Option Investor
Newsletter

Daily Newsletter, Sunday, 6/2/2013

Table of Contents

  1. Leaps Trader Commentary
  2. Portfolio
  3. New Plays
  4. Play Updates
  5. Watch

Leaps Trader Commentary

Market Pullback Now Two Weeks Old

by James Brown

Click here to email James Brown

The month of May has finally come to a close with stocks racing lower on Friday afternoon. It choppy month for both equities and the bond market. There seem to be growing signs that the rally in stocks is starting to breakdown. Talk of the Federal Reserve potentially "tapering" its QE program continues to overshadow the market. The sell-off on Friday appeared to be exaggerated by a massive amount of sell-on-close orders for some index rebalancing. Plus there were new fears over some obscure technical pattern called the "Hindenburg Omen". Meanwhile stock rocket-ride higher in the Japanese NIKKEI index appear to be over with another sharp sell-off on Thursday. In the U.S. the volatility index surged +19% for the month. In spite of a two-week decline for the stock market it was the first positive gain for U.S. stocks in the month of May since 2009.

Economic data last week was mostly positive. However, the newest estimate on the U.S. Q1 GDP growth was a disappointment with a drop from +2.5% growth to +2.4%. The initial jobless claims were also disappointing with an up tick to 354,000, which was about 15K more than expected. The 20-city S&P Case-Shiller home price index surged +10.87% in the month of March. That was higher than expected and above the prior month's +9.3% rise. March also marked the fast pace of rising home prices since April 2006. It is interesting to note that pending home sales, looking at April data, slowed down to a +0.3% increase, which was below estimates for +1.5% growth.

The recent surge in bond yields is having an effect on mortgage rates. According to Freddie Mac, rates on a 30-year fixed mortgage rose +0.22 basis points to 3.81%. That's a one-year high for rates. If this trend of rising rates continues it will have a negative impact on real estate sales. Although there might be a short-term burst of activity as buyers rush to get a deal done before rates go much higher.

Consumer confidence and consumer sentiment numbers were making headlines. The final tally on May's University of Michigan consumer sentiment was adjusted higher from 83.7 to 84.5. That's the highest reading since July 2007. The Conference Board's consumer confidence survey rallied from 68.1 in April to 76.2 in May, which is a new five-year high. Oddly enough, even though confidence is rising, consumer spending is not. The consumer spending numbers showed a -0.2% pullback in April, which was worse than expected.

The Chicago PMI was also a bullish economic surprise for the market. Last month the Chicago PMI had plunged to a 40-month low with a contraction-level reading at 49.0. Yet one month later this survey showed a 9.7-point gain to 58.7. Not only is that the highest reading in a year, it was the biggest one-month gain in 30 years. Numbers above 50.0 indicate growth. The Chicago area is heavily influenced by the auto manufacturing industry. These big swings may reflect the automobile factories switching gears for the new models.

Looking overseas there was a lot of focus on China and Japan. There have been growing concerns that China's economy is slowing down too much. The International Monetary Fund (IMF) lowered their 2013 growth forecast from +8.0% to +7.75%. They also lowered their 2014 Chinese growth forecast from +8.2% to +7.75%. You may recall that the latest HSBC Flash PMI data for China had fallen to a seven-month low of 49.6 in May. Numbers under 50.0 indicate contraction. The official government numbers just came out and the Chinese PMI data rose from 50.6 to 50.8 in May. Most economists were expecting a drop toward 50.1. While it wasn't a big gain, the report does remain in growth territory. Of course we have to take any government report with a grain of salt since many believe the Chinese government "manages" the official numbers.

It was a cloudy week for the stock market in the "Land of the Rising Sun." The Japanese NIKKEI has continued to correct lower. Thursday's session produced another big drop with a -5.2% decline. In just eight days the NIKKEI had fallen almost -15% from its May 22nd high. Friday's session saw a decent oversold bounce but the up trend appears to be in jeopardy.

The NIKKEI threatened to breakdown under its rising 50-dma before bouncing on Friday. Below you can see a three-month chart of the NIKKEI index and a longer-term chart to show you the scope of the recent move and Japan's rally over the last several months.

chart of the Japanese NIKKEI index:

Longer-term chart of the Japanese NIKKEI index:

(chart from
StockCharts.com)

News out of Europe was relatively quiet last week. It is worth noting that the EU's unemployment rate hit a new record high of 12.2%. Italy's unemployment hit a 36-year high at 12.0%. France also had a rough week with its PPI data falling -0.9% versus estimates for a -0.2% drop. French consumer confidence fell worse than expected and French consumer spending declined -0.3% compared to +1.3% the prior month. Standard & Poor's threatened to downgrade France's credit rating if the country didn't follow through on its proposed budget cuts.

Turning back to the U.S. markets there was some interesting data on money flows. There have been 22 weeks in 2013 so far. According to one analyst on CNBC the first week of the year saw negative fund flows (investors pulling money out) and ever since there has been positive inflows into stock funds. Yet this past week saw fund inflows fall to their lowest levels of the year. The folks at Lipper research had a slightly different analysis and Lipper is saying that last week actually saw negative flows out of stock funds, marking the first week of negative flows for the year. It really doesn't matter who you believe they're both saying the same thing. Investors are putting less money to work or they're already taking money off the table, which may suggest the market's rally has topped (at least temporarily).

One of the major stories last week and for the month of May has been bond yields. The yield on a U.S. ten-year bond is up +29% for the month. According to one analyst, "you just lost two-years worth of interest in one month". It was the fourth largest percentage increase for the 10-year bond yield in 50 years.

chart of the U.S. 10-year Bond Yield:

There are very different opinions on what the collapsing bond market means for the market and the economy since rising bond yields usually means rising interest rates. One camp argues that rising rates can be interpreted as growing confidence in U.S. economic growth. Others argue that what we're seeing is a bond-market crash. Both Bank of America and Goldman Sachs are warning that the bond market could be in trouble. Goldman is forecasting yields on the 10-year note to hit 2.50% by yearend.

Alen Mattich, writing on the Wall Street Journal's Money Beat blog, is suggesting that the U.S. Federal Reserve is in a Catch-22 situation. According to Mattich, "Central banks argue that their bond purchases are meant to push down yields in order to make long term finance cheaper. But, at the same time, a sign that QE's working is rising yields."

Just in case you've been living under a rock the last couple of weeks, market pundits have been obsessed with the idea of the Fed "tapering" down their QE purchases. There has been a constant debate over whether or not any taper in QE3 would be bullish or bearish for the market. It seems that all the anguish over the Fed's future taper is premature. The Fed keeps a close eye on inflation since it is half of the organization's dual mandate. The Fed wants to avoid excessive inflation yet more than anything else they want to avoid deflation. This past week revealed that inflation continues to fall. With over 50 years of data the personal consumption expenditures inflation index saw its "core" rate fall to an all-time low of 1.05%. Thus the Fed has plenty of room to keep the QE purchases going.

Major Indices:

Thus far 2013 has been an exception year for stocks. It has been the first time since 1996 that the S&P 500 started a year with five months of gains. Looking at year to date gains (+14.3%) it's the best start to a year for the S&P 500 since 1991. Unfortunately it looks like the rally might be in trouble. The large cap index is now down two weeks in a row. Friday's close below 1635 would suggest the next stop for the S&P 500 could be support near 1600 and its simple 50-dma.

Investors should not be too surprised here. The market has been overbought for weeks and we've been expecting a pullback. I would look for a bounce from support near 1600, which would keep the larger up-trend alive. A dip to 1600 would be a -5% correction from the intraday high, which is completely normal. A breakdown below 1600 would be a different story. If the S&P 500 breaks 1600 that might suggest a drop toward support near 1540 or even 1500. A -10% correction from the intraday high would be 1518.

If somehow the S&P 500 reverses higher from here there could be short-term resistance in the 1650-1660 zone and then likely resistance at the intraday high near 1685. The trend of higher highs would suggest a potential run to 1700.

chart of the S&P 500 index:

chart of the S&P 500 index:

The NASDAQ held up reasonably well. The index only lost -0.9% for the week and is up +14.4% year to date. It is down two weeks in a row, but the NASDAQ had its best May since 2005.

In spite of churning sideways for two weeks the NASDAQ still looks overbought. Furthermore this last week has created a bearish engulfing candlestick reversal pattern on the weekly chart. I would not be surprised to see a correction back toward the 3300 area.

May's intraday high was 3532. A simple -5% correction would mean a dip to 3355.

chart of the NASDAQ Composite index:

Believe it or not but the small cap Russell 2000 index had the best performance among the major indices with a -0.01% decline. Year to date the $RUT is up +15.8%. Unfortunately, these numbers don't tell the whole story. The action this past week in the $RUT looks like a potential short-term bearish double top pattern. I suspect we're going to see the $RUT pullback toward support near the March highs in the 950 area.

chart of the Russell 2000 index



Economic Data & Event Calendar

It's the first week of the month and that usually means a lot of economic data. The ISM on Monday, ADP employment report and Fed Beige Book on Wednesday will all be closely watched. Of course the big report for the week is Friday's nonfarm payrolls (jobs) report. Economists are expecting +165,000 new jobs, which would meet the same pace as April's jobs number.

Economic and Event Calendar

- Monday, June 03 -
Eurozone PMI data
vehicle sales
ISM index
construction spending

- Tuesday, June 04 -
Australian GDP

- Wednesday, June 05 -
ADP Employment Change report (for May)
factory orders
ISM services
Federal Reserve Beige Book report
Eurozone Services PMI

- Thursday, June 06 -
Weekly Initial Jobless Claims
European Central Bank (ECB) interest rate decision
Bank of England interest rate decision

- Friday, June 07 -
nonfarm payrolls (jobs) report for May
unemployment rate

Additional Events to be aware of:

September - U.S. debt ceiling deadline

The Week Ahead:

Previously the path of least resistance for the market was higher. That may no longer be the case. Do you recall a few weeks ago how market analysts were comparing this year's rally to the bull-market days of the mid 1990s? I find it odd that there seem to be a growing number of comparisons to 2007. The U.S. stock market last peaked back in 2007. The rally stalled in July 2007, there was a summer correction lower, and then stocks rallied again before peaking in October 2007 (for the S&P 500 index). This was just prior to an 18-month bear-market that cut stocks in half.

Now consider the following. Margin debt at the NYSE has exceeded the all-time high that was set in July 2007. That means investors are leveraged up with lots of margin if stocks reverse quickly they could face margin calls. The consumer confidence and consumer sentiment numbers are hitting levels not seen since 2007 (or 2008). Yet consumer spending is falling. There appears to be a disconnect here. Stock buybacks are set to double from last year and they are poised to exceed the all-time highs from... you guessed it: 2007. Two months ago, March 2013, the volatility index (VIX) hit lows not seen since early 2007. The Market Vane investor sentiment readings have hit bullish levels not seen since June, 2007. I do not want to sound like some crazy chicken little calling for a market crash but this evidence should make an investor pause.

It is also worth noting that the trailing P/E on the S&P 500 just hit 16x earnings for the first time in over three years. Stock valuations are getting richer. Another investor sentiment hitting extremes is the number of net speculative long positions in S&P futures is approaching record highs.

I also want to mention the Hindenburg Omen again. It's a very arcane and little known technical warning signal. I am not claiming it has any relevance here but the fact that it's a topic of conversation might suggest that traders are fearful that the market's rally has stalled and they're looking for explanations. Or maybe they're looking for an excuse to sell. You know that if the market needs an excuse it will find one.

Another challenge for the market could be Japan. More specifically a currency war that may have been started with Japan's record-breaking QE program. This is more of a longer-term concern than a short-term worry. You might recall earlier this spring there were several warnings about the prospect of a currency war. In April of this year Japan embarked on a QE program to double its money supply and try and raise the rate of inflation to 2%. Their plan is a $1.4 trillion QE program, which includes buying Japanese government bonds and equity ETFs. This plan is 60% larger than the Fed's QE3.

Unfortunately, there is a challenge with this plan. Japan is trying to raise the pace of inflation. Yet inflation erodes the value of bonds. Thus, investors have naturally started selling their Japanese bonds to avoid losing money. Falling prices raise bond yields. Rising bond yields raise interest rates. Rising interest rates will crush Japan's ability to pay the interest on its debt. Japan's debt to GDP ratio is 245%. Currently almost 25% of Japan's annual budget goes to paying interest on its debt and that's with an interest rate of 0.85%. If interest rates rise too far it will outpace the country's ability to pay the interest on its debt.

How can Japan prevent interest rates from rising? They will have to have the Bank of Japan buy more and more government bonds. This is essentially monetizing their debt. It will also make their currency worth less and less. As the Japanese yen falls in value it makes their exports cheaper. Other countries trying to compete with Japan on the global market will also try and defend their exports by devaluing their currencies. Thus we face the risk of a currency war. By the way, the U.S. QE program is not much different but our official debt to GDP ratio isn't as bad as Japan's. Yet any significant rise in interest rates is going to multiply the size of U.S. debt service payments, just like Japan.

Since we are on the topic of war, there seems to be a potential proxy war evolving in Syria. As you know Syria is in the grips of a civil war. This past week there were headlines that Russia was sending Syrian President Bashar Assad's regime some high-tech surface to air missiles. Israel has vowed to destroy these missiles to prevent them from falling into terrorist hands who would like to use them against Israel. Israel has already struck twice inside Syria. Assad has promised that if Israel does it again he will retaliate. The U.S. has considered sending arms to the Syrian rebels for weeks. The latest news is Britain has announced plans to provide arms to the rebels. Russia has responded by upping the ante and is sending MiGs (war planes) to Assad's regime. It's clear that the Syria civil war has had little impact on the rise of global stock markets. However, if the bigger players start getting involved there is a danger of escalation and that could see an impact on investor sentiment.

In summary, short-term the market looks poised for more profit taking. We've been expecting a market correction. Maybe it's finally here. I suspect that a dip to 1600 on the S&P 500 will be met with buyers. If it breaks 1600 then I would turn more bearish. I am still bullish on stocks through yearend but there could be a -5% to -10% pullback in the meantime. I wouldn't rush to buy the dip but you can definitely prepare and wait for your investment candidates to pullback to support before launching new positions.

James


Portfolio

Portfolio Update

by James Brown

Click here to email James Brown


Current Portfolio


Portfolio Comments:

The U.S. stock market is down two weeks in a row. There seem to be a growing number of signals that the market is poised for a pullback. We've been waiting for a correction, which would be healthy for the market.

I am suggesting investors double check their stop loss placement. I am turning cautious on a few of our trades. We want to exit our BBBY, DLTR, and MRVL immediately on Monday morning (June 3rd).

There are no stop loss changes tonight.

Disclaimer: At any given time the author may have positions in any or all of any companies mentioned in the Leaps Newsletter.

--Position Summary Table--
Table lists Directional CALL or PUT/LEAPS only.
Insurance puts, if applicable, are not shown.

Red symbol/name represents a play or option position exited or closed this week.




New Plays

Poised to Pullback?

by James Brown

Click here to email James Brown


- New Trades -


Editor's Note:

(June 01, 2013)

Has the market correction finally arrived? It feels like we've been waiting for a pullback for a long time. I expected the market to peak in the second half of April or the first half of May. It looks like I was a couple of weeks off. Of course the overall trend is still higher. The rally may not be over yet.

Overall we do not want to chase this market. Stocks always correct eventually. With what looks like an imminent pullback we do not want to launch positions tonight. We are adding three new candidates to the watch list. Plus, I have narrowed the radar list of candidates again.


Radar Screen:
Here is a list of stocks on my radar screen. These have potential to be LEAPS trades down the road if the right entry point presents itself:

CBI, M, UNP, TJX, PNRA, SBUX, GRPN, CY, NKE, UA, WFR, GS, ODFL, JNJ, BIDU, HD, TM, AXP,


Play Updates

Buckle Your Seat Belt

by James Brown

Click here to email James Brown

Editor's Note:

Investors may want to buckle their seat belts. Volatility is rising with the VIX index up +30% from its lows just two weeks ago. The market looks vulnerable to profit taking as we approach summer.

We did not have any closed trades this week. However, I am suggesting that we exit BBBY, DLTR, and our MRVL trades on Monday morning, June 3rd, at the opening bell.

Investors may want to take profits early on our Ford (F) trade.


Closed Plays



None. No closed plays this week.




Play Updates


Bank of America - BAC - close: 13.66

Comments:
06/01/13: Financials have continued to outperform the broader market. Investors are counting on a widening yield spread as interest rates increase to help banks become more profitable. Unfortunately for BAC the stock did hit new 52-week highs but it is struggling with a trend of higher highs and can't seem to breakout past the trend line.

I am still expecting a pullback. Once BAC sees a correction it could provide us another entry point.

More conservative investors with the 2014 calls may want to take profits now since the bid has hit 70 cents (+59%).

- Suggested Positions -
MAR 18, 2013 - entry price on BAC @ 12.29, option @ 0.44
symbol: BAC1418a15 2014 JAN $15 call - current bid/ask $0.70/0.71

- or -

MAR 18, 2013 - entry price on BAC @ 12.29, option @ 1.13
symbol: BAC1517a15 2015 JAN $15 call - current bid/ask $1.55/1.58

05/04/13 BAC did not participate in the market's rally this past week. Investors should turn more defensive here.

Current Target:$ 18.00
Current Stop loss: 10.90
Play Entered on: 03/18/13

Originally listed on the Watch List: 03/09/13


Bed Bath & Beyond - BBBY - close: 68.25

Comments:
06/01/13: Both consumer sentiment and consumer confidence are hitting multi-year highs. That should be bullish for retail-related stocks. Yet consumer spending actually went down in the latest report. There appears to be a disconnect between consumer attitudes and their wallet.

BBBY has been struggling with resistance near $70.00. I am longer-term bullish here but I strongly suspect BBBY will correct lower and could dip toward $65.00 or possibly toward the $62.50 zone. Therefore I am suggesting we go ahead and exit immediately on Monday morning, June 3rd, to lock in gains. We can re-visit BBBY after it's corrected lower as a potential entry point for a new trade.

- Suggested Positions -
MAR 21, 2013 - entry price on BBBY @ 63.06, option @ 5.20
symbol: BBBY1418a65 2014 JAN $65 call - current bid/ask $7.40/7.50

06/01/13 prepare to exit immediately on Monday, June 3rd
05/18/13 BBBY could be poised for a painful pullback here.
05/11/13 new stop loss @ 64.65
05/04/13 new stop loss @ 63.75
04/13/13 new stop loss @ 62.25
03/30/13 Nimble traders could exit now (for a small profit) and re-enter positions on a pullback.
03/21/13 trade opens with BBBY opening at $63.06
03/20/13 BBBY meets our entry requirement (close over $62.50) with a close at $63.34

Current Target:$ 74.50
Current Stop loss: 64.65
Play Entered on: 03/21/13
Originally listed on the Watch List: 03/16/13


Dollar Tree, Inc. - DLTR - close: 48.04

Comments:
06/01/13: My comments in the BBBY update about retail and consumers apply to DLTR as well. It proved to be a bearish week for DLTR. The stock failed at the $51.00 level on Tuesday (2nd time in three days) and then has declined every day since. Friday's session left DLTR breaking down below technical support at its 50-dma. Plus, the weekly performance has created a huge bearish engulfing candlestick reversal pattern on DLTR's weekly chart. It looks like a correction is imminent.

I am suggesting an immediate exit on Monday morning before our winning trade turns into a losing trade. Like BBBY, I am still longer-term bullish, but we can re-visit DLTR after its had corrected.

- Suggested Positions -
FEB 28, 2013 - entry price on DLTR @ 45.25, option @ 4.76
symbol:DLTR1418a45 2014 JAN $45 call - current bid/ask $ 5.90/5.60

06/01/13 prepare to exit immediately on Monday morning
05/18/13 Readers may want to take profits prior to the earnings report
04/13/13 new stop loss @ 44.75
03/30/13 new stop loss @ 43.45
More conservative investors might want to take profits as DLTR moves into the $49-50 zone.
03/16/13 new stop loss @ 41.40
02/28/13 trade opened following gap higher, above our trigger

Current Target: $53.50
Current Stop loss: 44.75
Play Entered on: 02/28/13
Originally listed on the Watch List: 02/23/13


Ford Motor Co. - F - close: 15.68

Comments:
06/01/13: Ford resumed its up trend last week with a breakout to new 18-month highs. Although it looks like the stock has found new resistance near $16.00, which has been a lid on the stock these last two sessions.

If the stock market corrects lower I do expect Ford will follow and that could mean a pullback toward the $14.00 area, which should be support. If you don't want to endure that move then I suggest you lock in profits now with the bid on our 2015 calls at $2.34 (+91.8%).

We are leaving the trade active but I am adjusting our long-term target to $17.75.

- Suggested Positions -
(closed the 2014 calls on May 20th, at the open)
APR 29, 2013 - entry price on F @ 13.73, option @ 0.60
symbol: F1418a15 2014 JAN $15 call - exit $1.18 (+96.6%)

- or -

APR 29, 2013 - entry price on F @ 13.73, option @ 1.22
symbol: F1517a15 2015 JAN $15 call - current bid/ask $ 2.34/2.39

06/01/13 investors may want to exit our 2015 calls now with a bid at $2.34 (+91.8%)
06/01/13 adjust long-term target to $17.75
05/20/13 closed the 2014 calls at the open. Option @ +96.6%
05/18/13 prepare to exit the 2014 calls on Monday, May 20th
05/18/13 new stop loss @ 13.40

Current Target:$ 17.75
Current Stop loss: 13.40
Play Entered on: 04/29/13
Originally listed on the Watch List: 04/20/13


Honeywell Intl. - HON - close: 78.46

Comments:
06/01/13: Just like the major indices shares of HON have posted a loss two weeks in a row. The stock's technical momentum indicators are crossed into bearish signals. HON looks poised to breakdown under the $78.00 level soon. I expect shares to correct lower toward what should be support near the $75.00 mark. No new positions at this time. We will re-evaluate after the pullback.

Earlier Comments:
Let's keep our position size small to start.

- Suggested Positions -
(closed the 2014 calls on May 20th at the open)
MAY 07, 2013 - entry price on HON @ 76.20, option @ 2.68
symbol: HON1418a80 2014 JAN $80 call - exit $5.10 (+90.2%)

- or -

MAY 07, 2013 - entry price on HON @ 76.20, option @ 4.10
symbol: HON1517a85 2015 JAN $85 call - current bid/ask $ 5.50/5.75

05/20/13 closed the 2014 calls at the open. option @ +90.2%
05/18/13 prepare to exit 2014 Jan. calls immediately on Monday, May 20th
05/18/13 new stop loss @ 74.50
05/07/13 Our trade opens
05/06/13 HON meets our entry requirement with a close above $76.00

Current Target:$ 95.00
Current Stop loss: 74.50
Play Entered on: 05/07/13
Originally listed on the Watch List: 05/04/13


Intel Corp. - INTC - close: 24.28

Comments:
06/01/13: The SOX semiconductor index managed to post a gain for the week and tag a new 52-week high on an intraday basis. INTC was helping with a slow and steady drift higher. INTC is trying to breakout past resistance near $24.50, which has been an obstacle for three weeks now.

If INTC does correct lower I would look for a pullback into the $23.00-22.00 zone.

Earlier Comments:
Our long-term target is $26.50 but we may have to exit our 2014 calls before then.

- Suggested Positions -
APR 24, 2013 - entry price on INTC @ 23.28, option @ 0.89
symbol:INTC1418a25 2014 JAN $25 call - current bid/ask $ 1.23/1.25

- or -

APR 24, 2013 - entry price on INTC @ 23.28, option @ 1.74
symbol:INTC1517a25 2015 JAN $25 call - current bid/ask $ 2.10/2.12

05/18/13 The rally has stalled. INTC might correct lower soon
05/11/13 new stop loss @ 21.90

Current Target: $26.50
Current Stop loss: 21.90
Play Entered on: 04/24/13
Originally listed on the Watch List: 04/20/13


The Coca-Cola Company - KO - close: 39.99

Comments:
06/01/13: Defensive names and traditional dividend trades like KO have been underperforming this past week. The stock got crushed with a three-day plunge back toward round-number support at $40.00. It was the worst week in months. I cautioned readers last week to expect a pullback.

KO should find support near at $40.00. If this level breaks then KO will hit our stop loss at $39.65.

- Suggested Positions -
(closed 2014 calls on April 1st, 2013 at the open)
FEB 12, 2013 - entry price on KO @ 38.05, option @ 1.01
symbol: KO1418a40 2014 JAN $40 call - exit $1.97 (+95.0%)

- or -

FEB 12, 2013 - entry price on KO @ 38.05, option @ 1.75
symbol: KO1517a40 2015 JAN $40 call - current bid/ask $3.55/3.65

05/25/13 adjust long-term target to $46.00
04/20/13 new stop loss @ 39.65, readers may want to take profits now.
04/01/13 exited 2014 calls at the open. Option @ $1.97 (+95.0%)
03/30/13 prepare to exit our 2014 Jan $40 calls on Monday, April 1st, 2013 at the opening bell to lock in gains. Current bid is $2.09.
03/30/13 new stop loss @ 38.25
03/23/13 new stop loss @ 37.65
Our 2014 calls have almost doubled and readers may want to take profits early right now

Current Target: $46.00
Current Stop loss: 39.65
Play Entered on: 02/12/13
Originally listed on the Watch List: 02/09/13


Lowe's Companies - LOW - close: 42.11

Comments:
06/01/13: LOW's annual meeting came and went and the stock didn't see any fireworks. Actually shares have been churning sideways for two weeks and look poised to correct lower. Last week's performance has created a bearish engulfing candlestick reversal pattern on the weekly chart. I am expecting LOW to decline toward $40.00, which should be support.

Currently our stop loss is at $39.00. More conservative investors could raise that closer to $40.00. More aggressive traders may want to move their stop below the simple 100-dma, which was support back in April.

- Suggested Positions -
MAY 07, 2013 - entry price on LOW @ 40.87, option @ 1.57
symbol: LOW1418a45 2014 JAN $45 call - current bid/ask $ 1.80/1.87

- or -

MAY 07, 2013 - entry price on LOW @ 40.87, option @ 3.52
symbol: LOW1517a45 2015 JAN $45 call - current bid/ask $ 4.05/4.25

05/22/13 LOW reported earnings and missed estimates.
05/18/13 new stop loss @ 39.00, LOW could see a pullback after its earnings report
05/07/13 Our trade opens.
05/06/13 LOW meets our entry requirement with a close above $40.25

Current Target: $49.50
Current Stop loss: 39.00
Play Entered on: 05/07/13
Originally listed on the Watch List: 05/04/13


Marvell Technology - MRVL - close: 10.85

Comments:
06/01/13: Ouch! MRVL underperformed the market and its peers with a -4.3% decline for the week. If you look at the weekly chart the stock has created what appears to be a three-candle bearish reversal pattern. It is possible that MRVL bounces off its 50-dma and 300-dma that are converging in the $10.65 area. However, I am suggesting we cut our losses immediately and exit positions on Monday morning.

- Suggested *Small* Positions -
MAY 13, 2013 - entry price on MRVL @ 11.25, option @ 0.78
symbol: MRVL1418a13 2014 JAN $13 call - current bid/ask $0.58/0.61

- or -

MAY 13, 2013 - entry price on MRVL @ 11.25, option @ 0.97
symbol: MRVL1517a15 2015 JAN $15 call - current bid/ask $0.80/0.85

06/01/13 MRVL is not cooperating. Prepare to exit immediately on Monday morning, June 3rd.

Current Target: $15.00
Current Stop loss: 10.25
Play Entered on: 05/13/13
Originally listed on the Watch List: 05/04/13


NetApp, Inc. - NTAP - close: 37.53

Comments:
06/01/13: Hmm... I am cautious on our NTAP trade. The middle of May was very volatile for the stock. Shares rallied on Tuesday, May 28th but then spent the rest of the week drifting sideways under the $38 level. I am not suggesting new positions. If NTAP breaks support at $36.00 it will likely fall quickly to the next support level at $35.00. Beyond that NTAP will hit our stop loss at $34.90.

Earlier Comments:
FYI: NTAP's point & figure chart is bullish with a $58 target.

- Suggested *Small* Positions -
MAY 17, 2013 - entry price on NTAP @ 38.93, option @ 3.35
symbol: NTAP1418a40 2014 JAN $40 call - current bid/ask $2.36/2.47

- or -

MAY 17, 2013 - entry price on NTAP @ 38.93, option @ 5.20
symbol: NTAP1517a40 2015 JAN $40 call - current bid/ask $4.00/4.30

05/18/13 adjust stop loss to $34.90
05/17/13 trade opens on NTAP's gap open higher at $38.93
05/16/13 NTAP met our entry requirement with a close above $37.15

Current Target: $44.75
Current Stop loss: 34.90
Play Entered on: 05/17/13
Originally listed on the Watch List: 05/11/13


U.S. Oil (ETF) - USO - close: 32.61

Comments:
06/01/13: The USO spent most of May churning sideways in the $32.50-34.50 zone. Yet it finally looks like this oil ETF is about to resume the longer-term trend lower. You could almost argue that the USO has created a bearish head-and-shoulders pattern that is now forecasting a drop toward $30.50.

I am not suggesting new positions. Currently our stop loss is a close above $34.50 (exit the next morning).

NOTE: Right now this is a put play with 2013 September puts.

Earlier Comments:
There is still a significant risk that Israel and Iran eventually start shooting at each other as Israel tries to stop Iran's nuclear weapons program. If that happens oil will definitely skyrocket higher. However, no one expects any Israel/Iran conflict until late summer. Oil could plunge to new relative lows before that happens.

This is a PUT play

- Suggested Positions -
APR 15, 2013 - entry price on USO @ 31.94, option @ 1.39
symbol: USO1321u30 2013 SEP $30 PUT - current bid/ask $ 0.79/ 0.81

05/18/13 adjust stop loss strategy to: if we see the USO close above $34.50, then exit immediately the next day!

Current Target:$ 29.50
Current Stop loss: see above
Play Entered on: 04/15/13
Originally listed on the Watch List: 04/06/13


Wal-Mart Stores - WMT - close: 74.84

Comments:
06/01/13: Bingo! I warned readers last week that WMT would likely correct lower into the $75-74 zone. The bounce failed at $78 near a few moving averages and WMT reversed into a three-day plunge. I am expecting WMT to find some support near $74.00. If the decline doesn't stop then WMT will hit our stop loss at $73.45.

- Suggested Positions -
(exited 2014 Jan. $75 calls on Monday, April 29th, 2013)
MAR 05, 2013 - entry price on WMT @ 73.47, option @ 3.10
symbol: WMT1418a75 2014 JAN $75 call - exit $6.05*(+95.1%)

- or -

MAR 05, 2013 - entry price on WMT @ 73.47, option @ 2.97
symbol: WMT1517a80 2015 JAN $80 call - current bid/ask $ 3.90/4.05

06/01/13 WMT has pulled back just as expected.
05/16/13 WMT reports earnings that miss estimates, miss revenues, and guides lower.
05/11/13 adjust exit target to $89.00.
04/29/13 planned exit for 2014 calls
*exit price is an estimate. The option did not trade when we closed this part of the play.
04/27/13 prepare to exit our 2014 calls immediately on Monday morning (04/29/13)
04/13/13 new stop loss @ 73.45
04/06/13 new stop loss @ 71.40
03/30/13 new stop loss @ 69.45

Current Target: $89.00
Current Stop loss: 73.45
Play Entered on: 03/05/13
Originally listed on the Watch List: 02/02/13


Watch

Insurance, Entertainment, & Autos

by James Brown

Click here to email James Brown


New Watch List Entries

AIG - Amer. Intl. Group

DIS - Walt Disney

GM - General Motors


Active Watch List Candidates

C - Citigroup Inc

CS - Credit Suisse

EL - The Est

JPM - JPMorgan Chase & Co

V - Visa

WDC - Western Digital Corp


Dropped Watch List Entries

None.



New Watch List Candidates:


American Intl. Group - AIG - close: 44.46

Company Info

AIG is another stock in the financial sector except this company focuses on insurance. The long-term trend is up. Yet short-term the stock looks poised for a pullback. The pullback from last week's high appears to be a bearish double top. I am expecting AIG to correct lower into the $40.00-37.00 zone.

We are adding AIG as a watch list candidate with an entry trigger to buy the dip at $38.50. If triggered at $38.50 we'll use a stop loss at $34.75. Our long-term target is the $45-50 zone.

Buy-the-Dip trigger: $38.50, stop loss @ 34.75

BUY the 2014 Jan $45 call (AIG1418a45) current ask $4.30

- or -

BUY the 2015 Jan $50 call (AIG1517a50) current ask $5.60

Chart of AIG:

Originally listed on the Watch List: 06/01/13


Walt Disney - DIS - close: 63.08

Company Info

DIS is a media and entertainment giant. They own and operate TV networks, a radio network, a movie studio, and an amusement park empire. Shares have been a consistent winner for months. Yet it looks like the rally peaked a couple of weeks ago. We want to be ready to buy the dip but I suspect there is still more profit taking ahead.

Use an entry trigger to buy calls on a dip at $57.00. If triggered we'll use a stop loss at $53.75. Our long-term target is the $75-80 zone.

Buy-the-Dip trigger: $57.00, stop @ 53.75

BUY the 2014 Jan $65 call (DIS1418a65) current ask $3.65

- or -

BUY the 2015 Jan $65 call (DIS1418a65) current ask $6.70

Chart of DIS:

Originally listed on the Watch List: 06/01/13


General Motors - GM - close: 33.89

Company Info

Investors have been bullish on the auto makers. The industry is expected to sell 15.0 million cars this year. Bullish expectations have pushed shares of GM and F to new 18-month highs. We want to hop on board but we don't want to chase the rally. With the stock market looking like it's about to correct lower we've got eyes on a buy-the-dip trade for GM.

Use a buy-the-dip trigger at $30.00 to launch call positions on GM. If triggered we'll use a stop loss at $27.75. Our long-term target is the $36-40 zone.

Buy-the-Dip trigger: $30.00, stop @ 27.75

BUY the 2014 Jan $35 call (GM1418a35) current ask $2.72

BUY the 2015 Jan $35 call (GM1517a35) current ask $4.90

Chart of GM:

Originally listed on the Watch List: 06/01/13


Active Watch List Candidates:



Citigroup, Inc. - C - close: 51.99

Comments:
06/01/13: The financial sector continues to show relative strength. Yet the banking stocks will not be immune to a market correction lower. I do not see any changes from my prior comments. We want to take advantage of any profit taking and be ready to buy the dip.

I suspect that Citigroup will find support near $45.00 and its 100-dma. I am suggesting a buy-the-dip trigger at $46.00 and we'll use a stop loss at $42.40. If triggered we want to start with small positions. Our long-term target is $59.00.

Buy-the-Dip trigger: $46.00, stop loss @ 42.40

BUY the 2014 Jan $50 call (C1418a50)

- or -

BUY the 2015 Jan $55 call (C1517a55)

Originally listed on the Watch List: 05/25/13


Credit Suisse Group - CS - close: 29.44

Comments:
06/01/13: Shares of CS are holding up pretty well. The stock did manage a gain for the week. Yet shares remain below resistance in the $30.00-30.50 zone. I am adjusting our entry point strategy. Wait for CS to close above $30.75 before initiating positions the next morning.

Earlier Comments:
If the stock closes above our trigger we can buy calls the next day with a stop loss at $27.75. More conservative investors may want to use a stop closer to $29.00 instead. We do want to keep our position size small since I consider this a more aggressive entry point given the market's major indices look over extended.

If triggered our long-term target is the $37.50-40.00 zone. The Point & Figure chart has a long-term target of $57.50.

Breakout trigger: Wait for a close above $30.75, then buy calls the next day
Use a stop loss at $27.75

BUY the 2014 Jan $33 call (CS1418a33)

- or -

BUY the 2015 Jan $35 call (CS1517a35)

06/01/13 adjust entry point: wait for a close above $30.75

Originally listed on the Watch List: 05/18/13


The Est - EL - close: 67.78

Comments:
06/01/13: We have been waiting for a pullback in shares of EL. It looks like the correction has begun. The stock underperformed the market last week. I am expecting a dip to $65.00, a level that should be support. Please note that I am adjusting our entry point to buy calls on a dip at $65.00. I am also adding the 2015 calls as an alternative trade.

Earlier Comments:
Currently the point & figure chart is bullish with a $93 target. We want to keep our position size small to limit our risk.

Buy-the-dip strategy at $65.00, stop loss at $62.25

BUY the 2014 Jan $75 call (EL1418A75) current ask $2.55

- or - BUY the 2015 Jan $75 call (EL1517A75) current ask $2.55

06/01/13 adjust the entry trigger to $65.00 (from 65.50)
add the 2015 calls options
05/18/13 strategy change: switch entry point to buy-the-dip at $65.50, move the stop loss to $62.25. Move the option strike to 2014 Jan $75 call

Originally listed on the Watch List: 05/04/13


JPMorgan Chase & Co. - JPM - close: 54.59

Comments:
06/01/13: After an impressive four-week rally it looks like JPM might be running out of gas. Shares may have just reversed at the $56.00 level. I am expecting a correction back toward $50.00, which should be significant support.

We want to be ready to buy calls on a dip near support. I am suggesting a buy-the-dip trigger at $50.25. If triggered we will use a stop loss at $47.40. Our long-term target is $64.00.

Buy-the-Dip trigger: $50.25, stop 47.40

BUY the 2014 Jan $55 call (JPM1418a55)

- or -

BUY the 2015 Jan $55 call (JPM1517a55)

Originally listed on the Watch List: 05/25/13


Visa Inc. - V - close: 178.14

Comments:
06/01/13: Visa's pullback last week was pretty mild. I am still expecting a correction toward the $170.00 level. We want to buy a dip at $171.00. If we are triggered at $171.00 I am suggesting a stop loss at $164.75. Our long-term target is $198.50.

Buy-the-Dip trigger: $171.00

BUY the 2014 Jan $180 call (V1418A180)

- or -

BUY the 2015 Jan $200 call (V1517A200)

Originally listed on the Watch List: 05/11/13


Western Digital Corp. - WDC - close: 63.32

Comments:
06/01/13: WDC continues to impress with another gain. The stock has extended its gains to six weeks in a row. We want to buy calls on a correction.

I am suggesting we wait and buy a dip at $55.00. If WDC hits our buy-the-dip trigger at $55.00 our long-term target is $70.00. The Point & Figure chart is currently forecasting a long-term target of $82.00. We'll start with a stop loss at $52.25.

Buy-the-Dip trigger: $55.00, stop loss @ 52.25

BUY the 2014 Jan $65 call (WDC1418a65)

- or -

BUY the 2015 Jan $70 call (WDC1517a70)

Originally listed on the Watch List: 05/18/13