Option Investor
Newsletter

Daily Newsletter, Monday, 11/7/2011

Table of Contents

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

Market Wrap

The Italian Job

by Todd Shriber

Click here to email Todd Shriber
U.S. stocks dodged an Italian bullet on Monday as all three major indexes posted decent gains on a day that started with ample speculation that Italy would be the Euro Zone's sequel to Greece. Comments from European policymakers helped assuage skittish investors even as Italian bond yields continued to blow out and Silvio Berlusconi fights for his political life.

Market Stats

While stocks were able to stave off more European crisis concerns today, it was gold that really impressed. The yellow metal is back within striking distance of $1,800 an ounce after closing at $1790/oz on Monday. Helping the cause were statements out of Germany that the EU's largest economy will not touch their gold reserves in order to fund bailout plans. Wise idea and just one more example that gold is in fact money.

Adding fuel to gold's fire is the lingering notion that the Federal Reserve will engage in another round of quantitative easing and that the European Central Bank (ECB) will follow suit. I do not know if the Fed and ECB are going travel down QE Street again, but I think it's apparent that gold's safe have status has been restored and with Greece, Italy and friends under substantial duress, investors want a safe have.

Gold Chart

One would have thought Monday would have been a grizzly day for Italian equities, what with calls for Prime Minister Silvio Berlusconi's head, I mean resignation, and growing speculation that Italy will be the next European domino to fall after Greece. As I have said before, Italy is much more significant than Greece because Italy is the third-largest Euro Zone economy behind Germany and France.

Even with yields on Italian bonds soaring to highs not seen since the debut of the Euro, German Finance Minister Wolfgang Schaeuble told the media today that investors are overreacting to Italy's situation. Schaeuble even went so far as to say that Italy is not comparable to Greece. Let's hope not.

Maybe those comments had a calming effect on stocks, I do not know for certain. I do know that when I got up this morning, I thought the iShares MSCI Italy Index Fund (NYSE: EWI) was headed for a nasty day. Instead, the lone Italy-specific ETF listed in the U.S. gained almost 2% on volume that was less than half the daily average.

Italy ETF Chart

Keeping with theme of surprises from across the Atlantic, BP (NYSE: BP) did not have a bad day all things considered. In fact, the U.S.-listed shares of Europe's second-largest oil company closed fractionally higher despite news that broke on Sunday that BP's plan to sell its 60% stake in Argentina's Pan American Energy to China's Cnooc (NYSE: CEO) for $7.1 billion collapsed.

BP was looking to sell the Argentine asset as part of its plan to raise $30 billion through asset sales to pay for Gulf spill-related liabilities, but the deal with Cnooc, China's largest offshore oil explorer, collapsed under the weight of Argentina's less than favorable regulatory environment. The South American country actually has some decent energy assets, it is the government that stands in the way of the country being a bigger energy player.

The transaction had a Nov. 1 deadline. In a filing with the Hong Kong stock exchange, Cnooc said Bridas Energy, in which the Chinese firm owns half, sent BP a letter on November 5 to terminate the deal, Reuters reported. BP said it's “happy to return to long-term ownership of these valuable assets, given the considerable improvement in its own financial strength and circumstances, as well as the improved external trading environment,” according to the Wall Street Journal.

What is even more surprising about the performance of BP ADRs today is that news of the deal with Cnooc falling apart prompted speculation that BP may not be able to raise its dividend next year as the company said it might when it reported third-quarter earnings a few weeks ago. Just as a note, BP CEO Bob Dudley has raised the company's asset sales target to $45 billion.

BP Chart

Another stock that notched a surprise gain despite all the worry surrounding Europe was Jefferies (JEF), the boutique investment bank. The embattled bank has been having to answer questions about its exposure to European sovereign since the MF Global (MF) imbroglio last week. In the case of Jefferies, it was really a case of ''Who is next?'' as traders pondered if another U.S. financial institution could be sunk by exposure to European bonds.

To be sure, the 1.4% Jefferies gained today barely puts a dent in last week's 18% plunge and it is worth noting that the December 6 puts in Jefferies have tumbled about 40% in the past two trading days. The company has slashed its holdings of PIIGS sovereign debt by 50% in a matter of days and investors seem to be buying into the theory that Jefferies is not as dangerously levered to Europe as was MF Global.

The four most-traded puts -- all of which expire in December and have strike prices at $5, $6, $10 and $11, Bloomberg News reported. Some options traders are betting Jefferies could disappear, but the company is at least making an effort to ward off that notion with being transparent (I think) about its Europe exposure.

Jefferies Chart

In earnings news, shares of satellite television providerDish Network (DISH) jumped more than 5% after the company declared a $2 per share special dividend and said its third-quarter profit rose to $319.1 million, or 71 cents per share, from $244.9 million, or 55 cents per share, a year earlier. Revenue increased 12% to $3.6 billion. Analysts expected a profit of 74 cents on revenue of $3.64 billion. The company had 13.9 million subscribers at the end of the quarter. Volume in shares of Colorado-based Dish was more than triple the daily average.

Dish Network Chart

Canada-based Cameco (CCJ) the largest North American uranium miner, plunged 6.25% on turnover that was more than double the daily average after the company lowered its 2011 uranium production forecast to 21.7 million pounds from an earlier estimate of 21.9 million pounds. Cameco's third-quarter profit rose to $102 million, or 26 cents a share, from $78.5 million, or 20 cents a share, a year earlier. Revenue rose 26% to $517.1 million. Analysts expected a profit of 30 cents.

Cameco Chart

Looking at the charts, the S&P 500's small Monday gain kept the index above 1250 and that's a bullish sign. Next resistance is 1300 and that's a legitimate possibility as long as the news flow out of Europe and U.S. economic data points remain kind of good/less bad. A move below the 1225 would be bad news. The S&P 500 needs to add just 13 points to surpass its 200-day line.

S&P 500 Chart

The Dow closed Monday above its 200-day moving average and the psychologically important 12,000 level. Now the blue-chip index needs to work its way back to resistance at 12,230, just below last week's closing high. I would remain bullish as long as support at 11,650 holds. A close below that level is a bearish sign.

Dow Chart

By comparison, the Nasdaq was not all that impressive today and remains below the important 2700 level. The silver lining is Monday's action was enough to get the Nasdaq above its 200-day moving average. Once the Nasdaq takes out 2700, it is on to next resistance at 2750. Closes above 2700 are bullish here and I would be cautious below 2650.

Nasdaq Chart

In my humble opinion, Monday was one of those days where I could have been telling you about a major loss on the S&P 500 and a triple-digit loss on the Dow. Obviously, that was not the case and the market deserves some credit for grinding higher in the face of some, shall we say, tricky headlines. Markets always find an excuse to sell-off and if the situation in Italy was not a valid excuse to move lower, I do not know what is. This weeks looks like it is shaping up to be a cautiously bullish affair.

Todd Shriber


New Plays

Oil & Gas Drilling

by James Brown

Click here to email James Brown


NEW BULLISH Plays

Kodiak Oil & Gas - KOG - close: 7.37 change: +0.27

Stop Loss: 6.75
Target(s): 9.75
Current Gain/Loss: unopened
Time Frame: two to three months
New Positions: Yes, see below

Company Description

Why We Like It:
KOG is a small oil exploration and production company focused on the Western United States. The company is ramping up production. In their recent earnings report KOG reported bottom-line numbers that were in-line with estimates. Revenues were up more than +260% but that still missed Wall Street's revenue estimate. Shares didn't move much on the earnings news.

Not only is KOG a momentum play (look at the move off the October low, whew!) but it's also a takeover trade. KOG is small and growing and these days it is easier for larger oil companies to just buy existing production instead of finding it.

The stock has struggled with resistance in the $7.40-7.50 zone for months. I am suggesting a trigger to open bullish positions at $7.51. More conservative investors may want to wait for KOG to actually close over $7.50 before initiating positions. We will use a stop loss at $6.75. Our multi-month target is $9.75. FYI: FYI: The Point & Figure chart for KOG is bullish with a $13.75 target.

Trigger @ 7.51

Suggested Position: buy the stock @ 7.51

- or -

buy 2012 MAR $7.50 call (KOG1217C7.5) current ask $1.25

Annotated chart:

Entry on November xx at $ xx.xx
Earnings Date 03/05/12 (unconfirmed)
Average Daily Volume = 6.6 million
Listed on November 5, 2011



In Play Updates and Reviews

DISH Announces Special $2 Dividend

by James Brown

Click here to email James Brown

Editor's Note:
Shares of DISH rallied on news of a special $2.00 dividend instead of sinking on lackluster earnings results. Our bearish play was stopped out and the move cut our gains on the stock position in half.

We have adjusted our entry point strategy on the XLF trade.

-James

Current Portfolio:


BULLISH Play Updates

Beazer Homes - BZH - close: 2.03 change: -0.01

Stop Loss: 1.75
Target(s): 3.25
Current Gain/Loss: -7.3%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
11/07 update: BZH closed virtually unchanged on Monday after spending the session bouncing around the $2.00-2.10 zone. I don't see any changes from my weekend comments.

I would still consider new positions now. Cautious traders may want to wait for a dip toward the $1.90-1.80 zone instead.

Earlier Comments:
We have listed 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


Casey's General Stores - CASY - close: 50.80 change: +0.73

Stop Loss: 47.70
Target(s): 54.50
Current Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Comments:
11/07 update: It turned out to be a good day for CASY with a +1.4% gain and a new high. Yet our trade is not open. Both the S&P 500 and CASY opened lower this morning. I am suggesting we try again. The plan is to open bullish positions if CASY and the S&P 500 index both open higher. Nimble traders may want to try and buy a dip near $50.00 instead. FYI: The Point & Figure chart for CASY is bullish with a $70.00 target.

*see Entry Details above*

Suggested Position: buy CASY stock @ the open

- or -

buy the DEC $50 call (CASY1117L50)

Entry on November xx at $ xx.xx
Earnings Date 12/06/11 (unconfirmed)
Average Daily Volume = 250 thousand
Listed on November 5, 2011


CEMEX - CX - close: 4.74 change: +0.06

Stop Loss: 4.24
Target(s): 4.95
Current Gain/Loss: + 5.8%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
11/07 update: CX is getting pretty close to our exit target at $4.95. The high today was $4.87. More aggressive traders may want to raise their target. The 100-dma might (currently near $5.45) might be a good alternative exit point. There is a good chance that if the markets are positive tomorrow that CX will hit our exit at $4.95.

I am not suggesting new positions at this time. We will raise our stop loss up to $4.24, keeping it under the simple 10-dma.

current Position: Long CX stock @ $4.48

- or -

Long Jan $5 call (CX1221A5) Entry $0.45

11/07 new stop loss @ 4.24
11/05 new stop loss @ 3.97
11/03 CX gapped open to $4.48 (+6.3%)

Entry on November 3 at $ 4.48
Earnings Date 10/26/11
Average Daily Volume = 20.3 million
Listed on November 2, 2011


Dycom Industries - DY - close: 19.54 change: +0.05

Stop Loss: 18.40
Target(s): 22.25
Current Gain/Loss: unopened
Time Frame: 6 to 8 weeks or until earnings.
New Positions: Yes, see below

Comments:
11/07 update: Our new trade on DY is not open yet. Neither DY or the S&P 500 index opened higher. I am suggesting we try again. We want to buy the stock or calls tomorrow morning but only if both DY and the S&P 500 open positive tomorrow.

Earlier Comments:
FYI: The Point & Figure chart for DY is bullish with a $32.50 target.
NOTE: We will probably choose to exit ahead of the earnings report to avoid holding over the announcement in late November.

*see Entry Details above*

Suggested Position: buy DY stock @ the open

- or -

buy the DEC $20 call (DY1117L20)

Entry on November xx at $ xx.xx
Earnings Date 11/22/11 (unconfirmed)
Average Daily Volume = 379 thousand
Listed on November 5, 2011


Healthstream Inc. - HSTM - close: 16.02 change: +0.29

Stop Loss: 14.40
Target(s): 18.00
Current Gain/Loss: + 1.4%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
11/07 update: Bingo! If you were looking for an entry point we got one today. I suggested waiting for a dip near its 10-dma. HSTM pulled back to its 10-dma and rebounded to eventually close up +1.8% on the session. I am raising our stop loss up to $14.40.

Earlier Comments:
Our plan was to keep position sizes small to limit risk. Our target is $18.00. FYI: The Point & Figure chart for HSTM is bullish with a $17.50 target. NOTE: HSTM does have options but the spreads are too wide to trade.

(small positions)

current Position: Long HSTM @ $15.79

11/07 new stop loss @ 14.40
11/03 HSTM gapped open higher at $15.79

Entry on November 3 at $15.79
Earnings Date 10/24/11
Average Daily Volume = 134 thousand
Listed on November 2, 2011


IMAX Corp. - IMAX - close: 19.51 change: +0.22

Stop Loss: 17.70
Target(s): 24.50
Current Gain/Loss: + 0.6%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
11/07 update: Traders bought the dip in IMAX near its rising 10-dma midday. If the stock market can rally tomorrow we could see IMAX breakout past the $20 level and its 100-dma.

Earlier Comments:
Our multi-week target is $24.50. Keep in mind that the exponential 200-dma could be resistance near $22.25ish. FYI: The Point & Figure chart for IMAX is bullish with a $28.00 target.

Current Position: Long IMAX @ $19.38

- or -

Long DEC $20 call (IMAX1117L20) Entry $1.27

Entry on November 3 at $19.38
Earnings Date 10/27/11
Average Daily Volume = 1.2 million
Listed on November 2, 2011


Juniper Networks - JNPR - close: 23.71 change: -0.27

Stop Loss: 21.90
Target(s): 29.00
Current Gain/Loss: - 0.0%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
11/07 update: JNPR is still stuck under resistance at the $24.00 level. Shares spent another day churning sideways in the $24-23 zone. I don't see any changes from my prior comments.

At the moment I am neutral on launching new positions. If stocks correct then JNPR is likely to retest the $22.00 level. If stocks continue to rise then we need to see JNPR breakout past $24.00 soon. Readers could use a move past $24.10 as an entry point but if you do I would consider raising your stop loss!

The plan was to keep positions small to limit our risk.

(small positions)

current Position: Long JNPR stock @ $23.72

- or -

Long JAN $25 call (JNPR1221A25) Entry $1.50

11/02 trade is open. JNPR opened at $23.72
11/01 Try again. New strategy. Buy JNPR if stock and S&P500 opens positive tomorrow, stop loss @ 21.90.
11/01 trade opened at $23.46, stopped out @ 22.75 (-3.0% loss)
option opened @ $1.80, exit $1.36 (-24.4%)
10/29 alternative entry point: dip at $23.00

Entry on November 2 at $23.72
Earnings Date 10/18/11
Average Daily Volume = 13 million
Listed on October 29, 2011


NetApp Inc. - NTAP - close: 42.84 change: +0.21

Stop Loss: 39.90
Target(s): 43.90
Current Gain/Loss: + 7.7%
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
11/07 update: NTAP managed to eke out another gain but shares spent most of the day churning sideways in a narrow range. I do not see any changes from my weekend comments.

I am not suggesting new positions at this time. More conservative traders may want to take profits now, especially if you're holding the calls.

Earlier Comments:
This is going to be a short-term trade. We do not want to hold over the November 16th earnings report.

current Position: Long NTAP stock @ 39.75

- or -

Long NOV $40 call (NTAP1119K40) Entry $1.71

11/05 new stop loss @ 39.90, adjusted target to $43.90
11/03 new stop loss @ 38.40
11/01 new stop loss @ 37.25
11/01 NTAP gaps open lower at $39.75, our new entry point.

Entry on November 1 at $39.75
Earnings Date 11/16/11 (confirmed)
Average Daily Volume = 6.8 million
Listed on October 31, 2011


Financial SPDR ETF - XLF - close: 13.36 change: +0.08

Stop Loss: 12.74
Target(s): simple 200-dma
Current Gain/Loss: unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see below

Comments:
11/07 update: We are adjusting our strategy on the XLF. The stock market's intraday rebound is a positive development. I'm an growing slightly more optimistic here. Instead of waiting to buy a dip in the XLF I am suggesting we open bullish positions when shares hit $13.55. More aggressive traders could open positions tomorrow morning if both the XLF and the S&P 500 index open positive as an alternative entry point.

If we are triggered at $13.55 we'll use a stop loss at $12.74 and aim for the simple 200-dma (currently $14.82). The exponential 200-dma (near 14.12) is likely to remain short-term overhead resistance.

We still want to keep our position size small!

Trigger @ $13.55 (small positions)

Suggested Position: buy the XLF @ $13.55

- or -

buy the 2012 Jan $14 call (XLF1221A14)

11/07 new strategy: Instead of buying a dip, I am suggesting we buy a rally with a trigger at $13.55. New stop loss $12.74. Target simple 200-dma.

Entry on November xx at $ xx.xx
Earnings Date --/--/--
Average Daily Volume = 137 million
Listed on November 3, 2011


Xilinx Inc. - XLNX - close: 32.97 change: +0.31

Stop Loss: 31.40
Target(s): 35.75
Current Gain/Loss: + 1.4%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
11/07 update: XLNX spent much of the day churning sideways. In the last two hours shares experienced a strong bounce and closed near its highs for the session. I would still consider new positions now.

Earlier Comments:
The plan was to keep our position size small to limit risk. Our multi-week target is $35.75. FYI: The Point & Figure chart for XLNX is bullish with a $46 target.

(small positions)

Current Position: Long XLNX stock @ 32.50

- or -

Long Jan $35 call (XLNX1221A35) Entry $0.95

Entry on November 1 at $32.50
Earnings Date 10/19/11
Average Daily Volume = 5.0 million
Listed on October 29, 2011


BEARISH Play Updates

None. We do not have any active bearish trades.


CLOSED BEARISH PLAYS

Dish Network - DISH - close: 24.66 change: +1.18

Stop Loss: 24.55
Target(s): 21.25
Current Gain/Loss: +3.2%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
11/07 update: Our DISH trade has been stopped out. The company reported earnings this morning. DISH missed estimates by one cent with revenues that were in-line with expectations. The company lost 111,000 subscribers, which was more than expected. The stock should have been down today but management tried to offset the bad news by announcing a special $2.00 dividend.

The stock opened at $23.10 and our stop loss was hit at $24.55 pretty quickly. This cut our gains in half.

closed Position: short DISH stock @ $25.38, exit $24.55 (+3.2%).

- or -

NOV $25 PUT (DISH1119W25) Entry $1.20, exit $1.00 (-16.6%)

11/07 stopped out a $24.55
11/05 new stop loss @ 24.55
11/01 new stop loss @ 24.75

chart:

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