Option Investor
Newsletter

Daily Newsletter, Sunday, 6/8/2014

Table of Contents

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

Leaps Trader Commentary

Bulls Rush Into Summer

by James Brown

Click here to email James Brown

European Central Bank President Mario Draghi finally delivered on his "whatever it takes" threat and announced new monetary easing rules for the EU on Thursday. This was highly anticipated by the market but instead of selling the news investors bought it. U.S. stocks surged to new highs. David Tepper got in on the act with comments on Thursday suggesting his biggest concerns for the equity market have diminished followed the ECB's move. Mr. Tepper is a very influential hedge fund manager (Appaloosa Management fund) and the market quivered three weeks ago when Tepper issued his "nervous" comments at the SALT conference in Vegas.

The S&P 500 index broke out to record highs. The Dow Jones Industrials, S&P 100, Russell 1000 index, Russell 3000 index, NYSE Composite index, and the Dow Jones Transportation Average have all rallied to new all-time highs. Meanwhile the NASDAQ-100 index and the SOX semiconductor index both ended the week at new 14-year highs. Year to date the transportation stocks, semiconductors, and biotechs have delivered very strong gains with +10.9%, +15.3%, and +14.2% gains, respectively.

Market technicians are noting this burst of bullishness in the stock market has pressed the volatility index (the VIX) to new multi-year lows. As of Friday the VIX closed at 10.73. That's the first close under 11.00 since February 2007. There is an ancient market maxim that says "when the VIX is low it's time to go." The other half of that maxim is when the VIX is high it's time to buy. While the low VIX is a warning signal, trying to use it as an entry/exit strategy can be tough. The VIX was stuck near 10.00 for a long time back in 2005-2006.

Weekly chart of the Volatility Index (VIX)

Monthly chart of the Volatility Index (VIX)

Economic Data

The market digested a lot of economic data last week. In the U.S. the ISM manufacturing index improved from 54.9 in April to 55.4 in May. The ISM services index advanced 1.1 to 56.3 in May, which is the best reading since last August. Numbers above 50.0 suggest economic growth. May's ISM services number is the 52nd month in a row above 50.0. Vehicle sales in May hit their best levels since February 2007 with an annual pace of 16.7 million units, this was above analysts' estimates.

Investors were also wading through the labor market numbers. On Wednesday the ADP National Employment Report showed private businesses hired +179,000 people in May, which was below expectations. April's report was revised lower from 220K to 215K. On Thursday the weekly initial jobless claims rose to 312,000 and the prior week's number was revised higher from 300K to 310K. Yet in spite of the rise the four-week moving average has fallen to 310,250, which is the lowest reading since June 2007.

The big report was Friday's nonfarm payroll (jobs) number. Economists were expecting a gain of +220,000. The government report said we added +217K. The not too hot, not too cold jobs number allowed the market rally to continue. The unemployment rate was unchanged at 6.3%. Unfortunately the labor force participation rate was also unchanged at 62.8%. Think about that. Over one third of the labor force is not working.

According to CNNmoney it took two year for the economy to lose 8.7 million jobs during the "Great Recession", which pushed the unemployment rate to 10%. It has taken four years to gain back 8.7 million jobs. According to the Department of Labor this has been the longest and slowest job market recovery since they started tracking this data back in 1939. Sadly the jobs we recovered were not all the same jobs we lost. Many of the new jobs have been lower-paying service sector jobs like retail, wait staff, and bartenders.

Over the last six years we still had people graduating from college, graduating from high school, and immigrating to the U.S. That's about 150,000 new people joining the workforce every month. Analysts estimate that we need another seven million new jobs to get back to "normal". A recent survey found that economists believe it will take another three years before we're back to "full employment", which is unemployment at 5.5%.

Overseas Data

The Eurozone announced that their Q1 GDP growth estimate rose +0.2% quarter over quarter. Eurozone CPI (consumer-level inflation) increased +0.5% while their PPI (wholesale inflation) fell -0.1%. Their unemployment rate inched down from 11.8% to 11.7%. Eurozone manufacturing PMI declined from 52.5 to 52.2, which was worse than expected.

Germany said their manufacturing PMI declined from 52.9 to 52.3, worse than expected. Their industrial production inched up +0.2% for the month following last month's -0.6% drop. German factory orders improved +3.1% for the month, which was better than analysts were hoping for. Meanwhile Spain said their industrial production for +4.3% year over year, much better than expected. The Eurozone retail sales came in better than expected with a +0.4% gain for the month. The Bank of England left their main interest rate unchanged at 0.5% and left their asset purchase plan unchanged at 375 billion pounds.

The big event for the week was the ECB meeting on Thursday. ECB President Draghi delivered on his promise to act at the June meeting. They lowered all three of the ECB's interest rates. The ECB refinancing rate was reduced from 0.25% to 0.15%. The marginal lending rate is now 0.4% from 0.75%. The one that got the most headlines was the deposit rate for the major banks, which was lowered from 0.00% to -0.10%. That means the ECB will charge banks for holding their deposits.

The ECB hopes that this -0.1% fee will provoke the banks to lend more money to businesses and stop storing their cash with the ECB. Individuals saving money in European banks won't be charged this fee but odds are the banks will merely pass this expense onto its customers in their other products. Some analysts have suggested that a mere 0.1% change is not going to make that much difference to the banking system as a whole. It is noteworthy that most of the struggling southern European countries saw their bond yields fall toward record lows. Across the Pacific the country of Japan said their manufacturing PMI was unchanged at 49.9 while their services PMI improved to 49.3. Numbers under 50.0 suggest economic contraction. The Bank of Japan expects their economy to hit their 2.0% inflation target by fiscal year 2015. Meanwhile China saw improvement with its official PMI manufacturing index inching higher from 50.4 to 50.8 and their PMI services number improving from 54.8 to 55.5. Yet the China HSBC manufacturing PMI reversed with a drop from 49.7 to 49.4 and the HSBC services PMI dropped from 51.4 to 50.7.





Major Indices:

The S&P 500 index managed to breakout past a recent trend line of higher highs with last week's rally. Year to date the S&P 500 is up +5.4%. You can see on the weekly chart that the long-term trend looks good but it's arguably overbought at current levels. On the daily chart you can see the index ended the week just below potential round-number resistance at 1950.

On a short-term basis I would expect a brief pullback but the path of least resistance is definitely higher. Investors are likely aiming for the 2,000 mark, which may prove to be tough psychological resistance to break.

chart of the S&P 500 index:

Weekly chart of the S&P 500 index:

The tech-heavy NASDAQ broke through resistance near 4250 and looks headed for its 2014 highs near 4375. Last week's rally has pushed the NASDAQ's year-to-date gain to +3.4%.

The 4350-4375 zone is most likely resistance and odds are the NASDAQ will pause or retreat on its first move back into this zone. Broken resistance at 4250 should become new support.

chart of the NASDAQ Composite index:

Weekly chart of the NASDAQ Composite index:

The small cap Russell 2000 index was one of the better performers last week with a +2.7% surge. After underperforming the last few months the $RUT might try and play catch up. That could be painful for the shorts since bearish bets on the small caps had been rising since the March top.

Last week's big rally lifted the $RUT to a +0.1% gain for the year. On a short-term basis the index looks a bit overbought but broken resistance near 1140 should be new support.

chart of the Russell 2000 index

Weekly chart of the Russell 2000 index



Economic Data & Event Calendar

It's a quiet week for economic data. The only reports worth noting are the inventory data numbers, retail sales for May, and the consumer sentiment report.

Economic and Event Calendar

- Monday, June 09 -
(nothing significant)

- Tuesday, June 10 -
wholesale inventory data (from April)

- Wednesday, June 11 -
(nothing significant)

- Thursday, June 12 -
Weekly Initial Jobless Claims
Retail Sales (from May)
Business inventory data (from April)

- Friday, June 13 -
Producer Price Index (PPI)
University of Michigan Consumer Sentiment

Additional Events to be aware of:

June 18th, FOMC meeting
June 18th, Janet Yellen press conference
July 3rd, U.S. markets close early
July 4th, U.S. markets closed for holiday

Looking Ahead:

The normal "sell in May" trend did not appear this year. Instead we saw stocks accelerate higher in the last half of May. The good folks at The Stock Trader's Almanac did some research on years when the month of May was positive. They found that since 1968, when the market posted gains in May, we had a good chance of strong gains the rest of the year (about 70% chance). We also need to consider the historical trends that the summer of midterm election years tend to be volatile. Right now volatility is super low and due to reverse higher.

There is no denying the S&P 500's up trend. It certainly appears that the path of least resistance is up. Money managers are going to chase the market higher for fear of missing out on the rally. Many mutual funds only have five months left before their yearend on October 31st.

Plenty of analysts are starting to worry that investors are now too bullish. Bespoke Investment noted that the weekly survey of American Association of Individual Investors (AAII) saw bullish sentiment rise from 36.5% to 39.5% last week. This is above the historical norm of 38.4%. Meanwhile Peter Boockvar, managing director with The Lindsey Group, noted that the Investors Intelligence survey of advisors and newsletter writers saw bullish sentiment hit 62.2%. This is the second highest on record and is now above the 60.8 seen in August 1987 (before the 1987 crash in October that year) and above the 62.0 from October 2007, the market's last peak before a bear market drop.

Thus far the U.S. stock market has managed to overcome every obstacle in its path. There is nothing to suggest the market will not continue climbing although I am starting to hear analysts comments about how stock prices are outpacing corporate earnings. When stocks "get ahead of themselves" they eventually correct. Speaking of corrections the S&P 500 index has now gone almost 980 days without a normal -10% correction. We're about 800 days overdue for a correction but there is nothing that says we're going to see a pullback any time soon.

On a short-term note, after last week's big rally, I would not be surprised to see a brief pullback before moving higher.

James







Portfolio

Portfolio Update

by James Brown

Click here to email James Brown


Current Portfolio


Portfolio Comments:

The market's rally accelerated last week. Several indices are hitting new all-time highs. We're starting to hit short-term overbought conditions. It might be time for a dip.

AAL, DVA, HAL, and PKG have graduated from our watch list to our active portfolio.

I have updated the stop loss on HES, NS, TPX, WFC, and WSM.

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

Graduation Trip

by James Brown

Click here to email James Brown

Editor's Note:

In addition to tonight's new play, I am 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:

MSFT, COST, AKAM, HLS, KMB, DECK, CBRL, CR, DE, BHI, LB, COST, SHW, LMT, NOC, GD, INTU, TTC, HUM, TMO, HP, APA, AKAM, IFF, IR, ALK, AAPL, ROP, FDX, SNA, SLB, VLO, TSO, NSC, CYT, ITW, PEP, EGN, CVS, WAG, DHR, GBX, TRN, VNET, CSX, AA, ALKS, WCN, ADM, TYC, GLW, THC



- New Trades -


Expedia Inc. - EXPE - close: 75.09

Comments:
06/08/14: EXPE was on our watch list. The plan was to wait for shares to close above $75.00 and then buy calls the next morning. The stock met our entry point requirement with Friday's close at $75.09. We want to buy calls on Monday morning.

I do not see any changes from my earlier comments below.

Earlier Comments:
EXPE is in the services sector. The company is in the super competitive online travel industry with rivals like Priceline.com (PCLN) and Orbitz Worldwide (OWW).

EXPE is developing a trend of beating analysts' estimates with strong profit and revenue growth. This past quarter EXPE reported revenues of $1.2 billion. That is the fifth quarter in a row that EXPE has delivered double-digit year over year revenue growth. The company has also seen surging growth in its bookings. Q3 2014 saw 15% bookings growth. Q4 2014 was +21%. Q1 2014 was +29%.

Analyst firm Cantor Fitzgerald recently offered bullish comments on EXPE and raised their price target. The company is having success with its Expedia Traveler Preference program. In Q3 2013 there were about 35,000 hotels in the program. By Q1 2014 that has grown to 51,000 hotels. As more hotels join it will boost EXPE's room nights metric and sales.

Billionaire hedge fund manager David Tepper's Appaloosa Management is also bullish on EXPE. The latest 13F filing showed that Appaloosa had initiated a new stake in EXPE in the first quarter of 2014.

Bears could argue that EXPE, PCLN and OWW could face competition from companies like Google and Facebook as they seek to boost their ad revenues to their large audiences. Reuters has reported that Google is experimenting with some programs with a few hotels. This threat is probably a few years away and could eventually make EXPE as potential takeover target.

Technically EXPE experienced a correction from $81 to $67 earlier this year. The stock found support in the $67 area and just recently EXPE has broken out past some key resistance. Currently shares hover just below short-term resistance at $74.00.

Our long-term target is the $90-100 zone.

Breakout trigger: Wait for a close above $75.00
then buy calls the next day with a stop at $69.25

BUY the 2016 Jan $90 call (EXPE160115C90) current ask $8.20

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

Chart of EXPE:

Originally listed on the Watch List: 06/01/14



Play Updates

Market Accelerating Higher

by James Brown

Click here to email James Brown

Editor's Note:

The stock market's widespread gains this past week lifted many of our active candidates to new relative highs.

We also added AAL, DVA, HAL, and PKG from the watch list to our active play list.


Closed Plays



None. No closed plays this week.




Play Updates


American Airlines Group, Inc. - AAL - $43.88

Comments:
06/08/14: Airlines were very strong performers last week. Shares of AAL broke through resistance near $40.00 and surged to new multi-year highs.

We had AAL on the watch list with a plan to buy calls if shares could close above $40.25. AAL closed at $41.22 on June 2nd. Our traded opened on the 3rd at $41.13.

At this point I would wait for a pullback in AAL's shares before initiating new positions. Broken resistance at $40.00 should be support.

Earlier Comments: May 18, 2014:
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%.

- Suggested Positions -
Jun 03, 2014 - entry price on AAL @ 41.13, option @ 3.00*
symbol: AAL150117C45 2015 JAN $45 call - current bid/ask $4.10/4.30

- or -

Jun 03, 2014 - entry price on AAL @ 41.13, option @ 6.20*
symbol: AAL160115C45 2016 JAN $45 call - current bid/ask $7.20/7.60

06/03/14 trade begins. AAL opens at $41.13
*option entry price is an estimate since the option did not trade at the time our play was opened.
06/02/14 AAL closed at $41.22, above our trigger of $40.25
Option Format: symbol-year-month-day-call-strike

Chart of AAL:

Current Target: AAL 50.00
Current Stop loss: 36.40
Play Entered on: 06/03/14
Originally listed on the Watch List: 05/18/14


American Intl. Group - AIG - close: 55.29

Comments:
06/08/14: Financials continued to push higher and AIG ended the week at new multi-year highs. The company announced another stock buy back program of up to $2.00 billion. AIG stock also garnered bullish analyst comments and a new $64 price target.

If you're looking for a new entry point I would consider waiting for a dip near $54.00.

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 $1.79/1.84

- or -

May 14, 2014 - entry price on AIG @ 53.94, option @ 4.35*
symbol: AIG160115C60 2016 JAN $60 call - current bid/ask $4.55/4.70

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: 108.18

Comments:
06/08/14: After a two-week pullback in shares of CAT the stock bounced in a big way last week. Shares added about six points and closed at new two-year highs. After a one-week, six-point rally I would expect a little short-term profit taking before CAT moves higher.

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 $4.70/4.90

- or -

APR 03, 2014 - entry price on CAT @ 101.92, option @ 7.40*
symbol: CAT1615a110 2016 JAN $110 call - current bid/ask $8.75/9.30

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


The Walt Disney Co. - DIS - close: 84.61

Comments:
06/08/14: DIS posted another gain for the week. That means shares are up five out of the last six weeks and closed at another record high. Unfortunately it looks like momentum is slowing a bit.

If the market pauses I would look for DIS to dip into the $80-82 zone.

- Suggested Positions -
OCT 23, 2013 - entry price on DIS @ 68.81, option @ 3.70
symbol: DIS1517a75 2015 JAN $75 call - current bid/ask $11.40/11.75

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


The Dow Chemical Co. - DOW - close: $53.13

Comments:
06/08/14: DOW spent the last few days consolidating sideways near $52.00. More aggressive traders could use Friday's move as a new entry point. I'd rather buy a dip near $51.00.

Earlier Comments:
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.

- Suggested Positions -
MAY 29, 2014 - entry price on DOW @ 51.78, option @ 1.95
symbol: DOW150117C55 2015 JAN $55 call - current bid/ask $2.44/2.50

- or -

MAY 29, 2014 - entry price on DOW @ 51.78, option @ 3.90*
symbol: DOW160115C55 2016 JAN $55 call - current bid/ask $4.50/4.65

05/29/14 trade begins. DOW opens at $51.78
*option entry price is an estimate since the option did not trade at the time our play was opened.
05/28/14 DOW closed at $51.77, above our trigger of $51.25
Option Format: symbol-year-month-day-call-strike

Current Target: DOW @ 60.00
Current Stop loss: 47.75
Play Entered on: 05/29/14
Originally listed on the Watch List: 05/26/14


DaVita Healthcare Partners - DVA - close: 71.91

Comments:
06/08/14: DVA was on our watch list. The plan was to wait for shares to close above $71.25 and then buy calls the next day. Shares have gone almost straight up over the last three weeks and closed at $71.47 on June 3rd. Our trade opened on the 4th at $71.44. If you missed our entry point I suggest waiting for a dip near $71.00 as your next entry.

Earlier Comments: June 1, 2014:
DVA is in the healthcare sector. The company provides kidney dialysis services and related lab services. The most recent earnings report was lackluster but DVA did report revenue growth above Wall Street estimates. Management has been buying up smaller domestic rivals and expanding overseas into countries like China, Columbia, Germany, India, Malaysia, Portugal, Saudi Arabia, and Taiwan. In the U.S. DVA has about 35% of the outpatient dialysis market.

Bears on this stock would argue the company is at risk for pricing pressures from Medicare. About 90% of its total U.S. dialysis patients are on some form of government-assisted program. Nearly 80% of are part of Medicare. The latest rules from Medicare said there would be no price changes in 2014 and 2015 but there could be reimbursement reductions in 2016 and 2017.

This pressure from Medicare has not stopped Warren Buffet's Berkshire Hathaway from raising its stake in DVA. Berkshire started investing in DVA back in Q4 2011. They have been slowly building a position and this past quarter (Q1 2014) Berkshire added another 1.1 million shares. Their total position is now 37.6 million shares worth about $2.6 billion. Berkshire tends to be a long-term investors, longer than our timeframe but it is still a vote of confidence for DVA.

- Suggested Positions -
JUN 04, 2014 - entry price on DVA @ 71.44, option @ 2.65*
symbol: DVA150117C75 2015 JAN $75 call - current bid/ask $2.60/3.10

- or -

JUN 04, 2014 - entry price on DVA @ 71.44, option @ 4.70*
symbol: DVA160115C80 2016 JAN $80 call - current bid/ask $3.60/4.60

06/04/14 trade begins. DVA opens at $71.44
*option entry price is an estimate since the option did not trade at the time our play was opened.
06/03/14 DVA closed at $71.47, above our trigger of $71.25
Option Format: symbol-year-month-day-call-strike

Chart of DVA:

Current Target: DVA @ 85.00
Current Stop loss: 66.40
Play Entered on: 06/04/14
Originally listed on the Watch List: 06/01/14


Halliburton Co. - HAL - close: 66.98

Comments:
06/08/14: HAL is another graduating watch list candidate. Oil and energy stocks have been showing strength in this market and HAL is one of the biggest oil service companies.

Our plan was to wait for shares to close above $65.50 and then buy calls the next day. HAL closed at $65.57 on June 3rd. Our trade opened the next morning at $65.46.

If you missed our entry point then consider waiting for a dip back toward the $65.50 area. Broken resistance at $65.00 should be new support.

Earlier Comments:
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 buyback 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 slowdown 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.

- Suggested Positions -
JUN 04, 2014 - entry price on HAL @ 65.46, option @ 2.90*
symbol: HAL150117C70 2015 JAN $70 call - current bid/ask $3.40/3.50

- or -

JUN 04, 2014 - entry price on HAL @ 65.46, option @ 6.40*
symbol: HAL160115C70 2016 JAN $70 call - current bid/ask $6.95/7.10

06/04/14 trade begins. HAL opens at $65.46
*option entry price is an estimate since the option did not trade at the time our play was opened.
06/03/14 HAL closed at $65.57, above our trigger of $65.50
Option Format: symbol-year-month-day-call-strike

Chart of HAL:

Current Target: HAL @ 80-85 zone
Current Stop loss: 59.75
Play Entered on: 06/04/14
Originally listed on the Watch List: 05/26/14


Hess Corp. - HES - close: 93.32

Comments:
06/08/14: HES is another energy stock hitting new multi-year highs. I would not chase it here. Wait for a dip near $90.00 as our next entry point.

I am raising our stop loss to $85.75.

Be forewarned that I do expect the $100 level to offer some round-number, psychological resistance.

- Suggested Positions -
APR 22, 2014 - entry price on HES @ 87.50, option @ 3.15*
symbol: HES1517a95 2015 JAN $95 call - current bid/ask $ 4.50/ 4.70

- or -

APR 22, 2014 - entry price on HES @ 87.50, option @ 5.80*
symbol: HES1615a100 2016 JAN $100 call - current bid/ask $ 6.55/7.30

06/08/14 new stop loss @ 85.75
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: 85.75
Play Entered on: 04/22/14
Originally listed on the Watch List: 04/06/14


Honeywell Intl. - HON - close: 95.20

Comments:
06/08/14: HON continues to push higher and Friday marked its third weekly gain in a row. The stock is now facing resistance at its 2014 highs near $96.00.

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 $11.45/12.00

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: 88.49

Comments:
06/08/14: ITW rallied past its May highs near $88 and closed at a record on Friday. I am not suggesting new positions at this time. More conservative investors may want to move their stop higher.

- Suggested Positions -
MAY 13, 2014 - entry price on ITW @ 87.57, option @ 3.40*
symbol: ITW1517a90 2015 JAN $90 call - current bid/ask $ 3.20/ 3.30

- or -

MAY 13, 2014 - entry price on ITW @ 87.57, option @ 6.65*
symbol: ITW1615a90 2016 JAN $90 call - current bid/ask $ 6.60/ 6.90

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

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: 64.11

Comments:
06/08/14: Our gamble to hold over JOY's earnings report paid off. JOY's net profits came in better than expected and beat Wall Street estimates by 5 cents a share. The stock had significant short interest ahead of the earnings report and the two-day surge is likely short covering. JOY is up more than 12% or almost $7 for the week. On a short-term basis JOY is now overbought and due for a pullback.

In JOY's earnings report the company said they saw improvement in Europe, which offset slowness in the U.S. while China appeared to be stabilizing. While they said coal inventories at U.S. power plants was low there is a lot of coal supply on the market. JOY said steel and iron prices remain weak but low copper inventories should keep a floor under copper. JOY reported they're seeing growth in the oil sands industry. More importantly JOY said they saw increased bookings for their service business two quarters in a row.

- Suggested Positions -
APR 08, 2014 - entry price on JOY @ 60.75, option @ 4.40
symbol: JOY1517a65 2015 JAN $65 call - current bid/ask $ 4.55/ 4.80

- or -

APR 08, 2014 - entry price on JOY @ 60.75, option @ 6.05
symbol: JOY1615a70 2016 JAN $70 call - current bid/ask $ 5.75/6.35

06/05/14 JOY reports better than expected bottom line results and sparks a short squeeze
06/01/14 adjust stop loss to $55.45
04/08/14 JOY hit our entry trigger at $60.75

Current Target: We're aiming for the $75-80 zone
Current Stop loss: 55.45
Play Entered on: 04/08/13
Originally listed on the Watch List: 04/06/14


NuStar Energy - NS - close: 61.76

Comments:
06/08/14: The rally in NS has resumed. Shares are now up seven days in a row and closed at new two-year highs. NS is quickly approaching potential resistance at its early 2012 highs near 62.65. After a 7-day run I would probably expect a pullback soon.

Tonight we'll move our stop loss to $54.95.

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 $ 7.00/7.70

06/08/14 new stop @ 54.95
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: 54.95
Play Entered on: 04/04/14
Originally listed on the Watch List: 03/23/14


Packaging Corp of America - PKG - $70.96

Comments:
06/08/14: PKG is another watch list candidate that has graduated to our active play list. The plan was to wait for shares to close above $70.50 and then buy calls. PKG closed at $70.71 on June 5th. Our trade opened on Friday morning at $70.82. I would still consider new positions now at current levels.

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.

- Suggested Positions -
JUN 06, 2014 - entry price on PKG @ 70.82, option @ 2.60*
symbol: PKG150117c75 2015 JAN $75 call - current bid/ask $ 2.35/2.70

- or -

JUN 06, 2014 - entry price on PKG @ 70.82, option @ 6.60*
symbol: PKG160115c75 2016 JAN $75 call - current bid/ask $ 3.30/7.00

06/06/14 trade begins. PKG opened at $70.82
*option entry price is an estimate since the option did not trade at the time our play was opened.
06/05/14 PKG closed at $70.71, above our trigger of $70.50
Option Format: symbol-year-month-day-call-strike

Chart of PKG:
Current Target: PKG @ 90.00
Current Stop loss: 64.75
Play Entered on: 06/06/14
Originally listed on the Watch List: 05/18/14


QUALCOMM Inc. - QCOM - close: 80.38

Comments:
06/08/14: I am worried about our QCOM trade. The stock market was surging higher this past week and QCOM really didn't participate. Investors will want to seriously consider exiting early right now. You can re-evaluate a new entry point if QCOM closes above $82.00 down the road.

I am not suggesting new positions.

- Suggested Positions -
NOV 15, 2013 - entry price on QCOM @ 71.34, option @ 4.90
symbol: QCOM1517a75 2015 JAN $75 call - current bid/ask $7.50/7.70

06/08/14 QCOM is not participating in the market rally like it should. Investors may want to exit early right now.
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


Tempur Sealy Intl. - TPX - close: 59.02

Comments:
06/08/14: TPX was a big performer last week with shares climbing about four points to a new two-year high. The $60.00 level could be psychological, round-number resistance so do not be surprised to see TPX near $60 and then retreat.

We are moving our stop loss to $51.75.

Earlier Comments: May 26, 2014:
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.

- Suggested Positions -
MAY 28, 2014 - entry price on TPX @ 55.86, option @ 4.75*
symbol: TPX150117C60 2015 JAN $60 call - current bid/ask $5.60/6.10

- or -

MAY 28, 2014 - entry price on TPX @ 55.86, option @ 6.50*
symbol: TPX160115C70 2016 JAN $70 call - current bid/ask $6.20/7.60

06/08/14 new stop @ 51.75
05/28/14 trade begins. TPX opens at $55.86
05/27/14 TPX closed at $56.03, above our trigger of $55.50
Option Format: symbol-year-month-day-call-strike

Current Target: TPX @ 69.00
Current Stop loss: 51.75
Play Entered on: 05/28/14
Originally listed on the Watch List: 05/26/14


Wells Fargo & Co. - WFC - close: 51.98

Comments:
06/08/14: WFC is still outrunning its peers in the financial sector. The stock raced to new all-time highs. If you're looking for an entry point I would consider waiting for a dip back toward $50.00, which should be new support.

We are moving our stop loss up to $47.45.

Earlier Comments:
(June 1, 2014) WFC's management also said they would love to boost the amount of capital they return to shareholders. They'd like to pay out 55% to 75% of their net profits back to shareholders as dividends and stock buybacks. That's up from 34% in 2013. Any changes still have to be approved by regulators.

- Suggested Positions -
DEC 26, 2013 - entry price on WFC @ 45.50, option @ 1.50
symbol: WFC1517a50 2015 JAN $50 call - current bid/ask $ 3.40/3.50

-- or --

DEC 26, 2013 - entry price on WFC @ 45.50, option @ 2.95*
symbol: WFC1615a50 2016 JAN $50 call - current bid/ask $ 5.00/5.10

06/08/14 new stop loss @ 47.45
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: 47.45
Play Entered on: 12/26/13
Originally listed on the Watch List: 12/08/13



Williams Sonoma - WSM - close: 68.48

Comments:
06/08/14: It looks like WSM traders were in a buy-the-dip mood last week. The stock found support at its rising 10-dma the last few days.

We will adjust the stop loss to $61.75.

I am not suggesting new positions at this time.

- Suggested Positions -
MAY 13, 2014 - entry price on WSM @ 64.36, option @ 2.95*
symbol: WSM1517a70 2015 JAN $70 call - current bid/ask $ 3.80/4.10

-- or --

MAY 13, 2014 - entry price on WSM @ 64.36, option @ 4.70*
symbol: WSM1615a75 2016 JAN $75 call - current bid/ask $ 5.50/6.10

06/08/14 new stop @ 61.75
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: 61.75
Play Entered on: 05/13/14

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



Watch

Technology and Financials

by James Brown

Click here to email James Brown



New Watch List Entries

FFIV - F5 Networks

HIG - Hartford Financial Group


Active Watch List Candidates

VFC - V.F. Corp.


Dropped Watch List Entries

DVA, AAL, HAL, and PKG have graduated to our active play list.

EXPE hit our entry point with Friday's close. We have moved it to our new play this weekend.



New Watch List Candidates:


F5 Networks - FFIV - close: 111.36

Company Info

FFIV is in the technology sector. The company sells networking equipment and software. The company is seeing a strong turnaround after introducing a new good/better/best pricing model for its products last year. Customers have responded well to the strategy. FFIV said products in this pricing model saw a +83% increase in sales quarter over quarter.

FFIV is also seeing strong sales demand from its telecom customers. The company also announced that it's seeing double-digit growth in America, Europe, Middle East, Africa and Japan. FFIV's most recent earnings report beat Wall Street's estimates on both the top and bottom line. Management then raised their guidance (for FFIV's third quarter).

On Friday FFIV traded up to $112.50 before trimming its gains. I am suggesting we wait for shares to close above $112.50 and then buy calls the next morning with a stop loss at $104.75. Our long-term target is the $135 region. Currently the point & figure chart is bullish and forecasting at $138 target.

Breakout trigger: Wait for a close above $112.50
buy calls the next day with a stop loss at $104.75

BUY the 2015 Jan $120 call (FFIV150117C120) current ask $7.75

- or -

BUY the 2016 Jan $130 call (FFIV160115C130) current ask $12.30

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

Chart of FFIV:

Originally listed on the Watch List: 06/08/14


The Hartford Financial Services Group - HIG - close: 36.23

Company Info

Financial stocks helped lead the market higher last week. If this bull market continues then the financials should remain part of the leadership group. HIG has been making progress in its transformation. The company is focusing more on its property and casualty insurance business, its Group Benefits business, and its mutual fund business. They just recently sold their Japan annuity company, which has reduced the company's risk profile.

This turnaround has been productive. Their most recent earnings report came in 25 cents better than Wall Street estimates with a profit of $1.18 per share. This net income of $495 million compares to a $241 million loss in Q1 2013. HIG has also been making improvements in its insurance combined ratio, which is essentially their gross margin on their insurance business. They've also been buying back stock.

Technically the three-week bounce from HIG's rising 200-dma has pushed shares toward resistance near $36.50. This is also the top of a five-month consolidation range. A breakout here should signal the next leg higher.

Tonight I am suggesting we wait for HIG to close above $36.75 and then buy calls the next morning with a stop loss at $33.75. Our long-term target is the $45.00 region.

Breakout trigger: Wait for a close above $36.75
buy calls the next day with a stop loss at $33.75

BUY the 2015 Jan $40 call (HIG150117C40) current ask $0.90

- or -

BUY the 2016 Jan $40 call (FFIV160115C40) current ask $3.00

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

Chart of HIG:

Originally listed on the Watch List: 06/08/14


Active Watch List Candidates:



V.F. Corp. - VFC - $63.37

Comments:
06/08/14: VFC eked out a small gain for the week. Shares are still struggling with resistance near the $64.00 level. A look at the daily chart shows traders are still buying dips at the rising 20-dma. I do not see any changes from my earlier comments.

Earlier Comments: May 18, 2014:
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)

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

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