Option Investor

Daily Newsletter, Tuesday, 7/30/2013

Table of Contents

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

Market Wrap

No Change

by Jim Brown

Click here to email Jim Brown

The Dow and S&P were little changed ahead of the expected "no change" from the Fed.

Market Statistics

Art Cashin said traders were sleepwalking ahead of the Fed and that was an accurate description. Traders were doing nothing but babysitting their positions and reacting to a few earnings reports. Wednesday is going to be a Red Bull day as traders try to decipher the printed words from the FOMC meeting, GDP and the ADP Employment.

The economic calendar for Tuesday was light and mixed. Consumer Confidence for July declined from the earlier reading of 82.1. That earlier reading was a five year high so a minor decline for July is nothing to be concerned about.

The present conditions component rose from 68.7 to 73.6. The expectations component fell from 91.1 to 84.7. Buying plans improved for all categories. Respondents planning on buying a car rose from 11% to 12.6%. Those planning on buying a home rose from 5.4% to 6.3%. Appliance buyers rose from 48.8 to 50%. Twelve month inflation expectations remain off the scale at 5.5% where it has been for the last year. With real inflation at 1.8% today those consumers are way out of touch with reality.

Case Shiller home prices rose only .1% to 12.2% from 12.1% for the May period. This is a lagging report but sudden fade from the +2% per month increases in prior months was somewhat of a shock to the market. Since this was the May period it was before the interest rates really began to rise. This pause in prices is more than likely the result of more foreclosures coming on the market.

The Texas Service Sector Outlook rose from 12.2 to 15.3 for July. That is the opposite direction from the manufacturing outlook that declined from 6.5 to 4.4 on Monday. All the internal components improved except hours worked, which declined from -0.6 to -2.7 and the second month in contraction. Texas is primarily a service state with manufacturing a growing component but still lagging.

Tomorrow's calendar is the hurdle for the week. The ADP Employment at 8:30 is expected to show job growth declined in July. This data will allow analysts to further refine their estimates for Friday's Nonfarm Payrolls so the ADP data is important.

The first look at Q2 GDP is also out at 8:30 and is expected to decline to something in the 0.4% to 0.8% range from +1.78% in Q1. However, the government is going to release a major revision in the way GDP is calculated and revise the data all the way back to 1929. Whenever the government revises the calculations the net result is normally an upward revision to the data. Entire recessions have been erased by backward revisions to the data. The government always wants to show growth even if it is not there so the hunt is always on for a new way to spin the numbers.

One analyst put this into perspective like this. The new rules change the money spent on developing content for TV from "expense" to "investment" and that changes the impact on GDP. However, there is a qualification. A series like Seinfeld that runs for a long time and has significant revenue from rerun syndication qualifies for investment status. A series like Jersey Shore or Keeping up with the Kardashians it treated like a newspaper. A week after it airs it is old news and nobody wants to see it in reruns 2-3 years later. That puts the "reality" shows in the expense category and the drama shows into the investment category.

Obviously government bean counters are really digging for something they can spin positively and push GDP numbers higher. If the "revised" GDP comes in well over existing expectations the low information investors will simply see a big number and assume all is well with the economy.

Watch the inflation component called the Personal Consumption Expenditures (PCE), which showed inflation was 2.6% when last updated and estimates are for a decline to 1.6% in Q2. Bernanke and the crew do not want to see falling inflation and a significant decline will keep QE in force.

The FOMC announcement is expected not to change and contain no additional comments about tapering QE. The FOMC will want to see as much data as possible before the September meeting where analysts do expect some change to QE.

If the statement does change significantly it will impact the market.

Economic Calendar

Earnings headliners today were Coach, Discovery, Symantec, Amgen, Merck, NYSE, and US Steel to name a few.

High end retailer Coach (COH) was knocked for a -8% loss after reporting earnings that disappointed the street. High end handbag sales declined with same store sales negative for the quarter and they lowered guidance for the year. Same store sales declined -1.7% in North America and that is where they get 63% of their sales. Not all the news was bad. Sales rose +35% in China helping to push international sales up +17%. Adjusted earnings of 89 cents were in line with estimates but revenue was light. The company warned investors not to expect any improvement in the current fiscal year which began on June 30th. That is some bearish guidance when you are four weeks into the year and project no growth for the year. Also, two more executives announced they were leaving. The exit door is open and those exits follow two other high management positions changes announced several months ago. It may be time to "bag" Coach as an investment and move to Michael Kors instead.

Coach Chart

Merck (MRK) posted a weak quarter as the pain of generics continued to weigh on older drugs. The company also said exchange rates knocked -3% off revenue. Adjusted earnings were 84 cents compared to estimates of 82 cents. Revenue fell -11% to $11.01 billion and analysts were expecting $11.24 billion. The company said 2013 sales would be 5-6% below 2012 levels of $47.27 billion. Shares of MRK fell -34 cents so no mad rush out of the stock.

The NYSE (NYX) reported earnings of 63 cents compared to estimates of 58 cents. Revenue rose +1% to $611 million compared to estimates of $601 million. Earnings were helped by a -30% reduction in capital spending. Shares gained 28 cents on the news.

Shares of US Steel (X) fell -7% after the company reported a loss of 54 cents but that was better than estimates for a loss of 81 cents. The earnings contain an adjustment of $3 million for a tax loss. Revenues fell -12% to $4.429 billion and misses estimates by $150 million. Guidance was lackluster and shares were sold.

Amgen (AMGN) profits declined slightly to $1.89 but remained well above estimates of $1.74. Revenue rose +5% to $4.68 billion and beat estimates of $4.49 billion. Rising expenses hurt Amgen with an 8% increase due mostly to a 17% jump in research spending. Shares of Amgen fell -1.90 after the report.

Symantec (SYMC) reported record earnings of 44 cents with a +2% increase in revenue to $1.71 billion. That beat estimates of 36 cents and $1.64 billion. For the current quarter the company projected earnings of 43 cents compared to estimates of 45 cents. Revenue will average $1.67 billion and below estimates of $1.71 billion. Shares of SYMC rose +$1 in afterhours trading.

The earnings calendar for Wednesday included Whole Foods, MasterCard, Marriott, Humana, MetLife and Allstate. The earnings will be overshadowed by the various economic events and it will be GDP-FOMC headlines all day long.

Earnings Calendar

Monday and Tuesday were a placeholder days. Traders had to suffer through the light volume and lackluster earnings before they could get to the economic hurdle on Wednesday. Think of Monday and Tuesday as blank squares on a children's board game. They are only there to provide an interlude between important events.

The rest of the week is one big important event. The market has been going sideways with a slight downward tilt for the last two weeks and nothing changed today. I am not going to spend a lot of time trying to spell out the market moves today since the Dow lost -1.38 and the S&P gained .63. I think you get the idea from those closing numbers.

The S&P has been stuck on 1685 for the last five days with a few intraday swings above and below that level but always returning. Real support is 1680 and initial resistance is 1690. That does not give the index a lot of room to run before hitting an obstacle.

The market is not running on fundamentals or technicals. This strictly headline driven and there will be a lot of driving over the next three days. Hopefully by Friday's close a new direction will appear.

S&P Chart

The Dow chart looks the same as the S&P with a narrow range and 15,500 playing the role of price magnet. Initial resistance is 15,600 and support 15,400 giving the Dow a little more range but it is not being used. Volatility has died along with the volume and the candles are very short.

Dow Chart

The Nasdaq is actually showing some life thanks to Apple. The Nasdaq posted a 17 point gain today and made a new 13 year intraday high at 3629. The Nasdaq chart appears to be suggesting a breakout ahead assuming the major headlines this week don't cause serious market damage.

Apple is proving power for the Nasdaq. Shares finally broke over the $430 resistance and nearly broke through the $455 level today. If Apple is healthy the Nasdaq is healthy. If Apple can make over the $455-$465 resistance levels we will have a summer tech rally that could improve sentiment all across all the indexes.

Nasdaq resistance is 3625 and support 3575.

Apple Chart

Nasdaq Chart

The Russell 2000 closed positive today with a +3 point gain but every day over the last week it has put in a lower high. Support at 1040 is holding but the intraday highs are declining. This suggests trouble ahead from a chart perspective. However, I view it as managers trimming positions ahead of the economics rather than taking profits. We are still on watch for a break below 1040 as a short signal.

Russell Chart

The market wants to go up. There is no other way to say it. It is handicapped by the large number of major economic events but there has not been a major sell off in advance of those events. We have seen caution creeping in but no wholesale selling.

If the headlines don't damage the market I think the next direction could be up despite August being a historically bad month for the market. I want the market to go down and give us a real buying opportunity after eight months of gains. However, what I want and what is a normal seasonal occurrence is not relative. Money is still flowing into the market and that is the life blood for stocks. Even claims of large scale distribution by institutions have failed to weaken sentiment. We need to be ready for a breakdown but continue to follow the trend until it ends. Keep those stops tight. There is always another day to trade as long as you have money in your account.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email

New Plays

Buying The Bounce

by James Brown

Click here to email James Brown


Broadcom Corp. - BRCM - close: 27.84 change: +0.44

Stop Loss: 26.49
Target(s): 31.00
Current Gain/Loss: unopened

Entry on July -- at $--.--
Listed on July 30, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 13.1 million
New Positions: Yes, see below

Company Description

Why We Like It:
It's been a rough month for Broadcom. The company makes a variety of semiconductors. Unfortunately for shareholders prior to the earnings report the market did not like what they heard in the conference call. Quarterly results were one cent above expectations. Yet in the conference call BRCM's management guided their Q3 revenue estimates lower. A wave of analyst firms downgraded the stock. Investors panicked fearing that BRCM was losing market shares. The stock collapsed on July 24th with a big gap down and a dip to $26.63.

So far the July 24th and 25th lows near $26.60 have held. It looks like BRCM fell victim to a knee-jerk reaction because there hasn't been any follow through selling. Instead the stock has quietly consolidated sideways. Now it's starting to rebound. We suspect that all the bad news has been priced in. If the market cooperates we are likely to see BRCM try and fill the gap down.

Today's high was $27.91. I am suggesting a trigger to launch small bullish positions at $28.05. If triggered our target is $31.00 although I will point out that it is possible the $30.00 level could act like round-number resistance. We will start with a stop loss at $26.49 but more conservative traders may want to use a stop loss closer to $27.20 instead.

Trigger @ 28.05 *small positions*

Suggested Position: buy BRCM stock @ (trigger)

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

Buy the Sep $30 call (BRCM1321i30) current ask $0.37

Annotated chart:

In Play Updates and Reviews

Stocks Churn Sideways Ahead of News

by James Brown

Click here to email James Brown

Editor's Note:
The U.S. stock market churned sideways on Tuesday ahead of potential market-moving news tomorrow. Investors want to know what the U.S. Q2 GDP estimate is and what the FOMC statement will say. Both come out tomorrow.

Current Portfolio:

BULLISH Play Updates

Alliance Fiber Optic Products - AFOP - close: 32.56 change: -1.78

Stop Loss: 33.45
Target(s): 39.75
Current Gain/Loss: unopened

Entry on July -- at $--.--
Listed on July 29, 2013
Time Frame: 3 to 6 weeks
Average Daily Volume = 440 thousand
New Positions: Yes, see below

07/30/13: Ouch! AFOP hit some heavy profit taking today with a -5.1% decline. I didn't see any specific news behind today's display of relative weakness. If AFOP doesn't recover soon then we'll drop it as a candidate. Currently we are on the sidelines waiting for a new high.

I am suggesting a trigger to open small bullish positions at $35.55. If triggered our target is $39.75.

Trigger @ 35.55 *Small Positions*

Suggested Position: buy AFOP stock @ (trigger)

Best Buy Co. - BBY - close: 29.34 change: +0.48

Stop Loss: 29.25
Target(s): 33.50
Current Gain/Loss: unopened

Entry on July -- at $--.--
Listed on July 25, 2013
Time Frame: exit PRIOR to earnings in late August
Average Daily Volume = 4.9 million
New Positions: Yes, see below

07/30/13: As expected BBY found support at its simple 30-dma. Shares bounced with a +1.6% gain. Yet the stock remains below the $30.00 level.

Earlier Comments:
I am suggesting a trigger to open bullish positions at $30.40. If triggered we will target a move to $33.50 but we do not want to hold over the late August earnings report.

Trigger @ 30.40

Suggested Position: buy the stock @ (trigger)

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

buy the Sep $32 call (BBY1321i32)

The Gap, Inc. - GPS - close: 46.11 change: +0.26

Stop Loss: 44.75
Target(s): 49.50
Current Gain/Loss: + 0.8%

Entry on July 29 at $45.75
Listed on July 27, 2013
Time Frame: exit PRIOR to earnings in late August
Average Daily Volume = 2.5 million
New Positions: see below

07/30/13: GPS keeps the rally alive with another gain today (+0.5%). We will adjust our stop loss higher to $44.75. Nimble traders may want to wait and try to buy a dip near $45.50.

We will plan to exit prior to GPS' earnings report in late August.

current Position: Long GPS stock @ $45.75

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

Long Sep $45 call (GPS1321i45) entry $2.27

07/30/13 new stop loss @ 44.75

L Brands, Inc. - LTD - close: 55.32 change: -0.09

Stop Loss: 52.45
Target(s): 58.50
Current Gain/Loss: + 2.7%

Entry on July 29 at $53.85
Listed on July 27, 2013
Time Frame: exit PRIOR to the earnings report on Aug. 21st
Average Daily Volume = 1.7 million
New Positions: see below

07/30/13: After Monday's big rally higher shares of LTD hit some profit taking today. Yet traders bought the dip twice and shares pared their losses to less than ten cents. I am not suggesting new positions at current levels.

FYI: The Point & Figure chart for LTD is bullish with a $68.00 target.

*small positions*

current Position: Long LTD stock @ $53.85

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

Long Sep $55 call (LTD1321i55) entry $1.45

Rackspace Hosting - RAX - close: 46.43 change: -0.29

Stop Loss: 43.85
Target(s): 49.00
Current Gain/Loss: +2.4%

Entry on July 25 at $45.35
Listed on July 24, 2013
Time Frame: exit PRIOR to earnings on Aug. 8th
Average Daily Volume = 1.9 million
New Positions: see below

07/30/13: The rally in RAX paused today with a -0.6% decline. If the stock does see a dip I would look for support near $45.00 and its 10-dma. Our stop is at $43.85 but readers may want to inch theirs higher.

Keep in mind our time frame and plan to exit prior to earnings on August 8th.

*small positions*

current Position: Long RAX stock @ $45.35

07/27/13 new stop loss @ 43.85

BEARISH Play Updates

Fiesta Restaurant Group - FRGI - close: 31.45 change: +0.58

Stop Loss: 31.55
Target(s): 27.25
Current Gain/Loss: + 4.4%

Entry on July 23 at $32.90
Listed on July 20, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 213 thousand
New Positions: see below

07/30/13: It looks like our FRGI play could be over soon. I cautioned readers that FRGI could bounce near $30 or near its 100-dma. We were expecting market weakness to help push FRGI lower through this potential support. The stock did bounce and shares added +1.8%. Today's high was $31.51, less than five cents from our new stop loss at $31.55. If there is any follow through higher tomorrow our trade will be closed.

current Position: short FRGI stock @ $32.90

07/29/13 adjust the exit strategy: target a drop to $27.25
new stop loss @ 31.55
07/27/13 do not be surprised to see a bounce toward the 10-dma

Isis Pharmaceuticals - ISIS - close: 28.36 change: +0.57

Stop Loss: 29.51
Target(s): 26.00
Current Gain/Loss: + 0.7%

Entry on July 24 at $28.57
Listed on July 23, 2013
Time Frame: exit PRIOR to earnings in early August
Average Daily Volume = 1.7 million
New Positions: see below

07/30/13: ISIS rallied this morning but the rebound ran out of steam by lunchtime under the $29.00 level. The stock did manage a +2.0% gain today. It looks like the support level to watch is the $27.75 level.

I am not suggesting new positions at this time.

Earlier Comments:
I am suggesting we keep our position size small. The latest data did list short interest at 16% of the 102.8 million share float.

*small positions*

current Position: short ISIS stock @ $28.57

07/29/13 adjust exit target to $26.00
07/27/13 new stop loss @ 29.51
07/25/13 warning! Today's move looks like a one-day bullish reversal pattern
07/24/13 triggered on gap down at $28.57. Trigger was $28.70