Option Investor

Daily Newsletter, Wednesday, 11/10/2010

Table of Contents

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

Market Wrap

Uneventful Wednesday

by Todd Shriber

Click here to email Todd Shriber
U.S. equities halted their two-day losing streak, perhaps highlighting that no matter how minor that dip was, it was worth buying. Higher oil prices helped lift energy stocks and a decline in initial jobless claims provided the bullish catalysts today as the Dow Jones Industrial Average traded in a range of nearly 100 points, but could only manage a gain of about 10 points. The S&P 500 and the Nasdaq were both far more solid in their end-of-the-day results.

Stats Table

Initial jobless claims declined by 24,000 last week to 435,000 last week, erasing the previous week's pop and stoking hopes that there might be some legitimate improvement on the job front sooner rather than later. It is worth noting that initial claims have been dwindling for the most part since touching what is viewed as the secondary peak of 504,000 in mid-August. Adding to the good news is the fact that the four-week moving average has fallen to 465,000.

The continuing claims data also provided a glimmer of hope as that number fell by 86,000 to about 4.3 million. That number has fallen by 24% in the past year. In less-than-chipper news, half of the unemployed have found themselves in that situation for more than 21 weeks, a level that is quite high by historical standards. Most economists seem to agree that the four-week moving average for continuing claims needs to find its way below 400,000 to signal a real reason for celebration.

Jobless Claims

Obviously, more folks going back to work would lead to an uptick in energy consumption, which would boost energy prices, but despite jobs data that is basically mediocre, oil prices have found a way to jump about 8% this month alone. The good times for oil bulls continued today as prices hit a two-year high after the Energy Department said crude stockpiles declined by 3.27 million barrels to 364.9 million last week.

One analyst quoted in Bloomberg's coverage of the inventory data called the number ''wildly bullish.'' A Goldman Sachs report published on Tuesday certainly adds to the bullish tone for oil. Wall Street's most profitable bank said it sees oil prices ''substantially higher'' by 2012 as the global economic recovery picks up steam and excess supplies dwindled. The report even said OPEC, responsible for 40% of the world's production, will be forced to bring more supply to market.

Oil Chart

No shocker here: Chevron (CVX), the second-largest U.S. oil company, was the top-performer in the Dow today, adding almost 2%. Rival Exxon Mobil (XOM) was modestly higher as well as the largest U.S. oil company is doing what it can to keep at Apple (AAPL) at bay for the title of largest company by market value.

That was really just a segue to talk about another Dow component, Boeing (BA). The aerospace giant had the dubious distinction of being the Dow's biggest loser today, tumbling more than 3% on more bad news related to the Dreamliner. Forgive me, but I cannot resist saying the Dreamliner has become a nightmare for Boeing.

Also known as the 787, the massive passenger jet has seen countless production delays, but Boeing said earlier this year it was on schedule to deliver the first Dreamliner to Japan's All Nippon Airways early next year. I would not be on that even taking place after Boeing was forced to ground a Dreamliner test flight due to a cabin fire. In fact, the company has grounded the entire Dreamliner test fleet. One analyst said this incident is ''serious even under a best-case scenario.''

Boeing has six planes in the Dreamliner test fleet and it was plane number two that caught fire and was forced to land in Laredo, Texas after a six-hour test run. The company said it will continue ground-based testing, but the FAA is now involved in the investigation. As I always say, it is rarely good news for a company to have one of Washington's alphabet soup agencies involved in its affairs and I do not expect Boeing shares to benefit from this news either.

Boeing Chart

Onto some good news, courtesy of Polo Ralph Lauren (RL), the purveyor of high-end fashion. Say what you want about the U.S. consumer, but Polo Ralph Lauren shares surged more than 7% today, briefly touching a new 52-week high, after the company posted a stellar set of fiscal second-quarter results and boosted its revenue outlook.

For the quarter ending October 2, the company earned $205.2 million, or $2.09 a share, compared with $177.5 million, or $1.75, a year earlier as sales jumped 11% to $1.53 billion. The New York-based company went on to say that it expects sales to increase at a low double-digit rate after previously forecasting sales growth in the mid to high single digits.

The one detail that makes Polo Ralph Lauren's results and outlook particularly impressive is the fact that the company depends on North America for 70% of its sales. For the third quarter, the company expects sales to rise by a high teens rate.

Polo Chart

Alright, back to the bad news. Cisco Systems (CSCO), the largest maker of networking gear and a bellwether technology stock, reported fiscal first-quarter results after the market closed today and while the quarterly numbers were fine, they will probably do little to impress investors and comments made by the company will likely have Cisco trading lower at Thursday's open.

California-based Cisco said it earned $1.9 billion, or 34 cents a share, compared with $1.8 billion, or 30 cents a share, a year earlier on revenue of $10.75 billion. Excluding charges, the company earned 42 cents a share. Analysts were expecting a profit of 40 cents a share on revenue of $10.74 billion. Analysts said investors will be disappointed that Cisco was not able to deliver an upside surprise on the top-line.

The company said it is expecting sales of $10.1 billion to $10.3 billion for the current quarter while analysts were forecasting sales growth of $11.1 billion. Making matters worse, Gartner Inc. said Cisco is likely to encounter ''lackluster'' corporate spending over the next five years. That is not good news for a company that is often viewed as a temperature check on the health of the U.S. economy.

Cisco shares have basically sat out the recent rally and that makes the company's dividend, planned for next year, perhaps the biggest impetus to own the shares. Speaking of the stock, it is getting slammed in the after-hours session, down 13.2% as of this writing.

Cisco Chart

Looking at the charts, not much has changed has since I was here on Monday. The big number for the S&P 500 to deal with is significant resistance at 1228. After a couple of days of profit-taking, the index rests about 10 points away from 1228. From there, the S&P 500 has a lot of room in front of it to make a run to 1300. Support should be found in the 1190-1200 area.

S&P 500 Chart

The Dow is honoring the 10,300-10,400 range, give or take a few points. Support looks firm at 10,100 and the index has a healthy amount of real estate in front of it before bumping into resistance at 10,775. Cisco's earnings news will not help tomorrow and the longer Boeing is under pressure, the more the burden falls to financials and energy stocks to stoke the Dow's rally.

Dow Chart

The Nasdaq put in a pretty solid day today and the good news regarding Cisco is that it does not account for an overwhelming percentage of the Nasdaq 100, so while I expect the Nasdaq to open in the red tomorrow just as a knee-jerk reaction to Cisco's results, the index could find its way to another higher close. Suppport at 2570 could be an issue early in the day and resistance at 2720 remains so far off that we do not need to dwell on that level this week.

Nasdaq Chart

The Russell 2000 was able to recoup of some of Tuesday's losses and is trading just two points below where it closed on Monday, so not much has changed and 760 remains the key resistance area to watch. I'm not sure the index can muster a run above 760 before the end of this week, but a close above 750 on Friday would set the Russell 2000 up for that run next week.

Russell 2000 Chart

As I mentioned on Monday, this week is light on economic data so stock-specific news is what we have to watch. If Wednesday is any indication, the market appears willing to put more emphasis on good news than bad. Consider the stocks I highlighted today. Boeing's Dreamliner problems are nothing new and Cisco has been absent from the rally, but when a consumer discretionary name like Polo Ralph Lauren chimes in with good news, the broader market found a way to a higher close.

New Option Plays

REIT, Round Two

by James Brown

Click here to email James Brown

Editor's Note:
We are taking advantage of the market's recent dip to launch bullish positions in this REIT.

- James


Macerich Co. - MAC - close: 46.91 change: +0.64

Stop Loss: 44.75
Target(s): 49.75, 54.00
Current Option Gain/Loss: + 0.0%
Time Frame: 4 to 5 weeks
New Positions: Yes

Company Description:
Macerich is a fully integrated self-managed and self-administered real estate investment trust, which focuses on the acquisition, leasing, management, development and redevelopment of regional malls throughout the United States. Macerich now owns approximately 73 million square feet of gross leaseable area consisting primarily of interests in 71 regional malls. (source: company press release or website)

Why We Like It:
I want to take another swing at the REIT industry again. MAC vaulted to new two-year highs in early November on a strong earnings report. I'm sure a lot of that move was short covering. Now that the post-earnings rally has corrected traders bought the dip twice near $46.00, which as prior resistance should be new support. I am suggesting we buy calls now, at current levels. We'll use a stop loss at $44.75 but more conservative traders might be able to get away with a tighter stop. Our first target is $49.75. Our second target is $54.00 but that's probably wishful thinking on my part. Maybe if we could buy January calls but none are available and I didn't want to pay for March calls.

Suggested Position: Buy the December $50 calls (symbol:MAC1018L50) current ask $0.75

Annotated Chart:

Entry on November 11th at $ xx.xx
Earnings Date 02/10/11 (unconfirmed)
Average Daily Volume = 1.2 million
Listed on November 10th, 2010

In Play Updates and Reviews

Market Recovers Intraday

by James Brown

Click here to email James Brown

Editor's Note:

After yesterday's fears of a bearish reversal there was no follow through lower today. The up trend continues.


Current Portfolio:

CALL Play Updates

Caterpillar - CAT - close: 82.46 change: +0.55

Stop Loss: 79.40
Target(s): 84.85, 89.50
Current Option Gain/Loss: +12.1%
Time Frame: 3 to 4 weeks
New Positions: Yes

11/10: Traders were in a buy-the-dip mood on Wednesday after the dollar pulled back from its intraday highs. CAT slipped to $81.30 before bouncing for a small gain. I don't see a lot of changes from my prior comments. Readers could launch positions now or wait for a better entry point near $80.50 but there is no guarantee CAT will pull back that low.

Earlier Comments
Our first target is $84.85. We want to exit the majority of our position here. We'll set a secondary target at $89.50 but again I warn you the $85 level should be tough resistance. FYI: The P&F chart is bullish with a $118 target.

Current Position: Long the December $85 calls (symbol: CAT1018L85)
Entry @ $1.40

Entry on November 9th at $ 81.75
Earnings Date 01/27/11
Average Daily Volume = 7.7 million
Listed on November 6th, 2010

Cliffs Natural Resources - CLF - close: 70.06 change: +1.23

Stop Loss: 64.75
Target(s): 71.50, 74.75
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see trigger

11/10: Hmm... commodity stocks reversed higher intraday with the rest of the market. Yesterday I lowered our trigger to buy calls from $68.00 to $67.00. After seeing today's intraday bounce in CLF I have to wonder if that was the right move or not. CLF dipped to $67.37, just under its 10-dma and rallied sharply back toward the $70.00 level. There was definitely no confirmation of Tuesday's bearish reversal pattern. More aggressive traders may want to go ahead and consider bullish positions now. I'm focusing on the dollar. The dollar is still climbing in spite of its pull back from today's intraday highs. If the dollar continues to climb I suspect that CLF will pull back. We'll keep the trigger at $67.00 for now.

Earlier Comments
We'll use a stop loss at $64.75. Our upside targets are $72.00 and $74.75.

Trigger to buy calls @ $67.00

Suggested Position: Buy the 2010 December $70.00 CALL

Entry on November XX
Earnings Date 02/17/11
Average Daily Volume = 4.3 million
Listed on November 1, 2010

Costco Wholesale - COST - close: 64.45 change: +0.23

Stop Loss: 62.90
Target(s): 69.00
Current Option Gain/Loss: -10.6%
Time Frame: 3 to 4 weeks
New Positions: Yes, see trigger

11/10: Shares of COST are still holding at support near $64.00 and its 30-dma. The intraday bounce today looks like a new entry point to buy calls on this stock. It is noteworthy that rival BJ's Wholesale Club (BJ) surged more than +12% intraday on news it was putting itself up for sale after it received a takeover offer from a private firm. BJ is the third largest wholesaler behind COST and Wal-Mart's Sam's Club. I didn't hear any speculation that COST might be a buyer. At least no one has suggested it thus far. I do want to warn you that if COST were to make an offer to buy BJ's then shares of COST could drop significantly on that kind of announcement. I don't expect this to happen but it's a possibility. Remember, we want to keep our position size small to limit our risk.

Current Position: December $65.00 calls (symbol: COST1018L65)
Option Entry @ $1.50

Entry on November 8th at $64.50
Earnings Date 12/09/10
Average Daily Volume = 3.4 million
Listed on November 6th, 2010

Humana Inc. - HUM - close: 59.65 change: +0.53

Stop Loss: 51.75
Target(s): 59.75
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes

11/10: It looked like the long, overdue correction in HUM had started this morning but traders bought the dip near short-term support at $58.00 and HUM added +8% by the close. I still don't want to chase it here. There is no change from my previous comments.

Earlier Comments
We want to wait for a dip and use a trigger at $55.25 to buy calls. Aggressive traders may want to consider puts while we wait since we're expecting such a big correction. If HUM hits our bullish trigger at $55.25 we'll use a stop loss at $51.75.

Suggested Position:

Trigger to buy calls at $55.25

BUY the 2011 January $55 calls.

Entry on November xxth at $ xx.xx
Earnings Date 11/01/10 (confirmed)
Average Daily Volume = 2.1 million
Listed on October 16th, 2010

iShares DJ Financial ETF - IYF - close 55.53 change +0.64

Stop Loss: 53.40
Target(s): 57.50, 59.75
Current Option Gain/Loss: -10.0%
Time Frame: 6 to 8 weeks
New Positions: Yes

11/10: After yesterday's underperformance the banking stocks were actually some of the better performers on Wednesday. The banking sector indices were up about +1.6% and the IYF trailed them with a +1.1% gain. Traders were buying the dip again near $54.50ish. I would seriously consider buying calls on this bounce!

Earlier Comments
Our first target is $57.50. Our second, longer-term target is $59.75.

Current Position: Long the December $55.00 CALLS, entry @ $2.00

Entry on November 9th @ 55.00
Earnings Date N/A (unconfirmed)
Average Daily Volume: 1.0 million
Listed on November 4, 2010

Nike Inc. - NKE - close: 83.88 change: +0.68

Stop Loss: 79.90
Target(s): 87.25
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see trigger

11/10: Uh-oh! NKE looks ready to run away from us. There was no follow through on yesterday's dip and traders quickly bought the morning lows near $82.80. There market did not see any follow through on yesterday's bullish reversal so I am suggesting an alternative entry point. This is more aggressive so we want to keep our positions small. The new plan is to buy calls on a dip to $83.00 and we'll use a stop loss at $81.80. Our first target is $86.75 and our second target is $89.50.

Trigger to buy calls @ 83.00 <-- New Trigger

Suggested Position: Buy the December $85.00 CALLS (symbol:NKE1018L85)

Annotated Chart:

Entry on November xxth at $ xx.xx
Earnings Date 12/21/10
Average Daily Volume = 2.3 million
Listed on November 6th, 2010

VimpelCom Ltd - VIP - close 15.71 change -0.18

Stop Loss: 14.80
Target(s): 16.75, 17.75
Current Option Gain/Loss: -19.0%
Time Frame: 6 to 8 weeks
New Positions: Yes

11/10: VIP provided us another entry point today. Yesterday I said look for a dip into the $15.50-15.25 zone. This morning VIP slipped to $15.48 before bouncing. FYI: VIP is due to report earnings around Nov. 24th.

Current Position: December $15.00 CALLS, Entry @ $1.05

Entry on November 8, 2010 @ 15.60
Earnings Date 11/24/2010 (unconfirmed)
Average Daily Volume: 3.5 million
Listed on November 3, 2010

PUT Play Updates

Lubrizol Corp. - LZ - close: 109.27 change: +1.59

Stop Loss: 110.25
Target(s): 100.50
Current Option Gain/Loss: -27.5%
Time Frame: 3 to 4 weeks
New Positions: Maybe

11/10: Warning! The lack of follow through on the stock market's bearish reversal from yesterday is a very bad sign for this new put play on LZ. Traders bought the dip at LZ's 50-dma and the stock has bounced back toward resistance near $110.00. Aggressive traders could use this as a new entry point. I am suggesting readers wait for this bounce to roll over again before considering new positions.

Current Position: Long the December $105 puts (symbol:LZ1018X105)
Entry @ $2.90

Entry on November 10th at $107.68
Earnings Date 02/03/11 (unconfirmed)
Average Daily Volume = 525 thousand
Listed on November 9th, 2010

Millicom Intl. - MICC - close: 93.45 change: +0.29

Stop Loss: 98.25
Target(s): 92.50, 90.25
Current Option Gain/Loss: + 2.0%
Time Frame: 3 to 4 weeks
New Positions: No

11/10: MICC broke down to new relative lows under support near $92.00 this morning. Unfortunately the market's reversal higher pulled MICC higher too. There is short-term resistance near $94 and again at $96.00. I'm not suggesting new positions at this time. An oversold bounce could easily carry MICC to the $96 level.

FYI: We still have our final target at $90.25.

Current Position: Long December 2010 $90 puts (MICC1018X90)
Entry @ $2.45

11/08 Target hit @ 92.50, option @ 2.85 (+16.3%)

Entry on November 1, 2010
Earnings Date 02/01/11
Average Daily Volume = 490 thousand
Listed on October 30th, 2010