Option Investor
Newsletter

Daily Newsletter, Tuesday, 9/11/2012

Table of Contents

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

Market Wrap

Moody's Warning Lifts Stocks

by Jim Brown

Click here to email Jim Brown

You can't make this up. A warning by Moody's of another potential debt downgrade for the USA helped to lift the market as the dollar fell.

Market Statistics

Moody's warned the U.S. could lose its AAA credit rating if next year's budget talks do not result in a lower debt to GDP ratio. S&P downgraded the U.S. in August 2011 and the market went into a brief tailspin with the S&P diving to 1100. The reason the market did not crater today is that the Moody's warning is well into the future. We will be past the elections and into heated budget discussions in Q1. The outcome of those discussions is expected to be positive with some kind of spending cuts and a plan to reduce the debt. I know, the odds of anything meaningful being done are slim but that is when the Moody's threat becomes more realistic.

The threat did push the dollar to a four month low. Expectations for the Fed to announce new stimulus on Thursday was also a factor. The euro rose to a four month high at 1.2834 intraday on expectations for the German court to rule positively on the constitutionality of the ESM at 4:AM ET in the morning.

The falling dollar pushed stocks and commodities higher but unless the Fed announces a major QE program on Thursday the commodity rally is done. That is probably why they did not react strongly today with gold gaining only $2.40 and crude oil 30 cents. Commodity traders see clouds forming in their crystal ball.

Dollar Index Chart

Euro Chart

The currencies will reverse hard if the German high court were to rule negatively on the constitutionality of the ESM bailout fund. The euro could plunge on the news because that would throw the ECB bond buying program into turmoil and prevent the ESM from being used as a rescue vehicle. This would be a very negative event for Europe. The German courts don't want to approve funding of weaker countries by the ECB. However, in theory the ESM can fund those countries after they agree to follow an austerity plan tailored to their specific situation. Analysts give the court about a 75% chance to rule in favor of the ESM. That happens at 4:AM ET and that will directly impact our market open on Wednesday. A rejection of the ESM would mean immediate spikes in bond rates for Spain and Italy and all the weaker countries in the euro zone.

The Manpower Employment Survey for Q4 found that most U.S. employers are unwilling to add workers because of uncertainty around the November elections and the fiscal cliff. The survey has been done continuously for 50 years and surveys 18,000 employers. The net employment outlook for Q4 declined -7 points from +15% to +8%. A positive number indicates hiring growth but that was a significant drop. That compares to the -2 low in 2009 and the all time high of +21 in 2006. Only one job category, education and health services, had a stronger hiring outlook than the prior quarter. Construction and manufacturing sectors saw the outlook decline.

Across the U.S. 17% of respondents reported they were planning on hiring in Q4. That was a drop from 21% in the prior survey. Nine percent of respondents said they were going to layoff workers, up from 6% in the prior survey. Seventy-two percent of respondents said they were not going to make any changes to employment.

Twenty-eight of the 42 countries surveyed in the global survey reported deteriorating hiring conditions while only 10 countries said hiring conditions improved. Three countries were unchanged. Those countries in Europe currently in crisis saw their net employment numbers sink even further. Greece fell to -15%, Italy -9%, Spain -7%, Ireland -7%. Those numbers represent continued employment declines. Germany was +5%, UK +3%, Switzerland +5% and Norway +7%.

The Job Openings and Labor Turnover Survey (JOLTS) for July saw job openings decline and hiring also slowed. The headline number of 2.7% has now been level for three consecutive months. Job openings declined from 3.722 million to 3.664 million. Hires declined from 4.284 million to 4.229 million. However, layoffs declined sharply from 1.761 million to 1.554 million. That is the lowest level since the survey started in December 2000. Businesses are not slashing jobs but hiring is weakening.

Moody's JOLTS Chart

The economic calendar for Wednesday is headlined by the German ESM vote and the Apple iPhone event. The big news is still Thursday with the FOMC statement and the Bernanke press conference. Analysts have backed off their 75% consensus for new stimulus to be announced and that is now 60%. The most expected change to the policy would be a change in the forecast for keeping rates low from the current 2014 to a new range of 2015 or longer. Vice chairman Janet Yellin said in a recent interview that FOMC participants actually thought rates would remain low until 2017 and the target date for the Fed to start slimming down its massive portfolio of securities.

The potential for a new open ended QE program is slightly less than 50% according to analysts on Tuesday. Another option is for the Fed to quit paying the .25% interest on funds on deposits at the Fed. They could reduce that amount or even make it negative in order to force the banks to find another use for the money like making consumer loans. However, that is how we got into the financial mess. Banks were forced to lend money to borrowers with weak credit in order to remain competitive. I don't think the Fed can force banks to lend today. The memory of the recent pain is too vivid.

Any FOMC move other than an open ended QE program is likely to be met with a market selloff. Expectations are very high in the market. With the markets at multi-year highs any resulting move is likely to be strong regardless of the direction.

Economic Calendar

The big event for Wednesday is the Apple iPhone 5 announcement at 1:PM ET. The phone is expected to be the same price as previous models and have a four inch screen. The screen width will be the same but the phone will be taller. The back of the case is expected to be metal instead of plastic and the phone may be thinner. It will also be "4G compatible" using LTE. I am not sure what the compatible means but I have seen it in several rumors as opposed to just saying 4G LTE.

Apple shares declined -$17 on Monday to $662 and another -$2 today to $660. This is a head start on the sell the news event that normally follows an iPhone announcement. The iPhone 4 saw a -7.6% decline in the following week. The iPad 2 saw a -6.1% decline and the iPhone 4S decline was -2.3%. However, the "New iPad" saw Apple shares rise +1.8% in the following week.

Since Apple was right at a new high at the open on Monday there is plenty of risk for those holding over the announcement. Apple shares have traded in a $20 range above $660 for the last three weeks and they have been unable to continue the move higher that started when the announcement date was leaked. That suggests the good news is already priced in.

Apple Chart

Stock news was rather scarce today with everyone waiting for the economic events. Volume was low at 5.7 billion shares and it should be more with the markets testing new highs.

Luxury goods maker Burberry Group (BURBY) shook up the retail sector with a warning its full year profits would disappoint due to slowing global sales. The company said profits would come in at the lower end of analyst estimates. Analysts were quick to question if this was a Burberry only sales decline or was it system wide. The Burberry CFO put that idea to rest saying "We know we are not alone in terms of what we have seen in the last couple of weeks. Traffic is down." He said he based that on conversations with other luxury goods makers. Same store sales for the 10 weeks ended on Sept 8th were flat with a "deceleration in recent weeks." In another conversation the CFO said same store sales were actually negative in the last couple of weeks with a broad based slowdown in all regions.

In July the company reported slowing sales in Q2 on lower licensing revenue and that was the second quarter of earnings misses. Given the two quarters of misses compared to strong beats by companies like Kors I believe it is more of a Burberry problem than the CFO wants to admit. Sales slowed in the U.S. because the company removed lower price items in an effort to upscale its brand. Shares of BURBY fell -18% on the news.

Burberry Chart

Morgan Stanley (MS) and Citigroup (C) finally settled on what the joint venture wealth management unit was worth. Citi is selling another 14% of the Morgan Stanley Smith Barney LLC unit to Morgan Stanley with the option to purchase all of it. They finally agreed on a $13.5 billion valuation. They already have a 49:51% joint venture in the deal. The deal will see Morgan Stanley acquire another 14% with the option to acquire the remaining 35% by June 1st 2015. Citi said it will book an after tax $2.9 billion charge. The two companies have been arguing over the total value of the unit for a couple years. The settlement allows MS to complete the acquisition as they intended when the deal was first structured in the aftermath of the recession. Shares of both companies rallied.

Morgan Stanley Chart

Facebook (FB) CEO Mark Zuckerberg spoke for the first time publicly since the IPO disaster. He appeared at the TechCrunch Conference at 5:PM tonight. He said the stock drop was "disappointing" and this would be an ideal time to "double down" on Facebook's future. He spoke to a standing room only crowd for about 30 min dressed in a T-shirt and jeans. He said Facebook has not been a stranger to controversy. "It is not like this is the first up and down we ever had." Also, "I would rather be in a cycle where people underestimate us. I think it gives us the latitude t go out and make some big bets." He said it was "really easy for folks to underestimate how really fundamentally good mobile is for us." That conversation thread helped lift the stock +65 cents in afterhours. He said a Facebook phone would not make any sense for us. There had been some analysts suggesting Facebook was exploring a phone product.

He admitted subscriber growth had slowed but mobile growth had increased. He said Facebook could make more money on mobile in the future than they do now on PCs. That would be a good trick but let's hope he is right. Facebook shares rallied +62 cents during normal trading to close at $19.44 and rallied again to $20 in after hours. That $20 level is strong resistance.

Facebook Chart

The White House rejected a request by Israeli Prime Minister Benjamin Netanyahu to meet with president Obama when Netanyahu is in the U.S. later this month to speak at the U.N. meeting. The White House said the president's schedule would not permit a meeting. That is another snub of Netanyahu and Israel by President Obama. Not agreeing to meet with the leader of one of our closest allies at a time of great stress for them is inexcusable. Obama clearly does not want to have to face specific questioning on why he won't force the issue on Iran and why both Obama and SoS Clinton have refused in the last couple to put deadlines on Iran for continuing the nuclear talks. Netanyahu said if Iran knows there is no deadline then it will continue doing exactly what it is currently doing and that is accelerating enrichment and research on nuclear weapons. With no deadline there is no reason to stop. The IAEA disclosed this week that Iran had modeled payload dimensions and weapon yields. Why are they trying to configure a payload that will fit on a missile if they are not planning on building bombs?

The markets too another run at the highs today but they appear to be hitting some stubborn resistance. The S&P rebounded from Monday's selloff to 1429 to a high of 1437.76 today but gave back some ground at the close. That is the third day that 1438 resistance was rock solid.

We can't apply any real significance to the narrow trading ranges and the lack of any material gains. We are in a holding pattern while we wait for the German vote and the FOMC. Whatever move we get for the rest of the week is going to be 100% headline related. Fundamentals don't count this quarter or we would be trading lower after several high profile earnings warnings.

For me to prognosticate about market direction at this point would be silly since any logical argument can be erased with one sentence from the Fed. Suffice to say that 1429 is initial support and 1438 initial resistance. Where we go from there could be a long drop or a long run higher. S&P 1400 is the likely pause point on a decline and 1450 should be resistance on a breakout.

S&P Chart

The Dow is similar to the S&P except that is has failed to break through that high resistance at 13,338 from May. It appears poised to move higher but that is just traders positioning themselves for the FOMC action. Support is 13,250 followed by 13,000.

Dow Chart

The Nasdaq declined -32 points on Monday and although it was higher intraday there was a lot of sell orders at the close to push it into the negative column for a couple minutes before edging out a fractional gain at the close.

Google was the biggest lower at -11 after Apple filed another suit in Poland against Android phones made by Samsung. This battle is far from over and Apple has a lot more cash in the bank.

Support is now 3085 and resistance remains 3135.

Nasdaq Chart

Unless you have a crystal ball for market direction I would remain on the sidelines for the next 48 hours. Once the post Fed move begins we can decide on market direction and take positions with a lot better chance of reward. Entering a position ahead of the FOMC decision on Thursday is a coin toss. Personally if I am flipping coins I want the risk reward to be pocket change rather than large quantities of $100 bills. There is always another trading day as long as you have investment capital.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email


New Plays

Oil & Natural Gas

by James Brown

Click here to email James Brown


NEW BULLISH Plays

Energy XXI Ltd. - EXXI - close: 35.05 change: +0.49

Stop Loss: 33.95
Target(s): 39.75
Current Gain/Loss: unopened

Entry on September xx at $ xx.xx
Listed on September 11, 2011
Time Frame: 4 to 6 weeks
Average Daily Volume = 790 thousand
New Positions: Yes, see below

Company Description

Why We Like It:
EXXI is an oil and natural gas company. Shares have been climbing with a bullish trend of higher lows. Currently EXXI is testing resistance near the $35.00 level. The August high was $35.43.

I am suggesting a trigger to launch small bullish positions at $35.55 with an initial stop loss at $33.95. Our target is $39.75.

Trigger @ 35.55

Suggested Position: buy EXXI stock @ (trigger)

- (or for more adventurous traders, try this option) -

buy the Oct $35 CALL (EXXI1220j35) current ask $2.05

Annotated chart:




In Play Updates and Reviews

Stocks Pare Their Gains

by James Brown

Click here to email James Brown

Editor's Note:
The market gave back some of its gains this afternoon as investors turn cautious ahead of the German court vote on the ESM and the FOMC announcement tomorrow.

Current Portfolio:


BULLISH Play Updates

Constant Contact, Inc. - CTCT - close: 20.35 change: -0.36

Stop Loss: 18.99
Target(s): 24.50
Current Gain/Loss: - 1.7%

Entry on September 10 at $20.70
Listed on September 08, 2011
Time Frame: 4 to 6 weeks
Average Daily Volume = 436 thousand
New Positions: see below

Comments:
09/11/12: CTCT is not seeing much follow through on Friday's bullish breakout past $20.00. Shares spiked higher yesterday and now the stock is retracing those gains. Look for support near $20.00. I would use a dip or a bounce near $20 as a new bullish entry point.

Earlier Comments:
CTCT could see more short covering. The most recent data listed short interest at 28% of the relatively small 29.8 million-share float. Our target is $24.50 but we may adjust that lower. Keep an eye on potential resistance at the simple 200-dma.

current Position: Long CTCT stock @ $20.70



eBay Inc. - EBAY - close: 48.33 change: -0.20

Stop Loss: 46.25
Target(s): 49.75
Current Gain/Loss: + 4.5%

Entry on August 17 at $46.25
Listed on August 16, 2011
Time Frame: 4 to 6 weeks
Average Daily Volume = 12.3 million
New Positions: see below

Comments:
09/11/12: EBAY is testing broken resistance at $48.00 as new support. The stock "should" bounce here but that will depend on how the market reacts to headlines out of Europe and the FOMC tomorrow. More conservative traders may want to tighten their stops.

I am not suggesting new positions at this time.

current Position: Long EBAY stock @ $46.25

- or -

(exited options on 09-10-2012 at the open)
Oct $47 call (EBAY1220J47) Entry $1.89 exit $3.05 (+61.3%)

09/10/12 closed option position this morning (+61.3%)
09/08/12 prepare to exit our call option on Monday morning
09/06/12 new stop loss @ 46.25
09/01/12 new stop loss @ 45.75
08/17/12 triggered at $46.25



Netgear Inc. - NTGR - close: 38.64 change: -0.65

Stop Loss: 38.80
Target(s): 44.75
Current Gain/Loss: unopened

Entry on September xx at $ xx.xx
Listed on September 10, 2011
Time Frame: 6 to 8 weeks
Average Daily Volume = 562 thousand
New Positions: Yes, see below

Comments:
09/11/12: Hmm... shares of NTGR reversed. Technically today's move has actually created a bearish engulfing candlestick reversal pattern. At the moment we are on the sidelines waiting for a breakout.

I am suggesting a trigger to open bullish positions at $40.25. Our target is $44.75. FYI: The Point & Figure chart for NTGR is bullish with a long-term $60 target.

Trigger @ 40.25

Suggested Position: buy NTGR stock @ (trigger)



Scotts Miracle-Gro Company - SMG - close: 43.00 change: +0.02

Stop Loss: 41.30
Target(s): 44.85
Current Gain/Loss: + 2.7%

Entry on September 04 at $41.85
Listed on September 01, 2011
Time Frame: 4 to 6 weeks
Average Daily Volume = 500 thousand
New Positions: see below

Comments:
09/11/12: SMG experienced a little volatility this morning and then closed almost unchanged on the session. Essentially SMG is trying to get through resistance in the $43.50-44.00 area but it may have to dip back toward $42 and its 30-dma before making any progress higher. I am not suggesting new positions at this time.

FYI: The Point & Figure chart for SMG is bullish with a long-term $54 target.

current Position: Long SMG stock @ $41.85

09/06/12 new stop loss @ 41.30
09/04/12 triggered @ 41.85



Veeco Instruments - VECO - close: 35.81 change: +0.27

Stop Loss: 33.90
Target(s): 39.75
Current Gain/Loss: - 0.2%

Entry on September 10 at $35.88
Listed on September 08, 2011
Time Frame: 6 to 8 weeks
Average Daily Volume = 723 thousand
New Positions: see below

Comments:
09/11/12: VECO rallied to a new two-week high intraday before paring its gains. I would still look for a dip near $35.00 as our next entry point.

Our plan was to limit our risk by keeping our position size small.

*Small Positions to Limit Risk*

current Position: Long VECO stock @ $35.88

- (or for more adventurous traders, try this option) -

Long Oct $37.00 call (VECO1220j37) Entry $1.60



Virgin Media, Inc. - VMED - close: 29.44 change: +0.07

Stop Loss: 27.45
Target(s): 31.50
Current Gain/Loss: unopened

Entry on September xx at $ xx.xx
Listed on September 06, 2011
Time Frame: 6 to 8 weeks
Average Daily Volume = 2.5 million
New Positions: Yes, see below

Comments:
09/11/12: VMED has been relatively resistant to any profit taking. Shares remain short-term overbought so we don't want to chase it.

I am suggesting a buy-the-dip trigger at $28.55.

Earlier Comments:
I suspect VMED could see more short covering since the most recent data listed short interest at 20% of the 256 million-share float. FYI: The Point & Figure chart for VMED is bullish with a $41 target.

Buy-the-Dip Trigger @ $28.55

Suggested Position: buy VMED stock @ (trigger)

- (or for more adventurous traders, try this option) -

buy the Oct $28 call (VMED1220j28)

09/08/12 adjust the buy-the-dip trigger higher from $28.25 to $28.55 and adjust the stop loss to $27.45



BEARISH Play Updates

Jive Software, Inc. - JIVE - close: 14.27 change: +0.45

Stop Loss: 15.05
Target(s): 10.25
Current Gain/Loss: - 2.7%

Entry on September 11 at $13.90
Listed on September 10, 2011
Time Frame: 4 to 6 weeks
Average Daily Volume = 1.0 million
New Positions: see below

Comments:
09/11/12: After breaking down through major support near $14.00 yesterday we decided to open bearish positions this morning. Naturally Murphy's Law states that JIVE has to move the opposite direction for us.

Shares opened at $13.90, dipped to $13.50 and bounced. Nimble traders could look for a failed rally in the $14.50-15.00 zone as a new bearish entry point since the $15.00 level should be the next area of overhead resistance.

Earlier Comments:
It looks like lots of investors are already bearish with short interest at 28% of the small 24.8 million-share float. That does raise the risk of a short squeeze so I would limit our position size to reduce our risk. You can also limit your risk by using the put options.

*Small Positions*

current Position: short JIVE stock @ $13.90

- (or for more adventurous traders, try this option) -

Long Oct $15 PUT (JIVE1220v15) Entry $1.90



Westport Innovations - WPRT - close: 32.55 change: +1.03

Stop Loss: 34.05
Target(s): 30.10
Current Gain/Loss: + 2.7%

Entry on September 07 at $33.45
Listed on September 05, 2011
Time Frame: 3 to 4 weeks
Average Daily Volume = 798 thousand
New Positions: see below

Comments:
09/11/12: WPRT also rebounded after yesterday's underperformance. We can look for new resistance at the exponential 200-dma near $33.40 and resistance near the $34.00 level. I am not suggesting new positions at this time.

Earlier Comments:
We do want to keep our position size small to limit our risk because WPRT does have a high amount of short interest. The most recent data listed short interest at 37% of the 40 million-share float. That does raise the risk of a short squeeze. Readers may want to consider limiting their risk by buying put options instead of shorting the stock. FYI: The Point & Figure chart for WPRT is bearish with a $28.00 target.

*Small Positions to Limit Risk*

current Position: short WPRT stock @ $33.45

- (or for more adventurous traders, try this option) -

Long Oct $30 PUT (WPRT1220v30) entry $1.05

09/10/12 new stop loss @ 34.05
09/07/12 triggered @ 33.45