Option Investor
Newsletter

Daily Newsletter, Thursday, 10/25/2012

Table of Contents

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

Market Wrap

Data Good, Revenue Not So Much

by Thomas Hughes

Click here to email Thomas Hughes
Introduction


You couldn't tell by revenue reports or by future guidance but the signs are still pointing to a fourth quarter up tick in GDP. For the most part corporations have had a weak quarter so far as revenue is concerned and that is what fourth quarter guidance is being based on. As an outside observer, it looks to me like the fourth quarter is going to be better than what these corporations and CEO's are forecasting. If this is the case, and operating margins remain the same or continue improving, the fourth quarter earnings season could see a number of upside surprises.

Futures were up this morning following a round of economic data that supports stability and global improvements. The United Kingdom grew at a faster pace than expected, joblessness is still declining, orders for durable goods improved and the housing market is improving.

The Economy

Initial claims for unemployment, while still at elevated levels, were in-line with market estimates. Initial claims fell by 23,000 to an adjusted 369,000 for the week ending 10/19. The previous week was revised up by 4,000 to 392,000. Last weeks revised data tied with data points in April and June for the highest rate of first time claims this year. The four week average also climbed in this latest round of data, gaining 1,500 to reach a three week high. Despite the jump in claims last week and the upward revision initial claims are still lower than they were in the middle portion of this year and trending down.


Continuing claims and total claims for unemployment both fell in the current release. Continuing claims fell by 2,000 to 3.25 million, basically inline with the previous week. Continuing claims are at their lowest level in two months and near 12 month lows. Total claims fell by a much larger 85,000 to 4.92 million. This marks 14 weeks of declines since the mild increase in claims we saw in July. Based on the drop in unemployment last month I have to assume that these people who are no longer receiving benefits have found jobs. If this is true we should see a further decline in unemployment this month.



Other data released today was also positive. Durable goods orders jumped more than expected on strength in the aircraft industry. Economists had been expecting an increase of 8.3% and were pleasantly surprised by a gain of 9.9%. Also, pending home sales increased by .3%. This number is basically flat from last month and is up by 14.5% over last year. The mild gain is not a strong sign of improvement but does show that the housing market is at least stable and that is good enough for now. Adding Wednesday's new home sales data, which gained 5.7%, the housing sector looks pretty good compared to where we were just a year ago. The pending sales data did show strength and weakness on a regional level with some areas growing rapidly while others were in decline.

Tomorrow we will get the eagerly anticipated, at least by me, Advance GDP figures. The number is widely expected to be above previous expectations due to improvements in many areas of the economy. It is possible that the market is expecting this and that the number could be a disappointment if it is not better enough.

Around The World

Asian shares extended their rally to ten days following Chinese PMI data. The numbers show that Chinese manufacturing is closer than ever to expansion. The gains in PMI over the last two months are based primarily on new orders and is expected to keep further stimulus from the Chinese central bank off the table for the near term. The data also supports the soft-landing scenario for the Chinese economic slowdown.

In Europe stocks ended the day mixed with most of the major indexes hovering around the flat line. The UK's release of GDP data, which was surprisingly good, failed to spark a rally. The UK's GDP was reported at 1%, nearly a half point higher than expected. This marks and end to the recent 3-quarter recession experienced by the country.

Gold and Oil

Gold bounced back from hitting its seven month lows yesterday. The metal gained close to 1% percent today on hopes of stimulus from Japan. The Bank Of Japan meets next week and has already stated that it is considering further stimulus for the country. The Gold Index also rallied, moving up from support and the 150 day EMA. The long term EMA is currently coincident with an important support/resistance line, adding to the significance of each. The index has cooled off some since breaking out of its reversal earlier this year but should continue its march upward. In the short term bearish momentum is subsiding and is divergent from price action. My current targets for the index are $225 in the short term and $250 further out. The 200 level will be key for the index over the next few days and weeks, if the index falls below my downside target will be $190 and then $175.

The Gold Index, daily

Black Gold gained in early trading as investors bought into the commodity on hopes of rising demand. The current economic data is supporting growth in the fourth quarter and this is what is leading some to speculate on increased oil consumption. The early rally did not have a lot of support and quickly sold off to near yesterday's closing price. While lower prices are great for the economy and business in general it is not good for expectations of future profits in the oil industry. It will take some time though for the analysts to figure out if the lower cost of fuel for the oil companies will out pace declining revenue from lower prices.

The oil index gapped up at the open, crossing above the 150 day EMA. The index has been trading to the downside for five days running and is now forming a potential bear flag. My previous downside target of 1150 still stands but the move downward will probably not come in a straight line.

Oil Index, daily

Bonds

Prices for ten and thirty year US Treasuries both fell today, approaching 6 month lows. The rate on the ten year note climbed to 1.829% while the 30 bond climbed to 2.9795%. Both rates have been on the rise in recent weeks and now they both look good for further increases. The chart of 30 year bond rates shows the long term 150 day EMA crossing over the shorter term 30 day EMA, a potentially bullish scenario, especially with the rate pushing up against long term resistance.

30 Year Bond Rates

Story Stocks

The story in stocks is still earnings. Earnings and revenue. The trend I have noted of corporations earning more on lower revenue continued today. Proctor & Gamble reported this morning, meeting analyst expectations for revenue (more or less) but posting profits fully 10 cents above projections. P&G was able to do this by lowering their costs and improving margins. Once again I am seeing an improvement in operations and margins, a trend that leads me to believe more and more in the possibilities of calendar fourth quarter upside earnings surprises. The stock responded favorably, gapping up by 3% on heavy volume to hit four year highs and the highest level since the 2008 bear market.

Proctor & Gamble, daily

Colgate Palmolive also reported today. The consumer products company reported an increase in profits that was in line with estimates on a reduction in revenue (sound familiar). Colgate earned an adjusted $1.38 per share and improved margins by 180 basis points. They are also planning a reduction in labor that is scheduled for 2014. The stock, which has been trending up all year, tanked on the report, dropping more than 2%. The decline was halted at the 150 day EMA.

Colgate Palmolive, daily

Ford came out today with an earnings warning ahead of their release next week. Management expanded guidance for expected lossed in the European division, they also announced the closing of plants in the UK and Belgium. The restructuring would cut their European workforce by roughly 18% and is expected to be a long term driver of lower costs. In the statement Ford also said that it expects earnings in the most recent quarter to exceed the previous and Wall Street predictions. The stock gapped up at open, crossing over the 150 day EMA. The stock sold off during the day but maintained support at the long term average.

Ford, daily

Apple and Amazon both reported after the bell, which is probably why trading was so mellow today. Apple was expected to earn $8.85 per share, a drop from the last quarter. The actual report showed a 24% increase in earnings but the gains fell short of the expectation. Actual EPS came in at $8.67 per share and the guidance for the next quarter was reduced significantly. The stock gained a few dollars in after hours trading but after the release the stock was halted due to heavy downside volume. Once after hours trading resumed the stock price quickly dropped below the $600 mark; trading was fierce and share price regained $600 but is still down from the close of regular trading.

Apple, daily

Amazon was expected to produce a loss this quarter of -$0.08 per share. Actual results were far worse than expected and sent the stock tumbling 10% in after market trading. The stock has been trading down ever since making a reversal earlier this year and I think it will probably keep going down.

Amazon, daily

The Indexes

The major indexes traded around flat line today following the recent selling. The SPX broke down through one of its support lines on Tuesday and has since held that level. The breakdown through support is troubling for the bulls in the short term as it may bring on some more technical selling. On the daily charts bearish momentum is increasing with each round of selling but so far the long term up trend has not been broken.

SPX, daily closes

On the longer term charts showing weekly closes momentum has turned bearish but is still very weak.

SPX, weekly closes

The VIX has retreated from its peak earlier this week but is still above the long term EMA. The volatility index looks poised for more gains and those gains could come tomorrow due to Amazon and Apple.

The VIX, daily

The Dow charts show that short term support has failed. The index is now sitting on a longer term support level (right around 13,000) with bearish momentum on the rise. I think that the index will hold this level provided there are no truly surprising developments in earnings or the economy. The caveat is that Apple and Amazon are going to spark some volatility tomorrow and the current market levels could continue to break down.

Dow Jones Index, daily

Today the Nasdaq Composite Index fell to close below the 150 day EMA for the second day in a row. This in itself isn't troubling until the index makes a move down from the EMA. While it holds around the long term average we can assume that institutional investors are using the weakness as an entry point. This index is in similar straits as the other two indexes but the technical indicators on the daily charts show that the bearishness is in decline and diverging from price. However, today's announcements after the bell from Amazon and Apple could send the index sharply lower tomorrow.

Nasdaq Composite, daily

Earnings seasons jitters will likely come out in full force tomorrow. Amazon and Apple are two very high profile companies to report earnings shortfalls and the selling could be fierce. On top of that the Advance GDP report could add fuel to the fire if it does not satisfy the markets expectations. We'll have to watch carefully to see if and when support kicks in. The impending up tick in GDP I am expecting for the fourth quarter should provide support for the indexes, if not then my upside targets for this year will fly right out the window.

Be vigilant, trade conservatively and remember the trend.

Thomas Hughes


New Plays

About To Break Down

by James Brown

Click here to email James Brown


NEW BEARISH Plays

Textainer Group - TGH - close: 30.20 change: -0.93

Stop Loss: 30.75
Target(s): 25.25
Current Gain/Loss: unopened

Entry on October xx at $ xx.xx
Listed on October 25, 2012
Time Frame: exit prior to the Nov. 6th earnings report
Average Daily Volume = 215 thousand
New Positions: Yes, see below

Company Description

Why We Like It:
TGH owns and leases marine cargo containers. You might think that with the rising Baltic Dry Goods Index ($BDI) it would indicate growth in oversea shipping demand. Yet if you look at shares of TGH the stock has been underperforming. The stock is actually poised to breakdown under key support near the $30.00 level.

Today's low was $29.66. The April 2012 low was $29.53. I am suggesting a trigger to open bearish positions at $29.45. If triggered our target is $25.25. However, we do not want to hold over the Nov. 6th earnings report so we only have a couple of weeks.

Trigger @ 29.45

Suggested Position: short TGH stock @ (trigger)

Annotated chart:




In Play Updates and Reviews

Morning Rally Fades Yet Again

by James Brown

Click here to email James Brown

Editor's Note:
The stock market's rally attempt this morning quickly faded, much like yesterday's. Fortunately, traders bought the dip midday and stocks bounced back into positive territory.

FYI: I am suggesting we exit our PCL trade tomorrow at the closing bell.

Current Portfolio:


BULLISH Play Updates

Bank of America - BAC - close: 9.24 change: -0.07

Stop Loss: 9.25
Target(s): 10.45
Current Gain/Loss: unopened

Entry on October xx at $ xx.xx
Listed on October 18, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 141 million
New Positions: Yes, see below

Comments:
10/25/12: Hmm... shares of BAC underperformed both the major indices and its peers in the financial sector today. Today's decline does look like a breakdown from the recent sideways consolidation. If BAC does not rebound tomorrow I will probably drop it as a bullish candidate.

Earlier Comments:
I am suggesting a trigger to launch bullish positions at $9.65 with a stop loss at $9.25. Our multi-week target is $10.45.

Trigger @ 9.65

Suggested Position: buy BAC stock @ (trigger)

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

buy the 2013 Jan $10 call (BAC1319a10)



Ctrip.com Intl. - CTRP - close: 19.53 change: -0.26

Stop Loss: 19.25
Target(s): 24.75
Current Gain/Loss: unopened

Entry on October xx at $ xx.xx
Listed on October 22, 2012
Time Frame: Exit prior to the Nov. 5th earnings report
Average Daily Volume = 2.9 million
New Positions: Yes, see below

Comments:
10/25/12: CTRP failed at resistance again with shares reversing under its exponential 200-dma. When shares do finally breakout the move could be explosive. I don't see any changes from my prior comments.

A breakout past this resistance could lead to more short covering. I am suggesting a trigger to launch small bullish positions at $20.55 with an initial stop loss at $19.25. Our target is $24.75 but we will plan to exit ahead of the November 5th earnings report if CTRP doesn't hit our target by then.

Keep positions small to limit risk. CTRP can be a little volatile.

Trigger @ 20.55 *Small Positions*

Suggested Position: buy CTRP stock @ (trigger)

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

buy the NOV $21 call (CTRP1217k21)



DreamWorks Animation - DWA - close: 20.86 change: +0.35

Stop Loss: 19.95
Target(s): 22.00
Current Gain/Loss: + 1.3%

Entry on October 18 at $20.60
Listed on October 17, 2012
Time Frame: exit prior to the Oct. 30th earnings report
Average Daily Volume = 902 thousand
New Positions: see below

Comments:
10/25/12: DWA displayed some relative strength with a +1.6% gain. The stock looks poised to breakout past the $21.00 level soon.

Our exit target is $22.00 but more aggressive traders could aim higher.

Earlier Comments:
The stock could see a short squeeze. The most recent data listed short interest at 43% of the 63 million share float. We do not want to hold over the October 30th earnings report.

current Position: Long DWA stock @ $20.60

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

Long NOV $20 call (DWA1217k20) Entry $1.45

10/23/12 new stop loss @ 19.95
10/18/12 triggered @ 20.60



ICICI Bank - IBN - close: 40.29 change: +0.54

Stop Loss: 39.15
Target(s): 44.85
Current Gain/Loss: unopened

Entry on October xx at $ xx.xx
Listed on October 22, 2012
Time Frame: 3 to 6 weeks
Average Daily Volume = 1.4 million
New Positions: Yes, see below

Comments:
10/25/12: IBN challenged the top of its trading range again with today's gap higher at the open. The stock looks like it's coiling for a breakout higher.

Use a trigger to open bullish positions at $40.85. If triggered our target is $44.85. Keep our position size small to limit risk.

Trigger @ 40.85 *Small Positions*

Suggested Position: buy IBN stock @ (trigger)



Plum Creek Timber - PCL - close: 44.01 change: -0.18

Stop Loss: 43.45
Target(s): 44.75
Current Gain/Loss: + 2.0%

Entry on October 15 at $43.15
Listed on October 13, 2012
Time Frame: exit prior to earnings on Oct. 29th (not yet confirmed)
Average Daily Volume = 1.1 million
New Positions: see below

Comments:
10/25/12: Hmm... the morning rally attempt in PCL failed at the $44.50 level. We are almost out of time for this trade. I am suggesting we exit positions at the closing bell tomorrow (Friday). I am also raising our stop loss to $43.45.

current Position: Long PCL stock @ $43.15

10/25/12 prepare to exit tomorrow at the closing bell
new stop loss @ 43.45
10/18/12 new stop loss @ 42.95, adjust target to $44.75
10/16/12 new stop loss @ 42.40
10/15/12 triggered at $43.15



Trex Co. - TREX - close: 34.50 change: -0.13

Stop Loss: 33.70
Target(s): 38.50
Current Gain/Loss: unopened

Entry on October xx at $ xx.xx
Listed on October 23, 2012
Time Frame: exit prior to the Nov. 1st earnings report
Average Daily Volume = 229 thousand
New Positions: Yes, see below

Comments:
10/25/12: TREX struggled with resistance near $35.00 again this morning. It's worth noting that short-term support near $34 held up again. There is no change from my earlier comments.

Earlier Comments:
I am suggesting a trigger to open bullish positions at $35.15. Our target is $38.50 but if shares don't move fast enough then we will plan on exiting prior to the November 1st earnings report.

Trigger @ 35.15

Suggested Position: buy TREX stock @ (trigger)



BEARISH Play Updates

Carrizo Oil & Gas - CRZO - close: 25.48 change: +0.62

Stop Loss: 25.85
Target(s): 20.50
Current Gain/Loss: unopened

Entry on October xx at $ xx.xx
Listed on October 24, 2012
Time Frame: exit prior to earnings on Nov. 6th,
Average Daily Volume = 624 thousand
New Positions: Yes, see below

Comments:
10/25/12: CRZO has a cloud of about six moving averages directly above it. Any one of these could have been resistance. Yet the spike higher this morning pierced all of them only to reverse lower once it was in the clear. I'm sure there were a few stops hit today. We are still waiting for a breakdown.

I am suggesting small bearish positions if CRZO can trade at $24.35 or lower. If triggered our target is $20.50. However, I will admit that is a bit optimistic. We do not want to hold over the early November earnings report and will plan on exiting prior to the announcement that is expected on Nov. 6th (still an unconfirmed date).

I mentioned that we want to limit our position size and that's because CRZO already has a sizeable short interest at 18% of its small 36 million share float.

Trigger @ 24.40

Suggested Position: short CRZO stock @ (trigger)



Navistar Intl. - NAV - close: 18.59 change: -0.49

Stop Loss: 20.05
Target(s): 16.00
Current Gain/Loss: + 5.9%

Entry on October 19 at $19.75
Listed on October 16, 2012
Time Frame: 3 to 6 weeks
Average Daily Volume = 1.6 million
New Positions: see below

Comments:
10/25/12: NAV continues to underperform. Shares lost -2.5% to close at new multi-year lows. I am lowering our stop loss down to $20.05.

Earlier Comments:
The 2008 lows were near $15.50 so we're going to target a drop to $16.00. FYI: There is already a growing amount of bearish pressure on the stock with the most recent data listing short interest at 15% of the 47.4 million share float.

current Position: short NAV stock @ $19.75

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

Long NOV $20 PUT (NAV1217w20) entry $1.55

10/25/12 new stop loss @ 20.05
10/24/12 NAV announced plans for 10 million new shares of stock
10/20/12 new stop loss @ 20.55
10/19/12 triggered @ 19.75



Sohu.com - SOHU - close: 38.69 change: +0.14

Stop Loss: 40.05
Target(s): 36.00
Current Gain/Loss: + 2.2%

Entry on October 10 at $39.55
Listed on October 9, 2012
Time Frame: Exit prior to the Nov. 5th earnings report
Average Daily Volume = 472 thousand
New Positions: see below

Comments:
10/25/12: SOHU is trying to bounce but the last couple of days have seen the stock fail at the simple 10-dma. I am not suggesting new positions at this time.

Earlier Comments:
I have to warn you that SOHU can be a volatile stock so we need to limit our position size to reduce our risk or consider trading the options. Our target is $36.00. More aggressive traders could aim for the $34.00 area.

*Small Positions*

current Position: short SOHU stock @ $39.55

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

Long Nov $37.50 PUT (SOHU1211w37.5) entry $1.85

10/23/12 new stop loss @ 40.05
10/20/12 new stop loss @ 40.55
10/18/12 new stop loss @ 41.01



Trimble Navigation - TRMB - close: 47.25 change: +0.83

Stop Loss: 48.05
Target(s): 42.50
Current Gain/Loss: - 1.6%

Entry on October 19 at $46.50
Listed on October 10, 2012
Time Frame: exit prior to earnings on Nov. 1st
Average Daily Volume = 697 thousand
New Positions: see below

Comments:
10/25/12: Ouch! TRMB outperformed the market today with a +1.7% bounce. The close above $47.00 and its 100-dma and exponential 200-dma is bad news for short-term bears. There is still likely resistance in the $48-49 zone but our stop loss is at $48.05.

I am not suggesting new positions.

(Small Positions)

current Position: short TRMB stock @ $46.50

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

Long Nov $45 PUT (TRMB1211w45) Entry $1.40

10/23/12 new stop loss @ 48.05, warning, today could be a bullish reversal in TRMB
10/19/12 triggered @ 46.50