Option Investor
Newsletter

Daily Newsletter, Thursday, 12/18/2014

Table of Contents

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

Market Wrap

Fed Rallies Patient Bulls

by Thomas Hughes

Click here to email Thomas Hughes
Market rally biggest one day gain in more than two years.

Introduction

Futures were soaring this morning, indicating an opening more than a percent higher than yesterday's close. The reason? FOMC use of the word patient. The Fed's stance on interest rates, the 2015 outlook and responses from Janet Yellen soothed the bulls, confirmed expectations and spurred global markets to rally.

Although Asian markets were mixed the bias was positive. European indices responded much better, climbing roughly 3% on average. Economic data also helped add to the rally. Jobless claims, Philly Fed Survey and Leading Indicators are all in line with trends, pointing to a continuation of economic recovery into next year.

Market Statistics

Futures were climbing all morning and into the open. After the opening bell stocks rose quickly, gaining more than 1.25% in the first 5 minutes. Trading remained strong throughout the morning but pulled back from the early highs for an hour or so. By lunchtime the indices were back retesting the early high, and then moving higher. The market kept on climbing throughout the afternoon and into the closing bell. The rally was strong, all 10 of the S&P sectors were in the green with gains greater than 1%. While the FOMC is the big catalyst, another factor impacting today's trading was Quadruple Witching options expiration which occurs tomorrow, a factor that will likely keep the market active going into the weekend.

Economic Calendar

The Economy

Lots of data was released today. Starting with the labor data, initial claims fell by 6,000 from an upward revision of 1,000 to 289,000. Claims are still elevated above the low, but also still below the heavily watched 300,000 line. The four week moving average also fell, by 750, to 298,750. The down trend in claims is stalled, but hanging near long term lows and in line with current labor trends. Looking forward, claims are on the decline following a seasonal peak and expected to move lower.

On an not adjusted basis, claims fell by 15.9%, slightly ahead of seasonal expectations. Surprisingly, there were massive numbers of new claims reported by PA, TX, GA and CA. Each of these states reported more than 6,000 new claims led by Pennsylvania's +12K. Declines in jobs were broad ranging from construction to waste remediation, transportation, warehousing, hospitality and administrative services.


Continuing claims fell by 147,000. This is a sharp drop in claims and comes on the heels of last week's spike. Last weeks number was revised higher, by 6,000, to 2.514 million. Continuing claims are still above the long term lows but still low and at levels consistent with the current recovery in labor.

The surprise this week is in the total claims number, and it is not a good one. This week the total number of claims was reported jumping more than 422,000 to 2.576. This is the highest level since June and could simply be reflecting the recent spike in initial and continuing claims. Seasonal factors are at play here, including staff downsizing to meet budget requirements seasonal expectations, and can be expected to impact claims for the next few weeks.


Philly Fed and Leading Indicators were both released at 10AM. Philly Fed declined from last month's peak, as expected, but remains positive. The decline to 24.5 is slightly more than expected but not a bad number as it is positive and near the highest levels for this indicator dating back to 2011. All gauges contributing to the diffusion index were positive, if down from last month. New orders showed the sharpest decline, -20 points, coming in at at 15.7. Employment also showed a decline but remains positive. The future index declined by 6 points but also remains positive and indicating optimism for next year. The number one reason for the decline in optimism is due to an expected increase in labor costs, primarily driven by health benefits which are expected to rise by more than 6%.


Leading indicators rose this month, the third month month of gains, and more than expected. The index climbed 0.6% versus expectations for a gain of 0.5%. The coincident and lagging index also increased this month, 0.4% and 0.3% respectively. A Conference Board economist was quoted in the report saying the index shows “continued moderate growth” in the US and that there are signs that wage growth is picking up. Eight of the ten indicators that comprise index contributed to the rise, aided by low oil and consumer spending.

The Oil Index

Oil prices were volatile again today, no surprise there. WTI and Brent both traded in wide ranges today, starting with a gain of more than 1% in the early market. These gains were reversed later by some remarks from Putin concerning his belief that oil could trade with a $40 handle. Additional remarks from Saudi oil minister to the effect they needed help to curb supply helped to send WTI down by down by 1.5% and Brent by more than 2.25%. This is now the fourth day WTI has traded around the $55 level and it looks like oil is consolidating here. Whether it is for a continuation or reversal is yet to be determined. The bias is still to the downside with no signs of support.

The Oil Index climbed in today's trading, gapping up at the open but then falling from resistance. Resistance is the previous low, set in October. The index has managed to rally over the past few days, perhaps on short covering, but is still in line with the 3 ½ month downtrend. Momentum is shifting and may turn bullish but that will depend on oil prices. Resistance at 1,336 could be tested further with additional resistance possible along the down trend line. Support is possible around the current low near 1,120.


The Gold Index

Gold held steady around $1195, just above technical support and below the $1,200 round number. Technical support, based on the October low, is $1188. Longer term support exists 40 points lower around $1150 and the long term low. While the long term bottom in gold may be in, where gold prices go today and tomorrow is questionable. The new message from the Fed seems to be that the economy s strong and interest rates are coming, not right away, at least 2 meetings, but be ready for them to come June/July. Gold appears to be in equilibrium right now, poised between dollar value and interest rate expectations and could go either way. This position could change by tomorrow though as we are expecting some news from the BOJ and possibly the ECB.

The Gold Index seems to be confirming that gold is at or near its bottom. The index gained over 4% today extending a bounce from support and regaining the 100% retracement of the 2008-2011 bull market in gold. This level has been in play for several weeks and is now looking pretty good as a bottom. The index has made two lows along the 100% retracement level, in tandem with shifting fundamentals and rising economic trends. The second low is higher than the first and accompanied by indicators that, while currently bearish, are still consistent with support around $60. A strong signal has yet to come but it is looking more and more like one is on the way. In the near term momentum is beginning to shift and could carry the index higher, but that will depend on central bank results tomorrow. Resistance is just above the current level along the 30 day moving average and then above that near $72.50.


In The News, Story Stocks and Earnings

Rite Aid reported earnings and revenue ahead of expectations this morning. The once ailing drug store chain has been able to enact a successful turnaround and more than double earnings. Focus on customer needs helped to increase same store sales which were a driver of the results. Company executives were able to raise guidance for the year to a range above the previous estimate. The news was met with approval in the pre-market session, causing the stock to gap up at the open. Shares of Rite Aid gained more than 12%, break several potential support levels and closing the gap formed in September.


ConAgra, a leading food products manufacturer and distributor, reported earnings in line with expectations. The company reported adjusted earnings of $0.61 after factoring a non-cash impairment charge. Company guidance for 2015 was reaffirmed but did not assure investors as improvements are not expected until 2016. The stock dropped sharply in the pre market session and gapped lower at the open. The stock began trading at the $35.50 support level, tested it, and then moved higher. The move did not recover all the loss and left the stock down by more than 1.5%.


Oracle was one of today's big winners, after reporting strong earnings after the bell yesterday. The company reported EPS well above average estimate driven largely by increases in all three of its cloud businesses. Oracle reported a 45% gain in cloud based revenue and is expecting it to continue to grow into the future. Shares of the stock surged 4% in after hours trading yesterday, held those gains this morning and into the open. The stock gapped higher at the opening bell and then kept on climbing for a gain of 10%. Oracle is now trading at new 14 year high and closing in on the all time high set during the Dot Com Bubble. Open source competitor RedHat reported after the bell today, positively surprisingly and sending that stock higher in after hours trading.


The Indices

The Fed gave the market just what it wanted. The combination of policy, outlook, verbiage and comments left no doubt that the economy is still improving, the Fed is optimistic but still data dependent, is set to raise interest rates but not for at least two meetings and that an increase in rates may come at any meeting, not just one with a press conference. The change in the use of “considerable time” to “patient” was very reassuring, letting us know that there was little chance of an increase before expected.

The Dow Jones Transportation Average was today's laggard. The transports gained a mere 1.58% compared to an average 2.3% gain posted by the rest. The move is the second of two days of strong gains following a test of support, centered on the FOMC meeting. This move confirms long term support between 8,500 and 8,750 but a retest of support may come. The indicators are mildly bullish and consistent with support. Momentum is still to the downside but it has peaked and is shifting. Stochastic is better, showing a weak bullish crossover and the early trend following signal. Targets for a rally start at 9,000, just above the current level, and go on to 9,250, 9,500 and 9,750 in the near to short term. Follow through tomorrow and into next week will be important for the bulls.


The Dow Jones Industrial Average gained 2.23% in today's action. Today's move was the biggest one seen in the blue chips for at least two years, creating a strong white candle. The index is moving up from support, has broken the short term moving average and is accompanied by indicators in line with a swing in the market. Current target is the all time near 18,000 with the possibility of 18,500 providing resistance can be broken.


The NASDAQ Composite gained 2.24%, gapping up at the open and then extending the gain. This is the second day of upward movement following the test of long term support which occurred over the last two days. The index is approaching current highs with momentum shifting to the upside. The indicators are weak but in line with the early phases of a longer term bounce. MACD is retreating from a bearish peak while stochastic is forming a weak crossover. Near term target is 4,800 near the current long term high with longer term targets significantly higher provided resistance can be broken. Support is at the short term moving average near 4,671, just below that along the 4,600 support line and again below that along the long term up trend line.


The S&P 500 led today's rally, gaining 2.4%. The broad market was supported by all ten sectors and created a strong white candle. The index is bouncing from support, along the long term trend line, and approaching the all time highs near 2,070. The index had a little trouble getting past 2,050 today but eventually wore the bears down and broke through. The indicators are the same as on the other charts, consistent with a swing in the market and in line the early phases of a trend following bounce. Bearish MACD is retreating from a peak and quickly approaching the zero line while stochastic is forming a weak bullish crossover and an early trend following signal. Near term targets are only 10 points above the current level at the all time high, with 2,100 a real possibility should resistance fall. There are multiple support lines in the 1990 to 2050 region, including the long term trend line and the should the index retreat.


The market is moving along, bouncing in line with the long term trends concurrent with an FOMC meeting and supported by underlying economic trends. It looks like the bull market is still intact and the bulls are back in action. The only thing that concerns me today is Quadruple Witching options expiration tomorrow, an event that could add volatility in either direction, but not enough to keep me out of the market.

Until then, remember the trend!

Thomas Hughes

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New Option Plays

Legal Trouble Ahead

by James Brown

Click here to email James Brown


NEW DIRECTIONAL PUT PLAYS

Arista Networks, Inc. - ANET - close: 66.77 change: -0.51

Stop Loss: 70.25
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 534 thousand
Entry on December -- at $---.--
Listed on December 18, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
ANET is in the technology sector. The company makes networking applications and cloud technology. According to company marketing materials, "Arista Networks was founded to deliver software-driven cloud networking solutions for large data center and computing environments. Arista's award-winning 10/40/100GbE switches redefine scalability, robustness, and price-performance, with over 3,000 customers and more than three million cloud networking ports deployed worldwide. At the core of Arista's platform is EOS, an advanced network operating system. Arista Networks products are available worldwide through distribution partners, systems integrators and resellers."

Shares of ANET held their IPO in June 2014 with 5.3 million shares priced at $43.00. The first trade was $55.25. The stock has been volatile but almost doubled with highs in the low $90s by September. Unfortunately for the bulls the rally has reversed.

ANET produced bearish double top near $94 in September. The stock did see a sharp pre-earnings rally before they reported results on November 6th. ANET beat estimates by 12 cents and beat the revenue estimate as well. Yet guidance was only in-line with Wall Street's estimates and traders sold the post-earnings pop. That has proved to be a new lower high.

Following its post-earnings reversal lower the company and the stock has been plagued with trouble. The stock has suffered thanks to two different lock ups expiring. November 11th was a lock up that allowed some ANET employees to sell about 50% of their stock. Then December 2nd was the 180-day lock up that allowed insiders to sell their shares (up to 53 million shares).

ANET was struggling with all of this additional supply coming to market. Then the company was hit with a massive lawsuit by networking giant Cisco Systems (CSCO)on December 5th. CSCO is a much larger rival and claims that ANET has violated patent and copyright infringement on several technologies. CSCO might have a case. ANET's CEO, Jayshree Ullal, spent fifteen years working for CSCO in its enterprise business. ANET claims that CSCO is merely trying to use the legal system to slow down a competitor.

It could take a couple of years for the legal battle to be resolved but Wall Street is turning more cautious. Since December 5th a few analysts have been lowering their price targets on ANET. Meanwhile bears are arguing that ANET is still too expensive with a P/E of 60 at current levels.

The U.S. stock market just produced its best two-day rally since 2008 and yet ANET did not participate. Instead shares faded lower. This relative weakness looks like a clear signal that the path of least resistance is lower.

Today's intraday low was $66.00. I'm suggesting a trigger to buy puts at $65.90. The $60.00 level could be round-number, psychological support but I suspect ANET could decline toward the $55 area. I want to reiterate that shares of ANET have been volatile so I'm suggesting smaller positions to limit risk.

Trigger @ $65.90 *small positions to limit risk*

- Suggested Positions -

Buy the MAR $60 PUT (ANET150320P60) current ask $4.70

Option Format: symbol-year-month-day-call-strike

Intraday Chart:

Daily Chart:



In Play Updates and Reviews

Stocks Erase Loss With Big Bounce

by James Brown

Click here to email James Brown

Editor's Note:

The market just delivered its best two-day rally in six years. The S&P has erased the prior five days of losses with an 89-point bounce.

A lot of stocks gapped open higher this morning. That made things tough for any bears looking to get out.

Both our PKG and SWKS bullish plays were triggered. GBX, a bearish play, was stopped out.


Current Portfolio:


CALL Play Updates

Packaging Corp of America - PKG - close: 79.32 change: +1.37

Stop Loss: 74.95
Target(s): To Be Determined
Current Option Gain/Loss: -10.0%
Average Daily Volume = 1.0 million
Entry on December 18 at $78.94
Listed on December 17, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
12/18/14: We were expecting PKG to rally and the plan was to buy calls at $78.55 but shares gapped open higher at $78.94 this morning. Our trade is open but investors may want to wait for a dip. It wouldn't surprise me to see PKG dip into the $78.00-78.50 area before moving higher.

Earlier Comments: December 17, 2014:
PKG is in the consumer goods sector. The company operates eight paper mills and 100 corrugated products plants and related facilities. Put it all together and PKG makes packaging products around the world.

According to company materials, "PCA is the fourth largest producer of containerboard in the United States, based on production capacity, and the third largest producer of uncoated freesheet in North America. We have approximately 13,600 employees, with operations primarily in the United States and some converting operations in Europe, Mexico and Canada."

It's been a pretty decent year for PKG earnings. Back in February they beat Wall Street estimates and guided higher. They beat estimates again in April and July. Their most recent report was October 20th. Earnings per share were only in-line with estimates at $1.26 but that is a +37% improvement from a year ago and a +8.6% improvement from the prior quarter. Revenues soared a whopping +79% to $1.52 billion, slightly above estimates. Management then raised their Q4 EPS guidance above Wall Street's estimates.

Mark W. Kowlzan, Chief Executive Officer, said, "This was our 8th consecutive quarter of record earnings driven by strong sales volume, record mill productivity, and mill cost reductions. The integration of Boise packaging continues to generate significant synergies, and operational improvements in White Papers have resulted in lower costs and higher margins."

Technically PKG looks bullish. The early 2014 high near $75.00 was resistance but the stock broke through this level in early December. Traders have since bought the dip at this level so $75 is now new support. The stock is near all-time highs. The point & figure chart is forecasting a very long-term target of $121.00.

The December 4th intraday high was $78.50. Tonight I'm suggesting a trigger to buy calls at $78.55. We are listing the April calls. More nimble traders may want to trade the January calls instead but they only have about four weeks left. There are no February or March calls available yet. After option expiration this coming Friday (December 19th) we should see more options listed.

- Suggested Positions -

Long APR $80 CALL (PKG150417C80) entry $4.00

12/18/14 triggered on gap open at $78.94, trigger was $78.55
Option Format: symbol-year-month-day-call-strike


Skyworks Solutions - SWKS - close: 73.19 change: +2.37

Stop Loss: 66.95
Target(s): To Be Determined
Current Option Gain/Loss: + 5.4%
Average Daily Volume = 3.9 million
Entry on December 18 at $73.00
Listed on December 17, 2014
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/18/14: Shares of SWKS also gapped open higher this morning. We were expecting shares to breakout and wanted to buy calls on rally at $71.55. SWKS soared today and outpaced the market's rally with a +3.3% gain. A good chunk of that gain was the gap open at $73.00.

SWKS' move today may have gotten a boost from one analyst firm upping their price target on SWKS to $90 this morning.

If you're looking for an entry point I'd consider waiting for a dip. Broken resistance in the $71.00-71.50 area should be new support.

Earlier Comments: December 17, 2014:
SWKS is part of the semiconductor industry. The SOX semiconductor index has been a strong performer this year with a +23.5% gain in 2014. Yet SWKS has outshined its peers with a +138% gain year to date.

Who is SWKS? According to the company website, "Skyworks Solutions, Inc. is an innovator of high performance analog semiconductors. Leveraging core technologies, Skyworks supports automotive, broadband, wireless infrastructure, energy management, GPS, industrial, medical, military, wireless networking, smartphone and tablet applications. The Company's portfolio includes amplifiers, attenuators, circulators, demodulators, detectors, diodes, directional couplers, front-end modules, hybrids, infrastructure RF subsystems, isolators, lighting and display solutions, mixers, modulators, optocouplers, optoisolators, phase shifters, PLLs/synthesizers/VCOs, power dividers/combiners, power management devices, receivers, switches and technical ceramics. Headquartered in Woburn, Mass., Skyworks is worldwide with engineering, manufacturing, sales and service facilities throughout Asia, Europe and North America."

SWKS is probably best known for being a component supplier for Apple's iPhones. SWKS is also supplying components to Amazon.com for that company's new Fire Phone.

SWKS soared in mid July following a better than expected earnings report. Wall Street was looking for a profit of 80 cents after SWKS guided higher to 80 cents in June. They still managed to surprise with a bottom line profit of 83 cents a share. Revenues soared almost 35% to $587 million, which was better than the $570 million estimate, up from $535 before SWKS's June guidance. SWKS management also raised their guidance going forward.

The earnings parade continued when SWKS delivered their Q4 report on November 6th. Analysts were expecting a profit of $1.08 per share. SWKS delivered $1.12. The company had already preannounced strong sales and quarterly revenues soared +50% to $718.2 million. Management then raised their guidance again (company's Q1 2015) and SWKS is forecasting earnings above Wall Street's estimates with revenues significant above prior expectations.

Since SWKS' last earnings report the stock has had a number of analysts reaffirm their bullish outlook and a few have upgraded their price targets.

Technically shares of SWKS have been building on a bullish trend of higher lows. However, the stock has been consolidating sideways the last two weeks under short-term resistance in the $71.00-71.25 area. After today's display of relative strength SWKS is setting up for a bullish breakout higher. The point & figure chart is already bullish and forecasting at $102 target.

I will warn investors that SWKS' all-time high going all the way back to February 2000 is the $78.25 area and could prove to be overhead resistance. Tonight we are suggesting a trigger to open bullish trades at $71.55.

- Suggested Positions -

Long FEB $75 CALL (SWKS150220C75) entry $4.08

12/18/14 triggered on gap open at $73.00, listed trigger was $71.55
Option Format: symbol-year-month-day-call-strike




PUT Play Updates

Arrow Electronics - ARW - close: 57.41 change: +2.05

Stop Loss: 57.75
Target(s): To Be Determined
Current Option Gain/Loss: -65.0%
Average Daily Volume = 585 thousand
Entry on December 16 at $54.75
Listed on December 13, 2014
Time Frame: Exit PRIOR to January option expiration
New Positions: see below

Comments:
12/18/14: ARW also gapped open higher this morning. Shares opened at $56.26 and then sprinted to a +3.7% gain. The intraday high was $57.67 and our stop loss is at $57.75. The $57.00 level should have been stronger resistance. More conservative traders may want to just abandon ship. If there is any follow through higher tomorrow we will see ARW hit our stop.

I'm not suggesting new positions at the moment.

Earlier Comments: December 13, 2014:
ARW is in the services sector. The company sells electronic components at the wholesale level. The company describes itself as "a global provider of products, services and solutions to industrial and commercial users of electronic components and enterprise computing solutions. Arrow serves as a supply channel partner for more than 100,000 original equipment manufacturers, contract manufacturers and commercial customers through a global network of more than 460 locations in 58 countries."

Most of this year ARW has been reporting results that beat Wall Street's bottom line estimates but they kept missing the revenue number. That changed with their Q3 results when ARW reported on October 29th. ARW managed to beat estimates on both the top and bottom line with revenues up +11% from a year ago. Management offered relatively bullish guidance. Yet the stock did not react. That appears to be the mystery.

ARW's share price performance immediately slowed down following its Q3 report. You can see on the daily chart below that ARW plunged with the market's correction in September and October. Yet while the S&P 500 lost about -10% during that pullback shares of ARW lost more than -25%. When the market started to bounce ARW followed but its rally stalled after its Q3 report. The S&P 500 and the NASDAQ continued to rally and broke out to new highs for the year. ARW was unable to follow suit. Now the stock appears to be reversing after a failed rally at round-number resistance near the $60 mark.

With the new lower high there is a good chance the weakness in ARW continues. The stock never reversed its massive sell signal on its P&F chart. Tonight we are suggesting a trigger to open bearish positions at $54.75. More aggressive traders may want to jump in earlier (like a drop under $56.00) but we would like to see ARW trade below its simple 50-dma (currently $55.22).

- Suggested Positions -

Long Jan $55 PUT (ARW150117P55) entry $2.00

12/16/14 triggered @ 54.75
Option Format: symbol-year-month-day-call-strike


CLOSED BEARISH PLAYS

The Greenbrier Companies - GBX - close: 48.80 change: +2.29

Stop Loss: 47.05
Target(s): To Be Determined
Current Option Gain/Loss: -74.9%
Average Daily Volume = 940 thousand
Entry on December 16 at $43.25
Listed on December 15, 2014
Time Frame: 3 to 6 weeks
New Positions: see below

Comments:
12/18/14: The stock market's big rally today helped fuel a +4.9% gain in shares of GBX. Our stop loss was at $47.05 but GBX gapped open higher at $48.39, immediately closing our trade.

*small positions* - Suggested Positions -

JAN $40 PUT (GBX150117P40) entry $2.15 exit $0.54 (-74.9%)

12/18/14 stopped out on gap open at $48.39, stop was $47.05
12/16/14 triggered @ 43.25
Option Format: symbol-year-month-day-call-strike

chart: