Option Investor

Daily Newsletter, Tuesday, 7/30/2013

Table of Contents

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

Market Wrap

No Change

by Jim Brown

Click here to email Jim Brown

The Dow and S&P were little changed ahead of the expected "no change" from the Fed.

Market Statistics

Art Cashin said traders were sleepwalking ahead of the Fed and that was an accurate description. Traders were doing nothing but babysitting their positions and reacting to a few earnings reports. Wednesday is going to be a Red Bull day as traders try to decipher the printed words from the FOMC meeting, GDP and the ADP Employment.

The economic calendar for Tuesday was light and mixed. Consumer Confidence for July declined from the earlier reading of 82.1. That earlier reading was a five year high so a minor decline for July is nothing to be concerned about.

The present conditions component rose from 68.7 to 73.6. The expectations component fell from 91.1 to 84.7. Buying plans improved for all categories. Respondents planning on buying a car rose from 11% to 12.6%. Those planning on buying a home rose from 5.4% to 6.3%. Appliance buyers rose from 48.8 to 50%. Twelve month inflation expectations remain off the scale at 5.5% where it has been for the last year. With real inflation at 1.8% today those consumers are way out of touch with reality.

Case Shiller home prices rose only .1% to 12.2% from 12.1% for the May period. This is a lagging report but sudden fade from the +2% per month increases in prior months was somewhat of a shock to the market. Since this was the May period it was before the interest rates really began to rise. This pause in prices is more than likely the result of more foreclosures coming on the market.

The Texas Service Sector Outlook rose from 12.2 to 15.3 for July. That is the opposite direction from the manufacturing outlook that declined from 6.5 to 4.4 on Monday. All the internal components improved except hours worked, which declined from -0.6 to -2.7 and the second month in contraction. Texas is primarily a service state with manufacturing a growing component but still lagging.

Tomorrow's calendar is the hurdle for the week. The ADP Employment at 8:30 is expected to show job growth declined in July. This data will allow analysts to further refine their estimates for Friday's Nonfarm Payrolls so the ADP data is important.

The first look at Q2 GDP is also out at 8:30 and is expected to decline to something in the 0.4% to 0.8% range from +1.78% in Q1. However, the government is going to release a major revision in the way GDP is calculated and revise the data all the way back to 1929. Whenever the government revises the calculations the net result is normally an upward revision to the data. Entire recessions have been erased by backward revisions to the data. The government always wants to show growth even if it is not there so the hunt is always on for a new way to spin the numbers.

One analyst put this into perspective like this. The new rules change the money spent on developing content for TV from "expense" to "investment" and that changes the impact on GDP. However, there is a qualification. A series like Seinfeld that runs for a long time and has significant revenue from rerun syndication qualifies for investment status. A series like Jersey Shore or Keeping up with the Kardashians it treated like a newspaper. A week after it airs it is old news and nobody wants to see it in reruns 2-3 years later. That puts the "reality" shows in the expense category and the drama shows into the investment category.

Obviously government bean counters are really digging for something they can spin positively and push GDP numbers higher. If the "revised" GDP comes in well over existing expectations the low information investors will simply see a big number and assume all is well with the economy.

Watch the inflation component called the Personal Consumption Expenditures (PCE), which showed inflation was 2.6% when last updated and estimates are for a decline to 1.6% in Q2. Bernanke and the crew do not want to see falling inflation and a significant decline will keep QE in force.

The FOMC announcement is expected not to change and contain no additional comments about tapering QE. The FOMC will want to see as much data as possible before the September meeting where analysts do expect some change to QE.

If the statement does change significantly it will impact the market.

Economic Calendar

Earnings headliners today were Coach, Discovery, Symantec, Amgen, Merck, NYSE, and US Steel to name a few.

High end retailer Coach (COH) was knocked for a -8% loss after reporting earnings that disappointed the street. High end handbag sales declined with same store sales negative for the quarter and they lowered guidance for the year. Same store sales declined -1.7% in North America and that is where they get 63% of their sales. Not all the news was bad. Sales rose +35% in China helping to push international sales up +17%. Adjusted earnings of 89 cents were in line with estimates but revenue was light. The company warned investors not to expect any improvement in the current fiscal year which began on June 30th. That is some bearish guidance when you are four weeks into the year and project no growth for the year. Also, two more executives announced they were leaving. The exit door is open and those exits follow two other high management positions changes announced several months ago. It may be time to "bag" Coach as an investment and move to Michael Kors instead.

Coach Chart

Merck (MRK) posted a weak quarter as the pain of generics continued to weigh on older drugs. The company also said exchange rates knocked -3% off revenue. Adjusted earnings were 84 cents compared to estimates of 82 cents. Revenue fell -11% to $11.01 billion and analysts were expecting $11.24 billion. The company said 2013 sales would be 5-6% below 2012 levels of $47.27 billion. Shares of MRK fell -34 cents so no mad rush out of the stock.

The NYSE (NYX) reported earnings of 63 cents compared to estimates of 58 cents. Revenue rose +1% to $611 million compared to estimates of $601 million. Earnings were helped by a -30% reduction in capital spending. Shares gained 28 cents on the news.

Shares of US Steel (X) fell -7% after the company reported a loss of 54 cents but that was better than estimates for a loss of 81 cents. The earnings contain an adjustment of $3 million for a tax loss. Revenues fell -12% to $4.429 billion and misses estimates by $150 million. Guidance was lackluster and shares were sold.

Amgen (AMGN) profits declined slightly to $1.89 but remained well above estimates of $1.74. Revenue rose +5% to $4.68 billion and beat estimates of $4.49 billion. Rising expenses hurt Amgen with an 8% increase due mostly to a 17% jump in research spending. Shares of Amgen fell -1.90 after the report.

Symantec (SYMC) reported record earnings of 44 cents with a +2% increase in revenue to $1.71 billion. That beat estimates of 36 cents and $1.64 billion. For the current quarter the company projected earnings of 43 cents compared to estimates of 45 cents. Revenue will average $1.67 billion and below estimates of $1.71 billion. Shares of SYMC rose +$1 in afterhours trading.

The earnings calendar for Wednesday included Whole Foods, MasterCard, Marriott, Humana, MetLife and Allstate. The earnings will be overshadowed by the various economic events and it will be GDP-FOMC headlines all day long.

Earnings Calendar

Monday and Tuesday were a placeholder days. Traders had to suffer through the light volume and lackluster earnings before they could get to the economic hurdle on Wednesday. Think of Monday and Tuesday as blank squares on a children's board game. They are only there to provide an interlude between important events.

The rest of the week is one big important event. The market has been going sideways with a slight downward tilt for the last two weeks and nothing changed today. I am not going to spend a lot of time trying to spell out the market moves today since the Dow lost -1.38 and the S&P gained .63. I think you get the idea from those closing numbers.

The S&P has been stuck on 1685 for the last five days with a few intraday swings above and below that level but always returning. Real support is 1680 and initial resistance is 1690. That does not give the index a lot of room to run before hitting an obstacle.

The market is not running on fundamentals or technicals. This strictly headline driven and there will be a lot of driving over the next three days. Hopefully by Friday's close a new direction will appear.

S&P Chart

The Dow chart looks the same as the S&P with a narrow range and 15,500 playing the role of price magnet. Initial resistance is 15,600 and support 15,400 giving the Dow a little more range but it is not being used. Volatility has died along with the volume and the candles are very short.

Dow Chart

The Nasdaq is actually showing some life thanks to Apple. The Nasdaq posted a 17 point gain today and made a new 13 year intraday high at 3629. The Nasdaq chart appears to be suggesting a breakout ahead assuming the major headlines this week don't cause serious market damage.

Apple is proving power for the Nasdaq. Shares finally broke over the $430 resistance and nearly broke through the $455 level today. If Apple is healthy the Nasdaq is healthy. If Apple can make over the $455-$465 resistance levels we will have a summer tech rally that could improve sentiment all across all the indexes.

Nasdaq resistance is 3625 and support 3575.

Apple Chart

Nasdaq Chart

The Russell 2000 closed positive today with a +3 point gain but every day over the last week it has put in a lower high. Support at 1040 is holding but the intraday highs are declining. This suggests trouble ahead from a chart perspective. However, I view it as managers trimming positions ahead of the economics rather than taking profits. We are still on watch for a break below 1040 as a short signal.

Russell Chart

The market wants to go up. There is no other way to say it. It is handicapped by the large number of major economic events but there has not been a major sell off in advance of those events. We have seen caution creeping in but no wholesale selling.

If the headlines don't damage the market I think the next direction could be up despite August being a historically bad month for the market. I want the market to go down and give us a real buying opportunity after eight months of gains. However, what I want and what is a normal seasonal occurrence is not relative. Money is still flowing into the market and that is the life blood for stocks. Even claims of large scale distribution by institutions have failed to weaken sentiment. We need to be ready for a breakdown but continue to follow the trend until it ends. Keep those stops tight. There is always another day to trade as long as you have money in your account.

Enter passively, exit aggressively!

Jim Brown

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New Option Plays

Strength In Consumer Goods

by James Brown

Click here to email James Brown

Editor's Note:

In addition to tonight's new candidate(s), consider these stocks as possible trading ideas and watch list candidates. Some of these stocks may need to see a break past key support or resistance:

(bullish ideas) CTXS, LMT, QIHU, KORS, TIF, WHR, ORLY, UTX, EQT,


Polaris Industries - PII - close: 110.09 change: +1.20

Stop Loss: 108.49
Target(s): 114.85
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
PII makes a wide variety of recreational vehicles and accessories. The company reported earnings on July 23rd and beat analysts' profit estimates by two cents. Management then raised their 2013 guidance.

PII has delivered an impressive six-week rally. Boil it down and this is a momentum trade. Right now PII is seeing a short-term consolidation sideways under the $110 level. Today's high was $110.84. We are suggesting a trigger to launch small bullish positions if PII can hit $111.05. If triggered our short-term target is $114.85.

I want to warn readers that while the trend for PII is up it could be a prime target for profit taking if the FOMC announcement or Q2 GDP estimates or the jobs report on Friday disappoint market participants. We definitely want to keep our position size small to limit our risk.

Trigger @ 111.05 *small positions*

- Suggested Positions -

Buy the Sep $115 call (PII1321i115) current ask $1.80

Annotated Chart:

Entry on July -- at $---.--
Average Daily Volume = 765 thousand
Listed on July 30, 2013

In Play Updates and Reviews

MOS Exceeds Our Target

by James Brown

Click here to email James Brown

Editor's Note:

Shares of the Mosaic Company (MOS) exceeded our bearish target today with a big move lower.

Elsewhere we have removed VFC as a candidate.

Current Portfolio:

CALL Play Updates

The Hain Celestial Group, Inc. - HAIN - close: 74.09 change: -0.60

Stop Loss: 71.95
Target(s): 79.50
Current Option Gain/Loss: -30.0%
Time Frame: exit PRIOR to August expiration
New Positions: see below

07/30/13: HAIN delivered a disappointing performance with a -0.8% pullback. Shares are hovering near $74 and their 10-dma. Readers may want to raise their stop loss. I am not suggesting new positions at this time.

Earlier Comments:
The most recent data listed short interest at 20% of the relatively small 38.6 million share float. The shorts might be ready to cover again. I am suggesting a trigger to launch small bullish positions at $74.40. If triggered our target is $79.50. FYI: The Point & Figure chart for HAIN is bullish with a $99 target.

- Suggested Positions -

Long Aug $75 call (HAIN1317H75) entry $1.50

Entry on July 25 at $74.40
Average Daily Volume = 420 thousand
Listed on July 22, 2013

Harman Intl. Industries - HAR - close: 59.15 change: +0.39

Stop Loss: 57.40
Target(s): 59.50
Current Option Gain/Loss: +72.2%
Time Frame: Exit PRIOR to earnings on August 6th
New Positions: see below

07/30/13: HAR is still inching higher with a +0.6% gain today. The intraday high was $59.37. Our exit target is $59.50 but readers may want to exit immediately to lock in gains. The simple 10-dma has risen to $57.50. We will raise our stop loss to $57.40.

Earlier Comments:
Don't forget that we will plan on exiting positions prior to the company's earnings report on August 6th. FYI: The Point & Figure chart for HAR is bullish with a long-term $81 target.

- Suggested Positions -

Long Aug $57.50 call (HAR1317H57.5) entry $1.80*

07/30/13 new stop loss @ 57.40
07/25/13 new stop loss @ 55.90
07/23/13 new stop loss @ 55.40, adjust the exit target to $59.50
*option entry price is an estimate since the option did not trade at the time our play was opened.

Entry on July 18 at $56.10
Average Daily Volume = 785 thousand
Listed on July 13, 2013

Johnson & Johnson - JNJ - close: 93.17 change: -0.04

Stop Loss: 91.49
Target(s): 98.00
Current Option Gain/Loss: Aug.call +2.9% & Sept.call: +1.2%
Time Frame: 3 to 6 weeks
New Positions: see below

07/30/13: JNJ tagged a new all-time high near the $94.00 level this morning. Shares eventually erased their gains to close virtually flat on the session.

- Suggested Positions -

Long Aug $92.50 call (JNJ1317H92.5) entry $1.37

- or -

Long Sep $95 call (JNJ1321i95) entry $0.82

Entry on July 29 at $93.05
Average Daily Volume = 9.0 million
Listed on July 27, 2013

Xilinx Inc. - XLNX - close: 46.24 change: +0.57

Stop Loss: 44.99
Target(s): 49.85
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

07/30/13: Semiconductor stocks were showing relative strength today and XLNX added +1.24%. The stock is poised to breakout from its current sideways consolidation.

Earlier Comments:
We are suggesting a trigger to buy calls at $46.65. If triggered our target is $49.85. I would keep our position size small since bears could argue that XLNX is overbought with a significant five-week rally already underway.

Trigger @ 46.65 *small positions*

- Suggested Positions -

buy the Aug $46 call (XLNX1317H46)

Entry on July -- at $---.--
Average Daily Volume = 3.5 million
Listed on July 25, 2013

PUT Play Updates

Accenture Plc - ACN - close: 73.74 change: +1.37

Stop Loss: 75.21
Target(s): 70.25
Current Option Gain/Loss: -35.2%
Time Frame: 3 to 4 weeks
New Positions: see below

07/30/13: ACN popped higher this morning but the rally struggled with technical resistance near $74 and its 200-dma. More conservative traders may want to lower their stop loss closer to $74.00.

FYI: The Point & Figure chart for ACN is bearish with a $54 target.

- Suggested Positions -

Long Aug $72.50 PUT (ACN1317T72.5) entry $0.85

Entry on July 24 at $73.80
Average Daily Volume = 4.9 million
Listed on July 23, 2013

Darden Restaurant - DRI - close: 49.02 change: -0.00

Stop Loss: 49.35
Target(s): 44.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

07/30/13: DRI is still struggling with technical resistance near its 10-dma and 150-dma. The stock closed unchanged on the session.

Currently we are waiting for a new relative low. The plan is to buy puts if DRI hits $47.75.

Earlier Comments:
We do want to keep our position size small. Bulls could argue that DRI is already short-term oversold and due for a bounce. If we are triggered at $47.75 our target is $44.50.

Trigger @ 47.75 *small positions*

- Suggested Positions -

Buy the Aug $50 PUT (DRI1317T50)

Entry on July -- at $---.--
Average Daily Volume = 1.3 million
Listed on July 24, 2013

iShares Russell 2000 ETF - IWM - close: 103.48 change: +0.09

Stop Loss: 106.05
Target(s): 97.00
Current Option Gain/Loss: - 2.0%
Time Frame: 3 to 6 weeks
New Positions: see below

07/30/13: Our plan was to open positions at the morning bell. The IWM opened higher at $103.69. There wasn't much follow through higher. I would still consider new positions now or you could wait for a new relative low under the $103.00 mark.

Earlier Comments:
I do expect to see some support and a temporary bounce when the IWM hits the $100 level and its 50-dma but we are going to aim for a drop to the rising 100-dma (currently near $97).

While this looks like a good set up for puts there are always risks. Short interest in the market has hit levels not seen since December 2012. If the FOMC statement or the Q2 GDP estimate on Wednesday or the jobs data on Friday surprise the market it could spark some short covering.

- Suggested Positions -

Long Sep $100 PUT (IWM1321u100) Entry $1.48

Entry on July 30 at $103.69
Average Daily Volume = 31 million
Listed on July 29, 2013

SPDR S&P 500 ETF - SPY - close: 168.59 change: -0.00

Stop Loss: 172.75
Target(s): 165.25
Current Option Gain/Loss: + 9.0%
Time Frame: 3 to 4 weeks
New Positions: see below

07/30/13: The market's early morning gains faded and the SPY closed unchanged on Tuesday. There is no change from my earlier comments.

NOTE: There are a lot of different option symbols for the SPY. Make sure you get the right one. We're choosing the regular August $170 put that expires on the 17th.

- Suggested Positions -

Long Aug $170 PUT (SPY1317T170) entry $1.98

07/24/13 trade opened with the SPY gapping higher at $169.79
07/23/13 adjust entry strategy. Do not wait for a trigger. Buy puts at the opening bell tomorrow.

Entry on July 24 at $169.79
Average Daily Volume = 123 million
Listed on July 22, 2013

Longer-Term Play Updates

Chicago Bridge & Iron - CBI - close: 59.70 change: +0.25

Stop Loss: 55.75
Target(s): 74.50
Current Option Gain/Loss: - 5.8%
Time Frame: 4 to 6 months
New Positions: see below

07/30/13: CBI managed a +0.4% bounce following Monday's decline. The company reported earnings tonight. The bottom line came in at $1.04 a share, which was one cent better than expected. Revenues surged +119% to $2.85 billion, which beat Wall Street estimates. Management reaffirmed their prior guidance. I would expect a bounce on the revenue beat but CBI's earnings could be overshadowed by the U.S. Q2 GDP news tomorrow morning.

I would still expect some volatility one way or the other tomorrow.

*Small Positions* - Suggested Positions -

Long 2014 Jan $65 call (CBI1418A65) entry $2.55

07/20/13 new stop loss @ 55.75
06/29/13 CBI might be poised to dip into the $57-55 zone again.
06/24/13 triggered @ 56.75
06/22/13 adjust entry trigger to $56.75
06/15/13 entry strategy change: change the breakout trigger at $65.25 to a buy-the-dip trigger at $56.50. Adjust the stop loss to $53.75.
Adjust the option strike to the 2014 Jan. $65 call

Entry on June 24 at $56.75
Average Daily Volume = 1.8 million
Listed on June 01, 2013


V.F. Corp. - VFC - close: 197.52 change: +0.39

Stop Loss: 195.75
Target(s): 209.50
Current Option Gain/Loss: Unopened
Time Frame: 3 to 6 weeks
New Positions: see below

07/30/13: VFC continues to coil sideways under resistance near $200. Our trade has not opened yet with the entry trigger at $200.75. We're removing VFC as a candidate but the larger up trend remains intact.

Trade did not open.

07/30/13 removed from the newsletter


Entry on July -- at $---.--
Average Daily Volume = 495 thousand
Listed on July 27, 2013


The Mosaic Co. - MOS - close: 43.81 change: -9.15

Stop Loss: 54.65
Target(s): 50.25
Current Option Gain/Loss: +710.7%
Time Frame: 3 to 4 weeks
New Positions: see below

07/30/13: We hit the jackpot with MOS today. Our plan was to exit at $50.25 but the stock gapped open lower at $40.54. Shares managed an oversold bounce from the $40 level and closed up about four points off its low.

The action in MOS and the fertilizer industry was one of the big stories today. There are two big cartels that control about 80% of the potash market. Today's volatility was a reaction to news that a Russian potash maker was pulling out of a cartel. Some speculate this is a gambit to shake up the industry and allow the Russians to buy the Belarus Potash Co. I'm skimming over the details. What matters to us is MOS gapped down and exceeded our target. The option opened at $11.50 and hit a high of $12.62 before paring its gains.

- Suggested Positions -

Aug $52.50 PUT (MOS1317T52.5) entry $1.40 exit $11.35 (+710.7%)

07/30/13 target exceeded on gap down at $40.54


Entry on July 24 at $52.95
Average Daily Volume = 4.0 million
Listed on July 23, 2013