Option Investor
Newsletter

Daily Newsletter, Thursday, 9/13/2012

Table of Contents

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

Market Wrap

FOMC Delivers And Markets Exhale

by Thomas Hughes

Click here to email Thomas Hughes
The world markets have seemingly been holding their breath in anticipation of the FOMC rate decision and possible QE3. Today Big Ben Bernanke and his band of federal bank regulators came through with a new round of monetary stimulus that pleased traders and lifted stocks. The S&P 500 has made a move up and away from the resistance/support zone and looks like it has room to proceed. This exhale of relief is driven on hopes and the support of the FOMC, not on any real growth figures. Today's data confirms the ongoing trend of sluggish job growth and job market stability.

S&P 500, daily with MACD

Market breadth was very weak before the FOMC announcement with advancers lagging decliners by a small margin. Following the announcement bullish participation increased to a margin of nearly 2 : 1 of advancing stock over declining. By the end of the day the advance/decline ratio was more like 4 : 1 across the major markets.



The Asian markets were quiet over night. The much anticipated FOMC meeting kept the lid on activity. The FOMC decision and U.S. market reaction has a lot of bearing on how China's own stimulus will affect economic growth. China announced a renewed effort to help support its struggling export sector by increasing the speed in which tax rebates and other incentives are delivered to exporters.

The Australian economy came into the spot light again this week. The Pacific nation has been one area of growth in the world, driven by a robust and growing mining sector. However, the global slowdown has begun to affect this area too, causing the first dip in Australian mining employment in over 3 years. Asian markets ended mixed today. The Nikkei Average gained a small 0.39%, the Shanghai Composite shed -0.14% and the Australian ASX dropped an even -0.5%.

. The European markets were equally quiet despite their own reason to rally. Approval of the ECB's bail-out plans helped keep the European indexes at four month highs but again, they were waiting to see what happened here first before moving much higher. The Spanish government continued to drag its feet over requesting bail-out money from the ECB. The recent strength in the European equities markets and the Euro has led some in the Spanish administration to think that Spain is OK but many analysts agree Spain will need assistance, the question is just when. The broad European FTSE Index gained 0.65% today while the German DAX and the Spanish Ibex lost -0.45% and -0.7% respectively.

Futures on the U.S. equity indexes were slightly lower today ahead of the economic releases and market opening. The new unemployment data, though surprising, failed to increase bearish sentiment and supported the growing expectation of increased QE. Initial jobless claims made a surprising jump of 15,000 to a new two month high of 382,000. Analyst had been expecting a smaller gain to 370,000 but an unexpected 9,000 people displaced by hurricane Isaac helped to inflate the data. This gain is also on top of upwardly revised data from the previous week, which added an additional 2,000 people to the unemployment lines. The loss of jobs due to hurricane Isaac is an unnecessary blow to the already stagnant job market and it is uncertain how many of these jobs will be recovered. The four week moving average of initial claims also climbed this week, also making a new two month high.


Continuing and total claims for unemployment both dropped in this weeks report. Both of these figures lag the initial claims number but are less subject to revision. Continuing claims has been holding steady for several months, suggesting that it is taking folks more than one or two weeks to find new work. The total claims has actually been able to make a nice downtrend, but it is still unclear if it is because of people finding work or just getting tired of looking. Last weeks jobs data was mixed, as has been the case with all the economic data. The drop in unemployment from 8.3% to 8.1% was divergent from weak job creation numbers and revealed a diminishing job pool.



Jobs and job creation is what I need to see to really believe in an economic recovery. The economy is based on consumerism; people can not buy stuff if they don't have a job and if people are not buying stuff there is not going to be any job growth. Job creation has been below the threshold level of a “strong” economy for most of the year, discounting the spike in July.



The Producer Price Index rose 1.7% in August, mostly on higher food and fuel prices. The core number, ex food and fuel, rose a much smaller 0.2%. On a year-over-year basis the core PPI has gained 2.5%, driven by the increasing costs of food and fuel. Energy prices gained 6% in August, followed by a near 1% jump in food. Eggs and dairy, one of the earliest segments to be hit by the surge in corn prices, led the way. Cal-Maine, the U.S. leading producer of shell eggs, has performed strongly over the past few years but has been in a trading range this year. The stock encountered an early sell-off this morning but recovered post-FOMC. The stock is trading up near the top of the range and is a potential candidate for a break-out. The company has had robust revenue and earnings growth to-date and is actively growing organically and through acquisitions.

Cal Maine, daily

The oil trad was volatile today ahead of the Fed announcement. The price jumped sharply in early trading and then settled slowly back down to near even just before the release. Afterward the price jumped right back up to near $99 and a key resistance level. The Oil index traded sharply upward on the Fed announcement and hopes of increased demand, in line with oil's gain and the general market. On the long term charts the index is making a move up from the 150 day moving average and trading very near a down trend line. The index looks ripe for a breakout to upside of the trend line but still faces heavy resistance once clear.

Oil Index, weekly

Big Ben and the FOMC gave the markets what they wanted. The Fed kept its key interest rate unchanged at 0.25% and extended its pledge to keep rates low until the mid 2015. What really made the markets happy today was an increase in monetary support of the financial markets. The Fed announced an increase of MBS purchases each month of $40 billion. This brings the monthly total of Federal Reserve backed long-term bonds to $85 billion each month until the end of the year. In the statement the Fed said that additional support was needed and that the current conditions may not be enough to support job growth without further easing. The total increase in MBS purchases totals $480 billion over the next 12 months and is intended to help support the housing markets and job growth.

One thing that has really surprised me about this rally is that it is built on weaker and weaker data. The economy is getting worse and the market is going up. The fact that the FOMC decided to increase its support only proves the point that the economy is getting worse. In fact, in Bernanke's statements following the release he lowers the Fed outlook for 2012 growth, again, and said that unemployment would remain high for several years. The expectation is for the unemployment to stay elevated and slowly retreat to near 7% by mid to late 2014. Now if we could only get the politicians to act instead of making us wait until the last minute for a decision on the “fiscal cliff”.

Gold prices skyrocketed after the FOMC announced its new MBS purchasing plan. Gold climbed an impressive $37, or 2%, at first writing and ended the day near the session highs. The Gold Index, which I have been watching closely for a completion of two one of two potential patterns, has confirmed its bullish break out and double bottom reversal. The Gold Index moved in sync with the base metal and added a substantial 4.5% to yesterday's closing price. The next resistance is $225 and could be reached by November.

Gold Index, daily

Yields on the ten and thirty year U.S. treasuries climbed today but were held back by resistance. The thirty year yield is making a possible short term double top and the ten year has made a lower high.

Thirty Year U.S. Treasury

Ten Year U.S. Treasury

The market turned decidedly positive in the afternoon trading. The leading sectors were materials, consumer staples and financials. The Materials Spyder (XLB) made a break above it resistance line at $37.50. This follows a leg up and consolidation just last week and into this one. The current move could take the index up to resistance at $40.

Materials Spyder, daily

The Consumer Staples Spyder made a nice move up from its short term moving average. This index has been consolidating after a long term move upward over the last year. Today's move bring the index right up to short term resistance.

Consumer Staples, daily

The XLF made a nice break above its resistance line, accompanied by a respectable spike in volume. A look at the short term charts shows that the volume spike begins with the release of the FOMC decisions at noon and carried the index all the way through resistance. This break out could carry the XLF to $17-$18 dollar range should it prove to hold strong.

Financial Spyder, daily

The chip-makers received a downgrade today from Citi. The downgrade is based on weakened and diminishing demand and expectations for demand of PC's. Shares of Intel, the leading chip-maker, traded up today but have been in decline for the last couple of months. Intel has dropped below support and confirmed a downtrend earlier this month, following a similar move led by AMD which has hit new long term lows within the last week.

Intel, daily

AMD, daily

The semiconductor index traded up today, above its short term moving average. This one is hard to read, by itself the index looks trapped in a range and moving up to the top. Add in the performance of Intel and some others I have seen the index is high and moving contrary to them. Others in the sector have charts very similar to the SOX, stock like Texas Instruments and Applied Materials are versions of a theme. Does this mean that Intel is under-performing or leading? Is Texas Instruments the new leader in semiconductors and semiconductor sales? I think the former is true. All signs point to a slow, slowing and sluggish world and U.S. economy over the next 24 months, not good conditions for PC and chip sales.

Semiconductor Index, daily

The markets, though seemingly quiet in early trading, were actually chomping on the bit and ready to go. Traders just needed a signal and the FOMC waved a huge flag in the bull's face. The initial reaction to the news was a quick jump from flat-line to +7 on the S&P. It seemed for about 20-30 minutes the gain wasn't going to hold. After fluctuating up and down a bit trading stabilized and continued upward for the rest of the day. In spite of, and I have to say it again, diminishing outlook on 2012 and 2013 the S&P has made a text book bullish candle stick formation. The corresponding move in the SPY index tracking stock shows only a mild increase in volume, the spike is double the past thirty days average volume but only a little above average for the last year.

S&P 500, daily

The VIX has moved down to extreme low levels and has made my inner contrarian shiver. I know we like volatility to be low so the market can rally and options are cheap but this just means that a spike is on the way. A look back over the last five years shows that the VIX does not like to stay this low for long. Now the VIX has hit 14 twice within two months; I would not be surprised to see a spike up to the 25-30 range but I don't think its coming just yet. The rally has a little steam left in it but just how much is always the gamble. The long term charts of the S&P are mildly bullish and support another leg up at this time. The VIX could bob along at this low level for a few more weeks or months depending on how data and the FOMC play out.

VIX, daily

S&P 500, weekly

There is more data on the horizon, as always, and the possibilities of trading opportunities. Tomorrow CPI and core numbers come out and some important metrics on real estate are due next week. These will each provide insights into the struggling economy. Yes we know its struggling. I and you all have been hearing about it for months, quarters and years. But it is still growing some and that is what the markets are clinging to, trying to eke whatever they can out of a world with high unemployment, high sovereign debt and relaxed fiscal policies.

Economic Calendar

The adage of “trade with the trend” is an old and good one. Right now the trend is up. They call it the “the most hated rally of all time” on TV and they may be right. It is hard find a reason for the market to rally and lots of reasons not to but rally it does. Beware of pitfalls and traps and watch out for that VIX spike that is surely on the way.

Thomas Hughes


New Plays

If Not Now, then When?

by James Brown

Click here to email James Brown

Editor's Note:

The stock market has rallied to new highs on the Fed's decision. The market's move today has produced a lot of breakouts but we don't want to chase the rally.

We are adding a bearish candidate but I'll post some bullish looking symbols for your watch list.

In addition to tonight's new candidate(s), consider these stocks as possible trading ideas and watch list candidates. Many of these need to see a break past key support or resistance:

(bullish ideas) BKI, HMIN, HSTM, LGF, HCII, PCAR,


NEW BEARISH Plays

Synacor, Inc. - SYNC - close: 7.46 change: -0.16

Stop Loss: 7.70
Target(s): 6.10
Current Gain/Loss: unopened

Entry on September xx at $ xx.xx
Listed on September 13, 2011
Time Frame: 6 to 8 weeks
Average Daily Volume = 628 thousand
New Positions: Yes, see below

Company Description

Why We Like It:
SYNC is an online content provider. If a stock can't rally today when is it going to rally? Shares have been underperforming the market for weeks and especially the last few days. The stock barely budged off support near the $7.50 level today.

Yesterday's low was $7.35. I am suggesting bearish positions if shares can hit $7.30. I do consider this an aggressive, higher-risk trade. The most recent data listed short interest at 15% of the very small 8.0 million share float. We will target a drop to $6.10.

Trigger @ 7.30

Suggested Position: short SYNC stock @ (trigger)

Annotated chart:




In Play Updates and Reviews

FOMC Surge

by James Brown

Click here to email James Brown

Editor's Note:
Stocks surged as Ben Bernanke gave the market what it wanted to hear.

We closed our CTCT trade as planned. NTGR was triggered.

Current Portfolio:


BULLISH Play Updates

eBay Inc. - EBAY - close: 48.88 change: +0.89

Stop Loss: 47.45
Target(s): 49.75
Current Gain/Loss: + 5.7%

Entry on August 17 at $46.25
Listed on August 16, 2011
Time Frame: 4 to 6 weeks
Average Daily Volume = 12.3 million
New Positions: see below

Comments:
09/13/12: EBAY displayed relative strength with a +1.8% gain. Shares look poised to rally toward likely resistance at $50.00. Our target to exit is $49.75. I am raising our stop loss to $47.45.

current Position: Long EBAY stock @ $46.25

- or -

(exited options on 09-10-2012 at the open)
Oct $47 call (EBAY1220J47) Entry $1.89 exit $3.05 (+61.3%)

09/13/12 new stop loss @ 47.45
09/12/12 new stop loss @ 46.75
09/10/12 closed option position this morning (+61.3%)
09/08/12 prepare to exit our call option on Monday morning
09/06/12 new stop loss @ 46.25
09/01/12 new stop loss @ 45.75
08/17/12 triggered at $46.25



Energy XXI Ltd. - EXXI - close: 36.53 change: +0.68

Stop Loss: 34.40
Target(s): 39.75
Current Gain/Loss: + 2.8%

Entry on September 12 at $35.55
Listed on September 11, 2011
Time Frame: 4 to 6 weeks
Average Daily Volume = 790 thousand
New Positions: see below

Comments:
09/13/12: It was a good day for EXXI. Traders bought the dip this morning near $35.25 and shares outperformed the market with a +1.89% gain. I am raising our stop loss to $34.40. I am not suggesting new positions at this time.

current Position: Long EXXI stock @ $35.55

- (or for more adventurous traders, try this option) -

Long Oct $35 CALL (EXXI1220j35) Entry $2.25

09/13/12 new stop loss @ 34.40



Netgear Inc. - NTGR - close: 39.70 change: +0.38

Stop Loss: 38.80
Target(s): 44.75
Current Gain/Loss: - 1.4%

Entry on September 13 at $40.25
Listed on September 10, 2011
Time Frame: 6 to 8 weeks
Average Daily Volume = 562 thousand
New Positions: see below

Comments:
09/13/12: Hmm... we need to be cautious here. NTGR rallied this afternoon along with the market. Yet after breaking through resistance near $40.00 the stock reversed. Our trigger to open bullish positions was hit at $40.25 but I would not launch new positions now. Nimble traders could watch and try and buy a bounce off $39.00. Otherwise I would wait for a new rally past $40.25 as our next entry point.

current Position: Long NTGR stock @ $40.25

09/13/12 triggered @ 40.25



Scotts Miracle-Gro Company - SMG - close: 43.95 change: +0.50

Stop Loss: 41.75
Target(s): 44.85
Current Gain/Loss: + 5.0%

Entry on September 04 at $41.85
Listed on September 01, 2011
Time Frame: 4 to 6 weeks
Average Daily Volume = 500 thousand
New Positions: see below

Comments:
09/13/12: SMG has climbed to a new three-month high. I am raising our stop loss to $41.75. More conservative traders may want to take profits now. I am not suggesting new positions at this time.

FYI: The Point & Figure chart for SMG is bullish with a long-term $54 target.

current Position: Long SMG stock @ $41.85

09/13/12 new stop loss @ 41.75
09/06/12 new stop loss @ 41.30
09/04/12 triggered @ 41.85



Veeco Instruments - VECO - close: 36.59 change: +0.56

Stop Loss: 34.45
Target(s): 39.75
Current Gain/Loss: + 2.0%

Entry on September 10 at $35.88
Listed on September 08, 2011
Time Frame: 6 to 8 weeks
Average Daily Volume = 723 thousand
New Positions: see below

Comments:
09/13/12: VECO consolidated sideways waiting for the Fed news and then shot higher to test the $37 level. I am raising our stop loss to $34.45.

Our plan was to limit our risk by keeping our position size small.

*Small Positions to Limit Risk*

current Position: Long VECO stock @ $35.88

- (or for more adventurous traders, try this option) -

Long Oct $37.00 call (VECO1220j37) Entry $1.60

09/13/12 new stop loss @ 34.45



Virgin Media, Inc. - VMED - close: 30.01 change: +0.35

Stop Loss: 27.85
Target(s): 31.50
Current Gain/Loss: unopened

Entry on September xx at $ xx.xx
Listed on September 06, 2011
Time Frame: 6 to 8 weeks
Average Daily Volume = 2.5 million
New Positions: see below

Comments:
09/13/12: VMED refuses to see a pullback. The stock rallied to another 52-week high and is now testing potential round-number resistance at the $30.00 mark. If we did not want to chase it earlier this week we still don't want to chase it now. If VMED does not start to see some sort of correction tomorrow then we'll drop it as a candidate. More aggressive traders could buy a breakout over today's high (30.14) and just use a super tight stop loss (maybe the prior day's low) as a strategy.

NOTE: I will adjust our buy-the-dip entry point to $28.75. If triggered we'll move the stop loss to $27.85.

Earlier Comments:
I suspect VMED could see more short covering since the most recent data listed short interest at 20% of the 256 million-share float. FYI: The Point & Figure chart for VMED is bullish with a $41 target.

Buy-the-Dip Trigger @ $28.75

Suggested Position: buy VMED stock @ (trigger)

- (or for more adventurous traders, try this option) -

buy the Oct $28 call (VMED1220j28)

09/13/12 adjust the entry trigger to $28.75
09/08/12 adjust the buy-the-dip trigger higher from $28.25 to $28.55 and adjust the stop loss to $27.45



BEARISH Play Updates

Aetna Inc. - AET - close: 38.17 change: +0.82

Stop Loss: 38.65
Target(s): 35.05
Current Gain/Loss: -2.4%

Entry on September 13 at $37.27
Listed on September 12, 2011
Time Frame: 3 to 6 weeks
Average Daily Volume = 4.0 million
New Positions: see below

Comments:
09/13/12: AET is not cooperating with us. The stock gapped open lower and then almost immediately rallied. Shares were climbing almost the entire session and posted a +2.1% gain. Furthermore today's bounce has painted a bullish engulfing candlestick reversal pattern. If there is any follow through higher AET will likely hit our stop loss at $38.65. I am not suggesting new positions.

current Position: short AET stock @ $37.27

- (or for more adventurous traders, try this option) -

Long Oct $35 PUT (AET1220v35) Entry $0.35



Jive Software, Inc. - JIVE - close: 14.53 change: +0.47

Stop Loss: 15.05
Target(s): 10.25
Current Gain/Loss: - 4.5%

Entry on September 11 at $13.90
Listed on September 10, 2011
Time Frame: 4 to 6 weeks
Average Daily Volume = 1.0 million
New Positions: see below

Comments:
09/13/12: Shares of JIVE were upgraded this morning and the news produced a gap open higher. Yet the rally did not break through resistance at the $15.00 level. JIVE still closed up with a +3.3% gain.

I am not suggesting new positions at this time.

Earlier Comments:
It looks like lots of investors are already bearish with short interest at 28% of the small 24.8 million-share float. That does raise the risk of a short squeeze so I would limit our position size to reduce our risk. You can also limit your risk by using the put options.

*Small Positions*

current Position: short JIVE stock @ $13.90

- (or for more adventurous traders, try this option) -

Long Oct $15 PUT (JIVE1220v15) Entry $1.90



Westport Innovations - WPRT - close: 31.83 change: -0.35

Stop Loss: 33.65
Target(s): 27.50
Current Gain/Loss: + 4.8%

Entry on September 07 at $33.45
Listed on September 05, 2011
Time Frame: 3 to 4 weeks
Average Daily Volume = 798 thousand
New Positions: see below

Comments:
09/13/12: WPRT continues to underperform the market. The bounce failed near technical resistance at its 100-dma and 300-dma today. I am lowering our stop loss down to $33.65. I am also lowering our target. While the $30.00 level could be round-number support we are going to aim for a the $27.50 level.

Earlier Comments:
We do want to keep our position size small to limit our risk because WPRT does have a high amount of short interest. The most recent data listed short interest at 37% of the 40 million-share float. That does raise the risk of a short squeeze. Readers may want to consider limiting their risk by buying put options instead of shorting the stock. FYI: The Point & Figure chart for WPRT is bearish with a $28.00 target.

*Small Positions to Limit Risk*

current Position: short WPRT stock @ $33.45

- (or for more adventurous traders, try this option) -

Long Oct $30 PUT (WPRT1220v30) entry $1.05

09/13/12 new stop loss @ 33.65, adjust target to $27.50
09/10/12 new stop loss @ 34.05
09/07/12 triggered @ 33.45



CLOSED BULLISH PLAYS

Constant Contact, Inc. - CTCT - close: 19.82 change: -0.53

Stop Loss: 18.99
Target(s): 24.50
Current Gain/Loss: - 4.4%

Entry on September 10 at $20.70
Listed on September 08, 2011
Time Frame: 4 to 6 weeks
Average Daily Volume = 436 thousand
New Positions: see below

Comments:
09/13/12: CTCT was really weak this morning. The recent breakout past resistance near $20.00 was a bull-trap pattern. Given the turnaround we decided last night to exit positions at the open today. Shares gapped open at $19.79 and then plunged to 418.20 before paring its losses.

closed Position: Long CTCT stock @ $20.70 exit $19.79 (-4.4%)

09/13/12 closed at the opening bell today
09/12/12 prepare to exit at the open tomorrow

chart: