Option Investor

Daily Newsletter, Thursday, 4/12/2012

Table of Contents

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

Market Wrap

Earnings Season Expectations Trumps Data

by Thomas Hughes

Click here to email Thomas Hughes
Economic data weighed on the markets early this morning but seemed to be shrugged off in anticipation of this seasons earnings reports. The market is eagerly awaiting this quarters numbers which have started off OK. Expectations got a boost today when speculation that China's GDP is outpacing estimates. Financial and materials stock led the markets today on renewed hopes of global economic expansion.

Futures were lukewarm today and the market was fairly quiet at the open. Today's economic data was not viewed negatively in the long term. Initial claims for unemployment was a surprise today but the number is skewed due to the Easter holiday. The number is likely to be revised with next weeks data. This weeks number on initial jobless claims jumped 13,000 from last weeks upwardly revised 367,000 to a total of 380,000. Analysts had been expecting claims to decline, a trend which is expected to continue from here. The four week moving average of initial unemployment claims climbed 4,250 to 368,000.

Continuing claims, which lags initial claims by a week, continued to fall. This number fell by 98,000 to 3,251,000 from last weeks revised data.

Total claims for unemployment also fell. Total claims were 6,952,876, 18% lower than the same time period last year.

Other economic data released today was met without fanfare. The Producer Price Index remained flat for the month while core PPI gained .3%, hotter than previously expected. Also, the trade balance shrank by 12% as exports hit a record high. At home, foreclosure rates dropped to the lowest quarterly level since 2007.

The European markets closed higher by more than 1% today, buoyed by US economic data. The FTSE 100 index led with a 1.6% gain followed by the Xetra Dax, 1.18%, and the CAC 40, 1.11%.Earlier, shares had been positive but flat from yesterday on concerns of widening debt issues. Yields on Italian three year bonds have risen more than a percent in the last month on growing concerns the country will continue to struggle with debt. The surprising gain in unemployment claims added to this and other fears the Eurozone debt issues were spreading.

News from Asia was quiet today ahead of tomorrow's expected release of first quarter gdp figures from China. China is expected to release the numbers overnight and there is talk of 9% growth versus the generally expected 8.4% and China's own estimates of growth around 7.5%. China's bank lending has recently reached a new high as signs of credit easing is beginning to gain traction and supporting the chance China could be growing faster than expected.

Royal Dutch Shell (RDS/A) was in the spotlight all day as news from reported oil spill in the Gulf of Mexico claimed attention. A ten square mile spill was reported in overnight news and response teams were sent out to investigate. Shares opened lower today on the US market but traded up on high volume throughout the day as traders awaited further news. Shell stated that it was confident the slick was not from its wells. The stock gained on the days initial loss with high volume.

Google (GOOG) was also in the spotlight as traders and investors awaited the company's earnings release which came after the bell. The stock jumped over 1% at market open and gained throughout the day on strong volume. Google's 1st quarter earnings per share, $10.08, were better than the expected $9.65 per share. Revenue was inline with expectations. The stock traded heavily after hours, surging as much as $10 on the release. Cost per click was down for the quarter but total paid clicks is on the rise. Google also announced a planned 2:1 stock split.

Google, daily

Other earnings releases of note today include Fastenal (FAST), RiteAid (RAD) and several regional banks. Fastenal reported first quarter 2012 earnings net earnings per share increased by over 25% from the same period last year to $0.34 per share. This was driven by an increase in new stores and same store sales growth. Fastenal is expecting to open more new stores in 2012. The company will be struggling with higher fuel prices which rose by over 10% in the quarter. Consensus estimate was for $0.35 per share, the narrow miss sent the stock down by over 2% in intra day trading. Today's decline was met with heavy volume. The stock has turned bearish in the short term, making a new lower low.

Fastenal, daily

Rite Aid improved results from last year but failed to turn a profit. The pharmacy and health care retailer reduced yearly losses in fiscal 2012 and projects that 2013 will be about the same. Sales increases in 2012 were attributed to an increase in same store traffic and an extra week in the reporting period. Same store sales increased by 2% in the period and Rite Aid expects the growth to remain flat, in the 1.5-2% range in fiscal 2013. The stock traded down around 1% today but regained the loss. Trading remains below the short term moving average but momentum is rolling over.

Rite Aid, Daily

Commerce Bancshares Inc (CBSH) gained more than 2% in today's trading and crossed above the 30 day moving average. The move came on record quarterly earnings. The company earned $0.74 per share in the first quarter, an 11% gain over last year and 7 cents above consensus estimates. Gains were based on increases in all business segments and are expected to continue into the current year. Investment banking, mortgage lending and deposit accounts were all up.The gains failed to spark support and the stock fell in the afternoon to close below the the short term moving average.

Commerce Bancshares, daily

The financial sector was one of today's leaders. The financial Spyder (XLF) gained more than 1.80% and closed above the short term moving average. The sector has been trading up all year and is still above trend.

Financial Spyder, daily

JP Morgan and Wells Fargo are both reporting tomorrow and are expected to release the information before the opening. Both stocks traded higher today ahead of the reports and are moving up from their short term moving averages toward recent highs.

JP Morgan, daily

Wells Fargo, daily

Energy stocks also led today's market. The energy Spyder (XLE) gained over 2%, erasing the last two days losses. The sector has been trending sideways for more than twelve months as warm weather, low natural gas and high crude prices affect revenue and profits.

Energy Spyder, daily

Today's gain in energy was led by Rowan Companies (RDC) and Peabody Energy (BTU). Rowan shares moved up on announced plans that it would keep its stock listed on the New York Stock exchange. The company is moving its headquarters to England but will continue to list class A shares in the US which will allow it to maintain its position in the S&P 500. Share price jumped over 9% today on high volume to close above the 30 day moving average.

Rowan Companies, daily

Peabody Energy gained over 7% in today's trading. The signs of strength from China, which is the worlds largest consumer of coal, boosted the entire energy complex and coal stocks in particular.

Peabody Energy, daily

The materials sector was also strong today. The materials Spyder (XLB) gained over 2.8%. Renewed hope of global expansion helped in this sector as well.

Materials Spyder (XLB), daily

Freeport McMoRan (FCX) was a leader among materials stocks. The company gained nearly 6% in today's trading. Freeport McMoRan is scheduled to release earnings next week.

Freeport McMoRan, daily

The market remains active for initial public offerings. Out of five scheduled openings three actually made it to open this week. Erickson Air-Cran (EAC), maker and operator of heavy lift crane and transport helicopters opened this week at the expected share price of $8. This stock had been scheduled to open last week but postponed. The stock has remained stable around $8 since its opening yesterday but trading remains thin.

Erickson Air-Cran, two days

Aleris (ARS), manufacturer of aluminum products, postponed their opening to a later date. BrightSource Energy (BRSE) withdrew their opening altogether. This puts the solar energy company back at square one in the transition to public sale.

Forum Energy Technology (FET) was hot this morning. Opening was projected between $18-$20 but ramped up to $22.50 at open. The stock traded steadily between $22 and $22.50 throughout the morning and then fell to close at $21.75 with 2.3 million shares traded. Forum Technology is an oil field products company servicing on and off shore needs.

Forum Energy Technology, One Day

MRC Global (MRC) priced between $21-$23 but actually opened below the range at $20.50. The stock found quick support and traded up over $21 by mid-morning. The company distributes PVF products to the energy industry and closed its first day at $21.04.

MRC Global, one day

Oaktree Capital (OAK), an investment management firm focused on alternative markets, also opened at the low end of its projected range. The stock traded up throughout the morning on weak volume and ended the day at $42.39.

Oaktree Capital, one day

Acme Packet received an upgrade from Barclay's. The stock was moved to overweight from equal weight. The company is scheduled to release earnings May 2nd. The companies revenues in the fourth quarter and full year grew by 18% and 33% last year. Consensus estimates for earnings this quarter are $0.17 per share compared to last years $0.27. Acme could be forming support around $25.

Acme Packet, daily

Mattel (MAT) was also upgraded and gained about 2% in today's trading. The stock is expected to report an earnings increase near 40% from the previous year. Mattel has scheduled their conference call and earnings announcement for next Monday. The current average estimate is around $2.42 per share with projections for that to increase again to $2.66 in fiscal 2013. The stock is trading near 12 year highs and the trend is up.

Mattel, daily

Natural Gas Inventories were reported to have increased by 8 billion cubic feet and sent the price up by 0.76% but failed to break back above $2. The possibility that China has escaped a hard landing have also helped to elevate energy prices. The chance of increased demand from China is causing some to question projections for 2012 demand. The cost of crude gained about 0.8% in today's trading.

Gold gained over 1% today as the dollar lost ground. Unemployment claims kept the dollar down and aided the rally in gold. Gold stocks gained today,the AMEX gold index rose by over 3%.

Gold Index, daily

Rates on the 30 year bond rose slightly today.

30 year bond rates, daily

The major indexes made broad gains today. Advancing stocks beat decliners by a wide margin. Unexpectedly negative unemployment data was shrugged off as hopes for renewed growth in China spurred the rally. The broad gains brought the Dow right up to the 30 day moving average and the S&P to just above it. The rally failed to bring the Dow back above 13,000 but it did come very close.

Dow Jones Index, daily

S&P 500, daily

The Nasdaq is showing the most strength. The tech heavy index is moving above the short term moving average and is the only index above the recent up trend. Google's report could help lift tech stocks tomorrow.

It is important to keep an on earnings and economic data. Earnings, and what the related statements say, will help give an impression for the rest of the year and drive the market. China GDP numbers could cause analysts to revise world and domestic growth expectations. Tomorrow we get the consumer price index, Michigan sentiment and expected first quarter GDP numbers from China. If China does come in hotter than expected it could raise hopes for increased world and domestic growth. Look out for retail sales, leading indicators and unemployment numbers next week.

Thomas Hughes

New Plays

Multi-Year Highs

by James Brown

Click here to email James Brown


TIBCO Software - TIBX - close: 32.86 change: +0.51

Stop Loss: 31.40
Target(s): 35.75
Current Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
It's a long way from its Internet bubble days at $140 a share but TIBX is trending higher. The company recently reported earnings in late March and beat both the revenue and the earnings estimate. Traders bought the post-earnings dip at support near $30.00. Now TIBX continues to build on its bullish trend of higher lows. The stock tried to breakout past resistance near $33.00 today but didn't quite make.

I am suggesting a trigger to open bullish positions at $33.50. We'll use a stop loss at $31.40. Our multi-week target is $35.75. FYI: The Point & Figure chart for TIBX is bullish with a $58.00 target.

Trigger @ $33.50

Suggested Position: buy TIBX stock @ (trigger)

- or -

buy the May $34 call (TIBX1219E34) current ask $1.15

Annotated chart:

Entry on April xx at $ xx.xx
Earnings Date 03/29/12 (already announced)
Average Daily Volume = 3.1 million
Listed on April 12, 2011

In Play Updates and Reviews

Stocks See A Widespread Bounce

by James Brown

Click here to email James Brown

Editor's Note:
The U.S. markets produced a widespread bounce lead by oil service, cyclicals, and housing names. Basic material-related stocks also surged and our ATI trade was stopped out. Meanwhile our new Zillow trade has been triggered.

Current Portfolio:

BULLISH Play Updates

Hain Celestial Group - HAIN - close: 44.85 change: +0.81

Stop Loss: 42.75
Target(s): 49.00
Current Gain/Loss: - 0.4%
Time Frame: up to its early May earnings report
New Positions: see below

04/12 update: Another 80-cent gain for HAIN puts the stock back above its 10-dma and our trade is almost in positive territory again. The move past $44.50 looks like a new bullish entry point.

current Position: long HAIN stock @ $45.05

- or -

Long May$45 call (HAIN1219E45) Entry $1.85

04/03/12 trigger @ 45.05

Entry on April 03 at $45.05
Earnings Date 05/03/12 (unconfirmed)
Average Daily Volume = 279 thousand
Listed on April 02, 2011

Skullcandy - SKUL - close: 16.68 change: -0.07

Stop Loss: 15.75
Target(s): 19.70
Current Gain/Loss: - 0.4%
Time Frame: up to its May earnings report
New Positions: see below

04/12 update: Hmm... SKUL did not participate in the market's widespread rally today. That is worrisome. Readers may want to wait for a new rally past $17.00 before considering new positions.

Earlier Comments:
Shares of this headphone and audio accessory maker could see a big short squeeze soon. The most recent data listed short interest at 123% of the very small 8.3 million-share float. Yes. That was 123%.

Our target is $19.70. More aggressive traders could aim higher. FYI: The Point & Figure chart for SKUL is bullish with a long-term $24.00 target.

current Position: Long SKUL stock @ $16.75

- or -

Long May $17.50 call (SKUL1219E17.5) Entry $0.85

04/05/12 triggered at $16.75

Entry on April 05 at $16.75
Earnings Date 05/09/12 (unconfirmed)
Average Daily Volume = 453 thousand
Listed on April 03, 2011

ProShares UltraPro Short QQQ - SQQQ - close: 10.89 change: -0.40

Stop Loss: 10.60
Target(s): 13.25
Current Gain/Loss: unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see below

04/12 update: The market continues to bounce and the SQQQ is fading lower. This ETF is now testing its simple 10-dma. There is no change from my prior comments.

We have a trigger to launch positions at $11.60. Remember, this is the triple inverse ETF on the QQQ so expect volatility.

Trigger @ $11.60

Suggested Position: buy SQQQ @ (trigger)

- or -

buy the May $12.00 call (SQQQ1219E12)

Entry on April xx at $ xx.xx
Earnings Date --/--/--
Average Daily Volume = 2.3 million
Listed on April 10, 2011

Zillow, Inc. - Z - close: 38.47 change: +1.25

Stop Loss: 36.75
Target(s): 44.50
Current Gain/Loss: - 3.0%
Time Frame: up to the early May earnings report
New Positions: see below

04/12 update: Uh-oh! Something happened to Zillow at the close. Shares opened higher at $39.22, quickly hit our bullish trigger at $39.25 and spent most of the day trading sideways under the $39.50 level. Then in the last 15 minutes of trading something pushed Z sharply lower toward $38.00. I couldn't find any news behind the drop.

Our play is open but I would wait for a new rally past $39.50 before considering new positions.

Earlier Comments:
The stock could see a short squeeze. The most recent data listed short interest at 16% of the very small 8.9 million-share float.

current Position: buy Z stock @ $39.25

- or -

Long May $40 call (Z1219E40) Entry $2.10

04/12/12 triggered at $39.25

Entry on April 12 at $39.25
Earnings Date 05/09/12 (unconfirmed)
Average Daily Volume = 379 thousand
Listed on April 11, 2011

BEARISH Play Updates

Cabot Oil & Gas - COG - close: 30.68 change: +0.87

Stop Loss: 31.25
Target(s): 25.50
Current Gain/Loss: unopened
Time Frame: up to the earnings report on April 25th
New Positions: Yes, see below

04/12 update: The stock market's widespread bounce lifted COG toward short-term technical resistance at its simple 10-dma. Gains were fading by the close but COG still added +2.9%. There is no change from my prior comments.

Earlier Comments:
The trend is down and COG appears to have formed a massive head-and-shoulder pattern (whish is bearish). Yet before you get too enthusiastic here I want to warn you that prior breakdowns under $30.00 have yet to stick. Plus the stock has spiked higher a couple of times on rumors that COG was a takeover target. Therefore we want to keep our positions small to limit our risk.

Last week's low was $29.44. I am suggesting a trigger to open bearish positions at $29.40. We'll use a stop at $31.25. Our target is $25.50. We do not want to hold over the April 25th earnings report.

Trigger @ $29.40 (small positions)

Suggested Position: short COG stock @ (trigger)

- or -

buy the May $28 PUT (COG1219Q28)

Entry on April xx at $ xx.xx
Earnings Date 04/25/12 (unconfirmed)
Average Daily Volume = 4.0 million
Listed on April 11, 2011

Ctrip.com Intl. - CTRP - close: 21.69 change: +0.63

Stop Loss: 22.51
Target(s): 18.00
Current Gain/Loss: + 0.0%
Time Frame: 3 to 6 weeks
New Positions: see below

04/12 update: Hmm... the sideways move in CTRP over the last few days is starting to look like a potential bottom. Shares still have overhead resistance at $22.00. I am lowering our stop loss down to $22.51.

Earlier Comments:
Readers may want to keep their position size small or limit their risk by trading put options. The most recent data listed short interest at about 10% of the 131 million share float. That could raise the risk of a short squeeze.

It's possible the $20.00 level could act as round-number, psychological support but we are aiming for $18.00. The Point & Figure chart for CTRP is bearish with a $15.00 target.

current Position: short CTRP stock @ $21.70

- or -

Long Apr $21 PUT (CTRP1221P21) Entry $0.65

04/12/12 new stop loss @ 22.51

Entry on April 02 at $21.70
Earnings Date 05/--/12 (unconfirmed)
Average Daily Volume = 3.6 million
Listed on March 31, 2011

DeVry, Inc. - DV - close: 32.53 change: +0.82

Stop Loss: 34.05
Target(s): 30.25
Current Gain/Loss: + 0.0%
Time Frame: 2 to 3 weeks
New Positions: see below

04/12 update: DV produced an oversold bounce today and shares added +2.5%. I would expect the bounce to continue until shares hit the $33.00 area or the simple 10-dma. More conservative traders might want to lower their stop loss a bit. I'm not suggesting new positions at this time.

current Position: short DV stock @ $32.54

04/10/12 new stop loss @ 34.05
04/09/12 DV gapped open lower at $32.54

Entry on April 09 at $32.54
Earnings Date 04/24/12 (confirmed)
Average Daily Volume = 670 thousand
Listed on April 07, 2011

Hi Tech Pharmacal - HITK - close: 33.93 change: +0.22

Stop Loss: 36.25
Target(s): 300-dma (moving target)
Current Gain/Loss: + 1.4%
Time Frame: 2 to 4 weeks
New Positions: see below

04/12 update: HITK has bounced two days in a row but gains have been anemic. The stock remains under overhead resistance at the 200-dma and the $35.00 level. More conservative traders might want to lower their stop loss. Our target is the simple 300-dma (currently at $31.10).

current Position: short HITK stock @ $34.40

- or -

Long Apr $35 PUT (HITK1221P35) Entry $1.50

04/10/12 triggered at $34.40

Entry on April 10 at $34.40
Earnings Date 07/05/12 (unconfirmed)
Average Daily Volume = 155 thousand
Listed on April 09, 2011


Allegheny Tech. - ATI - close: 41.37 change: +2.14

Stop Loss: 41.15
Target(s): 35.25
Current Gain/Loss: - 6.2%
Time Frame: 2 to 3 weeks
New Positions: see below

04/12 update: Many of the material names saw a sharp squeeze higher this morning. ATI was no exception. The stock surged to a +5.4% gain and hit our stop loss at $41.15.

closed Position: short ATI stock @ $38.74 exit $41.15 (-6.2%)

- or -

Apr $37.50 PUT (ATI1221P37.5) Entry $0.80 exit $0.10 (-87.5%)

04/12/12 stopped out at $41.15
04/09/12 ATI gapped down at $38.74


Entry on April 09 at $38.74
Earnings Date 04/25/12 (unconfirmed)
Average Daily Volume = 1.6 million
Listed on April 07, 2011