Option Investor

Daily Newsletter, Tuesday, 1/28/2014

Table of Contents

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

Market Wrap

Squeeze or Rally?

by Jim Brown

Click here to email Jim Brown

The markets finally posted a decent gain but was it a short squeeze or the beginning of a rally?

Market Statistics

The major indexes with the exception of the Nasdaq 100 ($NDX) all closed to the upside but the velocity of the gain was mediocre. The Dow rallied +90 thanks to gains in Visa, Goldman, Caterpillar and American Express. The rest of the components were lackluster although mostly positive.

The S&P rebounded to resistance at 1,793 by late afternoon but failed to move over that level. It was a dead stop.

The Nasdaq 100 languished in negative territory most of the day thanks to a -44 point decline in Apple.

Was it a short squeeze? I am sure some of the gains were from shorts covering but Monday's closing market was not that negative so I doubt there were a lot of shorts piling in at the close. Today appeared to be investors buying the dip. There was no rush but after the initial gap higher and intraday decline the buying was relatively steady. I was hoping for a breakout over resistance at the close but it did not happen.

It remains to be seen if this rebound will stick but I am encouraged. The rebound came on mixed economics and the day before the Fed's taper decision. I speculated in the weekend commentary that we might see further selling due to margin calls on Monday and then a bounce ahead of the Fed decision since the market expects no surprises.

The Durable Goods Orders fell -4.3% in December and well below expectations for a gain of +1.8% and November's +2.6% rise. November was revised down from +3.5% to +2.6%. Shipments declined -1.9% compared to +1.3% in November and unfilled orders fell from 0.9 to 0.4. Core capital orders declined -1.3%. Orders for transportation goods declined -9.5% thanks to weakness in autos and aircraft. Motor vehicle orders declined -5.8% and civilian aircraft orders fell -17.5%.

Analysts tried to blame seasonal factors and the weather for the sudden drop in orders but there is no way to confirm that. The unexpected decline in orders suggests the Q4 GDP coming out on Thursday could show some unexpected volatility.

The Richmond Fed Manufacturing Survey for January declined from 13 to 12 on the headline number. In the report components the new orders rose from 10 to 14 and backorders rose slightly from -8 to -2 but remain in contraction territory. Employment declined from 14 to 6 but the average workweek rose slightly from 6 to 8. The employment index declined from 17 to 12 suggesting hiring was slowing. This caused analysts to temper their expectations for growth over the next couple months.

The headline number on the Richmond Services Survey rose from -4 to zero. That is hardly a bullish reading. The services employment index declined from +1 to -2 or -4 if you exclude retail hiring. The bright spot came from retail expectations rising from 4 to 17. I am curious as to why since the December retail performance was so poor. If consumers are not buying during the holidays then why buy in Q1? The revenue index has been flat at 1 for the last three months compared to an average of 15 for the prior three months. Are analysts thinking that since revenue has been so low for the last three months that it has to accelerate in Q1? With consumers under increasing pressure from shrinking income I would expect that revenue number to decline further.

The positive report for the day came from Consumer Confidence. The headline number rose from a revised 77.5 in December to 80.7 in January. That is the highest level since August. The consensus estimate was for a minor gain to 78.1. The present conditions component rose from 75.3 to 79.1. The expectations component rose from 79.0 to 81.8. I don't understand why the headline number jumped so much since buying plans fell sharply. Those respondents planning on buying an appliance declined from 49.3% to 44.9%. Those planning on buying a home fell from 7.4% to 5.5%. Auto buyers were flat at 12.1%. When consumer confidence is rising the buying plans normally rise with it.

Those respondents that felt jobs were plentiful rose from 11.9% to 12.7%. That sharp of a gain is surprising while those who felt jobs were hard to get fell only slightly from 32.9% to 32.6%. Those expecting to get a raise jumped sharply from 13.9% to 15.8%. The 15% level is where the component has been for several months with the drop to 13.9% in December a surprise.

The big economic event for Wednesday is of course the FOMC taper announcement at 2:PM. The Fed is expected to reduce QE by another $10 billion. This is the path of least resistance at the present time. The market decline had no impact on their decision but the multiple meltdowns in emerging market currencies could have given them some indigestion. As the Fed tapers the dollar will strengthen and emerging currencies should decline further. This is a reason the Fed is not likely to accelerate its taper process. Numerous analysts still believe the Fed will eventually increase QE purchases again because the U.S. economy is definitely not accelerating. It is too soon to say it is declining but we are in a soft patch.

The GDP on Thursday is expected to decline to +3.0% growth but there numerous estimates below that consensus. What number we actually get is going to be a wild card.

The ISM Chicago on Friday is expected to decline and put one more report on the economic weakness side of the ledger.

The emerging market currency meltdown took a different turn today. The Turkish central bank held an emergency meeting and raised interest rates from 7.75% to 12.0% and the overnight borrowing rate from 3.5% to 8.0%. The Turkish lira immediately strengthened since the rate hike was much higher than expected. However, that also caused the interest on Turkey's debt to spike with the 10-year hitting 10.45% and the highest level since 2010. Turkey is the 17th largest economy in the world.

The announcement by Turkey spiked the S&P futures by +9 points in afterhours trading.

Earlier in the day India's central bank made a surprise announcement that it had raised interest rates by .25% to 8% to fight inflation. They have raised the repo rate by 75 basis points over the last four months. The minor increase on the headline rate simply showed that India was willing to act to strengthen their currency during the global rout even though they called it an inflation fighting move.

The Peoples Bank of China made another injection of liquidity to offset the decline in the yuan and remove some pressure on the $4.7 trillion shadow banking system. China has orchestrated some form of bailout on the $500 million investment vehicle that was about to default this week. The actual terms have not been released but the default is off.

After the bell Yahoo (YHOO) reported earnings of 46 cents compared to estimates of 38 cents. Revenue was $1.2 billion and in line with estimates. However, Yahoo guided lower for Q1 and the stock declined -5% in afterhours but regained some of that late in the session to close at $37 and a loss of -$1.22.

They guided to expected income of $130-$170 million and well below estimates. Another challenge was the -6% decline in revenue and the -62% decline in full year earnings to $1.26. Q4 display revenue fell -6% to $533 million with full year display revenue falling -9% to $1.95 million. Search revenue fell -4%. On the positive side paid clicks increased +17% but they were receiving less revenue per click.

Yahoo shares have been rising on the expectations for the $150 billion Alibaba IPO but the weak earnings could take some of the expectations out of the trade. In the video earnings call Yahoo showed a 51% revenue gain in Alibaba for the quarter but that was down from the 61% gain in the prior quarter. It could suggest growth is slowing but that is a leap from the limited data we have.

AT&T reported earnings after the bell that surprised and disappointed. The 53 cent earnings beat estimates for 50 cents and they added 809,000 wireless subscribers. Unfortunately analysts were expecting a gain of 1.25 million. Revenue was $33.16 billion, up from $32.61 billion. Analysts were expecting $33.06 billion. Shares of AT&T declined slightly after the news.

In other earnings news Amgen (AMGN) reported earnings of $1.81 compared to estimates of $1.70 but the gain came from a lower tax rate. Sales did increase +13% to $5.01 billion and beat estimates of $4.81 billion. The company said sales were up across the board on several of their high profile drugs. However, shares fell slightly after the close on the tax rate news.

Checkpoint Software (CHKP) reported earnings of 98 cents compared to estimates of 95 cents. Revenue rose +5% to $387.1 million that beat estimates of $383.6 million. They announced another stock buyback of $1 billion in shares with a maximum of $200 million a quarter. In 2013 they bought back 10.1 million shares for $538 million. Shares rallied +4% on the news.

DR Horton (DHI) rallied +10% after reporting earnings of 36 cents compared to estimates of 31 cents. Revenue rose to $1.64 billion and ahead of estimates at $1.49 billion. The company raised prices by 10% thanks to the strong demand for their homes.

Lexmark (LXK) reported earnings of $1.18 and beat estimates of $1.10. Revenue rose +4% to $1.01 billion compared to estimates for $930 million. Lexmark guided for earnings of 80-90 cents compared to analyst expectations for 85 cents. However, revenue was expected to decline 3-5% to a range of $849 million but that still beat analyst estimates for $842 million. The decline is related to their decision to exit the inkjet printer market. Shares rallied +9% on the news.

Earnings for Wednesday are headlined by Boeing and Facebook. December was a record month for Boeing so their earnings should be good. Facebook is another wildcard. How Facebook fared will give us some color on what to expect from Twitter next week.

Thursday is the big day with Amazon, Google, 3M and UPS. The shipper already warned so the actual results will be ignored except for the guidance.

The S&P and Russell 2000 had similar charts and I am going to use the Russell to illustrate my expectations. The Russell rallied to Monday afternoon's high at 1137 and came to a dead stop after posting a series of higher lows since Monday's drop. The close right at that 1137 resistance seemed to be setting the stage for a breakout on Wednesday. That picture changed after the close.

I have to illustrate it with the Russell ETF (IWM) to show an accurate picture. It is not exactly as precise as the Russell index but I think you can see the difference. I am not using the Russell futures because they are too volatile. After Turkey announced the big rate increase the S&P futures spiked +8 points and the IWM, which trades afterhours, broke through that resistance line after some serious volatility. The Russell futures are up +17. This suggests we are going to have a short covering rally at the open on Wednesday if the global situation does not change overnight.

The S&P futures have given back some of their gains but if this lasts overnight we should have a strong open. There is a lot of darkness before morning so anything can happen.

On the longer term chart the S&P dropped right to strong support at 1,775 and rebounded to the prior uptrend resistance at 1,793. Any positive open on Wednesday should push it back over 1,800 and possibly begin a move higher assuming the FOMC does not surprise us. At this point I am not even sure the Fed can surprise us enough to really impact the market. Everyone expects them to taper so the only real surprise would be a bigger taper, which is not likely to happen or no taper at all and that is also not likely to happen.

Once back over 1,800 we will need to see some real buyers come into the market or the negative outlook that has sprung up over the last several days could begin to weigh on the market. Any spike could be seen as another selling opportunity. The rest of the week is going to be critical to market direction.

The Dow did not decline to the strong support level at 15,700 and chose to pause at 15,700 on Monday. The rebound was driven by short covering at the open and then it collapsed intraday before easing back up at a snail's pace in the afternoon. This could be fear of the Fed or growing worries of a potential correction. The positive move was thanks to gains in Visa, Goldman, Caterpillar and American Express. The Dow futures are up +62 points as I write this and that suggests we will move over the afternoon resistance at 15,935.

The Nasdaq dropped to 4,050 on Monday and then showed basically the same pattern as the S&P and Russell except for the negative impact of Apple. The rebound on Tuesday was muted with only a 14 point gain. However, when you consider the -44 point drop in Apple that was a decent recovery.

The Nasdaq 100 never made it back to positive territory but at -3 it was very close and also a strong sentiment recovery.

The prior support at 4,100 on the Nasdaq Composite is now resistance. The futures are up +18 points and rising so it appears we are going to break through that level at the open. That puts us back into the congestion range from early January and it could be rough going to get back to the highs.

On the Russell the drop to uptrend support was picture perfect but now the real test is navigating back above that 1,150 level. The Russell futures are up +17.

With the S&P futures up +9 as I write this we should open higher on Wednesday. However, I seriously doubt that the volatility has left for good. Even if we do have a decent short squeeze at the open there is no guarantee we are just going to keep going higher like we did on every dip in 2013. The market drop at 3-4% was identical to most of those in 2013 but the economic and political landscape is different this time around.

The State of the Union Speech tonight is not likely to be market moving. It will contain whatever talking points the most pollsters checked off their list. It does not make any difference which party is giving the speech. It has turned into simply a sales pitch for voters and seldom to the points discussed actually come to pass. As such the market will probably ignore it ahead of the FOMC decision later in the day.

Sorry for the delay tonight. We had a server go down this afternoon and the replacement process took longer than expected.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email


New Option Plays

Services & Home Furnishings

by James Brown

Click here to email James Brown


EnerNOC, Inc. - ENOC - close: 22.84 change: +0.48

Stop Loss: 21.49
Target(s): 25.75
Current Option Gain/Loss: Unopened
Time Frame: EXIT PRIOR to earnings on February 13th
New Positions: Yes, see below

Company Description

Why We Like It:
ENOC is in the services sector. The company provides software and services to the energy industry. The stock has been showing significant relative strength and pretty much ignoring the market's recent sell-off. I can't find any specific catalyst behind the big move higher on January 8th this year. The stock is up seven out of the last eight weeks in a row.

On a short-term basis ENOC is poised to breakout past the $22.00 mark. I am suggesting a trigger to buy calls at $23.10. If triggered our target is $25.75. However, we will plan to exit prior to ENOC's earnings report on February 13th.

FYI: The Point & Figure chart for ENOC is bullish with a $28 target.

Trigger @ 23.10

- Suggested Positions -

Buy the MAR $22.50 call (ENOC1422C22.5) current ask $1.80

Annotated Chart:

Entry on January -- at $---.--
Average Daily Volume = 485 thousand
Listed on January 28, 2014


Restoration Hardware - RH - close: 57.44 change: -0.82

Stop Loss: 60.25
Target(s): 51.00
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
RH is in the services sector. The company is essentially a specialty retailer for home furnishings. Wall Street is pretty sour on anything related to retail these days. The Q4 and holiday shopping season turned out worse than many had hoped. The correction lower in shares of RH that started last year has continued into 2014.

On a short-term basis it looks like the oversold bounce has stalled at RH's simple 10-dma. I am suggesting new put positions now at current levels with a stop loss at $60.25. Please note that I do consider this a somewhat more aggressive, higher-risk trade because RH does have above average short interest (about 10% of the 34 million-share float).

Our multi-week target is $51.00. More aggressive traders could aim lower. The Point & Figure chart for RH is bearish with a $43 target.

(*launch small positions at the opening bell*)

- Suggested Positions -

Buy the MAR $55 PUT (RH1422o55) current ask $2.45

Annotated Chart:

Entry on January -- at $---.--
Average Daily Volume = 981 thousand
Listed on January 28, 2014

In Play Updates and Reviews

Stocks Snap Three-Day Slide

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. market ended a three-day sell-off with a bounce on Tuesday.

GD hit our entry trigger. We have removed HON. Tonight we are adding a new entry trigger on IWM.

Current Portfolio:

CALL Play Updates

Chicago Bridge & Iron - CBI - close: 77.18 change: +1.47

Stop Loss: 73.15
Target(s): 82.50
Current Option Gain/Loss: +14.7%
Time Frame: Exit PRIOR to CBI's earnings report in February
New Positions: see below

01/28/14: So far so good. The oversold bounce in CBI continued on Tuesday with shares outperforming the broader market with a +1.9% gain. The next challenge for the bulls will be potential resistance at the simple 50-dma near $79.30 and the $80.00 level. I am raising our stop loss to $73.15.

- Suggested Positions -

Buy the Mar $80 call (CBI1422C80) entry $1.70

01/28/14 new stop loss @ 73.15

Entry on January 27 at $76.17
Average Daily Volume = 1.5 million
Listed on January 25, 2014

General Dynamics - GD - close: 100.50 change: +0.55

Stop Loss: 97.75
Target(s): 107.00
Current Option Gain/Loss: - 3.3%
Time Frame: 4 to 6 weeks
New Positions: see below

01/28/14: Our new trade on GD has been triggered. The plan was to buy calls at $100.50. Shares rallied up toward short-term resistance near $102.00 before paring its gains this afternoon.

- Suggested Positions -

Long Mar $100 call (GD1422C100) entry $3.00*

01/28/14 triggered @ 100.50
*option entry price is an estimate since the option did not trade at the time our play was opened.

Entry on January 28 at $100.50
Average Daily Volume = 2.6 million
Listed on January 27, 2014

iShares Russell 2000 ETF - IWM - close: 112.97 change: +1.18

Stop Loss: 108.85
Target(s): 118.00
Current Option Gain/Loss: Unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

01/28/14: The IWM didn't see the follow through lower we were looking for. The ETF bounced near its trend line of higher lows. After hours tonight the central bank of Turkey raised rates almost 5% points to 12% to stop the sell-off in their currency and that seems to be supporting emerging markets and we're seeing a bounce in U.S. equities after hours. If this bounce continues we want to be ready to buy calls on the IWM. Therefore I am adding a secondary entry point to buy calls if the IWM can trade at $114.15. If that occurs we'll raise the stop loss to $109.90. Essentially we now have two different entry points on the IWM depending on which direction it decides to go.

Buy the Dip Trigger @ $110.30, stop loss 108.85

- or - Buy Trigger @ $114.15, stop loss @ 109.90.

- Suggested Positions -

Buy the Mar $115 call (IWM1422C115) current ask $2.00

01/28/14 add a secondary entry point to buy calls at $114.15
01/27/14 adjust the entry point trigger to $110.30 and move the stop loss to $108.85.

Entry on January -- at $---.--
Average Daily Volume = 31.7 million
Listed on January 25, 2014

NASDAQ-100 ETF - QQQ - close: 85.85 change: -0.05

Stop Loss: 83.90
Target(s): 92.00
Current Option Gain/Loss: -15.0%
Time Frame: 6 to 8 weeks
New Positions: see below

01/28/14: I am honestly surprised that the QQQ did not see more weakness considering the big gap down in shares of AAPL this morning. The QQQ saw a small gap down at $85.42 but there was almost no follow through lower. If you're looking for a new entry point I would be tempted to buy calls again if the QQQ rises above $86.25.

*small positions* - Suggested Positions -

Long Mar $87 call (QQQ1422C87) entry $1.60

01/27/14 adjust stop loss to $83.90
01/27/14 triggered at $86.00

Entry on January 27 at $86.00
Average Daily Volume = 29 million
Listed on January 25, 2014

PUT Play Updates

Philip Morris Intl. - PM - close: 80.81 change: +0.02

Stop Loss: 81.55
Target(s): 75.25
Current Option Gain/Loss: Unopened
Time Frame: Exit PRIOR to earnings on Feb 6th
New Positions: Yes, see below

01/28/14: Tuesday proved to be a quiet session for PM with the stock drifting sideways. I do not see any changes from our Monday night new play description (below).

Earlier Comments:
We're suggesting a trigger to buy puts at $79.85. If triggered our short-term target is $75.25. Please note that this is a short-term trade. PM is due to report earnings on February 6th and we do not want to hold over the report.

Trigger @ 79.85

- Suggested Positions -

Buy the Feb $80 PUT (PM1422N80)

Entry on January -- at $---.--
Average Daily Volume = 5.9 million
Listed on January 27, 2014


Honeywell Intl. - HON - close: 90.29 change: +1.82

Stop Loss: 84.75
Target(s): 94.50
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: see below

01/28/14: It was somewhat of a disappointing session for HON. Shares continue to struggle with resistance near $91.00-91.50. We have decided to drop HON as a bullish candidate. Our trade has not opened yet (suggested trigger was a dip at $87.25). I would keep HON on your watch list. A breakout past $91.50 could prove to be a new bullish entry point.

Trade did not open.

01/28/14 removed from the newsletter. did not hit our trigger at $87.25


Entry on January -- at $---.--
Average Daily Volume = 2.2 million
Listed on January 25, 2014