Option Investor

Daily Newsletter, Thursday, 7/26/2012

Table of Contents

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

Market Wrap

Stocks Surge On Draghi Comments

by Thomas Hughes

Click here to email Thomas Hughes
Comments by the ECB chairman Mario Draghi caused stocks to spike world wide. The European markets had one of their best days ever, with Spain leading the way. The comments in no way put to rest fears of further bail outs but does renew confidence in ECB leadership.

The comments by Mario Draghi caused US futures to surge more than 1% this morning. The comments were unexpected and sparked a rally in equities, the Euro and gold. The rally is suspect thought because the move came on a single statement and does not yet have the support of other EU central bankers. In his comments, Mr. Draghi said that the ECB would defend the Euro by “any means necessary” and that “it would be enough”. While his statements did not reveal what means those might be they did inspire some confidence in traders that steps would be taken sooner rather than later. The ECB is meeting next Wednesday and could announce further stimulus plans as early as then.

Further news from the European sector includes a new prediction by Citi economist Willem Buiten. Mr. Buiten has been handicapping the chances of a Greek exit ( “Grexit”, a word coined by Buiten) for several months now and has upgraded the chance to 90%. He is expecting continued weakness from the country as well as spillover into the other EU countries. He predicts that the move will occur in the next 2-3 quarters and that Spain will also need increased bail outs. It is not unreasonable to think that there will be the need for additional bail outs but I do not think it is very likely that Greece will be allowed to exit because of the possible global repurcussions.

Another round of unexpected unemployment data helped to lift stocks into the open. Unemployment claims continued to fluctuate wildly this week and fell by 35,000 to a seasonally adjusted 353,000 claims. This is a far cry less than the 378,000 predicted by economists. Of course, the previous weeks data was revised up, no surprise there, to 388,000. A shift in the way the big automakers have approached their seasonal summer layoffs has caused the wild swings and is expected to end soon. The four week moving average of claims, which fell by 8,750 to 367,250, is able to smooth out some of the fluctuations but is still susceptible to these wild weekly swings. Needless to say, the labor market is still not improving.

The unemployment data, like much of the other data and information we have available, continues to be mixed. Continuing claims dropped as well, falling by 30,000 to a total of 3.29 million. This is the lowest level in two months. The total number of Americans filing for unemployment climbed to its highest level in two months, 6 million. Next week be on the lookout for ADP and US employment data. Expectations are for a slight decline in hiring for the month of July.

The Durable Goods numbers did not reveal anything to me. There was a small surprise gain in June of .8% with a reversal in July to a decline of -1.1%. Economists on average had been expecting the data to remain flat so averaging the two months together gives us a flat to slightly negative number, in-line with expectations. Within this number the data was mixed as well. There were declines in most of the metrics but the 8% gain in transportation equipment nearly overcame them.

Market breadth was good at the opening, with advancers leading decliners by 6:1. After opening higher the major indexes seemed to tread water until the Pending Home Sales figures were release around 10:30. Analysts had been expecting a drop to 1%, from the previous months 5.9%, but were surprised by the -1% decline. The drop was due to an apparent lack of available homes for sale, not a lack of interested parties. This could be a good sign for the housing market in the longer term. Pent up demand could lead to higher prices and new sellers entering the marketplace, provided they don't outpace new buyers.

US bond yields rose today on the upbeat unemployment numbers. Despite the small gains the yields on the 30 year bond are still at multi-year lows.

US 30 year bond yield, daily

Gold also climbed on the statements by Mr. Draghi. The statements, combined with weak US data, renewed hopes of QE3 and added upward momentum to the price of gold. The index regained the upper side of a support/resistance level set in 2010 and could be bottoming. Further monetary stimulus from the ECB or the FOMC could help to send gold prices higher.

The Gold Index, daily

The drop in unemployment claims and comments from Mario Draghi also renewed hopes of increased oil demand, causing prices to rise for the third straight day. Trading in oil remained thin, ahead of US GDP numbers due out tomorrow. Geopolitical issues are more to blame for the rise in oil prices this summer than demand but further policy easing from world banking leaders could increase expectations for growth and demand for oil.

Today was a busy day for conference calls as earnings continue to roll in. More than 300 companies reported today with several big names reporting after the bell. The trend of higher earnings on lower revenue also continued. The fact that businesses are able to increase margins and improve profitability is good,this puts them in great position once the economy gets going again. The downside is that business in general is slowing, as evidenced by declining revenue.

3M Corporation made the news early today with their release. The company reported that profits were up while revenue was down and that they would be able to meet their current year end guidance. The stock surged on the news, opening above resistance and moving higher in early trading. By the end of the day the stock had traded about 1.5 times the average daily volume and closed below resistance.

3M Corporation, daily

Zynga was also a hot topic this morning. The online game maker missed earnings and revenue by a steep margin and lowered full year guidance. Zynga announced earnings of $0.01 per share, far below the estimated $0.06 per share investors were expecting. The company also lowered its full year guidance to $0.04-$0.09 per share from $.023-$0.29 per share. The company blames the miss and lowered guidance on the shift by users to mobile platforms and on game launch delays. What was clear in the report is that Zynga is still tied to Facebook and is having a hard time monetizing its services. The stock dropped about 40% today, hitting a new 52 week low.

Zynga, daily

Facebook, which released earnings after the bell today, felt the sting of Zynga's miss during today's session. Shares of the stock traded down today but remained above the once tested support zone at $27. The report did nothing to help investor confidence and sent the stock plummeting in the after market trading.

Facebook, daily

Exxon Mobil also reported a disappointing quarter. On the surface, Exxon reported a 49% increase in net income, not surprising for the worlds largest oil company. However, excluding sale of assets revenue and profits both fell short. After excluding one-time divestment of assets Exxon earned $1.80 a share, below the expected $1.96. The decline in revenue is due to a combination of decreased production and low prices. The stock moved upward today but is trading well under resistance with weak momentum.

Exxon, daily

The Oil Index also climbed today, with 9 out 11 components moving higher. The index also came short of its resistance zone and is divergent with its momentum indicator.

The Oil Index, daily

Sprint was another bright, if tarnished, star in the earnings parade today. The company, which has been struggling with profitability for a long time, reported that its second quarter loss widened. That was not the good news, the good news is that the wider than expected loss was due in part to write-downs of its Nextel network and that revenue was on the rise. Sprints model of offering unlimited data attracted new subscribers, driving the revenue gains. After the news the stock jumped and moved as much as 25% higher during the day with heavy volume. An increase in revenue is good for Sprint but it still has to address the profitability issue. Until this is done Sprint faces heavy resistance going forward. The stock has been range bound since hitting its bottom in 2009 and is currently trading in the middle of that range. A move up to $5.00 would close the window opened last summer when the stock gapped down.

Sprint, daily

The S&P 500 moved higher throughout the day, eventually surpassing the mornings high. Today's rally was driven more by relief over the attention Mario Draghi seems to be giving the European crisis and less with satisfaction over earnings. Some companies have done well over the last quarter, and certainly many of them have been able to improve earnings but just as many if not more have failed to make improvements. Bottom line performance is suggesting that internal operations are improving while declining revenue underscores the declining state of the global economy. Earnings drive market value and declining world expectations do not give much hope for improvements in the near future. Expectations for 2013 will soon start to influence trade and investment decisions and so far what I have found is not promising. On average, estimates for US GDP growth in the second half of 2012 will pick up slightly, maybe as much as 2.5%. The early estimates for 2013 are very similar. This will be good but will it be enough in light of lowered global growth expectations? The IMF lowered its 2013 global outlook to 3.9% just two weeks ago and so far there is no real sign of stabilization. The weakness in Europe is already blamed for poor results by US corporations, further declines there and in Asia will hurt corporate results and US GDP even more.

S&P 500, one day

On the one day charts the S&P is moving slowly upward toward its resistance zone between 1380 and 1420. The lower end of this range is equal to an important retracement level and has proven significant as resistance over the last few months. Momentum is very weak and does not support a bullish outlook on the index.

S&P 500, daily

Longer term the index is being squeezed by the 200 day moving average and the resistance zone described above. Momentum is weak but bearish. The index seems like a deer in headlights, not knowing which way to go. On the one hand earnings are disappointing, expectations are low and economic signals are pointing to more of the same. On the other hand, today's comment by Mr. Draghi and the growing possibility of QE3 lead us to think that something will be done to stimulate growth. Tomorrow begins a round of important economic indicators that will begin to bring clarity to the upcoming quarters.

S&P 500, weekly

Economic Calendar

The Nasdaq Composite has much weaker technicals than the S&P. The index's move up today was halted by a convergence of the 30 day moving average and a near term down trend-line.

Nasdaq, daily

Tomorrow will be another big day for earnings. Not only is there a new round of reports due out traders will be moving on earnings statements released after the bell today. Amazon and Starbucks delivered high profile misses while Amgen, Coinstar and Expedia beat expectations. The biggest mover tomorrow is likely to be the advance estimate for US 2nd quarter GDP. The consensus estimate is for growth around 1.2%.

Thomas Hughes

New Option Plays

Consumer Electronics & Rentals

by James Brown

Click here to email James Brown


Best Buy Co. - BBY - close: 17.23 change: -0.11

Stop Loss: 18.51
Target(s): 15.05
Current Option Gain/Loss: Unopened
Time Frame: exit prior to the Aug 21st earnings
New Positions: Yes, see below

Company Description

Why We Like It:
Shares of BBY appear to be in a long-term decline. The company has struggled with the show-room phenomenon where consumers browse products in BBY's big-box stores but then buy the product online from competitors like Amazon.com (AMZN). Recent signs of weakness in consumer spending only add to BBY's troubles. The company recently laid off 2400 people.

This trade is not without risk. There were some rumors a few weeks ago that BBY might be a takeover target or it might be taken private. Plus there are a lot of shorts already in BBY with the most recent data listing short interest at 16% of the 268 million-share float. This high short interest helps produce the short, sharp squeezes higher we've seen over the last several months.

BBY continues to show relative weakness. We are suggesting small bearish positions at the open tomorrow. We'll start with a stop loss just above the 10-dma. I would not be surprised to see BBY bounce near the 2008 low at $16.42. If BBY breaks down under the 2008 low the next level of support is probably $15.00 but the price history would suggest support is near $12.50 and the 2002 lows.

FYI: The Point & Figure chart for BBY is bearish with a $10 target.

- Suggested Positions -

buy the Aug $17 PUT (BBY1218T17) current ask $0.79

- or -

buy the SEP $17 PUT (BBY1222U17) current ask $1.63

Annotated Chart:

Entry on July xx at $ xx.xx
Earnings Date 08/21/12 (confirmed)
Average Daily Volume = 4.4 million
Listed on July 26, 2012

United Rentals, Inc. - URI - close: 27.43 change: +0.20

Stop Loss: 30.05
Target(s): 23.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
URI reported earnings last week and beat estimates by eight cents but that wasn't good enough. Traders sold the news. The oversold bounce failed early this week. Now URI is breaking down to new multi-month lows.

Yesterday and today the stock bounced near $26.90. I am suggesting a trigger to buy puts at $26.80. If triggered our target is the $23.00 level. However, don't be surprised if URI sees an oversold bounce off the $25.00 level (we just expect this bounce to roll over).

FYI: The Point & Figure chart for URI is bearish with a long-term $17 target.

Trigger @ 26.80

- Suggested Positions -

buy the Aug $26 PUT (URI1218T26) current ask $1.10

- or -

buy the Sep $26 PUT (URI1222U26) current ask $2.05

Annotated Chart:

Entry on July xx at $ xx.xx
Earnings Date 07/17/12
Average Daily Volume = 4.4 million
Listed on July 26, 2012

In Play Updates and Reviews

Bouncing off the 50-dma

by James Brown

Click here to email James Brown

Editor's Note:

The S&P 500 index seems to be bouncing off technical support at its simple 50-dma and an intermediate trend of higher lows.

HES and CRM have been triggered. We are removing RAX.

Current Portfolio:

CALL Play Updates

Health Care REIT - HCN - close: 61.05 change: +0.18

Stop Loss: 59.85
Target(s): 64.75
Current Option Gain/Loss: -16.1%
Time Frame: exit prior to the Aug 6th earnings
New Positions: see below

07/26/12 update: Hmm... HCN is just not having much success. Shares tried to rally this morning but quickly returned to this recent sideways churn near $61. I am growing more cautious on this trade.

FYI: The Point & Figure chart for HCN is bullish with a $70 target.

- Suggested Positions -

Long Aug $60 call (HCN1218H60) entry $1.55

07/24/12 triggered @ 61.15

Entry on July 24 at $61.15
Earnings Date 08/06/12 (confirmed)
Average Daily Volume = 1.5 million
Listed on July 23, 2012

Hess Corp. - HES - close: 47.56 change: +2.10

Stop Loss: 44.45
Target(s): 49.85
Current Option Gain/Loss: Aug$47.5c: +47.6% & Sep$47.5c: +24.7%
Time Frame: 3 to 6 weeks
New Positions: see below

07/26/12 update: It was a big day for many stocks in the energy sector. I saw a lot of strong rallies. HES gapped open higher at $46.65 and closed up +4.6% on the day. Since our trigger to buy calls was $46.55 the trade opened first thing this morning. I wouldn't chase it here.

- Suggested Positions -

Long AUG $47.50 call (HES1218H47.5) Entry $1.05

- or -

Long SEP $47.50 call (HES1222I47.5) Entry $2.02

07/26/12 triggered on gap open higher at $46.65

Entry on July 26 at $46.65
Earnings Date 07/25/12
Average Daily Volume = 4.3 million
Listed on July 25, 2012

PUT Play Updates

Alliant Techsystems - ATK - close: 44.64 change: -0.39

Stop Loss: 46.25
Target(s): 40.50
Current Option Gain/Loss: - 5.8%
Time Frame: exit prior to the early August earnings
New Positions: see below

07/26/12 update: ATK tried to rally this morning but the initial spike higher failed near short-term technical resistance at the simple 10-dma. The fact that ATK did not post a gain today with the market's widespread rally is a good sign for the bears.

FYI: The Point & Figure chart for ATK is bearish with a $35 target.

- Suggested Positions -

Long Aug $45 PUT (ATK1218T45) Entry $1.70

07/23/12 triggered @ 44.75

Entry on July 23 at $44.75
Earnings Date 08/02/12 (unconfirmed)
Average Daily Volume = 261 thousand
Listed on July 21, 2012

Salesforce.com - CRM - close: 124.61 change: -0.71

Stop Loss: 130.25
Target(s): 111.00
Current Option Gain/Loss: - 7.2%
Time Frame: exit prior to the mid August earnings
New Positions: see below

07/26/12 update: It was a volatile day for shares of CRM. The stock gapped open higher at $128.36, spiked past resistance near $130.00, and then reversed. The stock fell under support near $125.00 and hit our trigger to buy puts at $124.00. I would still consider new positions at current levels.

Readers should consider this an aggressive, higher-risk trade because CRM can be a volatile stock.

- Suggested Positions -

Long Aug $120 PUT (CRM1218T120) Entry $4.15

07/26/12 triggered at $124.00

Entry on July 26 at $124.00
Earnings Date 08/16/12 (unconfirmed)
Average Daily Volume = 1.8 million
Listed on July 24, 2012

SINA Corp. - SINA - close: 46.20 change: +0.72

Stop Loss: 47.60
Target(s): 40.50
Current Option Gain/Loss: -44.6%
Time Frame: exit prior to the mid August earnings report
New Positions: see below

07/26/12 update: The stock market's widespread gains on Thursday helped SINA to a +1.5% gain. This is the first time the stock has closed above $46 and its simple 10-dma in days. The larger trend is still bearish but we're not suggesting new positions at this time.

- Suggested Positions -

Long Aug $42.50 PUT (SINA1218T42.5) Entry $2.71

Entry on July 23 at $43.99
Earnings Date 08/16/12 (unconfirmed)
Average Daily Volume = 2.7 million
Listed on July 21, 2012

Wynn Resorts - WYNN - close: 93.10 change: +0.31

Stop Loss: 96.25
Target(s): 85.50
Current Option Gain/Loss: - 9.0%
Time Frame: 3 to 6 weeks
New Positions: see below

07/26/12 update: A 0.3% gain in WYNN versus the +1.6% rally in the S&P 500 doesn't bode well for this casino stock. Yet it's worth noting that WYNN did bounce sharply off the $90.00 level. I previously cautioned readers that the $90 mark is probably round-number support. WYNN's stock is scheduled to begin trading ex-dividend tomorrow. Don't be surprised if the stock gaps open lower at the open. The quarterly cash dividend is 50 cents.

FYI: The Point & Figure chart for WYNN is bearish with a $60 target.

- Suggested Positions -

Long Aug $90 PUT (WYNN1218T90) Entry $2.20

07/24/12 triggered @ 93.75

Entry on July 24 at $93.75
Earnings Date 07/17/12
Average Daily Volume = 2.3 million
Listed on July 23, 2012


Rackspace Hosting - RAX - close: 43.15 change: +1.32

Stop Loss: 41.55
Target(s): 35.50
Current Option Gain/Loss: Unopened
Time Frame: exit prior to the Aug 7th earnings
New Positions: Yes, see below

07/26/12 update: Strong gains for the tech sector helped RAX produce a +3.1% rally. The stock has bounced back into the middle of its $41-45 trading range. We are giving up on RAX as a candidate. Our trade did not open. The play was to buy puts on a breakdown with a trigger at $39.90.

Trade did not open.

07/26/12 removed. trade did not open.


Entry on July xx at $ xx.xx
Earnings Date 08/07/12 (confirmed)
Average Daily Volume = 1.6 million
Listed on July 24, 2012