Option Investor
Newsletter

Daily Newsletter, Saturday, 9/27/2014

Table of Contents

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

Market Wrap

Volatility Returns

by Jim Brown

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Seven of the last nine trading days have had triple digit moves on the Dow for a total gain of +80 points.

Market Statistics

Extreme volatility came after three weeks of zero volatility. The +80 point Dow gain over the last nine trading days is almost the number of Dow points Nike (NKE) represented on Friday with its +9.75 gain. As investors we should be really thankful for short squeezes with two major squeezes in one week to offset the decline from the highs.


Economics on Friday were right in the Goldilocks zone with the GDP splitting the difference between the 4.3% estimate and 4.8% whisper numbers. The actual reading was for 4.59% growth in Q2 as the country rebounded from the -2.11% weather related decline in Q1. The 6.7% swing from the Q1 lows was the biggest quarter to quarter change since 2001. After Q1 was revised up from -2.9% to -2.11% the final +4.59% reading for Q2 now averages out to be +1.24% growth year to date. Consumption rebounded from 0.83% to 1.75% and fixed investment rose from 0.03% to 1.45% growth. Profits rose +8.4%. Gross domestic income spiked +5.2% after declining -0.8% in Q1.

Last quarter was a great quarter if you believe the numbers and Q3 is shaping up to be decent as well. The current consensus estimate is for +3.2% growth. That is not as much as Q2 but I think we all realize Q2 was a snapback from Q1 and not a normal quarter. The estimates for Q3 range from a low of 2.8% from Barclays to 3.5% from Deutsche Bank with Goldman at 3.3% and Morgan Stanley at 3.4%. The odds of those firms missing the number by a mile are pretty slim. The estimate for Q4 is running from 2.6% to 3.0% but we don't have any Q4 data yet so those estimates could change dramatically.

This was a good report and calmed a lot of fears that had lingered from the Q1 disaster. It was not hot enough to really put pressure on the Fed to raise rates but you can be sure they will be looking at the Q3 numbers to make sure the economy is leveling out at a sustainable pace and not spiking. A 3.2% number would be a perfect Goldilocks rate.

Naysayers pointed out that a large amount of the Q2 GDP came from Obamacare spending and inventory building and not real consumption.


The final revision of Consumer Sentiment was unchanged from the prior release at 84.6. This is the highest reading since July 2013. The present conditions component declined from 99.8 to 98.9. The expectations component rose from 71.3 to 75.4. I don't know what everyone is so excited about over the next six months unless it is the elections and I doubt that is the case. I am always surprised by the number of people I meet that either don't know there is an election in five weeks or who is running and could care less. I guess it is possible consumers are excited about the approaching holidays with only 88 shopping days until Christmas.


Next week is payroll week with ADP Employment on Wednesday and Nonfarm Payrolls on Friday. The ADP number is expected to decline slightly from 204,000 to 198,000. The Nonfarm number is expected to rise from 142,000 to 203,000. This is a long shot. Several analysts are expecting 150,000 to 165,000. A print at 165,000 or lower would push rate hike estimates out somewhat but still represent a growing economy.

The ISM Manufacturing on Wednesday is actually expected to decline slightly from 59.0 to 58.3 but that is not enough of a decline to be troubling. Anything over 50 represents expansion. The ISM Nonmanufacturing on Friday is also expected to decline slightly from 59.6 to 58.5 but not a real problem.

One report that could be market friendly is the Personal Income on Monday. All eyes will be on the personal consumption expenditures (PCE) and the core PCE, which excluded food and energy. This is the Fed's preferred inflation indicator. In July the PCE rose only +0.1% and the lowest rate in five months. There are some expectations for it to possibly come in negative as a result of the falling energy prices. This would be upsetting for the Fed since they want to see inflation rise to at least 2% and it was only +1.6% annualized in July with the core PCE at +1.5%. A negative PCE for August would definitely push Fed rate hikes farther into the future.


There were no new split announcements last week.


The bond junkies were bouncing off walls in a daze on Friday after bond king Bill Gross resigned from Pimco and moved to Janus (JNS) to manage the Janus Global Unconstrained Bond Fund beginning on Monday. Gross founded Pimco in 1971 and built it into a business with $2 trillion in assets under management. The company was recently acquired by Allianz. Among his other duties Gross was Chief Investment Officer and managed the Pimco Total Return Fund with more than $220 billion in assets. That is down -$70 billion after 14 months of continuous withdrawals as investors prepare for interest rates to rise. That has got to be tough for Gross to see billions go out the door every month and that may have been at the root of the problem.

According to reports Gross was becoming more antagonistic and hard to get along with at work. Multiple portfolio managers had complained to the board that either Gross had to go or they were going to quit. The board was planning on "accepting Bill's resignation on Friday." In English that means they were planning on firing him on Friday. Gross had threatened to resign multiple times in his repeated clashes with the executive committee.

Of course everyone made nice in their press releases saying Bill Gross was a valued member of Pimco and they thanked him for his contribution to Pimco over the last 43 years.

Here is the kicker. The fund Gross is going to manage at Janus has $13 million in assets. That is a huge step down from $220 billion. Apparently his friend at Janus, CEO Richard Weil who previously spent 15 years at Pimco before moving to Janus, gave him a place to hang his hat and wind down after 43 years at Pimco. Gross said, "I look forward to returning my full focus to the fixed income markets and investing, giving up many of the complexities that go with managing a large, complicated organization." Gross is not the first company founder that sold to a larger company and then was unable to fit into the new corporate structure and was eventually forced out. Allianz is super conservative and Gross was probably a lightning rod in the organization that attracted all kinds of friction. Being the boss for 43 years and then being an employee in the company you built is almost an insurmountable task.

Janus shares were up +43% on the news. The bond market was especially turbulent on Friday as traders reacted to expectations that investors will pull money out of Pimco and where they thought that money would go. Obviously some of it will follow Gross to Janus.


The clunk you heard at noon on Friday was the other shoe dropping on Yahoo's doorstep. I mentioned a couple weeks ago that Yahoo was activist bait now that it had cash in the bank and a huge windfall profit in BABA shares that they can't sell until next year. The $8 billion they got from the BABA IPO and the $36 billion in shares they still own was too much of a good thing not to attract a flock of activist shareholders. The first one has appeared. Starboard Value LP said it has acquired a "significant" stake in Yahoo and urged the company to buy AOL. Starboard said Yahoo should quickly "monetize" its Asian assets, which now exceed the value of Yahoo's market cap.

Starboard said it was planning on "engaging directly" with Yahoo to discuss how this plan could be implemented in a timely manner. Starboard said the merger would create $1 billion in "synergies" by reducing overlaps in online display advertising and other overhead costs. The Yahoo-AOL topic has been a recurring theme in the blogosphere but it never gains any traction. AOL has a $3.5 billion market cap and it continues to shrink. Analysts don't believe the AOL acquisition will occur but it does point out that Yahoo is in play. Melissa Mayer is now under the gun to produce some growth in a hurry or the activists will be picking over Yahoo's carcass a year from now.

Starboard is hostile that Mayer did not do enough to reduce the tax bite on the 140 million BABA shares they sold. The $8.5 billion sale is expected to see a $2 billion tax bite. Starboard said they don't want to see another $16 billion in taxes when Yahoo sells the rest of its BABA stake late next year. Starboard said it would share several "alternative structures" with the Yahoo board to minimize "tax leakage." Yahoo also owns 36% of Yahoo Japan.

Starboard may be the first activist to surface but you can bet there will be others. I would not be surprised to see Carl Icahn appear any day now. More than 550,000 options traded on Yahoo on Friday with calls 2:1 over puts.


Nike shares sprinted to a new record high after the company posted earnings of $1.09 compared to estimates of 88 cents. The company said the FIFA World Cup marketing campaign resulted in much stronger profits. Orders surged +14% for the delivery period of September through January. U.S. orders rose +15% compared to prior estimates for 9.8% growth. Revenue rose to $7.98 billion for the quarter that ended August 31st. That exceeded estimates by $200 million. Chinese revenue rose 18% to $679 million. Guidance was also better than expected. Shares of Nike gained $9.75 to add about 80 points to the Dow.


BlackBerry (BBRY) reported a better than expected loss of -2 cents, compared to estimates for a -16 cent loss. That compares to a loss in Q2-2013 of -$1.84. Revenue was $916 million. The company said they don't expect their cash balance, currently $3.1 billion, to fall below $2.5 billion in the next two quarters and putting the cash burn rate question behind them. They expect to be cash flow positive by the end of 2015. The company said it had already received more than 200,000 orders for the square screen Passport device. Amazon sold out in ten hours and BlackBerry.com sold out in five hours. They said availability would be "squeezed a little bit" because of the volume of orders. They said they were still experiencing strong demand for the low end Z3 handsets in emerging markets. CEO Chen said this was the first time in a long time that they actually made money on hardware.

BlackBerry is switching to software for the majority of its future revenue. The company said it sold 3.4 million licenses in the quarter for the BlackBerry Enterprise Service 10 (BES10) device management platform. A quarter of the signups came from rival mobile device managers. The next release BES12 will be out in November. BlackBerry now has more than 91 million monthly active users. It is possible that BlackBerry will actually come back from the dead. Shares rallied +5% on the news.


Micron (MU) posted earnings of 82 cents compared to estimates for 81 cents. Revenue rose +49% to $4.23 billion beating estimates of $4.16 billion. That is not a big earnings beat but their guidance was strong. Micron forecast a 5.2% to 11.1% increase in revenue to $4.45-$4.7 billion for the quarter ending in November. Analysts were expecting $4.36 billion. Quarterly earnings are approaching $1 per quarter or $4 to $4.50 for FY 2015 and a reasonable PE of 15 would put their share price at $60 to $67. With the close at $33.83 that represents a double in the next 12-18 months. I think the two-year rally continues.


Apple (AAPL) keeps shaking off bad news and eventually their shares will rise to new highs. I just hope they dip to $95 first. On Thursday shares declined to $98 on Bendgate. Supposedly the new iPhone 6 models will bend when carried in the pocket of your tight jeans. A YouTube video showing a bent iPhone garnered over 30 million views in the first day alone. Shares plunged on the news. However, an entire army of bloggers immediately saw something funny in the video. During the video the time on the phone kept changing but not always moving forward. Sometimes it went backwards with the phone in various states of bend. Articles said the bent phone video was a scam to target Apple. The company immediately opened up its secret testing center where each model underwent more than 15,000 tests to prove it was sturdy and practically indestructible. They said after selling more than 10 million phones the first weekend only 9 people had reported their phones had bent. Shares rebounded $3 on Friday to close just below $101.

The #Bendgate hysteria prompted hundreds of bent pictures and jokes on Twitter. Link Here

Apple had to take IOS 8 out of service temporarily to resolve some bugs but that also failed to depress the stock. The only failure that Apple has is a failure to decline!


Alibaba (BABA) shares have quit going down at least temporarily. After trading down to $86.62 they rebounded to close at $90.23 on Friday and slightly over that potentially troublesome $90 level. For BABA holders there is good news. Options on BABA will begin trading on Monday. However, buying puts to protect yourself against a decline in BABA shares is not going to be cheap. The implied volatility is going to be huge and that suggests prices will be high. For people wanting to invest in BABA but not have to buy the stock you may have to pick a higher strike in order to afford the calls. Volume in BABA has eased with only 18.3 million shares trading on Friday so maybe the opening volatility is fading.

According to Bloomberg and Markit, investors have succeeded in borrowing and shorting 12.1 million shares of BABA since the IPO. That is a minor amount but I am sure it is due to the difficulty of borrowing the shares. The initial interest rate to borrow BABA shares was 8%. As time passes the number of shares short will grow. Markit said late in the week there were 45.1 million available to borrow.


Markets

The Dow lost -166 points for the week despite a +167 point short squeeze on Friday. That was a .96% loss for the week. This compares to the Russell 2000 with a -2.4% loss. The small caps lead the market but on Friday it was Nike leading the market. The $9.75 gain in the Dow component spiked the index to the point where those short the ETF were forced to cover. With the Dow spiking the rest of the indexes caught fire as shorts were forced to cover ahead of the weekend. It requires a very bearish set of circumstances for traders to want to remain short over a weekend. Despite the geopolitical concerns there was not enough bearish sentiment to take the chance. Shorts have a recurring nightmare and that is watching the futures soar on Sunday night and realizing there will be a huge gap open on Monday. After a couple doses of that reality traders are cured for life of going short over a weekend.

Apple's $3 rebound help produce a mini squeeze on the Nasdaq.

While on the topic of geopolitical concerns the battles in Iraq and Syria are no longer news. Now that the battle has been joined and the U.S. is bombing ISIS in both countries the news is no longer news. In a couple more weeks it will be a brief mention in the papers as the headlines focus more on a tragic traffic accident, a missing college student or another NFL player caught doing something he shouldn't. The ISIS problem only became front page news when they started beheading captives on camera. On Friday they killed more than 100 in Afghanistan and beheaded 15 of those and it barely made the news.

The market moving headlines for next week will probably be the rate decision and press conference by Mario Draghi and economic reports out of China and the ECB.

The S&P blew through the 50-day average at 1976 on Thursday and continued down to 1966 on Friday morning. The 100-day average was not much lower at 1955 but it remained untouched. The rebound made it back to 1986 before stalling. The 1980 support level was severely broken on Thursday and did not even cause a blip on the return trip higher on Friday. That should have been decent support.

The +17 point rebound on Friday was just over half of the loss of -27 on Thursday. That qualifies as a lower low and a lower high despite the solid gain.

If you gave me a naked chart like the one below and did not tell me who it was and without the benefit of prices I would tell you the stock was going lower. When you know the name of the stock or index you immediately attach your bias to it. When you know the prices you immediately start factoring in the "known" support and resistance levels. Taken together the details allow the human mind to rationalize its bias.

If you don't believe me put a chart on your screen and then ask one of your kids if it is going higher or lower. They have no market bias, no stock bias, no economic bias, etc. The chart is just a bunch of lines and 90% of the time they will give you the right answer.

Up or down?

Based on the naked chart above I would say the S&P is going lower. Each of the short squeezes last week recovered only about 50% of the prior declines.

On Tuesday I said:

At this point we should see at least a temporary bounce from the 1980 level because the selling has been slow and steady and not fast and furious. The fast drops are the ones that blow through support and keep going. Steady selling tends to pause at interim support levels and dip buyers on the sidelines interpret those pauses as bottoms. Sometimes that is self fulfilling if enough buyers take the bait. Sometimes the bounces from those support levels just provide a higher entry point for sellers. Also, I would tighten your stops on any bearish plays because you know there is a short squeeze lurking in our future.

Wednesday's short squeeze was text book with a gap open, pause midday and sprint into the close when the market did not roll over. In retrospect it provided the perfect entry point at a higher level for sellers.

Thursday's drop was fast and it blew through that 1980 support without even a stutter step. There was no chance for dip buyers to take the bait. The 1970 level became the price magnet and the index traded on both sides of that level for the better part of two days. Friday's squeeze actually started at 1:45 when Nike started tacking on points and the Dow moved to the high for the day.

The key for me is the 50% retracement of each dip. Buyers were reacting not buying. On Friday the volume was really light for a +167 point rally with only 5.4 billion shares. However, despite the severity of the drop on Thursday the volume was only moderate at 6.37 billion. I see that as no conviction in either direction. Thursday's decline was broad based with down volume 7:1 over advancing volume and decliners nearly 5:1 over advancers.

Without any proof in the form of heavy volume it is hard to pick a market direction. When in doubt even slightly heavier volume on down days is a clue. It is not convincing but it is a clue. The dual 50% rebounds are another clue. Add in the lower high and lower low and the odds are good we will see some lower lows in the days ahead.

Despite the BlackBerry and Nike earnings beats we don't really know how this earnings cycle is shaping up. We are entering the warning cycle next week with the initial wave or big cap earnings the following week. With the economic declines in Europe and China and the sanctions on Russia we could see a flurry of warnings soon. With the dollar at four year highs anyone that sells overseas and that is 50% of the S&P, will be hit with currency translation losses.

While the outlook has turned negative there is some good news. Volatility has returned. Why is that good? Volatility without directionality immunizes us. Despite the losses last week the numbers were not that bad. Losing -1% on the Dow is not a big deal.

On August 7th the S&P hit a low of 1904. On Sept 19th it hit 2019. That is a 115 point gain and at Friday's close of 1982 it has only given back 37 points. For a normal 50% retracement we need to lose another 20 points but if we consider the 1966 low on Friday morning we dropped to within 4 points of that 50% retracement. That is close enough for government work.

So we can look at this two ways. We have a possible 50% retracement from the last gain and traders should buy any repeat dip below 1970. OR, the trend is just getting started and we should expect lower lows. Based on the naked chart above I am going with option two.

I will leave you with one more chart. This is a weekly S&P for the last two years. The S&P has touched the uptrend line seven times in two years. Eventually that trendline is going to fail. I am not suggesting that will happen now but the last several upticks have failed to reach the top of the channel. The last one we are in now is the weakest since September 2013. In theory this suggests we should at least test the bottom of the channel. The rally looks like it is tiring.


Support should now be 1965, the 100-day at 1955 followed by 1950. Resistance is 1985 and 2000.


The Dow declined to stop almost exactly on support at 16,950. If there was going to be a perfect support test this was it. Unfortunately the rebound stopped almost exactly on prior resistance at 17,150. Dead stop in both directions and the Dow closed -37 points off its high on a strongly bullish day. It was a lower high but not quite a lower low. Another -11 point decline and it would have been a lower low.

It is hard to read the Dow chart because of the big gains in Nike. Without Nike the day could have ended much differently. Support remains 16,950 and resistance 17,150.



There is no doubt about the Nasdaq with a lower low, lower high and within 1 point of a 50% rebound. This is another one of those Rorschach charts. Which way is this chart moving? I am pretty sure if you did not know this was the Nasdaq you would say it was falling. Would you buy it? Probably not.


The Nasdaq is further complicated by the chart of the Nasdaq 100 big caps. Strong support at 4,000 has not even been touched on two occasions. We saw 4,009 on the 16th and 4,007 on Thursday. The dip buyers are alive and well in the big caps. Since the April dip the 50-day average has been support and it is now at 4,009.

The -$4 drop by Apple on Thursday accounted for about 17 of the -85 points the Nasdaq lows. This forced the QQQs to be sold and that caused a downdraft in the rest of the Nasdaq.

Even with that Apple crash the Nasdaq 100 still held above support. This leads me to name the Nasdaq 100 as the canary in the market coal mine this week. As long as the 4,000 level holds on the $NDX the broader market is not going to implode. We still have the declining chart to deal with but the 4,052 close gives us a big 50 point cushion before retesting that support. If the 4,000 level does fail it should mean we are actually headed for a correction.


The Composite broke two levels of support and the 50-day average and the rebound was lackluster. The 4,466 low is now support but it does not look promising.



The Russell 2000 is in serious decline. The 50 and 100 day averages have both moved below the 200 day. The index lost -2.4% last week and is now down -3.8% for the year. It is the only major index not showing a gain for the year. By comparison the NDX is up +13%, Nasdaq Composite +8%, S&P +7.3%, Transports +14.6%, Semiconductors +20% and the Dow +3.2%. Strange that the Dow is lagging so badly when it hit a record high of 17,350 the prior week. Even the Russell 1000 is up +7%.

Either the R2K is wrong or the rest of the indexes are wrong. If the R2K represents market sentiment what message is it giving today? If the small caps lead up and down did they take a wrong turn somewhere or did the big caps not yet get the message?

Support is 1,110 followed by 1,096. The 1,087 level represents a 10% decline from the highs. I think the odds are good we are going to at least test the 1,096 level and possibly 1,082. There is nothing positive about the R2K chart.



The S&P-400 Mid-cap is right on the verge of breaking the two-year uptrend. It bounced off the 200-day on Thursday at 1,373 but the rebound was lackluster. The mid-cap index is confirmation of the weakness in the Russell 2000.



For next week we have a tale of two markets. The small and mid-caps continue to be weak and the big caps are struggling to shrug off the weakness. The Nasdaq 100 is the canary in the market for next week with support at 4,000. As long as it stays above that level this market weakness is just noise. If it follows the Russell as the Pied Piper then the next decision point could be the 1,087 level on the Russell as a 10% drop from the highs and an official correction. The last time we had a serious dip the Russell hit correction territory on May 15th and rebounded strongly while the other indexes escaped without that severe of a drop. Nobody knows if that will happen again but the Russell is only about 33 points from that correction level.

Random Thoughts

After buying back more than $2 trillion in stock since the March 2009 market lows the buyback trend appears to be slowing. U.S. companies bought back $116.2 billion in shares in Q2 compared to the $159 billion in Q1. S&P said 295 S&P-500 companies bought back stock in Q2 and that is 5 more than Q1 and up significantly from the 223 in Q2-2013. S&P earnings analyst, Howard Silverblatt, said 23% of S&P companies bought back shares to push up their earnings per share compared to 20% in Q1 and 12% in Q2-2013. Apple purchased $5 billion in Q2 after buying $18 billion in Q1. IBM purchased $3.6 billion and Exxon bought back $3 billion. Companies routinely buy back shares to push earnings per share higher in tough quarters. IBM is the poster child for this tactic. In 1993 IBM had 2.3 billion shares outstanding. Today they have 997 million. That bought them a lot of earnings beats over the years.

If companies are slowing their buybacks this could reduce the upward pressure on the market from reducing the number of shares outstanding. Companies also slow their buybacks when markets are seen as overvalued and then increase buybacks again when corrections occur. What is this telling us about today's market? I think $116 billion is still a healthy number but should that continue to fall I would expect to see the market weaken.

So how is the consumer really doing? Are they lining up to buy armloads of things they don't really need? Not quite. The following retail companies have already warned for Q3 and some added Q4 as well. RH, WTSL, DLM, HOFT, BURL, PBY, CPB, BEBE, JCG warned and I am sure the list is longer but those are the only ones I can remember today. Comments were "challenging to attract consumers," "tough operating environment," "increased promotional environment is like being at war," "environment continues to be challenging and traffic continues to be a headwind."

With only 88 shopping days until Christmas have you seen the new holiday ads? Yes, retailers are always trying to extend the shopping season whenever possible and Kmart has already launched its first Christmas ad in early September. Not to be outdone Walmart, Target and Toys R Us quickly ran their versions of the seasons "Hot Toy" list for the holidays. With the retail sector a war zone you can expect to see longer store hours and shorter checkout lines. This is a self defense move by retailers to take some of the pain out of shopping so you won't give up and go shopping on Amazon. Walmart has promised to keep ALL checkout lines open during peak shopping times starting on Black Friday.

In 2008 retailers hired about 325,000 workers for the holidays. Last year the number was 786,000 and this year it could be close to one-million. Because of last year's online shopping nightmare where hundreds of thousands of packages got hung up at FedEx and UPS we will probably see online shoppers hit the buy button a little earlier this year. Pitney Bowes said a recent survey showed that 49% said they were going to start earlier. I don't believe it matters. Everyone has the best of intentions but there are a lot of procrastinators and they will still wait until the last minute.

If you are looking for that special gift for someone that needs nothing this might be an option. For the Man Who Has Everything

Bank of America said that more than half the stocks in the Russell 2000 and the Nasdaq Composite are already in a bear market with more than 20% declines from their highs. "The market is being held up by participation in the market leaders but this participation is waning and waning fast." BofA also said "the biggest concern is the new low for net free credit at $182 billion and it is a major risk should the market drop. If the market drops and triggers margin calls, investors do not have cash and would be forced to sell stocks or get cash from other sources to meet margin calls. This would exacerbate an equity market sell-off."

Standard & Poor’s has issued an extraordinary credit alert on the eurozone, one that deserves close attention. It warns that the rise of Germany’s AfD anti-euro party calls into question the euro bail-out machinery and queries the pitch for any form of QE, stimulus that has already been pocketed and spent in advance by the markets. It will force Angela Merkel to take a tougher line on Europe, and further complicates the management of the (already dysfunctional) currency bloc. (Comments from Ambrose-Evans Pritchard at the UK Telegraph)

Part of Thursday's market crash was the news that a pro-Kremlin deputy in Russia has submitted a draft law that would allow the government to seize foreign assets in Russia in response to Western economic sanctions. The submission came after Italy seized 30 million euros of stock, assets and cash from Russian businessman Arkady Rotenberg. He had 4 villas, apartments and a hotel seized. Part of the law would also allow for oligarchs to get compensation from the state in the case of an "unjust judicial act of a foreign court."

The Russian Duma passed by a vote of 430-2 a new law that limits foreign ownership of any Russian media business to 20% or less. Foreign owners have until January 2016 to divest themselves of any excess. If the government controls the press they control the people. No Foreign Ownership Allowed

Russia's GDP grew 0.8% over the last year, the Ruble is in free fall and the economy is sure to be in recession next year as a result of the sanctions. Capital flight out of Russia is expected to hit $100 billion according to the World Bank. Yes Vladimir, there are costs as a result of foreign aggression.

Ukraine is planning on applying for EU membership in 2020 according to President Petro Poroshenko. As part of this plan called "Strategy 2020" he is going to enact a series of both economic and political reforms. They probably have a much better chance of joining the EU than they do joining NATO. None of the NATO countries want to take on any additional risk related to Russia's plan to rebuild the country by pulling neighboring countries back into the fold by any means necessary.

Josh Brown posted the following cartoon from Gary Varvel, Indianapolis Star, with the caption "You left out rising interest rates." So far these four horsemen have had little impact on the market but the fear of rising interest rates is starting to create a choke hold.


More than 5% of working age population is now enrolled in disability. This is twice the average in 1990. Nearly 10% of "near" retirees who lack savings are applying for disability as their unemployment benefits are set to expire. State governments are actively recruiting people on state programs to apply for Federal disability. That gets them off the state rolls and transfers the obligation to the Federal government. There are even ads on late night TV where lawyers claim they can get almost anyone on disability. This is not going to end well if the trend towards claiming disability as a retirement pension of sorts continues.

Do you know why Sunni and Shia hate each other so much in some areas but intermarry and even pray together peacefully in others? Here is a link to everything you ever wanted to know about the Sunni-Shia conflict. Sunni-Shia Divide

Bloomberg reported that the 25 biggest pension systems by assets averaged a 7.45% return from 2004 to 2013. Unfortunately their liabilities tripled over the same period leaving them with a $2 trillion shortfall. Any kind of reasonable returns can't keep up with the ballooning obligations. Those top 25 funds account for 40% of the entire US public pension system. Illinois, Kentucky, Connecticut and Louisiana are at the top of the most underfunded list. Obviously if the market goes flat or declines for a period after interest rates begin to rise the problems with those funds are only going to get worse without a decent annual return. These top 25 funds manage about $5.3 trillion in U.S. public pensions. I hope you are not depending on one of those pensions for your retirement.

While October is known as the "bear killer" month because a lot of bear markets hit their lows in October, it is also the best performing month in a midterm election year. The Stock Trader's Almanac pointed out that a lot of our biggest market losses occurred in October but in eleven post WWII bear markets that ended in October, nine of them were midterm election years. Obviously you can't trade on that trend but it is always interesting to see what history has to offer. October is the month before the November elections and the politicians are out giving speech after speech about how things will be better once they are elected. Apparently some portion of the investing public believes them. However, I think October sparks a lot of rebounds because of Q3 earnings. If earnings are positive it creates some investor interest and a rebound is born.

Unbelievable but true. Did you know that a police officer can stop you on the highway and search you and your car without a warrant and seize anything they desire including cash, jewelry, guns, computers, etc and then make you prove that you obtained the items legally in order to get them back? Many times the process can take many months or even years plus having to sue the police dept to force them to turn over the goods. There were nearly 62,000 seizures since the law came into being after 9/11 with more than $2.5 billion seized. Only one-sixth of the seizures were challenged because of the cost to file suit and take it to trial. Only 4,455 cases (41% of those that filed suit) actually recovered their money and property. The appeals took more than a year and in most cases the individuals had to sign a hold harmless agreement not to sue the police departments for seizing the property. Police Stop and Seize Scam

North Korean dictator Kim Jong-un is suffering from an "uncomfortable physical condition" according to North Korean officials. He has not been seen in public since September 3rd. He is a heavy smoker, has added a lot of weight recently and was last seen walking with a limp. Analysts believe he is suffering from gout, diabetes and high blood pressure. He had recently blamed his rapidly rising weight on "a weakness for cheese." A North Korean medical team has recently visited Germany and Switzerland to consult colleagues about his health issues. Analysts are worried that a continued or worsening medical problem could trigger instability since there is no succession plan and Kim keeps replacing anyone that is seen as getting too close to the throne. Kim could stage a military exercise to show he is still in control.

The U.S. is using $50 million planes with $30,000 bombs to destroy $200,000 Humvees that they gave to the Iraqi military but were captured by ISIS. That means we will probably be building more Humvees to turnover to Iraq so they can fight ISIS. The 47 Tomahawk missiles fired into Syria last week to shutdown the Khorasan group cost $1.5 million each. The U.S. sent 48 strike aircraft on the initial Syria mission including the first time in combat for the F-22 Raptor. That plane costs $62,000 an hour to fly making it the most expensive manned aircraft to operate. The Pentagon estimated it was spending $7.5 million a day to fight ISIS but that was before the Syrian attack. That number will go up significantly.

Mario Draghi's one-trillion euro stimulus program ran into trouble last week. The LTRO program had far fewer takers than anyone expected. Apparently nobody wants the money even though it is at a record low rate. Loans for only 83 billion Euros were made and Spanish and Italian banks took 45% of that total. The common complaint was "We are not interested in borrowing money to expand. Demand is too limited to make it worth the risk." That pretty well sums up the problem with Europe. Only the firms really in trouble will take the money and the rest of the economy is going into bunker mode until a recovery appears. Expect Draghi to do something different at the meeting this week.

Enter passively and exit aggressively!

Jim Brown

Send Jim an email

"Once war is forced upon us, there is no other alternative than to apply every available means to bring it to a swift end. War's very object is victory, not prolonged indecision."

Gen. MacArthur

 


Index Wrap

Too Much Good News So Market Can't Climb 'Wall of Worry'

by Leigh Stevens

Click here to email Leigh Stevens
THE BOTTOM LINE:

The economy can't grow too much or it's too much of good thing! Better to do the common thing of climbing a wall of worry. The 'correction' camp has won out for awhile but that's a good thing too trading wise as bottoms are much easier to 'time' than tops. Really, seriously, tops in bull markets, even interim ones, are notoriously tricky to get into with options at the right time, especially in straight puts.

The right things are happening to 'set up' a next rally as the S&P 500 (SPX) and the Nasdaq Composite (COMP), even the small cap Russell, as they near or are at (RUT) 'oversold' territory relative to the 13-day Relative Strength Index (RSI) indicator. Not the Dow which isn't near an oversold low in RSI and is holding 17000; and, not in the Nasdaq 100 (NDX), which has a 'what me worry' sheen.

The problem so to speak with NDX here is that it's been too overbought longer-term to continue to advance and 'too much' in favor by investors to fall much. THAT would take real selling and who is going to sell the tech darlings!

I sensed some pullback if not a full-blown correction in NDX as I wrote 2 weeks back (9/13/14) that:

"I favor buying NDX calls in the 4000 area, assuming buying comes in this area as I believe it will; the idea being that what was a key (prior) chart resistance should now offer technical support on pullbacks. If not, a deeper correction may be 'signaled'."

Well, NDX got down to 4007 this past week before the sellers suddenly must have gotten struck by WHAT AM I THINKING?! They then stopped selling in the face of buyers wanting to come in near 4000.

Bullish sentiment finally has been declining as traders realize that maybe there actually ARE risks to owning stocks OR having too much of a weight in equities relative to those generous 2 percent government notes! I say GOOD. Not greed is good but some fear is healthy in trading.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX) DAILY CHART:

The S&P 500 (SPX) Index slipped some this past week and had a 1-day Close below 1980 support and below its 50-day moving average. A more prolonged stint below the 50-day average would suggest that SPX's support (up) trendline may get tested.

Near support comes in at 1965, at the recent intraday lows seen on Thursday and Friday, with next pivotal technical support coming in at SPX's up trendline, currently intersecting in the 1948 area. Fairly major SPX support is suggested in the low-1900 area as the early-August bottom.

Near resistance is at 2000. Further key resistance is suggested in the 2011 area, extending to 2020 as highlighted by the red down arrows on my chart.

The RSI momentum indicator, with low and high readings in the upper or lower zones suggesting an oversold or overbought condition respectively, got down to near a typical 'oversold' low this past week.

The last time SPX got 'fully' oversold in the 13-day RSI, which was also coupled with a low (preceding) CPRATIO, was the last clear cut bullish 'signal' relative to my two key technical indicators. This was COUPLED with a fall to price support implied by SPX's dominant up trendline and the primary trend reversal aspect of price action + RSI + sentiment extremes.

S&P 100 (OEX) INDEX; DAILY CHART

The big cap S&P 100 (OEX) also fell briefly below its technical and moving average (50-day) support at 880 but not for two days running which tends to 'confirm' the first instance.

Near support is highlighted (green up arrow) at the recent two-day intraday low at 877. Next technical/chart support then comes in around 866 or the current intersection of OEX's up trendline.

Near resistance is at 890-892, then is highlighted at 900 which is the 'pivotal' resistance; further resistance is then implied in the 910 area, at the upper end of OEX's broad uptrend channel.

A dip to the 870-866 area looks to offer a bullish play. I didn't suggest buying puts in the 900 area as I don't usually trade counter to the dominant trend. I still see the big cap OEX moving higher over time. September is not always a great month to prove the primary trend is intact. August saw outstanding gains; September looks like it may end slightly lower. Only Monday and Tuesday to go until month-end!

THE DOW 30 (INDU) AVERAGE; DAILY CHART:

Except for Thursday weakness, the Dow 30 Average (INDU) held its key current line of support at 17000. The chart remains bullish as it stands currently. INDU has traced out a sideways consolidation only. If there is a decisive downside penetration of 17000 then another down leg is suggested.

I've highlighted near support at 17000-16942, with key lower support coming in at the up trendline, currently intersecting around 16650.

Near resistance is at 17200-17215, then at the prior intraday high at 17350. Major resistance is projected to come in the 17600-17700 zone.

The 30 Dow stocks have 12 I count as either in strong bullish patterns or at least looking like they could go still higher; i.e., DD, GS, HD, INTC, JNJ, JPM, MMM, MRK, NKE, PG, TRV and UNH. The foregoing list here doesn't leave me feeling INDU has to go a lot higher but it's probably enough to pull the Average up. If there's another rally that only carries again to the 17130-17150 area and sideways thereafter for a period of time, I'd look at such a pattern as a possible Head & Shoulder's top.



NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite Index (COMP) is bearish on a short-term basis but still within its longer-term bullish uptrend as shown graphically by the highlighted uptrend price channel. The intermediate-trend would turn lower if there were Closes below COMP'S early-August lows. Below COMP's up trendline, technical/chart support is assumed at the prior (early-August) cluster of lows at 4350-4325.

Assuming that COMP holds at or above its up trendline, intersecting in the 4475-4460 area, the Index would be in a position to rally; especially so as it nears and/or is at a low 'oversold' reading in the 13-day Relative Strength Index. Moreover, a bearish 1-day or more extreme in trader sentiment could set the stage for a potential rebound.

Overhead resistance is first at 4550, then at 4600 and above that is projected next in the 4700 area.

NASDAQ 100 (NDX); DAILY CHART:

The Nasdaq 100 (NDX) remains bullish, although within the context of a sideways to lower short-term trend after NDX hit resistance implied by the upper end of its broad uptrend price channel as seen on the chart. NDX also held a key technical support thi8s past week as implied by its 50-day moving average. It's low was within a hair's breath of key technical support at 4000. Trendline support comes in at 3900.

Resistance is seen in the 4100 area, then (again) up at the upper end of NDX's uptrend channel in the 4182-4200 area.

Implied volatility increased over the past couple of weeks, which is good for options sellers and high-frequency traders. I'll spare you my opinion of those computer jocks but think low, very low.

Odds favor NDX continuing to hold its 50-day moving average. It's hard not to be bullish on big cap tech which seems to be oblivious to any big sell offs. It's been rare to see NDX any MORE oversold than it was on Thursday. The RSI was at that same level prior to NDX's last up leg.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQ) is mixed in its pattern in the short-term but has seemingly found support in the area of its up trendline. I've highlighted support at 98 with next key support in the 96.4-96 area.

Near-term overhead resistance is at 100, extending to 100.6 at the prior intraday high. Next resistance is implied at QQQ's upper trend channel boundary.

Daily trading volume shot up significantly on Thursday and Friday of this past week which is meaningful for the Q's, usually as often as not, occurring at or near a bottom. However, if 98 gives way, I don't see support coming in before 96.4-96. Major support begins in the 94 area. Stay tuned!

RUSSELL 2000 (RUT); DAILY CHART:

The Russell 2000 (RUT) is bearish in its pattern but RUT has the potential here to make a double bottom low; especially so given the oversold RSI.

MOST RELIABLE TRADE for the period shown below is to buy calls at oversold extremes and puts at overbought levels per the highlighted low ('oversold') and high ('overbought') zones in terms of the 13-day Relative Strength Index.

I don't have any more to say on RUT! It of course COULDN'T be that simple! You can always find reasons to make it more complex than this by further analysis!!


GOOD TRADING SUCCESS!




New Option Plays

Consumer Goods vs. Consumer Goods

by James Brown

Click here to email James Brown


NEW DIRECTIONAL CALL PLAYS

Deckers Outdoor - DECK - close: 99.38 change: +1.23

Stop Loss: 95.90
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 665 thousand
Entry on September -- at $---.--
Listed on September 27, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
DECK is part of the consumer goods sector. The essence of the company is making shoes. Many look at DECK and think of just one brand - Ugg. It's true that Ugg accounts for 80% of sales but DECK is growing. They have a number of brands and its Teva brand saw sales jump more than 25% last quarter. Its Sanuk brand had sales improve +19.6% last quarter.

According to a company press release, "Deckers Brands is a global leader in designing, marketing and distributing innovative footwear, apparel and accessories developed for both everyday casual lifestyle use and high performance activities. The Company's portfolio of brands includes UGG, I HEART UGG, Teva, Sanuk, TSUBO, Ahnu, MOZO, and HOKA ONE ONE. Deckers Brands products are sold in more than 50 countries and territories through select department and specialty stores, 126 Company-owned and operated retail stores, and select online stores, including Company-owned websites. Deckers Brands has a 40-year history of building niche footwear brands into lifestyle market leaders attracting millions of loyal consumers globally."

DECK is developing a healthy trend of beating Wall Street's earnings estimates. The last couple of quarters have seen beats by at least 15%. Many on wall street believe DECK should continue to see healthy margin improvements.

The company's latest earnings report was in July. It was their Q1 for fiscal year 2015. Wall Street expected a loss of $1.31 a share. DECK reported a loss of $1.07. Revenues soared +24.3% to a record $211.5 million, significantly above analysts estimates. Management then raised their EPS and revenue guidance for 2015.

This earnings improvement has powered the stock to new multi-year highs. The $90.00 level was significant resistance and now DECK is testing potential round-number resistance at $100. A breakout could spark some short covering. The most recent data listed short interest at 17.3% of the small 33.49 million share float. The point & figure chart is bullish and forecasting at $116 target and a move over $100 would produce a new triple-top breakout buy signal.

Tonight we're suggesting a trigger to buy calls at $100.25.

Trigger @ $100.25

- Suggested Positions -

Buy the NOV $105 call (DECK141122C105) current ask $3.50

Option Format: symbol-year-month-day-call-strike

Daily Chart:

Weekly Chart:




NEW DIRECTIONAL PUT PLAYS

Harley-Davidson, Inc. - HOG - close: 60.54 change: -0.44

Stop Loss: 62.25
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 1.6 million
Entry on September -- at $---.--
Listed on September 27, 2014
Time Frame: 8 to 12 weeks
New Positions: Yes, see below

Company Description

Why We Like It:
It looks like shares of HOG have run out of gas. The company is an American icon. Their website describes themselves as "Harley-Davidson Motor Company produces custom, cruiser and touring motorcycles and offers a complete line of Harley-Davidson motorcycle parts, accessories, riding gear and apparel, and general merchandise." The made in America label still resonates with many consumers, especially overseas. Unfortunately sales appear to have hit a pothole.

HOG's Q1 results were reported back in April and the numbers were better than expected. The stock gapped higher and hit new multi-year highs. Yet a week later HOG had peaked. Shares have been building a trend of lower highs ever since its late April high.

The latest earnings report was in July. While earnings were above expectations HOG's revenues were a hair below estimates. Management said that market share fell 260 basis points to 50.3%. More importantly management lowered their 2014 full year shipping guidance from a range of 279K-284K down to 270K-275K. This has resulted in some analysts lowering estimates and their ratings on the stock. Shares have also struggled.

HOG is now trading new 2014 lows. It's also testing significant support in the $60.00 level. A breakdown under $60 could send HOG toward $55 or even $50. The point & figure chart is bearish and currently suggesting at $49.00 target.

Technically shares of HOG have built a bearish head-and-shoulders pattern (easily seen on the weekly chart). The $60 level support is the neckline for this bearish sell signal. Tonight we're suggesting a trigger to buy puts at $59.75.

Trigger @ $59.75

- Suggested Positions -

Buy the NOV $60 PUT (HOG141122P60) current ask $1.98

Option Format: symbol-year-month-day-call-strike

Daily Chart:

Weekly Chart:



In Play Updates and Reviews

Stocks Trim Weekly Losses

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. market trimmed its weekly loss with a widespread bounce on Friday.

UHS has been removed.


Current Portfolio:


CALL Play Updates

Facebook, Inc. - FB - close: 78.79 change: +1.57

Stop Loss: 75.75
Target(s): To Be Determined
Current Option Gain/Loss: - 0.0%
Average Daily Volume = 33 million
Entry on September 25 at $78.75
Listed on September 23, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
09/27/14: FB helped lead the market's bounce on Friday with a +2.0% gain. That was enough to erase Thursday's loss and push FB to a new closing high. I would consider new bullish positions here. More conservative traders may want to see a breakout past $79.00 first.

Earlier Comments: September 23, 2014:
Facebook is the dominant social media company on the planet. Their social networking platform has 1.23 billion monthly active users and hundreds of millions of daily active users.

The stock was showing relative strength today and appears to be ignoring the market's three-day decline. Helping fuel the rally today (+1.9%) was news of a new ad platform. The Wall Street Journal broke the story and CNBC followed up with news on FB's new ad platform called Atlas. This new program will provide marketers with more tools on measuring the impact of their advertisements' success and helping them better target the right audience. The Atlas program will also tracks users across the web.

Google is the king of online advertising and its sales are about five times what FB's are currently. Yet FB has a huge advantage because they have so many details about each of its users. Plus, FB can track users across multiple devices from desktop PCs to mobile devices like your smartphone.

Yesterday FB was making headlines with news on its virtual reality system. Many pundits harpooned FB for spending $2 billion to buy Oculus, a leading VR design firm, back in March. Proponents say FB is planning ahead for the long-term future were VR could be huge. FB did unveil a new prototype VR headset called "Crescent Bay" and the company plans to launch a new full-scale consumer device in 2015.

This is a new all-time closing high for FB. If this rally continues we want to hop on board. Tonight I'm suggesting a trigger to buy calls at $78.75. We're not setting an exit target yet but I will note the point & figure chart is bullish and forecasting at $91.00 target.

- Suggested Positions -

Long 2015 Jan $85 call (FB150117c85) entry $3.07

09/25/14 triggered @78.75
Option Format: symbol-year-month-day-call-strike

chart:


Mallinckrodt Public Limited Co. - MNK - close: 90.00 change: +1.53

Stop Loss: 86.45
Target(s): To Be Determined
Current Option Gain/Loss: - 8.3%
Average Daily Volume = 4.85 million
Entry on September 17 at $87.25
Listed on September 11, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
09/27/14: MNK was also showing relative strength on Friday with a +1.7% gain. Shares are testing potential round-number resistance at $90.00. The intraday high was $90.50. Traders may want to consider a rally past $90.50 as a new bullish entry point.

Earlier Comments: September 11, 2014:
MNK is considered a drug maker but the stock is outperforming its peers in both the drug industry and the biotech industry. The S&P 500 is up about +8% in 2014. The pharmaceutical index (DRG) is up +13.1%. The biotech index is up +34.8% thus far in 2014. Yet MNK is up +64.4%.

The company describes itself as "a global specialty pharmaceutical and medical imaging business that develops, manufactures, markets and distributes specialty pharmaceutical products and medical imaging agents."

"Areas of focus include analgesics and central nervous system drugs for prescribing by office- and hospital-based physicians, and autoimmune and rare disease specialty areas like neurology, rheumatology, nephrology and pulmonology. The company's core strengths include the acquisition and management of highly regulated raw materials; deep regulatory expertise; and specialized chemistry, formulation and manufacturing capabilities."

"The company's Specialty Pharmaceuticals segment includes branded and specialty generic drugs and active pharmaceutical ingredients, and the Global Medical Imaging segment includes contrast media and nuclear imaging agents. Mallinckrodt has more than 5,500 employees worldwide and a commercial presence in roughly 65 countries. The company's fiscal 2013 revenue totaled $2.2 billion."

The company had seen a few key milestones this year. They recently finished their $5.6 billion acquisition of Questcor. In August the stock was added to the S&P 500 index. MNK's earnings report in May was better than expected and management raised their guidance. Their latest earnings report was August 7th. Wall Street expected a profit of $0.85 a share on revenues of $610 million. MNK delivered a profit of $1.20 a share with revenues up +14.6% to $653 million. Management raised their guidance again for both their 2014 EPS and revenue estimates.

MNK's Chief Executive Officer and President, Mark Trudeau, commented on their quarterly results saying,

"This has been another exceptionally strong quarter in what is shaping up to be a very promising year for Mallinckrodt. This performance is being driven by the strength of our Specialty Pharmaceuticals segment in both Brands and Specialty Controlled Substance Generics, as well as streamlined costs from our on-going restructuring initiatives, leading to meaningful top-line and bottom-line growth. We continue to be pleased with the performance of our base business and recently added OFIRMEV, and look forward to closing the acquisition of Questcor in the coming weeks."

The current rally in MNK stock has lifted shares to all-time highs. The September 5th move looked like a potential bearish reversal yet there was no follow through lower. Instead MNK has been consolidating sideways. If shares continue to march higher it could spark some short covering. The most recent data listed short interest at 29.3% of the small 53.9 million share float.

We are not setting a target tonight but the point & figure chart is forecasting at $90.00 target. We are suggesting a trigger to buy calls at $87.25.

*consider smaller positions* - Suggested Positions -

Long OCT $90 call (MNK141018C90) entry $3.00*

09/25/14 new stop @ 86.45
09/22/14 new stop @ 85.65
09/20/14 new stop @ 84.65
09/17/14 triggered @ 87.25
Option Format: symbol-year-month-day-call-strike

chart:


Union Pacific Corp. - UNP - close: 108.58 change: +1.39

Stop Loss: 106.90
Target(s): To Be Determined
Current Option Gain/Loss: - 2.7%
Average Daily Volume = 2.5 million
Entry on September 17 at $108.25
Listed on September 16, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
09/27/14: Railroad stocks were showing strength on Friday and UNP bounced from the $107.00 level. I'd like to see some follow through on this rebound. Readers may want to wait for a rally past $109.00 before launching new bullish positions.

Earlier Comments: September 16, 2014:
If you believe the U.S. economy is getting better then transports should perform well. Dow Theory suggests we can't have a significant rally without the transports. Thus far the group has shown leadership this year with the Dow Jones Transportation average up +15.1% in 2014. The railroads have been a strong part of that leadership.

UNP is one of the biggest. The company has been around for 150 plus years. They have over 46,000 employees, more than 8,200 locomotives, and pull nine million carloads a year.

According to the company website, "Union Pacific operates North America's premier railroad franchise, covering 23 states in the western two-thirds of the United States. Union Pacific serves many of the fastest-growing U.S. population centers, operates from all major West Coast and Gulf Coast ports to eastern gateways, connects with Canada's rail systems and is the only railroad serving all six major Mexico gateways. Union Pacific provides value to its roughly 10,000 customers by delivering products in a safe, reliable, fuel-efficient and environmentally responsible manner."

Believe it or not but the shale gas and shale oil energy boom in the U.S. has played a part in the railroad strength. U.S. energy production has soared with the Energy Information Administration reporting U.S. crude oil production at 8.5 million barrels a day in June. That's the highest production since July 1986. A lot of that crude oil gets moved by train.

Back in 2008 only 9,500 carloads a year were crude oil. Today that has surged to over 407,000 railcars of crude oil a year.

The railroad group continues to see strong traffic in 2014. The upcoming harvest will also put more demand on the railroads. American farmers are looking at a record-breaking crop this year.

Currently shares of UNP Have been consolidating sideways at all-time highs just under the $108.00 level. Tonight we're suggesting a trigger to buy calls at $108.25.

- Suggested Positions -

Long NOV $110 call (UNP141122C110) entry $2.15*

09/20/14 new stop @ 106.90
09/17/14 triggered @ 108.35, gap higher. Trigger was $108.25
*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

chart:




PUT Play Updates

Autoliv, Inc. - ALV - close: 94.70 change: -0.35

Stop Loss: 98.25
Target(s): To Be Determined
Current Option Gain/Loss: +27.2%
Average Daily Volume = 392 thousand
Entry on September 16 at $98.45
Listed on September 15, 2014
Time Frame: 4 to 6 weeks
New Positions: see below

Comments:
09/27/14: ALV did not participate in the market's bounce on Friday, which is good news for the bears. Shares underperformed with a -0.3% decline. More conservative traders might want to adjust their stop closer to the 10-dma.

Earlier Comments: September 15, 2014:
The auto part makers have been a bright spot in the market over the past year and a half or so. It looks like the group is starting to diverge. Stocks like DLPH, TRW, and LEA still look relatively strong. Yet BWA and ALV have broken down.

Who is ALV? According to their website, "For over 60 years, Autoliv has focused on one very important issue: saving lives. Our innovative products save 30,000 lives every year and prevent 10 times as many injuries. We are first and foremost a safety technology company. In the world of automotive occupant safety, we were the first to introduce the two- and three-point seat belt system and airbags for front and side impacts. We were also the first to launch pyrotechnic belt pretensioners and pedestrian protection systems. We develop, manufacture and market airbags, seatbelts, steering wheels, passive safety electronics and active safety systems such as radar, night vision and camera vision systems. We also produce anti-whiplash systems, pedestrian protection systems and integrated child seats. Autoliv Inc. is the result of a merger in 1997 of the Swedish company Autoliv AB, and the U.S. company Morton ASP."

Earnings momentum may have peaked. The company's most recent earnings report back in July was a miss. Wall Street expected a profit of $1.55 a share but ALV only delivered $1.45 with profits falling -2% from a year ago. Revenues did come in above expectations at $2.38 billion. Yet the sell-off on earnings may have started the current correction in ALV stock.

Technically shares look bearish. ALV produced a double top with the peaks in June and July. The bullish breakout past resistance near $104 in early September proved to be a bull trap. Now ALV is breaking support at its simple 200-dma and its long-term bullish trend (see weekly chart below).

Tonight we're suggesting a trigger to buy puts at $98.45.

- Suggested Positions -

Long OCT $95 PUT (ALV141018P95) entry $1.65*

09/22/14 new stop @ 98.25
09/16/14 triggered @ 98.45
Option Format: symbol-year-month-day-call-strike

chart:


Cummins Inc. - CMI - close: 133.78 change: +0.74

Stop Loss: 138.25
Target(s): To Be Determined
Current Option Gain/Loss: + 3.3%
Average Daily Volume = 1.26 million
Entry on September 23 at $134.65
Listed on September 22, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
09/27/14: CMI ended its five-day losing streak with a +0.5% bounce on Friday. I would not be surprised to see a bounce toward $135.00 or its 10-dma near $136.00. Both levels could be short-term overhead resistance.

Earlier Comments: September 22, 2014:
CMI is in the industrial goods sector. The stock has been in a long-term albeit choppy up trend since mid 2012.

Company describes itself as, CMI, "a global power leader, is a corporation of complementary business units that design, manufacture, distribute and service diesel and natural gas engines and related technologies, including fuel systems, controls, air handling, filtration, emission solutions and electrical power generation systems. Headquartered in Columbus, Indiana, (USA) Cummins currently employs approximately 48,000 people worldwide and serves customers in approximately 190 countries and territories through a network of approximately 600 company-owned and independent distributor locations and approximately 6,800 dealer locations. Cummins earned $1.48 billion on sales of $17.3 billion in 2013."

CMI is actually developing a bullish trend of beating Wall Street's estimates and raising guidance. Unfortunately investors seem to have forgotten about this growth. Shares have been underperforming since CMI peaked in June. It's been a steady trend of lower highs.

It does not help that Dow-component Caterpillar (CAT), considered a competitors for CMI, recently warned of slowing sales around the world.

Technically CMI's recent oversold bounce just failed at the $140.00 level. The stock has also broken down below a long-term trend line of support (see the weekly chart below).

Last week's low was $134.77. Tonight we're suggesting a trigger to buy puts at $134.65. We are not setting an exit target yet but the point & figure chart is bearish with a $114.00 target.

- Suggested Positions -

Long DEC $135 PUT (CMI141220P135) entry $5.90*

09/23/14 new stop @ 138.25
09/23/14 triggered @ 134.65
*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

chart:


iShares Russell 2000 ETF - IWM - close: 111.12 change: -0.99

Stop Loss: 113.05
Target(s): To Be Determined
Current Option Gain/Loss: +55.5%
Average Daily Volume = 29.0 million
Entry on September 10 at $114.85
Listed on September 08, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
09/27/14: The IWM bounced +0.89% on Friday but shares marked their fourth down week in a row. It looks like the $110 level might be short-term support as we suspected. The $112 and $114 levels should be overhead resistance. Our stop loss is unchanged at $113.05.

I'm not suggesting new positions at this time.

Earlier Comments: September 9, 2014:
The S&P 500 made it 14 days in a row without a move of more than 0.5% on a closing basis. Jonathan Krinsky at MKM Partners noted this occurrence yesterday. Krinsky said the last time we saw a streak this long was 1995. To find a streak longer than 14 days you have to go back to 1969, which saw a run of 20 days in a row. Today would have been the 15th day but stocks started to move and the direction was down. Small cap stocks were leading the way with the Russell 2000 falling -1.1% versus the -0.6% drop in the S&P 500.

Market watchers were blaming the rising dollar and new fears that the Federal Reserve might raise rates sooner than expected. There is speculation that the Fed might drop its "considerable time" guidance for low rates in its policy statement at the Fed meeting scheduled for next week.

Whatever the reason small caps look vulnerable and underperformed on above average volume today. We want to hedge our bullish bets with a put position on the IWM just in case the market does start to correct lower. Investors might be growing nervous about the 9/11 anniversary on Thursday. You could call this put a little 9/11 market insurance.

Tonight we are suggesting a trigger to buy puts at $114.85.

- Suggested Positions -

Long OCT $115 PUT (IWM141018P115) entry $2.70

09/23/14 new stop @ 113.05
09/22/14 new stop @ 114.35
09/10/14 triggered @ 114.85
Option Format: symbol-year-month-day-call-strike

chart:


Lennox Intl. - LII - close: 78.00 change: -0.02

Stop Loss: 80.25
Target(s): To Be Determined
Current Option Gain/Loss: + 5.1%
Average Daily Volume = 391 thousand
Entry on September 22 at $79.25
Listed on September 20, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
09/27/14: LII closed nearly unchanged on Friday. While the lack of participation in the market rally is a good sign shares of LII haven't really moved much the last few days.

More conservative traders may want to wait for a new failed rally under the $80.00 level before initiating new bearish position.

Earlier Comments: September 20, 2014:
LII is in the industrial goods sector. Unfortunately for shareholders the stock is significantly underperforming with a -6.1% decline in 2014. That compares to a +4.1% gain in the XLI industrials ETF and a +4.2% gain in the Dow Industrials.

This is a simple momentum trade. After a three-year rally from its 2011 lows near $25 the stock traded near $95.00 in early 2014. Shares have since been struggling. Traders started selling the rallies. Now LII has broken down below its simple 200-dma and its long-term up trend (see weekly chart below). The last few days have seen LII create a "death cross" with the 50-dma crossing under the 200-dma.

This past week saw the oversold bounce in LII fail near prior support near $82.00 and its 300-dma. Friday's low was $79.33. I'm suggesting a trigger for bearish positions at $79.25. Potential support looks like $75.00 and $70.00. Currently the Point & Figure chart is suggesting at $68.00 target.

- Suggested Positions -

Long DEC $80 PUT (LII141220P80) entry $3.90

09/23/14 new stop @ 80.25
09/22/14 triggered @ 79.25
Option Format: symbol-year-month-day-call-strike

chart:


Las Vegas Sands - LVS - close: 61.93 change: +1.64

Stop Loss: 62.65
Target(s): To Be Determined
Current Option Gain/Loss: +156.6%
Average Daily Volume = 4.6 million
Entry on August 27 at $67.40
Listed on August 26, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
09/27/14: The Nevada Gaming Commission reported on Friday that August 2014 gaming revenues fell -6% in Vegas and down -3.6% for the whole state. Prior to the announcement shares of LVS were bouncing. I don't see any news to explain the spike higher at the opening on Friday.

LVS hit $62.54 and tagged technical resistance near its falling 20-dma before paring its gains. Our stop remains at $62.65.

Earlier Comments: August 26, 2014:
The high-speed growth in the world's biggest gambling hub is slowing down. Investors are taking notice. It used to be that when the world wanted to gamble the came to Las Vegas. Today the biggest gambling center in the world is Macau, a city in southern China.

LVS describes itself as "the world's leading developer and operator of Integrated Resorts. Our collection of Integrated Resorts in Asia and the United States feature state-of-the-art convention and exhibition facilities, premium accommodations, world-class gaming and entertainment, destination retail and dining including celebrity chef restaurants, and many other amenities." LVS has properties in Vegas, Pennsylvania, Singapore, and Macau.

Macau has been the major focus for casino companies the last few years. The coastal strip of Macau is the only place in China where gambling is legal. Forbes described Macau as "Vegas on steroids." Macau overtook Vegas as the world's biggest gambling center back in 2006 with Chinese tourists accounting for nearly 66% of its traffic.

After years of booming growth in Macau the area is facing a few hurdles. One of them is rising wage costs. Current laws force casino operators to hire locals. This has driven unemployment in Macau down to 1.7%. Employees are unhappy. They make less than half that their counterparts in Vegas make. There has been a number of demonstrations as casino workers demand higher wages. There is currently the threat of a labor strike on August 28th this year.

Macau is also suffering from an economic slowdown in China. The country has been slowing grinding down for years. China is still expected to grow more than +7% this year but that's a multi-year low. Another issue has been China's crackdown on corruption this year. This new pressure from Beijing has thrown a wet blanket on VIP traffic to Macau. Yet another challenge for Macau is growing competition from foreign destinations. Other countries are starting to add gambling resorts, which could pressure traffic to Macau.

Analysts have been adjusting their earnings and revenues estimates lower for the casino stocks. That's not surprising given the recent reports of slowing revenue numbers. Macau's gambling regulators said gross gaming revenues dropped -3.7% in June and -3.6% in July. Morgan Stanley just slashed their 2014 Macau estimates from +12% to +6%.

Technically shares of LVS are bearish. The stock has broken significant support near $70.00. The oversold bounce is starting to roll over under resistance. The point & figure chart is bearish and forecasting at $56.00 target.

Tonight we are suggesting a trigger to buy puts at $67.40.

- Suggested Positions -

Long OCT $65 PUT (LVS141018P65) entry $1.50*

09/22/14 new stop @ 62.65
09/06/14 new stop @ 64.65
09/02/14 new stop @ 68.25
08/27/14 triggered @ 67.40
*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

chart:


Pentair Plc - PNR - close: 67.41 change: +0.62

Stop Loss: 68.65
Target(s): To Be Determined
Current Option Gain/Loss: + 5.5%
Average Daily Volume = 2.0 million
Entry on August 26 at $68.90
Listed on August 23, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
09/27/14: Shares of PNR shot higher on Friday afternoon. I don't see any headlines behind the move. This bounce should fail near $68.00 and its 50-dma near $68.25.

Currently I'm not suggesting new bearish positions.

Earlier Comments: August 23, 2014:
Pentair is considered part of the industrial goods sector. They manufacture industrial equipment across the globe. According to the company website, "Pentair is a global water, fluid, thermal management, and equipment protection partner with industry leading products, services, and solutions. Pentair reports the performance of its business within four reporting segments that focus on five primary verticals."

Long-term the stock has had a strong 2012 and 2013 performance. The rally appears to have peaked in 2014 when the market started pulling back in March this year. If you recall many of the momentum names and higher-growth stocks were hammered lower starting in March. PNR doesn't really qualify as a big momentum name or a high-growth name but shares have been unable to recover anyway. Shares have trended lower from the March peak, currently down -16% from its 2014 highs and down -10.6% year to date.

PNR's earnings results have not helped the stock's performance. Back in April they beat estimates but missed the revenue number and then guided lower for the second quarter. Their most recent earnings report was July 31st. Depending whose estimate you use PNR either reported in-line profits or managed to just beat by a penny. Revenues disappointed again. PNR missed the revenue estimate with a -2.7% decline from a year ago to $1.91 billion. Management lowered guidance again but they also announced they were exiting their struggling water transport business.

PNR collapsed on this late July earnings news and lowered guidance with a drop toward $64. Shares have spent three weeks with an oversold bounce that is just now starting to roll over under resistance. PNR appears to have resistance near $70-71 and its 50-dma and 300-dma (see daily chart below). The point & figure chart is bearish and currently forecasting at $61 target.

Tonight we are suggesting a trigger to buy puts at $68.90.

- Suggested Positions -

Long Nov $70 PUT (PNR141122P70) entry $3.60*

09/06/14 new stop @ 68.65
08/26/14 triggered @ 68.90
Option Format: symbol-year-month-day-call-strike

chart:


Starbucks Corp. - SBUX - close: 75.17 change: +1.05

Stop Loss: 76.51
Target(s): To Be Determined
Current Option Gain/Loss: -21.8%
Average Daily Volume = 3.6 million
Entry on September 23 at $74.25
Listed on September 22, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
09/27/14: Shares of SBUX have been volatile the last few days with big up and down swings within the $74-76 zone. Friday's bounce added +1.4%. Overhead resistance is still near $76.00.

Traders might want to wait for a new failed rally near $76 or a new relative low (under $73.78) before initiating positions.

Earlier Comments: September 22, 2014:
Summer is over and fall is officially here. That has many consumers thinking of hot coffee and seasonal fare like SBUX's pumpkin spice lattes. Unfortunately Wall Street doesn't appear too keen on SBUX, if you're looking at the share price action.

This company is in the services sector. They are a global power house as a specialty retailer of what some might consider overpriced coffee and sugary drinks with too many calories. After 30 years in business they have grown to more than 20,000 stores and over 180,000 full time employees.

The stock peaked in late 2013. It looked like the correction was over back in April this year and SBUX did rally from $68 to $79 by July. Yet the stock has been dead money the last several weeks and now it's starting to underperform the market.

That spike you see on the daily chart was a reaction to its Q2 earnings results. The recent breakdown under $76 is bearish and the oversold bounce just failed near this level. Today's intraday low was $74.33. We're suggesting a trigger to buy puts at $74.25.

- Suggested Positions -

Long NOV $72.50 PUT (SBUX141122P72.5) entry $1.60*

09/23/14 triggered @ 74.25
*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

chart:


Tupperware Brands Corp. - TUP - close: 70.29 change: -0.00

Stop Loss: 72.25
Target(s): To Be Determined
Current Option Gain/Loss: +19.6%
Average Daily Volume = 399 thousand
Entry on September 22 at $71.75
Listed on September 20, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
09/27/14: TUP ended Friday unchanged on the day. Last week saw a breakdown below support near $72.00. Now the $72 level should be new resistance.

Earlier Comments: September 20, 2014:
TUP was founded back in 1946 and over the last 60 years the company has grown from their plastic food prep and storage line into multiple brands.

According to the company website, "Tupperware Brands Corporation is the leading global marketer of innovative, premium products across multiple brands utilizing a relationship based selling method through an independent sales force of 2.9 million. Product brands and categories include design-centric preparation, storage and serving solutions for the kitchen and home through the Tupperware brand and beauty and personal care products through the Armand Dupree, Avroy Shlain, BeautiControl, Fuller Cosmetics, NaturCare, Nutrimetics, and Nuvo brands."

Unfortunately this year has not been the best for TUP's stock price. The company missed earnings expectations and lowered guidance back in January. You can see the market's reaction with the big drop in late January on the chart.

It took three months but TUP slowly clawed its way back toward resistance near $85 and its simple 200-dma. That area proved to be a lid on the stock price. Then in July the company disappointed again. It's Q2 earnings report disclosed that profits fell -38% to $47.6 million, down from $76.3 million a year ago. Management then lowered its full year guidance when they reported earnings and shares plunged again.

The weekly chart has produced a bearish head-and-shoulders pattern. The daily chart doesn't look healthy either. The Point & Figure chart is bearish and suggesting at $58.00 price target.

There is short-term support near $72.00. I'm suggesting a trigger to buy puts at $71.75.

- Suggested Positions -

Long 2015 Jan $70 PUT (TUP150117P70) entry $2.59

09/23/14 new stop @ 72.25
09/22/14 new stop @ 72.80
09/22/14 triggered @ 71.75
Option Format: symbol-year-month-day-call-strike

chart:



CLOSED BULLISH PLAYS

Universal Health Services - UHS - close: 109.03 change: -2.70

Stop Loss: 111.75
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 1.6 million
Entry on September -- at $---.--
Listed on September 23, 2014
Time Frame: 8 to 12 weeks
New Positions: see below

Comments:
09/27/14: UHS is not cooperating. Shares have underperformed the market two days in a row. It is possible that shares bounce from their simple 50-dma, which is where UHS closed at on Friday. We don't like the recent relative weakness. Since our trade has not opened yet we're removing UHS as a candidate.

Trade did not open.

09/27/14 removed from the newsletter, suggested trigger was $115.75

chart: