11:30pm (EST)
1. Market Summary
2. Apple Hits $600 as New iPad Makes Debut
3. Hershey (HSY) –Everybody Loves Chocolate
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)
= = = = = = = = = = = = = = =
1. Market Summary
“We mentioned how the first half of March was seasonally bullish while the back half of the month is usually bearish. March options expire this week and Friday also represents triple-witching which is when all index, futures, and options expire. Volatility has picked up this month but this is usually a mixed day. The good news is that the Monday before triple-witching is typically bullish as the Dow has posted gains nearly 70% of the time over the past 25 years.
We also mentioned last week how we haven’t seen a 4%-5% frantic surge to new highs in the market while in the same breath we talked about how there hadn’t been a 1% pullback for 2012. Well, the 1% selloff happened last Tuesday. We would love to see a 3% pop this week which would be enough to get the indexes past our fluff targets. After that, we would expect a pullback like the Wall Street pros have been calling for all year and still are because they didn’t buy Tuesday’s dip.” (END) from 3/11/2012…
Following a flat Monday, the bulls went ballistic on Tuesday after pushing the major indexes nearly 2% higher and past our fluff targets (Dow 13,000; S&P 1,400; Nasdaq 3,000). We can thank the Fed for that after keeping rates low and the fact that most U.S. banks passed their annual stress test. The Fed also allowed a few of them to raise their dividend which sparked a powerful sector rally in the Financial stocks.
The results weren’t due until Thursday but there may have been some leaks which led to Tuesday’s announcement after the close. Of the 19 banks that were tested, 4 failed. The big surprise was Citigroup (C, $36.69, up $0.42), but SunTrust Banks (STI, $24.38, down $0.11) and MetLife (MET, $38.38, down $0.03) also have brand awareness. Ally Financial rounded out the group of losers while the 15 that passed were led by JPMorgan Chase (JPM, $44.57, down $0.13) which raised its quarterly dividend and initiated a $15 billion stock buyback program.
Wednesday was a flat day following Tuesday’s big pop as Wall Street took a wait-and-see approach to Thursday’s jobless claims numbers and the Philly Fed. Both came in better-than-expected which pushed the market higher by another half-percent (0.5%) by the end of the day. Friday was mixed as the indexes traded in a tight range and consolidated the week’s gains.
Last week we showed you 3-month charts for the indexes and how close they were to breaking out. This week we will go over the longer-term charts and our near-term targets for the indexes. We said if the bulls cleared our fluff targets there could be a continued rally and at the end of January we listed further upside targets for the indexes in case the momentum was more powerful than we thought. We often say that markets tend to overshoot support and resistance after staying in a tight trading range and the major indexes are showing classic examples of this right now.
The Dow fell 20 points, or 0.15%, to close at 13,232. The blue-chips reached a high of 13,289 on Friday but went out on their low. We said once the index cleared 13,000 there could be a run to 13,200 which was our fluff target. At the end of January, we said if the bulls cleared this level on the close there would be run up to 13,500 and for 2012 we have given a 14,000 target for the Dow. The bears will be trying to get back under the 13,200 level this week and then 13,000 after taking out the 12,800 level during the prior week. The Dow started Monday at 12,922 and added 310 points, or 2.4% points for the week. For 2012, the blue-chips are up 1,015 points, or 8.3%.
The S&P 500 gained a little over a point, or 0.1%, to settle at 1,404. The index traded to a peak of 1405.88 on Friday and we said last week a close above 1,375 would bring 1,400-1,425 into play. At the end of January we gave a near-term target of S&P 1,400-1,450 and a longer-term target of 1,550-1,600. The bears will try to push near-tem support at 1,400-1,375 but we wouldn’t get nervous until we see a drop below 1,350. From there 1,325-1,300 would be in play and the possible start of a trend change. The S&P 500 gained 33 points, or 2.4%, for the week after starting at 1,370 on Monday. For the year, the index is up 147 points, or 11.7%.
The Nasdaq slipped 1 point, or 0.04%, to finish at 3,055. Tech finally closed above the 3,000 level on Tuesday after kissing a high of 3,000.11 at the end of February. The index traded to a high of 3,060 on Friday and we said 3,250 would come into play on a close above this level. In January, we said if the Nasdaq could reach these levels there could be a run at 3,750-4,000 by year-end. The bears had a lot of trouble cracking 2,900 during the prior week which was a good sign that kept us bullish and we will be watching this level like a hawk should the bears penetrate 3,000 this week. A break below these support levels would quickly lead to 2,800-2,750 and would also be the start of a trend change. The Nasdaq started the week at 2,988 and added 67 points, or 2.2%, by Friday’s close. For the year, the index is showing a gain of 450 points, or 17.3%.
Chart from mid-February:
The S&P Volatility Index ($VIX, 14.47, down 0.95) dropped 6% on Friday and fell below 15 to 5-year lows after touching 13.66 intraday. We said back in November with the VIX at 30+ that this rally would carry the index down to the mid-teens and we finally hit these levels last week as well. We said there was a possibility for a run to the lows teens if this level was taken out but these low levels are warning signs for a pullback in the market. The VIX can dance around or trade sideways at these levels for days and weeks so we won’t get too nervous until the bears push 20 again. The VIX tested a high of 21.24 on the prior week’s sell-off of Terrible Tuesday and we said to watch for a break above 20-22.50 for a trend change. Same deal going forward but also watch 17.50 for a clue.
The Russell 2000 also fell a point to close at 830. The small-caps have had major issues with the 830 level after testing a high of 831.23 on Tuesday’s surge, 831.61 on Wednesday, 831.46 on Thursday, but did test 832.78 on Friday. There is still the possibility the index can push 850 and our near-term target from January was 875 if cleared. To the downside, the bears will target a test back below 800 after breaking through the 50-day moving average (MA) during the prior week. A break below 780 would be the start of a possible trend change. The Russell 2000 popped 13 points, or 1.6%, after starting the week at 817. The index is up 90 points, or 12%, for the year.
We are puzzled when we hear the Wall Street pros, or the talking heads who say “the market has gone up too far, too fast”. Or, “shares have peaked after running 50% higher this year”, or, “the parabolic moves can’t continue”. Pay attention to some of the charts we just showed you and the ones we are going to show you today in the Financial stocks for our Daily and Weekly publications. Let’s just say, well, they have way further to run if they want when you look back on some of moves the market and stocks made in 2009.
For instance, Capital One (COF, $54.50, up $0.87) is showing hints it could trade to $80. Shares hit a low of $7.69 in 2009 and were pushing $40 before the year was out. American Express (AXP, $56.55, down $0.17) moved from $9 to $40.
You can also see the huge moves the market made from the 2009 lows which occurred in March and how far they ran by yearend. For instance, the Dow moved from a March 2009 low of 6,600 to 10,400 by the start of 2010. The S&P zoomed from 667 to over 1,100. It is hard to call a market top or market bottom so all we can do is look for clues and prepare.
We have been bullish since late August and we still are for 2012 but we are preparing for a pullback at some point. We mentioned coming into March that the first two weeks were normally bullish while the back-half is bearish. Given the momentum, especially by the Financial stocks, this theory could be in jeopardy as a pullback might not come until April or even May.
The key events going forward will be 1Q earnings which start the first week of April and oil which has many subplots. Between now and them, the next two weeks are reserved for “warnings” which is when companies confess that they might not meet current expectations. If some of the heavy hitters warn Wall Street they aren’t going to meet their estimates, then we could see a pullback. If things are quiet, the market could drift higher.
We will also have to see what the Wall Street pros do because many of them are behind the 8-ball. We mentioned back in December there was a good chance the mutual fund managers would miss the rally because all of them tend to take vacations at year-end and didn’t see a “Christmas” rally coming. When they got back in January, they were waiting for a pullback that never came.
In February, there were hints of a breakdown but it produced a 5-week trading range and the prior Tuesday sell-off at the beginning of the month flushed out a lot of weak hands. This means there could be some frantic buying over the next few weeks for those fund managers who are expected to show a profit for the quarter.
= = = = = = = = = = = = = = =
Key of Technicals Used In Following Articles
2. Apple Hits $600 as New iPad Makes Debut
Apple (AAPL, $585.57, up $0.01) shares hit $600 last week, peaking at $600.01 on Thursday. We did some chart work that night and here is what we are watching going forward:
Here were our thoughts at the beginning of the month (quotes and chart are from 3/2/2012):
“We also said last week we would like to see a rally up until St. Patty’s Day which is when the March options expire but there is one event that could really cause a pullback before then.
Apple (AAPL, $545.18, up $0.71) is expected to announce its iPad3 tablet on Wednesday and the stock has a history of selling off after the announcement following a big run-up into the event. Shares have zoomed $140 to start 2012 as they were at $405 at the end of 2011. This is a 35% increase so history is setting up to repeat itself once again.
Perhaps a pullback in Apple is in the cards which would mean the bulls winning streak could be coming to an end as shares weigh heavily on a couple of the major indexes. However, what if Apple moves to $600, first? (END)
We have missed some great trades in Apple because the options command too high of a premium for us to trade options on it in the Daily and shares are too expensive for the average investor to write covered calls on the stock. To do a covered call you would have to own 100 shares of Apple which would cost you $58,585. This is the reason stock-splits do matter Wall Street!
We went to our local Wal-Mart ($61.23, up $0.15) after midnight on Thursday to pick up the new iPad (for the office of course) to see what all the hype was about. Two words. Simply amazing.
We were not sure if they were allowed to sell the device that early because we saw the ridiculous lines on TV Friday morning but we weren’t about to ask questions. Someone actually paid one lady $1,000 to get her first-in-line ticket at one Apple store location.
We did not think there would be the type of “Call of Duty” video game lines for the new iPad as there is a big difference between a $50 game and a starting price of 5 bills for the iPad. We asked the sales clerk how many iPads he had sold since midnight. He said they had sold 5 by 12:15am. We were 6 and 7, and there were 2 people behind us wanting one. One store, one city, at midnight and please don’t tell Apple we got it early.
If one iPad sells for the higher-end $829 price tag, that is 16-17 video games. So, by our estimates, this was the equivalent of over 100 customers within the first hour “lined up” to get Apple’s products if we compare it to a video game.
This type of momentum is enough to keep Apple going to $700 but as you can see, there is risk of a huge letdown if shares start to fall back. The stock also weighs heavy on the major indexes and has accounted for a lot of our “fluff” targets.
This will be another clue we will be watching going forward. If Apple does start to slip because sales didn’t meet Wall Street’s estimate, or if there is a supply chain issue, or any other negative event, investors will sell first and ask questions later. Especially the new Apple investors who have just got in and would get nervous on a $100 pullback.
The 50-day moving average for Apple is just under $500 and the 200-day MA is just above $400. Price targets are being raised to $700. Should either hit, the market will be looking at new highs or a test back down to support. In other words, whichever way Apple goes over the next month, so will the market.
= = = = = = = = = = = = = = =
3. Hershey (HSY) –Everybody Loves Chocolate
Americans love chocolate. Sometimes we can take advantage of cyclic trends. So when do Americans tend to buy chocolate: Halloween, Christmas, Valentine’s Day, and Easter. And the chocolate industry is dominated by Mars Inc, Nestle (NSRGY.PK), Kraft’s (KFT) Cadbury, and Hershey (HSY, $60.14, down $0.16).
Now let’s compare HSY (blue line) to competitors KFT (yellow line), NSRGY.PK (red line), and its industry (confectioners) to see if shares are overpriced to begin with.
It is hard to say if shares are overpriced based on the statistics shown in the table above which is why there is more research needed. Positive numbers (green) slightly outnumbered negative numbers 10 to 9. As for the negatives, the price/sales, price/book, trailing PE, and forward PE are all the highest among those listed. The PEG is one of the highest. While trading for 2.2 times revenue is not bad, it is also the highest listed. The EV/EBITDA is reasonable, but high compared to those listed and likely too expensive to be considered an acquisition target. Insiders are not buying shares, so they likely do not see the shares as undervalued. The short interest is also the highest listed.
On the other hand, the high short interest could trigger a short squeeze, meaning many short sellers cover all at once, causing Hershey’s stock to jump. This, however, seems unlikely with only a 3% short interest. Insider ownership is a healthy 8%, the largest in the group. Also, considering the company’s size, the high insider ownership is a big positive. Institutions also seem to be holding enough stock, a sign that institutional demand remains strong. This is a positive since institutions have more tools than the average investor but lack the insider knowledge. Also, institutions have a lot of cash, so high institutional demand drives the stock higher. Also, note that the company is the only one listed with institutional buying. The current ratio, the highest listed, shows Hershey has a higher liquidity than its peers. The company has a lot of cash compared to its size and all listed margins are either the highest or near the highest in the group. The return on equity is very high, a good sign. And from our past experience, a stock with a return on equity greater than 50% usually performs well.
The $14 billion chocolate, sweets, and refreshment maker based in Hershey, Pennsylvania derives 90% of its revenue from the U.S. The company’s products include the Hershey’s brand, Reese’s, Milk Duds, Twizzlers, York, Mounds, and Almond Joy brands as well as Hershey’s Kisses and licensed U.S. sales of Nestle’s Kit-Kat bar.
Besides Cadbury Eggs, Hershey sells several candies from Reese’s peanut butter eggs to chocolate bunnies. Ninety million chocolate Easter bunnies are produced each year. And the company has ownership of all U.S. sales of Cadbury products due to licensing agreements.
Premium chocolate includes Cacao Reserve, Joseph Schmit, and Dagoba. It also makes Ice Breakers, Breath Savers, and Bubble Yum. Besides chocolate products, it offers snack bars and macadamia snack nuts; mints and gum; and chocolate baking products, toppings, sundae syrups, and hot cocoa mix. Further, the company makes chocolate-covered raisins, peanuts, and almonds; and chocolate and syrup beverages.
= = = = = = = = = = = = = = =
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, 3/16/12)
MONDAY
Adams Resources & Energy (AE, $55.83, up $3.83), Adobe Systems (ADBE, $33.82, down $0.35), American Oriental Bioengineerin (AOB, $1.52, Flat), Arrhythmia Research Technology (HRT, $3.63, up $0.10), Berkshire Bancorp (BERK, $7.47, up $0.12), Biostar Pharmaceuticals, (BSPM, $0.80, Flat), Bitstream (BITS, $4.49, up $0.19), Blonder Tongue Laboratories (BDR, $1.38, up $0.05), Cache (CACH, $7.38, down $0.01), China Botanic Pharmaceutical (CBP, $0.75, down $0.01), China Finance Online (JRJC, $2.77, up $0.05), China Kanghui Holdings American (KH, $18.05, down $0.34), Dehaier Medical Systems (DHRM, $3.28, up $0.015), Document Security Systems (DSS, $4.00, up $0.17), Feihe International (ADY, $3.29, up $0.07), First West Virginia Bancorp (FWV, $16.76, Flat), Focus Media Holding (FMCN, $27.44, up $1.10), Gordmans Stores (GMAN, $15.47, down $0.08), IGI, Laboratories (IG, $1.14, up $0.02), InterOil (IOC, $58.55, upo $0.51), Landmark Bancorp (LARK, $19.24, Flat), Nature’s Sunshine Products (NATR, $16.00, Flat), Neuralstem (CUR, $1.16, Flat), Skystar Bio-Pharmaceutical (SKBI, $2.23, down $0.05), Supertel Hospitality (SPPR, $1.02, up $0.01), Wave Systems (WAVX, $1.69, down $0.06), Western Liberty Bancorp (WLBC, $2.93, up $0.08), Zion Oil & Gas (ZN, $2.51, down $0.06)
TUESDAY
AAR (AIR, $21.84, down $0.36), Acorn International (ATV, $4.35, down $0.03), Astro-Med (ALOT, $8.09, down $0.22), Broadway Financial (BYFC, $1.50, up $0.14), China Yida Holding (CNYD, $1.80, up $0.11), Cintas (CTAS, $40.21, up $0.24), DSW (DSW, $55.50, down $1.05), FirstCity Financial (FCFC, $9.94, down $0.04), FSI International (FSII, $4.51, down $0.09), GTSI (GTSI, $4.82, down $0.03), Heelys (HLYS, $2.42, up $0.06), JA Solar Holdings (JASO, $1.91, up $0.08), Jabil Circuit (JBL, $26.82, down $0.21), Jefferies Group (JEF, $19.18, down $0.04), Krispy Kreme Doughnuts (KKD, $8.19, down $0.04), Life Partners Holdings (LPHI, $4.21, up $0.13), LookSmart (LOOK, $1.42, up $0.03), NuPathe (PATH, $4.84, up $0.03), Recovery Energy (RECV, $4.00, down $0.07), RIT Technologies (RITT, $3.26, up $0.01), SAIC (SAI, $13.16, Flat), Taomee Holdings (TAOM, $5.95, up $0.06), Tiffany (TIF, $68.03, down $0.63)
WEDNESDAY
Actuant (ATU, $28.94, down $0.43), American Electric Technologies (AETI, $5.07, up $0.05), Asure Software (ASUR, $8.46, up $0.01), Cadiz (CDZI, $9.91, down $0.63), CLARCOR (CLC, $51.32, down $0.30), Concord Medical Services (CCM, $3.83, down $0.03), Discover Financial Services (DFS, $32.05, up $0.03), Fred’s (FRED, $14.02, down $0.04), General Mills (GIS, $38.83, up $0.14), Herman Miller (MLHR, $21.50, Flat), Luby’s (LUB, $5.42, down $0.01), Reeds (REED, $1.57, up $0.04), Shoe Carnival (SCVL, $26.32, down $0.27), Sonic (SONC, $8.00, up $0.14), The9 Limited (NCTY $7.27, up $0.32)
THURSDAY
21st Century (TCHC, $3.67, up $0.13), Accenture (ACN, $63.62, down $0.02), Atlantic American (AAME, $2.97, down $0.01), Bacterin International Holdings (BONE, $3.13, down $0.11), Bonanza Creek Energy (BCEI, $19.50, up $0.36), CIFC (DFR, $5.15, Flat), ConAgra Foods (CAG, $26.43, down $0.15), Cost Plus (CPWM, $14.82, down $0.15), Dollar General (DG, $44.69, down $0.44), FedEx (FDX, $94.34, down $0.27), IHS (HIS, $97.20, up $1.30), Innotrac Corporation (INOC, $1.32, Flat), LaPorte Bancorp (LPSB, $9.29, down $0.11), Manitex International (MNTX, $7.33, down $0.17), Met-Pro (MPR, $9.53, up $0.15), Nike (NKE, $111.22, up $0.49), OPKO Health (OPK, $4.93, down $0.06), Perry Ellis International (PERY, $17.92, down $0.40), Rada Electronics Industries (RADA, $2.04, Flat), Signet Jewelers (SIG, $49.29, down $0.24), SmartHeat (HEAT, $3.20, down $0.06), Steelcase (SCS, $9.13, Flat), TearLab (TEAR, $2.71, down $0.05), Tri-Tech Holding (TRIT, $7.50, down $0.31), UTi Worldwide (UTIW, $16.11, up $0.34), Wet Seal (WTSLA, $3.36, down $0.07)
FRIDAY
Camelot Information Systems (CIS, $3.24, up $0.10), Darden Restaurants (DRI, $52.51, down $0.52), Discovery Laboratories (DSCO, $2.85, down $0.65), J. W. Mays (MAYS, $18.50, down $0.10), KB Home (KBH, $12.76, down $0.30), ZaZa Energy (ZAZA, $3.73, up $0.14), Westway Group (WWAY, $5.80, down $0.20)
= = = = = = = = = = = = = = =
4. Weekly Wrap Covered Call Portfolio Update (Closing prices as of 3/16/12)
The following 5 trades were closed on Friday as the stock price was higher than the March call option strike price we sold:
Solazyme (SZYM, $15.55, down $0.30) +55%
magicJack VocalTec (CALL, $25.45, up $1.26) +19%
Bank of America (BAC, $9.80, up $0.56) +20%
Vivus (VVUS, $20.25, up $0.11) +38%
Symantec (SYMC, $18.17, down $0.02) +16%
Other Closed Trades for 2012 (17-0, overall): DAR +20%, TIVO +5%, MGM +22%, ZNGA +13%, SGMS +6%, VVUS +17%, F +8%, AA +7%, CLNE +27%, DNDN +18%, MGM +19%, ACAS +3%.
E*Trade Financial (ETFC, $11.04, up $0.09)
April 10 calls (ETFC120421C00010000, $1.20, up $0.05)
Original Entry Price: $9.73 (2/29/12)
Lowered Price from Selling Options: $9.28
Exit Target: $12
Return: 19%
Stop Target: None
Action: Shares busted through $10 on Tuesday’s surge by the Financial stocks and rumors of a takeover hit the water coolers on Wednesday. For the week, shares added 14%. The next wave of resistance lies ahead at $12 while $10 will try to hold on a pullback.
We recommended buying the stock at $9.73 on 2/29/2012 and for every 100 shares to sell the April 10 calls for 45 cents. This lowered the cost basis to $9.28.
If shares are called-away by mid-April at $10 the trade makes 8%.
Bebe Stores (BEBE, $9.11, down $0.27)
Original Entry Price: $9.00 (2/22/12)
Lowered Price from Selling Options: Waiting for shares to reach $10
Exit Target: $8
Return: 1%
Stop Target: None
Action: Bebe traded to a high of $9.58 on Tuesday and Wednesday which was a 52-week high before falling 3% on Friday. We are still waiting for shares to trade above $10 before we sell a call option. Support is at $8 if $9 does not hold.
We recommended buying the stock at $9.00 on 2/22/2012
Pizza Inn (PZZI, $4.61, up $0.01)
Original Entry Price: $4.50 (2/22/12)
Lowered Price from Selling Options: No options available
Exit Target: $8
Return: 2%
Stop Target: None
Action: Shares cleared $5 on Monday, reaching $5.08, before ending the week slightly lower. We said shares could challenge $5 last week and our near-term target is $6, longer-term $8 if the company can manage its growth. We cannot sell options on this position, yet, because there are none listed. Support is at $4.50-$4.25
We recommended buying the stock at $4.50 on 2/22/2012.
OCZ Technology Group (OCZ, $8.21, down $0.17)
Original Entry Price: $9.60 (2/7/12)
Lowered Price from Selling Options: Waiting for shares to reach $10
Exit Target: $12+
Return: -14%
Stop Target: None
Action: Shares traded above $9 on Monday and support at $8 is holding up well. We are still expecting a run past $10 on short-covering which is where we will start writing call options and a move above $9.50 could trigger a squeeze. A break below $8 would be short-term bearish.
We recommended buying the stock at $9.60 on 2/7/2012.
Arena Pharmaceuticals (ARNA, $1.76, down $0.03)
July 3 calls (ARNA120723C00003000, $0.60, flat)
Original Entry Price: $1.88 (2/2/12)
Lowered Price from Selling Options: $1.33
Exit Target: $3+
Return: 28%
Stop Target: None
Action: The company announced earnings last week and missed analysts expectations. We weren’t too worried about their numbers because the company is losing money as it tries to bring drugs to the market. Arena should hear from the FDA in June on its obesity drug, Lorcaserin, which may or may not get approved. We believe there is a good chance it will and we will know more of the drug’s chances when Vivus hears from the FDA in April on its obesity drug, Qnexa.
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%.
MGM Resorts (MGM, $14.42, down $0.29)
Original Entry Price: $13.77 (2/2/12)
Lowered Price from Selling Options: $13.32
Exit Target: $15
Return: 8%
Stop Target: $13.40
Action: Our March 15 calls expired worthless so we will be looking to write an April or June call option this week. The April 15’s closed at 37 cents on Friday while the June 15’s are going for 90 cents.
MGM traded down to $13.41 to start the week and reached a high of $14.79 on Thursday and $14.80 on Friday before losing steam. Our-near-term target is $16 and the 52-week high is $16.05. There is little resistance between $17 and $25. If shares retreat this week, look for support at $13.50 to hold, followed by $13. If we do not sell an option, we have listed $13.40 as a Stop Target to protect profits but it is not a Hard Stop.
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.
Patriot Coal (PCX, $7.17, up $0.61)
April 9 call (PCX120421C00009000, $0.11, up $0.03)
Original Entry Price: $8.91 (1/12/12)
Lowered Price from Selling Options: $8.31
Exit Target: $15
Return: -14%
Stop Target: None
Action: Patriot held $6 all week after hitting a low of $5.97 during the prior week. There is still risk down to $5 but Friday’s 9% pop is telling us a bottom might be in for the sector. Coal stocks are out of favor right now which is why we went bottom-fishing but Patriot should be back near $10 over the next 12-24 months. At these levels, it also makes an interesting buyout candidate.
We recommended buying the stock at $8.91 on 1/12/2012 and for every 100 shares to sell the February 10 calls for 40 cents. This lowered the cost basis to $8.51.
On 2/29/12 we recommended selling the April 9 calls for $0.20 which lowered the cost basis to $8.31.
If shares are called away in mid-April at $9 the trade will make 9%.
Bank of America (BAC, $9.80, up $0.56)
April 8 call (BAC120421C00008000, $1.85, up $0.50)
Original Entry Price: $6.75 (1/12/12)
Lowered Price from Selling Options and Dividends: $6.34
Exit Target: $15
Return: 54%
Stop Target: None
Action: Our first Bank of America covered call trade was closed on Friday and made 20%. We started initiating coverage of the stock when it was around $5 back in December. Great call, huh? We said a move above $8.75 would be super bullish and could lead to $10 which is exactly what is happening. Support has moved up from $7.50 to $8.
We recommended buying the stock at $6.75 on 1/12/2012 and for every 100 shares to sell the April 8 calls for 40 cents. This lowered the cost basis to $6.35.
If shares are called-away by mid-April at $8 the trade makes 26%.
Alcoa (AA, $10.54, up $0.19)
Original Entry Price: $9.65 (1/12/12)
Lowered Price from Selling Options and Dividends: $9.37
Exit Target: $11
Return: 12%
Stop Target: $10.00
Action: Our March 11 calls expired worthless so we will be looking to write an April call option this week. The April 10s closed at 77 cents on Friday while the April 11 calls are going for 27 cents. Alcoa made it back above $10 last week and faces resistance at $11. We have listed a stop target at $10 if shares retreat and test $9 again.
We recommended buying the stock again 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.
Newpark Resources (NR, $8.03, up $0.08)
Original Entry Price: $9.45 (7/27/11)
Lowered Price from Selling Options: $7.85
Exit Target: $10+
Return: 2%
Stop Target: None
Action: The March 12.50 calls expired on Friday.
Shares made higher highs and lower lows all week as they attempt to move away from support at $7.50. If shares can hold $8 this week, we could be setting up for a run back to $9 which is where we will look to sell another call option.
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.
On 1/25/2012 we recommended selling the March 12.50 call at 25 cents which lowered our cost to $7.85.
Trades on HOLD: Rambus (RMBS, $6.82, up $0.08), Rare Element Resources (REE, $6.12, down $0.04), AKS Steel Holding (AKS, $8.20, up $0.30), DryShips (DRYS, $3.64, up $0.25)
= = = = = = = = = = = = = = =
5. Week Ahead
Economic news has been fast and furious over the past few weeks but we get a little breather this week.
Monday is light with the NAHB Housing Market Index which is out at 10am (EST) and the only report due.
Tuesday is Housing Starts and Building Permits while Wednesday brings the latest MBA Mortgage Index numbers, Existing Home Sales and the weekly Crude Inventories figures.
For Thursday, Wall Street will be watching Initial and Continuing Claims before the open, followed by the FHFA Housing Price Index report and Leading Indicators 30 minutes after the start of trading.
Friday wraps up with New Home Sales.