Option Investor
Newsletter

Daily Newsletter, Thursday, 5/7/2015

Table of Contents

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

Market Wrap

The Yellen Entry?

by Thomas Hughes

Click here to email Thomas Hughes
Yesterday Janet Yellen spooked the market but today it bounced back, is this the Yellen entry?

Introduction

I have to say that I was pretty upset yesterday when Fed Chair Janet Yellen said the market was overvalued. Her comments led to a sharp sell-off in the equities market and a bounce back rally today. I understand that she and the Fed are trying to help us along but really, there are just too many Fed officials giving their opinions on a day to day basis causing unnecessary volatility. Yesterday was no exception, what did she really say.... stocks are overvalued but not really.

Global equity markets did not fare so well. Both Asian and European suffered big losses today. Asian indices closed near the lows of the day, European indices at least were able to recover enough to close near to break even. Futures trading here at home was also negative in the early part of the morning. The major indices were indicated to open about a half percent lower but this moderated after the mornings economic data was released.

Market Statistics

Futures remained weak going into the opening bell but the market was able to hold its head above water at least once the open session got underway. The indices bobbed along break even levels for the our or so of trading until making a decided move higher. Around 10:45 the SPX made a new high, about +4, and proceeded to advance from there. The other indices followed suit and moved up to hit the early high around 12:45. After that the market spent the rest of the day in churn mode, trading up and down in a tight range just below the daily high.

Economic Calendar

The Economy

The Challenger Gray & Christmas report on planned lay-offs was a little bit of a surprise. The number of planned lay-offs surged by 68% to a new 3 year high. The number of lay-offs planned jumped to 61,582 in April from the 36,594 announced in March. This is 53% higher than this same month last year which puts the number of lay-offs 25% higher on a year-to-date basis than the first four months of 2014. Contributing to the jump are the retail and energy sectors. The retailers are laying off at a slightly faster rate than last year but it is the energy sector that is mostly to blame.


When looking with the data the energy sector contributed over 20,000 job losses this month and account for 34% of the gains. Excluding the energy sector job losses are more in line with trends, about 40,000. To date there have been 68,285 job losses directly attributable to the declining price of oil which is well within the expectations. If you will recall I have in previous Wraps outlined how the expected number of energy related job losses are less than 1/10th of 1% of the entire US working population so not a major threat to the labor picture. Recent talk is that shale oil rigs may come back on-line now that prices have rebound. If that is true then the hemorrhage of jobs may stop or even reverse.

While reading the Challenger press release I stumbled across two other reports from the job out-placement resources company. These reports addressed the health of the younger end of the employment spectrum. According to these releases college graduates in the age group 20-24 face the best prospects for employment since the 2008 crisis, as do teens seeking employment. Economic trends as well as an increasing pace of retirements are two factors cited. The pace of retirements is leading to better opportunities for advancement as well as increased availability of entry level jobs for new employees.


Looking at the teens the numbers reveal that while the participation rate among those younger than 20 is declining, the number of people in that cohort who are working has increased. This increase is directly related to the size of the Millennial population in America, there are simply more teenagers now that there were 10 years ago.

The jobless claims numbers remain good. The pace of initial claims is low and trending lower, this week coming in at 265,000. This is a mild increase from last weeks unrevised 262,000. The four week moving average declined by 4,250 to hit a new 15 year low. Initial claims are often seen as a measure of labor turnover, which appears to be very low despite the jump in planned lay-offs. On a not adjusted basis claims fell by -6.0% versus the expected -6.9% predicted by the seasonal factors.


Continuing claims also fell this week, losing just over -28,000 to hit a new 15 year low. This is down from last weeks upwardly revised figure. Last week was adjusted up by 3,000 but remains a 15 year low. The four week moving average also fell to a new low. The total number of claims also fell, by -105,948. This is the 9th week of declines and the low since late November of last year. Total claims are now -17.5% from last year at this time and near the long term low.

Tomorrow the big data is going to be the NFP, unemployment and labor participation rates. NFP may not be as strong as the +200K currently predicted by the consensus but I expect to see unemployment and labor participation rates to remain steady of improve. The data, last month and so far this month, suggests that the pace of job creation slowed during the winter months but that the labor market remained healthy. Turnover is low and hiring is steady to strengthening with an eye on expected improvements to the labor market, and possibly the consumer, in the next few months.

The Oil Index

Oil prices fell today, more than -2%, with WTI falling back below $60. Today's drop is not related to any one headline that I could see but likely in response to the recent run up in prices. The run was driven on international fears and dubious signs of slackening supply. There is a little indication that crude supply in the US has leveled, but also the first whispers that shale oil producers could come back on line soon, because of higher oil prices. Using the USO oil ETF as a proxy it is easy to see that price is well above resistance with increasingly divergent indicators.

The oil sector sold off today as well. The Oil Index lost about -1.75% in a move that took the index below support and below the short term moving average. The indicators are not both moving lower and pointing to potentially lower prices. Next support target is about 30 points below today's close near the 1,350 level. A break below that could go as low as 1,300 or a little lower before meeting up with the long term trend line. The long term trend is up and earnings outlook into the short to long term is positive so I will be watching this pullback for potential entry point for bullish positions.


The Gold Index

Bond prices came out of nowhere to influence the gold trade. Yields on the 10 year have risen steadily over the past two weeks but are still below resistance levels seen earlier in the year. This may be due to the dollars decline which would otherwise have helped to support gold. In any event it is now going to be necessary to keep an eye on yields as well as the dollar in terms of near term movement of gold prices. Today gold prices traded in a volatile range that once again tested support near the $1180 level. Prices fell to support, at which time volatility set in, driving them up and down in a range just above $1180 into the close of today's session.

The gold miners traded lower today on the weakness in gold but bounced back in late day trading. The Gold Miners ETF GDX gained just over a half percent in a move that took it down to retest support along my rising support line. The ETF continues to wind up within the rapidly narrowing range with bias to the upside. The indicators are currently pointing lower but are very weak. They are consistent in the longer term with support in the range between the rising support line and resistance near $20.50, and in the shorter term with testing of support. I'm still watching for a confirmed break out of this range but bullish on the sector overall.


In The News, Story Stocks and Earnings

Randgold Resources reported earnings roughly in line with expectations. The miner, which operates primarily in Africa, reported a 5% increase in profits despite a slight drop in production. Lower production levels were down due to expected lower grades of ore which has led the company to ramp up its exploration activities. Exploration had a negative impact on this quarters results as well. Offsetting the increased cost of exploration was lower cost of production which fell to $708 per ounce. Shares of the stock lost -1.5% in today's session and fell below the short term moving average.


Priceline, the darling of the internet travel space, reported better than expected revenue and earnings for the first quarter but failed to impress investors. The company provided guidance well below consensus estimates and sent shares of the stock down more than 5%. Share price fell to test support near $1,200 where they made a small bounce. Prices were able to hold above the support line at $1,200 but not below the short term moving average. The indicators are very weak and pointing lower so a further test of support should be expected.


Alibaba beat revenue and earnings estimates, sending the stock shooting higher. Shares jumped more than 7% in the pre-opening session to trade just shy of the IPO price. Shares managed to hold on to most of the gains but sold of from the early peak. This level attracted sellers, perhaps early owners seeking to get out, and created a strong black candle just under resistance.


The Indices

Except for a brief dip in to the red following the start of today's session the indices were able to trade higher all day. Today's move was led by the Dow Jones Transportation Index which gained more than twice the amount of any of the other indices, about 1.13%. The transports bounced off the bottom of the 6 month trading range, forming a relatively but not overly strong candle halting just below the short term moving average.

The indicators are currently pointing lower, suggesting that support could be tested again. Support is currently between 8,500 and 8,600, consistent with the bottom of the consolidation range. The index has been in this range long enough for it to return to its long term trend line which it will reach in the next week or so, if it continues to bounce along the bottom of the range. I remain bullish longer term, but still wary of near term weakness and potential Fed induced volatility.


The next largest move was made by the NASDAQ Composite. The tech heavy index gained only 0.53%, less than half that of the transports. Today's move was halted by the short term moving average and accompanied by bearish indicators which suggest it may move lower again. The NFP is a big question right now and could easily spark a sell-off, regardless of the forward outlook, if it is below expectations. If the index does move lower support target is the long term trend line near 4,750 or 4,800.

There is some sign in the indicators that the index may have reached the peak of a near term bearish swing, MACD has flattened out and stochastic %K is oversold. If this is a near term peak and start of a swing higher the index will need to break resistance at the short term moving average, the 5,000 level, the previous all-time high and the current all-time which are clustered together just above the current levels.


The Dow Jones Industrial Average is also looking a little weak despite today's gains. The blue chip index rose 0.46% in today's session only to be halted by the shot term moving average and my resistance line marking the December 2014 all-time high. The indicators are consistent with support over the short to long term, in line with the long term trend, but are bearish in the near term. MACD and stochastic are both pointing to a further test of support, along 17,750, but are weak at best. Momentum is very weak and stochastic indicates a market that is supported, but without strong direction.


The S&P 500 made the smallest gains today, only 0.38%. The broad market continued its bounce back from yesterday's low but failed to regain the upper side of the long term trend line. This is not enough to reverse my overall bullish stance but it does raise my caution levels. The indicators are similar to the other indices; they are weak and bearish in the near term, but consistent with a potential near term peak and onset of a trend following swing. The trend line will have to be watched closely, especially tomorrow, because a failure to break back above it could lead to technical selling.


The indices were able to bounce back from yesterday's sell-off. The Yellen comments and the fear they inspired proved to be short lived, at least for now. I think it safe to say that we can expect more of this type of comment from her and the Fed up to and until they do actually raise interest rates, whenever that is. Until then we need to keep our eyes on the trends.

The labor data this week has so far been on the weak side but still well within trend. Jobs are still being created, much more than are being lost, turnover remains low and longer term unemployment is in decline. So long as this continues I think we can expect a slow, steady improvement in the economy, the consumer and corporate earnings.

Speaking of earnings the earnings season is much better than expected. It is very likely that we will not see earnings decline this quarter and if we do it will be well below the -4.8% predicted as the season was beginning. The expectations for future earnings growth are still strong and that, along with economic trends, are what I am keeping my attention focused on. Where we go tomorrow is not clear but I remain bullish longer term and aiming to use any correction, or break of resistance, as a buying op.

A final thought. Tomorrow's NFP number carries a lot of meanings. It can mean economic strength, it can mean economic weakness. It can mean an early rate hike, it can mean a later hike. With so much nuance in the meaning it isn't hard to make a bullish case no matter which way the wind blows. If its a good number then the economy is on track and we can expect things to keep getting better. If it is a bad number and shows declining economic momentum it could mean the FOMC will keep rates where they are for a while in bad-news-is-good-news type of scenario.

Until then, remember the trend!

Thomas Hughes


New Plays

Surging To New Highs

by James Brown

Click here to email James Brown


NEW BULLISH Plays

Total System Services, Inc. - TSS - close: 40.66 change: +0.11

Stop Loss: 39.40
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on May -- at $---.--
Listed on May 07, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 843 thousand
New Positions: Yes, see below

Company Description

Why We Like It:
Consistently beating Wall Street's earnings estimates has driven shares of TSS to new all-time highs. The company is in the financial sector. The XLF financial ETF is down -1.2% for the year. TSS is up +19% for the year.

According to the company, "At TSYS® (TSS), we believe payments should revolve around people, not the other way around. We call this belief People-Centered Payments®. By putting people at the center of every decision we make, TSYS supports financial institutions, businesses and governments in more than 80 countries. Through NetSpend®, A TSYS Company, we empower consumers with the convenience, security, and freedom to be self-banked. TSYS offers issuer services and merchant payment acceptance for credit, debit, prepaid, healthcare and business solutions. TSYS' headquarters are located in Columbus, Ga., U.S.A., with local offices spread across the Americas, EMEA and Asia-Pacific."

This company has beaten analysts' estimates on both the top and bottom line the last four quarters in a row. Their most recent earnings report was April 28th. Earnings per share soared +41% to $0.54. That was eight cents above estimates. Revenues were up +11.7% to $662.2 million.

A few months ago (January 2015) TSS announced a new 20 million share stock buyback program to replace their old one. Last quarter they repurchased 1.45 million shares. When you include the company's dividend they paid out 73% of their available free cash flow to shareholders.

TSS' President and CEO, Mr. M. Troy Woods, commented on their recent results saying, "As a result of the great start to the year, we are revising our adjusted EPS guidance to grow between 12-14% from the previous range of 11-13%."

Shares of TSS surged to new highs on its earnings report. Since then traders have been buying the dips and the stock set a record closing high today. Tonight we're suggesting a trigger to launch bullish positions at $40.85.

FYI: TSS will hold an analyst day on May 20th.

Trigger @ $40.85

- Suggested Positions -

Buy TSS stock @ $40.85

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

Buy the AUG $40 CALL (TSS150821C40) current ask $2.10
option price is a current quote and not a suggested entry price.

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

Option Format: symbol-year-month-day-call-strike

Daily Chart:



In Play Updates and Reviews

Equities Manage Widespread Bounce

by James Brown

Click here to email James Brown

Editor's Note:
The stock market managed a widespread bounce on Thursday. There was not any one factor driving stocks higher. Although oil's decline fueled a rebound in the transports.

Tomorrow morning will bring the April nonfarm payroll (jobs) report. Economists are expecting +224,000 new jobs.

IMAX has been removed. OVAS was stopped out this morning.


Current Portfolio:


BULLISH Play Updates

Allegheny Technologies - ATI - close: 34.80 change: -0.70

Stop Loss: 33.85
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on May -- at $---.--
Listed on May 05, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.0 million
New Positions: Yes, see below

Comments:
05/07/15: The SLX steel ETF underperformed the broader market with a -1.7% decline. ATI was leading the group lower with a -1.97% drop and that's after paring its losses. I don't see any company-specific news behind today's weakness. If shares don't recover tomorrow we'll likely remove ATI as a candidate.

Our suggested entry point for bullish positions is $36.05.

Trade Description: May 5, 2015:
It looks like shares of ATI have put in a bottom.

The company is in the industrial goods sector. According to ATI, "Allegheny Technologies Incorporated is one of the largest and most diversified specialty materials and components producers in the world with revenues of approximately $4.4 billion for the last twelve months. ATI has approximately 9,600 full-time employees world-wide who use innovative technologies to offer global markets a wide range of specialty materials solutions. Our major markets are aerospace and defense, oil and gas/chemical process industry, electrical energy, medical, automotive, food equipment and appliance, and construction and mining."

ATI's most recent earnings report was April 21st. Management said their Q1 2015 earnings were $0.09 a share. Depending on who you polled ATI's nine cent profit was either one cent above or one cent below analysts' estimates. Whatever the case their $0.09 profit was a big improvement from the $0.19 loss a year ago. Revenues for Q1 2015 were up +14% from a year ago to $1.13 billion, which was above analysts estimates.

ATI saw a big improvement from their Q4 with sales up +7% sequentially. This helped drive a +25% improvement in operating profits.

ATI President and CEO Rich Harshman commented on their results, "Aerospace market sales increased 14% in the first quarter 2015 compared to the fourth quarter 2014. We saw double-digit demand growth from both jet engine and airframe customers of 14% and 22%, respectively. First quarter aerospace demand was led by organic growth of our mill products. Sales of our nickel-based alloys and specialty alloys increased 15% and sales of our titanium alloys grew 16% with a good mix of value-added mill products. We expect sales growth of our precision forgings, castings, and components to begin later this year supported by the build ramp of next-generation jet engines."

Looking ahead ATI expects demand from the oil and gas market to remain soft. However, demand from the airframe and jet engine makers should be strong throughout 2015.

The stock broke out from a consolidation pattern on its better than expected Q1 earnings. This helped generate a buy signal on the point & figure chart, which is currently forecasting at $47.00 target. Shares of ATI spent a few days struggling with technical resistance at its 200-dma but they have broken out past this level as well. The past seven months looks like a massive bottoming process for the stock. Now shares are on the verge of breaking out past key resistance in the $35-36 area. We want to use a trigger at $36.05 to launch bullish positions.

FYI: ATI's next dividend ($0.18) is this month. The ex-dividend date is May 22nd. The shareholder record date is May 27th.

Trigger @ $36.05

- Suggested Positions -

Buy ATI stock @ $36.05

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

Buy the JUL $37.50 CALL (ATI150717C37.50)

Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.

Option Format: symbol-year-month-day-call-strike




BEARISH Play Updates

Emerge Energy Services - EMES - close: 35.30 change: -2.65

Stop Loss: 41.25
Target(s): To Be Determined
Current Gain/Loss: +6.2%
Entry on May 07 at $37.65
Listed on May 06, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 413 thousand
New Positions: , see below

Comments:
05/07/15: Our new bearish play on EMES is off to a strong start. Shares hit our suggested entry point at $37.65 early this morning. The stock accelerated lower with a -6.98% decline to close at new 52-week lows.

Trade Description: May 6, 2015:
The bubble in fracking sand and proppant stocks popped in 2014. The top in the fracking sand producers was just a couple of months after crude oil peaked last year. The impact of crude oil's decline and the industry's reaction to the oversupply-pricing issue will still be felt for months to come. Just as the oil and gas producers are cutting expenses, mothballing rigs, and delaying new projects, the proppant companies are forced to do the same. EMES recently announced they were canceling plans to build a new silica sand processing facility.

EMES is in the basic materials sector. They're part of the oil services industry. According to the company, "Emerge Energy Services LP (EMES) is a growth-oriented limited partnership engaged in the businesses of mining, producing, and distributing silica sand, a key input for the hydraulic fracturing of oil and natural gas wells. Emerge Energy also processes transmix, distributes refined motor fuels, operates bulk motor fuel storage terminals, and provides complementary fuel services. Emerge Energy operates its sand segment through its subsidiary Superior Silica Sands LLC and its fuel segment through its subsidiaries Direct Fuels LLC and Allied Energy Company LLC."

The earnings picture has been damaged by a very rough pricing environment for EMES' sand. Their Q4 2014 earnings, announced on March 2nd, were $1.01 per share. That was 12 cents below expectations. Q4 revenues were down -1.4% to $242.6 million compared to analysts' estimates of $301 million. That's a huge revenue miss.

The weakness continued in the first quarter. Wall Street was expecting EMES to report Q1 2015 earnings of $0.83 a share on revenues of $264 million. The company only delivered $0.39 per share with revenues down -25.5% to $204 million. The rest of 2015 is expected to remain challenging.

The stock was hammered again on April 24th when EMES management reduced their dividend from $1.41 per share down to $1.00.

The $40.00 level has been support and now shares are breaking down. The most recent data listed short interest at 13% of the very small 14.6 million share float. This time the shorts are probably right but the high short interest could make this a volatile trade. EMES' recent attempt at a bounce has been failing. We want to catch the next leg lower. Tonight we are suggesting a trigger to launch bearish positions at $37.65.

- Suggested Positions -

Short EMES stock @ $37.65

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

Long JUN $35 PUT (EMES150619P35) entry $2.35

05/07/15 triggered @ 37.65
Option Format: symbol-year-month-day-call-strike



CLOSED BULLISH PLAYS

IMAX Corp. - IMAX - close: 36.72 change: -0.36

Stop Loss: 36.35
Target(s): To Be Determined
Current Gain/Loss: Unopened
Entry on May -- at $---.--
Listed on May 02, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 617 thousand
New Positions: see below

Comments:
05/07/15: Shares of IMAX did not participate in the market's widespread bounce today. Instead the stock fell for its third loss in a row. Considering this relative weakness we are removing IMAX as an active candidate.

Trade did not open.

05/07/15 removed from the newsletter, suggested entry was $38.25

chart:



CLOSED BEARISH PLAYS

OvaScience, Inc. - OVAS - close: 25.74 change: +1.25

Stop Loss: 27.25
Target(s): To Be Determined
Current Gain/Loss: -3.0%
Entry on April 28 at $27.65
Listed on April 27, 2015
Time Frame: 8 to 12 weeks
Average Daily Volume = 725 thousand
New Positions: see below

Comments:
05/07/15: Sometimes stocks just refuse to cooperate. Our OVAS trade was looking pretty good as of yesterday's close.

This morning OVAS gapped open higher at $28.47, a +16.25% move, thanks to some news on its augment fertility treatment. This treatment is not approved in the U.S. yet. It's natural that bearish traders might react in a panic on any good news regarding this OVAS product. Today's news was the first birth of a baby (what else?) using the experimental fertility treatment.

The rally immediately failed at technical resistance near OVAS' converging 20-dma and 200-dma. Unfortunately our stop loss was $27.25 so the gap higher immediately closed our play.

- Suggested Positions -

Short OVAS stock @ $27.65 exit $28.47 (-3.0%)

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

JUN $25 PUT (OVAS150619P25) entry $2.95 exit $1.95 (-33.9%)

05/07/15 stopped out on gap open at $28.47
05/06/15 new stop @ 27.25
04/29/15 new stop @ 29.45
04/28/15 triggered @ 27.65
Option Format: symbol-year-month-day-call-strike

chart: