Option Investor

Daily Newsletter, Saturday, 5/3/2014

Table of Contents

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

Market Wrap

Snap Back

by Jim Brown

Click here to email Jim Brown

Hiring rebounded strongly in April but the numbers scared the market.

Market Statistics

The Nonfarm Payroll report showed a headline gain of +288,000 jobs in April and a solid upward revision for prior months. That was slightly ahead of the highest estimate at 275,000 and well above the consensus estimate of 210,000. Unfortunately most investors already expected a good report and a strong number was priced into the market.

The February number was revised up from 197,000 to 222,000, a gain of +25,000. The March number was revised up from 192,000 to 203,000, a gain of +11,000. The monster April gain plus the revisions raised the three-month average to +237,700 and well over the prior three month average before revisions of +178,000. Remember when the Fed said they needed to see a three month trend over 200,000 in order to change their stimulus program? Don't look now but we are well over that threshold.

In April more than 273,000 jobs were created in the private sector. The biggest gains came in manufacturing and construction at +44K, retail +35K, professional +75K, leisure and hospitality +28K and temporary help at +24K. Employment increased for people over 55 so the retirement metric continues to move in the wrong direction.

The unemployment rate fell -0.4% to 6.3% thanks to a significant decline in the labor force. More than 806,000 workers dropped out of the labor force to push the labor force participation rate down to 62.8% and a drop of -0.4%. That is right at the lowest level since 1978.

On the downside the average hourly earnings were flat at $24.31 as was the workweek at 34.5 hours. If there was any upward pressure on hiring both should have risen at least slightly.

The separate Household Employment Survey did NOT confirm the Establishment Survey reported above. There was a LOSS of -73,000 jobs in the household survey. The household survey saw the total unemployed rise to 92,018,000.

The headline number may have exceeded all the official estimates but the sharp decline in the participation rate plus the loss of jobs in the household survey were wet blankets for the market. The snapback in employment from the winter weather has now occurred and analysts believe future employment will decline to +200-225,000 per month until the economy actually begins to improve.

If the economy was in takeoff mode with sustained jobs gains in the 275-350,000 per month range the bond market would be imploding and the Fed would accelerate its removal of existing stimulus. Interest rates would be soaring as a result of the accelerating economy and the removal of QE and the anticipated sale of the $4 trillion in treasuries the Fed is currently holding.

The bond market is doing exactly the opposite with yields on the 30-year falling to 3.367% and an 11 month low. The ten-year yield declined to critical support at 2.591%. Rates should be rising if not hitting new highs as the Fed tapers QE and projects an economic rebound.

Clearly there are two major factors here. The first is a flight to quality given the increasing hostility in the Ukraine, more on that later. The second is the confusion over the state of the economy plus the potential sell in May cycle. While nobody can guarantee this will be a year where the adage proves true the odds are good because it is also a midterm election year, which is down the vast majority of the time. There are investors who are taking the cautious route and moving to treasuries or cash ahead of the worst six months of the year period, which started May 1st.

The bond market is thought to be smarter than the equity market. Therefore if treasuries are rising and yields declining then equity traders start scratching their heads and wondering what they are missing.

Some analysts speculated the sharp dip in yields was due to short covering ahead of the weekend. Nobody would want to be short treasuries over the weekend with a potential invasion of Ukraine. Also, the Japanese markets are closed for the next two days and they typically buy bonds ahead of long weekends as a safety check.

Whatever the reason for the surge in bond buying and drop in yields it did scare the equity markets.

Also on Friday the Factory Orders for March grew only +1.1%, less than the +1.4% forecast and the +1.6% rise in February. Ex-transportation orders rose only +0.6%. Nondurable goods orders declined -0.6%. The slowdown in factory orders now means the next revision in the Q1 GDP could be as low as -0.2%, down from the +0.1% reading earlier this week.

Actually the internals were better than the headlines but they were improving from some pretty low levels. The report reinforced the idea that the economy is still growing but very slowly. That makes it even harder to accept the +288,000 new jobs in April.

The ISM New York headline number rose only +0.3 points to 627.4. That is the smallest monthly gain since June 2013 when the index was 578.1.

The internals were terrible. The six-month outlook declined from 65.6 to 58.8. Employment fell from 57.8 well into contraction at 43.1. That is a huge decline and that makes the April payroll gain even more suspect. The quantity of purchase component fell from 52.3 well into contraction at 41.7. Expected demand declined from 66.7 to 62.5 and regional prices fell from 65.2 to 57.7. The current conditions component, already low at 52.0 declined further to 50.6 and barely over contraction territory. That is the lowest level since June 2013.

This was a really ugly report despite the fractional gain in the headline number. It would appear that instead of rebounding out of the winter depression the growth in the New York area has not just stalled but is declining.

The economic calendar for next week could be listed on a Post it Note. This is the lightest calendar I have seen in a long time and the ISM Nonmanufacturing is the only major release. This means the equity market will be focused on the Ukraine and a small flurry of earnings to determine market direction.

Janet Yellen speaks again on Wednesday but she has finally gotten all the key phrases down perfectly so if anything it should be positive for the market. We can't count on that but keep your fingers crossed.

The pace of earnings slows significantly after next week. As you can see in the list below there are a lot of symbols most readers won't recognize. The following week it is even worse with only about one fifth the number of companies reporting. For all practical purposes with 74% of the S&P already reported investors know how the Q1 cycle is going to end. About 70% of companies have beaten on earnings and 54% on revenue. Compared to the expectations going into this cycle this was a good quarter even if earnings only grew +1.1%. Expectations were so low that any growth was a positive result.

Charles Biderman, CEO of TrimTabs.com, pointed out that float shrink in 2013 was more than $450 billion due to an extreme number of stock buybacks. So far in 2014 more than $150 billion in stock buybacks have occurred. Over the last year there has been more than $1 trillion in acquisitions, which also worked to reduce the float or available shares in the market.

In theory companies should be beating earnings estimates by a mile due to the reduced number of outstanding shares in the market. Fewer shares mean more earnings per share even if earnings did not grow.

Should we be excited by +1.1% earnings growth under those conditions? I think not since it suggests real earnings are shrinking and the beats are due only to buybacks and cost cutting rather than expanding businesses. Remember, only 54% or S&P companies beat the "lowered" revenue estimates.

Whining about earnings is not going to make us rich since we have no control over the outcome. I am just pointing it out because it will eventually impact the market negatively.

However, analysts are simply gushing over the earnings possibilities for the rest of the year. Some are expecting double digit earnings growth by yearend. Of course back in Q4 they were looking for high single digit growth in Q1. That did not work out well for them. Analyst earnings forecasts are always optimistic and rarely come to pass. If Q2 turns into another quarter of lowered estimates and marginal growth we could see the rest of the year revised lower and the market will react.

A reader sent me this question last week.

Why are we still rallying? Growth has been cut to nothing. The Fed is still tapering. They are still in denial by declaring that the economy is showing "signs of improvement" – when it’s not. As you have artfully articulated corporate earnings are only better because of cost cutting, layoffs and stock buybacks. They only beat earnings because they have lowered the bar so low that only a snake could slither over it. Europe still sucks even though it has escaped the limelight lately. Putin is on his way to taking over the Ukraine (with the Balkans in sight). Iran will have a nuke before 2015. What have I missed?

I think we are missing the inherent bullish optimism held by investors. With the market at new highs the retail investor is all in and trying to figure out how to raise more money so they can increase their available margin. With analysts telling them to "aggressively buy the dips" and with S&P price targets over 2,000 there is very little fear in the market. Rational investors should remember these are forecasts not guarantees.

The Volatility Index (VIX) is nearing the low for the year at 11.81 because nobody is buying puts for protection. When an eventual market correction appears it is sure going to take a lot of investors by surprise.

Earnings on Friday did not give us a lot to cheer about. Dow component Chevron (CVX) posted earnings of $2.36 that missed estimates of $2.54. The company blamed the weather for lower production and higher costs. Globally Chevron's production fell -2% but in the U.S. it declined -4%. Higher production in New Mexico and western Pennsylvania was offset by normal declines in aging fields elsewhere. The average price Chevron received for the oil declined -3% thanks to fluctuations in global prices and high production by OPEC. Chevron will see production spike significantly in the coming years after completion of the $100 billion in LNG projects in Australia and several deepwater projects in the Gulf of Mexico. Chevron shares declined only 22 cents on Friday.

CVS Caremark (CVS) posted earnings that jumped +18% and reaffirmed their full year forecast for 2014. The company earned $1.02 and that missed estimates by 2 cents but the stock gained anyway on the positive guidance. Revenue of $32.69 billion beat estimates of $32.3 billion. Full year earnings are expected to be $4.36-$4.50 a share and analysts were looking for $4.47. The company said it was taking a $2 billion hit to revenue because of their decision to phase out tobacco products but they don't expect earnings to change. Their pharmacy benefit operation, which supplies subscription drugs to employers and other clients saw revenue rise more than 10% to more than $20 billion. They also earned more by substituting more generic drugs for brand names. Shares gained 77 cents.

Late after the close Berkshire Hathaway (BRK.a, BRK.b) reported earnings of $2,149 or $3.53 billion that missed estimates of $2,172. Revenue rose +4% to $45.45 billion. The news came after trading had closed so there was no movement in the stock. Profits fell -4% due to bad weather and declining profits in insurance underwriting. Insurance profits declined -31% to $1.18 billion. Much of that was related to currency fluctuations and a very good quarter a year ago. The weather disrupted shipping at the BNSF Railway unit, which reduced profits at BNSF by -9%.

Berkshire had $48.19 billion in cash at the end of Q4 because of a lack of available acquisitions. Buffett has always said he wants to keep a $20 billion cash cushion to carry the company through economic troughs and be ready to make the big deals when they come available. On Friday Berkshire announced a $2.9 billion deal to acquire AltaLink LP, a Canadian based unit of SNC-Lavalin Group that provides energy transmission services in Alberta.

The Berkshire shareholder meeting called "Woodstock for Capitalists" is this weekend in Omaha. About 35,000 people are expected to attend. The meeting started in 1975 with about a dozen people attending. That grew to 1,000 by 1989 and rose to 5,000 in 1996. After Berkshire created the B shares that normal people could afford the numbers grew to 7,500 in 1997, 11,000 in 1998 and finally 37,000 in 2013.

The A shares have risen from $153,000 in February to close at $192,218 on Friday. This insures Buffett will be treated like a rock star at the Omaha party.

The market was dominated on Friday by the headlines from the Ukraine. The government has begun taking back its captured buildings by force and there were multiple deaths on both sides. Ukraine military took back the roads and eliminated separatist's roadblocks. Several buildings that had been held hostage for weeks were recovered.

In theory these separatists are disgruntled Ukrainians that want to return to Russian rule. In reality they are Russian special forces troops disguised to give the appearance of Ukrainians. However, how many militant groups have military weapons, pallets of ammo and shoulder fired surface to air missiles? Two Ukrainian helicopters were shot down on Friday, one with a missile.

In a brief search on the Internet you can find pictures of Russian Special Forces and identical pictures of fighters claiming to be Ukrainian separatists. My hat is off to whoever did the research. Secretary of State John Kerry said they had intercepted radio transmissions between Russia and the Separatists which left no doubt who was commanding them. The U.S. has the names and locations of the various generals controlling the separatists from inside Russia. The U.S. used their electronic warfare planes to intercept the communications.

We know the insurgents are Russian. We know that Putin never backs down. At about 11:AM on Friday Russia demanded an emergency UN Security Council meeting to complain about the use of force by Ukraine. At the same time he said the Ukraine had broken the peace agreement signed back on April 17th. Since Russia never honored it from the very minute it was signed it is laughable he would complain about it being broken.

The Russian UN ambassador came under fire at the meeting as other security council members assailed Russia for "releasing bands of thugs on Ukraine" and claiming "peaceful protestors do not use grenade launchers and shoulder fired missiles." Also, "They do not parade international observers held as hostages." Russia may have called the meeting as a pretext to his eventual invasion of Ukraine but the ambassador got no sympathy from the other members.

Putin reiterated his warning that Russia reserved the right to intervene to protect its interests and Russian leaning residents of eastern Ukraine.

The market rolled over on the news Russia called the meeting because investors feared we are nearing the end of this exercise by Putin. If the Ukraine army is moving to take over the buildings held hostage then Putin has either got to back down and tell his people to stand down and be captured or he will have to back them up using the 40,000 soldiers camped out on the Ukraine border. Since Putin does not have a history of backing down the time for a decision is running short. This weekend could be the tipping point and the invasion by Russia. Some are saying he will move his soldiers into Ukraine under the guise of "peacekeepers."

I don't know a single person or analyst that does not believe Putin will invade. He has been playing out the delaying tactic to try and build his case for protection of Russians in Ukraine. Now he has to follow through on his threats or be seen as giving in to the sanctions by the U.S. and EU.

If Putin does invade the Ukraine it is only a matter of time before he tries this again somewhere else and the Baltics are the likely location. The U.S. and NATO members are rushing additional jet fighters to the Baltics to fly patrols and send a clear message to Russia that unlike Ukraine, a non NATO country, the Baltics are protected. Whether that will deter Putin or not is unknown. Most observers believe Putin will try to grab as much land as possible while President Obama is in office. The president has been weak in his foreign policy and Putin is taking advantage of it. This means we can expect further flare-ups over the next two years.

The Latvian Prime Minister called on the U.S. to permanently base forces in that Baltic nation. Leaders from Estonia, Romania and Poland, all NATO members, have also asked for NATO to build bases in their nations. NATO says it is not bound by its 1997 agreement with Russia stating given the "current and foreseeable security environment" NATO would not pursue "additional permanent stationing of substantial combat forces" in eastern and central Europe. While the alliance intends to honor that pledge "for now" it isn't legally binding. A senior NATO official said "We would be within our rights even now" to reconsider the political commitment in light of Russia's recent moves into the Ukraine.

NATO is an alliance of 28 countries where an attack on one is considered an attack on all 28 and all will respond. NATO countries are required to spend a minimum of 2% of GDP on keeping military forces ready to fight if called on. The U.S., U.K, Denmark, France and Poland are currently flying defensive air patrols over the Baltic nations. Estonia held a welcoming ceremony last week for the arrival of four Danish F-16s and a 60 member support team. A U.S. infantry company of 150 troops from the 173rd Airborne Brigade landed in Estonia on April 28th for "exercises." About 600 soldiers from the brigade are currently deploying to Poland, Latvia, Lithuania and Estonia "to train with local forces" according to the U.S. European Command.

Germany's Angela Merkel was at the White House on Friday where they discussed additional sanctions against Russia. Merkel is in a tough position. They do tens of billions in trade with Russia every year. Plus they get 36% of their natural gas and 39% of their oil from Russia. If they react too harshly against Russia they actually have more to lose than Russia. Putin could cut off their energy supplies or simply raise the prices to the point where Germany could not afford to use them.

There is no easy way out of the Ukraine situation and the market is going to continue to react negatively to the headlines until the invasion is over.

If anyone doubts Putin's preparation for an invasion you only need to look at this map produced by the Washington Post and the Royal United Services Institute as of the end of April. This is worth a look. Map of Russian Forces on Ukraine Border

However, despite the Ukraine headlines the market closed at a new high. It was not the Dow or the Nasdaq but the NYSE Composite ($NYA) that closed a new high. The NYSE Composite is made up of 1,867 stocks, ADRs, REITs, tracking stocks and foreign companies listed on the NYSE. However, ETFs are excluded. There are 1,518 U.S. companies and 349 foreign companies. The float adjusted market cap is over $16.6 trillion.

The NYSE Composite is not 30 stocks like the Dow ($INDU) or 100 stocks like the Nasdaq 100 ($NDX) or a tech index like the Nasdaq Composite. It is a real broad based index with stocks as large as Exxon (XOM) with a market cap of $418 billion to stocks as small as $2.5 million market cap. The largest sector is financials at 21% followed by energy at 16%.

I am spending the time to acquaint you with this index because it is showing no weakness. The Nasdaq is still suffering from weakness in biotechs and semiconductors. The Dow is suffering from whatever single stock is in the tank that day. On Friday it was IBM dragging it lower.

We get so focused on the various mainstream indexes that we lose track of what the broader market is doing. The NYSE made a new intraday high at 10,676 and closed at a new high at 10,629.99.

Because of the confusion over the payroll report and the headlines around Ukraine the rest of the major indexes gave up their gains and finished in the red. The exception was the Russell 2000 and the Midcap 400, both of which gained +3 points but are well off their highs.

If Russia does not invade Ukraine this weekend I expect a strong open for the markets on Monday and the NYSE Composite will lead the charge.

The S&P spiked to 1,891 at the open after the strong jobs report. The hang time was about an hour before the confusion over the labor force participation rate started the decline and the 11:AM news about Russia's call for a UN meeting just added to the growing cloud.

However, despite the decline the index only gave up -2.5 points for the day. That is a hiccup not a decline. The resistance band at 1,885-1,890 held but prior resistance at 1,880 is now support. Given the major headlines and fear of the weekend a decline of only 2 points suggests the S&P is also ready to breakout on Monday assuming there are no headlines to kill the sentiment.

Why are the markets testing resistance when Monday is the start of the sell in May cycle. Thursday and Friday were the first two days of the month and when new retirement contributions are deposited. Monday is the first real day of May where incoming retirement funds are not a factor.

First, May has 31 days. The concept of sell in May is not a deadline oriented event. There is no bell that rings on May 5th to signal everyone to dump their positions. The market is made up of millions of traders and investors and as stupid as it seems as long as the market keeps going up they will keep buying. A market making new highs tends to attract a lot of previously cautious money.

Second, just because May has posted declines in 13 of the last 16 years it does not have to decline in 2014. Sometimes when the vast majority of traders are expecting something the opposite occurs. You may remember last week when I reported that hedge funds were net short nearly $3 billion in Russell 2000 futures expecting a decline in May. If that decline does not begin soon that could turn into a monster short squeeze.

Over the last four years May and August have only been positive once and that was in 2013.

Seasonality Chart from Stockcharts.com

It is not unusual for markets to begin corrections from new highs. Just because we are going higher does not mean we are going to keep going higher. Granted, new highs tend to produce higher highs but eventually there is nobody left to buy and the market rests.

For the last couple weeks I have cautioned about starting new bullish positions unless the S&P breaks through 1,900. So far that has not happened and we could have a bullish day on Monday and still not break through 1,900. You may remember back on April 4th when the market opened at 1,889 and spiked to 1,897 in the opening minutes. That spike was sold so hard it looked like the bottom fell out of the market. That came at the end of a week of decent gains but the last couple days were flat like we saw again last week. I am not saying that is going to happen again but putting a sell stop at 1,897 would be a valid strategy to take profits.

The daily chart shows the S&P trying to ease out of its prior range and chip away at that overhead resistance. One good headline would be enough to power it higher. Can you imagine what would happen if Putin capitulated and pulled his troops out over the weekend? We could have a monster rally from this level.

That would not negate the sell in May strategy but simply give followers of that strategy a higher exit point.

I wrote last week that 16,580 was a critical level for the Dow. The high close for the week was 16,580 on Wednesday and the Dow declined on Thr/Fri to close at 16,512. That 16,580 level is still the key. The two previous high closes were 16,576.66 on December 31st and 16,573 on April 2nd. This could turn into a triple top failure at that level. However, I once heard John Demark say the triple top formation was not reliable because normally the third attempt ends in a breakout. I don't remember the exact context of the conversation but that claim has stuck with me. If you look in any book of charts the triple top formation is clearly defined as a topping formation. The only caution is that it is not confirmed until support breaks. That would require a decline below 16,000 to confirm it as a triple top failure.

I am going to caution you that this looks suspiciously like a perfect triple top formation but the minor decline on Friday suggests we could go higher. Investors had a perfect reason to take profits on Friday with the Ukraine worries ahead of the weekend. Nobody sold. Volume was light at 5.89 billion shares and there was no rush to the exits. Advancers beat decliners 3,814 to 3,024. Buyers just pulled the bids and the indexes faded into the close. If investors were worried about Ukraine they would have pulled the rip cord and bailed out.

Watch 16,580 as an indicator but look for a decent close over 16,600 as confirmation of a breakout. One or two points over 16,600 is not confirmation.

The Nasdaq fought a hard battle on Friday. It was positive for most of the day but faded into the close to end down -3 points. Considering all the battles the Nasdaq has fought over the last two months this looks like a win to me given all the headlines.

The Nasdaq internals have improved but the index is facing strong resistance at the 30-day average at 4,139. This is also downtrend resistance from March 22nd. Until the Nasdaq can punch through this resistance and close over 4,200 the downtrend is still intact.

The winners and sinners list is pretty equally divided with no major imbalance.

The Russell 2000 closed with a minor gain of +3 points but the downtrend remains intact. I was encouraged by the relative strength but it would take another couple weeks of outperformance to lift it back to the highs.

I suspect the relative performance came from new retirement contributions hitting fund accounts at month end instead of a sudden urge by investors to buy small caps. The Russell closed at 1,128 and there is major resistance at 1,158 that would require a 30 point gain just to reach.

Let's just say I was encouraged but not convinced by the gain.

To summarize I was encouraged by the markets relative strength on Friday and a lack of negative headlines over the weekend could result in a strong open on Monday. A positive headline about a resolution of the crisis in Ukraine could produce a major bout of short covering. However, just because the market may move higher on Monday does not mean the rally is the start of a bullish May. It just means investors are not ready to pack it in for the summer.

I would hesitate to buy a strong open on Mondays in general. There is a reason they call the next day Turnaround Tuesdays.

Random Thoughts

In the past year the U.S. population rose by 2,260,000. At the same time the labor force rose by only +62,000. Those not in the labor force rose by 2,203,000. The number of people employed rose by 1,993,000. How well is the economy working when the number of people not in the labor force is rising faster than those finding jobs? The population rose by 2.26 million but the labor force was basically flat. Something tells me this is going to end badly. If people are not in the labor force they are depending on someone to support them. That means a family member or the government. With welfare and food stamp numbers continuing to climb the country is rapidly overextending its capabilities. More than 15% of the U.S. population or 46.5 million are on food stamps. In the top five states it is 20% or more. That is Mississippi, Oregon, Tennessee, New Mexico and Louisiana. In Washington DC it is 24%. In the 1990 recession the nationwide total rose to just 10%. With $17.573 trillion in debt and rising we can't continue to let this continue at the present rate.

Don't be misled by the big job gains in April. This is only the snap back from the first quarter and the worst winter in 20 years in some areas. You can't pour concrete in the snow and that means new home construction and new commercial building construction was on hold. More than 44% of the job gains in 2014 has been in the lowest paying jobs. That same category lost only 22% of workers in the recession. That means the quality of job growth is very low and that means future consumer spending will be weak because of the low pay.

A Bloomberg article on Saturday pointed out that the biggest sectors for job gains were food services and bars, retail sales and temporary help services. They speculated that unemployed workers were taking whatever they could get just to pay the rent. If you can flip burgers or wait tables there are plenty of jobs.

The Stock Trader's Almanac updated their seasonal chart for midterm election years with the data for April. The blue line is the average for midterm election years since 1950. The red line is 2014 year to day and represents the "you are here" indicator. For complete seasonal charts of all the major indexes go HERE. The Nasdaq chart at that link is especially ugly.

Chart from Stock Trader's Almanac

China and Russia are traditional enemies. However, they have decided to join forces against the U.S. and conduct joint naval drills in the East China Sea in late May. China's main strategic push today is to improve their "carrier killer" ICBMs that can be launched from more than 1,000 miles away into space and then dive at supersonic speeds into the decks of the carrier. Their second weapon is a satellite killer to wipe out GPS and communication satellites to leave the U.S. blind in the early stages of a conflict. Russia wants to obtain this technology. Need I say more?

Bullish sentiment in the AAII investor sentiment survey declined from 34.5% to 29.77% last week even though the S&P had been up most of the week. Bearish sentiment rose from 26.02% to 29.45%. This is a warning signal since the Dow made a new high on Wednesday, the NYSE on Friday and the S&P is less than 1% from its high. Bullish sentiment normally soars at new highs. This is evidence investors need to pay attention in the coming weeks.

The World Health Organization (WHO) warned last week that the world is quickly moving to a "post antibiotic" era, in which common infections and minor injuries will once again kill. You could actually die by a paper cut that gets infected. After a century of fighting infections with antibiotics we are losing ground. Antibiotics have been used so much the bugs, bacteria and fungi have developed a resistance to existing drugs. Drug companies are finding it harder to develop new antibiotics because the bugs have evolved to the point they can successfully evade our new drugs almost before they reach the production stage. There has not been a new class of antibiotic in 30 years.

Roughly 80% of antibiotics in the U.S. go to farm animals. Those antibiotics are then transferred to humans in a weakened form in the meat and dairy products. This weakened form allows the bugs to develop resistance. We are essentially vaccinating the bugs against the full strength version we get from the doctor. With the world becoming an increasingly smaller place because of the ease of travel we can easily contract a disease from another country as easy as catching a cold and that disease may have its own set of antibiotic resistance. A case in point is the case of Middle East Respiratory Syndrome (MERS) found in a man in Indiana this weekend. He brought it home from Saudi Arabia and exposed hundreds of people on his trip home by plane, train and bus. I strongly recommend readers reduce their consumption of meat and dairy so your personal bugs are not exposed to the weakened antibiotics.

The energy sector has been leading the market for the last month. Click the advertisement below for a free trial to the OilSlick.com newsletter.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"Financial markets will find and exploit hidden flaws, particularly in untested new innovations—and do so at a time that will inflict the most damage to the most people."
Raymond F. DeVoe


Index Wrap

Outlook Bullish

by Leigh Stevens

Click here to email Leigh Stevens

The S&P 500 and the Nasdaq reached new 4-week Closing highs. A breakout above 1900 looks likely ahead in SPX and the Composite has a bullish technical outlook now that 4000 is holding and COMP got oversold on an 8-week basis.



The S&P 500 (SPX) on a longer-term weekly chart basis is bullish as SPX continues its steady 2-year advance within SPX's well-defined uptrend price channel as highlighted below.

More recently, the Index looks bullish after two recent consecutive weekly lows formed at 1814-1815 and which tended to 'confirm' support in the area of its long-term up trendline. Moreover, the 8-week Relative Strength Index (RSI) got to a 'minor' oversold condition, a reading or close to it that has been associated with prior upside reversals since June of last year.

SPX's daily chart also looks bullish as will be seen further on.


The Nasdaq Composite weekly chart looks bullish for similar reasons to the S&P seen above in that COMP also successfully 'tested' its long-term up trendline as it held at that line of support. Moreover and unlike SPX, COMP got down to what I consider a 'fully' oversold extreme in terms of the 8-week RSI. This is the FIRST time COMP has reached such an extreme since its mid-November 2012 low.

Moreover, COMP has shown good support/buying interest in the 4000 area. A couple of weekly lows fell below 4000 briefly but buyers were there and selling dried up significantly. The daily COMP chart seen further on also has some other bullish aspects, namely a likely double bottom, which is especially apparent on the big cap Nas 100 daily chart.



The S&P 500 (SPX) Index is again nearing the upper end of it's trading range dating from mid-February. The question, especially after Friday's relatively weak close, is whether SPX can achieve a decisive upside penetration of the upper end of this range by going above 1897-1900.

Based on longer-range chart and indicator considerations as highlighted above in my initial 'Bottom Line' comments, I'd say yes. If so, it would not be a bullish negative if the Index then dipped to establish a new support area at 1900 breakout point and the common phenomena of prior resistance, once exceeded, 'becoming' subsequent support. Once there's such an upside breakout, those looking to get in will buy dips back to where they might have been previously selling, looking to break even and fearing to miss out on a new up leg.

What has finally come stopped recently is repeated jumps in bullish sentiment such as seen on 3 prior occasions highlighted by the 3 red down arrows in my CPRATIO indicator. Traders finally seemed to have reined in their most bullish impulses as tech stocks have gotten slammed repeatedly and as Q1 economic activity in the mainstream economy was weak due to the Siberian winter transplanted to the USA!

Initial resistance as already noted is at 1897-1900, extending to around 1925, then in the 1960 area after that. Near support is at 1860, extending to 1850, then to the current intersection of SPX's up trendline at 1820.


The S&P 100 (OEX) is bullish with OEX trading back above its 21 and 50-day moving averages, but traders fear the possibility that the big cap S&P 100 stalls out at the prior top.

At most, I envision a pause or minor pullback only at/from the prior 838 top and a likelihood of OEX making new highs for the current advance. Above 840, next resistance is projected in the 850 area. Eventually OEX should be able to reach 870 and above.

Near support is noted for 825 and in the area of the aforementioned two key moving averages. Next support is at 815, extending to 805 and the prior cluster of lows in that area. Fairly major support should be found on a pullback to OEX's up trendline.


The Dow 30 Average (INDU) appears also to be locked into a trading range and investors are leery right now of buying in the 16600 resistance area which would push INDU through it. Technically also, the Dow had looked like to could be forming a Head & Shoulder's top with a 'Right Shoulder' forming in the 16500 area, but the rally kept going and formation of that top/bearish pattern no longer looks valid.

Support is highlighted at 16450, extending 100 points lower to 16350; next support then is seen at 16200.

Near resistance is at 16600-16630; next resistance then is projected at 16850.

Now I know what INDU stocks 'win' when I pay prices well over $4 at the pump! CVX and XOM are going up with those inflated gas prices; along with strong moves being seen in CAT, INTC, JNJ, KO, MMM, MRK, MSFT (didn't we 'write' off old 'dinosaur' Microsoft in years past?), TRV, and UTX.


The Nasdaq Composite Index (COMP) is bullish on a long-term basis but has been mixed to bearish on a short to intermediate-term basis. Longer-term price and indicator patterns I pointed out on the weekly COMP chart in my initial 'Bottom Line' comments above lean bullish. And that COMP can and will break out above that pesky down trendline intersecting currently at 4185 as highlighted below.

There are other potentially bullish patterns seen on the daily chart here also: 1.) A bullish stair-step pattern of HIGHER relative downswing lows off the recent bottom, which forms a potential and (technically) 'potent' double bottom pattern.

2.) The absolute recent low held the area of its 200-day moving average and is another potent indicator in maintaining a major bull market trend.

3.) Lastly, traders finally seem to have STOPPED assuming that every rally was a big new bull move. My CPRATIO sentiment indicator finally stopped showing upward 'spikes' in bullishness.

That all said, COMP still needs to bust out above 4185-4200 resistance. Next resistance is seen at 4250-4285. Near support is highlighted at 4050, then at 4000, which is a major current support for the bulls to defend.


The Nasdaq 100 (NDX) is knocking at the door of a potential upside breakout above NDX's March-May down trendline, currently intersecting in the 3600 area which appears to be 'acting as' technical/chart resistance based on Thursday-Friday's trade.

I see the pattern as emerging bullish in that the Index is trading back above its 21-day average; next up is the key 50-day moving average which needs to be pierced to suggest continued upside momentum. A measured move objective, where a SECOND advance would equal the first upswing off the likely NDX double bottom, low (3419) could carry NDX next to the 3675-3700 resistance zone.

Near support is highlighted at 3550, with next and fairly major support seen around 3500.

VXN continues to drift sideways to lower from the recent 22.6 peak with that high of a level in the Nas 100 volatility index, as in some prior high VXN readings over 21, suggesting a significant low could be at hand.


The Nasdaq 100 tracking stock (QQQ) saw the same deflecting pattern at its March-May down trendline as the underlying NDX Index. Only the resistance level is different, at 88.1 and also suggesting key near technical resistance. I assume that a breakout move will carry QQQ above 88-88.1. Next resistance then is projected at 89.1, at the previously broken long-range UP trendline. I've noted a 3rd projected resistance in the 90 area.

A 'measured move' objective, whereby a second up leg relative to the current second upswing could reach 91 if the two rallies 'measure' out to equal moves. But, I'm getting ahead of myself. First and foremost as a case of continued QQQ upside momentum is for a decisive upside penetration of 88.

Key support is highlighted at 86 even, extending to 85.

Daily trading volume has tapered off considerably relative to the crash below the prior up trendline back in early-April. On Balance Volume (OBV) is trending higher and one of two important related bullish volume patterns; the second being where major volume spikes on big sell offs signal a bearish climax low.


The Russell 2000 (RUT) shows a mixed chart as RUT struggles to gain upside traction. On the bullish side, RUT appears to have put in a key bottom in the 1100 area, which is above the last big downswing low, keeping the major UP trend intact. We see a pattern of higher relative lows off the recent bottom, which is mildly bullish.

Still, the Index is chopping around and has to clear 1145-1150 to gain some renewed upside traction. Next resistance comes in at 1160-1165, with the most pivotal technical/chart resistance suggested at 1175 currently, at the March-May down trendline.

Near support is suggested at the 200-day moving average, with potential support extending to 1100.

If you want to be positioned for a bullish Market rebound, pick NDX trade strategies over the struggling Russell 2000.


New Option Plays

Aerospace & Social Media

by James Brown

Click here to email James Brown


The Boeing Company - BA - close: 129.94 change: +1.48

Stop Loss: 128.40
Target(s): to be determined
Current Option Gain/Loss: Unopened
Time Frame: 6 to 9 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
BA is in the industrial goods sector. The company is a major manufacturer in the aerospace and defense industries. The company's earnings results have been coming in better than expected. Shares peaked back on January 22nd, 2014 at $144.57 a share. A few days later BA reported Q4 earnings that beat Wall Street's top and bottom line estimates. Unfortunately BA lowered their 2014 guidance and the stock plunged on this news.

BA has been stuck consolidating sideways in the $121-131 trading range ever since. The most recent earnings report on April 23rd also beat the street's estimates on both the profit and revenue number. BA also raised their 2014 guidance. This lifted the stock but the rally stalled at technical resistance near the top of its trading range and the 100-dma.

BA has been affected by the Ukraine-Russian conflict since the U.S. State Department did suspend licenses for defense sales to Russia. Plus BA's and Lockheed's joint-venture has been banned from working with a Russian rocket-engine maker. Yet these headlines do not seem to be affecting BA's stock price.

Investors could be focusing on BA's aerospace business. A recent Reuters report unveiled that BA is on time to launch three new jet designs, the 787-9 Dreamliner, the 737 Max and the 777X. BA plans to introduce a total of six new jets between now and 2020, which could drive huge sales for an aerospace industry that is projected to surpass $4 trillion.

A handful of analysts have put a $160-161 price target on BA's stock. Currently the point & figure chart has a new buy signal and forecasting at $148 target. If shares can breakout from its trading range it could move quickly.

The $131.00-131.75 area is resistance. Therefore we're suggesting a trigger to buy BA calls at $132.00. I'm not setting an exit target yet but readers may want to target the $144 area.

Trigger @ $132.00

- Suggested Positions -

Buy the Jul $135 Call (BA1419G135) current ask $2.14

Annotated Chart:

Weekly Chart:

Entry on May -- at $---.--
Average Daily Volume = 3.7 million
Listed on May 03, 2014


LinkedIn Corp. - LNKD - close: 147.73 change: -13.49

Stop Loss: 158.25
Target(s): to be determined
Current Option Gain/Loss: Unopened
Time Frame: 4 to 8 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
LNKD is in the technology sector. The company is considered a major part of the social media space with its online professional network of 300 million people. Unfortunately investor sentiment on the high-flying momentum names has reversed this year.

A number of the momentum stocks peaked in the first quarter of 2014. Yet for LNKD the stock peaked in September last year at $256 a share. High-profile momentum names are usually driven by high expectations for growth. When growth slows down so does the stock price. That seems to be the predicament for LNKD. They're so big now that growth is slowing. They've now seen six consecutive quarters of slowing growth.

LNKD's earnings report back in February sparked a sell-off when the company lowered their 2014 guidance. Management quickly followed that up with a big announcement they were moving into a Chinese market. That seemed like a sure bet since China has more than 1.3 billion people and broad access to the Internet. Yet the China news failed to stop the decline in LNKD shares.

LNKD's latest report this past week came in better than expected and revenues soared +45% from a year ago. LNKD management even raised their 2014 guidance this time. Unfortunately they didn't raise it enough and their new raised guidance is still below Wall Street's 2014 estimates.

Analysts are divided on the name. Many are still bullish and were telling investors to buy on weakness although a few of them have been saying that for months. A handful of other firms have lowered their price targets on LNKD following its latest earnings report and guidance.

The stock's recent sell-off has broken some long-term support. The trend of lower highs and lower lows is very much intact. The Point & Figure chart is bearish and forecasting at $106 target.

We are suggesting readers take advantage of this bearish trend and weakened expectations with puts. Buy puts on Monday morning. Traders should consider this an aggressive, higher-risk trade due to LNKD's volatility. The stock can see big swings. Many of its bounces within the current down trend are $20-$30 each. I suggest small positions to limit risk. The April 7th low was $158.06 and this area could be resistance. We will start with a stop loss at $158.25.

*small positions* - Suggested Positions -

Buy the Jun $140 PUT (LNKD1421R140) current ask $6.15

Annotated Chart:

Weekly Chart:

Entry on May -- at $---.--
Average Daily Volume = 3.8 million
Listed on May 03, 2014

In Play Updates and Reviews

Job Data Fails To Inspire

by James Brown

Click here to email James Brown

Editor's Note:

The better than expected April jobs data failed to inspire the U.S. stock market. The major indices closed flat to down.

POT hit our entry trigger and RL hit our stop loss on Friday.

We want to exit our ADBE trade on Monday morning.

Current Portfolio:

CALL Play Updates

Adobe Systems - ADBE - close: 61.56 change: -1.03

Stop Loss: 59.45
Target(s): to be determined
Current Option Gain/Loss: -44.3%
Time Frame: 8 to 12 weeks
New Positions: see below

05/03/14: We have been patient with ADBE but the stock is just not performing. Shares underperformed on Friday with a -1.6% decline versus a -0.08% drop in the NASDAQ and a -0.1% dip in the S&P 500. Furthermore Friday's move in ADBE looks like a new lower high and a bearish engulfing candlestick reversal pattern.

ADBE could still find support and bounce again near $60.00 but we are suggesting an immediate exit on Monday morning to close this trade.

- Suggested Positions -

Long Jul $65 call (ADBE1419G65) entry $3.20

05/03/14 prepare to exit on Monday morning
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

Diamondback Energy, Inc. - FANG - close: 73.77 change: +2.50

Stop Loss: 69.25
Target(s): to be determined
Current Option Gain/Loss: + 2.9%
Time Frame: exit PRIOR to earnings in May
New Positions: see below

05/03/14: FANG displayed relative strength on Friday with a +3.5% gain and a close above its 10-dma. Unfortunately we are running out of time. FANG is scheduled to report earnings in May but we don't have a confirmed date yet. Most sources list May 7th as its announcement date. That would be this coming Wednesday. We might be closing this trade soon to avoid holding over the earnings announcement. I am not suggesting new positions.

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

Gilead Sciences - GILD - close: 77.71 change: -1.31

Stop Loss: 74.45
Target(s): to be determined (potentially $85.00)
Current Option Gain/Loss: +27.3%
Time Frame: 4 to 8 weeks
New Positions: see below

05/03/14: Uh-oh! The action in GILD on Friday looks bearish. The biotech tech industry struggled with selling and the IBB biotech ETF lost -1.48%. Shares of GILD underperformed with a -1.65% decline. Furthermore Friday's move in GILD looks like a potential failed rally under the $80 level and a bearish engulfing candlestick reversal pattern. I am not suggesting new positions at this time.

Earlier Comments:
If triggered our temporary target is $84.75. We'll re-evaluate our exit strategy as the trade progresses.

- Suggested Positions -

Long Jun $80 call (GILD1421F80) entry $2.12

05/01/14 new stop @ 74.45
04/30/14 triggered @ 77.00


Entry on April 30 at $77.00
Average Daily Volume = 23 million
Listed on April 29, 2014

Potasch Corp. of Saskatchewan - POT - close: 36.57 change: +0.32

Stop Loss: 34.45
Target(s): to be determined
Current Option Gain/Loss: + 1.1%
Time Frame: 3 to 4 months
New Positions: see below

05/03/14: We have been waiting for POT to breakout to new relative highs and shares did so on Friday. The stock was showing some relative strength with a +0.88% gain. The push past its late March high was the move we were waiting for. Our trigger to buy calls was hit at $36.50.

Earlier Comments:
(some of my earlier comments) 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.

- Suggested Positions -

Long Sept $35 call (POT1420i35) entry $2.65

05/02/14 triggered @ 36.50


Entry on May 02 at $36.50
Average Daily Volume = 5.0 million
Listed on April 26, 2014

Ventas, Inc. - VTR - close: 66.54 change: -0.10

Stop Loss: 64.75
Target(s): to be determined
Current Option Gain/Loss: -7.2%
Time Frame: 3 to 4 weeks
New Positions: see below

05/03/14: Friday proved to be a quiet session for VTR. Shares bounced near $66.00 on an early morning dip and spent most of the day drifting sideways in a narrow range. I would still consider new positions now at current levels.

- Suggested Positions -

Long Aug $65 call (VTR1416H65) entry $2.75

05/01/14 triggered @ 66.35


Entry on May 01 at $66.35
Average Daily Volume = 1.6 million
Listed on April 28, 2014

PUT Play Updates

ASML Holdings - ASML - close: 80.88 change: -0.47

Stop Loss: 82.05
Target(s): to be determined
Current Option Gain/Loss: Unopened
Time Frame: 6 to 8 weeks
New Positions: Yes, see below

05/03/14: ASML is still drifting lower and nearing its prior support at the $80.00 level. We are waiting on a breakdown to new relative lows. I don't see any changes from last Wednesday night's new play description on ASML.

Earlier Comments:
More aggressive traders could buy puts here. I am suggesting a trigger to buy puts at $79.85. That's just under the April 16th low of $79.94. I will point out that ASML might have some support near $75.00, which is near a long-term trend line of higher lows. However, the Point & Figure chart for ASML is bearish with a $67.00 target.

Trigger @ 79.85

- Suggested Positions -

Buy the Jun $80 (ASML1421F80)


Entry on April -- at $---.--
Average Daily Volume = 1.4 million
Listed on April 30, 2014


Ralph Lauren Corp. - RL - close: 155.00 change: +1.60

Stop Loss: 155.10
Target(s): to be determined
Current Option Gain/Loss: - 7.3%
Time Frame: exit PRIOR to earnings on May 9th
New Positions: see below

05/03/14: RL shot higher on Friday morning and broke through its short-term trend of lower highs. Our stop loss was hit at $155.10.

- Suggested Positions -

May $150 PUT (RL1417Q150) entry $3.70 exit $3.43* (-7.3%)

05/02/14 stopped out
*option exit price is an estimate since the option did not trade at the time our play was closed.
05/01/14 new stop @ 155.10
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