Option Investor
Newsletter

Daily Newsletter, Thursday, 3/7/2013

Table of Contents

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

Market Wrap

Quiet Market Awaits NFP Release

by Thomas Hughes

Click here to email Thomas Hughes
Introduction

Futures trading was quiet this morning ahead of the open. Tantalizing clues revealed in the unemployment claims data failed to spark a significant rally today. Traders are awaiting the Non-Farm Payrolls and Unemployment releases which come out tomorrow. These releases are yet another milestone in the unfolding job market recovery. There are growing expectations for a surge in job growth later this spring and this report could do a lot to bolster arguments for either side of that debate. Other data released today helps support a stabilizing economy.


The retail sector released same store sales data this morning as well. Retailers were able to make a comeback in February. Several were able to beat expectations for comp store growth and indicated that they expected sales to continue at or about the same pace. The bad news is that only 13 retailers report same store sales so its hard to put much weight on it anymore.

World banking leaders maintained current policies. The BOE, the ECB and the BOJ all held firm on current policy and some even hinted at further easing. Japan is waiting on the confirmation of a new BOJ Governor and an expected aggressive economic stimulus program. The ECB and Mario Draghi reiterated their stance of resumed growth in the second half but downside risks remain. Gold and oil both traded to the upside on that news.

One economic release came after the bell, stress test results from the banking sector. The release did not have much effect on banking stocks during market hours, the sector was one of best performers today. The index broke out and set a new high today. The index formed a strong white candle and looks good for some more upside. The average capitalization ratios for the 18 major U.S. banks was 7.7%, much better then the 5% target. Only one banks was found to be under capitalized.

Bank Index

The Economic Data

The unemployment claims data offers some new hints at the strength of the labor market. Initial claims fell by 7,000 to 340,000, near the 5 year low. The 4 week moving average also dropped by 7,000 and did make a 5 year low. Both of these numbers are great but both are also still basically within an expected range and don't really show that much improvement. The low levels are really good though when you consider the housing recovery that some analysts are predicting will improve this year. A surge in employment in this sector could do a lot to significantly lower these figures. There is also annual spring and Easter hiring to consider. The biggest decrease in claims came from California with a drop of -40K. The biggest increases were in MA, NC and IL with around 7,500 new claims between them.


The continuing claims figures were the most revealing in my opinion. This weeks number rose by 3,000 but is still just off the 5 year low. This figure has been trending downward for a couple of months now. This is suggesting to me that people are getting laid off but are maybe finding a new job faster than before. This drop could also help lower the overall unemployment rate, especially if it passes through to the total number of claims.


Total claims for unemployment did indeed drop this week. This number fell by a fairly large 362,000 to hit a 2 month low. This is nice to see. Total claims have been elevated for a few months, perhaps due to pre-Fiscal Cliff and sequester decisions. A drop in total claims will definitely help lower the unemployment rate. The question is why is it falling? Are people finding work or are they falling off the books? Are they not looking for work anymore or did they take early retirement? There are a lot of reasons for this number to fall that have nothing to do with new job creation.


The ADP number released yesterday and the Challenger survey of planned layoffs both help support the idea of a stable jobs environment. The ADP number was bigger than expected and could lead to a surprise gain in U.S. NFP. The ADP increase isn't huge, or even that strong, but does mark the third month of elevated activity. The Challenger survey rose by 7%, showing an increase in planned layoffs. This is a negative indication but was expected after last months sharp drop of -24%. On a net basis planned layoffs are still down nicely from two months ago. Tomorrow's unemployment rate is expected to remain steady with last months 7.9%. I agree with this but also think there is a small chance for a surprise drop.


The trade deficit grew in January but perhaps has a silver lining. The deficit increase was due to an rise in imports. This is a negative on face value but maybe is a sign that the world economy is improving. Sure, we bought more foreign things but they sold more. We are all looking for signs of improvement in the global economy, this could be one. Another thing to keep in mind is that this is a lagging indicator. January was two months ago, we know it was slowish. The forward view is still hopeful and the employment data is helping to fuel that sentiment.

The Retail Sector

As I mentioned before the retail sector, or a piece of it, reported same store sales data. For the most part results were good and even better than expected. Weakness due to late tax returns and other seasonal factors seen in January has begun to reverse but comps were still muted. Limited Brands, Costco and Stein Mart were all headliners. Coscto posted one of the biggest gains with a 6% jump in sales. Retail stocks responded well to the news and were one of today's best performing sectors. The Retail Spyder XRT popped in early trading and set a new intra-day high. This ETF is currently bouncing off its moving average with bullish technical indicators.


Around The World

The BOJ kicked off the day and left policy unchanged at their monthly meeting. Although nothing was done today bold action is expected soon. The board is currently awaiting the confirmation of Haruhiko Kuroda as the new governor. This action could come as early as next month at the next meeting. There was some discussion of moving up the planned start of the current asset purchase plan but it was voted down. The yen responded by losing ground to the dollar in anticipation of the expected stimulus. The USD/JPY currency pair broke above near term resistance and is indicated higher. This trade has been bullish ever since Abe was elected Prime Minister. Now that it appears his plans are moving forward this trade could get some new legs.

USD/JPY

The ECB followed suit and held its key rate steady as well. The statement released alongside the announcement and Mario Draghi's comments afterward both restate the view of a return to growth in the second half but that downside risks remain. The stance of the bank will remain accomodative and that structural reforms should work their way through the system. The risk present are enough for Citibank and others to predict a rate cut at the next meeting. If this were to happen, and take note that it would be coincident with the “aggressive easing” policies expected next month, it could be a major catalyst for equities and currencies. The euro gained strength versus the dollar today, bouncing off the 1.3000 support line, but was capped at the 1.3150 resistance. The EUR/USD pair is oversold at this time but momentum suggests at least a retest of the 1.3000 level. The euro may be volatile and/or range bound over the next month, especially if the possibility of an ECB rate cut grabs the markets attention.

EUR/USD

The Gold And Oil Indexes

Gold traded up today but remained below the $1600 mark. After an initial jump higher it lost some ground but managed to stay above yesterday's closing price. The news-as-expected releases by the world central banks did not have enough steam to move the market higher. The Gold Index tried to stab its way through the $150 level but was repelled back by resistance. The index is trending down with bearish technicals on weekly and daily charts. Yesterday's bounce was off of the 61.8% Fibonacci retracement so it may provide some support but we'll have to watch it for signs of its strength. A break below this retracement could take the index all the way down to the next level around $110.

Gold Index

Oil and natural gas both traded to the upside today. Signs of a strengthening U.S. and world economy are leading to some speculation on future demand. The Oil Index gained marginally in today's session, just under a long term and important resistance line. The MACD and stochastic are indicating market strength on weekly and daily charts but this resistance, at the $1350 level, could prevent a move up. A break above it would have a target around $1400.

Oil Index

The VIX

The VIX has retreated back below 15 and it is indicated down at this time. This is a sign that traders are not in the market for downside protection. The seeming strengthening of the economy and somewhat expected jobs recovery are definitely urging the bulls on. The NFP release and the Unemployment Rate could have a big impact on this. Good numbers could help lower views of downside risks and send the VIX down further. Bad numbers could cause it to spike as traders ponder the validity of so-called signs of economic strength.

The VIX

The S&P 500

The S&P 500, the DOW and the NASDAQ all made new closing highs today. The rising tide is being supported by what looks at this time to be a strengthening U.S. economy. This strong economy is a house of cards though, and one that could come tumbling down. There are risks to the economy and a lot of speculation over what will happen when the Fed unwinds its policies. A couple of weeks ago I went over the secular range and pointed out how, on a technical basis, I did no think the secular bear market would be broken. Today I want to bring up the possibility of what if it does? The economy could be gaining traction, jobs could be improving and the rest of the world seems to be right behind us.

SPX daily

My projected target for the SPX based on the February-March EMA bounce is 1600 and takes it past the all-time high and top of the secular range. My long and short term charts are both bullish and are indicating such a move is possible. The DOW is already at all time highs, it only makes sense for the S&P to follow it. Tomorrow could bring a little volatility to the market but if it does I don't think it will derail the rally. Looking ahead, if other parts of the world return to growth as well, gaining traction together, the data could take the index much higher than 1600. The downside is the possibility data will deteriorates over the course of the next few weeks and months. The market will could still break out to new highs but it would be a bull trap of colossal proportions.

DOW daily

Keep a watch for any signs from the labor market, official or anecdotal, that could indicate strength or weakness. The economy is ready to expand but we need a catalyst. The housing market could be the support we need to get that going. Tomorrow's big event is the release of Non-Farm Payrolls and the Unemployment Rate, both before the bell.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Technology & Healthcare

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Computer Sciences Corp. - CSC - close: 49.85 change: +0.50

Stop Loss: 48.40
Target(s): 54.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
CSC is in the information technology and professional services business, catering to government and commercial clients. The stock has been showing relative strength and has rallied to new 52-week highs. CSC currently sits just below round-number resistance at the $50.00 mark.

I am suggesting a trigger to buy calls at $50.25. If triggered our target is $54.50.

FYI: The Point & Figure chart for CSC is bullish with a $59 target. Plus, CSC's next dividend (20 cents) is payable on April 15, 2013 to shareholders on record as of March 18th.

Trigger @ 50.25

- Suggested Positions -

buy the Apr $50 call (CSC1320d50) current ask $1.40

Annotated Chart:

Entry on March -- at $---.--
Average Daily Volume = 1.6 million
Listed on March 07, 2012


NEW DIRECTIONAL PUT PLAYS

Quest Diagnostic - DGX - close: 55.42 change: -0.92

Stop Loss: 56.25
Target(s): 51.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
DGX provides medical diagnostic testing services. The stock has been underperforming since the company reported earnings on January 23rd. Now DGX has developed a bearish pattern of lower highs and lower lows. The stock just saw its bounce fail near short-term resistance at $57.00.

The Feb. 26th low was $55.16. I am suggesting a trigger to open bearish positions at $54.85, so about 30 cents under that low. If triggered our target is $51.00. More aggressive traders could aim lower. FYI: The Point & Figure chart for DGX is bearish with a $50 target.

Trigger @ 54.85

- Suggested Positions -

buy the Apr $55 PUT (DGX1320p55) current ask $1.50

Annotated Chart:

Entry on March -- at $---.--
Average Daily Volume = 1.2 million
Listed on March 07, 2012



In Play Updates and Reviews

Stocks Drift Higher

by James Brown

Click here to email James Brown

Editor's Note:

The market's major indices drifted higher on Thursday. Momentum seems to be slowing down.

GMCR and ONXX are exceptions. Both stocks displayed momentum and hit our entry triggers today.


Current Portfolio:


CALL Play Updates

Cerner Corp. - CERN - close: 91.51 change: +0.60

Stop Loss: 87.25
Target(s): 97.50
Current Option Gain/Loss: +14.2%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
03/07/13: CERN's early morning spike higher faded and the stock spent the rest of the session drifting sideways. I would not be surprised to see a dip to the $89.00-90.00 levels.

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


Green Mountain Coffee Roasters - GMCR - close: 51.56 chg: +2.38

Stop Loss: 47.75
Target(s): 54.75
Current Option Gain/Loss: +55.2%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
03/07/13: This morning GMCR issued a press release that the company had inked an agreement with consumer goods giant Unilever (UN) to offer Lipton hot and iced teas through GMCR's Keurig single cup brewers. This news may be partially responsible for the stock's show of strength. GMCR gapped open higher at $50.00 and then surged to a +4.8% gain. Our entry trigger to buy calls was hit at $50.25 early this morning.

Earlier Comments:
Our short-term target is $54.75. More aggressive traders could aim for the $58.50-60.00 zone instead.

- Suggested Positions -

Long Apr $55 call (GMCR1320d55) entry $1.05

Entry on March 07 at $50.25
Average Daily Volume = 5.3 million
Listed on March 06, 2012


Home Depot - HD - close: 70.25 change: -0.23

Stop Loss: 66.40
Target(s): 74.00
Current Option Gain/Loss: +52.0%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
03/07/13: HD spent Thursday's session drifting lower toward the $70.00 level. I suspect there is still a good chance we'll see HD correct lower 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: 158.74 change: -1.61

Stop Loss: 154.75
Target(s): 164.50
Current Option Gain/Loss: + 9.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
03/07/13: After a sharp three-day rally ICE hits some profit taking today with a -1.0% decline. The dip may not be over yet. Readers could use a pullback into the $156-155 area as a new bullish entry point.

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

03/06/13 new stop loss @ 154.75
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: 97.09 change: +0.28

Stop Loss: 94.75
Target(s): 99.50
Current Option Gain/Loss: +80.7%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
03/07/13: MCD continues to show strength with another gain. The stock edged up to a new multi-month high. I am adjusting our exit target down to $99.50.

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

- Suggested *Small* Positions -

Long Apr $95 call (MCD1320d95) entry $1.66

03/07/13 adjust exit target to $99.50
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


Onyx Pharmaceuticals - ONXX - close: 83.49 change: +3.47

Stop Loss: 77.75
Target(s): 84.85
Current Option Gain/Loss: +38.1
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
03/07/13: As expected the rally in ONXX continued. Shares outperformed the market with a +4.3% gain. On a positive note the rally was powered by strong volume. Our trigger to buy calls was hit at $80.30.

Earlier Comments:
Trading biotech stocks always carries a bit of danger. You never know when the wrong headline can send a stock gapping lower (or higher). Therefore I am suggesting small positions to try and limit our risk. The Point & Figure chart for ONXX is bullish with a $95 target.

*Small Positions* - Suggested Positions -

Long Apr $82.50 call (ONXX1320d82.5) entry $2.75

Entry on March 07 at $80.30
Average Daily Volume = 1.3 million
Listed on March 06, 2012


Pharmacyclics Inc. - PCYC - close: 94.20 change: +0.21

Stop Loss: 87.95
Target(s): 99.00
Current Option Gain/Loss: + 8.3%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
03/07/13: Watch out! Tomorrow could be interesting for shares of PCYC. The stock spiked lower this morning but managed to climb back into positive territory by the closing bell. The stock could gap open lower tomorrow. After the closing bell the company issued a press release. It seems that PCYC management wants to take advantage of their sky-high stock price and raise some capital. PCYC will sell an additional 2.2 million shares of stock, which is about 3.1% of the outstanding shares. Normally investors don't like it when company management dilutes their stock position so we could see PCYC spike down into the $91-90 zone tomorrow. More conservative traders may want to raise their stop loss.

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


Phillips 66 - PSX - close: 65.87 change: -0.18

Stop Loss: 63.75
Target(s): 69.75
Current Option Gain/Loss: - 9.3%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
03/07/13: PSX spiked down to $64.79 this morning but almost immediately bounced. Shares spent much of the day churning sideways. I would still consider new positions now at current levels.

Our short-term target is $69.75. More aggressive traders could certainly aim higher.

- Suggested Positions -

Long Apr $67.50 call (PSX1320d67.5) entry $2.15

Entry on March 06 at $66.15
Average Daily Volume = 3.9 million
Listed on March 05, 2012


Toyota Motors - TM - close: 103.26 change: -1.19

Stop Loss: 99.95
Target(s): 108.00
Current Option Gain/Loss: - 8.8%
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
03/07/13: The yen currency lost value against the dollar and the Japanese NIKKEI average was positive today. Both should have been bullish factors for shares of TM. Yet TM gapped open lower and posted a -1.1% decline, erasing yesterday's gains. I couldn't find any specific news to account for the relative weakness. Traders may want to wait and see if TM provides a dip near $102.00 before considering new bullish positions.

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: 13.06 change: -0.47

Stop Loss: 11.45
Target(s): 19.90
Current Option Gain/Loss: -34.2%
Time Frame: 8 to 9 weeks
New Positions: see below

Comments:
03/07/13: The volatility index is retreating as equities inch higher. The VIX lost -3.47% today. 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

F5 Networks - FFIV - close: 94.23 change: +1.12

Stop Loss: 96.75
Target(s): 86.50
Current Option Gain/Loss: -40.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
03/07/13: A stock analyst issued bullish comments on FFIV today and suggested investors should buy the stock on its recent weakness. The market reacted by sending FFIV sharply higher this morning but the rally reversed at its 100-dma. The high today was $95.67. I am adjusting our stop loss lower to $96.15. I am not suggesting new positions.

I want to remind you that we have March put options that expire in six trading days. These options are going to be very 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