Mark Fightmaster (mfightmaster@sir-inc.com)
8/31/2006 2:17:31 PM
A daily feature available on SchaeffersResearch.com is "Options Update." Every day, we'll give a brief market overview and focus on one stock that is the center of some heavy option trading. The focus of today's feature is Starbucks.
Before the market opened this morning, the Commerce Department reported that core consumer inflation moderated in July as inflation-adjusted consumer spending expanded at the fastest pace in the past year. Core consumer prices, which is measured by the personal consumption expenditure price index excluding food and energy, increased by 0.1 percent during July. This gain is the smallest since December, and short of the consensus estimate for a 0.2-percent gain. During the past year, core prices have increased by 2.4 percent, not only matching the largest gain in 11 years, but also above the Fed's "comfort zone" of one to two percent for core inflation. Consumer spending increased by 0.8 percent in July, which is the biggest gain since January and ahead of the expected 0.7-percent gain. After adjusting for inflation, real spending logged an increase of 0.5 percent, the largest gain since December.
Before the market opened, October-dated crude rose to $70.74 per barrel after the Iranian president said that "Iran will not back down an inch . . . and will not accept being deprived of its rights." This sentiment is not a surprise, nor is it a change from the country's stance since the U.N. agreed on a resolution on the Iranian nuclear program in July. The International Atomic Energy Agency is set to present a report to the U.N. Security Council later today, where it is expected to formally find Iran in breach of U.N. demands. The U.N. has threatened sanctions on Iran, but it is not clear what form any punishment may take. However, investor's have weighed any sense of trepidation over the Iranian situation against yesterday's surprise increase in inventories, and yesterday's increase is winning. Although crude is hovering near the round-number 70 level, it is currently trading at $69.55 per barrel, 48 cents lower on the day.
Slightly before 1:00 PM Eastern Time, Ben Bernanke stated the belief that the strong increase in productivity (output per hour of work) seen over the past decade is likely to continue for some time. The Fed head stated that "a case can be made that the strong productivity growth of the post-1995 era is likely to continue for some time." Sizeable gains in productivity permit the economy to grow quickly without a build in inflationary pressures. Bernanke's speech, the core consumer inflation data, and the situation in Iran have neither helped nor hurt the market, as all of the major indices are currently hovering at or slightly below the break-even level.
Most-Active Options Update
At 1:58 p.m. Eastern Time, the Dow Jones Industrial Average (DJIA – 11,383.6) is currently 0.01 percent higher. The S&P 500 Index (SPX – 1,303.35) is 0.07 percent lower, and the Nasdaq Composite (COMP – 2,184.0) has dropped 0.08 percent. At 2:00 p.m. Eastern Time, 2,322,196 calls have changed hands compared to 1,463,824 puts, equaling a single-day put/call volume ratio of 0.77. The CBOE's equity put/call volume ratio stands at 0.77, while the ISE's ratio comes in at 0.57.
Option Activity Follow-Up
I continued my weeklong look at blue-chip stocks with a look at Pfizer
(PFE:
sentiment,
chart,
options)
yesterday. Although the stock is up slightly, it has not yet been able to break through the resistance of the 28 level. Keep watching the stock; I maintain the stance I took yesterday when I said, " If PFE slips a bit, but doesn't breach support, we could see further pessimism from the Street, which would make PFE a more attractive bullish contrarian play."
Starbucks
As the father of a 14-month old, I now appreciate my morning cup of coffee more than I ever thought I could. Fortunately for me, there is a Starbucks
(SBUX:
sentiment,
chart,
options)
less than a mile from the palatial Schaeffer's grounds. Unfortunately for SBUX, I do have difficulty shelling out five-plus dollars for a venti mocha-chai-skim-choco-frappa-latte with a double shot of espresso and caramel (no, that isn't really one of their menu offerings . . . I think). Nonetheless, there are those days when a frothy, steaming cup o' Seattle's finest (along with a heaping helping of the Tragically Hip on the Fightmobile's stereo) is just about the only thing that can get these bleary eyes cleared.
It seems that put players also have a taste for the green-tea guru, as its September 30 put (SQX UF) appears to be quenching their thirst. I find this an interesting play, mainly because the 30 level has acted as support on four different times since January. When the year started, the dalai latte was struggling, but rebounded off the 30 level and rode the momentum of a positive earnings report higher. Of course, a worse-than-expected earnings performance sent the stock swirling lower, where it has again found a measure of support at the 30 level.
I am a bit worried about the 32.50 level, as it is the site of heavy call open interest in September and October. This configuration could throw a roadblock in any attempt SBUX makes at moving higher. Conversely, today's action has firmly established the 30 level as September's peak put open interest, which could provide support. Does this mean that the shares are simply going to bounce between these two levels? Let's take a look at some long-term technical indicators.
The weekly chart below suggests that SBUX is going to find a bit of resistance in the form of its 10-week moving average. However, notice that the caffeine king's recent pullback has met the support of its 80-week moving average. Since October 2004, the equity has finished below this trendline a handful of times (five to be exact). These two trendlines are on an apparent crash course, which could be a make-or-break moment for SBUX. If the 80-week trendline's support is broken, there is little in the way of potential short-covering support waiting to put a floor on the company's losses. However, topping its 10-week moving average could be just the catalyst SBUX needs to regain the success it enjoyed earlier this year. The pattern that these two trendlines are on suggests that we may not be waiting too long to find out which one will cave. I have also drawn two lines on the chart; the orange one is potential support at the point of last September's pullback. The black line is the good ol' round-number 30 level.
The long-term performance of the Pacific Northwest's coffee contribution is impressive. Again, some will be drawn to the recent pullback, but I am drawn to the long-term performance and trendlines. Notice that the recent pullback has met the shares' 20-month trendline. This is only the fifth time since December 2002 that the stock has had to rely on this level of support. There is little reason to believe that there will be any earth-shattering news before the end of the day that will cause this month's close to drop below its 20-month moving average. Moreover, the 30 level lurks below the 20-month trendline to lend further support if needed. Now, I am a bit concerned about one technical development. Notice that the twin trendlines seem to be flattening out, which could lead to a downturn, which could lead to a downtrend, which could lead to lower coffee prices at SBUX (yeah, right). I am a bit concerned about potential resistance at SBUX's all-time high just short of the 40 level. But, a repeated challenge of this level would represent a 22-percent gain from the baron of the bean's current price.
I dipped a toe into the sentiment pool when I mentioned that there is little in the way of potential short-covering support for SBUX. There is little support despite a short-interest increase of 14 percent during August. I also find cause for alarm in the analyst coverage for SBUX. According to Zacks, six of the 10 analysts covering the coffee company rate it a "buy" or better. Moreover, three of the remaining four rate SBUX a "hold," while the lone holdout deems it worthy of a "strong sell" rating. This configuration leaves the door open for downgrades, which could push the shares lower. If this happens, expect a stern test of the firm's 80-week and 20-month moving averages, along with the 30 level.
While I haven't polled each and every inhabitant of the options pits, my hunch is that they would agree with today's option activity. How can I say that with confidence? I'm psychic. In fact, I can tell what you are thinking right now, and you're right . . . I'm not really psychic. I am confident in my statement because SBUX's Schaeffer's put/call open interest ratio (SOIR) of 0.87 is higher than 73 percent of those taken during the past 52 weeks, which is a bearish reading. If this pessimism unwinds, the stock could enjoy a bit of buying pressure.
SBUX's Schaeffer's Equity Scorecard rating of 4.0 is rather non-descript. While it hints bearish possibilities for the company, I like to live on the edge and harbor bullish feelings for SBUX (not just because I like their coffee). Bulls could view the current pullback as a decent entry point for an intermediate-term bullish play on SBUX.
** The tables below reference notably active call and put contracts across all six exchanges.**
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