Option Investor
Newsletter

Daily Newsletter, Tuesday, 4/22/2014

Table of Contents

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

Market Wrap

Biotech Rebound

by Jim Brown

Click here to email Jim Brown

Thank the biotechs for Tuesday's rally as acquisition fever takes hold.

Market Statistics

The surprise announcement of multiple acquisitions and potential acquisitions sent the pharmaceutical sector soaring on expectations for more in the future.

Allergan (AGN) spiked $22 after Valeant Pharmaceuticals (VRX) and Bill Ackman's Pershing Square Management teamed up to make a hostile offer for AGN. Valeant previously offered $40 billion and was turned down. Today Valeant is offering $48.30 in cash and 0.83 VRX shares for every share of Allergan. That values AGN at $153 or $46 billion at the close on Monday. AGN closed at $141 on Monday. However, shares spiked to $164 today after VRX rallied +$9 on the announcement so that suggests VRX may have to sweeten the offer. Investors are bullish on the deal since both companies rallied strongly. Ackman owns 9.7% of Allergan.

Looking at the chart it would appear somebody knew about the pending offer a couple days before the announcement. Shares rallied from $116 to $140 over the last week. Call volume for AGN was eight times normal on Monday. You can be sure the SEC will be looking into that.

Valeant acquired more than 25 companies in 2013 and the CEO said today they expect to acquire more than 25 in 2014. This means almost every biotech/pharma company saw a bounce in their shares as the speculation surged on who would be the next target.



Also making headlines in the sector was a three way deal between GlaxcoSmithKline (GSK), Eli Lilly (LLY) and Novartis (NVS). Novartis agreed to buy GSK's cancer-drug business for $14.5 billion plus up to $1.5 billion more if certain milestones are met. Novartis agreed to sell its vaccine business to GSK for $7.1 billion plus royalties. The two companies also agreed to team up on a consumer health business where Novartis would own 36.5% of the joint venture with an expected $10 billion a year in revenue.

Novartis was not yet done. The company agreed to sell its animal health division to Eli Lilly for about $5.4 billion. Lilly has been hard hit by patent expirations and has been spending a lot of money developing new animal health drugs so the deal was a positive for Lilly in reducing competition and giving them a larger menu of offerings.

Shares of Lilly declined -$1, Novartis gained $1 and GSK rallied $2.


The musical chairs in the drug sector started the market off to the upside and we had a pretty good short squeeze rally going until late afternoon. The closing sell off knocked -50 points off the Dow to leave it with a 65 point gain. The Nasdaq benefitted from the pharma buzz and closed only -10 points off its high with a +40 point gain.

The economics continued to improve with the Richmond Fed Manufacturing Survey for April rising from -7 to +7 to put it back into expansion territory after two months in contraction. New orders were bullish with a jump to +10 after two months in contraction territory at -9. Backorders were not so bullish. Backorders rose slightly from -13 to -9 but they have been in contraction territory since last August. The employment component rose from two months at zero to +4. Expected new orders declined -9 points to 22 but still decent. Spring weather appears to have produced a strong improvement in the Richmond district. However, the Richmond Services Survey declined from +5 to +1. The prior three months of Dec-Feb averaged -1 so it was still a minor improvement. However, if you exclude retail services the headline number declined to -3 and contraction.

The Richmond Manufacturing Survey has a rocky and highly volatile past. Until a new trend develops I would not apply too much importance to the monthly moves.


Existing Home Sales for March declined for the third month to 4.59 million, down from 4.60 million. Sales are running at the slowest rate since June 2012 and are down -7.5% from March 2013. The conditions impacting sales are higher mortgage rates, higher home prices, very tight credit rules and the severe weather in Feb/Mar.

On the bright side the months of supply rose from 5.0 to 5.2 with the number of homes up +3.1% over the same period in 2013. Average prices are up +7.9% over March 2013 but that is down from +9% in February. The average sales price rose from $188,300 to $198,500. Distress sales are slowing and are not having the same impact on the market as they did in 2012-2013.


The calendar for the rest of the week is light and headlined by the New Home Sales on Wednesday and Kansas Fed Manufacturing on Thursday. The real attention will be on earnings.


More than 31% of the S&P 500 reports earnings this week. So far 20% of the S&P has already reported with 63% beating estimates, 15% meeting estimates and 22% missing expectations. The big names for Wednesday are Apple, Facebook and Boeing. Thursday is the busiest day of the week with more than 250 reports.


Netflix (NFLX) surprised last night with subscribers rising to nearly 49 million and shares rose +$24 today to close at $373. Earnings of 86 cents beat estimates by +3 cents. Revenue rose +24%. Netflix added 4.0 million subscribers in the quarter. The company said it was going to raise prices $1-$2 on new subscribers in selected regions in Q2.


Harley Davidson (HOG) posted earnings that rose +18.7% to $1.21 compared to analyst estimates of $1.07 and the comparison quarter at 99 cents. Revenue rose +11% to $1.57 billion. Motorcycle sales rose +3% to 35,730 and this was a very bad quarter for test driving motorcycles in snow, ice and rain. They reiterated guidance for shipments to rise between 7-9% for the year. Q2 shipments are expected to rise 9-15% to 92,000-97,000, up from 84,606 in Q2-2013.


Pentair (PNR) said earnings more than doubled to 73 cents and that was in line with estimates. However, revenue declined -3% to $1.73 billion and -9% in their largest division. Shares of PNR declined -7%.


After the bell Juniper (JNPR) reported earnings of 29 cents that met analyst estimates. Revenue rose +10% to $1.17 billion. The company said carrier orders were rising to accommodate an increase in Internet traffic. Phone service providers provide more than 65% of Juniper's revenue. The CEO said the company was accelerating out of the recession and "the best days are ahead of us." Shares were flat after the report.


Amgen (AMGN) reported earnings after the close that declined -25% on higher costs. Earnings of $1.87 missed estimates of $1.94. Total operating expenses rose +13%. Revenue rose +7% to $4.52 billion. Marketing costs rose sharply while prices received for drugs declined as copycat "biosimilar" drugs invade their marketplace. Research and development costs rose +17%. Sales of Enbrel, their number 2 drug, declined -5%. Shares fell -$2 after the report.


Gilead Sciences (GILD) posted earnings of $1.48 that beat estimates by 56 cents. Revenue was $5 billion including $2.27 billion for their new drug Sovaldi. Analysts were only expecting $1.13 billion for that drug. The 12 week course of treatment costs $84,000 or roughly $1,000 per pill. However, the drug cures Hep C in almost 100% of cases. About 30,000 patients have already started on the medicine. This is the fastest launch of any drug in history. It was approved for sale in December. This suggests the full year sales could be huge. Analysts now expect full year sales of Solvaldi could be near $12 billion. Chronic Hep C affects 3.2 million Americans. Investors had expected earnings to beat so the stock only gained $2 in afterhours after a +1.26 gain in regular trading. It was halted for trading for most of the afterhours session. Analysts now expect Gilead to earn close to $10 in 2015 so any reasonable PE puts the stock well over $100.


YUM Brands (YUM) posted strong earnings that rose +18% to 87 cents compared estimates of 84 cents. The company reiterated its forecast for earnings growth of at least 20% in 2014. Same store sales in China rose +9%. Sales at KFC rose +11% and Pizza Hut rose +8%. China is their largest market. This compares to McDonalds sales in China rising +6.6%. The conference call will be Wednesday morning. Shares rose +$3 to $80.20 and a new 52-week high in afterhours.


Dow component AT&T (T) reported earnings after the close and the market was disappointed. The company reported earnings of 70 cents compared to estimates of 70 cents. Revenue rose +4% to $32.5 billion. AT&T added 1,062,000 wireless subscribers. AT&T has been pushing wireless subscribers into higher end plans with larger data limits but at reduced prices. Investors were not excited. Shares declined $1 in afterhours.


Wynn Resorts (WYNN) rallied +11.65 after credit numbers from Macau suggested affluent VIP gamblers were getting around the government regulations limiting cash play in Macau. Visitation is up +8% QTD compared to 4.4% in 2013. WYNN will report earnings after the bell on Thursday.


The market rallied sharply at the open on the merger and acquisition news and a decent short squeeze was triggered. That lasted until about noon and buyers evaporated. The S&P rallied to strong resistance at 1,885 and came to a dead stop at 1,884.89. In theory we should expect to see a minor decline before we take another run at that resistance. Buyers will want to see how the market reacts to that dead stop at resistance before they add to positions.

Support is now 1,870 and 1,865 so a minor dip will find support really quickly. If we do move over 1,885 it should trigger significant short covering and that should immediately test the prior high resistance close at 1,890.90. We are very close to either a new high or a dramatic climax to the rally ahead of the sell in May cycle.


The Dow is showing a similar pattern only the January highs are at the same level as the April highs. This produces even stronger resistance at that 16,580 level. The Dow has rebounded +500 points from the April 11th low at 16,016 and that is a huge stretch for buyers to keep the rally going through strong resistance.

A triple-top reversal pattern is three equal peaks created over a 3-6 month period followed by a failure of support. All three highs should be relatively equal and well spaced to clearly define the resistance level. After the third high volume should increase to the downside as traders throw in the towel.

While nobody can ever predict in advance the potential is certainly there for the Dow. With the seasonal "sell in May" cycle only a week away we have the potential for a triple top failure. I would be very cautious on any further gains until the Dow moves well over that resistance. Support is now 16,400.


The Nasdaq benefitted greatly from the biotech rebound and acquisition speculation in the sector. The $64 question is how much higher can the biotechs push the index with solid resistance ahead. Despite the strong rebound from the 3,950 low last week the Nasdaq is still well below the relative levels seen in the Dow and S&P. The Nasdaq and the Russell 2000 are still the weakest links. Both have significant resistance well below their prior highs.

In the biotech list below ISRG was up +$11.22 at the close. After the close they reported earnings are declined from $422 to $387 and that will drag on the Nasdaq at the open. Earnings declined -77% and they cut their forecast for growth in robotic procedures. Adjusted earnings were $2.67 compared to estimates of $3.29.

Gains at the close

Real-time aftermarket numbers



After all the earnings hits and misses after the close were netted out the S&P futures are down only -1 point. I would have expected the futures to decline a little more given the hard stop at resistance but we did have more positive surprises than negative in the post close earnings.

I was surprised with the rally so far this week. I thought the charts over the weekend were bearish and evidently others did too since the short squeeze this morning was a surprise. I would remain cautious until the Dow and S&P make new highs. We could very easily rally up to those levels this week thanks to earnings and then collapse as we near May 1st.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email

 


New Option Plays

Rolling Lower

by James Brown

Click here to email James Brown


NEW DIRECTIONAL PUT PLAYS

Toyota Motor Corp. - TM - close: 108.42 change: -0.22

Stop Loss: 111.05
Target(s): 100.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
TM is in the consumer goods sector. Based in Japan, they are a major manufacturer of automobiles with major brands like Toyota, Crown, and Lexus. Auto companies had a pretty good year in 2013 as far as sales but TM's market share gains were essentially flat. At the start of the year analysts were estimating 2014 U.S. vehicles sales at 16.2 million (total sales, not just TM). That has retreated following a rough start to the year thanks to the extraordinarily cold winter.

TM's sales pace in the U.S. has been rocky, which they too blame on the weather. TM had a major scandal a few years ago over a massive recall where their Toyota vehicles had a chance to accelerate unexpectedly. They just agreed to a $1 billion settlement with the U.S. Justice Department in March this year. Already this year TM has announced two more significant recalls.

Bulls could argue that TM is doing well with sales in China. That is true. The Chinese market is now the biggest automobile market on the planet and TM has seen strong sales growth in China. Yet it does not seem to be helping the stock price.

Shares of TM are about to hit bear market territory. The stock is in a clearly bearish trend of lower highs and lower lows. The recent bounce toward the top of its bearish channel looks like an entry point to buy puts.

We are suggesting puts now, at current levels, with a stop loss at $111.05, just above the 40-dma. Our target is $100.50. However, we will plan to exit prior to TM's earnings report in May. The company has not set a date yet but we expect the announcement to be in the first half of May and will update our exit when they publish their earnings date.

FYI: The Point & Figure chart for TM is bearish with a $90 target.

- Suggested Positions -

Buy the May $105 PUT (TM1417Q105) current ask $1.06

Annotated Chart:

Weekly Chart:

Entry on April -- at $---.--
Average Daily Volume = 602 thousand
Listed on April 22, 2014



In Play Updates and Reviews

Big Caps Near Their 2014 Highs

by James Brown

Click here to email James Brown

Editor's Note:

Big cap blue chip indices like the S&P 500 and the Dow Industrials are nearing their recent highs. The oversold bounce in the NASDAQ and the Russell 2000 continues as well.

We closed CAT and QCOM ahead of their earnings report. LL hit our stop loss.


Current Portfolio:


CALL Play Updates

Adobe Systems - ADBE - close: 64.48 change: +0.18

Stop Loss: 59.45
Target(s): to be determined
Current Option Gain/Loss: - 3.1%
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
04/22/14: ADBE's bounce continues with shares up six days in a row. Yet most of today's action was sideways. Shares tagged their 30-dma intraday. I suspect ADBE will see a dip soon.

- Suggested Positions -

Long Jul $65 call (ADBE1419G65) entry $3.20

04/21/14 ADBE opened at $64.00

Entry on April 21 at $64.00
Average Daily Volume = 4.8 million
Listed on April 19, 2014


Devon Energy - DVN - close: 70.63 change: +0.13

Stop Loss: 68.75
Target(s): 74.75
Current Option Gain/Loss: -1.5%
Time Frame: exit PRIOR to earnings on May 7th
New Positions: see below

Comments:
04/22/14: DVN garnered some bullish analyst comments today and had its price target raised from $82 to $90. Traders bought the dip near support at $70.00 for the second day in a row. More conservative traders may want to adjust their stops closer to $70.00.

We will plan on exiting prior to earnings on May 7th. FYI: The Point & Figure chart for DVN is bullish with a $95 target.

- Suggested Positions -

Long May $70 call (DVN1417E70) entry $1.94*

04/17/14 triggered @ 70.35
*option entry price is an estimate since the option did not trade at the time our play was opened.

Entry on April 17 at $70.35
Average Daily Volume = 3.7 million
Listed on April 16, 2014


EOG Resources - EOG - close: 102.34 change: -1.19

Stop Loss: 99.65
Target(s): 109.00
Current Option Gain/Loss: - 3.1%
Time Frame: exit PRIOR to earnings on May 5th
New Positions: see below

Comments:
04/22/14: EOG erased yesterday's gain with some profit taking today, down -1.1%. The $102 level might be short-term support but I would look for support closer to the $100.00 level. I am not suggesting new positions at current levels.

- Suggested Positions -

Long May $105 call (EOG1417E105) entry $1.90*

04/19/14 new stop @ 99.65
04/16/14 triggered @ 101.75
*option entry price is an estimate since the option did not trade at the time our play was opened.

Entry on April 16 at $101.75
Average Daily Volume = 2.9 million
Listed on April 15, 2014


Diamondback Energy, Inc. - FANG - close: 74.26 change: -0.26

Stop Loss: 69.45
Target(s): to be determined
Current Option Gain/Loss: +58.8%
Time Frame: exit PRIOR to earnings in May
New Positions: see below

Comments:
04/22/14: Shares of FANG gapped open higher this morning after the stock had its price target raised from $77 to $93 before the bell. Unfortunately FANG gave back all of its morning gains. This almost looks like a potential short-term top. If FANG sees more profit taking tomorrow I would watch for support near $72.00.

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

- Suggested Positions -

Long May $75 call (FANG1417E75) entry $1.70*

04/21/14 new stop @ 69.45
04/19/14 new stop @ 68.75
04/16/14 triggered @ 71.25
*option entry price is an estimate since the option did not trade at the time our play was opened.

Entry on April 16 at $71.25
Average Daily Volume = 948 thousand
Listed on April 14, 2014


Gulfport Energy - GPOR - close: 73.30 change: -0.79

Stop Loss: 71.70
Target(s): 79.50
Current Option Gain/Loss: -37.6%
Time Frame: 3 to 5 weeks
New Positions: see below

Comments:
04/22/14: As a group, energy stocks were seeing some profit taking today. Yet GPOR is now down three days in a row. If shares don't bounce from short-term support near $72.00 we're going to see it hit our stop loss at $71.70 soon.

- 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


iShares Russell 2000 ETF - IWM - close: 114.62 change: +1.17

Stop Loss: 112.45
Target(s): to be determined
Current Option Gain/Loss: +27.4%
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
04/22/14: The IWM continues to push higher and is now up six days in a row. Today's rally stalled near the April 9th highs and its 100-dma. We are raising our stop loss to $112.45. More aggressive traders may want to keep their stop below $112.00 to give the IWM more room to maneuver since $112 looks like short-term support.

- Suggested Positions -

Long JUN $115 call (IWM1421F115) entry $2.37

04/22/14 new stop @ 112.45
04/21/14 new stop @ 111.45
04/16/14 triggered $ 112.15

Entry on April 16 at $112.15
Average Daily Volume = 55 million
Listed on April 15, 2014


Nu Skin Enterprises - NUS - close: 88.47 change: +3.09

Stop Loss: 79.75
Target(s): $96.50
Current Option Gain/Loss: +38.1%
Time Frame: 3 to 5 weeks
New Positions: see below

Comments:
04/22/14: NUS bounced back toward yesterday's high and its exponential 200-dma. Shares outperformed the broader market with a +3.6% gain. We are setting a bullish exit target at $96.50.

Currently our stop is at $79.75 but more conservative traders may want to consider a stop loss closer to $84.00.

Earlier Comments:
Currently the Point & Figure chart for NUS is bullish with a $102 target.

- Suggested Positions -

Long May $90 call (NUS1417E90) entry $3.04

04/22/14 set bullish exit target at $96.50
04/21/14 triggered @ 84.50

Entry on April 21 at $84.50
Average Daily Volume = 1.8 million
Listed on April 19, 2014




PUT Play Updates

Catamaran - Corp. - CTRX - close: 39.27 change: +0.46

Stop Loss: 40.65
Target(s): to be determined
Current Option Gain/Loss: -15.9%
Time Frame: Exit PRIOR to earnings on May 1st
New Positions: see below

Comments:
04/22/14: CTRX decided to bounce and added +1.1%. Technically today's move is a bullish engulfing candlestick. Yet the overall pattern remains bearish and CTRX should find resistance at its 10-dma and the $40.00 level. Wait for a new failed rally near resistance as our next entry point.

Earlier Comments:
CTRX is scheduled to earnings again on May 1st. We do not want to hold over the announcement. We're not setting at target to tonight but I would probably aim for the $35 region.

FYI: The Point & Figure chart for CTRX is bearish with a long-term $23 target.

- Suggested Positions -

Long May $40 PUT (CTRX1417Q40) entry $2.20

04/21/14 CTRX opened @ $39.06

Entry on April 21 at $39.06
Average Daily Volume = 3.3 million
Listed on April 19, 2014


Ralph Lauren Corp. - RL - close: 154.86 change: +0.94

Stop Loss: 156.60
Target(s): to be determined
Current Option Gain/Loss: Unopened
Time Frame: exit PRIOR to earnings on May 9th
New Positions: Yes, see below

Comments:
04/22/14: Shares of RL received some bullish analyst comments this morning and the stock spiked higher. It's worth noting the rally didn't get very far. RL failed to make it past $156.00. I don't see any changes from last night's new play description.

Earlier Comments:
I am suggesting readers use a trigger at $152.45 as our entry point to buy put options. If you are patient enough traders could aim for a drop toward $140. The Point & Figure chart is actually very bearish and forecasting at $112 target. We're not setting an exit target yet but plan on exiting positions prior to RL's next earnings report on May 9th.

Trigger @ 152.45

- Suggested Positions -

Buy the May $150 PUT (RL1417Q150)

Entry on April -- at $---.--
Average Daily Volume = 891 thousand
Listed on April 21, 2014



CLOSED BULLISH PLAYS

Caterpillar Inc. - CAT - close: 103.69 change: +1.05

Stop Loss: 101.40
Target(s): 109.00
Current Option Gain/Loss: +13.8%
Time Frame: exit PRIOR to earnings on April 24th
New Positions: see below

Comments:
04/22/14: CAT was kind enough to bounce for us right before we closed this trade. The plan was to exit today at the closing bell to avoid holding over earnings on April 24th. Shares did manage to breakout past short-term resistance near $103.50. We will definitely look at CAT again on Friday to see how it reacts following the earnings news.

- Suggested Positions -

MAY $105 call (CAT1417E105) entry $1.52 closed @ $1.73 (+13.8%)

04/22/14 planned exit at the close
04/21/14 new stop 101.40, prepare to exit tomorrow at the close
04/08/14 triggered @ 102.35

chart:

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


QUALCOMM Inc. - QCOM - close: 80.61 change: -0.32

Stop Loss: 80.40
Target(s): to be determined
Current Option Gain/Loss: +18.1%
Time Frame: Exit PRIOR to earnings on April 23rd
New Positions: see below

Comments:
04/22/14: Investors were in a wait and see mood ahead of QCOM's earnings tomorrow. Shares drifted lower, losing -0.39%. Our plan was to exit today at the close to avoid holding over the earnings announcement.

- Suggested Positions -

MAY $80 call (QCOM1417E80) entry $1.87 exit $2.21 (+18.1%)

04/22/14 planned exit at the close
04/21/14 prepare to exit tomorrow at the close. new stop @ 80.40
04/19/14 new stop @ 78.90
04/09/14 opened on Wednesday morning.

chart:

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


CLOSED BEARISH PLAYS

Lumber Liquidators - LL - close: 88.25 chang6: +0.95

Stop Loss: 88.35
Target(s): to be determined
Current Option Gain/Loss: - 52.3%
Time Frame: exit PRIOR to earnings on April 30th
New Positions: see below

Comments:
04/22/14: LL has not been cooperating. This morning saw shares shoot past their 10-dma and hit our stop loss at $88.35.

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.

- Suggested Positions -

May $80 PUT (LL1417Q80) entry $3.25* exit $1.55** (-52.3%)

04/22/14 stopped out
**option exit price is an estimate since the option did not trade at the time our play was closed.
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.

chart:

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