Option Investor
Newsletter

Daily Newsletter, Tuesday, 6/4/2013

Table of Contents

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

Market Wrap

Tuesday Trend Terminated

by Jim Brown

Click here to email Jim Brown

The Dow's streak of consecutive Tuesday gains ended at 20 with a -76 point loss today.

Market Statistics

The Dow traded in a 190 point range and declined as much as -153 intraday. There was a definite try to push the Dow back into positive territory by the close with a rebound to a loss of only -30 points but they could not hold it and sellers appeared in volume at the close.

The tide may be turning from the bad news is good news trend we have seen for the last five months. The very bad news from the Manufacturing ISM on Monday was greeted with a celebration rally. However, sometimes the day after a big celebration includes a powerful hangover or at least some serious indigestion. Today was one of those days as the economic reality began dawn like the realization the day after an office party where you can't remember how you got home.

The Manufacturing ISM on Monday was not just bad, it was horrible and I am repeating it here for emphasis. The headline number dropped from 50.7 to 49.0 and into contraction territory. It was the fastest monthly decline in more than four years. New orders fell from 52.3 to 48.8. Backorders declined from 53.0 to 48.0, a full -5 points. Production declined from 53.5 to 48.6. This was an ugly report and because of the sequestration it should only get worse. The only reason the market should rally on this news was the expectations for QE to last a lot longer.

ISM Chart

Kansas City Fed President Esther George apparently did not like the market rally on Monday so despite being ill today she phoned in her speech that was to have been given in Santa Fe, New Mexico. She said, "In light of improving economic conditions, I support slowing the pace of asset purchases as an appropriate next step for monetary policy." Also, "Waiting too long to acknowledge the economy's progress and prepare markets for more normal policy settings carries no less risk than tightening too soon." She is a voting member of the FOMC and she has dissented at the last two meetings.

She warned the Fed can't be expected to use monetary policy to support the job market when "regulatory uncertainty, including health care reform" is causing businesses to be cautious. This is not the first time a Fed head has warned that Obamacare is depressing the job market and slowing business investment. She also cited the record high margin debt as a sign the stock market is moving into bubble territory. "Investors are borrowing at very low rates of interest to purchase riskier financial assets. Presumably, some investors are pursuing this strategy because they anticipate that loans will continue to be available at very low rates of interest that will allow them to ride out any market volatility." Her comments suggest the record margin debt is going to be a market problem because rates are not going to remain low.

Her comments had a bigger impact on the market because she went to extra effort to make sure they were heard by posting them online when she could not give the speech. The market sank to its lows when the comments were released.

My only question is "what economic conditions are improving?" The ISM Manufacturing declined at the fastest pace in four years. The vast majority of the jobs created in April were part time as a result of the Obamacare restrictions.

There were no major economic reports on Tuesday. The Trade deficit expanded from -$37.1 billion to -$40.3 billion. That was less than the consensus estimates for $41.6 billion. Exports of goods rose by +2% while imports excluding oil rose by +3.9%. This smaller than expected increase in the deficit is still positive but analysts would have liked to have seen stronger exports.

The New York ISM rose from 577.4 to 579.6. However, the current conditions component declined from 58.3 to 54.4. The employment component declined from 53.3 to 49.4 and the quantity of purchase component plunged from 59.4 to 45.5. The pace of activity is slowing even in the normally bullish New York area. If it were not for the rebuilding for Hurricane Sandy the New York area would probably be in contraction as well.

The economic calendar for Wednesday has three big events. The ADP Employment is the first look at jobs for May. Expectations are for a gain of +157,000 jobs compared to the +119,000 gain in April. I personally think that is very optimistic but anything is possible.

The ISM Nonmanufacturing is important but it is not expected to dip into contraction. The U.S. has moved from a manufacturing economy to a services economy so that is where we should expect to see strength. If services were to fall into contraction it would be very negative for the market.

The Fed Beige Book could be a serious blip in the Fed's plan. If the Beige Book shows deterioration in the number of Fed districts showing economic gains then QE expectations would lengthen significantly. An unexpected decline in the Beige Book conditions could end talk of tapering for the rest of the year.

The biggest report left this week is the Nonfarm Payrolls on Friday. With the employment components falling in the regional activity reports we could see a surprisingly low number of new jobs. However, if part time jobs surge as they did last month the headline number could surprise on the upside despite the decline in the quality of employment. It is not a positive trend for wage earners to be forced to work two part time jobs to support their family because full time jobs are no longer available.

If a person is laid off from a full time job because of the approach of Obamacare and mandatory healthcare that is the loss of one job. If he is forced to take two part time jobs to make up for the lost income that counts as two new jobs even though it is only one person. I know multiple people that have been forced to do this. That shows job growth but is that a positive trend that should be celebrated by the market?

Economic Calendar

Stock news was very light since we are moving towards the summer doldrums and we are not quite to the earnings warning period for Q2. That begins in about two weeks.

SalesForce.com (CRM) declined -4% to $37.80 after announcing it was going to buy ExactTarget (ET) for $33.75 per share or roughly $2.5 billion. That is a 53% premium to Monday's closing price. SalesForce has spent more than $4 billion on 40 acquisitions over the last five years. ExactTarget helps companies run advertising programs with email, social networks and mobile devices. The SalesForce CEO said he was targeting an increase in advertising revenue from the current $100 million a year to $1 billion. ET had an IPO in 2012 and has not had a profit since 2008 even though revenue has increased every year. Reportedly the bidding for ET was very active. This was the biggest acquisition of a marketing firm since Google acquired DoubleClick in 2008.

SalesForce.com Chart

ExactTarget Chart

Monster Beverage (MNST) rallied nearly +10% after reporting a 9% sales increase over the last 60 days. Stifel Nicolaus said the data actually showed an acceleration in May with growth in the 13% range. SN thought this was bullish since early April saw a barrage of negative headlines over the health effects of consuming large amounts of energy drinks. BMO Capital Markets said the negative headlines created an attractive entry point.

The breakout on Tuesday closed over two months of consolidation and the positive sales growth suggests the worst is over and it could be headed back to the highs from 2012 at $80.

Monster Chart

G-III Apparel Group (GIII), the apparel manufacturer you never heard of, soared +18% today after posting stronger than expected earnings. G-III manufacturers Calvin Klein, Guess, NFL, Vilebrequin, Wilson Leather, Tommy Hilfiger, Cole Haan, Ivanka Trump and more than 30 other brands. Who knew? I had never even heard of them until today.

G-III Chart

Apple (AAPL) received some bad news today. The U.S. International Trade Commission posted a decision on its website claiming Apple faces a ban on sales of the iPhone 4 and iPad 2 because they violate a Samsung patent. The devices impacted are the ones operated on the AT&T and T-Mobile networks. Both Samsung and Apple have won patent cases against the other on the same devices. Apple can continue selling the devices while it appeals and by the time the appeal is decided the devices will be obsolete. The iPhone 4 is still a popular model because of the price point but Apple has the 4s and iPhone 5 producing most of the sales. President Obama can overturn the ruling during the presidential review process but normally presidents stay well away from the patent process. Apple spokesman reiterated that today's decision has no impact on the availability of Apple products in the USA. Apple shares lost only -$1.41 for the day.

Apple Chart

The selloff today was broad based with financials, housing and energy leading the decline. The home construction ETF fell -2.8% to extend a week of declines. Recent weakness in some housing reports suggests the housing boom is fading. With mortgage rates rising to 12 month highs the buyers that waited are now in terminal procrastination mode.

Dow Jones Home Construction ETF

Banks have been choppy for the last three weeks and headlines today about some large companies like AIG being added to the Too Big to Fail list caused another decline. The energy sector has been weak for the last couple of weeks despite oil prices in the mid $90s. The energy ETF (XLE) is threatening to break below five-week support at $80.

The summer hurricane season started on June 1st and right on schedule a low pressure area formed that could turn into a tropical storm in the next 48 hours. Oil rigs are making preparations for the first storm more as a live drill than actually expecting it to turn into a major storm. The upper air patterns are not currently conducive to a major storm.

Possible tropical storm forming in the Gulf

XLE Chart

For the first time in a week the Japanese Nikkei did not push our markets lower. The Nikkei gained +2% on Tuesday after declining -3.7% on Monday and -17% over the last eight days. Given the severity of that sell off the minor +2% rebound is less than exciting. This was just a dead cat bounce and there may be more weakness ahead. Note that 13,000 is the current support level.

Nikkei Chart

Today appeared to signal a slight shift in market sentiment but it was probably more a fear of Wednesday's economic reports than a sudden bearish turn. Volume was moderate at 6.7 billion shares and one billion less than Monday. The advance decline ratio was 2:1 declines over advances.

The market for Wednesday is going to be focused on what happens to the Nikkei tonight and whether there will be a continued decline and on the ADP Employment report at the open. It remains to be seen if a bad payroll number will bring back the bulls in hopes for more QE. At some point the bad news is actually going to be seen as bad news.

The S&P did not make a lower low today but it was a lower high. The tentative support at 1,638 failed but support at 1,625 held. Monday's low at 1,623 could also be seen as a support hold since it did not close there and there was a strong rebound rally. The rebound rally today was much weaker and stocks were selling off into the close instead of rallying.

A break under 1,623 is going to be a critical event. A close under 1,623 cold produce that dramatic shift in sentiment everyone has been expecting. We are right at the point where the dip buyers have been active over the last five months. If they fail to buy this dip at the -3.5% range then we move into uncharted territory with 1,600 the next logical support target.

S&P Chart - Daily

The Dow made a lower low and rebounded instantly from the 15,100 level that was support in early May. The volatility has been huge with a 190 point range today from +40 to -153. Although they tried to push the Dow back into positive territory at the close the best they could do was -30 and sellers immediately piled in when that surge lost traction. The 15,050-15,100 level is critical. Multiple levels of converging support will be broken if that level fails. The next downside target would be in the 14,700 range.

Dow Chart

The Nasdaq is slowly weakening. It has been the stronger of the big three indexes but the steady pattern of lower highs is forcing a retest of converging support at 3,420. That is a critical level for the Nasdaq and a breakdown there could trigger a significant decline. Apple is no longer contributing to this weakness. The selling is starting to spread and broaden to multiple sectors. If the bulls are going to make a stand before the summer doldrums hit they need to do it this week.

Nasdaq Chart - 90 Min

The Russell 2000 chart is a clone of the Nasdaq with the lower highs and critical support. The Russell has been the strongest index and given its sentiment characteristics for the broader market it is still bullish. Fund managers are not giving up on the small caps. However, the weakness is growing and a break below 970 would be a major sell signal. If fund managers suddenly decide to cut and run we should see it first in the Russell and a break of that support level. Watch carefully!

Russell Chart - 90 Min

I am not ready to write off the rally but we are due for a rest. The Q2 warning cycle is just ahead followed by the summer doldrums. Given the big gains in the first five months of the year it would make since for fund managers to take profits in the high flyers and raise cash to buy any late summer dip. These next few weeks are going to be critical for the market. We could easily see a couple attempts at a rebound followed by lower lows. Don't get married to your positions. Practice active cash management throughout the summer and be hesitant to aggressively buy the dips. Cash is a position.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email


New Plays

Underperforming Technology

by James Brown

Click here to email James Brown

Editor's Note:

Additional Trading Ideas:

In addition to tonight's new candidate(s), consider these stocks as possible trading ideas and watch list candidates. Some of these may need to see a break past key support or resistance:

(bullish ideas) RH, KAI, OMG, DNKN, STMP,



NEW BEARISH Plays

Akamai Tech. - AKAM - close: 44.65 change: -1.26

Stop Loss: 46.25
Target(s): 40.25
Current Gain/Loss: unopened

Entry on June -- at $--.--
Listed on June 04, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 2.2 million
New Positions: Yes, see below

Company Description

Why We Like It:
AKAM is in the business of providing online content delivery and cloud infrastructure services. The stock gapped open higher back in April on a better than expected earnings report and raised earnings guidance. The stock went from $36 to $48 in less than four weeks. That's a +33.3% gain. It looks like AKAM may have gone too far too fast thanks to its above average short interest (currently about 11% of the float). Now shares are correcting lower.

The bounce just failed at short-term resistance near $46.00. This looks like an entry point for short-term bearish positions. I am suggesting a trigger at $44.45. If triggered our target is $40.25. More aggressive traders could aim lower.

Trigger @ $44.45 *Small Positions*

Suggested Position: short AKAM stock @ (trigger)

Annotated chart:




In Play Updates and Reviews

Small Caps Underperform

by James Brown

Click here to email James Brown

Editor's Note:
The small cap index underperformed its big cap rivals. Could this be a clue to the market's current strength? Or should I say lack of internal strength.

Financials were also a laggard today, which is another warning signal for the market.

Our GRPN and STZ trades were stopped out today.


Current Portfolio:


BULLISH Play Updates

Barnes Group - B - close: 30.11 change: -0.23

Stop Loss: 29.90
Target(s): 34.75
Current Gain/Loss: unopened

Entry on May -- at $--.--
Listed on May 28, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 310 thousand
New Positions: Yes, see below

Comments:
06/04/13: It looks like more of the same for shares of B with the stock churning inside its $30-31 zone. Currently we are waiting for a bullish breakout past resistance at $31.00. The trigger to launch positions is $31.10 but if we see B close below $30.00 we will most likely drop this stock as a candidate.

Earlier Comments:
We definitely want to keep our position size small to limit our risk.

Trigger @ 31.10 *Small Positions*

Suggested Position: buy B stock @ (trigger)



Electronic Arts - EA - close: 22.72 change: -0.27

Stop Loss: 22.40
Target(s): 25.75
Current Gain/Loss: - 1.6%

Entry on May 28 at $23.10
Listed on May 23, 2013
Time Frame: 4 to 6 weeks
Average Daily Volume = 6.0 million
New Positions: see below

Comments:
06/04/13: Our EA trade could be in trouble. Shares lost -1.1% and closed right on its 10-dma, which should be short-term support. If EA sees any further weakness it will likely hit our stop loss at $22.40.

Earlier Comments:
If triggered our target is $25.75. However, that is a slightly aggressive target. The $25.00 level has been resistance in the past and could be resistance again.

current Position: Long EA stock @ $23.10

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

Long Jul $25 call (EA1320G25) Entry $0.62

06/01/13 new stop loss @ 22.40



Financial Engines - FNGN - close: 42.41 change: -0.23

Stop Loss: 42.25
Target(s): 49.50
Current Gain/Loss: unopened

Entry on May -- at $--.--
Listed on May 29, 2013
Time Frame: 4 to 8 weeks
Average Daily Volume = 396 thousand
New Positions: Yes, see below

Comments:
06/04/13: FNGN is still hovering near the bottom of its $42-44 trading range. We are waiting for a breakout to new highs.

Earlier Comments:
If FNGN can breakout past resistance it could see a short squeeze. The most recent data listed short interest at 19% of the 47.7 million-share float.

The May 20th high was $44.33. I am suggesting small bullish positions at $44.50. If triggered our target is $49.50. We do want to keep our position size small because FNGN is arguably overbought here.

Trigger @ 44.50 *small positions*

Suggested Position: buy FNGN stock @ (trigger)



Spirit Airlines - SAVE - close: 30.51 change: +0.36

Stop Loss: 29.20
Target(s): 34.00
Current Gain/Loss: + 0.9%

Entry on May 28 at $30.25
Listed on May 25, 2013
Time Frame: 8 to 9 weeks
Average Daily Volume = 686 thousand
New Positions: see below

Comments:
06/04/13: SAVE continues to show strength with a rally this morning. The stock spent the rest of the day drifting sideways. I don't see any changes from my prior comments.

I am urging caution here. SAVE looks poised to rally. Yet the XAL airline index looks poised to breakdown. If the industry declines it could make gains tougher for SAVE.

current Position: Long SAVE stock @ $30.25

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

Long Jul $30 call (SAVE1320G30) entry $1.50

06/01/13 new stop loss @ 29.20



SunTrust Banks - STI - close: 32.02 change: -0.22

Stop Loss: 31.40
Target(s): 34.50
Current Gain/Loss: + 2.0%

Entry on May 16 at $31.40
Listed on May 15, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 4.4 million
New Positions: see below

Comments:
06/04/13: Hmm... positive analyst comments could not keep STI in positive territory today. The financials actually underperformed the broader market. Has the rally in this industry group finally run out of fuel?

Yesterday's low was $31.54. Tonight I am raising our stop loss to $31.40, which is breakeven.

Earlier Comments:
I want to remind you that the 2011 highs near $33.00-33.15 could prove to be resistance. More conservative traders may want to exit near $33.00.

current Position: Long STI stock @ $31.40

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

Long Jul $32 call (STI1320G32) entry $0.78

06/04/13 new stop loss @ 31.40
05/28/13 call option traders might want to take profits early right now.
note: STI will begin trading ex-dividend tomorrow (10 cents)
05/20/13 new stop loss @ 30.95



Wells Fargo & Co - WFC - close: 40.44 change: -0.29

Stop Loss: 39.90
Target(s): 44.50
Current Gain/Loss: - 2.0%

Entry on May 30 at $41.25
Listed on May 29, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 20.5 million
New Positions: see below

Comments:
06/04/13: Hmm... the financial sector was a laggard today. Has the rally in this sector finally peaked? WFC looks poised to retest the $40.00 level again. Readers may want to wait for the dip to $40.00 or a bounce from $40.00 before initiating new positions.

*Small Positions*

current Position: Long WFC stock @ $41.25



BEARISH Play Updates

ConAgra Foods - CAG - close: 33.53 change: +0.08

Stop Loss: 35.05
Target(s): 30.15
Current Gain/Loss: +0.4%

Entry on June 03 at $33.67
Listed on June 01, 2013
Time Frame: Exit PRIOR to earnings on June 27th
Average Daily Volume = 2.8 million
New Positions: see below

Comments:
06/04/13: CAG gapped open higher but then spent the rest of the session churning sideways under the $33.75 level. I don't see any changes from my prior comments. If the broader market rallies tomorrow then I would not be surprised to see CAG produce a bounce back toward the $34.00-34.50 area.

Earlier Comments:
Nimble traders could wait for an oversold bounce and maybe a failed rally near $34.50 as an alternative entry point. Our target is $30.15. However, we will plan on exiting positions prior to CAG's earnings report on June 27th.

Suggested Position: short CAG stock @ $33.67

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

Long Jul $33 PUT (CAG1320S33) entry $0.80



Rackspace Holdings - RAX - close: 35.69 change: -1.14

Stop Loss: 40.10
Target(s): 31.00
Current Gain/Loss: +6.1%

Entry on May 22 at $38.02
Listed on May 21, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 3.0 million
New Positions: see below

Comments:
06/04/13: The cloud-computing industry is getting more competitive. Tech giant IBM just bought privately held SoftLayer Technologies for $2 billion in an effort to strengthen IBM's cloud computing services. That is not good news for RAX. The stock sank -3.0%.

Earlier Comments:
If you're concerned about shorting RAX then buy the put option to limit your risk to the cost of your option. Although you may want to buy the July puts. June puts only have three weeks left.

current Position: short RAX stock @ $38.02

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

Long Jun $37.50 PUT (RAX1322r37.5) entry $1.60

05/25/13 new stop loss at $40.10, more conservative traders may want to exit early now.
05/24/13 RAX confirms the bullish reversal pattern.
05/23/13 RAX produced a bullish reversal candlestick.



Safeway Inc. - SWY - close: 22.97 change: -0.23

Stop Loss: 23.75
Target(s): 20.00
Current Gain/Loss: - 0.3%

Entry on June 03 at $22.90
Listed on June 01, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 4.4 million
New Positions: see below

Comments:
06/04/13: SWY spiked higher this morning and managed to trade above its 10-dma at least temporarily. The high today was $23.57. Shares reversed to post a -0.99% decline. I would use today's move as a new bearish entry point or wait for a new relative low (under $22.64).

Earlier Comments:
I am suggesting we keep our position size small because the most recent data listed short interest at 23% of the 234 million-share float. That does raise the risk of a short squeeze. You could try and limit your risk by trading the options.

*Small Positions*

Suggested Position: short SWY stock @ $22.90

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

Long Jul $23 PUT (SWY1320S23) entry $1.35



CLOSED BULLISH PLAYS

Groupon, Inc. - GRPN - close: 7.00 change: -0.14

Stop Loss: 6.99
Target(s): 9.00
Current Gain/Loss: - 5.7%

Entry on May 28 at $ 7.41
Listed on May 25, 2013
Time Frame: 10 to 12 weeks
Average Daily Volume = 20.5 million
New Positions: see below

Comments:
06/04/13: The volatility in GRPN continued today and shares hit our stop loss at $6.99. There is still no explanation for Monday's sell-off in GRPN and the weakness continued today. The stock dipped to $6.92 intraday before bouncing back to close at $7.00.

I remain intrigued by GRPN as a potential trade but investors might want to just put it on your radar screen and wait for another bounce near its 100-dma and the long-term trend of higher lows.

Earlier Comments:
Due to the stock's volatility in the last couple of months I am suggesting we keep our position size small to limit risk.

closed Position: Long GRPN stock @ $7.41 exit $6.99 (-5.7%)

06/04/13 stopped out
06/01/13 new stop loss @ 6.99

chart:



Constellation Brands - STZ - close: 52.11 change: -1.30

Stop Loss: 51.75
Target(s): 58.00
Current Gain/Loss: - 3.5%

Entry on June 04 at $53.65
Listed on June 03, 2013
Time Frame: Exit prior to earnings in late June!
Average Daily Volume = 2.0 million
New Positions: see below

Comments:
06/04/13: STZ did not want to cooperate and hit both our entry trigger and our stop loss in the same session.

There was big news today in the alcoholic beverage business. Anheuser-Busch InBev (BUD) finalized its $20.1 billion purchase of Mexican brewer Grupo Modelo. According to the Associated Press, "The world's largest brewer has been trying for almost a year to buy the half of Modelo that it did not already own. The Department of Justice initially blocked the deal, concerned that it would hurt U.S. beer shoppers' choices, but signed off on the combination after AB InBev agreed to sell Modelo's entire U.S. business to a wine maker, Constellation Brands Inc."

STZ underperformed the market with a -2.4% decline. What's even more depressing is that STZ inched up just high enough this morning to hit our entry trigger at $53.65, thus opening our trade. Then, with the all-day slide lower, STZ fell just low enough to hit our stop loss at $51.75, closing our trade.

Earlier Comments:
I would keep our position size small.

*small positions*

closed Position: Long STZ stock @ $53.65, closed 51.75 (-3.5%)

06/04/13 triggered @ 53.65, stopped out at $51.75

chart: