Option Investor
Newsletter

Daily Newsletter, Thursday, 2/16/2012

Table of Contents

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

Market Wrap

U.S. Data, Europe Speculation Lift Stocks

by Todd Shriber

Click here to email Todd Shriber
Whether it was attributable to renewed speculation that Greece is edging close to a debt agreement or several strong economic data points courtesy of the U.S., stocks surged to their highest levels of 2012. Hopefully, it was more attributable to the U.S. than Europe. Maybe I am biased, but think the U.S. is a bit more reliable these days.

My opinion aside, the facts are the Dow Jones Industrial Average notched its third triple-digit up day of 2012. The S&P 500 jumped to its highest close in almost 10 months and the Nasdaq is just one or two good days away from 3000.

Market Stats

As I said, hopefully today's bullish action can be pinned on the U.S. and it very well could be. In economic news, the producer price index rose 0.1% in January following 0.1% drop in December, but that was still far better than 0.4% increase economists expected. Excluding volatile food and energy prices, the core index rose 0.4%, more than the 0.2% economists forecast. However, that was not the best news.

Weekly jobless claims fell by 13,000 to 348,000, easily surpassing the 365,000 new claims economists were expecting. That was the fourth drop in the past five weeks and the less volatile four-week moving average fell to 365,250. That is the fifth straight week the four-week moving average has declined. The average has fallen nearly 13 percent in the last year, according to the New York Times.

Jobless Claims

The Commerce Department said housing starts rose to a seasonally adjusted annual rate of 699,000 homes last month, a 1.5% jump from December's reading, providing further evidence the U.S. residential real estate market is improving.

Housing Starts

The rally was widespread, touching every sector, but there were a few laggards here and there. It probably was not that much of a surprise that 29 of the Dow's 30 components were higher today, nor was it too surprising that the one that closed in the red was Kraft (KFT). This was a risk on day after all.

To that end, there were a couple of noteworthy disappointments from the oil sector. Exxon Mobil (XOM) and Chevron (CVX) certainly chipped in toward the Dow's triple-digit jump, but ConocoPhillips (COP), the third-largest U.S. oil company, was down almost 1% today. The company announced the sale of its Vietnam operations for $1.3 billion. That news should not have caught anyone by surprise because Conoco has pledged to sell billions of dollars in non-essential assets over the next few years and that cash will likely be used for dividends, buybacks or increased oil production.

Near as I can surmise, the stock may have been down because financier Carl Icahn mentioned Conoco as a possible suitor CVR Energy (CVI). Icahn is doing with CVR what he most recently did with Clorox (CLX) and that is make a tender offer for the company himself with the hopes of prompting another suitor to get in the game.

Staying with oil disappointments, there is the case of Apache (APA), the second-largest of the U.S. independent oil and gas producers. Apache shares finished slightly lower, and I emphasize slightly, after the company reported a 75% increase in fourth-quarter profits. The company ended 2011 with proven reserves of 3 billion barrels of oil equivalent, up 1 percent from 2010, according to the Associated Press.

I am going to go out on a limb here and say this was just some moderate profit-taking. The stock is up about 19% year-to-date and if the average analyst price target of almost $130 proves accurate, there is still a lot of upside in this stock.

Apache Chart

There was plenty of upside in Itron (ITRI) today. The provider of products and services for the global energy and water markets surged more than 20% on volume that was nearly 10 times the daily average after forecasting 2012 EPS of $3.80-$4.20 on revenue of $2.1-$2.3 billion. Analysts were expecting full-year earnings of $4.10 on a revenue of $2.37 billion. The company posted a fourth-quarter loss of $55 million, or $1.35 a share, compared with a profit of $27 million, or 65 cents a share, a year earlier. On an adjusted basis, company earned $1.19 a share as revenue climbed 4% to $642.5 million. Analysts expected EPS of 99 cents a share on a revenue of $582.14 million.

Itron Chart

Give the Nasdaq some credit. The composite was up 1.51% and the Nasdaq 100 was up 1.42% and those sporty gains with Apple (AAPL) gaining ''just'' 0.9%. It was another volatile day for Apple shares, and that is saying something because this is a volatile stock to begin with. The shares traded in a range of $18 today and volume was more than 2.5 times the daily average. I saw a lot folks on Twitter yesterday saying they caught Apple short from $519-$520 and rode it below $500. Right...

Anyway, the path of least resistance with Apple is higher for the simple reason that there is no good reason to sell this stock beyond the belief it is overbought.

That sentiment cannot be extended to Amazon (AMZN), which was down 2.5% today, making the Nasdaq's jump all the more impressive. Morgan Stanley pared its rating on Amazon to equal weight today, citing risks from, you guessed it, Apple. I am sure this should have been an issue months ago when Amazon said they were going to challenge Apple in the tablet market, but better late than never.

Amazon might yet making something of its battle with Apple and if there is a company that can, I would put Amazon on the short list, but it also must be acknowledged that while Nasdaq is trading near its highest levels in a over a decade, Amazon could be back at its 52-week low with just a couple more bad days.

Amazon Chart

In news about what I would call ''Lazarus stocks,'' General Motors (GM) gained almost 9% after the company said it earned $7.6 billion in 2011. That is a record for the U.S. auto giant and it comes just a couple of years after the company was basically a ward of Uncle Sam. GM said it might have a hard topping that record this year, but the company did say its share of the global auto market will at least remain steady. Uncle Sam still owns 26.5% of GM.

GM Chart

Looking at the charts, as I mentioned earlier this week, only once in the past dozen or so attempts to crack 1350 has the S&P 500 been successful. Well, it was once prior to today. Today's stopping point was 1358, putting the index above the bullish 1355 area. It would be constructive if 1345-1355 turned into new support as the S&P 500 attempts to make its way to 1375.

S&P 500 Chart

The Dow is now less than 100 points away from 13,000. Just over 13,000 is some old uptrend resistance. Lost in all the hyperbole about AAPL being a $500 stock is that as IBM approaches $200, that is excellent news for the Dow. Oh, and here CAT is right near new 52-week highs. And imagine if CVX realizes the average price target of roughly $120. Support is 12,5000.

Dow Chart

I have already discussed the Nasdaq at length, but this is an increasingly bullish chart that may only find resistance at 3000 and only because of the psychological impact of that number. I know everyone is talking about AAPL, GOOG, AMZN, PCLN, etc. However, I would diminish the impact biotech can have on the Nasdaq going forward. Keep an eye on IBB and FBT.

Nasdaq Chart

A positive close on Friday, particularly one that came on somewhat decent volume, could really ignite this rally because as I mentioned earlier this week, the day before and the day after President's Day are usually down days for stocks. I am cautious only because of the three-day weekend and if bad news courtesy of Greece arrives on Sunday or Monday, the result could be ugly come Tuesday. Enjoy the long weekend.

Todd Shriber


New Plays

Oil & Pawn Shops

by James Brown

Click here to email James Brown


NEW BULLISH Plays

Energy XXI Ltd. - EXXI - close: 38.40 change: +1.37

Stop Loss: 36.45
Target(s): 42.50
Current Gain/Loss: unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
This oil and energy stock was showing relative strength today (+3.6%) after a four-day consolidation lower. EXXI is bouncing from prior resistance and what should be new support near its 2011 highs (April & May).

I am suggesting we launch small bullish positions in EXXI tomorrow morning but only if both this stock and the S&P 500 index open positive. If triggered we'll use a stop loss at $36.45. Our multi-week target is $42.50.
FYI: The Point & Figure chart for EXXI is bullish with a long-term $62 target.

Do not enter position unless EXXI and the S&P 500 are both positive at the open

(small positions)

Suggested Position: buy EXXI stock @ the open

- or -

buy the Mar $40 call (EXXI1217C40) current as $1.15

Annotated chart:

Entry on February xx at $ xx.xx
Earnings Date 04/26/12 (unconfirmed)
Average Daily Volume = 1.2 million
Listed on February 16, 2011


First Cashs Financial - FCFS - close: 43.77 change: +1.33

Stop Loss: 41.85
Target(s): 49.00
Current Gain/Loss: unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Months ago investors were worried that new regulations being considered in Washington could have a negative impact on the payday loan industry. Those fears appear to have vanished. FCFS has been in rally mode this year. Shares continued to climb in spite of its lackluster earnings report in late January. The last couple of weeks FCFS has been digesting gains and consolidating with a slow drift lower. That changed today with a +3.1% gain and a breakout past its short-term trend of lower highs.

I am suggesting small bullish positions at the open tomorrow morning but only if both FCFS and the S&P 500 index open positive. We'll use a stop loss at $41.85. Our multi-week target is $49.00. FYI: Further gains could spark some short covering. The most recent data listed short interest at 6.4% of the small 27 million-share float. The Point & Figure chart for FCFS is bullish with a long-term $65.00 target.

Do not enter position unless FCFS and the S&P 500 are both positive at the open

Suggested Position: buy FCFS stock @ the open

- or -

buy the Mar $45 call (FCFS1217C45) current ask $1.35

Annotated chart:

Entry on February xx at $ xx.xx
Earnings Date 04/18/12 (unconfirmed)
Average Daily Volume = 351 thousand
Listed on February 16, 2011



In Play Updates and Reviews

Stocks Shake Off Greek Worries

by James Brown

Click here to email James Brown

Editor's Note:
The stock market delivered its best performance in days with the S&P 500 closing at new relative highs. Most of our candidates followed the index higher. Readers may want to start taking profits in ADSK, KBH, SWHC, and ZUMZ.

Current Portfolio:


BULLISH Play Updates

Archer-Daniels-Midland Co - ADM - close: 31.23 change: +0.19

Stop Loss: 29.75
Target(s): 34.00
Current Gain/Loss: + 0.6%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
02/16 update: It was a quiet day for ADM. Shares failed to rally past yesterday's high but still managed a +0.6% gain. My worries from yesterday remain. Wednesday's action might be a short-term top.

I am not suggesting new positions at this time. We can look for short-term support near $30.50 and reconsider new positions there.

Earlier Comments:
More conservative traders might want to consider waiting to buy a dip near ADM's rising 10-dma. FYI: The Point & Figure chart for ADM is bullish with a $40.00 target.

current Position: Long ADM stock @ $31.21

- or -

Long Mar $32 call (ADM1217C32) Entry $0.47

Entry on February 15 at $31.21
Earnings Date 05/03/12 (unconfirmed)
Average Daily Volume = 5.6 million
Listed on February 14, 2011


Autodesk, Inc. - ADSK - close: 39.53 change: +0.88

Stop Loss: 37.45
Target(s): 39.90
Current Gain/Loss: + 8.3%
Time Frame: exit prior to the Feb 23rd earnings announcement
New Positions: see below

Comments:
02/16 update: The rally in ADSK continues and shares outperformed the market with a +2.2% gain. ADSK also closed at new multi-month highs. Our exit target is $39.90 but we will adjust our exit strategy and close positions tomorrow (Friday) at the closing bell even if shares do not hit our exit target. I am raising our stop loss to $37.45.

current Position: Long ADSK stock @ 36.50

02/16/12 prepare to exit tomorrow at the closing bell
02/16/12 new stop loss @ 37.45
02/15/12 new stop loss @ 36.95
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


Acme Packet, Inc. - APKT - close: 35.99 change: +0.42

Stop Loss: 33.65
Target(s): 39.75
Current Gain/Loss: - 0.1%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
02/16 update: Our new trade on APKT is now open. Shares traded over the $36.00 level a couple of times today and hit our trigger at $36.05. I would still consider new positions now if both APKT and the S&P 500 index open positive tomorrow morning. More conservative traders may want to choose to wait for a dip near $35.00 or its 10-dma as an alternative entry point.

The $40.00 level has been resistance in the past so we'll set our exit target at $39.75. FYI: The Point & Figure chart for APKT is bullish with a long-term $54.00 target.

(small positions)

current Position: Long APKT stock @ $36.05

- or -

Long Mar $35 call (APKT1217C35) Entry $2.70

Entry on February 16 at $36.05
Earnings Date 04/26/12 (unconfirmed)
Average Daily Volume = 4.1 million
Listed on February 15, 2011


Discover Financial Services - DFS - close: 29.58 change: +0.57

Stop Loss: 27.95
Target(s): 31.50
Current Gain/Loss: + 5.0%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
02/16 update: DFS continues to outperform. The stock added another +1.9% today. I would not be surprised to see the $30.00 level act as round-number resistance. More conservative traders may want to take profits in the $29.85-30.00 zone to lock in gains. I am not suggesting new positions at this time. We will inch up our stop loss to $27.95.

Current Position: Long DFS stock @ $28.15

- or -

Long MAR $28 call (DFS1217C28) Entry $1.10

02/16/12 new stop loss @ 27.95
02/15/12 new stop loss @ 27.75
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


Digital River - DRIV - close: 18.33 change: +0.42

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

Comments:
02/16 update: DRIV managed to outperform the market with a +2.3% gain but shares have not yet broken out from its trading range.

I am suggesting bullish positions if DRIV can trade at $18.50 or higher.

Earlier Comments:
DRIV can definitely see some volatility so we want to keep our position size small to limit our risk. There potential price resistance at $20.00. There is potential technical resistance at the 150-dma and exponential 200-dma.

Trigger @ $18.50 (small positions)

Suggested Position: buy DRIV stock @ (trigger)

- or -

buy the Mar $18 call (DRIV1217c18)

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


Eaton Corp. - ETN - close: 51.01 change: +0.14

Stop Loss: 49.75
Target(s): 54.75
Current Gain/Loss: + 1.5%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
02/16 update: ETN underperformed the market on Thursday. I am concerned that ETN was moving lower as the market is breaking out to new highs. ETN did bounce near its 20-dma but if shares don't show more strength tomorrow we might drop it from the newsletter. 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


Jos. A. Bank Clothiers - JOSB - close: 52.41 change: +0.74

Stop Loss: 49.75
Target(s): 55.00
Current Gain/Loss: + 3.2%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
02/16 update: JOSB quickly recovered after yesterday's decline. The stock surged to a +1.4% gain and a new ten-week closing high. I am not suggesting new positions at this time. More conservative traders may want to start raising their stop loss.

Earlier Comments:
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

02/14/12 new stop loss @ 49.75

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: 12.27 change: -0.12

Stop Loss: 10.75
Target(s): 13.50
Current Gain/Loss: +10.5%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
02/16 update: Stronger than expected housing starts data this morning did little to fuel any gains in KBH. I am still concerned that yesterday's performance could be a short-term top in the stock.

Readers will want to seriously consider an early exit right now to lock in gains. I would not be surprised to see a dip back toward the simple 10-dma near $11.60. 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: 5.25 change: +0.02

Stop Loss: 4.90
Target(s): 5.60
Current Gain/Loss: + 8.7%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
02/16 update: SWHC continues to churn sideways. The stock has been struggling with resistance near $5.30 the last few days.

There is no change from my prior comments. More conservative traders may want to raise their stop loss or take profits now. I am not suggesting new positions at this time.

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


Zumiez Inc. - ZUMZ - close: 31.61 change: +1.23

Stop Loss: 28.90
Target(s): 32.25 or 34.50
Current Gain/Loss: + 9.9%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
02/16 update: ZUMZ displayed relative strength today as traders bought the dip near support. Shares rallied +4.0% to close at new four-week highs. Don't forget that we have two different targets depending on your risk tolerance. I am raising our stop loss to $28.90.

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

02/16/12 new stop loss @ 28.90
02/15/12 exited Feb. $30 calls. bid @ $0.55 (-45%)
02/14/12 prepare to exit Feb. $30 calls at the close tomorrow
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.