Option Investor
Newsletter

Daily Newsletter, Thursday, 3/21/2013

Table of Contents

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

Market Wrap

Data Fails To Support Stocks

by Thomas Hughes

Click here to email Thomas Hughes
Introduction

S&P futures held in positive territory this morning following renewed posturing from the ECB and Cyprus. The seeming stand-off over that small country's debt is growing to a head. Ben Bernanke's statements about our economy and assurances that the situation in Cyprus was being monitored helped to reassure U.S. traders. Other international markets did not fare as well. Major indexes across Asia and Europe closed the day in the red with one notable exception. Japan continues to buck the short term swings and has reached a new 4.5 year high.


Perhaps one reason our indexes were poised to open in the green is that the Cyprus situation is expected to be a flash in the pan. Another reason might be the releases of economic data expected throughout the morning. Today's releases started with another round of improving labor data. Unemployment claims continue to trend lower. Although a good sign for the economy this data failed to keep futures in positive territory. Futures drifted into negative territory leading to a mildly lower opening. Other data supporting the improving economic recovery helped the market to find a bottom mid morning and move up to the days high.

Aside from Cyprus other signs of weakness in the Eurozone emerged. Flash PMI for Germany came in a little cooler than expected and have led to questions about the health of it's first quarter bounce back. Germany is expected to lead the EU in its recovery and some estimates had it growing at +0.5% this quarter. As expected there were other signs of strength in the world offsetting Eurozone weakness. Chinese Flash PMI came in hotter than expected and have led to some speculation that China could grow as fast as +8% this year.

All the conflicting world data and renewed fear over Europe spilled over into the oil and gold markets. Gold kept climbing on fears of currency destabilization. There is still no real sign of what a Cyprus bail out is going to look like because of the unresolved issue of where it will get its portion of the required funds. Russia is one source but one as unattractive to Cypriots as the bank levy. The run up in gold could be a bull trap. The underlying fundamentals are still pointing to a solidifying world economy. Cyprus will get fixed it some way.

The Economic Data

The morning was pretty full, one announcement even snuck up on me because it wasn't listed on my calendar. There were five major releases covering jobless claims, housing, manufacturing and the economy. First was jobless claims at 8:30. Initial claims rose by 2,000 to 336,000. This is a small gain from last week but still near the five year low and the bottom of the 12 month range. The four week moving average of claims fell by 7,500 and hit a new five year low. The low number of initial claims is a good sign and points to declining unemployment but is still lack luster. We really need to see another sustained drop in this figure. On a regional basis it seems like lay offs are stabilizing. There were only 6 states with a gain or drop in claims of greater than 1,000. NY and CA which have both been in either category on a week to week basis both posted drops in claims of over 6,000 GA was the only state with a gain of over 1,000.


Continuing claims also rose this week but also by a very small margin. This number gained 5,000 to hit an adjusted 3.053 million. While this is a gain I see this more as minor weekly fluctuation. Continuing claims has been trending down all year and especially over the last two months. If the drop in initial claims at least stays down around the current levels between 330,000 and 340,000 we could see continuing claims keep trending down. The recent drops are being linked to the improving housing market. Continued improvement in that sector could be what we need to see jobs creation ,and more importantly jobs retention, move up and unemployment move down.


Total claims was the one figure in the unemployment claims report actually move down. It dropped by over -250,000 to reach a near three month low. This number seems to be leading the U.S. unemployment rate so any move down here could be reflected in the March data. Last months surprise drop to 7.7% may have been the sign that the labor markets have turned a corner. We'll have to keep monitoring unemployment trends until we get further data on jobs creation and the housing recovery.


We got two data points from the housing sector today. This week has been full of housing data and today's releases were in line with expectations. The FHFA Housing Price Index gained 0.6% matching expectations for a 0.1% rise. The slow rise in home prices was attributed to increased inventory and a good sign. Tight supply had been pushing home prices fairly quickly and was seen as a threat to the housing recovery. Existing home sales also offered up some good news. Although coming in just of shy of the expected 5 million units it did rise more than 8% from last month. The Homebuilder Index which is trading just under an important resistance line dating back to the housing bubble bursting fell in today's trading. The index is showing some mixed/bullish signals on the weekly and daily charts. Any break above resistance would require a confirmation and a pick up in volume to be bullish in the longer term. Traders will be looking to guidance and earnings from this sector.

Home Builders Index

The remaining three data points all point to economic expansion. The Philadelphia Fed Survey, reported at +2, made a surprising reversal from last month and a big pick up in activity. The U.S. flash PMI reading was 54.9, up from the previous 54.3 and the Leading Indicators Index also climbed. The LDI gained 0.5%, as expected, and suggests that GDP is expanding in the current month. All of this data taken together points to an economy that is growing, with an improving housing market and declining unemployment. Positive comments from the FOMC and Ben Bernanke support this view. There is fear that the fiscal stimulus the FOMC ensures us will be ongoing is actually hurting the economy longer term. Unexpected changes or tightening of policy could send us back into recession, or at least send the markets down. The FOMC's pledge of transparency could help alleviate some of this fear; we know their targets for the economy now we know start seeing a framework for a plan.


Story Stocks

Oracle and the tech sector helped keep the general markets in negative territory today. Oracle released its first quarter earnings statement today and missed estimates. Oracle's release is usually a heads up to get ready for a new round of earnings. We still have a few weeks to go before it really heats up again but Oracle is one of the first in the cycle and can give a hint at what to expect, especially from tech. The miss was marginal, about $0.01, and blamed primarily on a growing sales force. In past quarters that growing sales force was a positive because it was supposed to lead to improved global sales. Sales were off slightly led by the struggling hardware department. Global macro economic factors were not a problem for Oracle in the first quarter and this may be the same for Oracles largest competitor RedHat. RedHat is an open source Linux based software company and reports earnings next week on Wednesday. Both companies stock are highly tradable though Oracle has much better open interest on the options front. There is a chance that RedHat could beat estimates, for one it is not being hampered by an expanding sales force. RedHat is expected to earn $0.21 per share, in line with the previous quarter. Oracle dropped sharply in today's trading, opening below previous support.

Oracle

RedHat

Today was another one full of earnings from retailers. About 8 brands from among the clothing and shoe retailers reported today. The one in the spot light was Lululemon. They beat estimates on the previous quarter but have issued poor guidance for the next quarter and the full year. Beside other factors, the recent see through spandex issue is going to take a bite out of their growth expectation. On a personal note I can't believe it's taken them this long to figure that out. Nike, Cato, Rue 21 and Ross Stores are also on the list today. Stores with exposure to Europe were hit especially hard today. The Retail Sector Spyder XRT retreated from last weeks weak candle formation and has made a bounce from the 30 day moving average. The technical indicators on the long term charts are bullish, economic strength could help this ETF find support around the $68.50-$69 level.

Retail Spyder, XRT

The Oil Index

Oil traded flat in the early part of the session. Later in the day the Cyprus bail out and fears of renewed trouble in Europe helped to push crude down by about 1%, nat gas by 1.25% and Brent by 1.1%. Positive U.S. and Chinese data failed to overcome the potential drag a crumbling EU would be on oil demand. The oil index responded by giving up ground and falling below the resistance line I have been watching the last few weeks. If the U.S. and world economy is really recovering oil prices should strengthen, at the moment eyes are on Cyprus and the EU for any clues. Any U.S. recovery would be muted if the EU fell deeper into recession and further dampen demand. Direction for the XOI is still undecided, the index is being supported by the short term moving average, an up trend line and economic data. Resistance is technical and being helped by current world politics, ie Cyprus and the EU. My upside target on a break out is 1400.

Oil Index

The Gold Index

Gold broke above 1600 this week on the Cyprus driven EU fears. Today's developments did nothing to alter that. Eventually the Cyprus issue will go away. It is a really small place and there is not much sympathy for the Russian oligarchs. Once the deal is struck, and struck I expect it will be, we can all go back to watching economic events that are really important. Gold has been trending down on a strengthening world economy, those fundamental have not changed as of yet. The move in gold above $1600 looks weak to me and is a potential bull trap. Even if Cyprus does default it is not going to shake the foundations of the world economy. A default would be the same in my opinion as a solution. One way or another someone is going to get the financial shaft from Cyprus. Today's trading brought the Gold Index up to the short term 30 day moving average and an attractive place for speculators to do some more selling. The MACD and stochastic both suggest that at least a retest of the 61.8% retracement support.

Gold Index

Europe and The Euro

Needless to say European markets are focused on Cyprus. Not just the issue at hand but what it may mean for other EU citizens. If one country can levy bank deposits to bail itself out then so can another. On top of this other signs of weakness have emerged. Last week I mention that crack were appearing in the EU recovery and today's flash PMI readings echo that sentiment. German data slowed unexpectedly to 51, still expansionary but not as good as last month's reading of 53. France continued to decline. Its reading sank to 42.1 fro 43.1. France is supposed to be one of the stronger EU economies but it has been having a real hard time shaking off recession. Fear and fact of weakness in the EU could keep pressure on the euro. It could also lead the ECB to enact some further policy action to help support the economy. The euro lost ground versus the dollar today but remained in the tight range it has been trading in all week. Long and short term indicators are bearish on this pair, my downside target is around 1.2750.

EUR/USD

China Surprises But Also Raises Fears

China's flash PMI was one that came in better than expected. It was 51.7 versus the expected 50.8 and the previous 50.4. This shows a substantial, though muted, pick up in manufacturing activity. However, it should be noted that the previous months data included the two week Lunar New Year holiday. This led to some new estimates for Chinese GDP growth in the 8% range for the year. It also renewed speculation over China's credit bubble and potential housing sector snap-back. There is growing evidence for China to begin a round of fiscal tightening. Tightening in this country could have global impact on business, especially in the EU. Chinese stocks closed down by about 0.15%.

In Japan stocks rallied as the yen gained strength against the dollar. There is a lot of internal shifting going on inside the Japanese markets driven by Shinzo Abe and now aided by the confirmation of Haruhiko Kuroda. The Nikkei gained over 1.3% in today's trading while the USD/JPY pair fell over 1.5%. The USD/JPY is in a consolidation range now but I expect it to continue its bull trend soon. Kuroda is in favor of “aggressive” fiscal policy and should begin to make his changes in the next couple of weeks. I believe official word from him through his office of BOJ Governor could be a trigger for this trade. In any event I will be keeping up with this one.

USD/JPY

The S&P 500

I began today looking at the charts and thought to myself, is today the day? Is today going to be the day the S&p 500 makes it to the all time high. Alas, the answer is no. A positive start to early trading turned into a negative opening that all of our positive data could not over come. The weekly charts were looking a little bullish going into today but I had to remind myself that that candle was not finished, not even close. Good thing too because by the end of the day it had changed and the bullish sign I was looking for failed to materialize. On the daily charts there is a clear range between the 1525 support and the top I have drawn at the all time intra-day high of 1472.73. There is some nearer term support at the 1550 and 1540 levels but the 1550 level got hit pretty hard today. There could be more downside over the next few days while the Cyprus situation plays out.

S&P 500 Daily

Narrowing our focus to the hourly charts it looks like 1540 is where near term support may kick in. The index tried to find a bottom intra-day just under 1550 but it failed to hold. I expect more headlines and selling centered on Cyprus tomorrow, 1540 may come into question. If it does not hold the next lower support is at 1525.

S&P 500 Hourly

The VIX spiked up this week but was capped at the 15 resistance level. I know that volatility is really low right now because the lower end of what I used to consider the “safe range” is now resistance. The fact the VIX is spiking shows that there is fear in the market. The fact that it is being capped at 15 with each thrust is a sign that perhaps the fear is contained. I am still looking for the VIX to hit the pre 2008 lows around the 10 level. We may have to wait until after the end of the Cyprus Affair and the next round of ECB and BOJ meetings to get to that point. Both of those central banks will be meeting in the first week or so of next month.

The VIX

The world economy is still volatile and fluctuating. It also stills needs some healing as evidenced by Cyprus, lets see if I can say it one more time Cyprus, and Japan. At some times one area is good while one or two others are not and at others that is reversed. At this time it seems like we are growing steadily and improving steadily, if only the rest of the world could get on board with us. I am suspicious of China, there just isn't enough data. Japan is questionable , stimulus can only go so far. The European outlook is unchanged but the emerging cracks may be telling a different story. Cyprus will fade and the EU will move on and so will we. What is important is the recovery and that story is being told in the data.

There are no releases of U.S. data tomorrow and only a small handful of earnings reports. Next week look out for durable goods, consumer confidence, home sales and the final estimate for fourth quarter GDP. The GDP will probably not be much of a factor, it is months old and we have already received two estimates. As for the others, look for signs of strengthening and a continuation of housing improvements.

Until then, remember the trend!

Thomas Hughes


New Plays

Consumer Goods

by James Brown

Click here to email James Brown


NEW BULLISH Plays

Hanesbrands Inc. - HBI - close: 42.03 change: +0.17

Stop Loss: 39.95
Target(s): 45.00
Current Gain/Loss: unopened

Entry on March -- at $--.--
Listed on March 21, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.0 million
New Positions: Yes, see below

Company Description

Why We Like It:
There's no slowdown in shares of HBI. This apparel maker is showing relative strength. The stock just hit a new all-time high today. This is essentially a bullish momentum trade. Today's high was $42.19. I am suggesting a trigger to launch small bullish positions at $42.25. If triggered our target is $45.00. More patient investors may want to consider waiting for a dip back toward the 30 or 40-dma and look for a bounce there as an alternative entry point but it could be awhile before any such dip occurs.

Our stop is a little bit wide at $39.95. More conservative traders may want to consider a stop near $40.45 instead.

Trigger @ 42.25 *Small Positions*

Suggested Position: buy HBI stock @ (trigger)

Annotated chart:




In Play Updates and Reviews

Locking In Potential Gains

by James Brown

Click here to email James Brown

Editor's Note:
Today we closed a couple of our bullish trades to lock in gains. The plan was to exit CRAY and PGR this morning at the open, which coincidentally helped us avoid most of today's losses.

I have removed YELP as a candidate. TSLA was triggered. I am suggesting we exit our MWV trade at the open tomorrow.


Current Portfolio:


BULLISH Play Updates

CSX Corp. - CSX - close: 23.92 change: -0.38

Stop Loss: 23.49
Target(s): 26.50
Current Gain/Loss: unopened

Entry on March -- at $--.--
Listed on March 19, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 8.7 million
New Positions: Yes, see below

Comments:
03/21/13: Transportation stocks were hit harder today within the market's sell-off. Railroad stocks were no exception and CSX gave back -1.5%. The overall trend is still up and CSX could bounce at the simple 10-dma near $23.75. Currently our plan is to launch positions at $24.40.
FYI: The Point & Figure chart for CSX is bullish with a $34.50 target.

Trigger @ 24.40

Suggested Position: buy CSX stock @ (trigger)



iShares Japan Index - EWJ - close: 10.73 change: +0.00

Stop Loss: 10.18
Target(s): 11.40
Current Gain/Loss: + 2.8%

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: see below

Comments:
03/21/13: The EWJ tagged a new relative high at $10.76. Actually that level was pretty much a lid for this ETF today. Shares closed unchanged on the session. If this ETF does see some profit taking look for short-term support near $10.60 and the 10-dma.

Earlier Comments:
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

03/20/13 new stop loss @ 10.18



Mattel, Inc. - MAT - close: 42.58 change: +0.28

Stop Loss: 40.95
Target(s): 44.85
Current Gain/Loss: + 3.0%

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:
03/21/13: MAT continues to show relative strength with a +0.6% gain. The stock closed at new multi-year highs. I am raising our stop loss to $40.95. I am not suggesting new positions at this time.

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

03/21/13 new stop loss at $40.95
03/20/13 new stop loss at $40.75



MeadWestvaco Corp. - MWV - close: 36.77 change: -1.23

Stop Loss: 36.65
Target(s): 39.25
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:
03/21/13: Ouch! MWV erased several days of gains with a -3.2% plunge. The breakdown below its simple 10-dma is short-term bearish. I could not find any specific news to account for the relative weakness. It just looks like traders rushing to lock in profits. I am suggesting we exit positions immediately at the opening bell tomorrow morning.

NOTE: Unfortunately the spread on our April $35 call has exploded to bid $1.55/ask $4.10.

current Position: long MWV stock @ $36.65

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

Long Apr $35 call (MWV1320D35) entry $2.20

03/21/13 prepare to exit at the opening bell tomorrow
03/20/13 new stop loss @ 36.65
03/16/13 adjust exit target to $39.25.
03/14/13 new stop loss @ 35.95 and adjust exit target to $39.50



Tesla Motors - TSLA - close: 36.01 change: +0.06

Stop Loss: 34.90
Target(s): 39.25
Current Gain/Loss: - 0.5%

Entry on March 21 at $36.20
Listed on March 19, 2013
Time Frame: 3 to 6 weeks
Average Daily Volume = 2.2 million
New Positions: see below

Comments:
03/21/13: TSLA displayed relative strength this morning but reversed midday and gave back almost all of its gains. The stock failed near the convergence of its 10, 30 and 40-dma. Our trade opened at $36.20. However, I would not launch new positions until we see TSLA rally past $36.25 again.

Earlier Comments:
If shares can breakout past $40.00 it could really fly on a short squeeze. The most recent data listed short interest at 64% of the 72 million share float.

current Position: long TSLA stock @ $36.20



Xerox Corp. - XRX - close: 8.55 change: -0.21

Stop Loss: 8.49
Target(s): 9.90
Current Gain/Loss: unopened

Entry on March -- at $--.--
Listed on March 16, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 9.8 million
New Positions: Yes, see below

Comments:
03/21/13: XRX completely erased yesterday's gains. The stock has reversed and is testing the bottom of its recent trading range. A breakdown under $8.50 would be bearish and we'd likely drop XRX as an active candidate.

Currently, I am suggesting a trigger to launch small bullish positions at $8.90. If triggered our target is $9.90.

NOTE: XRX will begin trading ex-dividend for its next dividend of 5.75 cents a share on March 26, 2013.

Trigger @ 8.90 *small positions*

Suggested Position: buy XRX stock @ (trigger)

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

buy the Jul $9.00 call (XRX13G9)



BEARISH Play Updates

Brunswick Corp - BC - close: 34.04 change: -0.77

Stop Loss: 35.30
Target(s): 30.30
Current Gain/Loss: - 0.4%

Entry on March 18 at $33.78
Listed on March 12, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 786 thousand
New Positions: see below

Comments:
03/21/13: The bounce in BC has reversed with a -2.2% decline. The low this week so far is $33.36. Readers might want to wait for a new relative low below this level as an entry point for new bearish positions.

Suggested Position: short BC stock @ $33.78

03/18/13 triggered on gap down at $33.78. Trigger was $33.90



Garmin Ltd. - GRMN - close: 33.15 change: -0.32

Stop Loss: 35.05
Target(s): 30.25
Current Gain/Loss: +2.3%

Entry on March 20 at $33.93
Listed on March 19, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.5 million
New Positions: see below

Comments:
03/21/13: GRMN continues to sink with a new 52-week low. Readers may want to start adjusting their stop loss lower.

current Position: short GRMN stock @ $33.93

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

Long Apr $33 PUT (GRMN1320P33) entry $0.39



Teck Resources - TCK - close: 28.09 change: -0.37

Stop Loss: 29.25
Target(s): 26.25
Current Gain/Loss: +3.1%

Entry on March 19 at $29.00
Listed on March 18, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 2.0 million
New Positions: see below

Comments:
03/21/13: There was no follow through on yesterday's oversold bounce. The stock looks poised to break down below the $28.00 level soon.

current Position: short TCK stock @ $29.00

03/19/13 new stop loss @ 29.25



CLOSED BULLISH PLAYS

Cray Inc. - CRAY - close: 21.61 change: -0.57

Stop Loss: 19.80
Target(s): 22.25
Current Gain/Loss: + 9.9%

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:
03/21/13: CRAY gave back almost all of yesterday's gains thanks to the market's sell-off today. Our plan was to exit positions at the opening bell this morning. CRAY opened at $22.14.

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

*Small Positions*

closed Position: long CRAY stock @ $20.15 exit $22.14 (+9.9%)

03/21/13 closed this morning
03/20/13 prepare to exit tomorrow morning at the open
03/16/13 new stop loss @ 19.80
03/13/13 new stop loss @ 19.65
03/04/13 triggered @ $20.15

chart:



Progressive Corp. - PGR - close: 24.84 change: -0.09

Stop Loss: 24.45
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:
03/21/13: We were growing worried that PGR's upward momentum was waning. Last night we decided it would be best to exit positions immediately this morning. PGR opened lower at $24.90.

closed Position: Long PGR stock @ $23.52 exit $24.90 (+5.9%)

03/21/13 closed this morning
03/20/13 prepare to exit at the opening bell tomorrow
03/13/13 new stop loss @ 24.45
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

chart:



Yelp, Inc. - YELP - close: 24.00 change: -0.12

Stop Loss: 23.90
Target(s): 29.00
Current Gain/Loss: unopened

Entry on March -- at $--.--
Listed on March 16, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.2 million
New Positions: see below

Comments:
03/21/13: YELP is not working for us. Our trade has not opened yet with a suggested entry trigger at $25.60. I am removing YELP as a candidate.

Trade did not open.

03/21/13 removed YELP as a candidate.

chart: