Option Investor

Daily Newsletter, Thursday, 1/20/2011

Table of Contents

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

Market Wrap

It Could Have Been Worse

by Todd Shriber

Click here to email Todd Shriber
Stocks were able to shrug off losses that were far worse earlier in the day to avoid the worst two-day stretch for the S&P 500 since November, but even with a late-day pick-me-up, all three major U.S. indexes closed in negative territory today despite a batch of encouraging economic data. The Dow barely closed in the red and actually looked like it might find its way to positive territory while the S&P 500 lost just over a tenth of a percent. The Nasdaq lost nearly 1% and the Russell 2000 tumbled 1.13%.

Stats Table

China's latest GDP report showed the world's fastest growing major economy expanded at a pace of 9.8% in the fourth quarter, easily topping economists' estimates and casting fresh doubt over the effectiveness of the tightening measure Beijing has thus far employed. At this point, it is quite obvious that the Chinese economy is proving very difficult for the guys in Beijing to control and all that does is stoke concerns about inflation, the four-letter buzz word for emerging markets in 2011.

It is a viscous circle when it comes to Chinese economics. The GDP beats estimates and that shows tightening measures are not working and that means more will be on the way. U.S. stocks sell-off as a result. Of course the other option would be for China's GDP report to disappoint, but we wold still be left with a sell-off. Pick your poison, but neither is particularly appetizing.

The China news combined with rising inventories here in the U.S. weighed on oil prices today with NYMEX-traded crude tumbling as low as $88 per barrel for the first time in 10 days. The U.S. Energy Information Administration said oil inventories rose 2.62 million barrels for the week ending Jan. 14 compared with estimates of a draw of 600,000 barrels. What should be really worrisome for the oil bulls is that oil declined on a day of positive jobless claims news.

Oil Chart

Speaking of those economic data points, the National Association of Realtors reported December existing home sales surged 12.3% to a seasonally adjusted 5.28 million units. That compares with a November reading of 4.68 million units. Economists had been expecting the December number to come in at 4.8 million units.

The Conference Board's December reading of leading economic indicators rose 1% after gaining 1.1% in November, perhaps buoying sentiment that the U.S. economic recovery may quicken its pace this year. Economists were expecting a December reading of 0.6%. Leading economic indicators have now risen for six straight months.

The Labor Department said initial claims for jobless benefits dropped to 404,000 last week from a revised reading of 441,000 the previous week, good for the biggest decline since February 2010. Continuing claims fell to 3.86 million, the lowest point in two years.

The trend for jobless appears to be downward, certainly a good sign for the U.S. economy and a real spark could be seen if ''support'' for the four-week moving average at 400,000 is broken. That number still hovers close to 412,000. It appears that we are getting closer to the point where we have a real recovery, one that actually produces enough jobs to bring down unemployment, rather than the pseudo-recovery we have been in for the last year and a half, according to Zacks Investment Research.

Jobless Claims

There was a slew of earnings news today, but I will keep the focus on some of the marquee names rather than get into every company that reported today. An interesting factoid about today's reports: It was a bad day to be a triple-digit stock that offered up a disappointing outlook.

Take the case of Freeport McMoRan (FCX), the largest U.S. copper miner. Sure, it was nice the Arizona-based company said its fourth-quarter results surged 60% and it has to be acknowledge this stock has doubled since last June thanks to soaring copper and gold prices, but a different fate may be awaiting this high-flier in 2011.

China is expected to ramp domestic production of base metals and Freeport announced its 2011 copper and gold sales will lag the numbers posted by the company in 2010. Freeport said copper sales are expected to drop to 3.85 billion pounds in 2011 from 3.9 billion pounds in 2010. It previously forecast 2011 sales of 3.9 million pounds while gold sales are expected to be 1.4 million ounces this year, down from 1.86 million in 2010, it said, and below its previous forecast of 1.5 million ounces, according to Reuters.

Add to that the fact that Freeport is forecasting higher production costs of $1.10 per pound of copper this year compared with 79 cents per pound last year and throw in China's GDP news, which pressured copper futures, and it was an ugly day to be long Freeport.

Freeport McMoRan Chart

Speaking of triple-digit laggards, the worst offender is F5 Networks (F5). The Seattle-based maker of software that manages computer networks plunged $29.63, or 21.4%, to $109.15 after announcing some disappointing guidance. F5 saw volume that was about 11 times the daily average and most of the declines were seen before the open as the shares traded in a range of less than $9 today.

Still, the company is forecasting fiscal second-quarter revenue of $275 million to $280 million, below the Wall Street estimate of $280.7 million. F5 expects to earn 84-86 cents per share on an adjusted basis in the quarter. Analysts are currently calling for 85 cents a share.

If you are looking for the silver lining here it is that several banks and research firms rushed to F5's defense using phrases such as ''buying opportunity'' and ''compelling risk/reward'' following the sell-off. Of course that did not stop some of them from paring their price targets on the stock.

F5 Chart

Over in the world of financials, for all the recent earnings reports that have prompted investors to end this sector's party before it really got started, there was some decent news today courtesy of Morgan Stanley. Perhaps the investment banking gods were shining on Morgan Stanley today after rival Goldman Sachs (GS) disappointed investors earlier this week.

Whatever the case may be, Morgan Stanley surged $1.27, or 4.6%, to $29.02 after saying it earned $836 million, or 41 cents a share, in the fourth quarter, compared with $617 million, or 29 cents a share, a year earlier. Revenue jumped 14% to $7.81 billion. Analysts had been calling for a profit of 35 cents a share on revenue of $7.35 billion.

Investment banking revenue climbed to $1.8 billion, up 5% from a year earlier and up 44% from the third quarter while revenue in Morgan Stanley institutional securities business, including investment banking, sales and trading, jumped 12% to $3.6 billion, according to the Wall Street Journal.

Morgan Stanley Chart

In after hours news, Google (GOOG) said its fourth-quarter profit rose to $2.54 billion, or $7.81 a share, from $1.97 billion, or $6.13, a year earlier. Excluding one-time items, the largest U.S. provider of Internet search services earned $8.75 a share, topping the $8.08 per share estimate of analysts polled by Bloomberg. Revnue checked in at $6.37 billion, beating analysts' forecasts of $6.06 billion.

California-based Google is also making some headway against Apple (AAPL) in the increasingly competitive smartphone market. Phones that run on Google's Android operating system are widely viewed as among the most viable competitors to the iPhone's stranglehold on this market. Well, Apple is not the market leader, yet, that honor goes to BlackBerry maker Research In Motion (RIMM), but Google is giving Apple a run for second place.

Android topped Apple’s iPhone in U.S. smartphone subscribers for the first time in November, accounting for 26 percent of the market, compared with 25 percent for Apple, Bloomberg reported, citing ComScore Inc.

Neither the smartphone data or the earnings news is the real Google news. The big headline is that co-founder Larry Page will replace Eric Schmidt as CEO. Schmidt has been with the company since 2001, is not leaving the company, but Page will take over day-to-day operations. Investors do not appear to be concerned as shares of Google are up 1.4% in the after-hours session.

Google Chart

Google wasn't the only big Silicon Valley company to make headlines after the market closed. Dow component Hewlett-Packard (HPQ) is showing four board members the door for the handling of the Mark Hurd debacle last year. Hurd, the CEO widely credited for turning HP around, left under a black cloud that involved some dubious expense reports and perhaps inappropriate behavior with a female consultant. Former eBay (EBAY) CEO and California gubernatorial candidate Meg Whitman is expected to be among the new HP board members.

Looking at the charts, the S&P 500 needs to get back above 1292 and then deal with resistance just over 1300, probably around 1304 to keep the rally going. I do not want to say the rally is officially over right now, but it is looking tired and a move to 1261 could be in the offing. If that dip is not bought, a decline to 1235 could be next.

S&P 500 Chart

The 11,850 looks like some token round-number resistance for the Dow, so the pivotal number to watch on the upside is 11,950. If earnings season has shown us anything it is that it probably will not be the catalyst to drive indexes higher, but for the truly optimistic, the Dow still has several of its higher priced constituents left to report. The index could take a wicked tumble if support at 11,570 does not hold.

Dow Chart

I think things look a little worse with the Nasdaq. Apple's blowout quarter did not do anything to help jolt the index higher and I do not expect Google to do anything miraculous for the Nasdaq either. A break of 2700 could set up a decline to 2635-3650.

Nasdaq Chart

The Russell 2000 was a leader on the upside and it looks like the small-cap index could be playing the same role on the way down. The Russell would need to move back to 800 and clear that resistance before dealing with more meaningful resistance at 820, but that may be a near-term stretch because the index is now just a point away from the pivotal 777 level. If that area does not hold, another 15-20 points probably come of the index and that may be an optimistic scenario.

Russell 2000 Chart

The Russell 2000 is an appropriate index to finish up on as it was one of the catalysts that kept this rally going, perhaps long than it should have. Now small-caps or riskier fare in general are stalling and looking ready to decline. I cannot say I am encouraged that stocks fell on a day when three good economic data points crossed the wires. A decline for the S&P 500 down to 1261 would not be terrible if the dip is bought and recent precedent shows it probably will be.

New Plays

Not Over Yet

by James Brown

Click here to email James Brown


UnitedHealth Group - UNH - close: 40.31 change: -0.25

Stop Loss: 36.90
Target(s): 42.00
Current Gain/Loss: unopened
Time Frame: 8 to 10 weeks
New Positions: Yes, see trigger

Company Description

Why We Like It:
Healthcare stocks have seen a sharp round of profit taking the last couple of days. Just check out a chart of the HMO index. The profit taking may not be over yet and if it continues I'm expecting it to drag shares of UNH back down toward support.

UNH held up reasonably well today as investors reacted to the company's earnings report. UNH reported this morning with a profit of 94 cents a share on revenues of $24.0 billion. Both profits and revenues were better than expected and management reaffirmed their 2011 profit targets and raised their revenue guidance.

Shares of UNH should have support near broken resistance at $38.00. I am suggesting we launch bullish positions on a dip at $38.10 with a stop loss at $36.90. Our multi-week target is the $42.00 level.

Buy-the-Dip Trigger @ $38.10

Suggested Position: Buy UNH stock @ $38.10

- or -

Buy the 2011 March $40 calls (UNH1119C40) current ask $1.74

Annotated chart:

Entry on January xx at $xx.xx
Earnings Date 01/20/11 (unconfirmed)
Average Daily Volume: 5.9 million
Listed on January 20th, 2010

In Play Updates and Reviews

Stocks Decline: Day Two

by James Brown

Click here to email James Brown

Editor's Note:
The market rallied off its intraday lows and a few sectors closed positive. We are seeing some sharp profit taking in individual stocks but there are a few pockets of strength. JBHT and MTW both hit our stop losses today.


Current Portfolio:

BULLISH Play Updates

Automatic Data Processing - ADP - close: 49.09 change: +0.38

Stop Loss: 46.75
Target(s): 49.75, 52.50
Current Gain/Loss: + 5.0%
Time Frame: 10 to 12 weeks
New Positions: see below

01/20 update: ADP continues to show relative strength and added +0.7% to close at new relative highs. There is no change from my prior comments. I am not suggesting new bullish positions at this time. Our plan was to keep your position size small to limit your risk.

FYI: the February $45 calls opened at $3.80 this morning.

Current Position: Long ADP stock @ $46.75

01/19: Take profits on Feb. call options @ $3.80 (+90%).
01/15: New stop loss @ 46.75
01/03: Entry @ $46.75
01/01: New stop loss @ 45.45
01/01: New entry point @ current levels, new option strike (Feb. $45)

Entry on January 3 at $46.75
Earnings Date 01/26/11 (confirmed)
Average Daily Volume: 2.8 million
Listed on December 16th, 2010

Alaska Air Group - ALK - close: 61.25 change: -1.43

Stop Loss: 59.95
Target(s): 59.75, 64.75, (option exit 61.75)
Current Gain/Loss: +11.5%
Time Frame: 8 to 9 weeks
New Positions: see below

01/20 update: ALK suffered some profit taking on Thursday. The stock's -2.2% decline was a lot worse than the XAL's -0.8% pullback. I didn't see any specific news behind the relative weakness. Traders did buy the dip near $60.50. The company reports earnings early next week so be prepared to exit soon. I am not suggesting new positions at this time. Our final target is $64.75.

Current Position: Long ALK stock @ $54.91

01/19: More conservative traders may want to exit now @ 62.68
01/15: New stop loss @ 59.95, Final Target adjusted to $64.75
01/12: New stop loss @ 58.75
01/08: New stop loss @ 57.75. New target at $64.90
01/07: Option Target Hit @ 61.75. Option @ $3.00 (+87.5%). 01/05: Target hit at $59.75 (+8.8%)
12/21: First target is 59.75, adding second target at $64 for ALK stock.
12/21: Adjusting our only exit target on the calls to $61.75.

Entry on November 22 at $54.91
Earnings Date 01/25/11 (confirmed)
Average Daily Volume: 331 thousand
Listed on November 20th, 2010

BE Aerospace Inc. - BEAV - close: 38.62 change: -0.83

Stop Loss: 37.75
Target(s): 43.40
Current Gain/Loss: - 0.6%
Time Frame: 6 to 8 weeks
New Positions: see below

01/20 update: Our BEAV play could be in trouble. The stock underperformed the defense sector indices on Thursday. Today's drop accentuates yesterday's bearish reversal. Traders did buy the dip near support at $38 this morning but I would not suggesting new positions at this time. Our stop loss is at $37.75. The plan was to keep our position size small to limit our risk.

Current Position: BEAV stock @ $38.89

- or -

Long the 2011 February $40.00 calls (BEAV1119B40) Entry @ $1.35

01/15: new stop loss @ 37.75

Entry on January 11 at $38.89
Earnings Date 02/01/11 (unconfirmed)
Average Daily Volume: 542 thousand
Listed on January 10th, 2010

CA Technologies - CA - close: 25.46 change: -0.04

Stop Loss: 24.19
Target(s): 26.65, 27.90
Current Gain/Loss: + 0.9%
Time Frame: 6 to 7 DAYS
New Positions: see below

01/20 update: CA did not seem to be affected by the big sell-off in technology stocks this morning. Shares spent a second day churning sideways in the $25.25-25.60 zone. I don't see any changes from my prior comments. We don't have much time left. We plan to exit on January 25th at the closing bell to avoid holding over CA's earnings report that evening.

Current Position: Long CA stock @ $25.21

- or -

Long the 2011 February $25 calls (CA1119B25) Entry @ $1.00

Entry on January 18 at $25.21
Earnings Date 01/25/11 (confirmed)
Average Daily Volume: 2.4 million
Listed on January 15th, 2010

Walt Disney Co. - DIS - close: 39.17 change: +0.08

Stop Loss: 37.85
Target(s): 39.90, 42.50
Current Gain/Loss: + 2.4%
Time Frame: 10 to 12 weeks
New Positions: see below

01/20 update: DIS saw a spike lower at the open but shares bounced at $38.51. If the market didn't look so vulnerable I would be tempted to launch new positions in DIS here. However, I'm concerned the major indices could be rolling over so no new positions at this time.

Our first target has already been hit. We're currently aiming for $42.50.

- Current Positions -

Long DIS stock @ 38.25

- or -

Long the 2011 February $40.00 calls (DIS1119B40) Entry @ $0.45

- or -

Long the 2011 April $40.00 calls (DIS1116D40) Entry @ $1.10

01/19: Consider an early exit from the option positions.
01/15: New stop loss @ 37.85
01/05: 1st Target Hit. Stock @ 39.90 (+4.3%)
01/05: 1st Target Hit. Feb. call @ $1.20 (+166%). April call @ 1.80 (+63.6%)
01/05: new stop loss @ 37.49
01/04: Play triggered @ 38.25

Entry on January 4 at $38.25
Earnings Date 02/08/11 (unconfirmed)
Average Daily Volume: 8.6 million
Listed on December 25th, 2010

FLIR Systems Inc. - FLIR - close: 29.27 change: -0.09

Stop Loss: 28.49
Target(s): 30.90, 33.00
Current Option Gain/Loss: + 0.5%
Time Frame: 10 to 12 weeks
New Positions: see below

01/20 update: There is no change from my prior comments on FLIR. The overall trend is up but I'm cautious on this stock right now. I would seriously consider an early exit from our April call position now to minimize losses. I am not suggesting new positions at this time.

Current Position: Long FLIR stock @ $29.10

- or -

Long the 2011 April $30.00 calls (FLIR1116D30) Entry @ $1.60

01/19: Consider an early exit from the option position (bid $1.30)
01/15: New stop loss @ 28.49
01/10: FLIR provided another entry point near $28.50
01/08: New stop loss @ 27.90

Entry on December 22 at $29.10
Earnings Date 02/10/11 (unconfirmed)
Average Daily Volume: 1.6 million
Listed on December 18th, 2010

Microsoft Corp. - MSFT - close: 28.35 change: -0.12

Stop Loss: 27.85
Target(s): 27.45, 29.75
Current Gain/Loss: +10.6%
Time Frame: 10 to 12 weeks
New Positions: see below

01/20 update: There is no change from my prior comments on MSFT. The stock is still churning sideways above the $28.00 level. I am not suggesting new positions at this time.

Current Position: Long MSFT stock @ 25.55

01/19/11 New stop loss @ 27.85
01/15/11 New stop loss @ 27.49
01/14/11 Follow up. Exit Jan $25 calls @ 3.25 (+133.9%)
01/13/11 Plan to exit our January calls tomorrow at the close.
01/06/11 raised final exit target to $29.75
01/06/11 new stop loss @ 26.95
12/25/10 new stop @ 25.95
12/18/10 new stop @ 25.70
12/14/10 Target hit @ 27.45 (+7.4%), option @ $2.55 (+83.4%)
12/11/10 New stop @ 25.45
11/29/10 New stop @ 24.70

Entry on November 17 at $25.55
Earnings Date 01/27/11 (unconfirmed)
Average Daily Volume: 68.4 million
Listed on November 15th, 2010

NASDAQ OMX Group - NDAQ - close: 24.01 change: +0.23

Stop Loss: 23.24
Target(s): 26.50
Current Gain/Loss: + 0.0%
Time Frame: 3 to 4 weeks
New Positions: see below

01/20 update: NDAQ displayed some relative strength today. Shares dipped toward their 30-dma and the bottom of its bullish channel only to bounce back into positive territory. NDAQ closed with a +0.9% gain. This looks like a new bullish entry point but I'm very worried about the broader market so readers may want to hesitate on launching positions. It was our plan to keep positions very small to limit our risk.

Current Position: Long NDAQ stock @ $24.00


Entry on January 19 at $24.00
Earnings Date 02/02/11 (unconfirmed)
Average Daily Volume: 1.5 million
Listed on January 18th, 2010

SXC Health Solutions - SXCI - close: 45.07 change: +0.74

Stop Loss: 42.65
Target(s): 49.00
Current Gain/Loss: + 1.7%
Time Frame: 8 to 9 weeks
New Positions: see below

01/20 update: SXCI displayed some impressive relative strength with a +1.6% gain. The stock closed at new four-week highs. The rally is encouraging but I would hesitate to launch new positions.

NOTE: Buying the options is a higher-risk trade. The calls on SXCI have wider than normal spreads put option traders at a disadvantage here.

Suggested Positions: Long SXCI stock @ $44.31

- or -

Long the 2011 February $45.00 calls (SXCI1119B45) Entry @ $1.44

01/19: New stop loss @ 42.65

Entry on January 10 at $44.31
Earnings Date 03/03/11 (unconfirmed)
Average Daily Volume: 292 thousand
Listed on January 8th, 2010

WellCare Health Plans, Inc. - WCG - close: 31.08 change: -1.16

Stop Loss: 29.85
Target(s): 33.75, 37.75
Current Gain/Loss: + 1.0%
Time Frame: 10 to 12 weeks
New Positions: see below

01/20 update: WCG ran into some painful profit taking today with a -3.4% decline. The HMO index only lost -1.7% and I couldn't find any news to explain WCG's relative weakness. The stock should find support near $30.00. I am not suggesting new positions at this time.

Keep in mind that investors will have to decide whether or not they are willing to take the risk of holding over WCG's earnings report in late February.

Current Position: WCG stock @ $30.75

- or -

Long the 2011 March $35.00 calls (WCG1119C35) Entry @ $0.60

01/15: new stop loss @ 29.85
01/06: Play triggered @ 30.75.

Entry on January 6 at $30.75
Earnings Date 02/17/11 (unconfirmed)
Average Daily Volume: 410 thousand
Listed on January 4th, 2010


JB Hunt Transport Services - JBHT - close: 40.95 change: -0.60

Stop Loss: 40.95
Target(s): 43.50, 46.75
Current Option Gain/Loss: + 1.5%
Time Frame: 10 to 12 weeks
New Positions: see below

01/20 update: JBHT was unable to recover from yesterday's sell-off. The stock spiked lower again this morning and hit $40.64 intraday. Our stop loss was tagged at $40.95. Our play is closed but readers may want to keep JBHT on their watch list for a dip near what should be stronger support near $38.00.

Closed Position: Long JBHT stock @ $40.33, Exit @ $40.95 (+1.5%)

- or -

2011 February $40 calls (JBHT1119B40) Entry @ $1.85, exit $1.65 (-10.8%)

01/20: Stopped out (+1.5%). Option @ $1.65 (-10.8%)
01/19: New stop loss @ 40.95
01/15 New stop loss @ 40.75
12/22 Entry at $40.33
12/21 New Entry Point - Launch Positions Now (open of 12/22)


Entry on December 22 at $40.33
Earnings Date 01/28/11 (unconfirmed)
Average Daily Volume: 1.2 million
Listed on December 13th, 2010

Manitowoc Co. Inc. - MTW - close: 12.93 change: -0.43

Stop Loss: 12.90
Target(s): 14.95, 16.25
Current Gain/Loss: - 4.7%
Time Frame: 10 to 12 weeks
New Positions: see below

01/20 update: Ouch! It was another ugly day for MTW. The stock opened lower at $13.25 and hit our stop loss at $12.90 before lunchtime. I didn't see any news behind MTW's relative weakness today. Readers might want to keep an eye on MTW for a dip back toward the $12.00 level or the 200-dma and then reconsider potential trades.

Closed Position: Long MTW stock @ $13.54, exit @ $12.90 (-4.7%)

- or

2011 February $14.00 calls (MTW1119B14) Entry @ $0.70, exit $0.25 (-64.2%)

01/20: Stopped out (-4.7%). Option @ 01/15: New stop loss @ 12.90
01/08: New stop loss @ $12.30


Entry on January 4 at $13.54
Earnings Date 02/02/11 (unconfirmed)
Average Daily Volume: 2.0 million
Listed on January 3rd, 2010