Option Investor

Daily Newsletter, Thursday, 4/11/2013

Table of Contents

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

Market Wrap

High Expectations For Earnings Season

by Thomas Hughes

Click here to email Thomas Hughes

U.S. traders woke up to a minor global rally today. Euphoria from our own rally yesterday carried over into Asian and European markets. Adding to the rally was positive data from China, Europe and here at home. China bank lending increased by a much larger margin than expected fueling hopes that recovery in that region is still going strong. European data shows that inflation at the consumer level is as expected. A drop in unemployment claims put the U.S. labor recovery back on the right track. Last weeks spike in initial claims and the horrible NFP figure could be one-off's. Today's data suggests this is true. There is still downside bias in the claims figures with all three of the major metrics near 12 month lows.

Earnings are back on tap. Alcoa surprised and relieved the markets Monday by beating, if by a small margin, Wall Street estimates. This may be a foreshadowing of what the rest of the season is going to bring us. The trend so far has been one of positive surprises, especially out of the retail sector which was one of today's leaders. Monthly retail comp store sales figures were also released revealing mixed results. Guidance from the sector is good so far but there are still hurdles for retailers and the consumer. Tomorrow has only a few earnings reports on the list but two at least are potential market movers. Wells Fargo and JP Morgan both report tomorrow with the rest of the big international and smaller regional banks reporting next week.

The market absorbed all the news and data and marched right on to make a new high today. Mildly positive futures trading led to a slight dip after the open but the market did not stay down long. By 10AM the S&P had gained about +3 and moved on from there to reach the day's high around 11AM. After that the markets drifted sideways finding support just above the 1590 level. There seems to be an expectation of good earnings this time around if yesterday's and today's price action is to be believed. The problem is there is still downside risk and the threat of the secular bear market. If earnings fail to satisfy and/or guidance is weak economic data may not be enough to keep the markets up.

SPX hourly

Asian Markets Rally

Yesterday's rally in carried over into the Asian market. All the major indexes finished in the green led by Japan's Nikkei 225. The Nikkei rally is being driven by the policy of Shinzo Abe and Haruhiko Kuroda. Elsewhere in the region stocks were supported by positive data from China. Chinese banks increased March lending by 1.06 trillion yuan, higher than the expected 850 billion. Japanese markets, especially the exporters, are being helped by declining yen values. The yen has lost more than 5 points versus the dollar since last weeks BOJ meeting and is expected to continue its slide. The USD/JPY pair is currently consolidating into a possible flag pattern just under the long term resistance level of 100. If it breaks above the near term target for the this pair is 106.50. Failure could bring the pair down to 97.50.


Europe Follows Asian Lead

European stocks rallied today as well driven by global optimism. The U.S. and Chinese data was reassuring for European markets who are dependent on both. There wasn't much data from the region today but what there was suggests that inflation is holding steady in Germany and France. Tomorrow is the beginning of the Eurogroup meeting and the release of EU industrial production figures and British Leading Indicators. Over the last week the euro has strengthened and climbed above the 1.300 level to test my resistance line at 1.3125. This line could hold, especially if EU industrial production falls or there is some other negative news from the Eurogroup.


The Economic Data

Futures held on to positive ground going into the release of today's jobless claims numbers. I'm not sure what I expected this week after the employment data last week but I was pleasantly surprised. Initial claims fell by 42,000 from an upwardly revised figure to 346,000. The four week moving average continued to climb higher but that is to be expected with last weeks peak. This week's initial claims puts it back near the lower end of the 12 month range and in line with the downtrend in joblessness the data has been showing us. I expect there may be some more volatility in this figure over the next couple of weeks due to the recent adjustments to benchmark numbers and the post-Easter seasonal lay-offs'. Job growth slowed in the second quarter last year and many pundits are talking about that happening again this year.

Continuing claims and total claims both fell in this weeks data as well. Continuing claims fell by 12,000 and total claims by 10,573. The continuing claims number comes with a caveat. The drop in claims this week is due to an upward revision of last weeks number. Without that revision this week would have been an equally small gain. Looking back over the past few weeks continuing claims have been relatively flat since hitting the five year low last month. In order to believe in an ongoing recovery in jobs and unemployment I would like to see this number continue to trend down. In the near term there is risk of continuing claims rising due to the seasonally slow period of job growth.

States with the biggest declines in claims were Texas, California and North Carolina with drops of -3,000, -2,500 and -1,600. States with the biggest gains in claims were Pennsylvania, New Jersey and Illinois all with increases larger than 2,000. Once again I am noticing the same states again and again at the top of these lists. There seems to be a lot of activity in the same areas. On a national basis the numbers are looking OK but on a regional or state level there is still a lot of instability in labor markets. Overall there is a steady downtrend in claims and the unemployment level. This downtrend is a little suspicious due to the declining participation rate. I need to see a pick up in the number of Americans looking for work in tandem with a pick up in jobs creation. There are a lot of hopes pinned to the housing market as a source of jobs creation. If it picks up it could lead a new round of jobs creation. Next week a new round of housing data begins with housing starts and and building permits.

Other data of note this mornings was import prices. Import prices fell as expected after last month's gains but the really important bit was the year over year number. In the last 12 months import prices have fallen more than 2.7%, far more than expected, and a good sign for inflation. The tame inflation data is good for the FOMC and its current QE programs. So long as inflation is not creeping into the system we can assume it will go on with its plans. Bernanke has been very vocal about the committee's desire for transparency so I am confident we will know about any plans to stop asset purchases or raise rates long before they happen. Tomorrow look out for official retail sales figures, core PPI, business inventory and Michigan sentiment. Also, later in the day Ben Bernanke will be giving a talk but is not expected to make any market moving comments.

Retail Comp Store Sales Irrelevant

The monthly release of retail comp stores sales has become irrelevant. The long dwindling list of retailers who actually report the figure has fallen from its peak to a mere 14 out of 120 publicly traded company's. Of the two reports I saw first one was a little disappointing, the other a little surprising. TJ Maxx reported comp sales dropping -2% versus the expected drop of -1%. L Brands, formerly The Limited, was able to increase comps by 3% versus its expected 0%. What this means for the industry is unclear but the traders of the XRT were clearly happy about it. The ETF jumped at the open, creating a small gap and continued to climb throughout the morning. The steadily improving housing sector and labor markets could be leading the speculation of improving revenues and profits in the retail sector. Declining import prices helps with that theory too.

Retail Spyder

Rite Aid was able to post a wildly surprising profit. Expectations of $0.00 EPS were blown away by the reported $0.13. The company also posted full year fiscal 2013 EPS of $0.43. Both numbers reverse losses in the previous comparable periods. Rite Aid also provided some guidance for the coming year. The company is expecting to earn above the current consensus estimates. The stock responded as expected on news of this kind and gapped up just like the retail Spyder. The move took the stock up to a new four year high and the top of its long term trading range.

Rite Aid

Earnings Season Is Here Again

Earnings season kicked off Monday with Alcoa's relieving report. Since then the trickle of reports has been positive as well but without any coming from a company of real importance. Today is more of the same, a dozen or so reports from some small and mid-cap companies but tomorrow the big boys come out to play. Wells Fargo and JP Morgan will be reporting and expectations are high for some any signs of growth, profits and improving conditions. Wells is expected to report $0.87 per share and JPM about $1.37 per share, both slightly below last quarter. Both stocks have been trading in a sideways range over the last 4-6 weeks like much of the rest of the sector. Both stocks are also consolidating above their short term moving averages. The Banking Index is also making this same move. It appears as if there is some expectation for good news tomorrow but that expectation may be capped at resistance. JP Morgan and Wells are both approaching resistance and so is the BKX. Long term bullish momentum in the index is in decline and divergent from price and the shorter term daily charts are suggesting the range may still be intact. I need to see a break above the top of the range at $57.50 to be bullish on the sector.


Technology Hit Fails To Curb Rally

The sharp drop in PC shipments reported for Q1 failed to curb the general market rally. Shipments were reported as dropping nearly 14% in the first quarter. The plunge is blamed on the growing popularity of smart phones and tablets. This shift in demographics is going to hurt those companies unable to make the shift. The Semiconductor Index opened slightly lower today but quickly found support and climbed to make a new one month high. This index is also looking like it is setting up for a possible surge upward. Something else it also has similar to the BKX is resistance. The SOX has long term resistance at $445 and $450 to break through.


The Oil Index

Oil traded down today for the first time since last Thursday. The price of crude lost about $0.50 during the day but remained above the $94. Sluggish world economic growth has led some analysts to lower 2013 oil demand and this is what caused today's decline. The mild nature of the decline makes me think that not many traders are taking the lowered estimates too seriously. U.S. data is still steadily improving so I can't rule out a jump in growth just yet. The Oil Index was able to regain the bullish side of its long term up trend line but still faces stiff resistance. 1350-1375 is an important range for the index now, it will have to break above or else be pushed through the trend line. The indicators are not telling me anything at this time, this index could break to either side at this point.


The Gold Index

Gold hit a one week low today. Several factors were at play including jobless claims, a cut in price target by Goldman Sachs and a requirement for Cyprus to sell 400 million of its reserves. Despite all this negative pressure gold appeared to find a support at $1550 and is building a possible base. The Gold Index may building a similar base but looks more like its consolidating for another down leg. The index failed to cross back above the 61.8% retracement and is looking more likely to move down than up.


The S&P 500

The S&P traded in a tight range today after hitting its peak just before lunch. The hourly charts show a market consolidating just above 1590 with a potential flag pattern. This flag would have a potential target a full 50 points above the current level. While this would be a great move for short term bulls it would also make the index dangerously over extended in new high territory and even more subject to the correction everyone is waiting for. In the very near term the first upside target in such a move would be around 1620. This could happen over the next few days if bank earnings are acceptable. Near term support exists around 1580 and 1570.

SPX hourly

The daily charts show a market breaking above resistance. The MACD and stochastic have both turned bullish coincident with the breakout. At this time there is no up side resistance on the daily or weekly charts as we are in new high territory. I do expect to see some sideways to down activity just on a consolidating basis but this is not a requirement. With the market making new highs daily and earnings looking good there is the possibility of price-chasers entering the market. I do not think this is a good time for price chasing if there every is one. The bull is going to be tested sooner or later, that is without a doubt. If earnings are good and data keeps improving it may not until later in the year. For now the bull market is still intact and the trend is still up.

SPX daily

Unless something changes, like bad reports from the banks, I am still in the buy-the-dip camp. Earnings and data will tell the tale and it will be written in the charts.

Until then remember the trend!

Thomas Hughes

New Option Plays

Agriculture & Storage Devices

by James Brown

Click here to email James Brown


Monsanto Co - MON - close: 107.10 change: +1.45

Stop Loss: 104.95
Target(s): 114.00
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
MON is a giant in the agricultural chemicals industry. Their recent earnings report was better than expected and management raised their 2013 guidance. The stock has garnered a couple of new higher price targets in recent days. Shares have been consolidating sideways in the $103-107 zone most of April but now MON looks poised to breakout.

There seems to be short-term resistance near $107.25. I am suggesting a trigger to buy calls at $107.50. If triggered our target is $114.00.

Trigger @ 107.50

- Suggested Positions -

buy the May $110 call (MON1318E110) current ask $1.42

Annotated Chart:

Entry on April -- at $---.--
Average Daily Volume = 2.8 million
Listed on April 11 2013

Western Digital Corp. - WDC - close: 52.39 change: -0.82

Stop Loss: 50.90
Target(s): 57.50
Current Option Gain/Loss: Unopened
Time Frame: Exit PRIOR to earnings on April 24
New Positions: Yes, see below

Company Description

Why We Like It:
The tech sector had a rough day. The semiconductor sector was downgraded. Meanwhile anything related to PC was hurt following an IDC report showing a -13.9% drop in worldwide PC shipments in the first quarter. A drop in PC sales is not surprising given the growth of the tablet market. Many were blaming Microsoft's new Windows 8 operating system as a stumbling block to computer sales. Yet if this news was so bad then why were traders buying the dip in WDC today?

The stock had rallied to new 15-year highs yesterday. The intraday bounce today could be an entry point. I am suggesting we buy calls at the opening bell tomorrow. However, traders should consider this a more aggressive, higher-risk trade. Earnings are coming up on April 24th and we do not want to hold over the announcement. Furthermore, WDC's all-time high was set in the $54.50-54.75 zone way back in 1997. Thus the $54.50-55.00 area could be resistance.

We'll launch positions tomorrow and try and reduce our risk by keeping position size small and using a stop loss at $50.90. FYI: The Point & Figure chart for WDC is bullish with an $82 target.

*Small Positions*

- Suggested Positions -

buy the May $55 call (WDC1318E55) current ask $1.91

Annotated Chart:

Entry on April -- at $---.--
Average Daily Volume = 2.4 million
Listed on April 11 2013

In Play Updates and Reviews

Equities March Higher

by James Brown

Click here to email James Brown

Editor's Note:

Stocks continue to post gains although the semiconductors and transports failed to participate on Thursday.

Our ALXN and AMT trades were triggered.

Current Portfolio:

CALL Play Updates

Allergan Inc. - AGN - close: 116.17 change: +1.39

Stop Loss: 111.75
Target(s): 117.50
Current Option Gain/Loss: +49.1%
Time Frame: 3 to 4 weeks
New Positions: see below

04/11/13: The stock market's rally has been good for AGN. Shares managed to break out past potential resistance at $115.00 and hit new highs today. Our exit target is $117.50. More aggressive traders could aim higher.

- Suggested Positions -

Long May $115 call (AGN1318E115) entry $2.28

04/10/13 new stop loss @ 111.75
04/02/13 triggered on gap open higher

Entry on April 02 at $113.24
Average Daily Volume = 1.2 million
Listed on April 01, 2013

Alexion Pharma. - ALXN - close: 100.42 change: +0.37

Stop Loss: 97.95
Target(s): 107.50
Current Option Gain/Loss: -10.9%
Time Frame: 2 to 4 weeks
New Positions: see below

04/11/13: The rally in ALXN was less impressive. Shares only gained +0.3% but they did hit new relative highs. The stock also hit our suggested entry point at $100.75 near its high for the day.

At this point I would wait for ALXN to trade above today's high ($100.78) before initiating new positions.

- Suggested Positions -

Long May $105 call (ALXN1318E105) entry $2.75

Entry on April 11 at $100.75
Average Daily Volume = 1.58 million
Listed on April 10 2013

American Tower Corp. - AMT - close: 80.32 change: +0.45

Stop Loss: 78.75
Target(s): 84.75
Current Option Gain/Loss: - 7.3%
Time Frame: Exit prior to earnings in early May
New Positions: see below

04/11/13: Our new trade on AMT has been triggered. Shares pushed past resistance near $80.00 and hit our suggested trigger to buy calls at $80.25. This is a new all-time high for the stock.

Our target is $84.75. More aggressive traders could aim higher. FYI: The Point & Figure chart for AMT is bullish with a $94 target.

- Suggested Positions -

Long May$80 call (AMT1318E80) entry $2.05

Entry on April 11 at $80.25
Average Daily Volume = 2.2 million
Listed on April 09 2013

Ingredion Inc. - INGR - close: 74.01 change: +0.44

Stop Loss: 71.75
Target(s): 74.50
Current Option Gain/Loss: +123.5%
Time Frame: 3 to 4 weeks
New Positions: see below

04/11/13: The stock market strength has also helped INGR rebound. The stock added +0.59% and shares are now flirting with a breakout past short-term resistance near $74.00. This is a new record high for the stock.

Please note that currently our exit target is $74.50. However, we have April options that only have a few days left. Therefore, if INGR does not hit our $74.50 target tomorrow, I am suggesting we go ahead and close our positions on Friday at the closing bell.

- Suggested Positions -

Long Apr $70 call (INGR1320D70) entry $1.70

04/11/13 if INGR does not hit our target on Friday, plan on closing positions on Friday at the closing bell (Friday, April 12th)
04/06/13 new stop loss @ 71.75
04/03/13 new stop loss @ 71.35
04/02/13 our option is up +88%, readers may want to take profits now
Adjusting the exit target to $74.50
03/30/13 new stop loss @ $69.75

Entry on March 25 at $70.65
Average Daily Volume = 585 thousand
Listed on March 23, 2013

Kimberly-Clark - KMB - close: 101.12 change: +0.82

Stop Loss: 97.85
Target(s): 104.00
Current Option Gain/Loss: +18.3%
Time Frame: Exit PRIOR to earnings on April 19th
New Positions: see below

04/11/13: Both KMB and the S&P 500 index are breaking out to new all-time highs. I am raising our stop loss on KMB to $97.85.

Our target is $104.00. However, we will plan to exit prior to KMB's earnings report on April 19th.

- Suggested Positions -

Long May $100 call (KMB1318E100) entry $2.45

04/11/13 new stop loss @ 97.85

Entry on April 10 at $100.25
Average Daily Volume = 2.3 million
Listed on April 06 2013

L-3 Communications - LLL - close: 83.30 change: -0.07

Stop Loss: 79.90
Target(s): 84.85
Current Option Gain/Loss: + 6.2%
Time Frame: Exit prior to earnings on April 25th
New Positions: see below

04/11/13: LLL tagged a new 52-week high intraday. Yet the trading today actually looks short-term bearish with LLL failing twice near the $84.00 level. On a short-term basis I would expect a pullback into the $82.50-82.00 zone.

Our short-term target is $84.85. However, we will plan on exiting positions prior to LLL's earnings report on April 25th.

- Suggested Positions -

Long May $85 call (LLL1318E85) entry $0.80

Entry on April 10 at $82.50
Average Daily Volume = 600 thousand
Listed on April 08 2013

SanDisk Corp. - SNDK - close: 58.62 change: +0.30

Stop Loss: 54.95
Target(s): 59.75
Current Option Gain/Loss: +40.4%
Time Frame: exit PRIOR to earnings on April 17th
New Positions: see below

04/11/13: SNDK saw some weakness this morning but traders bought the dip near $57.50. The stock managed to rebound and close up on the session.

Earlier Comments:
Our short-term target is $59.75. Keep in mind that this is going to be a short-term trade. SNDK is scheduled to report earnings on April 17th and we do not want to hold over the report. FYI: The Point & Figure chart for SNDK is bullish with a long-term $79 target.

- Suggested Positions -

Long May $57.50 call (SNDK1318e57.5) entry $2.35

Entry on April 10 at $56.75
Average Daily Volume = 3.3 million
Listed on April 09 2013

Under Armour - UA - close: 56.03 change: +1.06

Stop Loss: 52.75
Target(s): 58.50
Current Option Gain/Loss: +109.4%
Time Frame: Exit prior to earnings on April 19th
New Positions: Yes, see below

04/11/13: Bullish analyst comments and a new, higher price target helped UA outperform today. Shares rallied past resistance near $55.00 and closed up +1.9% on the session. I am raising our stop loss to $52.75, which is about 50 cents below the 10-dma.

Readers may want to consider taking profits now since our option has more than doubled in value (+109%).

We are aiming for $58.50 but will plan to exit prior to the April 19th earnings.

- Suggested Positions - *Small Positions*

Long May $55 call (UA1318e55) entry $1.48

04/11/13 new stop loss @ 52.75
04/10/13 UA has hit potential resistance at $55.00. Readers may want to take profits right now
04/05/13 trade opened on gap down at $52.45

Entry on April 05 at $52.45
Average Daily Volume = 1.4 million
Listed on April 04, 2013

PUT Play Updates

Concur Technologies - CNQR - close: 65.20 change: -0.14

Stop Loss: 66.05
Target(s): 60.25
Current Option Gain/Loss: -16.1%
Time Frame: 3 to 4 weeks
New Positions: see below

04/11/13: Thursday proved to be a very quiet day for CNQR. After a big rebound off its Tuesday morning lows the rally has stalled below its 300-dma. The lack of participation in the market's rally today could also be a warning sign for the bulls. I am not suggesting new positions.

Earlier Comments:
Readers may want to keep their position size small. The most recent data listed short interest at 21% of the small 53.5 million share float. That does raise the risk of a short squeeze should CNQR suddenly reverse higher. FYI: The Point & Figure chart for CNQR is bearish with a $59 target.

- Suggested Positions -

Long May $65 PUT (CNQR1318Q65) entry $3.40

04/09/13 new stop loss @ 66.05

Entry on April 05 at $64.75
Average Daily Volume = 325 thousand
Listed on April 03, 2013

Joy Global, Inc. - JOY - close: 54.84 change: -2.40

Stop Loss: 58.55
Target(s): 54.10
Current Option Gain/Loss: +70.4%
Time Frame: 3 to 4 weeks
New Positions: see below

04/11/13: JOY failed at resistance yesterday and the reversal accelerated lower today with a -4.19% drop to new four-month lows. Please note that I am adjusting our strategy on JOY. We have the April puts, which only have six trading days left. Now it's certainly possible that JOY could fall toward what is likely round-number support near $50.00. Yet I also see potential support near the $54.00 level. If we had the May puts then maybe I would hold on and aim for the $50 area. However, since our options only have a few days left I am adjusting our exit target to $54.10. I am also moving the stop loss down to $58.55. Traders may want to consider taking profits and closing positions tomorrow no matter what.

- Suggested Positions -

Long Apr 60 PUT (JOY1320P60) entry $3.05

04/11/13 new stop loss @ 58.55, adjust exit target to $54.10
04/09/13 adjust stop loss to $59.05
04/03/13 new stop loss @ 58.65

Entry on March 25 at $57.50
Average Daily Volume = 2.7 million
Listed on March 20, 2013