Option Investor
Newsletter

Daily Newsletter, Tuesday, 5/8/2012

Table of Contents

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

Market Wrap

Dow Down For Fifth Day

by Thomas Hughes

Click here to email Thomas Hughes
Continued uncertainty over the state of European financial reform depressed stocks for the fifth day in a row. Potential new government stances in France and Greece are threatening the current bailout and traders are questioning whether or not the rest of the Union, especially Germany, will stand for further negotiating. The concerns are adding to fears brought on by mixed economic and earnings information here at home.


Declining stocks led by a wide margin today. In early trading losers led 3 to 1 over gainers. Late in the afternoon the margin had declined to around 2 to 1.


Aside from a string of earnings reports there was little in the way of US economic news today. Tomorrow look out for the mortgage index, wholesale inventories and crude oil inventory data. Oil inventory is at 20 year highs and is expected to increase again.

Futures were down about a half percent before the bell as traders were digesting the new developments out of Greece and the European Union. The possible emergence of new government in Greece has set the markets on edge. The elections have brought the recent austerity measures and Greek bailout into question. According to reports this morning Greece has about 5 weeks of money left and Germany is reluctant to assist any more. Some traders speculated on the possibility of Greece being removed from the European Union. Greek stocks closed near twenty year lows today.

France and Spain are also expected to go back on some of their own spending measures. Spain is reported to be in the process of bailing out another bank, after stating earlier that no more bailouts were needed.

Germany remains the bright spot in Europe. The country is expected to keep itself out of recession and the new data supports this. Industrial production rose in the country by 2.8%, hotter than the expected 0.8%. Factory orders also increased in the month of March on strong foreign demand, especially from Russia, the US and China.

The events in Europe have sent gold tumbling. The metal lost about $35 in today's trading to fall below the technical $1600 mark. Intra-day trading brought the commodity down to the low's of January 3. The move was been sparked by the dollar's gain against the euro and has been accelerated by technical trading and stop-losses. Analysts say that short sellers could be moving in and send gold prices even lower. The CBOE gold index moved down in tandem with the metal and made a fresh twelve month low.

CBOE gold index, daily

The yield on 30 year bonds dropped today.

30 year bond rates, daily

Oil continued it's slide today, losing close to 1%. This is the fifth day of declines for US crude oil prices and brings the price to just above $97. Growing US oil stockpiles, worries over world demand fueled by the European elections and OPEC's statements about supply have all helped to bring the price down. The US energy agency raised its forecast for global demand in 2012 by 70,000 barrels a day but lowered its estimates for 2013. Be on the lookout for oil inventories on Wednesday and natural gas supply on Thursday.

Earnings continue to drive the markets as well. Several big names released information today but the biggest headline was Fossil. The stock reported weak earnings, guided the year lower and lost more than 35% of it's share value. Fossil reported first quarter earnings in line with expectations but the revenue for the quarter missed. Sales were strong in America and Asia but Europe was weak and is impacting the company's future expectations. The news sent the entire retail sector down.

Fossil, daily

The retail sector Spider XRT traded down on the news. The exchange traded fund made a new two month intra-day low. The move came on high volume and bearish indicators.

Retail sector spider,daily

Coca Cola Bottling Company (COKE), not to be confused with Coca Cola (KO), is the US bottler of Coca Cola products. The stock traded quietly today just above its recent support in anticipation of its earnings release which came after the close of today's trading. The stock gained 1% today on a mild spike in volume.

Coca Cola Bottling Company, daily

Walt Disney Company was also quiet today ahead of an after market earnings announcement. The company has taken some hits on recent movies but this weekends release of “The Avengers” set US box office records. The stock gained in today's session to close at a new twelve month high. The move was accompanied by higher volume and bullish technicals. In the report, Disney beat analyst expectation by 3 cents. The company earned $0.58 cents a share on revenue of $9.63 billion.

Walt Disney, daily

DIRECTV went directly down after it released its earnings report. The company reported earnings increased by 26%, in line with expectations. DIRECTV made the gains on increased subscriptions in North and South America. Revenue in the quarter grew by 11% fueled by new subscribers in Latin America. The stock lost more than 3% in intra-day trading but may have found support in the $46 range.

DIRECTV, daily

OfficeMax pleased its shareholders today. The stock rose by 10% today following the announcement of first quarter earnings. On an adjusted basis the company improved results by more than 50% from last year at the same time. The adjusted results do not include one time charges related to store closures earlier in the year. The closings were part of strategic re-alignment of the company and have begun to pay off for OfficeMax. The reported results were below analysts estimates but the adjusted results were well above the consensus. The company is guiding revenue estimates for the year in-line to slightly higher than expected. The stock moved up from support today with high volume and bullish indicators.

OfficeMax, daily

SunOpta, manufacturer and distributor of organic, natural and specialty foods, has been on the rise in 2012 since hitting a low in January. The stock traded down today and is expected to release earnings after the bell. The specialty foods maker earned $.07 per share in the previous period and is expected to earn $.08 this quarter.

SunOpta, daily

Discovery Communications is down sharply today. The cable network operator increased revenue in the quarter by 16% and income by 9%. The increase in income is excluding a one time charge from the previous year. The company's results were impacted negatively by the Oprah Winfrey Network. The Oprah Winfrey Network did not perform as expected. The stock lost more than 6% today on high volume but did not break trend.

Discovery Communications, daily

HSBC Holdings moved down today. It released earnings before the market opened. Profits in the quarter were down from the previous period due to adverse credit spreads on its own debt. Excluding these write downs the bank increased profits by around 25%. The stock moved down and closed just above the short term moving average, in the middle of a three month trading range.

HSBC Holdings, daily

McDonald's also moved lower today. The fast food bench mark reported April sales figures that were weaker than expected. The stock continued its three month down trend from the all time highs set at the end of last year. Same store sales were expected to be in the 5% range but came in at 3.3%. Strength in the US and Europe offset weakness in China and Asia. First quarter strength was based on strong comparable store sales. This new weakness in comp store sales gives traders cause to question McDonald's full year outlook. The decline in share prices has brought McDonald's dividend yeild up to 3%.

McDonald's, daily

Cognizant Technologies received a couple of surprise nods today following yesterday's disappointing earnings announcement. The company lowered its growth forecast due to a “slow start” to the year. Today, analysts at firm Robert W. Baird and Citigroup think the stock's revision is OK and the sell off yesterday was over blown. They are expecting earnings to rise in the coming quarters. The stock regained about a third of yesterday's loss.

Cognizant, daily

This week is hot for IPO's. Not only has Facebook begun it's final push toward public sale but there are ten IPO's scheduled for the week. Be on the look out for NSE, LLGX, WAGE, CCFI, RIBX, ADNC, WMC, EVAC, IRG and CUBI.

The Dow was down today for the fifth day in a row. This marks the second biggest 5 day decline this year. Many of the stocks rebounded in the afternoon and hovered around neutral near the close of the day. All 30 were down at some point in today's trading. The Dow is in a trading range now, between 12,700 and 13,300. Concerns for global slowdown are counterbalancing hopes of expansion. Momentum has turn bearish and could bring the index lower in the near term. Long term momentum has turned bearish as well but overall volume in the index is weak.

Dow, daily

Dow, weekly

The stocks in the S&P were able to cut their losses in afternoon trading but all S&P sectors were down for the day. The move was weak, just like the Dow, and short term momentum indicators are divergent. The S&P has support around 1350 that could keep the index around 1400 in the short term.

S&P 500, daily

The VIX made another move up to resistance at 20. The fear gauge was stopped at the line and is now being squeezed by the short term moving average and resistance.

CBOE Volatility Index, daily

The Nasdaq experienced the steepest decline today. The tech heavy index dropped down to support at 2900 before bouncing back in the afternoon trading to regain some of the days lost ground.

Nasdaq, daily

The markets seem to be pulling back in fear of more European fall out. Our own economic data is mixed and makes it easy to question the stability of the recovery. Traders are waiting for a clear sign of US and world economic direction. Economic data, earnings and growth outlooks will drive the markets into the near future.

Thomas Hughes


New Plays

Healthcare Diagnostics

by James Brown

Click here to email James Brown

Editor's Note:

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

(bullish ideas) GNC, DIS, KOP, VNTV, TRMK, PDCO, ADM

(bearish ideas) OAS, PETD, ALTR, RVBD, LOGM, RRGB, INFY


NEW BULLISH Plays

Meridian Biosciences - VIVO - close: 19.74 change: +0.29

Stop Loss: 19.10
Target(s): 22.00
Current Gain/Loss: unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
VIVO is a healthcare diagnostics company. Shares exploded higher n late April following a better than expected earnings report. The move was likely fueled by the stock's above average short interest and a small float. Now the correction lower seems to be over. VIVO is bouncing from technical support.

Aggressive traders may want to launch bullish positions now. I am suggesting a trigger at $20.25. We'll use a stop loss at $19.10. Our multi-week target is $22.00.

Trigger @ $20.25

Suggested Position: buy VIVO stock @ (trigger)

Annotated chart:

Entry on May xx at $ xx.xx
Earnings Date 07/19/12 (unconfirmed)
Average Daily Volume = 281 thousand
Listed on May 8, 2011



In Play Updates and Reviews

Be Careful Here

by James Brown

Click here to email James Brown

Editor's Note:
Be careful if you're trading bearish positions here. The market's big intraday bounce could be signaling a short-term bottom. We saw three of our bearish trades get triggered today (ENDP, NTAP, VC). Nearly all of our bearish trades joined the market in the afternoon rebound higher. I'm concerned we could see the market produce a big oversold bounce soon.

Current Portfolio:


BULLISH Play Updates

U.S. Bancorp - USB - close: 31.57 change: -0.27

Stop Loss: 30.90
Target(s): 34.75
Current Gain/Loss: - 2.1%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/08 update: USB held up reasonably well. Shares still have a very short-term bearish trend of lower highs inside its longer-term up trend. I am expecting a dip toward support near $31.00 and its 50-dma.

Our target is $34.75 but more aggressive traders could aim higher.

current Position: Long USB stock @ $32.25

- or -

Long May $32 call (USB1219E32) Entry $0.70

05/01/12 triggered @ 32.25

Entry on May 01 at $32.25
Earnings Date 07/18/12 (unconfirmed)
Average Daily Volume = 10.3 million
Listed on April 30, 2011


BEARISH Play Updates

Endo Pharma. - ENDP - close: 33.75 change: -0.05

Stop Loss: 35.05
Target(s): 30.25
Current Gain/Loss: - 0.9%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/08 update: I am suggesting caution here. ENDP did slip to new relative lows but it bounced back to almost unchanged. There is a good chance ENDP could bounce back toward its 10-dma near $34.60ish. I would wait for this rebound to reverse before considering new bearish positions.

Our target is $30.50. More aggressive traders could aim lower. The Point & Figure chart for ENDP is bearish with a $28 target.

current Position: short ENDP stock @ $33.45

- or -

Long May $35 put (ENDP1219Q35) Entry $1.85

05/08/12 triggered at $33.45

Entry on May 08 at $33.45
Earnings Date 05/01/12
Average Daily Volume = 1.4 million
Listed on May 5, 2011


Greenhill & Co. - GHL - close: 37.13 change: +0.23

Stop Loss: 38.75
Target(s): 34.25
Current Gain/Loss: + 0.3%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/08 update: I remain concerned with our GHL trade. The stock has bounced two days in a row following Friday's intraday reversal higher. I have warned readers that GHL will likely bounce toward the $38.00 level. I'd wait for shares to near $38.00 or fail near $38.00 before considering new positions.

Earlier Comments:
We do want to keep our position size small since being short GHL is a popular trade. The most recent data listed short interest at 18.5% of the small 26.8 million share float. That does raise the risk of a short squeeze.
FYI: The Point & Figure chart for GHL is bearish with a $29 target.

(small positions)

current Position: short GHL stock @ 37.25

05/05/12 new stop loss @ 38.75
05/03/12 triggered @ 37.25

Entry on May 03 at $37.25
Earnings Date 07/18/12 (unconfirmed)
Average Daily Volume = 508 thousand
Listed on May 2, 2011


Groupon, Inc. - GRPN - close: 10.33 change: -0.13

Stop Loss: 11.55
Target(s): 8.50
Current Gain/Loss: + 4.4%
Time Frame: exit prior to May 14th earnings report
New Positions: see below

Comments:
05/08 update: Hmm... the stock market was plunging lower today and yet GPRN did not breakdown under support near $10.00. If the stock is not going to drop on a day like today then what will it take for GRPN to start its next leg lower?

Readers may want to exit early now and take profits early. I am not suggesting new positions at this time. Remember this is an aggressive, higher-risk trade.

Earlier Comments:
Investors are unhappy with management, worried about earnings, and concerned that the upcoming lock up expiration could put even more pressure on the stock. The lock up period expires on June 1st (delayed from May 2nd). I do consider this an aggressive, higher-risk trade. The trend is down but GRPN is definitely oversold at this point. We want to use small positions to limit our risk. Readers may want to use options to limit their risk even further. We do not want to hold over the May 14th earnings report.

(Small positions)

Suggested Position: short GRPN stock @ $10.80

- or -

Long May $10 put (GRPN1219Q10) Entry $0.90

05/05/12 new stop loss @ 11.55. more conservative traders may want to take profits now (trade is up +7.7%).
Adjusted exit target to $8.50

Entry on May 02 at $10.80
Earnings Date 05/14/12 (confirmed)
Average Daily Volume = 2.6 million
Listed on May 01, 2011


Hi Tech Pharmacal - HITK - close: 33.40 change: +0.33

Stop Loss: 34.65
Target(s): $30.50
Current Gain/Loss: + 2.9%
Time Frame: 2 to 4 weeks
New Positions: see below

Comments:
05/08 update: Warning! HITK did not see much of a sell-off this morning and shares outperformed the market with a +0.99% gain and a close over short-term resistance at its 10-dma. This is a warning signal for the bears. Readers may want to exit immediately. I am not suggesting new positions at this time.

current Position: short HITK stock @ $34.40

05/08/12 readers may want to exit immediately
05/07/12 new stop loss @ 34.65
04/21/12 new stop loss @ 35.05, adjust exit target to $30.50
04/19/12 planned exit for our April put: $1.30 (-13.3%)
04/18/12 prepare to exit our April $35 puts at the close tomorrow
04/14/12 new stop loss @ 35.55
04/10/12 triggered at $34.40

Entry on April 10 at $34.40
Earnings Date 07/05/12 (unconfirmed)
Average Daily Volume = 155 thousand
Listed on April 09, 2011


NetApp, Inc. - NTAP - close: 37.81 change: -0.18

Stop Loss: 39.65
Target(s): 34.50
Current Gain/Loss: - 0.2%
Time Frame: exit prior to the late May earnings report
New Positions: see below

Comments:
05/08 update: I am suggesting caution here. NTAP broke down to new relative lows and hit our trigger to launch bearish positions early this morning. Unfortunately the stock bounced back sharply. Broken support near $38.00 should be new resistance but if the market rallies tomorrow I would expect NTAP to regain the $38 level. On the other hand, a failure here, at resistance, can be used as a new entry point.

Earlier Comments:
The plan was to keep our position size small to limit our risk. We do not want to hold over the late May earnings report (date still unconfirmed). FYI: The Point & Figure chart for NTAP is bearish with a $31 target.

(small positions)

current Position: short NTAP stock @ $37.75

- or -

Long May $37 PUT (NTAP1219Q37) Entry $0.86

05/08/12 triggered @ 37.75
05/05/12 new stop loss @ 39.65, only use small positions.

Entry on May 08 at $37.75
Earnings Date 05/23/12 (unconfirmed)
Average Daily Volume = 6.2 million
Listed on May 3, 2011


St. Jude Medical - STJ - close: 37.96 change: +0.10

Stop Loss: 39.35
Target(s): 34.25
Current Gain/Loss: - 1.4%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/08 update: Warning! STJ dipped toward its April lows and bounced. Today's move looks like a potential bullish reversal pattern. Readers may want to lower their stops toward the 10 or 20-dma. I am not suggesting new positions at this time.

current Position: short STJ stock @ $37.45

- or -

Long May $37.50 PUT (STJ1219Q37.5) Entry $1.20

05/08/12 warning! Today looks like a potential bullish reversal
05/05/12 new stop loss @ 39.35
04/23/12 new stop loss @ 40.05
04/23/12 triggered at $37.45

Entry on April 23 at $37.45
Earnings Date 04/18/12
Average Daily Volume = 5.1 million
Listed on April 21, 2011


Tesoro Corp. - TSO - close: 21.55 change: -0.19

Stop Loss: 23.25
Target(s): 18.25
Current Gain/Loss: - 0.1%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
05/08 update: It was a volatile session for TSO. Shares gapped open lower at $21.53, dipped to $20.77, and then bounced back to where it opened for trading. After a six-day decline TSO looks poised for an oversold bounce thanks to the big intraday rebound today. Look for a rally into the $22.00-22.50 zone if the market moves higher from here.

Earlier Comments:
There is possible support at the $20.00 mark but we are aiming for $18.25. This is a multi-week trade. We will start with a stop loss above the simple 20-dma. FYI: The Point & Figure chart for TSO is bearish with a long-term $13.00 target.

current Position: short TSO stock @ $21.53

- or -

Long Jun $20 put (TSO1216R20) Entry $0.66

Entry on May 08 at $21.53
Earnings Date 05/02/12
Average Daily Volume = 3.3 million
Listed on May 7, 2011


Visteon Corp. - VC - close: 45.57 change: -0.92

Stop Loss: 48.25
Target(s): 40.50
Current Gain/Loss: + 0.4%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
05/08 update: VC has broken support near $46.00 and hit our trigger at $45.75. The stock closed the session with a -1.9% decline. I would still consider new positions now but if the market opens positive readers may want to hesitate on launching new positions. The big rebound intraday in the market's major indices could be trouble for the bears. FYI: The Point & Figure chart for VC is bearish with a $35 target. NOTE: VC does have options but the bid/ask spread seems too wide to trade.

current Position: short VC stock @ $45.75

05/08/12 triggered @ 45.75

Entry on May 08 at $45.75
Earnings Date 05/02/12
Average Daily Volume = 513 thousand
Listed on May 5, 2011


CLOSED BULLISH PLAYS

The Home Depot - HD - close: 50.62 change: -0.77

Stop Loss: 50.95
Target(s): 54.75
Current Gain/Loss: - 2.5%
Time Frame: exit prior to the May 15th earnings report
New Positions: see below

Comments:
05/08 update: The widespread market sell-off this morning was too much for HD. The stock spiked down through several layers of potential support and briefly traded under its 50-dma and under the $50.00 mark. Our stop loss was hit at $50.95 along the way.

Suggested Position: Long HD stock @ $52.25 exit $50.95 (-2.5%)

- or -

May $52.50 call (HD1219E52.5) Entry $0.85 exit $0.27 (-68.2%)

05/08/12 stopped out at $50.95
05/05/12 new stop loss @ 50.95
04/27/12 triggered at $52.25

chart:

Entry on April 27 at $52.25
Earnings Date 05/15/12 (confirmed)
Average Daily Volume = 8.6 million
Listed on April 26, 2011