Option Investor
Newsletter

Daily Newsletter, Thursday, 6/26/2014

Table of Contents

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

Market Wrap

And Back To Support

by Thomas Hughes

Click here to email Thomas Hughes
Some less than expected data sent the markets back down to support.

Introduction

Lower than expected personal spending data sent the markets seeking support today. Asian markets ended up on the rebound in US stocks seen Wednesday while the EU indices felt some of the impact of today's economic data. In the pre-opening session US futures were indicated flat to positive until the 8:30AM time frame when the trade turned slightly negative. The reason, personal spending, a sign of the consumer strength, rose but only by 0.2% versus the expected 0.4%.


Just before the opening bell index futures strengthened to the point it seemed as if we might have a positive day but that did not last long. Soon after the start of open trading the indices began to drift into the red and then made a quick drop down to retest near term support. The SPX was down -3.5 in the first minutes, -9 by 9:45AM and by 9:50 had hit intraday bottom near -13. The index briefly touched 1945 then began bouncing higher. The remainder of the day saw the index tread water just above support and hold that level into the close. Although the spending data was today's excuse to sell it only takes a look at the calendar to see why the markets are treading water this week. Next week is the end of the month and the end of the 2nd quarter. This means there will be a massive wave of macroeconomic data that will affect 2nd quarter GDP estimates and outlook for the next quarter. And on top of that earnings season begins the week after that.


Another reason may be comments from Fed President Bullard. In comments today he said that the economy was likely much closer to “normal” than most people realize. He expects to hit 2% inflation and sub 6% unemployment later this year. He doesn't believe the market or policy makers understand that the economy is as close as it is to being normal. Further comments included things like the Fed is not as dovish as the market thinks and that interest rates could rise as soon as the end of Q1 2015. His projection for economic growth over the next four quarters averages 3% which means that, if correct, this quarter isn't going to be that bad even with the massive revision to the first quarter.

The Economy

First up, Personal Income and Spending. Personal income rose as expected by 0.4% but spending only rose by 0.2%, half the expected rise. This is now the second month of weaker than expected spending. This is concerning because it may have a drag on GDP in this quarter. On the flip side it may also mean that households are saving, which is good, either for summer vacations or other more long term reasons.

On the employment front initial claims for unemployment fell by -2,000 from an upward revision of 2,000 for a net gain of 0 from last weeks report. Claims this week were reported as 312,000. The four week moving average rose by 2,000 to 314,000. On a non adjusted basis claims rose by 2,832 to 304,169. Claims are holding steady and are near the bottom of the 7 month range. Based on this figure and chart it does not look as if the labor market is holding steady but has not significantly improved. Pennsylvania and California led with increases in claims of +7,120 and +670. Georgia ad Missouri led with declines of -2,245 and -2,130.


Continuing claims rose slightly this week as well. Claims for a second week of unemployment climbed by 12,000 to 2.571 million. Last week was revised lower by -2,000. The four week moving average of continuing claims fell to a new low not seen since November 3rd, 2007. This figure is looking better in terms of the labor market. Continuing claims is still trending lower and could be leading total unemployment lower as well. Total claims for unemployment this week fell by -37,990 to hit 2.441. This is just off the long term low for this figure.


There is only one economic indicator being released tomorrow, Michigan Sentiment. The expectation is for the final reading for the month of June to be revised higher by about one point to just above 82. Next week however is a different story and will provide a lot of information for the market to chew on. There are a total of 21 economic releases including auto/truck sales, pending home sales, ISM, factory orders, ADP, Challenger and the all important NFP. My calendar shows NFP on Thursday this time around which will make the Wednesday/Thursday time span full of employment data.

The Gold Index

Gold prices fell today but not as much as I might have guessed given the nature of the Bullard comments. Gold prices lost about $15 in the early part of the day but tapered that down to about -$6 or so at the close of trading. On top of the hawkish spin to Bullard's comments there was also some bearish news for gold including low demand among physical buyers as well as ETF and other fund buyers. China is also reported to be consuming less as imports fell more than 17% last month. Last weeks massive rally was driven by short covering which leaves gold in a very precarious position. If no one sees gold as bullish at this level there is no place for it to go but down. Bullard's comments are certainly no reason to get bullish on gold for me.

The Gold Index traded to the upside today but I am not too bullish on it. The drop from my resistance line just two days ago is a confirmation that there are still long term bears in this market. There is some sign of bottoming in the index on the longer term weekly charts but that bottom, if it is one and I am not calling it, is down around the $85 level. In view of the long term down trend in the Gold Index this is looking a lot like a trend following entry, possible near the end of the trend, but still trend following. The MACD is bullish and peaked at the resistance level simultaneously with a strong bearish stochastic crossover. There is long term resistance at the $100 level with support levels around the $95, $92.50, $90 and $85 levels. I took a stroll through the list of gold stocks, indices and funds I know to see what I could see. Every single one ( GOLD, GLD, GG, RGLD, ABX) shows price action confirming a longer term resistance level.


The Oil Index

Oil traders finally realized what the news reports have been saying all along. The oil infrastructure in Iraq is not under any more threat than it normally is. The ISIS uprising is not impacting Iraqi oil delivery, refining or production...yet. The possibility is still there but the need to drive up oil prices because of the possibility lessened somewhat today. WTI fell by nearly a dollar by the late afternoon with Brent down an equal amount. The Oil Index also traded lower today but appears to be confirming support. The index corrected hard this week after reaching its peak on Monday but is still above long term support and the short term 30 day moving average. Today's price action just above yesterday's close and then moved lower to test that support and then form a hammer doji. Even with the Iraq premium deflating oil prices are still at long term high levels and should have a positive impact on the bottom line of oil producers. The long term trend in the index is up and support is in play at the previous all time high at 1660.


In The News

There were quite a lot of names in the news today. Camera maker GoPro was a hot topic today. The company rang the opening bell and IPO'd. The stock was priced at $24 per share even though it was oversubscribed by about 20X. The opening went without a hitch and the stock quickly rose an additional $7 making many of the participants near instant millionaires.

Barclay's is the subject of a new investigation and allegations pertaining to dark pools and high frequency trading. The charges allege that Barclay's favored high frequency traders through its dark pool. The company naturally is cooperative. Barclay's ended plans for a new bond offering in the wake of the investigation and some of the brokers using the dark pool have dropped their connections. Shares of the stock dropped more than 7%.


GM halted all sales of its top selling Cruze vehicle due to an air bag malfunction. Not all cars are affected but the company decided to stop all sales until they can recall the bad parts. The talk on TV was how this was a bad sign for GM but there may be a positive in it. Yes GM's sales are going to be affected but the stance of taking no chances could stand out in the eyes of consumers once this issue is in the past. Until then, Ford may be the better pick in the auto sector.


Alcoa hit the news today and not because of earnings. The aluminum giant purchased Firthe Rickson, a maker of airplane parts for jet engines. Company execs say the move is to enhance their offering of air line related products. Alcoa reports earnings in less than two weeks. The stock has been trending up steadily for the last 9 months and looks as if it could continue. Today's announcement caused the stock to gap up and get ahead of the market so there may be some consolidation going into next week and earnings season.


Big Lots instituted a dividend. The dividend is $0.17 per share quarterly, or $0.64 annually or about 1.5% of current stock prices. Shares of Big Lots fell more than 1.25% on the news.

After the closing bell Dupont lowered its full year guidance on slow sales of corn seeds. Stronger sales in soy beans off set some of the difference but not enough to maintain projections.

The Indices

The market traded to the downside today after a fair opening and never could quite get back to break even. The Nasdaq posted the least amount of loss today and is trading closest to a new high of the big three. Today the index opened above the long term resistance of the previous 14 year high, tested that level and moved back above to close very near to the opening price. The Nasdaq made a new high and so far resistance has not pushed it back down. The indicators are consistent with a range bound stock so I am not over bullish on this index without a firmer break of resistance and move into new highs. A failure to do so could result in a return to support at 4,250 or 4,100.


The SPX traded lower to test support at 1,950. The early move lower took the index down to just below 1,945 before it made a sharp bounce back to the 1,950 level. Late day trading nearly took the index into the green but not quite. This is now the 7th day of trading above 1,950 and the indicators have softened to a point where buyers could step back into the market. Momentum is bearish but very very weak. The stochastic is in the mid part of the range, neither over bought or over sold, and has already given a weaker early trend following signal.


The Dow Jones Industrials fell about -0.13 % today but may get a boost tomorrow from Nike, which reported earnings after the bell. Nike beat on the top and bottom lines with solid guidance for the future. The stock popped more than 3% after the bell. As for the Dow itself it is sitting on a solid support level marked by a previous all time high and the short term moving average. The indicators are bearish but weak and consistent with consolidation at this time. The stochastic is similar to that of the SPX and is setting up for a potential second/stronger trend following signal. Support is currently at 16,750 with the next level just below at 16,500.


The Transports were today's loss leader with a -0.18% decline. This index also tested support at the short term moving average and is trading in a rapidly narrowing range that began about three weeks ago. This range/consolidation is beginning to look like a possible flag/triangle continuation and bears close watching. The indicators are little mixed as MACD is still bearish but the peaks show support at the current level. Stochastic is pointing to a trend following buy. A move above 8,250 on this index could lead to another prolonged up swing with a target at 8,500.


The markets are consolidating and getting ready for next week. There is a lot of data coming out and a lot of reasons for the market to get high or get spooked. The entire week will be important but Thursday and the NFP will be the focus I believe and that will quickly move on to earnings the very next week. There is not much on the schedule tomorrow save Michigan Sentiment and four earnings reports including KB Homes. The trends are still up but for now the markets are waiting for data and earnings. Unless something surprising comes out tomorrow could be more of the same we saw today.

Until then, remember the trend!

Thomas Hughes

 


New Plays

Russell Rebalancing Tomorrow

by James Brown

Click here to email James Brown

Editor's Note:

The stock market's failure to see any follow through on yesterday's bounce is a little bit frustrating. At the same time traders did buy the dip again this morning.

There was a lot of talk today about the Russell rebalancing tomorrow. This is an annual event. This affects over $600 billion invested directly in products based on the Russell indexes. It also influences the $4.1 trillion (with a T) in assets that are benchmarked to the Russell indices.

Tomorrow could be a quiet summer Friday but the Russell reconstitution might generate some volatility.

We are not adding new trades tonight.




In Play Updates and Reviews

Bouncing Off The Morning Lows

by James Brown

Click here to email James Brown

Editor's Note:
The stock market's major indices spiked lower at the opening bell. Equities spent the rest of the day slowly bouncing off these lows.


Current Portfolio:


BULLISH Play Updates

American Airlines Group Inc. - AAL - close $44.55 change: +0.64

Stop Loss: 38.85
Target(s): to be determined
Current Gain/Loss: +10.7%

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:
06/26/14: AAL continues to show relative strength with a +1.45% gain today. The stock is poised to hit multi-year highs soon.

I am not suggesting new positions.

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: 14.22 change: +0.80

Stop Loss: 12.75
Target(s): to be determined
Current Gain/Loss: +18.0%

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:
06/26/14: After being hammered lower three days in a row shares of ARWR bounced with a +5.9% gain. 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*

06/25/14 new stop @ 12.75
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: 52.12 change: -0.12

Stop Loss: 50.85
Target(s): To Be Determined
Current Gain/Loss: + 1.7%

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:
06/26/14: DOW saw some profit taking this morning. Shares managed to trim its losses to just 12 cents by the close. Tomorrow could be a rough day. Rival chemical company DuPont (DD) issued an earnings warning after the closing bell tonight. This news could weigh on all the chemical makers.

I am not suggesting new positions.

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*

06/24/14 new stop @ 50.85
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



Flextronics Intl. - FLEX - close: 11.11 change: +0.04

Stop Loss: 10.75
Target(s): $11.75
Current Gain/Loss: + 7.9%

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:
06/26/14: FLEX managed to outperform the broader indices with a +0.3% bounce today. Yet the stock remains under its simple 10-dma.

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: 62.57 change: +0.07

Stop Loss: 59.25
Target(s): To Be Determined
Current Gain/Loss: - 2.0%

Entry on June 20 at $63.85
Listed on June 10, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.8 million
New Positions: see below

Comments:
06/26/14: IR bounced from support near $62.00 again this morning. I would wait for a new rally above $63.00 before considering new positions.

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.

We're not setting an exit target tonight but the Point & Figure chart for IR is bullish with a $71.00 target.

current Position: Long IR stock @ $63.85

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

Long Sept $65 call (IR140920C65) entry $2.36*

06/20/14 triggered on gap higher at $63.85
suggested entry point was $63.75
*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



Sky-mobi Limited - MOBI - close: 7.67 change: -0.08

Stop Loss: 7.19
Target(s): To Be Determined
Current Gain/Loss: -1.3%

Entry on June 26th $ 7.77
Listed on June 25, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 696 thousand
New Positions: see below

Comments:
06/26/14: MOBI was off to a strong start. Shares opened at $7.77 and then rallied to $8.22. Unfortunately the rally didn't last. Shares reversed into a -1.0% decline. Given today's intraday reversal I would wait for a rise past $7.85 before initiating new positions.

Earlier Comments: June 25, 2014:
China is a massive market and continues to see strong growth in mobile phone adoption. That means more application downloads for the smartphone market. MOBI is cashing in on the app download business with their Maopao app store with 147 million users. They've already had over 15 billion apps downloaded from their store since 2005.

MOBI has strategic partnerships with China Mobile and China Unicom plus over 100 Chinese OEMs who pre-install MOBI's Maopao store on their mobile platforms. This allows MOBI to gain 400,000 new users every day.

When the stock market peaked in early March investors sold all of the high-growth and momentum names. MOBI was caught up in that sell-off with a correction from $12.00 to $6.00. Now shares appear to have found a bottom at the $6.00 level. The recent pullback this week looks like and entry point given MOBI's long-term prospects. The mobile gaming market in China is expected to surge +94% in 2014. MOBI's sales will surge as gaming grows.

Technically MOBI is starting to bounce after a 50% retracement of the rally off its June lows. We want to jump on board and buy today's bounce at the opening bell tomorrow morning. More conservative investors might want to consider waiting for a rally past $8.00 as an alternative entry point.

We are not setting a target just yet. I will point out that the point & figure chart is bullish and forecasting at $13.00 target.

This can be a volatile stock. Traders may want to consider limiting their position size to reduce their risk.

Current Position: Long MOBI stock @ $7.77

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

Long Oct $10 call (MOBI141018c10) entry $0.85

06/26/14 trade opens. MOBI opened @ 7.77
Option Format: symbol-year-month-day-call-strike



Microsoft Corp. - MSFT - close: 41.72 change: -0.31

Stop Loss: 39.45
Target(s): To Be Determined
Current Gain/Loss: -0.3%

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:
06/26/14: It was a disappointing session for MSFT bulls. The stock did not see any follow through on yesterday's breakout above $42.00. Shares instead reversed sharply at the open. I would wait for a new close above $42.00 before initiating new positions.

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



SoftBank Corp. - SFTBY - close: 37.48 change: +0.16

Stop Loss: 33.20
Target(s): To Be Determined
Current Gain/Loss: +2.2%

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:
06/26/14: SFTBY spent most of Thursday's session drifting higher off its morning lows. Shares did find resistance near $37.49 this afternoon.

Investors might want to wait for a rally past Friday's high ($38.65) 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.

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: 25.45 change: +0.18

Stop Loss: 19.90
Target(s): To Be Determined
Current Gain/Loss: +14.4%

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:
06/26/14: Positive analyst comments this morning helped shares of SMCI gap open higher. Unfortunately SMCI failed to maintain most of these gains.

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



Waste Connections, Inc. - WCN - close: 47.81 change: +0.09

Stop Loss: 45.75
Target(s): To Be Determined
Current Gain/Loss: +0.1%

Entry on June 25 at $47.75
Listed on June 21, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 464 thousand
New Positions: see below

Comments:
06/26/14: WCN continued to drift higher on Thursday and tagged another all-time high. I don't see any changes from my earlier comments.

Earlier Comments: June 21, 2014:
According to the company website, Waste Connections is an integrated solid waste services company that provides solid waste collection, transfer, disposal and recycling services in mostly exclusive and secondary markets.

Through its R360 Environmental Solutions subsidiary, the Company also is a leading provider of non-hazardous oilfield waste treatment, recovery, and disposal services in several of the most active natural resource producing areas in the United States, including the Permian, Bakken, and Eagle Ford Basins. Waste Connections serves more than two million residential, commercial, industrial and exploration and production customers from a network of operations across the United States. We also provide intermodal services for the movement of solid waste and cargo containers in the Pacific Northwest.

We seek to avoid highly competitive, large urban markets and instead target markets where we can attain high market share either through exclusive contracts, vertical integration or asset positioning. We also target niche markets, like exploration and production, or E&P, waste treatment and disposal services, with similar characteristics and, we believe, higher comparative growth potential.

Apparently the company's strategy is working. WCN is developing a pattern of beating Wall Street's earnings estimates on both the top and bottom line. WCN's model is generating more profit than its rival with EBITDA margins of 34% compared to its larger rival Waste Management's 24% margins.

WCN is seeing strong growth in its oil field waste business. The company said that its E&P (oil) waste business surged +20% in the first quarter of 2014. It's traditional solid waste business grew +5.5%. Management is optimistic with 2014 off to a strong start. Revenues are up. Free cash flow is up. Margins are improving. They expect to see 12% to 15% growth this year.

Technically shares of WCN just broke out from a two-week consolidation and closed at all-time highs. One could argue that WCN produced a big, inverse head-and-shoulders pattern over the last several months. The point & figure chart is bullish and suggesting a $62 price target.

WCN does have options but the option spreads are too wide to trade.

Current Position: Long WCN stock @ $47.75

06/25/14 triggered @ 47.75



Wells Fargo & Co - WFC - close: 52.37 change: -0.23

Stop Loss: 49.70
Target(s): To Be Determined
Current Gain/Loss: + 2.8%

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:
06/26/14: WFC shot lower this morning but bounced at the $52.00 mark.

I am not suggesting new positions at this time.

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



Xylem Inc. - XYL - close: 39.13 change: -0.24

Stop Loss: 37.75
Target(s): To Be Determined
Current Gain/Loss: unopened

Entry on June -- at $--.--
Listed on June 21, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 1.1 million
New Positions: Yes, see below

Comments:
06/26/14: Aside from a spike lower at the opening bell XYL spent the next 389 minutes trading sideways inside the $39.00-39.50 zone. I don't see any changes from my earlier comments. Our suggested entry point is $40.25.

(There are 390 minutes in a normal trading day.)

Earlier Comments: June 21, 2014:
Xylem is a spinoff from ITT Corp. and became an independent company in October 2011. Now they're a leading global water technology company doing business in more than 150 countries. The company name, Xylem, is from the classical Greek that refers to the supporting tissues that help transport water and nutrients from a plant's roots to its leaves.

Business has been good. The last two quarters in a row XYL has managed to beat Wall Street's earnings estimates on both the top and bottom line. The company has garnered positive analyst comments suggesting XYL could see strong revenue and margin growth over the next two or three years.

After their latest quarterly report XYL's CEO noted they were seeing strong growth in emerging markets. The Q1 2014 results saw earnings growth of more than 25%. Results have been boosted by strong sales of its pumps and technology that disinfects wastewater and kills viruses and parasites. Their backlog has risen $793 million, up six percent.

Long-term the company could see significant growth. Water consumption across the globe is rising at twice the rate of the world's population. This is creating huge demand on water resources. A Citigroup analyst recently pointed at XYL as the best publically traded "pure play" on water and water processing.

XYL expects to see a lot more growth overseas for both its water purification systems, desalination, power generation, and hydraulic fracking.

Technically shares have been showing relative strength with three weeks of gains in a row. Friday is an all-time closing high for the stock. Shares are hovering just below potential round-number resistance at the $40.00 level. Tonight we are suggesting a trigger to open bullish positions at $40.25.

Trigger @ $40.25

Suggested Position: buy XYL stock @ (trigger)

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

Buy the Oct $40 call (XYL141018C40)

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



BEARISH Play Updates

The TJX Companies, Inc. - TJX - close: 52.82 change: -0.32

Stop Loss: 55.10
Target(s): To Be Determined
Current Gain/Loss: +1.5%

Entry on June 25 at $53.65
Listed on June 24, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 4.5 million
New Positions: see below

Comments:
06/26/14: Uh-oh! TJX is starting to bounce. Shares did underperform the market with a -0.6% decline today but that was after shares bounced from the $52.00 level. TJX is now down six days in a row. I would not be surprised to see an oversold bounce tomorrow.

We can look for TJX to find short-term resistance near the $54.00 level.

Earlier Comments: June 24, 2014:
According to their website, the TJX Companies, Inc. is the leading off-price retailer of apparel and home fashions in the U.S. and worldwide. With over 3,200 stores in the U.S., Canada and Europe, 3 e-commerce sites and approximately 191,000 Associates at the end of 2013, we see ourselves as a global, off-price, value retailer and our mission is to deliver great value to our customers through the combination of fashion, brand, quality and price.

The stock has been a strong performer on Wall Street for years. Shares of TJX are up 2008 lows near $10 a share to until they peaked near $64.00 late last year. It would appear the long-term momentum is fading.

TJX, along with most retailers, are facing a tough consumer market. Big ticket items like new homes and automobiles are selling well. Smaller purchases like fashion and apparel have been tough unless you're in the luxury market.

The U.S. Commerce Department reported that consumer spending fell -0.1% in April, marking the first decline in a year. It is worth noting that consumer spending was up the prior two months, but that didn't help TJX first quarter sales. TJX reported earnings on May 20th. Their Q1 results (ending April) were 64 cents a share on revenues of $6.49 billion. That was three cents less than Wall Street's estimate of 67 cents a share on revenues of $6.59 billion.

TJX management said their Q1 same-store sales growth was only +1%, which was below guidance. TJX then lowered their 2015 guidance. There has been some speculation that TJX could be losing some market share to the return of JC Penney (JCP).

The issue could be bigger than just one or two stores fighting for market share. The U.S. consumer is facing higher prices. Consumer price inflation is up, especially for everyday items. Over the past twelve months the CPI has risen +2.1%. The price of meat, chicken, eggs, and fish is up +7.7%. The price of fruits and vegetables are up +3.2%.

The consumer is also facing higher gasoline prices. AAA said the national average on gas had risen to $3.68 per gallon. That is the high for this time of year. AAA is currently forecasting a range of $3.55 to $3.70 per gallon. Fortunately, they are hoping that gasoline prices will not hit $4.00 a gallon. However, that could change quickly if the violence in Iraq escalates and terrorist start to impact Iraq's oil exports. Another issue here at home is talk of raising the U.S. federal tax on gasoline from 18.5 cents per gallon to 30.5 cents over the next two years. Call your senator if you do not want that tax to go up.

All of these price increases are weighing on most Americans who are stuck with flat or very low wage gains. Oddly enough consumer confidence just hit a six-year high today. Hope springs eternal but just because consumers are hopeful doesn't mean they're actually spending more money.

Technically shares of TJX are bearish. It has a trend of lower highs and lower lows and just broke down under support near $54.00. We are not setting a bearish target tonight but I will point out that the point and figure chart is bearish and forecasting at $45.00 target.

Current Position: short TJX stock @ $53.65

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

Long Oct $50 put (TJX141018P50) entry $1.05*

06/25/14 triggered @ 53.65
*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