Option Investor
Newsletter

Daily Newsletter, Thursday, 2/28/2013

Table of Contents

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

Market Wrap

Markets Sequester Early Gains

by Thomas Hughes

Click here to email Thomas Hughes
Introduction

The world market got a big lift in overnight trading. The reassuring words of Big Ben Bernanke helped to sooth some fears and spur investor appetites. The euphoria did not carry over into the U.S. markets though they did manage to sustain the big gains we saw yesterday. On an intra-day basis the Dow Jones Average made a new 5 year high and speculation is rampant over when and if it will make a new all time high. The S&P 500 still has a little further to go in order to hit its all-time high. Today the index managed to hold yesterday's rebound but was capped at 1525.


The big news from around the world was the nomination of Kuroda for Bank of Japan Governor. This move has been expected and failed to make much of an impact on the yen. It did help the Nikkei to lead Asian markets with a 2.7% gain. The apparent success of the Italian bond auction yesterday was another plus on the international scene. It helped to ease fears even though Italy remains a wild card. The global rebound in stock continued in Europe with individual indexes gaining and average around 0.75%.

Economic data here at home was positive and supports the expectation and possibility of GDP growth in the next few quarters. Unemployment claims continued to trend lower, GDP in the fourth quarter was revised up, the housing sector got yet another positive reading and Chicago PMI grew stronger than expected. You'd think that with all that the markets would have been screaming higher, maybe the sequester isn't a non-event after all. The markets may be expecting a last minute deal to stave off the near term effects. I have to admit I am, why wouldn't they, we got one for the Cliff and we got one each time a budget issue has come up before that. It seems to be status quo. We saw a similar sharp pull-back just before the Fiscal Cliff blah blah blah that turned out to be a nice entry point. This could be the same but we need to see a break above 1430 on the S&P 500.

The Data

Early morning releases included the 4th quarter GDP revision and weekly unemployment claims figures. GDP was revised up to 0.1% from the previous -0.1%, a good sign but not as good as the expected 0.5% economists were looking for. This seems to be in line with other GDP reports we have seen over the last few weeks namely from the EU and Germany. Both of those reports also showed that things were a little weaker than expected but that expectations for rebound, especially in Germany, were at least as good if not better than before. Within the report there were some interesting details. Much of the difference between the expected number and the actual was laid at the feet of inventory increases and military spending. These two drags are both expected to reverse in the first quarter which could help boost GDP along with other factors. Consumer spending, which accounts for about 70% of our economy, rose by a bigger than expected 2.1%. This is another positive for GDP growth in the longer term providing the consumer can shrug off the effects of tax increase and spending cuts. Excluding the volatile inventory number the GDP rose by 1.7%, in line with expectations and hotter than the previous estimate of 1.1%.


Jobless claims seems to be trending down. There is some regional volatility but in general initial claims is near the bottom of its 12 month range and continuing claims reached a new low. Total claims are still lingering at relatively high levels but could begin to tick down if housing keeps gaining strength. Initial claims dropped by 22,000 to hit 344,000, only 14,000 higher than the 5 year low. The four week moving average also moved lower, dropping by 6,750 to hit 355,000. This is also approaching its five year low 350,000. A drop below either one of these levels could be the signal that hiring is gaining the upper hand over firing. This week 16 states reported drops of more than 1,000 claims and 5 with drops bigger than 2,000. California was the only state listed with a gain in claims larger than 1,000 and blew that limit away with over 26,000.


Continuing claims made a big drop. This number fell 91,000 to 3.07 million, the lowest level since June 2008. This chart is in decline, even taking into account its volatile nature over the past few months. This is a possible indication the labor market is picking up in some areas but I would like to see improvement in initial claims, total claims and the overall unemployment levels.


Total claims for unemployment is one area of concern. This number ticked up this week, approaching but not hitting, recent highs. This number has been elevated for several months, counter to the delining trend we saw in the first half of last year. It is the increase in total claims that I see as having the most influence on total unemployment. Comparing total claims to unemployment there is a bottom in total claims around Oct-Nov 2012 coincident with a bottom in unemployment. Based on the data so far I won't be expecting to see much, if any, improvement in unemployment levels when they are released next Friday.



I won't rehash all the housing data we have received over the last two weeks but I will highlight the news of today. Growth in home building was revised up to an annualized rate of 17.5%. This is good news for housing bulls and in line with the expectations. Housing is also expected to be a leader in a jobs recovery that could begin as early as this spring. The sector has been experiencing slow and steady growth for nearly a year, if that continues as expected we could see the unemployment data begin to decline again. Other data such as new home sales, existing home sales and housing inventory figures support an increase in building later this year. There is concern that the housing recovery is one sided and being driven by investment purchases and flippers but today's new home sales numbers may put some of that to rest.

The final piece of the economic puzzle revealed today was Chicago PMI with a reading of 56.8. This was much better than expected, ahead of the previous 55.6 and expected 54.0. This marks an eleventh month high and helped to lift the major indexes. It also marks the 2nd month of increase. The new orders portion of the report in combination with inventory levels with suggests that manufacturers will need to start increasing production in the near future. This could lead to an increase in hiring as well. If manufacturing gains traction at the same time as housing there could be a bigger than expected surge in the economy.

Japan and the Yen

Asian markets got a big lift following Bernanke's testimony and QA session this week. He gave one answer in particular that I thought would have had more impact on the USD/JPY pair than it did. He stated in a firm manner that he supported the Japanese policies and their efforts to devalue the yen. It is no secret that Japan is actively devaluing its currency and it based on reaction by the G7 and now Bernanke's endorsement those plans can move ahead full steam. These efforts also moved one step further into aggressive mode with the nomination of Haruhiko Kuroda to be BOJ Governor. He is an advocate of the policies put forth by Prime Minister Shinzo Abe and expected to help. The pair found support at the short term moving average after falling sharply on Monday. Today it regained the support/resistance level of 92.50. The longer outlook for the yen is more weakness, nearer term there could still be some volatility as other currencies adjust.

USD/JPY daily

Europe And The Euro

Europe traded to the positive today and rallied right into the close of trading. I think they expect the sequester and Italian worries to be blips on the radar and quickly put behind us. The reassurances from Bernanke that QE would not come to an end soon helped to ease fears in European and Asian markets. Draghi followed up today with remarks to the effect that there is no reason to unwind ECB policy at this time and that there may even be another rate cut in the offing. These statements did not help the EUR/USD pair. The Euro lost some ground to the dollar, falling from the 1.315 resistance line. The uptrend started last summer is broken and will provide resistance should the pair advance. It is oversold at this level but bearish momentum is still strong. Next support exists at 1.3000, a break below this would be bearish.

EUR/USD daily

The Oil Index

Oil traded below $95 a barrel for the seventh day today. The assurances from Bernanke and Draghi that the central banks would keep supporting the economy should have been good news for crude and brent. Crude hovered around flatline before falling off into the close. This could just be near term blahs, if housing and manufacturing pick up and lead to employment then oil will most likely go up as well. The Oil Index has been one of the more volatile ones this week. It dropped over 3% on Monday and is looking kinda bearish right now. However, if this is a precursor to economic growth later in the year then this is a potential entry area. MACD analysis of the previous peak suggests that it will be at least retested. This supported by a buy signal on the Stochastic indicator. Longer term bullishness requires a break above resistance at 1350 and the recent peak at 1375.

Oil Index daily

The Gold Index

Gold retreated below 1600 again today. The metal dropped sharply to to approach the recent lows near $1550. Economic strengths and technical selling are pressuring this trade and could send it even lower. The Gold Index looks like it is in free fall. It is approaching the 68.8% retracement of the previous bull market but the technicals are so weak I don't think it will even matter. At this time I can't see any technical reason for the Gold Index to find support here. Indicators on the daily charts are bearish with no signs of support or bottom and are just plain bearish on the weekly charts.

Gold Index daily

Story Stocks

Earnings are still making headlines with over 150 companies reporting today. Of course, this isn't counting all the hoopla over the Dow flirting with all time highs. JC Penny and Groupon both made big misses. JC Penny reported a net loss in the fourth quarter that totals more than 43% of losses for the full year. This was far more worse than expected and has caused CEO Ron Johnson to reverse the no discounting policy. The stock lost more than 15% in trading today, coming close to the 3 year low set a few months ago.

JC Penny daily

Groupon was another disaster and I am not surprised. Sales and revenue increases matched expectations but their guidance fell short. They expect 2013 revenue to be about 6.5% below the consensus and fueled speculation about the online discount sites viability. The stock lost about 25% in today's trading. After hours the company announced a change in leadership, the current CEO will be replaced with a team of two.

Groupon daily

Herbalife made headlines again with the addition of two new board members provided by Carl Icahn. The announcement also included an allowance for Icahn to increase his position up to 25%. The stock jumped on the announcement but is still in the middle of the recent range. The stock appears to be winding up for a break out. There is lots of pressure mounting from Icahn and the two hedge funds currently battling over the companies value.

Herbalife daily

The VIX

You have probably already noticed that volatility is back in the market. Albeit still at very low levels. The spike took the index almost all the way to the top of calm range but quickly fell back down. This move close the gap the VIX opened January 1st when the trading year started. This move was semi expected and raised the question of which volatility is moving now. The index is currently sitting on an important support level, one that bears close watching. The thing is, even if the market keep rallying it doesn't mean the VIX will fall. Speculation and fear of a reversal could lead to higher prices for options relative to the index and that will equal a higher value for the VIX.

The VIX daily

The S&P 500

The index started the day out fairly quiet considering the last few days. Regardless of what Art Cashin said about it being a non-event the Sequester is hanging heavy over the markets. News of failed attempts to pass bills from both sides of the Senate helped to put a damper on gains made during the middle part of the day. Near term resistance capped the index at 1525 that resulted in a pullback to 1520 in the late afternoon. The pullback extended into the close with the index dropping down to the 1515 level.

SPX 60 minute

On the daily charts there is an early signal forming, not so much a buy signal as a signal that a signal may be coming. MACD is not as clear. It is bearish and declining from a peak but not giving any firm signal. The 1525 resistance could keep the index in check until the sequester deadline blows over. It could also be a potential top so a break above it and then 1530 is really needed. The pullback of the last week did not even come close to breaking my up trend line so I am still bullish on the daily chart for now but I need to see that break above 1430.

SPX daily

The longer term charts have not been improving. The trend is still up but it is also still weakening as it approaches the top of the secular bear market range. The most recent peak in MACD is smaller than the last and currently declining making the third consecutive divergence in the indicator since the market hit bottom in 2011. Based on this chart it looks like there may not be much life left in the rally. Hopes of a housing recovery may be enough to help the index make one last push to the all time highs but it will take real hard evidence to keep it there.

SPX weekly

Tomorrow starts a new round of important monthly economic figures. Personal Income and Spending, PCE and Michigan Sentiment top the list. Resuming next week ISM, Construction Spending, the Fed's Beige Book and the all important ADP/Challenger/NFP bundle dominating the scene. Look for signs of improvement in hiring and unemployment to help boost the markets. Tomorrow could bring us some more volatility so be ready.

Until then, remember the trend!

Thomas Hughes


New Plays

Caving In

by James Brown

Click here to email James Brown


NEW BEARISH Plays

AngloGold Ashanti Ltd. - AU - close: 24.24 change: -0.84

Stop Loss: 25.55
Target(s): 20.25
Current Gain/Loss: unopened

Entry on March 01 at $--.--
Listed on February 28, 2013
Time Frame: 3 to 6 weeks
Average Daily Volume = 2.0 million
New Positions: Yes, see below

Company Description

Why We Like It:
The oversold bounce in gold prices has reversed and the precious metal is sinking again. This is weighing heavily on the mining stocks. AU is a South African gold miner and the stock just broke down to a new four-year low. The breakdown below round-number support at $25.00 looks pretty ugly.

We are suggesting new bearish positions now, at the open tomorrow. We want to keep our position size small because AU is arguably already short-term oversold. Of course it can grow a lot more oversold. Our target is $20.25. Readers may want to buy the put options, which can allow you to limit your risk to the cost of the option.
FYI: The Point & Figure chart for AU is bearish with a $13.00 target.

*Small Positions*

Suggested Position: short AU stock @ (the open)

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

buy the Apr $24 PUT (AU1320p24) current ask $1.05

Annotated chart:

Weekly chart:




In Play Updates and Reviews

An Afternoon Reversal

by James Brown

Click here to email James Brown

Editor's Note:
The stock market produced an afternoon pullback from its midday highs. The small caps managed a gain but the large cap indices posted declines.

We did see both NATI and SFLY hit our bullish entry triggers.


Current Portfolio:


BULLISH Play Updates

Gilead Sciences - GILD - close: 42.72 change: -0.17

Stop Loss: 40.75
Target(s): 44.85
Current Gain/Loss: +3.7%

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:
02/28/13: GILD garnered some bullish analyst comments today but that failed to help the stock's rally. Shares actually paused and spent most of the day inside a 40-cent range before following the market lower later in the day. I am not suggesting new positions.

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

02/23/13 new stop loss @ 40.75



National Instruments - NATI - close: 30.08 change: -0.12

Stop Loss: 29.60
Target(s): 32.75
Current Gain/Loss: - 0.9%

Entry on February 28 at $30.35
Listed on February 16, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 340 thousand
New Positions: see below

Comments:
02/28/13: NATI finally hit our suggested entry point at $30.35. Unfortunately the rally didn't last long this morning and shares faded lower. There should be short-term technical support at the 10-dma (29.85) and the 20-dma (29.70). Nimble traders could buy a dip on one of these moving averages. Otherwise, you may want to wait for a new relative high (30.40).

current Position: Long NATI stock @ $30.35



NASDAQ OMX Group - NDAQ - close: 31.66 change: -0.13

Stop Loss: 30.75
Target(s): 34.85
Current Gain/Loss: + 0.3%

Entry on February 25 at $31.55
Listed on February 23, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 2.0 million
New Positions: see below

Comments:
02/28/13: The rally in NDAQ has paused at resistance near $32.00. Shares spent most of the day in a pretty narrow range. A breakout past $32.00 could be used as an alternative bullish entry point.

*Small Positions*

current Position: long NDAQ stock @ $31.55

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

Long Apr $33 call (NDAQ1320d33) entry $0.95



Progressive Corp. - PGR - close: 24.36 change: -0.18

Stop Loss: 23.75
Target(s): 26.00
Current Gain/Loss: + 3.6%

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:
02/28/13: Trading in shares of PGR today looks a little ominous with a -0.7% decline. Readers may want to take profits now and exit early. PGR looks headed for the $24.00 level. I am not suggesting new positions at this time.

current Position: Long PGR stock @ $23.52

02/23/13 new stop loss @ 23.75
02/20/13 new stop loss @ 23.40
02/13/13 new stop loss @ 22.95



Shutterfly, Inc. - SFLY - close: 43.28 change: +0.16

Stop Loss: 40.95
Target(s): 48.50
Current Gain/Loss: + 0.1%

Entry on February 28 at $43.25
Listed on February 27, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.3 million
New Positions: see below

Comments:
02/28/13: SFLY rallied to a new relative high today at $44.09 but shares gave back most of its gains. I would not be surprised to see a dip back into the $43.00-42.50 zone. Readers may want to wait for the dip and then buy a bounce.

Earlier Comments:
SFLY could see another short squeeze. The most recent data listed short interest at nearly 40% of the small 28.6 million share float. I would keep our position size small as SFLY can be a volatile stock.

*Small Positions*

current Position: long SFLY stock @ $43.25



Sarepta Therapeutics - SRPT - close: 29.30 change: -2.22

Stop Loss: 28.85
Target(s): 34.75
Current Gain/Loss: - 2.8%

Entry on February 27 at $30.15
Listed on February 26, 2013
Time Frame: Exit PRIOR to earnings on Mar. 7th
Average Daily Volume = 1.0 million
New Positions: see below

Comments:
02/28/13: Ouch! I cautioned you that biotechs can be volatile. After yesterday's +8.5% rally shares reversed with a -7.0% decline. The close back beneath the $30.00 mark is technically bearish. If there is any follow through lower tomorrow we will likely see SRPT hit our stop loss at $28.85. I am not suggesting new positions at this time.

Earlier Comments:
We are aiming for $34.75. More aggressive traders could aim higher. Remember, this is a higher-risk trade. We want to keep our position size small.

*Small Positions*

current Position: long SRPT stock @ $30.15



Symantec Corp - SYMC - close: 23.44 change: +0.21

Stop Loss: 22.30
Target(s): 24.90
Current Gain/Loss: + 5.1%

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:
02/28/13: SYMC displayed relative strength with a +0.9% gain and another multi-year high. I am raising our stop loss to breakeven at $22.30.

*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

02/28/13 new stop loss @ 22.30
02/25/13 new stop loss @ 22.15
02/16/13 new stop loss @ 21.95



Verizon Comm. - VZ - close: 46.53 change: +0.18

Stop Loss: 44.35
Target(s): 47.25
Current Gain/Loss: + 2.3%

Entry on February 25 at $45.50
Listed on February 23, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 12.9 million
New Positions: see below

Comments:
02/28/13: Buyers continue to keep the rally alive in shares of VZ. The stock is now up eight days in a row. This can't last forever and shares will see a pullback, and probably sooner rather than later. I am not suggesting new positions at this time.

Our plan was to keep our position size small to limit our risk. Our target is $47.25. More aggressive traders may want to aim for the $50.00 area but you may have to be patient.

*Small Positions*

current Position: Long VZ Stock @ $45.50



BEARISH Play Updates

Apollo Group Inc. - APOL - close: 16.87 change: -0.25

Stop Loss: 18.60
Target(s): 15.50
Current Gain/Loss: + 7.6%

Entry on February 25 at $18.25
Listed on February 21, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 3.1 million
New Positions: see below

Comments:
02/28/13: Traders continue to sell APOL with shares underperforming the market with a -1.4% decline. I am lowering our stop loss to $18.60.

current Position: short APOL stock @ $18.25

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

Long Mar $18 PUT (APOL1316o18) entry $0.60

02/28/13 new stop loss @ 18.60



DuPont Fabros Tech. - DFT - close: 23.16 change: +0.36

Stop Loss: 23.60
Target(s): 20.25
Current Gain/Loss: - 1.4%

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:
02/28/13: Hmm...the action in DFT today is troubling. Shares outperformed the market with a +1.5% gain and closed above short-term resistance at the 10-dma and the $23.00 mark. More conservative traders may want to abandon ship. I am not suggesting new positions.

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

02/23/13 new stop loss @ 23.60



EMC Corp. - EMC - close: 23.01 change: -0.27

Stop Loss: 23.71
Target(s): 20.15
Current Gain/Loss: unopened

Entry on February -- at $--.--
Listed on February 25, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 27.4 million
New Positions: Yes, see below

Comments:
02/28/13: The bounce in EMC has reversed at short-term resistance on its simple 10-dma. Aggressive traders could use today's pullback as a new bearish entry point with a stop just above $23.50. I am suggesting we stick to the plan and wait for a new relative low. I am suggesting a trigger to open bearish positions at $22.65. If triggered our target is $20.15.

Trigger @ 22.65

Suggested Position: short EMC stock @ (trigger)

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

buy the April $22 PUT (EMC1320p22)



Ford Motor Co. - F - close: 12.61 change: -0.15

Stop Loss: 13.05
Target(s): 11.50
Current Gain/Loss: - 0.8%

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:
02/28/13: As expected there was no follow through on yesterday's big bounce. The rally in Ford stalled at its 20-dma. More conservative traders might want to adjust their stops closer to today's high (12.87).

Earlier 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