Option Investor
Newsletter

Daily Newsletter, Thursday, 7/26/2012

Table of Contents

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

Market Wrap

Stocks Surge On Draghi Comments

by Thomas Hughes

Click here to email Thomas Hughes
Comments by the ECB chairman Mario Draghi caused stocks to spike world wide. The European markets had one of their best days ever, with Spain leading the way. The comments in no way put to rest fears of further bail outs but does renew confidence in ECB leadership.



The comments by Mario Draghi caused US futures to surge more than 1% this morning. The comments were unexpected and sparked a rally in equities, the Euro and gold. The rally is suspect thought because the move came on a single statement and does not yet have the support of other EU central bankers. In his comments, Mr. Draghi said that the ECB would defend the Euro by “any means necessary” and that “it would be enough”. While his statements did not reveal what means those might be they did inspire some confidence in traders that steps would be taken sooner rather than later. The ECB is meeting next Wednesday and could announce further stimulus plans as early as then.

Further news from the European sector includes a new prediction by Citi economist Willem Buiten. Mr. Buiten has been handicapping the chances of a Greek exit ( “Grexit”, a word coined by Buiten) for several months now and has upgraded the chance to 90%. He is expecting continued weakness from the country as well as spillover into the other EU countries. He predicts that the move will occur in the next 2-3 quarters and that Spain will also need increased bail outs. It is not unreasonable to think that there will be the need for additional bail outs but I do not think it is very likely that Greece will be allowed to exit because of the possible global repurcussions.

Another round of unexpected unemployment data helped to lift stocks into the open. Unemployment claims continued to fluctuate wildly this week and fell by 35,000 to a seasonally adjusted 353,000 claims. This is a far cry less than the 378,000 predicted by economists. Of course, the previous weeks data was revised up, no surprise there, to 388,000. A shift in the way the big automakers have approached their seasonal summer layoffs has caused the wild swings and is expected to end soon. The four week moving average of claims, which fell by 8,750 to 367,250, is able to smooth out some of the fluctuations but is still susceptible to these wild weekly swings. Needless to say, the labor market is still not improving.


The unemployment data, like much of the other data and information we have available, continues to be mixed. Continuing claims dropped as well, falling by 30,000 to a total of 3.29 million. This is the lowest level in two months. The total number of Americans filing for unemployment climbed to its highest level in two months, 6 million. Next week be on the lookout for ADP and US employment data. Expectations are for a slight decline in hiring for the month of July.



The Durable Goods numbers did not reveal anything to me. There was a small surprise gain in June of .8% with a reversal in July to a decline of -1.1%. Economists on average had been expecting the data to remain flat so averaging the two months together gives us a flat to slightly negative number, in-line with expectations. Within this number the data was mixed as well. There were declines in most of the metrics but the 8% gain in transportation equipment nearly overcame them.

Market breadth was good at the opening, with advancers leading decliners by 6:1. After opening higher the major indexes seemed to tread water until the Pending Home Sales figures were release around 10:30. Analysts had been expecting a drop to 1%, from the previous months 5.9%, but were surprised by the -1% decline. The drop was due to an apparent lack of available homes for sale, not a lack of interested parties. This could be a good sign for the housing market in the longer term. Pent up demand could lead to higher prices and new sellers entering the marketplace, provided they don't outpace new buyers.

US bond yields rose today on the upbeat unemployment numbers. Despite the small gains the yields on the 30 year bond are still at multi-year lows.

US 30 year bond yield, daily

Gold also climbed on the statements by Mr. Draghi. The statements, combined with weak US data, renewed hopes of QE3 and added upward momentum to the price of gold. The index regained the upper side of a support/resistance level set in 2010 and could be bottoming. Further monetary stimulus from the ECB or the FOMC could help to send gold prices higher.

The Gold Index, daily

The drop in unemployment claims and comments from Mario Draghi also renewed hopes of increased oil demand, causing prices to rise for the third straight day. Trading in oil remained thin, ahead of US GDP numbers due out tomorrow. Geopolitical issues are more to blame for the rise in oil prices this summer than demand but further policy easing from world banking leaders could increase expectations for growth and demand for oil.

Today was a busy day for conference calls as earnings continue to roll in. More than 300 companies reported today with several big names reporting after the bell. The trend of higher earnings on lower revenue also continued. The fact that businesses are able to increase margins and improve profitability is good,this puts them in great position once the economy gets going again. The downside is that business in general is slowing, as evidenced by declining revenue.

3M Corporation made the news early today with their release. The company reported that profits were up while revenue was down and that they would be able to meet their current year end guidance. The stock surged on the news, opening above resistance and moving higher in early trading. By the end of the day the stock had traded about 1.5 times the average daily volume and closed below resistance.

3M Corporation, daily

Zynga was also a hot topic this morning. The online game maker missed earnings and revenue by a steep margin and lowered full year guidance. Zynga announced earnings of $0.01 per share, far below the estimated $0.06 per share investors were expecting. The company also lowered its full year guidance to $0.04-$0.09 per share from $.023-$0.29 per share. The company blames the miss and lowered guidance on the shift by users to mobile platforms and on game launch delays. What was clear in the report is that Zynga is still tied to Facebook and is having a hard time monetizing its services. The stock dropped about 40% today, hitting a new 52 week low.

Zynga, daily

Facebook, which released earnings after the bell today, felt the sting of Zynga's miss during today's session. Shares of the stock traded down today but remained above the once tested support zone at $27. The report did nothing to help investor confidence and sent the stock plummeting in the after market trading.

Facebook, daily

Exxon Mobil also reported a disappointing quarter. On the surface, Exxon reported a 49% increase in net income, not surprising for the worlds largest oil company. However, excluding sale of assets revenue and profits both fell short. After excluding one-time divestment of assets Exxon earned $1.80 a share, below the expected $1.96. The decline in revenue is due to a combination of decreased production and low prices. The stock moved upward today but is trading well under resistance with weak momentum.

Exxon, daily

The Oil Index also climbed today, with 9 out 11 components moving higher. The index also came short of its resistance zone and is divergent with its momentum indicator.

The Oil Index, daily

Sprint was another bright, if tarnished, star in the earnings parade today. The company, which has been struggling with profitability for a long time, reported that its second quarter loss widened. That was not the good news, the good news is that the wider than expected loss was due in part to write-downs of its Nextel network and that revenue was on the rise. Sprints model of offering unlimited data attracted new subscribers, driving the revenue gains. After the news the stock jumped and moved as much as 25% higher during the day with heavy volume. An increase in revenue is good for Sprint but it still has to address the profitability issue. Until this is done Sprint faces heavy resistance going forward. The stock has been range bound since hitting its bottom in 2009 and is currently trading in the middle of that range. A move up to $5.00 would close the window opened last summer when the stock gapped down.

Sprint, daily

The S&P 500 moved higher throughout the day, eventually surpassing the mornings high. Today's rally was driven more by relief over the attention Mario Draghi seems to be giving the European crisis and less with satisfaction over earnings. Some companies have done well over the last quarter, and certainly many of them have been able to improve earnings but just as many if not more have failed to make improvements. Bottom line performance is suggesting that internal operations are improving while declining revenue underscores the declining state of the global economy. Earnings drive market value and declining world expectations do not give much hope for improvements in the near future. Expectations for 2013 will soon start to influence trade and investment decisions and so far what I have found is not promising. On average, estimates for US GDP growth in the second half of 2012 will pick up slightly, maybe as much as 2.5%. The early estimates for 2013 are very similar. This will be good but will it be enough in light of lowered global growth expectations? The IMF lowered its 2013 global outlook to 3.9% just two weeks ago and so far there is no real sign of stabilization. The weakness in Europe is already blamed for poor results by US corporations, further declines there and in Asia will hurt corporate results and US GDP even more.

S&P 500, one day

On the one day charts the S&P is moving slowly upward toward its resistance zone between 1380 and 1420. The lower end of this range is equal to an important retracement level and has proven significant as resistance over the last few months. Momentum is very weak and does not support a bullish outlook on the index.

S&P 500, daily

Longer term the index is being squeezed by the 200 day moving average and the resistance zone described above. Momentum is weak but bearish. The index seems like a deer in headlights, not knowing which way to go. On the one hand earnings are disappointing, expectations are low and economic signals are pointing to more of the same. On the other hand, today's comment by Mr. Draghi and the growing possibility of QE3 lead us to think that something will be done to stimulate growth. Tomorrow begins a round of important economic indicators that will begin to bring clarity to the upcoming quarters.

S&P 500, weekly

Economic Calendar

The Nasdaq Composite has much weaker technicals than the S&P. The index's move up today was halted by a convergence of the 30 day moving average and a near term down trend-line.

Nasdaq, daily

Tomorrow will be another big day for earnings. Not only is there a new round of reports due out traders will be moving on earnings statements released after the bell today. Amazon and Starbucks delivered high profile misses while Amgen, Coinstar and Expedia beat expectations. The biggest mover tomorrow is likely to be the advance estimate for US 2nd quarter GDP. The consensus estimate is for growth around 1.2%.

Thomas Hughes


New Plays

Consumer Goods & Pawnshops

by James Brown

Click here to email James Brown


NEW BULLISH Plays

Jarden Corp. - JAH - close: 45.33 change: +1.29

Stop Loss: 43.35
Target(s): 49.00
Current Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
JAH makes a wide number of consumer goods. The company's recent earnings report came in better than expected. The stock has been coiling sideways under resistance at the $45.00 level for almost three weeks. The old all-time high was near $45 back in 2007.

Today's bullish breakout over resistance looks like a new entry point. Today's high was $45.45. We'll use a trigger at $45.55 to launch positions. Nimble traders could choose to try and buy a dip near $45.00 instead. Our multi-week target is $49.00 .

Trigger @ 45.55

Suggested Position: buy JAH stock @ (trigger)

Annotated chart:

Entry on July xx at $ xx.xx
Earnings Date 07/24/12
Average Daily Volume = 652 thousand
Listed on July 26, 2011


NEW BEARISH Plays

EZCORP, Inc. - EZPW - close: 22.11 change: -0.68

Stop Loss: 23.10
Target(s): 20.05
Current Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
You might think that with the U.S. economy struggling and unemployment still elevated that pawnshops would be doing strong business. Instead EZPW is struggling to meet its numbers. The company recently reported earnings and missed both the top and bottom line estimate. Furthermore management lowered their earnings guidance for 2012.

Now the stock is sitting on support at the $22.00 level. The June low was $21.91. I am suggesting a trigger to launch bearish positions at $21.80. Conservative traders can target a drop to $20.00. More aggressive traders could aim for the $18.00 level. The newsletter will plan on exiting at $20.05. FYI: The Point & Figure chart for EZPW is bearish with a long-term $10 target.

Trigger @ 21.80

Suggested Position: short EZPW stock @ (trigger)

- or -

buy the Sep $20 PUT (EZPW1222U20) current ask $0.55

Annotated chart:

Entry on July xx at $ xx.xx
Earnings Date 07/24/12
Average Daily Volume = 381 thousand
Listed on July 26, 2011



In Play Updates and Reviews

Groupon Ignores Market Rally

by James Brown

Click here to email James Brown

Editor's Note:
Shares of Groupon (GRPN) ignored the market rally and sank to new lows.

Meanwhile most of the market managed a bounce today.

Our RGR trade has been triggered. We have removed CNH.

Current Portfolio:


BULLISH Play Updates

Extra Space Storage - EXR - close: 31.94 change: +0.43

Stop Loss: 30.75
Target(s): 33.50
Current Gain/Loss: + 2.5%
Time Frame: exit prior to the July 30th earnings report
New Positions: see below

Comments:
07/26/12 update: Today's widespread market rally helped EXR push past its 10-dma. More conservative traders might want to inch up their stop loss closer to $31.00. We don't have much time left. We want to exit prior to the July 30th earnings report.

Suggested Position: Long EXR stock @ $31.15

07/21/12 new stop loss @ 30.75
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


Sturm Ruger & Co - RGR - close: 45.63 change: +1.87

Stop Loss: 43.45
Target(s): 49.00
Current Gain/Loss: +1.2%
Time Frame: exit prior the Aug. 1st earnings report
New Positions: see below

Comments:
07/26/12 update: Our new trade on RGR has been triggered. The stock really outperformed the market today with a +4.2% gain. That was enough to push RGR past resistance at $45.00. Our trigger was hit at $45.10. There is a good chance RGR could see a short squeeze higher.

The most recent data listed short interest at 30% of the small 17.4 million share float.

This is a short-term trade. We do not want to hold over the earnings announcement. If expectations are already high there is a risk RGR could disappoint. RGR reports earnings on Aug. 1st, after the closing bell.

current Position: Long RGR stock @ $45.10

- or -

Long Aug $45 call (RGR1218H45) Entry $2.60

07/26/12 triggered @ 45.10

Entry on July 26 at $45.10
Earnings Date 08/01/12 (confirmed)
Average Daily Volume = 479 thousand
Listed on July 25, 2011


BEARISH Play Updates

Focus Media Holdings - FMCN - close: 18.67 change: +0.13

Stop Loss: 20.10
Target(s): 15.25
Current Gain/Loss: - 1.5%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
07/26/12 update: FMCN ignored the market's rally today. Shares continue to churn sideways. I would look for a new drop under $18.25 as another entry point for bearish positions.

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


General Motors - GM - close: 19.11 change: +0.31

Stop Loss: 19.65
Target(s): 17.00
Current Gain/Loss: - 0.5%
Time Frame: exit prior to the Aug. 2nd earnings report
New Positions: see below

Comments:
07/26/12 update: GM kept pace with the S&P 500 today by rising +1.6%. The stock actually gapped open higher at $19.02 before swooning intraday. It looks like shares could test short-term resistance at $19.25 soon. Readers may want to wait for this bounce to fail before launching positions. Just remember our time frame. GM reports earnings on Aug. 2nd, before the opening bell.

current Position: short GM stock @ $19.02

- or -

Long Aug $18 PUT (GM1218T18) Entry $0.42

Entry on July 26 at $19.02
Earnings Date 08/02/12 (confirmed)
Average Daily Volume = 8.7 million
Listed on July 25, 2011


Groupon, Inc. - GRPN - close: 6.61 change: -0.63

Stop Loss: 9.05
Target(s): 6.25
Current Gain/Loss: +21.3%
Time Frame: exit prior to the Aug. 13th earnings report
New Positions: see below

Comments:
07/26/12 update: GRPN was downgraded again today. The news helped spark a -8.7% plunge in the stock price. Readers may want to take profits now. The newsletter's exit target is $6.25.

I am 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 08/13/12 (confirmed)
Average Daily Volume = 8.1 million
Listed on July 07, 2011


Home Inns & Hotels Management - HMIN - close: 17.65 change: +0.45

Stop Loss: 20.25
Target(s): 18.00 & 15.50
Current Gain/Loss: + 9.9%
Time Frame: exit prior to the Aug. 9th earnings report
New Positions: see below

Comments:
07/26/12 update: The oversold bounce continues for HMIN. Shares are up three days in a row. The stock is nearing what should be overhead resistance at its simple 10-dma (17.70) and the $18.00 level. More conservative traders may want to tighten their stops.

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: 43.20 change: +1.13

Stop Loss: 45.25
Target(s): 40.25
Current Gain/Loss: + 1.5%
Time Frame: exit prior to the Aug. 1st earnings
New Positions: see below

Comments:
07/26/12 update: The bounce in HOG stalled at its 10-dma. If this rebound continues the stock should find additional resistance near $44.00 and its 200-dma. I am not suggesting new positions at this time. We do not want to hold over the August 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


Hewlett Packard - HPQ - close: 18.01 change: +0.23

Stop Loss: 20.15
Target(s): 16.50
Current Gain/Loss: + 2.0%
Time Frame: exit prior to the Aug. 22nd earnings report
New Positions: see below

Comments:
07/26/12 update: The market's widespread gains helped HPQ produce a +1.2% bounce. Shares have essentially churned sideways in the $18.25-17.75 zone over the last three days. I don't see any changes from my prior comments. Readers may want to start adjusting their stop loss lower.

Our target is $16.50 but more aggressive traders could aim lower but the 2004 low was $16.08 so the $16.00 level could be support. FYI: The Point & Figure chart for HPQ is bearish with a $7.00 target.

Suggested Position: short HPQ stock @ 18.38

- or -

Long Aug $18 PUT (HPQ1218T18) Entry $0.54

07/23/12 trade opened on gap down at $18.38. Trigger was $18.40

Entry on July 23 at $18.38
Earnings Date 08/22/12 (unconfirmed)
Average Daily Volume = 18.0 million
Listed on July 21, 2011


Kellogg Co. - K - close: 46.61 change: +0.10

Stop Loss: 48.55
Target(s): 44.25
Current Gain/Loss: + 2.4%
Time Frame: exit prior to Aug. 2nd earnings
New Positions: see below

Comments:
07/26/12 update: Kellogg popped higher this morning but the rally ran out of steam. Shares settled with a 10-cent gain as traders sold into strength.

I am not suggesting new positions.

current Position: short K stock @ $47.75

- or -

Long Aug $47.50 PUT (K1218T47.5) Entry $0.85

07/25/12 readers may want to consider taking profits early on the August put. Current bid is $1.40
07/20/12 triggered @ 47.75

Entry on July 20 at $47.75
Earnings Date 08/02/12 (confirmed)
Average Daily Volume = 1.6 million
Listed on July 19, 2011


MGM Resorts - MGM - close: 9.22 change: +0.02

Stop Loss: 10.51
Target(s): 8.10
Current Gain/Loss: + 4.9%
Time Frame: exit prior to the Aug. 7th earnings report
New Positions: see below

Comments:
07/26/12 update: Be careful here. I cautioned readers that the $9.00 level could be support. Sure enough, MGM dipped to $9.00 and bounced. Now the larger trend is still bearish but MGM could easily bounce back to the simple 10-dma (near 9.75) before rolling over again.

I am not suggesting new positions. Cautious traders may want to take profits now.

Earlier Comments:
Looking at a weekly chart you will see significant support near $9.00. Yet 2011 saw a spike down to $7.40 and the Point & Figure chart for MGM is bearish with a $5.00 target. We are aiming for $8.10.

current Position: short MGM stock @ $9.69

- or -

Long Aug $9.00 PUT (MGM1218T9) Entry $0.27

07/23/12 triggered @ 9.69

Entry on July 23 at $9.69
Earnings Date 08/07/12 (confirmed)
Average Daily Volume = 8.9 million
Listed on July 21, 2011


Red Robin Gourmet Burgers - RRGB - close: 28.00 change: -0.09

Stop Loss: 31.05
Target(s): 26.00
Current Gain/Loss: + 6.2%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
07/26/12 update: The lack of a bounce in RRGB two days in a row is still a good sign for the bears. Yet the stock remains short-term oversold. I would not launch new positions now. Readers may want to adjust their stops closer to $30.00.

FYI: The Point & Figure chart for RRGB is bearish with a $22.00 target.

current Position: short RRGB stock @ $29.85

- or -

Long Aug $30 PUT (RRGB1218T30) Entry $1.60

Entry on July 24 at $29.85
Earnings Date 08/09/12 (unconfirmed)
Average Daily Volume = 170 thousand
Listed on July 23, 2011


CLOSED BEARISH PLAYS

CNH Global NV - CNH - close: 37.86 change: +2.41

Stop Loss: 36.05
Target(s): 30.25
Current Gain/Loss: unopened
Time Frame: exit prior to the Aug. 1st earnings report
New Positions: Yes, see below

Comments:
07/26/12 update: CNH shares are seeing a very strong bounce. The stock produced a +6.79% gain. It is unlikely that CNH will reverse soon enough to hit our trigger at $34.25.

We are removing CNH as a candidate. Our trade did not open.

Trade did not open.

07/26/12 removed. Trade did not open.

chart:

Entry on July xx at $ xx.xx
Earnings Date 08/01/12 (confirmed)
Average Daily Volume = 528 thousand
Listed on July 24, 2011