Option Investor
Newsletter

Daily Newsletter, Tuesday, 7/2/2013

Table of Contents

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

Market Wrap

July Fireworks......

by Thomas Hughes

Click here to email Thomas Hughes
Introduction

I was very busy this morning getting ready for today's wrap. It's not that so much was happening in the pre-market hours it was because there was so much scheduled to happen throughout the day. No one thing was really a market shaking event but altogether provided a long work day for economy watchers, investors and traders.


The Asian markets were calm in overnight trading, the one bit of important info I found in that market came from the Australian central bank. The bank left policy unchanged for now but made it clear that future easing is still on the table. Australian stocks led with a +2.5% gain.European indexes were in the red at the open of U.S. trading. However, they found a bottom after Ford revealed its June sales increased by 13.4%. The European indexes appear to be in short term consolidation following a support bounce and ahead of the ECB meeting on Thursday. There is little expectation of a policy change from them but the statements and press conference will be important. Mario Draghi usually reveals a lot about what the ECB thinks about the European economy. I am especially interested in how he views the 2nd half recovery in the EU which he has predicted will be led by Germany. Strengthening in the U.S and recent manufacturing expansion in Asia bode well for the EU.

As for us here at home our day started with small business lending, monthly sales from the auto industry, factory orders, the Fed vote on banking requirements, Fed speak from president Dudley and official U.S. auto and truck sales. These events were spread throughout the day and only one was released before the market opened. Each came without a bump, edging the market higher until reaching the daily peak around noon. Selling out paced buying during the after noon trade pushing the indexes into negative territory by 2PM. The release of the expected better-than-expected official U.S. auto/truck sales did nothing to help maintain stock prices.

Today's Events

First on the list for today was the release of the small business lending index maintained by Thompson-Reuters. Lending to small businesses rose by more than 14% in May making the second month of increases. The index rose to 115.1 from a downward revised 101.3. This is a great sign for the economy in my opinion. Small businesses make up more than 50% of our GDP and account for about 75% of the total workforce. An increase in lending to small businesses means an increase (fingers crossed) in spending on equipment, tools and supplies which is also supposed to lead to new hiring. This indicator typically leads the markets by 2-3 months so we could see an improvement in jobs data as early as this month.

Next up was Ford's release of June sales a few minutes after the opening bell. Ford increased Junes sales by 13.4%, nearly 2% better than the expected 11.7%. Sales gains were led by trucks; sales of the F-Series increased by more than 24%. Trucks are one thing that can be bought with a small business loan and is another sign of more work and possibly more workers. The S&P 500 had been down about -1.5 but quickly advanced into positive territory after Ford's announcement. Ford moved up by 1.75 % in early trading and broke the $16 long term resistance level with bullish technicals.

Ford daily

GM followed up with a better than expected increase as well. GM sales in June increased by 6.5% versus the expected 1.3%. On a comparative basis GM increased sales 400% better than expected versus Fords 14.5%. Shares of GM also moved up today with bullish technicals but did not break its long term resistance. On the weekly charts GM is still bullish but faces resistance that could contain prices in the short to mid term. Long term support is in the $30-$32.50 range with resistance at $35. A break above this level would be bullish but will also face resistance until the U.S. is fully divested.

GM daily

Simultaneous to GM's report was the release of factory orders. Orders rose 2.1%, ahead of the expectation. The previous month was also revised up from 1% to 1.3%. The double release of GM and Factory orders at 10 AM gave the markets pause but only for a brief time. The S&P had reached a new intra-day high by 10:20. The next item up on the agenda was the the Federal Reserve vote on banking requirements.

The Fed has been mulling a proposal to increase capital requirements for banks with balances over $10 billion. The proposal is to increase the requirement by 50% from 4% to 6%. Other aspects of the capital requirements put in place after the 2008 crisis were also targeted, some for increase others for decreases. The measures were approved and the results were met with little fan fare. Markets were only marginally impacted and were able to hold onto most of today's gains. Fed President Dudley spoke at 12:30 and basically repeated the same statements he made last week. The market sentiments are “out of synch” with the FOMC's stance on QE. He expects interest rates to remain low until 2015 and that any data dependent thresh holds are just that. If recent trends continue through the summer and fall tapering could begin by the end of the year. The S&P held steady near the early highs for about an hour and then slowly lost ground until the 2PM release of auto and truck sales.

Auto sales were reported with a “wow” headline. The annual pace of auto/truck sales came in at 15.9 million, just shy of the 16 million level we were seeing before the start of the financial crisis. Although a good sign it failed to boost markets. The S&P had turned negative just before the release and did not regain positive ground following. In the near to short term we can expect to see a drop in seasonal unemployment claims due to the scheduled suspension/shortening of the automotive industry summer break. The big three producers are all ramping up production to help build and maintain inventory going into the end of the summer.

Tomorrow the monthly employment starts to roll in. ADP employment, Challenger Job Cuts and an early release of jobless claims are on tap. ADP is expected to gain about 20,000 from last months 130,000. Challenger does come with an expectation however last month planned layoffs declined 42% and hit a long term low. Initial claims is expected to decline marginally to 345,000. There is a chance of positive surprises here but it will take a really big surprise to move the S&P much at this time. Thursday of course the markets are closed for Independence Day and then Friday wraps up the week. Non Farm Payrolls is expected to hold steady around 175,000. Trading on Friday will be a regular day but expect light volume.

The Euro

European markets are waiting for the ECB meeting, announcement and press conference scheduled for Thursday. The European indexes, as I said earlier, appear to be in a holding pattern. The same holds true for the EUR/USD. The pair has been trading at or near the long term support/resistance of 1.3000 with near term resistance at 1.31000. Thursday will likely be a turning point for the Euro, I will be watching for a break above or below the 5 day trading range.

EUR/USD

The Yen

The yen is continuing its trek back up to retest the 104 level set in May. The pair is well above the target Abe set but looks good to move higher in the nearer term. Next resistance is at 104. MACD and stochastic are both moving up. The next BOJ policy meeting is next Wednesday but there is no expectation of changes. There may be some indication of how QE is working and the state of the Japanese economy. Currently Japan is experiencing an uptick in sentiment, manufacturing and earnings expectations. It will take a few months for enough data to come in to really establish a recovery but at this time signs are that it's working. Until then the USD/Yen could be range bound with longer term top and bottom limits at 95 and 104.

USD/JPY

Oil Trades Near Top Of Range

Oil traded up today, gaining as much as $1.57 intra-day. Supply concerns stemming from Africa and the Middle East added to a slightly improved demand outlook to keep prices up at the current levels. Protests in Egypt are still raging across the country with unrest possibly spreading to other countries. The dead line set by the military is fast approaching and could result in even more turmoil in the region.

The primary concern at this time is the possible shut down of the Suez Canal which would add a lot of time to oil shipments. The Oil Index also traded up but is not mirroring the underlying commodity. The index has fallen below long term support and then bounced from the long term up trend. Momentum is bearish at this time but very close to the zero line. Stochastic is pointing up but the longer term analysis is wishy washy. This may be a good time to get into some oil stocks but I would need to see the index break back above 1,350 first. Downside targets on a break below the trend line are 1,300 and 1,250.

Oil Index

Gold

Gold traded to the down side today. Not surprising after the $50 bounce in prices yesterday. I am still bearish on gold simply because the metal broke down through my previous targets so quickly. Momentum analysis also points to a retest of the recent lows. The Gold Index is following closely along with the price of its underlying commodity also traded down today. The $100 dollar may be emerging as a near term resistance level on the index move down to fully retrace the 2008-2012 bull market.

Gold Index

Story Stocks

Zynga popped today on news that it had lured X-Box chief Don Mattrick to its CEO position. The move is being questioned by the media but sentiment seems to lean toward the positive. Mattrick is responsible for the X-Box's rise to profitability and could be just what Zynga needs. Shares of the stock jumped about 8-10% on the news to gap open near a long term resistance. This one is a good one to watch going into the summer and fall. The stock faces serious technical resistance moving forward, a break above $3.50 has strong resistance at $4.00 and that's just the middle of the $2 window opened last July.

Zynga

Constellation Brands was the one earnings report that caught my attention. The stars failed to shine when the company reported earnings of $0.27 per share, a drop from the $0.38 from a year ago and well below the $0.45 expected by the consensus. The stock traded to the upside initially but soon fell back under selling pressure to reach the long term support of $50.

Constellation

Earnings reports are near non existent the rest of the week. Monday the big boys start revealing their results. Alcoa reports Monday after the bell followed by Wells Fargo and JP Morgan on Friday.

The Indexes

The U.S. markets appear to be in a similar near term consolidation as the European indexes I mentioned earlier. The S&P 500 is making a bounce from long term support but that bounce is finding resistance in the form of the previous up trend line and the short-term moving average. This week is tough to gauge for a number of reasons. First it is the summer time so volume will be on the lighter side to begin with. Second its the Fourth Of July week so volume will be impacted by that as well. Third we have the ever important jobs data bundle on tap for tomorrow and Friday. These number could clarify or muddy the water, adding volatility to the market. Wrapping it up next week is the “official” start to earnings season. Alcoa is not expected to post any huge surprises but the outlook and guidance will go a long way toward helping judge the next quarter or two.

Looking at the daily charts the S&P looks likely to be range bound for now. Indicators are suggesting a retest of support is possible but they are also suggestive that support is actually there. Long term support still exists at the previous all-time highs in the 1570-1575 level. Upside resistance at the new all time highs with sideways pressure occurring along the previous long term up trend line. I think earnings season could be a time of consolidation in the index while investors position for the second half of the year.

SPX daily

Longer term the index is bouncing from support. Momentum is mildly bearish and stochastic is pointing down at this time but does not indicate long term weakness yet. My range theory still looks good here but keeping a close watch on support will be important.

SPX weekly

The long term up trend is broken but that does not mean that the new trend is down. It doesn't even really mean that the new trend is sideways either. The market could easily catch a wind and move higher but I'm not holding my breath. For now I see a lot of reason for stocks to hold their ground while data, earnings and outlook are digested. Without a break out I look for the S&P to bounce between the previous and current all-time high levels.

Until then, remember the trend!

Thomas Hughes


New Plays

Fast-Casual

by James Brown

Click here to email James Brown


NEW BULLISH Plays

Fiesta Restaurant Group. - FRGI - close: 34.99 change: +0.53

Stop Loss: 33.80
Target(s): 39.50
Current Gain/Loss: unopened

Entry on July -- at $--.--
Listed on July 02, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 245 thousand
New Positions: Yes, see below

Company Description

Why We Like It:
FRGI is back! This company runs a chain of Tex-Mex "fast-casual" restaurants. The stock peaked a couple of weeks ago but traders have been buying the dips over the last several days. You can see on the daily chart below that FRGI has been struggling with resistance at the simple 30-dma. Now it's testing the 10-dma, 20-dma and the 30-dma. A breakout higher here could spark the next leg higher.

I do want to warn you that bears could argue the recent bounce is nothing more than a bear-flag consolidation pattern. That is possible. A move below the $33.50 level or the 50-dma would be bad news for FRGI's longer-term up trend. Tonight we are suggesting a trigger to open bullish positions at $35.25. If triggered our target is $39.50.

Trigger @ 35.25

Suggested Position: buy FRGI stock @ (trigger)

Annotated chart:




In Play Updates and Reviews

Has The Rally Stalled?

by James Brown

Click here to email James Brown

Editor's Note:
The rally in the big caps, small caps and the transports appears to have stalled.

Our new EWJ trade has been triggered.


Current Portfolio:


BULLISH Play Updates

American Realty Capital Prop. - ARCP - close: 14.90 change: +0.10

Stop Loss: 14.35
Target(s): 16.00
Current Gain/Loss: + 2.1%

Entry on June 24 at $14.60
Listed on June 22, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 4.8 million
New Positions: see below

Comments:
07/02/13: Shares of ARCP continue to be volatile. The company was making headlines this morning after announcing they would acquire American Realty Capital Trust IV in a $3.1 billion merger.

The stock spiked higher this morning but failed again near technical resistance at its 30-dma and 100-dma. I am not suggesting new positions at this time.

NOTE: We are turning more cautious here and raising our stop loss to $14.35. More aggressive traders may want to keep their stop below support at the $14.00 mark.

*small positions*

current Position: Long ARCP stock @ $14.60

07/02/13 new stop loss @ 14.35



Community Health Systems - CYH - close: 46.54 change: -0.49

Stop Loss: 45.85
Target(s): 51.00
Current Gain/Loss: - 1.1%

Entry on June 26 at $47.05
Listed on June 25, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.2 million
New Positions: see below

Comments:
07/02/13: CYH underperformed the market today with a -1.0% decline. It looks like the rebound off the $44 level (Monday, June 24th) is rolling over. We are turning more cautious here and raising the stop loss to $45.85.

current Position: Long CYH stock @ $47.05

07/02/13 new stop loss @ 45.85



Engility Holdings - EGL - close: 28.77 change: -0.16

Stop Loss: 27.45
Target(s): 32.50
Current Gain/Loss: + 1.8%

Entry on June 25 at $28.25
Listed on June 24, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 96 thousand
New Positions: see below

Comments:
07/02/13: EGL spent Tuesday's session consolidating sideways in a narrow range. If the market cooperates we should see shares breakout past $29.00 soon.

Earlier Comments:
A breakout could spark some short covering. The most recent data listed short interest a 10% of the small 12.7 million share float.

current Position: Long EGL stock @ $28.25

06/29/13 new stop loss @ 27.45



iShares Japan Index - EWJ - close: 11.44 change: +0.08

Stop Loss: 10.98
Target(s): 12.40
Current Gain/Loss: - 1.0%

Entry on July 02 at $11.55
Listed on July 01, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 66 million
New Positions: see below

Comments:
07/02/13: The rebound in Japan continued. Shares of the EWJ gapped open higher at $11.51 this morning. The ETF managed to hit $11.56 midday before paring its gains. Our trigger to launch positions was hit at $11.55. I would still consider new positions now at current levels or you could wait for a rally above today's high.

current Position: Long EWJ stock @ $11.55

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

Long 2014 Jan $12 call (EWJ1418a12) entry $0.58



MetLife, Inc. - MET - close: 46.57 change: +0.03

Stop Loss: 45.40
Target(s): 50.00
Current Gain/Loss: + 0.7%

Entry on July 01 at $46.25
Listed on June 27, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 8.7 million
New Positions: see below

Comments:
07/02/13: MET tagged a new high this morning but shares pared their gains by the closing bell. We are raising our stop loss up to $45.40.

*small positions*

current Position: Long MET stock @ $46.25

07/02/13 new stop loss @ 45.40



Nexstar Broadcasting - NXST - close: 34.50 change: +0.01

Stop Loss: 33.49
Target(s): 39.50
Current Gain/Loss: - 2.9%

Entry on June 27 at $35.53
Listed on June 26, 2013
Time Frame: 4 to 8 weeks
Average Daily Volume = 615 thousand
New Positions: see below

Comments:
07/02/13: UBS raised their price target on NXST from $30 to $39 but the news failed to move the stock price. Shares closed almost unchanged on the session. The stock retested support near $34.00 and its 10-dma. More conservative traders may want to adjust their stop closer to yesterday's low (33.95).

*small positions*

current Position: Long NXST stock @ $35.53

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

Long Aug $40 call (NXST1317H40) entry $1.14

06/27/13 triggered on gap higher at $35.53 (trigger was 35.50)



Polypore Intl. Inc. - PPO - close: 41.05 change: -0.33

Stop Loss: 39.30
Target(s): 44.75
Current Gain/Loss: +0.7%

Entry on July 01 at $40.75
Listed on June 29, 2013
Time Frame: 3 to four weeks (unless you're trading the options)
Average Daily Volume = 3.3 million
New Positions: see below

Comments:
07/02/13: PPO rallied up to the $42 level only to reverse and eventually close down -0.79%. Traders can use a dip or a bounce near the $40.50 level as a new bullish entry point on PPO.

Earlier Comments:
If shares build on Friday's rally PPO could see another short squeeze. The most recent data listed short interest at 39% of the small 42.7 million share float.

*small positions*

current Position: Long PPO stock @ $40.75

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

Long Jul $40 call (PPO1320G40) entry $1.75*

*07/01/13 option entry price is an estimate since the option did not trade at the time our play was opened.



The Charles Schwab Corp. - SCHW - close: 21.30 change: -0.08

Stop Loss: 20.65
Target(s): 24.50
Current Gain/Loss: - 1.2%

Entry on July 01 at $21.55
Listed on June 29, 2013
Time Frame: Exit prior to earnings in 2 to 3 weeks
Average Daily Volume = 12.2 million
New Positions: see below

Comments:
07/02/13: SCHW marked a new 52-week high midday and then reversed. Shares settled with a -0.3% decline. Look for support near $21.00 and its 10-dma. Nimble traders may want to consider trying to buy a dip near $21.00.

Earlier Comments:
I would like to aim for $24.50 on this stock but we may not have enough time. The company could report earnings in the next two or three weeks and we'll plan to exit prior to the announcement. I am suggesting investors keep their position size small to limit risk.

*small positions*

current Position: Long SCHW stock @ $21.55



BEARISH Play Updates

Cliffs Natural Res. - CLF - close: 16.60 change: +0.18

Stop Loss: 16.51
Target(s): 12.15
Current Gain/Loss: unopened

Entry on June -- at $--.--
Listed on June 26, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 11.5 million
New Positions: Yes, see below

Comments:
07/02/13: CLF is still trying to bounce and added +1.0% on Tuesday. The stock remains below its 10-dma and resistance in the $17.00 area (at least for now). Currently there is no change from my earlier comments.

Earlier Comments:
If the $15.50 level breaks the next stop could be its 2009 lows near $12.00 (actually $11.84). I am suggesting small bearish positions if CLF hits $15.40 or lower. If triggered our target is $12.15. I am suggesting small positions because CLF is arguably oversold here. Instead of shorting CLF you may want to try and limit your risk by using put options (your risk being the cost of the option).

Trigger @ 15.40 *small positions*

Suggested Position: short CLF stock @ (trigger)

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

Buy the Aug $15 PUT (CLF1317T15)



Energy XXI Ltd. - EXXI - close: 22.75 change: +0.15

Stop Loss: 23.55
Target(s): 20.25
Current Gain/Loss: + 2.8%

Entry on June 27 at $23.40
Listed on June 25, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.0 million
New Positions: see below

Comments:
07/02/13: The Tuesday morning rebound in EXXI failed at the $23.00 level but shares still managed to close the day with a +0.66% gain. I am not suggesting new positions at this time.

Earlier Comments:
We are aiming for $20.25 as our exit target but the April 2013 lows could be support. More conservative traders may want to take profits early in the $22.00-21.50 area.

current Position: short EXXI stock @ $23.40

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

Long Jul $24 PUT (EXXI1320S24) entry $1.20

06/29/13 new stop loss @ 23.55