Option Investor

Daily Newsletter, Thursday, 11/18/2010

Table of Contents

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

Market Wrap

Bears Beaten Badly

by Jim Brown

Click here to email Jim Brown
After a week of declines the bears had plenty of time to load up on their shorts. After today's short squeeze they are regretting that decision.

Market Statistics

I wish I could say today's rally was due to an acceptance of positive economic data and a positive outlook for the future. While there was some of that, the real motive power was a simple short squeeze driven by better news from Ireland and China. It was purely a news driven squeeze and I saw very little evidence of bullish buying.

All the gains came in the first 45-minutes of trading and resistance at Dow 11,200 was rock solid. This was a textbook short squeeze. After the week of declines the Dow found solid support at 11,000 where it stabilized for two days. The bears were loading up on Wednesday at the close and they suffered when the overseas news sent futures up +12 points overnight. The opening spike higher came to a dead stop at 11,200 with no follow on buying by investors. It was just a short squeeze and not a change in investor sentiment.

Dow Chart - 15 min

There were two major news items from overseas that helped power the squeeze. The Irish debt problem took a positive turn when Ireland acknowledged it was seeking aid from international lenders, the IMF, ECB and the European Union. A team from those groups were meeting in Dublin today to discuss the terms of any bailout. A spokesman for the Irish central bank said the talks would lead to a loan in the tens of billions of euros.

Residents and investors had been losing confidence in banks and the bailout would recapitalize the banking sector as well as ease the debt problem. Ireland has been attacking its debt problem at a more aggressive rate than other EU countries so getting a loan is not expected to be a problem. The British government also signaled it could provide direct financial aid to Ireland.

The sudden rush by major entities to bail Ireland out of its fiscal mess was a strong positive for an equity market that had declined for a week on worries of a default.

Adding to the relief rally was positive news out of China. The markets had been worried that China would announce some radical new actions to curb inflation. On Thursday morning China's premier tempered those fears by saying things like "China will implement actions if necessary to restrain future inflation." The "if necessary" phrase seemed to indicate there was no rush to act and it toned down the expectations for drastic actions. The Shanghai composite had declined -10% over the last week on worries about impending actions. It was necessary for the premier to calm the markets rather than bash them with a huge anti-inflation club.

China also enacted some price controls for food that were much less severe than had been expected. The premier said China would work to increase stockpiles of food commodities to offset future price pressures. That was a positive because is suggested China would be active in the market and buying large amounts of grain and food stocks. The fear over potential market crippling actions was extremely overdone and the result of the premier's comments was a relief rally. Asian markets finished strongly positive. The Hang Seng gained +422, Nikkei +202. Commodities soared on the news. Corn and soybeans gained over 3% each with wheat up +2%. Rice spiked nearly 3%. Cotton was up +4% and sugar +6%.

In the U.S. the positive economic data added to the early morning market sentiment. The Jobless Claims were 439,000 and slightly less than expected. Claims have been trending down for several weeks so this was market positive.

The Philly Fed Survey spiked more than 21 points to 22.5 and equaled its highest level since 2005. New orders gained 15.4 points to rocket back from a minus 5.0 in October to a positive10.4 and the employment component jumped to 13.3 from 2.4. Backorders rallied back to positive territory at 3.7 from a negative 8.9 in October. The headline of business conditions has rebounded nearly +30 points from -7.7 in August to the 22.5 in November. This was solid report and suggests the national ISM in two weeks could also see a dramatic improvement. Estimates are for a strong +5 point increase to 53.7 for November.

Philly Fed Chart

The Mortgage Bankers Association said mortgage delinquency rates fell to 9.13% in Q3 for the second consecutive quarterly decline. Also, the number of homes currently delinquent more than 90 days declined from more than 4 million in Q2 to 3.8 million in Q3. Burrowing down a bit showed that 13.31% of prime adjustable mortgages were still delinquent and 29.8% of subprime adjustable mortgages were behind in payments. Both numbers have declined slightly.

This shows the housing sector is improving steadily but until jobs begin to improve it is going to be a long process. Lenders still have nearly three million home foreclosures to process before the pace of buying can actually impact prices. Mortgage interest rates are at 50-year lows and the Fed plans on keeping them at that level well into 2011 in hopes of making a dent in the housing glut. For those with credit this is a once in a lifetime opportunity.

There are no economic reports of note on Friday but Ben Bernanke will be giving a speech in Europe on monetary policy. His speech is 5:15 ET so whatever he says will have a bearing on our open.

After the bell today Dell reported earnings of 45-cents compared to analysts estimates of 32-cents. This was strong but revenue missed the market. Revenue was $15.39 billion compared to street estimates of $15.74 billion. Dell shares rallied +7% in after hours. Gross margins rose to 19.5% from 16.8%. Dell guided analysts to revenue growth in the middle of its prior range of 14% to 19%. That was slightly below analyst estimates.

While Dell crushed the earnings the mediocre guidance and slight miss on revenue was far from bullish. However, they did not repeat Cisco's warning. Apparently Dell does not have the same problems that Cisco reported. Other companies like Juniper and F5 Networks have also avoided the Cisco flu. This suggests the Cisco problem is simply a Cisco problem and not one that is impacting the entire tech sector. This should be positive for the market because it downplays the Cisco weakness.

There are continuing rumors that Michael Dell is considering taking Dell private. The business has changed since Michael started it in his college dorm room. If he takes it private the estimate is for $16 per share so the upside is limited from here. I would rate Dell an avoid because the upside is limited. If Michael thinks the future will improve he is more likely to take it private now. If he thinks the sector is going to weaken he will probably delay his move in hopes of getting a cheaper price later.

Dell Chart

Salesforce.com posted earnings of 32-cents compared to estimates of 31-cents. However the stock is up +$10 in after hours because they raised guidance for revenue to $448 million compared to street estimates of $425 million. Revenue growth for Q3 was up better than 30%.

Intuit (INTU) reported a loss of 12-cents, which was inline with estimates. The loss was attributed with the seasonality of the tax preparation business. Shares of INTU declined about $2 in after hours.

Gap (GPS) declined slightly in after hours after reporting earnings of 48 cents that was inline with estimates. Same store sales were flat and the CEO said sales trends were still choppy and competition for holiday sales would be fierce. He said they were not expecting Q4 sales to be any better than Q3. This level of pessimism is going to weigh on the stock. The company said it was making a huge investment in black denim and accessories for the holiday season. Analysts said this was a risk since holiday apparel is normally bright and cheerful.

GM finally completed its IPO and in doing so sucked all the energy out of the market. The stock opened at $35 and climbed to $35.99 almost instantly and then declined for the rest of the day to close at $34. That is supposedly a level where the underwriters will mount a defense in hopes of keeping the price over the IPO price of $33.

The GM IPO sucked about $23 billion out of the market. Some analysts feel this was a minor factor in the market decline over the last week as investors dumped other stocks to make room for their allotment of GM shares. Apparently quite a few investors were looking only for a quick flip since 458 million shares were traded out of the 478 million shares offered. Anyone who did not get an allotment in the IPO and bought at the open this morning is losing money tonight. GM may be profitable but they are still under the government's thumb. GM shares will have to rally to $50.50 for the government to break even on their remaining $28.8 billion unpaid balance. The government still owns 554 million shares.

GM Chart

The GM IPO was credited with taking the fizz out of the rally. That much money going into a single stock is a drag on the market. Late today Burlington Coat Factory pulled a $1.5 billion debt offering for lack of interest. Harrah's Entertainment is reported to be pulling their IPO because there is a lack of interest at the $15-$17 price. These casualties come from scheduling your events in the same week that GM sucked all the IPO money out of the market. Harrah's may be rescheduled for late next week but that is hearsay.

If GM's IPO had rallied to close higher analysts claim that would have invigorated the IPO market. The decline to close on the lows depressed the market. Anyone who bought the open and put in a stop could have already been knocked out of the trade.

After hours futures are flat and suggesting traders don't have a clue what the market is going to do on Friday. The short squeeze today demoralized the bears but the dead stop at S&P-1200 was a warning for the bulls as well.

The better than expected economics continue to paint a picture of a slowly improving economy and one that may actually be accelerating but comments like we saw from the Gap tonight are depressing sentiment. Supermarket chain Ahold missed earnings by a mile and warned not to expect a U.S. recovery anytime soon. The CEO said weak competitors were getting weaker because of fierce competition for the available consumer dollars. He blamed high unemployment for the decline in supermarket sales.

Those kinds of negative guidance are keeping investors from rushing back into the market despite a bounce off critical support at 1175. It was just a short squeeze and not a sentiment change.

What we do have now is a clear chart pattern from which to trade. The bottom end of the range is that 1175 support and the top end 1200. A breakout in either direction would be a clear trading signal. If the Fed would take a couple billion of its QE2 cash and buy enough equities on Friday to push the S&P over 1200 I think that would be a spark for a year-end rally. I am not holding my breath.

All the option expiration pressures should be behind us but we still need to get the actual expiration out of the way on Friday. We rarely have big moves on an expiration Friday or the following Monday so the best guess is a range bound market until next week. The closing print worries me because the spike is very unsupported and precariously perched on the edge of a cliff. The Bernanke speech at 5:15 Friday morning could upset that delicate balance. Without some external news event I believe the path of least resistance is a slight decline on Friday.

S&P-500 Chart

The outlook for the Dow is rougher than the S&P. The Dow has stronger resistance to overcome at the 11,200-11,225 level. Producing a move over that 11,225 resistance could require an even larger news event. Of course a return to a rapidly falling dollar would help. The range on the Dow is clearly 11,000 to 11,225 and I would bet that range is honored on Friday. However, should we get a news event that pushes the Dow over 11,225 it could trigger significant short covering and follow on buying.

Dow Chart

In my opinion the Nasdaq chart is neutral. The short squeeze looks almost like a cliff diver launching into a jackknife before plunging to the depths below. I doubt that formation description will make it into the technical trading books. The spike took the Nasdaq back over the 2500 level and that should be support but a lot depends on the big techs following through on gains they made today. AMZN, AAPL and GOOG were all weak into the close but still up strongly for the day. Traders that bought the dip on Tue/Wed may be interested in taking profits ahead of the weekend just to be safe.

A dip back below 2500 is a serious danger signal for me.

Nasdaq Chart

In summary I believe today was all squeeze and no substance. Since Friday is expiration the volatility will all be at the open and then decreasing volume the rest of the day. Normally the markets trade in a narrow range on expiration Friday and again on the following Monday. However, Thanksgiving week is normally bullish. How traders will position themselves ahead of next week is unknown but I do expect to see the market move up next week unless we get some more bad news from overseas. Overall, I am still in buy the dip mode to S&P 1175.

Jim Brown

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New Option Plays

Freight Services

by James Brown

Click here to email James Brown

Editor's Note:
I've had my eye on this stock for a long time and shares appear to be on the move again. Yet instead of correcting CHRW is breaking out again.

- James


CH Robinson Worldwide Inc. - CHRW - close: 72.25 change: +1.17

Stop Loss: 69.90
Target(s): 74.75, 79.00
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see trigger

Company Description:
Founded in 1905, C.H. Robinson Worldwide, Inc., is a global provider of multimodal transportation services and logistics solutions, serving over 35,000 customers through a network of 232 offices in North America, South America, Europe, Asia, Australia, and the Middle East. C.H. Robinson is one of the largest third-party logistics companies in the world, with 2009 total revenues of $7.6 billion (source: company press release or website)

Why We Like It:
CHRW is breaking out again. The stock has been a big winner since it broke out over resistance near $62 back in July. Since then CHRW has seen a couple of consolidations. Shares just spent over a month consolidating sideways and did not see that much of a pull back during the market's recent decline. Now the stock is breaking out from its consolidation pattern. Aggressive traders may want to go ahead and buy calls now. I am suggesting we look for a little dip with a pull back to $71.75. If triggered we'll use a stop loss under short-term support at $69.90. Our first target is $74.75. Our second, longer-term target is $79.00. FYI: The Point & Figure chart is very bullish with a $92 target.

Trigger @ 71.75 (I prefer the January calls)

Suggested Position: Buy the December $75.00 calls (CHRW1018L75)

- or -

Suggested Position: Buy the January $75.00 calls (CHRW1122A75)

Annotated Chart:

Entry on November xxth at $ xx.xx
Earnings Date 02/03/11
Average Daily Volume = 1.1 million
Listed on November 18th, 2010

In Play Updates and Reviews

Bounce Back To Resistance

by James Brown

Click here to email James Brown

Editor's Note:

The market experienced a widespread bounce on Thursday but for the most part the rally stalled at overhead resistance. Our bullish play on HUM was triggered while our bearish play on FFIV has been stopped out.


Current Portfolio:

CALL Play Updates

Ansys, Inc. - ANSS - close: 48.47 change: +0.78

Stop Loss: 44.90
Target(s): 49.50,
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see trigger

11/18: The market-wide bounce on Thursday lifted ANSS to a +1.6% gain but shares are still inside the sideways consolidation over the past week. There is no change from my prior comments. Currently our plan is to buy calls on a dip at $46.75 but readers may want to wait and watch for a bounce from the $46.00 level before initiating positions instead.

Buy-the-dip trigger @ 46.75

Suggested Position: Buy the 2011 January $50.00 calls (ANSS1018L50)

Entry on November xxth at $ xx.xx
Earnings Date 02/24/11 (unconfirmed)
Average Daily Volume = 651 thousand
Listed on November 13th, 2010

Caterpillar - CAT - close: 83.11 change: +1.94

Stop Loss: 79.40
Target(s): 84.85, 89.50
Current Option Gain/Loss: +12.1% & +34.1%
Time Frame: 3 to 4 weeks
New Positions: Yes

11/18: CAT said October sales came in strong and shares gapped open at $82.50 and closed with a +2.3% gain near the top of its recent trading range. I would probably look for CAT to fill the gap with a dip back toward $81.50 before initiating new bullish positions.

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.

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

Double Down
New Position: Buy the December $85 calls (CAT1018L85), current ask $1.17

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: 67.80 change: +1.39

Stop Loss: 64.75
Target(s): 71.50, 74.75
Current Option Gain/Loss: - 7.4%
Time Frame: 4 to 6 weeks
New Positions: Yes

11/18: A drop in the dollar helped buoy the commodity-related names. Shares of CLF gapped open at $68.00 and closed with a +2% gain on the session. Readers can buy calls on this bounce but I wouldn't be surprised to see another dip toward $67.00 before CLF moves higher again.

Current Position: Long the 2010 December $70.00 CALL, Entry @ $2.42

Entry on November 12th @ 67.00
Earnings Date 02/17/11
Average Daily Volume = 4.3 million
Listed on November 1, 2010

Costco Wholesale - COST - close: 66.41 change: -0.61

Stop Loss: 62.90
Target(s): 69.00
Current Option Gain/Loss: + 64.0%
Time Frame: 3 to 4 weeks
New Positions: No

11/18: The RLX retail index posted a gain but the sector lagged behind the rest of the market thanks to a huge earnings miss from Sears (SHLD). Shares of COST spiked to a new relative high of $67.49 this morning and then reversed. This could be a short-term bearish reversal but it needs to see confirmation first. I would expect COST to find some short-term support near $66.00.

Earlier Comments
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

Express Scripts - ESRX - close: 52.99 change: +1.58

Stop Loss: 49.65
Target(s): 53.95, 57.25
Current Option Gain/Loss: +45.0%, and +25.2
Time Frame: 5 to 6 weeks
New Positions: No, wait for a dip

11/18: Our new play in ESRX is off to a strong start. Shares opened at $51.81 and surged toward recent resistance in the $53.00-53.25 zone. If you're looking for a new entry point and did not buy the open I would watch for a pull back toward $52.00. Keep your position size small. My original plan was to buy half a position this morning and the second half on a dip near $50.50. Our first target to take profits is at $53.95. I'm setting a secondary target at $57.25.

EDIT: I originally listed the 2010 Dec $52.50 calls but I published the 2011 Jan $52.50 call symbols. I'm providing data on both.

Current Position: Long the 2010 December $52.50 calls (ESRX1018L52.5) Entry @ $1.22
- or -
Current Position: Long the 2011 January $52.50 calls (ESRX1122A52.5) Entry @ $2.10

Entry on November 18th at $51.81
Earnings Date 02/24/11
Average Daily Volume = 4.3 million
Listed on November 17th, 2010

Humana Inc. - HUM - close: 58.05 change: +0.49

Stop Loss: 51.75
Target(s): 59.75
Current Option Gain/Loss: - 2.6%
Time Frame: 4 to 6 weeks
New Positions: Yes, look for another dip

11/18: The good news is that our HUM play is now open. The bad news is that HUM issued a profit warning! The company warned that their 2011 profit forecast would decline as the company makes adjustments for the new healthcare laws and Medicare margins. Management did point out that longer-term the aging U.S. population offers a very favorable environment for HUM.

The stock gapped open lower at $55.05, dipped to $54.57, and almost immediately rebounded thanks to the market-wide rally. On a short-term basis I would not be surprised to see HUM roll over under the $58.00 level. If you missed the entry point this morning I wouldn't panic. HUM will probably see another dip toward $55 or at least its 50-dma again. We had a trigger to buy calls at $55.25 so the gap open at $55.05 immediately opened this trade.

Current Position: Long the 2011 January $55 calls (HUM1122A55) Entry @ $3.80

Annotated Chart:

Entry on November 18th at $55.05
Earnings Date 11/01/10 (confirmed)
Average Daily Volume = 2.1 million
Listed on October 16th, 2010

iShares DJ Financial ETF - IYF - close 53.77 change +0.67

Stop Loss: 52.90
Target(s): 57.50, 59.75
Current Option Gain/Loss: -57.5%
Time Frame: 6 to 8 weeks
New Positions: No

11/18: Banks saw a decent bounce and the IYF gained +1.2%. This ETF is back above its 50 and 200-dma but it failed to close over $54.00. Aggressive traders could look to buy another dip in the $53.25 region. Otherwise I would suggest waiting for a close over $54.00.

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: 82.47 change: +1.08

Stop Loss: 79.90
Target(s): 86.75, 89.50
Current Option Gain/Loss: -43.4%
Time Frame: 4 to 6 weeks
New Positions: Yes

11/18: NKE announced a 15% increase in its quarterly dividend to $0.31 a share. Meanwhile the market's strength today helped shares gain +1.3@ and close over potential short-term resistance near $82.00. I would probably look for a dip near the $82.00-81.50 zone as our next entry point.

Current Position: Long the December $85.00 CALLS (symbol:NKE1018L85) Entry @ $1.15

Entry on November 11th at $83.00
Earnings Date 12/21/10
Average Daily Volume = 2.3 million
Listed on November 6th, 2010

VimpelCom Ltd - VIP - close 15.82 change +0.29

Stop Loss: 14.80
Target(s): 16.75, 17.75
Current Option Gain/Loss: -23.8%
Time Frame: 6 to 8 weeks
New Positions: Yes, on dips

11/18: VIP managed a +1.8% gain on Thursday and shares appear to be breaking out from their recent consolidation but it's a little too early to tell just yet. I would still consider bullish positions on a dip near $15.50. 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: 105.00 change: +1.15

Stop Loss: 110.25
Target(s): 100.50
Current Option Gain/Loss: +17.2%
Time Frame: 3 to 4 weeks
New Positions: No

11/18: LZ spiked higher this morning but gains faded after the stock rolled over under its 50-dma. This could be a new bearish entry point to buy puts. You may want to keep your position size small to limit your risk.

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

Oceaneering Intl. Inc. - OII - close: 69.85 change: +1.05

Stop Loss: 71.05
Target(s): 64.50, 62.25
Current Option Gain/Loss: -24.1%
Time Frame: 3 to 4 weeks
New Positions: No

11/18: Energy stocks were big winners today thanks to a decline in the dollar. The OSX oil services index rallied +2.4%. OII lagged its peers with a +1.5% gain. OII's rally seemed to struggle near $70.55. I remain very cautious here and we're not suggesting new bearish positions at this time. Readers may want to exit early to limit losses.

Current Position: Long the December $65.00 puts (OII1018x65) Entry @ $1.45

Entry on November 15th at $69.21
Earnings Date 02/17/11
Average Daily Volume = 1.0 million
Listed on November 13th, 2010

Research In Motion - RIMM - close: 57.25 change: +1.33

Stop Loss: 60.25
Target(s): 55.05, 53.00
Current Option Gain/Loss: - 9.4%
Time Frame: 1 to 2 weeks
New Positions: No

11/18: RIMM was actually downgraded to a "hold" this morning but that didn't stop shares from rising with the rest of the market. RIMM appeared to roll over under the $58.00 level this afternoon, which is exactly where we expected to see some resistance. If the rally continues then look for resistance near $60.00 and the 200-dma. I would prefer to see the bounce roll over before buying puts again.

Current Position: Long the December $55 puts (RIMM1018X55) Entry @ $2.53

Entry on November 16th at $57.28
Earnings Date 12/16/10
Average Daily Volume = 17.6 million
Listed on November 15th, 2010


F5 Networks - FFIV - close: 120.51 change: +5.50

Stop Loss: 121.10
Target(s): 105.25
Current Option Gain/Loss: -45.6%
Time Frame: 2 to 3 weeks
New Positions: Yes

11/18: Our aggressive put play on FFIV did not pan out. With the market in widespread rally mode shorts were in a panic to get out of the way. FFIV opened at $117.99 and surged to almost $122 before fading back toward $120. Our stop loss was hit at $121.10. I am not convinced the correction is over yet but I would not open new bearish positions at this time.

Closed Position: Long the 2010 December $105 puts (FFIV1018X105) Entry @ $2.85, Exit @ $1.55 (-45.6%)


Entry on November 17th at $114.50
Earnings Date 01/19/11
Average Daily Volume = 2.9 million
Listed on November 16th, 2010