2460 from here and perhaps as low as 2400.

Nasdaq Chart

I am not backing down from my conviction that this market is beholden to two catalysts: Europe and U.S. economic data. For one day at least, both of those situations looked pretty good. I am not a believe in the positive sentiment on Europe lasting too long, but I will be flat heading into the weekend because that is the prudent thing to do. Have a great weekend.

Todd Shriber


New Plays

Multiple Triple-Digit Swings

by James Brown

Click here to email James Brown

Editor's Note:

Unless you're a day trader it's tough to trade when the Dow Industrials Average experiences not one but three triple-digit swings in the same day. That doesn't mean day traders had it easy. It can be nerve-racking trying to catch the intraday swings. The DJIA saw its +260-point rally this morning reverse into a -306 point drop from its highs and then reverse again with a +188 point bounce late in the day.

The positive news out today was Germany's successful vote to expand the EFSF bailout program. Plus, the U.S. Q2 GDP number was revised higher. Then the weekly U.S. jobless claims came in less than expected.

On the other hand the market reacted negatively to an earnings warning from semiconductor company AMD. Plus, there were renewed concerns over economic challenges in China (these concerns ebb and flow quite a lot).

You could argue that traders are confused with all the back and forth volatility. Meanwhile I don't trust the late day bounce. It was probably fueled by end of quarter window dressing since tomorrow is the end of the third quarter. Looking at the market today the weakness in the semiconductors and retailers is bearish but this was offset by strength in financials and transports. The question is, will investors be buying stocks heading into the weekend? Or will traders be selling stocks because they are afraid of the headline risk over the weekend?

There is too much volatility and tomorrow could see more end of quarter window dressing. We are not adding any new trades tonight. Look for new trades in the weekend newsletter!

-James


In Play Updates and Reviews

Stocks Reverse Late in the Day

by James Brown

Click here to email James Brown

Editor's Note:
The stock market's afternoon slide into negative territory reversed late in the day. I suspect the rebound was fueled by end of quarter window dressing. Unfortunately we did see SLW hit our stop loss today.

-James

Current Portfolio:


BULLISH Play Updates

Bristol-Myers Squibb - BMY - close: 31.12 change: +0.28

Stop Loss: 29.90
Target(s): 33.50
Current Gain/Loss: -0.1%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
09/29 update: It was a relatively quiet day for BMY. Shares dipped toward short-term support in the $3.75 area again before bouncing off these lows. While we're bullish on BMY I'm cautious on the market. I'd prefer to wait for a dip closer to $30.00 before considering new bullish positions.

current Position: Long BMY stock @ $31.15

- or -

Long 2012 Jan. $30 call (BMY1221A30) Entry $2.26

09/27 new stop loss @ 29.90
09/26 trade opened

Entry on September 26 at $31.15
Earnings Date 10/26/11 (unconfirmed)
Average Daily Volume = 13.6 million
Listed on September 22, 2011


PowerShares Gold Double Long - DGP - close: 52.29 change: +1.13

Stop Loss: 49.40
Target(s): 59.00, 64.00
Current Gain/Loss: -5.7%
Time Frame: 8 to 10 weeks
New Positions: see below

Comments:
09/29 update: After the recent volatility in gold prices today was positively boring. Shares of the DGP gapped open higher and then spent the rest of the session churning sideways. Readers might want to wait for another dip closer to the $50.00 mark before initiating new positions.

- Small Positions -

current Position: long the DGP @ $55.26

09/27 trade opened
09/26 reload this trade. Buy the open tomorrow, new stop 49.40
09/26 Trade opened on gap down at $51.96.
Trade stopped out at $51.45 (-0.9% loss)

Entry on September 27 at $55.26
Earnings Date --/--/--

1st Attempt:

Entry on September 26 at $51.96
Exit on September 26 at $51.45 (-0.9%)


Average Daily Volume = 1.3 million
Listed on September 24, 2011


Energy XXI Ltd. - EXXI - close: 22.57 change: +0.06

Stop Loss: 20.85
Target(s): 25.00
Current Gain/Loss: + 3.7%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
09/29 update: EXXI is normally a volatile stock. To see shares close almost unchanged on the session is a surprise. Of course the closing numbers don't tell the whole story. EXXI spiked to $23.42 this morning, dipped to $21.86 this afternoon, before paring its losses. I am not convinced of the market's late day rebound. Thus, I would hesitate to open new positions here.

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

Suggested Position: Long EXXI stock @ $21.75

- or -

Long OCT $23 call (EXXI1122J23) Entry $1.15

09/27 readers may want to take profits now
EXXI +8.4%, option bid @ $1.85 (+60.8%)

Entry on September 26 at $21.75
Earnings Date 10/26/11 (unconfirmed)
Average Daily Volume = 983 thousand
Listed on September 22, 2011


Human Genome Sciences Inc. - HGSI - close: 13.73 change: +0.08

Stop Loss: 12.89
Target(s): 16.25, 17.50
Current Gain/Loss: -4.0%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
09/29 update: HGSI fell from its intraday high of $14.16 to the afternoon low of $13.15 before paring its losses and closing in positive territory. Aggressive traders could buy this bounce. I would prefer to see a new rally past $14.20 or a close over $14.00. Cautious traders may want to up their stop toward today's low.

(Small Positions)

Current Position: Long HGSI @ $14.31

- or -

Long OCT $15 call (HGSI1122J15) Entry $0.83

Entry on September 26 at $14.31
Earnings Date 10/27/11 (unconfirmed)
Average Daily Volume = 4.8 million
Listed on September 24, 2011


iShares Russell 2000 ETF - IWM - close: 66.33 change: +1.13

Stop Loss: 63.40
Target(s): 69.75
Current Gain/Loss: +3.2%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
09/29 update: It was a volatile day for small cap stocks. The IWM gapped higher and rallied to $67.02 this morning before falling almost -4% at its intraday low. Stocks rebounded late in the session, probably on last minute quarter end window dressing by fund managers. More conservative traders may want to raise their stop loss near today's intraday low (64.37).

We are not suggesting new bullish positions.

NOTE: The plan was to sell half of our position at the open this morning. IWM @ 66.73 (+3.8%), Nov $68 call @ $3.56 (+32.3%).

Suggested Position: Long IWM @ $64.25

- or -

Long NOV $68 call (IWM1119K68) Entry $2.69

09/29 Planned to sell half at the open.
IWM @ 66.73 (+3.8%)
bid NOV $68 call $3.56 (+32.3%)
09/28 Sell HALF of our positions now!
09/27 readers may want to exit/take profits now
IWM (+5.5%), option bid @ $4.35 (+61.7%)
09/26 new stop loss @ 63.40

Entry on September 23 at $64.25
Earnings Date --/--/--
Average Daily Volume = 76.7 million
Listed on September 22, 2011


Red Hat Inc. - RHT - close: 43.93 change: +0.28

Stop Loss: 41.75
Target(s): 46.50, 48.00
Current Gain/Loss: +2.8%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
09/29 update: It was another volatile session for stocks but traders bought the dip in RHT near technical support at the 200-dma. Please note that I am raising our stop loss to $41.75.

Current Position: Long RHT stock @ $42.72

- or -

Long OCT $45 call (RHT1122J45) Entry $1.15

09/29 new stop loss @ 41.75
09/27 new stop loss @ 41.40

Entry on September 26 at $42.72
Earnings Date 12/21/11 (unconfirmed)
Average Daily Volume = 2.7 million
Listed on September 24, 2011


U.S. Oil ETF - USO - close: 31.97 change: +0.72

Stop Loss: 30.45
Target(s): 34.50
Current Gain/Loss: +4.10
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
09/29 update: A rebound in oil helped produce a gap open higher for the USO. Shares of this ETF then spent the rest of the day moving sideways in choppy trading. The 10-dma appears to be acting as short-term technical resistance. I am not suggesting new positions at this time. More conservative traders may want to exit early now!

current Position: Long the USO @ $30.71

- or -

Long NOV $32 call (USO1119K32) Entry $1.81

09/28 Cautious traders may want to exit early now
09/27 new stop loss @ 30.45
09/26 trade opened at $30.71
09/24 removed conditional entry, adjusted stop to $29.75.

Entry on September 26 at $30.71
Earnings Date --/--/--
Average Daily Volume = 10.7 million
Listed on September 22, 2011


BEARISH Play Updates

Avon Products Inc. - AVP - close: 19.83 change: +0.22

Stop Loss: 21.11
Target(s): 17.75, 15.50
Current Gain/Loss: +0.6%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
09/29 update: AVP's gap open higher this morning provided a better entry point for our bearish trade. Shares opened at $19.96, rallied to $20.25 only to reverse lower. The stock retested yesterday's support near $19.50 before paring its losses. I do not see any changes from my prior comments and would still open new positions now. More conservative traders may want to consider a tighter stop loss lower their risk.

Earlier Comments:
Our targets are $17.75 and $15.50. Readers may want to consider the November puts instead of Octobers. FYI: The Point & Figure chart for AVP is bearish with a $7.00 target.

Current Position: short the stock @ $19.96

- or -

Long OCT $20 PUT (AVP1122V20) Entry $0.79

Entry on September 29 at $19.96
Earnings Date 10/27/11 (unconfirmed)
Average Daily Volume = 3.9 million
Listed on September 28, 2011


CSX Corp. - CSX - close: 19.58 change: +0.68

Stop Loss: 20.26
Target(s): 18.10, 16.25
Current Gain/Loss: - 0.3%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
09/29 update: Railroad stocks were outperformers today. CSX erased yesterday's -3.4% decline with a +3.6% bounce. The move was fueled by positive analyst comments on the industry this morning. The larger trend for CSX is still down but readers may want to wait for a new failed rally at $20.00 before initiating new positions.

Earlier Comments:
Our first target is $18.10. Our second, much more aggressive target is $16.25, which could take a few weeks to get there.

Current Position: short CSX stock @ $19.65

- or -

Long OCT $20 PUT (CSX1122V20) Entry $1.20

Entry on September 28 at $19.65
Earnings Date 10/18/11 (confirmed)
Average Daily Volume = 12.4 million
Listed on September 27, 2011


Phillip Morris Intl. - PM - close: 64.01 change: +0.63

Stop Loss: 66.05
Target(s): 60.25, 57.50
Current Gain/Loss: +0.3%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
09/29 update: The morning rebound faded and PM tagged a new relative low before reversing back into positive territory. Shares remain under resistance at its 200-dma and the $66.00 level. I would still consider new positions here or you could wait for a new failed rally in the $65-66 area.

Current Position: short PM stock @ 64.21

- or -

Long NOV $60 PUT (PM1119W60) Entry $1.60

Entry on September 29 at $64.21
Earnings Date 10/20/11 (unconfirmed)
Average Daily Volume = 10.9 million
Listed on September 28, 2011


CLOSED BULLISH PLAYS

Silver Wheaton Corp. - SLW - close: 30.16 change: -0.47

Stop Loss: 30.45
Target(s): 37.00, 41.00
Current Gain/Loss: -11.4%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
09/29 update: Shares of SLW continued to underperformed even though silver prices gapped open higher and closed with a gain today. SLW's gap higher and spike to $31.73 failed. Shares hit our stop loss at $30.45 as it dipped under the $30.00 level. The $30.00 area has been support in the past. Aggressive traders may want to consider new bullish positions here with a tight stop loss. I'm going to keep SLW on my watch list for a few days.

*Small Positions*

closed Position: Long SLW stock @ $34.38, exit $30.45 (-11.4%)

- or -

OCT $35 call (SLW1122J35) Entry $1.70, Exit $0.60 (-64.7%)

09/29 stopped out at $30.45
09/27 trade opened on gap higher at $34.38

chart:

Entry on September 27 at $34.38
Earnings Date 11/08/11 (unconfirmed)
Average Daily Volume = 6.7 million
Listed on September 26, 2011