Option Investor
Newsletter

Daily Newsletter, Monday, 2/13/2012

Table of Contents

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

Market Wrap

Greek Progress Spurs Stocks Higher

by Todd Shriber

Click here to email Todd Shriber
Most of last Friday's losses evaporated today as the news out of Europe was significantly better today. In an effort to secure more bailout funds, Greece approved austerity plans. European policymakers will meet in Brussels on Wednesday to approve or reject another aid package to Greece, but chances are, that package will be approved and it is exactly why all the major indexes were higher today, led by an almost 1% gain for the S&P 500.

Market Stats

Monday's gains have the S&P 500 trading above the all-important 1350 level again. As CNBC reported today, the S&P 500 has traversed 1350 at least half a dozen times in the past 13 years, but only once has the index managed to keep on trucking higher. The one time the S&P 500 managed to break 1350 and keep on going was late 2006. That was before the all-time high almost 200 points away a year later. And we all know what happened after that.

I suppose it can be argued that history has a way of repeating itself and it certainly does in the financial markets, so the question becomes what version gets replayed here? The one where the S&P 500 makes its way beyond 1350 or the one where sellers step in and force the index lower?

It is worth noting that, as CNBC reported, short interest is currently at its lowest levels since March 2009 and company insiders are doing a lot more selling than buying of their own shares. In terms of insider selling, too much can be made of this issue because, as I am fond of saying, there is only one reason an executive buys his or her company’s shares, but there are several reasons why they sell and not all are bad. However, the reality is some of these executives are selling because they might think their company’s stock is overbought or due for a decline.

The lack of short interest may be perceived as a positive, but it is also constructive to have a large short interest when the market is moving higher for the simple reason that it forces shorts to cover and fans the flames of the rally. And before anyone gets mad and thinks I do not approve of short-selling, I love short-selling and when I traded professionally I did it a more than going long.

Speaking of stocks one probably does not want to be on the wrong side of because it keeps on climbing to new stratospheric heights, there is Apple (AAPL). The iPad and iPhone maker and all-around tech juggernaut closed above $500 today.

Bernstein was out with a note addressing a familiar topic: Apple possibly paying a dividend. Long story short, the research firm said Apple could afford an ''ongoing dividend'' with a payout ratio of 30% of free cash flow. ''On balance, we believe that prevailing circumstances should enable Apple to pay a meaningful ongoing dividend (i.e., 2.5%-3%) if it so chose, with no impact to its earnings or cash flow,'' Bernstein said in the note.

Apple really does not need to pay a dividend, not when its chart looks like this. The gap between Apple and Exxon Mobil (XOM) for the largest U.S. market cap crown has widened to almost $70 billion.

Apple Chart

In other stock-specific news, it was not a ''Merger Monday,'' but there was one deal that caught my. General Mills (GIS), the second-largest U.S. food company, is reportedly in talks to buy Brazilian food company Yoki for $1.16 billion. I bring this deal up for a couple of reasons. First, I know some folks like more conservative stocks with decent dividends and General Mills certainly fits the bill there. Second, if there has been a knock on Big G in recent years it has been that the company does not have enough emerging markets exposure. One deal in Brazil does not cure that dilemma outright, but it is a step in right direction.

General Mills

Shares of Regeneron Pharmaceuticals (REGN) surged over 12% on volume that was nearly triple the daily average after the after the company forecast higher sales of its eye drug Eylea. The company now expects U.S. sales of $250-$300 million of the drug compared with a previous forecast of $140-$160 million.

The company said its fourth-quarter loss widened to $53.4 million, or 58 cents per share, from $14.6 million, or 17 cents per share, a year earlier as revenue fell 8% to $123 million. Analysts expected a loss 60 cents per share and $132 million in revenue.

Regeneron Chart

Staying in the biotech arena, shares of Chelsea Therapeutics (CHTP) plunged almost 38% on volume that was approximately 15 times the daily average after the company said it received inquiries from the U.S. Food and Drug Administration regarding concerns about the company’s hypertension drug Northera. The FDA raised questions related to previously discussed issues such as the short duration of clinical studies and the limited size of the study population given the orphan status that the drug has, according to Reuters.

Chelsea Therapeutics Chart

Shares of Chesapeake Energy (CHK), the second-largest U.S. natural gas producer, climbed 2.4% on double the average daily turnover on news of planned asset sales that could reach up to $12 billion. This is an effort by Oklahoma-based Chesapeake to convince the investment community it is committed to increasing oil production and bolstering its balance sheet.

Still, Moody's Investors Service lowered its outlook on Chesapeake to Stable from Positive. Moody's already rates Chesapeake debt in junk territory and the ratings agency said ''the company’s capital expenditure plans far exceed its cash flows, necessitating the execution of continued asset sales and capital raising transactions in 2012.''

I am not saying its going to happen, but it is my OPINION and I have written to this effect elsewhere, that Chesapeake is a takeover target and BHP Billiton (BHP) makes for a logical suitor.

Chesapeake Chart

Looking at the charts, first support for the S&P 500, should the market pullback, is 1340 and then 1310. I do not want to jinx it, but if the index keeps stringing together closes above 1350, that is clearly a bullish sign and could mean we are off to 1375.

S&P 500 Chart

With today's close at 12,874, the Dow Jones Industrial Average is not too far from resistance at 12,900. The 12,750 area would be first support followed by 12,650 and 12,600. Twenty-five of 30 Dow stocks closed higher today and the pop was led by high-beta names such as BAC, CAT, JPM and CVX.

Dow Chart

The Nasdaq is flirting with 3000 for the first time since the third quarter of 2000 and everyone seems to be making a big deal about that, talking about 11-year highs for the composite. I do not want to ruin anyone's party, but I think it bears noting even 3,000 for the Nasdaq is more than 50% below the January 2000 highs. Resistance will be 3000 and support is found at 2900, 2885 and 2800.

Nasdaq Chart

Clearly, the big event for the week is getting that Greek bailout package approved on Wednesday and then the Philly Fed survey on Thursday. For those that are long, hope the market keeps grinding higher through Thursday because the day before and the day after the President's Day weekend are usually down days for stocks.

Todd Shriber


New Plays

Internet Services

by James Brown

Click here to email James Brown

Editor's Note:

In addition to tonight's new candidate, consider these stocks as possible trading ideas and watch list candidates. Some of them need to breakout past resistance.

(bullish candidates) CRNT, PHM, SYMC, TEX, CASY, ARO, SIRI, TICC


NEW BULLISH Plays

Digital River - DRIV - close: 18.28 change: +0.26

Stop Loss: 17.45
Target(s): 21.50
Current Gain/Loss: unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
The gap higher in shares of DRIV on February 3rd was a reaction to the company's better than expected earnings numbers. Investors ignored a warning for the first quarter and bought the stock anyway. Now shares are slowly consolidating higher and look poised to breakout past the $18.50 area.

DRIV can definitely see some volatility so we want to keep our position size small to limit our risk. I am suggesting bullish positions if DRIV can trade at $18.50 or higher. There potential price resistance at $20.00. There is potential technical resistance at the 150-dma and exponential 200-dma (see chart below).

Trigger @ $18.50 (small positions)

Suggested Position: buy DRIV stock @ (trigger)

- or -

buy the Mar $18 call (DRIV1217c18) current ask $1.00

Annotated chart:

Entry on February xx at $ xx.xx
Earnings Date 04/30/12 (unconfirmed)
Average Daily Volume = 727 thousand
Listed on February 13, 2011



In Play Updates and Reviews

Markets Maneuver Higher on Monday

by James Brown

Click here to email James Brown

Editor's Note:
For the most part stocks delivered a widespread bounce on Monday. The majority of our trading candidates did participate in the rally. Tomorrow could be a real test with futures lower on Moody's downgrades for Europe tonight.

Don't forget that February options expire in four days.

Current Portfolio:


BULLISH Play Updates

Autodesk, Inc. - ADSK - close: 38.37 change: +0.84

Stop Loss: 36.50
Target(s): 39.90
Current Gain/Loss: + 5.1%
Time Frame: exit prior to the Feb 23rd earnings announcement
New Positions: see below

Comments:
02/13 update: ADSK quickly rallied back toward last week's highs and stalled. Shares did outperform the major indices with a +2.2% bounce today. Readers may want to exit early now or raise their stops.

I am not suggesting new positions at this time.

current Position: Long ADSK stock @ 36.50

02/10/12 closed Feb. $37 calls, bid @ $1.02 (-0.5%)
02/09/12 prepare to exit Feb. $37 calls, current bid $1.65 (+52.7%)
02/08/12 new stop loss @ 36.50
02/07/12 new stop loss @ 36.25
02/02/12 new stop loss @ 35.75
02/01/12 new stop loss @ 35.25
01/26/12 the action today looks like a potential top or bearish reversal. Be careful!

Entry on January 26 at $36.50
Earnings Date 02/23/12 (unconfirmed)
Average Daily Volume = 2.5 million
Listed on January 24, 2011


Discover Financial Services - DFS - close: 28.68 change: +0.50

Stop Loss: 27.25
Target(s): 31.50
Current Gain/Loss: + 1.8%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
02/13 update: So far so good with our buy-the-dip strategy on DFS. The stock spiked higher this morning and closed up +1.7% on the session. The $29.00 level still looms as short-term overhead resistance.

Current Position: Long DFS stock @ $28.15

- or -

Long MAR $28 call (DFS1217C28) Entry $1.10

02/10/12 triggered at $28.15
02/08/12 new trigger @ 28.15, stop loss 27.25
02/07/12 still not open. Adjust strategy to buy a dip at $28.30, stop loss at $27.40
02/06/12 not open yet. try again.

Entry on February 10 at $28.15
Earnings Date 03/22/12 (unconfirmed)
Average Daily Volume = 6.2 million
Listed on February 04, 2011


Emulex Corp. - ELX - close: 10.82 change: +0.06

Stop Loss: 10.59
Target(s): 12.10
Current Gain/Loss: unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see below

Comments:
02/13 update: The action in ELX was somewhat anemic. Early morning gains faded and shares drifted sideways on low volume. I don't see any changes from my weekend comments. The stock's +0.5% gain lagged behind the S&P 500's +0.6% gain. We'll give ELX one more day to show some strength or we'll drop it as a bullish candidate.

Currently I am suggesting a trigger to open positions at $11.15 with a stop loss at $10.59. Our exit target is $12.10. We want to keep our position size small. The Point & Figure chart for ELX is bullish with a long-term $19.50 target.

Trigger @ $11.15 (small positions)

Suggested Position: buy ELX stock @ (trigger)

- or -

buy the Mar $11 call (ELX1217C11)

Entry on February xx at $ xx.xx
Earnings Date 04/25/12 (unconfirmed)
Average Daily Volume = 2.0 million
Listed on February 07, 2011


Eaton Corp. - ETN - close: 52.05 change: +0.61

Stop Loss: 49.75
Target(s): 54.75
Current Gain/Loss: + 3.5%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
02/13 update: Traders bought the dip in ETN this morning and the stock rallied to new six-month highs. I am not suggesting new positions at this time.

current Position: Long ETN stock @ $50.25

- or -

Long MAR $50 call (ETN1221C50) Entry $1.70

02/10/12 exited Feb $50 calls at the open. Bid @ $1.10 (+10%)
02/09/12 new stop loss @ 49.75
02/09/12 exit the Feb $50 calls at the open tomorrow, current bid is $1.95 (+95%).
02/06/12 new stop loss @ 48.40

Entry on February 03 at $50.25
Earnings Date 01/26/12
Average Daily Volume = 3.7 million
Listed on January 28, 2011


Flextronics Intl. Ltd. - FLEX - close: 6.98 change: +0.02

Stop Loss: 6.85
Target(s): 8.00
Current Gain/Loss: - 0.7%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
02/13 update: FLEX did not participate in the market's rally today. I am suggesting we exit positions first thing tomorrow morning.

(small positions)

current Position: Long FLEX stock @ $7.03

- or -

Long Feb $7.00 call (FLEX1218B7) Entry $0.22

02/13/12 prepare to exit at the open tomorrow morning
02/09/12 new stop loss @ 6.85
02/04/12 new stop loss @ 6.80
02/03/12 trade opened. FLEX opened at $7.03
02/02/12 not open yet. try again.

Entry on February 03 at $7.03
Earnings Date 04/26/12 (unconfirmed)
Average Daily Volume = 6.0 million
Listed on February 01, 2011


Jos. A. Bank Clothiers - JOSB - close: 51.26 change: +0.96

Stop Loss: 48.75
Target(s): 55.00
Current Gain/Loss: + 1.0%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
02/13 update: JOSB continues to show relative strength. The stock opened at $50.54 and surged to a +1.9% gain. Our trigger to open bullish positions was hit at $50.75.

Further gains could spark a short squeeze. The most recent data listed short interest at 19.8% of the 27.5 million-share float.

current Position: long JOSB stock @ $50.75

- or -

Long Mar $50 call (JOSB1217C50) Entry $1.90

Entry on February 13 at $50.75
Earnings Date 03/29/12 (unconfirmed)
Average Daily Volume = 301 thousand
Listed on February 11, 2011


KB Home - KBH - close: 12.39 change: +0.68

Stop Loss: 10.75
Target(s): 13.50
Current Gain/Loss: +11.6%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
02/13 update: Positive analyst comments and a $16 price target fueled a +5.8% rally in KBH today. Readers may want to start taking profits now. I am not suggesting new positions at this time.

Earlier Comments:
A breakout higher could produced another short squeeze. The most recent data listed short interest at 41% of the 65 million-share float. Bear in mind that KBH can be a volatile stock. Readers may want to keep their position size small. Our exit target is $13.50. FYI: The Point & Figure chart for KBH is bullish with a long-term $20.00 target.

current Position: Long KBH stock @ $11.10

- or -

Long Mar $12 call (KBH1217C12) Entry $0.50

02/13/12 readers may want to start taking profits now (+11.6%). The call option is +122%
02/09/12 new stop loss @ 10.75

Entry on February 09 at $11.10
Earnings Date 04/05/12 (unconfirmed)
Average Daily Volume = 7.8 million
Listed on February 08, 2011


Smith & Wesson Holding Corp. - SWHC - close: 5.26 change: +0.10

Stop Loss: 4.90
Target(s): 5.60
Current Gain/Loss: + 8.9%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
02/13 update: SWHC erased Friday's 10-cent drop with a similar sized bounce. Shares had been up twice that amount late this afternoon. I am not suggesting new positions at this time. More conservative traders may want to take profits now.

Earlier Comments:
I do consider this a very aggressive trade and we want to keep our position size small. FYI: The Point & Figure chart for SWHC is bullish with a long-term $10.25 target.

(Small Positions)

Suggested Position: long SWHC stock @ $4.83

02/08/12 big intraday dip and bounce, low was $4.93
02/04/12 new stop loss @ 4.90, adjust exit to $5.60
02/02/12 new stop loss @ 4.75
01/28/12 new stop loss @ 4.65
01/24/12 new stop loss @ 4.55

Entry on January 17 at $4.83
Earnings Date 03/12/12 (unconfirmed)
Average Daily Volume = 962 thousand
Listed on January 14, 2011


Yahoo! Inc. - YHOO - close: 16.12 change: -0.02

Stop Loss: 15.35
Target(s): 18.75
Current Gain/Loss: unopened
Time Frame: 6 to 12 weeks
New Positions: Yes, see below

Comments:
02/13 update: YHOO failed to participate in the market's widespread rebound today. Shares were content to drift sideways in a narrow range. I don't see any changes from my weekend comments.

I am suggesting we open small bullish positions if YHOO trades at $16.35. We do not want to open positions if YHOO were to gap open above $16.50. If triggered at $16.35 we'll use a stop under at $15.35 since the $15.40 level has been support the last few weeks. Our multi-week (possibly multi-month) target is $18.75.

Trigger @ $16.35

Suggested Position: buy YHOO stock @ trigger

- or -

buy the Apr $17 call (YHOO1221D17)

Entry on February xx at $ xx.xx
Earnings Date 04/19/12 (unconfirmed)
Average Daily Volume = 17.2 million
Listed on February 11, 2011


Zumiez Inc. - ZUMZ - close: 30.03 change: +0.65

Stop Loss: 28.45
Target(s): 32.25 or 34.50
Current Gain/Loss: + 4.4%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
02/13 update: Good news! ZUMZ is starting to bounce off support. I've been suggesting readers wait for a rise past $30.30 as our next entry point but if both ZUMZ and the S&P 500 open positive tomorrow I would consider it a bullish entry.

Keep in mind that February options expire in four trading days.

Earlier Comments:
I am setting two different targets. Conservative traders can exit at $32.25. More aggressive traders can exit at $34.50.

current Position: Long ZUMZ stock @ 28.75

- or -

Long Feb. $30 call (ZUMZ1218B30) Entry $1.00

02/11/12 new stop loss @ 28.45
02/08/12 new stop loss @ 27.90
02/01/12 Trade opened with ZUMZ gapping higher at $28.75

Entry on February 01 at $28.75
Earnings Date 03/12/12 (unconfirmed)
Average Daily Volume = 627 thousand
Listed on January 31, 2011


BEARISH Play Updates

None. We do not have any active bearish trades.


CLOSED BULLISH PLAYS

Marvell Technology - MRVL - close: 15.94 change: -0.11

Stop Loss: 15.75
Target(s): 19.00
Current Gain/Loss: - 2.1%
Time Frame: exit ahead of earnings on Feb. 23rd.
New Positions: see below

Comments:
02/13 update: MRVL ended the session down -0.6% but intraday the stock was down -2.4%. The reason for today's relative weakness appears to be an analyst downgrade. Our stop loss was hit at $15.75.

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

(small positions)

closed Position: Long MRVL stock @ 16.40, exit $15.75 (-3.9%)

- or -

Feb $17 call (MRVL1218B17) Entry $0.25 exit $0.02 (-92.0%)

- or -

May $17 call (MRVL1219E17) Entry $1.06 exit $0.30 (-71.6%)

02/13/12 stopped out at $15.75 thanks to an analyst downgrade
02/09/12 new stop loss @ 15.75
02/02/12 triggered at $16.40
01/28/12 adjusting our entry trigger to $16.40
01/27/12 MRVL issued an earnings warning

chart:

Entry on February 02 at $16.40
Earnings Date 03/23/12 (confirmed)
Average Daily Volume = 14.1 million
Listed on January 25, 2011