Option Investor
Newsletter

Daily Newsletter, Monday, 5/26/2014

Table of Contents

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

Leaps Trader Commentary

Stocks Hit Highs While The Vix Hits Lows

by James Brown

Click here to email James Brown

Stocks were up four out of five days last week. The only hiccup was thanks to Federal Reserve President Charless Plosser on Tuesday. Plosser suggested the Fed might need to taper faster and raise rates more quickly than expected. This sparked some selling last Tuesday but traders quickly bought the dip. The FOMC minutes from the last meeting proved to be a nonevent. News of another coup in Thailand failed to rattle the markets. Then again that's probably no surprise. This is the 19th military coup in Thailand in the last 80 years (including this one, only 12 coup attempts have been successful).

Big cap stocks continue to lead the market higher. The S&P 500 index closed above the 1,900 mark for the first time in history. The NASDAQ appears to have broken out from its recent consolidation and the small cap Russell 2000 has rallied back above technical resistance at its simple 200-dma. The Dow Jones Transportation Average is hitting new all-time highs. Last week's rally got a boost from gains in the semiconductor and biotech industries. Both the chips and the biotechs are up more than +9% for the year. The transports are up +7.9% in 2014.

Economic Data

We did not have a lot of economic data last week to move the markets. What we did see was focused on the real estate market. Existing home sales rose +1.3% to an annual pace of 4.65 million units in April. This snapped a three-month decline. New home sales in April rose +6.4% to an annual pace of 433,000. This followed March, which was revised higher from 384K to 407K. While the pace of new home sales increased April remained a slow month for sales. The price of new homes actually declined -1.3%.

Overseas Data

There was plenty of data out of Europe last week. Yet European markets were quiet ahead of the EU parliamentary elections this past weekend. The Eurozone said their manufacturing PMI declined from 53.4 to 52.5. This was worse than expected. The United Kingdom said its GDP rose +0.8% quarter over quarter and retail sales improved +1.3% for the month.

France said their manufacturing PMI fell from 51.2 into contraction territory at 49.3. Germany reported +0.8% growth for its quarterly GDP. Germany's manufacturing PMI dropped from 54.1 to 52.9. The German Ifo Business Climate index slipped from 111.2 to 110.4. PMI numbers below 50.0 suggest economic contraction.





China's HSBC Flash Manufacturing PMI number hit a five-month high at 49.7 in May. This reading was better than expected but it's also the fifth month in a row it's been under 50.0. That does not help relieve any worries about a slowing Chinese economy.

Japan said their manufacturing PMI inched up from 49.4 to 49.9, marking its second month in a row below the key 50.0 level. Japan's trade deficit improved significantly thanks to a +5.1% jump in exports. The country's core machinery orders gauge sprinted +19.1%, significantly higher than expected. The Bank of Japan announced no changes to its monetary policy as they believe their economy continues to improve at a moderate pace.

Major Indices:

The large cap S&P 500 index bounced off its 50-dma and rallied to new highs with a +1.2% gain for the week. Its 2014 gain is at +2.8%. It's nice to see a new high but closing at 1,900.53 does not qualify as a "breakout". Technically shares are merely testing round-number, psychological resistance at the 1900 level. There is no denying that the trend is higher. Further gains could definitely help fuel some short covering.

If I had to guess the 1920-1925 area could be overhead resistance. Should this rally fail then we can watch for short-term support in the 1860-1880 zone and the 1840 level.

chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

The action in the NASDAQ composite last week was definitely encouraging. The index has been consolidating sideways the last few weeks. Suddenly this tech-heavy index appears to be in breakout mode with a rally through its 50-dma and the 100-dma. Technically this is bullish. Last week's +2.3% gain has lifted the NASDAQ back into positive territory for 2014 with a +0.2% advance for the year.

chart of the NASDAQ Composite index:

Weekly chart of the NASDAQ Composite index:

The small cap Russell 2000 index has been underperforming its big cap rivals for the last three months. The action last week is hinting that it may have found a bottom, just maybe. The rally through technical resistance at its 30-dma and 200-dma is bullish. The next resistance levels to watch are probably 1140, its 150-dma, and the 50-dma. There are a lot of small cap shorts right now so further gains could spark some serious short covering.

Last week's +2.1% bounce in the $RUT has pared its year to date loss to -3.2%.

chart of the Russell 2000 index

Weekly chart of the Russell 2000 index



Economic Data & Event Calendar

Economic reports to watch this week are probably the durable goods number, the Q1 GDP estimate, and the Chicago PMI. Economists expect the durable goods orders to fall from +2.6% in March to -1.4% in April. The Q1 number is the second estimate on growth in the United States. The first estimate was almost negative at +0.1%. The consensus estimate is revision higher to +1.3% but Moody's is expecting a drop to -0.8%.

Markets will be watching ECB President Draghi in case he says anything about policy. Right now there is a growing expectation the ECB will announce some sort of stimulus program at their June meeting.

Economic and Event Calendar

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

- Tuesday, May 27 -
Consumer Confidence survey
Durable Goods Orders
Case-Shiller 20-city home price index
ECB President Mario Draghi will speak

- Wednesday, May 28 -
Eurozone Unemployment

- Thursday, May 29 -
Weekly Initial Jobless Claims
Q1 U.S. GDP estimate
Pending home sales for April

- Friday, May 30 -
Personal income and spending
Chicago PMI

Additional Events to be aware of:



Looking Ahead:

The continued strength in the big cap indices like the S&P 500 and the Dow Industrials is encouraging. Last week's participation in the rally by the NASDAQ and the Russell 2000 are also positive signs. However, the combination of the S&P 500 index hitting resistance and new highs at the 1900 level at the same time we see the volatility index (the VIX) falling to new 52-week lows and on the extremely low volume is a major warning signal for the bulls.

The VIX has been plunging, down four weeks in a row and at new one-year lows at 11.43. The March 2013 low was 11.05. Back in late 2006 and early 2007 the vix hovered around 10.0. These extremely low reading suggest significant investor complacency and normally accompany market tops.

There is no guarantee that stocks will reverse tomorrow but it seems like the perfect recipe to see the S&P 500 tag a new high at 1900 and the VIX at new low just as we move into summer, a traditionally weak period for equities.

chart of the Volatility Index

Looking ahead we could see the Ukraine-Russian conflict return to the headlines. Ukraine just held presidential elections over the weekend. It looks like pro-west businessman Petro Poroshenko has won the election. Russia claims they're willing to cooperate with the new Ukraine leadership. Poroshenko promises to stop the "war" in the eastern half of his country. He will have his hands full. New fighting broke out between Ukraine forces and pro-Russian rebels in the last couple of days. If it looks like Ukraine can soothe its eastern half and Russia doesn't invade then geopolitical risks to the stock market will fade. That's assuming the rising tensions in the East with China versus Japan and China versus Vietnam don't worsen.

We still want to keep an eye on the bond market. Bonds slowly pulled back last week but it could be just a rest before they rally to new 2014 highs. If the yield on the 10-year U.S. bond drops below 2.5% again it will be considered bearish for the stock market.

Big picture it's a tough time to be a raging stock market bull. China's growth is still slowing down and hitting its slowest pace in a decade. All of Europe's recent growth has faded and much of the area is on the verge of recession. The back and forth sanctions between Europe and Russia will also be another encumbering factor that slows business activity. Growth in the U.S. slowed significantly in the first quarter at +0.1% and almost negative territory. A lot of folks are expecting a big snapback rebound in Q2 growth now that the weather has improved but if it doesn't show up it's going to hurt investor sentiment. Meanwhile there is some hope in areas like India with the recent election and the new business-friendly Indian prime minister promising much needed reforms.

We cannot ignore the market's strength. There are opportunities for investors. I merely suggest caution. The summer before mid-term elections tend to be volatile. As much as I like the rebound in stocks we saw last week I'm worried we're due for a pullback. The S&P 500 index has gone 964 days without a -10% correction and 1,277 days without a -20% pullback. We are way, way overdue but that doesn't mean the market can't keep pushing higher.

James







Portfolio

Portfolio Update

by James Brown

Click here to email James Brown


Current Portfolio


Portfolio Comments:

Stocks look a lot more bullish this weekend than last weekend. However, the lack of volume behind the rally is worrisome.

We want to exit our CHK trade on Tuesday morning (May 27th).

I have updated the stop loss on DIS.

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

No Guarantees

by James Brown

Click here to email James Brown


- New Trades -


Editor's Note:

(May 26, 2014)

Broad market indices like the NASDAQ composite and the small cap Russell 2000 outpaced the rally in the big caps last week. This participation is very encouraging if you're bullish on stocks. At the same time the S&P 500 index hit a new all-time closing high.

What worries me is the S&P 500 closed right at resistance at the 1900 level. This event was done on extremely low volume while the volatility index (the VIX) hit new 52-week lows. These last two factors are not bullish. Some would argue that price is all that matters but stocks do not trade in a vacuum.

I am concerned that U.S. indices could see a pullback just as the NASDAQ and Russell 2000 start to join the rally. Fortunately, just because the VIX spiked lower doesn't guarantee a reversal. Stocks could just as easily keep climbing. That's why we are adding three new candidates to the watch list tonight (they are DOW, HAL, and TPX).

I'm also updating my radar screen.

Radar Screen:
Here is a list of stocks on my radar screen. These have potential to be LEAPS trades down the road if the right entry point presents itself. In no particular order:

radar: FB, GD, BA, ORLY, ADBE, STZ, AA, GLW, CR, ALK, KORS, LUV, HPQ, UPS, FDX, EOG, SLB, MON, FSLR, FLEX, VZ, TWX, MA, V, HTS, MSFT, INTC, ORCL, UA, NKE, JCI,



Play Updates

WSM Soars On Earnings

by James Brown

Click here to email James Brown

Editor's Note:

We want to close our CHK trade on Tuesday morning, May 27th.


Closed Plays


We closed BIG on Monday, May 19th



Play Updates


American Intl. Group - AIG - close: 53.60

Comments:
05/26/14: Goldman Sachs upgraded AIG to a "buy" on Wednesday and the stock gapped open higher. Shares spent the last three trading days hovering just below resistance near the $54.00 level.

Investors can use a close above $54.00 as a new bullish 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 $1.28/1.34

- or -

May 14, 2014 - entry price on AIG @ 53.94, option @ 4.35*
symbol: AIG160115C60 2016 JAN $60 call - current bid/ask $3.95/4.10

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

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


Caterpillar Inc. - CAT - close: 104.03

Comments:
05/26/14: It was a volatile week for shares of CAT. The company announced its sales for the three months ending in April. International sales were down -13% from a year ago and sales in Asia were off -25%. Sales in Europe, Africa and the Middle East were down -24% and down -28% in Latin America. North American sales were accelerating with stronger gains each month in February, March and April with a three-month rise of +12%. Altogether it was the worst drop in sales since February 2010.

These results are ugly! There's no way to sugarcoat it. The stock plunged on Tuesday to test its 50-dma. Coincidentally the broader market was also down sharply on Tuesday in reaction to worries over the Federal Reserve (see tonight's market commentary). The market has been in rally mode the last three days and CAT followed it higher.

CAT's results are bad enough that investors may want to exit this trade early right now. I am concerned that this bounce will roll over in the $104-105 zone and we'll see a deeper decline. That's just speculation on my part.

No 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 $3.15/3.20

- or -

APR 03, 2014 - entry price on CAT @ 101.92, option @ 7.40*
symbol: CAT1615a110 2016 JAN $110 call - current bid/ask $6.90/7.15

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: 27.68

Comments:
05/26/14: Shares of CHK were upgraded three times last week and the stock has continued to underperform. After the prior week's reversal lower CHK spent the last five days consolidating sideways near $28. Energy stocks are leading the market higher and CHK is not participating. That's a problem.

I am suggesting an immediate exit on Tuesday, May 27th. We can reconsider CHK again if it closes above $30.50 again.

- Suggested Positions -
MAY 13, 2014 - entry price on CHK @ 30.34, option @ 1.24
symbol: CHK150117C35 2015 JAN $35 call - current bid/ask $0.47/0.53

- or -

MAY 13, 2014 - entry price on CHK @ 30.34, option @ 2.75
symbol: CHK160115C35 2016 JAN $35 call - current bid/ask $1.71/1.75

05/26/14 prepare to exit immediately on Tuesday morning (May 27th)
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

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: 83.32

Comments:
05/26/14: DIS looks great. The stock has been showing relative strength. Its movie studio division is having a great year with big winners at the box office. Shares of DIS are approaching potential resistance at their all-time highs from March this year. A breakout could signal a run towards the $89-90 zone.

Please note our new stop loss at $77.75.

- Suggested Positions -
OCT 23, 2013 - entry price on DIS @ 68.81, option @ 3.70
symbol: DIS1517a75 2015 JAN $75 call - current bid/ask $10.65/10.75

05/26/14 new stop @ 77.75
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: 77.75
Play Entered on: 10/23/13
Originally listed on the Watch List: 10/13/13


Hess Corp. - HES - close: 89.86

Comments:
05/26/14: On Thursday shares of HES soared on news they were selling their retail gas station business, with 1,342 locations, to Marathon Petroleum for $2.6 billion. HES said it will use its profits from the sale to buy back its stock.

Shares of HES hit new multi-year highs near $92 a share before paring its gains.

I am not suggesting new positions at this time.

- Suggested Positions -
APR 22, 2014 - entry price on HES @ 87.50, option @ 3.15*
symbol: HES1517a95 2015 JAN $95 call - current bid/ask $ 3.00/ 3.20

- or -

APR 22, 2014 - entry price on HES @ 87.50, option @ 5.80*
symbol: HES1615a100 2016 JAN $100 call - current bid/ask $ 5.25/5.85

05/22/14 stock spikes as HES announces $2.6 billion deal to sell its gas station business to Marathon.
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: 91.97

Comments:
05/26/14: It was another quiet week for HON. The stock bounced from support near $90.00 and looks poised to re-challenge resistance at its 50-dma and 100-dma near $92 soon.

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 $ 9.10/ 9.25

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: 86.40

Comments:
05/26/14: ITW spent most of the week consolidating sideways below short-term resistance at its 10-dma near $86 a share. Friday's move looks like a short-term bullish breakout higher. Investors can use Friday's move as a new bullish entry point to buy calls.

- 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 $ 5.60/ 6.00

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

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: 58.36

Comments:
05/26/14: The correction in JOY is now five weeks old. Shares dipped to its 100-dma on Wednesday before bouncing. Friday's rally failed at its 50-dma, which does not inspire any confidence.

I remain concerned over JOY's recent performance. The intermediate trend is down. Earnings are coming up on June 5th. At this point I would wait until after JOY reports earnings before considering new positions.

- Suggested Positions -
APR 08, 2014 - entry price on JOY @ 60.75, option @ 4.40
symbol: JOY1517a65 2015 JAN $65 call - current bid/ask $ 2.34/ 2.45

- or -

APR 08, 2014 - entry price on JOY @ 60.75, option @ 6.05
symbol: JOY1615a70 2016 JAN $70 call - current bid/ask $ 3.75/4.15

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: 58.20

Comments:
05/26/14: The rally in NS stalled last week with a 75-cent pullback.

Looking at the market the NASDAQ and Russell 2000 started to participate. If these broader market indices start to accelerate higher it could diminish investor appetite for more safe haven trades like NS.

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 $ 4.50/5.20

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: 79.88

Comments:
05/26/14: QCOM spent last week consolidating sideways between short-term support at its 50-dma and the $80 level. The long-term trend is still higher but I am not suggesting new positions. QCOM faces resistance in the $81-82 zone.

- Suggested Positions -
NOV 15, 2013 - entry price on QCOM @ 71.34, option @ 4.90
symbol: QCOM1517a75 2015 JAN $75 call - current bid/ask $7.00/7.15

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: 50.16

Comments:
05/26/14: Financials bounced last week and WFC is helping lead the group higher. The stock closed above round-number, psychological resistance at $50.00 for the first time on Friday.

WFC held an analyst day on May 20th. The company remains upbeat on the U.S. economy.

If you were looking for a new bullish entry point then a close above $50.50 might be a good alternative entry point.

Please note that I am adjusting our long-term target from $54.50 to $59.00.

- Suggested Positions -
DEC 26, 2013 - entry price on WFC @ 45.50, option @ 1.50
symbol: WFC1517a50 2015 JAN $50 call - current bid/ask $ 2.41/2.45

-- or --

DEC 26, 2013 - entry price on WFC @ 45.50, option @ 2.95*
symbol: WFC1615a50 2016 JAN $50 call - current bid/ask $ 3.95/4.05

05/26/14 adjust long-term target from $54.50 to $59.00
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 $59.00
Current Stop loss: 44.80
Play Entered on: 12/26/13
Originally listed on the Watch List: 12/08/13



Williams Sonoma - WSM - close: 67.98

Comments:
05/26/14: WSM surged to new all-time highs following its earnings report.

Wall Street was expecting a profit of 44 cents a share on revenues of $941.25 million. WSM delivered 48 cents and revenues of $974.3 million. Management lowered their Q2 guidance and revenue estimates but raised their 2015 earnings and revenue estimates.

The stock soared from $63.73 to $69.49 on Thursday. Shares started to see some profit taking on Friday. I would not be surprised to see more profit taking as WSM potentially fills the gap. I am not suggesting 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 $ 3.90/4.20

-- or --

MAY 13, 2014 - entry price on WSM @ 64.36, option @ 4.70*
symbol: WSM1615a75 2016 JAN $75 call - current bid/ask $ 5.40/5.90

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

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



CLOSED Plays


Big Lots Inc. - BIG - close: 37.97

Comments:
05/26/14: Last week we were concerned about BIG's performance and in last weekend's newsletter announced plans to close this trade on Monday, May 19th. Shares opened at $38.64 on the 19th and continued to sink throughout the week.

- Suggested Positions -
APR 22, 2014 - entry price on BIG @ 39.29, option @ 4.15*
symbol: BIG1517a40 2015 JAN $40 call - exit $3.30** (-20.4%)

05/19/14 planned exit
**option exit price is an estimate since the option did not trade at the time our play was closed.
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



Watch

Basic Materials, Oil Services, & Consumer Goods

by James Brown

Click here to email James Brown



New Watch List Entries

DOW - Dow Chemical Co.

HAL - Halliburton Co.

TPX - Tempur Sealy Intl.


Active Watch List Candidates

AAL - American Airlines Group

PKG - Packaging Corp. of America

VFC - V.F. Corp.


Dropped Watch List Entries

None.



New Watch List Candidates:


The Dow Chemical Co. - DOW - close: $50.68

Company Info

DOW is in the basic materials sector. The company supplies chemical products as raw materials. The stock is currently in a long-term bullish channel. Investors have lifted shares to multi-year highs as market participants search for yield. DOW currently offers a 3.0% annual yield. Plus, they have an aggressive stock buyback program and plan to buy back $4.5 billion in stock this year.

DOW's business is doing well too. They have faced some rising prices for feedstock and energy costs. Yet they have managed to grow margins in the rest of their business. Management believes this margin growth will continue in 2014. Their Q1 2014 earnings were up +75% from a year ago and marked their sixth quarter in a row of year-over-year earnings growth.

Currently DOW is on the verge of breaking out past resistance near $50-51 and out of a three-month consolidation phase. I am suggesting investors wait for DOW to close above $51.25 and then buy calls the next morning with a stop loss at $47.75. We'll start with a long-term target at $60.00.

Breakout trigger: Wait for a close above $51.25
then buy calls the next day with a stop loss at $47.75

BUY the 2015 Jan $55 call (DOW150117C55) current ask $1.50

- or -

BUY the 2016 Jan $55 call (DOW160115C55) current ask $3.45

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

Chart of DOW:

Weekly Chart of DOW:

Originally listed on the Watch List: 05/26/14


Halliburton Co. - HAL - close: 64.01

Company Info

HAL is in the basic materials sector. The company is part of the oil equipment and services industry. They are considered one of "the big three" in the oilfield services industry, competing with Schlumberger (SLB) and Baker Hughes (BHI). Believe it or not but HAL was the first company to "frack" a well in the U.S. over sixty years ago.

The stock is in a long-term up trend. HAL did see a little correction in November-December 2013 but has since been stair-stepping higher. The company has been consistently buying back stock. They repurchased nine million shares in the first quarter and still have $1.2 billion left on their current buy back program.

Earnings have been strong. Their Q4 results beat Wall Street's top and bottom estimates. HAL managed to do it again with their Q1 results and beat analysts' earnings and revenue estimates in spite of a slow down in Brazil and Mexico drilling activity.

Some would consider HAL cheap with a forward-looking P/E of 12.4 based on its 2015 earnings estimates of $5.07 a share. Many Wall Street firms have price targets in the $80 range. Speaking of Wall Street, the current golden boy of Wall Street David Tepper and his Appaloosa Management fund raised their stake in HAL in the first quarter of 2014. This stock was their sixth largest holding.

Currently HAL is consolidating below resistance at the $65.00 level. I am suggesting we wait for HAL to close above $65.50 and then buy calls the next day with a stop loss at $59.75. If triggered our long-term target is the $80-85 zone.

Breakout trigger: Wait for a close above $65.50
then buy calls the next day with a stop loss at $59.75

BUY the 2015 Jan $70 call (HAL150117C70) current ask $2.38

- or -

BUY the 2016 Jan $70 call (HAL160115C70) current ask $5.65

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

Chart of HAL:

Weekly Chart of HAL:

Originally listed on the Watch List: 05/26/14


Tempur Sealy Intl. - TPX - close: 54.98 change: +0.75

Company Info

TPX is in the consumer goods sector. The company manufactures and markets bedding products including mattresses, pillows, and other bed-related hardware. The stock has been slowly recovering from its disastrous 2012 performance. Tempur purchased its rival Sealy in 2013 and this virtually doubled its overall sales. Yet margins retreated from 50% to 40% due to Sealy's lower margins.

TPX has managed to build on its acquisition of Sealy. Both the Q4 and Q1 earnings results delivered better than expected performance on both the top and bottom line. TPX management believes they will continue to see margins improve in 2014 as they focus on synergies from their Sealy acquisition. They just recently purchased the Sealy brand rights in Japan and Continental Europe, which "represent significant future growth" for the company.

The stock's trend is higher but I'll confess TPX doesn't move super fast. We'll need to be patient with this trade. The point and figure chart is bullish and is currently forecasting at $70 target.

At the moment TPX is hovering just below resistance at the $55.00 level. I am suggesting we wait for TPX shares to close above $55.50 and then buy calls the next morning with a stop loss at $49.75. Our long-term target is $69.00 but that might be too optimistic if you buy the 2015 calls.

Breakout trigger: Wait for a close above $55.50
then buy calls the next day with a stop loss at $49.75

BUY the 2015 Jan $60 call (TPX150117C60) current ask $4.40

- or -

BUY the 2016 Jan $70 call (TPX160115C70) current ask $6.10

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

Chart of TPX:

Weekly Chart of TPX:

Originally listed on the Watch List: 05/26/14


Active Watch List Candidates:



American Airlines Group, Inc. - AAL - $39.11

Comments:
05/26/14: AAL spent last week consolidating sideways. I do not see any changes from my earlier comments.

Earlier Comments:
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. 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 $2.30

- or -

BUY the 2016 Jan $45 call (AAL160115C45) current ask $5.50

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

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


Packaging Corp of America - PKG - $67.55

Comments:
05/26/14: PKG also spent last week consolidating sideways under resistance near $68 and its 100-dma. I do not see any changes from my earlier comments.

Earlier Comments:
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.

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)

- or -

BUY the 2016 Jan $75 call (PKG160115C75)

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

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


V.F. Corp. - VFC - $62.72

Comments:
05/26/14: VFC found support near $62.00 again. More aggressive traders may want to buy calls now with VFC's bounce from $62. I do not see any changes from my earlier comments.

Earlier Comments:
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)

- or -

BUY the 2016 Jan $70 call (VFC160115C70)

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

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