Option Investor

Daily Newsletter, Saturday, 5/17/2014

Table of Contents

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

Market Wrap

Lots of Smoke, No Fire

by Jim Brown

Click here to email Jim Brown

A flurry of short covering just before the close rescued the week.

Market Statistics

After the indexes failed to drop below Thursday's lows traders decided to take profits ahead of the weekend prompting a late day rebound. The morning dip came to a dead stop at 1,865 and just below the 50-day at 1,867. The 1,865 level has been prior support and it held firm on Friday. The morning rebound failed as sellers tried to push the market lower again. They were unsuccessful and the higher low at 1,868 convinced sellers to take profits ahead of the weekend. Anyone riding shorts down from the 1,895 level on Wednesday made a nice profit and with the potential for another short squeeze Monday it made sense to go home flat.

Even with the markets at new highs over the last couple weeks Consumer Sentiment declined sharply from 84.1 to 81.8. That erased more than half of the +4.1 point gain in April. The present conditions component declined from 98.7 to 95.1. The expectations component declined from 74.7 to 73.2.

Analysts have been telling us that once the winter weather went away all the economic reports would surge higher. Apparently they forgot to tell the consumers. This drop in sentiment appears to be matching up with the shortfall in retail sales for April and the weakness in home sales. This suggests the Q2 GDP could be another disappointment.

On the home sales front the Housing Starts for April surged +13.2% from 947,000 to 1.072 million. While that sounds great in the headline the components told another story. Single family starts rose only +0.8% while multi-family starts surged +39.6%. Single family permits rose only +0.3% and down -3.2% from the year ago period. Builders are focusing on apartments and condos where there is strong demand due to the inability for consumers to finance a house. Builders interviewed said they were focusing on multi-family because single family homes were no longer selling. That is not the trend the government or analysts want to see.

Starts surged 78% in the Northeast, 40% in the Midwest, 18% in the South and 13% in the West. Housing completions declined from 881,000 to 847,000 for a -3.9% drop.

The economic calendar for next week is light once again. The most important event will be the FOMC minutes on Wednesday. This could roil the markets if there was a lot of discussion between members about accelerating the QE Taper process. After the economic reports of the last two weeks there are some analysts that believe the Fed should be extending the stimulus rather than ending it.

The recent updates of economic data for Q1 are now pointing to a contraction in the GDP of -0.5% and you have to go back to Q2-2009 to see another quarter of contraction. However, analysts keep telling us that growth will snap back hard in Q2 to something in the +3.5% range. Personally I would be very surprised given the recent reports but time will tell. Full year estimates have now declined to about +2.4% growth.

There were just enough earnings left to almost fill my graphic but very few are mainline companies. SalesForce.com, Home Depot, Staples, Lowes, Target, Hewlett Packard, Best Buy and Sears are the highlights.

On Friday the big earnings winner was JC Penny (JCP). Shares rallied +16% after the company reported a jump in same store sales of +6.2%. Of course their comps from 2013 were horrible but it does appear they are finally turning the company around. That is the first time in more than two years that April sales have risen. Sales rose +6.3% to $2.8 billion.

They still lost -$350 million but the -$1.15 per share was better than the -$1.26 analysts expected. The company said it had secured a $2.35 billion line of credit that will add $500 million of incremental liquidity during seasonal peaks. JC Penny may have come back to the land of the living but they have a long way to go to regain consistent profitability.

There were plenty of shorts in JCP shares and they were expecting another earnings miss. Volume on Friday was a whopping 304 million shares.

Autodesk (ADSK) shares rallied +8% after they posted earnings that beat estimates and raised revenue guidance. The company posted earnings of 32 cents compared to estimates of 21 cents. They raised Q2 revenue estimates to a range of $595-$610 million. That was above estimates for $576 million. They expect to add 150-200,000 net new subscriptions.

Nordstrom (JWN) exploded higher with a 15% gain after reporting earnings of 72 cents compared to estimates of 68 cents. Revenue of $2.93 billion beat estimates of $2.86 billion. The company performed well despite winter weather and increased competition. Don't you just love it when some companies actually perform while others stand behind the "weather ate my earnings" excuse? The company also said it was looking for a partner to take over its credit card unit. Nordstrom currently has more than $2 billion in outstanding customer charge accounts. Getting somebody like GE Credit or Citigroup to take over their cards will infuse needed cash into Nordstrom.

Competitor Dillard's Inc (DDS) also jumped +15% after reporting earnings of $2.56 compared to estimates of $2.41. Revenue was light at $1.55 B compared to $1.6 B. Same store sales rose +2% when most retailers were reporting declines. This was the 15th consecutive increase in sales for Dillard's. I guess there was no winter weather around their stores. They purchased $65.9 million in shares (1.7%) during the quarter with $224 million still outstanding in purchase commitments.

Not having a fun day was World Wrestling Entertainment (WWE). Shares imploded for a -43% drop after the company said it had signed a new contract with Comcast NBC Universal (CMCSA). The multiyear deal will continue to broadcast WWE Raw on the USA Network and Smackdown on the Syfy Network. The terms of the deal were not disclosed but analysts concluded they signed for a smaller amount than was anticipated. Investors had expected a big rise in the $100 million a year they earned from the prior contract. The company warned on guidance suggesting profits could be in a range of $125-$190 million by 2015. The wide guidance range spooked investors and the stock was slammed for a huge loss.

Another factor was the poor performance of the WWE Network. The online streaming service is cutting into pay-per-view revenue and the expected subscriber growth has slowed. They now have 700,000 viewers but need over one million to hit their profit targets. WWE said the service will lose $45-$52 million in 2014 "if it reaches its goals." That assumes a bigger loss if those goals are not reached.

After shares collapsed the company announced a hastily scheduled conference call with analysts for Monday to discuss the events. Apparently reality is much more difficult to deal with than make believe.

Shares of Darden Restaurants (DRI) took a beating after they said they sold the Red Lobster chain to the private equity group Golden Gate Capital for $2.1 billion in cash. Shares declined -4% because shareholders were against the sale. Two activist hedge funds, Starboard Value and Barington Capital, that had targeted the company called the sale "unconscionable" and "unbelievable." The funds had been trying to halt any sales saying splitting off Red Lobster would hamper the restructuring of the entire company. The Red Lobster chain was a material portion of the company and had a lot of premium real estate. There are 705 stores and had $2.62 billion in sales in 2013.

Last month Starboard collected votes from 55% of the shareholders demanding a special meeting to discuss the different plans for selling assets. The company continually delayed the meeting by not setting a date. On Friday Darden said it would now hold the meeting but the Red Lobster sale would go on. It does not require shareholder approval. The founder of Barington's said "it is unconscionable that the Darden board would enter into an agreement to sell the Red Lobster business for what amounts to a 'fire sale' price after shareholders clearly indicated they did not want the company to enter into any transaction unless it received shareholder approval."

Golden Gate plans to immediately sell the real estate for $1.5 billion in a leaseback deal with American Capital Properties. This further incensed the shareholders against the deal. Darden officials said the sale would bolster the cash position and allow the company to focus on a faster restructuring of the Olive Garden brand.

Verizon (VZ) shares moved higher after quarterly 13F reports from hedge funds showed a sudden interest in the company. Warren Buffet bought 11 million shares, Hank Paulson 8.7 million and Dan Loeb 3.5 million. Lansdowne Partners added a stake of $641 million for the biggest new bet on Verizon. The reason everyone is buying Verizon is the company's competitive position, 4.4% dividend and low PE of 11. The massive Verizon 4G network is much larger than any competitor and that allows them to charge a fair price for their plans. Sprint and T-Mobile are fighting it out in the price war for the remaining customers and that means smaller margins. AT&T is in the middle with a decent network and infrastructure.

There are efforts in progress to allow Sprint (S) and T-Mobile (TMUS) to merge. The idea is to have three large competitors that can really compete rather than the duopoly of VZ & T comfortable in their respective areas with the crumbs left for the smaller companies. Quite a few people believe the merger could happen.

Apparently the billionaires believe whatever happens it will be good for Verizon since the barrier to entry for a similar sized network is nearly insurmountable. It took Verizon a decade and billions of dollars to build out the current 4G network they are now releasing a new 4G network called XLTE that has twice the capacity. XLTE has been going live around the country for the last seven months but Verizon has been quiet about its capabilities. Verizon bought $3.9 billion worth of 4G spectrum from a group of cable operators in 2012. The company gained between 20-40 Mhz of Advanced Wireless Licenses (AWS) to supplement its existing network. In New York, where a lot of this spectrum came online, researchers are seeing reports of up to 80 Mbps connections, which are significantly faster than most 4G connections. The billionaire investors evidently caught wind of the Verizon progress and wanted a piece of the action. This XLTE ad just popped up on YouTube this week. XLTE Video

They still have a long way to go because I don't have cell service at my home in Colorado and I am a Verizon customer.

Remember the Great Rotation? This year was supposed to be the year of the Great Rotation as money flowed out of bonds and into stocks. That is not working out quite like everyone expected. Analysts and market reporters were talking about the yields on the ten-year treasury all week. The low yield on Thursday was 2.473% and would have been a 10 month low had it closed there. Back in October we saw 2.471% intraday but the closing low was 2.485%.

There are as many theories about why treasuries are so hot right now as there are analysts. Some believe it is a reflection of the deterioration in the economy. Others believe it is in preparation for a crash in the equity markets. Still others believe it is a flight to quality from overseas investors as a result of economic conditions in Europe and the worry over Ukraine.

All of those reasons are probably valid to some extent. However, the biggest reason, in my opinion, is the lack of treasuries for sale. The Fed is buying them all. Despite the taper process the Fed is still buying $45 billion in treasuries and mortgage backed securities every month. With the number of treasuries being sold declining because the deficit is temporarily smaller it means there is a shortage of new supply on the market. Now add in all those reasons listed above and suddenly treasuries are in short supply.

That is also causing a short squeeze. Nearly every major hedge fund thought the trade of the decade would be to short treasuries once the Fed began to taper QE. With the Fed out of the market rates would rise and shorts would profit. Guess what, it is nearly a year since Bernanke started the taper conversation and crashed the equity markets last spring and yields are falling not rising. Anyone holding treasuries since the December high over 3% is losing a lot of money. With the economy sluggish, equities in turmoil and war in Ukraine we could see yields a lot lower. That means funds are being forced to cover their shorts in a very tight market. Some analysts were projecting yields in the 2.25% range later this year. If you own treasuries you are celebrating but if you are short the outlook is not good.

The Dow had multiple triple digit intraday declines last week but the Volatility Index ($VIX) stubbornly refuses to rally. On Monday it dipped to a five-month low of 11.88. Thursday's equity dive lifted it briefly over 13.50 but the decline on Friday was equally as fast. Despite the volatility in the indexes there is no volatility in the VIX.

This is a result of complacency by investors. Very few investors are buying puts to protect their positions because almost nobody believes the big cap market is going lower. The S&P is only about 20 points below its closing high at 1,897. The 50-day average has been support on the last three dips and it was support again on Friday. As long as the index remains above the 50-day the VIX will remain low.

Eventually this complacent market is going to end badly. Traders seem to forget the sharp decline in April and the major decline in January. They are only focused on the new highs made last week. Markets are supposed to pause for profit taking after new highs and that is what traders believe is happening.

Friday's close was right back in the congestion zone between 1,865 and 1,885 with strong resistance at 1,897-1,900. Eventually we are going to see a directional move and it could be strong. We just don't know which direction it will take. With earnings and economics weak there does not seem to be much reason to surge higher. However, as long as analysts keep talking about a 3.5% GDP in Q2, investor hope is alive. If that estimate suddenly begins to decline we could see a race to the exits.

We have an interesting setup on the Dow. Despite the decline from the breakout highs we have a nice pattern of higher lows. That is a signal for dip buyers to keep on doing what they have been doing. Until the Dow declines below 16,300 to break that pattern the technical uptrend is alive and well.

The 16,400 level has been support for the last two weeks but it was only touched once intraday last week and that was on Thursday. Support just above that level was strong. The Dow drop on Thursday came to a dead stop just above 16,400 on the opening decline and it held there for the rest of the week. Like the S&P the Dow has honored the 50-day average most of the time over the last three months. There have been two penetrations but both recovered quickly. The 50-day and uptrend resistance have formed a tight channel that is begging to be broken. Markets don't normally trend so clearly and that means a breakout/down is due.

The Nasdaq rebounded at the close on Friday to gain +19 points for the week. After topping at 4,155 on Tuesday the index declined to 4,035 on Thursday a -120 point drop. At that point it looked like it was all over for the bulls and the next stop would be a retest of 4,000 or even lower. The index declined again at the open on Friday but was unable to reach the Thursday lows. This emboldened traders and worried the shorts enough they were forced to cover. The memory of last Monday's monster short squeeze was still vivid in their minds.

I would not confuse the short covering at the close with a rally. This was simply account protection ahead of the weekend. The Nasdaq has major resistance at 4,150 and 4,180 and it will take more than a little effort to push through those levels. We are approaching summer with the Memorial Day weekend just ahead and summer is typically a weak period for the Nasdaq.

The one chart that should concern tech traders the most is the weekly chart. Since November 2012 the Nasdaq has been moving straight up with barely a blip in the trend to gain +56% from that 2,800 low. The decline this year has only brought it back to uptrend support. The long gain is being supported by the 4,000 level but the odds of this uptrend breaking are growing stronger every day. Stocks don't grow to the sky without periodic pauses and a break in the trend. We could argue that the decline from the 4,371 high back to 3,946 in April was that break. It was after all a -9.7% decline and took the Nasdaq right to correction territory. However, the rebound lasted only 4 days and it has been weak ever since. Last week's high at 4,155 was a lower high and suggests more selling ahead.

On the daily chart the 50-day average has crossed over the 100-day average and is now downward sloping. In a couple weeks we could be talking about a death cross of the 50 through the 200-day currently at 4,002. That is a very strong sell signal for managed equity funds.

The Nasdaq only had 12 stocks making new 52-week highs on Friday and 75 stocks making new lows. That is the smallest number of new highs this year. That was only slightly better than the 13/117 ratio on Thursday. Despite the small gain for the week the Nasdaq is not well. A decline next week below 4,030 could signal trouble.

The Russell 2000 remains the weakest link. The Russell hit a three-month low on Thursday at 1,082 and below the 1,087 level for a -10% correction. It did not close there and recovered to end at 1,095. On Friday the opening decline hit 1,088 and right at correction territory before rebounding at the close to 1,102 on short covering. Do not let that short covering bounce fool you. The path of least resistance is still down.

The Russell has declined to critical support. If there is going to be a goal line stand this is where it should appear. Clearly there are some buyers waiting at the 1,087 correction level but we don't know how much firepower they have. We could say the Russell is oversold but that does not mean it can't get more oversold. A break below that February low of 1,082 should see selling accelerate.

The NYSE Composite is still bullish. The uptrend support from the last two months is still intact and barely tested. The 50-day at 10,502 is now support and 10,670 is still resistance.

The Russell 3000 ($RUA), the top 3,000 stocks in the U.S. market, is struggling. That is because 2,000 of those stocks are the Russell 2000. However, thanks to the strength in the top 1,000 stocks the index is holding its own near the highs. This shows how much more influence the big cap stocks have over the small caps. If the R3000 declined to close under the 1,100 mark it would signal a negative change in the trend.

In summary I think the rebound at the close was short covering ahead of the weekend. I don't think anything has changed for the Russell 2000 or the Nasdaq. The biotechs have weakened again and the airwaves are full of comments on the negative influence of the Russell. While the big caps are range bound the small caps are slipping lower. Eventually one of the opposing forces will win. Either the negativity of the small caps or the positive sentiment in the big caps. Divergences like this don't last forever. Eventually one side will give up and join the other. The closer we get to summer the better chance the negative sentiment wins.

Friday was option expiration and we barely managed 5.7 billion in volume. It is only going to get worse as we head into summer. Ships can sink in a quiet sea and stocks can decline on low volume. It is a lot harder for them to rise on low volume. It has long been said that volume is a weapon used by the bulls.

Random Thoughts

Russia played a trump card in the Ukraine sanctions game last week. They said they would no longer help the U.S. launch astronauts to the International Space Station starting in 2020 and they would no longer allow the U.S. to use Russian rockets to launch military satellites. Karma is a killer. On Thursday a Russian rocket launching "Russia's most advanced communication satellite, the Express-AM4R" blew up 540 seconds into the flight. Russia said it was halting all further flights of the Proton rockets until the problem could be determined. The last crash of a Proton rocket was in July when a rocket carrying three Russian GPS satellites failed on takeoff and crashed into the cosmodome.

There was a slight inference that the U.S. may have had something to do with Thursday's failure. Did the CIA interfere in some way to cause the failure? Was the CA testing some secret anti-missile weapon? While I seriously doubt it that won't stop the Russians from blaming us to keep from admitting the rocket failed on its own.

Also last week we found out that Russia dumped a record $26 billion in U.S. treasuries in March to bring its post March total to just over $100 billion in inventory and the lowest since the Lehman crisis. With Putin on the prowl and sanctions about to bite it is no surprise that Russia began liquidating U.S. treasuries to raise cash and keep those assets from being frozen. Their holdings are now down -35% year over year. I strongly suspect April will show further declines in their holdings.

We all know that Russia pulled their troops back from the border because Putin said so. Unfortunately U.S. satellites showed no movement. Putin also said he would not attempt to influence the "illegal" presidential election on the 25th. However, just in case the "massive nuclear attack" military readiness drill last week did not get the point across Russia is holding an even larger drill on election day. The drill, called Avidarts 2014, will involve nine different types of military aircraft and 71 fighter jet crews rehearsing "Countering of enemy air defenses, destruction of ground targets and carpet bombing enemy territory." The drill will take place close to the Ukraine border.

NATO Secretary General Anders Fogh Rasmussen said "Don't believe Putin." He said he has no plans to pull back from Ukraine and he will impact the May 25th election. Read it here

France is going to ignore the U.S. call for sanctions against Russia and will deliver two warships to Russia for 1.2 billion euros. To Heck With Sanctions

Josh Brown gathered a list of things you don't want to see if you are long stocks. This list was a hot topic at the SALT Conference in Vegas last week.

They are all happening at once:

1. Collapsing home builder stocks and fading real estate data.

2. A US dollar on the verge of ripping to the upside.

3. Treasury bonds refusing to back down, nudging their way higher daily.

4. A deteriorating number of new highs for individual stocks as the indices flirt with record levels.

5. Influential managers who’ve been bullish for most of the rally starting to turn cautious (Einhorn, Cooperman, Tepper, etc)

6. Stalling earnings growth.

7. Defensive stock leadership

8. Huge divergence between small caps and large caps.

All of these things are blatantly occurring now. None of them are positives.

Mish Shedlock is convinced we are about to see a major slowdown in the German economy. He said the coming rebalancing of the Chinese yuan will be a challenge as well as the sanctions against Russia. Here are his points.

• The China rebalancing will cost Germany export volume.
• Germany has the most expensive energy policy in Europe – a drive away from atomic power dependency to a less obvious dependency on Russian gas.
• The Ukraine crisis impacts Germany. According to the Federation of German Wholesale, Foreign Trade and Services (BGA) about 6.200 German companies are doing business in Russia.
• The coming Chinese devaluation of the Yuan will significantly lift Chinese import prices.
• More than 300,000 German jobs depend on exports to Russia.
• Russia is Germany's 11 biggest export market.
• Germany imports 25% of its energy from Russia.

Despite the slowdown in some of our economic indicators the latest rail traffic data showed record gains in intermodal traffic and the highest 12 week average gain since 2011 at 8.5%. Intermodal traffic in April totaled 1,316,176 containers and trailers, up +9% or 108,485 units over April 2013. It was the 53rd month of consecutive increases. The weekly average in April was 263,235 units and the highest for any April in history and the second highest month ever. Carload originations totaled 1,481,586, up +6.4% in April. Commodities with the biggest carload increases including coal, up 34,502 carloads, or 6.4 percent; grain, up 22,683 carloads, or 27.6 percent; crushed stone, sand and gravel, 10,194 carloads, or 9.5 percent; and petroleum and petroleum products, up 5,316 carloads, or 7.6 percent.

Along the same line of thought orders for trucks have surged to an 8 year high. Eaton raised its forecast for North American truck output in 2014 by +5.7% to 280,000 units. That is an 11% increase over 2013. The average truck today is 9.6 years old and near a record. Active truck utilization since November has been 99%. That is up from less than 96% in 2012 and less than 86% in 2009. Manufacturers are suggesting we could see a truck shortage that raises shipping rated by 6% annually over the next several years. Engine maker Cummins (CMI) forecast sales growth of +10% in 2014. Paccar, maker of Kenworth and Peterbilt trucks is expected to grow by +12%. FTR Starks estimates there was a driver shortage of 236,000 in the first quarter. That was 43% higher than Q1-2013 and the largest shortfall in a decade.

Bespoke Investment Group tracks earnings and guidance for the S&P. They reported last week that forward guidance delivered with Q1 earnings rose by 0.03%. While that is a miniscule number it was the first time in ten quarters that forward guidance did not decrease expectations.

Bespoke Chart

China is upping the ante in its bid to control the South China Sea. They moved a giant oil rig to within 120 miles of Vietnam and well within Vietnam's continental shelf and Exclusive Economic Zone (EEZ). In order to support and protect this drilling rig China sent more than 80 ships and foreign ships have been warned to stay away from the rig for "safety." The 1982 UN Convention on the Law of the Sea established "that a coastal state has sovereign rights for the purpose of exploring and exploiting, conserving and managing the natural resources in its EEZ." There is no interpretation of sovereign rights that gives China the right to drill in Vietnamese waters. The U.S. warned that this was a serious provocation but the mainstream press ignored it. If China remains unchallenged in this blatant land grab they will continue to press their advantage against other neighbors in the South China Sea. This is eventually going to be a major problem. At least 21 were dead in Vietnam as protest riots over the rig turned deadly. 21 Dead in Vietnam   China's Big Mistake

In a little over a year 60 high ranking Chinese officials have died of unnatural causes, with most being suicide. There is strong suspicion this epidemic of mysterious deaths among China's elite is likely tied to the anticorruption campaign of General Secretary Xi Jinping. The anticorruption drive has reached higher in the bureaucracy than any such effort in decades. The epidemic is so strong that Chinese newspapers have been told in a secret order from Beijing to stop reporting on suicides by top government and party officials. Last year the anticorruption campaign led to the punishment of 180,000 party officials for abuse of power and corruption according to the official party numbers.

Thanks to China’s economic boom, and the very corruption that Xi now sees as threatening the future of Communist rule in China, many members of the elite have managed to smuggle a massive amount of wealth out of the country. Members of the elite have sent their children to college in the West, especially in the United States and the United Kingdom, and are purchasing real estate in Manhattan, London, and elsewhere in increasingly large numbers. Now may be the time for these officials to abandon China entirely and flee to the West. Read full story here.

European growth sank in the first quarter just like it did in the USA. The ECB has been trying to talk up Europe by warning of impending economic stimulus for months. The constant talk worked in the beginning but it is now being ignored. In Q1 Finland, Holland, Portugal and Italy fell into contraction. The Netherlands were already there with a -4% print. France fell to zero. This prompted a new threat of promised stimulus in June. Analysts are saying that after a couple years of promises the ECB needs to launch "shock and awe QE" to shake up the markets. This makes June's ECB meeting a potential inflection point for the European markets and that will hit the U.S. markets as well.

Walmart reported lower sales for the fifth consecutive quarter. Walmart sales are a reflection of the status of the working class consumer. While Dillard's, Nordstrom and Michael Kors are seeing sales gains the Walmart crowd is suffering. I don't know how many customers those three upscale stores see per week but 140 million people shop at Walmart every week. I believe we can easily say that Walmart sales reflect the U.S. economy and not be wrong. That suggests the economy is getting weaker

Piper Jaffray, one of the most bullish firms on Wall Street, warned clients last week that a major correction could be just ahead. "The S&P could tumble to 1,650 or even 1,600 before reversing higher. That is a 15% decline after a +184% gain over the past five years." Stealth correction coming

Michael Batnick reported last week, "The Russell 2000′s current 10% peak-to-trough decline (its first since November 2012) is small caps' 36th peak-to-trough decline of at least 10% since 2000, with an average decline of 17.1%. Of the first thirty-five corrections, every one of them were accompanied by large-caps also falling, with an average decline of 12.8%." Let's see 35 out of 36. The odds are definitely against us.

The S&P's current bull market streak of 955 days is nearly twice the average number of days without a correction.

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

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"The average man doesn't wish to be told that it is a bull or a bear market. What he desires is to be told specifically which particular stock to buy or sell. He wants to get something for nothing. He does not wish to work. He doesn't even wish to have to think."
Jesse Livermore


Index Wrap

Can't take em Up (for long), Can't take em Down (by much)

by Leigh Stevens

Click here to email Leigh Stevens

The S&P and Dow have shown a tendency for new highs that they can't 'hold', a pattern typical of a Market shifting gears. It's not your Grandfather's bull market any longer!

A point I'd make is that we continue in a bull market but perceptions of this year's upside potential is far under the unusual 30/30+% gains of 2013. Historic Market return, meaning mostly appreciation, is around 10%. This causes a lot of cross selling as investors start to seek more yield.

We're seeing a more down to earth expectation of the potential gains in THIS year's market. As soon as the economy actually begins showing increasing strength, investors are nervous already speculating that the Fed may have to raise rates much sooner than current consensus expectations. Crazy the contortions that we go through around the Fed.

I only have to look at the charts and it remains that there's more upside potential suggested technically at this point than down. The Dow 30 group of stocks has come alive and may take the leadership for a time. I've noticed the shift.

The only correlation I could make to sizable further downswing is that fact of the VIX getting so low, to around 12. There's occasional correlations to a very low S&P volatility index marking a high; after which prices continue lower. I don't bank on such correlations, but do take note of them. Price action, always my number one trading guide, is not currently suggesting to be wary of a new down leg.



The S&P 500 (SPX) Index continues to trade sideways in a narrow trading range. The line of lows is consistent in showing strong buying interest in the 1860 area; from that base recent rallies are reaching higher highs.

I write often that what appear to be upside or downside breakout moves that go strongly through widely perceived resistance or support levels needs to be 'confirmed' by the ability of prices to SUSTAIN a move above or below these trigger point levels.

1900 was going to be tricky to navigate through and it shows in the chart. Still, a sideways move within an overall uptrend is assumed to be a bullish consolidation. It's true well more than not. In ANY rectangle pattern there potential for a substantial move above or below EITHER well-defined support or resistance levels. The tendency is for breakout type moves that continues the dominant trend.

Pivotal SPX resistance is seen at 1900; next resistance 1930, then above 1960.

Near SPX support is at 1860; if breached technical support area expected around 1832 at SPX's up trendline.


The S&P 100 (OEX) wasn't able to sustain its move to new highs above 840, making the short-term chart picture still mixed, within a long range uptrend as suggested by the continued pattern of higher relative upswing highs on long-term weekly and monthly charts.

A couple of daily Closes below the 50-day moving average would suggest broken upside momentum. Now, upside momentum is intact as prices drift trend gradually higher from the 805 recent low.

I remain as I've said, mildly, not wildly, bullish. Prices are in the middle of OEX's broad uptrend price channel. A downswing to the low end of channel would be to 808-805, like the last low. A decline to the most recent to develop up trendline would only take OEX back to 822. A strong advance could carry to the HIGH end of the channel and above 870. Just saying!

The 50-day average should hold up as support and another move takes the Index above 840, maybe headed toward a next technical target, 853.


The Dow 30 Average (INDU) should also be currently judged by the collective performance of the relatively small number (30), such that you can gain a sometimes clear view of upside, or downside, potential, by perusing the 30 weekly charts involved from week to week.

I took notice when a number of Dow stock chart patterns were showing potential for at least further modest gains with a number showing strong uptrends. 25 of 30 INDU stocks with moderate to strong potential for further gains is seen with AXP, BA, CAT, CSCO, CVX, DD, DIS, GE, HD, IBM, INTC, JNJ, KO (extra +), MCD (extra +), MMM, MRK, MSFT, NKE, T, TRV (extra +), UNH, UTX, V, VZ, XOM.

INDU continues to show support at its 50-day moving average. Some automated trading programs like this area, with good reason, as a buy. I anticipate support in the 16400 area again. If so a next rebound could reach the 16800 area. A break of 16400 is not good for the bulls, suggesting support back in the 16200 area. Major support continues at 16000.

Initial resistance suggested by prior highs around 16720; next resistance is projected at 16850.


The Nasdaq Composite Index (COMP) chart is trending strictly sideways into more weeks of a lateral trend. It continues to look to me that the tech heavy Nasdaq is 'building' a bottom and the Composite will make it above the down trendline intersecting at 4135; next resistance suggested at 4150, then 4170. My upside expectations are modest ahead as it looks iffy for a really strong move such as to the 4285-4300 area again.

The near-term trend goes bearish again on a dip below 4025, then especially with back to back Closes below 4000.

COMP is still in the lower area of the 13-day Relative Strength Index (RSI) but isn't at an 'oversold' extreme. Bullish sentiment has been gradually trending lower. I like to take the other side of bullish-bearish bet when most are finally bearish; in an accelerating economy no less. There's should be a name for mild paranoia of the never completely predictable FED.


The Nasdaq 100 (NDX) has managed to END the week above its minor down trendline as seen in my highlights below. If this bullish action is going to lead to something, it would be a move to above 3625 next on the way to 3650, possibly higher.

The overall sideways trend after an apparent double bottom low suggests 'base' building and potential for gathering momentum for a recovery rally. That is playing upside/downside probabilities in chart patterns which is most of what I do. Sometimes boring too!

Near support is highlighted at 3535 and holding above the emerging up trendline seen there suggests at least a mildly bullish outlook. Staying above 3500 keeps the intermediate-term uptrend intact but a weekly close below 3500 support is bearish.


The Nasdaq 100 tracking stock (QQQ) is showing the same upside minor upside breakout of a near-term bearish down trendline as seen with NDX. I take this as a continuing, mildly bullish pattern in the tendency for prices to drift higher from recent lows.

88 in the Q's is a key near area for QQQ to pierce if this EFT is on its way to retesting the recent 88.6 relative high. Next stop in an increase in upside momentum could be a move to the 89.6-90 zone.

Pivotal support is 86-85.7; below this area we'd be looking at possibly seeing 84 again. Stay tuned on this one.

Daily trade volume did pick up on this most recent rally attempt and some traders or their computer programs or both were doing some buying. The pattern of higher relative highs and higher pullback lows should be bet on bullishly if you want to be in it. Oh, of course, selling premium in spreads, a direction neutral strategy, could work out if this range-bound trade continues.


The Russell 2000 (RUT) chart is bearish to mixed as the Index could have formed a double bottom. A continued move higher AND ability to hold the 1100 area on dips suggests that we seen the lowest RUT level for now. There's value in the small cap sector at the right price, like everything. The Market got a little panicked as to the NEXT winners and losers!

I wrote last week that ..."a bullish play, on a risk to reward basis, in the Russell is at or near at hand, with an exit on a close below 1080." I was thinking in terms of a bullish buy in on another dip to the 1085-1090 area. In answer to "How's that working out for ya?" OK so far.

The technical aspect that got me thinking that RUT 'had' to be near a bottom, at least trading risk-to-reward wise was the Index getting 'fully' oversold again with prices holding at the prior major downswing. A possible trade to like: in prior cases this kind of price/indicator patterns suggesting limited downside relative to even a modest rebound.

Resistance is seen at 1120, extending to 1130, with a next zone of resistance at 1160, extending to 1167 currently. Near support 1085-1083 to 1080. A Close below 1080 is bearish if it lasts, as really long-term support is down nearer 1000 than not.


New Option Plays

Healthcare & Grocery

by James Brown

Click here to email James Brown


Express Scripts Holding - ESRX - close: 68.72

Stop Loss: 66.90
Target(s): to be determined
Current Option Gain/Loss: Unopened
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
ESRX is in the healthcare sector. The company provides pharmacy benefit management (PBM) services in the U.S. and Canada. Both the NASDAQ and shares of ESRX peaked in early March. It would appear that investors considered ESRX one of the higher-growth, momentum names since it has been sinking with that group over the last couple of months.

That big drop you see on ESRX's daily chart was market reaction to its latest earnings news. The results were disappointing. You could call it a trifecta of bad news. ESRX missed Wall Street's estimates on both the top and bottom line. Management guided lower for 2014. Plus they disclosed three separate subpoenas from different state authorities as the company is investigated for its relationship with drug makers.

Investors already had lowered expectations for ESRX's earnings because the company lost UnitedHealth Group (UNH) as a client last quarter. The loss of UNH accounted for about half of ESRX's lost revenues. ESRX complained that a lot of expected new enrollments had been postponed. They didn't see quite the impact from the new Obamacare exchanges previously expected.

It sounds like plenty of bad news for ESRX. Yet here's the interesting part. The stock lost -6% following its earnings report but there was no follow through lower. Investors have been buying the dip. Shares are up two weeks in a row and slowing chewing through resistance. With a drop from $79 to $65 (-17.7%) it is possible that all the bad news is already priced into ESRX stock price. The long-term trend for ESRX is still higher. As the new affordable healthcare policy changes gain momentum it should mean more enrollments for ESRX.

Currently shares of ESRX are hovering below technical resistance at the simple 200-dma. There is also likely price resistance at $70.00. Therefore We are suggesting a trigger to buy calls at $70.50. If triggered at $70.50 we will start with a stop loss at $66.90.

Trigger @ $70.50

- Suggested Positions -

Buy the Aug $75 call (ESRX140816C75) current ask $0.69
option format: symbol-year-month-day-call-strike

Annotated Chart:

Weekly Chart:

Entry on May -- at $---.--
Average Daily Volume = 6.5 million
Listed on May 17, 2014


Whole Foods Market, Inc. - WFM - close: 37.91

Stop Loss: 40.25
Target(s): to be determined
Current Option Gain/Loss: Unopened
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
WFM is in the services sector. The company runs a grocery chain focused on natural and organic foods. As of May 2014 they had 379 stores. Unfortunately their success in the higher-margin organic foods has fueled significant competition.

The stock has been sinking for months as investors worried about growing competition. WFM's recent earnings report confirmed their fears. The stock crashed -19% after WFM missed estimates on both the top and bottom line and confessed they were facing tougher rivals. Management then lowered their 2014 guidance.

WFM said revenues still grew +10% and their same-store comparable sales were up +4.5%. Unfortunately profits were relatively flat and margins are getting squeezed with higher cost of goods sold and rising capex.

WFM is facing competition on all sides. Sprouts Farmers Market (SFM), The Fresh Market (TFM), Kroger (KR), Wal-mart (WMT), and regional competitors like HEB and Trader Joe's are all jumping on the organic and natural food bandwagon.

We are suggesting put options at the opening bell on Monday. More conservative investors might want to wait for a decline below the May 7th intraday low of $37.31 before initiating positions. We will start this trade with a stop loss at $40.25 since the $40.00 level is clearly defined resistance. Our target is the $30-26 area.

- Suggested Positions -

Buy the Aug $35 PUT (WFM140816P35) current ask $1.05

Annotated Chart:

Weekly Chart:

Entry on May -- at $---.--
Average Daily Volume = 9.2 million
Listed on May 17, 2014

In Play Updates and Reviews

Stocks End Week On An Up Note

by James Brown

Click here to email James Brown

Editor's Note:

The major U.S. indices managed to end the week on an up note.

Current Portfolio:

CALL Play Updates

The Boeing Company - BA - close: 130.81 change: -0.40

Stop Loss: 129.40
Target(s): to be determined
Current Option Gain/Loss: -27.6%
Time Frame: 6 to 9 weeks
New Positions: see below

05/17/14: BA found support near $130 again. The area is bolstered by its 20-dma and 100-dma. Traders bought the dip at $130.03.

If both BA and the S&P 500 index open positive on Monday I suggest launching new bullish positions here.

- Suggested Positions -

Long Jul $135 Call (BA1419G135) entry $2.75

05/13/14 new stop @ 129.40
05/05/14 triggered at $132.00


Entry on May 05 at $132.00
Average Daily Volume = 3.7 million
Listed on May 03, 2014

Gilead Sciences - GILD - close: 80.80 change: +0.70

Stop Loss: 77.90
Target(s): to be determined (potentially $85.00)
Current Option Gain/Loss: +43.8%
Time Frame: 4 to 8 weeks
New Positions: see below

05/17/14: GILD slipped to a new low for the week and pierced short-term support at its 10-dma before bouncing back. The stock ended Friday with a +0.8% gain, outpacing the major indices. I do not see any changes from my Thursday comments.

Readers may want to lock in gains now or consider raising your stop loss higher. I am not suggesting new positions.

- Suggested Positions -

Long Jun $80 call (GILD1421F80) entry $2.12

05/15/14 new stop @ 77.90, readers may want to exit now to lock in potential gains.
05/10/14 new stop @ 75.75
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

LyondellBasell Industries - LYB - close: 96.14 change: +0.90

Stop Loss: 93.75
Target(s): to be determined
Current Option Gain/Loss: - 1.9%
Time Frame: 6 to 9 weeks
New Positions: see below

05/17/14: LYB added +0.9% on Friday and ended the week just shy of a new all-time high. The stock appears to have short-term resistance near the $97.00 level. I am not suggesting new positions at this time.

Earlier Comments:
It is possible that the $100.00 level could be round-number resistance but we are aiming higher. The Point & Figure chart for LYB is bullish with a $110 target.

FYI: LYB will begin trading ex-dividend on May 12th. The quarterly dividend should be 70 cents.

- Suggested Positions -

Long Sep $100 call (LYB140920C100)* entry $2.55**

05/15/14 new stop @ 93.75
05/12/14 LYB gapped open higher at $96.20 (+75 cents)
**option entry price is an estimate since the option did not trade at the time our play was opened.
*I've provided the more standardized option symbol format.


Entry on May 12 at $96.20
Average Daily Volume = 3.1 million
Listed on May 10, 2014

3M Company - MMM - close: 141.13 change: +0.15

Stop Loss: 139.49
Target(s): to be determined
Current Option Gain/Loss: -31.5%
Time Frame: 4 to 8 weeks
New Positions: see below

05/17/14: MMM tested support near $140.00 again before bouncing on Friday. I found its rebound anemic and somewhat troubling. Traders may want to wait for a rise past $141.50 or $142.00 before considering new bullish positions. The larger trend is still very bullish.

- Suggested Positions -

Long Jun $140 call (MMM1421F140) entry $3.45*

05/15/14 new stop @ 139.49
05/08/14 triggered @ $142.00


Entry on May 08 at $142.00
Average Daily Volume = 2.65 million
Listed on May 07, 2014

Pacira Pharmaceuticals - PCRX - close: 75.11 change: -0.10

Stop Loss: 69.95
Target(s): to be determined
Current Option Gain/Loss: - 27.1%
Time Frame: 6 to 8 weeks
New Positions: see below

05/17/14: The normally very volatile PCRX turned in a more quiet session on Friday. Shares churned near the $75.00 level, likely due to it being an option expiration Friday. I am not suggesting new positions at this time.

Earlier Comments:
If PCRX does breakout it could see a short squeeze. The most recent data listed short interest at 17% of the 33.6 million share float. This is a somewhat aggressive trade because the option spreads on PCRX are a bit wider than we like. The Point & Figure chart for PCRX is bullish with a $93 target.

- Suggested Positions -

Long Aug $80 call (PCRX1416H80) entry $7.00

05/06/14 triggered on gap higher at $75.32, suggested entry was $74.25


Entry on May 06 at $75.32
Average Daily Volume = 602 thousand
Listed on May 05, 2014

Potasch Corp. of Saskatchewan - POT - close: 36.95 change: +0.18

Stop Loss: 34.90
Target(s): to be determined
Current Option Gain/Loss: + 3.7%
Time Frame: 3 to 4 months
New Positions: see below

05/17/14: Shares of POT hit new highs for 2014 last week. The intraday chart shows a bullish trend of higher lows. I would be tempted to launch new bullish positions here.

- Suggested Positions -

Long Sept $35 call (POT1420i35) entry $2.65

05/15/14 new stop @ 34.90
05/02/14 triggered @ 36.50


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

United Parcel Service - UPS - close: 101.33 change: +0.87

Stop Loss: 97.75
Target(s): to be determined
Current Option Gain/Loss: + 44.4%
Time Frame: 4 to 8 weeks
New Positions: see below

05/17/14: UPS saw some profit taking midweek but traders bought the dip on Friday. The transportation average is poised to hit new all-time highs soon. Traders could use Friday's bounce in UPS as a new entry point for bullish positions.

More conservative traders may want to raise their stop loss but I would keep it below $100.

We're not setting an exit target yet but the Point & Figure chart for UPS is bullish with a $114 target.

- Suggested Positions -

Long Jul $100 call (UPS140719C100)* entry $1.98

05/12/14 triggered @ 100.25
*I've provided the more standardized option symbol format.


Entry on May 12 at $100.25
Average Daily Volume = 2.9 million
Listed on May 10, 2014

Ventas, Inc. - VTR - close: 68.22 change: +0.79

Stop Loss: 65.75
Target(s): to be determined
Current Option Gain/Loss: +20.0%
Time Frame: 6 to 8 weeks
New Positions: see below

05/17/14: Thanks to Friday's +1.1% gain shares of VTR have almost erased their recent profit taking. VTR looks like it could challenge potential resistance at $70.00 soon.

- Suggested Positions -

Long Aug $65 call (VTR1416H65) entry $2.75

05/12/14 readers may want to exit early right now
05/10/14 new stop @ 65.75
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

Athenahealth, Inc. - ATHN - close: 113.55 change: -0.65

Stop Loss: 124.05
Target(s): to be determined
Current Option Gain/Loss: Jun$100put - 2.5% & Sep100put: - 0.0%
Time Frame: 4 to 12 weeks
New Positions: see below

05/17/14: ATHN seemed to find some support near $111.65 on Friday. Shares still underperformed the major indices with a -0.5% decline. I am not suggesting new positions at the moment.

Earlier Comments:
The plan was to keep our position size small to limit our risk.

*small positions* - Suggested Positions -

Long Jun $100 PUT (ATHN140621P100) entry $2.05**

- or -

Long Sep $100 PUT (ATHN140920P100) entry $6.90**

05/15/14 trade opened on gap down at $115.66
**option entry price is an estimate since the option did not trade at the time our play was opened.
*I've provided the more standardized option symbol format.


Entry on May 15 at $115.66
Average Daily Volume = 1.5 million
Listed on May 14, 2014

Discovery Communications - DISCA - close: 73.72 change: +1.02

Stop Loss: 75.05
Target(s): to be determined
Current Option Gain/Loss: -34.3%
Time Frame: 3 to 4 weeks
New Positions: see below

05/17/14: DISCA hit new multi-month lows last week. Yet shares started to bounce on Thursday. The oversold bounce accelerated on Friday with a +1.4% gain. DISCA is testing short-term technical resistance at its 10-dma. The stock should find additional resistance at the $75.00 mark. Our stop loss is at $75.05. That might be too close. More aggressive traders may want to widen their stop placement. I am not suggesting new bearish positions at the moment.

Earlier Comments:
We're not setting a target yet but the Point & Figure chart for DISCA is bearish with a $59 target.

- Suggested Positions -

Long Jul $70 PUT (DISCA140719P70)* entry $1.60**

05/14/14 triggered @ 72.25
**option entry price is an estimate since the option did not trade at the time our play was opened.
*I've provided the more standardized option symbol format.


Entry on May 14 at $72.25
Average Daily Volume = 1.63 million
Listed on May 10, 2014

Chart Industries - GTLS - close: 72.50 change: +0.04

Stop Loss: 75.55
Target(s): to be determined
Current Option Gain/Loss: - 17.7%
Time Frame: 4 to 6 weeks
New Positions: see below

05/17/14: GTLS rebounded on Friday afternoon but just barely made it back into positive territory by the closing bell. The overall trend remains bearish. I do not see any changes from our Thursday night new play description. I would still consider new positions here.

More conservative traders could wait for a drop under $71.00 as an alternative entry point.

FYI: The Point & Figure chart for GTLS is currently bullish but a drop below $71.00 would produce a new triple-bottom breakdown sell signal.

- Suggested Positions -

Long Jun $70 PUT (GTLS140621P70) entry $2.25

05/16/14 trade begins. GTLS opened at $72.34
*I've provided the more standardized option symbol format.


Entry on May 16 at $72.34
Average Daily Volume = 652 thousand
Listed on May 15, 2014

Lumber Liquidators - LL - close: 82.96 change: +1.54

Stop Loss: 84.05
Target(s): to be determined
Current Option Gain/Loss: -24.4%
Time Frame: 6 to 9 weeks
New Positions: see below

05/17/14: It looks like we should have waited for LL to trade below its late April low before initiating bearish positions. The stock's bounce continued on Friday with a +1.89% gain. Shares are nearing what should be short-term technical resistance at the 10-dma soon. I am not suggesting new positions at this time.

Earlier Comments:
I do consider a more aggressive trade because of LL's short interest. The most recent data listed short interest at 25% of the small 24.3 million share float, which raises the risk of a short squeeze. I am not setting a target yet. The P&F chart is bearish and forecasting at $72 target.

*small positions* - Suggested Positions -

Long Aug $75 PUT (LL140816P75) entry $4.50**

05/15/14 triggered @ 79.75
**option entry price is an estimate since the option did not trade at the time our play was opened.
*I've provided the more standardized option symbol format.


Entry on May 15 at $79.75
Average Daily Volume = 888 thousand
Listed on May 14, 2014

NetSuite Inc. - N - close: 73.74 change: +1.96

Stop Loss: 73.15
Target(s): 60.50
Current Option Gain/Loss: Unopened
Time Frame: 4 to 6 weeks
New Positions: Yes, see below

05/17/14: The market's rebound on Friday allowed N to surge from support near $70.00 with a +2.7% gain. The larger trend is still bearish. Nimble traders might want to consider bearish positions on a failed rally near its 20-dma (currently near $76.75). Officially we're suggesting a trigger to buy puts at $69.25. If triggered our target is $60.50. FYI: The Point & Figure chart for N is bearish with a $56 target.

Trigger @ 69.25

- Suggested Positions -

Buy the Jun $70 PUT (N140621P70)

*I've provided the more standardized option symbol format.


Entry on May -- at $---.--
Average Daily Volume = 1.1 million
Listed on May 15, 2014