Monday, May 20, 2013 (AM) - Momentum Trades

Bulls Push Upper Channels

9:00am (EST)

“For investors who sold in May and went away, welcome back.

The bulls are on a six-month roll and are trying to make May seven-straight months of gains. Since we are stock market history buffs, we should note that in the 14 previous times the market has had this type of win streak, the S&P was higher 10 months later. This would mean by next March, the index would be at 1,570 or better. Interesting, as this is a key current support level.

There is a 70% chance the 6-month win steak continues as the last 30 years have produced 10 of the 14 bullish runs with 7 times extending into a seventh month. Given the current gains for May, those odds have gone up.

For those of you wondering, back in 1983 the market experienced nine-straight months of gains while we were struggling passing 10th grade geometry. As for other steaks, the blue-chips are on a 17-week Tuesday roll that is an all-time record for Tuesday’s. We would love to see the Dow Tuesday’s threaten the wild Wednesday’s streak of 24-straight set back in ’68.

Friday’s have been bullish in recent weeks and the bulls won their third-straight Monday last week. There hasn’t been a significant 3-day pullback since last fall and we often talk about negative Friday and Monday closes. This past Friday was a little choppy but the indexes went out at their highs for the session. This bodes well for the start of next week. If we start to see negative Friday’s and Monday’s, or more than a 2-day losing streak, it could be warnings signs of a possible trend reversal.

We mentioned any dips should still be bought as the Fed is continuing to add $85 billion a month to keep the markets pushing new highs. Bernanke even mentioned Microsoft MSFT, $32.69, up $0.03) by name on Friday saying that it could be a bubble stock but so far so good.

At some point, the presses will stop providing the record amount of liquidity to the market as the Fed unwinds its balance sheet but for now all systems are still go. No government has ever “printed” its way out of debt but with the debt ceiling now getting pushed back to late summer or fall, expect the U.S. zombies to keep the presses running.

It’s been amazing to see the number of price target increases as to where the market is headed but these Johnny-come-lately’s were nowhere to be found in early February.

We forecast our year-end targets in late January/ early February every year for the major indexes and some thought we were crazy when we predicted Dow 16,000. The blue-chips closed at 14,009 on the first trading day of February. The 2,000 point prediction at the beginning of February represented another 14% gain for the Dow after a 6% pop in January.

The S&P 500 was at 1,513 and we forecasted a possible run to 1,700 by yearend. The nearly 200-point gain called for another 12% advance following January’s 5% jump.

We predicted 3,800 for the Nasdaq when it was at 3,179 and the 600+ surge would mean another 20% gain for the year after the 5.3% advance in January.

The small-caps were at 911 and we said a run to 1,025 could be in the works by the end of December. The 114 pop represented a 13% advance following the 6.5% run in January.

The huge returns in January were missed by a ton of traders and Wall Street pros due to the Fiscal Cliff worries. Heading into February, a usually choppy month, there was hope for a pullback or major correction. That never came. The rally has been called the most hated in the history of Wall Street because those who say it have been on the sidelines or have been buying put options and shorting the market all year long.

If the bulls continue with their May gains or at least end the month positive on any pullback, it’s likely the rally will continue into June and possibly July. The suit-and-ties are restless to start their vacations and usually depend on the summer doldrums to keep things in check. As they start to hit the beaches at the end of the month for Memorial Day and into June, they could miss out on a continued rally.

We can still feel the nervousness by the slick talking pros that have been calling for a pullback all year long. The market commentators also have no idea why the market continues to chug higher and can’t wait to get a correction instead of asking the suit-and-ties when the rally will end. After 6 months of gains, they sound like a broken record.

Of course, we can’t wait for a correction either because if and when the momentum slows and the Fed stops pumping money into the system, there will be a pullback, perhaps a nasty one. When this happens, all of the pros and the commentators will be negative and investors will be jumping ship but remember you can make just as much money trading put options in a tanking bear market as you can in a rising bull market. Take a look at our 2008 Track Record if you are a new subscriber.

We have outlined key levels of support and resistance all year long and the channels we have drawn for you have been spot on. We do have to keep checking the blind spots, but until we get the signals to go short, let’s continue to enjoy the ride.” (from 5/12/2013 Weekly Wrap Update)…

The market continued its winning ways in May as the bulls added another 2% last week to push the upper channels of resistance. The charts from last week showed another beautiful breakout with a slight back test on Thursday before Friday’s 1% pop.

The bears have continued a 6-month nap that has lasted through Winter and for much of Spring. They could stretch their hibernation into a seventh month if the monster gains from May hold up but this week could be volatile with Bennie and the Boys speaking and the first beach holiday weekend hitting Wall Street. (read more…)

Members Area

The Dow zoomed 121 points, or 0.8%, to close at 15,354 on Friday. The blue-chips made back test to 15,000 and kissed 15,053 to start the week and ended Monday with a loss 27 points. The bulls made another run at our 15,300 target on Tuesday after bouncing back and reaching 15,219. Wednesday’s push to 15,301confirmed our near-term price target and triggered a possible run to 15,500-15,600 over the near-term. Support at 15,000 has been strong since the first week of May and there is further help at 14,800. A close below 14,600 would be bearish and a possible trend change. The Dow came into the week at 15,118 and advanced 236 points, or 1.6%, by Friday’s close. For 2013, the blue-chips are up 2,250 points, or 17.2%. (2-year chart):

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The S&P 500 soared 17 points, or 1%, to end at 1,667. The index tested support at 1,625 on Monday after trading down to 1,626 but ended the day with a slight (.07 of a point) gain to keep our 1,650 target alive. There was further help back at 1,600 but the S&P 500 cleared our near-term target on another terrific Tuesday after touching 1,651 and closing right on 1,650. We mentioned there was fluff up to 1,675 and Wednesday’s high was 1,661. There was a pullback to 1,650 on Thursday to flush out the weak hands but Friday’s rebound and high of 1,667 keeps the bulls on pace for a continued rally. We could see our year-end target of 1,700 tested on the S&P 500 but it remain to be seen if this would be the climax before a major dip or if we underestimated the bulls. The S&P 500 was at 1,633 coming on Monday and was up 34 points, or 2.1%, for the week. For the year, the index is higher by 241 points, or 16.9%. (2-year chart):

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The Nasdaq advanced 34 points, or 1%, to finish at 3,498.97. Tech needed to hold 3,400 on any dip after clearing this level during the previous week. Monday’s low checked-in at 3,426 before a positive close of 2 points to 3,438. We said to pencil-in a run to 3,500 if support held and the index made higher highs up until Thursday. The index reached a peak of 3,485 before giving back a 6-pack to close at 3,465. Friday’s surge to 3,499.20 put Tech with spitting distance of our near-term 3,500 target. If cleared the Nasdaq could run another 100 points on continued momentum. The Nasdaq was at 3,436 before Monday’s open and was up 62 points, or 1.8%, for the week. Year-to-date, Tech has roared 479 points, or 15.9%. (2-year chart):

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The Russell 2000 jumped 11 points, 1.1%, to settle at 996. The small-caps slipped a few points to close at 973 on Monday but short-term support at 970 held. There was further help at 950 but Tuesday’s push back above our 975 target was a good clue the bulls would make a run at 1,000. The 12-point gain got the Russell to 985 and Wednesday’s pop to 991 all but confirmed a 4-digit print. There was a slight dip to 985 on Thursday’s close but Friday’s high of 996.47 was close enough for government work and should trigger this week. The Russell 2000 came into the week at 975 and surged 18 points, or 2%, ahead of the weekend. For 2013, the small-caps are up 144 points, or 17.3%.

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The S&P 500 Volatility Index ($VIX, 12.45, down 0.65) came into the week at 12.59 and stayed in an incredibly tight range all week. We mentioned to watch the 13.50 level for clues of increased volatility and downside pressure but the bears could only get to 13,46 on Thursday’s pullback. Friday’s low was 12.26 and the 52-week low of 11.05 is rapidly coming into the mix. We said last week and at the beginning of the year the VIX could trip single-digits if the S&P 500 triggers 1,700.

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The Dow has gained 515 points, or 3%, in May while the S&P 500 has jumped 70 points, or 4%. The Nasdaq has added 170 points, or 5%, and the Russell 2000 has advanced nearly 50 points, or 5%.

The gains in May have come following a nasty pullback to start the month but there has not been a 3-session losing streak this year. The market has now gone 180 days, or nearly 6 months, since there has been a 5% pullback.

The bulls are on an 18-straight Tuesday win streak that has accounted for 68% of the rally. Even more impressive, since the low of last year, Tuesday’s have accounted for nearly 85% of the current rally.

The numbers are mind-boggling if you stop to think about them and these facts alone would say we are due for a pullback. Economic news was terrible last week and could get worse but the bulls blew it off.

Tech has been a big winner and we mentioned it could lead the next leg higher but we have also been impressed with the Financial stocks.

We mentioned a few weeks ago a run to $20 for the Financial Select Sector Spiders (XLF, $19.95, up $0.26) would be bullish and Friday’s peak of $19.96 was a fresh 52- week high.

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We profiled the May 19 calls (XLF130518C00019000, $0.95, up $0.25) at 12 cents at the beginning of the month and they could have been sold on Friday near $1 for a 700% win.

The June 19 calls (XLF130622C00019000, $1.02, up $0.20) were at 32 cents and have gained over 200% since our May 5th Weekly Wrap and we added them to the Daily at 50 cents 3 days later as an official recommendation.

We wanted to add some JPMorgan Chase (JPM, $52.30, up $1.33) call options but we don’t like the current headline risk involving their CEO who plans to walk if his job duties are split and why we went with the XLF trade. If he stays, shares could easily trip double-nickels this week. The company will hold its shareholder meeting on Tuesday and vote on if Jamie Dimon should still hold the CEO and Chairman role or if it will be split.

JPM shares were at $47.57 at the time and we said if support held at $47 they could push $50-$51.

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They did and we profiled the June 50 calls (JPM130622C00050000, $2.80, up $0.95) at 40 cents. Yep, we missed a sweet 600% return there. Instead of trying to play the lottery, we said these call options were a “lottery play for a push past $50”. Perhaps the June 55 calls (JPM130622C00055000, $0.33, up $0.17) will be this week’s lottery winner. If Jamies walks, JPMorgan could fall back below $50 and we wouldn’t expect him to be out of a job for too long. Most companies would give him the keys to their palace any day of the week.

Gold is backtracking towards its previous lows and we said another close below $1,400 would be a warning sign for a possible drop to $1,300. The yellow metal fell through this level midweek and tested a low $1,353 of before ending at $1,359, down $26. A test to $1,300 is nearly a given but there would be further risk down to $1,200 on a continued slide.

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Silver tanked another 7% on Friday, falling $1.62 to $22.25 an ounce. We warned of another drop below $24 and the low of $22.06 on Friday is suggesting a drop to $20 is on the horizon. If this level fails, Silver could test $17.50 and where we would start backing the truck up.

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With 1Q earnings winding down, economic news could play a bigger role over the next few weeks and the market will be forced to continue its focus on the Fed. This week’s Fed Speak could move the market as Wall Street braces for the release of the FOMC minutes on Wednesday.

We have said we don’t expect the Fed to ease their monetary policies anytime soon but the debate continues as to when they will or if they will add more given last week’s worse-than-expected economic reports.

The zombies have steered clear of messing with the market as they have their own shenanigans to deal with so this has been a positive. While this has been good for the bulls over the short-term, if the IRS probe reaches the upper levels of the Obama Administration, it could have some market effects. Expect more headlines on this debacle this week. It should also be noted the Internal Revenue Service is the division in charge of implementing Obamacare in 2014. Hmmm…

Another worrisome sign is the high margin debt that is building as investors leverage their brokerage accounts to buy stock. Holders of cash accounts have to pay the entire purchase price for stocks up front, while investors with margin accounts can borrow as much as 50 percent of the price.

Margin debt is a double-edge sword as it can be good when stocks are going up but a disaster if the market starts to pullback or correct.

Cash balances in margin accounts have fallen to dangerous levels as the New York Stock Exchange (NYSE) recently reported its member firms had margin debt of nearly $400 billion, breaking the $381 billion recorded in July 2007. We will need to keep a close eye on this story because when the dips don’t get bought, and stocks start to tank, investors on margin could be forced out of positions if they don’t or can’t cover.

We don’t buy stocks on margin and we suggest you don’t either.

As the bulls continue their stampede through May, we mentioned analysts are tripping over themselves as they raise their yearend price targets for the major indexes. With the indexes rapidly approaching our yearend targets, we are going to stand pat.

We hate talking geopolitical tension, but at some point, North Korea or Syria, or both, could become a serious threat to the rally if tempers continue to rise. North Korea has been trigger happy in recent weeks and they were at it again over the weekend.

We are seeing an incredible amount of individual stocks moving 10%-20%, up and down, and the indexes are pushing the top of there upper channels. The market might or might not get this type of magnitude on any pullback or correction, but the indexes could experience volatile swings at some point of 3%-5% on a back test. This would mean a 500-800 point drop on the Dow.

It’s hard to see this happening over the near-term but at some point over the summer months, the possibility gets better with every 1% weekly pop. Until then, watch the bottom uptrend lines, the Monday/ Friday closes and the VIX. Oh, and the Tuesday win streak that we hope reaches 19-straight this week.

Futures are showing a slightly lower open this morning and look like this: Dow (xx); S&P 500 (xx); Nasdaq (xx).

MEMBERS AREA

Do not risk more than 5% of your trading account on any one trade but do try to take ALL of the trades. Please remember, ALL “Exit Targets” and “Stop Targets” are targets. You should not have any “Hard Stops” entered to close any trades or “Exit Orders” in your brokerage account unless we list one. We will send out a “Profit Alert” or “New Trade” if we want you to close a position OR if a new trade comes out. Otherwise, follow instructions at all times in the 9am and 1pm updates. Also, we will usually give you a heads-up if we think we are going to send an email outside of these time frames. Closed Trades for 2013: 49-33, including the Weekly Wrap that is 14-1).

Petrobras (PBR, $18.73, up $0.15)

June 20 calls (PBR130622C00020000, $0.25, flat)

Entry Price: $0.25 (5/17/13)
Exit Target: $0.50+
Return: 0%
Stop Target: None

July 20 calls (PBR130720C00020000, $0.45, flat)

Entry Price: $0.45 (5/17/13)
Exit Target: $1.00+
Return: 0%
Stop Target: None

Action: The 2-year chart is showing a possible run to $25 if $20 clears. Support at $18 but there is further risk down to $17 if this level fails to hold.

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Beam (BEAM, $68.94, up $0.29)

June 72.50 calls (BEAM130622C00072500, $0.60, flat)

Entry Price: $0.60 (5/16/13)
Exit Target: $1.20
Return: 0%
Stop Target: None

Action: Shares look poised to make a run past $70 as long as $66 holds. We will exit the trade if shares fall below $64.

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Goodyear Tire & Rubber (GT, $14.74, up $0.96)

June 14 calls (GT130622C00014000, $1.10, up $0.60)

Entry Price: $0.45 (5/16/13)
Exit Target: $0.90
Return: 144%
Stop Target: 75 cents (Hard Stop)

June 13 calls (GT130622C00013000, $1.90, up $0.90)

Entry Price: $0.45 (5/14/13)
Exit Target: $0.90 (5/16/2013 closed half @ $1.05)
Return: 228%
Stop Target: 90 cents, raise to $1.30 (Hard Stop)

July 13 calls (GT130720C00013000, $2.00, up $0.80)

Entry Price: $0.60 (5/14/13)
Exit Target: $1.20 (5/16/2013 closed half @ $1.20)
Return: 167%
Stop Target: 95 cents, raise to $1.70 (Hard Stop)

Action: Shares made a nice midweek surge past $13.50 and the 100-day moving average to push $15 and a fresh 52-week high by Friday’s close. Shares gained a whopping 15% for the week and reached $14.96, or 4 pennies away from our near-term target of $15. The 2-year chart is showing a run to $16, with a possible push to $17. Short-term support is at $14 with $13 serving backup. We have placed a Hard Stops on the positions in case shares slip from here.

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MGM Resorts International (MGM, $15.34, up $0.08)

July 17 calls (MGM130720C00017000, $0.30, flat)

Entry Price: $0.40 (5/10/13)
Exit Target: $0.80
Return: -25%
Stop Target: None

Action: Short-term support is at $14.50 and we like this trade as long as support holds. We went with the July options to allow more time for shares to make a run at $20. A move above $16.50 would be bullish.

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Yahoo (YHOO, $26.52, down $0.06)

July 28 calls (YHOO130720C00028000, $0.70, down $0.03)

Entry Price: $0.75 (5/8/13)
Exit Target: $1.50 (5/15/2013 closed half @ $1.20)
Return: 27%
Stop Target: 60 cents (Hard Stop)

January (2014) 31 calls (YHOO140118C00031000, $1.05, flat)

Entry Price: $1.05 (5/8/13)
Exit Target: $2.10
Return: 0%
Stop Target: 50 cents

Action: Shares on on the verge of another breakout and could push $30 on continued momentum. Support at $24 has been solid and we like both trades as long as $22 holds. New Flash: The WSJ announced late Sunday Yahoo is buying Tumblr for $1.1 billion in cash. We noticed on Friday Yahoo had scheduled an event on Monday to “share something special” and while acquiring companies usually see a dip in there share price on the news, Yahoo shares could rally on the news once confirmed.

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Financial Select Sector Spiders (XLF, $19.95, up $0.26)

June 19 calls (XLF130622C00019000, $1.00, up $0.10)

Entry Price: $0.50 (5/8/13)
Exit Target: $1.00 (5/15/2013 closed a third @ 90 cents)
Return: 90%
Stop Target: 70 cents, raise to 85 cents (Hard Stop)

Action: We nearly got our close above $20. Next stop $22 if cleared. Support is at $18.50.

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Clean Energy Fuels (CLNE, $13.65, up $0.40)

June 14 calls (CLNE130622C00014000, $0.50, up $0.15)

Entry Price: $0.55 (5/6/13)
Exit Target: $1.10
Return: -9%
Stop Target: None

Action: We think a run to $15 is still in the mix and a close above $14 would be bullish. Support is at $12. The chart is showing shares are on the verge of a major breakout (or breakdown).

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Solazyme (SZYM, $10.95, up $0.03)

June 10 calls (SZYM130622C00010000, $1.10, flat)

Entry Price: $0.35 (4/25/13)
Exit Target: $0.70 (5/10/2013 closed a quarter @ 65 cents)
Return: 182%
Stop Target: None

Action: Shares pushed $11 all of last week and reached a peak of $11.12 on Thursday and Friday. We are waiting for a close above this level that should get $12 in play over the near-term. We believe shares will reach $15 over the next 6 months and we will look to write another call option once shares clear $12. Support is back at $10.

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Keryx Biopharmaceuticals (KERX, $8.04, up $0.04)

June 10 calls (KERX130622C00010000, $0.20, flat)

Entry Price: $0.70 (2/12/13)
Exit Target: $1.40
Return: -71%
Stop Target: None

Action: Keryx traded to a high of $8.75 last week and we are still looking for a close above $8.50 that should lead to another run to $10. Support is at $7.50 and if shares fall below this level we will close the trade.

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Other 2013 Portfolio OPEN positions (0): These are trades that are still open in the portfolio but are down over 50%. They have longer expiration dates and are on “hold” but are not worth mentioning until they turn around. This means we would not open any new positions. We are still keeping track of the trades and we will record the results, accordingly, when we close them or if the options expire. Click on the 2013Portfolio link in the Members Area to view ALL open/ closed trades.

WATCH LIST SECTION

These trades are NOT recommendations. They are trades that we like but have not added to the portfolio as an official recommendation because of market conditions or because we are waiting for better entry prices. We try not to have more than 12-15 open trades at any one time which is why we created a Watch List. We will not list entry prices because these stocks are on the verge of breaking out or they could sell off but these are the trades we are watching as new candidates.

Apple (AAPL, $433.26, down $1.32)

June 475 calls (mini) (AAPL7130622C00475000, $2.30, down $0.55)

Thoughts: We are watching these mini options for a possible rebound and a run past $450.

Google (GOOG, $909.18, up $5.31)

June 1000 calls (GOOG130622C01000000, $2.00, flat)

June 800 puts (GOOG130622P00800000, $2.30, down $0.70)

Thoughts: There are price targets for Goog’s to trip $1,000. Shares could hit 1k but at some point there will be a pullback. It’s probably a safe bet to say this stock will be at $1,000 or below $800 over the next 30 days and these options together could make a great strangle option trade.

Spiders Gold Shares (GLD, $131.07, down $3.02)

June 125 puts (GLD130622P00125000, $2.00, up $0.70)

Thoughts: We wanted to get into this trade on the break below $140 but we have been late to the party.

SAIC (SAI, $15.47, up $0.15)

June 15 calls (SAI130622C00015000, $0.70, up $0.05)

Thoughts: We like these options if we decide to get back in.

Michael Kors Holdings (KORS, $60.61, up $1.34)

June 65 calls (KORS130622C00065000, $1.85, up $0.35)

Thoughts: We like these options as long as $60 holds as support.

Regeneron Pharmaceuticals (REGN, $266.97, up $2.31)

June 310 calls (REGN130622C00310000, $2.30, down $0.10)

Action: A close back above $280 should get our $300 target in play.

Boeing (BA, $98.92, up $2.34)

June 100 calls (BA130622C00100000, $1.75, up $0.85)

Thoughts: We should have been in Boeing once shares cleared $80. In any event, we like these calls for a possible push past $100.

JPMorgan Chase (JPM, $50.97, down $0.12)

June 55 calls (JPM130622C00055000, $0.33, up $0.17)

Thoughts: Shares could make a run at $55 as long as $50 holds.

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Nasdaq OMX Group (NDAQ, $31.26, up $0.50)

June 31 calls (NDAQ130622C00031000, $0.95, up $0.20)

June 32 calls (NDAQ130622C00032000, $0.55, up $0.10)

Thoughts: We are expecting a push to $32 as long as short-term support at $30 holds.

Spider S&P 500 (SPY, $166.94, up $1.60)

June 160 puts(SPY130622C00160000, $0.75, down $0.35)

Thoughts: Just in case we need a short-term put trade.

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