MomentumOptionsTrading.com Weekly Wrap for 10/23/11

10:30pm (EST)

1.  Market Summary

2.  Human Genome Sciences (HGSI) Active on Takeover Chatter

3.  Tempur Pedic International (TPX) Should Resume Uptrend

4.  Earnings

5.  Weekly Wrap Portfolio Update

6.  Week Ahead

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1.  Market Summary

The bulls were riding a 2-week winning streak and looked determined to make it 3-in-a-row coming into Monday’s session which has been a bullish day, historically, during the week of October expiration week.  The bears had their own plans and were trying to hold the top of the current trading range after the bulls pushed resistance on Friday.

Needless to say, the market fell back into its pattern following Monday’s 2% drop as Germany came to the bears rescue.  There was a lot of hype from the previous weekend that Europe was speeding up “the plan” to have something in place to deal with its debt crisis but Germany seems to think the top brass is struggling to come up with a comprehensive plan capable of stabilizing the region.  Although the drubbing was unexpected, the bulls did manage to hold the first wave of support.

Tuesday started off sketchy as the bears had some follow-through momentum, but the bulls battled back by halftime and used a huge rally of their own to “stretch” resistance.  The Dow was able to close above 11,600 while the S&P 500 closed right on our 1,225 target after kissing a high of 1,233.  The Nasdaq was above 2,650 and had Apple (AAPL, $392.87, down $2.44) on deck.

What we thought was going to be a good Wednesday turned into a drubbing for Tech after Apple came up short versus Wall Street’s expectations.  Shares fell 6% on the day and finished below $400 after the company posted a rare miss in their quarterly profits.  The Nasdaq was able to hold 2,600 while the S&P held 1,200 which were signs the bulls still wanted to push the action.

Thursday’s action was mixed but the volatility remained despite great corporate earnings and in-line jobless claims.  The Dow traded in a 200-point range but ended higher while the S&P dipped below 1,200 but held and ended higher.  The Nasdaq slipped a six-pack and closed below 2,600 but we said not to worry.

Going into Friday’s session, we had a good feeling about the day.  The Doors were jamming in the background as we headed to press and all that was left was to “break on through to other side”….

The Dow surged 267 points, or 2.3%, to settle at 11,808.  The blue-chips tested 11,600 all week and our target was 11,800 (blue line, black circles).  With Friday’s close, it would be hard to imagine the bulls not at least kissing 12,000 which is home of the 200-day moving average.  If this level is penetrated then the bulls could make a quick run to 12,200 (orange line, purple circles).  Short-term support is now 11,600 with 11,350 (green line, brown circles) providing backup.  The Dow was at 11,644 to start the week and added 164 points, or 1.4%.  For the year, the index is up 231 points, or 2%.

The S&P 500 zoomed 23 points, or 1.9%, to finish at 1,238.  The index tested support at 1,200 (blue line, orange circles) on Monday and we had to wait until Tuesday for 1,225 to print and confirmation the index was going to push 1,250 (green line, black circles).  We said last week if the bulls could clear this level then 1,275 (orange line, green circles) and the 200-day MA would come into play.  Same deal this week.  The S&P was at 1,224 before Monday’s opening bell and advanced 14 points, or 1.1%, for the week.  For 2011, the index is still down 19 points, or 1.5%.

The Nasdaq zoomed 39 points, or 1.5%, to settle at 2,637.  Tech tested a low of 2,557 on Thursday which is short-term support if 2,600 (green line, orange circles) breaks on a pullback.  If the 2,550 level is taken out then there is further support at 2,500 (blue line, black circles).  If the bulls can get a close above 2,650 then expect a pop to 2,700-2,750 (purple line, blue circles) and a test of the 200-day MA.  Tech started Monday’s session at 2,667 and fell 30 points, or 1.1%, for the week.  YTD, the Nasdaq is still showing a slight decline of 15 points, or 0.6%.

The S&P Volatility Index (^VIX, 31.32, down 3.46) came into the week below 30 (orange line, purple circles) and at 28.  The bulls will try to get the VIX back below 30 on a continued move higher and we said there could be a test down to 22.5 (green line, black circles) if the bulls push 1,300.   The bears will be looking to take the VIX back above 40 (blue line, green circles) after pushing 37 on Thursday and before Friday’s rally.

There have been some positive developments concerning Europe, yes, but the big driver of this market could be corporate earnings.  With 3Q earnings hitting mid-stride, nearly 75% of the companies that have confessed have beat or matched Wall Street’s expectations.  Usually, the fourth-quarter are most companies best quarters so expect January’s numbers to be even better.

The market is trading right on our price targets and so far we have been able to track its recent moves pretty well.  As some point, we will get caught with a few trades but the trend has been up for 3 weeks and we will ride the wave until the bulls hit shore.

Friday’s action was bullish because Europe added a “backup” meeting on Wednesday in case the top brass can’t come up with a game “plan” to stabilize the eurozone.  We will continue to watch the VIX and the 200-day MA’s and we also said October is historically bullish.  However, just in case there is a curveball, we are ready switch sides.  In fact, trading could get choppy as we near the 200-MA’s and there could be delays or flaws in Europe’s plan to get things right.  There could also be other headwinds so we are always respectful of both sides as the bears aren’t going anywhere.

The rally from the October 4th lows and been incredible to say the least, but, in the overall scheme of things the market is still flat for the year.  So, don’t get too caught up in what the talking heads are saying or some of the knuckleheads who only have one view on the market.  We also said last week fund managers could chase any rally or breakout and this will be the week they have to commit if they are going to make their clients any money this year.

We mentioned at the beginning of the month that statistically, October, which has been known to be the month of big crashes, averages gains of 0.6% for the month.  Well guess what?  We may have already seen the October crash if the bulls crack another layer of resistance and can get through this week.

The bounce since has been phenomenal to say the least.  We will still keep an eye on our downside targets but the trend is still up for now.  We could see a slight pullback after this week as Europe’s uncertainty gets closer but let’s enjoy the ride first.  We should know something by the first week of November on if “the plan” is going to work or not.  If there are no speed bumps, the bulls should cruise to new highs by year-end but if there is, or Europe’s debt doesn’t get resolved – the bears could push new lows.  Bottom line, the market is setting up for a massive move either way.

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2.  Human Genome Sciences (HGSI) Active on Takeover Chatter

Human Genome Sciences (HGSI, $13.37, up $0.07) has two big things going for it this week.  Not only does the company report earnings, it is in the center of buyout rumors and a strong pipeline shows that it might have more value than investors think.

British newspaper The Daily Mail rumored on Tuesday October 18th that the $2.55 billion biotech company based in Rockville, Maryland might be bought by lupus drug partner GlaxoSmithKline (GSK, $45.00, up $1.03) for $25 per share.  As of its closing price that day, the deal was a 123% premium.  The stock soared an additional 15% on Wednesday on speculation that it hired Goldman Sachs to explore alternatives for the firm, including selling itself.  Based on Friday’s close, the $25 buyout rumor is still an 87% premium.

The Daily Mail, United Kingdom’s second biggest-selling daily newspaper, cited GSK’s partnership in developing Benlysta as well as potential suitors Merck (MRK, $33.35, up $0.55) and Biogen Idec (BIIB, $108.84, up $7.17).  Benlysta was approved by the FDA in March to treat lupus, a chronic disease in which the immune system attacks the body’s tissues and organs.  Lupus affects 1 in 1000 people, and about 200,000 patients have moderate to severe lupus in the U.S. alone.  The drug is the first approval in over 50 years to treat the condition, which has been controlled to some extent in the past with ibuprofen, corticosteroids, immunosuppressants, and cancer chemotherapy.  However, the drug’s high price of $35,000 a year, its modest benefit rate of 30%, and doctors, concern of getting reimbursed may hinder use of the drug.  And because the drug weakens the body’s immune system, side effects can include infections, cancer, depression, and suicide.  In clinical trials, there were more deaths and serious infections among lupus patients taking Benlysta than among those taking the placebo plus standard therapy.  Plus, the drug generally only helps lower the dosage of current treatment, such as steroids.

Global expectations were high for the product, with commercialization licensed to GSK.  Under the agreement, both companies would split equally the cost and profits of the drug.  As of March this year, analysts were touting it as the next blockbuster drug projecting annual sales ranging from $3 billion to $7 billion.  GSK needs a replacement for its blockbuster drug Advair, which comes off patent this year and its diabetes drug Avandia goes off patent in 2012.  Advair had sales of $7.7 billion in 2009, while Avandia had peak sales of $2.5 billion in 2006.

The first month Benlysta went on the market the drug saw net sales of $270,000 per week, which grew to $630,000 per week for the second month and $1.05 million per week for the third.  2nd quarter sales came at $7.8 million.  Assuming sales grow at a rate of $1.44 million per month, 3rd quarter sales would come in at $21.24 million, and year-end sales would come at $63.24 million, still far short of $3 to $7 billion.

2nd quarter

3rd quarter

4th quarter

Total

1st month

$1.080 million

$5.640 million

$9.960 million


2nd month

$2.520 million

$7.080 million

$11.400 million

3rd month

$4.200 million

$8.520 million

$12.840 million

Total

$7.800 million

$21.240 million

$34.200 million

$63.240 million

Although sales are slower than expected, management is not concerned.  They anticipate it will continue to grow as physicians become more comfortable.  Executives told investors that more physicians than expected are aware of the drug and plan to soon prescribe it, but some remain cautious about which patients are eligible and how they’ll be reimbursed financially.

Executives said the company will continue to expand in the U.S., where it has secured coverage from health providers, but now has its eye on foreign markets.  Benlysta won approval from European and Canadian health agencies and applications have been submitted to regulators in Australia, Brazil, Colombia, Israel, the Philippines, Russia, Singapore, Switzerland and Taiwan.  However, the drug faced a significant blow when it was recently rejected to be covered by Britian’s national healthcare.

Human Genome Sciences reports earnings after the market closes on Tuesday.  This could help add to the buyout argument.  Analysts predict earnings and revenue will come at -$0.39 on $37.31 million in the 3rd quarter (9/11), down from -$0.22 on $50 million a year ago.  In the 4th quarter (12/11), analysts are looking for earnings and revenue of -$0.35 on $52.43 million, up from -$0.46 on $21 million a year ago.  Estimates are included in graphs below.

Analysts seem to expect that revenue will jump in 3rd and 4th quarters, but earnings will see a decrease in growth from the previous quarter.  Since Benlysta sales are expected to come in at $20-21 million, the company could meet the 3rd quarter estimate of $37.31 million.  That would require them to make $16.31-$17.31 million from other drugs and royalties.

In the 2nd quarter, revenues included $12.9 million in sales and deliveries of raxibacumab, a first of its kind treatment for the inhalation anthrax, to the U.S. Strategic National Stockpile; $7.8 million in sales of Benlysta (excluding $1.2 million in deferred revenue for Benlysta shipped to distributors, but not yet delivered to healthcare providers); and $3.5 million from manufacturing and development services.  That gives $16.4 million in non-Benlysta sales, barely meeting the low target.  Thus, the catch would be if Benlysta sales reach about $21 million, which as shown earlier is possible.

Earnings and revenue in the 1st quarter of 2009 were much higher than those of the following quarters due to sales of 20,000 doses or $153 million worth of raxibacumab to the U.S. Strategic National Stockpile.  In July 2009, HGS received a second order for 45,000 doses of raxibacumab from the U.S. Government, to be delivered over a period of three years, beginning near the end of 2009.  Assuming that the price of raxibacumab stays constant, that is $344.25 million in sales.  The company plans to send 15,000 doses in 2011.  That adds up to $114.75 million in sales.

As of June 30, 2011, cash and investments totaled $703.3 million.  This compares with cash and investments totaling $933.4 million as of December 31, 2010.  Thus, cash and investments are declining, which is not surprising of a developmental biotech company.

During the past three months, the average 3rd quarter estimate has moved up from a -$0.43 to -$0.39.  Last month, the average estimate was -$0.42.  This is a positive development for the stock.  However, during the past three months, the average 4th quarter estimate has moved down from a -$0.33 to -$0.35.  Last month, the average estimate was -$0.34.  This is negative development for the stock, meaning worse-than-expected earnings could put pressure the stock.

The company met earnings estimates in the 2nd quarter (no surprise) after 1st quarter and 4th quarter earnings came in at $0.21 and $0.08 lower than expected, respectively.  However, the company beat estimates by 14 cents in the 3rd quarter last year.  And based on everything stated above, it seems they will meet or beat earnings again.

At $13.37, the stock is near its low target of $11.00 made by the 19 analysts recorded by Thomson/First Call.  Mean target is $23.89; median target is $25.00; and high target is $37.00.  Using a scale of 1.0 as a strong buy and 5.0 as a sell, the average rating of the stock was 2.0, unchanged from a week ago.


Current Month

Last Month

Two Months Ago

Three Months Ago

Strong Buy

6

6

6

5

Buy

9

8

8

8

Hold

4

4

4

4

Underperform

1

1

1

1

Sell

0

0

1

1


Although an EV/EBITDA of -11.05 does not look takeover worthy, the stock trades at only 6.26 time book value.  An EV/EBITDA of 5 is often used to find takeover targets.  The current ratio is 1.07, meaning current assets are barely above current liabilities.  Thus, it is possible the company could run into credit problems in the near-term.

Most fundamentals look positive and the technical picture is a little negative, but we have a positive view on the stock.  However, there are some warning signs which makes us a little hesitant in adding it as a covered call right away.

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3.  Tempur Pedic International (TPX) Should Resume Uptrend

Tempur Pedic International (TPX, $67.50, up $3.90) just reported an earnings surprise last week and made a nice move on Friday. The $4.5 billion Lexington, Kentucky mattress maker reported 3rd quarter earnings ending September 30th of $0.90 a share on $383.1 million in revenue, beating estimates of $0.85 a share on $369.9 million in revenue.  Earnings and revenue were up 45% and 30% from a year ago, respectively.  The company sees full-year earnings per share of $3.12-$3.17 vs. estimates of $3.13, on average.  Full-year sales are seen to be $1.41-$1.43 billion vs. estimates of $1.39 billion.  Gross margins rose to 52.4% from 51.0% last year.

The leading manufacturer of premium mattresses and pillows worldwide benefited from favorable retail conditions in the home furnishing segment along with primary competitor Select Comfort (SCSS, $21.57, up $2.15).

The company products utilize its proprietary TEMPUR® pressure-relieving material and its foam-like beds and pillows are designed to fit the person’s contour to straighten the spine and increase sleeping comfort.  It is the worldwide leader in specialty sleep, the fastest growing segment of the estimated $13 billion global mattress market.  It also sell travel sets to assist in sleeping, cushions, dog beds, slippers, sleep masks, and teddy bears.  The company sells products in over 80 countries around the world.  Below is a breakdown of net sales from North America and internationally.  The North American operating segment consists of two U.S. manufacturing facilities and its North American distribution subsidiaries. The International segment consists of its manufacturing facility in Denmark.

Net sales (in thousands)

During the first three quarters of this year, 4.25 million shares of stock totaling $240 million were repurchased.  The company plans to repurchase additional shares up to $280 million.  These repurchases should boost the stock’s price.

As for the 4th quarter (12/11), analysts predict that earnings and revenue will come at $0.84 on $356.07 million.  Both of these estimates are lower than that reported in the 3rd quarter.  Thus, analysts may need to increase estimates, which could increase the stock price.  Also, the estimates do not follow the previous trend on the graphs below.

Compared to its top competitors and its industry, however, the company seems a little overvalued.

On the negative side, TPX’s price/sales, price/book, forward PE, market cap/revenue, market cap/cash, EV/revenue, and EV/EBITDA are the highest in the group.  The share price is a little high at 42.63 times book value.  The market cap, or price, is 3.358 times revenue and 43.685 times cash.  The trailing PE, PEG, total debt/revenue are the second highest in the group.  On the positive side, revenue growth, cash flow/revenue, return of assets, and return of equity are also the highest in the group.  That means out of the four top competitors, TPX can turn the most revenue percentage-wise into cash flow.  The return on equity is very high.  Gross margin is also the second highest in the group.  The current ratio is a comfortable 2.05, meaning current assets are slightly more than double current liabilities.  Thus, it probably won’t run into credit problems in the near-term.

At $67.50, the stock is near its low target of $67.00 made by the 9 analysts recorded by Thomson/First Call.  Mean target is $76.11; median target is $75.00; and high target is $85.00.  Using a scale of 1.0 as a strong buy and 5.0 as a sell, the average rating of the stock was 1.9, unchanged from a week ago.

Raymond James boosted its rating on the company’s shares following its quarterly release, telling investors to take advantage of weakness due to issues at its Danish plant and snap up shares.

Thus, due to the favorable fundamentals and semi-favorable technicals, we think the stock is a buy but the high share price doesn’t fit our Covered Call portfolio, unfortunately.

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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 (Quotes are as of Friday’s close, 10/21/11).

MONDAY

Aarons (AAN, $28.26, up $0.64), Advent Software (ADVS, $22.86, up $0.44), Amgen (AMGN, $58.59, up $1.32), Annaly Capital Management (NLY, $16.01, down $0.10), Beacon Federal Bancorp (BFED, $13.25, Flat), Caterpillar (CAT, $87.39, up $3.13), Cyberoptics (CYBE, $7.87, up $0.04), Ethan Allen Interiors (ETH, $18.50, up $1.29), First Bancorp (FBNC, $11.50, up $0.12), Fortinet (FTNT, $17.64, down $0.58), Getty Realty (GTY, $15.69, up $0.36), Hanesbrands (HBI, $26.01, down $0.24), Healthways (HWAY, $10.64, up $0.30), Kaiser Aluminum (KALU, $45.05, up $1.21), LaWhirlpool ndstar System (LSTR, $44.20, up $0.51), Lojack (LOJN, $3.40, down $0.01), Monster Worldwide (MWW, $8.73, up $0.37), Netflix (NFLX, $117.04, up $5.56), Orion Energy Systems (OESX, $2.65, up $0.11), Plum Creek Timber (PCL, $36.05, up $0.83), RadioShack (RSH, $13.32, up $0.15), Rent A Center (RCII, $31.44, up $0.93), ResMed (RMD, $31.09, up $0.86), Texas Instruments (TXN, $30.46, up $0.51), United Bancorp (UBCP, $7.95, down $0.27), Veeco Instruments (VECO, $25.44, down $0.60), Whirlpool (WHR, $57.40, up $2.32), Zions Bancorporation (ZION, $16.98, up $0.39)

TUESDAY

3M (MMM, $80.48, up $1.80), AK Steel Holding (AKS, $8.05, up $0.04), Amazon.com (AMZN, $234.78, up $1.17), Boyd Gaming (BYD, $6.05, up $0.07),Boston Properties (BXP, $92.98, up $2.13), Cabot (CBT, $28.16, up $1.00), Cell Therapeutics (CTIC, $1.23, up $0.03, Delta Air Lines (DAL, $8.66, down $0.04), Du Pont (DD, $45.15, up $1.02), Express Scripts (ESRX, $39.14, up $0.72), F5 Networks (FFIV, $88.92, up $2.20), Freesea (FREE, $0.89, down $0.09), Human Genome Sciences (HGSI, $13.37, up $0.07), Illumina (ILMN, $27.31, up $0.41), iRobot (IRBT, $29.68, up $1.72), Kona Grill (KONA, $5.82, down $0.08), Lexmark International (LXK, $29.67, up $0.96), Masimo (MASI, $22.09, down $0.02), OSI Systems (OSIS, $42.30, up $0.96), Panera Bread (PNRA, $111.70, up $5.85), Peabody Energy (BTU, $38.89, up $0.72), PolyOne (POL, $11.81, up $0.53), RadioShack (RSH, $13.32, up $0.15), RF Micro Devices (RFMD, $7.19, up $0.15), Ryder System (R, $47.09, up $0.99), Sherwin-Williams (SHW, $81.99, up $2.47), Simon Property Group (SPG, $120.70, up $3.96), T Rowe Price Group (TROW, $54.86, up $2.08), Tellabs (TLAB, $4.51, up $0.21), Under Armour (UA, $73.11, up $1.44), United Parcel Service (UPS, $70.06, up $0.86), United States Steel (X, $23.37, up $0.59), W R Grace (GRA, $39.08, up $0.75), Western Union (WU, $17.19, up $0.49), Xerox (XRX, $7.83, up $0.22)

WEDNESDAY

Aflac (AFL, $42.72, up $1.35), Allergan (AGN, $88.38, up $1.80), BMC Software (BMC, $38.55, up $0.83), Brinker International (EAT, $22.73, up $0.43), Cabot Oil and Gas (COG, $70.29, up $1.42), Cadence Design Systems (CDNS, $10.16, up $0.25), ConocoPhillips (COP, $71.83, up $1.56), Corning (GLW, $13.74, up $0.56), Dole Food (DOLE, $10.18, $0.44), Dr Pepper Snapple Group (DPS, $40.08, up $0.64), Famous Daves Of America (DAVE, $8.56, down $0.19), Ford Motor (F, $12.26, up $0.56), General Dynamics (GD, $65.32, up $2.17), Green Mountain Coffee Roasters (GMCR, $67.85, down $0.24), Harris (HRS, $36.79, up $0.57), Lockheed Martin (LMT, $77.40, up $1.70), Mylan (MYL, $18.04, up $0.66), Norfolk Southern (NSC, $70.90, up $2.11), Ryland Group (RYL, $13.07, up $0.95), Sealed Air (SEE, $17.34, up $0.32), Teradyne (TER, $13.56, up $0.21), TriQuint Semiconductor (TQNT, $6.87, $0.13), Visa (V, $93.43, up $2.08), WellPoint (WLP, $66.65, up $1.40)

THURSDAY

Aetna (AET, $38.12, up $0.78), Altria Group (MO, $27.45, up $0.20), Ariba (ARBA, $32.15, up $0.64), Baidu (BIDU, $122.16, down $1.71), Callaway Golf (ELY, $5.64, up $0.09), Cardinal Health (CAH, $44.00, up $1.58), Celgene (CELG, $66.93, up $0.98), Cloud Peak Energy (CLD, $21.47, up $0.56),  Coca-Cola Enterprises (CCE, $25.57, up $0.02), Colgate-Palmolive (CL, $93.92, up $2.88), Crocs (CROX, $15.25, up $0.02), Deckers Outdoor (DECK, $x), Digital River (DRIV, $x), Electronic Arts (ERTS, $x), First Solar (FSLR, $53.77, up $1.46), Gilead Sciences (GILD, $41.47, up $0.46), Hershey (HSY, $60.26, up $0.69), Imax (IMAX, $16.80, up $0.79), Infospace (INSP, $8.97, up $0.30), Iron Mountain (IRM, $32.77, up $0.60), Kemt (KEM, $7.77, up $0.20), L 3 Communications Holdings (LLL, $70.37, up $1.56), Las Vegas Sands (LVS, $41.29, down $0.47), Metlife (MET, $33.51, up $1.41), Newpark Resources (NR, $8.28, down $0.04), Occidental Petroleum (OXY, $86.74, up $2.15), Perrigo (PRGO, $97.16, up $0.85), Procter & Gamble (PG, $66.26, up $1.17), Qlogic (QLGC, $13.19, up $0.19), Regal Entertainment Group (RGC, $13.04, up $0.38), Stamps.com (STMP, $24.86, up $0.38), StellarOne (STEL, $11.48, up $0.36), Time Warner Cable (TWC, $70.87, up $1.08), US Airways Group (LCC, $5.87, down $0.14), Vistaprint (VPRT, $30.07, up $0.87), Zimmer Holdings (ZMH, $54.64, up $1.51)

FRIDAY

Alpha Networks (ARLP, $70.58, up $0.94), Arch Coal (ACI, $16.58, up $0.21), Barnes Group (B, $22.56, up $1.21), BorgWarner (BWA, $72.24, up $2.82), Calpine (CPN, $14.26, up $0.21), Chevron (CVX, $105.53, up $2.14), Dominion Resources (D, $52.07, up $1.03), First Bancorp (FBP, $2.89, down $0.12), Lifepoint Hospitals (LPNT, $38.27, up $1.12), Merck (MRK, $33.35, up $0.55), Newmont Mining (NEM, $62.63, up $0.99), Nobility Homes (NOBH, $5.20, up $0.42), Pilgrim’s Pride (PPC, $4.84, up $0.19), Repligen (RGEN, $3.21, up $0.03), Standard Register (SR, $2.64, Flat), Goodyear Tire & Rubber (GT, $12.97, up $0.84), Weyerhaeuser (WY, $17.09, up $0.67), Whirlpool (WHR, $57.40, up $2.32)

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5. Weekly Wrap Covered Call Portfolio Update (Closing prices as of 10/21/11)

We were called-away from Ford Motor (F, $12.26, up $0.56) which was closed for a 7% profit on Friday.  Rambus (RMBS, $16.69, up $0.50) was also closed as shares pushed $17 and we made 16%.  Also, we had to wait until the last day, but Symantec (SYMC, $18.42 up $0.48) was closed for a 4% profit.  This brings the 2011 Track Record to 12-0.

Other WEEKLY WRAP CLOSED TRADES for 2011 include: VVUS +18%, DNDN +9%, PCX +13%, SGEN +26%, TIVO +34%, REDF +11%, PCX +7%, GE +5%, CLNE +13%

Possible new candidates (in order):  DNDN, PCX, HGSI, AA


Vivus (VVUS, $8.66, up $0.32)

Original Entry Price:  $8.45 (9/9/11)

Lowered Price from Selling Options: $8.05

Exit Target: $10+

Return: 3%

Stop Target: None

Action:  The October 9 calls expired worthless and we were not called away.

Vivus continues to hold support at $8 (green line, blue circles) and faces strong resistance at $9 (orange line, black circles).  There is additional support at $7.50 (purple line, orange circles) should shares retreat below $8 but we are looking for a breakout.  The company resubmitted their obesity drug, Qnexa, for approval after labeling the drug unsafe for women capable of having children.  A decision could come in early 2012.  We may not sell another call option until we do get the breakout as the options pits have become pretty active which is leading us to believe traders are taking positions for a big move higher.  The November 10 calls traded 1,600 contracts on Friday while the January 10’s traded an even 1,000 contracts.  The March 12 calls traded over 2,500 contracts.

We recommended buying the stock at $8.45 on 9/9/11 and for every 100 shares to sell the October 9 calls for 40 cents.  This lowered the cost basis to $8.05.


MGM Resorts (MGM, $10.23, up $0.22)

Original Entry Price:  $11.73 (8/12/11)

Lowered Price from Selling Options: $10.23

Exit Target: $12+

Return: 0%

Stop Target: None

Action:  The October 12 calls were not exercised and expired worthless so we are still in this trade.

Shares continue to hover near multi-year support at $10 (green line, blue circles) and closed above this level every day last week.  There is additional support at $9 (orange line, brown circles) while resistance at $11 (black line, purple circles) continues to be a headwind.  We will be selling a November or December call at some point this week to lower our cost basis.

We recommended buying the stock at $11.73 on 8/12/11 and for every 100 shares to sell the September 12 calls for 90 cents.  This lowered the cost basis to $10.83.

On 9/20/11 we recommended selling the October 12 call option for $0.60 which lowered the cost basis to $10.23.


Newpark Resources (NR, $8.28, down $0.04)

December 10 call (NR111217C00010000, $0.30, flat)

Original Entry Price:  $9.45 (7/27/11)

Lowered Price from Selling Options: $8.10

Exit Target: $10+

Return:  2%

Stop Target: None

Action:  Shares made a strong move past $8 (blue line, purple circles) last week which was prior resistance and should serve as short-term support.  The next area of resistance is $9 (green line, orange circles).

We recommended buying the stock at $9.45 on 7/27/11 and for every 100 shares to sell the August 10 calls for 50 cents.  This lowered the cost basis to $8.95.

On 9/15/11 we recommended selling the December 10 call option for $0.85 which lowered the cost basis to $8.10.

If we are called away at $10 in mid-December, the trade makes 23%.


Rare Element Resources (REE, $5.42, flat)

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

Lowered Price from Selling Options: $11.23

Exit Target: $15+

Return: -52%

Stop Target: None

Action:  Shares tested resistance at $6 (green line, black circles) early in the week and we are still looking at adding to this position.  Support is at $4 (orange line, blue circles) should shares retreat and is the area we are targeting to add the 2nd position.

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.


AKS Steel Holding (AKS, $7.52, up $0.14)

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

Lowered Price from Selling Options: $14.58

Exit Target: $20+

Return: -45%

Stop Target: None

Action:  Shares gained 7% for the week and are right at resistance near $8 (blue line, purple circles) which is just above the 50-day MA.  Should shares retreat, support is at $7 (green line, black circles) but a run to $9 (orange line, green circles) could be in the mix if they announce better-than-expected earnings this week.  We may add to this position if $8 holds to lower our cost basis.

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.

On 7/1/11 we recommended selling the August 16 call option for $0.85 which lowered the cost basis to $14.58.


American Capital (ACAS, $7.03, up $0.26)

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

Lowered Price from Selling Options: $8.38

Exit Target: $15+

Return: -16%

Stop Target: None

Action:  The October 9 calls expired worthless so we are still in this position.  We will look to sell a November or December call once shares get near $7.50.

Shares continue to struggle with support/ resistance at $7.00 (black line, green circles) but will look to challenge $7.50 (blue line, orange circles) this week.  Short-term support is at $6.50 (orange line, brown circles).

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.

On 7/1/11 we recommended selling the August 10 call option for $0.55 which lowered the cost basis to $8.68.

On 9/13/11 we recommended selling the October 9 call option for $0.30 which lowered the cost basis to $8.38.


Cisco Systems (CSCO, $17.38, up $0.19)

November 17 calls (CSCO111119C00017000, $0.95, up $0.05)

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

Lowered Price from Selling Options (and dividends): $15.51

Exit Target: $20+

Return: 12%

Stop Target: None

Action:  Cisco continues to test resistance at $17.50 (purple line, brown circles) with $17 (blue line) providing short-term support.  It looks as though shares are setting up for a run to $19 (green line, purple circles) and these options are currently in-the-money.

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.

On 7/5/11 the company paid out a 6 cent quarterly dividend.  This lowered the cost basis to $16.52.

On 7/22/11 we recommended selling the August 17 calls for 30 cents which lowered the cost basis to $16.22.

On 9/9/11 we recommended selling the November 17 calls for 65 cents which lowered the cost basis to $15.57.

On 10/4/11 the company paid out a 6 cent quarterly dividend.  This lowered the cost basis to $15.51.

If shares are above $17 by mid-November and we are called away, the trade makes 9%.


Spreadtrum Communications (SPRD, $22.90, up $0.48)

November 25 call (SPRD111119C00025000, $0.95, up $0.10)

Entry Price:  $23.45 (2/7/11)

Lowered Price from Selling Options (and dividends): $20.38

Exit Target: $30

Return: 12%

Stop Target: None

Action:  Shares kissed a high of $23 on Friday and our price target is north of $25.  The 52-week and all-time high is $24.20 and we are on the verge of a breakout.  Support is at $21 (orange line).


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.

On 7/7/11 the company paid out a 5 cent quarterly dividend.  This lowered the cost basis to $21.43.

On 9/15/11 we recommended selling the November 25 call option for $1 which lowered the cost basis to $20.43.  If we are called away, the trade makes 22%.

On 10/6/11 the company paid out a 5 cent quarterly dividend.  This lowered the cost basis to $20.38.

If we are called away at $25 by mid-November the trade makes 23%.


DryShips (DRYS, $2.60. up $0.03)

January 2012 7.50 call (DRYS120121C00007500, $0.02, flat)

Entry Price:  $5.25 (1/03/11)

Lowered Price from Selling Options: $4.60

Exit Target: $8

Return: -43%

Stop Target: None

Action:  DryShips continues to trade in a range with resistance at $3 (blue line, black circles) and support at $2 (orange line, green circles).

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%.

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6.  Week Ahead

There is no economic news scheduled for Monday.  As a side note, the New York Fed President will be speaking and will offer his economic outlook at Fordham University.

On Tuesday, the Case-Shiller 20-City Index report is due out before the bell and is expected to come in at -4%.  The Consumer Confidence numbers and the FHFA Housing Price Index will be released 30 minutes after the open.

For Wednesday, the MBA Mortgage Index and Durable Goods Orders are due out before the session starts.  New Home Sales and the weekly Crude Inventories numbers will be released after trading begins.

Thursday starts-off with Initial Claims and Continuing Claims before the open along with the the 3Q Gross Domestic Product (GDP) numbers.  Pending Home Sales are due out 30 minutes after the open.

Friday is a busy day as Personal Spending and Personal Income figures will be released before the bell as well as the Employment Cost Index.  The final Michigan Sentiment survey is due out 30 minutes after the open.