Option Investor
Newsletter

Daily Newsletter, Thursday, 6/21/2012

Table of Contents

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

Market Wrap

Dow Dives on Weakening Outlook

by Thomas Hughes

Click here to email Thomas Hughes
Economic data from here at home and around the world continued to erode expectations for the second half of the year. Unemployment, PMI and Philly Fed readings confirmed the slowing economy and combined with news from Europe and Asia to sandbag the major indexes.



The unemployment data continues to support an increase in joblessness and a higher unemployment rate later in the year. The claims for initial unemployment benefits fell marginally from an upwardly revised figure to 387,000 in the week ending June 16 but initial claims have been trending up for two months, ever since the “Easter Spike”. The uptrend in new claims has brought the weekly figure to very near the post Easter highs. The four week moving average, a better indicator of the trend also climbed this week to a six month high and could be a signal of rising unemployment.


Continuing claims for unemployment, claims for a second week of benefits, remained unchanged from the previous week at 3.3 million. The number remains above the years lows and marks the third week of higher claims. Continuing claims lags the initial claims figures by a week and could continue to rise in the light of the recent up trend in first time claims for benefits.


Total claims for unemployment continued their decline to the years low. These figures lag initial claims by two weeks and could also see an increase over the next few weeks if recently laid off job seekers don't find work. Total claims came in at 5.83 million, down about 1,100.


The Philadelphia Federal Reserve business activity index made a surprising drop in May. The index came in at -16.6, well below the analysts expectations indicating factory output in the Mid-Atlantic region are slowing faster than anticipated. The one positive in today's data was an increase in the Index of Leading Indicators. The index increase by a slim 0.3%, ahead of the expected 0.1%.

Markits flash PMI reading of US manufacturing hit an 11 month low. The indicator, which still shows some expansion, fell to 52.9 from 54 in May. The main reasons cited for the decline were weak demand in China and Europe. New orders and hiring were the biggest decliners within the composite reading. The analyst also release PMI for Europe which remained steady at three year lows. The composite reading of 46 shows shows a moderately contracting European manufacturing sector.

China also reported some disappointing news today. Factory output in the country fell to an 8 month low. Declining exports are reported as the main reason for the low numbers. Chinese stocks shed about 1% today on its weak data. The Hand Seng Index dropped over 250 points to close 1.3% lower. The Shanghai Composite lost 32 points to close 1.4% lower. Japan managed to eek out a gain in today's trading. The Nikkei Average gained 71.76 to close higher by 0.82%

The European markets were hit modestly today. The weaker data and lack of change in FOMC interest rate policy failed to inspire confidence but did not spark any heavy selling. The Xetra Dax lost -0.64%, the CAC 40 shed -0.24% and the FTSE dropped -0.91%.

Some independent auditors released estimates that Spanish banks still need close to 60 billion Euros after the close of European trading. The estimates are below the 100 billion that is available to Spanish banks from the euro zone. The news could impact European markets tomorrow and helped to send US stock to their lows.

Oil fell over 2% today. The deteriorating economic picture weighed heavily on the commodity. The oil industry was one of the days biggest losers in the wake of the sell off. The Market Vector Oil Industry ETF (OIH) dropped more than 3.5% in today's trading. The ETF has been trending down for the last few months and is approaching 12 month lows.

OIH, weekly

Gold fell over $40 today in the wake of yesterday's FOMC decision on interest rates. The move was close to 3% of the metals value. The price of silver was hit even harder, losing more close to 5%. The CBOE gold index lost about 5% today.

CBOE Gold Index, daily

Aubrey Mclendon stepped down as chairman of the board for Chesapeake Energy today. Five new board members were instated and include a representative of Carl Icahn. The stock is bouncing down from resistance just below twenty, losing -3.7% today.

Chesapeake Energy, daily

Three big names reported earnings after the bell yesterday that were among today's biggest losers. Micron Technology posted a 3rd quarter loss of $0.32 per share. This is a wider loss than the previous quarter and the same period in the previous year. The loss is in the face of improving revenue that has been increasing on sales volume, margins and pricing. The business suffered a $58 million charge to revenue that impacted the current results. The stock lost around 3.5% today.

Micron Technology, daily

Redhat, maker of Linux based open source software solutions for business beat the streets estimations for first quarter earnings but lowered its 2nd quarter guidance. The company reported that GAAP and non-GAAP eps were up 12% and 25% respectively over last year with cash flow up more than 38%. The second quarter outlook stole the attention though as the company announced that sales would fall below estimates based on weakening worldwide demand. The stock dropped more than 10% in pre market trading but found support at open. The stock recovered more than half of its early loss on heavy volume.

Redhat, daily

Bed Bath and Beyond lost more than 4.5% after its earning announcement, dropping back below its short term moving average. The retailer reported a 15% gain in quarterly earnings but profits were hurt by shrinking margins. The second quarter outlook was also disappointing and helped to send the stock down .

Bed Bath and Beyond, daily

A couple of big names reported earnings today as well. Carmax managed to increase its revenue over last year but shrinking margins had a negative impact on the bottom line. Slowing wholesale and retail business were blamed for the miss. The stock has been in a downtrend for several months and today's news caused the price to drop close to 7%.

Carmax, daily

ConAgra Foods was one of very few positively performing stocks today. The company reported a loss per share due to a change in accounting procedures but on an adjusted basis the earnings actually improved by 9% over last year. The good news was further buoyed by 2013 expectations for continued earnings growth in the range of 8-9%. The stock jumped on high volume today, gaining more than 4%.

ConAgra, daily

Aside from ConAgra, which was the only really bright spot on the Spider Sector heat map today, the utility stocks were the only group managing to hold its ground. The utility sector spider (XLU) climbed in early trading but later fell to end the day just above the short term moving average. The utility sector is always a good place to find dividends and was one of last years best performing areas. Duke Energy, one of the biggest holdings of the utility ETF, currently pays around 4.4%. The stock has been moving upward after consolidating earlier in the year and has been outperforming the general market.

XLU, daily

Duke Energy,daily

Today's best performing Dow stocks were also some of the highest yielding. The top five average well over 4% dividend yield with AT&T leading the pack at 5%. The stock has been consolidating after making a nice move up and is trading above its short term average. The stock has support and is trading near recent high levels.

AT&T, daily

Verizon is yielding about 4.4% currently and is also trading near recent high levels. The two big telecoms are also both divergent from momentum and near overbought levels.

Verizon, daily,

Merck and Pfizer are next on the list, yielding around 4.25% and 3.9% respectively. Merck is one of the few stocks to trade in positive territory today. The stock has been range bound since the first of the year. Pfizer has only performed slightly better than Merck. The stock is at the top of its range and is trading on weak volume.

Merck, daily

Pfizer, daily

McDonald's decline over the past four months has improved its yield to near 3.2%, earning it a mention today. The stock has been trading around a support level at $87 and closed near that number today.

McDonald's, daily

An impending downgrade of the financial sector from Moody's also had the markets on edge today. The downgrade was released after the bell and included 15 international investment banks, including five of America's largest financial institutions. JP Morgan, Bank of America, Citigroup, Goldman Sachs and Morgan Stanley were all included. The downgrades were not unexpected but still managed to attract a lot of attention. There was nothing surprising in the announcement, the one big question was if Morgan Stanley would get cut 2 or 3 notches, the final call was for 2 notches. The financial sector was one of the hardest it today with the financial sector spider (XLF) falling around 2%, closing below its short term moving average.

XLF, daily

The VIX surged over 15% today and crossed back above the 20 level.

The VIX, daily

The combination of economic data points, deteriorating corporate outlook and imminent downgrade of the banking sector brought the Dow average down in one of its biggest declines this year. The index lost about 1.75% during the day as one bad announcement after another added new selling pressure. The index moved below it short term moving average in the final hour of trading and closed near the days lows. The near term trend is down with the closest support equal to the lows set last month near 12,100. In the longer term, the Dow has managed to remain above the 200 day moving average and bearish momentum is subsiding.

Dow, daily

Dow, weekly

The S&P and Nasdaq Indexes followed the Dow down today, logging declines greater than 2%. The S&P and the tech heavy Nasdaq both dropped below their short term moving averages.

S&P 500, daily

Nasdaq, daily

Economic data will continue to drive the markets until real signs of stabilization materialize. Earnings reports are starting to come in for second quarter of calendar 2012 and will shed a lot of light on the expectations for the second half of the year. So far, expectations for corporate profits are weak, supported by the declining economies of Europe and Asia. Our own unemployment data is troubling, suggesting a rise in the unemployment rate and a further drag on the struggling economy.

There are no scheduled economic reports scheduled for tomorrow so news and today's trading will be the biggest factors affecting tomorrows trading. Next week heats up again with an onslaught of data, including the final revision of first quarter US GDP.

Thomas Hughes


New Plays

Communication Equipment

by James Brown

Click here to email James Brown


NEW BEARISH Plays

Acme Packet, Inc. - APKT - close: 20.33 change: -0.87

Stop Loss: 21.05
Target(s): 17.00
Current Gain/Loss: unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
APKT provides network delivery services for voice, video and data. Unfortunately for shareholders the stock appears to be in a long-term downtrend that mirrors the impressive up trend from 2010. The market's recent weakness has pushed APKT to round-number support at the $20.00 mark.

I am suggesting we use a trigger to open bearish positions at $19.90. If triggered we'll aim for a drop to $17.00. More aggressive traders could aim lower since the Point & Figure chart for APKT is bearish with a $13.00 target. However, we want to make sure and keep our position size small since being short APKT is a popular position. The most recent data listed short interest at 18.7% of the 58.2 million share float.

Trigger @ 19.90 *Small Positions*

Suggested Position: short APKT stock @ (trigger)

- or -

buy the Jul $20 PUT (APKT1221S20) current ask $1.20

Annotated chart:

Entry on June xx at $ xx.xx
Earnings Date 07/19/12 (unconfirmed)
Average Daily Volume = 1.6 million
Listed on June 21, 2011



In Play Updates and Reviews

Widespread Market Reversal

by James Brown

Click here to email James Brown

Editor's Note:
The U.S. stock market has reversed sharply lower on another round of disappointing economic reports.

ALLT and HD were stopped out.

Current Portfolio:


BULLISH Play Updates

McMoRan Exploration - MMR - close: 9.97 change: -0.43

Stop Loss: 9.49
Target(s): 13.50
Current Gain/Loss: - 3.7%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
06/21/12 update: The energy sector was crushed today and MMR was no exception. Shares lost -4.1% and the close under $10.00 is technically bearish. More conservative traders may want to raise their stop loss. I am not suggesting new positions at this time.

Earlier Comments:
I do see potential resistance at $11.50 and the simple 200-dma but we're setting our multi-week target at $13.50.

current Position: Long MMR stock @ $10.35

- or -

Long Aug $10 call (MMR1218H10) Entry $1.45

06/19/12 triggered @ 10.35

Entry on June 19 at $10.35
Earnings Date 07/17/12 (unconfirmed)
Average Daily Volume = 2.5 million
Listed on June 18, 2011


Sprint-Nextel Corp. - S - close: 3.18 change: +0.05

Stop Loss: 2.89
Target(s): 3.70
Current Gain/Loss: + 1.6%
Time Frame: 6 to 9 weeks
New Positions: see below

Comments:
06/21/12 update: Sprint managed to shrug off the market's broad-based sell-off and shares continued to march higher. The relative strength is encouraging. Readers might want to wait for a dip back towards the $3.00 level, which should offer some support.

current position: Long S stock @ $3.13

Entry on June 20 at $ 3.13
Earnings Date 07/26/12 (unconfirmed)
Average Daily Volume = 53 million
Listed on June 19, 2011


The TJX Companies - TJX - close: 42.41 change: -0.70

Stop Loss: 41.15
Target(s): 47.00
Current Gain/Loss: - 1.9%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
06/21/12 update: Positive analyst comments on TJX today did not spare the stock from the market's sharp decline. Shares of TJX fell -1.6% but that was better than the S&P 500's -2.2% drop or the NASDAQ's -2.4% decline.

Look for a bounce near the 10-dma or the $42.00 level before considering new positions.

current Position: Long TJX stock @ $43.24

- or -

Long Jul $45 call (TJX1221G45) Entry $0.40

Entry on June 19 at $43.24
Earnings Date 08/14/12 (unconfirmed)
Average Daily Volume = 5.7 million
Listed on June 18, 2011


Ventas, Inc. - VTR - close: 60.62 change: -0.64

Stop Loss: 57.90
Target(s): 64.50
Current Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Comments:
06/21/12 update: VTR is still holding up reasonably well. The stock only fell -1.0%. Right now the plan is to buy calls on a dip at $60.00. more conservative traders may want to wait and see if VTR dips to $59.50 instead as their entry point.

Buy a dip at $60.00

Suggested Position: buy VTR stock @ (trigger)

06/18/12 Entry point conditions were not met this morning.
Adjust strategy to buy a dip at $60.00.

Entry on June xx at $ xx.xx
Earnings Date 08/02/12 (unconfirmed)
Average Daily Volume = 1.9 million
Listed on June 16, 2011


BEARISH Play Updates

Eaton Corp. - ETN - close: 37.78 change: -1.45

Stop Loss: 40.35
Target(s): 35.25
Current Gain/Loss: +4.5%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
06/21/12 update: It was a good day for bearish trades and ETN plunged -3.6%. The breakdown to new lows is bearish. I am not suggesting new positions at this time.

current Position: short ETN stock @ $39.54

- or -

Long Jul $40 PUT (ETN1221S40) Entry $1.45

Entry on June 21 at $39.54
Earnings Date 07/23/12 (unconfirmed)
Average Daily Volume = 5.7 million
Listed on June 20, 2011


Schnitzer Steel - SCHN - close: 23.96 change: -0.77

Stop Loss: 26.75
Target(s): 21.50
Current Gain/Loss: + 5.9%
Time Frame: exit prior to earnings on June 28th,
New Positions: see below

Comments:
06/21/12 update: SCHN continues to underperform as well. Shares gave up another -3.1% today. Readers could use this move today as a new entry point but keep in mind we plan to exit prior to the earnings report on June 28th.

The plan was to keep our position size small.

(small positions)

current Position: short SCHN stock @ $25.45

- or -

Long Jul $25 PUT (SCHN1221S25) Entry $2.10*

06/04/12 new stop loss @ 26.75
*06/01/12 entry price on the option is an estimate. Option failed to trade on Friday.

Entry on June 01 at $25.45
Earnings Date 06/28/12 (unconfirmed)
Average Daily Volume = 474 thousand
Listed on May 31, 2011


CLOSED BULLISH PLAYS

Allot Communications - ALLT - close: 25.93 change: -2.10

Stop Loss: 25.99
Target(s): 29.90
Current Gain/Loss: - 4.6%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
06/21/12 update: The market's widespread reversal lower was exaggerated in shares of ALLT today. The stock actually tagged a new relative high this morning and then plunged to a -7.5% loss by the closing bell. Our stop loss was hit at $25.99.

Earlier Comments:
We want to keep our position size small.

*Small Positions*

closed Position: Long ALLT stock @ $27.25 exit $25.99 (-4.6%)

- or -

Jul 30 call (ALLT1221G30) Entry $0.70 exit $0.15 (-78.5%)

06/21/12 big market drop pushed ALLT to our stop loss @ 25.99
06/18/12 triggered @ 27.25

chart:

Entry on June 18 at $27.25
Earnings Date 07/31/12 (unconfirmed)
Average Daily Volume = 584 thousand
Listed on June 12, 2011


Home Depot, Inc. - HD - close: 51.26 change: -1.57

Stop Loss: 51.35
Target(s): 58.50
Current Gain/Loss: - 3.2%
Time Frame: 6 to 9 weeks
New Positions: see below

Comments:
06/21/12 update: HD was not immune to the market's sharp decline. Shares broke down under short-term support and hit our stop loss at $51.35.

*Small Positions*

closed Position: Long HD stock @ $53.05 exit $51.35 (-3.2%)

- or -

Aug $55 call (HD1218H55) Entry $0.97 exit $0.49 (-49.4%)

06/21/12 stopped out
06/19/12 triggered @ 53.05
06/16/12 we want to keep our position size small!

chart:

Entry on June 19 at $53.05
Earnings Date 08/14/12 (unconfirmed)
Average Daily Volume = 14.3 million
Listed on June 12, 2011