Option Investor
Newsletter

Daily Newsletter, Tuesday, 3/5/2013

Table of Contents

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

Market Wrap

New Historic High

by Jim Brown

Click here to email Jim Brown

The Dow gained +126 points to close at 14,250 and a new historic high. Bears threw in the towel.

Market Statistics

For weeks now there has been an undertone to the market suggesting the rally could fail. Internals worsened, volume slowed, economics declined and market sentiment crashed but the buyers kept coming. The pent up demand finally burst out this morning and the major indexes closed at new highs. The talking heads on CNBC were all worked up over this "historic occasion." With the milestone behind them what are they going to do for future content?

After China's move last week to crack down on real estate prices sent commodities plunging the outlook for the global economy worsened. Today China's outgoing leader pledged to continue record stimulus spending and power China's GDP to at least 7.5% growth this year. The sudden turnaround in the outlook for China helped boost the overseas markets and the U.S. futures began moving higher well before the open. Crude oil and copper rebounded on the news as well.

A speech late Monday by Fed Vice Chair Janet Yellen enforced the view the Fed will continue aggressive QE purchases for a long time. Overnight Australia's Reserve Bank said it would keep interest rates at record lows. The Bank of Japan, Bank of England and the European Central Bank are also expected to keep rates low and possibly add additional stimulus when they meet this week. The combination of all these events finally overpowered the sellers and the markets shot higher.

Positive U.S. economics added fuel to the overseas bounce. The ISM Nonmanufacturing Index rose to 56.0 from 55.2 compared to estimates for a small decline. This is the highest reading since March 2012. The internal components were strong and suggest the services economy is accelerating.

New orders rose from 54.4 to 58.2. Backlogs rebounded out of contraction territory at 49.0 to hit 54.5. Export orders rose +5 points to 60.5 and the highest level since 2007. Employment was less impressive with a minor -0.3 point decline to 57.2 but still well into the expansion range. Eleven industries reported an increase in employment and only five reported declines.

ISM Chart

The economic calendar for Wednesday is headlined by the ADP Employment report. Expectations are going to be for a gain of +175,000 jobs. A smaller than expected number would only enforce the current QE purchases while a much stronger number would immediately cause fears the Fed will quit soon.

The Fed Beige Book at 2:PM should show all 12 Fed districts growing at a moderate pace. Any weakness here would only enforce QE as well.

On Wednesday there is a flurry of central bank rate decisions. None are expected to raise rates and it is possible additional stimulus could be added.

The biggest report is the Nonfarm Payrolls on Friday. Expectations are for the addition of +160,000 jobs. Like the other reports above, a slightly worse than expected number would cement the QE process, while a stronger than expected number would put QE in danger again.

Economic Calendar

Late today the Vice President of Venezuela reported that Hugo Chavez had died from complications from his battle with cancer. Just before the announcement the VP, Nicolas Maduro, announced the expulsion of two U.S. diplomats for an alleged plot to destabilize the government. He also accused "enemies of the fatherland" of giving Chavez an incurable cancer. The U.S. has been blamed several times over the last year of trying to assassinate Chavez by giving him the cancer but never before at the VP level.

Chavez himself continually claimed he battled conspiracies to depose him or assassinate him at every turn. Alleged conspiracies solidify public opinion against the enemies of the state and dictators frequently concoct stories to keep themselves in power. The VP claims today suggest there will not be a change of heart towards the U.S. now that Chavez is gone. The U.S. imports 950,000 bpd of oil from Venezuela. Halting those imports would cause significant pain for Venezuela because it is heavy sour crude that is not desirable to anyone else. Future sales of that crude would be for significantly lower prices and incur steep shipping charges. Rather than assassinate Chavez we could have halted those imports and he would have been bankrupt within a year.

In stock news Qualcomm (QCOM) boosted its dividend by 40% to 35 cents and setup a $5 billion share buyback plan. The stock repurchase plan replaces one with $2.5 billion left to be spent. Since 2003 QCOM has rewarded investors with $19.9 billion in buybacks and dividends. QCOM sells CDMA mobile phone chips to companies like Samsung and Apple. Qualcomm had $13.3 billion in cash and equivalents at the end of the quarter.

QCOM Chart

Google (GOOG) gained +$17 thanks to the market spike and because of a new price target from Jefferies. The broker reiterated a buy on Google with a $1,000 price target, up from $875. The analyst said better ad sales on YouTube and a larger stream of devices from Motorola were powering stronger earnings. Analyst Brian Pitz raised revenue estimates to $48.9 billion with $48.25 per share in profits. His 2014 estimates are $57.26 billion and $56.63 per share. The analyst said Google was rapidly advancing the "product listing ads" or PLAs. Those ads increased +32% in February.

Google Chart

Vornado (VNO) confirmed it sold 10 million shares of JCP at $16.03 each on Monday. That is a 6% stake in JCP and leaves them with 13.4 million shares based on their last statements. Vornado said it lost $224.9 million in Q4 as a result of its investment in JCP. Vornado joined Bill Ackman in acquiring a large stake in JC Penny in 2010. Apparently the confidence in the recovery is fading. Whoever bought the 10 million shares for $16.03, rumored to be Deutsche Bank, already lost money with the close today at $14.96. Vornado agreed not to sell any additional shares before March 11th.

The Wall Street Journal reported after the bell the JCP board was losing patience with CEO Ron Johnson and they will consider replacing him if sales don't improve by year end. Sales fell -25% in the last fiscal year. As a last resort the board is open to selling the 100 year old brand according to the WSJ article.

JCP Chart

Stock news was light today with the market the big news. The Dow was created in 1896 and it hit an all time high today. Regardless of what you think about the future of the market it is a definite milestone. The Dow is up +118% since the March 2009 lows at 6,547. The Dow closed at 14,253.77 and that is the new number to be watched.

The S&P rallied to 1539.79 and about 25 points below its historic high close at 1564. That is a new five-year high. The Nasdaq Composite rallied +42 points to 3224.13 and a new 12 year high.

The last time the Dow set a new high was Oct-9th, 2007. The graphic below shows a list of economic facts in 2007 compared to today. There are some really interesting numbers. For instance the Fed balance sheet has tripled. Unemployment has almost doubled. The yield on the ten-year treasury has declined more than 50%. Gold and silver have doubled even at their multi-month lows today. A really telling metric is the volume on the NYSE has declined more than 50%.

Economic Comparisons

Two points everyone should be aware of are these. When the market makes a new high after a long period of decline it typically goes into correction almost immediately. Analyst Jeff Cox said the last 11 times the Dow has made a new high after a period of consolidation it was followed by a pullback. Secondly, after the initial profit taking fades and a new high is made it tends to keep making new highs for weeks to months. No analysis was included about the impact of Fed easing on this process.

That should be encouraging to everyone currently on the sidelines waiting for an entry point. If history is going to be our guide there should be an entry point with a 5% to 10% decline in the near future.

However, this has been one of the most unloved rallies in history. Volume remains low with only 6.4 billion shares today on a breakout to a new high. Conviction is sorely lacking. That means we are lacking the irrational exuberance that typically accompanies new market highs. That could mean the post high selling may be muted.

The bad news bulls are slowly taking the market higher. Yes, there was a big spike today but it was mostly short covering after the intraday dip on March 1st and lackluster gains on Monday. The bears were looking at 14,100 as the top and expecting a failure. "You must short a market stalled at old highs" is one of the top ten commandments for bears. Today they were squeezed once again on low volume.

Ok, the new high is here, now what? With a week filled with important economic events there is always the opportunity for bad news. The Teflon bulls have shown they can ignore bad news. Actually bad news on employment will simply mean QE will last longer. This is the current version of the "good news, bad news" joke. The only thing that could upset the procession higher would be much stronger economic news and that is not likely.

I think you can make yourself crazy trying to guess the market direction at this point. Remember, the trend is your friend until it ends. It has not ended yet.

The breakout on the chart below appears very bullish. However, to have any credibility we have to see additional gains over the next several days. Once the momentum fades we could see traders drop stocks faster than a hot rock.

Dow Chart

The S&P chart is actually progressing just fine. There were three tests of resistance at 1525 over the last week with the close at 1525 on Monday. Today's breakout was perfectly formed from that resistance test. The S&P is not as vertical as the Dow and actually has a lot better chance of continuing higher. The next speed bump is the red uptrend resistance line at about 1545. If the S&P progresses higher to test the blue dashed resistance line it would intersect about 1565 by Friday. That would be a new high for the S&P with the old high at 1564. That would correspond with the top of the channel and suggest a break for profit taking before moving higher.

S&P-500 Chart

After more than a week of consolidation below resistance at 3180 the Nasdaq spiked higher to gain +42 points and close at 3224 and a 12 year high. Like the S&P the Nasdaq looks far more reserved than the Dow and we could still see some gains on this index. The +17 points Google gained today plus 11 for Apple were a major reason for the Nasdaq spike.

The Nasdaq has been lagging the blue chip indexes and Q2 is not normally a bullish period for tech stocks. That suggests any future Nasdaq gains could be slow and choppy.

Nasdaq Chart

There is a note of caution tonight. The Russell 2000 failed to break out to a new high and the relatively weak performance suggests the breadth of the overall rally is narrowing. The small caps led on the way up then went dormant in mid February. They did spike up on short covering today but it was not impressive. I would be cautious of any rally that came without the Russell breaking out to a new high.

Russell 2000 Chart

I have advised caution over the last couple weeks as the indexes consolidated below their February highs. While I still believe we are going higher as a result of the Fed stimulus that does not mean we are going straight up. I would stick with the current trend but I would like to see a decent pullback of more than two days so institutional investors and individuals can rotate positions and load up for the next leg higher. I have a hard time buying breakouts like the chart below. I know that is an accepted strategy but I feel naked buying those spikes. I suspect most individual traders feel the same way.

Flowserve Chart

I am happy about the new highs but I am still hoping for a decent pullback.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email


New Option Plays

Oil Refiners

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Phillips 66 - PSX - close: 65.77 change: +0.09

Stop Loss: 63.75
Target(s): 69.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Oil refining stocks have been showing relative strength. Shares of PSX have rallied to all-time highs near resistance at the $66.00 level. Traders could buy calls now but I am suggesting a trigger to buy calls at $66.15. If triggered our short-term target is $69.75. More aggressive traders could certainly aim higher.

Trigger @ 66.15

- Suggested Positions -

buy the Apr $67.50 call (PSX1320d67.5) current ask $2.00

Annotated Chart:

Entry on March -- at $---.--
Average Daily Volume = 3.9 million
Listed on March 05, 2012



In Play Updates and Reviews

Stocks Surge Higher on Tuesday

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. stock market surged higher on Tuesday with the Dow Jones Industrial Average hitting new all-time high.

The S&P 500 index broke out to a new multi-year high. We saw several trades hit our bullish entry triggers (CERN, ICE, PCYC, TM). We also closed CHKP and IYT this morning. I am suggesting an early exit in EMN at the open tomorrow.


Current Portfolio:


CALL Play Updates

Cerner Corp. - CERN - close: 92.28 change: +2.68

Stop Loss: 87.25
Target(s): 97.50
Current Option Gain/Loss: +36.5%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
03/05/13: The stock market's widespread rally on Tuesday fueled a bullish breakout in CERN past resistance at the $90.00 level. Shares hit our trigger to buy calls at $90.25.

FYI: The Point & Figure chart for CERN is bullish with a long-term $141 target.

- Suggested Positions -

Long Apr $90 call (CERN1320d90) entry $3.15

Entry on March 05 at $90.25
Average Daily Volume = 916 thousand
Listed on March 02, 2012


Home Depot - HD - close: 70.47 change: +0.18

Stop Loss: 66.40
Target(s): 74.00
Current Option Gain/Loss: +76.0%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
03/05/13: HD is now up six days in a row but momentum definitely seemed to slow today. After yesterday's bullish breakout past $70.00, the stock just sort of churned sideways today. I would not be surprised to see a pullback into the $69-68 area.

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


IntercontinentalExchange - ICE - close: 158.53 change: +1.96

Stop Loss: 152.75
Target(s): 164.50
Current Option Gain/Loss: + 6.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
03/05/13: Our ICE trade is open. The plan was to use a trigger at $156.85 to buy calls but ICE gapped open higher at $157.08 this morning, triggering our play. The stock surged to new four-year highs with today's +1.25% gain. The rally did stall this morning under the $160.00 mark. If the market rally does pause we might see ICE dip back into the $157-155 zone.

Earlier Comments:
ICE can be a volatile stock so I am suggesting small positions.

*Small Positions* - Suggested Positions -

Long Apr $160 call (ICE1320d160) entry $3.30

03/05/13 trade opened on gap open higher at $157.08, above our trigger of $156.85

Entry on March 05 at $157.08
Average Daily Volume = 1.2 million
Listed on March 04, 2012


McDonald's - MCD - close: 95.81 change: +0.74

Stop Loss: 94.75
Target(s): 99.75
Current Option Gain/Loss: +30.1%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
03/05/13: MCD erased yesterday's losses with a sharp rally this morning. Although the gains today did stall near the $96.00 level. It's worth noting that MCD underperformed the S&P 500 today. Today's high was $96.10 and a rally past today's high could be used as a new bullish entry point.

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

- Suggested *Small* Positions -

Long Apr $95 call (MCD1320d95) entry $1.66

03/04/13 new stop loss @ 94.75
03/02/13 new stop loss @ 94.25

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


Pharmacyclics Inc. - PCYC - close: 92.76 change: +1.35

Stop Loss: 87.95
Target(s): 99.00
Current Option Gain/Loss: - 6.2%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
03/05/13: Our new trade on PCYC has been opened. Shares opened higher at $91.71 and quickly hit our trigger to buy calls at $91.75. Shares gained +1.47% to close at new highs.

Earlier Comments:
PCYC can be a volatile stock so we do want to keep our position size small to limit our risk.

*Small Positions* - Suggested Positions -

Long Apr $95 call (PCYC1320d95) entry $4.80

Entry on March 05 at $91.75
Average Daily Volume = 788 thousand
Listed on March 04, 2012


Toyota Motors - TM - close: 103.30 change: +0.86

Stop Loss: 99.95
Target(s): 108.00
Current Option Gain/Loss: - 3.1%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
03/05/13: The Monday afternoon rally in TM continued today and shares hit our trigger to buy calls at $103.25. I would still consider new positions now at current levels.

Earlier Comments:
Our target is $108.00. More aggressive traders could aim higher.

I do want to warn you that shares of TM tend to gap open (up or down) each day as the U.S. shares adjust for trading that occurs back home in Japan.

- Suggested Positions -

Long Apr $105 call (TM1320d105) entry $2.25

Entry on March 05 at $103.25
Average Daily Volume = 686 thousand
Listed on March 02, 2012


CBOE Volatility Index - VIX - close: 13.48 change: -0.53

Stop Loss: 11.45
Target(s): 19.90
Current Option Gain/Loss: -28.9%
Time Frame: 8 to 9 weeks
New Positions: see below

Comments:
03/05/13: I cautioned readers that if the stock market continued to rally we would see the VIX retreat lower. Today saw a -3.7% pullback in the VIX. I am not suggesting new positions at this time.

- 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

Eastman Chemical - EMN - close: 71.12 change: +1.34

Stop Loss: 72.05
Target(s): 65.25
Current Option Gain/Loss: -47.8%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
03/05/13: We have been talking about how EMN is churning sideways and looked poised to breakout one way or the other. Shares broke out higher today from its pennant-shaped consolidation pattern. Bears can argue that the $72.00 level is still overhead resistance. However, I am suggesting we abandon ship and exit at the open tomorrow morning.

*Small Positions* - Suggested Positions -

Long Apr $67.50 PUT (EMN1320p67.5) entry $2.30

03/05/13 prepare to exit at the open tomorrow morning
03/01/13 trade opened on EMN's gap down

Entry on March 01 at $69.09
Average Daily Volume = 1.8 million
Listed on February 28, 2012


F5 Networks - FFIV - close: 93.43 change: +0.78

Stop Loss: 96.75
Target(s): 86.50
Current Option Gain/Loss: -19.1%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
03/05/13: The stock market's widespread rally is starting to have an affect on shares of FFIV. More conservative traders may want to exit early now or lower their stop loss. I am not suggesting new positions at this time.

We have the March puts. These expire in less than two weeks and thus they're going to be a lot more volatile to any movement in shares of FFIV.

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 to $3.55

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


CLOSED BULLISH PLAYS

Check Point Software Tech. - CHKP - close: 51.75 change: +0.15

Stop Loss: 50.75
Target(s): 54.50
Current Option Gain/Loss: -2.6%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
03/05/13: The recent performance in CHKP has been disappointing. Last night we decided the best move was to exit positions today at the opening bell. Shares opened at $51.80. The stock's failure to participate in the widespread rally today reinforces our concern for the stock.

*Small Positions* - Suggested Positions -

Mar $50 call (CHKP1316c50) entry $1.90 exit $1.85 (-2.6%)

03/05/13 planned exit at the open
03/04/13 prepare to exit tomorrow morning
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

chart:

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


CLOSED BEARISH PLAYS

iShares Dow Jones Transports - IYT - close: 109.40 change: +1.63

Stop Loss: 108.25
Target(s): 100.25
Current Option Gain/Loss: -40.9%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
03/05/13: Our aggressive bet on a pullback in the transports did not pay off. The close at a new high yesterday was a clear sign our play was not working. Last night we decided the best move was to exit immediately at the open this morning. Unfortunately shares of IYT gapped open higher at $108.54.

Small Positions - Suggested Positions -

Apr $105 PUT (IYT1320p105) entry $2.20 exit $1.30 (-40.9%)

03/05/13 planned exit at the open
03/04/13 prepare to exit at the open tomorrow morning

chart:

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