Option Investor
Newsletter

Daily Newsletter, Thursday, 3/15/2012

Table of Contents

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

Market Wrap

Dow Closes Near 4 Year Highs

by Thomas Hughes

Click here to email Thomas Hughes
The Dow Jones Industrial Average and the S&P 500 closed today near 4 year highs. The Dow continued its climb past 13,000 and the S&P breached 1,400. Financials and Transports led the advance. Other than that it was a rather quiet day. Economic data was a little mixed but generally supports an improving economy. Volume remained on the low side, a fact that some say is a sign of the times and will probably persist.


Futures were positive prior to the announcements of today's economic data and barely changed afterward. Holding steady throughout the morning the market opened marginally higher. After a brief dip below yesterdays close early in the morning stock prices regained the early advance and were approaching multi-year highs by the noon hour. The market was evenly mixed between advancers and decliners in early trading and ended the day with advancers firmly in the lead.


Initial jobless claims were lower than expected. First time claims for the week ending 3/10/2012 fell 14,000 to 351,000. This is a return to four year lows last seen in February. The previous week was revised up from 362,000 to 365,000. The four week moving average remained steady at 355,750 claims per week. Analysts had been expecting 355,000 initial claims.


Continuing Claims fell as well, by 81,000 to a seasonally adjusted 3.343 million.


Total claims for unemployment benefits edged marginally higher. Total claims rose by just over 36,000 to 7.42 million.


Economic data in today's news was positive despite rising producer prices. The Producer Price Index rose by .4% in February, slightly lower than the consensus .5% and hotter than January's .1%. The core number rose by .2% in February, down from .4% in January.

The Empire Manufacturing and the Philadelphia Federal Reserve Survey of Manufacturing both increased in February. Empire Manufacturing increased by nearly a full point to 20.21 from 19.53 in January. The Philadelphia Fed Survey rose to 12.5% from January's 10.2%. These numbers show strengthening manufacturing activity.

Real estate data is mixed but generally positive. Improvements are sluggish but show some big improvements from last year. Mortgage delinquencies were reported up in February but the backlog of foreclosed homes is starting to clear up. New foreclosures are down 2% from January and 8% from February last year. Home repossessions also decreased by 4% from the previous month. Interests rates on 30 year fixed rate mortgages rose less than .1% from last week to 3.92%.

News from across the pond include a warning to England, euro exchange rates, new highs in Greek unemployment and a bond offering in Spain. The UK was warned by credit rating agency Fitch that it could have its AAA rating downgraded in the next few years if it fails to contain public debt. Fitch says that UK has “limited resources” to withstand any more financial strains.

The Swiss National Bank left exchange rates unchanged at 1.20 Swiss Francs per Euro. It also left interest rates unchanged and continued to defend an exchange rate floor first introduced last September.

Greek unemployment rose to 20.7%, setting a new all time high. The problem is being intensified by the austerity measures put in place as conditions for continued economic aid. The debt swap deal reached in the last week helped Greece to secure a fresh 130 billion euro bailout. The International Monetary Fund also issued a 28 billion euro facility for Greece. Greece's economy shrank by over 7% in 2011 and 2012 is shaping up to be another year of sharp declines.

Spain sold close to $4 billion in new bonds Thursday. The offering had broad support from investors. The sale will help Spain with its short term obligations and helps ensure the country can live up its own austerity plans. The bonds were issued over several terms. The 2015 maturity bond, with a 4.4% coupon, sold at an average yield of 2.440%.

European markets closed mixed with weak gains for the DAX (+0.77%) and the CAC 40 (+0.31%) and a slight decline for the FTSE (-0.22%).

Providence Resources (PVR-LN), traded on the London stock exchange, found the gold at the end of the rainbow, the Black Gold that is. The oil driller discovered oil off the coast of Ireland with twice the commercial flow rate threshold. The find is in the Ballyhoe Field in the North Celtic Sea Basin. The stock was up 12% in mid day trading. Partner Lansdowne Oil & Gas (LOGP-LN) also traded higher on the news.

Three high profile IPO's happened this morning. Allison Transmission Holdings (ALSN), Demandware (DWRE) and MA-COM Technology Solutions.

Allison Transmission Holdings (ALSN) manufactures automatic transmissions for medium and heavy duty. commercial vehicles. The stock opened at $23, in the middle of its expected range, traded higher for a while and ended the day at $23.22.


Demandware(DWRE), a cloud computing provider, enables clients to design and implement ecommerce websites. The stock was originally priced in the range of $12.50-$14.50 and was thought to open around $16. Demand for Demandware pushed the opening to $25.25, the stock quickly traded lower and ended the day down from the opening at $23.65.


MA-COM Technology Solutions (MTSI) is a provider of high performance analog semiconductor solutions for wireless and wireline applications. The stock opened at $19.10, just over the high of end of its expected range of $17-$19. The stock quickly gained 4%, continued to trade higher and closed the day at $20.79, an 8.8% gain.


PF Chang's (PFCB) was upgraded to hold from sell by Argus. The stock has been trending up since last December from a bottom established summer 2011. The stock is approaching technical resistance around $42.50 on average volume. The restaurant chain is making money but not as much as expected and has an -33% earnings surprise percentage. The technical indicators are also weak.

PF Chang's, daily with support and resistance

Cisco Systems (CSCO) announced the purchase of London Based NDS Group for $5 billion. Analysts argued that the purchase was expensive but potentially a good move for Cisco long term. NDS provides streaming video for multichannel television networks. The move boosts Cisco's presence in video and entertainment. The stock traded down today as much as 2% and closed at $19.91, just above the 30 day moving average. The stock has support around $19 and is trading on average volume.

Cisco Systems, daily with moving average and support

Apple soared to new intraday highs and hit the $600 mark for the first time. This happened just a month after crossing $500. Expectations for the new version of the iPad and iPhones have the stock trading sharply higher for the year, up around 50% for the first 2 1/2 months of 2012. The stock appears to have support around $550, where the most recent round of buying started from. Apple opened the day at $600 and traded down throughout the day. Late afternoon trading brought the stock to close down $4.02 from yesterday at $585.56.

Apple, daily with support and volume

Technology research firm Gartner updated its estimates for global semiconductor revenue growth. The company had previously estimated growth around 2.2% but have raised estimates to 4% for 2012. The DRAM market is expected to see continued increases of sales and price increases which will help drive growth. NAND Flash is also expected to see significant growth in 2012 due to tablet, mobile and mainstream computing. The PHLX Semiconductor Sector index rose by around 2% today to close at 434.99. The index is moving up from support with momentum turning bullish.

SOX, daily with support and MACD

Intel Corporation (INTC), the world's largest producer of semiconductors, gained 1% on the revision. The stock is moving up from the 30 day exponential moving average but is facing resistance at $28 set back during the market decline in 2008. Momentum is bullish and could help the stock break through to the upside.

Intel, daily with resistance and MACD.

Microchip competitor Advanced Micro Devices (AMD) got an upgrade today on top of Gartners revenue revision. Market research firm Jefferies upgraded the stock to buy from hold based on valuation and risk/reward. The company has been gaining market share, especially in the low-end product and mobile devices segments. The stock surged over 6% today and closed at $8.23. The move took the stock above resistance at $8 with bullish momentum and increasing volume.

AMD, weekly with MACD, volume and resistance

The financial sector was strong today and built on gains made earlier in the week. The Financial Sector Spyder (XLF) broke above resistance Tuesday after results of the banking stress tests were released. The stock is making a strong move up from the previous resistance level and the 30 day moving average. The sector gained near 2% today and closed at $15.70. The bounce upward has supporting volume but faces resistance at $16. The top ten holdings of the ETF were up across the board led by Goldman Sachs (GS), Citigroup (C ) and JP Morgan (JPM).

XLF, weekly with support and resistance

Goldman Sachs gained $2.69 today. The stock is breaking above resistance at $120 with a spike in volume.

Goldman Sachs, daily with resistance and volume

Citigroup is making a similar move to Goldman Sachs, breaking out above resistance with high volume. The stock gained over a dollar today to close at $36.23

Citigroup, daily with resistance and volume

JP Morgan gained today as well and is a leader among the big financials. JP Morgan is trending about 20% higher than Citigroup and Goldman Sachs. This stock is also breaking out with increased volume.

JP Morgan, daily with resistance and volume

JP Morgan,compared to Citigroup and Goldman Sachs

Gold rebounded today following yesterday's 3% drop. The precious metal gained $15.80 to close at $1658.70 on the New York Mercantile Exchange. The CBOE Gold Index gained 0.59%, or 1.20 to close at 203.63. The index is at a new 12 month low and sitting on possible support.

CBOE Gold Index, daily with support

Oil prices dropped sharply midday on a faulty report of increased supply. Traders got wind of a possibility that the US and the UK reached an agreement to release oil from strategic reserves in an effort to curb rising prices. The White House quickly denied the report, stating that the topic has been discussed but that no decisions or agreements have been made. The price of crude quickly rebounded to make up the days losses. Natural gas inventories declined but the drop, though at the high end of the expected , was not a surprise. Total storage levels of natural gas remain at seasonal highs and The price remained steady.

30 year bond rates jumped to new highs opening today's trading. The yield declined throughout the session though to end the day only marginally higher.

30 year bond rates

During afternoon trading advancing stocks took the lead and brought the Dow Jones Average and S&P 500 to four year highs. The trend is up on the Dow and S&P. Momentum is bullish in the long term and just turn bullish and getting stronger in the short term. The next significant resistance level for the Dow Jones Index is 14,000. Transports, which gained 3.27%, led the markets in today's trading. Financials are looking strong in the wake of stress test results and helped lead the markets to new highs.

Dow Jones Average, monthly data

Dow Jones Average, daily data

Dow Jones Transports Index

The broader S&P 500 has been trending basically in line with the Dow Blue Chips but is slightly ahead for the year. The index traded higher throughout the day to end near session highs and close above 1,400 for the first time in four years. Both the Dow and the S&P 500 continue to lag the Nasdaq.

S&P 500 compared to the Dow and Nasdaq

S&P 500, trend is up

The Nasdaq also reached new highs today, led by semiconductors and device makers. The trend in this market is up long term and in the short. Strength among tech stocks is gaining support, Gartners revision of semiconductor revenue for 2012 may provide the basis for earnings revisions and positive surprises in the coming quarters for semiconductor makers. Device makers may also fare better than expected if they are going to be using more chips than previously forecast.

Nasdaq, daily data

Nasdaq, weekly data

A look at the Nasdaq index tracking stock, QQQ, shows a small but possibly significant increase in volume over the last three days.

Nasdaq Index Tracking Stock, QQQ

The economy seems to be improving as expected and the markets are responding. Things to look out for include new economic data and earnings. Tomorrow the CPI, Core CPI, Industrial Production, Capacity Utilization and Michigan Sentiment indicator are on tap.

Thomas Hughes


New Plays

Sporting Goods and Postage

by James Brown

Click here to email James Brown

Editor's Note:

In addition to tonight's new candidates, consider these stocks as possible trading ideas and watch list candidates:

(bullish candidates) ONNN, BLL, R, RAH, CREE, SIRO, ADP, PCAR, PAYX, INTC, UNH, F, AMP


NEW BULLISH Plays

Sturm, Ruger & Co. - RGR - close: 43.82 change: +1.14

Stop Loss: 41.75
Target(s): 48.50
Current Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
About four weeks ago RGR was seeing a lot of volatility as investors reacted to its earnings news. Since then the stock has managed to consolidate sideways helping alleviate its overbought condition. Now RGR is starting to move higher with a trend of higher lows again. If this rally continues it could be accelerated by short covering. The most recent data listed short interest at 10% of RGR's very small 17.4 million-share float.

I am suggesting a trigger to open bullish positions in RGR at $44.05. We will use a stop loss at $41.75. Our multi-week target is $48.50 but that means RGR has to get past its recent all-time high at $46.68. FYI: The Point & Figure chart for RGR is bullish with a $52.00 target.

Trigger @ 44.05

Suggested Position: buy RGR stock @ (trigger)

- or -

buy the Apr $45 call (RGR1221D45) current ask $1.40

Annotated chart:

Entry on March xx at $ xx.xx
Earnings Date 04/26/12 (unconfirmed)
Average Daily Volume = 319 thousand
Listed on March 15, 2011


Stamps.com Inc. - STMP - close: 27.98 change: +1.27

Stop Loss: 25.95
Target(s): 32.50
Current Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Shares of this Internet-based postage company are on the rebound again. The stock is currently trading inside a wide $23-33 trading range. This month the stock surged on March 8th after announcing it had resolved a patent infringement lawsuit. Now after a three-day consolidation lower STMP is on the rebound again.

Aggressive traders may want to buy STMP now. I am suggesting a trigger to open positions at $28.25. More conservative traders may want to wait for STMP to rally past its 50-dma near $28.58 before considering new positions. If the rally does continue we could see STMP accelerate due to short covering. The most recent data listed short interest at almost 16% of the very small 13.2 million share float.

If we are triggered at $28.25 we'll use a stop loss under Wednesday's low. Our target is $32.50. This is a volatile stock. I am suggesting we keep our position size small to limit our risk.

Trigger @ $28.25 (small positions)

Suggested Position: buy STMP stock @ (trigger)

- or -

buy the Apr $30 call (STMP1221D30) current ask $0.90

Annotated chart:

Entry on March xx at $ xx.xx
Earnings Date 04/30/12 (unconfirmed)
Average Daily Volume = 508 thousand
Listed on March 15, 2011



In Play Updates and Reviews

Stocks Rally Again, Oil & the Dollar Dip

by James Brown

Click here to email James Brown

Editor's Note:
The U.S. markets rallied again but oil and oil-related stocks underperformed. Our USO trade has been stopped out. Meanwhile our new play on LVLT has been triggered.

Current Portfolio:


BULLISH Play Updates

Akamai Technologies - AKAM - close: 37.35 change: +0.69

Stop Loss: 34.95
Target(s): 39.75 & 41.50
Current Gain/Loss: + 1.4%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
03/15 update: Traders bought yesterday's dip. AKAM outperformed today with a +1.8% gain. If the stock can rally past short-term resistance at $37.50 it should be poised for a run towards the $40.00 level.

I would be tempted to use a rally past $37.50 as a new entry point. We will inch up our stop loss to $34.95.

current Position: Long AKAM stock @ $36.82

- or -

Long Apr $36 call (AKAM1217D36) entry $1.92

- or -

Long May $40 call (AKAM1219E40) entry $1.39

03/15/12 new stop loss @ 34.95
03/13/12 trade opened this morning
03/12/12 not open yet. try again.

Entry on March 13 at $36.82
Earnings Date 04/26/12 (unconfirmed)
Average Daily Volume = 2.9 million
Listed on March 10, 2011


Abercrombie & Fitch - ANF - close: 52.87 change: -0.66

Stop Loss: 49.75
Target(s): 56.50
Current Gain/Loss: + 1.5%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
03/15 update: Hmm... after yesterday's strong session in ANF the rally stalled a bit today. Shares gave back -1.2%. I cautioned readers last night that ANF could see a pull back toward the $52-51 zone.

Earlier Comments:
We want to keep our position size small to limit our risk. There is potential resistance at the top of the November gap near $55.00. Plus the exponential 200-dma (near $54.40) and the simple 150-dma (near 55.45) could both be technical resistance. Our exit target is $56.50. FYI: The Point & Figure chart for ANF is bullish with a $69.00 target.

current Position: Long ANF stock @ $52.05

- or -

Long Apr $52.50 call (ANF1221D52.5) Entry $2.25

Entry on March 14 at $52.05
Earnings Date 05/16/12 (unconfirmed)
Average Daily Volume = 3.2 million
Listed on March 13, 2011


eBay Inc. - EBAY - close: 36.83 change: -0.79

Stop Loss: 34.75
Target(s): 39.50
Current Gain/Loss: + 1.5%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
03/15 update: Shares of EBAY retreated from multi-year highs after the stock was downgraded to a "neutral" this morning. I would use a dip into the $36.50-36.00 zone as a new bullish entry point. Conservative traders could wait for a bounce in this area before launching positions.

current Position: Long EBAY stock @ $36.29

- or -

Long Apr $35 call (EBAY1221D35) entry $2.02

03/13/12 trade opened this morning
03/12/12 not open yet. try again. added a trigger at $36.85

Entry on March 13 at $36.29
Earnings Date 04/26/12 (unconfirmed)
Average Daily Volume = 10.6 million
Listed on March 10, 2011


The Hain Celestial Group - HAIN - close: 42.80 change: -0.06

Stop Loss: 39.75
Target(s): 44.75
Current Gain/Loss: + 4.7%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
03/15 update: HAIN spent a second day churning sideways under new resistance at the $43.00 level. I am tempted to raise our stop loss toward the $41.00 area. More conservative trades may want to take profits early.

(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


Level 3 Communications - LVLT - close: 26.60 change: +1.67

Stop Loss: 24.70
Target(s): 29.00
Current Gain/Loss: + 1.6%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
03/15 update: We were expecting a rally in LVLT but today's gap higher was not what we had in mind. Before the opening bell the stock was upgraded. This sparked the gap open higher at $26.17. That is well above our trigger to open positions at $25.25. Our trade is open but now we face the risk that LVLT decides to fill the gap and dip back toward $25.00, which should now be support.

I am not suggesting new positions at this time. We will raise our stop loss to $24.70. I am also adjusting our exit target to $29.00.

Earlier Comments:
The stock could see a short squeeze. The most recent data listed short interest at 26% of the 153 million-share float. FYI: The Point & Figure chart for LVLT is bullish with a long-term $41.50 target.

current Position: Long LVLT stock @ $26.17

- or -

Long Apr $25 call (LVLT1221D25) Entry $0.00

03/15/12 new stop loss @ 24.70, adjust exit target to $29.00
03/15/12 trade opened on LVLT's gap higher at $26.17, which is above our trigger to open positions at $25.25.

Entry on March 15 at $26.17
Earnings Date 05/03/12 (unconfirmed)
Average Daily Volume = 2.4 million
Listed on March 14, 2011


The Toro Company - TTC - close: $71.96 change: +0.30

Stop Loss: 66.40
Target(s): 74.00
Current Gain/Loss: + 3.8%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
03/15 update: TTC continues to drift higher but shares struggled with the $72.00 level as overhead resistance all day long. I don't see any changes from my prior comments except that we will raise our stop loss up to $66.40.

Our target is $74.00. FYI: The Point & Figure chart for TTC is bullish with a $79.00 target.

current Position: Long TTC stock @ $69.32

03/15/12 new stop loss @ 66.40
03/13/12 Our TTC trade has been opened.
03/12/12 trade did not open. try again.
03/10/12 trade did not open. try again.
03/09/12 trade did not open. TTC opened lower and then bounced

Entry on March 13 at $69.32
Earnings Date 05/21/12 (unconfirmed)
Average Daily Volume = 330 thousand
Listed on March 08, 2011


Wyndham Worldwide - WYN - close: 45.54 change: -0.33

Stop Loss: 43.75
Target(s): 49.50
Current Gain/Loss: + 0.6%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
03/15 update: WYN is still digesting its big gain from Tuesday. The stock slipped -0.7% today. A dip or a bounce near the $45.00 level can be used as a new bullish entry point. Our multi-week target is $49.50.

FYI: The Point & Figure chart for WYN is bullish with a long-term $82.00 target.

current Position: Long WYN stock @ $45.25

- or -

Long Apr $45 call (WYN1221D45) Entry $1.65

03/13/12 new stop loss @ 43.75
03/13/12 trade triggered at $45.25

Entry on March 13 at $45.25
Earnings Date 04/26/12 (unconfirmed)
Average Daily Volume = 1.7 million
Listed on March 12, 2011


BEARISH Play Updates

Greenbrier Companies - GBX - close: 22.15 change: +0.38

Stop Loss: 23.25
Target(s): 18.50
Current Gain/Loss: - 3.0%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
03/15 update: Uh-oh! I have to warn you that the DJUSRR railroad index was a big outperformer today with a +5.7% gain. Most of the stocks related to the railroad industry were producing strong gains today. GBX added +1.7%. If the sector continues to rally it will put our bearish trade in danger. I am not suggesting new positions at this time.

Earlier Comments:
Traders should be aware that the $20.00 level, with the 200-dma, could be short-term support but we are aiming for a drop to $18.50.

current Position: short GBX stock @ $21.50

03/14/12 triggered at $21.50
03/13/12 removed the April $22.50 put as a suggested trade due to a ridiculously wide spread.

Entry on March 14 at $21.50
Earnings Date 04/09/12 (unconfirmed)
Average Daily Volume = 468 thousand
Listed on March 12, 2011


Halcon Resources - HK - close: 9.99 change: -0.01

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

Comments:
03/15 update: HK spent the session hugging support at the $10.00 mark. Shares did see a small dip lower this afternoon but managed to bounce back. The intraday low was $9.90.

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


CLOSED BULLISH PLAYS

United States Oil Fund (ETF) - USO - close: 40.28 change: -0.13

Stop Loss: 39.90
Target(s): 43.50
Current Gain/Loss: - 0.8%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
03/15 update: Crude oil prices declined even though the U.S. dollar also declined. Shares of the USO dipped under support at $40.00 and hit $39.70 before trimming its losses. Our stop loss was hit at $39.90.

Readers may want to keep an eye on the USO for a new rally past $41.00 as a new bullish entry point.

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.

(small positions!)

closed Position: Long the ETF @ $40.25 , exit $39.90 (-0.8%)

- or -

April $40 call (USO1221D40) Entry $2.10 exit $1.26 (-40.0%)

03/15/12 stopped out at $39.90
03/01/12 new stop loss @ 39.90
02/29/12 new stop loss @ 39.75
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