Option Investor
Newsletter

Daily Newsletter, Saturday, 6/8/2013

Table of Contents

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

Market Wrap

Goldilocks Jobs

by Jim Brown

Click here to email Jim Brown

If you believe the market reporters the Nonfarm Payroll number on Friday was perfect. Not too hot and not too cold.

Market Statistics

The Nonfarm Payroll report for May showed a gain of +175,000 jobs and +10,000 more than analysts expected. April job gains were revised lower from +165,000 to +149,000. March was revised higher from +138,000 to +142,000. With the revisions the May report added a net of +163,000 jobs. Service jobs added +57,000 with half of the gains by temporary services. Construction gained +7,000, hospitality added +43,000, retail +28,000 and healthcare +26,000.

Now for the bad news. The three month average of job gains has fallen to +155,000 from a high of +233,000 in February. Manufacturing lost -8,000 jobs. Government lost -3,000 and less than expected. Average weekly hours were flat at 34.5, which was somewhat positive since it did not show a further decline towards the 30 hour threshold for Obamacare coverage. The jobs added were mostly low paying food service workers and part time jobs. Temporary workers rose by 72,000 over the last three months.

The unemployment rate rose from 7.5% to 7.6% because there were 420,000 new people joining the labor force. May and June are graduation months and we should see a net addition for June as well. The separate Household survey showed a rise of +101,000 unemployed workers. Moody's expects payroll gains to remain "well under" 200,000 jobs per month for the rest of the year. The long term unemployed (more than 27 weeks) was unchanged at 4.4 million. The average long term unemployment is now 36.9 weeks.

The headline gain of +175,000 jobs should be taken with a large grain of salt because it includes an upward adjustment of +205,000 from the "birth-death" calculation. That is the highest monthly guess since May of 2012. They added +193,000 jobs in the April report. Basically the BLS tries to guess how many jobs may have been missed because of new businesses that might have started or existing businesses that may have died. When they have the real data three months from now the May headline number will be revised. I believe when the "adjustments" are larger than the ending number the data is clearly flawed. They estimated a gain of +5,000 in manufacturing to bring the sector up to only a loss of -8,000 instead of -13,000.

The larger U6 unemployment rate was 13.8% or 21,486,600. That is everyone unemployed that would work if a job was available and 7.9 million "involuntary part time" workers because they can't find a full time job.

The Labor Force Participation Rate rose +0.1 to 63.4% and just above the 35 year low of 63.3% set in March. Not much improvement for such a big market rally.

Over the last year the number of people NOT in the labor force rose by 1,741,000. Over the same period the number of people employed rose by 1,596,000 or an average of +133,000 a month. How healthy is the economy when more people dropped out of the labor force than were hired? The U.S. has to create more than 150,000 new jobs per month just to accommodate graduations and immigration. That does not take into account the millions out of work. We are slowly losing ground despite what the headline numbers say.

Labor Force Participation Rate Chart

Nonfarm Payroll Chart

I think it would make more sense to concentrate on the employment rate, currently 58.6% than the unemployment rate at 7.6%. The employment rate is barely off a 30 year low. It has not been this low since 1983 and is only marginally higher than during the Great Recession. I would point out that the Fed has not gotten a lot of employment bang for its $2.5 trillion in QE since the recession. The economy needs to add about 10 million more jobs to return to the pre recession employment levels.

Employment Rate Chart (Source CNN)

The big concern over the May payroll number was the impact on QE3 and the potential for the Fed to begin tapering their purchases. The hawks were out in force on Friday saying the Fed needed to begin tapering now so they would be done by early 2014 when the economy begins to gain traction. I wish I had the crystal ball they are using to predict economic growth. Apparently they just got it fixed because it has been giving bad data for the last three years. Bank of America, Goldman Sachs and others have recently downgraded their projections for growth to well below the Fed estimates. Who would you trust to be right, BAC, GS or the Fed?

The Fed claims they will not change monetary policy until unemployment reaches 6.5% (currently 7.5%) or inflation rises to 2.5% (Currently +0.7% headline, +1.1% core today). In theory neither of those numbers are not going to be reached for a long time. However, their recent commentary suggests they are about ready to begin tapering those QE purchases down from the current $85 billion a month. Apparently "tapering" is not the same as changing monetary policy or they would have to change their FOMC statements.

The Fed is so confused and opinions so diverse even they don't know what they are really going to do. The payroll numbers were not strong enough to change their QE stance based on their stated goals. Numerous Fed heads have said they would be open to tapering if they saw "several months" of payroll gains over 200,000 per month. February is the only month over 200,000 so far this year so "several months" would put us well into Q4 since the summer months of June, July and August are not normally strong job creation months.

On Friday the market rallied because some analysts said the Goldilocks number would keep the Fed from making any changes in the near future. I expect the opposite next week. I believe the hawks will start making their case that moderate payroll growth is economic progress and they will be calling for the tapering to begin. With the next FOMC meeting the following week we can expect plenty of posturing ahead of that meeting but most likely no actual changes at the meeting. The Fed will need to officially warn in a meeting statement that they are considering reducing purchases before they actually do it. They don't have to warn the markets but they know it would be ugly if they did not warn. That could happen at the June meeting. Several Fed heads have mentioned in their comments the change could occur in the "next several meetings" so we should expect a change to occur.

Dallas Fed President Richard Fisher warned, "We cannot live in the fear that the market is going to be unhappy that we are not giving them more monetary cocaine."

Remember, the government is not issuing as much debt today as they were in 2012. This means there are fewer treasuries in the market for the Fed to buy. The Fed needs to taper their purchases to keep from buying all the paper in the market and monetizing the government debt even more than they are already. The ratings agencies have warned against a continued increase in that monetization.

The following chart is a comparison of when the market expects QE to end compared to Goldman Sachs estimates.

QE3 End Calendar

I know I am boring a lot of readers with this analysis and I apologize. I just want everyone to be aware of the potential for Fed stress in the market over the next two weeks.

The economic calendar for next week is relatively light. The events that could cause trouble are coming from Japan. With the Nikkei down -21% from the May 23rd high of 15,942 to the 12,548 low on Friday the Nikkei has entered a bear market. On Monday Japan releases their GDP and Tuesday the Bank of Japan will announce their decision on rates. On Thursday the BOJ will release the minutes of the rate meeting. With their market in free fall and Abenomics at risk there could be some major announcements that could impact our market.

Investors in Japanese stocks thought they had a guaranteed rally for months to come because of the very aggressive BOJ QE program that buys not only bonds but REITs and equity ETFs. You can imagine their surprise when the market crashed -21% in three weeks.

Nikkei Chart

The Nikkei crash in the middle of a monster QE program struck fear into some U.S. investors and we saw increased volatility over the last three weeks. If the Japanese market were to suddenly rally the U.S. market could catch fire as well. Likewise if the Nikkei continues to fall we would probably decline with it.

On the U.S. calendar the 10-year Treasury auction on Wednesday could be interesting. Yields on the ten-year have rebounded to 2.16% and Alan Greenspan warned on Friday that rates are going up and they could rise at a much higher rate than investors expect. The taper talk is undermining the Fed's attempt to keep rates low. Mortgage rates are back at 4% and home sales are slowing. Mortgage applications declined -11.5% last week. The strength of the auction could impact the Fed's decisions at the FOMC meeting the following week. If demand is lackluster and yields spike they could worry about the impact of a taper statement before the economy is actually improving at a faster pace.

Over the last year the average GDP growth has been +1.8%. The last GDP revision for Q1 is not for a couple weeks and not expected to change much from the last 2.38% reading. This is inflated because of a blip in inventory. However, the Q2 GDP at the end of July is only expected to have risen by +1.5% to +1.7%. The Fed may want to wait to insure the number does not decline further before making any QE changes. Remember, the sequestration is expected to cause a -1.5% drag on GDP in Q2 and Q3. The Fed does not know how that is going to hit the economy until it happens.

Lipper said bond funds saw $9 billion in outflows for the week. You don't have to guess where that money went as investors bought the dip in equities on Thursday when the S&P rebounded from its 50-day average.

Ten Year Yield Chart

Retail sales on Thursday will be important to see if spending is keeping pace with sentiment. We have seen very high sentiment readings over the last month but talk is cheap. Did consumers put their money where their survey responses suggested?

Economic Calendar

The dollar imploded on the weaker than expected ISM, Beige Book and ADP Employment. It rebounded slightly on Friday after the Nonfarm Payrolls but only slightly. The weaker dollar will help the economy and improve earnings for international companies but it needs to return to the levels we saw in Q4 before the impact will be noticeable. The dollar had its worst week against the Yen since October 2008 as the Yen carry trade quickly unwound.

Dollar Index Chart

Precious metals were crushed on Friday as a result of the better headline number on the jobs report. The idea being that the U.S. economy was not as bad as the Manufacturing ISM suggested on Monday. The Armageddon trade is fading and equities are the only game in town. Money is rotating out of precious metals and into equities.

Silver was hurt the worst with a breakdown under support at $22 to close at a two-year low at $21.64. Gold hit $1423 intraday on Thursday as the dollar sold off but then plunged to $1384 at the close on Friday.

Silver Chart

Gold Chart

The payroll report helped boost the price of oil to a two-week high but that was also fueled by increasing concerns over Syria and the potential spread of violence through the Middle East. Also lifting prices was news of an outage at Nexen's 200,000 bpd Buzzard field in the North Sea. In the U.S. BP's 405,000 bpd Whiting, Indiana refinery is on schedule to restart by the end of June after a $4 billion remodeling effort.

Syria said its oil production has fallen from 380,000 bpd to 20,000 bpd because of the civil war. The rebels have captured the fields in northern and eastern Syria where most of the production is located.

Tropical Storm Andrea left the Gulf of Mexico without causing any trouble for the oil patch. Andrea is sprinting up the East Coast towards Massachusetts this weekend but winds are slowing and now in the 40 mph range. No material damage is expected and the storm is evaporating.

Crude Oil Chart

The EU is projecting accelerating growth in 2014. The IMF is projecting accelerating growth in 2014. The Federal Reserve is expecting accelerating growth late this year and into 2014. Unfortunately doctor copper is NOT projecting any global growth. Even though several copper mines have been shut down for strikes or mine problems the price of copper is holding just over two year lows at $3. Copper demand and prices rise ahead of economic growth. Copper is not rising.

Copper Chart

The short squeeze on Friday was the second best gain of the year for the Dow. Also, the Dow has not had a consecutive three day loss in 160 days. That is the longest streak since 1950. You would think that a +400 point rebound from Thursday's low would have come on decent volume. You would be wrong. Friday's short squeeze only managed volume of 6.4 billion shares. Advancers were slightly less than 2:1 over decliners. That is another weak point for the second best day of the year. The internals should have been a lot stronger. The Dow and S&P both bounced from critical support that should have fueled a rebound with even wider breadth. This was simply a short squeeze from a short term oversold condition. The majority of traders believed the Nonfarm Payrolls would miss estimates and everyone was leaning to the downside in their positions.

The S&P declined -15 points intraday to the 50-day average on Thursday and round number support at 1,600 before rebounding to close at 1,622. This was a textbook rebound. Shorts found themselves off balance at the close and Friday's gap higher on the payroll number pushed them into a panic.

The key levels to watch on Monday will be Friday's afternoon low at 1,632 and the resistance from Tuesday at 1,645. A break in either direction should be considered tradable. Stronger resistance at 1,660 would be critical if the rebound made it that far.

S&P Chart - 3 Min

S&P Chart - 30 Min

S&P Chart - Daily

The Dow went from oversold on Thursday to overbought on Friday with the +400 point rebound. Resistance at 15,200 became intraday support after the morning breakout. The critical number for Monday is 15,300 followed by 15,400. When the index was breaking out to new highs these barriers did not exist. As the index declined every lower high becomes future resistance. Like the S&P the Friday afternoon intraday low at 15,160 becomes a pivot point if broken.

Dow Chart - 30 Min

Dow Chart - Daily

The Nasdaq is no different than the S&P and Dow. The short squeeze pushed the index to downtrend resistance where it closed on Friday. It was the same for the Composite and the Nasdaq 100. In theory they should fail at this level. However, theory rarely works in reality. The Composite has additional resistance at 3,480 and again at 3,500. Tech stocks can move higher but it could be a tough climb.

Nasdaq Composite Chart - 60 Min

Nasdaq 100 Chart - 30 Min

While the major indexes averaged a +1.3% gain on Friday the Russell 2000 managed only a .8% gain. The small caps lagged in terms of Friday gains but they had also lagged on the decline earlier in the week. They did not decline as far because they were not as heavily shorted. They have a similar pattern of downtrend resistance but it is not as pronounced. The major resistance for the Russell is the highs from the prior week at 995. That would be a +7 point gain from Friday's close and a good place for an undecided market to stumble. A break over 995 faces that round number resistance at 1,000 that failed twice in late May. Each spike over 1,000 came on a gap open and each spike was immediately sold.

Russell 2000 Chart - 60 Min

The Dow Transports were the opposite of the Russell with a +2.4% gain on Friday. The transports had been down for 10 of the last 12 days and were in danger of a critical support break. They were heavily shorted after the Manufacturing ISM fell into contraction on Monday. The thought behind the selling was contracting business shipping and the rally was over. Those shorting the transports were crushed on Friday. The rebound took the transports to 6,343 and just a hair over resistance at 6,340.

Dow Transports Chart - Daily

The market this week has little in the way of economic reports to push it around. The market will be on its own and the bulls will have to find some conviction to push the market higher. The dip buyers did their part when the S&P hit the 50-day average and now it is up to the real investors to step up and buy stocks. If that conviction is lacking we could see another retest of support.

I found a deal so good I have to pass it on. If you go out to eat a lot and have a Ryan's Grill, Country Buffet, HomeTown Buffet or Fire Mountain Buffet near you this is a deal you can't pass up. I like to eat healthy and I have a Country Buffet down the street from me. I eat there 5-6 times a week. SweetJack.com, a site similar to Groupon, has a special this week where they are selling $10 gift cards for 60% off. You don't have to give them away you can use them yourself. It is like selling $10 bills for $4. I bought $1,000 worth for $400. That means my $8 senior special all I can eat lunch buffet with a drink actually costs me $3.20. You can't buy a crummy hamburger and drink at McDonalds for that. Here is the link to the deal. The deal is for a 50% discount but enter the promo code "Take10" at checkout to get the other 10% off. 60% Off Buffet Deal

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"Opportunity is missed by most people because it is dressed in coveralls and looks like work"
Thomas Edison


New Plays

Entertainment & Travel

by James Brown

Click here to email James Brown


NEW BULLISH Plays

Lions Gate Entertainment - LGF - close: 29.27 change: +0.47

Stop Loss: 27.80
Target(s): 34.00
Current Gain/Loss: unopened

Entry on June -- at $--.--
Listed on June 08, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.5 million
New Positions: Yes, see below

Company Description

Why We Like It:
LGF is the movie studio that produced the Twilight series. Now they have another hit on their hands with the Hunger Games trilogy. The next movie for Hunger Games comes out later this year. Meanwhile shares of LGF are consistently moving higher with traders buying the dips at the rising 10-dma and 20-dma.

Tonight we are suggesting small bullish positions if LGF can trade at $29.60. If triggered our target is $34.00.

Trigger @ 29.60 *Small Positions*

Suggested Position: buy LGF stock @ (trigger)

Annotated chart:



Ryanair Holdings - RYAAY - close: 50.10 change: +0.77

Stop Loss: 48.75
Target(s): 55.00
Current Gain/Loss: unopened

Entry on June -- at $--.--
Listed on June 08, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 319 thousand
New Positions: Yes, see below

Company Description

Why We Like It:
RYAAY is an Irish airline that services the United Kingdom and continental Europe. Shares of RYAAY have been outperforming the broader market and the airline sector in recent weeks. The stock has managed to breakout past its 2007 highs and major resistance in the $49-50 zone.

I am suggesting small bullish positions if RYAAY can trade at $50.50. If triggered our target is $55.00.

Please note I want to point out that RYAAY is a foreign company and its stock tends to gap open, up or down, each day as trading in the U.S. reacts to trading in Europe. Secondly I want to point out that there is a legal drama brewing between RYAAY and the U.K. government. There have been news articles discussing how the U.K. government "may force RYAAY to sell its 30% stake in Aer Lingus" (Reuters) because this ownership stake may allow RYAAY too much influence over its rival. The minority stake might prevent Aer Lingus from merging with another airline. Thus far this story does not seem to have any impact on RYAAY's stock price but investors should be aware of it.

Trigger @ $50.50 *Small Positions*

Suggested Position: buy RYAAY stock @ (trigger)

Annotated chart:




In Play Updates and Reviews

Jobs Data Sparks A Rally

by James Brown

Click here to email James Brown

Editor's Note:
The market's Thursday afternoon rebound continued with a boost from better than expected jobs data and stocks surged on Friday.

DLPH was triggered. AKAM hit our stop.


Current Portfolio:


BULLISH Play Updates

ACADIA Pharma. - ACAD - close: 17.01 change: +0.44

Stop Loss: 14.95
Target(s): (see below)
Current Gain/Loss: +12.1%

Entry on June 06 at $15.17
Listed on June 05, 2013
Time Frame: 4 to 6 weeks
Average Daily Volume = 3.1 million
New Positions: see below

Comments:
06/08/13: The rally in ACAD continued on Friday. Traders bought the dip on Friday morning and shares posted a +2.6% gain by the close. The stock is short-term overbought here. Right now we do not have an official exit target. The plan is to see how high will ACAD run. However, the $17.00 and $18.00 levels have been resistance in the past. Thus more conservative traders may want to take profits now.

*Small Positions*

current Position: Long ACAD stock @ $15.17

06/06/13 new stop loss @ 14.95, adjust exit target to $17.90
06/06/13 trade opened on gap higher at $15.17

chart:



Delphi Automotive - DLPH - close: 50.40 change: +1.01

Stop Loss: 47.85
Target(s): 54.50
Current Gain/Loss: + 0.3%

Entry on June 07 at $50.25
Listed on June 06, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 2.3 million
New Positions: see below

Comments:
06/08/13: Our new trade on DLPH has been triggered. Shares gapped open higher and managed to breakout past round-number resistance at the $50.00 level by Friday's close. Our trigger to open bullish positions was hit at $50.25.

current Position: Long DLPH stock @ $50.25

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

Long Aug $50 call (DLPH1317H50) entry $2.40

chart:



Electronic Arts - EA - close: 23.61 change: +0.33

Stop Loss: 22.40
Target(s): 25.75
Current Gain/Loss: + 2.2%

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:
06/08/13: Video game giant EA continues to rally and set a new 52-week high on Friday. This stock could see a boost next week as the annual E3 video game conference occurs in Los Angeles next week (June 11-13th).

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

chart:



Spirit Airlines - SAVE - close: 31.07 change: +0.43

Stop Loss: 29.49
Target(s): 34.00
Current Gain/Loss: + 2.7%

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:
06/08/13: SAVE landed a +1.4% gain on Friday. Shares look like they are about to breakout from the recent sideways trading range. Another plus for SAVE is the potential three-day bullish reversal pattern in the XAL airline index. If the industry rallies it could give SAVE a nice boost.

The simple 20-dma has risen to $29.63. We will raise our stop loss to $29.49.

current Position: Long SAVE stock @ $30.25

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

Long Jul $30 call (SAVE1320G30) entry $1.50

06/08/13 new stop loss @ 29.49
06/01/13 new stop loss @ 29.20

chart:



BEARISH Play Updates

ConAgra Foods - CAG - close: 33.75 change: +0.59

Stop Loss: 33.85
Target(s): 30.15
Current Gain/Loss: -0.2%

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:
06/08/13: Ouch! CAG delivered a +1.77% bounce on Friday. Traders were buying the dip Friday afternoon near $33.50. The stock looks poised to hit our stop loss at $33.85 soon. Nimble traders may want to look for a new bearish entry point on a failed rally near $35.00 and its 50-dma.

Earlier Comments:
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

06/06/13 new stop loss @ 33.85

chart:



Rackspace Holdings - RAX - close: 35.52 change: +0.62

Stop Loss: 37.25
Target(s): 31.00
Current Gain/Loss: +6.6%

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:
06/08/13: Shares of RAX were oversold and due for a bounce. The market's broad-based rebound on Friday helped RAX post a +1.77% gain. If this bounce continues the May 23rd low near $36.50 and the 10-dma near $37.00 should be overhead resistance. I am not suggesting new positions and more conservative traders may want to lock in gains now.

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

06/06/13 new stop loss @ 37.25
06/05/13 new stop loss @ 37.75
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.

chart:



Safeway Inc. - SWY - close: 22.71 change: +0.18

Stop Loss: 23.15
Target(s): 20.00
Current Gain/Loss: + 0.8%

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:
06/08/13: SWY was not immune to the market's widespread rebound on Friday. Yet SWY only posted a +0.7% gain versus a +1.28% rally in the S&P 500. I suspect that we will see SWY test the $23.00 level and its 10-dma soon. If the bounce goes any higher we'll see it hit our stop loss at $23.15.

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

06/06/13 new stop loss @ 23.15

chart:



CLOSED BEARISH PLAYS

Akamai Tech. - AKAM - close: 45.26 change: +0.70

Stop Loss: 45.15
Target(s): 40.25
Current Gain/Loss: - 1.6%

Entry on June 05 at $44.45
Listed on June 04, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 2.2 million
New Positions: see below

Comments:
06/08/13: We tried to limit our risk by lowering our AKAM stop loss on Thursday night to $45.15. The widespread market rally on Friday lifted AKAM to $45.28 intraday.

*Small Positions*

closed Position: short AKAM stock @ $44.45 exit $45.15 (-1.6%)

06/07/13 stopped out
06/06/13 new stop loss @ 45.15

chart: