Option Investor
Newsletter

Daily Newsletter, Thursday, 1/16/2014

Table of Contents

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

Market Wrap

Earnings, Data and The Fed

by Thomas Hughes

Click here to email Thomas Hughes
Earnings and data fail to move the market.

Introduction

It was a big day for earnings and to a lesser extent for data. There were not a whole lot of earnings reports, about 28 by my count, but most were from the banking sector and of the rest there were two Dow components. Fully 20 of the corporations reporting today were financial institutions with 5 of those considered to be a “big bank”. On the economic front we got the weekly release of unemployment claims and a small handful of other reports that together tell a mixed story, nothing new about that. As a whole, today was a day of reports that reveal the economy and earnings are improving but that there are also still some areas of weakness. The major indices traded to the downside for the most of the day, which was not surprising after the huge gains made over the past two days.


Futures trading on the S&P 500 was a little weak in the early hours. The index was indicated to open down by about 5 points leading into the first releases of data. After 8:30AM and the employment claims figures the trade firmed a little but remained in the red. At the ope, the S&P was down about 2 points and hovered around that level for most of the day. The NASDAQ was one index of note that was able to trade into the green. The tech heavy index, along with others like the Russell 2000 actually set new highs. These indices have broken out of their respective trading ranges set during the holiday season. Looking at this chart of hourly SPX prices we can see that index bounce off the pre-Holiday support level set the Friday before Christmas and then was repelled by resistance at the highs set on the last day of 2013.


The Data

Initial claims for the week ending 1/11/2014 fell by 2,000 to 326,000. This follows a 2,000 claim downward revision to last week making a net drop of 4,000 from last weeks reported figures. The four week moving average also fell, by -13,500, to a new 5 week low. Initial claims are now back to the levels we saw last fall when jobs growth appeared to be accelerating. This should be a good thing but since the non-farm payrolls number was so weak last Friday I am a little suspicious of labor trends right now. Private sector sources point to a labor market gaining strength, ADP figures for private payrolls has been over 200,000 for three months, while the NFP fell to a 12 month low. Not to mention that the unemployment rate fell much more than expected in the face of extremely poor NFP growth, another factor to cause confusion. Something is going on here and I am not sure what it is. It could just be seasonal adjusting, or it could be something deeper.


Adding to my concern is the rise in continuing and total claims. If jobs are improving then these numbers should not be on the rise, unless of course people are reentering the job market at a rate faster than jobs are being created but the fall in the participation rate does not support that. Continuing claims gained nearly 175,000 from an upward revision of over a 50,000 to hit a 6 month high just over 3 million. With initial claims on the fall I would expect this number to drop as well. Of course, one week of data does not make a new trend, we will just have to keep a watch on this, along with the total claims, which also saw a marked increase this week. Total claims jumped by over 500,000 to hit a 6 month high. Keep in mind that the continuing claims data is two weeks old, Jan 4, and that the total claims data is from 12/28/2013 and could reflect post holiday lay-offs. On a different note, the rate of decline in total unemployment is way down from previous levels. Total unemployment was declining at a rate ranging between 22-25% for most of 2013 but has moderated to about 18% in the last month.



Consumer level inflation remains tame for now. The headline CPI remained unchanged for December on a non-adjusted basis but had a gain of 0.3% on a seasonal basis. Ex food and energy the the seasonally adjusted number came in at a very mild 0.1%. This is below expectations on an adjusted and non-adjusted basis.

The Philadelphia Fed Survey of manufacturing rose to +9.4, also much better than expected and a full 3 points higher than last months 6.4. The NAHB Homebuilder Survey was released simultaneously and reveals that homebuilder sentiment remains high but has moderated somewhat from the previous month. Confidence levels were reported as 56, down one point from last month and one point from the expected number. A reading above 50 is expansionary.

Inflation is down, homebuilder confidence is up, manufacturing is up and yet the jobs market is still in flux. As I said before it seems as if something is going on here but I just can't put my finger on it. It could just be adjustment or a seasonal shuffle of employees but I think it goes deeper. I will have to keep digging until I find out what it is. Regardless, if the longer term claims for unemployment keep increasing it could signal a shift in the labor trends we have been following for the past 12 months. It's three weeks until the next NFP data and there is an FOMC, a BOJ and an ECB meeting before then. The market reaction today tells me the unemployment numbers are not too alarming yet. There is still a lot of data to come out before the next Fed meeting that could influence their decisions.


The Gold Index

Gold prices held steady today around $1240-$1242. The price of the metal has been firming over the past week but hit resistance at $1250. The economic data, for the most part, is pointing to continued if subdued improvement. Economic improvement is taper-positive which should in turn help strengthen the dollar and add pressure to gold. However, the Fed still is still in the drivers seat, gold prices could hold steady until it meets again. The Gold Index has also drifted higher but is now presenting a possible bearish entry. The index has been trading above the short term moving average, in a down trend, and is now showing divergences in both MACD and stochastic that could lead to a retest of the recent lows around $82.50. If you look at the stochastic you can see that the longer term %D line has rolled over and is beginning to point down while at the same time the %K has made two divergent peaks confirming resistance. This constitutes a stochastic sell signal, when in a down trend. Current support targets are the 30 day EMA around $88.50 and then next at $82.50.


The Oil Index

Oil prices fell today on improving supply outlook. There are several hot spots around the world that are showing signs of stabilization as well as several other areas coming into production. This is on top of the shale oil/gas boom going on in the states. WTI and Brent both fell by about 10 cents in the afternoon trade, holding below recent resistance levels. The Oil Index, which had been making a possible double top on the short term daily charts, has fallen back below support. A long black candle took the index below the 30 day EMA with increasing, if weak, momentum. The index is indicated to move lower but strong support is just below the current level at the long term trend line in the 1425-1450 range. The long term trend is still up, this could present a buy-the-dip opportunity in for the sector. The big oil companies are not scheduled to report until the end of the month.


Earnings

Today was a bid day for earnings, at least in the financial sector. Out of 28 corporations reporting 20 were financials and 5 of those “big banks”. Most reported before the bell but American Express and Capital One both released after. The generalisation is that today's reports were much like the ones we saw from JPM, WFC and BAC...there is some signs of improvement intermingled with some small disappointments. Before the bell was BBT, Citigroup and Goldman Sachs. BBT and GS both beat expectations while Citigroup did not. After the bell American Express reported a miss, by one penny. Regardless of what the expectations were most of these companies improved revenues and earnings over the last year and the comparable quarter. Citigroup was the one with the real big miss, the expectation was for EPS of $0.94, they reported $0.85, nearly a dime below the estimate but still more than double Q4 2012. Citi blamed the miss on weak mortgage origination and fixed income business.


The Banking Index traded to the downside today with weak indicators. The index has been trending up over the past 4 months in the short term and has developed some divergence from the indicators. This could indicate a correction to the short term trend line at least. The long term trend is still bullish with rising momentum so I think there are still higher prices coming. However, in the near to short term there could be some weakness in the index. Closest support is just below the current prices around $70 and the the short term moving average which is currently coincident with the short term trend.


Intel also reported after the bell. The chip maker reported earnings that missed estimates by a penny. Despite the miss, profits rose marginally over the previous year on what they company called “modest” sales growth. However, in the report Intel guided first quarter and full year 2014 lower than previously estimated. The stock lost about a half percent in today's trading, confirming the shooting star formed yesterday. After the release the stock added to the days losses extending them to about -3.3%.


The Semi-conductor index could be in for a fall tomorrow. The Intel report is sure to drag on the index, as well as others. The index has been trending up strongly in the long and short term but is forming divergences in both MACD and Stoch. The index is well above the long term trend line and could correct to it over the next few weeks.


The Indices

The indices held up rather well in the face of such a whirlwind of earnings and economic data. As a group, I can say that they all traded right around the break even point, more or less. There is a lot to consider in terms of the economy and earnings growth. The data shows that the economy is at least strong enough that we can expect taper to continue this month. However, there is the unemployment claims figures that have raised some concern over the the state of the jobs market. At the same time, earnings are OK-ish, not great, not bad, but OK. The question is...how will earnings outlook change over the next few weeks as the season rolls on?

The S&P 500 and the Dow both failed to make it into positive territory today. Both indices have also failed to break out of their holiday ranges, yet. At the same time other indices have broken out the holiday range and have even made new highs. The S&P 500 indicators are beginning to show signs that there is really support for the index at these levels but have not yet turned bullish. The index is capped by the resistance set the last day of 2013. For now the index is trapped in the holiday range. The combination of mixed economic data and mixed earnings reports could keep the index within the range with a possible target date for break out coincident with the FOMC meeting January 28th. Until then I will be watching this range very closely.


The Dow is in much the same shape as the SPX. The Blue Chips are still within the holiday range with weak and bearish indicators. The long term trend is still up but the short term is indicated sideways at best. Again, the FOMC meeting at the end of the month is my target date for a potential break out from this range. Current support is at the 16,225 level with resistance at 16,500. Tomorrow could be hard day for the Dow as Intel and AXP are both components. Should support at 16,225 not hold not the next target is around 15,750.


The Transports are one index to have set new highs this year. However, it traded to the negative today. The index seems to have met resistance at the round number of 7,500. The indicators are bullish but weak and divergent at this time. A correction to the 30 day EMA around 7,260 or even to the long term trend line around 7,100 is possible.


The Nasdaq has been making new highs this year and made a new high today. The tech index gained about 4 points today to set another new high. At the same time indicators are turning bullish and could indicate higher index prices. However, Intel will weigh heavily on the index tomorrow so I am not too sure about that. Looking to the moving average, we can see that the index is making a bounce from the moving average. This move is a good sign that bulls are still interested but with the divergences in the indicators could also be the last hurrah of the current rally. Earnings outlook among the tech stocks is not good for next year and could continue to add bearish pressure to the index. First support is around the 4,100 level.


Earnings season could spark a correction. It's not bad so far per se, but it's not great either. However, there is still a lot of reports to go. For now, it looks like the financial sector is doing OK. Revenues are growing although some sectors of business are not as strong as they could be. Elsewhere, Alcoa sees 2014 as a chance for improvement to take hold while Intel and other techs think that 2014 will be flat. Two more weeks of this, with two more weeks of basically good data, and the equities markets could easily move sideways to downward in search of longer term support. And this would coincide with the FOMC meeting. Don't forget that the markets are closed on Monday for the Martin Luther King Weekend.

Until then, remember the trend!

Thomas Hughes


New Option Plays

Short-Term Trade On Tech

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

QUALCOMM Inc. - QCOM - close: 74.72 change: +0.21

Stop Loss: 73.75
Target(s): 79.75
Current Option Gain/Loss: Unopened
Time Frame: Exit PRIOR to earnings on January 29th
New Positions: Yes, see below

Company Description

Why We Like It:
QCOM is in the technology sector. The company develops digital communication equipment. According to their website QCOM is the world leader in 3G, 4G, and next-generation wireless technologies (e.g. smartphone technologies).

This stock has been consolidating sideways in the $72-74 zone for almost seven weeks. Shares are finally starting to break out from this trading range. I am suggesting a trigger to buy calls at $75.25. If triggered our short-term target is $79.75. This is a short-term trade. QCOM is due to report earnings on January 29th. Yet Apple (AAPL), who QCOM does a lot of business with, reports earnings on January 27th. We will definitely plan to exit prior to QCOM's earnings report and might consider an exit ahead of AAPL's report.

FYI: The Point & Figure chart for QCOM is bullish with a $93 target.

Trigger @ 75.25

- Suggested Positions -

Buy the Feb $75 call (QCOM1422B75) current ask $1.75

Annotated Chart:

Entry on January -- at $---.--
Average Daily Volume = 8.3 million
Listed on January 16, 2014



In Play Updates and Reviews

N Hits Our Bullish Target

by James Brown

Click here to email James Brown

Editor's Note:

The market's major indices drifted sideways.

N hit our bullish exit target. SLXP was closed this morning to lock in potential gains. SHLD hit our stop loss.


Current Portfolio:


CALL Play Updates

Chicago Bridge & Iron - CBI - close: 82.90 change: +0.13

Stop Loss: 79.65
Target(s): 89.50
Current Option Gain/Loss: + 0.0%
Time Frame: Exit PRIOR to CBI's earnings report in February
New Positions: see below

Comments:
01/16/14: CBI underperformed the market this morning but shares bounced near $81.60 and managed to rebound back into positive territory. Shares actually managed to outperform by the closing bell. Shares look poised to breakout past resistance near $83.00.

Earlier Comments:
Our target is $89.50. We want to exit prior to CBI's earnings report in February.

- Suggested Positions -

Long April $85 call (CBI1419D85) entry $3.10

12/28/13 new stop loss @ 79.65

Entry on December 19 at $80.35
Average Daily Volume = 1.5 million
Listed on December 18, 2013


Cigna Corp. - CI - close: 88.82 change: -1.04

Stop Loss: 88.40
Target(s): 95.00
Current Option Gain/Loss: Unopened
Time Frame: exit PRIOR to earnings on February 7th
New Positions: Yes, see below

Comments:
01/16/14: A number of the Healthcare stocks underperformed today and CI followed its peers lower with a -1.1% decline. Shares settled on short-term support at the 10-dma. We are waiting for a move higher.

I am suggesting a trigger to buy calls at $90.25. If you prefer an alternative entry point could be $90.75, which would mean waiting for a breakout past its highs from last week. If we are triggered at $90.25 I am suggesting a $95.00 target. However, we'll plan on exiting prior to the earnings report on February 7th.

FYI: The Point & Figure chart for CI is bullish with a $119 target.

Trigger @ 90.25

- Suggested Positions -

buy the Feb $90 call (CI1422B90)

Entry on January -- at $---.--
Average Daily Volume = 1.0 million
Listed on January 15, 2014


Cognizant Tech. - CTSH - close: 100.30 change: -0.73

Stop Loss: 99.40
Target(s): 108.50
Current Option Gain/Loss: Unopened
Time Frame: exit PRIOR to earnings on February 5th
New Positions: Yes, see below

Comments:
01/16/14: CTSH drifted lower toward round-number support at $100.00. I don't see any changes from our new play comments last night.

Earlier Comments:
I am suggesting a trigger to buy calls at $101.50. If triggered our target is $108.50. However, we will plan on exiting positions prior to the earnings report on February 5th.

Trigger @ 101.50

- Suggested Positions -

buy the Feb $105 call (CTSH1422B105)

Entry on January -- at $---.--
Average Daily Volume = 1.6 million
Listed on January 15, 2014


General Dynamics - GD - close: 95.40 change: -0.19

Stop Loss: 93.85
Target(s): 99.50
Current Option Gain/Loss: - 2.7%
Time Frame: exit PRIOR to earnings on January 22nd
New Positions: see below

Comments:
01/16/14: GD drifted lower on relatively light volume. More conservative traders might want to adjust their stop loss higher. I am not suggesting new positions at this time.

Earlier Comments:
Our target is $99.50. More aggressive traders may want to aim higher since the Point & Figure chart for GD is bullish with a $105 target. The plan was to keep our position size small.

*small positions* - Suggested Positions -

Long Feb $95 call (GD1422B95) entry $2.21

Entry on December 31 at $95.25
Average Daily Volume = 1.1 million
Listed on December 28, 2013



Northrop Grumman - NOC - close: 118.29 change: +0.41

Stop Loss: 114.65
Target(s): 124.00
Current Option Gain/Loss: +25.9%
Time Frame: exit PRIOR to earnings on January 30th
New Positions: see below

Comments:
01/16/14: Defense names continued to move higher today. NOC drifted higher and outperformed the market with a +0.3% gain.

We will plan on exiting prior to earnings on January 30th.

Earlier Comments:
Our target is $124.00. I'll confess that might be a little bit optimistic since the $120 level could be round-number resistance.

- Suggested Positions -

Long FEB $120 call (NOC1422B120) entry $1.35

01/14/14 new stop loss @ 114.65
01/10/14 triggered @ 116.50

Entry on January 10 at $116.50
Average Daily Volume = 1.3 million
Listed on January 09, 2014


Seagate Technology - STX - close: 60.66 change: -0.18

Stop Loss: 58.45
Target(s): 65.00
Current Option Gain/Loss: - 4.8%
Time Frame: exit PRIOR to earnings on January 27th.
New Positions: see below

Comments:
01/16/14: It was a quiet session for shares of STX, which followed the market's sideways drift on Thursday. I would still consider new positions now or you could wait for a rise above today's high (61.10).

Earlier Comments:
Our short-term target is $65.00. Investors with a longer time horizon could aim higher since the Point & Figure chart is bullish with a $77.00 target. However, we will plan to exit prior to STX's earnings report on January 27th.

- Suggested Positions -

Long Feb $60 call (STX1422B60) entry $3.10

01/15/14 triggered @ 60.85

Entry on January 15 at $60.85
Average Daily Volume = 3.5 million
Listed on January 14, 2014


Thermo Fisher Scientific - TMO - close: 116.11 change: +0.59

Stop Loss: 112.65
Target(s): 119.75
Current Option Gain/Loss: + 7.4%
Time Frame: Exit PRIOR to earnings in late January or Early February
New Positions: see below

Comments:
01/16/14: TMO continued to show relative strength today with a +0.5% gain. Readers might want to adjust their stops closer to the simple 10-dma (currently near $113.40).

Earlier Comments:
Our target is $119.75. We will plan on exiting prior to earnings. At the moment there is no confirmed earnings date. It should be near the end of January or early February.

- Suggested Positions -

Long Feb $115 call (TMO1422B115) entry $3.35*

01/15/14 triggered @ 115.25
*option entry price is an estimate since the option did not trade at the time our play was opened.

Entry on January 15 at $115.25
Average Daily Volume = 1.8 million
Listed on January 14, 2014


United Technologies - UTX - close: 114.22 change: +0.15

Stop Loss: 111.75
Target(s): 118.50
Current Option Gain/Loss: - 8.3%
Time Frame: exit PRIOR to earnings in late January
New Positions: see below

Comments:
01/16/14: UTX, like the major indices, churned sideways today but it did so with a slightly bullish tilt. Shares look poised to breakout past this resistance in the $114.25 area.

Earlier Comments:
Our target is $118.50 but we'll plan on exiting prior to UTX's earnings report in late January. More aggressive investors might want to consider aiming higher. The Point & Figure chart for UTX is bullish with a $139 target.

- Suggested Positions -

Long Feb $115 call (UTX1422B115) entry $1.80

01/14/14 UTX did not participate in the rally. Readers may want to exit early now
01/09/14 new stop loss @ 111.75
12/31/13 trade opened on gap higher at $113.16. Suggested trigger was $113.05

Entry on December 31 at $113.16
Average Daily Volume = 2.8 million
Listed on December 26, 2013




PUT Play Updates

Rock-Tenn Co. - RKT - close: 100.18 change: -0.30

Stop Loss: 102.55
Target(s): 97.00
Current Option Gain/Loss: + 5.4%
Time Frame: Exit PRIOR to earnings on January 28th
New Positions: see below

Comments:
01/16/14: RKT is still churning sideways inside the $100-102 zone. I am adjusting our stop loss down to $102.55. I am not suggesting new positions at this time.

- Suggested Positions -

Long FEB $100 PUT (RKT1422N100) entry $3.70

01/16/14 new stop loss @ 102.55
01/13/14 new stop loss @ 103.55
01/11/14 adjust exit target from $96.00 to $97.00

Entry on January 09 at $101.96
Average Daily Volume = 656 thousand
Listed on January 08, 2014



CLOSED BULLISH PLAYS

NetSuite Inc. - N - close: 110.61 change: +2.01

Stop Loss: 104.65
Target(s): 109.75
Current Option Gain/Loss: +55.0%
Time Frame: 3 to 5 weeks
New Positions: see below

Comments:
01/16/14: Target achieved.

Shares of N were upgraded this morning. This news sparked a gap open higher at $109.68. N continued to rally and closed up +1.85%. Our exit target was hit at $109.75 early this morning.

- Suggested Positions -

Feb $110 call (N1422B110) entry $3.00 exit $4.65 (+55.0%)

01/16/14 target hit
01/15/14 new stop loss @ 104.65
01/14/14 adjust exit target to $109.75
01/11/14 new stop loss @ 101.90

chart:

Entry on January 08 at $103.75
Average Daily Volume = 410 thousand
Listed on January 07, 2014


Salix Pharmaceuticals - SLXP - close: 96.43 change: +1.13

Stop Loss: 92.75
Target(s): 98.50
Current Option Gain/Loss: +40.0%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
01/16/14: Hmm... we may have been a little early on pulling the rip cord for our SLXP trade. After yesterday's underperformance we decided in last night's newsletter to exit this morning. SLXP opened at $95.31. The stock then bounced and outperformed the market with a +1.1% gain. Unfortunately the option gapped down this morning at $4.00 (from yesterday's close at $4.40).

- Suggested Positions -

Feb $95 call (SLXP1422B95) entry $2.50* exit $3.50 (+40.0%)

01/16/14 planned exit
01/15/14 prepare to exit tomorrow morning
01/14/14 new stop loss @ 92.75, readers may want to take profits now
01/13/14 new stop loss @ 91.95
01/11/14 new stop loss @ 89.40
01/07/14 new stop loss @ 87.80
01/03/14 triggered @ 90.25
*option entry price is an estimate since the option did not trade at the time our play was opened.

chart:

Entry on January 03 at $90.25
Average Daily Volume = 790 thousand
Listed on December 31, 2013


CLOSED BEARISH PLAYS

Sears Holding Corp. - SHLD - close: 38.37 change: +1.67

Stop Loss: 38.05
Target(s): 30.25
Current Option Gain/Loss: -36.2%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
01/16/14: Retail stocks were unpopular thanks to the crash and burn in shares of BBY today. Yet SHLD actually rallied. The stock displayed significant strength with a +4.5% gain. SHLD was up +8.8% at its best levels of the day. The stock hit our stop loss at $38.05 before lunchtime.

Earlier Comments:
Please note that traders may want to use small positions. There is a high amount of short interest. The most recent data listed short interest at 54% of the 50.7 million share float. That could spark a short squeeze if the stock were to suddenly move higher.

- Suggested Positions -

MAR $30 PUT (SHLD1422o30) entry $2.04 exit $1.30 (-36.2%)

01/16/14 stopped out at $38.05

chart:

Entry on January 14 at $34.85
Average Daily Volume = 2.2 million
Listed on January 13, 2014