Option Investor
Newsletter

Daily Newsletter, Thursday, 10/17/2013

Table of Contents

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

Market Wrap

Let's Make A Deal

by Thomas Hughes

Click here to email Thomas Hughes
Introduction

U.S. politicians came up with an eleventh hour solution to the current debt ceiling and spending issues by putting it off until next year. The government shut down is over and things are getting back to normal. The news came as a relief to world markets, which traded to the upside, but failed to spark a rally in the index futures arena. S&P futures were down around -5 points with the Dow in the -90 range. Now that we can breathe a sigh of relief because a credit default has been averted we can begin to focus on what kind of damage has been done to the economy and potential fall-out from the next budget battle in just 3 short months. There is growing concern from businesses and economists about the impact to fourth quarter earnings growth, the holiday shopping season and all of 2014. It's amazing how the future out look can change so quickly. Just a month ago the market was concerned that QE was ending and tapering was beginning. Now, tapering is no longer a major concern and may even be pushed back to next year.


Important dates for the end of this year and beginning of next year. December 10th; deadline for budget committee. January 15th; newly passed government spending bill will expire. February 7th; the “soft” debt ceiling will be hit once again. March 2014; the next debt ceiling battle comes to a head. Unless of course the politicians on Capital Hill get it together and pass a budget with corresponding spending limits.

Economic data released today helped to lift the early futures trading. Jobless claims fell and the Philly Fed was better than expected. At the bell the major indices fell roughly 1/2% before catching a bid and moving higher. The Philly Fed report, released at 10 AM, seemed to help as well as the Presidents speech. The Philly Fed reading of 19.8 was above the expected 15. By 11:30 AM the S&P 500 and Nasdaq had entered positive territory for the day. The Dow was the big laggard, trading in a range between -60 and -90 during the morning hours. The Dow was heavily impacted by earnings today, losses in United Health, Goldman Sachs and IBM are mostly to blame. Earnings from all three companies did not meet expectations. Despite the growing fear the fourth quarter may not be as good as expected the markets climbed throughout the day with the S&P making a record close and the Nasdaq a new 13 year high.

The Jobless Claims

The initial claims is still being impacted by California's computer issues. The total number of initial claims fell by -15,000 this week but no states reported a drop in claims bigger than 1,000. 20 states reported an increase bigger than 1,000 with California at the top of the list with over 33,000 new claims logged. The numbers just don't add up in my mind. Anyway, a drop in claims is good. Last weeks figures were also revised lower by 1,000 claims. We'll have to keep an eye on this over the next few weeks to see what level claims stabilize and if the shut down has any lingering effects.


Longer term unemployment is still falling. Continuing claims dropped by -43,000 from a downward revision to last weeks data to 2.859. This is a three week low and very near to the long term lows set last month. Total claims also fell, by -82,725. This is also a three week low and just off the long term lows set last month. Continuing and total claims are still trending lower and point to a decrease in overall unemployment. According to reports today it could be next week before we get any of the data not released such as the most recent NFP and U.S. unemployment figures. Then, a week later, we'll get this months data so I expect some increased Fed speculation over the next couple of weeks.



Crazy Gold

Gold traders are going nuts today. The political solution sent gold prices skyrocketing by roughly $40(3%) during today's session. The shut down's effect on the economy is leading some to speculate that QE would remain in effect, weakening the dollar and strengthening gold. The Gold Index has followed through on the bullish move upward suggested earlier in the week. The index has broken back up into the pennant and over the 30 day moving average. The index appears to still be in the grips of a longer term consolidation pattern. This pattern intersects with the long term down trend in the middle of next month so it could continue to wind sideways for another month. Gold prices are still not stable so I do not put a lot of faith in today's upswing in prices. Gold could just as easily lose $60 tomorrow or next week depending on how economic data and FOMC speculation moves the markets.


Oil Prices Retreat

Increasing supply, decreasing political tensions mainly in Iran and concern of economic impacts from U.S. political fall out have been combining to push oil prices lower. Today benchmark crude fell around 1.5% to just over $100 per barrel. Today's drop in prices brings oil to a four month low. The $100 level is an important support level for oil prices long term. Again, the economic outlook and prospects for GDP growth have been clouded by the uncertain impact of the government shut down and spending will be on the economy. The Oil Index has been performing counter to the price of the underlying commodity, it has been breaking above long term resistance and making new highs even as oil prices have retreated to support. Perhaps this is a sign of expected earnings surprises in the sector. The big oil companies report at the end of the month with Exxon, Conoco Phillips, BP and Oxy all reporting either on the 29th or 31st. A quick glance at charts in the sector reveals just as many trending sideways as there those trending up.


Exxon is one of the worst performers in the sector. The stock has been trading in a range for the last year or more and is now near the bottom of that range. XOM just bounced off of support and may be consolidating for a move up to the top of the range. A return to a more rosy economic outlook, a good earnings report and especially a good future guidance or outlook could be a catalyst for this move. At this time the index is struggling with resistance at $87.50 with bullish indicators.


Fear Drops

The VIX has dropped significantly over the past few days. Today it moved another leg down and is now close to the what is the new “normal” level. 12.50 is the current target level for a calmly trending market. I will be looking for the index to move lower and test this level over the next couple of days but I also think that there could be some more volatility in the volatility index. Fear is up that the economy has been damaged. So far the little data we have gotten has been OK and support the continued trend of slow growth. The next data we get will be the old data we didn't get two weeks ago because of the shut down. It will probably be good, or at least good enough, for back then but how good will it be for now. There is also concern over earnings and earnings growth. Earnings season could also provide a mover for the fear gauge. Also, looking at the chart it is not hard to see that the average daily range for the index has picked up even without the ATR indicator below.


Earnings Round Up

Verizon was perhaps the biggest surprise of the day. The company reported that it had increased subscribers to its wireless services by 40%. This was far above analysts estimates and the driving cause of the earnings results. Verizon report profits of $2.23 billion, $0.78 per share, up from $0.56 from last year. This result builds on the move the company made last month when it purchased the remaining stake in the wireless portion of it's business from Vodaphone. The stock shot up in the premarkets, gapping up at the open. The move has brought the stock above resistance with a strong bullish indicators.


IBM reported a huge miss that has raised fear the tech giant has overstated its future expectations. Thh company missed earnings by nearly $1 billion dollars, blamed on a drop in growth market sales and a 40% drop in hardware sales in China. The company reported earnings of $3.68 versus $3.33 in the same period last year. The problem here isn't that IBM isn't making money, it's just not growing earnings fast enough and analysts fear it can't make up the shortfall. The stock lost over 6% today to hit a two year low.


Goldman Sachs also reported uninspiring earnings. The bank reported revenue and earnings that were basically flat from the same period last year. Revenue in the period fell significantly over last years results; fixed income and stock underwriting both fell more than 40%. The report blamed slow client volume. The company was also able to cut costs by 25%. The stock, which has been treading water for the last 6 months, fell 3% in early trading. After gapping open traders stepped in to drive prices back up but not above yesterday's closing prices.


United Health also reported earnings that were an improvement over last year but not enough to keep investors interested. The company reported in line with expectations, raised guidance to the upper end of the previous range and lost over 5% of shareholder value in today's trading. The stock is now trading just above potential support at the $70 and is a major reason why the Dow was lagging the S&P and Nasdaq today.


The Indices

The S&P 500 continued it's bounce up from the long term trend line and briefly touched the all time intraday high. The index is being carried higher on relief, earnings which are generally positive despite a lack of real earnings growth and the underlying long term trend. Indicators are bullish on the daily charts but still weak and divergent on the weekly charts. It is possible that the markets are approaching a major turning point, one that could result in a correction of 20% or more. However, as ever, there is still no evidence of such a reversal besides the divergences. As mentioned in yesterday's wrap the longer these divergences go on the bigger the chance a correction will follow and the bigger the correction could be. Today the index broke above resistance and reached a new all-time high but there are growing down side risks. Looking back at past divergences similar to the one now it has taken a week or two up to 2-3 months for the correction to start. I remain bullish on the S&P at this time but with caution. The index is likely to pull back and consolidate, at least on a short term basis, while earnings season unfolds and we await some reliable economic information.


The Dow was heavily impacted by earnings disappointments today. IBM, Goldman and United Health were all down more than 3% with heavy volumes. The weight of these giants were enough to overcome gains across the rest of the Dow components. According to Bob Pisani IBM alone was responsible for keeping the index in the red. Regardless, the index remains above the short term 30 day moving average and looks like it is consolidating to move up and test the top of the recent 6 month trading range.


The indices appear to still want to move higher. However, there are now new obstacles ahead for the market to consider. Has the economy slowed, will the shut down affect the 4th quarter/holiday season and what the heck is going to happen in 3 months when all this comes to a boil yet again. As of now the economic trends are still up and the markets are still making new highs. The next data we get will be dated but will also likely support the current trends. Earnings growth is still positive but that may change. Today after the bell earnings from CMG and GOOG among others reported better than expected. Tomorrow could be another big day.

Until then, remember the trend!

Thomas Hughes


New Plays

Tool Time

by James Brown

Click here to email James Brown


NEW BULLISH Plays

Lowe's Companies - LOW - close: 49.02 change: +0.55

Stop Loss: 47.75
Target(s): 54.00
Current Gain/Loss: unopened

Entry on October -- at $--.--
Listed on October 17, 2013
Time Frame: 4 to 6 weeks
Average Daily Volume = 6.8 million
New Positions: Yes, see below

Company Description

Why We Like It:
LOW operates over 1,750 home improvement retail locations. The stock tends to follow the housing market but thus far worries over a slowdown in housing has not really hit shares of LOW. Instead investors continue to buy LOW and build on its trend of higher lows. Now shares are poised to breakout to new all-time highs.

The previous high was set in September at $49.17. I am suggesting a trigger to open bullish positions at $49.50. More conservative traders may want to wait for LOW to actually close above the $50.00 level since $50 could be round-number, psychological resistance. If we are trigger at $49.50 our target is $54.00 but we will plan to exit prior to LOW's earnings in mid November.

NOTE: LOW is due to trade ex-dividend on October 21st. The quarterly dividend should be 18 cents.

FYI: The Point & Figure chart for LOW is bullish with a $57.50 target.

Trigger @ 49.50

Suggested Position: buy LOW stock @ (trigger)

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

Buy the NOV $50 call (LOW1316K50) current ask $0.63

Annotated chart:




In Play Updates and Reviews

Market At New Highs

by James Brown

Click here to email James Brown

Editor's Note:
The U.S. market's S&P 500 index and Russell 2000 index hit new record highs on Thursday. The move followed news that congress had finally ironed out a deal, even if it is a temporary deal to fund the government and raise the debt limit.

FSLR and WLT were triggered. URBN was closed this morning.


Current Portfolio:


BULLISH Play Updates

Avago Technologies - AVGO - close: 45.10 change: +0.60

Stop Loss: 42.90
Target(s): 48.00
Current Gain/Loss: + 1.3%

Entry on October 16 at $44.50
Listed on October 14, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 2.75 million
New Positions: see below

Comments:
10/17/13: Traders bought the dip in AVGO this morning near $44.00 and the stock rebounded with a +1.3% gain. This is another new record high. We will adjust our stop loss up to $42.90. Remember our plan was to keep our position size small to limit our risk.

*small positions*

Current Position: long AVGO stock @ $44.50

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

Long 2014 Jan $45 call (AVGO1418a45) entry $2.40

10/17/13 new stop loss @ 42.90



First Solar, Inc. - FSLR - close: 45.97 change: +0.21

Stop Loss: 43.90
Target(s): 54.00
Current Gain/Loss: - 0.2%

Entry on October 17 at $46.05
Listed on October 16, 2013
Time Frame: Exit PRIOR to earnings in very late October (or early Nov.)
Average Daily Volume = 4.5 million
New Positions: see below

Comments:
10/17/13: FSLR gapped open higher this morning but the rally sort of fizzled. Shares spent most of the day moving sideways and closed up with a +0.45% gain (versus +0.6% in the NASDAQ). Our trigger to open bullish positions was hit at $46.05 this morning.

Earlier Comments:
A breakout here could spark some short covering. The most recent data listed short interest at 21% of the 70.7 million share float. I am suggesting a trigger to open bullish positions at $46.05. If triggered our target is $54.00 but we may exit earlier to avoid holding over FSLR's earnings report expected around the end of October or early November. FYI: The Point & Figure chart for FSLR is bullish with a $54.00 target.

NOTE: FSLR can be a volatile stock. I am suggesting small positions to limit our risk.

*small positions*

current Position: Long FSLR stock @ $46.05

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

Long NOV $50 call (FSLR1316K50) entry $2.25



HB Fuller Co. - FUL - close: 47.35 change: +1.26

Stop Loss: 44.95
Target(s): 49.75
Current Gain/Loss: + 2.5%

Entry on October 15 at $46.20
Listed on October 12, 2013
Time Frame: 4 to 8 weeks
Average Daily Volume = 405 thousand
New Positions: see below

Comments:
10/17/13: It looks like we're back in business with FUL. The stock displayed relative strength with a +2.7% gain, closing at a new all-time high. I am raising our stop loss to $44.95.

Earlier comments:
If triggered our target is $49.75. More aggressive traders may want to aim higher. FUL's point & figure chart has created a spread triple-top breakout buy signal with a $62 target.

current Position: long FUL stock @ $46.20

10/17/13 new stop loss @ 44.95
10/15/13 be careful. FUL hit our trigger on a very brief intraday spike
10/14/13 adjust entry trigger to $46.20 from $46.15



iShares China Large Cap ETF - FXI - close: 38.11 change: -0.10

Stop Loss: 36.70
Target(s): 41.75
Current Gain/Loss: - 0.4%

Entry on October 11 at $38.25
Listed on October 10, 2013
Time Frame: 6 to 9 weeks
Average Daily Volume = 17.6 million
New Positions: see below

Comments:
10/17/13: The FXI gapped down this morning but pared its losses by the closing bell. I would still consider new positions now or you could look for a potential dip near $37.50 as an alternative entry point.

Earlier comments:
This ETF might see some short-term resistance in the $39.25 area (September high) and the $40.00 level but our multi-week target is $41.75.

current Position: long the FXI (ETF) @ $38.25

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

Long 2014 Jan $40 call (FXI1418a40) entry $0.97



HEALTHSOUTH Corp. - HLS - close: 35.84 change: +0.11

Stop Loss: 34.95
Target(s): 39.75
Current Gain/Loss: - 1.3%

Entry on October 15 at $36.30
Listed on October 10, 2013
Time Frame: exit PRIOR to earnings on Oct. 28th
Average Daily Volume = 459 thousand
New Positions: see below

Comments:
10/17/13: It looks like HLS is holding at support on its rising 10-dma, at least for now. The stock bounced but shares did underperform the broader market. I remain cautious here. More conservative traders may want to raise their stop loss. I am not suggesting new positions at this time.

Earlier Comments:
Our target is $39.75 but we do not want to hold over the earnings report scheduled for October 28th.

current Position: Long HLS stock @ $36.30

10/15/13 triggered at $36.30
10/14/13 adjust entry trigger to $36.30 from $36.25
adjust the stop loss from $34.75 to $34.95



Krispy Kreme Doughnuts, Inc. - KKD - close: 23.42 change: +0.21

Stop Loss: 21.85
Target(s): (sold half @ 23.25) exit the 2nd half at $24.75
Current Gain/Loss: (+14.5%) 2nd half = +15.4%

Entry on October 03 at $20.30
Listed on October 02, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.25 million
New Positions: see below

Comments:
10/17/13: The bounce in KKD continues and shares are challenging resistance near $23.50. A breakout higher here could spark another sprint higher.

Earlier Comments:
I am suggesting we sell half of our position at $23.25. We want to adjust our final exit target to $24.75.

NOTE: KKD is prone to some intraday spikes. I am suggesting small positions to limit our risk.

*small positions*

current Position: Long KKD stock @ $20.30

10/14/13 new stop loss @ 21.85
10/08/13 new stop loss @ 21.40
10/08/13 1st target hit at $23.25 (sell half) +14.5%
10/05/13 Strategy Update: new stop loss @ 20.45
Plus, we want to sell half of our position at $23.25 and then exit the rest of our position at $24.75.



Scientific Games - SGMS - close: 18.21 change: +0.23

Stop Loss: 16.40
Target(s): 19.75
Current Gain/Loss: + 3.5%

Entry on October 14 at $17.60
Listed on October 12, 2013
Time Frame: 4 to 6 weeks
Average Daily Volume = 690 thousand
New Positions: see below

Comments:
10/17/13: Thankfully there was no follow through on what looked like a possible reversal on Wednesday. Traders bought the dip this morning and SGMS outperformed the market with a +1.2% gain.

Earlier comments:
The next major resistance level looks like the $19.50-20.00 zone. Our target is $19.75. Keep in mind that we want to use small positions to limit our risk.

*small positions*

current Position: long SGMS stock @ $17.60

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

Long NOV $17.50 call (SGMS1316k17.5) entry $1.15*

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



Scotts Miracle-Gro Co. - SMG - close: 57.02 change: +1.13

Stop Loss: 54.75
Target(s): 59.85
Current Gain/Loss: + 1.5%

Entry on October 15 at $56.15
Listed on October 14, 2013
Time Frame: 3 to 5 weeks
Average Daily Volume = 310 thousand
New Positions: see below

Comments:
10/17/13: SMG spiked higher this morning following an analyst upgrade before the bell. SMG has cleared resistance near $56.00 and should be free to rally. I am raising our stop loss to $54.75.

current Position: long SMG stock @ $56.15

10/17/13 new stop loss @ 54.75



Walter Energy Inc. - WLT - close: 15.65 change: +0.15

Stop Loss: 14.95
Target(s): 19.50
Current Gain/Loss: - 3.7%

Entry on October 17 at $16.25
Listed on October 15, 2013
Time Frame: 4 to 6 weeks
Average Daily Volume = 6.7 million
New Positions: Yes, see below

Comments:
10/17/13: I cautioned readers last night to keep an eye on BTU's earnings report. BTU reported better than expected results this morning and the news sparked a rally across the coal industry. Shares of WLT surged to a +5.1% gain intraday. Unfortunately, WLT did not maintain these gains and the stock closed back below resistance. Our trigger was hit at $16.25 so our play is open but I would not launch new positions at this time. The failure to close above $16.00 might suggest this is a failed rally pattern.

Earlier comments:
Our target is $19.50 but we will plan to exit prior to WLT's next earnings report expected in early November. FYI: The Point & Figure chart for WLT is bullish with a $25.00 target.

current Position: Long WLT stock @ $16.25

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

Long NOV $17 call (WLT1316k17) entry $0.93



BEARISH Play Updates

ValueClick, Inc. - VCLK - close: 19.51 change: +0.06

Stop Loss: 20.26
Target(s): 18.05
Current Gain/Loss: + 1.7%

Entry on October 08 at $19.85
Listed on October 07, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.2 million
New Positions: see below

Comments:
10/17/13: VCLK spent Thursday's session churning sideways. The stock is still struggling with resistance at its 10-dma. I am not suggesting new positions at this time.

current Position: short VCLK stock @ $19.85

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

Long NOV $20 PUT (VCLK1316w20) entry $1.45

10/12/13 new stop loss @ 20.26
10/08/13 new stop loss @ 20.51



CLOSED BEARISH PLAYS

Urban Outfitters - URBN - close: 36.44 change: -0.02

Stop Loss: 36.75
Target(s): 34.50
Current Gain/Loss: + 2.6%

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:
10/17/13: URBN has not been cooperating. We decided in last night's newsletter that the best move was to exit early at the opening bell today. Fortunately, shares gapped down at $36.30.

closed Position: short URBN stock @ $37.25 exit $36.30 (+2.6%)

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

(we exited the October put on 10/09/2013)
Oct $38 PUT (URBN1319v38) entry $1.45 exit $2.85* (+96.5%)

10/17/13 planned exit
10/16/13 prepare to exit at the open tomorrow
10/09/13 planned exit to close our Oct. 38 puts at the open.
*option exit price is an estimate since the option did not trade at the time our play was closed.
10/08/13 new stop loss @ 36.75
prepare to exit the October $38 puts at the open.
10/07/13 new stop loss @ 37.25
10/05/13 new stop loss @ 37.75
09/28/13 new stop loss @ 38.25

chart: