Option Investor

Daily Newsletter, Tuesday, 1/14/2014

Table of Contents

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

Market Wrap

Squeeze Repeat

by Jim Brown

Click here to email Jim Brown

We may have to rename Tuesdays in 2014 as "Short Squeeze Tuesday."

Market Statistics

Last Tuesday we saw a strong short squeeze where the Dow rose +107 and the Nasdaq gained +40. The rest of the week was lackluster and Monday's decline fell to lows for the year on very negative internals. Today we got another short squeeze with the Dow gaining +116 and the Nasdaq really roaring with a +70 point gain to a new 13 year high.

I wrote in the weekend commentary "I am wondering if we might be looking at one more triple digit decline just to test the next support level at 16,300 and then a rebound can begin." That decline came on Monday to 16,240 and 4,100 on the Nasdaq. Investors definitely bought the dip on tech stocks and small caps but the Dow remains the laggard.

There was little in the way of economics to move the market. The Retail Sales for December rose a miniscule +0.2% compared to +0.4% in November. Excluding autos, which were lagging in December, sales rose +0.7% and excluding autos and gas sales rose +0.6%. Motor vehicles and parts were a drag on sales with a -1.8% decline. Electronics and appliance sales declined -2.5%. That was a real surprise since electronics are normally very strong in December. Building materials, sporting goods and home furnishings also declined. Food and beverages was the biggest gainer at +2.0%.

Analysts were quick to blame the cold weather for the weak sales and in this instance I think they were right. Winter storm Hercules severely depressed shopper traffic for nearly a week. January is going to have two monster storms courtesy of the polar vortex and sales should also be lousy.

The NFIB Small Business Optimism Index rose from 92.5 to 93.9 for December. That is up from a sharp drop in October to 91.6 as a result of the government shutdown. However, many of the internal components were negative. Those planning to increase employment declined from 9% to 8% and plans to increase inventories fell below neutral to -2%. Those expecting the economy to improve rose from -20% to -11% but still well into negative expectations. That is the highest level in three months even though it is still negative. An 8% of respondents reported weaker sales and 22% reported weaker profits.

It appears small businesses are treading water. They are holding their own while waiting for the economy to improve but they are taking measures to reduce expenses while they wait.

Philly Fed President Charles Plosser added lift to the markets today after he said the Fed will be in no hurry to raise interest rates even if the unemployment rate falls to 6.5%. This affirms other comments from Fed officials that the Fed will keep the benchmark rate near zero "well past the time" the jobless rate falls to 6.5%. That 6.5% threshold is a prime example of too much guidance. They made a mistake putting that number out there and now they will have to spend months backtracking the guidance to erase it. Plosser said the Fed was on course to eliminate QE in 2014 and would continue with the $10 billion per meeting reduction unless something happened in the economy to upset that process. The Fed meets again in two weeks.

Another economic point came from CMS regarding Obamacare enrollment. They now claim that 2.2 million people signed up by December 28th. Their goal was for 7 million by March 30th and that looks to be in danger since the pace of applications has declined significantly. More importantly only 24% were in the target 18-34 age group that is supposed to be healthy and their premiums would be used to support medical expenses for older people in the program. Lastly, and probably the most important, 79% of the people who have signed up received a subsidy from the government to cover their premiums. Clearly the metrics are not what the administration expected. We all know what is going to happen if 79% of people in Obamacare are being subsidized by the government. The program costs are going to skyrocket and that means more deficits in the years ahead. This is going to come back to bite us in the form of higher taxes over the next several years. Another point CMS downplayed is that 6.4 million people lost insurance coverage when their plans were cancelled as a result of the new rules. If the goal was to increase the number of people with healthcare they are going in the wrong direction.

The calendar for tomorrow has the NY Empire Manufacturing survey and expectations are for a decent gain in January. The Producer Price Index is expected to show flat inflation at +0.1% compared to -0.1% in November. With a lot of excess capacity still in the system manufacturers still don't have any pricing power.

Thursday is a big day with the Philly Fed Manufacturing Survey, Housing Market Index, Consumer Prices and a speech by Bernanke. There are also earnings from Goldman, Citigroup, American Express and Intel. This will easily be the most critical day of the week for market direction.

Earnings Calendar

The big earnings for today started out with JP Morgan (JPM). Adjusted earnings of $1.40 beat estimates by 6 cents. Net income was $2.4 billion, up +19% thanks to lower provisions for credit losses. Net revenue was $11.3 billion, a drop of -$1.0 billion. The loan loss provisions declined from $1.1 billion to $72 million.

The biggest shock came from the drop in mortgage originations of -54% to $23.3 billion. That was worse than the -42% decline in Q3. That was half of the originations reported by Wells Fargo. Investment banking net income declined -57% to $858 million. Revenue from investment banking declined from $7.6 billion to $6.0 billion.

Analysts claimed these were solid earnings but nobody was calling them outstanding. Lukewarm was the adjective being used a lot. JP Morgan is contracting as they pursue opportunities with less risk and heal from the tens of billions in fines and settlements. With the new banking rules and the new regulations for originating mortgages the revenue declines are likely to continue. JPM shares were up fractionally after the news.

JPM said it had to replace two-million credit cards after the Target breach by hackers. Bank analyst Dick Bove warned that he would be cautious on owning JPM in 2014 because they are a long way from putting the litigation behind them. There are more fines and lawsuits ahead.

Wells Fargo (WFC) reported earnings of $1.00 compared to estimates of 98 cents. Revenues declined -5.8% to $20.66 billion and slightly below consensus. Mortgage originations declined -37.5% to $50 billion, down from $80 billion. The bank warned that originations would continue to decline. Loan loss provisions declined -$600 million to $15.0 billion. Total loans outstanding were $825.8 billion, up +$13.5 billion from Q3. Wells Fargo shares rose only 3 cents after the report.

Analysts had thought the financial earnings would be strong enough to lift the market ahead of the broader range of earnings reports next week. If the big banks continue to report along the lines of JPM and WFC there may not be any support.

In other news Tesla (TSLA) rallied +$22 after the company said it delivered 6,900 Model S cars in Q4 and 20% more than previously expected. Elon Musk said the foreign sales of the car have been very strong. In Q4 the Model S sold more in Norway than any other car. Musk said they were shooting for 800+ cars per week in 2014, which would equate to a minimum of 41,600 cars compared to just over 20,000 cars in 2013. The right hand drive model will begin to be delivered in April and this will greatly improve demand in those countries with right hand drive.

Musk took to the airwaves to dispute the claim by the NHTSB that the software upgrade to prevent overheating of the charging cable adapters was a recall. Musk said it was an upgrade to compensate for weak wiring in customer garages rather than a recall. He said the software upgrade was distributed over the air the same way a cell phone operating system is upgraded. Most customers never even knew their OS for the Model S was upgraded. He also said the upgrade was to combat wiring problems in the garages not any defect in the Model S.

Tesla will report earnings next month and Musk alluded to some new revelations along with strong earnings. The Model X SUV is on track to begin delivering in early 2015 and the compact Model E deliveries are going to be dependent on the new battery plant being built in a joint venture by Tesla and Sony.

GM (GM) announced a dividend of 30 cents. It was the first dividend since May 2008. This comes after the treasury sold the last of its shares in December for a $10.5 billion loss. Shares of GM rose +3% to $41.20 in afterhours trading.

Boeing (BA) was in the spotlight after another battery failure and fire on a 787 in Japan. The smoking battery was discovered in a regular maintenance check when engineers saw smoke coming out of the parked aircraft. Upon inspection one cell in an 8 cell battery had failed. Boeing inspected the aircraft and said the engineering upgrade they added in 2013 performed as expected and prevented the fire from spreading and vented the smoke to the outside of the aircraft. They said if the failure had occurred in flight there would have been no danger. Just between you and me I prefer to fly in planes without melting batteries. Boeing shares dropped at the open but recovered to close down only 69 cents on the news.

GameStop (GME) crashed -20% after the company warned that lower game prices would significantly lower earnings. The company cut its outlook to a range of $1.85 to $1.95 compared to prior guidance of $1.97 to $2.14. The company said consumers were moving towards the cheaper games. Analysts said the movement from consoles to mobile platforms was pressuring the GameStop business model.

Intuitive Surgical (ISRG) rallied +$50 at the open after the company reported revenue of $576 million compared to consensus estimates of $549.1 million. The company will report earnings on January 23rd. The company said sales of the Da Vinci robotic systems but accessories sales rose 6% as more operations were performed. Sales of the machines had declined after numerous reports of injuries as a result of machine malfunctions. Shares rallied +$50 at the open but declined to close with a +$27 gain.

Easy come, easy go. Last week Intercept Pharmaceutical (ICPT) spiked from $80 to $450 in two days. This week the stock has declined from $450 to $250 in two days. Shares of ICPT declined -109 today alone to close at $253. The rapid decline came after news broke that cholesterol levels spiked in patients taking the OCA-NASH drug that sent the shares higher last week. Also, the CEO noted after a presentation on Monday that the company may need the assistance of a larger drug maker as a partner to help bring the OCA drug to market.

I am not a doctor but if I was dying of that liver disease I think a spike in cholesterol would be the least of my problems. I think everyone would agree that a spike from $80 to $450 was greatly overdone and profit taking was to be expected. I welcome it since it will bring the stock back to earth where we can eventually buy it.

3D printer maker Stratasys (SSYS) lost $10 after warning that rising costs would pressure earnings. SSYS preannounced earnings that were lower than expected. The company said earnings would be in the range of $2.15-$2.25 compared to analyst estimates of $2.33. However, revenue would be higher at $660-$680 million compared to estimates of $656 million. The company said operating costs would rise in 2014 as it increases spending on R&D and sales and marketing programs. Makerbot, acquired by SSYS last year, is exceeding expectations and will be accretive by the end of 2014. Most of the other 3D printer companies declined on the news. 3D Systems (DDD) fell -$7.50 on the news but recovered to close with only a -37 cent loss.

Rally or short squeeze? Obviously nobody knows for sure. One thing for sure the decline on Monday was so negative that plenty of bears jumped on as the slide accelerated towards the close. That means the market was heavily shorted at the close. All it took was a little good news and a lot of investors waiting to buy the dip for the Tuesday short squeeze to begin.

If you pay attention to the investing press they have been expecting a decent dip since 2014 began. Monday was a decent dip and was apparently the catnip investors needed to lure them back into stocks. The dip to 1,820 was rebound right to the 30-day average and technical support. The rebound back to 1,838 was exactly to strong resistance that caused so much grief last week.

The setup for the rest of the week should be positive since we tested the downside and buyers rushed in. All we need now is some positive earnings and economics to help improve market sentiment and push the S&P over 1,843 and finally over 1,850. Those positive factors may be tough to come by.

If the market was to roll over again and the S&P move below 1,830 I think we will set new lows. One day does not make a trend and that goes for both Monday and Tuesday. The trend right now is sideways consolidation and until that changes we are just passing time.

The Dow is the trouble maker this week. After a -179 point decline the rebound only gained +115 points. The Dow fell below its recent trend channel and the rebound looked a lot more like short covering than new buying while the Nasdaq looked like new money coming to market.

The Dow fell to 16,240 and just barely rebounded above the downtrend resistance at 16,350. If it were not for a buying spurt at the close we would be under that resistance level.

When the common investor thinks of the market they think of the Dow. "What did the market do today? The Dow was up +115." At least a +115 gain is positive and erases the negative connotations of the -179 point decline on Monday. However, it is still in a downtrend. If the Dow fails to continue its gains on Wednesday the rest of the market could roll over as well. The line in the sand for me is 16,330. If we break below that level I expect lower lows.

The Nasdaq is our hero today. The rebound from the support from the January 6th lows was very strong and the close was a new 13 year high. We can't complain about the tech sector and while it did stop right at uptrend resistance the index appears poised for a breakout.

I hope by putting those words in print I did not jinx the rally again. I believe that despite the Monday dip and the lackluster performance year to date that the Nasdaq wants to go higher. A breakout here could drag the other indexes out of their underperformance mode and send the entire market higher. Of course the we have a battle developing between the Dow and the Nasdaq with each moving in the opposite direction.

The Russell 2000 lagged the Nasdaq in performance and failed to return to strong resistance at 1,165 but came close. The Monday drop pierced the strong support at 1,147 intraday but rebounded to close at 1,148 to avoid a technical breakdown. If the Russell could move above 1,165 to a new high and the Nasdaq continue its gains there will be a significant improvement to market sentiment.

After two days of triple digit Dow moves we are right back where we closed on Friday for the Nasdaq and Russell 2000 with the S&P only lagging a couple points. All the drama of the last two days has left traders in a state of confusion. The S&P futures have been flat since the close as nobody seems to have a directional clue.

In a perfect world I would like to see the Nasdaq and Russell positive and the S&P over 1,865 before committing new money to the market. Unfortunately this is not a perfect world.

Today is the LAST DAY for the End of Year Subscription Special. This is the best price of the year so renew now and save money. This is a new year so the subscription price can be your first deduction for 2014.

Enter passively, exit aggressively!

Jim Brown

Send Jim an email


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New Plays

Rentals & Radio

by James Brown

Click here to email James Brown


Avis Budget Group, Inc. - CAR - close: 40.68 change: +0.94

Stop Loss: 39.40
Target(s): 45.00
Current Gain/Loss: unopened

Entry on January -- at $--.--
Listed on January 14, 2014
Time Frame: Exit PRIOR to earnings in mid February
Average Daily Volume = 1.3 million
New Positions: Yes, see below

Company Description

Why We Like It:
CAR is in the services sector. The company provides car and truck rentals around the world under its Avis and Budget brand names. The stock has seen significant momentum over the last couple of months but the rally stalled near $40 in January. Now after two weeks of digesting gains and consolidating sideways CAR looks poised to breakout higher.

I am suggesting a trigger to open bullish positions at $40.85. If triggered our target is $45.00.

Trigger @ 40.85

Suggested Position: buy CAR stock @ (trigger)

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

Buy the Feb $40 call (CAR1422B40) current ask $2.35

Annotated chart:

Pandora Media - P - close: 34.13 change: +1.60

Stop Loss: 32.65
Target(s): 39.50
Current Gain/Loss: unopened

Entry on January -- at $--.--
Listed on January 14, 2014
Time Frame: exit PRIOR to earnings on February 5th
Average Daily Volume = 9.6 million
New Positions: Yes, see below

Company Description

Why We Like It:
Pandora is in the services sector. The company provides an online Internet radio service with over 175 million registered users. The stock shot higher in early January after announcing its latest metrics with Pandora gaining market share. Part of the rally was potentially short covering since the most recent data listed short interest at 18% of the 154 million share float. Additional gains could spark more short covering.

Currently Pandora is hovering below what looks like short-term resistance near $34.50. I am suggesting a trigger to open bullish positions at $34.55. It is possible that the $35.00 level could be round-number resistance so readers might want to wait for a breakout above $35.00 instead as an alternative entry point. If we are triggered at $34.55 our target is $39.50. However, we will plan on exiting prior to Pandora's earnings report on February 5th.

Trigger @ 34.55

Suggested Position: buy P stock @ (trigger)

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

Buy the Feb $35 call (P1422B35) current ask $2.34

Annotated chart:

In Play Updates and Reviews

No Follow Through Lower

by James Brown

Click here to email James Brown

Editor's Note:
The stock market did not see any follow through lower on yesterday's decline. Quite the opposite! The U.S. market delivered a big bounce. We're updating stop losses on all of our bearish plays.

STRZA has been removed. TX hit our entry trigger.

Current Portfolio:

BULLISH Play Updates

TD Ameritrade Holding Corp. - AMTD - close: 31.32 change: +0.75

Stop Loss: 30.45
Target(s): 33.85
Current Gain/Loss: + 2.2%

Entry on December 31 at $30.65
Listed on December 21, 2013
Time Frame: exit PRIOR to earnings on January 21st
Average Daily Volume = 1.9 million
New Positions: see below

01/14/14: AMTD displayed some relative strength today. Shares added +2.45% and closed at a new multi-year high. I am raising our stop loss up to $30.45. I am not suggesting new positions at this time since we're running low on time.

current Position: long AMTD stock @ $30.65

01/04/14 new stop loss @ 29.90
12/31/13 triggered at $30.65

Caesars Entertainment - CZR - close: 22.62 change: -0.27

Stop Loss: 21.80
Target(s): 26.00
Current Gain/Loss: + 0.0%

Entry on January 06 at $22.62
Listed on January 04, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 836 thousand
New Positions: see below

01/14/14: CZR Suffered some weakness today, which may have been a market reaction to online gambling news. The state of New Jersey released numbers on the first six weeks of legal online gambling, which saw casinos bring in $8.37 million in revenues. That number may have been lower than expected. Shares of CZR spiked down to support near $22.00 before quickly bouncing back. I am not suggesting new positions at this time.

Earlier Comments:
FYI: The Point & Figure chart for CZR is bullish with a $27.00 target.

*small positions*

current Position: long CZR stock @ $22.62

01/11/14 new stop loss @ 21.80
01/06/14 trade opened on gap down at $22.62

Lannett Company, Inc. - LCI - close: 36.24 change: +0.47

Stop Loss: 33.95
Target(s): 39.50
Current Gain/Loss: +3.1%

Entry on January 10 at $35.15
Listed on January 09, 2014
Time Frame: exit PRIOR to earnings in early February
Average Daily Volume = 261 thousand
New Positions: see below

01/14/14: Traders bought the dip in LCI just before lunchtime today and shares rallied to a +1.3% gain. I am inching our stop loss up to $33.95. Today's intraday bounce could be used as a new bullish entry point.

Earlier Comments:
Our target is $39.50. However, we will plan on exiting prior to LCI's earnings report in early February (no date confirmed yet).

current Position: Long LCI stock @ $35.15

01/14/14 new stop loss @ 33.95
01/13/14 new stop loss @ 33.65
01/10/14 triggered @ 35.15

MDC Partners Inc. - MDCA - close: 26.28 change: +0.94

Stop Loss: 24.95
Target(s): 28.50
Current Gain/Loss: + 0.3%

Entry on January 09 at $26.20
Listed on January 07, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 215 thousand
New Positions: see below

01/14/14: Good news! MDCA displayed relative strength with a +3.7% bounce that erased the last two days of declines. I am raising our stop loss up to $24.95.

current Position: long MDCA stock @ $26.20

01/14/14 new stop loss @ 24.95
01/09/14 triggered @ 26.20

Ternium S.A. - TX - close: 32.09 change: +0.63

Stop Loss: 29.90
Target(s): 35.00
Current Gain/Loss: + 1.1%

Entry on January 14 at $31.75
Listed on January 13, 2014
Time Frame: exit PRIOR to earnings on Feb. 19th
Average Daily Volume = 204 thousand
New Positions: see below

01/14/14: Our new TX Trade is off to a good start. The plan was to launch positions at $31.75. Shares gapped open higher at $31.74 this morning and then rallied to a +2.0% gain. If you're worried about chasing a four-day rally then consider buying a dip in the $31.50-31.75 area.

Earlier Comments:
Our target is $35.00 but we will plan on exiting prior to TX's earnings report in February.

current Position: long TX stock @ $31.75

01/14/14 triggered @ 31.75

Yandex N.V. - YNDX - close: 43.78 chnage: +1.13

Stop Loss: 41.90
Target(s): 48.50
Current Gain/Loss: + 1.1%

Entry on January 02 at $43.31
Listed on December 31, 2013
Time Frame: exit PRIOR to earnings in mid February
Average Daily Volume = 2.7 million
New Positions: see below

01/14/14: I am still urging caution with our YNDX trade. The stock delivered a nice bounce (+2.6%) but today's session was inside of yesterday's range. That makes today an "inside day" and could suggest indecision by traders. I am not suggesting new positions.

Earlier Comments:
Our multi-week target is $48.50. We want to keep our position size small to limit our risk. FYI: The Point & Figure chart for YNDX is bullish with a $48.00 target.

*Small positions*

current Position: long YNDX stock @ $43.31

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

Long Feb $45 call (YNDX1422B45) entry $2.00*

01/08/14 new stop loss @ 41.90, warning! today looks like a potential bearish reversal pattern
01/07/14 new stop loss @ 41.75
01/02/14 trade opened on gap higher at $43.31.
*option entry price is an estimate since the option did not trade at the time our play was opened.

BEARISH Play Updates

Best Buy Co. - BBY - close: 37.05 change: +0.19

Stop Loss: 38.05
Target(s): 35.10
Current Gain/Loss: + 3.7%

Entry on January 08 at $38.47
Listed on January 07, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 4.2 million
New Positions: see below

01/14/14: Warning! The action in BBY today almost looks like a potential bullish reversal. Shares saw a sharp drop to $35.67 this morning but BBY managed a strong bounce back. If you're holding the put option you may want to lock in gains now.

I am not suggesting new positions. We will adjust our stop loss down to $38.05.

Earlier Comments:
Our target is $35.10. More aggressive traders could aim for technical support at the simple 200-dma.

current Position: short BBY stock @ $38.47

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

Long Feb $38 PUT (BBY1422N38) entry $2.06

01/14/14 new stop loss @ 38.05
01/08/14 BBY opened at $38.47

Ecopetrol SA - EC - close: 35.43 change: +0.12

Stop Loss: 36.25
Target(s): 31.00
Current Gain/Loss: + 5.1%

Entry on January 06 at $37.35
Listed on December 30, 2013
Time Frame: 6 to 8 weeks
Average Daily Volume = 716 thousand
New Positions: see below

01/14/14: EC has not move much the last few days. The slowing momentum could be a warning signal for traders that EC is nearing a bounce. I am not suggesting new positions. We will adjust our stop loss to $36.25.

Earlier Comments:
Our target is $31.00. Once it's below $37.50 the next level of support appears to be the $30.00 level.

current Position: short EC stock @ $37.35

01/14/14 new stop loss @ 36.25
01/08/14 new stop loss @ 38.25
01/06/14 triggered @ 37.35

Sears Hometown and Outlet Stores - SHOS - close: 23.10 change: +0.66

Stop Loss: 23.55
Target(s): 20.25
Current Gain/Loss: + 3.3%

Entry on January 07 at $23.90
Listed on January 06, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 160 thousand
New Positions: see below

01/14/14: Ouch! SHOS has cut our potential gains almost in half with a big +2.9% bounce today. Given the afternoon ramp up in shares more conservative investors may want to just abandon ship right now. We're adjusting our stop loss down to $23.55.

current Position: short SHOS @ $23.90

01/14/14 new stop loss @ 23.55
01/11/14 new stop loss @ 25.05


Starz - STRZA - close: 29.83 change: -0.15

Stop Loss: 29.45
Target(s): 34.75
Current Gain/Loss: unopened

Entry on January -- at $--.--
Listed on January 11, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.7 million
New Positions: see below

01/14/14: STRZA delivered a disappointing session on Tuesday. On one hand STRZA did rebound from its lows and the short-term trend of higher lows remains intact, which is bullish. However, on the other hand STRZA did not really participate in the market's widespread bounce today. That's a troubling sign. We're electing to drop STRZA as an active candidate. Our trade did not open.

Trade did not open.

01/14/14 removed from the newsletter. suggested entry trigger was $30.75