Option Investor
Newsletter

Daily Newsletter, Monday, 10/31/2011

Table of Contents

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

Market Wrap

Europe Rears Its Ugly Head Again

by Todd Shriber

Click here to email Todd Shriber
It was a dreadful day for U.S. equities as concern's regarding the European Union's ability to contain the continent's sovereign debt crisis played like Lazarus and rose from the grave. The MF Global (MF) situation did not help matters. With the rapid decline of the commodities and derivatives broker being viewed by some as miniature version of Bear Stearns or Lehman Brothers, investors were skittish on October's final trading day as the S&P 500 lost 2.5% and the Dow Jones Industrial Average dealt with a 276-point decline. The Nasdaq shed 1.93%.

Market Stats

I will not be so bold as to say all the good work the market did last week has gone for naught, but Monday's session serves as a stark reminder to what so many folks have been saying over the past week. That being Europe is making progress, but the sovereign debt issue is nowhere near solved. Most investors probably knew that in the back of their minds, but the behavior of U.S. and European equities today is proof positive that as fast as Europe can boost riskier assets, it can drag them down as well.

Making matters worse is the fact that China is not likely to play savior as so many European policymakers were secretly hoping. In fact, China's Xinhua News Agency said the world's biggest country by population will not play savior to Europe. Even as a former journalist, I say do not believe everything you read, but when it comes from the state-run news agency, I think it is a pretty safe bet that China will not be the ultimate backstop for Europe.

It was a bad day for bonds issued by the PIGS. The five-year Italian yield rose to the highest since the euro was introduced in 1999 and yields on Spanish 10-years rose to a 12-week high, Bloomberg reported. The spread on Italian 10-years over comparable German bunds is now 400 basis points. No treats on Halloween for investors in PIGS debt, that is for sure.

Italian Bond Yields

In economic news, the Chicago Purchasing Managers Index (PMI) fell to 58.4% in October from 60.4% in September. Economists expected a reading of 58.4%. The employment index jumped to a six-month high, but new orders fell to 61.3% from 65.3%. The national Institute of Supply Management's manufacturing index is released tomorrow.

As noted earlier, a large part of the reason for Monday's declines was the onslaught of negative headlines regarding MF Global. In what amounts to a potential embarrassment for MF Global CEO Jon Corzine, formerly head of Goldman Sachs (GS) and U.S. Senator from and governor of New Jersey, the brokerage firm filed for Chapter 11 bankruptcy protection in New York on Monday, listing $41 billion in assets and $39.7 billion in debt.

Throughout last week, there was a flurry of speculation that MF was looking to sell some of its assets o the entire company and Corzine reportedly made calls to basically every bank on the Street. There was a rumor that Jefferies (JEF) was interested. DealBook reported Sunday night that Interactive Brokers (IBKR) was talking with MF.

Cozine took the reigns at MF in March 2010 and by most accounts, looked to transform the brokerage house into more an investment bank. That shift included risky trading practices and those risky trades include big bets on European sovereign debt. MF held $6.3 billion of Italian, Spanish, Belgian, Portuguese and Irish debt as of Oct. 25, Bloomberg reported. That is not the kind of stuff you want sitting on the books when you are looking for a buyer.

Last week, Moody's and Fitch both downgraded MF debt to junk status and it appears bankruptcy for the firm arrived faster than a Kardashian divorce. I kid, I kid. In all seriousness, MF Global's bankruptcy is the eighth-largest in the U.S. by assets, according to bankruptcydata.com.

MF Global Chart

Finding stocks that were in the green, let alone making new 52-week highs today was easier said than done. One standout, however, was health insurance provider Humana (HUM). On a grizzly day for stocks, Humana jumped 5.7% on volume that was nearly triple the daily average. Humana said its third-quarter profit increased 13% to $444.7 million, or $2.67 per share, from $393.2 million, or $2.32 per share, a year earlier. Revenue rose 11% to $9.3 billion. Analysts expected a profit of $2.03 per share on $9.26 billion in revenue. Humana also forecast a 2012 profit of $7.40-$7.60 a share, which is well above the $7 analysts were expecting.

Humana Chart

There was another episode of as Yahoo (YHOO) turns airing on Monday. This time, the embattled Internet search company slid 5.6% on above average volume after the company said it may sell its Asian assets and distribute those proceeds to investors in the form of a dividend rather than sell itself. Proceeds from the sale of Yahoo's Asian assets could be used for a special dividend or a share buyback plan, Bloomberg reported citing sources with knowledge of the matter.

There has been no shortage of rumors about who is supposedly interested in Yahoo, but the company still seems intent on battling Google (GOOG) alone. Yahoo shareholders have been put through the ringer so much at this point at this point that it is going to take more than a one-time dividend to appease them and today's drop might tell us as much.

Yahoo Chart

After the bell, Anadarko Petroleum (APC), the second-largest U.S. independent oil and natural gas producer, reported a third-quarter loss of $3.05 billion, or $6.12 per share, compared to a year-earlier loss of $26 million, or 5 cents per share. The loss was attributable to Anadarko agreeing to settle Gulf of Mexico spill liabilities with BP (BP).

On an adjusted basis, Anadarko earned 66 cents a share on revenue of $3.20 billion, but those numbers missed Wall Street estimates of 67 cents on revenue of $3.31 billion. The company did say its total production rose 10% and onshore production surged 30%. The after-hours crowd may be focusing more On Anadarko's production numbers as the stock is higher by almost 1% as of this writing.

Anadarko Chart

Looking at the charts, the bad news about Monday's decline beyond the obvious carnage is that the S&P 500's stay above its 200-day moving average was short-lived. The index came to a dead stop at resistance at 1285 on Friday and if it spends too many days below what was support at 1255, a return to 1225 could become a reality.

S&P 500 Chart

Things are not much different for the Dow. The blue-chip index was overbought after last week's rally and Monday's decline has brought it slightly under the 200-day line. The Dow did not touch support at 11,900 today, but if it does this week, it will be important to see what happens there. If 11,900 holds, that is probably a buying opportunity before another run at 12,250.

Dow Chart

Tech was no place to hideout today as the Nasdaq slid below round number support at 2700 and legitimate support at 2691. If the Nasdaq can retake 2700, then 2740 is next resistance and then it is on to 2825. There are not of marquee earnings reports this week, but the number of earnings reports is decent enough and the Nasdaq does have two names that could make an impact: QCOM Wednesday and SBUX Thursday.

Nasdaq Chart

As Jim noted in the weekend wrap, JPMorgan has a 1400-1475 S&P 500 year-end price target. Assuming that proves accurate, the index needs to gain 147-222 points from here, but that does not really jibe with this statistic: Price targets for companies in the index from more than 10,000 estimates suggest the S&P 500 will advance 13 percent to 1,447.93 in a year, according to Bloomberg.

I have become convinced that anything is possible, particularly after the big pop stocks delivered in October. That said, I continue to beat the dead horse and warn that Europe can hasten or hamper gains for the rest of this year.


New Plays

Technology & Industrial Goods

by James Brown

Click here to email James Brown


NEW BULLISH Plays

Fastenal Co - FAST - close: 38.09 change: -0.53

Stop Loss: 35.75
Target(s): 39.90
Current Gain/Loss: unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
FAST rallied to new all-time highs last week. Shares were overbought and now they've begun to correct lower. We want to be ready to buy the dip in this industrial goods (building materials) company.

Tonight we're suggesting a buy-the-dip entry point at $37.25 with a stop loss at $35.75. More conservative traders may want to wait for a dip into the $36.50-36.00 zone instead as their entry point. Our target is $39.90. FYI: The Point & Figure chart for FAST is bullish with a $50 target.

buy the dip Trigger @ $37.25

Suggested Position: buy the stock @ 37.25

- or -

buy the NOV $37.50 call (FAST1119K37.5) current ask $1.55

Annotated chart:

Entry on October xx at $ xx.xx
Earnings Date 01/18/12 (unconfirmed)
Average Daily Volume = 3.0 million
Listed on October 31, 2011


NetApp Inc. - NTAP - close: 40.96 change: -0.63

Stop Loss: 38.45
Target(s): 44.50
Current Gain/Loss: unopened
Time Frame: 2 to 3 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Last week NTAP saw a big breakout past resistance at $40.00. Now it looks like shares are headed for a retest. Broken resistance at $40 should be new support. We want to buy the dip at the $40.00 mark with a stop loss at $38.45. This is going to be a short-term trade. We do not want to hold over the November 16th earnings report. We'll set our target at $44.50 but we'll plan to exit ahead of earnings.

buy the dip Trigger @ $40.00

Suggested Position: buy NTAP stock @ 40.00

- or -

buy the NOV $40 call (NTAP1119K40) current ask $2.48

Annotated chart:

Entry on October xx at $ xx.xx
Earnings Date 11/16/11 (confirmed)
Average Daily Volume = 6.8 million
Listed on October 31, 2011



In Play Updates and Reviews

ADBE Hits Our Target

by James Brown

Click here to email James Brown

Editor's Note:
Shares of software stock ADBE hits our exit target. Meanwhile UWM hits our stop loss, closing our position for a gain.

-James

Current Portfolio:


BULLISH Play Updates

Beazer Homes - BZH - close: 2.15 change: -0.05

Stop Loss: 1.84
Target(s): 3.25
Current Gain/Loss: -1.8%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
10/31 update: BZH opened at $2.19 and lost -2.2% by the closing bell. We would still consider new bullish positions now but a better idea might be to wait for a dip towards the $2.05-2.00 zone.

Earlier Comments:
Tonight I am listing a very high target at $3.25 but I anticipate scaling that down. This is sort of a just-in-case BZH delivers better than expected earnings and the stock explodes kind of target. This industry is very heavily shorted so a short squeeze is a definite possibility.

Please note we are going to take the unusual step and hold over BZH's earnings in November. Normally we try to always exit ahead of earnings to avoid holding over the announcement.

FYI: You could buy calls but the spreads are so wide they could actually increase your risk (but they'll definitely leverage any move higher).

current Position: Long BZH stock @ $2.19

- or -

Long 2012 Jan $3.00 call (BZH1221A3) Entry $0.15

Entry on October 31 at $2.19
Earnings Date 11/15/11 (confirmed)
Average Daily Volume = 2.4 million
Listed on October 29, 2011


Juniper Networks - JNPR - close: 24.47 change: -0.34

Stop Loss: 22.75
Target(s): 29.00
Current Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Comments:
10/31 update: Bullish analyst comments on JNPR were not enough to keep the stock in positive territory. Shares churned sideways but eventually lost -1.3%. I do not see any changes from my prior comments.

We are suggesting readers launch small bullish positions at $24.00 with a stop loss at $22.75. More conservative traders will want to consider waiting for a dip near $23.00 or even its simple 10-dma before initiating new bullish positions. Meanwhile aggressive traders will want to consider placing their stop loss under $22.00, which should be support. We want to keep our position size small to limit our risk. FYI: The Point & Figure chart for JNPR is bullish with a $41 target.

buy the dip trigger @ 24.00 (small positions)

Suggested Position: buy JNPR stock @ $24.00

- or -

buy the JAN $25 call (JNPR1221A25)

10/29 alternative entry point: dip at $23.00

Entry on October xx at $ xx.xx
Earnings Date 10/18/11
Average Daily Volume = 13 million
Listed on October 29, 2011


VeriFone Systems - PAY - close: 42.21 change: -0.79

Stop Loss: 39.95
Target(s): 44.85
Current Gain/Loss: +3.8%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
10/31 update: I am repeating my weekend comments. Readers may want to take profits now. The stock failed at $43.00 for the second day in a row. I would expect a dip back toward the $41.00-40.00 zone.

I am not suggesting new positions at this time.

Earlier Comments:
We will aim for $44.85 as our exit target. More conservative traders may want to exit near the 200-dma. FYI: The Point & Figure chart for PAY is bullish with a $59 target.

current Position: Long PAY stock @ $40.65

- or -

Long NOV $42 call (PAY1119K42) Entry $1.05

10/29 new stop loss @ 39.95
Readers may want to go ahead and take profits now, especially with the Nov $42 calls (+114%)
10/27 new stop loss @ 38.40
10/27 Trade opened. PAY gapped higher at $40.65

Entry on October 27 at $40.65
Earnings Date 12/01/11 (unconfirmed)
Average Daily Volume = 2.3 million
Listed on October 13, 2011


Red Hat, Inc. - RHT - close: 49.65 change: -2.21

Stop Loss: 47.80
Target(s): 54.75
Current Gain/Loss: +1.2%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
10/31 update: After last week's big gains RHT hit some profit taking today. The stock gapped open lower at $50.87 and closed down -4.2%. Broken resistance in the $49.00-48.00 zone should be new support. Wait for a dip into this area or a bounce out of this area as our next entry point.

current Position: Long RHT stock @ 49.05

- or -

Long NOV $50 call (RHT1119K50) Entry $1.20

10/29 new stop loss @ 47.80
readers may want to take profits on the calls now, which are already up +137%
10/27 trade opened at trigger $49.05

Entry on October 27 at $49.05
Earnings Date 12/21/11 (unconfirmed)
Average Daily Volume = 2.8 million
Listed on October 26, 2011


Financial Sector ETF - XLF - close: 13.50 change: -0.56

Stop Loss: 13.25
Target(s): 14.45
Current Gain/Loss: + 6.2%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
10/31 update: Financial stocks were some of the market's best performers in October. Thus they were some of the worst performers today as traders sought to lock in gains. The MF Global bankruptcy news also dampened spirits for the financial sector.

The XLF fell to $13.50 and its 100-dma with today's -4% pull back. If it continues lower we'll likely see the XLF hit our stop loss at $13.25. More aggressive traders may want to widen the stop so that it's under the $13.00 level.

I am not suggesting new positions at this time.

current Position: Long XLF @ $12.71

10/28 exited Nov. $13 calls @ $1.00 (+138.0%)
10/27 plan to exit Nov. $13 calls at the open tomorrow
10/27 new stop loss @ 13.25
10/20 trade opened. XLF at $12.71
10/19 try again. New stop loss @ 11.95

Entry on October 20 at $12.71
Earnings Date --/--/--
Average Daily Volume = 125 million
Listed on October 18, 2011


Xilinx Inc. - XLNX - close: 33.46 change: +0.27

Stop Loss: 31.40
Target(s): 35.75
Current Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Comments:
10/31 update: XLNX displayed relative strength with a +0.8% gain but the rally struggled with resistance at $34.00. I am still expecting a pull back soon.

I am suggesting we open small bullish positions on a dip at $32.50 with a stop loss at $31.25. More conservative traders may want to wait for a dip closer to $32.00 as their entry point instead.

Our multi-week target is $35.75. FYI: The Point & Figure chart for XLNX is bullish with a $46 target.

buy-the-dip trigger @ 32.50 (small positions)

Suggested Position: buy XLNX stock @ 32.50

- or -

buy the Jan $35 call (XLNX1221A35)

Entry on October xx at $ xx.xx
Earnings Date 10/19/11
Average Daily Volume = 5.0 million
Listed on October 29, 2011


BEARISH Play Updates

Ancestry.com Inc. - ACOM - close: 22.77 change: +0.10

Stop Loss: 24.35
Target(s): 18.75
Current Gain/Loss: -4.4%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
10/31 update: ACOM is still trying to bounce it's just not making very much progress. I would probably wait for a drop under $21.50 before initiating new positions. This was an idea I suggested as an alternative on Thursday night.

Earlier Comments:
FYI: You might want to trade the put options instead of shorting the stock. The most recent data listed short interest at 20% of the small 31.5 million share float. That raises the risk of a short squeeze.

current Position: short ACOM stock @ $21.80

- or -

Long NOV $22.50 PUT (ACOM1119W22.5) Entry $1.41

Entry on October 28 at $21.80
Earnings Date 10/26/11 (confirmed)
Average Daily Volume = 840 thousand
Listed on October 27, 2011


Dish Network - DISH - close: 24.17 change: -0.27

Stop Loss: 27.15
Target(s): 21.25
Current Gain/Loss: +4.7%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
10/31 update: DISH lost another -1.1% but shares managed to hold on to support near $24.00 for the second day in a row. The larger trend here is still bearish but I would wait for a bounce or a failed rally in the $25.00-25.50 zone before considering new bearish positions.

Earlier Comments:
FYI: The Point & Figure chart for DISH is bearish with a $16 target.

current Position: short DISH stock @ $25.38

- or -

Long NOV $25 PUT (DISH1119W25) Entry $1.20

Entry on October 28 at $25.38
Earnings Date 11/07/11 (confirmed)
Average Daily Volume = 3.0 million
Listed on October 27, 2011


CLOSED BULLISH PLAYS

Adobe Systems - ADBE - close: 29.41 change: +0.39

Stop Loss: 27.15
Target(s): 29.50
Current Gain/Loss: +8.7%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
10/31 update: Target achieved. ADBE gapped open lower at $28.48 but managed to rally to a new relative high at $29.72. Our final target was hit at $29.50 (+8.7%).

Current Position: Long ADBE @ 27.13, exit 29.50 (+8.7%)

- or -

NOV $27 call (ADBE1119K27) Entry $1.27 exit $2.65 (+108.6%)

10/31 exit target hit at $29.50
10/29 new stop loss @ 27.15
10/29 readers may want to take profits now (+6.9% & +75% option)
10/27 new stop loss @ 26.75
10/26 new stop loss @ 25.95
10/20 new stop loss @ 25.45
10/18 new stop loss @ 25.35, today's bounce looks like an entry
10/14 ADBE gapped higher at $27.13

chart:

Entry on October 14 at $27.13
Earnings Date 12/15/11 (unconfirmed)
Average Daily Volume = 7.1 million
Listed on October 11, 2011


Ultra (long) Russell 2000 ETF - UWM - close: 35.40 chg: -2.17

Stop Loss: 35.75
Target(s): 39.00
Current Gain/Loss: + 7.5%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
10/31 update: Ouch! The UWM would have cut our gains in half with today's -5.7% pull back but our trade is closed. Shares hit our new stop loss at $35.75. I would look for short-term support near $34.00 if you're looking for a new entry point.

(Small Positions)

Suggested Position: Long UWM stock @ 33.25, exit $35.75 (+7.5%)

10/31 UWM position stopped out at $35.75
10/28 exited Nov. $35 calls @ $3.25 (+91.1%)
10/27 prepare to exit Nov. $35 calls at the open tomorrow
10/27 new stop loss @ 35.75
10/24 triggered @ 33.25

chart:

Entry on October 24 at $33.25
Earnings Date --/--/--
Average Daily Volume = 3.9 million
Listed on October 22, 2011