Option Investor

Daily Newsletter, Monday, 8/29/2011

Table of Contents

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

Market Wrap

Seriously? Economic Data Lifts Stocks

by Todd Shriber

Click here to email Todd Shriber
Believe it or not, the primary catalyst behind the big up day for stocks was some decent economic data here in the U.S. as an unexpected jump in consumer spending in July helped lift the S&P 500 to a gain of nearly 3%. The Nasdaq surged by more than 3% while the Dow Jones Industrial Average tacked on nearly 255 points for a jump of almost 2.3%. The Russell 2000 surged nearly 4%.

Stats Table

No doubt, the consumer spending data was a pleasant surprise. The Commerce Department reported showed consumer spending climbed 0.8% in July and the June reading was revised upward to a drop of just 0.1% compared with the previous reading of 0.2%. Economists had been expecting a July increase of half a percent.

July's consumer spending data was good enough to prompt some positive revisions to GDP growth projections by some analysts. While the second-quarter GDP number was nothing short of anemic, Capital Economics said July's consumer spending data could lead to full-year GDP growth of 2.5%. Not amazing, but better than the 1.5%-2% many banks and economists have been forecasting.

Real personal consumer expenditures increased by half a percent in July compared with the 0.1% drop seen in June while personal income climbed 0.3% to $42.3 billion. The June personal income reading was also revised up to an increase of 0.2% from the previous reading of 0.1%. All this means consumers are saving less as the savings rate as a percentage of disposable income fell 5% last month.

There was some economic news that was not so good. The National Association of Realtors said pending home sales declined 1.3% last month. Contracts signed to purchase previously owned homes fell to 89.7 from 90.9 in June, indicating low mortgage rates and foreclosure prices have not been enough to get home buyers off the sidelines.

Personal Expenditures And Income Chart

Post-Jackson Hole, positivity permeated the market today as just three S&P 500 constituents closed in the red and all 10 industry groups traded higher. While there may have been some initial disappointment on Friday to Federal Reserve Chairman Ben Bernanke not announcing a third round of quantitative easing, a couple of things on that front are worth remembering. First, Bernanke was clear to remind investors that the Fed still has tools as its disposal to jolt the economy if necessary. Second, if QE3 is not announced in the near-term, perhaps that signals the Fed is bullish in its outlook for economic growth. Today's economic data would underscore that view.

Keeping with the positivity theme, Monday was a stellar day for insurance stocks. According to Bloomberg News, last week, Kinetic Analysis Corp. estimated that the total loss to insurance providers related to Hurricane Irene could be as much as $14 billion. That estimate was slashed to $2.6 billion today, sparking a rally in almost every major insurance stock. Rather than run through each of them individually, I have included a chart of the SPDR KBW Insurance ETF (KIE), which gained nearly 6% on volume that was almost twice the daily average. Total economic losses, including those that are not insured, may be about $7 billion, Bloomberg reported.

Insurance ETF Chart

Bank of America (BAC), the Dow component and largest U.S. bank by assets, enjoyed another solid day and this time, it had nothing to do with Warren Buffett. Shares of BofA gained more than 8% on volume that was well above the daily average after the bank announced it will sell half its stake in China Construction Bank to a group of unidentified investors in a transaction worth about $8.3 billion.

This is just the latest in a number of asset sales that BofA has engaged in an almost desperate attempt to assuage investors that it does have sufficient capital. Bruce Thompson, BofA's CFO, said the deal to sell half of its China Construction stake will boost its Tier 1 capital reserves by $3.5 billion and reduce its risk-weighted assets by $7.3 billion under the Basel I rules, the New York Times reported.

All told, BofA will be parting with about 13.1 billion shares of China Construction, more than likely to sovereign wealth funds in Asia and the Middle East. Even the after that massive share dump, BofA will still own 5% of China Construction, the Times reported. The transaction is slated to close later this quarter.

Bank Of America Chart

And from the category of ''can you believe it,'' one of the biggest gainers on any major U.S. exchange today were the U.S.-listed shares of National Bank of Greece (NBG). Admittedly, by price tag this is a penny stock, but a 38% gain on almost triple the average daily volume for any stock with ties to Greece is noteworthy these days.

Still suffocating from the grip of an epic financial crisis, Greek stocks got some good news today when Eurobank and Alpha Bank, the country's second- and third-largest banks respectively, agreed to merge in a deal that will make the combined bank larger than NBG. The merger creates a bank with almost $212 billion in assets. NBG tried to acquire Alpha earlier this year, but the latter dismissed the offer as too low.

A bank with $212 billion in assets is a big bank, especially by the standards of Greece, but to put things in perspective, Greece has received $315 billion in bailout funds over the past two years, according to the Associated Press.

National Bank of Greece Chart

Looking at the charts, I do not want to go out on a limb and say we are suddenly in the throes of a legitimate bullish rally, but Monday's action does add to that case. Resistance for the S&P 500 looked strong at 1205, but that level was taken out today. Now the test becomes the ability of 1200 to hold as support. If not, a firmer floor is found at 1175. On the upside, the S&P 500 now has a lot of room to work with before encountering next resistance in the 1245-1250 area.

S&P 500 Chart

Twenty-nine of the Dow's 30 members managed to close in the green today with Home Depot (HD) the lone laggard. On an individual basis, Monday's surge for TRV was probably a one-off event and BAC is still beholden to substantial headline risk, but there is some good news as well. Oil bears have been unable to force West Texas Intermediate below $80 and every positive economic data point is good for oil prices. In turn, that is good for CVX and XOM.

Fund managers looking for safety and dividends could also drive the Dow higher in the coming days. Monday's close above 11,500 could prove to be a bullish sign as that was some solid resistance. Support should be old resistance at 11,325.

Dow Chart

The Nasdaq was able to take out its August high at 2555 today while smashing through resistance at 2480. Now the index has a clear runway for another 75-100 points. The Nasdaq's bullish tell would be the 2550 zone turning into support. If not, a pullback could mean a retreat to 2480. A source of encouragement for tech bulls could be strong charts for AAPL, AMZN and PCLN.

Nasdaq Chart

The Russell 2000 was a stout performer today and a couple more days of this type of action and it might be safe to say money managers are embracing risk again. Resistance at 700 was did not prove to be much of a hurdle at all and the Russell 2000 looks it could make a run back to the 750 area where it would start to encounter more congestion. From a psychological standpoint, it would be a positive to see the Russell remain above 700.

Russell 2000 Chart

Monday's trade was significant in that there was a legitimate catalyst in the form of some surprisingly strong economic data and that is important because this week is chock full of economic data points with the big ones being ISM, the ADP jobs report and then the August non-farm payroll number on Friday. Since we are heading into a holiday weekend, this is the perfect opportunity for buyers to take advantage of absent sellers and tack on some light volume gains. Encouraging economic data provides the perfect excuse to do some buying now with the expectation of a rally into year end.

New Plays

Looking Short-term Overbought

by James Brown

Click here to email James Brown

Editor's Note:

Monday proved to be a very bullish day for stocks with widespread gains almost across the board. Gold and gold miners did underperform.

At the moment stocks look a little short-term overbought. The market is up five out of the last six days with the S&P500 index up +7.7% in that time frame. I am reluctant to chase the market tonight. We are not listing any new trades. However, I will provide a list of stocks that caught my eye as possible bullish candidates. Several of these probably need to see a little pull back first.


- James

In Play Updates and Reviews

ALXN and RGR Hit Our Profit Targets

by James Brown

Click here to email James Brown

Editor's Note:
It was a good day to be a bull. Stocks surged. Targets were hit. ALXN and RGR hit our final targets. While SLX hit our first profit target.

We need to be careful with the shipping stock shorts. Both of them look ready to hit our stop losses.


Current Portfolio:

BULLISH Play Updates

Auxilium Pharma - AUXL - close: 17.70 change: +0.59

Stop Loss: 16.25
Target(s): --.--, 18.45
Current Gain/Loss: +9.7%
Time Frame: 6 to 8 weeks
New Positions: see below

08/29 update: AUXL managed to outperform the NASDAQ with its +3.4% gain. The stock is nearing potential resistance at $18.00 and its 50-dma. More conservative traders may want to lock in a profit now. I am raising our stop loss to $16.25. Thus I am not suggesting new positions at this time.

Given the market's recent volatility we do want to keep our position size small.

Current Position: Long AUXL stock @ $16.13

- or -

Long SEP $17.50 call (AUXL1117I17.5) Entry $0.45

08/29 new stop loss @ 16.25
08/27 new stop loss @ 15.75
08/27 adjusted target to $18.45.
08/25 Planned exit to sell half. AUXL @ 17.07 (+5.8%)
sold half of Sep. $17.50 call, bid @ 0.60 (+33.3%)
08/24 Take profits (sell half) Tomorrow at the close
08/24 new stop loss @ 15.25
08/23 new stop loss @ 14.95.
08/23 added 2nd target at $19.75

Entry on August 22 at $16.13
Earnings Date 11/03/11 (unconfirmed)
Average Daily Volume = 1.4 million
Listed on August 20, 2011

Avon Products Inc. - AVP - close: 22.04 change: +0.36

Stop Loss: 20.75
Target(s): 23.50, 24.40
Current Gain/Loss: + 0.5%
Time Frame: 6 to 8 weeks
New Positions: see below

08/29 update: Gains in AVP were pretty meager with a +1.6% gain today. The stock is struggling with resistance at the $22.00 level. Readers may want to consider just exiting AVP positions now to free up cash to buy something else.

The high today was $22.26. If you're still bullish on AVP then my suggestion to wait for a move past the $22.25 area could still work as an entry point.

- small bullish positions -

Suggested Position: Long AVP stock @ $21.91

- or -

Long SEP $23 call (AVP1117I23) entry $0.50

08/29 *option did not trade. this is an estimate.

Entry on August 29 at $37.06
Earnings Date 11/17/11 (unconfirmed)
Average Daily Volume = 4.9 million
Listed on August 27, 2011

Peet's Coffee & Tea - PEET - close: 56.14 change: +2.12

Stop Loss: 53.25
Target(s): 62.00
Current Gain/Loss: +2.4%
Time Frame: 6 to 8 weeks
New Positions: see below

08/29 update: PEET is off to a strong start. Shares gapped open higher at $56.64 and then rallied to a +3.3% gain. The stock spent most of its Monday churning sideways underneath resistance at the $58.00 level and its 50-dma. I suspect there is a good chance we'll see PEET pull back and dip into the $57-56 zone. You may want to wait for that dip before launching positions.

Earlier Comments:
There is a good chance that PEET could see another short squeeze. The most recent data listed short interest at 23.7% of the very small 12.6 million-share float. I would keep our position size small. We are not trading the options. The spreads are too wide.

Current Position: Long PEET stock @ $56.64

Entry on August 29 at $56.64
Earnings Date 11/02/11 (unconfirmed)
Average Daily Volume = 268 thousand
Listed on August 27, 2011

RealD Inc. - RLD - close: 14.86 change: +0.15

Stop Loss: 13.75
Target(s): 18.00
Current Gain/Loss: + 5.8%
Time Frame: 6 to 10 weeks
New Positions: see below

08/29 update: The action in RLD today was rather disappointing. Shares only gained +1.0% versus +2.8% for the S&P 500 index. The lack of participation is a bit worrisome. I am not suggesting new positions at this time.

Earlier Comments:
We want to use small positions to limit our risk.

current Position: Long RLD stock @ $14.04

- or -

Long SEP $15.00 call (RLD1117I15) Entry $0.60

08/27 new stop loss @ 13.75
08/25 planned exit to sell half at the close.
RLD +4.0%, option @ $0.90 (+50%)
08/24 Prepare to take profits early and sell half tomorrow at the closing bell.
08/24 new stop loss at $13.25
08/22 gap open entry at $14.04

Entry on August 22 at $14.04
Earnings Date 11/02/11 (unconfirmed)
Average Daily Volume = 1.4 million
Listed on August 20, 2011

Steel ETF - SLX - close: 54.90 change: +2.24

Stop Loss: 49.40
Target(s): 54.50, 59.00
Current Gain/Loss: +9.8%
Time Frame: 2 to 6 weeks
New Positions: see below

08/29 update: Target achieved. Industrial names were strong performers on Monday. The SLX rallied +4.2%. Shares ended the day right at resistance near $55 and its mid August highs. I would not be surprised to see some profit taking tomorrow.

In the weekend newsletter we had adjusted our first profit target to $54.50 and our second target to $59.00. I am not suggesting new positions at this time.

The plan was to keep our position size small to limit our risk.

Play Triggered.

Suggested Position: Long this ETF @ $50.00

- or -

Long SEP $55 call (SLX1117I55) Entry $0.90

08/29 1st target hit at $54.00.
stock position at $54.00 (+8.0%)
08/27 adjusted targets to $54.50 and $59.00
08/26 Play triggered at $50.00
08/25 new strategy: buy a dip at $50.00, new stop 49.40


Entry on August 26 at $50.00
Earnings Date --/--/--
Average Daily Volume = 126 thousand
Listed on August 23, 2011

BEARISH Play Updates

Nordic American Tanker - NAT - close: 17.97 change: +0.64

Stop Loss: 18.55
Target(s): 12.75, 10.50
Current Gain/Loss: - 5.4%
Time Frame: 6 to 12 weeks
New Positions: see below

08/29 update: It was not a good day to be a bear. The oversold shipping stocks are bouncing. NAT is testing resistance at the $18.00 level. More conservative traders may want to exit now or lower their stop loss. I am not suggesting new positions at this time.

Earlier Comments:
You may want to consider using put options instead since your risk is limited to the cost of the put you purchase.

- small positions -

Current Position: short NAT stock @ $17.05

- or -

Long OCT $15 PUT (NAT1122V15) Entry $0.75*

08/24 NAT provides another entry point with failed rally at $18
08/22 gap open entry @ 17.05
* option entry is an estimate. option did not trade today

Entry on August 22 at $17.05
Earnings Date 11/07/11 (unconfirmed)
Average Daily Volume = 583 thousand
Listed on August 20, 2011

Overseas Shipholding Group - OSG - close: 17.31 change: +1.50

Stop Loss: 17.55
Target(s): 12.50, 10.25
Current Gain/Loss: -11.5%
Time Frame: 6 to 12 weeks
New Positions: see below

08/29 update: The market's surge higher at the open prompted some short covering in OSG. The stock outperformed today with a +9.4% gain. The breakout past $16.00 is short-term bullish. If there is any follow through higher tomorrow we will most likely get stopped out at $17.55.

This is just an oversold bounce. If we do get stopped out I would keep OSG on your watch list. Eventually the bearish fundamentals in the shipping industry will reassert themselves.

We are not suggesting new positions at this time. The plan was to keep our position size small to limit our risk.

- Small Bearish Positions -

Current Position: short OSG stock @ $15.52

- or -

Long OCT $14 PUT (OSG1122V14) Entry $1.50

08/27 Turn cautious. OSG did not break support at $15.00 on Friday.
08/22 gap open entry at $15.52

Entry on August 22 at $15.52
Earnings Date 11/02/11 (unconfirmed)
Average Daily Volume = 981 thousand
Listed on August 20, 2011


Alexion Pharmaceuticals - ALXN - close: 57.02 change: +2.34

Stop Loss: 51.40
Target(s): --.--, 57.00
Current Gain/Loss: +12.5%
Time Frame: 2 to 5 weeks
New Positions: see below

08/29 update: Target achieved. ALXN surged to a +4.2% gain and managed to close above the $57.00 level this afternoon. Our final target happens to be the $57.00 mark. ALXN is looking a little short-term overbought here. I would not launch new positions but readers may want to keep it on your watch list.

Our plan was to keep our position size small to limit our risk.

closed Position: ALXN stock @ $50.67 , exit $57.00 (+12.49%)

- or -

SEP $55 call (ALXN1117I55) Entry $1.40, exit $3.00 (+114.2%)

08/29 target hit at $57.00
08/27 new stop loss @ 51.40
08/25 Sold Half @ 53.49 (+5.5%) -stock only, not the option
08/24 new stop loss @ 49.45
08/24 Take profits now. Sell half at the open tomorrow. ALXN is currently up +5.6% (stock only). We'll leave our option position unchanged. Current bid is $1.40 (+0.0%)
08/15 new stop loss @ 47.90
08/12 trade is open.
08/11 open positions if ALXN and S&P500 are positive Friday morning
08/09 new entry point strategy, new stop loss, new targets.


Entry on August 12 at $50.67
Earnings Date 10/20/11 (unconfirmed)
Average Daily Volume = 1.7 million
Listed on August 8, 2011

Sturm Ruger & Co - RGR - close: 34.11 change: +1.55

Stop Loss: 29.75
Target(s): 33.75
Current Gain/Loss: +11.5%
Time Frame: 6 to 8 weeks
New Positions: see below

08/29 update: Target achieved. RGR surged to another new all-time high. Our target was hit at $33.75 early this morning. Our play is closed but I would keep RGR on your watch list for a significant pull back and then reconsider new bullish positions. Shares are currently overbought.

closed Position: Long RGR stock @ 30.25, exit 33.75 (+11.5%)

- or -

SEP $30 call (RGR1117I30) Entry $1.95, exit $3.90 (+100%)

08/29 target hit @ 33.75
08/27 new stop loss @ 29.75, cautious traders may want to take profits now
08/22 RGR gaps open higher at $30.25 (entry point)


Entry on August 22 at $30.25
Earnings Date 10/27/11 (unconfirmed)
Average Daily Volume = 310 thousand
Listed on August 20, 2011