Option Investor
Newsletter

Daily Newsletter, Thursday, 12/20/2012

Table of Contents

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

Market Wrap

Market Moves Waiting For Plan B

by Thomas Hughes

Click here to email Thomas Hughes
Introduction

The markets took a deep breath today and waited patiently for the Plan B vote. The vote scheduled for tonight at 7pm, is underway now as I upload this wrap. It was good for today to be so calm in respect to the Cliff because there was a whole lot of real stock market news to catch up with. Economic data is always unfolding and today was no different. New insights into the job market and unemployment data mixed with yet another twist in the housing story to help put a positive spin on the waiting.


Europe and China are fading into the back drop of events. News from those fronts has also returned to business and away from slowing, crisis and bail outs. Once we clear the decks of Fiscal Cliff hoopla we too can return to business as usual. For us as traders this means business reports, earnings reports. The early hallmark of the new earnings season, Oracle, reported this week and has set a nice tone that others may build upon.

Today's Economic Data

There was a bagful of interesting economic data in Santa's bag today. The signs of a solidly sluggish and stable economy continue to mount. Early data included jobless claims and the final revision for 3rd quarter GDP. Later in the morning the Philly Fed Survey, existing home sales and leading indicators were added to the mix and the total combined to keep the S&P 500 in positive territory ahead of the Plan B vote. In fact, the data helped the Dow and the Nasdaq climb to flat line as well. These two indexes had been a little more bearish after the open than the S&P.

The final revision for 3rd quarter GDP gave us an increase of 0.4%, putting annualized GDP at a rate of 3.1%. This is an impressive figure considering the state of global economics, global slowdown and poor earnings and revenue growth. This level is equal, near enough, to a two year high; Is it a peak or what we can expect for the next few quarters. The current estimates are for the US to grow a little over 2% in 2013 and for growth to accelerate through the end of the year. Looking at a chart of GDP over the last few years the 3rd quarter is a nice spike and the expectations for next year are above the average since we returned to growth.


Initial jobless claims are basically inline with the last 12 months. Claims jumped by 17,000 to reach 361,000, firmly in the pre-Sandy range and unremarkable in any other sense. The previous weeks claims were revised up by 1,000 and the 4-week moving average dropped. The average fell by nearly 14,000 to 367,750 and back to pre-Sandy levels. The Sandy Effect on initial claims was minimal and short lived. We can now let that fear go and focus on longer lasting drivers of employment.


Continuing claims was the surprise number in employment data today. The number of people filing for a second week of unemployment dropped by over 140,000 to 3.127 million. This is a new low and the lowest level in years. It looks like holiday hiring and Sandy rebuilding has had an affect on employment. We'll have to keep a look out for post holiday spikes in initial claims to judge what effect , if any, this drop in claims has on the long term employment situation. As an added bit of perspective, today's figure is about 11% lower than last year at this time.


Total claims also fell but are still elevated post-Sandy. Total claims for unemployment dropped by 238,000 to 5.402 million, 24% lower than the previous year. There is concern over the drop in unemployment being driven by people dropping out of the workforce. After reading an email last week from a reader it dawned on me that many of these people may be retiring. Baby Boomers, the largest segment of our population, are at retirement age. Many are facing early retirement for one reason or another. I wonder how many of the people that are no longer included in the workforce data have retired or been forced out? I tried to search for some figures but could only find information on how to plan for retirement. If there are a significant number of retirees falling out of the workforce then this is a good thing. It will open up employment and advancement opportunities for others and help lower unemployment further.


Later in the morning we had the release of the Philly Fed survey and Leading Indicators. The Philly Fed came in at a surprisingly good 8.1%. This is a reversal from the previous months reading of -10.7. The Leading Indicators made a reverse move. They dropped by -0.2% versus a gain of 0.3% in the previous months data. An increase in the sentiment of Philadelphia regional manufacturers is good and offers one more brick in the foundation of economic recovery. A drop in leading indicators is potentially not so good. The markets first reaction was to shed a whole point on the S&P from -.60 to -1.60ish but then it snapped right back to hug the zero line.


The news that put stock indexes in the green was existing home sales. Folks, the housing recovery is back on the table. It was just yesterday that I was reading and seeing articles on how the housing recovery was off track based on one weak data point. Now, with only one more positive data point the pundits are already rebuilding their cases for housing recovery. My take is that housing is in a solidly stabilizing and improving period of change. Much of what I see, hear and read speaks of the shift from ownership to rental and other changes in the nature of real estate markets. What I also see is lots of data, some mixed, that supports the market is there. Its not there like it was and probably never will be but it is there. Existing home sales increased by nearly 6% last month. This is well over the 2% generally expected by the analysts. This is also on top of an upward revision of October's existing home sales figures and marks the 17th month of gains. Important to note within this report is that sales were up across the country and that inventories are at or near long term low levels. To recap, sales are up and inventories are down, based on this I would expect to see another increase in average prices.

Around The World

Stock markets closed mostly higher in Asia. News from the region was fairly quiet and dominated by our own Fiscal Cliff (eerie music plays in the background) and a newly renewed round of further easing from the BOJ. Shinzo Abe is already putting pressure on the BOJ and they responded by increasing the latest round of fiscal stimulus. The yen, which has been slipping nicely against the dollar, lost more ground today. The drop in yen value over the last few weeks and months has helped to drive Japanese stocks higher but today they were the big loser in the region. The Nikkei fell about -1.75% on profit taking and Fiscal Cliff worry.

European stocks traded flat and just to the upside following our economic data. It seems as though Eurozone worries are out of the markets minds at this time. Other than a few articles pondering the future of Greece there was not a whole lot out of this region either. Europe, like Asia and ourselves, was holding its breath today ahead of the Plan B vote.

Gold And Oil

Gold continued to fall in today's trading. The spot price dropped another +1% to hit a new four month low and break support at $1650. This move is contrary to what I might expect from gold with all the easing we've seen over the last week, month and quarter. The Gold Index may be at a bottom, at least in the short term. The index has been moving down toward support ahead of the underlying metal and has now failed to make a new low. Last week I noted the divergence from momentum, an potential indicator of bottoms. This week the index retested the near term low of $180 and not only halted at that level but bounced back up before closing. This potential support is also coincident with a long term trend line drawn from this summers two lows in May and July. If this level holds a long term uptrend could be starting in the gold sector. On the bear side of the coin new low prices in gold could help push gold miners and the Gold Index through support and back down to supports at $175, $170 and $165.

The Gold Index, daily

Oil traded up toward the top of its two month range and cracked $90 a barrel. If everyone is afraid of the fiscal cliff and 2013 is supposed to be so bad because of it why is oil trading up? The market seems to think, the oil market anyway, that we're going to need more oil and this is making my spidey sense tingle. No, this is not an official indicator, but sometimes you have to listen to intuition. Perhaps the markets will unleash the bull in 2013. This would surely help oil prices surge, especially since many reports I have read concerning oil and oil companies mention lower production levels. Lower production and increased demand outlook would really send oil spiking. The Fiscal Cliff is casting a big shadow. Even though some traders and investors are chomping at the bit a gearing up for the get go doesn't mean its the right thing to do. Oil could just as easily hit resistance and fall back down to the lower end of it's range.

The Oil Index is also leading the underlying commodity. The index has been moving up for just over a month since hitting its near term bottom in November. The Oil Index made only about a 50% retracement of its summer bull movement before bouncing. The current move upward is strong and is supported by MACD convergence. The index broke above long term resistance Tuesday and is now consolidating above this level. The Gold Index looks good for a continuation of the near term up trend and a retest of resistance at 1275, 1300 and a potential upside target of 1350.

The Oil Index, daily

Story Stocks

The big story in stocks today was the announced purchase of NYSE/Euronext by the ICE. The purchase would include cash and stock and would total $33.12 per share. The move came as a surprise to everyone considering a failed attempt last year. The deal is a substantial premium over yesterday's closing prices and sent the stock up in today's trading.

NYSE/Euronext

Earnings are the other story in today's stock news. The earnings season is beginning again and was officially started, by my reckoning, earlier this week when Oracle reported. I thought it was interesting that the first report of the season was an upside surprise. Today Oracle followed through with an announced new acquisition. The stock traded in a tight range today but maintained a level near yesterday's close. I do expect the gap formed on the earnings announcement to be closed eventually but when that may be is anyone's guess. Initial volume on the gap up was good but today's volume did not follow through, perhaps awaiting Fiscal Cliff Plan B voting.

Oracle

A handful of companies reported before the start of trading or during the day. I don't want to expound on each and everyone of them but I do want to point out that the early trend in earnings is upside surprise. This doesn't mean that business is booming and earnings are growing faster than expected. What this means is that Q3 was very likely the earnings trough many analysts suggested. As earnings growth slowed in the first part of the year fourth quarter guidance and analysts projections continued to decline, lowering the bar to new low levels. Now, with business picking up modestly, businesses are able to beat these low expectations. The low expectations and the expanding margins we also saw in the third quarter will combine with the moderate 3.1% growth to inflate bottom lines.

I think there is a good chance that any company reporting increased profits on lower earnings last quarter is a candidate for an earnings upside surprise this quarter. This morning four well known names reported earnings that beat Wall Street expectations. Carnival earned $0.13 versus the expected $0.11. Conagra, Winnebago and Jabil Circuit also all beat expectations. One company that did not beat was Darden Restaurants. This food service chain improved revenue and was able to keep earnings inline despite rising food costs. The stock lost over 1% today on average volume.

Darden Restaurants, daily

Nike reported after the bell and guess what? Upside surprise. Nike posted earnings of $1.14 per share versus the expected $1.00 per share. Revenues were basically flat but sales in North America surged about 18%. The stock jumped in after hours trading breaking resistance.

Nike, daily

Rimm also reported after the bell. The company is still struggling with sales and innovation, posting a net loss for the quarter. The good news is that they beat analysts expectations and lost less than anticipated. Rimm has been getting a boost lately, mostly on reversal of analyst sentiment, and it got another one today in after hours trading.

Rimm, daily

The Indexes

The futures trade this morning held steadily just below flat line from yesterday's close. Yesterday's Fiscal Cliff driven sell off was sharp but held above my closely watched 1430 level and so did futures trading. This is new support and futures moved up from here after the 8:30 release of economic data. Trading turned positive by +1 on the S&P 500 following the release, fluctuating very slightly.

Trading was very hushed after the bell. Breadth was fairly even and volumes were light. The markets were holding their breath, awaiting remarks, news and solutions for the Cliff. Later in the morning we got some more data, more data confirming the solidly stable and sluggishly growing economy. This data immediately sent indexes that were hovering below 0 into positive territory.

The Cliff has certainly brought us volatility but the underlying trend remains up. During the day comments from both sides concerning Plan B, the negotiations, the vote on Plan B and each other failed to move the indexes. The underlying uptrend and positive data carried the market to the days highs levels, near 1444 on the S&P 500.

S&P 500, 30 minutes

Economic data, housing and what I have seen of earnings so far support that trend. On the daily charts of the S&P 500 the index is moving up, making new short term highs and has bullish momentum. The caveat is that momentum is weakening and diverging. This makes the resistance line at 1465 look like a potential target for a near term top. Bullish traders would be wise to use caution as the index moves upward toward this area as it is a good place for profit taking. It is also possible that momentum will carry the index through 1465 and on to possibly retest 1565. Today's candle, made possible by late day buying, suggest the move to 1465 could happen soon.

S&P 500, daily

On the longer term charts of weekly closings the S&P is being supported and carried upward by the 150 day moving average. The index is approaching long term resistance at 1465 with diminishing momentum. This divergence suggests a top is near but does not mean that it is. I have been trying to anticipate a top in the index on the long term charts based on the weakening and divergent momentum. My previous target failed and now the next candidate for that trade is 1465 but the more I think about it and look at the charts it looks like 1465 could be blown away with ease.

S&P 500, weekly

I am still bullish on the index in the short and intermediate terms. How the markets interpret Cliff negotiations, Plan B, earnings and outlook will determine how high and where resistance will set in. Long term momentum is currently bearish but if it turns bullish coincident with a break above 1465 then a retest of the all time high could be in play. However, I keep coming back to the Cliff. What if the markets don't like what we get? What if what we expect isn't enough to inspire confidence? These questions and more are begging to be answered. Until they are I am still trading with the trend with my bear goggles on high power.

Remember the trend Thomas Hughes


New Plays

Home Fixtures & Security

by James Brown

Click here to email James Brown

Editor's Note:

Additional Trading Ideas:

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) TMK, DIS, CRZO, MANT, UNT, CI, KMT, ANDE, USG, LAD, TG, APOG



NEW BULLISH Plays

Fortune Brands Home & Security - FBHS - close: 30.33 change: +0.32

Stop Loss: 29.25
Target(s): 34.00
Current Gain/Loss: unopened

Entry on December xx at $ xx.xx
Listed on December 20, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.5 million
New Positions: Yes, see below

Company Description

Why We Like It:
FBHS is in the consumer goods sector. They make a wide variety of home furnishings, fixtures, and home security products. The stock has been consolidating sideways under resistance near $30.00 for several weeks. You'll notice it has developed a bullish trend of higher lows. Now the stock is poised to breakout to new all-time highs.

I am suggesting a trigger to open bullish positions at $30.60. If triggered our multi-week target is $34.00.

Trigger @ 30.60

Suggested Position: buy FBHS stock @ (trigger)

Annotated chart:




In Play Updates and Reviews

Relatively Widespread Gains

by James Brown

Click here to email James Brown

Editor's Note:
The U.S. stock market managed relatively widespread gains on Thursday. Unfortunately we did see our AMD and ESI trades stopped out.

Current Portfolio:


BULLISH Play Updates

Banner Corp. - BANR - close: 30.87 change: +0.13

Stop Loss: 29.40
Target(s): 34.00
Current Gain/Loss: + 1.2%

Entry on November 21 at $30.49
Listed on November 20, 2012
Time Frame: 8 to 10 weeks
Average Daily Volume = 157 thousand
New Positions: see below

Comments:
12/20/12: BANR rallied to $31.24 intraday before trimming its gains. This was a new multi-year high for the stock. The trend is up but BANR just moves super slow. I am not suggesting new positions at this time.

NOTE: BANR doesn't move very fast. This trade could take a couple of months.

*Small Positions*

current Position: Long BANR stock @ $30.49

12/15/12 new stop loss @ 29.40
11/21/12 out trade opened on the gap higher.



Ball Corp. - BLL - close: 45.46 change: +0.89

Stop Loss: 43.85
Target(s): 48.00
Current Gain/Loss: + 3.7%

Entry on November 06 at $43.85
Listed on November 3, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 687 thousand
New Positions: see below

Comments:
12/20/12: BLL displayed some relative strength on Thursday with a +1.99% gain and a bullish breakout over what has been significant resistance near $45.00. This is great news for the future of our trade in BLL. I am raising our stop loss to $43.85.

current Position: Long BLL stock @ $43.85

12/20/12 new stop loss @ 43.85
12/12/12 new stop loss @ 43.45
11/24/12 new stop loss @ 43.25
11/17/12 new stop loss @ 42.55
11/06/12 triggered @ 43.85



Cree, Inc. - CREE - close: 34.64 change: -0.02

Stop Loss: 32.45
Target(s): 39.00
Current Gain/Loss: + 2.6%

Entry on December 11 at $33.75
Listed on December 10, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.3 million
New Positions: see below

Comments:
12/20/12: CREE is still churning sideways underneath resistance at the $35.00 level. I am not suggesting new positions at this time.

Earlier Comments:
If this rally continues CREE could see a short squeeze. The most recent data listed short interest at 17% of the 113 million-share float. If triggered our multi-week target is $39.00. FYI: The Point & Figure chart for CREE is bullish with a $42 target.

current Position: long CREE stock @ $33.75

12/15/12 new stop loss @ 32.45



Juniper Networks, Inc. - JNPR - close: 20.35 change: +0.19

Stop Loss: 19.25
Target(s): 23.50
Current Gain/Loss: + 1.0%

Entry on December 18 at $20.15
Listed on December 17, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 7.8 million
New Positions: see below

Comments:
12/20/12: JNPR followed a common pattern seen today. The stock was weak this morning only to reverse before lunchtime and rally to gains by the closing bell. This rebound near the $20 level could be used as a new bullish entry point. I told readers yesterday to look for a dip near $20.00.

Earlier Comments:
The stock can be somewhat volatile so I am suggesting we keep our position size small. FYI: The Point & Figure chart for JNPR is bullish with a $26.00 target.

current Position: Long JNPR stock @ $20.15



Nuance Communications - NUAN - close: 22.40 change: -0.50

Stop Loss: 22.40
Target(s): 25.75
Current Gain/Loss: unopened

Entry on December xx at $ xx.xx
Listed on December 19, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 2.2 million
New Positions: Yes, see below

Comments:
12/20/12: Hmm... NUAN underperformed the market with a -2.1% decline on Thursday. This failure at resistance near $23 and its 200-dma and the close under short-term support near $22.50 is definitely bearish. I'm not ready to give up just yet. We'll wait and see if there is any follow through.

Currently the plan calls for a breakout. We are suggesting small bullish positions with a trigger to initiate a trade at $23.20. If triggered our target is $25.75. NUAN can be a volatile stock so I am suggesting we keep our position size small to limit our risk.

Trigger @ 23.20

Suggested Position: buy NUAN stock @ (trigger)



Pegasystems Inc. - PEGA - close: 23.63 change: +0.36

Stop Loss: 21.90
Target(s): 23.75
Current Gain/Loss: +11.2%

Entry on December 10 at $21.25
Listed on December 04, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 257 thousand
New Positions: see below

Comments:
12/20/12: PEGA is almost there! The stock continues to climb and added another +1.5% today. The intraday high, set right near the close today, was $23.73. Our exit target is $23.75. I am raising our stop loss to $21.90. I am not suggesting new positions at current levels.

current Position: Long PEGA stock @ $21.25

12/20/12 new stop loss @ 21.90
12/18/12 adjust exit target to $23.75
12/17/12 new stop loss @ $21.40
12/15/12 new stop loss @ $20.95
12/12/12 new stop loss @ $20.49



Stamps.com Inc. - STMP - close: 26.35 change: +0.37

Stop Loss: 24.95
Target(s): 29.50
Current Gain/Loss: + 0.4%

Entry on December 18 at $26.25
Listed on December 11, 2012
Time Frame: 4 to 8 weeks
Average Daily Volume = 250 thousand
New Positions: see below

Comments:
12/20/12: Thankfully there was no follow through on yesterday's bearish performance in STMP. The stock bounced off the $26.00 level today. Readers could use this move as a new entry point for bullish positions.

Earlier Comments:
Don't forget that STMP can be a volatile stock and we want to keep our position size small to limit our risk.

*Small Positions*

current Position: Long STMP stock @ $26.25



Suntech Power - STP - close: 1.21 change: -0.05

Stop Loss: 0.97
Target(s): 1.48
Current Gain/Loss: + 9.0%

Entry on December 19 at $1.11
Listed on December 18, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.8 million
New Positions: see below

Comments:
12/20/12: I am not surprised to see a little profit taking in STP today after yesterday's huge surge higher. The stock dipped to $1.16 before paring its losses. I am not suggesting new positions at current levels.

Earlier Comments:
This can be a volatile stock. I am suggesting we keep our position size small to limit our risk.

*Small Positions*

current Position: long STP stock @ $1.11



Tenneco Inc. - TEN - close: 34.49 change: +0.20

Stop Loss: 31.85
Target(s): 37.00
Current Gain/Loss: + 4.0%

Entry on December 12 at $33.15
Listed on December 04, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 517 thousand
New Positions: , see below

Comments:
12/20/12: TEN recovered from its morning dip near $34.00 and shares added +0.5%. I am not suggesting new positions at this time.

Earlier Comments:
We need to be patient with TEN. The stock does not move very fast.

*Small positions*

current Position: Long TEN stock @ $33.15

12/15/12 new stop loss @ $31.85



BEARISH Play Updates

Chesapeake Granite Wash Trust - CHKR - close: 17.14 change: -0.25

Stop Loss: 18.05
Target(s): 16.40
Current Gain/Loss: + 4.2%

Entry on December 04 at $17.90
Listed on November 26, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 226 thousand
New Positions: see below

Comments:
12/20/12: After days of churning sideways we are seeing some movement in CHKR. The stock tried to rally this morning but reversed at its 20-dma and fell to a -1.4% decline. The stock looks poised for further weakness. I am not suggesting new positions at this time.

*Small Positions*

current Position: short CHKR stock @ $17.90

12/17/12 new stop loss @ 18.05
12/10/12 new stop loss @ 18.25



Stone Energy Corp. - SGY - close: 20.27 change: +0.12

Stop Loss: 20.75
Target(s): 16.00
Current Gain/Loss: - 2.4%

Entry on December 04 at $19.80
Listed on December 03, 2012
Time Frame: 3 to 6 weeks
Average Daily Volume = 719 thousand
New Positions: see below

Comments:
12/20/12: Shares of SGY were downgraded this morning before the open. This news prompted the stock to gap open lower at $19.72 but SGY managed a bounce at $19.27. The stock rebounded all the way back to fill the gap and more with a +0.5% gain. I remain cautiously bearish here. I am not suggesting new positions at this time.

The next major support is all the way down near $15.00. We will target a drop to $16.00. FYI: The Point & Figure chart is bearish and forecasting at long-term $12 target.

current Position: short SGY stock @ $19.80

12/17/12 new stop loss @ 20.75
12/05/12 SGY surges following M&A news with peers.



CLOSED BULLISH PLAYS

Advanced Micro Devices - AMD - close: 2.40 change: -0.12

Stop Loss: 2.37
Target(s): 2.98
Current Gain/Loss: - 7.1%

Entry on December 19 at $2.5
Listed on December 18, 2012
Time Frame: 6 to 8 weeks
Average Daily Volume = 27.5 million
New Positions: see below

Comments:
12/20/12: Our bullish bet on AMD did not pan out thanks to a downgrade today. A stock analyst cut their earnings estimates on AMD and shares plunged to... drum roll please... $2.37 intraday. It just so happens that our stop loss is at $2.37 so the trade has been closed. It still looks like AMD may have formed a significant bottom over the last several weeks but it may need to consolidate further before advancing any higher.

*Small Positions*

closed Position: Long AMD stock @ $2.55 exit $2.37 (-7.1%)

12/20/12 stopped out

chart:



ITT Educational Services - ESI - close: 18.32 change: -1.13

Stop Loss: 18.99
Target(s): 24.75
Current Gain/Loss: - 5.8%

Entry on December 14 at $20.15
Listed on December 12, 2012
Time Frame: 2 to 6 weeks
Average Daily Volume = 500 thousand
New Positions: see below

Comments:
12/20/12: Thursday proved to be an ugly day for shares of ESI. I cautioned readers last night that yesterday's move looked like a bearish reversal. Today we saw the stock plunge -5.8% and hit our stop loss at $18.99 along the way.

Earlier Comments:
I do consider this a more aggressive, higher-risk trade.

*Small positions*

closed Position: Long ESI stock @ $20.15 exit $18.99 (-5.8%)

12/20/12 stopped out
12/19/12 today's bearish reversal is worrisome. Readers may want to exit early now!

chart: