Option Investor

Daily Newsletter, Monday, 10/24/2011

Table of Contents

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

Market Wrap

Merger Monday, Earnings, Europe Ignite The Rally

by Todd Shriber

Click here to email Todd Shriber
Having one catalyst to move the market higher is always helpful. Two is even. And three, well that is just icing on the sundae. That is exactly what Mr. Market had working in his favor today as a slew of mergers and acquisitions news, some decent earnings reports and news that was viewed as positive out of Europe helped send the S&P 500 to a gain of 1.3%. The Dow Jones Industrial Average notched another triple-digit gain while the Nasdaq soared almost 2.1%.

Market Stats

In a clear sign that the risk on trade is on, at least for now, West Texas Intermediate Crude futures jumped 4.4% to their highest closing price in three months. In fact, it is more expensive to buy oil now than it is to buy longer-dated contracts, the condition known as ''backwardation.'' Some decent economic data points out of China and Japan, the world's second- and third-largest oil consumers behind the U.S., buoyed crude's fortunes today.

For those that prefer to play the oil patch with equities, the earnings slate this week is littered with oil companies as XOM, CVX, COP and OXY, the four largest U.S. oil companies, all deliver third-quarter results. Those numbers probably will not be great because of the week macroeconomic environment and that is expected at this point, so Wall Street might be looking more at production and new project outlooks for the current quarter and 2012.

Oil Chart

In a day chock full of mergers and acquisitions news, one of the headline deals came courtesy of the health insurance sector where Cigna (CI) said it will acquire rival HealthSpring (HS) for $3.8 billion in an effort to gain more exposure to the rapidly growing Medicare Advantage market. News of the deal sent HealthSpring soaring by 33.7% on volume that was nearly 26 times the daily average.

Tennessee-based HealthSpring has about 340,000 Medicare Advantage customers in 11 states and a Medicare prescription drug business with more than 800,000 customers, according to the Associated Press. Cigna has less than 50,000 Medicare Advantage customers and that might be the motivation behind the 37% premium Cigna is paying for HealthSpring. Connecticut-based Cigna raised its 2011 profit forecast to $5.05 -$5.30 a share from $4.95-$5.25. Analysts were expecting $5.29 a share. Cigna's estimate excludes any estimate from the HealthSpring transaction.

HealthSpring Chart

Enterprise software giant Oracle (ORCL) is acquiring closely held Endeca Technologies in a deal that was inked last week though disclosed today. While Oracle did not disclose how much it paid for Massachusetts-based Endeca, the Boston Globe reported the price tag could be close to $1.08 billion. Endeca counts Bessemer Venture Partners, Venrock, Intel (INTC) and SAP Ventures among its backers, according to the San Jose Business Journal.

As anyone that follows the tech sector knows, Oracle is one of the most acquisitive companies around. Sometimes, there will even be news of multiple Oracle deals in the same day as was the case today. Looking to boost its exposure to the booming cloud-computing space, Oracle said it will buy RightNow Technologies (RNOW) for $1.5 billion. The news sent shares of RightNow up 19.4% on volume that was roughly 32 times the daily average.

Oracle may be getting RigthtNow on the cheap. As the Financial Times reported, after recent $85 million funding round, folks close to RightNow valued the company at $2 billion. Montana-based RightNow was profitable in the second quarter and the deal means Oracle can butt heads even more with rival Salesforce.com (CRM).

RightNow Chart

Of course, no Merger Monday would be truly complete without a juicy rumor to get the market buzzing. This one is familiar target with a different potential suitor this time around. The Wall Street Journal reported over the weekend Google (GOOG) has held talks with unidentified private firms about procuring financing to acquire downtrodden rival Yahoo (YHOO). The news sent Yahoo shares up by 3.7%. For several years now, Yahoo has been the subject of takeover speculation with Microsoft usually being the company viewed as the most likely suitor.

Google has deep pockets of its own and a penchant for overpaying on acquisitions. Remember the premium on Motorola Mobility (MMI)? Obviously, neither Google nor Yahoo commented on the rumor. It should be noted that to this point, only China's Alibaba, in which Yahoo owns a stake, has publicly expressed its interest in Yahoo. Private equity firms KKR, Blackstone and Silver Lake have been mentioned as possible Yahoo suitors in various press reports though no confirmation has been made public.

Before getting too excited about Google acquiring Yahoo, keep this in mind: Google has often had rocky relationships with governments, be they in Beijing or Washington, D.C. I found it doubtful the Justice Department will just let Google acquire Yahoo without making some stern anti-competition inquiries.

Yahoo Chart

In earnings news and in another positive sign for the risk on crowd, Dow component Caterpillar (CAT), the world's largest maker of construction and mining equipment, jumped 5% on volume that was 33% above average after the company posted a 44% surge in third-quarter profits. Illinois-based Caterpillar earned $1.14 billion, or $1.71 per share, compared with $792 million, or $1.22 per share, a year earlier.

Well, that is the previous quarter and what is done is done. Caterpillar's guidance was excellent. The company forecast full-year revenue of $58 billion up from a previous forecast of $56 billion to $58 billion. Caterpillar expects a profit of $6.75 a share, up from previous guidance of $6.25-$6.75. Factor in the benefit of acquiring Bucyrus and Caterpillar expects to earn $7.25 a share this year.

CAT Chart

Not everyone can deliver earnings reports like that. Netflix (NFLX) used to be able to, but this company has really lost its way. The company reported third-quarter results after the bell, but what is really important here is not the previous quarters profit or revenue. What is important is the loss of 810,000 subscribers between the second and third quarters and total U.S. subscribers of 23.79 million at the end of the third quarter, that is below the expected 24 million.

Making matters worse, Netflix forecast a fourth-quarter profit of 36-70 cents a share on revenue of $841-$875 million. Analysts were expecting $1.08 a share on revenue of $920 million. Customer cancellations rose to 6.3% in third quarter from 4.8% in the second quarter. And all this explains why Netflix shares are down almost 28% in the after-hours session, flirting with $87. The stock has not traded below $90 since April 2010.

Netflix Chart

In other after-hours news, Texas Instruments (TXN), the second-largest U.S. semiconductor maker, delivered decent third-quarter results, but the shares were trading lower after TI forecast fourth-quarter revenue of $3.26 billion to $3.54 billion. That is below the estimate of several analysts. The consensus view is for revenue of $3.43 billion, but at least one analyst was expecting $3.57 billion.

Texas Instruments Chart

Looking at the charts, the S&P 500 took out resistance at 1225 on Friday, reclaiming its 100-day moving average in the process. The index's bullish ways continued to today as the S&P 500 closed just 21 points below its 200-day moving average, which is likely the next critical resistance area. From there, round number resistance at 1300 looms, but there is pretty clear sailing back to the 1340-1350 area.

S&P 500 Chart

The Dow's chart is showing similar breakout characteristics to the S&P 500 and on an intraday basis, the blue-chip index was able to jump over resistance at 11, 925, but finished just below that mark. Earnings reports from DD and MMM on Tuesday could help the Dow not only clear that resistance, but maybe also get back to its 200-day line at 11,965. After Tuesday, five more Dow components deliver third-quarter results this week.

Dow Chart

The Nasdaq blew past resistance at 2665 today to trade just over resistance at 2700 for a little while before closing at 2699. Maybe the Nasdaq is due for a breather and NFLX and TXN, even though it is not a Nasdaq stock, provide ideal excuses. The other side of the coin is NFLX has been in the tank for a while now and Amazon (AMZN) reports tomorrow after the close and those headlines are far more important to the Nasdaq's near-term fortunes than NFLX.

Nasdaq Chart

As I mentioned earlier, the market benefited from having three positive catalysts on Monday and it is rare that we get a troika of good news on the same day. Oddly enough, there was not really anything substantive to emerge out of Europe over the weekend, but riskier assets reacted positively anyway. European policymakers meet again on Wednesday and if nothing bad comes of that meeting, it will be another excuse to rally. Imagine if they really made progress on the sovereign debt issue? I think we would love to see how stocks would react to that news.

Todd Shriber

New Plays

Heavy Construction

by James Brown

Click here to email James Brown


MdDermott Intl. Inc. - MDR - close: 14.78 change: +0.59

Stop Loss: 13.95
Target(s): 17.90
Current Gain/Loss: unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Worries over a global slowdown seem to be fading. That should make investors more comfortable owning a heavy construction stock like MDR. Shares have been consolidating sideways under resistance near $15.00 for the last couple of weeks. A breakout should signal a new leg higher. I am suggesting a trigger to launch bullish positions at $15.15. If triggered our target is $17.90 since broken support at $18.00 should be resistance.

I do have a few concerns with possible resistance at the simple 100-dma and the exponential 200-dma above. Plus, MDR is due to report earnings in the middle of November. Normally we do not want to hold over the earnings report. If we choose to exit ahead of earnings that's going to impact our time for this trade to work.

FYI: The Point & Figure chart for MDR is bullish with a $24.50 target.

Trigger @ 15.15

Suggested Position: buy MDR stock @ $15.00

- or -

buy the NOV $15 call (MDR1119K15) current ask $0.95

Annotated chart:

Entry on October xx at $ xx.xx
Earnings Date 11/08/11 (unconfirmed)
Average Daily Volume = 4.8 million
Listed on October 24, 2011

In Play Updates and Reviews

NPO Hits Our Target

by James Brown

Click here to email James Brown

Editor's Note:
EnPro Industries hit our exit target today. The stock market delivered another widespread rally.

Our new trades on SPLS and UWM have been triggered. MS was opened as well although shares of MS did not perform very well.


Current Portfolio:

BULLISH Play Updates

Adobe Systems - ADBE - close: 28.20 change: +0.90

Stop Loss: 25.45
Target(s): 29.50
Current Gain/Loss: +3.9%
Time Frame: 6 to 8 weeks
New Positions: see below

10/24 update: ADBE continues to perform well. Shares added another +3.2% and rallied past potential resistance at the 100-dma and the $28.00 level. ADBE is starting to look short-term overbought here. More conservative traders may want to exit near the exponential 200-dma near $28.85. I am not suggesting new positions at this time.

Current Position: Long ADBE @ 27.13

- or -

Long NOV $27 call (ADBE1119K27) Entry $1.27

10/20 new stop loss @ 25.45
10/18 new stop loss @ 25.35, today's bounce looks like an entry
10/14 ADBE gapped higher at $27.13

Entry on October 14 at $27.13
Earnings Date 12/15/11 (unconfirmed)
Average Daily Volume = 7.1 million
Listed on October 11, 2011

Autodesk, Inc. - ADSK - close: 33.05 change: +1.27

Stop Loss: 30.45
Target(s): 33.80
Current Gain/Loss: +8.9%
Time Frame: 6 to 8 weeks
New Positions: see below

10/24 update: ADSK was another strong performer. The stock rallied +3.99%. ADSK seemed to run out of steam halfway through the day and just consolidated sideways near $33 the rest of the session.

Please note our new stop loss at $30.45. More conservative traders may want to raise their stop even higher. Please note that I am adjusting our exit target down to $33.80.

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

10/24 new stop loss @ 30.45, adjust target to $33.80
10/20 ADSK provided another entry point on the dip to $30.00
10/15 new stop loss @ 29.75, adjusted target to $34.00

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: 32.53 change: -0.03

Stop Loss: 31.95
Target(s): 33.50
Current Gain/Loss: +4.5%
Time Frame: 6 to 8 weeks
New Positions: see below

10/24 update: Uh-oh! BMY did not participate in the market's rally today. That's a warning signal. More conservative traders may want to exit immediately. We are raising our stop loss to $31.95. I am not suggesting new positions at this time.

Earlier Comments:
We will plan on exiting this trade on Oct. 26th at the closing bell to avoid holding over the earnings announcement. That's assuming shares do not hit our exit target at $33.50 first. Our stop loss remains at $31.75.

current Position: Long BMY stock @ $31.15

- or -

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

10/24 new stop loss @ 31.95
10/22 plan on exiting October 26th if not sooner
10/17 sold half 2012 Jan. $30 call open (bid) @ 2.90 (+28.3%)
10/15 new stop loss @ 31.75
10/15 Plan to take profits on the call, sell half on Monday
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 10/27/11 (confirmed)
Average Daily Volume = 13.6 million
Listed on September 22, 2011

Lowe's Companies - LOW - close: 21.78 change: -0.35

Stop Loss: 20.90
Target(s): 22.85
Current Gain/Loss: + 4.9%
Time Frame: 4 to 8 weeks
New Positions: see below

10/24 update: Hmmm.... readers may want to exit now. Today's action in LOW looks like a failed rally at the exponential 200-dma. We should probably expect a dip back toward the simple 10-dma near $21.00. I am not suggesting new positions at this time.

Earlier Comments:
I would keep our position size small.

current Position: Long LOW stock @ 20.75

- or -

Long NOV $21 call (LOW1119K21) Entry $0.85

10/22 new stop loss @ 20.90
10/22 Cautious traders may want to take profits now
LOW +6.6%, Nov. $21 call +81%

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

Morgan Stanley - MS - close: 17.15 change: +0.13

Stop Loss: 15.45
Target(s): 19.75
Current Gain/Loss: - 0.8%
Time Frame: 4 to 8 weeks
New Positions: see below

10/24 update: Our MS trade is not off to a very good start. Shares opened higher at $17.30 and then spent the rest of the day consolidating sideways above $17.00. The stock added +0.7% but I would argue that MS did not truly participate in the market's widespread rally. That's a caution signal for us.

Earlier Comments:
Our target is $19.75 but I am concerned the 100-dma might be overhead resistance. FYI: The Point & Figure chart for MS is bullish with a $29 target.

(Small Positions)

Current Position: Long MS stock @ $17.30

- or -

Long NOV $18 call (MS1119K18) Entry $0.72

Entry on October 24 at $17.30
Earnings Date 10/19/11
Average Daily Volume = 42.8 million
Listed on October 22, 2011

VeriFone Systems - PAY - close: 40.13 change: +1.46

Stop Loss: 37.95
Target(s): 44.85
Current Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

10/24 update: I was almost ready to give up on PAY. Our play is still not open yet but shares performed well today with a +3.7% gain. The stock's close over $40.00 and its exponential 200-dma is bullish. Currently our plan is to open bullish positions at $40.50.

Earlier Comments:
We will aim for $44.85 as our exit target. More conservative traders may want to exit near the 200-dma. FYI: The Point & Figure chart for PAY is bullish with a $59 target.

Trigger @ 40.50

Suggested Position: buy PAY stock @ $40.50

- or -

buy the NOV $42 call (PAY1119K42)

Entry on October xx at $ xx.xx
Earnings Date 12/01/11 (unconfirmed)
Average Daily Volume = 2.3 million
Listed on October 13, 2011

Staples Inc. - SPLS - close: 15.09 change: +0.20

Stop Loss: 14.35
Target(s): 16.75
Current Gain/Loss: - 0.1%
Time Frame: 3 to 6 weeks
New Positions: see below

10/24 update: Our new trade on SPLS is now open. Shares rallied past resistance at $15.00 and hit our trigger at $15.11. I would still consider new positions now with the close above $15.00.

Earlier Comments:
Our target is %16.75. However, that might be a little optimistic. The exponential 200-dma could be resistance. Plus, SPLS has two rivals, OMX and ODP, both reporting earnings this week. Results from these companies could have a big impact on SPLS.

current Position: Long SPLS stock @ 15.11

- or -

Long NOV $16 call (SPLS1119K16) Entry $0.30

10/24 trade opened at $15.11 (trigger)

Entry on October 24 at $15.11
Earnings Date 11/15/11 (confirmed)
Average Daily Volume = 9.2 million
Listed on October 22, 2011

Ultra (long) Russell 2000 ETF - UWM - close: 35.03 chg: +2.10

Stop Loss: 29.85
Target(s): 39.00
Current Gain/Loss: +5.3%
Time Frame: 6 to 8 weeks
New Positions: see below

10/24 update: Our new play on the ultra-long small cap Russell 2000 ETF is off to a strong start. Shares gapped open higher at $33.24, hit our trigger at $33.25, and then surged to a +6.3% gain for the day. The late August peak near $36.20 could be potential resistance. I'd wait for a pull back before considering new bullish positions. FYI: The Nov. $35 call actually opened lower at $1.70.

(Small Positions)

Suggested Position: Long UWM stock @ 33.25

- or -

Long NOV $35 call (UWM1119K35) Entry $1.70

10/24 triggered @ 33.25

Entry on October 24 at $33.25
Earnings Date --/--/--
Average Daily Volume = 3.9 million
Listed on October 22, 2011

Financial Sector ETF - XLF - close: 13.42 change: +0.29

Stop Loss: 11.95
Target(s): 14.45
Current Gain/Loss: +5.5%
Time Frame: 6 to 8 weeks
New Positions: see below

10/24 update: Financial stocks continued to rally. The XLF added +2.2%. Yet the rally stalled under the late August peak near $13.50ish. That could be a warning that the rally is tired and stocks are due for a dip. I would wait for a pull back (maybe near $13.00) before considering new positions.

Remember, this sector is currently hostage to the news out of Europe. Trade carefully.

Earlier Comments:
Investors need to be aware that the XLF could see a HUGE move next week as the market reacts to news from the EU summit. That huge move could be up or down. If you are the hedging type then consider buying a put to protect yourself here.

current Position: Long XLF @ $12.71

- or -

Long NOV $13 call (XLF1119K13) $0.42

11/20 trade opened. XLF at $12.71
11/19 try again. New stop loss @ 11.95

Entry on October 20 at $12.71
Earnings Date --/--/--
Average Daily Volume = 125 million
Listed on October 18, 2011

BEARISH Play Updates

None. We do not have any active bearish trades.


EnPro Industries - NPO - close: 33.32 change: +0.93

Stop Loss: 30.40
Target(s): 33.45
Current Gain/Loss: + 8.3%
Time Frame: 2 to 4 weeks
New Positions: see below

10/24 update: Target achieved. NPO surged to $33.64 this afternoon. Our exit target was $33.45.

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

(Small Positions)

closed Position: Long NPO stock @ $30.87, exit $33.45 (+8.3%)

10/24 target hit at $33.45
10/22 new stop loss @ 30.40
10/22 adjusted target to $33.45
10/19 exit Oct. $30 calls, bid @ $1.25 (-28.5%)
10/18 plan to exit Oct. calls tomorrow at the close
10/17 October options are running out of time. Consider an early exit
10/15 adjusted target for stock to $34.00
10/15 adjusted target for option to $33.00
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