Option Investor
Newsletter

Daily Newsletter, Tuesday, 4/15/2014

Table of Contents

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

Market Wrap

Major Reversals

by Jim Brown

Click here to email Jim Brown

Turnaround Tuesday was complete with multiple major reversals.

Market Statistics

The Dow rallied +99 points at the open only to collapse at 10:AM to drop -210 points to 16,063 by 1:PM. At that point somebody hit the buy program switch and the Dow rallied +198 points to close at 16,262.

The Nasdaq rallied +30 points at the open to 4,055 before collapsing -109 points to a new four month low at 3,946. The 1:PM buy program caused a +87 point rebound to close at 4,033.

To say Tuesday was volatile would be an understatement. For the Dow to have 3 triple digit moves in opposite directions is true volatility. The Nasdaq traded in a 2.7% range after being down -1.8% intraday.

The Biotech ETF (IBB) traded in a 5.9% range intraday before finishing only -3 points from the intraday high. At the low of the day at 207.48 the index was -24% off its highs for the year and firmly in bear market territory. Some analysts claim that dip into bear market territory was what triggered the buy program in the biotechs and lifted the market off its lows.

It was definitely not the geopolitical events or the economics that lifted the market. The NY Empire State Manufacturing Index for April declined from 5.6 to 1.3 compared to estimates for a gain to 8.0. New orders fell from +3.1 into contraction territory at -2.8. Backorders improved slightly from -16.5 but remained in contraction territory at -13.3.

The headline number was the weakest since November and is very close to slipping into contraction as well. The average workweek component declined from 4.7 to 2.0. This is the report for April so analysts were not able to blame the weather for the weak performance.


The NAHB Housing Market Index for April rose slightly from 46 to 47 but that was well under the consensus estimate of 50 and the Moody's forecast for 54. The single family sales component was flat at 51 but the outlook for the next six months rose from 53 to 57. Buyer traffic was also flat at 32. This is the third consecutive month that the headline number was in contraction territory under 50. The headline number is only 1 point above the low for the year.

The headwinds for housing sector are higher mortgage rates, very stiff requirements to get a loan, shrinking inventory and rising prices. While the rising prices are positive for builder profits it also restricts the number of buyers when coupled with the tighter credit rules. Equifax said 86% of mortgage originations went to borrowers with a credit score over 700. Unfortunately a lot of buyers over 700 are still being denied because of the price/rate calculations. The Mortgage Bankers Association said mortgage applications for purchases are at the lowest level since 1996.


The Consumer Price Index (CPI) rose +0.2% for March compared to +0.1% in the prior two months. The CORE rate also rose +0.2% after holding at 0.1% for the prior three months. Food rose +0.4% and energy declined -0.1%. Owners rents rose +0.3%. Over the trailing 12 months the headline inflation rate is +1.5% with the CORE rate +1.6%.

The rise in the CPI was not enough to strike fear into the Fed but it could be the start of a sustained increase. The Fed would like to see inflation over 2% so there is still a long way to go.

The economic calendar for Wednesday is headlined by the Fed Beige Book with a breakdown of economic conditions from each of the Fed districts. It should show improvement from the March report, which mentioned slowdowns in the Northeast because of the weather.

The Chinese GDP for Q1 will be released and expectations are for a decline to 7.3% growth and the slowest growth in two decades. This could weigh on the markets but this has been expected for a long time so it may be ignored. All the numbers out of China for the last couple months have been declining steadily so GDP expectations may be priced in to the market.


Events in the Ukraine continue to weigh on the markets as violence increases and headlines are appearing with increasing speed and urgency. As long as the U.S. does not take any military steps the headlines will eventually fade. President Obama warned today that the U.S. may consider additional aggressive sanctions if Russia does not pullback from the Ukraine border and call off the Russian troops masquerading as separatists now holding 10 buildings in the Ukraine.

Fortunately investors in the U.S. are more focused on earnings than the Ukraine. The earnings today were better than expected in most cases. Johnson & Johnson (JNJ) saw earnings rise +8% to $1.54 per share compared to estimates for $1.48. Revenue of $18.12 billion rose +3.5% compared to estimates for $18.04 billion. Prescription drug sales rose +11% to $7.5 billion. The company raised full year estimates a nickel to a range of $5.80 to $5.90. Shares rallied $2 on the news.


Coca-Cola (KO) reported earnings of 44 cents compared to estimates of 44 cents. Revenue declined -4% to $10.58 billion compared to estimates for $10.55 billion. Noncarbonated beverage sales rose +8% compared to a -1% decline in carbonated beverages. Carbonated declined -2.2% for all of 2013. Volume in North America was flat with gains being made overseas. Shares rose +3.7% on the news.


Pep Boys (PBY) blew a engine with a -15% decline after reporting earnings that disappointed. The company reported a loss of -6 cents compared to expectations for a +4 cent profit. Revenue was $495.7 million compared to estimates of $531.2 million. PBY said tire prices are below last year's levels and will continue to weigh on profits through Q2.


Shares of Northern Trust (NTRS) declined -1.6% after reporting earnings of 75 cents compared to estimates of 78 cents. Revenue of $1.04 billion missed estimates of $1.07 billion. The company said the earnings miss was due to a rise in operating expenses. Declining interest rates caused net interest margin (NIM) to decline to 1.12%. Non-interest expenses rose +5% to $768 million. Provision for credit losses declined -40% to $3 million. Charge offs fell sharply from $8.7 million to $1.5 million.


After the bell Intel (INTC) reported earnings of 38 cents compared to estimates of 37 cents. Revenue of $12.76 billion was slightly below estimates for $12.81 billion. The CFO said there were clear signs of stabilization in the PC market as employers replaced an aging inventory of PCs now that Windows XP support has ended. He said PC shipments would still decline slightly in 2014 but nowhere near the pace of the last couple of years. He also talked up their cloud initiative and their path to control the tablet market. They shipped 5 million tablet chips in Q1 and were on track to do 40 million for the full year. In 2013 they only shipped 10 million. Gross margin was 59.7% and was expected to rise to 61% later in the year. Intel guided for $13 billion in revenue for Q2 and that was just slightly over the $12.957 billion analyst estimate.


Yahoo (YHOO) reported earnings of 38 cents compared to estimates of 37 cents. Net revenue was $1.09 billion and slightly ahead of estimates for $1.08 billion. Ad revenue metrics improved slightly but investors were not impressed with shares rising only about 50 cents until they disclosed news about Alibaba. They said Alibaba revenue rose +66% in Q4 and earnings rose +110% to $1.35 billion. This means the valuation of the coming IPO is likely to rise and with it the value of Yahoo's 24% stake. Alibaba is expected to be worth $150 to $200 billion when it goes public. By comparison Facebook was valued at $104 billion when the IPO was priced. Shares rallied +$2.50 after the Alibaba news broke.

Yahoo's share of search advertising is expected to decline to 2.5%, down from 3.5% in 2012. Google's share is expected to rise to 33% and Facebook 8%.


CSX (CSX) said the worst winter in years slowed rail traffic and contributed to a 14% drop in Q1 profits. The railroad posted earnings of 40 cents compared to estimates of 37 cents. The company said weather cost it 8-9 cents per share in lost revenue and increased expenses. Without the weather impact it would have been a blowout quarter. However, the CEO had nothing but good things to say about the economy. He said they were seeing increased activity in every sector and they could not be happier about the future. They are predicting double digit profit growth in 2015 and beyond. The CEO said carloads increased 3% and were rising now that winter was over. He said chemicals, crops, lumber, coal, grains, drilling pipe, frac sand, etc were all surging. Shares rallied 30 cents after the report.


The highlights for Wednesday will be IBM and Google. IBM has had some rocky quarters recently and while I hope they have recovered overseas I am worried we could see another revenue miss. Google is a tossup. They have so much going on in multiple areas you never know how expenses and profits will line up. I would not want to hold either one over their earnings report.

So far, not counting tonight's reports, 7% of the S&P has reported. Over 53% have beaten earnings, 17% met estimates and 31% missed estimates. Guidance has been mixed.


Are you ready to rumble? The intraday drop in the Nasdaq and V bottom recovery suggests the worst is over. Volume spiked to 7.6 billion shares in what is normally a very slow week. The Nasdaq came within 22 points of a 10% correction to 3,922. The dead stop on 3,950 with the 200-day average at 3,942 would seem to indicate the bulls are trying to make a goal line stand and stop this selling madness.

I wrote last night that the converging support at Nasdaq 4,000 should have produced a stronger rebound on Monday. I felt the lack of a decent rebound meant we were going to see lower lows. The rebound from the 3,950 level today did not make it back to strong resistance at 4,050 but it was a good try and I appreciate the buy program that triggered the short squeeze. If we can get a headline bounce above that 4,050 resistance it would trigger significant short covering.



The Nasdaq is clinging to the 4,000 level and so far able to overcome the intraday bouts of selling at that level.

Today's rebound could be the start of a longer rally. Large intraday reversals at critical support levels tend to produce a change in the trend.


For three days the S&P has found support in the 1,815 area and today's rebound stopped right on the high for the day set at the open. This was a bullish rebound regardless of what caused it. The chart clearly shows strong support and the potential for the S&P to move higher on Wednesday. The close over 1,840 after spending nearly an hour defending the afternoon gains suggests we are not going lower.



The Dow had three triple digit moves if we count the +99 rally at the open as close enough to triple digits to count. Up +99, down -210, up +198. This is a prime example of why adding high dollar stocks to the Dow creates additional market volatility. Visa has been moving multiple dollars per day and sometimes in alternate directions. This is a prime example why Apple and Google will never be added to the Dow.

The Dow has posted a higher low for the last two days after coming to a dead stop at 16,025 on Friday. While we can never know for sure that a bottom is behind us I am starting to lean in that direction.



The fly in the rally ointment is the Russell 2000. The Russell dipped below 1,100 intraday and rebounded +25 points to close at 1,119. On the surface that appears to be a decent short covering rally. However it continues to set a pattern of lower lows and lower highs. I want to believe the Russell is going to push back over 1,130 but seeing is believing. Until I see it I will be skeptical.


There are plenty of precedents where a monster intraday reversal like we saw today turns into a lasting rally. There are also plenty of failures of that pattern. Whatever triggered the buying at the lows today may never be known. We need to see a continuation of the move higher on Wednesday. If the S&P can move over 1,850, Nasdaq 4,050 and Russell 1,130 we should see significant short covering and buyers may start to come off the sidelines. The problem will be low volume. Wednesday will be slow and Thursday slower expect for some option expiration activity. The markets could either be highly volatile in the low volume or extremely calm. Just remember ships can still sink in a calm sea.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email

 


New Plays

High Dividend Play

by James Brown

Click here to email James Brown


NEW BULLISH Plays

CenturyLink, Inc. - CTL - close: 34.05 change: +0.17

Stop Loss: 32.95
Target(s): to be determined
Current Gain/Loss: unopened

Entry on April -- at $--.--
Listed on April 14, 2014
Time Frame: exit PRIOR to earnings on May 7th
Average Daily Volume = 5.5 million
New Positions: Yes, see below

Company Description

Why We Like It:
CTL is in the technology sector. They are a telecommunications company. The stock appears to have turned the corner. After a terrible performance in 2013 shares of CTL bottomed in early February this year. Now CTL has broken the long-term trend line of lower highs. The two-month bounce has also lifted CTL through all of its key moving averages.

It's possible that investors are moving into CTL as a safe-haven trade. The stock offers a 6.5% dividend yield, which is significant in a market looking for yield.

Technically the last few months have created an inverse head-and-shoulders pattern (that's bullish) and now CTL is poised to breakout past resistance near $34.00.

I am suggesting a trigger to open bullish positions at $34.35. Plan on exiting prior to CTL's earnings report in early May.

Trigger @ $34.35

Suggested Position: stock @ (trigger)

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

Buy the May $34 call (CTL1417E34) current ask $0.90

Annotated chart:

Weekly chart:




In Play Updates and Reviews

Markets Produce Afternoon Rebound

by James Brown

Click here to email James Brown

Editor's Note:
The U.S. markets produced a pretty sharp afternoon rebound after a rather sour morning performance.

Double check your stop losses. We have updated some stop losses on our bearish plays. The market's bounce could see some follow through tomorrow morning.

PPC and FUEL hit our entry triggers.


Current Portfolio:


BULLISH Play Updates

Hewlett-Packard Co. - HPQ - close: 32.39 change: -0.51

Stop Loss: 31.55
Target(s): to be determined
Current Gain/Loss: - 1.4%

Entry on April 09 at $32.85
Listed on April 07, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 14.0 million
New Positions: see below

Comments:
04/15/14: HPQ produced a disappointing session. It followed the market lower and started to bounce midday. Unfortunately HPQ's afternoon rebound didn't quite make it back into positive territory. Today's intraday low was $31.88. More conservative investors might want to tighten their stops closer to today's low.

Earlier Comments:
Plan on exiting prior to HPQ's earnings report in late May.

current Position: Long HPQ stock @ $32.85

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

Long May $33 call (HPQ1417E33) entry $0.96

04/09/14 triggered @ 32.85
04/08/14 adjust the trigger from $33.15 to $32.85



Pilgrim's Pride Corp. - PPC - close: 21.48 change: +0.42

Stop Loss: 20.35
Target(s): to be determined
Current Gain/Loss: + 0.1%

Entry on April 15 at $21.45
Listed on April 14, 2014
Time Frame: exit PRIOR to earnings on April 30th
Average Daily Volume = 914 thousand
New Positions: see below

Comments:
04/15/14: The rally in PPC picked up speed today with a +1.99% gain and a breakout to new relative highs. Our suggested entry point to launch bullish positions was hit at $21.45. I would still consider new positions at current levels.

Earlier Comments:
This is currently a short-term trade. We plan to exit prior to PPC's earnings report on April 30th. However, we might be tempted to hold over the announcement.

FYI: The Point & Figure chart for PPC is bullish with a long-term $35.50 target.

current Position: Long PPC stock @ $21.45

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

Long May $20 call (PPC1417E20) entry $2.10*

04/15/14 triggered @ 21.45
*option entry price is an estimate since the option did not trade at the time our play was opened.



Tutor Perini Corp. - TPC - close: $29.42 change: -0.23

Stop Loss: 28.45
Target(s): to be determined
Current Gain/Loss: - 2.7%

Entry on April 14 at $30.25
Listed on April 12, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 255 thousand
New Positions: see below

Comments:
04/15/14: TPC disappoints for a second day in a row. Shares underperformed the broader market with a -0.7% decline. Traders did buy the dip near $29.00 and its 10-dma.

I would wait for a new relative high above $30.30 or a close above the $30.00 level before initiating new positions.

current Position: Long TPC stock @ $30.25

04/14/14 triggered @ 30.25



BEARISH Play Updates

Apollo Education Group - APOL - close: 26.99 change: -0.20

Stop Loss: 28.25
Target(s): $26.00
Current Gain/Loss: + 9.6%

Entry on April 08 at $29.85
Listed on April 07, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 2.2 million
New Positions: see below

Comments:
04/15/14: We're almost there. APOL fell to $26.55 intraday and underperformed the market with a -0.7% decline at the close. Our exit target is $26.00. I am adjusting our stop loss down to $28.25.

I am not suggesting new positions at this time.

Investors may want to use small positions to limit their risk. The most recent data listed short interest at 14% of the 98.2 million share float.

current Position: short APOL stock @ $29.85

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

Long May $30 PUT (APOL1417Q30) entry $1.45*

04/15/14 new stop loss @ 28.25
04/14/14 new stop loss @ 29.25
04/11/14 set a bearish exit target at $26.00 although traders may want to start taking some money off the table now.
04/10/14 new stop @ 30.25, APOL could bounce from here
04/08/14 triggered @ 29.85
*option entry price is an estimate since the option did not trade at the time our play was opened.



ChannelAdivsor - ECOM - close: 30.39 change: +1.05

Stop Loss: 31.60
Target(s): 25.25
Current Gain/Loss: - 2.2%

Entry on April 14 at $29.75
Listed on April 12, 2014
Time Frame: 3 to 4 weeks
Average Daily Volume = 625 thousand
New Positions: see below

Comments:
04/15/14: ECOM has essentially erased yesterday's loss. The stock dipped to new relative lows and then surged +7.1% off today's low and closed back above the $30.00 mark. This is not good news for the bears. I suspect that ECOM could be setting up for a bounce back to short-term resistance near $32.00 and its 10-dma (also at $32.00). However, I'd rather not risk that much of a move. Tonight we're moving the stop loss down to $31.60. More aggressive traders will want to consider leaving their stop above $32.00 and giving ECOM more room to maneuver.

Earlier Comments:
Traders may want to use put options to limit their risk. Our short-term target is $25.25. More aggressive traders may want to aim lower. The Point & Figure chart for ECOM is bearish with a $22.00 target.

current Position: short ECOM stock @ $29.75

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

Long May $30 PUT (ECOM1417Q30) entry $2.85

04/15/14 new stop loss @ 31.60
04/14/14 triggered @ 29.75



Rocket Fuel Inc. - FUEL - close: 36.56 change: +0.53

Stop Loss: 37.55
Target(s): to be determined
Current Gain/Loss: -3.3%

Entry on April 15 at $35.40
Listed on April 14, 2014
Time Frame: exit PRIOR to earnings in mid May
Average Daily Volume = 559 thousand
New Positions: see below

Comments:
04/15/14: Warning! The move in FUEL today looks like a potential bullish reversal. The stock fell to new lows and was down -5.9% at its worst levels of the session. Our entry trigger to launch bearish positions was hit at $35.40. Unfortunately the market's big bounce also lifted shares of FUEL. The afternoon bounce produced a +7.9% gain in FUEL.

I cautioned readers that FUEL has a high amount of short interest and any bounce could be trouble. Shares could rally to $40 or its 10-dma before rolling over again. Tonight we're going to try and reduce our risk by moving the stop loss to $37.55.

Earlier Comments:
Use small positions to limit risk. The Point & Figure chart for FUEL is bearish with a $30.00 target.

Current Position: short FUEL stock @ $37.55

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

Long May $35 PUT (FUEL1417Q35) entry $3.40*

04/15/14 new stop loss @ 37.55
04/15/14 triggered @ 35.40
*option entry price is an estimate since the option did not trade at the time our play was opened.



Gogo Inc. - GOGO - close: 16.13 change: -0.66

Stop Loss: 17.05
Target(s): to be determined
Current Gain/Loss: +10.1%

Entry on April 14 at $17.95
Listed on April 08, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 3.1 million
New Positions: see below

Comments:
04/15/14: GOGO continues to perform well for the bears with a -3.9% drop today. GOGO was down -9.5% at its worst levels of the session before the market's big afternoon rebound. I am concerned that GOGO is oversold and could see a further bounce. The stock has essentially tested round-number support at $15.00 today and was down -29% from last Thursday's high.

Readers will want to seriously consider taking profits now. We are going to speculate on further weakness and adjust our stop loss down to $17.05 instead.

Earlier Comments:
Investors may want to use small positions or consider using put options to limit their risk. There are already a lot of bears in this name. The most recent data listed short interest at 31% of the small 30.9 million share float. There is definitely fuel for a short squeeze but that doesn't guarantee one. The Point & Figure chart for GOGO is bearish with an $11.00 target.

*small positions*

current Position: short GOGO stock @ $17.95

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

Long MAY $17.50 PUT (GOGO1417Q17.5) entry $1.53

04/15/14 new stop @ 17.05, readers may want to take profits now!
04/14/14 triggered @ 17.95



Qiwi Plc - QIWI - close: 31.00 change: +1.21

Stop Loss: 32.05
Target(s): 22.50
Current Gain/Loss: - 3.9%

Entry on April 14 at $29.85
Listed on April 10, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 619 thousand
New Positions: see below

Comments:
04/15/14: Warning! QIWI produced a pretty big bounce today. Shares also failed to hit new relative lows like most of the market did this morning. The sharp afternoon bounce lifted QIWI to a +4.0% gain. Currently we have a stop loss at $32.05 but more conservative traders may want to exit early or lower their stop loss. I am not suggesting new positions.

The growing tensions between Ukraine and Russia should be negative for QIWI, especially with the West threatening more sanctions. This stock is probably going to be very volatile with big swings in both directions.

Earlier Comments:
We will aim for $22.50. More conservative investors may want to aim for the $26-25 zone since $25.00 could be potential support. Keep in mind that as a foreign company their stock could gap open (up or down) each morning as U.S. shares adjust to trading overseas. Therefore I am suggesting small positions to limit our risk. Or instead of shorting QIWI stock consider limiting your risk with put options.

*small positions*

current Position: short QIWI stock @ $29.85

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

Long MAY $30 PUT (QIWI1417Q30) entry $2.70*

04/14/14 triggered @ 29.85
*option entry price is an estimate since the option did not trade at the time our play was opened.