Option Investor
Newsletter

Daily Newsletter, Tuesday, 12/11/2012

Table of Contents

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

Market Wrap

Hope Springs Eternal

by Jim Brown

Click here to email Jim Brown

The markets rallied at the open on hopes a cliff deal was imminent and even after politicians said no the markets closed with gains.

Market Statistics

The president and John Boehner met at the White House over the weekend and no details were released. That was seen as a plus on hopes there was some progress and they did not want to endanger that progress until a deal was done. The Dow opened up to gain +137 points but once the deal denials began to flow the gains began to fade.

The first news came when the press was alerted about an hour in advance that Boehner would speak around noon. Not to let him steal any thunder the president tweeted about 20 min before Boehner spoke "If your taxes go up Dec 31st it will be the republicans fault." A few minutes later Boehner gave a ten sentence speech claiming they offered to accept the tax cuts but the president refused to put any spending cuts on the table. An hour later Harry Reid countered that it was not up to the democrats to come up with spending cuts and they would not discuss cuts until the republicans put a plan on the table with detailed spending cuts.

The goal here for both parties is to make the other suggest cuts first. That way they can blame the other party for wanting to cut Medicare or Social Security benefits. This is simply another scene in the political theater leading up to a last minute resolution. Harry Reid also said he did not believe there would be a deal before Christmas.

Remember, nothing is going to happen until the last minute. Without an imminent deadline fraught with all kinds of economic dangers neither party can marshal enough votes to get a deal done. There has to be an imminent deadline to create a sense of urgency and provide the motive to vote for something lawmakers don't like. Nobody wants to be blamed for pushing the economy over the cliff but at the same time nobody wants to be blamed for raising taxes or cutting Medicare benefits.

Lawmakers really need the market to drop about -1500 points to force them to act. So far the market is still hoping there will be a resolution. Long time investors understand the last minute deadline scenario and they still believe something will get done.

The general consensus today is that the tax deal will get done with taxes going up on the top 2% and remaining at the 2012 rate for everyone else. The rest of the cliff is expected to be kicked well into 2013 through some mutually agreeable legislation so the new Congress will be forced to deal with it later. No lame duck lawmaker is going to want to vote for taxes or benefit cuts. They may want to run for some other office in the future and they will not want that on their record.

Continuing lawmakers will want to deal with the cliff issues one at a time in committee and out of the public eye sometime in 2013. They farther out they can procrastinate the decisions the better for them.

Lawmakers typically hide politically sensitive pieces of legislation inside some other bill. The "Helping Pregnant Mothers and Orphaned Children" bill may include a change in Medicare benefits that is stuck under reams of support for the bill's headline topic. This way they can slip the changes through one small piece at a time with minimal awareness.

What this means for the market is that nothing is going to happen until we reach that last minute where urgency can be used as an excuse for politically unpopular decisions and most of those decisions will probably be can kicked into 2013.

On the economic front the reports were mixed. The weekly chain store sales declined again with a -0.7% drop. This came after the -3.1% post Black Friday drop the prior week.

The Job Openings and Labor Turnover Survey (JOLTS) report showed a steadily improving labor market. Job openings in October increased from 3.55 million to 3.68 million. That was an increase of +7.8% over the same period in 2011. Hiring increased from 4.2 million to 4.34 million for a +2.8% increase over 2011. Offsetting the better news in hiring was the increase in people leaving their jobs, which rose from 4.02 million to 4.08 million. Layoffs did decline -4.6% but they remain 41% of all terminations. This was positive data but it was also lagging data for the October period.

The Manpower Hiring Survey for Q1 improved slightly. Nine percent of net respondents said they would be hiring in Q1 compared to only 8% in Q4. Overall, 17% said they were going to hire, 8% said they were going to cut workers and 72% said they were not planning any changes.

Globally 29 of 42 countries surveyed reported deteriorating hiring conditions. However, the U.K. and Sweden rose +3% and Germany was steady at +5% hiring growth.

The Wholesale Trade report for October saw inventories rise +0.6% and slightly ahead of expectations for a +0.4% rise. Computer equipment, lumber, metals and machinery were the strongest categories. However, wholesale sales declined -1.2% after rising +1.9% in September. On the negative side the inventory to sales ratio rose to 1.22 and is now at the highest point since 2009. The inventory to sales ratio rises in a recession so rising to the highest level in three years is not a good sign.

Lastly the foreign trade deficit for October worsened to -$42.2 billion compared to the -$40.3 billion in September. The deficit has averaged -$44.45 billion a month for the last eight months. Imports of $222.8 billion were offset by exports of $180.5 billion. Crude oil accounted for $11 billion of the deficit.

Obviously the economics for the day were boring. That won't be the case on Wednesday. The FOMC meeting announcement at 12:30 is sure to be a market mover as will be the Bernanke press conference at 2:15. The Fed is expected to announce a program to replace Operation Twist that will buy $25 to $45 billion in treasuries a month for the next year. The Fed is expected to increase its balance sheet from the current $2.84 trillion to more than $4 trillion by year end.

Any deviation from those expectations is sure to cause some market volatility. Traders have been buying stocks even in the face of the cliff problems because they expect the Fed to act. With the cliff negotiations taking on a deadlock stance a disappointment from the Fed could be ugly.

Economic Calendar

As if there was not enough hostility in Washington a group of high net worth individuals called on congress to increase the estate tax to "responsible" levels. Bill Gates, Warren Buffett, Jimmy Carter, George Soros, Robert Rubin, John Bogle, Richard Rockefeller, Norman Lear, Robert Crandall, Leo Hindery and more than 20 others signed the letter. Currently the republicans have a proposal for a 35% tax rate with a $5 million exemption. President Obama wants to raise it to 45% with a $3.5 million exemption. The "responsible tax" group wants 45% OR MORE with a $2 million exemption. Personally I believe if those people want to pay more then just write a check.

Inheritances provide one of the biggest sources of funds for beneficiaries to start new businesses, expand or acquire others. Inheritances are rarely just deposited in the bank to draw interest. This money normally goes to people with less income than the deceased and they will spend it either on themselves or to start a business. Giving the money to the government to spend on drilling oil wells in Brazil as Obama has proposed or building bridges to nowhere is not the best use of the funds. The deceased has paid taxes on that money and taxing it again when they die is double or even triple taxation.

In stock news rare earth producer Molycorp (MCP) had rallied from $9 to nearly $12 this week as the result of some insider buying and a decent short squeeze at the $9 level. The company received a notice several weeks ago from the SEC on an investigation into some of their disclosures. Management said it was no big deal and CEO Mark Smith and several other executives made large purchases of the stock on the open market. The news helped power the rebound from the post SEC news low of $5.75.

After the close today Molycorp announced that CEO Mark Smith had resigned. In a different press release spokesman, Jim Sims, said the board felt the transition of the company from a startup to a fully active mining and manufacturing firm required a different skill set. They appointed vice chairman Constantine Karayannopoulos as the interim replacement while they hunt for a permanent CEO. CK was the former CEO of Neo Material, a rare earth manufacturing company Molycorp acquired for $1.3 billion about six months ago. The spokesman said the resignation was a "mutual" decision. So how mutual was it if he was buying stock to support the price just two weeks ago?

After two years of spending Molycorp has completed the phase one restructuring of the Mountain Pass mine and production is expected to quadruple to an annual rate of more than 19,000 tons by the end of the quarter. That will significantly increase their cash flow and profitability. Rare earth prices have declined about 50% from 2010 levels but that is only temporary as a result of the global economic slowdown. Shares fell sharply in after hours on the CEO news.

Molycorp Chart

Chip maker Texas Instruments (TXN) issued guidance for Q4 of sales in the range of $2.89-$3.01 billion. Analysts were expecting $2.95 billion so no big change. The VP, Ron Slaymaker, said inventory levels were low as well as orders. Low inventory levels "reflect economic uncertainty and relatively weak demand" according to Slaymaker. He said demand remained weak in the computing, communications and industrial markets. Consumer markets were mixed, with TV makers cutting back on orders, while game consoles and e-book readers were seeing higher demand.

Slaymaker projected Q4 earnings between 5-9 cents and analysts were expecting 6 cents so that was a slight increase. The company announced last month it was cutting 1,700 jobs and moving away from digital chips that power phones and tablets because of the increased competition. Samsung now controls half the market for digital chips. TXN is the largest maker of analog chips. TXN shares rallied +4% on the positive earnings guidance. I thought it was a down report based on the often repeated "weak demand" phrase but apparently investors thought differently.

Texas Instruments Chart

Dupont (DD) announced after the close it was boosting its stock buyback by $1 billion and expected to earn $3.25 to $3.30 for the full year. Analysts were expecting $3.29 so that would look like a potential for a miss but shares rallied $1 after the close. DD previously slashed its forecast from $3.79 per share in October. The buyback will be funded with part of the $4.9 billion in cash they are getting from sales of its car paint business to Carlyle Group. The CEO said "While we are seeing indications that market conditions are firming up in some areas, volatility and uncertainty also persist." That seems to be a persistent theme in all the guidance updates lately.

Dupont Chart

The government announced it was selling its remaining 15.9% ownership in AIG in a public offering. The government owns 234.2 million shares and they are pricing them at $32.50 to generate $7.61 billion. AIG shares rallied +6% on the news to close at $35.26. At one point last year the government owned 92% of AIG but has been selling off shares when the market permitted. The last sale in September raised $20.7 billion.

AIG received a $182.3 billion rescue loan from the Fed in September 2008. AIG has sold off $65 billion in assets and used the proceeds to buy back shares from the Fed. The Fed still has some AIG warrants that they are keeping. In other bailouts they eventually auctioned the warrants to generate additional cash and close the relationship.

AIG Chart

Geospace Technologies (GEOS) reported earnings after the close and the stock took a hit. Earnings of 33 cents compared to 28 cents in the year ago period. Apparently investors were expecting more because shares crashed -$9 in afterhours trading.

Geospace Chart

In reality there was not much news for investors today. There was a minor amount of stock news but it was overshadowed by the fiscal cliff headlines. The opening rally took the S&P over near term resistance at 1420 but there was an almost dead stop at strong resistance at 1430. There was a brief spike through that level but it was quickly sold. The index is now back over its 50-day average for the first time since late October.

This is clearly on hopes of a resolution to the cliff and on expectations for further Fed action. Those hopes could be dashed in a heartbeat in the days ahead but for now they seem to be strong enough to overcome the almost daily guidance warnings of weak business conditions and lowered earnings expectations.

Eventually fundamentals will matter again but until then I remain in buy the dip mode. Prior resistance at 1420 should now be initial support. IF, big IF, the S&P moves through 1430 there is not much in the form of resistance until 1460. That would put the index near the highs of the year and thoroughly confuse everyone. Shorts would be pulling their hair out and those in cash would be banging their heads on their desks.

S&P Chart

There was a strong breakout by the Dow to test resistance at 13,279. A break through that level would immediately target the resistance highs from September at 13,625 and the highs for the year. I can't begin to express my amazement at this show of strength in the face of a potential disaster. It just proves that the trend is your friend, until it ends.

Every tick over 13,279 is going to increase the short covering and we could see a race to the highs.

Dow Chart

The Nasdaq exploded over the resistance at 3,000 thanks to strong gains in both Apple and Google gaining +13 each. The Nasdaq came to a dead stop at the 100-day at 3,025 but it appears poised to break out if we get the slightest bit of good news. The 3,000 level should now be support.

Nasdaq Chart

In the weekend newsletter I pointed out the minimal 7 point range on the Russell 2000 for the last seven days. I suggested you trade in the direction of the breakout. That breakout occurred this week with the Russell exploding higher. Fund managers must have gotten some confidential news because they jumped in with big bucks.

The close over the 833 resistance level, if it continues, should produce significant short covering.

Russell Chart - Intraday

Russell Chart - Daily

Late tonight John Boehner said the republicans have given president Obama a new proposal that includes higher taxes and spells out some proposed spending cuts. No specific details were released but that was enough to rekindle hopes and the market will probably reflect that tomorrow as long as politicians refrain from mudslinging overnight.

As you can see in the charts above all the indexes are moving steadily higher and any good news on the cliff could produce a blowout rally. The FOMC meeting on Wednesday is the potential pothole in the yellow brick road to new highs. Anything is possible so be prepared on Wednesday afternoon.

I remain in buy the dip mode until proven wrong.

Until a resolution appears, enter passively, exit aggressively!

Jim Brown

Send Jim an email

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New Plays

Poised to Breakout

by James Brown

Click here to email James Brown


NEW BULLISH Plays

Stamps.com Inc. - STMP - close: 25.84 change: +0.85

Stop Loss: 24.95
Target(s): 29.50
Current Gain/Loss: unopened

Entry on December xx at $ xx.xx
Listed on December 11, 2012
Time Frame: 4 to 8 weeks
Average Daily Volume = 250 thousand
New Positions: Yes, see below

Company Description

Why We Like It:
According to their website Stamps.com provides Internet-based postage services. What they don't say is that they've been stealing business from the U.S. postage service for years. STMP's huge rally in late October was a reaction to better than expected earnings and raised guidance. Since then the stock corrected but shares have begun to reverse higher.

Right now STMP is trying to breakout past resistance in the $26.00-26.20 zone. I am suggesting a trigger to open bullish positions at $26.25. As you can tell from the chart, STMP is a volatile stock. Therefore I am suggesting we keep our position size small to limit our risk.

Trigger @ 26.25

Suggested Position: buy STMP stock @ (trigger)

Annotated chart:




In Play Updates and Reviews

Widespread Gains on Tuesday

by James Brown

Click here to email James Brown

Editor's Note:
The U.S. stock market delivered widespread gains on Tuesday in spite of the gridlock in Washington on the fiscal cliff issue.

Our CREE trade was triggered.

Current Portfolio:


BULLISH Play Updates

Bank of America - BAC - close: 10.51 change: -0.06

Stop Loss: 9.89
Target(s): 11.50
Current Gain/Loss: + 4.1%

Entry on December 05 at $10.10
Listed on December 01, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 150 million
New Positions: see below

Comments:
12/11/12: BAC is still hovering near its recent highs. Yet today's session has created a bearish engulfing candlestick reversal pattern. I would not be surprised to see a pullback soon. Broken resistance at $10.00 should now be new support.

Earlier Comments:
If triggered our target is $11.50. More aggressive traders could aim for $12.00. This is a multi-week trade.

current Position: Long BAC stock @ $10.10

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

Long 2013 Jan $10 call (BAC1319a10) entry $0.51

12/08/12 new stop loss @ 9.89



Banner Corp. - BANR - close: 29.95 change: +0.14

Stop Loss: 28.90
Target(s): 34.00
Current Gain/Loss: - 1.8%

Entry on November 21 at $30.49
Listed on November 20, 2012
Time Frame: 8 to 10 weeks
Average Daily Volume = 157 thousand
New Positions: see below

Comments:
12/11/12: BANR continues to churn sideways. I am not suggesting new positions at this time. BANR should see a rebound off the bottom of the channel soon.

NOTE: BANR doesn't move very fast. This trade could take a couple of months.

*Small Positions*

current Position: Long BANR stock @ $30.49

11/21/12 out trade opened on the gap higher.



Ball Corp. - BLL - close: 44.75 change: +0.21

Stop Loss: 43.25
Target(s): 48.00
Current Gain/Loss: + 2.1%

Entry on November 06 at $43.85
Listed on November 3, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 687 thousand
New Positions: see below

Comments:
12/11/12: The rebound in BLL continues with the stock up three out of the last four sessions. Shares are nearing prior resistance at $45.00. I am not suggesting new positions.

current Position: Long BLL stock @ $43.85

11/24/12 new stop loss @ 43.25
11/17/12 new stop loss @ 42.55
11/06/12 triggered @ 43.85



Cree, Inc. - CREE - close: 34.69 change: +1.17

Stop Loss: 31.49
Target(s): 39.00
Current Gain/Loss: + 2.8%

Entry on December 11 at $33.75
Listed on December 10, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.3 million
New Positions: see below

Comments:
12/11/12: Our new bullish trade on CREE is off to a strong start. Shares opened at $33.55 and then surged toward $35.00. Our trigger to open positions was hit at $33.75. If you missed it I would look for a dip as our next entry point.

Earlier Comments:
If this rally continues CREE could see a short squeeze. The most recent data listed short interest at 17% of the 113 million-share float. If triggered our multi-week target is $39.00. FYI: The Point & Figure chart for CREE is bullish with a $42 target.

current Position: long CREE stock @ $33.75



Electronic Arts - EA - close: 15.15 change: +0.33

Stop Loss: 14.20
Target(s): 17.50
Current Gain/Loss: + 2.9%

Entry on December 10 at $14.72
Listed on December 08, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 4.5 million
New Positions: see below

Comments:
12/11/12: EA was also showing relative strength today. Most of the rally was all in the first 30 minutes of trading. EA spent the rest of the session drifting sideways. The next hurdle is the late November high at $15.32. I am not suggesting new positions at current levels.

Earlier Comments:
More conservative traders might want to wait and look for a rally past $15.00 before initiating positions. EA can be volatile so we'll keep our position size small to limit our risk. We will target a move to $17.50 over the next few weeks. FYI: The Point & Figure chart for EA is bullish with a $21 target.

*Small Positions*

current Position: Long EA stock @ $14.72



Granite Construction - GVA - close: 32.16 change: +0.61

Stop Loss: 29.90
Target(s): 34.50
Current Gain/Loss: + 3.0%

Entry on December 10 at $31.23
Listed on December 08, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 240 thousand
New Positions: see below

Comments:
12/11/12: GVA is showing relative strength as well. The stock posted a +1.9% gain and is now up four days in a row (and four weeks in a row if anyone's counting). I am not suggesting new positions at current levels.

Our multi-week target is $34.50. FYI: The Point & Figure chart for GVA is bullish with a long-term $43.50 target.

Suggested Position: buy GVA stock @ (the open)



Pegasystems Inc. - PEGA - close: 21.91 change: +0.56

Stop Loss: 19.90
Target(s): 24.00
Current Gain/Loss: + 3.1%

Entry on December 10 at $21.25
Listed on December 04, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 257 thousand
New Positions: see below

Comments:
12/11/12: PEGA displayed relative strength with a +2.6% gain. The stock will soon be challenging potential resistance in the $22.50-23.00 zone. Do not be surprised to see a pullback. Our target is $24.00.

current Position: Long PEGA stock @ $21.25



Tenneco Inc. - TEN - close: 32.88 change: -0.03

Stop Loss: 31.45
Target(s): 37.00
Current Gain/Loss: unopened

Entry on December xx at $ xx.xx
Listed on December 04, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 517 thousand
New Positions: Yes, see below

Comments:
12/11/12: TEN is hovering just under resistance near $33.00. There is no change from my prior comments.

Earlier Comments:
I am suggesting we keep our position size small to limit our risk. We will use a trigger to open bullish positions at $33.15. More conservative traders may want to wait for TEN to actually close above the $33.00 level and then open positions the next morning. If triggered our multi-week target is $37.00. This trade could take weeks.

Trigger @ 33.15 *Small positions*

Suggested Position: buy TEN stock @ (trigger)



ValueClick, Inc. - VCLK - close: 19.72 change: +0.15

Stop Loss: 18.75
Target(s): 19.85
Current Gain/Loss: + 8.4%

Entry on November 20 at $18.20
Listed on November 19, 2012
Time Frame: 4 to 6 weeks
Average Daily Volume = 666 thousand
New Positions: see below

Comments:
12/11/12: VCLK continues to march higher and just added another +0.7%. The stock is starting to look overbought here. Our exit target is $19.85 but readers may want to exit early now! I am raising the stop loss to $18.75.

Earlier Comments:
I would keep our position size small. VCLK has been volatile in the past.

current Position: Long VCLK stock @ $18.20

12/11/12 new stop loss @ 18.75
12/08/12 new stop loss @ 18.45, adjust target down to $19.85
11/28/12 new stop loss @ 17.85



BEARISH Play Updates

Chesapeake Granite Wash Trust - CHKR - close: 17.08 change: +0.06

Stop Loss: 18.25
Target(s): 16.40
Current Gain/Loss: + 4.6%

Entry on December 04 at $17.90
Listed on November 26, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 226 thousand
New Positions: see below

Comments:
12/11/12: CHKR continues to hover along the $17.00 level. Downward momentum has stalled with the wider market moving higher. I am not suggesting new positions at this time.

Earlier Comments:
Our initial target is $16.40 but we might reconsider and aim lower.

*Small Positions*

current Position: short CHKR stock @ $17.90

12/10/12 new stop loss @ 18.25



MICROS Systems - MCRS - close: 41.92 change: +0.12

Stop Loss: 44.05
Target(s): 40.25
Current Gain/Loss: + 2.2%

Entry on December 03 at $42.85
Listed on November 28, 2012
Time Frame: 3 to 6 weeks
Average Daily Volume = 542 thousand
New Positions: see below

Comments:
12/11/12: MCRS is still consolidating sideways and managed a minor +0.2% gain. There is no change from my prior comments. Readers might want to tighten their stops closer to the $43 level.

current Position: short MCRS stock @ $42.85

12/08/12 adjust exit target to $40.25
12/03/12 triggered at $42.85



Stone Energy Corp. - SGY - close: 20.49 change: -0.23

Stop Loss: 21.35
Target(s): 16.00
Current Gain/Loss: - 3.5%

Entry on December 04 at $19.80
Listed on December 03, 2012
Time Frame: 3 to 6 weeks
Average Daily Volume = 719 thousand
New Positions: see below

Comments:
12/11/12: Good news! It looks like the bounce in SGY is rolling over under the $21.00 level (again). There is no change from my prior comments. Aggressive traders could use today's failed rally as a new entry point. For the rest of us I would wait for a new drop under $20.00 before considering new bearish positions.

current Position: short SGY stock @ $19.80

12/05/12 SGY surges following M&A news with peers.