Option Investor

Daily Newsletter, Thursday, 1/12/2012

Table of Contents

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

Market Wrap

Stealth Rally Continues

by Jim Brown

Click here to email Jim Brown
Weak economics offset positive news from Europe but the early morning dip was again bought and all markets closed with minor gains.

Market Statistics

Unbelievable auction results from Italy and Spain over powered weak economics in the USA. Spain sold euro 10 billion in 2015 and 2016 bonds with demand very strong and the amount sold was double the initial target. Italy sold euro 12 billion in a heavily bid auction.

Yields on Italian 12-month bonds fell sharply to 2.735%, down from last month's rate of 5.95%. Four month bond yields declined to 1.644% from 3.251% in the last auction. Spanish yields did not fall as far with the 10-year falling to 5.15% from 5.32%.

The key here was the 489 million euros loaned to 523 European banks for three years at 1% in December. These LTRO loans provided significant liquidity for the banks and they put that to work buying short term sovereign debt. Note that the debt for less than three years in duration fell sharply while the 10-year paper barely dipped at all. European banks don't believe Italy will default over the next 4-12 months so they were eager to put their 1% money to work at 2.7%. That is exactly what the ECB thought would happen when it made the loans. I reported at the time the LTRO loans were an indirect bailout of those weak countries and it appears to be working. The proof of this is in the results for the longer term debt due to be auctioned on Friday. If the yields remain high as I expect it will be a clear signal the LTRO loans were the factor in Thursday's auctions.

The ECB will offer LTRO loans again in February so the liquidity issues in Europe sovereign debt appear to be easing and that removes the headline risk for our markets.

The U.S. economics were headlined by a sharp jump in weekly jobless claims. The headline number rose to 399,000 from an upwardly revised 375,000 last week. The 24,000 increase was reported as "unexpected" by the market reporters. If you have been reading my commentary you know we did expect claims to jump this week and next because of all the seasonal workers filing new claims and those regular workers laid off just before the holidays waiting until January to start looking for new work. The "unexpected" label was only used by the "uninformed." I was surprised the numbers were not worse.

Jobless Claims Chart

Retail sales for December provided an even bigger hit to market sentiment after the headline number showed only a +0.1% gain. That was significantly less than expected at +0.3% and definitely less than the whisper numbers at +0.4% to 0.5%.

Even worse, if you extract auto sales the core rate actually saw sales decline by -0.2%. Year over year sales growth slowed to +6.5% and the worst since August 2010. Electronics sales declined -3.9% and general merchandisers -0.8%. Gasoline stations declined -1.6% but that is actually a good thing since it means less pain at the pump. Analysts blamed the decline in electronics sales on slowing orders for iPhones and iPads ahead of the spring announcements. Can you say "grasping at straws?" I believe the lower sales came from heavy discounting of prices to attract shoppers. Competition was fierce. If you discount prices by -20% then you have to sell a lot more units to achieve the same dollar amount.

Building materials sales rose +1.6%, motor vehicles and parts +1.5% and home furnishings and furniture rose +1.0%.

Moody's Retail Sales Chart

The Manufacturers Alliance Survey saw outlook decline to 66%, a -1% drop from the prior survey. That is still firmly in expansion territory but well below the 81% in Q2-2010. That was the high for the post recession cycle and this month was the low. Manufacturing conditions may still be improving but the pace of the improvement is slowing.

Order backlogs declined from 73% to 67%. Exports shipments declined from 85% to 71% and export orders declined from 80% to 71%. This was not a bullish report but it has very little market significance because of its lagging nature.

Reports due out on Friday include Import & Export Prices, International Trade and Consumer Sentiment. None are really market movers.

The market event for Friday will be the longer term debt auctions for Italy and Spain. Should those not go well the European cloud over our market will darken. Should yields decline on good auction volume that would be market positive.

The JP Morgan ($JPM) earnings on Friday morning will also be a potential market mover. The estimates are all over the board and the stock closed at a two month high today. If earnings and guidance are good it would benefit the entire banking sector. Conversely, disappointing earnings would be negative for all the big banks. JPM is seen as the best managed major bank and therefore it is the bellwether for the bank earnings cycle. The rally in JPM shares over the last four weeks has already built a lot of expectations in the stock. Strong overhead resistance at $37.50.

JPM Chart

Shares of Tractor Supply (TSCO) rallied +10% to a new high after the company raised guidance significantly. Full year earnings are now expected to be in the range of $2.97 to $2.99 compared to prior guidance of $2.85 to $2.89. Analysts were expecting $2.90. TSCO said Q4 revenue rose +20% to $1.24 billion compared to estimates of +$1.2 billion.

TSCO Chart

Williams Sonoma (WSM) was another retail casualty today with a -12% drop after lowering its earnings forecast to $1.10-$1.15 from $1.15-$1.20 "due to the more promotional pricing environment." Analysts were expecting $1.19. WSM even raised its dividend by 7-cents to 29 cents and added a $225 million stock buyback but the stock was still crushed on five times normal volume.

WSM Chart

Wynn Resorts (WYNN) fell -5% in early trading after a large stockholder sued the company saying WYNN was concealing its books and records from him regarding stock based compensation and donations made by Wynn. The company said the suit had no merit and shares rebounded $5 to close down only -$2.

Infosys (INFY) cut its revenue and earnings outlook due to weakening business sentiment and "raging" uncertainty in Europe. New guidance sees full year revenue growth of +16.4% compared to prior estimates of +17.1% to +19.1%. They also said they had to cut their guidance because of the strength in the dollar and weakness in the euro. INFY shares declined -9%.

INFY Chart

The strong dollar, weak euro is going to be a major challenge for many international companies. IBM declined sharply after the INFY warning but recovered to close down only -1%. IBM may have some exposure but they normally manage their currency translation issues fairly well.

Sears Holding ($SHLD) took another hit this morning after lender CIT said it was halting loans to Sears suppliers. CIT is a factor, someone that loans money on invoices from one company to another. When a large company orders hundreds of thousands or even millions of dollars of product using a purchase order the seller/manufacturer can take that PO to a factor like CIT and borrow money to finance the inventory until Sears pays the bill. CIT said it was no longer loaning money on Sears invoices starting immediately.

Sears fired back in the press saying not to worry because other factors were still eager to loan money against their purchase orders. Sears said CIT loans were less than 5% of their payables. If the factoring business dried up for Sears they would have to draw down on their credit line to pay for some merchandise up front and that would limit their liquidity. Data from Thomson Reuters suggests there is a 77% chance Sears will default in the next five years. Shares of SHLD rebounded to close positive after they publicly responded to the CIT news. I personally think Sears is going to pull out of their dive. Lampert owns 59% of the company and continues to buy shares on the market. The Sears real estate is worth more than the $4 billion market cap of the company.

SHLD Chart

The number of U.S. airlines may shrink by one soon according to some analysts. U.S. Airways (LCC), Delta (DAL) and private equity firm TPG Capital are among several interested parties circling the bankrupt carcass of American Airlines. No deal is likely to be done until AMR completes its bankruptcy and that could take a year or longer. Everyone wants the new lean, mean, flying machine that will emerge from the AMR ashes without a lot of debt and free of its older gas guzzling airplanes. Because American is so large it would probably take a multi airline deal with American's routs system and gates being split up to satisfy regulators. I would not hold my breath for this to happen. American's strength is in its large footprint.

AMR Chart

Dow component Chevron (CVX) warned Wednesday night that Q4 profit would be "significantly below" Q3 results because of weaker profit margins on refining and low natural gas prices. While the exploration and production division should report profits in line with Q3 the low margins in refining will drag the earnings lower. Profits at the Q3 level would not be that bad. Profits in Q3 more than doubled the same period in 2010 at $7.83 billion or $3.92 per share.

Chevron said currency translation problems (dollar/euro) would also be a drag on earnings. This is going to be a continuing theme as earnings accelerate next week.

Chevron Chart

Oil prices fell off a cliff intraday after touching nearly $103 in early trading. The contract fell from just over $102 to $98.50 after news broke the EU was likely to phase in its embargo of Iranian oil rather than provide a firm cutoff date. Despite what appears to be general agreement among euro nations ahead of the Jan 23rd meeting to discuss the embargo, there will likely be a phased in enforcement to allow for receipt of cargos already on the water and to give time to contract replacements elsewhere. The embargo will happen. It is just a matter of time. However, for traders expecting a declaration on the 23rd the comments were somewhat of a letdown. Japan said it was willing to cut its imports significantly but needed to do it gradually. Japan imports 10% of its oil from Iran. Crude declined nearly $4 on the news but is recovering in afterhours trading.

The close at $99 was the low for the year.

Crude Oil Chart - 90 Min

Crude Oil Chart - Daily

The S&P continues to creep slowly higher. However, if it were not for the opening spikes on Jan 3rd and 10th there would be no gains for the year. Those spikes added dozens of points only to see the index trade sideways for days after the event. All the gains for the year occurred in less than 30 min on each of those days.

However, the bears have been unsuccessful in selling those spikes despite numerous negative news events from Europe and earnings. The rally is continuing higher on a wall of worry that appears unable to stop the advance.

The red line in the chart below is the long term uptrend resistance from November 2010. This would be the perfect place for a failure but with 1300 or even 1350 acting as the dangling carrot for traders there is always the possibility of a higher move. There is still no conviction by either side and volume remains light.

The big briar patch for the market will be the thicket of major earnings next week and as we have seen recently there are plenty of thorns mixed in with the roses. With Q4 earnings growth now seen as only +6% and possibly lower there is a lot of bad news already priced into the market.

Note the dead stop at 1,295.

S&P Chart - 30 Min

S&P Chart - Daily

The Dow chart is identical to the S&P with major gains coming only on two days in 2012. The uptrend resistance is the same only the Dow has seen support form at prior resistance of 12,400. The weakness in CVX and IBM was offset by gains in CAT and DD.

Dow component JPM will be the major force for the Dow on Friday with earnings before the open.

Dow Chart - 30 Min

Dow Chart - Daily

The Nasdaq continues to lead to the upside with a quick rebound into positive territory after the opening drop on negative economics. It has failed to move over the October highs but it is moving very close.

Google participated today with a +3 gain but AMZN, JDAS, INFY, SFLY and DMND were definite drags. Despite their declines the Nasdaq was not to be stopped. How much longer can this rally last? The Nasdaq has posted six consecutive days of gains. Next week could be a torture test of tech earnings the Nasdaq must pass to move to higher ground.

Nasdaq Chart

The Russell finally overcame resistance to breakout to a new high even if it was a rather lackluster day. The new five month high suggests fund managers may be starting to drink the kool-aid.

Everyone keeps looking for a top in the market but we are getting a constant improvement in the charts and the dips are being bought.

Russell 2000 Chart - Daily

Friday will be dominated by headlines from JPM and auction news from Italy. It remains a headline driven market with serious event risk over a three day weekend. The U.S. market is closed on Monday.

Traders will have to decide early if they want to be long, short or flat over the long weekend.

Tomorrow is Friday the 13th. Will we get a dose of bad luck or will the curse be broken by a strong rebound on JP Morgan earnings? Consult your crystal ball for the answer.

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Jim Brown

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New Plays

Networking Devices

by James Brown

Click here to email James Brown

Editor's Note:

In addition to tonight's new play these stocks caught my eye and might offer a short-term trading opportunity. You'll notice these stocks are were all showing relative strength today.




Cisco Systems Inc. - CSCO - close: 19.15 change: +0.08

Stop Loss: 18.60
Target(s): 20.75
Current Gain/Loss: unopened
Time Frame: up to CSCO's February earnings
New Positions: Yes, see below

Company Description

Why We Like It:
Networking giant CSCO is on the verge of breaking out past resistance near its late 2011 highs. I am suggesting at trigger to open bullish positions at $19.35. We want to ride the stock up to its early February earnings report but exit prior to the announcement. FYI: The Point & Figure chart for CSCO is bullish with a long-term $27.00 target.

Trigger @ 19.35

Suggested Position: buy CSCO stock @ 19.35

- or -

buy the Feb $20 call (CSCO1218B20) current ask $0.40

Annotated chart:

Entry on January xx at $ xx.xx
Earnings Date 02/08/12 (confirmed)
Average Daily Volume = 39.0 million
Listed on January 12, 2011

In Play Updates and Reviews

Another Widespread Advance

by James Brown

Click here to email James Brown

Editor's Note:
Energy stocks were the exception to the market's widespread gains on Thursday. Almost of all of our active trades inched higher, some outperforming the major indices. This has not been a healthy environment for bearish trades. Readers may want to pare back or exit early any bearish positions.


Current Portfolio:

BULLISH Play Updates

Ball Corp. - BLL - close: 37.82 change: +0.91

Stop Loss: 39.00
Target(s): 36.25
Current Gain/Loss: + 3.4%
Time Frame: up to the earnings report (01/26)
New Positions: see below

01/12 update: BLL outperformed the market with a +2.4% gain thanks to news that J.P.Morgan had upgraded the stock to an "overweight" this morning. BLL rallied toward resistance near $38.00. More conservative traders may want to exit early now to lock in gains. We will raise our stop los up to $36.25. I am not suggesting new positions at this time.

Don't forget that we plan to exit ahead of the late January earnings report.

Earlier Comments:
Our target is $39.00. More conservative traders may want to take profits early near $38.00 instead. FYI: The Point & Figure chart for BLL is currently bearish but a rally past $37.00 would produce a brand new buy signal.

current Position: Long BLL stock @ 36.55

- or -

Long Feb $35 call (BLL1221A35) entry 2.30

01/12/12 new stop loss @ 36.25
01/11/12 new stop loss @ 35.75
01/06/12 trade triggered at $36.55
01/05/12 adjusted stop loss to $35.35, plan to exit prior to earnings

Entry on January 06 at $36.55
Earnings Date 01/26/12 (confirmed)
Average Daily Volume = 985 thousand
Listed on January 03, 2011

Harley-Davidson - HOG - close: 40.75 change: +0.86

Stop Loss: 38.75
Target(s): 44.50
Current Gain/Loss: + 0.9%
Time Frame: up to the earnings report (late January)
New Positions: see below

01/12 update: HOG was also showing some relative strength today. Traders bought the dip this morning at $39.45 and HOG rebounded to a +2.1% gain and a new multi-week high.

Our target is $44.50 but we may have to exit early given our time frame. HOG is tentatively scheduled to report earnings in late January and we do not want to hold over the announcement.

current Position: long HOG stock @ 40.35

- or -

Long Feb $40 call (HOG1221B40) entry $2.06

Entry on January 10 at $40.35
Earnings Date 01/24/12 (unconfirmed)
Average Daily Volume = 1.5 million
Listed on January 05, 2011

PetMed Express Inc. - PETS - close: 10.59 change: +0.04

Stop Loss: 10.20
Target(s): 11.90
Current Gain/Loss: + 0.0%
Time Frame: 6 to 8 weeks
New Positions: see below

01/12 update: If you were hoping to exit at breakeven then this is it. The gap open higher back on January 3rd screwed up our entry point and the stock has finally bounced back to these levels. Shares actually posted their third gain in a row of exactly four cents today. I am not suggesting new positions at this time.

Earlier Comments:
A breakout could spark a short squeeze. The stock could see a short squeeze due to the high amount of short interest. The most recent data listed short interest is almost 26% of the very small 19.8 million-share float.

PETS has potential technical resistance at the simple 150-dma at $10.35. I would keep our position size small to limit our risk. The simple and exponential 200-dma could be significant overhead resistance and PETS struggled with resistance near $11.50 in the past.

NOTE: I would prefer to trade the stock over the options but we're listing the options as an alternative.

(small positions)

current Position: Long PETS stock @ $10.59

- or -

Long Feb $10 call (PETS1218B10) entry $0.74

01/11/12 new stop loss @ 10.20
01/10/12 new stop loss @ 10.10
01/04/12 readers may want to exit early. PETS is not cooperating and the action looks bearish.
01/03/12 PETS gapped higher at $10.59, which is above our trigger at $10.45.

Entry on January 03 at $10.59
Earnings Date 01/23/12 (confirmed)
Average Daily Volume = 231 thousand
Listed on December 27, 2011

Starbucks Corp. - SBUX - close: 47.60 change: +0.48

Stop Loss: 44.90
Target(s): 49.75
Current Gain/Loss: + 3.3%
Time Frame: up to the January earnings report.
New Positions: see below

01/12 update: Another day, another record high for SBUX. Shares are just slowly marching higher. I am raising our stop loss to $44.90. You may want to raise your stop even higher. I am not suggesting new positions at this time.

NOTE: SBUX is tentatively scheduled to report earnings in late January. Normally we prefer to exit prior to any earnings announcement.

Earlier Comments:
Our multi-week target is $49.75. FYI: The Point & Figure chart for SBUX is bullish with a long-term $75 target.

current Position: long SBUX stock @ $46.08

- or -

Long FEB $47 call (SBUX1218B47) entry $1.56

01/12/12 new stop loss @ 44.90
01/11/12 new stop loss @ 44.60
01/07/12 new stop loss @ 43.95

Entry on December 29 at $46.08
Earnings Date 01/25/12 (unconfirmed)
Average Daily Volume = 5.1 million
Listed on December 28, 2011

Textainer Group Holdings - TGH - close: 29.94 change: -0.16

Stop Loss: 28.95
Target(s): 34.00
Current Gain/Loss: unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

01/12 update: TGH spiked to $30.48 this morning before reversing to a -0.5% decline. it's not too surprising to see a little profit taking after yesterday's big bounce. The volume was very low on today's pull back. I don't see any changes from my prior comments.

Earlier Comments:
The stock has been consolidating sideways in the $29.00-30.40 zone for over three weeks. A breakout could spark some short covering. The most recent data listed short interest at 11% of the very small 12.8 million share float. That raises the risk of a short squeeze. Plus, TGH should appeal to the high-yield crowd since shares sport a 4.7% yield.

I am suggesting a trigger to open bullish positions at $30.60 with a stop loss at $28.95. More conservative traders may want to use a stop closer to $29.50 instead.

NOTE: TGH does have options but the spreads are a little wide.

Trigger @ 30.60

Suggested Position: buy TGH stock @ 30.60

Entry on January xx at $ xx.xx
Earnings Date 02/09/12 (unconfirmed)
Average Daily Volume = 172 thousand
Listed on January 11, 2011

Vertex Pharmaceuticals - VRTX - close: 37.07 change: -0.25

Stop Loss: 33.75
Target(s): 39.50
Current Gain/Loss: unopened
Time Frame: up to the February earnings
New Positions: Yes, see below

01/12 update: VRTX saw a little bit of profit taking today but not enough. Traders bought the dip near $36.00 and shares were able to pare their losses.

We are suggesting a buy-the-dip trigger at $35.25 but if VRTX doesn't cooperate soon we'll drop it to make room for another trading idea. If triggered our target is $39.50 but we do not want to hold over the early February earnings report (unconfirmed at this time).

Trigger @ 35.25

Suggested Position: buy VRTX stock @ 35.25

- or -

buy the Feb $35 call (VRTX1218B35)

Entry on January xx at $ xx.xx
Earnings Date 02/02/12 (unconfirmed)
Average Daily Volume = 3.0 million
Listed on January 10, 2011

BEARISH Play Updates

Ctrip.com Intl. - CTRP - close: 23.81 change: +1.17

Stop Loss: 24.05
Target(s): 20.25
Current Gain/Loss: - 4.1%
Time Frame: up to earnings in mid February.
New Positions: see below

01/12 update: If you're a bear the market is not cooperating at least not in CTRP. Shares outperformed the market today with a +5.1% gain. The stock closed just under resistance at $24.00. Today's move was fueled by strong volume, which is a troubling sign if you're bearish.

More conservative traders may want to exit immediately. I am not suggesting new positions at this time.

Earlier Comments:
I do want to warn you that short interest on CTRP is nearing 10% of the float, which raises the risk of a short squeeze. I am suggesting we keep our position size small to limit our risk. More conservative traders can wait for a new relative low under $22.00 as their entry point instead. Our exit target is $20.25. I'm starting this play with a wide stop loss (a.k.a. riskier stop loss) at $24.05. FYI: The Point & Figure chart for CTRP is bearish with a $9.00 target.

Small Positions

current Position: short CTRP stock @ $22.87

- or -

Long Feb $22 PUT (CTRP1218N22) entry $1.20

01/12/12 CTRP is bouncing higher. Readers may want to exit immediately

Entry on January 10 at $22.87
Earnings Date 02/13/12 (unconfirmed)
Average Daily Volume = 1.8 million
Listed on January 09, 2011

Electronic Arts - EA - close: 19.51 change: +0.13

Stop Loss: 21.05
Target(s): 18.00
Current Gain/Loss: + 2.3%
Time Frame: up to the earnings report
New Positions: see below

01/12 update: EA produced a bit of an oversold bounce. Today's +0.6% gain was better than the S&P 500's +0.2% advance. EA should find resistance near the $20.00 level. I am almost tempted to lower our stop toward the $20.50 area. Readers may want to look for a new failed rally near $20.00 before considering new positions.

Our plan was to keep our position size small to limit risk.

Our exit target is $18.00 but we may adjust it as the play progresses. Please note that we want to exit prior to the early February earnings report (still unconfirmed).

(Small Positions)

current Position: short EA stock @ 19.97

- or -

Long 2012Jan $20 PUT (EA1221M20) entry $0.70

Entry on January 09 at $19.97
Earnings Date 02/01/12 (unconfirmed)
Average Daily Volume = 4.9 million
Listed on January 07, 2011

Jos. A Bank Clothiers - JOSB - close: 47.27 change: +0.31

Stop Loss: 48.05
Target(s): 41.00
Current Gain/Loss: - 1.1%
Time Frame: 4 to 6 weeks
New Positions: see below

01/12 update: I am growing concerned with the lack of downward momentum in shares of JOSB. It almost looks like shares are building a short-term bottom near $46.00. If JOSB rallies past $47.50 then it sets up for a run towards the $48.50-50.00 zone. I am lowering our stop loss down to $48.05. More conservative traders may want to just exit early now.

Earlier Comments:
I suspect the path of least resistance is down and I'm not the only one. The most recent data listed short interest at 19% of the small 27.5 million-share float. This high amount of short interest does raise the risk of a short squeeze should the stock suddenly reverse unexpectedly.

Our target is $41.00 but don't be surprised to see a temporary bounce near $44.00. FYI: The Point & Figure chart for JOSB is bearish with a $39.00 target.

(Small Positions)

Suggested Position: short JOSB stock @ 46.75

- or -

Long Feb. $45 PUT (JOSB1218N45) entry $1.55

01/12/12 new stop loss @ 48.05

Entry on January 09 at $46.75
Earnings Date 03/29/12 (unconfirmed)
Average Daily Volume = 236 thousand
Listed on January 07, 2011

Target Corp. - TGT - close: 49.03 change: +0.24

Stop Loss: 50.50
Target(s): 46.05
Current Gain/Loss: - 3.7%
Time Frame: 3 to 6 weeks
New Positions: see below

01/12 update: I cautioned readers to expect a potential oversold bounce back toward the $50.00 area. Fortunately the $50.00 level should be new resistance. A failed rally here can be used as a new bearish entry point.

(small positions)

current Position: short TGT stock @ 48.00

- or -

Long Feb $50 PUT (TGT1218B50) entry $2.65

01/05/12 new stop loss @ 50.50
01/05/12 Our trade was opened on the gap down at $48.00 instead of our trigger at $49.45 thanks to TGT's missed same-store sales numbers and an earnings warning.

Entry on January 05 at $48.00
Earnings Date 02/22/12 (unconfirmed)
Average Daily Volume = 4.6 million
Listed on January 04, 2011