Option Investor
Newsletter

Daily Newsletter, Tuesday, 5/7/2013

Table of Contents

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

Market Wrap

Another Terrific Tuesday

by Jim Brown

Click here to email Jim Brown

The Dow set another record for gains on 17 consecutive Tuesdays and a new high at 15,056.

Market Statistics

It was a very slow news day but most of the major indexes managed to squeeze out another gain. The Nasdaq was the weakest link with the composite index gaining +3 but the Nasdaq 100 losing -2. The Dow and the small cap Russell 2000 performed the best. The Dow closed over 15,050 for another new high after Australia cut interest rates.

The chain of terrific Tuesdays continued. More than 70% of the Dow's gains in 2013 have been made on Tuesdays. Mondays seem to be suffering from a weekend hangover and news overload from Europe and Asia. Tuesdays have been free of those accumulated pressures and the rest of the week was spent consolidating the Tuesday gains.

The U.S. markets rose after the Royal Bank of Australia cut interest rates to 2.75% and the lowest on record. That was the seventh rate cut in the last 19 months. Australia's economy had not been impacted as much as the rest of the world because they are so resource rich. Their active mining and energy sectors have been producing a constant stream of cash to keep the economy moving. At least that was the driving force until Australia passed a new 40% tax on profits three years ago and miners cut back on expansion and production and the economy has suffered. If you kill the goose laying the golden eggs the flow of eggs stops. They have also been hit with a flurry of cyclones over the last three years that caused significant damage to the mining operations.

Japan's Nikkei gained +3.6% to trade above 14,000 for the first time since June 2008. The broader Topix gained +3.1% to levels not seen since Lehman failed on September 15th, 2008. Markets all across Asia rallied except for South Korea (-0.4%) and Taiwan's Taiex (-0.1%). Toyota gained +4.1% ahead of earnings.

In the U.S. traders ignored economics once again. The Job Openings and Labor Turnover Survey (JOLTS) showed that job openings declined -1.3% or -55,000 in March. The hiring rate declined slightly from 3.3% to 3.2%. The number of workers hired declined from 4.451 million to 4.259 million. While the report was slightly negative it could have been a lot worse. The JOLTS report is lagging data for March and was ignored.

The weekly Chain Store Sales snapshot showed sales declined -1.1% compared to gains of +0.4% and +0.8% in the prior two weeks. This was only the third decline in the last nine weeks. Food stores and drug stores were the weakest chains. Sales should pickup soon as warmer spring weather becomes more pronounced. The Mothers Day holiday should boost sales over the next two weeks. This weekly data is normally ignored.

Consumer Credit rose less than expected in March at +$8.0 billion compared to +$18.1 billion in February. This was the smallest gain since September. Revolving credit declined -$1.7 billion while non-revolving credit rose +$9.7 billion. Worry over the sequestration and potential consequences probably kept consumers from rushing out to buy stuff on credit in March. This report was also ignored.

The economic calendar for the rest of the week is devoid of any material reports. The weekly jobless claims on Thursday are probably the most interest after the better than expected nonfarm payroll report last Friday.

Economic Calendar

Earnings provided the only excitement for the day and that was muted as well. Fossil (FOSL) surged +9% and gaining +9 to $108 after posting earnings that beat the street. Fossil posted adjusted earnings of $1.08 compared to estimates of 97 cents. The company raised full year guidance from $5.85-$6.15 to $6.00-$6.25. However, earnings guidance was .89 to .94 per share and analysts were expecting $1.05. Global same store sales rose +4.3% with North America sales rising +13% and Europe +14%. The increase in sales offset the weak earnings guidance and shares rallied.

Fossil Chart

First Solar (FSLR) lost -9% or -$4 on earnings of 69 cents when analysts were expecting 75 cents. The earnings and lackluster guidance knocked the entire solar sector for a loss. SPWR declined -5%, SolarCity -8%, JA Solar and LDK Solar -5%. FSLR guidance was heavily weighted to the last half of the year. In order to reach the prior guidance of 6.2 gigawatts of production through 2015 FSLR will have to add about 3.6 GW of bookings. So far this year they have only booked 328 megawatts. The company said it had identified 5.5 GW of opportunities. Analysts claim there is a difference between opportunities and bookings.

The problem for FSLR is their cost of production. Their current actual cost per watt is 58-59 cents. China is selling panels for 58 cents. That means FSLR is facing an uphill battle in achieving that 6.2 GW of production.

FSLR Chart

JC Penny (JCP) reported selected numbers today and will report full earnings on May 16th. The company reported same store sales that declined -16.6% in Q1. Analysts were expecting a decline of -13.2%. Revenue was $2.64 billion and below estimates of $2.74 billion. The company has $821 million in cash on hand after spending $870 billion in Q1 based on an estimate by Morningstar. JCP completed a deal last week to raise $1.75 billion in financing through Goldman Sachs. I would not be surprised to see a bigger loss on the Q1 earnings because the company and the new CEO will want to pin every penny of losses possible on Ron Johnson so the company can start out with a clean slate for Q2 and beyond. This is the blame it on Ron quarter. On the bright side analysts claim suppliers are making positive comments and recent Penny's ads clearly mention "sale" and "25% off" suggesting buyers will be returning.

JCP Chart

EOG Resources (EOG), formerly Enron Oil and Gas, reported a +53% jump in Q1 earnings that beat analyst estimates. EOG reported $1.80 compared to estimates for $1.17. Yes, that is not a typo. Revenue rose from $2.81 billion to $3.36 billion. The company said production rose +4.6% to 475,600 boe/d. Liquids production was 187,300 bpd, a +33% increase. Natural gas liquids (NGL) production rose +16.4%. Gas volumes decreased -11.2%. Prices received increased +4.4% to an average of $105.61 per barrel for oil. EOG is focusing on liquids rich plays and plans to spend $7.1 billion on capex in 2013. The company plans on increasing the number of wells drilled thanks to the declining cost of drilling and faster drilling times.

EOG Chart

Whole Foods Market (WFM) said after the bell that same store sales rose +6.9% in Q1 and they are up +9.4% so far in Q2. The company blamed the slight weakness in Q1 on winter storm Nemo that blanketed the Northeast. Also, Valentine's Day fell on a bad day for retailers on a Thursday. Total sales rose +13% to $3.03 billion as a result of lowering prices to better compete with stores like Fresh Market (TFM). Net income rose to 76 cents per share. The company raised full year forecasts to a range of $2.86-$2.89 from $2.83-$2.87. Shares of WFM spiked +$8 in afterhours trading.

WFM Chart

Disney (DIS) reported earnings after the bell of 79 cents compared to estimates of 77 cents. Net income was $1.51 billion. Revenue rose to $10.55 billion and beat estimates of $10.49 billion. Parks and resorts revenue rose +14% to $3.30 billion. CEO Bob Iger said park attendance was strong as was cruises and movie sales. ESPN revenues were higher but ABC revenue and audiences declined. Cash on hand rose to $3.95 billion. Disney said Ironman 3 had already grossed $711 million worldwide. Shares declined about 95 cents after the report. Disney shares have been in vertical ascent mode and is due for a rest.

Disney Chart

After the close Carl Icahn said he boosted his stake in Herbalife (HLF) to 16.5% from 15.9%. He now owns more than 16.97 million shares. Icahn is trying to produce the mother of all short squeezes to force Bill Ackman to cover his $1.1 billion short in HLF shares. They hate each other and Icahn is winning this battle. Shares of HLF were less than $35 when Icahn began accumulating his position. Shares rallied to $43.50 in late trading.

Herbalife Chart

This was a very slow news day and I am not going to try and fill space here with needless stories. However, it is worth noting that Syria dropped off the Internet at 2:PM today. It is unknown if the country was knocked off the air by the rebels or the government turned it off to prevent citizens from being able to access news and communicate with others. I would bet it was turned off.

Akamai Internet Traffic

The S&P added another +8 points to close at 1625 and a new record. The close was also at uptrend resistance that has held since November. While the 1600 level was a highly visible, round number line in the sand the 1625 level represents strong resistance.

Bespoke Investments said late today that over the last ten years the S&P has lost an average of -2% between May 6th to May 20th. Over the last couple of months there have been numerous studies released saying basically the same thing and so far buyers have not paid attention.

The higher we go without a meaningful retracement the stronger it will be when it comes. However, remember that bull markets tend to gain 4% to 7% in the last few days of the run because of the increasingly violence of short squeezes, funds chasing performance and investors coming off the sidelines. I would say with the +90 point rebound from mid April we are approaching terminal velocity.

S&P Chart

The Dow added a whopping +87 points to close well over 15,000. Compared to the Nasdaq 100 decline this was a stellar move. The Dow has room to run before hitting serious resistance. However, closing over round number resistance at 15,000 removed the obvious target. Markets are brainless and no number is different than any other. However, markets are watched by millions of investors and we humans tend to fixate on numbers, especially round numbers. With the 15,000 target now achieved it will be interesting to see if the gains continue unabated.

Remember, Dow 10,000? That level was broken several times by a couple points followed an 85 point intraday spike but there was no close at that level. After the intraday spike to 10,085 the Dow declined to 9,625 over the next five days. That was followed by a five day rebound to close at 10,006 and then another drop to 9,765. The third time was the charm with a six-week rally from that dip to hit 11,130.

Round numbers tend to be targets but once the target is achieved there is typically a post target depression. Nobody knows if that will happen with Dow 15,000 but we should watch out for it.

Dow Chart

The Nasdaq Composite struggled to add +3 points as uptrend resistance maintains a strong hold on the index. The Nasdaq 100 big cap index lost -2.50 but held the 2,950 level. However, the big caps you would normally blame were only minor losers. AAPL -3, GOOG -4, etc. it was more of a broad based decline in tech stocks.

The candle for today on the Nasdaq Composite chart is normally bearish. It represents distribution at the highs with sellers dumping to buyers in a controlled mode. This is a typical topping candle BUT that does not mean that is what we are seeing. This could be just rotation from techs to something else since techs have been strong since mid April.

Resistance is the morning high at 3,400.

Winners & Sinners

Nasdaq Composite Chart

Nasdaq 100 Chart

The Russell 2000 small caps and the Dow Transports are surging. These indexes posted the largest percentage gains of all the indexes. The Russell has no immediate resistance and you could make a case for the 1,000 level being the new market target.

The Dow Transports broke out of a bearish configuration and have surged to the 6,400 level. While that could be round number resistance there is no immediate resistance in the near term. The resistance is simply the nearly +400 points the transports have gained over the last week. The short covering began on Friday and has not slowed. FDX spiked over $3 today with all the major transport components posting strong gains. Evidently investors are confident the economy is going to improve but none of the economic numbers are actually showing any improvement other than the big increase in part time jobs in April.

Russell 2000 Index

Dow Transports

I believe the market is overbought but the sentiment indexes of the Russell 2000 and the Transports are telling us to get out of the way. Sentiment is actually improving the higher they go rather than fading. Whether that will carry over to the rest of the market is the unknown.

I am worried about the nonperformance in the big cap techs today when the Dow was up nearly 90 points. This could be simple sector rotation or the leading edges of some profit taking.

The biggest warning I saw today was the volume. Total volume on Monday was only 5.2 billion shares followed by 5.8 billion today. Both of those numbers are very low. Beware major market moves on light volume because it means a lack of conviction.

I would remain cautiously long until proven wrong. There will be a dip in our future but it will be bought.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email


New Option Plays

Consumer Goods & Healthcare

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

HanesBrands Inc. - HBI - close: 50.88 change: +1.37

Stop Loss: 48.75
Target(s): 54.75
Current Option Gain/Loss: + 0.0%
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
HBI is in the consumer goods sector. The company makes a number of apparel products with several brands. The stock has been showing a lot of upward momentum. There have been minor corrections in February and mid April. Yet traders keep buying the dips. Now after consolidating sideways near round-number resistance at $50.00 the last few days HBI is breaking out to new historic highs.

I am suggesting new bullish positions now, at current levels. I am suggesting a stop loss at $48.75. Our target is $54.75. NOTE: HBI is scheduled to begin trading ex-dividend on May 16th. The quarterly cash dividend should be 20 cents.

- Suggested Positions -

buy the Jun $50 call (HBI1322F50) current ask $2.10

Annotated Chart:

Entry on May -- at $---.--
Average Daily Volume = 1.4 million
Listed on May 07 2013


WellPoint Inc. - WLP - close: 74.71 change: +1.20

Stop Loss: 73.35
Target(s): 79.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Any confusion or frustration with the implementation of Obamacare is not slowing down the healthcare stocks. Healthcare has actually been one of the best performing sectors this year. WLP is no exception. The stock has rallied to new 52-week highs. After consolidating near resistance at $74.00 for a few days the stock is breaking out.

Today's high was $75.04. I am suggesting a trigger to buy calls at $75.25. If triggered our target is $79.75.

Trigger @ 75.25

- Suggested Positions -

buy the Jun $75 call (WLP1322F75) current ask $1.71

Annotated Chart:

Entry on May -- at $---.--
Average Daily Volume = 2.0 million
Listed on May 07 2013



In Play Updates and Reviews

The Rally Continues

by James Brown

Click here to email James Brown

Editor's Note:

Stocks extended their gains on Tuesday with the major indices hitting new highs (again).

Our LL trade has been triggered.

AGU was stopped out. I have removed DEO and UFS for not cooperating.


Current Portfolio:


CALL Play Updates

The Boeing Co. - BA - close: 94.79 change: +0.60

Stop Loss: 92.40
Target(s): 99.00
Current Option Gain/Loss: + 9.9%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
05/07/13: BA rebounded from short-term support at $94.00 this morning and rallied to another new multi-year high. I don't see any changes from our prior comments although it is possible that $95.00 is round-number resistance. If BA pulls back look for additional support near the rising 10-dma.

- Suggested Positions -

Long Jun $95 call (BA1322F95) entry $2.02

Entry on May 06 at $94.25
Average Daily Volume = 4.9 million
Listed on May 04 2013


Lumber Liquidators - LL - close: 84.20 change: +0.30

Stop Loss: 79.45
Target(s): 89.50
Current Option Gain/Loss: -7.3%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
05/07/13: Our new trade on LL has been opened. We wanted to buy calls when LL rose to $84.10. The stock gapped open higher this morning at $84.35, immediately triggering our trade. The stock didn't make much progress after the gap open. Overall I don't see any changes from my prior comments.

Earlier Comments:
LLL had a lot of short interest prior to the report and the good news sparked a short squeeze. The most recent data listed short interest at 27% of the small 26.2 million share float but that number may be out of date. If triggered our short-term target is $89.50. I would keep our position size small to limit our risk.

*Small Positions* - Suggested Positions -

Long Jun $85 call (LL1322F85) entry $4.10

05/07/13 triggered on gap open higher

Entry on May 07 at $84.35
Average Daily Volume = 761 thousand
Listed on May 06 2013


L Brands, Inc. - LTD - close: 52.63 change: +1.65

Stop Loss: 50.40
Target(s): 54.50
Current Option Gain/Loss: +41.5%
Time Frame: Exit PRIOR to earnings in mid-May
New Positions: see below

Comments:
05/07/13: LTD displayed relative strength with a +3.2% gain and a rally to new all-time highs. I am adjusting our stop loss up to $50.40. Keep in mind we only have a couple of weeks, maybe less, before we need to exit prior to LTD's earnings report.

- Suggested Positions -

Long Jun $50 call (LTD1322F50) entry $2.26

05/07/13 new stop loss $ 50.40

Entry on May 03 at $50.85
Average Daily Volume = 2.7 million
Listed on April 27 2013


Ross Stores - ROST - close: 66.50 change: +1.30

Stop Loss: 64.15
Target(s): 69.00
Current Option Gain/Loss: +12.9%
Time Frame: exit prior to earnings in late May
New Positions: see below

Comments:
05/07/13: ROST was also showing relative strength today with a +1.99% gain and a bullish breakout past resistance near $66.00. I am not suggesting new positions.

- Suggested Positions -

Long Jun $67.50 call (ROST1322F67.5) entry $1.55

05/04/13 new stop loss @ 64.15
05/01/13 new stop loss @ 63.90

Entry on April 26 at $65.25
Average Daily Volume = 2.3 million
Listed on April 25 2013


PUT Play Updates

Amgen Inc. - AMGN - close: 104.46 change: -0.37

Stop Loss: 106.75
Target(s): 96.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Comments:
05/07/13: AMGN continues to underperform the market and posted a -0.3% decline. The stock looks poised to breakdown under short-term support soon. It is worth noting that AMGN might see another spike higher at the open tomorrow. Tonight after the closing bell AMGN announced positive results on its Vectibix Phase 3 study. Yet I'm not seeing any after hours rally in the stock so far.

Earlier Comments:
Last Tuesday's low was $103.85. More aggressive traders could buy puts now but I am suggesting a trigger to buy puts at $103.65. If triggered our target is $96.00. However, more conservative traders may want to exit near $100 since it's possible the $100 level could prove to be round-number support.

Trigger @ 103.65

- Suggested Positions -

buy the Jun $100 PUT (AMGN1322R100)

Entry on May -- at $---.--
Average Daily Volume = 1.4 million
Listed on April 30 2013


Expedia Inc. - EXPE - close: 57.07 change: -1.22

Stop Loss: 60.25
Target(s): 1st target: 55.10, 2nd target 53.00
Current Option Gain/Loss: +23.3%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
05/07/13: Our new EXPE trade is off to a good start. Shares fell -2.0% while the major indices hit new highs. I do want to caution readers that EXPE could be influenced by earnings results from rival Priceline.com (PCLN), who reports earnings on May 9th, after the closing bell.

Earlier Comments:
Please note I am listing two targets. Our conservative target is $55.10 since the $55 level has been support in the past. Our more aggressive target is $53.00. You choose which target you want to exit at. FYI: The Point & Figure chart for EXPE is bearish with a $55 target.

- Suggested Positions -

Long Jun $55 PUT (EXPE1322R55) entry $1.50

Entry on May 07 at $58.48
Average Daily Volume = 2.9 million
Listed on May 06 2013


Vertex Pharma. - VRTX - close: 76.40 change: -0.85

Stop Loss: 80.50
Target(s): 66.00
Current Option Gain/Loss: + 2.7%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
05/07/13: It is encouraging to see VRTX underperforming the market. Lack of follow through on yesterday's bounce is good news for the bears.

Earlier Comments:
The old 2012 highs were near $65.00. This could be new support. We will aim for $66.00.

- Suggested Positions -

Long Jun $75 PUT (VRTX1322R75) entry $3.60

Entry on May 02 at $76.30
Average Daily Volume = 3.8 million
Listed on May 01 2013



Longer-Term Play Updates



Chicago Bridge & Iron Co. - CBI - close: 56.50 change: +0.20

Stop Loss: 49.25
Target(s): 62.50
Current Option Gain/Loss: July's: +63.6% or Jan's: +37.9%
Time Frame: 3 to 4 months
New Positions: see below

Comments:
05/07/13: No change from my earlier comments.

Please review our original play description on this page here.

- Suggested Positions -

Long 2013 Jul $55 call (CBI1320G55) Entry $2.20*

- or -

Long 2014 Jan $60 call (CBI1418A60) Entry $2.90*

*option entry price is an estimate since the option did not trade at the time our play opened.

Entry on April 22 at $51.53
Average Daily Volume = 2.5 million
Listed on April 20 2013


CLOSED BULLISH PLAYS

Diageo Plc - DEO - close: 122.95 change: +0.40

Stop Loss: 121.45
Target(s): 129.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/07/13: DEO slipped lower this morning after news hit that after 13 years its CEO was retiring soon. Traders did buy the dip at $122 but we're still waiting on a rally past $124.00. The U.S. market is breaking out to new highs and DEO is not really participating. Of course DEO is a British company so I looked at the FTSE index and the FTSE is nearing multi-year highs set in February. Considering DEO's failure to follow the market higher we are removing it as an active candidate tonight. The long-term trend is still bullish. Patient investors might want to give DEO more time.

Trade did not open.

05/07/13 removed from the newsletter

chart:

Entry on May -- at $---.--
Average Daily Volume = 608 thousand
Listed on May 04 2013


CLOSED BEARISH PLAYS

Agrium Inc. - AGU - close: 91.05 change: +0.67

Stop Loss: 91.55
Target(s): 85.25
Current Option Gain/Loss: -34.6%
Time Frame: Exit prior to earnings on May 9th
New Positions: see below

Comments:
05/07/13: Our AGU trade has been stopped out. We were planning to exit positions today at the closing bell. Yet shares hit our new stop loss at $91.55 midday.

Earlier Comments:
We wanted to keep our position size small to limit our risk.

*Small Positions* - Suggested Positions -

May $90 PUT (AGU1318Q90) entry $2.45 exit $1.60 (-34.6%)

05/07/13 stopped out
05/06/13 new stop loss @ 91.55, exit tomorrow at the close
05/04/13 prepare to exit on May 7th at the closing bell

chart:

Entry on May 01 at $89.75
Average Daily Volume = 1.5 million
Listed on April 23 2013


Domtar Corp. - UFS - close: 70.16 change: +1.25

Stop Loss: 70.05
Target(s): 62.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
05/07/13: UFS is not cooperating. The stock rallied past its 10-dma and outperformed the major indices with a +1.8% gain. Our trade has not opened yet. I am removing UFS from the newsletter.

Trade did not open.

05/07/13 removed from the newsletter

chart:

Entry on May -- at $---.--
Average Daily Volume = 448 thousand
Listed on May 02 2013