Option Investor
Newsletter

Daily Newsletter, Thursday, 1/16/2014

Table of Contents

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

Market Wrap

Earnings, Data and The Fed

by Thomas Hughes

Click here to email Thomas Hughes
Earnings and data fail to move the market.

Introduction

It was a big day for earnings and to a lesser extent for data. There were not a whole lot of earnings reports, about 28 by my count, but most were from the banking sector and of the rest there were two Dow components. Fully 20 of the corporations reporting today were financial institutions with 5 of those considered to be a “big bank”. On the economic front we got the weekly release of unemployment claims and a small handful of other reports that together tell a mixed story, nothing new about that. As a whole, today was a day of reports that reveal the economy and earnings are improving but that there are also still some areas of weakness. The major indices traded to the downside for the most of the day, which was not surprising after the huge gains made over the past two days.


Futures trading on the S&P 500 was a little weak in the early hours. The index was indicated to open down by about 5 points leading into the first releases of data. After 8:30AM and the employment claims figures the trade firmed a little but remained in the red. At the ope, the S&P was down about 2 points and hovered around that level for most of the day. The NASDAQ was one index of note that was able to trade into the green. The tech heavy index, along with others like the Russell 2000 actually set new highs. These indices have broken out of their respective trading ranges set during the holiday season. Looking at this chart of hourly SPX prices we can see that index bounce off the pre-Holiday support level set the Friday before Christmas and then was repelled by resistance at the highs set on the last day of 2013.


The Data

Initial claims for the week ending 1/11/2014 fell by 2,000 to 326,000. This follows a 2,000 claim downward revision to last week making a net drop of 4,000 from last weeks reported figures. The four week moving average also fell, by -13,500, to a new 5 week low. Initial claims are now back to the levels we saw last fall when jobs growth appeared to be accelerating. This should be a good thing but since the non-farm payrolls number was so weak last Friday I am a little suspicious of labor trends right now. Private sector sources point to a labor market gaining strength, ADP figures for private payrolls has been over 200,000 for three months, while the NFP fell to a 12 month low. Not to mention that the unemployment rate fell much more than expected in the face of extremely poor NFP growth, another factor to cause confusion. Something is going on here and I am not sure what it is. It could just be seasonal adjusting, or it could be something deeper.


Adding to my concern is the rise in continuing and total claims. If jobs are improving then these numbers should not be on the rise, unless of course people are reentering the job market at a rate faster than jobs are being created but the fall in the participation rate does not support that. Continuing claims gained nearly 175,000 from an upward revision of over a 50,000 to hit a 6 month high just over 3 million. With initial claims on the fall I would expect this number to drop as well. Of course, one week of data does not make a new trend, we will just have to keep a watch on this, along with the total claims, which also saw a marked increase this week. Total claims jumped by over 500,000 to hit a 6 month high. Keep in mind that the continuing claims data is two weeks old, Jan 4, and that the total claims data is from 12/28/2013 and could reflect post holiday lay-offs. On a different note, the rate of decline in total unemployment is way down from previous levels. Total unemployment was declining at a rate ranging between 22-25% for most of 2013 but has moderated to about 18% in the last month.



Consumer level inflation remains tame for now. The headline CPI remained unchanged for December on a non-adjusted basis but had a gain of 0.3% on a seasonal basis. Ex food and energy the the seasonally adjusted number came in at a very mild 0.1%. This is below expectations on an adjusted and non-adjusted basis.

The Philadelphia Fed Survey of manufacturing rose to +9.4, also much better than expected and a full 3 points higher than last months 6.4. The NAHB Homebuilder Survey was released simultaneously and reveals that homebuilder sentiment remains high but has moderated somewhat from the previous month. Confidence levels were reported as 56, down one point from last month and one point from the expected number. A reading above 50 is expansionary.

Inflation is down, homebuilder confidence is up, manufacturing is up and yet the jobs market is still in flux. As I said before it seems as if something is going on here but I just can't put my finger on it. It could just be adjustment or a seasonal shuffle of employees but I think it goes deeper. I will have to keep digging until I find out what it is. Regardless, if the longer term claims for unemployment keep increasing it could signal a shift in the labor trends we have been following for the past 12 months. It's three weeks until the next NFP data and there is an FOMC, a BOJ and an ECB meeting before then. The market reaction today tells me the unemployment numbers are not too alarming yet. There is still a lot of data to come out before the next Fed meeting that could influence their decisions.


The Gold Index

Gold prices held steady today around $1240-$1242. The price of the metal has been firming over the past week but hit resistance at $1250. The economic data, for the most part, is pointing to continued if subdued improvement. Economic improvement is taper-positive which should in turn help strengthen the dollar and add pressure to gold. However, the Fed still is still in the drivers seat, gold prices could hold steady until it meets again. The Gold Index has also drifted higher but is now presenting a possible bearish entry. The index has been trading above the short term moving average, in a down trend, and is now showing divergences in both MACD and stochastic that could lead to a retest of the recent lows around $82.50. If you look at the stochastic you can see that the longer term %D line has rolled over and is beginning to point down while at the same time the %K has made two divergent peaks confirming resistance. This constitutes a stochastic sell signal, when in a down trend. Current support targets are the 30 day EMA around $88.50 and then next at $82.50.


The Oil Index

Oil prices fell today on improving supply outlook. There are several hot spots around the world that are showing signs of stabilization as well as several other areas coming into production. This is on top of the shale oil/gas boom going on in the states. WTI and Brent both fell by about 10 cents in the afternoon trade, holding below recent resistance levels. The Oil Index, which had been making a possible double top on the short term daily charts, has fallen back below support. A long black candle took the index below the 30 day EMA with increasing, if weak, momentum. The index is indicated to move lower but strong support is just below the current level at the long term trend line in the 1425-1450 range. The long term trend is still up, this could present a buy-the-dip opportunity in for the sector. The big oil companies are not scheduled to report until the end of the month.


Earnings

Today was a bid day for earnings, at least in the financial sector. Out of 28 corporations reporting 20 were financials and 5 of those “big banks”. Most reported before the bell but American Express and Capital One both released after. The generalisation is that today's reports were much like the ones we saw from JPM, WFC and BAC...there is some signs of improvement intermingled with some small disappointments. Before the bell was BBT, Citigroup and Goldman Sachs. BBT and GS both beat expectations while Citigroup did not. After the bell American Express reported a miss, by one penny. Regardless of what the expectations were most of these companies improved revenues and earnings over the last year and the comparable quarter. Citigroup was the one with the real big miss, the expectation was for EPS of $0.94, they reported $0.85, nearly a dime below the estimate but still more than double Q4 2012. Citi blamed the miss on weak mortgage origination and fixed income business.


The Banking Index traded to the downside today with weak indicators. The index has been trending up over the past 4 months in the short term and has developed some divergence from the indicators. This could indicate a correction to the short term trend line at least. The long term trend is still bullish with rising momentum so I think there are still higher prices coming. However, in the near to short term there could be some weakness in the index. Closest support is just below the current prices around $70 and the the short term moving average which is currently coincident with the short term trend.


Intel also reported after the bell. The chip maker reported earnings that missed estimates by a penny. Despite the miss, profits rose marginally over the previous year on what they company called “modest” sales growth. However, in the report Intel guided first quarter and full year 2014 lower than previously estimated. The stock lost about a half percent in today's trading, confirming the shooting star formed yesterday. After the release the stock added to the days losses extending them to about -3.3%.


The Semi-conductor index could be in for a fall tomorrow. The Intel report is sure to drag on the index, as well as others. The index has been trending up strongly in the long and short term but is forming divergences in both MACD and Stoch. The index is well above the long term trend line and could correct to it over the next few weeks.


The Indices

The indices held up rather well in the face of such a whirlwind of earnings and economic data. As a group, I can say that they all traded right around the break even point, more or less. There is a lot to consider in terms of the economy and earnings growth. The data shows that the economy is at least strong enough that we can expect taper to continue this month. However, there is the unemployment claims figures that have raised some concern over the the state of the jobs market. At the same time, earnings are OK-ish, not great, not bad, but OK. The question is...how will earnings outlook change over the next few weeks as the season rolls on?

The S&P 500 and the Dow both failed to make it into positive territory today. Both indices have also failed to break out of their holiday ranges, yet. At the same time other indices have broken out the holiday range and have even made new highs. The S&P 500 indicators are beginning to show signs that there is really support for the index at these levels but have not yet turned bullish. The index is capped by the resistance set the last day of 2013. For now the index is trapped in the holiday range. The combination of mixed economic data and mixed earnings reports could keep the index within the range with a possible target date for break out coincident with the FOMC meeting January 28th. Until then I will be watching this range very closely.


The Dow is in much the same shape as the SPX. The Blue Chips are still within the holiday range with weak and bearish indicators. The long term trend is still up but the short term is indicated sideways at best. Again, the FOMC meeting at the end of the month is my target date for a potential break out from this range. Current support is at the 16,225 level with resistance at 16,500. Tomorrow could be hard day for the Dow as Intel and AXP are both components. Should support at 16,225 not hold not the next target is around 15,750.


The Transports are one index to have set new highs this year. However, it traded to the negative today. The index seems to have met resistance at the round number of 7,500. The indicators are bullish but weak and divergent at this time. A correction to the 30 day EMA around 7,260 or even to the long term trend line around 7,100 is possible.


The Nasdaq has been making new highs this year and made a new high today. The tech index gained about 4 points today to set another new high. At the same time indicators are turning bullish and could indicate higher index prices. However, Intel will weigh heavily on the index tomorrow so I am not too sure about that. Looking to the moving average, we can see that the index is making a bounce from the moving average. This move is a good sign that bulls are still interested but with the divergences in the indicators could also be the last hurrah of the current rally. Earnings outlook among the tech stocks is not good for next year and could continue to add bearish pressure to the index. First support is around the 4,100 level.


Earnings season could spark a correction. It's not bad so far per se, but it's not great either. However, there is still a lot of reports to go. For now, it looks like the financial sector is doing OK. Revenues are growing although some sectors of business are not as strong as they could be. Elsewhere, Alcoa sees 2014 as a chance for improvement to take hold while Intel and other techs think that 2014 will be flat. Two more weeks of this, with two more weeks of basically good data, and the equities markets could easily move sideways to downward in search of longer term support. And this would coincide with the FOMC meeting. Don't forget that the markets are closed on Monday for the Martin Luther King Weekend.

Until then, remember the trend!

Thomas Hughes


New Plays

Healthcare Breakout

by James Brown

Click here to email James Brown


NEW BULLISH Plays

Hanger, Inc. - HGR - close: 40.44 change: -0.01

Stop Loss: 39.45
Target(s): 44.50
Current Gain/Loss: unopened

Entry on January -- at $--.--
Listed on January 16, 2014
Time Frame: 4 to 5 weeks
Average Daily Volume = 159 thousand
New Positions: Yes, see below

Company Description

Why We Like It:
HGR is in the healthcare sector. The company provides orthotic and prosthetic services and equipment. The stock has quietly been trending higher from its September 2013 lows. Traders have continued to buy the dips near its rising 40-dma. That dip buying appears to have matured into a bullish breakout past round-number resistance at $40.00.

Today's high was $40.58. I am suggesting a trigger to open bullish positions at $40.70. Our target is $44.50. However, we will plan on exiting prior to HGR's earnings report (estimated in mid February).

Trigger @ 40.70

Suggested Position: buy HGR stock @ (trigger)

Annotated chart:




In Play Updates and Reviews

Best Buy Exceeds Our Target

by James Brown

Click here to email James Brown

Editor's Note:

Shares of Best Buy Inc. (BBY) exceeded our bearish exit target with a massive gap down this morning.

We also closed our CZR and YNDX trades this morning.
TAN hit our entry trigger.
I am suggesting an early exit for our AMTD trade tomorrow.


Current Portfolio:


BULLISH Play Updates

TD Ameritrade Holding Corp. - AMTD - close: 32.40 change: +0.59

Stop Loss: 31.70
Target(s): 33.85
Current Gain/Loss: + 5.7%

Entry on December 31 at $30.65
Listed on December 21, 2013
Time Frame: exit PRIOR to earnings on January 21st
Average Daily Volume = 1.9 million
New Positions: see below

Comments:
01/16/14: The rally in AMTD seems to be picking up speed with shares surging another +1.85% today. The stock is up three days in a row. We were planning to exit prior to AMTD's earnings report next Tuesday but I am suggesting we exit tomorrow. Plan to close our AMTD position at the closing bell tomorrow. More conservative traders may want to jump out Friday morning instead. I am raising our stop loss to $31.70.

current Position: long AMTD stock @ $30.65

01/16/14 new stop loss @ 31.70, prepare to exit tomorrow at the close
01/15/14 new stop loss @ 30.65
01/14/14 new stop loss @ 30.45
01/04/14 new stop loss @ 29.90
12/31/13 triggered at $30.65



Avis Budget Group, Inc. - CAR - close: 41.52 change: -0.19

Stop Loss: 39.85
Target(s): 45.00
Current Gain/Loss: + 1.6%

Entry on January 15 at $40.85
Listed on January 14, 2014
Time Frame: Exit PRIOR to earnings in mid February
Average Daily Volume = 1.3 million
New Positions: see below

Comments:
01/16/14: CAR garnered some bullish analyst comments this morning. The stock spiked higher in reaction and almost hit $42.50 before paring its gains. Unfortunately the pullback turned negative and CAR actually underperformed with a -0.45% decline today. Investors may want to wait for a new bounce from $41.00 before launching new positions.

current Position: Long CAR stock @ $40.85

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

Long Feb $40 call (CAR1422B40) entry $2.50*

01/15/14 new stop loss @ 39.85, triggered at $40.85
*option entry price is an estimate since the option did not trade at the time our play was opened.



Lannett Company, Inc. - LCI - close: 36.24 change: -0.65

Stop Loss: 33.95
Target(s): 39.50
Current Gain/Loss: +3.1%

Entry on January 10 at $35.15
Listed on January 09, 2014
Time Frame: exit PRIOR to earnings in early February
Average Daily Volume = 261 thousand
New Positions: see below

Comments:
01/16/14: Thursday proved to be a disappointing session for LCI. The stock added 65 cents yesterday and erased those gains today. Technically today's decline has also created a bearish engulfing candlestick reversal pattern. I would expect LCI to fall toward the $35.00 level soon. We can look for a new entry point there.

Earlier Comments:
Our target is $39.50. However, we will plan on exiting prior to LCI's earnings report in early February (no date confirmed yet).

current Position: Long LCI stock @ $35.15

01/14/14 new stop loss @ 33.95
01/13/14 new stop loss @ 33.65
01/10/14 triggered @ 35.15



MDC Partners Inc. - MDCA - close: 26.32 change: +0.10

Stop Loss: 24.95
Target(s): 28.50
Current Gain/Loss: + 0.5%

Entry on January 09 at $26.20
Listed on January 07, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 215 thousand
New Positions: see below

Comments:
01/16/14: I don't see any changes from my prior comments on MDCA. If this stock doesn't start showing more movement soon then we'll likely drop it as a candidate. I am not suggesting new positions at this time.

current Position: long MDCA stock @ $26.20

01/14/14 new stop loss @ 24.95
01/09/14 triggered @ 26.20




Pandora Media - P - close: 35.74 change: +0.69

Stop Loss: 33.75
Target(s): 39.50
Current Gain/Loss: + 3.4%

Entry on January 15 at $34.55
Listed on January 14, 2014
Time Frame: exit PRIOR to earnings on February 5th
Average Daily Volume = 9.6 million
New Positions: see below

Comments:
01/16/14: Shares of Pandora continued to soar with shares added +1.9% today. These are new all-time highs and P is now up 10 out of the last 11 sessions. I would not be surprised to see a little pullback toward the $35-34.50 area soon. We are raising our stop loss to $33.75.

Earlier Comments:
If this rally continues it could spark more short covering. The most recent data listed short interest at 18% of the 154 million share float. Our target is $39.50. However, we will plan on exiting prior to Pandora's earnings report on February 5th.

current Position: long P stock @ $34.55

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

Long Feb $35 call (P1422B35) entry $2.55*

01/16/14 new stop loss @ 33.75
01/15/14 triggered @ 34.55
*option entry price is an estimate since the option did not trade at the time our play was opened.



Solar ETF - TAN - close: 42.68 change: +1.14

Stop Loss: 39.75
Target(s): 48.50
Current Gain/Loss: + 1.0%

Entry on January 16 at $42.25
Listed on January 14, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 442 thousand
New Positions: see below

Comments:
01/16/14: Our brand new trade on TAN is off to a strong start. Shares gapped open higher at $42.20 and surged +2.74%. A lot of this move was due to SolarCity (SCTY), which was initiated with a "buy" rating and a $90 price target by Deutsche Bank this morning. Shares of SCTY surged +12% and pulled the rest of the solar industry with is. If SCTY sees any profit taking tomorrow it will weigh on shares of TAN.

Earlier Comments:
Our plan was to use small positions to limit our risk. Our multi-week target is $48.50. This could turn into a multi-month trade so we'll have to try and be patient.

FYI: A rise past $42.00 has created a new triple-top bullish breakout buy signal on TAN's point & figure chart, which is currently forecasting a long-term target of $61.

*small positions*

current Position: long TAN @ $42.25

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

Long April $45 call (TAN1419D45) entry $2.25*

01/16/14 triggered at $42.25 (thanks to SCTY's +12% rally)
*option entry price is an estimate since the option did not trade at the time our play was opened.



Ternium S.A. - TX - close: 31.48 change: -0.76

Stop Loss: 29.90
Target(s): 35.00
Current Gain/Loss: - 0.9%

Entry on January 14 at $31.75
Listed on January 13, 2014
Time Frame: exit PRIOR to earnings on Feb. 19th
Average Daily Volume = 204 thousand
New Positions: see below

Comments:
01/16/14: Uh-oh! The action in TX could be a warning signal. Shares opened higher, rushed to $32.99 and then reversed lower. The stock underperformed the broader market with a -2.3% decline. In doing so TX also created a bearish engulfing candlestick reversal pattern today. More conservative traders may want to raise their stop loss tonight.

Earlier Comments:
Our target is $35.00 but we will plan on exiting prior to TX's earnings report in February.

current Position: long TX stock @ $31.75

01/14/14 triggered @ 31.75



BEARISH Play Updates

Ecopetrol SA - EC - close: 35.41 change: -0.37

Stop Loss: 36.25
Target(s): 31.00
Current Gain/Loss: + 5.2%

Entry on January 06 at $37.35
Listed on December 30, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 716 thousand
New Positions: see below

Comments:
01/16/14: EC spiked lower this morning. Shares fell to 34.27 before paring their losses. It looks like the simple 10-dma will remain as overhead resistance for now. I am not suggesting new positions at this time.

Earlier Comments:
Our target is $31.00. Once it's below $37.50 the next level of support appears to be the $30.00 level.

current Position: short EC stock @ $37.35

01/14/14 new stop loss @ 36.25
01/08/14 new stop loss @ 38.25
01/06/14 triggered @ 37.35




CLOSED BULLISH PLAYS

Caesars Entertainment - CZR - close: 22.76 change: +0.68

Stop Loss: 21.80
Target(s): 26.00
Current Gain/Loss: - 3.0%

Entry on January 06 at $22.62
Listed on January 04, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 836 thousand
New Positions: see below

Comments:
01/16/14: CZR was underperforming the market most of the week and in last night's newsletter we decided to abandon ship and exit this morning. Naturally CZR decided to bounce and outperformed the market with a +3.0% gain.

FYI: CZR would have hit our stop at $21.80 before rebounding higher today.

*small positions*

closed Position: long CZR stock @ $22.62 exit $21.94 (-3.0%)

01/16/14 planned exit
01/15/14 prepare to exit tomorrow morning
01/11/14 new stop loss @ 21.80
01/06/14 trade opened on gap down at $22.62

chart:



Yandex N.V. - YNDX - close: 43.76 chnage: +0.40

Stop Loss: 41.90
Target(s): 48.50
Current Gain/Loss: - 0.6%

Entry on January 02 at $43.31
Listed on December 31, 2013
Time Frame: exit PRIOR to earnings in mid February
Average Daily Volume = 2.7 million
New Positions: see below

Comments:
01/16/14: YNDX is still churning sideways. Our plan was to exit positions this morning and the stock gapped down at $43.05. Shares managed a +0.9% bounce by the closing bell.

*Small positions*

closed Position: long YNDX stock @ $43.31 exit $43.05 (-0.6%)

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

Feb $45 call (YNDX1422B45) entry $2.00* exit $1.70 (-15.0%)

01/16/14 planned exit
01/15/14 prepare to exit tomorrow morning
01/08/14 new stop loss @ 41.90, warning! today looks like a potential bearish reversal pattern
01/07/14 new stop loss @ 41.75
01/02/14 trade opened on gap higher at $43.31.
*option entry price is an estimate since the option did not trade at the time our play was opened.

chart:



CLOSED BEARISH PLAYS

Best Buy Co. - BBY - close: 26.83 change: -10.74

Stop Loss: 38.05
Target(s): 35.10
Current Gain/Loss: +32.6%

Entry on January 08 at $38.47
Listed on January 07, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 4.2 million
New Positions: see below

Comments:
01/16/14: Target exceeded.

BBY was one of the market's biggest stories today. BBY is not scheduled to report earnings until late February. Yet this morning the company issued an earnings warning for their fourth quarter. Same-store sales during holiday shopping season fell -0.9%. U.S. same-store sales plunged -1.5%.

The stock had more than tripled in 2013 (with a +237% gain last year). Investors quickly decided to hit the panic button and sell stock after today's disappointing figures.

Our bearish exit target was $35.10 but BBY gapped open lower at $25.91 and settled with a -28.5% loss on the session. BBY normally trades about five million shares a day. The stock traded over 85 million shares today.

Our put option gapped open higher at $12.00 (15-cent spread).

closed Position: short BBY stock @ $38.47 exit $25.91 (+32.6%)

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

Feb $38 PUT (BBY1422N38) entry $2.06 exit $11.85 (+475.2%)

01/16/14 target exceeded on gap down
01/14/14 new stop loss @ 38.05
01/08/14 BBY opened at $38.47

chart: