Option Investor
Newsletter

Daily Newsletter, Wednesday, 8/1/2012

Table of Contents

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

Market Wrap

FOMC Drives Markets

by Thomas Hughes

Click here to email Thomas Hughes
As mentioned by my colleagues in previous wraps, today's market was driven by the FOMC. The economic data, which continues to show declines, was ignored in hopes of further policy easing and stimulus.



The weak data will help to increase the chances for policy easing in the future but most analysts, economists and traders agreed that the there would be little in the way easing with this meeting and they weren't wrong. The Fed left the rate unchanged and announced no new policy changes. They cited a number of negative and/or declining metrics in their statement and downgraded their view of the economy. The wording in the statement was changed from “expanding moderately” to “decellerated somewhat” in the first half of the year. What was surprising was a the lack of extension of their low-rate pledge, which should stand until 2014. The statement also said that additional action would be taken if it was deemed necessary. This is almost exactly what Bernanke has said before in statements to congress and the press.

The decision by the FOMC to hold off on further stimulus could turn out to be very wise. There are expectations for the global economy to turn up in the second of half of this year already, without stimulus. Several estimates, including one from Kiplinger's and one from the Conference Board, have second half GDP growth accelerating to near 2%. If that is the case, then the upturn is happening now, without the easing and perhaps we should wait and see how it unfolds.

The day started as the futures markets considered the overnight data out of Asia. Basically, it was set aside in favor of the FOMC meeting. However, it should not be ignored. The China official PMI came in lower than the expected 50.3 at 50.1. This gauge is still showing expansion, but just barely. India also reported that its manufacturing sector had reached a new 9 month low. South Korean manufacturing is also declining and their exports have reached a 3 year low, dropping 8.8% this month. Some economist are speculating that the Asian manufacturing sector will be rebounding in the current quarter but so far there is no evidence of this.

Asian markets traded near the flat line today. Internationally, eyes are on the FOMC and the ECB to determine economic and market direction. The Hang Seng gained 0.12%, the Nikkei lost -0.61% and the Shang Hai index added 0.94%.

The ADP employment data came in much weaker than expected. The estimates were for a gain in employment much larger than what was delivered. ADP reported that its gauge of non-farm private pay rolls increased by 163,000 in July, below the consensus estimate. Analysts had been predicting a much larger gain of 179,000 just last week. ADP also revised its June number down to 172,000 from 176,000.

The US non-farm payroll data is due out at the end of the week and is not expected to be much better than the ADP report. US non-farm payrolls are only expected to grow by about 80,000, much weaker than the economy needs. Within today's ADP number the services sector led with a gain of 148,000 new jobs. Construction employment also picked up for the second month adding 5,000 new jobs. The report cited that this was the 30th month of employment gains and the job market had picked up since the spring downturn. Overall, total unemployment remains at high levels and has made at least a short term bottom from its downtrend earlier this year.



Mortgage Applications rose last week. The gains were made on demand for refinancing of current loans. The number of applications for new home purchases fell, not a good sign for the struggling home market.

The ISM gauge of manufacturing fell to 49.8. Below the median 50 mark, showing a slight contraction in the sector. Analysts had been expecting the number to remain above 50 at 50.4.

Europe was quiet today, awaiting action from the ECB. The ECB meeting tomorrow comes with the same expectations as today's FOMC meeting, a dovish outlook and the possibility of stimulus to come soon. The FOMC made no hints of what or when future stimulus would be, perhaps the ECB will be a little more forthcoming. Today the European markets traded mixed, the FTSE 100 gained 1.38% followed by the Xetra Dax and the Spanish Ibex index at -0.27%.

Earnings are still rolling in, and like the economic data, were mostly ignored in favor of the FOMC and ECB meetings. Time Warner reported lower revenue this quarter but the stock gained over 1% in early trading anyway. The media giant reported a 33% drop in net earnings based on weak magazine sales and CNN's poor ratings. The earnings of $0.44 per share beat the estimates and that is why the stock is up. Time Warner also reported that ad sales were softening and that they expected the revenue from ads to remains flat over the current quarter. The stock traded up to a an all time high but has weak momentum and volume.

Time Warner, daily

Comcast also beat the street's estimates, posting $0.50 per share, vs the expected $0.47. Revenue for the quarter was up and in line with the expectations. The cable operator, like Time Warner, made some gains in internet and phone services but was held back by the operation of NBC. The stock is also trading near multi-year highs with weak momentum.

Comcast, daily

Green Mountain Coffee Roasters released their earnings after the bell. The company reported slowing sales growth and lowered its 2012 outlook for the second time this year. The stock was volatile in after hours trading, first dropping 6% then swinging back into positive territory. Green Mountain is being hit by weakening demand stemming from its k-cup delivery system emerging from patent protection.

Green Mountain Coffee Roasters, daily

Harley Davidson should be in hog heaven after increasing revenue by 14%. The huge gain, based on strong US sales, fell short of the consensus estimates. Harley says it will be impacted negatively in the future by currency exchange rates from over seas operations and slowing sales growth. The stock dropped significantly in early trading, losing more than 3% and falling below a support line.

Harley Davidson, daily

Avon opened lower today, trading on top of a long term support line, after announcing a 70% decline in earnings on a 9% drop in revenue. US sales were particularly weak and were blamed on a declining sales force. Avon also reported profit losses based on currency exchange and the strengthening dollar.

Avon, daily

Master Card increased its profit by 15% but revenue fell short of estimates. The credit provider reported that transactions and payments volume had both increased but total revenue fell short because of customer rebates. The company executives are “uncertain” about economic growth in the second half but see signs of strength in their business. The stock dropped below its short term moving average in early trading and failed to regain the level before close.

Master Card, daily

Owens Corning, maker of building materials, reported that its profit fell by nearly 50% in the quarter. The biggest declines in the business were seen in the Composites section, which accounts for about 1/3 of all business. The stock surged up from a support zone on the news but was held back by the 30 day moving average. Owens is being squeezed by long term support and a down trending moving average.

Owens Corning, daily

The price of oil traded up over 1% today but settled back toward the 0.8% range following the FOMC rate decision announcement and statement. The price was further supported by an unexpectedly large draw on oil supply. Oil gained $0.69, or .78%, at today's close.

Gold dropped sharply today ahead of the FOMC announcement, falling below $1600 for the first time in over two weeks. The price of all metals fell today following the string of weak economic reports from around the world. Silver and Copper both lost around 2% during the days trading.

The Gold Index fell today but was held up by its short term moving average. The index has now made a higher low and appears to be confirming long term support set in 2010. There is still downside risk in gold, if the economy begins to show signs of improving and the Fed does not need to act at the next meeting gold could resume it's fall.

The Gold Index,daily

Today's FOMC meeting was not the market mover that traders were anticipating. The week remains full, so be watchful, this week could still prove to be important for the equities markets. Tomorrow eyes will be on the ECB but there will also be important employment data that will need to be considered. Tomorrow Challenger reports its expected job cuts numbers and unemployment claims are on the list. The data continues on Friday with the US non-farm payrolls numbers.

Economic Calendar

Last week the S&P entered the resistance zone between 1380 and 1420 I have described in past recaps and has since eased lower in anticipation of today's announcement. Ahead of the release the S&P traded in a tight range, just over and under the bottom number of the range and the 78.8% retracement of the 2008 bear market. Immediately following the announcement the S&P turned negative but quickly recovered from the selling pressure. During the afternoon the major market flirted with yesterday's closing level but failed to regain positive territory.

S&P 500, one day

Today the S&P 500 closed beneath the resistance zone after trading in a very tight range. The MACD and stochastic indicators are both weak on the one day charts and divergent from the two month up trend. The FOMC decision did very little in the way of helping bullish momentum and I am expecting the same from the ECB decision. The employment numbers tomorrow and especially on Friday will likely have more impact on near term direction.

S&P 500, daily

The Vix made a higher low this week and moved above its short term moving average. The VIX is still in the calm zone, between 15 and 20 but heading up toward the top end of the range. While not alleviating current fears, the FOMC did not cause any new ones and that is what I expect tomorrow from the ECB as well.

VIX, daily

The Dow treaded water at the 13,000 mark today but fell to near 12975 just before closing. Now that the FOMC is out of the picture, at least for the next few weeks, earnings and the economy will take over again. There is currently no reason to expect an improvement in corporate earning in the next quarter and that is what will likely drive stock prices now.

Dow, daily

Keep on the lookout for signs of economic strength and beware of unexpected weakness. The ECB is likely to follow the lead of the FOMC and maintain its dovish stance while doing nothing at this time. The ECB is likely to move before the FOMC but when is still in question. The world's attention, the trading world's attention anyway, will be on Mario Draghi and what the ECB says it's going to do to spur the European economy.

Thomas Hughes


New Plays

Downward Momentum

by Jim Brown

Click here to email Jim Brown
The trend is your friend until it ends. Let's hope it does not end.

Editor's Note:

I have been waiting on a bounce in tonight's short candidate because I hate to jump on a stock that has gone down routinely for a long time. However, even when the broader market was up strongly last week this stock did not rise.

I know everyone has looked at charts in the past that went up or down in a straight line for a long time and wished they have jumped on the bandwagon a long time ago but we waited for an entry that never came.

Sometimes you just have to bite the bullet and jump on the speeding train.


NEW BULLISH Plays

No new Longs today


NEW BEARISH Plays

Ingram Micro - IM - close: 14.72 change: -.20

Stop Loss: 15.65
Target(s): 12.00
Current Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Ingram is a technology company that sells all types of computer hardware and components. The hardware sector is very soft today. Companies are holding off on new purchases until they see how the election plays out and what happens to the fiscal cliff.

Ingram posted earnings this week of 39 cents that beat estimates by a penny. Revenue only rose +0.3% from the year ago quarter. Currency translation cost the company 5% of their earnings. The company used the Europe excuse for the lackluster earnings.

They also complained about product mix saying customers are buying cheaper products with lower margins. Expenses rose +2.2% and operating margin declined to 4.0%. That does not leave a lot for profit.

They guided lower for Q3 saying revenue would be flat and gross margins to decline further. They warned they would be facing an additional interest burden of $2 million for debt incurred to fund the Brightpoint acquisition.

Wednesday's close at $14.72 is last ditch support dating back to mid 2010 and again in March 2008. The stock traded lower in the recession to $10 and below. If Ingram declines below today's closing support I believe it will retest congestive support at $12.

Trigger @ 14.60

Suggested Position: Short IM stock @ $14.60

Premiums on options are skewed so shorting is the only play.

Current Portfolio:

Entry on July xx at $ xx.xx
Earnings Date 08/09/12
Average Daily Volume = 1.3 Million
Listed on August 1, 2012


In Play Updates and Reviews

Surprising Resilience

by Jim Brown

Click here to email Jim Brown
The market showed surprising resilience after the Fed failed to enact any new stimulus programs.

Editor's Note:
The markets declined after the Fed announcement then rebounded to positive territory for a few minutes before rolling over and closing near the lows of the day. It was still a surprisingly tame reaction to the Fed news.

Analysts believe investors are more concerned about what the ECB will do on Thursday and the Fed actually left a window open for an intermeeting move if the ECB disappoints.

The Fed changed its language from "monitoring and may change" to "ready to announce new policy," which analysts thought was one step closer to a new program. This is just speculation by analysts and no guarantee of any future action.

The calendar for the rest of the week has the ECB meeting on Thursday and the Nonfarm Payrolls on Friday. Either or both could dramatically move the market but it would take an abnormal increase in policy by the ECB to really spike the market. The odds are better they will disappoint.

Estimates for the payroll report are for a gain of +100,000 jobs. Anything around that number would be market neutral or even negative because it would not be bad enough for the Fed to act.

Emulex remains unopened, EZPW was triggered. HMIN was stopped.

I changed the stop losses on the stocks in yellow on the portfolio graphic.

James is on vacation this week.

Current Portfolio:


BULLISH Play Updates

Jarden Corp. - JAH - close: 45.08 change: -.17

Stop Loss: 43.75
Target(s): 49.00
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Company Description

Comments
Update 8/01/12:
No move. No news. I am encouraged there was no decline. All we need now is a positive market.

Our multi-week target is $49.00.

Entry @ 45.55

Entry on July 27 at $ 45.55
Earnings Date 07/24/12
Average Daily Volume = 652 thousand
Listed on July 26, 2012


Sandisk Corp. - SNDK - close: 41.43 change: +.30

Stop Loss: 38.95
Target(s): 50.00
Current Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Company Description
Comments:
8/01/12 update:
SNDK actually rallied slightly in a negative market so I expect a decent move if the market turns positive.

Trigger @ 42.75 hit 7/30/12

Suggested Position:

Long SNDK stock @ $42.75

OR

Long SNDK Sept $44 Call, @ $2.28.

Entry on July 30 at $ 42.75
Earnings Date 07/20/12 (past)
Average Daily Volume = 4.5 Million
Listed on July 28, 2012


Emulex - ELX - close: 6.24 change: -.25

Stop Loss: 5.85
Target(s): 7.25
Current Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Back on July 5th Emulex and Broadcom settled a long running suit. Shares of ELX declined sharply on the settlement but found support at the $6.20 level. On Friday the entire chip sector was crushed at the open knocking ELX back to $5.85. However, the shares rebounded immediately to end the day flat and then continued their rebound on Monday when the majority of the Nasdaq was negative.

Emulex announced on Monday they had a new fibre channel product for Dell equipment with transfer speeds of 16Gb. That is extremely fast compared to the 3-6 Gb speeds of normal equipment. The transfer speed is important because of the massive amounts of data that current generation servers have to manage on an hourly basis.

According to IDC the total data in the storage universe will triple from 2.7 zettabytes in 2012 to more than 8 zettabytes by 2015. Moving that data around will consume more and more time so faster channel speed is critical. The new Emulax HBA devices are capable of handling over one million I/O operations per second, per port. That is up to five times faster than current technology.

I believe this announcement will insulate Emulex from further broad market declines but of course it does not make them immune.

We may hold this position over earnings on August 9th.

Trigger @ 6.65

Suggested Position: buy ELX stock @ $6.65

Entry on July xx at $ xx.xx
Earnings Date 08/09/12
Average Daily Volume = 4.5 Million
Listed on July 30, 2012


BEARISH Play Updates

Focus Media Holdings - FMCN - close: 19.80 change: +.39

Stop Loss: 20.10
Target(s): 15.25
Current Gain/Loss: - 7.0%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
8/01/12 update:
FMCN finally declined after several days of creeping higher. Support at $18.35 is the next target.

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, 2012


Groupon, Inc. - GRPN - close: 6.50 change: -0.18

Stop Loss: 7.15 (new)
Target(s): 6.25
Time Frame: exit prior to the Aug. 13th earnings report
New Positions: see below

Comments:
8/01/12 update: A new low on Groupon allowed me to lower the stop loss to $7.15 to avoid a sudden surprise. We are only 25 cents away from the exit target.

The exit target is $6.25.

*Small Positions*

current Position: short GRPN stock @ $8.40

- or -

Long Aug $8.00 PUT (GRPN1218T8) Entry $0.80

07/27/12 lowered stop to $8.25.
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, 2012


Hewlett Packard - HPQ - close: 17.65 change: -0.58

Stop Loss: 18.75 (new)
Target(s): 16.50
Time Frame: exit prior to the Aug. 22nd earnings report
New Positions: see below

Comments:
8/01/12 update: Finally a decent decline to a new low. I lowered the stop loss to 18.75.

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

- or -

Long Aug $18 PUT (HPQ1218T18) Entry $0.54

07/27/12 lowered stop loss to 19.25
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, 2012


MGM Resorts - MGM - close: 9.42 change: -0.10

Stop Loss: 9.90
Target(s): 8.10
Time Frame: exit prior to the Aug. 7th earnings report
New Positions: see below

Comments:
8/01/12 update: No movement, no news. No change.

I am not suggesting new positions.

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, 2012


Red Robin Gourmet Burgers - RRGB - close: 29.34 change: -.53

Stop Loss: 30.50 (new)
Target(s): 26.00
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
8/01/12 update: No movement, no news. I lowered the stop loss to $30.50.

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, 2012


EZCORP, Inc. - EZPW - close: 21.86 change: -0.67

Stop Loss: 22.85 (new)
Target(s): 20.05
Current Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Company Description
8/01/12 update:
We finally got an entry on Ezcorp when it declined to $21.80 intraday. The sharp decline could be an omen of things to come. I lowered the stop loss to 22.85.

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

Entry on July xx at $ xx.xx
Earnings Date 07/24/12
Average Daily Volume = 381 thousand
Listed on July 26, 2012


CTrip.com. - CTRP - close: 12.71 change: +0.21

Stop Loss: 14.25
Target(s): 10.25
Current Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Company Description
Comments:
8/01/12 update:
Minor rebound after a new low on Monday.

The chart is really ugly and there is no support until $10.

Trigger @ 13.15 hit 7/30/12 @ 10:40

Position: short CTRP stock @ $13.15

- or -

Long the Dec $12 PUT @ $1.10

Entry on July 30 at $ 13.15
Earnings Date 07/24/12
Average Daily Volume = 2.8 Million
Listed on July 28, 2012


CLOSED BULLISH PLAYS

No long plays closed


CLOSED BEARISH PLAYS

Home Inns & Hotels Management - HMIN - close: 18.86 change: +.60

Stop Loss: 18.65
Target(s): 18.00 & 15.50
Time Frame: exit prior to the Aug. 9th earnings report
New Positions: see below

Comments:
8/01/12 update: HMIN was one of the better performing stocks in today's market and it rose to hit our stop loss at $18.65 ending the play.

The first profit trigger was hit at $18.00 on July 12th for a gain of +1.60 but the second target at $15.50 remained elusive.

Position: short HMIN stock @ $19.60
First exit @ $18.00, +1.60
Second exit at $18.65, +0.95.

- or -

Long Aug $20 PUT (HMIN1218T20) Entry $1.70, bid $1.75 at stop. No options traded today.

07/27/12 new stop loss @ 18.65
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
Chart of HMIN

Entry on July 10 at $19.60
Earnings Date 08/09/12 (confirmed)
Average Daily Volume = 284 thousand
Listed on July 09, 2012