Option Investor

Daily Newsletter, Tuesday, 4/29/2014

Table of Contents

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

Market Wrap

Morning Earnings Thaw

by Jim Brown

Click here to email Jim Brown

Better than expected morning earnings boosted market expectations.

Market Statistics

While the markets may have given the appearance of returning to rally mode today I would not rush to a bullish judgment. The S&P gained +9 points but came to a dead stop once again at the 1,880 resistance level. The Nasdaq gained +29 points but also came to a dead stop at the 4100-4110 resistance band.

Market reporters were all hyped up with the potential for the Dow and S&P to set new highs. At the high for the day the Dow was only about 17 points from its historic closing high of 16,576. We need to remember the Dow is only 30 stocks. However, at its intraday high of 1,880 the S&P was only about 11 points from a new high close at 1,991. Unfortunately those 11 points could be very tough to gain.

The economic calendar was lacking any material reports so the market was left to focus on earnings. The final revision to the Consumer Confidence came in unchanged from the initial reading at 82.3 and well below analyst estimates at 84.0. The headline number was down from the upwardly revised March reading at 83.9. The present conditions component declined from 82.5 to 78.3 and the expectations component rose only slightly from 84.8 to 84.9. Respondents expressed more concern over the lack of available jobs and 12.9% of those with jobs said they expected a pay cut.

Those planning on buying a car declined from 13% to 10.6%. Home buyers rose from 5.3% to 5.6%. Those planning on buying an appliance like a refrigerator or television declined from 50.5% to 46.3%. It is unclear whether the decline in buying expectations came as a result of consumers having already acted on their impulses when the weather thawed or their expectations of future income declined to the point where they were reconsidering their plans.

The Texas Service Sector Outlook Survey rose slightly from 10.1 to 11.3 for April. Respondents said they were less optimistic about the coming summer months. However, the employment component rose from 11.2 to 16.4 and 22.8% reporting that hiring increased. This is the highest level since August 2010. The revenue component rose +2 points from 16.5 to 18.5 and the highest level since February 2012.

The survey was slightly improved and suggests the Texas service economy is continuing to grow but the excitement over the spring thaw appears to be fading.

Wednesday is a busy day for economics with the ADP Employment, GDP and FOMC announcement. The deluge of critical data could have been the reason for the market rebound today. Shorts were covering ahead of the event and a few buyers were betting on some good news.

The ADP employment is expected to show minor improvement with the addition of 200,000 jobs in April. The Nonfarm Payrolls on Friday are expected to rise +18,000 to 210,000. However, there are some estimates all the way up to a gain of 275,000 jobs. That bullishness is probably carrying over to the ADP report but we are just not hearing those estimates in the news. There is a potential here for a negative surprise.

The official GDP estimate is for a gain of +1.3% for Q1 but there are also estimates a lot closer to zero. Deutsche Bank lowered their estimate on Friday to a gain of only 0.5%. I heard another forecast for 0.3% in a newscast over the weekend but I missed who it was making the call. Any bad number is going to be blamed on the weather so it probably won't be a market mover.

The FOMC announcement is the wild card. Officially everyone expects the Fed to cut QE purchases by another $10 billion a month and retain the zero interest rate policy for the foreseeable future. Unofficially there are some analysts that have mentioned the Fed pausing for a month on QE cuts because of the slow economy and to keep the bond market from becoming too complacent. There are others who think the Fed could accelerate QE cuts to end the uncertainty over when they are going to end it. I personally don't think either option is valid. I believe they will continue to cut at each meeting and probably announce a final cut of -$15 billion at the October meeting effective on November 1st. There is always volatility around the FOMC announcement regardless of what they announce.

The Friday Nonfarm Payroll report could be the pivotal event for the week. If jobs are a lot stronger than expected it could send the markets through resistance to new highs. If jobs are much weaker than expected it could sour the market and send us back to support.

It was a decent day for earnings with a few decent beats during the day but that picture changed after the close. Opening the day Aflac (AFL) reported earnings of $1.69 compared to expectations for $1.58 per share. However, revenue declined -9.1% to $5.6 billion compared to estimates of $5.8 billion. The company said the weaker Japanese yen was the major drag on Q1 earnings. Aflac shares rallied +2.4% or $1.51 on the news.

Cummins Inc (CMI) posted results of $1.83 compared to estimates of $1.67. Revenue rose +12% to $4.4 billion because of a +25% jump in North American revenues. The company guided for the full year for revenues to rise 6-10% compared to the previous range of 4-8%. Shares of Cummins rose +4% or $5.61 to $151.

MGM Resorts (MGM) posted blowout earnings of 21 cents compared to estimates of 8 cents. However, the headline number contained a $3.5 million tax benefit. Revenue rose +12% to $2.63 billion and beating estimates of $2.35 billion. The company said strong results in Maccau and improved room bookings in Las Vegas pushed the earnings higher. MGM is planning a $66 million expansion to the Mandalay bay convention center and a $350 million arena on the strip. The arena will have an eight-acre dining park with numerous restaurants in front of the facility. Shares rose +8.5% or +1.96 on the news.

Dow component Merck (MRK) reported earnings that rose +7% to 88 cents and beating estimates by +9 cents. Revenue of $10.26 billion was down -4% and just under the $10.44 billion analysts expected. Drug sales declined -5% due to copycat pills stealing market share. However, the company made drastic cuts in expenses to push profits higher. Administration and marketing expenses declined -7% while research spending declined -17% as the new head of research slashed less promising programs. Merck also cut its workforce by 2,000 during the quarter. The company reaffirmed its forecast for 2014 of $2.15-$2.47 and did not raise it on the risk of another currency devaluation in Venezuela. Shares rallied +3.6% to a new high and helped push the Dow higher.

Shares of 3D Systems (DDD) fell -9% after the company reported earnings of 15 cents that were in line with estimates. Revenue of $147.8 million beat estimates of $145.5 million. However, the company reaffirmed revenue guidance of $700 million but lowered earnings for the full year to a range of 73-85 cents. That was below consensus of 81 cents. In Q1 R&D expenses rose +165% and will continue to be a weight on earnings the rest of the year.

Boston Scientific (BSX) posted better than expected earnings of 20 cents compared to estimates of 18 cents. The company said higher sales of catheters and pain relieving devices propelled sales. However revenue of $1.774 billion was below estimates of $1.793 billion. They raised full year guidance to 77-82 cents from 75-80 cents. They maintained full year revenue guidance of $7.3-$7.5 billion. Q2 earnings are expected to be 18-20 cents on sales of $1.865 billion. Shares declined -6.25% on the news.

After the bell the earnings turned negative. Ebay (EBAY) reported earnings of 70 cents compared to estimates of 67 cents. Revenue of $4.26 billion also beat estimates of $4.22 billion. However Q2 guidance of 67-69 cents and $4.33-$4.43 billion was below estimates for 70 cents and $4.4 billion. The company said it took a $3 billion charge for taxes on the repatriation of $9 billion in cash from overseas. That drew some hostile comments from analysts. Nearly all major corporations leave the cash overseas rather than pay the stiff tax to bring it home. A competent CFO can structure ways to use the cash overseas and avoid the U.S. taxes. Apple announced this week it was going to borrow $12 billion instead of bringing back cash from overseas. With $150 billion in cash Apple could have afforded to pay the taxes but they are a better manager of their money. Ebay could have done the same thing. Ebay shares declined more than $2 to $52.40 in afterhours trading.

Twitter (TWTR) posted earnings of zero compared to estimates for a loss of 3 cents. Revenue of $250 million beat estimates for $241 million. Average active monthly users rose +5.8% to 255 million. While it appeared to be a decent beat the stock was hammered after the report. Analysts said the slow user growth was a concern and about 2 million below analyst estimates. Timeline refreshes, a measure of user activity increased 15% to 157 billion but below analyst expectations for 165 billion. A timeline refresh is another advertising opportunity. Analysts compared Twitter's 255 million users to Facebook's 1.28 billion and LinkedIn at 277 million. WhatsApp recently surpassed 500 million users. Twitter raised guidance for Q2 to $275 million compared to estimates for $273.3 million. However, for the full year they expect $1.2-$1.25 billion and analysts were expecting $1.24 billion. Shares of TWTR declined nearly $4.25 or -10% in afterhours.

Shares of Express Scripts (ESRX) declined -$4 in afterhours after posting earnings of 99 cents that missed estimates of $1.01. Revenue of $23.68 billion missed estimates of $23.80 billion. The company lowered its full year earnings forecast by -6 cents to $4.82-$4.94 down from $4.88-$5.00. Analysts were looking for $4.94.

Vistaprint (VPRT) was crushed in afterhours trading with a decline of -$9 or nearly -20% after the company reported adjusted earnings of 24 cents compared to the year ago quarter at 48 cents. Revenue was $8.3 million, down from $16.9 million. The company guided for the full year for $2.70-$2.85 and analysts were expecting $2.85. Revenue guidance of $1.27 billion was in line. Vistaprint said extensive customer research was forcing the company to reevaluate their deep discount model. "The biggest headwinds to date occurred in the past quarter. They were the result of changes to our pricing and marketing practices that we rolled out in our largest markets."

Panera Bread (PNRA) shares declined -$8 in afterhours after reporting earnings of $1.55 compared to estimates for $1.52. Revenue of $605.2 million beat estimates for $597.4 million. The company lowered guidance for Q2 to $1.70-$1.76 and full year guidance to $7.00. Analysts were expecting $1.86 and $6.93.

Headlining the earnings calendar for Wednesday is ADP, MET, TWX and WLP. The next two days will see a concentration of the remaining Q1 earnings. Starting next week the volume of reports will decline significantly and the number of large companies remaining to report will slip to a few random events. This week is basically the end of the Q1 earnings cycle and the majority of companies in every sector have already reported with the exception of retailers, which have a later reporting cycle.

Approximately 74% of S&P companies have beaten earnings and 54% have beaten on revenue. More than 22% have missed estimates. Earnings growth has risen to +1.1% compared to expectations for nearly a -1% decline three weeks ago. The Q1 cycle has been a surprise but it was based on lowered expectations so we should not draw too many conclusions as to the health of corporate earnings.

The markets continue to baffle traders with the periods of high volatility followed by days of relative calm such as we had today. Analysts are either telling clients to aggressively buy the dips or sell the spikes and there is no consensus as to direction.

A survey by Bank of America and Bloomberg found that hedge funds are betting as much as $2.8 billion by shorting Russell futures in expectations the Russell 2000 will fall further. That is the most since 2012 and the highest average level since 2004. Bloomberg said the Russell's valuation was the highest since 1995 based on 10.8 times EBDTIA. The average is 7.7 times. The big caps in the Russell 1000 are trading at 8.7 times and the highest since 2001. The average short interest on a Russell 2000 stock is 4.2% compared to 2.1% for the S&P. That high short interest in the stocks and the futures could provide a massive short squeeze under the right conditions.

The earnings shortfalls after the close did not harm the futures. The S&P, Dow and Russell 2000 futures are flat at 7:30 ET and the Nasdaq futures are only down -5 points. On the surface that would suggest the gains from today will stick BUT there is the problem of the morning economic reports and the potential for new headlines out of the Ukraine. Putin is supposedly having his advisors draw up sanctions against the U.S. and EU in retaliation for sanctions against Russia. Meanwhile the events in the Ukraine are getting worse and it appears more likely Putin will eventually invade.

A headline claiming Russian forces are on the move will likely tank the market but it won't last. As I explained last week this is a political event rather than a war. The U.S. and EU will not engage Putin militarily and their pinprick sanctions will only anger him. The faster he invades Ukraine and takes it over like he did Crimea the faster the headlines will disappear. Have you heard a headline about Crimea in the last two weeks?

Baring a shooting war in the Ukraine the market will be focused on the ADP Employment and GDP at the open. The real volatility will come when the FOMC announcement is released at 2:PM. I doubt the market is going to breakout to new highs before the FOMC announcement. There is too much risk for something unexpected from the FOMC. What happens after the announcement is a coin toss. Just remember the initial market direction is rarely the eventual direction. The market has a habit of rushing off in one direction on the announcement and then reversing later in the day and the day after.

The S&P spent most of the day trading between 1,877 and 1,881 and right at strong resistance. Should it move over that level the next line in the sand is 1,885-1,991. These are strong resistance levels. With the sell in May cycle upon us it may take a decent uptick in volume to punch through that resistance. There will be plenty of investors ready to sell at the old highs.

The Dow has equally strong resistance at the 16,580 level and the old closing high of 16,576.66. We have spiked through that level more than once but sellers appeared immediately. The 30 Dow stocks are blue chips and they are not considered momentum stocks. Most pay dividends. That makes them a relatively safe haven for money managers until the bottom actually falls out of the market. I believe that is what we are seeing today. Managers are putting excess cash in the blue chip stocks just in case a rally breaks out. If the market does roll over in May they can exit those positions quickly.

I would focus on that 16,580 level because a breakout and close over that level could trigger short covering on the other indexes.

In the winners and sinners list below I think it is interesting that we are not seeing a lot of biotechs. The Biotech ETF (BBH) rallied +3% today but it was very broad based and there were very few big gainers in the sector.

Google, Wynn Resorts, Zillow, Tesla and Regeneron were the big Nasdaq gainers but all with the exception of Zillow are multi hundred dollar stocks so they would be expected to move in big increments.

The Nasdaq gained +29 points but it reached its peak at 12:30 and volume died. Obviously that is preferable to the 2% intraday swings it has had recently but the lack of afternoon volume is troubling. The index came to a dead stop at the 4,110 level and then closed back at 4,100. The 4,110 level is the resistance high from Monday so that level is still rock solid. Despite today's rebound the Nasdaq is still in a downtrend with critical support at 4,000 and critical resistance at 4,180.

Without positive earnings to push it higher I seriously doubt we will have a new high anytime soon.

The Russell 2000 is an identical chart to the Nasdaq. This shows a negative trend and no material rebound. The Russell would have to literally catch fire and make a +45 point breakout move higher to really change its trend. The path of least resistance is still down.

Don't be fooled by the low volume rally today. The Russell and Nasdaq are still the anchors dragging the market lower. Until their trends change a new high by the Dow and S&P may be the trigger for the sell in May cycle. With earnings basically over and the potential for negative headlines from Europe what would be the catalyst for a breakout rally in May?

Enter passively, exit aggressively!

Jim Brown

Send Jim an email


New Option Plays

Pushing Through Resistance

by James Brown

Click here to email James Brown


Gilead Sciences - GILD - close: 76.24 change: +2.16

Stop Loss: 73.45
Target(s): to be determined (potentially $85.00)
Current Option Gain/Loss: Unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
GILD is in the healthcare sector. The company operates in the biotech industry. Shares of GILD have been a runaway success the last couple of years. Unfortunately the biotech sector was crushed with a -20% correction from its February highs to the April lows. It looks like the group is starting to recover.

GILD was not immune to the biotech industry pullback. Its own stock retreated -25% from its February high near $85.00. Investors are likely using the correction as an entry point. Wall Street loves this stock. Back in February when GILD reported earnings they beat estimates on both the top and bottom line and sparked a wave of new price targets in the $90-100 zone. When GILD reported earnings again on April 22nd they produced one of the biggest earnings beats in biotech history and just blew away analysts expectations. Now the stock is seeing new price targets above $110 or higher. A lot of analyst feel that GILD is still cheap compared to forward earnings.

Technically shares are rebound as well. The Point & Figure chart has produced a new triple-top breakout buy signal with an $85 target but that target could grow. GILD was showing relative strength today with a +2.9% gain and a close above potential technical resistance at its 50-dma and the 100-dma. Yesterday's intraday high was $76.80. I am suggesting a trigger to buy calls at $77.00. If triggered our temporary target is $84.75. We'll re-evaluate our exit strategy as the trade progresses.

Trigger @ $77.00

- Suggested Positions -

Buy the Jun $80 call (GILD1421F80) current ask $1.91

Annotated Chart:

Weekly Chart:

Entry on April -- at $---.--
Average Daily Volume = 23 million
Listed on April 29, 2014

In Play Updates and Reviews

Widespread Gains But Small Caps Underperform

by James Brown

Click here to email James Brown

Editor's Note:

The stock market delivered widespread gains on Tuesday but the small caps underperformed.

We want to exit our CTRX trade tomorrow.

Current Portfolio:

CALL Play Updates

Adobe Systems - ADBE - close: 60.91 change: +0.51

Stop Loss: 59.45
Target(s): to be determined
Current Option Gain/Loss: -49.3%
Time Frame: 8 to 12 weeks
New Positions: see below

04/29/14: ADBE has started to bounce from support near $60.00 with a +0.8% gain. Readers could use this rebound as a new entry point for bullish positions.

- Suggested Positions -

Long Jul $65 call (ADBE1419G65) entry $3.20

04/21/14 ADBE opened at $64.00

Entry on April 21 at $64.00
Average Daily Volume = 4.8 million
Listed on April 19, 2014

Devon Energy - DVN - close: 70.48 change: +0.20

Stop Loss: 69.45
Target(s): 74.75
Current Option Gain/Loss: - 9.7%
Time Frame: exit PRIOR to earnings on May 7th
New Positions: see below

04/29/14: DVN's performance today was disappointing. The stock shot higher this morning and almost hit $71.50 before giving back a full point. Odds are we will see DVN retest the $70.00 level again.

We will plan on exiting prior to earnings on May 7th. FYI: The Point & Figure chart for DVN is bullish with a $95 target.

- Suggested Positions -

Long May $70 call (DVN1417E70) entry $1.94*

04/17/14 triggered @ 70.35
*option entry price is an estimate since the option did not trade at the time our play was opened.

Entry on April 17 at $70.35
Average Daily Volume = 3.7 million
Listed on April 16, 2014

Diamondback Energy, Inc. - FANG - close: 72.22 change: +1.26

Stop Loss: 69.25
Target(s): to be determined
Current Option Gain/Loss: -17.6%
Time Frame: exit PRIOR to earnings in May
New Positions: see below

04/29/14: FANG managed to outperform the broader market with a +1.7% gain. It looks like the 10-dma did act as resistance today (as did the $73.00 level).

Earlier Comments:
FANG could see some short covering. The most recent data listed short interest at 37% of the small 32.5 million share float. That's plenty of fuel for a short squeeze. FYI: The Point & Figure chart for FANG is bullish with an $85 target.

- Suggested Positions -

Long May $75 call (FANG1417E75) entry $1.70*

04/25/14 adjust stop to $69.25
04/21/14 new stop @ 69.45
04/19/14 new stop @ 68.75
04/16/14 triggered @ 71.25
*option entry price is an estimate since the option did not trade at the time our play was opened.

Entry on April 16 at $71.25
Average Daily Volume = 948 thousand
Listed on April 14, 2014

Potasch Corp. of Saskatchewan - POT - close: 35.76 change: -0.08

Stop Loss: 34.45
Target(s): to be determined
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 months
New Positions: Yes, see below

04/29/14: POT rallied toward its March high and reversed. The intraday high today was $36.24. I don't see any changes from our weekend newsletter's new play description on POT.

Earlier Comments:
(some of my earlier comments) The March high in POT's share price was $36.29. We are suggesting a trigger to buy calls at $36.50. We're not setting an exit target just yet. We'll start with a stop at $34.45.

FYI: rival potash producers Agrium (AGU) and Mosaic (MOS) both report earnings on May 6th. Their results and guidance could influence trading in POT.

Trigger @ $36.50

- Suggested Positions -

Buy the Sept $35 call (POT1420i35)

Entry on April -- at $---.--
Average Daily Volume = 5.0 million
Listed on April 26, 2014

Ventas, Inc. - VTR - close: 65.92 change: +0.19

Stop Loss: 64.75
Target(s): to be determined
Current Option Gain/Loss: Unopened
Time Frame: 3 to 4 weeks
New Positions: Yes, see below

04/29/14: VTR inched higher today and closed near potential resistance at $66.00 and its simple 300-dma. There is no change from last night's new play description on VTR.

Earlier Comments:
We're suggesting investors wait for a move above the April high ($66.30). The newsletter's suggested entry point is $66.35 with a stop at $64.75.

Trigger @ 66.35

- Suggested Positions -

Buy the Aug $65 call (VTR1416H65) current ask $2.65

Entry on April -- at $---.--
Average Daily Volume = 1.6 million
Listed on April 28, 2014

PUT Play Updates

Catamaran - Corp. - CTRX - close: 38.76 change: +0.03

Stop Loss: 39.55
Target(s): to be determined
Current Option Gain/Loss: - 4.5%
Time Frame: Exit PRIOR to earnings on May 1st
New Positions: see below

04/29/14: Shares of CTRX have been churning sideways the last few days. It could be investors waiting to hear the company's earnings report, which is due out on May 1st.

We will plan on exiting this trade tomorrow (April 30th) at the closing bell to avoid holding over the earnings announcement.

I am moving our stop loss down to $39.55.

- Suggested Positions -

Long May $40 PUT (CTRX1417Q40) entry $2.20

04/29/14 prepare to exit tomorrow
new stop @ 39.55
04/21/14 CTRX opened @ $39.06

Entry on April 21 at $39.06
Average Daily Volume = 3.3 million
Listed on April 19, 2014

QIWI Plc - QIWI - close: 28.48 change: +1.59

Stop Loss: 30.25
Target(s): to be determined
Current Option Gain/Loss: -28.0%
Time Frame: 3 to 6 weeks
New Positions: see below

04/29/14: Tensions on the Ukrainian border seemed to cool a bit today and shares of QIWI surged +5.9%. At this point I would wait for a new failed rally below $30.00 before considering new bearish positions.

Do you think Russian President Putin would push this far only to back down now?

Earlier Comments:
I suggest small positions to limit risk. We're not setting an exit target yet but the P&F chart for QIWI is bearish with a $19 target.

*Small Positions* - Suggested Positions -

Long Jun $25 PUT (QIWI1421R25) entry $2.50

04/28/14 trade opened. QIWI gapped down at $27.37

Entry on April 28 at $27.37
Average Daily Volume = 657 thousand
Listed on April 26, 2014

Ralph Lauren Corp. - RL - close: 152.31 change: +0.84

Stop Loss: 156.15
Target(s): to be determined
Current Option Gain/Loss: + 2.7%
Time Frame: exit PRIOR to earnings on May 9th
New Positions: see below

04/29/14: RL regained about half of yesterday's decline. A quick look at the intraday chart shows the bounce stalling under the $153.00 level. I would still consider new bearish positions.

Earlier Comments:
If you are patient enough traders could aim for a drop toward $140. The Point & Figure chart is actually very bearish and forecasting at $112 target. We're not setting an exit target yet but plan on exiting positions prior to RL's next earnings report on May 9th.

- Suggested Positions -

Long May $150 PUT (RL1417Q150) entry $3.70

04/26/14 new stop @ 156.15
04/24/14 triggered @ 152.45

Entry on April 24 at $152.45
Average Daily Volume = 891 thousand
Listed on April 21, 2014

Toyota Motor Corp. - TM - close: 107.50 change: +0.43

Stop Loss: 109.25
Target(s): 100.50
Current Option Gain/Loss: -11.7%
Time Frame: 3 to 4 weeks
New Positions: see below

04/29/14: TM's bounce this morning stalled near resistance at the $108 level. Readers could use this move as a new bearish entry point. Just keep in mind our plan to exit prior to earnings coming up in a few days.

Earlier Comments:
Our target is $100.50. However, we will plan to exit prior to TM's earnings report in May. The company has not set a date yet but we expect the announcement to be in the first half of May and will update our exit when they publish their earnings date. FYI: The Point & Figure chart for TM is bearish with a $90 target.

- Suggested Positions -

Long May $105 PUT (TM1417Q105) entry $1.11

04/26/14 new stop @ 109.25
04/23/14 TM opens at $108.28

Entry on April 23 at $108.28
Average Daily Volume = 602 thousand
Listed on April 22, 2014