Option Investor
Newsletter

Daily Newsletter, Thursday, 2/23/2012

Table of Contents

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

Market Wrap

Decent Data, Decent Day

by Todd Shriber

Click here to email Todd Shriber
Thursday was one of those days where it was hard to be excited about the gains posted by the major indexes at the end of the session, but gains are gains and the slow grind higher keeps on, well, grinding after getting some support from solid economic data courtesy of the U.S. and Germany. Those data points also proved to be a boon for oil prices, which have now entered parabolic territory.

Market Stats

The weekly jobless claims number of 351,000 was the same as the prior week's reading, but that was still better than the 355,000 economists were expecting. More importantly, the four-week moving average, which is less volatile, fell 7,000 to 359,000, the lowest level since March 2008.

Germany's Ifo institute said its German business climate index, based on a survey of 7,000 executives, climbed to 109.6 in February from January's 108.3 beating the reading of 108.8 economists were expecting, Bloomberg reported. Remember, Germany is the European Union’s largest economy, one of the 10 largest economies in the world and an export-driven economy that needs oil.

That leads me to my next point of the aforementioned oil prices. NYMEX-traded crude for April delivery rallied $1.55, or 1.5%, to settle at $107.83 a barrel. In London, Brent crude added just over half a percent to settle at $123.62 a barrel.

Not to diminish what has been a string of nice gains for West Texas Intermediate, but as I am sure Jim mentions on OilSlick, Brent is the global benchmark. Brent over $120 a barrel is getting into an area where global equity markets are going to be concerned about oil prices crimping growth and where OPEC might need to consider boosting output.

Those geopolitical concerns require more examination than I can offer at the moment. What I can tell you is that for the first time in what feels like ages, the controversial U.S. Oil Fund (NYSE: USO) sharply outperformed the U.S. Brent Oil Fund (NYSE: BNO) today. Still, BNO was up, made another 52-week high and did so on impressive volume. Check out the chart.

BNO Chart

In stock-specific news, shares of biotech firm Vivus (VVUS) surged almost 78% on volume that was almost 29 times the daily average after an FDA advisory panel voted 20-to-2 to approve the company’s experimental weight-loss drug, Qnexa. It should be noted that while impressive, that 78% gain is actually a pullback when considering Vivus shares doubled during the Wednesday after-hours session when the advisory panel vote was first reported.

The advisory panel vote puts Vivus in a strong postion to see Qnexa become the first weight-loss drug approved by the FDA in 13 years. The Vivus news also lifted shares of Orexigen Therapeutics (OREX), which is working on a competitor to Qnexa. Shares of Arena Pharmaceuticals (ARNA) were down on heavy volume, odd considering that company is also working on a rival to Qnexa. Qnexa has also completed Phase II clinical trials for type 2 diabetes and obstructive sleep apnea, but weight-loss is apparently what investors are paying attention to here.

Vivus Chart

In the laggards turned leaders category, there is the case of embattled Sears Holdings (SHLD). Remember way back when hedge fund legend Eddie Lampert acquired Sears and folks were proclaiming him the next Warren Buffett? Yeah, it is hard to remember that because Sears has not exactly turned out to be a Buffett-esque investment for Lampert. Then again, this deal was arguably a real estate grab, not an effort to turn Sears and Kmart around.

Problem with that is the market pays more attention to the bottom lines of Sears and Kmart than it does the real estate and that has plagued Sears investors, at least until recently. The shares soared almost 19% today on volume that was nearly triple the daily average after the company was able to assuage investors regarding liquidity concerns. The company expects to raise $400-$500 million through a rights offering that separate its hardware, hometown and outlet stores and raise another $270 million in a real estate deal.

As you can see, this stock has more than doubled this year after being one of the worst and most hated stocks last year.

Sears Chart

Shares of retailer Kohl's (KSS) plunged almost 6% after the company forecast a first-quarter profit of 60 cents a share and full-year EPS of $4.75. Analysts were expecting 77 cents for the current quarter and $4.93 for the full year. The company said its fourth-quarter profit fell to $455 million, or $1.81 a share, from $494 million, or $1.66 a share, a year earlier. Revenue was flat $6 billion. Analysts expected a profit of $1.94 a share and revenue of $6.2 billion. Volume today was more than double the daily average. On the bright side, Wisconsin-based Kohl's boosted its dividend by 28% to 32 cents a share payable on March 28.

Kohl's Chart

More earnings woes: Shares of Dow component Hewlett-Packard (HPQ) slid 6.5% today, a day after the company new CEO Meg Whitman did not exactly thrill the Street with results and outlook. The Thursday tumble made HP by far the worst performer of the 10 Dow losers. The company said its fiscal first-quarter profit fell to $1.47 billion, or 73 cents per share, from $2.6 billion, or $1.17 a share, a year earlier. Revenue fell to $30 billion from $32.3 billion. On an adjusted basis, HP earned 92 cents a share. Analysts were expecting 87 cents on revenue of $30.7 billion.

On the conference call Wednesday evening, Whitman cautioned investors that HP's turnaround story could take up to five years. Who in their right mind is going to wait for that? It is a good question to ask because five years is a obviously a long time and with a yield of just 1.6%, an investor will not really be compensated for his or her time waiting for the HP turnaround to materialize.

I say that not only because blindfolded any of us could pick 100 better stocks with better yields, but also because this company, aside from myriad obvious issues that negatively impact the share price, does not possess a rich dividend tradition. Sure, last year's 50% increase was nice, but that was first dividend increase by HP since 1997. Coca-Cola (KO) and Procter & Gamble (PG) HP is not when it comes to dividends and that makes the prospect of holding this dog for four or five years unappealing, at least to me.

HP Chart

Looking at the charts, the S&P 500’s close just over 1363 puts the index basically in the middle of trying to make a run at next resistance in 1375-1378 area and threatening to pullback to first support at 1350. I get the impression there is a decent amount of cash on the sidelines waiting for that pullback, but the danger is there are no guarantees the pullback will arrive. Should it show up and 1350 proves vulnerable, next support should be 1340.

S&P 500 Chart

The Dow traded in a range of about 114 points today, but even with all of that commotion, the blue chips did not peak above 13,000. Granted, the Dow tried, trading as high as 12,996 and as noted earlier, 20 of the 30 components were higher. Most of the gains came courtesy of PG, but I would not overlook IBM's move to $200. It is more a matter of when, not if. As Keene noted last night, it would be bullish to see the Dow move above 13,111 and concerning to see a retreat below 12,750.

Dow Chart

The Nasdaq enjoyed a solid day and that is despite Apple gaining ''just'' 0.56%. Biotech fever certainly helped matters here, but the Nasdaq still needs to clear 2975 before addressing considerable round-number resistance at 3000. Look for support at 2900 and then 2850.

Nasdaq Chart

Overall, it is hard to not at least respect the market’s bullish way and it was nice to see U.S. and European economic data combine to help the cause, even if it was just one day of seeing that scenario. Hopefully, it serves as a reminder to investors everywhere that countries like the U.S. and Germany are far more important on the global economic stage than Greece. My newest position is VNM, which I added Tuesday.

Todd Shriber


New Plays

Industrial Goods & Consumer Goods

by James Brown

Click here to email James Brown


NEW BULLISH Plays

Avery Dennison - AVY - close: 30.85 change: +0.49

Stop Loss: 29.75
Target(s): 33.40
Current Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
AVY is in the industrial goods sector. Shares have been stair-stepping higher. Traders bought the dip near $30.00 this morning but AVY rebounded to new multi-month highs. Today's +1.6% gain is also a breakout past technical resistance at its simple and exponential 200-dma.

I am suggesting a trigger to open bullish positions at $31.05 with a stop loss at $29.75. Our target is the late July highs near the bottom of its gap down. We will plan to exit at $33.40. FYI: The Point & Figure chart for AVY is bullish with a $43.00 target.

Trigger @ $31.05

Suggested Position: buy AVY stock @ 31.05

- or -

buy the Apr $30 call (AVY1221D30) current ask $1.65

Annotated chart:

Entry on February xx at $ xx.xx
Earnings Date 04/26/12 (unconfirmed)
Average Daily Volume = 1.5 million
Listed on February 23, 2011


The Hain Celestial Group - HAIN - close: 40.94 change: +0.85

Stop Loss: 39.35
Target(s): 44.75
Current Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
HAIN sells a number of natural, organic products and specialty teas. Shares have spent the last several days consolidating sideways near the $40 level. Today's rally looks like a resumption of the prior up trend.

I am suggesting we open bullish positions tomorrow morning but only if both HAIN and the S&P 500 index open positive. We'll use a stop loss at $39.35. Our multi-week target is $44.75. FYI: The Point & Figure chart for HAIN is bullish with a long-term $59.00 target.

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

Suggested Position: buy HAIN stock @ the open

Annotated chart:

Entry on February xx at $ xx.xx
Earnings Date 05/03/12 (unconfirmed)
Average Daily Volume = 430 thousand
Listed on February 23, 2011



In Play Updates and Reviews

SWHC Underperforms

by James Brown

Click here to email James Brown

Editor's Note:
Shares of Smith & Wesson underperformed today as investors decided to sell the news on rival RGR's earnings report last night. SWHC hit our new stop loss at $5.15 (+6.6%).

Meanwhile I am adjusting our entry point on WFC.

Current Portfolio:


BULLISH Play Updates

Archer-Daniels-Midland Co - ADM - close: 31.74 change: +0.19

Stop Loss: 29.75
Target(s): 34.00
Current Gain/Loss: + 1.7%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
02/23 update: ADM continues to drift higher. Shares closed at new six-month highs today. More conservative traders may want to start raising their stop loss.

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


Discover Financial Services - DFS - close: 30.04 change: +0.32

Stop Loss: 27.95
Target(s): 31.50
Current Gain/Loss: + 6.7%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
02/23 update: It was a good day for DFS. Shares didn't see that big of a dip this morning and the stock managed to close over round-number resistance at $30.00. Granted at $30.04 the breakout isn't that convincing yet.

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: 18.23 change: +0.33

Stop Loss: 17.45
Target(s): 21.50
Current Gain/Loss: - 1.4%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
02/23 update: DRIV managed to outperform the market with a +1.8% gain but shares remain inside its $17.50-18.50 trading range. I am not suggesting new positions at this time.

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.

(small positions)

current Position: Long DRIV stock @ $18.50

- or -

Long Mar $18 call (DRIV1217c18) Entry $1.00

Entry on February 17 at $18.50
Earnings Date 04/30/12 (unconfirmed)
Average Daily Volume = 727 thousand
Listed on February 13, 2011


Energy XXI Ltd. - EXXI - close: 39.03 change: +0.36

Stop Loss: 36.45
Target(s): 42.50
Current Gain/Loss: + 1.5%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
02/23 update: EXXI bounced off the $38.00 level and its 10-dma to rally +0.9% by the closing bell. Shares look poised to breakout past its early February high. If both EXXI and the S&P 500 index open positive I would use it as a new bullish entry point.

Earlier Comments:
The plan was to keep our position size small to limit our risk. Our multi-week target is $42.50. FYI: The Point & Figure chart for EXXI is bullish with a long-term $62 target.

(small positions)

current Position: Long EXXI stock @ $38.43

- or -

Long Mar $40 call (EXXI1217C40) Entry $1.00

Entry on February 17 at $38.43
Earnings Date 04/26/12 (unconfirmed)
Average Daily Volume = 1.2 million
Listed on February 16, 2011


First Cash Financial - FCFS - close: 42.87 change: +0.06

Stop Loss: 41.85
Target(s): 49.00
Current Gain/Loss: - 2.5%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
02/23 update: FCFS spiked down toward $42.00 before bouncing back to close in positive territory. It was a bit of a rocky session for FCFS and I remain cautious. I'm not suggesting new positions at this time.

Earlier Comments:
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.

current Position: Long FCFS stock @ $44.00

- or -

Long Mar $45 call (FCFS1217C45) Entry $1.05

Entry on February 17 at $44.00
Earnings Date 04/18/12 (unconfirmed)
Average Daily Volume = 351 thousand
Listed on February 16, 2011


Graco Inc. - GGG - close: 51.10 change: +1.07

Stop Loss: 48.95
Target(s): 54.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
02/23 update: GGG did its part with a higher open but the S&P 500 index did not, which negated our entry this morning. That's too bad since GGG outperformed with a +2.1% gain. The breakout past $50 is bullish. I am suggesting we try again. Launch bullish positions tomorrow at the open but only if both GGG and the S&P 500 index open positive. Our target is $54.50. FYI: The Point & Figure chart for GGG is bullish with a long-term $77 target.

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

suggested position: buy GGG stock @ (the open)

02/23/12 trade did not open, try again.
02/22/12 trade did not open, try again.

Entry on February xx at $ xx.xx
Earnings Date 04/26/12 (unconfirmed)
Average Daily Volume = 414 thousand
Listed on February 21, 2012


Jos. A. Bank Clothiers - JOSB - close: 52.11 change: +0.91

Stop Loss: 49.75
Target(s): 54.00
Current Gain/Loss: + 2.6%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
02/23 update: JOSB rebounded off the $51.00 level this morning to outperform the market with a +1.7% gain. I am not suggesting new positions at this time.

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

02/18/12 adjusted exit target to $54.00.
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: 11.75 change: +0.49

Stop Loss: 10.90
Target(s): 13.50
Current Gain/Loss: + 5.8%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
02/23 update: Good news! KBH completely erased yesterday's losses with a +4.3% bounce today. Shares look poised to re-challenge the $12.00 level soon. I am not suggesting new positions at this time but aggressive trades could buy this bounce with a stop just under $11.00.

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

02/21/12 new stop loss @ 10.90
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


NYSE Euronext - NYX - close: 30.37 change: +0.10

Stop Loss: 28.45
Target(s): 34.75
Current Gain/Loss: unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see below

Comments:
02/23 update: Both NYX and the S&P 500 saw a small gap open lower this morning, which negated our entry point. Both of them recovered to close up on the day. I am suggesting we try again.

We want to open small bullish positions at the open tomorrow but only if both the NYX and the S&P 500 index open positive. If triggered we'll use a stop loss at $28.45. Our multi-week target is $34.75. FYI: The Point & Figure chart for NYX is bullish with a $41.00 target.

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

(small positions)

Suggested Position: buy NYX stock @ (the open)

- or -

buy the Mar $30 call (NYX1217C30)

02/23/12 not open yet, try again.

Entry on February xx at $ xx.xx
Earnings Date 04/30/12 (unconfirmed)
Average Daily Volume = 3.4 million
Listed on February 22, 2011


United States Oil Fund (ETF) - USO - close: 41.37 change: +0.78

Stop Loss: 38.75
Target(s): 43.00
Current Gain/Loss: + 2.7%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
02/23 update: Oil prices ignored the rise in U.S. inventory numbers this morning and rallied to new relative highs. The USO surged +1.9% to close at eight-month highs. At this point I am not suggesting new positions at this time. The USO looks a little bit overbought.

Remember, the plan was to keep our position size small to limit our risk. Our multi-week target is $43.50.

Earlier Comments:
We do not want to use the USO for long-term positions. This ETF is constantly rolling over its futures positions over time, which can have a negative impact on the share price. FYI: The Point & Figure chart for USO is bullish with a long-term $58.00 target.

(small positions!)

current Position: Long the ETF @ $40.25

- or -

Long April $40 call (USO1221D40) Entry $2.10

Entry on February 21 at $40.25
Earnings Date --/--/--
Average Daily Volume = 8.8 million
Listed on February 18, 2011


Wells Fargo & Co. - WFC - close: 30.65 change: +0.06

Stop Loss: 29.75
Target(s): 34.00
Current Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Comments:
02/23 update: WFC almost made it! Shares dipped to $30.28 before bouncing back to close up on the session. Our trigger to open positions was not hit at $30.25. After today's market-wide bounce I am suggesting we adjust our entry point strategy. We'll open positions tomorrow at the opening bell but only if both WFC and the S&P 500 index open positive.

We will use a stop loss at $29.75. More conservative traders could wait for a rally past $31.50 as their entry point instead.

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

Suggested Position: buy WFC stock @ (trigger)

- or -

buy the April $32 call (WFC1221D32)

02/23/12 adjust entry point strategy. open positions tomorrow morning if both WFC and the S&P 500 open positive.
02/21/12 based on WFC's intraday reversal lower we are adjusting our entry point strategy to "buy a dip" at $30.25 with a stop loss at $29.75
02/21/12 trade did not open because S&P 500 opened lower.

Entry on February xx at $ xx.xx
Earnings Date 04/19/12 (unconfirmed)
Average Daily Volume = 30.5 million
Listed on February 18, 2011


Zumiez Inc. - ZUMZ - close: 30.50 change: -0.42

Stop Loss: 28.90
Target(s): 32.25 or 34.50
Current Gain/Loss: + 6.0%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
02/23 update: I was a bit surprised by the relative weakness in ZUMZ today. Looks like we can blame a broker downgrade for the gap down and spike lower to $29.51. ZUMZ managed to pare its losses. If both ZUMZ and the S&P 500 index open positive tomorrow I would use it as a new bullish entry point.

NOTE: I am listing the March $30 calls as a potential trade here.

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 -

buy the Mar $30 call (ZUMZ1217C30) current ask $2.15
if ZUMZ and S&P 500 index open positive tomorrow morning.

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.


CLOSED BULLISH PLAYS

Smith & Wesson Holding Corp. - SWHC - close: 5.30 change: -0.13

Stop Loss: 5.15
Target(s): 5.60
Current Gain/Loss: + 6.6%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
02/23 update: The action in SWHC and RGR today was disappointing. I was expecting both to gap open higher today in reaction to RGR's earnings report last night especially when RGR was trading higher after hours last night. Unfortunately investors decided to sell the news and both stocks spiked lower. SWHC dipped to $5.11 intraday, which hit our new stop loss at $5.15.

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)

closed Position: long SWHC stock @ $4.83 exit $5.15 (+6.6%)

02/21/12 new stop loss @ 5.15
02/18/12 new stop loss @ 4.95
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

chart:

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