Option Investor
Newsletter

Daily Newsletter, Tuesday, 4/15/2014

Table of Contents

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

Market Wrap

Major Reversals

by Jim Brown

Click here to email Jim Brown

Turnaround Tuesday was complete with multiple major reversals.

Market Statistics

The Dow rallied +99 points at the open only to collapse at 10:AM to drop -210 points to 16,063 by 1:PM. At that point somebody hit the buy program switch and the Dow rallied +198 points to close at 16,262.

The Nasdaq rallied +30 points at the open to 4,055 before collapsing -109 points to a new four month low at 3,946. The 1:PM buy program caused a +87 point rebound to close at 4,033.

To say Tuesday was volatile would be an understatement. For the Dow to have 3 triple digit moves in opposite directions is true volatility. The Nasdaq traded in a 2.7% range after being down -1.8% intraday.

The Biotech ETF (IBB) traded in a 5.9% range intraday before finishing only -3 points from the intraday high. At the low of the day at 207.48 the index was -24% off its highs for the year and firmly in bear market territory. Some analysts claim that dip into bear market territory was what triggered the buy program in the biotechs and lifted the market off its lows.

It was definitely not the geopolitical events or the economics that lifted the market. The NY Empire State Manufacturing Index for April declined from 5.6 to 1.3 compared to estimates for a gain to 8.0. New orders fell from +3.1 into contraction territory at -2.8. Backorders improved slightly from -16.5 but remained in contraction territory at -13.3.

The headline number was the weakest since November and is very close to slipping into contraction as well. The average workweek component declined from 4.7 to 2.0. This is the report for April so analysts were not able to blame the weather for the weak performance.


The NAHB Housing Market Index for April rose slightly from 46 to 47 but that was well under the consensus estimate of 50 and the Moody's forecast for 54. The single family sales component was flat at 51 but the outlook for the next six months rose from 53 to 57. Buyer traffic was also flat at 32. This is the third consecutive month that the headline number was in contraction territory under 50. The headline number is only 1 point above the low for the year.

The headwinds for housing sector are higher mortgage rates, very stiff requirements to get a loan, shrinking inventory and rising prices. While the rising prices are positive for builder profits it also restricts the number of buyers when coupled with the tighter credit rules. Equifax said 86% of mortgage originations went to borrowers with a credit score over 700. Unfortunately a lot of buyers over 700 are still being denied because of the price/rate calculations. The Mortgage Bankers Association said mortgage applications for purchases are at the lowest level since 1996.


The Consumer Price Index (CPI) rose +0.2% for March compared to +0.1% in the prior two months. The CORE rate also rose +0.2% after holding at 0.1% for the prior three months. Food rose +0.4% and energy declined -0.1%. Owners rents rose +0.3%. Over the trailing 12 months the headline inflation rate is +1.5% with the CORE rate +1.6%.

The rise in the CPI was not enough to strike fear into the Fed but it could be the start of a sustained increase. The Fed would like to see inflation over 2% so there is still a long way to go.

The economic calendar for Wednesday is headlined by the Fed Beige Book with a breakdown of economic conditions from each of the Fed districts. It should show improvement from the March report, which mentioned slowdowns in the Northeast because of the weather.

The Chinese GDP for Q1 will be released and expectations are for a decline to 7.3% growth and the slowest growth in two decades. This could weigh on the markets but this has been expected for a long time so it may be ignored. All the numbers out of China for the last couple months have been declining steadily so GDP expectations may be priced in to the market.


Events in the Ukraine continue to weigh on the markets as violence increases and headlines are appearing with increasing speed and urgency. As long as the U.S. does not take any military steps the headlines will eventually fade. President Obama warned today that the U.S. may consider additional aggressive sanctions if Russia does not pullback from the Ukraine border and call off the Russian troops masquerading as separatists now holding 10 buildings in the Ukraine.

Fortunately investors in the U.S. are more focused on earnings than the Ukraine. The earnings today were better than expected in most cases. Johnson & Johnson (JNJ) saw earnings rise +8% to $1.54 per share compared to estimates for $1.48. Revenue of $18.12 billion rose +3.5% compared to estimates for $18.04 billion. Prescription drug sales rose +11% to $7.5 billion. The company raised full year estimates a nickel to a range of $5.80 to $5.90. Shares rallied $2 on the news.


Coca-Cola (KO) reported earnings of 44 cents compared to estimates of 44 cents. Revenue declined -4% to $10.58 billion compared to estimates for $10.55 billion. Noncarbonated beverage sales rose +8% compared to a -1% decline in carbonated beverages. Carbonated declined -2.2% for all of 2013. Volume in North America was flat with gains being made overseas. Shares rose +3.7% on the news.


Pep Boys (PBY) blew a engine with a -15% decline after reporting earnings that disappointed. The company reported a loss of -6 cents compared to expectations for a +4 cent profit. Revenue was $495.7 million compared to estimates of $531.2 million. PBY said tire prices are below last year's levels and will continue to weigh on profits through Q2.


Shares of Northern Trust (NTRS) declined -1.6% after reporting earnings of 75 cents compared to estimates of 78 cents. Revenue of $1.04 billion missed estimates of $1.07 billion. The company said the earnings miss was due to a rise in operating expenses. Declining interest rates caused net interest margin (NIM) to decline to 1.12%. Non-interest expenses rose +5% to $768 million. Provision for credit losses declined -40% to $3 million. Charge offs fell sharply from $8.7 million to $1.5 million.


After the bell Intel (INTC) reported earnings of 38 cents compared to estimates of 37 cents. Revenue of $12.76 billion was slightly below estimates for $12.81 billion. The CFO said there were clear signs of stabilization in the PC market as employers replaced an aging inventory of PCs now that Windows XP support has ended. He said PC shipments would still decline slightly in 2014 but nowhere near the pace of the last couple of years. He also talked up their cloud initiative and their path to control the tablet market. They shipped 5 million tablet chips in Q1 and were on track to do 40 million for the full year. In 2013 they only shipped 10 million. Gross margin was 59.7% and was expected to rise to 61% later in the year. Intel guided for $13 billion in revenue for Q2 and that was just slightly over the $12.957 billion analyst estimate.


Yahoo (YHOO) reported earnings of 38 cents compared to estimates of 37 cents. Net revenue was $1.09 billion and slightly ahead of estimates for $1.08 billion. Ad revenue metrics improved slightly but investors were not impressed with shares rising only about 50 cents until they disclosed news about Alibaba. They said Alibaba revenue rose +66% in Q4 and earnings rose +110% to $1.35 billion. This means the valuation of the coming IPO is likely to rise and with it the value of Yahoo's 24% stake. Alibaba is expected to be worth $150 to $200 billion when it goes public. By comparison Facebook was valued at $104 billion when the IPO was priced. Shares rallied +$2.50 after the Alibaba news broke.

Yahoo's share of search advertising is expected to decline to 2.5%, down from 3.5% in 2012. Google's share is expected to rise to 33% and Facebook 8%.


CSX (CSX) said the worst winter in years slowed rail traffic and contributed to a 14% drop in Q1 profits. The railroad posted earnings of 40 cents compared to estimates of 37 cents. The company said weather cost it 8-9 cents per share in lost revenue and increased expenses. Without the weather impact it would have been a blowout quarter. However, the CEO had nothing but good things to say about the economy. He said they were seeing increased activity in every sector and they could not be happier about the future. They are predicting double digit profit growth in 2015 and beyond. The CEO said carloads increased 3% and were rising now that winter was over. He said chemicals, crops, lumber, coal, grains, drilling pipe, frac sand, etc were all surging. Shares rallied 30 cents after the report.


The highlights for Wednesday will be IBM and Google. IBM has had some rocky quarters recently and while I hope they have recovered overseas I am worried we could see another revenue miss. Google is a tossup. They have so much going on in multiple areas you never know how expenses and profits will line up. I would not want to hold either one over their earnings report.

So far, not counting tonight's reports, 7% of the S&P has reported. Over 53% have beaten earnings, 17% met estimates and 31% missed estimates. Guidance has been mixed.


Are you ready to rumble? The intraday drop in the Nasdaq and V bottom recovery suggests the worst is over. Volume spiked to 7.6 billion shares in what is normally a very slow week. The Nasdaq came within 22 points of a 10% correction to 3,922. The dead stop on 3,950 with the 200-day average at 3,942 would seem to indicate the bulls are trying to make a goal line stand and stop this selling madness.

I wrote last night that the converging support at Nasdaq 4,000 should have produced a stronger rebound on Monday. I felt the lack of a decent rebound meant we were going to see lower lows. The rebound from the 3,950 level today did not make it back to strong resistance at 4,050 but it was a good try and I appreciate the buy program that triggered the short squeeze. If we can get a headline bounce above that 4,050 resistance it would trigger significant short covering.



The Nasdaq is clinging to the 4,000 level and so far able to overcome the intraday bouts of selling at that level.

Today's rebound could be the start of a longer rally. Large intraday reversals at critical support levels tend to produce a change in the trend.


For three days the S&P has found support in the 1,815 area and today's rebound stopped right on the high for the day set at the open. This was a bullish rebound regardless of what caused it. The chart clearly shows strong support and the potential for the S&P to move higher on Wednesday. The close over 1,840 after spending nearly an hour defending the afternoon gains suggests we are not going lower.



The Dow had three triple digit moves if we count the +99 rally at the open as close enough to triple digits to count. Up +99, down -210, up +198. This is a prime example of why adding high dollar stocks to the Dow creates additional market volatility. Visa has been moving multiple dollars per day and sometimes in alternate directions. This is a prime example why Apple and Google will never be added to the Dow.

The Dow has posted a higher low for the last two days after coming to a dead stop at 16,025 on Friday. While we can never know for sure that a bottom is behind us I am starting to lean in that direction.



The fly in the rally ointment is the Russell 2000. The Russell dipped below 1,100 intraday and rebounded +25 points to close at 1,119. On the surface that appears to be a decent short covering rally. However it continues to set a pattern of lower lows and lower highs. I want to believe the Russell is going to push back over 1,130 but seeing is believing. Until I see it I will be skeptical.


There are plenty of precedents where a monster intraday reversal like we saw today turns into a lasting rally. There are also plenty of failures of that pattern. Whatever triggered the buying at the lows today may never be known. We need to see a continuation of the move higher on Wednesday. If the S&P can move over 1,850, Nasdaq 4,050 and Russell 1,130 we should see significant short covering and buyers may start to come off the sidelines. The problem will be low volume. Wednesday will be slow and Thursday slower expect for some option expiration activity. The markets could either be highly volatile in the low volume or extremely calm. Just remember ships can still sink in a calm sea.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email

 


New Option Plays

Energy & Small Caps

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

EOG Resources - EOG - close: 101.11 change: +1.15

Stop Loss: 98.75
Target(s): 109.00
Current Option Gain/Loss: Unopened
Time Frame: exit PRIOR to earnings on May 5th
New Positions: Yes, see below

Company Description

Why We Like It:
EOG is in the basic materials sector. The company explores for and produces oil and gas. Energy stocks were some of the market's best performers today and the group has been showing relative strength. Today's move in EOG is a new all-time closing high. The intraday high is $103.30 from April 4th.

EOG's last earnings report was February 24th and the company beat both the top and bottom line estimates. Wall Street was impressed and several firms upgraded their price targets or rating on EOG since the earnings announcement. The spike higher on April 4th appears to be a reaction to one analyst putting a $120 price target on EOG.

This week's breakout past round-number resistance at the $100.00 level is good news for the bulls. Today's intraday high was $101.68. I am suggesting a trigger to buy calls at $101.75. If triggered we'll set an exit target at $109.00 but plan on exiting prior to earnings on May 5th.

Trigger @

- Suggested Positions -

Buy the May $105 call (EOG1417E105) current ask $1.68

Annotated Chart:

Entry on April -- at $---.--
Average Daily Volume = 2.9 million
Listed on April 15, 2014


iShares Russell 2000 ETF - IWM - close: 111.15 change: +0.43

Stop Loss: 108.60
Target(s): to be determined
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
The small caps have been correcting lower since their early March highs. The IWM has been testing support near $110 and its simple 200-dma the last two days in a row. At today's intraday low the IWM was down -9.8% from its high. Traders could have been waiting for a -10% correction as their entry point to buy the dip. The IWM ETF certainly bounced and closed back above support at $110 and its 200-dma.

The trend is down but odds look good the market is poised for a short-term bounce. We're suggesting a trigger to buy calls at $112.15 with a stop under today's low. We're not setting a target yet but I would consider exiting in the $115-117 zone.

Trigger @ 112.15

- Suggested Positions -

Buy the JUN $115 call (IWM1421F115) current ask $2.16

Annotated Chart:

Entry on April -- at $---.--
Average Daily Volume = 55 million
Listed on April 15, 2014



In Play Updates and Reviews

Stocks Recover From Tuesday Lows

by James Brown

Click here to email James Brown

Editor's Note:

Early on the markets seemed to be sinking on worries over the Ukraine but equities reversed higher and back into the green with a strong afternoon bounce.

Double check your stop loss placement on any bearish plays. The market's bounce might have further to go.

LL hit our entry trigger.


Current Portfolio:


CALL Play Updates

Caterpillar Inc. - CAT - close: 102.50 change: -0.28

Stop Loss: 99.75
Target(s): 109.00
Current Option Gain/Loss: - 3.9%
Time Frame: exit PRIOR to earnings on April 24th
New Positions: see below

Comments:
04/15/14: CAT's performance today was a bit disappointing. Shares did produce a slightly new higher low but they failed to close in positive territory. We're running out of time with earnings coming up.

Earlier Comments:
Our exit target is $109.00. However, we do not have much time for CAT to perform. The company is scheduled to report earnings on April 24th and we do not want to hold over the announcement.

- Suggested Positions -

Long MAY $105 call (CAT1417E105) entry $1.52

04/08/14 triggered @ 102.35

Entry on April 08 at $102.35
Average Daily Volume = 5.9 million
Listed on April 07, 2014


Diamondback Energy, Inc. - FANG - close: 69.08 change: -1.04

Stop Loss: 67.75
Target(s): to be determined
Current Option Gain/Loss: Unopened
Time Frame: exit PRIOR to earnings in May
New Positions: Yes, see below

Comments:
04/15/14: FANG did not see any follow through on yesterday's rally thanks to a downgrade this morning. Traders did buy the dip twice near $66.90. Currently we are on the sidelines waiting for a breakout higher.

Earlier Comments:
The stock looks poised to break out past resistance near $70.00. If that happens FANG could see some short covering. The most recent data listed short interest at 37% of the small 32.5 million share float. That's plenty of fuel for a short squeeze.

We are suggesting a trigger to buy calls at $71.25. We are not setting an exit target yet but plan to exit prior to earnings in mid May.

FYI: The Point & Figure chart for FANG is bullish with an $85 target.

Trigger @ 71.25

- Suggested Positions -

buy the May $75 call (FANG1417E75)

Entry on April -- at $---.--
Average Daily Volume = 948 thousand
Listed on April 14, 2014


Gulfport Energy - GPOR - close: 73.10 change: -0.90

Stop Loss: 71.70
Target(s): 79.50
Current Option Gain/Loss: -24.6%
Time Frame: 3 to 5 weeks
New Positions: see below

Comments:
04/15/14: GPOR underperformed its peers in the energy industry today. I don't see any news today to explain the relative weakness. I warned readers to be cautious after yesterday's performance. The intraday low was $71.75, just 5 cents above our stop loss. I am not suggesting new positions.

- Suggested Positions -

Long May $75 call (GPOR1417E75) entry $3.85*

04/14/14 triggered @ 74.25

Entry on April 14 at $74.25
Average Daily Volume = 1.45 million
Listed on April 12, 2014


QUALCOMM Inc. - QCOM - close: 79.49 change: +0.35

Stop Loss: 77.40
Target(s): to be determined
Current Option Gain/Loss: - 2.1%
Time Frame: Exit PRIOR to earnings on April 23rd
New Positions: see below

Comments:
04/15/14: QCOM struggled with round-number resistance at the $80.00 level today. I would be tempted to buy calls on a breakout past $80 but we're running out of time before the company reports earnings.

Earlier Comments:
Prepare to exit prior to QCOM's earnings report on April 23rd.

- Suggested Positions -

Long MAY $80 call (QCOM1417E80) entry $1.87

04/09/14 opened on Wednesday morning.

Entry on April 09 at $79.26
Average Daily Volume = 2.0 million
Listed on April 08, 2014




PUT Play Updates

Advance Auto Parts - AAP - close: 117.20 change: +0.95

Stop Loss: 120.25
Target(s): 110.50
Current Option Gain/Loss: + 3.1%
Time Frame: exit PRIOR to earnings on May 15th
New Positions: see below

Comments:
04/15/14: Shares of AAP are hovering near technical support at the 100-dma. More conservative traders may want to lower their stop closer to the $119 level. I am not suggesting new positions at this time.

- Suggested Positions -

Long May $115 PUT (AAP1417Q115) entry $3.20

04/11/12 triggered @ 117.25

Entry on April 11 at $117.25
Average Daily Volume = 752 thousand
Listed on April 10, 2014


Avago Technologies - AVGO - close: 58.94 change: +0.12

Stop Loss: 60.35
Target(s): 53.00
Current Option Gain/Loss: -30.9%
Time Frame: 3 to 4 weeks
New Positions: see below

Comments:
04/15/14: AVGO mimicked the move in the NASDAQ today with a drop to new relative lows and then a sharp bounce into the afternoon. This could be a potential reversal. More conservative traders may want to tighten their stop loss.

Earlier Comments:
FYI: It should not be a stock-moving event but investors may want to be aware that AVGO is in the process of acquiring LSI Logic for $6.6 billion. The acquisition is expected to be completed in the first half of 2014.

FYI: The Point & Figure chart for AVGO is bearish with a $52 target.

- Suggested Positions -

Long May $57.50 PUT (AVGO1417Q57.5) entry $2.10*

04/14/14 triggered @ 58.35

Entry on April 14 at $58..5
Average Daily Volume = 2.1 million
Listed on April 12, 2014


Lumber Liquidators - LL - close: 85.64 change: +0.94

Stop Loss: 88.35
Target(s): to be determined
Current Option Gain/Loss: - 24.6%
Time Frame: exit PRIOR to earnings on April 30th
New Positions: see below

Comments:
04/15/14: The market's bounce today could be a problem for us. LL's move looks a lot like the NASDAQ's with a sharp drop to new lows that reversed midday. LL managed to outperform the major indices with a +1.1% gain by the closing bell. Unfortunately, our trigger to open bearish positions was hit at $83.80 on the way down this morning. More conservative traders may want to tighten their stops. I am not suggesting new positions at this time.

Earlier Comments:
Readers may want to use small positions because there are already a lot of bears in this name. The most recent data listed short interest at 27% of the small 24.4 million share float. That could make any bounce a volatile one.

Plan on exiting prior to LL's earnings report on April 30th. We are not setting an exit target just yet. FYI: The Point & Figure chart for LL is bearish with a $72 target.

- Suggested Positions -

Long May $80 PUT (LL1417Q80) entry $3.25*

04/15/14 triggered @ 83.80
*option entry price is an estimate since the option did not trade at the time our play was opened.

Entry on April 15 at $83.80
Average Daily Volume = 761 thousand
Listed on April 14, 2014


Lockheed Martin Corp. - LMT - close: 157.39 change: +1.57

Stop Loss: 158.25
Target(s): 146.00
Current Option Gain/Loss: -36.1%
Time Frame: exit PRIOR to earnings on April 22nd
New Positions: see below

Comments:
04/15/14: LMT's bounce managed to outperform the major indices with a +1.0% gain. If there is any follow through higher tomorrow we could see LMT hit our stop loss at $158.25. I'm worried that LMT is just going to bounce up to $160.00 and then roll over again.

Earlier Comments:
Our target is $146.00 but keep a wary eye on the $150.00 mark, which is potential round-number support.

This is a short-term trade. LMT is scheduled to report earnings on April 22nd and we do not want to hold over the announcement.

- Suggested Positions -

Long May $150 PUT (LMT1417Q15) entry $2.35*

04/12/14 triggered @ 154.50
*option entry price is an estimate since the option did not trade at the time our play was opened.

Entry on April 11 at $154.50
Average Daily Volume = 1.7 million
Listed on April 10, 2014