Option Investor
Newsletter

Daily Newsletter, Wednesday, 7/9/2014

Table of Contents

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

Market Wrap

The Fed Minutes

by Thomas Hughes

Click here to email Thomas Hughes
The Fed reveals that all is as expected.

Introduction

Better than expected earnings from Alcoa lifted the markets early but failed to spark a major bounce. The FOMC minutes were in the market's sights and held trading in check until after their release at 2PM. Early trading was muted and saw the US indices post mild gains after yesterday's sell off. The weakness yesterday was not unexpected as we are on the brink of what could be a very important earnings season. The S&P is expected to post earnings growth of over 6% this quarter and if Alcoa is still the indicator it once was could be pointing to even better results than that. Alcoa's reported adjusted earnings are 50% better than expected and came with reaffirmed full year guidance and a promising outlook. On top of that economic conditions are still in question even though last week's jobs numbers were much better than expected.


Early futures trading had the indices down a few points but by 9AM were in the green. The SPX and other major indices made a rebound at that lasted for all of about 5 minutes before trading settled down to a calm level for the rest of the day, up until 2PM at which time the FOMC minutes took over. Other news affecting early trading is a growing round of violence in the mid East between Israel and Hammas militants. Israel has fired missles and made airstrikes into Gaza in an attempt to stave off a new round of attacks from the group. So far no accord has been reached. Also in the news was a warning from the Container Store. The company reported a wider than expected loss and lowered its full year guidance due to weak sales.


Once the minutes were released the bulls made a little head fake toward support that quickly reversed, sending the indices to new intraday highs. The minutes were largely as expected and did not indicate anything other than what we already knew, or though we knew. The economy is growing, the taper is going to end, most likely in October with the last $15 billion, interest rates are going to rise next year and it's all based on the data. Maybe now earnings can start to take over. Friday Wells Fargo reports before the bell.

One Minute Chart

The Economy

Contrary to what the media may have you thinking the FOMC minutes were not the only piece of data released today. The mortgage index was also released today and came out better than expected. The Mortgage Brokers adjusted index of mortgage application activity rose by 1.9% this week after several weeks of declines. On a non adjusted basis applications rose by just over 4%. The Fed Minutes revealed that members were generally in favor of ending the taper in October with a final $15 billion reduction. This was contingent on the data supporting, as it has been, their expected improvement in the labor market. They were surprised at the rate of decline in the 1st quarter but see rebound in the 2nd quarter and growth moving forward. On the interest rate front there was little conviction among members to increase rates sooner than expected with the current target of mid 2015 still standing.

The trend in jobs has been up in recent months. The NFP and ADP have both been strong with the last round very strong. Yesterday the JOLT's numbers revealed that job openings have increased in June more than expected which also supports that trend. Tomorrow the jobless claims, expected to show a mild drop from last week, will be watched for additional sign of improvements. The next FOMC meeting is at the end of the month, July 29 and 30th.

The Oil Index

Not everything was affected by Fed Watch. The price of oil fell sharply today with WTI losing more than 1%. Brent was not far behind with a -0.75% drop followed by a -0.25 fall in natural gas. This is due in part to a reduction in fear of supply disruption in Iraq but more specifically with another positive report from Libya. Not only are the two main oil ports close to opening the largest oil field, Sharara, is close to resuming production as well. For now this is just a headline but if/when either of these two facilities come online for certain there could be another dip in oil prices.

The Oil Index fell today as well, but only by about a tenth of a percent, before picking back up in the afternoon portion of the session. Oil prices were at premium levels for all of the calendar 2nd quarter which has led the market to expect good earnings this season. However, now that oil prices are falling the hopes of future earnings growth may be dimming. This is perhaps why the industry has begun to receive some down grades. Today BP was downgraded to hold from buy at Deutsche Bank today, another in a series of downgrades for the company since the beginning of last month. The index is still supported by the short term moving average and long term resistance turned support just above 1,650. Bearish momentum is growing so I would expect the index to at least continue to test that support. If support holds until the big oil companies can report earnings and give us a peak at the future the long term up trend could resume. Until then a break down of support could bring it down to 1625 or 1600 in the near term and still leave the long term trend intact.


Gold Pops On Fed Minutes

Gold rallied on the Fed minutes and the view that rates would rise later rather than sooner. Current consensus has it around the end of the 2nd quarter 2015. Some speculation had rates going up as early as the end of the first quarter and I think I may still lean toward that camp. Data is improving steadily and if/when the sectors of the economy start to move in synch with each other there could be real jump in GDP output. Of course there could not be as well. I'm still on the fence with gold and the Gold Index and fear this could be a bull trap.

The Gold Index responded appropriately and moved higher as well. The index climbed close to three percent but is still showing some serious divergence. I'm willing to concede that gold is moving higher and the gold index with it, obviously, but the index is still within a longer term down trend pattern so I'm not getting too bullish yet.


Alcoa

Just to touch base with Alcoa. The aluminum producer produced golden earnings based largely on value added products. I can believe it...I don't think they make bikes but the one I just bought, made from aluminum, was not inexpensive and I can only imagine what the costs are for the high quality widgets being used by and for the growing number of adult millenials there are in America today. Shares of Alcoa surged 2% in the after hours sessions and continued its climb today. The stock broke out to new highs on strong volume accompanied by trend following stochastic and MACD signals. This may be a good one to get into on a consolidation or dip.


In The News

Sofware maker Gigamon lowered its revenue outlook for the 2nd quarter based on problems with closing deals in the pipeline. The lowered revenue guidance puts the firms at the lower end of the expected range and has caused several down grades. One analyst said the downgraded status was due to lack of confidence in the companies management. Shares of the stock fell 32% today are down close to 60% for the past 12 months.


Today's hot sector was consumer discretionary. The Consumer Discretionary Spyder (XLY) gained more than one percent today after falling from a new high earlier in the week. The ETF has been moving higher over the short term but is capped by resistance at this time. The indicators are bullish but weak and consistent with a potential range. If resistance is broken the ETF could carry as high as $72.50 or $75.00. Earnings for the big names in the fund don't begin to come out for about two weeks and stretch until the end of the season. Data, particularly earnings data such as tomorrows jobless claims, could help keep the ETF testing resistance until then provided it supports improvement.


The Indices

The Nasdaq Composite led the major indices in their bounce higher today. The tech heavy index climbed more than a half percent following the release of the Fed minutes. The index is above support but weak indicators suggest that support may be tested in the coming days. Momentum has turned bearish in the near term but longer term analysis shows that the trend is still up. Stochastic is pointing down but in light of the underlying up trend in stocks this is more of a chance for the index to cool down some rather than an indication of reversal. The index may experience more weakness until traders grab onto a reason to start buying again. This could be data or earnings. If earnings and data fail to support the trends and the index breaks near term support at 4400 longer term support exists around 4300, 4200 and 4100 with the long term trend line just below that around 4,000. While a long term correction is always possible I'm not seeing it in the charts right now.


The Transports were also favored today. The Dow Jones Transportation Average climbed about 0.54% in today's session. The index is bouncing after a mild correction that seems to be finding at least near term support above the short term moving average. It also appears as if the index is confirming the break above a bull flag pattern that could take it higher by 250 points or more. Tempering this assessment are weak indicators that have yet to confirm the move. The upcoming earnings season and next weeks round of macro economic data could be the catalyst.


The Dow Jones Industrial Average edged out the S&P 500 by a tenth today. The Blue Chips gained 0.47%, climbing from the short term 30 day moving average. The index is sitting near the all time high with indicators that may be more accurately describing the current market sentiment. Neutral. MACD momentum has been at or just above the zero line for several days with a stochastic that is trending firmly through the middle of the range. This I think shows a market waiting for the next sign of what to do. At the current high level it would be easy to run for cover and take money off the table but at the same time what's going to happen with the market and the economy in the next month and quarter if economic trends continue the way they are?


The broad market was the laggard today. The S&P 500 climbed 0.46% today flirting with near term resistance at 1975. Despite today's gain the indicators remain bearish with momentum on the rise, if still weak, and stochastic crossing under the upper signal line. Although the trend is up there is room for the index to come down and the indicators support the possibility. There may at least be a little more sideways trading and consolidation until the earnings trend is set. Near term support today kicked in around 1965, if that does not hold next support is around 1950 with the trend line not far below that around 1925.


It all comes down to earnings now. And data. And the Fed. Well, earnings first. Tomorrow earnings season really gets started with Wells Fargo. Other than there is not much on the calendar until Monday and Citigroup, then Tuesday with JPMorgan and a few other of the major bankers. Once the earnings trends are set, and there is wide expectation for earnings growth the time around, the next thing in focus will be the data. Next week is pretty big for data as it is the mid point of the month and includes several key points of housing information. Following that another big week of earnings and then the next week an FOMC meeting.

Until then, remember the trend!

Thomas Hughes

 


New Plays

Keep Looking

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. market did bounce today. That is a little encouraging after what felt like a sharp two-day drop but in reality wasn't that bad. While the larger trend for the S&P 500 index remains higher today's rebound is a little bit worrisome.

Today's gain in the S&P 500 has created an "inside day". That means today's range is inside of yesterday's range. This is a potential warning signal and suggests trader indecision.

I looked at hundreds of stocks today trying to find something worthwhile to add to the newsletter but nothing fit our criteria. The biggest challenge is Q2 earnings season.

We prefer to avoid holding over a company's earnings announcement. There are too many unknown variables that could send the stock crashing the next day as the market reacts to the company's results. All of the most promising stocks I found this week have earnings coming up in the next couple of weeks.

I'll keep looking but tonight we are not adding any new candidates.




In Play Updates and Reviews

NASDAQ Leads The Bounce

by James Brown

Click here to email James Brown

Editor's Note:
The NASDAQ composite led the major indices higher on Wednesday. Airline stocks were some of the best performers today.

Most of our active candidates bounced today.

TJX hit our stop loss.


Current Portfolio:


BULLISH Play Updates

Bitauto Holdings - BITA - close: 46.73 change: +0.68

Stop Loss: 43.45
Target(s): To Be Determined
Current Gain/Loss: - 2.1%

Entry on June 30 at $47.75
Listed on June 28, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 933 thousand
New Positions: see below

Comments:
07/09/14: Yesterday BITA tested the $45.00 level and started to bounce after a painful drop. Today shares dipped to $45.38 before rebounding. I remain cautious after yesterday's high-volume drop.

I am not suggesting new positions at this time.

Earlier Comments: June 28, 2014:
According to BITA's website, Bitauto Holdings Limited is a leading provider of internet content and marketing services for China's fast-growing automotive industry. Bitauto manages its businesses in four segments: the bitauto.com advertising business, the EP platform business, the taoche.com business, and the digital marketing solutions business. They were founded in 2000 and headquartered in Beijing, China.

BITA has partnerships with all the major Chinese Internet portals like Sina, Tencent, Yahoo! China, Alibaba, Netese, Qihoo360, and Tom. They have sales networks in more than 70 cities.

The company is developing a trend of beating analysts' estimates. Their most recent quarterly report was May 8th with their Q1 results. Wall Street expected a profit of 16 cents on revenues of $54.3 million. BITA delivered a profit of 18 cents with revenues climbing +46.6% to $56.9 million. The company has also made significant progress with its gross margins, which jumped to 79.1%.

This trend is likely to continue. Earnings are up +296% from 2010 to last year (2013). Sales are up +246% over the same time frame. Wall Street is expecting BITA's profits to rise 50 percent in 2014.

It's not surprising to see why. Millions of Chinese people are entering the middle class. That means surging demand for automobiles. China is now the biggest auto market on the planet with almost 20 million new cars purchased every year. The U.S. is having a good year for new cars sales too but we are only on track for 16.7 million vehicles this year.

Currently shares of BITA are hovering near their highs and what looks like resistance in the $47.00 area. The stock peaked to $47.00 back in March this year and it's been trying to breakout past this area the last several days.

Please note I do consider a more aggressive, higher-risk trade. BITA has been a volatile stock in the past. Investors may want to use small positions to limit their risk. We are not setting any targets tonight but the point & figure chart is bullish and forecasting at $57.00 target.

*small positions to limit risk*

Current Position: long BITA stock @ $47.75

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

Long Oct $50 call (BITA141018C50) entry $5.40*

07/08/14 readers may want to raise their stop after today's big drop
06/30/14 triggered @ 47.75
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike



Microsoft Corp. - MSFT - close: 41.67 change: -0.11

Stop Loss: 39.90
Target(s): To Be Determined
Current Gain/Loss: - 0.4%

Entry on June 17 at $41.85
Listed on June 14, 2014
Time Frame: 10 to 12 weeks
Average Daily Volume = 23 million
New Positions: see below

Comments:
07/09/14: MSFT's momentum is starting to fade. Shares are testing short-term support near $41.50. Today's session actually created a bearish engulfing candlestick reversal pattern. I suspect we will see MSFT dip toward its 50-dma soon (currently $40.78).

Earlier Comments: June 14, 2014:
It's back to the future with old-tech heavyweights making progress on Friday. Semiconductor giant Intel (INTC) surprised the market with an announcement Thursday night. INTC raised their revenue guidance due to stronger PC sales. That's right, they said stronger PC sales. Intel chips are in about 80% of the world's PCs. Unfortunately the PC has been declared dead for years due to the explosion of laptops, smartphones, and tablets. It is true that PC shipments have been falling for the last eight quarters in a row. IDC expects PC shipments to fall another -6% in 2014. If that's true then what's the story behind Intel's positive guidance? It might be Microsoft.

Microsoft ended support for its Windows XP operating system in April this year. No more support means they would no longer provide patches or virus updates to protect your system from hackers. With credit card data being stolen a constant threat for businesses the lack of support for XP has sparked an upgrade cycle, especially among corporations.

There does seem to be some disagreement on just how long and how big of an effect this upgrade cycle will last. Was it a one quarter bump or will it last throughout the rest of 2014? An FBR analyst estimates that 25% of the PCs connected to the Internet still run Windows XP. That is a very large number so the upgrade cycle for Microsoft could last a while. It could be bigger than expected too.

Not only are consumers and businesses going to upgrade their operating system from Windows XP to Windows 8 but they will most likely buy an upgraded copy of Microsoft Office. MSFT will likely sell a few more copies of SQL server as well.

The MSFT story is not just about software either. The company seems to be making in-roads into the healthcare sector with their Surface Pro 3 tablets. MSFT is also slugging it out with Sony in the game console wars. Consumers bought $3.6 billion in video games in the first quarter of 2014. MSFT's line up of games for its Xbox One looks pretty good following the annual E3 conference last week.

Technically shares of MSFT are in a long-term up trend and hitting 14-year highs. As an investor would you rather buy a 10-year bond with a 2.6% yield or MSFT with a 2.7% yield and good chance for price appreciation?

More conservative investors may want to wait for a rally past $42.00 before initiating positions.

current Position: long MSFT stock @ $41.85

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

Long 2015 Jan $45 call (MSFT150117c45) entry $1.16

06/30/14 new stop @ 39.90
06/17/14 triggered @ 41.85
Option Format: symbol-year-month-day-call-strike



SoftBank Corp. - SFTBY - close: 37.40 change: +0.55

Stop Loss: 35.35
Target(s): To Be Determined
Current Gain/Loss: +1.9%

Entry on June 17 at $36.68
Listed on June 16, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 499 thousand
New Positions: see below

Comments:
07/09/14: SFTBY almost completely erased yesterday's loss with a decent bounce today (+1.49%). Shares appear stuck in a $36.50-38.50 trading range.

I am not suggesting new positions at this time. Resistance remains overhead near $38.50.

Earlier Comments: June 16, 2014:
SoftBank Corp. has been referred to as the Warren Buffet of Technology although a better comparison is probably to Buffet's Berkshire Hathaway. They are a holding company with hundreds of businesses. According to the company website SFTBY has 235 subsidiaries and 108 affiliates (including 150 consolidated subsidiaries and 83 equity method companies). SoftBank Group possesses both advanced infrastructure and diverse services and content, and invests in promising companies working in the Internet field.

SFTBY owns 80.2% of Sprint Corp., 33.3% of eAccess Ltd., 100% of WILLCOM, Inc., 33.3% of Wireless City Planning Inc., 58.5% of GungHo Online Entertainment, and 42.5% of Yahoo Japan Corp. They also own 34% of Renren Inc., which is considered the Chinese version of Facebook. They also own 36.7% of Alibaba Corp., which is a much larger and more profitable version of Amazon.com. That's on top of owning SoftBank Telecom, SoftBank BB Corp. and SoftBank Mobile.

SFTBY's combined telecom assets makes the company one of the largest telecom/wireless players in Japan. In 2013 they added 4.1 million new subscribers and more than double the 1.19 million subscriber gain by NTT DoCoMo and 2.8 million for AU, which is owned by KDDI. Softbank added 47% of the Android phones activated in Japan and 39% of the iPhone 4s and 5c models. Both metrics are the largest in Japan and shows how Softbank is gaining market share.

Their Renren investment could be a big. China already has the largest Internet audience on the planet and it's only going to get bigger. Currently Renren has about 200 million users. This will grow. Like Facebook, Renren is developing its mobile platform. Renren is currently valued at about $8 per user but this seems extremely low considering what Facebook paid for WhatsApp.

SFTBY's majority stake in Sprint is starting to pay off. Sprint has had a rough few years working through its merger with Nextel. Sprint later acquired Clearwire. It looks like Sprint is now in recovery mode after adding +477,000 subscribers in Q4 2013 versus losing -337,000 in Q4 2012. SFTBY wants to acquire T-Mobile and combine it with Sprint. Currently 75% of U.S. customers are on AT&T or Verizon. SFTBY calls them an American duopoly but they believe by combining Sprint, the third largest carrier, with T-Mobile, the fourth largest, the combined company could compete with AT&T and Verizon, which would be good for competition and ultimately consumers.

Today the real allure of SFTBY is its 37% ownership of Alibaba. Amazon.com (AMZN) is an Internet powerhouse with sales of $86 billion in 2013 and a net profit of $274 million. Alibaba dwarfs AMZN with 2013 sales of $160 billion and a profit of $2.16 billion. Right now it looks like Alibaba will IPO this summer. Analysts have been estimating they could be the biggest IPO in history with a value of $160 to 185 billion.

There were new numbers out on Alibaba today with the company stating that its Q4 revenues only rose +39% to $1.9 billion. That's down from 62% growth in Q3. Margins retreated from 51.3% to 45.3% on higher marketing costs. This spooked investors today into thinking that maybe the valuation may not be in the $160-185 billion range.

We believe that SFTBY's shares are very undervalued and when the Alibaba IPO does hit this stock could soar. Tonight we're suggesting investors launch positions tomorrow morning at current levels. Depending on your trading style this could be an aggressive entry point. Technically SFTBY still has resistance in the $38-39 zone. More conservative investors may want to wait for SFTBY to close above $39.00 before initiating new positions. The risk of not launching positions now is that we do not know when Alibaba is going to announce its IPO. It could be any day and likely in the next few weeks. We will plan on exiting after Alibaba's first day of trading.

Current Position: Long SFTBY stock @ $36.68

06/30/14 new stop $ 35.35
06/17/14 trade opens. SFTBY gapped down at $36.68
note: SFTBY does not have options.



Waste Connections, Inc. - WCN - close: 48.28 change: -0.16

Stop Loss: 47.85
Target(s): 49.85
Current Gain/Loss: +1.1%

Entry on June 25 at $47.75
Listed on June 21, 2014
Time Frame: exit before earnings on July 21st
Average Daily Volume = 464 thousand
New Positions: see below

Comments:
07/09/14: WCN dipped to $48.00 and bounced. This might be short-term support for the stock but I am not suggesting new positions at this time. Our stop loss is at $47.85.

Earlier Comments: June 21, 2014:
According to the company website, Waste Connections is an integrated solid waste services company that provides solid waste collection, transfer, disposal and recycling services in mostly exclusive and secondary markets.

Through its R360 Environmental Solutions subsidiary, the Company also is a leading provider of non-hazardous oilfield waste treatment, recovery, and disposal services in several of the most active natural resource producing areas in the United States, including the Permian, Bakken, and Eagle Ford Basins. Waste Connections serves more than two million residential, commercial, industrial and exploration and production customers from a network of operations across the United States. We also provide intermodal services for the movement of solid waste and cargo containers in the Pacific Northwest.

We seek to avoid highly competitive, large urban markets and instead target markets where we can attain high market share either through exclusive contracts, vertical integration or asset positioning. We also target niche markets, like exploration and production, or E&P, waste treatment and disposal services, with similar characteristics and, we believe, higher comparative growth potential.

Apparently the company's strategy is working. WCN is developing a pattern of beating Wall Street's earnings estimates on both the top and bottom line. WCN's model is generating more profit than its rival with EBITDA margins of 34% compared to its larger rival Waste Management's 24% margins.

WCN is seeing strong growth in its oil field waste business. The company said that its E&P (oil) waste business surged +20% in the first quarter of 2014. It's traditional solid waste business grew +5.5%. Management is optimistic with 2014 off to a strong start. Revenues are up. Free cash flow is up. Margins are improving. They expect to see 12% to 15% growth this year.

Technically shares of WCN just broke out from a two-week consolidation and closed at all-time highs. One could argue that WCN produced a big, inverse head-and-shoulders pattern over the last several months. The point & figure chart is bullish and suggesting a $62 price target.

WCN does have options but the option spreads are too wide to trade.

Current Position: Long WCN stock @ $47.75

06/25/14 triggered @ 47.75



BEARISH Play Updates


None. We do not have any active bearish trades.



CLOSED BEARISH PLAYS

The TJX Companies, Inc. - TJX - close: 54.48 change: +0.63

Stop Loss: 54.25
Target(s): To Be Determined
Current Gain/Loss: -1.1%

Entry on June 25 at $53.65
Listed on June 24, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 4.5 million
New Positions: see below

Comments:
07/09/14: The Container Store (TCS) was grabbing most of the retail headlines today after last night's earnings miss. The TCS management said they were experiencing a retail "funk" and suggested that most of the retail environment was struggling. Yet shares of TJX did not react negatively. Instead shares of TJX started to rally today. I did hear TJX garner some positive comments on CNBC television today. There was some chatter yesterday that discount retailers like TJX could be giving the rest of the group more competition (stealing market share).

Whatever the cause, shares of TJX rallied through short-term resistance at $54.00 and hit our stop loss at $54.25.

closed Position: short TJX stock @ $53.65 exit $54.25 (-1.1%)

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

Oct $50 put (TJX141018P50) entry $1.05* exit $0.78** (-25.7%)

07/09/14 stopped out
**option exit price is an estimate since the option did not trade at the time our play was closed.
06/30/14 new stop @ 54.25
06/25/14 triggered @ 53.65
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike

chart: