Option Investor

Daily Newsletter, Tuesday, 2/12/2013

Table of Contents

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

Market Wrap

Early Gains Fade

by Jim Brown

Click here to email Jim Brown

The Dow and S&P rallied to new 5-year highs intraday but faded into the close.

Market Statistics

The two major indexes managed to close at new five-year highs but only by a couple points. The Dow rallied to 14,039 but faded to close at 14,018. Still a new five-year closing high but only by +9 points. The S&P rallied to 1522 intraday but faded to close at 1519 and a new high by only +1 point. Traders were probably a little concerned about holding profits over the State of the Union speech tonight. You never know what might be said to surprise traders.

The economics were lackluster and failed to give the market any reason to surge forward. The weekly China Store Sales declined -2.5% compared to a +2.4% gain the prior week. This report is only noise and is normally ignored.

The Job Openings and Labor Turnover Survey (JOLTS) for December showed the number of available jobs declined slightly. The job openings in December totaled 3.6 million compared to 3.8 million in November. Workers hired in December totaled 4.2 million, down from 4.4 million in the prior month. Separations also declined from 4.2 million to 4.1 million. Net employment remained positive although the trend was lower as the debate over the fiscal cliff was a cloud over hiring.

On the positive side the number of layoffs declined from 1.699 million to 1.567 million. Workers are changing jobs at the rate of about one million a month less than the years prior to the recession. Workers with jobs are staying put and that is reducing the need for new hiring. Wages are at the lowest level in five years because of the number of people out of work. Delta reported they received over 44,000 applications when they advertised for 400 flight attendant positions.

The federal government ran a budget surplus of $2.9 billion in January. Budget year to date (4 months) the government has a combined deficit of $290 billion, which is $59 billion less than in 2012. The surplus in January is simply a timing event where tax inflows offset expenses. Once the tax cycle is over the big deficits will return. The budget year begins in October and there was a -$120 billion shortfall followed by a -$172 billion shortfall in November. A number of new taxes on Obamacare went into effect on Jan-1st and that raised the incoming tax revenue.

The economic calendar for the rest of the week is busy but mostly noise. The biggest day is Friday with Industrial Production and Empire Manufacturing. Neither report is expected to be a market mover.

The State of the Union speech tonight is potentially a market mover if the president turns farther to the left instead of becoming a centrist as some presidents do in their final term. His political capital has been spent on various social issues and the economy is coming back to haunt him with the GDP declining in Q4 and the sequestration spending cuts expected to reduce GDP even further. We could be entering another recession and he will have to deal with it even if his priorities are elsewhere. Market analysts are afraid he may take an activist direction tonight that suggests he is not taking the economy seriously and the market may react negatively to that news. If he stresses the need for more spending that will increase the deficit the market may take it badly. Conversely should the president show signs of willingness to compromise on the spending cuts slated for March 1st the markets could react positively.

Economic Calendar

The big news for Wednesday will be the Cisco earnings after the close. That will be the most watched earnings report this week. Other techs reporting on Wednesday include AMAT, NTAP and NVDA.

Earnings Calendar

Michael Kors (KORS) was the high profile winner on Tuesday. Earnings rose +129% to 64 cents and easily beating estimates of 41 cents. The company reported revenue for Q4 that rose +70% and the company said full year revenue for 2013 will rise +62%. They raised full year profit estimates from $1.50 to $1.82. Analysts were expecting $1.57. Revenue for Q4 climbed to $636.8 million from $373.6 million and easily beat estimates of $540 million. Same store sales rose +41% for the quarter and +39% for all of 2012. Sales in Europe rose +58%. Shares of KORS rallied +9% to $62.

KORS Chart

Another high end retailer also posted strong results. Fossil (FOSL) shares rose +5% after reporting earnings of $2.51 per share, up from $1.87 and well over estimates of $2.27. Revenue rose +14% to $947.7 million. Same store sales improved at +2.4% but that was a weak metric. The company guided analysts to earnings of 93-98 cents for the current quarter and that was less than the $1.03 the street expected. Fossil guided for full year earnings of $5.85 to $6.15 and analysts were expecting $6.12. The weaker than expected guidance removed -$5 from the highs of the day at $115.19. Fossil closed at $110.74.

Fossil Chart

Avon Products (AVP) soared +20% for the biggest gain since January 1974. Earnings were 37 cents compared to estimates of 27 cents. However, sales fell -1.4% to $2.96 billion. Analysts were looking for $3.01 billion. Helping to push the shares higher was news they were cutting 1,500 jobs and leaving the South Korea and Vietnam markets as part of a plan to save $400 million by the end of 2015. Avon also said it would explore alternatives for the Silpada jewelry unit. Sales in that unit declined -18% in the quarter. They bought that unit in 2010 for $650 million. The company had sales of $230 million at the time. Avon said the devaluation of the Venezuelan currency last week would cost them $50 million for the current quarter and another $50 million for the rest of the fiscal year.

Avon Chart

Not all the earnings were positive. Coca Cola (KO) reported earnings of 45 cents that beat the street by a penny but revenue of $11.46 billion missed estimates of $11.53 billion. Sales declined -4% in China and -5% in Europe. Sales did rise +5% in Latin America, +1% in North America and +2% in the Pacific region. The company said it expects commodity costs to rise +$100 million due to higher costs for sweeteners, juices, metals and plastics.

Coca Cola Chart

It was a big day in the world of home video. Sony (SNE) reported it had inked a multiyear deal with Starz (STARZ) for exclusive content. Starz will have exclusive pay TV rights for Sony Pictures theatrical releases. The deal will start in 2017 when the current deal expires. Starz is also the exclusive home for Disney releases, including Lucasfilm, Marvel and Pixar films.

Not to be left out NetFlix (NFLX) announced it will create the first NetFlix Original Series for kids in conjunction with Dreamworks Animation. (DWA) The series Turbo F.A.S.T. for (fast Action Stunt Team) will appear in December in the U.S. and 40 other countries.

Comcast (CMCSA) and Fox Networks signed a distribution agreement to carry Fox programming on TVs, computers, smartphones and tablets to Comcast's 22 million customers. Any Fox content will be available on demand the next day to any Comcast customer.

Intel announced it was developing an Internet TV service and a set-top box for that service. The new Intel group will be called Intel Media and they have hired people from Apple, NetFlix and Google to develop the Internet television platform. The Internet device will be an all in one product with live TV, on-demand, catch-up TV and built in applications. The as yet unnamed box/service will be available later this year. This is a direct competitor to Apple TV.

Amazon announced a content licensing deal with CBS TV to increase the number of archived programs available for Amazon content viewers. Amazon Instant Video is a digital streaming and download service that lets users rent, buy or subscribe to a wide range of video content. Amazon Prime Instant Video will be the exclusive online subscription service for streaming a new drama called "Under the Dome" based on Stephen King's novel of the same name. Over the last year Amazon has entered into numerous deals with every major studio and some of the major cable networks like PBS Distribution and TNT.

After the bell Comcast announced it was buying the remaining 49% of NBC Universal it did not already own for $16.7 billion from GE. It was also paying $1.4 billion for GE facilities at 30 Rockefeller Plaza in NYC and studios in New Jersey. The company also said it was going to raise its dividend by 20% and buy back an additional $2 billion in shares. Comcast bought 51% of NBC universal in 2011 and had an option to buy the rest by the end of 2014.

Comcast was supposed to announce earnings tomorrow but the company went ahead and released them with the news tonight. Earnings were 52 cents, missing estimates by a penny. They reported a net addition of +503,000 new cable subscribers and +341,000 new high speed Internet subscribers.

Comcast Chart

GE announced it was going to use the money to increases its previously announced share buyback from $23 billion to $35 billion. This sale gets GE completely out of the TV and entertainment business. GE shares rallied $1 in afterhours to $23.58.

GE Chart

Dell shares rallied slightly after the second largest shareholder, T. Rowe Price, said it was also going to oppose the buyout for $13.65 by Michael Dell. The company said "We don't believe the buyout terms reflect the true value of Dell and we do not intent to support the offer as put forward." The money manager controlled 4.4% of Dell shares according to Thomson Reuters. So far investors representing more than 18% of Dell shares have announced their intentions to protest the deal. Shares of Dell are now trading above the offer price and suggests the deal will have to be improved significantly.

Dell Chart

Apple shares took a turn for the worst with a -$12 loss after another major shareholder came out in favor of the "bundled" proposal number two scheduled for the Feb-24th shareholder vote. One part of the bundled proposal limits Apple's ability to issue preferred shares. David Einhorn of Greenlight Capital is suing Apple to remove that provision from the vote and asking Apple to issue preferred shares. The David and Goliath argument is not winning any friends among regular Apple shareholders. They all want Apple to return some of the $137 billion cash hoard to shareholders in general and NOT to preferred shareholders only. Einhorn may have struck out on this session.

Apple shares were also declining after news broke that Apple may be developing a smartphone wrist watch. The watch may perform some of the computing tasks now handled by the iPhone and iPad according to people familiar with the plans. The introduction of a wearable device could be a negative unless the functions are far greater than what the public foresees today. Google is developing an eyeglass computer and plans to introduce them in 2014. A T. Rowe Price analyst said more people would probably wear an Apple watch than would wear Google glasses.

The various headlines swirling around Apple are confusing investors. Shares declined -$12 to $467.

Apple Chart

Today was a throw-away day in the market. The economic reports were not important and the limited earnings were a bunch of second and third tier companies. The volume was low at 5.8 billion shares but was still significantly better than the 4.8 billion on Monday. Traders are digging out of the snowstorm and returning to their regular pattern but with the State of the Union speech tonight there was no real incentive to open new positions.

The political risk to the market may be small but it does exist. The sequestration spending cuts appear destined to occur on March 1st unless a miracle appears. They will drag the economy lower but that is the lesser of the two evils. It is up to the administration to put forth some suggested changes and that is looking doubtful at present.

Despite the political overhang the Dow and S&P did make new intraday and closing highs even if it was only by a handful of points. The S&P is still facing solid resistance at 1520-1525 and it may take a solid news event to push through that level. Support has formed at 1515 so the daily ranges are very tight.

The market does not want to go down. The volatility index closed at a three week low and very close to a five year low. Despite the low volatility the upward momentum in equities has definitely stalled.

I would gladly take a market that continues higher in small steps every day but we need some bigger daily gains to drag new cash off the sidelines. As long as we have the 2-3 point gains in the S&P the retail traders will continue to believe the market has topped and they will wait for the correction to get in.

I would also gladly take a 3-5% correction because it would clear the uncertainty and give us some better entry points. Nobody wants to buy a "weak" new high. They want to see strength not caution.

S&P Chart

The Dow chart is not bullish. It may not be bearish either but it lacks any strong confirmation the next move is going to be a new leg higher. We saw more than a week of consolidation with higher volatility but when the breakout came it was lacking any volume or conviction.

The Dow did make a new five-year high but only barely. The low volume from traders still returning from the Nemo storm and worries over what the president might say tonight were major clouds on the market.

This suggests we could see a strongly directional move on Wednesday once the State of the Union speech details are known. Initial support is 13,950 and resistance is today's high. Critical support is 13,850. A move below that level could quickly gain speed.

Dow Chart

The Nasdaq moved to within three points of 3200 intraday before falling back to close near the lows for the day at 3186. This was just one more Apple driven loss. Google helped with a minor decline after Eric Schmidt said he was going to sell nearly 50% of his shares.

Apple is fighting strong round number resistance at 3200 and resistance of the 12 year highs at 3196.93. The intraday higher today was 3196.92 so you can't tell me traders are not fading that 12 year high level.

The Nasdaq is the laggard in the bunch but a good day by Apple could push it over the top.

Nasdaq Winners and Sinners

Nasdaq Chart

The Russell 2000 broke out to another new high at 917 and closed only a point off its intraday high at 918. The Russell is up +20% since the November lows and fund managers do not seem concerned about the overextended gains. As long as the Russell continues to set new highs the blue chips will follow even if their velocity is lower.

Russell 2000 Chart

I would be very cautious about committing new money to the market and I would tighten up stop losses on existing long positions.

We can go higher from here but we need to see a convincing breakout on decent volume to confirm a new leg higher. Traders continue to buy the dips but their conviction is lacking.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email

New Plays

Not So Fast!

by James Brown

Click here to email James Brown


Caesars Entertainment - CZR - close: 12.41 change: -0.18

Stop Loss: 13.25
Target(s): 10.10
Current Gain/Loss: unopened

Entry on February 13 at $--.--
Listed on February 12, 2013
Time Frame: Exit prior to earnings on Feb. 27th
Average Daily Volume = 1.3 million
New Positions: Yes, see below

Company Description

Why We Like It:
It looks like the bulls won the royal flush last week with a huge short squeeze in shares of CZR. Short interest was about 18% of the float. When news hit last week that New Jersey Governor Christie might consider allowing online gambling, the stock exploded. Mr. Christie actually vetoed the bill that would allow online gambling but suggested a few minor amendments before he would sign a new one. New Jersey is not the only state considering legalizing online gambling. Such a move could be extremely beneficial for the major players in the gambling industry. CZR sponsors the "world series of poker" which is definitely a brand they could capitalize on. Unfortunately, we think the move in CZR is too much, too soon and was probably exaggerated by a short squeeze when the stock broke through technical resistance at its simple 200-dma. The company has a huge amount of debt at more than $21 billion. CZR has consistently missed Wall Street's earnings estimates the last few quarters. We think this rally fades as bulls cash in their chips.

I am suggesting bearish positions immediately. We'll start with a stop loss at $13.25. Our target is $10.10.

Suggested Position: short CZR stock @ (the open)

- (or for more adventurous traders, try this option) -

buy the Mar $10 PUT (CZR1316o10) current ask $0.45

Annotated chart:

In Play Updates and Reviews

Stocks Mostly Higher

by James Brown

Click here to email James Brown

Editor's Note:
The NASDAQ and the transports were exceptions but the market was mostly higher on Tuesday.

We closed our ACOR trade as planned.

Current Portfolio:

BULLISH Play Updates

Asbury Automotive Group - ABG - close: 36.21 change: +0.13

Stop Loss: 34.85
Target(s): 38.50
Current Gain/Loss: + 2.7%

Entry on January 24 at $35.25
Listed on January 23, 2013
Time Frame: Exit PRIOR to earnings on Feb. 19th
Average Daily Volume = 275 thousand
New Positions: see below

02/12/13: ABG seems to be stuck hovering just above the $36.00 level. I am raising our stop loss to $34.85. I am not suggesting new positions at this time.

We are planning to exiting prior to the Feb. 19th earnings report.

Please note that we do want to keep our position size small to limit our risk.

*Small positions*

current Position: Long ABG stock @ $35.25

02/12/13 new stop loss @ 34.85
02/05/13 new stop loss @ 34.40

Conns Inc. - CONN - close: 31.47 change: +0.79

Stop Loss: 28.85
Target(s): 33.50
Current Gain/Loss: + 6.5%

Entry on February 05 at $29.55
Listed on February 4, 2013
Time Frame: 4 to 6 weeks
Average Daily Volume = 416 thousand
New Positions: Yes, see below

02/12/13: CONN continues to show relative strength with a +2.5% gain and a new multi-year high today. I am raising our stop loss to $28.85. I am not suggesting new positions at this time.

Our target is $33.50. More aggressive traders could aim higher. FYI: The Point & Figure chart for CONN is bullish with a long-term $48.00 target.

current Position: Long CONN stock @ $29.55

02/12/13 new stop loss @ 28.85
02/09/13 new stop loss @ 28.45

Deckers Outdoor Corp. - DECK - close: 44.50 change: +0.10

Stop Loss: 41.40
Target(s): 49.75
Current Gain/Loss: + 0.2%

Entry on February 12 at $44.41
Listed on February 11, 2013
Time Frame: exit PRIOR to earnings in late February
Average Daily Volume = 2.2 million
New Positions: see below

02/12/13: DECK did not see much follow through higher today. Shares seemed to struggle with the $45.00 level. The stock opened at $44.41. Nimble traders may want to look for a dip near $43.00 as an alternative entry point.

Earlier Comments:
I do consider this an aggressive, higher-risk trade. DECK can be a volatile stock. Thus we want to keep our position size small. It is worth noting that if this strength continues DECK could see a short squeeze. The most recent data listed short interest at almost 44% of the small 30.9 million share float. We do not want to hold over the late February earnings report. At the moment it looks like that report might come out on Feb. 21st but the date has not been confirmed. More aggressive traders may want to buy the call options.

*Small Positions*

current Position: Long DECK stock @ $44.41

Morgan Stanley - MS - close: 23.63 change: +0.35

Stop Loss: 21.95
Target(s): 26.00
Current Gain/Loss: + 2.1%

Entry on February 01 at $23.15
Listed on January 30, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 27 million
New Positions: see below

02/12/13: MS managed to outperform many of its peers in the financial sector with a +1.5% gain today. More conservative traders may want to tighten their stop loss.

Small Positions*

current Position: Long MS stock @ $23.15

Ocwen Financial - OCN - close: 41.32 change: +0.36

Stop Loss: 39.65
Target(s): 44.75
Current Gain/Loss: - 0.1%

Entry on February 07 at $41.37
Listed on February 6, 2013
Time Frame: Exit prior to the Feb. 28th earnings
Average Daily Volume = 1.7 million
New Positions: see below

02/12/13: OCN turned in a quiet first half before starting to tick higher after lunchtime. Shares are still struggling with the $41.50 level as resistance.

After the closing bell tonight there was a press release saying Altisource Portfolio Solutions (ASPS) signed a non-binding letter of intent to purchase "certain fee-based businesses related to Ocwen's recently acquired Homeward Residential Holdings, Inc. mortgage servicing and origination business platform (the "Homeward Residential Fee-Based Businesses") and Ocwen's anticipated purchase of the mortgage servicing platform from Residential Capital, LLC (the "ResCap Fee-Based Businesses") for a combined purchase price of $218.6 million." (source: company press release)

I'm not sure how this sale of assets will affect shares of OCN tomorrow. I'm not suggesting new positions. We want to exit prior to the earnings report on Feb. 28th.

*Small Positions*

current Position: Long OCN stock @ $41.37

North American Palladium - PAL - close: 1.94 change: +0.15

Stop Loss: 1.55
Target(s): 2.45
Current Gain/Loss: +17.6%

Entry on January 14 at $ 1.65
Listed on January 12, 2013
Time Frame: Exit prior to earnings on Feb. 21
Average Daily Volume = 2.8 million
New Positions: see below

02/12/13: It was a good day for PAL. After yesterday's -6.7% plunge the stock rebounded with a +8.3% bounce today. I still don't see any news to account for all of the volatility but then PAL has been a volatile stock in the past. More conservative traders may want to raise their stop loss.

current Position: long PAL stock @ $1.65

02/06/13 adjusted time frame for earnings on Feb. 21st
01/30/13 new stop loss @ 1.55

Progressive Corp. - PGR - close: 23.75 change: +0.19

Stop Loss: 22.45
Target(s): 26.00
Current Gain/Loss: + 1.0%

Entry on February 11 at $23.52
Listed on February 9, 2013
Time Frame: 9 to 12 weeks
Average Daily Volume = 4.8 million
New Positions: see below

02/12/13: PGR continues to march higher and set another new multi-year high today. Readers may want to start inching up their stop loss.

current Position: Long PGR stock @ $23.52

Synopsys Inc. - SNPS - close: 34.44 change: +0.29

Stop Loss: 33.45
Target(s): 37.50
Current Gain/Loss: + 0.6%

Entry on February 06 at $34.25
Listed on February 2, 2013
Time Frame: exit prior to the February 20th earnings
Average Daily Volume = 1.1 million
New Positions: see below

02/12/13: Good news! There was no follow through on yesterday's bearish reversal candlestick pattern in SNPS. The stock rallied early this morning and spent the rest of the session fading sideways.

current Position: Long SNPS stock @ $34.25

Sonic Corp. - SONC - close: 11.47 change: +0.20

Stop Loss: 10.95
Target(s): 12.75
Current Gain/Loss: + 2.9%

Entry on January 14 at $11.15
Listed on January 12, 2013
Time Frame: 8 to 9 weeks
Average Daily Volume = 658 thousand
New Positions: see below

02/12/13: SONC seems to be trending higher again. The stock outperformed the major indices with a +1.7% gain today.

Earlier Comments:
Our multi-week target is $12.75. We may have to be patient to give SONC time to get that far. FYI: The Point & Figure chart for SONC is bullish with a $15.50 target.

current Position: Long SONC stock @ $11.15

02/09/13 new stop loss @ 10.95
01/26/13 new stop loss @ $10.80

Symantec Corp - SYMC - close: 22.70 change: +0.06

Stop Loss: 21.45
Target(s): 24.90
Current Gain/Loss: + 1.8%

Entry on February 06 at $22.30
Listed on February 5, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 10 million
New Positions: see below

02/12/13: SYMC tagged another new high at $22.91 before paring its gains. If the market sees any kind of dip I would expect SYMC to fall toward its 10-dma pretty quickly.

*Small positions*

current Position: long SYMC stock @ $22.30

- (or for more adventurous traders, try this option) -

Long Mar $23 call (SYMC1316c23) entry $0.38

Synaptics - SYNA - close: 34.69 change: -0.06

Stop Loss: 33.95
Target(s): 39.50
Current Gain/Loss: - 2.1%

Entry on February 08 at $35.43
Listed on February 7, 2013
Time Frame: 4 to 8 weeks
Average Daily Volume = 895 thousand
New Positions: see below

02/12/13: I am starting to worry about our SYNA trade. Shares have been drifting lower three days in a row. Granted the stock really has not moved that much over the last couple of sessions SYNA is still not participating in the market's rally. I am not suggesting new positions at this time.

Earlier Comments:
The plan was to keep our position size small to limit our risk. More conservative traders may want to use a trigger at $36.05 instead as their entry point.

*Small Positions*

current Position: long SYNA stock @ $35.43

Terex Corp. - TEX - close: 34.84 change: +1.56

Stop Loss: 31.95
Target(s): 38.00
Current Gain/Loss: + 3.4%

Entry on February 11 at $33.71
Listed on February 9, 2013
Time Frame: exit prior to earnings on Feb. 19th
Average Daily Volume = 2.5 million
New Positions: see below

02/12/13: The homebuilding industry was a bright spot in the market today. Strength in the homebuilders also filtered down to auxiliary plays like TEX. Shares of TEX actually displayed significant relative strength with a +4.6% gain and a new 52-week high.

NOTE: We will plan on exiting prior to the company's earnings report on Feb. 19th.

Earlier Comments:
We will plan to exit prior to the late February earnings report. Thus, odds of TEX actually hitting our target at $38 before we exit are probably slim but there is the possibility of a short squeeze.

current Position: Long TEX stock @ $33.71

02/11/13 trade opened on gap higher at $33.71

BEARISH Play Updates

Peabody Energy - BTU - close: 23.75 change: +0.22

Stop Loss: 24.75
Target(s): 20.25
Current Gain/Loss: - 0.2%

Entry on February 07 at $23.70
Listed on February 5, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 7.2 million
New Positions: see below

02/12/13: BTU managed an oversold bounce on Tuesday and erased Monday's minor loss. Readers may want to wait for a new failed rally near the 10-dma before launching new positions.

current Position: short BTU stock @ $23.70

- (or for more adventurous traders, try this option) -

Long Mar $23 PUT (BTU1316o23) entry $0.80


Acorda Therapeutics - ACOR - close: 29.53 change: +0.28

Stop Loss: 28.80
Target(s): 31.00
Current Gain/Loss: + 3.6%

Entry on January 22 at $28.50
Listed on January 19, 2013
Time Frame: 2 to 4 weeks
Average Daily Volume = 417 thousand
New Positions: see below

02/12/13: ACOR was kind enough to keep the rally going for us. Shares added +0.9% today. Our plan was to exit today at the closing bell to avoid holding over the company's earnings report due tomorrow.

closed Position: long ACOR stock @ $28.50 exit $29.53 (+3.6%)

02/12/13 planned exit
02/11/13 new stop loss @ 28.80, ready to exit tomorrow at the closing bell
02/09/13 new stop loss @ 28.60, prepare to exit on Feb. 12th at the close
02/05/13 new stop loss @ 28.25
01/30/13 new stop loss @ 27.95