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Daily Newsletter, Wednesday, 6/11/2014

Table of Contents

  1. Market Wrap
  2. New Plays
  3. In Play Updates and Reviews

Market Wrap

Slowing Global Growth Spooks Investors

by Keene Little

Click here to email Keene Little
The World Bank announced a revision to their estimate for 2014 global growth and the revision was downward. This depressed European and U.S. stock markets as it's becoming harder to justify the 'P' in the P/E when the 'E' is coming down.

Wednesday's Market Stats

The market started off weak this morning following a drop in the futures overnight as European indexes turned down. As soon as the cash market opened NDX immediately got jammed back to the upside and closed the morning gap within the first 20 minutes. At that point it was easy to believe the morning gap down was just another dip to buy. But as the morning progressed the bounce looked weak and even though NDX stayed in the green (while the DOW remained close to -100) the bifurcated market and the choppy rise in NDX looked like the rally attempt was going to fail, which it did. However, the bears were thwarted once again as the bulls charged back in and drove the NDX back up near its high for the day. The other indexes didn't fare as well but the pullback is looking like new highs are coming.

There were no significant economic reports to sway the market this morning. The only report of significance came from the World Bank, which lowered its global economic forecast to +2.8% for the year, down from its previous forecast of +3.2%. I strongly suspect the 2.8% growth will be revised lower within the next 3 months and the actual result will probably be even lower. Next year's forecast will likely be negative as they keep ratcheting down their estimates (as economists continually do when they're trying to catch up with actual economic results).

The lower revision for growth means lower 'E' in the P/E equation and that will mean the stock market will have to factor in these lower expectations. The decline in Europe followed by the decline in the U.S. was very likely a reaction to this. But it doesn't mean a market top is in place yet. The stock market has long ignored the fundamentals, believing instead in the power of the central banks. Bad economic data? Woohoo, more stimulus from the CBs and that means more money for our party -- another round for my bullish buddies please.

Another chart that suggests there could be trouble ahead for stock prices if they start to reflect actual corporate profits. The chart below shows the sharp drop in adjusted corporate profits in 2014 and was discussed by Albert Edwards, a global strategist at Societe Generale SA. He measures profits a little differently and incorporates inventory values. As older inventory is depreciated there is an accounting charge that reduces the value of assets held by the company. Edwards uses these figures to adjust reported earnings to get "real" earnings and the chart below shows adjusted pretax earnings, which declined -9.8% in Q1.

Adjusted U.S. Corporate Profits, chart courtesy Societe Generale SA

The sharp decline in Q1 was the sharpest drop since Q4 2008 when profits dropped -26% in the middle of the 2008-2009 recession. Edwards' conclusion is that this measurement can be an early warning of a coming recession, something the majority of economists today believe is not even on the horizon (which alone is a good contrarian signal that one is a lot closer than believed). While corporate earnings have reportedly risen +5.8% in Q1, this was profit before inventory and depreciation adjustments. Against Edwards' report showing a -9.8% decline there's quite a split and the inventory write-off will also be a reduction to GDP.

The stock market has long made a mockery of fundamentals and has been disconnected from what's happening on Main Street for a long time. But one early indication of trouble for the stock market is the recent decline in margin debt. The market is obviously dependent on more money coming in to pay for higher prices and the increase in margin debt has been one of the things fueling the rally. But as can be seen on the chart below, market tops tend to follow a downturn in margin debt as traders start to get more nervous about the market and therefore decrease their exposure. One way to decrease that exposure is to reduce your use of margin. That in turn means more selling and less buying and a stock market top is born. Margin debt peaked in February and dropped in March and dropped again in April.

NYSE Margin Debt vs. SPX, chart source dshort.com

The chart above was last updated through the end of April and therefore does not reflect the spike higher in SPX since mid-May. I do not have the latest numbers for margin debt but if the stock market high is being made with a lower margin debt it's going to give us a topping signal like we had in 2000 and 2007. It's not a market-timing signal but it does offer us another warning sign (as if we need more).

Here's another warning sign, a chart I've show before, which uses the ratio of XLY to XLP. XLY is an ETF of consumer discretionary stocks and XLP is an ETF of consumer staples stocks. When people are feeling good about their financial position they'll buy more of the discretionary goods (with money left over after buying their staples). This is reflected in higher stock prices for the discretionary stocks, such as the larger holdings in XLY -- Disney, Comcast, Amazon, Home Depot and McDonald's. But when consumers are starting to live more paycheck to paycheck they'll back off on their discretionary spending and concentrate on the necessities. The top holdings in XLP include Proctor & Gamble, Coca-Cola, Philip Morris, Walmart and CVS. This group includes the stocks that tend to do better (at least relatively) in an economic downturn -- "if you can eat it, smoke it or drink it, buy it."

S&P 500 vs. XLY/XLP, Weekly chart

There are two takeaways from the above chart. The first is that SPX has rallied for the 3rd time up the top of its bearish rising wedge for the rally from 2009, the top of which held down the December and March rallies and was tested again with Monday's high at 1955. This creates a 3-drives-to-a-high topping pattern so the risk for bulls here is a turn down that won't be just a pullback (that bearish rising wedge pattern calls for a complete retracement).

The second takeaway from the chart above is that the XLY/XLP ratio has significantly underperformed SPX since the 2009 low, which indicates the consumer has not been as bullish as the stock market would suggest. We know there's been a disconnect between Wall Street and Main Street for a long time and this is a graphic portrayal of that. And recently it has barely lifted off its May low while SPX dashed higher, a clear bearish divergence. This is a clear indication that the stock market is out of touch with reality as the consumer digs in and goes into protection mode. The divergence is a clear warning and the price pattern says the warning is about to lead to a significant break to the downside.

Another sign of trouble is what we're seeing in the high-end retailers and the lower-end ones. The affluent continue to spend their money in places like Tiffany's, a company that had +9% higher revenue in Q1. In the meantime middle-class shopping in places like Sears and Walmart has declined precipitously. Walmart's Q1 revenue declined -5%. But at the other end from Tiffany's, stores like Dollar Tree, which cater to the real bargain shoppers, also saw a Q1 revenue increase of +7%. It's the middle that's getting squeezed and it's the middle that is the biggest chunk of consumer spending. And it is this reduced spending, especially on discretionary items, which poses a significant risk to our economy, a risk that the stock market is apparently not concerned about, yet.

Continuing with more charts of SPX, the weekly chart below is using the arithmetic scale to show the parallel up-channel from October 2011 (the 2nd leg of the 3-wave move up from 2009), which it has reached again after hitting the top of the channel in December and March. Another example of a 3-drives-to-a-high topping pattern. I show the potential for a throw-over finish (light green dashed line) but the higher-odds scenario is for a top to form here and now.

S&P 500, SPX, Weekly chart

One of the reasons why I show the potential for a throw-over finish on the weekly chart above is because of the parallel up-channel for the rally from February, the top of which is currently near 1997. A 3-wave move up from April (in case the EW count is corrective instead of impulsive as I've labeled it) would have the 2nd leg achieving 162% of the 1st leg at 2004. But two equal legs up from February points to 1960 and two equal legs up from April points to 1950, which is a reason why I've been thinking recently that we could see a top in the 1950-1960 area (and Monday's high at 1955 split the difference).

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1964
- bearish below 1925

SPX 1950-1960 is also the location of the top of the parallel up-channel from April, as well as the top of the up-channel from October 2011, as well as the top of its rising wedge from 2009. There's a lot here to say why the market should be topping here and now and I'm watching the shorter-term pattern for clues as to where that high will be. Notice too the increasing slopes of the up-channel since February, an indication the rally is going parabolic. Parabolic rallies never end well.

The decline from Monday's high looks corrective (choppy overlapping highs and lows within a down-channel that looks like a bull flag) and that suggests we've got higher prices ahead of us. As shown below, SPX found support where it closed Friday's gap at 1940.12 with a low of 1940.08. In a 5-wave count up from May 15th the 5th wave would equal the 1st wave at 1963.72, which is why I have 1964 as a key level for the bulls to break in order to keep the larger pattern bullish. That projection crosses the top of the up-channel from April on Friday, which just so happens to be a full moon as well. Is it lunacy to think we might have a high on a full moon? A drop below 1937, that stays below it, would be a break of its short-term down-channel, which would leave a failed bull flag pattern and would instead likely be followed by stronger selling.

S&P 500, SPX, 60-min chart

NDX spent much of the day in the green today but that didn't help the DOW, which spent most of its day down about -100. A big reason for its decline was Boeing and that was blamed on Republican House Majority leader Eric Cantor, who had the audacity to get defeated in the Virginia primary by a Tea-Party candidate. Apparently Cantor has been a big supporter of the Export-Import Bank, which assists in financing exports of U.S.-manufactured goods. For Boeing's big airplanes (hence BA) this is a big deal and its -2.3% decline today, starting with a gap down, put a big dent in the DOW.

The DOW's big red candle follows a test of the top of its parallel up-channel from April 11th and the trend line along the highs from March 7 - April 4. It looks like a great setup for lower prices and that's the risk for anyone thinking the market has higher prices yet to go. I show that potential on the chart, with a high near 17000 by Friday, but it's almost a coin toss here as to whether it will head immediately lower or only after a minor new high first. Today it found support at a trend line along the highs from April 4 - May 13 and therefore there's the potential for a bullish back-test and new high to follow.

Dow Industrials, INDU, Daily chart

As noted on the DOW's chart above, the wave pattern would turn more bullish if it rallies above 17062 since it would make the 3rd wave in the move up from February the shortest wave and that violates an EW rule. Therefore short against 17062 is a recommended position but flat or long above 17062 (I don't like the risk:reward on the long side but short would not be the right place to be above 17062).

Key Levels for DOW:
- bullish above 17,062
- bearish below 16,670

NDX has been in a flat trading range since last Friday and today it tested both sides of the range -- the top near 3404 and the bottom near 3784. Today's low was a slight break of its uptrend line from May 16th but it held with this afternoon's recovery. It's been pressing up against its broken uptrend line from June 2013 - February 2014, currently near 3404, and it could be doing a back test which will be followed by a bearish kiss goodbye. If it continues to chop up and down in a big sideways/down correction (light green dashed line) we could be looking at a boring month of June and then a final high in July. But at the moment I see the potential for a new high by the end of the week, to put in the final high, and then start a decline next week.

Nasdaq-100, NDX, Daily chart

Key Levels for NDX:
- bullish above 3827
- bearish below 3738

The projection shown on the chart above, at 3826.51, is the 127% extension of the previous decline, which is the March-April decline. This is a common reversal Fib so it makes a good upside target for the completion of its rally. But trading on the long side for that is not worth the risk in my opinion. Matching that 3826 projection is another projection shown on the 60-min chart below. For the 5-wave move up from May 9th the 5th wave would equal the 1st wave at 3824.77, giving us close correlation with the trend lines and why it could be an important top if achieved. The risk is an immediate breakdown.

Nasdaq-100, NDX, 60-min chart

There's an interesting setup on the semiconductor index (SOX) that's worth watching closely here. As go the semis so go the tech indexes and as go they so goes the broader market. At today's high, at 625.91, the SOX tagged the top of its parallel up-channel for the rally from 2013 (starting with a trend line drawn across the highs from February-July 2013 and attaching a parallel line to the August 2013 low). At the same time it met its price objective out of the sideways triangle that ran from the April 4th high -- taking the widest part of the triangle and projecting it from the breakout (on May 22nd) we get an upside price objective near 625. By the oscillators you can see the index is extremely overbought. It can stay overbought but considering it has reached the top of its up-channel following a pattern (sideways triangle) that called for a final leg up to complete the rally, it's a risky place to hold the semis long here. Today's spinning-top doji has the potential to be a reversal candlestick.

Semiconductor index, SOX, Daily chart

Following Monday's high I was thinking there was a good possibility it made a final high for its bounce off May 15th low. It came within 39 cents of achieving two equal legs up at 1180.23 for an a-b-c correction to its March-May decline and was a good setup for a reversal back down. But so far the decline from Monday has held inside a bull flag pattern, which looks more like a correction to the rally instead of something more bearish. It also held price-level support near 1165 and both keep the short-term pattern bullish. The RUT would be bullish above 1180 but with multiple resistance levels just above (bounce highs at 1194, 1205 and then its March 4th high near 1213) it would be a difficult trade to hang onto). The bottom of its short-term down-channel from Monday is currently near 1158 so a break below that level would leave a failed bullish pattern, which in turn would likely be followed by strong selling.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1180
- bearish below 1118

There's also an interesting setup for a top to the banking index (BKX), which actually is the March 21st high where it met the price objective for two equal legs for its 3-wave move up from 2009. Following its decline into the May 15th low it has now bounced back up to its broken uptrend line from June 2012. It's a back test that should be followed by a bearish kiss goodbye if the top is in place. The bounce also fits as the right shoulder of a H&S topping pattern (it looks small on the weekly chart below).

KBW Bank index, BKX, Weekly chart

Like the broader indexes, the TRAN's pullback from Monday looks corrective and therefore suggests we could see another push higher into the end of this week. But the bigger picture is shown on its weekly chart below and like the other indexes, it's at an important point in its pattern here. The EW count can be considered complete at any time at the same time it has pushed up to trendline resistance near 8320-8330 (Monday's high was 8256). The trend line along the highs from May 2013 and the one along the highs from 2010-2011 create a barrier with an overbought market on the daily and weekly charts. This is a risky place to be thinking higher, even though there's at least a little more upside potential to the 8325 area.

Transportation Index, TRAN, Weekly chart

The U.S. dollar waffled a little bit in the past week, especially after the Euro did the same after the ECB announced again that they're ready to do "whatever it takes" to keep the stock markets, I mean economy flooded, I mean supplied with the financing that the banks, I mean companies need to keep their businesses growing. But the dollar bounced right back up on Monday and Tuesday and consolidated today. It remains on track for a strong rally this year but in reality we don't know which way it's going to go until it breaks out of the trading range it's been in (79-81.50) since last October.

U.S. Dollar contract, DX, Weekly chart

Gold has bounced off its June 3rd low but it looks like a correction to its decline, not something more bullish. It retraced 38% of its decline from May 22nd, which is the high I'm using as the completion of its sideways triangle consolidation pattern in April-May, and then turned back down today. It could progress a little higher but it needs to break its downtrend line from March 17th, currently near 1278 (this morning's high was 1265.50), before it would be more bullish. A continuation lower to at least 1155 is still my expectation.

Gold continuous contract, GC, Weekly chart

Oil is on the verge of breaking out of its sideways consolidation that it's been in since March 3rd high but so far has only managed intraday breaks above its shallow downtrend line from the March high, currently near 104.70. If it rallies above the March 3rd high at 105.22 (yesterday morning's high was 105.06) and then uses the downtrend line as support we'd likely see oil head up to its longer-term shallow downtrend line from May 2011, near 111. What's interesting about the sideways triangle pattern on the weekly chart below is that there's a very similar sideways triangle on the daily chart since the March high. The fractal pattern suggests a bullish break above 105.22 would likely lead to a break above resistance near 111 as well.

Oil continuous contract, CL, Weekly chart

If oil turns bullish here, it would likely have a negative impact on the fragile global economies. Usually higher oil prices are a reflection of a stronger economy but in this case something else is causing it and just as too-high interest rates can squash an economy, too-high oil prices could do the same.

There are a few more economic reports Thursday morning but not likely anything that will move the market. Friday's reports will include PPI numbers and could move the market if there's a significant change from what's expected. Otherwise we've got a quiet two days to finish the week.

Economic reports and Summary

The longer-term charts suggest we're in bear-infested waters here and at any moment one or more could take a big chunk out of the bull's hide. Price objectives, trend lines, EW counts and Fibs say there could be a little more to the upside into Friday and if that happens we might be looking at a negative opex week next week. If the market declines into Friday there's a good chance we'll get at least a bounce back up next week before tipping over stronger. I've been saying the past few days that the bears need to continue exercising patience while the bulls need to exercise extreme caution.

The risk:reward favors the short side but we could be a day or two away from a better short entry if the market does give us new highs. A new high by Friday would also give us a high on a full moon, which would make for an interesting setup. As for when the market would turn more bullish, I'm using the DOW for now to see if it can rally above 17062, in which case the bears would need to back off and let the bulls take this to an even more overstretched market and wait until the rubber band snaps.

Good luck and I'll be back with you next Wednesday.

Keene H. Little, CMT

In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying


New Plays

Stocks Sink On World Bank Forecast

by James Brown

Click here to email James Brown

Editor's Note:

Volume tends to drop during lazy summer sessions. That makes stocks a little more vulnerable to headline news. Today the market-moving headline was the World Bank cutting its global growth forecast. The World Bank reduced its global growth forecast from +3.2% down to +2.8% for 2014. The major European markets closed in the red. Asian markets were mixed.

Stocks as a whole were a bit overbought and due for a pullback anyway. Any excuse would work for traders to take some money off the table.

A pullback is healthy but it may not be over yet.

We are not adding any new plays tonight.




In Play Updates and Reviews

Airlines Sink On German Warning

by James Brown

Click here to email James Brown

Editor's Note:
Airline stocks were sinking today after Germany's largest airline issued an earnings warning. Our DAL trade was stopped out and AAL took a hit.


Current Portfolio:


BULLISH Play Updates

American Airlines Group Inc. - AAL - close $42.29 change: -1.37

Stop Loss: 37.25
Target(s): to be determined
Current Gain/Loss: +5.1%

Entry on May 28 at $40.25
Listed on May 17, 2014
Time Frame: 9 to 12 weeks
Average Daily Volume = 10.3 million
New Positions: see below

Comments:
06/11/14: The profit taking in airline stocks accelerated today after Germany's largest airline, Deutsche Lufthansa, issued an earnings warning thanks to tough competition. This news sparked selling across the industry.

AAL gapped down at the open and closed near short-term support at its 10-dma with a -3.1% loss.

I am not suggesting new positions. More conservative investors may want to raise their stop loss.

Earlier Comments: May 17, 2014:
AAL is in the services sector. AAL is the merger between US Airways and American Airlines (AMR). The new company, American Airlines Group, is the largest carrier with nearly 6,7000 flights a day, over 330 destinations, to more than 50 countries, with over 100,000 employees worldwide.

This $17 billion merger was threatened by the U.S. Justice department last year. Regulators tried to block the merger on fears the new company would be too big, hold too much power, and reduce competitiveness and thus pricing for consumers. A U.S. district judge just recently approved a settlement worked out between AAL and the Justice Department where the new company agreed to sell certain assets to competitors. Getting the legal hurdle for its merger out of the way it's one more worry that investors can forget.

The airlines would also like to forget about winter. The 2014 winter season was brutal for the airline industry. In January and February the Bureau of Transportation Statistics said 6.05% of all domestic flights were cancelled. That number dropped to 4.6% of all flights cancelled in March. Put them all together and you have the worst winter cancellation rate in 20 years. Yet this news has failed to stop the rally in airline stocks. Granted AAL did consolidate sideways for a few weeks but now it is only a couple of points away from new eight year highs.

AAL just recently released data on April. Their revenue passenger miles for April were up 4.7 percent to 18.1 billion in 2014 versus April 2013. Odds are this number is going to improve since summers tend to be more bullish for the airline business.

Wall Street seems keen on shares of AAL. Goldman Sachs recently put a $46 price target on the stock. In the latest 13F filings it was revealed that Paulson & Co had raised their stake in AAL from 8.5 million shares to 12.2 million. Meanwhile David Tepper is the hot fund manager everyone loves and his Appaloosa Management has AAL as its second largest holding. In the last quarter Appaloosa increased their AAL stake by 22.5%.

current Position: Long AAL stock @ $40.25

- (or for more adventurous traders, try this option) -

Long Aug $40 call (AAL140816C40) entry $2.65*

05/28/14 triggered @ 40.25
*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



AO Smith Corp. - AOS - close: 50.79 change: -0.12

Stop Loss: 47.90
Target(s): To Be Determined
Current Gain/Loss: unopened

Entry on June -- at $--.--
Listed on June 09, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 577 thousand
New Positions: Yes, see below

Comments:
06/11/14: AOS recovered from its morning lows but still can't seem to breakout past the $51.00 level. There is no change from my earlier comments.

Earlier Comments: June 9, 2014:
AOS is in the industrial goods sector. The company manufactures water heaters and boilers for the residential and commercial markets. The company's most recent earnings report was April 22nd. Their results were mixed but Wall Street liked it anyway. Analysts were expecting a profit of 53 cents a share on revenues of $557.84 million. AOS delivered a profit of 54 cents on revenues of $552.2 million for the quarter. Evidently these results were good enough to spark three upgrades the next day.

What investors like is AOS' growth rate and steady business. About 85% of AOS sales come from its replacement business. Water heaters have a limited lifespan and eventually need replacing. AOS also has exposure to new construction. As the U.S. economy improves and construction increases then it should be more new business for AOS. Earlier this year there were concerns about a slowdown in the U.S. real estate market but most recent data suggests that housing starts were up 13 percent month over month in April. We also saw new permits to build houses hit their highest levels in five years. As housing construction improves it will boost AOS' business.

In their last earnings report AOS management said business was strong enough that they passed along a small price increase to help offset rising steel costs.

AOS is also seeing growth in both India and China. Their sales in China surged +25% last quarter. As more and more Chinese move from the rural west to the coastal cities and join the middle class it will boost demand for luxuries like water heaters.

Analysts like the stock because AOS is showing strong earnings growth. Earnings grew +36% last year and estimates suggest they will have a compound growth rate of almost 18% over the next four years.

Technically shares of AOS just broke out past round-number, psychological resistance at the $50.00 mark. We want to see a little follow through so we're suggesting a trigger to open bullish positions at $51.25. The $55.00 level is overhead resistance but we think AOS can hit new highs before the year is out.

Trigger @ $51.25

Suggested Position: buy AOS stock @ (trigger)

FYI: We're not listing any options for AOS. The bid/ask spreads on the longer-term options are too wide to play.



Arrowhead Research - ARWR - close: 14.94 change: +0.04

Stop Loss: 10.75
Target(s): to be determined
Current Gain/Loss: +24.0%

Entry on May 27 at $12.05
Listed on May 19, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 1.3 million
New Positions: see below

Comments:
06/11/14: Biotech stocks were not immune to the relatively widespread profit taking across the market. Yet ARWR managed to eke out a small gain. The stock does appear to have found new resistance in the $15.50 area. I am not suggesting new positions.

Earlier Comments: May 19, 2014:
ARWR is in the healthcare sector. The company is in the biotech industry. Biotech stocks peaked in early March as investors started selling momentum and high-growth names. ARWR was definitely a target for profit taking after a rally from $2.00 a share back in July 2013 to over $25 in March 2014.

Biotech analysts believe ARWR has a lot of potential. The company is working on a treatment for hepatitis B and should have new data available in the third quarter this year. If successful the hepatitis B treatment could be a multi-billion drug as there are over 300 million patients around the world. ARWR currently has a market cap of about $600 million but a Deutsche bank analysts believes ARWR's market cap could surge to $4-to-$5 billion if its hepatitis B treatment is approved. ARWR is also developing new treatments on its RNAi technology.

Make no mistake, this is an aggressive trade. ARWR is an early stage biotech firm with no revenues. Any investment is a belief they will bring successful clinical data and eventually get FDA approval for its drugs in development.

Technically after a drop from $25 to $10 most of the air has been let out of the prior bubble. As investors return to risk on trades we think ARWR could outperform.

Current Position: Long ARWR stock @ $12.05

- (or for more adventurous traders, try this option) -

Long Sep $12.50 call (ARWR140920C12.5) entry $3.40*

06/09/14 the intraday pullback today might be a short-term top. Our trade is up +20% and investors may want to take some money off the table
05/27/14 triggered @ 12.05
*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



The Dow Chemical Co. - DOW - close: 52.86 change: -0.29

Stop Loss: 47.90
Target(s): To Be Determined
Current Gain/Loss: + 3.1%

Entry on May 27 at $51.25
Listed on May 24, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 9.5 million
New Positions: see below

Comments:
06/11/14: DOW briefly traded below short-term support at its 10-dma before trimming its losses. If the market weakness continues we might see DOW retest the $52.00 level.

Earlier Comments: May 24, 2014:
DOW is in the basic materials sector. The company supplies chemical products as raw materials. As Wall Street searches for returns and yield DOW will likely continue to show up on their radar screen.

The company has been doing a good jog on maintaining cost controls and returning capital to shareholders. The Q1 2014 earnings report showed net profits surged +75% from a year ago. The first quarter was their sixth consecutive quarter of year-over-year earnings growth.

Dow has raised their dividend by 15% and now sports a 3.0% yield. They plan to complete a $4.5 billion stock buyback program in 2014.

In spite of higher feedstock and energy costs DOW still managed to see margins grow. They expect 2014 to see this margin growth gain further momentum.

Wall Street has been upgrading the stock and raising earnings forecasts.

Shares of DOW are in a long-term up trend (see weekly chart below). Yet the last couple of months have seen shares consolidating gains in a sideways move near $50. This consolidation looks like it's about over. DOW is poised for a breakout higher.

Current Position: Long DOW stock @ $51.25

- (or for more adventurous traders, try this option) -

Long Sep $50 call (DOW140920C50) entry $2.88*

05/27/14 triggered @ 51.25
*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



Foot Locker, Inc. - FL - close: 49.61 change: -0.33

Stop Loss: 46.90
Target(s): To Be Determined
Current Gain/Loss: unopened

Entry on June -- at $--.--
Listed on June 05, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.2 million
New Positions: Yes, see below

Comments:
06/11/14: Shares of FL continue to consolidate sideways just below the $50.00 level.

Earlier Comments: June 5, 2014:
FL is in the consumer goods sector. The company is a retailer focused on footwear and athletic apparel. As of February 2014 they had 3,473 stores.

This is one retailer that did not seem to be affected by the harsh winter weather that so many retailers blamed for their poor Q1 performances. FL actually beat analysts estimates on both the top and bottom line when they reported earnings on May 23rd. FL is developing a trend of beating Wall Street's estimates.

Their Q1 results were a net profit of $1.11 per share on revenues of $1.87 billion. Consensus estimates were $1.06 on revenues of $1.79 billion. FL also said their comparable-store sales surged +7.6%. Analysts were only expecting +6% improvement. Gross margins also improved +0.4 to 34.6 percent.

Rising revenues, rising same-store sales, rising gross margins all sound like a great recipe for new highs on the stock, which is what we're seeing today. Wall Street thinks there is more upside ahead. Recent analysts comments suggest FL will be able to keep the momentum alive.

Tonight shares of FL are hovering just below psychological, round-number resistance at $50.00. We're suggesting a trigger to open bullish positions at $50.25. If triggered we'll start with a stop loss at $46.90, under its 50-dma. We are not setting a target tonight but a good area to aim for is probably the $55 region.

Trigger @ $50.25

Suggested Position: buy FL stock @ (trigger)

- (or for more adventurous traders, try this option) -

Buy the Aug $50 call (FL140816C50)

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



Flextronics Intl. - FLEX - close: 11.35 change: +0.03

Stop Loss: 9.45
Target(s): $11.75
Current Gain/Loss: +10.2%

Entry on June 00 at
Listed on May 31, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 6.9 million
New Positions: see below

Comments:
06/11/14: FLEX ignored the market weakness on Wednesday and rebounded off its morning lows.

I do not see any changes from my recent comments. FLEX is overbought and due for a pullback. Readers may want to take some money off the table now.

I am not suggesting new positions here.

Earlier Comments: May 31, 2014:
FLEX is in the technology sector. The company is the second largest contract electronics manufacturer. They make electronic components for some of the world's biggest companies like Apple, Samsung, Cisco Systems, Google, IBM, and Microsoft.

FLEX reported earnings on April 30th and results beat Wall Street's estimates on both the top and bottom line. EPS was 24 cents, 4 cents above consensus estimates. Revenues rose 27% from a year ago to $6.72 billion for the quarter, well above analysts' estimates. Operating income surged +72% from a year ago.

Just a few days ago the stock broke out past major resistance in the $9.75 region following its analysts day. FLEX appears to be making improvements that will bring about better margins and earnings growth. The most recent quarter saw gross margins improve 170 basis points.

The company ended the quarter with $1.59 billion in cash and cash equivalents and have continued to deliver on their strong stock buyback program. FLEX has already repurchased 9% of its outstanding shares in fiscal 2014. Value investors also love FLEX's strong free cash flow, which is the highest among its peers at more than 12% FCF. The company looks poised to outperform its peers with EPS growth of +27% by the end of 2016 versus average growth of +20% from its rivals.

current Position: Long FLEX stock @ $10.30

- (or for more adventurous traders, try this option) -

Long Oct $10 call (FLEX1018C10) entry $0.80

06/07/14 set target at $11.75
06/03/14 triggered @ 10.30
Option Format: symbol-year-month-day-call-strike



Ingersoll-Rand Plc - IR - close: 62.20 change: -0.51

Stop Loss: 59.25
Target(s): To Be Determined
Current Gain/Loss: unopened

Entry on June -- at $--.--
Listed on June 10, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.8 million
New Positions: Yes, see below

Comments:
06/11/14: Shares of IR retreated with the market's pullback on Wednesday. I do not see any changes from my earlier comments. We're waiting on a breakout higher.

Earlier Comments: June 10, 2014:
IR is in the industrial goods sector. They operate two business divisions, their Climate and Industrial segments. The climate business accounts for the majority of their sales as they compete in the heating, ventilation, and air conditioning markets. They're best known for their Club Car, Ingersoll Rand, Thermo King, and Trane brand names.

The company has been consistently growing earnings with EPS growth of +28% from 2011 to 2013. They've also seen operating margins improve over the same three-year period. Their most recent earnings report in April beat analysts' estimates by three cents with a profit of 29 cents a share. Revenues were up +3.2% from a year ago to $2.72 billion. Orders were up +5% for the quarter while margins in its climate business rose 210 basis points.

Steady revenue growth and margin growth sound like a pretty good deal if you're bullish on the stock. Management followed up their earnings news by raising their guidance on the second quarter this year.

Weather was a factor in the first quarter but now that we're into summer any increase in construction should be a boon for IR. In yesterday's new play (AOS) we noted that the U.S. real estimate market looks poised for improvement. Housing starts were up 13 percent month over month in April. New permits to build houses hit their highest levels in five years. This should all point to improved sales for IR's HVAC business.

We know that somebody is bullish on IR. The last couple of weeks have seen some pretty big option bets. Thousands of July calls options have been purchased expecting IR's rally to continue over the next few weeks.

Technically we are seeing IR rebound from its long-term up trend. The last four months have also built what appears to be an inverse head-and-shoulders pattern, which forecasts a $69-70 target.

The January 2014 high near $63.50 could be resistance. We're suggesting a trigger to buy calls at $63.75. We're not setting an exit target tonight but the Point & Figure chart for IR is bullish with a $71.00 target.

Trigger @ $63.75

Suggested Position: buy IR stock @ (trigger)

- (or for more adventurous traders, try this option) -

buy the Sept $65 call (IR140920C65)

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



NN Inc. - NNBR - close: 25.78 change: +0.18

Stop Loss: 23.75
Target(s): To Be Determined
Current Gain/Loss: + 2.1%

Entry on June 04 at $25.25
Listed on June 02, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 153 thousand
New Positions: see below

Comments:
06/11/14: NNBR managed to tag a new multi-year high before trimming its gains. The relative strength is encouraging but I would hesitate to launch new positions at the moment.

Earlier Comments: June 2, 2014:
NNBR is in the industrial goods sector. The company makes precision bearing and metal components, industrial plastic, and rubber products. They sell components to the aerospace, agriculture, automotive, construction, energy, industrial, marine, and medical industries.

NNBR's big rally in 2013 has continued into 2014. This year has been a bit of a roller coaster ride for the stock. The rally really picked up steam in early May after NNBR reported earnings on May 6th.

Wall Street was expecting a profit of 29 cents a share on revenues of $1.1.3 million. NNBR delivered 31 cents a share with revenues rising +9.3% to $102.5 million. The 31-cent net profit is a +47.6% surge from a year ago. The company said its gross margins rose 110 basis points to 21.7%.

News on NNBR is pretty quiet but industrial stocks have been leading the market higher. Rising revenues, rising profits, and rising margins sound like a good recipe for further appreciation.

Currently NNBR is hovering below round-number resistance at the $25.00 mark. We are suggesting a trigger to open bullish positions at $25.25.

We're not setting a bullish target tonight but I will point out that the point & figure chart is forecasting a long-term bullish target of $49. I also want to note that it's possible, but unlikely, that NNBR could see potential resistance at its all-time highs at $26.75 set 18 years ago back in May 1996.

Current Position: Long NNBR stock @ $25.25

06/07/14 new stop @ 23.75
06/04/14 triggered @ 25.25



Saia, Inc. - SAIA - close: 45.61 change: -0.05

Stop Loss: 42.90
Target(s): To Be Determined
Current Gain/Loss: -0.8%

Entry on June 09 at $46.00
Listed on June 07, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 239 thousand
New Positions: see below

Comments:
06/11/14: SAIA spent today's session churning sideways and closed virtually unchanged.

Earlier Comments:
SAIA is in the services sector. The company runs trucking service to handle shipments between 100 and 10,000 pounds. They were formerly known as SCS Transportation.

The S&P 500 index ended the week at record highs. The transportation stocks have been leading the market higher. The Dow Jones Transportation Average also closed at all-time highs. The latest economic data has been mixed with the most recent Q1 GDP estimate revised lower. Yet data from the transport industry suggest a growing economy. Rail traffic has been strong and trucking traffic has also been improving.

Cass Information Systems reported that trucking shipments in May were up +3.6% year over year and up 1% from the prior month. Thus far trucking companies have seen freight shipments in the first five months of 2014 hit their best levels "since the end of the Great Recession" (source: IBD).

The first quarter was rough for a lot of companies but not for SAIA. The company delivered its Q1 results on April 25th and beat Wall Street's top and bottom line estimates in spite of the harsh weather. Analysts are expecting SAIA's earnings to grow +30% this year and +24% in 2015.

On May 20th SAIA said LTL tonnage per day rose +7.5% in April compared to a year ago. Halfway through May their LTL tonnage was up more than 8%. If this keeps up the company is likely to deliver another strong quarter of earnings.

Current Position: long SAIA stock @ $46.00

- (or for more adventurous traders, try this option) -

Long Sep $50 call (SAIA140920C50) entry $1.75

06/09/14 triggered @ 46.00
Option Format: symbol-year-month-day-call-strike



Super Micro Computer, Inc. - SMCI - close: 22.65 change: -0.11

Stop Loss: 19.90
Target(s): To Be Determined
Current Gain/Loss: +1.8%

Entry on June 09 at $22.25
Listed on June 07, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 467 thousand
New Positions: see below

Comments:
06/11/14: After recovering from its early morning lows SMCI spent the rest of Wednesday drifting sideways in a narrow range. If the market continues to sink tomorrow traders might want to consider launching new positions in SMCI near $22.00.

Earlier Comments:
SMCI is in the technology sector. The company makes high performance servers (computers). The stock has been stuck in the $8.00-18.00 trading range for years. That changed back in January when SMCI reported earnings that beat analysts' estimates on both the top and bottom line. If that wasn't enough SMCI's management also raised their guidance. Shares soared to all-time highs on this news. You can see the spike higher in January.

When investors turned sour on high-growth and momentum names this past spring shares of SMCI corrected sharply but now it's back and poised to challenge its highs. That's because SMCI has delivered another strong quarter of growth.

SMCI reported its Q3 results on April 22nd. Wall Street was expecting a profit of $0.27 per share on revenues of $335.19 million. SMCI bested estimates with a profit of $0.37 per share and revenues soared +34.5% to $373.8 million. Management then guided higher for the current quarter and raised its top and bottom line estimates above Wall Street's estimate. It was their second straight quarter of record highs for revenues and earnings.

Analysts have started revising their numbers on SMCI as the company is growing faster than its rivals. Some might consider SMCI cheap with a P/E at 20.

The point & figure chart is bullish and forecasting at $25 target.

current Position: long SMCI stock @ $22.25

- (or for more adventurous traders, try this option) -

Long Oct $22.50 call (SMCI141018C22.50) entry $2.25*

06/09/14 triggered @ 22.25
*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



Wells Fargo & Co - WFC - close: 52.24 change: -0.35

Stop Loss: 48.75
Target(s): To Be Determined
Current Gain/Loss: + 2.6%

Entry on June 02 at $50.94
Listed on May 31, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 13.5 million
New Positions: see below

Comments:
06/11/14: After a three-week rally WFC was due for a pullback. The profit taking may not be over yet. Look for support near $51.00 and near $50.00.

Earlier Comments: May 31, 2014:
WFC is in the financial sector. They are a major, money center bank, headquarter in San Francisco with annual revenues of $81.72 billion and net income of over $21.5 billion. The financial sector has been a strong performer these last couple of weeks and WFC has helped lead the group higher.

Currently WFC is up +11.8% year to date. Its closest rivals are all negative for the year. Bank of America (BAC) is down -2.75%. JPMorgan Chase (JPM) is off -4.98%. Citigroup (C) is down -8.7% for 2014. WFC says business is good and they expect it to get better. The bank reported that credit quality has been improving. They managed to reduce their loan loss reserves in the first quarter and they expect this trend to continue in 2014.

At WFC's recent analyst day their CFO said they want to raise how much money they return to shareholders. They'd like to pay out 55 percent to 75 percent of net income back to shareholders as dividends and stock buybacks. That's up from 34% in 2013 but the new capital plans are subject to regulatory approval.

The shareholder friendly management at WFC is probably just one reason that Warren Buffet likes this company. WFC is Berkshire Hathaway's largest holding. Some have suggested that WFC is the best way to benefit from any long-term rebound in the U.S. housing market and consumer spending.

In recent news WFC says it is poised to end some of its legal troubles surrounding the robo-signing scandal during the housing crisis. It could final settle this issue for $67 million fine and put this issue behind it.

Technically shares of WFC looks very bullish with a long-term up trend. This past month has seen WFC breakout past key resistance at the $50.00 level. Shares ended the week at a new all-time high.

Current Position: Long WFC stock @ $50.94

- (or for more adventurous traders, try this option) -

Long Oct $50 call (WFC141018C50) entry $2.31

06/09/14 new stop @ 48.75
06/02/14 trade begins. WFC gapped higher at $50.95
Option Format: symbol-year-month-day-call-strike



BEARISH Play Updates

The TJX Companies, Inc. - TJX - close: 55.47 change: -0.59

Stop Loss: 57.10
Target(s): To Be Determined
Current Gain/Loss: -1.6%

Entry on May 28 at $56.41
Listed on May 27, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 4.5 million
New Positions: see below

Comments:
06/11/14: TJX underperformed the broader market with a -1.0% decline. I am not suggesting new positions at this time.

Earlier Comments: May 27, 2014:
TJX is in the services sector. The company runs off-price apparel and home fashion retail outlets with brand names under T.J.Maxx, Marshalls, HomeGoods, and more. TJX has over 1,000 locations.

Retail has had a tough time this year. Disappointing Q4 Christmas shopping season results were then followed by one of the worst winter seasons in years. TJX has not been immune to the issue. The company reported Q4 earnings results and missed estimates and then lowered guidance for Q1 and full year 2015. They did it again just a few days ago when they reported their Q1 results. TJX missed estimates on both the top and bottom line and then management lowered their guidance for 2015 again.

Shares collapsed last week following the new earnings earning and the oversold bounce has already failed. TJX has also broken down through some long-term bullish trend lines (see weekly chart below).

There are a few analysts saying the sell-off is overdone and traders should buy this weakness but no one seems to be listening. There could be more analysts coming out and trying to call a bottom on TJX, which might spark some short-term rallies but the path of least resistance is down.

Currently the point & figure chart is bearish and forecasting at $45 target.

current Position: short TJX stock @ $54.61

- (or for more adventurous traders, try this option) -

Long Oct $52.50 PUT (TJX141018P52.50) entry $1.70*

05/28/14 trade begins. TJX opened at $54.61
*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




CLOSED BULLISH PLAYS

Delta Air Lines - DAL - close: 40.71 change: -1.21

Stop Loss: 40.44
Target(s): to be determined
Current Gain/Loss: + 7.4%

Entry on May 05 at $37.65
Listed on May 03, 2014
Time Frame: 6 to 8 weeks
Average Daily Volume = 13.5 million
New Positions: see below

Comments:
06/11/14: Airline stocks hit some turbulence today after Germany's largest airline issued an earnings warning. This prompted immediate profit taking in shares of DAL, which were up eight weeks in a row. The stock gapped down at the open at $41.00 and dipped to $39.88 before paring its losses. Our stop loss was hit at $40.44.

Our trade is closed but I would keep DAL on your watch list. A correction to the 50-dma might be a new entry point.

closed Position: long DAL stock @ $37.65 exit $40.44 (+7.4%)

- (or for more adventurous traders, try this option) -

Sept $40 call (DAL1420i40) entry $2.20* exit $3.10 (+40.9%)

06/11/14 stopped out
06/03/14 new stop @ 40.44, investors may want to take profits now as DAL tests a trend line of higher highs.
05/28/14 DAL is nearing potential resistance at its trend line of higher highs.
05/12/14 new stop @ 36.45
05/07/14 new stop @ 35.75
05/05/14 triggered @ 37.65
*option entry price is an estimate since the option did not trade at the time our play was opened.

chart: