Option Investor
Newsletter

Daily Newsletter, Thursday, 12/22/2011

Table of Contents

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

Market Wrap

Economics Continue to Improve

by Jim Brown

Click here to email Jim Brown
Economic improvement is pushing the market higher on hopes the U.S. recovery is finally beginning to accelerate.

Market Statistics

Thursday saw a flurry of mixed economic reports but investors and traders seemed to focus on those with a positive spin. The weekly jobless claims declined to 264,000 and the lowest level since June 2008. While I would be thrilled if these numbers were accurate and represented a new trend I continue to believe this is a seasonal disruption. Anyone who was just laid off and has a final paycheck in their pocket is not likely to file for unemployment until after the holidays. I suspect we will see a strong pickup in claims in the first two weeks in January.

If by some quirk of fate the claims did not spike up in January this would be very bullish for market sentiment. If employers are cutting the number of layoffs then the next step would be to add new workers. Some analysts have already started raising their estimates for the nonfarm payrolls to a gain of 250,000 jobs. I suspect they will see a negative surprise. December is not normally a big hiring month.

Jobless Claims Chart

University of Michigan Consumer Sentiment rose to 69.9 for the final reading for December. That was up from 67.7 in the initial release. This is a significant gain from the 64.1 in November.

The expectations component carried all the weight with a jump from 55.4 to 63.6. The current conditions component was only slightly higher at 79.6, up from 77.6. Sentiment rose more strongly in the second half of the month and again suggesting the recovery is accelerating. However, I view this as a seasonal disruption. Sentiment normally improves ahead of the holidays and then declines in January when the bills come due.

If the sentiment continues to improve and begins to move over the 75 level I think it would be contagious for the market. A move over 77.5 would be a new post recession high.

Consumer Sentiment Chart

Mass layoffs declined slightly to 1,331 from 1,353 but the number of workers impacted rose to 129,887 from 118,689. This was for the November period. December is a big month for layoffs as more than 100,000 seasonal workers are terminated. I expect this number to increase over the next two months.

The final GDP revision for Q3 declined to +1.81% growth from +2.0%. The decline came from a lower estimate of consumer spending and a higher revision to inventory accumulation. The economy grew by +1.3% in Q2 and +0.36% in Q1. The market ignored this report because recent GDP estimates for Q4 have been rising sharply.

A month ago the consensus was for something in the 2.5% to 3.0% range. That rose to 3.25% a couple weeks ago and now we are starting to hear estimates as high as 4.0%.

I think we are being setup for failure again with the rapid escalation of estimates. They are using the sudden increase in consumer spending, strong pace of auto sales, which could be at the high of the year for December and the declining jobless claims as justification. I am not holding my breath and I will be thrilled with any number starting with a +3.n

GDP Chart

On the flip side the Chicago Fed National Activity Index (CFNAI) for November fell to a three month low at -0.37 from -0.13 in October. Estimates had been for a minor gain. The CFNAI was hurt by a big drop in industrial production in November. This was due in part to a slowdown in components from Thailand that weighed on electronics and auto production. This report was ignored because the Thailand flood was a onetime event and not a reason for concern in future quarters.

The Conference Board Leading Indicators rose by +0.5% for November. Even though this was lower than the +0.9% in October they continue to show expansion and a declining chance of another recession. Estimates were for a gain of +0.3%. Seven of the ten components posted gains. This report was also ignored although it got a positive mention in several headlines.

The calendar for tomorrow has four reports but there will be nobody around to care. New home sales will probably be the only headline worth noting and the headline number is expected to rise to 316,000 from 307,000.

Economic Calendar

Thursday was almost as bad for traders as Friday will be. Volume was only 5.8 billion shares and Friday will likely be under five billion shares. The stock news was almost nonexistent but there were a few winners and sinners.

Micron (MU) rallied +16% despite missing earnings and revenue estimates. Micron posted a loss of 19-cents compared to estimates of 9-cents. Revenue was $2.09 billion compared to estimates of $2.12 billion. Gross margins held at 15% thanks to improvements in NAND Flash margins, which were offset by declines in DRAM margins. The company said the flooding in Thailand had cut demand for basic chips as much as 15%.

Micron shares rallied after analysts raised their ratings on the company saying the worst was behind them and chip prices would likely firm from here. Wedbush Morgan upgraded Micron from neutral to outperform and Raymond James reiterated a strong buy. Both analysts said the product mix was shifting to the higher margin chips and demand should increase in 2012 as the flood impact dissipated.

Micron Chart

Bed Bath and Beyond (BBBY) reported better than expected earnings but revenues disappointed. Earnings were 95-cents and beat estimates of 88-cents. Revenue rose +6.8% to $2.34 billion but that was less than the $2.359 billion estimate. One negative was a decline in same store sales growth to +4.1% from +7.0% in the year ago quarter. Management guided to sales growth of only 2% to 4% in the current quarter. The cautious guidance and lower sale growth caused traders to toss BBBY into the dirty linen hamper. Shares declined -6%.

BBBY Chart

Akamai Technology (AKAM) rallied +19% on news it was acquiring privately held Contendo, a company that specializes in software and services that improve content delivery on the web and on mobile devices. The company is a small 100-person firm with most employees working in Israel. Analysts were very positive on the acquisition saying Contendo's applications were a perfect fit for Akamai. They must have really liked it because you almost never see a major spike in the acquiring company.

Akamai Chart

The NYSE Euronext (NYX) rose slightly after the Justice Dept approved the company's merger with the Deutsche Boerse contingent on a sale of some assets. NYX must sell ISE's minority stake in Direct Edge Holdings. They have two years to complete the sale.

The Dow has now closed positive for three consecutive days. The positive economics, lack of any negative news from Europe and the normal holiday sentiment has pushed the indexes back to their early December highs.

It would be very hard to make anything out of today's move given the lack of volume. This is the normal pre holiday melt up because the major funds and institutions are not in the market. They can't trigger buy/sell programs in a market this thin without inducing severe volatility.

This minor rally ahead of the holidays is normal. A week ago I was very skeptical it would happen and I am definitely not complaining. The indexes have closed with resistance and a major news headline could push us over and cause further short covering and price chasing into year end.

The market for Friday is an afterthought. The only way we could produce less volume is if they closed it. You can't draw any meaningful conclusions about market direction from today's action or Friday's. I am not going to spend a lot of effort diagramming the charts because other than the overhead resistance they don't matter for Friday.

The S&P rallied +10 points to close at 1,254 and just under strong resistance at 1,255, the 200-day at 1,259 and prior resistance at 1,265. Without a major news event I can't imagine breaking through those levels on Friday. However, news the House was going to approve the two month extension of the payroll tax cut did spike the S&P futures by +7 points late Thursday evening.

S&P Chart

The Dow came to a stop just under strong resistance at 12,200. Should a big news headline power the Dow over that level we could see new short covering and a possible breakout to a new five month high. That would be a great way to finish the year but a breakout could produce enough market buzz going into yearend we could conceivably push over the high close for the year at 12,810. That would be an amazing feat to close at the high for the year after months of extreme volatility.

I am not predicting it but we are close enough that the possibility exists.

Dow Chart

The Nasdaq is the fly in our year end soup. The Nasdaq is stuck at resistance at 2,600 with the 200-day at 2,661 and well under the highs for the year. The Nasdaq can move fast when techs are on fire but I would be very surprised to see a major move over 2,700.

The Nasdaq would have to pull an Akamai like move of better than +10% over the next six days to equal the high for the year at 2,872. It is technically possible but like the possibility of a permanent solution in Europe the odds are slim.

Nasdaq Chart

Russell 2000 Chart

The wild card for Friday and for next week is the Dow Transports. They are very close to a breakout and a new five month high. A breakout here would energize the Dow and S&P and could be the spark we are looking for to create a yearend rally.

Dow Transports Chart

If you have to buy something on Friday make sure it is in the mall and not the market. My only qualification to that would be to buy calls on the Dow Transport ETF, the IYT.

Dow Transports ETF Chart (IYT)

Friday will be extremely low volume and almost assuredly extremely headline driven. However, with the majority of the world in the mall and not the market it may take a dramatic headline to create any movement. The qualification to that is of course the low volume. Any material headline would be capable of generating a sizeable market move. Rarely do these happen on the last trading day before Christmas but it is always possible.

The futures are up +7 on the agreement between the Democrats and Republicans to accept the two month extension on the tax cuts with some added language to force a conference committee on extending it for the rest of 2012 in January. In a truly show of political avoidance the vote on extending the cut for two months will not be recorded. That way nobody will know who voted for it. Only in Washington!

 

The Buck is BACK!


The Free Silver Dollar bonus with the End of Year Special went over so well over the Black Friday weekend we are bringing it back. EVERY end of year subscriber will receive a FREE U.S. SILVER DOLLAR!

One free Morgan or Peace dollar with each End-of-Year Special subscription! These U.S. silver dollars were minted between 1878-1935 and consist of 90% silver, roughly eight tenths of an ounce of silver. With the price of silver hovering around $30 these are worth collecting and make great gifts for grandkids!

                                 Peace Dollar Description

    

FREE SILVER DOLLAR WITH EOY SUBSCRIPTION!

Have You Renewed Yet? Time Is Growing Short!

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!

Jim Brown

Send Jim an email


New Plays

High-Yield Drugs

by James Brown

Click here to email James Brown


NEW BULLISH Plays

GlaxoSmithKline - GSK - close: 45.55 change: +0.43

Stop Loss: 44.40
Target(s): 49.25
Current Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Investors have been buying up the large drug makers with big dividend. GSK definitely qualifies with a 4.8% yield. The stock appears to be breaking out from its two-week consolidation pattern. We want to see a little more confirmation.

I am suggesting a trigger to open bullish positions at $45.75 with a stop loss at $44.40. Our multi-week target is $49.25 (GSK doesn't move very fast).
FYI: The Point & Figure chart for GSK is bullish with a $56 target.

Trigger @ 45.75

Suggested Position: buy GSK stock @ 45.75

- or -

buy the Feb $46 call (GSK1218B46) ask $1.00

Annotated chart:

Entry on December xx at $ xx.xx
Earnings Date --/--/?? (unconfirmed)
Average Daily Volume = 2.5 million
Listed on December 22, 2011



In Play Updates and Reviews

Bears On the Defensive

by James Brown

Click here to email James Brown

Editor's Note:
The U.S. market's oversold three-day bounce is starting to hit some stops. We saw both STI and T get stopped out today.

-James

Current Portfolio:


BULLISH Play Updates

Lam Research - LRCX - close: 36.75 change: +0.04

Stop Loss: 34.75
Target(s): 39.75
Current Gain/Loss: unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
12/22 update: Our new trade on LRCX is not open yet thanks to a flat open for the S&P 500 and a dip for LRCX this morning. The stock spent the session consolidating sideways. We will try again.

I am suggesting we open small bullish positions tomorrow morning but only if both LRCX and the S&P 500 open positive. If the S&P 500 opens flat then we'll launch positions if LRCX opens positive. We'll use a stop loss under this week's low. Our target is $39.75.

*See Entry Details Above* (small positions)

Suggested Position: buy LRCX stock @ the open

- or -

buy the 2012Jan $38 call (LRCX1221A38)

12/22/11 trade not open yet. try again.

Entry on December xx at $ xx.xx
Earnings Date 01/25/12 (unconfirmed)
Average Daily Volume = 4.0 million
Listed on December 21, 2011


Oxford Industries Inc. - OXM - close: 43.08 change: -0.99

Stop Loss: 40.90
Target(s): 44.90
Current Gain/Loss: + 1.8%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/22 update: After hitting new highs yesterday OXM hit some profit taking today. The stock lost -2.2%. Look for short-term support at the simple 10-dma near $42.35. We will inch our stop loss up to $40.90.

(small positions)

current Position: long OXM stock @ $42.32

- or -

Long Jan $45 call (OXM1221A45) entry $0.85

12/22/11 new stop loss @ 40.90

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


Rackspace Hosting - RAX - close: 43.19 change: -0.86

Stop Loss: 43.45
Target(s): 49.75
Current Gain/Loss: unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see below

Comments:
12/22 update: RAX underperformed the market again. If this stock doesn't show some improvement tomorrow then we'll drop it as a candidate.

We have a trigger to open bullish positions at $45.55 with a stop at $43.45. More conservative traders may want to wait for RAX to close over $46.00 instead since the spring 2011 highs may still be resistance.
FYI: The Point & Figure chart for RAX is bullish with a $65 target.

Trigger @ 45.55

Suggested Position: buy RAX stock @ 45.55

- or -

buy the Jan $45 call (RAX1221A45)

Entry on December xx at $ xx.xx
Earnings Date 02/09/12 (unconfirmed)
Average Daily Volume = 1.5 million
Listed on December 20, 2011


Ross Stores Inc. - ROST - close: 47.66 change: -0.15

Stop Loss: 45.75
Target(s): 52.50
Current Gain/Loss: - 0.8%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
12/22 update: ROST produced a minor pull back today. Readers can choose to wait for a new high over $48.15 or wait to try and buy a dip near $46.00 instead.

current Position: long ROST stock @ 48.05

- or -

Long 2012Jan $50 call (ROST1221A50) entry $0.45

Entry on December 21 at $48.05
Earnings Date 03/19/12 (unconfirmed)
Average Daily Volume = 1.1 million
Listed on December 20, 2011


United Continental Holdings - UAL - close: 20.26 change: -0.04

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

Comments:
12/22 update: UAL lost four cents on the session. If this stock doesn't show improvement tomorrow then we'll drop it this weekend.

Currently our plan is to open small bullish positions when UAL trades at $21.55.

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: 29.77 change: +0.88

Stop Loss: 30.25
Target(s): 26.00
Current Gain/Loss: + 2.4%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
12/22 update: Ouch! This oversold bounce in BRCM is quickly erasing our unrealized gains. Readers may want to exit early now. The stock has rallied and apparently stalled at resistance near $30.00. We have a stop loss at $30.25. If the market continues higher tomorrow then BRCM will likely hit our stop loss. I am not suggesting new positions at this time.

Suggested Position: short BRCM stock @ $30.53

- or -

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

12/22/11 readers may want to exit early now
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


Ctrip.com Intl. - CTRP - close: 23.82 change: +1.30

Stop Loss: 24.15
Target(s): 20.25
Current Gain/Loss: - 3.5%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/22 update: It's been a volatile week for CTRP. Tuesday it was up +4.0%, yesterday down -3.9%, and today up +5.7%. The stock is now testing resistance near $24.00. Readers may want to go ahead and exit now. We are going to lower our stop loss to $24.15. I am not suggesting new positions at this time.

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

12/22/11 readers may want to exit early now. New stop @ 24.15
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 - EA - close: 20.30 change: -0.00
(symbol changed from ERTS)

Stop Loss: 22.05
Target(s): 18.05
Current Gain/Loss: + 1.6%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/22 update: EA produced a choppy morning but closed unchanged on the session. The overall trend is still down. Readers may want to look for another failed rally near the exponential 200-dma before considering new positions.

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: 37.55 change: +0.50

Stop Loss: 38.25
Target(s): 32.50
Current Gain/Loss: + 3.9%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/22 update: This oversold bounce in the market and PCAR is eating into our unrealized gains. Readers may want to exit now. I am still expecting resistance near $38.00. I am not suggesting new positions at this time.

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

12/22/11 readers may want to exit early now
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


Vera Bradley, Inc. - VRA - close: 31.60 change: +0.47

Stop Loss: 35.25
Target(s): 27.50
Current Gain/Loss: + 4.7%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/22 update: VRA continues to bounce from oversold levels. Nothing has changed from my prior comments. Readers may want to exit early now to lock in a gain. The action yesterday still looks like a potential bullish reversal.

The 10-dma should offer some resistance near $33.40.

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

12/21/11 new stop loss @ 34.05, readers may want to exit early now to lock in a gain.
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 BEARISH PLAYS

Cash America Intl. - CSH - close: 47.16 change: +1.32

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

Comments:
12/22 update: CSH is not cooperating. The larger trend is still bearish with a pattern of lower highs. Yet CSH is currently bouncing off support near $45.00. If the market rolls over then keep CSH on your watch list for a breakdown under $45.00. Yet given the market's current bounce we're not going to wait around. We're removing CSH from the newsletter with the trade unopened.

Trigger @ 44.75

Trade did not open

12/22/11 trade did not open. We are removing CSH as a candidate.

chart:

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


SunTrust Banks, Inc. - STI - close: 17.65 change: +0.70

Stop Loss: 17.15
Target(s): 11.00
Current Gain/Loss: - 6.3%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/22 update: Financials helped lead the rally higher today. STI outperformed with a +4.1% gain. The stock broke out past short-term resistance at $17.00. Our stop was hit at $17.15.

closed Position: short STI stock @ $16.12 exit 17.15 (-6.3%)

- or -

2012Jan $15 PUT (STI1221M15) entry $0.41 exit 0.15 (-63.4%)

12/22/11 stopped out at $17.15

chart:

Entry on December 20 at $16.12
Earnings Date 01/20/12 (unconfirmed)
Average Daily Volume = 7.6 million
Listed on December 19, 2011


AT&T Inc. - T - close: 29.66 change: +0.36

Stop Loss: 29.55
Target(s): 24.25 or 22.75
Current Gain/Loss: - 0.5%
Time Frame: 6 to 9 weeks or more
New Positions: see below

Comments:
12/22 update: Shares of AT&T are getting into the holiday spirit. The stock showed some uncommon strength today and broke out past potential resistance at $29.50, its 150-0dma and its simple 200-dma. Our stop loss was hit at $29.55.

closed Position: short T stock @ 29.40, exit $29.55 (-0.5%)

- or -

2012Jan $27.50 PUT (T1221M27.5) Entry $0.31 exit 0.09 (-70.9%)

- or -

Mar $26 PUT (T1217O26) Entry $0.42 exit 0.20 (-52.3%)

12/20/11 new stop loss @ 29.55
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

chart:

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