Option Investor
Newsletter

Daily Newsletter, Wednesday, 6/18/2014

Table of Contents

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

Market Wrap

Fed Disappoints, Market Rallies Anyway

by Keene Little

Click here to email Keene Little
Today's FOMC meeting did not give the market anything to cheer about but it cheered anyway. Now we're left to wonder if the afternoon rally was real or just a head-fake break.

Wednesday's Market Stats

The market had been chopping higher off last week's low and especially for indexes like the DOW and SPX it looked like nice bear flag patterns. The setup was for a selloff following the FOMC announcement. The bulls had a different idea and blasted the shorts out of the water this afternoon. When technical patterns fail they tend to fail hard and that's what happened to the bear flags today.

The market was essentially on hold the past week while waiting for the gray-haired lady from the Fed to sprinkle some more pixie dust all over the market and make the bulls feel happy. It worked and even though the Fed is continuing their taper program (reducing their asset purchases by another $10B/month) and even though the FOMC statement was less optimistic than the market expected to hear, the market rallied anyway. Obviously there was an agenda to rally the market regardless of what the Fed said or didn't say. After all, this is opex week.

The Fed noted consumer spending is weaker than they would like to see and they're now thinking an economic growth rate of 2.1%-2.3%, down from the 2.8%-3.0% that it provided in March. If the Fed follows their normal course, that growth estimate will again be ratcheted lower in the fall.

In Yellen's press conference, she assured us that the stock market is not overvalued and that the economic slowdown that we've seen in the first half of the year is over. We can now expect better growth in the 2nd half. Excuse me when I say my BS meter pegged to the right on her statements. The Fed is wrong about 100% of their economic calls. 100%. At the top of the tech bubble Greenspan felt the market was fairly valued and didn't have a clue what was happening and how the Fed's easing (for Y2K concerns) was the last straw that helped the bubble burst. At the top of the housing market Bernanke said we weren't in a housing bubble and that prices were not overvalued. These people are worthless as predictors and yet the market eats their words up as if they came down from the Mount. I don't get it but the only important thing to remember is the mood of the market and whether it will ignore bad news and rally. When the market is selling on good news then you know the mood is souring.

Speaking of mood, in the beginning of June I saw a chart of the Investors Intelligence Sentiment, which is a measure of how many financial newsletters are bullish vs. bearish and two weeks ago the number was 45. As you can see on the chart below, whenever the measure got to 42 or above it was considered bearish from a contrarian perspective. The number is likely higher today than it was in early June and at or above the January high at 46. That high of course led to the sharp market decline into February and the two previous highs at 42, in October 2007 and May 2011, also led to significant market declines. Again, from a contrarian perspective this is not where you want to be bullish the stock market.

Investor's Intelligence Sentiment, 2006-present, chart courtesy Pension Partners

There's another interesting sentiment chart that can be found at CNN Money (cnn.com/data/fear-and-greed), which uses several different measurements to come up with the index value. It's currently at 94 on a scale of 1 to 100. The high reading matches previous highs since 2012, as can be seen at the bottom of the chart, and what's scary for bulls is how quickly sentiment shifted to Extreme Greed. It's not only high but it seems to have sucked everyone back into the bull camp remarkably quickly. There's simply no question by many that the market is heading higher.

Fear & Greed Index, chart courtesy CNN Money

If you go to the site and check this index out, you'll see you can open the individual measures and I've copied just two of them below. The top one on the chart below shows the spread between junk bonds and safer investment-grade corporate bonds. This essentially shows no fear by investors in junk bonds (trying to get higher yield and at the moment there's a lot of risk for very little return). This narrow spread has been seen at previous important market highs, such as in 2007. The put/call ratio at the bottom is not quite as low as it was at the end of December but again, when many are convinced the rally will continue they're buying call options to play it. The market rarely accommodates the majority for long.

Fear & Greed Index, Junk Bond Demand and P/C Ratio, chart courtesy CNN Money

Today we got a new multi-year low in the VIX and as a component of the Fear & Greed Index it has helped drive the index into the Extreme Greed zone. The chart below is what I'm tracking and just as the rapid rise to extreme greed is a dangerous sign, so too is the collapse in the VIX the past two days. There's simply no fear out there and most feel there is no need to buy put protection. Why bother? The market's going to the moon! Well, at least SPX is going to 2000. I mean everyone knows that's going to happen for sure. This can go on for a long time and SPX could head for 2200 before it's done rallying but when you combine all these sentiment indicators it's a risky bet on the long side. The VIX is now less than a point from where it bottomed in 2007.

Volatility Index, VIX, Daily chart

A chart I've shown before is another reason why it's hard to believe in the upside. While it could continue much higher, chasing it higher from here is akin to playing Russian roulette -- you could do just fine but I consider the reward potential not worth the larger risk. Since new 52-week highs peaked in March 2013 the 10-day moving average of this measure started to decline until a lower high was made in December as the market pressed to new price highs. Since December the measure of new 52-week highs has dropped even lower while the NYSE has continued to rally higher. This is a clear indication the indexes are making new highs on the backs of fewer and fewer participating stocks. This is why the average stock has not kept up with the indexes themselves. This is a strong indication the rally is in trouble and the longer the divergence continues the stronger will be the decline. This chart should have a sign on it "Danger Will Robinson."

NYSE vs. New 52-week highs, Weekly chart

So with that let's look at what the indexes are doing. The above information is good to know since it tells you whether you're trading with or against the prevailing winds. But price is king and all of our chart patterns are based on price so that's what we analyze.

Starting with the weekly chart of SPX it continues to push up against the top of its parallel up-channel from the October 2011 low, currently near 1954. It had pushed about 6 points above the line last week so another similar throw-over would be to about 1960, about 2 points above today's high. The top of its parallel up-channel from April is near 1970 so that gives us an upside target zone to watch for a possible final high. Between the over-the-top bullish sentiment and the bearish momentum and other market breadth indicators I think it's better to be looking for a top rather than participating in the rally (unless you're able to watch it during the day and get quickly if you have to).

S&P 500, SPX, Weekly chart

Shown on the daily chart below, there's another parallel up-channel from February, the top of which is currently near 2004 and that's the bullish potential if we get more of a blow-off top than currently expected. The top of the up-channel from April is near 1972. Above 1972 would be more bullish for the run up to 2000 that most traders are expecting to see. The wave pattern is messy and therefore projections based on the wave count can only be used to identify levels of interest to see how price behaves around them. One thought for the wave count, different from what I'm showing, calls for two equal legs up from February at 1960, which would be the 6-point throw-over above the top of its up-channel from 2011, making it a strong level of interest. With today's high at 1957.74 that's not much higher.

S&P 500, SPX, Daily chart

Key Levels for SPX:
- bullish above 1972
- bearish below 1925

The 60-min chart below shows another potential upside target, at 1964, which is where the 5th wave of the leg up from May 15th would be 162% of the 1st wave. Between a few different wave count ideas, price projections and tops of up-channels I'm thinking SPX could top out in the 1960-1972 area. The risk in thinking about any more upside is that it's been common to see the day after FOMC reverse the post-FOMC afternoon move, which means down in this case. It's possible a decline could start out of the gate Thursday morning.

S&P 500, SPX, 60-min chart

At today's high at 16911.41 it came within about a point of the 78.6% retracement of last week's decline. I've mentioned this retracement level many times in the past, especially as it relates to the DOW's high retracements before turning back down. Whether it turns back down immediately this time or not is something we'll find out quickly Thursday morning. Just beware of that particular retracement level (16912.80). Other than that I see trendline resistance near 16970 and 17070. In between there's century and millennial resistance at 17K, another level that most traders will now be achieved.

Dow Industrials, INDU, Daily chart

Key Levels for DOW:
- bullish above 17,000
- bearish below 16,700

When the NDX was rallying into its high on June 9th I had an upside target near 3825 that I liked. It stopped short of that level, hitting a high at 3804, but now might have another shot at it. This is where the 127% extension of the previous decline is located (3826.51), a common reversal level, and it would be another back-test of its broken uptrend line from June 2013 - February 2014, which it tested into the June 9th high but was rejected. It's now trying again with bearish divergence (so far). As with the other indexes, it's now important for the bulls to defend last week's lows (NDX 3751) since a break of those lows would be a good indication the top is in place.

Nasdaq-100, NDX, Daily chart

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

Today's high for the RUT, at 1183.38 is less than 2 points from its 78.6% retracement of its March-May decline, at 1184.94, so that level deserves to be watched carefully. I've been saying for a long time that the RUT's price pattern is a choppy mess and was the one supporting the idea we'd get a new high following the choppy decline from May. That potential still exists, especially if it gets above 1185 and holds above. A break below 1154 would be strong indication the bounce high is in place.

Russell-2000, RUT, Daily chart

Key Levels for RUT:
- bullish above 1185
- bearish below 1154

The 30-year yield, TYX, has been struggling around its downtrend line from December 31st, which is where it closed today and is now also battling its broken uptrend line from July 2012 - May 2013, which it hit yesterday but closed back down today. It's currently bouncing between its 20-dma, at 3.406, and its 50-dma, at 3.431. I suspect a break below Monday's low at 3.83 would lead to lower prices, in which case it could break to new lows. A rally above its June 5th high near 3.5 would be more bullish but at the moment I'm leaning to the downside on bond yields. I think they have a long way to drop this year.

30-year Yield, TYX, Daily chart

There's been very little movement in the U.S. Dollar over the past 3 weeks and it's in the middle of its 9-month trading range between 79 and 81.50. Still looking for higher, eventually.

U.S. Dollar contract, DX, Weekly chart

Monday's high for gold, at 1285.10, was a little shy of the apex of its previous sideways triangle, near 1292, that ran from April through May. The apex is typically strong S/R when back tested following the break of the triangle so in this case it's viewed as a resistance level. It poked above its downtrend line from March, near 1273 at the moment, but failed to get back above its 50-dma, at 1286 on Monday and currently at 1285. The 50-dma has held down every rally attempt since early May. Gold would be more bullish above 1292, although gold bulls would have a tough fight up until its downtrend line from October-November 2012, near 1322, but the larger pattern continues to support another leg down.

Gold continuous contract, GC, Daily chart

Last Thursday's rally in oil was a strong breakout from its ascending triangle that ran from March to the truncated low on June 5th. The minimum upside projection for the breakout is to the 110-112 area and any higher above 112 would be an even larger breakout since it would be above the top of the large sideways triangle running from May 2011, shown on its weekly chart below. If that happens (more than just a head-fake break above it) we could be looking for oil to rally up to 140-150 to challenge its July 2008 high near 147. While the stock market and oil tend to trade more in synch than out of synch, a strong rally in oil this time could put a major squeeze on a fragile global economy, which is already in trouble. At the moment I do not believe oil will rally above 112 but I'll be watching closely for evidence that it will.

Oil continuous contract, CL, Weekly chart

Thursday morning we'll get the usual unemployment claims data and then at 10:00 AM we'll get the Philly Fed and Leading Indicators, two reports that will provide a little more information about how our economy is doing. The Philly Fed is expected to show some slowing while the Leading Indicators is expected to remain flat.

Economic reports and Summary

The positive reaction to the FOMC announcement looks bullish, especially coming out of a corrective base following last week's low. The pullbacks are getting smaller and smaller and the new highs are occurring on weaker market breadth, a combination that typically is a sign of topping rather than accelerating higher. We could see opex week continue to push higher into the end of the week but with the sentiment picture so bullish and market breadth/momentum weakening I think it's ripe for a market top. Whether the top occurs becomes buying simply peters out or we get some outside event that scares the market, it's likely very close now.

Most market participants expect SPX to hit 2000 and the DOW to hit 17K. It could easily happen from here since neither level is far away. But when too many expect something to happen we often see the market disappoint the many. Will that happen this time? The pieces are in place for a top at any moment but bears need to stay aware of the upside potential.

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

Chinese Internet Stocks

by James Brown

Click here to email James Brown

Editor's Note:

Additional Trading Ideas:

Consider these stocks as possible trading ideas and watch list candidates. Some of these may need to see a break past key support or resistance:

(bullish ideas)
SKX, XRS, GIL, KATE, NOK, XLF, LM, AA, FTK



NEW BULLISH Plays

KraneShares CSI China Internet ETF - KWEB - close: 36.01 change: +0.38

Stop Loss: 33.80
Target(s): To Be Determined
Current Gain/Loss: unopened

Entry on June -- at $--.--
Listed on June 18, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 20 thousand
New Positions: Yes, see below

Company Description

Why We Like It:
KWEB is an ETF designed to mimic the performance of the CSI China Overseas Internet Index. This ETF's top ten holdings are: Tencent, Baidu.com, Ctrip.com, Qiho 360 Technology, Vipshop, Netease.com, JD.com, 21Vianet Group, Youku.com, and YY Inc.

As a group the Chinese internet stocks have been a pretty strong rebound following the extremely painful March-May sell-off. Without a doubt this is a volatile group. Individually the stocks are definitely popular with the momentum traders.

Odds are you have heard about Alibaba and its upcoming IPO. If you haven't, check out the SoftBank (SFTBY) description in the Premier Investor Newsletter's play update section tonight. We think KWEB might be another way to play the excitement around Alibaba. Technically KWEB does not have any direct exposure to Alibaba but when Alibaba finally announces its IPO, expected this summer, it will likely drive a lot of interest into the Chinese Internet names.

Shares of KWEB have rallied to short-term resistance near $36.00. We are suggesting a trigger to open bullish positions at $36.25. KWEB does not have options so we have to play the equity.

Please note that I consider this an aggressive, higher-risk trade. Not only are the Chinese Internet stocks a volatile bunch but volume on KWEB is extremely low. That can make a volatile stock even more volatile. We want to use small positions to limit our risk.

Trigger @ $36.25 *small positions*

Suggested Position: buy KWEB @ (trigger)

Annotated chart:




In Play Updates and Reviews

Fed Gives Stocks A Green Light

by James Brown

Click here to email James Brown

Editor's Note:
The U.S. stock market surged to new highs following the dovish FOMC announcement and press conference from Fed head Yellen.

AOS has been removed. TJX hit our stop loss.

We want to exit NNBR tomorrow morning.


Current Portfolio:


BULLISH Play Updates

American Airlines Group Inc. - AAL - close $42.66 change: +0.79

Stop Loss: 38.85
Target(s): to be determined
Current Gain/Loss: +6.0%

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:
06/18/14: The rebound in AAL continues with AAL pushing past potential short-term resistance near $42.00 and its 10-dma.

I am not suggesting new positions at the moment.

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*

06/14/14 new stop @ 38.85
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



Arrowhead Research - ARWR - close: 14.99 change: +1.01

Stop Loss: 10.75
Target(s): to be determined
Current Gain/Loss: +24.4%

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:
06/18/14: ARWR has erased last week's sharp losses with a big three-day bounce. The stock is once again testing resistance in the $15.00-15.50 zone.

I am not suggesting new positions at this time.

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: 52.52 change: +0.52

Stop Loss: 49.75
Target(s): To Be Determined
Current Gain/Loss: + 2.5%

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:
06/18/14: DOW outperformed the major indices with a +1.0% gain. Yet the rally was not enough to breakout past its simple 10-dma. I am not suggesting new positions at this time.

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*

06/14/14 new stop @ 49.75
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: 49.98 change: +0.66

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:
06/18/14: FL erased yesterday's loss with a +1.3% gain today. The stock is once again poised to breakout past key resistance near $50.00.

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: 11.17 change: +0.01

Stop Loss: 10.75
Target(s): $11.75
Current Gain/Loss: + 8.4%

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:
06/18/14: It was a volatile morning for FLEX. Something spooked traders and shares gapped open lower at $10.81. Fortunately FLEX almost immediately rebounded and one minute later was back above the $11.00 mark. 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

06/16/14 new stop @ 10.75
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: 63.47 change: +0.45

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:
06/18/14: IR finally broke out past resistance near $63.00. Shares look ready to hit our suggested entry point at $63.75 tomorrow. I don't see any changes from my earlier comments.

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



Microsoft Corp. - MSFT - close: 41.65 change: -0.03

Stop Loss: 39.45
Target(s): To Be Determined
Current Gain/Loss: -0.5%

Entry on June 17 at $41.85
Listed on June 14, 2014
Time Frame: 10 to 12 weeks
Average Daily Volume = 23 million
New Positions: see below

Comments:
06/18/14: MSFT spent Wednesday's session retesting short-term support at its 10-dma before rebounding back to unchanged.

Earlier Comments: June 14, 2014:
It's back to the future with old-tech heavyweights making progress on Friday. Semiconductor giant Intel (INTC) surprised the market with an announcement Thursday night. INTC raised their revenue guidance due to stronger PC sales. That's right, they said stronger PC sales. Intel chips are in about 80% of the world's PCs. Unfortunately the PC has been declared dead for years due to the explosion of laptops, smartphones, and tablets. It is true that PC shipments have been falling for the last eight quarters in a row. IDC expects PC shipments to fall another -6% in 2014. If that's true then what's the story behind Intel's positive guidance? It might be Microsoft.

Microsoft ended support for its Windows XP operating system in April this year. No more support means they would no longer provide patches or virus updates to protect your system from hackers. With credit card data being stolen a constant threat for businesses the lack of support for XP has sparked an upgrade cycle, especially among corporations.

There does seem to be some disagreement on just how long and how big of an effect this upgrade cycle will last. Was it a one quarter bump or will it last throughout the rest of 2014? An FBR analyst estimates that 25% of the PCs connected to the Internet still run Windows XP. That is a very large number so the upgrade cycle for Microsoft could last a while. It could be bigger than expected too.

Not only are consumers and businesses going to upgrade their operating system from Windows XP to Windows 8 but they will most likely buy an upgraded copy of Microsoft Office. MSFT will likely sell a few more copies of SQL server as well.

The MSFT story is not just about software either. The company seems to be making in-roads into the healthcare sector with their Surface Pro 3 tablets. MSFT is also slugging it out with Sony in the game console wars. Consumers bought $3.6 billion in video games in the first quarter of 2014. MSFT's line up of games for its Xbox One looks pretty good following the annual E3 conference last week.

Technically shares of MSFT are in a long-term up trend and hitting 14-year highs. As an investor would you rather buy a 10-year bond with a 2.6% yield or MSFT with a 2.7% yield and good chance for price appreciation?

More conservative investors may want to wait for a rally past $42.00 before initiating positions.

current Position: long MSFT stock @ $41.85

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

Long 2015 Jan $45 call (MSFT150117c45) entry $1.16

06/17/14 triggered @ 41.85
Option Format: symbol-year-month-day-call-strike



NN Inc. - NNBR - close: 25.00 change: -0.31

Stop Loss: 23.75
Target(s): To Be Determined
Current Gain/Loss: - 1.0%

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:
06/18/14: Caution! NNBR's recent performance over the last four sessions has turned bearish. Today's failure at the 10-dma and relative weakness is a warning signal.

We are suggesting an immediate exit tomorrow morning at the opening bell.

Current Position: Long NNBR stock @ $25.25

06/18/14 prepare to exit tomorrow morning
06/13/14 Caution! Friday's move looks like a potential bearish reversal
06/07/14 new stop @ 23.75
06/04/14 triggered @ 25.25



SoftBank Corp. - SFTBY - close: 37.52 change: +0.74

Stop Loss: 33.20
Target(s): To Be Determined
Current Gain/Loss: +2.3%

Entry on June 17 at $36.68
Listed on June 16, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 499 thousand
New Positions: see below

Comments:
06/18/14: SFTBY was bouncing today and gained +2.0%. Shares also closed above their 10-dma and their 100-dma. Investors can buy this bounce while more conservative traders may want to wait for a rally above $38.50 before initiating positions.

Earlier Comments: June 16, 2014:
SoftBank Corp. has been referred to as the Warren Buffet of Technology although a better comparison is probably to Buffet's Berkshire Hathaway. They are a holding company with hundreds of businesses. According to the company website SFTBY has 235 subsidiaries and 108 affiliates (including 150 consolidated subsidiaries and 83 equity method companies). SoftBank Group possesses both advanced infrastructure and diverse services and content, and invests in promising companies working in the Internet field.

SFTBY owns 80.2% of Sprint Corp., 33.3% of eAccess Ltd., 100% of WILLCOM, Inc., 33.3% of Wireless City Planning Inc., 58.5% of GungHo Online Entertainment, and 42.5% of Yahoo Japan Corp. They also own 34% of Renren Inc., which is considered the Chinese version of Facebook. They also own 36.7% of Alibaba Corp., which is a much larger and more profitable version of Amazon.com. That's on top of owning SoftBank Telecom, SoftBank BB Corp. and SoftBank Mobile.

SFTBY's combined telecom assets makes the company one of the largest telecom/wireless players in Japan. In 2013 they added 4.1 million new subscribers and more than double the 1.19 million subscriber gain by NTT DoCoMo and 2.8 million for AU, which is owned by KDDI. Softbank added 47% of the Android phones activated in Japan and 39% of the iPhone 4s and 5c models. Both metrics are the largest in Japan and shows how Softbank is gaining market share.

Their Renren investment could be a big. China already has the largest Internet audience on the planet and it's only going to get bigger. Currently Renren has about 200 million users. This will grow. Like Facebook, Renren is developing its mobile platform. Renren is currently valued at about $8 per user but this seems extremely low considering what Facebook paid for WhatsApp.

SFTBY's majority stake in Sprint is starting to pay off. Sprint has had a rough few years working through its merger with Nextel. Sprint later acquired Clearwire. It looks like Sprint is now in recovery mode after adding +477,000 subscribers in Q4 2013 versus losing -337,000 in Q4 2012. SFTBY wants to acquire T-Mobile and combine it with Sprint. Currently 75% of U.S. customers are on AT&T or Verizon. SFTBY calls them an American duopoly but they believe by combining Sprint, the third largest carrier, with T-Mobile, the fourth largest, the combined company could compete with AT&T and Verizon, which would be good for competition and ultimately consumers.

Today the real allure of SFTBY is its 37% ownership of Alibaba. Amazon.com (AMZN) is an Internet powerhouse with sales of $86 billion in 2013 and a net profit of $274 million. Alibaba dwarfs AMZN with 2013 sales of $160 billion and a profit of $2.16 billion. Right now it looks like Alibaba will IPO this summer. Analysts have been estimating they could be the biggest IPO in history with a value of $160 to 185 billion.

There were new numbers out on Alibaba today with the company stating that its Q4 revenues only rose +39% to $1.9 billion. That's down from 62% growth in Q3. Margins retreated from 51.3% to 45.3% on higher marketing costs. This spooked investors today into thinking that maybe the valuation may not be in the $160-185 billion range.

We believe that SFTBY's shares are very undervalued and when the Alibaba IPO does hit this stock could soar. Tonight we're suggesting investors launch positions tomorrow morning at current levels. Depending on your trading style this could be an aggressive entry point. Technically SFTBY still has resistance in the $38-39 zone. More conservative investors may want to wait for SFTBY to close above $39.00 before initiating new positions. The risk of not launching positions now is that we do not know when Alibaba is going to announce its IPO. It could be any day and likely in the next few weeks. We will plan on exiting after Alibaba's first day of trading.

FYI: SFTBY is scheduled to hold its annual shareholder meeting on June 20th.

Current Position: Long SFTBY stock @ $36.68

06/17/14 trade opens. SFTBY gapped down at $36.68
note: SFTBY does not have options.



Super Micro Computer, Inc. - SMCI - close: 26.02 change: +1.13

Stop Loss: 19.90
Target(s): To Be Determined
Current Gain/Loss: +16.9%

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:
06/18/14: SMCI continues to show impressive relative strength. There was no follow through on yesterday's profit taking. The stock reversed higher to post a +4.5% gain. I am not suggesting new positions at this time.

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*

06/16/14 SMCI rallies +10.7%
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: 52.04 change: +0.38

Stop Loss: 49.70
Target(s): To Be Determined
Current Gain/Loss: + 2.2%

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:
06/18/14: WFC outpaced the rally in the financials with a +0.7% gain on Wednesday. Investors may want to consider this rebound a new entry point.

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

06/16/14 new stop @ 49.70
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


None. We do not have any active bearish trades.




CLOSED BULLISH PLAYS

AO Smith Corp. - AOS - close: 49.73 change: -0.06

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:
06/18/14: It looks like AOS might hold support near $49.00. Unfortunately shares have just not been performing as we expected. Our trade has not opened yet with a suggested trigger at $51.25. Tonight we are removing AOS as an active candidate. There are too many stocks that are on the move for us to waste time with AOS.

Trade did not open

06/18/14 removed from the newsletter. suggested entry trigger was $51.25.

chart:



CLOSED BEARISH PLAYS

The TJX Companies, Inc. - TJX - close: 55.56 change: +0.82

Stop Loss: 55.50
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:
06/18/14: We were worried that TJX might bounce and lowered the stop loss in yesterday's newsletter. Sure enough the stock surged. TJX rebounded +1.49% and hit our stop at $55.50.

closed Position: short TJX stock @ $54.61 exit $55.50 (-1.6%)

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

Oct $52.50 PUT (TJX141018P52.50) entry $1.70* exit $1.25 (-26.4%)

06/18/14 stopped out
06/17/14 new stop @ 55.50
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

chart: