Option Investor

Daily Newsletter, Saturday, 12/24/2011

Table of Contents

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

Market Wrap

Santa Melt Up

by Jim Brown

Click here to email Jim Brown

A lack of volume and nice timing on a buy program combined to push the Dow to 12,294 and the S&P exactly to resistance at 1265.

Market Statistics

Volume died after 12:00 on Friday and barely 3.7 billion shares traded for the entire day. Nothing happened after lunch until about 3:40 when a buy program hit the tape and added about 50 points to the Dow. It was strange someone would purposely launch a buy program going into the close on almost nonexistent volume but somebody did it. Perhaps it was somebody short and throwing in the towel to avoid gap up risk on Monday.

The Dow managed to close positive for four consecutive days but a couple of those were in doubt until the end. The melt up rally came on positive economics and a lack of bad news from Europe. Traders were also positioning themselves for the historical Santa Claus rally. The rally is talked about constantly and every blip for the entire month of December is sometimes attributed to the Santa rally. Unfortunately most reporters are wrong.

The official Santa Claus rally period is the last five trading days of the year plus the first two days of the New Year. The Stock Trader's Almanac has tracked this period since 1969 and the average S&P gain is +1.6%. Unfortunately the markets rebounded +3.5% last week so that puts further gains in doubt for next week.

The advance put the Dow up +6.2% for the year and the S&P roughly flat with only a minor +0.61% gain. There was a lot of pain in 2011 to only end the year flat. Sentiment would improve significantly if the Dow could add another +500 points and close at the highs for the year.

Friday's economics were mostly positive and did not give traders any reason to sell ahead of Santa. The Durable Goods for November rose +3.8% compared to -0.7% in October and -1.4% decline in September. Estimates were for a gain of +2.0%. Fortunately most investors only see the headline number and did not look under the hood.

Orders ex-aircraft actually rose only +0.3%. Core capital orders declined -1.2% and shipments subtracted another -1%. The impact from aircraft orders was dramatic because aircraft orders rose +73.3% and mostly from Boeing.

Backorders rose +1.3% and the 11th monthly increase. Analysts believe business investment over the next year will slow as pent up demand weakens. Orders took a big jump after the recession ended and that demand is fading.

The durable goods orders will be a big plus for Q4 GDP which is now being quoted between +3.5% and 4.0% growth.

Personal Income for November rose by +0.1%. That was a disappointment compared to the +0.4% in October and the +0.2% estimates. Consumer spending rose by +0.2%. The savings rate declined slightly to 3.5% from 3.6%. With YTD inflation at the lowest rate since April (+2.5%) consumers are catching a break from the low increases in income.

New home sales in November increased by +1.6% to an annualized pace of 315,000. Sales are up over the same period in 2010 by +9.8%. Of specific importance was the drop in months of inventory on hand to six months. That is the lowest inventory level since 2006. Prices declined by -6% to an average of $214,600.

The headline number was better than expected and caused a minor uptick in market sentiment but the homebuilders lost ground on the overall slow rate of sales. Even if December is a blowout month for sales the total for the year could be at the lowest rate since records were started in 1963. Builders are selling homes but they are doing it by not building and forcing buyers to select from existing inventory. However we did see starts and permits pick up in the last report so they do appear to be planning on having new inventory ready in the spring.

Overall the number of homes for sale has decreased by -20% from a year ago and is still trending lower. Despite record low mortgage rates the number of people who can qualify for a home continues to decline. It could be years before that metric reverses. There is also the overhang from Europe's uncertainty and the U.S. unemployment.

There is a long way to go to return to prior building levels and I doubt it will happen in this decade. Without the loose money lending it could be 7-10 years before consumers rebuild their credit, repossessions fall off their credit report and they can qualify for tight money loans again. Since recessions appear every 3-5 years that could be two recessions from now. Despite that gloomy prediction we are starting to see the sector improve slightly.

New Home Sales Chart

Next week will be another period of low volume and the economic calendar has some decent events that could move the market in light trading. The market is closed on Monday. Tuesday has Consumer Confidence and the Richmond Fed Manufacturing Survey. Neither should rock the market but unexpected surprises could produce moves.

The biggest event for the week is the Italian 3-year bond auction on Wednesday. Rates on the 10-year climbed back to the critical 7% level on Friday and that puts the spotlight on Wednesday's auction. Italy is trying to sell up to 8.5 billion euros in debt. In 2012 Italy has to sell a total of 440 billion euros of debt ($574 billion). Prime Minister Mario Monti was plugging the bonds on Friday saying "It is essential that Italians buy government bonds and treasury bills, whose yields are very high. We must trust ourselves." Good luck with that! Italians are joining other Europeans in withdrawing cash from banks. I seriously doubt they will be using that cash to buy government debt.

Thursday and Friday have the preliminary ISM reports ahead of the national ISM the first week in January. Chicago activity is expected to have declined due to parts shortages from the Thailand flood.

Economic Calendar

In stock news Yahoo (YHOO) said the board was exploring a plan to sell off its Asian assets in a complex deal valued at $17 billion. The deal would transfer Yahoo's 40% ownership in Alibaba back to that company. The 35% stake in Yahoo Japan would be sold to Japan's Softbank Corp. In order to avoid a serious tax bite the buyers would create new companies where they would deposit cash and some other "yet to be named" assets. They would then swap those companies to Yahoo in exchange for the Yahoo assets. That would make the deal tax free if done correctly. Yahoo is trying to structure a deal where it retains 15% of Alibaba.

Private equity firms TPG and Silver Lake have each made separate proposals to Yahoo that would involve those companies buying a minority stake in Yahoo. Those proposals have been fiercely opposed by several major shareholders of Yahoo. Essentially the PE firms would acquire the stake and they leverage up Yahoo and have the company buy back the rest of its stock. This is favored by Jerry Yang because he believes the leveraged buyout would return him to control.

Yahoo shares spiked on the news on Thursday and again at the close on Friday. At Friday's close Yahoo was valued at $20 billion. If $17 billion of that is the Asian assets then the LBO guys could be looking to acquire the U.S. operations on the cheap. I see a shareholder lawsuit ahead.

Yahoo Chart

Shutterfly (SFLY) fell -5% after warning on Q4 earnings. Shutterfly now sees Q4 revenue ranging from $259-$264 million, down from the prior forecast of $270-$275 million. The EBITDA projections fell to a range of $84-$88 million from a prior range of $96-$101 million. CEO Jeffrey Household said, "The uncertain economic environment combined with heavy competitor discounting throughout the peak holiday shopping season, contributed to the shortfalls." Shares declined but failed to give back all of Thursday's gains.

Shutterfly Chart

United Continental (UAL) was weak after analysts cut profit estimates citing weaker than expected revenue. UAL said in a SEC filing on Thursday that it expects consolidated passenger revenue per available seat mile (revpar) to rise from 8.5% to 9.5% in Q4. Analysts were expecting something in the double digits. Analysts said concerns about a recession in Europe were depressing estimates. Dahlman Rose cut Q4 profit estimates to 25-cents from 50-cents to account for lower capacity and traffic. The analyst did say they expected UAL to benefit from the AMR bankruptcy. Ticonderoga Securities cut estimates to 16-cents from 43-cents. The average consensus prior to Friday was 46-cents. UAL dropped sharply on the news but rebounded to close nearly flat.

Delta said last week it was cutting capacity to Europe by 7% due to declining business activity there.

UAL Chart

Mead Johnson (MJN) shares took a serious hit after several other chains announced they were removing the Enfamil Newborn formula from store shelves. A 10-day old Missouri newborn died of a rare bacterial infection that may have been linked to Enfamil. The lot number is ZP1K7G. Wal-Mart, Supervalu, Walgreens, Kroger and Safeway said they have removed the 12.5 ounce cans of that lot. Goldman lowered estimates and price targets for MJN and reiterated a neutral rating.

The source of the bacteria has not been located and so far samples of the formula have tested negative. However, the results of the key tests from formula in the infant's home have not been completed.

Mead Johnson Chart

Rambus rallied +12% on Friday after they announced a patent license agreement with Broadcom (BRCM). The agreement covers the use of Rambus patented innovations in a broad range of products offered by Broadcom. The +12% rally was slim consolation to RMBS shareholders after the huge decline in November. Rambus lost a $4 billion patent suit in mid November against Micron and Hynix Semiconductor. RMBS shares dropped from $18 to $7 on the news.

Rambus Chart

The dollar has been flat for the last three days and that has allowed the commodities to flat line as well. Silver closed at $29.10, gold $1,608 and copper $3.45. That is actually a rally for copper from $3.25 just over a week ago.

Crude oil has managed to rally over the last week to close just below $100 with resistance at $102. The positive economics are helping but this remains a security rally. Iran is in the news every day with some new threat. They are holding 10-days of war games in the Strait of Hormuz starting this weekend. Syria is shifting into massacre mode plus protests in Egypt, tribal fighting in Libya and riots in Nigeria. Massive bombings are now hitting Iraq nearly every day claiming hundreds of lives and disrupting the fragile peace. How can you expect international oil companies to completely renovate the oil fields with 25-50 people getting killed by terrorists every day? Global inventories are at multiyear lows for this time of year and U.S. inventories could decline next week to levels not seen since December 2008. If economic conditions continue to improve and China shows a new spark in activity we could see oil break through that $102 barrier. It is very close already and all we need is a little more in the way of headlines. Energy stocks are pretty close to the top of every list produced by analysts for 2012. On Friday one analyst called oil a "storehouse of wealth" that is being consumed faster than it is being found with no change in sight.

More than 30% of Americans are expected to travel this weekend. That is 92 million people using planes, trains and automobiles and all powered by crude products.

Crude Oil Chart

The risk to the Santa Claus rally will come from Europe. S&P, Moody's and Fitch have all warned of potential downgrades to European countries and banks. In this race for headlines you have to believe at least one of them will issue a press release soon with a wholesale set of downgrades. The only thing keeping them from doing it next week is because nobody is paying attention and they could find themselves in trouble for downgrading in a light volume week. That does not mean the threat of downgrades won't keep a lid on the market.

The stocks making new highs are not the normal stocks you would expect to rally in December. Some making new highs on Friday were WMT, MCD, KFT and MRK. I would call those defensive stocks and that suggests the market tone is still cautious and deservedly so.

Despite the defensive posture the Dow and S&P posted their best four day winning streak since mid September. The Dow closed at a new five month high and is apparently in breakout mode. The S&P rallied over downtrend resistance and the 200-day average and came to a dead stop on early December resistance at 1265. That is pretty much the last hurdle to cross before breaking out to new five month highs as well. That would require a close over 1285 and that is entirely possible next week. Unfortunately "possible" and "probable" are two different concepts.

Last week was a holiday sentiment week. The coming week will be a portfolio positioning week for any traders actually at work and that will be a very small number. This would be a good week for the Fed's Plunge Protection Team (PPT) to juice the equity markets with some key buying in the futures and make sure the S&P moves over 1285. The positive sentiment created by a market making new relative highs is enormous.

Without the Fed we could still see a continued melt up into yearend but I am very concerned about January. The new highs in defensive stocks and the comparative underperformance in the Nasdaq suggests managers are just passing time until the new year begins. If nothing spectacular has appeared in Europe or jobless claims start rising dramatically we could see managers fleeing back to cash.

Nobody wants to have a year like John Paulson in 2012. Paulson's Advantage Plus fund is down another -9% through Dec-16th to push losses for the year to 52%. The Paulson Advantage fund declined -6% pushing the total losses for the year to 36%. The average non Paulson fund was down -4.37% through November.

If a superstar like Paulson can lose that kind of money the rest of the fund community must be scared to death to put money at risk. That suggests we could see a mass exodus in January if we get more bad headlines out of Europe. The reverse of that situation could be a better than expected payroll report for December (Jan-6th) and another gain in the national ISM (Jan-3rd). If managers really believe the U.S. recovery is accelerating they might be willing to stick with the market a little longer.

Lastly, the horrible market volatility over the last six months may have shaken out the weak holders and managers with a longer term view may be willing to add to positions in January. There are numerous potential scenarios for January and next week will be the opening act.

A famous Wall Street saying goes like this. If Santa should fail to call, bears may come to Broad and Wall. Historically when there is no Santa Claus rally the next several months are negative. As a macro analyst I believe it is impossible to count up all the different events over the last year and those facing us today and then compare them "historically" to any other late December rally, BUT historical trends are trends for a reason. They tend to repeat often enough to become recognized. The Santa rally comes from managers investing year end retirement contributions and individuals putting their holiday bonuses to work. Bonuses this year have seen a significant haircut.

I think investors want to believe there are better times ahead and may be willing to put some money on the line in hopes they are right. Unfortunately hope is not a valid trading strategy. However, if you analyze the facts and then make an educated guess it is not called hope. It is called investing. Of course we all hope our investments work out well but that is after we intelligently weigh the facts and predicted the outcome.

I believe the facts are jumbled today. Europe is not going away although last week's ECB loan program made a significant dent in the liquidity problem. The proof will be in the Italian debt auction on Wednesday. A successful auction could go a long way towards improving European sentiment. A failed auction puts us right back in trouble again.

The U.S. is improving but at a snail's pace. Random economic reports still show unexpected declines while others are improving rapidly. We need ALL the reports to improve in order to increase investor confidence.

All of these individual data points are factored into the market. We are told the market looks six months into the future. Lately I sometimes think six days would be a stretch. Every new data point works to adjust that future outlook. That outlook today is still cloudy. There are signs of sunlight peeking through but visibility is still limited.

Numerous companies have warned on earnings and guidance. We are only three weeks from the start of the Q4 earnings cycle. We could see some additional warnings next week from companies hoping the holiday week will provide them limited exposure and they can escape the stock losses normally following a confession.

Bottom line, I would love to see the S&P move higher to a new five month high but I remain skeptical. Hopeful but skeptical. January has a bad record of unexpected declines for whatever reason. For that reason I would trade any Santa Claus rally but be prepared to exit quickly if the markets turn against us in January.

S&P Chart

The Dow broke over Nov/Dec resistance and closed at a new five month high at 12,294. In theory this is bullish confirmation of the rally and the breakout by the Dow transports is further evidence. Several Dow components are setting new highs and the Dow is only 519 points from a new high for the year. Adding +500 points in a holiday week on thin volume would be no small feat. If it did happen it would be headline news. I am not suggesting this will happen but I would be thrilled if it did.

Support is 12,200 followed by 12,000. The next major resistance level is 12,750.

Dow Chart

Dow Transport Chart

The Nasdaq is a serious negative for next week. The Nasdaq has been lagging the big cap indexes by a material amount. Granted this is related to the problems in Thailand but it is still relative to market health. The markets are supported by the three legged stool of techs, financials and energy. Techs are not participating and that leaves us with a short leg and an unstable stool.

The Nasdaq did move over initial resistance at 2600 but it needs to add another 100 points to bring it to the same level as the Dow. The weak Nasdaq chart is a caution flag for next week and into January.

Nasdaq Chart

If the Nasdaq is a caution flag the Russell is a storm warning. The Russell managed only a +0.3% gain on Friday of only 2.47 points. Clearly the blue chips are seeing money flows as they act as the safe deposit boxes for fund cash. Easy in, easy out and a fat dividend while they wait. The Russell small caps are the riskier assets and nobody wanted to play in that arena on Friday.

Resistance is 750 and again at 763 and neither were touched on Friday. The Santa Rally is typically in small cap stocks. Santa was a no-show on Friday despite the gains in the other indexes.

Russell Chart

The broader indexes are lagging the blue chips. The Wilshire 5000 (TMSI or $DWC) is about to test strong resistance at the 200-day (13,239) and the December highs at 13,250. The Dow, S&P and Dow Transports are already above their 200-day levels.

If the TMSI can move over 13,250 it would be bullish for market sentiment. Many traders use the Wilshire/TMSI as their key directional indicator because of its breadth. The Dow can distort the true picture because of its narrow 30 stock base. The TMSI is 5,000 stocks consisting of large and small and all sectors. This is the market.

Wilshire 5000 Chart

Another broad index is the NYSE Composite with 2700+ stocks. It is also lagging the blue chip indexes because of its breadth. It has multiple resistance levels to overcome before catching up to the Dow/S&P.

NYSE Composite Chart

The broader indexes are lagging because there is no conviction in the market. When fund managers and retail traders have faith in market direction they tend to buy the smaller stocks because the returns are greater. As you can tell by the Russell, Wilshire and NYSE the small caps in every flavor are lagging. That means no conviction.

Further evidence can be found in the energy sector. Crude rose intraday on Friday to a two week high of more than $100. However, of the 250 energy stocks I follow every day 75 of them were negative on Friday. With crude in rally mode you would expect the energy sector to follow. There is no conviction.

The lack of conviction is troubling. With no bad news from Europe and mostly positive economic news from the U.S. you would think investors would be adding equities to their portfolio. The volatility of the last six months has scared investors away from the market. They have been hammered with major drops so many times they are shell shocked and waiting in cash. Eventually something is going to wake them up and bring them back to equities. That could be a better than expected payroll report or a successful debt auction by Italy. More than likely it will be a collection of multiple events. That means time must pass while investors collect those events like S&H Green Stamps and once they have their confidence book filled they can start looking for bargains in the market.

Investors expect more volatility despite the VIX at five month lows. Fortunately investor memory is short once the market reaches new highs. Those new high headlines tend to erase large blocks of memory referring to prior losses. Once the markets hit new highs the hopium will begin to flow. I will revisit this line of thought in mid January and try to predict the rest of the quarter.


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Jim Brown

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"Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it."
Will Rogers

New Plays

Leading Transports Higher

by James Brown

Click here to email James Brown

Editor's Note:

In addition to tonight's new play these stocks look interesting and might offer a trade set up soon.

FAST - this stock was showing relative strength on Friday. FAST hit new all-time highs on Friday. My concern is that shares could be short-term overbought.

SBUX - this stock is also trading near all-time highs. I would be tempted to open positions now.

ODFL - this is a transportation stock that closed near all-time highs on Friday. The breakout past $40.00 is very positive.

NANO - shares of NANO might be a buy if the stock can breakout past resistance near $18.00.



Trinity Industries - TRN - close: 30.62 change: +0.67

Stop Loss: 28.75
Target(s): 34.75
Current Gain/Loss: unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
TRN operates in the railroad industry. As a sector the transports look poised to breakout past major resistance. Shares of TRN are already leading the way higher. TRN broke out past resistance near $30.00 and its simple 200-dma on Friday. This looks like a new bullish entry point.

I am suggesting we open bullish positions on Tuesday morning but only if both TRN and the S&P 500 index open positive. If the S&P 500 opens flat then we'll base our decision on TRN's open but if the S&P opens down, then no trade. We will use a stop loss at $28.75. Our target is $34.75.

FYI: The Point & Figure chart for TRN is currently bearish but a breakout past $31.00 would produce a new triple-top breakout buy signal.

*See Entry Details Above*

Suggested Position: buy TRN stock @ the open

- or -

buy the Jan $30 call (TRN1221A30) ask $1.75

Annotated chart:

Entry on December xx at $ xx.xx
Earnings Date 02/15/12 (unconfirmed)
Average Daily Volume = 633 thousand
Listed on December 24, 2011

In Play Updates and Reviews

OXM at New 52-week Highs

by James Brown

Click here to email James Brown

Editor's Note:
Actually shares of Oxford Industries (OXM) are hitting new multi-year highs. We want to be ready to exit our OXM position on Tuesday.

The GSK and LRCX trades are open. I am removing RAX and UAL and we're suggesting an early exit on CTRP.


Current Portfolio:

BULLISH Play Updates

GlaxoSmithKline - GSK - close: 45.55 change: +0.43

Stop Loss: 44.40
Target(s): 49.25
Current Gain/Loss: - 0.2%
Time Frame: 6 to 8 weeks
New Positions: see below

12/24 update: Just as expected GSK continued its bullish breakout from the recent sideways consolidation. Shares hit our trigger to open bullish positions at $45.75. I would still consider new positions now.

Our multi-week target is $49.25 (GSK doesn't move very fast).
FYI: The Point & Figure chart for GSK is bullish with a $56 target.

current Position: long GSK stock @ 45.75

- or -

Long Feb $46 call (GSK1218B46) entry $1.05


Entry on December 23 at $45.75
Earnings Date --/--/?? (unconfirmed)
Average Daily Volume = 2.5 million
Listed on December 22, 2011

Lam Research - LRCX - close: 36.93 change: +0.18

Stop Loss: 34.75
Target(s): 39.75
Current Gain/Loss: - 0.2%
Time Frame: 3 to 4 weeks
New Positions: see below

12/24 update: Our LRCX trade is open. After opening higher this morning the stock saw a brief dip toward $36.00 before bouncing and closing up +0.45. I would still consider new positions now. More conservative traders might want to consider a tighter stop loss.

(small positions)

current Position: Long LRCX stock @ $37.02

- or -

Long 2012Jan $38 call (LRCX1221A38) entry $0.60

12/23/11 trade opened.
12/22/11 trade not open yet. try again.


Entry on December 23 at $37.02
Earnings Date 01/25/12 (unconfirmed)
Average Daily Volume = 4.0 million
Listed on December 21, 2011

Oxford Industries Inc. - OXM - close: 44.82 change: +1.74

Stop Loss: 41.90
Target(s): 44.90
Current Gain/Loss: + 5.9%
Time Frame: 3 to 6 weeks
New Positions: see below

12/24 update: Prepare to exit. OXM displayed relative strength on Friday with a +4.0% gain. Shares hit $44.87 intraday. Our exit target is $44.90. More aggressive traders could aim higher. If the market is positive on Tuesday next week I expect OXM to hit our target. Please note that I am raising our stop loss to $41.90.

(small positions)

current Position: long OXM stock @ $42.32

- or -

Long Jan $45 call (OXM1221A45) entry $0.85

12/24/11 new stop loss @ 41.90
12/22/11 new stop loss @ 40.90


Entry on December 19 at $42.32
Earnings Date 03/29/12 (unconfirmed)
Average Daily Volume = 220 thousand
Listed on December 17, 2011

Ross Stores Inc. - ROST - close: 47.66 change: -0.15

Stop Loss: 45.75
Target(s): 51.75
Current Gain/Loss: + 0.4%
Time Frame: 4 to 6 weeks
New Positions: see below

12/24 update: ROST displayed some relative strength on Friday with a +1.2% gain and a breakout past short-term resistance at $48.00. These are new all-time highs for the stock (on a post-split basis). If you were looking for ROST to produce some follow through then this is your entry point.

NOTE: We are adjusting our multi-week target down to $51.75.

current Position: long ROST stock @ 48.05

- or -

Long 2012Jan $50 call (ROST1221A50) entry $0.45

12/24/11 adjusted target to $51.75


Entry on December 21 at $48.05
Earnings Date 03/19/12 (unconfirmed)
Average Daily Volume = 1.1 million
Listed on December 20, 2011

BEARISH Play Updates

Broadcom Corp. - BRCM - close: 29.77 change: -0.01

Stop Loss: 30.25
Target(s): 26.00
Current Gain/Loss: + 2.4%
Time Frame: 6 to 8 weeks
New Positions: see below

12/24 update: BRCM closed virtually unchanged on Friday. Shares continue to struggle with resistance near $30.00. Yet if the market rallies again next week I would expect BRCM to hit our stop loss. Readers will want to seriously consider an early exit now. I am not suggesting new positions at this time.

Suggested Position: short BRCM stock @ $30.53

- or -

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

12/22/11 readers may want to exit early now
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

Electronic Arts - EA - close: 20.71 change: +0.41
(symbol changed from ERTS)

Stop Loss: 21.55
Target(s): 18.05
Current Gain/Loss: - 0.2%
Time Frame: 3 to 6 weeks
New Positions: see below

12/24 update: The large video game stocks were all showing relative strength on Friday (ATVI, TTWO, and EA). Shares of EA rallied +2.0% but they remain under resistance near $21 and its exponential 200-dma near $21.44. The larger pattern on EA is bearish but I am cautious on the short-term. Readers may want to pare back our already small positions. We are lowering our stop loss to $21.55. I am not suggesting new positions at this time.

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

12/24/11 New stop loss on EA at $21.55
12/19/11 ERTS will start trading as EA starting on the 20th


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: 37.98 change: +0.43

Stop Loss: 38.25
Target(s): 32.50
Current Gain/Loss: + 2.8%
Time Frame: 3 to 6 weeks
New Positions: see below

12/24 update: PCAR continues to chip away at our gains (on the stock position, not the option one). Shares inched closer to resistance near $38.00 on Friday. If the market continues to move higher next week then odds are we will see PCAR hit our stop loss at $38.25. More conservative traders may want to exit early now. I am not suggesting new positions at this time.

NOTE: Our 2012Jan $36 puts are now $35.30 puts thanks to the recent dividend.

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

12/22/11 readers may want to exit early now
12/19/11 new stop loss @ 38.25
12/17/11 new stop loss @ 39.05
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

Vera Bradley, Inc. - VRA - close: 32.29 change: +0.69

Stop Loss: 32.55
Target(s): 27.50
Current Gain/Loss: + 2.6%
Time Frame: 3 to 6 weeks
New Positions: see below

12/24 update: As we feared shares of VRA continue to see an oversold bounce. I'm worried the stock could be making a bullish reversal pattern. We need to play on the defensive here. I am suggesting we lower our stop loss down to $32.55. I am not suggesting new positions at this time. More conservative traders may want to exit now.

Earlier Comments:
Traders need to keep in mind this is an aggressive, higher-risk trade. We want to keep our position size very small to limit risk. 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. 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!)

current Position: short VRA stock @ $33.17

12/24/11 new stop loss @ 32.55
12/21/11 new stop loss @ 34.05, readers may want to exit early now to lock in a gain.
12/19/11 new stop loss @ 35.25
12/15/11 this is an aggressive, higher-risk trade.


Entry on December 16 at $33.17
Earnings Date 12/07/11
Average Daily Volume = 796 thousand
Listed on December 15, 2011


Rackspace Hosting - RAX - close: 43.31 change: +0.12

Stop Loss: 43.45
Target(s): 49.75
Current Gain/Loss: unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see below

12/24 update: RAX underperformed the market on Friday. We are choosing to drop it as a candidate. Our trade never opened with a trigger at $45.55. I would keep it on your watch list to see if shares can breakout past the $45.50-46.00 area.

Trigger @ 45.55

Trade did not open

12/24/11 removing RAX as a candidate (unopened)


Entry on December xx at $ xx.xx
Earnings Date 02/09/12 (unconfirmed)
Average Daily Volume = 1.5 million
Listed on December 20, 2011

United Continental Holdings - UAL - close: 19.85 change: -0.41

Stop Loss: 20.35
Target(s): 24.75
Current Gain/Loss: unopened
Time Frame: 4 to 8 weeks
New Positions: see below

12/24 update: We have been concerned about UAL the last few days. The plan was to drop the stock as a trading candidate if shares didn't improve on Friday. Well Friday's relative weakness made it an easy decision. Friday morning the company issued bearish guidance for some of its key metrics. The stock opened lower and spike down to $18.40 before paring its losses.

We are removing UAL as an active candidate.

Trigger @ $21.55 (small positions)

Trade did not open.

12/24/11 We are removing UAL as an active candidate.


Entry on December xx at $ xx.xx
Earnings Date 01/25/12 (unconfirmed)
Average Daily Volume = 7.1 million
Listed on December 17, 2011


Ctrip.com Intl. - CTRP - close: 23.14 change: -0.68

Stop Loss: 24.15
Target(s): 20.25
Current Gain/Loss: - 0.6%
Time Frame: 3 to 6 weeks
New Positions: see below

12/24 update: After a volatile week for CTRP the stock underperformed on Friday with a -2.8% loss. Sharers could be forming a bottom here in the $23-24 zone. The downward momentum has definitely slowed (and almost reversed). I am suggesting we exit early and look elsewhere.

Earlier Comments:
I do consider this an aggressive trade. 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*

closed Position: short CTRP stock @ 23.00, exit 23.14 (-0.6%)

- or -

2012Jan $22.50 PUT (CTRP1221M22.5) entry $1.40 exit 0.85 (-39.8%)

12/24/11 suggesting an early exit
12/22/11 readers may want to exit early now. New stop @ 24.15
12/19/11 new stop loss @ 24.25
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