Option Investor
Newsletter

Daily Newsletter, Tuesday, 9/24/2013

Table of Contents

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

Market Wrap

Filibuster = Market Buster

by Jim Brown

Click here to email Jim Brown

The market fought back from an opening decline only to be slammed at the close on news of a Senate filibuster in progress.

Market Statistics

While it is not actually a filibuster Senator Ted Cruz has vowed to talk until he is no longer able to stand in an effort to try and convert enough Senate votes to pass the current budget bill and defund Obamacare. Cruz has taken on an impossible mission in trying to prevent the bill from coming up for debate. He believes once it is opened for debate that Harry Reid will strip out the language to defund Obamacare and then try to get it passed on a simple majority vote where only 51 senators would have to approve it.

Even though he has little chance of winning the argument about bringing the bill to the floor Cruz is hoping to use the long winded speech to try and convert a handful of senators to his side before the actual vote on the passage of the bill later. Several high profile republican senators have already said they would not vote with Cruz on the first effort. However, if Cruz is successful in swaying just 2-3 democrats the final outcome could be a lot different. There are 54 democrats including 2 independents that normally vote and caucus with the democrats and 46 republicans. Cruz would have to convert 4 of the democrats and maintain all 46 of the republicans to avoid a loss in the case of a simple majority vote. Cruz can prevail whenever the rules call for a super majority of 60 votes to pass a bill. Some analysts believe he could win a rules vote during the process. Cruz was joined in the marathon speech by Mike Lee, Rand Paul and David Vitter. With four of them in rotation they could talk for a long time but their time limit is noon on Wednesday.

The market plunged at the close because the stakes are rising in the Washington political battle. The more contentious it becomes the greater the chance of a government shutdown. Even if the budget battle ends the debt ceiling battle is right behind it and that promises to be even more contentious. Investors may be starting to realize that this could get ugly. The "everything will work out" mindset may be starting to crack. Clearly anyone who understands politics knows that 3-4 weeks from now the budget resolution will be passed and the debt ceiling will have been raised or even eliminated for 2014. It is how we get from here to there that is unnerving investors.

Other than the headlines from Washington it was a relatively quiet day. Economics disappointed again but that should not be a surprise.

The Richmond Fed Manufacturing Survey for September declined from +14 to zero and the internals were not good. Nearly every component decreased significantly. New orders declined from +16 to +5, Backorders fell from -6 to -7 and the average workweek declined from +8 to -4. The gap between orders and inventories fell from +3 to -6. Employment declined from +6 to -6 and the lowest level since late 2009. This was a very negative report.

However, the Richmond Manufacturing survey has been very volatile in recent months. It is hard to draw any material conclusions until the data breaks out of the recent range. What the survey does illustrate is the lack of a sustained recovery. Orders are fluctuating wildly and growth is nonexistent.

The headline on the corresponding Richmond Services Survey rose only +1 point from 14 to 15. If you exclude retail services the number declined from 19 to 16. Retail employment rose from -10 to +5 so that is a step in the right direction. However, expected services demand over the next six-months declined from 19 to 16. The employment index did rise from +1 to +7 and the highest level in a year.


Consumer Confidence declined to 79.7 from 81.8 amid calls by analysts for a relatively weak holiday season and the growing concern over Washington headlines. Shoppers said they were less excited about the future as the number of full time jobs declines and part time jobs increase. Families are worried about decreasing incomes and the higher cost of medical insurance. Declining gasoline prices and higher home prices were unable to support confidence.

The present conditions component rose slightly from 70.9 to 73.2. However, the expectations component declined from 89.0 to 84.1. Those respondents that felt jobs were harder to get rose +2.5% to 19.7%. Those consumers that believe their income will be flat or shrink over the next six months rocketed from 72.5% to 84.6%.


Two different home price indexes showed prices rose again and according to FHFA they are up +8.8% over the last 12 months. The Case Shiller indexes showed a +12.3% gain in the 10-city composite. No real surprise here.

The calendar for the rest of the week has several reports of note but the GDP and Kansas Fed Manufacturing Survey are the biggest. The GDP is expected to decline slightly in the latest revision. The Kansas Manufacturing Survey has risen for the last two months on the strength of auto manufacturing and it should continue.


Facebook (FB) bucked the market decline with a +2.7% gain to a new historic high. The power behind the move was an upgrade to buy from neutral by Citigroup and the hike in their price target from $32 to $55.

Another plus was news that Facebook, Twitter and other banned social media websites would be allowed and accessible in a planned free trade zone in Shanghai. China heavily censors the Internet and bans sites deemed inappropriate or politically sensitive. This would be a major concession by China. The country also said they would welcome bids from foreign telecom firms for licenses to provide Internet services in the zone.

China blocked Facebook and Twitter in 2009 after the riots in the Xinjiang province where the government said they were fueled by posts on social network sites. The New York Times was blocked last year after saying that Premier Wen Jiabao had amassed a fortune while premier.

The concept behind allowing access in the free trade zone was to allow foreigners who use those services to feel at home in Shanghai. The government wants them to feel like China is an open and bustling economy. Good luck with that.


Applied Materials (AMAT) announced it was buying Tokyo Electron in an all stock transaction for $9.39 billion. The merger will combine the number 1 and 3 companies in the semiconductor equipment market. The number 2 company is ASML Holding (ASML). The merger will create a $29 billion company that could scale into the next big upgrade in chip technology. Analysts say the combined companies could speed the new innovations necessary to make that next leap in technology. Combined revenue over the last twelve months was $12.6 billion of which $7.2 billion was AMAT. The merged company will launch a $3 billion stock buyback to be executed within 12 months of the deal closing. Normally stock in the acquiring company declines on an acquisition announcement. Today AMAT shares spiked +9% on the deal because it is so complimentary.


Cypress Semiconductor (CY) was not so lucky today. The company warned for the next two quarters citing weakness in phone sales, mobile computing and Asian markets. The Q3 earnings forecast was cut to a range of 10-12 cents compared to prior guidance of 17-18 cents. Revenue was cut to a range of $184-$187 million from $201-$207 million. It was even worse for Q4. The company projected revenue of $164-$170 million and well below estimates of $203 million.

The CFO said Asian mobile handset orders were being delayed or reduced to account for slowing sales and rising inventory levels. Shares of Cypress fell -15% on the news and given the severity of the warning there may be more pain ahead.


Barclays downgraded EMC (EMC) and NetApp (NTAP) to neutral saying the share prices were approaching their price targets. The company said new product cycles were behind them and there were fewer incremental catalysts over the next several quarters to warrant multiple expansion. Both EMC and NTAP declined about -1%.

Clovis Oncology (CLVS) fell -$9 after the close after being unable to find a buyer. The developer of cancer treatments put itself up for sale and nobody showed up with an offer. The company said it contacted some potential suitors but found no buyers. Clovis said it is no longer soliciting bids and is considering alternatives. Shares of Clovis more than doubled in price in June amid takeover speculation. The company has several major drugs in initial trials but according to Clovis "they could still fail" so buyer interest is muted until there is an actual product. Clovis has no drugs in production and no revenue. That makes it a tough sale.


Linkedin (LNKD) rallied +6.24 to $246 after Evercore Partners raised the price target from $250 to $280.

Athena Health (ATHN) fell -5% to $108 after Leerink Swan downgraded the stock to market perform. The analyst still likes the stock but said the practice management and medical records space was getting saturated with providers.

Carnival Corp (CCL) fell -7.6% after earnings and guidance failed to impress. Earnings of $1.38 beat lowered estimates of $1.30 but guidance was bad. Q4 earnings were projected in a range of -3 cents to +3 cents compared to prior estimates of 9 cents. The company said revenue would be down 3% to 4% and costs higher. The major impact is the continuing trouble in the Mediterranean and lack of tourist visits to places like Egypt, Turkey, etc. Carnival is recovering from a number of ship mishaps including the Costa Concordia. That ship was finally righted last week and will be towed to a beach where it will be cut up for scrap.


JC Penny shares declined to close at $11.90 and a low not seen since 2001. Apparently JCP is looking to raise additional money either through a loan or a share sale. Would you loan money to JCP?


The yield on the ten-year treasury fell to 2.65% today and a six-week low. In theory that should be good for the equity markets because investors would be looking to shift from treasuries to stocks in search of yield. However, with tremendous uncertainty in Washington it is equities that are being sold not treasuries. The critical area on the ten-year is about 2.45% and the support from July and August. Some analysts believe investors are waiting for that level to sell treasuries again.


I am not going to dwell too much on the major indexes today because it is not the market that is sick. The declines are due to the increasingly negative headlines in Washington and they will probably continue to weigh on the market for the next week and then get worse.

Eventually passing a budget resolution is just the first step in the process. That will be ugly but the real fight will come on the debt ceiling increase. That could start by this weekend or by next week for sure. The House is going to hang an entire wish list of ornaments on the bill and then fight to keep as many as possible. The government is expected to run out of money between Oct 9th-18th so there is a real urgency to get it done. There have been 11 fights over the debt ceiling in the last 20 years so this is nothing new. The House has the responsibility for the purse strings and the debt ceiling is one of their only weapons to fight for lower spending.

The headline volatility is going to be with us for a while. The S&P declined -4 points today and most of that came at the close on the filibuster news. Weak support at 1695 was tested and held. The next support level is 1680 followed by 1630 with a speed bump at 1650.


The Dow lost -66 points and closed at a 7 day low at 15,337 after dropping -80 points in the last 90 minutes of trading. The Dow was the weakest index with two of the new additions accounting for 50% of the drop. Goldman declined -2.28 and Visa -2.90.

The Dow appears poised for a significant drop as the headlines intensify. Initial support is 15,300 but then we could easily see a drop to 14,880 if investors start getting seasick on the volatility.



The Nasdaq Composite bucked the trend. The tech index closed mildly positive with a +3 point gain on back of the gains in AMAT, FB, LNKD, PCLN, NFLX, SSYS and AMZN. The strength in the techs and small caps is refreshing and suggests that fund managers are not too worried about an end of the world scenario developing out of the budget battles.

Resistance on the Nasdaq is 3800 with initial support at 3750 followed by 3700.


The Russell 2000 punched through to a new high over 1080 intraday but could not hold it during the closing drop. The Russell still managed to gain +2.5 points to close just below 1075 and within easy striking distance of a new closing high.

You have heard me say this many times but the Russell strength is very bullish for the overall market. If this trend continues there will be a blowout once the Washington madness ends. Support is 1065 and 1050 with resistance at 1080.


Buy the debt ceiling dip! There will probably be continued weakness into the debt ceiling fight but that is the dip I would buy. The Russell 2000 and Nasdaq are pointing the way but they are handicapped by uncertainty. Once that headline fog clears I think we could see a strong move higher. Repeated earnings warnings, wars and rumors of wars, massive terrorist attacks, threats of QE cuts, etc, etc, have not been able to hold back the Russell and Nasdaq. Let's hope that trend continues. Personally I would love to see a major dip on the debt ceiling fight because I believe it would be a great buying opportunity.

Enter passively, exit aggressively!

Jim Brown

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New Plays

Long-Term Channel

by James Brown

Click here to email James Brown


NEW BULLISH Plays

Seagate Technology - STX - close: 41.80 change: +0.86

Stop Loss: 39.95
Target(s): 47.00
Current Gain/Loss: unopened

Entry on September -- at $--.--
Listed on September 24, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 3.5 million
New Positions: Yes, see below

Company Description

Why We Like It:
STX makes electronic data storage devices. The stock hit new all-time highs in July only to crash following its Q2 earnings report. Since then STX has seen a -20% correction. Investors finally stepped in to buy the stock near its rising 200-dma and its long-term trend of higher lows (see weekly chart). The last few weeks have seen STX bounce back and the stock is on the verge of breaking out past resistance near $42.00.

I am suggesting a trigger to open bullish positions at $42.25. If triggered our multi-week target is $47.00.

Trigger @ 42.25

Suggested Position: buy STX stock @ (trigger)

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

Buy the 2014 Jan $45 call (STX1418a45) current ask $1.55

Annotated chart:

Weekly chart:




In Play Updates and Reviews

Large Cap Profit Taking Continues

by James Brown

Click here to email James Brown

Editor's Note:
The S&P 500 index continued to sink on Tuesday. Yet the small cap Russell 2000 index managed to post a gain and actually tagged a new high on an intraday basis.

PKI was stopped out. WLL & URBN have been triggered.


Current Portfolio:


BULLISH Play Updates

Avago Technologies - AVGO - close: 42.41 change: +0.54

Stop Loss: 39.85
Target(s): 44.50
Current Gain/Loss: + 5.4%

Entry on September 17 at $40.25
Listed on September 10, 2013
Time Frame: 9 to 12 weeks
Average Daily Volume = 2.1 million
New Positions: see below

Comments:
09/24/13: AVGO continues to show relative strength and added +1.28% today. I am adjusting our stop loss higher to $39.85.

Earlier Comments:
FYI: The Point & Figure chart for AVGO is bullish with a long-term $56.00 target.

current Position: long AVGO stock @ $40.25

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

Long 2014 Jan $40 call (AVGO1418a40) entry $2.80

09/24/13 new stop loss @ 39.85
09/21/13 new stop loss @ 39.40



Freeport-McMoRan Copper & Gold - FCX - close: 33.74 change: -0.02

Stop Loss: 32.75
Target(s): 36.00
Current Gain/Loss: + 4.5%

Entry on September 11 at $32.30
Listed on September 09, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 11.5 million
New Positions: see below

Comments:
09/24/13: Gold, silver and copper were all weak this morning. Copper fell on concerns of lower demand from China. This impacted shares of FCX, which also gapped open lower. Yet traders bought the dip in FCX and the stock closed virtually unchanged.

I am suggesting traders remain defensive here. More conservative traders may want to just exit now to lock in gains.

current Position: Long FCX stock @ $32.30

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

Long 2014 Jan $35 call (FCX1418a35) entry $1.15

09/21/13 new stop loss @ 32.75
09/18/13 new stop loss @ 31.85



Goodyear Tire & Rubber Co. - GT - close: 22.82 change: +0.71

Stop Loss: 21.65
Target(s): 25.00
Current Gain/Loss: + 1.4%

Entry on September 19 at $22.50
Listed on September 18, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 4.2 million
New Positions: see below

Comments:
09/24/13: GT displayed impressive strength with a +3.2% gain. This is a new multi-year closing high for the stock. I am raising our stop loss up to $21.65.

current Position: long GT stock @ $22.50

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

Long 2014 Jan $23 call (GT1418a23) entry $1.63

09/24/13 new stop loss @ 21.65



NVIDIA - NVDA - close: 15.70 change: +0.06

Stop Loss: 15.45
Target(s): 16.90
Current Gain/Loss: + 0.6%

Entry on September 11 at $15.60
Listed on September 10, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 8.4 million
New Positions: see below

Comments:
09/24/13: NVDA is still hovering between short-term support near $15.50 and short-term resistance at its 10-dma. I am not suggesting new positions at this time.

Earlier Comments:
Our plan was to use small positions to limit our risk.
FYI: The Point & Figure chart for NVDA is bullish with a long-term $23.00 target.

current Position: long NVDA stock @ $15.60

09/21/13 new stop loss @ $15.45



Omnicell, Inc. - OMCL - close: 24.98 change: +0.13

Stop Loss: 23.90
Target(s): 29.00
Current Gain/Loss: unopened

Entry on September -- at $--.--
Listed on September 21, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 235 thousand
New Positions: Yes, see below

Comments:
09/24/13: OMCL is trying hard to breakout past round-number resistance at $25.00. The stock almost did it today and hit $25.09 intraday before paring its gains. There is no change from my prior comments.

Earlier Comments:
I am suggesting a trigger to launch small bullish positions at $25.15. If triggered our multi-week target is $29.00.

Trigger @ 25.15 *small positions*

Suggested Position: buy OMCL stock @ (trigger)



Primoris Services - PRIM - close: 25.51 change: -0.20

Stop Loss: 24.20
Target(s): 28.50
Current Gain/Loss: + 0.0%

Entry on September 23 at $25.50
Listed on September 21, 2013
Time Frame: exit PRIOR to earnings in early November
Average Daily Volume = 222 thousand
New Positions: see below

Comments:
09/24/13: After yesterday's strong move higher PRIM saw a little profit taking today. If you missed our entry point consider waiting for a dip back toward the $25.50-25.00 zone. We're expecting the $25.00 level to offer short-term support.

FYI: PRIM should begin trading ex-dividend on September 26th, 2013. The cash dividend should be 3.5 cents.

current Position: Long PRIM stock @ $25.50



Toro Co. - TTC - close: 55.20 change: +0.95

Stop Loss: 53.75
Target(s): 59.50
Current Gain/Loss: + 0.0%

Entry on September 16 at $55.20
Listed on September 14, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 235 thousand
New Positions: see below

Comments:
09/24/13: TTC surged to a +1.75% gain on Tuesday but the rally stalled near its recent highs. Shares are due to begin trading ex-dividend on September 26th. The quarterly cash dividend should be 14 cents.

I would wait for a close above $55.50 before considering new bullish positions.

current Position: long TTC stock @ $55.20

09/21/13 new stop loss @ 53.75
09/16/13 trade opened on gap higher at $55.20
suggested trigger was $55.15



Whiting Petroleum - WLL - close: 57.72 change: +1.48

Stop Loss: 54.75
Target(s): 62.00
Current Gain/Loss: +1.7%

Entry on September 24 at $56.75
Listed on September 23, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.5 million
New Positions: see below

Comments:
09/24/13: Our new play on WLL is off to a strong start. Shares outperformed the broader market with a +2.6% gain. This is a new 18-month high. Our trigger to open bullish positions was hit at $56.75.

Earlier Comments:
Our multi-week target is $62.00, although we may have to adjust that. It is possible that the $60.00 level could prove to be round-number, psychological resistance.

current Position: Long WLL stock @ $56.75

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

Long 2014 Jan $60 call (WLL1418a60) entry $2.80*

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



Yahoo! Inc. - YHOO - close: 31.27 change: +1.01

Stop Loss: 29.75
Target(s): 34.75
Current Gain/Loss: + 2.2%

Entry on September 19 at $30.60
Listed on September 18, 2013
Time Frame: 9 to 12 weeks
Average Daily Volume = 13.3 million
New Positions: see below

Comments:
09/24/13: Traders were in a buy-the-dip mood this morning and YHOO soared past the recent highs and closed up +3.3% on double the normal volume. This is a new multi-year high for the stock.

Earlier Comments:
Our plan was to keep our position size small to limit our risk.

*small positions*

current Position: Long YHOO stock @ $30.60

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

Long 2014 Jan $32 call (YHOO1418a32) entry $1.70*

09/21/13 new stop loss @ $29.75
*option entry price is an estimate since the option did not trade at the time our play was opened.



BEARISH Play Updates

Axiall Corp. - AXLL - close: 37.58 change: -0.50

Stop Loss: 40.15
Target(s): 35.25
Current Gain/Loss: +3.0%

Entry on September 18 at $38.75
Listed on September 17, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.0 million
New Positions: see below

Comments:
09/24/13: So far so good. Shares of AXLL continue to sink and hit new lows for the year today with a -1.3% decline.

Earlier Comments:
Our target is $35.25. More aggressive traders may want to aim lower since the P&F chart is bearish with a quadruple-bottom breakdown sell signal and a $29.00 target.

FYI: AXLL is due to begin trading ex-dividend on September 25th. The quarterly cash dividend should be 16 cents.

current Position: short AXLL stock @ $38.75

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

Long Oct $40 PUT (AXLL1319v40) entry $2.20*

09/23/13 new stop loss @ 40.15
*option entry price is an estimate since the option did not trade at the time our play was opened.



Urban Outfitters - URBN - close: 37.29 change: -0.14

Stop Loss: 38.60
Target(s): 34.50
Current Gain/Loss: - 0.1%

Entry on September 24 at $37.25
Listed on September 19, 2013
Time Frame: 3 to 4 weeks
Average Daily Volume = 2.8 million
New Positions: see below

Comments:
09/24/13: Our URBN trade has opened. The stock broke down to new relative lows and slipped to $37.07 before paring its losses. Our trigger to launch bearish positions was hit at $37.25.

Earlier Comments:
Our target is the November 2012 lows near $34.50. FYI: The Point & Figure chart has produced a sell signal and is forecasting at $31.00 target.

current Position: short URBN stock @ $37.25

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

Long Oct $38 PUT (URBN1319v38) entry $1.45



CLOSED BULLISH PLAYS

PerkinElmer Inc. - PKI - close: 37.82 change: -0.04

Stop Loss: 37.60
Target(s): 42.50
Current Gain/Loss: - 1.4%

Entry on September 16 at $38.15
Listed on September 12, 2013
Time Frame: 6 to 9 weeks
Average Daily Volume = 784 thousand
New Positions: see below

Comments:
09/24/13: PKI displayed weakness this morning. The stock gapped open lower and dipped to $37.59 before bouncing. Our stop loss was hit at $37.60.

Traders may want to keep PKI on their watch list for a correction toward the $36.00 level, which should be significant support.

closed Position: Long PKI stock @ $38.15 exit $37.60 (-1.4%)

09/24/13 stopped out
09/21/13 new stop loss @ 37.60

chart: