Option Investor

Daily Newsletter, Thursday, 1/31/2013

Table of Contents

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

Market Wrap

Tepid Data Stalls Rally

by Thomas Hughes

Click here to email Thomas Hughes

The major indexes continued the pullback that began with yesterday's FOMC statements. The state of the U.S. economy as described by the Fed, in addition to today's round of tepid data, gave traders reason to pause. Traders and investors alike rushed into equities at the beginning of the year on the heels of Fiscal Cliff semi-resolution. The S&P 500 has been up over 75 points, or about 5%, since the end of last year and offering a nice profit for traders who got in during November and December. One reason for the inrush this year is that the market, in general, views the U.S. and world economy as being “OK”. Not great mind you, but OK. China's soft landing has turned into some mild expansion, Europe has gotten its house in order and our own data confirms the sentiment. The thing is, the data is only confirming OK. Until we see an increase in expansion there is little reason to keep chasing prices higher.

The data today was another mixed bag. Unemployment claims figures grew by an unexpectedly large amount and threaten the recent drops in the overall unemployment rate, which is being released tomorrow at 8:30 AM. On the other side of the coin personal incomes and spending were up. On an adjusted basis these gains are not as good as they appeared at first glance. This week was a big one for economic data and it was a lot for the markets to digest. There are still at least two, if not three, big potential market moving announcements left; U.S. Non farm payrolls, U.S. unemployment rate and the official Chinese PMI.

European and Asian markets traded mixed today. Data from both regions, and corporate earnings, weighed heavily. The world economy is healing and improving but not at a wild pace and certainly not at an expansionary one. Current GDP estimates for this year and into the next are only marginally better than the last two. Real growth is not really expected by world leaders until 2014 and much of the corporate guidance I have read suggests the same. Tough, uncertain and headwinds are three words that keep appearing within many forward looking statements.

Oil and gold both dipped today, if for different reasons. Investors, traders and businesses are still not sure where the world economy is heading. The rise in the price of oil over the last couple of months suggests that the expectations for oil demand are on the rise. The range bound price of gold suggest indecision and uncertainty. What is certain is that around 65% of S&P 500 companies beat earnings estimates this quarter. This is up from 35% in the last quarter and reflects a 4.8% rise in earnings. It seems as though the 3rd quarter was the earnings trough many had predicted. Whether or not its the beginning of a sustained period of growth or just a short term blip on the radar is yet to be seen.

Earnings reporting continued today as well. There were about 150 reports on the list today, not counting Facebook which reported after the bell yesterday. The general run of reports was in line or above expectations but there were a couple of notable misses and quite a bit of weak guidance.

Today's Economic Releases

Today's roll call of releases began this morning with the Challenger Job Cuts estimates. The estimate for January were 40,430 planned layoffs, down 24.5% from the previous month. Challenger also estimated an increase in planned hiring. This underscores yesterday's ADP estimate for job growth, which beat the expectations by nearly 30,000. Tomorrows non-farm payrolls figures and the unemployment rate will be a tough call due to the conflict between rising employment as predicted by ADP and Challenger and rising unemployment as predicted by the total claims number.

Claims for unemployment rose across the board in this weeks release. Initial claims rose by 38,000 to 368,000. This is still an expansionary number but not one like we need to see to really believe the labor market is strengthening. In fact, discounting the declines over the past two weeks of data, initial claims has been holding very steady over the last year. The fluctuations in the data are all due to expected seasonal volatility. The highest rates of insured unemployment were in Alaska and several states in New England. The largest increases were in Florida, Arizona and Vermont with the largest decreases in Pennsylvania, Texas and North Carolina.

Continuing claims for unemployment gained 22,000 to reach 3.197 million. This number is still down near long term lows but has been very volatile in the post holiday season. This number also lags initial claims by one week and could jump in the next weeks data. There is still downward bias on this table but I don't trust it. The other figures in this report are not telling the same story. Total claims gained 255,000 and reached a new 6 month high. This is more than 22% lower than last year but on the rise in recent months. The rate of decrease in total claims versus last year is declining. Based on this I suspect the labor market may have stabilized as much as it can under the current circumstances. It will be interesting to see if any of the pundits and analysts think the same thing.

Personal income and spending both climbed last month. Personal incomes increased by 2.6% and spending increased by 0.2%. My first question is how does the Fiscal Cliff and the increase in social security tax factor into all this. Personal income is figured on an after tax basis and this number is for December. The social security tax increase began in January and is not in this data. It could cause a drop in the next reading. The jump is also attributed to an increase in one time items sparked by the Fiscal Cliff. Excluding special dividends and bonuses that were paid ahead of the new year personal income only gained 0.4%, a much softer number than the headline. The reading for January will be telling because of the impact of increased taxes.

The Chicago PMI was also released today. This gauge of mid west manufacturing made a surprise jump to 55.6%, well above the previous 50.0 reported for December. This jump is expansionary and a positive surprise.

Around The World

European stocks ended the day in negative territory today. Luke warm data, earnings and guidance all played their parts. The stance of European businesses does not reflect the expectations of the ECB and Mario Draghi. He is still calling for a return to growth in the later part of this year. Corporate guidance does echo that sentiment and many are citing “tough times ahead”. One headwind is rising unemployment. German unemployment levels are rising in recent reports and the country contracted in the 4th quarter. If the pillar of the EU is on the decline how good can it be elsewhere in the region? The pause in U.S. growth isn't helping them any either. Germany cited slowing exports as one reason for the decline in GDP.

The Euro is still climbing versus the dollar. The pair broke above the 1.3500 level yesterday and are on the way to my next target of 1.3750. Indicators on the weekly and daily charts are bullish and rising with the pair trading above a long term support/resistance line. The only possible change to the underlying fundamentals that I see at this time are the impending debt ceiling/U.S. Budget debate, sequester and possible default on credit. I think this could help the trade move higher until we get some clarity to the situation. As always, I will also be on the look out for fiscal news from the Eurozone as well, you never know what might happen between now and then.

Euro/USD daily

Asian markets ended the day mixed. Japan, as usual, bucked the trend and closed the day higher. Stabilization in the U.S. and Europe are helping Asian markets. Overnight China is expected to release official PMI data and could influence market direction. The Japanese markets are still being driven by Shinzo Abe, the Bank of Japan and fiscal stimulus. Their combined efforts have resulted in a weaker yen and subsequently higher values for yen based stock. The yen broke above 91 this week and moved higher today. The pair is way overbought in the long and short term but indicators are consistent with a long term uptrend. In the shorter term the pair is extended and weak, susceptible to potential correction.


The Oil Index

The price of oil dipped today after reaching a new 5 month high yesterday. Supply concerns and hope of world demand growth have both helping this trade to move higher over the last half year. The Oil Index has made a nice breakout above long term resistance on the back of this rally in oil prices. This week the gap up and move above 1350 was decisive. Today's pull back to support is not surprising. A consolidation here would be nice. The index is trading at/near 18 month highs with bullish technicals but may still be range bound. Upside resistance exists around 1375 in the near term and 1400 longer term.

Oil Index, daily

The Gold Index

The speculation over GDP growth, quantitative easing and the Fed's $85 billion a month asset purchases have kept gold in a tight range over the past couple of months. The metal has been trading between $1650-$1700 for over 2 months. Feelings are mixed as to the state of the economy; it's a glass half full, glass half empty kind of thing. Strength in the world economy could help pressure the price of gold while continued fiscal stimulus will surely inflate it. We know that Fed asset purchases on still ongoing with no sign of an end and that the world economy is firmly sluggish and slowly growing. The Gold Index retreated to new lows today. This could be a sign of where the price of gold is heading. The index has been leading the price of the underlying metal at least as long as it has been in its range. The long term technicals for the index are bearish and indicate a further slide in prices for gold stock. Downside targets on this index are $160 and $150.

Gold Index weekly

Story Stocks

Earnings is still a big factor in the current market environment but they aren't getting the attention they did last week and the week before. In general, corporate earnings are still coming in as expected and a little better but there are some notable misses. First up is Facebook. The social media leader reported yesterday after the bell and sent the stock on a wild ride. It opened today with a loss greater than 6% but investors stepped in during the day and scooped it up. The results were pleasant, the company made money and increased mobile ad revenue by two fold. The company's expansion plans for 2013 are what caused the concern. The stock has be receiving downgrades all day.

Facebook daily

United Parcel Service reported earnings and guidance that sent the stock down by more than 2%. Quarterly earnings and full year earning, though record setting, were below estimates. A one time non-cash charge related to pension expenses pushed to company to a net loss on a gaap basis. Guidance for 2013 was also below estimates and helped put pressure on share price. The stock dropped beneath a long term support line and was capped there in intra-day trading.

UPS daily

Dow Chemical was another notable miss. Demand for the companies products is waning in the U.S. and abroad. The lack of demand could be a sign of a larger weakness in the world economy since Dow produces important industrial chemicals. On a non adjusted basis the company posted a fourth quarter loss on restructuring charges. Sales for the company decreased in all geographic regions and business segments except agricultural. Adjusted earnings per share increased over the last year while the company's net loss widened. The stock dropped sharply today on high volume and formed a long legged doji.

Dow Chemical daily

MasterCard reported an 18% increase in profits this morning, the only beat that was worthy enough for mention on CNBC. The company beat estimates for EPS by $0.06. Transactions were up by 20% and international business was also up around 17%. The news sent the stock up in early trading to make a new intraday high but resistance stepped in and drove price down before the close.

MasterCard daily


The VIX is still down at historically low levels but it has been moving up over the last week. It is now sitting just below the long term support/resistance line and a potential turning point. If the markets decide all the news and earnings this week point to a continuation of recovery then fear could subside again and possible reach the all time lows. Tomorrow's non-farm payrolls and unemployment rate could trigger that turn. A surprise drop in new payrolls and an increase in unemployment would be a bad sign for the bulls, especially if Chinese PMI is reported as shrinking. Recently fear has been subsiding in tandem with a lower unemployment rate and increased corporate profits. The current guidance for 2013 profits is already troubling (in terms of eps growth). Surprise data showing a deterioration in employment could fuel the fear. A break above the 15 level would not be bearish long term but could signal a correction in the nearer terms.

VIX daily

The S&P 500

The S&P traded in a tight range today after dropping about 4 points on the opening. Yesterday's price action, spurred by the FOMC, created a dark cloud for the market but perhaps one that will be short lived. The body of yesterday's candle was small and what I would call normal-sized when compared to the last two months of trading. Other indexes such as the DJI and the NYSE made similar candle signals. One notable exception is the RUT. This index had a much sharper drop yesterday and created a more significant Dark Cloud, one that is in fact an engulfing pattern. The long black candle appearing on the RUT engulfs the previous four days of rally.

RUT daily

The S&P followed through on the signal, trading to the negative for most of the day and into the close. The index did break above the flat line a few times during trading but was pushed back down each time. The significant number in today's trading was 1500. The index tried hard to maintain the level but indicators on the daily charts are pointing to more weakness. I think at this time traders are expecting the jobs report and unemployment levels to be nothing special. If this is the case then there will be little reason for the index to move higher and plenty of reason for profit taking. The MACD on the daily charts has been declining for the entire length of this leg of the current primary trend. Stochastic is overbought and extreme levels. Neither of those two indications are fool proof but they do help understand where the index is at this point in the game; trending up but extended, weak and nearing a major long term resistance.

S&P 500 daily

In the longer term the index is still trending up as well. Momentum is bullish and stochastic is indicating an ongoing buy signal but this uptrend is nearing a potential end. The index is nearing the long term resistance of all time highs and the upper range of the secular bear market. Looking back at ten years of weekly closes I can see that Bullish MACD peaks have been declining ever since the S&P reversed in 2009. The peaks in MACD that occur with each up leg of the primary trend are divergent and the smaller peaks within each leg of the rally are divergent.

S&P 500 weekly

One thing that I have noticed new in the news today was the mention of the January Effect or the January Indicator. Statistically speaking when the markets are up in January by 5% or more they tend to finish significantly higher by the end of the year. I am not discounting this indicator but I do want to point out that just because the market ends higher at the end of the year does not mean it goes straight there. Beware the January Effect. The market looks ready for a correction and one is due.

Until then remember the trend!

Thomas Hughes

New Option Plays

Software & Transportation

by James Brown

Click here to email James Brown


Check Point Software Tech. - CHKP - close: 50.00 change: +1.46

Stop Loss: 48.25
Target(s): 54.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
CHKP is an Israeli software and technology company. The stock has been pushing higher since its October lows. Now shares have broken out past its 200-dma and CHKP is about to breakout past round-number resistance at the $50.00 mark.

I am suggesting small bullish positions if CHKP can trade at $50.25. If triggered our target is $54.50.

Trigger @ 50.25 *Small Positions*

- Suggested Positions -

buy the Mar $50 call (CHKP1316c50) current ask $1.60

Annotated Chart:

Entry on January -- at $---.--
Average Daily Volume = 2.7 million
Listed on January 31, 2012


iShares DJ Transportation Avg.(ETF) - IYT - close: 103.05 chg: +0.26

Stop Loss: 105.05
Target(s): 98.25
Current Option Gain/Loss: Unopened
Time Frame: 2 to 3 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
The IYT is an ETF based on the Dow Jones Transportation Average. The transports have gone too far too fast with a huge rally from its November lows to new record highs just a few days ago. Now the sector and index is ripe for profit taking. Naturally there is no guarantee the profit taking will happen right now but it looks like the pullback has already started.

I am suggesting positions now at current levels. More conservative traders could wait for a new drop under $102.45 instead. We'll use a stop loss at $105.05. Our target is $98.25.

I expect this to be a short-term trade so we will list February puts but I'm listing March puts as well.

- Suggested Positions -

buy the Feb $102 PUT (IYT1316n102) current ask $1.05

- or -

buy the Mar $102 PUT (IYT1316o102) current ask $2.10

Annotated Chart:

Entry on January -- at $---.--
Average Daily Volume = 683 thousand
Listed on January 31, 2012

In Play Updates and Reviews

U.S. Justice Dept. Sues for Cheap Beer

by James Brown

Click here to email James Brown

Editor's Note:

Shares of Anheuser Busch INBEV (BUD) plunged on news of a government lawsuit today. Our BUD play was stopped out on the move. XEC was also stopped out today and we closed IR.

Current Portfolio:

CALL Play Updates

Starwood Hotels - HOT - close: 61.41 change: +0.25

Stop Loss: 59.75
Target(s): 64.50
Current Option Gain/Loss: +23.7%
Time Frame: exit prior to earnings on Feb. 7th
New Positions: see below

01/31/13: HOT is still hovering sideways above the $61.00 level for now. We only have a few days left. The plan is to exit positions prior to the company's earnings on Feb. 7th next week. I am not suggesting new positions.

- Suggested Positions -

Long Feb $60 call (HOT1316B60) entry $1.81

01/28/13 new stop loss @ 59.75

Entry on January 22 at $60.60
Average Daily Volume = 1.9 million
Listed on January 15, 2012

Noble Energy - NBL - close: 107.79 change: -0.44

Stop Loss: 106.95
Target(s): 114.00
Current Option Gain/Loss: -17.3%
Time Frame: Exit prior to earnings on Feb. 7th!
New Positions: see below

01/31/13: NBL gapped down at the open and dipped toward $107 before paring its losses. Tomorrow could be a volatile day for the energy sector. Both XOM and CVX report earnings before the opening bell tomorrow. These results might have an influence on shares of NBL. I am not suggesting new positions at this time.

- Suggested Positions -

Long Feb $110 call (NBL1316B110) entry $1.15

01/30/13 new stop loss @ 106.95
01/29/13 new stop loss @ 105.75
01/26/13 new stop loss @ 104.65
01/22/13 new stop loss @ 103.75
01/17/13 new stop loss @ 102.75

Entry on January 14 at $105.31
Average Daily Volume = 820 thousand
Listed on January 12, 2012

Starbucks Corp. - SBUX - close: 56.00 change: +0.40

Stop Loss: 54.75
Target(s): 59.85
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

01/31/13: SBUX rallied this morning and the stock came very close to hitting out entry trigger. Yet the rally ran out of steam at $56.49.

I am suggesting a trigger to buy calls at $56.50. If triggered our target is $59.85. More aggressive traders could aim for the all-time highs in the $62 area set last year. FYI: The Point & Figure chart for SBUX is bullish with a long-term $67 target.

Trigger @ 56.50

- Suggested Positions -

buy the Mar $55 call (SBUX1316c55) current ask $2.21

Entry on January -- at $---.--
Average Daily Volume = 6.8 million
Listed on January 30, 2012

Shire Plc - SHPG - close: 100.14 change: +0.03

Stop Loss: 99.75
Target(s): 104.90
Current Option Gain/Loss: Unopened
Time Frame: Exit prior to earnings on Feb. 14th
New Positions: Yes, see below

01/31/13: SHPG rallied off its early morning lows but gains faded by the closing bell. If SHPG doesn't breakout to new highs soon we will likely drop it.

Earlier Comments:
This is a short-term trade. We do not want to hold positions over the Feb. 14th earnings report. For that reason I am listing the February calls, which expire after the 15th. Otherwise I would probably choose the March calls. Looking at Februarys I would play either the Feb. $100s or the Feb $105s. The spread is wider on the $105s but your capital outlay is less.

I am suggesting a trigger to open bullish positions at $101.15. If triggered our target is $104.90. FYI: The Point & Figure chart for SHPG is bullish with a long-term $137 target.

Trigger @ 101.15

- Suggested Positions -

buy the Feb $105 call (SHPG1316b105)

Entry on January -- at $---.--
Average Daily Volume = 323 thousand
Listed on January 29, 2012

SPX Corp. - SPW - close: 74.63 change: -0.37

Stop Loss: 73.75
Target(s): 78.00
Current Option Gain/Loss: +26.9%
Time Frame: Exit prior to earnings on Feb. 14th
New Positions: see below

01/31/13: SPW spent most of the day drifting sideways inside the $74.50-75.00 range. If the market accelerates lower I would expect SPW to hit our stop at $73.75. I am not suggesting new positions at this time.

- Suggested Positions -

Long Feb $75 call (SPW1316B75) entry $1.30

01/30/13 new stop loss @ 73.75
01/29/13 new stop loss @ 71.95, adjust exit to $78.00
readers may want to just take profits right now
01/28/13 new stop loss @ 71.40

Entry on January 23 at $72.42
Average Daily Volume = 832 thousand
Listed on January 22, 2012

Whole Foods Market - WFM - close: 96.25 change: +1.00

Stop Loss: 93.75
Target(s): 99.50
Current Option Gain/Loss: +71.0%
Time Frame: Exit PRIOR to earnings on Feb. 13th
New Positions: see below

01/31/13: WFM displayed relative strength with a +1.0% gain on Thursday. While the bounce is encouraging I would hesitate to launch new positions.

Earlier Comments:
We do not want to hold over the Feb. 13th earnings report.
NOTE: because of a previous dividend the option strike for February is an odd one (95.50)

- Suggested Positions -

Long Feb $95.50 call (WFM1316B95.5) entry $1.90

01/30/13 new stop loss @ 93.75
01/29/13 new stop loss @ 92.25, expect a pullback soon

Entry on January 24 at $94.25
Average Daily Volume = 1.5 million
Listed on January 23, 2012

PUT Play Updates

Herbalife Ltd. - HLF - close: 36.32 change: -0.77

Stop Loss: 40.55
Target(s): 31.00
Current Option Gain/Loss: +25.0%
Time Frame: Exit prior to earnings on Feb. 19th
New Positions: see below

01/31/13: HLF saw a very brief midday spike higher but the rally attempt quickly reversed. Shares underperformed the market with a -2.0% decline.

Earlier Comments:
I want to warn you that HLF can be a volatile stock. We consider this an aggressive, higher-risk trade.

*Small Positions*- Suggested Positions -

Long Feb $37.50 PUT (HLF1316n37.5) entry $2.40

Entry on January 29 at $38.50
Average Daily Volume = 13.6 million
Listed on January 28, 2012

Monster Beverage Corp. - MNST - close: 47.90 change: -0.28

Stop Loss: 50.15
Target(s): 41.00
Current Option Gain/Loss: -20.6%
Time Frame: Exit PRIOR to the late February earnings report
New Positions: see below

01/31/13: There was no follow through on yesterday's bounce in MNST. Yet at the same time traders did buy the dip in the stock this morning. There is no change from my prior comments. We are keeping our stop loss at $50.15 for now. More conservative traders may want to tighten their stop instead. I am not suggesting new positions at this time.

Earlier Comments:
Please note that MNST has been a very volatile stock in the past. This should be considered an aggressive, higher-risk trade.

- Suggested Positions - *Small Positions*

Long Mar $45 PUT (MNST1316o45) entry $2.90

Entry on January 28 at $46.91
Average Daily Volume = 2.0 million
Listed on January 26, 2012


Anheuser-Busch InBev - BUD - close: 88.60 change: -5.54

Stop Loss: 91.75
Target(s): 94.85
Current Option Gain/Loss: +18.0%
Time Frame: 3 to 6 weeks
New Positions: see below

01/31/13: BUD turned out to be a major story on Thursday. Less than an hour into the trading day shares of BUD suddenly plunged on news that the U.S. Justice Department had filed a lawsuit to block BUD's planned $20.1 billion deal to buy Grupo Modelo SAB. The government claims that the merger would reduce the amount of competition in the beer market and result in higher prices for consumers.

The stock plunged toward its 100-dma near $86.75 before bouncing to close down -5.8%. Our stop loss was hit pretty early at $91.75. I hope some of our readers took my suggestion last night to just exit early and take a profit. We had a potential gain of +70% as of last night. Our trade closed much lower.

- Suggested Positions -

Long MAR $90 call (BUD1316c90) entry $3.05 exit $3.60*(+18.0%)

01/31/13 stopped out at @91.75 on news of a lawsuit from the U.S. government.
*exit price is an estimate. BUD was moving fast. Actual exit could have been better or worse.
01/30/13 new stop loss @ 91.75, adjust target to $94.85, readers may want to just exit early now with a profit
01/29/13 new stop loss @ 89.75
01/25/13 new stop loss @ 88.45


Entry on January 22 at $90.25
Average Daily Volume = 894 thousand
Listed on January 19, 2012

Ingersoll-Rand - IR - close: 51.39 change: -0.23

Stop Loss: 50.75
Target(s): 54.00
Current Option Gain/Loss: +11.4%
Time Frame: Exit prior to earnings on Feb. 1st!
New Positions: see below

01/31/13: IR continues to hover near its recent highs. Our plan was to exit today at the closing bell to avoid holding over the earnings report tomorrow.

- Suggested Positions -

Feb $50 call (IR1316B50) entry $1.75 exit $1.95 (+11.4%)

01/31/13 scheduled exit
01/30/13 new stop loss @ 50.75
01/29/13 prepare to exit on Jan. 31st at the close
01/26/13 new stop loss @ 49.75
01/24/13 new stop loss @ 49.25


Entry on January 17 at $50.25
Average Daily Volume = 1.8 million
Listed on January 12, 2012

Cimarex Energy Co. - XEC - close: 63.86 change: +0.11

Stop Loss: 62.90
Target(s): 69.50
Current Option Gain/Loss: - 36.0%
Time Frame: Exit PRIOR to earnings on Feb. 19th
New Positions: see below

01/31/13: XEC spiked down at the open and hit our stop loss at $62.90 before reversing back into positive territory.

- Suggested Positions -

Mar $65 call (XEC1316c65) entry $2.50 exit $1.60 (-36.0%)

01/31/13 stopped out
01/30/13 new stop loss @ 62.90


Entry on January 29 at $64.55
Average Daily Volume = 708 thousand
Listed on January 26, 2012