Option Investor

Daily Newsletter, Thursday, 6/21/2012

Table of Contents

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

Market Wrap

Dow Dives on Weakening Outlook

by Thomas Hughes

Click here to email Thomas Hughes
Economic data from here at home and around the world continued to erode expectations for the second half of the year. Unemployment, PMI and Philly Fed readings confirmed the slowing economy and combined with news from Europe and Asia to sandbag the major indexes.

The unemployment data continues to support an increase in joblessness and a higher unemployment rate later in the year. The claims for initial unemployment benefits fell marginally from an upwardly revised figure to 387,000 in the week ending June 16 but initial claims have been trending up for two months, ever since the “Easter Spike”. The uptrend in new claims has brought the weekly figure to very near the post Easter highs. The four week moving average, a better indicator of the trend also climbed this week to a six month high and could be a signal of rising unemployment.

Continuing claims for unemployment, claims for a second week of benefits, remained unchanged from the previous week at 3.3 million. The number remains above the years lows and marks the third week of higher claims. Continuing claims lags the initial claims figures by a week and could continue to rise in the light of the recent up trend in first time claims for benefits.

Total claims for unemployment continued their decline to the years low. These figures lag initial claims by two weeks and could also see an increase over the next few weeks if recently laid off job seekers don't find work. Total claims came in at 5.83 million, down about 1,100.

The Philadelphia Federal Reserve business activity index made a surprising drop in May. The index came in at -16.6, well below the analysts expectations indicating factory output in the Mid-Atlantic region are slowing faster than anticipated. The one positive in today's data was an increase in the Index of Leading Indicators. The index increase by a slim 0.3%, ahead of the expected 0.1%.

Markits flash PMI reading of US manufacturing hit an 11 month low. The indicator, which still shows some expansion, fell to 52.9 from 54 in May. The main reasons cited for the decline were weak demand in China and Europe. New orders and hiring were the biggest decliners within the composite reading. The analyst also release PMI for Europe which remained steady at three year lows. The composite reading of 46 shows shows a moderately contracting European manufacturing sector.

China also reported some disappointing news today. Factory output in the country fell to an 8 month low. Declining exports are reported as the main reason for the low numbers. Chinese stocks shed about 1% today on its weak data. The Hand Seng Index dropped over 250 points to close 1.3% lower. The Shanghai Composite lost 32 points to close 1.4% lower. Japan managed to eek out a gain in today's trading. The Nikkei Average gained 71.76 to close higher by 0.82%

The European markets were hit modestly today. The weaker data and lack of change in FOMC interest rate policy failed to inspire confidence but did not spark any heavy selling. The Xetra Dax lost -0.64%, the CAC 40 shed -0.24% and the FTSE dropped -0.91%.

Some independent auditors released estimates that Spanish banks still need close to 60 billion Euros after the close of European trading. The estimates are below the 100 billion that is available to Spanish banks from the euro zone. The news could impact European markets tomorrow and helped to send US stock to their lows.

Oil fell over 2% today. The deteriorating economic picture weighed heavily on the commodity. The oil industry was one of the days biggest losers in the wake of the sell off. The Market Vector Oil Industry ETF (OIH) dropped more than 3.5% in today's trading. The ETF has been trending down for the last few months and is approaching 12 month lows.

OIH, weekly

Gold fell over $40 today in the wake of yesterday's FOMC decision on interest rates. The move was close to 3% of the metals value. The price of silver was hit even harder, losing more close to 5%. The CBOE gold index lost about 5% today.

CBOE Gold Index, daily

Aubrey Mclendon stepped down as chairman of the board for Chesapeake Energy today. Five new board members were instated and include a representative of Carl Icahn. The stock is bouncing down from resistance just below twenty, losing -3.7% today.

Chesapeake Energy, daily

Three big names reported earnings after the bell yesterday that were among today's biggest losers. Micron Technology posted a 3rd quarter loss of $0.32 per share. This is a wider loss than the previous quarter and the same period in the previous year. The loss is in the face of improving revenue that has been increasing on sales volume, margins and pricing. The business suffered a $58 million charge to revenue that impacted the current results. The stock lost around 3.5% today.

Micron Technology, daily

Redhat, maker of Linux based open source software solutions for business beat the streets estimations for first quarter earnings but lowered its 2nd quarter guidance. The company reported that GAAP and non-GAAP eps were up 12% and 25% respectively over last year with cash flow up more than 38%. The second quarter outlook stole the attention though as the company announced that sales would fall below estimates based on weakening worldwide demand. The stock dropped more than 10% in pre market trading but found support at open. The stock recovered more than half of its early loss on heavy volume.

Redhat, daily

Bed Bath and Beyond lost more than 4.5% after its earning announcement, dropping back below its short term moving average. The retailer reported a 15% gain in quarterly earnings but profits were hurt by shrinking margins. The second quarter outlook was also disappointing and helped to send the stock down .

Bed Bath and Beyond, daily

A couple of big names reported earnings today as well. Carmax managed to increase its revenue over last year but shrinking margins had a negative impact on the bottom line. Slowing wholesale and retail business were blamed for the miss. The stock has been in a downtrend for several months and today's news caused the price to drop close to 7%.

Carmax, daily

ConAgra Foods was one of very few positively performing stocks today. The company reported a loss per share due to a change in accounting procedures but on an adjusted basis the earnings actually improved by 9% over last year. The good news was further buoyed by 2013 expectations for continued earnings growth in the range of 8-9%. The stock jumped on high volume today, gaining more than 4%.

ConAgra, daily

Aside from ConAgra, which was the only really bright spot on the Spider Sector heat map today, the utility stocks were the only group managing to hold its ground. The utility sector spider (XLU) climbed in early trading but later fell to end the day just above the short term moving average. The utility sector is always a good place to find dividends and was one of last years best performing areas. Duke Energy, one of the biggest holdings of the utility ETF, currently pays around 4.4%. The stock has been moving upward after consolidating earlier in the year and has been outperforming the general market.

XLU, daily

Duke Energy,daily

Today's best performing Dow stocks were also some of the highest yielding. The top five average well over 4% dividend yield with AT&T leading the pack at 5%. The stock has been consolidating after making a nice move up and is trading above its short term average. The stock has support and is trading near recent high levels.

AT&T, daily

Verizon is yielding about 4.4% currently and is also trading near recent high levels. The two big telecoms are also both divergent from momentum and near overbought levels.

Verizon, daily,

Merck and Pfizer are next on the list, yielding around 4.25% and 3.9% respectively. Merck is one of the few stocks to trade in positive territory today. The stock has been range bound since the first of the year. Pfizer has only performed slightly better than Merck. The stock is at the top of its range and is trading on weak volume.

Merck, daily

Pfizer, daily

McDonald's decline over the past four months has improved its yield to near 3.2%, earning it a mention today. The stock has been trading around a support level at $87 and closed near that number today.

McDonald's, daily

An impending downgrade of the financial sector from Moody's also had the markets on edge today. The downgrade was released after the bell and included 15 international investment banks, including five of America's largest financial institutions. JP Morgan, Bank of America, Citigroup, Goldman Sachs and Morgan Stanley were all included. The downgrades were not unexpected but still managed to attract a lot of attention. There was nothing surprising in the announcement, the one big question was if Morgan Stanley would get cut 2 or 3 notches, the final call was for 2 notches. The financial sector was one of the hardest it today with the financial sector spider (XLF) falling around 2%, closing below its short term moving average.

XLF, daily

The VIX surged over 15% today and crossed back above the 20 level.

The VIX, daily

The combination of economic data points, deteriorating corporate outlook and imminent downgrade of the banking sector brought the Dow average down in one of its biggest declines this year. The index lost about 1.75% during the day as one bad announcement after another added new selling pressure. The index moved below it short term moving average in the final hour of trading and closed near the days lows. The near term trend is down with the closest support equal to the lows set last month near 12,100. In the longer term, the Dow has managed to remain above the 200 day moving average and bearish momentum is subsiding.

Dow, daily

Dow, weekly

The S&P and Nasdaq Indexes followed the Dow down today, logging declines greater than 2%. The S&P and the tech heavy Nasdaq both dropped below their short term moving averages.

S&P 500, daily

Nasdaq, daily

Economic data will continue to drive the markets until real signs of stabilization materialize. Earnings reports are starting to come in for second quarter of calendar 2012 and will shed a lot of light on the expectations for the second half of the year. So far, expectations for corporate profits are weak, supported by the declining economies of Europe and Asia. Our own unemployment data is troubling, suggesting a rise in the unemployment rate and a further drag on the struggling economy.

There are no scheduled economic reports scheduled for tomorrow so news and today's trading will be the biggest factors affecting tomorrows trading. Next week heats up again with an onslaught of data, including the final revision of first quarter US GDP.

Thomas Hughes

New Option Plays

A New 2012 Low for Oil?

by James Brown

Click here to email James Brown


U.S. Oil ETF - USO - close: 29.46 change: -1.03

Stop Loss: 28.49
Target(s): 33.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
The sell-off in oil is getting overdone. Oil has been collapsing over the last several weeks thanks to a parade of weak economic data from around the world. Investors are concerned that a global slowdown will mean less demand for oil (& fuel). Now the USO is nearing its 2011 lows near $29.00.

Make no mistake, this is an aggressive trade since we're trying to call a short-term bottom in oil prices here. The commodity could definitely see some strength as we get closer to the EU oil embargo against Iran, which is scheduled to start on July 1st.

I am suggesting we buy calls at the open tomorrow morning. We'll start with a stop loss at $28.49 just in case the USO does pierce the 2011 low ($29.10). Our multi-week target is $33.00.

- Suggested Positions -

buy the Jul $30 call (USO1221G30) current ask $0.89

- or -

buy the Aug $30 call (USO1218H30) current ask $1.36

Annotated Chart:

Entry on June xx at $ xx.xx
Earnings Date --/--/--
Average Daily Volume = 8.6 million
Listed on June 21, 2012

In Play Updates and Reviews

Energy Stocks Get Crushed

by James Brown

Click here to email James Brown

Editor's Note:

The OIX oil index was one of the market's worst performers today. Weak economic data helped send oil to a new 2012 low.

Our APC trade was stopped out. WMT was triggered.

Current Portfolio:

CALL Play Updates

Citrix Systems - CTXS - close: 78.05 change: -2.84

Stop Loss: 77.75
Target(s): 86.50
Current Option Gain/Loss: -61.7%
Time Frame: 3 to 4 weeks
New Positions: see below

06/21/12 update: Readers may want to hit the eject button and abandon ship. CTXS' bullish breakout over resistance at $80.00 hags reversed. Now the stock is back under $80 and back under its 50-dma. If there is any follow through lower tomorrow CTXS should hit our stop loss at $77.75 pretty quickly.

I am not suggesting new positions at this time.

- Suggested Positions -

Long Jul $82.50 call (CTXS1221G82.5) Entry $3.40

06/19/12 trade opened on gap higher at $81.40

Entry on June 19 at $81.40
Earnings Date 07/25/12 (unconfirmed)
Average Daily Volume = 2.0 million
Listed on June 18, 2012

Snap-on Inc. - SNA - close: 61.95 change: -1.41

Stop Loss: 61.95
Target(s): 69.00
Current Option Gain/Loss: Unopened
Time Frame: 6 to 9 weeks
New Positions: see below

06/21/12 update: The market's reversal lower is also evident in shares of SNA. The stock's two-day slide has erased four days of gains. If SNA doesn't improve soon we'll drop it as a candidate. Currently I am suggesting we stick to our original plan and wait for SNA to hit our trigger at $64.55 as our entry point.

FYI: The Point & Figure chart for SNA is bullish with a long-term $79 target.

Trigger @ 64.55

- Suggested Positions -

buy the Jul $65 call (SNA1221G65)

- or -

Buy the Sep $65 call (SNA1222I65)

Entry on June xx at $ xx.xx
Earnings Date 07/19/12 (unconfirmed)
Average Daily Volume = 424 thousand
Listed on June 19, 2012

Whole Foods Market, Inc. - WFM - close: 94.17 change: -1.97

Stop Loss: 93.25
Target(s): 95.00 & 98.50
Current Option Gain/Loss: Jul $92.50c: + 7.5% & Aug $95c: - 2.2%
Time Frame: 3 to 6 weeks
New Positions: see below

06/21/12 update: WFM was a clear target for profit taking after hitting new highs yesterday. Shares fell -2.0% and painted a bearish engulfing candlestick reversal pattern today. Readers may want to exit early now since the market looks weak and WFM could easily retreat back toward the $91-90 zone before it finds any support. We have a stop loss at $93.25.

- Suggested Positions -

Long Jul $92.50 call (WFM1221G92.5) Entry $3.30

- or -

Long Aug $95 call (WFM1218H95) Entry $4.40

06/18/12 new stop loss @ 93.25
06/15/12 first target hit at $95.00, options values at:
Jul $92.50 call @ $4.50 (+36.3%)
Aug $95.00 call @ $5.05 (+14.7%)
06/15/12 triggered at $92.05

Entry on June 15 at $92.05
Earnings Date 07/25/12 (unconfirmed)
Average Daily Volume = 1.8 million
Listed on June 12, 2012

Wal-Mart Stores Inc. - WMT - close: 67.70 change: -0.82

Stop Loss: 67.40
Target(s): 72.00
Current Option Gain/Loss: Jul$70c: -43.4% & Aug$70c: -28.7%
Time Frame: 3 to 6 weeks
New Positions: see below

06/21/12 update: Our new trade on WMT is not off to a very good start. The stock rallied just high enough this morning to hit our trigger and then reverse lower. We wanted to buy calls at $68.65. WMT hit $68.66 at its high today. The reversal looks kind of ugly with WMT dipping to short-term support at its rising 10-dma. If there is any follow through lower tomorrow then WMT will most likely hit our stop loss at $67.40.

- Suggested Positions -

Long Jul $70 call (WMT1221G70) Entry $0.46

- or -

Long Aug $70 call (WMT1218H70) Entry $0.94

06/21/12 triggered @ 68.65

Entry on June 21 at $68.65
Earnings Date 08/16/12 (unconfirmed)
Average Daily Volume = 11.7 million
Listed on June 20, 2012

PUT Play Updates

Deckers Outdoor Corp. - DECK - close: 44.71 change: -2.40

Stop Loss: 50.05
Target(s): 42.00
Current Option Gain/Loss: Jul45p: +66.6% & Aug45P: +27.5%
Time Frame: 3 to 6 weeks
New Positions: see below

06/21/12 update: A bad day for stocks proved to be a good day for our new put play on DECK. Shares opened at $47.31 and then plunged to a -5.0% decline. I am not suggesting new positions at this time.

Earlier Comments:
This is an aggressive trade because so many investors are already short this stock. The most recent data listed short interest at 26% of the small 36.7 million share float. That does raise the risk of a short squeeze, although DECK hasn't seen a squeeze in a while. FYI: The Point & Figure chart for DECK is bearish with a $34 target.

- Suggested (SMALL) Positions -

Long Jul $45 PUT (DECK1221S45) Entry $1.35

- or -

Long Aug $45 PUT (DECK1218T45) Entry $2.90

Entry on June 21 at $47.31
Earnings Date 07/26/12 (unconfirmed)
Average Daily Volume = 1.45 million
Listed on June 20, 2012


Anadarko Petroleum - APC - close: 60.56 change: -3.65

Stop Loss: 63.40
Target(s): 69.75
Current Option Gain/Loss: -57.1%
Time Frame: 3 to 4 weeks
New Positions: see below

06/21/12 update: Another round of slowing economic data pushed oil prices to a new 2012 low and the energy sector was pummeled to a significant loss. APC fell -5.6%. Our trade was stopped out at $63.40.

- Suggested Positions -

Jul $67.50 call (APC1221G67.5) Entry $1.75* exit $0.75 (-57.1%)

06/21/12 stopped out at $63.40
*option entry price is an estimate. looks like there was a bad tick at $5.00 this morning (06/19/12)
06/19/12 triggered @ 65.55


Entry on June 19 at $65.55
Earnings Date 07/23/12 (unconfirmed)
Average Daily Volume = 5.2 million
Listed on June 16, 2012