Option Investor
Newsletter

Daily Newsletter, Thursday, 11/10/2011

Table of Contents

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

Market Wrap

A Europe Rebound...Sort Of

by Todd Shriber

Click here to email Todd Shriber
A day after equity markets were rocked by stark reminders there are still significant problems in Europe to be dealt with, the dip was bought, but not enough to erase Wednesday's savage beating. A calmer outlook on the political front in Italy helped the S&P 500 and the Dow Jones Industrial Average each gain almost 1% while the Nasdaq barely closed higher.

Market Stats

Despite all the chaos in Europe, there was one good economic data point out today here in the States. Weekly jobless claims dropped to 390,000 last week, easily beating the reading of 400,000 claims economists expected. More importantly, the number is the lowest in seven months. The four-week moving average also ticked lower. I am not saying it is time to breakout the bubbly, but there are some slight indications the jobs market is improving.

That said, there is still too much commotion in Europe to forecast an entirely smooth ride in the months ahead for the U.S. economy. On Friday we get the latest reading of the Reuter's/University of Michigan's consumer sentiment index. The consensus estimate is 61.3 compared with the previous reading of 60.9.

Jobless Claims

As noted in the market stats table, gold took a beating today, probably because Italy looked like less of a disaster. For one day at least. As I always say, one day does not make a new trend and it would a lot more than a one-day decline to reverse gold's long-term trend. If you like to use the options market as a tell, then traders remain quite bullish on gold.

The gap of calls to buy the SPDR Gold Trust (GLD) compared to puts to sell the largest gold ETF has risen 6.5% this month, with ownership of June $220 calls showing the biggest increase, according to Bloomberg. Last week, long bets on gold futures jumped almost 7% to 148,279 contracts and a Bloomberg survey indicates analysts and money managers see the yellow metal touching $1,950 an ounce in the first quarter of 2012. Disclosure: I am long the iShares Gold Trust (IAU).

GLD Chart

Taking a closer look at Italy, the Euro Zone's third-largest economy was able to sell bonds today with a yield of 6.9% and there was relief in the market that the sale went smoothly and that Italy was able to escape a 7% yield. Still, that's the highest yield on 12-month debt Italy has paid in 14 years, Reuters reported. Such is life when the market takes its eyes off Greece and focuses squarely on Italy.

Problem with that is Italy probably cannot keep issuing debt with these lofty yields and while European policymakers might be able to craft a bailout plan for an economy as small as Greece's, they have basically said already they cannot afford a similar plan for Italy. So forgive me if I say the 3.3% jump in the iShares MSCI Italy Index Fund (EWI) today was not all that impressive. Volume was about 20% below the daily average and the ETF closed right in the middle of its 40-cent intraday range. And the ETF is still down almost 9% in the past month.

Italy ETF Chart

In stock-specific news, shares of controversial Green Mountain Coffee Roasters (GMCR) plunged 39% after the Vermont-based company posted fiscal fourth-quarter sales of $711.9 million, well below the $757.7 million analysts expected. The company's profit for the quarter rose to $75.4 million, or 47 cents a share, from $27 million, or 20 cents, a year earlier. For fiscal 2012, Green Mountain expects to earn $2.65 a share. Analysts were expecting $2.60.

Predictably, this was not a light volume decline. Nearly 47.4 million GMCR shares changed hands compared to average daily volume of almost 5.7 million. The stock has been halved in about a month, but if one is desperate to say something nice about the stock, it's still positive year-to-date as the chart indicates.

Or that could mean there is more downside to come, a bet that hedge fund manager David Einhorn has made in GMCR. That looks like a winning to me. And for what it is worth, Einhorn is also bullish on gold miners. Noteworthy is the fact that one online source touted GMCR as a takeover candidate today, naming Starbucks (SBUX) and Nestle (NSRGY) as the possible suitors.

Green Mountain Chart

Shares of Kohl's (KSS) gained almost 2% after the company said its third-quarter profit rose 20% to $211 million, or 80 cents per share, from $176 million or 57 cents per share a year earlier. Revenue increased 4.1% to $4.38 billion and same-store sales rose 2.1%. Analysts expected a profit of 80 cents on sales of $4.38 billion.

Kohl's gave decent guidance of a fourth-quarter profit of $1.93-$2.04 a share on revenue of $6.28-$6.4 billion. Analysts were expecting a profit of $1.96 per share on revenue of $6.3 billion. The company expects a full-year profit of $4.34-$4.49 a share. Analysts were expecting $4.46.

Kohl's Chart

In after hours news, another former darling continues to see its star lose some luster. I am referring to Molycorp (MCP), the largest U.S.-based rare earths miner. The company reported a profit of 67 cents a share on revenue of $138.1 million, but analysts were expecting 70 cents on revenue of $161.6 million. That miss was not viewed as slight and that shares of Molycorp down 9.6% as of this writing.

Sales, margin and income were all records in the third quarter, but that was not enough to impress investors. The company did provide an update on its important Mountain Pass, Calif. rare earths project.

''Molycorp’s ''Project Phoenix'' modernization and expansion plan at its flagship Mountain Pass, California rare earth facility has been accelerated, with the Company now expecting to achieve its Phase 1 production run rate of 19,050 metric tons per year by September 30, 2012, three months earlier than originally planned. The Company's Board of Directors authorized an additional investment of $114 million to fund the acceleration, which includes contingency funds. The acceleration of Project Phoenix Phase 1 will increase the Company’s estimated 2012 production by approximately 3,500 metric tons of Rare Earth Oxide equivalent to between 8,000 and 10,000 metric tons,'' according to a statement.

Molycorp Chart
Looking at the charts, Wednesday's slide was extremely damaging to the S&P 500 as it forced the index below its 200-day moving average. Thursday's gain was not nearly enough to get the index back to that level. Another drop below the 1220-1230 area probably takes the S&P 500 down to 1215, perhaps lower. If the index can reclaim its 200-day moving average, then the 1305-1310 area could come into play on the upside.

S&P 500

The Dow's chart looked just as ugly following the Wednesday dive as that drop represented a violation of the uptrend established last month. Obviously, Thursday's up move was not enough to put much of a dent in the previous day's loss, but the bears were not able to force the Dow down to the critical 11,630 level. That would be the area where selling could accelerate. Resistance can be found just below 12,200. From there, look for 12,350 and 12,875 as next resistance.

Dow Chart

The Nasdaq is not any more impressive than the other two major indexes. In fact, a lethargic Thursday performance might be cause for concern. The bright side is the Nasdaq remains above 2611. A drop below that area probably gets us back to 2585. From there another 20 points could come off. Next resistance lies around the 2680 area, then 2715 and 2733. I say worry about 2700 first and then the other resistance points will come into focus.

Nasdaq Chart

With a strong day on Friday, the S&P 500 and the Dow could actually close the week flat or slightly higher. Either scenario could be viewed as a victory following Wednesday's action. I would not say that is an invitation to get really heavy. However, if the consumer sentiment number is strong and the news out of Italy improves, those would at least be signs to do some selective buying.

Todd Shriber


New Plays

Potential Short Squeeze

by James Brown

Click here to email James Brown


NEW BULLISH Plays

KB Home - KBH - close: 7.33 change: +0.43

Stop Loss: 6.70
Target(s): 9.50
Current Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
It looks like some of the homebuilders may have bottomed. Maybe all the bad news for this industry is finally priced in. KBH appears to have formed a bullish double bottom with the lows in August and October. The last couple of weeks have seen KBH consolidating sideways under technical resistance at the 100-dma. If shares can breakout it could see some short covering.

The most recent data listed short interest at more than 50% of the relatively small 65.4 million-share float. That's definitely enough fuel for a significant short squeeze.

The 100-dma is at $7.42. I am suggesting a trigger to open bullish positions at $7.55. More conservative traders will want to wait for a rally past possible resistance at $7.60 instead (try a trigger at 7.65). KBH can be a volatile stock so we need to use a wide stop loss. This raises the risk profile on this trade. We'll use a stop at 6.70, which is under Wednesday's low.

We will aim for $9.50 but the exponential 200-dma might be overhead resistance (currently at 9.11).

Trigger @ 7.55

Suggested Position: buy KBH stock @ 7.55

- or -

buy the Jan $7.50 call (KBH1221A7.5) current ask $0.84

Annotated chart:

Entry on November xx at $ xx.xx
Earnings Date 01/09/12 (unconfirmed)
Average Daily Volume = 5.8 million
Listed on November 10, 2011



In Play Updates and Reviews

Stocks Rebound After Yesterday's Loss

by James Brown

Click here to email James Brown

Editor's Note:
Stocks delivered a widespread bounce but traders seem nervous. Investors could be afraid of what headlines this weekend might produce.

We saw DY hit our stop loss today.

-James

Current Portfolio:


BULLISH Play Updates

Beazer Homes - BZH - close: 2.22 change: +0.02

Stop Loss: 1.75
Target(s): 3.25
Current Gain/Loss: +1.3%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
11/10 update: It was another relatively quiet day for BZH. Shares are churning sideways near the 100-dma. I would still consider new positions on a dip in the $2.10-2.00 zone.

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: 50.65 change: -0.28

Stop Loss: 47.95
Target(s): 54.50
Current Gain/Loss: - 1.0%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
11/10 update: CASY is still consolidating lower. Shares dipped to their simple 10-dma this afternoon and pretty much tested the $50.00 level. I see this bounce from $50.00 as a new bullish entry point. More conservative traders could wait for a dip or bounce near $49 instead.

Earlier Comments:
FYI: The Point & Figure chart for CASY is bullish with a $70.00 target.

Current Position: Long CASY stock @ $51.19

- or -

Long DEC $50 call (CASY1117L50) Entry $2.90

11/08 new stop loss @ 47.95
11/08 trade opened.

Entry on November 08 at $51.19
Earnings Date 12/06/11 (unconfirmed)
Average Daily Volume = 250 thousand
Listed on November 5, 2011


CEMEX - CX - close: 4.40 change: +0.06

Stop Loss: 4.24
Target(s): 4.95
Current Gain/Loss: - 1.7%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
11/10 update: CX spiked higher this morning and hit $4.57. Unfortunately the strength faded and shares spent the rest of the session oscillating on either side of the $4.40 level. Volume was pretty light today. I am not suggesting new positions at this time.

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


Honeywell Intl. - HON - close: 53.56 change: +0.73

Stop Loss: 52.40
Target(s): 58.50
Current Gain/Loss: unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
11/10 update: HON tried to rally but couldn't quite get past the $54.00 level and its 200-dma. The stock ended the session up +1.3% but our trigger at $54.25 has not been hit.

Trigger @ 54.25

Suggested Position: buy the stock @ $54.25

- or -

buy the DEC $55 call (HON1117L55)

11/09 adjusted entry point strategy to Trigger @ 54.25, moved stop loss to $52.40

Entry on November xx at $ xx.xx
Earnings Date 01/30/12 (unconfirmed)
Average Daily Volume = 5.3 million
Listed on November 8, 2011


Healthstream Inc. - HSTM - close: 15.33 change: -0.34

Stop Loss: 14.80
Target(s): 18.00
Current Gain/Loss: - 2.9%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
11/10 update: Hmm... HSTM underperformed the market today. That's not a good sign. Shares are nearing what should be support near $15.00. Readers could use a bounce from this level as a new bullish entry point.

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

11/09 new stop loss @ 14.80
11/08 new stop loss @ 14.65
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: 18.55 change: -0.07

Stop Loss: 17.70
Target(s): 24.50
Current Gain/Loss: - 3.9%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
11/10 update: It looks like IMAX is still headed for the $18.00 level. Wait for a dip or a bounce from the $18.00 mark before considering new bullish positions.

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: 23.77 change: +0.46

Stop Loss: 21.90
Target(s): 29.00
Current Gain/Loss: + 0.2%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
11/10 update: The strong earnings report from CSCO last night helped JNPR outperformed today. Shares of JNPR spiked to $24.39 intraday and settle with a +1.9% gain. The fact that shares could not close over $24.00 is a bit troubling. Readers may want to wait for JNPR to close over $24.00 before considering new positions.

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


Kodiak Oil & Gas - KOG - close: 7.35 change: +0.17

Stop Loss: 6.75
Target(s): 9.75
Current Gain/Loss: - 2.1%
Time Frame: two to three months
New Positions: see below

Comments:
11/10 update: KOG bounced from the $7.20 level this morning and rallied toward its recent highs before paring its gains. Shares still added +2.3% by the close. While I would consider new positions here readers may want to wait for a dip near the $7.00 level instead.

Earlier Comments:
Our multi-month target is $9.75. FYI: The Point & Figure chart for KOG is bullish with a $13.75 target.

current Position: Long the stock @ 7.51

- or -

Long 2012 MAR $7.50 call (KOG1217C7.5) Entry $1.25

11/08 trade opened at $7.51.

Entry on November 08 at $ 7.51
Earnings Date 03/05/12 (unconfirmed)
Average Daily Volume = 6.6 million
Listed on November 5, 2011


Red Hat, Inc. - RHT - close: 49.07 change: +0.40

Stop Loss: 48.45
Target(s): 54.90
Current Gain/Loss: unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
11/10 update: RHT saw its morning spike to $49 fail and shares dipped to $48.00 before bouncing back into the green. Aggressive traders may want to consider buying this bounce with a stop under today's low. I am suggesting readers wait for a move over $50.00. We have a trigger to open small bullish positions at $50.25.

More conservative traders may want to wait for a breakout past the $51.00 level before initiating positions.

Trigger @ 50.25 (small positions)

Suggested Position: buy the stock @ $50.25 n

- or -

buy the DEC $52.50 call (RHT1117L52.5)

11/09 adjusted entry point strategy: Trigger @ 50.25, stop loss 48.45

Entry on November xx at $ xx.xx
Earnings Date 12/21/11 (unconfirmed)
Average Daily Volume = 2.1 million
Listed on November 8, 2011


Financial SPDR ETF - XLF - close: 12.93 change: +0.06

Stop Loss: 12.59
Target(s): simple 200-dma
Current Gain/Loss: - 4.5%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
11/10 update: The early morning bounce in the financials failed and the XLF spent the day churning sideways. There is no change from my prior comments. I am not suggesting new positions at this time.

Earlier Comments:
Our multi-week target is the simple 200-dma (near $14.50ish) but there is potential resistance at the exponential 200-dma (closer to $14.00), not to mention possible resistance at the October highs. We want to keep our position size small!

(small positions)

current Position: Long the XLF @ $13.55

- or -

Long 2012 Jan $14 call (XLF1221A14) Entry $0.59

11/09 new stop loss @ 12.59
11/08 trade opened at $13.55
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 08 at $13.55
Earnings Date --/--/--
Average Daily Volume = 137 million
Listed on November 3, 2011


Xilinx Inc. - XLNX - close: 31.95 change: -1.36

Stop Loss: 31.40
Target(s): 35.75
Current Gain/Loss: - 1.6%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
11/10 update: XLNX dipped toward last week's low and bounced. Shares underperformed their peers in the semiconductor sector with the SOX adding +0.85%. XLNX only gained +0.09%. I remain cautious here. We are not suggesting new positions. The low today was $31.62. If stocks slip lower again tomorrow we could see XLNX hit our stop loss at $31.40.

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 BULLISH PLAYS

Dycom Industries - DY - close: 18.64 change: +0.08

Stop Loss: 18.40
Target(s): 22.25
Current Gain/Loss: - 6.9%
Time Frame: 6 to 8 weeks or until earnings.
New Positions: see below

Comments:
11/10 update: A little volatility in DY this morning was enough to end our trade. Shares hit our stop loss at $18.40.

closed Position: Long DY stock @ $19.78, exit $18.40 (- 6.9%)

- or -

DEC $20 call (DY1117L20) Entry $1.30 exit $0.50 (-61.5%)

11/10 stopped out at $18.40
11/08 trade opened on DY's gap higher at $19.78.

chart:

Entry on November 08 at $19.78
Earnings Date 11/22/11 (unconfirmed)
Average Daily Volume = 379 thousand
Listed on November 5, 2011