Option Investor

Daily Newsletter, Monday, 1/31/2011

Table of Contents

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

Market Wrap

Stocks Give Egypt The Stiff Arm

by Todd Shriber

Click here to email Todd Shriber
Not even mounting political tension in Egypt could derail stocks on Monday as the Dow got a lift from oil earnings and oil prices while some mergers and acquisitions news helped the S&P 500 managed to reclaim some of Friday's severe losses.

Stats Table

On the economic front, the Commerce Department said consumer spending increased more than expected last month, rising 0.7% after a 0.3% increase in November. Economists were expecting an increase of 0.5%. In the fourth-quarter, consumer spending surged 4.4%, the most robust pace in four years.

Apparently the U.S. consumer is starting to feel a tad better about his economic situation as there is evidence consumers are using some of their savings to fund purchases. Incomes rose 0.4% last month, but savings dwindled to their lowest point since March. Savings fell to $614.1 billion from $634.4 billion in November, Reuters reported.

Private wages rose 0.3% in December compared with an increase of just 0.1% and while 4% annual increase in private wages lags what was seen prior to the financial crisis, it is an improvement.

Private Wage Chart

In another bit of good economic news, the Institute for Supply Management said its survey of business activity in the Chicago area rose for the sixteenth consecutive month, jumping to 68.8 in January from 66.8 in December on a seasonally adjusted basis. Readings over 50 are considered bullish. The Chicago PMI index has remained the leader among the regionals, now nearly 10 points above the average of 56.1 for the four other surveys, according to Bondsquawk.

Fueled by potential supply concerns that could arrive due to escalating political protests in Egypt, oil continued its bullish ways on Monday, adding to Friday's gain of better than 4%. NYMEX-traded crude for March delivery tacked on another 3% today to break above $92 a barrel. There might be a tinge of overreaction in the oil markets to the Egypt situation because the country is a small player in terms of daily output and any output that could be lost due to a potential military conflict in Egypt would easily be made up for by OPEC members that are more than happy to violate their own production quotas.

Oil Chart

The real story is not the West Texas Intermediate contract moving above $92, but Brent crude topping $100 for the first time since 2008. One could argue it is the Brent contract where the market is pricing in a possible supply disruption on the Suez Canal where two million barrels of oil are transported each day. Hey, it is a long, expensive journey for tankers to have to go all the way around Africa if they cannot use the canal.

Staying with the oil theme, Exxon Mobil (XOM), the largest U.S. oil company, reported another boffo set of quarterly results, saying it earned $9.25 billion, or $1.85 a share in the fourth-quarter, compared with $6.05 billion, or $1.27 per share, a year earlier. No surprise here. Increased demand and higher oil prices were the catalysts driving Exxon's fourth-quarter results. We have heard that from basically every other oil major that has reported thus far.

Revenue jumped 17% to $105 billion. Analysts were expecting a profit of $1.62 a share on sales of $99.1 billion. Taking advantage of favorable oil prices, Texas-based Exxon ratcheted up fourth-quarter production by 19%. The company's exploration and production operations posted a domestic profit of $1.3 billion and $6.2 billion on a global basis.

Exxon's refining business showed a profit of $1.2 billion after posting a loss in the fourth-quarter of 2009. The chemical's business had a profit of $1.1 billion for the quarter. Perhaps the lone dark cloud dark in the Exxon numbers is the natural gas business. The company became the largest U.S. natural gas producer through its purchase of XTO Energy last year, but natural gas prices continue to languish.

Even in the face of those falling prices, Exxon and its rivals continue to target shale acquisitions and are bringing ample supply to market.

Exxon Chart

Speaking of natural gas, Chesapeake Energy (CHK), the second-largest U.S. natural gas producer behind Exxon, put in a stellar run today, surging $2.27, or 8.3%, to $29.60, after announcing another shale deal with Cnooc (CEO), China's largest offshore oil exploration firm. While Chesapeake is a dominant natural gas player, the company has been looking for ways to boost its oil exposure and this deal with Cnooc is certainly more about oil.

The Chinese company will pay Oklahoma-based Chesapeake $570 million for a one-third stake in Chesapeake's Niobrara shale project and pick up $697 million, or two-thirds, of Chesapeake's drilling cots. Cnooc will pay about $2,140 an acre for its stake in Niobrara and has the right to a one-third share in future acquisitions in the shale formation, according to Bloomberg News.

Like other Chinese oil majors, Cnooc has a voracious appetite for international energy acquisitions and despite being turned away for Unocal five years ago, the company has remained diligent in its pursuit of North American assets. In November, Cnooc paid Chesapeake almost $1.1 billion for a one-third stake in 600,000 acres in the Eagle Ford Shale in south Texas. All of this is very good news for Chesapeake shares as the chart below illustrates.

Chesapeake Energy Chart

In energy news that will not come as much of a surprise to anyone that has been watching the coal sector over the past few months, Alpha Natural Resources (ANR), the third-largest coal producer, finally got around to making its well-known flirtation with Massey Energy (MEE) a legitimate relationship by announcing it will acquire its smaller rival for $7.1 billion in cash in and stock. The deal values Massey at $69.33 a share, a 21% premium to where Massey, the largest coal producer in Central Appalachia, closed on Friday.

This deal has been pretty well advertised for a while now as multiple press outlets reported multiple times that Alpha Natural was holding advanced talks with Massey. The signs were all there on Friday when these two high-beta stocks found their way to closes in the green while the broader market was being punished. Just look at an intraday chart from Friday for either Alpha Natural or Massey and you will see that the bulls ran into both names around 2PM New York time.

I love to dig through the options volume after a big deal is announced to find something the conspiracy theorist would like and Alpha Natural and Massey did not disappoint. The was some, to put it delicately, curious options activity in both stocks on Friday, though the bulk of the action was concentrated in Massey. There was rampant buying across the 55-65 February calls, which was a good idea, for the 55-60 buyers as of today. (Massey closed below $63). There was also no noteworthy activity in Alpha Natural puts, rather the unusual options activity in that name was also on the call side.

I will just file that under ''things that make you go hmmm'' and leave it at that. Fun fact of the day: $69 seems like a great deal for Massey, which was trading for around $26 in July, just a few months after the tragedy at its Upper Big Branch mine in West Virginia. Or does it? Well, the answer lies in your perspective. I will just say that once upon a time, June 2008 to be precise, Massey was a $91 stock and no, there was not a split.

Massey Chart

Certainly helped by what was a pretty good day for stocks, Intel (INTC) was able to avoid a real drubbing and close the day unchanged after announcing it had found a flaw in one of its chips. The timing leaves something to be desired for the world's largest semiconductor maker because the company is in the middle of rolling out the Sandy Bridge processor, which was introduced earlier this month. The chip is designed to enhance computer graphics.

On a postive note, since the Sandy Bridge is so new, it has not found its way into a large amount of PCs as of yet. The bad news is Intel has to pay to fix the problem and that led the company to say it will lose $300 million in first-quarter sales due to the Sandy Bridge issues. Intel also lowered its gross profit margin estimate for the quarter by 2%. Over the course of this year, Intel expects to miss out on another $700 million in sales to fix the chip.

First-quarter revenue will be about $11.7 billion, up from a previous forecast of $11.5 billion. Gross margin will be about 61 percent, down from a previous forecast of about 64 percent, according to Bloomberg News.

Intel Chart

Looking at the charts, the S&P 500 moved off support at 1275 today, but at 1286 and some change is basically right in the middle of 1275 and 1300. I watched an hour or two worth of Egypt coverage on Sunday night and got the impression the situation there was worsening, so naturally I thought stocks would extend Friday's declines. Obviously, I was wrong, but if things get worse in Egypt and Yemen and others really join fray, 1275 will be seen again and 1265 could come into play as well.

S&P 500 Chart

I will pin most of the Dow's cheery performance for the day on Exxon earnings and rising oil prices giving a lift to Chevron (CVX). Financials performed admirably as well. Resistance remains 12,000 here, but Egypt could be a drag this week and enhance the likelihood of a retest of 11,800. A break there probably takes us to 11,600.

Dow Chart

Well, at least the Nasdaq did not extend last Friday's thrashing and found its way to a close of 2700. I am not sure what the four horsemen of the Nasdaq are anymore because the quartet changes quite often, but I do know that of Apple (AAPL), Amazon (AMZN), Google (GOOG) and Netflix (NFLX), only Apple closed higher today. If that trend continues, the Nasdaq could back into support at 2675, if not lower as risk appetite wanes.

Nasdaq Chart

One way or another, oil and Egypt are going to factor into Mr. Market's plans for this week. There are still some marquee oil earnings left to come. Anadarko Petroleum (APC) reported after the close today and is trading down 1% in the after-hours session. BP (BP) reports early Tuesday morning. Here is what is clear: The Egypt situation smacks of contagion. In fact, this started in Tunisia, spread to Egypt and has now moved to Yemen. That is by definition contagion. If the bears want to force the S&P 500 to 1260 and the Dow to 11,600, the excuses are there.

New Plays


by James Brown

Click here to email James Brown


Timken Co. - TKR - close: 47.02 change: -1.26

Stop Loss: 50.25
Target(s): 45.05, 42.00
Current Gain/Loss: unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see trigger

Company Description:
The Timken Company keeps the world turning with innovative friction management and power transmission products and services, enabling its customers' machinery to perform more efficiently and reliably. With sales of $3.1 billion in 2009, operations in 27 countries/territories and approximately 17,000 employees, Timken is Where You Turn® for better performance. (source: company press release or website)

Why We Like It:
TKR reported earnings on January 27th. The company beat estimates by 3 cents, beat on revenues, and offered positive revenue guidance yet that wasn't enough. Traders have been selling the news following TKR's +62% rally off its August lows. The stock has broken several layers of support in the last few days.

Aggressive traders may want to open bearish positions now. I'd much rather wait for a bounce. I'm suggesting a trigger to open bearish positions at $48.00. You could wait for a rebound closer to $49.00. We'll set our stop loss at $50.25. Our exit targets are $45.05 and $42.00.

Trigger @ 48.00

Suggested Position: short TKR stock @ $48.00

- or -

Buy the March $45 puts (TKR1119O45)

Annotated chart:

Entry on February x at $xx.xx
Earnings Date 01/27/11 (confirmed)
Average Daily Volume: 857 thousand
Listed on January 31st, 2011

In Play Updates and Reviews

Widespread Bounce

by James Brown

Click here to email James Brown

Editor's Note:
Fears over Egypt cool and stocks stage a bounce. Lack of follow through lower is positive for the bulls.


Current Portfolio:

BULLISH Play Updates

Walt Disney Co. - DIS - close: 38.87 change: +0.02

Stop Loss: 37.85
Target(s): 39.90, 42.50
Current Gain/Loss: + 1.6%
Time Frame: 10 to 12 weeks
New Positions: see below

01/31 update: Traders have been buying the dip in DIS near $38.65 for two days in a row. Yet the stock closed virtually unchanged on the day. I'm still expecting a drop toward what should be stronger support near $38.00. I am not suggesting new positions at this time.

- Current Positions -

Long DIS stock @ 38.25

01/31: Update option exit: Feb call @ 0.41 (-8.8%) Apr. call @ 1.06 (-3.6%)
01/29: Exit call positions. Feb call @ 0.38 (-15.5%) April call @ 1.02 (-7.2%)
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 (confirmed)
Average Daily Volume: 8.6 million
Listed on December 25th, 2010

FLIR Systems Inc. - FLIR - close: 31.04 change: +0.41

Stop Loss: 29.75
Target(s): 30.90, 33.00
Current Option Gain/Loss: + 6.6%
Time Frame: 10 to 12 weeks
New Positions: see below

01/31 update: FLIR continues to inch higher and posted a +1.3% gain on Monday, outperforming the broader market. I am not suggesting new positions at this time. Our final target is $33.00 but we plan to exit ahead of the earnings report.

Current Position: Long FLIR stock @ $29.10

- or -

2011 April $30 calls (FLIR1116D30) Entry @ $1.60, exit @ 1.80 (+12.5%)

01/29 Exit remaining call positions. option @ 1.80 (+12.5%)
01/29: New stop loss @ 29.75
01/28: 1st Target Hit @ 30.90 (+6.1%), option @ $2.00 (+25%)
01/25: New stop @ 28.90
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 02/09/11 (confirmed)
Average Daily Volume: 1.6 million
Listed on December 18th, 2010

Hansen Natural Corp. - HANS - close: 56.64 change: +1.49

Stop Loss: 53.40
Target(s): 59.50
Current Gain/Loss: + 1.9%
Time Frame: 6 to 8 weeks
New Positions: see below

01/31 update: Traders were quick to buy the dip in HANS this morning and the stock rallied to a new relative high. Shares settled with a +2.7% gain, strongly outperforming the major averages. Considering HANS' relative strength I would be tempted to buy the stock on a dip near $55.50 again but consider a tight stop if you do. Small positions only to limit our risk.

- Small Positions to limit our risk -

Current Position: HANS stock @ $55.54

01/29 Exit call positions early. @ $1.15 (-23.3%)
01/26 the CBOE listed the MAR $60 call's open @ $1.50

Entry on January 26 at $55.54
Earnings Date 02/24/11 (unconfirmed)
Average Daily Volume: 654 thousand
Listed on January 25th, 2010

Oracle Corp. - ORCL - close: 32.03 change: +0.03

Stop Loss: 31.40
Target(s): 34.90
Current Gain/Loss: - 1.8%
Time Frame: 6 to 8 weeks
New Positions: see below

01/31 update: ORCL has spent a day and a half consolidating sideways in the $31.80-32.20 zone. Lack of follow through on Friday's big drop is encouraging but I'm reluctant to open new positions here.

Our target on ORCL is the $34.90 mark since $35.00 looks like the next level of resistance.

small positions

Current Position: ORCL stock @ $32.62

- or -

Long the 2011 March $33 calls (ORCL1119C33) Entry @ $0.80

01/29 Consider an early exit, especially the calls.
01/27 The CBOE listed the open for our calls at $0.80

Entry on January 27 at $32.62
Earnings Date 03/24/11 (unconfirmed)
Average Daily Volume: 27 million
Listed on January 26th, 2010

UnitedHealth Group - UNH - close: 41.05 change: +0.12

Stop Loss: 40.45
Target(s): 44.75
Current Gain/Loss: - 0.2%
Time Frame: 8 to 10 weeks
New Positions: see below

01/31 update: There was no follow through lower on UNH's bearish reversal on Friday but we're still in danger. I am reluctant to open new bullish positions here. I would still strongly consider exiting call positions early to limit risk.

Current Position: UNH stock @ $41.15

- or -

Long the 2011 March $42 calls (UNH1119C42) Entry @ $1.20

Entry on January 28 at $41.15
Earnings Date 01/20/11 (unconfirmed)
Average Daily Volume: 5.9 million
Listed on January 20th, 2010

BEARISH Play Updates

Endo Pharmaceuticals - ENDP - close: 33.22 change: -0.31

Stop Loss: 35.75
Target(s): 31.00, 30.10
Current Gain/Loss: - 3.7%
Time Frame: 3 to 4 weeks
New Positions: see below

01/31 update: So far so good. ENDP is still slipping lower and underperformed the market on Monday. Shares are quickly approaching the January 10th low of $33.12, where the stock might try and bounce. The next level of support lower is the late September lows at $32.50. More conservative traders might want to consider a tighter stop loss. Our targets are $31.00 and $30.10.

Current Position: Short ENDP stock @ 34.50

- or -

Long the 2011 February $35 PUT (ENDP1119N35) Entry @ $1.30

Entry on January 27 at $34.50
Earnings Date 02/22/11 (unconfirmed)
Average Daily Volume: 1.3 million
Listed on January 24th, 2010

Hittite Microwave Corp. - HITT - close: 59.79 change: +0.26

Stop Loss: 62.05
Target(s): 56.15, 53.50
Current Gain/Loss: + 0.3%
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

01/31 update: HITT saw a late morning climb that ran out of steam. I see this move as just another entry point to launch bearish positions. Keep an eye on the SOX semiconductor index since this is a chip company.

Our targets are $56.15 and $53.50. Readers should note that the most recent data listed short interest in HITT at 4% of the 28.2 million-share float. That's a very small float and raises our risk of a short squeeze. FYI: The Point & Figure chart for HITT has turned bearish.

Editor's note: The options on HITT have relative wide spreads making them a significantly higher-risk trade for us.

Current Position: short HITT stock @ 59.76

- or -

Long the 2011 March $55 PUTS (HITT1119O55) Entry @ $1.65

Entry on January 31 at $59.76
Earnings Date 02/17/11 (confirmed)
Average Daily Volume: 166 thousand
Listed on January 29th, 2010

Reliance Steel - RS - close: 52.29 change: +0.10

Stop Loss: 55.05
Target(s): 45.05
Current Gain/Loss: + 1.7%
Time Frame: 3 to 4 weeks
New Positions: see below

01/31 update: Monday was a quiet day for RS. Shares churned sideways under the $53.00 level. There is no change from my weekend comments. I am suggesting new bearish positions now at current levels. More conservative traders may want to move their stop loss closer to the $54 mark. There is potential support near $48 but I'm targeting a drop toward the $45 level and its 200-dma. We do not want to hold over the earnings in mid February.

Current Position: Short RS stock @ $51.41

- or -

Long the February $50 PUT (RS1119N50) Entry @ $1.35

01/29 New entry point for bearish positions.
01/24 CBOE listed the $50 PUT opening price at $1.35

Entry on January 24 at $51.41
Earnings Date 02/17/11 (unconfirmed)
Average Daily Volume: 654 thousand
Listed on January 22nd, 2010

Riverbed Technology - RVBD - close: 35.87 change: +0.34

Stop Loss: 38.15
Target(s): 31.75, 28.00
Current Gain/Loss: + 0.9%
Time Frame: 2 to 3 weeks
New Positions: see below

01/31 update: RVBD tried to bounce but didn't get very far. There is no change from my weekend comments. I would still consider new bearish positions now at current levels. Our targets for RVBD are $31.75 and $28.50. This is an aggressive, higher-risk trade. Keep your position size small.

Readers need to know that the latest data listed short interest at 7.6% of the 135 million share float. That's relatively high short interest and raises the risk on this trade. You may want to buy put options instead. FYI: The Point & Figure chart for HITT has turned bearish.

- Small Positions to Limit our Risk -

Current Position: Short RVBD stock @ 35.55

- or -

Long the 2011 Feb. $35 puts (RVBD1119N35) Entry @ $1.05

- or -

Long the 2011 Mar. $35 puts (RVBD1119O35) Entry @ $1.75

Entry on January 31 at $35.55
Earnings Date 01/27/11
Average Daily Volume: 5.1 million
Listed on January 29th, 2010

Virgin Media, Inc. - VMED - close: 25.16 change: +0.23

Stop Loss: 26.15
Target(s): 22.25
Current Gain/Loss: + 0.3%
Time Frame: 3 to 4 weeks
New Positions: see below

01/31 update: VMED produced a decent little bounce but shares still looks bearish given Friday's failure. There is no change from my weekend comments. I would still consider new positions here. Our target is the $22.25 mark, since the simple 200-dma could be technical support. Readers need to know that the most recent data listed short interest at 9.7% of the 298 million-share float. That's a lot of short interest and definitely raises the risk of a short squeeze. You might want to buy the puts instead of shorting the stock.

Current Position: short VMED stock @ 25.08

- or -

Long the 2011 Feb. $24 puts (VMED1119N24) Entry @ $0.51

- or -

Long the 2011 Mar. $22.50 puts (VMED1119O22.5) Entry @ $0.45

Entry on January 31 at $25.08
Earnings Date 02/17/11 (unconfirmed)
Average Daily Volume: xxx million
Listed on January 29th, 2010