Option Investor
Newsletter

Daily Newsletter, Monday, 11/21/2011

Table of Contents

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

Market Wrap

Merger Monday No Use For The Bulls

by Todd Shriber

Click here to email Todd Shriber
Expectations that the Super Committee will turn out to be a super failure and more European concerns had investors overlooking mergers and acquisitions news. That was enough to extend last week's sell-off into this holiday shortened week as the S&P 500 and the Nasdaq each lost around 1.9% and the Dow Jones Industrial Average plunged 2.1%. The S&P 500 and Nasdaq are now negative year-to-date.

Stats Table

In today's look at yet another commodity getting hammered by the debt situations on either side of the Atlantic, I offer up silver. I happened to come across a piece online last week that noted a rally in gold and silver was right around the corner. In the case of both metals, we'll have to wait a bit longer as both were punished again today. As is par for the course, silver has been more volatile than gold and that is saying something. Silver Chart

In economic news, the National Association of Realtors said sales of existing rose 1.4% last month to an annual rate of 4.97 million compared with a downwardly revised 4.90 million homes in September. Economists expected an October number of 4.85 million. The bad news is the median home price fell to $162,500. That is a 2% drop from September and a 4.7% decline from October 2010.

Home Sales

Bad news was not hard to come by at the stock-specific level today. Pick a sector and chances are you will find a sea of red. One of the primary culprits behind the Dow's decline was Chevron (CVX), the second-largest U.S. oil company. Not long ago, this was a $105 stock. Now it's struggling to stay above $95 following what appears to be a minor oil spill off the coast of Brazil. Problem is for Chevron shares is that in a post-Gulf of Mexico spill world, there really is no such thing as a ''minor'' oil spill.

On Sunday, the CEO of Chevron's Brazil unit said his company is taking full responsibility for the spill. That is very un-BP (BP) of Chevron. Still, Brazil's national oil regulator, the ANP, has fined Chevron $28 million. Obviously, that is nothing in the big scheme of things for Chevron, but the near-term problem for Chevron is two-fold.

First, now notorious Transocean (RIG) was drilling the well for Chevron and that is bad from a public relations perspective because Transocean owned the Deepwater Horizon rig. Second, Brazil's oil production is surging and it would behoove any non-Brazilian company operating there to not run afoul of the government. After all, the government is the largest shareholder in Petrobras (PBR) and has already shown it is happy to give most of the good exploration contracts to the state-run oil company.

The spill started two weeks ago today and the estimate is for 110,000 gallons leaked. That is well below the spills seen off Brazil's coast in 2000 and 1975, but that does not matter in a trading context. Put ''oil'' and ''spill'' in the same sentence and you have the recipe for a big down move in just about any oil stock.

Chevron Chart

As we all know, days like Monday are not the days to own financials. Personally, I am not sure when those days are, but I digress. Dow component Bank of America (BAC) was down another 5% today and is now down nearly 60% year-to-date. Monday's tumble has the stock sitting around levels not seen since March 2009. Back then, it was an invitation to buy BofA. This time around, I am not so sure.

BofA Chart

As I mentioned earlier, there was some mergers and acquisitions today, but it was not enough to ignite a broader rally. In the more controversial deal of the day, Gilead Sciences (GILD) said it will acquire Pharmasset (VRUS) for $11 billion. Pharmasset is making an advanced hepatitis C treatment and that is one of the more lucrative niches of the pharma universe. At an offer of $137 per share, Gilead is paying an 89% premium to acquire Pharmasset and that is exactly why some analysts are investors are concerned Gilead is overpaying.

I was covering this story for another outlet today and most of the analyst and buy side comments that I came across condemned Gilead for paying too rich of a premium. Hence, the punishment endured by the stock today. This deal is no different from any other in that it has prompted speculation about what company that is currently working on hepatitis C treatments might be next to be taken out.

That discussion seems to be revolving around Inibitex (INHX) with a few analysts saying Bristol-Myers (BMY) could be a logical suitor. For now, Gilead needs to make this Pharmasset deal pay dividends or more selling could be on the way.

Gilead Chart

Shares of Transatlantic Holdings (TRH), the property and casualty insurance provider, did not get much of a lift after Alleghany (Y), a property and liability insurance provider, said it will acquire the company for $3.4 billion in cash and stock. Investors will get 0.145 share of Alleghany and $14.22 in cash for each Transatlantic share, valuing the reinsurer at $59.79 a share based on Alleghany's closing price last Friday, according to Bloomberg News.

Several companies, including a unit of Berkshire Hathaway (BRK-A), wanted to acquire Transatlantic, but it looks like Alleghany will be the ultimate victor. The deal is expected to close early next year.

Transatlantic Chart

In after-hours, in the ''what a relief'' category, Standard & Poor's said it will keep its AA+ credit rating on the U.S. despite the failure of the Super Committee to deliver a substantive debt-cutting package. The supposedly bipartisan committee just could not reach an agreement. This is not a shock, but $1.2 trillion in automatic spending cuts will now trigger. How is that a bad thing?

Speaking of things that are definitely bad, there is the case of Netflix (NFLX). Not only did the beaten down stock touch a new 52-week low today, after the market closed, the company filed an 8-K that said it has raised $200 million in convertible notes. Those notes convert less than 17% from where the stock closed today and equal 2.3 million shares in added dilution current Netflix investors now must contend with. That will not make for a merry Christmas.

Netflix Chart

Looking at the charts, the S&P 500 has flashed a bearish signal with the close below 1200. Now we will have to see if the 1175-1185 acts as support. If not, the index could tumble to 1150 and from there, all bets are for a December rally are probably off. At this point, 1215-1225 on the upside needs to be reclaimed in order to show even nascent stages of another rally.

S&P 500 Chart

The Dow continues to look more bullish than the S&P 500, but that is not saying much at this point. The blue chip index closed below critical support at 11,600 today as all three of the Dow stocks closed in the red. Hopefully we will see a bounce from here or from a retest of support at 11,400. Drop below that area and it could be back to 11,000 and then to 10,600.

Dow Chart

The Nasdaq is the worst of the lot and it looks like things could worse before they get better, barring a Black Friday miracle that is. As I suspected, selling has gained steam below 2600. Round number support at 2500 lingers. Lose that area and the Nasdaq could fall back to 2450. AAPL? AMZN? Are you guys listening?

Nasdaq Chart

I am nothing if not consistent. I saw no reason to be long last week and I am not feeling different today. That said, the Super Committee failure is not as bad as it looks. Some automatic spending cuts are better than nothing and the U.S. credit rating will remain in tact. Frankly, France losing its AAA rating might be the more pressing near-term issue. In a holiday-shortened week, I'd stay on the sidelines until after Black Friday.

Todd Shriber


New Plays

Auto Sales & Drug Makers

by James Brown

Click here to email James Brown

Editor's Note:

In addition to tonight's new plays these stocks caught my eye and might offer an opportunity. Check them out:

NILE did not sell off with the market today. Shares managed a bounce instead. Has this stock finally found a bottom? I would be tempted to open bullish positions if NILE could rally past $35.00.

ETFC is another stock that appears to have found a bottom with support near $8.00. Shares were showing relative strength today. How far could an oversold bounce carry ETFC?

-James


NEW BULLISH Plays

AutoNation Inc. - AN - close: 33.66 change: +0.16

Stop Loss: 32.45
Target(s): 39.50
Current Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
AN is one of the largest automobile retailers in the U.S. It looks like the stock may have found a bottom. If shares can reverse they could see a short squeeze. The most recent data listed short interest at over 20% of the float.

I am suggesting a trigger to open bullish positions at $34.45. If triggered we'll use a stop loss at $32.45. Our multi-week target is $39.50. More conservative traders may want to exit in the $37.75 region instead.

Trigger @ 34.45

Suggested Position: buy AN stock @ the trigger

- or -

buy the Jan $35 call (AN1221A35) current ask $1.55

Annotated chart:

Entry on November xx at $ xx.xx
Earnings Date 02/02/12 (unconfirmed)
Average Daily Volume = 1.3 million
Listed on November 21, 2011


Hi Tech Pharmacal Co. - HITK - close: 37.72 change: +0.64

Stop Loss: 35.80
Target(s): 44.00
Current Gain/Loss: unopened
Time Frame: 2 to 3 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
HITK is also a short squeeze candidate. Not only are shares of this drug maker near all-time highs but the stock has been very resistant to the market's troubles. The stock could see a short squeeze. The most recent data listed short interest at 14% of the very small 9.9 million-share float.

I am suggesting bullish positions tomorrow morning if both HITK and the S&P 500 index can open positive. We'll use a stop loss at $35.80 since $36.00 has been short-term support. The $40.00 level might be resistance but if HITK does see a short squeeze I am expecting a much bigger move. FYI: The Point & Figure chart for HITK is bullish with a $58.00 target.

NOTE: We do not want to hold over the December earnings report so we only have two or three weeks.

*see Entry Details Above*

Suggested Position: buy HITK stock @ the open

- or -

buy the DEC $40 call (HITK1117L40) current ask $1.25

Annotated chart:

Entry on November xx at $ xx.xx
Earnings Date 12/08/11 (unconfirmed)
Average Daily Volume = 180 thousand
Listed on November 21, 2011



In Play Updates and Reviews

Stopped & Triggered

by James Brown

Click here to email James Brown

Editor's Note:
The market's pull back today hit a couple of stops but it also hit some buy-the-dip triggers.

IMAX and XLNX were stopped out. CSL, R, and FRX were all triggered.

-James

Current Portfolio:


BULLISH Play Updates

Beazer Homes - BZH - close: 2.12 change: +0.03

Stop Loss: 1.90
Target(s): 3.25
Current Gain/Loss: -9.1%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
11/21 update: This morning the National Association of Realtors said the sale of existing homes in October rose to a 4.97 million unit pace. This is above the estimate for 4.8 million pace. Yet the data failed to have much of an impact on the homebuilders. Shares of BZH turned lower with the market. Shares actually underperformed with a -6.1% drop. BZH hit an intraday low of $1.94 before bouncing back to close near the $2.00 level. I am concerned that if the market's decline continues then we could see BZH hit our stop loss at $1.90 soon.

At this point, given the sour tone on Wall Street, I would wait for BZH to rally past $2.10 before initiating new positions.

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: 50.83 change: -0.19

Stop Loss: 49.40
Target(s): 54.50
Current Gain/Loss: - 0.7%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
11/21 update: The profit taking in CASY was relatively mild. Shares did briefly violate support at the $50.00 level. More conservative traders may want to raise their stop loss toward today's low at $49.87. The bounce from $50 looks like a new entry point but readers may want to wait for the S&P 500 to rebound before considering new positions.

Keep in mind that CASY is due to report earnings in the next two or three weeks and we will exit ahead of the announcement.

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: 41.86 change: -1.21

Stop Loss: 39.85
Target(s): 49.50
Current Gain/Loss: + 0.2%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
11/21 update: Our trade on CSL has been opened. The stock gapped open lower at $42.22 and fell to $41.44 before paring its losses. Our trigger to buy the stock was hit at $41.75. More conservative traders may want to wait for a rally past $43.00 before considering new positions.

Earlier Comments:
We want to keep our position size small to limit our risk on this aggressive entry point.

(small positions)

current Position: Long CSL stock @ $41.75

11/21 trade opened at $41.75
11/19 moved our trigger down to $41.75
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 21 at $41.75
Earnings Date 02/07/12 (unconfirmed)
Average Daily Volume = 327 thousand
Listed on November 14, 2011


KB Home - KBH - close: 6.98 change: -0.24

Stop Loss: 6.70
Target(s): 9.50
Current Gain/Loss: -7.5%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
11/21 update: It was a very volatile day for KBH. News that existing home sales in October came in better than expected failed to help the homebuilders. Shares of KBH fell to $6.72 before bouncing. At this point, given the negative sentiment in the market, I would want to see a new rally past $7.25 before considering new bullish positions.

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: 8.01 change: +0.26

Stop Loss: 7.20
Target(s): 9.75
Current Gain/Loss: + 6.6%
Time Frame: two to three months
New Positions: see below

Comments:
11/21 update: KOG was showing some relative strength today thanks to some bullish analyst comments and a $10 price target. Over the weekend I suggested readers watch for a dip or a bounce near $7.50 as a new entry point and sure enough that's what the stock provided for the first half of today's session.

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: 40.78 change: -0.09

Stop Loss: 39.70
Target(s): 43.90
Current Gain/Loss: + 1.3%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
11/21 update: By the end of the day NFX managed to reduce today's profit taking to just a few cents. Yet this morning the stock came really close to hitting our stop. The intraday low was $39.76 (stop at $39.70). I don't see any changes from my weekend comments. I would still consider new positions now if both NFX and the S&P 500 open positive tomorrow morning. Our short-term target is $43.90. More aggressive traders could aim higher.

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

(small positions)

current Position: Long NFX stock @ $40.25

- or -

Long DEC $40 call (NFX1117L40) Entry $2.50

11/18 trade opened at $40.25
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 18 at $40.25
Earnings Date 02/16/12 (unconfirmed)
Average Daily Volume = 4.1 million
Listed on November 12, 2011


Ryder System, Inc. - R - close: 50.11 change: -1.03

Stop Loss: 48.99
Target(s): 54.75
Current Gain/Loss: - 0.0%
Time Frame: 6 to 9 weeks
New Positions: see below

Comments:
11/21 update: We had a close call with R today. The stock gapped open lower at $50.13 and then dipped to $49.15 before bouncing back to reduce its loss to just -2.0%. We had a trigger at $50.25 so the play was opened first thing this morning. We also have a stop loss at $48.99, which was almost hit. We will leave our stop at $48.99 for now. More aggressive traders may want to give R more room and widen their stop. I would still consider new positions tomorrow if both R and the S&P 500 index open positive.

current Position: Long R stock @ $50.13

- or -

Long 2012 Feb. $55 call (R1202B55) Entry $2.45

11/21 trade opened on R's gap open lower at $50.13
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 21 at $50.13
Earnings Date 02/02/12 (unconfirmed)
Average Daily Volume = 727 thousand
Listed on November 15, 2011


Stamps.com - STMP - close: 26.16 change: -1.00

Stop Loss: 24.75
Target(s): 32.50
Current Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Comments:
11/21 update: Our trade on STMP is not open yet. The market's (and the stock's) gap open lower negated our entry point. Shares opened at $26.46 and fell to $25.50 before settling near $26.00. Depending on your time frame this is either a bearish breakdown from its prior trading range or it's a dip to the longer-term trendline of higher lows.

I remain bullish here and I am suggesting we try again. Open bullish positions tomorrow morning but only if both STMP and the S&P 500 index open positive. We will adjust our stop loss to $24.75.

*See Entry Details Above*

Suggested Position: buy STMP stock @ the open

- or -

buy the Feb $30 call (STMP1218C30) current ask $2.30

11/21 trade not open. try again. Move stop loss to $24.75

Entry on November xx at $ xx.xx
Earnings Date 02/09/12 (unconfirmed)
Average Daily Volume = 646 thousand
Listed on November 19, 2011


BEARISH Play Updates

AFLAC Inc. - AFL - close: 41.07 change: -0.91

Stop Loss: 44.05
Target(s): 37.50
Current Gain/Loss: + 2.4%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
11/21 update: I would be careful with our AFL trade. Shares lost -2.1% but the sharp bounce off its 100-dma almost looks like a short-term bullish reversal. We will lower our stop loss to $44.05. More conservative traders might want to lower their stop even more. I am not suggesting new positions at this time. I would not be surprised to see an oversold bounce back to the $42.50-43.00 zone.

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

(Small Positions)

current Position: Short AFL stock @ 42.12

- or -

Long DEC $40 PUT (AFL1117x40) Entry $1.52

11/21 new stop loss @ 44.05

Entry on November 18 at $42.12
Earnings Date 02/01/12 (unconfirmed)
Average Daily Volume = 4.3 million
Listed on November 17, 2011


Forest Labs Inc. - FRX - close: 29.01 change: -0.27

Stop Loss: 30.55
Target(s): 25.25
Current Gain/Loss: - 0.2%
Time Frame: 9 to 12 weeks
New Positions: see below

Comments:
11/21 update: Our new trade on FRX has been opened. Shares gapped open lower at $28.96 and quickly hit our trigger at $28.95. The stock hit a new 52-week low at $28.79 before trimming its losses. I would still consider new positions now or you can wait for an oversold bounce in the $29.00-30.00 zone.

Earlier Comments:
Our multi-week target is $25.25. FRX doesn't move very fast so we have to give it some time. FYI: The Point & Figure chart for FRX is bearish with a $19 target.

NOTE: You may want to trade the options instead of the stock to limit risk. FRX has about 6 or 7 days worth of short interest (approximately 9% of the float). Looking at the chart you can see the super sharp bounces caused by short covering.

current Position: short FRX stock @ 28.95

- or -

Long FEB $30 put (FRX1218N30) Entry $2.25

Entry on November 21 at $28.95
Earnings Date 01/17/12 (unconfirmed)
Average Daily Volume = 2.5 million
Listed on November 19, 2011


CLOSED BULLISH PLAYS

IMAX Corp. - IMAX - close: 18.74 change: -0.69

Stop Loss: 18.20
Target(s): 24.50
Current Gain/Loss: - 6.0%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
11/21 update: The stock market's sharp move lower today pushed IMAX to an intraday low of $18.17. That's enough to stop us out (stop was $18.20). Readers may want to keep IMAX on their watch list for a breakout past resistance near $20.00.

Current Position: Long IMAX @ $19.38, exit $18.20 (-6.0%)

- or -

DEC $20 call (IMAX1117L20) Entry $1.27 exit $0.25 (-80.3%)

11/21 stopped out at $18.20
11/17 new stop loss @ 18.20

chart:

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


Xilinx Inc. - XLNX - close: 31.23 change: -0.24

Stop Loss: 31.40
Target(s): 35.75
Current Gain/Loss: - 4.1%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
11/21 update: XLNX was already flirting with a breakdown below support. Today's market plunge helped seal the deal. Shares gapped open lower at $31.14, which was well below our stop loss at $31.40.

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

(small positions)

Current Position: Long XLNX stock @ 32.50, exit 31.14 (-4.1%)

- or -

Jan $35 call (XLNX1221A35) Entry $0.95 exit 0.37 (-61.0%)

11/21 stopped out on XLNX's gap open lower at $31.14, under our stop loss.

chart:

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