11:00pm (EST)
1. Market Summary
2. Weekly Wrap Portfolio Update
1. Market Summary
Bulls Battle Back but Divergence Continues
The market continued its run at record highs last week but Friday’s pullback gave the bears a split with the bulls for the weekly win. While the broader market held up well, the small-caps struggled with resistance and faded throughout the week.
Volatility remains heightened as geopolitical concerns still exist and this week is full of market moving events. Economic news and continued earnings will play a major role in determining the next trend. The current trading range is getting stretched, both to the upside and downside, and this type of pattern usually portrays a much larger price movement forthcoming. (read more…)
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The Dow dropped 123 points, or 0.7%, to close at 16,960 on Friday. The blue-chips fell below 17,000 within minutes after the open and struggled trying to regain this level for the remainder of the session. The good news is the bears only pushed a low of 16,917 with the bulls having a 1% cushion to 16,800. The bad news any dips or a close below this level and the 50-day MA will likely lead to 16,600 and the 100-day MA. The bulls are still on track to test 17,200-17,300 as long as support holds. The index declined nearly 140 points, or 0.8%, for the week.
The S&P 500 slipped 9 points, or 0.5%, to finish at 1,978. The index opened back below the 1,985 level on Friday and tested 1,974 while holding 1,975. There is risk 1,960-1,950 on continued weakness. A close below the latter and the 50-day MA would be bearish. The bulls came within 9 points of triggering the 2,000 level on. Thursday and need to reclaim 1,980-1,985 to get the momentum back. The S&P gained a tenth-point for the week, or 0.01%.
The Nasdaq fell 22 points, or 0.5%, to end at 4,449. Tech opened below the 4,450 level that had served as prior resistance after making a run at the prior 52-week high of 4,485 on Thursday. The bulls held support at 4,425 and had backup at 4,400 they didn’t need. They have wiggle room down to 4,375-4,350 but a close below the July low of 4,351 and the 50-day MA would be troubling. I still believe 4,500 trips on a summer rally and last week I listed additional fluff to 4,600 on an overshoot. For the week, the Nasdaq advanced 17 points, or 0.4%.
The Russell 2000 gave back 11 points, or 1%, to settle at 1,144. The small-caps opened below the 1,150 level at 1,149.78 and traded down to 1,141.84 while holding 1,140 along with the 200-day MA. I have talked about this level of support repeatedly in recent weeks as I have cautioned any dips below this level could lead to 1,125. The 1,140 level was stretched mid-month after the test to 1,131 that has served as a double-bottom since. If tested again, it will be interesting to see if the dip is bought. If not, I could get aggressive with put options on a close below 1,130-1,125 as the bears would then target 1,100. Otherwise, I remain bullish but the index needs to regain 1,150-1,160 quickly. The Russell 2000 fell 7 points, or 0.6%, last week.
The S&P 500 Volatility Index ($VIX, 12.69, up 0.85) gained 7% and closed above 12.50 after testing a high of 12.75. The bears pushed 13.62 to start the week but the bulls held 12.50 over the next 3 days before Thursday and Friday’s close back above the 50-day MA. I have talked about the wiggle room up to 13.50-15 for the bulls but if these levels are tested again, I’m not so sure they hold this time. The mid-July intraday high reached 15.38 and I mentioned this shook more traders out of the market. I have said not to “flinch”, or get aggressive with put options, until the bears clear AND hold the 15 level. I have also said the bulls need to get a close below 11.50 (and the 50-day MA) to confirm the next leg higher for the market. Last week’s low reached 11.41 with a close of 11.52 midweek. Again, the VIX continues to provide great market direction clues and is getting attention again.
I mentioned the continued divergence between the indexes could give Wall Street fits again and it did despite the run to record highs last week. I also said more and more slick talking pros continue to call for a pullback and those echoes grew louder last week with continued worries over Russia and Gaza.
The game plan is still the same as last week as the indexes made less than a 1% move overall for the week. The one troubling sign was the fact the Dow closed lower on BOTH a Monday and Friday for the first time in months. The bulls need a Monday win to start the week and another down M/F would be very bearish.
The GDP (Gross Domestic Product) numbers for Q2 are due on Wednesday. The suit-and-ties are expecting growth of 2.5% compared to a nearly 3% decline for the first quarter. Additionally, there will be some Fed speak the market will have to deal with.
Friday’s open (and close) will be super important as Nonfarm Payrolls are due out before the bell. Wall Street is expecting a number south of 250,000 and a decline from last month’s showing of 288,000, a surprise would be bullish (along with the GDP numbers).
History has shown wild price swings coming the week after July option expiration but the market didn’t make the 3%-4% moves that the indexes have experienced in the past. However, this week has the possibility of the market moving 3%-4% given the events.
Market philosophers often say history doesn’t repeat itself although it often rhymes. I beg to different as history can and does repeat itself – it just might not be the same day, week, or year. With the trading mini trading range still intact, the longer it remains, the bigger the breakout or breakdown will be. History will be made once the next 3%-4% move comes either way. My goal is to catch the move before it happens.
If the bulls clear resistance, I can use index call options to play the move. If the bears crack the second (and third) waves of support, I can use index put options to play the move.
I want to keep this week’s commentary short as nothing has changed from last week’s big update. That, and the fact I am on a mini vacation for the first time in years. Of course, I never take a day off when the market is open so I will still be working normal hours. I don’t mind though as this is my job. I will have waves and a waterfront view instead of cars and concrete to look at so don’t feel bad for me. The relaxation will also help me prepare for what I expect to be a busy August.
Last week’s comments:
“The uptrend lines are still intact despite the divergence and volatility from last week. The time to go short will be on any drops below: Dow 16,800-16,750: S&P 1,940-1,935; Nasdaq 4,350-4,325; and for the Russell 1,110-1,100. Otherwise, I remain bullish.”
Heading from desk to press, futures look like this: Dow (-28); S&P 500 (-3); Nasdaq 100 (-6).
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2. Weekly Wrap Covered Call Portfolio Update (Closing prices as of 7/25/14)
The Weekly Wrap Closed Trade Track Record for 2014 is 21-4, or 84% win rate (106-11, or 91% win rate, overall since the start of 2011)
Special Notice: Shares of Apple (AAPL, $97.67, up $0.64) held $97 and the covered call stock trade was closed on Friday. I recommended the stock at $93.10 on 6/30/14 and lowered the cost to $91.25 after selling the July 97 weekly call option. The trade made 6%.
Although I’m happy with the 3-week return, I was disappointed shares were called away from the portfolio. I may recommend another position in Apple on Monday or later in the week. Look for a Trade Alert on a move above $98 or on a dip to $95.
Current Trades
Pizza Inn Holdings (PZZI, $7.45, down $0.06) Stock Trades
Original Entry Price: $6 (7/9/14)
Lowered Price from Selling Options: No options available
Exit Target: $8, raise to $10
Return: 24%
Stop Target: $6.70, raise to $7 (Stop Limit)
Original Entry Price: $8.10 (10/11/13)
Lowered Price from Selling Options: No options available
Exit Target: $12+
Return: -8%
Stop Target: $5
Action: Shares traded to a low of $6.81 early in the week before rebounding 7% on Thursday to close at $7.51 after kissing $7.70. Friday’s high reached $7.85 before shares slipped with the overall market. The 52-week high is north of $9.
I have raised the stop limit of $6.70 to $7 to protect profits on the second position. The other position is a long-term core holding. Near-term support is at $7 and the 200-day MA.
Previous comments:
The company announced further expansion plans. Pizza Inn is now on track for 200 stores. I believe this will be a $15-$20 stock in 1-2 years with insiders and mutual funds owning nearly 40% of the company. I have already recommended 2 profitable trades for the Weekly Wrap when shares were near $3.
Kodiak Oil & Gas (KOG, $15.94, up $0.02) LEAP Trade
December 16 calls (KOG141220C00016000, $1.20, flat)
Original Entry Price: $0.95 (6/30/14)
Exit Target: $1.90-$2 (closed half @ $1.25 on 7/16/2014)
Return: 29%
Stop Target: 85 cents, raise to $1.05 (Stop Limit)
Action: I have raised the Stop Limit of 85 cents to $1.05 on the other half of the trade.
Shares traded to a 52-week high of $16.25 on Thursday before finishing just below $16 on Friday. I believe shares can trip $17 but there isn’t much juice left in this trade following the takeover offer.
I had been penciling-in an offer worth $20 all year long for KOG and was frustrated along with their shareholders Whiting Petroleum (WLL, $88.75, down $0.78) got the company for cheap.
I may also close the trade this week as technically these options would only be worth $1 by mid-December if shares are at $17 and the transaction will close sooner than that. It will also clear some room for new trades. Near-term support is at $15.50 and if shares fall below this level or $15, the stop limit will likely trigger on the other half.
CubeSmart (CUBE, $18.39, down $0.03) stock trade
Original Entry Price: $18.62 (6/23/13)
Lowered Price from Selling Options/ Dividends: $18.49
Exit Target: $22
Return: -1%
Stop Target: $14
Dividend Yield: 2.8%
Action: Shares traded to a low of $18.23 on Friday but held the 50-day MA. A close below this level will likely lead to $18 and the 100-day MA. Resistance is at $18.60. Earnings are due out on August 7.
The company paid a dividend of 13 cents on 6/27/2014 to lower the cost of the trade to $18.49.
Limelight Networks (LLNW, $2.65, down $0.13) stock trade
Original Entry Price: $3.00 (6/9/14)
Lowered Price from Selling Options: None
Exit Target: $5
Return: -12%
Stop Target: None
Action: Shares traded to a low of $2.56 on Wednesday and Friday but held the 50-day MA. I’m looking for this to serve as a short-term double-bottom. If not, there is risk to $2.40-$2.20 and the other major MA’s.
A close above $3 would be bullish. The company will announce earnings on August 4th and talk about why they declined a takeover offer north of $6.
There was also a negative article late in the week that said shares could be headed to $1.75. The story also claims management has no clue how to operate the business. The weird thing is, the company said the same thing about the takeover offer that the acquirer couldn’t run their business. Perhaps a smear tactic (?) but something has to give.
My comments have been different on the company as I have also been predicting a buyout of LLNW. Hopefully, earnings and the conference call addresses some of my concerns but risk has moved up if management drops the ball.
Previous comments:
Shares traded to a high of $3.25 on 6/20 after Tuition Build offered roughly $645 million, or $6.55 a share, for Limelight. The company dismissed the Silicon Valley’s private-equity firm’s offer after basically saying they weren’t experienced enough to run the business.
I have been suggesting a buyout offer would come for Limelight Networks with the company’s cheap market cap and said they would make a very luscious takeover target.
Its litigation issues have decreased dramatically following their recent win against AKAM and they are open to a much bigger marriage.
Roth Capital lifted its Price Target for Limelight Networks to $4.50 from $3 following its recent court win against AKAM. I have already covered the acquisition appeal of the stock and Captain Obvious echoed those comments last week. I was hoping shares would go unnoticed by the suit-and-ties and perhaps they have been reading my updates but I have a much higher target for Limelight. I have said shares could make a run to $5, possibly $8 if the takeover talk heats up over the summer.
Apple, Google, Facebook, Microsoft and Verizon, just to name a few, could take a look at this company as it looks to build out its CDN network. Limelight has a market cap of just $280 million and would be a great acquisition target for Apple. The market cap was just $214 million when I started recommending shares at the end of May at $2.16.
Hercules Offshore (HERO, $3.78, up $0.11)
Original Entry Price: $4.50 (5/30/14)
Lowered Price from Selling Options: $4.20
Exit Target: $7
Return: -10%
Stop Target: $2
Action: The company announced earnings midweek and missed estimates. However, they stated demand would pick up in the second half of the year. There is risk to $3.60 if shares continue to struggle at $3.90-$4.
On 5/30/2014 I recommended buying shares at $4.50 and selling the July 4.50 calls for 30 cents to lower the cost basis to $4.20.
Alexza Pharmaceuticals (ALXA, $4.98, down $0.03) Covered Call Trade
Sold September 5 calls (ALXA140920C00005000, $0.45, flat)
Original Entry Price: $5.53 (3/4/14)
Lowered Price from Selling Options: $4.68
Exit Target: $6+
Return: 6%
Stop Target: $3
Action: Shares slipped below $5 throughout the week and tested $4.91 on Friday. Near-term support is at $4.80. The 52-week high is at $5.93. A “golden cross” is forming with the 50-day and 100-day MA’s and would be a bullish sign if shares can trend higher over the next few weeks.
On 3/4/2014 I recommended buying shares at $5.53 and selling the June 6 calls for 50 cents to lower the cost basis to $5.03.
On 6/23/2014 I recommended selling the September 5 calls for 35 cents to lower the cost basis of the trade to $4.68. If shares are called away at $5 by mid-September the trade will make 7%.
Discovery Laboratories (DSCO, $1.60, up $0.02) Covered Call Trade
Sold October 2 calls (DSCO140101900002000, $0.25, flat)
Original Entry Price: $2.42 (1/7/14)
Lowered Price from Selling Options: $1.67
Exit Target: $4.50-$5
Return: -1%
Stop Target: None
Action: Disco shares continued their fade after testing $1.56 on Friday. The May and 52-week low of $1.51 could come into play and a break below this level could lead to $1.25. Resistance is at $1.75 and the 50-day MA.
The company recently announced Phase 2 trials for Aerosurf have begun.
On 1/7/2014 I recommended buying shares at $2.42 and selling the April 3 calls for 25 cents to lower the cost basis to $2.17.
On 4/30/14 I recommended selling the June 3 calls for 15 cents to lower the cost basis for the trade to $2.02.
On 6/23/2014 I recommended selling the October 2 calls for 35 cents to lower the cost basis of the trade to $1.67. If shares are called away at $2 by mid-October the trade will make 20%.
Rambus (RMBS, $12.23, down $0.50)
Original Entry Price: $17.83 (11/14/11)
Lowered Price from Selling Options: $16.38
Exit Target: $18-$20
Return: -25%
Stop Target: $10
Action: Shares had a terrible week despite the company announcing better-than-expected earnings. Weaker guidance is what caused the pullback but the good news is the 100-day MA held.
I said a test to $12.50 could come depending on the results and there is now further risk to $12-$11.75 if this level serves as resistance going forward. A close back above $12.75-$13 would be bullish.
Previous comments:
Shares tanked $11 in late November 2011 from $18 to $7 on a court ruling the company had infringed on certain patents. I originally recommended this trade on a favorable court ruling.
The outlook for Rambus has improved over the past 6 months with a profitable quarter and a recent deal with Qualcomm.
I want to sell another call option on this position but would like to see shares clear $15-$16 before doing so.
On 11/14/2011 I recommended buying shares at $17.83 and selling the December 20 calls for $1.45 to lower the cost basis to $16.38.
Trades on HOLD: AKS Steel Holding (AKS), DryShips (DRYS), Bebe Stores (BEBE), Vivus (VVUS), Dendreon (DNDN), Galena Biopharma (GALE) LEAP Trade/ Stock Trade, Zynga (ZNGA)