Option Investor
Newsletter

Daily Newsletter, Monday, 7/7/2014

Table of Contents

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

Market Wrap

Calm Before The Earnings Storm

by Thomas Hughes

Click here to email Thomas Hughes
The week started with relative calm as the market digests last weeks jobs numbers, enters earnings season and waits on FOMC minutes.

Introduction

The week started off with relative calm following the three day holiday. International markets began the week mixed as traders contemplated the upcoming earnings season and weaker than expected data from Europe. In Germany industrial production fell -1.8%, the second month in a row of decline and below the expected rise of 0.3%. Asian and EU equity indices fell about a half percent on on the news with earnings and GDP growth in focus.

Early trading on the US market was muted. The futures trade indicated an open about 5 points below last weeks close for the SPX with the other major indices on similar footing. There was no economic data today to impact the early trading but comments from the IMF's Lagarde made over the weekend was the talk of the morning. She expects the US economy to improve over the next 18 months although momentum has declined. She also hinted at possible lower GDP estimates for 2014 based on some weakness in Europe and China.


There was no economic data today and the calendar is pretty light for the week. Tomorrow we'll get the JOLTs number, expected job openings, and consumer credit. JOLTs is released at 10AM while consumer credit is scheduled for 3PM. On Wednesday the FOMC minutes are released for the prior meeting. Traders will be looking for clues into the Fed's view on the economy, when the taper will end and more importantly when interest rates may begin to rise. After that the economic front is dominated by the weekly jobless claims on Thursday along with wholesale inventories, followed up by the Treasury Budget on Friday.


Trading was weak at the open as expected. In the first few minutes the SPX dipped down by about -6 points before finding early support around 1980. The index made a small bounce bringing it up to about -3 ish until just before 11AM. Right aroud 10:52AM the market began to sell off, bringing the index down about a half percent to just above 1975. The SPX held near this level for the mid part of the day with the Nasdaq down about 30 points and the Dow Jones Industrials about 45. Intraday bottom was hit about 2:30PM with the SPX down about 0.5%. The day's low levels held for the better part of the afternoon with a slight pick in action going into the close leaving the SPX at -0.39% for the day.

The Economy

No economic reports were released today except Moody's Survey of Business Confidence. Mark Zandi reports that business remain upbeat and “sunny” about the economy. He continues to add that the report is consistent with an economy growing faster than anticipated and that June hiring was strong. Personally, I have noticed that quite a few of my local stops have hired and are training new staff.

Earnings Season Starts Tomorrow

Earnings season gets underway tomorrow with Alcoa. The aluminum giant is expected to report earnings of $0.13 per share, up $0.07 from the previous quarter and well ahead of earlier estimates for the second quarter. Analysts forecast for Alcoa earnings have been on the rise and are nearly double what they were at the first of the year. There is an expectation for revenue to decline somewhat on weak aluminum prices but the foreward guidance will be of more importance, especially after the recent acquisition of Firth Rixson last month. Alcoa is currently up over 85% for the last 12 months and currently testing resistance at the $15 level. $15 has been a pivotal level for this stock over the past 5 years in the wake of the 2008 market crash. The long term trend is up but the indicators suggest a return to the trend line could be on the way. Today shares of Alcoa fell more than 1.5% from the current high and long term resistance.


The next significant earnings report will come from Wells Fargo on Friday. The bank is the second big report of the season and the lead off for the banking sector. Monday Citigroup reports followed by JPMorgan and Goldman Sachs on Tuesday. Wells Fargo is expected to report earnings slightly lower than the previous quarter but remain in line with full year projections. To date Wells Fargo remains one of the strongest of the big banks. Today the stock lost about -.95% but remains above the long term resistance turned support level of $52.50. The stock has been trending up for about 9 months and is within a percent or so of the high set within the last two weeks. Indicators are bullish but a growing divergence in the stochastic and weak momentum suggest a pull back or correction is likely. Near and short term support exists at the current level near $52.50, just below along the 30 day EMA and then longer term support a little further down along the $50 level. This week could see the stock consolidate or pull back ahead of the earnings report on Friday.


The Banking Index also fell today, dropping from resistance set earlier this year. In the near term momentum is bearish but extremely weak while stochastic indicates the sector is neither overbought nor oversold. While being consistent with a trading range the indicators also leave open the possibility of a break out, providing what little economic we will get this week is positive, bank earnings do not disappoint and future guidance is acceptable. Current resistance is $72.50 with an upside target, on a break out, near $77.50. Near term support is just below the current level near $71.50 with short and longer term support below that around $71, $70 and $67.50.


The Oil Index

Oil prices continued to fall today as Iraq fear exits the market and Libyan oil ports prepare to reopen. WTI fell by roughly $0.75 today with Brent dropping about $0.30 per barrel. The insurgent uprising in Iraq has yet to have an impact on Iraqi oil production or supply which is allowing the fear premium to subside while at the same time the stand off in Libya which has had oil shipping ports shut down for over a year is near an end. Rebels and officials have reached some agreement which could lead to ports reopening in the near future. If so Libyan supply could more than double to nearly 1.5 million barrels per day. This has been on the table before and failed to come to fruit so there is still risk up to and until the ports are actually opened. In the meantime the Oil Index also traded down today, losing about three quarters of a percent. The index remains above long term support along the 1650-1675 level. The indicators are bearish at this time, in line with the current pull back from the recent all time high, but not to troubling at this time so long as support holds. The prolonged run of high oil prices this spring should convert into higher revenue and potential earnings for the big oil companies, the bulk of which will report earnings in the first week of next month. Until then watch support levels and developments in Iraq and Libya.


Sector Watch

Fourth of July box office revenue was reported today and is down 44% from last year. The top box office title this year was Transformers which actually opened the week before. Total holiday weekend revenue was just over $130 million, about $13 million less than last years single top income producer Despicable Me 2 which brought in over $143 million on its own. This years top three hopefuls were only able to produce about $33 in revenue together. Industry insiders blame the drop in sales on a lack of big blockbusters and no animated family titles. Today the Consumer Discretionary Spyder (XLY) fell from last weeks new high to drop back below resistance. The ETF, which includes names like 21st Century FOX, Disney and Time Warner, fell about a half percent to trade just below the previous all time high set this past march. Both MACD and stochastic are weak and divergent, consistent with resistance and a potential trading range. Most of these names, in particular Walt Disney and Time Warner, do not report until the first week of next month so there could easily be some consolidation or pull back until then. The longer term trend in the sector is up so I expect to see some discretionary spending somewhere, it just isn't in the movie theaters at this time. Other top names held by this ETF include Amazon which never makes money, Home Depot, which has been doing well and benefiting from the slowly rebounding housing market, and Priceline, darling of the market.


Apple Does It Again

Apple made a move this weekend that sent the newly split stock to a new high. The company hired Tag Heuer executive director of sales, according to Reuters. The news fueled speculation of the upcoming iWatch and along with reported strong June sales sent the stock up by over 1.5%. Apple made no comment on the report. The move up in the stock is accompanied by bullish indicators and could carry the it higher. In the nearer term stochastic is overbought but momentum has just turned bullish so the current move may have only just begun. Apple is scheduled to release earnings in two weeks on July 22nd and is expected to report EPS of $1.22 or 40% less than the previous quarter.


The Indices

The Dow Transports once again led the indices into the red. The Trannies fell by more than a full percent today, falling from all time highs set last week. The indicators have just turned bearish with MACD and stochastic both indicating near term weakness. The long term trend is still up so I don't think this is much to worry about, just another chance to buy on the dip unless earnings from the sector don't pan out. Higher oil prices are a concern for this sector and could hurt the bottom line for many. Guidance will be an important factor as always and of course, if oil prices continue lower then that burden will lighten for the transports.


The Nasdaq Composite was second up in terms of today's loss. The tech heavy index fell by more than -0.80% today on light volume. Today's decline is a retreat from new highs set in the previous trading session and not unexpected in light of the index position relative to support, the short term moving etc. The index has been making a push higher on economics and earnings hope and, even with today's drop, is still 2.5% above the 30 day EMA. The long term trend is bullish but the upcoming earnings season may provide reason enough for traders to wait for news and cause the index to consolidate or correct. At this time MACD momentum is bullish but divergent and stochastic is entering a bearish crossover high in the range. This is not a reversal signal but one that could lead to a consolidation, pullback or correction. A potential catalyst for this index will be Intel earnings next Tuesday. Current support is about 100 points below the current level, around 4350.


The SPX lost about a half percent in today's trading. The broad market also fell from a new all time high set last week with weak indicators. Although still bullish, the indicators are both divergent at this time. With the index extended 1.5% beyond the moving average it is not unwise to expect some form of a pull back. On the longer term charts of weekly prices the index is still bullish and advancing, but also appears to be quite extended. I don't think any major correction is in the offing but some consolidation ahead of and into earnings season is not out of the question. After that it will come down to the earnings themselves and guidance into the end of the year.


The Dow Industrial Average was today's strongest index. At the end of the day the blue chips had lost only about a quarter percent, falling less than 50 points. The index managed to close above the all important psychological level of 17,000 with divergent and weak indicators. If the index does not hold onto 17,000 going into earnings season then a pull back to 16,750 is likely with further support indicated just below that around 16,500. Tomorrow will be a big day for the Dow even though Alcoa is no longer a Dow Component. Earnings from the Aluminum giant will surely be taken as an indication of what is to come for the actual Dow components.


Today's the markets fell, but from all time or at least new highs. Highs driven by the rising economic tide and the much better than expected jobs data released last week. The much better than expected ADP, Challenger and NFP numbers, if not one time events, could be pointing to the jobs rebound we have all been expecting to come.If so, then the data should continue to improve into the summer and that could lead to improved earnings, GDP growth a quick end to the taper.

Earnings season this time around may not be as good as we might like, simply because of all the down ward revisions to past data we have had, so it will be the forward looking guidance that trumps all. In that vein the companies reporting earlier will be more of a backward looking indicator versus those reporting next month who's current quarter is more in line with the calendar year. What will companies say in their reports? According to Mark Zandi and Moody's Survey of Business Confidence “Business' sunny disposition remains firmly in place”. If this is true and the earnings and data show it then the market could rally on into the summer. Between then and now there are FOMC minutes on Wednesday and an FOMC meeting next week.

Until then, remember the trend!

Thomas Hughes

 


New Plays

Russell Leads The Decline

by James Brown

Click here to email James Brown

Editor's Note:

The U.S. stock market delivered a widespread decline on Monday. There was no discernible catalyst for the pullback. You could argue the bull market had gotten a little bit ahead of itself. Profit taking was actually pretty mild with the S&P 500 down -0.39%.

On the CNBC Halftime report they had Laszlo Birinyi, the found and president of Birinyi & Associates as a guest. He said it's not too late for investors to jump into stocks and predicted the S&P 500 would hit 2100 before year end. It appeared no one was listening.

What is concerning is the action in the small cap Russell 2000 index ($RUT). The index underperformed with a -1.7% decline. The $RUT is retreating from resistance and could be forming a potential bearish double top pattern.

Overall we hesitant to launch new positions. We are not adding new plays tonight.

(daily chart of the $RUT)




In Play Updates and Reviews

Small Caps Underperform

by James Brown

Click here to email James Brown

Editor's Note:
After last week's sprint higher the market encountered some profit taking on Monday. The small cap Russell 2000 index underperformed.

We closed our AAL trade this morning.
FEYE and WFC hit our stop loss.


Current Portfolio:


BULLISH Play Updates

Bitauto Holdings - BITA - close: 49.46 change: +1.49

Stop Loss: 43.45
Target(s): To Be Determined
Current Gain/Loss: + 3.6%

Entry on June 30 at $47.75
Listed on June 28, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 933 thousand
New Positions: see below

Comments:
07/07/14: BITA displayed relative strength today with a +3.1% gain and a new closing high. I don't see any specific news behind the move. BITA is getting closer to potential round-number resistance at $50.00.

Earlier Comments: June 28, 2014:
According to BITA's website, Bitauto Holdings Limited is a leading provider of internet content and marketing services for China's fast-growing automotive industry. Bitauto manages its businesses in four segments: the bitauto.com advertising business, the EP platform business, the taoche.com business, and the digital marketing solutions business. They were founded in 2000 and headquartered in Beijing, China.

BITA has partnerships with all the major Chinese Internet portals like Sina, Tencent, Yahoo! China, Alibaba, Netese, Qihoo360, and Tom. They have sales networks in more than 70 cities.

The company is developing a trend of beating analysts' estimates. Their most recent quarterly report was May 8th with their Q1 results. Wall Street expected a profit of 16 cents on revenues of $54.3 million. BITA delivered a profit of 18 cents with revenues climbing +46.6% to $56.9 million. The company has also made significant progress with its gross margins, which jumped to 79.1%.

This trend is likely to continue. Earnings are up +296% from 2010 to last year (2013). Sales are up +246% over the same time frame. Wall Street is expecting BITA's profits to rise 50 percent in 2014.

It's not surprising to see why. Millions of Chinese people are entering the middle class. That means surging demand for automobiles. China is now the biggest auto market on the planet with almost 20 million new cars purchased every year. The U.S. is having a good year for new cars sales too but we are only on track for 16.7 million vehicles this year.

Currently shares of BITA are hovering near their highs and what looks like resistance in the $47.00 area. The stock peaked to $47.00 back in March this year and it's been trying to breakout past this area the last several days.

Please note I do consider a more aggressive, higher-risk trade. BITA has been a volatile stock in the past. Investors may want to use small positions to limit their risk. We are not setting any targets tonight but the point & figure chart is bullish and forecasting at $57.00 target.

*small positions to limit risk*

Current Position: long BITA stock @ $47.75

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

Long Oct $50 call (BITA141018C50) entry $5.40*

06/30/14 triggered @ 47.75
*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



Flextronics Intl. - FLEX - close: 11.01 change: -0.27

Stop Loss: 10.75
Target(s): $11.75
Current Gain/Loss: + 6.8%

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:
07/07/14: FLEX was not immune to the market's widespread pullback today. Shares underperformed the market with a -2.35% decline. More conservative traders may want to raise their stop loss.

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: 62.34 change: -0.76

Stop Loss: 61.65
Target(s): To Be Determined
Current Gain/Loss: - 2.4%

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:
07/07/14: IR underperformed the major indices with a -1.2% decline. Furthermore today's drop is a breakdown below technical support at its 20-dma. More conservative investors may want to abandon ship and exit early now.

I am not suggesting new positions at this time.

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*

07/07/14 IR has closed below its 20-dma. Readers may want to exit early now
07/02/14 recent activity is not very encouraging. Readers may want to exit early.
06/30/14 new stop @ 61.65
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: 7.39 change: -0.45

Stop Loss: 7.19
Target(s): To Be Determined
Current Gain/Loss: -4.9%

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:
07/07/14: I am growing more concerned about our MOBI trade. Shares have been underperforming the market. Today's drop of 5.7% definitely underperformed the major indices and marked its fourth daily loss in a row. Readers may want to exit immediately.

I am not suggesting new positions at this time.

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

07/07/14 MOBI continues to show relative weakness. Readers may want to exit immediately
06/26/14 trade opens. MOBI opened @ 7.77
Option Format: symbol-year-month-day-call-strike



Microsoft Corp. - MSFT - close: 41.99 change: +0.19

Stop Loss: 39.90
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:
07/07/14: MSFT was showing some relative strength today but it continues to struggle with resistance near $42.00.

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

06/30/14 new stop @ 39.90
06/17/14 triggered @ 41.85
Option Format: symbol-year-month-day-call-strike



NewLink Genetics - NLNK - close: 26.72 change: -1.14

Stop Loss: 25.85
Target(s): To Be Determined
Current Gain/Loss: unopened

Entry on July -- at $--.--
Listed on July 05, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 327 thousand
New Positions: Yes, see below

Comments:
07/07/14: It would appear that NLNK does not want to cooperate with us. Shares reversed sharply with a -4.0% decline and a close near technical support at its 10-dma. If this sell-off continues tomorrow we'll likely remove NLNK as a candidate.

Earlier Comments: July 5, 2014:
NLNK is a small-cap biotech company. They were founded in 1999. They are development cancer treatments with a focus on stimulating the human body to destroy its cancer cells. These cancer immunotherapies offer a lot of hope but there is still a lot of work to be done.

NLNK is developing two different pathways to conquer cancer. One is NLNK's HyperAcute immunotherapy and the other is IDO pathway inhibitions. The HyperAcute system is designed to stimulate the human body's immune system to recognize and then destroy cancer cells. Their best treatment so far, the algenpantucel-L, is currently in a critical Phase 3 IMPRESS trial for patients with resected pancreatic cancer. The trial began in September 2013 and remains in progress.

NLNK's second platform is IDO pathway inhibitors. The company is working with indoleamine 2,3-dioxygenase (IDO) inhibitors to develop small-molecule drugs that would target cancer tumors and turn off the tumors ability to evade the body's defenses. If successful, the body would target the tumor and destroy it. NLNK's best candidate in this field is Indoximod and is currently in trials for patients with melanoma, pancreas, prostate, breast and brain cancers.

I'm sure you noticed that shares of NLNK have been crushed from their February 2014 peak. The stock got ahead of itself and more than doubled from its early January lows to the February top. The broader market was suffering some profit taking in March. Nearly all of the high-growth and momentum stocks were punished during the March correction lower. The drop in NLNK was exaggerated.

NLNK's stock price drop in March was accelerated following news on its IMPRESS clinical trial for its HyperAcute therapy. The clinical trial was designed to provide interim analysis after the 222nd patient/event was hit. That threshold was reached in February and the analysis was released in March.

The good news is that they didn't see any new safety concerns with the treatment. The independent monitors running the IMPRESS trial suggested the trial proceed. That was the headline that sent shares of NLNK lower. Investors were hoping that the results would be so good that the monitors would stop the trial early due to better than expected success. What this means now is the HyperAcute clinical trial continues. The next thresholds are 333 patient events and if necessary 444 patient events. The next analysis on this trial is not expected until January 2015.

It looks like most of the weak-stomach investors might be out of the stock. NLNK's perilous drop from $50 to $19 in about six weeks completely erased its 2014 gains back in April. Traders bought NLNK on a pullback near $19 again back in early June. This has created a double bottom pattern. The last four weeks have seen shares of NLNK push through multiple layers of resistance including its 50-dma, its 200-dma, and most recently its 100-dma. This should make the shorts nervous.

There are plenty of bears in this name. Short interest is about 25% of the very small 19.8 million share float. If this rally continues it could accelerate due to short covering. So why are so many investors short NLNK? One reason might be cash. NLNK is running out. They have virtually no revenues. Bullish investors are betting that NLNK will be successful and these clinical trials will eventually produce a product that can be sold. There is always a chance of failure. Unfortunately, clinical trials are not cheap. NLNK will likely end the year with $40 million in cash. They're going to burn through it fast with 100 employees and its current projects. There is a risk that NLNK could raise money by issuing more stock in a secondary offering. More stock dilutes current shareholders and the stock price tends to drop.

Bullish investors may want consider buying call options so you can limit your risk to the cost of the option.

Tonight we are suggesting a trigger to open bullish positions at $28.25. We will start with a stop loss at $25.85.

I do consider this an aggressive, higher-risk trade. Consider using smaller positions to limit risk.

Trigger @ $28.25 *small positions*

Suggested Position: buy NLNK stock @ (trigger)

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

Buy the Oct $30 call (NLNK141018c30)

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



SoftBank Corp. - SFTBY - close: 37.45 change: -0.30

Stop Loss: 35.35
Target(s): To Be Determined
Current Gain/Loss: +2.1%

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:
07/07/14: There is nothing new to report on SFTBY. Shares failed to see any follow through on last Thursday's rally. The stock remains inside its recent trading range.

I am not suggesting new positions at this time. Resistance remains overhead near $38.50.

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

06/30/14 new stop $ 35.35
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: -0.50

Stop Loss: 24.15
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:
07/07/14: Hmm... SMCI just erased Friday's gains with a -1.9% decline and another failure at the $26.00 level. More conservative investors may want to exit immediately to lock in potential gains.

I would not open new positions.

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*

06/28/14 new stop @ 24.15
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: 48.43 change: -0.46

Stop Loss: 47.85
Target(s): 49.85
Current Gain/Loss: +1.4%

Entry on June 25 at $47.75
Listed on June 21, 2014
Time Frame: exit before earnings on July 21st
Average Daily Volume = 464 thousand
New Positions: see below

Comments:
07/07/14: WCN dipped toward short-term technical support at its 10-dma before paring its losses. I am not suggesting new positions at this time.

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



BEARISH Play Updates

The TJX Companies, Inc. - TJX - close: 53.41 change: -0.39

Stop Loss: 54.25
Target(s): To Be Determined
Current Gain/Loss: +0.4%

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:
07/07/14: As expected shares of TJX appear to be rolling over underneath resistance near $54.00. Today's move could be used as a new bearish entry point.

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*

06/30/14 new stop @ 54.25
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




CLOSED BULLISH PLAYS

American Airlines Group Inc. - AAL - close $40.10 change: -1.52

Stop Loss: 39.85
Target(s): to be determined
Current Gain/Loss: + 3.7%

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:
07/07/14: Shares of AAL were not acting very healthy last week. In the weekend newsletter we decided to just exit immediately on Monday morning. Good thing we did. Shares opened at $41.72 and then plunged -3.65%.

closed Position: Long AAL stock @ $40.25 exit $41.72 (+3.7%)

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

Aug $40 call (AAL140816C40) entry $2.65* exit $3.05 (+15.0%)

07/07/14 planned exit
07/05/14 prepare to exit on Monday morning
07/02/14 DAL reported disappointing June traffic figures
06/28/14 new stop @ 39.85
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

chart:



FireEye, Inc. - FEYE - close: 36.61 change: -2.34

Stop Loss: 36.90
Target(s): To Be Determined
Current Gain/Loss: -10.2%

Entry on July 01 at $41.10
Listed on June 30, 2014
Time Frame: 8 to 12 weeks
Average Daily Volume = 5.2 million
New Positions: see below

Comments:
07/07/14: It was not a good day for FEYE shares. Momentum stocks got hammered today and it didn't help that FEYE was already starting to look a little weak last week. Shares accelerated lower today and posted a -6.0% loss. Our stop was hit at $36.90.

I warned readers in the weekend newsletter that FEYE had formed a bearish reversal pattern. Today's move definitely confirms it.

The story on FEYE is still long-term bullish. We may want to keep FEYE on our watch list for a bounce from support near $30.00.

closed Position: long FEYE stock @ $41.10 exit $36.90 (-10.2%)

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

Sep $45 call (FEYE140920C45) entry $3.30* exit $1.75** (-46.9%)

07/07/14 stopped out
**option exit price is an estimate since the option did not trade at the time our play was closed.
07/01/14 triggered @ 41.10
*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:



Wells Fargo & Co - WFC - close: 52.50 change: -0.50

Stop Loss: 52.45
Target(s): 54.35
Current Gain/Loss: + 3.0%

Entry on June 02 at $50.94
Listed on May 31, 2014
Time Frame: exit PRIOR to earnings on July 11th
Average Daily Volume = 13.5 million
New Positions: see below

Comments:
07/07/14: We had just raised our stop loss on WFC in the weekend newsletter. The stock was swept up in the market's widespread pullback today and happened to hit our new stop at $52.45 in the last minute of trading.

NOTE: I would keep WFC on your watch list for a potential entry point after the company reports earnings on July 11th.

closed Position: Long WFC stock @ $50.94 exit $52.45 (+3.0%)

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

Oct $50 call (WFC141018C50) entry $2.31 exit $3.10 (+34.1%)

07/07/14 stopped out
07/05/14 new stop @ 52.45, set target at $54.35
06/28/14 new stop @ 50.90
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

chart: