MomentumOptionsTrading.com Weekly Wrap for 6/10/12

 

11:30pm (EST)

 

1.  Market Summary 

2.  Heineken NV (HINKY) – Good Beer for Cheap Price

3.  Tilly’s (TLYS) – Recent IPO Looking to Make Name

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   

“This week will be an important test for the bulls and next week will be even bigger.  The bulls will be looking for a Bernanke bailout but he will not be speaking until Thursday.  The FOMC meeting is the following week so he will need to say something positive ahead of this event to stop the bleeding.  However, the Fed Beige Book is due out on Wednesday, a day before Ben speaks, and the numbers will need to be good.

While there is a chance Bernanke introduces some kind of new “stimulus” package, the bottom line is that it will involve starting the printing presses once again which does help the financial cliff the U.S. is facing in 2013 but that is another story for another day.  This puts the pressure back on Europe to doing something in a hurry but we doubt that happens.

With so much headline risk out there to the downside, the bears could step on the gas, until Thursday which means it will be crucial for the bulls to hold support to start the week.  If the Europe news gets worse and Big Ben fails to connect on a Hail Mary pass then the U.S. and global markets will see a continued correction.” (from 6/3/2012 Weekly Wrap/ Monday Morning Outlook)…

The stars lined-up for the bulls as they used a rally to shoot back to the moon and were able to push resistance last week.  The situation in Europe didn’t get any better with the world politicians playing a game of cat-and-mouse but Wall Street liked the rhetoric as they work on a solution for Spain and saw the recent weakness as a buying opportunity.

We knew when the bulls held the 200-day MA’s (moving averages) to start the week there could be a chance for a snap-back rally or dead-cat bounce.  We said on Tuesday morning after “water-cooler talk of a Fed-ECB bailout to help save the world hit Wall Street desks” there could be a test to the second wave of resistance.

The bulls were able to recoup all of the prior week’s losses and this week should provide some clues on if the rally was for real or if it was a classic bull trap.  While some of the headlines have been positive of late, there is still a ton of other noteworthy events that will shape the market for the rest of June and into the summer so it will be important to keep your emotions in check.

The Dow added 93 points, or 0.75%, to finish at 12,554 on Friday.  The blue-chips fell to a low of 12,035 to start the week but the bulls held support at 12,000.  The first wave of resistance was at 12,200-12,350 which was tested on Tuesday and cleared on Wednesday.  The second wave of resistance was tested on Thursday at 12,600 as the Dow pushed 12,555 before fading.  Friday’s close was a point away from the prior day’s high.  A break above 12,800-13,000 could be a possible trend change as you can see on the longer-term chart while a close below 12,200 this week would confirm the bears are still in control.  The Dow started Monday at 12,118 and soared 436 points, or 3.6%, for the week.  For 2012, the index is back into positive territory by 337 points, or 2.8%. 

Longer-term chart: 

The S&P 500 advanced 11 points, or 0.8%, to settle at 1,325.  The index tested a low of 1,266 on Monday but never really came close to testing the 1,257-1,250 level which is major support and an area the bulls must hold going forward.  The close at 1,278 was a sign 1,275 would hold, which it did on Tuesday, and set up a run to 1,300 which was cleared on Wednesday’s close at 1,315.  The second wave of resistance at 1,325 proved to be a bit strong as Thursday’s test to 1,328 ended with a close at 1,314.  The bulls were hoping to clear this level on Friday and push 1,350 but ran out of time.  A move above this level brings 1,375-1,400 back into play.  The S&P 500 started Monday at 1,278 and soared 48 points, or 3.7%, for the week.  For the year, the index is showing a gain of 68 points, or 5.4%. 

Here is the longer-term S&P 500 chart:

The Nasdaq jumped 27 points, or 1%, to close at 2,858.  Tech traded to a low of 2,726 at the beginning of the week and slipped below crucial support at 2,750 before finishing at 2,760 on Monday.  The bulls made a run at 2,800 on Tuesday and cleared this level of resistance with Wednesday’s close of 2,844.  The next wave of resistance at 2,850-2,900  on Thursday also proved to be a challenge as the Nasdaq pushed a high of 2,873 before fading to end the day lower (-13 points) at 2,831.  Friday’s push to 2,860 still keeps 2,900 in play and a possible run to 3,000.  The Nasdaq was at 2,747 on Monday and advanced 111 points, or 4%, by Friday’s close.  YTD, the Nasdaq is higher by 253 points, or 9.7%.  

Here is a 30-month chart for Tech:     

The Russell 2000 popped 9 points, or 0.8%, to finish at 769.  The small-caps kissed a low of 729 on Monday’s bottom as the bulls held 720 which was short-term support.  Tuesday’s push to 750 was a sign the760 level was going to be tested which was the first wave of resistance.  This area was cleared on Wednesday’s rally as the Russell closed at 765.  Thursday’s trip to 775 was just shy of the brick wall at 780 and the failed test was enough to knock the index back to 760 by the close.  Friday’s test to 770 is still a sign the bulls could push 800 on continued momentum this week but only if 780 is cleared.  Coming into the week, the Russell was at 737 and tacked-on 32 points, or 4.3%.  The index is back in the green for 2012 by 29 points, or 3.8%.

Here is a longer-term chart of the Russell 2000:

The S&P Volatility Index ($VIX, 21.23, down 0.49) came into the week at 26.66 and traded to a high of 27.73 on Monday but had fallen to a low of 20.74 on Thursday’s open.  A VIX reading under 20 is usually bullish while a print over 30 is bearish.  If the bulls break the next layer of resistance (or two), the VIX could fall to 17.50 if 20 is taken out.  The bears will target a move back above 22.50 and then 25.

The market was at crucial support to start the week with the bulls needing to hold the 50-week and the 200-day MA’s (moving averages).  These levels got “stretched” on Monday’s drop at the open but the bulls were able to reclaim support while pushing new highs.  Resistance at the top also got stretched but the bulls are eying a breakout.

Ben Bernanke’s comments on Thursday were reserved but the rally faded because the bulls were expecting the Fed to actually do something.  Big Ben refused to commit new money to stimulate the economy but said he was ready to act although he didn’t say when or how the Fed would do so.  We talked about the game of poker that the European leaders are playing but they are pot committed which is why we saw some resolution with Spain over the weekend.

Spain is the fourth eurozone country to ask for a bailout and will get $125 billion ($100 billion euros) to shore up their banks.  The EU (European Union) finance members didn’t provide any details on where this money will come from but if its “joint-euro bonds”, expect Germany to throw a fit.  We still say Germany should cut the kids off (Portugal, Ireland, Italy, Greece, Spain) and go back to their own currency which would really throw the market for a loop.

Nothing will be final until June 21 with Spain as their banks will have to undergo stress tests but the money will be funneled through the country’s bank-rescue fund.  The strongest banks will get the bulk of the capital but what they do with it will be the main issue.  The EU is tressing this is a “loan”, not a bailout.

A week doesn’t make a trend but the S&P 500 had its first Friday/ Monday up close since late March, early April.  The week after on April 5 Thursday (the market was closed for Good Friday), the S&P closed lower by a point and was at 1,398.  The following Monday the index fell 16 points and on the Friday afterwards, the index fell 17 points and we wrote “Bingo” on our notes as we had possible confirmation of a bear market for the rest of April and into May. 

The bearish trend was confirmed in late April and early May which lasted until June 1, Friday, as the S&P ended the session at 1,278, down 22 points.  The index was at 1,419 on April 2 and fell 141 points, or 10%, in 2 months.  It was one of the main reasons we loaded up on over 35 put option trades over that timeframe.  

Friday/ Monday up or down closes are important to us and are one of many indicators we use to get a feel for a possible trend changes.  The past Monday and Friday were positive closes for the S&P which hasn’t happened in over 2 months and this Monday looks positive. 

Greece will have their elections this upcoming weekend and a new party could force the country out of the eurozone anyway.  Spain’s news will be short-lived as the focus quickly turns back to Greece.  June option triple-witching is on Friday and it can bring volatility.  Also, we have mentioned the week after June options expiration is extremely bearish, historically, for the market.

Second quarter earnings season will start in July and from now and until then, companies use this period to “pre-warn”.  China appears to be slowing down and cut rates to spur growth over the weekend.   

Obviously, the Spain news has had a positive impact on futures and will likely lead to a huge pop on Wall Street for Monday’s open.  We expect the second layers of resistance we have charted to come into play but something just doesn’t feel right.  While the bulls’ momentum has been strong, the bears’ bite was just as powerful during the prior week sell-off or did everyone forget?

It’s hard to say the “trend” is up until the market breaks out past stronger resistance so let’s just say the rally could continue this week.  The bulls love to climb a wall of worry but the bears like to lay back and attack when you least expect it.  

As we head to press, futures are showing a huge open for Monday by 1% and look like this.  Dow futures are up 134 points to 12,637 while the S&P 500 futures are higher by 14 points to 1,336.  The Nasdaq 100 futures are advancing 30 points to 2,587.      

 

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2.  Heineken NV (HINKY) – Good Beer for Cheap Price

With the debt crisis haunting the continent, European stocks have plummeted but this very reason creates a buying opportunity for the contrarian investor.  Select companies which have a strong brand which people will buy regardless of the state of the economy stand to perform well.  We think shares of Heineken NV (HINKY, $23.80, down $0.21) fit this category.

The company is based in Amsterdam, Netherlands and has a market cap of $28 billion.  Heineken is the third largest brewer in the world with over 200 brands in 71 countries worldwide.  Its brews include Heineken, Amstel, Birra Moretti, Cruzcampo, Desperados, Dos Equis, Foster’s, Newcastle Brown Ale, Ochota, Primus, Sagres, Sol, Star, Tecate, Zlaty Bazant, Zywiec, Anchor, Cristal, Kingfisher, Tiger, Bulmer’s, and Strongbow Gold.  Besides beer, the company offers both cider and soft drinks.  With the recent purchase of Stassen Ciders, it extended its lead in the global cider market over rivals.  Cider sales have been a hit and have outperformed the beer market by bringing in new consumers, especially female drinkers. 

Heiny’s brands seem to be growing in popularity.  According to the most recent Harris Poll EquiTrend, the brewmaker’s Newcastle Brown Ale is the 4th strongest brand in America, and its Heineken flagship brand is the 9th strongest.  A year ago, the company did not have a brand in the top ten.  Further, having excusive pouring rights for its portfolio of beer and cider brands at the Olympics in London should help boost sales in the near term.

Last month, Molson Coors Brewing Company (TAP, $38.98, up $0.24) beat profit estimates, and Anheuser-Busch Inbev (BUD, $68.13, up $0.53) said its quarterly profit jumped 75% on better sales and lower financing costs.  Heineken should also see similar numbers.

Some things to note, a current ratio, a measure of liquidity, of 0.76 means current liabilities exceed current assets by about 31% which is a little high.  The forward PE is in single digits, while those of the other two are in double digits andbased on its price/sales and price/revenue, HINKY has better sales and revenue compared to its price than that of its top two competitors.

Source:  Google Finance

The graphs show that revenue has been increasing over the years while quarter-over- quarter revenue does not see much of a seasonal trend.  Revenue did pull back some in the 2nd quarter of last year, but 2010 did not see any change in revenue.  And the table of earnings below also shows that as 2nd quarter 2011 earnings dipped from 4th quarter 2010 earnings.   

 

2nd 2009

4th 2009

2nd 2010

4th 2010

2nd 2011

4th 2011

$1.26

$1.36

$1.67

$1.57

$1.28

$1.79

 

 

Heineken has very little analyst coverage, with only two analysts following it and only one placing a price target on the stock.  The lone analyst as recorded by Thomson/First Call has a $31.00 price target which is much higher than the stock’s current price.  As seen in the table below, both analysts have a hold rating on the stock but we think it’s a BUY at current levels.  However, since shares do not trade options and are thinly traded, it makes it a less desirable candidate for our covered call portfolio.

 

Current Month

Last Month

Two Months Ago

Three Months Ago

Strong Buy

0

0

0

0

Buy

0

0

0

0

Hold

2

1

1

1

Underperform

0

0

0

0

Sell

0

0

0

0

 

3.  Tilly’s (TLYS) – Recent IPO Looking to Make Name

Considering  Facebook’s (FB, $27.10, up $0.79) “failed” IPO (Initial Public Offering), one must wonder if Tilly’s (TLYS, $14.65, up $0.76) debut would fall into this category.  The stock opened its first day of trading well above its IPO price of $15.50  on May 4, but is still trading below its offering despite Friday’s 5% pop.

The specialty retailer provides clothing and accessories from the top players in the surf, skate, motocross, and lifestyle apparel industries.  Based in Irvine, California, Tilly’s was founded in 1982, and operates 126 stores in 11 states.  The company sells tops, outerwear, bottoms, and dresses, backpacks, hats, sunglasses, headphones, handbags, watches, and jewelry which involves 47 brands including the RSQ, Full Tilt, Blue Crown, and Infamous brand names.

Tilly’s recently reported its quarterly results in late May, its first as a publicly traded company following its IPO at the beginning of the month.  Net income reached $3.6 million, or 18 cents a share, up from $3 million, or 14 cents, earned in the year-earlier period.  Quarterly sales came in at $96.5 million, a 16.1% increase from the prior year and included increased e-commerce sales of $10.9 million.  Gross margins came in flat at 31.5%.

Compared to its top publicly-traded competitors and its industry, the company looks undervalued, with positives (green) outnumbering negatives (red) 11 to 6.  

GPS = The Gap                       PSUN = Pacific Sunwear of California

URBN = Urban Outfitters         ZUMZ = Zumiez                    Industry = Apparel Stores

 

Shares have already accumulated three analysts coverage, with one giving it a strong buy and one giving it a hold.  Thus, using a scale of 1.0 as a strong buy and 5.0 as a sell, the average rating of the stock is 2.0, unchanged from a week ago.  At $14.65, the stock is below even its low target of $18.00 made by the 3 analysts recorded by Thomson/First Call.  Mean target is $20.33, median target is $21.00, and high target is $22.00.   

   

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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, 6/8/12) 

 

Monday

Argan (AGX, $14.46, up $0.32), Benihana (BNHN, $16.08, Flat), Credo Petroleum (CRED, $14.34, down $0.01), ePlus (PLUS, $32.45, up $0.09), Finisar (FNSR, $14.88, up $0.24), Limoneira (LMNR, $15.10, up $0.16), MFRI (MFRI, $7.16, $0.04)

 

Tuesday

AEP Industries (AEPI, $34.91, up $0.12), Breeze-Eastern (BZC, $8.50, up $0.35), FactSet Research Systems (FDS, $106.00, up $0.82), Michael Kors Holdings (KORS, $38.37, up $2.33), Orchard Supply Hardware Stores (OSH, $15.62, down $0.22)

 

Wednesday

ChinaEdu (CEDU, $6.79, down $0.09), Korn/Ferry (KFY, $13.87, up $0.16), Luby’s (LUB, $5.75, up $0.29)

 

Thursday

Kroger (KR, $21.57, down $0.17), Lakeland Industries (LAKE, $7.18, down $0.02), National Technical Systems (NTSC, $5.51, up $0.09), Pier 1 Imports (PIR, $15.87, up $0.30), Smithfield Foods (SFD, $19.36, down $0.18), Synutra International (SYUT, $5.39, down $0.13), Winnebago Industries (WGO, $8.99, up $0.12)

 

Friday

Rosetta Genomics (ROSG, $11.30, up $1.07)

 

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5.  Weekly Wrap Covered Call Portfolio Update (Closing prices as of 6/8/12)

Closed Trades for 2012 (19-0, overall):  BAC +26%, EFTC +8%, SZYM +55%, VVUS +38%, CALL +19%, BAC +20%, SYMC +16%, DAR +20%, TIVO +5%, MGM +22%, ZNGA +13%, SGMS +6%, VVUS +17%, F +8%, AA +7%, CLNE +27%, DNDN +18%, MGM +19%, ACAS +3%.   

 

 

Solazyme (SZYM, $11.11, up $0.07)

June 15 calls (SZYM120616C00015000, $0.05, flat)

Original Entry Price:  $12.40 (4/17/12)

Lowered Price from Selling Options: $12.00    

Exit Target:  $15+

Return:  -7%

Stop Target:  None

Action:  Shares traded up to $11.18 on Thursday and the close above $10.50 on Monday was our clue a run to $11 was coming.  Short-term support is at $10-$10.50 and the next level of resistance will come in at the 50-day and 200-day MA’s.  A break above these levels would be bullish. 

The June options expire this Friday and we will likely not get called away unless shares surge past $15.  The option premiums are pretty juicy on Solazyme which means we will be able to get a good price on the July or August call options we sell next.      

 

We recommended buying the stock at $12.40 on 4/17/2012 and for every 100 shares to sell the June 15 calls for 40 cents.  This lowered the cost basis to $10.18.

If shares are called-away by mid-June at $15 the trade makes 25%.

 

Bank of America (BAC, $7.56, up $0.14)

Original Entry Price:  $8.93 (4/17/12)

Lowered Price from Selling Options and Dividends:  $8.47  

Exit Target:  $15+

Return:  -11%

Stop Target:  None

Action:  BofA closed below $7 to start the week but held $6.75 after testing a low of $6.85.  Shares were able to rebound with the overall market and peaked at $7.90 on Thursday.  The next level of resistance is at $8 and where we would look to write another call option.  The August 9 calls are at 18 cents and we would like to get at least 35-40 for them so we will be watching them to see if they move higher this week.  

We recommended buying the stock at $8.93 on 4/17/2012 and for every 100 shares to sell the May 9 calls for 45 cents.  This lowered the cost basis to $8.48.

On 5/30/12 the company paid a 1 cent quarterly dividend which lowered our cost basis to $8.47.

 

Scientific Games (SGMS, $8.88, up $0.03)   

Original Entry Price:  $11.10 (3/20/12)

Lowered Price from Selling Options:  Waiting for shares to reach $10-$11

Exit Target:  $15+

Return:  -20%

Stop Target:  None

Action:  Shares traded to a high of $9.21 on Thursday but ended Friday below $9.  We said a close above $9 would be bullish but the bigger hurdle will be $9.50 which is where we will look to sell a call option.  Support has been solid at $8.25.  

We recommended buying the stock at $11.10 on 3/20/2012.

 

Pandora Media (P, $11.05, up $0.36)

June 13 calls (P120616C00013000, $0.05, flat)

Original Entry Price:  $10.58 (3/20/12)

Lowered Price from Selling Options:  $10.18

Exit Target:  $12

Return:  9%

Stop Target:  None

Action:  Shares held short-term support at $10 to start the week after testing $9.92 and $9.90 but closed at $10 or better on Monday and Tuesday.  Shares surged to a high of $11.60 on Thursday and resistance at the 200-day MA ($11.60) is next.  If we are not called away on Friday, we can sell another call option or take profits.

We recommended buying the stock at $10.58 on 3/20/2012 and for every 100 shares to sell the June 13 calls for 40 cents.  This lowered the cost basis to $10.18.

If shares are called-away by mid-June at $13 the trade makes 28%.

 

Arena Pharmaceuticals (ARNA, $6.62, up $0.20)

July 3 calls (ARNA120723C00003000, $3.75, up $0.15)

Original Entry Price:  $1.88 (2/2/12)

Lowered Price from Selling Options:  $1.33

Exit Target:  $3+

Return:  380%

Stop Target:  None

Action:  This is a 10-year chart for Arena.  Arena traded to a high of $6.53 to start the week but fell to $6.15 the following day.  Shares closed above $6.50 which was bullish but we are still looking for a run past $7 which has been strong resistance.   

We have a price target of $10+ if there is no delay with their obesity drug, Lorcaserin, which could go to market by the end of the year if all goes well.  For those of you just joining us, the company will meet with the FDA on June 27 and we did a big update on the company in our last Weekly Wrap.

We recommended buying the stock at $1.88 on 2/2/2012 and for every 100 shares to sell the July 3 calls for 50 cents.  This lowered the cost basis to $1.33.

If shares are called-away by mid-July at $3 the trade makes 117% so our gains will be capped.

 

MGM Resorts (MGM, $11.39, up $0.18)

Original Entry Price:  $13.77 (2/2/12)

Lowered Price from Selling Options:  $12.67

Exit Target:  $15

Return:  -10%

Stop Target:  None

Action:  MGM held support at $10 and made a run towards its 200-day MA ($11.72) on Thursday.  A move above this level could lead to a test of the 50-day MA ($12.33) and where we would sell another call option.

We recommended buying the stock at $13.77 on 2/2/2012 and for every 100 shares to sell the March 15 calls for 45 cents.  This lowered the cost basis to $13.32.

On 3/20/12 we recommended selling the April 14 calls for $0.65 which lowered the cost basis to $12.67.

 

Alcoa (AA, $8.52, down $0.03)

Original Entry Price:  $9.65 (1/12/12)

Lowered Price from Selling Options and Dividends:  $9.14

Exit Target:  $11

Return:  -7%

Stop Target:  None

Action:  Alcoa tested $8 to start the week but was pushing $9 by Thursday after hitting $8.91.  The 50-day MA is at $9.25 and where we would like to sell a July or August call option.  A close below $8.40 would get the 52-week low of $8.21 back into the mix.  

We recommended buying the stock at $9.65 on 1/12/12.    

On 1/23/12 we recommended selling the March 11 calls for $0.25 which lowered the cost basis to $9.40.

On 2/1/12 the company paid a 3 cent dividend which lowered our cost basis to $9.37.

On 3/20/12 we recommended selling the April 11 calls for $0.20 which lowered the cost basis to $9.17.

On 5/10/12 the company paid a 3 cent quarterly dividend which lowered our cost basis to $9.14.

Trades on HOLD:  DryShips (DRYS, $2.12, up $0.05), AKS Steel Holding (AKS, $5.80, down $0.21), Rare Element Resources (REE, $4.14, down $0.12), Newpark Resources (NR, $5.56, up $0.01), Rambus (RMBS, $4.86, up $0.14), Patriot Coal (PCX, $1.67, down $0.18), OCZ Technology Group (OCZ, $5.15, up $0.41), Pizza Inn (PZZI, $2.25, down $0.05), Bebe Stores (BEBE, $6.10, up $0.07)  

 

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6.  Week Ahead

There are no economic reports scheduled for Monday.

Tuesday is rather light with Weekly Chain-Store Sales at 7:45am (EST), followed by Import/ Export prices which are due out an hour before the bell.  The Treasury Budget for May will be released later in the day at 2pm. 

Wednesday’s action includes the MBA Mortgage Index at 7am; Retail Sales at 8:30 am along with the latest Producer Price Index (PPI) numbers which will carry weight.  After the open, Business Inventories will be posted at 10am while the weekly Crude Inventory numbers hit the Street 30 minutes later.

Thursday’s slate starts with Initial and Continuing Claims at 8:30am, as well as the latest Consumer Price Index (CPI) figures.  OPEC will be meeting as well and there are talks of production cuts.

Friday could be volatile with triple-witching expiration and a bevy of economic news starting with the latest Empire Manufacturing numbers at 8:30am.  At 9am, Net Long-Term TIC Flows will be released and 15 minutes afterwards, Industrial Production and Capacity Utilization updates are due out.  After the open and just before 10am, the Michigan Sentiment Survey will be out and can carry some weight.