Option Investor
Newsletter

Daily Newsletter, Thursday, 12/12/2013

Table of Contents

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

Market Wrap

Taper Fear Grips Market

by Thomas Hughes

Click here to email Thomas Hughes
Mixed economic data continues to spin taper speculations.

Introduction

Thursday started with a drop in global equities. The drop overseas was driven, once again, by taper speculation and the Wednesday fall in U.S. equities. A recent round of Fed speak, on top of decent economic data, has given some traders the idea that the taper could begin next week even though none of the thresh holds previously given have been reached. Today's data added to the confusion and the idea of tapering sooner rather than later. Retail sales were surprisingly strong while initial jobless claims were surprisingly weak. The news was shrugged off by the markets at first but selling soon followed.


The morning hours were dominated by relatively calm trading in the equities markets. The S&P moved down to a morning low about -5 points from yesterday's close after the initial foray into the green. Some other indices such as the Russell and the Nasdaq held positive ground during the day however the Dow spent the morning down about -80. Other markets impacted by the mixed data were gold and currencies. Gold prices took another tumble today, dropping more than $25 in the first half of today's session. The dollar got a lift from the data strengthening it against the other major world currencies.

At this time the moves in equity, gold and currency markets are being driven by speculation. Speculation over what will happen next week when the FOMC meets again. At the same time we are also approaching earnings season again. Next week my benchmarks for the start of the season, Redhat and Oracle, will be reporting. A few weeks after that Alcoa reports and kicks off the official start to the next season. Expectations for this quarter are mixed; economic data has been good but guidance has been poor. The surprise strength displayed in the 3rd quarter is also playing havoc with expectations. It has led some to lower expectation for the 4th quarter, claiming expected growth has already occurred, Today's data suggests that it may be stronger than expected.

The Data

There was a small deluge of data today, all surprising in one way or another. Export prices was first up. Prices for goods shipped out of the U.S. rose by 0.1%, ahead of expectations and much better than last months -0.6% drop. Export prices are a factor in determining GDP, this number helps support a good GDP number. Business inventories, another factor of GDP, also rose more than expected. Economists had been expecting a modest 0.3% rise after last month's more robust 0.6%. The actual 0.7% is more than double expectations and another support for a potentially good fourth quarter for GDP. Retail sales, yet another factor of GDP and positive surprise, gained 0.7% as well. Economists had been expecting a gain of 0.6%, the actual figure is the biggest gain in 5 months. Within the retail data every segment showed growth with some performing double the expectations. Automobiles and the consumer were leading segments.

Initial claims were the one negative surprise, which was surprising. Claims jumped by 68,000 to reach 368,000 for the first time in months (March 2013), not counting the California induced spike of October. Claims have been trending down of late and there have been no indication of impending lay offs. Last weeks data was revised up by 2,000 for a net gain of 70,000 from last weeks reported numbers. The moving average also gained but remains at low levels near 323,000 for now. It is unclear what caused this jump but uncertainty over next year could be part of it. The FOMC, tapering, Obamacare, the Debt Ceiling and more are competing with improving economic data for dominance over 2014 outlook.


Seasonal adjusting may be playing a part in the jump in initial claims numbers. Looking at the break down by state the numbers just don't add up to me. There were 14 states reporting a drop in claims of more than 1,000 with a total of -58,000 from last week. Only 3 states reported increases in claims more than 1,000 for a total of 10,500. This leaves only 37 states and a handful of territories to account for the difference between those numbers plus the additional 68K claims reported. According to my math there should have been a net drop in initial claims.

Continuing claims also rose this week, by 40,000, to reach 2.791 million. This is still below the 3 million mark and near the long term low. The long term low, set last week, was revised up to 2.752 million. The long term trend in claims is still down but the spike in initial claims is small cause for concern until it passes or is at least explained in some satisfying way.


Total claims is the only component of the weekly jobs report to have dropped. This figure fell by nearly -300,000 to hit 3.8 million. This brings the total number of people on unemployment back below the 4 million mark and a new long term low. The trend in unemployment does indeed appear to be continuing lower, we just need to keep an eye on this new spike in initial claims and how changing policy will affect economic and job growth.


The Gold Index

Gold prices fell sharply again today. The metal fell more than $30 by the end of today's session to retest recent lows in the $1220 range. Mixed data and taper speculation are behind the wild swings in prices this week. The lack of certainty of what's going to happen when the FOMC meets next week make this a poor time to long the metal at the same time being bearish may be questionable as well. Until the Fed meets next week gold prices could remain volatile.

The Gold Index is still suffering from the prolonged period of low gold prices. The index made a new 6 year low today in continuation of the long term bear market. Indicators on the short term daily charts are bearish but suggest that the current down leg could be exhausted. On the longer term weekly charts indicators are in bullish territory, about to cross over into bearishness. If or when long turn momentum turns bearish this index could retreat to the 2008 lows. Gold prices and ultimately the FOMC hold the future of this index. If gold prices keep falling then I expect to see this index keep falling as well.


The Dollar Index

The stronger than expected economic data, especially the retail sales data, helped to strengthen the dollar today. The Dollar Index moved up by nearly a half percent from the 80 level in a possible confirmation of support. The stochastic indicator is oversold at the current level and in position to rally up to the 81 and 82 levels. The increasing chances of taper should help to keep the dollar firm at least until the FOMC meeting.


The USD/JPY received the biggest boost from the strengthening dollar. Not only is the FOMC meeting next week with the chance of taper on the table, the BOJ is also meeting with a chance of increased QE on its table. This pair has been trading in a range since reaching its peak this past spring. The combination of a strengthening dollar and weakening yen pushed this pair back up to retest recent highs near long term resistance and the upper end of that range. There is a chance that it could break above the range next week once the two central banks meet. Until then the index is indicated higher but is also just below a long term resistance area. A break above the 103.30-103.75 level will be bullish long term while a failure to break could bring the pair back down to the bottom of the range near 97.50.


The euro also lost ground to the dollar today. The EUR/USD pair fell back from resistance at the 1.3825 level today in a possible confirmation of long term resistance. The pair first tested and fell from this level about 6 weeks ago, the last time the FOMC was meeting and taper speculation was running wild. Indicators are bullish at this time but there is a strong chance that the 1.3825 level could mark the top of the long term range. A break above the 1.3825 level would be bullish long term. Current support exist around the 1.3625 level, a previous resistance line. Economic data and taper speculation affect this pair as well until the FOMC meeting next week.


Story Stocks

Lululemon released earnings today, beating estimates. The company beat on the top and bottom lines but lowered 4th quarter and full year guidance. Revenues for the reported quarter beat by nearly $4 million dollars but this was not enough to off set headwinds experienced by the retailer. Fourth quarter EPS is now projected in a range 6 cents below the previous estimates. Investors did not like this news and drove stock prices down by over 10% to reach a near a two year low.


Adobe systems reported after the bell today. The consensus estimate was for EPS in the range of $0.21. The actual results positively shocked the market and sent the stock surging higher in the after hours trading session. Revenue was a little light but the adjusted EPS of $0.32 beat estimates by half. During the open session shares of Adobe fell by more than 1% on growing bearish momentum to reach a one month low. In the after hours shares climbed nearly 6% from that level. This could be a good sign for the bulls to expect similar results from the other big software providers next week.


Adobe competitors RedHat and Oracle both report next week. These two stocks are my personal bench mark as the end of the previous and beginning of the new earnings season. Oracle reports on Wednesday and Redhat on Thursday. Oracle is expected to increase EPS by nearly 15% from $0.56 to $0.64 per share by some analysts but the outlook isn't so rosy. A downgrade today from Morgan Stanley calls the company's ability to grow profits into question. One reason is the way businesses are now running their IT networks. The switch to cloud computing and a the widespread availability of cheaper solutions being the main causes. Oracle itself released poor guidance last quarter citing similar reasons. The down grade caused the stock to drop close to 3% today and brought the share price back into the same range it has been in the past two earnings sessions between $33 and $34. These two levels should/could keep the stock contained until actual earnings are released next week.


RedHat is expected to report earnings in line with the previous quarter's $0.24 per share. The previous quarter was disappointing for investors and also came with some warning for a potentially weak 4th quarter. The stock had been trading down following the previous earnings release but has recently recovered some of the losses. The stock is now trading just below the window opened upon the previous release with uncertain technical indicators. Share prices could remain within the $45-$47.50 range until next Thursday when this quarter's report is released.


The Indexes

Today was another day of down markets. Taper fear, as misplaced as I think it is at this time, brought the S&P down below the short term moving average and to a one month low. There was some evidence of potential support during the day but it faded by the close. A mid afternoon rally brought the index off its lows and briefly into positive territory before it fell back in the red. The selling this week is a mild concern but I think it will turn out to be another buy the dip scenario similar to the past three times that tapering has caused the market to correct. Indicators on the shorter term daily charts are bearish and indicate that some more weakness could come but the index is also still above strong support levels, levels that could/should hold at least until the FOMC meeting. A no-taper meeting, based on the past performance of the market, should set the market back on the long term up trend. I'm still undecided what a taper-meeting will do for the market, I'm bullish but there are other things to consider as well. Current support targets for the near to short term exist around the 1750 and 1725 levels. 1750 is coincident with the top of the recently broken rising wedge, the 1725 level with the long term trend line.


The long term trend in the SPX is still up but indicators suggest a peak has been reached. Whether or not this peak is the last one the bull market or another one on the way to new highs is yet to be determined. At this time there is no indication of impending long term reversal in the charts that I see. The FOMC meeting could spark a break of the trend but we will have to wait for then to find out. Until then I see the market correcting to and testing support, perhaps as low as the long term trend line around the 1725 level. A break below this line, with a confirmation, would be bearish.


The Dow suffered alongside the SPX today. The Dow shed just over 0.6% coming to rest just above the support created by the top of a previous trading range. This is the first test of the top of the range since the index broke out last month. The break out was foreshadowed by a similar break out on the Transportation Average charts which rallied more than 12% from the top of its comparable range. At this time the index is sitting on closest support but if it were to break below there is a short term support level just below the current level. Taper speculation will likely have a big impact on this index over the next four trading days, it will be important to watch support levels here and in the other indexes.


The Tech heavy Nasdaq Composite managed to hold above its short term moving average today but still ended in the red. This index has been leading the general markets since the spring and could continue to do so provided the FOMC does not reverse the markets next week. Should the current levels not hold the next potential support zone is between the 3750-3850 level. Even a correction to this low support would not break the long term trend, which remains up.


Taper fear has gripped the markets but what does it really mean? It means that the markets are scared the economy is better than expected. A better than expected economy means it is growing faster than expected and possibly on its own footing. A growing economy is good for the markets even if less QE could be bad. Even if tapering does occur next week and by no means am I a proponent of that idea it may only cause the market to correct back to the long term trend.

My opinion is that the Taper is not likely to come next week. Even with the positive data and recent Fed Speak I just don't see it happening. For it to happen the FOMC would have to go back on over two years of official statements to the effect that transparency was a high priority and that economic thresh holds must be met. However, there is another specter shadowing the markets, one that I had not considered until my uncle brought it up over Thanksgiving dinner (the uproar this caused amongst my incredibly diverse NC family is the subject for another day). Obamacare, the Affordable Health Care Act, is going to impact the consumer.

No matter what your opinion of the Act I think most would agree that the money spent by the average family on insurance is going to come right out of their daily budget and cause a sharp drop in consumer spending. With this in mind I am now closely watching the chart for signs of topping. Today's retail sales figures do not reflect this idea but that could change over the next couple of months. The FOMC could taper now and spark a correction, or it could not taper now and spark more rally but in the end I think the ACA is going to be a bigger impact on long term direction.

Until then, remember the trend!

Thomas Hughes


New Plays

Ignoring Market Weakness

by James Brown

Click here to email James Brown


NEW BULLISH Plays

Groupon, Inc. - GRPN - close: 10.40 change: +0.26

Stop Loss: 9.65
Target(s): 12.50
Current Gain/Loss: unopened

Entry on December -- at $--.--
Listed on December 12, 2013
Time Frame: to 8 weeks
Average Daily Volume = 18.4 million
New Positions: Yes, see below

Company Description

Why We Like It:
GRPN is listed as being in the technology sector. The company provides daily deal with significant discounts in multiple urban areas, delivered to your email or on their website. The stock price peaked in mid September at $12.64. Shares closed at $8.75 on December 2nd. That's -30% correction. That December low also marked a test of technical support at its rising 200-dma. The stock has recently picked up speed with a bounce from recent support near the $9.00 area thanks in part to some bullish analyst comments and a new $15 price target.

You'll also notice that GRPN is ignoring the market's three-day decline. I am suggesting a trigger to open small bullish positions at $10.70. If triggered our target is $12.50.

FYI: A rally past $11.00 will create a new buy signal on GRPN's point & figure chart.

Trigger @ $10.70

Suggested Position: buy GRPN stock @ (trigger)

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

Buy the 2014 FEB $12 call (GRPN1422b12) current ask $0.62

Annotated chart:




In Play Updates and Reviews

Stocks Sink A Third Day

by James Brown

Click here to email James Brown

Editor's Note:
Markets around the world were showing weakness on Thursday. Declines in the U.S. followed weakness in Asia and Europe.

ADM has been removed. ICON and VRSN were stopped out. QIWI was triggered.


Current Portfolio:


BULLISH Play Updates

Autodesk, Inc. - ADSK - close: 45.51 change: -0.24

Stop Loss: 44.90
Target(s): 50.00
Current Gain/Loss: - 2.2%

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:
12/12/13: Now we have reason to worry. Today's decline technically confirms yesterday's bearish reversal candlestick. More conservative investors may want to exit now. There is still a good chance that ADSK will find support at the $45.00 mark.

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



Comerica Inc. - CMA - close: 45.51 change: +0.66

Stop Loss: 44.40
Target(s): 49.90
Current Gain/Loss: - 0.5%

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:
12/12/13: CMA ignored the market's decline and bounced from its simple 30-dma on Thursday. Shares outperformed the major indices with a +1.4% gain. More conservative traders might want to raise their stop toward yesterday's low near $44.80. I am not suggesting new positions at this time.

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: 32.34 change: +0.04

Stop Loss: 31.95
Target(s): 38.50
Current Gain/Loss: - 5.0%

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:
12/12/13: FNP bounced from short-term support near $32.20 but gains were quickly fading toward the closing bell. Tonight we are adjusting our stop to $31.95. More conservative traders might want to raise their stop loss closer to the $32.20 level. I am not suggesting 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*

12/12/13 we are adjusting the stop loss to $31.95
*option entry price is an estimate since the option did not trade at the time our play was opened.




Johnson Controls Inc. - JCI - close: 49.99 change: +0.05

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

Comments:
12/12/13: JCI was upgraded this morning, which helped shares gap higher. At the same time the stock began trading ex-dividend this morning. The quarterly dividend was 22 cents. JCI ended the session sitting on round-number support at $50.00. We will see how shares perform tomorrow and then re-evaluate. At the moment I don't see any changes from my prior comments.

Earlier Comments:
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)



Qiwi plc - QIWI - close: 49.66 change: +2.39

Stop Loss: 44.75
Target(s): 54.50
Current Gain/Loss: + 4.4%

Entry on December 12 at $47.55
Listed on December 11, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 384 thousand
New Positions: see below

Comments:
12/12/13: Yesterday's rally in QIWI picked up speed today. The stock surged +5.0% and is now challenging resistance near $50.00 and its all-time high from mid November.

Our trigger to open bullish positions was hit at $47.55 this morning. If you missed our entry point I would wait for a dip. QIWI might consolidate near resistance at $50 first.

Earlier Comments:
The plan was to use small positions to limit our risk. Our multi-week target is $54.50. However, QIWI does have to breakout past potential round-number, psychological resistance at the $50.00 level.

*small positions*

current Position: long QIWI stock @ $47.55

12/12/13 triggered @ 47.55



BEARISH Play Updates

CGI Group, Inc. - GIB - close: $33.72 change: -0.48

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:
12/12/13: The weakness in GIB continues with a -1.4% decline and a new four-week closing low. There is no change from my earlier comments.

Earlier Comments:

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)



CLOSED BULLISH PLAYS

Archer Daniels Midland - ADM - close: 40.59 change: -1.12

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: see below

Comments:
12/12/13: The stock market's three-day decline is starting to take its toll on shares of ADM. This stock underperformed today with a -2.6% drop. It's possible that shares might bounce tomorrow on news out after the closing bell that congress has passed a stop gap farm bill. Yet I'm not seeing any movement in ADM after hours.

Our plan was to open bullish positions at $42.65 but that's unlikely to happen any time soon. We are removing ADM with the trade unopened.

Trade did not open.

12/12/13 removed from the newsletter. suggested trigger was $42.65

chart:



Iconix Brand - ICON - close: 38.74 change: +0.01

Stop Loss: 38.45
Target(s): 44.00
Current Gain/Loss: - 2.7%

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:
12/12/13: ICON closed virtually unchanged on the day. Unfortunately its intraday weakness was enough to hit our stop loss at $38.45.

closed Position: long ICON stock @ $39.50 exit $38.45 (-2.7%)

12/12/13 stopped out
12/05/13 new stop loss @ $38.45

chart:



VeriSign, Inc. - VRSN - close: 56.44 change: +0.15

Stop Loss: 55.95
Target(s): 59.50
Current Gain/Loss: +1.3%

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:
12/12/13: VRSN ended the day in positive territory and outperformed the market with a +0.26% gain. Unfortunately a spike down at the opening bell was low enough to hit our stop loss at $55.95.

closed Position: long VRSN stock @ $55.25 exit $55.95 (+1.3%)

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

2014 Jan $55 call (VRSN1418a55) entry $2.01 exit $1.96 (- 2.4%)

12/12/13 stopped out
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

chart: