Option Investor
Newsletter

Daily Newsletter, Tuesday, 10/22/2013

Table of Contents

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

Market Wrap

Data Please!

by Thomas Hughes

Click here to email Thomas Hughes
Introduction

The global markets were relatively quiet in the overnight sessions. The lack of follow through from Friday's rally and anticipation of today's long awaited NFP release are the likely reasons. Today we finally received the NFP, unemployment and other data that was held back by the government shut down. Futures trading was up ahead of the release. Earnings reports were rolling in left and right as well as talk over yesterday's reports released after the bell. Netflix was one stock everybody was talking about, the company blew away the projected earnings estimates and gained roughly 7.5% in the premarket hours. Other positive reports from companies like United Technologies and Travelers Insurance also provided a lift for the markets.


Just ahead of the report futures trading started to lift. Following the report the indices extended their gains and remained strong going into the open. After the bell the markets rallied broadly in the middle part of the morning. Two of today's leading sectors were the transports and technology. The Dow Transportation Average hit a new all time high while the various tech following indices and ETF's all extended a two week rally that looks nearly vertical on the charts. The S&P was up nearly 10 points by 10AM, the Dow 75 and the Nasdaq 18 or so. A look at the charts will show that the blue chips are still lagging the broader markets. The Dow remains contained within its 6 month trading range while other indices are making new highs.

The Dow

At 10 AM new construction spending data was released and it helped to spur the markets higher. The SPX extended its gains to +12 with the Nasdaq up over 20. However, a late morning reversal in Netflix weighed heavily on the Nasdaq pushing it down to just below break even. A huge miss by Radioshack also helped to pressure the Nasdaq into negative territory. The indices tread water for most of the rest of the day. The SPX moved between +5 and +10, the Dow hung around the +70 level and the Nasdaq clawed it's way back to just above flat line. About an hour before the close the indices began to move back toward the top of today's range where they held until the bell sounded.

The Data

The NFP number was a bit below the expectations but it may not matter. For one thing the markets lifted after the news and extended gains after the open. Perhaps traders were fearful the number may have been even worse than it was? September job growth totalled 148,000 versus an expected 170,000. This is down from an upward revision to the previous month which pushed the number of new jobs in August up to 193,000. The softness in the jobs number added fuel to the debate of when/if the FOMC will begin to taper. While low this number is still about average for the last 12 months and should help to support things as they are. What will be more important for this perspective are the next two weeks of data. This week we will get jobless claims data. The last two weeks have seen claims elevate but I think it may be blamed on the Cali computer glitch. This weeks data could help to confirm or deny that theory. Next week will be the monthly ADP and Challenger reports and then the week after the next NFP report(it's being delayed because of the shut-down). Strong jobs equals better economy and tapering; weak jobs equals slowing economy and no tapering.


The Unemployment Rate declined unexpectedly by -0.1% to 7.2%. This is the low since 2008. I think economists and analysts alike were looking for the rate to remain stable or even to increase. At the current rate of decline, if things remain as they are, total U.S. unemployment could reach the threshold set by the FOMC by the 2nd quarter of next year. The labor force participation rate held steady at 63.2%. In my view this is good for overall unemployment. The participation rate is being heavily impacted by the retiring baby boomers (roughly 20% of our population). If participation can remain high while so many people are or are approaching retirement it must mean that more and more young people are entering the work force. I would like to see a figure on employment/participation rates for people under 50 and also for those under 30. In my small amount of research into the boomers I discovered that while there was a baby boom after WWII there was also a baby bust during the 70's and then another boom in the 80's.


Other data released today was net Long Term TIC flows. This measures the amount of internationally based money that flows into and out of U.S. backed securities including bonds and equities. The flow fell to -$8.9 billion versus the expected $31 billion and the previous months $31 billion.

Construction spending moved up unexpectedly, especially after yesterday's reported drop in home sales. The actual 0.6% is double the expected 0.3% and in line with the revision to the previous month's figures. A rise in construction spending goes hand in hand with jobs creation and is one positive indication for the next round of employment data. The rest of the week is full with housing data, employment claims, Michigan Sentiment and other gauges of the economy.


The Gold Index

Gold was indicated lower in the early hours. Just before the release of the NFP gold was trading down about -$4. However, the weakness in the data helped to support the idea that tapering wasn't coming anytime soon, weakening the dollar the strengthening gold. Gold prices shot higher by about $15 and then extended that gain to near $25 by lunchtime. Gold is still being influenced by taper talk and could continue to make wild swings over the next two weeks as we get caught up with the data. The Gold Index was lifted by gold's gains today and moved higher into the pennant formation I have been tracking. The index formed a long white candle today that may indicate a continuation of the near term rally. Looking ahead of the present it appears as if the near term sideways trend/pennant formation will converge with the longer term trend in the early part of next month, just after the next FOMC meeting(Oct 30-31st). Indicators are bullish and rising.

Gold Index

The Oil Index

Oil held steady today around $99 a barrel, a near four month low, until just after lunch. Then, the price of benchmark West Texas crude fell to below $98 for the first time in nearly five months. Declining political tension in Iran, rising U.S. stockpiles of oil and natural gas are all adding downward pressure to prices along with concern over fourth quarter and 2014 economic growth. Delayed data shows that last week oil inventory rose by nearly 6 million barrels, nearly double the expectations. The oil index moved up again today, opposite the price of oil, as it has been doing for the past two weeks. The index is looks extended and is showing signs of slowing the upward progression. The candles today and yesterday are very small, today's has a bearish looking upper wick. Indicators are still bullish but rolling over, forming potential divergences in MACD and stochastics. The long term trend is still up with supportive indicators. If a pull back does occur it may be only short term in nature. Look for support around 1430, the point of the most recent break out.

Oil Index

The Ten Year

I am by no means a bond trader so I won't try to analyze bond prices. I do know that bonds are an important part of the investment world, incredibly important to market function and an indicator of market sentiments. Lately there has been a lot of concern over rising interest rates and their impact on global markets. This has quieted somewhat since the 10 year treasury hit it's top near 3.0%. Today the 10 year treasury fell again, moving down to a 3 month low. The yield is now just above 2.5%, a level that could provide support for the short to near term.

Ten Year

Story Stocks

Earnings was the big news today but Apple also made an appearance in the headlines. Apple was scheduled to reveal new versions of the iPad today at it's event. The stock had traded up initially but about 10AM sellers began to outweigh buyers, pushing the stock down. Shares of Apple hit an intra day bottom just before 11 when they began to move back up. The Apple shareholder event released a new Mac operating system and a new iPad, the Air.

Apple

Earnings was the story of the day. Netflix reported after the bell yesterday and really got traders psyched up. The company reported earnings that beat expectations by a large margin driven mostly by an increase in new subscribers. Netflix is now the largest provider of streaming on line media, surpassing HBO. The stock shot up in the after hours, stayed up this morning for a while and then fell heavily on profit taking. The stock at one point today was up more than 300% on the year, an attractive place for many to take some money off the table. Future expectations for this company are still positive so I wouldn't count on a bearish trend just yet. There may be a correction in the offing though, a reversion to trend would bring the stock down about 8% from the current level while keeping yearly gains in the 200% range.

Netflix

United Technologies reported earnings that beat estimates by a penny on lighter than expected revenue. This is a trend I have noted several times over the past few quarters, not for this stock in particular but for companies in general. Revenue and earnings were both up 13% from the comparable quarter last year and were negatively impacted by restructuring costs. Without these costs the companies earnings would have been up 19%. Although the company sees revenue and earnings growth to continue into the next year they guided below analysts estimates citing weakness in government spending here and in Europe. Restructuring will continue this year and into next, providing further savings and margin growth. The stock trade up initially but reversed mid day, falling by about 1.25%. The $105 level is current support.

United Technology

Travelers was another company reporting earnings that beat estimates. The stock shot up in the early hours of the pre market, then sold off during the open session. The stock gapped up at to open above resistance and at what would have been a 12 month high. Net income was up 4% over last year, resulting in eps $0.28 cents above expectations. Improving margins and rate gains are the two main reasons for the increase. The board of directors also authorized another $5 billion in share repurchases. Pulling back to the long term charts the stock appears to be consolidating after a 1.5 year rally. Indicators are bullish long term but there may be some weakness in the shorter term.

Travelers

Radioshack was one of few companies today to report an actually bad report. There were quite a few that weren't up to expectations but this is the one that really stunk. The electronics retailer reported a loss larger than expected. The loss was attributed to the current turnaround and restructuring efforts by company CEO Joseph Magnacca. The plan is to reposition the brand utilizing the data they compiled from a handful of concept stores. The company is expecting up to 100 stores to reflect the new concept by the end of the year. The report also commented on a near $1 billion debt refinancing deal that is in the works. The stock fell by more than 20% today, coming close to the long term support around $2.50. Long term indicators also show that support is building at this level.

Radioshack

The Indices

I have already pointed out that the Dow is lagging the broader markets. This is especially true of the tech sector which has been skyrocketing this month. Looking at the Nasdaq we can see that the index has gained 8.5% over the last ten days, in line with the S&P 500 gains while the Dow has only gained 4.9%. On the short term daily charts the index's gain is accompanied by strong, rising, bullish MACD and stochastic. However, today's candle formation is a warning that the current rally may be peaking. Support levels on a pullback may be found at the 3900, 3800 and 3750 levels.

Nasdaq Composite

The transports are another sector that has been on a serious tear the last two weeks. This index is up more than 8% in the same time ten day time frame. This index is displaying similar technicals as the Nasdaq Composite although today's candle is a little less ominous. Even though there is a fat white candle body the long upper wick is a sign of bearishness from above. The indicators remain bullish on the weekly charts although the long term divergences we have all been tracking are still present. A correction to the long term trend would equal roughly 3% of the current price level.

Transports

The SPX powered higher in the late afternoon to close near the daily high and setting a new all time high. The daily charts are bullish, the index has broken above two potential support lines with strong bullish indicators. Even though the index is above a potential support area it is extended from the long term trend and could easily enter a consolidation or correction from this point. In the near term earnings reports will affect prices, in the long term earnings outlook and economic will do the same. The long term trend is still up so I remain bullish longer term with caution, especially in the nearer term.

SPX

For now it seems as if the political turmoil we could be facing at the end of the year (next round of debt ceiling shenanigans) is not at the forefront of traders minds. Earnings and economic data are back on the scene and influencing stock prices. Today we were just playing catch-up with last months data. It wasn't great but it wasn't worse than expected either, it was just right for the market to keep keeping on until the FOMC or the next round of data changes the whole perspective, or supports it. Tomorrow's trading will be impacted by the housing index on the economic front and by earnings from Caterpillar, Boeing, AT&T, Wal-Mart de Mexico, a handful of regional banks and dozens of well known mid-caps.

Until then, remember the trend!

Thomas Hughes


New Plays

Rising Tech

by James Brown

Click here to email James Brown


NEW BULLISH Plays

Yahoo! Inc. - YHOO - close: 33.94 change: -0.12

Stop Loss: 33.40
Target(s): 39.50
Current Gain/Loss: unopened

Entry on October -- at $--.--
Listed on October 22, 2013
Time Frame: 6 to 9 weeks
Average Daily Volume = 27.5 million
New Positions: Yes, see below

Company Description

Why We Like It:
Internet giant YHOO has had a good year. The stock did peak in early October just days ahead of its Q3 earnings report. The earnings results were not that inspiring. YHOO actually lowered its Q4 and 2013 earnings guidance. Yet traders bought the news anyway. Investors are probably happy with YHOO's growing mobile user base that is approaching 400 million people. Plus, YHOO's management said they would keep a larger chunk of Alibaba than Wall Street previously expected. Alibaba is a Chinese Internet company that is expected to IPO in the not too distant future but no date yet and YHOO owns 24% of the company.

YHOO is currently hovering below resistance in the $34.50-35.00 range. The October 4th high was $35.06. I am suggesting a trigger to open bullish positions at $35.15. More aggressive traders may want to jump in early on a move above today's high at $34.60 instead. Our target is $39.50.

Trigger @ 35.10

Suggested Position: buy YHOO stock @ (trigger)

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

Buy the 2014 Jan $35 call (YHOO1418a35) current ask $1.81

Annotated chart:




In Play Updates and Reviews

Major Indices Hit New Highs

by James Brown

Click here to email James Brown

Editor's Note:
The U.S. market's major indices continue to climb. Stocks are looking short-term overbought and due for a dip.

ADBE and FWLT were triggered. VCLK was closed.


Current Portfolio:


BULLISH Play Updates

Adobe Systems - ADBE - close: 53.17 change: +0.09

Stop Loss: 51.25
Target(s): 58.50
Current Gain/Loss: - 0.6%

Entry on October 22 at $53.50
Listed on October 21, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 3.6 million
New Positions: see below

Comments:
10/22/13: It wasn't much but ADBE managed to hit another new all-time high on Tuesday. Shares also hit our suggested entry point at $53.50. I would still consider new positions now or you could wait for a rally past today's high (53.57).

current Position: long ADBE stock @ $53.50

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

Long 2014 Jan $55 call (ADBE1418a55) entry $1.95



Avago Technologies - AVGO - close: 46.87 change: -0.18

Stop Loss: 44.75
Target(s): 48.00
Current Gain/Loss: + 5.3%

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:
10/22/13: AVGO spent the session trading sideways. Traders bought the dip near $46.50 midday. I am not suggesting new positions at this time. Readers may want to lock in gains.

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

10/21/13 new stop loss @ 44.75
10/19/13 new stop loss @ 43.25
10/17/13 new stop loss @ 42.90



Salesforce.com, Inc. - CRM - close: 54.28 change: -0.82

Stop Loss: 52.25
Target(s): 59.75
Current Gain/Loss: - 3.3%

Entry on October 21 at $56.15
Listed on October 19, 2013
Time Frame: 3 to 5 weeks
Average Daily Volume = 4.0 million
New Positions: see below

Comments:
10/22/13: I cautioned readers that CRM would likely fill the gap. Shares did more than that with a sharp spike lower this morning. CRM fell to $53.00 before bouncing. The relative weakness is a bit worrisome. Traders may want to wait and see if the bounce continues tomorrow before initiating new positions.

We will plan to exit prior to CRM's earnings report in late November. FYI: The Point & Figure chart for CRM is bullish with a long-term $77 target.

current Position: long CRM stock @ $56.15

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

Long 2014 Jan $60 call (CRM1418a60) entry $2.10

10/21/13 trade opened on gap higher at $56.15, trigger was 54.50
(gap higher due to an upgrade to strong buy)



HB Fuller Co. - FUL - close: 48.16 change: +0.68

Stop Loss: 45.75
Target(s): 49.75
Current Gain/Loss: + 4.2%

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:
10/22/13: FUL displayed relative strength with a +1.4% gain. Shares also hit new all-time highs. The 10-dma has risen to $46.23. I am adjusting our stop loss to $45.75.

Earlier comments:
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

10/22/13 new stop loss @ 45.75
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



Foster Wheeler - FWLT - close: 27.71 change: -0.28

Stop Loss: 26.95
Target(s): 31.00
Current Gain/Loss: -1.6%

Entry on October 22 at $28.15
Listed on October 19, 2013
Time Frame: exit PRIOR to earnings on Nov. 7th
Average Daily Volume = 891 thousand
New Positions: see below

Comments:
10/22/13: Uh-oh! I am urging caution here. The action in FWLT was bearish today. FWLT rallied up to $28.44 this morning and then reversed. Not only did it reverse but shares fell to a -1.0% decline. Today's move has produced a bearish engulfing candlestick reversal pattern. Unfortunately, the morning move higher hit our suggested entry point at $28.15. Now normally these reversal patterns need to see confirmation so for now it's just a warning signal. I am not suggesting new positions at the moment.

current Position: long FWLT stock @ $28.15



iShares China Large Cap ETF - FXI - close: 38.17 change: -0.00

Stop Loss: 37.49
Target(s): 41.75
Current Gain/Loss: - 0.2%

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:
10/22/13: The Chinese stock markets were down today. Plus many of the popular momentum Chinese stocks suffered profit taking today. Yet the FXI closed virtually unchanged.

I am suggesting we remain cautious. No new positions at this time.

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

10/21/13 new stop loss @ 37.60
10/19/13 new stop loss @ 37.49



HEALTHSOUTH Corp. - HLS - close: 36.48 change: +0.01

Stop Loss: 35.40
Target(s): 39.75
Current Gain/Loss: + 0.5%

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:
10/22/13: HLS did not see much follow through on yesterday's rally. The stock closed virtually unchanged on Tuesday. On a short-term basis I would expect a dip back toward $36.00. We are raising our stop loss to $35.40.

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

10/22/13 new stop loss @ 35.40
10/19/13 new stop loss @ 35.25
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: 24.58 change: +0.93

Stop Loss: 22.85
Target(s): (sold half @ 23.25) exit the 2nd half at $26.50
Current Gain/Loss: (+14.5%) 2nd half = +21.1%

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:
10/22/13: KKD displayed relative strength with a +3.9% gain and a breakout past resistance to hit new multi-year highs. Traders have a decision to make. Where do you plan to exit the rest of our position? We've been aiming for $24.75. Today's high was $24.66. Based on KKD's strength I suspect we could see this stock rally past the $25.00 level (which could be round-number resistance).

You could choose to lock in gains now (+21%). We are raising our exit target from $24.75 to $26.50. I am also raising our stop loss to $22.85.

Earlier Comments:
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

10/22/13 Exit Strategy Update: We are raising our exit target on the second half of our trade from $24.75 to $26.50.
new stop loss @ 22.85.
10/19/13 new stop loss @ 22.40
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: 18.88 change: -0.06

Stop Loss: 17.90
Target(s): 19.50
Current Gain/Loss: + 7.3%

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:
10/22/13: The rally in SGMS could be getting tired. The stock hit a new high on an intraday basis but closed in negative territory. I am raising our stop loss to $17.90.

NOTE: Our plan was to exit our November $17.50 calls at the opening bell this morning.

Earlier comments:
The next major resistance level looks like the $19.50-20.00 zone. 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) -

(option exit on 10/22/2013)
NOV $17.50 call (SGMS1316k17.5) entry $1.15* exit $1.80* (+56.5%)

10/22/13 new stop loss @ 17.90
10/22/13 planned exit to close the call options. +56.5%
10/21/13 new stop loss @ 17.40, adjust exit target to $19.50
prepare to exit our Nov. $17.50 call at the open tomorrow.
10/19/13 new stop loss @ 16.90
*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: 58.09 change: +0.70

Stop Loss: 55.40
Target(s): 59.85
Current Gain/Loss: + 3.5%

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:
10/22/13: SMG raced higher with a +1.2% gain on Tuesday. This is a new two-year high for the stock. I am not suggesting new positions at this time.

current Position: long SMG stock @ $56.15

10/21/13 new stop loss @ 55.40
10/17/13 new stop loss @ 54.75



BEARISH Play Updates


None. We do not have any active bearish trades.



CLOSED BEARISH PLAYS

ValueClick, Inc. - VCLK - close: 19.99 change: +0.10

Stop Loss: 20.11
Target(s): 18.05
Current Gain/Loss: - 0.7%

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:
10/22/13: VCLK has not been cooperating with us. We decided in last night's newsletter to exit positions at the opening bell today.

closed Position: short VCLK stock @ $19.85 exit $19.99 (-0.7%)

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

NOV $20 PUT (VCLK1316w20) entry $1.45 exit $1.20 (-17.2%)

10/22/13 planned exit at the opening bell
10/21/13 prepare to exit at the opening bell tomorrow.
10/19/13 new stop loss @ 20.11
10/12/13 new stop loss @ 20.26
10/08/13 new stop loss @ 20.51

chart: