Option Investor
Newsletter

Daily Newsletter, Monday, 12/19/2011

Table of Contents

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

Market Wrap

Europe, Financials Doom Stocks

by Todd Shriber

Click here to email Todd Shriber
Well, that headline could probably have been applied to any number of days over the past 18-24 months and the number is either too high to count or too frustrating to mention, so that will not happen here. However, there is no getting around an ugly performance for equities on Monday as continuing concerns about Europe and downtrodden U.S. bank stocks sent the S&P 500 to a loss of more than 1% and the Dow Jones Industrial Average to a triple-digit loss.


Not the way investors want to be heading into Christmas and as if you needed a reminder, this is the final trading week before Christmas. I was having this conversation with a couple of folks earlier and I predicted volume is about to dry up. Not that I am going out on a limb by saying, I am not, but there are just eight trading days left in 2011 and Hanukah begins tomorrow, so things will probably be at a standstill by the time Friday rolls around. Put another way, time has all but run out on a Santa Claus rally and I say that as someone who is really trying to get into the spirit of the season.

Santa

Stocks were dragged lower after European Central Bank President Mario Draghi merely said things most of us already knew, but none of us really wanted to hear again. He said substantial risks to the economy are still out there and European Union law prevents the ECB from going into the market to buy more bonds.

That helped all 10 industry groups tracked within the S&P 500 tumble on the day as all ignored some decent housing data and some small-scale mergers and acquisitions news. The National Association of Home Builders said homebuilder sentiment rose to 21 in December from 19 in November, good for the third consecutive month of gains. Economists expected a December reading of 20.

As I mentioned at the start, financials were the primary culprit among losers today and one of the main, if not all too familiar villains in that group was Dow component Bank of America. Granted, it is just by a penny, but BofA now resides under $5 for the first time since March 2009. Things are tough when a close at $4.99 is pretty good compared to the intraday low at $4.92.

What is even more interesting about these sub-$5 levels Bank of America is dealing with is that it means Warren Buffett has a real turkey of an investment on his hands thus far. Indeed, even the greatest investors are like baseball players: None of them bat .1000, but late in the day, the Wall Street Journal ran an article saying Buffett's Berkshire Hathaway (BRK-A, BRK-B) was $1.5 billion on its BofA investment that was announced in the summer.

Obviously $1.5 billion is not all that much to Buffett, but to put it into context, that is roughly the market cap JetBlue (JBLU) closed with today. And there is no getting around the fact that Berkshire is deep in the red on its BofA investment. The company has warrants to purchase to 700 million BofA shares at $7.14 a share so that means the stock still needs to rise more than 40% from current levels for those warrants just to break-even. I guess it is a good thing Berkshire is raking in $300 million per year in dividends on its BofA stake, something that would be next to impossible for the rest of us to do based on the current quarterly dividend of a penny a share.

BofA Chart

Speaking of Dow stocks, it was a day of quashed mergers and acquisitions dreams and speculation. I will start with the speculation. On Sunday, a British paper reported that Exxon Mobil (XOM), the largest U.S. oil company, was considering a $10.9 billion bid for U.K.-based Gulf Keystone. That company is supposedly sitting on some plush oil reserves in the semi-autonomous Kurdistan region of Iraq. Exxon also has a footprint in that area.

Gulf Keystone issued a statement today, refuting the rumor, but traders said the company remains an attractive takeover target and the usual suspects popped up as possible suitors if Exxon really is not interested. The Independent, the British daily that initially reported the rumor, said Chevron (CVX) and Sinopec of China, the largest Asian refiner, were monitoring the situation. Today the Wall Street Journal said Royal Dutch Shell (RDS-A) and BP (BP), the two largest European oil companies, would make for logical suitors for Gulf Keystone.

Shares of Exxon Mobil closed modestly lower on the day.

Exxon Chart

And in the let us not make a deal department, Dow component AT&T (T) announced this afternoon it would not move forward with its $39 billion bid for T-Mobile. As previously announced, AT&T will pay a $4 billion breakup fee and that charge will be taken in the current quarter. This is not much of a surprise given the opposition to the deal on the part of the Federal Trade Commission and the Justice Department, but AT&T was not happy.

''AT&T will continue to be aggressive in leading the mobile Internet revolution,'' said Randall Stephenson, AT&T chairman and CEO, in a statement. ''Over the past four years we have invested more in our networks than any other U.S. company. As a result, today we deliver best-in-class mobile broadband speeds – connecting smartphones, tablets and emerging devices at a record pace – and we are well under way with our nationwide 4G LTE deployment.''

AT&T shareholders were not sent away empty-handed. The company raised its annual dividend 2.3% to $1.76 a share today. That is good for 28 straight years of dividend increases. However, the biggest winners in the near-term may be Sprint (S) shareholders. At its highs after-hours, the stock was up almost 9%. As of this writing, it is up nearly 5.6%. Sprint was the ring-leader against AT&T acquiring T-Mobile.

AT&T Chart

Also in after-hours news China-based Yanzhou Coal (YZC), that country's fourth-largest coal miner, said it will acquire Australia-based Gloucester Coal Ltd. for at least $2 billion, Bloomberg reported, citing sources with knowledge of the matter. The deal will need to be approved by Gloucester's largest shareholder, Noble Group. This is not Yanzhou's first Australian foray. The company acquired Felix Resources in 2009 for about $3 billion. Yanzhou's U.S.-listed shares have dropped almost 35% this year.

Yanzhou Coal

Looking at the charts, the S&P 500 is back to flirting with support at 1200. Fall through that level, it would probably be back to 1185. After that 1150, might offer some support, but the S&P could just as easily fall to 1125. Resistance can be found at 1225 and 1255. I am hesitant to believe 1295 will be factor before the end of the year.

S&P 500 Chart

Even with the Dow's 100-point loss today, there is still some breathing between today’s close and support at 11,600. After that, it could be off to 11,500 and then 11,425. From there, things could be get ugly on a return to 10,600. After 12,000 is reclaimed, next resistance from there is 12,285 and 12,750. As is the case with the S&P 500, I think it is a stretch seeing the Dow getting all the way to the best case year-end scenario.

Dow Chart

The Nasdaq is a mess. Round number support at 2500 could be in play in a day or two and from there the declines could be especially nasty with the 2400 level eventually being threatened. Oracle (ORCL) reports earnings after the bell Tuesday and that might be one last saving grace for the beaten down Nasdaq, but not enough to bring 2600 into play on its own.

Nasdaq Chart

There are a couple earnings reports watching over the next couple of days, namely ORCL and GIS, but I doubt either will be monumental to move this market. It is still all about Europe and with that pesky issue showing no signs of abating, the money managers that are positive for the year are not likely to mess with a good thing by making new buys this week and those that are in the red may not want to make things worse with Christmas week trades. Expect light volume and do some Christmas shopping instead of over trading. And since next Monday the market is closed, I will take this opportunity to wish everyone happy holidays.

Todd Shriber


New Plays

Financials Lead Stocks Lower

by James Brown

Click here to email James Brown

Editor's Note:

In addition to tonight's new play these stocks caught my eye. They all look like potential bearish candidates. Some need to break down to new relative lows first.

DD, WHR, TXN, NBR, TDC

-James


NEW BEARISH Plays

SunTrust Banks, Inc. - STI - close: 15.80 change: -0.68

Stop Loss: 17.15
Target(s): 11.00
Current Gain/Loss: + 0.0%
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Financials helped lead the markets lower on Monday as worries persist over the sector's exposure to risk in Europe. Shares of STI, after hovering near support near the bottom of its trading range, finally broke down to new two-year lows.

I am suggesting readers open bearish positions now. We'll use a stop loss at $17.15. Our multi-week target is a drop to $11.00. FYI: The Point & Figure chart for STI is bearish with a $12.50 target.

Open Positions at the Open tomorrow

Suggested Position: short STI stock @ the open

- or -

buy the 2012Jan $15 PUT (STI1221M15) ask $0.57

Annotated chart:

Entry on December xx at $ xx.xx
Earnings Date 01/20/12 (unconfirmed)
Average Daily Volume = 7.6 million
Listed on December 19, 2011



In Play Updates and Reviews

AT&T Gives Up on T-Mobile Buy

by James Brown

Click here to email James Brown

Editor's Note:
One of the big headlines after the closing bell was news that AT&T would give up its plans to acquire T-Mobile. Shares of AT&T should see some movement tomorrow morning.

Meanwhile the widespread market weakness contributed to some of our bullish plays getting stopped out. I've also updated a couple of stop losses tonight.

-James

Current Portfolio:


BULLISH Play Updates

Oxford Industries Inc. - OXM - close: 42.04 change: -0.05

Stop Loss: 40.65
Target(s): 44.90
Current Gain/Loss: - 0.6%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/19 update: Our new play on OXM is open. Both the stock and the S&P 500 opened positive. Unfortunately for bulls both the stock and the index rolled over to close lower. OXM only lost -0.1% versus a -1.1% drop in the S&P 500. Readers looking for a bullish entry point in OXM might want to wait for a dip or a bounce near the rising 10-dma instead (currently at 41.35).

Earlier Comments:
If our trade is opened we'll use a tight stop loss at $40.65 and we want to keep positions small to limit our risk. Our target is $44.90. FYI: The Point & Figure chart for OXM is bullish with a $62 target.

(small positions)

current Position: long OXM stock @ $42.32

- or -

Long Jan $45 call (OXM1221A45) entry $0.85

Entry on December 19 at $42.32
Earnings Date 03/29/12 (unconfirmed)
Average Daily Volume = 220 thousand
Listed on December 17, 2011


United Continental Holdings - UAL - close: 20.30 change: +0.94

Stop Loss: 20.35
Target(s): 24.75
Current Gain/Loss: unopened
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
12/19 update: It was an ugly day for airline stocks with the XAL index down -4.6%. UAL gave up -4.4%. The stock is back under its 200-dma and about to test the $20 level.

Currently our plan is to open small bullish positions when UAL trades at $21.55. However, we might drop UAL as a candidate if we don't see shares recover quickly from today's decline.

Earlier Comments:
I see potential resistance near $21.50 so the newsletter is suggesting a trigger to open small bullish positions at $21.55. We'll use a stop loss at $20.35. We'll set our exit target at $24.75.
FYI: The Point & Figure chart for UAL is bullish with a $31.50 target.

Trigger @ $21.55 (small positions)

Suggested Position: buy UAL stock @ 21.55

- or -

buy the 2012Jan $22.50 call (1221A22.5)

Entry on December xx at $ xx.xx
Earnings Date 01/25/12 (unconfirmed)
Average Daily Volume = 7.1 million
Listed on December 17, 2011


BEARISH Play Updates

Broadcom Corp. - BRCM - close: 27.74 change: -0.98

Stop Loss: 30.25
Target(s): 26.00
Current Gain/Loss: + 9.1%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
12/19 update: BRCM has broken down under short-term support near $28.00. Shares underperformed the market with a -3.4% decline. More conservative traders may want to take profits now. The newsletter's final target is $26.00.

Suggested Position: short BRCM stock @ $30.53

- or -

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

12/14/11 new stop loss @ 30.25
12/13/11 new stop loss @ 30.55
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


Cash America Intl. - CSH - close: 45.82 change: -1.16

Stop Loss: 47.25
Target(s): 40.25
Current Gain/Loss: unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
12/19 update: The oversold bounce in CSH has failed near its 10 and 20-dma. More aggressive traders may want to open bearish positions now with a stop near today's high. The newsletter is still waiting for a breakdown under support. We have a trigger at $44.75. Our target is $40.25.
FYI: The Point & Figure chart for CSH is bearish with a $33 target.

Trigger @ 44.75

Suggested Position: short CSH stock @ 44.75

- or -

buy the Jan $45 put (CSH1221M45)

Entry on December xx at $ xx.xx
Earnings Date 01/26/12 (unconfirmed)
Average Daily Volume = 331 thousand
Listed on December 14, 2011


Ctrip.com Intl. - CTRP - close: 22.53 change: -0.57

Stop Loss: 24.25
Target(s): 20.25
Current Gain/Loss: + 2.0%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/19 update: CTRP has broken down to new 2011 lows with today's -2.4% decline. Last week's high was $24.11. I am moving our stop loss down to $24.25.

Earlier Comments:
I do consider this an aggressive trade. 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

12/19/11 new stop loss @ 24.25
12/13/11 readers may want to exit early. CTRP is not cooperating.
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


Electronic Arts - ERTS - close: 19.85 change: -0.38

Stop Loss: 22.05
Target(s): 18.05
Current Gain/Loss: + 3.8%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/19 update: ERTS continues to underperform. The stock lost -1.8% and closed under round-number support at $20.00. More conservative traders might want to lower their stops.

FYI: ERTS announced that its ticker symbol will change to "EA" starting on December 20th.

Earlier Comments:
Our multi-week target is $18.05. I would expect possible support at $20.00 and $19.00. This trade is going to take some patience. Let's keep our position size small.

(small positions)

current Position: short ERTS stock @ 20.65

- or -

Long 2012Jan $20 PUT (ERTS1221M20) entry $1.05

12/19/11 ERTS will start trading as EA starting on the 20th

Entry on December 14 at $20.65
Earnings Date 02/01/12 (unconfirmed)
Average Daily Volume = 5.7 million
Listed on December 13, 2011


PACCAR Inc. - PCAR - close: 35.48 change: -0.74

Stop Loss: 38.25
Target(s): 32.50
Current Gain/Loss: + 9.2%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/19 update: Traders may want to start taking profits on our PCAR trade. The stock is down -9.2% from our entry point. The put option is up +62%. The $35.00 level could act as possible round-number support. I am not suggesting new positions at this time. We will lower our stop loss to $38.25.

NOTE: Our 2012Jan $36 puts are now $35.30 puts thanks to the recent dividend.

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 $35.30 PUT (PCAR1221M35.3) Entry $0.80

12/19/11 new stop loss @ 38.25
12/17/11 new stop loss @ 39.05
12/15/11 thanks to a 70-cent dividend our 2012Jan $36 puts are now 35.30 puts.

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: 28.74 change: -0.11

Stop Loss: 29.65
Target(s): 24.25 or 22.75
Current Gain/Loss: + 2.2%
Time Frame: 6 to 9 weeks or more
New Positions: see below

Comments:
12/19 update: Tomorrow could be interesting but more on that in a moment. The early morning bounce attempt failed and T faded to a -0.3% decline.

After the closing bell AT&T announced it was giving up on its acquisition of T-Mobile. That means AT&T will have to pay T-Mobile's parent company, Deutsche Telekom a $4 billion (with a B) breakup fee. I would have expected shares of T to fall after hours on this news but the stock isn't seeing it yet. I would expect shares to gap open tomorrow morning.

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

12/19/11 after hours, T announces it will give up on plans to acquire T-Mobile, will pay $4 billion break up fee
12/17/11 new stop loss @ 29.65

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


Vera Bradley, Inc. - VRA - close: 30.82 change: -2.14

Stop Loss: 35.25
Target(s): 27.50
Current Gain/Loss: + 7.0%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/19 update: It was a great day to be a bear in VRA. The stock plunged to a -6.5% decline. The danger now is that VRA might try and bounce at round-number support near $30.00. We are adjusting our stop down to $35.25. More conservative traders may want to lower their stop loss even more.

Earlier Comments:
Traders need to keep in mind this is an aggressive, higher-risk trade. We want to keep our position size very small to limit risk. The most recent data listed short interest at almost 80% of VRA's very small 19.7 million share float. If there is some sort of unexpected rally in this stock it could spark a short squeeze and stops may not work very well in a fast market environment. I would suggest using put options in a situation like this to limit your risk but the spreads on the January puts are too wide. Our target is $27.50 although readers may want to take profits near $30.00 since it could prove to be round-number support. FYI: The Point & Figure chart for VRA is bearish with a $26 target.

(very small positions only!)

current Position: short VRA stock @ $33.17

12/19/11 new stop loss @ 35.25
12/15/11 this is an aggressive, higher-risk trade.

Entry on December 16 at $33.17
Earnings Date 12/07/11
Average Daily Volume = 796 thousand
Listed on December 15, 2011


CLOSED BULLISH PLAYS

AirMedia Group Inc. - AMCN - close: 3.30 change: -0.14

Stop Loss: 3.30
Target(s): 4.90
Current Gain/Loss: -10.8%
Time Frame: 8 to 10 weeks
New Positions: see below

Comments:
12/19 update: After hovering near support the last couple of days AMCN finally broke down when the stock market accelerated lower this afternoon. Shares hit our stop loss at $3.30.

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

(small positions)

closed Position: long AMCN stock @ 3.70, exit 3.30 (-10.8%)

chart:

Entry on December 13 at $3.70
Earnings Date 03/05/12 (unconfirmed)
Average Daily Volume = 170 thousand
Listed on December 12, 2011


AutoNation Inc. - AN - close: 34.52 change: -1.25

Stop Loss: 34.95
Target(s): 39.50
Current Gain/Loss: + 1.4%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
12/19 update: Ouch! It was a rough day for AN. The early morning rally attempt stalled and shares accelerated lower from 10:30 to 11:30 this morning. AN tried to hold support near $35.00 but couldn't do it and dropped again this afternoon. Our stop was hit at $34.95.

closed Position: Long AN stock @ $34.45 exit 34.95 (+1.4%)

- or -

Jan $35 call (AN1221A35) Entry $1.95 exit 1.15 (-41.0%)

12/19/11 stopped out at $34.95
12/15/11 new stop loss @ 34.95
12/03/11 new stop loss @ 34.75
11/30/11 new stop loss @ 33.45

chart:

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: 11.65 change: -0.23

Stop Loss: 11.69
Target(s): 13.45
Current Gain/Loss: - 4.9%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
12/19 update: ATVI also underperformed today. Shares broke down under the simple 200-dma and settled with a -1.9% decline. Our stop was hit at $11.69.

closed Position: Long ATVI stock @ $12.30 exit 11.69 (-4.9%)

- or -

FEB $13 call (ATVI1218B13) Entry $0.42 exit 0.14 (-66.6%)

12/19/11 stopped out at $11.69
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.

chart:

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