Option Investor
Newsletter

Daily Newsletter, Thursday, 2/21/2013

Table of Contents

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

Market Wrap

Data Doesn't Sooth Bernanke Hangover

by Thomas Hughes

Click here to email Thomas Hughes
Introduction

Yesterday the release of FOMC sent the market into a dive. The rush spilled over into today and brought the S&P down more than 30 points from yesterday's high. What I can't figure out is why? The minutes revealed no indication of an end to QE. There was debate amongst the fed governors over the long term use of bond purchases, the effects of the current bond purchases, signs of moderate improvement in the economy and how to effectively unwind the Fed's bond position. There was no hint of when QE would end and no sign of a change in policy. The best I can figure is that it made a good excuse to take profits.


From what I read including articles, excerpts and the minutes themselves it seems to me as if the board is still divided on how to proceed. Despite a pause of growth in some areas the board sees the overall economy as sluggish with some modest growth. The housing sector was singled out as one area of stabilization along with an unemployment rate they expect to continue declining. There are at least 4 differing schools of thought at play with opinions on when and how to end the bond purchasing programs. Governors agreed that the current purchases were good and that the programs were working. The discussion over how to proceed was left open and will likely dominate the next several FOMC meetings.

There were other positives I took from the minutes. These included the statement about “fewer downside risks”, strengthening in housing sector and inflation expected to run below target. The PPI and CPI numbers released yesterday and today at least seem to be in line with their thoughts on inflation. The housing sector is still chugging along and today's release of Existing Home Sales suggests that it is still expanding. Unemployment is also at low levels but has ticked up over the last two months. Many pundits and analysts are tying a recovery in employment with a recovering housing market. If this is the case then as one improves the other should follow in step. However, the spending sequester is still hanging over the economy and could reduce available jobs in the public and private sectors. That potential reduction won't be good for housing.

The Economic Data

This morning started off with the new CPI data. The headline was unchanged from last month and below the consensus estimate. The core number came in a little above expectation at 0.3% but only missed by a tenth. This is a modest gain in prices but nothing out of the norm. Combined with yesterday's PPI inflationary pressures don't seem to building to quickly.

Unemployment claims were mixed this week and within previous ranges. Initial claims for unemployment gained 20,000 to hit 362,000. The previous week was revised up by only one thousand claims, a smaller than usual revision but maybe one that reflects the lack of seasonal volatility. The four week moving average climbed as well, gaining 8,000 to reach 360,750. Taken together these figures and are well within the range of claims over the last year and show no signs of improvement. At this point it seems as if job creation and job losses are near equilibrium.


Continuing claims also rose this week, adding 11,000 to last weeks mild upward revision. Continuing claims appears to be in decline over the last few months but has also experienced some volatility. I think it will take a few more weeks of data to know for sure. However, if the housing market is expanding, and keep in mind we are entering the building season, it could help with the overall unemployment situation as expected by economist.


Total claims retreated from a 7 month peak with a drop of over 300,000. Total claims tallied in at 5.610 million, more than 2 million less than last year at this time. Looking at this it is clear that the employment situation has improved greatly. It is also clear to see that there has an uptrend in total claims over the last three months. This could just be a short term peak. It is the winter, and post holiday, so there is reason to believe some of this gain in total claims is seasonally driven. The biggest decreases in claims were in CA, NY and OR. The decreases were reported due to fewer layoffs in agriculture, construction, services and transportation. Only one state had an increase of more than 1,000 claims, Kansas, and those came from across the board lay offs in transportation.


Existing home sales increased by 0.4% and grew to an annualized rate of 4.92 million units. This is at the same time that inventory of existing homes for sale dropped to a 13 year low. This could be good or bad depending on which side of the market is stronger. If more sellers than buyers are waiting in the wings then the housing recovery may not have the strength to continue. Other data released this week was also mixed. The number of new houses started in January was 890,000, a few thousand below expectations. The number of new building permits increased though. January is one of the worst months for building houses so a drop in starts is not too surprising. An increase in permits, even though it is not a guarantee of new starts, is a positive forward looking sign. To sum it all up, the housing sector is still ok, mildly expanding and expected to do more of the same. Next week we'll get some more data on new home and pending home sales.

The reading of the Index of Leading Indicators showed a mild increase in activity for this month. The index rose 0.2% in January, compared to 0.5% in December. This increase was overshadowed by the Philadelphia Fed Manufacturing Survey. The consensus estimate was a gain of +1.5 but the actual was a dismal -12.5. Declines were seen in production last month but there were still some positive signs. Within the data there was expansion in two forward looking segments. Shipments of goods and employment both rose in January with employment making the biggest gains. Employment jumped 0.9% compared to a decline of -5.2% for the previous month.


Europe And The Euro

European markets spooked on the FOMC minutes ran from weaker than expected PMI readings. The drop in the flash PMI was due in large part to unexpected weakness in France. Germany grew at a “healthy rate” according to the report which has been expected. Because of the lower reading some estimates of EU GDP have been lowered, which also helped drive their markets lower.

At the moment the European economy is stabilizing and weathering a period of recession in anticipation of a return to growth. The last thing they, or we, need is for any downside risks to be realized. Expectations are good for a return to growth later this year so long as downside risks are avoided. One such risk is the impending Italian elections in which former Prime Minister Berlusconi may get reelected. If he is successful there could be an end to Italian austerity measures and hurt EU recovery efforts. His election is seen by many to a major hurdle to recovery efforts and this is highlighted by a statement from the EU Parliament President, “don't vote for Berlusconi”.

Recent data including GDP reports last week have already shown that fourth quarter of last year and the first part of this year were slower than expected. They have also shown that the forward looking statements are expecting the recovery to take hold and for the EU to grow. Nothing about the PMI is any different.

The EUR/USD pair dropped sharply this week and exceeded the target I had projected. The move brought the pair down to the 7 month up trend line around the 1.3750 level. Bearish technicals on the daily charts are pointing to a possible break down of this level. There was evidence of intra day support around the 1.3750 level but it remains untested at this point. The indicators on the weekly charts are still bullish but aren't really indicating a buy at this point, more like a peak has crested and time to wait for the next wave. Judging by the MACD on the daily charts near term momentum is building to the downside. My longer term outlook for the Euro is still bullish but in the nearer term downside targets exist around 1.3135 and 1.3000.

Eur/USD daily

The Yen And The Dollar

It appears that weakness in the yen will go on for some time. It is also starting to look like some other countries are going to follow suit if things continue to go the way they are in world currency. The policy of Shinzo Abe and the BOJ used to devalue the yen, improve competitiveness and drive up the prices of yen based stock will likely move forward. The lack of attention paid to it by the G7 (at least in public) have allowed the Japanese to continue without worry. The success of the plans and a growing “imbalance” in currency in the region have caused Korea and Australia to announce that they would take steps to devalue their own currencies is needed.

The USD/JPY pair has been consolidating above 92.500 for over two weeks. The pair is well above a target set by Abe and Japanese finance ministers but is still undervalued according to some analysts. The indicators on the daily charts are bearish now but this is normal during a consolidation. A break out of the consolidation range is required to get really bullish on the trade. Once the break out occurs, if at all, upside targets exists around 95 and 100.

USD/JPY

Earnings And Story Stocks

Earnings still linger but are being overshadowed by the spending sequester set to go into place next week. Current results are still good, the fourth quarter of 2012 was better than expected for the better of S&P companies. Expectations for the current quarter are mixed but are still more positive the negative. For the most part guidance has met expectations but there have been enough warnings for me to take note of. The big one today was Wal Mart. The corporate behemoth managed to beat earnings for last quarter but failed to meet expectations for next. Wal Mart cited economic factors as impacting customers in many of its markets. These factors could be exacerbated by spending cuts next week. Shares of WMT jumped back above the sup/resistance line they fell below earlier in the week after the report. The move below the line came with a gap that today's move has closed.

Wal Mart daily

Chesapeake Energy released today and beat expectations but that headline isn't worth much. The company's net income was down sharply from last year and they were hit by some massive charges. Earnings were expected to drop from $0.52 to $0.15 but were surprised by EPS of $0.26. CEO Aubrey McClendon was cleared of wrong doing but is still expected to retire April 1st. Shares opened the day up from the previous close but fell under heavy selling pressure to finish down on the session.

Chesapeake daily

There was a little earnings action after the close. AIG and Hewlett Packard both released just after 4pm. AIG posted a net loss on Hurricane Sandy and other charges but still managed to perform better than expected. Shares jumped in after hours trading by about $1.50 to hit $38.75. Another surprise was Hewlett Packard. HP performed better than expected and lost much less than anticipated. Adding to the good news was a positive outlook for the coming quarter. Shares of HPQ jumped by more than $1.00 in after hours trading. Texas Instruments was another after hours mover but for a different reason. The tech giant announced another round of stock buybacks and an increase in the quarterly dividend. Shares of this stock were also up in the after hours.

The Gold Index

Gold dropped below the support of $1600 this week on signs of a stronger economy and contained inflation. The Gold Index followed suit and dropped below the $165 support I have been watching. This breakdown will have long term implications and could be a continuation of the down trend started in late 2011. Next potential support is around $145 and the 61.8% retracement of the 2011 peak.

The Gold Index

The VIX

The VIX continued a steep move up in tandem with the S&P 500's decline. The lack of fear proved to be misplaced for many investors scrambling to buy puts today. Today's action created a second long white candle and increased bullish momentum in options prices. Today's action also brought VIX back up above the 15 level where it could remain until after the sequester is laid to rest or kicked down the road.

The VIX

The S&P 500

The S&P tanked again today. The index dropped over 15 points at one point, crossing below 1500 several times. The strength of the black candles alone suggests that the price of the S&P 500 is going to come down some more. Using a Fibonacci retracement of the Nov-Feb rally the first potential area of support is 1490 with the next near 1458. The projections for the correction ranged from 2-7% today. Today's drop brings us to just over 3.2%, about half of the high end of that range. Another 3.2% would bring the index down to just above 1450. Tomorrow could bring another round of selling for several reasons but primarily driven by the sequester. This would be a very similar situation to the end of last year when the market sold off just before the “fiscal cliff” (I still hear ominous music in my head whenever I say that). That sell off turned out to be a great buying opportunity once the cliff was averted. I think there is a high probability for that to happen here as well. The markets will likely brace for the worst and what we'll get will be a compromise that isn't as bad as what we thought.

SPX daily

Looking at the charts of 30 minute bars we can see that the index dropped down to 1500 early in the day. After trading around that level during the mid day support really kicked in at 2:30, causing two long white candles to appear. The move up to close above 1500 is a potentially good sign for the bull in me but another test or two will be needed to believe the correction is stopping here.

SPX 30 minutes

There are no scheduled U.S. economic releases tomorrow. Next week starts to heat up with new home sales, consumer confidence, durable goods, auto sales, construction spending and the second estimate for GDP. Overshadowing all of that will be the spending sequester. Once that is resolved debt ceiling and budget will come back to the forefront.

Until then, remember the trend!

Thomas Hughes


New Plays

Flunking Out

by James Brown

Click here to email James Brown


NEW BEARISH Plays

Apollo Group Inc. - APOL - close: 18.55 change: -0.58

Stop Loss: 19.60
Target(s): 15.50
Current Gain/Loss: unopened

Entry on February -- at $--.--
Listed on February 21, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 3.1 million
New Positions: Yes, see below

Company Description

Why We Like It:
Education stock APOL looks weak and poised to breakdown from its four-month consolidation in the $18-22 zone. Shares have been trending lower for over a year. Now that its attempt at a bottom appears to be failing APOL could be poised for the next leg lower. Where it stops is a good question. APOL hasn't traded below the $18.00 level since the year 2000.

The recent lows have seen traders buying the dip near $18.50. I am suggesting a trigger to open bearish positions at $18.25. We do want to keep our position size small. There is already a large amount of shorts in the stock. Traders may want to consider buying put options to limit their risk but they'll also be more volatile.

If triggered at $18.25 our initial target is $15.50.

Trigger @ 18.25

Suggested Position: short APOL stock @ (trigger)

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

buy the Mar $18 PUT (APOL1316o18) current ask $0.49

Annotated chart:




In Play Updates and Reviews

Stocks Continue to Weaken

by James Brown

Click here to email James Brown

Editor's Note:
The profit taking continued for a second day with the U.S. market in another widespread decline.

DECK and MS were stopped out.


Current Portfolio:


BULLISH Play Updates

Conns Inc. - CONN - close: 30.46 change: -0.56

Stop Loss: 29.45
Target(s): 33.50
Current Gain/Loss: + 3.1%

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: see below

Comments:
02/21/13: No surprises here. I cautioned readers that CONN would likely dip toward what should be round-number support at $30.00. Nimble traders could use a bounce off the $30.00 mark as a new bullish entry point.

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

02/19/13 new stop loss @ 29.45
02/12/13 new stop loss @ 28.85
02/09/13 new stop loss @ 28.45



Gilead Sciences - GILD - close: 41.54 change: -0.34

Stop Loss: 39.85
Target(s): 44.85
Current Gain/Loss: +0.9%

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:
02/21/13: As expected shares of GILD continued to pull back and now the stock is testing short-term technical support at the simple 10-dma. If this level fails we could see GILD decline toward round-number, psychological support at the $40.00 mark. I am not suggesting new positions at this time.

Earlier Comments:
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



Progressive Corp. - PGR - close: 24.48 change: +0.18

Stop Loss: 23.40
Target(s): 26.00
Current Gain/Loss: + 4.1%

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:
02/21/13: PGR displayed some relative strength with a +0.7% gain. Shares even managed a new intraday high. I am not suggesting new positions at this time.

current Position: Long PGR stock @ $23.52

02/20/13 new stop loss @ 23.40
02/13/13 new stop loss @ 22.95



National Instruments - NATI - close: 29.41 change: -0.25

Stop Loss: 29.60
Target(s): 32.75
Current Gain/Loss: unopened

Entry on February -- at $--.--
Listed on February 16, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 340 thousand
New Positions: Yes, see below

Comments:
02/21/13: I was prepared to drop NATI as a bullish candidate given today's decline. Yet traders did buy the dip twice intraday. We'll keep the stock on the newsletter another day and see how shares perform tomorrow. Right now our plan is unchanged. I am suggesting a trigger to open bullish positions at $30.35. That would be a new 52-week high. If triggered our multi-week target is $32.75.
FYI: The Point & Figure chart for NATI is bullish with a $40.00 target.

Trigger @ 30.35

Suggested Position: buy NATI stock @ (trigger)



Splunk, Inc. - SPLK - close: 34.04 change: -0.07

Stop Loss: 33.75
Target(s): 39.50
Current Gain/Loss: - 4.0%

Entry on February 15 at $35.44
Listed on February 14, 2013
Time Frame: exit PRIOR to earnings on Feb. 28th
Average Daily Volume = 1.5 million
New Positions: see below

Comments:
02/21/13: SPLK flirted with a breakdown under short-term support at $34.00. The stock almost hit our stop loss at $33.75. I am not suggesting new positions at this time.

Earlier Comments:
A breakout here could spark a short squeeze. The most recent data listed short interest a 16% of the 55.6 million share float.

current Position: Long SPLK stock @ $35.44

02/15/13 trade opened on gap higher at $35.44, trigger was $35.30



Symantec Corp - SYMC - close: 22.31 change: -0.25

Stop Loss: 21.95
Target(s): 24.90
Current Gain/Loss: + 0.0%

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:
02/21/13: Today's action doesn't bode well for SYMC. The stock has broken down from its $22.40-22.90 trading range. Shares have also broken down below their 10-dma. If this trend continues we'll see SYMC testing the $22.00 level soon and we have a stop loss at $21.95. 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

02/16/13 new stop loss @ 21.95



BEARISH Play Updates

Caesars Entertainment - CZR - close: 11.18 change: +0.34

Stop Loss: 13.25
Target(s): 10.10
Current Gain/Loss: +10.8%

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:
02/21/13: Shares of CZR were actually trending lower today. Then around 2:37 p.m. the stock just exploded higher with a move from the low of the day to over $12.00 in just a few minutes. I couldn't find any news or catalyst at 2:37 p.m. that might account for the sudden rise. However, it is possible the stock was moving on news out of Nevada. Just before 2:00 p.m. ET the Las Vegas Sun published an article that said the Nevada Legislature had "fast tracked an online gaming bill" and after unanimously passing it they immediately delivered it to Governor Brian Sandoval who signed it later that afternoon. Nevada wants to be first to approve online gambling before other states do. Several states are considering approving online gambling and New Jersey is close to getting it passed. Nevada wants the first mover advantage.

CZR did pare its gains today. I am not suggesting new positions.

current Position: short CZR stock @ $12.53

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

Long Mar $10 PUT (CZR1316o10) entry $0.45



DuPont Fabros Tech. - DFT - close: 22.62 change: -0.21

Stop Loss: 24.05
Target(s): 20.25
Current Gain/Loss: + 1.0%

Entry on February 20 at $22.85
Listed on February 16, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.25 million
New Positions: see below

Comments:
02/21/13: DFT continues to sink. The stock is now down eight days in a row and has clearly broken support near $23.00.

Earlier Comments:
Please note that we do want to keep our position size small. That's because there is already a lot of short interest. The most recent data listed short interest at 22% of the 62.2 million share float. That raises the risk of a short squeeze. Readers may want to buy the put options to limit their risk to their size of their position.
FYI: The Point & Figure chart for DFT is bearish with a $10.00 target.

*Small Positions*

current Position: short DFT stock @ $22.85

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

Long Mar $25 PUT (DFT1316o25) entry $2.35



Ford Motor Co. - F - close: 12.39 change: -0.21

Stop Loss: 13.05
Target(s): 11.50
Current Gain/Loss: + 1.0%

Entry on February 21 at $12.51
Listed on February 20, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 43.7 million
New Positions: see below

Comments:
02/21/13: The sell-off in shares of Ford continued today. The stock gapped open lower at $12.51. I don't see any changes from my prior comments. We do want to keep our position size small. Our initial target is $11.50 but we'll make adjustments along the way.

current Position: short F stock @ $12.51



CLOSED BULLISH PLAYS

Deckers Outdoor Corp. - DECK - close: 40.84 change: -2.15

Stop Loss: 41.85
Target(s): 49.75
Current Gain/Loss: - 5.8%

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:
02/21/13: Another down day for the U.S. stock market sparked a sharp sell-off in shares of DECK. The stock broke down under short-term support near $42.50 and the 200-dma. Shares hit our stop loss at $41.85.

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.

*Small Positions*

closed Position: Long DECK stock @ $44.41 exit $41.85 (-5.8%)

02/21/13 stopped out
02/20/13 new stop loss @ 41.85

chart:



Morgan Stanley - MS - close: 22.83 change: -0.59

Stop Loss: 22.85
Target(s): 26.00
Current Gain/Loss: - 1.3%

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:
02/21/13: Yesterday's profit taking in MS wiped out several days of gains. Today's profit taking (-2.5%) wiped out even more days of gains. The stock actually gapped open lower at $23.22 and then fell toward $22.50 before paring its losses. Our stop was hit at $22.85.

Small Positions*

closed Position: Long MS stock @ $23.15 exit $22.85 (-1.3%)

02/21/13 stopped out
02/20/13 new stop loss @ 22.85
02/16/13 new stop loss @ 22.45

chart: