Option Investor
Newsletter

Daily Newsletter, Thursday, 2/14/2013

Table of Contents

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

Market Wrap

Global GDP Not Good?

by Thomas Hughes

Click here to email Thomas Hughes
Global GDP reports were a little worse than expected. The rear looking view faded from the spotlight in favor of future expectations.

Introduction

Today brought a variety of tidbits for the market to digest. Economic growth, earnings, mergers and acquisitions all had their turn on stage. Rear looking GDP figures from two of the worlds leading economies revealed the measure of what we were all expecting; economic shrinkage in the fourth quarter. The surprising amount of weakness from Japan and the Eurozone was a brief concern but quickly left the spotlight. This concern faded quickly to talk of the future expectations and new M&A activity.


U.S. economic data was very light today and revealed nothing new. The labor market is still relatively stable but some of the data continues experience volatile swings. All the talk of weakness and what to expect from the future helped keep oil and gold traders in balance. Both commodities had some intra-day volatility but flattened out before closing. All in all it was a fairly quiet day of trading. The S&P opened slightly lower and traded in a narrow 9 point range all day.

The mergers and acquisitions scene is still simmering and produced two new big deals today. Berkshire Hathaway announced a deal with 3G to purchase the number one selling ketchup brand Heinz. The deal is worth $28 billion and puts Warren Buffet in ownership of the world's top brand of the most used condiment after salt and pepper. Another big merger was that of US Air and American Airlines to form the largest U.S. air carrier by passenger miles. Pundits seem to think its a good move but with the decades of corporate shuffling the airlines have gone through I'll reserve judgment on that for a while.

The Economic Data

U.S. data was limited to unemployment claims today. Don't worry though, next week starts to heat up again with a full roster of reports. Today initial claims were reported to have dropped 27,000 to 341,000. This is from a mild upward revision of 2,000 from last weeks figures. The four week moving average was also revised up by a small amount and gained a little this week too. This weeks figures are a nice drop from the last two weeks but is still within the expected range. There is still no sign of a real improvement in labor markets here. Later in the day Goldman Sachs released forecasts predicting that housing related employment was going to pick up soon. This could help reverse labor market trends if it actually happens.


Continuing claims is a little different story. This number dropped by a much larger margin and set a new low. That is good news but this number has been the most volatile of the three important claims figures. Next week it could jump right back up. Taking this into consideration it still appears like there improvement here but it could be bottoming out just over 3.1 million. Signs of improvement here are only hints and could easily disappear as we approach the time of expected spring and Easter volatility in employment figures.


The total claims number is the one that causes me some concern. This figure has been trending up over the last few months despite steady to lower numbers of initial and continuing claims. Total claims jumped more than 325,000 to match a high set two weeks ago. This rise in total claims led us to a slight increase in the unemployment figure for January and it could do it again this month. Until the total claims trends down again I think unemployment is going to keep edging up. States with the biggest drop in claims included NC, TN and AL. States with the biggest increases were CA, TX and NY. One thing I have noticed is that the top states in both categories appear here each week but usually flip flop. Last week NC (my own home state) topped the list for increases, this week it tops the list for decreases. Until this changes on a state level the national figures will probably continue to show some volatility as well. Once the country as a whole can increase jobs in concert with each other we will start seeing a drop in unemployment levels.


Japan GDP Turns Negative

Asian markets, including Japan, closed in the green despite a surprise drop in Japanese GDP. No one was expecting robust growth but modest expectations of 0.1% were not met. The Japanese economy shrank by -0.1% but it wasn't this pseudo shocking piece of data that investors focused on. It was the future outlook. Shinzo Abe's plans to stimulate the economy through fiscal policy, yen printing and government spending seems to be working. More forward looking views of the economy are pointing to a rebound in the first quarter. Machinery orders are on the rise and so is the services sector. These signs are making investors think the stimulus is working and the GDP figure will likely reinforce plans by the government to keep it up. The fact that does appear to be working what is spurring the talk of currency war. If it works for one country why can't it work for another. According to G7 statements we don't have that to worry about though.

The dropped versus the dollar today after the news from Japan, but not as much as I might have expected. The USD/JPY currency pair is within a short term range and above another near term support line. Weakness over the last three days is helping to alleviate some of the previous overbought condition and setting the pair up for another momentum driven move. Expectations of continued aggressive easing from the bank could give this trade legs for another move up. The 92-94.50 range will be important to watch, a break above the range could keep the yen sliding.

USD/JPY

Europe Recedes Again

The European Union has receded again. The pullback was a little larger than expected but the pullback itself was fully in line with expectation. The EU GDP fell by -0.8% versus the expected -0.6% and marked the fourth quarter of negative growth. Germany was the surprise of the bunch, dropping a sharp -0.6%, far below expectations. France was another area of weakness, dropping -0.1% in the fourth quarter. France also received some negative revisions that put it in recessionary territory at the beginning of last year. This data was also brushed aside in favor of the forward looking perspective. There is still expected to be some shrinkage in the current quarter but there is also expected to signs of improvement as well. Economist expect Germany, for one, will experience a quick comeback. The pillar of the EU is expected to rebound by +0.3% in the first quarter and continue expanding into the second half. Another article cited “noticeable economic growth” in Germany for the quarter.

The Euro responded by dropping sharply versus the dollar. The EUR/USD pair fell back from resistance on the news and dropped below the short term moving average in a continuation of last weeks down leg. Technical indicators support potential short term weakness. Bearish MACD is increasing and stochastic is pointing down. The pair is still in an uptrend with trend line support around 1.3250. Underlying fundamentals of international monetary policy are not changing at the moment. I am maintaining a longer term bullish outlook on this pair unless there is significant breakdown of support.

Eur/USD

The Gold Index

Gold had a volatile day today following the releases of EU and Japanese GDP. The metal has been trading near the lower end of its 2 month range and settled down by $10 today. The charts are looking weak here, a drop for gold below $1627-$1630 could have longer term implications. The Gold Index traded to the upside today but remained below it long term down trend line. The index is entering a narrowing range bound on both sides by long term support/resistance. The technical indicators are weak and are giving me no hints of a bottom. A drop below $165 could take the index all the way down to $150.

The Gold Index

Oil And The Oil Index

Oil traded in a tight range today, closing near flat and just under $97.50. Oil is trading near the top of its two week range and 5 month highs. Expectations of a return to growth are fueling some speculation in the markets. If data continues to support the idea that the economy is stable and has growth prospects in the coming quarter oil could move up. A break above $98 could send oil up to $100. The oil index has retreated since making its 12 month high a few weeks ago. This move down closed the gap it formed when crossing a long term resistance level. This closure is good, especially since the index is maintaining the upper side of that resistance level at closing. A confirmed move from 1350 has a target of 1400.

Oil Index

Earnings, Mergers and Acquisitions

Earnings season is nearly over but there are still quite a few left. Today there were about 150 reports with two notable ones. GM missed its expectations on losses in Europe and other charges. The up takes on the report were positive earnings for the third running and strengthening U.S. markets. Net income for the quarter rose to near $1.2 billion, up about 40% from last year. European losses are blamed in part on consumers who are waiting to buy because of political uncertainty. This uncertainty will eventually lead to pent up demand in EU countries that could accelerate the economic growth currently expected for later this year. Automakers in general are having a hard time in the region and are not expecting rapid change. The stock dropped sharply on the news but halted at a long term support. MACD and stochastic are confirming support at this time but caution is still in order here. Today's candle is pretty strong and could lead to further testing of the $27.50 level.

GM

Pepsico beat earnings estimates on price hikes enacted in the quarter but guidance missed. Net income for the quarter is $1.66 billion on revenue of $19.9 billion. The positive pass through of prices is good for Pepsi and should help with future earnings growth. However, the guidance for the next year fell short of the expectations and sent the stock on a roller coaster ride. The expected 2013 EPS guidance of $4.49 only missed by a few pennies which should be easy to beat, especially is the economy does pick up. A nice little doji pattern formed today engulfing the previous black candle and piercing long term resistance. A break above $92.50 could take it up to $95, the intra-day high preceding the 2008 crash. Continued economic signs of strength could help lift Pepsico over this resistance. A failure could have the long term bearish implications of a double top matching the highs in August 2012 with the recent high.

Pepsico

American Airlines parent AMR and US Airways announced a merger deal that will create the largest U.S. based air carrier. The deal is worth $11 billion in stock and is supposed to reduce costs and increase efficiency. The deal has several obstacles such as a bankruptcy filing by AMR and others. Shares of US Airways crashed in today's trading, losing more than 10%. The move brings the stock down to a potential support and has a lot of volume behind it. It is also confirming a short term triple top. The $13.00 level could prove to be a consolidation level. It will have to be watched for sign of support or weakness. The longer term 150 day EMA is just below $13 and is the next target of support should $13 fail.

LCC

The last big nugget of M&A news was the announced purchase of HJ Heinz by Berkshire Hathaway and 3G. The deal was announced for $72.50 per share and totals $28 billion. The price is a 20% premium on the previous day's closing and provided a hefty profit to investors and traders. At one point during the day one of the Najarian brothers pointed out some questionable options activity. Whether anything is amiss is yet to be determined.

HJ Heinz

The Indexes

Futures were only mildly in the negative this morning which was a little surprising with the negative GDP figures. But, as I pointed out, more attention was paid to the forward looking statements. Expectations for improvement from this level, even if that improvement is just a better negative number, suggests there is hope and belief we are at the bottom of an economic trough. If so then the rising tide of world economic growth could continue to lift the S&P higher. At this time the S&P is in yet another critical juncture.

Last week the index crawled above the consolidation range between 1500-1515. This move came late in the week, Friday, which is a good sign for bullish sentiment. This week the index was able to hold that level but was capped at another long term resistance. This is the resistance of the intra-day, not closing, high of 12/11/2007. This is the intra-day high of the right shoulder of the H&S reversal pattern preceding the 2008 bear market. I don't think this resistance will be too heavy but it could intensify as we the index approaches the all time highs. Anyone still holding positions from that period, especially index funds, etfs and etc could be eying this as a time to get out of the market.

SPX 30 Minute Bars

A move above this point will take the S&P to 1550 and a hairsbreadth away from the all time highs around 1565. Technical indicators on the daily charts are a little mixed but this in not unusual with a market in consolidation. Longer term indicators are firmly bullish and suggest a rising market. On the daily chart the MACD is diverging from the trend, showing a weakening trend, but are not indicating a reversal yet. Another pop of bullish momentum could be all it takes to break above the current resistance.

SPX Daily Bars

The VIX is still near five year lows. Today decline brought it down to what could possibly be a support area. If the outlook for global economic strength keeps brightening fear could completely leave the market and drop the VIX down to 2010 levels just under $10. This may coincide with or lead the final push for the S&P 500 to hit the 1565 level.

VIX

Next week starts another round of economic releases. Early in the week the FOMC minutes will be released and scoured for hints into the state of the economy and what the Fed might do in the near future. There will also be housing data, the PPI, CPI, Leading Indicators and the usual weekly fare. Tomorrow is on the light side; industrial production, capacity utilization and Michigan sentiment. Earnings begin to lighten up as well. There are only about 45 releases scheduled including Campbells Soup and Smuckers.

The trend is still up and there is yet to be signs of a top. Until that happens I have to stick with the trend.

Thomas Hughes


New Plays

Application Software

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) EVR, BCEI, SWKS, CTAS, DLPH, GRMN, LEG, NWL

(bearish ideas) DFT, COH



NEW BULLISH Plays

Splunk, Inc. - SPLK - close: 35.08 change: +0.58

Stop Loss: 33.75
Target(s): 39.50
Current Gain/Loss: unopened

Entry on February -- at $--.--
Listed on February 14, 2013
Time Frame: exit PRIOR to earnings on Feb. 28th
Average Daily Volume = 1.5 million
New Positions: Yes, see below

Company Description

Why We Like It:
SPLK is in the application software industry. Shares appear to be breaking out from a multi-week sideways consolidation. The stock has definitely been showing some relative strength the last few days. SPLK is currently testing resistance at the $35.00 level. A breakout here could spark a short squeeze. The most recent data listed short interest a 16% of the 55.6 million share float.

I am suggesting a trigger to launch bullish positions at $35.30. if triggered our target is $39.50.

Trigger @ 35.30

Suggested Position: buy SPLK stock @ (trigger)

Annotated chart:




In Play Updates and Reviews

Another New High for Small Caps

by James Brown

Click here to email James Brown

Editor's Note:
The small cap Russell 2000 index tagged another new all-time high today. That small cap strength is helping some of our bullish candidates.

Elsewhere our BTU trade was stopped out.


Current Portfolio:


BULLISH Play Updates

Asbury Automotive Group - ABG - close: 36.24 change: -0.07

Stop Loss: 34.85
Target(s): 38.50
Current Gain/Loss: + 2.8%

Entry on January 24 at $35.25
Listed on January 23, 2013
Time Frame: Exit PRIOR to earnings on Feb. 19th
Average Daily Volume = 275 thousand
New Positions: see below

Comments:
02/14/13: ABG has spent more than a week now consolidating sideways along the $36.00 level. I am not suggesting new positions. Readers may want to tighten their stop further.

We are planning to exiting prior to the Feb. 19th earnings report.

Please note that we do want to keep our position size small to limit our risk.

*Small positions*

current Position: Long ABG stock @ $35.25

02/12/13 new stop loss @ 34.85
02/05/13 new stop loss @ 34.40



Conns Inc. - CONN - close: 31.20 change: -0.48

Stop Loss: 28.85
Target(s): 33.50
Current Gain/Loss: + 5.6%

Entry on February 05 at $29.55
Listed on February 4, 2013
Time Frame: 4 to 6 weeks
Average Daily Volume = 416 thousand
New Positions: Yes, see below

Comments:
02/14/13: CONN hit some profit taking today with a -1.5% pullback. The dip may not be over yet. Look for support at the 10-dma or the $30.00 level. I am not suggesting new positions at this time.

Our target is $33.50. More aggressive traders could aim higher. FYI: The Point & Figure chart for CONN is bullish with a long-term $48.00 target.

current Position: Long CONN stock @ $29.55

02/12/13 new stop loss @ 28.85
02/09/13 new stop loss @ 28.45



Deckers Outdoor Corp. - DECK - close: 43.58 change: -0.92

Stop Loss: 41.40
Target(s): 49.75
Current Gain/Loss: - 1.6%

Entry on February 12 at $44.41
Listed on February 11, 2013
Time Frame: exit PRIOR to earnings on Feb. 28th
Average Daily Volume = 2.2 million
New Positions: see below

Comments:
02/14/13: DECK managed a small bounce today. I am not convinced the pullback is over. Readers may want to wait and try and buy a dip near $42.75.

Earlier Comments:
I do consider this an aggressive, higher-risk trade. DECK can be a volatile stock. Thus we want to keep our position size small. It is worth noting that if this strength continues DECK could see a short squeeze. The most recent data listed short interest at almost 44% of the small 30.9 million share float. We do not want to hold over the late February earnings report. At the moment it looks like that report might come out on Feb. 21st but the date has not been confirmed. More aggressive traders may want to buy the call options.

*Small Positions*

current Position: Long DECK stock @ $44.41



Gilead Sciences - GILD - close: 41.60 change: +0.20

Stop Loss: 39.85
Target(s): 44.85
Current Gain/Loss: +1.0%

Entry on February 14 at $41.18
Listed on February 13, 2013
Time Frame: 4 to 8 weeks
Average Daily Volume = 8.0 million
New Positions: see below

Comments:
02/14/13: GILD opened lower at $41.18 but shares recovered and closed at another new high. I would still consider new positions now at current levels.

We do want to keep our position size small. Biotech stocks can be volatile.
FYI: The Point & Figure chart for GILD is bullish with a $47.50 target.

*Small Positions*

current Position: Long GILD stock @ $41.18



Morgan Stanley - MS - close: 23.83 change: +0.20

Stop Loss: 21.95
Target(s): 26.00
Current Gain/Loss: + 2.9%

Entry on February 01 at $23.15
Listed on January 30, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 27 million
New Positions: see below

Comments:
02/14/13: MS outperformed the market with a +0.8% gain. Traders bought the dip at technical support on the simple 10-dma again this morning. I am not suggesting new positions. More conservative traders may want to tighten their stop loss.

Small Positions*

current Position: Long MS stock @ $23.15



Ocwen Financial - OCN - close: 41.03 change: -0.38

Stop Loss: 39.65
Target(s): 44.75
Current Gain/Loss: - 0.8%

Entry on February 07 at $41.37
Listed on February 6, 2013
Time Frame: Exit prior to the Feb. 28th earnings
Average Daily Volume = 1.7 million
New Positions: see below

Comments:
02/14/13: Thursday was a disappointing session for OCN. Shares lost -0.9% and spent most of the day hovering near the $41 level. I'm not suggesting new positions. We want to exit prior to the earnings report on Feb. 28th.

*Small Positions*

current Position: Long OCN stock @ $41.37



North American Palladium - PAL - close: 1.85 change: -0.02

Stop Loss: 1.55
Target(s): 2.45
Current Gain/Loss: +12.1%

Entry on January 14 at $ 1.65
Listed on January 12, 2013
Time Frame: Exit prior to earnings on Feb. 21
Average Daily Volume = 2.8 million
New Positions: see below

Comments:
02/14/13: PAL lost -1% and slipped toward its 10-dma and 200-dma. More conservative traders may want to raise their stop loss.

current Position: long PAL stock @ $1.65

02/06/13 adjusted time frame for earnings on Feb. 21st
01/30/13 new stop loss @ 1.55



Progressive Corp. - PGR - close: 24.00 change: -0.49

Stop Loss: 22.95
Target(s): 26.00
Current Gain/Loss: + 2.0%

Entry on February 11 at $23.52
Listed on February 9, 2013
Time Frame: 9 to 12 weeks
Average Daily Volume = 4.8 million
New Positions: see below

Comments:
02/14/13: After a sharp, multi-day rally higher shares of PGR were due for a pullback. The profit taking got a little help with an analyst downgrade for PGR shares this morning. Look for support near $23.50 or the 10-dma.

current Position: Long PGR stock @ $23.52

02/13/13 new stop loss @ 22.95



Synopsys Inc. - SNPS - close: 34.33 change: +0.09

Stop Loss: 33.45
Target(s): 37.50
Current Gain/Loss: + 0.2%

Entry on February 06 at $34.25
Listed on February 2, 2013
Time Frame: exit prior to the February 20th earnings
Average Daily Volume = 1.1 million
New Positions: see below

Comments:
02/14/13: SNPS is still churning sideways inside the $34.00-34.60 zone. More conservative traders might want to raise their stops closer to the $34.00 level.

current Position: Long SNPS stock @ $34.25



Sonic Corp. - SONC - close: 11.30 change: -0.08

Stop Loss: 11.15
Target(s): 12.75
Current Gain/Loss: + 1.3%

Entry on January 14 at $11.15
Listed on January 12, 2013
Time Frame: 8 to 9 weeks
Average Daily Volume = 658 thousand
New Positions: see below

Comments:
02/14/13: SONC retreated with a -0.7% decline. If the stock doesn't start showing more strength we might drop it from the newsletter this weekend. I'm not suggesting new positions.

current Position: Long SONC stock @ $11.15

02/13/13 new stop loss @ 11.15
02/09/13 new stop loss @ 10.95
01/26/13 new stop loss @ $10.80



Symantec Corp - SYMC - close: 22.67 change: +0.05

Stop Loss: 21.45
Target(s): 24.90
Current Gain/Loss: + 1.7%

Entry on February 06 at $22.30
Listed on February 5, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 10 million
New Positions: see below

Comments:
02/14/13: Traders bought the morning dip in SYMC at $22.41 and shares rebounded to a +0.2% gain. I am not suggesting new positions at this time.

*Small positions*

current Position: long SYMC stock @ $22.30

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

Long Mar $23 call (SYMC1316c23) entry $0.38



Synaptics - SYNA - close: 34.83 change: +0.35

Stop Loss: 33.95
Target(s): 39.50
Current Gain/Loss: - 1.7%

Entry on February 08 at $35.43
Listed on February 7, 2013
Time Frame: 4 to 8 weeks
Average Daily Volume = 895 thousand
New Positions: see below

Comments:
02/14/13: I was about to give up on SYNA but shares outperformed the market with a +1.0% gain today. I remain cautious on this stock. I am not suggesting new positions.

Earlier Comments:
The plan was to keep our position size small to limit our risk. More conservative traders may want to use a trigger at $36.05 instead as their entry point.

*Small Positions*

current Position: long SYNA stock @ $35.43



Terex Corp. - TEX - close: 35.00 change: -0.23

Stop Loss: 32.45
Target(s): 38.00
Current Gain/Loss: + 3.8%

Entry on February 11 at $33.71
Listed on February 9, 2013
Time Frame: exit prior to earnings on Feb. 19th
Average Daily Volume = 2.5 million
New Positions: see below

Comments:
02/14/13: The rally in TEX stalled with the stock hovering near the $35.00 mark.

NOTE: We will plan on exiting prior to the company's earnings report on Feb. 19th.

Earlier Comments:
We will plan to exit prior to the late February earnings report. Thus, odds of TEX actually hitting our target at $38 before we exit are probably slim but there is the possibility of a short squeeze.

current Position: Long TEX stock @ $33.71

02/13/13 new stop loss @ 32.45
02/11/13 trade opened on gap higher at $33.71



BEARISH Play Updates

Caesars Entertainment - CZR - close: 11.24 change: -0.00

Stop Loss: 13.25
Target(s): 10.10
Current Gain/Loss: +10.3%

Entry on February 13 at $12.53
Listed on February 12, 2013
Time Frame: Exit prior to earnings on Feb. 25th
Average Daily Volume = 1.3 million
New Positions: see below

Comments:
02/14/13: The sell-off in CZR continued on Thursday and the stock almost hit $10.60 before finally bouncing back. The stock rebounded to close unchanged on the session. I am not suggesting new bearish positions at this time.

current Position: short CZR stock @ $12.53

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

Long Mar $10 PUT (CZR1316o10) entry $0.45



CLOSED BEARISH PLAYS

Peabody Energy - BTU - close: 25.01 change: +1.08

Stop Loss: 24.75
Target(s): 20.25
Current Gain/Loss: - 4.4%

Entry on February 07 at $23.70
Listed on February 5, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 7.2 million
New Positions: see below

Comments:
02/14/13: Alpha Natural Resources (ANR) reported better than expected earnings numbers this morning. That fueled a big oversold bounce in the coal industry. Shares of ANR surged +13.8%. This strength rubbed off on shares of BTU, which rallied +4.5%. Our stop loss on BTU was hit at $24.75.

closed Position: short BTU stock @ $23.70 exit $24.75 (-4.4%)

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

Mar $23 PUT (BTU1316o23) entry $0.80 exit $0.38 (-52.5%)

02/14/13 stopped out at $24.75

chart: