1. Market Summary
2. Affymax (AFFY) Crumbles, Still a Risky Bet
4. Weekly Wrap Portfolio Update
5. Week Ahead
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1. Market Summary
“If a current market top is in, we were 2 days off as we predicted a rally through March 22 before a possible pullback. We often mention calling a market top or bottom is never easy and trading the market in general takes a daily discipline unmatched by any profession if you want to be good at options trading. We have been bullish since early December and we have stayed strong and long while most Wall Street pros and talking heads were bearish for the last 1,000 Dow points.
We mentioned at the beginning of March that the front half of the month is usually strong while the back half is weaker. Last week’s pullback wasn’t too much to worry about but the small-caps looked weaker than the other indexes. The Russell 2000 has led the charge higher all year and will likely lead the pullback when we do get one. Also, the Dow Transports could be topping and a close below 6,100 would be bearish.
Copper got rocked to start the week and we have been talking about the importance of the metal holding $3.50. If the global economy is on the road to recovery, copper prices would be trending higher. Last week’s dip to $3.38 and the November lows needs to be watched carefully. The market might not care right now about the weakness in copper but it will if it continues to trend lower.
Caterpillar (CAT, $87.48, up $0.65) said global sales are slowing and not growing which is a real concern. FedEx (FDX, $98.48, up $1.98) missed earnings while lowering guidance but both stock rebounded on Friday. The next two weeks could see some warnings from companies who might also miss Wall Street’s marks. First-quarter earnings begin the second week of April so the ones that are going to miss usually try to sneak the bad news in before April.
We haven’t talked about negative Friday/ Monday closes since February because the Dow had been on a 10-week Friday win streak to start the year. The S&P 500 had a lower F/M close back in February but the blue-chips closed lower last Monday for their first negative F/M in 2013. This past Friday was higher and up until now the dips have been bought. We will have to watch Monday’s close but if its negative, along with the upcoming Friday, it could be another clue the market is topping.
The Financial stocks are also beginning to pull back after leading the charge to recent highs. They will need to show strength this week and into April if the bulls are going to make another run at new highs. We are watching the Financials Select Spiders (XLF, $18.17, up $0.11) for clues of a rebound of breakdown. The XLF held $18 but a close below the March 6 low of 17.98 would be bearish while a run past $18.50 would be bullish for the market.
End of quarter fund managers could be locking in gains this week while others who are behind start to chase. This could lead to some continued volatility as window-dressing takes shape. All fund managers are judged by their returns and the ones behind the curve will have some explaining to do.
As far as the political picture, Cyprus will again be the main focus as the zombies here at home will likely avoid the March 27 deadline for a government shutdown. They worked overtime Friday night and passed a bill to keep them funded through the end of September. As far as Cyprus, it appears a deal has been reached with the Eurogroup which is represented by the finance ministers from 17 eurozone nations. They have agreed to give Cyprus 10 billion euros ($13 billion) in aid, in exchange for a levy on some large deposits and the closure of a major bank.
This bit of news should power the market higher to start the week but many of the sectors we have focused on need to rebound as well. Although we have called for a possible pullback this week, we still believe the bulls have one last run in them before a possible 3%-5% pullback. However, if the market ends lower on Monday and support starts to crack throughout the week, expect the bears to make their presence known.” (from 3/24/2013 Weekly Wrap Update)…
The final weeks of March were bearish until Thursday as the bulls won the week and padded their gains for the month and quarter. The back-and-forth battle last week saw the bears test support at the beginning of week but the bulls managed to push fresh all-time closing highs on the S&P 500 while bringing the Dow along for the ride.
The Dow gained 52 points, or 0.4%, to settle at 14,578 on Thursday. The blue-chips traded down to 14,395 on Monday and held support at 14,400 but it would be as close as the bears would get. Tuesday’s finish back above 14,500 was a good clue the dips would be bought and Wednesday’s low of 14,439 was a higher low than Monday’s. Thursday’s high of 14,585 was good to see but the bulls need a close above 14,600 to reach our 14,750 near-term target. A close below 14,400 and then 14,200 and the bottom uptrend line would signal a possible trend change. The Dow started Monday at 14,512 and added 66 points, or 0.5%, by Friday’s close. For the year, the blue-chips are up 1,474 points, or 11.3%.
The S&P 500 popped a 6-pack, or 0.4%, to end at 1,569. The bears were determined to get the index back below 1,550 and pushed 1,546 on Monday’s open. The bulls gave up a nickel but held this level with the close of 1,551 while pushing new highs. Tuesday and Wednesday’s low was also 1,551 but the S&P held 1,563 and 1,562 on the close leading to Thursday’s run to 1,570. A close above 1,575 keeps our 1,600 target on the map but a close below 1,550 could lead to a back test to 1,525-1,500. The S&P 500 came into the week just under 1,557 and added 12 points, or 0.8%, before Good Friday’s holiday. For 2013, the index is higher by 143 points, or 10%.
The Nasdaq jumped 11 points, or 0.3%, to settle at 3,267. Tech came into the week below the 3,250 level and fell to a low of 3,222 before closing above the 3,225 level. Tuesday’s push and close to 3,252 was a good sign the bulls were still on track to reach our 3,300 target but they need a close above 3,275 to confirm the action. Thursday’s high was 3,270. A close back below 3,250 and then 3,225 could set up a back test to 3,175-3,150. The Nasdaq was at 3,267 before Monday’s open and advanced 22 points, or 0.7%, by Thursday’s closing bell. Year-to-date, the index has advanced 248 points, or 8.2%.
The Russell 2000 added a little over a point, or 0.1%, to settle at 951 on Thursday. The small-caps may not have been the strongest of the indexes for once but they gave a good clue on Monday’s attack that the rally would continue after holding 940. The low checked in at 941 and Tuesday’s run to 950 was bullish. Wednesday’s close at 950 confirmed the bulls were still looking to clear our 975 target and Thursday’s high was 953. The all-time high of 954 was set in mid-March. The Russell 2000 started Monday’s session at 946 and rose 5 points, or 0.6%, for the week. For 2013, the small-caps are showing a triple-digit gain of 101 points, or 12%.
The S&P Volatility Index ($VIX, 12.70, down 0.45) was at 13.57 coming into the week and needed to hold 15 to keep the rally going. Monday’s run to 14.61 looked scary but the VIX closed below 14 for the session at 13.74. Tuesday’s pop pushed the VIX back below 13 to 12.77 and Wednesday’s run to 13.97 didn’t look or feel as bad as Monday’s pullback. Thursday’s higher close on the S&P pushed the VIX to a low of 12.54 with the 52-week low of 11.05 up next.
Before we get into this week’s commentary, we wanted to review some of our notes from early December, 2012:
December 9, 2012 Weekly Wrap:
“We gave yearend price targets for the major indexes last week and said we believe the Dow could push new highs by the end of the year. We are officially making it 13,777.77 as there could be some “fluff” if resistance at the highs is cleared. Our target for the S&P is 1,492 and for the Nasdaq we will go with 3,140. For the Russell 2000 we have a target of 867.” (END)
January 21, 2013 Weekly Wrap:
“With some of our fluff targets being triggered, we must now focus on the extended targets we gave you last week: Dow 14,000; S&P (500) 1,500-1,525; Nasdaq 3,200-3,250; and Russell (2000) 900-925. There could be a pullback to support or prior resistance levels if Apple, Google and IBM come up lame but we are expecting higher prices for the market through the end of January and possibly into February if we get some more can kicking by the zombies.” (END)
March 3, 2013:
After giving back 1% at the open, the market started March off with decent quarter-percent gain. With the major indexes near 5-years highs and all-time highs, another 2%-3% gain would have all of the indexes at all-time highs, excluding Tech of course, and would be the blow-off type top that sucks in the last of the quiet money still on the sidelines. As long as support holds, the near-term targets we have given you are Dow 14,750; S&P (500) 1,600; Nasdaq 3,300; and Russell (2000) 975. (END)
We have been telling you for a couple of months the bulls haven’t done all of this good work not to get the S&P 500 to new all-time highs and we were proven right on Thursday’s close. While we do believe higher prices are in store, we need to figure out if the bulls will remain strong out of the gate to start April or if there will be a pullback.
The first trading day after Easter is usually bearish if it falls on April Fool’s Day but overall the bulls usually start the month off with gains. With many of the “pros” STILL calling for a pullback, we don’t see why they would change their tune this week or next. Their thinking is that Thursday was the final push to all-time closing highs on the S&P 500 and Dow and now that the indexes are there, the bulls can rest.
We aren’t sure how many of them are history buffs but April is the Dow’s strongest month during the bulls historical runs from November through April. The blue-chips have average a 2% advance since 1950 and are up 7-straight Aprils with an average pop of 3.5%. Post-election years are also bullish over the past 60 with the Dow averaging gains of 1.9%; the S&P 500 1.5%; and the Nasdaq 2.4%.
Our current extended targets of Dow 14,750; S&P (500) 1,600; Nasdaq 3,300; and Russell (2000) 975 are less than 1%2% away so if history plays out like it normally does, we could see these extended fluff targets trigger. There have also been some bearish April’s over the past decade but the last ones were in 2005 and 2004. Of course, when you talk winning streak they are normally snapped but any April weakness should come after the tax deadline mid-month if there is a pullback.
Although history is on the bulls’ side, we are seeing some trouble signs ahead for May and the summer. Copper continues to look weak but held $3.40 for now. As you can see from the chart, a break below $3.37 could lead to a test to $3.30 but a rebound and close back above $3.50 would be bullish.
Gold tripped $1,600 before the S&P 500 but ended the quarter with a loss for the second-straight time after finishing below this level. The yellow-metal finished the quarter at $1,597 and a close below $1,560 again would be bearish. A close above $1,620 would be bullish going forward and it will be interesting to see where Gold and the S&P will be in a couple of weeks.
There were no high profile warnings last week which leaves this week as the last window of opportunity to confess to Wall Street ahead of 1Q earnings. Analysts have low expectations as they only see the S&P 500 growing its earnings base by a half-percent. Although there wasn’t a big name that came forward to warn, nearly 100 of the companies in the index issued lowered guidance when they gave their 4Q updates in January and February.
Perhaps they were sandbagging due to the political landscape at the time but if company earnings come in much better than expected, then we should see a continued rally. If the market sees 1Q numbers being better than anticipated the gains usually come before the news is reported which means we could have a very bullish start to April.
Europe and economic news will be two curveballs we will have to continue to watch for. Although the worst with Cyprus seems to be over, we warned last month to watch out for Spain in April if Europe continues to sink in a recession. Economic news here at home will have a major impact on the market this week as we will see a number of employment reports along with the final Q4 Gross Domestic Product (GDP) figures.
The next few weeks will be important in determining if our extended targets will be met or if we are in for the slight pullback everyone has been calling for.
As we head to press, futures are showing a lower open for Monday. Dow futures are down 8 points to 14,490 while the S&P 500 futures are lower by 2 points to 1,561. The Nasdaq 100 futures are declining a point to 2,810.
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Key of Technicals Used In Following Articles
2. Affymax (AFFY) Crumbles, Still a Risky Bet
By Michael Bryant
Affymax (AFFY, $1.38, down $0.14) recently tumbled from $16 to $2 in late February and continues to slide but investing in the stock at current levels could be dead money even if the company survives. We have been following the company for a few years and did a feature article back in December 2011 when shares were in the $6-$7 range. We never made an official recommendation on the stock because of its pipeline and even though shares look “cheap”, the story has changed.
Affymax has strategic alliance agreements with Takeda Pharmaceutical and Nektar Therapeutics to develop and commercialize Hematide. Under the agreement, Takeda and AFFY will share equal profits in the U.S, while Takeda will hold an exclusive license to develop and commercialize outside the U.S. Nektar supplies PEG (polyethylene glycol) to Affymax for the production of Hematide.
The FDA advisory panel recommended approval for the drug 15-1 in 2011. Then on March 27, 2012, the FDA approved the drug despite Phase 3 results showing a higher rate of death and stroke in patients not on dialysis. The New Drug Application (NDA) was only for patients on dialysis, where the cardiovascular risk wasn’t seen. In the FDA’s approval letter, it outlined post-marketing requirements: an observational study and a randomized controlled trial to be completed with final reports submitted in 2018 and 2019, respectively. The objectives of the studies are to evaluate cardiovascular safety and assess safety of long-term use in adult patients on dialysis. All looked good for the company.
On February 25, 2013, the company and Takeda Pharmaceutical voluntarily recalled all lots of OMONTYS® (peginesatide) injection as results of the new post-marketing study reported serious hypersensitivity reactions, including anaphylaxis, which can be life-threatening or fatal. The companies also issued a letter to health care professionals indicating that no new or existing patients should receive OMONTYS.
The company has no other drugs in development, so survival is in question. A sale or merger is on the table and bankruptcy is an option. The company cut 75% of its workforce to save cash while it investigates the cause of the anaphylaxis cases. Although only 0.2% of total patients developed anaphylaxis, with 0.02% of patients dying, this news will haunt the stock over the next few years and makes an investment in this company a very risky one.
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The companies in BOLD, we are looking at as possible trades and we may list call or put options on them in our Daily Newsletter. If they become official recommendations, we sent out Trade Alerts or include them in our 9am and 1pm updates that come out during the week (Quotes are from 3/28/13 close)
By Catherine Tierney
Ares Commercial Real Estate (ACRE, $16.92, down $0.03), Asure (ASUR, $6.39, up $0.05), BBX Capital (BBX, $8.25, up $0.14), Bridgford Foods (BRID, $8.03, up $0.03), Cal-Maine (CALM, $42.56, up $0.23), Daqo New Energy (DQ, $6.93, up $0.11), Derma Sciences (DSCI, $12.08, down $0.30), Frisch’s (FRS, $17.94, up $0.02), Global-Tech (GAI, $8.67, down $2.29), Jos. A Bank Clothiers (JOSB, $39.90, down $0.46), MFC (MIL, $9.06, up $0.04), Neurocrine Biosciences (NBIX, $12.16, up $0.76), Restoration Hardware (RH, $35.00, up $0.05), Shoe Carnival (SCVL, $20.44, down $0.10), Veeco Instruments (VECO, $38.41, up $0.22), Transcontinental Realty Investors (TCI, $5.37, down $0.16)
Amerisafe (AMSF, $35.54, up $0.16), G-III Apparel (GIII, $40.11, up $0.37), Global Payments (GPN, $49.66, up $0.23), McCormick & Company (MKC, $73.55, up $0.90), Oxford Industries (OXM, $53.10, down $2.61), Pep Boys (PBY, $11.79, up $0.02), Resources Connection (RECN, $12.70, up $0.02), Team (TISI, $41.07, up $0.37)
Acuity Brands (AYI, $69.35, down $0.12), Bassett Furniture (BSET, $15.96, up $0.48), ConAgra Foods (CAG, $35.81, up $0.22), Conns (CONN, $35.94, up $0.89), Electro Rent (ELRC, $18.54, up $0.12), Dominion Diamond (DDC, $16.33, up $0.02), Mitcham Industries (MIND, $16.92, up $0.35), Monsanto (MON, $105.63, up $0.51), OMNOVA Solutions (OMN, $7.67, up $0.10)
Franklin Covey (FC, $14.53, up $0.16), Greenbrier Companies (GBX, $22.71, up $1.38), International Speedway (ISCA, $32.68, up $0.02), RPM (RPM, $31.58, up $0.32), WD-40 Company (WDFC, $54.77, up $0.05), Xyratex (XRTX, $9.90, down $0.17)
Skyline (SKY, $5.97, up $0.48)
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4. Weekly Wrap Covered Call Portfolio Update (Closing prices as of 3/28/13)
Our Weekly Wrap Closed Trade Track Record for 2013 is 9-1 (53-3, overall since late 2010).
Bank of America (BAC, $12.18, down $0.05)
April 12.50 calls (WEEKLY) (BAC130405C00012500, $0.05, down $0.05)
Original Entry Price: $11.61 (3/5/13)
Lowered Price from Selling Options: $11.16
Exit Target: $15+
Stop Target: $12
Action: These options expire this Friday and when we sold them we said shares may have temporarily peaked. Support is at $12 and then $11.75 and the 50-day MA. If there is continued weakness we can close out the position or write more call options on the stock. If shares are above $12.50 by this Friday’s close we will be called away. If it appears like we will, we may open another position for a run past $13 on a rebound and continued strength.
We recommended buying Bank of America at $11.61 on 3/5/13.
On 3/21/13 we sold the April 12.50 calls for $0.45, down which lowered our cost basis to $11.16. If we are called-away at $12.50 in April, the trade will make 12%.
Research in Motion (BBRY, $14.45, down $0.12)
April 12.50 calls (BBRY130405C00012500, $2.00, down $0.50)
Original Entry Price: $12.86 (3/5/13)
Lowered Price from Selling Options: $11.36
Exit Target: $15+
Stop Target: $10
Action: Earning came out Thursday and despite how the bears and talking heads want to spin a profit is a profit. We knew the company would beat estimates and we knew this stock has some value when we entered the trade but we weren’t surprised to see a flat finish considering the ambush. Support is at $14 but there is a chance shares get stretched as they could test the 100-day MA at $13 on further weakness. We were looking for a close above $16 and a run to $18. Thursday’s high was $15.55. We will likely get called away, either way, if shares are above $12.50 by this Friday’s close. If so, we may enter another trade or wait for a pullback.
We recommended buying Research In Motion at $12.86 on 3/5/13. We also sold the April 12.50 calls for $1.50 which lowered our cost basis to $11.36. If we are called-away at $12.50 in April, the trade will make 10%.
Apollo Group (APOL, $17.38, flat) (Short Position)
Original Entry Price: $16.10 (3/4/13)
Lowered Price from Selling Options: None
Exit Target: $12
Stop Target: $20
Action: Shares made a run to $20 on Monday, trading up to $x, after the company beat Wall Street’s expectations. We could care less about their numbers as enrollment declined again. Shares were downgraded midweek on valuation concerns. Short-term resistance is at $17.50 and a xlose back below the bottom downtrend channel at $17 would get $16 and the 52-week lows back in the mix.
Sony (SNE, $17.40, down $0.24)
April 16 calls (SNE130420C00016000, $1.50, down $0.20)
Original Entry Price: $15.38 (3/4/13)
Lowered Price from Selling Options: $14.78
Exit Target: $20+
Stop Target: $12
Action: Shares made a run past $18 to start the week before fading to a low of $17.31 on Thursday. There is further risk down to $16 and where our strike price is at. A close below this level would be bearish. We would like to see a close above $17.50 to start the week and $18 midweek. From there, a run to $20 and the top of the upper channel is possible.
We recommended buying Sony at $15.38 on 3/4/13. We also sold the April 16 calls for 60 cents which lowered our cost basis to $14.78. If we are called-away at $16 in April, the trade will make 8%.
Keryx Biopharmaceuticals (KERX, $7.05, up $0.18)
Original Entry Price: $7.22 (2/12/13)
Lowered Price from Selling Options: $7.22
Exit Target: $10+
Stop Target: None
Action: Shares traded down to $6.80 midweek and there is further risk down to $6.50 and the 50-day MA. From there it could be a freefall. The close above $7 was mildly bullish but we would like to see another run back to $7.50 over the near-term. If there are any setbacks with its drug, Zerenex, shares will take a hit.
Yahoo (YHOO, $23.53, down $0.06)
April 22 calls (YHOO130420C00022000, $1.65, down $0.15)
Original Entry Price: $19.81 (2/6/13)
Lowered Price from Selling Options: $19.16
Exit Target: $25
Stop Target: $14
Action: We have been calling for made a push towards $24 and shares reached $23.88 and another 52-week high to start the week. The 5-year chart is showing a run to $$27 and the upper channel on continued strength. Near-term support has been strong at $22 and there is longer-term help at $20.
We recommended buying Yahoo at $19.81 on 2/6/13.
On 2/13/13 we sold the April 22 calls for 65 cents which lowered our cost basis to $19.16. If we are called-away at $22 in April, the trade will make 15%.
Scientific Games (SGMS, $8.75, down $0.07)
Original Entry Price: $11.10 (3/20/12)
Lowered Price from Selling Options: $11.10
Exit Target: $13
Stop Target: None
Action: Shares reached a high of $9.01 by Tuesday and tested the 50-day MA but kissed $8.69 on Thursday’s low. A close above $9.10 would be bullish and a break below $8.50 would set up a test back to $8.
We recommended buying SGMS at $11.10 on 3/20/12.
Pizza Inn (PZZI, $4.41, up $0.19)
Original Entry Price: $4.50 (2/22/12)
Lowered Price from Selling Options: No options available
Exit Target: $9
Stop Target: None
Action: Shares finally cleared $4 and are working their way to $5 which is the next level of resistance. Support at $3.80 represents prior resistance followed by $3.50. A deal with a Florida restaurateur to open up 10 Pie Five Pizza joints gave shares a lift and there an option for him to purchase up to 5 more units. He already owns a successful tavern chain but pizza is his love and he says it’s the best in the business. We have mentioned the company plans to open up to 75 stores in prime locations as they look to become the next Chipotle but with pizzas.
We recommended buying PZZI at $4.50 on 2/22/12.
MGM Resorts International (MGM, $13.15, up $0.19)
Original Entry Price: $13.77 (2/2/12)
Lowered Price from Selling Options: $12.35
Exit Target: $15
Stop Target: None
Action: Shares held $13 all week for the most part with 2 dips to $12.98. Monday’s high was $13.34 and we are still waiting for a close above $13.50 before possibly writing another call option. However, a close above this level would be bullish for a run to $15 so we could also wait. There is additional support at $12.75 should shares close back below $13.
We recommended buying MGM at $13.77 on 2/2/2012 and for every 100 shares to sell the March 15 calls for 45 cents. This lowered the cost basis to $13.32.
On 3/20/12 we recommended selling the April 14 calls for $0.65 which lowered the cost basis to $12.67.
On 2/13/13 we recommended selling the March 14 calls for $0.32 which lowered the cost basis to $12.35.
Trades on HOLD: DryShips (DRYS, $2.04, down $0.05), AKS Steel Holding (AKS, $3.31, down $0.07), Rare Element Resources (REE, $2.21, down $0.01), Rambus (RMBS, $5.61, down $0.16), Bebe Stores (BEBE, $4.17, down $0.03), Vivus (VVUS, $11.00, up $0.31), Solazyme (SZYM, $7.80, down $0.25)
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6. Week Ahead