Option Investor

Daily Newsletter, Tuesday, 11/13/2012

Table of Contents

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

Market Wrap

Cisco Rally?

by Jim Brown

Click here to email Jim Brown

Cisco beat the street after the bell and shot up +8%. Will that be enough to rally the markets on Wednesday?

Market Statistics

Cisco (CSCO) reported earnings of 48 cents that beat the street estimate of 46 cents. That was a year over year gain of +18%. Revenue of $11.9 billion was slightly higher than estimates of $11.77 billion. Revenue rose +6% over the comparison quarter. Gross margins were 62.7% and the company has $45 billion in cash. Cisco shares spiked +8% in afterhours trading not because the results were so strong but simply because traders were expecting Cisco to miss estimates and warn due to weakness in Europe.

CEO John Chambers gave cautious but firm guidance for the current quarter and that helped fuel the short covering in afterhours trading. Chambers said global macroeconomic uncertainty continued but Europe "will get worse before it gets better." CFO Frank Calderoni projected revenue growth of 3.5% to 5.5% in the current quarter. The street is looking for 4.5% so guidance was right in line.

The market may see a short squeeze in the tech sector on Wednesday but that may not trigger a broad market rally.

Cisco Chart

We saw a rally early Tuesday after Home Depot (HD) posted a strong earnings beat. The Dow rallied +149 points from the morning lows to touch +83 intraday. That intraday rally faded in the afternoon and the Dow closed down -58 points and almost the lows of the day.

Home Depot shares rallied to a +3.6% gain despite the Dow decline late in the afternoon. HD reported earnings of 74 cents compared to estimates of 70 cents. Revenue rose +4% to $18.13 billion compared to estimates of $17.92 billion. HD raised full year guidance to $3.03 per share from the prior $2.95. Revenues are expected to rise about +5.2%.

HD expects to see a $360 million in sales from the Hurricane Sandy damage. They are using the number from Hurricane Irene and Sandy was stronger with more flooding so the actual sales could be higher. The CEO said Q3 results were better than expected as a result of the improvement in the housing market. Customer transactions over $900, which account for about 20% of sales, rose +4.3% during the quarter driven by purchases of appliances, flooring and kitchen equipment.

The company took a charge for closing its stores in China. The DIY (Do it yourself) model never caught on in China where the mindset is DIFM. (Do it for me) China is also a monster referral network where business is done through referrals rather than advertising.

Home Depot Chart

Dow component Microsoft (MSFT) knocked the Dow lower at the open after they announced the surprise departure of Steve Sinofsky. He was the head of the Windows unit and widely expected to replace Steve Ballmer when Steve retires. Sinofsky rescued Microsoft from the Windows Vista failure with a strong Windows 7 release and just two weeks ago released a major upgrade in Windows 8. The 23 year veteran Sinofsky ruled the Windows kingdom with an iron fist and abrasive management style and that may have been a reason for Ballmer to make the change. Ballmer appointed two relative unknowns to replace Sinofsky.

Microsoft shares fell to a 10 month low on the news.

Microsoft Chart

Casino stocks declined after Las Vegas Sands and Genting Singapore reported the lowest gaming revenue in more than 18 months. Slower economic growth and tighter rules are restricting spending by gamblers. The newness of the gambling opportunity may be wearing off and the pain of losing is settling in on the gamblers. Anyone who has been exposed to gambling for any length of time eventually realizes that the house always wins in the end.

Singapore's economy is also slowing with only a +1.5% rise in GDP in 2012 compared to 4.9% in 2011. The industry regulator is also squeezing business by charging local residents $82 every time they enter a casino. That pretty well restricts the walk in traffic. Genting was fined $600,000 in September for reimbursing entry fees through promotions including free tickets to concerts. Las Vegas Sands said gaming revenue declined -28% to $470.8 million. Genting said revenue fell -20% to S$528.4 million. Despite the decline in gaming revenue the Marina Bay Sands recorded a 12% increase in hotel revenue and had a 99.8% occupancy rate for the 2,560 room resort with an average daily rate of $361.

Las Vegas Sands Chart

Gilead Sciences (GILD) held its gains from yesterday after announcing a cure for Hepatitis C. A study in human patients eliminated the virus in 100% of patients tested. The study showed that when added to the standard Hep C medicines it cleared the virus in all 25 patients tested. The one pill, once daily dosage with a 100% success rate is going to be a blockbuster drug for Gilead worth an estimated $5 billion yearly. Abbot Labs also released the results of a study where 87% of 79 patients tested were cured. Bristol Meyers reported results of their test where 94% of patients were cured with their drug. Normally those would be outstanding results but Gilead's 100% success will be hard to beat. Also, the Gilead drug works in four weeks while Abbots takes 12 weeks. Hep C affects more than 170 million people worldwide. If the Gilead drug proves as successful in the field as in trials it could make Hep C the seventh disease to be eradicated like small pox and polio. I would buy any dip on GILD.

Gilead Chart

AMD reported late Tuesday it had hired JP Morgan to explore options, which could include a sale, as the demand for its chips declines. The industry is moving to mobile and away from traditional PCs. Intel is stretching its lead on server chips and AMD is left with products that are obsolete almost as soon as they are released. The only reason AMD exists is to keep Intel from being considered a monopoly. Intel has supported AMD with grants and loans in the past to keep them afloat because it was cheaper than fighting court battles over being a monopoly.

Sources told Reuters the outright sale of the company was not a priority, (as if anyone would actually buy them), but of more importance was the sale of their patent portfolio. AMD later sent an email to Reuters saying AMD was not pursuing a sale of the company at this time. AMD is laying off workers because their cash burn rate is reaching critical levels. Some analysts believe a technology company might buy AMD to gain full control of the chip process for their own products rather than rely on outside vendors, long lead times and questionable quality control.

AMD Chart

There was nothing material to the market on the economic calendar today. The weekly chain store sales rose +0.7% but that report is just noise. The Treasury Budget for October shot up to a shortfall of -$120.0 billion from the +$75 billion in September. The average over the last eight months is a shortfall of about -$70 billion a month. October is the first month in the fiscal year so we are off to a good start on the next deficit. Interest payments accounted for $25 billion of the shortfall. That number will continue rising.

The national debt is roughly $16.4 trillion and should grow to more than $20 trillion over the next four years regardless of what kind of debt/spending deal gets done in relation to the fiscal cliff. That pretty much assures us of further ratings downgrades and higher interest rates once the Fed quits buying all the treasuries. Any "grand bargain" will likely be in the neighborhood of $2 trillion in reduced spending over ten years. That is $200 billion a year and we are running a deficit of -$1.2 trillion a year. That means the deficit will decline to only $1.0 trillion a year. That is a step in the right direction but nowhere close to what is needed to fix the problem. We are headed for financial disaster and nobody in Washington has the guts or the votes to fix it.

For Wednesday the highlight is the FOMC minutes at 2:PM. I don't expect any surprised but you never know.

Economic Calendar

I will try to make this topic as painless as possible. Fiscal cliff. Still there. No progress. Talk is cheap.

Natural gas futures rallied to $3.78 and close to the high for the year on expectations for the first inventory decline of the winter demand cycle when inventories are reported on Thursday. This is much ado about nothing since natural gas inventories are currently at an all time high of 3.929 TCF. There was only a 21 Bcf injection last week and the weather has been cold across much of the country. However, the lack of electricity in much of the Northeast as a result of Sandy could have reduced demand. Gas prices have risen more than 25 cents in the last two days. That is an amazing spike.

Natural Gas Chart

Crude oil declined to $85.27 and remains just over critical support at $85. The headline about the U.S. becoming the largest producer of oil in the world by 2020 has gotten a lot of attention despite its mathematical improbability. The decline today was due to a lowering of demand estimates by the IEA in their monthly update.

Crude prices should be nearing the point where they begin their summer rally but the broader market and the worries over the fiscal cliff could delay the start of that seasonal rally. Should support at $85 break we could easily see a retest of $80 but I seriously doubt there will be any further declines from that level.

We could see some volatility in oil prices later this week because both WTI and Brent futures expire this weekend.

Crude Oil Chart

I warned in the weekend letter the market was likely to weaken as worries over the fiscal cliff and most importantly changes in the capital gains and dividend taxes are discussed. On Monday the markets fought to a draw. Today I was surprised to see them significantly higher intraday but reality returned as we neared the close.

Part of that reality was a further decline by the S&P 500 that took it significantly below the 200-day average at 1381. The 1375 close is a clear break and it suggests we are about to start a new leg down. However, the Cisco earnings could produce a short squeeze at the open. The Nasdaq 100 futures are up +12.50 but the Russell 2000 futures are down -3.50 so we could have a mixed market at the open but the outlook is still for a move lower.

The S&P has broken all the uptrend support and the 200-day average. The next material support is 1265 but there are some stepping stones along the way so buyers could step in at any time if there is any progress on the fiscal cliff discussions.

S&P Chart - Daily

The Dow has clearly broken down and the failure of the 149 point rebound intraday was a very bad omen. Surely there was some worry over the Cisco earnings but the longer term selling trend was still in place. The next material support is 12,500 and the odds are very good it will be tested this week.

Dow Chart - Daily

The Nasdaq failed at soft support at 2900 and should be targeting 2800. The Cisco earnings will probably provide a short squeeze at the open but like the Dow rally today it will likely be sold. There are just too many challenges for the market to mount a material rally. (Famous last words)

I would simply follow the trend rather than try to fight it. I think it is too early to be looking for a buying opportunity.

Nasdaq Chart

The Russell 2000 is also in breakdown mode and significantly under the 200-day average. The next pause point could be 783 but the most likely target is 765. With the Russell futures down -3.50 after the Cisco earnings it suggests there will be selling on Wednesday.

Russell 2000 Chart

I have been telling you I expect the markets to move lower. However, there are a number of analysts making comments after today's close saying we are close to a bottom. They are saying a further drop to S&P 1355 or 1335 would be a launch point for a year-end rally. Personally I believe it is too early to be thinking year-end rally when the fiscal cliff battles have yet to be fought. Politicians are just now getting around to establishing their positions and are weeks away from a potential resolution. I suppose it could happen sooner but it would be the equivalent of Moses parting the Red Sea. You can't get 600 senators and representatives and a victorious president to come together for a tent revival on the White House lawn just because the market has lost a few hundred points. Positions, guidelines and talking points established in the coming weeks will be the battle lines for the next four years. It is not going to happen overnight.

I would be cautious of any rebounds until there is something concrete to celebrate.

Until then, enter passively, exit aggressively!

Jim Brown

Send Jim an email

New Plays

Basic Materials & Shipping

by James Brown

Click here to email James Brown


Georgia Gulf - GGC - close: 41.05 change: +1.23

Stop Loss: 39.40
Target(s): 44.90
Current Gain/Loss: unopened

Entry on November xx at $ xx.xx
Listed on November 13, 2012
Time Frame: 6 to 9 weeks
Average Daily Volume = 773 thousand
New Positions: Yes, see below

Company Description

Why We Like It:
GGC is in the basic materials sector. The company makes chemicals and building products. The stock has been showing relative strength lately. Shares outperformed the market again today with a +3.0% gain. GGC appears to be breaking out from its $35-41 trading range from the past couple of months. If this trend continues then GGC will be hitting new multi-year highs soon.

I am suggesting a trigger to open bullish positions at $41.50. If triggered our target is $44.90. FYI: The Point & Figure chart for GGC is bullish with a quadruple top breakout buy signal and a long-term $73 target.

Trigger @ 41.50

Suggested Position: buy GGC stock @ (trigger)

Annotated chart:


Teekay Offshore - TOO - close: 26.00 change: -0.90

Stop Loss: 27.01
Target(s): 1st target 24.05, 2nd target 22.50
Current Gain/Loss: unopened

Entry on November xx at $ xx.xx
Listed on November 13, 2012
Time Frame: 8 to 12 weeks
Average Daily Volume = 279 thousand
New Positions: Yes, see below

Company Description

Why We Like It:
TOO is in the shipping business, specifically crude oil transportation. Unfortunately it's been a tough fall for shipping stocks. Now shares of TOO are poised to breakdown under support near $26.00. If that occurs the next level of support appears to be at $24 and $22.

The recent lows are at $25.80. I am suggesting a trigger to open bearish positions at $25.75. Our first target is $24.05. Our second, longer-term target is $22.50.

Trigger @ 25.75

Suggested Position: short TOO stock @ (trigger)

Annotated chart:

In Play Updates and Reviews

Triggered Plays

by James Brown

Click here to email James Brown

Editor's Note:
The stock market gave back its gains this afternoon but we did see a few trades hit our entry triggers today.

ALK, TSM and IMPV are all open.

Current Portfolio:

BULLISH Play Updates

Alaska Air Group - ALK - close: 41.32 change: -0.02

Stop Loss: 39.95
Target(s): 44.75
Current Gain/Loss: - 0.7%

Entry on November 13 at $41.60
Listed on November 12, 2012
Time Frame: 6 to 9 weeks
Average Daily Volume = 768 thousand
New Positions: see below

11/13/12: We were expecting ALK to breakout higher but today was not exactly what we had in mind. Shares spiked higher at the open and hit $42.48 intraday. Then as the market rolled over shares of ALK followed it lower and gave back all of its gains. This now looks like a false breakout or bull trap pattern. I would wait for a new rally past $41.75 before considering new bullish positions.

Earlier Comments:
We do want to keep our position size small. ALK is definitely overbought with an eight-week rally. That doesn't mean it can't grow more overbought.

current Position: Long ALK stock @ $41.60

Ball Corp. - BLL - close: 43.37 change: -0.33

Stop Loss: 42.40
Target(s): 48.00
Current Gain/Loss: - 1.1%

Entry on November 06 at $43.85
Listed on November 3, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 687 thousand
New Positions: see below

11/13/12: Today's close under the 10-dma in BLL is short-term bearish. I suspect we'll see this stock test its 50-dma near $42.75 soon. I am not suggesting new positions at this time.

current Position: Long BLL stock @ $43.85

11/06/12 triggered @ 43.85

EXtra Space Storage - EXR - close: 35.33 change: +0.09

Stop Loss: 34.25
Target(s): 39.50
Current Gain/Loss: - 0.5%

Entry on November 08 at $35.50
Listed on November 7, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 700 thousand
New Positions: see below

11/13/12: Traders bought the dip in EXR this morning near its 10-dma. Shares spent the rest of the day consolidating sideways under the $35.50 level.

current Position: Long EXR stock @ $35.50

McMoRan Exploration - MMR - close: 12.70 change: +0.11

Stop Loss: 11.90
Target(s): 15.00-16.00 zone
Current Gain/Loss: -2.4%

Entry on November 12 at $13.01
Listed on November 10, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 2.3 million
New Positions: see below

11/13/12: MMR rallied off the initial spike lower this morning. Yet the rally stalled at the $13.00 level midday. I am concerned about the wider market and how that might impact MMR. Readers may want to wait for a new rally past $13.05 before initiating new positions or we can wait for a bounce near $12.00.

current Position: Long MMR stock @ $13.01

Taiwan Semiconductor - TSM - close: 16.18 chagne: -0.27

Stop Loss: 15.25
Target(s): 18.50
Current Gain/Loss: + 0.2%

Entry on November 13 at $16.15
Listed on November 10, 2012
Time Frame: 6 to 9 weeks
Average Daily Volume = 10.3 million
New Positions: see below

11/13/12: As we suspected TSM is starting to pullback from its new highs. The stock did hit our new buy-the-dip trigger at $16.15. Looking now at how TSM performed today odds are good we're going to see this stock test the $16.00 level. Readers could wait for a dip or a bounce near $16.00 before initiating new positions.

current Position: Long TSM stock @ $16.15

11/13/12 triggered @ 16.15
11/12/12 adjust trigger to $16.15

BEARISH Play Updates

Check Point Software - CHKP - close: 44.27 change: -0.32

Stop Loss: 45.15
Target(s): 40.65
Current Gain/Loss: - 1.3%

Entry on November 09 at $43.72
Listed on November 8, 2012
Time Frame: 3 to 6 weeks
Average Daily Volume = 4.0 million
New Positions: see below

11/13/12: It looks like the simple 30-dma continues to hold as overhead technical resistance in CHKP. Yet it's worth noting that traders bought the dip at $44.00 this morning. I would be tempted to launch new bearish positions on a drop to $43.80 again.

current Position: short CHKP stock @ $43.72

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

Long DEC $43 PUT (CHKP1222x43) entry $1.45*

11/12/12 adjust stop loss to $45.15
11/09/12 play opened on gap down at $43.72, trigger was $43.80
*option entry price is an estimate since the option did not trade at the time our play was opened.

Crocs, Inc. - CROX - close: 12.61 change: +0.20

Stop Loss: 13.05
Target(s): 10.25
Current Gain/Loss: - 1.7%

Entry on November 07 at $12.40
Listed on November 6, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 2.4 million
New Positions: see below

11/13/12: Hmm... is our CROX trade in trouble? An oversold bounce from $12.00 is not surprising but I was expecting the $12.50 mark to be stronger resistance. The stock is hovering near its 10-dma. Our stop loss remains at $13.05 for now. I am not suggesting new positions at this time.

Remember that we want to keep our position size small to limit our risk.

*Small Positions*

Suggested Position: short CROX stock @ $12.40

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

Long Dec $12 PUT (CROX1222x12) Entry $0.55

11/07/12 triggered @ $12.40

Hewlett-Packard - HPQ - close: 13.14 change: -0.27

Stop Loss: 14.15
Target(s): 11.50
Current Gain/Loss: + 5.3%

Entry on November 01 at $13.88
Listed on October 31, 2012
Time Frame: exit prior to the Nov. 20th earnings report
Average Daily Volume = 35.7 million
New Positions: see below

11/13/12: Another day, another new multi-year low for shares of HPQ. It will be interesting to see if CSCO's earnings report, which came out tonight, can spark a bounce in the tech sector. HPQ and CSCO are not direct competitors but a rally in CSCO could spark some short covering across the big cap tech stocks and HPQ is probably due for another bounce.

We want to exit prior to the Nov. 20th earnings report.

current Position: Short HPQ stock @ $13.88

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

Long DEC $13 PUT (HPQ1222x13) Entry $0.47

11/12/12 new stop loss @ 14.15
11/07/12 HPQ has reversed lower with the market
11/06/12 HPQ is showing strength. Readers may want to exit early now!

Imperva Inc. - IMPV - close: 28.96 change: -0.88

Stop Loss: 31.05
Target(s): 25.50
Current Gain/Loss: + 2.2%

Entry on November 13 at $29.60
Listed on November 12, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 221 thousand
New Positions: see below

11/13/12: Our new IMPV trade is off to a good start. Shares confirmed the breakdown under $30.00 with a -2.9% plunge today. Our trigger to open positions was hit at $29.60.

Earlier Comments:
We want to keep our position size small because IMPV can be a volatile stock. Our target is $25.50. FYI: The Point & Figure chart for IMPV is bearish with a $25.00 target.

current Position: short IMPV stock @ $29.60

Netgear Inc. - NTGR - close: 34.06 change: -0.22

Stop Loss: 36.05
Target(s): 30.25
Current Gain/Loss: + 1.3%

Entry on November 07 at $34.50
Listed on November 3, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 381 thousand
New Positions: see below

11/13/12: NTGR spent the session churning sideways near the $34.00 level. I have to warn you that larger rival CSCO reported earnings tonight and currently shares of CSCO are up sharply after hours on its report. This CSCO news could spark some short covering in NTGR. I would not be surprised to see NTGR bounce to the 10-dma near $34.85 or higher, possibly the $35.50 area. I am not suggesting new positions at this time.

current Position: short NTGR stock @ $34.50

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

Long DEC $33 PUT (NTGR1222x33) entry $1.00

11/13/12 caution, CSCO's earnings could have an impact on NTGR tomorrow
11/07/12 triggered @ 34.50