Option Investor
Newsletter

Daily Newsletter, Tuesday, 12/10/2013

Table of Contents

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

Market Wrap

Tax Loss Selling Or More Taper Trembling

by James Brown

Click here to email James Brown

The U.S. stock market ended a two-day bounce with widespread declines on Tuesday. Fortunately losses were mild. Overall it was a relatively quiet session without any major economic news. A few market pundits blamed today's weakness on tax-loss selling before the yearend. Others felt that stocks could be reacting to a small but growing camp of analysts who suspect that the Federal Reserve might announce a taper to their QE program at next week's FOMC meeting.

By the closing bell the S&P 500, Dow Industrials, and NASDAQ composite were all down about -0.3%. Yet the small cap Russell 2000 index underperformed with a -0.89% decline. Precious metals managed a bounce with the GLD gold ETF up +1.75% and the SLV silver ETF up +2.8% thanks to the U.S. dollar falling to a new six-week low.

Volcker Rule Vote

One of Wall Street's biggest stories today was the vote on the Volcker Rule. The rule is named after former Federal Reserve Chairman Paul Volcker. This piece of legislation was part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which passed into law back in 2010. The rule is supposed to limit activities for U.S. banks with limits on what sort of hedging they can do, limits on what sort of risky investments they can participate in, and the probably the most controversial part of the rule is an outright ban on any proprietary trading.

Five U.S. regulating bodies (The Federal Reserve, the FDIC, the SEC, the CFTC, and the OCC) all voted on the Volcker Rule today and it passed. The current version does have several exceptions and will slowly be phased into effect over the next two years. There has been plenty of debate over the Volcker Rule. The big banks believe the rule is too strict while the anti-bank crowd thinks the rule is too lenient. You can bet we'll be hearing about the Volcker Rule again.

A December Taper?

A major theme today was speculation that the Federal Reserve might announce some sort of taper to their $85 billion a month QE program at its next FOMC meeting on December 18th (next week). The idea here is that the recent string of better than expected jobs reports and the positive, albeit bumpy, trend in economic data is suggesting the U.S. recovery is finally self sustaining. There does seem to be a growing camp of analysts suggesting that the Fed could taper in December. This speculation could be sapping the stock market's strength.

I've heard a number of analysts suggest that a taper is already baked into the market. That is possible. Investors have been hearing about the potential for the Fed to taper for months and months. Odds are that stocks could still see a knee jerk reaction sell off when the Fed does announce, especially if they announce in December. Most people are expecting the Fed to announce a taper at their March 2014 FOMC meeting. That would allow Janet Yellen to assume her position as the next Fed chairman. Plus, waiting until March would avoid any potential turmoil the U.S. debt ceiling debate could cause in February.

The bond market certainly doesn't seem to be alarmed about any potential Fed taper in December or the bond market does not think there is a high chance it will happen. Today saw the U.S. bond market continue to bounce with the yield on the 10-year note falling to 2.797%. If bond investors really thought the Fed would taper next week then bonds should be falling (and yields rising). Of course everyone knows the Fed will taper their QE program eventually so maybe the bond market has also priced in the taper whether it's announced in December, January, or March.

U.S. Budget Deal

One of the best news stories out today was a budget deal in Washington. After the market's closing bell it was announced that House Budget Committee Chairman Paul Ryan and Senate Budget Committee Chairman Patty Murray had agreed on a two-year U.S. budget deal. This has been in negotiation for weeks and honestly many doubted a deal would get done before the Friday, December 13th deadline.

In the true spirit of compromise no one was happy. Republicans felt it didn't do enough to cut spending and address the U.S. debt. Democrats felt the deal didn't address taxes and corporate loopholes. What this deal does do is remove the annual sequestration cuts to both defense spending and entitlement programs. House leader Boehner and Senate leader Reid both felt that the new budget has a good shot at getting passed. Congress will vote on it before Friday and their Christmas recess. The Senate will vote on it next week. Lack of a U.S. budget deal was a potential black cloud for the stock market and tonight's headlines could be bullish for tomorrow's market. It is worth noting that tonight's budget deal does not settle the fight over the U.S. debt ceiling and its February 2014 deadline.

Stock Headlines

In corporate news General Motors (GM) was making headlines. Yesterday the company announced that the U.S. government had finally sold off the remainder of its equity stake in the company. During the 2007-2008 financial crisis the U.S. government provided a $50 billion bailout for GM, which gave the U.S. a 60% stake in the company. Five years later the U.S. sold the last of its stock for a $10 billion loss. Today's big headline for GM was news that CEO Dan Akerson is retiring next month and Mary Barra will replace him. Barra has been working for GM for years as an engineer. Today's announcement makes Mary the first female CEO of any of the big three U.S. automakers in history.

Another story you will likely hear about tomorrow is MasterCard Inc.'s (MA) stock split. After the closing bell tonight MA announced that its Board of Directors had approved a 10-for-1 stock split and an +83% increase in its dividend to $1.10 a share. The stock closed at $763.61 a share today and was trading up to $800 a share in after hours. The stock split will take effect on January 9th, 2014. Post-split the new dividend will equal 11 cents a share.

Major Indices:

The S&P 500 lost 5.75 points and ended a two-day bounce. It looks like the large-cap index is stalling at resistance near its recent highs in the 1810-1813 zone. If this pullback continues the 1780 level should be support.

chart of the S&P 500 index:

The NASDAQ composite only lost -0.2% and looks the strongest of the major market indices. Should this pullback continue we can look for potential support at its 10-dma at 4046 (not likely to hold) or the 4,000 level. A breakdown below 4,000 might portend a drop toward its simple 50-dma.

chart of the NASDAQ Composite index:

The small cap Russell 2000 index delivered the worst performance among the major indices with a -0.89% decline. The $RUT settled near what should be short-term support in the 1120 area. If this dip continues then we're likely to see the $RUT test one of its rising trend lines of higher lows, mostly likely near the 1100 level.

chart of the Russell 2000 index


We only have fourteen trading days left in 2013. Typically the second half of December tends to be positive for stocks. Fund managers have had a terrible year and most are trailing behind the S&P 500's +26% gain for the year. That means there should be a crowd of money waiting to buy the dips as money managers chase stocks higher. I am encouraged by tonight's news that we have a two-year U.S. budget deal that should pass a vote in both the congress and the senate. This removes a potential overhang for the stock market.


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New Plays

Consumer Goods

by James Brown

Click here to email James Brown


NEW BULLISH Plays

Johnson Controls Inc. - JCI - close: 51.45 change: +0.54

Stop Loss: 49.75
Target(s): 57.50
Current Gain/Loss: unopened

Entry on December -- at $--.--
Listed on December 10, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 4.7 million
New Positions: Yes, see below

Company Description

Why We Like It:
JCI is in the consumer goods sector. The company is a diversified technology and industrial design company. They design systems for buildings, they make automobile batteries, and they manufacture interiors for autos.

The stock shot higher following its late October earnings report. The stock popped again after announcing a $3.65 billion stock buyback program over the next three years.

This morning the stock gapped open higher in reaction to an analyst upgrade. RBC Capital raised JCI from "outperform" to their "Top Pick" and gave the stock a $61 price target.

I am suggesting a trigger to open bullish positions at $52.10. If triggered our multi-week target is $57.50.

NOTE: JCI will begin trading ex-dividend on December 12th. The quarterly cash dividend should be 22 cents.

FYI: The Point & Figure chart for JCI is bullish with a long-term $80.00 target.

Trigger @ 52.10

Suggested Position: buy JCI stock @ (trigger)

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

Buy the 2014 April $55 call (JCI1419D55) current ask $1.40

Annotated chart:




In Play Updates and Reviews

Tuesday's Slow Sink Lower

by James Brown

Click here to email James Brown

Editor's Note:
The U.S. market slowly sank lower on Tuesday's session with the small cap Russell 2000 index underperforming.

FNP hit our entry trigger. We want to exit our DLR trade tomorrow morning.


Current Portfolio:


BULLISH Play Updates

Archer Daniels Midland - ADM - close: 42.36 change: -0.12

Stop Loss: 40.85
Target(s): 47.00
Current Gain/Loss: unopened

Entry on December -- at $--.--
Listed on December 09, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 4.8 million
New Positions: Yes, see below

Comments:
12/10/13: ADM held up reasonably well today. Traders quickly bought the spike down this morning but the rally failed near yesterday's high around $42.50. I don't see any changes from my earlier comments.

Earlier Comments:
I am suggesting a trigger to open bullish positions at $42.65. If triggered our target is $47.00. More aggressive traders may want to aim higher since the Point & Figure chart for ADM is bullish with a $67.00 target.

Please note that traders in ADM should be aware that any stocks related to the farming industry could be volatile this week. The current U.S. government farm bill is due to expire on January 1st, 2014. Right now the democrats and republicans have not agreed on a new one. Congress plans to adjourn for their Christmas break after this Friday, December 13th. Investors may want to use small positions to limit their risk.

Trigger @ 42.65

Suggested Position: buy ADM stock @ (trigger)

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

Buy the 2014 Jan $42 call (ADM1418a42) current ask $1.90



Autodesk, Inc. - ADSK - close: 46.79 change: +0.01

Stop Loss: 44.90
Target(s): 50.00
Current Gain/Loss: + 0.5%

Entry on December 05 at $46.55
Listed on December 04, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 3.0 million
New Positions: see below

Comments:
12/10/13: ADSK also rebounded off its morning lows. The stock managed to climb all the way back and tag a new high before closing virtually unchanged.

The broader market looks a little weak. I would hesitate to launch new positions here.

Our short-term target is $50.00. More aggressive investors may want to aim higher.
FYI: The Point & Figure chart for ADSK is bullish with a $56.00 target.

current Position: long ADSK stock @ $46.55

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

Long 2014 Jan $47 call (ADSK1418a47) entry $1.35



CareFusion Corp. - CFN - close: 39.47 change: -0.77

Stop Loss: 38.90
Target(s): 44.00
Current Gain/Loss: unopened

Entry on December -- at $--.--
Listed on December 09, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.35 million
New Positions: Yes, see below

Comments:
12/10/13: CFN did not see any follow through on yesterday's rally. The stock opened lower and continued to sink all day long, closing on its lows for the session. We are currently on the sidelines.

I am suggesting a trigger to open bullish positions at $40.50. If triggered our multi-week target is $44.00.

Trigger @ 40.50

Suggested Position: buy CFN stock @ (trigger)



Comerica Inc. - CMA - close: 45.76 change: -0.31

Stop Loss: 44.40
Target(s): 49.90
Current Gain/Loss: + 0.0%

Entry on November 25 at $45.76
Listed on November 21, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.5 million
New Positions: see below

Comments:
12/10/13: The morning rally in CMA faded and shares closed right where we started this trade at $45.76. Today's high was $46.25. Readers may want to wait for CMA to rally above this level before initiating new positions.

current Position: Long CMA stock @ $45.76

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

Long 2014 Jan $45 call (CMA1418a45) entry $1.72*

11/25/13 trade opened on gap higher at $45.76. suggested trigger was $45.65
*option entry price is an estimate since the option did not trade at the time our play was opened.



Fifth & Pacific Companies, Inc. - FNP - close: 32.91 change: -0.21

Stop Loss: 31.99
Target(s): 38.50
Current Gain/Loss: - 3.3%

Entry on December 10 at $34.05
Listed on December 07, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.3 million
New Positions: see below

Comments:
12/10/13: It was a bit of a volatile day for FNP. Shares spiked down to hit its low for the day at $32.80 and then immediately shot higher and traded above $34.00 all within the first two and a half hours of trading. Unfortunately FNP reversed again and closed with a loss on the session.

The volatility might have been a reaction to news out this morning that FNP was selling its Lucky Brand denim business. That really should not have been a surprise since it was widely expected. That leaves FNP with its last major business the Kate Spade brand. Many believe that Kate Spade is also a takeover/acquisition target.

Our bullish trade was triggered at $34.05 this morning. Unfortunately the sharp pullback has produced a bearish engulfing candlestick reversal pattern. More conservative traders may want to immediately raise their stop loss. I would wait for a new relative high (above $34.10) before initiating new positions.

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

NOTE: I am listing the 2014 January call but if you're an option trader you may want to use the April calls instead.

*small positions*

current Position: long FNP stock @ $34.05

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

Long 2014 Jan $35 call (FNP1418a35) entry $1.15*

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




Iconix Brand - ICON - close: 39.35 change: -0.18

Stop Loss: 38.45
Target(s): 44.00
Current Gain/Loss: - 0.4%

Entry on November 27 at $39.50
Listed on November 26, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 728 thousand
New Positions: see below

Comments:
12/10/13: ICON tested short-term support near $39.00 this afternoon. I am not suggesting new positions at this time.

Earlier Comments:
It is possible that the $40.00 level could be round-number resistance. Therefore more conservative traders may want to wait for ICON to trade over $40.00 before initiating positions. If we are triggered at $39.50 our multi-week target is $44.00.

current Position: long ICON stock @ $39.50

12/05/13 new stop loss @ $38.45



Isis Pharmaceuticals - ISIS - close: 37.76 change: -0.64

Stop Loss: 37.65
Target(s): 47.50
Current Gain/Loss: unopened

Entry on December -- at $--.--
Listed on December 05, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.1 million
New Positions: Yes, see below

Comments:
12/10/13: It was not a good day for ISIS. The stock underperformed the broader market with a -1.6% decline and a breakdown below the bottom of its $38-40 trading range. If shares do not recover tomorrow then we will likely remove ISIS as an active candidate.

Earlier Comments:
If shares can breakout past round-number resistance at $40.00 the stock might see another sprint higher. I am suggesting small bullish positions if ISIS can trade at $40.25. If triggered our target is $47.50.

Biotech Stock Warning
Regular readers know that I label most biotech stocks as higher-risk, more aggressive trades. We never know when a headline might surface about some approval process or clinical trial that could send the stock gapping lower (or higher). We want to keep our position size small to limit our risk. If options are available then investors may want to buy an option to limit your risk to the cost of the option.

Trigger @ 40.25

Suggested Position: buy ISIS stock @ (trigger)

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

buy the 2014 Jan $42 call (ISIS1418a42)



VeriSign, Inc. - VRSN - close: 57.34 change: +0.57

Stop Loss: 55.95
Target(s): 59.50
Current Gain/Loss: +3.8%

Entry on November 14 at $55.25
Listed on November 13, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.1 million
New Positions: see below

Comments:
12/10/13: VRSN displayed some relative strength tonight with a +1.0% gain and a new multi-year closing high. Keep in mind that we have less than six weeks before our 2014 January calls expire. Currently the calls closed with a bid at $2.82.

I am not suggesting new positions at this time.


FYI: The Point & Figure chart for VRSN is bullish with a long-term $76.00 target.

current Position: long VRSN stock @ $55.25

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

Long 2014 Jan $55 call (VRSN1418a55) entry $2.01

12/07/13 new stop loss @ 55.95
12/02/13 new stop loss @ 55.65
11/30/13 new stop loss @ 54.90
11/23/13 new stop loss @ 54.40



BEARISH Play Updates

Digital Realty Trust Inc. - DLR - close: 46.74 change: +1.11

Stop Loss: 47.25
Target(s): 40.25
Current Gain/Loss: - 4.1%

Entry on December 03 at $44.90
Listed on December 02, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.7 million
New Positions: see below

Comments:
12/10/13: DLR is not cooperating. Friday's intraday pullback looked like a new lower high. Yet today saw DLR outperform the market with a +2.4% surge higher. We are suggesting an immediate exit tomorrow morning.

Earlier Comments:
I do consider DLR a more aggressive trade because there are already a lot of shorts. The most recent data listed short interest at 25% of the 128 million share float. Readers may want to try and limit their risk and buy puts options instead of shorting DLR stock.

*small positions*

current Position: short DLR stock @ $44.90

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

Long 2014 Jan $45 PUT (DLR1418m45) entry $2.20

12/10/13 prepare to exit tomorrow morning



CGI Group, Inc. - GIB - close: $34.98 change: +1.23

Stop Loss: 35.25
Target(s): 28.50
Current Gain/Loss: unopened

Entry on December -- at $--.--
Listed on December 07, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 327 thousand
New Positions: Yes, see below

Comments:
12/10/13: Shares of GIB shot higher this morning. The rally initially stalled near $35.00 but traders bought the midmorning dip and GIB pushed back toward round-number resistance near $35.00 by the closing bell. Today's move (+3.6%) definitely outperformed the major indices. I don't see any news to account for today's display of relative strength. Currently we are still on the sidelines.

I do not see any changes from my weekend new play description on GIB.

Why We Like It:
GIB is in the technology sector. They are now infamous as the tech company that built the seriously flawed and "glitch" filled healthcare.gov website. The federal government healthcare website fiasco is a PR nightmare that could negatively impact GIB's ability to garner new business, especially new government contracts.

The stock is up about +50% for the year but shares have plunged in the last two weeks. Traders were quick to sell any rally attempt on Friday morning and GIB underperformed the market with a -1.7% decline in spite of the market's broad-based rally. GIB is now on the verge of breaking down below its longer-term trend of higher lows.

There is a decent amount of short interest in this name and thus GIB could be volatile. I am suggesting small positions to limit risk. We will use a trigger at $32.80 to launch bearish positions. GIB does have options but the spreads are too wide to trade them. If triggered at $32.80 we'll start with a stop loss at $35.25. Our target is $28.50.

Trigger @ $32.80 *small positions*

Suggested Position: short GIB stock @ (trigger)