Option Investor
Newsletter

Daily Newsletter, Monday, 1/9/2012

Table of Contents

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

Market Wrap

Ahead Of Earnings, Stocks Eke Out Gains

by Todd Shriber

Click here to email Todd Shriber
It was a Monday of meager gains, but gains nonetheless as all three major U.S. indexes closed higher ahead of the start of fourth-quarter earnings. German Chancellor Angela Merkel and French President Nicolas Sarkozy, the duo affectionately known as ''Merkozy,'' were meeting again to try to hash out a plan for Europe’s sovereign debt woes and just that meeting helped stocks trade higher.

Market Stats

For those that are fans of stock market history, the fact that stocks closed higher today is significant because it means the S&P 500 is higher on the fifth trading day of the new year than it was when the year started. My parents got me a copy of the Stock Trader's Almanac for Christmas and since I do not want to copy directly from those guys without their permission, I will merely say it is fun reading and I encourage you to get a copy to see just how good the odds are the S&P 500 will finish higher for the year now that the index moved higher over the first five trading days of 2012.

If there is any bad news in terms of historical market musings it might come in the form of the lethargic performance of small-caps to start the year. Those that are believers in the January Effect might be concerned that small-caps, as measured by the iShares Russell 2000 Index Fund (NYSE: IWM), are slightly lower to start the year. The January Effect assumes small-caps will be leaders to start the new year. Maybe that will materialize and it is worth noting IWM is not all that far removed from its 200-day moving average.

Russell 2000 ETF Chart

Good news for beleaguered gold bugs. Goldman Sachs was out with a bullish call on the yellow metal today, saying Comex-traded gold could jump to $1,940 an ounce in 12 months aided by depressed interest rates here in the U.S. That price is not much higher than the September 2011 record we saw, but gold has tumbled more than 15% since then. Morgan Stanley is even more bullish on gold. That bank said gold may average a record $2,200 an ounce, Bloomberg reported.

It will be interesting to see how accurate those predictions on gold are. Last year, investors pulled a net $372 million from the SPDR Gold Shares (GLD), the largest gold ETF, but the December outflow number was over $2.24 billion.

Gold Chart

To be sure, this was not a real ''Merger Monday,'' but there was one sizable deal to discuss and it actually leaked out last Friday. Pharmaceuticals giant Bristol-Myers Squibb (BMY) is buying Inhibitex (INHX) for $2.5 billion. You may recall that in November when Gilead Sciences (GILD) ponied up $11 billion for Pharmasset (VRUS), I, along with many others, opined that that deal would probably touch off more mergers and acquisitions activity among big pharma companies looking for ways to get their hands on potentially lucrative Hepatitis C treatments.

Before I delve too deeply into that, I am going to stand on one of my favorite soapboxes: Suspicious options trading leading up to a deal announcement. It was reported that someone bought 2,000 Inibitex $10 calls last Friday for $2 per contract. Nice move considering the stock closed at $23.70 today. What makes that options buying all the more, shall I say interesting, is the fact that last Tuesday Inhibitex lost 8% and the following day the stock was down as much as 16%.

Oh well. Better to be lucky than good, I suppose. For those of us that do not have that type of good fortune, the field of potential Hepatitis C takeover candidates has been narrowed to two: Achillion Pharmaceuticals (ACHN) and Idenix Pharmaceuticals (IDIX).

Oddly enough, Idenix was downgraded to market perform by JMP Securities today, but Bank of America raised its price objective on the stock to $18, well above the $9.67 the stock closed at.

Idenix Chart

For its part, Achillion probably was not moving higher today just because of the deal for Inhibitex. The company’s Phase II trial for its Hepatitis C drug is apparently going well as interim results released today indicate. That probably piques the interest of possible suitors even more.

Achillion Chart

After hours, Dow component Alcoa (AA), the largest U.S. aluminum maker, kicked off the fourth-quarter earnings parade by reporting a loss of $34 million, or 3 cents a share on revenue of $5.99 billion. Alcoa said it has a debt-to-capital ratio of 35% and free cash flow of $906 million.

''Alcoa turned in solid performance in a volatile year by responding quickly to changing market conditions and relentlessly managing cash. We stayed focused on growth and took aggressive action to cut costs, improve our competitiveness, and strengthen our balance sheet,'' said Alcoa Chairman and CEO Klaus Kleinfeld said in a statement.

Pennsylvania-based Alcoa said aluminum demand climbed 10% last year and the company is forecasting a 7% increase this year. The company plans to trim capacity by 12% to improve its competitive position and earlier today said it would reduce capacity at a smelter in Italy and two in Spain.

It seems like Alcoa always reports on a Monday, so I get to include that news in this wrap and as I always say, do not expect a $9.43 to move the Dow, a price-weighted index. Alcoa is up just two cents in the after-hours session and remains the second-lowest priced stock in the Dow buffered from the basement by only Bank of America (BAC).

Alcoa Chart

Looking at the charts, closed right around 1280 and that means the next hurdle is some fairly stiff resistance at 1285. The best case scenario for getting through that area is Europe at least remaining quiet, earnings reports that are positive surprises following previous warnings and a fresh round of dividend increases sure would not hurt. If 1285 results in one of those January sell-offs, the S&P 500 probably returns to the 1260-1265 range and from there 1250 becomes an issue.

S&P 500 Chart

The Dow is back to flirting with 12,400 and as I said, I do not expect Alcoa to do much for the Dow in either direction. Monday’s close puts the index less than 35 points away from resistance at 12,425 and support is 12,200. There are no more Dow components reporting this week until JPMorgan Chase (JPM) on Friday before the bell.

As an aside, I am not sure if this means the risk on trade is really back on, but it is interesting to note that CAT is up almost 4% to start the year while PG is flat and Coca-Cola (KO) is down more than 2%.

Dow Chart

The Nasdaq was fortunate to eke out a gain today, but the same cannot be said of the Nasdaq 100. Apple (AAPL) and Amazon (AMZN) both traded lower, but Google (GOOG) was the real problem, tumbling more than 4.2% after Motorola Mobility (MMI), the smartphone maker Google is acquiring (some would say for too much), forecast fourth-quarter sales of $3.4 billion. That is well below the $3.88 billion analysts were expecting. For the composite, support is 2660 and resistance is 2680.

Nasdaq Chart

I cannot say I have been impressed with much of anything thus far in 2012, as I said before, gains are gains. That said, it would be nice to see small-caps show a little more moxy and give fund managers a reason to get involved with that group. Something else that I found interesting is the performance to start the year by the Utilities Select Sector SPDR (XLU) and the Consumer Staples Select Sector SPDR (XLP), two obvious defensive plays and two of the best performing sector funds from 2011. XLU is down 2.6% while XLP is down about 1.5%. On the other hand, the Materials Select Sector SPDR (XLB) is up almost 1.5%.

Todd Shriber


New Plays

Chinese Stocks

by James Brown

Click here to email James Brown


NEW BEARISH Plays

Ctrip.com Intl. - CTRP - close: 22.44 change: -0.51

Stop Loss: 24.05
Target(s): 20.25
Current Gain/Loss: unopened
Time Frame: up to earnings in mid February.
New Positions: Yes, see below

Company Description

Why We Like It:
The last three quarters have been pretty ugly for shares of CTRP, a travel services company focused on China. Now the stock's recent oversold bounce has failed and shares are breaking down to new lows.

I do want to warn you that short interest on CTRP is nearing 10% of the float, which raises the risk of a short squeeze. I am suggesting we keep our position size small to limit our risk. We want to open bearish positions at the open tomorrow. More conservative traders can wait for a new relative low under $22.00 as their entry point instead. Our exit target is $20.25. I'm starting this play with a wide stop loss (a.k.a. riskier stop loss) at $24.05. FYI: The Point & Figure chart for CTRP is bearish with a $9.00 target.

Small Positions

Suggested Position: short CTRP stock @ the open

- or -

buy the Feb $22 PUT (CTRP1218N22) current ask $1.45

Annotated chart:

Entry on January xx at $ xx.xx
Earnings Date 02/13/12 (unconfirmed)
Average Daily Volume = 1.8 million
Listed on January 09, 2011


Focus Media Holdings - FMCN - close: 18.71 change: +0.08

Stop Loss: 20.51
Target(s): 15.50
Current Gain/Loss: + 0.0%
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
FMCN is another Chinese company. This one is in the advertising industry. There were headlines about FMCN last week when Muddy Waters LLC, a research firm focused on Chinese companies, alleged there was something fishy about FMCN's recent acquisition of a ginseng plantation. Investors have to wonder why an advertising company is buying plantations. The company (FMCN) denies there was any wrongdoing. Shares still look vulnerable to more selling pressure.

The stock has a bearish trend of lower highs and closed under recent support near $19.00. I am labeling this an aggressive trade because FMCN can be a volatile stock. We want to keep our position size small to limit our risk. Open bearish positions tomorrow morning. We'll use a stop loss at $20.51. Our target is $15.50. FYI: The Point & Figure chart for FMCN is currently bullish but a drop under $18.00 will create a new sell signal.

NOTE: Using the put options can limit your capital exposure.

(Small Positions)

Suggested Position: short FMCN stock @ the open

- or -

buy the Feb $18 PUT (FMCN1218N18) current ask $1.80

Annotated chart:

Entry on January xx at $ xx.xx
Earnings Date 03/06/12 (unconfirmed)
Average Daily Volume = 2.7 million
Listed on January 09, 2011



In Play Updates and Reviews

GSK Disappoints

by James Brown

Click here to email James Brown

Editor's Note:
British drug maker GSK issued some disappointing drug data this morning and the stock suffered for it. We were stopped out of our GSK trade at the open this morning.

-James

Current Portfolio:


BULLISH Play Updates

Ball Corp. - BLL - close: 36.83 change: -0.29

Stop Loss: 39.00
Target(s): 35.35
Current Gain/Loss: + 0.7%
Time Frame: up to the earnings report (01/26)
New Positions: see below

Comments:
01/09 update: BLL hit some profit taking today, down -0.7%. Broken resistance near $36.50 should be new support.

Don't forget that we plan to exit ahead of the late January earnings report.

Earlier Comments:
Our target is $39.00. More conservative traders may want to take profits early near $38.00 instead. FYI: The Point & Figure chart for BLL is currently bearish but a rally past $37.00 would produce a brand new buy signal.

current Position: Long BLL stock @ 36.55

- or -

Long Feb $35 call (BLL1221A35) entry 2.30

01/06/12 trade triggered at $36.55
01/05/12 adjusted stop loss to $35.35, plan to exit prior to earnings

Entry on January 06 at $36.55
Earnings Date 01/26/12 (confirmed)
Average Daily Volume = 985 thousand
Listed on January 03, 2011


Harley-Davidson - HOG - close: 39.35 change: -0.23

Stop Loss: 38.75
Target(s): 44.50
Current Gain/Loss: unopened
Time Frame: up to the earnings report (late January)
New Positions: Yes, see below

Comments:
01/09 update: HOG is still drifting sideways under resistance near $40.00. The stock underperformed today with a -0.5% decline.

I am suggesting a trigger to open small bullish positions at $40.35 with a stop loss at $38.75. Our target is $44.50 but we may have to exit early given our time frame. HOG is tentatively scheduled to report earnings in late January and we do not want to hold over the announcement.

Trigger @ 40.35

Suggested Position: buy HOG stock @ 40.35

- or -

buy the Feb $40 call (HOG1221B40)

Entry on January xx at $ xx.xx
Earnings Date 01/24/12 (unconfirmed)
Average Daily Volume = 1.5 million
Listed on January 05, 2011


Lam Research - LRCX - close: 38.71 change: +0.87

Stop Loss: 36.40
Target(s): 39.50
Current Gain/Loss: + 4.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
01/09 update: The semiconductor sector was showing relative strength today and LRCX was doing its part with a +2.2% gain. Today's move is a bullish breakout over resistance at $38.00. Please note that we are raising the stop loss to $36.40. I am adjusting our exit target down to $39.50.

(small positions)

current Position: Long LRCX stock @ $37.02

- or -

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

01/09/12 new stop loss @ 36.40, adjust target to $39.50
01/03/12 new stop loss @ 35.75
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


PetMed Express Inc. - PETS - close: 10.55 change: +0.10

Stop Loss: 9.90
Target(s): 11.90
Current Gain/Loss: - 0.3%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
01/09 update: PETS slowly drifted higher on Monday and closed up with a +0.9% gain. Readers may want to consider inching up their stop loss toward the $10.15 area.

Earlier Comments:
A breakout could spark a short squeeze. The stock could see a short squeeze due to the high amount of short interest. The most recent data listed short interest is almost 29% of the very small 19.8 million-share float.

PETS has potential technical resistance at the simple 150-dma at $10.35. 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.

(small positions)

current Position: Long PETS stock @ $10.59

- or -

Long Feb $10 call (PETS1218B10) entry $0.74

01/04/12 readers may want to exit early. PETS is not cooperating and the action looks bearish.
01/03/12 PETS gapped higher at $10.59, which is above our trigger at $10.45.

Entry on January 03 at $10.59
Earnings Date 01/24/12 (unconfirmed)
Average Daily Volume = 231 thousand
Listed on December 27, 2011


Starbucks Corp. - SBUX - close: 46.59 change: -0.13

Stop Loss: 43.95
Target(s): 49.75
Current Gain/Loss: + 1.1%
Time Frame: up to the January earnings report.
New Positions: see below

Comments:
01/09 update: Monday was a quiet day for SBUX with the coffee stock churning sideways. There is no change from my weekend comments. I am a bit hesitant to open new positions in SBUX. More conservative traders may want a stop closer to $44.50 or near $45.00 instead.

NOTE: SBUX is tentatively scheduled to report earnings in late January. Normally we prefer to exit prior to any earnings announcement.

Earlier Comments:
Our multi-week target is $49.75. FYI: The Point & Figure chart for SBUX is bullish with a long-term $75 target.

current Position: long SBUX stock @ $46.08

- or -

Long FEB $47 call (SBUX1218B47) entry $1.56

01/07/12 new stop loss @ 43.95

Entry on December 29 at $46.08
Earnings Date 01/25/12 (unconfirmed)
Average Daily Volume = 5.1 million
Listed on December 28, 2011


BEARISH Play Updates

Electronic Arts - EA - close: 19.42 change: -0.25

Stop Loss: 21.05
Target(s): 18.00
Current Gain/Loss: + 2.7%
Time Frame: up to the earnings report
New Positions: see below

Comments:
01/09 update: Our new EA trade is off to a good start. Shares opened at $19.97 and then immediately spiked down to a new relative low at $19.08 before paring its losses.

Our plan was to keep our position size small to limit risk.

Our exit target is $18.00 but we may adjust it as the play progresses. Please note that we want to exit prior to the early February earnings report (still unconfirmed).

(Small Positions)

current Position: short EA stock @ 19.97

- or -

Long 2012Jan $20 PUT (EA1221M20) entry $0.70

Entry on January 09 at $19.97
Earnings Date 02/01/12 (unconfirmed)
Average Daily Volume = 4.9 million
Listed on January 07, 2011


EZchip Semiconductor - EZCH - close: 29.54 change: +0.24

Stop Loss: 30.10
Target(s): 25.50
Current Gain/Loss: - 3.9%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
01/09 update: Warning! Readers may want to exit immediately. EZCH is flirting with a breakout past resistance at $30.00. The stock saw an intraday spike to $30.08 before trimming its gains. I am not suggesting new positions at this time.

Earlier Comments:
We want to keep our position size small to limit our risk. The $26.60 level has been support in the past but we're aiming for $25.50. More aggressive trades may want to aim for $23 over the next several weeks. FYI: The Point & Figure chart for EZCH is bearish with a $24 target.

Suggested Position: short EZCH @ 28.38

- or -

Long Jan $28 PUT (EZCH1221M28) entry $0.95

Entry on December 29 at $28.38
Earnings Date 02/08/12 (unconfirmed)
Average Daily Volume = 280 thousand
Listed on December 28, 2011


Jos. A Bank Clothiers - JOSB - close: 46.40 change: -0.07

Stop Loss: 48.55
Target(s): 41.00
Current Gain/Loss: + 0.7%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
01/09 update: JOSB continues to underperform the market although today's decline was pretty minor. Shares opened at $46.75 and dipped to $45.78 before paring its losses.

Earlier Comments:
I suspect the path of least resistance is down and I'm not the only one. The most recent data listed short interest at 19% of the small 27.5 million-share float. This high amount of short interest does raise the risk of a short squeeze should the stock suddenly reverse unexpectedly.

Our target is $41.00 but don't be surprised to see a temporary bounce near $44.00. FYI: The Point & Figure chart for JOSB is bearish with a $39.00 target.

(Small Positions)

Suggested Position: short JOSB stock @ 46.75

- or -

Long Feb. $45 PUT (JOSB1218N45) entry $1.55

Entry on January 09 at $46.75
Earnings Date 03/29/12 (unconfirmed)
Average Daily Volume = 236 thousand
Listed on January 07, 2011


Target Corp. - TGT - close: 48.57 change: -0.38

Stop Loss: 50.50
Target(s): 46.05
Current Gain/Loss: - 1.1%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
01/09 update: The oversold bounce is already beginning to fade. This is good news for the bears. The $49.50-50.00 zone should be resistance.

(small positions)

current Position: short TGT stock @ 48.00

- or -

Long Feb $50 PUT (TGT1218B50) entry $2.65

01/05/12 new stop loss @ 50.50
01/05/12 Our trade was opened on the gap down at $48.00 instead of our trigger at $49.45 thanks to TGT's missed same-store sales numbers and an earnings warning.

Entry on January 05 at $48.00
Earnings Date 02/22/12 (unconfirmed)
Average Daily Volume = 4.6 million
Listed on January 04, 2011


CLOSED BULLISH PLAYS

GlaxoSmithKline - GSK - close: 44.36 change: -1.82

Stop Loss: 44.90
Target(s): 49.25
Current Gain/Loss: - 3.2%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
01/09 update: Ouch! Investors were unhappy with the latest news out of GSK this morning. The company released data on its final trials for a new asthma medication. Unfortunately the new once-a-day drug, Relovair, did not show any significant improvement over GSK's twice-a-day drug already on the market. The stock gapped open lower at $44.25, which was under our stop loss at $44.90, immediately closing our trade.

closed Position: long GSK stock @ 45.75, exit 44.25 (-3.2%)

- or -

Feb $46 call (GSK1218B46) entry $1.05, exit 0.30 (-71.4%)

01/09/12 stopped out on gap down at $44.25 on lackluster news regarding GSK's Relovair drug
01/04/12 new stop loss @ 44.90

chart:

Entry on December 23 at $45.75
Earnings Date 02/07/12 (unconfirmed)
Average Daily Volume = 2.5 million
Listed on December 22, 2011