Option Investor
Newsletter

Daily Newsletter, Thursday, 5/31/2012

Table of Contents

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

Market Wrap

Data Drags Dow Down

by Thomas Hughes

Click here to email Thomas Hughes
Economic data is pointing to further slowing of the world economy. US GDP growth in the first quarter was slower than previously expected and the current state of the economy is worrying the markets.


Declining stocks led advancing stocks by a margin of about 3:1 in early trading. By midday that changed as stocks began to rebound from the day's lows. At the day's end advancing stocks trailed declining stocks by a small margin.


Futures remained flat this morning as the schedule of economic data releases carried on. Jobless claims, GDP and Chicago PMI were all disappointing and indicate further weakening of the US economy.

Initial jobless claims posted a surprising spike in numbers for the last week reported. Claims jumped 10,000 from an upwardly revised 373,000 claims to 383,000 claims in the week ending May 25, 2012. The previous weeks data was revised upwardly by 3,000 claims. Combined with this weeks spike jobless claims appear to be on the rise. This is coincident with a 66% increase in planned job cuts, as reported this morning by Challenger. The consensus estimate of initial claims for the week was 370,000, well below the actual number. The four week moving average of initial claims rose after falling sharply in the previous few weeks. The average increased by 3,750 to 374,000.


Continuing claims for unemployment dropped this week to 3.24 million. The drop of 36,000 claims continues the downward trend in continuing claims and suggests that people may be finding work after an initial week of unemployment.


The total number of Americans filing for all forms of unemployment benefits also fell. Total claims declined by around 30,000 to 6.14 million. The decline in total claims has been going on since the end of last year but the rate of decline is slowing. This weeks number is the smallest drop in total claims since February.


ADP released its private sector payroll data today, ahead of the release of Federal non-farm payroll statistics tomorrow. The ADP figures were well below the consensus estimates and led traders to speculate on further weakening of the economy. According to ADP the private sector added about 133,000 new jobs in May. Analysts had been expecting a much larger increase of 157,000 new jobs. Aprils figures were revised down to 115,000. Tomorrow the federal jobs number will be released. Expectations are for about 170,000 new non-farm jobs to have been created this month. The Institute of Supply Management's Chicago PMI was also below expectations and gave further sign of a weak domestic economy. Analysts had been expecting a reading of 56.5, which would have been a slight increase over last months 56.2. Instead, the markets were disappointed with a reading of 52.7. The Chicago PMI is a measure of mid-west manufacturing and is the last of this months regional readings ahead of tomorrows ISM index reading. Manufacturing is expected to be expanding, the worry is over how much or how little momentum it will have going forward this year.

We also got the second estimate on first quarter GDP this morning. Analysts had been ready for a lower estimate than the previous 2.2%. The consensus was 2% GDP growth which was just a hair high of the actual 1.9% reported.


The slowing economy has help mortgage interest rates. The rate on a 30 year fixed mortgage fell to a new all time low of 3.75%.

Interest rates on US government debt fell today as investors sought out safer havens for investment. The rate on the US 30 year bond dropped to an intra-day low of 2.585%. The rate on thirty year bonds is approaching lows set in December of 2009.

Thirty Year Bond Rates, daily

Asian stocks ended the day lower as data from the region reveals more weakness in the economy. India reported its first quarter GDP as 5.3%, an otherwise impressive number but missing analysts forecasts of 6.1%. Japan also reported some weaker than expected news. Industrial output for the island nation rose a mere .2%, much lower than forecast. China's slowing economy, the weak Euro and rising inventories are blamed. The Nikkei lost -1.05%, the Heng Seng lost -0.32% and the China Index lost 0.52%.

Europe is still in the spotlight as leaders, regulators and officials question what to do. There is still no clear direction to a solution. The weak data here at home did not help confidence abroad and European shares ended their trading day decidedly mixed. The FTSE gained 0.18%, the CAC gained 0.05% and the Xetra DAX lost -0.26%.

Energy prices continued to fall on fears of global slowdown. That, and record US crude inventories, have sent the price of crude oil down by another 1%. Crude inventories were released today because of the Memorial Day holiday and surprised energy traders with a larger than expected injection. The rise in stockpiles took inventories to near 30 year high levels. Brent crude, light crude and gasoline all fell. Natural gas prices continued their climb and added just over 2% in today's trading.

Today also brought the release of same-store sales figures for some of the nations retailers. Most retailers posted some gains in same-store sales but many failed to meet the expectations of analysts. Target, Macy's, TJ Maxx and Limited all beat forecasts. Discount retailer Costco fell just shy of the consensus and Kohl's not only failed to increase sales but actually lost more than expected.

Target reported that total sales increased by 5% and same-store sales by 4.4%. This came in at the high end of their own expectations and above the consensus estimate. This is on the heels of its recent first quarter report of an 11% gain in quarterly adjusted earnings. Target shares jumped in pre-market trading and opened the day higher. Target ended the day maintaining a small gain over yesterday.

Target, daily

Macy's reported sales were up 4.1% in the month, 4.2% on a same-store basis. This is above expectations of 4% same-store growth. In the release online sales were an important driver of the company's success. Macy's reported strong growth across geographic and category lines. Year-to-date Macy's sales are 4.3%. The stock retreated on the news and is trading just below the 30 day moving average.

Macy's, daily

TJ Maxx increased its same-store sales by over 8%. The strength in sales led the company to update its second quarter guidance. The release cited strength in every business across the US, Canada and Europe. The company has exceeded it's sales expectations so far in the period and is looking for quarterly results to be at the high of the previous range around $0.50 per share. TJ Maxx climbed on the news. Technical indicators are turning bullish on this one but today's advance was stopped at near term resistance.

TJ Maxx, daily

Limited Brands also beat expectations. The company reported comparable store sales for the month increased by 6% and by 7% for the 17 week period with the same ending date. The stock dropped sharply on the news and fell below recent support.

Limited Brands, daily

Costco's comp-store sales fell just shy of the consensus estimate. Analysts had been looking for a gain of around 4.1-4.4%. US sales led the company with a 5% increase, Europe lagged with a 3% increase in comp-store sales. Declining gasoline prices had a negative impact on earnings for the one month period but high prices throughout the quarter are positively impacting quarterly results. The stock gained about 1% today on the news but is still below resistance.

Costco, daily

Kohl's was one of two big sales misses in the retail sector. The clothing retailer was expected to post a decline in same-store sales of about -1.2% but shocked analysts with a much larger than expected 4.2% decline in comparable store sales. The company reported a decline in total sales as well despite opening several new stores. The company's CEO stated that business would be “hindered” until the back-to-school season. Kohl's stock dropped over 5% today.

Kohl's,daily

Wet Seal, retailer of clothing for young women, posted an 8.8% drop in comparable store sales. The decline was larger than the expected 8.3% decline expected by analysts. In the statement management says that the company performed within expectations and is positioning itself for back-to-school shoppers. The stock trade down today but is off 12 month lows set last week.

Wet Seal, daily

Facebook and its IPO are still making big headlines. The stock faced more selling pressure today and dropped below $27 for a short time. The stock was buoyed by the late after rally which brought the major indexes back into positive territory. Adding to the negative pressure was price target down-grade by S&P Capital from $30 to $27 dollars. The stock managed to rally into the close today in spite of the down grade. Along with declining share value Facebook and its underwriters both face numerous lawsuits stemming from the IPO and possible investigations into the events leading up to it. This is on top of inquiries into the Instagram deal Mark Zuckerberg set-up last month without the OK from the board of directors.

Facebook, one week

Social Media game maker and Facebook rival Zynga received an upgrade today. Analysts at Robert W. Baird raised the stock's rating to outperform citing that “headwinds...are priced in” and that Zynga has future that is not dependent on Facebook. Analyst Colin Sebastian argued in his report that the opportunities in mobile devices are “too compelling to ignore”. The traders jumped on the report and sent the stock higher by over 5%. Zynga is still trading near all-time lows.

Zynga, daily

Other social media website LinkedIn traded down today. The stock has been trading down since reporting a 100% increase in earnings for the first quarter of 2012 over the same period last year. In the same statement LinkedIn raised its full year guidance for revenue and earnings.

LinkedIn, daily

Liberty Media is increasing its pursuit of Sirius-XM. It is seeking approval to move forward with takeover plans that include buying more stock. Liberty now owns over 46% of Sirius and the move is intended to give Liberty Media de facto control of Sirius-XM until it can establish a majority ownership. The stock gained more than 1% on the news.

Sirius XM Radio, daily

The Dow had a choppy day today. The index was weighed down by economic data and expectations of more data tomorrow. Traders were able to shrug off most of the bad news by midday and rallied the index back into positive territory. The small gains were short lived as the bears came out in force during the last 40 minutes of trading.

Dow, one day

The near term trend is still down. Bearish momentum is declining but tomorrow's data points could add downward pressure on the markets.

Dow, daily

The Dow is trading below long term support/resistance and the 200 day moving average.

Dow, weekly

The S&P 500 barely made it into positive territory before plunging back below yesterday's closing price. The index is trading just above a support line at 1300 with near term momentum near neutral. Longer term the index has bearish momentum and is trading below the 200 day moving average in tandem with the Dow.

S&P, daily

S&P, weekly

The VIX set a new intra-day high today. The fear indicator is moving upward from the short term moving average and has momentum behind it.

The VIX, daily

The Nasdaq was not quite as volatile as the other two major indexes. Momentum in the tech heavy index has turned bullish today but is still bearish in the long term.

Nasdaq, daily

Tomorrow is a big day of data for the markets to digest. About 9 areas of information will be updated tomorrow, giving new insights into the stagnating domestic and global economy. Look out for car/truck sales, personal spending and income, workweek and earnings, construction spending, the ISM index reading, PCE and the two real biggies, unemployment and payrolls. Jobs creation is the most important factor in the economic recovery right now and is being carefully watched. Expectations for jobs creation in May is high at an estimated 170,000. A miss, especially a big one, could be market moving.

Thomas Hughes


New Plays

Technology & Basic Materials

by James Brown

Click here to email James Brown


NEW BEARISH Plays

Coherent Inc. - COHR - close: 44.14 change: -1.31

Stop Loss: 46.25
Target(s): 40.50
Current Gain/Loss: + 0.0%
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
COHR is in the scientific and technical instrument making business. After a brief pause sideways last week the stock has resumed its bearish trend. COHR just broke down to a new relative low today.

I am suggesting small bearish positions at the open tomorrow. We'll use a stop loss at $46.25. Our exit target is $40.50 since the $40.00 level should be support.

(small positions)

Suggested Position: short COHR stock @ (the open)

Annotated chart:

Entry on June xx at $ xx.xx
Earnings Date 07/26/12 (unconfirmed)
Average Daily Volume = 127 thousand
Listed on May 31, 2011


Schnitzer Steel - SCHN - close: 26.08 change: -1.28

Stop Loss: 27.25
Target(s): 21.50
Current Gain/Loss: unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Steel and resource names are underperforming. Shares of SCHN look poised to break down from its two-week sideways consolidation in the $26-28 area. The May 18th low was $25.59. I am suggesting a trigger to launch small bearish positions at $25.45. If triggered our target is $21.50. We want to keep our position size small.

Trigger @ 25.45 (small positions)

Suggested Position: short SCHN stock @ (trigger)

- or -

buy the Jul $25 PUT (SCHN1221S25) current ask $1.80

Annotated chart:

Entry on June xx at $ xx.xx
Earnings Date 06/28/12 (unconfirmed)
Average Daily Volume = 474 thousand
Listed on May 31, 2011



In Play Updates and Reviews

DeVry Inc. Hits Our Target

by James Brown

Click here to email James Brown

Editor's Note:
Shares of DV hit our bearish exit target this morning. Meanwhile POT was stopped out. We want to exit our FIO trade at the open tomorrow.

Current Portfolio:


BULLISH Play Updates

Cirrus Logic - CRUS - close: 28.72 change: +0.26

Stop Loss: 26.35
Target(s): 32.00
Current Gain/Loss: + 1.3%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
05/31 update: Traders were buying the dip near $28.00 today and CRUS eventually bounced higher. Shares managed to outperform the market with a +0.9% gain. If both CRUS and the market open positive tomorrow readers could use it as a new bullish entry point. More conservative traders may want to inch up their stop loss.

current Position: Long CRUS stock @ $28.35

- or -

Long Jul $30 call (CRUS1221G30) Entry $1.85

05/29/12 triggered @ 28.35

Entry on May 29 at $28.35
Earnings Date 07/19/12 (unconfirmed)
Average Daily Volume = 2.4 million
Listed on May 26, 2011


Market Leader, Inc. - LEDR - close: 4.50 change: +0.01

Stop Loss: 4.15
Target(s): 6.00
Current Gain/Loss: + 3.4%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
05/31 update: LEDR bounced off the $4.40 level and its 10-dma this morning and managed to tag a new relative high above $4.61 before paring its gains. I am not suggesting new positions at current levels.

Earlier Comments:
We'll try and limit our risk by keeping our position size small. FYI: The Point & Figure chart for LEDR is bullish with a $6.75 target. Remember, small positions. Don't go overboard just because the share price is low. I would consider this a higher-risk trade.

Current Position: Long LEDR stock @ $4.35

05/29/12 new stop loss @ 4.15
05/23/12 new stop loss @ 3.95
05/21/12 triggered at $4.35

Entry on May 21 at $4.35
Earnings Date 05/01/12
Average Daily Volume = 77 thousand
Listed on May 19, 2011


BEARISH Play Updates

Abercrombie & Fitch - ANF - close: 33.54 change: -0.35

Stop Loss: 36.25
Target(s): 30.25
Current Gain/Loss: - 1.1%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/31 update: ANF opened at $33.93 and then spiked down to $32.76 intraday before paring its losses. I would still consider new positions now or you could wait for a bounce back into the $34.50-35.00 zone as an entry point.

current Position: short ANF stock @ $33.93

- or -

Long Jul $30 PUT (ANF1221S30) Entry $1.05

Entry on May 31 at $33.93
Earnings Date 08/15/12 (unconfirmed)
Average Daily Volume = 3.9 million
Listed on May 30, 2011


American Railcar Ind. - ARII - close: 21.15 change: +0.34

Stop Loss: 22.75
Target(s): 20.05 or 18.55
Current Gain/Loss: + 4.9%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
05/31 update: I couldn't find any news to explain ARII's relative strength today (+1.6%). You'll notice that the bounce stalled near $21.00, which as previous support should be new resistance. I am not suggesting new positions at this time.

Earlier Comments:
We have two targets. Our conservative target is $20.05. Our aggressive target is $18.55. FYI: The Point & Figure chart for ARII is bearish with a long-term $14.00 target.

Suggested Position: short ARII stock @ $22.23

05/26/12 new stop loss @ 22.75
05/17/12 new stop loss @ 23.55

Entry on May 16 at $22.23
Earnings Date 07/25/12 (unconfirmed)
Average Daily Volume = 108 thousand
Listed on May 15, 2011


Ebix, Inc. - EBIX - close: 17.40 change: -0.13

Stop Loss: 18.35
Target(s): 16.15
Current Gain/Loss: + 2.8%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/31 update: EBIX slipped to another new relative low today. We are adjusting our stop loss down to $18.35. I am not suggesting new positions at this time.

Earlier Comments:
Our first target is $16.15. We want to keep our position size small to limit our risk because EBIX could see a short squeeze. The most recent data listed short interest at 29% of the small 34.6 million share float. Readers may want to use put options to limit risk instead of shorting the stock.
FYI: The Point & Figure chart for EBIX is bearish with a $12.00 target.

Current Position: short EBIX stock @ $17.90

- or -

Long JUN $18 PUT (EBIX1216R18) Entry $0.90

05/31/12 new stop loss @ 18.35
05/24/12 triggered @ 17.90

Entry on May 23 at $17.90
Earnings Date 08/07/12 (unconfirmed)
Average Daily Volume = 386 thousand
Listed on May 23, 2011


Fusion-io, Inc. - FIO - close: 20.88 change: +0.77

Stop Loss: 22.05
Target(s): 17.00
Current Gain/Loss: - 3.9%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/31 update: Shares of FIO have been way too volatile recently. The stock is up or down plus or minus 3% to 5% every day. The stock was showing too much relative strength today as well. I am suggesting we exit positions at the open tomorrow morning.

Earlier Comments:
This is a higher-risk, aggressive trade. We want to keep our position size small because there has been some M&A rumors with FIO as a takeover target. Traders may want to limit their risk by using put options. FYI: The Point & Figure chart for FIO is bearish with a $16.00 target.

(small positions)

Suggested Position: short FIO stock @ $20.09

- or -

Long Jun $17.50 PUT (FIO1216R17.5) Entry $0.85

05/31/12 prepare to exit early at the open tomorrow

Entry on May 18 at $20.09
Earnings Date 08/02/12 (unconfirmed)
Average Daily Volume = 4.1 million
Listed on May 17, 2011


Foster Wheeler AG - FWLT - close: 17.89 change: -0.27

Stop Loss: 19.75
Target(s): 17.25
Current Gain/Loss: + 8.4%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/31 update: FWLT plunged to 17.40 this morning and spent the rest of the session climbing back toward the $18 level. Readers may want to start taking profits now and/or lowering their stop loss. Our exit target is $17.25. I am not suggesting new positions at this time.

current Position: short FWLT stock @ $19.53

- or -

Long Jun $20 PUT (FWLT1216R20) Entry $1.40

05/26/12 new stop loss @ 19.75
05/22/12 new stop loss @ 20.35

Entry on May 17 at $19.53
Earnings Date 08/02/12 (unconfirmed)
Average Daily Volume = 1.4 million
Listed on May 16, 2011


Hospira Inc. - HSP - close: 31.26 change: -0.66

Stop Loss: 32.35
Target(s): 30.25
Current Gain/Loss: + 5.1%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
05/31 update: HSP has broken down to new relative lows. Furthermore the stock did not see that much of a bounce this afternoon. The stock looks poised to accelerate lower. We are adjusting our stop loss down to $32.35. I am not suggesting new positions at this time.

FYI: Readers should note that HSP does have above average short interest. The most recent data listed short interest at 7.8% of the 165 million share float.

current Position: short HSP stock @ $32.95

- or -

Long Jun $30 PUT (HSP1216R30) Entry $0.35

05/31/12 new stop loss @ 32.35
05/23/12 new stop loss @ 33.55
05/14/12 opened on the gap down at $32.95, trigger was 33.20

Entry on May 14 at $32.95
Earnings Date 07/26/12 (unconfirmed)
Average Daily Volume = 1.1 million
Listed on May 9, 2011


Netgear Inc. - NTGR - close: 31.39 change: +0.66

Stop Loss: 31.55
Target(s): 26.00
Current Gain/Loss: - 5.5%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
05/31 update: The situation does not bode well for our bearish NTGR trade. This stock is showing too much relative strength. Shares closed near their 10-dma this afternoon. The intraday high was $31.53 while we have a stop at $31.55. If there is any follow through tomorrow we will most likely get stopped out. I am not suggesting new positions at this time.

current Position: short NTGR stock @ $29.75

- or -

Long Jun $30 PUT (NTGR1216R30) Entry $1.70

05/25/12 triggered @ 29.75

Entry on May 25 at $29.75
Earnings Date 07/26/12 (unconfirmed)
Average Daily Volume = 549 thousand
Listed on May 24, 2011


Silicon Motion Tech. - SIMO - close: 13.54 change: -0.25

Stop Loss: 14.15
Target(s): 10.25
Current Gain/Loss: unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
05/31 update: SIMO is still drifting lower. We are waiting for a breakdown under support. Currently the plan is to launch bearish positions if SIMO hits $12.85.

Trigger @ 12.85

Suggested Position: short SIMO stock @ (trigger)

- or -

buy the Jun $15 PUT (SIMO1216R15)

Entry on May xx at $ xx.xx
Earnings Date 07/26/12 (unconfirmed)
Average Daily Volume = 819 thousand
Listed on May 26, 2011


Teva Pharmaceuticals - TEVA - close: 39.19 change: -0.01

Stop Loss: 40.05
Target(s): 35.25
Current Gain/Loss: - 3.6%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/31 update: TEVA spiked higher this morning but gains faded and the stock eventually closed virtually unchanged on the session. I remain cautious here and we're not suggesting new positions.

I checked two different quote feeds and both of them listed the intraday high at $39.91. Yet if I look at my intraday charts TEVA appeared to trade over the $40.00 mark several times this morning.

current Position: short TEVA stock @ $37.81

- or -

Long Jun $37.50 PUT (TEVA1216R37.5) Entry $0.95

05/30/12 trade opened with TEVA gapping down at $37.81

Entry on May 30 at $37.81
Earnings Date 07/25/12 (unconfirmed)
Average Daily Volume = 4.8 million
Listed on May 29, 2011


Marriott Vacations Worldwide - VAC - close: 28.30 change: -0.37

Stop Loss: 29.25
Target(s): 25.25
Current Gain/Loss: - 0.7%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/31 update: VAC is still churning between short-term support near $27.60 and overhead resistance near $29.00. I remain cautious here and would wait for a new drop under $27.60 before considering new bearish positions.

(small positions)

current Position: short VAC stock @ $28.10

05/26/12 new stop loss @ 29.25

Entry on May 25 at $28.10
Earnings Date 08/02/12 (unconfirmed)
Average Daily Volume = 495 thousand
Listed on May 24, 2011


CLOSED BULLISH PLAYS

Potash Corp. - POT - close: 39.53 change: +0.11

Stop Loss: 38.90
Target(s): the 50-dma
Current Gain/Loss: - 3.4%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
05/31 update: Thursday proved to be a bit of a volatile day for shares of POT. The stock spiked down to $38.60 intraday before bouncing back and actually closing in positive territory. Unfortunately our stop loss was hit at $38.90.

Earlier Comments:
POT can be a volatile stock so I am suggesting we keep our position size small.

(small positions)

closed Position: Long POT stock @ $40.30 exit $38.90 (-3.4%)

- or -

JUN $40 call (POT1216F40) Entry $1.36 exit $0.72 (-47.0%)

05/31/12 stopped out at $38.90
05/29/12 triggered @ 40.30

chart:

Entry on May 29 at $40.30
Earnings Date 07/26/12 (unconfirmed)
Average Daily Volume = 5.4 million
Listed on May 24, 2011


CLOSED BEARISH PLAYS

DeVry Inc. - DV - close: 27.33 change: -0.18

Stop Loss: 29.05
Target(s): 26.75
Current Gain/Loss: + 9.7%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/31 update: Target achieved.

The market's widespread decline this morning helped push DV to an intraday low of $26.50. Our exit target was hit at $26.75.

closed Position: short DV stock @ $29.62 exit $26.75 (+9.7%)

- or -

Jun $30 PUT (DV1216R30) Entry $1.35 exit $3.25*(+140.7%)

*exit price on the option is an estimate. the option did not trade at the time of our exit!
05/31/12 target hit at $26.75
05/26/12 new stop loss @ 29.05
05/24/12 adjusting exit target to $26.75
05/17/12 new stop loss @ 30.35

chart:

Entry on May 14 at $29.62
Earnings Date 08/09/12 (unconfirmed)
Average Daily Volume = 1.0 million
Listed on May 12, 2011