Option Investor

Daily Newsletter, Thursday, 11/3/2011

Table of Contents

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

Market Wrap

Lord of Chaos

by Jim Brown

Click here to email Jim Brown
Greek Prime Minister George Papandreou was called the lord of chaos by a major Greek newspaper but he may not be lord of anything in 48 hours.

Market Statistics

Papandreou went to the G20 meeting where he was hammered for his impromptu call for a referendum on the austerity package. Back at home the opposition was growing with emergency meetings on how to keep the bailout from melting down. The on again, off again vote that would have prevented Greece from getting any further bailout funds until mid December or later, is now off again. The opposition to Papandreou agreed to support the new version of the austerity package if Papandreou agreed to resign. After the vote was cancelled and Papandreou failed to resign the opposition party leader, Antonis Samaras, gave an impassioned speech on the floor of the parliament where he called Papandreou a liar for failing to resign as agreed and asked for members to vote against Papandreou in the no confidence vote scheduled for midnight Friday. With numerous defections from the ruling socialist party it appears Papandreou will be evicted from his position after that vote.

Samaras is calling for snap elections immediately after the confidence vote and for a caretaker government to take control until a real vote for a new PM can be held.

The story in Greece/Europe has been literally changing by the hour. The G20 meeting is also producing some fireworks. Apparently Italy, Spain, France, the USA and the EU Commission is trying to force Germany to allow the ECB to take a larger role in overseeing the financial conditions of the EU countries and be allowed to permanently buy bonds. They want the ECB to take the role of the Federal Reserve and have broader authority and deeper pockets. Germany has been adamantly against letting the ECB have free reign and the ability to take on debt without country approvals. Since Germany is nearly 20% of the EU it would mean any debt incurred by the ECB would be guaranteed up to 20% by Germany. German citizens are already on the hook for $4,100 each for the Ireland, Portugal and Greece bailouts.

The new head of the ECB, Mario Draghi, surprised everyone today with an unexpected quarter point rate cut to 1.25% after the ECB raised rates twice earlier in the year. The surprise cut signaled Draghi could be more reactive to current conditions and stimulating growth rather than constantly worried about inflation, which is currently +3% in Europe. A stimulative ECB could help ease recession worries from the current debt crisis.

I have gotten far more education into the EU and the individual intricacies of the EU countries over the last year than I ever wanted to know. This is driving investors crazy and the alternating triple digit market moves and rampant volatility is making investing about as safe as roulette. At midnight last night I wrote an email to the Option Writer subscribers warning them the futures were down -15 points. By the open they had completely recovered and the Dow gapped up +150 points. This is ridiculous but I think we are nearing a point where Europe will take a back seat once this Papandreou thing has passed.

The market rallied sharply on the rate cut, the abandonment of the Greek referendum and the possibility for a more aggressive ECB. However, economics in the U.S. were also fueling the fire. The weekly Jobless Claims dropped -9,000 to 397,000. If those numbers don't compute from what you remember from last week it is because they revised last week higher by 4,000 to 406,000. The weekly quote and revise cycle makes it nearly impossible to determine a trend on a week to week basis. However, assuming this week is not revised higher it was only the third time under 400K since April.

Jobless Claims

Factory Orders for September rose unexpectedly by +0.3% compared to consensus estimates for a decline of -0.1%. Core capital goods orders rose +2.9%, also not expected. Backorders rose +0.9%. The unexpected improvement in orders suggests Q4 GDP could be slightly higher than expected.

Nonfarm business productivity rose +3.1% in Q3 compared to a decline of -0.7% in Q2. This was also stronger than expected. Production output rose more than hours worked and pushed unit labor costs lower by -2.4%. Since manufacturers can only get a finite amount of production out of existing workers this suggests they will have to hire people soon if business continues to improve.

ISM Nonmanufacturing for October declined by .01 to 52.9 from 53.0. Expectations were for a rise to 53.5. The miniscule decline still left the services sector in growth mode. Analysts pointed out that new orders had been choppy because of the headline events making businesses unsure about the future. Once Europe is not hogging the headlines and the Congressional super committee decision is behind us we should see business begin to improve. Today businesses don't know what the tax and regulation picture is going to look like after year end. The committee could drop a bomb on business with some big change to revenue or it could announce something positive for taxes. Businesses are afraid to expand until the future picture is clear.

ISM Services Chart

The only report due out on Friday is the Nonfarm Payrolls for October. The consensus estimate is for a gain of +100,000. Morgan Stanley is expecting a gain of +125,000. I am not sure it really matters to the market that jobs number could be lower. As long as it is over 50K it should not be a problem. If it is well over 100K it could really provide a boost. The recent economic reports have continued to be marginally better but a gain in employment would be a major boost since the current unemployment is the biggest drain on the economy.

There were a lot of earnings today with some big winners and losers. Este Lauder (EL) reported earnings of $1.41 and severely beating estimates of $1.18. On top of the strong earnings they raised guidance, declared a 2:1 stock split and raised their dividend by 40%. Talk about an outstanding earnings report! EL shares rallied +18% on the news.

Este Lauder Chart

Alpha Natural (ANR) rallied +13% after posting earnings of 35-cents compared to estimates of 4-cents. Revenue more than doubled. The CEO said "despite predictions in the financial markets that the sky was falling in August and September we have not seen any real change in worldwide demand for either met coal or steam coal. On the contrary, China has continued to ramp up its production of steel and set a new record for coal imports in September.

Alpha Chart

Kellogg Co (K) reported earnings that declined -14% on rising commodity costs and plant renovations. Kellogg's also lowered guidance below current expectations. Earnings fell to 80-cents and analysts were expecting 89-cents. Kellogg forecast earnings for the full year to $3.38 and analysts were expecting $3.45.

The biggest disappointment was Abercrombie & Fitch (ANF). Shares of ANF fell -20% after warning of sluggish growth overseas. Everything else was positive in their report. Same store sales rose +7% and revenue rose +21% to $1.08 billion. However, sales fell at stores in Europe, Japan and Canada. The warning was critical because retailers have been counting on international sales to overcome the slow growth in the USA.

Abercrombie Chart

Starbucks (SBUX) reported earnings of 47-cents compared to 37-cents in the year ago quarter. Analysts were expecting 36-cents. It was a blowout quarter for Starbucks. Same store sales in the U.S. rose +10% and +9% globally. Revenue rose +7% to $3 billion. Coffee prices have come down by -20% since September 1st and the CEO projected a strong Q4 as a result. CEO Howard Schultz said they were buying coffee now for the end of 2012 and into the 2013 harvest in order to lock in prices. They are expecting to have their K-cups in every major grocery store chain by year end. Starbucks announced plans to buy back 20 million shares and raised its dividend +31% to 17 cents. It would appear SBUX is on a serious growth spurt.

Starbucks Chart

Linkedin (LNKD) reported earnings after the close and it lost 2-cents per share. That compares to earnings of 2-cents in the year ago quarter. Revenue doubled to $139 million and they added 15.4 million subscribers to bring their total to 131.2 million. The company said it was spending more to expand its business. They also said they were going to sell another $100 million in shares to fund its expansion. Investors were not excited with the earnings or the impending dilution. Shares declined -$8 after the report.

Linkedin Chart

Groupon (GRPN) priced its IPO at $20 per share compared to the expected range of $16-$18. The stock will trade on Friday and analysts either love it or hate it, there appears to be no middle road. Groupon is only selling a small fraction of itself, 4.7%, and that values Groupon at $12.7 billion. Eleven bookrunners are promoting the IPO and that is a record number for any IPO. Quite a few analysts are recommending investors immediately flip any shares they were lucky enough to get. Groupon is $405 million in debt and they IPO will only raise about $700 million. Reportedly vendors running Groupon promotions are not coming back for a repeat offer. For instance if you are selling a service for $100 Groupon will want you to offer it for $50. Of that $50 Groupon gets 50-65% and the vendor the rest. They end up selling their service for something around $20. Groupon has created a class of consumer called Groupon junkies that wait for the next deal for a similar service rather than revisit the initial vendor.

The dollar declined and Euro rose on the potential resolution of the vote question in Greece. The surprise rate cut by the ECB and the comments from Bernanke on Wednesday helped fuel speculation there will be further stimulus both in Europe and the U.S. and that pushed gold higher. The rally triggered some short covering after it broke over technical resistance at $1750. Gold posted a +$36 gain to close at $1765. The breakout over resistance suggests we could see another run at the highs in the coming months.

Gold Chart

Crude oil closed at a three month high on expectations for economic growth, a cheaper dollar and falling inventories in distillates. A break over $95 could trigger additional short covering and a test of $100 once again.

Crude Oil Chart

Friday will be another headline day. Greece will be the headline every hour on the hour as the clock winds down towards the confidence vote at midnight Greece time. That is 6:PM ET. Anything is possible so traders will be cautious going into the close depending on how the news flow is projecting the results.

The U.S. news will be the Nonfarm Payrolls before the open. I think investors are so tired of the negative outlooks and geopolitical headlines they will be hoping for good news but ignoring bad news unless it is very bad.

The S&P rebounded back over 1250 to close at 1261 and a positive jobs report could push it back to the highs from last week. Quite a few analysts believe we could rally into year end if Europe goes quiet. Hedge funds are down about 8.5% for the year into Oct 1st and analysts believe they will chase stocks into year end. The remaining pothole is the super committee deadline on the 23rd. So far it has not impacted the markets since there have been bigger headlines from Europe.

Support is 1225 and resistance 1285.

S&P Chart

The Dow rebounded back over the 200-day average at 11,975 and back into the 12,000s. A decent jobs report and no headlines from Greece could see a return to the resistance high from last week at 12,285. Those are a couple of big "IFs" but it is possible.

Dow Chart

The Nasdaq closed back above the 200-day but it was a lackluster rebound. However, Apple gained +$6 and appears to have built a base at $395. That should encourage investors but it will take a move over $410 to really get the rally started. I would be a buyer of Apple over $410. The positive move in Apple could signal the beginning of a new trend higher for techs.

The Nasdaq needs to move over 2740 to trigger additional short covering. It is very close with the close at 2697.

Nasdaq Chart

The Russell chart is a clone of the Nasdaq and fund managers have not yet begun to buy small caps. A move over 765 is needed to inspire confidence.

Russell 2000 Chart

I am in buy the dip mode again. There are still some headlines in our future and they may not all be positive. However, I think the short term trend should be higher. Remember, Greece will vote on ousting Papandreou at 6:PM ET on Friday. That could impact the sentiment at the close depending on what news flow was like during the day.

Buy the dip, sell too soon.

Jim Brown

Send Jim an email

New Plays

Take A Look at Financials

by James Brown

Click here to email James Brown


Financial SPDR ETF - XLF - close: 13.47 change: +0.23

Stop Loss: 12.45
Target(s): 14.00
Current Gain/Loss: unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Financials have been a volatile sector thanks to all the drama in Europe. We still think there is more upside between here and the end of the year. Of course that will depend on the next episode of the Greek-European soap opera.

Tonight we are suggesting a buy-the-dip entry point to open small bullish positions in the XLF at $12.90 with a stop loss at $12.45. More conservative traders may want to use a stop closer to the simple 50-dma near $12.62 instead. Our multi-week target is $14.00.

buy the dip Trigger @ $12.90 (small positions)

Suggested Position: buy the XLF @ $12.90

- or -

buy the 2012 Jan $13 call (XLF1221A13)

Annotated chart:

Entry on November xx at $ xx.xx
Earnings Date --/--/--
Average Daily Volume = 137 million
Listed on November 3, 2011

In Play Updates and Reviews

Fastenal Hits Our Target FAST

by James Brown

Click here to email James Brown

Editor's Note:
Shares of Fastenal (FAST) hit our upside target a lot quicker than expected. Meanwhile we had CX, HSTM, and IMAX all opened this morning.


Current Portfolio:

BULLISH Play Updates

Beazer Homes - BZH - close: 2.06 change: +0.00

Stop Loss: 1.75
Target(s): 3.25
Current Gain/Loss: -5.9%
Time Frame: 6 to 8 weeks
New Positions: see below

11/03 update: Is that real? Or was that a bad tick? Right around 10:25 a.m. this morning shares of BZH spiked down to $1.79 and then immediately recovered. It looks like just a bad tick. It also looks like a dip to support near its 50-dma.

I don't see any changes from my prior comments. BZH is still consolidating near the $2.00 area and I would still consider new positions here.

Earlier Comments:
We have listed a very high target at $3.25 but I anticipate scaling that down. This is sort of a just-in-case BZH delivers better than expected earnings and the stock explodes kind of target. This industry is very heavily shorted so a short squeeze is a definite possibility.

Please note we are going to take the unusual step and hold over BZH's earnings in November. Normally we try to always exit ahead of earnings to avoid holding over the announcement.

FYI: You could buy calls but the spreads are so wide they could actually increase your risk (but they'll definitely leverage any move higher).

current Position: Long BZH stock @ $2.19

- or -

Long 2012 Jan $3.00 call (BZH1221A3) Entry $0.15

Entry on October 31 at $2.19
Earnings Date 11/15/11 (confirmed)
Average Daily Volume = 2.4 million
Listed on October 29, 2011

CEMEX - CX - close: 4.49 change: +0.27

Stop Loss: 3.89
Target(s): 4.95
Current Gain/Loss: + 0.2%
Time Frame: 6 to 8 weeks
New Positions: see below

11/03 update: Sometimes the gap open is your friend. Sometimes it is your enemy. All of the quote services I checked show CX gapping open this morning at $4.48 but if you look at an intraday chart it looks like CX actually opened at $4.34, spiked down toward $4.05 and then immediately spiked up to $4.48. It was obviously a volatile morning. We will use the official opening price of $4.48 today. Unfortunately that means we get to enjoy none of today's +6.6% gain in CX. More conservative traders may want to wait for a dip into the $4.25-4.00 zone before considering new bullish positions.

*See Entry Details Above*

current Position: Long CX stock @ $4.48

- or -

Long Jan $5 call (CX1221A5) Entry $0.45

11/03 CX gapped open to $4.48 (+6.3%)

Entry on November 3 at $ 4.48
Earnings Date 10/26/11
Average Daily Volume = 20.3 million
Listed on November 2, 2011

Healthstream Inc. - HSTM - close: 15.99 change: +0.48

Stop Loss: 14.25
Target(s): 18.00
Current Gain/Loss: + 1.2%
Time Frame: 6 to 8 weeks
New Positions: see below

11/03 update: Our new play on HSTM is open. Unfortunately the stock's gap open higher this morning took a chunk out of our potential gains. The stock opened at $15.79 and closed at $15.99 (+3.0%) on the session. Nimble traders were given a chance to buy the dip this morning after the initial gap higher. I would wait for a dip into the $15.50-15.00 zone before considering new positions.

Earlier Comments:
Our plan was to keep position sizes small to limit risk. Our target is $18.00. FYI: The Point & Figure chart for HSTM is bullish with a $17.50 target. NOTE: HSTM does have options but the spreads are too wide to trade.

(small positions)

current Position: Long HSTM @ $15.79

11/03 HSTM gapped open higher at $15.79

Entry on November 3 at $15.79
Earnings Date 10/24/11
Average Daily Volume = 134 thousand
Listed on November 2, 2011

IMAX Corp. - IMAX - close: 19.43 change: +0.05

Stop Loss: 17.70
Target(s): 24.50
Current Gain/Loss: + 0.2%
Time Frame: 6 to 8 weeks
New Positions: see below

11/03 update: IMAX underperformed the market today with a sideways consolidation and barely closing in positive territory. I would still consider new positions here while more conservative traders may want to wait for a dip into the $19.00-18.50 zone as their entry point instead. FYI: IMAX opened flat at $19.38 while the S&P 500 opened higher. We are going to consider that a win so the play is opened.

Earlier Comments:
Our multi-week target is $24.50. Keep in mind that the exponential 200-dma could be resistance near $22.50ish. FYI: The Point & Figure chart for IMAX is bullish with a $28.00 target.

Current Position: Long IMAX @ $19.38

- or -

Long DEC $20 call (IMAX1117L20) Entry $1.27

Entry on November 3 at $19.38
Earnings Date 10/27/11
Average Daily Volume = 1.2 million
Listed on November 2, 2011

iShares Russell 2000 ETF - IWM - close: 74.97 change: +1.82

Stop Loss: 67.49
ETF target: 75.75
November Call Target: 73.75
January Call Target: 75.75
Current Gain/Loss: unopened
Time Frame: 2 to 8 weeks
New Positions: Yes, see below

11/03 update: Small caps continue to rally. The IWM gapped open higher, reversed course to fill the gap and then reversed again with a rally the rest of the session. The close over its exponential 200-dma is technically bullish.

The jobs data comes out tomorrow and stocks could see a lot of volatility in reaction to that number. We will keep our buy-the-dip entry point at $69.50 for now.

We are suggesting small bullish positions on a dip at $69.50 with a stop loss at $67.45, which is under the mid October lows. Readers can buy the ETF of you can buy the call options.

Trigger @ 69.50 (small positions)

Suggested Position: buy the IWM @ 69.50
Target: 75.75

- or -

buy the NOV $72 call (IWM1119K72)
Target: 73.75

- or -

buy the JAN $73 call (IWM1221A73)
Target: 75.75

Entry on November xx at $ xx.xx
Earnings Date --/--/--
Average Daily Volume = 84 million
Listed on November 1, 2011

Copper ETN - JJC - close: 46.58 change: +0.22

Stop Loss: 41.90
Target(s): 48.00
Current Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

11/03 update: The JJC copper ETF initially sold off but found support near $45.50 intraday. Shares remain under their 50-dma. I do not see any changes from my prior comments.

We will leave our buy-the-dip entry point at $44.35 with a stop loss if triggered at $41.90. More conservative traders might want to consider a tighter stop loss. Our target is $48.00 although more aggressive traders may want to aim for $50.00 instead.

buy the dip Trigger @ 44.35

Suggested Position: buy the JJC @ 44.35

- or -

buy the NOV $45 call (JJC1119K45)

- or -

buy the JAN $47 call (JJC1221A47)

Entry on November xx at $ xx.xx
Earnings Date --/--/--
Average Daily Volume = 438 thousand
Listed on November 1, 2011

Juniper Networks - JNPR - close: 23.96 change: +0.42

Stop Loss: 21.90
Target(s): 29.00
Current Gain/Loss: + 1.0%
Time Frame: 6 to 8 weeks
New Positions: see below

11/03 update: Traders bought the mid morning dip near $23.00 but JNPR was unable to breakout past resistance near $24.00 and its simple 100-dma. If the stock market gaps higher on the jobs data tomorrow then readers may want to consider launching new positions in JNPR but I would hesitate if JNPR gaps open higher than $24.50.

The plan was to keep positions small to limit our risk.

(small positions)

current Position: Long JNPR stock @ $23.72

- or -

Long JAN $25 call (JNPR1221A25) Entry $1.50

11/02 trade is open. JNPR opened at $23.72
11/01 Try again. New strategy. Buy JNPR if stock and S&P500 opens positive tomorrow, stop loss @ 21.90.
11/01 trade opened at $23.46, stopped out @ 22.75 (-3.0% loss)
option opened @ $1.80, exit $1.36 (-24.4%)
10/29 alternative entry point: dip at $23.00

Entry on November 2 at $23.72
Earnings Date 10/18/11
Average Daily Volume = 13 million
Listed on October 29, 2011

NetApp Inc. - NTAP - close: 41.96 change: +1.71

Stop Loss: 38.40
Target(s): 44.50
Current Gain/Loss: + 5.5%
Time Frame: 2 to 3 weeks
New Positions: see below

11/03 update: It was a big day for NTAP. The stock dipped to $39.76 this morning and then soared to a +4.2% gain with a rally to short-term resistance near $42.00. I am not suggesting new positions at this time. We will raise our stop loss to $38.40.

More conservative traders may want to take profits tomorrow before the close, especially if you're holding the November calls (currently up +78%).

Earlier Comments:
This is going to be a short-term trade. We do not want to hold over the November 16th earnings report. We'll set our target at $44.50 but we'll plan to exit ahead of earnings.

current Position: Long NTAP stock @ 39.75

- or -

Long NOV $40 call (NTAP1119K40) Entry $1.71

11/03 new stop loss @ 38.40
11/01 new stop loss @ 37.25
11/01 NTAP gaps open lower at $39.75, our new entry point.

Entry on November 1 at $39.75
Earnings Date 11/16/11 (confirmed)
Average Daily Volume = 6.8 million
Listed on October 31, 2011

Xilinx Inc. - XLNX - close: 32.42 change: +0.61

Stop Loss: 31.40
Target(s): 35.75
Current Gain/Loss: - 0.2%
Time Frame: 6 to 8 weeks
New Positions: see below

11/03 update: Yesterday the low was $31.62. Today the low in XLNX was $31.65. Traders bought the dip and shares rallied to a +1.9% gain. The close over $32.00 is bullish and I would be tempted to launch new positions here if the market opens positive tomorrow.

Earlier Comments:
The plan was to keep our position size small to limit risk. Our multi-week target is $35.75. FYI: The Point & Figure chart for XLNX is bullish with a $46 target.

(small positions)

Current Position: Long XLNX stock @ 32.50

- or -

Long Jan $35 call (XLNX1221A35) Entry $0.95

Entry on November 1 at $32.50
Earnings Date 10/19/11
Average Daily Volume = 5.0 million
Listed on October 29, 2011

BEARISH Play Updates

Dish Network - DISH - close: 23.68 change: -0.01

Stop Loss: 24.75
Target(s): 21.25
Current Gain/Loss: +6.7%
Time Frame: 4 to 8 weeks
New Positions: see below

11/03 update: DISH continues to underperform the market. There was an early morning spike to $24.30 but the rally quickly faded. DISH consolidated sideways in a narrow range while the rest of the market rallied higher.

More conservative traders may want to exit early on a dip into the $22.50-22.00 zone.

Earlier Comments:
FYI: The Point & Figure chart for DISH is bearish with a $16 target.

current Position: short DISH stock @ $25.38

- or -

Long NOV $25 PUT (DISH1119W25) Entry $1.20

11/01 new stop loss @ 24.75

Entry on October 28 at $25.38
Earnings Date 11/07/11 (confirmed)
Average Daily Volume = 3.0 million
Listed on October 27, 2011


Fastenal Co - FAST - close: 40.13 change: +1.87

Stop Loss: 35.75
Target(s): 39.90
Current Gain/Loss: + 7.3%
Time Frame: 3 to 6 weeks
New Positions: see below

11/03 update: Target achieved. FAST outperformed the market today with a +4.8% gain and a rally past resistance at $40.00. Our exit target was hit at $39.90.

closed Position: Long FAST @ 37.17, exit $39.90 (+7.3%)

- or -

NOV $37.50 call (FAST1119K37.5) Entry $1.00, exit $2.75 (+175.0%)

11/03 exit target hit at $39.90
11/01 FAST gapped open lower at $37.17, trade opened.


Entry on November 1 at $37.17
Earnings Date 01/18/12 (unconfirmed)
Average Daily Volume = 3.0 million
Listed on October 31, 2011