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Daily Newsletter, Thursday, 6/14/2012

Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews

Market Wrap

Unconfirmed Rumors

by Jim Brown

Click here to email Jim Brown
The market was setting up for another plunge at the close when an unconfirmed rumor rescued the indexes from negative territory.

Market Statistics

A report from Reuters claimed central banks from the G20 nations were planning a massive coordinated liquidity event for Monday if the anti-austerity party won the Greek elections. The Nasdaq had fallen -25 points from its highs and had just entered negative territory when the rumor broke. The S&P was -7 points off its intraday highs and threatening to break under 1320 again. The shorts were piling on and the indexes were setting up for another negative close.

The rumor instantly propelled the indexes higher forced everyone that had shorted the afternoon decline to cover in a panic. The S&P spiked +14 points and the Dow +118 on the news. The Nasdaq rebounded +27 points on the news.

Unfortunately the rumor was either denied or no commented by everyone who could be contacted by the major news agencies. The markets rolled over again but the frantic news flow regarding the rumor in the last 30 min of trading helped to keep the gains despite some extreme volatility.

The Reuters report cited a "senior G20 aide familiar with discussions among international financial diplomats." Reportedly his statement was confirmed by "several" other G20 officials but none would speak on the record. The G20 is scheduled to meet in Los Cabos, Mexico, on Monday and Tuesday.

A second G20 official said depending on the severity of the market response to the Greek election, an emergency meeting of ministers from the Group of Seven developed nations could be held on Monday or Tuesday in Los Cabos.

Also a concern for the G20 is the results of the French parliament and Egyptian presidential elections also this weekend. The French election will likely give control of parliament to the socialists after the last election put Hollande, also a socialist, into power. In Egypt the currently ruling military government could win after a court struck down gains made by the Muslim Brotherhood on Wednesday.

The rumors gave the markets a knee jerk boost but the markets finished well off their highs after the credibility was discounted.

Nasdaq Chart - 5 Min

After the market closed there was a flurry of press releases where some finance officials and central banks made comments in response to the Reuters report. None specifically confirmed the coordinated liquidity event but individually they seemed to all indicate they were ready to provide liquidity "if needed." I think the officials saw an opportunity to affirm their constant mantra of liquidity as needed in hopes the comments would provide enough support to the markets ahead of the Greek elections to actually head off any instability.

The UK Finance Minister, George Osborne, said the Bank of England would act together with the government would implement new monetary policy tools to tackle tightening credit and financial market conditions. Osborne said BOE governor Mervyn King would reveal more details of the scheme later. King said the BOE would flood its banking system with cash in a coordinated move to get credit flowing again in the recession economy. "The country will launch a scheme to provide cheap long-term funding to banks to encourage them to lend to businesses and consumers, and the central bank will activate an emergency liquidity tool."

The U.S. markets opened lower after the weekly Jobless Claims rose higher than expected. The headline number showed a rise in claims to 386,000 from a revised 380,000 from the prior week. That number was revised up from 377,000. The weekly jobless claims have risen for five of the last six weeks and are not suggesting job growth is increasing.

Note in the chart below how the right edge is accelerating higher and approaching the critical 400,000 level. This suggests the Fed may consider further action next week to stimulate future job growth.

Jobless Claims

The Consumer Price Index (CPI) declined -0.3% in May and a larger drop than expected. The rapidly declining prices for energy were responsible for the large drop in the headline number. Gasoline prices fell -6.8% in the reporting period. Energy prices are now -3.7% below the same period in 2011.

The core rate, excluding food and energy, rose +0.2%. Even though the core rate continues to climb the headline rate year over year gain of only +1.7% is well below levels where the Fed would be concerned. This gives them plenty of room to add stimulus at next week's meeting.

Consumer Price Index Chart

The first quarter Current Account Deficit rose to -$137.3 billion and well over estimates for a rise to -$131.2 billion. The prior quarter was -$118.7 billion. This represents 3.6% of GDP and the highest since the 2009 financial crisis.

Moody's Deficit Chart

In other economic news OPEC announced it was keeping its production quota at 30.0 mbpd and vowed to eliminate over production. Currently OPEC is producing between 31.6 and 32.964 mbpd depending on which set of numbers you believe. There are no "official" figures because production reports are fabricated for various reasons. OPEC itself has to rely on tanker trackers and informants to produce its estimates.

Abdullah el-Badri, the secretary general of OPEC said the countries currently over producing have agreed to cut production. "It is a collective decision." Since Saudi Arabia said just a week ago they were going to continue to produce at high levels regardless of the quota and said on Tuesday they were going to press for a higher quota, I have serious doubts about the ability of OPEC to slow production as claimed. Saudi oil minister Ali al-Naimi would not talk to the press as he left the meeting other than to say he was "happy" with the outcome. Unfortunately his body language conveyed a different message.

The price of Brent crude has fallen from $128 in March to $96 on oversupply in the market and worries about a slowdown in Asia and Europe. At the meeting most ministers agreed that $100 would be a fair price although Iran and Venezuela pushed for prices as high as $120.

Brent Crude Chart

Friday has a full list of economic reports and it is quadruple witching option expiration. None of the economics are specifically important and will be ignored ahead of the Greek election. The NY Manufacturing report and Industrial Production are the reports with the most interest although on a summer Friday there may be few traders watching.

Economic Calendar

Obviously the big event for the weekend is the Greek election. Greece forbids polls in the two weeks before an election but informal polls seem to indicate the pro-austerity party may be slightly ahead. However, the Spanish bank bailout without an austerity program attached has given the Syriza candidate new ammunition for his political speeches. He claims Greece does not have to undergo austerity and he can solve the problem by renegotiating with the EU and the troika. The troika has said there will be NO renegotiating the agreement.

With the comments over a liquidity event on Monday "if needed" there appears to be a "protective put" under the market. If the pro-austerity party wins the market will rally. If the anti-austerity party wins and volatility appears the banks will inject liquidity and the markets will rally. I know it sounds crazy but that appears to be the way it is developing.

Unfortunately, regardless of who wins the election it could be a week or two before the government is formed. No single party has the strength to win a majority of the votes. That means more than one party must form a ruling coalition. That process can take a couple weeks. This is what happened in the May elections. The various parties were unable to form a coalition in the required time and they were forced to schedule a new election in hopes of a new result. With the pro and anti austerity parties currently neck and neck there could be another coalition failure. I don't know what the Greek rules are about a second election failure but I doubt it will be pretty.

If the pro-austerity party wins Greece will probably stay in the euro but the austerity will continue to drag the Greek economy lower. There will be riots in the streets as the youth, strongly for the anti-austerity party, protest and pillage.

With the Fed starting a two day meeting on Tuesday they will have three days of events in Europe to consider before releasing their statement on Wednesday afternoon. Consensus is growing for a continuation of Operation Twist but nothing else unless Greece implodes.

Traders are hoping for some Fed action and they could be disappointed if it does not appear. The U.S. market has been running on hope of action for the last couple weeks as the prior sugar high has long since faded.

The euro rebounded on the rumors to close at a four week high. There is a strong potential for a euro move higher but the stars would have to be perfectly aligned. The rising wedge pattern in the chart below appears likely to break out to the upside.

Euro Chart

The abundance of Greek election news and the worries over Spain and Italy crowded out any stock news. Spain is sinking even further into the abyss with yields on its ten year notes rising to a record 6.96%. Over 7% is considered to be unsustainable. Spain is scheduled to auction more debt next week. Italy saw its yields rise to 6.13%. The clock is definitely ticking on both countries regardless of what is happening in Greece. That will keep the lid on the global markets regardless of what happens in Greece. European banks are holding nearly 800 million euros of Spanish and Italian sovereign debt. As the yields rise the value of those bonds declines. The banks will need further recapitalization as the values continue to decline. This is the ticking time bomb.

The S&P rallied right to strong resistance at 1325 and held there all day until the sell off began at 2:PM when it fell to 1320. The rumor rebound pushed the S&P up to secondary resistance at 1334 where it immediately failed. The index closed at 1328 simply because time expired and the rumor news was frantic.

With Friday's trading overseas likely to be filled with headline overload the U.S. markets are going to be volatile as well. We will have the benefit of seeing how Europe handled the news and how those markets setup for the weekend.

The only thing we know for sure is that multiple countries and central bankers are united in wanting to prevent a meltdown next week. That should be bullish for equities next week.

We are still missing a "coordinated statement" from the ECB and the Fed. Both entities are the most influential and they have been perfectly quiet as of Thursday night. If the EU was actually concerned about the markets and wanted to provide support they would do it with a coordinated statement. That carries the most weight and lasts longer than the sound bites from the BOE or BOJ. If we get that statement we could be off to the races depending on what it says. If they just say they stand ready to provide liquidity "if needed" then the boost could be short lived.

As far as trading our markets the new number to watch is 1334.93 on the S&P. That was secondary resistance as the market high on May 29th. A move over that level on strong volume would be a buyable event. The second number is 1325. A decline back below 1325 would give that prior resistance more weight.

I can't stress enough how potentially volatile Friday and Monday may be. Don't trade if you are not prepared for triple digit Dow moves.

S&P Chart

The Dow actually closed at four week highs thanks to the rumors but it was testing those waters intraday. There is a growing amount of bullishness in the markets ahead of the Fed and the fear of Greece is apparently already priced in. Next resistance is 12,725 and support is now 12,600.

Dow Chart

The Nasdaq was the weak index with a return to negative territory just before the rumors broke. Apple and Google were both negative and Google closed at a new six month low. The big gainers list is lackluster and contains names you would not expect to be in the top 20. All the big guns are conspicuously absent.

The Nasdaq is nowhere close to its key resistance levels and even with today's bounce is trending to the low side of its recent range. This is not a good sign. Watch 2850 on the upside and 2805 as support.

Nasdaq Gainers

Nasdaq Chart

Taking a test flight in a private plane without any prior experience might be safer than shorting the market on Friday. That is contrary to my thoughts on Tuesday night. I thought being short into the weekend and switching to a long on Monday was the plan. With all the news stories about monetary policy and liquidity events flying around tonight the odds for a move higher in equities is increasing.

The ECB and Fed have been quiet and I expect to hear from them soon. They might want to take advantage of the current environment to try and juice the market with a statement rather than an actual policy change. However, anything is possible.

Buckle up; it may be a wild ride!

Enter passively, exit aggressively!

Jim Brown

Send Jim an email


New Option Plays

Healthcare Technology

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Cerner Corp. - CERN - close: 81.53 change: +1.61

Stop Loss: 79.45
Target(s): 84.85 & 87.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
CERN is a healthcare information technology company. Now after six weeks of consolidating from its early May highs this stock is showing strength again. CERN has broken the trend of lower highs and displayed relative strength today.

I am suggesting bullish positions at the open tomorrow. It is possible that the May highs near $84.10 could be resistance but we're going to set two different targets. Our conservative target is $84.85. Our more aggressive target is $87.50.

- Suggested Positions -

buy the Jul $85 call (CERN1221G85) current ask $1.20

Annotated Chart:

Entry on June xx at $ xx.xx
Earnings Date 07/26/12 (unconfirmed)
Average Daily Volume = 1.25 million
Listed on June 14, 2012



In Play Updates and Reviews

Near Session Highs

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. market saw stocks close near their session highs on late afternoon headlines about coordinated central bank efforts to provide liquidity should it be needed following the Greek election on Sunday.

Current Portfolio:


CALL Play Updates

Dollar Tree, Inc. - DLTR - close: 107.91 change: +1.38

Stop Loss: 104.45
Target(s): 112.50
Current Option Gain/Loss: + 7.5%
Time Frame: exit prior to the stock split on June 26th
New Positions: see below

Comments:
06/14/12 update: DLTR displayed some relative strength with a +1.3% gain and a new closing higher. We only have seven trading days left before it's time to exit prior to the stock split. I am not suggesting new positions at this time.

- Suggested Positions -

Long Jul $110 call (DLTR1221G110) Entry $2.37

06/12/12 new stop loss @ 104.45
06/11/12 trade opened with DLTR gapping higher at $107.42

Entry on June 11 at $107.42
Earnings Date 08/16/12 (unconfirmed)
Average Daily Volume = 1.3 million
Listed on June 09, 2012


Monster Beverage - MNST - close: 76.31 change: +1.54

Stop Loss: 73.25
Target(s): 79.50
Current Option Gain/Loss: + 23.5%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
06/14/12 update: MNST was also showing some relative strength today with a +2.0% gain. The stock looks ready to challenge Monday's high. More conservative traders may want to adjust their stops closer to $74.00. I am not suggesting new positions at this time.

- Suggested Positions -

Long Jul $80 call (MNST1221G80) Entry $1.70

06/09/12 new stop loss @ 73.25
06/06/12 new stop loss @ 70.75
06/06/12 triggered at $74.25

Entry on June 06 at $74.25
Earnings Date 08/02/12 (unconfirmed)
Average Daily Volume = 1.9 million
Listed on June 04, 2012


Ross Stores Inc. - ROST - close: 65.52 change: +1.28

Stop Loss: 63.45
Target(s): 68.50
Current Option Gain/Loss: +16.6%
Time Frame: 3 to 5 weeks
New Positions: see below

Comments:
06/14/12 update: ROST rallied to a new all-time high and closed up +1.99%. Readers may want to start inching up their stop loss. Today's move could also be used as a new bullish entry point.

- Suggested Positions -

Long Jul $65 call (ROST1221G65) Entry $2.10

06/12/12 new stop loss @ 63.45
06/07/12 triggered on gap higher at $64.47

Entry on June 07 at $64.47
Earnings Date 08/16/12 (unconfirmed)
Average Daily Volume = 2.3 million
Listed on June 06, 2012


Whole Foods Market, Inc. - WFM - close: 91.54 change: +1.64

Stop Loss: 89.60
Target(s): 95.00 & 98.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Comments:
06/14/12 update: WFM is hovering under resistance near $92.00. I am suggesting a trigger to buy calls at $92.05. I am listing two different exit targets. Our conservative exit target is $95.00. Our more aggressive exit target is $98.50.

Trigger @ 92.05

- Suggested Positions -

buy the Jul $92.50 call (WFM1221G92.5)

- or -

buy the Aug $95 call (WFM1218H95)

Entry on June xx at $ xx.xx
Earnings Date 07/25/12 (unconfirmed)
Average Daily Volume = 1.8 million
Listed on June 12, 2012


PUT Play Updates

Anixter Intl. - AXE - close: 53.11 change: -0.12

Stop Loss: 56.05
Target(s): 48.50
Current Option Gain/Loss: - 6.5%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
06/14/12 update: AXE continues to underperform the market's major indices. Shares tagged a new relative low today. I would still consider new bearish positions now.

Earlier Comments:
We want to keep our position size small because AXE has above average short interest. The most recent data listed short interest at 15% of the small 27.6 million share float.

*Small positions* - Suggested Positions -

Long Jul $50 PUT (AXE1221S50) Entry $1.07

Entry on June 14 at $53.35
Earnings Date 07/24/12 (unconfirmed)
Average Daily Volume = 339 thousand
Listed on June 13, 2012


Baxter Intl. - BAX - close: 49.03 change: -0.77

Stop Loss: 51.51
Target(s): 48.00
Current Option Gain/Loss: Jun$50p: +40.9% & Jul50p: +19.3%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
06/14/12 update: BAX sank to new relative lows with today's -1.5% decline. It was our plan to exit our June $50 puts at the closing bell tonight! We're still planning to exit any remaining positions at our $48.00 target.

- Suggested Positions -

(exit on Thursday, June 14th @ the close)
Jun $50 PUT (BAX1216R50) Entry $0.66 exit $0.93 (+40.9%)

- or -

Long Jul $50 PUT (BAX1221S50) Entry $1.55

06/14/12 planned exit for Jun $50 puts at the close (+40.9%)
06/13/12 prepare to exit our June $50 puts at the close on Thursday
06/02/12 new stop loss @ 51.51
05/31/12 triggered at $50.95

Entry on May 31 at $50.95
Earnings Date 07/19/12 (unconfirmed)
Average Daily Volume = 2.4 million
Listed on May 29, 2012


NASDAQ OMX Group - NDAQ - close: 21.27 change: -0.06

Stop Loss: 22.55
Target(s): 20.15
Current Option Gain/Loss: -11.7%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
06/14/12 update: NDAQ is still underperforming the market and is hovering near its lows. The stock looks poised to break down. The key level to watch is $21.25.

(SMALL Positions) - Suggested Positions -

Long July $21 PUT (NDAQ1221S21) Entry $0.85

Entry on June 06 at $21.95
Earnings Date 07/25/12 (unconfirmed)
Average Daily Volume = 3.8 million
Listed on June 05, 2012


Netflix, Inc. - NFLX - close: 62.66 change: -0.17

Stop Loss: 67.25
Target(s): 60.25
Current Option Gain/Loss: - 6.1%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
06/14/12 update: NFLX is also underperforming the major indices and continues to slowly drift lower. I am not suggesting new positions at this time.

Earlier Comments:
I am suggesting we keep our position size small because NFLX can be volatile at times and being short the stock is a popular position with short interest at 20% of the 54 million share float. Our first target is $60.25. More aggressive traders could aim a lot lower. The Point & Figure chart is suggesting a $48 target although I suspect the $50 level could be significant support.

(Small positions) - Suggested Positions -

Long Jul $60 PUT (NFLX1221S60) Entry $3.57

Entry on June 08 at $64.37
Earnings Date 07/23/12 (unconfirmed)
Average Daily Volume = 4.9 million
Listed on June 07, 2012


Oil States Intl. - OIS - close: 67.02 change: +1.08

Stop Loss: 68.55
Target(s): 61.50
Current Option Gain/Loss: -53.3%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
06/14/12 update: OIS is showing too much strength. The stock looks poised to breakout past resistance near $68.00. I am suggesting an early exit. We'll close positions at the open tomorrow morning.

- Suggested Positions -

Long Jul $60 PUT (OIS1221S60) Entry $2.25

06/14/12 prepare to exit positions at the open tomorrow

Entry on June 08 at $66.04
Earnings Date 07/30/12 (unconfirmed)
Average Daily Volume = 720 thousand
Listed on June 07, 2012


CLOSED BEARISH PLAYS

Celgene Corp. - CELG - close: 63.59 change: +0.52

Stop Loss: 65.55
Target(s): 60.50
Current Option Gain/Loss: -35.9%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
06/14/12 update: Biotech stocks were showing relative strength today with the BTK biotech index outperforming the major indices. CELG helped lead the charge higher after the stock garnered some bullish analyst comments this morning. Shares of CELG surged +3.6% and broke out back above the $65.00 mark and its 300-dma. Our stop loss was hit at $65.55.

- Suggested Positions -

Jul $62.50 PUT (CELG1221S62.5) Entry $2.03 Exit $1.30 (-35.9%)

06/14/12 stopped out at $65.55

chart:

Entry on June 12 at $63.88
Earnings Date 07/26/12 (unconfirmed)
Average Daily Volume = 2.9 million
Listed on June 11, 2012