Option Investor
Newsletter

Daily Newsletter, Tuesday, 7/9/2013

Table of Contents

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

Market Wrap

Keeps Going and Going and Going

by Jim Brown

Click here to email Jim Brown

The market is doing a great imitation of the Energizer Bunny with the strongest four-day gain since early April.

Market Statistics

The indexes have moved to about 1% from new historic highs despite serious geopolitical tensions, declining earnings estimates and a pending speech by Ben Bernanke. If this sounds familiar it is. The last couple times he spoke the markets were testing overhead resistance and crashed after the speech.

If there was ever a perfect setup for a strong move this is it. The Dow closed right on resistance of 15,300. The Nasdaq closed right on resistance of 3,500. The S&P closed .51 points above the closing high from June 18th, which is also current resistance. For all three indexes to close right on resistance ahead of the FOMC minutes and Bernanke speech on Wednesday is seriously tempting fate.

S&P-500 Bar Chart

There were no economic reports of note on Tuesday. The Job Openings and Labor Turnover Survey (JOLTS) is a lagging report for May and is generally ignored. Hiring was flat according to the report with the number of available jobs at 3.828 million, up from 3.800 million. Hiring rose only slightly from 4.395 million to 4.441 million. This compares to 5.6 million a month prior to the recession. Separations rose slightly from 4.287 million to 4.323 million. Quits rose from 2.185 million to 2.203 million. This report was ignored.

A nonscheduled report that did move the market was news from CoreLogic (CLGX) that foreclosures fell by -29% to about one-million homes in some stage of foreclosure. Completed foreclosures totaled 52,000 in May. That is a -27% decline from May 2012.

The company also said the shadow inventory of homes fell below two-million for the first time since 2008. Those are homes that are seriously delinquent and in imminent danger of being foreclosed and those owned by mortgage servicers but not yet on the market. These may need repair before being listed or the mortgage companies are waiting for prices to rise further before trying to sell them.

While the falling foreclosure rate does not directly impact builders it does imply lower home inventories and the potential for builders to raise prices. Homebuilder stocks soared on the news with DR Horton (DHI) rising +7.5%. However, most builders declined by that amount just two days earlier when the interest rates spiked after the payroll report. Stronger jobs means tighter Fed policy and much higher mortgage rates. Rate hikes by the Fed may not happen until 2015 but rate hikes in the market in expectations of QE tapering are already occurring. Other gainers were TOL +6.4%, PHM +5.5%, LEN +6%.

DHI Chart

The economic calendar for Wednesday will be led by the FOMC minutes at 2:PM. This is the minutes for the meeting that "deputized" Bernanke to outline a timeline for tapering in the post meeting press conference. Analysts will be scouring the minutes for signs of doves or hawks changing sides in the tapering debate. Several Fed heads appear to have changed sides to a more dovish position since the FOMC meeting so it will be interesting to see how the meeting dynamics played out. Expect volatility surrounding the event.

Bernanke does not speak until 4:10 and the topic is not specifically related to monetary stimulus. I expect this speech to be boring and ignored. However, he could take advantage of the podium to try and fine tune his post FOMC remarks that crashed the market. I don't expect him to say anything that will be market negative. If anything is said it should be an attempt to calm the markets and take the pressure off of mortgage rates.

Economic Calendar

YUM Brands (YUM) reports earnings after the close on Wednesday and they are the biggest report for the day. Because they sell to working class families their earnings and guidance will be important. They are still battling a scare over tainted chicken in China and positive news about winning that battle would be very good for YUM shares. The stock is close to a 52-week high and a positive earnings report could make that a reality.

YUM Chart

Hi-Tech Pharma (HITK) had a dramatic earnings reaction. Shares opened at the low of the day at $30.50 before rebounding to close near the highs at $35.25. The company reported a loss of 34 cents or $4.6 million. This was less than the 73 cent loss of $9.9 million in the year ago quarter. Revenue declined -5% to $58.5 million from $61.3 million. Analysts were expecting a loss of 66 cents on revenue of $67 million. Obviously they beat substantially on the earnings and missed by a mile on the revenue. There was a large item where the company set aside $15.5 million tied to an investigation into price submission in Texas. Apparently traders were shocked by the revenue and once over the sticker shock they decided the stronger earnings were the key. HITK declined -7.3% before the open then ended the gain with a +5% gain.

HITK Chart

Wolverine Worldwide (WWW) reported Q2 GAAP profits declined -11% to 36 cents per share. However, adjusted earnings were 46 cents and that beat analyst estimates of 34 cents. Revenue surged +88% to $587.8 million and analysts were expecting $590.8 million. The surge in revenue came from the acquisition of the Sperry Topsider, Saucony, Stride Rite and Keds brands. The company raised its full-year guidance to $2.60-$2.75 and analysts were only expecting $2.31. Shares spiked +7% before the open but gave back some in regular trading.

WWW Chart

Earnings due out on Wednesday include FDO, FAST, YUM, TXI, PSMT and ADTN.

Earnings estimates for the S&P continue to fall. S&P IQ said today they are now expecting +2.9% earnings growth, a decline from last week's expectations of +3.3%. Revenue expectations rose from +0.5% to +1.5%. Without the financials the S&P would be looking at an earnings decline of about -4%. The rate of negative preannouncements has been the worst in the last 12 years.

In stock news Tesla Motors (TSLA) is replacing Oracle (ORCL) in the Nasdaq 100 (NDX). That is the 100 biggest nonfinancial stocks on the Nasdaq. Oracle announced it was moving to the NYSE. The addition of TSLA to the NDX will occur on Monday July 15th. The addition to the index will require hundreds of fund managers indexed to the NDX to buy shares of Tesla. With the low float we could see TSLA move sharply higher. The gains today were relatively muted given the news but the buys don't have to occur until Friday.

TSLA Chart

Intuitive Surgical (ISRG) was crushed after it warned on Q2 earnings and the decline in sales of robotic surgery systems. Revenue growth will drop to +7% compared to +23% in the prior quarter. The company has been under pressure after numerous complaints of problem with the machines that were harming patients. The company sold only 90 of the systems in the U.S. compared to 124 in the year ago quarter. Goldman Sachs, Canaccord and JMP Securities downgraded the stock and others are sure to follow. Shares fell a whopping -16%.

ISRG Chart

Goldman Sachs downgraded IBM from buy to neutral saying the tech giant is seeing pressure on its growth markets with slowing revenues in its higher margin business lines. Some analysts believe IBM is suffering from the same indecision and deferment on orders as Oracle and Accenture both warned about last month. IBM has not given any clue that sales are slowing and they are the leader in the industry. Expectations for IBM are already low so there is a possibility of an upside surprise. Shares of IBM declined -3.68 to knock -31 points off the Dow but the index was not deterred.

IBM Chart

BlackBerry held its shareholder meeting today and the CEO pleaded for patience with the turnaround. He said, "This is a long-term transition for the company, but I can assure you that we are pushing very hard. Blackberry will pursue every opportunity to create value for shareholders." He was asked if the company might be broken up and he dodged the question but he did not say no. He said they were open to "any and all options that create value for shareholders." He indicated there may be some partnerships in the future. CEO Heins said they were already seeing some signs of market share gains in the top-end of the Smartphone line. He did say competition in the low-end devices in Asia was "intense" but they were holding their ground. The company said another round of layoffs was coming and they fired the VP for sales in the USA. Blackberry has 11,000+ employees after cutting -5,000 in 2012. Shares are trying to form a bottom at $9 after the big drop from $14 when earnings disappointed in late June.

BlackBerry Chart

The markets are setup for big things on Wednesday. We are either going to blow out to new highs or take profits from the last seven days of gains. With all the major indexes closing right on critical resistance the trap has been set and the FOMC minutes should decide whether it is the bulls or bears that get squeezed.

The S&P closed at 1652.32 and the closing high for June was 1651.81. That is solid resistance but not insurmountable. The historic high close is 1669.16 so we still have a ways to go before we hit blue sky again in the S&P. The S&P has rebounded +89 points since the 1560 low on June 24th. Even if we are destined to move higher it is time for some profit taking. That could be done in a day or a several days but we need some stop losses to be hit and give those on the sidelines an excuse to buy.

Support is the 50-day at 1628 and then prior resistance at 1620-1625.

S&P Chart

The Dow is in a similar situation. The Dow stopped exactly on resistance from the June highs at 15,300. The high close in June was 15,318. The rebound from 14,550 in June has run for nearly +800 points without any material pause. The historic high close is 15,409 and only 109 points over today's close. With the target highs so close the odds are pretty good we will see them tested soon.

The challenge will be to avoid a double top failure if the earnings are disappointing. With warnings and downgrades an everyday occurrence now the market has proven to be very resilient. It will have to keep up the pace or investors could get cold feet ahead of the late summer doldrums.

Dow Chart

The Nasdaq is leading the big cap pack. The Nasdaq closed at 3,504 and that is a new twelve-year high. The May closing high was 3,502.12. Closing at a new high was done without any fanfare. The Nasdaq just kept adding a small step every day and today's +19 points was not spectacular. Trading was calm and orderly with very low volatility.

With the Nasdaq and the Russell 2000 at new highs it would seem to suggest the Dow and S&P should follow. Support on the Nasdaq is now 3,450. The Nasdaq did stop at uptrend resistance and that 3,500 level was a real challenge in May. The index traded over 3,500 intraday on seven days but only close there once.

Nasdaq Chart

There is no doubt about the Russell 2000. The index has rebounded +76 points since the 942 low in June and the last three days have been strongly higher into new high territory. Today's +9 point gain on top of a big string of gains suggests the bulls are in control and there is no fear of the traditional summer weakness.

While a major part of this rally is related to the end of June index rebalance the buyers have stepped in with additional volume to keep the move alive. Resistance would be around 1,030 and support should now be 1,000. The Russell closed at 1017.54.

Russell 2000 Chart

Despite the halt at strong resistance levels on the Dow, S&P and Nasdaq the bias is clearly bullish. Assuming there is no smoking gun in the FOMC minutes that will poison sentiment I think the trend remains bullish. We need a couple days of profit taking but I would expect the dips to be bought.

The market is ignoring dozens of negative conditions from weak earnings, civil wars, economic weakness and currency volatility. Money is coming out of bonds and equities making new highs are a big welcome mat for that cash.

We can't afford to become too complacent so look both ways before stepping off the curb and save some cash back for the dip that will appear when we least expect it.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email


New Plays

Industrial Goods

by James Brown

Click here to email James Brown


NEW BEARISH Plays

AZZ Inc. - AZZ - close: 35.31 change: -0.43

Stop Loss: 36.25
Target(s): 30.50
Current Gain/Loss: unopened

Entry on July -- at $--.--
Listed on July 09, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 231 thousand
New Positions: Yes, see below

Company Description

Why We Like It:
AZZ is in the industrial goods sector. They manufacture electrical equipment and other components. The stock produced an impressive performance in 2012 and the first quarter of 2013. The stock peaked in March and spent almost the entire second quarter consolidating sideways. AZZ reported earnings on June 28th and missed estimates. If that wasn't bad enough they also guided lower and announced their CEO was retiring.

AZZ has tried to bounce from support near the $35.00 level but it looks like the oversold bounce has failed. A breakdown under $35 could signal a drop to the next major support level near $30.

I am suggesting a trigger to open bearish positions at $34.75. If triggered our target is $30.50.

FYI: AZZ will begin trading ex-dividend on July 10th. The quarterly dividend should be 14 cents.

Trigger @ 34.75

Suggested Position: short AZZ stock @ (trigger)

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

buy the Aug $35 PUT (AZZ1317T35) current ask $1.45

Annotated chart:




In Play Updates and Reviews

Four-Day Rally

by James Brown

Click here to email James Brown

Editor's Note:
The U.S. market has produced a four-day rally. That hasn't happened since April.

I've updated a handful of stop losses tonight.


Current Portfolio:


BULLISH Play Updates

Engility Holdings - EGL - close: 29.01 change: +0.16

Stop Loss: 28.25
Target(s): 32.50
Current Gain/Loss: + 2.7%

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:
07/09/13: EGL managed to post a gain today but you could argue the action in the stock was bearish. Shares spiked up toward potential round-number resistance at $30.00 and reversed.

I am raising our stop loss up to $28.25.

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

07/09/13 new stop loss @ 28.25
07/06/13 new stop loss @ 27.85
06/29/13 new stop loss @ 27.45



iShares Japan Index - EWJ - close: 11.58 change: +0.06

Stop Loss: 10.98
Target(s): 12.40
Current Gain/Loss: + 0.3%

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:
07/09/13: It was a quiet day for the EWJ. Shares of this ETF churned sideways near the $11.60 level.

current Position: Long EWJ stock @ $11.55

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

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



Fiesta Restaurant Group. - FRGI - close: 34.89 change: -0.11

Stop Loss: 33.80
Target(s): 39.50
Current Gain/Loss: -1.5%

Entry on July 05 at $35.42
Listed on July 02, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 245 thousand
New Positions: Yes, see below

Comments:
07/09/13: I couldn't find any headlines to explain the relative weakness in FRGI this morning. Shares spike down toward $34.00 and then bounced right back toward resistance near $35.00.

Readers may want to use a trigger at $35.50 to initiate new positions.

current Position: Long FRGI stock @ $35.42

07/05/13 trade opened on gap higher at $35.42. Trigger was $35.25.



MetLife, Inc. - MET - close: 48.78 change: +0.73

Stop Loss: 45.90
Target(s): 49.75
Current Gain/Loss: + 5.5%

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:
07/09/13: Financial stocks continue to flex their relative strength muscles. MET surged +1.5% and closed above potential resistance at its February 2011 highs. Please note that I am adjusting our exit target down to $49.75. I am raising the stop loss to $45.90.

*small positions*

current Position: Long MET stock @ $46.25

07/09/13 new stop loss @ 45.90, adjust target down to $49.75
07/02/13 new stop loss @ 45.40



Nexstar Broadcasting - NXST - close: 38.53 change: +0.22

Stop Loss: 35.75
Target(s): 39.50
Current Gain/Loss: + 8.4%

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:
07/09/13: Traders bought the dip near $38.00 this morning but NXST is having trouble getting past the $39.00 level. Readers may want to go ahead and take profits now. I am raising our stop loss up to $35.75.

*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

07/09/13 new stop loss @ 35.75
07/08/13 new stop loss @ 34.85
07/06/13 new stop loss @ 33.85
06/27/13 triggered on gap higher at $35.53 (trigger was 35.50)



Polypore Intl. Inc. - PPO - close: 42.01 change: +0.94

Stop Loss: 39.90
Target(s): 44.75
Current Gain/Loss: + 0.8%

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:
07/09/13: Traders bought the dip in PPO and shares outperformed the market today with a +2.2% gain.

I am adjusting our stop loss up to $39.90.

Earlier Comments:
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*

07/09/13 new stop loss @ 39.90
*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: 22.20 change: +0.01

Stop Loss: 21.35
Target(s): 24.50
Current Gain/Loss: + 3.0%

Entry on July 01 at $21.55
Listed on June 29, 2013
Time Frame: Exit prior to earnings on July 15th
Average Daily Volume = 12.2 million
New Positions: see below

Comments:
07/09/13: SCHW delivered a disappointing session. Gains faded and shares closed virtually unchanged on the day. The stock is near the top of its narrow channel. Readers may want to go ahead and exit now to lock in a gain. I am raising our stop loss up to $21.35, just below the simple 10-dma.

Note: we will probably exit SCHW by week's end to avoid holding over the earnings report (expected early next week).

*small positions*

current Position: Long SCHW stock @ $21.55

07/09/13 new stop loss @ 21.35



Seagate Tech. - STX - close: 45.73 change: +0.28

Stop Loss: 44.90
Target(s): 49.85
Current Gain/Loss: - 0.7%

Entry on July 08 at $46.05
Listed on July 06, 2013
Time Frame: exit PRIOR to earnings on July 24th
Average Daily Volume = 3.5 million
New Positions: see below

Comments:
07/09/13: STX came close to erasing yesterday's decline. Traders may want to wait for a new breakout past $46.00 before considering new bullish positions. I am adjusting our stop loss up to $44.90.

current Position: Long stock @ $46.05

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

Long Aug $47 call (STX1317H47) entry $1.80

07/09/13 new stop loss @ 44.90



Whole Foods Market - WFM - close: 54.71 change: +0.86

Stop Loss: 52.25
Target(s): 58.50
Current Gain/Loss: + 1.8%

Entry on July 08 at $53.75
Listed on July 06, 2013
Time Frame: exit PRIOR to earnings on July 31st.
Average Daily Volume = 2.2 million
New Positions: see below

Comments:
07/09/13: WFM's rally continues after yesterday's bullish breakout. The stock outperformed the market with a +1.59% gain. I am not suggesting new positions at current levels.

Our target is $58.50. However, we will plan to exit prior to the earnings report on July 31st. FYI: The Point & Figure chart for WFM is bullish with a $78.00 target.

current Position: Long WFM stock @ $53.75

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

Long Aug $55 call (WFM1317H55) entry $1.60



BEARISH Play Updates

Cliffs Natural Res. - CLF - close: 16.39 change: +0.43

Stop Loss: 16.31
Target(s): 12.15
Current Gain/Loss: unopened

Entry on June -- at $--.--
Listed on June 26, 2013
Time Frame: exit PRIOR to earnings in late July
Average Daily Volume = 11.5 million
New Positions: Yes, see below

Comments:
07/09/13: The bounce in CLF continues. Shares are nearing resistance at the $17.00 level. If this rebound continues we will likely drop CLF as a candidate.

Currently we want to wait for shares to hit new lows. I am suggesting a trigger to open bearish positions at $15.30.

Earlier Comments:
The 2009 lows near $12.00 (actually $11.84) could be support if CLF continues to break down. I am suggesting small bearish positions if CLF hits our entry trigger. 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 @ 15.30 *small positions*

Suggested Position: short CLF stock @ (trigger)

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

Buy the Aug $15 PUT (CLF1317T15)

07/06/13 CLF came close ($15.41) but did not hit our suggested entry trigger at $15.40. Tonight we are adjusting the entry trigger down to $15.30 and the stop loss to $16.31.



DR Horton Inc. - DHI - close: 21.22 change: +1.49

Stop Loss: 20.55
Target(s): 17.00
Current Gain/Loss: unopened

Entry on July -- at $--.--
Listed on July 08, 2013
Time Frame: Exit PRIOT to earnings on July 25th
Average Daily Volume = 8.1 million
New Positions: Yes, see below

Comments:
07/09/13: Today's move in DHI is a good example of why we have been using entry triggers. Yesterday DHI broke down below support. You could have easily used yesterday's drop as an entry point for bearish plays. Yet the stock exploded higher today with a gap open this morning and then a +7.5% surge higher.

It wasn't just DHI. Several homebuilders were bouncing higher as the market reacted to new foreclosure data. CoreLogic came out with their latest foreclosure numbers that showed a -27% drop in foreclosed homes from a year ago in June. That is definitely improvement. Yet foreclosures were actually over +3% from a month ago.

The move in DHI looks more like a short squeeze and the foreclosure data was just the excuse. If DHI sees any follow through higher tomorrow we will likely remove it as a bearish candidate. For the moment our trade is unopened. I am suggesting a trigger to launch positions at $19.60.

Trigger @ 19.60

Suggested Position: short DHI stock @ (trigger)

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

Buy the Aug $20 PUT (DHI1317T20)