Option Investor
Newsletter

Daily Newsletter, Tuesday, 12/17/2013

Table of Contents

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

Market Wrap

Tick Tock, Tick Tock

by Jim Brown

Click here to email Jim Brown

The markets traded slightly lower as everyone waited patiently on the sidelines ahead of the Fed decision on Wednesday.

Market Statistics

If you are looking for a lot of market news you would be out of luck today. The indexes dipped slightly lower at the open as traders took profits from Monday's short squeeze. After the initial dip it was positively boring as volume died and trading slowed to a near halt. It is all about the Fed and nothing else seems to have enough flash to attract the attention of traders.

The economics were not enough to move the market but they may have been strong enough to keep the indexes from slipping lower in late morning. The biggest news came from the NAHB Housing Market Index. The headline number jumped four full points from 54 to 58 and the highest level since November 2005. All three subcomponents posted gains.

Single family sales rocketed from 58 to 64 and a multiyear high. Buyer traffic rose from 41 to 44 and a three-month high. The six month outlook rose from 60 to 62. This data suggests the decline surrounding the government shutdown has passed and the sudden recoil from the slight bump in interest rates has passed. There was an initial pullback as interest rates rose but the impact was muted. Buyers anxious to find a new home were pulled out of the slump by rising prices and that slow period is now behind us.

When the Fed eventually tapers QE the rates will rise again but the spring shopping season should overcome buyer reluctance to commit to the new rates. In reality a half point rise in rates from the current levels is still a very low interest rate compared to historical norms.


The Consumer Price Index (CPI) showed prices were flat in November after declining -0.1% in October. The core CPI excluding food and energy rose +0.2%. The trailing 12 month CPI is now +1.2%. Last week the Producer Price Index (PPI) declined for the third consecutive month. The -0.1% headline number was slightly improved from the -0.2% in October but still a decline. The trailing 12 month inflation rate for finished goods is +0.7% and very anemic. That is -1.5 percentage points below the 2013 peak in June. This is a warning signal for the Fed that there is low demand and high capacity and prices are suffering as a result.

These numbers will not be acceptable to the Fed. There is no inflation relatively speaking. The Fed's desired inflation is 2% and the upper threshold is +2.5% and we are nowhere near it. This is another reason why the Fed should be in no hurry to taper QE. The Fed's preferred measure of inflation the PCE fell to 0.74% year-on-year in October, down from 0.95% in September.

In the October FOMC statement the Fed said, "The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term."

I believe the Fed remains data dependent regardless of how badly they want to end QE. The data does not support a view that the economy is on a sustainable path as long as inflation is declining. Real final sales, up +1.9% in Q3, remain relatively weak. Q4 GDP is expected to be around 1% growth and the slowest growth since Q4-2012. The debt ceiling still has to be resolved in February and Washington has been suspiciously quiet on the subject during the budget negotiations.

More than anything the Fed does not want to lose additional credibility by tapering too soon and having to go back and add new QE purchases if the economy weakens. Janet Yellen said she was in no hurry to taper QE. While 25% of analysts believe there could be a taper announcement on Wednesday the vast majority believes it will be in March or even later. After buying $3 trillion in treasuries continuing the program for a couple more months won't make any difference to the final outcome. Tapering too early could cause problems so the Fed needs to err on the side of caution.

We will know at 2:05 on Wednesday whether this theory is correct. This is Bernanke's last press conference and he is expected to be neutral and direct everyone to Yellen for the hard questions. However, there is a risk that Bernanke puts on his hawkish personality so he can refer back in the future and claim he was for an earlier tapering. That will be his fallback position if the eventual unwind goes badly and everyone begins to blame him for the monstrous mess the Fed is dealing with. "I wanted to taper in September but the board overruled me."

Lastly, Citigroup's Robert DiClemente, said over the last 40 years the Fed has not tightened monetary policy in December. This is due in part to liquidity concerns. They prefer initiating policy changes in Q1 or Q2.

The only other economic event of note on Wednesday will be the New Residential Construction for November. After the strong NAHB Index today I would expect the starts and permits to be stronger. Consensus estimates are for 950,000 starts. There is no previous number for Oct or Sept because of the government shutdown. Going back to August there were 883,000 starts.

The Philly Fed Manufacturing Survey on Thursday is the most important report for the rest of the week. Expectations are for a decline from 6.5 to 3.5. That should also factor into the Fed's decision on Wednesday since they will have the number in advance.


There was very little stock news on Tuesday and that will continue to dwindle as we near the holidays. Helping to support the Dow was Boeing with a +1.16 gain. The company announced a new $10 billion stock buyback to start in January and they raised their dividend by 50% to 73 cents. Boeing had suspended share buybacks when it was dealing with the 787 Dreamliner problems. It has $800 million left on the prior authorization.

Boeing is expected to deliver between 635-645 planes in 2013. They booked $27 billion in new orders in Q3 to raise their backlog to $415.1 billion. In just the last couple weeks they won $6.5 billion in orders from Air Canada and a "sizeable" order from the Pentagon. Today the Dept of Defense announced 16 new contracts worth $712 million and Boeing won two worth $82 million and $70 million. Boeing's costs continue to fall and they are currently looking for a place to build the 777X passenger plane. The company has received proposals from 22 states covering 54 locations. Boeing is moving the construction site because the machinists union in Washington State refused to accept two contract proposals from Boeing to reduce costs. The plane is expected to carry 400 passengers and be more fuel efficient than the current 777. The first plane is expected to be completed before 2020.


Herbalife (HLF) continued to rally after the giant gain on Monday. The spike was caused by the completion of the re-audit by PriceWaterhouseCoopers (PWC) of 2010, 2011, 2012 and part of 2013. The audit was required because a partner in KPMG was found guilty of insider trading and the company had to withdraw from its contract with Herbalife. The re-audit found no material errors and Herbalife said it was thankful the process was over and was planning on getting back to business as usual.

The motive power for the stock was the large $1 billion short position by Bill Ackman. He had sent the auditor a 52 page document complaining about Herbalife accounting and outlining the things to look for. Apparently PWC did not find anything. After saying for a year, wait for the audit, it will be ugly, Ackman immediately downplayed the findings and again promised that Herbalife will go to zero once it is proven to be a pyramid scheme.

Carl Icahn was also out in the news almost immediately praising Herbalife and putting Ackman theory down. Icahn continued to suggest Herbalife would be better off as a private company, which would require them to buy back their stock in an LBO and further crush Ackman. Icahn also floated the stock buyback balloon again by suggesting a Dutch Auction, which would require all shareholders to claw back their stock from the short sellers and send prices significantly higher. This battle of the titans is not yet over and with the re-audit behind them Herbalife is likely to move higher. One analyst raised his price target from $96 to $113 saying the news was all good and there was smooth road ahead.


After the close VeriFone Systems (PAY) reported adjusted earnings of 27 cents and beating estimates by a penny. Revenue fell -11% to $431.2 million but beat estimates of $421 million. While that sounds good on the surface the company projected earnings for Q4 of 26 cents and well below analyst estimates for 32 cents. They cut the full year projections to $1.38 and well below the $1.59 estimates.


Jabil Circuit (JBL) shares declined -$3 in afterhours after they reported adjusted earnings of 51 cents compared to analyst estimates of 54 cents. Again it was the guidance that crushed the stock. Jabil said it expected to earn between 5-15 cents on revenue of $3.6 billion in the current quarter and analysts were expecting 52 cents and revenue of $4.29 billion. Jabil said it was going to sell its consumer electronics repair business to iQor Holdings for $725 million. The repair business generated revenue of $1.1 billion in 2013. The payment will be $675 million in cash and $50 million in preferred stock. Shares of JBL declined to $16.98 in afterhours.


On a slow news day Tesla (TSLA) shares gained +4.50 after unveiling a Chinese website to take orders for cars in China. A month after opening its first showroom in China the company launched the www.Tousule.cn website to take orders for the Model S. Customers can reserve a model S for delivery in the first quarter of 2014 for a reservation fee of 250,000 RMB. That is about $41,000. The Model S will cost between $146,000 and $200,000 because of the steep taxes China levies on imports. That compares to $71,000-$120,000 in the US. In Europe that range is $98,000-$162,000. Elon Musk said he expected demand of about 10,000 units per year from Europe and 5,000 from Asia. Chinese consumers can also reserve a Model X with deliveries of the SUV expected in the U.S. in 2014. Tesla expects to deliver 21,500 vehicles in 2013 and 40,000 in 2014.

The company also said it was entering the broader consumer market in 2015 with the Model E. They plan to unveil the car at the 2015 Detroit auto show. The Model E is a "car for the masses" according to the Tesla Chief Designer Franz von Holzhausen. The auto industry watchers expect prices for the Model E to be in the $30,000 to $40,000 range. The company also plans to unveil a pickup truck in the next several years and a small "city" car like the Smart car "would certainly make sense" for the Tesla product line.

For a slow news day that was information overload and the shares rallied sharply on all the optimistic news.


BP Plc (BP) said it was in a deal to pipe natural gas from Azerbaijan's Shah Deniz field to Italy. The move will offer Europe an alternative to Russia as the gas supplier. Pipelines will cross Turkey into Greece, Albania and Italy. Production from the field will increase by 16 billion cubic meters a year. The field is thought to contain 1.2 trillion cubic meters of gas. That equates to about 1.5% of Europe's consumption. Russia supplies about 25% of the gas to the region. In recent years Russia and the Ukraine have threatened to halt gas flowing through pipelines unless the countries paid sharply higher prices. BP partners include Statoil (STO), Total Sa (TOT) and Lukoil (LUKOY).


After the bell today AMC Entertainment Holdings (AMC) priced its IPO at $18 per share for 18.42 million shares. The company saw three aborted IPOs since 2004 and was recently sold for $2.6 billion in 2012 to the Chinese firm Dalian Wanda Group. They merged with Lowes Cineplex several years ago. They have 343 theaters with a total of 4,950 screens and they will raise $1.7 billion in the IPO. They currently have $2.07 billion in debt. Wanda's Chairman Wang Jianlin, with a net worth of $12 billion, will own 80% of the company after the IPO. There is some concern that demand will be weak and shares could trade down on Wednesday.

There is little to be determined by the charts today. The market movement was minimal and major support levels were not broken. The S&P lost -5 points to close at 1,780 and comfortably above the 1,775 support level that held last week.

The market technicals will not matter much after the Fed decision at 2:PM on Wednesday. The odds are good we will pick a direction on Thursday and that will last until Christmas. This is a quadruple witching and that means volume will be even heavier regardless of what the Fed decides. Just imagine a million compressed springs and they will all be released at 2:PM tomorrow.

If the S&P breaks support at 1,775 we could drop hard to 1,760 or even 1,750. If the Fed does not taper and the market moves sharply higher the levels to break will be 1,790 and then 1,805-1,810.


Dow resistance at 15,900 has held for the last two days and that will be a key level to watch tomorrow followed by 16,000 and 16,100. Support is 15,700 followed by 15,600. The Dow has a pattern of lower highs and lower lows and another lower low could be lights out for the rest of 2013. A continued rebound over 15,900 and 16,000 could setup a yearend rally to close at new highs. That would be a December 31st sell signal for me.


On the Nasdaq the 4,000 level continues to hold and is the key level to watch for this index. The recent highs at 4,080 would be the target before Christmas if the market reacts positively to the Fed news. This has little to do with tech earnings or momentum stock and everything to do with Fed reaction.


The Russell closed right at session highs and lost less than one point for the day. It appears the small cap investors are loaded up for a breakout on positive Fed news. The 1,120 level is current resistance with the index closing at 1,118.91. Next level resistance is 1,130 followed by the recent highs at 1,140 and change.

I would buy the 112 January calls on the IWM on any move over 1,120 after the FOMC meeting. If we go direction to the upside the Russell could easily hit 1,140 before next Wednesday.


About the only thing guaranteed for Wednesday is that volatility will be huge. It should also be noted that the direction of the move immediately after the announcement is normally a head fake with a directional reversal later in the day. Given the importance of Wednesday's taper announcement that may not be the case this week.

Should a bullish move come after the Fed decision I believe it will last for several days. However, if a bearish move appears I would look for a support level to appear for a last minute holiday rebound. Rarely are the markets bearish over the holidays.

We have had a very nice year in the markets. Most of the indexes are near new highs and the outlook for the future is improving. If we can just keep the Fed from rocking the boat we could have a good 2014 as well. Analyst estimates are ranging from 2050 to 2200 for the S&P by year end 2014. Don't go through 2014 alone. Take advantage of the 15th annual End of Year Renewal Special today. Don't wait until the last minute.

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Enter passively, exit aggressively!

Jim Brown

Send Jim an email


New Plays

Buying Bad News

by James Brown

Click here to email James Brown


NEW BULLISH Plays

21Vianet Group, Inc. - VNET - close: 20.48 change: +0.78

Stop Loss: 19.45
Target(s): 24.90
Current Gain/Loss: unopened

Entry on December -- at $--.--
Listed on December 17, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 614 thousand
New Positions: Yes, see below

Company Description

Why We Like It:
VNET is in the technology sector. The company provides an Internet data center in China. The stock looks interesting as a bullish candidates because investors are buying it in spite of bad news.

The gap down in late November was a reaction to VNET's earnings. Management lowered their guidance and shares plunged. Yet traders quickly bought the dip. Now here it is three weeks later and VNET is on the verge of hitting new 52-week highs. If investors are buying bad news then the past of least resistance is definitely up.

The stock has short-term resistance near $21.00 (actually about 21.10). Tonight we are suggesting a trigger to open small bullish positions at $21.20. We do want to keep our position size small for a reason. First, VNET has obviously been very volatile over the last couple of months. That could make it tough to trade. Second, the post-IPO high from back in 2011 is $22.33 and that could be significant overhead resistance.

NOTE: I am not listing the options on VNET because the spreads are a bit too wide to trade. However, using the options could limit your risk.

Trigger @ 21.20 *small positions*

Suggested Position: buy VNET stock @ (trigger)

Annotated chart:




In Play Updates and Reviews

Waiting For The Fed

by James Brown

Click here to email James Brown

Editor's Note:
The stock market is once again waiting on the Fed and if the FOMC announces a taper tomorrow afternoon.

GRPN hit our entry trigger. We have removed GIB.


Current Portfolio:


BULLISH Play Updates

Autodesk, Inc. - ADSK - close: 47.50 change: +0.31

Stop Loss: 44.90
Target(s): 49.85
Current Gain/Loss: + 2.0%

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:
12/17/13: ADSK was back to showing relative strength again with a +0.66% gain on Tuesday. More conservative traders may want to start raising their stop loss again. I am not suggesting new positions at this time.

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

12/14/13 adjust exit target to $49.85



Comerica Inc. - CMA - close: 45.49 change: -0.07

Stop Loss: 44.40
Target(s): 49.90
Current Gain/Loss: - 0.6%

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:
12/17/13: CMA is still churning sideways albeit with a slightly bullish trend of higher lows as traders buy the dips near its rising 30-dma. 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: 32.97 change: -0.14

Stop Loss: 31.95
Target(s): 38.50
Current Gain/Loss: - 3.2%

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:
12/17/13: FNP retested short-term technical support at its rising 20-dma this morning. The bounce back from its morning lows is encouraging but I am not suggesting new positions.

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

*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.



Groupon, Inc. - GRPN - close: 10.67 change: +0.31

Stop Loss: 9.65
Target(s): 12.50
Current Gain/Loss: - 0.3%

Entry on December 17 at $10.70
Listed on December 12, 2013
Time Frame: to 8 weeks
Average Daily Volume = 18.4 million
New Positions: see below

Comments:
12/17/13: GRPN displayed relative strength today with a +2.99% surge to new four-week highs. Our trigger to open bullish positions was hit at $10.70.

Earlier Comments:
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.

Our target is $12.50. A rally past $11.00 will create a new buy signal on GRPN's point & figure chart.

current Position: Long GRPN stock @ $10.70

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

Long 2014 FEB $12 call (GRPN1422b12) entry $0.67

12/17/13 triggered at $10.70




Johnson Controls Inc. - JCI - close: 51.32 change: +0.37

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:
12/17/13: JCI continued to bounce with a +0.7% gain on Tuesday. Shares are nearing resistance at the top of its trading range in the $51.70-51.90 area. We are still waiting on a bullish breakout higher. 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.

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)



Micron Technology - MU - close: 22.92 change: +0.15

Stop Loss: 21.90
Target(s): TBD
Current Gain/Loss: - 1.1%

Entry on December 16 at $23.17
Listed on December 14, 2013
Time Frame: exit PRIOR to earnings on Jan. 7th
Average Daily Volume = 44 million
New Positions: see below

Comments:
12/17/13: If you were waiting to buy the dip near MU's rising 10-dma then you got your wish. Traders rushed in to buy MU at this rising moving average and the stock outperformed with a +0.65% gain by the closing bell.

Earlier Comments:
MU is certainly overbought with a seven-week win streak but that doesn't mean it can't grow more overbought. However, investors may want to limit their position size to reduce risk. We will plan on exiting prior to MU's earnings report on January 7th, 2014.

*Small positions *

current Position: long MU stock @ $23.17

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

Long Jan $23 call (MU1418A23) entry $1.57

12/16/13 trade opened on Monday with MU at $23.17



WageWorks, Inc. - WAGE - close: 59.39 change: -0.27

Stop Loss: 57.75
Target(s): 67.50
Current Gain/Loss: unopened

Entry on December -- at $--.--
Listed on December 16, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 347 thousand
New Positions: Yes, see below

Comments:
12/17/13: Today is the second day in a row that WAGE's attempt to rally past $60.0 failed below the $60.50 mark. I don't see any changes from last night's new play description.

Earlier Comments:
I am suggesting a trigger to launch bullish positions at $60.55. If triggered our multi-week target is $67.50.

Trigger @ 60.55

Suggested Position: buy WAGE stock @ (trigger)



BEARISH Play Updates

AECOM Technology - ACM - close: 27.84 change: -0.44

Stop Loss: 28.60
Target(s): 24.25
Current Gain/Loss: - 0.6%

Entry on December 16 at $27.68
Listed on December 14, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 525 thousand
New Positions: see below

Comments:
12/17/13: Good news! There was no follow through on yesterday's bounce in ACM. The stock appears to be failing at short-term resistance at its descending 10-dma. The drop back below $28.00 looks like a new bearish entry point.

Earlier Comments:
Technically ACM has a bleak outlook. The stock has created a huge bearish head-and-shoulders pattern over the last year. The recent breakdown below support at $28.00 also breaks the neckline to this H&S pattern. The pattern is forecasting a drop toward $21.00. The Point & Figure chart is also bearish and forecasting a drop toward $23.00. Our target is $24.25 since the $24 level could be support.

*Small positions *

current Position: short ACM stock @ $27.68

12/16/13 trade opened on gap higher at $27.68



Cisco Systems - CSCO - close: 20.92 change: +0.24

Stop Loss: 21.55
Target(s): 17.00
Current Gain/Loss: - 0.9%

Entry on December 17 at $20.74
Listed on December 14, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 50 million
New Positions: see below

Comments:
12/17/13: Our CSCO trade is now open. Today's performance is either a warning signal or a gift of an entry point. Last night we decided to change our entry point strategy and suggested bearish positions at the opening bell today. CSCO gapped open higher at $20.74. Shares rallied up to their 20-dma (near today's high of $21.13) before paring its gains. The +1.1% gain today certainly qualifies as relative strength on a day most of the market was down. That's not good if you're bearish. Plus, on CNBC's halftime show they pointed out that someone was buying a lot of upside calls in CSCO, which might be considered bullish. On the other hand CSCO share price did close below what we discussed should be resistance at the $21.00 level. This bounce to resistance near $21.00 could be a great entry point. However, more conservative investors may want to adjust their stop loss so it's closer to today's high.

current Position: short CSCO stock @ $20.74

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

Long Feb $20 PUT (CSCO1422n20) entry $0.63

12/17/13 trade opens. CSCO @ $20.74
12/16/13 New entry point strategy: launch bearish positions at the opening bell on Tuesday, Dec. 17th. Prior entry point was a trigger at $19.85



CLOSED BEARISH PLAYS

CGI Group, Inc. - GIB - close: $34.72 change: +1.00

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: see below

Comments:
12/17/13: We are removing GIB as a bearish candidate. The stock is not cooperating. Shares outperformed the market with a +2.9% gain today. It seems unlikely that GIB will hit our suggested entry point at $32.80 any time soon.

Trade did not open.

12/17/13 removed from the newsletter. suggested trigger was $32.80

chart: