Option Investor
Newsletter

Daily Newsletter, Tuesday, 7/23/2013

Table of Contents

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

Market Wrap

UTX Wins, TRV Loses

by Jim Brown

Click here to email Jim Brown

The Dow closed with a minor win thanks to gains in UTX offsetting losses in TRV.

Market Statistics

The Dow was the only major index posting gains today with positive earnings from United Technology (UTX) and AT&T (T) offsetting post earnings declines from Travelers (TRV) and DuPont (DD). The mixed earnings offset some negative news from the economic reports.

The Richmond Fed Manufacturing Survey for July plunged unexpectedly into contraction territory. The Richmond headline number declined from +11 in June to -11 for July. New orders declined from -1 to -15 and the eighth consecutive monthly decline. Backorders imploded with a decline from +1 to -24. Employment fell from +11 to zero. This was a very negative report.

The gap between new orders and inventories, a proxy for future activity, fell from -11 to -30. This component has been in negative territory since January 2012.

The separate Richmond Fed Services Survey fell from +12 in June to -6 in July. Six month expected demand fell from +11 to -29. Six of the seven overall components were negative.


Sentiment derived from the Richmond Services Survey suggests consumer spending is starting to slow dramatically. Employment declined, wage gains slowed and shopper traffic slowed. The six month outlook suggests retailers are not expecting conditions to improve for the rest of the year. Because the U.S. consumer is 70% of GDP Moody's believes Q3 is currently running at about a +0.5% GDP growth rate. This is a very negative projection since Q2 GDP is now expected to be less than 1% growth.

The economic calendar for Wednesday has the reaction to the Chinese PMI due out later tonight and the Eurozone PMI. On the U.S. side New Home Sales could show a decline if they follow the path of existing home sales, which declined sharply in June. Builders are fighting the rising interest rates and the flurry of new foreclosures this summer.

The Kansas Fed Manufacturing Survey on Thursday is the most important report for the rest of the week. If that report shows the same kind of decline as the Richmond survey today then the Fed will have a tough time launching any QE taper program when it meets next week.

Economic Calendar

This was a very busy earnings day. Rather than try and spend a couple paragraphs discussing each of the major reporters I am going to just give the bullet points to cut down on the length of this commentary.

AT&T (T) reported earnings of 67 cents compared to estimates of 68 cents. Revenue of $32.08 billion beat estimates for $31.81 billion. The company added 550,000 contract customers in the quarter. Shares declined -30 cents in afterhours.

United Technology (UTX) reported earnings that rose +4% to $1.70 compared to estimates of $1.56. Revenue rose +16% to $16.0 billion but missed estimates slightly at $16.2 billion. New orders were up +23%. Shares of UTX rose +$3 on the news.

DuPont (DD) reported earnings of $1.11 compared to estimates of $1.27. Revenue fell -1% to $9.8 billion compared to estimates for $10.04 billion. DuPont shares ended the day flat. The CEO said the weakness was due to the overall global economic weakness but predicted the second half of 2013 would be significantly better.

Peabody Energy (BTU) reported earnings of 39 cents compared to estimates for a -5 cent loss. Revenue of $1.73 billion missed estimates of $1.82 billion due to lower prices for coal. The earnings beat was made possible by aggressive cost cutting with U.S. costs declining -6% and Australian costs down -20%. Peabody said U.S. demand for thermal coal would grow by 50-70 million tons as the fuel has regained "significant market share" as a result of high natural gas prices. Demand rose +11% in the first half and natural gas demand declined -15%. BTU shares rose +5% for the day.

Advertise for Option Investor

Texas Instruments (TXN) reported a 48% increase in profits and gave a strong forecast for the rest of the year. TXN projected earnings of 49-57 cents in Q3 compared to estimates for 51 cents. Revenue of $3.05 billion missed estimates of $3.06 billion. Earnings of 42 cents beat some street estimates by a penny but were in line with others. TXN reduced costs in research and development by -17% to produce those earnings on declining revenue. Shares of TXN rose +4%.

Altria (MO) reported earnings of 62 cents missing estimates by a penny. Revenue fell -2.5% to $4.5 billion compared to estimates for $4.62 billion. Cigarette volume fell -7% to 33.8 billion. Marlboro volume declined -7% and the other premium brands declined -11%. Older smokers are dying off faster than new smokers are picking up the habit. Shares of MO declined -2.4%.

VMware (VMW) reported earnings that rose +27% to 79 cents compared to estimates of 77 cents. Revenue rose +11% to $1.24 billion beating estimates of $1.23 billion. Future guidance was in line with estimates. Surprisingly shares of VMW spiked +10.5% to $78.75 in afterhours.

Panera Bread (PNRA) reported earnings of $1.74 compared to estimates of $1.77. Revenue of $589 million missed estimates of $596 million. Same store sales rose by +3.7%. Shares declined -$15 in afterhours.

Broadcom (BRCM) posted earnings of 70 cents and revenue of $2.09 billion compared to estimates of 69 cents and revenue of $2.104 billion. Weakness in Broadcom's revenue suggests sales of smartphones are lagging. The company makes 3G chips used in the cheaper phones. Shares of BRCM declined -4.3% during the regular session to $31.81 after a morning downgrade then declined further to $30 in afterhours.

Illumina (ILMN) reported earnings of 43 cents, beating the street by +3 cents. Revenue rose +23.3% to $346.1 million beating consensus of $332 million. Shares rallied +$5 in afterhours.

Discover Financial (DFS) reported earnings of $1.20 that beat the street by 4 cents. Revenues rose +8.2% to $2.04 billion and beat analyst estimates of $2.01 billion. Loans rose by +6% to $61.7 billion. Credit card balances rose by +5% to $49.8 billion. Shares were flat on the day.

Juniper (JNPR) reported earnings of 29 cents compared to estimates of 25 cents. Revenue rose +7% to $1.15 billion and beat consensus estimates of $1.09 billion. Shares ended the afterhours session flat. They also announced the retirement of the CEO.

Electronic Arts (EA) reported a loss of 40 cents but that beat the consensus estimates for a loss of 60 cents. Revenue rose slightly to $495 million compared to consensus of $454 million. Shares of EA rose $1.50 in afterhours to $25.35.

Freeport McMoran (FCX) reported earnings of 49 cents, a nickel better than consensus at 44 cents. Revenue fell -4.2% to $4.29 billion and below consensus of $4.35 billion. They raised Q3 guidance from $5.5 billion to $5.8 billion. FCX shares rallied +3% for the day to $30.00.

Lockheed Martin (LMT) reported earnings of $2.64 that was 43 cents better than estimates of $2.21. Revenue declined -4.3% to $11.41 billion but still ahead of estimates at $11.15 billion. They raised guidance for the full year to $9.20-$9.50 up from $9.01. Analysts were expecting $8.95. LMT shares rallied +2%.

Illinois Toolworks (ITW) reported earnings of $1.08 compared to estimates of $1.10. The company cut its full year estimates from $4.25 to a range of $4.10-$4.30. Revenue declined -5.4% to $4.2 billion. They said weak demand offset strong sales to the auto industry. Shares declined -2.8% on the news.

There were hundreds of additional announcements but I think you get the picture. Companies are beating on earnings thanks to aggressive cost cutting but are missing on revenue due to slowing demand and slowing economy.

The biggest earnings for the day came from Apple (AAPL) after the close. Apple shares rallied +15 after the earnings to $435 after they beat lowered expectations. Apple reported earnings of $7.47 per share or $6.9 billion. That is a decline from year ago levels of $9.32 and $8.8 billion. Analysts were expecting $7.31 per share. That had been drastically lowered from the $9.25 estimate when the quarter began on April 1st.

Apple shipped 31.2 million iPhones compared to the 27 million analysts expected. However, the average selling price plunged -$32 as a result of discounts and promotions. Revenue of $35.3 billion barely beat estimates of $35.2 billion. Shipments of iPads totaled 14.6 million and well short of the 17.5 million analysts expected. Mac shipments were 3.8 million.

Apple guided lower for Q3 to revenue in the range of $34-$37 billion and analysts were looking for $37.1 billion. Gross margins are expected to decline to 36.5% compared to 36.9% in Q2. The company refused to discuss future products on the conference call. Apple is widely expected to announce a new, possibly cheaper iPhone in Q3.

The minor $15 rebound in afterhours suggests investors are growing concerned about the future of the smartphone and tablet market given the big miss in iPad shipments. Apple can always sell more iPhones if they keep discounting the price but tablets are losing to the Android platform and the much cheaper prices. Apple would have to significantly discount the iPad to battle Android and that would impact profit margins. Apple would rather have a higher priced "aspriational" product that everyone wishes they could afford. This way they don't have to produce as many and they can keep margins high.

Apple Chart

Earnings for Wednesday are going to be headlined by Facebook (FB) and Boeing (BA). Qualcomm is going to be watched hard after the weak earnings from Broadcom. Qualcomm makes the faster 4G chips and should do better than BRCM.

Etrade (ETFC) earnings will be compared to the Ameritrade earnings today. AMTD rallied to a 13 year high after they reported an $8 billion increase in assets or +8% gain for the quarter. Average client trades per day rose +6.7% to 399,000. Interest rate sensitive assets rose +19% to $94 billion with client assets totaling $524 billion.

Earnings Calendar

Crude prices rebounded from an overnight drop to $105.50 after Platts reported an 11.7% increase in imports in June. Imports rose to 9.99 mbpd and the highest level since February 2011. Oil product imports spiked +50% in June. That is refined products like diesel, jet fuel and chemicals. For the first half of 2013 China's oil demand has grown by +3.9% compared to +0.7% in the first six months of 2012. Remember, China's economic growth has been declining for the last four quarters and is at the lowest rate today in the last four years. If China was to see growth accelerate we could expect oil demand to accelerate as well.

WTI Crude Chart

The markets have basically traded sideways for the last week. Every day has seen a minor new high for most of the indexes but the momentum appears to be evaporating. This is typical for the Q2 earnings cycle and summer trading.

The S&P has failed for two days to tag the psychologically important 1700 level and sank to close at the lows of the day at 1692. The Apple earnings may provide some upside lift at the open simply because they were not as bad as some whisper numbers expected. It would be a relief rally but we were not seeing that in the late afterhours trading today. Apple closed off its post earnings high of $442 but not by a lot.

With earnings activity peaking this week and plenty of revenue misses piling up along with weak manufacturing reports and the FOMC meeting next week there are plenty of reasons for investors to take some profits.

The S&P has round number resistance at 1700 and initial support at 1670. There is plenty of room for a hiccup in the trend without breaking that trend.

The biggest loss for the day was in the transports at -1%. They tried for three days to break through resistance at 6600 and failed. UPS formerly reported disappointing earnings of $1.13 after warning a couple weeks ago they would miss estimates of $1.20. UPS blamed a slower global economy and the shift to lower cost services by consumers.

The UPS and FDX warnings failed to weaken the transports in early July but reality may be settling in now that the official earnings are out.

S&P Chart

Dow Transports Chart

The Dow has tried for four days to move over round number resistance at 15600 with no success. Every day there is at least one Dow stock that post ugly earnings and holds the index back. The Dow has decent support at 15400 but faces a big drop if that level fails.

Boeing and Caterpillar are the two Dow components reporting on Wednesday and while Boeing could do well thanks to the monster order backlog, Caterpillar could be ugly. With commodity prices falling around the world the need for large earth moving equipment should be weakening. China's slowing economy could be a problem for CAT and its forecast.

Dow Chart

The Nasdaq was the strongest of the big cap indexes in the prior three weeks but it has lost that title this week. The Nasdaq declined to a seven-day low at 3578 at the close. Obviously this was investor caution ahead of the Apple earnings plus numerous other tech stocks reporting after the close. With Apple's earnings just "ok" it remains to be seen if the stock moves higher on Wednesday. The Nasdaq futures are up +12 at 9:PM but there is still a lot of darkness before the dawn.

The closing print at 3578 is critical short term support. If that level breaks we could easily see a -100 point decline or batter. The resistance at 3600 still exists even though we saw two closes slightly above that level. This would be the perfect spot for the Nasdaq to rest or even begin its seasonal late summer decline.

Nasdaq Chart

The momentum in the small cap Russell 2000 has also faded. The index fought resistance at 1050 last week before finally punching through. Now that prior resistance is being used as support and this support is critical to maintaining the momentum. A breakdown here could quickly retest 1040 but that does not mean the rally is over. Initially this would be a bout of profit taking and price discovery. Depending on the reaction to the initial dip trader sentiment could change.

Russell 2000 Chart

I am very cautious on the market in the coming weeks. I believe we are at least going to see some consolidation and possibly a decent pullback as fund managers attempt to capture year to date profits and lock in bonuses ahead of the mutual fund year end in October. August and September are typically weak months for the market as managers shuffle their portfolios ahead of that October year end. Winners have to be sold to cover losses in the losers and that means some of the high flyers get thrown out with the weaker performers.

Will this seasonal scenario take place this year? Nobody knows until it happens. If investors decide to take profits they will find a convenient headline to blame and the red ink will begin piling up. The markets have been flat over the last week. Until a new direction appears I would be cautious about new positions.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email


New Plays

Recently Downgraded

by James Brown

Click here to email James Brown


NEW BEARISH Plays

Isis Pharmaceuticals - ISIS - close: 29.12 change: -1.80

Stop Loss: 30.15
Target(s): 25.35
Current Gain/Loss: unopened

Entry on July -- at $--.--
Listed on July 23, 2013
Time Frame: exit PRIOR to earnings in early August
Average Daily Volume = 1.7 million
New Positions: Yes, see below

Company Description

Why We Like It:
Biotech stocks were underperforming on Tuesday and ISIS was helping lead the way lower. The stock received a downgrade due to valuation this morning. ISIS recently issued bullish data on a study for a new cholesterol treatment that lowered triglycerides but the news failed to help the stock price. It's possible the news had already been priced in.

The breakdown below the $30.00 level and the 20-dma definitely looks short-term bearish. Yesterday's intraday low was $28.80. Today's low was $29.02. I am suggesting a trigger to launch bearish positions at $28.70. If triggered our target is $25.35, which should be just above the rising 50-dma. I am suggesting we keep our position size small. The latest data did list short interest at 16% of the 102.8 million share float.

Trigger @ 28.70 *small positions*

Suggested Position: short ISIS stock @ (trigger)

Annotated chart:




In Play Updates and Reviews

Market Slowdown Ahead?

by James Brown

Click here to email James Brown

Editor's Note:
The stock market's major indices look like they might be losing momentum. The S&P 500 index almost hit 1700 before paring its gains. The NASDAQ composite and Russell 2000 index also posted minor declines.

FLO, GWRE, and BVN have all been removed.
We want to exit HSP tomorrow morning.
FRGI was triggered today.


Current Portfolio:


BULLISH Play Updates

CareFusion Corp. - CFN - close: 38.77 change: -0.11

Stop Loss: 37.75
Target(s): 42.50
Current Gain/Loss: + 0.1%

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:
07/23/13: CFN is not making any progress. Shares struggled with the $39.00 level all day. Traders might want to adjust their stop loss closer to yesterday's low (38.32). 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



Celldex Therapeutics - CLDX - close: 20.50 change: -0.92

Stop Loss: 20.45
Target(s): 24.85
Current Gain/Loss: unopened

Entry on July -- at $--.--
Listed on July 20, 2013
Time Frame: exit PRIOR to earnings in early August
Average Daily Volume = 2.6 million
New Positions: Yes, see below

Comments:
07/23/13: Ouch! Biotech stocks underperformed today. CLDX was hit harder than most with a -4.29% decline. Currently we are still on the sidelines. The plan is to open bullish positions if shares hit $22.15. If this sell-off continues we will likely drop it as a candidate.

If CLDX hits the newsletter's trigger at $22.15 our target is $24.85. However, we will plan to exit prior to the company's earnings report in mid August.

Trigger @ 22.15 *small positions*

Suggested Position: buy CLDX stock @ (trigger)



iShares Japan Index - EWJ - close: 11.97 change: -0.01

Stop Loss: 11.85
Target(s): 12.40
Current Gain/Loss: + 3.6%

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:
07/23/13: The early morning gains faded. The EWJ will likely test short-term technical support at its 10-dma soon. If this moving average fails it could signal a drop back toward the $11.50 area. We are adjusting our stop loss higher again, this time to $11.85.

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

07/23/13 new stop loss @ 11.85
07/22/13 new stop loss @ 11.74
07/17/13 new stop loss @ 11.55
07/15/13 new stop loss @ 11.45
07/13/13 new stop loss @ 11.24



Hospira Inc. - HSP - close: 39.49 change: -0.30

Stop Loss: 38.95
Target(s): 44.00
Current Gain/Loss: -1.0%

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:
07/23/13: It looks like HSP is failing at round-number resistance near $40.00 again. We want to abandon ship immediately and exit this trade tomorrow morning.

Earlier Comments:
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

07/23/13 prepare to exit tomorrow morning
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: 15.58 change: +0.11

Stop Loss: 14.90
Target(s): 16.25
Current Gain/Loss: + 4.9%

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:
07/23/13: Traders bought the dip midday and RRD rebounded to close up +0.6%. This relative strength is encouraging but if the market rolls over RRD will likely follow suit. More conservative traders may want to take profits now. I am inching our stop loss up to $14.90.

We only have a few trading days left. The plan is to exit prior to the earnings report on July 30th.

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

*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

07/23/13 new stop loss @ 14.90
07/22/13 new stop loss @ 14.80
07/18/13 new stop loss @ 14.49



Santarus, Inc. - SNTS - close: 24.40 change: -0.48

Stop Loss: 23.95
Target(s): 28.50
Current Gain/Loss: -3.2%

Entry on July 22 at $25.20
Listed on July 20, 2013
Time Frame: exit PRIOR to earnings in early August
Average Daily Volume = 1.4 million
New Positions: see below

Comments:
07/23/13: Biotech stocks hit some profit taking today. SNTS was no exception with a -1.9% pullback. Shares are testing short-term support near $24.00. If this level fails then the stock should quickly hit our stop loss at $23.95.

Earlier Comments:
Our target is $28.50 but we will plan on exiting positions prior to the company's earnings report in early to mid August (no date yet).
FYI: The Point & Figure chart for SNTS is bullish with a long-term $36.00 target.

current Position: Long SNTS stock @ $25.20



BEARISH Play Updates

Fiesta Restaurant Group - FRGI - close: 32.64 change: -0.69

Stop Loss: 34.05
Target(s): 30.15
Current Gain/Loss: + 0.8%

Entry on July 23 at $32.90
Listed on July 20, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 213 thousand
New Positions: see below

Comments:
07/23/13: So far so good. FRGI continues to slip lower as expected. The stock hit our suggested entry point for bearish positions at $32.90. I would still consider new bearish positions now.

current Position: short FRGI stock @ $32.90



CLOSED BULLISH PLAYS

Flowers Foods, Inc. - FLO - close: 23.30 change: -0.24

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:
07/23/13: FLO is not cooperating. The stock has been down since we've added to the play list. Our trade has not opened yet (trigger @ 24.30). Given the stock's recent weakness we are removing it as a candidate.

Trade did not open.

07/23/13 removed from the newsletter.
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.

chart:



Guidewire Software, Inc. - GWRE - close: 44.32 change: -0.31

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:
07/23/13: GWRE is not cooperating either. We've been waiting for a breakout but shares just drift sideways. Our trade has not opened yet so we are removing GWRE as a candidate.

Trade did not open.

07/23/13 removed from the newsletter

chart:



CLOSED BEARISH PLAYS

Compa - BVN - close: 15.20 change: +1.02

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: see below

Comments:
07/23/13: The rebound in gold, silver and copper is fueling a bounce in the mining stocks. BVN outperformed today with a +7.1% gain. Shares are unlikely to hit our suggested entry point at $13.25 any time soon. We are removing BVN as a candidate.

Trade did not open.

07/23/13 removed from the newsletter

chart: