Option Investor

Daily Newsletter, Tuesday, 3/5/2013

Table of Contents

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

Market Wrap

New Historic High

by Jim Brown

Click here to email Jim Brown

The Dow gained +126 points to close at 14,250 and a new historic high. Bears threw in the towel.

Market Statistics

For weeks now there has been an undertone to the market suggesting the rally could fail. Internals worsened, volume slowed, economics declined and market sentiment crashed but the buyers kept coming. The pent up demand finally burst out this morning and the major indexes closed at new highs. The talking heads on CNBC were all worked up over this "historic occasion." With the milestone behind them what are they going to do for future content?

After China's move last week to crack down on real estate prices sent commodities plunging the outlook for the global economy worsened. Today China's outgoing leader pledged to continue record stimulus spending and power China's GDP to at least 7.5% growth this year. The sudden turnaround in the outlook for China helped boost the overseas markets and the U.S. futures began moving higher well before the open. Crude oil and copper rebounded on the news as well.

A speech late Monday by Fed Vice Chair Janet Yellen enforced the view the Fed will continue aggressive QE purchases for a long time. Overnight Australia's Reserve Bank said it would keep interest rates at record lows. The Bank of Japan, Bank of England and the European Central Bank are also expected to keep rates low and possibly add additional stimulus when they meet this week. The combination of all these events finally overpowered the sellers and the markets shot higher.

Positive U.S. economics added fuel to the overseas bounce. The ISM Nonmanufacturing Index rose to 56.0 from 55.2 compared to estimates for a small decline. This is the highest reading since March 2012. The internal components were strong and suggest the services economy is accelerating.

New orders rose from 54.4 to 58.2. Backlogs rebounded out of contraction territory at 49.0 to hit 54.5. Export orders rose +5 points to 60.5 and the highest level since 2007. Employment was less impressive with a minor -0.3 point decline to 57.2 but still well into the expansion range. Eleven industries reported an increase in employment and only five reported declines.

ISM Chart

The economic calendar for Wednesday is headlined by the ADP Employment report. Expectations are going to be for a gain of +175,000 jobs. A smaller than expected number would only enforce the current QE purchases while a much stronger number would immediately cause fears the Fed will quit soon.

The Fed Beige Book at 2:PM should show all 12 Fed districts growing at a moderate pace. Any weakness here would only enforce QE as well.

On Wednesday there is a flurry of central bank rate decisions. None are expected to raise rates and it is possible additional stimulus could be added.

The biggest report is the Nonfarm Payrolls on Friday. Expectations are for the addition of +160,000 jobs. Like the other reports above, a slightly worse than expected number would cement the QE process, while a stronger than expected number would put QE in danger again.

Economic Calendar

Late today the Vice President of Venezuela reported that Hugo Chavez had died from complications from his battle with cancer. Just before the announcement the VP, Nicolas Maduro, announced the expulsion of two U.S. diplomats for an alleged plot to destabilize the government. He also accused "enemies of the fatherland" of giving Chavez an incurable cancer. The U.S. has been blamed several times over the last year of trying to assassinate Chavez by giving him the cancer but never before at the VP level.

Chavez himself continually claimed he battled conspiracies to depose him or assassinate him at every turn. Alleged conspiracies solidify public opinion against the enemies of the state and dictators frequently concoct stories to keep themselves in power. The VP claims today suggest there will not be a change of heart towards the U.S. now that Chavez is gone. The U.S. imports 950,000 bpd of oil from Venezuela. Halting those imports would cause significant pain for Venezuela because it is heavy sour crude that is not desirable to anyone else. Future sales of that crude would be for significantly lower prices and incur steep shipping charges. Rather than assassinate Chavez we could have halted those imports and he would have been bankrupt within a year.

In stock news Qualcomm (QCOM) boosted its dividend by 40% to 35 cents and setup a $5 billion share buyback plan. The stock repurchase plan replaces one with $2.5 billion left to be spent. Since 2003 QCOM has rewarded investors with $19.9 billion in buybacks and dividends. QCOM sells CDMA mobile phone chips to companies like Samsung and Apple. Qualcomm had $13.3 billion in cash and equivalents at the end of the quarter.

QCOM Chart

Google (GOOG) gained +$17 thanks to the market spike and because of a new price target from Jefferies. The broker reiterated a buy on Google with a $1,000 price target, up from $875. The analyst said better ad sales on YouTube and a larger stream of devices from Motorola were powering stronger earnings. Analyst Brian Pitz raised revenue estimates to $48.9 billion with $48.25 per share in profits. His 2014 estimates are $57.26 billion and $56.63 per share. The analyst said Google was rapidly advancing the "product listing ads" or PLAs. Those ads increased +32% in February.

Google Chart

Vornado (VNO) confirmed it sold 10 million shares of JCP at $16.03 each on Monday. That is a 6% stake in JCP and leaves them with 13.4 million shares based on their last statements. Vornado said it lost $224.9 million in Q4 as a result of its investment in JCP. Vornado joined Bill Ackman in acquiring a large stake in JC Penny in 2010. Apparently the confidence in the recovery is fading. Whoever bought the 10 million shares for $16.03, rumored to be Deutsche Bank, already lost money with the close today at $14.96. Vornado agreed not to sell any additional shares before March 11th.

The Wall Street Journal reported after the bell the JCP board was losing patience with CEO Ron Johnson and they will consider replacing him if sales don't improve by year end. Sales fell -25% in the last fiscal year. As a last resort the board is open to selling the 100 year old brand according to the WSJ article.

JCP Chart

Stock news was light today with the market the big news. The Dow was created in 1896 and it hit an all time high today. Regardless of what you think about the future of the market it is a definite milestone. The Dow is up +118% since the March 2009 lows at 6,547. The Dow closed at 14,253.77 and that is the new number to be watched.

The S&P rallied to 1539.79 and about 25 points below its historic high close at 1564. That is a new five-year high. The Nasdaq Composite rallied +42 points to 3224.13 and a new 12 year high.

The last time the Dow set a new high was Oct-9th, 2007. The graphic below shows a list of economic facts in 2007 compared to today. There are some really interesting numbers. For instance the Fed balance sheet has tripled. Unemployment has almost doubled. The yield on the ten-year treasury has declined more than 50%. Gold and silver have doubled even at their multi-month lows today. A really telling metric is the volume on the NYSE has declined more than 50%.

Economic Comparisons

Two points everyone should be aware of are these. When the market makes a new high after a long period of decline it typically goes into correction almost immediately. Analyst Jeff Cox said the last 11 times the Dow has made a new high after a period of consolidation it was followed by a pullback. Secondly, after the initial profit taking fades and a new high is made it tends to keep making new highs for weeks to months. No analysis was included about the impact of Fed easing on this process.

That should be encouraging to everyone currently on the sidelines waiting for an entry point. If history is going to be our guide there should be an entry point with a 5% to 10% decline in the near future.

However, this has been one of the most unloved rallies in history. Volume remains low with only 6.4 billion shares today on a breakout to a new high. Conviction is sorely lacking. That means we are lacking the irrational exuberance that typically accompanies new market highs. That could mean the post high selling may be muted.

The bad news bulls are slowly taking the market higher. Yes, there was a big spike today but it was mostly short covering after the intraday dip on March 1st and lackluster gains on Monday. The bears were looking at 14,100 as the top and expecting a failure. "You must short a market stalled at old highs" is one of the top ten commandments for bears. Today they were squeezed once again on low volume.

Ok, the new high is here, now what? With a week filled with important economic events there is always the opportunity for bad news. The Teflon bulls have shown they can ignore bad news. Actually bad news on employment will simply mean QE will last longer. This is the current version of the "good news, bad news" joke. The only thing that could upset the procession higher would be much stronger economic news and that is not likely.

I think you can make yourself crazy trying to guess the market direction at this point. Remember, the trend is your friend until it ends. It has not ended yet.

The breakout on the chart below appears very bullish. However, to have any credibility we have to see additional gains over the next several days. Once the momentum fades we could see traders drop stocks faster than a hot rock.

Dow Chart

The S&P chart is actually progressing just fine. There were three tests of resistance at 1525 over the last week with the close at 1525 on Monday. Today's breakout was perfectly formed from that resistance test. The S&P is not as vertical as the Dow and actually has a lot better chance of continuing higher. The next speed bump is the red uptrend resistance line at about 1545. If the S&P progresses higher to test the blue dashed resistance line it would intersect about 1565 by Friday. That would be a new high for the S&P with the old high at 1564. That would correspond with the top of the channel and suggest a break for profit taking before moving higher.

S&P-500 Chart

After more than a week of consolidation below resistance at 3180 the Nasdaq spiked higher to gain +42 points and close at 3224 and a 12 year high. Like the S&P the Nasdaq looks far more reserved than the Dow and we could still see some gains on this index. The +17 points Google gained today plus 11 for Apple were a major reason for the Nasdaq spike.

The Nasdaq has been lagging the blue chip indexes and Q2 is not normally a bullish period for tech stocks. That suggests any future Nasdaq gains could be slow and choppy.

Nasdaq Chart

There is a note of caution tonight. The Russell 2000 failed to break out to a new high and the relatively weak performance suggests the breadth of the overall rally is narrowing. The small caps led on the way up then went dormant in mid February. They did spike up on short covering today but it was not impressive. I would be cautious of any rally that came without the Russell breaking out to a new high.

Russell 2000 Chart

I have advised caution over the last couple weeks as the indexes consolidated below their February highs. While I still believe we are going higher as a result of the Fed stimulus that does not mean we are going straight up. I would stick with the current trend but I would like to see a decent pullback of more than two days so institutional investors and individuals can rotate positions and load up for the next leg higher. I have a hard time buying breakouts like the chart below. I know that is an accepted strategy but I feel naked buying those spikes. I suspect most individual traders feel the same way.

Flowserve Chart

I am happy about the new highs but I am still hoping for a decent pullback.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email

New Plays

Consumer Goods

by James Brown

Click here to email James Brown


Mattel, Inc. - MAT - close: 41.17 change: +0.57

Stop Loss: 40.40
Target(s): 44.85
Current Gain/Loss: unopened

Entry on March -- at $--.--
Listed on March 05, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 2.7 million
New Positions: Yes, see below

Company Description

Why We Like It:
Higher payroll taxes and rising gasoline prices should be having a negative effect on consumer spending. Yet investors are not worried about a slowdown in consumer spending if shares of MAT are any sign. The stock is trading near multi-year highs and poised to breakout from a two-week consolidation pattern.

I am suggesting a trigger to open bullish positions at $41.35. If triggered our long-term target is $44.85. We may have to exercise some patience on this trade. It could take a while to get to the $45.00 level since MAT doesn't move very fast but the long-term trend is definitely higher.

Trigger @ 41.35

Suggested Position: buy MAT stock @ (trigger)

Annotated chart:

In Play Updates and Reviews

GILD Hit Our Target

by James Brown

Click here to email James Brown

Editor's Note:
Shares of biotech stock Gilead Sciences (GILD) hit our bullish target today.

The GNW trade has been triggered. EMC was removed. Ford was closed.

Current Portfolio:

BULLISH Play Updates

Cray Inc. - CRAY - close: 20.45 change: -0.05

Stop Loss: 18.95
Target(s): 22.25
Current Gain/Loss: + 1.5%

Entry on March 04 at $20.15
Listed on March 02, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 419 thousand
New Positions: see below

03/05/13: Shares of CRAY hit a little profit taking this morning but traders bought the dip and the stock pared its losses. The $20.00 mark should be round-number support and investors could use dips near $20.00 as a new entry point.

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

*Small Positions*

Current Position: long CRAY stock @ $20.15

03/04/13 triggered @ $20.15

Genworth Financial - GNW - close: 9.39 change: +0.30

Stop Loss: 8.49
Target(s): 11.00
Current Gain/Loss: + 0.3%

Entry on March 05 at $ 9.36
Listed on March 02, 2013
Time Frame: 4 to 6 weeks
Average Daily Volume = 8.6 million
New Positions: Yes, see below

03/05/13: The rally in GNW continued on Tuesday. Unfortunately shares gapped open higher at $9.36. That was above our suggested entry point at $9.25 and negatively impacts our entry point. The stock spiked higher to hit $9.87 intraday before trimming its gains. I would not be surprised to see GNW fill the gap created this morning. That would mean a potential dip into the $9.15-9.11 zone, which we could use as an alternative entry point.

NOTE: Option volumes for at-the-money and near-the-money calls were very heavy again today.

current Position: Long GNW stock @ $9.36

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

Long Apr $10 call (GNW1320d10) entry $0.48

03/05/13 triggered on gap higher at $9.36

NASDAQ OMX Group - NDAQ - close: 32.45 change: +0.42

Stop Loss: 30.75
Target(s): 34.85
Current Gain/Loss: + 2.9%

Entry on February 25 at $31.55
Listed on February 23, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 2.0 million
New Positions: see below

03/05/13: Shares of NDAQ have rallied to new four-year highs while the NASDAQ composite index has rallied to a new 12-year high. NDAQ is breaking out from a three-week consolidation under the $32.00 level.

*Small Positions*

current Position: long NDAQ stock @ $31.55

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

Long Apr $33 call (NDAQ1320d33) entry $0.95

Progressive Corp. - PGR - close: 24.65 change: +0.13

Stop Loss: 23.90
Target(s): 26.00
Current Gain/Loss: + 4.8%

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

03/05/13: PGR is inching higher with a +0.5% gain today. Readers may want to consider taking profits early in the $24.80-25.00 zone.

I am not suggesting new positions at this time.

current Position: Long PGR stock @ $23.52

03/02/13 new stop loss @ 23.90
02/23/13 new stop loss @ 23.75
02/20/13 new stop loss @ 23.40
02/13/13 new stop loss @ 22.95

Shutterfly, Inc. - SFLY - close: 44.75 change: +0.11

Stop Loss: 41.85
Target(s): 48.50
Current Gain/Loss: + 3.5%

Entry on February 28 at $43.25
Listed on February 27, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.3 million
New Positions: see below

03/05/13: After yesterday's bullish breakout past resistance near $44.00 one might have hoped for a bit more follow through higher today. The stock only gained 0.2% instead. I am not suggesting new positions at this time. We will raise our stop loss to $41.85.

Earlier Comments:
SFLY could see another short squeeze. The most recent data listed short interest at nearly 40% of the small 28.6 million share float. I would keep our position size small as SFLY can be a volatile stock.

*Small Positions*

current Position: long SFLY stock @ $43.25

03/05/13 new stop loss @ 41.85

Symantec Corp - SYMC - close: 24.20 change: +0.25

Stop Loss: 23.25
Target(s): 24.50
Current Gain/Loss: + 8.5%

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

03/05/13: Hmm... SYMC posted another gain today. The stock is up six days in a row. We are aiming for $24.50 but it looks like someone with a lot of stock to sell decided they would get out in front of everyone and sell at $24.40, which was suddenly a wall of resistance this morning. Readers will want to seriously consider an early exit right now. I am not suggesting new positions.

Please note I am suggesting we exit our March $23 calls immediately at the open tomorrow morning. These calls are currently at $1.27bid/1.31ask. I am also raising the stop loss on our stock trade to $23.25.

*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

03/05/13 new stop loss @ 23.25, prepare to exit our March $23 calls at the opening bell tomorrow! current ask on the option is $1.27
03/04/13 new stop loss @ 22.65, exit down to $24.50
02/28/13 new stop loss @ 22.30
02/25/13 new stop loss @ 22.15
02/16/13 new stop loss @ 21.95

BEARISH Play Updates

Apollo Group Inc. - APOL - close: 16.70 change: +0.50

Stop Loss: 18.15
Target(s): 15.50
Current Gain/Loss: + 8.5%

Entry on February 25 at $18.25
Listed on February 21, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 3.1 million
New Positions: see below

03/05/13: Shares of APOL were upgraded this morning from a "sell" to a "hold". This news combined with a bullish market environment probably fueled some short covering and APOL spiked to $17.24 intraday. I am not suggesting new positions at this time.

current Position: short APOL stock @ $18.25

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

Long Mar $18 PUT (APOL1316o18) entry $0.60

03/04/13 the put option has tripled in value. Readers may want to take profits now.
03/02/13 new stop loss @ 18.15
02/28/13 new stop loss @ 18.60

AngloGold Ashanti Ltd. - AU - close: 23.45 change: +0.04

Stop Loss: 25.55
Target(s): 20.25
Current Gain/Loss: +2.3%

Entry on March 01 at $24.01
Listed on February 28, 2013
Time Frame: 3 to 6 weeks
Average Daily Volume = 2.0 million
New Positions: see below

03/05/13: AU gapped open higher this morning but gains faded to almost unchanged on the session. I am not suggesting new positions at this time.

Earlier Comments:
We want to keep our position size small because AU is arguably already short-term oversold. Of course it can grow a lot more oversold. Our target is $20.25. Readers may want to buy the put options, which can allow you to limit your risk to the cost of the option.
FYI: The Point & Figure chart for AU is bearish with a $13.00 target.

*Small Positions*

current Position: short AU stock @ $24.01

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

Long Apr $24 PUT (AU1320p24) entry $1.10


Gilead Sciences - GILD - close: 45.02 change: +1.15

Stop Loss: 41.85
Target(s): 44.85
Current Gain/Loss: +8.9%

Entry on February 14 at $41.18
Listed on February 13, 2013
Time Frame: 4 to 8 weeks
Average Daily Volume = 8.0 million
New Positions: see below

03/05/13: Target achieved.

GILD continued to rally on Tuesday and outperformed the broader market with a +2.6% gain. Shares hit our exit target at $44.85.

Earlier Comments:
We do want to keep our position size small. Biotech stocks can be volatile.

*Small Positions*

closed Position: Long GILD stock @ $41.18 exit $44.85 (+8.9%)

03/05/13 target hit
03/04/13 new stop loss @ 41.85
03/02/13 new stop loss @ 41.40
02/23/13 new stop loss @ 40.75



EMC Corp. - EMC - close: 23.74 change: +0.52

Stop Loss: 23.71
Target(s): 20.15
Current Gain/Loss: unopened

Entry on February -- at $--.--
Listed on February 25, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 27.4 million
New Positions: see below

03/05/13: We are giving up on EMC as a bearish candidate. The stock broke out past short-term technical resistance at its 10-dma today. Our trade never opened.

Trade did not open.

03/05/13 removed from the newsletter


Ford Motor Co. - F - close: 12.87 change: +0.12

Stop Loss: 13.05
Target(s): 11.50
Current Gain/Loss: - 2.9%

Entry on February 21 at $12.51
Listed on February 20, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 43.7 million
New Positions: see below

03/05/13: Last night we decided it was time to close our Ford trade. The plan was to exit at the open this morning. Unfortunately F gapped open higher at $12.87.

Earlier Comments:
We do want to keep our position size small.

closed Position: short F stock @ $12.51 exit $12.87 (-2.9%)

03/05/13 planned exit this morning
03/04/13 prepare to exit at the open tomorrow