Option Investor
Newsletter

Daily Newsletter, Tuesday, 3/12/2013

Table of Contents

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

Market Wrap

That Was a Squeaker

by Jim Brown

Click here to email Jim Brown

The Dow gained +8 points in the last 30 seconds of trading to end with a +2 point gain and another new record.

Market Statistics

Traders managed to lift the Dow +40 points in the last hour to keep the winning streak alive. The Dow has been up for the last eight days and has closed at a new high for the last six days. The Dow has not had an eight day winning streak in two years.

The markets struggled today after MasterCard said this morning that consumer spending had slowed in February. That is not surprising given the tax hikes and higher fuel prices. This could mean the February retail sales due out on Wednesday could have a negative surprise. The Dow had risen to 14,478 by 10:20 and it was all downhill from there until the small spike right at the close. The rest of the major indexes all closed in the red.

The only economic report of note was the Job Openings and Labor Turnover Survey. The report was barely positive with the headline number rising to 3.693 million jobs openings in January compared to 3.612 million in December. The key point here is that this was a lagging report for January and as such it is normally ignored. The gross number of workers hired rose from 4.195 million to 4.247 million.

In the separate Manpower Hiring Survey that projects trends for Q2, U.S. companies improved only marginally. Those companies planning on hiring rose from 17% to 18%. Those planning layoffs declined from 8% to 5%. Those planning no changes rose 1% to 73%. It was a positive report showing anticipated layoffs declined but the overall hiring trends are still flat.

In the international portion of the survey 21 of 42 countries reported improved hiring conditions with 15 reporting declines in Q1. Compared to 2012 25 of those 42 countries were lower than the year ago quarter. The majority of the declines were in Europe with the Americas and Asia reporting slightly improved conditions year over year.

The economic calendar for Wednesday is headlined by the February Retail Sales with consensus expectations for a +0.5% increase. Given the MasterCard comments there may be a disappointment.

Economic Calendar

In stock news YUM Brands (YUM) reported same store sales out of China that were better than expected. Actually they were "less bad" than expected. Sales declined -20% compared to the -25% they had predicted. The challenge to sales was twofold. The most dramatic was a story several months ago about a chicken supplier selling chickens to YUM with higher than allowable levels of antibiotics and growth hormones. YUM had already dropped the supplier long before the story broke but the damage to sales was severe. The second reason sales were erratic over the same period in 2012 was the calendar offset of the Chinese New Year. This skewed sales comparisons year over year. Overall sales for February increased +2% in China. Oppenheimer said this represents a "clear improvement" as the chicken meat issues begin to abate. They raised the price target to $77 with a buy rating. Bank of America raised the price target to $80. Shares of YUM spiked on the news but faded into the close.

YUM Brands Chart - Daily

Cabela's (CAB) rocketed higher after it raised guidance for Q1. The company said earnings will be 10-15 cents higher than previously predicted because of stronger sales of firearms and ammo. Customers coming in to buy guns and ammo are also buying other items on impulse. Cabela's said same store sales are likely to be in the "high teens" percentage rate. Cabela's shares spiked +6.75 on the news.

In a separate news item a couple days earlier they said they can't keep ammunition in stock. Pallets of rifle ammo are sold out within hours of hitting the sales floor. Firearms are sold the same day they arrive. Both ammo and firearms are heavily backordered from suppliers and manufacturers are backordered on components so the entire supply chain is working 24/7 to try and fill the supply.

Cabela's Chart

Dicks Sporting Goods (DKS) is seeing a different outcome from Cabela's. Dick's reported earnings on Monday that missed estimates on both earnings and revenue. They said they would likely report earnings of 47-49 cents and analysts were expecting 50 cents. Same store sales declined -2.2%. Clearly sporting goods buyers were going to Cabela's and others based on Dick's inventory decisions. Dick's said they pulled all guns from stores near the Sandy Hook shooting and removed most semi-automatic firearms from all stores nationwide. The company said the shortage of ammunition also impacted sales. The company also blamed the drug admission by Lance Armstrong that hurt sales of the Livestrong brand of fitness equipment. Livestrong accounts for 50% of Dick's treadmill and elliptical sales. Shares of DKS declined more than $5 on Monday

On Tuesday Goldman Sachs upgraded DKS from buy to conviction buy saying sales would improve once weather patterns returned to normal. Goldman also said the lowered expectations would make it easier for Dick's to outperform later in the year. However, they did lower the price target from $56 to $53. Sure seems to be a "lack of conviction" in that recommendation but shares did rebound slightly.

Dick's Chart - Daily

Goldman Sachs also dumped on Radio Shack (RSH) and gave it a sell rating saying the company was "operating with a challenged business model, given its reliance on wireless, a slowing category where it is losing market power, the perpetual challenge of price transparency and limited opportunity for cost cuts after sharp reductions in recent years." They also said the company operated with lofty leverage and minimal equity value. Goldman cut them to sell with a price target of $2.75. Most analysts believe Radio Shack is already terminally ill. The Internet has made electronics and electronics components available to anyone at bargain basement prices with almost instant delivery. That makes the Shack obsolete.

Radio Shack Chart

Jefferies analyst Peter Misek, reiterated a hold rating on Apple and cut the price target to $420 from $500. Misek said there is a good chance Apple will miss Q1 estimates. His check of Asia based suppliers led him to cut sales estimates on the iPhone. He said iPhone sales will likely be down from 37.5 million to 35.0 million due to new builds being only about 25 million units. Apple is holding 2.0 million unsold iPhones in inventory. Manufacturer Hon Hai also has a "few million" in inventory. He believes the upcoming release on Thursday of the next Galaxy smartphone will further pressure iPhone sales. He cut his earnings estimate to $9.52 from $10.04 and that was already below the street consensus of $10.19. He cut the June quarter from $8.70 to $7.22 with the street at $9.56. Delivery dates for a cheaper version of the iPhone have slipped from June to Aug-Sept due to manufacturing problems. He also believes the iTV announcement expected in March may be postponed until 2014 because of manufacturing problems at LG and Sharp.

IDC made news this afternoon saying Google (GOOG) tablets will surpass iPads later this year. Android tablets have risen to 49% of the market, up from 41.5%, while iPads are expected to decline from 51% to 46%. The analyst believes Microsoft could have 7.4% of the market by 2017.

Apple Chart

Chevron (CVX) held its analyst meeting today and the news was all good. The company said it was targeting a 25% increase in production by 2017 and 98% of that increase was already being developed so the target was realistic not hopeful. They are expecting to raise production from the current 2.65 mboepd o 3.3 mboepd. (Mboepd means million barrels of oil equivalent per day) This calculates gas production equivalent to a barrel of oil so total production of both gas and oil can be reported in one number. Chevron said its depletion rate for existing production was 3-4%.

Chevron has some massive LNG projects under construction that will significantly increase their production later this decade. They have two of the largest LNG projects in the world under construction in Australia. Those are the Wheatstone and Gorgon projects. Wheatstone is 9 million tonnes per year in two trains and Gorgon is 15 million tonnes per year in three trains. They are spending $9 billion in 2013 on just those two projects. They just took over operation of the Kitimat LNG project in Canada in December. They have more than a dozen other major gas projects either under construction or in the engineering and design phase around the world. Natural gas delivered as LNG in Asia sells for up to five times the price of natural gas in the USA.

Chevron expects to drill 440 wells in the Permian Basin in 2013. They bought the acreage from Chesapeake in 2012 and they said initial wells show the production to be better than previously expected. They see their Permian production rising to 200,000 bpd by 2017. Chevron now has four million acres of shale gas under lease in Central Europe and they are negotiating on three million more acres.

Chevron has raised its dividend for 25 consecutive years and they have $22 billion in cash.

Chevron Chart

The Twinkie lives! Apollo Global Management (APO) agreed to pay $410 million for the majority of the Hostess Brands snack business. They were the only qualified bid received by the bankruptcy court. They will produce Twinkies, Ding Dongs, Ho Hos, Hostess Cupcakes and other Hostess products. Groupo Bimbo, maker of Sara Lee products, Entenmann's cakes and Thomas English Muffins won the Beefsteak bread brand for $31.9 million. Flowers Foods (FLO) won most of the remaining bread brands including Wonder Bread for $360 million. There are still bids outstanding for the Drake brand and four others. There are multiple bidders for the other assets including miscellaneous brands, plants, depots and equipment. The skeleton will be picked clean when the sales are completed.

The end of day Dow rally was really just market manipulation by traders on the floor of the NYSE. If you were looking at the charts in real time you could see they waited until the last minute and then produced a small surge of buying that was just enough to close the Dow in positive territory. Their stunt succeeded in stretching the streak of positive Dow gains to eight days and the longest since 2011. Art Cashin pointed out that the longest streak of Dow gains was 13 days in early 1987. Can we duplicate that feat? It will take a minor miracle given the overextension of the indexes today but anything is always possible.

The S&P was not so lucky. The S&P streak of gains came to an end at seven days with the S&P losing about -4 points. The intraday high of 1556.77 was another five year high but we are in nosebleed territory at this level. Buyers are losing traction and volume is slowing. On Monday there were only 5.4 billion shares traded and that was the lowest since February 11th. The lowest volume in a month with the markets closing at new highs is not a good sign. Only 5.7 billion shares traded today so there was no conviction in the selling either.

The S&P closed over 1550 and that is the round number, triple top resistance that is the key for traders. Everyone wants to see a new record close over 1565 but the 1550 level is still a stumbling point.

In the chart below the RSI is maxed out at 72.16. Whenever the RSI approaches that 70 level it ALWAYS results in a sell off but not exactly on the first day. This is a weekly chart and what we see is increasing volatility when the RSI tops out. It can last days or weeks as we see under the red bars but the high RSI is a strong indicator of overconfidence.

S&P Chart - Weekly

In our current situation I believe the 1565 historic high is like the Greek Sirens that called to sailors and lured them to crash their boats on the reefs. Odysseus saved his crew by filling their ears with wax. The 1565 level is calling to traders and at this point is nearly irresistible. Traders have nobody to fill their ears with wax. To the contrary we have the stock TV cheerleaders filling their ears with dreams of new highs. We may not go to 1565 directly but we are headed in that direction. Once we crash our boat on the 1565 reef there may not be enough pieces left to float us higher.

Support is currently 1540.

S&P Chart - Daily

S&P Chart - Monthly

The Dow has posted gains for the last eight days. That sentence alone should be cause for concern. Nothing goes up in a straight line and we are due for some profit taking. I am not saying we are going to suddenly lose -5% but we are due for some consolidation and at least a temporary pause. We could drop all the way back to 14,000 and maintain the bullish trend but I seriously doubt that is going to happen now. I do expect it after Q1 earnings.

Dow Chart - Daily

Dow Chart - Weekly

With Google down -7 and Apple -9 the Nasdaq never had a chance. The rest of the losses were minimal but the two biggest weightings kept the lid on tight. The Nasdaq is facing short term resistance at 3250 and Monday's highs followed by longer term resistance at 3265 and 3275. The short term uptrend is clear on the daily chart and it will take a major move to bust through that red line.

Nasdaq Top 20 Winners and Sinners

Nasdaq Chart - Daily

Nasdaq Chart - Weekly

The Russell 2000 and the Dow Transports both lost ground but they amount they lost was negligible. Losing -2 points on the Russell and -18 on the Transports was just noise. However, the Russell has stalled at 942. A +40 point gain in six days deserves a rest and this may be just consolidation.

Continue to watch these indexes for signs of a bigger problem. They will lead us on the next decline.

Russell 2000 Chart - 15 Min

Russell 2000 Chart - Daily

Dow Transports Chart

The Volatility Index fell to 11.50 on Monday and the lowest since February 2007. That is just one more warning that complacency is building. The minor +6% gain today to 12.27 was nothing. There is a bigger spike in our future but the trick is knowing when it is going to happen. There is nothing on the immediate horizon that is signaling a downturn ahead. Be patient, it will come.

VIX Chart

The good news is that there have not been any big emotional spikes in the market. It has been very well behaved and the lack of emotional outbursts generally means the trend will continue. The big volatility spikes tend to signal the end of the trend.

The bad news is that there have not been any big emotional spikes in the market. Investors are in a trance. Buy, the market goes up, sell, repeat. It is almost boring in the lack of major events. It reminds me of how the passengers on the Titanic were feeling before they hit the iceberg.

They say never short a dull market. This is about as close to a dull market as you can get but I am ready to short it on the next big gain and target a 2-3 day decline. We are not in iceberg waters yet but neither was the Coasta Concordia.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email


New Plays

Striking Out

by James Brown

Click here to email James Brown


NEW BEARISH Plays

Brunswick Corp - BC - close: 34.30 change: -0.90

Stop Loss: 35.30
Target(s): 30.30
Current Gain/Loss: unopened

Entry on March -- at $--.--
Listed on March 12, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 786 thousand
New Positions: Yes, see below

Company Description

Why We Like It:
BC is a recreational goods giant. Unfortunately it looks like the fun for investors is about to run out. BC's rally peaked about three weeks ago in mid February. Shares had hit overbought conditions. Now we're seeing the stock start to correct lower. BC is nearing potential support at its 50-dma near $34.00.

I am suggesting a trigger to launch bearish positions at $33.90. If triggered our target is $30.30.

Trigger @ 33.90

Suggested Position: short BC stock @ (trigger)

Annotated chart:




In Play Updates and Reviews

S&P 500 Kills Seven-Day Streak

by James Brown

Click here to email James Brown

Editor's Note:
The S&P 500 index ended a seven-day winning streak with today's decline. Granted, the losses were pretty mild. It looks more like the rally just paused.

I am suggesting an early exit in AU tomorrow.


Current Portfolio:


BULLISH Play Updates

Cray Inc. - CRAY - close: 20.07 change: -0.13

Stop Loss: 18.95
Target(s): 22.25
Current Gain/Loss: - 0.4%

Entry on March 04 at $20.15
Listed on March 02, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 419 thousand
New Positions: see below

Comments:
03/12/13: CRAY was little changed on Tuesday. Shares continue to churn sideways near round-number support at $20.00.

The plan was to keep our position size small to limit our risk.

*Small Positions*

Current Position: long CRAY stock @ $20.15

03/04/13 triggered @ $20.15



iShares Japan Index - EWJ - close: 10.42 change: -0.12

Stop Loss: 9.90
Target(s): 11.40
Current Gain/Loss: - 0.2%

Entry on March 12 at $10.44
Listed on March 11, 2013
Time Frame: 9 to 12 weeks
Average Daily Volume = 30 million
New Positions: Yes, see below

Comments:
03/12/13: The Asian markets were down today. Japan was no exception. The EWJ gapped open lower in response to the weakness in the NIKKEI. Our trade opened this morning at $10.44. More patient investors may want to wait and see if EWJ provides a better entry point on a dip near $10.25 instead.

We have a longer-term time frame for this trade to work. If you're going to play it, be patient.

Current Position: Long the EWJ @ $10.44



FLIR Systems - FLIR - close: 26.44 change: -0.06

Stop Loss: 25.85
Target(s): 29.75
Current Gain/Loss: unopened

Entry on March -- at $--.--
Listed on March 09, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 984 thousand
New Positions: Yes, see below

Comments:
03/12/13: Not much follow through on yesterday's reversal lower. FLIR is still trying to hold on to the bottom of its bullish channel. I don't see any changes from my previous comments.

The newsletter is suggesting traders wait and use a trigger to launch small bullish positions at $27.25.
FYI: The Point & Figure chart for FLIR is bullish with a $43 target.

Trigger @ 27.25

Suggested Position: buy FLIR stock @ (trigger)



Genworth Financial - GNW - close: 10.46 change: -0.04

Stop Loss: 10.25
Target(s): 11.00
Current Gain/Loss: +11.8%

Entry on March 05 at $ 9.36
Listed on March 04, 2013
Time Frame: 4 to 6 weeks
Average Daily Volume = 8.6 million
New Positions: see below

Comments:
03/12/13: GNW snapped a six-day winning streak with today's four-cent dip. Shares spent most of the day churning sideways on either side of the $10.40 level. More conservative traders will want to seriously consider exiting right here to lock in gains.

current Position: Long GNW stock @ $9.36

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

Long Apr $10 call (GNW1320d10) entry $0.48

03/11/13 new stop loss @ 10.25
03/09/13 new stop loss @ 8.85
03/05/13 triggered on gap higher at $9.36



Mattel, Inc. - MAT - close: 41.61 change: -0.06

Stop Loss: 40.40
Target(s): 44.85
Current Gain/Loss: + 0.6%

Entry on March 06 at $41.35
Listed on March 02, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 2.7 million
New Positions: see below

Comments:
03/12/13: Tuesday was a quiet session for shares of MAT. If you are looking for a new bullish entry point then consider waiting for a dip near the rising 10-dma.

Earlier Comments:
Our long-term target is $44.85. We may have to exercise some patience on this trade. It could take a while to get to the $45.00 level since MAT doesn't move very fast but the long-term trend is definitely higher.

current Position: Long MAT stock @ $41.35



MeadWestvaco Corp. - MWV - close: 36.76 change: +0.34

Stop Loss: 35.40
Target(s): 39.75
Current Gain/Loss: + 0.3%

Entry on March 11 at $36.65
Listed on March 09, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.3 million
New Positions: see below

Comments:
03/12/13: Shares of MWV also churned sideways in a narrow range on Tuesday. If you're looking for a new bullish entry point you may want to consider waiting for a dip into the $36.35-36.00 zone as an alternative entry point.
FYI: The Point & Figure chart for MWV is bullish with a $42 target.

current Position: long MWV stock @ $36.65

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

Long Apr $35 call (MWV1320D35) entry $2.20



NASDAQ OMX Group - NDAQ - close: 32.10 change: -0.21

Stop Loss: 30.75
Target(s): 34.85
Current Gain/Loss: + 1.7%

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:
03/12/13: NDAQ gave back most of yesterday's gains with a -0.24% decline. The stock hovered just above support near $32.00 all day long. More conservative traders might want to tighten their stop loss.

*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: 24.90 change: -0.02

Stop Loss: 23.90
Target(s): 26.00
Current Gain/Loss: + 5.9%

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:
03/12/13: PGR continues to churn sideways just below round-number resistance at the $25.00 mark.

current Position: Long PGR stock @ $23.52

03/02/13 new stop loss @ 23.90
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: 43.76 change: -0.09

Stop Loss: 42.75
Target(s): 48.50
Current Gain/Loss: + 1.2%

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:
03/12/13: SFLY churned sideways on Tuesday not really making any progress. On a negative note SFLY remains under its simple 10-dma. More conservative traders may want to tighten their stops. I am not suggesting new positions at this time.

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

03/11/13 new stop loss @ 42.75
03/05/13 new stop loss @ 41.85



BEARISH Play Updates

Apollo Group Inc. - APOL - close: 17.00 change: -0.05

Stop Loss: 17.35
Target(s): 15.50
Current Gain/Loss: + 6.8%

Entry on February 25 at $18.25
Listed on February 21, 2013
Time Frame: EXIT prior to earnings on Mar. 25th
Average Daily Volume = 3.1 million
New Positions: see below

Comments:
03/12/13: APOL continues to churn sideways in a narrow range near the $17.00 level. The fact that traders bought the dip near APOL's simple 10-dma intraday is not a good sign for bears. Readers may want to exit early now.

NOTE: We do not want to hold over the March 25th earnings report.

Keep in mind that our March $18 put will expire soon so we'll need to plan an exit there soon.

current Position: short APOL stock @ $18.25

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

Long Mar $18 PUT (APOL1316o18) entry $0.60

03/11/13 new stop loss @ 17.35
03/04/13 the put option has tripled in value. Readers may want to take profits now.
03/02/13 new stop loss @ 18.15
02/28/13 new stop loss @ 18.60



AngloGold Ashanti Ltd. - AU - close: 25.34 change: +0.56

Stop Loss: 25.55
Target(s): 20.25
Current Gain/Loss: -5.5%

Entry on March 01 at $24.01
Listed on February 28, 2013
Time Frame: 3 to 6 weeks
Average Daily Volume = 2.0 million
New Positions: see below

Comments:
03/12/13: Worries over Europe helped spark a rally in gold prices and the gold miners rallied again. AU has not been cooperating with us these last few days. I'm ready to throw in the towel. We're suggesting an early exit tomorrow morning at the opening bell.

Earlier Comments:
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*

current Position: short AU stock @ $24.01

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

Long Apr $24 PUT (AU1320p24) entry $1.10

03/12/13 prepare to exit tomorrow morning
03/06/13 warning! Today's session looks like a potential bullish reversal pattern for the gold miners, including AU.



Harris Corp. - HRS - close: 44.93 change: +0.11

Stop Loss: 46.65
Target(s): 40.50
Current Gain/Loss: + 0.8%

Entry on March 08 at $45.30
Listed on March 07, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 855 thousand
New Positions: see below

Comments:
03/12/13: HRS tagged a new relative low and then bounced. I would not be surprised to see HRS rebound back toward the $45.50 area or even $46.00 and then roll over again.

*Small Positions*

current Position: short HRS stock @ $45.30