Option Investor

Daily Newsletter, Tuesday, 5/7/2013

Table of Contents

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

Market Wrap

Another Terrific Tuesday

by Jim Brown

Click here to email Jim Brown

The Dow set another record for gains on 17 consecutive Tuesdays and a new high at 15,056.

Market Statistics

It was a very slow news day but most of the major indexes managed to squeeze out another gain. The Nasdaq was the weakest link with the composite index gaining +3 but the Nasdaq 100 losing -2. The Dow and the small cap Russell 2000 performed the best. The Dow closed over 15,050 for another new high after Australia cut interest rates.

The chain of terrific Tuesdays continued. More than 70% of the Dow's gains in 2013 have been made on Tuesdays. Mondays seem to be suffering from a weekend hangover and news overload from Europe and Asia. Tuesdays have been free of those accumulated pressures and the rest of the week was spent consolidating the Tuesday gains.

The U.S. markets rose after the Royal Bank of Australia cut interest rates to 2.75% and the lowest on record. That was the seventh rate cut in the last 19 months. Australia's economy had not been impacted as much as the rest of the world because they are so resource rich. Their active mining and energy sectors have been producing a constant stream of cash to keep the economy moving. At least that was the driving force until Australia passed a new 40% tax on profits three years ago and miners cut back on expansion and production and the economy has suffered. If you kill the goose laying the golden eggs the flow of eggs stops. They have also been hit with a flurry of cyclones over the last three years that caused significant damage to the mining operations.

Japan's Nikkei gained +3.6% to trade above 14,000 for the first time since June 2008. The broader Topix gained +3.1% to levels not seen since Lehman failed on September 15th, 2008. Markets all across Asia rallied except for South Korea (-0.4%) and Taiwan's Taiex (-0.1%). Toyota gained +4.1% ahead of earnings.

In the U.S. traders ignored economics once again. The Job Openings and Labor Turnover Survey (JOLTS) showed that job openings declined -1.3% or -55,000 in March. The hiring rate declined slightly from 3.3% to 3.2%. The number of workers hired declined from 4.451 million to 4.259 million. While the report was slightly negative it could have been a lot worse. The JOLTS report is lagging data for March and was ignored.

The weekly Chain Store Sales snapshot showed sales declined -1.1% compared to gains of +0.4% and +0.8% in the prior two weeks. This was only the third decline in the last nine weeks. Food stores and drug stores were the weakest chains. Sales should pickup soon as warmer spring weather becomes more pronounced. The Mothers Day holiday should boost sales over the next two weeks. This weekly data is normally ignored.

Consumer Credit rose less than expected in March at +$8.0 billion compared to +$18.1 billion in February. This was the smallest gain since September. Revolving credit declined -$1.7 billion while non-revolving credit rose +$9.7 billion. Worry over the sequestration and potential consequences probably kept consumers from rushing out to buy stuff on credit in March. This report was also ignored.

The economic calendar for the rest of the week is devoid of any material reports. The weekly jobless claims on Thursday are probably the most interest after the better than expected nonfarm payroll report last Friday.

Economic Calendar

Earnings provided the only excitement for the day and that was muted as well. Fossil (FOSL) surged +9% and gaining +9 to $108 after posting earnings that beat the street. Fossil posted adjusted earnings of $1.08 compared to estimates of 97 cents. The company raised full year guidance from $5.85-$6.15 to $6.00-$6.25. However, earnings guidance was .89 to .94 per share and analysts were expecting $1.05. Global same store sales rose +4.3% with North America sales rising +13% and Europe +14%. The increase in sales offset the weak earnings guidance and shares rallied.

Fossil Chart

First Solar (FSLR) lost -9% or -$4 on earnings of 69 cents when analysts were expecting 75 cents. The earnings and lackluster guidance knocked the entire solar sector for a loss. SPWR declined -5%, SolarCity -8%, JA Solar and LDK Solar -5%. FSLR guidance was heavily weighted to the last half of the year. In order to reach the prior guidance of 6.2 gigawatts of production through 2015 FSLR will have to add about 3.6 GW of bookings. So far this year they have only booked 328 megawatts. The company said it had identified 5.5 GW of opportunities. Analysts claim there is a difference between opportunities and bookings.

The problem for FSLR is their cost of production. Their current actual cost per watt is 58-59 cents. China is selling panels for 58 cents. That means FSLR is facing an uphill battle in achieving that 6.2 GW of production.

FSLR Chart

JC Penny (JCP) reported selected numbers today and will report full earnings on May 16th. The company reported same store sales that declined -16.6% in Q1. Analysts were expecting a decline of -13.2%. Revenue was $2.64 billion and below estimates of $2.74 billion. The company has $821 million in cash on hand after spending $870 billion in Q1 based on an estimate by Morningstar. JCP completed a deal last week to raise $1.75 billion in financing through Goldman Sachs. I would not be surprised to see a bigger loss on the Q1 earnings because the company and the new CEO will want to pin every penny of losses possible on Ron Johnson so the company can start out with a clean slate for Q2 and beyond. This is the blame it on Ron quarter. On the bright side analysts claim suppliers are making positive comments and recent Penny's ads clearly mention "sale" and "25% off" suggesting buyers will be returning.

JCP Chart

EOG Resources (EOG), formerly Enron Oil and Gas, reported a +53% jump in Q1 earnings that beat analyst estimates. EOG reported $1.80 compared to estimates for $1.17. Yes, that is not a typo. Revenue rose from $2.81 billion to $3.36 billion. The company said production rose +4.6% to 475,600 boe/d. Liquids production was 187,300 bpd, a +33% increase. Natural gas liquids (NGL) production rose +16.4%. Gas volumes decreased -11.2%. Prices received increased +4.4% to an average of $105.61 per barrel for oil. EOG is focusing on liquids rich plays and plans to spend $7.1 billion on capex in 2013. The company plans on increasing the number of wells drilled thanks to the declining cost of drilling and faster drilling times.

EOG Chart

Whole Foods Market (WFM) said after the bell that same store sales rose +6.9% in Q1 and they are up +9.4% so far in Q2. The company blamed the slight weakness in Q1 on winter storm Nemo that blanketed the Northeast. Also, Valentine's Day fell on a bad day for retailers on a Thursday. Total sales rose +13% to $3.03 billion as a result of lowering prices to better compete with stores like Fresh Market (TFM). Net income rose to 76 cents per share. The company raised full year forecasts to a range of $2.86-$2.89 from $2.83-$2.87. Shares of WFM spiked +$8 in afterhours trading.

WFM Chart

Disney (DIS) reported earnings after the bell of 79 cents compared to estimates of 77 cents. Net income was $1.51 billion. Revenue rose to $10.55 billion and beat estimates of $10.49 billion. Parks and resorts revenue rose +14% to $3.30 billion. CEO Bob Iger said park attendance was strong as was cruises and movie sales. ESPN revenues were higher but ABC revenue and audiences declined. Cash on hand rose to $3.95 billion. Disney said Ironman 3 had already grossed $711 million worldwide. Shares declined about 95 cents after the report. Disney shares have been in vertical ascent mode and is due for a rest.

Disney Chart

After the close Carl Icahn said he boosted his stake in Herbalife (HLF) to 16.5% from 15.9%. He now owns more than 16.97 million shares. Icahn is trying to produce the mother of all short squeezes to force Bill Ackman to cover his $1.1 billion short in HLF shares. They hate each other and Icahn is winning this battle. Shares of HLF were less than $35 when Icahn began accumulating his position. Shares rallied to $43.50 in late trading.

Herbalife Chart

This was a very slow news day and I am not going to try and fill space here with needless stories. However, it is worth noting that Syria dropped off the Internet at 2:PM today. It is unknown if the country was knocked off the air by the rebels or the government turned it off to prevent citizens from being able to access news and communicate with others. I would bet it was turned off.

Akamai Internet Traffic

The S&P added another +8 points to close at 1625 and a new record. The close was also at uptrend resistance that has held since November. While the 1600 level was a highly visible, round number line in the sand the 1625 level represents strong resistance.

Bespoke Investments said late today that over the last ten years the S&P has lost an average of -2% between May 6th to May 20th. Over the last couple of months there have been numerous studies released saying basically the same thing and so far buyers have not paid attention.

The higher we go without a meaningful retracement the stronger it will be when it comes. However, remember that bull markets tend to gain 4% to 7% in the last few days of the run because of the increasingly violence of short squeezes, funds chasing performance and investors coming off the sidelines. I would say with the +90 point rebound from mid April we are approaching terminal velocity.

S&P Chart

The Dow added a whopping +87 points to close well over 15,000. Compared to the Nasdaq 100 decline this was a stellar move. The Dow has room to run before hitting serious resistance. However, closing over round number resistance at 15,000 removed the obvious target. Markets are brainless and no number is different than any other. However, markets are watched by millions of investors and we humans tend to fixate on numbers, especially round numbers. With the 15,000 target now achieved it will be interesting to see if the gains continue unabated.

Remember, Dow 10,000? That level was broken several times by a couple points followed an 85 point intraday spike but there was no close at that level. After the intraday spike to 10,085 the Dow declined to 9,625 over the next five days. That was followed by a five day rebound to close at 10,006 and then another drop to 9,765. The third time was the charm with a six-week rally from that dip to hit 11,130.

Round numbers tend to be targets but once the target is achieved there is typically a post target depression. Nobody knows if that will happen with Dow 15,000 but we should watch out for it.

Dow Chart

The Nasdaq Composite struggled to add +3 points as uptrend resistance maintains a strong hold on the index. The Nasdaq 100 big cap index lost -2.50 but held the 2,950 level. However, the big caps you would normally blame were only minor losers. AAPL -3, GOOG -4, etc. it was more of a broad based decline in tech stocks.

The candle for today on the Nasdaq Composite chart is normally bearish. It represents distribution at the highs with sellers dumping to buyers in a controlled mode. This is a typical topping candle BUT that does not mean that is what we are seeing. This could be just rotation from techs to something else since techs have been strong since mid April.

Resistance is the morning high at 3,400.

Winners & Sinners

Nasdaq Composite Chart

Nasdaq 100 Chart

The Russell 2000 small caps and the Dow Transports are surging. These indexes posted the largest percentage gains of all the indexes. The Russell has no immediate resistance and you could make a case for the 1,000 level being the new market target.

The Dow Transports broke out of a bearish configuration and have surged to the 6,400 level. While that could be round number resistance there is no immediate resistance in the near term. The resistance is simply the nearly +400 points the transports have gained over the last week. The short covering began on Friday and has not slowed. FDX spiked over $3 today with all the major transport components posting strong gains. Evidently investors are confident the economy is going to improve but none of the economic numbers are actually showing any improvement other than the big increase in part time jobs in April.

Russell 2000 Index

Dow Transports

I believe the market is overbought but the sentiment indexes of the Russell 2000 and the Transports are telling us to get out of the way. Sentiment is actually improving the higher they go rather than fading. Whether that will carry over to the rest of the market is the unknown.

I am worried about the nonperformance in the big cap techs today when the Dow was up nearly 90 points. This could be simple sector rotation or the leading edges of some profit taking.

The biggest warning I saw today was the volume. Total volume on Monday was only 5.2 billion shares followed by 5.8 billion today. Both of those numbers are very low. Beware major market moves on light volume because it means a lack of conviction.

I would remain cautiously long until proven wrong. There will be a dip in our future but it will be bought.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email

New Plays


by James Brown

Click here to email James Brown


Loews Corp. - L - close: 45.64 change: +0.02

Stop Loss: 44.45
Target(s): 49.75
Current Gain/Loss: +0.0%

Entry on May 08 at $--.--
Listed on May 07, 2013
Time Frame: 9 to 12 weeks
Average Daily Volume = 1.3 million
New Positions: Yes, see below

Company Description

Why We Like It:
Loews is a conglomerate of various businesses. There is an insurance company, an oil drilling company, oil exploration and production, oil and gas pipelines, and the hotel and resort business. Both the energy and insurance industries have been showing relative strength in the market, which has helped boost L to a new multi-year high. The stock's bullish breakout past resistance near $45.00 paves the way for a run towards $50.00.

I am suggesting new bullish positions now but I am suggesting we keep our position size small. Our multi-week target is $49.50 and we may need to be patient. Shares of L don't usually move that fast. FYI: The Point & Figure chart for L is bullish with a $58 target.

*Small Positions*

Suggested Position: buy L stock @ (the open)

Annotated chart:

In Play Updates and Reviews

Pushing Higher

by James Brown

Click here to email James Brown

Editor's Note:
The major U.S. stock indices continue to push higher. The Dow Industrials closed above 15,000 for the first time.

Our RSG trade has been triggered.

Current Portfolio:

BULLISH Play Updates

Archer Daniels Midland - ADM - close: 34.34 change: +0.46

Stop Loss: 33.25
Target(s): 37.50
Current Gain/Loss: unopened

Entry on May -- at $--.--
Listed on May 04, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 4.7 million
New Positions: Yes, see below

05/07/13: ADM is still drifting higher and hit a new 52-week high with today's +1.3% gain. Yet shares have not hit our suggested entry point at $34.50.

I am suggesting a trigger to launch bullish positions at $34.50. If triggered our multi-week target is $37.50. The 2011 highs are near $38.00.

Trigger @ 34.50

Suggested Position: buy ADM stock @ (trigger)

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

buy the Sep $35 call (ADM1321i35)

The Hartford Financial Serv. Group - HIG - close: 29.29 change: +0.26

Stop Loss: 27.25
Target(s): 32.50
Current Gain/Loss: +0.2%

Entry on May 07 at $29.23
Listed on May 06, 2013
Time Frame: 9 to 12 weeks
Average Daily Volume = 7.3 million
New Positions: see below

05/07/13: HIG set a new 52-week closing high today but most of the gain was from the gap open this morning. I don't see any changes from my prior comments.

Earlier Comments:
I do think patient traders will probably be able to buy HIG on a dip at $28.50 soon so consider waiting for the dip as HIG fills the gap from Friday morning. The early 2011 high near $31.00 could be potential resistance but we're aiming higher. Keep in mind this is a multi-week trade so we'll need patience for the trend to play out for us. I would start this trade with small positions to limit our risk.

current Position: Long HIG stock @ $29.23

05/07/13 trade opened on gap open higher at $29.23

The Kroger Co. - KR - close: 34.99 change: +0.49

Stop Loss: 33.85
Target(s): 36.50
Current Gain/Loss: +3.4%

Entry on April 19 at $33.85
Listed on April 18, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 4.2 million
New Positions: see below

05/07/13: KR continues to show relative strength with a +1.4% gain. Today's rally helped ease any concerns about a potential bearish double top but $35.25 remains short-term resistance. I am not suggesting new positions.

Earlier Comments:
Shares of KR are now hitting new 13-year highs. We should take note of its old highs. The closing high was $34.16 and the intraday high was $34.91 from March 1999. These levels could be potential overhead resistance. Yet it was so long ago they may not matter anymore. If you're worried about KR seeing resistance at these levels then you may want to wait for KR to close above these levels before initiating positions.

FYI: KR should begin trading ex-dividend on May 13th, 2013. The quarterly dividend should be 15 cents.

current Position: buy KR stock @ $33.85

05/04/13 new stop loss @ 33.85
05/01/13 new stop loss @ 33.15
04/25/13 new stop loss @ 32.90

Altria Group - MO - close: 36.47 change: +0.39

Stop Loss: 35.95
Target(s): 40.00
Current Gain/Loss: - 0.1%

Entry on April 29 at $36.50
Listed on April 27, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 8.6 million
New Positions: see below

05/07/13: Investors bought the dip in MO near $36.00. I am cautiously bullish here and we're raising the stop loss to $35.95.

Earlier Comments:
Our target is $40.00 but keep in mind that MO does not move very fast. This could be a multi-week trade.

current Position: Long MO stock @ $36.50

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

Long Jun $35 call (MO1322F35) entry $1.80

05/07/13 new stop loss @ 35.95

Republic Services - RSG - close: 34.98 change: +0.31

Stop Loss: 33.40
Target(s): 37.50
Current Gain/Loss: + 0.7%

Entry on May 07 at $34.75
Listed on May 04, 2013
Time Frame: 9 to 12 weeks
Average Daily Volume = 1.7 million
New Positions: see below

05/07/13: RSG is extending its gains to six days in a row. Our trigger to open bullish positions has been $34.75. The stock gapped open at $34.75.

Earlier Comments:
I am suggesting a trigger to launch small bullish positions at $34.75. However, more conservative investors may want to wait for a close above $35.00 as an alternative entry point. It looks like the $35.00 region was resistance back in 2007 and 2008. I am suggesting we keep our position size small to limit our risk.

*Small Positions*

current Position: Long RSG stock @ $34.75

05/07/13 triggered at $34.75

Semiconductor ETF - SMH - close: 37.92 change: +0.08

Stop Loss: 35.90
Target(s): 40.00
Current Gain/Loss: + 0.5%

Entry on May 03 at $37.75
Listed on May 02, 2013
Time Frame: 3 to 6 weeks
Average Daily Volume = 2.6 million
New Positions: see below

05/07/13: The SMH eked out another gain but it looks like the $38 level has become new short-term resistance. I would not be surprised to see a pullback here. Readers might want to wait for a dip before initiating new positions.

Earlier Comments:
Our short-term target is $40.00 although traders could aim for the 2007 high near $41.40 instead. FYI: The Point & Figure chart for SMH is bullish with a $44.00 target.

I am listing our stop loss at $35.90 but more conservative traders may want to use a higher stop.

current Position: Long SMH @ $37.75

05/03/13 triggered on gap open at $37.75, trigger was $37.55

The TJX Companies - TJX - close: 50.03 change: +0.74

Stop Loss: 47.90
Target(s): 52.00
Current Gain/Loss: + 4.8%

Entry on April 09 at $47.75
Listed on April 08, 2013
Time Frame: exit PRIOR to earnings on May 21
Average Daily Volume = 4.7 million
New Positions: see below

05/07/13: TJX was downgraded this morning before the open. Yet that didn't stop shares from outperforming the market with a +1.5% gain. The stock has rallied to potential round-number resistance at $50.00. More conservative investors may want to take profits now. Our exit target is still $52.00. I am not suggesting new positions.

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

current Position: Long TJX stock @ $47.75

05/06/13 new stop loss @ 47.90
05/02/13 new stop loss @ 47.40
04/18/13 today's decline is bad news. TJX looks ready to hit our stop at $46.45 soon.

BEARISH Play Updates

None. We do not have any active bearish trades.