9:30pm (EST)

1.  Market Summary 

2.  Symantec (SYMC) – A Cyber Security and Storage Play     

3.  Melco Crown Entertainment (MPEL) – A Covered Call Down the Road    

4.  Earnings 

5.  Weekly Wrap Portfolio Update 

6.  Week Ahead

(To view the charts, please log into the Members Area and go to the Weekly Wrap Premium section)

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1.  Market Summary 

The bears continued their recent domination of the bulls as the market fell for the sixth-straight week.  After a rough May, the selling pressure has continued into June with 7-out-of-8 losing sessions to start the month.  The only positive day came on Thursday which was a much needed bounce but the momentum has picked up over the past few weeks as the bears continue to take out key support levels.  

The lack of positive catalysts has hurt the bulls as global and the U.S. economies continue to struggle.  Word of slower economic growth out of China sparked Friday’s decline along with an unexpected increase in U.S. import prices for the month of May.  But, the news was bad all week and Friday’s decline was just the icing on the cake as the bears broke thru several psychologically significant levels for the major indexes.

The Dow fell 172 points, or 1.4%, on Friday to settle at 11,951.  The index reached a low of 11,937 intraday and easily fell thru our downside target of Dow 12,000.  The bulls tried to make a run back over 12,200 early in the week but resistance was heavy which led to the slow drift downward and Friday’s selloff.  We said last week if the 12,000 level didn’t hold up there would be short-term support at 11,800-11,750.  Watch these levels for the week and if penetrated all signs would point towards Dow 11,600-11,500.  Upside resistance will now be 12,000 and then 12,200.  For the week, the blue-chips fell nearly 200 points, or 1.6%, but are still up 3.2% YTD.  A break below 11,600 would wipe out the gain and would put the Dow at even for the year.

The S&P 500 dropped 18 points, or 1.4%, and closed at 1,270.  The index dipped to a low of 1,268 on Friday and was unable to mount a serious threat at 1,300 even with Thursday’s bounce back to 1,289.  We mentioned downside pressure at 1,275 if the bulls couldn’t get back over the 1,300 level and there is now further risk down to 1,250.  These two areas will be act as short-term resistance and support going forward.  For the week, the S&P 500 dropped 29 points, or 2.2%, but is still holding on to a 1.1% gain for 2011.  A break below 1,257 would put the index in the red for the year.

As far as the Nasdaq, it tumbled 41 points, or 1.5%, and settled at 2,643.  The index fell below the 2,750 level the week before last and we said further risk was down to 2,700 once this level was breeched.  By Tuesday, the bears were all over 2,700 and we said in our daily that 2,650 would come into play.  Tech traded to a low of 2,641 on Friday and faces further risk down to 2,600-2,550 for the upcoming week.  Resistance is now at 2,700-2,725.  For the week, the Nasdaq plunged 89 points, or 3.3%, and is now down 0.3% for 2011 after starting the year at 2,652.

We also wanted to point out the decline in the Russell 2000 which we said was also in danger of falling below key support levels.  The index went into Monday’s session above 800 but dropped 13 points for the day to finish at 795.  By Friday, the Russell closed at 779, down another 13 points, which marked a 10% correction from the high. 

And finally, the S&P 500 Volatility Index (^VIX, 18.86, up 1.09) jumped 6% on Friday but managed to stay below 20 all week.  We have also mentioned that a break above 20 could cause panic as the index is used to gauge fear.  A VIX reading under 20 indicates confidence and calm while a reading above 30 indicates nervousness and panic.  So, if you think this is panic, you haven’t seen anything yet. 

The recent debacle has brought the major indexes down to their mid-March closing lows which are Dow 11,613; S&P 1,256; and Nasdaq 2,616.  If these levels are breeched then the VIX will be over 20 and could be headed to 30 on a continued selloff. 

We mentioned a few months ago to start watching for lower Friday and lower Monday closes which indicate money is moving out of the market and that a trend is changing.  From May 22, 2011:

“We mentioned last week that bull market rallies show signs of fading with weak Friday and Monday closes.  We had also mentioned there had only been three occurrences where the S&P 500 finished lower on a Friday and the Monday after (for 2011).  Make that four with last Monday’s lower close.

The problem the market faces on Monday if we do close lower will be a back-to-back consecutive lower Friday/ Monday finishes.  We have said this could signal a trend change and we will continue to monitor this development but we still have this feeling the market is going to hit new highs in June.” (END)

On May 23, the following Monday, the Dow fell over 100 points.  We had a higher Friday/ Monday close to end the month of May but the market started the month of June with lower closes on both days.  If the bears win Monday’s session then it probably means the trend lower continues and we break the March lows.  From there, it could get worse, or, we could start to see some nibbling at the support levels we have outlined.  In any event, this week will be crucial for the bulls as they try to hold support and avoid a seventh weekly drop.  If they can’t then we doubt we see new highs until the after summer is over.  

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2.  Symantec (SYMC) – A Cyber Security and Storage Play      


By Michael Bryant

The latest hacking attack was against Citigroup (C, $37.92, up $0.15).  Not long before that, Lockheed Martin (LMT, $77.30, down $0.59) and EMC (EMC, $26.32, down $0.59) both experienced attacks.  With internet security breaches running high, this is good news for Symantec (SYMC, $18.50, down $0.35), the largest internet security provider.  But what most people overlook is that the company is also #2 in storage, just behind EMC.  This segment will provide further growth.

The company has a 16% market share in the $3.5 billion storage software market, behind EMC’s 23.8% market share.  The storage market grew by 12.4% year-over-year in the first three months of this year.  Thus, the company raked in $560 million from storage and with the growth of cloud computing, the storage market is only expected to grow.

But the recent security breaches give the most promise to the company.  Ponemon Institute estimates such breaches cost companies, on average, $7.2 million per incident in 2010.  Further, the recent breach at EMC’s RSA security division and a related attack at Lockheed Martin have damaged RSA’s reputation, according to industry experts.  That gives companies that sell alternatives to RSA’s SecurIDs, such as Symantec, more room to try to win customers from EMC.  As a result, companies will likely spend more for security and Symantec could steal some market share.


In the fourth quarter the company launched Norton 360 Version 5, which has so far received over 95 positive reviews and awards.  The company’s NetBackup, the number one information management solution for enterprises, posted strong double-digit bookings growth and gained market share.


The Security and Compliance segment grew 11% year-over-year.  The Storage and Server Management segment grew 1% year-over-year.  The Services segment shrank 13% year-over-year.  And the Consumer segment grew 4% year-over-year.  Each segment compromises 25%, 37%, 6%, and 32% of quarterly revenue respectively.  Thus, all segments that compromise a significant percentage of revenue grew.

Below are the revenue, earnings, cash flow, and operating margin graphs.  For the revenue and earnings graph, estimates for the next two quarters are included.  The next quarterly earnings report is not till August.


The operating margin has appeared to reverse its downward trend, a sign that the company’s operations are strengthening.  Operating cash flow has surged over the past two quarters, but if history repeats itself, operating cash flow will fall in the next two quarters.  Analysts expect year-over-year revenue to grow at the same rate in the 1st and 2nd quarters of 2011, but year-over-year earnings growth is expected to be less in the 1st quarter than that of the 2nd quarter.  Thus, either 1st quarter earnings or revenue may either beat or miss estimates.  The company has met or beat earning four quarters in a row.  Thus, it is unlikely that the company will miss on earnings, but could still miss on revenues.

Taking a look at the chart, shares are near the support line, thus inferring that it could move higher to the resistance line.  The price is right between the 50-day and 100-day moving averages.  The 100-day MA correlates with the support line.  The support and resistance lines are between the Bollinger Bands, meaning that these prices would likely stay close to these lines.  All technical’s except the MFI are near or in oversold levels.  The stochastic %K and %D formed a bullish cross.  The last time the stochastic %K and %D formed a bullish cross and the other technical’s were at similar levels, as indicated by the vertical purple line, the stock started its long rise upward.

Recently, the stock was upgraded to Outperform at Cowen and Company.  On top of that, Barron’s reported that the company could also be a takeover target which we already knew.  EV/EBITDA is 8.29, which is a little high, since most takeovers are at EV/EBITDA of 4-6.  With a market cap of $14 billion, any takeover must be by a large company.  Forward P/E ratio is 10.45, PEG ratio is 1.21, price to sales is 2.29, and price to book is 3.14.  All numbers look cheap for a company, but the big question is who would be interested in buying the company.  Perhaps Microsoft (MSFT, $23.70, down $0.25) could use their $48 billion in cash to buy the company but after buying Skype they have to work on those synergies, first.  Google (GOOG, $509.51, down $7.22) has $38 billion in cash and would be a more ideal fit, since it is a competitor with Symantec. However, even if the company is not bought, the rumor and upgrade should provide support for the stock to move higher.

As you know, the general market has been in a downtrend and sentiment may not change anytime soon with until 2Q quarter’s earnings season which begins in July.  We recommended positions last week on Wednesday even as the market looked weak because we feel there is some safety in the stock as cyber attacks continue to grow.

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3.  Melco Crown Entertainment (MPEL) – A Covered Call Down the Road

We are bullish on the Casino/Gaming industry long-term and we wanted to take a look at another popular casino stock, Melco Crown Entertainment (MPEL, $10.41, down $0.48).  Unlike MGM Resorts (MGM, $12.55, down $0.49), this casino mainly does business in Macau, the only place in China where gambling is legal.  With 1.2 billion people in the country, Macau should see growth for many years to come.  The island is already thriving and so should Melco’s stock.

While Las Vegas is slowly recovering from the economic depression, Macau is booming.  Assuming a 25% growth rate from 2010-2015, the island could bring in $72 billion in revenue per year.  Taking that this stock has a market cap of $5.55 billion, the company must gain a 13% market share in Macau to justify its price.  With seven casinos, the company is one of six casinos licensed to operate on the island.  Thus, acquiring a 13% market share should be easy.  Its City of Dreams is already a must-see attraction, raking in about $500 million last quarter.

As the graphs below show, revenue has increased nicely over the quarters.  Analysts’ estimates for the next two quarters are added.  The company does not report earnings until mid-July.


However, one must wonder if growth is slowing, as apparent by the quarter-over-quarter graph which seems to be leveling off.  Of course, the last two points are analysts’ estimates, which could be wrong.  But the company’s EBITDA margin is only 15%, compared to 33% for competitor Las Vegas Sands (LVS, $38.81, down $0.83) and 31% for Wynn Resorts (WYNN, $131.99, down $3.21).

The stock is still cheap, selling for a PEG of 0.75 compared to 0.95 for Las Vegas Sands.  Thus, despite the concern in revenues, we think the stock will continue to head higher.  And the technical’s shown below support this. 

The stock has broken out of both the resistance and secondary resistance lines.  While it is possible that the stock could pullback to resistance and support lines, both lines are heading higher, and the stock will likely follow.  The vertical purple line in June shows that when the technical’s were at similar levels, the stock rose.  But the vertical purple line in November shows a pullback to support.  And the orange vertical line shows a large drop in the stock price.  Thus, a covered call would be the best choice, especially in uncertain market times but there is no need to rush things right now. 

We would like to see shares come down to the lower level of the current long-term uptrend which is around $9.50-$10.00.  If we get there this week, we will reevaluate the chart and see where we are at.

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4.  Earnings 

The companies in BOLD, we are looking at as possible trades and we may list call or put options on them in our Daily Newsletter.  If they become official recommendations, we sent out Trade Alerts or include them in our 9am and 1pm updates that come out during the week.  The first set of companies report before the bell that day, the second set after the market closes.  (Quotes are as of Friday’s close, 6/10/11). 

MONDAY

Campus Crest Communities (CCG, $11.95, down $0.39), Casey’s General Stores (CASY, $40.49, down $0.46), Dot Hill Systems (HILL< $2.88, up $0.05), Majesco Entertainment (COOL, $4.00, down $0.01), Motorcar Parts of America (MPAA, $15.40, down $0.06), Pure Bioscience (PURE, $1.02, down $0.03), Rand Logistics (RLOG, $7.19, down $0.16)

TUESDAY

Agilysys  (AGYS, $7.33, down $0.24), Best Buy (BBY, $28.43, down $0.54), Capstone Turbine (CPST, $1.65, down $0.03), Central Bancorp (CEBK, $18.70, down $0.20), Factset Research Systems (FDS, $104.02, down $1.79), Synutra International (SYUT, $9.64, down $0.88)

WEDNESDAY

Casella Waste Systems (CWST, $5.60, down $0.06), Finisar (FNSR, $18.21, down $0.22), Miller Energy Resources (MILL, $5.64, up $0.29), WSP Holdings (WH, $0.91, up $0.11)

THURSDAY

Actuant (ATU, $22.67, down $0.20), First Capital (FCAP, $16.75, flat), Kroger (KR, $23.28, down $0.52), Pier 1 Imports (PIR, $10.99, down $0.16), Research In Motion (RIMM, $36.56, down $1.05), Smithfield Foods (SFD, $19.02, down $0.28), Winnebago Industries (WGO, $10.51, down $0.29)

FRIDAY

Funtalk China Holdings (FTLK, $6.60, flat)

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5.  Weekly Wrap Covered Call Portfolio Update (Closing prices as of 6/10/11)

Symantec (SYMC, $18.50, down $0.35)

July 19 calls (SYMC110716C00019000, $0.40, down $0.15)

Original Entry Price:  $18.77 (6/8/11)

Lowered Price from Selling Options: $18.17

Exit Target: $20+

Return: 2%

Stop Target: None

Action:  There is risk down to $18 (black line and red circles) for shares of Symantec which is the first wave of support.  A break below $18 could lead to $17.50 (red circles and green line) which is where would expect a trading range to form before the next leg up. 


We recommended buying the stock at $18.77 on 6/8/11 and for every 100 shares to sell the July 19 calls for 60 cents.  This lowered the cost basis to $18.17. 

If shares are called away by mid-July at $19 the trades makes 5% in 5 weeks.

 

Rare Element Resources (REE, $9.75, down $0.41)

July 12 calls (REE110716C00012000, $0.15, down $0.05)

Original Entry Price:  $12.38 (5/31/11)

Lowered Price from Selling Options: $11.23

Exit Target: $10+

Return: -13%

Stop Target: None

Action:  We said last week Rare Element is not profitable so it is a risky stock to own.  However, we like the company for its futures growth prospects and takeover appeal.  We also mentioned there was support just below the $10 area as shares fell over 10% for the week.  Prior resistance should act as support (black line, red circles) if there is continued selling this week.  We did a big write-up on Rare Element Resources for our Weekly Wrap on April 3 for those of you want to learn more about their business.    


We recommended buying the stock at $12.38 on 5/31/11 and for every 100 shares to sell the July 12 calls for $1.15.  This lowered the cost basis to $11.23. 

If shares are called away by mid-July at $12 the trades makes 7% in 6 weeks.

 

Vivus (VVUS, $7.78, down $0.02)

June 8 calls (VVUS110618C00008000, $0.10, down $0.05)

Original Entry Price:  $7.93 (5/11/11)

Lowered Price from Selling Options: $7.43

Exit Target: $10+

Return: 5%

Stop Target: None

Action:  June options expire this week.

Vivus traded to a low of $7.66 for the week and this area has been acting as short-term support.  However, if broken, it could lead to a trading range between $6-$8.  Vivus may have a winner with Qnexa on two fronts which is what most analysts are forgetting.  The drug has completed Phase 3 trials for obesity and is still awaiting approval from the FDA.  However, Qnexa has also completed Phase 2 clinical trials and is hoping to get approval to treat diabetes and obstructive sleep apnea as well.  If shares are below $8 on Friday, we will look to sell a July or August call option.


We recommended buying the stock at $7.93 on 5/11/11 and for every 100 shares to sell the June 8 calls for 50 cents.  This lowered the cost basis to $7.43. 

If shares are called away by mid-June at $8 the trades makes 8% in less than 5 weeks.


AKS Steel Holding (AKS, $15.22, up $0.23)


Original Entry Price:  $15.93 (5/2/11)   

Lowered Price from Selling Options: $15.43

Exit Target: $20+

Return: -1%

Stop Target: None

Action:  AKS Steel made a nice run on Friday and is pushing short-term resistance (black line, blue circles).  We are still waiting for shares to trade back over $16 before writing another call.  Long-term support is at $14 but the big money has been scooping up shares at these low levels.  We have a target of $17-$18 by year-end for shares of AKS Steel. 


We recommended buying the stock at $15.93 on 5/2/11 and for every 100 shares to sell the May 16 calls for 50 cents.  This lowered the cost basis to $15.43.


American Capital (ACAS, $8.75, down $0.22)

June 10 calls (ACAS110618C00010000, $0.03, flat)

Original Entry Price:  $9.73 (4/19/11)   

Lowered Price from Selling Options: $9.23

Exit Target: $15+

Return: -5%

Stop Target: None

Action:  June options expire this Friday. 

We said last week short-term support was at $9 (red line) and a break below this level would lead to $8 (black line, green circles) which was prior resistance but longer-term support if $8.50 (blue line) doesn’t hold.   Shares have dropped 17% from their May 10 intraday high of $10.60 but are due for a bounce.  We doubt we will get called-away at $10 and will look to sell a July or August call next week.


We recommended buying the stock at $9.73 on 4/19/11 and for every 100 shares to sell the June 10 call for 50 cents.  This lowered the cost basis to $9.23. 

If shares are called away by mid-June at $10 the trades makes 8%.   

   

Cisco Systems (CSCO, $15.12, down $0.19)

Original Entry Price:  $17.14 (3/17/11)   

Lowered Price from Selling Options: $16.58

Exit Target: $20+

Return: -9%

Stop Target: None

Action:  Yes, this sounds like a broken record…Cisco hit another 52-week low of $15.01 on Friday.  We said there could be further weakness down to $15 (black line) but also take note of the March 9, 2009 low of $13.61 which could be tested if current levels don’t hold.


We recommended buying the stock at $17.14 on 3/17/11 and for every 100 shares to sell the May 18 call for 56 cents.  This lowered the cost basis to $16.58. 


Spreadtrum Communications (SPRD, $14.68, down $0.76)  

Entry Price:  $23.45 (2/7/11)

Lowered Price from Selling Options: $21.48

Exit Target: $30

Return: -32%

Stop Target: None

Action:  Shares fell $3 for the week and have seen continued selling pressure since the break below $18 (red line) and then $16 (red line).  From the looks of things, we could challenge $14 (blue line) before a rebound.    


Shares opened at $23.43 on 2/7/11 and the March calls could have been sold for 95 cents.  This lowered the cost basis to $22.48.

On 4/11/11 we recommended selling the May 22.50 call option for $1.00 which lowered the cost basis to $21.48.


DryShips (DRYS, $3.76, up $0.06)

January 2012 7.50 call (DRYS120121C00007500, $0.11, flat)   

Entry Price:  $5.25 (1/03/11)  

Lowered Price from Selling Options: $4.60

Exit Target: $8

Return: -18%

Stop Target: None

Action:  DryShips fell back below $4 (black line) and into a lower trading range with support just below $3.50 (red line) following last week’s decline.


DryShips opened at $5.37 on 1/3/11 and shares were at $5.25 shortly after the bell.  The January call options could have been sold for 65 cents which lowered the cost basis to $4.60.  

If shares are over $7.50 by January 2012, the stock will be “called away” and the trade will make over 60%.


Seattle Genetics (SGEN, $19.40, down $0.45)   

June 17.50 calls (SGEN110618C00017500, $2.00, down $0.40) 

Entry Price:  $15.50 (12/27/10)  

Lowered Price from Selling Options: $13.85

Exit Target: $20

Return: 40%

Stop Target: None

Action:  Seattle Genetics reached a high of $20 again on Thursday but slipped 2% on Friday.  There is strong support at $19 (black line) but we realize a test back down to $17 (red line, green circles) could come into play if $18.50 is taken out.  In any event, we are likely to get called away on Seattle Genetics this Friday as we look for support to hold even if there is further selling pressure in the overall market.    


Seattle Genetics opened at $15.80 and shares were at $15.50 at 10am on 2/27/10.  The March 17.50 call option could have been sold for 90 cents.  This lowered the cost basis to $14.60. 

On 4/4/11, the June calls could have been sold for 75 cents which lowered the cost basis to $13.85.  If shares are called away at $17.50 in mid-June the trade will make 26%.    

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6.  Week Ahead

There is no economic news on Monday’s docket and earnings won’t be a factor which could lead to volatility.

On Tuesday, Retail Sales results and the Producer Price Index (PPI) for May are due out before the bell, along with the government’s Business Inventories report for April which is due 30 minutes after the open.

For Wednesday, the MBA Mortgage Index will be released before the open along with May’s Consumer Price Index (CPI) report.  At the same time, the Empire State Manufacturing Index will hit the Street an hour before the bell as well.  Once trading begins, the market will get its weekly update on crude inventories along with the NAHB Housing Market Index report.   

Thursday is another big day as Wall Street will digest the latest Initial Claims and Continuing Claims figures.  Housing Starts and Building Permits for May are also due out before the open with the Philly Fed Index for June due out shortly afterwards.

Friday wraps up with the week with the release of the Reuters/University of Michigan Consumer Confidence Index for June, as well as the Conference Board’s Leading Indicators for May.  Friday is also June triple-witching for the options market so expect volatility.