Option Investor

Daily Newsletter, Thursday, 11/15/2012

Table of Contents

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

Market Wrap

No Word Yet On Cliff Deal

by Thomas Hughes

Click here to email Thomas Hughes
The markets are in a seeming free fall as we all await the impending fiscal cliff compromise. In the meantime the skew in jobless data from Sandy and earnings releases failed to grab media attention.

The fiscal cliff has everyone's attention. Until we get a resolution to it I see market participants on the sidelines, waiting to see what happens. At this point, even if things start to get better and there is a solution to the cliff that satisfies both sides it may be too late for the equities markets. The Nasdaq is already in correction territory and our previous market leader, Apple, has been there for weeks. Unless some reason to buy arises the markets could continue to drift.

The Economy

Futures were flat to negative this morning before the release of data and afterward there was little change. Data was mixed, skewed by Hurricane Sandy, and failed to show any sign of real improvement. The loss of jobs associated with the storms started to show themselves with a surprisingly large gain in first time claims. At the same time consumer prices showed a smaller gain than expected 1/2% decline from the previous month. The CPI for October was 0.1%, ex food and fuel 0.2%. The headline number was inline with expectations while the core CPI was a tenth hotter than expected. On the unemployment front initial jobless claimes spiked by 78,000 from a revised 361,000 to an 18 month high of 439,000. When I added today's figures to the table it really put all of the last year in a new perspective... now it all looks like noise, the peaks and trends of the last twelve months have flattened out. Even with the spike in claims we saw during the spring/Easter layoffs and the volatility associated with auto sector layoffs over the summer the number of initial claims has been fairly steady.

The four week moving average of claims also climbed to a new high, peaking to 383,750 with a gain of nearly 12,000. It will be interesting to see how this spike in claims plays out over the next few weeks. Initial claims could remain elevated as workers find themselves in need of assistance post-storm(s). Not everyone will see the need at first, it may take a week or two to realize that work isn't there.

The storm and it's affects on GDP have led me to pose a few questions. Are businesses going to rebuild, move or fold? Are they going to keep the employees they have while they rebuild or clean house? Are new businesses going to step into vacancies left in the aftermath of the storm?

There could be some volatility in claims over the next few weeks that spills over into the data for people receiving longer term benefits. Continuing claims climbed this week to a new 7 month high. The jump in this weeks data, which completely offset last weeks surprising decline, is the first week impacted by the storm. Again, there could be some volatility here as well as employers and employees figure out what their status is so far as business and work is concerned.

Total claims actually fell. Drops in total claims around the country offset increases found along the eastern seaboard. This drop comes after two weeks of mild increases and brings the total number of people close to the multi-year low.

Other data points include the NY Fed survey of manufacturing, which came in at -5.22. Although showing a decline, the rate is much slower than the previous months -6.16. In real estate mortgage delinquencies and foreclosures are up. Foreclosures rose 3% in October over Septembers rate.

Around The World

The European Union announced today that it had indeed entered a second recession. GDP for the bloc fell to -0.1% in the 3rd quarter, marking the second quarter of decline in a row and the second recession for the Union this year. I don't think it was a surprise to anyone to hear this news. A bigger surprise would be to hear that GDP was on the rise or that the debt crisis had been resolved. What the question now is how long will the recession last? Mario Draghi has already made statements to the effect that the Eurozone will be in recession this year (duh) and that it could worsen into the next. Does this mean that Europe will be in decline for the next 2,3 or more quarters?

Germany, the pillar of the European Union, is on the verge of contraction itself. German GDP is at 0.2% and is still being dragged down by other members of the Union. Neighboring France also grew at an annualized 0.2% but is being criticized for its potential weaknesses. Spain and Greece are both being hailed for their efforts but at the same time aid is not forthcoming; Spain's failure to ask is to blame on the one hand and disagreements between policy makers on the other. None of this is really new but with our Fiscal Cliff looming the Euro Cliff looks a lot worse than it did when the S&P was still rallying.

In China the expected change in leadership was announced. Xi Jinping is now in line to take control of the nation next year. His first statements to the public included words promising reform, getting back in touch with the people and curbing corruption and bureaucratic entanglements. For the most part Asian shares responded negatively to the change in leadership, dropping around 1.5%.

Japanese markets climbed by close to 2%. A sharp drop in the yen's value versus the dollar over the last two days helped to support higher prices for Japanese stocks. Over the last two day's the dollar has gained over 2% against the yen. The BOJ has been actively trying to devalue the currency in order to help the country stimulate growth and has eased policy as recently as last month. Now, the expected new leader of Japan, Shinzo Abe, is calling for unlimited easing in order to bring inflation back under control. As long as this is on the table and in effect I would expect the yen to continuing weakening against the dollar and other world currencies.

Oil, Gold And Bonds

Crude oil prices dropped 1.5% while Brent crude gained 1% following news of hostilities in Israel. A new round of missile attacks has traders on edge, helping to increase the price of Brent. Energy prices over the last few weeks have been fairly stable, with light sweet crude holding around $85-$87. Supply worries are being undermined by global demand worries, which are being exacerbated by the fiscal cliff, Eurozone cliff and China worries.

The Oil Index has been trading down during the same time-frame that oil has been trading sideways. The index has been making a steady downward push ever since it whipsawed to the upside two weeks ago. The index is in a narrowing trading range that I have been watching for some time and is currently moving down towards the bottom of that range. It looks like my target of 1,150 will be met; My next downside target for this index will be the up trend-line around 1,100.

Oil Index, daily

Fiscal cliff worries put the pressure on gold today as well. The metal lost about 0.9% in today's trading but found support at $1700. The Gold Index continued the drop below support it started yesterday. The index fell another 2.5% today, approaching the levels it reversed from over the summer. The index has actually been falling for over a week, from resistance at $210.

On the long term charts the drop is not so ominous looking. The long black candle formed by this weeks declines is not unusual for the index after a gain like it had from August to September. The decline may just be a return to the trend started with the August-July bottom. This theory is supported by the extreme peak in MACD convergent with said bottom. Based on the MACD I would expect the index to retest the recent highs at some point in the near to mid term.

The Gold Index, weekly

Bond rates continue to move lower. The rate on the thirty year US bond fell to 2.716 and hit a two month low.

Thirty Year Bond Rates, daily

Story Stocks/Earnings

Earnings were on tap today as well. Several big names, including a few big retailers, reported and helped move the markets. Wal Mart was an early story, reporting profits that beat estimates on revenue that fell short. Once again I am seeing a business that is improving operations and getting positioned to benefit from potential increases in spending. Earnings were up 9%, coming in at $1.08 per share versus the expected $1.07. Sales were up 3.4%, slightly less than anticipated and helping the revenue to fall short. Analysts had been expecting $0.8 billion more than the $113.2 billion reported. Wal Mart also raised its guidance to the top end of the previous range but cited “macroeconomic conditions” as “pressuring” customers and that they expect the holiday season to be “competitive”. The stock responded by dropping 3.5% to hit a 6 month low.

Wal Mart, daily

Target was another big retailer to report earnings today. This retailer was able to beat estimates on the top line but some of its revenue is attributable to sale of its CC portfolio. On an adjusted basis Target earned $0.90 per share, much higher than the expected $0.77 and last years $0.88. Revenues from sales were in line with estimates. Target went on to guide its full year earnings to a range in line with the consensus. The stock gained close to 2% but met resistance at the short term moving average. This stock may be forming a short term bottom but faces resistance around $65.

Target, daily

Gap reported after the bell and beat on the top and bottom lines. The stock jumped in after hours trading but failed to rise above resistance. The first reports to hit the wires said that Gap had fallen on heavy volume but my last check is showing me a gain of +$1.00 in the Bid/Ask spread. Gap was able to continue its trend of sales increases by adding 8% to last years 3rd quarter gains. Company guidance was also raised to a range that meets the current consensus estimates. The last listed price for GPS was $33.26, the bid/ask spread was centered on $34.345 at last check. Tomorrow could be a big day for this stock either way.

Gap Stores, daily

The Retail Spyder (XRT) traded down today but was supported by a long term sup/resistance level. The index is below the long term moving average and could move below support In the long term the retail sector has been trending up strongly since the 2009 bottom. A drop below this level could signal more weakness in this sector. Other retailers such as Dollar Tree and Ross Stores also reported today with mixed results. Several more retailers reported after the bell and may drive volatility in this sector tomorrow.

Retail Spyder (XRT), daily

The Indexes

The S&P is full of indecision. The fiscal cliff, the global economy and weak corporate revenues are fighting for dominance. On the short term charts (30 minute bars) the markets may be on a short term bottom. The 1350 level on the charts of 30 minute closings shows support but it may just be a dead cat bounce. The late afternoon rally that brought the index back up and over 1350 is a positive sign but only a weak one in the current technical set-up. There is a down trend in the index in this time frame and the next support, once 1350 is breached, will be along the long term up trend line. At the current rate/angle of decline the index should intersect the trend line around 1325-1335. Next resistance for this time frame is 1375 but may break down, the next would be 1380.

S&P 500, 30 minute bars

On the daily charts bearish momentum is on the rise and convergent with lower prices. The consecutively lower peaks in momentum suggests that the downward movement is gaining strength with each leg lower. While MACD converges with prices I will expect prices for the S&P to move lower ,and retest lows should a bounce occur, in this time frame. Any bounce from the current levels will meet resistance at 1380, which could be significant because it will have the added weight of short and long term moving averages.

S&P 500, daily bars

The longer term charts of weekly closings shows bearishness in the S&P as well. MACD is bearish and on the rise, pushing the index down toward the long term up trend line. With bearish momentum in the mid and long terms I am expecting the S&P to fall all the way down to the trend line before finding any real chances of support.

S&P 500, weekly bars

At this time the index has not broken trend or made any sign of a long term top. The current political and economic conditions have reversed the short and mid terms but once the Fiscal Cliff is resolved, or has some tangible solution, a relief rally will likely follow. Until then I expect the S&P, and the other major indexes, to drift and eventually reach the long term trend line. Once the cliff is passed, which I also think many are expecting, we will get a much clearer picture of what is really going on with the market. If the long term rally still has legs the markets should be able to march up and make a new high. If not then the relief rally will probably be halted by resistance or even fall short of the target high.

The VIX climbed today, gaining over 1%. This increase is about average for the index over the last few weeks. The VIX is still well within the “calm” range and suggests that investors are not all that scared. Options prices remain low in comparison with the index as it moves lower which means options are declining at the same time stocks are declining. With the VIX so low and so much uncertainty in the markets many traders are expecting a jump in the VIX, the current put/call ratio on the VIX, reported by the CBOE, is around 0.32. This could mark an extreme in sentiment, at least towards volatility.

The VIX, daily

The markets are uncertain and that is one thing that is certain. There are a lot of factors in play right now and until we get some clarity on the future it will stay that way. Economic improvement is at the heart of any recovery and stock market rally, anything seen as a help or hindrance will be a market mover. However, until we get some direction as to the Fiscal Cliff solution I think the markets will stuck in a range. We need to get behind a solution as a country and do like CNBC says and Rise Above.

Thomas Hughes

New Option Plays

Potential Short Squeeze

by James Brown

Click here to email James Brown


Netflix, Inc. - NFLX - close: 81.48 change: +1.70

Stop Loss: 78.20
Target(s): 89.75
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
I have had my eyes on NFLX as a bullish candidate the last few days. While most of the market has been sinking shares of NFLX have been consolidating sideways under resistance near $80.00 and its 200-dma. Now shares are starting to breakout and it could spark a short squeeze. The most recent data listed short interest at 31% of the 54.2 million share float.

NFLX can be volatile so I am suggesting small positions to limit our risk. We'll use a trigger at $82.25 to buy calls, which is just above the exponential 200-dma. If triggered our target is $89.75.

Trigger @ 82.25

- Suggested Positions -

buy the DEC $85 call (NFLX1222L85) current ask $4.30

Annotated Chart:

Entry on November xx at $ xx.xx
Average Daily Volume = 6.5 million
Listed on November 15, 2012

In Play Updates and Reviews

Growing Oversold

by James Brown

Click here to email James Brown

Editor's Note:

I want to warn you that stocks could see a bounce soon. The market continues to sink but we saw a lot of stocks producing intraday bullish reversals. Equities are short-term oversold so a bounce soon would make sense.

We want to sell at least half of our VNO trade at the open tomorrow to lock in gains.

Current Portfolio:

CALL Play Updates

Currently we do not have any active call trades.

PUT Play Updates

Avalonbay Communities - AVB - close: 127.69 change: +0.08

Stop Loss: 132.05
Target(s): 121.50
Current Option Gain/Loss: + 15.1%
Time Frame: 4 to 6 weeks
New Positions: see below

11/15/12: AVB dipped to $126.12 before bouncing back and closing in positive territory. I am concerned that we could see AVB bounce back toward the $130 level soon. Broken support near $130 should be resistance.

- Suggested Positions -

Long DEC $125 PUT (AVB1222x125) entry $1.65

11/14/12 triggered @ 129.75

Entry on November 14 at $129.75
Average Daily Volume = 593 thousand
Listed on November 13, 2012

Carpenter Tech. - CRS - close: 44.81 change: -1.38

Stop Loss: 49.05
Target(s): 42.50
Current Option Gain/Loss: +82.6%
Time Frame: 3 to 6 weeks
New Positions: see below

11/15/12: CRS continues to underperform. The stock lost -2.9% and closed under what could have been round-number support at $45.00. If shares do see a bounce we can look for resistance near $47.50 and $48.50.

More conservative traders may want to just take profits now! (+82%)

Earlier Comments:
Our multi-week target is $42.50. CRS can be somewhat volatile so readers may want to limit their position size to reduce risk.

- Suggested Positions -

Long Dec $45 PUT (CRS1222x45) Entry $1.15

11/14/12 new stop loss @ 49.05

Entry on November 12 at $48.23
Average Daily Volume = 460 thousand
Listed on November 10, 2012

Dow Jones Industrial Average (ETF) - DIA - close: 125.51 change: -0.25

Stop Loss: 129.15
Target(s): 125.25
Current Option Gain/Loss: +51.9%
Time Frame: 3 to 4 weeks
New Positions: see below

11/15/12: DIA fell to support near $125.00 (12,500 on the Dow Industrial average). This ETF looks ready to bounce. Look for overhead resistance near $127.50. I am not suggesting new positions at this time.

- Suggested Positions -

long DEC $125 PUT (DIA1222x125) entry $1.79

11/14/12 new stop loss @ 129.15
11/13/12 new stop loss @ 130.15
11/08/12 new stop loss @ 130.60

Entry on November 08 at $129.18
Average Daily Volume = 5.3 million
Listed on November 7, 2012

iShares Russell 2000 ETF - IWM - close: 76.84 change: -0.40

Stop Loss: 80.15
Target(s): 75.50
Current Option Gain/Loss: +47.0%
Time Frame: 4 to 6 weeks
New Positions: see below

11/15/12: The IWM dipped to $76.29 intraday before paring its losses. This ETF looks short-term oversold and due for a bounce. Watch for resistance near $78.50. More conservative traders may want to take profits now (+47%).

- Suggested Positions -

Long 2013 Jan $75 PUT (IWM1319m75) entry $1.53

11/14/12 new stop loss @ 80.15
11/13/12 new stop loss @ 81.05

Entry on November 08 at $79.85
Average Daily Volume = 36 million
Listed on November 7, 2012

Lockheed Martin Corp. - LMT - close: 87.58 change: -0.53

Stop Loss: 90.65
Target(s): 84.25
Current Option Gain/Loss: +12.5%
Time Frame: 3 to 4 weeks
New Positions: see below

11/15/12: LMT continued to fall as expected. Readers may want to wait for a failed rally near $89.00 before considering new positions since the market looks poised to bounce.

Earlier Comments:
We do want to keep our position size small because LMT has produced a new breakdown on its daily chart but it has not yet broken below potential support on the weekly chart. It is possible the stock could bounce off the trend line displayed on the weekly chart but I doubt it given the market's broader weakness.

- Suggested *Small* Positions -

Long Dec $85 PUT (LMT1222x85) Entry $1.60

Entry on November 15 at $88.02
Average Daily Volume = 1.6 million
Listed on November 14, 2012

Lufkin Industries - LUFK - close: 50.18 change: -0.05

Stop Loss: 51.55
Target(s): 45.15
Current Option Gain/Loss: -46.6%
Time Frame: 3 to 4 weeks
New Positions: see below

11/15/12: I am concerned about our LUFK trade. The stock is just churning sideways in the $48.50-51.00 zone. While the larger trend is down a rally past $51.00 could spark some short covering. I am not suggesting new positions at this time.

- Suggested Positions -

Long DEC $45 PUT (LUFK1222x45) entry $1.50

11/14/12 time to turn cautious. LUFK is not participating in the market weakness. new stop loss @ 51.55

Entry on November 09 at $48.95
Average Daily Volume = 467 thousand
Listed on November 8, 2012

Las Vegas Sands - LVS - close: 40.56 change: -0.36

Stop Loss: 44.05
Target(s): 36.50
Current Option Gain/Loss: Dec40p: +49.0% & Jan40p: +39.9%
Time Frame: 4 to 8 weeks
New Positions: see below

11/15/12: Beware the bounce. LVS dipped toward potential support near $40.00 today. The stock could see an oversold bounce here. I am not suggesting new positions at this time.

Readers may want to consider taking profits right now.

Our target is $36.50 but more conservative traders may want to exit in the $38.50-38.00 area.

Trigger @ 42.25

- Suggested Positions -

Long DEC $40 PUT (LVS1222x40) Entry $1.10

- or -

Long 2013 Jan $40 PUT (LVS1319m40) entry $1.65

11/14/12 triggered @ 42.25

Entry on November 14 at $42.25
Average Daily Volume = 6.4 million
Listed on November 13, 2012

Mercadolibre - MELI - close: 74.45 change: +1.81

Stop Loss: 75.55
Target(s): 70.25
Current Option Gain/Loss: -10.9%
Time Frame: 3 to 6 weeks
New Positions: see below

11/15/12: Warning! MELI dipped to $71.26 and rebounded. Today's bullish bounce has created a bullish engulfing candlestick reversal pattern. Now these normally need to see confirmation first. I am not suggesting new positions and more conservative traders may want to lower their stops.

Earlier Comments:
I do consider this a higher-risk trade. MELI can be volatile and is arguably already oversold with a four-week decline. Of course stocks can always get more oversold.

Trigger @ 74.75

- Suggested *Small* Positions -

Long DEC $72.50 PUT (MELI1222x72.5) entry $2.75

11/14/12 new stop loss @ 75.55
11/13/12 play triggered on gap down at $74.56. suggested trigger was $74.75

Entry on November 13 at $74.56
Average Daily Volume = 603 thousand
Listed on November 12, 2012

Vornado Realty - VNO - close: 73.28 change: -0.68

Stop Loss: 76.25
Target(s): 72.50
Current Option Gain/Loss: Dec75p: +92.8% & 2013Jan$75p: +68.4%
Time Frame: 3 to 6 weeks
New Positions: see below

11/15/12: VNO is down seven days in a row. The low today was $73.06. I am concerned that VNO is growing so short-term oversold that it will see a big oversold bounce.

I am suggesting we sell at least half of our positions at the open tomorrow morning! I am moving our stop loss down to $76.25.

- Suggested Positions -

Long DEC $75 PUT (VNO1222x75) entry $1.40*

- or -

Long 2013 Jan $75 PUT (VNO1319m75) entry $1.90*

11/15/12 SELL HALF of our positions to lock in gains tomorrow morning,
move the stop loss down to $76.25 for the rest
11/14/12 readers may want to start taking profits now
new stop loss @ 78.05
11/12/12 trade opened on gap down at $76.89
*option entry price is an estimate since the option did not trade at the time our play was opened.

Entry on November 12 at $76.89
Average Daily Volume = 1.1 million
Listed on November 10, 2012

Whole Foods Market - WFM - close: 88.62 change: +0.53

Stop Loss: 91.05
Target(s): 82.50
Current Option Gain/Loss: - 15.2%
Time Frame: 3 to 4 weeks
New Positions: see below

11/15/12: Hmm... WFM is not exactly cooperating. Shares opened at $88.02 and spent most of the day consolidating sideways in a narrow range. This is not a good sign if you're bearish. On a short-term basis I would expect a bounce back to $90.00. I am not suggesting new positions at this time.

Earlier Comments:
I am suggesting small positions because it is possible that WFM could bounce on its long-term trend line but given the market's widespread weakness I am expecting new lows.

- Suggested *small* Positions -

Long DEC $87.50 PUT (WFM1222x87.5) entry $2.69

Entry on November 15 at $88.02
Average Daily Volume = 1.6 million
Listed on November 14, 2012