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Daily Newsletter, Saturday, 2/25/2012

Table of Contents

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

Market Wrap

Close But No Cigar

by Jim Brown

Click here to email Jim Brown

The Dow flirted with 13,000 for most of the day but ended about 18 points short of that psychological level.

Market Statistics

It was touch and go all day with the Dow trading as high as 13,013 and as low as 12,950 but in the end the Dow closed only 18 points away from the psychological 13,000 level. The Dow fought that level for the last four days and it is only a matter of time before we see a close over that millennium marker. The S&P finally closed over the April high close of 1363.61 but only by a couple of points at 1365. Every little bit counts.

The market got some help from the U.S. economics with the Consumer Sentiment for February rising to 75.3 and a new 12 month high. The survey posted a 55.7 low back in August and that was only 0.4 points from a 28-year low. Conditions have definitely improved in just the last six months. The final reading for the month was +3 points above the initial reading at 72.5 and that suggests sentiment is accelerating higher. Gas prices will kill that move eventually but as of month end the apparent good news on Greece has boosted sentiment.

The present conditions component did decline to 83.0 from 84.2 but the expectations component rose from 69.1 to 70.3.

More importantly this was only the second February since 2000 that sentiment posted a gain in February. Normally there is a sentiment decline as the holiday bills come due and consumers start worrying about paying their income tax. This was the sixth consecutive monthly improvement in sentiment.

Gasoline prices averaged $3.69 on Thursday, up +39 cents over the last six weeks. Analysts are expecting prices to continue rising to well over $4 and this is going to put a serious squeeze on sentiment in the months ahead.

Consumer Sentiment Chart

New home sales for January declined slightly to an annualized rate of 321,000 from 324,000 in December. January is not normally a big month for new home sales and analysts were only expecting 315,000 so the number was market positive. Sales are up +3.5% year over year and accelerating at their fastest pace in more than a year. Months of supply fell to 5.6 and the lowest level since early 2006.

The median home price rose significantly from $207,000 in December to $221,200 in January and that is another sign of an improving market.

In the "everything is relative" category we are getting excited about a pace of annual sales over 320,000 when sales at the 2006 peak were over 1.4 million. We have a very long way to go before the homebuilder sector is healthy again.

Home Sales Chart

The economic calendar for next week has several high profile reports. The GDP revision, Fed Beige Book and the ISM Manufacturing will be the attention getters. The GDP is expected to be revised higher to +3.0% growth. The ISM is expected to post a minor gain to 54.6 but there are whisper numbers in the 56.0 range. The Fed Beige Book is expected to show continued growth in at least ten of the twelve Fed regions. This is a preview of what the Fed statement might say when they meet on March 13th.

The ECB will hold their second LTRO loan offering on Feb 29th. The first one in December injected 489 billion euros into the market in the form of three year loans to European banks at a 1% interest rate. That immediately lowered the yield on short term sovereign debt as those banks bought the short term bonds for a guaranteed profit. There is significant anticipation over how much European banks will actually request in the second offering. Some estimates are as low as 250 billion euros and some are guessing it could be as high as one trillion euros. I think that is well out of the range because it would suggest the European banking system was still under a lot of stress. I think a lot of that stress was relieved in the first LTRO and banks are rather calm at present. It should be interesting. If there is a low number, say in the 250 billion range, the euro currency should spike significantly because a low number would provide assurance the danger is over. If the number is over 500 billion the euro could tank on worries there are still some underlying challenges for banks.

The next day the EU leaders will hold another summit with the EU Finance Ministers meeting the day before. With the Greek deal underway there should not be any major headlines from either event but you never can tell. We could see something erupt at any time. There is a G20 meeting in Mexico this weekend and the IMF is going to be lobbying for a bigger firewall around Europe's weak countries and for larger contributions to the IMF to create a bigger firewall from that institution as well.

Germany and Finland parliaments will be voting on the Greek bailout next week and that could provide some headline risk. There is no guarantee the votes will pass but it would be a big mistake if they were allowed to fail and restart the entire bailout discussion.

Economic Calendar

The markets traded sideways for the week with the Dow only adding 33 points and the S&P less than 3. The Nasdaq added 11. The major winner for the week was the energy sector with a +2% gain on a +6% gain in oil prices. Crude oil closed for the week at $109.62 with Brent at $125. Analysts are now targeting $120 for WTI and $140 for Brent thanks to Iran and problems in Syria, Egypt, Nigeria and the Sudan.

WTI Crude Oil Chart

Brent Crude Chart

Unfortunately a strong rally to new highs in crude tends to have the opposite impact on the markets. Initially strong crude prices lifts energy stocks and that lifts the S&P. Energy stocks account for more than 15% of the S&P. So what does that say for the S&P with a +3 point gain and the energy sector is up more than +2%? It says the rest of the S&P was seriously lagging and that included the help from Apple.

Apple gained another $6 to a new closing high at $522. The S&P can thank Apple for pushing it over that 1363 April high close that everyone has been worrying about. Apple is 3.7% of the S&P by weight. Apple was responsible for 50% of the S&P gains for the week. If Apple had been added to the Dow on January 1st it would be over 14,000 today.

Personally I believe the rally in crude is overdone in the short term. While I would love to see the sector continue higher I would rather it be with a stealth rally rather than daily $2 spikes in crude. The $6 move last week to $109 brought out the politicians clamoring for the president to open the Strategic Petroleum Reserve (SPR) to bring down prices. Clearly they don't understand the word strategic. When there is a strong potential for a shooting contest with Iran I don't think that is the time to be drawing down the strategic reserve to lower gas prices 10-cents. If Iran goes hostile on the Strait of Hormuz and WTI spikes to $150 then opening the SPR would make sense. Iran can't control the strait for more than a few days so the spike would be temporary.

While I expect crude prices to cool next week we can expect Iran to stoke the fires in an effort to push prices higher in the weeks ahead. If they are seeing oil sales decline then inflating the price of oil with some heated rhetoric is a good way to raise more revenue.

The IAEA team that visited Iran last week said Iran had tripled its enrichment of uranium, refused to allow them access to the Parchin military testing site near Tehran and has not resolved outstanding questions about weapons-related work. The IAEA said it "continues to have serious concerns regarding possible military dimensions to Iran's nuclear program." Iran has also provided four conflicting versions of the research and work being done at the Fordow nuclear site. However, the IAEA also said no diversion of nuclear material had occurred from Iran's "declared" nuclear facilities. The key is declared. If Iran does not declare a facility is a nuclear facility then the IAEA can't investigate it. The Parchin military facility is suspected of being the site of weapons testing for future nuclear weapons but since it is not a declared nuclear facility it can't be visited.

All this sleight of hand by Iran and the huffing and puffing by the IAEA, Israel and the U.S. should keep support under oil prices for the rest of the summer. Iran will attempt to keep those prices as high as possible using the media and staging war games every couple of weeks.

That suggests any dip in oil prices would be a buyable event since demand and prices tend to rise in the spring and summer months anyway. If there is an economic depression from the high fuel prices it will take several months to be felt. Obviously the transportation sector will be the hardest hit as prices move higher. Gasoline averaged $3.67 on Thursday and jet fuel $3.42 per gallon. With the spike in oil prices last week we could see another +15 cents rise in those prices next week.

I continually get emails complaining about big oil gouging consumers with high gas prices. The big story last week was Bill O'Reilly and Lou Dobbs complaining about refiners exporting gasoline and diesel overseas so inventories would be low and prices higher in America. Also mentioned in that episode was a complaint against President Obama and his anti-oil policies. They complained the president wanted gasoline prices as high as possible in order to force people to buy green vehicles.

Both of those complaints had a thread of truth but plenty of misinformation to go along with it. Coastal refineries around the Gulf of Mexico do export some gasoline and diesel. This is because there are more refineries in the area producing more refined products than are being used. There is a surplus of crude oil in the coastal Gulf and there is a lack of demand for refined products. Gasoline demand in the U.S. is -6% below year ago levels. Rather than shutdown capacity those coastal refineries export some refined products. If there was enough demand in the U.S. they would much rather sell them here because transporting, loading and shipping those products cuts into the profits. Despite these Gulf coast exports the U.S. "IMPORTED" 845,000 NET barrels of gasoline every day plus 122,000 bpd of diesel. That means they imported far more than they exported.

This fuel is imported on the east coast and the west coast where there is a shortage of refineries. This fuel has a higher cost because it started out life as Brent crude or some crude flavor indexed to Brent prices. The refineries on the east and west coast have to buy waterborne crude indexed to Brent to refine into fuel. Everyone in California and the east coast will be buying gasoline next week that was made from $125 Brent crude or some grade indexed to Brent. The refineries in the Midwest buy land locked crude indexed to WTI and that is why Colorado, Wyoming, Nebraska, etc, have $3.20 gasoline this weekend.

The problem with gas prices is not gouging by big oil companies. They have nothing to do with the price of oil or gasoline. In fact most refiners have lost money whenever the price of oil rises because the price of gasoline does not rise fast enough in the market to compensate. Read the earnings reports for the periods when oil prices spike. Big integrated oil companies like Exxon operate on extremely low margins in the range of 8%. That is far less than banks, manufacturing companies, tech companies, etc.

Lastly the president and his staff have said in years past they thought gasoline prices were too cheap and they needed to go higher in order to cause a shift in the purchasing patterns of consumers. He mentioned raising gas taxes to force that shift to economical cars. However, I guarantee you President Obama does not want high gasoline prices in an election year. If he could somehow push them back to $2.50 it would be done tomorrow. Given all the anti-energy policies he has pushed over the last three years the sharp rise in gasoline prices is the last thing he wants. That only draws attention to his policies and their results.

Whining over high gasoline prices will do no good. Buy some energy stocks on the next dip and earn some profits to help pay those prices. The biggest problem is going to be the recession that results from those high prices if they continue higher as expected.

For every $1 crude oil rises the U.S. airline industry loses $1.6 billion. With jet fuel at $3.42 and climbing it is already at the highs for 2011 and the worst months are ahead. Airlines are going to lose money, a lot of money. There have been 22 attempted fare hikes over the last year and only ten of them stuck. Most are quickly canceled when fliers begin booking elsewhere. The airline hurt the worst is US Airways (LCC). They don't hedge their fuel costs. The best airline for hedging is Southwest (LUV). Unfortunately the airline stocks have already begun showing the impact of the spike in oil prices. Buy puts on any airline if oil prices dip.

Airline Index Chart

The transportation sector is going to be crushed. Nearly all companies have fuel adjustment clauses in their rates but we saw in the last oil spike that rates did not adjust quick enough to protect companies like UPS (UPS) or CH Robinson (CHRW) to cover the increased costs. Cruise lines like Carnival (CCL) consume huge amounts of fuel and the spike will hurt their profits as well. After the ship disaster in Italy they are already going to be pressured to fill their cabins so raising prices will be a challenge.

The Dow Transports rolled over on Feb 3rd and should easily test support at 5075 or even lower at 4960 to 4800. This will be a classic battle between the economic hopefuls that expect the economy to continue improving and those that expect oil to go to $120 and crush the profits out of the transport sector.

Dow Transports Chart

U.S. consumers are going to start cutting back on driving and cutting back on non-essential purchases as gasoline prices cross over the $4 level. We know from recent history this is the threshold where spending decreases. Unfortunately there is nothing we can do about it other than plan ahead to profit from the rise in oil prices.

In stock news Hewlett Packard (HPQ) continued its decline to close at $26.64 after their disappointing earnings report after the close on Wednesday. HPQ has now lost about 8% since the $29 close before earnings.

Hewlett Packard Chart

Clearwire (CLWR) lost -7% after Google said it was selling its entire investment of 29.4 million shares for $1.60, a $453 million (-94%) loss. The WiMax technology never really caught on and the stake dumping by Google suggests the outlook is not good. The desperation sale by Google could be the beginning of the end for Clearwire. The company just got a shot in the arm when Sprint renewed their access agreements in December but that is a short term fix. The two major shareholders left are Sprint (S) and Comcast (CMCSA). With Google gone the hopes for a major acceptance of the WiMax technology appear slim.

Clearwire Chart

Shorts piling into Sears Holdings (SHLD) after its big run in January and February were crushed again on Friday. Sears announced earnings and said it was selling nine Great Indoors stores and spinning off more than 1,000 hometown and outlet stores to raise up to $500 million. The news prompted a +17% spike on Thursday and another +11% gain on Friday to close at $68 after trading as low as $29 in January. Shares weakened earlier in the week ahead of earnings but anyone who took that opportunity to add short positions was punished severely. There are almost no shares available to short and covering those shorts is a painful process.

Sears Holding Chart

Also making unbelievers pay the price was Salesforce.com (CRM) with a +9% gain. The company posted adjusted earnings of 43-cents after the close on Thursday. Analysts were expecting 40-cents. Revenue rose +38% to $632 million. That was better than the +36% gain in Q3. Deferred revenue rose by 48% to $1.38 billion. That is for prepaid orders for future delivery. Customers receive discounts by paying annually for service and CRM recognizes this revenue as it is earned. One analyst said, "You don't have to believe the CRM story, but just don't short it."

SalesForce.com Chart

On March 6th 2009 the Dow traded below 6,500. On two days last week the Dow traded over 13,000 intraday for a +100% rebound from those recession lows in slightly less than three years time. That 100% threshold on the S&P was 1332 and well behind us now. That 1332 number was strong resistance when touched on January 26th but we blew through it on Feb 3rd thanks to positive headlines from Europe.

The Dow also reacted on its first touch of 13,000 with two days of declines but it appears likely we will close above that resistance next week. This will be a crucial week for the market. Nearly every market commentator is predicting a pullback but those same analysts are also projecting higher highs ahead. This constant prediction of profit taking is preventing investors from going "all in" and pushing the indexes higher at a faster clip. Nobody wants to be the person to buy the highs just before the profit taking hits. The majority of investors are holding back in hopes of a dip but every shallow bump in the road is being bought and the anticipated 3% to 5% decline on profit taking has yet to appear.

The volume is terrible. The overall volume on Friday was 5.7 billion shares. The volume on the NYSE was the lowest since Jan 10th. Everyone is waiting for something to happen. That something is either a meaningful dip or a breakout over resistance on increasing volume. That volume increase is the key.

These back to back days of 2-3 point gains on the S&P is like watching grass grow. Friday's gain of +2 points to 1365 is not a breakout. It is technically a close over 1363.61 but still not a breakout in terms of sentiment. If we don't breakout this week and start stringing some bigger gains together the natives are going to get restless. Somebody will eventually give up on the rally and pull the sell program trigger when we least expect it.

When you look at the fundamentals the deck appears stacked against a continued rally. Earnings were terrible, the worst since the recession. The Q4 earnings cycle is over and 64% of the S&P lowered estimates for Q1. Oil prices are going to start squeezing the economy like a vise. We have already hit the year end S&P estimates for some analysts at 1350 and many more are just above at 1375 and it is only February. Morgan Stanley is holding firm for a sharp decline back to 1167 by year end.

They say bull markets are built by scaling a wall of worry. Greece is not yet behind us but in theory the potential for a catastrophic default has ended. They may no longer be the big obstacle in that wall of worry but there are plenty of Grecian thorns left on the wall until we get past the March 20th debt payment.

I am wondering if the big Greek default worry held investors back for so long that little things like crummy earnings are no longer important to the market. Investors are so happy Greece is going away that all they can see is blue sky ahead. Maybe the improving U.S. economics and some of the "less bad" European numbers are functioning as a security blanket for investors and insulating them from the cold earnings facts.

I can remember several rallies over the years that kept going and going and going just like the Energizer bunny despite constant calls for a correction. You know profit taking does not have come with triple digit declines on the Dow. Profit taking can also occur in the form of consolidation ranges where portfolios are adjusted, traders take profits and new money moves in from the sidelines. There has not been a triple digit Dow loss in 2012. The last -1% decline on the S&P was December 28th. Despite all the trouble in Europe this market has been digesting the headlines and inching slowly higher.

Dow Chart - 90 Min

This has been a stealth rally and one of the least loved rallies in history according to analysts. There has been no conviction along the way. No massive volume surges and relatively few days of decent point gains. However, if you could order the perfect rally this would be it. If you could order a rally would you want a one with a steady climb, no nerve racking declines to stop us out and one that continued for months while breaking out to new highs? I suspect the only problem is that it came when investors least expected it and they are frustrated they did not recognize it sooner.

Could the current rally be a duplicate of the one we saw in 1995? The rebound started in December 1994 and the market went straight up with barely any declines for 13 months until Jan 1996. Obviously we can always wish for a repeat performance.

S&P Chart for 1995

Now that Greece is almost behind us for at least a couple quarters the bond market is likely to help fuel future gains in equities. The urge to be in a safe and secure fixed income investment is going to fade fast if the Dow and S&P continue their moves to new highs. How much upside could you have left in bonds with the ten year yield already under 2%? I seriously doubt it is going much lower and if economics continue to improve the real value of your investment will decline.

Fixed income funds have been the favorite place to stash cash for the last couple years. Over the last several months bond funds received inflows of cash at the rate of 400% to 600% higher than equity funds. If equities continue to move higher next week and actually do move across current resistance levels on the Dow and S&P I suspect those fund flows are going to reverse and equities are going to be in favor again. It is not rational but new highs are the best attractant of new money. The herd always piles into the market after the majority of the gains have already been made. Hopefully, for those of us already long, the herd will push us higher for a couple more weeks.

Once past 13,000 the next material resistance is the May 2008 high close at 13,058 then it gets really choppy between 13,500-14,000. Current support appears to be 12,900.

Dow Chart - Weekly

The S&P bull market is now more than 1,000 days old. Since we did not decline -20% from the April 2011 high at 1363.61 and we closed above that level on Friday that means we are still in the bull market that started on March 9th 2009 at 676.53. Fridays close represents better than a +100% rebound in the S&P. The close above 1363.61 means this bull market has run for 1,082 days and makes it the ninth longest bull market in history. Statistics don't lie but they sure misrepresent reality. After two major bouts of selling in the summer of 2010 and 2011 it hardly feels like a three year bull market.

Support is 1355 followed by 1340. The next material resistance is 1425 and a lot of analysts will be very disappointed if we make it that far because it would take a bear market from that level for their yearend targets to be reached.

Year End Predictions from January

S&P Chart - Daily

The Nasdaq just keeps adding a handful of points nearly every day but there are no long candles after the breakout over 2885 in early February. It is two steps forward, one step back and repeat. Like the other charts the Nasdaq is consolidating in place as it moves slowly higher. I will have no complaints if this trend continues but the chart is definitely over extended. This is going to drive analysts crazy until a decent dip occurs.

Support is 2930 and you have to go back to December of 2000 to find resistance at 3,000. Those big round numbers tend to be a bump in the road but that resistance is 11-years old. How strong it will be is anybody's guess. IF investors suddenly start dumping bonds we could blow past that level and never look back. Unfortunately that is a capital IF. They have not shown any sudden urge to exit bonds in favor of stocks but this week could be the key if the Dow and S&P can tack on some points to their breakout.

Nasdaq Chart

Nasdaq Chart - Monthly

The Russell 2000 has been far weaker than the other indexes although several decent dips were bought on higher volume. Unfortunately it was not enough to produce a breakout over resistance at 830. Even if that resistance was broken there is even stronger resistance waiting at 860-865. The failure of the Russell to keep pace with the big cap indexes is another example of lack of conviction in the rally.

Russell Chart - 60 Min

Russell Chart - Daily

The broadest market index is a clone of the Dow with a dead stop right at strong resistance but also on the verge of a meaningful breakout. We need one good headline to punch through these resistance walls on the Dow, S&P and Wilshire and attract new money into the equity market.

Wilshire 5000, Total Stock Market Index Chart - Daily

This will be a pivotal week for the markets. The major indexes can't continue adding 3-5 points a day without moving into new high territory far enough to attract serious investor attention. A dip, regardless of how shallow, should be bought again. It appears a real breakout is in the cards and the only question is when?

We also need volume to pickup and for the Russell 2000 to confirm sentiment with a move over 830. As long as I am wishing for the seemingly impossible I would also like a 100 pound bag of $100 bills.

Jim Brown

Send Jim an email

"A democratic government is the only one in which those who vote for a tax can escape the obligation to pay it."
Alexis de Tocqueville


New Plays

Brokerage & Communications

by James Brown

Click here to email James Brown

Editor's Note:

Tonight we're adding a couple of bullish candidates. However, readers will want to keep an eye on the transports and the airline stocks. These groups could suffer as crude oil continues to go higher. Oil might see a little dip next week. That could produce a little oversold bounce in the airlines and transports, which might end up being an entry point for bearish put positions.

I would keep an eye on airline stock DAL and UAL. Both are trading at what could be short-term support after a sharp decline this past week. We will watch for the oversold bounce to stall before considering new bearish positions.


NEW BULLISH Plays

Charles Schwab - SCHW - close: 13.52 change: +0.31

Stop Loss: 12.49
Target(s): 14.75
Current Gain/Loss: unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Shares of SCHW have spent almost seven months building a bottom in the $10.70-13.00 zone. Now the stock is breaking out past the top of this range and its simple and exponential 200-dma. I am suggesting we open bullish positions on a dip a t $13.25 with a stop loss under Thursday's low at $12.49. Our multi-week target is $14.75.
FYI: The Point & Figure chart for SCHW is bullish with a $19.00 target.

Trigger: buy a dip at $13.25

Suggested Position: buy SCHW stock @ (trigger)

- or -

buy the Apr $13 call (SCHW1221D13)

Annotated chart:

Entry on February xx at $ xx.xx
Earnings Date 04/16/12 (unconfirmed)
Average Daily Volume = 15.9 million
Listed on February 25, 2011


VimpelCom - VIP - close: 12.50 change: +0.31

Stop Loss: 11.75
Target(s): 14.25
Current Gain/Loss: unopened
Time Frame: up to its March earnings report
New Positions: Yes, see below

Company Description

Why We Like It:
VIP is a European wireless company that's showing relative strength. The stock has built a bottom over the last several months. The recent breakout past resistance near $12.00 is bullish. I am suggesting we open small bullish positions at the opening bell on Monday but only if both VIP and the S&P 500 index open positive. We'll use a stop loss at $11.75. Our target is $14.25 but I will confess this is too optimistic. VIP is due to report earnings in mid March and we do not want to hold over the report.

Keep in mind that VIP is prone to gap open each morning as shares adjust to trading overseas. FYI: The Point & Figure chart for VIP is bullish with a long-term $19.00 target.

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

Suggested Position: buy VIP stock @ (the open)

Annotated chart:

Entry on February xx at $ xx.xx
Earnings Date 03/13/12 (unconfirmed)
Average Daily Volume = 1.7 million
Listed on February 25, 2011



In Play Updates and Reviews

USO at Eight-month Highs

by James Brown

Click here to email James Brown

Editor's Note:
A falling U.S. dollar and saber rattling by Iran is fueling gains for crude oil. Our USO trade is performing well but oil might be getting a little bit overbought here.

I am dropping WFC as a candidate.

Current Portfolio:


BULLISH Play Updates

Archer-Daniels-Midland Co - ADM - close: 31.96 change: +0.22

Stop Loss: 29.75
Target(s): 34.00
Current Gain/Loss: + 2.4%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
02/25 update: ADM continues to inch higher. The stock is now up three days in a row and testing the $32.00 level. I am not suggesting new positions at this time but nimble traders might want to buy a dip near the rising 10-dma. 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

chart:

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


Avery Dennison - AVY - close: 30.80 change: -0.05

Stop Loss: 29.75
Target(s): 33.40
Current Gain/Loss: - 0.8%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
02/25 update: Friday was a relatively quiet session for AVY but shares did see a morning rally past $31.00 and hit our trigger at $31.05. More conservative traders might want to consider waiting to buy AVY on a dip in the $30.50-30.00 zone.

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.

current Position: Long AVY stock @ 31.05

- or -

Long Apr $30 call (AVY1221D30) Entry $1.65

chart:

Entry on February 25 at $31.05
Earnings Date 04/26/12 (unconfirmed)
Average Daily Volume = 1.5 million
Listed on February 23, 2011


Discover Financial Services - DFS - close: 30.19 change: +0.15

Stop Loss: 28.45
Target(s): 31.50
Current Gain/Loss: + 7.2%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
02/25 update: DFS is still showing relative strength and closed at new four-year highs with Friday's +0.49% gain. I am raising our stop loss to $28.45. More conservative traders may want to go ahead and take profits now or raise their stop closer to the $29.00 level instead. I am not suggesting new positions at this time.

FYI: Our March $28 calls have doubled (+100%) and readers may want to take profits now.

Current Position: Long DFS stock @ $28.15

- or -

Long MAR $28 call (DFS1217C28) Entry $1.10

02/25/12 new stop loss @ 28.45
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.

chart:

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: 18.10 change: -0.13

Stop Loss: 17.45
Target(s): 21.50
Current Gain/Loss: - 2.1%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
02/25 update: The S&P 500 and the NASDAQ composite are hitting new relative highs yet DRIV is not participating. The stock remains stuck in a sideways trading range. We might want to start thinking about an early exit to cut our losses early. I am not suggesting new positions at this time.

Earlier Comments:
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

02/25/12 we may want to consider an early exit to cut our losses.

chart:

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: 38.58 change: -0.45

Stop Loss: 36.45
Target(s): 42.50
Current Gain/Loss: + 0.3%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
02/25 update: EXXI displayed a little bit of volatility on Friday morning. Shares eventually settled with a -1.1% decline. Readers may want to wait for a new high past $39.33 before considering new bullish positions.

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

chart:

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: 43.20 change: +0.33

Stop Loss: 41.85
Target(s): 49.00
Current Gain/Loss: - 1.8%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
02/25 update: FCFS managed another bounce on Friday. Shares appear to be rebounding from the bottom of its $42.00-44.50 trading range. Shares outperformed the market's major indices on Friday but I am 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

chart:

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: 51.16 change: +0.06

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:
02/25 update: Our GGG trade is still not open thanks to GGG opening lower and the S&P 500 opening flat. I am adjusting our entry point strategy. We will buy a dip at $50.25 with a stop loss at $48.95. I am suggesting we keep our position size small. Our target is $54.50. FYI: The Point & Figure chart for GGG is bullish with a long-term $77 target.

Trigger: buy a dip at $50.25

suggested position: buy GGG stock @ (trigger)

02/25/12 trade did not open. Adjust entry to buy a dip at $50.25
02/23/12 trade did not open, try again.
02/22/12 trade did not open, try again.

chart:

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


The Hain Celestial Group - HAIN - close: 40.66 change: -0.28

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

Comments:
02/25 update: HAIN opened higher on Friday but the S&P 500 did not. Our trade is not open yet. I am suggesting we try again. The plan is to open bullish positions if both HAIN and the S&P 500 index open positive on Monday morning. Or as an alternative readers may want to consider buying a dpi near $40.00.

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

02/25/12 trade did not open. Try again

chart:

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


Jos. A. Bank Clothiers - JOSB - close: 50.60 change: -1.51

Stop Loss: 49.75
Target(s): 54.00
Current Gain/Loss: - 0.3%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
02/25 update: Ouch! What happened to JOSB. The sharp decline on Friday morning looks like a reaction to some sort of downgrade or maybe an earnings report from a rival retailer. Yet I can't find any specific news to account for JOSB's relative weakness. The stock is headed for what should be support near $50.00 and its 200-dma. Wait for a bounce from this level before considering new bullish positions.

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

chart:

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: 11.44 change: -0.31

Stop Loss: 11.10
Target(s): 13.50
Current Gain/Loss: + 3.0%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
02/25 update: Warning! The action in KBH on Friday looks bearish. The rally attempt failed near $12.00 and its 10-dma. Furthermore the last two candles on the weekly chart both look like a potential bearish reversal. Readers will want to seriously consider an early exit right now. I am raising our stop loss to breakeven at $11.10. I am not suggesting new bullish 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

02/25/12 new stop loss @ 11.10 (breakeven for the stock position)
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

chart:

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: 30.84 change: +0.47

Stop Loss: 28.75
Target(s): 34.75
Current Gain/Loss: unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see below

Comments:
02/25 update: Unfortunately our NYX is not open yet. Shares of NYX are doing their part and outperformed on Friday with a +1.5% gain. Yet the S&P 500 index opened flat. Our conditions to open positions was a positive open in the S&P 500. We will adjust our entry point strategy to buy NYX on a dip at $30.25. The $29.75 area and the simple 10-dma should be new support. We will raise our stop loss to $28.75.

We want to keep our position size small. Our multi-week target is $34.75. FYI: The Point & Figure chart for NYX is bullish with a $41.00 target.

Trigger: buy a dip at $30.25, new stop loss $28.75

(small positions)

Suggested Position: buy NYX stock @ (trigger)

- or -

buy the Mar $30 call (NYX1217C30)

02/25/12 adjust entry point strategy to buy a dip at $30.25 and adjust stop loss to $28.75
02/23/12 not open yet, try again.

chart:

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: 42.01 change: +0.64

Stop Loss: 39.40
Target(s): 43.50
Current Gain/Loss: + 4.3%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
02/25 update: Saber rattling by Iran and a falling U.S. dollar are both fueling gains in crude oil. The USO rallied to a new multi-month high near $42 on Friday. Crude oil and the USO are both starting to look short-term overbought. I am not suggesting new positions at this time. We will raise our stop loss to $39.40. Our target to exit is still $43.50 but longer-term traders could aim for the $45.00 area.

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

02/25/12 new stop loss @ 39.40.

chart:

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


Zumiez Inc. - ZUMZ - close: 30.18 change: -0.32

Stop Loss: 29.25
Target(s): 32.25 or 34.50
Current Gain/Loss: + 4.9%
Time Frame: up to the early March earnings report
New Positions: see below

Comments:
02/25 update: Hmm... the action in ZUMZ on Friday is disappointing. Shares are flirting with support near $30.00 and its 50-dma and the bottom of its wide bullish channel. A breakdown here would be very bearish. I am raising our stop loss up to $29.25. At this time I'd wait for a rise pat $31.05 before considering new bullish positions.

On Thursday I suggested launching new positions if both ZUMZ and the S&P 500 index opened positive. That did not happen with ZUMZ gapping open lower.

NOTE: ZUMZ is due to report earnings in early March. We do not have a confirmed date yet and we do not want to hold over the report. I suspect we have less than two weeks left for this trade.

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)
we can buy calls if ZUMZ trades over $31.05 again.

02/25/12 new stop loss @ 29.25
02/24/12 ZUMZ did not meet our new entry point conditions.
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

chart:

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

Wells Fargo & Co. - WFC - close: 30.18 change: -0.47

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

Comments:
02/25 update: We have been trying to enter bullish positions in WFC for a week but the stock will not cooperate. Shares gapped open lower on Friday morning and underperformed most of its peers with a -1.5% decline. The gap down negated our new entry point. Shares are testing short-term support near $30.00 so more aggressive traders might want to consider buying this dip or buying a bounce from current levels. I am suggesting we merely drop WFC as a bullish candidate for now and put it on our watch list.

Trade did not open.

02/25/12 trade did not open. Remove WFC from the newsletter.
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.

chart:

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