Option Investor

Daily Newsletter, Thursday, 7/10/2014

Table of Contents

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

Market Wrap

Small Worries Big Decline

by Thomas Hughes

Click here to email Thomas Hughes
A handful of small global fears turned into a basket full of worry sending the markets seeking support.


It's amazing just how much can change overnight. I went to bed thinking there would not be much for the market to think about today and woke up with a plateful of market moving events. What happened? A domino effect of small worries swept the globe and sent the markets seeking support. I will begin where the trading day always begins, in Asia. Asian markets began the day in positive territory following the rally in our market yesterday. Soon after the open of trading in Japan new data revealed that machine order fell by nearly -10% versus an expected gain of about 5%. This news sent the Japanese indices plummeting. Next up, in China, weak import/export data left Shang Hai and Hong Kong indices mixed and confused. The data shows that both imports and exports rose in the current data but that neither were as strong as hoped. Both pieces of data renewed talks of potential stimulus moves that may or may not be needed by the respective central banks.

The bearish sentiment only gained strength in Europe. Traders already concerned with growth in Asia were hit with a one two punch from their industrial production data and a growing unease over the state of Portugese banking giant Banco Esperito Santo. Industrial production fell throughout the EU with noted weakness in the peripheral countries including Portugal. While being a small concern in the near term, Portuguese banking has little to do with us so far as I know. France was another country with a notable decline in production. EU indices fell hard during their trading day, only finding support after the open of the US market. The early indication here at home was for a much lower open, in the range of -1% or better. A little good news was released in the early part of the morning but it did not seem to have much affect; jobless claims fell more than expected.

Other news that may have had an affect on early trading includes the growing round of violence in Israel and the West Bank.

Futures trading was markedly down throughout the morning. The SPX was indicated lower by nearly -20 points going into the open. Once trading began the indices did indeed open lower and move down to the indicated levels they did not slam down to support like I thought they might but drifted, almost gently, down to support. Almost as soon as the SPX reached the 1950-1955 level it began to show signs of buying activity and began its move back higher. The rest of the day saw the indices push their way back up to near yesterday's closing prices but not quite. The sluggish trading may not be over but I think it is safe to say that at least for now the indices seem to have support at or below today's closing prices. There is still concern for earnings and the need for positive economic data is as strong as ever but next week promises to provide plenty of opportunity to fill that need.

The Economy

Initial claims for unemployment, released before the bell at 8:30AM, fell more than expect from last weeks unrevised numbers. Claims fell by -11,000 to 304,000. This is just of the long term lows set a few months ago. This is better than expected, analysts had estimated that claims would remain steady at last weeks reported 315,000. The four week moving average also fell, to 311,500. On an unadjusted basis claims gained by 16,542 or 5.4%. On the table of adjusted data claims are trending lower and could break through 300K any time. However, this may not need to happen for the labor market to improve. With so many available workers it makes sense to me that there is going to be turnover until the jobs find the workers they like and the workers find the jobs that they like. On a state by state basis NJ and MA led with increases in claims of +8,579 and +4,566. California and Pennsylvania had the biggest declines with drops of -7,294 and -4,608.

Continuing claims, a slightly better gauge of employment trends, gained 10,000 from last week's revised figure. Last week was revised lower by -5,000 making this weeks gain an actual +5K. This is just off the 7 year low. Although this is the third weekly rise in continuing claims the over all trend here is still down. Total claims for unemployment, which is not revised, fell by -3,427, a negligible amount. Total claims remain at long term lows and trending lower.

At 10AM wholesale inventories were reported as rising 0.5%, as expected. There were no major revisions to last months data. The sales component of the data rose by 0.7%. This is a factor in GDP and part of 2nd quarter data.

The Gold Index

Gold prices made a big move higher today. The lack of firm indication of when interest rates will rise was one catalyst along with possible flight to safety sparked by the early sell off in global stocks. Adding to the bullishness may also have been a hope that the new government in India would lower gold tariffs which now stand at 10%. Gold shot up by roughly $20 on an intraday basis but fell back just before the close. Gold settled today above $1340. The move by India, or lack of move, could add to downward in pressure in gold prices over the next week. Economic data next week will also play an important factor.

The India government did not lower the tariff on gold, a move that many had hoped would increase consumption. This may be why gold prices did not close at the day's high and why the Gold Index, which can often foreshadow gold prices, created a bearish candle with a long upper shadow. The Gold Index moved strongly higher after the open, shadowing gold prices, but then fell back from strong resistance at $105 with a growing divergence in the indicators. Both MACD and stochastic are bullish at this time so there could be more testing of resistance but I refrain from getting bullish on this one. At best the gold sector has bottomed but I'm not calling that either.

The Oil Index

Oil prices fell in the early part of the day as global growth fear was gripping the market. That lasted bor a little while and then prices started to slowly creep back up into the green. WTI settled just under $103 today with a 0.65% gain. Brent also gained but only about a half percent. Although there are many concerns for oil traders now including global growth concerns, potential increase in Libyan supply and other sources of potential disruptions none of them are realities yet so oil prices may hover in this range until something changes.

The Oil Index fell hard this morning during the early sell off breaking support. The index was able to regain its footing before the close but it looks like it may test support further or even move down to next support. Bearish momentum is on the rise still and there is a ways to go before stochastic is oversold. A break below 1650 would find support just below that in the range of 1600 to 1625. The longer term trend is up in the sector so this may turn out to be another opportunity for the bulls. Earnings will be the factor of course, along with oil prices, the economy etc. The oil companies tend to report about a month into the season. Today Connoco Phillips raised it's dividend by 5.8% to $0.73 per share.

Sector Watch

The Utilities sector was today's leading sector, followed by technology. This could be due to the higher rates of dividend returns typically found in the sector. The Dow Jones Utility Average added another half percent to a bounce from long term support begun late last week. This support is the previous all time and long term resistance turned support. The index is trending higher in the long and short term with stochastic and MACD both consistent with a strong market. In the near term the index is indicated lower further testing of support is not unlikely. Top names in the sector report earnings toward the end of the month and in the first week of August.

In The News

Costco June comp sales rose 6%, ahead of the expected 5.5%. This was on higher gas prices. Net sales for the five weeks in June were up 10%. Shares of Costco opened lower but found bullish momentum which carried about a quarter point higher. MACD and stochastic are on the rise but the stock is still beneath resistance. A break above $119 would be bullish.

Family Dollar missed estimates and revenue by a small margin. The consensus estimate was for adjusted earnings of $0.89, the actual was only a few pennies shy at $0.85. The good news is that the company guided to the high end of the range for the next quarter. Shares of Costco opened sharply lower but found support at $62.50 and, after a wild day of trading, closed only about a quarter percent lower than yesterday's closing prices.

The Indices

The Nasdaq suffered today's worst declines falling more than -1.25% at the open. The tech heavy index opened right at the 30 day EMA, just below long term support. Almost immediately the index found buyers who quickly pushed it back up break even. There were quite a few techs among today's leaders with some big names posting gains in today's session. The Nasdaq itself closed in the red but created a large white candle moving up from the moving average and retaking support levels. The indicators are still bearish but if support holds will quickly turn. There could be a retest of support at 4350 until either the data or the earnings dictate longer term direction.

The SPX did not open at support but quickly moved down to it. The broad market opened only slightly lower, then drifted down to support before bouncing back up to break even during the day. As I mention earlier the SPX, once it moved down to the 1950-1955 zone, immediately found buyers. This support level is coincident with the EMA for added confirmation. The indicators are still bearish, but also still weak, and consistent with a test of support for now. Until further developments this is looking like another buy on the dip scenario with a possible retest of the 1950 region before moving higher.

The Dow Jones Industrial Average also fell today from a slightly lower opening. The blue chips were actually able to pierce the moving average before finding support but find it they did. Momentum has just turned bearish on this one but is so weak, and with the previous peaks so weak, it still looks more neutral than anything else. The stochastic only adds to the feeling of sit-and-wait. This indicator is still firmly in the middle of the range, consistent with support and yet showing no real sign of direction. Earnings could be the ticket, one way or another.

The Transports continue to lead the other indices. The Dow Jones Transportation Average fell only -0.23% today, the least of the four majors I tend to follow. The index opened slightly lower. Moved down to test support at the moving average and top of my bull triangle before moving back to brush break even and then fall back to close near the open. Momentum is bearish but consistent with support in the near term. As for stochastic, %D is flat, flat. I'm not sure what to make of it except that the near and short term are in synch with no direction.

Today was a wild day. It was one of those days when I started out thinking Oh No and ended up thinking nothing to worry about. Yet. What happened today is a ripple of fear swept the market and sent the indices running for cover. These fears are not misplaced but I think for now are over blown. This is how I see it; Japan isn't in awesome shape but it hasn't been for decades, but it's getting a little better. China is China, we will never really know for sure anything that goes on over there but the data, although weak, was expansionary. In Europe, Portuguese banking is a problem for the Portuguese, the ECB and the EU. Its a small country that won't affect us too much but could cause the ECB to act in some way which, in the end, would be good for the economy.

What we really need to focus on now is the earnings. So far its hard to say. Earnings from Alcoa were good but there have been some warnings. Tomorrow the big banks begin Wells Fargo, the bulk of them reporting mid to late next week. There are also quite a few other big names reporting next week as well, not to mention all important housing, inflation data, Fed Beige Book and US Industrial Production.

Until then, remember the trend!

Thomas Hughes

New Plays

A Few Trading Ideas

by James Brown

Click here to email James Brown

Editor's Note:

Thursday was another rough day for stocks. The S&P 500 spiked down at the open and was down -1.0% before bouncing. The large cap index did recover most of its losses but it's now down three out of the last four days.

Meanwhile the small cap Russell 2000 index continues to underperform. The $RUT gapped down this morning and essentially bounced off potential support near the 1,150 level and its simple 150-dma. Currently the $RUT is right in the middle of its 1,080-1,210 range over the last few months.

The big bounce off this morning's lows is somewhat encouraging but there is no guarantee the pullback is over.

I am not adding any new trades tonight but I will mention a few stocks that caught my eye.

ADM looks interesting. The company has earnings on August 5th. ADM displayed relative strength today with a +2.6% gain The stock's all-time high is $48.95 (from 2008). The trend is up but the $49-50 zone could be significant resistance.

DV also looks interesting. DV is scheduled to report earnings on August 7th. Shares have a long-term up trend and are just now starting to rally off technical support near its 100-dma and pattern of higher lows. Today's high was $44.89. I would be tempted to buy a breakout past $45.00. The $50.00 level is probably resistance and I would not hold over the earnings announcement.

GB also caught my eye. They are in the medical appliances and equipment industry. GB is due to report earnings on July 31st. I think GB has potential on a rally past its July 1st high of $50.65 but I would not hold over the earnings report.

These are not official newsletter trades but merely ideas that might be worth your attention.

We will definitely put in some extra effort to find new trades for the weekend newsletter!

In Play Updates and Reviews

A Gap Down Open

by James Brown

Click here to email James Brown

Editor's Note:
Investors were in such a rush to sell stocks this morning that many U.S. equities gapped open lower. Yet there was very little or no follow through and the market recouped a good chunk of its losses by the closing bell.

The opening weakness was enough to stop out BITA and WCN.

Current Portfolio:

BULLISH Play Updates

Microsoft Corp. - MSFT - close: 41.69 change: +0.02

Stop Loss: 39.90
Target(s): To Be Determined
Current Gain/Loss: - 0.4%

Entry on June 17 at $41.85
Listed on June 14, 2014
Time Frame: 10 to 12 weeks
Average Daily Volume = 23 million
New Positions: see below

07/10/14: I cautioned readers that we might see MSFT test support near $41.00. Shares hit $41.05 during the market's drop this morning. MSFT rebounded back to virtually unchanged by the closing bell.

The PC-related tech industry got some good news today. IDC Worldwide Quarterly PC tracker said Q2 PC sales around the globe only fell -1.7%. Previous estimated suggested we could see PC sales fall -7.1%.

Earlier Comments: June 14, 2014:
It's back to the future with old-tech heavyweights making progress on Friday. Semiconductor giant Intel (INTC) surprised the market with an announcement Thursday night. INTC raised their revenue guidance due to stronger PC sales. That's right, they said stronger PC sales. Intel chips are in about 80% of the world's PCs. Unfortunately the PC has been declared dead for years due to the explosion of laptops, smartphones, and tablets. It is true that PC shipments have been falling for the last eight quarters in a row. IDC expects PC shipments to fall another -6% in 2014. If that's true then what's the story behind Intel's positive guidance? It might be Microsoft.

Microsoft ended support for its Windows XP operating system in April this year. No more support means they would no longer provide patches or virus updates to protect your system from hackers. With credit card data being stolen a constant threat for businesses the lack of support for XP has sparked an upgrade cycle, especially among corporations.

There does seem to be some disagreement on just how long and how big of an effect this upgrade cycle will last. Was it a one quarter bump or will it last throughout the rest of 2014? An FBR analyst estimates that 25% of the PCs connected to the Internet still run Windows XP. That is a very large number so the upgrade cycle for Microsoft could last a while. It could be bigger than expected too.

Not only are consumers and businesses going to upgrade their operating system from Windows XP to Windows 8 but they will most likely buy an upgraded copy of Microsoft Office. MSFT will likely sell a few more copies of SQL server as well.

The MSFT story is not just about software either. The company seems to be making in-roads into the healthcare sector with their Surface Pro 3 tablets. MSFT is also slugging it out with Sony in the game console wars. Consumers bought $3.6 billion in video games in the first quarter of 2014. MSFT's line up of games for its Xbox One looks pretty good following the annual E3 conference last week.

Technically shares of MSFT are in a long-term up trend and hitting 14-year highs. As an investor would you rather buy a 10-year bond with a 2.6% yield or MSFT with a 2.7% yield and good chance for price appreciation?

More conservative investors may want to wait for a rally past $42.00 before initiating positions.

current Position: long MSFT stock @ $41.85

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

Long 2015 Jan $45 call (MSFT150117c45) entry $1.16

06/30/14 new stop @ 39.90
06/17/14 triggered @ 41.85
Option Format: symbol-year-month-day-call-strike

SoftBank Corp. - SFTBY - close: 36.54 change: -0.86

Stop Loss: 35.35
Target(s): To Be Determined
Current Gain/Loss: -0.4%

Entry on June 17 at $36.68
Listed on June 16, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 499 thousand
New Positions: see below

07/10/14: SFTBY underperformed the rest of the market today with a -2.2% decline. Shares have closed below their simple 50-dma and settled on the exponential 200-dma near $36.50.

Currently our stop loss is at $35.35. More conservative investors may want to raise their stop closer to $36.00 instead.

I am not suggesting new positions at this time. Resistance remains overhead near $38.50.

Earlier Comments: June 16, 2014:
SoftBank Corp. has been referred to as the Warren Buffet of Technology although a better comparison is probably to Buffet's Berkshire Hathaway. They are a holding company with hundreds of businesses. According to the company website SFTBY has 235 subsidiaries and 108 affiliates (including 150 consolidated subsidiaries and 83 equity method companies). SoftBank Group possesses both advanced infrastructure and diverse services and content, and invests in promising companies working in the Internet field.

SFTBY owns 80.2% of Sprint Corp., 33.3% of eAccess Ltd., 100% of WILLCOM, Inc., 33.3% of Wireless City Planning Inc., 58.5% of GungHo Online Entertainment, and 42.5% of Yahoo Japan Corp. They also own 34% of Renren Inc., which is considered the Chinese version of Facebook. They also own 36.7% of Alibaba Corp., which is a much larger and more profitable version of Amazon.com. That's on top of owning SoftBank Telecom, SoftBank BB Corp. and SoftBank Mobile.

SFTBY's combined telecom assets makes the company one of the largest telecom/wireless players in Japan. In 2013 they added 4.1 million new subscribers and more than double the 1.19 million subscriber gain by NTT DoCoMo and 2.8 million for AU, which is owned by KDDI. Softbank added 47% of the Android phones activated in Japan and 39% of the iPhone 4s and 5c models. Both metrics are the largest in Japan and shows how Softbank is gaining market share.

Their Renren investment could be a big. China already has the largest Internet audience on the planet and it's only going to get bigger. Currently Renren has about 200 million users. This will grow. Like Facebook, Renren is developing its mobile platform. Renren is currently valued at about $8 per user but this seems extremely low considering what Facebook paid for WhatsApp.

SFTBY's majority stake in Sprint is starting to pay off. Sprint has had a rough few years working through its merger with Nextel. Sprint later acquired Clearwire. It looks like Sprint is now in recovery mode after adding +477,000 subscribers in Q4 2013 versus losing -337,000 in Q4 2012. SFTBY wants to acquire T-Mobile and combine it with Sprint. Currently 75% of U.S. customers are on AT&T or Verizon. SFTBY calls them an American duopoly but they believe by combining Sprint, the third largest carrier, with T-Mobile, the fourth largest, the combined company could compete with AT&T and Verizon, which would be good for competition and ultimately consumers.

Today the real allure of SFTBY is its 37% ownership of Alibaba. Amazon.com (AMZN) is an Internet powerhouse with sales of $86 billion in 2013 and a net profit of $274 million. Alibaba dwarfs AMZN with 2013 sales of $160 billion and a profit of $2.16 billion. Right now it looks like Alibaba will IPO this summer. Analysts have been estimating they could be the biggest IPO in history with a value of $160 to 185 billion.

There were new numbers out on Alibaba today with the company stating that its Q4 revenues only rose +39% to $1.9 billion. That's down from 62% growth in Q3. Margins retreated from 51.3% to 45.3% on higher marketing costs. This spooked investors today into thinking that maybe the valuation may not be in the $160-185 billion range.

We believe that SFTBY's shares are very undervalued and when the Alibaba IPO does hit this stock could soar. Tonight we're suggesting investors launch positions tomorrow morning at current levels. Depending on your trading style this could be an aggressive entry point. Technically SFTBY still has resistance in the $38-39 zone. More conservative investors may want to wait for SFTBY to close above $39.00 before initiating new positions. The risk of not launching positions now is that we do not know when Alibaba is going to announce its IPO. It could be any day and likely in the next few weeks. We will plan on exiting after Alibaba's first day of trading.

Current Position: Long SFTBY stock @ $36.68

06/30/14 new stop $ 35.35
06/17/14 trade opens. SFTBY gapped down at $36.68
note: SFTBY does not have options.

BEARISH Play Updates

None. We do not have any active bearish trades.


Bitauto Holdings - BITA - close: 48.06 change: +1.33

Stop Loss: 43.45
Target(s): To Be Determined
Current Gain/Loss: - 9.0%

Entry on June 30 at $47.75
Listed on June 28, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 933 thousand
New Positions: see below

07/10/14: Ouch! It's been a really rough week for the momentum names. The stock market plunged at the open with many stocks gapping lower. BITA was one of them. Shares gapped down at $44.00 and hit a low of $43.17 before bouncing all the way back to $48.00. That means BITA was down -7.6% at its worst levels of the session and then surged +11.3% off this morning's low.

Our stop loss was hit at $43.45.

I still think BITA has promise but you may want to wait for a close above $50.00 before considering new positions. Or if stocks turn south then a bounce off $40.00 might work as a potential entry point.

Earlier Comments:
Please note I do consider a more aggressive, higher-risk trade. BITA has been a volatile stock in the past. Investors may want to use small positions to limit their risk.

*small positions to limit risk*

closed Position: long BITA stock @ $47.75 exit $43.45 (-9.0%)

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

Oct $50 call (BITA141018C50) entry $5.40* exit $3.75** (-30.5%)

07/10/14 stopped out
**option exit price is an estimate since the option did not trade at the time our play was closed.
07/08/14 readers may want to raise their stop after today's big drop
06/30/14 triggered @ 47.75
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike


Waste Connections, Inc. - WCN - close: 47.62 change: -0.66

Stop Loss: 47.85
Target(s): 49.85
Current Gain/Loss: -0.2%

Entry on June 25 at $47.75
Listed on June 21, 2014
Time Frame: exit before earnings on July 21st
Average Daily Volume = 464 thousand
New Positions: see below

07/10/14: The majority of the stock market seemed to gap down at the opening bell. Shares of WCN were no exception and the stock gapped down at $47.66. That is below our suggested stop loss at $47.85 so the play closed immediately. WCN spent the rest of the day slowly drifting sideways.

closed Position: Long WCN stock @ $47.75 exit $47.66 (-0.2%)

07/10/14 stopped out on gap down at $47.66
07/05/14 new stop @ 47.85
06/25/14 triggered @ 47.75