Option Investor
Newsletter

Daily Newsletter, Thursday, 3/8/2012

Table of Contents

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

Market Wrap

Markets Calm Ahead Of Jobs Numbers

by Thomas Hughes

Click here to email Thomas Hughes
The markets were fairly calm today in front of tomorrows jobs report. A strong opening was met with lack luster trading and a late afternoon rally that was short lived. The late afternoon rally met resistance as sellers stepped in around 12935 on the Dow. The news from Europe, including the impending Greek debt swap and moderate US unemployment data helped to sustain the bounce back from Tuesday's sharp losses and maintain the opening gains plus some.

The data is a little mixed, improving employment and earnings growth are being contradicted by warnings from some big name players. McDonald's warned about slowing earnings growth in upcoming quarters and Texas Instruments dropped sharply after the bell on a disappointing earnings call. Concerns of global slowdown are not really being talked about in the news but they are there. China and Europe have both reduced their expectations of growth for 2012 and I think the market is waiting for some definitive answer to the question of whether the market is going up or down. McDonald's, who had been experiencing strong growth in Europe and Asia, listed them as the biggest drags on February sales. Austerity measure put in place to help the trouble zone escape debt are pinching profits.


Index futures were up nearly 1% in pre-market trading but withdrew a little after the release of the newest unemployment data. Last weeks number of initial jobless claims was revised up to 354,000, an increase of 3000. This weeks advance number, for the week ending March 3rd, is 362,000. This is an increase of 8000 from last week and higher than expectations. Analysts had been looking for claims to remain steady at 351,000. The four week moving average of initial claims, a better gauge of unemployment, rose a mere 250 to a seasonally adjusted 355,000 claims. Continuing claims rose marginally as well to 3.416 million for the week ending 2/25. Futures initially retreated on the news but soon shrugged it off. These small increases are not seen as worrisome and are still in line with the short term trend of declining unemployment. Even though the recovery is slow unemployment is at 4 year lows and improvements are expected to continue. Analysts are expecting a good jobs report tomorrow which would make the third straight month of strong gains in employment. The government thinks its job report data is being leaked to Wall Street, an implication with serious implications. A review by Sandia National Laboratories has been commissioned and is underway.




European markets closed up today on the Greek debt swap and news from some key central banks. The European Central Bank and the Bank of England both left their key interests rates unchanged. The ECB rate is steady at 1% and the Bank of England rates remains at 0.5%. The European markets were up 1.5% ahead of the announcement and finished the day strongly in the green. The FTSE closed up 1.8% led by the DAX and CAC 40 at 2.45% and 2.54% respectively.

The highly anticipated Greek debt swap deadline passed today at 3 pm. An overwhelming majority of bondholders were in support of the deal. Attention will now focus on the next steps in the bailout process including loans and potential credit default swaps.

Gold and silver traded higher today on economic optimism tied to Greece's swap deal. The precious metals did come off their highs though when the European Central Bank warned on inflation. Gold is expected to keep trading higher on expectations the FOMC and European Central Bank will continue with current monetary policies in support of economic growth.

There is a lot of chatter concerning high oil prices. The price of crude oil and gasoline rose again today, threatening to derail the current economic recovery. It is certain for some analysts that higher fuel prices will impact consumer spending. What is not certain is how long oil, and gas especially, will remain at elevated levels. Gas historically goes up in the early spring only to retreat as summer approaches. This year is the same, only earlier, spurred on by fears of Iran. I think global demand will ultimately be less than forecast. The world economy is slowing and no one really knows how much. Some forecasts, notably China, have been revised down again recently, further lowering expected demand for oil and hopefully prices as well. Should oil and gas prices remain at these elevated levels then there is a real chance they could slow world growth further.

Facebook made another move getting ready for its impending and much anticipated IPO. The company added 25 new underwriters and raised $8 billion in revolving credit and bridge loans. The company is boosting cash ahead of the IPO in order to solidify its position. Among the new underwriters are Wells Fargo Securities, Citigroup Global Markets and RBC Capital Markets. Facebook is still anticipated to be the largest internet opening of record and is expected to start a new round of internet based IPO's.

AIG made headlines when the US Treasury announced that it would sell up to $6 billion of its AIG stock with AIG expected to buy half of the offered shares. The move reduces the Fed's portion of AIG by 7%. An agreement was also made ensuring repayment of the remainder of the $8.5 billion preferred equity investment in AIG owned AIA-Aurora LLC. The total stake in AIG held by the treasury would fall to around $42 billion after being repaid by AIG for Aurora. Shares fell over 3% in today's trading.


GM slammed up against it's 30 day moving average on a bounce from recent lows. Today CEO Daniel Akerson announced that the company is expecting losses in the European segment of business to continue for 1-2 more years. The losses are due in part on the current economic crisis in the region. The stock, which had been showing strength and a possible uptrend fell below the 200 day moving average during the week. It is bouncing up from a possible support but is squeezed between a long and short term moving average and looks like it may continue down from here.


Apple and five other suppliers of ereaders and books may be sued by the Justice Department, according to reports. The makers and sellers of ebooks are accused of colluding to raise prices. US and International officials have been investigating the matter but nothing concrete has been released. Shares of Apple traded up today but are still shy of the all time highs set earlier in the week. Action was light considering the recent high and a release of its newest iPad device yesterday. It is likely the announce was priced in because it was not really a secret. Some other companies are expected to do well in the wake of Apple and its latest device. AT&T and Verizon are supposed to be the biggest gainers with the chip makers that supply Apple and other ereader makers coming in close second.


McDonald's took a pounding today. The fast food giant reported smaller than expected same store sales in February and shed 3% for the day. The drop started pre-opening and maintained that level throughout the day. Same store sales came in at a positive 7.5% but analysts had been expecting a more robust 8.2%. The poor result is thought to foreshadow earnings for the rest of 2012 and came with a warning from McDonald's itself concerning quarterly earnings expectations. Globally, all stores, not just comp store sales, grew by 9.4%. The US sales climbed by over 11% and were lagged by Europe and Asia/Pacific/Africa by 4% and 2.4% respectively. Europe is McDonald's largest market by revenue and is being hurt by austerity measures and unemployment in the region. Based on the current state of the Eurozone I expect to see further weakness in results for McDonald's and others, including General Motors which I mentioned earlier. McDonald's stock dropped today on high volume and is sitting on a short term support line. At this level the dividend yields 2.8%, not as good as some others but if the stock moves down a little more then I think it will be a good candidate for a dividend investment.


Dendreon took another hit today, losing roughly 7% in today's trading. The company is facing renewed competition from Johnson and Johnson. JNJ's prostate cancer pill Zytiga received reviews that it set up to challenge Dendreon's Provenge therapy. Dendreon is not out of the fight however, its medicine is currently being used to treat advanced prostate cancer while Zytiga is still in clinical trials. Dendreon's stock opened around 18% lower but moved up on strong volume to close above a key support/resistance line. Dendreon may be at or near its bottom but I think some more evidence is needed to commit to this stock.


Johnson and Johnson did not fare as well as you might think after seeing Dendreon's drop. The stock traded up to its 30 day exponential moving average but failed to break to the upside. The stock has been trading choppy and sideways for years and I do not see any evidence to change that at this time. When Zytiga proves successful and gains wider acceptance the stock could break out and make significant gains. I will keep watching until then.


Wells Fargo is a leader among the biggest US holding banks with return on assets consistently over 1.2%. The bank rose over 3% today to close at $31.39, on top of an announcement of a new banking fee. Customers in 6 states will have to pay a $7 monthly fee if their balances fall below a certain level. A spokesman for the bank said that over 80% of customers would avoid the new fees. The stock is bouncing from its 30 day exponential moving average but does not have volume to support it. A similar move last year by Bank of America was short lived, rousing the wrath of disgruntled customers.


The financial Spyder (XLF) is making a move similar to Wells Fargo but without the percentage gains. It is also bumping up against long term resistance and has negative momentum. The MACD is consistent with XLF trading below the moving average, at least in the short term. As a sector the banks are making big improvements and are gaining strength but global slowdown, especially in Europe, is taking a toll business system wide. I think there are some good investments in banking but they are in the small cap, regional operators that are sheltered from the global exposure faced by the big bank holding companies.


Today marked the biggest two day gain in the stock market in nearly two months. Futures were higher this morning on expectations of growth and a resolution to the Greek debt crisis. I can not help but think the optimism is misplaced. The move put the S&P 500 right up at the long term resistance line it was flirting with last week. The trend is still up but I am watching out for any kind of topping action. Tuesday's drop could be a minor correction, there is some near term support around 1350 but it will take volume and earnings to convince me. So far news, reports and expectations are too disconnected for blind confidence.


The Dow looks exactly the same to me as the S&P. The trend is still up but it now in question due to the recent pull back. The index made up a lot of the losses today but failed to cross 13,000. The index opened up today and traded basically flat throughout the day, declining some and then moving strongly upward as the results of the Greek swap deal became certain. The afternoon rally took the index up to 12,937.50 before sellers stepped in to drive price down to the close. All in all the day was fairly mellow, news failed to really spark any renewed buying ahead of tomorrows jobs report.


The VIX retreated about 5% today to relative historic lows. The current level is consistent with extended rallies in the past. It will be important to watch this, especially tomorrow, as a sudden spike up would help reinforce fears of a possible market top.


The Nasdaq moved up in unison with the other two major indexes today. The short term trend is still up, with near term support and the 30 day exponential moving average equal at 1306. Once again volume is not in the move and technical indicators support at least a retest of the recent dip. Looking at the Nasdaq ETF, QQQ, it appears like a short term double top could be forming.


News and Data seem to be contradicting each other. Some things point to recovery and growth like declining unemployment and earnings. Other things, like growth expectations and earnings, seem to be pointing to further economic weakness. I know I mentioned earnings twice but that is because it is relevant in both columns. Earnings are improving due to balance sheet improvements, expanding markets and organic growth but, like McDonald's today, they are not living up to expectations that have been built into the market. I think for the bull market to continue from here we will need to see signs of earnings growth that exceeds current expectations. I think we are in for a time of earnings revisions while corporations are getting their business outlooks in perspective with global growth expectations. It will be important to monitor economic data and earnings very closely, any negative surprises, especially tomorrow with the jobs report, could keep stocks down.

Thomas Hughes


New Plays

New Highs

by James Brown

Click here to email James Brown


NEW BULLISH Plays

The Toro Company - TTC - close: $68.54 change: +1.30

Stop Loss: 65.75
Target(s): 74.00
Current Gain/Loss: unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
TTC is best known for its turf maintenance equipment. While spring is officially still about two weeks away it looks like investors are already looking toward warmer weather. The stock has been making strong gains the last few weeks. Today's action is a breakout to new record, all-time highs.

I am suggesting we launch bullish positions at the open tomorrow but only if both TTC and the S&P 500 index open positive. If our trade opens we will target a move to $74.00 and we'll start with a stop loss at $65.75. FYI: The Point & Figure chart for TTC is bullish with a $79.00 target.

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

Suggested Position: buy TTC stock @ (the open)

Annotated chart:

Entry on March xx at $ xx.xx
Earnings Date 05/21/12 (unconfirmed)
Average Daily Volume = 330 thousand
Listed on March 08, 2011



In Play Updates and Reviews

Small Caps Help Lead the Rebound

by James Brown

Click here to email James Brown

Editor's Note:
The small cap Russell 2000 index helped lead the market higher with a +1.3% gain. Unfortunately that could not save our AIG trade and JOSB dropped thanks to bad news from a rival.

Current Portfolio:


BULLISH Play Updates

Archer-Daniels-Midland Co - ADM - close: 31.11 change: +0.06

Stop Loss: 29.95
Target(s): 34.00
Current Gain/Loss: - 0.3%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
03/08 update: ADM continues to see a little intraday volatility. The morning rally failed at its 10-dma but traders bought the dip this afternoon. I am concerned that the failed rally this morning means ADM could be rolling over. I am not suggesting new positions at this time.

current Position: Long ADM stock @ $31.21

- or -

Long Mar $32 call (ADM1217C32) Entry $0.47

03/07/12 new stop loss @ 29.95

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


The Hain Celestial Group - HAIN - close: 40.62 change: +0.10

Stop Loss: 39.75
Target(s): 44.75
Current Gain/Loss: - 0.5%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
03/08 update: Trading in HAIN today was not very inspiring. The stock chopped around and barely closed positive. I remain cautious on HAIN and we're not suggesting new positions at this time.

(small positions)

current Position: Long HAIN stock @ $40.85

03/05/12 new stop loss @ 39.75
03/03/12 new stop loss @ 39.45
02/29/12 triggered at $40.85
02/27/12 trade did not open. Adjusting entry strategy to buy HAIN at $40.85 with a stop loss at $38.95
02/25/12 trade did not open. Try again

Entry on February 29 at $40.85
Earnings Date 05/03/12 (unconfirmed)
Average Daily Volume = 430 thousand
Listed on February 23, 2011


Rite Aid Corp. - RAD - close: 1.77 change: +0.08

Stop Loss: 1.54
Target(s): 1.90
Current Gain/Loss: + 6.6%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
03/08 update: It was another strong session for RAD. Shares rallied to $1.81 intraday before settling with a +4.7% gain. The move was fueled by RAD's news that same-store sales grew +3.1%. I am raising our exit target from $1.85 to $1.90.

Small Positions

current Position: Long RAD stock @ $1.66

03/08/12 raise our exit target from $1.85 to $1.90

Entry on March 07 at $1.66
Earnings Date 04/12/12 (unconfirmed)
Average Daily Volume = 8.7 million
Listed on March 06, 2011


Charles Schwab - SCHW - close: 13.92 change: +0.12

Stop Loss: 13.20
Target(s): 14.75
Current Gain/Loss: + 5.0%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
03/08 update: SCHW continue to show strength. The stock tagged a new multi-month high intraday at $14.15 but eventually settled with a +0.8% gain. I am raising our stop loss to $13.20.

I am not suggesting new positions at this time.

Earlier Comments:
Our multi-week target is $14.75. FYI: The Point & Figure chart for SCHW is bullish with a $19.00 target.

current Position: Long SCHW stock @ $13.25

- or -

Long Apr $13 call (SCHW1221D13) entry $0.59

03/08/12 new stop loss @ 13.20
03/03/12 new stop loss @ 12.90

Entry on February 27 at $13.25
Earnings Date 04/16/12 (unconfirmed)
Average Daily Volume = 15.9 million
Listed on February 25, 2011


Targa Resources - TRGP - close: 44.78 change: -0.10

Stop Loss: 43.75
Target(s): 48.00
Current Gain/Loss: - 0.6%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
03/08 update: TRGP is not cooperating. Shares can't seem to get past short-term resistance at their 10-dma. More conservative traders may want to abandon ship early. I am not suggesting new positions at this time.

(small positions)

current Position: Long TRGP stock @ 45.05

Entry on March 07 at $45.05
Earnings Date --/--/-- (unconfirmed)
Average Daily Volume = 215 thousand
Listed on March 05, 2011


United States Oil Fund (ETF) - USO - close: 40.82 change: +0.21

Stop Loss: 39.90
Target(s): 43.50
Current Gain/Loss: + 1.4%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
03/08 update: The oil ETF bounced again but failed to breakout past short-term resistance at its 10-dma. Depending on the jobs number tomorrow and how the U.S. dollar reacts, we could see the USO retest the $40.00 level again or rally towards $42.

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

03/01/12 new stop loss @ 39.90
02/29/12 new stop loss @ 39.75
02/25/12 new stop loss @ 39.40

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


BEARISH Play Updates

Arch Coal Inc. - ACI - close: 11.87 change: +0.02

Stop Loss: 13.75
Target(s): 10.10
Current Gain/Loss: + 7.8%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
03/08 update: So far so good. ACI is still not participating in the market's widespread bounce. Shares are hovering under the $12.00 level. I am not suggesting new positions at this time.

Earlier Comments:
Being short ACI is a popular trade with short interest already at 16.5% of the 210-million share float. That does raise the risk of a short squeeze should the stock (or industry) suddenly find strength.

Our multi-week target is $10.10. The $10.00 level could be psychological support.

(Small positions)

current Position: short ACI stock @ $12.87

- or -

Long Apr $12 PUT (ACI1221P12) Entry $0.49

03/05/12 new stop loss @ 13.75

Entry on March 05 at $12.87
Earnings Date 04/26/12 (unconfirmed)
Average Daily Volume = 9.4 million
Listed on March 03, 2011


Halcon Resources - HK - close: 10.01 change: +0.03

Stop Loss: 10.70
Target(s): 8.00
Current Gain/Loss: unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
03/08 update: HK saw an intraday bounce of +3.7% and then saw it fade. Shares closed almost unchanged on the session as investors sold into strength. This is a good sign for our bearish trade but the play is not open yet.

Earlier Comments:
There is already relatively high short-interest so I am suggesting small positions. We will use a trigger to open bearish positions at $9.75 with a stop loss at $10.70. Our target is $8.00. More aggressive traders could target the 100-dma instead.

Trigger @ 9.75

Suggested Position: short HK stock @ 9.75

Entry on March xx at $ xx.xx
Earnings Date 03/05/12 (confirmed)
Average Daily Volume = 1.7 million
Listed on March 07, 2011


True Religion Apparel, Inc. - TRLG - close: 25.25 change: -0.30

Stop Loss: 26.55
Target(s): 22.25
Current Gain/Loss: + 0.4%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
03/08 update: TRLG opened at $25.48, spiked down toward $24.89, and then bounced as the rest of the market rallied. Naturally, with a positive market, I'm not too surprised to see TRLG bouncing near its October 2011 lows. I cautioned readers yesterday that traders may want to wait for a breakdown under $24.85 before initiating new positions. At this point readers may want to wait for a failed rally near what should be new resistance at the $26.00 level before considering positions.

Our multi-week target is $22.25. FYI: The Point & Figure chart for TRLG is bearish with a long-term $14.00 target.

current Position: short TRLG stock @ $25.48

- or -

Long Apr $25 PUT (TRLG1221P25) Entry $0.00

Entry on March 08 at $25.48
Earnings Date 04/26/12 (unconfirmed)
Average Daily Volume = 924 thousand
Listed on March 07, 2011


CLOSED BULLISH PLAYS

American Intl. Group - AIG - close: 28.31 change: -1.14

Stop Loss: 28.40
Target(s): 34.50
Current Gain/Loss: - 6.8%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
03/08 update: News out last night that the U.S. government plans to sell $6 billion in AIG stock was not met with cheers. I cautioned readers that AIG would probably trade lower and hit our stop loss. Sure enough AIG gapped open lower at $28.59 and hit our stop loss at $28.40 within the first hour of trading.

- small positions -

closed Position: Long AIG stock @ $30.50 exit $28.40 (-6.8%)

- or -

Apr $30 call (AIG1221D30) Entry $1.88 exit $0.82 (-56.3%)

03/08/12 AIG hit our stop at $28.40
03/07/12 after the closing bell the U.S. gov. announces plans to sell $6 billion in AIG stock
03/06/12 warning! the breakout has reversed!
03/05/12 triggered at $30.50
03/03/12 adjust entry strategy to use a trigger at $30.50, stop loss @ 28.40
03/02/12 trade did not open.

chart:

Entry on March 05 at $30.50
Earnings Date 05/07/12 (unconfirmed)
Average Daily Volume = 6.1 million
Listed on March 01, 2011


Jos. A. Bank Clothiers - JOSB - close: 51.52 change: -0.78

Stop Loss: 50.75
Target(s): 54.75
Current Gain/Loss: + 0.0%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
03/08 update: The action in JOSB was disappointing. The RLX retail index rallied to new highs. I would have expected JOSB to breakout from this three week consolidation. Instead shares of JOSB spiked lower and hits the 30-dma and 100-dma before bouncing. Shares were down thanks to rival Men's Warehouse (MW) lowering their guidance as they reported earnings.

I do think JOSB goes higher but unfortunately we had just raised our stop loss to $50.75 last night. The intraday low today was $50.54.

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.

closed Position: long JOSB stock @ $50.75 exit $50.75 (-0.0%)

- or -

Mar $50 call (JOSB1217C50) Entry $1.90 exit $1.50 (-21.0%)*

03/08/12 stopped out at $50.75
*exit price on the option is an estimate. The option did not trade at the time of our exit
03/07/12 new stop loss @ 50.75, adjust exit to $54.75
03/06/12 readers may want to cut their losses on any March call positions now.
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