Option Investor

Daily Newsletter, Thursday, 4/11/2013

Table of Contents

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

Market Wrap

High Expectations For Earnings Season

by Thomas Hughes

Click here to email Thomas Hughes

U.S. traders woke up to a minor global rally today. Euphoria from our own rally yesterday carried over into Asian and European markets. Adding to the rally was positive data from China, Europe and here at home. China bank lending increased by a much larger margin than expected fueling hopes that recovery in that region is still going strong. European data shows that inflation at the consumer level is as expected. A drop in unemployment claims put the U.S. labor recovery back on the right track. Last weeks spike in initial claims and the horrible NFP figure could be one-off's. Today's data suggests this is true. There is still downside bias in the claims figures with all three of the major metrics near 12 month lows.

Earnings are back on tap. Alcoa surprised and relieved the markets Monday by beating, if by a small margin, Wall Street estimates. This may be a foreshadowing of what the rest of the season is going to bring us. The trend so far has been one of positive surprises, especially out of the retail sector which was one of today's leaders. Monthly retail comp store sales figures were also released revealing mixed results. Guidance from the sector is good so far but there are still hurdles for retailers and the consumer. Tomorrow has only a few earnings reports on the list but two at least are potential market movers. Wells Fargo and JP Morgan both report tomorrow with the rest of the big international and smaller regional banks reporting next week.

The market absorbed all the news and data and marched right on to make a new high today. Mildly positive futures trading led to a slight dip after the open but the market did not stay down long. By 10AM the S&P had gained about +3 and moved on from there to reach the day's high around 11AM. After that the markets drifted sideways finding support just above the 1590 level. There seems to be an expectation of good earnings this time around if yesterday's and today's price action is to be believed. The problem is there is still downside risk and the threat of the secular bear market. If earnings fail to satisfy and/or guidance is weak economic data may not be enough to keep the markets up.

SPX hourly

Asian Markets Rally

Yesterday's rally in carried over into the Asian market. All the major indexes finished in the green led by Japan's Nikkei 225. The Nikkei rally is being driven by the policy of Shinzo Abe and Haruhiko Kuroda. Elsewhere in the region stocks were supported by positive data from China. Chinese banks increased March lending by 1.06 trillion yuan, higher than the expected 850 billion. Japanese markets, especially the exporters, are being helped by declining yen values. The yen has lost more than 5 points versus the dollar since last weeks BOJ meeting and is expected to continue its slide. The USD/JPY pair is currently consolidating into a possible flag pattern just under the long term resistance level of 100. If it breaks above the near term target for the this pair is 106.50. Failure could bring the pair down to 97.50.


Europe Follows Asian Lead

European stocks rallied today as well driven by global optimism. The U.S. and Chinese data was reassuring for European markets who are dependent on both. There wasn't much data from the region today but what there was suggests that inflation is holding steady in Germany and France. Tomorrow is the beginning of the Eurogroup meeting and the release of EU industrial production figures and British Leading Indicators. Over the last week the euro has strengthened and climbed above the 1.300 level to test my resistance line at 1.3125. This line could hold, especially if EU industrial production falls or there is some other negative news from the Eurogroup.


The Economic Data

Futures held on to positive ground going into the release of today's jobless claims numbers. I'm not sure what I expected this week after the employment data last week but I was pleasantly surprised. Initial claims fell by 42,000 from an upwardly revised figure to 346,000. The four week moving average continued to climb higher but that is to be expected with last weeks peak. This week's initial claims puts it back near the lower end of the 12 month range and in line with the downtrend in joblessness the data has been showing us. I expect there may be some more volatility in this figure over the next couple of weeks due to the recent adjustments to benchmark numbers and the post-Easter seasonal lay-offs'. Job growth slowed in the second quarter last year and many pundits are talking about that happening again this year.

Continuing claims and total claims both fell in this weeks data as well. Continuing claims fell by 12,000 and total claims by 10,573. The continuing claims number comes with a caveat. The drop in claims this week is due to an upward revision of last weeks number. Without that revision this week would have been an equally small gain. Looking back over the past few weeks continuing claims have been relatively flat since hitting the five year low last month. In order to believe in an ongoing recovery in jobs and unemployment I would like to see this number continue to trend down. In the near term there is risk of continuing claims rising due to the seasonally slow period of job growth.

States with the biggest declines in claims were Texas, California and North Carolina with drops of -3,000, -2,500 and -1,600. States with the biggest gains in claims were Pennsylvania, New Jersey and Illinois all with increases larger than 2,000. Once again I am noticing the same states again and again at the top of these lists. There seems to be a lot of activity in the same areas. On a national basis the numbers are looking OK but on a regional or state level there is still a lot of instability in labor markets. Overall there is a steady downtrend in claims and the unemployment level. This downtrend is a little suspicious due to the declining participation rate. I need to see a pick up in the number of Americans looking for work in tandem with a pick up in jobs creation. There are a lot of hopes pinned to the housing market as a source of jobs creation. If it picks up it could lead a new round of jobs creation. Next week a new round of housing data begins with housing starts and and building permits.

Other data of note this mornings was import prices. Import prices fell as expected after last month's gains but the really important bit was the year over year number. In the last 12 months import prices have fallen more than 2.7%, far more than expected, and a good sign for inflation. The tame inflation data is good for the FOMC and its current QE programs. So long as inflation is not creeping into the system we can assume it will go on with its plans. Bernanke has been very vocal about the committee's desire for transparency so I am confident we will know about any plans to stop asset purchases or raise rates long before they happen. Tomorrow look out for official retail sales figures, core PPI, business inventory and Michigan sentiment. Also, later in the day Ben Bernanke will be giving a talk but is not expected to make any market moving comments.

Retail Comp Store Sales Irrelevant

The monthly release of retail comp stores sales has become irrelevant. The long dwindling list of retailers who actually report the figure has fallen from its peak to a mere 14 out of 120 publicly traded company's. Of the two reports I saw first one was a little disappointing, the other a little surprising. TJ Maxx reported comp sales dropping -2% versus the expected drop of -1%. L Brands, formerly The Limited, was able to increase comps by 3% versus its expected 0%. What this means for the industry is unclear but the traders of the XRT were clearly happy about it. The ETF jumped at the open, creating a small gap and continued to climb throughout the morning. The steadily improving housing sector and labor markets could be leading the speculation of improving revenues and profits in the retail sector. Declining import prices helps with that theory too.

Retail Spyder

Rite Aid was able to post a wildly surprising profit. Expectations of $0.00 EPS were blown away by the reported $0.13. The company also posted full year fiscal 2013 EPS of $0.43. Both numbers reverse losses in the previous comparable periods. Rite Aid also provided some guidance for the coming year. The company is expecting to earn above the current consensus estimates. The stock responded as expected on news of this kind and gapped up just like the retail Spyder. The move took the stock up to a new four year high and the top of its long term trading range.

Rite Aid

Earnings Season Is Here Again

Earnings season kicked off Monday with Alcoa's relieving report. Since then the trickle of reports has been positive as well but without any coming from a company of real importance. Today is more of the same, a dozen or so reports from some small and mid-cap companies but tomorrow the big boys come out to play. Wells Fargo and JP Morgan will be reporting and expectations are high for some any signs of growth, profits and improving conditions. Wells is expected to report $0.87 per share and JPM about $1.37 per share, both slightly below last quarter. Both stocks have been trading in a sideways range over the last 4-6 weeks like much of the rest of the sector. Both stocks are also consolidating above their short term moving averages. The Banking Index is also making this same move. It appears as if there is some expectation for good news tomorrow but that expectation may be capped at resistance. JP Morgan and Wells are both approaching resistance and so is the BKX. Long term bullish momentum in the index is in decline and divergent from price and the shorter term daily charts are suggesting the range may still be intact. I need to see a break above the top of the range at $57.50 to be bullish on the sector.


Technology Hit Fails To Curb Rally

The sharp drop in PC shipments reported for Q1 failed to curb the general market rally. Shipments were reported as dropping nearly 14% in the first quarter. The plunge is blamed on the growing popularity of smart phones and tablets. This shift in demographics is going to hurt those companies unable to make the shift. The Semiconductor Index opened slightly lower today but quickly found support and climbed to make a new one month high. This index is also looking like it is setting up for a possible surge upward. Something else it also has similar to the BKX is resistance. The SOX has long term resistance at $445 and $450 to break through.


The Oil Index

Oil traded down today for the first time since last Thursday. The price of crude lost about $0.50 during the day but remained above the $94. Sluggish world economic growth has led some analysts to lower 2013 oil demand and this is what caused today's decline. The mild nature of the decline makes me think that not many traders are taking the lowered estimates too seriously. U.S. data is still steadily improving so I can't rule out a jump in growth just yet. The Oil Index was able to regain the bullish side of its long term up trend line but still faces stiff resistance. 1350-1375 is an important range for the index now, it will have to break above or else be pushed through the trend line. The indicators are not telling me anything at this time, this index could break to either side at this point.


The Gold Index

Gold hit a one week low today. Several factors were at play including jobless claims, a cut in price target by Goldman Sachs and a requirement for Cyprus to sell 400 million of its reserves. Despite all this negative pressure gold appeared to find a support at $1550 and is building a possible base. The Gold Index may building a similar base but looks more like its consolidating for another down leg. The index failed to cross back above the 61.8% retracement and is looking more likely to move down than up.


The S&P 500

The S&P traded in a tight range today after hitting its peak just before lunch. The hourly charts show a market consolidating just above 1590 with a potential flag pattern. This flag would have a potential target a full 50 points above the current level. While this would be a great move for short term bulls it would also make the index dangerously over extended in new high territory and even more subject to the correction everyone is waiting for. In the very near term the first upside target in such a move would be around 1620. This could happen over the next few days if bank earnings are acceptable. Near term support exists around 1580 and 1570.

SPX hourly

The daily charts show a market breaking above resistance. The MACD and stochastic have both turned bullish coincident with the breakout. At this time there is no up side resistance on the daily or weekly charts as we are in new high territory. I do expect to see some sideways to down activity just on a consolidating basis but this is not a requirement. With the market making new highs daily and earnings looking good there is the possibility of price-chasers entering the market. I do not think this is a good time for price chasing if there every is one. The bull is going to be tested sooner or later, that is without a doubt. If earnings are good and data keeps improving it may not until later in the year. For now the bull market is still intact and the trend is still up.

SPX daily

Unless something changes, like bad reports from the banks, I am still in the buy-the-dip camp. Earnings and data will tell the tale and it will be written in the charts.

Until then remember the trend!

Thomas Hughes

New Plays

Agricultural Chemicals

by James Brown

Click here to email James Brown


American Vanguard - AVD - close: 28.17 change: -0.53

Stop Loss: 29.15
Target(s): 25.15
Current Gain/Loss: unopened

Entry on April -- at $--.--
Listed on April 11, 2013
Time Frame: exit PRIOR to earnings in early May.
Average Daily Volume = 227 thousand
New Positions: Yes, see below

Company Description

Why We Like It:
AVD is in the agricultural chemical industry. Unfortunately, while giants like Monsanto (MON) are hitting new highs shares of AVD are trading near their Q1 lows. The stock has been underperforming the market for the last few weeks. AVD has fallen to support near $28.00 and its simple 300-dma (currently 27.89).

We are suggesting a trigger to launch bearish positions at $27.75. If triggered our target is $25.15. More aggressive traders could aim lower. The Point & Figure chart for AVD is bearish with a $21.00 target.

Trigger @ 27.75

Suggested Position: short AVD stock @ (trigger)

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

buy the May $30 PUT (AVD1318Q30) current ask $2.65

Annotated chart:

In Play Updates and Reviews

EWJ Hits Our Target

by James Brown

Click here to email James Brown

Editor's Note:
The iShares Japan ETF (EWJ) has continued to rally and shares hit our bullish target today.

BSFT was triggered. CLGX was stopped out. WTI was closed.

Current Portfolio:

BULLISH Play Updates

Gulfport Energy - GPOR - close: 48.43 change: +0.16

Stop Loss: 45.75
Target(s): 52.50
Current Gain/Loss: + 2.3%

Entry on April 08 at $47.35
Listed on April 06, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.4 million
New Positions: see below

04/11/13: I am growing concerned with our GPOR trade. The U.S. market's major indices continue to rise. GPOR eked out a minor gain yet today's move looks more like a failed rally at round-number resistance near $50.00.

More conservative traders may want to abandon ship. I am not suggesting new positions. We will raise the stop loss to $45.75. More aggressive traders may want to keep their stop loss below the 20-dma.

Earlier Comments:
Our target is $52.50, but investors should note that the $50.00 level might be overhead, round-number resistance. FYI: The Point & Figure chart for GPOR is bullish with a long-term $70.00 target.

current Position: Long GPOR stock @ $47.35

04/11/13 new stop loss @ 45.75

Plum Creek Timber Co. - PCL - close: 51.88 change: +0.08

Stop Loss: 50.85
Target(s): 54.50
Current Gain/Loss: +2.6%

Entry on March 25 at $50.56
Listed on March 23, 2013
Time Frame: Exit prior to earnings on April 29th
Average Daily Volume = 732 thousand
New Positions: see below

04/11/13: The trading in PCL is a bit disappointing as well. The stock was barely in positive territory at the closing bell. Shares seem to be struggling with their early April highs. I am turning more defensive here. We will raise our stop loss to $50.85, which is just below the 20-dma.

Our May $50 call closed with a bid/ask of $2.24/2.31. I am suggesting we go ahead and close our call position at the opening bell tomorrow.

*Small Positions*

Current Position: Long PCL stock @ $50.56

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

Long May $50 call (PCL1318E50) entry $1.40*

04/11/13 new stop loss @ 50.85
Prepare to exit our May $50 calls at the opening bell tomorrow
04/10/13 new stop loss @ 50.60
03/30/13 new stop loss @ 49.90
*option entry price is an estimate since the option did not trade at the time our play was opened.

Starz - STRZA - close: 21.80 change: +0.03

Stop Loss: 19.95
Target(s): 24.50
Current Gain/Loss: +0.2%

Entry on April 10 at $21.75
Listed on April 06, 2013
Time Frame: exit PRIOR to earnings on May 9th
Average Daily Volume = 1.6 million
New Positions: see below

04/11/13: Thursday proved to be a quiet session for shares of STRZA. The stock just drifted sideways under the $22.00 level. Nimble traders may want to look for a dip near $21.50 before initiating new positions.

*Small Positions*

current Position: Long STRZA stock @ $21.75

04/10/13 trade opened on gap higher at $21.75
04/09/13 adjust entry trigger from $21.50 to $21.55

The TJX Companies - TJX - close: 48.74 change: +1.23

Stop Loss: 46.45
Target(s): 52.00
Current Gain/Loss: + 2.1%

Entry on April 09 at $47.75
Listed on April 08, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 4.7 million
New Positions: see below

04/11/13: It was a volatile morning for shares of TJX. Officially the low of the day was only $47.37. Yet if you look at an intraday chart it seems like TJX gapped open lower near $46.50 before quickly surging higher again. If poke around you'll see that $46.50 was the pre-market low. The volatility was a reaction to TJX's same-store March sales. Analysts polled by Reuters were expecting -1% growth. TJX announced same-store sales fell -2% in March. Management blamed the slowdown on the timing of Easter and an unusually cold month for much of the country.

The stock rallied quickly off its morning lows and broke out to new highs.

Earlier Comments:
If triggered our target is $52.00. However, there is a risk that the $50.00 mark could be round-number resistance.

Suggested Position: Long TJX stock @ $47.75

BEARISH Play Updates

Brunswick Corp - BC - close: 32.91 change: +0.00

Stop Loss: 34.25
Target(s): 30.30
Current Gain/Loss: + 2.9%

Entry on March 18 at $33.78
Listed on March 12, 2013
Time Frame: Exit PRIOR to earnings on April 25th
Average Daily Volume = 786 thousand
New Positions: see below

04/11/13: BC spent the day consolidating sideways to close unchanged. The stock's failure to participate in the market's rally is bearish. I am not suggesting new positions at this time.

Suggested Position: short BC stock @ $33.78

04/03/13 new stop loss @ 34.25
04/01/13 new stop loss @ 34.75
03/18/13 triggered on gap down at $33.78. Trigger was $33.90

BroadSoft, Inc. - BSFT - close: 24.57 change: -0.30

Stop Loss: 25.25
Target(s): 20.75
Current Gain/Loss: - 0.3%

Entry on April 11 at $24.50
Listed on April 09, 2013
Time Frame: exit PRIOR to earnings in early May
Average Daily Volume = 854 thousand
New Positions: see below

04/11/13: Our new play on BSFT has been triggered. Shares have continued to under perform and the stock lost -1.2% today. Shares broke down to new multi-week lows. Our trigger to open bearish positions was hit at $24.50.

Earlier Comments:
Please note that we do want to limit our position size to reduce our risk. The most recent data listed short interest at 21% of the small 27.6 million-share float. Thus if BSFT were to suddenly turn higher it could spark a short squeeze. Furthermore there has been some speculation that BSFT is a takeover target. You may want to consider buying a put option instead of shorting the stock as a way to limit your risk.

*Small Positions*

current Position: short BSFT stock @ $24.50

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

Long May $25 put (BSFT1318Q25) entry $2.60

Cabot Microelectronics - CCMP - close: 32.89 change: -0.46

Stop Loss: 34.05
Target(s): 30.25
Current Gain/Loss: -0.6%

Entry on April 03 at $32.69
Listed on April 02, 2013
Time Frame: exit PRIOR to earnings on April 25th
Average Daily Volume = 104 thousand
New Positions: see below

04/11/13: The semiconductor sector was downgraded this morning. This weighed on the sector all day and the SOX closed negative. Shares of CCMP saw their early morning rally attempt fail near the 20-dma. Shares reversed to close down -1.37%. Today's low was $32.74. Readers could use a drop below today's low as a new bearish entry point.

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

*Small Positions*

current Position: short CCMP stock @ $32.69


iShares Japan Index - EWJ - close: 11.34 change: +0.13

Stop Loss: 10.47
Target(s): 11.40
Current Gain/Loss: + 9.2%

Entry on March 12 at $10.44
Listed on March 11, 2013
Time Frame: 9 to 12 weeks
Average Daily Volume = 30 million
New Positions: see below

04/11/13: Target achieved.

Record-setting monetary easing in Japan has helped fuel the rally in Japanese stocks and the EWJ. Another up day back home in Japan helped the EWJ cap open higher. Shares hit a new 52-week high of $11.44 intraday. Our exit target was hit at $11.40.

closed Position: Long the EWJ @ $10.44 exit $11.40 (+9.2%)

04/11/13 target hit
04/10/13 new stop loss @ 10.58
04/08/13 new stop loss @ 10.47
04/04/13 new stop loss @ 10.35
03/30/13 new stop loss @ 10.28
03/20/13 new stop loss @ 10.18



CoreLogic, Inc. - CLGX - close: 25.68 change: +1.52

Stop Loss: 25.25
Target(s): 22.15
Current Gain/Loss: - 4.8%

Entry on April 11 at $24.09
Listed on April 10, 2013
Time Frame: 2 to 4 weeks
Average Daily Volume = 861 thousand
New Positions: see below

04/11/13: Sometimes the market does not want to cooperate. CLGX has been trending lower and underperforming the market for weeks. Yesterday saw a bearish breakdown below support to new relative lows. The stock opened weak this morning but managed a bounce back toward the unchanged level. Then around 11:15 a.m. today something happened and CLGX just exploded higher. Unfortunately I cannot find any news to explain the sudden surge in this stock. In less than two and a half hours the stock went from $24.20 to 26.40 (a +9% move). The rally failed near technical resistance (several moving averages). CLGX ended the session with a +6.29% gain. Our trade opened this morning at $24.09 and CLGX hit our stop loss at $25.25.

closed Position: short CLGX stock @ $24.09, exit $25.25 (-4.8%)

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

July $22.50 PUT (CLGX1320s22.5) entry $1.10* exit $0.65* (-40.9%)

04/11/13 trade opened at $24.09, stopped out at $25.25
*option entry and exit price is an estimate since the option did not trade at the time our play opened or closed.

Annotated chart:

W&T Offshore Inc. - WTI - close: 13.73 change: -0.07

Stop Loss: 14.25
Target(s): 12.15
Current Gain/Loss: + 0.6%

Entry on April 01 at $13.85
Listed on March 30, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 696 thousand
New Positions: see below

04/11/13: The oversold bounce in WTI continued for a fifth day in a row. Shares pierced potential resistance at $14.00 but reversed to eventually close in negative territory. Our plan was to exit positions at the opening bell.

closed Position: short WTI stock @ $13.85 exit $13.77 (+0.6%)

04/11/13 scheduled exit at the open
04/10/13 prepare to exit at the opening bell tomorrow
04/06/13 readers may want to exit now to lock in gains. WTI looks poised for an oversold bounce
04/03/13 new stop loss @ 14.25