Option Investor

Daily Newsletter, Monday, 9/26/2011

Table of Contents

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

Market Wrap

Same Old Song, But Stocks Rise

by Todd Shriber

Click here to email Todd Shriber
Equities soared on Monday on renewed optimism that European policy makers are moving closer to a solution for the region's debt woes. The Dow Jones Industrial Average enjoyed its best one-day performance since August while all the other major U.S. indexes notched solid gains as well. Gold was once again taken to the woodshed.

Stats Table

I am sure I have said ''Call me skeptical'' more than once in recent months when it comes to Europe, but I see no reason to change my tune and I am fearful that Monday's action is just a repeat of the same sad, old song. Markets take a beating for a few days because of Europe then along comes a rally like we saw today because the folks in Brussels are suddenly closer to a solution.

I admit I have not been keeping track about how many times this situation has occurred in the past 18 months, but I do know this: It has happened enough that there is good reason to be skeptical. Fool me once, shame on you. Fool me twice, shame on me. Fool me eight, ten or more times, and well, I am just going to be annoyed.

Greece teetering on the brink of insolvency erased $1 trillion in market value from U.S. stocks last week, according to Bloomberg, and one day of good cheer is not going to restore all of that $1 trillion.

In my humble opinion, the price action in gold might be a more accurate tell regarding just how fearful investors are these days. Global finance ministers met over the weekend and there was not much to emerge from those talks that makes Greece and the rest of Europe suddenly look more attractive. As the Wall Street Journal noted today following gold's 2.8% slide, investors may be treating a potential Greece default like the collapse of Lehman Brothers.

Translation: In the face of a default by Greece or any other Euro zone member, gold's safe have status will wilt as investors hoard cash. I will fess up to a bullish long-term view of gold and also say that I am long a gold ETF. That said, I think it is worth noting that one of the major catalysts behind gold's recent woes is hedge funds and other speculators selling gold futures contracts to cover other losing positions. That does not mean those guys (and gals) are bearish on gold. It means they need the cash to cover bad trades.

It should also be noted that Commerzbank said today there have been hardly any outflows seen from ETFs such as the SPDR Gold Shares (GLD) and the iShares COMEX Gold Trust (IAU).

Gold Chart

In stock-specific news, energy names were on the move today as West Texas Intermediate Crude futures continued to honor critical support at $80 per barrel. As I often say, we are not going to see a 270-point upside move in the Dow without the help of Exxon Mobil (XOM) and Chevron (CVX), the two largest U.S. oil companies.

The duo obliged with XOM gaining almost 3.5% and CVX tacking on 1.6%. ''We believe the cost structure of a company's current assets and the quality of a company's project line-up will differentiate it from other companies that have simply benefited from higher oil and gas prices. Exxon remains our preferred pick,'' Citigroup said in a research note.

Citi's bullish sentiment for integrated oil stocks did not stop there. The bank upgraded Occidental Petroleum (OXY) to ''buy'' helping the California-based company gain almost 7% in the process. The Energy Select Sector SPDR (XLE) popped 3.7% on volume that was well above the daily average. XOM, CVX and OXY account for about 38% of that ETF's weight.

XLE Chart

In what may considered a real surprise, Warren Buffett's Berkshire Hathaway (BRK-A, BRK-B) announced it will embark on a share buyback plan. Remember that while Buffett is a big fan of buying dividend stocks, he is not a fan of paying dividends to Berkshire shareholders, nor is he a fan of repurchase plans.

Buffett practically bragged to Berkshire investors in his annual letter to shareholders in February that Berkshire has not spent a dime on dividends or buybacks over the past decade. Buffett has a nice problem: Berkshire is making too much money, if there is such a thing as too much money. The company's various businesses generate $1 billion a month in profits, according to Bloomberg, and finding uses for that cash is not as easy as some might think.

Berkshire said in a statement it will repurchase its shares at 110% of book value and not allow cash holdings to fall below $20 billion due to the buyback plan. I included the chart of Berkshire's Class ''B'' shares since most of us probably are not involved with the six-figure Class ''A'' shares.

Berkshire ''B'' Chart

Speaking of noteworthy investors, Carl Icahn was in the news today, but his headlines were not nearly as inviting as Buffett's. Consumer products giant Clorox (CLX) slid 4.3% on volume that was nearly 50% above the daily average after the activist Icahn said he is withdrawing a slate of directors he wanted to be placed on the Clorox board. Icahn also acknowledged that other large Clorox shareholders would not support his plan for a sale of the company.

Ichan made a bid for the maker of Hidden Valley Ranch salad dressings and its namesake bleach in July that was rebuffed. The reality is that bid was pretty much bluster and an attempt by Icahn to get Clorox rivals Procter & Gamble (PG) and Kimberly Clark (KMB) interested in the company.

Beyond that, Icahn seemed to be the only one that viewed Clorox as an acquisition target. Even though PG is almost 100 times larger than Clorox by market value, Icahn is the only one, at least recently, to tout the Dow component as a potential suitor for Clorox. Why sell in a depressed market? That is a fair question. When the dust settled on Monday, Clorox was trading at its lowest levels in a month. For those looking for a silver lining, Clorox now yields 3.6% and that is a lot better than what you will get on money markets or Treasuries.

Clorox Chart

Looking at the charts, support at 1120 for the S&P 500 did not come into play today as the lowest the broader market index traded was 11 points above that level. With Monday's close around 1162, the S&P 500 is still a fair bit removed from psychological resistance at 1200 and the 50-day moving average at 1210.

If we do see a bounce, it would be a positive sign for the 1150-1160 area to turn into new support. If support at 1120 does not hold, then a return to 1050 could be in the cards. From there, things turn really ugly as 860 could be the next stopping point.

S&P 500 Chart

All 30 of the Dow's constituents were higher today. Rare has been the day in recent months that we have seen that situation. Only Intel (INTC) and Home Depot (HD) gained less than 1%. I am trying to curb my enthusiasm, but it may prove encouraging that the Dow broke above resistance at 10,800 and closed above 11,000. Maybe 10,800 becomes new support, though for now, a firmer floor is 10,600. The Dow has almost 300 points of real estate before seeing next resistance.

Dow Chart

It was a strong day for the Nasdaq and the move above 2500 on the Composite was made all the more impressive by the fact that Apple (AAPL) was one just 16 Nasdaq 100 members to close in the red. With a market bounce, the Nasdaq could reclaim its 50-day moving average at 2574 and then take a shot at the September high of 2643. Support is 2465.

Nasdaq Chart

In the case of the Russell 2000, any gains is welcomed, but after the bruising the index has absorbed, it is going to take more than 13-point gains to generate much excitement. I still believe psychological resistance at 700 must be dealt with then the 50-day line at 721 before buyers start feeling comfortable with small-caps again.

Russell 2000 Chart

Monday was one of those days where I was reminded of the expression ''don't fight the tape.'' Heading into the day, I would have bet against a gain of this magnitude. With that, some of the indexes did conquer important technical levels today and if the news out of Europe improves, or least stays less bad, I would expect stocks, led by the more risky fare to rally. I know I beat up on Europe quite a bit in this space, but I really would like to see things come together on the sovereign debt front. That would be good news indeed.

Todd Shriber

New Plays

Poised for Gains

by James Brown

Click here to email James Brown

Editor's Note:

Below is a list of potential candidates to add to your watch list:




Sturm, Ruger & Co. - RGR - close: 31.48 change: +0.80

Stop Loss: 29.90
Target(s): 36.00
Current Gain/Loss: unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
RGR could see a short squeeze. The stock has been consolidating sideways the last few weeks. When the market sold off last week RGR dipped to technical support at its rising 50-dma. Now shares are nearing resistance in the $32.00 area. A breakout could spark some short covering.

I am suggesting a trigger to buy RGR at $32.25. If triggered we'll use a stop loss at $29.90. The August high was $36.85. We'll set our target at $36.00.

FYI: The Point & Figure chart for RGR is bullish with a $40 target. Traders will also want to note that the most recent data listed short interest at more than 11% of the very small 18 million-share float.

Trigger @ 32.25

Suggested Position: buy RGR @ 32.25

- or -

buy the NOV $35 call (RGR1119K35) current ask $1.40

Annotated chart:

Entry on September xx at $ xx.xx
Earnings Date 11/02/11 (confirmed)
Average Daily Volume = 428 thousand
Listed on September 26, 2011

Silver Wheaton Corp. - SLW - close: 32.27 change: -0.04

Stop Loss: 30.45
Target(s): 37.00, 41.00
Current Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
SLW is a silver "streaming" company. As silver prices rebound so should shares of SLW. Currently both shares of SLW and silver look short-term oversold and due for a bounce. This morning SLW gapped open lower at $31.01, dipped to $30.55, and then rebounded with a +5.6% surge off its lows of the session. I am suggesting we buy this bounce. We'll open positions tomorrow morning with a stop loss at $30.45. Our multi-week targets are $37.00 and $41.00. More conservative traders may want to exit early near $35.00. Aggressive traders may want to use a stop under $29.75 instead.

We want to use small positions to limit our risk.

*Small Positions*

Suggested Position: buy SLW stock @ the open

- or -

buy the OCT $35 call (SLW1122J35) current ask $1.21

Annotated chart:

Entry on September 27 at $ xx.xx
Earnings Date 11/08/11 (unconfirmed)
Average Daily Volume = 6.7 million
Listed on September 26, 2011

In Play Updates and Reviews

Risk On!

by James Brown

Click here to email James Brown

Editor's Note:
Investors were in a "risk on" mood today in spite of some negative economic data. It seems that market participants came back from the weekend in a hopeful mood over Europe and Greece. Stocks saw a broad-based bounce. All of our bullish trades have been opened.


Current Portfolio:

BULLISH Play Updates

Bristol-Myers Squibb - BMY - close: 30.94 change: +0.05

Stop Loss: 28.90
Target(s): 33.50
Current Gain/Loss: -0.6%
Time Frame: 6 to 8 weeks
New Positions: see below

09/26 update: Our BMY trade is now open. Shares gapped open higher at $31.15 but after spending the day churning sideways the stock closed near its lows. The larger trend is bullish and I would consider new positions now but more conservative traders may want to wait for a dip near $30.00 as their entry point.

current Position: Long BMY stock @ $31.15

- or -

Long 2012 Jan. $30 call (BMY1221A30) Entry $2.26

09/26 trade opened

Entry on September 26 at $31.15
Earnings Date 10/26/11 (unconfirmed)
Average Daily Volume = 13.6 million
Listed on September 22, 2011

PowerShares Gold Double Long - DGP - close: 52.20 change: -1.79

Stop Loss: 49.40
Target(s): 59.00, 64.00
Current Gain/Loss: +0.0%
Time Frame: 8 to 10 weeks
New Positions: Yes, see below

09/26 update: Buy the bounce! DGP is a new trade from this weekend. We wanted to buy this ETF at the open with a stop at $51.45. I did caution readers that gold prices could see another spike down at the open on Monday as investors reacted to the margin hike news. Sure enough, gold and metals did move lower before rebounding intraday as expected. Unfortunately, the DGP opened at $51.96 and then hit our stop loss at $51.45 before bouncing near round-number support at the $50.00 level. This was a loss of -0.9% (less than 1%). In my weekend comments I suggested that if we get stopped out to go ahead and buy the dip near $50.00.

Therefore, I'm reloading this play to buy the DGP tomorrow at the open with a stop loss at $49.40. Today's low was $49.66. Our targets are $59.00 and $64.00.

- Small Positions -

Suggested Position: buy the DGP @ the open

09/26 reload this trade. Buy the open tomorrow, new stop 49.40
09/26 Trade opened on gap down at $51.96.
Trade stopped out at $51.45 (-0.9% loss)

Entry on September xx at $ xx.xx
Earnings Date --/--/--

1st Attempt:

Entry on September 26 at $51.96
Exit on September 26 at $51.45 (-0.9%)

Average Daily Volume = 1.3 million
Listed on September 24, 2011

Energy XXI Ltd. - EXXI - close: 22.63 change: +1.12

Stop Loss: 20.85
Target(s): 25.00
Current Gain/Loss: + 4.0%
Time Frame: 6 to 8 weeks
New Positions: see below

09/26 update: EXXI is a volatile stock and shares almost hit our stop loss today. The market's positive open and EXXI's gap open higher at $21.75 triggered our trade. Shares did see an immediate spike down this morning but bounce at $20.95. Shares then rallied +8.0% to close at its highs for the session. Gain on the day was +5.2%.

If you missed our entry point this morning I would still consider new positions now. Just remember to keep positions size small to limit risk.

Earlier Comments:
NOTE: Technically you could argue that EXXI has broken down from a pennant-shaped consolidation pattern. That's bearish and another reason why we want to keep our position size pretty small to limit our risk.

Suggested Position: Long EXXI stock @ $21.75

- or -

Long OCT $23 call (EXXI1122J23) Entry $1.15

Entry on September 26 at $21.75
Earnings Date 10/26/11 (unconfirmed)
Average Daily Volume = 983 thousand
Listed on September 22, 2011

Human Genome Sciences Inc. - HGSI - close: 14.24 change: +0.03

Stop Loss: 12.89
Target(s): 16.25, 17.50
Current Gain/Loss: -0.5%
Time Frame: 4 to 6 weeks
New Positions: see below

09/26 update: Trading in HGSI today was disappointing. That may have been due to some bearish analyst comments this morning. The stock opened higher at $14.31, dipped to $13.71 and then bounced back to barely close in positive territory. It's not a very convincing gain with the rest of the market in rally mode.

Readers may want to wait for another bounce from the 10-dma (currently near $13.40) or wait for a new rally past $14.65 before initiating positions.

(Small Positions)

Current Position: Long HGSI @ $14.31

- or -

Long OCT $15 call (HGSI1122J15) Entry $0.83

Entry on September 26 at $14.31
Earnings Date 10/27/11 (unconfirmed)
Average Daily Volume = 4.8 million
Listed on September 24, 2011

iShares Russell 2000 ETF - IWM - close: 66.37 change: +1.23

Stop Loss: 63.40
Target(s): 69.75
Current Gain/Loss: +3.3%
Time Frame: 3 to 6 weeks
New Positions: see below

09/26 update: Small caps continue to bounce. The IWM provided a new entry point with not one but two dips into the $65-64 zone midday before surging toward its highs for the session. The low last week was $63.49. I am raising our stop loss to $63.40. Our first target is $69.75.

Suggested Position: Long IWM @ $64.25

- or -

Long NOV $68 call (IWM1119K68) Entry $2.69

09/26 new stop loss @ 63.40

Entry on September 23 at $64.25
Earnings Date --/--/--
Average Daily Volume = 76.7 million
Listed on September 22, 2011

Red Hat Inc. - RHT - close: 43.49 change: +1.17

Stop Loss: 39.75
Target(s): 46.50, 48.00
Current Gain/Loss: +1.8%
Time Frame: 6 to 8 weeks
New Positions: see below

09/26 update: It was a bullish day for RHT and nimble traders got an entry point near $41.50 intraday. Our trade was opened this morning when RHT gapped higher at $42.72. Shares saw a spike down to $41.52 near its 100-dma before reversing higher and breaking out past technical resistance at its simple 200-dma.

Current Position: Long RHT stock @ $42.72

- or -

Long OCT $45 call (RHT1122J45) Entry $1.15

Entry on September 26 at $42.72
Earnings Date 12/21/11 (unconfirmed)
Average Daily Volume = 2.7 million
Listed on September 24, 2011

U.S. Oil ETF - USO - close: 31.47 change: +0.38

Stop Loss: 29.75
Target(s): 34.50
Current Gain/Loss: +2.4%
Time Frame: 6 to 8 weeks
New Positions: see below

09/26 update: Our USO trade is off to a good start. Shares opened at $30.71, dipped to $30.23 before reversing to end up +1.2%. Shares closed at their highs for the day. I would still consider new positions now.

current Position: Long the USO @ $30.71

- or -

Long NOV $32 call (USO1119K32) Entry $1.81

09/26 trade opened at $30.71
09/24 removed conditional entry, adjusted stop to $29.75.

Entry on September 26 at $30.71
Earnings Date --/--/--
Average Daily Volume = 10.7 million
Listed on September 22, 2011

BEARISH Play Updates

5 Greif, Inc. - GEF - close: 44.04 change: +0.44

Stop Loss: 45.60
Target(s): 44.00, 40.50
Current Gain/Loss: +6.1%
Time Frame: 6 to 8 weeks
New Positions: see below

09/26 update: GEF spent Monday churning sideways under resistance near $44.00. Shares did close near their highs for the session and if the market continues to bounce we could see GEF hit our stop loss at $45.60. More conservative traders may want to take profits now and exit early. I am not suggesting new positions at this time.

Earlier Comments:
FYI: The Point & Figure chart for GEF is bearish with a $34 target. I am not suggesting the options. The spreads are too wide.

*Small Bearish Positions*

Current Position: short GEF stock @ $46.93

09/24 new stop loss @ 45.60
09/22 new stop loss @ 46.25
09/22 1st target hit at $44.00 (+6.2%)
09/21 new stop loss @ 48.55
09/19 new stop loss @ 49.55

Entry on September 12 at $46.93
Earnings Date 12/07/11 (unconfirmed)
Average Daily Volume = 247 thousand
Listed on September 10, 2011