Option Investor
Newsletter

Daily Newsletter, Thursday, 7/5/2012

Table of Contents

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

Market Wrap

Dow Down On Mixed Data

by Thomas Hughes

Click here to email Thomas Hughes
Future's for the major market indexes were slightly lower going into today's open. A string of mixed domestic economic data hit the market today, following yesterday's holiday, that failed to spark a rally. Job data is still lackluster and other indications are uninspiring. World banking leaders announced a number of moves in efforts of further quantitative easing.



Initial jobless claims came in much lower than expected at a seasonally adjusted 374,000. Analysts had been expecting a much smaller drop of 2,000. The previous weeks data was revised upward as well by 2,000 to 388,000. The four week moving average of initial claims dropped by 1500 but remains near the years highs.


Continuing claims continued to rise in this weeks data, as laid off workers fail to find new jobs. Claims for a second week of unemployment benefits rose by 4,000 to 3.31 million Americans.


Total claims for unemployment for the week ending 6/17 fell to 5.87 million. This is a tic down from last week buts still above the years lows.


ADP released its estimates for June non-farm payroll additions. They are estimating that the US non-farm sector added 176,000 new jobs in June, compared to 136,000 in May. Job increases for the month of June were led by the services sector. The US Census Beaureau releases its own data for June employment tommorow. The comprehensive reading is expected to be in the range of about 90,000 new jobs for the month. This is a bit lower than the 125,000 level that economist believe will get the US economy back on track.


Jobless and job creation data failed to rally the market after the open. The Dow hung around -60 for the first half hour until the ISM services gauge came in weaker than expected. The reading was reported at 52.1%, near contraction and 0.8% lower than forecast. This is the lowest level for the indicator since January , 2010. Data within the reading reveal that employment is up within the sector while production and new orders have fallen.

Banking leaders around the world announced further policy easing in a seemingly syncronous effort at economic stimulus. The Bank of England held steady with its key interest rates but did announce an increase in asset acquisition totaling 50 billion Euros. In a similar move ECB chairman Mario Draghi announced that the central bank would lower the benchmark rate by .25% to an all time low of .75%. The ECB also lowered its overnight deposit rate for banks to 0% in hopes of stimulating inter-bank lending.

Reports from China this morning announced that the government had cut its key lending rate for the second time in a month. The Chinese central bank lowered its one year deposit rate on the Yuan by 25 basis points and the lending rate by 31 bps. The central bank also relaxed the rules on lending for the country's banks by allowing to lend at a rate 70% below the benchmark.

European shares posted modest declines on the slew of economic information from around the world. The CAC 40 led the decline with a -1.41% loss, followed by the XETRA DAX's -0.89% and the FTSE 100 with a much smaller -0.15% retreat. Asian shares ended a little bit more upbeat with the Nikkei losing -0.27% and the Hand Seng gaining +0.5% and the Shanghai Composite shedding -1.17%.

The price of gold fell about -0.8% following the European and Chinese rate cuts. The CBOE Gold Index lost about -.5% in response to the decline in gold prices. The index is still above the short term moving average, a level regained earlier this week.

GOX, daily

The prices of oil and gas traded mixed today. Oil inventory data was released today due to the Independence Day holiday yesterday and revealed a larger than expected decline. Oil inventories fell by 4.3 million barrels in the last week but the diminished supply did not outweigh speculation over the slowing economy and global demand. The prices of gasoline and Brent crude however rose in today's trading. The iPath Total Return Crude Oil ETF dropped about 1% today but remained above the short term moving average.

OIL, daily

The nations retailers who participate in providing comparable store sales figures release their data today. The sector as a whole was dissapointing but there were a few bright spots. The stagnant jobs market and sluggish global economy has had its impact on the sector and has caused some companies to revisit this years guidance. Cato Group was one of the biggest dissapointments. The stock posted one of the days biggest percentage declines. The chain of women's apparel retailers posted a whopping 10% drop in comp store sales during June, down from the 3% increase in May. The company reported the declines as “below expectations” and continues to open and continues to make adjustments to operations in effort to improve results.

Cato, daily

Target reported a 2.6% gain in same store sales for the five week period. The increase was at the low end of their own expectations but above analyst estimates. The company's CEO restated that the company is expecting to perform as previously stated in earlier guidance. The stock traded in a wide range today but was able to stay above the short term moving average.

Target, daily

Limited Brands made an impressive 7% gain in comparable store sales. The operator of brands like Victoria's Secret also reported a 7% gain in sales for the quarter-to-date. Net sales for the period are slightly lower than last year but when adjusted for one time gains made last year attributable to sales of business assets are ahead of last year. The stock made a 5% jump today on a mild spike in volume and improving technical indicators.

Limited, daily

Kohl's posted a larger than expected decline in comparable store sales but was able to maintain its guidance for the quarter but at the low end of the expected range. The stock made a 7% jump today on high volume to come right up to a resistance level.

Kohl's, daily

Two coal companies were among today's most heavily traded stocks. James River Coal and Patriot Coal both made high volume breaks above their short term moving averages today. The coal sector has been hit hard over the last six months but expectations for record demand out of China has speculators moving toward the sector. James River Coal Company rose more than 16% today and could spark some short covering. Patriot Coal gained a stunning 25% in today's session.

James River Coal Company, daily

Patriot Coal Company, daily

The energy sector as a whole helped to lead the entire market lower, posting the biggest losses among the S&P sectors. The Energy Sector Spider fell by about 1.5% today. The ETF has recently broken above its short term moving average but is facing resistance at $70.

Energy Sector Spider, daily

Apple was heavily traded today as well. The stock broke back above $600 for the first time in two months. Rumors of a new “mini” i-Pad were out in the news and could have something to do with today's gain in the stock. Apple appears to have solid support at the $550 level and is moving up from there with supportive technical indicators.

Apple, daily

Netflix shares surged over 10% today on news the company's streaming business is booming. The company's CEO boasted on Facebook that over 1 billion hours of entertainment were streamed from the website. This comes on the heels of bullish comments from a Citi analyst earlier this week. Option activity in the stock is about three times normal with put/call ratio at 0.44.

Netflix, daily

The banking sector was also fairly active today. Bank of America, JP Morgan and Citigroup all traded down today following the moves made by the European and Chinese central banks. JP Morgan made the biggest decline, leading the entire sector lower. The entire sector is facing a lot of headwinds, including heavy technical resistance. The Financial Sector Spyder just crested a one month high on waning momentum as it approaches resistance at $15 and $16.

Bank of America, daily

JP Morgan, daily

Citigroup, daily

XLF, daily

The Dow Jones Industrial Average traded down today by about -.35% on very light volume. The economic data today was more or less as expected and have not given any new insight into the second half of the year. The moves made by the Chinese and European Central Banks could help stimulate economic growth in the second half of 2012 but the question of whether or not it is enough is still being asked. The Dow is approaching long term resistance set during the steep decline of 2008 and currently has bearish momentum. Tomorrows job report could be the catalyst to move the market higher but I think it will take more than one months data to make any significant bullish impact right now. The shorter term chart suggests that the Dow is at resistance and the index's momentum is divergent from the most recent short term high.

Dow, weekly

Dow, daily

The S&P 500 is similiarly positioned, approaching long term resistance set back in 2008. Momentum is divergent from the short term advance from June into July and suggests weakness.

S&P 500, daily

The Nasdaq managed to eke out a gain today, led by tech stocks. The index is also at a one month high trending weakly.

Nasdaq, daily

Tomorrow watch out for two important numbers from the job sector. US non-farm payroll numbers and the unemployment rate for June. The non-farm payrolls number is expected to be around 90,000 but I have seen estimates ranging from 50,000 to 150,000. The unemployment number is expected to remain steady at 8.2% in light of the recent up-tick in jobless claims.

Thomas Hughes


New Plays

Waiting on the Jobs Report

by James Brown

Click here to email James Brown

Editor's Note:

The stock market has stalled as traders wait for the June jobs report, which is due out tomorrow morning before the opening bell. A month ago the May jobs report showed a disappointing +69,000 gain. Economists are expecting tomorrow's report to show +90,000 new jobs. However, in just the last few days it seems that analysts have grown more positive on tomorrow's report. Many are expecting a number in the +100K to +125K instead. A better than expected report could help refuel the market's rally. On the other hand if investors are expecting good news then a disappointing number would spark an exaggerated sell-off, especially in this low-volume environment.

We are not adding any new trades tonight as we wait for tomorrow's market-moving economic data.


In Play Updates and Reviews

BJRI and EDU See Sharp Moves

by James Brown

Click here to email James Brown

Editor's Note:
Shares of both BJRI and EDU surged higher on Thursday and hit our stop loss closing these bearish trades.

Current Portfolio:


BULLISH Play Updates

ACI Worldwide, Inc. - ACIW - close: 46.30 change: +0.90

Stop Loss: 43.75
Target(s): 49.00
Current Gain/Loss: + 5.1%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
07/05/12 update: ACIW surged to $46.90 intraday before settling with a +0.69% gain. The stock is up four days in a row and looks a little bit overbought here. It might be time for a pullback. Readers may want to consider taking profits early. I am not suggesting new positions at this time.

current Position: Long ACIW stock @ $44.05

07/03/12 new stop loss @ 43.75
06/29/12 triggered @ 44.05

Entry on June 29 at $44.05
Earnings Date 07/26/12 (unconfirmed)
Average Daily Volume = 318 thousand
Listed on June 27, 2011


Sprint-Nextel Corp. - S - close: 3.31 change: -0.16

Stop Loss: 3.18
Target(s): 3.70
Current Gain/Loss: + 5.8%
Time Frame: 6 to 9 weeks
New Positions: see below

Comments:
07/05/12 update: Ouch! Sprint just gave up -4.6%. It might have been a reflection of this low-volume environment. Shares retreated back to their simple 300-dma. I am not suggesting new positions at this time.

current position: Long S stock @ $3.13

07/03/12 new stop loss @ 3.18

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


Six Flags Entertainment - SIX - close: 54.29 change: -0.14

Stop Loss: 53.25
Target(s): 56.50
Current Gain/Loss: + 4.7%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
07/05/12 update: The early morning strength in shares of SIX didn't last very long. The stock spent the rest of the day drifting sideways. I am not suggesting new positions at this time.

current Position: Long SIX stock @ $52.05

07/03/12 new stop loss @ 53.25
06/30/12 new stop loss @ 51.75
06/26/12 triggered @ 52.05

Entry on June 26 at $52.05
Earnings Date 07/24/12 (before the opening bell)
Average Daily Volume = 512 thousand
Listed on June 25, 2011


VeriSign, Inc. - VRSN - close: 44.99 change: +0.70

Stop Loss: 42.85
Target(s): 49.00
Current Gain/Loss: unopened
Time Frame: exit prior to the late July earnings report
New Positions: see below

Comments:
07/05/12 update: Our entry point strategy did not work very well today. The plan was to open bullish positions this morning but only if both VRSN and the S&P 500 index opened positive. Both of them opened negative but VRSN quickly reversed higher and outperformed with a +1.5% gain.

The jobs report tomorrow could produce a lot of volatility in the market. We will hold off on new positions tomorrow and then adjust our entry point for VRSN this weekend for a potential trade on Monday.

Trade did not open on Thursday.

Wait and watch how it trades on Friday. We'll re-evaluate an entry this weekend.

07/05/12 trade did not open. No new trades until Monday. Look for a new entry strategy this weekend.

Entry on July xx at $ xx.xx
Earnings Date 07/26/12 (unconfirmed)
Average Daily Volume = 2.0 million
Listed on July 03, 2011


Ventas, Inc. - VTR - close: 63.19 change: -0.66

Stop Loss: 62.45
Target(s): 64.50
Current Gain/Loss: + 5.8%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
07/05/12 update: I warned readers that VTR looked due for a pullback. Shares gave up -1% on Thursday. Readers may want to take profits early now. I'm not suggesting new positions at this time.

current Position: Long VTR stock @ $59.71

07/03/12 new stop loss @ 62.45
06/30/12 new stop loss @ 60.20
06/23/12 triggered on the gap down at $59.71
06/18/12 Entry point conditions were not met this morning.
Adjust strategy to buy a dip at $60.00.

Entry on June 25 at $59.71
Earnings Date 08/02/12 (unconfirmed)
Average Daily Volume = 1.9 million
Listed on June 16, 2011


Zumiez, Inc. - ZUMZ - close: 38.97 change: -1.22

Stop Loss: 38.40
Target(s): 44.00
Current Gain/Loss: - 3.3%
Time Frame: 4 to 8 weeks
New Positions: see below

Comments:
07/05/12 update: The trading action in ZUMZ is very disappointing. Analysts were expecting +8.6% same-store sales figures. ZUMZ reported +8.2% June same-store sales. This miss sent the stock lower. The close back under $40.00 is short-term bearish. I am not suggesting new positions at this time.

Earlier Comments:
Shares of this action sports related apparel company could see a short squeeze. The most recent data listed short interest at 19.4% of the very small 22.3 million share float.

current Position: Long ZUMZ stock @ $40.30

- or -

Long Aug $45 call (ZUMZ1218H45) Entry $0.70

07/03/12 triggered @ 40.30
06/30/12 adjusted entry trigger to $40.30

Entry on June xx at $ xx.xx
Earnings Date 08/23/12 (unconfirmed)
Average Daily Volume = 531 thousand
Listed on June 26, 2011


BEARISH Play Updates

Aetna Inc. - AET - close: 37.86 change: -0.29

Stop Loss: 39.55
Target(s): 35.10
Current Gain/Loss: + 1.5%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
07/05/12 update: AET continues to sink and shares closed under $38.00 for the first time in months. I am not suggesting new positions at this time. After five down days in a row it might be time for a bounce.

FYI: The Point & Figure chart for AET is bearish with a $29 target.

current Position: short AET stock @ $38.45

- or -

Long Aug $38 PUT (AET1218T38) Entry $1.65

07/03/12 new stop loss @ 39.55
07/03/12 triggered @ 38.45

Entry on July 03 at $38.45
Earnings Date 07/31/12 (unconfirmed)
Average Daily Volume = 6.0 million
Listed on June 30, 2011


Acme Packet, Inc. - APKT - close: 18.40 change: -0.01

Stop Loss: 19.25
Target(s): 17.00
Current Gain/Loss: +7.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
07/05/12 update: Thursday's performance in APKT looked a lot like Tuesday. Shares drifted sideways in a narrow range and closed virtually flat on the session.

Readers may want to take profits now. I am not suggesting new positions at this time.

Earlier Comments:
More aggressive traders could aim lower since the Point & Figure chart for APKT is bearish with a $13.00 target. We want to 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.

*Small Positions*

current Position: short APKT stock @ $19.90

- or -

buy the Jul $20 PUT (APKT1221S20) entry $1.50

07/03/12 new stop loss @ 19.25
06/28/12 readers may want to take profits now
06/25/12 triggered @ 19.90

Entry on June 25 at $19.90
Earnings Date 07/19/12 (unconfirmed)
Average Daily Volume = 1.6 million
Listed on June 21, 2011


First Solar Inc. - FSLR - close: 15.43 change: -0.24

Stop Loss: 15.51
Target(s): 12.00, 10.50
Current Gain/Loss: unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see below

Comments:
07/05/12 update: Thursday's performance in FSLR is almost identical to Tuesday's with a failed rally in the morning and a slow fade lower the rest of the session.

There is no change from my prior comments.

Currently we are suggesting a trigger to launch bearish positions at $14.40. We'll set two targets. Our first target is $12.00. Our longer-term, more aggressive target is $10.50.

Trigger @ 14.40

Suggested Position: short FSLR stock @ (trigger)

- or -

buy the Aug $14 PUT (FSLR1218T14)

Entry on June xx at $ xx.xx
Earnings Date 08/02/12 (unconfirmed)
Average Daily Volume = 7.3 million
Listed on June 30, 2011


7 Days Group Holdings Ltd. - SVN - close: 10.43 change: -0.05

Stop Loss: 10.65
Target(s): 8.50
Current Gain/Loss: unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
07/05/12 update: SVN drifted sideways in a narrow range under resistance at its 50-dma. I don't see any changes from my prior comments.

Currently, I am suggesting a trigger to open small bearish positions at $9.95. If triggered we'll use a stop loss at $10.65, just above today's high. Our exit target is $8.50.

Trigger @ 9.95 *SMALL Positions*

Suggested Position: short SVN stock @ (trigger)

Entry on June xx at $ xx.xx
Earnings Date 08/16/12 (unconfirmed)
Average Daily Volume = 88.7 thousand
Listed on June 27, 2011


CLOSED BEARISH PLAYS

BJ's Restaurants, Inc. - BJRI - close: 38.85 change: +1.13

Stop Loss: 38.55
Target(s): 35.10
Current Gain/Loss: - 2.3%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
07/05/12 update: BJRI outperformed the market with a +2.99% gain. This looks like a short squeeze that was exacerbated by the low-volume market. BJRI hit our stop loss at $38.55.

Earlier Comments:
Let me warn you now that being short BJRI is a popular position with the most recent data listing short interest at 22% of the very small 24.5 million share float. That does raise the risk of a short squeeze. Readers may want to keep their position size small or play the options instead.

closed Position: short BJRI stock @ $37.69 exit $38.55 (-2.3%)

- or -

Jul $40 PUT (BJRI1221S40) Entry $2.86 exit $1.70 (-40.5%)

07/05/12 stopped out at $38.55
07/03/12 new stop loss @ 38.55
06/25/12 triggered on gap down at $37.69

chart:

Entry on June 25 at $37.69
Earnings Date 07/19/12 (unconfirmed)
Average Daily Volume = 496 thousand
Listed on June 23, 2011


New Oriental Education - EDU - close: 24.85 change: +0.85

Stop Loss: 24.85
Target(s): 22.00
Current Gain/Loss: - 4.2%
Time Frame: exit prior to the July 17th earnings
New Positions: see below

Comments:
07/05/12 update: I could not find any news to explain the relative strength in EDU today. The stock normally trades about 820 thousand shares a day. Yet Thursday saw 3.14 million shares traded. EDU surged from $24.00 to round-number resistance at $25.00 intraday. Our stop was hit at $24.85.

closed Position: short EDU stock @ $23.85 exit $24.85 (-4.2%)

- or -

JUL $24 PUT (EDU1221S24) Entry $1.50 exit $0.80 (-46.6%)

07/05/12 stopped out at $24.85
07/03/12 adjust stop loss to $24.85
07/03/12 triggered @ 23.85

chart:

Entry on July 03 at $23.85
Earnings Date 07/17/12 (confirmed)
Average Daily Volume = 820 thousand
Listed on July 02, 2011