Option Investor

Daily Newsletter, Tuesday, 4/16/2013

Table of Contents

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

Market Wrap

Relief Rally?

by Jim Brown

Click here to email Jim Brown

The Dow recovered slightly more than 50% of its Monday loss but sentiment was still shaky.

Market Statistics

The morning economics coupled with a sense the market was oversold contributed to a strong gain but it was not straight up. The initial opening spike sold off until 11:00 where a lunch time rally ensued. At 1:00 another two hour decline began but the dip buyers were feeling better and the last hour saw stocks rally again to close at the high of the day.

Dow Chart - 5 Min

On Monday we saw another round of economic reports that came in weaker than expected in both the U.S. and China. That added to the commodity swoon that dragged the market lower. Today the reverse was true. The Consumer Price Index (CPI) declined -0.2% in March. That was slightly more than the -0.1% analysts expected. It was well below the +0.7% increase in February. This decline brought the year over year inflation gain down from +2.0% to +1.5%.

The decline in the headline rate was helped by a -2.6% decline in energy prices. The gasoline component declined -4.4%. The sharp drop in commodity prices will help push inflation lower in the months to come.

The core rate rose only +0.1% and well within the Fed's tolerance zone. The core rate was well below the +0.2% and +0.3% in February and January respectively. Year over year core inflation is holding at +1.9% and the lowest level since July.

The decline in inflation will keep the pressure off the Fed to end the QE program and raise interest rates.

New Residential Construction soared in March to 1,036,000 annualized units compared to only 917,000 in February. This is the fastest rate of growth since mid-2008 and the first time over one million since before the housing crash. Housing starts grew at a 47% faster rate than in March 2012. Unfortunately all the gain came in multifamily units. The starts for single-family homes declined by -4.8% while multifamily starts soared by +31%. Total permits declined -3.9% to 902,000 units.

The weakness in single-family starts is probably due partly to the uncertainty surrounding the year-end fiscal cliff and the March 1st sequester. The multifamily sector is benefitting from the consumer credit problem. After the financial crisis there are tens of millions of consumers that cannot buy a house today because of credit problems. This is benefitting the rental market and investors are spending money to build apartments and condos. The rise in multifamily construction should benefit employment because large complexes require large crews.

New Housing Starts

Industrial Production for March rose +0.4% and that was slightly better than the expectations of +0.2%. This compared to +1.1% gain in February. The street liked the headline number but as always if you look at the internals there was not much to be happy about.

The big gains came from the utilities. Power production soared +5.3% thanks to the coldest March in more than a decade. That electrical generation to heat homes and offices only added to utility bills rather than increase the manufacturing base.

Total manufacturing declined -0.1% and ex-autos it declined -0.3% and the largest decline since October. Durable goods declined -0.2%. The mining sector declined -0.2%. Production of construction supplies declined -1.3%. Capacity utilization for manufacturing declined -0.2% to 77.1%. I don't think investors should have been excited about this report.

The economic calendar for Wednesday has the biggest report of the week. The Fed Beige Book is expected to show weakness in the 12 regions in March as a result of the sequester on March 1st. It may be too soon to notice a big impact but there could be early signs. This report will be examined for strength or weakness that could lengthen or shorten the Fed's QE program.

The Philly Fed Manufacturing Survey on Thursday is expected to show improvement over March but the majority of the regional Fed surveys have been showing declines. If the Philly Fed did disappoint it could be market negative.

Through Tuesday 20 of 25 economic reports in April have disappointed.

Economic Calendar

Earnings on Tuesday were led by Goldman Sachs (GS). Goldman reported earnings of $4.29 compared to estimates of $3.88. Net income was $2.19 billion. Revenue was $10.09 billion. Annualized return on equity rose to 12.4% but only slightly above the 12.2% in the year ago quarter. Before the financial crisis this used to be in the 30% range. JP Morgan reported 13.0% and Wells Fargo 13.59%.

The stock sold off after Goldman's leaders sounded cautious on the conference call. They said investors were still nervous about the economy and the bank would continue to focus on controlling costs. Investors are always glad when costs come down but they don't feel that should be the overriding goal of management. They want to see revenue and profits rise from increased business rather than cost cutting.

Shares also declined on lower trading revenues. Goldman missed estimates on both bond and stock trading. The gains came from underwriting bond offerings from clients as the corporate world continues to load up on debt while rates are low.

Goldman also said corporate clients felt better in January and February but pulled back again in March as a result of the sequester fears and the bank robbery in Cyprus and the potential for it to spread to other eurozone countries. Shares of GS declined -2.36 on the earnings release.

Goldman Chart

Johnson & Johnson (JNJ) posted a -10.6% decline in profits to $1.44 per share or $3.5 billion because of higher costs from acquisition and litigation charges as well as higher production costs. Revenue rose +8.5% to $17.51 billion. The earnings per share beat the estimate by 4 cents. The company guided for full year earnings at $5.35-$5.45 and revenue to grow by 6% to $71.0-$71.7 billion. The company said medical device sales would have declined except for an acquisition of Synthes last summer. Shares of JNJ rallied +2%.

JNJ Chart

Coca Cola (KO) reported earnings of 46 cents that beat estimates by a penny on a -1% decline in sales but shares of KO soared +5.7%. Sales volume grew +11% thanks to Eurasia and Africa up +15%. Latin America sales rose +4% and North America +1%. Consumer trends in the U.S. have been away from sugared beverages by some consumers and other buyers going towards the energy drinks like Monster Beverage.

Investors also liked a deal announced today for KO to cut the amount of volume it handles by 5% for five independent bottlers. This was possible because Coke bought Coca-Cola Enterprises (CCE) in October 2010. Coke will continue to sell syrup to the bottlers who will spend more of their own money to market the products.

Coca-Cola Chart

US Bancorp (USB) declined after posting earnings of 73 cents that were in line with estimates. Income rose +6.7% to $1.4 billion. Revenue declined -1.1% to $4.9 billion. That was slightly below consensus estimates. Deposits were up +7.3% to $16.7 billion and loans rose +5.8% to $12.3 billion. Net interest margin fell -12 basis points because of more money in lower yielding investments. Noninterest income fell -3.3% to $2.2 billion on reduced mortgage banking revenues. USB has not been as aggressive in competing for new mortgages. Overall it was a lackluster earnings report and shares declined to two month lows.

USB Chart

After the bell Intel (INTC) reported earnings of 40 cents or $2.0 billion that declined -27% from year ago levels. Analysts were expecting 41 cents. Revenue declined -2.3% to $12.6 billion. Shipments of PC chips declined -7% but they shipped 6% more server chips. Intel guided in line with analyst estimates for the current quarter at $12.9 billion in revenue. They lowered capex targets by $1 billion to $12 billion. Intel expects to sell more chips later this year because of more different types of devices. Those used in cell phones and tablets are cheaper than PC chips but there are more devices. However, Intel expects the margin to remain in the 60% range. Intel shares were flat in afterhours trading. This was about as close as you can get to a disappointment. Fortunately the IDC news last week on dramatically lower PC sales had already conditioned the market not to expect too much.

Intel Chart

Yahoo (YHOO) also reported earnings after the close and the result was a sharp drop in YHOO shares. Yahoo posted earnings of 38 cents compared to estimates of 25 cents but there was some confusion over what the 38 cent number contained. Yahoo said starting with this report they were going to change the impact of stock based compensation. Analysts were scrambling to decide what that entailed.

Yahoo's revenue declined by -7%. Display advertising fell by -11% and the number of ads displayed declined as well. Search revenue declined -6%. Investments in their Asian business totaled $216 million and boosted the overall earnings. Revenue after subtracting ad commissions was $1.07 billion and below estimates. The overall earnings report seemed to be saying they were continuing to lose ground to Google.

Shares declined -4.5% after the bell.

Yahoo Chart

Earnings due out on Wednesday include AXP, BAC and EBAY.

After imploding on Monday the commodity sector saw a slight rebound today. It was very slight. After a -$149 point decline on Monday we saw gold gain $5 today to $1366. That is hardly a booming rebound. Silver gained a penny to $23.37 and crude oil was flat at $88.75.

The capitulation flush on Monday was due to weaker economic data from China suggesting growth in 2013 could be at a 13 year low. China's weakness is due to the recession in the eurozone because 35% of China's exports go to Europe.

This global weakness story is not over just because some commodities declined to multiyear lows on Monday. This story will be in the background for the rest of 2013. That is probably the reason commodities did not rebound as expected on Tuesday. You would have thought that a massive decline in gold prices to $1321 intraday would have brought the buyers back in volume. Unfortunately many of those buyers of gold just had their accounts trashed by the massive $200 decline. I am sure they are still reeling in shock.

Commodities are the market leaders when the global economy is expected to rise or fall. In this case they appear to be telling us the global economy is headed sharply lower.

JP Morgan said today the commodity "super cycle" still has a decade left to run. However, the "mid-cycle pause" may last for 12 more months. The bank expects commodity costs to rise to new highs over the next ten years. While that does not make me want to run out and load up on gold I am strongly convinced the current QE programs around the world are going to cause rampant inflation in the coming years and we will see new highs for the metals. The timing of that inflationary cycle is the key. There is no date on my calendar but we will know it when it arrives. Until then I will just keep adding to my silver stash.

Gold Chart

The news surrounding the Boston bombing suggests the police have no suspects. They do know the bombs were encased in pressure cooker pots and left in backpacks along the route. They were not in the trashcans as previously thought. The heavy duty pressure cookers make the explosion similar to a pipe bomb but capable of holding more explosive and shrapnel like nails and BBs to create more damage. They have pictures of the backpacks on the ground next to the building and trashcan. When every person in America has a cell phone camera on their body at all times there is no shortage of candid pictures that could contain evidence for the prosecution.

The pressure cooker method of building a bomb was widely advertised by Al-Qaeda in their online English language Inspire magazine. A pressure cooker was used in an attempted bombing of Time Square in 2010. In 2006 pressure cooker bombs were used to kill 130 people in Mumbai India when they were placed on trains. Two months ago a pressure cooker bomb killed 5 in a restaurant in Afghanistan. The tightly closed pressure cooker allows the pressure to build before it finally explodes and turns the metal of the pot into shrapnel.

There was another terror attack today but it was not widely reported. Senator Roger Wicker of Mississippi received a letter that tested positive for the lethal poison Ricin. As little as a few grains the size of table salt can kill an adult human. A dose the size of 1/228th of an aspirin tablet is fatal. The letter was intercepted by the Postal Service before it was delivered. Mail to lawmakers is routinely scanned for dangerous compounds after the Anthrax scare several years ago.

The rebound today was decent but lackluster. That may be hard to believe with a +22 point gain on the S&P and +157 on the Dow but everything is relative. Advancers beat decliners by a 3:1 margin but volume of 6.3 billion shares was -2.1 billion less than the 8.4 billion on Monday. We had what some are calling a capitulation event on Monday but we did not have a capitulation rebound today. The AD imbalances on Monday favored decliners by a 7:1 margin.

The S&P declined to 1552 on Monday and right to the initial support from early April. While the -37 point decline was dramatic the +22 point rebound was not. If the rally continues tomorrow then more buyers may be convinced the worst is over and it is safe to get back into the market.

The unofficial analyst target for late April is still 1600. We came within 3 points last week before the selling began. The three Es of economics, earnings and Europe are going to determine if that target will be hit in April.

The closer we get to May the less likely the rally will succeed.

S&P Chart

The Dow chart is another textbook example of support and resistance. The uptrending blue line from the February 4th highs was drawn over a month ago and has not been moved. The Dow has used that as support since late March and it has been perfect. That also means a downside break through the convergence of the two blue lines would have more validity.

Actually the big red candle from Monday was a positive event. It erased the series of spiked gains from last week but kept the longer term uptrend intact. Had it not been accompanied by the commodity implosion I think many more investors would have bought the dip.

Dow Chart

The Nasdaq rebound was fairly broad based and most of the big caps contributed. However, Apple can't seem to move away from the $420 level and you would have expected some serious short covering after the frantic day Apple had on Monday. The volatility was strong but it only traded in a $5 range. Today was a $6 range. Obviously the buyers and sellers are mired in a form of trench warfare at the $425 level.

Google was the biggest Nasdaq gainer at +$10. They have earnings on Thursday so they are not likely to break higher on Wednesday.

The Nasdaq has clear resistance at 3300 and clear support at 3200.

Nasdaq Chart

The Russell 2000 remains our canary in the coal mine. The rebound was lackluster and the Russell is well below the relative levels of the big cap indexes. The Russell has not set a new high since March 15th. The odds are very strong we will see a breakdown to 895 or lower.

Russell 2000 Chart

Dow Transports Chart

I would caution about buying Monday's dip. The rebound gains may already be history. The three Es are going to determine our fate. The Fed Beige Book on Wednesday afternoon could portray a decline in business conditions in the U.S. since the weekly economics reports are already heading in that direction. The closer we get to May the more risky the market becomes.

I would pay close attention to the Russell and the Dow Transports the rest of the week. They are the true sentiment indicators for market health.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email

New Option Plays

Losing Altitude

by James Brown

Click here to email James Brown


Atlas Air Worldwide - AAWW - close: 38.73 change: -0.25

Stop Loss: 40.05
Target(s): 33.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
AAWW outsources aircraft and aviation services. This looks like a simple momentum trade for the bears. AAWW has been underperforming the market. April has seen shares break down below support near $40.00. Now after two weeks of trying to find a bottom AAWW looks poised to breakdown again. On the weekly chart AAWW has created a large (bearish) head-and-shoulders pattern.

More aggressive traders could launch bearish positions now. I am suggesting a trigger to buy puts at $38.00. If triggered our target is $33.50 but more conservative traders could exit early near $35.00 instead. FYI: The Point & Figure chart for AAWW is bearish with a $29 target.

Trigger @ 38.00

- Suggested Positions -

buy the May $37.50 PUT (AAWW1318Q37.5) current ask $1.45

Annotated Chart:

Weekly Chart:

Entry on April -- at $---.--
Average Daily Volume = 262 thousand
Listed on April 16 2013

In Play Updates and Reviews

No Follow Through Lower

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. market rebounded right out of the opening gate this morning. The S&P 500 closed near its highs for the session. The lack of follow through lower means the trend of higher lows remains intact.

Our AGN trade was stopped out.
Prepare to exit our SNDK trade tomorrow.

Current Portfolio:

CALL Play Updates

American Tower Corp. - AMT - close: 80.59 change: +1.16

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

04/16/13: AMT dipped just below its simple 10-dma before bouncing this morning. The stock posted a +1.4% gain and almost erased yesterday's losses. Readers may want to wait for a rally past $81.00 before initiating new positions.

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

Gilead Sciences - GILD - close: 52.01 change: +1.33

Stop Loss: 49.75
Target(s): 56.50
Current Option Gain/Loss: - 9.2%
Time Frame: Exit PRIOR to earnings on May 2nd
New Positions: see below

04/16/13: Two days in a row this week GILD has garnered bullish analyst comments and a higher price target. That helped shares gap open higher this morning. Today's rebound (+2.6%) managed to erase yesterday's losses.

Earlier Comments:
I do consider this a more aggressive entry point. More conservative traders may want to wait for a pullback near the $50.50-50.00 zone as an alternative entry point. Our target is $56.50 but we'll plan on exiting prior to the May 2nd earnings report.

- Suggested Positions -

Long May $52.50 call (GILD1318e52.5) entry $1.94

Entry on April 15 at $52.25
Average Daily Volume = 11.7 million
Listed on April 13 2013

Kimberly-Clark - KMB - close: 101.58 change: +1.37

Stop Loss: 99.45
Target(s): 104.00
Current Option Gain/Loss: +34.6%
Time Frame: Exit PRIOR to earnings on April 19th
New Positions: see below

04/16/13: KMB recovered from yesterday's dip with a +1.3% gain and a new intraday high near $102. While the trend is up I want to remind you that our play is almost over. KMB is scheduled to report earnings on Friday morning (April 19th). We will plan exiting positions Thursday at the closing bell if KMB doesn't hit our target by then.

- Suggested Positions -

Long May $100 call (KMB1318E100) entry $2.45

04/16/13 prepare to exit by Thursday's closing bell
04/15/13 new stop loss @ 99.45
04/13/13 new stop loss @ 98.75
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: 82.68 change: +1.10

Stop Loss: 79.90
Target(s): 84.85
Current Option Gain/Loss: -31.2%
Time Frame: Exit prior to earnings on April 25th
New Positions: see below

04/16/13: The defense industry lagged behind the bounce in the S&P 500 but LLL managed a +1.3% gain. Shares look poised to challenge its recent high near $84.00 soon. More conservative traders might want to adjust their stop closer to yesterday's low (near the 20-dma).

Earlier Comments:
We have just less than two weeks left for this trade to work. Nimble traders could use a bounce from current levels as a new entry point. More conservative traders may want to raise their stop loss.

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: 57.49 change: +1.50

Stop Loss: 55.75
Target(s): 59.75
Current Option Gain/Loss: +12.7%
Time Frame: exit PRIOR to earnings on April 17th
New Positions: see below

04/16/13: SNDK outperformed the broader market with a +2.6% bounce on Tuesday. That may be due to another analyst raising their price target on the stock. Investors seem bullish ahead of the company's earnings report. Tomorrow is our last day. SNDK is scheduled to report earnings on April 17th after the closing bell. We will plan on exiting positions tomorrow at the close to avoid holding over the announcement.

- Suggested Positions -

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

04/16/13 prepare to exit tomorrow (04/17/13) at the closing bell
04/13/13 new stop loss @ 55.75

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

Ulta Salon - ULTA - close: 86.64 change: +0.88

Stop Loss: 84.95
Target(s): 92.00
Current Option Gain/Loss: -12.8%
Time Frame: 3 to 4 weeks
New Positions: see below

04/16/13: Tuesday was a relatively quiet session for ULTA. Shares churned sideways between $85.50 and $87.00. We are cautiously bullish here. Readers could wait for a rally past $87.00 before considering new positions.

Earlier Comments:
I do consider this an aggressive, higher-risk trade so we do want to limit our position size to reduce our risk. There is a chance that the $90.00 level, the early March high at $92.12, or any of the myriad of moving averages directly overhead could become resistance for the stock.

*Small Positions* - Suggested Positions -

Long May $90 call (ULTA1318e90) entry $1.95

Entry on April 15 at $87.50
Average Daily Volume = 1.78 million
Listed on April 13 2013

Western Digital Corp. - WDC - close: 52.03 change: +0.87

Stop Loss: 50.90
Target(s): 57.50
Current Option Gain/Loss: -15.1%
Time Frame: Exit PRIOR to earnings on April 24
New Positions: see below

04/16/13: WDC followed the market higher this morning and posted a +1.7% gain by the close. Yet while the major indices closed near their high for the session WDC was pulling back at the closing bell. I am urging traders to remain cautious.

*Small Positions* - Suggested Positions -

Long May $55 call (WDC1318E55) entry $1.85

Entry on April 12 at $52.41
Average Daily Volume = 2.4 million
Listed on April 11 2013

PUT Play Updates

FedEx Corp. - FDX - close: 95.14 change: +0.43

Stop Loss: 96.25
Target(s): 86.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

04/16/13: Today's bounce in FDX was relatively meager. The S&P 500 added +1.4% and the transportation average added +2.2%. Yet FDX only gained +0.4%. This "weakness" could be a clue. Currently we are on the sidelines waiting for FDX to break down below support.

Earlier Comments:
I am suggesting a trigger to launch bearish positions at $93.50. If triggered our target is $86.50.

Trigger @ $93.50

- Suggested Positions -

buy the May $92.50 PUT (FDX1318Q92.5)

Entry on April -- at $---.--
Average Daily Volume = 3.3 million
Listed on April 15 2013


Allergan Inc. - AGN - close: 113.12 change: -0.91

Stop Loss: 112.45
Target(s): 117.50
Current Option Gain/Loss: -25.4%
Time Frame: 3 to 4 weeks
New Positions: see below

04/16/13: Most of the market rallied off the open this morning. Not so for shares of AGN. Before the opening bell the company disclosed it had received a "Complete Response Letter" from the U.S. FDA for its new drug application for LEVADEX, an inhalation aerosol for the acute treatment of migraine in adults. Essentially this is a temporary rejection letter from the FDA pointing out issues the government would like AGN to fix.

Shares of AGN gapped open lower on the news at $112.99 and spiked down toward $111.94 on an intraday basis although if I look at my intraday charts the morning low appears to be $110.00 so that could be a bad tick or an errant pre-market trade. Our stop loss was hit at $112.45.

- Suggested Positions -

May $115 call (AGN1318E115) entry $2.28 exit $1.70 (-25.4%)

04/16/13 stopped out
04/13/13 new stop loss @ 112.45
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