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Newsletter

Daily Newsletter, Saturday, 10/19/2013

Table of Contents

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

Market Wrap

What Shutdown?

by Jim Brown

Click here to email Jim Brown

The shutdown has been forgotten and worries over the short term budget extension are nonexistent.

Market Statistics

The markets exploded higher last week on expectations that everything would work out ok and return to normal. The end of the shutdown and avoidance of the debt ceiling coincided perfectly with some strong earnings surprises and money came flooding back into the market.

The S&P rebounded +98 points or +5.9% since the 1,646 low on October 9th to close at 1,744 and a new high. The Russell 2000 rallied +76 points or +7.3% from the 1,038 low to close at a new high at 1,114.77. The Nasdaq rebounded +246 points or +7.2% from the 3,650 low to close at a new 13-year high at 3,914. The Dow was the laggard with a +577 point or +3.9% gain to 15,396 but well below the prior high of 15,676. The Dow was hit with some major losses from stocks like IBM, GS, HD, MRK and UNH so it is a wonder there were any gains at all on the index.

The shutdown is over temporarily and all is forgotten until the select budget committee fails in reaching a bipartisan solution on budget cuts in mid December. The headlines will begin again but should not heat up until early January. Without a budget agreement the shutdown process will repeat unless cooler heads prevail. Fortunately investors have short memories and the focus is now on earnings. With the government back in business the economic reports will begin to flow again with the two-week late Nonfarm Payrolls scheduled for Tuesday.

The payroll report is expected to show a gain of only 160,000 jobs, down from 169,000 in August. This report covers the period before the government shutdown so there should be almost zero impact from that event. The report for October is likely to show a sharp decline to something in the 125,000 range. The BLS will have their work cut out for them to do their normal survey polling with only two weeks left in October. Fortunately the calendar is favorable with the report rescheduled for November 8th so they gain time there as well.

We will also get the manufacturing updates from Chicago, Richmond and Kansas as well as the three largest housing reports. Home sales numbers are expected to decline as a result of higher interest rates and the end of the traditional summer selling season. Very few people want to move in the snow.

The FOMC meets the following week but at this point they are just a footnote to the economy. The shutdown could have subtracted a half point from an already weak GDP and the Fed is not going to taper QE any time soon. The existence of the January 15th deadline could reduce it by another .2% as corporations hold back on spending until the future is clearer.

Some analysts are now predicting a June announcement but the majority are betting on March as the earliest taper announcement. There are analysts that believe it could be 2015 before QE is cut if the Q4 GDP declines enough. With Yellen the assumed Fed head for 2014 there will be no rush to cut stimulus. Not only will the economic numbers be weak over the next 60 days as a result of the shutdown the accuracy of the numbers will also be questioned because of the lack of data.

However, two new hawks will rotate into voting position in 2014. The chart below came from Credit Suisse by way of ZeroHedge. Esther George, a strong and vocal advocate for cutting QE now, rotates out as a voting member in 2014. Two other vocal hawks will take her place with Plosser and Fisher rotating back into voting position. Even with the addition of one more hawk the roster for 2014 is strongly dovish. The market is sensing there will be no changes in the near future. Evans said late Friday that tapering would not be an option at the October meeting. He said, "I have not seen anything like what I thought it would take in order to get us to a 'yes' vote on tapering." Also, "economic data gathered during and after the shutdown will include noise." Unless he resigns, Bernanke will remain on the committee as a Fed governor through Jan-2020 even though he will no longer be chairman.

Fed Open Market Committee (FOMC)

Non U.S. events are the HSBC China PMI on Wednesday night and the Eurozone PMI on Thursday. The G7 meeting begins on Friday but it rarely impacts the market.


After a slow start to earnings with several high profile misses early in this cycle the reports over the last couple of days have been surprising. Google reported earnings on Thursday night that beat estimates by 40 cents and the stock surged +$122 (+13.9%) on Friday to close at $1,011. Google cofounder Larry Page saw his net worth rise +$3.0 billion on Friday. He is ranked as the 13th richest person in the U.S. with $28.3 billion. Cofounder Sergey Brin is listed as the 14th richest and saw his net worth rose +$2.9 billion to $27.7 billion. He has slightly fewer shares than Page.

Google shares are now in an elite group of stocks priced over $1,000. The other members are Berkshire Hathaway (BRK.a) $175,345, PriceLine (PCLN) at $1,048 and Seaboard Corp (SEB) at $2,827. In years past when a stock price moved into triple digits it was normally followed by a stock split. The theory was a cheaper stock price allowed more people to invest. There were higher commissions on odd lots of shares that prevented investors from buying 20-30 shares of a high dollar stock. Smaller accounts could buy 100 share lots of a $50 stock so corporations would split their shares. This tended to work in the 1990s and prior.

Since the Great Recession there have been very few stock splits. Companies like Amazon (AMZN), Chipolte (CMG), Intuitive Surgical (ISRG), NetFlix (NFLX), Apple (AAPL) and NVR Inc (NVR) have refused to split their stock. Different companies have different reasons. Some say the bookkeeping from having millions of tiny shareholders is the reason. They would rather have a high stock price where most of their shareholders are funds with large block ownership. Others believe the high share price is a status symbol. Lastly, having billions of shares slows the stock appreciation. Microsoft is an example. They split continually in the momentum days and now have 8.36 billion shares outstanding and the stock barely moves. There is too much volume so there are always ready buyers and sellers. There is no competition for shares because there are so many. Funds or shorts can't push it around. Volume in MSFT was 41.8 million shares on Friday. Google only has 274 million shares outstanding. They could afford to split 4:1 and still have one-eighth the outstanding shares as Microsoft.


Chipotle Mexican Group (CMG) posted earnings that rose +15% on revenue that climbed +18% and raised its guidance for the year. The company also said it was going to raise prices for the first time in three years. Same store sales rose +6.2% and well above estimates of +4.7% thanks to an aggressive advertising campaign. Advertising expenses would rise from 1.3% to 1.6% of sales. Management said Q4 sales growth would be similar or slightly better. CMG is carrying a PE of 44 and the highest of North American restaurants.


UBS upgraded Amazon (AMZN) to buy from hold and the stock jumped +$18. The broker raised the price target from $305 to $385. There were other reasons for the stock spike. Amazon said their latest Kindle Fire HDX began shipping on Friday. The New York Times said the new Kindle Fire "is a lightweight, sharp-screened, superfast pleasure." It has a quad core processor, double the memory, super sharp screen and 11 hour battery life in either full size or mini. Nearly every reviewer has raved about it and the timing of the delivery could not be better.

In France and Germany Amazon listings for the Apple TV suddenly went to an out of stock status. They said the boxes would not be available until October 23rd and one day after Apple is scheduled to make another new product announcement. That announcement is expected to be various iPads but you never know for sure. For Amazon to suddenly be out of the Apple TV product a week before a mystery announcement the conspiracy theorists went crazy. Rumors of a set-top box from Amazon are rampant. There are also rumors Amazon has struck a deal with NetFlix to stream its content to an Amazon product.

With Amazon releasing its HDX tablet with a starting price of $229 it puts more pressure on Apple. Suppliers for Apple have reportedly been having trouble producing enough screens for the smaller Retina displays. That means supplies of the new iPads may be limited. With cheap Android tablets flooding the market Apple needs to be able to deliver. Amazon earnings are next Thursday.


Netflix (NFLX) rallied ahead of next week's earnings on expectations for strong subscriber growth. Increased content and new partnerships are expected to fuel that growth. The new generation of Smart TVs that come complete with a Netflix interface already built in are helping spread the news about the service. Now with private content they have moved into a new realm of marketing. That sets them apart from Amazon or Hulu. A real deal with Amazon could catapult them even higher.


While on the topic of Apple's announcement the stock is threatening to break out over two month resistance at $510. The sell off appears to be over and the normal holiday rally is starting. On a purely technical basis I would but a breakout over $510 BUT on a sentiment basis I would be wary. Apple has a history of major declines after product announcements. With the market in stampede mode that post announcement decline could be negated.


Not all the news was good. Intuitive Surgical (ISRG) reported earnings that missed on revenue with a -7.2% drop. That was down from a +7.8% rise in Q2 and +23.5% in Q1. Company sales are not just declining they are plunging. Safety concerns are weighing on the company with a FDA probe underway. Reporters claim there is 50% unused capacity on Da Vinci machines already in the market. The company sold 101 Da Vinci robots in Q3 compared to 155 in the year ago quarter. They warned that pressures from Obamacare were forcing hospitals to reevaluate capital spending given the new insurance reimbursement rules under the program.


GE posted the biggest gain on earnings in a long time after they reported earnings that beat by a penny. The excitement came from a 13% spike in order backlogs. Industrial segments grew earnings by +11% with energy rising +18% and aviation spiking +12%. Power and water equipment was the only division declining at -10%. They said wind power was surging again and that would return that division to profitability. The company said earnings growth would rise in Q4 with more volume and lower costs.


Ebay (EBAY) reported earnings earlier in the week and the stock was crushed after the company warned on a weak Q4. The warning was based on comScore data showing the e-commerce market had weakened significantly ahead of and during the government shutdown. The CFO Bob Swan called it a "dramatically decelerating U.S. e-commerce growth." Company officials were reaching out to analysts late in the week saying "perhaps we were too negative." The CEO, John Donahue, told AllThingsD that "Bob and I both have colds, I think it came across more negative than intended." He said they were also facing a shorter holiday season because of a late Thanksgiving in 2013. That is a problem we can't overcome but it impacts all retailers alike. He said, "I don't think we are seeing anything different than other retailers, we just reported it first." Also, "We try to be consistent in having a conservative outlook...but we didn't intend to be that negative." Shares rebounded slightly on the apology.


After the bell Wall Street Journal reported JPM had reached a settlement deal with the Federal Housing Finance Agency (FHFA). The agency said the bank misrepresented $33 billion in loans that were sold to the agency prior to the subprime crisis. Actually more than 80% of the loans came from Bear Stearns and Washington Mutual. Those were two companies that JP Morgan ended up buying to keep them from failing. Jamie Dimon has complained multiple times about having to pay a fine on loans that were originated by the failing companies because regulators "encouraged" JPM to bail out the companies and prevent a recurrence of Lehman Brothers. JP Morgan was considered to be the strongest bank at the time. Several researchers have written about the strong arm tactics regulators used to force JPM to take over the companies. Now they are making the bank pay for their sins. JPM now has more than $23 billion in loss reserves for possible legal fees and settlements. The bank took a $7.2 billion charge in Q3 earnings. The news came right at the close and the stock did not have time to react to the news.


IBM was crushed on Thursday as a result of a dramatic drop in hardware and services sales to BRIC nations, especially Asia. Sales of zSeries equipment, mostly mainframes, declined -40% to -50% in China. Unix and Linux server sales fell -38%. Those are the machines that power the major cloud systems. Teradata, a company that sells analytic tools for Big Data warned that quarterly revenues fell -21% in Asia and -19% in the Middle East. So what changed so suddenly in Asia? In a word "Snowden."

China realized from the Snowden leaks that the NSA had backdoor deals with U.S. equipment, software and services providers that allowed them access to their cloud systems. Initially the NSA wanted to stop U.S. providers from supplying highly encrypted technology to Asia because the NSA would no longer be able to eavesdrop on their data and communication. After a fight the NSA eventually agreed to let U.S. companies continue the sales but they had to give the NSA a key that would allow them to access the data. Essentially they said give China and Asia whatever they want but just give us the key to unlock it.

As a result of the Snowden revelations the Shanghai Securities News, a branch of the state owned Xinhua News Agency, found out that IBM, EMC and Oracle had become targets of the Ministry of Public Security because of the backdoor access by the NSA. The Chinese security apparatus probably alerted IT buyers in government agencies, state owned enterprises and major independent corporations to halt orders for sensitive products. Sales of high technology equipment to China was booming until Q3 when it fell off a cliff. We can expect this to also affect sales to the other BRIC nations since nobody wants the NSA scanning their state secrets. This may have long lasting effects on the tech community.


With the short term budget deal now history the dollar has imploded. The shutdown and the potential for a repeat deadlock in January the prospect for QE tapering has evaporated. This means another six months or more of $85 billion a month in Fed purchases. That is another half trillion in bond purchases by the Fed and weakening of the dollar. This is good for stocks and commodities.


Friday was October option expiration and we saw a lot of bearish option positions being unwound. With the market outlook so negative in the first half of the month the options positions were bearish. Unwinding those positions was bullish for the market. Volume was 6.6 billion shares on Friday and while it was not strong it was the best day of the week. New highs were breaking out all over. The new highs across all markets totaled 1,306 compared to new lows at 86. That was the most new highs since November 4th, 2010.

The S&P and Nasdaq broke out to new highs thanks to the monster gains in those very high dollar stocks I profiled above. With Google spiking $122, Amazon $19, etc it would be very surprising to see the S&P and Nasdaq not post major gains.

The S&P 500's new record high was fueled by an eight-day rebound of nearly 100 points. The length of that gain in any short term period should cause investors to pause before jumping on board. However, as we all know markets can remain irrational for long periods of time. The earnings surprises late in the week could be a preview of next week when the flood gates really open.

Fund managers will be the key now that October options have expired and the fiscal year end for funds is just nine trading days away. Will they take profits and restructure portfolios before Halloween or will they stick with the positions they have today?

Resistance on the S&P is 1,750 followed by 1,775. Strong support is well below at 1,700 and I would be very surprised to see that break over the next couple of weeks. Initial support would be 1,715


The Dow rebounded to gain +162 points for the week and come to a halt just under resistance at 15,400. The Dow's progression has been marred by some disappointing earnings and weak guidance by several Dow components. Unlike the Nasdaq it did not have a bunch of stocks with triple digit prices soaring for big gains.

The Dow struggled to post only a +28 point gain on Friday when the Nasdaq gained +51 thanks to Google. The Dow has some solid resistance at 15,400, 15,500, 15,600 and the prior high at 15,683. It will not be a cake walk to a new high. It will be a fight.


The Nasdaq list of winners was impressive with the top 20 gainers posting big wins. The losers list only had a handful of symbols you would probably recognize with ISRG losing four times as much as the second place finisher.

Given the index weighting of GOOG, AMZN, PCLN, BIDU, NFLX and AAPL nobody should have been surprised about the +51 point gain on the index. The Nasdaq blew through resistance at 3,875 and closed well into new 13-year high territory at 3,914. What will the index do for an encore after that performance?

I strongly doubt those double digit gainers below will repeat that performance on Monday. It would be natural for those stocks to see some profit taking and for the Nasdaq to take a post rebound rest.

Support is 3,875 and 3,850.

Nasdaq Winners and Sinners


The Russell 2000 continues to amaze with another +12 point gain to a new historic high at 1,114.77. The next material hurdle would be uptrend resistance at 1,130. I think the Russell may be close to running out of steam. The rebound has been very strong and fund managers are probably drinking champagne for breakfast they are so excited. However, with the fiscal year end for funds only 9 trading days away there is a good chance we will see some profit taking. They have to balance their desire to take profits with the desire to have winners in the portfolio for the year end statements. The next 9 days will be interesting.


The budget agreement settled nothing. The only agreement was to continue funding at the prior levels until January and a promise to talk about the 2014 budget before December 13th. The house wants deep spending cuts and no new taxes. The senate wants large tax increases and no spending cuts. Both sides are rock solid in their positions and the special budget committee is likely to fail exactly like the one in 2011 that was tasked with exactly the same goals. If they don't come up with a bipartisan agreement the sequester cuts are scheduled to increase in January. This is the trump card for the republicans. They can just wait and spending will decline again in January. The sequester is a meat cleaver approach rather than a scalpel but it does reduce spending.

The national debt jumped +$328 billion on Thursday to $17.075 trillion. The jump came as the Treasury "replenished" the funds it had used that belonged to other Federal accounts. In other words the Treasury used segregated funds from places like highway funds and state grants. These are funds allocated to other uses but the Treasury dipped into those accounts using what it called "extraordinary measures" to avoid the debt ceiling. The instant the debt ceiling was lifted the law allows the Treasury to borrow money to replenish the extraordinary measures slush funds.

The agreement passed last week did not set a new debt limit. It suspended the debt limit until February 7th. That means the government can borrow whatever it wants and analysts believe that will raise the debt by about $750 billion. If the bipartisan budget talks do not go well and it appears we are heading into another battle in late January I would expect the Treasury Dept to load up on additional debt ahead of the February 7th deadline. That would allow them to weather any new deadlock for a couple additional months using that extra cash before resorting to the extraordinary measures again.

The market is exploding higher but not because all earnings have improved. It is moving higher because sentiment is bullish. It is bullish because the markets are moving higher. This is a circular argument and it could go on for some time or it could fail at any moment. The S&P is up +22% for the year. However, S&P earnings are up less than +5%. The other 19% of market gain is the result of increased market valuation on those earnings. In other words the market went up four times as fast as earnings. Much of those earnings gains came from cost savings and stock buybacks that reduced the number of shares outstanding. The gains did not come from rapidly increasing revenue. Over the last several quarters revenue gains have been in the low single digits. Of the 99 S&P companies that have reported Q3 earnings only 38% beat on revenue. That compares to 45% in Q2.

Historically the earnings multiple increases after major recessions. Stocks are beaten down by the recession and they cut staff, close unprofitable divisions and return to a minimalist posture. When the economy rebounds after a recession the product demand returns and companies are wildly profitable with their new lower cost structure. Only this time the economy has posted the weakest rebound of any major recession. In fact it has been the slowest six-years of GDP growth since 1936. With GDP averaging about 1.5% growth this year the lack of product demand has stalled the normal business expansion cycle. However, the equity market is acting like there is a real economic rebound underway and stocks are being priced for that scenario.

There may be trouble ahead. Some analysts believe we will return to recession in 2014 as a result of Obamacare. Depending on which study you believe 77% to 83% of all jobs created in 2013 have been part time to get under the 30 hour threshold for full time workers. Employers can take three 40 hour workers and cut them back to 30 hours each and then hire a new worker at 30 hours and the same amount of work is performed. Only the 120 hours are now spread between four workers instead of three and the employer does not have to provide insurance.

Those four workers have seen their full time wages cut -25% to part time wages. On top of that they have to buy their own insurance through Obamacare at rates that are 25% to 50% higher than 2013 levels. They now have less income and more outgo. This is a recipe for drastically reduced consumer spending in 2014.

For the reported 1% that have actually made it though the website signup procedure the sticker shock on prices has been horrendous. In some states the rates have gone up far more than 50%. In this graphic the 2012 rates are contrasted with 2014 Obamacare rates. Be glad you don't live in Arkansas with a +171% hike, Georgia with a +168% hike or Virginia with a whopping +252% hike.


What this is going to mean is a lot more uninsured people with no access to healthcare. For those who can't pay those rates above they have the option of paying a fine of 1% of your gross income in 2014 that rises to 2.5% in 2015.

The flaw in the plan is the need for 7 million healthy young people to sign up for insurance and pay the rates listed above and subsidize the older people who use more healthcare. The poverty level people who can't afford to pay and will be subsidized as well. How many healthy young people under the age of 27 are going to rush right out and sign up for a $250 a month insurance plan they might only use once a year? That could be very darn few. They will pay the minimal fine and life for them will go on. That will force prices up for everyone else and that means less consumer spending down the road.

While the recessionary impact of the Affordable Care Act (ACA) may not be felt until the second quarter of 2014 I believe it will continue to increase in severity as the year increases. With consumer spending already slowing as a result of the change to a part time workforce I believe it will slow even further as individuals and families are forced to pay for insurance in 2014. This is effectively a new tax on American workers. That is how lawyers described it to the Supreme Court and the judges bought off on the argument. Now we are about ready to see that tax come home to roost. In reality there were 20 new taxes created in the ACA and while some have already started the majority will begin on January 1st. Analysts believe the taxes will average about $6,000 per person. You won't see them all directly because they are taxes on medical devices, hospitals, drugs and higher Medicare fees but you will pay them in some form. There is even a tanning tax for people that use tanning salons. The IRS received $500 million to setup enforcement of the new taxes and regulations.

Stocks may continue to rally into November but eventually fundamentals will matter again. The economic data returns next week with the nonfarm payrolls on Tuesday. If the economics continue to decline it will only complicate the earnings fundamentals for Q4. We have already seen numerous companies warn for Q4 and we are barely into the earnings cycle. Yes, there have been some positive earnings surprises but they were magnified by the negative sentiment from the prior two weeks. Google beat the street estimates by 40 cents with earnings of $10.74 per share compared to estimates of $10.34. Is that worth a $122 spike in the stock price? Any good news in a negative market will produce outsized reactions. There will be more negative surprises like IBM and Goldman Sachs. We can count on it. If those companies can't prosper in this environment that should be a clue as to our real economic health.

Eventually cautious investors will realize that nothing was solved in the agreement and just like the Ground Hog Day movie we will get to repeat the scenario again in January. That gives funds about two months to strategize and decide how they want to setup for year end. The headlines over disagreements in the bipartisan budget committee will probably begin in early December. That will be the signal to start boarding up the windows for the next big storm.

The way the Washington calendar is setting up we could see the entire Santa Claus rally pulled forward into the next six weeks leaving December and January as potentially bearish months.

Just because we are not falling off a budget cliff today is no reason for the market to party until year end as some are predicting.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"Of all the speculative blunders there are few greater than trying to average a losing game. Always sell what shows you a loss and keep what shows you a profit."
Jesse Livermore

 


Index Wrap

Stong Upside Reversals from Prior Week 'Confirmed'

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

How could further advances in the market be predicted without knowing the resolution of the debt ceiling crisis? Simple, in that price action tends to predict future Market direction. This is one of the primary foundations of technical analysis and why Dow theory 'works' to predict whether a recessionary period of bad earnings is in the cards for example. I got asked this question more than once after I wrote last week that price action from the prior week (before the Congressional logjam was broken) suggested higher levels ahead period. I didn't write that what I was anticipating ahead was 'contingent' on the United States NOT going into default.

I recall thinking I should have hedged myself and said my projection of a higher prices would ONLY work out IF Congress did its part but am pretty habituated to forecasting on a technical basis alone. Not that there can't be unanticipated events and surprises but price action of the major indexes was implying that the political crisis was going to be resolved and stocks were going UP. Amazing how chart pattern analysis WORKS in forecasting much if not most of the time!

If you looked at my column last week, you may recall that I put some bullish stock in the 'key' upside reversal I highlighted with the S&P 500 (SPX). By way of follow up, I include next the updated weekly SPX chart. Based on the upper end of SPX's broad weekly uptrend channel SPX could reach 1800 and above before it would hit any technical 'resistance'.

Speaking of possible upside resistance ahead I anticipate technical resistance in the red-hot Nasdaq market around 4000 basis the Nasdaq Composite (COMP) Index. What's the saying about "too hot not to cool down"! Moreover, bullish sentiment spiked on Friday in terms of my (CPRATIO) indicator as slightly over 2 million equity calls were traded on the CBOE. I tend to want to exit when so many traders are jumping into calls.

I've noticed the tendency for the SPX volatility index, in recent months at least, to be associated with bottoms when the VIX got up to the 20 area. VIX ended the week at 13. There's a minor tendency for interim tops to be associated with relatively low VIX levels around 12 or under. The Dow is sort of being 'dragged' along as many of the 30 INDU stocks are in congestion patterns with trade below prior highs. INDU did make an apparent double bottom low on its dip under 14800 support, which was a 'confirming' bullish indicator for the overall market, but TECH stocks are leading the way. We can of course point to the love affair with Google and some other stocks within the Nasdaq market for putting the Composite on track to probably getting to or near 4000.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) chart saw good upside follow through in the bullish action of the prior week. I wrote last week that "SPX looks headed still higher". A risk to say so unequivocally no doubt and I wondered about this as I watched weekend political pundits predict disaster ahead on a default scenario! Anyway, bullish upside follow is what occurred. So much so that SPX has now reached minor technical resistance implied by SPX's upper channel line intersecting currently around 1745-1750. Next key resistance is projected in the 1800 area.

Key support is seen down in the 1700 area, with support extending to around 1680. SPX is now back into overbought territory, as is the most recent daily reading of my call to put (ratio) sentiment indicator. SPX may be getting close to having a short-term pullback/correction.

We're of course in earning reporting season so look for cross currents. Goldman (GS), now in the Dow 30 Average, is an example of how the charts PREDICT as the stock traced out a triple top from mid-June on and then boom came a disappointing Q3 earning report this past week.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) chart saw a strong bullish follow through dating from the Index's recover from a level above its prior downswing low. A series of higher relative (downswing) lows being of course the definition of an uptrend.

OEX may now be at least minor resistance at 777-780 as suggested by the upper trendline. A breakout move above this trendline, that's sustained, would suggest further upside momentum and potential to the 800 area. Technical support is highlighted around 765 and then extends down to 755-752.

I noted last week that OEX had gotten within a hair's breath of a 'fully' oversold (RSI) reading at its last bottom and now is getting close to an overbought RSI reading. However, in terms of the Relative Strength Index, I don't necessarily anticipate tops in a strong bull move until or unless RSI gets well into its 'typical' overbought zone and then sometimes not before it gets there two or more times. I would shy away from initiating further bullish trades when RSI hits the 70 area or above, given the significant risk of a downside correction.

THE DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) chart is bullish as the recent rally saw a further 200 point gain to next resistance in the 15400 area. Key next resistance is seen around 15000-15550, then at prior highs in the 15665-15710 zone.

The Dow stocks are a mixed bag with strong bullish moves seen in AXP, BA, INDU bellwether GE, MMM, NKE, PFE, VZ and V. Not enough stocks to say that the Dow is going to be leading this market. Moreover, bearish charts are apparent with IBM, MRK and UNH. The other 19 Dow stocks are in mixed, mostly sideways, patterns. Not a lot to get excited about in the Industrials unless you have participation in the stocks mentioned in strong uptrends.

I'll repeat what I said last week that "I'm mildly, not wildly, bullish" on the Dow. Study of the weekly INDU chart (not shown) would suggest that if the Dow can achieve a decisive upside penetration of its 15560-15700 resistance zone, especially on a weekly Closing basis, there's potential to 17000 ahead.





NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite (COMP) Index chart continues strongly bullish and COMP has reached a new high after breaking out above 3820 resistance, now seen as initial/near support. Pivotal next resistance now looks like 3965-4000, possibly extending to 4100 over time, based on a broad daily chart uptrend channel. On long-term weekly and monthly charts (not shown) 4000 is also seen as potential major resistance area.

While COMP isn't yet showing a fully overbought reading on the 13-day RSI, on longer-term charts the Index is about as extreme as I've seen previously. I don't know what would moderate this very strong advance, almost 'bubble' like, but as the old saying goes, bull markets can die of their own 'weight'. Valuations may be too high to be sustained but that's a further off consideration at this point it appears. I don't underestimate runaway upside momentum, especially in tech stocks as what is a normal or 'proper' price to earnings ratio is a lot of guesswork; and what investors and speculators are willing to chase after.

Also at a bullish high point is my sentiment indicator, which is staring to reflect what may be unrealistic expectations for exceptional earnings growth. We've been through these cycles before. PE's get very high until there's an earnings stumble.

Near support as noted already is suggested at 3820, with next support at 3750, extending to 3700.

NASDAQ 100 (NDX); DAILY CHART:

The Nasdaq 100 (NDX) chart also is strongly bullish and the most recent upside price gap looks like either a runaway type gap occurring around the midpoint of a move or something else. Beware of a top forming in these circumstances as price gaps can then look like an 'exhaustion' gap which sometimes comes at interim tops. Hard to predict yet as to whether NDX is only at the midpoint of a move or nearer the end of one. I suggest being cautious and not taking on further bullish positions.

I wrote last week that "a re-test of prior highs seems likely", something of an understatement as the big cap Nas 100 accelerated so strongly. Once traders get on a bandwagon, especially in sexy tech/internet areas, it's look out above, and below!

I've highlighted potential resistance at 3400, extending to 3450, and then possibly to 3500 based on the broadest possible uptrend price channel based on the daily NDX chart. Weekly chart considerations would suggest the same 3450 resistance area, but NDX could certainly hit 3500 given current upside momentum.

Near support is suggested in the 3250, extending to 3200. Fairly major support comes in around 3100. Hang on for the ride, roller coaster or otherwise! Long-term charts suggest that NDX is about as overbought as it gotten historically, which is not to say that the first high such reading is the last one.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nasdaq 100 (QQQ) chart is showing an accelerating bullish momentum advance fully consistent with the underlying Nas 100 Index. Next resistance is projected in the 83 area. The broadest possible uptrend channel suggests next higher technical resistance around 85, possibly closer to 86. Long-term weekly chart (not shown here) considerations suggest the 85 area as where QQQ would be quite 'extended' on the upside.

Showing a type of unusual volume pattern for QQQ anyway is the jump in daily trading volume on Friday's overnight (from Thursday) runaway gap higher as QQQ shot above 82.

I've highlighted support in the 80 area, then back at 78.

Speaking of volume considerations, On Balance Volume (OBV) is in a strong upward trend, which is consistent with the strong price advance.

RUSSELL 2000 (RUT); DAILY CHART:

The Russell 2000 (RUT) chart is also in a quite bullish pattern as RUT rallied strongly though its prior highs and looks headed toward the upper end of its broad uptrend price channel. The same type of 'runaway' price gap as seen with Nasdaq suggests that RUT could be about half way in its current move. A possible test of the upper end of RUT's uptrend channel suggests potential to the 1130-1135 area. The upper/resistance end of RUT's weekly chart uptrend channel (not shown) comes in not far off from the daily chart, at 1143-1145.

Near support is highlighted in the 1080 area, then at RUT's up trendline, currently intersecting around 1052.

RUT looks headed still higher but I wouldn't be chasing this Index higher, with possible further upside potential about equal to downside risk, assuming RUT were to pull back to support at the 21-day moving average.



GOOD TRADING SUCCESS!


New Option Plays

China, Online Services, & RVs

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Ctrip.com - CTRP - close: 59.58 change: +1.29

Stop Loss: 58.25
Target(s): 68.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
Ctrip.com International, Ltd. specializes in travel services in the country of China. The stock has been popular with the momentum traders. Last month saw CTRP rally to new all-time highs. The recent news regarding an uptick in Chinese GDP should provide a bullish background for Chinese companies.

Traders have been buying the dips in CTRP and now shares are testing their highs set in early October. The October 2nd high was $61.09. I am suggesting a trigger to buy calls at $61.25. If triggered our target is $68.50. However, we will plan to exit prior to CTRP's earnings report in early November.

NOTE: CTRP can be a volatile stock. I do consider this a more aggressive, higher-risk trade. We want to use small positions to limit our risk.

FYI: The Point & Figure chart for CTRP is bullish with a $67.50 target.

Trigger @ 61.25 *small positions*

- Suggested Positions -

Buy the NOV $65 call (CTRP1316K65) current ask $2.35

Annotated Chart:

Entry on October -- at $---.--
Average Daily Volume = 2.65 million
Listed on October 19, 2013


J2 Global, Inc. - JCOM - close: 54.55 change: +1.17

Stop Loss: 53.25
Target(s): 59.75
Current Option Gain/Loss: Unopened
Time Frame: exit PRIOR to earnings on November 5th
New Positions: Yes, see below

Company Description

Why We Like It:
JCOM is an Internet company that provides business cloud services and digital media. The stock has been a strong performer this year. Shares did peak in August but now after a two-month consolidation JCOM has broken out. The stock looks ready to launch its next leg higher. New highs could spark a short squeeze. The most recent data listed short interest at 31% of the 43.7 million share float.

Friday's high was $54.64. I am suggesting a trigger to buy calls at $55.05. If triggered our target is $59.75 but more aggressive traders could aim higher. The Point & Figure chart for JCOM is bullish with a $77 target.

Trigger @ 55.05

- Suggested Positions -

Buy the NOV $55 call (JCOM1316K55) current ask $1.80

Annotated Chart:

Entry on October -- at $---.--
Average Daily Volume = 329 thousand
Listed on October 19, 2013


Thor Industries - THO - close: 58.95 change: +0.86

Stop Loss: 57.75
Target(s): 64.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
THO makes recreational vehicles. You might think that during our challenging economy that expensive items like RVs might suffer. Yet last month THO said its motorized RV sales were up 56% last quarter. THO's rival Winnebago (WGO) just reported better than expected earnings with both the top and bottom line besting Wall Street's estimates. WGO also said its backlog was growing, suggesting stronger demand for its RVs. This positive background has helped lift THO shares toward new all-time highs.

The stock is currently trading below short-term resistance in the $59-60 zone. I am suggesting a trigger to buy calls at $60.25. If triggered our target is $64.75.

Trigger @ 60.25

- Suggested Positions -

Buy the NOV $60 call (THO1316K60) current ask $1.40

Annotated Chart:

Entry on October -- at $---.--
Average Daily Volume = 528 thousand
Listed on October 19, 2013



In Play Updates and Reviews

New Record Highs

by James Brown

Click here to email James Brown

Editor's Note:

Investors rushed back into stocks following news that the government shutdown would end and the debt ceiling would be raised. No one seemed to care that deal was only temporary and postponed the budget and debt ceiling issues.

The S&P 500 and the Russell 2000 ended the week at record highs. The NASDAQ closed at new 13-year highs.

We are removing BWLD. DDD was triggered. We want to exit our ZMH play on Monday.


Current Portfolio:


CALL Play Updates

3D Systems - DDD - close: 56.77 change: +0.01

Stop Loss: 53.45
Target(s): 64.00
Current Option Gain/Loss: - 6.6%
Time Frame: exit PRIOR to earnings on Oct. 29th
New Positions: see below

Comments:
10/19/13: DDD's performance on Friday was a bit disappointing. Shares closed virtually unchanged in spite of the market's broad-based rally. Shares did manage to hit a new high and DDD did hit our suggested entry point to buy calls at $57.05. I would wait for a new rise past $57.00 before launching positions.

Earlier Comments:
DDD could see some short covering. The most recent data listed short interest at 32.5% of the 94.5 million share float.

Our target is $64.00. However, we will plan to exit prior to DDD's earnings report on October 29th.

- Suggested Positions -

Long NOV $60 call (DDD1316K60) entry $2.25

chart:

Entry on October 18 at $57.05
Average Daily Volume = 6.8 million
Listed on October 17, 2013


Dril-Quip, Inc. - DRQ - close: 119.38 change: +1.38

Stop Loss: 114.75
Target(s): 124.50
Current Option Gain/Loss: Nov120c: -15.5% & Dec125c -12.8%
Time Frame: 3 to 5 weeks
New Positions: see below

Comments:
10/19/13: DRQ quickly recovered from Thursday's dip. Shares gapped higher on Friday morning and posted a +1.1% gain. This is a new closing high for the stock. The next challenge for DRQ bulls is potential resistance at the $120.00 mark.

Earlier comments:
Our target is $124.50. However, we will most likely exit prior to DRQ's earnings report expected in early November. If you are willing to hold over the earnings announcement then you may want to use the December options instead of November options. I am suggesting small positions because the spread on DRQ's November options are a bit wide.

*small positions* - Suggested Positions -

Long NOV $120 call (DRQ1316k120) entry $2.90*

- or -

Long DEC $125 call (DRQ1322L125) entry $1.95

*option price is an estimate.

chart:

Entry on October 16 at $118.25
Average Daily Volume = 281 thousand
Listed on October 14, 2013


Helmerich & Payne, Inc. - HP - close: 76.76 change: +0.92

Stop Loss: 71.75
Target(s): 79.50
Current Option Gain/Loss: +29.8%
Time Frame: 4 to 5 weeks
New Positions: see below

Comments:
10/19/13: HP displayed relative strength on Friday. Shares gapped open higher and hit $77.73 intraday before paring its gains. That is a new all-time high. Shares are starting to look a little short-term overbought. I would not be surprised to see a dip back toward the $75.00 area but given the rally in the oil stocks HP may not see a dip. I am not suggesting new positions at this time.

We do not want to hold over the mid-November earnings report. FYI: The Point & Figure chart for HP is bullish with an $82 target.

- Suggested Positions -

Long NOV $75 call (HP1316K75) entry $2.31

chart:

Entry on October 14 at $74.50
Average Daily Volume = 1.1 million
Listed on October 12, 2013


iShares Russell 2000 ETF - IWM - close: 110.69 change: +1.25

Stop Loss: 104.80
Target(s): 114.00
Current Option Gain/Loss: +23.5%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
10/19/13: The congressional band-aid for the government shutdown and the debt ceiling gave investors the "all clear" signal. The small cap Russell 2000 index and the IWM raced to new all-time highs. This ETF could find resistance near the top of its bullish channel (see chart). I am not suggesting new positions.

- Suggested Positions -

Long 2014 Jan $110 call (IWM1418a110) entry 2.80

chart:

Entry on October 16 at $108.55
Average Daily Volume = 41 million
Listed on October 14, 2013


Starbucks Corp. - SBUX - close: 79.31 change: +0.58

Stop Loss: 75.75
Target(s): 82.50
Current Option Gain/Loss: +13.3%
Time Frame: exit PRIOR to earnings in very late October
New Positions: see below

Comments:
10/19/13: SBUX gapped higher on Friday and shares closed with a +0.7% gain and another new all-time high. It is possible that the $80.00 level is round-number resistance. Should the stock fail there I would expect a dip back toward $78.00, which should be new support.

Earlier Comments:
Our target is $82.50. Yes, it's possible that the $80.00 level could be round-number, psychological resistance but after a three-week consolidation sideways under the $78.00 level we suspect that $80 is not going to stop the rally in SBUX. We do not want to hold over SBUX's earnings, which will likely occur at the end of the month of early November.

- Suggested Positions -

Long NOV $80 call (SBUX1316k80) entry $1.65

chart:

Entry on October 14 at $78.25
Average Daily Volume = 3.7 million
Listed on October 12, 2013


Constellation Brands - STZ - close: 64.33 change: +0.44

Stop Loss: 59.75
Target(s): 67.50
Current Option Gain/Loss: +84.7%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
10/19/13: The march higher in STZ continues with a +0.6% gain on Friday. It is possible that the $65.00 level could be round-number, psychological resistance. If that's true then STZ may be close to a pullback. More conservative traders might want to take some money off the table here. I am not suggesting new positions.

Earlier Comments:
Our target is $67.50 but we may end up exiting near $65.00, which could be potential round-number resistance.

- Suggested Positions -

Long NOV $62.50 call (STZ1316k62.5) entry $1.38

10/16/13 new stop loss @ 59.75
10/11/13 trade opened on gap higher at $61.25,
trigger was $61.10

chart:

Entry on October 11 at $61.25
Average Daily Volume = 1.9 million
Listed on October 10, 2013


Vipshop Holdings Limited - VIPS - close: $76.51 change: +3.02

Stop Loss: 69.75
Target(s): 78.50
Current Option Gain/Loss: +43.7%
Time Frame: 3 to 5 weeks
New Positions: see below

Comments:
10/19/13: Wow! VIPS continues to sprint higher. Shares just added +4.1% on Friday following a +4.1% gain on Thursday. The intraday high on Friday was $77.20. I am adjusting our exit target from $77.50 to $78.50. More conservative traders may want to just take profits now since VIPS is starting to look short-term overbought again. I am raising our stop loss to $69.75.

Earlier Comments:
If this rally continues the stock could see some short covering. The most recent data listed short interest at 8.7% of the very small 20.5 million share float.

- Suggested Positions -

Long NOV $75 call (VIPS1316K75) entry $4.80

10/19/13 new stop loss @ 69.75, adjust exit target from 77.50 to 78.50

chart:

Entry on October 17 at $71.55
Average Daily Volume = 1.25 million
Listed on October 16, 2013


Zimmer Holdings - ZMH - close: 88.95 change: +1.07

Stop Loss: 84.40
Target(s): 89.50
Current Option Gain/Loss: +70.3%
Time Frame: exit PRIOR to earnings on Oct. 24th
New Positions: see below

Comments:
10/19/13: Our exit target has been $89.50. Shares of ZMH hit $89.49 on Friday before trimming its gains. The stock ended the session up +1.2%. I am suggesting we exit immediately on Monday morning to lock in gains. More aggressive traders may want to let this trade run but bear in mind that ZMH is looking overbought and nearing likely resistance (see chart).

- Suggested Positions -

Long NOV $85 call (ZMH1316k85) entry $2.70

10/19/13 prepare to exit on Monday, Oct 21st to lock in gains
10/16/13 new stop loss @ 84.40
10/14/13 adjust exit target to $89.50

chart:

Entry on October 10 at $85.55
Average Daily Volume = 1.2 million
Listed on October 09, 2013


PUT Play Updates


Currently we do not have any active put trades.




Longer-Term Play Updates



Chicago Bridge & Iron - CBI - close: 74.44 change: +1.62

Stop Loss: 68.40
Target(s): 79.00
Current Option Gain/Loss: +300.0%
Time Frame: 4 to 6 months
New Positions: see below

Comments:
10/19/13: Shares of CBI seem to be bullet proof. The stock is up six weeks in a row. Friday saw CBI outperform the market with a +2.2% gain. I am raising our stop loss to $68.40. More conservative investors may want to lock in gains now. I am not suggesting new positions at this time.

FYI: CBI is due to report earnings on October 29th.

*Small Positions* - Suggested Positions -

Long 2014 Jan $65 call (CBI1418A65) entry $2.55

10/19/13 new stop loss @ 68.40
10/01/13 new stop loss @ 64.00, adjust target to $79.00
09/21/13 new stop loss @ 59.75
09/11/13 new stop loss @ 57.65
07/20/13 new stop loss @ 55.75
06/29/13 CBI might be poised to dip into the $57-55 zone again.
06/24/13 triggered @ 56.75
06/22/13 adjust entry trigger to $56.75
06/15/13 entry strategy change: change the breakout trigger at $65.25 to a buy-the-dip trigger at $56.50. Adjust the stop loss to $53.75.
Adjust the option strike to the 2014 Jan. $65 call

chart:

Entry on June 24 at $56.75
Average Daily Volume = 1.8 million
Listed on June 01, 2013


Vanguard FTSE Europe ETF - VGK - close: 56.57 change: +0.36

Stop Loss: 52.75
Target(s): 58.50
Current Option Gain/Loss: +50.0%
Time Frame: exit PRIOR to 2014 March option expiration
New Positions: see below

Comments:
10/19/13: Friday was another bullish session for the European stock markets. The VGK followed Thursday's big gain with another new 52-week high on Friday. I am raising our stop loss to $52.75. I am not suggesting new positions at this time.

Earlier Comments:
We are taking a multi-month time frame with this trade. If we are triggered our target is $58.50 but we'll adjust it as the trade progresses. FYI: The Point & Figure chart for VGK is bullish with a $63 target.

- Suggested Positions -

Long 2014 Mar $55 call (VGK1422L55) entry $1.80*

10/19/13 new stop loss @ 52.75
09/11/13 trade opens. VGK @ 53.60
*option entry @ 1.80 is an estimate. Ask closed at $1.75 yesterday
09/10/13 entry trigger met. open positions tomorrow.
09/10/13 new stop loss @ 50.95
08/24/13 adjust the option strike from 2013 Dec $55 to $2014 Mar $55.

chart:

Entry on September 11 at $---.--
Average Daily Volume = 3.0 million
Listed on August 10, 2013


CLOSED BULLISH PLAYS

Buffalo Wild Wings, Inc. - BWLD - close: 119.43 change: +0.94

Stop Loss: 118.40
Target(s): 129.00
Current Option Gain/Loss: Unopened
Time Frame: exit PRIOR to earnings on Oct. 29th
New Positions: see below

Comments:
10/19/13: BWLD managed a bounce on Friday. The larger trend is up but shares have not fully participated in the market's current rally. Our trade has not opened yet (trigger was $122.00). Tonight we're removing BWLD as an active candidate. Readers may want to keep an eye on BWLD and revisit it if shares breakout past $122.00.

Earlier comments:
The most recent data listed short interest at 9% of the very small 18 million share float. A breakout to another new high could spark more short covering.

Trade did not open.

10/19/13 removed from the newsletter

chart:

Entry on October -- at $---.--
Average Daily Volume = 324 thousand
Listed on October 15, 2013