Option Investor
Newsletter

Daily Newsletter, Monday, 12/12/2011

Table of Contents

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

Market Wrap

Europe Giveth, Europe Taketh Away

by Todd Shriber

Click here to email Todd Shriber
If European policymakers were cats with nine lives, they must be getting close to exhausting that allotment because not much happened in Brussels last week. That was enough to keep the market humming last Friday, but not enough to stem big losses today. Moody's Investors Service and Fitch Ratings had less than choice words for the lack of result out of the EU summit last week. That coupled with some glum stock-specific headlines here in the U.S. led to losses of well over 1% for all three major indexes.

Stats Table

Say what you want about ratings agencies being late to the party and you will probably be correct, but Moody's was not shy in its assessment of European financials. The ratings agency said it will review all the credit ratings of all European nations acknowledging last week's summit accomplished a whole bunch of nothing.

While saying Europe remains ''prone to further shocks'' and the euro will remain pressured, Moody's said last week's accord does nothing to address the massive debt loads facing European countries. Of course, none of the ratings agency chatter was good for European bonds. According to Reuters: The yield on the benchmark Italian 10-year bond rose to 6.53 percent. Greece and Portugal were forced to seek bailouts from their creditors when their bond yields approached 7 percent.

And as bad news out of Europe normally does, it pressured riskier assets today. Caterpillar (CAT), Chevron (CVX) and Exxon Mobil (XOM) were among the Dow's worst offenders today, but the carnage was not contained to equities. Gold was no safe have. An almost 3% drop for the iShares Silver Trust (SLV) has that ETF in danger of dropping below $30 for the first time since October. Oil was taken to the woodshed as well with January West Texas Intermediate futures giving up 1.7%. Macro concerns clearly make it difficult for oil to hold the triple-digit area.

Oil Chart

As I noted at the start, it was not a pretty day at the stock-specific level either. Take the curious case of Diamond Foods (DMND) as an example. I say this as someone that holds and intends to hold General Mills (GIS) for a while: Food stocks are pretty boring, but then again that is part of the allure as long as the dividend is reliable. Well, Diamond Foods has been anything but boring.

In fact, this company is a soap opera right and has been for at least a month now. I will try to give you the abridged version. Diamond wants to acquire the Pringles brand from Procter & Gamble (PG). That deal looked like it was going to happen until some shareholder suits popped up calling Diamond's accounting practices into question. That has delayed the Pringles deal. In November, several outlets reported that a Diamond director who was also a member of the board's audit committee took his own life. All that negative press sent the stock plunging and keep in mind, Diamond was a about as close as one could come to a growth stock in the food sector.

On Friday, a KeyBanc analyst said the inquiries into the company's accounting practices would probably end soon and that sent the stock up almost 53%. Then last night, a story appeared on the Wall Street Journal's Web site that said Diamond was doing some suspect things with payments to walnut growers. Today, the company said it is delaying the filing of its 10-Q.

“In accordance with standard Nasdaq procedure, Diamond expects to receive a notice of deficiency from the Nasdaq Listing Qualifications Department, indicating that Diamond is not in compliance with Nasdaq Listing Rule 5250(c)(1). Diamond intends to submit a plan to regain compliance as quickly as possible. During this process, Diamond's common stock will continue to be listed and traded on The NASDAQ Global Select Market,” Diamond said in a statement.

The stock fell almost 23% today on volume that was more than seven times the daily average.

Diamond Foods Chart

Also following victim to a bad news, large volume decline was Dow component Intel (INTC). The world's largest semiconductor maker lowered its fourth-quarter revenue guidance due to flooding in Thailand that has hampered production of computer-related equipment. Intel lowered its fourth-quarter revenue guidance to $13.7 billion, give or take $300 million, down from a previous forecast of $14.7 billion. Analysts were expecting $14.65 billion.

Analysts expect the Thailand floods to reduce global hard drive production by a third this quarter. Intel said its customers are reducing their stock of chips in anticipation of the hard drive shortage continuing early next year, although it said it still expects sales of PCs to be up in the fourth quarter, Reuters reported.

The Intel news comes on top of a less-than-impressive guidance from Texas Instruments (TXN) last week and it sent shocks throughout the chip sector. TI was down another 3% today while AMD was down 4.3%. The Semiconductor HOLDRs fell 3.1%. TI and Intel account for over 40% of that ETF's weight.

Intel Chart

The big problem with the Intel news is that we are on the cusp of another earnings season and if they were not previously, concerns are now swirling that other companies, regardless of sector, are going to be issuing downbeat guidance in the coming weeks.

That remains to be seen, but there was some good news for select stocks on Monday. Just two Dow stocks finished the day higher, Walt Disney (DIS) and McDonald's (MCD) with the latter making yet another 52- week high. Man, my dad told me to buy MCD a while ago. I should have listened. Pfizer (PFE) finished the day in the red, but the Dow component did say it is raising its quarterly dividend 10% to 22 cents a share from 20 cents and boosting its share repurchase plans by $10 billion. The company said it plans to buyback $5 billion of its own stock next year.

One of the days stalwarts was aggregates producer Vulcan Materials (VMC), which surged 15.4% after receiving a a hostile $4.8 billion all-stock offer from smaller rival Martin Marietta Materials (MLM). In the go-go days of the U.S. housing market, these were awesome stocks, but in the past two years, MLM is down over 16% while Vulcan has plunged more than 30%.

As the Wall Street Journal reported, Martin Marietta is using a logical approach to try to woo Vulcan shareholders: Cost-savings and the dividend. The combined company could save $250 million annually and Martin Marietta offers a better, safe dividend. Vulcan used to pay 25 cents per quarter, but that was recently cut to the princely sum of a penny per quarter. That works out to four cents a year. MLM's current payout is $1.60 per share per year. That seems to be a sound argument, at least to me.

Vulcan Materials Chart

Looking at the charts, the S&P 500 closed just over 1236, meaning the index closed just above support at 1235. If 1235 does not hold, the next stopping points would be 1225, 1200 and 1185 on the dowside. Resistance is 1265, 1295 and then 1350. It is going to take the absence of bad news from Europe for the S&P 500 to get to 1350 or higher by year-end.

S&P 500 Chart

The Dow has a moderately more attractive chart than the S&P 500 and at least the Dow can say it is still above its 50- and 200-day moving averages. The Dow was able to remain above support at 12,00 at the close today and in this topsy-turvy environment, could easily make a run back to resistance at 12,230 any day now. However, if that is going to happen, McDonald's cannot do all the work alone. Caterpillar remains below its 200-day line and CVX could drop below there as well with a couple of bad days. If those stocks stay in their funk, the Dow probably is not going anywhere.

Dow Chart

I keep hearing that is the time of year to own growth and discretionary stocks, but the Nasdaq is not confirming that theory at the moment. Even with a sharp decline today, the Nasdaq remained above critical support at 2600. A drop below there would likely mean accelerated selling with no rest until 2500 or below. Resistance is 2670.

Nasdaq Chart

I apologize for being so brief this week, but I have a nasty cold. I will leave you with an interesting factoid though: On this day in 1979 gold closed at what was then a record $462.50 an ounce. Gold bugs have a come a long way.

Todd Shriber

The Ultimate Investor Newsletter

We are adding a new publication to the End of Year special this year. Option Investor and Premier Investor have gravitated over the years to shorter term trades. I am launching a different type of newsletter for longer term investors that don't want to be managing trades every day. The types of positions in the Ultimate Investor could last from weeks to months depending on the position. These will be lower volatility "investments" rather than trades.

This newsletter will focus on "story stocks" and special situations that provide us with a low risk opportunity to profit. An example would be a long term call option on Hewlett Packard when they fired their CEO and hired Meg Whitman to turn the company around. That would be a 3-6 month position. Another example would have been taking a position in Yahoo when Carol Bartz was fired and the company put up for sale. We will also take positions in stocks ripe for a takeover as we have seen in the oil sector with Global Industries (GLBL) and Brigham Exploration (BEXP).

Click here for Full Description of Ultimate Investor

Ultimate Investor will use all investment strategies including stocks, options of all types, spreads, etc. The type of strategy used will fit the special situation we are targeting.

This will be an investment newsletter rather than a trading newsletter. If market volatility has gotten you down then maybe something with a longer focus is what you need.

Subscribers to the End of Year Special below will receive six months of the Ultimate Investor Newsletter as well.

Have You Renewed Yet?

Every December we offer the best prices of the year on a renewal package of our top newsletters. If you have been a subscriber for several years you know this is the best price and the best deal of the year.

This year we are offering Option Investor, Premier Investor, Leap Trader, Option Writer and our new newsletter starting in January, Ultimate Investor.

Please follow the link below to see for yourself the EOY subscription special for 2011. You will not be disappointed!


New Plays

Advertising in China

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 present an opportunity. Check them out:

HSTM, BABY, and AF

-James


NEW BULLISH Plays

AirMedia Group Inc. - AMCN - close: 3.61 change: +0.11

Stop Loss: 3.30
Target(s): 4.90
Current Gain/Loss: unopened
Time Frame: 8 to 10 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
AMCN is a marketing company that displays ads to travelers in airports and on airplanes in China. If you look at the long-term weekly chart for AMCN you can see that shares tend to have the big, multi-month swings (both up and down). The stock appears to be on the upswing after spending four months building a bottom under the $3.00 level.

Now shares have spent a week consolidating sideways in the $3.40-3.65 zone near its simple and exponential 200-dma. A breakout from this range should signal the next leg higher. I am suggesting a trigger to open small bullish positions at $3.70 with a stop loss under today's low. We will set our multi-week target at $4.90.

Let's keep our position size small to limit our risk.

Trigger @ 3.70 (small positions)

Suggested Position: buy AMCN stock @ 3.70

Annotated chart:

Entry on December xx at $ xx.xx
Earnings Date 03/05/12 (unconfirmed)
Average Daily Volume = 170 thousand
Listed on December 12, 2011



In Play Updates and Reviews

Stocks Swoon Over Europe (Again)

by James Brown

Click here to email James Brown

Editor's Note:
Word that the Moody's rating agency might downgrade parts of Europe put investors on the defensive. Meanwhile an earnings warning from tech giant Intel (INTC) didn't help matters.

We are removing IAU and NVDA from the newsletter with these trades unopened.

-James

Current Portfolio:


BULLISH Play Updates

AutoNation Inc. - AN - close: 36.78 change: -0.12

Stop Loss: 34.75
Target(s): 39.50
Current Gain/Loss: + 6.7%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
12/12 update: AN is holding up reasonably well. The stock recovered off its morning lows to close down -0.3% versus a -1.5% drop in the S&P 500. A breakout past resistance near $37.00 could herald the next leg higher.

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: 12.12 change: -0.12

Stop Loss: 11.69
Target(s): 13.45
Current Gain/Loss: - 1.4%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
12/12 update: ATVI retested support near $12.00 again before paring its losses -1%. I am a bit reluctant to launch new positions with the major market indices looking so vulnerable.

current Position: Long ATVI stock @ $12.30

- or -

Long FEB $13 call (ATVI1218B13) Entry $0.42

12/10/11 new stop loss @ 11.69
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: 5.52 change: -0.03

Stop Loss: 5.17
Target(s): 6.45
Current Gain/Loss: + 5.1%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
12/12 update: BRCD also recovered off its morning lows and limited its losses to just three cents. Lack of any serious profit taking here is definitely positive. I am raising our stop loss to $5.17. I am not suggesting new positions at this time.

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

12/12/11 new stop loss @ 5.17
12/10/11 new stop loss @ 5.12
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


Fuel Systems Solutions, Inc. - FSYS - close: 17.51 change: -0.07

Stop Loss: 16.85
Target(s): 20.50
Current Gain/Loss: unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
12/12 update: We see a similar story here. FSYS gapped open lower but traders bought the dip this morning and FSYS pared its losses significantly by the closing bell.

I am suggesting we open small bullish positions if FSYS can trade at $18.10 or higher.

Earlier Comments:
We want to keep our position size small to limit our risk.

Trigger @ 18.10 (small positions)

Suggested Position: buy FSYS stock @ $18.10

- or -

buy the 2012Jan $20 call (FSYS1221A20)

12/10/11 adjust strategy to use a trigger at $18.10

Entry on December xx at $ xx.xx
Earnings Date 03/05/12 (unconfirmed)
Average Daily Volume = 282 thousand
Listed on December 06, 2011


Kodiak Oil & Gas - KOG - close: 8.88 change: -0.30

Stop Loss: 8.45
Target(s): 9.45
Current Gain/Loss: +18.2%
Time Frame: two to three months
New Positions: see below

Comments:
12/12 update: Shares of KOG were downgraded this morning, which probably contributed to the stock's underperformance today (-3.2%). There is no change from my prior comments. More conservative traders may want to exit now to lock in a gain. Officially the newsletter is aiming for an exit at $9.45.

We are not suggesting new positions at this time.

current Position: Long the stock @ 7.51

12/10 new stop loss @ 8.45
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


Piper Jaffray Companies - PJC - close: 20.62 change: -1.20

Stop Loss: 20.75
Target(s): 25.75
Current Gain/Loss: unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
12/12 update: Hmm... financials were underperformers today. PJC really showed some relative weakness with a -5.5% drop. I am tempted to remove this stock from the newsletter. Yet since we're still sitting on the sidelines it doesn't hurt to just wait and watch. We will leave our trigger to open bullish positions at $22.55. More nimble traders might want to consider buying a bounce off the $20.00 level with a very tight stop loss instead.

I would keep position size small to limit our risk.

Trigger @ 22.55 (small positions)

Suggested Position: buy PJC stock @ $22.55

- or -

buy the Jan $22.50 call (PJC1221A22.5)

Entry on December xx at $ xx.xx
Earnings Date 01/25/12 (unconfirmed)
Average Daily Volume = 207 thousand
Listed on December 07, 2011


Trinity Industries - TRN - close: 28.79 change: -0.98

Stop Loss: 28.75
Target(s): 34.75
Current Gain/Loss: unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
12/12 update: Traders bought the dip in TRN near last week's lows. I don't see any changes from my weekend comments. I am suggesting we use a trigger to open bullish positions at $30.55. If triggered we'll aim for $34.75. More aggressive traders could aim higher.

Trigger @ $30.55

Suggested Position: buy TRN stock @ 30.55

- or -

buy the Jan $30 call (TRN1221A30)

Entry on December xx at $ xx.xx
Earnings Date 02/15/12 (unconfirmed)
Average Daily Volume = 703 thousand
Listed on December 10, 2011


BEARISH Play Updates

Broadcom Corp. - BRCM - close: 29.27 change: -1.02

Stop Loss: 31.20
Target(s): 26.00
Current Gain/Loss: + 4.1%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
12/12 update: An earnings warning from Intel (INTC) helped push most of the technology sector lower. BRCM fell -3.3% to set a new 52-week closing low. Last week's high was $31.14. I am lowering our stop loss to $31.20.

Readers may want to consider an early exit soon. BRCM is scheduled to hold their "analyst day" on December 14th. Conservative traders might want to exit prior to this event to avoid any unnecessary headline risk.

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

12/12/11 new stop loss @ 31.20
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


Ctrip.com Intl. - CTRP - close: 23.24 change: +0.04

Stop Loss: 25.05
Target(s): 20.25
Current Gain/Loss: - 1.0%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/12 update: Uh-oh! We do not want to see relative strength in our bearish candidates. CTRP gapped open lower at $23.00 (our new entry point) and spent the day bouncing sideways in the $23.00-23.50 zone before settling up four cents. The larger trend is still very negative but readers may want to hesitate on launching new positions.

Earlier Comments:
I do consider this an aggressive trade because CTRP is arguably still short-term oversold here six-days of losses (prior to Friday's bounce). We will use a stop loss at $25.05. You may want to use a tighter stop loss. We are aiming for $20.25. FYI: The Point & Figure chart for CTRP is bearish with a $9.00 target. Note: We want to keep our position size small to limit our risk. CTRP can be a volatile stock and short interest is nearing 10% of the float.

*Small Positions*

current Position: short CTRP stock @ 23.00

- or -

Long 2012Jan $22.50 PUT (CTRP1221M22.5) entry $1.40

12/12/11 CTRP gapped open lower @ 23.00

Entry on December 12 at $23.00
Earnings Date 02/13/12 (unconfirmed)
Average Daily Volume = 5.2 million
Listed on December 10, 2011


PACCAR Inc. - PCAR - close: 38.68 change: -1.42

Stop Loss: 40.55
Target(s): 32.50
Current Gain/Loss: + 1.1%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/12 update: PCAR produced a sharp spike lower to $37.79 before paring its losses. The stock underperformed with a -3.3% decline. Readers can use this move as a new entry point.

Earlier Comments:
More aggressive traders could place their stop above $41.30 instead. There is possible support near $36.75, near its November low, but we're aiming for $32.50.

(Small Positions)

current Position: short PCAR stock @ $39.11

- or -

Long 2012Jan $36 PUT (PCAR1221M36) Entry $0.80

Entry on December 09 at $39.11
Earnings Date 02/01/12 (unconfirmed)
Average Daily Volume = 2.7 million
Listed on December 08, 2011


AT&T Inc. - T - close: 29.01 change: -0.02

Stop Loss: 30.05
Target(s): 24.25 or 22.75
Current Gain/Loss: + 1.3%
Time Frame: 6 to 9 weeks or more
New Positions: see below

Comments:
12/12 update: Monday proved to be a quiet day for shares of AT&T. The stock hovered near the $29.00 level all session long. Readers can watch for a new failed rally near $29.40 or resistance near $29.50 as a new entry point for bearish positions.

current Position: short T stock @ 29.40

- or -

Long 2012Jan $27.50 PUT (T1221M27.5) Entry $0.31

- or -

Long Mar $26 PUT (T1217O26) Entry $0.42

Entry on December 07 at $29.40
Earnings Date 01/26/12 (unconfirmed)
Average Daily Volume = 23.4 million
Listed on November 26, 2011


CLOSED BULLISH PLAYS

iShares Gold ETF - IAU - close: 16.25 change: -0.43

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

Comments:
12/12 update: Gold prices took a dive today. The GLD fell -2.6% while IAU dropped -2.5%. This ETF actually gapped open lower near its 150-dma and closed there.

I am removing IAU from the newsletter. Our plan to open bullish positions at $17.25 is unlikely to happen any time soon. Today's drop looks like a breakdown under the eight-week trend of higher lows. However, I will point out that on a longer-term time horizon this dip to the rising 150-dma might actually be a bullish entry point. Traders bought the dip in the IAU at the 150-dma back in October, in September, and back in January of this year.

Trade Did Not Open!

chart:

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


NVIDIA Corp. - NVDA - close: 14.53 change: -0.37

Stop Loss: 14.35
Target(s): 15.95 or 16.95
Current Gain/Loss: unopened
Time Frame: 3 to 6 weeks,
New Positions: see below

Comments:
12/12 update: Our new entry point on NVDA was not triggered. This weekend we adjusted our plan to open bullish positions if both NVDA and the S&P 500 opened higher. Shares of NVDA gapped open lower this morning. The stock fell to new two-week lows.

I am temporarily giving up on NVDA as a candidate. We are dropping it from the newsletter with the trade unopened.

Trade Did Not Open!

12/12/11 Trade did not open. We are removing it from the newsletter
12/10/11 Adjusting our entry strategy. Open small bullish positions on Monday morning if NVDA meets our entry criteria. New stop loss @ 14.35.

chart:

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