Option Investor
Newsletter

Daily Newsletter, Thursday, 11/17/2011

Table of Contents

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

Market Wrap

Europe Fears Send Stocks To One-Month Lows.

by Todd Shriber

Click here to email Todd Shriber
Thursday's market action was an unfortunate, yet familiar refrain of what investors have had to deal with far too long. Fears regarding Europe's ability to contain its sovereign debt crisis trumped some decent economic data points here in the U.S. and the result was an ugly trading day that saw the Nasdaq lose almost 2% and the S&P 500 drop almost 1.7%. The Dow Jones Industrial Average shed 1.1%.

Stats Table

As I mentioned yesterday, correlations are so elevated in this market that even gold can get whacked. Some days, it is apparent the yellow metal is indeed a safe have. Other days, Thursday being a prime example, it is obvious gold is nowhere to hide. Gold dropped the most in seven weeks today and silver, platinum and palladium went along for the ride.

Marcus Grubb of the World Gold Council said in an interview with Bloomberg that some investors may be moving out of gold ''to shore up losses in the rest of their portfolio.'' That is probably a valid thesis and one I believe we have seen come to pass several times recently. However, that does not make nasty sell-offs in gold, such as the one we saw today, any easier to stomach. Oh yeah, the U.S. dollar index is on a four-day winning streak.

Gold Chart

Looking at some of those aforementioned economic data points, industrial production rose 0.7% last month, topping the consensus estimate of 0.4%. Capacity utilization rose up to 77.8% from 77.3%. That is the highest level since August. The November Housing Market Index showed a reading of 20, topping the October reading of 17. November's reading is also the best since May 2010.

On the jobs front,new claims for jobless benefits fell by 5,000 to 388,000 last week. That's good for a seven-month low and below the 395,000 new claims economists expected. There is a tug-of-war of sorts at play in the U.S. labor market right now. Layoffs are easing and that is certainly good news. However, new hires remain slack. In other words, do not always equate lower jobless claims with a strong gains in new jobs. Overall, the last few weeks have shown the claims picture is definitely improving.

Jobless Claims

On the surface, this would not appear to be the type of market environment in which to scramble to file and list an IPO, but the opposite may be true. Consumer-reviews site Angie's List (ANGI) made its debut as a public company today on the Nasdaq and saw its shares rise by more than 25%. Angie's List is kind of like Yelp meets Craigslist. If you want to find a new doctor, housekeeper or something along those lines, Angie's List is the place and the site has reviews.

Apparently there is something to modeling a business based on other people's opinions because Yelp filed for a $100 million IPO today. The company did not say on what exchange it will trade, but predictably, its ticker will be YELP. Goldman Sachs and Citigroup are leading the offering.

Yelp

In earnings news, there was an avalanche of reports from retailers today. Starting with the bad one, shares of Sears Holdings (SHLD) plunged more than 12% after the company said its third-quarter loss widened to $421 million, or $3.95 per share, compared with a year-earlier loss of $218 million, or $1.98 per share. On an adjusted basis, Sears lost $2.57 a share. Analysts expected a loss of $2.29. Revenue fell to $9.57 billion from $9.68 billion. Analysts expected $9.63 billion. Same-store sales dropped 0.7%.

Eddie Lampert has been trying and trying to get the Sears ship headed in the right direction, but the stock has been almost cut in half since March 2010 and the chart is not pretty at all.

Sears Chart

There is hope among discount retailers and the really deep discount ones at that. I have not been in Dollar Tree (DLTR) store, but the concept of a place that sells everything for less than a buck is interesting. Appar it is profitable, too. Dollar Tree actually finished higher today after saying said its fiscal third-quarter profit climbed to $104.5 million, or 87 cents per share, from $93.2 million, or 73 cents per share, a year earlier as sales rose to $1.6 billion from $1.43 billion. Analysts expected a profit of 83 cents per share on revenue of $1.58 billion. Dollar Tree expects a fiscal fourth-quarter profit of $1.50-$1.57 a share on sales of $1.89-$1.94 billion. Analysts are expecting $1.54 on revenue of $1.92 billion.

The company raised its full-year guidance to $3.94-$4.01 a share from $3.82-$3.95. Revenue guidance is $6.57-$6.62 billion. Analysts are expecting a profit of $3.95 on sales of $6.58 billion.

Dollar Tree Chart

In the tech world, Amazon (AMZN) is supposedly preparing another product that will intensify its rivalry with Apple (AAPL). Citigroup analyst Mark Maheny said Amazon is readying a smartphone that will go on sale in the fourth quarter of 2012. Maheny told Bloomberg that the Amazon smartphone would use chips from Texas Instruments (TXN) and Qualcomm (QCOM). Amazon shares were flat after-hours after falling 3.5% during regular trading.

One stock that was getting slammed after-hours was enterprise software maker Salesforce.com (CRM). The company reported a third-quarter loss of $3.76 million, or 3 cents a share, compared with a year-earlier profit of $21 million, or 15 cents a share, after the bell today. On an adjusted basis, Salesforce.com earned 34 cents topping the 31 cents Wall Street expected. Revenue climbed to $584 million from $429 million, beating the $572 million analysts expected.

Salesforce forecast an adjusted fourth-quarter profit of 39-40 cents, but as Barron's reported today, 20% of the company's revenue comes from Europe and that is not a good thing these days. After losing 4.3% during regular trading, the stock was down 6.3% after-hours.

Salesforce Chart

Looking at the charts, this was a destructive day from a technical perspective. I mentioned yesterday that after the S&P 500 fell below 1240, next support would be 1225. Well, that area failed today and 1200 is beckoning. From there, 1185 would be next. Suddenly, there is a lot resistance facing the S&P 500 at 1225, 1240, 1255 and 1275 and that is assuming stocks move higher.

S&P 500 Chart

On Wednesday, 29 of 30 Dow stocks closed lower with one unchanged. The situation was barely better today with 28 falling and only VZ and WMT closing higher. Maybe the best thing that can be said of the Dow today is that support at 11,600 did not come into play, but I get the feeling it is only a matter of time. Old support at 12,000 did not hold, so that is probably next resistance for the Dow.

Dow Chart

The Nasdaq is arguably the weakest of the three major indexes. Support at 2600 did not hold and we may be looking at how firm support at 2575 is as soon as Friday. CRM is not a Nasdaq stock, but it is one of the more important tech names. The Nasdaq is now almost 100 points below its 200-day moving average and it closed below its 50-day line on Thursday.

Nasdaq Chart

Here is what is extremely problematic about this market: There is nothing that even smacks of bailout support for Italy. Spain fell $600 million short of its target in a bond auction today. France is reportedly in danger of losing its AAA credit rating. All of that will continue to overshadow anything remotely positive the U.S. can offer up. Obviously, things change on a dime these days, but I am not feeling encouraged about a fourth-quarter rally.

Todd Shriber


New Plays

Supplemental Insurance

by James Brown

Click here to email James Brown


NEW BEARISH Plays

AFLAC Inc. - AFL - close: 41.96 change: -1.34

Stop Loss: 44.65
Target(s): 37.50
Current Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Shares of AFL have been churning sideways in a tug-of-war between the bulls and the bears for over two weeks. It looks like the bears are winning. The stock just broke down under short-term support. AFL could see a retracement back toward the $37.50 area.

I am suggesting small bearish positions at the open tomorrow. We want to keep our positions small to limit our risk. The $40.00 level could be possible support so don't be surprised to see a bounce. We'll start with a stop loss at $44.65.

AFL's Point & Figure chart is still bullish but it's on the verge of a new sell signal.

(Small Positions)

Suggested Position: Short AFL stock @ the open

- or -

buy the DEC $40 PUT (AFL1117x40) current ask $1.76

Annotated chart:

Entry on November xx at $ xx.xx
Earnings Date 02/01/12 (unconfirmed)
Average Daily Volume = 4.3 million
Listed on November 17, 2011



In Play Updates and Reviews

Stocks Stumble Sharply Lower

by James Brown

Click here to email James Brown

Editor's Note:
The U.S. market experienced a widespread sell-off on Thursday. We saw a handful of plays get stopped out.

We are taking this opportunity to adjust some entry point strategies on unopened trades.

-James

Current Portfolio:


BULLISH Play Updates

Beazer Homes - BZH - close: 2.09 change: -0.07

Stop Loss: 1.90
Target(s): 3.25
Current Gain/Loss: -4.5%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
11/17 update: Housing starts came in better than expected today. Yet the news had little impact on the homebuilders. BZH is still slipping back toward support near $2.00. Traders can launch new positions on a dip or a bounce off the $2.00 level.

current Position: Long BZH stock @ $2.19

- or -

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

11/12 new stop loss @ 1.90. More conservative traders may want to exit prior to the earnings report to lock in a gain.

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: 50.73 change: -0.36

Stop Loss: 49.40
Target(s): 54.50
Current Gain/Loss: - 0.9%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
11/17 update: CASY is holding up reasonably well. Shares only lost -0.7% versus -1.9% in the NASDAQ. I would still be tempted to buy a dip or a bounce near the $50.00 mark.

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

11/15 new stop loss @ 49.40
11/12 new stop loss @ 48.75
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


Carlisle Companies - CSL - close: 42.56 change: -1.05

Stop Loss: 39.85
Target(s): 49.50
Current Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Comments:
11/17 update: CSL lost -2.4% and is hovering near the 200-dma. Volume was pretty light on today's decline. We are adjusting our entry point strategy. Tonight we're suggesting small bullish positions on a dip at $42.25 with a stop loss at $39.85. More conservative traders may want to use a stop loss closer to $41.50ish instead. We want to keep our position size small to limit our risk on this aggressive entry point.

Trigger @ 42.25 (small positions)

Suggested Position: buy CSL stock @ trigger

11/17 adjusted entry point to trigger @ 42.25, stop loss to $39.85
11/16 adjusted entry point strategy to use a trigger at $45.05

Entry on November xx at $ xx.xx
Earnings Date 02/07/12 (unconfirmed)
Average Daily Volume = 327 thousand
Listed on November 14, 2011


CEMEX - CX - close: 4.37 change: -0.14

Stop Loss: 4.29
Target(s): 5.10
Current Gain/Loss: - 2.4%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
11/17 update: CX lost another -3% today on top of yesterday's -2.8%. Technical indicators are starting to turn bearish. More conservative traders may want to abandon ship. The low today was $4.33 and we have a stop loss at $4.29. 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

11/12 new stop loss @ 4.29, new exit target @ 5.10
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


IMAX Corp. - IMAX - close: 19.10 change: -0.17

Stop Loss: 18.20
Target(s): 24.50
Current Gain/Loss: - 1.4%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
11/17 update: The $19.00 level was pretty solid support today for IMAX but volume was pretty light today too. Last week's low was $18.31. I am raising our stop loss up to $18.20. I am not suggesting new positions at this time.

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

11/17 new stop loss @ 18.20

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


KB Home - KBH - close: 7.42 change: -0.09

Stop Loss: 6.70
Target(s): 9.50
Current Gain/Loss: -1.7%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
11/17 update: The better than expected housing starts data did not have much impact on the homebuilders. KBH gave up -1.1% but shares still have a bullish trend of higher lows. We are not suggesting new positions at this time.

Earlier Comments:
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.

KBH can be a volatile stock so we need to use a wide stop loss. This raises the risk profile on this trade. We will aim for $9.50 but the exponential 200-dma might be overhead resistance (currently at 9.10).

current Position: Long KBH stock @ 7.55

- or -

Long Jan $7.50 call (KBH1221A7.5) Entry $0.91

11/11 trade opened at $7.55

Entry on November 11 at $ 7.55
Earnings Date 01/09/12 (unconfirmed)
Average Daily Volume = 5.8 million
Listed on November 10, 2011


Kodiak Oil & Gas - KOG - close: 7.88 change: -0.24

Stop Loss: 7.20
Target(s): 9.75
Current Gain/Loss: + 4.9%
Time Frame: two to three months
New Positions: see below

Comments:
11/17 update: Hmm... that's the second day in a row that KOG has failed at the $8.50 level. More conservative traders may want to go ahead and take profits now. I would expect a drop back toward the $7.50-7.30 zone soon. I am not suggesting new positions at this time.

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

current Position: Long the stock @ 7.51

- or -

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

11/15 gap down at 7.41 and hit 7.21 before bouncing.
11/14 new stop loss @ 7.20
11/14 KOG announces plans to sell an additional 37.5 million shares of new stock
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


Newfield Exploration Co. - NFX - close: 40.60 change: -1.81

Stop Loss: 39.70
Target(s): 43.90
Current Gain/Loss: unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
11/17 update: Ouch! NFX really underperformed its peers with a -4.2% drop today. The close under its 50-dma is short-term bearish. However, there is a good chance that NFX might hold support at the $40.00 level.

I am suggesting we open small bullish positions on a dip at $40.25 and we'll adjust our stop loss to $39.70. If triggered we'll set a new short-term target at $43.90.

NOTE: I've adjusted our option strike to the Dec. $40s.

Earlier Comments:
I am suggesting we keep our position size small to limit our risk.

Trigger @ 40.25 (small positions)

Suggested Position: buy NFX stock @ trigger

- or -

buy the DEC $40 call (NFX1117L40) current ask $2.80

11/17 adjusted our entry strategy to buy-the-dip at $40.25, stop loss 39.70
11/16 adjusted entry strategy to use a trigger at $44.25, stop @ 41.95

Entry on November xx at $ xx.xx
Earnings Date 02/16/12 (unconfirmed)
Average Daily Volume = 4.1 million
Listed on November 12, 2011


Ryder System, Inc. - R - close: 51.12 change: -1.01

Stop Loss: 48.99
Target(s): 54.75
Current Gain/Loss: unopened
Time Frame: 6 to 9 weeks
New Positions: Yes, see below

Comments:
11/17 update: R fell -1.9% on Thursday. The breakdown under $52.00 would suggest a drop toward support near $50.00. I am adjusting our entry point strategy. We want to open bullish positions on a dip at $50.25 with a stop loss at $48.99. Our new target is $54.75.

I have adjusted our option strike to the $55s.

Trigger @ 50.25

Suggested Position: buy R stock @ $50.25

- or -

buy the 2012 Feb. $55.00 call (R1202B55) current ask $2.80

11/17 adjusted our entry point strategy to buy the dip at $50.25 with a stop loss at $48.99
11/16 adjusted entry strategy to use a trigger at $54.05 and a stop at $51.40

Entry on November xx at $ xx.xx
Earnings Date 02/02/12 (unconfirmed)
Average Daily Volume = 727 thousand
Listed on November 15, 2011


Xilinx Inc. - XLNX - close: 31.76 change: -0.93

Stop Loss: 31.40
Target(s): 35.75
Current Gain/Loss: - 2.2%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
11/17 update: XLNX saw an intraday drop below support at $31.60 but shares didn't quite make it to our stop loss at $31.40. The trade is still open. If the stock market and XLNX open higher tomorrow then readers can use this dip as a new bullish entry point.

Earlier Comments:
The plan was to keep our position size small to limit risk. Our multi-week target is $35.75.

(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

Allegheny Technologies Inc. - ATI - close: 48.36 change: -1.64

Stop Loss: 47.75
Target(s): 56.75
Current Gain/Loss: -5.6%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
11/17 update: Another day of stock market weakness was enough to push ATI below support near $48.00. Shares hit our stop loss at $47.75.

current Position: Long ATI stock @ 50.60, exit 47.75 (-5.6%)

- or -

DEC $52.50 call (ATI1117L52.5) Entry $2.75, exit 1.25 (-54.5%)

11/16 new stop loss @ 47.75
11/14 trade triggered at $50.60

chart:

Entry on November 14 at $50.60
Earnings Date 01/26/12 (unconfirmed)
Average Daily Volume = 2.5 million
Listed on November 12, 2011


Honeywell Intl. - HON - close: 52.60 change: -0.69

Stop Loss: 52.40
Target(s): 58.50
Current Gain/Loss: - 3.6%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
11/17 update: HON is breaking down under some short-term support levels. The stock hit our stop loss at $52.40 this afternoon. I'd keep HON on your watch list for a dip or a bounce near $50.00, which should be stronger support.

Current Position: Long HON stock @ $54.40, exit 52.40 (-3.6%)

- or -

DEC $55 call (HON1117L55) Entry $1.78 exit $1.10 (-38.2%)

11/17 stopped out @ 52.40
11/16 HON broke down under support near $54 and its 10 and 200-dma. More conservative traders may want to exit immediately
11/11 trade opened on HON's gap higher at $54.40
11/09 adjusted entry point strategy to Trigger @ 54.25, moved stop loss to $52.40

chart:

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


Juniper Networks - JNPR - close: 22.73 change: -1.25

Stop Loss: 22.95
Target(s): 29.00
Current Gain/Loss: - 3.2%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
11/17 update: Technology stocks were underperformers today. JNPR helped lead the way down with a -5.2% drop. Shares hit our stop loss at $22.95.

Earlier Comments:
The plan was to keep positions small to limit our risk.

(small positions)

current Position: Long JNPR stock @ $23.72, exit 22.95 (-3.2%)

- or -

JAN $25 call (JNPR1221A25) Entry $1.50 exit $1.17 (-22.0%)

11/17 stopped out @ 22.95
11/16 new stop loss @ 22.95
11/12 new stop loss @ 22.70
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

chart:

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


Red Hat, Inc. - RHT - close: 49.58 change: -2.31

Stop Loss: 49.40
Target(s): 54.90
Current Gain/Loss: - 1.6%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
11/17 update: The relative strength we saw in RHT earlier this week has vanished. The stock plunged with a -4.4% decline today. Shares broke support near $50.00 and hit our stop loss at $49.40 this afternoon.

Earlier Comments:
Our plan was to keep positions small to limit our risk.

(small positions)

current Position: Long RHT stock @ $50.25, exit 49.40 (-1.6%)

- or -

DEC $52.50 call (RHT1117L52.5) Entry $1.50 exit $1.20 (-20.0%)

11/17 stopped out at $49.40
11/16 new stop loss @ 49.40
11/11 trade opened at $50.25
11/09 adjusted entry point strategy: Trigger @ 50.25, stop loss 48.45

chart:

Entry on November 11 at $50.25
Earnings Date 12/21/11 (unconfirmed)
Average Daily Volume = 2.1 million
Listed on November 8, 2011