Option Investor

Daily Newsletter, Tuesday, 5/14/2013

Table of Contents

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

Market Wrap

Tepper Tuesday

by Jim Brown

Click here to email Jim Brown

The Dow set another record for gains on 18 consecutive Tuesdays thanks to David Tepper.

Market Statistics

Hedge fund guru David Tepper, founder of Appaloosa Management, was interviewed on CNBC and his comments lit a fire under the market. He said not to worry about a tapering of the Fed's QE program because if they did not taper the market could blowout like the last half of 1999. "If the Fed does not taper back, we are going into a hyper-drive market." The Fed has to quit feeding the fire and it won't hurt the market when it happens, according to Tepper.

Appaloosa, with $18 billion under management, delivered a +30% after fees return to investors in 2012. He said the deficit is declining and the economy is in the early stages of a recovery that could be lasting. The QE money has nowhere to go and there is more than $400 billion in cash with nowhere to go but equities.

The better than expected tax revenues is allowing the government to hold off on selling treasuries for several more months. Mortgage securities are actually disappearing from the market because so many mortgages are being paid off as a result of higher home prices and the refinancing cycle. From April through the fiscal year end in September the Fed will buy $270 billion in treasuries and $240 billion in mortgage securities for a total of$510 billion. However, as a result of the higher tax receipts over that same period the government only needs to sell $142 billion in treasuries and there are no mortgage securities coming to market. That means there is a surplus of $368 billion in QE and nothing new to buy. The Fed will be the 8,000 pound gorilla in the secondary market on treasuries and that means all available treasuries will find their way into the Fed's account.

That $368 billion plus the surplus Tepper says is already looking for a home, will be forced into the equity market. Add that together with the nearly $500 billion in stock buybacks that have been announced year to date and the market could go into hyper-drive. Hardly a day goes by without multiple companies announcing a new share repurchase agreement. Barclays said 50% of S&P profit growth over the last 12 months was due to buybacks.

Tepper warned against trying to short anything because of the wave of cash looking for any dip to buy. Investors took his words to heart and the markets exploded higher.

This was the 18th consecutive Tuesday gain for the Dow and another record. More than 1,300 Dow points have been gained on Tuesday in 2013.

It was another quiet day economically with the calendar heating up on Wednesday. The weekly chain store sales declined -2.0% following a -1.0% decline last week. I am kind of surprised the decline was so large given the Mothers Day holiday. Today's report was for the week ended on May 10th so we will see an uptick next week for all the late holiday shoppers.

Retail sales for April were reported on Monday at +0.1% when analysts were expecting a decline. Ex-autos and gasoline sales rose +0.6% and the strongest growth since November.

Import and export prices for April were also reported today. Import prices declined -0.5% and the second consecutive month of declines. A lot of that decline was due to falling oil prices. Ex-energy prices only fell -0.1%. Petroleum prices declined -1.9% on their own. Export prices declined -0.7% for the biggest decline in nearly a year. The decline in both import and export prices is further proof the global economy is weakening.

There was a lot of data from China overnight and I am surprised it did not weigh on our markets more. Industrial production rose +9.3% for April and up only slightly from the +8.9% in March. Analysts were hoping for more. Retail sales barely rose to 12.8%, a gain of +0.2% over March. Fixed asset investment was 20.6% in April, down slightly from 20.9% for the first quarter. Property sales are still booming. In Shanghai the sale of residential properties rose +30% to 218,000 square meters in the first seven days of May. The average cost was $3,339 per square meter. That was actually down -11% from the prior week. That equates to about $310 per square foot.

The calendar for Wednesday has Empire Manufacturing, Producer Price Index, Industrial Production and the Housing Market Index.

Economic Calendar

In a speech in Sweden Philly Fed president Charles Plosser called on the Fed to halt QE purchases as soon as the June 18th meeting. He said the zero rate policy is becoming increasingly troubling to many people at the Fed. He warned that maintaining the policies for very long periods can result in distortion of decisions in many ways that could be harmful to the economy. He said labor market conditions warrant ending the programs now.

The strong retail sales on Monday, the call by Plosser for an end to QE and the Tepper warning about the need to at least taper QE programs helped push the dollar to a ten-month high. The sharply rising dollar weighed on commodities with gold and oil losing ground. This is the biggest four day gain for the dollar since October 2011. This forced oil into its first four-day losing streak in 2013.

Dollar Index Chart

Gold Chart

Crude Oil Chart

Copper declined -2% on the day after the weak economic news from China. This was not the end of the world since it had rebounded +10% over the last couple weeks.

Copper Chart

I mentioned earlier about the flood of share repurchase programs being announced. There have been nearly $500 billion announced year to date. Hardly a day goes by without multiple companies announcing a new share repurchase agreement. Barclays said 40% of S&P profit growth over the last 12 months was due to buybacks. Fewer shares in the market mean higher earnings per share. This is pouring fuel on the fire as companies try to "buy their stocks back before they go higher" so they can meet earnings estimates for the next quarter. Revenue is flat so the only way companies can boost earnings is with cost cuts and buybacks and they are running out of things to cut.

In stock news Apple (AAPL) had its worst day in three weeks with a -$11 loss to $443.80. A comment by Jefferies was blamed for the decline. Jefferies said the iPhone 5s would not be announced until September and not June as some had expected. Shares traded slightly negative most of the day but fell off the cliff at 2:PM when critical support at $450.80 cracked.

Apple Intraday Chart - 5 Min

There were a couple mentions the BlackBerry (BBRY) announcement may have pressured Apple. I don't believe that was the case but anything is possible. The BBRY announcement was earlier in the day and BBRY shares declined sharply a 11:AM not 2:PM. However, part of the BBRY announcement was targeted at Apple. Blackberry CEO Thorsten Heins said they will offer the BBM instant messaging service on Apple iPhones and on Google Androids to satisfy enterprise customers. The new enterprise operating system BES10.1 canbe used to manage Androids and iPhones and the testing sandbox would be available by the end of June.

Blackberry also announced the Q5 keyboard phone for initial distribution to overseas markets. This will be a lower cost device for the entry level consumer. The device is meant to compete with the sub $100 Android phones popular overseas. BBRY shares declined -4% after the announcement because analysts thought the press release was short a lot of details. Blackberry shares remain in "show me" territory. Investors want to believe the hype but they have been burned before. They want to see unit sales and earnings for the new handsets.

BlackBerry Chart - Daily

Tesla (TSLA) shares spiked +$10 to $97 at the open as the last short covered. Once it was clear the spike was over they all started piling on again and the stock ended with a -5% or -$4.56 loss for the day. Even with the day's decline the stock is still up +50% over the last week. Based on a Thomson Reuters survey TSLA is now more overvalued than 98% of other stocks with a PE of 227. Just a week ago analysts were raising their targets to between $50-$70 and then they reported blowout earnings and the short squeeze began. The most recent data showed 37% of the float to be short so that fueled a monster squeeze. Markit said the stock was so heavily shorted the borrowing costs were roughly 30% n an annualized basis. That is 100 times the normal borrowing costs a normal stock. More than 65% of shares available for loan are loaned out. Tesla has added $4 billion in market cap over the last week.

Volume today spiked to 37 million shares compared to average volume of roughly 4 million in April. Today's volume was a record for Tesla compared to the prior record at 28 million on May 9th and the post earnings day. Clearly there were some shorts that were in denial and in serious pain.

Morgan Stanley (MS) boosted its target to $103 from $47 and kept its overweight rating. However, they are talking their book since they still own more than 1% of the company and does investment banking work for them.

Tesla Chart

Dan Loeb and the Third Point hedge fund said it has acquired a $1.1 billion, 6% stake in Sony Corp (SNE). The announcement was made today and shares rallied +9.9% in the U.S. market. The rally should continue in the Japanese market on Wednesday. Loeb sent Sony a letter calling for them to sell their entertainment arm.

On Monday options volume exploded by 700% and volume in the stock more than doubled to 6.1 million shares. Apparently somebody got the news in advance of the official announcement. Nearly 10,000 of the June $19 calls were purchased for an average of 87 cents. The open interest was only 53 before the purchase so there was no doubt it was an unusual purchase. They closed at $2.40 today. I am sure the SEC is already preparing their subpoenas. Across all strikes there were 43,000 calls and 16,000 puts traded on Monday. Over the last three months they averaged 8,331 total contracts for both calls and puts. Trade Alert said total option volume on Tuesday was a record 72,000 contracts.

Sony Chart

The Volatility Index actually rose intraday despite the strong market gains. This is troubling since it normally goes up in declines as the cost of puts rises. The VIX has been hovering just over 12 for the last two weeks. We discussed adding a VIX call in the plays tonight but passed after looking at the call premiums. We know the VIX is going to hit 18 again in the future but bullishness is overwhelming right now. We will look at it again on Wednesday.

VIX Chart

It has been a record 178 days since the S&P has had a -5% dip. That should case everyone to pause and rethink their short term outlook. On the other side Tepper is expecting the markets to go into hyper-drive if the Fed does not cut spending soon. We know from history they can't cut spending soon. They have to warn they are going to make a change before they can actually make a change. That is the time honored method to keep from roiling the market. If they just announced at the June meeting they had cut spending to $50 billion the market would implode.

The Fed gets to see another jobs report before the June meeting. If it is strong then the Fedspeak will begin and they will begin setting the stage for a statement change in June. As we draw closer to that June 7th payroll report we can expect the Fedspeak to increase and it will impact the market.

The S&P rally this morning was another short squeeze similar to the one on May 3rd but this one was different. Today's squeeze powered the S&P well above its recent six-month uptrend channel. If this gain holds it will change the complexion of the market and we could see another round of acceleration. Fund managers and individual traders could begin chasing performance with the idea that hyper-drive is already upon us.

Conversely, if the spike out of the prior channel is immediately retraced and the S&P falls back into the channel it could embolden the sellers. If investors had not yet sold in May the Tuesday spike was a perfect opportunity and it would probably come at the open on Wednesday. That makes Wednesday a pivotal day, a confirmation day so to speak.

Initial support is back at 1,625, 1,615 and then 1,580. We are above any near term resistance.

S&P 500 Chart - Daily

The Dow has not yet reached the top of the uptrend channel and still has some room to run. However, the Dow had faded over the last several days and appeared ready to take a breather. The gains today were due to short covering and like in the Tesla chart the spike was sold. If the Dow spike is sold then near term support at 15,050 is critical.

Dow Chart

Tech stocks continue to power forward. They were the strongest market over the last week with a clear breakout over prior uptrend resistance. Today's +23 gain with Apple -12 was impressive. However, the Nasdaq was sold with the high coming around 12:15 followed by a -17 point intraday decline. The index recovered at the close but it did raise some eyebrows.

Initial support is around 3,400. The recent acceleration by the Nasdaq is typical of the final stages of a market rally. The buying/short covering becomes hectic and the index can gain 4-7% in the final 5-7 days of a rally. Let's hope that is not the case.

Nasdaq Chart

The Russell 2000 is closing in on the key 1,000 level. This should be critical round number psychological resistance. The Russell is still lagging the rest of the indexes in terms of chart patterns but it is still making new highs and showing no signs of retracement. Today was a short squeeze but that 1,000 level is a siren call for traders. Beware if it is hit.

Russell 2000 Chart

In case you did not catch my undertone of worry in the paragraphs above I am concerned that Tuesday could have been a buying climax. Actually it would have been more of a short capitulation. If we can survive the rest of the week without giving it "all" back I would be thrilled. Some retracement would actually be welcomed.

I am not sure there is any economic or geopolitical news that can knock the market down. The bad news bulls have stampeded through everything that has been thrown at them. The final straw could simply be buyer exhaustion but as long as there are billions chasing performance the dips should be shallow.

I would continue to be cautiously long and hope for a dip to buy. We will know the trend has changed when we get a 2-3% dip that is not bought.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email

New Plays

Revving Higher

by James Brown

Click here to email James Brown

Editor's Note:

Additional Trading Ideas:

In addition to tonight's new candidate(s), consider these stocks as possible trading ideas and watch list candidates. Some of these may need to see a break past key support or resistance:

(bullish ideas) F, BECN, SMG, MAR, GIS, STZ, URBN, WFC, JPM, STI, UNM


Delphi Automotive - DLPH - close: 46.33 change: +0.77

Stop Loss: 44.85
Target(s): 49.75
Current Gain/Loss: unopened

Entry on May -- at $--.--
Listed on May 14, 2013
Time Frame: 4 to 8 weeks
Average Daily Volume = 2.2 million
New Positions: Yes, see below

Company Description

Why We Like It:
DLPH is in the auto parts industry. The company reported earnings on May 1st that were 12 cents better than the 95-cent Wall Street estimate. Revenues also beat estimates. The stock has been consolidating sideways the last couple of weeks but investors have been buying the dips. Now shares look poised to break out to new all-time highs.

I am suggesting a trigger to launch bullish positions at $46.75. If triggered our target is $49.75. FYI: The Point & Figure chart for DLPH is bullish with a $50.00 target.

Trigger @ 46.75

Suggested Position: buy DLPH stock @ (trigger)

Annotated chart:

In Play Updates and Reviews

Stocks Surge Again

by James Brown

Click here to email James Brown

Editor's Note:
Bullish comments from an influential hedge fund manager helped boost the market today. You can read more about Mr. Tepper's comments in tonight's market wrap.

We closed our KR trade this morning. NNI was triggered.

Current Portfolio:

BULLISH Play Updates

Garmin Ltd. - GRMN - close: 35.50 change: +0.03

Stop Loss: 34.95
Target(s): 39.50
Current Gain/Loss: - 2.1%

Entry on May 13 at $36.25
Listed on May 11, 2013
Time Frame: 4 to 6 weeks
Average Daily Volume = 1.0 million
New Positions: see below

05/14/13: GRMN's performance today does not help the bullish case for this stock. The market is in rally mode and shares barely eke out a three-cent gain? That could be a warning signal. I would wait for a new rally back above $36.00 before considering new positions.

Earlier Comments:
Please note that I do consider this an aggressive, higher-risk trade. GRMN can be a very volatile stock. The longer-term trend is down with a pattern of lower highs. We're going against the grain in this stock. NOTE: GRMN does have options available for the more aggressive trader.

*very small positions*

current Position: long GRMN stock @ $36.25

The Hartford Financial Serv. Group - HIG - close: 30.59 change: +0.70

Stop Loss: 28.45
Target(s): 32.50
Current Gain/Loss: +4.7%

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

05/14/13: Insurance stocks continue to show impressive relative strength. The industry seemed to accelerate higher today. HIG gained +2.3% and set a new 52-week high. Keep in mind that the 2011 high at $31.08 might be potential resistance. Don't be surprised to see HIG tag $31.00 and then pullback a bit.

Please note our new stop loss at $28.45.

Earlier Comments:
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

05/14/13 new stop loss @ 28.45
05/07/13 trade opened on gap open higher at $29.23

Loews Corp. - L - close: 45.46 change: +0.01

Stop Loss: 44.45
Target(s): 49.75
Current Gain/Loss: +1.1%

Entry on May 08 at $45.52
Listed on May 07, 2013
Time Frame: 9 to 12 weeks
Average Daily Volume = 1.3 million
New Positions: see below

05/14/13: The market's widespread rally helped push L to a new four-year high. I don't see any changes from my prior comments.

FYI: Loews did announce a quarterly cash dividend of 6.25 cents a share, payable on June 14, 2013, to shareholders on record as of June 3rd.

Earlier Comments:
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*

current Position: Long L stock @ $45.52

Altria Group - MO - close: 37.06 change: +0.14

Stop Loss: 35.95
Target(s): 40.00
Current Gain/Loss: + 1.5%

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

05/14/13: Another day, another high for shares of MO. I don't see any changes from my prior comments.

NOTE: If you choose to trade the call options you may want to buy the Septembers instead of the Junes.

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

Netnet, Inc. - NNI - close: 36.32 change: +0.87

Stop Loss: 34.75
Target(s): 39.50
Current Gain/Loss: +1.6%

Entry on May 14 at $35.75
Listed on May 13, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 68.7 thousand
New Positions: see below

05/14/13: Our brand new play on NNI is off to a strong start. NNI quickly hit our trigger to launch bullish positions at $35.75 this morning. By the closing bell the stock was up +2.4%. The stock closed at levels not seen since 2006.

Earlier Comments:
I do want to urge traders to keep their position size small. NNI does not trade a lot of daily volume. If triggered our target is $39.50.

*small positions*

current Position: Long NNI stock @ $35.75

Prologis, Inc. - PLD - close: 43.37 change: +0.13

Stop Loss: 42.25
Target(s): 47.50
Current Gain/Loss: unopened

Entry on May -- at $--.--
Listed on May 11, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 4.4 million
New Positions: Yes, see below

05/14/13: I am starting to lose a little faith in shares of PLD. The stock market is surging to new highs but PLD can't seem to hit our entry trigger at $43.55. Overall I don't see any changes from my prior comments. The trend remains higher.

I am suggesting a trigger to launch small bullish positions at $43.55. If triggered our multi-week target is $47.50.

Trigger @ 43.55 *small positions*

Suggested Position: buy PLD stock @ (trigger)

Semiconductor ETF - SMH - close: 38.35 change: +0.06

Stop Loss: 35.90
Target(s): 40.00
Current Gain/Loss: + 1.6%

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

05/14/13: Hmm... the SMH lagged behind the SOX (+0.44%) and the S&P 500 (+1.0%). I suspect this ETF is due for a pullback. I am not suggesting new positions. More conservative traders may want to raise their stop loss.

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.

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: 51.45 change: +0.95

Stop Loss: 49.90
Target(s): 52.00
Current Gain/Loss: + 7.7%

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

05/14/13: Tuesday proved to be a strong session for shares of TJX. The stock added +1.8% and rallied to a new all-time high. Our exit target is $52.00. More aggressive traders may want to aim higher. Keep in mind that I would not hold over the earnings report on May 21st.

NOTE: I am raising our stop loss to $49.90. More conservative traders may want to take profits early or raise their stop close to $50.40 instead.

FYI: TJX has a quarterly dividend of $0.145, which is payable on June 6, 2013. The stock will begin trading ex-dividend on May 14th.

current Position: Long TJX stock @ $47.75

05/14/13 new stop loss @ 49.90
05/09/13 new stop loss @ 48.45
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.

SPDR S&P Homebuilders ETF - XHB - close: 32.35 change: +0.43

Stop Loss: 29.75
Target(s): 34.50
Current Gain/Loss: + 3.2%

Entry on May 09 at $31.34
Listed on May 08, 2013
Time Frame: 9 to 12 weeks
Average Daily Volume = 5.3 million
New Positions: see below

05/14/13: The homebuilder ETF continues to show relative strength with a +1.3% gain and another high. I want to warn readers that this ETF does look short-term overbought here. I am not suggesting new positions at current levels.

NOTE: The XHB does have options but I would prefer to see a dip in the ETF before considering call options on it. If you do choose to trade the options I would probably pick the Septembers or 2014 Januarys.

*Small Positions*

current Position: Long the XHB @ $31.34

BEARISH Play Updates

None. We do not have any active bearish trades.


The Kroger Co. - KR - close: 34.80 change: +0.85

Stop Loss: 33.85
Target(s): 36.50
Current Gain/Loss: +0.5%

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

05/14/13: I am not too surprised to see KR bounce. Shares were at the bottom edge of its rising bullish channel. Yesterday's closed was just low enough to look like a bearish breakdown. To be on the safe side we suggested an early exit this morning. The stock gapped open higher at $34.03 and then surged to a +2.5% gain.

If you're still in this stock investors should be aware that KR could move in reaction to earnings from Wal-Mart (WMT) who reports earnings on May 16th, before the opening bell.

current Position: buy KR stock @ $33.85 exit $34.03 (+0.5%)

05/14/13 planned exit
05/13/13 prepare to exit tomorrow morning
05/04/13 new stop loss @ 33.85
05/01/13 new stop loss @ 33.15
04/25/13 new stop loss @ 32.90