Option Investor
Newsletter

Daily Newsletter, Thursday, 2/28/2013

Table of Contents

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

Market Wrap

Markets Sequester Early Gains

by Thomas Hughes

Click here to email Thomas Hughes
Introduction

The world market got a big lift in overnight trading. The reassuring words of Big Ben Bernanke helped to sooth some fears and spur investor appetites. The euphoria did not carry over into the U.S. markets though they did manage to sustain the big gains we saw yesterday. On an intra-day basis the Dow Jones Average made a new 5 year high and speculation is rampant over when and if it will make a new all time high. The S&P 500 still has a little further to go in order to hit its all-time high. Today the index managed to hold yesterday's rebound but was capped at 1525.


The big news from around the world was the nomination of Kuroda for Bank of Japan Governor. This move has been expected and failed to make much of an impact on the yen. It did help the Nikkei to lead Asian markets with a 2.7% gain. The apparent success of the Italian bond auction yesterday was another plus on the international scene. It helped to ease fears even though Italy remains a wild card. The global rebound in stock continued in Europe with individual indexes gaining and average around 0.75%.

Economic data here at home was positive and supports the expectation and possibility of GDP growth in the next few quarters. Unemployment claims continued to trend lower, GDP in the fourth quarter was revised up, the housing sector got yet another positive reading and Chicago PMI grew stronger than expected. You'd think that with all that the markets would have been screaming higher, maybe the sequester isn't a non-event after all. The markets may be expecting a last minute deal to stave off the near term effects. I have to admit I am, why wouldn't they, we got one for the Cliff and we got one each time a budget issue has come up before that. It seems to be status quo. We saw a similar sharp pull-back just before the Fiscal Cliff blah blah blah that turned out to be a nice entry point. This could be the same but we need to see a break above 1430 on the S&P 500.

The Data

Early morning releases included the 4th quarter GDP revision and weekly unemployment claims figures. GDP was revised up to 0.1% from the previous -0.1%, a good sign but not as good as the expected 0.5% economists were looking for. This seems to be in line with other GDP reports we have seen over the last few weeks namely from the EU and Germany. Both of those reports also showed that things were a little weaker than expected but that expectations for rebound, especially in Germany, were at least as good if not better than before. Within the report there were some interesting details. Much of the difference between the expected number and the actual was laid at the feet of inventory increases and military spending. These two drags are both expected to reverse in the first quarter which could help boost GDP along with other factors. Consumer spending, which accounts for about 70% of our economy, rose by a bigger than expected 2.1%. This is another positive for GDP growth in the longer term providing the consumer can shrug off the effects of tax increase and spending cuts. Excluding the volatile inventory number the GDP rose by 1.7%, in line with expectations and hotter than the previous estimate of 1.1%.


Jobless claims seems to be trending down. There is some regional volatility but in general initial claims is near the bottom of its 12 month range and continuing claims reached a new low. Total claims are still lingering at relatively high levels but could begin to tick down if housing keeps gaining strength. Initial claims dropped by 22,000 to hit 344,000, only 14,000 higher than the 5 year low. The four week moving average also moved lower, dropping by 6,750 to hit 355,000. This is also approaching its five year low 350,000. A drop below either one of these levels could be the signal that hiring is gaining the upper hand over firing. This week 16 states reported drops of more than 1,000 claims and 5 with drops bigger than 2,000. California was the only state listed with a gain in claims larger than 1,000 and blew that limit away with over 26,000.


Continuing claims made a big drop. This number fell 91,000 to 3.07 million, the lowest level since June 2008. This chart is in decline, even taking into account its volatile nature over the past few months. This is a possible indication the labor market is picking up in some areas but I would like to see improvement in initial claims, total claims and the overall unemployment levels.


Total claims for unemployment is one area of concern. This number ticked up this week, approaching but not hitting, recent highs. This number has been elevated for several months, counter to the delining trend we saw in the first half of last year. It is the increase in total claims that I see as having the most influence on total unemployment. Comparing total claims to unemployment there is a bottom in total claims around Oct-Nov 2012 coincident with a bottom in unemployment. Based on the data so far I won't be expecting to see much, if any, improvement in unemployment levels when they are released next Friday.



I won't rehash all the housing data we have received over the last two weeks but I will highlight the news of today. Growth in home building was revised up to an annualized rate of 17.5%. This is good news for housing bulls and in line with the expectations. Housing is also expected to be a leader in a jobs recovery that could begin as early as this spring. The sector has been experiencing slow and steady growth for nearly a year, if that continues as expected we could see the unemployment data begin to decline again. Other data such as new home sales, existing home sales and housing inventory figures support an increase in building later this year. There is concern that the housing recovery is one sided and being driven by investment purchases and flippers but today's new home sales numbers may put some of that to rest.

The final piece of the economic puzzle revealed today was Chicago PMI with a reading of 56.8. This was much better than expected, ahead of the previous 55.6 and expected 54.0. This marks an eleventh month high and helped to lift the major indexes. It also marks the 2nd month of increase. The new orders portion of the report in combination with inventory levels with suggests that manufacturers will need to start increasing production in the near future. This could lead to an increase in hiring as well. If manufacturing gains traction at the same time as housing there could be a bigger than expected surge in the economy.

Japan and the Yen

Asian markets got a big lift following Bernanke's testimony and QA session this week. He gave one answer in particular that I thought would have had more impact on the USD/JPY pair than it did. He stated in a firm manner that he supported the Japanese policies and their efforts to devalue the yen. It is no secret that Japan is actively devaluing its currency and it based on reaction by the G7 and now Bernanke's endorsement those plans can move ahead full steam. These efforts also moved one step further into aggressive mode with the nomination of Haruhiko Kuroda to be BOJ Governor. He is an advocate of the policies put forth by Prime Minister Shinzo Abe and expected to help. The pair found support at the short term moving average after falling sharply on Monday. Today it regained the support/resistance level of 92.50. The longer outlook for the yen is more weakness, nearer term there could still be some volatility as other currencies adjust.

USD/JPY daily

Europe And The Euro

Europe traded to the positive today and rallied right into the close of trading. I think they expect the sequester and Italian worries to be blips on the radar and quickly put behind us. The reassurances from Bernanke that QE would not come to an end soon helped to ease fears in European and Asian markets. Draghi followed up today with remarks to the effect that there is no reason to unwind ECB policy at this time and that there may even be another rate cut in the offing. These statements did not help the EUR/USD pair. The Euro lost some ground to the dollar, falling from the 1.315 resistance line. The uptrend started last summer is broken and will provide resistance should the pair advance. It is oversold at this level but bearish momentum is still strong. Next support exists at 1.3000, a break below this would be bearish.

EUR/USD daily

The Oil Index

Oil traded below $95 a barrel for the seventh day today. The assurances from Bernanke and Draghi that the central banks would keep supporting the economy should have been good news for crude and brent. Crude hovered around flatline before falling off into the close. This could just be near term blahs, if housing and manufacturing pick up and lead to employment then oil will most likely go up as well. The Oil Index has been one of the more volatile ones this week. It dropped over 3% on Monday and is looking kinda bearish right now. However, if this is a precursor to economic growth later in the year then this is a potential entry area. MACD analysis of the previous peak suggests that it will be at least retested. This supported by a buy signal on the Stochastic indicator. Longer term bullishness requires a break above resistance at 1350 and the recent peak at 1375.

Oil Index daily

The Gold Index

Gold retreated below 1600 again today. The metal dropped sharply to to approach the recent lows near $1550. Economic strengths and technical selling are pressuring this trade and could send it even lower. The Gold Index looks like it is in free fall. It is approaching the 68.8% retracement of the previous bull market but the technicals are so weak I don't think it will even matter. At this time I can't see any technical reason for the Gold Index to find support here. Indicators on the daily charts are bearish with no signs of support or bottom and are just plain bearish on the weekly charts.

Gold Index daily

Story Stocks

Earnings are still making headlines with over 150 companies reporting today. Of course, this isn't counting all the hoopla over the Dow flirting with all time highs. JC Penny and Groupon both made big misses. JC Penny reported a net loss in the fourth quarter that totals more than 43% of losses for the full year. This was far more worse than expected and has caused CEO Ron Johnson to reverse the no discounting policy. The stock lost more than 15% in trading today, coming close to the 3 year low set a few months ago.

JC Penny daily

Groupon was another disaster and I am not surprised. Sales and revenue increases matched expectations but their guidance fell short. They expect 2013 revenue to be about 6.5% below the consensus and fueled speculation about the online discount sites viability. The stock lost about 25% in today's trading. After hours the company announced a change in leadership, the current CEO will be replaced with a team of two.

Groupon daily

Herbalife made headlines again with the addition of two new board members provided by Carl Icahn. The announcement also included an allowance for Icahn to increase his position up to 25%. The stock jumped on the announcement but is still in the middle of the recent range. The stock appears to be winding up for a break out. There is lots of pressure mounting from Icahn and the two hedge funds currently battling over the companies value.

Herbalife daily

The VIX

You have probably already noticed that volatility is back in the market. Albeit still at very low levels. The spike took the index almost all the way to the top of calm range but quickly fell back down. This move close the gap the VIX opened January 1st when the trading year started. This move was semi expected and raised the question of which volatility is moving now. The index is currently sitting on an important support level, one that bears close watching. The thing is, even if the market keep rallying it doesn't mean the VIX will fall. Speculation and fear of a reversal could lead to higher prices for options relative to the index and that will equal a higher value for the VIX.

The VIX daily

The S&P 500

The index started the day out fairly quiet considering the last few days. Regardless of what Art Cashin said about it being a non-event the Sequester is hanging heavy over the markets. News of failed attempts to pass bills from both sides of the Senate helped to put a damper on gains made during the middle part of the day. Near term resistance capped the index at 1525 that resulted in a pullback to 1520 in the late afternoon. The pullback extended into the close with the index dropping down to the 1515 level.

SPX 60 minute

On the daily charts there is an early signal forming, not so much a buy signal as a signal that a signal may be coming. MACD is not as clear. It is bearish and declining from a peak but not giving any firm signal. The 1525 resistance could keep the index in check until the sequester deadline blows over. It could also be a potential top so a break above it and then 1530 is really needed. The pullback of the last week did not even come close to breaking my up trend line so I am still bullish on the daily chart for now but I need to see that break above 1430.

SPX daily

The longer term charts have not been improving. The trend is still up but it is also still weakening as it approaches the top of the secular bear market range. The most recent peak in MACD is smaller than the last and currently declining making the third consecutive divergence in the indicator since the market hit bottom in 2011. Based on this chart it looks like there may not be much life left in the rally. Hopes of a housing recovery may be enough to help the index make one last push to the all time highs but it will take real hard evidence to keep it there.

SPX weekly

Tomorrow starts a new round of important monthly economic figures. Personal Income and Spending, PCE and Michigan Sentiment top the list. Resuming next week ISM, Construction Spending, the Fed's Beige Book and the all important ADP/Challenger/NFP bundle dominating the scene. Look for signs of improvement in hiring and unemployment to help boost the markets. Tomorrow could bring us some more volatility so be ready.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Basic Materials

by James Brown

Click here to email James Brown


NEW DIRECTIONAL PUT PLAYS

Eastman Chemical - EMN - close: 69.73 change: -1.06

Stop Loss: 72.05
Target(s): 65.25
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
It looks like the rally in EMN ran out of fuel a couple of weeks ago. Since then the stock has been volatile but shares are developing a bearish trend of lower highs with the bounces failing at the simple 10-dma. There is a good chance that EMN corrects toward its 100-dma near $64.50 or even toward the $62-60 zone.

I am suggesting small bearish positions now, at the open tomorrow morning, with a target of $65.25. We will set our initial stop loss at $72.05. More conservative traders may want to use a stop loss closer to today's or yesterday's highs (71.22 or 71.34, respectively).

*Small Positions*

- Suggested Positions -

buy the Apr $67.50 PUT (EMN1320p67.5) current ask $1.90

Annotated Chart:

Entry on March 01 at $---.--
Average Daily Volume = 1.8 million
Listed on February 28, 2012



In Play Updates and Reviews

The Rebound Loses Momentum

by James Brown

Click here to email James Brown

Editor's Note:

The stock market's short-term rebound is starting to lose some momentum.

We did see HD hit our trigger. FOSL was stopped out. MON was removed.


Current Portfolio:


CALL Play Updates

Check Point Software Tech. - CHKP - close: 52.51 change: -0.21

Stop Loss: 50.75
Target(s): 54.50
Current Option Gain/Loss: +42.1%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
02/28/13: CHKP's rally stalled at the $53.00 level today. The stock looks poised to dip back toward the $52.00-51.75 area tomorrow. Readers may want to start inching up their stop loss again. I am not suggesting new positions at this time.

*Small Positions* - Suggested Positions -

Long Mar $50 call (CHKP1316c50) entry $1.90

02/25/13 market looks weak, readers may want to exit now
02/20/13 new stop loss @ 50.75
02/16/13 CHKP looks poised to dip back toward support at $50.00
02/13/13 new stop loss @ 49.90
02/06/13 new stop loss @ 49.40

Entry on February 01 at $50.25
Average Daily Volume = 2.7 million
Listed on January 31, 2012


Canadian Pacific Railway - CP - close: 121.52 change: -0.18

Stop Loss: 116.60
Target(s): 124.75
Current Option Gain/Loss: + 9.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
02/28/13: The transportation sector continued to rally and hit a new high before paring its gains almost back to unchanged by the closing bell. Shares of CP were not quite so strong and the stock hovered under the $122 level. Nimble traders may want to try and buy calls on a dip or a bounce near the $120.00 mark.

- Suggested Positions -

Long Mar $120 call (MAR1316c120) entry $2.75

Entry on February 27 at $120.25
Average Daily Volume = 795 thousand
Listed on February 23, 2012


Home Depot - HD - close: 68.50 change: +0.44

Stop Loss: 66.40
Target(s): 74.00
Current Option Gain/Loss: - 4.0%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
02/28/13: The rally in HD continued on Thursday with a new multi-year high. Shares hit $69.19 intraday before trimming its gains. Our entry point to buy calls was hit at $68.50 .

Earlier Comments:
It is possible that the $70.00 level could act as round-number, psychological resistance especially since the stock failed their multiple times in the 1999-2000 time frame. However, we are going to set our sights on a run to $74.00. FYI: The Point & Figure chart for HD is bullish with a long-term $95 target.

- Suggested Positions -

Long Apr $70 call (HD1320d70) entry $1.00

Entry on February 28 at $ 68.50
Average Daily Volume = 6.9 million
Listed on February 27, 2012


McDonald's - MCD - close: 95.90 change: +0.17

Stop Loss: 93.25
Target(s): 99.75
Current Option Gain/Loss: +42.1%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
02/28/13: MCD slowly drifted higher on Thursday. I don't see any changes from my prior comments. I would still consider new positions now at current levels.

FYI: The Point & Figure chart for MCD is bullish with a $115 target.

- Suggested *Small* Positions -

Long Apr $95 call (MCD1320d95) entry $1.66

Entry on February 25 at $95.38
Average Daily Volume = 4.9 million
Listed on February 23, 2012


CBOE Volatility Index - VIX - close: 15.51 change: +0.78

Stop Loss: 11.45
Target(s): 19.90
Current Option Gain/Loss: + 7.8%
Time Frame: 8 to 9 weeks
New Positions: see below

Comments:
02/28/13: The volatility index (VIX) produced a midday rebound as stocks started to pare their gains. If you were looking for a new entry point to buy calls on the VIX this could be it.

- Suggested Positions -

Long Apr $16 call (VIX1317D16) entry $1.90

02/25/13 adjust exit target to 19.90

Entry on February 10 at $13.37
Average Daily Volume = n/a
Listed on February 09, 2012


PUT Play Updates

Capital One Financial - COF - close: 51.03 change: -0.56

Stop Loss: 54.55
Target(s): 48.50
Current Option Gain/Loss: +52.8%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
02/28/13: COF underperformed the broader market with a -1.0% decline. Although shares have essentially been churning sideways the last couple of sessions. More conservative trades may want to exit early as COF nears the $50.00 mark. We are aiming for $48.50. I am not suggesting new positions at this time.

- Suggested Positions - *Small Positions*

Long Mar $52.50 PUT (COF1316o52.5) entry $1.23

02/23/13 be careful here. COF is holding support at the $52 level. Shares could be poised to bounce.

Entry on February 20 at $52.25
Average Daily Volume = 5.9 million
Listed on February 19, 2012


F5 Networks - FFIV - close: 94.43 change: +1.39

Stop Loss: 96.75
Target(s): 86.50
Current Option Gain/Loss: -20.2%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
02/28/13: FFIV spiked down to a new relative low this morning and then bounced. Shares managed to outperform the market with a +1.49% gain. Fortunately the rally did seem to struggle near the $95.00 level but I am not suggesting new positions at this time.

Please note we are making a correction in the entry price of our option. I have updated the entry price below to $3.55. Yesterday we listed values for one of the short-term weekly options by accident.

Earlier Comments:
It's possible the $90.00 level could act as round-number, psychological support but we are going to aim for the $86.50 level.

- Suggested Positions -

Long Mar $95 PUT (FFIV1316o95) entry $3.55

02/28/13 corrected the option entry price toe $3.55

Entry on February 27 at $93.50
Average Daily Volume = 1.4 million
Listed on February 26, 2012


iShares Dow Jones Transports - IYT - close: 103.59 change: +0.20

Stop Loss: 108.25
Target(s): 100.25
Current Option Gain/Loss: - 6.8%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
02/28/13: This morning was our aggressive entry point on the IYT. The transportation ETF managed to tick higher and hit a new all-time high before trimming its gains and closing almost unchanged on the session. Optimistic bears might call that a failed rally. Our stop loss is at $108.25 but more conservative traders may want to adjust their stop closer to today's high of $107.46. I would still consider new positions at current levels.

Small Positions - Suggested Positions -

Long Apr $105 PUT (IYT1320p105) entry $2.20

Entry on February 28 at $106.61
Average Daily Volume = 610 thousand
Listed on February 26, 2012


CLOSED BEARISH PLAYS

Fossil, Inc. - FOSL - close: 102.77 change: +0.78

Stop Loss: 103.30
Target(s): 93.25
Current Option Gain/Loss: -75.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
02/28/13: The rebound in FOSL continued on Thursday and shares hit our stop loss at $103.30. We initially wanted to buy puts on the breakdown below support at $100 and the 50-dma. Unfortunately there was no follow through lower on the breakdown and FOSL reversed with a three-day bounce. There is still a chance the stock rolls over in the $103-105 zone but our play is closed.

- Suggested Positions -

Mar $95 PUT (FOSL1316o95) entry $1.60 exit $0.40*(-75.0%)

02/28/13 stopped out at $103.30
*option exit price is an estimate since the option did not trade at the time our play was closed.

chart:

Entry on February 26 at $ 99.21
Average Daily Volume = 1.1 million
Listed on February 25, 2012


Monsanto Company - MON - close: 101.03 change: +0.63

Stop Loss: 100.65
Target(s): 92.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
02/28/13: MON has continued to rebound with the stock now up three days in a row. I would not be surprised to see shares roll over under the $102 level but our trade has not opened yet (trigger was 97.80). Since the trade is not open yet we're dropping MON as an active candidate.

Trade not open yet.

02/28/13 removed from the newsletter

chart:

Entry on February -- at $---.--
Average Daily Volume = 2.5 million
Listed on February 25, 2012