Option Investor
Newsletter

Daily Newsletter, Thursday, 7/19/2012

Table of Contents

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

Market Wrap

Earnings Trump Data

by Thomas Hughes

Click here to email Thomas Hughes
Earnings news seems to be trumping economic data. A surprise jump in unemployment claims, weak home sales and drop in the leading indicators failed to reverse the short term rally.



This mornings futures trading pointed to a continuation of the bounce up from last weeks lows. A surprising jump in jobless claims failed to dampen the earnings driven advance which continued into the first hour of trading. Initial claims for unemployment made a “surprising” jump this week, far exceeding analysts expectations. The jump is blamed on seasonal volatility associated with expected auto industry lay offs. If the volatility was and is expected I don't understand why the increase of 34,000 claims was such a surprise. Initial claims came in at an elevated 386,000 in the week ending July 14, just shy of the years highest levels, set back during the Easter season lay offs. Economists are expecting the volatility in claims to continue through July so initial claims will be less important than the four week moving average. The average fell this week by 1500 to 375,000 claims, the fourth week of declines in this metric.


Continuing claims rose by a small 1,000 to 3.31 million. There is still downward bias in the trend of continuing claims but the data has been holding steady around 3.3 million for nearly two months now. The total number of claims for unemployment, lagging the initial claims data by two weeks, fell by 121,000 to the years lows 5.75 million. The jobs data has been weak all year and is not expected to improve if statements from Ben Bernanke and the FOMC over the last few weeks concerning the jobs market are to be believed.



Traders seemed to shrug off the unemployment data in the face of earnings and focus has turned to the bottom line. A number of big names have reported so far, beating Wall Street estimates for bottom line earnings. One trend that has been recognized by more than one pundit is how many companies are beating estimates for earnings but missing the target on revenue.

The markets did indeed open higher today and the gains extended into the first hour of trading. Around 10:30 another round of discouraging data sent the markets into negative territory, if only briefle. Once again, however, the evidence of our slowing economy failed to contain the markets and they moved higher again, testing and surpassing the days highs.

Existing home sales fell by 5% in June, possibly in response to a slight rise in prices. June was the weakest month for home sales since last October but is still up +4% over the same time last year. Though improving, the housing market remains depressed and below rates considered to be healthy for the economy. First time buyers were only 32% of the market, another indicator of the sluggishness of the housing recovery.

The Philadelphia Federal Reserve Business Outlook Survey came in at -12.9%. A larger than expected negative reading but an increase from the previous months -16%. Regardless of the number, the reading indicates contraction among businesses surveyed by the Philly Fed. Adding to the gloom was the leading indicators index, also falling more than expected. More than half of the indicators, 6 of 10, declined. Analysts had been predicting a -0.1% drop, the actual was -0.3%.

There was little news from Asia or Europe, their eyes are on us for the time. Nothing has changed since last week and US earnings are just more interesting now. Asia ended their trading day up, helping to support our own opening. The Hang Seng led the Asian markets with a 1.66% advance, followed by the Nikkei and Shang Hai indexes with 0.79% and 0.73%. China reported that it's big four banks had double their lending in July, but was mostly on government backed investments. The biggest story from the region is Yum! Brands. The company released its earnings yesterday and revealed some interesting things. The company's China revenue makes up about 50% of its total, and were hurt by rising inflation in the country. Rising wage and food prices were cited as reasons for declining margins and lower profits. Now, with corn prices surging, China and the rest of Asia are expected to face even more inflationary pressure. Yum! Brands is expecting to recover from the slump and meet its full year guidance of at least 12% eps growth.

Yum! Brands, daily

Europe even quieter than Asia. European shares climbed modestly and hit a four month high on a string of positive earnings reports from some European based companies. The Xetra Dax gained 1.11%, followed by the CAC 40 and FTSE with 0.87% and 0.5%.

The precious metals gained some ground today on a slightly weaker dollar. The advance was led by copper, gaining around 1.75% during today's trading. Gold traded up as much as 1% today, followed by silver's more modest .3%. The rising stock prices in Europe led to a strengthening of the Euro versus the Dollar, which lost ground against several other world currencies today. The Gold Index moved up today but is still trading near multi-year lows.

CBOE Gold Index, daily

Oil gained 3% as eyes turned to Syria. Escalating hostilities there are threatening to disrupt supply and boosting energy prices. Oil is now at a two month high and could continue to rise while the Syrian conflict ensues.

Walgreen's was the story stock of the morning, announcing a deal with Express Scripts. The long awaited deal was a relief to investors, boosting the stock by more than 12%. The deal is expected to benefit both companies. The jump brought the stock above the 200 day moving average but failed to breach long term resistance. Momentum is bullish but I would like to see a strong move above $35 in order to get bullish on this one.

Walgreen Co, daily

Morgan Stanley continued the trend set by the other big banks this earnings season. The investment giant reported higher earnings on lower revenue. The gains are a reversal of losses in the same period last year and an added sign that the company and its business have been improving. Unfortunately, when taking into consideration the top line short comings of Morgan Stanley and others like American Express revenues are not growing despite the improvements to operations. The earnings, while an improvement over last year, also fell short of expectations and sent the stock looking for support. MS lost over 6.5% today and is approaching long term support.

Morgan Stanley, daily

The Financial Sector Spider (XLF) lost about 1% today. The ETF has been trading to the negative all week, in spite of the up beat earnings reports. The ETF failed to make a new high in the short term and is facing technical resistance moving forward. That, combined with expectations of further economic decline in the second half of the year, could hinder any advances.

Financial Spider, daily

The smaller, regional financials are reporting results surpassing their larger counterparts. BB&T announced record quarterly earnings today and a 62% increase in earnings per share. The bank made improvements in interest and non-interest income, increased margins and lowered costs. Shares of the stock jumped significantly today, piercing long term resistance and forming an interesting candle. This one bears close watching. A move above $32.50 could signal further gains in the stock.

BB&T, daily

FifthThird Bancorp reported some decent results today as well but the stock did respond favorably. The bank improved revenue over the same period last year on increased revenues. FifthThird beat the expectations of $0.35 per share by a full nickel. The stock traded up briefly today only to touch a resistance level and trigger some selling. If FifthThird can maintain this level, and break through $14.00, it could continue upward. The company reported positive earnings trends and favorable credit conditions that it expects to continue.

FifthThird Bancorp, daily

Dole Food Company traded quietly today in anticipation of earnings results reported after the bell. Based on the 16% short interest I would say that investor expectations were low. Dole reported earnings and revenue in line with corporate guidance and announced the possibility of spinning off one or more parts of its business as part of restructuring. The stock, which has been trading near five year lows, climbed over 2% in after hours trading. Tomorrow could see a short squeeze in this stock.

Dole Food Company, daily

Technology giants AMD, Microsoft, Google and Sandisk also reported after the bell. AMD stock traded down today on elevated volume but did not break through its support zone. The company was expected to earn $0.07 per share on revenue of $1.41 billion. AMD had previously announced lowered preliminary results so there was nothing surprising in the report. The bad news is that AMD further lowered its guidance for the next quarter and sent shares down in after hours trading.

AMD, daily

Sandisk was expected to earn about $0.19 per share but actually earned $0.21 on a non-gaap basis. The company beat earnings estimates on a reported a 25% decline in revenues on a year-over-year basis. Sound familiar? The stock made some big gains today ahead of the announcement and extended them following it. The momentum indicators are consistent with a bottom, at least in the short term, indicating that Sandisk could move up. A move to the next resistance level of $40 would close the window opened in May.

Sandisk, daily

Google and Microsoft both reported results echoing those of other big names this quarter; Earnings beat but revenue fell short. Microsoft jumped in after hours trading to break through near term resistance. The stock looks good to advance to the $33 level where it will faced further technical resistance. Microsoft also announced the arrival of Windows 8 this October. The release of the new operating system should be a strong driver of sales and help Microsoft increase revenue in the fourth quarter of calendar 2012. Google reported earnings of $10.12 per share, up from $8.74 in the year ago period. Analysts had been expecting slightly lower earnings on slightly higher revenue. Google also jumped in after market trading to cross above near term resistance with a spike in volume.

Microsoft, daily

Google, daily

Fast casual food retailer Chipotle Mexican Grill was not able to please investors. The stock, which had gained about 5% during today's trading lost it all and more following the earnings release. The company was able to produce gains that met or beat expectations except in one area, same store sales. Same store sales increases were a mere 8% versus the expected 10% and sent the shares tumbling.

Chipotle Mexican Grill, daily

The afternoon trading today turned out to be as directionless as the morning. After reaching the days highs around 12:30 pm stocks drifted back down toward the days lows only to bounce back up to end near the middle of the days range. The S&P 500 has moved into the lower end of my target zone of 1370-1400, coincident with the 78% retracement of the 2008-2009 bear market. In the near term, the S&P is making a new high, but it is very weak and comes on divergent momentum. Earnings may continue to push the market higher but I think that the reality of global economic conditions will weigh heavily on any advances.

SPX, one day

SPX, daily

The VIX continued to work its way down to the 15 level. The fear index is near its multi-year lows and could be signaling further advance in the S&P 500 for the near term. In the long term, with the VIX at such low levels, I will be looking out for spikes in volatility and indications of a potential market turnaround.

VIX, daily

The Dow also traded up to its resistance line today before retreating. The momentum indicators for the blue chip index are even weaker than in the S&P. The index is being pushed up by positive earnings, but the earnings reports are only positive because of reduced estimates. To me, this only means that business is not quite as bad as feared. In order to have a sustainable rally corporate earnings are going to have start beating increased estimates, proving growth. The fact that bottom line numbers are better than expected does reveal that businesses are improving, but the top line misses are highlighting the fact that the global economy is still slowing. The Dow is climbing the proverbial wall of worry and may be setting itself up for a fall.

Dow Jones Industrial Average, daily

The Nasdaq traded near to its resistance line but did not touch it. The Nasdaq could lead the general markets higher tomorrow in the wake of the Google and Microsoft earnings releases.

Nasdaq,daily

Relief over this quarters earnings will probably keep the markets moving higher in the short term. In the longer view, economic data does not support hopes for corporate growth, at least in an international perspective. The American market remains a driver of growth for many businesses but may not be enough to drive earnings growth, especially if China and Europe keep slowing. Tomorrow is free of any major economic releases and will be dominated by earnings, there are a handful of regional banks reporting as well as General Electric, Schlumberger, Ingersoll-Rand and Xerox.

Thomas Hughes


New Plays

The Impact of Rising Corn

by James Brown

Click here to email James Brown

Editor's Note:

Additional Trading Ideas:

In addition to tonight's new candidate, consider these stocks as possible trading ideas and watch list candidates. Many of these need to see a break past key support or resistance:

(bullish ideas) TTC, PLCE, AMRN, Z, AAWW, ADP, CMCSA, LBTYA

(bearish ideas) CHK, TZOO


NEW BEARISH Plays

Kellogg Co. - K - close: 48.07 change: +0.01

Stop Loss: 48.55
Target(s): 44.25
Current Gain/Loss: unopened
Time Frame: exit prior to Aug. 2nd earnings
New Positions: Yes, see below

Company Description

Why We Like It:
Rising commodity prices, especially corn, which hit a new high today, does not bode well for companies like Kellogg. Granted, K probably hedges some of its commodity exposure but rising input costs should pressure margins.

The stock is in a bearish decline and testing major support near $48.00. The early June low was $47.88. I am suggesting a trigger to launch bearish positions at $47.75. Our target is $44.25.

Trigger @ 47.75

Suggested Position: short K stock @ (trigger)

- or -

buy the Aug $47.50 PUT (K1218T47.5) current ask $0.75

Annotated chart:

Entry on July xx at $ xx.xx
Earnings Date 08/02/12 (confirmed)
Average Daily Volume = 1.6 million
Listed on July 19, 2011



In Play Updates and Reviews

Stocks Rise, But Small Caps Underperform

by James Brown

Click here to email James Brown

Editor's Note:
The U.S. market rallied again but the small cap Russell 2000 index closed in negative territory.

Our TWX trade was triggered today.

Current Portfolio:


BULLISH Play Updates

ACI Worldwide, Inc. - ACIW - close: 44.91 change: +0.16

Stop Loss: 43.75
Target(s): 49.00
Current Gain/Loss: + 2.0%
Time Frame: exit prior to the July 26 earnings report.
New Positions: see below

Comments:
07/19/12 update: ACIW's bounce didn't get very far today. The stock struggled with short-term technical resistance at its 10-dma. That doesn't bode well for our trade. Readers may want to exit early now. I am not suggesting new positions. Don't forget that we want to exit prior to the July 26th earnings report.

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 (confirmed)
Average Daily Volume = 318 thousand
Listed on June 27, 2011


Extra Space Storage - EXR - close: 31.86 change: -0.27

Stop Loss: 29.99
Target(s): 33.50
Current Gain/Loss: + 2.3%
Time Frame: exit prior to the July 30th earnings report
New Positions: see below

Comments:
07/19/12 update: EXR suffered some profit taking today with a -0.8% decline. Shares did pare their losses off the $31.58 intraday low. Of course if the market starts to pullback we will likely see EXR retest the $31.00 level again. Cautious traders might want to consider a stop loss closer to the $31 level.

Our target is $33.50 but we'll plan to exit prior to the July 30th earnings report.

Suggested Position: Long EXR stock @ $31.15

07/09/12 triggered @ 31.15

Entry on July 09 at $31.15
Earnings Date 07/30/12 (confirmed)
Average Daily Volume = 1.5 million
Listed on July 07, 2011


IdaCorp. - IDA - close: 43.19 change: -0.18

Stop Loss: 41.90
Target(s): 45.00
Current Gain/Loss: + 0.1%
Time Frame: exit prior to the early August earnings report
New Positions: see below

Comments:
07/19/12 update: Hmm... IDA flirting with a breakdown under support near $43.00 and its 10-dma but shares managed to rebound. This doesn't inspire a lot of confidence. IDA has spent the last four days consolidating in what looks like a bull flag pattern. Readers may want to use a new rally past $42.50 as an entry point. Just remember our plan to exit prior to the early August earnings report.

current Position: Long IDA stock @ $43.15

07/13/12 triggered @ 43.15

Entry on July 13 at $43.15
Earnings Date 08/02/12 (confirmed)
Average Daily Volume = 217 thousand
Listed on July 11, 2011


Lennar Corp. - LEN - close: 30.32 change: -0.06

Stop Loss: 29.49
Target(s): 34.50
Current Gain/Loss: - 3.5%
Time Frame: 6 to 8 weeks
New Positions: see below

Comments:
07/19/12 update: LEN broke down to a new three-week low and traded under what should have been support near $30.00 before bouncing back. The intraday low was $29.51 and our stop is at $29.49. Aggressive traders could buy this bounce but I would hesitate to launch new positions here.

Earlier Comments:
The most recent data listed short interest at almost 22% of the 161 million share float. LEN could see a short squeeze if it shows any strength. FYI: The Point & Figure chart for LEN is bullish with a long-term $46 target.

current Position: Long LEN @ $31.40

- or -

Long Aug $32 call (LEN1218H32) Entry $1.57

07/13/12 triggered @ 31.40

Entry on July 13 at $31.40
Earnings Date 09/12/12 (unconfirmed)
Average Daily Volume = 7.2 million
Listed on July 12, 2011


Prudential Financial - PRU - close: 48.57 change: -0.08

Stop Loss: 47.49
Target(s): 53.00
Current Gain/Loss: unopened
Time Frame: exit prior to the Aug. 1st earnings report.
New Positions: Yes, see below

Comments:
07/19/12 update: The sideways consolidation in PRU continues. We are waiting for a breakout higher.

I am suggesting a trigger to launch positions at $49.50. Please note that the $50.00 level could still be round-number resistance so more conservative traders may want to use a trigger above the $50.00 mark. Our target is $53.00 but we'll plan to exit ahead of the August 1st earnings report.

Trigger @ 49.50

Suggested Position: buy PRU stock @ (trigger)

- or -

buy the Aug $50 call (PRU1218H50)

Entry on July xx at $ xx.xx
Earnings Date 08/01/12 (confirmed)
Average Daily Volume = 3.0 million
Listed on July 14, 2011


Papa John's Intl. Inc. - PZZA - close: 52.59 change: +0.08

Stop Loss: 48.49
Target(s): 54.75
Current Gain/Loss: + 3.7%
Time Frame: exit prior to the July 31st earnings report (unconfirmed)
New Positions: see below

Comments:
07/19/12 update: After yesterday's sprint higher in PZZA the stock took a day to catch its breath. Shares drifted sideways in a narrow range. I'm not suggesting new positions at current levels. FYI: The Point & Figure chart for PZZA is bullish with a $63 target.

current Position: Long PZZA stock @ $50.70

- or -

Long Aug $55 call (PZZA1218H50) Entry $0.55

Entry on July 18 at $50.70
Earnings Date 07/31/12 (unconfirmed)
Average Daily Volume = 115 thousand
Listed on July 17, 2011


Time Warner Inc. - TWX - close: 39.14 change: +0.22

Stop Loss: 37.90
Target(s): 42.50
Current Gain/Loss: - 0.5%
Time Frame: exit prior to the early August earnings report
New Positions: see below

Comments:
07/19/12 update: TWX tagged a new multi-year high and hit our trigger at $39.35 before paring its gains. I would still consider new positions now or nimble traders could try and buy a dip near $38.50. FYI: The Point & Figure chart for TWX is bullish with a $50 target.

current Position: Long TWX stock @ $39.35

- or -

Long Aug $38 call (TWX1218H38) Entry $1.80

07/19/12 triggered @ 39.35

Entry on July 19 at $39.35
Earnings Date 08/01/12 (unconfirmed)
Average Daily Volume = 6.0 million
Listed on July 18, 2011


Verisk Analytics - VRSK - close: 50.44 change: -0.30

Stop Loss: 49.75
Target(s): 54.50
Current Gain/Loss: - 0.6%
Time Frame: exit prior to the July 31st earnings report (unconfirmed)
New Positions: see below

Comments:
07/19/12 update: VRSK is down 50 cents in the last two days and shares look headed for the $50.00 level. At this point I would wait for a bounce from $50.00 before launching new positions. As an alternative you could wait for a new relative high over $51.00 as their entry point.

Our target is $54.50 but we'll plan to exit prior to the late July/early August earnings report.

Current Position: Long VRSK stock @ $50.72

Entry on July 18 at $50.72
Earnings Date 07/31/12 (unconfirmed)
Average Daily Volume = 874 thousand
Listed on July 17, 2011


BEARISH Play Updates

Focus Media Holdings - FMCN - close: 18.95 change: +0.20

Stop Loss: 20.10
Target(s): 15.25
Current Gain/Loss: - 3.0%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
07/19/12 update: FMCN continues to hover near short-term resistance at the $19.00 level. I would probably wait for a new drop under $18.50 or under $18.25 as our next bearish entry point.

Readers will want to consider limiting the size of their positions since FMCN can be such a volatile stock (or just use the options to limit how much capital you have exposed).

current Position: short FMCN stock @ $18.40

- or -

Long Aug $18 PUT (FMCN1218T18) Entry $1.50

Entry on July 17 at $18.40
Earnings Date 05/29/12
Average Daily Volume = 2.2 million
Listed on July 16, 2011


Groupon, Inc. - GRPN - close: 7.40 change: +0.33

Stop Loss: 9.05
Target(s): 6.25
Current Gain/Loss: +11.9%
Time Frame: exit prior to the early August earnings report
New Positions: see below

Comments:
07/19/12 update: GRPN saw an oversold bounce today with a +4.6% gain. The simple 10-dma at $7.85 and the $8.00 level should be overhead resistance. I don't see any changes from my prior comments. Readers may want to exit early to lock in a gain.

I'm not suggesting new positions.

*Small Positions*

current Position: short GRPN stock @ $8.40

- or -

Long Aug $8.00 PUT (GRPN1218T8) Entry $0.80

07/18/12 readers may want to start taking some money off the table
our GRPN trade is up +15.8%
07/12/12 new stop loss @ 9.05

Entry on July 09 at $8.40
Earnings Date 08/08/12 (unconfirmed)
Average Daily Volume = 8.1 million
Listed on July 07, 2011


Home Inns & Hotels Management - HMIN - close: 17.45 change: +0.25

Stop Loss: 20.25
Target(s): 18.00 & 15.50
Current Gain/Loss: +11.0%
Time Frame: exit prior to the Aug. 9th earnings report
New Positions: see below

Comments:
07/19/12 update: HMIN also saw an oversold bounce today but the rebound stalled at short-term resistance near $18.00. Readers may want to tighten stops and/or take some money off the table early. I am not suggesting new positions at this time.

HMIN hit our first target at $18.00 on July 12th. Our second target is $15.50.

Earlier Comments:
Readers may want to keep their position size small or use the options to limit their risk. The most recent data listed short interest at 17% of the 24.2 million share float.

Suggested Position: short HMIN stock @ $19.60

- or -

Long Aug $20 PUT (HMIN1218T20) Entry $1.70

07/12/12 new stop loss @ 20.25
07/12/12 1st target hit @ 18.00 (+8.2%)
1st target hit @ 18.00, option bid @ $2.50 (+47.0%)*
(option exit price is an estimate since the option did not trade at the time our first target was hit)
07/10/12 triggered @ 19.60

Entry on July 10 at $19.60
Earnings Date 08/09/12 (confirmed)
Average Daily Volume = 284 thousand
Listed on July 09, 2011


Harley-Davidson - HOG - close: 44.78 change: +0.76

Stop Loss: 45.25
Target(s): 40.25
Current Gain/Loss: - 2.1%
Time Frame: exit prior to the Aug. 1st earnings
New Positions: see below

Comments:
07/19/12 update: HOG is not cooperating. After hovering near support near $44 and its 200-dma the last few days the stock finally moved but it was the wrong way. The stock rallied with a +1.7% gain and almost hit our stop loss at $45.25. If there is any follow through higher tomorrow then expect HOG to hit our stop. I am not suggesting new positions.

We do not want to hold over the Aug. 1st earnings report. FYI: The Point & Figure chart for HOG is bearish with a $35.00 target.

current Position: short HOG stock @ $43.86

- or -

Long Aug $42 PUT (HOG1218T42) Entry $1.62

Entry on July 16 at $43.86
Earnings Date 08/01/12 (confirmed)
Average Daily Volume = 2.2 million
Listed on July 14, 2011