Option Investor

Daily Newsletter, Thursday, 7/12/2012

Table of Contents

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

Market Wrap

Markets Extend Losses

by Thomas Hughes

Click here to email Thomas Hughes
Evidence of a slowing world economy continues to mount as earnings season begins to unfold. Yesterday's release of FOMC minutes merely served to confirm what the markets seemed to know already; the US economy continues to slow but is still growing. Asia, especially China, and Europe continue to affect the global outlook and US corporate earnings.

The FOMC minutes show that many committee members fear that the US economic slowdown could worsen but failed to hint at any further easing. Rising inventories of wholesales goods are only one of the latest signs of slowdown, reported yesterday as climbing by .3% while sales fell by 8%. Adding to the problem of weak global growth are impending US tax hikes should congress fail to extend the Bush era tax cuts. The increased tax burden, coupled with the sluggish and unstable labor market, could severely impact consumer spending, the driving force of US gross domestic product.

Asian shares closed lower yesterday following the release of the FOMC minutes and a surprise interest rate cut from South Korea. The cut renewed worries of further economic slowdown that were exacerbated by a sharp drop in Australian employment. The Nikkei and Hang Seng indexes shed 1.5% and 2% respectively, followed by a .5% gain in the Shanghai composite.

Futures extended yesterday's losses in early pre-market trading and were not helped by today's surprising unemployment data. First time claims for unemployment fell by a surprising 26,000 claims to a four year low. Analysts had been expecting a more modest decline in the 1-2000 range. Initial claims were reported at 350,000 for the week ending July 7; Claims in the previous week were revised upward by 2000 resulting in a net drop of 24,000 from last week release. In the report one-time seasonal factors, led by fewer auto-sector lay-offs than normal, were cited as the primary reason claims fell so abruptly. The four week moving average of initial claims fell as well, dropping nearly 10,000 claims to 376,500.

Continuing claims for unemployment were as expected at 3.3 million. This number is a slight decline from last weeks data and correlates with Junes spike in initial claims. Total claims for unemployment climbed by a negligible amount, remaining steady at 5.87 million. The decline in unemployment seems to have halted and lends credence to expectations from the FOMC for unemployment to remain at these levels into 2013.

European shares added to the global sell off. Lack of direction from the FOMC, a poor start to US earnings season and fear of Chinese economic data scheduled to be released tomorrow combined to push the European markets down by roughly 1%. The FTSE led the European decline with a -1% drop, followed by the CAC 40 and Xetra Dax with -0.7 and -0.65% losses.

The price of oil fell today with the renewal of global slowdown fears. In a report, the IEA said that global slowing could cap world demand growth and put a “lid” on oil prices. Oil traded down today, losing close to $2 in early trading. There was a small rally into the close of trading reducing the decline to near $0.80, or -0.92%. The NYSE Arca Oil Index shed just over -0.62 in response to the change in oil. The index has rallied over the last 6 weeks but is still trading beneath the 200 moving average. The index could continue to rally up to the long term average but momentum indicators are inconsistent with a an advance past the 1200 level.

NYSE Arca Oil Index, daily

Gold softened today and hit an intraday low near $1550. The FOMC minutes put an end to any near term hopes of a surge in precious metals prices. The minutes shifted focus, at least for now, into the dollar which strengthened against the Euro and the Pound. The minutes show that some of the panel are open to further easing but it will take more weakness in the US economy for the full committee to support the move. The CBOE gold index continued its slide today and is now approaching lows set in late spring and potential support. Momentum indicators are consistent with a support level forming, showing divergences.

CBOE Gold Index, daily

The tech sector was hurt this morning by a new report from Gartner estimating that PC sales in the second quarter were down 6-11%. The drop was led by Asia weakened demand in Asia. PC sales dropped by-0.1% from last year, a full 2.2% lower than the already “conservative” estimate from IDC for 2.1% growth in the quarter. Applied Materials and Advanced Micro Devices both issued weak forecasts for sales in the second half of the year, following a warning on third quarter earnings from network gear maker Adtran. The Philadelphia Semiconductor Index fell by more than 2.5% in early trading. Today's loss extends a strong move down from the 200 day moving average and touched near term support.

Philadelphia Semiconductor Index, weekly

Adtran added to yesterday's sharp losses, falling more than 4% today. The stock has been trading below its 200 day moving average for most of this year and is now suffering from increased short term bearishness as evidenced by the downward bounce from the short term moving average. The stock is approaching a two year low and possible support near $20.

Adtran, weekly

AMD has made a similar move as Adtran but is now approaching the corresponding support level. We'll have to carefully watch how AMD behaves at this level, a break down from here could signal another round of selling with the next support zone near $2.50.

AMD, weekly

Applied Materials is also trading down from its short term moving average but with much lighter volume. The stock is above a long term support level and momentum indicators show increasing bearishness, but again, like with AMD, it will be important to see how share price reacts when it does reach support.

Applied Materials, daily

Supervalu dropped sharply overnight after the food retailer suspended its dividend. The company reported that revenue and profits had fallen sharply and that it needed to reinvest the capital in better ways, namely reducing debt load. The supermarket giants earnings dropped -46% on a reduction in revenue of only 5%. The dividend, which was near 7% yesterday, proved to be a reason to hold the stock as investors got out today as fast as they could. The company has paid a dividend for 60 years and the move was not taken well by investors. Today the stock lost close to half of its value on a sharp spike in volume and dropped below support.

Supervalu, daily

Earnings season rolled on today as well though without many big names in the mix. Enterprise software maker SAP pre-released a portion of its second quarter statement today. The pre-release was a prudent move on the part of the company in light of recent warnings from other tech names. The company reported a 7% increase in second quarter operating profit and offered some insight into the health of the company. License sales in the second quarter rose by 26%, a key figure when contemplating future earnings and stability. The stock responded favorably and jumped over 3.5%, moving above the short term moving average for the third time in the last 4 weeks. The stock appears to have bottomed from its spring decline but still faces headwinds moving forward. A sustained move above the short term moving average with a corresponding strong move above the long term average is necessary for a bullish outlook on the stock.

SAP, daily

Bank of the Ozarks reported today as well. The regional bank has been a strong performer over the last three years, benefiting from the same strengths seen in the rest of the regional banking sector; Low or no exposure to Europe, increasing organic business and strengthening balance sheets. The company released its earnings after the bell but today's trading candlestick indicated hope for more good results. The bank is expected to report a 30% increase in earnings over last year at this time.

Bank of the Ozarks, daily

Fastenal reported a gain in earnings of 18% for the second quarter on a revenue increase of only 6.5%. Analysts had been expecting slightly weaker earnings on higher revenue. The report sent the stock shooting up through the short term moving average and gaining close to 8%. In the report sales growth, which was strong in the early part of the year and fell off during the spring, has been picking up again. Today's move was halted just shy of crossing the 200 day moving average and a recent support/resistance zone. This level will bear close watching as earnings season progresses and the third quarter outlook solidifies.

Fastenal, daily

JP Morgan is scheduled to release its earnings statement tomorrow. The big question on many minds is “how big is the Whale and how much impact did it really have on the business?” The trading loss and ensuing media frenzy put CEO Dimon's reputation at risk and severely impacted the stocks price. Investors will be looking for information that will help them see behind the losses and reveal the companies true strength. As it stands the company is expected to have curbed much of the losses already and to have exited the bulk of the bad trade. Any signs of fallout and further impacts from the Whale could be huge negatives for traders. JP Morgan is also the first bank giant to report earnings and will set the tone for the rest of the sector. The results, discounting the Whale loss, will be a driving force in market direction tomorrow and going into the first of next week. The stock dropped sharply in late day and after market hours in anticipation of the report.

JP Morgan, daily

The Dow and other major indexes reversed during the day and continued their climb into the afternoon hours. The Dow crossed into positive territory, if briefly, around 1:45 before sinking back below the break even line. The indexes continued to flirt with the break even line throughout the afternoon before settling down into negative territory just before the close. Worry over this quarters earnings are keeping traders in check until a clearer picture is available on the state of earnings.

The major indexes could rebound from here and continue the short term trend upward but will face stiff resistance at 13,000(Dow) and 1400(S&P). Further, MACD and stochastics do not support a strong rally at this point. The bullish momentum in June has declined going into July even though the indexes have made new highs. The stochastic indicator on the Dow is also divergent from the most recent high and is flattening out if not beginning to roll over. The SPX chart shows a similarly divergent stochastic, but one that is still pointing strongly up. Regardless of indicators a strong move above resistance is a requirement at this point for me. These levels coincide with the 78% retracement of the 2008-2009 declines and the same level the markets failed to maintain earlier in the year. If the Dow and S&P fail to cross above, and then maintain those levels more weakness could follow.

Dow, one day with previous close

Dow, daily with MACD

S&P 500, daily MACD

Dow, daily with Stochastic

S&P 500, daily with Stochastic

The Nasdaq daily chart shows the stochastic indicator to be flattish and divergent from the last peak. The Nasdaq also approached its 200 day moving average before heading higher.

Nasdaq, daily

The VIX continued its basically sideways move in the “calm” range between 15 and 20. The index's momentum remains bearish although it is weakening at this point.

Volatility Index (VIX), daily

Economic data will continue to be important though corporate earnings will dominate the news for the next few weeks. Tomorrow's release from JP Morgan will no doubt set the tone for Citigroup's release on Monday and Goldman Sachs on Tuesday. The rest of the week is packed full of reports that could add to market volatility. Further impacting tomorrow's trading is China's GDP figures which are scheduled to be released overnight. Analysts are predicting that the world's largest country could have slipped to a growth rate slower than 8% and could trend lower. Further slumping in China is feared because it will deflate the already lowered expectations for corporate earnings and growth.

Thomas Hughes

New Plays

Potential Short Squeeze Candidate

by James Brown

Click here to email James Brown


Lennar Corp. - LEN - close: 31.06 change: +1.08

Stop Loss: 29.49
Target(s): 34.50
Current Gain/Loss: unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Some of the homebuilders were showing relative strength today. If the market can manage a rally then the homebuilders could see a short squeeze. That's definitely true for LEN now that shares have rallied toward multi-year highs. The most recent data listed short interest at almost 22% of the 161 million share float.

Today's high was $31.37. I am suggesting a trigger to launch bullish positions at $31.40. More conservative traders will want to wait for LEN to trade over $32.00 instead as their entry point. We'll use a stop under today's low. Our target is $34.50.

FYI: The Point & Figure chart for LEN is bullish with a long-term $46 target.

Trigger @ 31.40

Suggested Position: buy LEN @ (trigger)

- or -

buy the Aug $32 call (LEN1218H32) current ask $1.27

Annotated chart:

Entry on July xx at $ xx.xx
Earnings Date 09/12/12 (unconfirmed)
Average Daily Volume = 7.2 million
Listed on July 12, 2011

In Play Updates and Reviews

Six Down Days In A Row

by James Brown

Click here to email James Brown

Editor's Note:
The stock market just produced its sixth decline in a row. Yet the intraday bounce might suggest a rebound tomorrow.

Our THLD trade was stopped out but our HMIN trade hit our first target.

We have updated several stop losses tonight.

Current Portfolio:

BULLISH Play Updates

ACI Worldwide, Inc. - ACIW - close: 45.00 change: +0.18

Stop Loss: 43.75
Target(s): 49.00
Current Gain/Loss: + 2.2%
Time Frame: 6 to 8 weeks
New Positions: see below

07/12/12 update: ACIW almost hit our stop loss but managed to bounce at $43.87. This rebound looks like a potential entry point but readers may want to wait for ACIW to rally past $45.50 before initiating positions.

current Position: Long ACIW stock @ $44.05

07/03/12 new stop loss @ 43.75
06/29/12 triggered @ 44.05

Entry on June 29 at $44.05
Earnings Date 07/26/12 (unconfirmed)
Average Daily Volume = 318 thousand
Listed on June 27, 2011

Extra Space Storage - EXR - close: 31.17 change: +0.47

Stop Loss: 29.99
Target(s): 33.50
Current Gain/Loss: + 0.1%
Time Frame: exit prior to the late July earnings report
New Positions: see below

07/12/12 update: EXR showed some relative strength today with a +1.5% gain. The stock tagged new highs before paring its gains this afternoon.

Our target is $33.50 but we'll plan to exit prior to the late July earnings report.

Suggested Position: Long EXR stock @ $31.15

07/09/12 triggered @ 31.15

Entry on July 09 at $31.15
Earnings Date 07/26/12 (unconfirmed)
Average Daily Volume = 1.5 million
Listed on July 07, 2011

IdaCorp. - IDA - close: 42.93 change: -0.02

Stop Loss: 41.90
Target(s): 45.00
Current Gain/Loss: unopened
Time Frame: exit prior to the early August earnings report
New Positions: Yes, see below

07/12/12 update: Our new trade on IDA is not open yet. The stock only made it to $43.06 before retreating. Overall nothing has changed from my Wednesday comments.

I am suggesting a trigger to launch positions at $43.15. We'll use a stop loss at $41.90. Our multi-week target is $45.00.

Trigger @ 43.15

Suggested Position: buy IDA stock @ (trigger)

Entry on July xx at $ xx.xx
Earnings Date 08/02/12 (unconfirmed)
Average Daily Volume = 217 thousand
Listed on July 11, 2011

BEARISH Play Updates

Aetna Inc. - AET - close: 37.55 change: -0.21

Stop Loss: 38.55
Target(s): 35.10
Current Gain/Loss: + 2.3%
Time Frame: 3 to 6 weeks
New Positions: see below

07/12/12 update: AET continues to churn sideways. The 10-dma (currently 38.19) should be resistance. We are lowering our stop loss down to $38.55. I am not suggesting new positions at this time.

FYI: The Point & Figure chart for AET is bearish with a $29 target.

current Position: short AET stock @ $38.45

- or -

Long Aug $38 PUT (AET1218T38) Entry $1.65

07/12/12 new stop loss @ 38.55
07/03/12 new stop loss @ 39.55
07/03/12 triggered @ 38.45

Entry on July 03 at $38.45
Earnings Date 07/31/12 (unconfirmed)
Average Daily Volume = 6.0 million
Listed on June 30, 2011

First Solar Inc. - FSLR - close: 14.01 change: -0.64

Stop Loss: 15.51
Target(s): 12.00, 10.50
Current Gain/Loss: +2.7%
Time Frame: 4 to 8 weeks
New Positions: see below

07/12/12 update: FSLR is definitely seeing a lot of volatility. Yesterday's big bounce failed and the stock gave up -4.3% today. Readers may want to start adjusting their stop loss lower.

Our first target is $12.00. Our longer-term, more aggressive target is $10.50.

Trigger @ 14.40

Suggested Position: short FSLR stock @ (trigger)

- or -

buy the Aug $14 PUT (FSLR1218T14) Entry $1.45

07/10/12 triggered @ 14.40

Entry on July 10 at $14.40
Earnings Date 08/02/12 (unconfirmed)
Average Daily Volume = 7.3 million
Listed on June 30, 2011

Groupon, Inc. - GRPN - close: 7.98 change: +0.21

Stop Loss: 9.05
Target(s): 6.25
Current Gain/Loss: + 5.3%
Time Frame: exit prior to the early August earnings report
New Positions: see below

07/12/12 update: Hmm... what do we do with GRPN here? The stock produced a +10% bounce off its intraday low of $7.25 today. There were analysts suggesting that investors should buy GRPN at these lows because it's cheap. Our readers might want to consider taking some money off the table. I'm not suggesting new positions. We are going to try and reduce our risk by adjusting the stop loss down to $9.05.

*Small Positions*

current Position: short GRPN stock @ $8.40

- or -

Long Aug $8.00 PUT (GRPN1218T8) Entry $0.80

07/12/12 new stop loss @ 9.05

Entry on July 09 at $8.40
Earnings Date 08/08/12 (unconfirmed)
Average Daily Volume = 8.1 million
Listed on July 07, 2011

Home Inns & Hotels Management - HMIN - close: 18.57 change: +0.20

Stop Loss: 20.25
Target(s): 18.00 & 15.50
Current Gain/Loss: + 5.3%
Time Frame: 3 to 6 weeks
New Positions: see below

07/12/12 update: Target achieved. HMIN dipped to $17.76 before bouncing back and actually closing up on the day. We had two target for this trade. Our first target was $18.00. HMIN is still short-term oversold and we suspect it could bounce back toward resistance near $20.00. Please note our new stop loss at $20.25.

Our second target is $15.50.

Earlier Comments:
Readers may want to keep their position size small or use the options to limit their risk. The most recent data listed short interest at 17% of the 24.2 million share float.

Suggested Position: short HMIN stock @ $19.60

- or -

Long Aug $20 PUT (HMIN1218T20) Entry $1.70

07/12/12 new stop loss @ 20.25
07/12/12 1st target hit @ 18.00 (+8.2%)
1st target hit @ 18.00, option bid @ $2.50 (+47.0%)*
(option exit price is an estimate since the option did not trade at the time our first target was hit)
07/10/12 triggered @ 19.60

Entry on July 10 at $19.60
Earnings Date 08/09/12 (unconfirmed)
Average Daily Volume = 284 thousand
Listed on July 09, 2011

Riverbed Tech. - RVBD - close: 13.86 change: +0.18

Stop Loss: 15.10
Target(s): 12.50
Current Gain/Loss: + 4.4%
Time Frame: 3 to 6 weeks
New Positions: see below

07/12/12 update: I need to warn you that today's move in RVBD looks like a one-day bullish reversal pattern. I would not be surprised to see RVBD bounce back toward resistance near $15.00. We will adjust our stop loss lower to $15.10. Wait for this bounce to fail before considering new positions. Our target is $12.50 but more aggressive traders may want to aim lower.

current Position: short RVBD stock @ $14.50

- or -

Long Aug $14 PUT (RVBD1218T14) Entry $1.16

07/12/12 new stop loss @ 15.10

Entry on July xx at $ xx.xx
Earnings Date 07/24/12 (confirmed)
Average Daily Volume = 3.4 million
Listed on July 09, 2011

TRW Automotive - TRW - close: 34.47 change: -0.87

Stop Loss: 36.35
Target(s): 30.50
Current Gain/Loss: + 2.6%
Time Frame: exit prior to the July 31st earnings report
New Positions: see below

07/12/12 update: TRW continues to underperform the market. The stock dipped to $33.74 this morning. Shares eventually pared its losses and TRW settled with a -2.4% decline. I am adjusting our stop loss down to $36.35.

current Position: short TRW stock @ $35.38

- or -

Long Aug $35 PUT (TRW1218T35) Entry $1.90

07/12/12 new stop loss @ 36.35

Entry on July 11 at $35.38
Earnings Date 07/31/12 (confirmed)
Average Daily Volume = 949 thousand
Listed on July 10, 2011


Threshold Pharmaceuticals - THLD - close: 7.74 change: -0.16

Stop Loss: 7.49
Target(s): 9.75
Current Gain/Loss: - 9.2%
Time Frame: exit prior to the very late July /early August earnings
New Positions: see below

07/12/12 update: It was not a good day for THLD. Shares broke down under its 10-dma and fell to $7.35 before bouncing. Our stop loss was hit at $7.49. I would be tempted to keep THLD on your watch list and wait for a new close over $8.05 or $8.20 as a potential entry point for bullish positions again.

Earlier Comments:
There is a good chance THLD might see a short squeeze. The most recent data listed short interest at 18% of the 40.7 million-share float. Biotechs can be volatile stocks so readers may want to limit their position size to reduce risk.

closed Position: Long THLD stock @ $8.25 exit $7.49 (-9.2%)

- or -

Aug $7.50 call (THLD1218H7.5) Entry $1.20 exit $0.65 (-45.8%)

07/12/12 stopped out at $7.49
07/10/12 produced a bearish reversal candlestick. readers may want to raise their stop loss.
07/09/12 triggered @ 8.25


Entry on July 09 at $ 8.25
Earnings Date 07/30/12 (unconfirmed)
Average Daily Volume = 1.6 million
Listed on July 07, 2011