Option Investor

Daily Newsletter, Thursday, 10/13/2011

Table of Contents

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

Market Wrap


by Jim Brown

Click here to email Jim Brown
Google's earnings beat after the close and resulting $40 after hours spike should kick the Nasdaq well over 2625 resistance at Friday's open.

Market Statistics

There is no recession at Google. The company earned +$9.72 per share or $2.7 billion for the quarter. Estimates $8.74 per share. That was a +26% gain from the year ago quarter. Gross revenue was $9.7 billion with net revenue after deducting for partner shares at $7.5 billion and +$200 million over estimates.

Analysts were expecting a slight slowdown in Google's growth on worries the lagging economy would cause advertisers to pull back on ad spending. Instead the Q3 revenue growth was +32% over the Q2 rate. CEO Larry Page said on the conference call it was a "gangbuster" quarter. Google added 2,600 employees in the quarter and +7,000 year to date. On the downside Google's operating expenses rose by +40% to $6.1 billion. Page said they had cut about 20 nonperforming products so far so employees can focus on what is working and reduce expenses. Page said Google Plus, announced in June, now has more than 40 million users compared to 800 million for Facebook.

Google Chart

JP Morgan (JPM) reported earnings that beat the street but the stock fell on the guidance. JPM reported earnings of $1.02 per share and estimates were 91-cents. Revenue was $24.4 billion compared to estimates of $23.4 billion. Several things dragged the stock price lower. JPM said investment banking revenue fell -31% to $1 billion because overseas customers were pulling back from deals because of the uncertainty about the debt crisis and the stability of the European banks.

They also said the increased regulations of Dodd-Frank and other new rules would add more than $500 million to expenses. Because of the increasing regulation expenses JPM was going to cut several thousand additional employees and would rethink their prior plan to open an additional 2,000 branches. This is your government regulation at work. 2,000 new branches would have been billions in revenue for local economies and more than 10,000 new employees. Local branches are bricks and mortar and local jobs not Wall Street.

Morgan also said it would lose $300 million in income from debit card fees in Q4. That is because a new Federal rule that caps the amount banks can charge merchants for debit card usage at about 24 cents per transaction, down from 44-cents. The rule went into effect Oct 1st.

JPM Chart

Bank America announced a $5 per month service charge for cardholders to offset the loss of fees. Other banks followed suit with fees of their own. Lawmakers in congress immediately requested the Justice Dept begin an antitrust inquiry against these banks for defying the will of Congress and possibly conspiring to raise rates. The major banks told Congress when they were considering the bill they would have to raise rates on consumers to offset the costs of handling the debit cards. Personally I would rather the retailer pay the extra 20-cents instead of me paying $5 a month for each of the nine debit cards my wife and I have. Retailers are making a profit on each transaction and they can factor that into the cost of sales. Just another stupid regulation that costs taxpayers money.

Safeway (SWY) reported earnings of 38-cents that rose +15% and beat the street by 3-cents. Revenue rose +7% to $10.065 billion. Gross margins shrank from 28.14% to 27.0%. The stock spiked higher at the open but then declined after the CEO said sales volumes were down throughout the industry and wholesale prices were rising.

Safeway Chart

Rumors continue to swirl around Yahoo and a potential acquisition. Names surfacing on Thursday included KKR and Blackstone as firms possibly considering an offer. Those firms would be part of a consortium that would pool financing. Alibaba has also discussed a plan with Silver Lake and Russia's Digital Sky Technologies about a joint bid. Yahoo owns 40% of Alibaba. A third group includes Providenc Equity Partners and Former News Corp executire Peter Chernin. Yahoo sent a memo to employees saying the companies advisers have been fielding inquiries from "multiple parties."

Microsoft may also be involved in order to protect its interest in the Yahoo advertising partnership. Microsoft is rumored to be offering a financing arrangement to prospective buyers. Microsoft has the cash and can possibly leverage that cash into an even better partnership deal with the new owners. Microsoft and Yahoo have a 10-year agreement to outsource Yahoo's search business to Microsoft.

One thing for sure, if no offer emerges soon the stock is going to tank really hard. With all the vultures circling the carcass, should they leave that would suggest there was no meat left on the Yahoo bones.

Yahoo Chart

Triquint (TQNT) and Qualcomm (QCOM) were big winners after a tear-down of a new iPhone 4S revealed multiple chips from both companies. Triquint was the biggest percentage gainer but QCOM, SWKS and AVGO also gained as their parts were identified. The news powered the SOX to a +2% gain and helped push the Nasdaq into positive territory.

Apple reported that all the available inventory for preorders of the iPhone 4S had been sold. Carriers are now projecting delivery in terms of weeks instead of days. This is going to be a blockbuster quarter for Apple.

Triquint Semi Chart

After the bell Microchip Technologies (MCHP) warned for the quarter saying business did not pickup as expected. I guess that is the penalty for not having any chips in the iPhone. Earnings are now seen in the range of 45-47 cents, down from 52-cents in prior guidance. Revenue estimates are now $340.6 million, down from $362 million. The company last issued guidance on August 4th.

Microchip said, "We experienced incrementally stronger headwinds and saw no seasonal Christmas build, which in turn adversely impacted all of our product lines and sales channels." Shares of MCHP declined -2% in after hours but the announcement was late and we could see a bigger decline on Friday.

MCHP Chart

Also after the bell Fitch downgraded its outlook for European banks RBS, BCS, UBS and Lloyds Banking Group. The company said pending capital raises, downgrades to the value of sovereign debt held by these banks and worries over an economic slowdown in Europe was behind the guidance change. Downgrades or warnings of a pending downgrade were also made on SocGen, Deutsche Bank, BNP Paribas and Rabobank. On the U.S. side of the pond Fitch put Morgan Stanley and Goldman Sachs on credit watch negative.

Goldman Sachs and Morgan Stanley have mentioned they might drop their banking status in order to avoid the Dodd-Frank rules on trading for their own accounts but that was not a factor in the negative credit watch. Fitch believes the firms still have exposure to events in Europe.

European banks are starting to kick back against the potential tier 1 capital requirements expected to be announced soon. In order to deal with the potential fallout from a Greece default and/or significant haircut on existing debt, there is discussion about forcing banks to boost tier 1 capital from 5% to 9% and do it in a hurry. That would force capital raises and/or sales of assets and the major banks are rebelling. EU officials are now starting to talk about a 60-70% haircut on Greek debt. That would be very detrimental to banks but you can't say they did not see it coming. Most analysts have already been pricing in that much of a drop.

The news of the downgrades reversed the positive futures into a negative decline. This could help to defuse the positive sentiment from the Google earnings on Friday.

On the economic front the weekly Jobless Claims rose came in at 404,000. This was a drop of -1,000 from last week's upwardly revised number of 405,000. That was revised higher from 401,000. We should be encouraged there is no upward increase because eventually even a slowly growing economy will create more jobs. Still, the weekly claims need to be under 350,000 to show any improvement in hiring.

Jobless Claims

The Manufacturers Alliance Survey for Q3 was flat at 67% compared to 68% for Q2. This is further confirmation the economy did not collapse in Q3 but it also did not grow. New orders were flat at 79 but back orders declined slightly to 73 from 80. Since anything over 50 represents expansion this was a positive report but the market rarely pays attention to these broad brush reports covering an entire quarter. They get the same data in the monthly reports.

The International Trade Deficit was also flat for August. The headline number came in at -$45.6 billion, same as the previously reported July number, although July was revised slightly higher at -$44.4 billion. This report was also ignored.

Reports due out on Friday include Import & Export Prices, Retail Sales, Consumer Sentiment, Business Inventories and the Treasury Budget. Sentiment will be the most important.

The markets were very well behaved even though the JPM earnings sparked a sell off in the banking sector. The S&P rallied exactly to strong resistance at 1220 on Wednesday and failed exactly on that resistance. The high was exactly 1220.25. The Dow also stopped at 11,625.30 and right on resistance. It is always nice to see the indexes perform as expected.

The S&P declined to initial support at 1190 on Thursday and that represented a decent -20 point pullback and what should have been a decent dip to buy. After a +145 point rebound a -30 point dip is minor. If the positive earnings continue I believe we can expect the rebound to continue.

The headache for Friday is the opening of the G20 Finance Ministers meeting in Paris. While there are no specific headlines expected you can't get that many high ranking officials together without someone speaking out of turn as they try to get their five minutes of camera time. Hopefully they will talk about progress being made in resolving the debt crisis but I am not holding my breath.

I am hoping the Google earnings will push the Nasdaq over resistance at 2625 and drag the S&P and Dow higher for another test of their resistance. Apple is up +$5 in after hours so if the gains from GOOG/AAPL hold we should see a positive start to Friday's market.

If we do see some more profit taking I would watch SPX 1190 as a critical support level followed by 1180. I think it will take more than general news out of Europe to push us any lower because the bull is out of the barn. He may not have escaped the corral yet but a break over 1220 could mean a run to greener pastures.

S&P Chart

The Dow may have failed exactly at resistance but it did not retreat very far. The dip to 11,400 was exactly where it should have rested and that left it within striking distance of resistance if there is no negative news.

The Dow will struggle over the downgrade in the financials but that may be offset by the bullishness in the tech stocks. Unless there is a major news event on Friday the Dow is likely to not venture far from Thursday's close. There is a little event risk for the weekend and traders may be reluctant to establish new positions until Monday.

Dow Chart

The motive power for Friday should be the Nasdaq. The gains by Google and Apple tonight should push the Nasdaq over resistance at 2625 and could trigger significant short covering. The Nasdaq bounced off that resistance on both Wednesday and Thursday and that probably gave the sellers an opportunity to establish short positions since the resistance level was so easy to recognize.

A spike through that level at the open on Friday will likely see early selling as traders attempt to capitalize on what they might see as a temporary spike. If the spike does not fail it would stimulate additional short covering and hopefully establish a new trading range on the breakout.

Nasdaq Chart

I am neutral for Friday. I remain in buy the dip mode and I think Thursday was an ideal dip to buy. The bank downgrades after the close are the wildcard but the Google/Apple gains are the offsetting entries.

Because it is Friday and there is always weekend event risk I would not expect a big move higher. I would be perfectly happy for all the indexes to just close slightly over current resistance and set us up for a potential move on Monday if there are no negative weekend events.

Jim Brown

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New Plays

Homebuilders & Cloud Computing

by James Brown

Click here to email James Brown


KB Home - KBH - close: 6.82 change: +0.03

Stop Loss: 6.25
Target(s): 8.75
Current Gain/Loss: unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Most of the homebuilding stocks have been sliding lower for months. Yet it looks like they may have found a bottom in recent weeks. Shares of KBH has been churning sideways in the $5.00-7.00 zone. The August and October lows look like a potential bullish double bottom. Traders were quick to buy the dip at $6.30 midday. KBH could easily see a short squeeze. The most recent data listed short interest at 51% of the 65-million share float.

I am listing two different entry point strategies. First I am suggesting we open bullish positions now at current levels but only if both KBH and the S&P 500 index open positive tomorrow morning. If that entry requirement is not met but KBH rallies past $7.00 anyway, then we want to open positions at $7.10 regardless of what the market might be doing. We will use a stop loss at $6.25 for both entry points. Our multi-week target is $8.75 but we'll need to keep a wary eye on the 100-dma as possible resistance.

This is an aggressive trade. We want to keep our position size small to limit our risk.

*See Entry Details Above* (small positions)

Suggested Position: buy KBH stock @ (see above)

- or -

buy the NOV $7.00 call (KBH1119K7) current ask $0.53

- or -

buy the 2012 JAN $7.50 call (KBH1221A7.5) current ask $0.75

Annotated chart:

Entry on October xx at $ xx.xx
Earnings Date 01/09/12 (unconfirmed)
Average Daily Volume = 4.4 million
Listed on October 13, 2011

SuccessFactors, Inc. - SFSF - close: 25.59 change: +0.75

Stop Loss: 23.90
Target(s): 29.50
Current Gain/Loss: unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
SFSF is part of the cloud-based computing industry, a hot topic these days. It looks like the stock has found a bottom. Shares are beginning to breakout past the trendline of lower highs and breakout past resistance near $25.00. The Point & Figure chart for SFSF is bullish with a $36 target.

I am suggesting we open positions now but only if both SFSF and the S&P 500 index both open positive tomorrow morning. We'll use a stop loss at 23.90. More aggressive traders may want to place their stop under the 50-dma instead. Our multi-week target is $29.50 but don't be surprised to see some resistance near $28.00.

*See Entry Point Details Above*

Suggested Position: buy SFSF stock @ the open

- or -

buy the NOV $27 call (SFSF1119K27) current ask $1.50

Annotated chart:

Entry on October xx at $ xx.xx
Earnings Date 10/26/11 (unconfirmed)
Average Daily Volume = 1.8 million
Listed on October 13, 2011

In Play Updates and Reviews

NASDAQ Outperforms

by James Brown

Click here to email James Brown

Editor's Note:
Looking at the major indices the tech-heavy NASDAQ managed to outperform today. Surprisingly our technology-related names on the list merely consolidated sideways. For the most part today was a non-event. Nothing happened except that most stocks bounced off their morning lows.


Current Portfolio:

BULLISH Play Updates

Adobe Systems - ADBE - close: 25.80 change: -0.08

Stop Loss: 24.75
Target(s): 29.50
Current Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

10/13 update: ADBE followed the market lower this morning and dipped to $25.39 but eventually trimmed its losses to just -0.3%. There is no change from my prior comments. Currently our plan is to open bullish positions if ADBE hits $26.35. More conservative traders may want to move that trigger higher to $26.55 instead.

Trigger @ 26.35

Suggested Position: buy ADBE @ 26.36

- or -

buy the NOV $27 call (ADBE1119K27)

Entry on October xx at $ xx.xx
Earnings Date 12/15/11 (unconfirmed)
Average Daily Volume = 7.1 million
Listed on October 11, 2011

Autodesk, Inc. - ADSK - close: 30.99 change: -0.03

Stop Loss: 28.25
Target(s): 34.50
Current Gain/Loss: +2.1%
Time Frame: 6 to 8 weeks
New Positions: see below

10/13 update: ADSK held up pretty well today. After yesterday's rally, well actually after an eight-day rally, the stock was poised for some profit taking. The stock dipped to $30.36 and bounced back to almost unchanged.

The plan was to keep our position size small since ADSK is short-term overbought here.

*Small Positions*

current Position: Long ADSK stock @ 30.35

- or -

Long NOV $32 call (ADSK1119K32) Entry $1.60

Entry on October 12 at $30.35
Earnings Date 11/17/11 (unconfirmed)
Average Daily Volume = 4.5 million
Listed on October 11, 2011

Bristol-Myers Squibb - BMY - close: 32.76 change: -0.06

Stop Loss: 30.75
Target(s): 33.50
Current Gain/Loss: +5.1%
Time Frame: 6 to 8 weeks
New Positions: see below

10/13 update: BMY suffered a very mild decline today. Shares essentially drifted sideways. There is no change from my prior comments.

Earlier Comments:
The trend is up but BMY looks short-term overbought. Cautious investors may want take profits now. I am expecting a pull back, probably toward the $32.00-31.50 area. Our final target is $33.50.

current Position: Long BMY stock @ $31.15

- or -

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

10/10 new stop loss @ 30.95
10/04 new stop loss @ 30.75
09/27 new stop loss @ 29.90
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: 55.29 change: -0.61

Stop Loss: 50.50
Target(s): 60.00
Current Gain/Loss: +0.0%
Time Frame: 8 to 10 weeks
New Positions: see below

10/13 update: Gold can't seem to build on its up days. This up one day and down the next can be frustrating to trade. Today's session erased yesterday's gain. I am not suggesting new positions tonight. We are essentially at breakeven. More conservative traders may want to abandon ship and exit early now.

- Small Positions -

current Position: long the DGP @ $55.26

10/13 Not making any progress. Cautious traders may want to exit early now with DGP near breakeven
10/08 adjusted exit target to $60.00
10/04 new stop loss @ 50.50
09/27 trade opened
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 27 at $55.26
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

Copper ETF - JJC - close: 43.06 change: -0.45

Stop Loss: 41.25
Target(s): 47.50
Current Gain/Loss: - 0.4%
Time Frame: 3 to 6 weeks
New Positions: see below

10/13 update: Overall metals were generally weak today in spite of a decline in the U.S. dollar (normally a down dollar would be bullish for metals). The JJC gave back about half of yesterday's gains. We are still bullish on copper but more conservative traders might want to up their stop loss closer to the $42 level.

current Position: Long JJC (ETF) @ $43.25

- or -

Long NOV $45 call (JJC1119K45) Entry $1.90

10/10 JJC hit our upside trigger at $43.25, stop 41.25

Entry on October 10 at $43.25
Earnings Date --/--/--
Average Daily Volume = 461 thousand
Listed on October 08, 2011

Lowe's Companies - LOW - close: 20.45 change: -0.17

Stop Loss: 19.75
Target(s): 22.85
Current Gain/Loss: - 1.4%
Time Frame: 4 to 8 weeks
New Positions: see below

10/13 update: LOW underperformed the market's major indices today with a -0.8% decline versus -0.3% for the S&P 500 index. At this point I'd rather see a dip or a bounce near the $20.00 level before considering new positions.

Earlier Comments:
The $22.00 level might be resistance but I'm listing our exit target at $22.85. I would keep our position size small.

current Position: Long LOW stock @ 20.75

- or -

Long NOV $21 call (LOW1119K21) Entry $0.85

Entry on October 10 at $20.75
Earnings Date 11/14/11 (unconfirmed)
Average Daily Volume = 16.7 million
Listed on October 08, 2011

EnPro Industries - NPO - close: 31.74 change: +0.19

Stop Loss: 29.80
Target(s): 34.50
Current Gain/Loss: + 2.8%
Time Frame: 2 to 4 weeks
New Positions: see below

10/13 update: NPO spent nearly the entire session bouncing sideways in a tight range between $32.40 and $31.90. Today's +0.6% gain is a show of relative strength but I would hesitate to launch new positions here.

Earlier Comments:
We want to keep our position small to limit risk.

(Small Positions)

current Position: Long NPO stock @ $30.87

- or -

Long Oct $30 call (NPO1122J30) Entry $1.75

10/10 new stop loss at $29.80

Entry on October 07 at $30.87
Earnings Date 11/03/11 (unconfirmed)
Average Daily Volume = 282 thousand
Listed on October 06, 2011

NetApp, Inc. - NTAP - close: 38.65 change: -0.24

Stop Loss: 37.95
Target(s): 44.00
Current Gain/Loss: unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

10/13 update: NTAP erased yesterday's small gain after a day of drifting sideways. The high today was $39.11. There is no change from my prior comments posted below:

Earlier Comments:
I do consider this an aggressive trade so we will want to keep our position size small. The plan is to open bullish positions if NTAP can trade at $39.55. If triggered we'll use a stop loss at $37.95. Our upside target is $44.00. Remember, small positions!

Trigger @ $39.55 (small positions)

Suggested Position: buy NTAP stock @ 39.55

- or -

buy the NOV $40 call (NTAP1119K40)

Entry on October xx at $ xx.xx
Earnings Date 11/16/11 (unconfirmed)
Average Daily Volume = 7.4 million
Listed on October 12, 2011

BEARISH Play Updates

Walgreen Co. - WAG - close: 32.96 change: -0.19

Stop Loss: 34.26
Target(s): 30.50
Current Gain/Loss: +0.4%
Time Frame: 4 to 8 weeks
New Positions: Yes, see below

10/13 update: WAG spent most of the session churning sideways under the $33.00 level. I would still consider new bearish positions now. Do not be surprised to see a bounce near $32.00. Our target is $30.50.

NOTE: October options only have six trading days left.

current Position: short WAG stock @ $33.11

- or -

Long Oct. $32 put (WAG1122V32) Entry $0.19

- or -

Long NOV $31 put (WAG1119W31) Entry $0.59

Entry on October 13 at $33.11
Earnings Date 12/21/11 (unconfirmed)
Average Daily Volume = 8.6 million
Listed on October 12, 2011