Option Investor
Newsletter

Daily Newsletter, Tuesday, 12/27/2011

Table of Contents

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

Market Wrap

Italian Apprehension

by Jim Brown

Click here to email Jim Brown
Mixed economics in the U.S., a major warning from Sears and worry over the Italian debt sale kept the markets from extending gains.

Market Statistics

U.S. Consumer Confidence exploded higher in December to 64.5 compared to 55.2 in November. That is an eight month high and the gains were led by the expectations component, which rose +10 points to 76.4 from 66.4. The current conditions component rose only slightly less to 46.7 from 38.3. The headline number has rallied +23.6 points in the last two months alone.

Unfortunately the good news had a hollow ring to it because buying plans declined in two of three components. Those considering buying an auto plunged to 9.8% from 12.2%. Those planning on buying an appliance like a TV or washing machine declined to 47.9% from 49.4%. Home buying plans rose slightly to 5.1% from 4.9%. It would appear the improving confidence did not carry over into buying plans.

Those who felt jobs were hard to get declined to 41.8% from 43%. Those who felt jobs were plentiful rose from 5.6% to 6.7%. Both numbers are the BEST readings since January 2009.

Over the last 22 years the December confidence numbers were higher than November 73% of the time. That suggests there is a little bit of holiday cheer bleeding over into the respondent answers.

Those who felt the market would rise over the next year rose from 23.9% to 26.5%.

Consumer Confidence Chart

The Richmond Fed Manufacturing Survey rose to +3.0 for December from zero in November. This was the first time since June that manufacturing posted gains in the Richmond district. August was the recent low point at -10.

New orders rose to +7.0 from -2.0 and backorders edged into positive territory at +1.0 after a -10.0 reading in November. Backorders fell as low as -25 over the last six months so edging into positive territory is a definite improvement.

On the negative side the employment component fell back into contraction at -4.0 from zero last month. Capital expenditure plans declined to 7.0 from 15.0 indicating manufacturer confidence in the future could be declining.

Richmond Fed Chart

The Texas Manufacturing Survey declined back into contraction territory at -3.0 from +3.2 in November. The Texas survey is not widely followed but it was a drag on the market today.

The Texas survey had been in positive territory for two months after dropping to -14.4 in September. The Q4 bounce appears to be fading. All the major components remained in negative territory except for employment, which rose to 11.8 from 9.0.

The economic calendar for the rest of the week is highlighted by the Italian debt sale scheduled for Wednesday and Thursday. Currency trading in Europe was very light on Tuesday with the UK markets closed. Yields for Italian debt rose slightly in advance of Italian auction. There is some real fear it won't come off at a reasonable number and could tank the markets into year end.

Economic Calendar

In stock news Sears (SHLD) was the big story. The chain said it would close up to 120 Sears and Kmart stores as holiday sales fell more than expected. Sears same store sales for the eight weeks ended on Dec 25th fell by -5.2% while the department store sector rose an average of +4.0%.

Closing the Kmart and Sears stores will generate $140 to $170 million of cash from inventory sales and leasing and sales of the stores themselves. Sears owns some of the best real estate in the U.S. and selling the stores should not be a problem. However, Sears will incur non-cash expenses of as much as $2.4 billion in Q4 to write down the value of goodwill and potential tax benefits.

The company plans to reduce fixed costs by another $100 to $200 million. Chairman Eddie Lampert, along with his hedge fund, owns 60% of Sears. Lampert has been Chairman while Sears suffered 18 consecutive quarters of declining sales. Sears has closed 171 of its large U.S. stores since 2005. The company plan is to move to smaller stores and franchising efforts. Sears opened 133 of those "specialty" stores over the last year. Sears now has 945 of those stores. Wal-Mart and Target are the main competitors for Sears. The lack of home sales is impacting their sales of appliances.

Bruce Berkowitz and the $8 billion Fairholme Fund (FAIRX) came into the week with a -29% loss for the year. They were hammered for another $180 million loss when Sears shares declined -27%. The fund held 16.3 million shares as of the last report. Berkowitz was named fund manager of the decade in 2010 but he is trailing 99% of funds this year. In May he told investors on a conference call "I don't see how we can get hurt with Sears." Oops! Sears was the sixth worst performer in the S&P this year and the fifth largest holding in the Fairholme fund.

Sears Holdings Chart

Whirlpool (WHR) shares declined -9% on the news from Sears. The retail giant sells brands manufactured by Whirlpool such as Maytag. Whirlpool has been weak on its own over the last year as consumer budgets shrank due to high unemployment and the lack of home equity gains.

Whirlpool Chart

Computer Sciences Corp (CSC) warned it would have to write down the value of a U.K. health information contract by -$1.5 billion. In September the British government said it would scrap the 9-year-old contract to create a nationwide information technology program for its state-run health care system. CSC warned in a SEC filing it will revise its 2012 forecast and book a material impairment charge in the current quarter because of the lost work.

CSC said it was continuing to negotiate a scaled back version of the contract with the UK but could not determine the actual charges until the talks completed. CSC shares declined -9% on the news.

CSC Chart

Apple (AAPL) shares pushed a little farther over $400 on news from DigiTimes the long awaited iTV could hit store shelves as early as this summer. Piper Jaffray is also saying they will be on store shelves in time for the 2012 fall buying season.

DigiTimes said Samsung began producing the chips that would power the TV last month and Sharp is making the displays. The initial TVs will come in 32-inch and 37-inch models. Those sizes seem small compared to the current surge to even larger flat screens in the 80-inch range. However, by keeping the small sizes they can hold down the costs on the initial versions and get more into the marketplace. Once the product is accepted they can increase the sizes on future models. The smaller screens will also make them easier to stock in the Apple stores. Packaging for 50-60 inch TVs takes up a lot of room and would change the way stores inventory their products.

The term iTV is still not the official name. They can't call them Apple TV because that is the name for the set top boxes already in use. The iTV name is trademarked by another company so Apple would either have to buy the name for what would probably be a large amount of money or come up with another name.

There are rumors that other television manufacturers are slowing production of existing models because they don't want to have a lot of inventory at risk when the new Apple product is released. Apple has such a rabid fan group it would have to be a major flop to fail and that is not going to happen since Steve Jobs had a major voice in its development.

Apple Chart

Google (GOOG) shares rallied to close at a new four year high after Flurry Analytics said that downloaded apps for Android and Apple devices on Christmas day more than doubled prior years. Google has already exceeded 10 billion downloads and Apple is approaching that number. Consumers received millions of smart devices for Christmas and they immediately rushed to download the newest applications. Flurry said consumers downloaded 242 million apps on Christmas day and 150 million on Christmas Eve. Overall the market for apps is running +125% over 2010 levels.

Google Chart

Shares of MGM, WYNN, LVS and Boyd Gaming (BYD) rallied after the government said it would let the states decide if they wanted to allow online gaming. On Friday the DOJ appeared to reverse its previous position on Internet gambling, saying that the online sale of lottery tickets within the state does not violate the Wire Act of 1960. A Roth Capital analyst, Todd Ellers, said this could be a big win for the major casinos operating virtual casinos if enough states authorized it. Obviously this would be a win for the states since they could tax it heavily.

WYNN Chart

Oil prices rose again to close over $101 as Iran increased its threats to block the Strait of Hormuz. The Strait sees over 15 million barrels per day of oil pass through narrow four mile width. That is about a sixth of global production.

Iran said "If Iran oil is banned, not a single drop of oil will pass through Hormuz Strait." To emphasize this point they are currently conducting naval war games in and around the Strait.

Iran has been the target of global sanction because of its quest for nuclear weapons. Last month the U.S. declared the Iranian Central Bank a threat as a money launderer in what could be a prelude to cutting out international transfers to and from the bank. The central bank has begun receiving payments on oil because other banks around the world have taken the sanctions seriously and are refusing to do business with Iranian banks. However, the central bank is still an authorized payment gateway. That will likely end soon.

If shipments from Iran were halted the price of oil could immediately rocket $40 higher according to Merrill Lynch. Iran exports 2.2 mbpd of crude. If Iranian oil was blocked and Iran succeeded in blocking the Strait the price of crude could go to $200.

If Iran did attempt to block the Strait it would cause a war with the U.S., which has pledged to keep the Strait open to aid Persian Gulf nations in exporting their oil and prevent a global recession from high oil prices. If Iran attempted to block the Strait the only real thing it would accomplish would be to lose its navy to the larger and far superior U.S. fleet. The battle would be swift and decisive. However, since Iran knows this they could take action against the Persian Gulf nations instead and target offshore terminals. While the U.S. would likely assist in defending those nations it would not be the same as trying to shutdown the Strait.

War with Iran in some form is almost unavoidable as long as they continue to defy the U.N. sanctions. It is only a matter of time. If Iran is successful in creating a nuclear weapon our chances of suffering a major EMP blast that knocks us back to the 1800s technology wise would increase by several hundred percent. A lack of oil would be the least of our worries.

WTI Crude Oil Chart

Strait of Hormuz

The S&P came to a dead stop at 1,265 once again as the low volume was not strong enough to break through that resistance. The markets were mixed all day with the conflicting economics and the big warning from Sears over weak Q4 sales.

There is no real story here other than light volume and strong resistance. Analysts are worried about the Italian debt auctions and the impact on the global markets if they fail.

The spike in crude prices also weighed on the markets. The dollar declined and provided no support for equities and commodities.

The lack of continued gains after last week's +3.5% rebound is not surprising. Those traders actually in the market are content with waiting out the week to see how the year ends. The vast majority of funds are not in the market with shops closed for the week for trading.

This is a window dressing week so those fund managers still in the market will be content to close the year at these levels. It is the next week we need to be worried about.

Initial support is 1,260 and the 200-day average but a decline could accelerate if that level fails.

S&P Chart

The Dow traded in a narrow 59 point range and closed the day with a -2.65 point loss. Basically the Dow held just below resistance at 12,300 and withstood a couple attempts to sell off. Chevron was the leader with a +.48 cent gain and CAT the loser with a -70 cent decline. Clearly a very low volatility day.

Initial support is 12,250 followed by 12,200. ANY move higher would be a new five month high.

Dow Chart

You can thank Apple and Google for the Nasdaq gains today. With Sears dragging the index down the twin big caps came to the rescue with decent gains. However, while the Nasdaq continued adding gains over 2600, those gains were minimal.

There was nothing exciting in the Nasdaq move. It was a very thin market and advancers were only slightly ahead of decliners. I looked at about 200 stock charts and I was shocked at the number of charts that looked bullish on Friday but had turned negative today. The headline gain on the Nasdaq does not tell the true story. The big caps may have kept the index positive but the troops were heading in the other direction.

Nasdaq Chart

Russell Chart

I would not apply any significance to the markets today. There were some significant cross currents but the real key was the very low volume and no real headlines to push us higher. There were threats of headlines that could push us lower like the Italian debt auctions and Iran threatening to close the Strait. Financials declined on profit worries and oil stocks failed to rally even though oil closed well over $100.

There was no overriding trend or headline in the market. This was a place holding day for fund managers as they count down the days left in 2011. They want the indexes to close here or even slightly higher. They want desperately to escape 2011 without further losses and start over again in 2012.

The risk for Wednesday is the Italian debt auction.

 

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Send Jim an email


New Plays

Drug Delivery

by James Brown

Click here to email James Brown


NEW BULLISH Plays

PetMed Express Inc. - PETS - close: 10.25 change: +0.13

Stop Loss: 9.90
Target(s): 11.90
Current Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
High-dividend stocks are pretty popular these days. PETS has an annual yield of 4.9%. Yet there are plenty of investors who are bearish on the stock. Short interest is almost 29% of the very small 19.8 million-share float. PETS does not have a good history of hitting Wall Street's earnings estimates. Looking over the last several quarters the company tends to miss. That helps explain the big drop from $24 in early 2010 to $9.00 late this year.

If you're bullish on PETS then the good news is that shares appear to have formed a bottom with the lows this fall and in late November. You could argue this is a double bottom for PETS. If shares can gain any momentum then shorts may start to cover and that could produce a short squeeze.

PETS has potential technical resistance at the simple 150-dma at $10.35. I am suggesting a trigger to open bullish positions at $10.45. We'll use a stop loss under today's low. I would keep our position size small to limit our risk. The simple and exponential 200-dma could be significant overhead resistance and PETS struggled with resistance near $11.50 in the past.

NOTE: I would prefer to trade the stock over the options but we're listing the options as an alternative.

Trigger @ 10.45 (small positions)

Suggested Position: buy PETS stock @ $10.45

- or -

buy the Feb $10 call (PETS1218B10) ask $0.70

Annotated chart:

Weekly chart:

Entry on December xx at $ xx.xx
Earnings Date 01/24/12 (unconfirmed)
Average Daily Volume = 231 thousand
Listed on December 27, 2011



In Play Updates and Reviews

Only Three Days Left

by James Brown

Click here to email James Brown

Editor's Note:
We've got three trading days left for 2011. Today's sideways performance in the market would suggest that investors are either indecisive or indifferent. Or maybe they're just weary of all the choppiness this year and have given up to leave the last few days to the trading robots.

Our OXM trade has hit our exit target. BRCM has been stopped out. We're closing the EA trade early.

-James

Current Portfolio:


BULLISH Play Updates

GlaxoSmithKline - GSK - close: 45.74 change: +0.09

Stop Loss: 44.40
Target(s): 49.25
Current Gain/Loss: - 0.0%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
12/27 update: GSK saw a brief dip to $45.30 this morning and spent the rest of the day in a very narrow range drifting sideways. There is no change from my prior comments. I would still consider new positions now.

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.

current Position: long GSK stock @ 45.75

- or -

Long Feb $46 call (GSK1218B46) entry $1.05

Entry on December 23 at $45.75
Earnings Date --/--/?? (unconfirmed)
Average Daily Volume = 2.5 million
Listed on December 22, 2011


Lam Research - LRCX - close: 37.11 change: +0.18

Stop Loss: 34.75
Target(s): 39.75
Current Gain/Loss: + 0.2%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
12/27 update: That's not a typo. LRCX posted 18 cents gains two days in a row. While the stock outperformed the major indices today with a +0.48% gain I am concerned with today's performance. It looks like a failed rally under the $38.00 level. You could almost argue that LRCX is forming a bear-flag pattern.

I am not suggesting new positions at this time and more conservative traders may want to raise their stop loss.

(small positions)

current Position: Long LRCX stock @ $37.02

- or -

Long 2012Jan $38 call (LRCX1221A38) entry $0.60

12/23/11 trade opened.
12/22/11 trade not open yet. try again.

Entry on December 23 at $37.02
Earnings Date 01/25/12 (unconfirmed)
Average Daily Volume = 4.0 million
Listed on December 21, 2011


Ross Stores Inc. - ROST - close: 48.97 change: +0.73

Stop Loss: 45.75
Target(s): 51.75
Current Gain/Loss: + 1.9%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
12/27 update: ROST displayed relative strength today with a +1.5% gain and another new high. This could be window dressing as fund managers dress up their portfolios with winning stocks for the quarter.

Our exit target is $51.75. Yet more conservative traders may want to exit early near $50.00, which could be round-number, psychological resistance. Plus the $50 level is currently near the top of ROST's rising channel. I am not suggesting new positions at this time.

current Position: long ROST stock @ 48.05

- or -

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

12/24/11 adjusted target to $51.75

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


Trinity Industries - TRN - close: 30.44 change: -0.18

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

Comments:
12/27 update: Our TRN trade is not open yet. The stock opened lower this morning. Yet shares held support near $30 and its 200-dma. I am suggesting we try again. The plan is to open bullish positions tomorrow morning but only if both TRN and the S&P 500 open positive. If the S&P 500 opens flat then we'll base our decision on TRN's open. We will use a stop loss at $28.75. Our target is $34.75.

FYI: The Point & Figure chart for TRN is currently bearish but a breakout past $31.00 would produce a new triple-top breakout buy signal.

*See Entry Details Above*

Suggested Position: buy TRN stock @ the open

- or -

buy the Jan $30 call (TRN1221A30)

Entry on December xx at $ xx.xx
Earnings Date 02/15/12 (unconfirmed)
Average Daily Volume = 633 thousand
Listed on December 24, 2011


BEARISH Play Updates

PACCAR Inc. - PCAR - close: 37.97 change: -0.01

Stop Loss: 38.25
Target(s): 32.50
Current Gain/Loss: + 2.9%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/27 update: PCAR is hovering near resistance at the $38.00 level but it's worth noting that PCAR hit an intraday high of $38.17. If the stock market is positive tomorrow we could see PCAR hit our stop loss at $38.25. More conservative traders might want to go ahead and exit early. 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: 32.09 change: -0.20

Stop Loss: 32.55
Target(s): 27.50
Current Gain/Loss: + 2.8%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/27 update: Fortunately there was no follow through on VRA's recent bounce. The stock drifted sideways on either side of the $32.00 level and closed down -0.6%. The high today was $32.24. I am not suggesting new positions at this time. More conservative traders may want to exit now.

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

12/24/11 new stop loss @ 32.55
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 BULLISH PLAYS

Oxford Industries Inc. - OXM - close: 45.71 change: +0.89

Stop Loss: 41.90
Target(s): 44.90
Current Gain/Loss: + 6.1%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/27 update: Target achieved. OXM displayed impressive relative strength today. Shares rallied to $46.66 intraday and settled with a +1.9% gain. Our exit target was hit pretty early today at $44.90.

OXM is short-term overbought here. I would keep it on your watch list and look to buy a correction.

(small positions)

closed Position: long OXM stock @ $42.32 exit $44.90 (+ 6.1%)

- or -

Jan $45 call (OXM1221A45) entry $0.85 exit $1.45 (+70.5%)

12/27/11 target hit at $44.90
12/24/11 new stop loss @ 41.90
12/22/11 new stop loss @ 40.90

chart:

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


CLOSED BEARISH PLAYS

Broadcom Corp. - BRCM - close: 29.77 change: -0.01

Stop Loss: 30.25
Target(s): 26.00
Current Gain/Loss: + 0.9%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
12/27 update: BRCM produced a brief rally above resistance at $30.00 before reversing lower. Unfortunately our stop loss was hit at $30.25 closing our trade.

closed Position: short BRCM stock @ $30.53 exit $30.25 (+0.9%)

- or -

2012Jan $28 PUT (BRCM1221M28) Entry $0.88 exit $0.36 (-59.0%)

12/27/11 stopped out at $30.25
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.

chart:

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


Electronic Arts - EA - close: 21.01 change: +0.30
(symbol changed from ERTS)

Stop Loss: 21.55
Target(s): 18.05
Current Gain/Loss: - 1.7%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/27 update: I am throwing in the towel on our EA short. The stock outperformed the market today with a +1.4% gain. Shares are still trading under resistance but it's not worth the risk given the market's up trend. We're suggesting an early exit now.

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

(small positions)

closed Position: short ERTS stock @ 20.65, exit 21.01 (-1.7%)

- or -

2012Jan $20 PUT (ERTS1221M20) entry $1.05 exit 0.48 (-54.2%)

12/27/11 exit early
12/24/11 New stop loss on EA at $21.55
12/19/11 ERTS will start trading as EA starting on the 20th

chart:

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