Option Investor

Daily Newsletter, Thursday, 12/15/2011

Table of Contents

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

Market Wrap

Economics Overcome Europe

by Jim Brown

Click here to email Jim Brown
Good economic news in the U.S. overcame a steady stream of negative news from Europe to lift the markets slightly higher.

Market Statistics

Europe did not crash the markets but conditions did not improve. Bond yields continued to rise and a new crisis has developed. The Italian government will face a new confidence vote on Friday in reaction to the austerity measures imposed by Mario Monti. That confidence vote is suspected to pass but only because the reforms have been severely watered down. The labor reforms have been almost completely eliminated and the opening of previously closed professions were dropped. Monti is finding it is a lot easier to tell people what needs to be done than to actually get them to make the changes.

Spain sold euro six billion in 10-year bonds at a yield of 5.45%. Demand was about twice the 3.5 billion they expected. The yield was neutral but the demand was positive and helped to calm fears that Italy would contaminate Spain.

In the USA the weekly jobless claims surprised to the downside at 366,000 and a drop of -19,000 from the prior week. Last week was revised only slightly higher from 381,000 to 385,000. The drop over the last two weeks is a major acceleration in the recent trend. The number this week is the lowest level in three years.

HOWEVER, in capital letters, very few terminated people will rush out to apply for a new job only two weeks before Christmas. They don't want to go through the hassle of looking for a job over the holidays. Corporations are not hiring although they may be going through the motions. Most workers would look at being laid off two weeks before the holidays as an opportunity for a vacation. Look for claims to accelerate higher the first week in January.

Jobless Claims Chart

The Philly Fed Manufacturing Survey for December was much stronger than expected at 10.3 compared to the prior month at 3.6 and estimates of 5.0. The Philly Fed is a proxy for the national ISM report due out in early January.

This was the third month in positive territory after dipping to -30.7 in August and the current reading is the highest since April. New orders rose to 9.7 from 1.3 and back orders rose from -1.5 to +7.2.

This was a bullish report and suggests the manufacturing sector is accelerating as we head into 2012.

Philly Fed Chart

The New York Empire Manufacturing Survey for December rose to 9.5 from 0.6 and three times the consensus estimates of 3.0. This was also a very strong report suggesting economic activity is accelerating. New orders rose to +5.1 from -2.1 after being in negative territory for six months. Backorders declined to -15.1 from -7.3 and a surprise given the gains in the other components. The employment component picked up sharply from -3.7 to +2.3. Job growth in the region has improved consumer confidence and that shows in the increased activity.

NY Empire Chart

The November Producer Price Index (PPI) rose by +0.3% compared to estimates of +0.2%. Several analysts had expected it to be flat or down for the month. The spike was related to a big jump in food prices including vegetables, meat and poultry. Excluding food and energy the core rate rose only +0.1%. Prices of core intermediate goods declined and crude goods declined -2.5. The headline gain of +0.3% offset a -0.3% decline in October. Since the headline gain was limited to only a couple components it would appear inflation is going to continue lower.

Industrial production was the black sheep of the economic group today. Production declined -0.2% for November after a +0.7% gain in October. Manufacturing output fell -0.4% and the first decline since April, led by a -3.4% drop in auto production. Floods in Thailand caused parts shortages just as the automakers were recovering from the Japanese quake. Because this was basically a weather event most analysts ignored the production decline.

The SEMI Book-to-Bill for November rose to 0.83 from 0.74. This was the second consecutive monthly gain. For every $100 in product shipped they received $83 in new orders. New orders rose +5.0% and shipments declined -6.7%. Demand for consumer electronics continues to grow with well over 100 million units of phones, tablets, iPods, etc expected to be sold in Q4. Despite the warnings from Texas Instruments it would appear things are looking up in the chip sector. Broadcom (BRCM) raised guidance with earnings this week.

There was an acquisition in the chip sector today with Lam Research (LRCX) acquiring Novellus for $3.2 billion. Novellus shareholders will 1.125 shares of Lam stock for each Novellus share. That represents a 28% premium over Wednesday's closing prices. The acquisition will close in Q2.

Novellus Chart

FedEx (FDX) reported earnings of $1.57 per share compared to 89-cents in the year ago quarter. The earnings beat street estimates of $1.53. Revenue rose +10% to $10.59 billion. The company guided higher for the current quarter. The FedEx guidance roughly corresponded with the National Retail Federation's expectations for holiday sales in Nov and Dec to rise +3.8% to $469.1 billion. That is above the +2.8% forecast made in October. FedEx said it shipped over 17 million packages on Dec 12th. They also announced they were buying 27 new Boeing 767-300 aircraft with the first to arrive in 2014. They will replace some planes as old as 40 years. They also announced they were delaying the purchase of 11 Boeing 777 freighters because of slowing demand in Asia. That is a key factoid that we should remember in future economic discussions. I have reported before that shipments to Europe from Asia had declined -20%. Here is further proof from FedEx.

FedEx Chart

Deckers (DECK) was downgraded to underperform from buy at Sterne Agee. The analyst said channel checks indicate disappointing UGG results. The firm believes there could be order cancellations in Q1 due to high inventory levels. They put a price target of $72 on the $95 stock. DECK declined -$9 on the downgrade to close at $86. Lazard Capital defended Deckers saying their order book was strong.

Deckers Chart

Honeywell (HON) reported earnings and reiterated guidance for all of 2011 at $36.5 billion, an increase of +13% and earnings of $4.03, a +43% increase. Prior guidance was $3.85 to $4.00. Guidance for 2012 rose +6% to 12% to between $4.25 and $4.50. HON shares rose slightly on the positive report.

Research in Motion (RIMM) reported earnings that beat the lowered street estimates but their guidance was negative. RIMM posted earnings of $1.27 compared to estimates of $1.19. Revenue was $5.2 billion compared to estimates of $5.27 billion. They guided for revenue of $4.6 to $4.9 billion compared to analyst estimates of $5.1 billion. They expect to sell 11-12 million devices in the quarter. Analysts said the number of devices should have been 20-25% higher for the holiday quarter. They took a $54 million charge for the outage early in Q4. They also took a huge charge for writing down the value of their Playbook inventory. They also warned they were delaying the shipment of the new QNX-based Blackberry 10 phones until the "latter part" of 2012. They had been expected in Q1. Shares of RIMM declined to $14 after the earnings.

RIMM Chart

Adobe (ADBE) posted earnings after the bell of 67-cents compared to estimates of 60-cents. Revenue was $1.15 billion and a +14% increase. The company said 2012 would be a transition year as it moves away from Flash and shifts toward other types of software including a strong emphasis on the cloud. Adobe guided to 54-59 cents for the current quarter. Shares rose +3% after the report.

Adobe Chart

Zynga priced its IPO after the bell at $10 and the high end of its range. They are selling 100 million shares to raise $1 billion. This values the company around $7 billion, about equal with ERTS but less than ATVI at $14 billion. Zynga has 54 million active customers and more than the next 14 game companies combined. It has not monetized those customers yet and receives only 5% of its revenue from advertising. The ticker symbol will be ZNGA.

The market spiked at the open on the better than expected economic news but that was the high of the day. There was very little interest in trading for the day before option expiration. Volume was light at 6.7 billion shares with only a slight edge for advancers over decliners.

I believe traders are still wary of the support break on the major indexes and the continued problems in Europe. With Friday OpEx and the majority of traders planning to head for the malls next week instead of trading stocks there is little to stimulate trading.

Commodity funds have been sellers. Hedge funds have been sellers. Individuals have been selling. Nobody really believes Europe is fixed and they are just waiting for the next shoe or country to drop. Spain's debt auction today was a positive step but Italy's confidence vote on Friday could be a setback.

I think traders are probably done until after Christmas. They may start bargain hunting again on the 27th but most will likely wait until the new year in hopes of picking up some January bargains.

The S&P spiked to resistance at 1225 and it was rock solid. That killed the day right from the start. It was all downhill from there. Support intraday was 1215 but the conventional wisdom is suggesting a retest of 1200 and quite a few analysts believe it will fail with a retest of 1160 the real target.

Since sentiment has switched from bullish to bearish over the last week the risk is for a counter trend rebound. We did not see any support of that theory today so I would not hold my breath. The Adobe earnings after the close were positive but probably not enough to offset the negative sentiment from RIMM.

I would not be loading up on longs here although I am itching to buy some oil and gold. We may get a chance to buy those lower since critical support levels have been broken. Overall I would suggest shopping at the mall on Friday instead of the stock market.

S&P Chart - 5 min

S&P Chart - 90 Min

The Dow failed to hit 12,000 on the opening spike and while it traded better than the other indexes it was still lackluster. Initial support is now 11,800 and I believe we could easily retest 11,600 on any further negative news from Europe. The key level to watch on the upside is 12,000. It would take a move over that level to produce any real buying interest. The opening gain was +144 and it barely closed positive at +45.

Dow Chart

The Nasdaq failed to make a lower low but the opening spike of +27 points ended the day with a gain of less than two points. Intraday support at 2540 was exactly where the Nasdaq closed and I am surprised it did not close negative.

The chip stocks were weak despite the LRCX/NVLS deal and although tech stocks typically do well in December the worry over the disk drive shortage continues to weigh on the tech sector.

Support at 2530 is the key level to watch. A break there would target 3500 or even 2450.

Nasdaq Chart

Overall I am slightly bearish on the market. I believe we could see a short term rebound but today was definitely not a promise of things to come. However, it was not a down day. It was a consolidation day ahead of option expiration. I believe the volatility of the last week knocked most option traders out of the market. That would definitely be true for any longs. The shorts and put holders will have to bail on Friday and that could produce a positive bounce at the open.

You have to wonder if the weekend event risk will keep what few traders that are left from placing any material bets on Friday. I would think the odds are good it will be a lackluster day unless something happens to cause a new short squeeze. Since that squeeze did not appear on Thursday's opening spike the odds of a strong squeeze on Friday are slim.

If you have to be in the market take small positions and exit early.

The Ultimate Investor Newsletter

We are adding a new publication to the End of Year special this year. Option Investor and Premier Investor have gravitated over the years to shorter term trades. I am launching a different type of newsletter for longer term investors that don't want to be managing trades every day. The types of positions in the Ultimate Investor could last from weeks to months depending on the position. These will be lower volatility "investments" rather than trades.

This newsletter will focus on "story stocks" and special situations that provide us with a low risk opportunity to profit. An example would be a long term call option on Hewlett Packard when they fired their CEO and hired Meg Whitman to turn the company around. That would be a 3-6 month position. Another example would have been taking a position in Yahoo when Carol Bartz was fired and the company put up for sale. We will also take positions in stocks ripe for a takeover as we have seen in the oil sector with Global Industries (GLBL) and Brigham Exploration (BEXP).

Click here for Full Description of Ultimate Investor

Ultimate Investor will use all investment strategies including stocks, options of all types, spreads, etc. The type of strategy used will fit the special situation we are targeting.

This will be an investment newsletter rather than a trading newsletter. If market volatility has gotten you down then maybe something with a longer focus is what you need.

Subscribers to the End of Year Special below will receive six months of the Ultimate Investor Newsletter as well.

Have You Renewed Yet?

Every December we offer the best prices of the year on a renewal package of our top newsletters. If you have been a subscriber for several years you know this is the best price and the best deal of the year.

This year we are offering Option Investor, Premier Investor, Leap Trader, Option Writer and our new newsletter starting in January, Ultimate Investor.

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Jim Brown

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New Plays

Out of Fashion

by James Brown

Click here to email James Brown

Editor's Note:

In addition to tonight's new play these stocks caught my eye. Consider them potential trading ideas.

BAS - oil service stocks are underperforming. BAS is breaking down under its November lows. It could fall toward the October lows.

BJRI - a breakdown under the $44.00 level might be a bearish entry point.

ESRX - The stock is breaking technical support at the 50-dma and its trendline of higher lows. You could argue it has also formed a bearish head-and-shoulders pattern (with a tilted neckline).

RVBD - this tech stock is also showing relative weakness and has broken down under its November lows.



Vera Bradley, Inc. - VRA - close: 33.17 change: -0.59

Stop Loss: 36.05
Target(s): 27.50
Current Gain/Loss: +0.0%
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
VRA makes women's apparel. Shares have been struggling with a bearish trend of lower highs and lower lows. VRA underperformed the market today with a -1.7% decline. Before I continue I have to warn you that this is an aggressive, higher-risk trade. The most recent data listed short interest at almost 80% of VRA's very small 19.7 million share float. If there is some sort of unexpected rally in this stock it could spark a short squeeze and stops may not work very well in a fast market environment. I would suggest using put options in a situation like this to limit your risk but the spreads on the January puts are too wide.

I am suggesting very small bearish positions at the open tomorrow morning. We'll use a wide, aggressive stop loss at $36.05. Our target is $27.50 although readers may want to take profits near $30.00 since it could prove to be round-number support. FYI: The Point & Figure chart for VRA is bearish with a $26 target.

(very small positions only!)

Suggested Position: short VRA stock @ the open

12/15/11 this is an aggressive, higher-risk trade.

Annotated chart:

Entry on December xx at $ xx.xx
Earnings Date 12/07/11
Average Daily Volume = 796 thousand
Listed on December 15, 2011

In Play Updates and Reviews

Stocks Bounce After -3% Drop

by James Brown

Click here to email James Brown

Editor's Note:
The S&P 500 was down -3% for the week until the market finally bounced on some decent economic data this morning.


Current Portfolio:

BULLISH Play Updates

AirMedia Group Inc. - AMCN - close: 3.46 change: -0.02

Stop Loss: 3.30
Target(s): 4.90
Current Gain/Loss: - 6.4%
Time Frame: 8 to 10 weeks
New Positions: see below

12/15 update: AMCN traded sideways all day and closed virtually unchanged on the session. The stock is holding above its simple 200-dma but I remain cautious after yesterday's reversal lower. I am not suggesting new positions at this time.

Earlier Comments:
Let's keep our position size small to limit our risk.

(small positions)

current Position: long AMCN stock @ 3.70

Entry on December 13 at $3.70
Earnings Date 03/05/12 (unconfirmed)
Average Daily Volume = 170 thousand
Listed on December 12, 2011

AutoNation Inc. - AN - close: 35.99 change: +0.25

Stop Loss: 34.95
Target(s): 39.50
Current Gain/Loss: + 4.4%
Time Frame: 6 to 8 weeks
New Positions: see below

12/15 update: AN recovered a fourth of yesterday's decline. Shares remain inside this $35.00-37.50 trading range. We are raising our stop loss to $34.95. Readers may want to exit early now to lock in a gain. I am not suggesting new positions at this time.

Earlier Comments:
Our multi-week target is $39.50. More conservative traders may want to exit in the $37.75 region instead.

current Position: Long AN stock @ $34.45

- or -

Long Jan $35 call (AN1221A35) Entry $1.95

12/15/11 new stop loss @ 34.95
12/03/11 new stop loss @ 34.75
11/30/11 new stop loss @ 33.45

Entry on November 22 at $34.45
Earnings Date 02/02/12 (unconfirmed)
Average Daily Volume = 1.3 million
Listed on November 21, 2011

Activision Blizzard, Inc. - ATVI - close: 11.86 change: +0.10

Stop Loss: 11.69
Target(s): 13.45
Current Gain/Loss: - 3.5%
Time Frame: 4 to 8 weeks
New Positions: see below

12/15 update: There was no follow through lower on yesterday's sharp decline. It could be traders buying the dip at technical support near the simple 200-dma. I remain cautious. Conservative traders may want to exit now to limit any losses. I am not suggesting new positions at this time.

current Position: Long ATVI stock @ $12.30

- or -

Long FEB $13 call (ATVI1218B13) Entry $0.42

12/10/11 new stop loss @ 11.69
11/30/11 trade open. ATVI gaps higher at $12.30
11/29/11 ATVI gapped open lower. Trade not open yet.

Entry on November 30 at $12.30
Earnings Date 02/09/12 (unconfirmed)
Average Daily Volume = 14.9 million
Listed on November 28, 2011

BEARISH Play Updates

Broadcom Corp. - BRCM - close: 28.16 change: -0.29

Stop Loss: 30.25
Target(s): 26.00
Current Gain/Loss: + 7.7%
Time Frame: 6 to 8 weeks
New Positions: see below

12/15 update: The combination of a positive market this morning and some optimistic analyst comments on BRCM helped propel the stock higher. Unfortunately for the bulls the gap open gains didn't last. Shares faded lower to a -1.0% decline.

I am not suggesting new positions at this time.

Our target is $26.00 although more aggressive traders could aim lower. FYI: The Point & Figure chart for BRCM is bearish with a $21.00 target.

Suggested Position: short BRCM stock @ $30.53

- or -

Long 2012Jan $28 PUT (BRCM1221M28) Entry $0.88

12/14/11 new stop loss @ 30.25
12/13/11 new stop loss @ 30.55
12/12/11 new stop loss @ 31.20
12/05/11 BRCM gapped open higher at $30.53.

Entry on December 05 at $ 30.53
Earnings Date --/--/-- (unconfirmed)
Average Daily Volume = 8.2 million
Listed on December 03, 2011

Cash America Intl. - CSH - close: 46.09 change: +0.77

Stop Loss: 47.25
Target(s): 40.25
Current Gain/Loss: unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

12/15 update: CSH saw an oversold bounce of +1.6% but that's not surprising with the stock sitting on support near $45.00. I am suggesting a trigger to open bearish positions at $44.75 with a stop loss $47.25. Our target is $40.25.
FYI: The Point & Figure chart for CSH is bearish with a $33 target.

Trigger @ 44.75

Suggested Position: short CSH stock @ 44.75

- or -

buy the Jan $45 put (CSH1221M45)

Entry on December xx at $ xx.xx
Earnings Date 01/26/12 (unconfirmed)
Average Daily Volume = 331 thousand
Listed on December 14, 2011

Ctrip.com Intl. - CTRP - close: 23.00 change: -0.00

Stop Loss: 25.05
Target(s): 20.25
Current Gain/Loss: + 0.0%
Time Frame: 3 to 6 weeks
New Positions: see below

12/15 update: CTRP inched to a new 52-week low of $22.80 before bouncing back and closing unchanged on the session at $23.00. The path of least resistance still appears to be down. More conservative traders may want to lower their stops closer to the $24.00 level.

Earlier Comments:
I do consider this an aggressive trade because CTRP is arguably still short-term oversold here six-days of losses (prior to Friday's bounce). We will use a stop loss at $25.05. You may want to use a tighter stop loss. We are aiming for $20.25. FYI: The Point & Figure chart for CTRP is bearish with a $9.00 target. Note: We want to keep our position size small to limit our risk. CTRP can be a volatile stock and short interest is nearing 10% of the float.

*Small Positions*

current Position: short CTRP stock @ 23.00

- or -

Long 2012Jan $22.50 PUT (CTRP1221M22.5) entry $1.40

12/13/11 readers may want to exit early. CTRP is not cooperating.
12/12/11 CTRP gapped open lower @ 23.00

Entry on December 12 at $23.00
Earnings Date 02/13/12 (unconfirmed)
Average Daily Volume = 5.2 million
Listed on December 10, 2011

Electronic Arts - ERTS - close: 20.92 change: +0.58

Stop Loss: 22.05
Target(s): 18.05
Current Gain/Loss: - 1.3%
Time Frame: 3 to 6 weeks
New Positions: see below

12/15 update: This is a new entry point for bears on ERTS. The stock has produced an oversold bounce (+2.8%) that stalled near the $21.00 level. As prior support this is new resistance and I would use this move as a new entry point.

FYI: ERTS announced that its ticker symbol will change to "EA" starting on December 20th.

Earlier Comments:
Our multi-week target is $18.05. I would expect possible support at $20.00 and $19.00. This trade is going to take some patience. Let's keep our position size small.

(small positions)

current Position: short ERTS stock @ 20.65

- or -

Long 2012Jan $20 PUT (ERTS1221M20) entry $1.05

Entry on December 14 at $20.65
Earnings Date 02/01/12 (unconfirmed)
Average Daily Volume = 5.7 million
Listed on December 13, 2011

PACCAR Inc. - PCAR - close: 36.38 change: -0.20

Stop Loss: 40.55
Target(s): 32.50
Current Gain/Loss: + 6.9%
Time Frame: 3 to 6 weeks
New Positions: see below

12/15 update: PCAR posted a 90-cent drop but if you look at your quotes the stock only fell 20 cents. That's because the stock began trading ex-dividend for their quarterly cash dividend of 70 cents today. Today's move is still a new relative low so I'm not complaining. The stock is arguably short-term oversold. I am not suggesting new positions at this time.

NOTE: Our 2012Jan $36 puts are now $35.30 puts.

Earlier Comments:
More aggressive traders could place their stop above $41.30 instead. There is possible support near $36.75, near its November low, but we're aiming for $32.50.

(Small Positions)

current Position: short PCAR stock @ $39.11

- or -

Long 2012Jan $35.30 PUT (PCAR1221M35.3) Entry $0.80

12/15/11 thanks to a 70-cent dividend our 2012Jan $36 puts are now 35.30 puts.

Entry on December 09 at $39.11
Earnings Date 02/01/12 (unconfirmed)
Average Daily Volume = 2.7 million
Listed on December 08, 2011

AT&T Inc. - T - close: 28.79 change: -0.02

Stop Loss: 30.05
Target(s): 24.25 or 22.75
Current Gain/Loss: + 2.0%
Time Frame: 6 to 9 weeks or more
New Positions: see below

12/15 update: AT&T appears to be drifting lower, albeit at a glacial pace. I am not suggesting new positions at current levels. More conservative traders may want to lower their stop toward $29.60, just above the simple 200-dma.

current Position: short T stock @ 29.40

- or -

Long 2012Jan $27.50 PUT (T1221M27.5) Entry $0.31

- or -

Long Mar $26 PUT (T1217O26) Entry $0.42

Entry on December 07 at $29.40
Earnings Date 01/26/12 (unconfirmed)
Average Daily Volume = 23.4 million
Listed on November 26, 2011