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TFC Commodity Trading Forum

Wall Street's Thursday Lunch Options

Chris Tyler, Optionetics.com
February 3, 2011

Strong data takes a backseat to more unwanted geopolitical unrest and possible inflation concerns as investors make a quick u-turn to highway junction 1,300 and 12,000. As of 11:10 ET the SP-500 (SPY) is off -0.40% and giving bulls a little something more to think about other than “Buy, Buy, Buy!”

On the economic front, things couldn’t be better for bulls in Thursday’s storyline. In the pre-market, weekly filings for unemployment benefits slid by 42,000 to 415,000 compared to estimates calling for a drop to 425,000. Separately, Q4 productivity increased 2.6%, topping Street views of 2.2% while unit labor costs fell -0.6% versus forecasts of 0.1%.

Intraday, ISM Services for January registered a five year high of 59.4 and besting views of 57.0. Making it four-for-four stateside, factory orders increased by 0.2% compared to estimates of a -0.6% drop. Bulls have also enjoyed a swath of better-than-expected same-store-sales results.

January retail chain data grew by 4.2% compared to estimates of 2.7% according to Thomson Reuters and for bulls, has been worthy of a shopping spree in the sector while the broader market comes up with its version of a “One Day Sale!”

Beating and enjoying investor awareness rather than a sometimes common “sell-the-news” response, niche young adult retailers Abercrombie (ANF), Aeropostale (ARO) and American Eagle (AEO) are showing gains of 1.50% to 4.50%.

Consumer wholesaler Costco (COST) is up 3.30% after it beat views by three points with same-store sales of 9.0%. And sitting atop the leadership board, rival BJ’s (BJ) is up nearly 13% after it topped estimates and stated its exploring its strategic options which includes a potential sale.

In earnings news, one story percolating bulls (and bears) interest is Green Mountain Coffee Roasters (GMCR). The erstwhile growth and still heavily-shorted stock [26% short interest / cover ratio 12.70] could be making a comeback of sorts after it beat by two cents on profits of $0.18 per share and stronger-than-expected revenue growth of 66.7%.

The company went on to guide both its second quarter and fiscal year above Street views. However and still to be determined, as current estimates fail to incorporate Green Mountain’s Van Houtte acquisition; today’s bullish espresso shot could prove short-lived fuel.

Intraday, GMCR is up 16.25% and continuing to forge a series of higher highs. In other technical circles and still to be determined, Thursday’s price action could be an ascending triple top made to order for bears not yet steaming mad.

In other reports of notice and keeping bulls entombed near the technical crossroads of “Dow 12,000” and “SP-1300”, Middle East protesting is proving unshakable. Continued and escalating violent eruptions rather than increased peaceful negotiations have been the unwanted order of the day.

Also acting as a drag on investor sentiment, amidst a slug of mostly favorable economic readings out of Europe and including the ECB’s decision to leave its targeted rate at 1.00%, group chieftain Trichet commented on signs of inflation, tied to energy and commodity prices, as increasing.

Though President Trichet went on to use some circular logic of prices expected to remain in-line with price stability, bulls don’t seem to be entirely confident of today’s pitch. Intraday and in those often intertwined markets of influence, the iShares 20-Year Treasury (TLT) is off -0.30% after narrowly hitting fresh intermediate lows from a bearish descending triangle breakdown.

Finally, semi outfit Netlogic (NETL) is making “sense and cents” to some bulls and maybe including those that follow this strategist’s weekly Growth Stock Option column or the IBD 50. Shares are up about 10% following the company’s $0.09 profit beat on earnings of $0.45 per share and in-line but solid sales growth of 44.5%.

Intraday, while NETL is still showing solid gains, shares are under pressure from session highs of about +13%. Technically speaking, the price action is forming a shooting star or hangman pattern that jumped above a near six-month long up channel line.

According to IBD’s own gospel, when a stock extends above a long-standing trendline, it makes the stock vulnerable to profit-taking and maybe something more severe down a road less traveled of late. In those sometimes accurate heat-seeking option markets, traders don’t appear to be listening as heavy trading some 300% above average is favoring call contracts by a near 2.5-to-1.0 margin.

Personally, if any initiating buyers were already “in it, to win it”, I can’t fault allocating a percentage of profits into a stock substitution strategy with a long call as premiums are now nicely i.e. very fairly priced on a relative trading range basis. For others though, I’d rather take the road less traveled than the prevailing high road north, hope it holds but find the adage of “all gaps eventually get filled” receive quick confirmation.

Chris Tyler
Senior Options Writer, former Market Maker & fulltime Option Hedge Hog Advocate
Optionetics.com ~ Your Options Education Site