Option Investor

Daily Newsletter, Thursday, 10/11/2012

Table of Contents

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

Market Wrap

Resilient Market Bounces Back?

by Thomas Hughes

Click here to email Thomas Hughes
Today the major indexes began to bounce back from the early week sell-off but lost their impetus by early afternoon. Economic data, earnings and the ever unfolding saga of free-spending Greece and the Eurozone crisis have cushioned the drop and helped to give the markets a slight nudge to the upside. The market weakness, which started Monday, is not unexpected and its arrival has been predicted many times by all of us here on the Wrap. Nothing significant has change from last week or two weeks ago and now the economic data seems to be supporting an improving economy. The sell off is expected but whether this is a near term correction or the start of a major bear market is yet to be seen.

Futures were up this morning ahead of the release of today's economic data. The markets seem to be anticipating earnings although today there was not much of note happening on that front. Tomorrow JP Morgan and Wells Fargo both report and their results could drive market direction.

The positive spin on futures carried into the morning after the open of regular trading. The S&P opened strong and quickly put on +9 points or 0.65%. Market breadth was also surprising strong with advancing stocks outpacing declining stocks by 5 : 1 at the open. The Nasdaq led the charge with a ratio of 5.5 : 1. Even after the afternoon decline in stocks advancing stocks still led declining stocks by around 2 : 1.

Today's surprising drop in unemployment claims barely budged stock futures. Analysts has been expecting a small drop of about 1-2000 claims for the last week of data. The number dropped a surprising 30,000 to a four year low of 339,000. This is a huge drop and comes on the heels of last weeks surprise unemployment figure of 7.9%. If this is not a one time occurrence then the unemployment rate could continue to decline into the fourth quarter. The previous weeks figure was revised up by only 2,000 claims, barely affecting the net drop from last weeks report. Likewise, the 4 week moving average of claims fell as well to near a four month low of 364,000.

Continuing claims and total claims both fell in tandem with the initial claims data. Based on recent reports it looks like there is a renewal of the downward trend in unemployment we have seen over the last year or so. Continuing claims fell by 15,000 to 3.27 million, a five week low and near the years lowest levels. Total claims reached new lows in data that lagged the initial claims figures by two week. Total claims for the week ending September, 21 were around 5.0 million, 44,000 claims lower than the previous week and 1.8 million (26.4%) lower than last year at this time. The labor market is not strong but you have to admit that it is making progress.

In other economic news today the trade gap widened today as exports fell and import prices rose. The trade gap widened to $44.2 billion in August, a +4% jump from the previous month. US exports fell by 1% while at the same time the cost of imports climbed by 1.1%. Despite the gain in prices imports are still 0.6% cheaper than they were a year ago.

European shares closed higher, buoyed by the US markets, a downgrade of Spanish debt and a softening attitude toward Greece. Standard & Poors downgraded Spanish debt to just above junk status and inspired some hope that the move could force Spain into asking for bail-out money. Spanish bond yields have been slipping over the last week or so and fears of further downgrades loom for the country. This is the third downgrade of Spanish debt this year.

Christine Lagarde of the International Monetary Fund made some statements over night concerning Greece that may have started a new round of assistance for that country. In her comment she states that Greece needs more time to institute the changes and meets its budget goals. She went on to say that “front-loading” austerity measures to fast could hurt Greece in the long run. She and the IMF are advocating more time for Greece.

Stock news in Europe was positive with retailers and housewares leading today. Several merchants, including supermarket giant Carrefour, reported strengthening sales and other positive news. The positive earnings reports and the impending extension of Greece's debt obligations helped to send the European markets up by nearly 1%.

In Asian news China increased its public works spending, adding another 20 billion yuan to railway spending. The move is another effort to boost the economy and a good one. The increase in spending is expected to create new jobs and help the economy expand into more remote regions of the country. This move comes after a reported drop in lending by China's four largest banks. Asian shares ended the day lower amid mounting uncertainty over the economy.

Oil prices traded to the upside today. Rising tensions in the middle east are keeping trading active and the upper end of the two week range. Oil prices have been gaining volatility lately but have yet to show true direction. The Oil Index regained some of the ground it lost yesterday. The index is moving down from the down-sloping top of its range and fell below the short term moving average with conviction. Today the index traded around yesterday's mid-point but closed below it, a move with bearish implications.

Oil Index, Daily

Gold also traded to the upside today, breaking a four day losing streak. The metal has been near all-time highs and with all the stimulus is likely to retest those highs again at the least. The Gold Index has also been performing well, breaking out of a double bottom and now possibly preparing to make another leg up. A break to the upside could take the index another 25-35 points higher.

The Gold Index, daily

The yield on ten year US treasuries fell today and moved back below the short term moving average. Investors just can't get away from the safe haven of US debt.

Ten Year US Treasuries

There was a buzz on the floor of the NYSE today, I wasn't there but I could tell from watching CNBC. Perhaps it was the four IPO's scheduled for today. All were met with investor enthusiasm and traded 20% or more to the upside which would cause me to buzz if I was one of the fortunate early investors. The one of note is Realogy Holdings. They are the largest franchisor of real estate brokerages in the US and owner of Century 21 amongst other recognizable brands. The stock was initially priced at $27 and opened trading at $32. By the end of the day the stock had gained over 4.5% from the opening price to close +$34.

Realogy, daily

There isn't much happening today on that scene but tomorrow JP Morgan and Wells Fargo both report and the news could be market moving. JP Morgan is still being haunted by the Whale as it rocks the management structure of the firm and is not expected to have made much in the way of earnings growth. The banks stock has been trending up over the last few months but is at resistance now. The consensus estimates for earnings are inline with last quarters $1.21 per share.

JP Morgan, daily

Wells Fargo is expected to earn in the range of $0.86-0.87 per share, a 6% gain over the previous quarter. Wells Fargo is trading just below recent five year highs and still above of the short term moving average. Tomorrow's report and the outlook for the current quarter could have a major affect on stock price.

Wells Fargo, daily

The banks have been trending up all year and now the Bank Index is making an attempt at new highs. JP Morgan, which has a high surprise ratio, will probably deliver more than we are expecting. Today Citigroup upgraded US equities as a whole, citing some risks to earnings and the help of strong moves by the Fed. Citi analysts see the housing market improving and remaining stable apart from the stock market which they expect to outperform the global markets. Banking business should be improving along these lines, especially in homes loans and refinances. Tomorrow's reports are important for the sector and will set the tone for the rest of the banks and stocks in general.

Banking Index, daily

Sprint Nextel was another story stock today. Japan's Softbank made moves to buy the telecommunications giant and sent the shares up by more than 18% in pre-market trading. After the open shares climbed higher before eventually giving up much of the knee-jerk reaction to the news. Volume was incredibly high today, I expect to see more volatility come from this news.

Sprint, daily

Around mid-day stocks began to decline, led by a drop in Apple, and eventually went into the red for a brief time during the afternoon. Most of the indexes, including the S&P 500 crept back into the green by the end of the day. The S&P 500 is now sitting just above the critical support of 1433 and under the short term moving average. This marks the middle of the break out from the previous resistance range and the continuation signal I have pointed out in past wraps. I think it goes without saying that I will be watching this level closely. The S&P is still trending up though we may be in for some more neutral or downward action until the market returns to the long term trend. Market moving data is light in the next week despite a full roster of lesser reports so earnings and international events will be the big drivers.

S&P 500, daily

Crossing under the short term moving average is potentially bearish. If short term traders can build up momentum on bad news or earnings the index could come down to 1400 or 1380 in the near term. Momentum on the S&P 500 is bearish and increasing on the daily charts at this time. On the longer term weekly charts the MACD indicator is still bullish but divergent from the last 12 month up-trend. Momentum in the long term trend is declining, it is one of the factors that I and other Wrap writers have pointed out and cited for many weeks. At this time it is still bullish in the long term so we should expect the markets to snap back from the current weakness. The S&P really needs to hold this level to keep a bullish near-term outlook.

S&P 500, weekly

The Nasdaq has already made a textbook lower high and lower low. The index has entered what is at least a near term down-trend and is building momentum. Apple's wild ride down to the lower $600's has really put a hurting on the index and stocks as a whole. Without Apple's leadership the Nasdaq will have to find a new leader or keep following the old leader down. Apple will surely find a bottom but when and where is yet to be seen.

Nasdaq, daily

The VIX hardly made a move this week which goes to show that nothing happened that was not expected. In fact, like I said last week, the volatility in volatility seems to be subsiding. While the volatility index is still creeping along at such low levels the S&P should continue to move up.

Thinking about the low volatility just reminded me of Elmer Fudd as he quietly tip toes through the woods; “be very very quiet, I'm hunting rabbits” he says. Instead of a lovable cartoon character we have volatility quietly moving along hunting for the next bear market catalyst. I still say a spike in the VIX is coming, maybe sooner than later.

VIX, daily

Earnings are going to play a big role in what's to come for the US indexes. Yes, the European fear is still there but every time it seems to boil they relax a policy, buy some bonds or kick the can down the road with some other fiscal boot. The US economy, at this time, is showing signs of improvement. Unemployment is down and after today's claims data I expect it may come down some more. The housing market is showing signs of life and fiscal stimulus is in place. Now it comes down to earnings, are things going to be as bad as we feared or worse? Right bad is OK because that's what we expect but worse won't be good. Keep a close eye out for earnings, future guidance and economic data.

Economic Calendar

Remember the trend and do like Jim says, enter passively and exit aggressively!

Thomas Hughes

New Plays

Weak But Still Above Support

by James Brown

Click here to email James Brown

Editor's Note:

No new trades tonight.

The market looks vulnerable to more declines but the S&P 500 is still holding above support at the 1430 level. The NASDAQ composite, while weak, is still above support near 3040.

If you feel compelled to trade you may want to consider bearish positions on the SPY, the DIA, or the IWM if we see the indices breakdown to new relative lows.

I am providing a list of candidates that caught my eye and may have potential as trades in the near future:

(bullish ideas) HII, SWN, UAN, HMIN, NWL, BONT, ROVI, SLM, VMED

(bearish ideas) BMY, VLO, ARUN, TRIP, DMND,

In Play Updates and Reviews

Early Gains Fade

by James Brown

Click here to email James Brown

Editor's Note:
The market's early morning gains faded and stocks drifted back toward unchanged.

We did see JCP hit our stop loss.

Current Portfolio:

BULLISH Play Updates

American Intl. Group - AIG - close: 35.68 change: +0.19

Stop Loss: 33.90
Target(s): 39.75
Current Gain/Loss: - 0.9%

Entry on October 9 at $36.00
Listed on October 8, 2012
Time Frame: exit prior to earnings on Nov. 1st
Average Daily Volume = 44 million
New Positions: see below

10/11/12: AIG is still struggling with resistance near the $36.00 level. I would still expect a dip toward $35.00, especially if the market's major indices move lower tomorrow.

Our target is $39.75 but we'll plan on exiting prior to the early November earnings report. FYI: The Point & Figure chart for AIG is bullish with a $42.50 target.

Current Position: Long AIG stock @ $36.00

- (or for more adventurous traders, try this option) -

Long Nov $37 call (AIG1211k37) entry $0.76

Bio-Reference Labs - BRLI - close: 32.30 change: +0.79

Stop Loss: 30.75
Target(s): 34.75
Current Gain/Loss: + 6.8%

Entry on October 03 at $30.25
Listed on October 2, 2012
Time Frame: 4 to 6 weeks
Average Daily Volume = 232 thousand
New Positions: see below

10/11/12: BRLI displayed relative strength with a rally toward its early October highs. The rebound did pare its gains to settle with a +2.5% advance. A failure here and it's going to look like a short-term bearish double top. More conservative traders may want to take profits now. I am raising our stop loss to $30.75.

current Position: Long BRLI stock @ $30.25

10/11/12 new stop loss @ 30.75
10/04/12 new stop loss @ 29.90
10/03/12 new stop loss @ 29.25
10/03/12 triggered @ 30.25

Colfax Corp. - CFX - close: 36.30 change: -0.03

Stop Loss: 34.95
Target(s): 39.90
Current Gain/Loss: - 1.9%

Entry on October 01 at $37.00
Listed on September 29, 2012
Time Frame: 4 to 8 weeks
Average Daily Volume = 753 thousand
New Positions: see below

10/11/12: CFX was little changed at the closing bell today. Shares are still trading with a very short-term trend of lower highs within the larger bullish trend. Readers may want to adjust their stops closer to $36.00. I am not suggesting new positions at this time.

The plan was to keep our position size small to limit our risk. FYI: The Point & Figure chart for CFX is bullish with a long-term $59 target.

*Small Positions*

Suggested Position: Long CFX stock @ $37.00

10/01/12 triggered @ 37.00

Sun Hydraulics Corp. - SNHY - close: 26.60 change: -0.45

Stop Loss: 25.95
Target(s): 31.00
Current Gain/Loss: - 3.8%

Entry on October 03 at $27.65
Listed on October 1, 2012
Time Frame: exit prior to earnings in November
Average Daily Volume = 54 thousand
New Positions: see below

10/11/12: It's starting to look ugly with SNHY. The morning rally failed and shares lost -1.6% by the close. The next level of support should be the $26.00 level. I am not suggesting new positions at this time. More conservative traders may want to exit early.

Don't forget that we want to limit our position size to reduce our risk. SNHY could be volatile thanks to its lack of volume.

FYI: The Point & Figure chart for SNHY is bullish with a $38 target.

*Small Positions*

current Position: Long SNHY stock @ $27.65

10/03/12 triggered @ 27.65

BEARISH Play Updates

Centene Corp. - CNC - close: 35.82 change: +0.13

Stop Loss: 37.05
Target(s): 31.50
Current Gain/Loss: + 2.5%

Entry on September 20 at $36.75
Listed on September 19, 2012
Time Frame: exit prior to earnings on Oct. 23rd.
Average Daily Volume = 693 thousand
New Positions: see below

10/11/12: CNC managed another gain but the rebound keeps struggling with new resistance near $36 and its 100-dma. I am not suggesting new positions.

current Position: short CNC stock @ $36.75

- (or for more adventurous traders, try this option) -

Long Oct $35 PUT (CNC1220v35) Entry $1.20

10/10/12 new stop loss @ 37.05
10/02/12 new stop loss @ 38.05

Con-way Inc. - CNW - close: 27.83 change: -0.08

Stop Loss: 28.60
Target(s): 25.05
Current Gain/Loss: + 2.1%

Entry on September 20 at $28.44
Listed on September 19, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 787 thousand
New Positions: see below

10/11/12: The early morning rally attempt in CNW failed for the third day in a row. I am adjusting our stop loss down to $28.60. I am not suggesting new positions at this time.

Our target is $25.05. More aggressive traders could aim lower. The Point & Figure chart for CNW is bearish with a $20 target.

current Position: short CNW stock @ $28.44 (gap down)

- (or for more adventurous traders, try this option) -

Long Oct $27.50 put (CNW1220v27.5) Entry $1.00*

10/11/12 new stop loss @ 28.60
10/06/12 more conservative traders will want to seriously consider an early exit now to avoid a loss
09/25/12 new stop loss @ 29.05
09/20/12 new stop loss @ 29.55
09/20/12 entry on gap open lower at $28.44
*option entry price is an estimate since the option did not trade at the time our play was opened.

Sohu.com - SOHU - close: 40.17 change: +0.36

Stop Loss: 41.40
Target(s): 36.00
Current Gain/Loss: - 1.6%

Entry on October 10 at $39.55
Listed on October 9, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 472 thousand
New Positions: Yes, see below

10/11/12: Uh-oh! SOHU has closed back above the $40.00 level. That's not a good sign for the bears although SOHU should still have resistance near $41.00 and its converging 50-dma and 100-dma. I am not suggesting new positions with the stock above $40.

Earlier Comments:
I have to warn you that SOHU can be a volatile stock so we need to limit our position size to reduce our risk or consider trading the options. Our target is $36.00. More aggressive traders could aim for the $34.00 area.

*Small Positions*

current Position: short SOHU stock @ $39.55

- (or for more adventurous traders, try this option) -

Long Nov $37.50 PUT (SOHU1211w37.5) entry $1.85

Synaptics Inc. - SYNA - close: 23.35 change: +0.14

Stop Loss: 24.51
Target(s): 22.15
Current Gain/Loss: + 5.8%

Entry on September 26 at $24.79
Listed on September 25, 2012
Time Frame: 3 to 6 weeks
Average Daily Volume = 439 thousand
New Positions: see below

10/11/12: SYNA continues to churn sideways with a bearish trend of lower highs. I am not suggesting new positions.

Our target is $22.15 but more aggressive traders could aim lower.

Earlier Comments:
I do consider this a higher-risk, more aggressive trade because SYNA has already seen a big move down. We want to limit our risk and keep our position size small.

*Small Positions*

current Position: short SYNA stock @ $24.79

- (or for more adventurous traders, try this option) -

(exit on Oct 2nd, at the open)
Oct $25 PUT (SYNA1220v25) Entry $1.15 exit $1.65 (+43.4%)

10/06/12 new stop loss @ 24.51
10/02/12 planned exit to close our put option at the open
10/01/12 new stop loss @ 24.70, plan on exiting our October puts at the opening bell tomorrow
09/29/12 new stop loss @ 26.05, adjust exit target to $22.15

Titanium Metals - TIE - close: 12.43 change: +0.27

Stop Loss: 13.05
Target(s): 11.00
Current Gain/Loss: - 0.2%

Entry on October 4 at $12.41
Listed on October 3, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.5 million
New Positions: see below

10/11/12: TIE is bouncing and managed a rally with a +2.2% gain. The rebound stalled at resistance near $12.50 and its 10-dma.

*Small Positions*

current Position: short TIE stock @ $12.41

Trimble Navigation - TRMB - close: 47.43 change: +0.67

Stop Loss: 48.55
Target(s): 42.50
Current Gain/Loss: unopened

Entry on October xx at $ xx.xx
Listed on October 10, 2012
Time Frame: exit prior to earnings on Nov. 1st
Average Daily Volume = 697 thousand
New Positions: Yes, see below

10/11/12: TRMB produced a bounce but it failed at short-term resistance near $48.00. More aggressive traders may want to use today's move as a new entry point. I am suggesting we stick to our plan and wait for a breakdown.

Earlier Comments:
I am suggesting small bearish positions if TRMB can trade at $46.50 or lower. If triggered our target is $42.50 but we want to exit prior to the next earnings report on November 1st.

Trigger @ 46.50 (Small Positions)

Suggested Position: short TRMB stock @ (trigger)

- (or for more adventurous traders, try this option) -

buy the Nov $45 PUT (TRMB1211w45)

Veeco Instruments - VECO - close: 28.32 change: +0.45

Stop Loss: 30.15
Target(s): 26.65
Current Gain/Loss: + 4.8%

Entry on October 08 at $29.75
Listed on October 6, 2012
Time Frame: exit prior to the Oct 22nd earnings report
Average Daily Volume = 740 thousand
New Positions: see below

10/11/12: VECO produced an oversold bounce after four days of declines. I am not suggesting new positions.

Earlier Comments:
A lot of investors are already bearish on this stock so there is a risk of a short squeeze should it unexpectedly move higher. The most recent data listed short interest at 29% of the 38.7 million share float. Thus you may want to use put options to limit your risk instead of shorting the stock.

current Position: short VECO stock @ $29.75

- (or for more adventurous traders, try this option) -

Long Nov $30 PUT (VECO1211w30) Entry $2.20

10/10/12 adjust exit target to $26.65
10/09/12 new stop loss @ 30.15
10/08/12 new stop loss @ 30.55


J.C.Penney Co. - JCP - close: 26.18 change: +2.03

Stop Loss: 25.05
Target(s): 20.25
Current Gain/Loss: - 6.3%

Entry on October 3 at $23.57
Listed on October 2, 2012
Time Frame: 3 to 6 weeks
Average Daily Volume = 8.9 million
New Positions: see below

10/11/12: Our JCP trade has been stopped out thanks to today's +8.4% gain. Back in January 2012 the company's management announced a new pricing structure to offer everyday low prices instead of focusing on sales. The CEO said they were going to try and wean customers off the use of sales and promised to stop issuing coupons. Since then the market has been unhappy with the results.

This morning it was announced that the CEO had approved a new coupon with a $10 off their next purchase of $10 or more. Management isn't calling it a "coupon".

The market liked it or the shorts got spooked by it and shares of JCP soared this morning. Our stop loss was hit at $25.05.

Earlier Comments:
I consider this a somewhat aggressive, higher-risk trade. We want to limit our risk by keeping our position size small.

*Small Positions*

closed Position: short JCP stock @ $23.57 exit $25.05 (-6.3%)

- (or for more adventurous traders, try this option) -

Oct $23 PUT (JCP1220v23) entry $0.65 exit $0.09 (-86.1%)

10/11/12 stopped out at $25.05