Option Investor
Newsletter

Daily Newsletter, Sunday, 5/18/2014

Table of Contents

  1. Leaps Trader Commentary
  2. Portfolio
  3. New Plays
  4. Play Updates
  5. Watch

Leaps Trader Commentary

Warning Signs Blossom

by James Brown

Click here to email James Brown

The stock market divergence continues. The S&P 500 index, the Dow Industrials, and Dow Transportation average hit new all-time highs last week. Yet the small cap Russell 2000 index fell to -10% correction levels on Thursday. Meanwhile U.S. bonds hit new highs for the year and yields plunged. Commodities like oil, silver, and gold all posted gains for the week while banking stocks underperformed (-1.7%).

Last week started out strong. Big gains in Asian markets on Monday helped fuel a bounce in U.S. stocks. Investors were bullish on the election results in India. China suggested they might allow more foreign investment. Unfortunately investor sentiment seemed to change when the S&P 500's rally stalled at the 1900 mark. The SALT conference in Las Vegas was making headlines in the financial media. Reporters were blaming Thursday's market sell-off as a Tepper Tantrum after Wall Street celebrity David Tepper, founder of the extremely successful Appaloosa Management hedge fund, issued cautious comments.

When asked about the stock market Tepper said, "there's times to make money and there's times not to lose money. This is probably you're supposed to think about preserving some of your money...I think you can still be long, but I think you're supposed to have some cash now." Tepper also said, "I am nervous. I think it's nervous time."

Art Cashin, director of floor operations for UBS at the NYSE, also shared some insight to the market's weakness on Thursday with his comments, "We're living in a five-year paradox here. Things like GDP, the macro numbers, have not lived up to what the market was doing. And the market has done what it's done simply on earnings. And through financial engineering we've gotten the earnings up." Cashin claims that market participants are worried that the European Central Bank does not have the tools it needs to handle the slowdown in Europe. The phantom of deflation seems to be looming larger these days.

Economic Data

Most of the economic data last week was negative but there were a few exceptions. The New York Empire State manufacturing survey surged from 1.3 in April to 19 in May. The survey hasn't been this high since 2010. Small business optimism continued to move higher and hits levels not seen since 2007, before the financial crisis. U.S. jobless claims fell to 297,000 for the week, which is the lowest level since May 2007.

The Philadelphia fed survey slipped from 16.6 in April to 15.4 in May. U.S. industrial production dropped -0.6% in April after March was revised higher from +0.7% to +0.9%. Consumer confidence dropped in May. Analysts were expecting a gain but the University of Michigan consumer confidence survey slipped from 84.1 to 81.8. Analysts blamed rising food costs and gasoline prices on the slide. Retail sales also came in below expectations. Economists were hoping for U.S. retail sales in April to rise +0.4% but the data only showed a +0.1% gain. March retail sales were revised higher from 1.2% to 1.5%.

There was some positive news from the railroad traffic numbers. The 12-week moving average for rail traffic hit highs not seen since 2011 with a +8.5% surge. The increase in rail traffic in April 2014 was the 53rd consecutive month of increase. Rising rail traffic is normally a bullish sign for the economy. Another bullish development is rising demand for trucks. The latest data showed that demand for trucks hit an eight-year high.

While most of the world seems worried about deflation the U.S. saw a bump in inflation. The wholesale inflation gauge, the Producer Price Index (PPI), rose +0.6% in April. The year-over-year increase hit +2.1%, which is the biggest one-year gain since March 2012. The consumer level inflation gauge, the CPI, surged +2% in April, marking the largest one-month increase since July 2013.

Elsewhere the U.S. residential market continues to slide. April housing starts surged +13.2% but almost all of the gain was due to multi-family permits. Single-family (home) permits were down -3.2% from a year ago. The NAHB homebuilder sentiment survey dropped from 47 in April to 45 in May. This is discouraging since we are supposed to be in the middle of the Spring-summer selling season.

If we boil down all of the economic data there is a growing sense of concern that the Q1 GDP growth estimate could be revised lower, possibly -0.5%. It would be the first time the U.S. has seen negative quarterly growth since Q2-2009. Nearly everyone has been expecting the U.S. economy to see this huge snap back rally in Q2 following a dismal Q1 due to the unusually cold winter. Unfortunately the current pace of Q2 data is not showing any big bounce in economic activity.

Overseas Data

Europe is slowing down. Growth appears to be vanishing across the continent. The latest Eurozone GDP quarterly estimate was +0.2% growth, below expectations. Eurozone GDP has only improved +1% from the first quarter of 2013. Germany, Europe's largest economy, is still growing with its latest GDP estimate at +0.8%, up from the prior quarter's +0.4%. Yet growth in France, Italy, and Portugal has stalled. Finland has fallen into recession. Fear of deflation in Europe is surging.

The European Central Bank all but promised some sort of stimulus or QE program at their June meeting but markets are worried the ECB doesn't have the right tools to combat the problem. Interest are already close to zero. They could launch a negative interest rate program and charge banks for holding their reserves but such a program hasn't been proven to be very effective. The EU does not have a single, consolidated bond market like the U.S. so any QE program would be challenging to implement.

Japan offered some positive economic data last week with industrial production growing +0.7% month over month, which was better than expected. Japan's Q1 GDP estimate came in at +1.5% for the quarter. It was the best growth reading since Q3 2011. Unfortunately the worry is this sudden spurt of growth was a temporary surge in consumer spending as people rushed to buy items before the new sales tax took effect. Thus they likely pulled forward a lot of business from Q2 and Q2 numbers will likely disappoint.

China helped fuel the stock market's rally last Monday when regulators hinted that they might loosen limits on foreign investment in public Chinese companies. The impact was short lived. Plenty of economist are worried about China's slowdown. The latest data on China's electricity usage confirms the slowdown with consumption slowing to +4.6% growth. That's down from +7.2%.

China is also dealing with the aftermath of its illegal drilling in Vietnam waters. I mentioned last week how China had moved its brand new deep sea oil drilling rig into the Vietnam's area of the South China Sea. There have been constant clashes between Chinese and Vietnamese ships surrounding the rig. Public sentiment in Vietnam has turned from frustration to anger. Vietnamese protests of China's incursion into their waters have turned into riots with at least 21 dead. Now China is trying to get some of its citizens out of Vietnam.

Ukraine-Russian Conflict

Worries over Russia potentially invading Ukraine seem to have cooled a bit this past week. After last weekend's vote for independence the eastern Ukraine cities of Donetsk and Lugansk both declared their independence and Donetsk immediately asked to join the Russian Federation. Meanwhile the back and forth sanction exchange between Russia and the West continued. Russia said they will no longer allow U.S. astronauts to travel on their Russian rockets to the International Space Station starting in 2020. Russia also said they would no longer sell Russian rockets to the U.S. effectively halting the U.S. military's ability to launch new satellites. Speaking of satellites, Russian President Putin claims he has moved Russian troops away from the Ukraine border. Yet U.S. satellite show no such pullback has occurred.

It was disclosed that Russia dumped a record-setting $26 billion in U.S. treasuries in March. That brings Russia's total U.S. bond portfolio to less than $100 billion, the lowest levels since the Lehman Brother's crisis. Russia could be pulling their money out of U.S. treasuries in anticipation of further sanctions where the U.S. might freeze Russian assets in their custody. April will likely show more selling.

Ukraine is scheduled to hold presidential elections on May 25th. Russia has promised not to interfere. However, Russia plans a massive military drill on the Ukraine border on May 25th.





Major Indices:

The S&P 500 index hit 1900 for the first time in history last week. It promptly reversed. We have been expecting 1900 to be potential round-number, psychological resistance. The index dropped from resistance at 1900 to toward technical support near its 50-dma. With the bounce on Friday the S&P 500 pared its losses to just -0.03% for the week.

The overall picture has not changed much with the S&P 500 virtually unchanged for the week. Another new high and traders still buying the dips. A significant close above 1900 could spark a wave of short covering. The index appears to have support at 1860, 1840 and the 1800 level.

chart of the S&P 500 index:

The NASDAQ composite managed a +0.4% gain for the week. It was the only major index to close positive. This tech-heavy index appears to be churning sideways. The 50-dma and 100-dma are overhead resistance. meanwhile the 200-dma, near the 4,000 level, should be support. A breakthrough either area could spark a big move. Odds are it should see a breakout, one way or the other, from this narrowing consolidating within the next two weeks.

chart of the NASDAQ Composite index:

The small cap Russell 2000 index ($RUT) was the worst performer last week with a -0.39% decline. At its worst levels on Thursday the index was down -10% from its 2014 highs. That's considered correction territory.

The February low was 1,082. Thursday's low was 1,082. It's not a surprise to see a bounce there. I would not be surprised to see the $RUT rebound back toward the current trend line of lower highs. That likely means a bounce toward the 1120-1140 range.

If somehow the $RUT were to close above technical resistance at its 50-dma (currently near 1150) it could be bullish and likely spark some serious short covering. Likewise if we see the $RUT close below 1080 it would be bearish and could spark heavy selling pressure.

chart of the Russell 2000 index



Economic Data & Event Calendar

Ahead of us is a relatively quiet week for economic data but plenty of events. Former Federal Reserve Chairman Ben Bernanke is scheduled to speak on the U.S. economy on Monday. Monday will also see defense ministers from ten Southeast Asian nations come together as they discuss China's incursion into Vietnamese waters.

On Tuesday Russian President Putin begins a two-day meeting with Chinese leaders in Beijing. Many expect the two nations to sign a major trade deal with Russia exporting natural gas to China. On Wednesday the U.S. Federal Reserve will release their minutes from the April meeting. Elsewhere the Bretton Woods Committee will meet with speakers from the IMF, World Bank, and former Fed chairs.

The HSBC Chinese PMI data on Thursday could influence markets. April's reading was in contraction territory at 48.1. Thursday also marks the beginning of EU elections. British and Dutch voters will go to the polls to vote on the European Parliament. The rest of the 28-nation union will vote on May 25th.

The U.S. markets will be closed on Monday, May 26th for Memorial Day.

Economic and Event Calendar

- Monday, May 19 -
Ben Bernanke speaks on the economy

- Tuesday, May 20 -
Russian President Putin meets Chinese leaders in Beijing
JPMorgan Chase's annual meeting

- Wednesday, May 21 -
FOMC minutes from the last meeting
Bank of Japan policy update

- Thursday, May 22 -
Weekly Initial Jobless Claims
Existing home sales
European elections begin
HSBC Markit Chinese PMI data

- Friday, May 23 -
New Home Sales

Additional Events to be aware of:

May 26 - U.S. market closed for Memorial Day


Looking Ahead:

The bond market was a major topic for investors last week. I have been warning readers for weeks that a breakdown below the February lows could signal trouble for the equity markets. Bonds surged midweek and yields on the 10-year U.S. treasury briefly traded below 2.5%. These are six-month lows. The rally in bonds stalled near their October 2013 highs.

Worries over the global economy, geopolitical risk, and a desperate reach for yield are all likely factors pushing money into the bond market. The bond market is supposed to be "smart money" and if bonds are rising it likely means investors are afraid to own stocks. Equity bulls would argue that doesn't make sense with the S&P 500 and the Dow Industrials hitting new highs last week.

Investors should view this rally in bonds as an ill omen for stocks.

chart of the 10-year U.S. bond yield

Warning Signs

There were a parade of analysts offering warning signs for the market last week. Comstock partners warned that market internals continue to deteriorate with only 165 new highs this month. Margin debt remains at record highs. They contend that market valuations are at the highest levels and "exceeded only in 1929, 2000, and 2007."

Piper Jaffray issued a warning last week. They're concerned the S&P 500 index could see a 15 percent correction and drop into the 1,600-1,650 zone before finding a bottom. Long-time market bull, Ralph Acampora, also issued a warning. Acampora is worried the S&P 500 could see a -10% to -15% pullback between now and October. He said the Russell 2000, the NASDAQ, and the S&P midcap index could all drop -20% to -25% from their highs.

Michael Batnick, on The Irrelevant Investor Blog, noted the divergence between the small caps and the big caps. A few days ago Batnick wrote, "The Russell 2000's current 10% peak-to-trough decline (its first since November 2012) is small caps' 36th peak-to-trough decline of at least 10% since 2000, with an average decline of 17.1%. Of the first thirty-five corrections, every one of them were accompanied by large-caps also falling, until now (an average decline of 12.8%)."

The Stock Trader's Almanac noted that since 1949 there have been 11 bull markets that lasted an average of 1,770 calendar days with an average gain of +161.4%. The current bull market is 1,894 days (as of today) with a +180.5% gain. The current bull market in the S&P 500 has also gone an incredible 956 days without a -10% correction.

I continue to urge caution. There are pockets of strength in this market. However, they are unlikely to last if the big cap indices rollover. I will repeat Tepper's comment that "there is a time to make money and a time to not lose money."

There is always opportunity in the market somewhere. If you do initiate new positions I would start small to limit risk. If the market does see a correction you will wish you had some capital available to take advantage of the weakness. I would not be in a rush to buy dips since we don't know when the next dip fails to be bought and turns into something more painful.

James







Portfolio

Portfolio Update

by James Brown

Click here to email James Brown


Current Portfolio


Portfolio Comments:

It was a record-setting week for the S&P 500 and the Dow Industrials with new highs for both. Yet stocks retreated midweek and the Russell 2000 hit -10% correction territory.

We added four new trades from our watch list: AIG, CHK, ITW, and WSM.

We want to exit our BIG trade on Monday morning (May 19th).

I have updated the stop loss on NS and QCOM.

Disclaimer: At any given time the author may have positions in any or all of any companies mentioned in the Leaps Newsletter.

--Position Summary Table--
Table lists Directional CALL or PUT/LEAPS only.
Insurance puts, if applicable, are not shown.

Red symbol/name represents a play or option position exited or closed this week.




New Plays

A Successful Week for the Watch List

by James Brown

Click here to email James Brown


- New Trades -


Editor's Note:

(May 18, 2014)

The big cap indices continue to drift higher while the small caps continue to drift lower. This divergence will not last forever. Eventually one group of stocks will reverse and join the others. After 950 days without a -10% correction in the S&P 500, what are the odds that the big caps don't follow the small caps lower? Another way to look at it, the last 35 times the small cap Russell 2000 index produced a -10% correction (since the year 2000) the big caps followed them lower. The Russell just produced its 36th -10% correction. Will the big caps follow this time?

In tonight's market wrap I mentioned how there are pockets of strength. This past week we saw four of our five watch list candidates graduate to our active play list (AIG, CHK, ITW, and WSM ). It was a successful week for our watch list. Tonight we are adding three new candidates to the watch list (AAL, PKG, and VFC). I urge investors to be cautious on launching new trades. Consider starting with small positions to limit your exposure.

Summers can be a tough time for the bulls and summers ahead of a midterm election can be especially rocky. That doesn't mean there aren't exceptions. We just need to be careful.

I am not adding any new active trades tonight.



Play Updates

Adding New Trades

by James Brown

Click here to email James Brown

Editor's Note:

We added four new plays from our watch list this past week: AIG, CHK, ITW, and WSM.

We want to exit our BIG trade immediately on Monday morning.


Closed Plays



None. No closed plays this week.




Play Updates


American Intl. Group - AIG - close: 52.50

Comments:
05/18/14: The stock market's rally on Monday and Tuesday last week helped lift AIG to new multi-year highs. We had AIG on our watch list with a plan to buy calls if shares closed above $53.75. AIG met that requirement on Tuesday. Our trade opened on Wednesday morning at $53.94. Profit taking in the last couple of days almost erased AIG's weekly gain.

At this point I would be hesitant to launch new positions. We can wait for a dip near $50.00 as an alternative entry point or if the market rallies, then a new close above $54.00 could work as an entry point.

Our long-term target is the $65-70 zone. Currently the point & figure chart is bullish with a $64 target.

- Suggested Positions -
May 14, 2014 - entry price on AIG @ 53.94, option @ 1.50*
symbol: AIG150117C60 2015 JAN $60 call - current bid/ask $1.07/1.12

- or -

May 14, 2014 - entry price on AIG @ 53.94, option @ 4.35*
symbol: AIG160115C60 2016 JAN $60 call - current bid/ask $3.65/3.80

05/14/14 trade opens. AIG opens at $53.94
*option entry price is an estimate since the option did not trade at the time our play was opened.
05/13/14 AIG closed at $53.96, above our suggested trigger above $53.75
Please note I'm listing the standardized option symbol:
symbol-year-month-day-call-strike

Chart of AIG:

Current Target: AIG 65.00
Current Stop loss: 49.75
Play Entered on: 05/14/14
Originally listed on the Watch List: 05/11/14


Big Lots Inc. - BIG - close: 38.70

Comments:
05/18/14: I am worried that we should have waited until after BIG closed above $40.00 as our entry point. The stock has struggled with resistance at $40.00 for the last four weeks in a row. Traders bought the dip at its 50-dma on Friday but upward momentum has clearly stalled.

I am suggesting a conservative approach. We will exit positions immediately on Monday morning to limit any losses and put BIG back on our watch list after it reports earnings on May 29th.

- Suggested Positions -
APR 22, 2014 - entry price on BIG @ 39.29, option @ 4.15*
symbol: BIG1517a40 2015 JAN $40 call - current bid/ask $3.30/3.60

05/17/14 prepare to exit on Monday morning, May 19th,
04/22 trade opens. BIG opened at $39.29
*option entry price is an estimate since the option did not trade at the time our play was opened.
04/21 BIG closed above our trigger at $39.25

Chart of BIG:

Current Target: BIG @ 47.00
Current Stop loss: 35.75
Play Entered on: 04/22/14
Originally listed on the Watch List: 04/13/14


Caterpillar Inc. - CAT - close: 106.03

Comments:
05/18/14: CAT traded up to new two-year highs on Tuesday. The widespread pullback on Thursday pulled CAT to its 30-dma but traders were in a buy-the-dip mood on Friday. I am not suggesting new positions at this time.

Earlier Comments:
Our long-term target is the $115-125 zone. Currently CAT's point & figure chart is bullish with a $126 target.

- Suggested Positions -
APR 03, 2014 - entry price on CAT @ 101.92, option @ 3.50*
symbol: CAT1517a110 2015 JAN $110 call - current bid/ask $4.20/4.30

- or -

APR 03, 2014 - entry price on CAT @ 101.92, option @ 7.40*
symbol: CAT1615a110 2016 JAN $110 call - current bid/ask $8.10/8.40

04/27/14 new stop @ 98.45
04/03/14 trade opens. CAT @ 101.92
*option entry price is an estimate since the option did not trade at the time our play was opened.
04/02/14 CAT meets our entry trigger with a close above $101.00

Current Target: CAT @ 115.00-125.00 zone
Current Stop loss: 98.45
Play Entered on: 04/03/14
Originally listed on the Watch List: 03/30/14


Chesapeake Energy - CHK - close: 27.64

Comments:
05/18/14: There is no way to sugarcoat it. Our CHK trade is off to a terrible start. We had CHK on the watch list with a plan to buy calls if shares could break through resistance at $30.00 and close above $30.25. The stock closed at $30.33 on Monday. Our trade opened on Tuesday morning, which was pretty much the top on the stock. Shares immediately reversed lower.

I couldn't find any news to explain CHK's relative weakness on Wednesday. You already know the entire market was weak on Thursday but CHK bounced off its intraday lows. Friday's drop in CHK (-4.65%) was a reaction to news the company was cutting its full-year production estimates to the slowest level since 2000.

CHK plans to spin off its oilfield services business. This will reduce its debt and interest payments. It will also cuts its headcount by half. The move also reduces revenues by about $250 million. Investors were obviously not pleased with the news. CHK shares are nearing what should be support at $27.00 and its 50-dma.

Technically last week was ugly with the big drop forming a bearish engulfing candlestick reversal pattern on the weekly chart. Currently our stop loss is at $26.75. If the sell-off sees any follow through this week CHK could hit our stop. I am not suggesting new positions at this time.

- Suggested Positions -
MAY 13, 2014 - entry price on CHK @ 30.34, option @ 1.24
symbol: CHK150117C35 2015 JAN $35 call - current bid/ask $0.54/0.57

- or -

MAY 13, 2014 - entry price on CHK @ 30.34, option @ 2.75
symbol: CHK160115C35 2016 JAN $35 call - current bid/ask $1.75/1.79

05/13/14 trade begins. CHK opened @ $30.34
05/12/14 CHK closed @ 30.33, above our trigger at $30.25
Please note I'm listing the standardized option symbol:
symbol-year-month-day-call-strike

Chart of CHK:

Current Target: CHK @ 40.00
Current Stop loss: 26.75
Play Entered on: 05/13/14

Originally listed on the Watch List: 05/11/14


The Walt Disney Co. - DIS - close: 80.39

Comments:
05/18/14: DIS also retreated from its Monday highs. Shares are hovering near their 50-dma. If this pullback continues DIS could retest technical support at its 100-dma near $78.00. A close below $78 would be troubling. The long-term trend is still higher but we're not suggesting new positions at this time.

- Suggested Positions -
OCT 23, 2013 - entry price on DIS @ 68.81, option @ 3.70
symbol: DIS1517a75 2015 JAN $75 call - current bid/ask $ 8.70/ 8.80

05/11/14 new stop @ 75.75, adjust exit target from $89 to $97.50
04/27/14 DIS looks poised to hit new relative lows and our stop loss
04/13/14 investors may want to take profits now. DIS could be headed for $70.00
03/09/14 new stop loss @ 74.75, traders may want to take some money off the table here. DIS is overbought and due for a dip.
03/02/14 new stop loss @ 71.75
02/16/14 more conservative traders may want to take profits now.
We are adjusting our long-term target from $84 to $89
01/05/14 new stop loss @ 69.40
12/29/13 new stop loss @ 67.40
12/08/13 new stop loss @ 65.75
11/24/13 new stop loss @ 64.75

Current Target: DIS @ 97.50
Current Stop loss: 75.75
Play Entered on: 10/23/13
Originally listed on the Watch List: 10/13/13


Hess Corp. - HES - close: 87.40

Comments:
05/18/14: The upward momentum in HES has stalled. Shares have been churning sideways for just over two weeks. I am still expecting shares to correct lower into the $84-86 zone. I would wait for that pullback before considering new positions.

- Suggested Positions -
APR 22, 2014 - entry price on HES @ 87.50, option @ 3.15*
symbol: HES1517a95 2015 JAN $95 call - current bid/ask $ 2.31/ 2.43

- or -

APR 22, 2014 - entry price on HES @ 87.50, option @ 5.80*
symbol: HES1615a100 2016 JAN $100 call - current bid/ask $ 4.50/5.05

05/04/14 new stop @ 83.45
04/30/14 HES delivered better than expected earnings and revenues
04/22 trade opened. HES opens at $87.50
*option entry price is an estimate since the option did not trade at the time our play was opened.
04/21 HES closes at $87.78, above our entry trigger of $87.50

Current Target: HES @ 109.00
Current Stop loss: 83.45
Play Entered on: 04/22/14
Originally listed on the Watch List: 04/06/14


Honeywell Intl. - HON - close: 91.20

Comments:
05/18/14: HON soared on Monday thanks to an upgrade and a widespread market rally. Unfortunately the rally reversed. Midweek profit taking shaved off more then three points. HON looks poised to retest support near $90.00 again. Our stop is at $89.75.

More conservative investors may want to just take profits now. I am not suggesting new positions at this time.

- Suggested Positions -
(closed the 2014 calls on May 20th at the open)
MAY 07, 2013 - entry price on HON @ 76.20, option @ 2.68
symbol: HON1418a80 2014 JAN $80 call - exit $5.10 (+90.2%)

- or -

MAY 07, 2013 - entry price on HON @ 76.20, option @ 4.10
symbol: HON1517a85 2015 JAN $85 call - current bid/ask $ 8.45/ 8.65

04/27/14 investors may want to just take profits now!
03/02/14 new stop loss @ 89.75, adjust target to $99.00
02/09/14 new stop loss @ 87.45
12/29/13 new stop loss @ 84.85
12/22/13 adjust the exit target to $98.00
...please see earlier newsletter for prior comments...
The plan was to use small positions to limit our risk.

Current Target: exit when HON hits $99.00
Current Stop loss: 89.75
Play Entered on: 05/07/13
Originally listed on the Watch List: 05/04/13



Illinois Tool Works, Inc. - ITW - close: 85.63

Comments:
05/18/14: ITW is another watch list candidate that has graduated to our play list. The plan was to wait for shares to close above $86.50 and buy calls the next day. ITW closed at $87.17 on Monday. Our trade opened on Tuesday morning at $87.57. The market's midweek pullback has dragged ITW back toward its 20-dma. It's still less than three points away from all-time highs. The $82-84 zone should be support. Investors could use a bounce from this area ($82-84) as a new bullish entry point.

- Suggested Positions -
MAY 13, 2014 - entry price on ITW @ 87.57, option @ 3.40*
symbol: ITW1517a90 2015 JAN $90 call - current bid/ask $ 2.45/ 2.60

- or -

MAY 13, 2014 - entry price on ITW @ 87.57, option @ 6.65*
symbol: ITW1615a90 2016 JAN $90 call - current bid/ask $ 5.50/ 5.90

05/13/14 trade begins. ITW opens at $87.57
05/12/14 ITW closes @ 87.17, above our suggested entry above $86.50

Chart of ITW:

Current Target: ITW @ $98.00
Current Stop loss: 81.75
Play Entered on: 05/13/13
Originally listed on the Watch List: 05/04/14


Joy Global Inc. - JOY - close: 59.17

Comments:
05/18/14: It was a volatile week for JOY. Monday's bounce failed at resistance near $60 and its 20-dma. The midweek pullback broke down below its 50-dma on Thursday. However, traders were in a buy-the-dip mood on Friday and JOY outperformed the market with a +1.9% bounce.

I would wait for a new close above last week's high ($60.23) before initiating new positions. More conservative investors may want to wait until after JOY reports earnings before considering new positions. We do not have a confirmed date yet but JOY will likely announce earnings in the last week of May or early June.

- Suggested Positions -
APR 08, 2014 - entry price on JOY @ 60.75, option @ 4.40
symbol: JOY1517a65 2015 JAN $65 call - current bid/ask $ 2.82/ 2.96

- or -

APR 08, 2014 - entry price on JOY @ 60.75, option @ 6.05
symbol: JOY1615a70 2016 JAN $70 call - current bid/ask $ 4.00/4.65

04/08/14 JOY hit our entry trigger at $60.75

Current Target: We're aiming for the $75-80 zone
Current Stop loss: 55.75
Play Entered on: 04/08/13
Originally listed on the Watch List: 04/06/14


NuStar Energy - NS - close: 58.96

Comments:
05/18/14: Investors remained defensive last week and shares of NS continued to drift higher. The stock is poised to hit new two-year highs soon.

I am raising our stop loss to $53.75.

I am not suggesting new positions at this time.

Earlier Comments:
Our target is $64.50. More aggressive investors with a longer time frame may want to aim higher since the point & figure chart is targeting an $87 target.

- Suggested Positions -
APR 04, 2014 - entry price on NS @ 55.25, option @ 3.10*
symbol: NS1517a55 2015 JAN $55 call - current bid/ask $ 5.00/5.50

05/18/14 new stop @ 53.75
04/04/14 our play opens. NS @ 55.25
*option entry price is an estimate since the option did not trade at the time our play was opened.
04/03/14 NS closes above $55.25
Current Target: exit calls when NS hits $64.50
Current Stop loss: 53.75
Play Entered on: 04/04/14
Originally listed on the Watch List: 03/23/14


QUALCOMM Inc. - QCOM - close: 79.42

Comments:
05/18/14: QCOM is virtually unchanged for the week with a minor eight-cent loss. Technically the move last week is a bit more negative. You could argue that QCOM has now filled the gap from April and the rebound is starting to fail. This is technically bearish but there really hasn't been any confirmation yet. We will try and limit our risk by raising the stop loss to $75.75. This keeps the stop below the 100-dma. More conservative traders may want to consider just taking some money off the table now.

In other news QCOM is rumored to be talking to Israeli chipmaker Wilocity about acquiring the company for $300 million.

- Suggested Positions -
NOV 15, 2013 - entry price on QCOM @ 71.34, option @ 4.90
symbol: QCOM1517a75 2015 JAN $75 call - current bid/ask $7.05/7.15

05/18/14 new stop @ 75.75, more conservative traders may want to take some money off the table.
04/24/14 QCOM's earnings were a disappointment and they disclosed a Wells Notice. Investors may want to exit now and wait for the dust to clear.
04/20/14 new stop @ 74.70
03/30/14 new stop @ 73.75
03/23/14 new stop @ 71.75
03/04/14 QCOM raises dividend and buyback program
02/19/14 QCOM being investigated by Chinese authorities
01/19/14 new stop loss @ 69.45
12/08/13 new stop loss @ 67.75
11/15/13 trade opens. QCOM @ 71.34
11/14/13 QCOM closes above entry trigger (above 70.50)

Current Target: $85.00
Current Stop loss: 75.75
Play Entered on: 11/15/13
Originally listed on the Watch List: 11/03/13


Wells Fargo & Co. - WFC - close: 49.08

Comments:
05/18/14: Banking stocks were some of the market's worst performers last week. WFC managed to close the week unchanged, a small victory. Upward momentum has clearly stalled with resistance at the $50.00 level.

I have been warning investors to expect a correction into the $46-47 zone and I still believe odds are good this will happen. I'm not suggesting new positions at this time.

WFC is scheduled to host an investor day on May 20th.

- Suggested Positions -
DEC 26, 2013 - entry price on WFC @ 45.50, option @ 1.50
symbol: WFC1517a50 2015 JAN $50 call - current bid/ask $ 1.99/2.03

-- or --

DEC 26, 2013 - entry price on WFC @ 45.50, option @ 2.95*
symbol: WFC1615a50 2016 JAN $50 call - current bid/ask $ 3.55/3.70

04/06/14 WFC looks poised for a pullback
03/30/14 new stop loss @ 44.80
03/09/14 new stop loss @ 43.90
01/19/14 new stop loss @ 42.90
12/26/13 trade opens with WFC @ $45.50
*option entry price is an estimate since the option did not trade at the time our play was opened.
12/24/13 WFC closed @ 45.39, above our trigger at $45.25

Current Target: Exit WFC hits $54.50
Current Stop loss: 44.80
Play Entered on: 12/26/13
Originally listed on the Watch List: 12/08/13



Williams Sonoma - WSM - close: 64.05

Comments:
05/18/14: WSM is the fourth watch list candidate to graduate to our play list last week. The plan was to buy calls if WSM closed above $64.50. Shares closed at $64.55 on Monday. Our play opened on Tuesday morning at $64.36. Traders bought the dip on Thursday and WSM was showing relative strength on Friday with a +1.29% gain. The stock is now up four out of the last five weeks. We're long just in time for earnings to come out on May 21st. Earnings announcements can be dangerous if WSM disappoints or guides lower.

Shares look bullish here but investors may want to wait to see how the market reacts to WSM's earnings results before considering new positions.

- Suggested Positions -
MAY 13, 2014 - entry price on WSM @ 64.36, option @ 2.95*
symbol: WSM1517a70 2015 JAN $70 call - current bid/ask $ 2.50/2.75

-- or --

MAY 13, 2014 - entry price on WSM @ 64.36, option @ 4.70*
symbol: WSM1615a75 2016 JAN $75 call - current bid/ask $ 3.90/4.40

05/13/14 trade begins. WSM opened at $64.36
*option entry price is an estimate since the option did not trade at the time our play was opened.
05/12/14 triggered. WSM closed at $64.55, above our trigger of $64.50

Chart of WSM:

Current Target: Our target is WSM in the $75-85 zone.
Current Stop loss: 59.75
Play Entered on: 05/13/14

Originally listed on the Watch List: 05/04/14



Watch

Airlines, Packaging, & Apparel

by James Brown

Click here to email James Brown



New Watch List Entries

AAL - American Airlines Group

PKG - Packaging Corp. of America

VFC - V.F. Corp.


Active Watch List Candidates

None. We do not have any current active watch list candidates. See below.


Dropped Watch List Entries

AIG, CHK, ITW, and WSM all graduated to our active play list.

We are removing RGR as a watch list candidate.



New Watch List Candidates:


American Airlines Group, Inc. - AAL

Company Info

AAL is in the services sector. AAL is the merger between US Airways and American Airlines (AMR). The new company, American Airlines Group, is the largest carrier with nearly 6,700 flights a day, over 330 destinations, to more than 50 countries, with over 100,000 employees worldwide.

Wall Street was worried about the merger between these two big airlines as the U.S. Justice Department initially tried to block the deal. Regulators feared that new company would be too big, hold too much power, and reduce competitiveness and thus impact pricing for consumers. Fortunately, a U.S. district judge just recently approved a settlement worked out between AAL and the Justice Department where the new company agreed to sell certain assets to competitors. Getting the legal hurdle for its merger out of the way it's one more worry that investors can forget.

Summer is almost here and should mean good news for airlines. In addition to more vacation travelers the industry won't have to worry about so many cancellations. The 2014 winter season was brutal. In January and February the Bureau of Transportation Statistics said 6.05% of all domestic flights were cancelled. That number dropped to 4.6% of all flights cancelled in March. Put them all together and you have the worst winter cancellation rate in 20 years.

The Wall Street crowd is bullish on shares of AAL. Goldman Sachs recently put a $46 price target on the stock. In the latest 13F filings it was revealed that Paulson & Co had raised their stake in AAL from 8.5 million shares to 12.2 million. Meanwhile David Tepper is the hot fund manager everyone loves and his Appaloosa Management has AAL as its second largest holding. In the last quarter Appaloosa increased their AAL stake by 22.5%.

On a short-term basis shares of AAL are sitting just below resistance at $40.00. Tonight I am suggesting we wait for AAL to close above $40.25 and then buy LEAPS the next morning. We'll start with a stop loss at $36.40. We will tentatively set our exit target at $50.00 for now.

Breakout trigger: Wait for a close above $40.25
then buy calls the next day with a stop at $36.40

BUY the 2015 Jan $45 call (AAL150117C45) current ask $2.45

- or -

BUY the 2016 Jan $45 call (AAL160115C45) current ask $5.30

(note: I have listed the more standardized option symbol format.
symbol-year-month-day-call-strike )

Chart of AAL:

Originally listed on the Watch List: 05/18/14


Packaging Corp of America - PKG

Company Info

PKG is in the consumer goods sector. The company makes containerboard and corrugated packaging materials in the U.S., Canada, Europe, and Mexico. The stock was a big winner last year thanks in large part to PKG's accelerated growth. The company saw 2013 earnings surge to $436 million, up from $164 million in 2012.

PKG just recently acquired Boise and the new merged company is now the fourth-largest containerboard and corrugated packaging maker in the U.S. Management said they expected significant synergies with the acquisition but the results have actually been better than expected.

The last couple of earnings reports from PKG were both bullish with the company beating Wall Street's estimates on the top and bottom line. The latest announcement for the first quarter reaffirmed their full-year 2014 guidance.

Technically the stock has seen a $10 correction (about -13%) with the pullback from $75 to $65. Now shares are starting to rebound from support near $65 and its long-term trend line of higher lows (see weekly chart below). There is potential resistance at the 50-dma and the $70.00 level. Therefore I am suggesting we wait for PKG to close above $70.50 and buy calls the next day. We'll start with a stop loss at $64.75. Our long-term target is the $90 area.

Breakout trigger: Wait for a close above $70.50
buy calls the next day with a stop loss at $64.75.

BUY the 2015 Jan $75 call (PKG150117C75) current ask $1.85

- or -

BUY the 2016 Jan $75 call (PKG160115C75) current ask $4.80

(note: I have listed the more standardized option symbol format.
symbol-year-month-day-call-strike )

Chart of PKG:

Originally listed on the Watch List: 05/18/14


V.F. Corp. - VFC

Company Info

VFC is in the consumer goods sector. The company makes apparel and footwear for sale in the U.S. and Europe. Products include handbags, luggage, backpacks, accessories. Major brands include The North Face, Vans, Timberland, Kipling, Jansport, Reef, Smartwool, Eastpak, Wrangler, Lee, just to name a few.

After big gains in 2013 shares of VFC have been consolidating sideways. The company split their stock 4-for-1 back in December 2013. VFC guided lower back in February but the market reaction was a one-day event. Shares have since recovered. Their most recent report was bullish with VFC beating estimates. That's significant since so many apparel makers blamed the weather on a terrible Q1.

There has been growing speculation that VFC might be Lululemon (LULU) or another athletics apparel brand. Normally the acquiring company's stock goes down on a merger announcement but lately Wall Street has been sending the acquirer's stock higher on positive M&A news.

Technically shares look poised to breakout from their five-month consolidation. The Point & Figure chart is already bullish and forecasting an $80 target.

I am suggesting we wait for VFC to close above $64.25 and then buy calls the next day with a stop loss at $59.75. Our long-term target is the $75.00 region.

Breakout trigger: Wait for a close above $64.25
buy calls the next day with a stop loss at $59.75

BUY the 2015 Jan $70 call (VFC150117C70) current ask $1.45

- or -

BUY the 2016 Jan $70 call (VFC160115C70) current ask $4.10

(note: I have listed the more standardized option symbol format.
symbol-year-month-day-call-strike )

Chart of VFC:

Originally listed on the Watch List: 05/18/14


Active Watch List Candidates:



Sturm, Ruger & Co. - RGR - close: 65.36

Comments:
05/18/14: RGR's recent attempt at a rally has failed at resistance near $70 and its 100-dma and 150-dma. Tonight we are removing RGR as a watch list candidate. I would keep the stock on your radar screen for a close above $70.00 as a potential bullish entry point.

Trade did not open.

05/18/14 removed from the watch list.
05/11/14 adjust entry point strategy. Wait for RGR to close above $70.25 and use a stop loss at $64.75.

Originally listed on the Watch List: 05/04/14