Option Investor

Daily Newsletter, Thursday, 6/7/2012

Table of Contents

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

Market Wrap

Stocks Jump, Bernanke Drags

by Thomas Hughes

Click here to email Thomas Hughes
American stocks made broad based gains at the open today after surprising news from China renewed hopes of fiscal easing. The jobless data, statements from Chairman Ben Bernanke and second quarter 2012 earnings outlooks later dragged on stocks, paring the gains made in early morning trading. Later, new capital requirements financial institutions sent stocks into negative territory.

Futures were up sharply this morning after China made a surprise interest rate cut. The worlds largest economy cut its key benchmark interest rate by 25 basis points to 3.25%. The cut was not expected and comes after signs the Chinese economy is slowing more than previously expected. Traders saw the move as a positive as it will help to curb the slowing economy which has been dragging on global GDP. China's industrial production data is expected out over the weekend and is expected to show more weakness and support the decision to cut rates.

Futures declined slightly after the release of this weeks unemployment data but quickly recovered and pointed to a strong opening. Initial jobless claims for the week ending June 2, 2012 fell by 12,000 to a seasonally adjusted 377,000 claims. Last weeks data was revised upward by 6,000 to 389,000, which made up half of this weeks total decline. The number was lower than the expected 380,000 but does not reverse the recent upward trend in initial claims. The four week moving average of initial claims also continued to rise, adding 1,750 to total 377,750 and marking a third week of increases in the average.

Continuing claims for unemployment ticked upward this week to 3.293 million. The number is a five week high and may be a sign the down trend in continuing claims is broken.

Total claims for unemployment continued their decline but this number lags the initial claims data by two weeks. The recent uptrend in initial claims and last weeks spike in continuing claims could be a sign the job market is taking a turn for the worse.

Ben Bernanke made statements today on Capital Hill that support the apparent reversal of trend in the jobless data, saying that the gains made earlier in the year was the economy playing “catch up” and that those gains were probably over. He went on to say that the labor markets were in need of further support from the federal government. Chairman Bernanke pointed out that the European crisis was weighing on US exports, jobs and hurting our GDP. He made no real comments concerning any more easing of fiscal policy but when asked said that “nothing was really off the table yet”.

There were some signs of resilience in the world economy today. Australia made a surprising gain in new jobs, outpacing analyst estimates by a wide margin. Unemployment remained steady in the country despite the surprising gain in new jobs. The gain in employment helped to boost the Australian dollar in today's trading.

The Bank of England held firm on their position of no further economic easing. The central bank feels the island nation is strengthening on its own, led by gains in the services sector. The central bank remains on alert though as the European debt crisis continues to unfold.

The rate on 30 year US bonds made modest gains today.

US 30 year bond rates, daily

The price of gold had been treading water until the Federal Reserve Chairman's tatements took hopes of near term easing out of the picture. Following his statements gold dropped over 2%, falling below $1600. Gold stocks took a beating with the Philadelphia Gold Index dropping more than 4%.

Gold Index, daily

Oil prices were volatile today as conflicting information confused traders. China's easing of interest rates renewed hopes of increased future demand but the statement by Bernanke put the expectation back into perspective. An early 2% gain was erased following the statements and sent the price of oil back below $84.

Hewlett Packard CEO Meg Whitman told shareholders today that it could take up to five years for the company to fully recover. The stock responded by moving higher after the opening but was soon capped off by its short term moving average. Today's comments come on the heels of HP's recent earnings release and announced plans of productivity and restructuring improvements. The company is committed to returning shareholder value in the form of dividends and share repurchases and is planning on reinvesting planned savings from business improvements.

Hewlett Packard, daily

Lululemon announced its most recent quarterly earnings today and dissappointed its investors. The company announced a 53% increase in quarterly revenue and a 25% in comparable store sales but the gains did not meet expectations and to compound the shortfall the company lowered its guidance. Lululemon expects second quarter revenue to fall short of first quarter results and for the full year to come in below previous expectations do to slowing sales growth. Shares of the stock dropped more than 8% on heavy volume.

Lululemon, daily

Agilysys, provider of software solutions to the hospitality and retail industries reported its earnings after the bell today. Shares of the stock were lifted with the market at open but traded down into the close. The company reported an 11% increase in revenue for the quarter and guided fiscal 2013 earnings higher. The stock lost over 4% in today's trading and held steady in after hours trading.

Agilysys, daily

Smuckers produced some sweet results in the recently ended quarter and fiscal year. Net sales were up for the quarter and the full year by 14% and 15% respectively. The strong year resulted in record cash levels for the company and Smuckers expects the next year to realize further sales gains. Company projections show growth in the 7% range. Shares of the stock moved higher in today's trading but were halted at the short term moving average.

JM Smucker, Daily

Comtech Telecommunications also reported after the bell today. The stock traded up today in anticipation of the release and moved above the 30 day moving average. The telecommunications services and products provider was expected to earn about 24 cents a share, down 49% from last year. The estimate has been in decline over the last 2 months, moving down from a previous consensus estimate of $0.29 per share. The analysts should have stuck to their first estimates as earnings were reported as $0.29 per share.

Comtech Telecommunications, daily

Juniper Networks received a downgrade today from analysts at Needham. The downgrade was based on competition and margin issues as the networking sector goes through a transitional phase. The company is viewed as solid but the stock was cut from buy to hold. Shares of the stock declined today and are trading near 12 month lows.

Juniper, daily

Groupon and Chesapeake Energy both received surprise upgrades today. Groupon was upgraded from sell to hold by Stifel Nicolaus because one analyst at the firm believes that Groupon's value is between $8-$12. In the report he says that the stocks "sharp" decline since its IPO is over. Shares of the stock benefited from an early boost but traded down by days end.

Groupon, daily

Chesapeake Energy was also upgraded to hold from sell by Argus. The upgrade is reportedly based on the sole fact that Carl Icahn has taken control of the company and is getting whipped into shape. The company has had a string of up and downgrades over the past few months in the wake of the recent scandal centered around CEO Aubrey McClinton and Carl Icahn's interest in the company. Shares of the stock gave up 2% in today's session.

Chesapeake Energy, daily

In his statements this morning Ben Bernanke also commented on the health of the banking sector. He said that US banks have added over $300 million to their balance sheets since 2009 and are still improving. He sees the credit markets functioning better despite claims from small business and sub-prime borrowers that it is still hard to get loans. The Financial Sector Spider (XLF) jumped today gaining close to 1% in today's action until an announcement of increased capital requirements for banks sent the sector down. The recent downtrend in the stock is divergent from momentum indicators in the near term butlong term momentum is still bearish.

Financial Sector Spider, daily

Financial Sector Spider, weekly

The industrial sector was the hottest S&P sector today. The Industrial Sector Spider (XLI) jumped more than 1% today but was halted at the short term moving average. The stock is in a near term downtrend but is also divergent from momentum.

Industrial Sector Spider, daily

The technology sector was today's laggard. Roughly half the stocks in the Technology Sector Spider (XLK) were even or down from yesterday's close. The Technology Spider lost about .5% today.

The Technology Sector Spider, daily

The US stock markets opened broadly higher today with about 95% of stocks up from yesterday's close. The news of China's rate cut was seen as a good thing, causing the Dow to open about 75 points higher than yesterday's close. Recent data shows that China is slowing more than expected and the move from the Chinese government will help bolster confidence in their plans to sustain growth.

The unfolding picture in the jobs market and Ben Bernanke's testimony on Capitol Hill weighed on stocks throughout the day as hopes of further Fed stimulus faded away. Further quantitative easing is not off the table, according to remarks from Mr. Bernanke, but the stance taken by the Chairman today suggests they are in no hurry to do anything at this time. However, later in the day the Federal Reserve approved new rules to force banks to increase their capital reserves even more.

Late afternoon selling influenced by the new banking rules brought the major indexes to the days lows, erasing most of the days' gains. The Dow finished the day up about 0.3%, above the near term down trendline. The recent near term down trend is divergent from momentum but the index is still below resistance.

Dow, One day

Dow, daily

The S&P 500 moved up to its short term moving average today before selling pressure brought the index back down and into negative territory.

S&P 500, daily

The volatility index fell below its short term moving average but remians elevated and above the critical 20 level. Bullish momentum in the index is divergent from the series of recent peaks in the index.

The Vix, daily

The Nasdaq posted the days biggest loss, shedding about 0.5% from yesterday's close. The initial jump at today's open brought the index up to the short term moving average where selling started. The move initially broke the the down trend line but by the days end the index had retreated back below it.

Nasdaq, daily

With the chance of quantitative easing slipping away traders will begin looking to earnings. Earnings season will begin heating up again in a few weeks and traders will be looking for indications of sustained growth and third quarter expectations. Current guidance for the second quarter has been generally weak leading to lower expectations.

Tomorrow is light for US data but expect more from Europe and China. Next week is big for US data with a full roster of data points scheduled each day.

Thomas Hughes

New Plays

Wireless Tech & Industrial Goods

by James Brown

Click here to email James Brown


InterDigital, Inc. - IDCC - close: 24.36 change: -0.83

Stop Loss: 25.55
Target(s): 21.50
Current Gain/Loss: unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
IDCC is in the wireless technology industry. Unfortunately the stock seems to be in a long-term decline. News that IDCC raised its revenue guidance in early May was quickly sold. Now the recent oversold bounce is already rolling over.

I am suggesting bearish positions at the open tomorrow. We'll use a stop at $25.55. Our multi-week target is $21.50. More aggressive traders could aim for the $20 level instead.

Suggested Position: short IDCC stock @ (the open)

- or -

buy the Jul $22.50 PUT (IDCC1221S22.5) current ask $1.05

Annotated chart:

Entry on June xx at $ xx.xx
Earnings Date 07/25/12 (unconfirmed)
Average Daily Volume = 648 thousand
Listed on June 07, 2011

Polypore Intl. - PPO - close: 34.56 change: -1.41

Stop Loss: 36.85
Target(s): 30.25
Current Gain/Loss: unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
PPO is in the industrial goods sector. Some of its products end up in the hybrid vehicle and electric vehicle products. The stock has been churning sideways in the $34-40 zone for weeks. Yet it's most recent oversold bounce just reversed under its 50-dma into a bearish engulfing candlestick pattern.

I am suggesting small bearish positions now, at the open tomorrow, with a stop loss at $36.85, just above today's high. Our target is $30.25. More conservative traders will want to wait for PPO to breakdown to new relative lows under $33.60 before initiating positions. We want to keep our position size small because a lot of investors are already short this stock. The most recent data listed short interest at 33% of the 46.3 million share float. If something happens and PPO starts to suddenly show strength it could spark some short covering. Considering buying put options to limit your risk.

(SMALL Positions)

Suggested Position: short PPO stock @ (the open)

- or -

buy the Jul $32.50 PUT (PPO1221S32.5) current ask $2.10

Annotated chart:

Entry on June xx at $ xx.xx
Earnings Date 08/01/12 (unconfirmed)
Average Daily Volume = 1.2 million
Listed on June 07, 2011

In Play Updates and Reviews

Early Morning Gains Faded

by James Brown

Click here to email James Brown

Editor's Note:
The market's early morning strength quickly faded for most stocks.

We did see FRX and IDIX get triggered but NSM, NTGR, and VAC were all stopped out.

Current Portfolio:

BULLISH Play Updates

Forest Labs - FRX - close: 35.03 change: -0.26

Stop Loss: 33.95
Target(s): 38.00
Current Gain/Loss: - 1.3%
Time Frame: 6 to 8 weeks
New Positions: see below

06/07 update: FRX is not off to the strongest start. Shares gapped open higher, hit our trigger to open positions at $35.50, and then quickly reversed lower. The move today looks like a bull trap or failed rally pattern. I am not suggesting new positions at this time. The intraday high was $35.59. Wait for a move over $35.60 before considering new positions.

current Position: Long FRX stock @ $35.50

- or -

Long Jul $36 call (FRX1221G36) Entry $1.25*

06/07/12 triggered at $35.50
*option price is an estimate. option did not trade at the time our play was opened.

Entry on June 07 at $35.50
Earnings Date 07/17/12 (unconfirmed)
Average Daily Volume = 1.9 million
Listed on June 06, 2011

Idenix Pharmaceuticals - IDIX - close: 8.81 change: -0.32

Stop Loss: 8.49
Target(s): 11.50
Current Gain/Loss: - 4.8%
Time Frame: 4 to 8 weeks
New Positions: see below

06/07 update: We see a similar issue here. IDIX displayed enough strength this morning to hit our trigger than then quickly reversed lower. Our trade is open but I'm not suggesting new positions here. Readers can wait for a new bounce off the $8.50 level as an entry point or wait for a new relative high at $9.30 as an entry point.

FYI: The Point & Figure chart for IDIX is bullish with a $15.50 target.

current Position: Long IDIX stock @ $9.25

- or -

Long Jul $10 call (IDIX1221G10) Entry $1.10

06/07/12 triggered at $9.25

Entry on June 07 at $ 9.25
Earnings Date 05/02/12
Average Daily Volume = 1.5 million
Listed on June 01, 2011

Molycoorp, Inc. - MCP - close: 21.33 change: -0.35

Stop Loss: 20.49
Target(s): 24.95
Current Gain/Loss: - 3.5%
Time Frame: 3 to 6 weeks
New Positions: see below

06/07 update: The early morning rally in MCP faded. By the end of the day this stock had erased yesterday's gain as well. I would expect MCP to hit $21.00 tomorrow and potentially trade down to $20.50. No new positions at this time.

Earlier Comments:
The most recent data listed short interest at 41% of the 56.6 million share float. That is significant and definitely raises the risk of a short squeeze higher.

current Position: Long MCP stock @ $22.10

- or -

Long Jul $23 call (MCP1221G23) Entry $1.45

06/06/12 triggered @ 22.10

Entry on June 06 at $22.10
Earnings Date 08/09/12 (unconfirmed)
Average Daily Volume = 2.5 million
Listed on June 05, 2011

BEARISH Play Updates

Abercrombie & Fitch - ANF - close: 32.13 change: -0.51

Stop Loss: 33.85
Target(s): 30.50
Current Gain/Loss: + 3.8%
Time Frame: 3 to 6 weeks
New Positions: see below

06/07 update: The early morning rally attempt in ANF ran out of steam under the $33.50 level. Shares eventually settled with a -1.5% decline. Technically today's move is a small bearish engulfing candlestick reversal pattern. Nimble traders could use it as a new bearish entry point although more conservative traders may want to lower their stop loss closer to $33.50.

We are aiming for $30.50. Readers could aim for $30.00 instead.

current Position: short ANF stock @ $33.93

- or -

(exited on June 5th)
Jul $30 PUT (ANF1221S30) Entry $1.05 exit $1.56 (+48.5%)

06/05/12 exited July $30 puts at the open (bid) $1.56 (+48.5%)
06/04/12 new stop loss @ 33.85
prepare to exit our July $30 puts at the open tomorrow.
06/02/12 new stop loss @ 34.55, adjust exit to $30.50

Entry on May 31 at $33.93
Earnings Date 08/15/12 (unconfirmed)
Average Daily Volume = 3.9 million
Listed on May 30, 2011

Heritage-Crystal Clean - HCCI - close: 16.17 change: -0.92

Stop Loss: 18.25
Target(s): 14.50
Current Gain/Loss: + 6.0%
Time Frame: 6 to 8 weeks
New Positions: see below

06/07 update: HCCI continues to underperform the market. Shares opened higher at $17.20, which proved to be the high for the day. The stock plunged to a -5.2% drop on the session. I am not suggesting new positions at this time.

Earlier Comments:
I want to warn you that this is an aggressive trade. The average volume of 55,000 is very, very light, which can lead to sharp intraday spikes. Plus, the most recent data listed short interest at 14% of the very, very small 8.4 million share float. That raises the risk of a short squeeze. FYI: The Point & Figure chart for HCCI is bearish with a $14.00 target.

(SMALL positions to limit risk)

current Position: short HCCI stock @ $17.20

Entry on June 07 at $17.20
Earnings Date 07/23/12 (unconfirmed)
Average Daily Volume = 55 thousand
Listed on June 06, 2011

Schnitzer Steel - SCHN - close: 25.41 change: -0.12

Stop Loss: 26.75
Target(s): 21.50
Current Gain/Loss: + 0.2%
Time Frame: 3 to 6 weeks
New Positions: see below

06/07 update: SCHN crossed above short-term resistance near $26.00 and its 10-dma before quickly reversing lower. Today's move looks like a new bearish entry point.

We want to keep our position size small.

(small positions)

current Position: short SCHN stock @ $25.45

- or -

Long Jul $25 PUT (SCHN1221S25) Entry $2.10*

06/04/12 new stop loss @ 26.75
*06/01/12 entry price on the option is an estimate. Option failed to trade on Friday.

Entry on June 01 at $25.45
Earnings Date 06/28/12 (unconfirmed)
Average Daily Volume = 474 thousand
Listed on May 31, 2011


Nationstar Mortgage Holdings - NSM - close: 19.20 change: -0.60

Stop Loss: 18.69
Target(s): 21.00
Current Gain/Loss: - 4.6%
Time Frame: 3 to 6 weeks
New Positions: see below

06/07 update: The last few days have been a bit volatile for NSM with news of its acquisition and then the analyst downgrade. The profit taking continued today and NSM underperformed the market with a -3.2% decline. Our stop loss was hit at $18.69.

Our plan was to keep our position size small.

(small positions)

closed Position: buy NSM stock @ $19.60 exit $18.69 (-4.6%)

06/07/12 stopped out at $18.69


Entry on June 05 at $19.60
Earnings Date --/--/-- (unconfirmed)
Average Daily Volume = 639 thousand
Listed on June 04, 2011


Netgear Inc. - NTGR - close: 31.79 change: +0.48

Stop Loss: 31.55
Target(s): 26.00
Current Gain/Loss: - 7.4%
Time Frame: 4 to 6 weeks
New Positions: see below

06/07 update: The back and forth volatility in NTGR the last several days has been very challenging to try and trade around. Shares gapped higher this morning at $31.95, which was above our stop loss at $31.55, quickly ending our play.

closed Position: short NTGR stock @ $29.75 exit $31.95 (-7.4%)

- or -

Jun $30 PUT (NTGR1216R30) Entry $1.70 exit $0.05 (-97.0%)

06/07/12 stopped out at $31.55
05/25/12 triggered @ 29.75


Entry on May 25 at $29.75
Earnings Date 07/26/12 (unconfirmed)
Average Daily Volume = 549 thousand
Listed on May 24, 2011

Marriott Vacations Worldwide - VAC - close: 27.22 change: +0.16

Stop Loss: 27.55
Target(s): 25.25
Current Gain/Loss: + 2.0%
Time Frame: 3 to 6 weeks
New Positions: see below

06/07 update: It was choppy trading session for VAC. The spike higher this morning looks like it may have been a reaction to some positive analyst comments. Shares did struggle with short-term resistance near $28.00 but our stop was hit early on at $27.55.

(small positions)

closed Position: short VAC stock @ $28.10 exit $27.55 (+2.0%)

06/04/12 new stop loss @ 27.55
05/26/12 new stop loss @ 29.25


Entry on May 25 at $28.10
Earnings Date 08/02/12 (unconfirmed)
Average Daily Volume = 495 thousand
Listed on May 24, 2011