Option Investor
Newsletter

Daily Newsletter, Thursday, 7/18/2013

Table of Contents

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

Market Wrap

Markets Reach New Highs

by Thomas Hughes

Click here to email Thomas Hughes
Introduction

Thursday is always a full day, even when it's slow. Today however was not a slow Thursday. Although it did not come with a big bang market forces combined to drive the indexes to new all-time highs. This morning the early markets were reeling from yesterday's surprise after-hours earnings releases. Two factors were in play; earnings season and economic data. The data was not that great but it wasn't bad either. Jobless claims were mixed, Leading Indicators were weaker than expected but Philly Fed numbers blew away expectations. The earnings reports are mixed as well. Some companies are beating expectations and others are not. The good news is that more companies are beating than missing estimates for earnings.


Ben Bernanke continued to testify on Capital Hill and his stance has not changed. He pledges “highly accomodative policy” for the foreseeable future. He also says that the recovery and end of QE is not on autopilot. Based on his statements and the data at hand tapering, and higher interest rates, may not be as close as some think. The economic thresh hold has not yet been reached and I'm not so sure it will be any time soon. However the ever changing conditions could easily force the FOMC into acting. In any event, even if tapering were to begin tomorrow low interest rates are likely to continue for some time to come.

The S&P futures were able to trade into positive territory in the early market. The positive spin carried through into the open at which time the S&P quickly moved up into new all-time-high territory. The index, accompanied by the Dow, Nasdaq and other major indexes continued to move higher into the morning, reaching an early peak around 10:30. During Beranke's testimony the markets retreated by a small amount but appeared to find support at the previous all-time-high level. After that trading was mellow, the indexes fluctuated by only a small margin during the afternoon hours before finally closing near the upper end of today's trading range.

Breaking It All Down- The Data

Today's list of events begins with the release of initial jobless claims. The initial claims made a surprising drop from a downward revision to last week's figures for a net decline of -26,000. The figure reported today of 334,000 is close to the long-term low. This brings the figure firmly back below the 350K level but it still appears as if initial claims is holding steady. The four week moving average also fell from a downward revision and is now back below 350K as well. I would like to see more of a decline in this figure but there is a chance it is being affected by the increase in the participation rate. For now I will be satisfied with holding steady but will keep a close eye on other factors.


The continuing claims made a surprise peak which may just be the result of last weeks spike in initial claims. This is the second week of increases in continuing claims and a five month high. Looking at the state by state break down there were numerous lay-offs in Michigan and New York centered around manufacturing and transportation. Other states, including MI and NY also reported lay-off's in education and services. The previous weeks continuing claims were also revised higher. Total claims fell by a meager 1,903 to just above the 5 year low.



The Philadelphia Federal Reserve Manufacturing Index set a new high and soundly beating the expectations. The consensus was 3.0-5.5, the actual was 19.8, a 26 month high. This is also more than 6 points higher than last months reading of 12.5. Within the report the employment sector posted a 7.7. the first positive reading in 4 months. The final bit of data today was the Leading Indicators, which came in a little weaker than expected with a 0% change over last month. This reading shows that growth is expected to have continued on at the same pace as last month. Over the last 12 months the LDI have been choppy but mostly positive. There is no data on my calendar tomorrow, next week brings us housing data during the first half and some more manufacturing data during the second half.


Earnings- Banking Sector

Bank earnings keep rolling in. Today marks the end of the big banks but there are still dozens of regional financials yet to report. This morning Morgan Stanley and BB&T held to trend and reported better than expected numbers on the top and bottom line. The entire sector performed above expectations last quarter and they all reportedly expect this performance to continue. The Banking Index made another big move up today and set another new high. At this time the daily charts is overbought but bullish momentum is on the rise. Longer term conditions are the same, however, caution is required due to the extended nature of the price action.

Banking Index

Morgan Stanley reported better than expected earnings and a $5 million dollar stock buy back. Expectations of EPS in the range of $0.40 were beaten by a nickel on $8.5 billion in revenue. Revenue increased by $1.6 billion over last year at this time. Revenues from trading and equity sales increased by more than 38% in the same period. The stock jumped in early trading, gaining about 5% intra-day. The move opens a gap and brings the stock above long term resistance with bullish technicals long and short term.

Morgan Stanley

BB&T also reported better than expected earnings. The NC based bank beat by 2 cents and set a company record for shareholder earnings. The bank reports that gains were made based on their diversification strategy, credit quality improvements and interest income. This stock actually dropped in early trading, opening lower than yesterday's closing prices. The stock dipped down near to the short term moving average where it found support and managed to recover the day's losses. The charts are bullish long and short term but suggest that the current rally may be cresting. First support is around the $34 level and the 30 day EMA.

BBT

Regional banker FifthThird also reported today. The bank beat the expectations of $0.44 with EPS of $0.66. The reported EPS was affected by pre-tax benefits from the sales of a position in Vantiv and warrants associated with the same. The bank also reported favorable credit trends and increases in deposits, loan growth and interest income. The stock also opened below yesterday's close. FITB reached and breached the support of the 30 day moving average before catching a bid and moving higher. This chart is presenting similar to BB&T, bullish in the long and short term but with declining indicators suggestive of a consolidation or short term top.

FifthThird Bancorp

Earnings-Technology

Yesterday Intel reported weak revenue and weak earnings and cut its full year outlook. Today AMD reported after the bell. The actual results were a loss, but better than expected. The stock traded higher in the after market. Indicators on the daily chart are bullish and point to a break. The expectation for good results was very high. Over the past few days the stock has traded up against resistance in a tightening range forming a potentially bullish signal. Failure to break above $4.50 will likely keep this stock in a trading range.

AMD

The Semiconductor Index fell in today's trading but remains above the long term trend and the nearest long term support level. The long term trend remains up and indicators on the weekly and daily charts are still bullish if weakening. This index may also be cresting a short term peak at this time. Closest support at this time is around 480 with next closest just below that at 475 and the 30 day moving average.

SOX

Other techies reporting today include IBM (yesterday after the bell) and Microsoft today. IBM beat expectations and was able to raise its full year outlook. Microsoft was not. During the day the stock traded to the downside but remained above the $35 support level. Following Microsoft's earnings release prices fell below to the $34 level and the longer term up trend. MACD and stochastic are both bullish following MSFT's recent break out to 5+year highs but are currently in decline

MSFT

Google was also on the after hours earnings list for today. The search giant was expected to report earnings in the range of $9.00-$10.78, depending on where you look. The actual $9.56 was either better or worse than expected but revenue was on the light side regardless. Costs per click declined more than expected which counts for most of the revenue decline. The stock had been trending up over the past year but tht may have ended today. After hours trading saw prices drop by about $40 following the report.

Google

The Technology Sector Spyder is approaching the top of a possible trading range with bullish indicators. Strong momentum and overbought conditions are both in decline on the daily charts with the weekly charts indicating a stochastic buy signal. The long term trend is up for this ETF but there is sign of a possible top here as well, a break above resistance would have a longer term bullish outlook. Failure to reach new highs would put the ETF in danger of topping out. the sharp after hours sell off in MSFT and GOOG will weigh heavily on this ETF in the morning.

Technology Spyder

The Yen Trade

The yen weakened ahead of impending elections in Japan. The election are expected to bolster the ranks of the Japanese government with Shinzo Abe supporters. This will pave the way for more of Abe's long term plans for stimulating the Japanese economy. The USD/JPY has found support along the 30 day moving average ahead of the elections and is now extending a bounce that began yesterday. Today's move has brought the pair back over the 100 level for the second time since correcting in May/June. Indicators on the long term and near term charts are declining but as yet support has been holding.

USD/JPY

The S&P 500

The S&P 500 is showing an early long term stochastic buy signal. The caveat as always is that today is only Thursday so the analysis of weekly candles is only temporary until this week's candle is completed. However, at this time, bullish activity is taking the index to new all time highs. The May/June correction made a very small bearish peak in MACD that is already on the verge of crossing back over to bullish. Declining stochastic is also rolling over, creating a higher trough and sign of support. Stochastic is also presenting a crossover signal, although I think it may be the early signal. The real danger now is how much fall out spills over into the broader markets at tomorrow's open. The sharp after hours sell off in GOOG and MSFT will have a big effect on index prices tomorrow.

SPX weekly

Today's break above the previous all-time intra-day highs is a good sign but not overly convincing. The bulls tip toed over the line like they were afraid to get their feet wet. The indicators on the daily charts are declining which is another reason to doubt today's move as a definitive break above resistance. It is possible that the market could trade up against resistance for a few days or retest the support of the previous all-time closing high before moving higher. If all of my if's line up with the stars and moon. The longer term analysis of daily MACD and Stochastic both indicate strong support at the current levels between 1575-1650 and that prices are likely to move higher. Tomorrow could be a volatile one as the markets digest the after hours reports of Microsoft and Google.

SPX daily

Until then, remember the trend!

Thomas Hughes


New Plays

Following The Trend

by James Brown

Click here to email James Brown


NEW BEARISH Plays

Compa - BVN - close: 13.47 change: -0.57

Stop Loss: 14.41
Target(s): 10.25
Current Gain/Loss: unopened

Entry on July -- at $--.--
Listed on July 18, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 2.3 million
New Positions: Yes, see below

Company Description

Why We Like It:
Compania de Minas Buenaventura S.A.A. is a mining company based in Peru. BVN produces mostly precious metals (gold, silver) but also mines copper, lead and zinc. Thanks to a rising dollar and falling gold and silver prices, shares of BVN are in a serious down trend. The stock has fallen to multi-year lows.

BVN produced an oversold bounce in late June but the rebound failed near its 10-dma. Now, just over two weeks later, BVN is poised to breakdown to new lows again. Today's low was $13.33. I am suggesting a trigger to open bearish positions at $13.25. If triggered our target is $10.25.

NOTE: If stocks see some profit taking tomorrow then gold and silver might bounce. I suspect this would be temporary. Investors should also note that I can't find an earnings date for BVN. We do not like to hold over an earnings announcement so not knowing when BVN reports next does raise the risk here.

Trigger @ 13.25

Suggested Position: short BVN stock @ (trigger)

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

Buy the Aug $13 PUT (BVN1317T13) current ask $0.55

Annotated chart:




In Play Updates and Reviews

Another Round of New Highs

by James Brown

Click here to email James Brown

Editor's Note:
The U.S. market managed another day of new record highs on Thursday.

We have removed SBGI as an active candidate.


Current Portfolio:


BULLISH Play Updates

CareFusion Corp. - CFN - close: 38.82 change: +0.21

Stop Loss: 37.75
Target(s): 42.50
Current Gain/Loss: + 0.2%

Entry on July 12 at $38.75
Listed on July 11, 2013
Time Frame: 3 to 6 weeks
Average Daily Volume = 1.7 million
New Positions: see below

Comments:
07/18/13: CFN bounced back toward its highs set a couple of days ago but shares pared their gains by the closing bell. I am not suggesting new positions at this time.

Earlier Comments:
Our target is $42.50 but we will plan on exiting prior to the company's earnings report in early August.

current Position: Long CFN stock @ $38.75

07/15/13 new stop loss @ 37.75



Engility Holdings - EGL - close: 30.79 change: +0.90

Stop Loss: 29.15
Target(s): 32.00
Current Gain/Loss: + 9.0%

Entry on June 25 at $28.25
Listed on June 24, 2013
Time Frame: Exit PRIOR to earnings on Aug. 12th
Average Daily Volume = 96 thousand
New Positions: see below

Comments:
07/18/13: EGL looks like it's in breakout mode. The stock has finally conquered round-number resistance at the $30.00 level with a +3.0% gain today.

Please note that I am adjusting our exit target down to $32.00. We will move the stop loss up to $29.15. I am not suggesting new positions.

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

07/18/13 new stop loss @ 29.15, adjust exit target to $32.00
07/15/13 new stop loss @ 28.75
07/11/13 new stop loss @ 28.45
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: 12.04 change: +0.06

Stop Loss: 11.55
Target(s): 12.40
Current Gain/Loss: + 4.2%

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:
07/18/13: The EWJ continued to drift higher and technically today's close above the $12.00 level is bullish. More conservative traders might want to consider taking some money off the table tomorrow. The Japanese market and the EWJ could be volatile on Monday. Japan will hold elections for its upper house on Sunday, July 21st. Current polling would suggest that Prime Minister Shinzo Abe's Liberal Democratic Party (LDP) is poised to win a strong majority. If there is a surprise the Japanese market could sell off. Even if there is no surprise there could be a sell-the-news reaction.

NOTE: The top of the gap down from May 22nd at $12.13 could be overhead resistance.

current Position: Long EWJ stock @ $11.55

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

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

07/17/13 new stop loss @ 11.55
07/15/13 new stop loss @ 11.45
07/13/13 new stop loss @ 11.24



Flowers Foods, Inc. - FLO - close: 23.78 change: -0.10

Stop Loss: 22.99
Target(s): 26.50
Current Gain/Loss: unopened

Entry on July -- at $--.--
Listed on July 17, 2013
Time Frame: exit PRIOR to earnings in mid-August
Average Daily Volume = 923 thousand
New Positions: Yes, see below

Comments:
07/18/13: FLO hit a new high on an intraday basis but the rally failed to stick. Shares traded to an intraday high of $24.24 before reversing into a -0.4% decline on the session. That means we are still on the sideline since our suggested entry point was $24.25. After today's near miss I am moving our trigger to $24.30.

If triggered our target is $26.50. However, we will plan to exit prior to the company's earnings report in mid August.

Trigger @ 24.30 *Small Positions*

Suggested Position: buy FLO stock @ (trigger)

07/18/13 move the suggested entry trigger to $24.30 from $24.25
FLO almost hit our initial target at $24.25 but missed it by a penny.



Guidewire Software, Inc. - GWRE - close: 44.81 change: -0.01

Stop Loss: 43.90
Target(s): 49.75
Current Gain/Loss: unopened

Entry on July -- at $--.--
Listed on July 15, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 598 thousand
New Positions: Yes, see below

Comments:
07/18/13: Hmm... GWRE's failure to participate in the market's rally today is a little bit worrisome. At the moment I don't see any changes from my prior comments.

Earlier Comments:
We are suggesting a trigger to launch small bullish positions at $45.75. If triggered our target is $49.75. However, we will plan to exit prior to the earnings report expected in early September. FYI: The Point & Figure chart for GWRE is bullish with a $58.00 target.

Trigger @ 45.75

Suggested Position: buy GWRE stock @ (trigger)



Hospira Inc. - HSP - close: 39.42 change: -0.03

Stop Loss: 38.95
Target(s): 44.00
Current Gain/Loss: -1.2%

Entry on July 11 at $39.89
Listed on July 10, 2013
Time Frame: Exit PRIOR to earnings on July 31st
Average Daily Volume = 1.0 million
New Positions: see below

Comments:
07/18/13: HSP is not really seeing a lot of movement this week. That is a potential warning sign with the market's major indices hitting new highs. More conservative traders may want to just exit immediately. We are inching up our stop loss to $38.95. I am not suggesting new positions at current levels.

Earlier Comments:
We will plan to exit positions prior to the company's earnings report on July 31st. FYI: The Point & Figure chart for HSP is bullish with a $60 target. NOTE: I am suggesting we keep our position size small since HSP appears to be near the top of a channel. This is a more aggressive, higher-risk trade.

*Small Positions*

current Position: Long HSP stock @ $39.89

07/18/13 new stop loss @ 38.95
07/17/13 new stop loss @ 38.85
07/15/13 new stop loss @ 38.65
07/11/13 trade opened on gap higher at $39.89. Trigger was $39.65



R.R. Donnelley & Sons - RRD - close: 15.24 change: +0.33

Stop Loss: 14.49
Target(s): 16.25
Current Gain/Loss: + 2.6%

Entry on July 15 at $14.85
Listed on July 13, 2013
Time Frame: Exit PRIOR to earnings on July 30th
Average Daily Volume = 1.8 million
New Positions: see below

Comments:
07/18/13: Good news! RRD appears to be accelerating higher and today's display of relative strength (+2.2%) also produced a breakout past the $15.00 mark. We will raise our stop loss up to $14.49.

Earlier Comments:
We want to keep our position size small to limit our risk. More conservative investors may want to wait for a breakout past the $15.00 mark instead since $15 could be round-number resistance. If we are triggered at $14.85 our target is $16.25. However, we will plan to exit prior to the earnings report on July 30th.

*small positions*

current Position: Long RRD stock @ $14.85

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

Long Aug $15 call (RRD1317H15) entry $0.55

07/18/13 new stop loss @ 14.49



Seagate Tech. - STX - close: 46.90 change: +0.21

Stop Loss: 46.25
Target(s): 49.85
Current Gain/Loss: + 1.8%

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:
07/18/13: STX is still slowly drifting higher. Today the stock added +0.4%. Things could change tomorrow as the tech-sector might see some profit taking thanks to disappointing earnings from GOOG and MSFT tonight.

We are raising the stop loss to $46.25.

current Position: Long stock @ $46.05

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

Long Aug $47 call (STX1317H47) entry $1.80

07/18/13 new stop loss @ 46.25
07/16/13 new stop loss @ 45.65
07/09/13 new stop loss @ 44.90



Whole Foods Market - WFM - close: 56.22 change: -0.02

Stop Loss: 55.65
Target(s): 58.00
Current Gain/Loss: + 4.6%

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:
07/18/13: Be careful here. WFM has been stuck churning sideways three days in a row. Has the rally run out of fuel? More conservative traders may want to exit now. We are raising the stop loss up to $55.65.

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

07/18/13 new stop loss @ 55.65
07/17/13 new stop loss @ 54.65
07/15/13 new stop loss @ 53.75
07/13/13 new stop loss @ 52.75, adjust exit target to $58.00



BEARISH Play Updates


None. We do not have any active bearish trades.



CLOSED BULLISH PLAYS

Sinclair Broadcast Group - SBGI - close: 30.63 change: +0.23

Stop Loss: 29.90
Target(s): 36.00
Current Gain/Loss: unopened

Entry on July -- at $--.--
Listed on July 13, 2013
Time Frame: exit PRIOR to earnings on Aug. 7th
Average Daily Volume = 1.5 million
New Positions: see below

Comments:
07/18/13: We are giving up on SBGI, at least for now. The larger trend is still bullish. One could argue that the two-week consolidation the stock is currently seeing almost looks like a bull-flag pattern. Yet the stock has been unable to shake the short-term trend of lower highs. Our trade has not opened yet (trigger 32.15) so we're removing SBGI as a candidate.

Trade did not open.

07/18/13 removed from the newsletter

chart: