Option Investor
Newsletter

Daily Newsletter, Monday, 12/5/2011

Table of Contents

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

Market Wrap

It's Europe's World...We Just Live In It

by Todd Shriber

Click here to email Todd Shriber
The first trading day of the week started off in fine fashion after Italy ushered in a massive austerity program and Germany and France, the Eurozone's two largest economies, pushed for more debt-fighting solutions. However, stocks pared their gains after the Financial Times broke a story that Standard & Poor's will put German and France on creditwatch negative and that was enough to help equities pare the nice gains seen earlier in the day.

Market Stats

Also potentially vulnerable to an S&P downgrade are Austria, Finland and Luxembourg. Oddly enough, all five countries currently have AAA credit ratings. Perhaps the U.S. will not be so lonely in the ''lost our AAA rating'' club after all.

Initially, S&P did not comment on the speculation. Then after U.S. markets closed, the ratings agency warned that ratings downgrades may await all 17 members of the Euro Zone. Creditwatch means S&P is reviewing its ratings for possible downgrades in no more than 90 days. Moody's Investors Service and Fitch Ratings previously said they are considering downgrades for some of the Euro Zone's AAA countries. European Union leaders meet in Brussels on Thursday and Friday, so yeah, we will be looking at another weekend fraught with headline risk.

Here in the U.S., the economic data points released today were not all that impressive. The Commerce Department said factory orders fell 0.4% in October and the September reading was revised down to a 0.1% drop from an initial reading that showed a 0.3% gain. Commercial aircraft orders fell 17% in October. The Institute for Supply Management said its non-manufacturing index fell to 52% in November from a reading of 52.9% in October. Economists were expecting a November reading of 54%.

ISM Chart

In stock-specific news here in the U.S., there was a little bit of Merger Monday at work. Well, it was actually Merger Saturday playing out today as shares of business software provider SuccessFactors (SFSF) surged over 51.4% on nearly 50 times the average daily turnover after German software giant SAP AG (SAP) announced it will acquire the California-based company for $3.4 billion, or $40 a share. That works out to a 52% premium to where the stock closed on Friday.

Not surprisingly, SAP's deal for SuccessFactors prompted speculation about what company in this space of the software universe might be next to be taken out. Taleo (TLEO) and Conqur Technologies (CNQR) were a couple names that popped up. Ariba (ARBA) was also mentioned in a Jefferies analyst note. Citigroup said today Taleo could find its way into Oracle's (ORCL) always acquisitive arms.

Success Factors Chart

Shares of online auction site and PayPal owner eBay (EBAY) jumped 3.7%, but on below average volume, after Raymond James raised its rating on the stock to ''strong buy'' from ''market perform'' with a $39 price target. That is well above the $30.70 the stock closed at today.

ChannelAdvisor reported on Friday that eBay's November same-store sales increased 18 percent from the same period last year, according to Reuters. Raymond James also sees eBay improving its results through some recent measures it has taken, including 1) shift to fixed price sales; 2) surfacing of top rated sellers (TRS); 3) improved site search; 4) adoption of free shipping; and 5) vertical shopping experiences in key categories, Barron's noted.

EBAY Chart

Speaking of analyst chatter, somehow, someway BlackBerry maker Research In Motion (RIMM) closed higher today despite more negative sentiment from the sell-side community. UBS lowered its price target on RIM to $18 from $26 while paring its fiscal 2013 revenue estimate to $17.4 billion from $20.4 billion and its EPS estimate to $3.87 from $4.73.

Sterne Agee lowered its fiscal 2013 revenue estimate to $20.8 billion from $20.9 billion while R.W. Baird trimmed its fiscal 2013 outlook for RIM to $17.92 billion and $3 per share from $19.98 billion and $3.95 per share. RIM was up today, but it is quite clear this stock is in a death spiral.

RIMM Chart

I do not think you can buy a BlackBerry at Dollar General (DG), but stock was up 1.6% today after the company said its fiscal third-quarter profit climbed 34% to $171.2 million, or 50 cents per share, from $128.1 million, or 37 cents per share, a year earlier. Revenue rose 12% to $3.6 billion. Analysts expected a profit of 47 cents on sales of $3.57 billion. Same-store sales rose increased 6.3%.

The Tennessee-based discount retailer forecast an adjusted 2011 profit of $2.29-$2.32 a share up from previous guidance of $2.20-$2.30 a share. The company forecast revenue growth of 13% and same-store sales growth of 5.6%-5.8% up from prior guidance of 3%-5%.

Dollar General Chart

Adding to the good cheer on the outlook front was Yum Brands (YUM), parent company of KFC, Pizza Hut and Taco Bell. Kentucky-based Yum raised its 2011 profit forecast and said it expects earnings per share to grow at least 10% in 2012. The company said it expects to earn $2.85 a share on an adjusted basis in 2011, implying growth of 13%. That compares with an original estimate of 12% profit growth. The company said it expects to open 600 new restaurants in China next year.

Overall, Yum Restaurants International will open 800 new stores next year, but it is really all about China for Yum, where the company actually far outpaces rivals like McDonald's (MCD). It might also be fair to say that Yum is less and less about Mexico. At least Mexican food as there is a rumor that the company is mulling a spin-off of Taco Bell. Keep the Bell or let it go, either way, Yum hit a new 52-week high today.

Yum Chart

Looking at the charts, the 1265 area proved to be significant resistance for the S&P 500 today and that mountain was too tall to climb as the morning's larger gains dwindled later in the day. If the S&P 500 can get through that barrier, there is some open real estate to next resistance at 1295. And then more resistance at 1350. Look to 1240 as support, then 1225.

S&P 500 Chart

The Dow probably should have finished with a triple-digit gain, but even after leaving something out there, the index is just one more good day away from breaking resistance at 12,200. Twenty-four Dow stocks were higher today and despite disappointing closes, MCD and KFT both touched new 52-week highs today. MCD can be a Dow leader at over $95 a share. First support is 12,000.

Dow Chart

On a percentage basis, the Nasdaq was the top performer among the Big Three Indexes today and that helped the index move solidly past resistance at 2625. Now the Nasdaq is just a small gain away from reclaiming its 200-day moving average at 2673. After that, 2700 is next resistance. Support is 2600.

Nasdaq Chart

I thought it would be interesting to see where the leadership is coming from these days, so I screened for large-cap stocks trading 3% or less below their 52-week highs. Around 60 NYSE-listed stocks turn up and almost 20% of that group are staples stocks. GIS, KFT, MCD, PG, etc. Another 16 are either master limited partnerships or utilities. Not sexy, but not sexy appears to be working these days.

Todd Shriber


New Plays

Short Squeeze Candidate

by James Brown

Click here to email James Brown

Editor's Note:

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

BBY is on the verge of breaking out past resistance.

IP a rally past $29.50 might be a bullish entry point.

QGEN is also on the verge of breaking out past overhead resistance.

-James


NEW BULLISH Plays

Expedia Inc. - EXPE - close: 28.92 change: +0.82

Stop Loss: 27.90
Target(s): 32.00
Current Gain/Loss: unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
EXPE could see a short squeeze. The most recent data listed short interest at 10% of the 187-million share float. Today's show of relative strength (+2.9%) is also a breakout past resistance at its 100-dma. EXPE is also breaking the trend of lower highs.

I am suggesting we open small bullish positions at the open tomorrow morning but only if both EXPE and the S&P 500 index open positive. We'll use a relatively tight stop loss at $27.90. Our target is $32.00.

*See Entry Details Above*

Suggested Position: buy EXPE stock @ the open

- or -

buy the 2012Jan $30 call (EXPE1221A30) ask $0.90

Annotated chart:

Entry on December xx at $ xx.xx
Earnings Date 02/09/12 (unconfirmed)
Average Daily Volume = 3.7 million
Listed on December 05, 2011



In Play Updates and Reviews

Gains in HITK

by James Brown

Click here to email James Brown

Editor's Note:
The gap open higher in HITK this morning was beneficial, closing both our stock and option position. Meanwhile we took profits on our KOG calls, as planned.

-James

Current Portfolio:


BULLISH Play Updates

AutoNation Inc. - AN - close: 36.92 change: +0.74

Stop Loss: 34.75
Target(s): 39.50
Current Gain/Loss: + 7.1%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
12/05 update: AN put out a press release this morning, prior to the open, that said its new vehicle sales in November were up +21% from a year ago. This positive news helped fuel a gap open higher and AN managed to close over technical resistance at its 100-dma.

I am not suggesting new positions at this time.

Earlier Comments:
Our multi-week target is $39.50. More conservative traders may want to exit in the $37.75 region instead.

current Position: Long AN stock @ $34.45

- or -

Long Jan $35 call (AN1221A35) Entry $1.95

12/03/11 new stop loss @ 34.75
11/30/11 new stop loss @ 33.45

Entry on November 22 at $34.45
Earnings Date 02/02/12 (unconfirmed)
Average Daily Volume = 1.3 million
Listed on November 21, 2011


Activision Blizzard, Inc. - ATVI - close: 12.44 change: +0.17

Stop Loss: 11.59
Target(s): 13.45
Current Gain/Loss: + 1.1%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
12/05 update: The action in ATVI today was good news. Not only did shares outperform the market with a +1.3% gain but there was no follow through on Friday's bearish reversal pattern.

current Position: Long ATVI stock @ $12.30

- or -

Long FEB $13 call (ATVI1218B13) Entry $0.42

11/30/11 trade open. ATVI gaps higher at $12.30
11/29/11 ATVI gapped open lower. Trade not open yet.

Entry on November 30 at $12.30
Earnings Date 02/09/12 (unconfirmed)
Average Daily Volume = 14.9 million
Listed on November 28, 2011


Brocade Communications - BRCD - close: 5.50 change: +0.15

Stop Loss: 4.98
Target(s): 6.45
Current Gain/Loss: + 4.7%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
12/05 update: BRCD also delivered a strong session. Shares outperformed the market with a +2.8% gain. Today's move is also a close over technical resistance at its simple 200-dma. I am not suggesting new positions at this time. We will up our stop loss to $4.98.

Earlier Comments:
Keep in mind that the simple 200-dma near $5.40 could still be technical resistance. I expect this trade to take many weeks to play out but we're aiming for $6.75. We'll make adjustments to our exit strategy as needed.

current Position: Long BRCD stock @ $5.25

- or -

Long 2012JAN $5.50 call (BRCD1221A5.5) Entry $0.37

12/05/11 new stop loss @ 4.98
12/03/11 new stop loss @ 4.84

Entry on November 28 at $5.25
Earnings Date 02/16/12 (unconfirmed)
Average Daily Volume = 8.6 million
Listed on November 26, 2011


iShares Gold ETF - IAU - close: 16.78 change: -0.25

Stop Loss: 16.85
Target(s): 19.75*
Current Gain/Loss: unopened
Time Frame: 6 to 9 weeks or more
New Positions: Yes, see below

Comments:
12/05 update: Gold turned lower on Monday. The IAU opened at $16.96 and closed with a -1.4% decline. Shares of this ETF are still trading inside the triangle pattern. I don't see any changes from my weekend comments.

We are suggesting a trigger for small bullish positions at $17.25. If triggered at $17.25 we'll set our multi-week target at $19.75. The 2011 highs near $18.50 could definitely prove to be resistance. We want to keep our position size small.

Trigger @ 17.25

Suggested Position: buy the IAU @ 17.25

- or -

buy the April $18 call (IAU1221D18)

*final exit price will be adjusted as the trade progresses.

Entry on December xx at $ xx.xx
Earnings Date --/--/--
Average Daily Volume = 5.0 million
Listed on December 03, 2011


Ipath Copper ETN - JJC - close: 45.70 change: -0.43

Stop Loss: 44.75
Target(s): 48.90
Current Gain/Loss: + 0.8%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
12/05 update: Copper prices also turned lower later this afternoon. The JJC opened higher but couldn't get past last week's high. Shares closed down -0.9%. Today's move is a bearish engulfing candlestick pattern. Readers may want to seriously consider an early exit now! I am not suggesting new positions at this time.

current Position: Long JJC (ETF) @ $45.30

- or -

Long JAN $45 call (JJC1221A45) Entry $3.30

12/03/11 new stop loss @ 44.75
11/30/11 JJC gaps higher at $45.30. Adjusting stop loss to $42.90 and moving exit target to $48.90.

Entry on November 30 at $45.30
Earnings Date --/--/-- (unconfirmed)
Average Daily Volume = 148 thousand
Listed on November 29, 2011


Kodiak Oil & Gas - KOG - close: 9.09 change: +0.12

Stop Loss: 7.75
Target(s): 9.45
Current Gain/Loss: +21.0%
Time Frame: two to three months
New Positions: see below

Comments:
12/05 update: KOG continues to inch higher. Shares managed to close over the $9.00 level. Our exit target is $9.45 but readers may want to exit now to lock in a gain (trade is up +21%). I am raising our stop loss to $8.20.

We are not suggesting new positions at this time. It was our plan to exit the March $7.50 calls at the open this morning.

current Position: Long the stock @ 7.51

- or -

2012 MAR $7.50 call (KOG1217C7.5) Entry $1.25 exit $2.15 (+72.0%)

12/05 KOG gapped higher at $9.13. Exit on the March $7.50 calls at $2.15 (+72%)
12/05 new stop loss @ 8.20
12/03 plan to exit our March $7.50 calls @ Monday's open (currently +60%)
12/01 Readers may want to exit now to lock in a gain (+18.3%). I am adjusting our exit target to $9.45
11/30 new stop loss @ 7.75
11/28 new stop loss @ 7.49
11/23 new stop loss @ 7.38
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


MAKO Surgical - MAKO - close: 28.60 change: -0.16

Stop Loss: 27.90
Target(s): 37.50
Current Gain/Loss: - 6.9%
Time Frame: 6 to 9 weeks
New Positions: see below

Comments:
12/05 update: The situation with MAKO is not improving. The stock tried to rally this morning but failed near resistance at $30.00. Readers may want to exit early now. I am not suggesting new positions at this time.

Earlier Comments:
MAKO could see a short squeeze. The most recent data listed short interest at 38% of MAKO's small 32.1 million share float.

current Position: Long MAKO stock @ 30.73

- or -

Long 2012Jan $35 call (MAKO1221A35) Entry $1.00

12/05/11 MAKO is underperforming. Readers may want to exit early
12/03/11 MAKO gapped higher at $30.73. Trigger was 30.55.

Entry on December 02 at $30.73
Earnings Date 03/01/12 (unconfirmed)
Average Daily Volume = 1.1 million
Listed on December 01, 2011


NVIDIA Corp. - NVDA - close: 15.72 change: -0.10

Stop Loss: 14.75
Target(s): 19.50
Current Gain/Loss: unopened
Time Frame: 6 to 8 weeks, or more
New Positions: Yes, see below

Comments:
12/05 update: NVDA tried to rally past resistance but failed. Shares retreated to close down -1.5%. Nimble traders might want to consider buying a dip near $15.00 with a tight stop loss. Our plan has not changed.

Use a trigger at $16.30 to open small bullish positions on NVDA. We want to keep our position size small because NVDA can be a volatile stock.

Trigger @ 16.30

Suggested Position: buy NVDA stock @ 16.30

- or -

buy the 2012Jan $17.50 call (NVDA1221A17.5)

Entry on December xx at $ xx.xx
Earnings Date 02/16/12 (unconfirmed)
Average Daily Volume = 18.5 million
Listed on December 03, 2011


BEARISH Play Updates

Broadcom Corp. - BRCM - close: 30.42 change: +0.43

Stop Loss: 31.55
Target(s): 26.00
Current Gain/Loss: + 0.3%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
12/05 update: The gap open higher in BRCM at $30.53 provided a better entry point for our bearish positions. Shares spent the rest of the day consolidating sideways. I would still consider new positions now but more conservative traders may want to wait for a drop under $29.85 before initiating positions.

Our target is $26.00 although more aggressive traders could aim lower. FYI: The Point & Figure chart for BRCM is bearish with a $21.00 target.

Suggested Position: short BRCM stock @ $30.53

- or -

Long 2012Jan $28 PUT (BRCM1221M28) Entry $0.88

12/05/11 BRCM gapped open higher at $30.53.

Entry on December 05 at $ 30.53
Earnings Date --/--/-- (unconfirmed)
Average Daily Volume = 8.2 million
Listed on December 03, 2011


AT&T Inc. - T - close: 29.15 change: +0.19

Stop Loss: 30.05
Target(s): 24.25 or 22.75
Current Gain/Loss: unopened
Time Frame: 6 to 9 weeks or more
New Positions: Yes, see below

Comments:
12/05 update: AT&T continues to inch higher. Shares hit $29.30 intraday before settling with a +0.6% gain. There is no change from my weekend comments.

Our new trigger to open bearish positions is at $29.40 and we'll use a stop loss at $30.05.

Trigger @ $29.40

Suggested Position: short T stock @ 29.40

- or -

buy the 2012Jan $27.50 PUT (T1221M27.5)

- or -

buy the Mar $26 PUT (T1217O26)

Entry on November xx at $ xx.xx
Earnings Date 01/26/12 (unconfirmed)
Average Daily Volume = 23.4 million
Listed on November 26, 2011


CLOSED BULLISH PLAYS

Hi Tech Pharmacal Co. - HITK - close: 38.90 change: -3.78

Stop Loss: 39.75
Target(s): 44.00
Current Gain/Loss: +17.2%
Time Frame: 2 to 3 weeks
New Positions: see below

Comments:
12/05 update: Sometimes your trading results are impacted by luck. Today we were fortunate that good luck smiled on us. The trend in HITK has been higher but we were worried about some profit taking. That's why over the weekend I suggested we exit our December $40 calls at the open this morning. I was not expecting the stock to gap open higher nor was I expecting the sharp sell-off that followed. The big move was fueled by HITK's earnings report, released prior to the opening bell. We were not expecting HITK's earnings to come out until December 8th.

The company beat estimates by 27 cents, which helped fuel the gap open higher at $44.36. Shares hit $44.58 and then plunged to a -8.8% loss. Fortunately our exit target for the stock position was $44.00 so the opening gap closed both positions (stock and options) for us. Why the big drop? I couldn't find any bad news so maybe it's just a classic "sell the news" reaction.

NOTE: The December $40 call closed with an bid of $3.30 on Friday. Given the $1.68 gap open on Monday morning I would have expected the bid to open around $4.30 or higher. Unfortunately it looks like the option wasn't trading first thing this morning. Our exit is in the $2.85 area.

closed Position: Long HITK stock @ $37.84, exit $44.36 (+17.2%)

- or -

DEC $40 call (HITK1117L40) Entry $1.65 exit $2.85 (+ 72.7%)

12/05/11 Target exceeded. HITK gapped open higher at $44.36. Our exit was $44.00. Both stock and option positions were closed.
12/03/11 new stop loss @ 39.75
12/03/11 Prepare to exit Dec. $40 calls on Monday. currently +100%
11/30/11 HITK underperformed. Readers may want to take profits now.
11/29/11 new stop loss @ 37.65
Readers may want to take profits early right now.
HITK +10.2%, Dec $40 call +66%
11/28/11 new stop loss @ 36.75

chart:

Entry on November 22 at $37.84
Earnings Date 12/08/11 (unconfirmed)
Average Daily Volume = 180 thousand
Listed on November 21, 2011