Option Investor
Newsletter

Daily Newsletter, Sunday, 10/19/2014

Table of Contents

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

Leaps Trader Commentary

Stocks Catch Ebola Fever

by James Brown

Click here to email James Brown

The news media caught Ebola fever last week with headlines about the virus infecting the airwaves and fueling fears of an outbreak in the U.S. While Ebola remains a lethal disease the odds of a large scale infection in the U.S. are unlikely. Unfortunately the media's white hot focus on Ebola did not help investor sentiment. Meanwhile stocks reacted to ongoing worries over a global economic slowdown and individual names moved on earnings results.

Volatility was the name of the game for stocks. Since the September Alibaba IPO peak the Dow Jones Industrial Average has seen an intraday drop of almost 1,500 points. The S&P 500 almost hit correction territory with a -9.8% pullback from intraday high to intraday low. The NASDAQ did tag a -10.7% correction on an intraday basis. These sharp moves has fueled a massive spike in the volatility index (VIX), which has risen from near 11 in late September to an intraday peak above 30 this past week. The VIX has not been this high in years. Investors searching for safety rushed into U.S. treasuries and the yield on the 10-year bond dropped under 2.0% for the first time since 2013.

Chart of the Volatility Index (VIX)

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

Stocks did see a sharp two-day bounce on Thursday and Friday. Helping fuel gains, aside from bears covering positions ahead of the weekend, was help from central banks. Maybe I shouldn't say help. The correct term might be encouraging talk. James Bullard, President of the St. Louis Federal Reserve, offered dovish comments suggesting that maybe the Fed should postpone ending their current QE program, which is set to expire at the next meeting in late October. While his comments may have helped investor sentiment Bullard is not currently a voting member of the FOMC. Markets also responded to soothing words from comments that the European Central Bank was nearing some form of QE program in the next several days. We'll talk a little more about that in a bit.

After the week was down the S&P 500 still posted a loss, marking its fourth weekly decline in a row. It's the worst decline in over three years. The Dow Industrials ended the week with a -1% loss and is down -1.1% for the year. The NASDAQ and S&P 500 both trimmed their 2014 gains. The small caps delivered a big bounce but the Russell 2000 is still negative for the year. Transports were some of the best performers with the Dow Transportation average up +3.2% last week and up +10% for the year. The SOX semiconductor index also performed well with a +2.4% gain last week. The U.S. dollar posted its second weekly loss in a row but that failed to help crude oil. Oil prices plunged another -3.6% and oil is now down -16.6% for 2014.

Economic Data

Worries about economic weakness in Japan, China, and Europe helped fuel the stock market sell-off. Yet so far the economic weakness is not showing up in America. We did see a disappointment in the New York Empire State manufacturing survey for October, which dropped from 27.5 to 6.2. Yet the Philadelphia Fed business outlook survey only dipped from 22.5 to 20.7 when economists were expecting a drop to 19.8. Numbers above zero suggest economic growth. We also saw U.S. industrial production rise +1.0% in September following a -0.2% decline in August. Analysts were only looking for an improvement of +0.4%.

Some of the housing data was encouraging. New building starts improved from an annual pace of 957,000 to 1,017,000 in September. Single-family housing starts rose from 639K to 646K. We also saw mortgage refinance applications surge +10.6%, a four-month high, thanks to falling mortgage rates. One area of concern were the homebuilders themselves. The latest survey of homebuilders showed the National Association of Home Builders sentiment drop from 59 to 54 when pundits were expecting confidence to remain steady.

One area of confidence that has been strong is consumers. Gasoline prices at four-year lows always helps consumer confidence. The latest survey of consumer sentiment showed an improvement from 84.6 to 86.4 when economists were expecting a decline. The current reading is a seven-year high. The slowly improving job market has helped boost confidence. Last week we saw initial jobless claims drop to a 14-year low at 264,000.

Overseas Economic Data

Japan reported their industrial production numbers dropped -1.9% last month. That was worse than expected and below the prior month's -1.5% decline. In China we saw new inflation numbers with consumer price inflation up +0.5% while wholesale producer price inflation down -1.8%. China is also expected to report their slowest growth in several years. Estimates are coming in around +7.2% GDP growth. That is below the official target of +7.5%. Unfortunately China's growth has been steadily slowing down from +10.5% in 2010 to what could be less than +7.5% in 2014. China reports their next GDP estimate on Monday, October 20th.

We already know Europe is slowing down. The 18-nation Eurozone is heading toward its third recession in the last six years. Germany has long been the engine of growth for the EU but now that engine has stalled. The latest investor confidence ZEW survey in Germany dropped from 6.9 to -3.6, which was significantly worse than expected. This helped send the German DAX (stock index) to a new 52-week low. If a slowdown in growth isn't enough to scare you then Europe is also facing a looming threat of deflation. At the same time the European credit crisis looks poised to flare up again. Greece is starting to make headlines and threatening to leave the EU. Yields on Greek 10-year bonds soared from 6.6% to over 9% last week before settling at 8.9%.

All of these negative pressures in Europe is pushing investor money into the safety of bonds. The United Kingdom's Telegraph news agency noted that yields on the 10-year German Bund fell to an all-time low of 0.72%. That is the lowest level ever seen in a major European nation "in recorded history." According to Andrew Roberts, the credit chief at RBS, "This is not going to stop until the European Central Bank steps up to the plate. If it does not act in the next few days, this could snowball."

Comments from ECB officers last week that the central bank would start purchasing asset backed securities soon did help alleviate the market sell-off. Yet ECB President Mario Draghi has been hinting at some form of QE program for years and never really committed. Now it would appear that investors are tired of all the talk and want to see more action. If we don't see a satisfactory response from the ECB this coming week it could ignite the next sell-off in European stocks.




Major Indices:

The S&P 500 lost -1.0% for the week. That cut its 2014 gains to just +2.0%. On a closing basis the index is down -7.4% from its September high. Yet on an intraday basis it's down -9.8%. That's probably close enough to consider it a -10% correction. Unfortunately last week's decline saw the S&P 500 breakdown under technical support at its simple 200-dma and the 1900 level. Now that this support is broken it's new overhead resistance. So guess where the bounce stalled on Friday? It stopped just shy of the 1900 mark.

Technical traders will also note that the oversold bounce in the S&P 500 stalled near its 38.2% Fibonacci retracement. The 1900-1950 zone is where any bounce is going to run into trouble. According to Carter Worth, the Chief Technical Analyst at Sterne Agee, this area in the S&P 500 is the "kill zone" for the oversold bounce.

I would focus on resistance at 1900, 1925 and 1940. Support is probably 1850 and 1820 but it needs to be retested before having any confidence in these support levels. That's especially true since the average market correction is about -13%, which would mean a drop to the 1750 area, which is pretty much around the February 2014 lows.

If we see the S&P 500 put in a double bottom near 1820 or even a higher low then we can have more confidence that the correction might be over.

chart of the S&P 500 index:

Weekly chart of the S&P 500 index

The NASDAQ composite lost -0.4% for the week. It's 2014 gains have slipped to +1.9%. Last week saw the index's intraday pullback reach -10.7% from its September highs. Thursday's bounce produced a bullish engulfing candlestick reversal pattern but the bounce is stalling at resistance.

Broken support near 4300 and its simple 200-dma is now overhead resistance for the NASDAQ. You can see on the daily chart how the NASDAQ's bounce also failed at the 38.2% Fibonacci retracement of the sell-off. I suspect the 4300-4400 zone could be a challenge for the bulls.

chart of the NASDAQ Composite index:

Intraday chart of the NASDAQ Composite index

After underperforming the rest of the market for weeks the small cap stocks finally bounced. The Russell 2000 delivered a +2.75% gain last week. The $RUT is still down -7% for the year. Sadly last week's bounce does not invoke a lot of confidence. The rebound stalled at round-number resistance near the 1100 mark. All of the $RUT's major moving averages have rolled over or they are starting to for the longer ones. This is suggesting a potential trend change on a larger scale.

I would hesitate to put any faith in any Russell 2000 rebound until we see better evidence of a bottom.

chart of the Russell 2000 index

Weekly chart of the Russell 2000 index



Economic Data & Event Calendar

The week ahead is relatively quiet when it comes to economic data. We'll see plenty of data out of China on Monday. In the U.S. we'll get a couple of regional Fed surveys on Thursday. The real headlines should be earnings.

Apple (AAPL) will make headlines when they report on Monday night. Altogether more than 20% of the S&P 500 will report earnings this week. More than one third of the Dow Industrials will report. We could see a lot of volatility for individual stocks.

Overall the Q3 earnings season has not been that bad. The average earnings growth so far has been about +5.1%. That's better than consensus estimates for +4.1%.

Economic and Event Calendar

- Monday, October 20 -
Apple (AAPL) reports earnings after the closing bell
China Retail Sales
China Industrial Production
China GDP estimate

- Tuesday, October 21 -
Existing Home Sales

- Wednesday, October 22 -
Consumer Price Index (CPI)

- Thursday, October 23 -
Weekly Initial Jobless Claims
Chicago Fed National Activity survey
Kansas City Fed manufacturing survey

- Friday, October 24 -
New Home Sales

Additional Events to be aware of:

October 29, FOMC policy update
October 30, Q3 GDP estimate

Looking Ahead:

If we look at the big picture for the economy the sell-off in crude oil is a bullish tailwind for the economy. Worldwide the price of crude oil has plunged -27% or $31 to about $84.50 a barrel from its 2014 highs. According to MSN.com, this is terrible news for oil producers who are losing almost $3 billion in oil revenues every single day. On the other hand it's great for the global economy because consumers and transportation companies (trucks, trains, and airlines) are all pay less for fuel. That means the world can spend that $3 billion on something else besides fuel every day. Citigroup estimates that low fuel prices could provide more than $1 trillion worth of stimulus to global economies and the average consumer will save $600 a year.

Ebola Virus Outbreak

Ebola will remain a top headline for news agencies. It's a horrendous disease so it's easy to generate fear. Yet a major outbreak in the U.S. is unlikely. There is still a huge risk in Western Africa but the media is not telling you that some countries have managed to contain the outbreak. A recent W.H.O. report noted that Nigeria and Senegal have apparently managed to stop the spread of Ebola but you don't hear about it because it doesn't sell the news. Speaking of the World Health Organization, they have admitted to several mistakes in responding to the Ebola outbreak in Africa. The U.S. Centers of Disease Control (CDC) has also confessed to making mistakes.

Thus far the U.S. has only seen a small handful of people diagnosed with the virus and only one has died. When you consider we are a very active and mobile society of more than 318 million people and we're still allowing airplanes to fly back and forth from West Africa to the U.S. it's amazing the spread of Ebola hasn't been worse. Investors should not worry about this story unless it gets materially worse. The current strain of Ebola has a 70% death rate. So we might see a few more deaths, which is terrible but you don't see headlines about the tens of thousands of people who die from the flu every year. Personally I suspect the government is not telling us the whole truth about how risky Ebola is. The story has been that it's hard to catch and we shouldn't worry. Yet new federal protocols for treating Ebola patients will have health workers using protective gear with absolutely no skin showing.

Market Performance

The Ebola story has just been an excuse or a catalyst to help fuel the market pullback when the market was already tired and needed a correction. The real challenge is the global growth picture, which is slowing.

Another factor behind the stock market sell-off is probably the end of the Federal Reserve's QE program. When the Fed ended QE1 the market dropped about 17%. When they ended QE2 the market fell about 13%. Today the Federal Reserve's balance sheet is $1.5 trillion higher than it was at the end of QE2. As we near the end of QE3, which should be announced at the next FOMC meeting on October 29th, we have one more excuse for investors to sell stocks.

Trading can be a complicated game. Part of the game is investor psychology. Everyone has known that the market was due for a pullback. People talk about how they wanted to see a pullback and hoped for a correction so they could take advantage of the weakness and buy stocks. Market pundits point to all the previous market selloffs as opportunities for you to have jumped in. Yet when we are in the middle of the selloff and stocks are plunging faster than you might expect then suddenly nobody wants to buy anything. Suddenly everyone is worried about a market crash. Suddenly stocks look too risky and we see money move into the perceived safety of bonds. Be mindful of your emotions and use stop losses to help manage your risk.

The market's sell-off from its September high has done a lot of technical damage. It might take a while to repair that damage. I do think this pullback is an opportunity but that does not mean we have to jump into new bullish positions tomorrow. We should wait for more evidence that the correction might be over before putting new capital to work. I previously suggested that we might see a market bottom in the second half of October. That is the next two weeks. Be patient.

James







Portfolio

Portfolio Update

by James Brown

Click here to email James Brown


Current Portfolio


Portfolio Comments:

Stock market bulls suffered another painful week. We thought the prior week was volatile but last week saw the VIX spike to 30, a level not seen since 2011.

All the market volatility and big declines tagged nearly all of our stop losses.

CELG, EXPE, HBI, LMT, MS, MSFT, NKE, VFC, WFC, WLP have been stopped out.

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

Beware the Falling Knife

by James Brown

Click here to email James Brown


- New Trades -


Editor's Note:

(October 19, 2014)

The S&P 500 just delivered its fourth weekly decline in a row. It has been the worst four-week performance in years. Stocks experienced a short-term panic and the volatility index (VIX) soared to levels not seen since 2011 with a spike above 30.

Currently the markets appear to be seeing an oversold bounce. The problem is we do not know yet if this is just a bounce or if the correction is over. The S&P 500 did come close to a -10% correction on an intraday basis. The NASDAQ composite tagged a -10% pullback from its recent intraday highs to intraday lows. Has this satisfied the market's need for a pullback or is there more weakness ahead? The answer might be found in corporate earnings.

The next couple of weeks will see a virtual flood of quarterly earnings reports. Their results and guidance for the fourth quarter and into 2015 will do a lot to set the tone of the market.

Seasonally a volatile October tends to portend a bullish market performance in November and December but we all know that seasonal patterns are not guaranteed.

I would hesitate to launch new positions. Be patient and wait for the right entry point. Don't be afraid to miss the bottom since trying to catch a falling knife tends to end up with injuries.

We are not adding any new trades tonight. We have added FDX and HUM as new watch list candidates. The list of symbols on my radar screen below look interesting since many are testing or have tested what looks like potential support. I'd like to see some follow through on the rebound over the next couple of weeks.

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:

LB, DECK, GPC, CSX, CLVS, FB, TWTR, SHW, WLK, SAIA, WCN, SBAC, GILD, LSTR, SNDK, C, MA, CELG, HBI, LMT, NKE, VFC, Z, KO, CCI



Play Updates

Stocks Get Flushed Lower

by James Brown

Click here to email James Brown


Closed Plays


The stock market volatility hit extremes last week. The VIX spiked to levels not seen since 2011.

The widespread market declines were enough to close nearly all of our active trades.

CELG, EXPE, HBI, LMT, MS, MSFT, NKE, VFC, WFC, WLP all hit our stop loss last week. We also saw DVA hit our stop to exit the 2015 calls.



Play Updates


DaVita Healthcare Partners - DVA - close: 72.75

Comments:
10/19/14: DVA weathered the market volatility relatively well. Unfortunately the weakness DVA did see was enough to hit our new stop loss at $71.75 to close our 2015 call position.

The stop loss for our 2016 calls remains DVA at $69.85.

DVA is scheduled to report earnings on November 6th. I am not suggesting 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 -
(Closed on October 16, 2014)
JUN 04, 2014 - entry price on DVA @ 71.44, option @ 2.65*
symbol: DVA150117C75 2015 JAN $75 call - exit $1.65** (-37.7%)

- or -

JUN 04, 2014 - entry price on DVA @ 71.44, option @ 4.70*
symbol: DVA160115C80 2016 JAN $80 call - current bid/ask $3.00/4.90

10/16/14 DVA hit our stop at $71.75 to close our 2015 calls.
**option exit price is an estimate since the option did not trade at the time our play was closed.
10/12/14 adjusting stop loss strategy:
Use a stop at $71.75 for the 2015 calls.
Use a stop at $69.85 for the 2016 calls.
08/24/14 new stop at $69.85
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: 69.85 for the 2016 calls, $71.75 for the 2015s
Play Entered on: 06/04/14
Originally listed on the Watch List: 06/01/14



CLOSED Plays


Celgene Corp. - CELG - close: 88.12

Comments:
10/19/14: Biotech stocks are still some of the market's best performers this year. Yet the market volatility has been rough and the group has not been except from the sharp moves.

CELG hit our stop at $88.00 on Monday, October 13th.

- Suggested Positions -
Aug 18, 2014 - entry price on CELG @ 91.00, option @ 3.45*
symbol: CELG150117c100 2015 JAN $100 call - exit $2.25** (-34.7%)

- or -

Aug 18, 2014 - entry price on CELG @ 91.00, option @ 10.00*
symbol: CELG160115c100 2016 JAN $100 call - exit $9.70** (-3.0%)

10/13/14 stopped out at $88.00
**option exit price is an estimate since the option did not trade at the time our play was closed.
10/12/14 Investors may want to raise their stop loss.
08/31/14 new stop @ 88.00
08/18/14 CELG hit our trigger at $91.00 (intraday)
*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

Chart

Current Target: CELG 110-120 zone
Current Stop loss: 88.00
Play Entered on: 08/18/14
Originally listed on the Watch List: 08/17/14


Expedia Inc. - EXPE - close: 74.57

Comments:
10/19/14: It has been a horrible October for EXPE thus far. Shares have corrected from $88 to almost $71.00 before paring its losses.

I cautioned readers about the recent weakness and suggested an early exit last week. Now I'm wishing we had taken an early exit.

The stock market's big drop on Monday, October 13th was enough to send EXPE plunging from $81 to its 200-dma near $77. Our stop loss was hit at $79.75.

- Suggested Positions -
JUN 09, 2014 - entry price on EXPE @ 75.30, option @ 8.20*
symbol:EXPE160115C90 2016 JAN $90 call - exit $8.80** (+7.3%)

10/13/14 stopped out @ 79.75
**option exit price is an estimate since the option did not trade at the time our play was closed.
08/24/14 new stop @ 79.75, adjust target to $98.00
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

Chart

Current Target: EXPE @ 98.00
Current Stop loss: 79.75
Play Entered on: 06/09/14

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



Hanesbrands Inc. - HBI - close: 104.46

Comments:
10/19/14: HBI was also stopped out on Monday's big decline in the stock market. Shares sliced through support near $105 and its 50-dma. Our stop was hit at $104.95.

- Suggested Positions -
OCT 03, 2014 - entry price on HBI @ 110.50, option @ 3.80*
symbol: HBI150117c115 2015 JAN $115 call - exit $2.10** (-44.7%)

10/13/14 stopped out at $104.95
**option exit price is an estimate since the option did not trade at the time our play was closed.
10/03/14 Triggered. Credit Suisse tags a $125 price target on HBI, shares soar and breakout past resistance near $110.00. Stock hits our intraday trigger at $110.50.
*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

Chart

Current Target: HBI in the $125.00 area
Current Stop loss: 104.95
Play Entered on: 10/03/14
Originally listed on the Watch List: 09/28/14


Lockheed Martin Corp. - LMT - close: 176.24

Comments:
10/19/14: The market's volatile movement last week sent LMT toward the $170 level. Our stop loss was hit at $171.75 on October 15th.

The long-term bullish trend for LMT still works. I would keep this stock on your radar screen. Let us see how it performs after they report earnings this week.

- Suggested Positions -
AUG 19, 2014 - entry price on LMT @ 172.02, option @ 3.40*
symbol: LMT150117C180 2015 JAN $180 call - exit $4.01** (+17.9%)

- or -

AUG 19, 2014 - entry price on LMT @ 172.02, option @ 7.00*
symbol: LMT160115C190 2016 JAN $190 call - exit $7.50** (+7.1%)

10/15/14 stopped out
**option exit price is an estimate since the option did not trade at the time our play was closed.
09/28/14 new stop @ 171.75
09/21/14 new stop @ 168.45
09/14/14 new stop @ 164.75
08/19/14 trade begins. LMT opens at $172.02
*option entry price is an estimate since the option did not trade at the time our play was opened.
08/18/14 LMT closed at $171.52, above our trigger at $171.00
Option Format: symbol-year-month-day-call-strike

Chart

Current Target: LMT @ 199.00
Current Stop loss: 171.75
Play Entered on: 08/19/14
Originally listed on the Watch List: 08/17/14


Morgan Stanley - MS - close: 33.22

Comments:
10/19/14: Financials had a volatile week thanks to the broader market and reaction to earnings reports from several banking stocks. We missed most of the volatility after MS hit our stop on Monday, October 13th at $32.90.

- Suggested Positions -
SEP 05, 2014 - entry price on MS @ 34.42, option @ 1.57*
symbol: MS150117C35 2015 JAN $35 call - exit $1.12** (-28.6%)

- or -

SEP 05, 2014 - entry price on MS @ 34.42, option @ 1.80*
symbol: MS160115C40 2016 JAN $40 call - exit $1.38** (-23.3%)

10/13/14 stopped out
**option exit price is an estimate since the option did not trade at the time our play was closed.
10/12/14 Expect to get stopped out on Monday morning
10/05/14 new stop @ 32.90
09/21/14 new stop @ 32.40
09/05/14 trade begins. MS opens at $34.42
*option entry price is an estimate since the option did not trade at the time our play was opened.
09/04/14 MS closed @ 34.70, above our trigger of $34.60
Option Format: symbol-year-month-day-call-strike

Chart

Current Target: 2015 calls is MS @ 39.50, 2016 calls is MS @ 49.00
Current Stop loss: 32.90
Play Entered on: 09/05/14
Originally listed on the Watch List: 08/31/14


Microsoft Corp. - MSFT - close: 43.63

Comments:
10/19/14: I warned readers last week that MSFT looked poised to hit our stop on Monday. Shares went one better and actually gapped down at $43.82 instead of hitting our stop at $43.90.

- Suggested Positions -
JUN 25, 2014 - entry price on MSFT @ 41.93, option @ 1.05
symbol:MSFT150117c45 2015 JAN $45 call - exit $1.34 (+27.6%)

- or -

JUN 25, 2014 - entry price on MSFT @ 41.93, option @ 2.60
symbol:MSFT160115c45 2016 JAN $45 call - exit $3.25** (+25.0%)

10/13/14 stopped on gap down at $43.82, stop was $43.90
**option exit price is an estimate since the option did not trade at the time our play was closed.
10/12/14 MSFT will likely hit our stop on Monday, Oct 13th.
09/21/14 new stop @ 43.90
09/07/14 new stop @ 41.90
09/07/14 set exit target for 2015 calls: MSFT @ $49.50
08/24/14 new stop @ 41.45
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

Chart

Current Target: Exit 2015 calls: MSFT @ $49.50
(no target yet to exit the 2016 calls)
Current Stop loss: 43.90
Play Entered on: 06/25/14
Originally listed on the Watch List: 06/15/14


Nike, Inc. - NKE - close: 87.18

Comments:
10/19/14: NKE is another victim of the market's sell-off on Monday, October 13th. Shares hit our stop loss at $86.40. Two days later NKE was added to the "conviction buy" list by Goldman Sachs.

I would keep NKE on your radar screen. A dip back to the $80.00-82.50 area could be a new entry point.

- Suggested Positions -
SEP 07, 2014 - entry price on NKE @ 81.92, option @ $5.20*
symbol: NKE160115c90 2016 JAN $90 call - exit $7.25** (+39.4%)

10/13/14 stopped out at $86.40
**option exit price is an estimate since the option did not trade at the time our play was closed.
10/05/14 new stop @ 86.40
09/28/14 new stop @ 79.45, set exit target at $99.00
09/21/14 earnings are coming up on Sept. 25th
09/08/14 Trade begins. NKE Opens at $81.92
*option entry price is an estimate since the option did not trade at the time our play was opened.
09/07/14 NKE is added to our new play section

Chart

Current Target: $99.00
Current Stop loss: 86.40
Play Entered on: 09/08/14
Originally listed in the New Plays 09/07/14


V.F. Corp. - VFC - close: 63.76

Comments:
10/19/14: VMC dipped to and pierced its simple 200-dma midweek. The stock has started to bounce and it still has a long-term bullish trend of higher lows. Unfortunately the volatility was enough to hit our stop loss at $61.75.

- Suggested Positions -
SEP 15, 2014 - entry price on VFC @ 65.85, option @ 4.50*
symbol: VFC160115C70 2016 JAN $70 call - exit $3.95** (-12.2%)

10/15/14 stopped out
**option exit price is an estimate since the option did not trade at the time our play was closed.
10/12/14 new stop @ 61.75
09/15/14 trade begins. VFC opened at $65.85
*option entry price is an estimate since the option did not trade at the time our play was opened.
09/12/14 VFC met our entry requirement with a close above $65.75
Option Format: symbol-year-month-day-call-strike

Chart

Current Target: VFC 85-90.00 zone
Current Stop loss: 61.75
Play Entered on: 09/15/14
Originally listed on the Watch List: 09/07/14


Wells Fargo & Co. - WFC - close: 48.69

Comments:
10/19/14: A round of big bank earnings helped exaggerate the volatility in the financials. WFC would have hit our stop at $49.90 but they gapped open lower at $49.50 after the company reported earnings on October 14th.

- Suggested Positions -
DEC 26, 2013 - entry price on WFC @ 45.50, option @ 1.50
symbol: WFC1517a50 2015 JAN $50 call - exit $1.51 (+0.0%)

-- or --

DEC 26, 2013 - entry price on WFC @ 45.50, option @ 2.95*
symbol: WFC1615a50 2016 JAN $50 call - exit $3.75** (+27.1%)

10/14/14 stopped out on gap down at $49.50
**option exit price is an estimate since the option did not trade at the time our play was closed.
09/21/14 new stop @ 49.90
09/14/14 a close above $52.10 could be a new bullish entry point to buy 2016 calls.
08/24/14 new stop @ 49.25
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.
...please see earlier updates for older comments...

Chart

Current Target: Exit WFC hits $59.00
Current Stop loss: 49.90
Play Entered on: 12/26/13
Originally listed on the Watch List: 12/08/13


WellPoint Inc. - WLP - close: 114.99

Comments:
10/19/14: WLP could not escape the market's volatility and shares hit our stop on Monday's market drop. Our play was closed at $114.75.

- Suggested Positions -
JUL 15, 2014 - entry price on WLP @ 113.05, option @ 4.00*
symbol:WLP150117c120 2015 JAN $120 call - exit $3.85** (-3.75%)

-- or --

JUL 15, 2014 - entry price on WLP @ 113.05, option @ 7.35*
symbol:WLP160115c125 2016 JAN $125 call - exit $8.10** (+10.2%)

10/13/14 stopped out
**option exit price is an estimate since the option did not trade at the time our play was closed.
10/02/14 WLP increases its stock buyback program from $1 billion to $6B
09/21/14 new stop @ 114.75
09/07/14 new stop @ 112.25
08/31/14 new stop @ 109.45
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

Chart

Current Target: Exit WLP hits $130.00
Current Stop loss: 114.75
Play Entered on: 07/15/14
Originally listed on the Watch List: 07/06/14



Watch

Transports & Healthcare

by James Brown

Click here to email James Brown


New Watch List Entries

FDX - FedEx Corp.

HUM - Humana Inc.


Active Watch List Candidates

CHKP - Check Point Software

LLY - Eli Lilly & Co


Dropped Watch List Entries

TGT has been removed from the watch list.



New Watch List Candidates:


FedEx Corp. - FDX - close: 156.12

Company Info

FDX is one of the largest package delivery companies in the world. The company's most recent earnings report showed improvement. FDX beat Wall Street's estimates on both the top and bottom line. Profits were up +24% from a year ago and it was the second quarter in a row that FDX beat estimates.

Management said their 2015 fiscal year was off to a great start. The company has enough demand they have recently raised prices on some services.

The plunge in crude oil and fuel prices is a huge tailwind for FDX. As a transportation company the cost of fuel is a major expense. With oil at four-year lows it should be a boost to FDX margins.

FDX should also benefit from the growth in online shopping. Last year there was a huge last minute surge in Christmas sales that needed to be delivered quickly by companies like UPS and FDX. This year online shopping is expected to grow +17%. That's another bonus for FDX.

The stock has been volatile thanks to the market's big swings but FDX is still respecting its long-term bullish trend of higher lows.

Tonight I am suggesting we wait for a close above $158.00 and buy calls the next morning with a stop loss at $148.50.

Breakout trigger: Wait for a close above $158.00
Then buy calls the next morning with a stop at $148.50

BUY the 2016 Jan $170 call (FDX160115c170) current ask $11.85

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

Chart of FDX:

Originally listed on the Watch List: 10/19/14


Humana Inc. - HUM - close: 128.23

Company Info

HUM is in the healthcare sector. The company offer health insurance. Right now that's a good spot to be as the system irons out the kinks in the Affordable Care Act (a.k.a. Obamacare). Thus far Obamacare has been a boon to insurers as more and more Americans sign up for health insurance.

Shares of HUM did see a pullback from its recent highs near $136 down to $121 (a -11% correction) but now HUM is on the rebound. Even with the pullback HUM still has a long-term bullish trend of higher lows. The point & figure chart is bullish and suggesting a long-term target of $173.00.

Tonight I am suggesting we wait for HUM to close above $130.25 and then buy calls the next morning with a stop loss at $119.75. I do want to warn you that HUM is scheduled to report earnings on November 7th but several of its peers (AET, CI, and WLP) will report earnings in the next two weeks (before the end of October). Their quarterly results and guidance (good or bad) could influence shares of HUM.

Breakout trigger: Wait for a close above $130.25
Then buy calls the next morning with a stop at $119.75

BUY the 2016 Jan $140 call (HUM160115c140) current ask $12.70

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

Chart of HUM:

Originally listed on the Watch List: 10/19/14


Active Watch List Candidates:



Checkpoint Software Tech. - CHKP - close: 66.27

Comments:
10/19/14: Believe it or not but CHKP held up pretty well last week. Traders were buying the dips and the stock posted a gain. The company has earnings coming up on October 23rd. I do not expect to see CHKP meet our entry point requirement by then.

Currently we want to see a close above $72.50 before buying calls but we will re-evaluate after the company's earnings report.

Earlier Comments: September 14, 2014:
CHKP is another technology stock and it is similar to AKAM in that both have beaten earnings estimates every quarter this year and both are trading near 14-year highs. While AKAM facilitates Internet traffic, CHKP seeks to guard its clients against Internet hazards.

The company describes itself as, "the worldwide leader in securing the Internet, provides customers with uncompromised protection against all types of threats, reduces security complexity and lowers total cost of ownership. Check Point first pioneered the industry with FireWall-1 and its patented stateful inspection technology."

"Today, Check Point continues to develop new innovations based on the Software Blade Architecture, providing customers with flexible and simple solutions that can be fully customized to meet the exact security needs of any organization. Check Point is the only vendor to go beyond technology and define security as a business process. Check Point 3D Security uniquely combines policy, people and enforcement for greater protection of information assets and helps organizations implement a blueprint for security that aligns with business needs. Customers include tens of thousands of organizations of all sizes, including all Fortune and Global 100 companies. Check Point's award-winning ZoneAlarm solutions protect millions of consumers from hackers, spyware and identity theft."

It feels like a week doesn't go by that we don't hear about another major hacking scandal in the business world. It's not going away and corporations have to constantly update their cyber defense. CHKP has been working cyber security since 1993.

Shares of CHKP spent much of this year consolidating gains from 2013. However, the last week of August produced a crucial breakout past resistance near $70.00. Tonight I am suggesting a trigger to buy calls if CHKP can close above $72.50. We'll start with a stop at $69.45. The point & figure chart is bullish and currently forecasting an $89.00 target. We'll start with a long-term target in the $95-100 zone (our target to exit the 2015 calls will be lower).

Breakout trigger: Wait for a close above $72.50
Then buy calls the next morning with a stop at $69.45

BUY the 2015 Jan $75 call (CHKP150117C75)

- or -

BUY the 2016 Jan $80 call (CHKP160115c80)

10/05/14 Friday's move might signal the end of the pullback.
Option Format: symbol-year-month-day-call-strike

Originally listed on the Watch List: 09/14/14


Eli Lilly & Co - LLY - close: 62.58

Comments:
10/19/14: LLY has broken below technical support at its 100-dma. Yet the long-term trend of higher lows still works - at least for now.

LLY has earnings coming up on October 23rd. I doubt we'll see shares meet our entry point requirement with a close above $66.25 by then. We will re-evaluate our entry point strategy after we see the company's earnings report.

Earlier Comments: October 5, 2014:
You may have noticed that stocks have turned a bit more volatile recently. That could be a new trend after as investors try to look ahead into 2015 and ponder a market environment without a QE program by the Federal Reserve. That's why tonight we're looking at a stock like LLY, which is traditionally considered a more safe haven trade.

LLY has been building on its longer-term trend of higher lows. Plus the company has seen some good news. The U.S. FDA recently approved LLY's new once-a-week injectable diabetes drug for adults with type 2 diabetes. This new treatment, Trulicity, helps improve the patients' blood sugar levels. There are an estimated 26 million Americans who suffer with type 2 diabetes. LLY is also teaming up with AstraZeneca to work on a Alzheimer's treatment.

The two-week pullback in shares of LLY was pretty mild and investors are already buying the dip. We want to hop on board if this rebound continues. Tonight we are suggesting investors wait for LLY to close above $66.25 and then buy calls the next morning with a stop loss at $61.90.

Please note that LLY is due to report earnings on October 23rd. You may want to wait on launching any positions until after we see how the market reacts to LLY's results.

trigger: Wait for LLY to close above $66.25
Then buy calls the next morning with a stop at $61.90

BUY the 2016 $70 call (LLY160115c70)

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

Originally listed on the Watch List: 10/05/14


Target Corp. - TGT - close: 59.07

Comments:
10/19/14: The drop in crude oil and gasoline prices to four-year lows should be very bullish for consumer spending this holiday season. Yet this development has not stopped the retail stocks like TGT from getting hammered in the market sell-off.

The recent breakdown under $60 and its 200-dma is bearish. Tonight we are removing TGT from the watch list.

Trade did not open.

10/19/14 removed from the watch list. Suggested trigger was a close above $63.60

Originally listed on the Watch List: 10/05/14