Option Investor

Daily Newsletter, Thursday, 10/24/2013

Table of Contents

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

Market Wrap

Waiting for The Fed

by Thomas Hughes

Click here to email Thomas Hughes

Asian stocks traded mixed in the overnight session. In part due to a surprise gain in Chinese flash PMI data and partially due to rising concern over a renewed credit crisis in the country. PMI reading grew more than expected and support a recent string of positive data from the country. At the same time rising rates in China's money markets are causing some to fear liquidity problems. In Europe the mood was more positive. Flash PMI for the EU was a little below expectation but still expansionary. Auto stocks led in the European markets, helping to send them roughly 0.5% higher.

Futures trading here at home was also positive this morning. The S&p was indicated marginally higher ahead of today's economic data releases and extended that lead after the reports came out. Joblessness is still trending lower even though last months computer issues from California and Nevada are still skewing the data. At the open stocks extended the early gains, briefly, before falling back to the flat line during the first 15 minutes. The indices found support at yesterday's closing prices pretty quickly and bounced right back up. The S&P traded in a really tight 3 point range for the first part of the day, between 1745 and 1748 before extending that range to 1752 by lunchtime. The afternoon trading session saw the index churning within the early range with a bias to the high end. Later in the afternoon the indices moved a little higher and held strong into the close. The S&P and Nasdaq both closing near the recently set highs.

Today was one of the biggest single day's of earnings report within one of the biggest weeks of earnings season. So far there have been a few high profile misses and one or two real disappointments but no real scare. For every company reporting a miss there is another reporting a beat. Ford was the one that really caught my eye. I am a big fan of the company and was pleased to hear that the company was improving sales globally. A number of names reported after the bell including Amazon and Microsoft that will have an affect on Friday's trading. Amazon was expected to increase its loss from last quarter from (-0.02) to (-0.09). Also on the roster for tomorrow are Proctor&Gamble, Sherwin Williams, Weyerhauser, UPS and a handful of oil services/services drilling companies.

The Data

Jobless claims fell by a smaller than expected amount, including an upward revision of 4,000 to last weeks numbers. The back log of California claims caused last month is still working its way through the system. This week claims fell by -12,000 to hit a three week low of 352,000. This is still elevated from the previous lows near 300,000 but not too concerning at this time. The average of claims starting from the week before we learned about the California/Nevada computer revamps is 328,375. This is in line with the level of claims the week preceding the unexpected drop to 294,000 caused by the issues. Assuming that California and Nevada are the only causes of the jump in claims the drop in first time claims still holds and could indicate lower unemployment levels when the data is released in two weeks time. The four week moving average of claims also rose by more than 10,000 to reach 348,250, still below 350,000 and also not overly concerning at this time.

I think the continuing and total claims numbers may be a little more reliable. So far both of these numbers have been trending down, without any spike in claims. Continuing claims fell by 8,000 to 2.87 million from a mild upward revision. The revision to last week and the drop this week basically canceled each other out for claims to hold basically flat from last weeks reported number. So far the spike in initial claims has not filtered through into the continuing claims report. I see this as a good sign that any actual increase in joblessness was very short term and that overall joblessness is still in decline. The total claims also fell. This number dropped by 72,000 to 3.856 million, a new long term low.

For now, the California back log and the government shut down do not appear to have impacted joblessness. The shut down may have caused damage but it will not be seen in this round of data. However, I have begun to hear speculation that the data we can expect to get over the next two weeks may be skewed. The shut down may have hampered collection of the data and therefore the reported results could be based on incomplete data. This go round the data may not pack the punch it would have normally because the market may not believe it. The month after that the revisions to this month may be important. The Fed meets next week, I wonder if the data they will be using is complete. The talk of tapering is now focused on whether it will be this year or next year, some have even raised the possibility of more QE although I don't see that happening. On top of the FOMC meeting there are an additional 22 economic reports due out next week, not counting data from overseas.

The trade deficit increased last month by a small margin. Less exports and high oil prices combined to drive the deficit up 0.4% to $38.8 billion. This is less than expected but when adjusted for inflation is basically flat from the previous month. This data is also late, it was originally scheduled for release over two weeks ago. The next data point in this series will be out in another two weeks.

Gold Driven Higher

The prospects that the Fed won't taper this year are driving up the prices of gold. There is a chance the Fed will announce something to the effect that tapering is still a long ways off, there is also the chance they will announce that tapering is closer than gold bulls think. I am leery of gold at this level ahead of the FOMC and the data we are expecting to receive over the next two weeks. Gold may continue to drift upward until next Wednesday when the FOMC statement is released. The metal is trading right at the $1350 level at this time, a level that provided resistance last month. The Gold Index is still trending up and back into it's long term pennant formation. Today the index formed a long white candle, the second in three days, confirming a move up from the short term 30 day moving average. The candle pattern formed over the past three days is very bullish and points to higher prices. This analysis is supported by the indicators which are both bullish and rising. Longer term, the index is still caught up in the pennant formation and faces resistance at the $117 level. Just above and beyond that level is the long term down trend line and another potential area of resistance.

Earnings will be a big driver for the Gold Index, and in particular future earnings prospects. If the Fed puts off tapering and boosts the price of gold above $1350 or even $1400 then earnings outlooks for gold miners will improve and possible help them move higher. GoldCorp reported today. The company earned $0.23 per share, down about 60% from the same period last year. This is above the consensus estimates of $0.21 and the previous quarters $0.14. One highlight of the report was that mines across the company's portfolio had been able to reduce costs, one reason for the unexpected increase in earnings. The report was released before the market opened and sent the stock up in pre market trading. After the open the stock continued higher accompanied by bullish indicators. The outlook for this company is positive at this time, especially while gold prices are at higher levels. Looking forward there is potential resistance at the $27.50 and $30 levels.

Oil Touches Support

Oil prices pushed lower this morning on an increasing supply and increasing supply outlook. The shale gas boom is leading some analysts to estimate that the U.S. could be a net exporter of oil in the next year or two, adding to the downward pressure. Oil prices moved down in the early part of the day, touching the $96 per barrel price level before consolidating for a move back up. By mid afternoon prices had regained today's losses and crossed over into positive territory around $97 per barrel. A larger than forecast increase in natural gas supplies was initially met with selling. I think the gain in supply was expected by more than a few traders because natural gas moved into positive territory, almost in tandem with WTI crude. The Oil Index opened higher, moved lower and then eventually back above break even for the day. The index is sitting on a possible support level following a pullback in prices yesterday. The index is indicated higher but declining momentum suggests it may move sideways in the nearer terms. This index will also be impacted by data and the Fed over the next week as traders try to make sense of where the global is and where it is going. Lower oil prices will be a concern for the oil companies in the near term but longer term may result in a larger down stream sales volume as consumers are able to afford more of the product. The big oil companies report next week.

Apple And Icahn

Carl Icahn announced he upped his stake in Apple. He also sent a nice letter to Apple CEO Tim Cook requesting an immediate $150 billion (that's with a B) share buyback. No response from Apple is known by me at this time but Carl went on to say later that he may consider a proxy fight if neccesary. It is clear that Carl wants some of that money sitting in Apple's bank accounts. Let's not forget that George Soros also recently entered the Apple arena by purchasing a large stake just two months ago. Apple hasn't made any indication of what it is planning to do with that money yet and I don't think it is going to let Icahn and Soros have their way without a fight. The stock extended its rally today, breaking above $530 for the first time since last January. There is resistance ahead in the form of the previous long term up trend line, momentum is weak and the stock is overbought.

Story Stock

Ford reported better than expected earnings this morning. The auto maker was expected to earn $0.38 per share, less than the previous quarter. The actual results beat by $0.07 on an adjusted basis. The really good news in the report revolve around improvements in Europe. The European branch of Ford Motor Company is expected to return to profitability as soon as late next year or early 2015, ahead of previous estimates. The company also reported strengthening numbers on a global basis and was able to increase guidance for this year. The stock jumped in pre market trading, gapping up at the open to hit highs not seen since January of 2011. The stock is breaking out of long term triangle pattern but this move may be a whipsaw. Indicators are bullish and rising on the daily charts but divergences in MACD suggest the move is weak.

The Indices

The Dow is still trapped within it's 6 month range. The blue chips have not been making the same new highs as the broader markets. Perhaps it is because the market does not see as much earnings growth potential in this sector or that the dividends provided by these stocks are not attractive enough. In the short term the index is bullish although momentum is weak at this time and stochastic indicates it is overbought. Looking at the longer term charts of weekly prices the index is also trending sideways but the indicators are bearish. The disconnect between the long and short term charts may result in the index continuing to trend sideways. The thing to watch for tomorrow and over the next few days is the resistance of the upper end of the range, where the Dow is currently trading. If the Dow were to break above resistance it could move as high as 16,000 before it hits resistance. If the index remains trapped in the trading range support exists at the lower boundary around 14,800. If the a longer term correction ensues and the index breaks below the lower range boundary it could retreat all the way to 14,000.

Dow Daily

Dow Weekly

The SPX is making new highs, not today but this week. The last three days saw the index make a new high, pull back and then move back up. At this time the index is moving sideways, just above a potential support zone. Indicators are bullish but MACD is peaking and stochastic is overbought, suggesting the rally is slowing or could be slowing. Longer term the index is still indicated but the divergences in MACD and stochastic that I have been tracking are still present. If the index fails to hold support at the current levels it could enter a longer term correction but there is still no actual indication of that, just the prediction of a divergent indicator. Support levels in the near term are 1745,1740 and 1730. In the short to long term 1700, 1650 and 1600.

SPX daily

SPX weekly

So, the trend is still up but it is in question. The markets are concerned with earnings growth, economic growth and the Fed. There is also likely lingering fear of the next round of debt ceiling debates even though it has faded from the forefront for now. Tomorrow and the first part of next week will be dominated by earnings. Economic data gets heavy next week as well including the FOMC meeting on Tuesday and announcement on Wednesday. Good data will go a long way toward bolstering hopes for earnings growth but will also bring tapering sooner. Not so good data keeps tapering off the table. The FOMC is sure to give us some indication as well.

Until then, remember the trend!

Thomas Hughes

New Plays

Potential Short Squeeze Candidate

by James Brown

Click here to email James Brown


GameStop Corp. - GME - close: 54.80 change: +0.33

Stop Loss: 53.25
Target(s): 63.00
Current Gain/Loss: unopened

Entry on October -- at $--.--
Listed on October 23, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.7 million
New Positions: Yes, see below

Company Description

Why We Like It:
GameStop Corp. is in the services sector. They operate over 6,600 stores in over 15 countries selling video games and related equipment. A few days ago GME broke out past resistance near $53.25. Traders quickly bought the dip yesterday and GME looks poised to test and bypass its August 22nd high (which was $56.08). If this rally continues GME could see a short squeeze. The most recent data listed short interest at 18% of the 114 million share float.

I am suggesting a trigger to open bullish positions at $55.50. If triggered our target is $63.00 but more conservative traders may want to exit near $60.00, which could prove to be round-number, psychological resistance.

Trigger @ 55.50

Suggested Position: buy GME stock @ (trigger)

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

Buy the 2014 Jan $60 call (GME1418a60) current ask $2.28

Annotated chart:

In Play Updates and Reviews

Major Indices Bounce

by James Brown

Click here to email James Brown

Editor's Note:
The U.S. market's major indices managed a bounce on Thursday but healthcare stocks underperformed.

CMN was triggered today. HLS was stopped out.

Current Portfolio:

BULLISH Play Updates

Adobe Systems - ADBE - close: 54.21 change: +1.15

Stop Loss: 51.25
Target(s): 58.50
Current Gain/Loss: + 1.3%

Entry on October 22 at $53.50
Listed on October 21, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 3.6 million
New Positions: see below

10/24/13: ADBE shot higher at the open but I didn't see any specific news to account for the relative strength. Shares closed at a new record high after today's +2.1% gain.

current Position: long ADBE stock @ $53.50

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

Long 2014 Jan $55 call (ADBE1418a55) entry $1.95

Cantel Medical Corp. - CMN - close: 35.65 change: +0.41

Stop Loss: 34.25
Target(s): 39.00
Current Gain/Loss: + 0.8%

Entry on October 24 at $35.35
Listed on October 23, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 153 thousand
New Positions: see below

10/24/13: We did not have to wait very long for CMN to hit our entry trigger. Another bullish day in the market allowed CMN to hit another new high. Shares opened at $35.31 and quickly hit our suggested entry point at $35.35. Shares did pare their gains by the close. Given the afternoon pullback I would not be surprised to see CMN retest the $35.30 area, which we could use as another entry point.

Earlier Comments:
We want to keep our position size small because CMN is arguably already overbought (but that tends to happen with momentum stocks).

*small positions*

current Position: long CMN stock @ $35.35

Salesforce.com, Inc. - CRM - close: 54.38 change: +1.04

Stop Loss: 52.25
Target(s): 59.75
Current Gain/Loss: - 3.2%

Entry on October 21 at $56.15
Listed on October 19, 2013
Time Frame: 3 to 5 weeks
Average Daily Volume = 4.0 million
New Positions: see below

10/24/13: CRM spent more than two days retreating from its spike higher on Monday. Yet traders were buying the dip midweek. Today saw CRM outperform with a +1.9% bounce. Yesterday I was suggesting readers use a rally above $54.00 as a new entry point.

We will plan to exit prior to CRM's earnings report in late November. FYI: The Point & Figure chart for CRM is bullish with a long-term $77 target.

current Position: long CRM stock @ $56.15

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

Long 2014 Jan $60 call (CRM1418a60) entry $2.10

10/21/13 trade opened on gap higher at $56.15, trigger was 54.50
(gap higher due to an upgrade to strong buy)

HB Fuller Co. - FUL - close: 48.28 change: -0.21

Stop Loss: 45.75
Target(s): 49.75
Current Gain/Loss: + 4.5%

Entry on October 15 at $46.20
Listed on October 12, 2013
Time Frame: 4 to 8 weeks
Average Daily Volume = 405 thousand
New Positions: see below

10/24/13: Thursday proved to be a quiet day for shares of FUL. The stock drifted sideways and closed down -0.4%. There is no change from my prior comments. Shares are on track for their sixth weekly gain in a row.

Earlier comments:
Our target is $49.75. More aggressive traders may want to aim higher. FUL's point & figure chart has created a spread triple-top breakout buy signal with a $62 target.

current Position: long FUL stock @ $46.20

10/22/13 new stop loss @ 45.75
10/17/13 new stop loss @ 44.95
10/15/13 be careful. FUL hit our trigger on a very brief intraday spike
10/14/13 adjust entry trigger to $46.20 from $46.15

Krispy Kreme Doughnuts, Inc. - KKD - close: 24.54 change: +0.29

Stop Loss: 22.85
Target(s): (sold half @ 23.25) exit the 2nd half at $26.50
Current Gain/Loss: (+14.5%) 2nd half = +20.9%

Entry on October 03 at $20.30
Listed on October 02, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.25 million
New Positions: see below

10/24/13: KKD's rival Dunkin Donuts (DNKN) reported earnings this morning and missed bottom line estimates by two cents. Revenues were better than expected but management issued cautious guidance. Thankfully this news did not hamper KKD's rally. Instead shares outperformed the market again with a +1.1% gain.

More conservative traders could lock in profits now but the trend is still higher.

Earlier Comments:
KKD is prone to some intraday spikes. I am suggesting small positions to limit our risk.

*small positions*

current Position: Long KKD stock @ $20.30

10/22/13 Exit Strategy Update: We are raising our exit target on the second half of our trade from $24.75 to $26.50.
new stop loss @ 22.85.
10/19/13 new stop loss @ 22.40
10/14/13 new stop loss @ 21.85
10/08/13 new stop loss @ 21.40
10/08/13 1st target hit at $23.25 (sell half) +14.5%
10/05/13 Strategy Update: new stop loss @ 20.45
Plus, we want to sell half of our position at $23.25 and then exit the rest of our position at $24.75.

Scientific Games - SGMS - close: 18.90 change: +0.24

Stop Loss: 17.90
Target(s): 19.50
Current Gain/Loss: + 7.4%

Entry on October 14 at $17.60
Listed on October 12, 2013
Time Frame: 4 to 6 weeks
Average Daily Volume = 690 thousand
New Positions: see below

10/24/13: SGMS erased yesterday's loss with a 24-cent bounce. The last couple of days look like SGMS is just churning sideways. I am not suggesting new positions. More conservative traders may want to take profits now.

Earlier comments:
The next major resistance level looks like the $19.50-20.00 zone. Keep in mind that we want to use small positions to limit our risk.

*small positions*

current Position: long SGMS stock @ $17.60

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

(option exit on 10/22/2013)
NOV $17.50 call (SGMS1316k17.5) entry $1.15* exit $1.80* (+56.5%)

10/22/13 new stop loss @ 17.90
10/22/13 planned exit to close the call options. +56.5%
10/21/13 new stop loss @ 17.40, adjust exit target to $19.50
prepare to exit our Nov. $17.50 call at the open tomorrow.
10/19/13 new stop loss @ 16.90
*option entry price is an estimate since the option did not trade at the time our play was opened.

Scotts Miracle-Gro Co. - SMG - close: 58.38 change: +0.34

Stop Loss: 55.85
Target(s): 59.85
Current Gain/Loss: + 4.0%

Entry on October 15 at $56.15
Listed on October 14, 2013
Time Frame: 3 to 5 weeks
Average Daily Volume = 310 thousand
New Positions: see below

10/24/13: SMG continued to drift higher and managed to outpace the S&P 500 on Thursday with a +0.58% gain. Shares do look short-term overbought here. I am not suggesting new positions.

current Position: long SMG stock @ $56.15

10/23/13 new stop loss @ 55.85
10/21/13 new stop loss @ 55.40
10/17/13 new stop loss @ 54.75

BEARISH Play Updates

None. We do not have any active bearish trades.


HEALTHSOUTH Corp. - HLS - close: 35.40 change: -0.96

Stop Loss: 35.40
Target(s): 39.75
Current Gain/Loss: - 2.5%

Entry on October 15 at $36.30
Listed on October 10, 2013
Time Frame: exit PRIOR to earnings on Oct. 28th
Average Daily Volume = 459 thousand
New Positions: see below

10/24/13: Healthcare-related stocks underperformed the market today. HLS led the way lower with a -2.6% plunge. Shares broke down below their two-month up trend and hit our stop loss at $35.40.

closed Position: Long HLS stock @ $36.30 exit $35.40 (-2.5%)

10/24/13 stopped out
10/22/13 new stop loss @ 35.40
10/19/13 new stop loss @ 35.25
10/15/13 triggered at $36.30
10/14/13 adjust entry trigger to $36.30 from $36.25
adjust the stop loss from $34.75 to $34.95