Option Investor

Daily Newsletter, Thursday, 8/9/2012

Table of Contents

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

Market Wrap

Rally On?

by Thomas Hughes

Click here to email Thomas Hughes
The markets were quiet today following new data released overnight from Asia, Europe and here at home. Unfolding news events and global economic data continue to be a drag on the current rally. The S&P 500 barely managed to cling to the 1400 level today and is still well within its long term resistance zone of 1380-1420.

S&P 500, daily

Corn prices continued to rise today, ahead of anticipated crop report from the USDA tomorrow. The report is expected to unveil the state of the US corn crop and could have a real impact on prices. The rising cost of corn is already expected to increase food prices in nearly almost area. If the price of corn keeps going up it will further impair global growth.

New data from China suggests that the country is slowing faster than previously thought. An estimate I read today put the Country at 4.5-5% for the current quarter. Inflation in the country has sunk to a 30 month low as manufacturing and industrial production sink to a similar 30 month low. Manufacturing in China slowed to 9.2% and if it is still slowing it could mean the hard landing economists had predicted last year is happening now.

China is not the only sluggish economy in the region. India also reported that June industrial output slowed to new lows and the Bank Of Japan maintained their policy stance while lowering their output forecasts.

The Asian markets jumped on the news today, gaining around 1%. The signs of increasing economic weakness raise hopes for the chance of further policy easing or other stimulus. Some economists think it is too late for economic policy to have much effect, especially with the inflationary cost of corn looming overhead. The Hang Seng climbed 1.02%, the Nikkei gained 1.1% and the China Composite Index gained 0.61%.

From Europe the debate over aid for Spain and Italy heats up as Italian Prime Minister Mario Monti stands tough. He is standing up to German Chancellor Merkel over the availability of funding and access to the credit markets necessary for the two ailing countries to stay afloat. Spain and Italy are both suffering from the rising costs of their debt, which has surged to the 6-7% range.

The UK trade deficit hit a record high as exports dropped sharply. The countries export goods have been in decline and are a prime cause of the current UK recession. The UK's main export market is the Eurozone nations who have been having some obvious problems. Despite the problems, the data from China and the US helped to send European shares higher in afternoon trading to close near flat for the day. The FTSE 100 gained 0.1%, the Xetra DAX lost -0.02% and the CAC 40 gained 0.54%.

US data today was dominated by unemployment and trade deficit data. The number of initial claims for unemployment fell this week by 6,000 to 361,000. This is short of the expected 370,000 and is the first week of data without the seasonal automotive industry lay-offs. The four week moving average of initial claims gained 2,250, just off the recent low. The initial claims number is near this years low but is still above the levels expected for a strong labor market.

Continuing claims made an unexpected jump. The number of people filing for a second week of unemployment climbed to 3.32 million, the highest level since March. This could be carryover from some of the auto sector lay-offs and should be carefully watched. Another uptick in unemployment would be a bearish signal.

The total number of people filing claims for unemployment ticked back down to the years lowest level. The downtrend in total unemployment seems to following the unemployment rate which made a similar downtrend in the beginning of the year. Since the then the unemployment rate has seemingly bottomed and begun to trend upward.

The US trade deficit shrank to its smallest amount in 18 months. The deficit fell by a surprising 10.7% to $42.9 billion. Much of the decline is attributable to the lower price of oil.

Wholesale inventories also shrank in June. The drop of -0.2% was worse than expected.

The interest rate on a 30-year fixed rate mortgage climbed last week to 3.59% from the previous 3.55%.

Oil traded higher on the day, gaining around 0.5% in intraday day trading. Supply worries are helping to boost support for the commodity. A lower outlook for Brent Sea supply and disruptions to production in Mexico due to tropical storm Ernesto combined to drive prices higher. Additionally, weak economic signs are increasing hopes for stimulus which is boosting hopes for higher oil demand. Natural gas rallied today after the US supply injection failed to meet expectations. The supply gain of 24 bcf was well short of the consensus estimates.

Gold remained steady, trading over $1600 an ounce. The talks of global stimulus are supporting the price of gold which has been trading over $1600 all week. The gold index climbed today by 1% and maintained it perch above the short term moving average.

The Gold Index, daily

JP Morgan lost about -0.5% today after restating first quarter earnings. The bank lowered its profit statement citing that some of the internal numbers the report was based on were meant to hide the full scale of the London Whale. Also in the statement filed with the SEC JP Morgan has pushed back its planned restart of share re-purchasing to the first part of next year.

JP Morgan stock has been trading under resistance coincident with the bottom of the window opened in May. The gap down was caused by the original announcement of the Whale and has proved to be resistance twice since the fall. The stock is currently caught between the 30 day and 200 day moving averages.

JP Morgan, daily

The Bank Index is trading under resistance with weak momentum and declining volume.

Bank Index, daily

Earnings season is still progressing but nearing the end of the cycle for this quarter. Kohl's was the big name in the headlines today, beating the estimates of $0.96 per share. Despite beating the estimates Kohls, who competes directly with JC Penny and Macy's, had a bad quarter. Earnings fell 20% over the last quarter and Q2 comparable store sales declined. The stock, which had been trending up over the last few months, sold off today with heavy volume and making a very bearish candle signal.

Kohl's, daily

Nordstrom's reported after the bell, beating earnings expectations by a penny but coming short on revenue. The current quarter guidance was in line with expectations and sent the stock up in the after market trades.

High end cosmetics retailer Elizabeth Arden pleased investors. The company's 4th quarter and 2012 results, plus the future outlook, sent shares to an all time on heavy volume. The company reported an earnings gain around 30% for the year and is expecting the increases to continue in 2013. Elizabeth Arden is expecting sales to increase around 15% and earnings to improve nearly 25%. The stock gapped up sharply at the open today but faced heavy selling pressure into the close.

Elizabeth Arden, daily

Randgold Resources reported a higher than expected net earnings per share, due primarily to better than expected gold output from operations. The company says it is on track to reach its growth targets and has achieved significant progress in two of its mining operations. The company is expecting to increase production by 19% in 2013. The stock gained about 3.5% on the report and is now trading near resistance and the top of a window opened this spring.

Randgold, daily

Red Robin Gourmet Burgers reported it was able to increase earnings, revenue and margins in the recently ended quarter. The news sent this stock up by over 10%, to trade at resistance and the bottom of a gap opened this spring (I think I wrote that before...). In the report the company says that is is expecting to see growth in the range of 0.5 for 2012 with margins in the range of 20-20.5% of sales, just below this quarters 21.8%. The statement makes no mention of rising food prices or how it expects those costs to impact results in the coming quarters.

Red Robin Gourmet Burger, daily

Tower Semiconductor reported that revenues in the second quarter were up over 21% year-over-year and that 2012 sales to-date were 29% ahead of last year. The company improved operating margins on a gaap and non-gaap basis. Tower is expecting the gains to continue through 2012. The current guidance for the third quarter puts the company at only 12-14% revenue gain for the year, leaving plenty of room for an upside surprise. The stock lost well over 20% in early trading as investors took advantage of a recent stock split. Support kicked in though and the bulls recaptured much of the day's loss.

Tower Semiconductor, weekly

Chip maker Nvidia reported after the bell, beating expectations for earnings but falling short on revenue;no surprise there. The company offered guidance above the estimates and the stock price gained in after hours trading.

The Semiconductor Index is making long term bounce from its support level 350. The momentum indicators are bullish and the index appears to be moving up to next resistance at 425-450. The industry is expected to see strong growth in 2013 and could pull stocks like Tower up with it.

Semiconductor Index, weekly

Olympic Steel reported a 22% increase in sales from the same period last year. The steel services provider also announced a sharp drop in earnings per share. The company reported that declining steel prices and other manufacturing costs impacted results negatively. Other significant impacts include investment in start-ups that are not yet operational. The investments are expected to begin paying off in the current quarter and into the future. The stock traded flat on the news, near a long term support line.

Olympic Steel, daily

I feel like a broken record describing how the current market rally is extended, without significant momentum and facing a deteriorating global outlook but now I've said it. The S&P is in the middle of a long term and cyclical resistance level, one that will take more than a few positive surprises to break. Today the market traded weakly around the 1400 line, a symbolic number smack between the low and high end of the current resistance range.

S&P 500, one day

After dancing around the breakeven line all day the S&P finally closed at +0.53%, very near to zero. Looking at the one day charts we see that the market has been drifting up into resistance over the last few days. It's not for me to say that no more rally will happen but my experience is screaming at me to watch for some sort of selling because indications support market weakness. A 50 point drop in the S&P would bring the S&P back to trend. In the longer term, the indicators are mildly bullish and suggest some potential upside.

S&P 500, daily

S&P 500, weekly

The VIX is at very low levels, near 15, where it likes to be just before a spike in volatility. Looking over the 5 year chart of the VIX you can see that the index spiked 6 times over the last 2 1/2 years after reaching the low end of its trading range near 15.

The VIX, daily

It's one of those times when I know something is going to happen but just not what exactly. The VIX level is telling me the market has reached an extreme and is due for some change. Instinct and short term analysis lead me to think a sell off is due. What this means is yet to be determined, if at all. I am proceeding with caution in my trading and trust you all to do the same.

Earnings have been very blah this quarter; on a per share basis increases are great but without a gain in revenue no real growth is happening. Plus, these results are on the back of lowered expectations. Future growth is now suspect as well. China may be slowing more and faster than feared, the European crisis is not over, food prices are rising on the price of corn and it is all affecting the US in one way or another. I don't mean to paint such a gloomy picture, I don't think it's as bad as all that. I just don't think there is much reason for stocks to go up at this time.

Tomorrow will be affected by a number earnings reports which came out after the market closed today. The economic data is light until next week when we get retail sales and Empire Manufacturing numbers.

Happy Trading!

Thomas Hughes

New Option Plays

Not Participating

by James Brown

Click here to email James Brown


Edwards Lifesciences - EW - close: 98.30 change: -1.99

Stop Loss: 100.25
Target(s): 91.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
EW has not participated in the market's recent rally. Today shares were underperforming and broke down under the $100 mark and its 50-dma. Given what looks like a bearish reversal in the last two weeks we could see EW correct lower toward support near $90.00.

I am suggesting a trigger to open bearish positions at $97.75. Our target is $91.50. FYI: The Point & Figure chart for EW is bearish with an $86 target.

Trigger @ 97.75

- Suggested Positions -

buy the Sep $95 PUT (EW1222u95) current ask $2.40

Annotated Chart:

Entry on August xx at $ xx.xx
Average Daily Volume = 950 thousand
Listed on August 9, 2012

Vornado Realty Trust - VNO - close: 80.01 change: -1.59

Stop Loss: 80.55
Target(s): 72.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 5 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
VNO is a REIT stock that has plunged sharply after reporting earnings on August 6th. Now shares are back underneath their 200-dma and testing major support in the $80-79 area.

You can tell on the weekly chart below that it almost looks like a bearish head-and-shoulders pattern. I am suggesting a trigger to open bearish positions at $78.45. Our target is $72.50 but keep in mind that the $75.00 level might be round-number support. FYI: The Point & Figure chart for VNO is bearish with a $74 target.

Trigger @ 78.45

- Suggested Positions -

buy the Sep $75 PUT (VNO1222u75) current ask $0.75

Annotated Chart:

Entry on August xx at $ xx.xx
Average Daily Volume = 943 thousand
Listed on August 9, 2012

In Play Updates and Reviews

A Quiet Day on Wall Street

by James Brown

Click here to email James Brown

Editor's Note:

Thursday proved to be a quiet summer trading session on Wall Street. Art Cashin, on the floor of the NYSE, said the hottest seller today was No Doze!

Current Portfolio:

CALL Play Updates

BRCM - Broadcom - close: 33.90 change: -0.33

Stop Loss: 33.25
Target(s): 38.50
Time Frame: 4-6 weeks
New Positions: see below

08/09/12 update: BRCM managed a rebound near its rising 10-dma and outperformed the market with a +1.2% gain. Shares remain under resistance in the $34.50-35.00 zone. I am not suggesting new positions at this time.

- Suggested Positions -

Position: Nov $36.00 Call (BRCM1217K36) entry $1.80

08/08/12 new stop loss @ 33.25
no follow through, turning cautious
08/07/12 triggered @ $34.75
08/06/12 adjust stop loss to $32.45

Entry on August 07 at $34.75
Average Daily Volume = 10 million
Earnings Oct-23rd
Listed on Aug 4, 2012

Caterpillar - CAT - close: 88.40 change: +1.18

Stop Loss: 84.90
Target(s): 91.50
Current Option Gain/Loss: +16.8%
Time Frame: 3 to 4 weeks
New Positions: see below

08/09/12 update: I heard positive comments about CAT on CNBC today. Shares outperformed the wider market with a +1.3% gain and a new multi-week high. I am not suggesting new positions at current levels.

Earlier Comments:
I do consider this somewhat aggressive. CAT's recent earnings were strong and the company raised guidance but its stock price is probably still vulnerable to negative economic headlines. Furthermore the $90.00 level might be round-number resistance.

- Suggested (SMALL) Positions -

Long Sep $90 call (CAT1222I90) Entry $1.90

08/07/12 triggered @ $87.25

Entry on August 07 at $87.25
Average Daily Volume = 8.6 million
Listed on August 6, 2012

Celgene Corp. - CELG - close: 71.25 change: -0.52

Stop Loss: 69.90
Target(s): 75.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

08/09/12 update: Lack of movement in the broader market has left CELG to hover just under resistance near the $72.00 level. We are still waiting for a breakout. I am suggesting a trigger to buy calls at $72.25. Our target is $75.75.

FYI: The Point & Figure chart for CELG is bullish with an $81 target.

Trigger @ 72.25

- Suggested Positions -

buy the Sep $75 call (CELG1222I75)

Entry on August xx at $ xx.xx
Average Daily Volume = 3.4 million
Listed on August 7, 2012

Dollar Tree - DLTR - close: 51.66 change: -1.29

Stop Loss: 49.45
Target(s): 54.50
Current Option Gain/Loss: - 5.2%
Time Frame: exit prior to earnings on Aug. 16th
New Positions: see below

08/09/12 update: Ouch! After yesterday's nearly one dollar gain in DLTR shares gave it all back and more today (-2.4%). I couldn't find any specific news behind today's relative weakness. I'd wait for a bounce near $51.00 before considering new positions.

We do not want to hold over the earnings report on August 16th.

- Suggested Positions -

Position: Long Sept $52.50 Call (DLTR1222I52.5) @ $1.90

08/06/12 new stop loss @ 49.45, adjust time frame to exit prior to Aug. 16th earnings report

Entry on Aug 3rd at $ 51.42 (gap open)
Average Daily Volume = 1.5 million
Listed on Aug 2, 2012

PPG Industries - PPG - close: 111.37 change: +0.26

Stop Loss: 109.75
Target(s): 117.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

08/09/12 update: Thursday was a quiet session for the market and PPG drifted sideways under short-term resistance at $112.00.

I am suggesting a trigger to buy calls at $112.25. We'll use a stop loss at $109.75. The $115 level could be resistance but we are aiming for $117.50. FYI: The Point & Figure chart for PPG is bullish with a $137 target.

Trigger @ 112.25

- Suggested Positions -

buy the Sep $115 call (PPG1222I115)

Entry on August xx at $ xx.xx
Average Daily Volume = 1.3 million
Listed on August 8, 2012

Qualcomm - QCOM - close: 62.00 change: +0.55

Stop Loss: 57.75
Target(s): 64.50
Current Option Gain/Loss: +24.7%
Time Frame: 4-6 weeks
New Positions: see below

08/09/12 update: QCOM continues to show relative strength with a +0.89% gain. Shares closed at another new relative high. You could argue that QCOM is a little bit short-term overbought here. Readers may want to wait for a dip near $60.50 before considering new positions.

- Suggested Positions -

Position: Oct $62.50 Call (QCOM1222J62.5) entry $1.70

08/07/12 triggered @ 60.51

Entry on August 07 at $60.51
Average Daily Volume = 1.5 million
Listed on Aug 4, 2012

WellPoint Inc. - WLP - close: 56.79 change: -0.65

Stop Loss: 54.40
Target(s): 59.75
Current Option Gain/Loss: + 6.2%
Time Frame: 3 to 4 weeks
New Positions: see below

08/09/12 update: WLP hit a little bit of profit taking after a strong two-day advance. Shares slipped -1.1%. Broken resistance near $56.00 should be new support.

- Suggested Positions -

Long Sep $57.50 call (WLP1222I57.5) Entry $1.60

08/08/12 triggered @ 56.50

Entry on August 08 at $56.50
Average Daily Volume = 4.4 million
Listed on August 7, 2012

PUT Play Updates

Akamai Technologies - AKAM - close: 36.21 change: +0.03

Stop Loss: 36.75
Target(s): 32.00
Current Option Gain/Loss: -54.2%
Time Frame: 2-4 weeks
New Positions: see below

08/09/12 update: AKAM is little changed on the session. I remain cautious here. More conservative traders may want to exit early now to limit losses.

- Suggested Positions -

Position: Long Sept $34 PUT (AKAM1222U34) @ $1.53

08/02/12 triggered @ $34.85

Entry on Aug 2nd at $ 34.85
Average Daily Volume = 3.0 million
Listed on July 30, 2012

FB - Facebook - close: 21.01 change: +0.29

Stop Loss: 23.25
Target(s): 17.00
Time Frame: 2-4 weeks
Current Option Gain/Loss: -17.2%
New Positions: see below

08/09/12 update: FB danced on either side of the $21.00 level all day long. The stock did manage to post a +1.3% gain by the close. There is no change from my prior comments. Cautious traders may want to look for a new relative low before initiating positions.

Earlier Comments:
Facebook has turned into the stock everyone loves to hate. Facebook has 674 million shares outstanding as of Friday. On August 15th another 268 million shares will see their lockup expire and become available for trading. That is 40% additional shares. If you were an investor or employee and you watched your shares decline from $35 to $20 ahead of your lockup expiration you are probably just waiting for an opportunity to sell. Another factor is that taxes are due on the awarded shares regardless of whether they are sold. That means employees have a big tax bill and they have not been able to sell those shares to pay the taxes. That is an additional incentive to pull the trigger on at least part of their position on August 15th.

Facebook has hundreds of detractors and they seem to be racing each other trying to put a lower price target on the stock. Mark Hulbert was on CNBC on Friday with a $13.80 price target based on a bunch of different metrics.

Facebook also has the various lawsuits over the IPO including the valuation and the various claims made about users and revenue in the days leading up to the IPO. There are plenty of clouds and no real catalysts to pump up the stock.

Facebook said expenses grew by 60% in Q2 and they would grow faster in Q3/Q4. That means earnings will decline.

I am recommending a September option with plans to exit (some time) after the August 15th share lock up expiration.

Suggested Positions

current position: Sept $20 PUT (FB1220U20) entry $1.45

08/07/12 triggered @ 20.95
08/06/12 adjust entry trigger to $20.95

Entry on August 07 at $20.95
Average Daily Volume = 80.0 million
Listed on August 5, 2012

iShares Russell 2000 ETF - IWM - close: 80.20 change: +0.38

Stop Loss: 80.75
Target(s): 76.50
Time Frame: 3-5 weeks
New Positions: Yes, see below

08/09/12 update: Hmm... the small caps managed to outperform the big cap stocks today. The IWM closed up +0.4% and above the $80 level. I remain very cautious on this trade and suggest readers limit their position size to reduce risk.

Currently the plan is open small bearish put positions if the IWM trades at $79.40 or lower.

Entry Trigger: buy puts at $79.40

- Suggested (SMALL) Positions -

Buy Oct $78 PUT (IWM1220V78)

08/08/12 Adjust entry/stop/exit
Use a trigger @ 79.40, stop @ 80.75, target 76.50. Small Positions Only!
08/07/12 adjust trigger to buy puts up to $78.90

Entry on Unopened XX at $ XX.XX
Average Daily Volume = 60.0 million
Listed on August 5, 2012