Option Investor
Newsletter

Daily Newsletter, Monday, 6/16/2014

Table of Contents

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

Leaps Trader Commentary

Negative Headlines Spark Mild Profit Taking

by James Brown

Click here to email James Brown

The U.S. stock market ran into some profit taking last week after a string of record highs for the S&P 500 index. The S&P 500 and the Dow Industrials snapped a three-week winning streak. News that the World Bank had downgraded their global growth forecast midweek helped spark the selling. This was followed by disturbing headlines of an Al-Qaeda aligned terrorist group winning several victories in Iraq. Suddenly Iraq is facing the prospect of civil war along Sunni-Shia religious lines and oil prices surged on fears that Iraq's oil production could be in jeopardy. Crude oil rallied to nine-month highs.

Energy stocks outperformed the broader indices thanks to strength in oil. Gold managed a bounce as investors looked for safe havens among rising geopolitical tensions. Meanwhile the World Bank reduced their global growth estimates for 2014 from +3.2% to +2.8%. They adjusted their U.S. growth estimate from +2.8% to +2.1% and they moved their China forecast from +7.7% to +7.6%. Overall the market pullback was not that bad. The NASDAQ composite and the small cap Russell 2000 both declined to short-term technical support at their rising 10-dma. The S&P 500 is less than 1% from its all-time high. There was no pullback in the semiconductor industry with the SOX index hitting its seventh weekly gain in a row, although only the last four weeks are worth noting.

Economic Data

The U.S. continues to see mixed economic data. Retail sales for May were a disappointment. Economists were expecting +0.6% growth but retail sales only rose +0.3%. Wholesale inventories for April grew more than expected with a +1.1% rise versus estimates of +0.6%. This followed a +1.1% jump in March. Wholesale inflation in the Producer Price Index for May slipped -0.2%. Excluding food and energy prices the core PPI declined -0.1%. This was below expectations.

We did see some improvement in the mortgage application numbers. Purchase applications rose +9.3% while refi applications bounced +11%. NFIB small business optimism survey beat expectations with a reading at 96.6. Yet consumer sentiment slipped. The preliminary June reading for the University of Michigan Consumer Sentiment survey came in at 81.2. This was below the final reading of 81.9 for May and June marks the lowest sentiment reading since March.

Overseas Data

In Europe the French said their industrial production improved +0.3% last month, which is up from -0.4% the prior month. Eurozone industrial production rose +0.8% for the month, which was better than expected. Germany said their wholesale price index inched down -0.1%. The Bank of England might raise interest rates sooner than expected. Instead of early 2015 it could be late 2014 when the BoE raises rates.

Japan said their industrial production fell -2.8% last month. Their core machinery orders dropped -9.1% versus a +19.1% the prior month. The Bank of Japan left their monetary policy unchanged. Data in China was mixed with industrial production rising +8.8% and retail sales in May rising +12.5%. Yet home sales in China plunged -11% in May.





Major Indices:

The big cap S&P 500 index lost -0.68% for the week. It's still up +4.8% year to date and only down 15 points from its all-time closing high of 1,951. I would still look for short-term support near 1920 and 1900 with additional support at the 50-dma near 1888. The 1950 level is probably short-term resistance if stocks rebound from current levels. Should the rally continue then the 2,000 mark could end up being tough round-number, psychological resistance to push through.

chart of the S&P 500 index:

The profit taking in the NASDAQ has been very mild with the index holding short-term support at its 10-dma. If this level fails then 4250 is the next area of support. The recent high near 4350 and the March highs near 4370 are overhead resistance. Last week's -0.25% drop in the NASDAQ reduced its year to date gain to +3.2%.

chart of the NASDAQ Composite index:

The small cap Russell 2000 index retreated from resistance at 1180 to support near 1160 and its 10-dma. Actually Friday's intraday low was 1154.33. Technically, last week's pullback is a 38.2% Fibonacci retracement of the rally from 1120 to 1180. The $RUT looks poised to bounce from current levels but that will depend on headlines over the weekend and Monday morning. Year to date the $RUT is down -0.2%.

The 1140 and 1120 levels should be support. 1180 and 1200 are overhead resistance.

chart of the Russell 2000 index



Economic Data & Event Calendar

We have a relatively quiet calendar this week. However the Fed meeting midweek could be a market mover. Not only will the FOMC announce their decision on interest rates but Federal Reserve Chairman Janet Yellen will hold a press conference. The Fed will also release their economic projections. Analysts do expect the Fed to reduce their QE asset purchases again.

After the World Bank reduced their forecast last week will the Fed reduce their forecast as well?

Not listed on the calendar is the Russell rebalancing. The Russell 1000, Russell 2000, and Russell 3000 are widely followed indices. The new weightings, deletions, and additions could definitely move individual stocks. You can view the changes here. The changes will take place on Friday, June 27th.

Economic and Event Calendar

- Monday, June 16 -
New York Empire State manufacturing survey
U.S. industrial production for May
Eurozone CPI data

- Tuesday, June 17 -
Housing starts and building permits
Consumer Price Index (CPI)

- Wednesday, June 18 -
FOMC meeting
Fed Chairman Janet Yellen press conference

- Thursday, June 19 -
Weekly Initial Jobless Claims
Philadelphia Fed survey

- Friday, June 20 -
(nothing significant)

Additional Events to be aware of:

July 3rd, U.S. markets close early
July 4th, U.S. markets closed for holiday

Looking Ahead:

This past week the markets were rattled by increasing violence in Iraq. An Al-Qaeda splinter group called the ISIS (a.k.a. ISIL) has been sweeping through the central north region of the country. This looks like it could split the country into another civil war drawn along the Sunni-Shia religious divide.

The ISIS are hard line Sunni Muslims. The Iraqi government and most of southern Iraq is Shia Muslims. The Shias and Sunnis have been fighting each other for 1,000 years. The ISIS' recent victories and news they were headed south to march on the Iraqi capital of Baghdad was followed by new headlines that Iran was sending military forces to help Baghdad fight the terrorists. Iran is a Shia Muslim country. In contrast, Iraq's southern neighbor, Saudi Arabia, is mostly Sunni Muslism. Iraq is sandwiched in the middle with the northern most tip of the country controlled by the Kurds.

Oil prices surged on this growing violence for fears that Iraq's oil production could be at risk. It has taken years but Iraq's oil production has been steadily growing and they account for over half of OPEC's new production growth. Iraq currently produces about 3.5 million barrels of oil a day. If something were to happen to that production the reaction in the oil markets would be sharp. We could see oil jump another $20-25 a barrel if Iraqi production is damaged.

At the moment it seems unlikely that Iraq's oil industry is in trouble but war is hardly predictable. The U.S. does not want to send in troops. Washington has been talking about helping with air strikes and drone attacks. Unfortunately that means we have to pick sides. It doesn't matter what side we pick (Sunni/Shia) it will be a lose-lose situation for us. What we do not want to see is Iran gain any more control of Iraq but Washington doesn't want hardcore Sunnis taking over either. There has been speculation that if the violence continues we could see Iraq breakdown into three separate countries. One controlled by Sunnis, one by Shiites, and one by the Kurds.

Investors focus on the price of oil because it impacts our economic growth. Estimates suggest that every $10 rise in oil prices shaves off -0.2% of our GDP. Every dollar rise in crude oil pushes gasoline prices up about 2.5 cents. Right now the U.S. national average for gas is about $3.65 a gallon. Once we get over $4.00 a gallon it starts having a very negative impact on consumer spending, which is a majority of the U.S. economy.

Since we are on the topic of energy, the price of natural gas could be rising for Europe soon. Ukraine and Russia have been negotiating on natural gas prices. Last year Russia was charging Ukraine $268.50 per 1,000 cubic meters of gas. Russia was giving Ukraine an export-duty break (discount) because of Russia's lease on their very important naval base in Crimea and because Ukraine had a pro-Russia president.

Things changed this year after Ukraine kicked out the old president and Russia invaded Crimea and annexed the peninsula (along with its naval base). Russia raised the price on natural gas to $485.50. That means all the gas that Russia had already delivered to Ukraine was now worth about $2 billion. With a $2 billion unpaid bill Russia was demanding that Ukraine start pre-paying for all future natural gas deliveries. This was important to Europe because 30% of their natural gas comes from Russia and half of that runs through Ukraine pipelines.

The two sides have been going back and forth on a new price with the EU trying to help broker a deal. Russia offered a 20% discount at $385. The EU moderator offered $326, which Ukraine is willing to pay. Yet it seems the two sides are at a stalemate and the deadline for Ukraine to start pre-paying for natural gas is Monday, June 16th. The Ukraine Prime Minister has already warned its government to prepare for Russia to cut off natural gas supplies.

This entire negotiation has been tense because fighting between Ukraine forces and pro-Russian rebels in eastern Ukraine continues today. Just a couple of days ago these pro-Russian rebels shot down a jet, killing all 49 people on board. Then there is a new story that three Russian T-64 tanks have crossed into Ukraine territory.

The stock market has a lot of headlines to digest. Thus far stocks have managed to climb this wall of worry. The slope might get too steep for the bulls if the situation in Iraq and Ukraine continue to deteriorate. Keep in mind that in spite of all this news so far the S&P 500 is only 15 points away from its all-time high. It's not like anyone is panicking but investor sentiment can change quickly.

James







Portfolio

Portfolio Update

by James Brown

Click here to email James Brown


Current Portfolio


Portfolio Comments:

After three weeks of gains and new highs for the S&P 500 the market was looking a little overbought. We were due for some profit taking. Overall last week's pullback was relatively mild and may not be over yet.

FFIV has graduated from our watch list to our active portfolio.

I have updated the stop loss on DIS 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

Rising Geopolitical Tensions

by James Brown

Click here to email James Brown


- New Trades -


Editor's Note:

(June 15, 2014)

Equities experienced some profit taking last week. Overall the pullback was relatively mild. Unfortunately there is no guarantee the pullback is over and geopolitical tensions in Iraq and Ukraine could get worse this week.

The market is also facing a potentially pivotal event with the Fed meeting midweek and Janet Yellen's press conference on Wednesday.

The larger market trend is still higher but stocks I am urging caution when it comes to launching new positions. We have seen success with our watch list the last couple of weeks. Instead of adding new plays tonight I'm adding three new candidates to the watch list (EVEP, MSFT, and XOM). Plus I have updated 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:

MYL, APD, CVX, SJM, AA, CSX, PTEN, CRK, ATVI, CHK, CRR, TKR, HP, OXY, CLR, SLB, SIAL, GMCR, SAVE, SBUX, ROP, EGN, MLM, VMC, DHR, MRO, CR, CYT, TMO, AAPL, LMT, FB



Play Updates

Stocks Fade Lower

by James Brown

Click here to email James Brown

Editor's Note:

EXPE was a new play added last weekend.
FFIV is a graduate from our watch list.


Closed Plays



None. No closed plays this week.




Play Updates


American Airlines Group, Inc. - AAL - $40.38

Comments:
06/15/14: It was a very painful week for the airline stocks. News of a German airline issuing an earnings warning sparked some profit taking across the industry. Then the sharp rally in oil, thanks to terrorist wins in Iraq, caused concern over fuel prices for the airlines. After a -12% pullback in AAL shares it looks like the stock might hold support near $40.00.

I would hesitate to launch positions. Let's see how AAL fares this coming week.

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 $2.95/3.20

- or -

Jun 03, 2014 - entry price on AAL @ 41.13, option @ 6.20*
symbol: AAL160115C45 2016 JAN $45 call - current bid/ask $5.70/6.50

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

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: 54.70

Comments:
06/15/14: AIG produced a minor pullback. Investors may want to consider launching new positions if we see AIG test $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 $1.62/1.67

- or -

May 14, 2014 - entry price on AIG @ 53.94, option @ 4.35*
symbol: AIG160115C60 2016 JAN $60 call - current bid/ask $4.40/4.55

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: 106.77

Comments:
06/15/14: CAT raised its quarterly dividend to 70 cents a share. That did not stop the stock from falling with the market on Thursday. If you're looking for a new entry point then consider waiting for a bounce from the $105.00 level.

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 $8.15/8.50

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: 82.80

Comments:
06/15/14: Shares of DIS rallied up to its long-term trend line of higher highs dating back to 2009 and then reversed lower. Fortunately traders were in a buy-the-dip mood on Friday. I cautioned readers last week to look for a dip into the $80-82 zone.

Tonight we are raising the stop loss to $79.00.

- Suggested Positions -
OCT 23, 2013 - entry price on DIS @ 68.81, option @ 3.70
symbol: DIS1517a75 2015 JAN $75 call - current bid/ask $10.20/10.30

06/15/14 new stop @ 79.00
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: 79.00
Play Entered on: 10/23/13
Originally listed on the Watch List: 10/13/13


The Dow Chemical Co. - DOW - close: $52.40

Comments:
06/15/14: Aside from Thursday's drop shares of DOW spent most of the week consolidating sideways. If the market continues to sink I would expect DOW to test the $50.00-51.00 zone, which could be used as a new bullish entry point.

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 $2.16/2.22

- or -

MAY 29, 2014 - entry price on DOW @ 51.78, option @ 3.90*
symbol: DOW160115C55 2016 JAN $55 call - current bid/ask $4.30/4.45

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: 70.79

Comments:
06/15/14: DVA held up reasonably well. Shares gave up less than $2 for the week. Broken resistance near $70.00 should be support. Investors could buy calls on this dip but considering the market action last week readers may want to wait for a bounce from the $70 area as an alternative entry point.

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 $2.15/2.50

- or -

JUN 04, 2014 - entry price on DVA @ 71.44, option @ 4.70*
symbol: DVA160115C80 2016 JAN $80 call - current bid/ask $1.70/4.60

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

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


Expedia Inc. - EXPE - close: 74.26

Comments:
06/15/14: EXPE is a watch list candidate that graduated to our active play list a week ago. Shares met our entry point requirement on Friday, June 6th closing at $75.09. Our suggested entry point was a close above $75.00. We added it as a new play to last week's newsletter.

EXPE opened on Monday, June 9th at $75.30. The stock was hitting new two-month highs before the market's widespread sell-off on Thursday knocked it lower. At this point I suggest one of the following tactics. Wait for a new rally above $75.00 or wait for a potential dip near its simple 50-dma (currently near $71.70) as your next entry point.

Earlier Comments: June 1, 2014:
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.

- Suggested Positions -
JUN 09, 2014 - entry price on EXPE @ 75.30, option @ 8.20*
symbol:EXPE160115C90 2016 JAN $90 call - current bid/ask $7.40/7.90

06/09/14 trade begins. EXPE opens at $75.30
*option entry price is an estimate since the option did not trade at the time our play was opened.
06/06/14 EXPE closes above our trigger, above $75.00
Option Format: symbol-year-month-day-call-strike

Current Target: EXPE @ 90.00-100.00 zone
Current Stop loss: 69.25
Play Entered on: 06/09/14

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


F5 Networks - FFIV - close: 112.30

Comments:
06/15/14: FFIV is a new watch list candidate that has graduated to our active play list. The plan was to wait for shares to close above $112.50 and then buy calls the next morning. FFIV met that requirement on June 10th with a close at $112.59. Shares opened the next morning at $111.96.

I would still consider new positions now. However, if you're concerned about broader market weakness then you may want to consider waiting for a dip near $110 as an alternative entry point.

Earlier Comments: June 8th, 2014:
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 is 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).

Our long-term target is the $135 region. Currently the point & figure chart is bullish and forecasting at $138 target.

- Suggested Positions -
JUN 11, 2014 - entry price on FFIV @ 111.96, option @ 8.20*
symbol:FFIV150117C120 2015 JAN $120 call - current bid/ask $7.80/8.00

- or -

JUN 11, 2014 - entry price on FFIV @ 111.96, option @ 12.55*
symbol:FFIV160115C130 2016 JAN $130 call - current bid/ask $12.05/12.70

06/11/14 trade begins. FFIV opens at $111.96
*option entry price is an estimate since the option did not trade at the time our play was opened.
06/10/14 FFIV closed @ 112.59, above our trigger of $112.50
Option Format: symbol-year-month-day-call-strike

Chart of FFIV:

Current Target: FFIV @ 135.00
Current Stop loss: 104.75
Play Entered on: 06/11/14
Originally listed on the Watch List: 06/08/14


Halliburton Co. - HAL - close: 67.58

Comments:
06/15/14: Energy stocks outpaced the market last week thanks to a spike in oil prices. HAL spent most of the week consolidating sideways until traders bought the dip on Friday. Shares then surged to another new closing high.

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 $3.65/3.75

- or -

JUN 04, 2014 - entry price on HAL @ 65.46, option @ 6.40*
symbol: HAL160115C70 2016 JAN $70 call - current bid/ask $7.35/7.50

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

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: 95.95

Comments:
06/15/14: HES is another energy stock that extended its gains last week. The stock is up almost nonstop over the last four weeks and looking a bit overbought here.

More conservative investors may want to consider taking profits as HES nears potential round-number resistance at the $100.00 mark.

- Suggested Positions -
APR 22, 2014 - entry price on HES @ 87.50, option @ 3.15*
symbol: HES1517a95 2015 JAN $95 call - current bid/ask $ 5.80/ 6.35

- or -

APR 22, 2014 - entry price on HES @ 87.50, option @ 5.80*
symbol: HES1615a100 2016 JAN $100 call - current bid/ask $ 8.15/8.75

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: 93.77

Comments:
06/15/14: HON hit new all-time highs on Monday and then spent the rest of the week retreating lower.

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 $10.30/10.75

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: 88.18

Comments:
06/15/14: ITW also hit new all-time highs on Monday and then drifted lower.

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 $ 3.10/ 3.30

- or -

MAY 13, 2014 - entry price on ITW @ 87.57, option @ 6.65*
symbol: ITW1615a90 2016 JAN $90 call - current bid/ask $ 6.50/ 6.80

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: 61.09

Comments:
06/15/14: Shares of JOY have turned volatile again. The stock saw big gains following its earnings report. The big gains are fading fast with a big pullback last week.

I am not suggesting new positions at this time.

- Suggested Positions -
APR 08, 2014 - entry price on JOY @ 60.75, option @ 4.40
symbol: JOY1517a65 2015 JAN $65 call - current bid/ask $ 3.10/ 3.30

- or -

APR 08, 2014 - entry price on JOY @ 60.75, option @ 6.05
symbol: JOY1615a70 2016 JAN $70 call - current bid/ask $ 4.35/4.95

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: 60.73

Comments:
06/15/14: Last week's pullback in NS found support near $60.00. Shares did pierce $60 on Friday but the stock rebounded and outpaced the market with a +0.8% gain.

More conservative investors may want to move their stop loss closer to the simple 50-dma (currently near $57.60). 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 $ 5.80/7.10

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 - $69.86

Comments:
06/15/14: PKG snapped a four-week winning streak with a $1.10 loss last week. If this pullback continues we could see PKG retest what should be support near $68.00. I am not suggesting new positions at the moment.

Earlier Comments: May 18, 2014:
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 $ 2.10/2.45

- or -

JUN 06, 2014 - entry price on PKG @ 70.82, option @ 6.60*
symbol: PKG160115c75 2016 JAN $75 call - current bid/ask $ 3.00/6.50

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
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: 79.11

Comments:
06/15/14: I have been worried about our QCOM trade for a while now. Last week the stock garnered new bullish analyst comments but they failed to help the stock price. The action last week looks bearish with a breakdown under its 50-dma. More conservative traders may want to exit immediately. I am raising our stop loss to $77.65 so it's just below the 100-dma.

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 $6.65/6.80

06/15/14 new stop @ 77.65
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: 77.65
Play Entered on: 11/15/13
Originally listed on the Watch List: 11/03/13


Tempur Sealy Intl. - TPX - close: 57.27

Comments:
06/15/14: TPX rallied up to resistance near $60.00 and then reversed. I do not think the profit taking is over yet. Look for a drop toward $56.00 and its 20-dma.

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 $5.00/5.50

- or -

MAY 28, 2014 - entry price on TPX @ 55.86, option @ 6.50*
symbol: TPX160115C70 2016 JAN $70 call - current bid/ask $6.10/7.10

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: 51.90

Comments:
06/15/14: WFC only lost 8 cents for the week. Shares closed Friday on short-term technical support at its 10-dma. I do not think the profit taking is over yet. Look for a dip into the $50.00-51.00 zone.

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 $ 4.90/5.10

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: 67.72

Comments:
06/15/14: Monday's spike proved to be the high for the week. WSM has faded lower four days in a row. If the broader market continues to pullback there is a chance we could see WSM try and fill the gap. That means a drop into the $64.50 area.

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 $ 3.50/3.80

-- or --

MAY 13, 2014 - entry price on WSM @ 64.36, option @ 4.70*
symbol: WSM1615a75 2016 JAN $75 call - current bid/ask $ 5.10/5.70

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

Energy & Software

by James Brown

Click here to email James Brown


New Watch List Entries

EVEP - EV Energy Partners

MSFT - Microsoft Corp.

XOM - Exxon Mobil Corp.


Active Watch List Candidates

HIG - Hartford Financial Group

VFC - V.F. Corp.


Dropped Watch List Entries

FFIV graduated to our active play list.



New Watch List Candidates:


EV Energy Partners - EVEP - close: 38.45

Company Info

EVEP is in the energy industry. They are a master limited partnership and one of the largest operators of onshore oil and gas assets. They have properties in the Utica Shale, Barnett Shale, the Appalachian Basin, the Mid-Continent area, the San Juan Basin, the Monroe Field in Louisiana, the Permian Basin, Central and East Texas, and Michigan.

Shares of this company have spent the last several months building a bottom. If the market turns more volatile then investors could turn to EVEP to capture the stock's 8% dividend yield. If oil prices continue to climb it should also give EVEP a boost.

More aggressive investors may want to consider bullish positions now. I am suggesting we wait for EVEP to close above $40.25 and then buy calls the next morning with a stop loss at $35.75.

Breakout trigger: Wait for a close above $40.25
then buy calls the next day with a stop at $35.75.

BUY the 2015 Jan $40 call (EVEP150117C40) current ask $1.95

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

Chart of EVEP:

Originally listed on the Watch List: 06/15/14


Microsoft Corp. - MSFT - close: 41.23

Company Info

Shares of semiconductor giant Intel (INTC) soared on Friday when the company surprised investors by raising its revenue guidance the night before. INTC said they were seeing stronger sales of PCs. That's right. They said PCs. The sale of personal computers has been falling for several quarters as consumer spend the money on laptops, tablets, and smartphones. To be fair INTC did say they were seeing stronger sales of PCs to businesses but it's still good news for INTC but it could be great news for MSFT.

INTC hinted that when MSFT stopped supporting the Windows XP operating system in April this year it has sparked an upgrade cycle. XP has been around for years. One analyst estimated that 25% of the PCs currently connected to the Internet are running XP. That's a huge number of computers and now they're at risk for virus and hacking attempts that MSFT will no longer try to patch.

As businesses and consumers upgrade their PC it should mean strong sales for MSFT's Windows 8 operating software. This upgrade cycle could last a while.

Currently shares of MSFT are in a long-term up trend (see chart) and they closed near 14-year highs on Friday. There is short-term resistance at $41.65. I am suggesting we wait for MSFT to close above $42.00 and then buy calls the next day with a stop loss at $38.40.

I am listing the 2015 and 2016 calls but my preference is for the 2016s.

Breakout trigger: Wait for a close above $42.00
then buy calls the next morning with a stop loss at $38.40.

BUY the 2015 Jan $45 call (MSFT150117C45) current ask $1.03

- or -

BUY the 2016 Jan $45 call (MSFT160115C45) current ask $2.50

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

Chart of MSFT:

Originally listed on the Watch List: 06/15/14


Exxon Mobil Corp. - XOM - close: 102.65

Company Info

XOM is the largest publicly traded oil company on the planet. They're actually one of the largest companies on the planet with more than 75,000 employees and a market cap of more than $440 billion.

This company is so big they've got their hands in just about every region of the world, anywhere from U.S. shale region, Canadian oil sands, West Africa, Kazakstan, everywhere. Of course being every does pose a risk to geopolitical tensions. XOM has some significant deals with Russia. If the situation between Russia and the West were to worsen it could spell trouble for XOM's investments in Russia. The same holds true in Iraq. Right now violence in Iraq is driving oil prices higher but it poses a risk for XOM's investments in the country. Currently most of the fighting is in the northern half of Iraq and most of the oil fields and infrastructure is in the south. There is no guarantee the Iraq fighting couldn't move south.

Technically shares look great. The stock hit all-time highs in early May and spent the rest of the month consolidating gains. Now shares are bouncing from technical support at its rising 50-dma. XOM looks poised to breakout higher soon. Not only does XOM have a strong stock buyback program but they're currently yielding 2.7%. That's more than a U.S. ten-year bond's 2.6% yield.

Tonight I am suggesting we wait for XOM to close above $103.75 and then buy calls the next morning with a stop loss at $99.25. Our long-term target is the $125-130 zone. The point & figure chart is bullish and forecasting at $133 target.

Breakout trigger: Wait for a close above $103.75
then buy calls the next day with a stop at $99.25.

BUY the 2015 Jan $105 call (XOM150117C105) current ask $2.89

- or -

BUY the 2016 Jan $110 call (XOM160115c110) current ask $3.90

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

Chart of XOM:

Originally listed on the Watch List: 06/15/14


Active Watch List Candidates:



The Hartford Financial Services Group - HIG - close: 35.73

Comments:
06/15/14: Last week's pullback in shares of HIG was pretty mild. I do not see any changes from my earlier comments.

Earlier Comments: June 8, 2014:
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)

- or -

BUY the 2016 Jan $40 call (FFIV160115C40)

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

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


V.F. Corp. - VFC - $61.64

Comments:
06/15/14: VFC had a rough week. It's two dollar drop erased four weeks of hard fought gains. Shares settled on Friday at technical support on its 50-dma.

Last week there was chatter that Lululemon (LULU) is a takeover target and VFC might be a buyer.

Overall I don't 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