Option Investor

Daily Newsletter, Thursday, 5/22/2014

Table of Contents

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

Market Wrap

Markets Move Higher

by Thomas Hughes

Click here to email Thomas Hughes
The post Fed minute rally continued today as data stoked investor hopes for global growth.


Yesterday the Fed indicated, through the minutes of the last meeting, that the taper was still on yet the chances of a rate hike are still far off. The rally in US equities inspired by this news carried over into the over night sessions lifting Asian and EU markets. Adding to the positive spin was better than expected data from China and some mixed data from the EU. Chinese flash PMI rose to 49.7 versus the previous final reading of 48.1 in April. This indicates that the pace of contraction in China is slowing and may soon revert to growth as expected. In Europe isolated weakness, France, was overlooked in favor of stronger PMI readings for Germany and the EU as a whole. Flash PMI for the EU is 53.9, in line with expectations.

Early futures trading indicated the markets would open flat to negative ahead of the 8:30 release of jobless claims data. Following the release futures held steady into the open at which time the markets dipped briefly into the red. By 10AM the markets had rebounded from the early lows and moved into positive territory with the S&P 500 tickling current all time high levels. Once the morning highs had been reached the indices tread water going into the lunch hour and held those levels for most of the afternoon. Late afternoon trading saw the indices retreat from their daily highs but remain in positive territory from yesterday's closing prices. The Dow Transports set a new high while the VIX moved down to test a more than one year low.

The Economy

Data started today with the weekly release of unemployment claims. Initial claims for unemployment rose by 28,000 from a mild 1,000 claim revision to last weeks data. Claims were reported at 326,000 in the current data, above the expected range of 310-320,000. The 4 week moving average fell this week, in response to last weeks sharp drop, by -1,000 to 322,500. On an unadjusted basis claims gained 15,638 versus an expected decline of about -1,000. This weeks gain, while not exactly expected, is not too disturbing. Initial claims seem to be bobbing along between 300,000 and 350,000. This may be the new “normal” for this indicator, while other data improves this possibility looks more and more likely. I am beginning to view initial claims as an indication of job turnover more than joblessness. Job turnover can remain elevated provided that job creation and total unemployment are coming down.

Continuing claims and total claims both fell this week. Continuing claims fell by about -13,000 to a new low not seen since December 1, 2007. The previous weeks figure was also revised down by -1,000. This data point is still in decline and suggestive that once someone loses a job it doesn't take too long to find another one. On an unadjusted basis continuing claims fell by more than -50,000. Total claims fell by nearly -85,000 to reach another new low as well. Total claims, which is not revised, was reported at 2.620 million. This indicator of longer term unemployment has been in decline all year, even after the massive drop in claims at the beginning of the year due to expiring benefit extensions.

Existing home sales was reported as expected at +1.3%. The previous months data was unrevised. On a regional basis there were ares of strength and weakness led by gains in the west. This is the first increase in sales this year and are expected to trend upward. Comments within the report noted that inventories were up and prices were down and that the combination would help the home sales market to continue trending up this year.

Leading indicators were also released today. The Index of Leading Indicators gained by 0.4% last month, indicating a gain in activity this month. This is the third month of increases in the index and in line with expectations. The previous 1% increase was unrevised. The Coincident and Lagging Indicators also rose in the current data indicating that last month and the previous month were both a little stronger than expected.

Tomorrow there is only one economic release on the calendar, New Home Sales. Next week Durable Goods is released on Monday followed up by the Case Shiller Index, FHFA Index, Consumer Confidence, 2nd estimate for 1st quarter GDP and Pending Home Sales. There are no earnings reports scheduled for tomorrow.

The Dollar

The Dollar Index strengthened today. The FOMC minutes and mixed EU PMI combined to help this move I think. The minutes are indicative of the taper continuing with the start of interest rate hikes still far off. Mixed EU PMI furthered the speculation the ECB could or would start some form of QE in early June. Today's economic helped as well, adding a little weight to the idea the economy is rebounding as we speak. Regardless, the Dollar Index made a strong move up from support at the 80 level with bullish momentum and stochastic crossing the upper signal line.

The euro fell to a new low versus the dollar. The EUR/USD fell near a three month low in today's session. The next ECB meeting is June 5th, when the governing council has hinted it may begin a Fed style stimulus program. This expectation is being helped by tepid EU data and will likely drive this pair until then.

The Gold Index

Gold prices trade up in the early part of the morning, hovering around $1300 before moving up around $1305 before the open of stock trading. After the bell gold prices fell back below $1300, where it traded the rest of the day. Adding to the pressure on gold are reports of fund outflows. Holdings of gold of the top gold backed funds dropped, led by the Spyder Gold Trust with a drop of 3.3 tons. Although gold price held positive territory following yesterday's FOMC minutes it did not hold above $1300.

The Gold Index traded up from yesterday's close but down from resistance. In the past week the index has fallen beneath the near term support line I have been tracking. Today, prices opened higher, just beneath the line and then traded down from there. This is a possible confirmation of the break of support. The indicators are bearish although momentum is very weak. Stochastic is crossing the lower signal line which can be a sign of impending weakness in some cases. A peek at the longer term chart of weekly closings shows momentum turning bearish and stochastic moving lower as well. With the current set up I would not be surprise to see the Gold Index move lower in the near to short term with my previous targets near the $85 level still in play. Until gold prices firm and move higher there is little reason to expect improving earnings from gold miners.

The Oil Index

Oil prices hovered around $104 for most of the day before falling down near $103.50 in the late afternoon. Reports of violence in the Ukraine mixed with unsubstantiated claims from Putin that his troops have been order to withdraw helped to keep prices higher while better than expected data from China and here at home added downward pressures. Growing unrest in Libya has also helped to boost oil prices over the past week or two. The Oil Index traded to the upside today in a continuation of a moving average bounce begun earlier this week. The expected pullback in the index was very shallow and is bouncing off the short term moving average while capped by resistance at this time. Resistance is right around 1625-1630 at this time and bears close watching. A break above could lead to another move higher for this index. For now, the indicators are still bearish but beginning to roll over. There could be some more consolidation in the near term. Support levels exist near 1600, 30 day EMA, and 1550, previous resistance.

Story Stocks

Retail earnings were in the spot light today. Today, and this week in particular, is heavy with retail earnings. Today Best Buy and others reported what most of the other retailers have as well...less than expected with weak guidance. Best Buy reported a surprise gain in EPS despite missing on revenue and posting a near 2% drop in comp store sales. The company reported $0.33 per share on revenue of $9.04 billion versus an expected $0.20 on revenue of $9.206 billion. Comp store sales fell by -1.9%, analysts had been expecting a drop of -0.8%. Guidance for the next two fiscal quarters includes an expectation for single digit decline of comp store sales as well. The stock, which has been trading in a tight range all year, opened above the 30 day moving average and climbed higher before falling back before the close. This stock has been range bound for months, appears to be range bound now and has little reason to break out now....unless its to the downside. Upper resistance is around $27.50 with support around $22.50.

The Spyder Retail ETF XRT trade to the upside today, moving up by more than 1%. Today's gain was capped by resistance near the $83 level, a level coincident with the middle of a long term trading range. The indicators are incredibly neutral and consistent with a range bound asset. This index may continue to consolidate around the $83 level until the market gets a cleared indication of an improving economy and more importantly an improving consumer.

McDonald's made the news today as the company geared up for its share holder meeting. What made the news was record protests of the company by its workers and fast food employees. Protesters are demanding the right to unionize as well as for a $15 minimum wage. Shares of McDonald's lost about a tenth of a percent in today's session. The stock has been trending up over the past two months and is just off the all time high, supported by the short term moving average.

The Indices

The SPX is still winding up into the point of the current triangle formation. Today's action extended the move from the lower support of the long term trend line up to the resistance of the current all time high begun yesterday, but could not quite break above it. The indicators are once again pointing to an early/weak buy signal but a break above resistance is needed to get bullish on it. In the near term momentum is turning bullish with today's candle but remains weak, stochastic is rolling over and making a weak bullish crossover; Over the longer term both indicators show support along the trend line. At this time I am really just looking for a break of one of these lines. I am still a long term bull and believe the markets are going higher but without that break of support the chances of a correction in the index grow. Resistance 1900, Support 1875 and 1850.

The VIX fell to a new +12 month low today. The so called fear gauge is now at levels only briefly touched in the time since the 2008 financial crisis. This could be seen in two ways. First, it could indicate that the market is extremely calm, fearless and ready to rally. It could also be seen as an extreme of fearlessness in an uncertain time and indicative of an upcoming correction. This certainly goes along with my current analysis of the SPX. The index appears to be at a point of change be it a more up or down and the VIX seems to support it.

The Dow Jones traded to the upside today as well although by a smaller percentage gain. The blue chip index crept up from the short term moving average but remained below resistance. Resistance is the previous all time high with the current all time high just above. Dividend yield could be one thing keeping the index at the current levels; about 2/3's of Dow stocks are yielding about 2.5%, just about what the ten year treasury is yielding. The indicators are weak at this time but rolling over toward bullishness. A break above the current resistance could take the index up to near 17,000 while a failure to break could bring it back to support around 16,250 and 16,000.

The Dow Transports continue to set new highs, which is a bullish indicator in and of itself. The new highs being set by the transports were confirmed, if weakly, by the Dow just last week. Basic Dow theory says that the Transports will often lead the broader markets and that new highs in the Transports should be confirmed by a new high in the Industrials. So far both events have occurred although the indicators on the Transports are divergent. A correction of the up trend could by in the future but for now the index is indicated higher. Support exists around 7600 and 7800 between a longer term trend line and the short term moving average.

The Nasdaq Composite gained a half percent today, leading the big three indices. The tech heavy index moved up from support and the short term moving average today with rising, bullish, indicators. The index is showing support at the current levels following the correction of the past 6 weeks or so and could be gearing up for a move back up to retest the most recent long term highs. Following up from last week's addition of Bollinger â„¢ Bands to the Comp chart I see that they are still narrowing, pointing to further calming of market volatility and echoing the sentiment perceived from the VIX. A break above the upper band would be a bullish signal for me at this time.

Near term fears are still weighing on the market although it appears as if long term trends are still intact and taking back control. Jobless claims remain stable in the near term and are trending lower in the longer term; Leading indicators are positive and show better than expected improvement over the past and current month; home sales are improving and the Trannies are making new highs. There is still resistance for the markets in terms of technical levels and geo politics but I think they are both losing importance.

Tomorrow's trading could be weak due to the 3 day weekend so I wouldn't put much stock into what happens. Next week and the week after will be much more important in terms of the summer outlook for stocks. There will be now reports of earnings tomorrow, only one economic release. There will be no earnings or economic releases on Monday but a few important ones later in the week. Two weeks from now it will be time for new Jobs data.

Until then, remember the trend!

Thomas Hughes


New Plays

Seeing Improvement

by James Brown

Click here to email James Brown

Editor's Note:

Stocks continued to drift higher on Thursday. The S&P 500 is only a few points away from a new all-time high. We're also seeing encouraging moves in the NASDAQ and the Russell 2000. The NASDAQ closed above its 50-dma for the first time in weeks.

We are not adding any new trades to the Premier Investor newsletter tonight. If you feel you must trade something you might want to consider bullish positions on the S&P 500 ETF (symbol: SPY) or the Dow Jones Transportation ETF (IYT) as both look poised to hit new highs.

Keep an eye on the Russell 2000 and resistance near 1120 and its 30-dma and 200-dma. A breakout there could be a turning point for the market.

In Play Updates and Reviews

Watch The Russell 2000

by James Brown

Click here to email James Brown

Editor's Note:
We would keep an eye on the small cap Russell 2000 index tomorrow. Today saw the $RUT testing resistance at its simple 200-dma. It also has potential resistance near the 1120 level (it's currently at 1113).

A breakout in the $RUT could spark stronger gains across the market.

Current Portfolio:

BULLISH Play Updates

American Airlines Group Inc. - AAL - close $38.72 change: +0.40

Stop Loss: 37.25
Target(s): to be determined
Current Gain/Loss: unopened

Entry on May -- at $--.--
Listed on May 17, 2014
Time Frame: 9 to 12 weeks
Average Daily Volume = 10.3 million
New Positions: Yes, see below

05/22/14: AAL has spent a week now consolidating sideways near the $38.00-38.50 zone.

I do not see any changes from our weekend newsletter's new play description.

Earlier Comments:
AAL is in the services sector. AAL is the merger between US Airways and American Airlines (AMR). The new company, American Airlines Group, is the largest carrier with nearly 6,7000 flights a day, over 330 destinations, to more than 50 countries, with over 100,000 employees worldwide.

This $17 billion merger was threatened by the U.S. Justice department last year. Regulators tried to block the merger on fears the new company would be too big, hold too much power, and reduce competitiveness and thus pricing for consumers. A U.S. district judge just recently approved a settlement worked out between AAL and the Justice Department where the new company agreed to sell certain assets to competitors. Getting the legal hurdle for its merger out of the way it's one more worry that investors can forget.

The airlines would also like to forget about winter. The 2014 winter season was brutal for the airline industry. In January and February the Bureau of Transportation Statistics said 6.05% of all domestic flights were cancelled. That number dropped to 4.6% of all flights cancelled in March. Put them all together and you have the worst winter cancellation rate in 20 years. Yet this news has failed to stop the rally in airline stocks. Granted AAL did consolidate sideways for a few weeks but now it is only a couple of points away from new eight year highs.

AAL just recently released data on April. Their revenue passenger miles for April were up 4.7 percent to 18.1 billion in 2014 versus April 2013. Odds are this number is going to improve since summers tend to be more bullish for the airline business.

Wall Street seems keen on shares of AAL. Goldman Sachs recently put a $46 price target on the stock. In the latest 13F filings it was revealed that Paulson & Co had raised their stake in AAL from 8.5 million shares to 12.2 million. Meanwhile David Tepper is the hot fund manager everyone loves and his Appaloosa Management has AAL as its second largest holding. In the last quarter Appaloosa increased their AAL stake by 22.5%.

On a short-term basis shares of AAL are sitting just below resistance at $40.00. I am suggesting a trigger to launch bullish positions at $40.25. We'll start with a stop loss at $37.25, just under this past week's low. I'm not setting an exit target yet but probably somewhere in the $45-50 zone.

Trigger @ $40.25

Suggested Position: buy AAL stock @ (trigger)

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

Buy the Aug $40 call (AAL140816C40)

option format: symbol-year-month-day-call-strike

Arrowhead Research - ARWR - close: 11.46 change: +0.53

Stop Loss: 10.75
Target(s): to be determined
Current Gain/Loss: unopened

Entry on May -- at $--.--
Listed on May 19, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.3 million
New Positions: Yes, see below

05/22/14: Biotech stocks were showing relative strength today. The group looks like they could breakout from a multi-week sideways consolidation soon. If that happens it could give ARWR a big boost.

There is no change from the Monday night new play description.

Earlier Comments:
ARWR is in the healthcare sector. The company is in the biotech industry. Biotech stocks peaked in early March as investors started selling momentum and high-growth names. ARWR was definitely a target for profit taking after a rally from $2.00 a share back in July 2013 to over $25 in March 2014.

Biotech analysts believe ARWR has a lot of potential. The company is working on a treatment for hepatitis B and should have new data available in the third quarter this year. If successful the hepatitis B treatment could be a multi-billion drug as there are over 300 million patients around the world. ARWR currently has a market cap of about $600 million but a Deutsche bank analysts believes ARWR's market cap could surge to $4-to-$5 billion if its hepatitis B treatment is approved. ARWR is also developing new treatments on its RNAi technology.

Make no mistake, this is an aggressive trade. ARWR is an early stage biotech firm with no revenues. Any investment is a belief they will bring successful clinical data and eventually get FDA approval for its drugs in development.

Technically after a drop from $25 to $10 most of the air has been let out of the prior bubble. As investors return to risk on trades we think ARWR could outperform.

Tonight we're suggesting a trigger to open bullish positions at $12.05. We'll start this trade with a stop loss at $10.75.

Trigger @ $12.05

Suggested Position: buy ARWR stock @ $12.05

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

buy the Sep $12.50 call (ARWR140920C12.5)

Delta Air Lines - DAL - close: 38.63 change: +0.29

Stop Loss: 36.45
Target(s): to be determined
Current Gain/Loss: + 2.6%

Entry on May 05 at $37.65
Listed on May 03, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 13.5 million
New Positions: see below

05/22/14: DAL continued to drift higher today. The stock is on track for its sixth weekly gain in a row.

More conservative traders may want to adjust their stop higher. I am not suggesting new positions at this time.

Current Position: long DAL stock @ $37.65

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

Long Sept $40 call (DAL1420i40) entry $2.20*

05/12/14 new stop @ 36.45
05/07/14 new stop @ 35.75
05/05/14 triggered @ 37.65
*option entry price is an estimate since the option did not trade at the time our play was opened.

BEARISH Play Updates

Aegerion Pharma. - AEGR - close: 31.50 change: -0.21

Stop Loss: 32.55
Target(s): to be determined
Current Gain/Loss: unopened

Entry on May -- at $--.--
Listed on May 20, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.4 million
New Positions: Yes, see below

05/22/14: AEGR underperformed its peers in the biotech industry. Shares also underperformed the broader market after the stock reversed near its 10-dma today.

At the moment I do not see any changes from the Tuesday night newsletter's new play description.

Earlier Comments:
AEGR is in the healthcare sector. The company is a biotech firm that develops treatments for rare diseases. This stock delivered a tremendous rally from October 2012 to October 2013. That's when shares revered at the $100 level and it's been downhill ever since. Exacerbating AEGR's decline has been the company's earnings warning. They lowered guidance back in January and they lowered guidance again when they reported earnings on May 7th.

The stock gapped down sharply following the May 7th report and there has been no oversold bounce. Wall Street was expecting revenues of $33.6 million for the quarter. The company only reported $27 million.

AEGR seems to be facing challenges with its only marketed product, Juxtapid. This is an oral treatment for homozygous familial hypercholesterolemia. This is a genetic disorder characterized by extremely high levels of cholesterol, especially the LDL (bad) cholesterol.

Most of the company's sales are in the U.S. Last quarter a large chunk of its sales in Brazil evaporated with a -70% decline due to an investigation into anticorruption laws in Brazil.

There are concerns that AEGR may have to lower the price for its Juxtapid treatments, which currently cost in the $250,000-$300,000 a year range. There are competing treatments for a lot less money. There is also a worry that there may be fewer customers than previously believed. There were some claims that Juxtapid might have the potential to treat 3,000 patients in the U.S. Yet homozygous familial hypercholesterolemia only affects one in a million people. That means there are closer to 300 potential patients in the U.S.

The company is also facing an investigation from the U.S. Department of Justice for comments made by AEGR's CEO when he appeared on CNBC's Fast Money program last year.

The company seems to be facing a lot of negatives and is clearly in a bear market with lower as the path of least resistance. Currently shares of AEGR are testing round-number support at $30.00. We want to wait for a breakdown below $30.00 and launch bearish positions at $29.50. If triggered we will try and limit our risk with a stop loss at $32.55.

Traders should consider this an aggressive, higher-risk trade. Not only can AEGR see big intraday swings but there is a risk of a short squeeze. The most recent data listed short interest at 30% of the small 28.39 million share float. So far the shorts have been right.

We're not setting an exit target tonight but the $20.00 level looks like it could be significant support.

Trigger @ $29.50

Suggested Position: short AEGR stock @ (trigger)

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

Buy the Sep $30 PUT (AEGR140920P30)

Financial Engines, Inc. - FNGN - close: 40.85 change: +0.99

Stop Loss: 42.25
Target(s): to be determined
Current Gain/Loss: - 5.4%

Entry on May 14 at $38.75
Listed on May 13, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 567 thousand
New Positions: see below

05/22/14: FNGN were downgraded this morning but that didn't stop shares from surging +2.48%. The breakout past the $40.00 mark probably sparked some short covering.

FNGN is quickly approaching what should be resistance near the bottom of the gap ($40.95-41.70 zone) and technical resistance at its simple 20-dma. Shares failed near their 20-dma in mid April and early May. Currently this moving average is close to $41.50. These are the levels to watch.

I am not suggesting new positions. (FYI: getting stopped out at $42.25 would be a -9.0% loss)

Earlier Comments:
FYI: The most recent data listed short interest at about 13% of the 50.4 million share float.

current Position: short FNGN stock @ $38.75

05/14/14 triggered @ 38.75

Jacobs Engineering Group - JEC - close: 53.17 change: +0.12

Stop Loss: 54.55
Target(s): to be determined
Current Gain/Loss: + 2.4%

Entry on May 15 at $54.48
Listed on May 14, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.4 million
New Positions: see below

05/22/14: Bearish momentum in JEC has stalled. Although it is worth noting that the market is rising and JEC is not. My concern is that JEC is short-term oversold and due for a bounce.

Tonight we are moving the stop loss to $54.55.

current Position: short JEC stock @ $54.48

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

Long Jun $55 PUT (JEC140621P55) entry $1.65**

05/22/14 new stop @ 54.55
05/17/14 new stop @ 56.15
05/15/14 trade opened at $54.48
**option entry price is an estimate since the option did not trade at the time our play was opened.
*I've provided the more standardized option symbol format.