Option Investor
Newsletter

Daily Newsletter, Sunday, 8/17/2014

Table of Contents

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

Leaps Trader Commentary

The Slow Blade

by James Brown

Click here to email James Brown

The U.S. stock market rebounded almost all of last week on hopes that Putin was telling the truth about his plans to deescalate the situation in Ukraine. This allowed stocks to ignore a week of negative economic data, especially out of Europe. Yet by Friday the focus had returned to Russia. All week long there was suspicion over Russia's convoy of humanitarian aid to Ukraine. Suddenly the situation worsened on Friday when Ukraine reported they had destroyed a number of Russian armored personnel carriers trying to sneak into the country just ahead of the humanitarian convoy. Where the market goes next could depend on geopolitical headlines over the weekend.

In other news there is a ceasefire in Gaza between Hamas and Israel while diplomats try and hammer out another agreement. It's somewhat surprising the current ceasefire has lasted as long as it has. Nearby the situation in Iraq remains troubling. The EU and the U.K. are supplying weapons to the Kurds to help protect themselves from the Islamic State terrorists. While there has been some success rescuing the Yazidi religious minority in Iraq this past weekend brought new headlines of ISIS terrorists massacring dozens Yazidi men. The terrorists attacked a village saying convert or die. Those that refused were shot and the village women and children were kidnapped, likely to be forced into marriages to foreign ISIS terrorists.

The combination of geopolitical headlines and distressing economic data has been driving money into safe haven investments like U.S. bonds and German bonds. U.S. bonds rallied to new 13-month highs driving 10-year yields toward 2.3%. The yield settled at 2.34% on Friday. Meanwhile money poured into German bonds and the yield on the 10-year German bond closed at 0.95%. If investors are worried enough to put their money into low-yielding bonds then why are stocks rising as well?

The large cap S&P 500 index bounced +1.2% last week and boosted its year to date gains to +5.7%. The NASDAQ composite outperformed with a +2.1% bounce. The small cap Russell 2000 index only managed a +0.9% gain and is still down -1.9% for the year. Transports were strong with a +2.1% bounce last week. Semiconductors were stronger with a +3.0% gain. Biotechs were the leaders with a +4.5% surge higher last week. Year to date the biotechs are up +24.9%.

Economic Data

The U.S. government said retail sales in July were flat following a +0.2% increase in June. That's disappointing considering that consumer spending accounts for almost 70% of the U.S. economy. The biggest retailer on the planet, Wal-mart (WMT), reinforced this news with a disappointing earnings report. WMT said their customers are struggling both here in the U.S. and abroad. WMT reported flat same-store sales growth. The company's sales growth has been relatively flat for virtually six quarters in a row. WMT lowered its 2015 guidance.

The New York Empire State manufacturing survey was another disappointment. The survey plunged from July's 25.6 to 14.7in August. The Producer Price Index (PPI) inched up +0.1% in July following a +0.4% jump in June. U.S. industrial production did improve from +0.2% in June to +0.4% in July. While that is slow we're definitely outpacing industrial production in Europe.

Yet another disappointment was the University of Michigan Consumer Sentiment Survey. The headline number retreated from 81.8 in July to 79.2 in August. That's the lowest reading since November. Economists were expecting a rise to 82.5.

Overseas Economic Data

Economic headlines out of Europe were terrible. The 18-member Eurozone said their Q2 GDP growth was flat as in zero growth. This was below expectations for growth of +0.1%. Germany, France, and Italy all weighed on the region. You may have heard that Italy's Q2 GDP growth has turned negative again and the country is in its third recession since 2008. France is the second biggest economy in the EU and they reported +0.0% Q2 GDP growth. That's the second quarter in a row that French growth has been flat.

The big shocker last week was Germany. Germany is the EU's biggest and strong economy. At least it used to be the strongest. Germany reported Q2 GDP growth, actually a decline of -0.2%. That's down from +0.7% in Q1. This is the first time Germany has seen negative growth in over a year. Germany has been Europe's growth engine. If Germany has turned negative what does that say for where the region is headed? According to Britain's Telegraph, "Zero or negative growth, combined with very low or negative inflation, means that debt burdens will start to shoot up as a share of GDP and that bank balance sheets will begin to take losses again. The European Central Bank is failing to perform the impossible task that it has been set: it is meant to set the right monetary policy for an extraordinarily heterogeneous set of economies."

There is a growing expectation that the European Central Bank (ECB) will be forced to do something to save the region from another financial crisis. Unfortunately this time Europe is suffering the side effects of the Russian sanctions. While the sanctions are designed to hurt Russia they also impede business and growth in Europe, which is why the EU was so slow to initially launch any meaningful sanctions.

In other news the Eurozone said their industrial production fell -0.3% for the month. The Eurozone ZEW economic sentiment poll collapsed from 48.1 to 23.7, which was way below expectations.

The news feed was not any brighter in Asia. Japan reported a terrible Q2 growth number. Japan's economy sank at an annualized pace of -6.8% in the second quarter. For the quarter Japan's GDP fell -1.7% marking its worst drop since 2011. The big drop follows Japan's increase on sales tax in April. The government said they might raise the sales tax again from 8% to 10% if they need to raise money. They need to do something since the country's debt has risen past one-quadrillion yen.

It's widely believed that the major economic reports out of China are massaged by the government to appear healthier than they really are. If that's true then the economy must be slowing down a lot worse than anyone expects. This past week the latest data on power consumption in China does not paint a pretty picture. The Jiangsu and Shanghai provinces saw power consumption drop -10% in July versus double-digit increases a year ago. Several provinces reported a drop in power consumption of more than -20%. Why is this important? Since we believe the Chinese government manipulates the official GDP numbers economists have taken to looking at power consumption as another way of gauging China's economic activity. Big declines in power usage do not bode well for the country's GDP growth.

Ukraine-Russian Conflict

Let's talk briefly about the situation on the eastern Ukraine border. One week ago Russian President Putin offered what sounded like conciliatory remarks about stopping the bloodshed and conflict in Ukraine. He announced Russia would send a convoy of humanitarian supplies to help out. This helped spark the bounce in U.S. stocks. All week long there was debate over the purpose of this convoy. Was it a Trojan horse meant to infiltrate Ukraine? The Ukraine government promised to block the convoy unless it was inspected first.

Putin was speaking from the recently invaded and annexed Crimea this past Friday. His public remarks called for a peaceful resolution to the crisis in Ukraine. Yet at the same time there are eye witness accounts of Russian armored vehicles crossing the border into Ukraine. The Ukraine government said they destroyed these Russian military vehicles. Putin denies any Russian vehicles were in the area. So who is telling the truth? There were two British journalists with the humanitarian convoy of supply trucks. They reported their eye witness accounts of seeing Russian military vehicles cross into Ukraine ahead of the convoy. Why would Putin let these reporters see that crossing take place and then deny it when Ukraine says they destroyed the invading vehicles?

It might be disinformation but some reports suggested these Russian military vehicles did not have any plates to identify them as Russian. Another story suggests they were actually Ukraine vehicles destroyed by Ukraine to make it look like an attack on Russian troops.

There are plenty of opinions on Russian President Putin. Does he really know what he's doing? Depending on who you ask, he is three steps ahead of his rivals or he is just making it up on the spot. It feels like a chess game as Putin thumbs his nose at the West. One has to wonder if Putin is a fan of Frank Herbet's Dune book or at least the concept of "the slow blade penetrates the shield." Russia has been training and arming the Ukraine rebels for months. Russian vehicles have been crossing back and forth across the border the entire time. Why would he stop now? One could argue we're seeing the Russian invasion in slow motion. Maybe the plan is to slowly desensitize the global audience before moving in for the kill. Or maybe he plans to just swallow Ukraine one small chunk at a time.

One thing to consider is the calendar. Summer is going to be over soon. If you're a Game of Thrones fan then you know what the Starks say, "Winter is coming." Russia could play hardball and start using their energy exports as economic weapons by raising prices or cutting off supplies. Europe might be more agreeable if it's a cold winter and they need Russian natural gas to heat their homes. Granted that is a two-edged sword since Russia needs the money from its energy exports. That doesn't mean Putin wouldn't do it.





Major Indices:

The S&P 500's rebound from support near 1900 and the bottom of its bullish channel has stalled. The rally is testing resistance near 1960 and its converging moving averages. The main averages appear to be the 30-dma and 50-dma. If this bounce fails then we're headed right back toward 1900. Should this rally continue then likely resistance is 1985 and the 2000 mark.

If the S&P 500 breaks down below 1900 it would be a blow for investor sentiment on top of breaking its two-year trend of higher lows.

chart of the S&P 500 index:

Weekly chart of the S&P 500 index

Strength in technology, semiconductor, and biotech stocks helped boost the NASDAQ last week. The composite index is testing resistance at its 2014 highs. A breakout could really boost investor attitudes but the 4500 level could be challenging resistance to crack.

If this index reverses I would keep an eye on the 4200 level and its simple 200-dma.

chart of the NASDAQ Composite index:

Weekly chart of the NASDAQ Composite index

The small cap Russell 2000 index continues to underperform the large cap indices. Last week's rebound attempt struggled with resistance in the 1150 area and the simple 100-dma, 150-dma, and 200-dma. There is additional resistance near 1160 and its 50-dma.

Potential support levels to watch remain 1100 and 1080.

chart of the Russell 2000 index

Weekly chart of the Russell 2000 index



Economic Data & Event Calendar

This week we're going to get an update on the U.S. residential real estate market with multiple reports on the industry. The market will also be interested in the FOMC minutes. Friday investors will be tuned in to hear Federal Reserve Chairman Janet Yellen speak from the Fed's annual conference in Wyoming. She'll be speaking on the labor market with a speech titled, "Re-Evaluating Labor Market Dynamics".

Economic and Event Calendar

- Monday, August 18 -
NAHB housing market index

- Tuesday, August 19 -
Consumer Price Index (CPI)
Housing Starts & Building Permits

- Wednesday, August 20 -
China manufacturing PMI data
FOMC Minutes

- Thursday, August 21 -
Weekly Initial Jobless Claims
Eurozone PMI data
Existing home sales
Philadelphia Federal Reserve survey
Federal Reserve Annual Jackson Hole conference

- Friday, August 22 -
Fed Chairman Yellen's keynote address

Additional Events to be aware of:

Aug. 28th - 2nd estimate on U.S. Q2 GDP growth
Sept. 1st - U.S. market closed for Labor Day

Looking Ahead:

As we look ahead I'm concerned the market will be held hostage to any new developments between Russia and Ukraine. If the headlines from this conflict stall then stocks could be allowed to rally. Earnings last quarter were better than expected. The U.S. economy seems to be holding up in spite of some very disappointing headlines and numbers coming out of the retail industry.

We need to be keenly aware that Europe is slowing down quickly. One analyst suggested that stock market strength is a bet that central banks will do whatever they can to prop up their economies with more stimulus. That could be Europe, China even the U.S. if growth slows again. The challenge is that central banks have a hard enough time trying to steer the economy if we add geopolitical headlines on top of problem the central bankers may be unable to help.

The markets struggled during the European financial crisis back in 2009. Unfortunately Europe never really solved this problem. They slapped a bunch of band aids and temporary patches on the issue and kicked the can down the road. Now it's five years later and the European financial system is still fragile. This time is different with a slowing German economy and Russian sanctions to encumber the region. Any more financial shocks could shake investor sentiment. This is more of a big picture issue and not one likely to affect us in the week ahead.

Technically I will remind investors that August and September are normally weak for equities. These are merely seasonal trends and there are always exceptions. The U.S. congress is in recess and we should see the midterm election campaigning pick up speed, which could sour consumer and investor attitudes. The S&P 500's current bull market is now the second longest bull market in the last 85 years. The average bull market lasts about 165 weeks. This bull market is 283 weeks old. The question investors might start asking is what is the next catalyst to power stocks higher, especially if Europe and Asia are slowing down?

Keep an eye on bond yields. Right now falling bond yields would suggest smart money is not bullish on stocks or the economy.

James







Portfolio

Portfolio Update

by James Brown

Click here to email James Brown


Current Portfolio


Portfolio Comments:

The U.S. market managed to keep the rebound going. Now the S&P 500 is testing resistance near its 50-dma and the NASDAQ is testing resistance at its 2014 highs.

CSX and NEM have graduated from our watch list to our active play list.

There are new stop losses on DIS, DOW, and HES.

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

August Rebound Continues

by James Brown

Click here to email James Brown


- New Trades -


Editor's Note:

(August 17, 2014)

The market's August rebound continues. Investors continue to ignore disappointing economic data overseas. Meanwhile traders remain nervous over the situation between Ukraine and Russia.

The overall trend for the S&P 500 and the NASDAQ composite remain bullish. However, I have cautioned readers that we're in a potentially volatile season for equities. I would be careful on launching new positions.

We were successful with the watch list last week seeing CSX and NEM both graduate to active trades. This week we are adding CELG and LMT as new watch list candidates. Both have a great chance of being triggered this week.

I have also updated my radar screen below.

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:

HD, ODFL, ATVI, XRX, LOW, FISV, CDW, JCP, VMW, WNR, SWHC, IBB, FSLR, DAL, LUV, CVS,



Play Updates

Stocks Mostly Higher For The Week

by James Brown

Click here to email James Brown

Editor's Note:

CSX and NEM have graduated from our watch list to our active play list below.


Closed Plays



None. No closed plays this week.




Play Updates


American Intl. Group - AIG - close: 53.99

Comments:
08/17/14: The stock market's bounce last week pushed AIG up toward technical resistance at its simple 50-dma. The stock is also nearing its five-week trend of lower highs. I would expect a short-term pullback before AIG moves higher.

I am not suggesting new positions at this time.

- Suggested Positions -
May 14, 2014 - entry price on AIG @ 53.94, option @ 1.50*
symbol: AIG150117C60 2015 JAN $60 call - current bid/ask $0.68/0.73

- or -

May 14, 2014 - entry price on AIG @ 53.94, option @ 4.35*
symbol: AIG160115C60 2016 JAN $60 call - current bid/ask $3.40/3.60

08/04/14 AIG beats earnings estimates, announces $2 billion stock buyback
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


CSX Corp. - CSX - close: 30.22

Comments:
08/17/14: Our new watch list candidate on CSX has been triggered. The plan was to wait for shares to close above $30.00 and then buy calls the next morning. The stock closed at $30.16 on Thursday. Our trade opened on Friday, August 15th at $30.29.

I do not see any changes from my earlier comments.

Earlier Comments: August 10, 2014:
The transportation group has been leading the stock market higher until about two weeks ago. That's then the group peaked. Since then the Dow Jones Transportation Average has seen a -6% pullback. It looks like the profit taking might be over as the group helped lead the bounce on Friday.

The railroads have delivered a similar performance. We want to take advantage of the pullback with CSX. According to the company's website, " CSX Corporation, together with its subsidiaries based in Jacksonville, Fla., is one of the nation's leading transportation suppliers. The company’s rail and intermodal businesses provide rail-based transportation services including traditional rail service and the transport of intermodal containers and trailers. CSX Transportation network encompasses about 21,000 route miles of track in 23 states, the District of Columbia and the Canadian provinces of Ontario and Quebec. Our transportation network serves some of the largest population centers in the nation. Nearly two-thirds of Americans live within CSX's service territory."

The rebound in the U.S. economy should be great news for the railroads. Rising consumer demand would mean more shipments. A healthy automobile market means more auto shipments. The oil and gas shale boom means more energy shipped by rail. Record harvests mean more grain shipments. A stabilizing coal industry will also help put a floor under the railroads.

Altogether the future looks bullish for the railroad companies. That's why we want to take advantage of this post-earnings profit taking in CSX. The stock has retreated to its long-term trend line of support and started to bounce. More aggressive investors may want to buy calls now. I am suggesting we wait for CSX to close above $30.00 and then buy calls the next morning with a stop loss at $28.40.

Our long-term target for the 2016 calls is CSX in the $37-40 zone. Currently the Point & Figure chart is $38.50. If you buy the 2015 calls plan on exiting sooner.

- Suggested Positions -
Aug 15, 2014 - entry price on CSX @ 30.29, option @ 1.48
symbol: CSX150117C30 2015 JAN $30 call - current bid/ask $1.44/1.48

- or -

Aug 15, 2014 - entry price on CSX @ 30.29, option @ 1.14*
symbol: CSX160115C35 2016 JAN $35 call - current bid/ask $1.05/1.10

08/15/14 trade begins. CSX opens at $30.29
*option entry price is an estimate since the option did not trade at the time our play was opened.
08/14/14 CSX meets our entry point requirement with a close above $30.00 (closed at $30.16)
Option Format: symbol-year-month-day-call-strike

Chart of CSX:

Current Target: CSX in the $37-40 zone
Current Stop loss: 28.40
Play Entered on: 08/15/14
Originally listed on the Watch List: 08/10/14


Deckers Outdoor Corp. - DECK - close: 92.67

Comments:
08/17/14: DECK spent last week slowly consolidating lower. Shares briefly traded below short-term support at the simple 10-dma on Friday before bouncing. I cautioned readers last week to look for a potential dip into the $91-90 zone. The pullback may not be over yet. Watch for $90.00 to act as support.

Earlier Comments: August 3, 2014:
The 40-year old Deckers Corp. is headquartered in California. The company considers itself "a global leader in designing, marketing and distributing innovative footwear, apparel and accessories developed for both everyday casual lifestyle use and high performance activities. The Company's portfolio of brands includes UGG®, Teva®, Sanuk®, TSUBO®, Ahnu®, MOZO®, and HOKA ONE ONE®. Deckers Outdoor products are sold in more than 50 countries and territories through select department and specialty stores, 126 Company-owned and operated retail stores, and select online stores, including Company-owned websites."

DECK might also be an exception to the struggling retail space this year. The company just reported its 2015 fiscal year first quarter on July 24th. Spring happens to be the worst season for DECK's sales but they still turned in a strong report. Wall Street was expecting a loss of $1.29 a share. DECK reported a loss of $1.07. Revenues soared +24.3% from a year ago to $2.11.5 million, significantly above expectations. Their Q1 gross margins were 41.% Management raised their 2015 guidance and expect gross margins to rise to 49%. DECK is still planning on adding 30 to 35 new stores this year. Management is also forecasting +18% sales growth for the year. Altogether it was a bullish report and shares soared to new multi-year highs and almost tagged $95 a share.

The post-earnings profit taking is normal. Prior resistance in the $87.50-90.00 zone should be support. Seeing DECK rebound from its 10-dma on Friday is encouraging if you're bullish. If you're bearish, well, it could be a painful year. The long-term trend is bullish with a strong pattern of higher lows. The most recent data listed short interest at 19% of the small 33.4 million share float. If the up trend continues it could pressure more shorts to cover.

I am cautious on the broader market so we want to be patient with our entry point on DECK. I am suggesting we wait for DECK to close above $91.25 and then buy calls the next morning with a stop loss at $86.90. I'm suggesting a target in the $110-115 zone.

- Suggested Positions -
AUG 06, 2014 - entry price on DECK @ 91.54, option @ 5.05*
symbol: DECK150117c100 2015 JAN $100 call - current bid/ask $4.90/5.30

- or -

AUG 06, 2014 - entry price on DECK @ 91.54, option @ 13.30*
symbol: DECK160115c100 2016 JAN $100 call - current bid/ask $12.30/14.40

08/06/14 trade begins @ 91.54
*option entry price is an estimate since the option did not trade at the time our play was opened.
08/05/14 triggered with a close at $91.71 (above trigger $91.25)
Option Format: symbol-year-month-day-call-strike

Current Target: DECK @ 110-115
Current Stop loss: 86.90
Play Entered on: 08/06/14
Originally listed on the Watch List: 08/03/14


The Walt Disney Co. - DIS - close: 89.28

Comments:
08/17/14: It was a bullish week for shares of DIS. The stock has broken through significant resistance in the $87.50-88.00 zone. The rally has also broken out past DIS' long-term trend line of higher highs. Shares garnered bullish analyst comments last week and one firm upped their price target to $101.

Tonight I am adjusting our exit target to $98.50. We will also move our stop loss to $82.95.

- Suggested Positions -
OCT 23, 2013 - entry price on DIS @ 68.81, option @ 3.70
symbol: DIS1517a75 2015 JAN $75 call - current bid/ask $14.35/15.20

08/17/14 new stop @ 82.95, adjust exit target to $98.50
08/05/14 DIS delivers better than expected earnings and revenues
08/03/14 Investors will want to consider taking profits now before DIS reports earnings.
07/06/14 DIS is testing a trend line of higher highs
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
...please see older updates for earlier adjustments...

Current Target: DIS @ 98.50
Current Stop loss: 82.92
Play Entered on: 10/23/13
Originally listed on the Watch List: 10/13/13


The Dow Chemical Co. - DOW - close: $52.02

Comments:
08/17/14: It was a quiet week for DOW with shares slipping 26 cents. This relative weakness versus the broader market indices could be a warning sign.

I am not suggesting new positions at this time. We are moving the stop loss up to $49.75.

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 $1.40/1.44

- or -

MAY 29, 2014 - entry price on DOW @ 51.78, option @ 3.90*
symbol: DOW160115C55 2016 JAN $55 call - current bid/ask $3.75/4.00

08/17/14 new stop @ 49.75
07/20/14 new stop @ 49.00
06/27/14 DOW declines after DuPont issues an earnings warning
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: 49.75
Play Entered on: 05/29/14
Originally listed on the Watch List: 05/26/14


DaVita Healthcare Partners - DVA - close: 72.11

Comments:
08/17/14: Shares of DVA were downgraded on Friday from a "buy" to a "hold". Reaction to this news almost erased DVA's gains for the week. Traders were buying the dip on Friday afternoon. I am hesitant to launch new positions at this time.

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 $1.90/2.25

- or -

JUN 04, 2014 - entry price on DVA @ 71.44, option @ 4.70*
symbol: DVA160115C80 2016 JAN $80 call - current bid/ask $3.70/5.00

07/31/14 DVA reports better than expected bottom and top line results
07/20/14 new stop @ 69.00
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: 69.00
Play Entered on: 06/04/14
Originally listed on the Watch List: 06/01/14


Expedia Inc. - EXPE - close: 85.37

Comments:
08/17/14: EXPE has spent the last two weeks digesting its post-earnings rally in a sideways consolidation. You'll notice this past week the stock has been slowly edging higher. EXPE looks poised to breakout past resistance near $86.00 soon. If you were looking for a new entry point then a breakout could work.

More conservative investors may want to raise their stop again.

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 $11.60/12.10

08/03/14 new stop @ 76.75
07/31/14 EXPE delivers better than expected earnings and revenue growth
07/06/14 new stop @ 74.75
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: 76.75
Play Entered on: 06/09/14

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


F5 Networks - FFIV - close: 114.01

Comments:
08/17/14: FFIV surged higher last Monday but the rally failed near its intraday 2014 highs. Shares gave back all of its gains by Friday's closing bell. At this point investors may want to wait for a close above $118.00 before considering new bullish positions.

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 $6.20/6.45

- or -

JUN 11, 2014 - entry price on FFIV @ 111.96, option @ 12.55*
symbol:FFIV160115C130 2016 JAN $130 call - current bid/ask $11.75/12.05

08/10/14 new stop @ 107.40
07/24/14 reported strong earnings and raised guidance
06/22/14 Caution! FFIV has reversed at a trend line of resistance.
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

Current Target: FFIV @ 135.00
Current Stop loss: 107.40
Play Entered on: 06/11/14
Originally listed on the Watch List: 06/08/14


Hess Corp. - HES - close: 98.90

Comments:
08/17/14: Energy stocks have struggled somewhat as oil prices plunge. Shares of HES have been consolidating sideways with a somewhat bearish bias. The stock flirted with a breakdown under its simple 50-dma this past week.

I am turning more cautious here. We'll move our stop loss up to $96.75, just below the August 1st low. I'd rather get stopped out early if HES breaks down. We can revisit the stock if shares retreat toward support near $90.00.

I am not suggesting new positions.

- Suggested Positions -
Closed 2015 calls on July 28, 2014
APR 22, 2014 - entry price on HES @ 87.50, option @ 3.15*
symbol: HES1517a95 2015 JAN $95 call - exit $8.10** (+157.1%)

- or -

APR 22, 2014 - entry price on HES @ 87.50, option @ 5.80*
symbol: HES1615a100 2016 JAN $100 call - current bid/ask $ 8.90/10.05

08/17/14 new stop loss @ 96.75
07/28/14 planned exit for 2015 calls
**option exit price is an estimate since the option did not trade at the time our play was closed.
07/27/14 Exit the 2015 calls immediately
07/27/14 new stop @ 94.75
07/20/14 new stop @ 93.95
07/06/14 new stop loss @ 92.25
Investors may want to take profits now with HES testing $100
06/22/14 new stop loss @ 89.65
Investors may want to take profits as HES near the $100 mark
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: 96.75
Play Entered on: 04/22/14
Originally listed on the Watch List: 04/06/14



Microsoft Corp. - MSFT - close: 44.79

Comments:
08/17/14: MSFT displayed relative strength last week with shares up four days in a row and breaking through short-term resistance near $43.50.

More conservative investors might want to adjust their stop closer to $42.00.

Earlier Comments: June 15, 2014:
Shares of semiconductor giant Intel (INTC) soared on Friday (June 13th) 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.

- Suggested Positions -
JUN 25, 2014 - entry price on MSFT @ 41.93, option @ 1.05
symbol:MSFT150117c45 2015 JAN $45 call - current bid/ask $ 1.86/1.88

- or -

JUN 25, 2014 - entry price on MSFT @ 41.93, option @ 2.60
symbol:MSFT160115c45 2016 JAN $45 call - current bid/ask $ 3.85/3.95

07/27/14 new stop @ $39.75
07/20/14 Our 2015 call option has almost doubled in value and investors may want to take some money off the table.
06/26/14 Trade begins. MSFT opens down at $41.93
06/25/14 MSFT closes at $42.03, above our trigger of $42.00
06/23/14 MSFT closes at $41.99
Option Format: symbol-year-month-day-call-strike

Current Target: MSFT @ $50.00
Current Stop loss: 39.75
Play Entered on: 06/25/14
Originally listed on the Watch List: 06/15/14


Newmont Mining Corp. - NEM - close: 26.89

Comments:
08/17/14: NEM is another watch list candidate that has graduated to our active play list. The plan was to wait for shares to close above $26.75 and then buy calls the next morning. NEM closed at $27.06 on the 12th. Our trade began on August 13th at $27.14.

NEM has spent months building a major base under the $26.00 level and last week's rally is a bullish breakout. I would still consider new positions at current levels.

Earlier Comments: July 13, 2014:
According to the company website, Newmont Mining Corporation is primarily a gold producer, with significant assets or operations in the United States, Australia, Peru, Indonesia, Ghana, New Zealand and Mexico. Founded in 1921 and publicly traded since 1925, Newmont is one of the world's largest gold producers and is the only gold company included in the S&P 500 Index and Fortune 500. Headquartered near Denver, Colorado, the company has around 32,000 employees and contractors worldwide.

NEM also produces copper and silver but they are the second biggest gold producer on the planet by production. The biggest gold producer is Barrick Gold Corp. (ABX) and NEM almost merged with ABX in April this year but discussions fell apart. NEM investors either want the company to resume talks with ABX or break itself up to unlock shareholder value. That seems unlikely but JPMorgan believes the deal talks with ABX may not be dead.

I like NEM more for the technical set up on the charts. It's true that gold has been in rally mode, currently up six weeks in a row and up +10% for the year. Yet the gold miners have been outperforming and the GDX gold miner index is up +29% this year. NEM is only up +12.5% this year but it could play catch up if shares break out from its base.

The stock has been building a base in the $21-26 zone for months. I am suggesting we wait for NEM to close above $26.75 and then buy calls the next morning with a stop loss at $23.75. I would consider this a more aggressive, higher-risk trade because gold and the gold miners can be a volatile group. You may want to limit your position size to reduce your risk.

- Suggested Positions -
AUG 13, 2014 - entry price on NEM @ 27.14, option @ $0.91*
symbol: NEM150117c30 2015 JAN $30 call - current bid/ask $0.72/0.76

- or -

AUG 13, 2014 - entry price on NEM @ 27.14, option @ $2.73*
symbol: NEM160115c30 2016 JAN $30 call - current bid/ask $2.45/2.58

08/13/14 trade begins. NEM opens at $27.14
*option entry price is an estimate since the option did not trade at the time our play was opened.
08/12/14 NEM meets our entry point requirement with a close above $26.75 (closed @ 27.06)
Option Format: symbol-year-month-day-call-strike

Chart

Current Target: To Be Determined
Current Stop loss: 23.75
Play Entered on: 08/13/14
Originally listed on the Watch List: 07/13/14


Western Digital Corp. - WDC - close: 100.62

Comments:
08/17/14: The rally in WDC is looking a little tired and might be signaling a pullback ahead. Shares posted a loss on the week although traders were buying the dip at WDC's rising 30-dma. If shares do move lower I would not be surprised to see the stock retreat into the $94-96 area.

A temporary pullback should not derail the long-term up trend but it's up to you how much risk you want to take. More conservative traders may want to use a significantly higher stop loss.

I am not suggesting new positions at this time.

Earlier Comments: June 22, 2014:
WDC is in the technology sector. The company manufacturers data storage devices. They make hard drives and solid state drives. The company has about a 45% market share in the hard drive market, just ahead of its biggest rival Seagate Technology (STX). WDC has managed to grow in spite of long-term decline in PC sales. Today WDC's non-PC related devices account for 53% of its sales.

There has been a new development in the death of the PC story. A couple of weeks ago Intel reported that they were seeing growth in PC sales, mostly for business/enterprise use. That could be great news for WDC, who has developed a stronger solid-state drive business focused on enterprise.

The acceptance of cloud storage continues to surge. All of those cloud storage networks need hard drives to store that data, which should benefit WDC.

Technically shares of WDC have been consolidating sideways the last three weeks. The stock closed up on Friday and looks poised to breakout past short-term resistance near $93.00. More aggressive traders may want to launch positions above $93.50. I am suggesting an intraday trigger to buy calls at $95.25.

There is a good chance that $100.00 could be round-number, psychological resistance. Eventually I do expect WDC to rally past the $100 mark. Our long-term target is $110. Currently the Point & Figure chart is bullish and forecasting at $118 target.

- Suggested Positions -
JUL 01, 2014 - entry price on WDC @ 95.25, option @ 5.62
symbol: WDC150117C100 2015 JAN $100 call - current bid/ask $7.10/7.25

- or -

JUL 01, 2014 - entry price on WDC @ 95.25, option @ 8.00*
symbol: WDC160115C110 2016 JAN $110 call - current bid/ask $ 9.95/10.30

08/17/14 WDC looks poised for a pullback
08/03/14 new stop at $92.40
07/30/14 WDC delivered better than expected earnings and revenue results
07/01/14 WDC hit our intraday trigger at $95.25
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike

Current Target: WDC @ 110.00
Current Stop loss: 92.40
Play Entered on: 05/28/14
Originally listed on the Watch List: 06/22/14


Wells Fargo & Co. - WFC - close: 50.21

Comments:
08/17/14: I remain concerned about WFC. The stock managed a meager bounce last week even though shares are testing support near $50.00 and more importantly support near its long-term up trend of higher lows.

Our stop loss is at $48.80. More conservative traders may want to use a stop closer to $49.35 instead. I am not suggesting new positions.

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 $ 2.06/2.11

-- or --

DEC 26, 2013 - entry price on WFC @ 45.50, option @ 2.95*
symbol: WFC1615a50 2016 JAN $50 call - current bid/ask $ 3.90/4.10

08/10/14 adjust stop loss to $48.80
07/11/14 WFC reported earnings that were in-line with estimates
07/06/14 investors may want to take profits before WFC reports earnings on July 11th.
06/29/14 new stop loss @ 49.40
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: 48.80
Play Entered on: 12/26/13
Originally listed on the Watch List: 12/08/13


WellPoint Inc. - WLP - close: 111.78

Comments:
08/17/14: After a two-week drop shares of WLP bounced. The stock is trying to rally past resistance near $112.00. If successful the next hurdle is resistance near $116.00.

In other news WLP announced plans to change its corporate name to Anthem Inc. Anthem is WLP's biggest brand and WLP believes the name change will help it reach more consumers.

I am not suggesting new positions at this time.

Earlier Comments: July 6, 2014:
WellPoint is one of the nation's leading health benefits companies. We believe that our health connects us all. So we focus on being a valued health partner and delivering quality products and services that give members access to the care they need. With nearly 67 million people served by our affiliated companies including nearly 37 million enrolled in our family of health plans (source: WLP website).

Healthcare stocks have been market leaders. Both the XLV healthcare ETF and the XHS healthcare services ETF are at all-time highs. One of the factors driving this move has been Obamacare. Love it or hate it the Affordable Care Act has generated more customers for the healthcare industry. The latest data would suggest about eight million people have signed up for Obamacare. It would appear that 60% of the people that have signed up did not previously have insurance.

A lot of insurance/healthcare firms expect their participation in the Obamacare program to either be a breakeven or end up with negative margins. WLP has been forecasting their Obamacare business should see 3% to 5% margins.

WLP has also done well focusing on the Medicaid business. They are currently the largest participant in Medicaid and they believe it will continue to grow for them at a double-digit rate.

Technically shares of WLP are hitting all-time highs. Shares produced a big rally higher in May and spent most of June consolidating gains in the $105-110 zone. Now WLP is on the verge of a breakout. Thursday's intraday high was $111.01. I am suggesting we wait for WLP to close above $111.00 and then buy calls the next morning with a stop loss at $104.75. Our long-term target is the $130.00 area. Currently the Point & Figure chart is bullish and forecasting at $149.00 target.

- Suggested Positions -
JUL 15, 2014 - entry price on WLP @ 113.05, option @ 4.00*
symbol:WLP150117c120 2015 JAN $120 call - current bid/ask $ 2.89/3.20

-- or --

JUL 15, 2014 - entry price on WLP @ 113.05, option @ 7.35*
symbol:WLP160115c125 2016 JAN $125 call - current bid/ask $ 6.20/7.15

08/10/14 technically WLP is showing weakness and investors might want to raise their stop loss.
07/15/14 trade begins. WLP opens at $113.05
07/14/14 triggered. WLP closed at $113.15, above our $111.00 trigger
*option entry price is an estimate since the option did not trade at the time our play was opened.
Option Format: symbol-year-month-day-call-strike

Current Target: Exit WLP hits $130.00
Current Stop loss: 104.75
Play Entered on: 07/15/14
Originally listed on the Watch List: 07/06/14


Williams Sonoma - WSM - close: 70.61

Comments:
08/17/14: The rally in WSM stalled last week. Shares inched higher with a 12-cent gain. If you're feeling optimistic then seeing WSM bouncing from short-term technical support at its converging moving averages is a good sign.

Overall the stock has held up pretty well considering all the disappointing headlines coming from the retail industry.

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 $ 4.50/5.00

-- or --

MAY 13, 2014 - entry price on WSM @ 64.36, option @ 4.70*
symbol: WSM1615a75 2016 JAN $75 call - current bid/ask $ 6.10/6.70

07/27/14 WSM not looking good. Investors may want to exit now
06/29/14 new stop @ 66.40
adjust the exit target to $79.00
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 at $79.00
Current Stop loss: 66.40
Play Entered on: 05/13/14

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



Watch

Biotech & Defense

by James Brown

Click here to email James Brown



New Watch List Entries

CELG - Celgene Corp

LMT - Lockheed Martin


Active Watch List Candidates

BCR - C.R.Bard Inc

CMI - Cummins Inc.

TMO - Thermo Fisher Scientific


Dropped Watch List Entries

CSX and NEM have graduated to our active plays.



New Watch List Candidates:


Celgene Corp. - CELG - close: 89.61

Company Info

If you're looking for opportunity it's hard to beat some of the biotech names. CELG is one of the strongest. According to their press release, "Celgene Corporation, headquartered in Summit, New Jersey, is an integrated global biopharmaceutical company engaged primarily in the discovery, development and commercialization of novel therapies for the treatment of cancer and inflammatory diseases through gene and protein regulation."

What makes CELG so attractive is the company's pipeline. Developing drugs is an expensive business. A lot of older firms are buying other companies for their pipeline. Meanwhile CELG is developing a very strong pipeline. You can view the company's current progress on this webpage.

CELG is also growing earnings. Their most recent earnings report was July 24th. Wall Street was looking for a profit of 89 cents a share on revenues of $1.84 billion. CELG beat estimates with a profit of 90 cents and revenues rising +17.1% to $1.87 billion. Earnings per share are up +18% from a year ago. Management raised their guidance for 2014. Wall Street was a little disappointed with the guidance because analysts are more optimistic.

Big picture, CELG is a strong company and the stock looks poised to breakout. Shares have been consolidating sideways under resistance at $90.00 for the last six weeks. Now it's poised to breakout. The stock is only up +6.0% year to date versus a +16% gain for the IBB biotech ETF and a +19% gain in the XBI biotech ETF. CELG could be poised to catch up with its peers.

Technically the point & figure chart is also bullish with a quadruple top breakout buy signal.

The 2014 high is $90.50. I am suggesting an intraday trigger to buy calls at $91.00. More conservative traders could instead choose to wait for a close above $90.50 as an alternative entry point. If triggered we'll start with a stop loss at $85.75, under the 50-dma. I do expect the $100 level to offer some resistance but our long-term target is the $110-120 zone.

Breakout trigger: intraday trigger at $91.00

BUY the 2015 Jan $100 call (CELG150117c100) current ask $3.10

- or -

BUY the 2016 Jan $100 call (CELG160115c100) current ask $9.65

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

Chart of CELG:

Originally listed on the Watch List: 08/17/14


Lockheed Martin Corp. - LMT - close: 169.16

Company Info

LMT is considered part of the industrial goods sector. According to their press release, "Headquartered in Bethesda, Maryland, Lockheed Martin is a global security and aerospace company that employs approximately 113,000 people worldwide and is principally engaged in the research, design, development, manufacture, integration and sustainment of advanced technology systems, products and services. The Corporation’s net sales for 2013 were $45.4 billion."

That's a pretty brief summary for such a large company. Their aerospace and defensive business is extensive covering aircraft, ground vehicles, missiles, missile defense, naval systems, radar systems, sensors, tactical communications, training & logistics, transportation, and unmanned systems.

Their information technology business works in biometrics, cloud computing, cyber security, health and life sciences, and more. Their space division includes satellites, exploration, and launch vehicles. Plus their emerging technologies operations covers exciting fields like robotics, nanotechnology, and advanced aeronautics.

Fundamentally the company has managed to navigate both the economy's ups and downs and the constantly stormy political weather in Washington. LMT has managed to beat Wall Street's earnings estimates the last four quarters in a row. Management has raised their guidance three out of the last four quarters. LMT's most recent earnings report was July 22nd. Analysts were expecting a profit of $2.66 a share on revenues of $11.15 billion. LMT delivered $2.76 a share with revenues of $11.31 billion.

If you look at the world today there seems to be a growing number of conflicts, not less. Just this past week U.S. Defense Secretary Hagel was speaking and said, "The world is exploding all over." Sadly that's probably bullish for LMT's military business.

The stock has spent almost six months consolidating its very impressive 2013 gains. Now it looks ready to breakout. Shares are hovering just below resistance in the $170-171 area. Tonight I am suggesting we wait for LMT to close above $171.00 and then buy calls the next morning with a stop loss at $161.95.

The point & figure chart is bullish with a $196.00 target. We'll start this trade with a potential exit target at $199.00.

Breakout trigger: Wait for LMT to close above $171.00
then buy calls the next morning with a stop at $161.95.

BUY the 2015 Jan $180 call (LMT150117C180) current ask $2.75

- or -

BUY the 2016 Jan $190 call (LMT160115c190) current ask $6.40

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

Chart of LMT:

Originally listed on the Watch List: 08/17/14


Active Watch List Candidates:



C. R. Bard Inc. - BCR - close: 149.83

Comments:
08/17/14: BCR's bounce last week failed at short-term resistance near $152.00. Overall our strategy is unchanged.

Earlier Comments: August 3, 2014:
C.R. Bard (a.k.a. BARD) is "a leading multinational developer, manufacturer, and marketer of innovative, life-enhancing medical technologies in the product fields of vascular, urology, oncology, and surgical specialty. BARD markets its products and services worldwide to hospitals, individual health care professionals, extended care facilities, and alternate site facilities. BARD pioneered the development of single-patient-use medical products for hospital procedures; today BARD is dedicated to pursuing technological innovations that offer superior clinical benefits while helping to reduce overall costs (source: company website)."

Thus far 2014 has been a bit of a roller coaster ride for BCR investors. That is a bit surprising considering that BCR has significantly beaten Wall Street's earnings estimates two quarters in a row. The company saw its Q2 revenues rise +8.8% to $827 million. BCR's Q2 profit soared +29.6% to $2.06 a share. Management then raised guidance and the stock broke out past major resistance near $150.00.

The broader market's recent weakness has pulled BCR back toward the $150 area, which should be support. If the stock bounces we want to be ready to hop on board.

Wait for a close above $152.00 and then buy calls the next morning with a stop loss at $146.95. I am not setting an exit target tonight but I'll note that the point & figure chart is bullish and forecasting at long-term target of $194.

Breakout trigger: Wait for a close above $152.00
Then buy calls the next day with a stop at $146.95.

BUY the 2015 Jan $160 call (BCR150117C160)

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

Originally listed on the Watch List: 08/03/14


Cummins Inc. - CMI - close: 140.93

Comments:
08/17/14: CMI is down less than half a point for the week. Yet the action looks bearish with CMI failing at its simple 200-dma and underperforming the market's move higher.

We are not giving up yet. Wait for a close above $144.00.

Earlier Comments: August 10, 2014:
Cummins Inc. was founded back in 1919 by its namesake Clessie Lyle Cummins. The company has four businesses: engines, power generation, components, and distribution. They're headquartered in the state of Indiana with about 48,000 employees worldwide. They do business in 190 countries.

According to the company website CMI describes themselves as "a corporation of complementary business units that design, manufacture, distribute and service diesel and natural gas engines and related technologies, including fuel systems, controls, air handling, filtration, emission solutions and electrical power generation systems."

CMI reported Q1 earnings on April 29th. They crushed the earnings number and beat the revenue estimates with revenues up +12.3% for the quarter. CMI management raised their 2014 guidance by +6% to +10% (about $18.3-19.0 billion).

When CMI reported Q2 earnings on July 28th Wall Street was expecting a profit of $2.39 a share on revenues of $4.82 billion. CMI beat those numbers with a profit of $2.43 on revenues of $4.84 billion. Profits were up +10.5% from a year ago. Management raised their 2014 guidance again. This time they see revenues up +8% to +11% in 2014. That's about $18.7-19.2 billion.

CMI's Chairman and CEO Tom Linebarger said, "Demand is growing in on-highway markets in North America this year as the economy improves and we have gained market share in medium duty truck and bus markets." Their North American sales surged +14% last quarter versus a -1% pullback in international sales.

That's two quarters in a row that CMI has beat Wall Street's top and bottom line estimates and raised guidance. Yet the stock was crushed following the July earnings number. It appears the upgraded revenue guidance wasn't good enough and analysts were expecting more.

CMI reported sales of $17.3 billion in 2013. Now they're approaching $19 billion. They've already approved a $1 billion stock buyback program to replace their current $1 billion buyback program once it's complete. They have also raised their dividend this year.

The company has rising sales, rising market share, rising profits, and rising dividends. It has a trailing P/E of 17 and a forward P/E of 12.8. That sounds like a pretty good combination.

Technically the stock has fallen to its long-term trend line of support (see the weekly chart below). Last week shares have started to rebound from this trend. However, on a short-term basis the breakdown under its 200-dma looks pretty ugly. The bounce last week failed near $144.00 and its 10-dma. Therefore tonight we are suggesting investors wait for CMI to close above $144.00 and then buy calls the next morning with a stop at $137.90.

Breakout trigger: Wait for a close above $144.00
then buy calls the next morning with a stop at $137.90

BUY the 2015 Jan $150 call (CMI150117C150)

- or -

BUY the 2016 Jan $160 call (CMI160115c160)

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

Originally listed on the Watch List: 08/10/14


Thermo Fisher Scientific - TMO - close: 121.55

Comments:
08/17/14: TMO garnered some bullish analyst coverage and a new $150 price target. This failed to rally fire up the stock price. TMO consolidating sideways last week with traders buying dips near short-term support at $120.00.

I do not see any changes from my earlier comments.

Earlier Comments: August 10, 2014:
TMO is considered part of the healthcare sector. They provide products and services in their analytical instruments, laboratory services, specialty diagnostics, and their new Life Sciences division.

According to the company website, "Thermo Fisher Scientific Inc. is the world leader in serving science, with revenues of $17 billion and 50,000 employees in 50 countries. Our mission is to enable our customers to make the world healthier, cleaner and safer. We help our customers accelerate life sciences research, solve complex analytical challenges, improve patient diagnostics and increase laboratory productivity. Through our four premier brands – Thermo Scientific, Life Technologies, Fisher Scientific and Unity Lab Services – we offer an unmatched combination of innovative technologies, purchasing convenience and comprehensive support."

TMO is developing a trend of beating Wall Street's estimates. Back in April they reported their first quarter results that beat estimates on both the top and bottom line. Management then raised their guidance for 2014. TMO did it again when they reported Q2 earnings on July 23rd. However, this report is significant because it's the first earnings report including its new Life Sciences acquisition.

Wall Street was expecting TMO to report earnings of $1.63 a share on revenues of $4.25 billion. The company beat these expectations. Earnings rose +30% to $1.72 a share. Revenues soared +33% to $4.32 billion. Gross margins improved 154 basis points to 45.4%. Management then adjusted their revenue guidance higher.

TMO's management has also upgraded their expected synergies from the Life Sciences acquisition. They now expect to reap $350 million in synergies over the next three years. That's up from $300 million.

The stock has reflected TMO's bullish performance with big gains over the past couple of years. Yet the rally peaked in March 2014 and shares have been digesting gains for months. This past week saw TMO testing significant support near its long-term trend of higher lows. This looks like an opportunity to hop on board.

I am suggesting we wait for TMO to close above $122.50 and then buy calls the next morning with a stop loss at $117.40. The $127.00 level is overhead resistance but we're betting on a bullish breakout to record highs.

FYI: The option spreads on TMO are a little bit wide. Investors may want to use smaller positions to limit their risk.

Breakout trigger: Wait for a close above $122.50
then buy calls the next morning with a stop at $117.40

BUY the 2015 Jan $130 call (TMO150117c130)

- or -

BUY the 2016 Jan $130 call (TMO160115c130)

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

Originally listed on the Watch List: 08/10/14